ITEM NO. CA1
PUBLIC UTILITY COMMISSION OF OREGON
STAFF REPORT
PUBLIC MEETING DATE: October 14, 2014
REGULAR
CONSENT
X
EFFECTIVE DATE
DATE:
September 18, 2014
TO:
Public Utility Commission
FROM:
Nicola Peterson
October 15, 2014
THROUGH: Jason Eisdorfer, Bryan Conway, and Roger White
SUBJECT: OREGON UNIVERSAL SERVICE FUND: Lowering the Minimum Average
Quarterly Cash Balance from Three Months to One Month.
STAFF RECOMMENDATION:
Staff recommends that the Commission lower the minimum, average, quarterly, cash
balance for the Oregon Universal Service Fund (OUSF) from three months down to one
month.
DISCUSSION:
Order No. 98-094 (Docket No. UM 731, Phase II) set the minimum, average, quarterly
cash balance at three-month’s disbursements. This conservative1 three-month minimum
was set prior to the fund’s inception and without any analysis of actual cash flow
requirements.
A minimum cash balance is needed because there is a mismatch between cash inflows
and cash outflows. Cash is collected on a quarterly basis while it is disbursed on a
monthly basis. For the past five quarters disbursements have been running ahead of
contributions and based on Staff’s projections are expected to do so into the future. This
has created a situation where the average cash balances will go below the minimum
three-month average level, which would trigger a surcharge rate increase.
1
At current disbursement levels, a three-month minimum would result in $10.2 million dollars being held
to meet the minimum required balance. Using the methodology that Staff is proposing, this balance would
cover the cash requirements of the fund for nearly three years.
Oregon Universal Service Fund
September 18, 2014
Page 2
In order to postpone this rate increase and possibly avoid it, Staff has reviewed
alternative ways to manage the OUSF’s cash balance. As a result of this review, Staff
has found a method for managing the cash balance that will allow the fund to operate
with a significantly smaller balance.
This method requires the monthly tracking and forecasting of cash flows so that Staff
can project when a fund shortfall will occur and therefore when a surcharge rate
increase should be implemented.2 This method was developed to address potential
risks associated with a lower cash balance.
Forecasting this shortfall and taking into account the lead-time required before a rate
increase will generate the necessary cash, allows Staff to reduce the average cash
balance of the fund to between 1.0 months and 1.5 month’s disbursements based on
current conditions. The method also mitigates the risk associated with a lower balance
by increasing the frequency the balance is monitored from quarterly to monthly.
At the May 7, 2014, OUSF Board meeting Staff presented its proposal to lower the
minimum balance from 3.0 months down to 1.0 month. After a discussion of the
potential risks, the Board voted unanimously in favor of proposing the change to the
Commission for approval.
PROPOSED COMMISSION MOTION:
The minimum OUSF average cash balance be reduced from three months to one
month.
2
From an analysis of cash flows, we know that we require one month’s disbursement as a minimum to
cover the fluctuations in a quarter’s cash flows (one month’s disbursement is paid out in the first month
prior to contributions being received in the second month). If the fund balance does not cover the
projected monthly disbursement, a shortfall will occur. By monitoring the fund on a monthly basis, Staff
can forecast when this “critical” balance will be reached in the future. As there is a three quarters leadtime before a rate increase will generate the necessary cash, Staff would forecast out three quarters
into the future.