By Mylo Einarson, President & CEO
In the latest Nodak Neighbor and in this year’s Annual Report, I alluded to the fact that several factors were putting significant pressure on our rates and that we may be forced to increase them sometime this year. I wish I had better news to pass along, but after closely monitoring the situation through the first four months of this year, it’s apparent our rates need to be adjusted. Beginning with the power bill you receive in late June or early July, all rate components and all rate classes will be increased by 3%.
There are a number of reasons we find ourselves in the unfortunate position where we need to raise rates. The largest factors are the increased power cost due to last year’s wholesale rate adjustment, lagging general service and heating sales, and losing one of our largest members due to a plant closure.
It’s been pointed out several times in our publications that the 30% rate increase in 2011 from our wholesale power provider, Minnkota Power Cooperative, was matched with a 17% retail rate adjustment by Nodak. Based on our cost of power, to fully recover that increase in power cost, the retail rate adjustment would have needed to be in the 22 – 23% range. Load growth across the system was slated to provide the extra revenue needed to make up the difference. While we have seen robust growth from some of our largest members, sales from the balance of our membership is down by over 15% for the year. Compound that with the fact that our second largest member, ADM’s ethanol facility in Walhalla, closed its doors in April, and it’s obvious a rate increase is necessary.
The bright spot in this is when you factor in the two mill reduction in the renewable energy surcharge we passed along in January, depending on your rate class, average member rates will be only slightly above or slightly below where they were at the end of 2011.
At its April meeting, the board of directors also discussed capital credit retirements. A capital credit retirement is the return or reduction of member equity that members typically see in the form of a check each spring. The board of directors has demonstrated a long standing commitment to retiring these capital credits each year. Over the last four years, the board has sacrificed margins in exchange for passing along lower retail rate increases during this time of rapidly escalating wholesale power costs. At the same time, the board of directors has continued to distribute capital credit payments, but that has resulted in a decrease in total member equity.
The proper level of equity is an important financial consideration for the board. Equity levels that are too low increase the cost of capital for the cooperative by way of higher interest rates from lenders. Equity levels that are too high needlessly restrict access to equity dollars by the member-owners. An equity level of 40% is what we feel strikes a good balance between the equity needs of the cooperative and those of the member-owner. For two years now, equity levels have sunk below that 40% target and it appears we will end the year 2012 in a similar situation. Each year, the board makes budget, rate, and capital credit decisions with a goal to achieve and maintain that 40% target. After several lengthy discussions, the board has decided to take a year off from retiring capital credits in order to help that equity position recover towards that 40% threshold. I have a very high level of confidence that in 2013 our members will see a return to capital credit retirements once again.
We will continue to keep you informed about the status of our financial condition during the year. After this rate adjustment, we are currently projecting wholesale and retail rates to remain steady through 2013. However, projections are little more than a “best guess” and with new loads coming on, existing loads curtailing, and unpredictable weather, power sales can be a moving target. We will be sure to keep you updated on how close we are to hitting that target throughout the year.