2023-018 Electric ROI February 24,2023 Report No. 2023-018
STAFF REPORT
TO MAYOR AND CITY COUNCIL
SUBJECT:
Electric Return on Investment (ROI) Information
BACKGROUND:
On February 8, 2023, Council Member Davis requested additional information regarding future
rate increases for the Electric Utility and the possibility of decreasing the ROI payment to the
General Fund.
DISCUSSION:
The Return on Investment(ROI)payment for the Electric utility is intended to provide a monetary
benefit to the General Fund for owning and operating the utility. Changes to the ROI percentage
are at the discretion of the City Council. The City Charter states, "the City shall be entitled to
receive annually on the net investment from excess revenues, if any, not more than six (6)percent
of the net investment." On April 21, 2020, in response to the COVID pandemic, the City Council
approved a temporary increase to the ROI percentage for Electric Utility from 3.5% to 6%. The
Council recently adopted Ordinance 22-1804 maintaining a 6%ROI for the Electric Utility as part
of the FY 2022-23 budget. The Electric ROI calculation is based on the following revenue
categories; residential, commercial, wholesale, and other revenue.
The Electric financial forecast has been updated based on the Transmission Cost of Service
(TCOS) filing and revised Data Center revenue projection. Currently, the Electric five-year
forecast includes a 12% rate increase for the average residential customer during the upcoming
five years. As discussed during the February 7th work session, this increase is not sufficient to
maintain a fund balance above the minimum reserve requirement and will need to be reevaluated
during the FY 2023-24 budget process.For reference,the ending Electric fund balance in FY 2023-
24 is projected to drop to $95.7 million which is $21 million below the minimum reserve target of
$116.8 million. The current Electric ROI payment to the General Fund totals approximately $12
million annually. If the ROI percentage were reduced to 3.5%,the annual payment would decrease
by approximately $5.1 million. A 1% decrease in the ROI will decrease the annual payment by
approximately$2.1 million.Based on the current forecast,both scenarios are not sufficient to avoid
a possible rate increase,however, any decrease in the ROI percentage will mitigate the overall rate
impact on customers. To the extent that the ROI was to revert to 3.5%,the forecasted fund balance
in FY 2023-24 is projected to rise by$5.1 million, reducing the deficit from the minimum reserve
target of$21 million to $16 million. The compounding impact of this higher ending year fund
balance, less use of reserves in FY 2023-24 and FY 2024-25 ($5.1 million in each fiscal year), and
modeled rate increases do significantly reduce rate pressure in FY 2023-24 and beyond.
It is important to note that a decrease in the ROI percentage will have a negative financial impact
on the General Fund. Based on the current General Fund forecast, a .01 cent property tax increase
will generate approximately $1.4 million in annual revenue. If the ROI percentage decreased to
3.5% it could result in a 3.5 cent increase in the property tax rate.
February 24,2023 Report No. 2023-018
A decrease in the ROI percentage will need to be evaluated as part of the budget process. Staff will
reevaluate the need for an Electric rate increase as part of the upcoming FY 2023-24 budget
process.
STAFF CONTACT:
Cassey Ogden
Assistant City Manager/CFO
cassandra.o gden(i�cityofdenton.com
Nick Vincent
Interim Director of Finance
nicholas.vincent(kcityofdenton.com
Antonio Puente Jr.
Electric General Manager
antonio.puente(a=,cityofdenton.com
REOUESTOR:
Council Member Davis
PARTICIPATING DEPARTMENTS:
CMO, Finance, Electric
STAFF TIME TO COMPLETE REPORT:
Staff— 1 hour