The Municipal Light Board discussed the financial buffer for both the electric and gas divisions with the Westfield Gas & Electric management team Wednesday night.
Daniel Golubek, the late general manager, established the electric division stabilization fund more than 20 years ago, while the gas division stabilization fund was established following Hurricane Katrina, which caused a huge spike in the cost of natural gas.
General Manager Daniel Howard said the two funds are intended to buffer ratepayers from unanticipated spikes in the base cost of electrical power and natural gas.
Howard said that while both markets are currently stable, the municipal utility has to be prepared for periods of volatility, such as those experienced by the electric division between 1995 and 1998, when the Millstone nuclear plant was taken off-line for emergency repairs, and again in 2009 when both the Millstone and Seabrook plants were off-line.
Nuclear energy is a major segment of the department’s electric base-energy portfolio. Power purchased on the spot market to replace nuclear power is substantially more expensive, a fact that could drive up the rate of residential and commercial customers, if not protected by a stabilization buffer.
Howard said there are several stabilization models based either upon revenue or energy consumption and that, based on those models, the stabilization reserve goal for the electric division could be as high as $80 million.
The department’s current electric division stabilization fund is more than $20 million. The department’s bond agency, Standard & Poor, recommends that the utility have reserve funds to cover four months of that division’s operating expenses, which today is slightly less than in the account, but by 2017 exceeds the reserve available.
Howard said his goal is to “slowly build” that reserve to $37 million.
The gas division reserve, established in January of 2007, is currently just over $5 million.
Howard said that his goal is to continue to add $450,000 a year to build the reserve to $7.5 million.
Howard said the electric market poses a greater risk of financial “exposure” to the utility than does the gas market.
“We have a pretty good handle on the gas side,” he said.
Howard said the department’s outside auditor, Meyers Brothers Kalicka PC, has also suggested the creation of a third stabilization fund to address weather-related damage. The department should attempt to fund $100,000 a year, from both the gas and electric divisions, to cover the department’s insurance deductible of $500,000.
Howard said that if the weather events of 2011 were not declared federal emergencies, subject to Federal Emergency Management Agency funding, the utility would have had a liability of more than $2 million. The response cost of the Oct. 29-30 Nor’easter disaster alone is $1.5 million, funds the utility is seeking to recoup through FEMA and the Massachusetts Emergency Management Agency.
Howard said the department’s insurance does not cover weather disaster events. Those policies are for damage to gas and electric substations and other fixed facilities.
Members of the Municipal Light Board question Howard on funding the stabilization accounts, asking why more revenue was not dedicated to achieving the level of funding described in the department’s reserve goals.
Howard replied that the department also uses that revenue for both planned and unexpected construction and plant improvements in both divisions. The construction effort has increased in recent years because of the number of major road project requiring the replacement of aged gas lines and moving utility poles.
The department is required by law to replace cast iron pipes with new mains year.
“Over the past 20 year we’ve replaced 60 miles of both cast iron mains and services, so we’re averaging two miles a year,” he said.
