Facility Charge is a Fairness Issue

September 2005

There are about 900 electric distribution cooperatives in the country and they vary greatly in size and demographics. The smallest electric cooperative has less than 1,000 service locations and the largest has over 200,000 service locations. Nodak provides power to about 13,000 members at roughly 16,300 locations.

Each year, we receive statistics which compare our system to all of the other electric cooperatives in the state and the nation. One of the statistics which stands out is our average investment in utility plant per consumer. Nodak presently has an average investment in plant of $6,098 per consumer. This is a little less than the state average, but is much higher than the median investment of all electric cooperatives nationwide. The median investment per consumer across the country is $3,830 per consumer.

So, what does this mean with regard to doing business in North Dakota versus other parts of the country? It means that on average, we need to do a fair amount of business per consumer to simply pay for our investment in distribution plant. For example, if you were to borrow $6,098 at five percent interest over 35 years, the payments would be about $375 per year. If you are in the business of selling electricity with this distribution plant, you need to average $375 annually in margins (growth profit) just to pay for your investment. This provides nothing to pay for labor, taxes, maintenance, and many other operating expenses. Certainly, these statistics are important in understanding the challenge to provide affordable electricity in a sparsely-populated rural service area. It also helps to explain the need for the monthly facility charge which is necessary but not always popular.

The monthly facility charge is a flat fee that is charged to each customer whether or not any power is used. It is frequently the cause of resentment on the part of our customers, especially those who use little or no power on a monthly basis. The reason that a facility charge is necessary is because of equity and fairness among all members of the Cooperative.

An electric distribution system is expensive to build and maintain. We have that cost regardless if anyone buys any power. It would be unfair if some members had access to the system “just in case” they wanted to buy some power while all of the ownership costs are being paid by the other members who are buying power. On this basis, it is appropriate to get some of our needed revenue “up front” in the form of a monthly facility charge with the majority of our revenue coming from the actual sale of electricity.

If we eliminated the facility charge, we would simply need to increase the charge for each kilowatt-hour we sell. The result would be the same for the Cooperative and some members would see very little change in their total monthly bill. However, those who use little or no power each month would be getting a free ride as far as paying for the distribution system that is in place. Their share would be picked up by those members who use more than average amounts of electricity each month at a slightly higher per-kilowatt-hour rate.

The bottom line is that when you pay an electric bill, part of what you pay is to have the delivery system in place and ready to sell you electricity, and part of what you pay is the actual electricity which is delivered.