— by Tom Owens —
Every utility, including OPALCO, makes decisions on its rate design. These decisions are made for some very good reasons. However, they can impact individual customers quite differently. This article is a short review comparing the rates designs of OPALCO and Puget Sound Energy (PSE), our nearest electric energy provider. You will see that if you are a low usage OPALCO customer, you are paying significantly more to OPALCO than a similar PSE customer would be paying. If you are a high energy use customer you can be better off with OPALCO.
I am a low energy user, heating with wood or oil. My July bill was $90.28 from OPALCO for 538 kwhr’s of energy use. Using PSE’s rate schedule, my bill would have been $59.23. That makes OPALCO about 50% higher than PSE. What a surprise! Note that OPALCO is charging an ‘interim” surcharge to make up for last winter’s warmer weather. PSE is not currently allowed to do this.
But what about the winter when I may use more energy? When I compare my costs for January through July, OPALCO again came out about 50% higher than PSE ($556.25 for OPALCO vs $378.63 for PSE). So clearly, I am not using enough electricity to make OPALCO a better deal. It turns out that if I would have used about 3100 kwhr’s of energy usage every month of the year, OPALCO and PSE costs would be about equal.
This is the result of the rate structures used by each utility. OPALCO uses a fixed cost of $38.90 and an energy (kwhr) charge of $0.0855. PSE uses a fixed charge of $7.87 and an energy (kwhr) charge of $0.0948. It takes a good deal of energy (kwhr) usage at OPALCO’s lower energy rate ($0.0855 for OPALCO vs $0.0948 for PSE) to make up for OPALCO’s high fixed charge ($38.90 for OPALCO vs $7.87 for PSE). The difference in the energy charge is about $0.01/kwhr. The difference in the fixed charge is $31.03 per month. So to find the energy usage level where the two utilities have about same cost, you must divide the $31.03 by the difference in energy charge, $0.01/kwh. The result is 3100 kwhr’s. This does not take into account the increases in each utility’s energy charge at the steps in the rate design for higher energy usage (at 1500 and 3000 kwhr’s, different for each utility). It also does not include OPALCO’s current surcharge to make up for last year’s warm winter.
So OPALCO is not a “low cost” energy provider for those of us who don’t use a lot of electric energy (kwhr’s). OPALCO can only be a “low cost” provider if you use enough electric energy (averaging more than 3100 kwhr’s per month over the year).
This exercise is NOT to judge how good a job OPALCO is doing, it is simply illustrate how OPALCO’s rate design impacts some of its customers. A statistically valid comparison of utility performance is possible and has been done elsewhere a number to times. This is NOT that type of study. Common “benchmarking”, where a few utilities are compared against each other, is a totally invalid way to go.
To satisfy those who will want to comment on OPALCO’s performance here are a few of the many points you should consider.
There are many reasons why OPALCO’s rates are what they are. The subsea cables add a lot of costs. OPALCO has to meet the same industry standards in its distribution system as all other electric utilities. The customer base is small and not densely packed. It has chosen to serve remote islands and to place cables underground. OPALCO enjoys a very low cost for the energy it purchases from BPA to supply our needs. OPALCO pays no tax or dividends to investors but instead tries to keep rates low for the benefit of its members.
There are also many reasons why PSE’s rates are what they are. PSE is regulated by the State of Washington and must file rate cases to gain approval of any changes to its rates. It has to pay dividends to stockholders and taxes to the federal, state and local agencies. When PSE borrows money for its operations and capital projects, the costs are higher than OPALCO’s costs. PSE must operate and manage generation plants, transmission assets and provide system control for its service area. It does not enjoy BPA’s low rates for energy to the extent OPALCO does. It does have a much larger customer base that in places are very densely packed.
Good luck coming to any performance conclusions with all these variables.
While Tom Owens’ thoughtful rate structure comparison is interesting as an intellectual exercise, there is no reason to believe that if Puget Sound Energy (PSE) were a small largely rural electric distribution utility responsible for inter and intra island electric service, its rates would be any different from those OPALCO now charges its members. As Tom points out, OPALCO has a substantial proportion of its fixed assets in the form of depreciating feeder lines immersed in seawater, a mechanically and chemically hostile environment.
And, as Tom also points out, we don’t live on the mainland, and economies of scale available to PSE don’t apply to OPALCO. The million dollar surcharge that OPALCO suffered from exceeding its Tier 1 BPA power allotment two winters ago was a major hit. The resulting assessment was shared by all, but “all” in OPALCO’s case is not a large number. A million dollar hit is nothing to PSE, and may not even merit a footnote on its financial statements.
Tom does not, however, point out the most fundamental distinction between OPALCO and PSE rate setting: OPALCO’s rates are set to minimize its rate of return (subject only to its lender’s requirements), whereas in stark contrast, PSE’s ratemaking (subject only to regulation) is designed to maximize return for its shareholders. The “dividends” that OPLCO members receive are not like PSE’s shareholder dividends, they are tied directly to business done with OPALCO. As a result, they are technically refunds of capital and therefore nontaxable to members.
While OPALCO’s lender’s covenants effectively set a floor on OPALCO’s rates, that lender has a statutory obligation to encourage cooperative utilities, and unlike banks, OPALCO’s lender is not obligated to establish a reserve against default and after 90 days write the loan off and foreclose as banks are. This means that OPALCO can charge rates as low as possible, just barely (but sometimes, as occurred recently) scraping the edge in order to do so. It can do this because its lender is not hostile. The fact that OPALCO rates were recently increased is an after-the-fact confirmation of a situation benefitting members that the OPALCO board ran out as long as feasible.
Contrary to Tom’s assertion that PSE can’t impose a surcharge, it can and it does, by a utilities commission-permitted mechanism called “revenue decoupling” which amounts to a surcharge to assure PSE’s utility commission-approved rate of return. This charge is imposed independently of the customer’s actual consumption of electric energy. Its burden per customer is small, because it is spread over so many PSE customers. It just isn’t as transparent as OPALCO’s term: “surcharge.”
Tom reports that he is a “low energy user,” but it’s clear he is only referring to electric energy. As he reports, he heats with wood (a short cycle carbon) or oil (a long cycle carbon) so in a real sense, he is more likely to be an average total energy user. Tom also reports that if he used more electric energy, his per kilowatt hour cost of (electric) energy would go down. Not so in the case of oil. This raises the question for all on the OPALCO-served islands: how does one reduce the total cost of energy?
Answer: Shift as much of your fossil fuel energy to electric energy. Properly used, it is lower cost for heating and driving.
Tom has laid it out for us: if you use oil (or propane), you are paying an extra transportation penalty plus local markup because you’re already paying the transportation and delivery cost for electricity in the facilities charge no matter how much you use.
Like OPALCO, all of us, whether on or off the grid, pay a price for living across salt water from the mainland; ferry fares. How do we reduce them? We consolidate trips and are careful with “to-do” lists. How do we reduce the transportation penalty for energy? I suggest that OPALCO members consolidate energy use. Let that charge you already pay for your lighting, computers and entertainment also pay for the transportation of your heating, cooking and cooling energy (and your EV; look on Craigslist for EVs under $10K) since you have to pay the cost of energy delivery anyway. And, as Tom points out, your cost of energy would go down.
Some would say this defeats the point of conservation. Conservation isn’t, however, just using less electric energy, it’s using less external energy of any kind. To save electric energy and use oil, for example, simply squeezes the balloon, which bulges elsewhere (and, I suggest, in a far worse place, but that’s another issue).
We who live in San Juan County cannot afford to hemorrhage money to the mainland. We need it here. Tom should be thanked for his exposition. It should get us all thinking. And those of us who are OPALCO co-op members, acting.