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Rob Pearson
Chief Executive Officer
Board Announces Rates Decision
At the August Board of Directors Monthly Meeting, your Board of Directors took a major step to help keep rates as low as possible. Over the last several years, the board and I have diligently worked on the financial stability of your cooperative. We have concentrated on increasing our cash position and making sure we keep our equity percentage high. By accomplishing these goals, we have been assured flexibility in financing and have created options on the decision as to what level of borrowing is appropriate.
As you know, making decisions on what to finance and what to pay cash for are both important decisions on running your household. These are also important decisions for your cooperative. We have to analyze on a monthly basis what items should be paid for up front and what items can be financed. When a pole is put in the ground, that pole is depreciated over 30 years. The pole may actually last longer than that, but the Rural Utility Service agency of the Department of Agriculture established guidelines say that 30 years is appropriate timeline for the life of an electrical pole . This is the agency that loans money to the cooperatives as well as using local financial institutions. But since that pole will be in use for at least 30 years, should we pay for that up front or finance it over the course of its useful life? We can look at it both ways and there are advantages with either choice.
If you pay for it with cash, then you do not pay the finance charges over the 30 years, but you make the rate payers (members) pay for the use even if they do not stay on the lines for the 30 year life of the pole. If you finance the pole, you will have some finance charges, but the members that are serviced by the pole will be paying for it while it is in use. Complicated decision? You bet, but these are the type of hard decisions your management and board make on a monthly basis. We are always torn between what a rate should be, versus how much debt we should incur.
Now to explain the major step taken at the August board meeting, as you can see, there are different thoughts on how to finance the growth of the cooperative. Depending on the decision made, the rates are affected accordingly. We need to constantly purchase new equipment to improve our system, the better the equipment the more reliable the system. By keeping our equity high we have to pay for most of the added cost by cash, this helps keep our cost of debt low, but puts upward pressure on our rates. The board has looked at the future of rates predicted by our power suppliers and is concerned about these increases. They have made the decision to lower our equity and do some special financing in place of passing along some of these large increases to the cooperative members. We are now able to take advantage of the conservative decisions on financing, made in the past. This decision will help offset rate increases for hopefully the next two years. We hope that by that time, we are starting to see some stability in the power industry and can return to a more normal power rate growth pattern.
You will see a difference on your bill. I have readjusted the rate structure to easily track the power cost adjustments and make sure that instead of passing them along, I use our financing to pay for new construction. What you will see on your monthly bill is a larger power cost tracker and a slightly larger facility charge, but a reduction on the base rate. Over the next few years, the board will continue to strive to keep these rate increases from affecting Wabash County REMC members.
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