Warren County REMC strives to provide our members with reliable service at fair and reasonable rates. To help evaluate our rates, Warren County REMC began a study to help determine what it actually costs to serve each type of member — residential, commercial, industrial and outdoor lighting.
While everyone needs the basic power poles and power lines for electric service, other requirements vary depending on the type of member. Like any business, we need to make sure our prices match our costs so that our rates are fair and set at a level that will allow us to provide reliable service to everyone.
With that in mind, we hired a cooperative expert, The Prime Group LLC, to conduct a cost of service study. The study took all of the cooperative’s actual expenses for the 12 months ending Dec. 31, 2018, and adjusted these costs to reflect the costs that we know are going to change.
Adjusting historic costs for known and measurable changes provides us with a good estimate of what it will cost us to serve members in the future when the rates will actually be in effect. Then, we allocated these adjusted costs to the various classes of members as fairly as possible based on the members’ actual use patterns.
The basic principle of fairness that The Prime Group used in performing the study and in designing cooperative rates is that members should pay the costs that they impose on the system. Designing rates that reflect the cost of providing service helps ensure members pay their fair share of the cooperative’s costs and margins, yet only have to pay for what they actually use and no more.
Additionally, it is important for a cooperative’s rates to send the right price signals to members so that they can make informed decisions regarding their energy use. Members’ use patterns have a direct impact on our cooperative’s costs, which, in turn, has a direct impact on the cooperative’s rates.
With cost-based rates, members are provided a proper price signal which reflects both the cooperative’s costs and the results of members’ purchase decisions. Cost-based rates allow members to make informed decisions based on the actual costs that their use causes for the cooperative. When rates reflect the cost of providing service, the economics of a member’s decisions are aligned with the cooperative’s economics, thus creating greater economic and engineering efficiencies for both the cooperative and its members.
On a more pragmatic level, a cost of service study is an important analytical tool for a cooperative. A cost of service study helps to assure the management team and cooperative board that all classes of members are at least covering the cost of providing service and making some contribution to the cooperative’s margins. A cost of service study also provides the detailed cost information necessary for designing rates.
With this in mind, the cost of service study looks at the prices the cooperative charges for each type of service that it provides to see if the prices charged match the cost of providing that service. The good news is that our current rates are close to cost-based rates and do not need to be changed very much.
Currently, Warren County REMC assesses a fixed monthly member service charge of $33 per meter for residential service. The board adopted a $1 increase to the fixed monthly residential member service charge.
This member service charge recovers the cost of the minimum set of equipment that the cooperative needs to have in place for any member to access the electric grid. This minimum set of equipment, or minimum system, is composed of the meter, the service drop from the transformer to the meter, the transformer, and some minimum-sized wire and poles extending from the transformer to the distribution substation that is necessary to provide a member with access to the electric grid.
Each member needs at least the minimum system to receive service from Warren County REMC. Many members need more equipment in place than this minimum system in order to receive adequate service. The cost of this equipment above the minimum is related to the member’s use level and is recovered through the energy charge of 11.64 cents (currently 11.32 cents) per kWh or kilowatt-hour.
With the fixed cost of providing a minimum set of distribution equipment to each member recovered through the fixed monthly member service charge, the energy that we purchase to supply our members is passed straight through the energy charge per kWh with no markup. Whatever it costs us to buy the power is passed through to our members. Recovering our fixed costs and margins through the fixed monthly member charge allows us to work aggressively on energy efficiency with our members with no negative financial impact on the cooperative.
We have also developed time-of-use rates with an on-peak period of 4 to 8 p.m., Monday through Friday, with all other hours of the year being off-peak. Thus, about 17.8% of the hours during a year are on-peak, while about 82.2% of the hours during the year are off-peak. The on-peak rate is 26.08 cents (currently 24.7 cents) per kWh and the off-peak rate is 8.035 cents (currently 7.975 cents) per kWh.
With the flat energy charge of 11.64 cents (currently 11.32 cents) per kWh, the only way members can reduce their usage is to use less kWh, while with the on-peak off-peak rates, members can reduce their energy bills by shifting use from on-peak to off-peak periods. The Warren County REMC board approved time-of-use rates because it wanted to provide members with as much opportunity as possible to manage their energy bills.
We believe that the new rates are fair, accurately reflect our cost of serving our members, and provide the cooperative with the continued financial stability necessary to provide safe, reliable service. The new rates go into effect April 1.