Lincoln Mayor Chris Beutler says a 10.1 percent rate hike proposed by the Lincoln Electric System Administrative Board is a step in the right direction.

“I’m glad that the board is being sensitive to public opinion and trying to hold the rates down,”  Beutler said.

The mayor said he and his staff will examine the board’s rationale for the proposed rate hike and make constructive suggestions.

On Friday, the LES board unanimously proposed a 10.1 percent systemwide rate increase to deal with a projected $9.3 million shortfall by year’s end. As part of  the rate package, the board also wants to reduce the utility’s operational costs by $1.1 million and use $1.5 million from its Rate Stabilization Fund.

A week ago, Beutler and LES Administrator and CEO Terry Bundy squared off publicly over news the utility would seek a rate increase, perhaps as high as 12 percent. The mayor said such a jump was unacceptable in such a difficult economy; he threatened a veto and withdrew his proposed 1 cent increase in the city property tax rate. Bundy accused Beutler of using the rate hike as a scapegoat for city budget issues.

The Lincoln Employers Coalition, a rate watchdog group made up of the city’s 25 largest employers, also blasted the earlier proposal, saying that when combined with a 5 percent increase this spring, it would amount to a 17 percent rate hike in one year.

“We appreciate anything the board can do to lessen the impact on the employers and citizens of Lincoln,” coalition spokesman Bob Caldwell said Friday.

“Our concern and disappointment is that in less than a 12-month period, we will have over a 15 percent increase in electric rates,” added Caldwell, president and CEO of Hampton Enterprises.

LES management plans an Aug. 5 public hearing on the proposed 10.1 percent rate hike. Afterward, the board will vote to forward a rate increase to the City Council.

If the 10.1 percent hike is approved by the council, a typical residential customer would see an $8.50 increase in his or her monthly electric bill beginning Sept.1. The annual increase would be $102.

According to LES, higher wholesale energy and power generation costs, especially skyrocketing natural gas prices, caused the utility to seek a rate hike for the second time this year. A 5 percent rate hike took effect March 1.

“Just as the increases in fuel costs have been difficult for LES, we understand they will also be difficult for our customers,” Bundy said. “As we have in the past, we will work with our customers through this time of rising costs.”

Last year, about 17 percent of LES’s energy was generated by natural gas, compared with the national average of 22 percent for utilities. This year, LES said,  about 10 percent will be generated by natural gas, because of the utility’s partnership in the Walter Scott coal plant south of Council Bluffs, Iowa.

LES plans to reduce its operational costs this year by cutting travel and training expenses,   eliminating customer surveys by consultants, leaving some jobs vacant and deferring maintenance on generating equipment until next year, Bundy said in an interview. There will be no layoffs, he said.

“I expect the Employers Coalition to have concerns and to want to know the details about the numbers and we are certainly willing to provide those,” he said. “I think there will be a lot of (coalition) members … that will recognize what is happening to fuel prices. They use natural gas like we do.”

Before the vote, Kathy Campbell, chairwoman of the LES budget and rates committee, warned that there may be more rate increases as the utility grapples with escalating energy costs.

“It’s extremely important to remember that this is not a one-time event,” Campbell said.

Bundy said LES might need a 1 percent to 4 percent increase in 2009, depending on year-end adjustments from its partner power plants, like Laramie River Station in Wyoming, and what happens to natural gas costs.

Campbell said the budget and rates committee focused much of its time on the utility’s Rate and Stabilization Fund. LES has used the fund to keep  a lid on rates in the past. But over the years, the fund has been depleted, from $12 million to about $2.4 million.

“If we had a lot of money in the Rate Stabilization Fund it would make our decisions today a lot easier, but we don’t,” she said.

Omaha Public Power District, for example, has $32 million in its fund, Campbell said, which allows it more flexibility and helps the utility cover rising energy costs.

Board member Dawn Rockey said she didn’t like to see LES’s Rate Stabilization Fund depleted, but added: “I think using the $1.5 million is doable.”

Rockey said she is frustrated because LES officials went to the Lincoln City Council a couple of years ago to ask for the authority to use a “power cost adjustment” tool to deal with escalating energy costs. Similar to a surcharge, the adjustment would allow LES to adjust its rates automatically to reflect market conditions.

“We were blown out of the water,” Rockey said. “Now, maybe members of the council and the Lincoln Employers Group will understand how a PCA would be used in this situation.”

Bundy told the board LES doesn’t have the tools it needs to deal with escalating energy prices and the financial shortfall. They include: a higher level of debt coverage, more money in its Rate Stabilization Fund and the Power Cost Adjustment.

Caldwell said the coalition  has generally supported having a reasonable amount of money in the Rate Stabilization Fund to cover swings in power costs, but is “absolutely” opposed to a power cost adjustment.

“We believe that is not the answer. All a PCA does is allow LES to raise rates whenever they want to without asking for a vote,” Caldwell said. “If we had a PCA today there would be none of these hearings and they would have raised rates by 10 percent.”

Bundy said a power cost adjustment would be a good tool for LES, but it does not have plans to implement that right now. He said the utility may consider a PCA if customers become more comfortable with it. In the past, they have reacted adversely to such a proposal.

“We will find a way to pay the bills,” said Bundy, noting that he is more concerned about the utility’s  financial ratings with bond agencies. Those ratings allow LES to borrow money for capital improvements.

“What we are seeing here is not that unusual,” Bundy said. “These rate increases are happening across the country. Our timing is earlier because we don’t have the tools to deal with it on a short-term basis.”

Reach Algis J. Laukaitis at 473-7243 or alaukaitis@journalstar.com.