RFP for Cost-of-Service and Rate Study

REQUEST FOR PROPOSALS (RFP)
Perform a Comprehensive Utility Financial Planning, Cost of Service Analysis and Rate
Design Study for Electric, Water, and Wastewater Departments
PURPOSE
The Gaffney Board of Public Works ("BPW") is soliciting proposals from qualified utility
financial and rate consultants to perform a comprehensive cost-of-service, and rate design study
for BPW's Electric, Water, and Wastewater utilities.
The selected consultant will be expected to perform a comprehensive evaluation of the financial
condition, revenue requirements, cost allocation, rate structures, capital funding requirements,
reserves, debt capacity, customer classes, and long-term financial sustainability of each utility.
The study should provide BPW with a defensible and practical framework for establishing rates
and financial policies over a minimum five-year planning horizon while maintaining reliable
service, funding necessary capital investment, preserving appropriate financial strength, and
allocating costs equitably among customers.
The engagement shall also address significant strategic issues facing BPW, including large
electric loads, growth-related infrastructure, system development and capacity charges, changing
consumption patterns, and other issues identified during the study.
BPW intends for the final work product and financial models to become ongoing management
tools rather than documents used solely for a single rate-setting decision.
STUDY OBJECTIVES
The primary objectives of the engagement are to:
1. Determine the revenue requirements of the Electric, Water, and Wastewater utilities over
a minimum five-year planning period.
2. Determine whether existing rates and charges adequately recover the cost of providing
service.
3. Develop a detailed cost-of-service analysis for appropriate customer classes within each
utility.
4. Evaluate whether existing customer classes are appropriately defined and whether each
class is recovering its allocated cost of service.
5. Evaluate the balance between fixed and variable revenues and the extent to which
existing rate structures recover fixed system costs through fixed charges.
6. Develop alternative rate structures that appropriately balance revenue stability, cost
causation, customer impact, conservation, economic development, simplicity, and
fairness.

7. Evaluate reserve levels, debt service coverage, liquidity, capital funding strategies, and
other financial policies.
8. Incorporate BPW's capital improvement plans into long-term financial forecasts and
determine the appropriate combination of cash funding, debt financing, contributions,
grants, and other funding sources.
9. Evaluate BPW's financial exposure to changes in purchased power costs, customer
demand, water demand, wastewater flows, customer growth, inflation, capital costs, and
other significant variables.
10. Evaluate rates and contractual provisions applicable to wholesale customers and
exceptionally large utility customers.
11. Develop recommendations concerning growth-related charges, system development fees,
capacity charges, and other appropriate mechanisms for recovering costs associated with
new development.
12. Provide BPW with fully functional, unlocked financial and cost-of-service models that
BPW staff can maintain and update following completion of the engagement.
SCOPE OF WORK
GENERAL FINANCIAL ANALYSIS
The consultant shall develop a comprehensive financial plan for each utility.
At a minimum, the analysis shall include:
A. Five-Year Financial Forecast
Develop a minimum five-year forecast for the Electric, Water, and Wastewater utilities
incorporating:
* Operating revenues
* Customer and usage forecasts
* Operating and maintenance expenses
* Purchased power and other purchased utility costs
* Personnel expenses
* Inflation
* Anticipated debt service
* Capital expenditures
* Cash-funded capital
* Depreciation
* Transfers between funds, if applicable
* Contributions and other non-rate revenues
* Reserve requirements
* Debt service coverage

* Cash balances
* Working capital
* Other relevant financial metrics
The consultant shall identify anticipated rate adjustments necessary to maintain the
recommended financial condition of each utility throughout the forecast period.
B. Financial Policy Review
Evaluate and recommend appropriate targets for:
* Operating reserves
* Capital reserves
* Emergency reserves
* Debt service reserves
* Days cash on hand
* Debt service coverage
* Minimum unrestricted cash
* Capital funding from current revenues
* Debt-to-capital relationships
* Other appropriate utility financial metrics
Recommendations should consider utility industry practices, BPW's credit
considerations, capital requirements, and the operational characteristics of each utility.
C. Capital Funding Strategy
Evaluate BPW's planned capital improvement programs and recommend an appropriate
funding strategy.
The analysis shall evaluate:
* Cash funding
* Revenue bonds or other debt
* State and federal funding programs
* Grants
* Customer contributions
* Developer contributions
* System development/capacity fees
* Special contractual arrangements
* Other available funding mechanisms
The consultant shall evaluate the intergenerational equity of funding major long-lived
infrastructure entirely from current rates versus debt financing.

COST-OF-SERVICE ANALYSIS
The consultant shall conduct a detailed cost-of-service analysis for each utility using generally
accepted utility ratemaking principles.
The analysis shall identify the cost of providing service to individual customer classes and
appropriate functional cost categories.
The consultant shall clearly document allocation methodologies, assumptions, and cost causation
principles.
The analysis shall identify:
* Current revenues by class
* Allocated revenue requirement by class
* Rate of return or revenue sufficiency by class, as appropriate
* Percentage difference between current revenues and cost-of-service revenues
* Interclass subsidies
* Significant intraclass subsidies where reasonably identifiable
* Recommended movement toward cost-of-service
Where immediate movement to full cost-of-service rates would create unreasonable customer
impacts, the consultant shall recommend appropriate transition strategies.
ELECTRIC UTILITY ANALYSIS
The Electric Utility analysis shall include, at a minimum:
A. Electric Cost of Service:
Functionalize, classify, and allocate electric system costs as appropriate among:
* Generation or purchased power
* Transmission
* Distribution
* Customer-related costs
* Demand-related costs
* Energy-related costs
* Metering
* Billing and customer service
* Administrative and general costs
* Other appropriate categories
The consultant shall evaluate appropriate allocation methodologies including coincident peak,
non-coincident peak, energy consumption, customer count, and other applicable cost drivers.

B. Electric Rate Design
Evaluate:
* Customer charges
* Energy charges
* Demand charges
* Minimum bills
* Minimum demand provisions
* Seasonal rates
* Time-of-use rates
* Power factor provisions
* Demand ratchets
* Load factor considerations
* Economic development rates
* Interruptible or curtailable rates
* Standby rates
* Distributed generation rates
* Other appropriate rate structures
The consultant shall identify the fixed costs associated with providing electric service and
evaluate the extent to which existing fixed charges recover those costs.
C. Purchased Power Analysis
Evaluate BPW's purchased power costs and how those costs should be reflected in retail
rates.
The consultant shall examine:
* Energy costs
* Capacity costs
* Transmission costs
* Demand charges
* Purchased power adjustments
* Peak demand exposure
* Load factor
* Coincident peak responsibility
* Other applicable purchased power cost components
The consultant shall recommend appropriate mechanisms for passing through volatile or
externally imposed power supply costs without requiring a complete rate study each time
those costs change.

LARGE-LOAD AND INDUSTRIAL ELECTRIC RATE ANALYSIS
BPW desires a detailed analysis of exceptionally large electric loads and the financial and
operational risks associated with serving such customers.
The consultant shall evaluate whether BPW should establish one or more separate large-load
customer classifications or tariffs.
The analysis shall address:
* Contract demand
* Minimum billing demand
* Demand ratchets
* Load factor
* Coincident peak responsibility
* Transmission cost responsibility
* Purchased power capacity requirements
* Dedicated infrastructure
* Substation and transformer requirements
* Customer-specific facilities
* Power factor
* Minimum monthly bills
* Security requirements
* Credit requirements
* Deposits
* Letters of credit or other financial security
* Contract terms
* Minimum contract periods
* Early termination provisions
* Stranded asset protection
* Construction advances
* Contributions in aid of construction
* Expansion requirements
* Ramp-up periods
* Load reductions
* Failure to reach projected demand
* Backup or standby requirements
* Curtailable/interruptible options
* Economic development incentives
* Risk allocation between existing customers and the large-load customer
The consultant shall specifically analyze circumstances in which a customer's projected load
requires BPW to incur substantial power supply, transmission, substation, distribution, or other
infrastructure obligations before the customer achieves full load.

The consultant shall recommend contractual and rate mechanisms to prevent existing customers
from bearing stranded costs if a proposed large-load customer fails to materialize, develops more
slowly than anticipated, reduces load, or terminates service.
WATER UTILITY ANALYSIS
The Water Utility analysis shall include:
A. Water Cost of Service
Allocate water system costs among appropriate functions including:
* Source of supply
* Treatment
* Pumping
* Transmission
* Distribution
* Storage
* Metering
* Customer service
* Billing
* Administrative costs
* Fire protection
* Other appropriate functions
B. Water Rate Design
Evaluate:
* Base/customer charges
* Meter-size charges
* Volumetric rates
* Inclining or declining block rates
* Uniform volumetric rates
* Minimum bills
* Residential rates
* Commercial rates
* Industrial rates
* Irrigation rates
* Fire protection charges
* Bulk water rates
* Wholesale rates
* Other applicable charges
The consultant shall evaluate the amount of fixed water system costs and the appropriate
level of fixed-cost recovery.

WASTEWATER UTILITY ANALYSIS
The Wastewater Utility analysis shall include:
A. Wastewater Cost of Service
Allocate wastewater costs among appropriate functions including:
* Collection
* Pumping
* Conveyance
* Treatment
* Solids handling
* Customer service
* Billing
* Administrative costs
* Capital costs
* Other appropriate functions
B. Wastewater Rate Design
Evaluate:
* Base/customer charges
* Volumetric charges
* Minimum bills
* Residential rates
* Commercial rates
* Industrial rates
* High-strength waste charges
* Surcharges
* Contract customers
* Other appropriate charges
The consultant shall evaluate whether wastewater charges appropriately reflect both flow and
strength characteristics where applicable.
SYSTEM DEVELOPMENT, CAPACITY, AND GROWTH-RELATED FEES
The consultant shall evaluate BPW's existing mechanisms for recovering the cost of system
capacity and infrastructure associated with growth.

The analysis shall include appropriate methodologies for:
* Water system development fees
* Wastewater system development fees
* Connection charges
* Tap fees
* Meter fees
* Electric infrastructure contributions
* Developer contributions
* Oversizing reimbursements
* Extension policies
* Other growth-related charges
The consultant shall distinguish between charges intended to recover direct installation costs and
charges intended to recover the value or cost of system capacity.
Recommendations shall be legally defensible and consistent with applicable South Carolina law
and generally accepted utility industry methodologies.
CUSTOMER BILL IMPACT ANALYSIS
For all recommended rate alternatives, the consultant shall prepare customer bill impact analyses.
The analysis shall include representative customers within each major class and show:
* Current bill
* Proposed bill
* Dollar change
* Percentage change
* Impacts at different usage levels
* Impacts over the multi-year implementation period
For major industrial and large commercial customers, BPW may request customer-specific
impact analyses.
The consultant shall identify unusual or disproportionate impacts and recommend appropriate
mitigation or transition strategies where warranted.
RATE BENCHMARKING
The consultant shall compare BPW's existing and proposed rates with relevant peer utilities.

Benchmarking shall not be used as a substitute for cost-of-service ratemaking but shall provide
context concerning BPW's competitive position.
Comparisons should consider differences in rate structure and, where possible, include
representative monthly bills rather than comparison of individual rate components alone.
SCENARIO AND SENSITIVITY ANALYSIS
The consultant shall develop financial scenarios allowing BPW to evaluate material changes in
assumptions.
At a minimum, scenarios shall address:
* Higher and lower customer growth
* Loss of a major customer
* Addition of a major customer
* Large electric load additions
* Higher purchased power costs
* Changes in peak electric demand
* Higher inflation
* Higher capital construction costs
* Higher interest rates
* Changes in water demand
* Changes in wastewater flows
* Accelerated capital programs
* Delayed capital programs
* Major regulatory expenditures
* Changes in debt financing assumptions
BPW shall be able to modify key assumptions within the final financial models.
AFFORDABILITY AND CUSTOMER IMPACT
The consultant shall evaluate the affordability implications of recommended rate changes,
particularly for residential customers.
The consultant shall identify generally accepted affordability metrics and provide
recommendations regarding strategies BPW may consider for addressing affordability concerns
without creating inappropriate subsidies or undermining the financial integrity of the utilities.