Efforts to Reduce Costs and Minimize Rate Increases
Emerald PUD, like many other utilities throughout the Northwest, faces several challenges that impact electric rates including:
- An increase in wholesale electric rates from the Bonneville Power Administration (BPA)
- Lower revenue from the sale of surplus power
- Increasing costs to maintain electric systems
Rising Power Costs
About 40% of Emerald PUD expenditures in 2012 are for wholesale power – the power we purchase mainly from the BPA to serve you.
In 2011, BPA increased their rates to us by an average of 5.8%. We were able to avoid a rate increase that year. In 2012, Emerald PUD staff was able to limit the rate increase to 4% despite a much higher increase in our wholesale power costs. Increases in wholesale power costs make it difficult to avoid increasing rates even when offsetting cuts elsewhere. Emerald's initial estimates were a 10-20% rate increase in 2013 from the Bonneville Power Administration (BPA), which supplies the majority of its power. More recent information provided by BPA shows an expected 5-10% rate increase in October 2013.
Emerald’s effort to reduce costs keeps the forecasted rate increase to its Customer-Owners at an estimated 3% in 2013. This would have been significantly higher without Emerald PUD taking action.
Low Surplus Power Sales
Like other utilities, Emerald relies on revenues from surplus energy sales to help offset its wholesale power costs. When its energy supply is greater than its retail customer load, the utility sells the surplus into the wholesale market. Over the last year, the market for wholesale power has fallen dramatically due to record natural gas supplies and weak demand. This means that we’re recouping fewer dollars from the sales of our surplus, directly affecting our ability to offset wholesale power costs.
This situation applies to all of our surplus energy, regardless of which resource it comes from. Emerald typically has surplus through our contracts with both BPA and White Creek Wind. White Creek Wind is a power purchase agreement that the utility entered into back in 2007 to help meet expected load growth. At the time, forecasts showed a need for a new resource by 2011, and thus the output of White Creek was sold under long-term contract between 2007-2011. Unfortunately, due to the recession our loads actually dropped during this time period and we still don’t have a need for the White Creek energy. As a result, we continue to sell the surplus output from both BPA and White Creek into the wholesale market.
Recent news highlighted Emerald’s involvement in an arbitration process related to White Creek Wind. This arbitration dispute has to do with a specific contract charge and not the underlying cost of the power itself. As part of the arbitration outcome, Emerald may see a financial benefit in both 2012 as well as in future years. It is important to note however that the outcome of this matter will not be enough to completely close our short-term budget gap.
What Else Factors Into Emerald Taking Action?
The rising rate of power and low power surplus sales are important. However, there are other factors also guiding our decision to take action now in an effort to reduce costs now to minimize future rate increases.
- One of our largest expenses is the Debt Service expenditure which includes principal and interest payments. As a young utility, we’re still paying off debt that we incurred when establishing Emerald. We are required to maintain a specific level of debt service coverage and making necessary reductions now keeps Emerald PUD in compliance with this bond requirement.
- We have seen a drop in usage from most of our customers, with the biggest impact being our industrial customers. Some customers have reduced usage, while others have completely closed down or downsized. This creates a shortfall in revenue to cover our fixed costs.
Emerald’s Effort to Reduce Costs
Emerald PUD has been carefully managing its challenges for some time.
Even before the start of the 2012 budget year, Emerald PUD deferred $2.2 million in expenses. Staff deferred $1.5 million in capital spending including vehicle purchase, excavation services, equipment upgrades, materials and supplies, and improvements to technology. Emerald PUD also deferred $660,000 in operating and maintenance expenses including labor, legal and consulting services, professional development, travel, subscriptions, membership dues, direct mailing.
After closely monitoring external factors impacting our budget, Emerald PUD determined additional reductions are necessary in 2012. The reductions include the elimination of 10 positions, operating and maintenance expenses, and construction and capital costs. The eliminated positions include two positions that are currently vacant and will not be filled. Emerald staff has also been asked to evaluate medical benefits and explore options for reducing this cost.
The decision to layoff some of our employees was incredibly difficult for the utility. Our utility is family.
However, other options such as reducing or freezing salaries, or implementing furlough days would not reach the level of reductions necessary on an on-going basis. Offering an incentive for early retirement was also explored. While this could potentially open up positions without layoffs, it could also mean that vacated positions that are critical to utility operations would need to be refilled and cost-savings reduced.
A total of 10 positions will be eliminated. Two of these are currently vacant and will not be filled. Eight employees will be laid off. The savings amount to roughly $27,000 in 2012. In 2013, the full savings will be $900,000.
Labor is not the major driver of utility costs. We are at a point where all other options have been explored and we are still left with gap between expenses and revenues.
Emerald PUD contracts with a third-party consultant to review and analyze the overall compensation structure to ensure it aligns with the market and Board policy direction. This review occurs every five years; the last was completed in 2010 comparing EPUD to 14 other utilities in the industry. Utilities have important differences in service delivery including whether the service is primarily urban or rural, what the customer base is, and the ratio of highly-skilled positions to the entire utility workforce.
Emerald PUD wants people who will work hard and put Customer-Owners first. A highly-skilled workforce is essential to delivering excellent, reliable service. We need to remain competitive to the market, which is why we contract with an external consultant to review and ensure compensation at Emerald PUD remains in line with wage and benefits in the utility industry.
What Does This Mean for Our Customer-Owners?
Emerald is committed to providing Customer-Owners with excellent and reliable service. It’s what you’ve come to expect from us and we intend to deliver. That’s why we’ve put a lot of careful consideration into making reductions in a way that preserves service to our Customer-Owners.
While we cannot completely avoid a rate increase in 2013, we are taking steps to reduce costs to minimize future rate increases. We have heard Customer-Owners concerns regarding rate increases and the hardships many are facing in this economy. We believe it is essential to reduce our costs and limit the impact of future rate increases to our Customer-Owners. In a recent Board meeting, Emerald Directors challenged themselves to make reductions to the Board’s budget as well.
At this time, we do not anticipate an impact to 2012 service levels or delivery. As we move into the budget adoption process for 2013, we will review programs and services and make any necessary changes to reduce costs in order to limit future rate increases.
Emerald PUD provides power AT COST. We raise rates only when necessary to cover the cost of providing power. As of May 2012, Emerald PUD rates are 19.6% less than Pacific Power based on average use of residential customers.
Emerald is committed to keeping Customer-Owners informed. As we work toward our budget adoption process for 2013, expect regular updates online and in Power Lines.
While this is a very difficult time for the utility, we have “Emerald Spirit” where we focus on doing the right thing for Customer-Owners and employees. This is not an intangible motto – it’s how we do business. Doing the right thing sometimes means making tough decisions to manage the utility in way that limits rate increases on our Customer-Owners. We are challenging ourselves to do things a bit differently while maintaining excellent and reliable service to our Customer-Owners.