Lincoln Electric May 2017 Rate Change
At the January board meeting, LEC's Board of Trustees approved a new rate structure and increase to become effective May 1, 2017. The largest change is the addition of a three-part rate that adds a charge for demand on residential and small commercial services. For members who do not wish to pay demand, there is a two-part rate option for residential and small commercial services.
Demand is how much electricity your service requires the system to provide at any given moment. For LEC billing purposes, a service's demand is the maximum average demand over ONE 15 minute interval during the month.
Our electric system - poles, wires, substations, transformers, etc - has to be built to provide enough capacity to support every service on our system at their maximum, or peak, demand. This is also true of our power supplier, Bonneville Power Administration (BPA).
But not everyone uses electricity the same way. Some services do not put as much of a strain on the electric grid, yet with past rate structures they were billed in the same way as those that do. With the new rate design, we are working toward solving this inequality and making electric costs as fair as possible for each member and how they use electricity.
In addition to the added demand charge, the system maintenance charge and kilowatt-hour charges have been adjusted. Please see the rate change chart below for details.
The main driver behind a rate increase is the increased cost of wholesale power from BPA. On October 1, 2017, they will again raise our rates. With this newest increase, LEC will have seen a 45% increase in wholesale power costs since 2011.
In contrast, due to LEC and your Trustees holding our controllable costs down, LEC's retail rates have increased only 14.7% over the same time period. So although we are constantly evaluating how to reduce expenses, BPA increases force us to pass along rate increases to our members.
While wholesale power costs are largely out of our control, how these rate changes are implemented can help carry out the cooperative vision of fairness. When your cooperative was created, most members paid roughly the same amound for electricity. Most homes had only a minimum need for electricity and their charges were very similar. As a result, each member contributed nearly equally to their cooperative.
Over time, as electric appliances, needs, and devices became more prevalent, members started using electricity differently. However, the rate structure has remained the same for nearly 70 years, creating a large inequality in how members contribute to their cooperative. Instead of collecting the same base revenue from every member to cover fixed costs, the kilowatt-hour charge has steadily risen over time to make up for that deficit. This results in members with higher usage subsidizing members with lower usage.
The monthly system maintenance charge is billed to every service to help pay for the fixed costs of your cooperative. Fixed costs are expenses that stay relatively similar regardless of how much electricity is sold. They include, but are not limited to: taxes; depreciation; insurance; billing; metering; tree trimming; outage restoration; administration; system maintenance and replacements; health, safety and regulatory compliance; energy efficiency programs; vehicles and equipment; property and facility maintenance; and capital credit retirements.
With the May 2017 rate increase, the system maintenance charge will collect only about 72% of these fixed costs. The remaining 28% is then collected through the kilowatt-hour rates. So those who use more electricity are paying more than their fair share toward the fixed costs.
The new rate structure and increase is working toward remedying this inequality. By increasing the system maintenance charge, we get closer to each service contributing fairly and equally to the fixed costs of the system. It is the Board of Trustee's intention to adjust the system maintenance charge over the next five years so all fixed expenses are collected through this charge.
Beyond fairness to all members, the rate structure change and increase is also intended to provide financial security for LEC. In today's energy environment, the traditional method of collecting revenue to operate is placing LEC in financial jeopardy. Relying on the kilowatt-hour charge to raise needed revenue creates instability in a couple of ways.
Due to our dependence on the kilowatt-hour, LEC collects almost our entire yearly margins in the four coldest winter months. Meanwhile, we lose money (do not collect enough revenue) in the warmer months of the year. If the weather is warmer than normal, especially in the winter, our ability to raise the needed operating revenue is greatly reduced. This jeopardizes our ability to meet our lender's requirements, which affects the cost of capital to LEC.
On the other hand, if the weather is colder than normal, revenues are too high, creating a hardship for the members. Either scenario is unfavorable because there is too much dependence on the unpredictable Mother Nature. Therefore, gaining some stability across the year is beneficial for all.
As with all other things, the cost of electricity will continue to increase. However, LEC and your Board of Trustees will constantly evaluate our rates and billing methods to keep the impact of our members as low as possible while still maintaining our financial stability and keeping fairness to all members at the forefront of any rate decisions.
More information on this rate design change and increase can be found in past issues of the Rural Montana. Rate information articles can be found in the following issues:
January 2016 - Manager's Article "Public Energy Policy 'Demands' a Rate Design Change"
March 2016 - Manager's Article "A Rate Design Change is Essential to Cooperatives"
May 2016 - Manager's Article "Annual Meeting Recap and Community Meetings"
July 2016 - Feature Article "You're Invited to a Free Barbecue!"
September 2016 - Feature Article "LEC Brings Food & Education to Our Members"
November 2016 - Manager's Article "New Rate Design Committee Appointed by Board of Trustees"
February 2017 - Feature Article "What Exactly is Electric Demand?" and Manager's Article "Board Approves New Rate Design"
March 2017 - Manager's Article "New Rates Approved by Your Board of Trustees" and four-page special rates insert containing "Lincoln Electric Announces Rate Increase", "Demand in a Nutshell" and rate comparison charts
May 2017 - Feature Article "Lincoln Electric 68th Annual Meeting Recap"
June 2017 - Manager's Article "Rate Change and Home & Garden Show"