OPD Study Takes Closer Look At Rate Structure

By VERNON ROBISON

Moapa Valley Progress

Important changes may be just around the corner for customers of the Overton Power District (OPD), specifically in the way that their power rates are structured.

The OPD has recently undergone a cost of service study. Experts from the Cooperative Finance Corporation (CFC), the district’s main lender, were asked to carefully analyze OPD financial and operational data. The study aims to carefully unravel the current rate structure to get to the bottom of the individual cost behind the rates. In essence, this allows analysts to see if each of the dozen some-odd OPD rate classes is paying its fair share of the actual costs.

On Wednesday afternoon, the OPD Board of Trustees heard a report from CFC analyst Rod Nefsky on the results of the study.
Nefsky explained that the full study actually had three phases.

The first was recognizing the district’s revenue requirement. That is a big picture number that sums up all of the revenues needed to meet the district’s goals and objectives. Then a determination must be made whether the current rates are meeting that requirement.
“The good news is that, overall, you are meeting your revenue goals,” Nefsky said.

The second phase was the actual cost of service analysis. A closer look at how OPD revenues are collected across rate classes showed that a moderate subsidization is taking place between rate classes, Nefsky said.In other words, the district’s main Residential class is supporting its General/Large Commercial class.

According to the study, the Residential class is actually bearing a $20 million allocation of the district’s annual operating revenues of $37.6 million. But the cost of the class to the district is only a $17 million allocation. That represents nearly a 16 percent difference.

On the other hand, the General/Large Commercial class is bearing a $10 million allocation of the annual revenues, but its actual cost of service allocation is at nearly $12 million, a 16 percent difference the other way.

Nefsky indicated that this type of moderate inequity is common in utilities. “Frankly we see it in all companies,” he said. “Cross-subsidization happens in every utility and it usually isn’t something to worry too much about.”

But with the Energy Choice Initiative coming before Nevada voters for the last time this fall, important changes may make it necessary to take a second look at this issue, Nefsky said.

If passed by the voters this year, the Energy Choice Initiative would deregulate the energy markets in the state. Rather than being limited to only one power provider, customers would have a choice between competing energy providers.

This might pose some unique challenges for small districts, Nefsky said.
First there is the possibility that larger providers may come in and “cherry pick” the largest commercial customers away from the smaller rural districts, he said. With greater economies of scale, those large providers would be in a position to lure the bigger commercial customers; as well as the regional municipal classes such as schools and other institutions; away from the small providers. That would essentially leave only the retail residential rate classes, which are traditionally more expensive and inconvenient to service, Nefsky said.

The Initiative could also set up another dilemma. Presumably it would create a new class of customer for the OPD. Because the district would retain all of the infrastructure needed to deliver power to every customer in its territory, there may be customers to which the district would deliver power, but not actually sell them the power. In that case, the district would need to be able to break out the costs of power delivery for the customer, as separate from the actual cost of the power itself, Nefsky said.

These factors would lead into the third phase of the study process: rate design, or changing the structure of how costs are distributed among rate classes.

Nefsky explained that the current OPD power bill is divided into only two parts. The first is the customer charge, a flat rate for all customers meant to cover the expenses of running the district. The second is an energy charge which is assessed as a rate per kilowatt hour used by the customer.

But embedded within that energy charge is actually two elements, Nefsky said. In addition to the cost of the energy delivered, it also includes a demand charge which is the cost of building and maintaining the distribution infrastructure necessary to meet the customer’s highest demand during that monthly period.

Nefsky suggested that those two elements needed to begin to be separated out for the customer.
“In the past, while it has been common among large industrial customers, a separate demand charge in smaller retail customers has been unheard of,” Nefsky said. “But with changes coming, customers need to get accustomed to the idea of a demand charge. They need to start seeing it on their bill and getting used to it.”

To summarize, Nefsky said that the district stood strong in meeting its revenue needs. But the cost subsidization taking place across rate classes could make it less attractive given the changes likely coming in the market. The study concluded that a rate design may be needed to remedy this.

OPD General Manager Mendis Cooper said that OPD staff was already looking toward that remedy.
“We will continue to work with CFC on the rate design portion of this process,” he said.

The Board expressed interest in forming a subcommittee to engage with the staff and continue looking at the process. Board members asked staff to put the selection of that subcommittee on to a future meeting agenda.