Electric Rates Not Just an Arbitrary Number

When setting rates, your public power provider considers factors from the national level down to your community

By Brandon Pomrenke

The power grid is a complex and ever-evolving part of American infrastructure. It’s no surprise several factors affect your electric rates.

Public utilities set their rates high enough to recover operating costs, maintain and upgrade infrastructure, and set aside any funds required by loan originators.

Approximately two-thirds of a public power utility’s costs are attributed to the cost of power. For public utilities in the Northwest, most of that power comes from the Bonneville Power Administration—one of four federal power marketing administrations.

“In business management school, one of the fundamentals is to have your fixed costs covered by fixed revenue,” says Clatskanie PUD General Manager Marc Farmer. “If you look at any other utility or service—whether it’s phone, gas, water or sewer—it’s all based on fixed charge with your usage on top of that. The electric industry historically has not done that.”

Farmer, who took the helm at the PUD in Clatskanie, Oregon, a few years ago, says co-ops, municipal, and PUDs throughout the electric industry have had to adapt their business models.

There are exceptions to every rule, and some communities must find other ways to recoup costs. Meera Kohler, president and CEO of Alaska Village Electric Cooperative, says the communities AVEC serves may see rate structure changes in the future.

“Our rates are three-tiered: a modest $5 customer charge, an energy rate that covers all non-fuel costs, and a fuel charge that captures the cost of fuel per kilowatt-hour in that specific community,” Kohler says. “Because we serve communities with greatly varying costs of fuel—some are in proximity to the coast, with year-round barge access, others are inaccessible by anything other than air transport—we do not have a postage stamp fuel rate. We intend to shift our revenue structure to recover more from the fixed charge in the future since the customer charge is woefully inadequate to recover actual fixed costs per customer.”

While some utilities are preparing for changes, others have started the process of recovering fixed costs.

“When I first came here, we had to re-institute a base charge due to the financial condition of the district,” Farmer says. “We started with a $12 base charge. Our COSA (cost-of-service analysis) indicates we’re at $40 per meter per month to maintain the system. That includes not only the physical but also the cost of customer service. Regardless of whether a person used 500 or 1,500 kilowatts, this is what the fixed costs are.”

It may be called something different depending on the utility, but the idea behind the base charge is it allows utilities to better set their budgets when considering overhead.

“When your base charge is established and you can cover your fixed costs with fixed revenue, then you are indifferent to whether someone wants to go to solar, wind, or some other form of distributed generation,” Farmer says. “You’re indifferent to that because if they’re still going to be connected as a backup to your system, they’re still going to have that basic charge to cover their share of the cost to deliver power to their residence.”

Farmer says the Clatskanie PUD staff has presented a plan to its board to better recover the increasing costs associated with providing power. The idea, he says, is to not increase costs all at once, and to help customers understand the reasons rates must change.

“To do it right, it takes a prolonged education of your customer base so they understand what it is you are trying to do, why you’re trying to do it, and the thought process in getting there,” Farmer says. “My philosophy has always been that nobody likes a rate increase—and I don’t like having to do a rate increase— but as long as they understand it is necessary, I’ve done my job.”

Tanner Electric Cooperative in North Bend, Washington, serves three distinct service territories: North Bend, Ames Lake, and Anderson Island—a 90-minute drive and an hour-long ferry ride away.

“One of the things that really affects our member rates is our operations,” says TEC General Manager Steve Walter. “We have additional linemen on the island that we probably wouldn’t have otherwise. If we were all connected, we would be able to serve our members with our current Northbend operations.”

More linemen means more equipment.

“We have to have duplicate sets of everything there that we have over here to be able to respond to calls,” Walter says.

Even though the service areas are spread far from one another and come with their own challenges, TEC does its best to keep rates equal across the membership. With the exception of replacing the marine cable on Anderson Island. The island members picked up a larger share of the cost.

“I guess you could say that’s the co-op philosophy,” says TEC Chief Financial Officer Rob Carr. “We don’t charge different rates for all of our members just because they live in a more expensive area.”
When it comes to spread-out service territories, few can comprehend the challenges and expenses as well as Alaska Village Electric Cooperative. Its headquarters is in Anchorage, but the cooperative serves 58 communities spread throughout interior, western, and southeastern Alaska. AVEC’s service territory is the largest of any retail electric cooperative in the world.

Providing electricity to such a large and dispersed membership is expensive, but the AVEC staff and board work to keep a lid on costs. This is done by consolidating power generation and sharing costs.

“By connecting communities electrically with what we call tielines, we can improve efficiencies,” says Kohler. “Larger engines equal more kilowatt-hours sold per gallon of diesel—and reduce generation expenses by operating one less plant and typically three fewer generators.”

Keeping costs in mind is critical to cooperatives, municipal, and public utility districts, which formed when investor-owned utilities did not want the expense and low-profit margin dealing with rural communities.

While these entities work to keep power reliable and affordable, the number of meters per mile, terrain, vegetation, and regulations affect rates.

“A lot of the rate increases I’ve been part of here at Tanner have had to do with Bonneville Power Administration charges that have been continuing to go up over 30 percent on the wholesale side,” Walter says. “In the same fashion, we’ve seen a loss of sales here the last four to five years, mainly due to conservation and a lack of growth.

“Our city of North Bend—where most of our load would be—is stagnated. It’s trying to keep rural. Any cost pressures wind up going onto our rates because there’s nowhere else to spread it.”

Kohler sees growth as a way to keep individual costs down.

“Adding communities also spreads fixed administration costs over a larger sales base,” she says.

Population density can affect individual utilities, but government regulations can affect entire regions. One example is wildlife conservation.

Protecting the environment and native species is important, but so is reliable, affordable energy. An issue utilities in the Northwest face comes from its wholesale power provider, BPA.

“About a third of the wholesale rate paid to BPA is for fish and wildlife mitigation,” Walter says. “One of the things we always have to communicate with our legislators—whether federal or state—is how much we’re already paying for that. It seems like even after we give on certain things when Bonneville gives on it, we pay for it. We’re the ratepayer, so we still end up the next year or two going back and they just want more.”

Farmer agrees and wonders what the future will bring when utility contracts end in 2028—especially since BPA’s rates are not necessarily the cheapest anymore.

Local, state, and federal governments need to understand that when they do things that affect electric rates, consumers are hit hardest, Farmer says, noting governments may think the utility absorbs the increased costs associated with providing power, but that is not true.

“Regulations always have an impact on us,” Farmer says. “How do utilities deal with it? Unfortunately, it goes right down to the customer because that’s where the revenue comes from.”

BPA Sets New Rates

The Bonneville Power Administration released its fiscal year 2018 and 2019 rates. BPA announced a 5.4 percent average wholesale power rate increase. BPA also announced an average transmission line decrease of 0.7 percent. These rate adjustments took place on October 1, 2017.

BPA also has generated a spill surcharge to recover costs associated with a state-mandated spill at eight dams along the Columbia and Snake Rivers. The charge will be announced after further information is gathered.