A utility has a brush with the death spiral

The so-called electric utility “death spiral” is an intriguing concept: It’s the idea that high power prices encourage people to go solar, and as the costs of the grid are borne by a shrinking pool of customers, prices rise further, encouraging even more solar and “grid defection.”   My grim fascination with utility death brings back memories such as PG&E’s 2001 bankruptcy in California’s electricity crisis (whose 15-year anniversary is coming up) or Enron’s epic collapse. It’s fun to speculate about the demise of widely-hated companies, such as investor-owned electric utilities. What was interesting about Enron, for instance, was not so much the corporate bankruptcy, but that bad guys were going to jail. The satisfaction of reading “justice-is-served” stories depends, ultimately, upon having a good enemy. For me at least, investor-owned utilities (IOUs) make for good enemies. When they’re not letting natural gas pipelines explode in the suburbs (San Bruno, CA) or causing the largest natural gas leak in American history (Aliso Canyon, CA), they are busy accelerating wealth transfers from the working poor to investors with multi-billion dollar rate hikes. Worse, utilities generate 40% of America’s carbon dioxide and are structural obstacles to reducing emissions. Indulging in a little bit of death-spiral visualization is thus especially gratifying when the utility is your favorite misbehaving, too-big-to-fail IOU.

But recently I met a utility that challenged my negative image of the sector: Orcas Power & Light Cooperative (OPALCO), located in Washington state’s San Juan Islands. I interviewed Suzanne Olson, Public Relations Administrator, to get a small co-operative’s take on the death spiral threat. I was surprised at what I learned.

The San Juan Islands

In 2014, OPALCO’s revenue and profits were severely eroded by the warmest winter months recorded since the 1880s. For 14,000 customers served by the co-op, household electric baseboards didn’t run very much last winter, causing a $1.4M revenue shortfall (on total revenue of about $22 million) that all but eliminated the co-op’s profit in 2014. Whether caused by warm temperatures, energy efficiency or customer self-generation, reduced income hurts the utility in the same way. The co-op has also invested heavily in energy efficiency (EE) over the years, reducing its income. The San Juan Islands are known for being socially progressive, and OPALCO’s EE spending, important to individual co-op members, has reduced demand by approximately 1% per year. OPALCO’s resulting financial situation is serious: the co-op violated a covenant with its lender, the U.S. Department of Agriculture’s Rural Utilities Service. The board and senior management are faced right now with precisely the reality of the death spiral: trying to balance unpopular rate increases with the financial realities of running a utility. The steps OPALCO has taken to address its death spiral concerns are remarkably instructive to both utilities across the country and curious observers such as myself.

Here’s some background on OPALCO. The San Juans are totally dependent on Bonneville Power Administration’s Columbia River dams for power; the archipelago has no power plants of its own, except for some small community solar here and there. The juice is delivered to the islands via submarine cables. For those infrastructure nerds out there (you know who you are), you will be tickled and delighted to watch this 23-minute video about the laying of the submarine cables from Anacortes to Orcas Island in 1951.

25,000 Volts Under The Sea

OPALCO has much larger infrastructure needs than its mainland peers. The utility serves 20 islands with 26 submarine cables. The removal of one older cable recently cost $3 million. The replacement of the Lopez-San Juan cable, planned for 2017, will cost $15 million – nearly an entire year’s revenue. The new cable must cross protected shoreline, so they can’t just lay down the new cable on the seabed; a 1,900-foot bore hole must be drilled down from the land and then horizontally out to deep water to avoid crossing the shallow depths that are protected by environmental laws. And three separate line crews must be maintained year-round on different islands to quickly fix power outages.

Undersea cables: Snapped from a recent ferry ride, you can see the right-of-way meet the water’s edge. A white sign warns against dropping anchor in the vicinity.

With huge infrastructure costs and profits decimated by warm weather, OPALCO’s back was against the wall. In a rushed period following the breach of loan covenants, the OPALCO board pushed through a radical, and very unpopular, series of rate changes that would make any investor-owned utility green with envy: volumetric charges (charges based on how much you use) were converted into fixed charges. Previously, bills were, on average, 25% fixed charges and 75% volumetric. They are now being turned upside down: 75% fixed charges, 25% volumetric. This means that, in a few years when the changes are phased in, the average residential user will spend $74.70/month even if they use no power at all.

 

This is an extreme shift. It provides revenue stability to the co-op during unusual weather patterns – global weirding, as I heard recently – but it dramatically curtails members’ financial incentive to conserve energy or go solar. Over the years, commentators from solar advocates to former FERC Chair Jon Wellinghoff and others have railed against fixed charges. After all, why should electricity be all-you-can-eat? It gets the incentives all wrong – customers have no financial reason to save energy or carbon. Fixed charges act like a carbon subsidy, making it cheaper to pollute. Yet despite the public policy insanity represented by fixed charges, many utilities across the nation have received approval for creeping fees: $5, $10 or $15/month, just for the service of being there, even if you don’t use it.

I generally thought that fixed charges are evil. But talking with Suzanne Olson forced me to question my strongly-held position. Unlike an IOU, there aren’t distant Wall Street stockholders who stand to benefit from OPALCO’s reform. OPALCO is a co-op owned by its members. I have a lot of sympathy for them: their infrastructure costs are real, the financial pickle is real. There’s no Enron to blame. Sometimes the community just needs to invest in essential public services.

In the end, while not happy about OPALCO’s reforms, I left the conversation with Suzanne feeling that their actions were justified. And not because OPALCO is a member-owned co-op, but because of an even larger social equity issue. The San Juan Islands are a vacation hot spot, attracting wealthy visitors during the summer months. But many locals are not as economically fortunate. Pointing to the polarized socio-economic distribution of residents, Suzanne told me that islanders “either have three homes or three jobs.” With vacation homes vacant most of the year and the power turned off, those owners don’t pay as much for the expensive submarine cables as the year-round residents do, whose meters spin year-round. A fixed monthly charge thus recovers a lot more revenue from wealthier vacation home owners. Viewed through the lens of income inequality on the islands, the benefits of fixed charges perhaps outweigh their negatives.

In the end, what I learned is that even friendly, member-owned co-ops like OPALCO can be sucked into the same death spiral as IOUs. It’s very challenging to organize a viable power sector around declining sales, whether you’re talking about IOUs, munis or co-ops. Rate design is, and always will be, an imperfect instrument; it’s not about finding the best rate structure, but about the least unfair structure. This time I’ll give OPALCO a pass on their fixed charges, but only because of their demographics and geography. §

Boating around San Juan with labradoodle sidekick. We later spotted some orcas.

 

 

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