Last month, I wrote in this column that our biggest issue in 2002 would be an increase in our wholesale cost of power from Minnkota Power Cooperative. Our wholesale price has been stable for many years, but it will be increased this month by about 8.5%. With this increase over the last nine months of the year, our total power bill for the year is expected to be roughly $1.6 million more than in 2001.
The 8.5% increase in our wholesale power bill is the bad news. The good news is that we ended 2001 with margins significantly higher than expected. While much of the 2001 margins will be used to pay back capital credits, the above average amount will also help to cushion the impact of our wholesale price increase.
Our board of directors is most interested in keeping your retail electric rates as stable as possible. The last increase in our General Service Rate was in 1993 when it was increased by roughly 6%. At our board meeting in February, it was decided not to increase our General Service Rate at this time, but we will need to make a very moderate increase in our Off-Peak Heating Rate.
Our present Off-Peak Heating Rate is 2.9Â¢ per kilowatt-hour, which it has been since 1993. Recent cost of service studies performed by an independent consultant have shown that this rate is slightly lower than it should be in relationship to other rate classes. Last year, we made a partial move to bring equity to this rate by adding a $2 per month facility charge for each off-peak account. With the increase in our wholesale rate this year, it is clear we need to increase the off-peak kilowatt-hour charge from 2.9Â¢ per KWH to 3.1Â¢ per KWH.
A typical home with an off-peak heating system may consume about 20,000 kilowatt-hours annually for electric heat. The increase of 2 mills per kilowatt-hour for our Off-Peak Rate will add about $40 to the total heating bill for such a home. While we never like to increase any rate, it should be noted that this is a very modest change. It pales in comparison to the huge fluctuations in the cost of heating with other forms of energy in recent years.
Previously, I have reported on changes in our cost of power during the summer season versus the winter season. In prior years, power that was consumed only during summer months was much lower cost for us, and consequently, we adopted discounted incentive rates for applications that were strictly summer peak contributors. One of these applications was air conditioning. For the past 20 years, we have offered to sell power for air conditioning at the same Off-Peak Rate as interruptible heating, if the consumer was heating with electricity.
Recently, our power cost for summer peaking loads has changed and will soon be about the same as for any other use of electricity. For this reason, we will need to discontinue the lower incentive rate for air conditioning. We have elected to phase out of the discounted air conditioning rate over a period of years. As a first step, we will increase the Off-Peak Rate to existing customers for the months of May through September to 4.0Â¢ per kilowatt-hour. During the coming years, we will continue to step this rate up each year until it is equal to the low step on our General Service Rate.
We trust you understand that our overall goal is to keep your retail rates as low as possible. We are confronted this year with a big increase in our cost of doing business. We will be able to absorb about 80% of this increase, and we will recover the other 20% with a very modest increase in our Off-Peak Heating Rate. The good news is that our off-peak heating customers will still have a low-cost heating bill that is the envy of many of their neighbors.
Next month, you will receive the cooperativeâ€™s 2001 Annual Report. As you review the financial reports, I believe you will be pleased that the cooperative you own is financially strong. Better still, we are maintaining financial strength with retail rates that are very, very stable. Please look at this Annual Report when it arrives and plan to attend your annual meeting in Grand Forks on April 13.