Small Adjustment Big Future Impact
Trustees review financial adjustments and table actions amid pandemic
Small steps. The FreeState Board of Trustees is proposing small steps to make a significant impact on the cooperative’s revenue to meet future lending requirements. Just not right now.
The board of trustees understands that now is not the time to make any adjustments due to the ongoing COVID-19 pandemic. That is why the nine trustees made the decision to table any adjustment to the Electric Service Charge (ESC), the fixed charge every member pays to the cooperative monthly.
The board did discuss a plan that will be implemented at a later date. The plan is to make small incremental adjustments to the ESC. The small steps will prevent having to make one significant change at a later date.
The ESC is a fixed amount per rate class that provides revenue for the cooperative to cover the cost of materials like poles, wire, transformers and other infrastructure items. It also includes operation and maintenance costs.
“The board diligently calculated all possibilities,” said Jeanine Murphy, board president. “We looked at many scenarios because we wanted to hold off as long as we could because we know that this is not the best time to make these adjustments during a global pandemic.”
“But, the fact of the matter is that we must do something very soon,” Murphy added. “If we don’t act in the near future, we’ll have to make even bigger changes later and if we are going to have to adjust, we want to make small incremental adjustments to help minimize the financial impact to our members.”
“It is not doom and gloom, by any means,” said Steve Foss, CEO. “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 do.”
The proposed adjustment is not a rate change. Your cooperative has kept costs consistent for years. Members have not seen any adjustment since 2010 (East District, previously LJEC) and 2012 (West District, previously Kaw Valley). For a decade there have been no changes, but neighbors powered by the investor-owned utility have seen 39 rate changes in that same amount of time.
“No changes to rates or service charges for a decade is quite an accomplishment,” Foss added. “But things are changing. Costs are rising.”
Financial Factors are Changing
Cooperative revenue has been on the decline. It’s a trend that does not seem to be changing.
“There are many factors that contribute to the decreased revenue,” Foss said. “Weather is a factor, energy efficiency is a factor, and renewable options for our members have increased significantly. These are great for our members, but we have seen an overall drop in revenue and our financial forecasts are telling us we need to act now to maintain stability and keep pushing that costly cost of service study out as far as possible.”
The proposal for the ESC adjustment comes after the Revenue Requirement Study FreeState entered in March. Jill Taggart, finance manager, led the study to determine what exactly was needed in order to meet the revenue requirements from lenders and the USDA Rural Utilities Service.
“Cooperative finances can be complex,” said Taggart.
The costs of a typical distribution cooperative like FreeState are put into areas identified as operation and maintenance (O&M), overhead, and capital costs. There are also many factors that make up the cost structure like line density, or members per mile of line, service territory, labor costs and the infrastructure supply chain.
“One ratio we focus on is TIER,” said Taggart. “It is our financial ratio that measures our financial health and ability to meet our interest expense on long-term debt. It compares our margins with interest expenses.”
“This is what allows the cooperative to borrow money when needed,” Taggart added. “We have minimum requirements that must be maintained with our lenders, so consequently TIER is used as one of the many appropriate measures to setting revenue requirement.”
The decrease in revenue and the financial forecasts are showing that will change if actions are not taken.
Recovering from the Pandemic
“The goal is stability in a time of uncertainty,” said Foss. “Right now, we know things are uncertain, there is more unknown than known as we look at recovering from the pandemic economically.”
“The pandemic response has impacted everyone,” Foss added. “When businesses aren’t able to operate, they don’t use electricity; when schools are closed, they don’t use electricity — that all contributes to a decline in sales and we know that is something we have to account for.”
Foss also added that FreeState did not disconnect accounts for non-payment until June 1, and no penalties or late fees were assessed during that time.
“We just don’t know what economic recovery looks like, and we don’t want to put any added pressure on our members,” said Foss. “But we do want to remind our members that bills are not going to disappear, we’re just allowing more time for members to get payment to us.”
“We wanted to go ahead and talk about this plan and to make sure our members were prepared and that we were up front and transparent about the financial standing of the cooperative,” Foss added. “We will not make any adjustments until we are able to fully communicate, but we wanted our members to be aware of what is on the table for the near future.”
Members facing financial hardships due to lack of work or illness associated with the pandemic, or as a result of state and county orders for citizens to stay home for extended periods of time are encouraged to call the office at 800-794-1989 to discuss options for assistance.