Feb 21, 2008

On Wednesday of this week, Mayor Leon Harris and City of Ava administrators noted they are still fighting to find a solution to the electrical rate increase that has been adopted by Sho-Me Electric, the increase takes effect April 1. The new rate formula has the potential to raise the average rates sold to municipal customers by as much as 90 percent –– this factor will have an impact on the City, and Ava's industrial community. As an update, city officials have provided the following information, and summary on their position. Electric Co-op Power Costs Threaten Economy of South-Central Missouri. Jobs in towns like Lebanon, Houston, Ava, Salem, Cuba, and Sullivan are the backbone of the economy of much of rural southern Missouri. But beginning in April, electric customers there may wish their cities were industrial ghost towns. Economic vitality and the prospect of growth are destined to drive electric rates through the roof. Sho-Me Electric Cooperative, which supplies electric power to the city-owned utilities in these communities, is raising its average rates to these municipal customers as much as 90 percent. That might seem bad enough, but the real news is worse. Sho-Me’s re-designed rate structure actually targets these particular towns and hits particularly hard at their economic development and population growth. Under Sho-Me’s new rates, each kilowatt hour of energy above last year’s baseline usage will cost these towns 28.9 cents, an increase of about one thousand percent! It’s a situation that could almost force these communities to actively discourage economic growth. (In its public announcements, Sho-Me seems to mask the overall percentage rate increases that take place in April by averaging the impact over the full calendar year.) Sho-Me is passing along higher costs being charged by Associated Electric Cooperative Inc.(AECI), which supplies power to all Missouri rural electric cooperatives. Sho-Me says it is targeting new usage because additional usage is what drives up rates for all rural electric customers throughout the state. If the cooperatives don’t add new customers and existing customers don’t increase their electric usage, AECI can provide most of its electricity from its existing low-cost generators. But each kilowatt hour of additional electricity has to be either 1) produced by generators that are more expensive to fuel and operate or 2) bought at higher costs from the wholesale electric market. Sho-Me says its rate for additional usage merely reflects AECI’s energy cost of supplying each kilowatt-hour of new usage added to the rural electric system anywhere in Missouri. The towns understand the need to cover their fair share of AECI’s cost increases. That really is not the issue. Their primary problem is the unique, irrational and discriminatory way that Sho-Me is shifting the allocation of costs among its customers. Sho-Me does not sell directly to retail consumers. Its customers are smaller rural electric cooperatives —which actually own and govern Sho-Me—and city-owned utilities that have purchased from Sho-Me for many decades. Late last year Sho-Me’s board of directors redesigned its rates in a way that shifts major new costs onto most municipal customers while holding down costs for the cooperatives. Unlike Sho-Me’s cooperative customers, city customers have no representation on Sho-Me’s board and have no ownership interest in Sho-Me. Since Sho-Me is not regulated, the cities have no recourse before the Missouri Public Service Commission. Sho-Me was subject to oversight by the PSC until the 1990s, but it reorganized itself to escape regulation immediately after the Commission disallowed a large portion of Sho-Me’s requested rate increase at that time. The affected towns see two major problems with the coop’s rate design: the way they are specially targeted and the way they are penalized compared to Sho-Me’s other customers. First, the new rate structure specially and irrationally targets the towns for having customers with more stable year-round usage. This more stable year-round usage makes the towns actually cheaper to serve. This is because the more stable needs of these “high load factor” customers, usually industries or other businesses or institutions, can be more easily planned for and served by lower cost generators. But the new Sho-Me rate structure specially classifies these towns by the stability of their electric loads in order to shift costs to them. In fact, the restructured rates would irrationally reward the affected towns if they increased their peak loads to create a greater gap between peak and baseload usage. Secondly, the new rate design penalizes all additional usage – but only in the targeted towns – as if every single new kilowatt could be avoided by energy conservation measures. In these towns, every single kilowatt hour of any new household or new business is penalized as if the load growth represents an avoidable waste of energy. The new 28.9 cent rate is applied to all such growth. No such penalty exists with Sho-Me’s other customers. By shifting the major burden of its AECI cost increase to these particular towns, Sho-Me is unilaterally imposing sudden, major rate hikes on all municipal retail customers in those communities. Additionally, by penalizing the cost of new electric usage in these towns, the new Sho-Me rate discourages the towns from accepting any growth—residential, business or institutional. The effect will be to drive economic activity out of town. But services like water, sewer, stormwater control and fire and police protection (and probably electric line extensions) are less accessible or affordable outside town. With no zoning protection, rural residents may also resist having unwanted industrial neighbors nearby. The bottom line is that economic growth will slow in the entire region. Sho-Me claims that its re-design of rates is intended to promote conservation and says that its cooperative customers (again, those represented on its board of directors) are doing more to save energy. Those claims are unsubstantiated. The cities’ utilities and many of their customers, especially businesses, are active in conservation efforts. They believe that they already conserve and use energy more efficiently than typical customers on the coop systems. In Ava, for example, Scroll Compressors LLC, owned by Emerson, has invested over $99 million since 2004 to expand its production capacity by 94% while increasing electric consumption by only 41.5% by major conservation initiatives (see attachment). This created 262 jobs for residents of Ava and surrounding rural areas. The cities are also heavily promoting conservation among their residential customers, and they believe these types of intense energy conservation efforts are more typical of customers found among their utilities than among most of Sho-Me’s other customers. Leaders in some of the towns believe that Sho-Me’s new rates aren’t designed just to reduce energy usage and save costs. They suspect Sho-Me wants to help the distribution co-ops (that own Sho-Me) take electric business away from the city utilities. Although the federal rural electric program was established for rural areas and state law restricts co-op service in cities, many cooperatives would like to grow their electric business and have offered to move into towns or even buy out a whole municipal utility. This of course does nothing to help AECI hold down power costs for co-op members, but there is potential tension for utility managers between minimizing power costs for customers and the prestige or salary that can come from growing their local electric co-op business. If Sho-Me is truly aiming only to conserve electricity to save energy costs, the cities are willing to look for another supplier to provide some of their power and relieve Sho-Me of that part of their load. However, Sho-Me seems to interpret its long term contract with the cities to prevent that and isn’t offering to change the restriction. Sho-Me also now insists that the price for using its transmission lines to bring in outside power will be much higher than has been before. In calculating the embedded cost of its grid, Sho-Me proposes to include investments in the extensive broadband telecommunications system it has developed and is using to produce separate revenue. For many decades, electric purchases by these municipal customers have helped fund Sho-Me and AECI investments in power generation and electric transmission infrastructure. AECI has given notice that it may be forced to review and increase rates annually for the foreseeable future, and Sho-Me apparently feels entitled to shift those costs around whenever and however it chooses, without reasonable notice or even a gradual implementation to avoid rate shock. The towns do not even enjoy the annual “capital credit” payments that go to other co-operative customers. The towns believe their long term contracts entitle them at least to cost-based rates from the assets they have supported developing. They are willing to pay a fair share of reasonable, justifiable and rational cost increases and do not want to have to litigate this dispute, but they may have little recourse but to the courts.