Monday, April 6, 2015

Guest Column - The Straight Story on OPALCO

Utility costs are increasing, but TH doesn't believe the local press/blogs have adequately summarized all the moving parts related to OPALCO's current situation ... maybe because no one wants to ... or maybe because no one has done the research. That's why TH is publishing the following analysis by someone who has carefully analyzed the finances and plans of OPALCO. We have no dog in this hunt. This is just a straight-up analysis from a financial expert who is also a keen watcher of local dynamics. You can call her (or him) W.D. Morgan.


There is an ancient belief that the gods love the obscure and hate the obvious. Without benefit of divinity, some of the self-described community activists here in the San Juans, like the gods, are trying to confuse OPALCO members. To what end is not clear, they just “want to ask questions” and “start a conversation”. No one here at the Trojan Heron is opposed to conversations or questions, we just like to make sure that the conversation isn’t premised on confusing correlation with causality, and other fun logic flaws. Then we can get back to arguing with and disliking each other for more concrete reasons.

First, no one here at Trojan Heron works at OPALCO, does any consulting for OPALCO or has any other connection other than as members of the cooperative. We’re not advocating for or against anyone running for the OPALCO board.

Our agenda? As always: question everything. Even question the self-proclaimed experts (because experts have done some of the dumbest, or most disastrous, things imaginable). Especially ask questions of the people who say they don’t have an agenda but simply want to ask questions themselves and have a conversation. Seems to me that we should have a community conversation about all the people (usually the same people over and over again) who want to have community conversations.

The OPALCO topic of the week seems to be their 2014 financial statements, their 2015 budget and, lastly, their proposed rate increases through 2019. Witness the article in the Island Guardian by Chom Greacen, a resident of the Lopez Community Land Trust and "founder of Palang Thai, a nongovernmental organization that conducts public-interest research and works for fair, sustainable, and democratic development of the energy sector".

While the lead-in to Greacen’s article in the Island Guardan promises “what’s behind the rising rate is worse” than the rate increases, you’re never let in on the secret. Only questions. More questions. And a supposition that there’s a dark conspiracy at OPALCO to bury the costs of a broadband build-out in your electric rates. The “proof” of that? Why ... it's the “curious patterns”. Patterns of increasing costs. Mysterious words are used: “grid control backbone”, “underground cable replacement” “computers/servers/software”. There are no conclusions, mind you. More questions. Words like “perhaps”. More questions.

Never mind that the answers to those questions are largely found in a single document.

Some of the things in Greacen's article simply aren’t accurate. For example the article states that a $7.5 million loan to the broadband subsidiary has “pushed OPALCO financially close the brink”. And what would make her think that? That OPALCO as of 12/31/14 needed to negotiate an exception to a loan covenant as to its TIER requirement (see below for more about TIER). Hmmm ... as long as we’re posing questions: how did a loan that hadn’t been made as of 12/31/14 and won’t be made per OPALCO’s own schedules until the years 2015 through 2019 (in the link, see page 12 of 20, explanation for line 30, debt) ... how did the as-yet-to-be-incurred debt push OPALCO “close to the brink” on 12/31/14? It must have involved a time machine. Or maybe it didn’t push OPALCO “close to the brink”. Or maybe OPALCO wasn’t “close to the brink” at 12/31/14 – for support see discussion of financial ratios below.

But, back to the cost of the broadband subsidiary.  Board minutes indicate that the start-up costs will be that $7.5 million amount, but the only out-of-pocket costs for members will be paid at $3/member/month for 24 months, beginning in 2015. The rest is either directly paid from cash flow from the new broadband business or indirectly from the cash flow of the new business as it pays down the intercompany loan from the parent.  The board minutes also specifically reflect that the costs of the new entity “are not included in the new rate structure”.

You’re encouraged in Greacen's article to find scheduled rate increases “alarming” ... 41% by 2019. You’re not pointed to the detail. It’s here - it’s a 12% increase in 2015, followed by estimated increases of 6% annually thereafter. And the explanation? It’s right here - and, hey, guess what – it’s consistent with what OPALCO has been saying for months. Electricity cost and electricity infrastructure costs are driving OPALCO rates upward.

The author pretty much accuses OPALCO of fraud when she goes into more detail about the “curious patterns” where she wants you to conclude that increases in headquarter facility costs, computers/servers/software and even underground cable replacement are really hidden broadband costs. Actually, you don’t have to look further than here to see that all the costs related to Island Fiber are shown separately from OPALCO operations down in “non-operating margins” where the revenue from and costs associated with “NewCo” (really Island Fiber/Rock Island) are shown.

And what about those patterns? It’s worthwhile remembering that correlation doesn’t mean causation. That when two numbers both increase, it doesn’t mean there’s a connection. It’s something that even people with graduate degrees forget or don’t notice, but it’s important. You can end up with graphs that show that suicides are "caused" by US science spending. Likewise, you can also end up thinking broadband is driving up OPALCO's rates, when there is precious little evidence to support that connection.

Greacen makes much of OPALCO’s TIER ratio, without explaining what it is. But it’s name dropped. And it’s “alarming”. What else would you need to know?

It’s useful to understand what a “TIER” calculation is (and isn’t) before discussing its relevance. TIER stands for “times interest earned ratio,” you’ll also see it commonly referred to in financial literature as the “interest coverage ratio”. It’s a leverage ratio designed to measure the amount of earnings a business has available to make interest payments on its debt obligations. The formula for the calculation is: earnings before interest and taxes divided by interest expense.

“Earnings before interest and taxes”, sometimes called “profit before interest and taxes”, is, just as it implies, the net earnings of a business before payment of interest and non-operating taxes. It’s the amount of money available to make the payments on the debt the business owes. “Interest expense” is just that – the interest on all debt, long and short-term, of the business.

What kinds of things affect a TIER calculation? Decreases in operating margins – as perhaps might be caused by relatively flat revenue caused by warmer winters while at the same time operating expenses increased because of BPA pushing through rate increases on purchased electricity? Yep. That's what happened. Also, having to pay to replace existing underground cable? Yep. That happened too.

It’s reasonable to expect OPALCO to explain their TIER calculations and the changes over the years, but to accuse them of financial fraud without acknowledging the answers they've already given ... or perhaps not even knowing that answers had been given to those questions ... is an overreach.

What other sort of analysis might be done on OPALCO’s financial statements. Let’s take a look at a couple of widely used ratios:
  • Liquidity Ratio – measures the ability of the business to pay off current liabilities. A business’s Liquidity Ratio is calculated as: Current Assets/Current Liabilities = Liquidity Ratio. Usually, a business with a liquidity ratio of less than 1.5 is considered to be in financial distress. OPALCO’s liquidity ratio at 12/31/14 was $9,883,829/$3,438,051, or 2.87 (or if you work for CNBC, about 3). 
  • Leverage Ratio – measures how much the business relies on debt. The Leverage Ratio is calculated as: Equity/Total Assets = Leverage Ratio. A business with a Leverage Ratio lower than .3 might be considered to be overly leveraged and in financial trouble. OPALCO’s leverage ratio at 12/31/14 was $40,662,189/69,270,631 or .59 – note that the leverage ratio cannot be higher than 1.0. At the December 2014 board meeting, the OPALCO board adopted a resolution requiring that the company maintain an equity-to-capital ratio, another label for leverage ratio, of at least 40% on an annualized basis.
  • Quick Ratio – measures a business’s ability to meet short-term obligations and is calculated as: (Cash & Cash Equivalents + Marketable Securities +· Accounts Receivable)/Current Liabilities. OPALCO’s quick ratio at 12/31/14 was ($3,534,091 + $0 + 3,036,986)/$3,438,051, or 1.91. The industry averages for electric utilities is a quick ratio of between .85 and 1.0 – meaning OPALCO’s ability to meet short-term obligations is better than average.
  • Long-Term Debt percentage – measures the proportion of a business’s total assets that was financed by long-term debt (technically, this is the remainder of the Leverage Ratio calculation, there will be a small difference in the two calculations related to current liabilities). OPALCO’s long-term debt percentage at 12/31/14 was $24,987,266/$69,270,631, or 36%. OPALCO’s long-term debt percentage is somewhat better (i.e., lower) than other electric utilities.
  • Percentage of Cash and Short-term Investments – measures the percentage of total assets made up of cash and short-term investments; this, like the Quick Ratio, reflects the ability of the business to fund operations. OPALCO’s percentage of Cash and Short-term Investments at the end of 2014 was ($2,254,475 + $1,279,616)/$69,270,631, or 5.1%.
Is all of this still confusing? Maybe read through this ... it’s the budget document that OPALCO put together to explain the 2015 – 2019 activity and it covers not just the budgets but has narrative explanations of most things. If you just want the highlights, they’re covered in the first few pages and then you can drill down into whatever excruciating detail you’d like.

Actually, if OPALCO can be criticized for anything, it’s probably that they put out so much information. Monthly board packages often run 50 pages or more. Sometimes well over that. One worthwhile suggestion would be that members need to have someone at OPALCO curate the information, telling the members where to look to find executive summaries of information and where to look if they want to drill down into the detail.

Here’s the executive summary: by all appearances, OPALCO isn’t “close to the brink”. On the contrary, it’s healthy compared to others in the electric utility industry. Sure it’s reasonable to “ask questions and demand straight answers from the board and management” of OPALCO. It’s also reasonable to ask members to refrain from insinuating dark conspiracies as a community organizing strategy. Alleging fraud on the part of the management and board of the co-op where your only “proof” is various questions that have largely been answered is simply irresponsible.

OPALCO is a cooperative – when we talk about the “company” we’re talking about “us”. Where management isn’t perfect, we, the owners, should require them to improve. And management has to remember that perfect consensus will never be achieved – what they owe the members is that conversations are fully fleshed out and then the elected board decides what to do. Keeping in mind that not everyone will be happy.

Worthwhile conversations to have amongst the members would be to talk about relative merits of differing ways to try and equitably allocate costs, or to hear OPALCO’s ideas about what happens to its business model over time as more users switch to solar generation, or to talk about what we as members can do to assist those members most in need.

Those conversations aren’t helped when the opening position is accusing management of fraud. If I want dark conspiracies, I’ll watch The X Files on Netflix. Or I would if my broadband were fast enough. 

-- W.D. Morgan  


  1. Can Ms. Morgan please do the same analysis for the County budget?

    1. I cannot understand why the same people who think OPALCO is in financial trouble have no problem believing that public money grows on trees and the county is a money machine.

    2. You should understand it because it's all part of the same economic belief system. Luddite, tourist-overwelmed, government-enlarged, low wage, grant-funded economic "sustainability" in a county run by the FOSJ and the various affordable housing gulags. They don't want people to lead independent, useful lives. They want all of us to be low wage members of the collective. We take orders better that way. All private enterprise is bad, no matter how good it is. All government enterprise is good, no matter how bad it is.

      That is Chom Graecen's role. To be the spokeswoman for that system.

  2. How much longer before Chom is head of both the FOSJ and the Lopez Community Land Trust? She seems well positioned to take over both as their politburos age out.

    She has a future.

    For someone who doesn't like OPALCO's internet plans, she uses email a lot.

  3. Now I am suffering from cognitive dissonance. Alex MacLeod is on the same side as the Land Trust people? Alex has a letter in the Island Guardian claiming financial mismanagement at OPALCO as usual, but W.D. Morgan's analysis is the most factual review I've seen so far.

    I don't know what to think. I am suspicious of OPALCO, but I don't want to be played the fool either. It's become a he-said, she-said bonker job, and the only facts I have to go on are the ones in the article above. No one else is talking facts and ratios.

  4. Good analysis. Here's the straight story on the straight story. OPALCO's original broadband plans were sloppy. Lots of blowback. They made some mistakes with sending out threatening letters. They changed. They improved. They got Rockisland on board. Much better internet plans now.

    Their electricity rates are going up regardless. They didn't set aside enough money in the past for infrastructure upgrades FOR ELECTRICITY. Now they have to. Same time Bonneville is beefing up prices. We're screwed on electricity prices no matter what happens. Not broadband's fault.

    Critics are blaming all of OPALCO's woes on broadband. Eliminating broadband won't solve them. Also, critics haven't changed as much as OPALCO has. Critics are singing the same song they've been singing for years, and THEY need to update their criticisms.

    Creating strange bedfellows. Alex and Chom. I don't think those two would agree on anything, but they agree on OPALCO. Sure sign that one or both are off their mark.

    No one is going to bring us broadband if OPALCO doesn't. Can't count on C-Link. OPALCO is a good option. Public utility owned by all. Supposed to provide a return to shareholders, if they make one. That's us. We vote too. Better option than C-Link taking their money and running.

  5. Chom and her husband run a solar and energy consulting business. They are trying to install solar at Lopez school. Nothing wrong with that, but they would probably like it if opalco went down the tubes and they got all their business. Constrain opalco finances, keep growth in these islands limited. First they come for your land, then your water, then your internet, and then your electricity. Hard to grow an island economy when you don't have any of those. We'll all be on solar, using dial up, sipping water from our catchment tanks, on micro-parcels of land in multi-use developments, paying taxes for all the things we don't do anymore. Heaven.

  6. "I don't know what to think. I am suspicious of OPALCO, but I don't want to be played the fool either. It's become a he-said, she-said bonker job, and the only facts I have to go on are the ones in the article above. No one else is talking facts and ratios."

    No, the facts are there - all you have to do is go read them. Go read the budget summary - it's linked in the article above. Never trust anyone, including Capt Morgan. Don't let anyone decide for you. Assume everyone is an unreliable narrator. Find out for yourself.

    Like Capt Morgan said, OPALCO's main PR problem at this point is that they provide so much information it's hard to wade through. They should designate one of the public information positions that Chom is complaining about the cost of as being the official curator of the information they put out.

    Chom, Steve Ludwig and the usual suspects will complain that they can't get straight answers from OPALCO, yet the co-op puts out an unprecedented amount of information. The anti-broadband crowd (including each and every one of the ones who claims they're not anti-broadband) uses the claim that "we can't get answers, and we only have more questions" as a strategy in stopping the progress. At the heart of their questions is the falsehood that everyone else but them is lying, committing fraud and hiding their crimes. If Chom wants me to believe that everyone on the OPALCO board, OPALCO management, BPA management and God knows who else is lying, why should I believe her? She has an agenda, she just won't admit what it is. She "just has questions".

    Steve Ludwig's comment last night on LR is outrageous - he's accusing OPALCO of an ongoing financial fraud and asserting that they are directly responsible for deaths. Two comments: if he is aware of those crimes, he has an affirmative obligation to bring them to the attention of the prosecuting attorney in the county and/or the WA state AG's office. [Of course he won't because, like his allegations that the OPALCO board is in violation of certain RCWs - interesting that the cite changes over time, are false.] His "leakers" (if they exist somewhere outside of his own mind) are protected under any of several applicable whistleblower statutes. Unless, and maybe this is where he's three steps ahead of all of us, he and they are worried about the OPALCO board murdering the leakers in their sleep. Me, I like my heroes a bit better looking than Steve - get back to me when Matthew McConaughey is playing the role. Or Robert Redford when he was 35. Oh my. Second, Steve is implying potentially false facts in support of what is in all likelihood a defamatory statement. An opinion based on a specific disclosed fact would be a protected First amendment statement. Someone implying that he a) has possession of certain facts unknown to the general public, and b) makes a statement based on those facts, might have an interesting time ahead of him. The legal defense to defamation requires that the person prove that his statements are "substantially true". If Steve knows a first amendment attorney, this might be a good time to buy him or her a cup of coffee. If I were OPALCO, I'd be on the phone to our corporate counsel this morning.

  7. I'd been trying to draft a response to some of the recent letters from Mr. MacLeod and Ms. Greacen alleging that OPALCO was hiding the cost of broadband in the 2015 budget and rate increases, and then I read "W.D. Morgan's" letter above, which did a much better and more thorough job.

    I am in full agreement with Morgan. In no way is the OPALCO board hiding information from us. Morgan correctly points out that the issue, if anything, is that OPALCO is not a simple business whose operation can be summarized in a line or two. The data are all there, but it does take effort to work through it.

    Doing so is something that Mr. MacLeod has declined to do, in favor of simply repeating accusations and creating conspiracy theories with little or no evidence backing them.

    Ms. Greacen, on the other hand, has plunged into the deep waters of the budget, and in several recent posts has claimed to find places in the budget where power-side expenditures "really" are broadband expenditures. I believe that she is mistaken. Underground cable replacement is not a euphemism for "installing fiber" as she implies. It means, literally, replacing power cables. How do I know this? Because there is red conduit and power distribution cable being replaced in my neighborhood right now, and the board has repeatedly discussed this as a long term project.

    It is true that this board and this OPALCO is not the sleepy board and coop of yesteryear. But neither do we live in yesteryear.

    I see the board's 2015 budget as a document which balances some difficult realities and takes on some important challenges for the membership, and I continue to commend the board on its efforts to take on the many challenges of aging infrastructure, complex undersea cable upgrades, changes to our relationship with BPA, climate change, and the increasing transition of broadband service from a luxury to a utility.

    And I thank "W.D. Morgan" for doing such an amazing job of walking us all through the details. I look forward to hearing more of their analysis!

  8. I'd love to see W.D. Morgan weigh in and share the wisdom and deep analysis with the public. I see Chom has posted widely, including and

    1. Something tells me that you're not going to get WD pitching in on those pages, but WD is watching, and you are very welcome to repost anything you see on TH. Fair use, but more importantly, if you like it, share it. No pride of ownership. We just want the truth.

  9. While I find the diversity of residents here in San Juan County invigorating and often amusing, the place is truly overrun with people who believe that they have all the answers AND that they must start yet another nonprofit to "help" (read control) the rest of us. Chom Graecen is a good example. Why is she qualified to "found" Palang Thai, a nongovernmental organization that conducts public-interest research and works for fair, sustainable, and democratic development of the energy sector? There are literally hundreds of these folks who know better than the rest of us. It's one thing to have an opinion; it's another to think one self so important in the scheme of things to create a new organization and squawk nonstop about an issue without rhyme or reason to support you. Kind of a marriage of narcissism and a con game (if grant funds are available). Look at the Madrona Institute--can anyone tell me what it DOES? And the Friends--dividing the community with phony science for 30 years. Sigh.

  10. Can we crowdfund an analysis of County management in the same vein? Maybe we can create our own nonprofit group?

  11. What does "democratic development of the energy sector" mean anyway? Is this supposed be obvious? Do we have a "talking circle" and pass the "speaker's rock" around the room while "the people" debate interconnect standards for micro-grids, and free solar panels?

  12. It will be interesting and revealing to see if the OPALCO ballot is printed in the same manner (a total screw job on Cornelius and Sutton) as it was in the treatment of candidate Steve Hudson.

    Even a proxy attorney would have blushed at the separation of "Board Candidates" and the parking of Hudson off in the hinterlands to the side.

    No matter who you want to vote for, this type of corporate rigging the outcome is just as bad for your stocks as it is for OPALCO.

    1. Given that the candidates write their own bios, and they are minimally edited before they go on the ballot, then perhaps the treatment of Steve Hudson was self-inflicted?

    2. No, it was blatant. This isn't about content. It had the candidates on the front page, then a bunch of text, except Steve, literally a page or 2 later.

  13. "Look at the Madrona Institute--can anyone tell me what it DOES?"

    That's easy - the Madrona Institute is the environmental non-profit version of what the Port of Lopez is.

    The Port of Lopez has two functions: 1) it's a private club for well-off old men who have penis substitutes with wings; 2) it denies it's a private club for well-off old men who have penis substitutes with wings.

    The Madrona Institute creates position papers explaining the need for more grants. Grants are used to create position papers explaining the need for more grants. Fortunately, it's a closed system, so Teh Crazy never really escapes, it just goes around in circles.

  14. Meanwhile Sen. Wanker hath become a BIG DEAL PROGRESSIVE DEM. Read all about it. Make sure you write Him and thank Him for the job He hath created unto you. What s hot steaming pile. What a waste of space. And we're whining about Jarman??

  15. AND, on the actual ballot you mark to vote on, Hudson was listed separate from the other candidates, board candidates were listed center left and Hudson far to the right side under some heading I can't remember.

    Maybe: "Oh yeah, this other person."

    1. Hey, I looked at last year's ballot, and Hudson, nominated by "petition" was the first candidate under that heading. The pattern appears to be candidates nominated by committee, followed by petition candidates. Is he still fuming that he wasn't the committee's choice?