Electric Service Charge Adjustment FAQ
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.
This graph demonstrations the months FreeState typically sees above average sales. The increase in average temperature means FreeState’s kilowatt hour sales have declined, putting financial pressure on the cooperative. The graph illustrates the last three years of heating degree day data. The solid black line shows the average for the month. The added pressure has meant cutbacks on expenditures where possible, and entering into a revenue requirement study to evaluate the financial needs moving forward. This is not a cost-of-service study.
Members have not seen any adjustment to service charges since 2010 (East District, prior LJEC) and 2012 (West District, previous Kaw Valley). For the past decade, we have worked tirelessly to maintain affordability and stability.
One reason for that decade long consistency was the consolidation in 2017. True dollar savings paired with avoided costs put the cooperative on the right track, but revenue has been on the decline. It’s a trend that does not seem to be changing.
- No changes in a significant amount of time is an accomplishment, considering how everything changes much more frequently.
- For example, Evergy has increased rates 39 times in the past 10 years. At that same time, we have seen an increase in the demand component of our power bill rise over 39%.
- Because of savings related to the consolidation we have been able to absorb most of the increases over the past 4 years. We have not had any change to the Electric Service Charge or base kilowatt-hour charge in that same amount of time.
- When the cost of service studies were done for the prior co-ops in 2010 and 2012 ESC amounts suggested at that time were near $40. We aren’t even close to that suggested amount and haven’t been. Even with minimal adjustment, we will still be well below the previously suggested amount.
Members will see a $3 per month adjustment beginning in 2021 on the February bill.
- February 2021 to January 2022 - $3 per month adjustment
- February 2022 to January 2023 - $1 per month adjustment
- February 2023 to January 2024 - $1 per month adjustment
- February 2024 to January 2025 - $1 per month adjustment
It is important to remember that a decade ago, or the last time an adjustment was made, the suggested electric service charge was $40 per member, per month. Even with these incremental adjustments, the electric service charge is still below the suggested amount.
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 decreased revenue.
- Energy efficiency
These factors are beneficial to members, but FreeState has 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.
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. 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.
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.
Costs are rising all around us. The cooperative wants to take a proactive approach. By making small adjustments now, we can avoid a costly cost-of-service study or larger adjustments in the future.
In the past five years, we have seen a significant increase in operating expenses.
- The cooperative’s operating costs increased by 10% from 2015 to 2019.
- A very mild 2020 means the co-op’s revenue from kilowatt hour sales has fallen 5% below our projections and this put added pressure on our finances as operating costs continue to rise.
- The cooperative’s growth has also been stalled due to a slight economic turndown.
- For example, in 2018 we connected 242 new services compared to just 160 in 2019.
- Slow growth paired with advanced technology has driven efficiencies across the territory resulting in lower revenue. We expect this trend to continue.
- Members are installing LED lightbulbs, enhancing insulation in their homes, and renewable generation is on the rise with over 180 members using some form of renewable generation.
- To put renewable generation into perspective, we currently have just shy of 1.4 mega-watts installed by our members. FreeState is the leading Kansas cooperatives in this area.
- More than 80% of the cooperative’s expenses are not controlled by the cooperative.
- FreeState has no control over power costs. And, they keep rising.
- Other costs that have increased are:
- costs of environmental regulations
- property taxes
- labor and transportation
For FreeState to maintain the quality, reliability, and stability of the services we provide, we must take a comprehensive look at our revenue requirements and 10-year financial forecast.
- FreeState does not make a profit, and we do not make a profit for shareholders. We return overages to our members in the form of capital credits.
- In the past three years we have returned over $1.5 million in capital credits.
- We have also returned $900,000 in margin stabilization to our east district members. Including a consolidation credit of $800,000.
- We focus on keeping the business financially secure on behalf of all our members so we can provide the safest, most reliable service at the lowest practical cost.
- In 2020 capital credit payments were DELAYED due to several factors, including reduced revenue from the impact of COVID-19.