A Letter to OPALCO Members to Clear-Up Some Lingering Confusion

(Editor’s note: A version of this letter appeared in the Comments section under the Orcas Issues post last Friday:  ((orcasissues.com/opalco-board-sets-temporary-revenue-recovery-add-on )). Since there has been a response to the letter, we are keeping the original version in the Comments as well as publishing it here.)

— from Suzanne Olson (solson@opalco.com)–

First, apologies to those who have been waiting to hear from OPALCO in response to recent postings. We have many irons in the fire and are working hard to give each its due attention. If I could have a conversation with each of you, it would go something like this.

How does OPALCO determine the difference in cost of providing service between Residential and Commercial customers?

As a couple of you have mentioned in social media posts, it would have been easier for members to understand the add-on charge if OPALCO had just applied the same one cent to every member regardless of rate class. True, that would have simplified things. But, that’s not how a co-op works. We take pains to assess rates (and any other charges) based on the true cost of providing service to each rate class. Sucks for us – it’s quite an exercise – but the system is built on the co-op principles of sharing the load.

For those who haven’t been following the conversation, OPALCO uses a Cost of Service Analysis (COSA) performed by an independent consulting firm to estimate the cost to serve each member class (e.g. Residential, Commercial).

In plain speak, we add up all the costs that are necessary to deliver power to a member rate class and divide by the number of members. It costs more per kilowatt hour (kWh) to serve Residential members than Commercial members, on average, despite the larger loads of businesses. The difference on the residential side is caused by the sheer number of accounts (nearly 75% of all accounts), and heavily weighted by the number of homes served by equipment (transformers, regulators, etc.) used by only the one (or two) homes, often at a distance from the core of our system. The difference on the commercial side due to the small percentage of accounts weighted by the fact that most businesses are located in a central village location close to our core and where several businesses share the infrastructure that delivers the power. Chom: we do not have a bias toward commercial members – we make sure that each member class pays its fair share.

For those who prefer consultant speak (are you out there?), “A COSA is an analytical exercise that allocates OPALCO’s total revenues, revenue requirement and investments in assets (infrastructure) among the residential and commercial customer classes based on how each customer class uses the power supply and distribution system.

Step 1: A cost of service study begins by identifying costs as power supply (i.e. the actual electricity used) costs, transmission/transportation costs, local distribution system costs or customer related costs.

Step 2: Next, each cost category is identified as either demand-, energy-, or customer-related costs. Demand related costs are those that the utility incurs to meet a customer’s maximum instantaneous usage requirement, and is usually measured in kilowatts (kW). Energy related costs are those that vary directly with longer periods of consumption and are usually measured in kilowatt-hours (kWh). Customer related costs are those that vary with the number and type of customers served.

Step 3: The final step in a COSA is to “allocate” the three cost components (demand, energy and customer) to each class of service based upon the most equitable method available for each specific expense. For example, expenses that have been classified as energy-related are allocated based on the amount of energy consumed by the residential and commercial customer classes. Demand related costs are allocated based on how much demand (or kW) each customer class puts on the system, while customer-related costs are allocated to the residential and commercial customer classes based on how many customers are in each class.
Once the three steps have been performed, OPALCO’s costs have been allocated between residential and commercial customers based on how each customer class use electricity and OPALCO’s infrastructure. At that point, the cost of serving each customer class can be compared to the revenues collected through rates.”

End consultant speak.

To illustrate the difference between ACTUAL residential and commercial energy usage and revenue patterns, please see the 2015 Q1 Sales and Usage Report online in Find Documents / Financial Information / 2015 (it was also included in the June board materials). In the first quarter, residential revenue is down ($502,404) compared to commercial revenue ($119.382).

Some have wondered why our forecast was off for residential, but pretty close on commercial. This is because residential energy usage was most affected by warmer temperatures. Residential members are the ones heating their homes at night (when businesses are closed), a pattern of usage that has been standard throughout the first quarter months in the past. In fact, usage was so high in February of 2014 (and temperatures cold) that the Co-op incurred a huge demand charge from BPA for power above and beyond the norm. Commercial usage was not as much affected by the warmer temperatures because the biggest commercial loads are more about coolers and lighting – which remained relatively stable. Also, most of our largest businesses – grocery stores – have taken advantage of OPALCO’s energy efficiency and commercial lighting rebate programs and are running very efficiently.

What is OPALCO’s commitment to Energy Efficiency?

Some have questioned OPALCO’s commitment to energy efficiency. The new “climate” (temperatures, usage patterns, regulatory costs for our submarine cables, etc.) changes HOW we can support energy efficiency but not our commitment to it. We will continue to promote energy efficiency, conservation and renewable power but can no longer afford to put in on the backs of all ratepayers.

OPALCO has made tremendous contributions toward improving the efficiency (and therefore the affordability and quality) of island housing stock through our rebates and low-income weatherization programs over several decades. We continue to pass on more than our utility’s allocation of BPA Conservation Program funds through rebates (we use what other co-ops can’t manage to spend) and have invested more than $200,000 to reach beyond the BPA offerings through the San Juan Islands Conservation District. We are putting solar arrays on schools and supporting the Member Owned Renewable Energy program, through which members can support and participate in local power production. Did you attend an Energy Fair in May or June? Come see us at the County Fair.
We would love to see more residences become energy efficient regardless of the shift in revenue patterns. Without asking all members to subsidize (through rates) those who are able to take advantage of efficiency measures, we will find new ways to support and reward efficiency while continuing to support low-income members through our weatherization program and cooperation with the Opportunity Council. We can adapt our rate structure to meet the ever-evolving needs and pressures on the Co-op and will continue to do so with each budget cycle.

Is debt a concern?

Yes, of course OPALCO is very attentive to its debt and it is for this reason that we are taking corrective action to keep our margin and TIER within the desired range (see Corrective Action Plan in Find Documents / Financial Reports). However, our debt is not at “historically high levels,” as Alex Conrad has stated. Throughout the 79-year history of the Co-op we have taken on debt to build and improve our system, recovered and then have done it again. See a chart of debt per member from 1956-2014 in Find Documents / Financial Reports / Financial Analysis. For the data curious, this information was drawn from Form 7 documents, which are also available online (back to 2004).

What will OPALCO do to help members with low incomes in this time of rising rates?

Despite the myth out there that low income members use less energy, they are often some of our highest residential energy users because the housing affordable to them is less efficient. OPALCO is studying ways we can reach further to help our most vulnerable members and will be collaborating with county-wide organizations to thoroughly understand the need. Based on that study, we will update Project PAL and develop other rate relief programs. We expect to include updated programs and new ways to help in our 2016 budget.

We are listening.

Alex Conrad offers his financial expertise. Joe Cohen calls for the Board to form a member committee on finance. Fred Klein would like to host a consensus process. Chom and Chris Greacen would like to design our rate structure. Don Webster would like a change of leadership. Ed Sutton is confused. Michael Riordan is puzzled.

Even though the negative commentary these co-op members offer is not always productive, we appreciate that these members are engaged, following the news and trying to understand the complex issues, opportunities and problems that our rural co-op is facing. We are listening and always searching for ways to do a better job of two-way communication, of explaining things and keeping our membership informed. Are we going to take advantage of every suggestion? Probably not, but each idea, question and concern is included in the ongoing discussion each month in the board room as policy and direction is decided.

There is no one good way to keep all of our 11,200 members informed. We use every available channel in San Juan County and ask our members to be proactive in gathering information.
Please take the time to read our monthly newsletter (subscribe online), go to the website –especially the Document Library – to get your info first-hand, attend board meetings when there is an item of interest and keep asking questions. We’ll do our best to answer them.