LOWER VALLEY ENERGY
FALL RIVER ELECTRIC COOPERATIVE
BEARTOOTH ELECTRIC COOPERATIVE
Evaluation of Potential Consolidation Between
Lower Valley Energy, Fall River Electric Cooperative and
Beartooth Electric Cooperative
April 20, 2016
Prepared by:
570 Kirkland Way, Suite 100
Kirkland, Washington 98033
A registered professional engineering corporation and management consulting
firm with offices in Kirkland, WA and Portland, OR
Telephone: (425) 889-2700
Facsimile: (425) 889-2725
www.eesconsulting.com
PRIVILEGED AND CONFIDENTIAL
April 20, 2016
Mr. Jim Webb
Lower Valley Energy
P.O. Box 188
Afton, WY 83110
SUBJECT:
Mr. Bryan Case
Fall River Electric Cooperative
1150 N 3400 E
Ashton, ID 83420
Evaluation of Potential Consolidation between Lower Valley Energy, Fall River Electric
Cooperative and Beartooth Electric Cooperative
Dear Mr. Webb:
It is with pleasure that we submit our final evaluation of the potential consolidation between
Lower Valley Energy, Fall River Electric Cooperative and Beartooth Electric Cooperative.
We appreciate all of the help you have provided in conjunction with this study. Please feel free
to contact me directly with any questions or comments.
Very truly yours,
Gary Saleba
President
570 Kirkland Way, Suite 100
Kirkland, Washington 98033
Telephone: 425 889-2700
Facsimile: 425 889-2725
A registered professional engineering corporation with offices in
Kirkland, WA and Portland, OR
PRIVILEGED AND CONFIDENTIAL
Contents
Introduction and Background ......................................................................................................... 1
Consolidation Overview .................................................................................................................. 3
Economic Analysis ........................................................................................................................... 9
Rate Comparisons ......................................................................................................................... 21
Summary, Conclusions and Recommendations ........................................................................... 27
POTENTIAL CONSOLIDATION BETWEEN LVE, FR AND BEC
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Introduction and Background
Lower Valley Energy (LVE) and Fall River Electric Cooperative (FR) are considering a potential
consolidation between the two utilities in order to provide more efficient service to members.
Currently LVE is providing management services to Beartooth Electric Cooperative (BEC) under a
three year contract. An option where BEC is included in a consolidation with LVE and FR is now
being considered as well. EES Consulting, Inc. (EES) completed a study for LVE and FR in
November 2015 to review the potential savings associated with a potential consolidation and
review some of the steps necessary to proceed. The addition of BEC to the consolidation is added
to the economic analysis previously completed and presented in this report. This report provides
a discussion of considerations related to the potential three-way consolidation and provides an
economic analysis to quantify the expected savings and benefits under a combined utility and
how those savings would impact retail rates for members. The findings of the consolidation of
just LVE and FR are included in this report, and the results of adding BEC to the consolidation are
presented in incremental terms as well in the total impacts for all three utilities. By showing the
incremental savings for BEC, this could also serve as the results for a scenario where LVE and BEC
merged without the inclusion of FR.
LVE serves roughly 27,000 electric customers and 4,000 gas customers in western Wyoming and
eastern Idaho. It is a cooperative with a seven-person Board of Directors and 65 employees.
Offices are located in Afton and Jackson, WY.
FR is an electric cooperative serving southeast Idaho, western Wyoming and southwest Montana
with headquarters in Ashton, ID. It serves roughly 16,000 customers. It is overseen by a nineperson Board of Directors and has 46 employees.
BEC is an electric cooperative serving southern Montana and northern Wyoming with
headquarters in Red Lodge, MT. It serves roughly 6,000 customers (meters). It is overseen by a
seven-person Board of Trustees and has 14 employees.
The cooperatives have entered into discussions regarding a potential consolidation between the
three utilities. While discussions are in the early stages, a basic overview of a consolidated utility
has been identified. This study is based on that broad overview and is subject to change as
discussions continue.
The goal of the parties is to generate cost savings on behalf of its members through the
efficiencies associated with a combined utility. It is expected that the majority of these savings
would come through reducing staff and expenses in areas that overlap, including management,
accounting, computer systems and Board of Directors’ expenses. It is important to note that
these efficiencies can be accomplished through retirements of staff and other attrition and will
not result in layoffs of employees.
In terms of timing, a consolidation would need to be approved by all three utilities at a Board of
Directors meeting, currently expected to occur in September of 2016. FR bylaws require a 2/3rd
POTENTIAL CONSOLIDATION BETWEEN LVE, FR AND BEC
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vote of all membership to approve the consolidation. LVE would require a simple majority of all
members to approve the consolidation. BEC would need to accommodate a Montana law that
would require a 2/3rd vote of those members that vote as well as a WY law requiring the majority
of all members. In this case the lawyers will need to determine how these two different lawa
would apply to BEC. The expected timing would allow for review and preparation prior to those
Board of Directors meetings. Although a precise date for implementing the potential
consolidation has not yet been identified, it is assumed to be July 1, 2017 for purposes of this
study.
It is the objective of this study to address some of the issues to consider with respect to the
potential consolidation as well as identify the estimated financial impacts with a combined utility.
The following section lays out an overview of a potential consolidation and provides a brief
analysis of issues to consider. The subsequent section provides an economic analysis to
determine the estimated cost savings with a combined utility compared to continued operation
of separate utilities. This is followed by section on potential rate impacts associated with a
consolidation.
POTENTIAL CONSOLIDATION BETWEEN LVE, FR AND BEC
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Consolidation Overview
This section describes the issues that will need to be addressed in the event of a consolidation
between LVE, BEC and FR. These are issues that need to be considered as part of the decision
making process by the utilities. A game plan for addressing these issues under a consolidated
utility will need to be developed if the utilities decide to consolidate. In some cases, such as
staffing, further discussion is provided in the economic analysis section as the issue includes some
potential savings under a consolidation.
The following key topics are addressed in this section of the report:





Governance and Board of Directors Oversight
Management and Staffing
Finance and Accounting
Engineering and Operations
Public Relations and Communication
The issues included within this section, as well as the following sections, have been discussed
with the General Managers at both LVE and FR. Note that this includes input for BEC as the
management is now being performed by LVE. The Boards at LVE and FR have been provided with
the results of the consolidation study for the two utilities and have had a chance to provide some
input, while the BEC Board has provided input with respect to the management agreement but
not yet for an actual consolidation.
Governance and Board Oversight
With a consolidation of the three utilities, there would be various legal issues associated with
forming the new utility that would need to be addressed by legal counsel. EES Consulting is not
providing a legal opinion of the steps that need to be taken but is addressing some of the business
decisions that will need to be made.
While the timing of the potential consolidation is assumed to be July 1, 2017 for purposes of this
study, an exact date would be dependent upon the legal process, approvals required, and
management and Board agreements that would need to be reached. A business agreement
between the utilities would be the first step in the process and would need input from both
management and the Boards of LVE, BEC and FR. From there a legal agreement could be drafted
that would encompass the business agreement and any other necessary legal steps required.
While a general business agreement that includes the basic framework of the consolidation
would be necessary, some of the major decisions could be made by the Board of the new utility
once the consolidation took place. Many of the detailed decisions would also be most effectively
made by the combined management under the new utility.
Currently LVE and BEC both have seven board members and FR has nine board members. For
LVE and FR alone, the previous study discussed an initial consolidation reflecting the combining
POTENTIAL CONSOLIDATION BETWEEN LVE, FR AND BEC
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of two equal partners, and it was expected that each utility would have an equal number of
members on the new Board. With the addition of BEC, there would need to be a different split
in voting that would reflect the inclusion of three different parties. For practical reasons, all three
utilities would need to reach a general consensus on major issues to make the consolidation work
for all parties. The initial make-up of the Board would need to be included as part of the business
agreement. While this initial Board make-up would be required during the start-up and transition
phase to ensure that the existing utilities are fairly represented to make the major decisions for
the consolidated utility, this Board make-up would need to be simplified and reduced over time
to provide a manageable Board. It is expected that this initial Board make-up would only apply
for the first three years.
Typically a cooperative Board would have an uneven number of members with staggered election
terms. As with the current utilities, using separate districts to reflect the members within the
various geographical regions of a consolidated utility may provide the best assurance that all
members are represented in the future. A move towards the final Board composition could be
made all at once at the end of a transition period or it could be done over a phase-in period that
would reflect the natural election cycles of the current Board members. It is recommended that
the agreement contains a specified transition period for the initial Board and that after that time
period the Board would be formed based on districts with equal membership per District
throughout the combined service area.
While this report is designed to reflect a consolidation of all three utilities, it does not preclude
the consolidation of just LVE and FR or just LVE and BEC. There is also a possibility that the utilities
could consolidate at two different times, however, it may be more efficient for a single
consolidation all at one time.
Bylaws for the new utility would need to be developed. It is expected that the current bylaws of
each utility have many common provisions. Any items that have conflicting provisions would
need to be resolved. Also, changing the bylaws would need to meet the legal requirements in all
three states and legal review is required for this issue.
Finally, a new name that would reflect the combined geographical areas and history of the
current utilities would need to be selected. This decision would need to be made as part of the
business agreement so there would be ample time to develop a communication plan for the
members prior to the actual consolidation date. As with other issues, this could include an
immediate change at the time of the consolidation or a more phased-in approach with an initial
combined name in place initially and a move towards a shorter name after a few years.
Management and Staffing
As there are two general managers at the present time there would need to be some
consolidation in management. As BEC is currently managed by LVE, the duplication in
management does not exist for BEC. It is expected that there will be additional work during the
transition period to develop all of the structures and protocols for the new utility, as well as
provide information to the Board so that they can make the necessary decisions for the
POTENTIAL CONSOLIDATION BETWEEN LVE, FR AND BEC
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consolidated utility. Communication with staff and utility members will also be vital during the
transition period. And the day-to-day running of the utilities will still be necessary.
The structure of top management could include co-general managers, a general manager and an
assistant general manager, a chief executive officer and chief operations officer, or a transition
manager and operations manager. Tasks would need to be split between the two managers and
a clear reporting structure would need to be established. After the transition period the Board
would select one permanent General Manager to run the consolidated utility.
The existing General Managers would need to evaluate the next tier of management and develop
a new reporting structure for those staff. There will be some overlap in management, however,
it is expected that retirements will take care of the overlap over a few years. Early retirement
offers for both management and other staff may be necessary to speed up the process. There
may need to be some temporary assignments made to deal with transition issues before the final
management structure would be in place. There will also need to be management in place at all
locations over the short term until decisions are made about permanent office locations.
For remaining staff, any reductions are expected to occur through retirements and normal
attrition. There may need to be some re-assignments in positions and in a few cases there may
need to be some re-locations. For the most part, staff will be needed at all locations to meet
operational and customer service needs. Current technology also allows for coordination of staff
located in different locations. Staffing levels and potential cost savings are addressed further in
the next section. Note that for BEC, savings in staff would not be based on further reductions
from existing levels but rather in comparison to a standalone case where BEC would have to hire
back top management at the end of the LVE agreement.
During the transitional period of the new utility, it is expected that the LVE and FR headquarters
will be maintained with administrative and operational staff at each site. BEC’s location has
remained in use for local operational staff under the management agreement. After the
consolidation it is expected that the new Board will need to consider the optimal location for the
administrative headquarters. This may be at one of the current locations, or at a new site that is
centrally located to the combined service area. Operational staff will still need to be located
throughout the service area to reach the various facilities in a timely manner. Added travel will
be required by both management and staff during the transition period to effectively manage
staff, to coordinate joint projects, for cross-training of staff and for transitioning functions such
as billing, accounting, IT, etc. to one system.
Finance and Accounting
The various financial aspects of the utilities would need to be combined under a consolidated
utility. This would include existing and new debt, accounting systems and procedures, customer
billing systems and procedures as well as all of the IT and communications systems. In most cases
the utilities have their own systems in place and a decision will need to be made whether one of
the current systems, or a new system, would be implemented after the consolidation. Under the
management agreement some migration in systems for BEC has already been made, but more
POTENTIAL CONSOLIDATION BETWEEN LVE, FR AND BEC
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would need to be done under a consolidation. There may need to be some redundancy in
systems during the transition period to provide a smooth transition, allow time for migration of
data and avoid any interruption in required service.
Rather than making these types of decisions as part of the business agreement, it would be
recommended that key staff from all utilities work together to develop the best solution
considering both cost-effectiveness and workability. Their recommendations would be reviewed
by the management and Board as needed prior to implementation.
In terms of existing debt, it is expected that all existing debt would be retained as is with a simple
change in the utility name as required under the provisions of the debt. New debt would be
issued as needed by the new utility. The exception would be for RUS debt at BEC. BEC currently
has over $7 million in debt with RUS. Because LVE and FR do not carry RUS debt, it would be
easier to pay off that debt and refinance with CFC or amortize the up-front cost over time. There
would be a $1.5 million pre-payment penalty associated with this debt. It was assumed for this
study that the pre-payment (debt plus penalty) would be refinanced for the remaining 27 years
term of the debt. The refinance would add the $1.5 million penalty to the principal but would be
at a slightly reduced interest rate, resulting in added costs of $42,734 per year.
While there may be some one-time transition costs required in order to implement the
consolidation, it is expected that each utility would need to contribute to the cost in an equitable
manner for any costs incurred prior to the consolidation. After the consolidation, funds would
be combined and would be used as needed to fund any required consolidation costs. Funding
issues prior to the consolidation implementation would need to be part of the business
agreement.
Rates for the three utilities are considerably different at the present time with LVE rates
significantly lower than FR rates, and FR rates considerably lower than BEC rates. Options for
rates under a consolidated utility are discussed in more detail in a later section of this report.
Because of the rate differences, it is expected that different rates will need to be maintained over
the short term, if not indefinitely. While that will be a decision for the new Board at a later time,
it will be important to set up a billing system that can accommodate regional rates. In addition,
tracking some of the costs separately for the various regions will need to continue in order to
provide the cost basis for future rate differentials by region. Costs that are common to all regions
will need to be allocated between the regions. Over time this may become more difficult as the
separation between the utilities becomes blurred and more costs are incurred for joint projects.
The utilities are looking at potential rate impacts associated with allocating the common costs of
a consolidated utility on a regional basis outside of this study.
Engineering and Operations
A consolidated utility will require a total system approach for engineering and operations of the
utility. While some aspects will be simple to view as a whole and managed on a more global
basis, operations at the more local level may continue to be managed on a more regional basis.
POTENTIAL CONSOLIDATION BETWEEN LVE, FR AND BEC
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Power supply and transmission purchases for LVE and FR from BPA will not be combined under
the consolidation due to FR’s existing membership in PNGC. For that reason, no savings are
expected in power supply costs. Both LVE and FR have some of their own small resources and
operation of those resources will need to be coordinated to ensure the greatest benefit to the
combined utility. Planning for future power supply in light of BPA’s tiered rates will also need to
be completed on a global basis, taking into account any FR commitments with PNGC. As BEC is
served from a different power supply source and interconnection point, power purchases will
continue to be separate and no specific savings will result from diversity with the other utilities.
Currently FR is a member of PNGC Power and receives services from the organization related to
planning, reporting and operations of power supply and transmission. LVE is a member of
Northwest Requirements Utilities (NRU) which provides information and advocacy services
related to power supply and transmission. There is overlap between the services provided by
these two organizations, and LVE provides some of its own reporting using internal staff
compared to FR’s use of reporting services from PNGC. Note that BEC recently exited from
Southern and the costs associated with that exit have already been included in retail rates.
For utility owned transmission, planning will need to be done on an integrated basis for the
consolidated utility. Whether or not there are benefits associated with a direct interconnection
between the utilities is something that should be examined by engineering staff after the
consolidation. One benefit of the consolidation would be a reduction in time and reporting
associated with WECC. Due to some inadvertent flows from LVE to FR, WECC reporting for LVE
is more complex than for a typical distributing utility. This will no longer be an issue after the
consolidation.
Distribution planning and operations will continue to be examined on a local level, however,
standards and operating criteria will need to be standardized for the consolidated utility. As with
other functions, this is best completed by studying the alternatives cooperatively among existing
staff. While it is expected that crews will be maintained at the current locations spread
throughout the combined service area, those crews will need to adhere to any new standards
and protocols established for the new utility. It is expected that cross-training of staff between
the existing utilities will provide benefits and that new safety and other employee training will
be done in a coordinated manner.
Public Relations and Communications
With a consolidation, communication with members will be a critical factor. This includes
information made publically available during the decision-making process, information required
prior to the FR membership vote, and information that is important for the membership in
preparation for a consolidation once an agreement is reached. While the majority of this will be
aimed at members, it will be important to inform employees of the status of the potential
consolidation and what it will mean to them personally as well as how the new utility will operate.
BEC and LVE recently managed a successful communication plan associated with the
management agreement.
POTENTIAL CONSOLIDATION BETWEEN LVE, FR AND BEC
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During the decision-making process it will be important to provide a limited amount of
information ahead of the process so that rumors and misinformation are not spread among staff
and members.
For the membership vote required by the utilities, and specifically in the case of FR where a 2/3rd
of full membership vote is required, background information will need to be distributed to
explain the rationale for the consolidation, the potential savings and how the Board of Directors
will work under the new utility. Generally this type of information is distributed through direct
mailings and advertising as well as open meetings to allow for a presentation along with the
ability for members to ask questions. At the same time, meetings with staff would need to be
held to ensure their concerns and questions are answered. It is typical to provide a list of
frequently asked questions and answers to cover details associated with the consolidation. The
utilities are working on a coordinated effort to determine what would be required for the
membership vote in each case and the cost for that process has been excluded from this study
as it would occur prior to a final consolidation agreement.
If a consolidation is approved, a detailed public relations plan will need to be developed to
prepare for the consolidation. This would need to address branding, advertising and direct mail
and bill stuffer communications. Members will need to be made aware of how the changes will
affect them in terms of rates, reliability, contacting the utility, where to pay bills, etc. The plan
will also need to address the roll out of the new name, signage, contact numbers and addresses
for the utility.
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Economic Analysis
To quantify the potential efficiencies associated with the potential consolidation between FR,
BEC and LVE, the expected savings in expenditures for a combined utility were determined for
various system accounts. Savings were expected to occur in staff salaries and benefits, reduced
consultant and contractor costs, reductions in publications, public relations and advertising,
warehouse savings, and competitive bid savings. More details on quantifying savings in those
categories are provided below.
In all cases the individual utility budget by line item was used as the starting point for the analysis
of savings. The 10-year financial forecast for the utilities was also incorporated into the analysis,
and extended to run through 10 years after the potential consolidation. For the case of BEC, the
2016 budget was used as the starting point for both 2016 and 2017, as those years both reflect
having the management agreement with LVE in place. After 2017, it was assumed that in the
base case BEC would revert back to self-management. This required adding staff back into the
costs, reverting certain expense items back to the 2014 level, and eliminating the cost of the
management agreement.
A 2% rate of inflation was applied to all costs for the years 2016 through 2026. For those line
items where savings were expected, the percent of the budget that would be saved was
estimated to determine the total dollar savings expected in each year. The analysis then provides
a long-term estimate of costs for a combined utility in comparison to the sum of the two
individual utilities without a consolidation, assuming an implementation date of July 1, 2017. Any
accounts not specifically addressed in this section were assumed to be the same with or without
the potential consolidation.
To determine the overall impacts on members, the estimated savings were subtracted from the
forecast costs for the individual utilities combined, resulting in a net percent savings amount
related to the consolidation. In the future, rates may or may not be equalized between the
service areas. A more detailed discussion of rates is included in the next section.
To corroborate the potential savings, a look at benchmarking of staff and costs for other utilities
of the same size was completed. The Washington PUD Association provides a periodic
benchmarking report showing the staffing levels and various cost categories for the PUD’s in the
state. For the utilities of comparable size to LVE and FR the staff levels and expenses other than
power supply costs were well above LVE and FR current levels. For the larger utilities that would
be comparable to the size of the consolidated utility there were four comparable PUD’s that were
also BPA purchasers without their own generation to manage. Again, the staff levels for these
utilities were in the range of 150 staff compared to the total combined staff of LVE and FR of 106
for the electric business. Because of LVE’s and FR’s current levels of efficiency, we determined
that the benchmarking approach would not provide any relevant information regarding savings
associated with a consolidation.
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Staffing Reductions Through Retirements
LVE has a total electric staff of 60 and FR has a staff of 46 at the present time. BEC has a current
staff of 14 with the management agreement in place. It was assumed that three staff would need
to be added back in 2018 if the utility were to operate independently. For the gas/propane
business LVE has 5 staff and FR has 6 staff in addition to those working for the electric utility. The
utilities are facing some retirements over the next 5 years and by not replacing some those
positions total costs can be reduced. For purposes of this study positions have been categorized
into four categories, as follows:




Administrative
Member Services
Engineering
Operations
With a consolidated utility there will be some overlap in positions which will allow for reduced
staffing overall. There are two issues to consider when looking at reduced staffing. First, there
may be additional work during the first year or two of the consolidation and positions may not
be able to be eliminated immediately. Secondly, while not replacing retired staff will be the
approach used to reach reduced staffing levels, the retirements may not exactly line up with the
positions that are overlapping. For this reason it is expected that some staff may have to shift to
alternate positions or responsibilities may change for various positions. This report has not
assessed individual positions or responsibilities but rather looks at the overall needs in each of
the four categories relative to the expected retirements in each category to determine the overall
reduction that can be achieved.
Table 1 provides a summary of the number of staff by category for the utilities, as well as the
expected retirements as provided by the utilities. Note that this table includes both electric and
gas/propane employees.
Table 1
Staffing Levels and Retirements
Current Staffing Levels
Administrative
Member Services
Engineering
Operations
Total
1
LVE
FR
BEC
10
8
13
34
65
4
11
12
25
52
4
2
0
11
17
1
Expected Retirements (through 2021)
Total
LVE
FR
BEC
Total
18
21
25
70
134
5
2
5
13
25
0
1
4
3
8
0
1
0
3
4
5
4
9
19
37
Note that the staffing includes 3 administrative staff added to current levels in the year 2018.
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In examining both the overlapping positions and the expected retirements, the number of staff
that would be reduced each year by not replacing retired staff was estimated by category. Note
that specific staff or positions were not identified and the number from each utility was also not
identified. However, the eligible retirement status and positons of various staff at each utility
were considered when developing the expected reductions per year. The reductions for the
engineering and operations categories are less than the potential retirements. It is expected that
many of the positions will need to be filled in those two departments as retirements occur.
Table 2 provides the number of positions that would be reduced through retirement for each
year and in each category. It was expected that no reductions were applied to the first year as
there would be additional work required due to the transition to the consolidated utility. These
are estimated numbers per year and the actual timing may differ slightly based upon both needs
and staff preferred retirement dates. Also, reductions are assumed to be for the entire year,
although in actuality retirements may occur throughout the year. Based on the numbers, the
total reduction is roughly 5% per year for 2018 and 2019 and 5% in total for 2020 and 2021. This
results in 1 total reduction of 15% across the combined utility.
Table 2
Staffing Reductions Through Retirement
Administrative
Member Services
Engineering
Operations
Total
2017
2018
2019
2020
2021
Total
0
0
0
0
0
3
1
1
1
6
2
1
2
1
6
0
1
1
2
4
0
0
1
1
2
5
3
5
5
18
Note that in the case of BEC, it is assumed that three additional management/administrative staff
would be added to the utility in 2018 if a consolidation does not proceed. Because these are not
existing positions, they are not included in the staff reductions shown in Table 2. The costs for
these three employees are included for BEC without the consolidation starting in 2018, and are
not included in the cost of the consolidated utility. Therefore there will be savings shown for BEC
as a result of a consolidation, they just do not reflect a cut in existing staff.
To determine the dollar savings associated with these reductions, an average annual cost per
employee was estimated. While salaries differ among employees, for purposes of this study the
average level was used for each staff reduction as the specific staff members have not been
identified. There was little difference in the average amounts for the utilities. Based on total
labor and benefit expenses identified in the 2015 budgets for the two utilities, and the number
of staff, the average loaded cost per employee is roughly $93,000.
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After applying the average loaded cost to the number of reductions each year, the dollar savings
were estimated. Note that these cost savings have also been adjusted to account for inflation
each year. The results are provided in Table 3. Note that savings for 2018 are shown based on
annual salaries. Actual savings for that year would only apply for the latter 6 months of the year.
Table 3
Savings in Staff Expenses per Year
2017
Administrative
Member Services
Engineering
Operations
Incremental $ per Year
Cumulative $ per Year
$0
$0
$0
$0
$0
$0
Administrative
Member Services
Engineering
Operations
Incremental $ per Year
Cumulative $ per Year
$0
$0
$0
$0
$0
$0
Administrative
Member Services
Engineering
Operations
Incremental $ per Year
Cumulative $ per Year
$0
$0
$0
$0
$0
$0
20182
2019
2020
Consolidation of LVE and FR Only
$296,077
$201,332
$0
$98,692
$100,666
$102,680
$98,692
$100,666
$205,359
$98,692
$201,332
$102,680
$592,154
$603,997
$410,718
$592,154
$1,207,994 $1,642,872
Added Savings with BEC
$441,0003
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$441,000
$0
$0
$441,000
$449,820
$458,816
Consolidation of LVE, FR and BEC
$737,077
$201,332
$0
$98,692
$100,666
$102,680
$98,692
$100,666
$205,359
$98,692
$201,332
$102,680
$1,033,154
$603,997
$410,718
$1,033,154 $1,657,814 $2,101,689
2021
Total
$0
$0
$104,733
$104,733
$209,466
$1,885,196
$523,666
$314,199
$523,666
$523,666
$1,885,196
$1,885,196
$0
$0
$0
$0
$0
$467,993
$467,993
$0
$0
$0
$467,993
$467,993
$0
$0
$104,733
$104,733
$209,466
$2,353,189
$991,658
$314,199
$523,666
$523,666
$2,353,189
$2,353,189
The total savings associated with staff reductions ranges from over $1.0 million in 2018 (reflects
12 months of savings) to $2.35 million by the year 2021. This reflects a 15% reduction in staff
costs and a 2.4% savings to the electric utility overall by year 5 of the consolidation.
Contracts, Material & Supplies
The next largest category of savings is for contracts with outside parties and materials and
supplies that can be reduced. These estimates come from specific accounts in the budget and
2
Reflects annual savings is labor costs for the year. For BEC the savings would occur mid-2018 when the
management agreement expires. When BEC labor savings are calculated in total for subsequent tables, only 6
months of these savings would apply.
3
Based on expected cost for senior staff required rather than the average per employee used for other categories.
Note that only $352,893 of this would be expensed and the rest would be capitalized. However the full amount is
included as savings for the year.
POTENTIAL CONSOLIDATION BETWEEN LVE, FR AND BEC
12
PRIVILEGED AND CONFIDENTIAL
are for expense items not associated with labor costs.
Expense savings were developed by looking at those functions that contained overlap between
the utilities and would therefore first be combined and then reduced under the consolidation
scenario. For example, each utility subscribes to professional publications to inform its staff
members. As individual utilities, each might subscribe to the same publication and therefore
together they pay for and receive 2 or 3 copies of the same thing. After the consolidation this
overlap could be eliminated and only one copy ordered. But it is not expected that all of these
costs would be split in half. In the example, there may be some national or regional subscriptions
that overlap and others that are local and therefore do not overlap.
To estimate the savings for each line item where overlap was identified, the total costs for each
line item were summed for LVE, BEC and FR as the starting point. From there, a percent savings
would be expected in each year was determined. For example, if the utilities have the same
expenses associated with publications, then a 40% reduction in the combined cost was applied.
In some cases, cost savings were capped at 40% because although there may be duplication of
items, the cost may be greater as the utility would be larger with more staff and more employees.
Once the reductions in expenses were calculated for the identified line items, they were summed
into general categories to match with the overall financial forecast structure. The following table
provides the cost per line item and the expected % savings achieved each year.
The majority of the savings is within the A&G category for expenses such as computer-related
costs, membership dues and Board-related costs. Costs savings in the O&M category do not
include any savings or reduction in service levels associated with maintenance of facilities. Costs
savings for this category are limited to more efficient training for a combined staff and outside
contracting.
Whereas the staffing level savings were projected to occur over a 5-year period, the expense
savings are projected to occur within a 3-year period. In this case, there are some areas where
savings would occur in the first year of the consolidation, although it would reflect only the
second half of the year.
POTENTIAL CONSOLIDATION BETWEEN LVE, FR AND BEC
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PRIVILEGED AND CONFIDENTIAL
Table 4
Line Item Expenses and Potential Savings Percent
2015
Combined
Budget
(LVE + FR)
2015
Combined
Budget
(LVE+FR+BEC)
2017
%
Savings
2018
%
Savings
2019
%
Savings
Computer Software/Equipment/Fees
$589,749
$650,749
0%
20%
40%
Holiday Party, Longevity
$51,880
$51,880
10%
25%
40%
Outside Consultants
$58,260
$95,751
10%
25%
40%
Legal Costs
$120,343
$170,343
0%
25%
50%
Auditor Fees
$27,800
$43,309
0%
20%
40%
Publications
$6,779
$6,779
0%
5%
10%
Dues (Excluding Power Supply)
$219,198
$261,198
15%
25%
30%
Public Relations/Advertising
$47,684
$89,684
20%
30%
40%
Meeting Expenses
$172,229
$207,229
5%
20%
40%
Board Expenses/Annual Meeting
$398,457
$629,305
5%
30%
50%
$1,692,379
$2,206,227
Communications/Newsletters
$85,055
$97,308
10%
20%
40%
Bank Fees
$60,576
$60,576
20%
30%
40%
Credit Card Merchant Fees
$272,755
$272,755
0%
5%
10%
Subtotal
$418,385
$430,638
Employee Training
$151,879
$188,787
25%
50%
50%
Safety Training
$98,131
$98,131
25%
50%
50%
Contract Labor & Materials
$1,696,501
$1,796,501
5%
15%
25%
Subtotal
$1,946,511
$2,083,419
TOTAL
$4,057,275
$4,720,284
Administrative & General
Subtotal
Customer Service
Operations & Maintenance
Based on the 2015 expenses and the percent savings, Table 5 provides the savings expected in
each year when all three utilities are consolidated. As the percent savings reflect the cumulative
savings in each year, the total savings as shown in Table 5 are also cumulative amounts. In
addition, inflation has been used to adjust the savings for each year. After year 3 the savings are
expected to continue for the entire 20-year period.
POTENTIAL CONSOLIDATION BETWEEN LVE, FR AND BEC
14
PRIVILEGED AND CONFIDENTIAL
Table 5
Line Item Expenses and Potential Savings
2017
Savings
2018
Savings
2019
Savings
$0
$5,398
$9,962
$0
$0
$0
$40,762
$18,662
$10,780
$32,736
$118,300
$138,116
$13,764
$25,403
$45,192
$9,192
$360
$69,296
$28,552
$43,983
$200,347
$574,205
$281,757
$22,463
$41,458
$92,192
$18,752
$734
$84,819
$38,831
$89,724
$340,590
$1,011,319
$10,124
$12,605
$0
$22,728
$20,653
$19,285
$14,472
$54,410
$42,132
$26,228
$29,524
$97,883
Subtotal
$49,104
$25,524
$93,454
$168,081
$100,171
$52,069
$285,969
$438,209
$102,175
$53,110
$486,148
$641,432
TOTAL
$309,110
$1,066,824
$1,750,634
Administrative & General
Computer Software/Equipment/Fees
Holiday Party, Longevity
Outside Consultants
Legal Costs
Auditor Fees
Publications
Dues (Excluding Power Supply)
Public Relations/Advertising
Meeting Expenses
Board Expenses/Annual Meeting
Subtotal
Customer Service
Communications/Newsletters
Bank Fees
Credit Card Merchant Fees
Subtotal
Operations & Maintenance
Employee Training
Safety Training
Contract Labor & Materials
With LVE and FR only, the total savings associated with these overlapping expenses is $1.45
million, or nearly 10% of total combined O&M and A&G costs. This also reflects a savings of 1.7%
of the total combined revenue requirement after three years. Adding BEC to the consolidation
provides an incremental savings of $300,000. A large portion of this savings results from separate
training for BEC staff and contract labor which would be required if BEC was a standalone utility.
The final savings with all three utilities, as shown in Table 5, are $1.75 million, reflecting 11%
savings to combined O&M and A&G costs and 1.9% of the total combined revenue requirements
after three years.
POTENTIAL CONSOLIDATION BETWEEN LVE, FR AND BEC
15
PRIVILEGED AND CONFIDENTIAL
Capital Cost Savings
With a consolidation, it is expected that some savings will occur for capital related costs. One of
these savings would come from maintaining a smaller inventory as the inventory for larger items
could be shared. A second type of savings would occur from being a larger utility and benefitting
from more competitive bidding on equipment and contracts. A third type of savings would be
from the consolidation of offices in the future.
For LVE and FR alone, warehouse savings are estimated at $10,000 per year and competitive
bidding savings are estimated at $10,000 per year. For BEC, another $10,000 for warehouse and
$10,000 for competitive bidding savings would be expected, however, savings would begin
earlier as they are already taking place under the management agreement and would continue
automatically with a consolidation.
Office consolidation savings are estimated at $50,000 per year starting in year 5. This savings
reflects the utility, maintenance and other operating costs for the facility as well as avoidance of
rent, rental income for leasing unused space or amortization of the sale of a building.
Table 6
Capital Related Savings
2017
2018
2019
2020
2021
Consolidation of LVE and FR Only
Warehouse Savings
$0
$10,000
$10,200
$10,404
$10,612
Competitive Bidding
$0
$10,000
$10,200
$10,404
$10,612
Office Consolidation
$0
$0
$0
$0
$50,000
Total per Year
$0
$20,000
$20,400
$20,808
$71,224
Added Savings with BEC
Warehouse Savings
$5,000
$10,000
$10,200
$10,404
$10,612
Competitive Bidding
$5,000
$10,000
$10,200
$10,404
$10,612
Office Consolidation
$0
$0
$0
$0
$0
$10,000
$20,000
$20,400
$20,808
$21,224
Total per Year
Consolidation of LVE, FR and BEC
Warehouse Savings
$5,000
$20,000
$20,400
$20,808
$21,224
Competitive Bidding
$5,000
$20,000
$20,400
$20,808
$21,224
Office Consolidation
$0
$0
$0
$0
$50,000
$10,000
$40,000
$40,800
$41,616
$92,448
Total per Year
In total, for LVE and FR alone these items are expected to provide savings of roughly $71,000 per
year, or 0.1% of total costs for the combined utility. Greater savings occur through BEC because
the smaller size of the utility provides less efficiency in warehousing and competitive bidding.
With all three utilities consolidated, the cost savings would be $92,000 by the year 2021.
POTENTIAL CONSOLIDATION BETWEEN LVE, FR AND BEC
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PRIVILEGED AND CONFIDENTIAL
Transition Costs
While a consolidation is expected to save money for the utility over time, there will be some upfront costs associated with the consolidation of operations. Costs for these items would occur
prior to or in the first year of the consolidated operation. For LVE and FR alone, these added
costs are estimated to include $50,000 each for legal and outside services, advertising and
communications, and computer/billing system integration. An additional $30,000 is estimated
for employee transition costs. In total, the costs for the transition would be $180,000 in total.
Adding BEC to the consolidation would not double the transition costs because some tasks would
be combined and other expenses already occurred as a result of the management agreement.
An incremental transition cost of $50,000 was assumed for BEC. This results in total transition
costs of $230,000.
One potential transition cost that has not been identified is the cost associated with any early
retirement benefits that may be offered. While retirements and attrition are expected to account
for the staff reductions, it may be necessary to offer some benefits packages to entice staff to
take retirement a little early. The economics of this type of program would be examined at a
later time as necessary to determine if the savings would offset the costs of the program.
These costs do not include costs incurred by the utilities individually prior to the consolidation or
the overlap of staff during the transition period to help with the transition.
Total Electric Utility Savings
Table 7 summarizes the cost savings by category for the year 2021.
Savings are broken down into O&M, Customer and A&G categories. There are no expected
savings in power supply costs. One additional issue for BEC is outstanding debt with RUS. BEC
has $7.4 million in debt with RUS. Under a consolidation, holding onto that debt would lead to
LVE and FR losing a current discount on their outstanding debt with CFC, as well as an additional
administrative and reporting burden. For that reason it was assumed that the RUS debt would
be prepaid. The prepayment would incur a $1.5 million penalty, so a total of $8.9 would need to
be refinanced. The interest rate is expected to be slightly lower, with an expected incremental
cost of $42,734 that would be an offset to the savings estimated for BEC.
POTENTIAL CONSOLIDATION BETWEEN LVE, FR AND BEC
17
PRIVILEGED AND CONFIDENTIAL
Table 7
Estimated Savings by 2021 by Category
Consolidated
LVE & FR Savings
Incremental BEC
Savings
Consolidated LVE, FR
and BEC Savings
$0
$0
$0
$1,047,331
$0
$1,047,331
O&M Expenses
$618,410
$48,936
$667,346
Warehouse
$10,612
$10,612
$21,224
Bidding
$10,612
$10,612
$21,224
Subtotal O&M
$1,686,965
$70,160
$1,757,126
Customer Labor
$314,199
$0
$314,199
Customer Expenses
$92,580
$0
$92,580
Subtotal Customer
$406,779
$0
$406,779
A&G Labor
$523,666
$449,820
$973,486
A&G Expenses
$762,985
$289,191
$1,052,176
Office Consolidation
$50,000
$0
$50,000
$1,336,650
$739,011
$2,075,661
$0
-$49,734
-$49,734
$3,430,395
$766,438
$4,196,832
Power Supply
O&M Labor
Subtotal A&G
Prepayment of RUS Debt
Net Savings
When the various types of savings are summed together, the total savings estimated for the
potential consolidation of LVE and FR alone reach a total of roughly $3.4 million per year by year
5. This reflects percent savings of 19% for the costs that the utility can control, namely O&M and
A&G costs. When compared to total costs, the percent savings is 3.9%. When the savings are
estimated for the entire 10-year period, the total is $21.1 million in net present value.
Adding BEC to the consolidation adds a considerable amount of additional savings relative to the
size of BEC. Because of BEC’s smaller size, there are naturally less efficiencies than for LVE and
FR. Adding the customers from BEC to the consolidated utility does not add significant costs to
the A&G for a consolidated utility.
The total savings for a three-way consolidation are $4.2 million per year by year 5. This reflects
savings of 20% for O&M and A&G costs, and 4.3% relative to the total costs for the consolidated
utility. The 10-year net present value of combined savings is $26.7 million.
The annual costs of the consolidated utility, the savings and the % savings per year are shown in
Table 8.
POTENTIAL CONSOLIDATION BETWEEN LVE, FR AND BEC
18
PRIVILEGED AND CONFIDENTIAL
Table 8
Annual Savings Associated with Consolidation
Consolidated Utility
Costs
Annual Savings
% Savings O&M/A&G
Costs
% Savings Total Costs
Consolidation of LVE and FR Only
4
$82,667,070
$36,369
0.2%
0.0%
2018
$83,802,822
$1,495,990
8.8%
1.8%
2019
$83,423,559
$2,678,351
15.4%
3.1%
2020
$86,829,243
$3,125,527
17.6%
3.5%
2021
$85,440,045
$3,430,395
19.0%
3.9%
2022
$88,098,391
$3,481,893
18.9%
3.8%
2023
$89,700,443
$3,534,422
18.8%
3.8%
2024
$92,195,105
$3,588,001
18.7%
3.7%
2025
$94,224,071
$3,642,651
18.6%
3.7%
2026
$97,270,541
$3,698,395
18.5%
3.7%
2017
Added Savings with BEC
2017
$8,745,972
$202,036
7.7%
2.3%
2018
$8,206,496
$769,153
27.1%
9.4%
2019
$8,281,713
$714,038
25.1%
8.6%
2020
$8,440,054
$735,612
25.3%
8.7%
2021
$8,592,741
$766,438
25.8%
8.9%
2022
$8,749,482
$796,881
26.3%
9.1%
2023
$8,909,357
$827,933
26.7%
9.3%
2024
$9,072,430
$859,606
27.1%
9.5%
2025
$9,238,764
$891,912
27.6%
9.7%
2026
$9,408,425
$924,865
28.0%
9.8%
Consolidation of LVE, FR and BEC
4
2017
$91,413,042
$238,405
1.3%
0.3%
2018
$92,009,317
$2,265,144
11.5%
2.5%
2019
$91,705,272
$3,392,389
16.8%
3.7%
2020
$95,269,297
$3,861,139
18.8%
4.1%
2021
$94,032,786
$4,196,832
20.0%
4.5%
2022
$96,847,873
$4,278,774
20.0%
4.4%
2023
$98,609,800
$4,362,354
19.9%
4.4%
2024
$101,267,535
$4,447,607
19.9%
4.4%
2025
$103,462,835
$4,534,564
19.9%
4.4%
2026
$106,678,966
$4,623,260
19.9%
4.3%
Note that 2017 savings reflects 6 months rather than a full year of savings.
POTENTIAL CONSOLIDATION BETWEEN LVE, FR AND BEC
19
PRIVILEGED AND CONFIDENTIAL
Gas/Propane Savings
While the gas and propane utilities serve fewer customers and have smaller budgets than the
electric utility, it is expected that there will be additional savings on the gas side of the business.
Some of these savings may have been captured with the reductions in administrative staff over
time as those staff contribute to both the electric and gas/propane utilities. We have not
identified specific line item savings associated with the gas/propane utility for this study.
However, percent savings are likely to be of a similar magnitude as for the electric utility, in the
range of 4% per year. Given combined costs for the gas /propane businesses of roughly $12
million per year, the expected savings would be in the range of $600,000 per year for LVE and FR
alone. This places the combined savings for electric and gas/propane at roughly $4 million per
year for LVE and FR alone.
Currently, BEC does not provide propane service to its members. The ownership structure of the
gas/propane business will need to be reviewed on a legal basis as the requirements differ by
state. After the consolidation, additional benefits could be achieved by expanding the propane
business. Direct benefits to members of improved access to propane have not been quantified.
The utility would benefit because of the sharing of overhead costs between the electric and
propane business. It is estimated that $50,000 to $100,000 of overhead costs per year could be
shared by the propane business over time and included in the cost of propane. This would
provide an equivalent reduction in cost assigned to the electric business. Direct staff costs and
other expenses associated with the propane business would also be included in the cost of
propane sold to customers and would therefore not impact electric customers.
Given these additional benefits, the net combined savings for electric and gas/propane when all
three utilities are included in the consolidation would be roughly $4.8 million per year.
While this represents significant savings associated with the gas/propane business, this study has
not quantified the additional benefits that may be possible. With a consolidated service area,
there are ample opportunities to expand the gas and propane business in the consolidated
service area, without incurring added overhead costs. This could lead to rate reductions for all
gas and propane customers.
POTENTIAL CONSOLIDATION BETWEEN LVE, FR AND BEC
20
PRIVILEGED AND CONFIDENTIAL
Rate Comparisons
With a consolidation, the combined utility will need to decide on how to treat rates for the
different utilities. Both the level of the rates as well as the rate structure differs between the two
utilities at the present time. Whether rates continue to remain different for the service areas or
consolidated into one rate is a decision to be made. It is often the case with a consolidation that
rates remain separate for some fixed amount of time to help lessen the impacts. This section
discusses the issues to consider regarding rates but does not propose any specific plan for rates.
That is a decision for the Board of the potentially consolidated utility to evaluate in the future.
Rate Consolidation
Currently FR rates are significantly higher than LVE rates, in large part due to the fact that the FR
service area is less dense than the LVE service area and the average electric use per customer is
lower. BEC rates are even higher than FR, due to even lower density and average use per
customer. Historically, higher rates for BEC were also due to power supply costs, but those costs
have been significantly reduced with corresponding rate reductions. The other factor would be
the economies of scale for that differ among the utilities, with larger utilities able to spread
administrative costs over a large amount of sales. Because of the difference in current rate levels,
careful consideration will need to be given as to whether the rate differential should continue or
whether rates should be consolidated at some point.
There are instances where rates remain separate indefinitely after a consolidation or acquisition,
some cases where the rates of one utility are applied to the entire combined utility right away,
and some cases where combined rates are phased-in over time. In the case of acquisitions for
investor-owned utilities there is often a requirement that rates are frozen for some set amount
of time before any changes can be made. This reflects the argument made by the utility that
costs will not increase as a result of the acquisition.
Under a scenario where the utility plans to keep rates differentiated by service area there are
several ways to accomplish this. To keep cost-based rates for all three service areas, costs would
need to be tracked separately over time. This would include maintaining separate assets lists
and employees for items that would not be shared, such as the cost of meters and meter reading.
For shared costs, such as accounting and the annual meeting costs, the costs would need to be
allocated between the two service areas on the basis of customers and/or sales. An alternative
would be to establish a fixed split between assets and costs based on current costs for the
utilities, and apply that split to all costs in the future. Another approach would be to establish
the percent increase required for the utility as a whole and apply the same percent increase to
the current rates for each utility. While any of these approaches would work well for the short
term, the only method to ensure long-term equity between customers would be to maintain the
tracking of costs by service area. This approach would require a greater level of effort, and
potentially a higher cost overall.
Given the differences in the rate designs between LVE, BEC and FR, it is recommended that some
POTENTIAL CONSOLIDATION BETWEEN LVE, FR AND BEC
21
PRIVILEGED AND CONFIDENTIAL
of the rate design features be standardized over time even if rates are never consolidated. This
will allow for better understanding from customers, easier administration by the utility and allow
for the potential to consolidate rates in the future. This would not necessarily need to be done
overnight but may be incorporated over one or two rate increases.
In terms of a potential consolidation of rates, there are several options that could be used to
phase-in new rates. The first option would include different rate increases for the utilities to
move towards rate equity over time. A second option would be to freeze rates for BEC and FR
and apply all rate increases to LVE (and FR later on) until rates are equalized. A third option
would be having a common rate but apply a rider to FR and BEC rates to reflect the current
difference between them. In this case the riders could be reduced over time if desired.
Comparison of Current Rates
LVE, BEC and FR are different in size, mix of customers and average rates. Table 9 below provides
a summary of the sales and revenues for the various utilities, as well as average use and average
revenue by class. Note that for LVE and FR the information is based on 2014 actuals while BEC
data is based on the 2016 budget. Because BEC implemented a 10% rate decrease after the
budget was developed, the revenues were reduced by 10% to provide an up to date comparison.
BEC is also considering an additional 5% rate decrease later this year that is not included in the
table.
In general, LVE is bigger than FR with roughly 70% more customers and about 150% more sales.
In turn, FR is larger than BEC, with more than double the number of customers and over four
times the amount of sales.
Both LV and FR have roughly 55% of their sales coming from the residential class, while BEC has
80% of its sales from residential customers. FR has a much larger irrigation class with 16% of
sales compared to 5% for BEC and only 1% at LVE. LVE has more commercial sales with 43% of
its sales from commercial customers compared to 29% for FR and 15% for BEC.
POTENTIAL CONSOLIDATION BETWEEN LVE, FR AND BEC
22
PRIVILEGED AND CONFIDENTIAL
Table 9
Sales and Revenue Comparison
Fall River
Lower Valley
Beartooth5
Combined
Number Customers
Residential
12,831
20,162
5,518
38,511
Commercial
2,181
4,814
374
7,369
Irrigation
629
186
112
927
Lights
N/A
1,552
N/A
N/A
Total
15,641
26,714
6,004
Annual MWh Sales
48,359
Residential
156,254
407,140
51,314
614,708
Commercial
83,227
309,106
9,750
402,083
Irrigation
45,923
4,075
2,894
52,891
Lights
N/A
635
N/A
N/A
Total
285,404
720,956
63,958
1,070,318
Revenue ($000)
Residential
$17,701
$24,786
$7,512
$49,999
Commercial
$6,928
$17,227
$1,186
$25,341
Irrigation
$3,125
$240
$399
$3,764
Lights
$56
$125
$47
$228
Total
$27,810
$42,377
$9,145
$79,332
Average Use per Customer
Residential
12,178
20,193
9,299
15,962
Commercial
38,160
64,210
26,088
54,566
Irrigation
73,010
21,907
25,835
57,057
Lights
N/A
409
N/A
N/A
Total
18,247
26,988
10,653
22,133
Average $/ kWh
5
Residential
$0.113
$0.061
$0.146
$0.081
Commercial
$0.083
$0.056
$0.122
$0.063
Irrigation
$0.068
$0.059
$0.138
$0.071
Lights
N/A
$0.196
N/A
N/A
Total
$0.097
$0.059
$0.143
$0.074
Reflects 2016 forecast values after 10% rate decrease.
POTENTIAL CONSOLIDATION BETWEEN LVE, FR AND BEC
23
PRIVILEGED AND CONFIDENTIAL
In addition to the differences in overall size and mix of customers, LVE has the largest average
use per customer for both the residential and commercial class. Again, BEC average use is lower
than that for FR. For the irrigation class, however, FR has not only more customers but much
larger customers.
Overall, average rates per kWh for BEC are the highest at 14.3 cents per kWh compared to 9.7
cents per kWh for FR and 5.9 cents per kWh for LVE. This is a difference of 47% between BEC
and FR and a difference of 66% between FR and LVE. These differences are a result of different
densities between the utilities, different average use levels and different power supply sources.
These results for LVE and FR are based on 2014 actual sales and revenues. When sales and
revenues are projected for the future, some differences are seen. This may be in part due to the
wholesale power rate increases recently put in place by BPA and partly to conservative
projections in some cases. Based on the long-term cost and sales projections associated with
each utility, the rate differential between LVE and FR is expected to be reduced to 43% by the
year 2017 and to 45% for the difference between FR and BEC. Note that BEC is considering
another 5% rate decrease later this year, which would further reduce the difference in rates
between BEC and FR. Because that rate decrease has not yet been approved or implemented, it
is not included in the rate comparisons.
Residential Rates
In looking at the potential for combined rates in the future, the issue of the average revenue as
well as the rate design is an important consideration. For the residential class, the average rate
per kWh is 6.1 cents for LVE, 11.3 cents for FR and 14.6 cents for BEC. This reflects an 86%
differential between LVE and FR and a 29% differential between FR and BEC. This differential is
larger than for the other classes but is likely due to the large difference in use per residential
customer and the fact that fixed expenses associated with the T&D system must be spread over
fewer kWh sales. Table 10 shows the rate structures for the different utilities.
Table 10
Residential Rates
Line/Service Charge
Block 1 (first 2000 kWh)
Block 2 (over 2000 kWh)
Fall River
Lower Valley
Beartooth
$36.00
$16.00
$33.50
$0.05193
$0.10316
per kWh
$0.05193
$0.10316
per kWh
$0.07427
$0.08765
per customer per month
The residential rate for FR has a higher service charge and has inverted block rates. Beartooth
has a slightly lower service charge than FR and a flat energy rate. LVE also has a lower service
charge and a flat rate energy charge. To prepare for consolidation, if desired, rates would need
to move towards a consistent service charge and have either an inverted rate or flat rate for all
service areas.
POTENTIAL CONSOLIDATION BETWEEN LVE, FR AND BEC
24
PRIVILEGED AND CONFIDENTIAL
Commercial Rates
All utilities have two different classes for commercial customers, although the revenues and sales
are shown for the two rates combined. In addition, BEC has a separate industrial rate. The
average commercial rate per kWh is 12.2 cents for BEC, 8.3 cents for FR and 5.6 cents for LVE.
This reflects a 46% difference between BEC and FR and a 49% difference between LVE and FR.
Table 11 shows the rate structures for small and large commercial/industrial customers for the
utilities.
Table 11
Commercial Rates
Fall River
Lower Valley
Beartooth
$36.00
$16.00
$33.50
$0.05551
$0.05193
$0.101408
Small GS/Commercial
Line/Service Charge
Energy Rate
Demand Charge
$8.17
per customer per month
per kWh
per kW per month
GS/Large Power
Line/Service Charge
Energy Rate
Demand Charge
$121.80/218.25
$58.00
$0.05284
$0.03489
$0.062778/$0.065797
$8.17
$6.91
$12.40
per customer per month
per kWh
per kW per month
The FR rates contain the same demand charge for both small and large customers but has a higher
system charge and lower energy charge for large customers. LVE has a service charge for small
customers only and a demand charge for large customer only. The energy rate is significantly
lower for large customers due to the addition of the demand charge. BEC has a service charge
for small commercial, large commercial and industrial rates. They do not have a demand charge
for small commercial customers but have a high demand charge for both large commercial and
industrial customers. To prepare for consolidation, if desired, the utility needs to decide whether
a system charge, demand charge, or both should be applied to the different classes. The
qualifying loads for each class should also be equalized.
Irrigation Rates
LVE and FR have different rates for small and large irrigators while BEC has one rate for all sizes.
FR has one irrigation rate with different terms by size while LVE has a separate small and large
rate. For small irrigators, FR has an annual HP charge, a demand charge and an energy charge.
LVE has a service charge plus an energy charge but no demand charge. It also has an optional
charge that eliminates the service charge but has a higher energy charge. BEC has a service
charge, demand charge and energy charge. For large irrigators FR has the same rate as for small
irrigators, however, the HP charge is higher.
POTENTIAL CONSOLIDATION BETWEEN LVE, FR AND BEC
25
PRIVILEGED AND CONFIDENTIAL
There is also a difference in billing, with BEC charging the service charge for 6 months while LVE
charges for all 12 months and FR charges an annual amount but on a per HP basis.
The average irrigation rate per kWh is 6.8 cents for FR and 5.9 cents for LVE, reflecting a 16%
difference. The BEC average rate is twice that of FR. Table 12 shows the rate structures for small
and large irrigation customers for the utilities.
Table 12
Irrigation Rates
Fall River
Lower Valley
Beartooth
$16.00
$121.80
$0.05456
$0.057036
Small Irrigation
Line/Service Charge
Annual HP Charge
Energy Rate
Demand Charge
$21.00
$0.03037
per customer per month
per HP per year
$12.40
$1.44
per kWh
per kW per month
Large Irrigation
$121.80
Line/Service Charge
Annual HP Charge
Energy Rate
Demand Charge
$30.87
$0.03037
$1.44
per HP per year
$0.03489
$0.057036
$6.91
$12.40
per kWh
per kW per month
The FR and BEC rates are more complicated than those for LVE, and all FR irrigators are billed on
demand requiring a demand meter for each. As FR has a much larger irrigation load, it is
important that those customers are not unduly harmed in terms of changing rates under a
consolidation. To prepare for consolidation, if desired, the utility will need to decide whether it
should apply a demand charge to all irrigators, whether the HP charge should continue and if a
service charge should be used.
Rate Impacts of Consolidation
As stated earlier, while the 2014 differential in rates between LVE and FR was 66%, this
differential is expected to be 43% by the year 2017 and beyond. The differential between FR and
BEC are expected to be 45% in the future, and possibly lower if BEC implements another 5%
decrease later in 2016.
No agreement has been reached as to whether rates would continue to be differentiated by
region or how savings would be shared between the utilities. In total, the savings associated with
the consolidation would be passed on to customers, whether it be equally across all three areas
or not. Given that the percent savings reaches 4.3% by year 5 of the consolidation, it is expected
that rates can be reduced by an equivalent amount.
POTENTIAL CONSOLIDATION BETWEEN LVE, FR AND BEC
26