Weather weighs on OPALCO rate hikes

  • Wed Jul 22nd, 2015 4:02pm
  • News

OPALCO says that erratic weather has been a contributor to the rate increases.

By Meredith M. Griffith

Weekly contributor

The Orcas Power and Light Cooperative members are seeing continued rate increases as OPALCO continues to collect less revenue due to lower kilowatt sales.

This February OPALCO enacted a $10.30 facility charge on all member accounts. For July, the co-op board approved an additional “revenue recovery add-on” through 2015 to meet a projected revenue shortfall of $661,000. The increase will raise the average member’s bill by $8.43 per month.

“Despite these rate increases,” says OPALCO public relations administrator Suzanne Olson, “member bills have been lower on average than the past couple of years. This is because we’re not using as much energy – our revenues are down and so are our bills.”

One key contributor, says Olson, is that recent erratic weather – and the resulting energy demand volatility – pays no heed to the fixed operating costs of energy utilities.

It’s not just that demand for electricity drops in warm weather, erratic weather makes it difficult for energy companies to accurately forecast both the amount of electricity needed from suppliers, and the yearly revenue that will be provided by kilowatt-hour (kWh) electricity sales.

“Everybody in the nation has been caught short this year because it’s an unusual trend we haven’t seen,” explained Olson.

OPALCO President Jim Lett said that many member utilities of the Northwest Public Power Association are struggling with revenue shortfall, due mostly to warmer weather but also because of increased conservation measures and solar generation.

In 2014, OPALCO’s cost of purchased power from Bonneville Power Administration increased by $546,056 it went from $7,584,245 to $8,130,301. That included a $200,000 demand charge levied by BPA in February due to much higher than contracted electricity use spurred by cold temperatures.

Then came unusually warm fall weather that dramatically reduced OPALCO’s expected revenue from kWh energy sales. OPALCO sold approximately 9 million fewer kWh than expected in 2014, resulting in $1,392,794 less kWh revenue than in 2013. NASA and The Natural Oceanic and Atmospheric Administration declared 2014 the warmest year on record since 1880.

“Bonneville Power has 40 people who come up with weather projections,” said Olson. “Normally we calculate our budget of how many kilowatt-hours we’re going to sell based on their predictions, and we generally come out pretty close to what BPA is predicting for the region.”

In 2014, those projections didn’t even come close for OPALCO and for other utilities in the region, resulting in large cost increases.  OPALCO had budgeted in a 2014 margin of $1,121,998, but at year’s end that cushion was reduced to just $121,951. The 2015 budget aims to replenish that margin to $1,098,363.

So for its 2015 revenue projections, OPALCO  based projections off of what Olson calls a “worst-case scenario,” or what happened in 2014. The problem, she says, is that actual revenue for 2015 has been even lower. In the first quarter, the co-op reports heating degree days (HDD) were 42 percent below normal, and kWh sales were down 6 percent, resulting in revenue of $551,276 below budgeted.

Normally a cost of service study every two years has kept OPALCO’s rates on track to collect the revenues required, but the weather lately has been far from normal. Seattle-based EES Consulting has been advising OPALCO on adaptive rate strategies.

A large part of the solution is a transition from directly use-dependent kWh charges toward fixed-rate facilities charges. In 2014, just 25 percent of OPALCO’s operating costs were covered by fixed facilities charges; the other 75 percent of the costs was dependent on islanders using an anticipated amount of energy.

Over the next seven years, OPALCO is forecasting a gradual shift in the rate structure so that up to 75 percent of the facilities costs will be covered by fixed facilities charges, leaving less of the cost burden on kWh revenue. Olson said costs are forecast to increase by 6 percent yearly during 2016-2019. Per current forecasting, the current budget forecasts meeting this increase through facilities charges, while charges for residential energy usage will stay at about $0.08 per Wh (ranging from $0.0852 ‐ $0.078) for the next five years.

“A forecast is just a tool to help us project our future needs,” said General Manager Foster Hildreth. “The board will revisit the rate structure during our budget process this fall. We are listening to our members, and recent board discussions point to a likely shift in how we adjust our facilities charge going forward.”

For the 2015 revenue recovery add-on, added Olson, “If we get cold temperatures coming in, we can put a halt to the add-on. That is a mechanism to be sure we don’t get caught short.”

As for the purchase of Rock Island Communications and its impact on the budget, OPALCO borrowed $2.9 million at the end of 2014 for its start-up capital. The monthly loan payments will be covered by charging each of OPALCO’s 11,198 members $3 per month over 24 months (yielding roughly $806,256), in combination with revenue coming in from established network accounts.

“In 2016, OPALCO plans to borrow another $3.1 million for start-up capital,” said Olson. “By that time, Rock Island will have a more robust revenue stream and, despite compounding loan payments for 2015 and 2016, the amount of $3 per month per member will meet the need. Beginning in 2017 Rock Island Communications is projected to have enough revenue to cover their expenses.”

Olson added that debt service on the purchase price of Rock Island, just under $500,000, will be covered by the cash flow that came with acquisition of the company. A November 2013 OPALCO board directive had already set the co-op’s course toward sharing its high-speed fiber optic infrastructure more broadly for Internet services. When Rock Island became available for purchase the board saw it as a way to speed the process, as well as to greatly reduce its startup costs of hiring staff and developing infrastructure.

“It created a quicker path to profitability, which minimizes our risk as a co-op,” said Olson.

Part of OPALCO’s cost is $4.5 million set aside for up to 3,000 “construction incentives” of $1,500 per home to offset homeowners’ estimated fiber installation costs of $1,500 to $6,000 per home.

OPALCO expects Rock Island to reach the “break even” point in 2017 at somewhere between 2,000 and 3,000 connections, and at that point to take over funding its own expansion to meet further demand. OPALCO expects to begin receiving positive cash flow from Rock Island around the year 2021. Currently six neighborhoods are under construction; 226 locations are connected, and 80 neighborhoods are in the design process.

An August 2014 OPALCO survey revealed a populace ready for better Internet service. The majority of respondents received internet service through CenturyLink (over 60 percent) or Rock Island (18.7 percent). Despite its large market share, just 22 percent of CenturyLink customers said they were satisfied, compared with 64 percent for Rock Island. Major factors were speed, reliability and customer service.

Another major part of OPALCO’s overall financial picture is the need to replace 18 costly submarine cables over the next 30 years, and three of those in the next seven years. The most pressing is a 14,000-foot cable between Lopez and San Juan originally installed in 1977 for $3 million. OPALCO will replace it in 2017 at a cost of over $15 million. Hildreth expects revenue from Rock Island and a USDA loan to help offset those expenses.