Economic Development Rate FAQs

2018 Economic Development Rate (EDR) Rate Proposal

What is an Economic Development Rate?
An Economic Development Rate (EDR) is an incentive used by utilities to attract, retain and promote the expansion of businesses within their service area.  Qualifying companies receive a discount on standard rates, which helps reduce the cost of doing business within a particular service area.

Why does SMUD offer an Economic Development Rate?
To maintain and increase energy sales, SMUD must attract new customers, retain current customers and increase load growth. One of the ways we accomplish this is through keeping our rates among the lowest in California.  However, other states such as Arizona, Washington, Nevada, Texas and Oregon often compete to attract high profile projects and businesses, while offering much lower electricity prices. Recognizing that electricity costs are often a factor in a company’s decision to locate to a region, SMUD provides an EDR to help make the Sacramento Region more attractive to businesses.

How are the recommended changes to the EDR going to benefit the regional economy?
The recommended changes are designed to help the Sacramento region compete as a location for companies to create and retain jobs, providing benefits for both SMUD’s customers and residents throughout the region. We expect the changes will help encourage regional economic growth. Creating and retaining jobs in the area contributes to the local economy through more home sales, retail activity and further investment which all help improve the economic vitality of the region.

How will the change in EDR affect me?
Attracting new customers allows fixed costs to be distributed among a greater number of customers, which will help us continue to keep our rates low.

What are the highlights of the EDR changes?
The highlights include increasing the overall discount, extending the length of time the discount is offered and removing some eligibility requirements, such as industry limitations, to allow more businesses to qualify. The proposal provides incentives to attract new business customers to SMUD’s service area, as well as retain and grow existing customers. In addition, the proposal puts an emphasis on economic development in disadvantaged communities by offering larger discounts for companies locating, remaining or growing in those areas.

Why are changes being made to the EDR?
SMUD offers very competitive rates within the State of California. However, some neighboring states offer more competitive energy rates and they are also seeking to attract commercial businesses. By enhancing our EDR incentive, we’re giving the Sacramento Region a competitive edge.

How many customers utilize the EDR?
Over the last 10 years, 8 customers have enrolled in the rate. The existing EDR includes several criteria that businesses must meet to qualify for the rate. The changes proposed aim to simplify the EDR and remove some qualifying guidelines to increase participation and encourage economic development in the region.

What is the current EDR?
A customer must meet all of these criteria to qualify for the EDR:

  • Take service of at least 300 kW on a single meter; and
  • Be an designated industry in North American Industry Classification System (NAICS) in one of the following areas: agriculture, mining, utilities, construction, manufacturing, wholesale trade, transportation, information, real estate, finance, professional and technical services, management of companies and enterprises, administrative and support services and health care; and
  • Create or retain at least 50 full-time equivalent jobs, or 25 full-time equivalent jobs in areas of high unemployment and poverty; and
  • Receive full service from SMUD.
  • The company also receives a 5% discount in year 1, 3% in year 2 and 1% in year 3.

What does “full service” mean?
Full service is defined as purchasing all electricity for the applicable facility from SMUD. The customer may not augment or offset any electric requirements from solar or any other form of distributed generation not provided by SMUD.

How does the current EDR compare to other utilities?
When compared to other electric utilities in California, SMUD currently offers the smallest EDR incentive, yet has the largest number of eligibility requirements. 

Why is SMUD extending the contract term from 5 to 10 years?
The recommendation extends the term of the contract to a 10-year period for the EDR because most businesses looking to relocate consider a planning horizon of 10 years and are interested in some level of certainty. Additionally, 10 years is a longer horizon to allow customers to start their business, begin their expected growth, and move to full operation and provide a gradual transition from the discount rate to the standard rate.

What are the main changes to the EDR?
The recommended changes to the EDR are as follow:

  • Remove the industry requirements so that all industries may qualify for the EDR rate;
  • Remove the minimum jobs requirements;
  • Require verification from a 3rd party entity responsible for attracting new businesses to the Sacramento area to ensure that a discount on electricity would have a meaningful impact on the business;
  • Remove the “full service from SMUD” requirement to allow customers to receive power from solar and/or other distributed generation options;
  • Extend the contract term from 5 to 10 years; and
  • Provide a higher discount for businesses locating, remaining or growing in disadvantaged communities.

Why open up the EDR to all industry sectors?
Our economy is dynamic and constantly changing. It’s been determined that the current EDR isn’t very effective. Over the last 10 years, 8 companies have utilized the EDR. One of the leading factors is the limitation of industry sectors, and many industries are continually changing. Manufacturing isn’t the same as it has been in the past, and with new emerging companies like Google, Salesforce and Amazon, this change will help keep Sacramento as a viable alternative for companies to consider.

Why remove the jobs requirement?
As the Sacramento economy continues to change and grow, it has become apparent that the attraction of smaller businesses and startups is critical to the region’s future. By removing this requirement, the Sacramento region positions itself to be much more attractive to these new customers. Also, as ‘just in time’ manufacturing has emerged, companies operate much leaner, so the number of jobs per company has shrunk.

Why use a 3rd party entity to verify an EDR applicant and who will be used to perform this work?
3rd party verification adds a level of review and validation to attraction and more importantly retention projects. By involving a 3rd party for verification purposes, the intention is to prevent abuse of the EDR while also making it an attractive benefit for those companies that do qualify. 

Why remove the “full service” requirement from the EDR?
With the changing energy marketplace and SMUD’s continued push for environmental sustainability, SMUD doesn’t want to limit customer’s choice of electricity.  By removing the “full service” requirement, it puts participating companies in a situation where they can either receive the discount or possibly put solar on their roof or another technology. 

How does the retention component work?
The company must meet all of the requirements and have an executive certify when a company is exploring other locations and electricity costs are a factor in their decision. It’s important to remember there is also the 3rd party verification.

What is the new discount?
Qualified companies will have two options for the discount, depending on their location within SMUD’s service area.  The table below outlines the options: 

Proposed Economic Development Rate discount options 

  Year 1  Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Option 1
6% 6% 6% 6% 6% 5%  4% 3% 2% 1%
Option 2
4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5%  4.5%

For areas of high unemployment, a company can qualify for this discount:

Proposed Economic Development Rate discount options for disadvantaged communities

  Year 1  Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Option 1
8% 8% 8% 8% 8% 6.5%  5% 3.5% 2% 0.5%
Option 2
6% 6% 6% 6% 6% 6% 6% 6% 6% 6%

How were the new discount levels determined?
SMUD has collected higher revenue from commercial and industrial customers with demand of at least 300 kW as compared to its marginal cost. Large grocery stores, manufacturing facilities, and large fitness centers are examples of customers with electricity demand of at least 300 kW. SMUD performed an analysis which resulted in the new EDR discount. This incentive should translate into steadier load growth and new marginal revenue from new retail sales which help reduce rate pressures by creating new revenue from existing infrastructure. Additionally, with the creation of new jobs and the retention of existing jobs in the region, residential growth is also expected.

How are areas of high unemployment determined?
Eligible businesses locating in areas of high unemployment and poverty will be determined by the Disadvantaged Community designation under the Office of Environmental Health and Hazard Assessment. SB 535 is how it is also known.

Why did you change the definition for disadvantaged communities?
SMUD currently uses a mapping tool for the State’s Hiring Tax Credit which is monitored by the Franchise Tax Board.  In the Governor’s proposed budget, this geographic component will be removed, which then eliminates this tool. Additionally, the new tool is already successfully utilized by our Energy Assistance Program Rate (EAPR) program which provides qualified low-income SMUD customers with a discount on their monthly bill.

What specific parts of the SMUD bill is discounted with the EDR?
Qualified businesses will receive a discount on the System Infrastructure Fixed Charge, Site Infrastructure Charge, Summer Super Peak Demand Charge and electricity usage charges on their bill.

Will the proposed EDR change affect current residential or commercial rates?
Implementing the recommended changes will not impact rates for residential customers or current commercial customers who do not change their operations.

How do these changes benefit current customers?
The changes to the EDR would benefit SMUD customers by increasing SMUD’s customer base, which helps to keep rates low by spreading SMUD’s fixed costs over a larger number of customers. It also contributes to the overall economic vitality of the region we serve.

What is the fiscal impact of the new EDR?
Economic development experts estimate that about 15-20% of prospects on average decide to establish their business in a new location. The Sacramento region’s lead business attraction organization, Greater Sacramento Economic Council, works on roughly 90-100 projects a year.  With roughly 15-20 companies moving to the region about 20% of them will qualify for the EDR. This was determined by the historical number of projects that are large electric users and would be eligible for the EDR. The discount resulting from the changes is expected to be approximately $4.7 million annually. Over 10 years, additional customers would be added to the rate, so the total discount is expected to be approximately $31 million. It is expected that could generate approximately $421 million of new sales after the discount is applied.