Members will pay monthly add-on to recover under-charged bill amounts
— from Suzanne Olson for OPALCO —
At the June 18 board meeting on Lopez, the Orcas Power & Light Cooperative Board approved a temporary revenue recovery add-on to make up for the current cost-of-service gap and projected revenue shortfall through the end of 2015. The add-on will be applied to all member bills beginning in July, 2015.
“Members have not been paying their full share,” explained Foster Hildreth, General Manager. “They’ve been undercharged because our rates have not collected the true cost of service.”
Residential members will pay an additional one cent per kilowatt hour (kWh) and commercial members will pay just more than a half-cent per kWh. The difference between the residential and commercial add-on is due to the cost-of-service spread: commercial usage is less than 25% of our total system load. The increase will average $8.43 for a residential member with average usage.
“However, the situation is better than we thought,” said Hildreth. “Our first quarter financials came in with less shortfall than anticipated due to lower power purchases from BPA and savings from cutting expenses.” Hildreth reported to the Board that kilowatt-hour sales were down 6.4% through May. The total shortfall projected by year end is $661,000.
The revenue recovery add-on was calculated using the total projected shortfall divided by projected energy sales. The methodology is detailed in a report from EES Consulting in the June 2015 board materials, available at www.opalco.com. The Board has mandated that the shortfall be resolved by the end of the year. The add-on will be discontinued if the shortfall is resolved before the end of the year and no further shortfall is projected.
In addition to keeping a stable margin, this corrective action is required to remain compliant with our federal funder, USDA/Rural Utilities Service (RUS). RUS works closely with utilities to keep financial indicators healthy using a three-year window for review. OPALCO is compliant at this time. More detail about OPALCO’s corrective action plan and financial standing with RUS is available online in the June 2015 board materials.
For the latest information about OPALCO, go to: www.opalco.com; sign up for our email newsletter (https://www.opalco.com/about/email-signup/); and follow us on Facebook (Orcas Power & Light Cooperative) and Twitter (@orcaspower). OPALCO is our member-owned cooperative, powering more than 11,000 members on 20 islands in San Juan County since 1937.
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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.
OPALCO talks about “fixed costs”, “cost of service”, “infrastructure costs”….all those that “don’t go away” and until we are all paying a $78.00 facility charge in 2019 we aren’t covering those costs. So then why is this “surcharge” going to be based on usage, and less for large commercial member/owners? Shouldn’t it be a flat fee, dollar amount that everyone pays?
Thank you Michael. You have asked the same questions that I would like answered.
Well, I am confused. It seems to me that OPALCO had a rate increase at the May Board meeting, less than a month after the Annual Meeting. And now there is to be a surcharge on top of that??
I would very much appreciate a recap and a summary of the rate changes
since the beginning of the year.
As an aside, Carol and I have made several changes in our usage of power, specifically lowering the temperature on the hot water heater, and turning off the heat to our home for the summer. If everyone’s KW usage decreases through conservation, how does OPALCO get out of the revenue spiral?
I am wondering, further, when our local OPALCO directors are going to meet with their constituents and explain this dilemma. ???????
Ditto to the comments above. Logic Opalco!
Spirit Eagle
I am no expert on OPALCO, but in general, utilities don’t adhere to any usual supply/demand economic theory. They usually answer to a public service/utility board that approves rates and fees and guarantees them a set rate of return. If use goes down costs can be raised to assure that the ROR is maintained. The people of Orcas are smart enough and thoughtful enough about the environment to want to reduce usage, but there is often no financial incentive for so doing, and as we are seeing here, there may actually be a penalty. As people move to solar/wind/geothermal OPALCO will need to keep raising rates. It is indeed a tragic spiral.
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.
Fred Klein speaks for a number of islanders who are fatigued with the condescending tone of OPALCO’s p.r. in justifying rate increases and surcharges based on power sales shortfalls while simultaneously pushing into a capital intensive infrastructure build out which lends capital to an affiliate. I concur, throw the quants out instead of those of limited income under the bus.
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.
Many members have weighed in on this discussion. Frankly, I would prefer to hear from Foster Hildreth, specifically, and from the Board members that represent me. I DO NOT want to have consultants or PR people respond and parrot the party line. I’m waiting !!!
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?
Many thanks to those who responded to my initial comment, expanding upon it and developing the general theme of unfairness. But I have to disagree strongly with Mr. Altdorf’s suggestion. To apply an absolutely equal facilities charge across all OPALCO members would mean that a widow living frugally on fixed income in one of the tiny houses near the Senior Center, and drawing perhaps 1 kW, would pay the same facilities charge as a large commercial user drawing the average 9.5 kW. Or the same as a 4000 sq. ft. home on Henry Island drawing almost as much.
I’m sorry, Harry, but the latter put much greater demands on the system, and their facilities charge should scale proportionately. Unfortunately for us all (or most of us), this does not seem to be the direction in which OPALCO is headed with its impending changes in rate structure.
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…
I appreciate all the well intended and (mostly) thoughtful comments – when a subject matter attracts this much interest it is GOOD.
What is ‘not GOOD’ is the rapid erosion of TRUST our OPALCO Board has traditionally enjoyed. Clearly something is not resonating with the constituency. The many comments speak of ‘lack of confidence’ in too many ways.
We are not going to solve this ‘big issue’ in Orcas Issues (but thank goodness we have a venue for discussion – thank you Margie Doyle)!
We need a mechanism to sort this out – and in a reasonable time frame:
My suggestion:
We (as members) put forth a group of 3 – 5 individuals with very strong business and financial expertise (perspectives). This group delves into (with the financial steward of our BOARD) all the many issues that have (and will be) raised. What we need most is a clean and fully transparent airing of the health of OPALCO.
We can ill afford an OPALCO adrift and in risk of running aground.
OPALCO BOARD: Will you consider such an undertaking? (The courtesy of a prompt reply is appreciated in advance).
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.
I strongly agree with Joe Cohen regarding the need for an independent group to review and discuss the state of affairs at OPALCO. Having served on many boards over many years, I can attest to the value of communication, and open discussion of such complex issues.
There have been several persons who have offered a detailed analysis of this situation. I would expand Joe’s suggestion somewhat and have those several critics of OPALCO meet with Foster Hildreth and two Board members, PLUS the three to five financial expects of whom Joe speaks to sort out this mess for the benefit of the 11,000 customers of our Co-Op who can’t understand what is the correct state of affairs.
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.
Thank you Michael. I would only add that debt appears to be at historically high levels too…plus, we already know that the leverage will only increase with cable replacement, etc. This leverage puts OPALCO in a position of significant risk relative to cost of capital, and I do not think this risk has been reasonably communicated.
Regarding your first question on this post, about cost of service for residential vs commercial. The announcement is misleading. I have no doubt that the underlying rate structures are developed upon some cost of service methodology. Fine. But the statement that the surcharge is due to the cost of service spread is not correct. The surcharge math is simply a derivative of H1 budgeted revenue minus actual/projected revenue and H2 budgeted revenue minus a new internal revenue forecast…this is simply calculated twice…once basis the residential budgeted revenue, and again for the commercial budgeted revenue. I agree, calculating once on an aggregate revenue number would be the better way to go. Somewhat cynically, the current methodology rewards commercial users simply because OPALCO was better at forecasting commercial usage vs residential usage.
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.
updated at 3:50 p.m. on June 24
Thank you Alex and Michael for illuminating us on OPALCO’s financials. It is clear to me that many members have questions about expenses and capital expenditure, as well as cost allocations, among different members as well as between OPALCO’s electrical business and fiber internet service.
I have attended several board meetings including the last two recent ones. Clearly several members have expressed time and again our interests to be engaged and directly involved in OPALCO’s cost and rate review process. There is however a gulf of difference between what OPALCO see as an appropriate level of involvement by members and what members wish to see happen. I sense a level of fear among the board to keep the members as an arms length as OPALCO is in a very tender spot right now, financially speaking.
It’s not too late for OPALCO to be open and vulnerable, and welcome members to be part of the solutions. I agree with Alex that blaming the members (we didn’t pay enough, or didn’t consume enough) is not a productive story line to win members’ trust and support in this difficult time.
Many of us put in so much volunteer time on this because we deeply care about the health of our co-op. Public forums, round-table discussions, member advisory committee, joint-member-board/staff working group, and/or readiness to share information would go a long way towards improved mutual understanding and trust.
As a side note on commercial vs residential: In the Nov 2014 Cost of Service study, the consultant EES actually found that residential members over-paid their fair share while commercial members under-paid, based on the 2014 rate structure. Despite this finding, the board approved the Jan 2015 rate re-structure that led to a much higher rate increase for the residential class, compared to the commercial. Among the commercial members, the small users are hit the hardest, while large commercial users only see a total 2% increase.
This example illustrates to me two things: 1) OPALCO’s decision is not necessarily based on good analysis or fairness, but rather informed by its own bias in favor of the commercial class, particularly large ones; 2) affordability, especially for small businesses and residential users, is NOT high on OPALCO’s list of concerns.
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.
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.