Temperatures And Cost Continue to Rise
A Mild winter. Milder summers. Changing Weather patterns put extra pressure on cooperative finances as costs continue to rise.
A milder winter than normal was a bonus for most, but for FreeState it meant kilowatt hour sales plummeted. In a business whose budget is dependent on the weather, it was anything but good news.
Pair a lack of sales with the COVID-19 pandemic and FreeState was put into a precarious position.
“It seemed like things were coming at us from every direction,” said Steve Foss, FreeState CEO. “Right before the pandemic hit, we were entering into a Revenue Requirement Study (RRS) and just as we were getting a handle on that and preparing to discuss everything with our membership at the annual meeting, the board had to make the difficult decision to cancel the meeting.”
FreeState joined cooperatives across the country in making the decision to put public health ahead of cooperative business.
“We just couldn’t risk it,” said Jeanine Murphy, Board President, regarding the annual meeting. “Our most loyal members are some of those that are most vulnerable and the amount of work that goes into planning a meeting with no apparent timeline of when it would be safe to meet again – we just decided to do what was best.”
“That’s our job,” said Murphy. “To do what is best for the overall health of the cooperative and our communities.”
Foss (and Murphy) said financial health is also a big part of the equation, and that FreeState had been analyzing data and financial forecasts since late 2019. The outlook was not as positive as expected and being transparent with members was also top of mind.
“Sales have been down because our weather has been good,” Foss said. “We had to start looking at what we needed to do in order to make up some ground and we discussed entering into a Revenue Requirement Study (RSS) not expecting a pandemic to break out. But, regardless of the situation we’re in we want to be up front with our members and provide information to them that may impact them later, because it’s the right thing to do.”
According to the Energy Information Administration (EIA) collected data shows that 2017 was the first year that residential electricity sales fell at a significant rate, and they have continued a downward trend due to rising temperatures in months that are typically very cold or very hot. There are factors that can contribute to using less electricity. Factors like energy efficiency practices, and renewable energy. But, the biggest factor in the change in electricity usage is weather.
Utilities typically see spikes in usage from December to February, and from June to September. These are the coldest and hottest months when heating and cooling are used the most. However, the warming winter temperatures have changed how consumers use electricity.
“Electric demand is highly dependent on weather,” said Foss. “If we look at the heating degree days, which are the daily temperature differences compared with a base temperature of 65 degrees, the past couple of winters have been warmer than normal. And, that coupled with milder summers means we have less sales than we budgeted for.”
Foss said that national weather data and heating and cooling degree day data are utilized in financial forecasting for the co-op.
“We use the data to estimate sales and revenue,” Foss added. “But the data we use to forecast with is about 10% in either direction of the actual weather and that is out of our control.”
Jill Taggart, FreeState’s Finance Manager, who assists executive management in determining the financial requirements for the co-op says that relying on weather data to forecast revenue is a practice many utilities have used for decades.
“It’s not a new practice, but FreeState wants to move away from using weather as a primary factor,” Taggart said.
“It’s way too volatile,” added Taggart. “Averages just aren’t as accurate and are not something we want to be dependent on when we forecast our budget in order to meet our financial goals.”
Foss says the Board of Trustees and executive management along with Taggart have been closely monitoring the variation of revenue. The trend in the numbers made it clear what the cooperative has to do. But when the cooperative will take action remains tentative due to the global COVID-19 pandemic which has not only impacted residential accounts due to the increase in unemployment and financial uncertainty but has also shut down some of the co-op’s largest commercial accounts. Closing the doors on businesses and schools has dropped kWh sales and pushed revenue further down.
“We do know that if we want to make a significant positive impact to our revenue by making just a small adjustment to our electric service charge, we need to do it as soon as possible,” Foss said. “But the current timing is terrible. We want to make sure that when we make adjustments, they are small and incremental, but we also want to make sure that our members are not burdened any more than they are now.”
“There never is a right time for us to make any adjustments,” said Foss. “We want to meet our financial goals, but we want to take care of our members first. They are our priority here.”
Foss added that instead of members bearing all the brunt of decreased revenue, the staff at FreeState, along with the trustees started looking at costs and making cuts to everything unless it was a necessity to provide the standard of customer service members expect in a safe manner.
“If it’s not necessary we are cutting it,” said Foss. “We are going to look at every cost from post-it notes to poles.”
The cooperative entered into the RRS to see what adjustments were necessary to the service charge, not the kilowatt hour rate. Taggart started working on the RRS for FreeState in February when the weather continued an upward trend and sales continued downward. It was clear the numbers were not going to correct themselves.
“This is not a cost of service study, that I want to make clear,” said Taggart. “This is a way we can get a comprehensive and detailed look at everything so we can determine what our next steps will be.”
“Think of this as our financial road map,” Taggart added.
Foss said the objective of the study is to determine not only a plan, but how small the adjustments can be to still make an impact without putting a burden on members.
“Our goal from day one has been to push that costly Cost of Service Study out as far as we can,” said Foss. “This detailed analysis that [Jill] Taggart is doing for us is going to identify ways we can increase revenue while cutting spending to delay a full cost of service study.”
Foss says weather was the most significant factor when looking at variances to start the revenue requirement study. FreeState operates as close to cost as possible, but even a small variance in overall revenue can make a big impact on the bottom line and that’s what Foss and the FreeState team want to avoid – the weather dependency.
The milder winters for the past three years have impacted overall kilowatt hour sales. Comparing the past three years, 2020 (and December of 2019) have been much warmer than average, and that can put financial pressure on the cooperative
“It is not doom and gloom, by any means,” said Foss. “This is a necessary measure for us. Because we must maintain financial security and we need to look at all avenues to do that without raising kilowatt hour rates, and if we can do that with small incremental adjustments to the electric service charge, then that’s what we will look at.”
In addition to doing the RRS, FreeState has made cuts to the costs the cooperative can control because more than three-quarters of the cooperative’s expenses are not controlled by the cooperative.
“Power costs are not something we can control,” said Foss. “And, they keep rising. Mix those costs in with the increased costs of environmental regulations, property taxes, materials, labor and transportation and it just doesn’t seem to get any easier.”
“The last time we had any sort of change was the last time rates were adjusted,” Foss said. Rates were adjusted in 2010 for the former LJEC (East District) and 2012 for the former Kaw Valley (West District). “To say we have been able to stay steady for the better part of a decade is quite an accomplishment, especially when everything else we utilize has gone up. Consumer goods and services just keep getting more expensive, but our cost of electricity has stayed consistent in that amount of time.”
“The primary goal of FreeState’s board and management is to provide the best member experience and service around,” added Foss. “And, we’ll continue to do that. However, there comes a time when we must look at making adjustments to meet our financial obligations.”
Foss said the board and staff understands that members are seeing a lot of uncertainty at this time and are doing what they can to assist members who are impacted by this unprecedented situation.
Members facing financial hardships due to the COVID-19 pandemic are encouraged to call the office at 800-794-1989 to discuss options to assist members who have fallen behind due to a hardship associated with the pandemic, as well as orders for citizens to stay home for extended periods of time.