— by Alex MacLeod —
A day after the OPALCO board approved an emergency 10% increase in our electric rates, effective at the start of this month, its management issued a press release announcing the “Temporary Revenue Recovery Add-On.” In it, General Manager Foster Hildreth “explained” that the emergency increase was needed because “Members have not been paying their full share” of OPALCO’s costs.
It is hard to imagine a more brazen — nor less accurate — reason for our electric rates having been increased 10% just four months after having been increased 12%, and these on top of sequential 6% annual increases. The real reason is that OPALCO has so badly mismanaged its spending that it needed this latest increase to try to get right with its primary lender after violating terms of its loan agreements.
While OPALCO’s board described the latest increase as temporary, it is working on a new rate plan for 2016 which would increase rates as much and as often as necessary to cover any and all expenses, a move required by a “corrective action plan” to satisfy its lender.
OPALCO’s financial problems are the result of bad energy-use forecasting, large increases in debt to finance its entry into the Internet/broadband business and significant increases in operating expenses, all of which have produced board-approved budgets over the past 18 months that have tumbled into the red and led to the violation of the loan agreements.
Members, on the other hand, have been paying our bills in full and on time, even though those bills now include the cost of creating the infrastructure for OPALCO’s Internet/broadband venture. Management has justified passing those costs on to all members by including them in its core “true cost of service.”
When OPALCO began making these Internet/broadband investments, which it said were necessary to upgrade the electric-grid “backbone,” it said they would more than pay for themselves. In fact, management calculated those “direct and indirect savings” down to the penny — $29.42 per member per year.
However, electric-distribution expenses instead rose 18.6% in one year and OPALCO’s “general and administrative expenses” rose 19.4% over the same period. And those are called savings?
Rather than address the root causes of its financial problems, management and the board have chosen to simply raise rates to cover its ever-increasing expenses. And now it is working on a similar, long-term rate change it is calling “decoupling.” Like this latest “emergency” rate increase, it will just guarantee that OPALCO will have all the revenue it needs to keep its lender from calling the loans or raising interest rates while continuing to spend without limit. The only “decoupling” will be us from our wallets.
If this weren’t troubling enough, OPALCO soon will need to begin borrowing upwards of $45 million to replace submarine electric cables. These are really important, as you might guess. But rather than position the cooperative to be ready for that financial impact, the board chose instead to spend millions to jump into the Internet/broadband business, to serve perhaps one-third of its members, and in the process violated its loan covenants.
Neither the board nor, more importantly, we cooperative members, have been well served by this gross mismanagement, but it is only the members who will pay. One might presume the board, under these circumstances, would attend more closely to its oversight of management, or at least its access to the membership who showed up in big numbers to complain at the board’s June 18 meeting.
But no, that’s not the board’s response. Its response is to cancel its July meeting and not meet — at least in public — until Aug. 20. Having tried to blame its problems first on “global warming” and then on its electric customers, this may give management time to come up with a new excuse for its own failures.
Alex MacLeod is a longtime OPALCO member who lives on Shaw.
Mr. McLeod’s strong opinions about Opalco are within his rights to express, however, there are some inaccuracies to correct.
There are been two Opalco rate increases in 2015. The first came with the February billing cycle: a 12% overall rate increase along with a new rate structure with the goal of raising residential bills by an average of $10/month to be collected in the facilities charge.
After the first quarter financials showed we had collected no additional revenues because of warmer temperatures and lower energy usage, a corrective measure was put in place to prevent another revenue shortfall at year end. The temporary revenue recovery add-on began in July with the goal of collecting an average of $8.43/month ( $0.01 per kilowatt hour) per residential member. When McLeod blames the temporary corrective measure on “bad energy-use forecasting,” he implies incompetence, when the reality is the entire region and every utility in it is making adjustments based on what the National Oceanic and Atmospheric Administration is calling “the warmest temperatures on record.”
Despite rate increases, member bills continue to go down, on average. Want to see for yourself how rate increases have affected your bill? Call 376-3500 and we’ll provide a bill analysis on your account.
Despite allegations otherwise, the fact is that Opalco is not in violation of its loan covenants, not now, and not projected to be any time in the near future. Our margin dropped in 2014 due to the revenue shortfall; the new rate structure and rate increases are designed to correct that. We will bring our margin back up through prudent budgeting – including rates, revenue and expense – in order to meet our lender’s criteria for TIER within the next year or two. Our lenders are not worried – fluctuations in debt and equity are par for the course in the utility industry.
The Board welcomes member comments at the beginning of each meeting. Eleven members attended the June 18, 2015 meeting, not particularly notable member attendance and just about average for Board meetings, representing less than .1 (that’s point one) percent of our membership. The regular board meeting for July was canceled to allow our staff and Board members a break before they begin the arduous task of budget preparations. The next board meeting is August 20th in Friday Harbor.
As I have stated previously, any consideration of an unbalanced budget needs to consider expenses as well as revenue. In reading the numerous dialogs on the OPALCO financial situation, I have yet to have been made aware of any consideration of expense cuts as an alternative to a continuing increase in rates.
Is OPALCO top-heavy in management costs? What, for example, is the budgeted cost of the public relations personnel that write the responses to member inquiries? Might it be $100,00 per staff position? Is it true that the Board members receive a medical benefit for their service? What is that cost? Where else might OPALCO trim its budget to save 5%?
Interested members should become involved in the upcoming budget discussion in order to answer these questions and many like them.
Too, why are not my elected representatives communicating with us about these issues. Winnie?? Randy??
If Opalco were a private utility in the mess it’s in it be bought by a bigger fish. Private utilities can’t raise rates because they want to. The UTC has final say on rates. We are exempt for we are a Cooperative. A Cooperative on paper but in fact Opalco operates like the Chinese government. I may be wrong but I believe Opalco has a nepotism problem. Many of the members work two or three jobs and in any event feel powerless which is why so many people don’t vote in national elections or attend Board meetings.
I was told by what I believe was a very very very reliable source that the Cooperative bank was going to call our loans because the system was not up to standard. Randy was brought in to clean up the mess. Interest rates were rock bottom so we spent a small fortune in a relatively short amount of time. The Board of the day did not negotiate for a longer upgrade arguing that we only have 11,200 members. Then we had the warm winter. The utility management and the Board made budgeting assumptions based on revenue projections which did not pan out. In the private sector the CEO would be sacked but our members voted the budget writer on to the Board. This is America where even the well off can be incredibly naive.
What is most galling is not the budgeting mistake for people are human and prone to mistakes, but the fact that no straight forward explanation was given and no apology for the budgeting error. The Board needs number crunchers like Joe Cohen and Bill Anders. People who are experts in numbers. The Board needs to get out of recommending members for Board openings.
The final two things I would like to say are that I believe that since we the membership paid to put the fiber optics in on the electrical side Opalc should have let Century Link use the fiber for free in return Century Link would have brought broadband to the hinterlands. The board wanted to charge. Orcas Online is paying $6,000.00 a month and then the Board takes our money, our credit and against the members wishes Rams internet down our throats. This is like your dad saying before he beats you, I know this will hurt BUT ITS FOR YOUR OWN GOOD. Have you people no shame?
My Alzheimer’s is acting up so I can’t remember my last comment. Oh here it comes from the fog. I have been to a few Board Meetings and there are those on the Board who give you the distinct impression that they are tired of being polite and listening to you and want you to hurry and get out.
I don’t know quite what to make of OPALCO spokeswoman Theresa Haynie’s comments about my guest column. Claiming “inaccuracies,” she begins by stating exactly what I wrote: That OPALCO raised rates twice so far this year (though she put it more creatively: “There are been two rate increases in 2015.”). And your point is what, exactly.
More disingenuous is her own claim that OPALCO “is not in violation of its loan covenants, not now and not projected to be any time in the near future.” This is sophistry typically reserved to politicians. One of OPALCO’s loan covenants requires it to stay above a certain financial benchmark called TIER. OPALCO failed to do that last year. That is what is called violating a loan covenant, and it is why OPALCO was required to create a “corrective action plan” to demonstrate to the lender the steps it would take over the next three years to meet that benchmark. Absent any effort to cut expenses, the July 1 rate increase was required by the corrective-action plan to meet the TIER benchmark.
It is revealing that Ms. Haynie takes no issue with my reporting that OPALCO promised that its large investments it said were to improve the electric backbone would produce savings of $29.42 per member per year, when in fact its electric-distribution expenses rose 18.6% year-over-year and administrative expenses rose 19.4% over the same period. The reality is that 90% or more of the value of the grid investments were for the Internet/broadband business, not energy distribution, but we are paying for them as if they were.
Apparently the member attendance at the June board meeting was about average. I stand corrected.However, I’m not sure there is much difference between my saying the board chose to take a “vacation” in the midst of this precarious financial situation, especially facing the upcoming need to borrow about $45 million to replace underwater power cables, and her statement that the board and management need “a break.”
Ms. Haynie’s comments are of a kind with OPALCO’s public statements. They pick (carelessly) around the edges, but fail to address the core issues. They want us to believe its financial problems are our fault for using less electricity and paying smaller bills as a result, rather than their fault for spending so aggressively that one warm winter leads to violating a loan covenant and requiring a corrective-action plan. And their ultimate defense seems to be that only “point-one” percent of the members are showing up to complain at board meetings, as if that is answer to the criticisms
Finally, Ms. Haynie, since you are being paid to speak for OPALCO, you might take the time to spell your target’s name correctly. I am, after all, a member of the cooperative.
Harvey…please clarify what you mean when you say, “I believe that since we the membership paid to put the fiber optics in on the electrical side Opalc should have let Century Link use the fiber for free in return Century Link would have brought broadband to the hinterlands. The board wanted to charge. Orcas Online is paying $6,000.00 a month and then the Board takes our money, our credit and against the members wishes Rams internet down our throats.”
I think Mr. Macleod has a very appropriate title for this article. The root of the problem is mismanagement. Unless OPALCO has a very knowledgeable, empowered and engaged BOD, they will be “fed” data and recommendations by the GM and his staff. While the BOD may possess power, does it have the resources and knowledge to challenge what the management is saying and recommending?
We have a misguided Broadband initiative that is having an adverse impact on our rates and increasing our borrowing needs. With the Rock Island acquisition the internet business became “to big to fail” (remember that from the financial meltdown last decade).
The BOD did not do it’s duty and undertake a search for the best qualified GM. It took the easy, comfortable route and we are sliding down the greasy slope as a result.
It’s past time for the BOD to develop a spine and take control of the situation. Start cutting costs rather than jacking up our power rates. You do not have to do what the management recommends!
it seems to me that mr. macleod is correct in stating that the increased cost of electric service to members is due to large increases in expenses (how these increased costs are recovered by revenues i.e. as part of customer usage or cost of access is a separate issue). and therein lies the conundrum; who is qualified to say whether the capital budget is reasonable and if not what should be changed. this is what we rely on the opalco board in their collective wisdom to decide. what is important is that the board realize that costs/benefits are reasonable and meet the needs of all the membership. not everyone can afford a Rolls-Royce.
Thanks to Alex McCloud. He has been ringing on the alarm bell consistently for some time now and it is time we started paying some attention. Our rates are going up, it is not far fetched to assume it is in part because of the internet expansion. There is an issue with a loan( never a good sign). And what really worries me, is the very large expense for the replacement of the electric cables under the water. OPALCO ‘s answers are inadequate. I feel we have put our power grid in jeopardy , in order to supply fiber optic cable to a minority of islanders, and all ratepayers are on the hook to pay for it.
In his response, Alex Macleod demolished Theresa Haynie’s gymnastic attempt to defend OPALCO’s rate increases and policies. Of the other seven comments to Macleod’s initial opinion piece, all in one way or another express the view that his analysis penetrates the flak to get to the reality: we members have been snookered, conned, bamboozled by a board whose only competence is in seeking inept ways to evade responsibility and make the membership pay dearly for the board’s follies. One comment incidentally alludes to China, whose present tumultuous stock market reflects some very bad national policies. and in today’s, July 31, NYT piece by Paul Krugman has this closing paragraph. While hardly a parallel–China has a population of close to 1.5 billion from which to draw its leadership; San Juan County clocks in at under 20,000 from which OPALCO can draw for its board–the paragraph is a siren alert about competence and leadership: “The big news here isn’t about the Chinese economy; it’s about China’s leaders. Forget everything you’ve heard about their brilliance and foresightedness. Judging by their current flailing, they have no clue what they’re doing.” Merely substitute OPALCO for China, and you will find nothing to surprise you in endless rate hikes, creative excuses, and the costs passed on to a largely mute membership.