Cloverland Electric Cooperative has proudly maintained safe, reliable and affordable electricity since 1938. At $.092 cents per kwh (residential), our rates are currently the lowest of Michigan cooperatives, and fifth lowest among all Upper Peninsula utilities (including investor owned, municipals and cooperatives). With any business, revenue needs to cover expenses. Our rates have held steady since 2017 despite increasing costs to provide power to our members.
Last fall, Cloverland retained an independent firm to conduct a comprehensive electric cost of service analysis (COSA). In our industry, these studies are standard procedure every few years to serve as a basis for rate structure. The COSA takes revenue requirements for a utility and allocates costs across the various customer classes – residential, business, commercial and industrial. Results ensure that proposed rates are fair and equitable for all members.
For perspective on our co-op, we maintain more than 43,000 meters for approximately 34,000 members with 4,000 miles of line across five counties in the Eastern Upper Peninsula. Residential members make up 82.1 percent of our total customers and 40.4 percent of energy sales. General service members comprise another 21 percent of energy and the remaining 38 percent are related to large business and governmental members.
The study was conducted in cooperation with Cloverland staff, led by our Chief Financial Officer, Lisa Castilho. In addition to her accounting team, many other staff members provided essential data for the study. The study reviewed ways to support operations through incremental steps toward cost-of-service to better prepare for future developments and insulate members from over-and under-collection risk for unexpected changes in member loads and demands.
Typically, after reviewing the results of a COSA and before proceeding with rate design changes, the governing body of a utility will consider how big of a disparity warrants rebalancing. I’ll be working with Cloverland’s board of directors over the next few months to examine our COSA results and how we can rebalance rates closer to COSA results. Rebalancing is achieved by more accurate matching rates to the actual cost to provide electric service to each class of customer. It could be a single increase/decrease or a graduated approach, where the rate class under-paying gets slightly higher rate increases than the class under-paying in the next general rate increase.
We will be fully transparent as we move forward to determine the impact to a potential new rate structure. Rebalancing rates is a good conservative step to prepare for the future with better aligned rates and a solid financial position. It ensures that we can continue to provide all members with safe, reliable and affordable electricity for years to come.
By Lisa Castilho
Cloverland plans to use cost of service analysis (COSA) results for potential rate changes in 2022, subject to board approval. The COSA takes the revenue requirement for our utility and seeks to equitably allocate those costs to the various customer classes of service. This analysis provides a determination of the level of revenue responsibility of each class of service and the adjustments required to meet the cost of service.
Since the last rate increase in 2017, our regular operating and capital projects costs have increased normally. However, over the last six months, unprecedented inflationary pressures led by freight, logistics, labor and material have impacted our vendors, contractors and suppliers. As a result, we’re enduring increases to prices and lead times on parts and other key components essential to keeping power flowing to our members.
The most common transformers we use have increased in price by 126 – 168% from last year and the best lead times we are offered are 50-60 weeks. We have already started placing orders for transformers to be delivered in 2023 but prices are not guaranteed until shipment.
The cost of wire is up 35% and we use tens of thousands of feet to maintain our power lines. Electrical conduit is in short supply and demand is high. Prices for lineman tools and equipment are up between 5-15% and the cost for parts we stock in inventory have increased between 3- 16%. Digital meter availability has also been a big challenge due to the worldwide shortage of microchips.
Economic recovery from the pandemic and strong demand for workers is a driving factor for increases in the cost of labor. Our contractors are facing the same price increases on materials and labor, so they are passing those costs along to us. We have multi-million dollar infrastructure projects that need to be completed over the next few years and we are seeing 15-25% increases in prices compared to previous years.
Domestic freight costs continue to increase and freight rates are up 34% versus 2020. Long distance trucking increased 26% versus 2020. We are also facing fuel surcharges increasing with oil prices 80% higher versus 2020.
Little relief is expected in the near term as challenges from COVID persist while demand remains extremely strong.