Tim McCarthy, CEO
You Need To Read This One
Over the past few months you have read about the impact clean air legislation and the cap and trade plan could have on our electric bills. We have other issues closer to home that will impact us as well. The board and the staff have an obligation to keep the cooperative financially healthy and that calls for a continual evaluation of revenues and how they are generated through our rate structures.
There are two parts to your electric bill. The first is what the cooperative pays our power provider to supply power. This is a direct pass through cost with no mark up to the member. This accounts for roughly 60-70% of your bill. The remainder of your bill is what the cooperative uses to maintain the entire distribution system and all administrative functions a utility must perform to provide service, meet mandated requirements, and be a responsible corporate member of the community. I’ll refer to this as the Tipmont portion of your bill for the sake of this article. The Tipmont portion of the bill is further divided into two elements.
The first part of the Tipmont portion of the bill is the monthly “Service Charge.” This is a fixed charge designed to cover the costs for the physical assets that are constructed and put in place to serve the entire membership. Each member should pay a set fee appropriately assigned across the rate classes to cover these costs. At some point in the future we hope to change our bill format so this cost will be clearly shown as a line item on your bill. As a point of reference, the most expensive member class to deliver electricity to is the residential group. This is due to the system build out that must occur to each residence in the cooperative’s service territory.
The second part of the Tipmont portion of the bill is the energy charge. At Tipmont, like the majority of electric companies, we use what is known as a declining block rate structure. This structure front loads the rates to insure the utility collects any remaining costs associated with the physical assets that the “Service Charge” does not cover. The rates then decline in each energy block as these capital costs are covered. Any revenue collected beyond the cost of building out and maintaining the electric system is used to cover the cost to purchase the wholesale power we deliver to you and all our other members. In many instances the standard monthly “Service Charge” is artificially low and always made up for in the rate blocks.
Our cooperative is one in which the “Service Charge” has been artificially low for quite some time. This can weaken the cooperative’s financial position as it hinges revenues on the hope of “normal” operating conditions. A great example of the financial concern this creates occurred this summer with the cool weather we experienced. It was reported that July, 2009 was the second coldest July since records have been kept. Energy sales were down accordingly. This creates the type of challenge our cooperative is currently facing. When a utility does not capture all of its fixed costs in the “Service Charge” and counts on sales volume to make up for the shortfall it is exposed financially. This summer we showed losses for two consecutive months. We have to start to change this antiquated rate structure to make sure the cooperative is protected and remains financially strong for the membership.
As my position requires, I sometimes have to deliver less than favorable news. The Board and the management staff agonized over this decision greatly at the annual planning session. Ultimately, it was decided to start taking steps toward getting the “Service Charge” in line with true costs of service. To do this, a $5.00 increase to the member “Service Charge” will be implemented in January 2010. For the residential service class this means an increase from $15.00 to $20.00 a month in the standard fee for your service. All other rate classes will see this initial increase in their respective “Service Charge” as well. We are making this change based on the information contained in the rate study we used for the last rate review in 2008. Costs have increased since this time and this increase would have been well within line then. We will be conducting a new rate study in the future and looking to restructure our rate format and align our rates in a manner consistent with costs. The goal is to insure all members across all classes of service are paying something closer to the actual cost to physically serve them going forward.
I am sure I will get a good amount of feedback from this news. I have worked through rate issues in the past in my career and I know that no one wants to see increases. The reality is the costs to provide service and maintain the electrical system continue to rise. The board has taken actions to lower their expenses including freezing their compensation at 2009 levels. The staff will be going through the budget process this year with an eye to further eliminate as many internal costs as we reasonably can to hold down any future increases as much as possible. We are trying to communicate this change early so you have time to adjust. You will see further communications in your billing inserts and on our web site. As always, I will try to answer as many emails as I can personally or in a grouped fashion to keep you informed about this matter and any others in the future.
Until next time,
Tim McCarthy, CEO