What’s a Fair Fixed Fee for Electricity at Munis and Co-ops?

Municipal electric utilities (munis) and rural electric cooperatives (co-ops) provide electricity service to about a quarter of U.S. residential customers. Like investor-owned utilities (IOUs), they collect money from customers (or members) to cover their generation and delivery costs through fixed fees (sometimes called the “customer charge”) and charges based on volume of use. But unlike IOUs, most munis and co-ops are not subject to public or state utility commission oversight that can help keep fees and rates in check. So how do muni and co-op customers know if their fixed fee charges are fair and justified?

What we do know is that fixed charges at some munis and co-ops are on the rise, and some are more than double the average fixed fees of IOUs. As these fees rise, they take a bigger bite out of household incomes, particularly for those living on lower incomes. Many co-ops and munis are located in persistent high-poverty counties and communities.

In this post, we hear from energy policy experts and consumer advocates — John D. Wilson, Deputy Director for Regulatory Policy at the Southern Alliance for Clean Energy, Rory McIlmoil, Senior Energy Analyst with Appalachian Voices, and Paul Chernick, President of Resource Insight — about fixed fees at munis and co-ops, with an eye toward helping co-op members and muni customers become advocates for fair charges.

QUESTION: What kinds of fixed charges are you seeing at co-ops and munis in your area?

John Wilson: Most, but not all, co-ops and munis in the Tennessee Valley Authority (TVA) region have been increasing these fixed charges, and TVA’s system-wide grid access fee (part of TVA’s new rate structure for its local distribution utilities) has exacerbated that pressure, even though the grid fee is based on the distributor’s average usage over the past five years, not the number of customers. Generally, decisions regarding fixed charges are not made in a transparent manner. The most long-term, sustained effort has been at the Knoxville Utilities Board, which has been basing its argument for higher fixed fees not on economics, but on a hunch. There have been similar trends in other southeastern states, and the Florida Municipal Power Agency (FMPA) is now pushing to impose a $50/month fee on its members. The fundamental issue for many of these utilities is revenue stability. We are not seeing a lot of sophistication in the analyses or arguments — although sometimes (rarely) there are cost-of-service studies that use the minimum system method to back them up.

Rory McIlmoil: The average residential monthly fixed charge imposed by electric co-ops in North Carolina to date is more than $25 per month — or $300 per year — with charges ranging from $12 per month (Jones-Onslow Electric Membership Corporation) to $35 per month (Piedmont Electric Membership Corporation). Sixteen of the state’s 26 co-ops charge $25 per month or more, and six charge $30 per month or more. To put these values into perspective, until Duke Energy Carolina’s 2018 rate case, which raised Duke’s monthly fixed charge to $14, its fixed charge was $11 per month. Even that dramatic increase resulted in a charge that is less than half the average fixed charge for co-ops. The high fixed charges imposed by the state’s co-ops are the direct result of the fact that they are no longer regulated by the North Carolina Utilities Commission and, other than the co-op boards of directors, there is no direct, independent oversight of co-op rates or rate structures in the state. The effect is that the co-ops can impose whatever fixed fees they’d like without having to submit those rate structures for public or regulatory scrutiny and approval. And indeed they have done just that.

QUESTION. Regulators around the country have been keeping IOU fixed charges in the $10 per month range on average. At rural electric co-ops, fixed charges are often $25 or higher. One typical high-level explanation is that in a rural area there are fewer people per mile of transmission line to share infrastructure costs. Is this reasoning sound?

Paul Chernick: No, customers per mile of transmission line does not make sense as an umbrella explanation. Each transmission line is added because there is some level of use by many customers that justifies it, and so its costs should be recovered based on that usage, not in the fixed fee. The same is true for distribution substations and most feeders.

The only portion of the grid that is unique to the individual customer regardless of usage — and consequently okay to recover through the customer fixed charge — is the meter and the “service drop,” the line from the street to the customer. Unlike most IOUs, munis, and suburban co-ops, some very rural co-ops are so sparsely populated that the average residential or farm customer may be served by many poles and spans along the public way that serve no one else. In essence, these customers have very long service drops. That is mostly an issue in the West or the Plains. In the Northeast, by contrast, a “rural” co-op’s customers will mostly be served by common distribution, and a normal sort of service drop from the street to the customer.

Let’s look at an example. Consider a co-op with 5,000 customers and 1,250 miles of distribution lines, where the total of all service drops (lines serving just one customer) is 250 miles. In this case, the customer charge might include 1/20th of a mile (264 feet) of distribution line, or essentially one pole and one span of line. Now consider another co-op with the same number of customers and total miles of line, but a different layout where just 20 miles of total line serve only individual customers. In this case, the service drop portion of the customer charge would be much smaller, based on just 21 feet of line.

Similarly, for most utilities the costs of line transformers on the street is driven almost entirely by load. Most transformers serve multiple customers, and as load grows, the utility replaces transformers with larger units or adds transformers to share the load. For very rural utilities, almost every customer may have its own transformer, so the number of transformers, but not the size, is driven by customer number. In that case, the customer charge may reasonably include the costs of a minimal-sized transformer.

So in very sparsely populated rural areas are the potential costs of very long service drops or transformers for individual homes enough to justify fixed fees of $25 or more? To find out, co-op members will need to press for details. Perhaps the co-op is limiting the fixed fee to only the cost of single-customer distribution lines, single-customer minimum transformers, service drops, meters and billing, with all other costs (shared distribution lines, shared transformers, transformer capacity above the minimum size, substations, transmission) recovered through the energy charge. On the other hand, it could be the case that the co-op is allocating whole categories of costs to the fixed fee that don’t belong there.

QUESTION: So even though co-ops, munis, and IOUs might be very diverse in terms of density or other characteristics, you’re saying that the method for calculating the fixed fee should still be the same? Are there any special issues to consider?

Rory McIlmoil: Yes, the method should be the same. The Basic Customer Method is the most appropriate fixed charge calculation method for any utility. It assigns just the following to the customer cost category: the cost of the line to the home (the service drop), the meter, billing, and associated customer service. All other costs should be considered energy-related and be recovered in the energy usage charge.

John Wilson says: One special issue that comes up for some agricultural customers is having multiple meters on their property, which is both for convenience and to help with managing irrigation and other water uses. When monthly fixed fees are low, multiple meters make sense. But applying high monthly fees means these customers pay really high bills, since they’re having to pay the charges even when they are shifting water demand around from meter to meter over time. Since bills are often just the total amount, and don’t disclose the monthly charge, agricultural users are often unaware of how many monthly meter charges they are paying. This was a significant issue in the recent Duke South Carolina rate cases, the commission specifically cited Farm Bureau testimony in rolling back the fixed fees. It would definitely apply in many co-op situations.

QUESTION: So in a sparsely populated rural area — and with the fixed charge appropriately recovering only customer costs — would usage (volumetric) rates then tend to be higher, as a result of the lower density? Is this still the right way to go about cost recovery in these areas?

Paul Chernick: Yes, providing delivery capacity is more expensive in very rural areas than in areas with higher load density.

Rory McIlmoil: Yes. If rates are higher, that would enhance the cost-effectiveness of energy efficiency and distributed generation investments and allow users more control over their bills. It would also make programs like utility on-bill financing more cost effective to help members reduce their usage. For Blue Ridge Energy, I estimate that reducing the fixed charge from $24.17 to $10 would — assuming all of the co-op’s expenses are justified (which they’re not) — require the average volumetric rate to increase from 10.1 cents/kWh to 11.5 cents/kWh, an increase of 14%. That would be a one-time increase and result in a net zero change in monthly bills for an average member, as well as no change to revenue collection for the co-op, and would still cover the co-op’s purported “revenue requirement” of $53 per residential meter, per month (which we challenge). The change, of course, is that the customer is more in control — more of their bill can be managed with changes in usage. That’s a big difference from fixed fees, which customers cannot change or control at all.

QUESTION: What about munis? A municipal utility might be small town, very urban, or part urban and part rural. Is there anything different about how a customer served by a muni should be thinking about how their fixed charges should be set as compared to an IOU or co-op serving a very rural region?

Paul Chernick: All utilities should mostly use the same method, regardless if it is a muni, co-op, or an IOU. The important issues are the density of customers (which decreases the extent to which certain distribution equipment is driven by customer number) and load. Many small municipal utilities are relatively compact, with density as high as that in suburbs or larger cities.

Rory McIlmoil: Yes, they should all use the same method, which should reflect the Basic Customer method. The end result will obviously be different, but the method used to get to that result should be the same.

QUESTION: How do governance and decision-making structures at co-ops and munis factor in on this issue?

John Wilson: In terms of transparency and internal staff work, there is typically less reliance on actual studies and definitely less disclosure of the decisions to the public. We have had difficulty in reconstructing just what was actually decided by a number of munis and co-ops that we’ve engaged with. Also, sometimes co-ops are unwilling to share information with non-members, or even with members, although Freedom of Information Act laws (“FOIA” or “Sunshine” laws) can sometimes work more effectively than IOU discovery rules.

Rory McIlmoil: The governance and transparency issue is a big problem. At my co-op, Blue Ridge Energy, our CEO is paid $1 million a year and co-ops have a number of additional staff expenses on top of compensation, such as conferences and travel. How much of these kinds of expenses — some of them exorbitant — are being loaded into our fixed charges?

As I describe in my comments on the North Carolina Clean Energy Plan, co-ops enjoy monopoly control over the sale of electricity in their service areas. They are not subject to government or public oversight, and in North Carolina, their boards of directors actively suppress member participation in the decision-making process. This means members have limited ability to voice their concerns about fixed charges, and the co-ops intentionally suppress member access to information. Cost of service studies are not provided to members.

As a member, I tried to gain access to Blue Ridge Energy’s cost of service study — and was denied, meaning members aren’t able to see or evaluate how and why our $24.17 per month fixed charge was calculated. In my estimate, a more justifiable monthly fixed charge for Blue Ridge Energy would be a lot lower, around $10 a month.

QUESTION: How can co-op members and muni customers effectively advocate for fair fixed charges?

Rory McIlmoil: They just have to get involved and advocate both for reforms at the co-op/muni level as well as for policy changes at the state level. Unfortunately those changes may only happen after deep corruption is exposed, like in Colorado, South Carolina, Georgia, and Texas (among others), but in most cases the “fix” is insufficient to solve the deeper fundamental problems and things tend back to they way they were. This is why member involvement in co-op activities and decision-making is so critical, and why states need to regulate the rates, investments, and even governance and transparency policies for co-ops. Advocates who are focused on these issues are critical to engaging, educating, and empowering co-op members to advocate for those policies and reforms on their own behalf.

John Wilson: Persistence is a necessity. The exact tactics depend on what the rules are. For example, is the municipal utility governed by an independent board, directly by a city council, or something else? Can a ballot initiative be run? Making the issue prominent in local elections is one good tactic. Petitions, turnout at meetings, private meetings with staff, and general public education are all part of the process to achieving victory. It is essential for credibility and consistency of message to do thorough research into the issue and understand (to the extent possible) what the utility is trying to achieve and what data it has relied upon.

Paul Chernick: It is really helpful to understand something about how the utility plans and operates its system. Attend meetings of the governing board, read whatever reports the utility produces. When you run into a utility employee working on the distribution system, ask what problem they are addressing and whether the utility has some plan to avoid that problem, for example — upgrading lines or adding distributed storage. Get to know which overhead lines are electric (they are higher than phone and cable) and what the line transformers look like in your neighborhood; if the utility includes transformer costs in the customer charge, you can show that many customers share a transformer. If you don’t have a neighborhood, or every customer has their own transformer, you are probably in one of those very rural areas discussed above.