Guest Opinion: OPALCO Has a Spending Problem

— by Alex MacLeod —

Despite its claims to the contrary, OPALCO doesn’t have a revenue problem. It has a debt and spending problem.

The problem has gotten so bad that it has violated a financial requirement of its lender. Unless it significantly cuts spending, and does it right now, it will have no choice but to raise our electric rates beginning July 1, and as often as monthly well into the future.

What makes this an especially bitter pill for many members to swallow is this financial problem has much less to do with OPALCO’s historic, core mission, which is to supply its members with electricity than it does its debt and spending. It is, again despite the OPALCO board’s and management’s stubborn insistence to the contrary, almost entirely the result of its effort to become an Internet and telecom business.

The evidence defies the straight-faced denials of management and the board.

By 2009, OPALCO had modernized its electric-grid infrastructure to (among many other things) read our meters automatically and give us the ability to check our electricity use hourly. It’s long-term debt stood at $11.2 million, more than $2.5 million less than it had been when it started the project. Its annual operating expenses stood at $13.3 million.

It wasn’t long after that the board decided to explore a way to provide county residents and businesses with high-speed broadband service. Its initial plan, which included a monthly fee to be charged to all electric customers, was roundly rejected by the membership. Rather than backing off or looking for other ways to solve broadband desires, the board very quietly decided on another course: call the investments necessary improvements to the electric-grid backbone, ones that would almost immediately produce operating savings, even though management at the time told the board no more than 5% of the investment would actually benefit the electric operations.

The board then went on to buy Vulcan’s wireless spectrum in the county and later buy Rock Island and lend it $7.5 million over the next three years, much of which is to fund $1,500 loans to incentivize connections.

When it finally went public with its Internet business plan last October, it said it would break even by 2017 and then return a 30% profit by 2020. (So far its forecast for connections is way behind its plan.) It also said the total cost to the each electric customer would be $72 spread over the following two years. Really.

By the end of last year, management had told the board that it needed to increase the base “facilities charge” to each customer by 36% and raise rates overall by 12%. This was after having raised rates by 6% each of the two previous years, planning to raise rates another 6% a year through 2019 and nearly doubling the higher “facilities charge” by 2019. And this was before today’s “revenue shortfall crisis.”

So, what has happened since 2009?

OPALCO’s debt has more than doubled, to $25 million, including an increase of $7.5 million last year. Its operating expenses have increased by nearly 30% (despite the pledge that the “electric-grid” investments would produce operating savings). Annual interest on the debt has increased 85% to $1 million. (And OPALCO has yet to begin serious borrowing — $15-17 million — to replace the underwater cable between Lopez and San Juan islands.)

General Manager Foster Hildreth told the board last week that it was a “revenue shortfall” caused by a warmer-than-normal winter and less than forecasted energy use that led to this crisis and the need for the board to add a surcharge on our bills in July. But the fact is that the electric revenues for this past winter were actually about $500,000 greater than the average revenue for the same winter months from 2009 through 2013. And even if they are below OPALCO’s faulty forecast and not keeping up with the cost of electricity OPALCO buys, this, alone, did not trigger this financial crisis. It was just the last straw.

So, just to be clear, the problem is not the “revenue shortfall.” It is spending. The doubling of debt can only be explained by broadband. Most of the operating expense increases can also be tied to broadband and its interest payments. The debt and spending is directly responsible for OPALCO violating the terms of its loan agreements, as Alex Conrad of Orcas demonstrated in a recent post on this website.

I believe it is way past time for the OPALCO board and management to be honest with the membership about the true reasons for all this debt and spending and that one warmer-than-usual winter isn’t the root cause of OPALCO’s financial crisis. It also needs to provide the membership — as well as its lender — a “corrective action plan” that is something other than the blank check it seems intent on writing, and that we will pay.

A NOTE TO READERS: The numbers I have used for debt, interest on debt and operating expenses are certified reports OPALCO is required to submit annually to its lender (called RUS Form 7s), and from its 2015 budget. I’ve had to estimate the electric revenues for this January, February and March from a line graph Foster presented to the board last week. He refused my request for the actual numbers used to create the graph.