Balancing Differences Among Rate Categories

CEO Dave MarkhamIn January 2021, Phase III of Central Electric Cooperative’s gradual rate redesign goes into effect. Residential members will see a slight decrease in the kilowatt-hour energy charge offset by a slight increase in the monthly facilities charge on their February bills. On average, the typical residential bill should remain largely the same.

The transitional rate redesign, which began in 2017 and ends in 2025, addresses an imbalance in the rate structure. Phase III marks the third of five phases—every odd year over eight years.

Historically, the utility industry blended all of its costs into a customer’s energy use charge. The cooperative did too. Born out of convenience, the practice entailed lumping a utility’s fixed costs—such as operations, inventory, maintenance, repair and administration overhead—with the kilowatt-hour charge. This approach created an inaccurate perception among members that the co-op’s services were defined solely by how much electricity they used. While a utility’s expense to buy
energy for its members fluctuates based on weather and the energy markets, its fixed costs
remain constant.

CEC began to address the issue in 1978 when it added a customer charge—later named the facilities charge—to add some stability to revenues. It started with gradual increases—initially, $6.25 a month, climbing to $12.77 before the launch of the redesign in January 2017. However, the charge did not keep pace. CEC’s fixed costs significantly exceeded revenues received and put the co-op’s rate design out of balance.

Various factors contributed to this imbalance. The chief driver of electricity demand is weather. It has become more unpredictable and extreme, creating strong fluctuations in revenue and making business management more challenging. The electric industry has rapidly evolved, with emerging technologies affording customers multiple ways to reduce their energy use through efficiency and rooftop solar. CEC applauds and encourages members’ efforts to reduce their energy use. Nevertheless, the unintended consequences resulted in fewer members contributing toward helping the co-op recover its fixed costs, leaving other members to pick up the balance.

Consequently, it became necessary to separate or decouple fixed costs from electricity use because fixed costs began to exceed revenues. Ten volunteer co-op members representing all customer classes served on a rate design advisory committee in 2016 to create a balanced solution. After studying various options, the board of directors adopted their recommendations.

The committee’s efforts achieved a revenue-neutral redesigned rate structure to bring fairness and balance among the different rate categories. In the end, members will pay for the energy they use and their fair share to operate the utility.