Episode 4 - Inside Midstate Electric Rates

 

Episode 4 Transcript:

Jim Anderson: 0:00

Welcome to Power Factor, the podcast that takes you behind the scenes at Midstate Electric Cooperative. I'm Jim Anderson, the CEO and General Manager, and I'm going to be your host as we dive into topics about our industry and the challenges we face, and the members we proudly serve. In today's episode, we're going to discuss a topic that impacts every member, electric rates. Do you ever wonder how electric rates are determined or why they change over time? Today you're going to get the answers straight from the source. Joining us is our chief financial officer, or we'll refer to her as the CFO, Jami. She's going to be here to help walk through the numbers, explain the key drivers behind the rates, and share how your cooperative works to keep the power reliable and affordable. Welcome, Jami.

Jami: 0:39

Hello.

Jim Anderson: 0:40

So what does a CFO do? Maybe that's a good place to start with our membership.

Jami: 0:45

Ultimately, I'm responsible for everything related to the finances of the cooperative. Um, I also am responsible for the customer service or member support department and our billing department as well.

Jim Anderson: 0:58

So do you have a large department that you work with? Is this just you?

Jami: 1:01

I have a department of 13.

Jim Anderson: 1:03

13? Yeah. That's a large department. And they're all busy working to keep the rates down and satisfy the membership to keep them happy? That they are. Excellent. So I guess we're gonna start with the basics. So at the beginning, we have to look at where we're going and what we're doing at the co-op. So we've got to figure out how to set the rates. So how do we set the rates at Mid state?

Jami: 1:20

Well, every two or three years or so, we have a consultant do a cost- of- service study. So they look at the costs by a class of customer, and then we determine what revenue requirement is needed to cover those costs.

Jim Anderson: 1:34

And the process is probably more complex than just looking at our numbers.

Jami: 1:37

It's probably a very it usually takes three to six months total. They do the cost of service study and then we do rate design in the board. Uh, we have a rate committee that's involved that looks at it along the entire way and makes a recommendation to the complete board as a whole, and and then we implement the plan.

Jim Anderson: 1:56

So when the board's looking at this and our consultants are looking at the rate structure, what are some of the key factors that go into building the rate?

Jami: 2:04

One of the main things that they look at at first is how many kilowatt-hour sales we have per class of customer or the max demand per class of customer and just the count itself. Um, certain expenses are allocated based on all of those components to the different classes.

Jim Anderson: 2:19

And we're not just looking at residential when we design rates, we're looking at uh rates across the board. So we have all sorts of different rate classes here at Midstate.

Jami: 2:26

We do.

Jim Anderson: 2:27

Each individual rate class is analyzed and we try to find out what is the best recovery of rate for that member, being fair and equitable across uh for everybody?

Jami: 2:37

Fair and equitable, yes. We look at each one, make sure that each class is contributing, covering their costs and contributing to our margin that we use to uh maintain our plant and pay out our capital credits. So, yes.

Jim Anderson: 2:50

So one of the biggest things we look at is Bonneville Power when you're designing the rates. And I know Bonneville Power has been historically good at saying the average rate increase is going to be 2% for the membership. But that isn't necessarily the case when it comes to Midstate's or other cooperatives. The rates traditionally can be higher.

Jami: 3:09

Right. And traditionally, Midstates are higher than Bonneville's average because we have a larger share in tier two power, which is power that they have to buy off of the market. So we have load growth, and that ends up giving us a larger share of their increase historically.

Jim Anderson: 3:27

Okay, so that brings up a good point. Tier one, tier two power. I know our board has been very good at looking at the tier one power allocation from Bonneville or our high watermark, as they call it. When we design the rates, we meld for our residential cup customers tier one and tier two power together. So that actually gives us the rate for the membership.

Jami: 3:47

Correct.

Jim Anderson: 3:48

Okay.

Jami: 3:48

Total cost of power.

Jim Anderson: 3:49

Total cost of power. So with a large commercial load or a large industrial load moves into the territory and comes on, we've designed a rate structure so that it allows that person or that business new member to fairly pay their share of tier two only and not impact the tier two blend with the residential.

Jami: 4:09

You are correct.

Jim Anderson: 4:10

So how's that done?

Jami: 4:12

Again, it's based on so those are the newer classes of customer that we have, and it's again based on the amount of kilowatt hour sales that that class will have. So the consultant breaks out the tier one power costs versus the tier two and makes a direct allocation to that class of customer and not to any of the rest of them.

Jim Anderson: 4:35

Well, and I think that's important that the members know exactly that we're trying to protect the rates of everybody and to hold off these new large loads that come in so they don't directly impact the residential member.

Jami: 4:46

Yes.

Jim Anderson: 4:47

This year, since we're on the BPA topic, Bonneville came out again with a large rate increase for Midstate, it's gonna be somewhere around 28%. How did the co-op come up with the rate increase that we're gonna have this year being considerably less when we hear 28% Midstate's going in with approximately a 12% rate increase? Where do we get that number at? How do we get to that point of arriving at where the new cost is gonna be? And did we actually leverage the demand charge to save us some of this cost? Where I'm seeing other utilities going forward with larger increases year over year, there's a good possibility as it thinks that right now that this will be the last rate increase our members are gonna see, unless we have some major event until October of 2028, our members could see flat rates with no increases.

Jami: 5:38

Yeah, so our total power costs are normally about 50% of our operating costs. And having that new residential demand charge that we put in place earlier this year has definitely helped minimize the increase that we're going to be receiving from Bonneville Power Effect of October 1st.

Jim Anderson: 5:57

Okay, so this comes into that same thing of being proactive on our planning, looking at how the cost of service study actually could benefit the membership. Although at the times rates seem pretty painful and some changes we're making aren't necessarily popular. In the long run, they're actually going to be beneficial to the membership.

Jami: 6:15

Absolutely. And now we have a demand charge for every class of customer, and that is similar to the different components that we have on our BPA bill that Midstate pays on behalf of the customers.

Jim Anderson: 6:28

Okay, so I guess but that gets us into probably financial stewardship. Midstate Cooperative is a not-for-profit. We're a 501 C12 company. Can we talk about what the board does to make sure that they're setting the rates accordingly to be financially responsible given the guidelines that we have to operate underneath? So when we set the rates, how does the board look at that to maintain our standing with our lenders or other key metrics that we have to live up to?

Jami: 6:59

Well, number one is that each customer class pays their fair share. Um, and we don't want a one class subsidizing another class's costs. So they do take that very seriously. As far as our lenders go, there's some requirements that we have in place that ensure that we have enough margins to make our principal and interest payments to them on a quarterly basis. We are definitely looking at that monthly at each of the board meetings.

Jim Anderson: 7:30

And when the board looks at all this, I know there's so many drivers taking off right now between increased transportation and tariff charges. The co-op is actually getting on some materials coming in, long lead times, you know, some cases tripling in price. The board takes that into consideration when they're looking at these numbers as well.

Jami: 7:49

Oh, yeah. The board gets a 10-year construction work plan from our Engineering and Operations departments. And so we go through all of the capital projects that are needed in the next 10 years, and then we use that information to then put into a 10-year financial forecast. That forecasts out our uh expenses as well as our revenue. And then if there is a needed rate increase, it will also have that in there by year. So they have that on their radar constantly, and that's definitely always in the back of their minds.

Jim Anderson: 8:24

So this isn't something that just comes together in a matter of weeks or months. This is a process that's actually years in the making in some cases, as we look at the rate structure.

Jami: 8:34

Absolutely, it sure is. Yep.

Jim Anderson: 8:36

Yeah, and things can change really quickly. If we have a huge uh storm or a fire or something happens at the co-op, that could impact the rates going forward as well.

Jami: 8:44

Yes, it could.

Jim Anderson: 8:45

And you've dealt with the board, you've probably been here, you've been here longer than I have. So, as I know, as we sit in the boardroom and we talk about rates with the board, in your opinion, how difficult is this for the board to actually go through the process? Is this something that's easily done or is this a difficult decision for the board to make when it comes to the rates?

Jami: 9:04

Oh, it's very difficult. They they understand, you know, nobody likes an increase to their power bill. So they try to minimize that as much as possible, try to get creative on ways to generate funds without raising rates. But we are running a business and we're trying to cover the cost increases that we're seeing as well. So it's just kind of all of those things are being considered before they make their final decision.

Jim Anderson: 9:29

And they're still looking at this rate structure and they're looking at the margins, they're looking at the budget as we go forward. And you guys have a, you know, accounting plays heavily into the budget, making sure that we're staying with the guidelines of the budget as we go forward. So the rates play into that as well.

Jami: 9:44

Oh yeah. The board looks at our financials every month and we compare those to the budget that we have in place that the board also approves annually. So they're tracking this on a monthly basis.

Jim Anderson: 9:56

Okay, and then at the end of the year, we kind of look with the board and true up. That's that's kind of in the the past as we look at the end of the year and see how we've done it, see how we're how the budgeting is done forecasted versus actual.

Jami: 10:07

Mm-hmm. Yeah, and when we're looking at the next year's budget, we'll know if those costs have increased so much, we'll we'll have an idea that we do need to do a rate increase. And then just try to minimize that as much as possible, look at our costs and see if there's places we can cut and then go forward.

Jim Anderson: 10:23

And everything pulls into it. Midstate's a growing utility, and the and the bigger we get, there's a lot that happens behind the scenes of Midstate with infrastructure and other things that go on. But the board also has to be proactive in planning out uh the future for you know line building and uh and new equipment that's needed and how we're gonna serve the membership. And so when we look at the rates, that plays into it as well.

Jami: 10:44

Oh, yeah, absolutely. That's in that construction work plan that I talked about, and that will tell you what the needs are each year for the next 10 years, and then capital items. We depreciate capital items over the life of the plant itself. So what happens with that is that say a poll, we depreciate that over 30 years. So that's gonna hit the rate over a 30-year period of time. So one-thirtieth of that poll cost is in the rate versus a maintenance cost, which would all hit in one year. So it does spread out the cost of those items.

Jim Anderson: 11:15

Okay, and then that comes back to being each member paying their fair share. And I know when we set the rates, we're also looking at being a cooperative. The current member of the cooperative pays a share of these construction costs. But when we look at these rates, we're looking at that item going out, you know, 20%. So the current member is getting the benefit, but the future member's also paying their fair share of the stuff that's legal forward. So the rate design takes all that into account.

Jami: 11:42

It does, yeah.

Jim Anderson: 11:43

So it's it's pretty complex.

Jami: 11:45

It is.

Jim Anderson: 11:46

It is. It is. Yeah, definitely keep you on your toes. So what happens, and I know some of our members are new to the co-op and they're not uh aware of capital credits or they hear about capital credits, but they don't know how this works. So at the end of the year, when we come in with our margins being high, what does that mean to the membership? What's that going to mean to future members of mid-state? What can they expect from the co-op?

Jami: 12:10

Sure. Yeah, so we're not not for profit. So any profits that we do uh generate are used in the short term for operating, but ultimately are allocated back to the member the following year, and then they will get capital credit checks at a future date regularly once they start retiring them. This year we're paying out the rest of 2008 and part of 2009.

Jim Anderson: 12:37

Okay, and then that's another decision the board has to make that impacts the rate structures, they're figuring out how to pay these capital credits back. Yes, because that's not actually money that Midstate has sitting in an account ready to go. So this is actually capital that Midstate has to either borrow to pay back, or there's a mechanism that we can use to actually get that money back to.

Jami: 12:58

Yeah, we don't we're not holding on to those margins, we're using them to keep our costs down and to reduce the amount of borrowing that we have to do. So that's why we we typically hold on to them for you know 15 to 20 years and then return them 100% back to the members.

Jim Anderson: 13:14

And historically Midstate has been above the state average and national average and paying back our capital credits to risk.

Jami: 13:20

They sure have, yeah.

Jim Anderson: 13:21

So definitely responsible to the members and making sure that money gets back where it needs to go. What are you seeing is probably one of the most difficult parts of the rates as we go forward with the new loads coming on or with the changes of the climate that we've had here. You know, we used to be totally winter peak, but now we're seeing more people coming in in the summer. What are you thinking is probably some of the most difficult things we have to address as a co-op?

Jami: 13:47

It seems like the last few years we've had a lot of increases from Bonneville power, which we're not used to having. So, you know, like I said, we've tried to minimize those costs, but ultimately we have to pass them through to the membership. Bonneville is trying to focus heavily on rebuilding their transmission lines just given the extra load that we have in our region. And so that costs money, and then that ultimately we see that on our power bill. So it's kind of a trickle-down effect, but uh that's the key driver. Uh, like I said, it's 50% of our total cost to Midstate's rates.

Jim Anderson: 14:22

Yeah, very complex to put it together. I guess if a member does have a question about their rates and about their bill as a whole, what can they do? Can they reach out to people on your staff to answer these questions?

Jami: 14:36

Absolutely. Yep. Just call into Midstate. One of our member service reps will help you. They'll take a look at your bill and see if there's ways to help reduce usage or offer, you know, budget billing or the different programs that we do offer to help smooth out the changes.

Jim Anderson: 14:52

Yep. And I know Midstate is trying to get our rate schedule set to match Bonneville's. I know it's really difficult. I know the turnaround for some people seems pretty quick that we're having a rate increase coming in in November, but that's mainly due to Bonneville actually changing our rate at the end of September.

Jami: 15:10

Yeah, so Bonneville's uh fiscal year is October 1st to September 30th. So we knew there was going to be a rate increase coming. We did not know specifically what Midstate's increase was going to be until early August. So we had to quickly do some number crunching and determine what increase we had to then carry forward to the membership.

Jim Anderson: 15:33

Okay, so and I know our communications uh we're going to talk to those folks here in another episode or two to talk about getting that out to the membership because we want people to know that why we're doing it and when we have to do it. We're trying not to do it in the peak of winter.

Jami: 15:46

Yeah, we changed that. Last time it was January 1st, so we did move it up to November 1st, but we also want to be mindful of the membership, give them enough notice of an increase, and hopefully give them a little time to plan accordingly before we did have it on their bills.

Jim Anderson: 16:00

Yep. And I guess one good thing, since we're talking about planning on the bills, you know, the prepay people, they seem to, at first with the demand, and I know they've had some issues where we have to bill all at once based on our current system. But we do have a software change, a new program rolling out for those people, and that's gonna be in, I believe it's January or February that that's gonna be rolling out so that the new system will actually be a month lagging on their demand, so their bills will be steady equalized across the month. They won't have these peaks and valleys going through.

Jami: 16:31

Yeah, yeah, that's gonna be the main difference. It's going to divide out the demand daily instead of having one day peak and then true up following that. So, and it'll look at the members' demand for the previous month to do so.

Jim Anderson: 16:45

Yeah, and I know the other good thing that we should probably tell everybody that is on the prepay is that with the new software program and the advancements Midstate's making in our systems here, that the six dollar fee that Midstate used to charge to be on prepay is actually gonna go away. So that's six dollars that can actually be used on the bill instead of actually having to go to be on the program. So definitely some good things your department's doing, trying to make sure that we're addressing all the membership needs going forward and balance things out. I know I've tried to cram a lot in here today and talk to you a lot about rates and we'll get things stirred up a little bit, but rates are really important to Midstate. They're not easy to set. The crystal ball always uh isn't exactly clear because we don't know what's coming down the pipe with Bonneville. But there's a lot that goes into the rate process that you've talked about today. Is there anything that we missed at all that we want to talk about on the rates?

Jami: 17:37

Boy, I feel like that covered it.

Jim Anderson: 17:39

Okay. Well, I appreciate you spending time with us today. I appreciate the membership for actually taking the time to listen to this. And it seems to be the most front and center of everybody's mind is rates. Things are changing, and we want to make sure that we're addressing this as much as possible. So if you do have any questions on your bill or the the process, you can contact the MSRs and Jami's staff, and they can help you work through this.

Jami: 18:03

Absolutely. We're here to help you.

Jim Anderson: 18:05

Well, thank you very much for joining us today.

Jami: 18:07

Thank you.

Jim Anderson: 18:07

Thank you for tuning in to another episode of Power Factor. Be sure to subscribe or follow us on your favorite podcast application to stay informed on the latest from Midstate Cooperative. We appreciate you listening to us and always stay safe, stay informed, and stay empowered. Until next time, thank you.