TACKA Morgan - Part Deux

The analyst currently known as (TACKA) "W.D. Morgan" has been following the various OPALCO conversations in the media, and she wanted to post a response ... but as she worked on her response, it kinda ballooned into a new post.

So here is the new post from W.D. Morgan.
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It might be worthwhile for the people buying into the “dark conspiracy” storyline of Chom & Steve Ludwig to just take a step back and look at the really big picture. A couple of people have made comments along the line of “well, if OPALCO is raising revenue over the period through 2019 to the tune of $27 million and all they have to do is buy a $15 million cable, then why can’t they just drop the rate increases to let members keep the ‘extra’ $12 million”.

Two things to consider:

First, let’s start at the 10,000 foot level: replacing the Lopez-San Juan underwater cable isn’t the only thing OPALCO has to do over the next few years. BPA power costs alone are expected to rise from $7.5 million annually in 2013 to $9.3 million annually in 2019. Spending on energy savings programs is expected to rise from $832 thousand annually in 2013 to $1.35 million annually in 2019. Depreciation was $2.7 million in 2013 and is expected to rise to $4.2 million in 2019. A word about the depreciation: first, depreciation isn’t a cash cost, it’s the recovery of a cost already spent. But, it’s indicative of the “using up” of the asset, so it’s an important number to watch; and if it’s an asset that you’ll need to replace, the depreciation must be matched by either savings or increased borrowing capacity to be able to pay for the purchase of the replacement asset.

And, oh Lord, we have a lot of assets that will need to be replaced. The biggest and most talked about it the Lopez-San Juan underwater cable. But remember, that’s just the start. Comparing our costs to the costs of mainland communities doesn’t make any sense, despite the apples to carrots comparisons that some of the “energy experts” around here like to promote. OPALCO serves a rural, not dense, service area with challenging terrain (rocks, hills, wetlands, etc. etc. etc.) THAT IS SEPARATED FROM THE SOURCE OF OUR POWER BY 5 MILES OF SALT WATER. Comparing OPALCO’s maintenance costs to some urban or suburban village on the mainland far away from salt water is pointless. All the things that make the San Juans special make it a difficult area to serve from a utility standpoint. [Want a market-based existence proof of that? Two words: Century Link.]

And, as OPALCO has noted, the marine environment is causing cable replacements to happen earlier than they originally thought. And the Lopez-San Juan cable is only the start – OPALCO has pointed out that they’ll need to replace at least 3 other underwater cables within the next 20 years. Remember – OPALCO will either need savings or borrowing capacity to fund those replacements. Oh, and the changing environmental concerns means that OPALCO can’t just leave the old cable in place – OPALCO must remove the cable being replaced. Maybe we can have a work party to take care of that – everyone bring your diving helmet!

Let’s climb a little higher to 30,000 feet and consider OPALCO’s forecasted income.  [Numbers here and above are drawn from OPALCO’s 2019 budget document, found here.]

Taking into account the new rates, here is the net margin that OPALCO is forecasting through 2019:

• 2015          $1.098 million
• 2016          $0.929 million
• 2017          $2.075 million
• 2018          $1.470 million
• 2019          $2.101 million

So, a total of $7.673 million in budgeted net income over the next 5 years. Not increase in net income. Total net income. On a total budgeted revenue of $139.2 million for that same 5 years. So the budgeted net income amounts to 5.51% of income.

Yes, gross charges for electricity and facilities are going up. But that net income is needed to cover increases in costs and reinvestments in plant and facility over the next 5 years – and OPALCO will need to save for repairs and reinvestments for the period after that 5 years is over as well. If the savings isn’t directly spent on those capital expenditures, it will be needed to demonstrate the ability to repay loans to fund those costs. As members of the cooperative, we should be asking questions regarding what the money is getting spent on. OPALCO has provided a lot of information about that already, but it’s incumbent on every member to satisfy herself or himself that the reinvestments make sense.

My second point, and I’ll make this much briefer than the first, is that it seems like a large part of the discussion is about the breakout between electric charges and facilities charges. Emotional arguments aside, this is simply a cost allocation issue – if most of the members agree that the money OPALCO is taking in needs to be spent on specified costs, then the remaining question is how is the allocation done between the marginal cost of electricity and the cost to have access to the grid. One way or another, all of that money is going to be collected from the members.

Let me break this subdiscussion down into two separate conversations: first – what is the reasonable way to charge for facilities costs vs the actual electrons people use. Second, what, if anything, should be done to assist those members most in need – Chom and others want to combine those into a single discussion, but they’re really separate issues.

What is the true cost to have a meter on your house? Well, the utility is paying the same costs to hang your meter, you’re using the same distribution lines, the maintenance gals and guys are maintaining the entire system and your meter is hooked up to the same underwater cable as everyone else. That’s true even if you have solar pre-heated water, even if you have a solar array on your roof, even if you have a windmill, even if you turn the switch off on your power cords, even if you have LED lights instead of compact fluorescents, and on and on. The costs to maintain and install the system and line up to your meter are the same irrespective of whether you only use the system on the coldest days in the winter or whether you leave your doors and windows open and the a/c on all year. Maintenance and repair on the system isn’t caused by the number of electrons running through your meter, it’s caused by weather, the marine environment, the passage of time AND THAT WE LIVE 5 MILES ACROSS AN OPEN OCEAN FROM OUR POWER SOURCE. Sorry, it just is what it is. Discussing a reasonable facility charge in the San Juans by reference to how a utility in Southern California does it, where their electricity distribution lines run a short way from the source ACROSS OPEN SAND, is pointless.

Lastly, the members need to have a discussion about what, if anything, it is reasonable to do to help our least fortunate members afford electricity. To conflate this conversation with the determination of what the facility charge should be is wrong-headed, but if your goal is to confuse members, it’s a good way to inflame the discussion. But we do need to talk about who should be assisted, what the income cutoffs should be, what the form of that assistance should be and what measures should be in place to ensure that no member is gaming the system. And we should have that conversation bearing in mind that OPALCO is a cooperative – WE are the utility, so every dollar someone doesn’t pay is a dollar that must be collected from someone else.

-- W.D. Morgan