Overton Power Board Considers Rate Increase

Overton Power District (OPD) customers may face a significant increase in their power rates beginning as early as May of this year. At a meeting held in Overton on Wednesday, February 25, district staff presented three possible rate increase scenarios to the OPD Board of Directors. According to these scenarios, residential customers could see rates increase by an additional $6 to $25 per month, depending on which scenario is adopted and how much power a household uses.

Staff members stated that the time for a rate increase may be overdue. The last OPD rate increase was done in November of 2005. “Since then we have had four years of inflation in costs and wages that have not been adjusted for,” said OPD General Manager Delmar Leatham.

Rate adjustments had not taken place up until now because the rate of new customer hook-ups and power sales had remained very strong and rate increases were not necessary, Leatham said. But over the past year, he said, some key factors have changed.

Firstly, OPD has seen growth in its customer base dry up significantly. Since January 2008, the district tracked only a 2.5% rate of growth. “That is a pretty small number,” Leatham said.

In addition, in the last three months the district actually saw a slight decline in customers. “Most of those were commercial customers closing their doors,” Leatham explained.

Past OPD budgets had planned for about $3 million in revenue per year coming in for new hook-up fees. The current budget was cut in half to be $1.5 million. But early numbers for hookups indicated sharply lower than what was budgeted. Leatham said that if the current trend continues, the revenue from new hook-ups could be as low as $200,000 this year.

In addition to this, and perhaps because of it, revenue from the sale of power has also dropped. “We find ourselves in a position where we are selling less and less power to fewer and fewer customers,” Leatham said.

All of this threatens to cause a problem with the district’s cash flow.

Leatham explained that the district is required to maintain a debt service ratio of at least 1.35. This ratio shows how current income covers the district’s expenses. A ratio of 1 means that income exactly covers the most basic expenses like cost of power, wages and debt payments. A 1.35 debt service ratio allows about 30% of income to be free to do additional maintenance and upkeep of the OPD system.

Nationwide among small electric utility coops, the debt service ratio averages about 1.94. “Our target is to run at about 1.46,” Leatham said. “That keeps us safe but it still cuts pretty close to the bone.”

“We are obligated by our debtor agreements to stay at 1.35,” Leatham said. “Fail to do that and we are required by law to raise rates. If we continue as is, our projections indicate that we will be under 1 by the end of this year.”

Over the past year, the Cooperative Finance Corporation, an independent financial institution, conducted a rate study for the OPD. The study analyzed the revenue requirements of the different ratepayer classes and looked closely at the average cost of providing service to each class. The study then compared the current rate structure to a proposed structure which completely levelized these factors.

The study found that rates for residential customers were lower than what were reflected in the costs to provide service; by a total difference of over $2.5 million per year. Rates for commercial customers, on the other hand, brought a surplus. They were higher by just under $1 million, than what would be reflected in the cost to service them.

“So what is happening is that the residential rates are being subsidized to some extent by commercial ratepayers,” Leatham said. “That is not entirely uncommon, though.”

To even this out, the study proposed that residential rates be raised a whopping 19% while commercial rates would be reduced by 5%.

But Leatham admitted that this action would not be practical. “The proposed rate design in the study is based on if it was a completely fair world,” Leatham said. “But the fact is, we can’t just drop a rate increase like that on residential customers.”

Instead, Leatham proposed three possible rate increase scenarios.

The first two would raise total annual revenues by $1.5 million and $1.7 million respectively. But Leatham feared that this would not be enough to maintain the financials required of the OPD. To do that, the target had been set at a $2 million increase in revenues. “That kind of increase will serve for now as long as the loads that we are seeing stay stable,” Leatham said.

The third scenario was the recommended option. It proposed to begin by raising the base service charge that all residential households pay for basic service from $13.20 to $20. “Our base service rate is comparatively low,” Leatham said. “The study recommended it to be raised to $28 which is closer to the average.”

In addition, this option would increase the residential rates for per kilowatt hour (kWh) usage. These rates are set up in tiers of use. For the first 500 kWh used in a household, the rate would increase 15%. For the next 1500 kWh used the rate increases 9%. Anything over 2000 kWh used would be subject to a 3.5 % increase.

The average OPD residential household uses about 1500 kWh.

The proposal also would raise commercial base rates to $30 and would increase the per kWh usage rate by 4%.

This rate increase scenario would provide an additional $2.5 million in revenue to the district, thus comfortably meeting the target, Leatham said.

Both OPD Board members and staff expressed the difficulty they felt in raising rates in the current economic environment. “We are certainly sensitive to the fact that we are in tough economic times and this will have an affect on our customers,” Leatham said. “But if we don’t do something about this, the district will end up in bad shape and that won’t help anyone, especially our customers.”

“And if we don’t move to raise rates now, they can force us to raise them later,” added OPD Board member from Mesquite, David Anderson. “In that case we would undoubtedly see a much more drastic increase.”

A vote on the rate increase was postponed to the next meeting of the Board. The next meeting will be held on March 18 at 4:00 p.m. in the new OPD Mesquite office at 731 Turtleback Road in Mesquite.