(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.
(copied from original post’s comment thread)
Thank you for your note Suzanne. It provides some clarification of OPALCO’s point of view, although it is unfortunately not responsive to many of the concerns raised. As valuable as Orcas Issues is as a community platform, it’s not the ideal place for ongoing, in-depth analysis of complicated issues like this. I’d like to re-iterate an endorsement of Joe Cohen’s suggestion for dialogue.
COSA Review
This review is useful and insightful. However it does not respond to the initial claim that the difference between residential and commercial surcharge rates “is due to the cost-of-service spread.” To be clear, the difference in the surcharge rates is driven by budget vs actual revenue and usage, which is calculated for both residential and commercial budget/actual lines separately.
Contextual Suggestion re: Numbers
Your feedback about the difference between residential (night heating, etc) and commercial usage is certainly useful. I understand why you offered some numbers for illustrative purposes: “In the first quarter, residential revenue is down ($502,404) compared to commercial revenue ($119.382).” Note that these numbers are actually for Jan – May, not Q1 results as stated.
My larger point though, and I suppose a suggestion for future communications, is to provide context when referencing results…specifically, percentage change and year-over-year comparisons are exceptionally useful beyond simply looking at budget to actual variances. For example:
Q1 res. revenue 2014: $5,102,738
Q1 res. revenue 2015: $4,972,730, decrease of $130,008 or 2.6% from ‘14
Q1 res. revenue 2015 budget: $5,380,898 variance of $(408,168) or 7.6%
Q1 com. revenue 2014: $1,604,685
Q1 com. revenue 2015: $1,652,605, increase of $47,920 or 3%
Q1 com. revenue 2015 budget: $1,761,692, a variance of $(109,087) or 6.2%
Using this type of contextual, comparative language will eliminate a lot of confusion when using terms like, ‘shortfall.’
Request for Clarification re: surcharge calculation
Your note did not touch on this. It’s important enough that I’d like to ask for clarification. As I understand it, the surcharge is calculated by dividing budget/forecast revenue shortfall by Jul-Dec projected kWh usage. For illustrative purposes only…the Jan – May residential budget to actual shortfall is $502,404. The Jul-Dec residential kWh usage from budget is 65,880,526 kWh…so, in this illustrative example the surcharge would be $502,404 divided by 65,880,526 for a result of $0.0076/kWh. Is my understanding of the methodology correct? If it is, the methodology appears to be deeply flawed. In this scenario, OPALCO will collect the GROSS revenue shortfall amount. But should not the calculation be done basis NET revenue? When revenue is earned through usage, there is a non-trivial cost of power (i.e. BPA bill) against the revenue. In a surcharge scenario, there is no variable cost of power against surcharge revenue. It certainly seems like the fairest way to calculate any revenue-based surcharge is via a NET revenue methodology. Otherwise, using a GROSS revenue basis for the surcharge will provide a non-trivial margin cushion, which will not encourage crisp execution on the expense side.
Q1 Expenses
Mr. Hildreth made a strong statement regarding Q1 expenses, referencing “savings from cutting expenses.” We now know (see earlier comment on this post) that this statement is not true. While variable expenses related to power consumption fell with revenue, other board/management discretionary expenses not only increased, but increased significantly. Mr. Hildreth needs to reconcile his statement about cutting expenses against his statement from the 23 June ‘Letter from the GM’, where he espoused a management style embracing “the principles of cooperation, democracy, transparency and concern for community guiding our way.” A great way to achieve this would be to agree to Joe Cohen’s suggestion for direct dialogue.
Debt Chart
Thank you for creating this chart. Yes, it’s a good reminder of the co-op’s long and impressive history. No doubt you created it to challenge my statement about ‘debt at historic levels.’ Fair enough. But debt per meter/member seems an interesting metric to choose. Why? Member numbers have been steadily increasing over time – and debt itself is not bad…it’s the context of debt to other performance ratios that can be troublesome. There’s a reason that lender’s like USDA’s RUS look at ratios such as TIER, not ‘debt per member.’ Ratios like TIER provide a RELATIVE look at debt vis-à-vis other metrics in the financials. 2014’s (and daresay Q1 2015’s) TIER is already acting like a canary in the coalmine. There is danger of a default ahead. When you consider Mr. Foster’s warning (from his recent GM letter) that up to an additional $45 million (possibly in addition to current debt of approx.. $22.4 million) may soon be needed for cable replacements, this is troubling indeed. My position remains unchanged. I believe that OPALCO’s debt position is in the danger zone. It’s better to talk about this openly now – and no, I do not endorse OPALCO’s current corrective action strategy, which focuses almost entirely on the revenue side.
Efficiency / Renewables
Thank you for sharing valuable information about OPALCO’s commitment to efficiencies and renewables. Past energy transformations…wood to coal, later coal to oil…have taken a long time, often measured in half-centuries as built infrastructures were updated. Because the contemporary transformation is more technology driven than fuel driven, things are happening much, much faster. That being said, the need for centralized power-generation is not going away any time soon…herein lies the challenge facing OPALCO and essentially every other utility around the globe. As a backgrounder, Bill McKibben has an excellent article in the current 29 June issue of the New Yorker (https://www.newyorker.com/magazine/2015/06/29/power-to-the-people) about the challenges that renewables/efficiencies pose for utilities. There are a lot of interesting developments globally that I hope OPALCO can draw inspiration from to think about this challenge more innovatively.
Mr. Hildreth’s ‘Like it or Nots’
The 23 June report from the GM is full of ‘like it or not’ statements. I’m not a fan of the choice of tone here, but I’ll return his serve. Whether Mr. Hildreth likes it or not, member criticism is mounting because the board and management have not adequately addressed concerns about the issues identified by Mr. Hildreth…cable replacements and debt, fiber and wireless backbone costs and capitalization, efficiencies/renewables and certainly broadband. Like it or not, acknowledging these important issues as critical matters does not automatically mean one must endorse OPALCO’s strategy and tactics – – there are valuable alternative ideas out there. Like it or not Mr. Hildreth, the primary responsibility for engaging more effectively with your members falls first to you, and then to the board. Like it or not, current engagement, by any reasonable measure, is falling far short of the mark.
Towards a Solution
Yes, some of us are OPALCO critics. But being a critic should not be conflated with being an enemy. Being a reasonable critic means you have care and concern about the issues. I can’t imagine a more valuable asset to a member owned entity than care and concern from stakeholders. Our local government has citizen advisory groups. Some of the most successful and effective organizations on the island regularly include members of the community in key dialogues. I’d like to see OPALCO step up and better utilize this asset that is right in front of them. Your critics are part of the solution, not the problem.
Alexander Conrad 1: OPALCO 0! Game on!
Mr. Conrad,
When dealing with OPALCO, I have experienced a different response. I wrote an article on electric vehicles and this drew OPALCO’s attention. A meeting was arranged at which all our points of view were fully discussed. It was an exchange of views. Everyone listened, everyone spoke. Attending were Mr. Hildreth, two board members and another interested party. The meeting lasted two hours. We are currently exchanging ideas and another article will appear soon, hopefully fairly reflecting both sides of the issue.
Tom, that’s super.
I read your article on environmental considerations for EVs…unquestionably an interesting and important topic. I thought your subsequent ‘Prius People’ post was shot through with the verve of the Borowitz Report.
Certainly look forward to your follow-on brief…will keep an eye out for it…
Alex,
I think this forum is very important and those that are interested should keep participating. It is public and that is good. So, I appreciate you taking the time and interest to wade into this difficult topic.
The challenge is to get more people interested and participating. Note the lack of further comments.
I do not have any idea what the Borowitz Report has to say on Prius’s. So if my article is “shot through” with their verve, I guess I agree with them.
Tom, don’t take the quiet following Alex’s commend as disinterest. Many of us are very interested and reading along. I can’t imagine what I would add to his comments other than… Thank You!
Tom, ditto what Justin said.
I too am following this thread w/ interest and w/o the expertise to even attempt to supplement Alex’s analysis…I would, however, like to comment further on Suzanne’s effort to “clear up some lingering confusion”, edited from its original form as a comment to the June 20 OI article.
I thank Suzanne for a clear explanation for the rationale behind the variation between residential and commercial member rates for the “Temporary Revenue Recovery Add-On”(TRRAO). It does not, however, mention the numerous un-budgeted expenses, documented previously by our stalwart Alexes MacCloud & Conrad…expenses which (if I recall correctly) equal the revenue shortfall.
Conrad’s commentaries enumerate the many aspects of unanswered member concerns which go far beyond “any lingering confusion”.
I would like to know if in the annual reports from 2011 through 2014 the “administrative and general”
is what the employees are making along with their medical.
here is why I ask:
Administrative and general 2011 $2,605,413.00
Administrative and general 2012 $3,076,103.00
Administrative and general 2013 $3,181,855.00
Administrative and general 2014 $3,195,763.00
The difference between 2011 and 2012 was $470,690.00
the difference between 2012 and 2013 was $105,752.00
the difference between 2013 and 2014 was $13,908.00
In 4 years this general and Administrative has gone up $590,350.00. Now I realize that this is only a 4.895% increase, however I wonder why there was such a raise between 2011 and 2012 of $470,690.00, while in 2013 to 2014 the hike was only $13,908.00
If the administrative and general is not for employee pay and medical, then where are the numbers on the annual report for them?
Melissa-
To answer your question:
“In 4 years this general and Administrative has gone up $590,350.00. Now I realize that this is only a 4.895% increase, however I wonder why there was such a raise between 2011 and 2012 of $470,690.00, while in 2013 to 2014 the hike was only $13,908.00. If the administrative and general is not for employee pay and medical, then where are the numbers on the annual report for them?”
The numbers for G&A in the Annual Report are detailed on page 5 (of 15) in the Detailed Breakout of Notable Drivers section of 2013 Year-End Unaudited financials. In the Comments with each line item, you’ll see the accountant’s notes about less or more expense (than budgeted amount) with notes. Employee pay and medical are included in the General and Administrative. Your question is perhaps pointing out the leap in 2012 that was the beginning of engineering and consulting studies for what would become our initial Internet service offering, Island Network, that by 2014 began to be separated into its own detailed section.
A clarification…
Source: 2014 year-end and Q1 2015 financials from OPALCO website
G&A results across four years…year-end 2010 vs year-end 2014:
Admin G&A 2010 $2,116,896
Admin G&A 2014 $2,822,439
Increase of $705,543, or 33%
Total G&A 2010 $2,459,678
Total G&A 2014 $3,195,763
Increase of $736,085 of 30%
More recently:
Q1 2014 Total G&A $902,604
Q1 2015 Total G&A $1,077,839
Increase of $175,235 or 19%