On PEC’s unfulfilled promise of cost-effective, fair and equitable electric rates . . .

[T]he Navigant Report, which investigated and detailed PEC expenditures over the past several years, showed that PEC’s controllable expenses were substantially higher than electric cooperatives with more than 100,000 members

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Is this the lodge on Lake Buchanan
where the PEC held an expensive training retreat?

Editor's Note: How 'bout it, should we send our new and duly democratically elected representatives on PEC's Board of Directors a quick howdy: "So whassup guys!" A couple of the new directors are brand new to the table and it will take a little while for them to get a handle on the fairly c0mplicated co-op electric power business. Meantime, the many important points and questions raised by Mr. Moden below are pretty straightforward and might make a good starting place for the board to investigate/act on and get back to us members & ratepayers with some answers.

Many alert and close observers of Pedernales Electric have already exposed some obvious recent lavish spending by the management, not the least of which was a reported $65,000-plus training retreat at a resort lodge on Lake Buchanan. Who made that call, how is it justified, and how will it be accounted for in the budget? In the run up to the June board of directors' election, we heard a lot of promises of efficiency in spending, lower rates and management transparency. Let's all encourage our new directors to start delivering the goods sooner than later.

By Merle Moden

The Pedernales Electric Cooperative Board of Directors on June 15, 2009 approved a Cost of Service and Rate Design Study conducted by the consulting firm of C. H. Guernsey & Company (Guernsey) with main offices in Oklahoma City, Oklahoma.

The vote for the new rate schedule was six for; none against; and, one absent. The new schedule contained in this study will be effective with August 2009 bills. On June 29, 2009 two new members were seated on PEC's board. The make-up of the board of directors is quite different now; however, it is speculative whether or not the rate schedule would or would not have been approved by this new board.

There are three primary cost drivers which determine the cost of electricity for PEC member-customers: (1) energy cost from the costs of power generation which accounts for 59% of total cost; (2) expenses from depreciation, operations, and maintenance which account for 34% of total cost; and, (3) return on investment from PEC’s investment in transmission facilities, distribution facilities, and general plant facilities which accounts for 7% of total cost.

Member-customers need to be assured that the PEC Board of Directors and PEC management are governing and managing the PEC to yield cost-effective rates and services. There are several questions that PEC member-customers need to ask the new board regarding the underlying costs and expenses that support this new rate schedule.

First, since PEC generates no power, its electric rates are driven primarily by the underlying costs of buying power from wholesale power providers of which the Lower Colorado River Authority (LCRA) is PEC’s primary source. The LCRA, in addition to its electric power generation activities, is engaged in other revenue producing activities including the treatment and distribution of water. The PEC entered into a 25-year contract recently with the LCRA for purchased power which was negotiated by the law firm of Clark, Thomas, and Winters. This law firm recently agreed to pay PEC $4.1 million in damages for unspecified failure(s) to provide competent legal services.

As a State Agency, LCRA’s charges cannot exceed its costs. Do the power costs in this new 25-year contract reflect only LCRA’s costs to generate and transmit power to the PEC? What assurances are there that the discredited Clark, Thomas, and Winters law firm represented the best interests of PEC member-customers? The question is, is the LCRA complying with the “charges cannot exceed costs” requirement by misapplying it in the aggregate , or is LCRA correctly applying this requirement to each revenue producing activity?

For example, is the LCRA overcharging its electric generation customers and undercharging its water customers. The LCRA, in response to an Open Records request, refuses to furnish its costs of operation for each of its revenue producing activities to answer this question. Consequently, the extent to which PEC’s member-customers may be subsidizing rates for LCRA’s water customers is unknown. The recent controversy between the LCRA and the San Antonio Water System which, it would appear, will cost the LCRA $18 million raises the question of where LCRA will find the money to pay this $18 million. Will it come solely from its water operations?

Cost per customer rose $400 in two years

Second, the Navigant Report, which investigated and detailed PEC expenditures over the past several years, showed that PEC’s controllable expenses were substantially higher than electric cooperatives with more than 100,000 members (Peer Group). Based upon these Navigant Report data and the new LCRA contract, is the PEC moving aggressively to bring its costs more in line with its Peer Group? The total annual cost per customer rose from $2,005.47 in 2007 to $2,409.68 in 2009, a compound annual rate of growth of 9.6%. This not an encouraging sign that any serious cost-containment is being implemented by PEC management.

PEC is the largest electric cooperative in the U. S. Were the PEC to achieve the economies of scale that its size should produce, electric rates would be much lower. As a result of many years of financial mismanagement, PEC has simply failed to achieve its promise as a low-cost electric cooperative. Only a committed PEC Board of Directors through unambiguous instructions to the PEC General Manager can PEC reduce its excessive expenses.

Third, the Guernsey Study fails to assign cost responsibility in a fair and equitable fashion. Guernsey argues that the failure to implement a $39.90 per customer minimum charge for residential customers – PEC raised the minimum charge to $22.50 – results in large residential customers subsidizing small residential customers. If you use Guernsey’s flawed cost of service and rate design model, that would be the correct conclusion.

What is a fair and equitable rate design model?

However, if PEC implemented a fair and equitable cost of service and rate design model, the result would be that: (1) in the residential rate class small customers would cease subsidizing large customers; (2) in the small power rate class small customers would cease subsidizing large customers; (3) single-phase customers would cease subsidizing three-phase customers; and, (4) customers receiving overhead service would cease subsidizing customers receiving underground service.

Three of our newest, just elected, PEC directors:
From Wimberley Larry Landaker and Patrick Cox,
and Cristi Clement from Marble Falls.

Guernsey’s approach when encountering disparate cost responsibilities among customers is simply to ignore those disparate costs and dump and spread those costs among all the customers in a rate class. As a conceptual example, if a small customer has a customer cost of $20 per month, and a large customer has a customer cost of $60 per month, Guernsey would conclude that the average cost is $40, and both customers should pay a $40 per month customer charge. The Guernsey Study fails to address substantive differences in cost responsibilities among customers in its cost of service and rate design.

In summary, PEC member-customers do not know one thing and do know two things. They don’t know if their contract with the LCRA is based upon LCRA’s costs of generating and transmitting power, and does or does not include subsidies for LCRA’s water customers. They do know that PEC’s controllable expenses are excessive, based upon comparisons with their Peer Group, as shown in the Navigant Report. They do know that the Guernsey Study is flawed and does not yield fair and equitable rates for electricity.

Only a committed PEC Board of Directors can address and correct these deficiencies. PEC member-customers will not see cost-effective, fair, and equitable electric rates until such deficiencies are corrected.

Merle L. Moden has resided in Wimberley since 1997. Mr. Moden is a retired economist. He served on the Austin Electric Utility Commission for several years, chaired a citizen’s committee on City of Austin Water and Wastewater cost of service, and served on the Travis Central Appraisal District Board of Review.