OPALCO Board Sets Temporary Revenue Recovery Add-On

I continue to be puzzled by the fact that residential members are being asked to bear the greater brunt of the OPALCO rate increases, one cent versus a half cent per kWh. At the May Board meeting, Fred Klein spoke up near the end and said that the pain of these inevitable increases should be shared equally by the members. This does not appear to be happening.

Suzanne, you say that this difference is “due to the cost-of-service spread: commercial usage is less than 25% of our total system load. This does not make sense and is not an answer to my question. If all members had to pay an extra one cent per kWh, the extra pain would be spread proportionately.

The same tendency to favor large commercial users over residential and small commercial users was apparent in the January memo from Foster Hildreth to the Board. Residential users’ facilities charge was to increase 7% per year while that of large commercial users only 2% per year, LESS THAN the OPALCO rate of inflation. By comparison, small commercial users were to be hit with a whopping 10% per year increase.

I have asked Foster and two or three Board members for an explanation of these glaring disparities. To date, I have not heard a good one. I’m sure that other OPALCO members besides me would appreciate hearing one.

Thank you Michael. You have asked the same questions that I would like answered.

Ditto to the comments above. Logic Opalco!
Spirit Eagle

This is a “surcharge” which, IMO, should not be conflated w/ a discussion of rates. OPALCO pitches it as a charge necessary to compensate for a “revenue shortfall” irrespective of numerous expenses, previously documented in Alex MacCloud’s and Alex Conrad’s Guest Opinions, which far exceeded what had been budgeted.

To what extent these expenses can be attributed to OPALCO’s leap into broadband is a matter of some debate.

But regardless, if OPALCO is to act as a true cooperative, membership-owned, enterprise…surely in asking the membership to cover for what some might describe as poor management, the only fair way to distribute the pain of this additional expense to members would be to allocate it to all members in proportion to their use.

Why would a true cooperative impose a 1 cent kwh surcharge on one class of its members (residential), and just half that on another class of members (commercial)?

And if the REAL need for this surcharge is to cover for lost revenue…Why, pray tell, should the large commercial users not be asked to pony up at the same rate as retirees and single moms?

I thought we were all in this together…?…

And I’m rather tired of hearing about how complicated this is with the implication that only the Board and management have the intelligence and information to handle things…the oh-so-complex “cost of service” analyses and algorithms…I say throw the quants out and just spread the pain equally.

I think Opalco’s biggest problem is lack of communication. I had posted more than once that I thought that the system was upgraded to the tune of millions or tens of millions of dollars too rapidly. As it turns out our system was so substandard that the Rural Cooperative bank was going to call our loans. Randy was hired to get our house in order and he did.
The logic of raising the base rate to have the entire overhead paid that way is that numerous people leave for the winter and consume next to nothing in power at the highest consumption time and therefore are not paying their fair share of the overhead costs. Remember, winter for an electrical utility is like Christmas for a retailer, or summer for our local businesses.
Having an extremely high base rate with the Kilowatt charge not marked up at all is probably the fairest way to handle our basic costs. I do not understand why Opalco is phasing in this logical approach. They should just raise the base rate to $80.00 now and sell us the electricity at their cost.The fact is that every active member should share equally in the base overhead even if you use a tiny amount of power. I know this smacks of the poor subsidizing the well off but there are tremendous costs to having power at your door whether you use it or not.
As for the surcharge I know nothing as to the decision to have different charges for residential or business.

Another major “stumble” for the OPALCO BOD and Management.

We are in the early stages of the inappropriately approved Broadband expansion that will cost us all dearly in the long term as that part of the organization becomes our own mini “to big to fail” business. Our own financial meltdown is looming.

Now another rate hike is occurring when the ink is barely dry on the previously announced hike. Did they not see the headlight on the train approaching during the winter? The BOD and the OPALCO leadership are hiding behind their PR people and blaming us for not using enough electricity! What real actions are they taking to cut their costs to meet the revenue?

In an earlier cycle of OPALCO postings I indicated that one of the OPALCO BOD mistakes was to promote the current GM without doing the due diligence of a candidate search. It would have been the prudent thing to do. I don’t know the current head of OPALCO personally but if the organization is not functioning properly (and this one surely isn’t) then heads should roll – starting at the top! Do we have to wait for them to fly this “aircraft” into the ground before the membership wakes up and takes back control of the COOP?

I am not certain about the efficacy of commenting on OPALCO challenges to inspire change, but this announcement is so rife with inaccuracies and general fibbing that it calls out for a response.

Out of the gate, I thought the chosen tone remarkable, “Members have not been paying their full share…they’ve been undercharged because our rates have not collected the true cost of service.” Wow, generally speaking, blaming your customers for business challenges is rarely a good idea. I don’t know Mr. Hildreth, but I’ll give him this, he’s no prisoner of humility.

We are told that the projected shortfall by year-end is $661,000. In the June Board Materials, the shortfall is referenced in the context of margin. In the announcement above, it is stated without context. The Q1 financial report tells us that through March, the actual-to-budget miss for revenue was $505,001, while the net margin miss was $157,743. It seems that OPALCO now expects to miss margin targets for the remaining three quarters of the year by roughly the same amount as the Q1 miss. ($157,743 x 4 = $630,972 i.e. in range of a now projected $661,000 deficit)

Why?

Let’s look at a few things related to margin from Q1 results. Remember that margin is essentially the difference between your revenues and your costs…with costs being an aggregate of variable and fixed. Revenue was down modestly from Q1 ‘14 to this year: Q1 ’14 $6,841,371 vs Q1 ’15 $6,771,883 or a decrease of about 1%. (note, commercial revenues actually slightly increased year-over-year) Variable expenses (using ‘cost of power’ metric) however, dropped more dramatically: Q1 ’14 $2,649,545 vs. Q1 ’15 $2,273,893 or $375,652 14%. Variable costs dropping faster than revenues should have a positive impact on results. Indeed, this is likely what Mr. Hildreth was referring to when he said, “However, the situation is better than we thought.”

He also went on to reference “savings from cutting expenses.” Let’s fact-check that statement.

General & Administration Expense:
Q1 ’14 $902,604 vs Q1 ’15 $1,077,839 an INCREASE of $175,235 or 19.4%

Operations – Distribution
Q1 ’14 $767,854 vs Q1 ’15 $910,439 an INCREASE of $142,585 or 18.6%

Total Operating Expenses (n.b. this includes the variable ‘cost of power’ metric too)
Q1 ’14 $5,868,028 vs Q1 ’15 $5,982,712 an INCREASE of $114,684 or 2%

Let’s be clear about this for a moment. Although the variable cost of power declined significantly with diminished usage, overall costs still INCREASED due to significantly accelerated expenses on Board/Management discretionary items. It is remarkable that Mr. Hildreth characterizes such substantial increases in Board/Management discretionary items as ‘savings from cutting expenses.’

Here’s a quick look at some of these line items over the past few years, comparing Q1 ’12 vs Q1 ’15…the trends speak for themselves.

Revenue:
Q1 ’12 $6,276,325 vs Q1 ’15 $6,771,883 an increase of $495,558 or 7.9%

Cost of Power:
Q1 ’12 $2,551,636 vs Q1 ’15 $2,273,893 a decrease of $277,743 or 10.9%

General & Administration Expense:
Q1 ’12 $688,074 vs Q1 ’15 $1,077,839 an increase of $389,765 or 56.6% (!)

Distribution:
Q1 ’12 $662,835 vs Q1 ’15 $910,439 an increase of $247,604 or 37.3%

Total Operating Expense:
Q1 ’12 $5,391,938 vs Q1 ’15 $5,982,712 an increase of $590,774 or 11%

Interest on long-term debt:
Q1 ’12 $189,091 vs Q1 ’15 $236,041 an increase of $46,950 or 24.8%

Net Margin
Q1 ’12 $771,694 vs Q1 ’15 $606,371 a decrease of $165,323 or 21.4%

Let’s look now at the ‘temporary’ revenue recovery add-on. First off, notice that while Mr. Hidreth’s mouth is moving to say that he is cutting expenses (which we now know to be a fib…) the only action being taken to solve this margin problem is to raise rates. We’re directed to the EES Consulting report to find out what ‘total projected shortfall divided by projected energy sales’ actually means.

First off, in a technical sense, the EES Consulting methodology is impossible to follow. Step 1 of their approach is to take actual revenue from January through June. Obviously June is not yet over, so this is impossible to execute beginning with the first step. No doubt they used assumptions for this – so why not just tell us what the calculations were specifically? Leaving us with a consultant’s methodology tells us very little, especially when the consultant did not even proof read their own report to discover than June has 30, not 31 days.

The methodology is flawed as well in that there is no mechanism to stop the surcharge early if second half revenues come in stronger than predicted, nor is there a methodology to credit any amount collected in excess of the ‘shortfall’…

For reference, here’s how the methodology calculates the surcharge…this exercise is done separately for both residential and commercial budgeted revenues, hence the different surcharge results….the EES Consulting report takes 7 steps to explain this…but it can be done in 4…

Step 1:
Take January through June actual vs budgeted revenue. (We know Q1 Jan – Mar results were some $408,168 lower than budget for residential and $109,087 lower for commercial…Q2 Apr – Jun results/assumptions were not disclosed)

Step 2:
Take July through December and subtract newly forecast revenue against budgeted revenue. (these numbers were not publicly disclosed)

Step 3:
Based on the new revenue forecast noted in Step 2 above, note the amount of power usage/sales for July – December against this revenue.

Step 4:
The surcharge is calculated as Step 1 result PLUS Step 2 result DIVIDED BY Step 3 result.

Let’s be clear. Although the OPALCO board and management have done little to establish credibility for their forecasting skills, the rate surcharge will deliver to them their budgeted/forecast revenue for 2015. BUT SINCE THIS IS A SURCHARGE, NOT ACTUAL USAGE DRIVEN REVENUE, THERE WILL BE NO UNDERLYING VARIABLE COST OF POWER AGAINST THIS REVENUE – this viscerally removes incentive to manage expenses aggressively, as the methodology of the surcharge provides management with an extra margin cushion. The flawed surcharge methodology is Christmas in July for the OPALCO board and management.

However, the most important part of the EES Consulting report is arguably not about the revenue recovery add-on for this year. Look at the end of the report titled, “Revenue Decoupling Adjustment.” Hmm, what does that mean? It’s a method to make sure OPALCO’s budgeted revenue = actual revenue every year beginning in 2016. In a sense, it makes the ‘temporary’ surcharge beginning in July of this year permanent – although it’s described and executed differently. Management will never have to worry about future revenue shortfalls again because with “Revenue Decoupling Adjustment,” they are giving themselves de-facto taxing authority – rates will be variable every month or quarter to deliver management their revenue numbers regardless of usage levels…with decoupling, rates simply go up if usage falls…as well, revenue decoupling provides NO incentive to manage the expense side of the business responsibly.

Revenue decoupling is a bad idea for too many reasons to list here. Preventing revenue decoupling will take a determined effort on the part of OPALCO membership to develop alternate ideas not only to rate structure, but also to governance…and the time to do so is drawing nigh…

Important Orcas conversations such as this only occur on Orcas Issues, way to go Margie Doyle and Lin McNulty, we islanders need to increase our financial support for such worthy local journalism!
OPALCO clearly lacks sufficient good planning and financial acumen. Something must be done if it’s to remain a non-profit coop rather than acting as a utility monopoly, and continuing to spend more on our backs is not the solution.
We want to understand and trust OUR OPALCO. I support Joe’s suggestion wholeheartedly.

Thank you, Alex Conrad, for your diligent, penetrating analysis of OPALCO finances. Anyone who looks at these figures and can understand a profit and loss statement will recognize that OPALCO does not have a revenue problem. It has an EXPENSE problem.

Looking at the Q1 figures given by Alex (which I have not checked against the official OPALCO statements, but have no reason to doubt them), the revenues are growing quite nicely from 2010 to 2014 to 2015. The gross margin, which is revenues minus cost of sales (i.e., BPA power), grows from $3.725 million to $4.192 million to $4.498 million, or from 59.3% to 61.3% to 66.4% of revenues. Any serious investor will recognizes this as a healthy gross margin for a company to work with.

The problem comes with the OPALCO expenses, particularly General and Administrative (G&A) and Distribution. Taken together, they grow from 21.6% of revenues in 2010 to 24.4% in 2014 to 29.3% in 2015. Thus, despite healthy and growing gross margins, the net margin drops from 12.3 of revenues in 2010 to 9.0% in 2015. Therein lies the problem.

I will be looking more deeply into OPALCO financial statements as time becomes available in the next month, but the picture that is emerging from an analysis of First Quarter results is not a promising one.

Thanks again to Alex for providing factual statements amid a sea of otherwise cloudy references. I, too, appreciate Joes suggestion, but given the current sense of absolute defensive nature of OPALCO I suspect that the group he is proposing will have to happen DESPITE the OPALCO board rather than through its blessing.

I think I speak for most common Islanders when I say that should such a group convene, I would support their efforts and findings- even if they produced a result that said OPALCO was doing everything correct. It would just be nice to have some independent clarity on what is happening.

June 24, 2015

A Letter to OPALCO Members to Clear-Up Some Lingering Confusion
from Suzanne Olson (solson@opalco.com)

First, apologies to those who have been waiting to hear from OPALCO on these issues. We have many irons in the fire and are working hard to give each its due attention. Reader be warned: this is a long letter.

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. 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 to serve Residential members than Commercial members, on average, despite the larger loads of businesses. The difference is weighted on the residential side by the number of single 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; and weighted on the commercial side 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 members are the ones heating their homes at night (when businesses are closed) usually pretty regularly throughout the first quarter months.

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. 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 will continue to promote energy efficiency, conservation and renewable power but can no longer afford to put in on the backs of all ratepayers.

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? We’ll be at the County Fair in August.

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?

Our lowest income members 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.

Member Engagement
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.

Despite the sometimes negative commentary these co-op members offer, they are our rock stars. They are engaged co-op members, 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.

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. Thanks for paying attention.