Here’s why pressure on utility rates will continue

By Rich Riazzi, General Manager

9/13/2007

Five years ago, the aluminum wire we use as high-voltage underground power line cost 90 cents a foot. Today it’s $1.65 – up 83 percent.

Five years ago a 45-foot utility pole cost $350; today it’s $850 – an increase of 143 percent.

Utility costs keep going up, especially materials, and here in Chelan County we haven’t had an electric rate increase in seven years.

How have we paid for the rising costs? We’ve been fortunate many years to have surplus wholesale power sales that have covered the gap between our revenues and our costs. However, we cannot count on that every year. This year, for example, the Snake River Basin just 500 miles away had water runoff that was significantly below average.

A recent study by a consulting firm called The Brattle Group also points out how costs keep rising.

It said electric utilities nationwide are facing substantially higher construction costs as they continue to address the nation’s need for new investment in generation, transmission, distribution and environmental compliance. The study added that price increases felt by customers today are still largely due to increased fuel and purchased power cost, but the higher costs of utility construction will be borne in higher rates in the future as infrastructure projects are completed.

We have our share of those “infrastructure projects” at Chelan County PUD.

We are finishing up a new 230kv Andrew York transmission line from Rocky Reach Dam to a switchyard in Monitor at a cost of almost $14 million. We are reconfiguring our system of reservoirs and water lines in outlying areas of Wenatchee to improve reliability and fire flows at an estimated cost of $8 million. Modernizing turbines and generators (and related equipment) at Lake Chelan and Rock Island dams is expected to cost around $140 million. The projects connected with relicensing Lake Chelan and Rocky Reach dams for the next 50 years could require about $500 million over that period.

We have been relying on surplus power sales to cover a portion of our basic costs and to pay for part of these large capital expenses, but surplus power sales revenue can vary greatly from year to year depending on winter snowpack and market prices. In addition, as our county grows, the demand for power grows, leaving less surplus to sell.  Relying on these volatile surplus sales is risky.

We have reserves, but we cannot whittle away at them too much because we need to protect against years when snowpack is low, market prices drop or we have significant events like storm damage or major equipment failure.

By adding small utility rate increases each year, the PUD can come closer to keeping up with inflation and take some of the edge off big jumps in materials costs (as mentioned above). Rate increases can also reduce the need for large surcharges in some years as we have heard customer-owners say they prefer small, predictable increases. After 10 months of strategic planning and open public meetings, the Board of Commissioners approved rate increases for all of our service offerings effective Jan. 1, 2008.

As we see from reports like the Brattle Group’s work, the price pressure is expected to continue for the major part of the work we do. We plan to be as cost-efficient as possible, but it would not be wise to bet that surplus power sales will always be enough to cover the gaps. To maintain our long-term financial stability, rate increases are likely to be necessary for the next few years at least.