Sitka’s Energy Economics (Connect to the SCRES Webinar 3 of 5)

Recording. Awesome.

Well, thank you so much, everybody. This is webinar 3 of 5, Energy Economics. I'm Bree Gabel, the sustainability coordinator. As a fun little joke I like to tell is that I'm a biologist by training and a coordinator in theory. My job is very much herding cats, and I think you will quickly realize what I mean by that throughout this presentation.

And I'm joined with my co-worker here. I'm Amy Ainslie. I'm the Planning and Community Development Director for the City and Borough of Sitka. My background is actually in economics, and I started my career in energy economics, so I'm very excited for things to be coming full circle. But I now am a planner and do that by passion.

I've been doing that for about the last 5 years here. I'm also, as you can tell, really bad at remembering to get professional pictures done. So at least my face today hopefully Covers my more professional view, but thanks for joining. So just to quickly outline, as we have been for all of these, what we're kind of hoping to accomplish and hoping what you get out of it. Today we're going to be talking about how rates are determined, what impacts the cost of electricity, a little bit about the debt that the city has specifically around Blue Lake, what it might mean for the future, and end on how we can possibly reduce the cost of electricity.

By the end of this webinar, we hope that you are able to list some different aspects of the things that influence the cost of electricity. You get a better breakdown of where that debt plays into our overall operations, and you can start to possibly hypothesize the way that we could reduce that cost, and you can argue some pros and cons. So we're hoping to give you a couple of skills as well as some knowledge out of this webinar as we continue. But first, I want to just set a couple ground rules here. I've been starting with every webinar that electricity is not the same as energy, and energy is not the same as electricity.

Energy in its most basic form is the ability to do work. Energy is really abundant in nature, but it is not always readily available to do the work. So once we take that energy and convert it into electricity, it becomes a finite resource. I'll let Amy talk about the economic principle. Yeah.

So a couple of things to kind of keep in mind as we move through the presentation that are helpful framing. So first is that people make choices by kind of balancing the costs and benefits of every individual choice. That's sort of the rational economic actor theory. And the economy overall is sort of this big nebulous thing that's hard to describe. But in short, it's really the sum of all people's past and present choices.

Which then influence the future choices that everybody makes. Incentives are really important, you know, again, because by people make choices based on balancing pros and cons and costs and benefits, then they also in that same vein would respond to incentives. And incentives can be positive or negative. They can encourage you to do things or discourage you to do others. And choices have consequences into the future.

That those, and they can be positive or negative consequences, and they can also be intentional or unintentional as well. And you probably have heard these terms like needs, wants, goods, services. These are all very commonly used in the economic spheres. Needs are normally things that we absolutely need for survival. Wants are anything beyond that.

Goods can be physical objects that can be purchased, and services are actions that can be performed for a fee. All of these things rely on energy. And before we really dive into it, I want to just throw out there that for the ease of communication and understanding, knowing that this is a lunchtime webinar and we're all probably eating sandwiches, hopefully on the sides, a lot of these numbers have been rounded. They do not perfectly reflect the reality of CBS finances. You do have the option of actually going to cityofseccadotfinance.secrata.com and exploring city finances in more specific detail if that is something you want to do.

So the numbers are very, very close. But I don't like lots of zeros to make things easy. We've picked some little bit rounder numbers to help digest things better. So to first talk about why we're talking about energy economics and why is that sort of one theory together, it's because energy really drives the economy. And you've probably heard some similar, you know, breakdown of these concepts in other webinars that, that Bri has done because just on a, like on a personal level, the way that we use energy, it also translates to to the economy overall.

So big, big three of what does energy do for us? It moves us, it gives us transportation, it provides heat, and it provides light, and again, that power or electricity to facilitate our work. And so the economy is so highly dependent on the ability to move and to be in warm heated spaces and to have light and power to do our work. That it's— these are really kind of integral concepts, energy and economy together. And because of that, the Venn diagram is basically just one kind of collapsed circle.

There are so many things that work together in common, and they're so dependent on one another that it's really kind of helpful to think about it as almost kind of a combined concept. And because energy is, you know, kind of equivalent to or so highly tied to economics in the economy, we also have to think about, you know, the economy being a global system and a geopolitical concern, that energy is also, you know, a global, a global sector, a global driver. So when we think about general economic theory and we think about the types of markets and the types of structures that people are operating in, people, again, people are making those choices within. We generally think about that on a spectrum. So on the far left, you have, you know, sort of the, the classical interpretation of perfect competition.

And on the far right, you have a monopoly where there's just one power. So when we try and land ourselves within this spectrum, these are a couple of the things that we'll think about. So we think about the number of options that customers have. We think about the barriers to entry. So to start a new business, how easy is it to get into the market and into the business?

As a supplier or as a business, what are you— what's your ability to impact price? On the far left-hand side of the spectrum, you really have no choice. The, the market's already kind of been set. It's highly driven by competition. And so you're really just putting your product out there for what the market will bear.

Whereas on the far end of the spectrum on monopolies, you as a business or as a, a supplier are really the price maker because you're the only one setting, you know, sort of creating that, that product and selling it. And then we also have the nature of the project, of the product too that's being sold. So generally things that are more competitive are things that are very homogeneous, very easily replaceable with one another. Whereas on the far end, on the right-hand side for a monopoly, there's not really a lot of substitutes. There's really only kind of one core product.

So some great examples of perfect competition would be like common agricultural products or other commodities. Like that. Whereas, you know, a monopolistic competition would be more like fast food chains, where you really have to have a lot of capital and, and that sort of thing to become a, a big name and to be in lots of different places. An oligopoly would be something like more like the oil industry where there's, you know, kind of in that middle ground. But again, the barriers to entry are really, really high because of the capital investment.

And so there's really only sort of a few players in that market. And then generally speaking, utilities are, are a very good example of where we tend to see monopolies. But isn't that bad? Generally, you know, again, in classic economic theory, competition is usually seen as a good thing because that drives prices down for the consumer and also, you know, has market efficiency and all those good things. We usually always think competition is good.

Competition is a good thing, but in certain situations and in certain sectors, it's not necessarily, you know, monopolies are not necessarily bad. So this is a great kind of representation of early development of electrical lines. So this is New York utility lines in 1890, where you can see there was a lot of competition and a lot of suppliers, and it creates a hazard because you have such limited space to convey these utilities over that when you have a lot of competition, those things get crowded altogether and can create hazards and it can be a safety issue and also just sort of inefficiencies in, you know, trying to do things at mass scale when competing for the same customer base. So it's not necessarily a bad thing that utilities are more of a monopoly, but it does mean that there needs to be more regulation around it. So again, in a monopoly, the supplier is the one who sets the price.

And so regulation wants to check that power to make sure it's not abused. They wanna make sure that the rates that are charged for the product. So again, if we're talking specifically about energy or we're talking about electricity, we're talking about electrical rates. We wanna make sure that the rates are reflective of the actual cost of service and that monopolies are not taking advantage of the customer. So costs need to be, you know, prudent for including them in your rate design.

Rate structure. You know, you can't be paying for vacations and, you know, corporate retreats and all kinds of other things that you should probably shouldn't be passing along to your customers, that you're actually, you know, using assets that are used to produce the product, that they're fair and reasonable. But then we also need to make sure that the supplier can still cover their costs in the meantime. So within this, again, we're kind of narrowing down. We started with this big spectrum of economic structures.

We're really down to that far right side of the spectrum, the monopolies. And so within that, what are the different structures or comp— or competitors? 3 Broad buckets here. The first would be private companies, or it's also called an investor-owned utility or IOU. In the middle, you have a cooperative.

And on the other side, you have public utilities. So this again kind of breaks down into a couple of different factors to consider. So in an IOU, shareholders or investors are the owners. In a co-op, the customers of the cooperative are all owners of it. But in a public utility, it is the, you know, it's the government that represents its, you know, its constituents, whether that be a municipal government like ours here in Sitka or a state or a province and that sort of thing.

There's different forms of governing bodies. So who's the regulator that helps to check the prices being charged? And that's a little bit different based on your structure. So sometimes there's regulatory, federal regulatory bodies or state ones for IOUs. Cooperatives kind of govern themselves with a board of trustees.

And then for public utilities, local, you know, local officials or a board of elected officials. The profits that get used in these kind of work really differently, and that's going to be really important when we talk later on about the rate structure and how we set rates. So for an IOU, the profit, some of it gets invested into the structure, the infrastructure, but some of it also gets paid out, you know, in the form of, you know, shareholder value. Dividends, stock buybacks, that sort of thing. Cooperatives are kind of nonprofit-ish.

Generally, most of the profits go back into, you know, reinvesting in your infrastructure, but sometimes those can also get redisbursed among its members, whereas public utilities are generally considered, you know, non— you know, truly kind of nonprofit. All the profits go back into the infrastructure. They all have the same purpose to provide the power and the electricity to, you know, to all of their customers. But investor-owned utilities also have a, you know, they have a duty to provide returns and profit to their shareholders, whereas cooperatives and public utilities are more focused on the service and not so much the profit.

On energy supply, this one's a little bit complex, but IOUs have some much more complex ways of providing energy, and customers sometimes have more, a little bit more choice in how they source their energy when they're served in an area by IOUs. Whereas if you are served by a co-op or a public utility, you usually don't have quite as much choice. So how does this look across the US then? So there's only over 3,000 utilities in the United States, and the map, You know, a large majority of them, two-thirds of them are publicly owned, with another 28% being co-ops and 6% being investor-owned. But when you actually look at the scale of these different companies, different story.

So it's over 70% of US customers. So 160 million US customers are served by IOUs. So again, they only have— they're only 6% of the total number of utilities, but they serve nearly you know, 3/4 of, um, US customers. So that's, you know, massive difference in scale that we're talking about. And so we're— we fall in that, that green 14%, um, of US citizens that are served by a publicly owned utility across the spectrum, regardless of what kind of structure you have.

The role of a utility is generally to design a system that will supply, what is being demanded, right? So this is a great graph that Bri has put together and has, you'll probably, if you keep coming to webinars and if you've gone to past ones, you'll see this one because it's really important. So this is a great example from Sitka specifically about how much power we can generate. And in short, the amount of water, sorry, the amount of power that we can generate here in Sitka is driven by how much rainfall there is. So if we have a low water year versus average versus high, that will drive how much power we can supply.

Supply, and then we then chart that against how much power is demanded or how much our customers use here. So you can see that we're, you know, kind of working towards making sure we have power in our low years and our low water years and average water years to serve our current levels of demand. But then we also have to be thinking about the future and what future demand is going to look like so that the supply can meet future demand as well. So in balancing all of these things, there's a great— I love— Bri kind of coined the, the, the trilemma, which is, I think, a really helpful way of thinking about it. And this sort of three-dimensional scale of sustainability.

So that's the environmental, political, and social constraints that we have to operate within. We also need to focus on reliability to make sure that our services are available and delivered whenever they're needed, because again, energy is so ingrained in our personal lives as well as our, you know, just overall well-being, human life and economy that needs to be a reliable service. And then we also want to make sure that it's affordable too. We want to deliver that at a reasonable cost. And so there's a lot of different considerations for trying to balance all of these things out.

And as you can see kind of listed here, all of these concerns have multiple aspects of the trilemma that affect them. So for example, fuel supply and logistics, we don't use a lot of fuel here in Sitka, and we try not to. It's, you know, because there's sustainability concerns and affordability concerns on that. But we also have to balance that against the reliability of the system, the scalability, the flexibility, the ability to respond to like natural disasters and weather. So you can see how these things are all important, but can sometimes be in conflict with one another, which is why we need to work to balance them.

And then you add the extra dimension on top of them, of all that, of time, that we have both the short-term and the long-term that we have to plan for. Because we want to, again, our goal is to meet what is being demanded of us now. But if we also aren't thinking ahead about what is going to be demanded in the long term, we can't make good decisions about, you know, the kind of utility provider that we are going to be in the future.

Oh, and on top of all these things to balance, we are also subject to the overall economy. Again, we talked about this, you know, the economy and energy being a, you know, a global driver, a geopolitical concern. And so, you know, we have to balance, you know, and make decisions based on a lot of different factors. So the global energy market is, Essentially all of the people of the world, you know, all over 8 billion of them. And we all are working in this cycle in this sort of self— I kind of call it self-feeding cycle or of, you know, sort of micro and macro economics.

So again, we think about the microeconomics. That's the kind of the personal choices that we as individuals make, our households make together, businesses, make and how we personally respond to supply and demand changes. And all of us as individuals making those choices feed macroeconomic factors about total national income, our GDP, levels of inflation, levels of unemployment. And all of those factors then play into, again, how we make decisions on an individual basis. And so, you know, there's a lot to consider.

There's a lot to balance. And there's some things that are kind of squarely in our control and some things that aren't. And that's what makes the prospect of managing and designing a, a, a good utility system a really challenging endeavor. So we're gonna talk a little bit more about these, you know, as we kind of go through the, the rest of the presentation. But generally, when we think about cost of service, then there's all these 8 different factors.

So the, the cost of our fuel, our generation type, our operating costs just to, you know, keep things running, our transmission and distribution lines, responding to weather and regulations, seasonality, the location and where we are, and the different types of consumers that we have.

So we're gonna start talking about the dollars and cents a little bit and how this starts to apply to you and to your utility bill. So we talked about earlier about regulators setting prices for, for power and the core principle.

Is that the rate and the, the revenue that we receive has to be fair in terms of covering our cost, our cost of delivery. So that's where this term of revenue requirement— how much revenue do we have to make to cover our costs? Costs are generally broken down into these 4 buckets. So the first is operating expenses. Again, that's your sort of day-to-day expenses, your regular maintenance, your people, insurance, admin support, that kind of thing.

Capital expenses then are your kind of longer-term, bigger expenses. And I like to think about capital expenses in two ways. There's first, there's depreciation, which is a weird word that often doesn't make a lot of sense, especially when you start to think about it too much in terms of accounting. But the easiest way to think about depreciation is replacement, that you need to eventually replace your big assets because they're going to depreciate over time, i.e., they're going to lose life, they're going to get worn worn, they're going to need to be replaced. And so you're going to eventually have to replace those assets.

That's depreciation. And then there's also investments. That's where you're expanding your ability to produce more revenue, and in the case of an electric utility, produce more power. And debt payments come into both covering depreciation and investments as well. So that's a second bucket there, capital expenses.

The nice thing is that the other two boxes don't apply to us because we are a public utility. But for an IOU, and in some cases a co-op as well, they also have to be concerned about return. Again, they have to deliver profit, they have to deliver shareholder value, and so they have to have a return on their, on their investments. And they also generally have to pay taxes as well. And so because we don't have to worry about returns and profit and taxes, that really focuses our conversation and our considerations about how Sitka sets rates and setting our revenue requirement to really operating and capital expenses.

And so in general, as we move forward into Sitka specifically, I want to throw out this concept. We've seen this kind of color-coded scale a number of times, and we've talked a lot about economies of scale. And all of this kind of ties into this one big concept, which is that the benefits that come with these economies of scale often sacrifice some level of self-sufficiency and independence and vice versa. So it's also a balancing act of how self-sufficient and do you— and independent do you want to be, knowing that that might cost a little bit more. So I'm gonna pause for just a quick sec because we've been through a lot.

What we know so far and what we need to remember moving forward. Sika's grid is a not-for-profit, islanded large microgrid. That means it experiences the influences of the cost factors different than most other grids. But because it is not-for-profit, it's an island, so it's not interconnected, and it's a large microgrid that's actually 100% renewable or 99.999% renewable, is far more independent than self— and self-sufficient, which has a lot of benefits. And if this is something that interests you, I highly recommend coming to that next webinar on November 7th, where we go much more into the independence, self-sufficiency, reliability, and resiliency.

So lots of big buzzwords, but we're going to get more into it at that next webinar. Oh, there's my, there's my little pitch. So quick overview of Sitka's Grid, like I mentioned, islanded microgrid. We have 2 hydroelectric dams. As you can see, our orange line is our transmission and distribution system.

It's not connected. Any power produced in Sitka stays in Sitka. And so how do those 8 factors that Amy quickly summarized influence Sitka's grid? How do they impact our operational cost? Well, like I mentioned, we're 100% hydro.

We are not reliant on fuel. Rain is essentially free. We have plenty of it. The problem with that is it can vary greatly depending on the year. So we still might have to use diesel if we are not watching these things very carefully.

Our generation source is two hydroelectric plants, which is incredibly reliable. It's a well-established technology and it's renewable, which is something that a big part of the world is trying to rapidly adopt. So we're a little bit ahead of the curve though. However, hydropower is one of the most expensive upfront pieces of infrastructure as far as cost to build go, because they were talking massive hundreds of thousands of pounds, millions of tons of cement and cost. And so they're huge, they're huge infrastructure investments.

So they're really expensive upfront, but they also last sometimes 100+ years, which is really great. Our transmission system and distribution system is primarily above ground. And because we are small, right, we're a little microgrid, we don't have very much to really take care of, which is great. However, that does come with the fact that all of those lines play a bigger important part because we don't have very much redundancy. Because they're above ground, they're very vulnerable to weather.

Speaking of weather, I've mentioned rain. We also have high winds. We also have lots of landslide risks. The good thing about this is we use the weather to provide our quote unquote fuel. For our energy, but they can be so extreme that they unintentionally damage that infrastructure.

Regulations. We're islanded. We are not connected to any other grid because all of our power stays within that. We really don't need to— our, our regulators are ourselves, so we are primarily self-governing. That comes with a lot of independence.

However, that's a big responsibility, and as a responsibility, that takes a lot of work to make sure that that ensures fairness for everybody who does use power here in Sitka. Seasonality demand: higher in the winter, lower in the summer. That means we can actually lower the rates in the winter, but it also means we have to raise the rates in the summer. This is actually the opposite for most of the country because of AC concerns. So most places are seeing higher demand in the summer due to more use of AC and lower demands in the winter because it's a little bit— you have more options to heat your house right now.

You can use other fuel sources. Our location, we're very remote. The pros of this is if you're in Sitka currently or anywhere in Southeast Alaska, really look out that window, right? It's a fantastic place to live. But because of that, we are the end of the supply chain.

So it gets expensive when we factor in shipping costs. Things can be delayed and for equipment and of course our customer types. In Sitka, we have 5 categories. I'll talk a little bit more about that. The nice thing about that is your different customer groups can be allocated different amounts of costs of that RR, that big number Amy was just mentioning.

But the challenging thing about that is because we are so small, our numbers don't line up quite the same as the lower 48, which goes into a lot of how some of the, the rates are made. So let's talk a little bit more about that. All of these things, these 8 factors on the far left, influence those big buckets Amy kind of mentioned. Those then feed into our capital expenses, which feeds into our revenue requirement, which we then divide by our customer class to come up with that orange number, right? That's probably the number you are most concerned about.

How on earth do we get there?

In general, there's 3 big steps, and I like to think of budgeting and electric economies, especially in Sitka, as this pie, right? So the first step is figuring out how big that pie needs to be, right? What is that revenue requirement to serve all of the utility customers? Then you need to decide how much that cost is responsible for each customer. Once you do that, you're going to start designing rates that help collect that amount.

Based on the needs of that customer type. So how big is your pie? How you want to cut that pie up and how big those bites should be. So how big is Sitka's power pie? Well, that revenue requirement, right, is essentially that power pie.

Our operating expenses are about 48%. Our capital expenses are about 50% or 52%. This is very similar to other examples that I was able to find across municipally owned utilities. It is almost a 50/50 split. We can break down those costs a little bit more into general operations, regular maintenance, administrative support, insurance are all things that we consider operating expenses.

Those then can add to that 48%. The capital expenses is not as diverse. We've got infrastructure debt and we've got depreciation, which Amy explained earlier. So I'm going to take a quick second. Pass it back to Amy because that 42% is something I get a lot of questions about.

It is the biggest number. It can be kind of scary, but I want to address it so we all feel good about it moving forward. So debt. Yeah, as Brie mentioned, debt is generally kind of a scary word. And when we're looking at, you know, Sitka's pie, how much, how big our pie has to be and how much your rates have to, you know, have to cost.

That debt piece is a really big piece. But it's really important to remember that debt is a tool. And debt is not necessarily unusual or necessarily even a bad thing in energy economics or really any kind of large-scale sector, kind of manufacturing production kind of sector. Again, you have to make big investments into infrastructure.

Structure, either depreciation, replacing your existing assets, or if you want to expand your ability to generate, you have to make, you know, these big capital outlays. And so if we didn't use debt to pay for our replacements or expansions, we would have to pay for those things upfront out of pocket, which would make your rates basically cost prohibitive. No one would be able to afford them. If we had to pay for those things all at once. And so the, the reason that debt is an important tool is because you can spread your cost over time as opposed to paying it all upfront.

So when we talked about, you know, taking bites of a piece of pie, using debt allows you to take smaller bites rather than having to take bigger bites. So the other great thing, because we are a public utility, Debt payments buy us and our future generations ownership in our infrastructure, as opposed to an investor-owned utility that may take out debt. You know, they— you are sort of buying the, you know, the shareholders' value in terms of the value of that asset and the, and the return on them overall. We are investing really in ourselves when we make our debt payments. And so while as much as, you know, I'm, I'm kind of talking about how important debt is and how it's a tool, it's not necessarily bad, not necessarily unusual.

We do also have to keep in mind though that it is, you know, it's a liability and we have to manage it responsibly. We don't want to take on a whole bunch of debt because then that, you know, impacts our rates right now. So again, if the purpose of debt is to allow us to have this incredible infrastructure and to have the supply meet the demand, and we're trying to make those bites of the pie as small and reasonable as possible, if you overload yourself with too much debt, you actually can make your bites too big. And so it's really important that we responsibly manage those. And again, when we talked about earlier in the presentation about balancing the short-term and long-term needs of the system, that role of debt is really important.

So the $110— big, big bold number that you're seeing there— $110 million is roughly the amount of our current electric infrastructure debt, and we're expecting to pay that off by approximately 2050. And again, not unusual for other other electric utilities, and particularly even other public utilities as well. So some great numbers there about, you know, how much debt other municipal utilities have with some other much larger, much scarier numbers, but also larger populations to spread that over. So it's all—. It's important to keep all of those things in context.

But again, SITCA is, you know, actually very much tracking with sort of what the, the standard and the norm is for managing public utilities in terms of our debt load.

So what that looks like in the future, well, that piece of the pie is going to continue to be there. We're going to continue to pay it, and we're doing a lot of things to make sure that we're responsible about it. So we're doing things like rate studies, similar to what I'll explain in just a moment. We're doing condition assessments so we can better plan for that depreciation number, as well as resilience planning and finding grants, because grants is kind of the only other way that you could pretty quickly make that requirement number smaller. By how much smaller really depends on the grant.

But that future outlook, that long-term goal, how much more power do we need? How much more power do we want? All of those things will really help determine how big that slice of pie that debt is will need to be. And the best way to do that is to actually engage in this process that we're doing right now, which is the Sitka Community Renewable Energy Strategy, because ideally we can start making your future a little more certain, giving us a little bit more of an idea of what we're thinking and what we want so we can start planning as far ahead as possible. So back to this cost of service.

We know that about $19.5 million a year is SITCA's revenue requirement. Step 1, done. Next step, determining the cost for each type of customer. This is where it gets really, really tricky. Step 2 is that red arrow, right?

How are we actually taking that $19.5 million and dividing it amongst our 4, technically 5 customer groups.

To do this, we use something called allocation factors, and these are what we use to actually divide that pie, right? This is how we're kind of deciding where to take that knife and start cutting. They are developed by analyzing cause-effect relationships amongst cost categories and characteristics. Some of those cost categories we've gone over, like fuel, regular maintenance, capital projects. Insurance, administrative support, many, many others.

And we can use characteristics like usage or peak demands or number of customers or number of meters, because that might not always be the same, and other factors to basically say, okay, here's how this piece should be divided based on a number of factors. This is what it kind of looks like. As an example, let's say we spent— we, I'm not going to say we— a utility spent $100 million in fuel, and they decided to use that allocator as energy usage, right? It makes a lot more sense that if you are using more of that fuel, you should be paying for more of it. So they look at the energy usage of each category and say, okay, 600,000 megawatt hours total, 230,000 of those were from residents, 3,700, 3,700 $370,000.

Thank you. This is why I don't like zeros. Um, was commercial. So it makes sense that 38% of the costs, or $38 million, should go to the residents, and commercial should pay $62 million of that. Let's just quickly apply it.

Let's, let's see, let's just kind of see what happens. So we have $19.5 million in revenue requirement. I've now divided our customer classes by the percentage. Some napkin math, we do some, you know, little calculations. That turns out to be 25.6% kilowatt— or cents per kilowatt-hour.

That's, that's not right.

It's way too high. And these numbers also change. Why is that? And that's because you have to do this determination over a number of factors. So it's not as simple as just dividing it equally.

You gotta do a lot more work into it. Because rates are really designed on two broad concepts. They need to be able to recover the cost by applying just and reasonable rate-making principles that satisfy the policy and/or market objectives, as well as different stakeholder motivations, so that utility can then recover the cost. So it's this another self-feeding cycle. It's kind of a theme throughout this process.

So one side is a little bit more math-based. The other side is a little bit more human-based. So we've got a little bit of science, a little bit of art. So let's add some art to that science. So we've got our cost categories, we've got our possible characteristics, very much on the science side.

But in addition to that, when we're deciding to make those slices, we're using something called Bond-Brite, Bond-Bite principles. Wow, I'm getting kind of mumbly. I'm so sorry. Understanding our customers, ease of implementation, fairness of appropriate apportions of costs amongst customers that avoid undue discrimination. Let's try and take that butter knife and turn it more into like a specialized pie knife.

So we're doing a better job at allocating those slices.

Because rate making should look like this. It should look like the cost changes by X% each year. The billing demand then changes by that same amount, X, for every year. That means that our utility revenues changed by X percent of that year, which achieves our authorized returns, right? We were said we could hit our revenue requirements.

That's what we need to do. We did it. That means rates reset exactly the same way. This is all in a perfect world. In reality, it looks more like this.

The rates changed by X, but the determinants, those 8 factors, changed by Y, which then changed our revenues by Z. And our ability to hit that revenue requirement exactly on point, it not, not quite as good. We're a little bit high, a little bit low, which makes it difficult, right? And so it's a very dynamic system that in reality is really, really complicated. So With that in mind, when you're designing allocations and rates, there are kind of 3 very common components that you see that we actually use here in Zipka as well, knowing that the— we operate in the real world more than the perfect world, unfortunately.

Some of those rate components are just volumetric charges. These can be flat. This is just the number of kilowatt-hours that you use on your meter, and it is great because you can just say, okay, you use this much out, you use this much, you pay this much. There's a little bit of an art behind it because you can use it to balance policy goals and help customers understand and help them decide when and how they're using power. We do this in Sitka.

I mentioned that rates change seasonally. This is one way we actually use this principle because.

Most of our power is used in the winter, less of our power is used in the summer, and so our rates actually fluctuate depending on the season. And that's because our consumption changes. So our residential's consumption is the highest. It's the highest in the winter because it's cold and we're heating our homes. But our commercial bumps up more in the summer because we get the industrial processes in Sitka especially are very fish processing heavy, those are coming online.

And so we use this volumetric demand and the rate that reflects that to help better allocate where those costs come from.

Other things we use is a demand charge. A demand charge is much more specific to industrial and commercial sectors, but essentially if you, you turn on a tap really fast or you like flush your toilet while you're taking a shower, all that hot water gets pulled and all of a sudden the water gets cold. A similar thing can happen on an electric grid. If a big industry turns on a whole bunch of big equipment at once, it basically draws all that power, and you can— that's called demand. And so you can actually charge on that by how much you're using all at once.

This is good because you can actually then use it to allocate expenses for things like transmission and distribution to other areas that use it more because they need it more quickly. And so it's not something you would normally see in a residential thing because typically residential loads are very consistent, but it is far more common in industry. And lastly, there's this customer charge. These are really great for allocating set expenses that are fixed. So things like billing, things like insurance, it's really easy to divide that evenly as well as making it a little bit more tailored based on the kind of customer that you have.

And the nice thing about that is it, again, it helps make that equal division a little bit more equitable when done correctly. And you can actually see these on your bill. So this is the City of Sitka's customer fact sheet. At the top in this little orange square there, you can actually see what is currently being charged. And as of this recording, our rates are $0.21.50 per kilowatt-hour.

You can find how much you're charged per month, right? That customer class, that orange piece. For residents, it's $21.20.

I will point out where the demand charge is so you are aware of it, and you'll see that it is by kilowatt, right? It's not by kilowatt-hour. Way back in that first presentation, if you were curious about the difference between kilowatt-hours and kilowatts, We talk about that in our general energy economic, our first webinar, which was our future, our present and future energy usage.

You can also find what you need to know what your energy usage is on your bill. So if you take that 2120 from that utility sheet and that number, that per kilowatt hour, you can find your consumption in this green square. If you put this formula together, that number should equal your electric consumption. So their multiplier, I believe, I have not confirmed that, that is the demand. So again, if you are a resident, it should always be 1, but that is actually how like all of those principles in practice use all that information.

So I'm gonna end on how the cost of electricity can be reduced. This is a question that we also hear quite a bit of is, how do we make, how do we make things lower? How do we make things a little bit more affordable? Well, we can continue to do good rate studies and look at the ways we can allocate those costs, but we do have other options, and some of them are easier and more immediate, and some of them we are actively doing. The easiest and most straightforward one is to use more.

Because it's a fixed cost. If we can cut up that pie into as many small pieces or get other people to come and use or help us eat that pie, every single person has to eat a little bit less. We can also do things that increase our reliability and our resiliency to avoid surprise costs. Any sort of hazardous, um, power line that might go down or a storm or something failing because it hasn't been maintained. Those are all things that could come out of nowhere.

And if we aren't prepared, that's gonna basically require us to either rebake the pie. The pie might be a little bit burned, might have to start over. Makes it more expensive, right? More time, more money that we don't necessarily wanna have to put in. We don't want to increase our fixed costs if we don't have to for the sake of selling more.

Ideally, we are using what we already have and doing what we can to get the most out of it, because doing so essentially would require us to have future buyers without necessarily having commitments, which could get a little bit tricky. But the most easiest and immediate form of energy, or easiest way to cost or lower the cost of electricity, is just to conserve it and use it more efficiently. You can learn more about that in our previous webinar, which was all about energy conservation and efficiency. And you probably have noticed that the one on the far left and the one on the far right are, are a bit of a paradox, and that is something that is just part of what happens. And that is all coming back to that balancing act and being aware of that landscape.

And so the city is really focusing on the increasing the reliability and resiliency aspect, especially with our C2C project. As well as getting a better understanding of what our consumers and our customers need through the SCRESS project. The best way, if you want to use less or to reduce your electrical cost, that number on the bill on this slide here, use a little bit less because increasing and diversifying that consumption can be a little bit tricky, but it is an option. And if it's an option you want to talk more about, or any of these other options, or learn more about them, The best thing you can do is really keep learning, and you can do all of this at cityofsitka.com/scress. There are going to be other ways that you hopefully you can take some of our super crash course principles that we have talked about today and apply them into this SCRESS through some workshops that we're planning in the winter of next year.

We also have a couple more webinars coming up. We've got a little bit more radio shows talking about emergency preparedness and related to those reliability, resiliency, and independency. Aspects, those big buzzwords that I keep talking about. But yeah, I want to turn it over and leave a couple of time for questions. So I'm going to say thank you.

I know it was a lot all at once. It's a very big, broad concept, but hopefully you learned something. And I will be putting all of this on that SCRESS website so you can peruse it more at your leisure. Ask questions, get involved is my big hope from all of this. I hope, hope this was intriguing more than anything else.

So thank you.

If you need to contact me or have questions, you can reach me at [email protected]. My number is 907-747-1856. Just so it's on the audio record, I'm going to stop sharing my screen now.

And we can take questions if there are any.

I think Haley's our, our moderator. Let us know if there are any questions. Yeah. Yeah, I think if anyone has something, they can put it in the Q&A function or just in the chat, but it's okay if they don't as well.

I think that we are all good. Yeah, thanks so much, Amy and Bri. I can't wait to have other ways to engage this too and have it on the website, and I think it was really helpful information. Awesome. Well, thank you so much, everybody.

I hope you have a great rest of your day. I'm gonna go get some lunch now. So yeah, yeah, I'm just gonna— I— this is probably my only webinar, so I just wanted to say Thanks for hosting, Bri, and the technical team, and for the community for coming to listen. And just want to shout out the really excellent work that's being done to help both inform the public about, you know, Sitka's energy and the planning process that's going underway. It's a huge effort by our sustainability coordinator Bri, as well as the technical team and support.

And so really excited about this project and appreciate everyone's thoughts and input and participation as we move forward.

All right. Bye. Awesome. Thanks. Thanks for being here.

See ya.