OPALCO Board Approves 2016 Budget and Rates

Monday, November 30th, 2015

OPALCO’s Board of Directors has approved the 2016 budget with measures in place to keep our Co-op financially healthy, following two years of declining energy sales. Members’ bills will go up by an average of 5% beginning in January and a new Energy Assistance Program will provide a monthly discount to qualified households. The full budget report and presentation are available online.

At the November 19th budget work session, the Board reviewed the results of the 2015 member survey and heard the voice of the membership say: do your best to minimize rate increases, use voluntary donations not rate increases to fund rebate and renewable energy programs, and place a high priority on rate relief for qualified seniors and low-income households. The full survey report is available online.

The Board spent a day discussing budget measures and alternate billing and rate structures in detail before approving the budget at a regular board meeting on Friday, November 20th in Friday Harbor. Both meetings were attended by a handful of co-op members. To meet our budget needs, the Board decided to scale back capital credit distribution to 50% for 2015 when 1990 capital credits are issued. Within a couple of years, we would expect to true-up and return to our 25-year cycle. It’s a common practice for co-ops to adjust the pattern of capital credit distribution during periods of greater capital expense such as our submarine cable replacement project.

In December, the Board will have a second reading of the proposed billing increase, which is expected to be spread equally across both the facilities and energy (kWh) charges – taking the middle road, as more than 50% of our members preferred in the 2015 survey. The details of OPALCO’s new Energy Assistance Program will also be further developed in December: who qualifies, how to apply and how awards will be determined. Support for the Energy Assistance Program will appear as a line item on member bills (about $0.45/month for an average residential member: $0.0005/kWh x 900kWh/month).

The temporary Revenue Recovery “decoupling” line item ends in December. In 2016, a similar line item may be invoked in the case of a revenue shortfall – or windfall. This line item can also be used to issue a credit to members if revenues are higher than forecast.

On the Energy Savings front, General Manager Foster Hildreth estimates that our remaining allocation from Bonneville Power Administration (BPA) for energy efficiency and conservation rebates will take us through the summer — and possibly further. “Staff will prioritize rebates for residential measures to maximize member benefits,” said Hildreth. “We’ll do our best to keep a fairly normal cycle going until BPA funds are available again in 2017.”

In the past, OPALCO has been able to make use of BPA funds allocated to other co-ops that don’t have the ability to operate a conservation program. The potential for additional funding, along with targeted measures such as residential ductless heat pumps (that give us some incremental savings), will help extend our rebate program. Staff will also conduct education and outreach to members about the benefits of switching from propane heat to electric – and from gasoline-powered cars to electric vehicles. “We can save members money on their total energy usage – including gas and propane,” said Hildreth. “Why not optimize the one utility we all own? Members save on their total energy outlay and we all benefit from greater co-op energy sales.”

The 2016 budget includes staff time to research and plan a pilot community solar project, which would be funded by members’ voluntary investment. The planning for a location, system design and start-up funding will take place in 2016 with an offering to members who want to participate expected by early 2017.

OPALCO’s wholly-owned subsidiary Rock Island Communications came in on target for fiber to the home deployment in 2015, but behind schedule and over budget on LTE Wireless deployment due to a midstream change in the core equipment necessary to serve the challenging terrain of San Juan County. In 2016, with a new approach to LTE service, Rock Island expects to catch up on its service offerings and reach its financial targets.

OPALCO’s budget is built to meet the cost of service, which is higher than most other utilities given our remote island communities connected to the mainland by submarine cables. During the past two years of revenue shortfalls, we’ve tightened the belt along the way and delayed projects and hiring to meet the need. In 2016, we project a stable revenue year as the adjustments we’ve made for changing energy usage and weather patterns are built in to budget assumptions. It’s been a bit of a bumpy ride for all utilities in the region, but OPALCO projects smoother sailing ahead as we adjust to the new weather norms, get through the final two years of our submarine cable replacement project, major upgrades to our communications infrastructure, Rock Island’s start-up operations begin to level out and we begin to add new electrical load through fuel switching. Thank you for your patience and cooperation during the bumps!

 

OPALCO RELEASES LOW-INCOME NEEDS ASSESSMENT FINDINGS: PROPOSES ENERGY ASSISTANCE PROGRAM

Friday, November 6th, 2015

OPALCO led a county-wide work group to identify the needs of our lowest-income residents and to collaborate on effective solutions. The findings show there is a broad spectrum of affordability needs to address and that an effective response will require county-wide agency participation. OPALCO will do its part, proposing new measures in the Co-op’s 2016 budget to address the affordability of electricity for qualified households.

The work group, which began meeting in July of 2015, included stakeholders from island community foundations, family services, the County Housing Bank and Opportunity Council. Following three stakeholder meetings and data research provided by CLEAResult consulting group, OPALCO has released a comprehensive report of the findings, available online at energysavings.opalco.com/find-documents (see Find Documents, select folder Board Materials, select folder 2015, select folder October, click document icon to view the PDF).

The work group sought to address three key questions: who is in need, how big is the need, and how can we collaborate to best help struggling islanders. Using available market and Census data, the work group determined that roughly 19% of full-time residents fall below 150% of the Federal Poverty Guidelines, representing about 1,500 island households and 3,000 people. All of the available resources for community assistance were inventoried and estimates calculated for how much additional support is needed.

For these 1,500 households, the greatest portion of their monthly budget is housing (23%), followed by transportation (16%), medical (12%) and up to 10% for electric expense (numbers vary slightly for seniors, families with children, and single adults). Effective solutions will require county-wide collaboration across agencies to improve affordability in the islands.

OPALCO underwrote the cost of the Needs Assessment and will take the lead with a solution to reduce electricity expense for those households. OPALCO’s Project PAL collects voluntary donations from co-op members to fund some 250 assistance awards of about $150 each during the heating season. To extend the assistance, OPALCO staff will recommend that the Board consider a couple of options for the 2016 budget in addition to continuing with Project PAL: 1) Develop an Energy Assistance Program which would award grants based on income and household size using existing qualification tests (SSI, SSDI, LIHEAP programs); or 2) augment member donations to PAL with a budgeted amount to increase the effectiveness of that program.

General Manager Foster Hildreth expects to make a recommendation for an OPALCO solution as part of the budget discussion at the November meeting. Look for the November Board materials to be posted online Monday, November 16, 2016 in the Find Documents/Board Materials/2015/November section of the OPALCO website.

OPALCO APPROVED FOR INFRASTRUCTURE PROJECT LOAN FROM USDA

Monday, October 26th, 2015

OPALCO is among the 77 electric utilities recently approved for USDA Rural Utility Services (RUS) loans. OPALCO is approved for a loan of $17.1M to move forward with the submarine cable replacement for the Lopez to San Juan link, as forecast in our long-range and construction work plans. The loan amount also includes other transmission upgrade projects. Loan funds are not awarded in advance, but function as a line of credit, reimbursed as projects progress and as certified by RUS.

The US Agriculture Secretary Tom Vilsack today announced nearly $2.3 billion in loans to build and improve rural electric infrastructure in 31 states. The funding is provided through USDA Rural Development’s Electric Program, which makes loans and loan guarantees to non-profit and cooperative associations. Since 2009, USDA has funded $34 billion in electric loans and more than $1 billion for smart grid technologies.

A video about the OPALCO submarine cable project is available on YouTube.

Board Perspective on Rates and Finance

Wednesday, October 14th, 2015

Board Perspective on Rates and Finance
Jim Lett, Board President
September 9, 2015

Dear Co-op Members:

The following thoughtful analysis of OPALCO’s rates and revenue situation was initiated by our Shaw Island board member, Dr. Jerry Whitfield, who brings significant expertise in business and financial matters. This letter has been reviewed and edited by the full board to reflect our position as a whole in the hope that we can bring greater clarity and understanding to the membership about our financial position.

Summary

OPALCO experienced a significant shortfall in revenue during 2014 that was 6.0% below budgeted “cost of service”[1] that is continuing in 2015. The Cooperative’s bottom line, or Net Margin, was down by $1.0M in 2014, which put the Co-op’s key TIER[2] ratio below the minimum required in its loan covenants (see table below). This requires a corrective action plan to be filed with OPALCO’s lenders. Recently, the Board approved a temporary charge on all residential and commercial electric bills through the end of 2015 to recover the expected 2015 shortfall in revenue and to restore TIER to above the required level. The underlying reasons for this revenue shortfall, the impact on member’s electric bills, and a process for finding solutions are examined here for the benefit of all members.

 Chart: budget to actual 2014-15

Background

An electric cooperative is a not-for-profit, membership-owned, quasi-monopoly. As such it is required to provide an exclusive electric service to all its members at its “cost of service.” This means that it must charge a price for this service that covers all of its actual operating expenses plus a small margin (Net Margin), typically 4-5%. This margin is not considered profit in the strictest sense but is used to build up “patronage capital” for each and every member which is repaid to members after 25 years of service.

Obviously, revenue shortfalls are bad financially for any organization. OPALCO relies on long-term, low-interest government loans administered through the Department of Agriculture to provide and maintain the infrastructure that delivers electricity to our homes and businesses. OPALCO services these loans through revenues collected from members of the cooperative when they pay their electric bills. If these revenues continue to fall short, OPALCO will continue to make adjustments as required in the corrective action plan to meet our revenue requirements and avoid risking default on its loan covenants that are designed to assure the lender of OPALCO’s continued ability to repay these loans.

To meet its loan covenants, OPALCO must maintain its Net Margin at a level that is at least equal to 25% of the interest it must pay on all of its outstanding loans, (TIER=1.25). In 2014 TIER dropped to 1.13, or 13% of its interest repayments, requiring OPALCO for the first time ever to provide its lenders with a recovery plan. Please note that OPALCO remains in loan compliance as TIER covenants are measured via a three-year rolling review.

Revenue Shortfall

How does OPALCO set its rates and how has this revenue shortfall occurred? OPALCO, along with its professional rate consultants, EES Consulting, undertake a Cost of Service Analysis[3] to develop a “rate structure” that is designed to generate revenues sufficient to recover OPALCO’s full cost of providing its service. A rate structure is also intended to fairly allocate expenses in relation to each member’s use of and impact on the system, to reduce the impact of weather variations, market and other volatility, and promote OPALCO’s financial stability. The Cost of Service Analysis utilizes OPALCO’s annual budget (projected revenues and expenses) as well as its load forecast (estimate of future electricity demand by all members) to develop electricity rates. The cost of service line items are clearly delineated each year in the annual budget. Still, the current rate structure did not meet its objectives for generating the revenue required to meet its cost of service. How so, and how can it be fixed?

Forecasting energy usage is not an exact science and a small variance can make a big difference. Our margin of error for weather prediction (heating degree days) is typically +/- 5%. In 2014, actual variance was 6%.

In the last 2-3 years there has been no growth in the residential customer base, and average customer usage dropped by 5% in 2014 with a steeper decline in Q1 2015. Usage is expected to decline through the rest of the year with another projected warmer winter.

chart 2

chart 3

However, the cost-of-service analysis projected a 1% annual load growth in both 2014 and 2015, over-predicting sales of KWh by >6% in 2014. The $/kWh rate was established on this load projection, and when usage comes in low, so does revenue, which leads directly to the revenue shortfall. The net effect is that OPALCO has charged all members below the full cost of service during this period.

This trend has been in the making since 2010 (see charts below) because rates were held relatively flat while revenues increased on average by 3.3% per year on a $/KWh basis; however energy expenses (BPA) went up by 5.6% per year and non-energy expenses by 6.5% per year. This was an intentional board direction: rates increases were minimized to help with recession recovery and then, in 2012, the Board intentionally began driving down Net Margins and TIER, which was higher due to elevated kWh sales during a cold weather year in 2011.

Trends in Cost of OPALCO Electricity

 

chart 6

chart 7

chart 8

Impact on Members Bills

Monthly electric bills consists of two parts: a fixed facility charge and a variable energy charge determined by kilowatt hour (KWh) usage. Historically, the energy charge (kWh sales) has represented the majority (60-75%) of the bill so that lower revenues are directly linked to lower sales. While it is good for the member to have a fixed price per unit of electricity, it represents a revenue risk for OPALCO if actual usage falls below predicted. Recently, warmer weather patterns, installation of low-energy lighting and appliances, and more solar generation by members has resulted in a significant downturn in usage per customer compared to forecast and at a time when the customer base is not growing. Had our forecast been on target, the average member bill would have increased by the budgeted 6% instead of the actual increase of only 2.8% in 2014.

The variation in average monthly bill for residential usage is shown here over the last five years. Seasonal demand change is very clear. Year-to-year changes are quite modest.chart 9

 

 

 

 

 

OPALCO Financial Management

Predicting the weather is a difficult task, even with all the BPA expertise and experience OPALCO has in its team and consultants. The warmer weather patterns of late as well as member’s decisions to invest in energy efficiency and local distributed power are beyond OPALCO’s direct control.

Missing the TIER targets has been characterized by some as an expense problem which must be fixed by slashing expenses and capital investment. Expenses were reduced by over $650k (3%) in 2014, but this was insufficient to relieve the underlying problem. This a revenue problem first and foremost that can only be solved by first generating sufficient revenues to cover the true cost of service.

The current challenge for Management and the Board is to rigorously control costs during a time of declining usage, thereby minimizing further rate increases, without compromising safety and reliability of service.

Going forward, OPALCO has a number of capital investment challenges, including replacement of some aging submarine cables and financing the build-out of broadband internet through Rock Island Communications[4].

It is important to note that our investment in broadband was based on a decision made in 2013 and we are fully committed and contractually obligated to see it through to profitability. With the acquisition of Rock Island in February 2015, the risk, timeline and costs involved in meeting this directive have been significantly reduced from our initial proposal and we are on track to reach financial breakeven with a minimal number of connections (2,000-3,000).

The total cost of the capital buildout for our fiber optic backbone is about 2.5% of a member’s electric bill today increasing to a maximum of 5% when completed in 2017 (see chart on the previous page). This is a cost-benefit issue that deserves on-going and systematic review by Management, the Board and the Membership.

This is a challenging period of necessary capital investment. We anticipate higher debt load in the future which will add further to the cost of service and members’ electric bills. This was clearly spelled out in the 2015 Budget.[5] Management and the Board must be aware of the rate impact of these future funding decisions and be prepared to communicate these decisions.

It is important to understand that OPALCO provides an electric service, guaranteeing grid connectivity across many island waterways, and supplying reliable, affordable power to all its members at all times. It is not solely a retail commodity provider of kilowatt hours akin to a gas station or grocery store where the commodity prices depend on supply and demand. As such, member-owners must be prepared to pay the full cost of service regardless of changing weather patterns and decisions made by users to improve their energy efficiency. And the Board must serve the interests of the membership by striving to minimize increases in members’ bills. This is a responsibility that comes with cooperative ownership, and costs must be shared fairly across the membership. Bear in mind that higher rates do not always spell out higher monthly bills (see above chart, Average Residential Monthly Bill).

Where do we go from here? There are a number of ideas on the table for rate structure solutions and discussion will continue at future Board Meetings.  No matter how we go forward, there will be trade-offs including unintended consequences and tough decisions to make, such as:

  • When we structure rates to encourage conservation (higher kWh charges, lower facilities charge), members have more control of their bills but our revenue is more subject to volatility based on weather and usage and, an unintended consequence is that, part-time members are subsidized by full-time members for the year-round fixed costs of the infrastructure that serves them.
  • If we try to encourage fuel switching (replacing member propane and gas usage with hydropower), the rate structure includes lower KWh charges and a higher facilities charge which reduces revenue volatility, encourages new electric load and revenue and charges part-time members their full cost of service year round. The trade-offs are less reward for conservation and less member control over their bills.
  • As rates go up, what role should the Co-op play in addressing affordability in San Juan County? Does the membership want to subsidize a rate relief program for qualified seniors and low-income member household through increased rates? Our county-wide low-income assessment in process this summer will provide key information on this important affordability issue.

Members are invited to weigh in on these important questions by taking a survey online at www.OPALCO.com/survey. The results of this survey will help inform our decision making during the 2016 budget process.

To follow the conversation, members can read each Board packet when they are posted online (find documents/board materials). To participate in the discussions, board meetings are open to members and provide a forum for exchanges of information and ideas. If you have questions, come to the source: the wealth of information online and our knowledgeable staff and leadership. Social media helps to broaden participation in the conversation, but should not be mistaken for the conversation itself.

Notes and links:

[1] Cost of service = (total operating expenses + total fixed charges (interest in long term debt) + net margin)

[2] Times Interest Earned Ratio = (Net Margin + Interest)/(Interest) = 1 + (Net Margin/Interest)

[3] Orcas Power and Light Cooperative Electric Cost of Service and Rate Study, Final. EES Consulting. Feb 12th 2015. http://www.OPALCO.com/wp-content/uploads/2015/04/Rate-Design-COSA.pdf
pp25-77.

[4]2015 Capital Projects Budget. http://www.OPALCO.com/wp-content/uploads/2015/01/2015-Capital-Projects-Budget.pdf

[5] http://www.OPALCO.com/wp-content/uploads/2015/03/2015-Budget-Report-updated-rate-chartREV.pdf. pp8-29.

Local Co-ops Join in Celebration of National Co-op Month

Monday, October 5th, 2015

The Orcas Food Co-op, San Juan Island Food Co-op and OPALCO have joined forces to bring the National Co-op Month celebration San Juan County. During the month of October, we are cooperatively offering family activities, co-op talks, film showings, goodies and a Gold Star Co-op Member checklist with prizes and a raffle drawing. Get the full calendar of events online.

We are celebrating all the perks of our local, independent and democratically-governed businesses such as voluntary and open membership, concern for community, sharing education and information and cooperation among cooperatives. Our co-ops improve our quality of life in San Juan County and we want to appreciate and share the bounty with our members!

Co-op Month Kick-Off – Monday, October 5th

  • Cookies and cider at OPALCO’s Eastsound and Friday Harbor offices
  • Hot apple cider at the Orcas Food Co-op Deli
  • Coffee, tea and home-baked goodies at the San Juan Island Food Co-op
  • Pick up a Co-op Month coloring book and “Gold Star Co-op Member” checklist at OPALCO, Orcas Food Co-op or San Juan Island Food Co-op.

Activities:

  • San Juan Island Farm Parade – watch or walk with us!
    October 3rd 2:30 pm – starts at Fairgrounds, ends at Brickworks
  • Game night – Play “Co-opoly” and more! Bring your favorite game to share!
    October 6th 6pm-9pm @ Orcas Food Co-op Commons
  • Co-op Talk: Cooperatives: An alternative economic model for resilient communities
    October 16th, 4pm-6pm @ Orcas Food Co-op Commons
  • Cider Pressing Fundraiser – Hosted by Orcas Food Co-op & Orcas Island Forest School
    October 17th, 1pm-4 pm (location TBA)
  • Co-op Film Showing: Food for Change: The Story of Cooperation in America
    – October 25th 4pm-6pm @ Oddfellows Hall – popcorn provided!
    Followed by potluck social 6pm-7pm
    – November 6-8th – Friday Harbor Film Festival
  • Co-op Talk: The History of Electric Co-ops in America
    October 27th, 5pm-6pm @ OPALCO conference room, Eastsound

Get the Gold Star Co-op Member checklist at any of the participating co-ops, or download from our websites. The checklist includes five areas of co-op member engagement: join, voice, participate, inform and contribute. Check off all five and return the checklist to your local co-op for an immediate prize. Three raffle prize winners will be drawn from all completed checklists to win some great co-op prizes such as the board game “Co-opoly,” local foods gift baskets from our food co-ops and energy savings gizmos from OPALCO.

There are more than 29,000 cooperatives in the United States with more than 100 million members. Adaptable and time tested, cooperatives operate in every industry including agriculture, energy, financial services, food retail and distribution, health care, child care, insurance, housing, purchasing and shared services, telecommunications, and more. Members are encouraged to participate in making decisions for their co-op. From attending an annual meeting to serving on the board of directors, people who belong to cooperatives have a real stake in their economic destiny. So why sit on the sidelines when you can take an active role in a co-op?

Take ownership! Get started today by downloading or picking up the Gold Star Co-op Member checklist at your local co-op.

Learn more about Orcas Food Co-op at http://www.orcasfood.coop/.

Learn more about San Juan Island Food Co-op at http://sanjuancoop.org/.

Rock Island VP Mike Greene Steps Down as Start-Up Operations Solidify

Friday, October 2nd, 2015

Rock Island Communications founder Mike Greene, who has most recently been serving as Vice President of Technology, has announced that he will be leaving the company as of October 15.

When OPALCO purchased Rock Island in February, Greene stayed on to help with the transition, merging staff and operations to keep the business humming while a huge infrastructure expansion began. With that transition solidifying, Greene has taken the opportunity to step down. Company operations will continue to be directed by Gerry Lawlor, Executive Vice President of Rock Island.

“Rock Island is revolutionizing Internet services for our communities,” said Lawlor. “We are taking a local ISP to the next level, delivering modern services by building on the foundation of OPALCO’s backbone.”

It’s not unusual for founding leaders to step down in the year following an acquisition, but Mike Greene’s expertise and institutional knowledge will surely be missed. “We wouldn’t be here today without the significant investment that Mike has made in our communities,” said Foster Hildreth, President of Rock Island and General Manager of OPALCO. “Rock Island Communications is the product of his passion, foresight and skillful entrepreneurship in San Juan County.”

Rock Island continues to build out its staff in both the Friday Harbor and Eastsound offices. In August, the company hired Chief Financial Officer Chad Bailey to lead the accounting team, and hiring will continue as the business grows. Rick Lysen, who has been the architect and manager of the OPALCO fiber backbone for the past 14 years, will continue to oversee network operations.

The team currently serves thousands of customers, and is engaged in the construction of “fiberhoods” and LTE Wireless systems throughout the county to deliver next generation, fiber-based Internet services. Rock Island currently has a total of 235 fiber customers. With more than 300 currently under construction, the company is well on its way to meeting its 2015 target of 500 new fiber customers.