Chelsea City Council Evaluates Proposed Electric Rate Hike Following In-Depth Study

At the Chelsea City Council meeting on December 18th, Chris Lund from Utility Financial Solutions presented a detailed study on the city's electrical rates, sparking a significant discussion about potential rate adjustments. The study aimed to provide city leaders with a comprehensive understanding of Chelsea's electricity usage and financial needs, especially in light of possible rate increases.

Lund shared insights from the study, which focused on the financial history and projected needs of Chelsea's municipally owned electric department. "What we did is we looked at a very detailed approach to looking at your financial history," Lund stated, underscoring the depth of the analysis.

The study suggested a 1.5% average rate increase based on various financial parameters across different categories (See chart). Lund explained, "What the study shows is that we are suggesting that the council consider and hopefully approve a 1.5% rate increase to the electric rates." This recommendation was driven by the need to cover projected five-year plans, including capital improvements and internal costs.

Proposed electrical rate increases across different user categories. Image: Utility Financial Solutions.

Utility Financial Solutions examined key financial areas like minimum cash reserves, target operating income, and debt coverage ratio. "We looked at the electric financial projection," Lund said, highlighting the complex financial modeling involved. The study emphasized the necessity of maintaining adequate cash reserves. Lund noted, "We want you to build so you have roughly four months of cash available of your annual expenses to maintain paying your bills and staying healthy financially."

The report also delved into operating income requirements and debt coverage ratios. Lund clarified the need for an operating income that covers expenses, contributes to cash reserves, and addresses inflationary pressures.

Addressing the council's queries, Lund assured them that the proposed rate adjustments take into account scheduled improvements. "This does, and we will get to a slide that lists the dollar amounts each year that are budgeted for those infrastructure improvements," he confirmed.

City Manager Colburn recommended a cautious approach, suggesting a one-year review period given market volatility. Colburn emphasized the importance of treating the electric department as an enterprise fund, needing careful financial management.

In response to a request for historical context, Colburn noted that the last rate increase was in July 2019, a $1 per meter increase. He pointed out the rarity of maintaining zero rate increases for over four years and highlighted Chelsea's position as having some of the lowest rates in the state.

Lund’s presentation can be found in the council meeting packet and heard on the meeting video, both on the city’s website. The city has set a public hearing for January 8th, 2024, to hear public comments on the council’s consideration of an electrical rate increase.