PEACE COUNTRY REA
A FEASIBILITY STUDY TO BECOME A SELF-OPERATING REA
BY PATHFINDERS PROFIT CONSULTANTS CA
September 2012
1
Table of Contents
Page
Letter from the PCREA Board of Directors
4
Letter of Recommendation Pathfinders Profit Consultants
5
Self-Operating Feasibility Study Overview
6
Background on Peace Country REA
8
Report Summary
9
Discussion and evaluation of Option 1 (Base Case)
11
Discussion and evaluation of Option 2 (Project Case)
REA and Facility Overview
Discussions on how each of the REAs visited function
Summary of key points April 19, 2012
11
12
12
14
Facility Mobilization
Pro – Forma Balance Sheet
Land
Inventory
Structures
Operations Equipment
Brushing Equipment
Shop Equipment
Office Furniture and Equipment
Communications and Other Field Safety Equipment
Computer Equipment
New Loans
Loan Payment Schedule
14
15
16
17
17
18
18
19
19
19
20
20
21
Financial Model
Creating a Pro-forma or Budget Model Profit and Loss Statement
Notable points of the Pro Forma Financial Statements
Pro Forma Profit & Loss Statement for PCREA
Energy
Three Components of an Electricity Bill
The Web Site of South Alta REA contains their Energy Policy
Transmission Charges & Distribution Charge (O&M)
Pro – Forma Cash Flow Projections Years 2014 – 2023
Cash Flow Assumptions and Estimates Chart
22
22
22
23
24
24
25
25
26
29
2
Impact of a Sale of PCREA on ATCO’s Farm Rate
Member Rate Comparisons
Self-Operating vs. Impact of PCREA Purchase on ATCO Farm Rates
30
31
32
Other Areas of Focus for Mobilization
Finding and Hiring a General Manager for PCREA
Finding and Hiring Linemen
Finding and Hiring Administrative Staff
Timing of the move to a “Self-Operating” REA
35
35
35
35
35
Potential Enhancements to Self-Operating PCREA
New PCREA construction investment policy
Upgrades of transformers and breakers
Back-up Power option buy/rent
36
36
36
36
Discussion and evaluation of Option 3 (Selling Assets to ATCO)
36
Conclusion
37
Appendices
Pictures of SAREA Shop and Admin
Pictures of NPPREA Shop and Admin
Pictures of LLREA Shop and Admin
Pictures of WRREA Shop and Admin
Pictures of PCREA Current Admin Building and Land
Comparison prepared by South Alta REA to ATCO Farm Rate
Impact of PCREA Purchase by ATCO on ATCO’s Farm Rates
Other PCREA RRO and Contract Monthly Rate Comparisons
Self-Operating Rates vs. Current ATCO Farm Rates
Current Rates vs. Impact of PCREA Purchase on ATCO Farm Rates
Current Rates vs. Current ATCO Farm Rates
Job Description of a Lineman
A1
A2
A3
A4
A5
A6
A7
A8
A9
3
Peace Country REA Members
Your Board of Directors of PCREA are pleased to be able to provide you with this significant information
on Self-Operating that many of you said you needed in order to make the best informed decision on
whether to sell or retain the REA. Retaining the REA will mean moving to a Self-Operating strategy as
operating as we are now is not a viable option. The data comparison, therefore contrasts the SelfOperating Option to a Sell Option which reflects the cost of energy under ATCO and the resulting cost
for ATCO to recover their investment of $66,083,158 and provide a guaranteed return of up to 9% on
that investment.
The costs and revenues prepared for our Self-Operating REA were validated by the Consultant and
compared in detail to two other Self-Operating REA’s. This indicated that our costs and revenues are
achievable. The seven other Self-Operating REA’s in the province, representing 37,000 members, are
able to offer lower Contract and RRO (Regulated Rate Option) rates and have done so consistently for 5
or more years.
The data indicates we can finance the necessary capital additions, their replacements over time, and
replenish and grow the Deposit Reserve to over $ 2,000,000. This being done while consistently
providing the lowest monthly energy cost to each member.
Another important consideration is that of Service Levels. The Linemen will only be servicing REA lines
and equipment and therefore can be focused on preventative repairs giving us a reliable system. Should
outages occur two of the seven linemen will be located in Spirit River and Valleyview to provide fast,
initial response and assess whether additional resources are required. The objective is to have better, or
as good, service levels as we do now.
CONCLUSION
The data clearly indicates that SELF-OPERATING is the Best, Lowest Cost way to provide energy to you
the members. In addition to the above your equity has been enhanced and will continue to grow each
year the REA operates. The REA will also remain in control of the future and continue to provide lower
cost energy into the future while expanding other services for its members.
President, Peace Country REA
4
5
Self-Operating Feasibility Study Overview:
With ATCO presenting their offer to all 3,186 members to buy each member’s share out
at $20,742 in April, three options were chosen to be explored:
Option 1: Continue with operations as structured now, which contracts ATCO for most
operations, maintenance, and new construction.
Option 2: Change to a self-operating business model, which is defined by PCREA as
managing all aspects of the REA operations in-house or on a contract basis.
Option 3: Selling assets to ATCO and being under the ATCO electric tariffs.
PCREA’s Board of Directors is recommending to the members that based on the results of the
Self-Operating Feasibility Study, it is in the best interests of all Members to vote to NOT to sell
the Peace Country Rural Electrification Association to ATCO. We are also recommending the
PCREA move to a Self-Operating Model.
Reasons why we are recommending members DO NOT SELL:
•
Members can retain the ability to control power costs for their farming operations and
households. Power usage is growing at most locations and the numbers of PCREA
members are increasing.
•
PCREA assets that ATCO is looking to buy are increasing in value every year based
on ATCO’s own formula for valuation. Why sell an asset that is increasing in value?
•
Selling is a one-time, non-reversible sale. Subject to income taxes at your marginal
rate of taxation. Your marginal tax rate could be as high as 39% and this may impact
a senior’s old age security (OAS) and federal and provincial supplements. You need
to consult your accountant to determine the financial implications for your situations.
•
Putting $20,742 (pre-tax dollars) in Members’ pockets today will cause ATCO to
charge an increased Farm Rate. You, the customer, will pay a portion of their
investment plus ATCO’s guaranteed profit of up to 9%.
•
ATCO’s focus has always been on shareholder’s profits made from customers. If you
sell, you will go from being a member and customer to only a customer. REA’s are
member owner co-operatives. Selling to ATCO goes against the very reason the REA
was created.
•
ATCO Farm Distribution Farm Rates with the inclusion of the PCREA assets sold to
ATCO represents up to an 82% increase for all of ATCO Farm Distribution
customers.
•
Your PCREA Board of Directors can authorize distribution rate reductions. ATCO
controls rates which must result in a strong profit.
•
Operation of PCREA could allow employment opportunities for Member’s families.
6
The Board of Directors of the PCREA has an obligation to the members to protect the REA’s
assets and to strive to increase service levels while at the same time to reduce costs. The best
way to accomplish this is move to a Self-Operating Model.
Enhancements to Self-Operating PCREA
A key benefit of PCREA moving to a “Self Operating” REA is that the Members would be in
control and can add or adjust programs that will benefit the Members.
•
New Members could have new construction completed at a reduced cost. This could now
be accomplished because we are in control of our lower installation costs. Another
variation or addition could be to offer financing options for the new installation costs.
•
Upgrade of transformers and breakers at lower cost would impact existing Members and
provide them the ability to upgrade their service capability to meet their increasing
demand at lower cost.
•
Volume purchases of back-up generators that could be purchased by the Member or
rented. This service is offered by other REAs.
Creating a Self-Operating REA
Data we have collected clearly supports that self-operating is the best and lowest-cost solution to
provide energy to members.
There are seven viable, self-operating REAs in the province of Alberta - four with comparable
membership size to PCREA. We were able to review the operations and financial statements of
these self-operating REAs.
The contracting committee has decided to use the North Parkland Power REA (NPPREA)
facility and operation as the model for a self-operating PCREA.
•
Maximum new debt required would be $1.7 million on $68 million in assets, part of
which may be offset by reserves.
•
We arrived at a positive cash flow of more than $280,000 per year after financing charges
and loan payments.
•
In all sizes of transformers, the Regulated Rate Option (RRO) PCREA Self-Operating
rates are lower, with a savings of up to $619 to $1942 per year based on transformer size.
In all sizes of transformers, the Contract PCREA Self-Operating rates are lower with a
savings of up to $602 to $1,902 per year based on transformer size.
Voting for a self-operating REA gives you – a shareholder – control.
Rates, costs, growth, and service would be under your control and at a lower cost to you, while
maintaining an asset you can sell with your farm.
7
Background on PCREA
The Contracting Committee thought it was important to provide a little background on your
REA. Many of you simply pay the bill and expect the power to come on. This is the work of
your REA.
There are seven, self-operating REAs in Alberta. The bid to take-over the REAs is not new.
ATCO and FORTIS are both shareholder owned and want to gather up or absorb anything and
everything that they can to increase the wealth of their shareholders. This is the mandate and
purpose of a for-profit company
The Board of Directors wants PCREA, Peace Country REA, to remain independent and become
self-operating.
PCREA was formed from an amalgamation of REAs in 2000. At the end of 2011, distribution
facilities included the following major equipment:
Distribution Lines (by Voltage) in Kilometers
7,200 volt (7.2 kV) - (I phase)
14,400 volt (14.4 kV) - (I phase)
382
2,458
25,000 volt (25 kV) - (3 phase)
Total
119
2,959
These lines consist of the following number and types of capitalized poles:
Butt treated (installed between 1952-1960)
161
Full treated (installed after 1960)
28,854
Total
Number of Member Transformers/Billed Services
Number of Substations
29,015
3,186
5
Number of Voltage Regulators/Autoboosters
12
Number of Oil Circuit Re-closers/Versa-tech Re-closers 112
Members' average monthly energy consumption:
1,151 kWh (2011)
1,111 kWh (2010)
1,146 kWh (2009)
8
Report Summary
The overriding purpose of a Rural Electrification Association (REA) is to set direction to ensure
that the Members receive an electricity system with quality service at a competitive cost.
To aid in advising the membership, the Board of Directors of the REA formed a Contracting
Committee to study the move to being Self-Operating and the impact this would have on the
Members. The Contracting Committee prepared a bid document that outlined three options. The
committee then engaged the services of Pathfinders Profit Consultants of Calgary to perform a
“feasibility study” on the following three options:
Option 1 (Basic Case): Continue with operations as structured now, which are to
contract with ATCO for most operations, maintenance, and new construction.
Option 2 (Project Case): Change to a self-operating business model. Self-Operating is
defined by PCREA as managing all aspects of the REA operations in-house or on a
contract basis.
Option 3 (Selling Assets to ATCO) Compare to an alternative case of selling the REA
to ATCO and being under the ATCO Electric tariffs.
Option 1 (Basic Case): The key in evaluating this alternative course of action is to appreciate
that ATCO is owned by shareholders and has a mandate to increase the equity and return on
investment to ATCO’s shareholders. This is in complete opposition to the principles of the REA,
which are to offer continuous, quality service at a minimal or competitive cost to the REA
membership.
Option 2 (Project Case) is the most ambitious but best accomplishes the objectives of the REA.
There are seven, viable, self-operating REAs in the province of Alberta. PCREA and Pathfinders
selected four REAs that were of comparable membership size to PCREA. We were fortunate to
be allowed to visit these facilities and be provided financial statements of several of these REAs.
With this information, a model could be developed for PCREA and, thereby, avoid the costly
“trial and error” scenarios that are part of most start-ups.
At the visits to each of the four REA facilities, we talked with the General Manager and several
key employees. The goal was to establish a level of trust and gain a feel of how the facility
operated. We also learned the size of their shops, the number and types of equipment they were
using, the number of staff they were employing in the field and in their administration.
From these visits, the Contracting Committee has decided to use the North Parkland Power REA
(NPPREA) facility and operation as the model for PCREA.
9
We used the information gathered on these visits to create a list of required additional assets.
Again, the idea was to have a base to work from. The committee decided to use bank loans to
finance part of the purchase of assets. We determined that Prime plus ½, or 3.5%, would be a
good working interest rate. We developed a bank loan repayment schedule that includes finance
charges.
We were again fortunate to be granted access to the profit and loss statements for several years
of several of the REAs. This takes the guesswork out of the numbers. This became the model or
financial plan for the self-operating PCREA.
We arrived at a pro-forma profit and loss statement that shows a $425,000 profit per year before
financing charges and loan payments. The pro-forma profit and loss statements, the finance
schedule, and the loan repayment schedule, were all combined into a 10-year cash-flow
projection. The cash flow shows that, after financing charges and loan payments, PCREA is
achieving a positive cash flow of more than $280,000 per year to be used for member
distribution rate reduction, deposit reserve growth or equipment replacement.
Option 3 Selling the REA Assets to ATCO. The Alberta Utilities Commission (AUC) and
industry convention has developed a formula to determine the value of the distribution system of
REAs. In short, this means the total value of all the wires, poles and equipment used to provide
electricity to all the members of an REA.
The formula is RCN – D (Replacement Cost New less Depreciation.) The reconstruction cost is
the key component. The costs of wages, poles, equipment are all going up. The cost to replace
the entire distribution system will continue to increase every year.
ATCO has offered each member of PCREA $20,742 for their share of the distribution system.
They are being asked to sell an asset that is increasing in value. Next year, and for every year
thereafter, the asset will be worth more and the replacement price will increase. The general rule
is don’t sell assets that are increasing in value.
ATCO is guaranteed up to 9% return on any investment they make. ATCO would pay you
$20,742 for your share. ATCO can then recover their investments through rate increase which
cover their investment and return. ATCO’s offer to buy your share of the REA is an example of
the company’s motive to maximize ATCO shareholders wealth.
10
Discussion and Evaluation of Option 1 (Base Case)
Continuing the current operations means that the financial performance and costs experienced in
the past would continue. The Board of Directors of PCREA has an obligation to the members to
protect the REAs assets and to strive to increase service while at the same time to reduce costs.
A central issue to continuing with the current structure is that by contracting out operations,
maintenance, new construction to ATCO, and the retailing of energy by Direct Energy, the REA
does not have control and is restricted in setting the direction of the REA. Typically when O&M
tasks are contracted, the costs are inflated. The other way of stating this is that when the REA
employees and equipment are used for operations, maintenance, and new construction, the tasks
can be performed more efficiently and at less cost to the REA. We have been told that North
Parkland REA (NPPREA) can replace a power pole for about $800 where Fortis or ATCO would
charge $1,200.
PCREA currently performs the brushing work and while it is a big step to take on all operations,
maintenance, and new construction, seven other REAs in Alberta have made the change and are
all operating profitably.
Contracting operations to ATCO is seen as a self-defeating proposition. The financial intention
of ATCO is to maximize profit to ATCO shareholders. ATCO will sell its services to the REA at
a similar cost as what it would sell to its own customers. ATCO is a monopoly supplier. ATCO
will always try to maximize the benefit and profit to ATCO. The only control is the Alberta
Utilities Commission. Under the contract, there is little that the REA can do except to pay the
bills.
Discussion and Evaluation of Option 2 (Project Case)
The key to this evaluation or Feasibility Study is to determine the profitability or simple viability
of Option 2 (Project). This information together with an estimate of the cost required to build the
facility and purchase equipment will provide the statistics to compare to the other two options.
We are grateful to SAREA (South Alta REA), NPPREA (North Parkland Power REA), LLREA
(Lakeland REA), and WRREA (Wild Rose REA). We had an opportunity to visit each of these
facilities and these visits provided great insight into how the operations worked and the
structures and equipment used by each facility. In several cases we received financial statistics.
Self-Operating REAs in the province serve a total of 37,000 farm and irrigation services. These
seven REAs range in size from just over 1,600 to just fewer than 9,000. All are viable with a
positive cash flow in their yearly financial statements resulting in lower rates to members. Four
were chosen because they are of similar size to PCREA.
11
REA and Facility Overview
The service area and the terrain serviced by the REA should to be taken into consideration in the
evaluation of equipment needed and the number of the linemen required to service the Members.
Even where the linemen reside should be taken into consideration. North Parkland services
members in the Lac La Biche area of the province. This is quite a distance from the shop in
Thornhild. However, accommodations need to be made to service these members when required.
The general manager of NPPREA is working hard to find a qualified lineman in the Lac La
Biche area. South Alberta has a second shop and equipment in Bow Island. Lakeland has placed
inventory on a director’s property at a distant point of the REAs service area. South Alta REA is
relatively flat where Lakeland REA and North Parkland Power have different equipment
requirements based on terrain to be serviced.
Discussion on how each of the REAs visited function.
South Alta
South Alta REA is the oldest facility we visited. The General Manager took over in 2008. The
REA has been viable with a positive cash flow every year. The shop has several rather unique
features that should be taken into consideration if Peace Country decides to build a shop-admin
facility. The admin area has several offices rather than the open floor plan of the other REAs we
visited. The second floor of the admin building has a large conference or meeting area with a
kitchen lounge area attached. The area works well. The shop is heated with in-floor heating. The
shop has single equipment access doors at either end of the shop. The actual shop width will
accommodate two large pieces of equipment side by side. The REA has two shops, one in
Claresholm and a second in Bow Island. The REA appears to have more inventory than any of
the other REAs we visited. Pictures of the facility are included in Appendix A1.
North Parkland
North Parkland REA facilities are relatively new. Prior to building the Shop and Admin
structures the REA worked out of a trailer on the current site. The admin area has an open space
concept divided into cubicles. There are several offices around the exterior of the admin area.
The shop is significantly larger than the South Alta shop. It has single equipment doors at either
end of the bay and uses radiant heating. The facility has a large meeting room on the main floor
across from the admin area. About one-third of the shop area is used as an inventory room, an
operations center and a shop. The REA has invested in some rather specialized brushing
equipment. Pictures of the facility are included in Appendix A2.
Lakeland
The Lakeland REA has a rather unique shop/admin configuration. The administration functions
are performed on the main street of Vegreville. The admin area is rather small relative to the
other facilities we visited. The REA has a general foreman, he owned and operated a contracting
company and performed the O & M functions of the REA until a few years ago. While operating
12
the contracting company he found a suitable building to use as the shop, approximately 10
minutes out of town. The contracting company sold the shop and some equipment to the REA.
The shop is functional. They use a steel shipping container to store inventory. The REA has a
very low employee turnover rate. The staff does a lot of the vehicle maintenance in the REA
shop. Pictures of the facility are included in Appendix A3.
Wild Rose
Wild Rose REA is a new structure. The shop has four equipment bays. One of the bays is wider
and is used as a cleaning bay. The other three bays have an open structure and are large in
comparison to the other facilities we visited. Inventory is along the wall of the main shop and
there is a workbench at the end of the main shop area. The administration area has an open office
concept. There are no cubicles and the office appears to be very neat and orderly. The Wild Rose
REA has an administrative staff of five. The REA performs the administrative function for
several other operations on a contracting basis. The funds charged for these services offset the
additional admin staff costs. The admin structure has a basement that is an open meeting area.
The shop has radiant heating and the admin area is air-conditioned. All the equipment is new.
They have a large tandem-axle digger truck and a single-axle digger truck. Wild Rose REA does
not have a bucket truck. The linemen prefer to climb the poles and it is thought that running a
truck into a wet ditch would cause unnecessary problems. Pictures of the facility are included in
Appendix A4.
Comparison of REA’s
The following Chart will help with the comparison of the relative size of the four facilities and
help to determine some of the requirements of creating a Self-Operation REA for Peace Country.
# of Members
Office &
Admin
Digger
Trucks
Bucket
Trucks
Service
Trucks
North
Parkland
2900
South
Alberta
2700
Wild Rose
Lakeland
2640
1428
Peace
Country
3186
5 (incl GM)
5 (incl GM)
6 (incl GM)
3 (incl GM)
4 (incl GM)
1
2
2
2
1
1
1
0
1
1
6
6
6
6
5
# of Linemen
8 (incl 5
Apprentice)
10 (incl 4
Apprentice)
6 (incl 1
Apprentice)
6
7
Shop Size
100’ x 300’
75’ x 35’
44’ x 84’
60’ x 40’
Admin Offices
2500 Sq Ft
3000 Sq Ft
1900 Sq Ft
2000 Sq Ft
100’ x 300’
2000 Sq Ft
13
Summary of North Parkland’s Key Points April 19, 2012
At your membership meeting on April 19, 2012, a presentation by North Parkland REA was
made highlighting the following points:
Three Key Strategies for Success.
CONTROL: The REA runs your business from energy retailing to distribution services
for the benefit of the Members, not outside shareholders.
ACCOUNTABILITY: You, as Members, select and elect your board from your
Membership to direct and protect your interests, be accessible to the Members, and be
accountable to the membership (the buck stops here!).
COST: Your board selects the management with the capabilities to structure and run a
self-sustaining business, from operations budgets to capital requirements to managing energy
rates (understand the business not just the operations)
A Practical Guide to Becoming Self Operating
•
•
•
Once YOU decide to leverage your investment and secure your REAs future,
The Self-Operating REAs throughout this province are equipped to work with YOU to
create a sustainable and achievable roadmap to self-sufficiency ON YOUR TERMS.
All you need to do is ask.
Facility Mobilization
Peace Country is again fortunate to have an association with North Parkland, Lakeland, Wild
Rose, and South Alta. By using these facilities as a gauge, Peace Country can assess the
buildings, equipment, inventory, staff, and labour requirements of the proposed facility.
We have prepared a Pro-Forma Balance Sheet for PCREA that shows the effect of adding the
required facilities, operating equipment, and shop and office equipment.
The overriding prerequisite of PCREA moving to a “self-operating” entity is that the quality of
service provided to members be maintained or improved. With the move toward a self-operating
model, the costs of the service will be minimized and this will keep the cost of service to the
Members very competitive. PCREA must provide continuous quality and timely service to all
Members. Acquiring quality equipment is a key component to this service mandate.
There are companies in the province that could be contracted to perform some of the operations,
maintenance, and new construction requirements. Through close monitoring of the contractors
performance and costs, this arrangement could be managed. The costs of the contractor would
likely be less than the current levy charged by ATCO and the length of the contract could be
negotiated more favorably. Lakeland REA and Wild Rose REA each employed a contractor prior
to moving to a fully functional self-operating REA.
14
We have used the statistics from your Balance Sheet of your Financial Statements as of
December 31, 2011 as the base or current statistics. The second column shows the effect of
adding the assets required to move PCREA to a “Self- Operating” entity.
We have shown the effect of applying $589,000 of the Deposit Reserve toward paying down the
initial required bank loans. We also show the effect of using $217,000 of short-term investment
funds to purchase the required inventory.
Proforma Balance Sheet
With Statistics from December 2011 and Additional Assets and Debt
Assets
Current Assets
Cash
Short Term Investments
Accounts Receivable
Prepaid Expenses
Deposit Reserve
Inventory
Total Current Assets
Fixed Assets
Property Plant and Equipment
Additions
Structures / Buildings
Operating Equipment
Brushing Equipment
Shop Equipment
Office furniture and Equipment
Communication Equipment
Computer Equipment
Total Added Assets
Current
With
Dec-11
Additions
Using
Deposit
Reserve
297,085
454,233
232,894
11,265
1,822,873
2,818,350
297,085
237,233
232,894
11,265
1,822,873
217,000
2,818,350
297,085
237,233
232,894
11,265
1,233,873
217,000
2,229,350
66,645,855
66,645,855
66,645,855
450,000
770,000
361,000
75,000
5,000
3,000
6,000
1,670,000
450,000
770,000
361,000
75,000
5,000
3,000
6,000
1,670,000
Total Fixed Assets
66,645,855
68,315,855
68,315,855
Total Assets
69,464,205
71,134,205
70,545,205
15
Liabilities and Net Assets
Current Liabilities
Accounts Payable
Deposits received
Current portion of long term debt
Goods and services tax payable
Total Current Liabilities
Long Term Debt
Existing Long Term Debt
NEW Long Term Debt
Building and Structure Loan
Operating Equipment Loan
Brushing Equipment
Shop / Office / Communications Equip
Total New Loans
Total Long Term Debt
Net Assets
General fund
Deposit Reserve
Total Liabilities and Net Assets
193,666
281,699
11,886
2,338
489,589
193,666
281,699
11,886
2,338
489,589
193,666
281,699
11,886
2,338
489,589
44,135
44,135
44,135
450,000
770,000
361,000
89,000
1,670,000
450,000
470,000
161,000
0
1,081,000
44,135
1,714,135
1,125,135
67,107,608
1,822,873
68,930,481
67,107,608
1,822,873
68,930,481
67,696,608
1,233,873
68,930,481
69,464,205
71,134,205
70,545,205
There are a number of alternatives. Lakeland REA passed a resolution to use the deposit reserve
to buy their shop. PCREA has a deposit reserve of $1,822,873. Part of this might be used to
offset the loan requirements. The loans are based on estimated equipment costs, which will
probably be lower once the acquisition process begins i.e. tenders, etc. These estimates do not
use the discount that may be available through AAMDC (Alberta Association of Municipal
Districts and Counties). These discounts could be considered similar to fleet purchasing
discounts.
Land
PCREA already owns 6.5 acres. The land is located in Bezanson, 35 km North East of Grande
Prairie on Highway 43. We have included a Google Map image of the Property with a proposed
rough location of the Shop.
16
Inventory
Self-Operating will require the purchase of inventory.
From discussions with the other REAs, some of this equipment may take several months to have
delivered. Purchasing inventory should be considered as a significant priority in the “to-do” list.
Transformers are part of the equipment needing a long period to acquire. The transformers are
estimated under Electrical Parts Yard. We have used information from WRREA as the cost of
Inventory and Equipment required to outfit a service-truck at $9,000 per truck.
Inventory
We have estimated the Inventory Requirements. Included in the inventory is an estimate of the
Inventory that should be on each Service-Truck.
Inventory
Poles 30 @ $400 per pole
Service Truck Inventory 5 trucks @ $9,000 /Truck
Electrical Parts Shop
Electrical Parts Yard
Vehicle Parts
Total Inventory
12,000
45,000
75,000
75,000
10,000
217,000
Building and Structures
We have used the construction costs of building a shop. WRREA built their Shop/Admin
building for $584,000, but it has a basement under the Admin Area. We have used the Shop and
Administration buildings of NPPREA as the model. Pictures of the Shop and Admin buildings
17
are attached to this study in Appendix A5. The shop area of NPPREA has an open shop area with
an operations office, a lunch meeting room, an inventory room, and a shop to the side. We think
this shop configuration would function well.
Building / Structures
Shop
100' x 300' Shop, Operations Office, Shop inventory
area, Includes radiant heating, washing area.
Total Additional Shop Costs
450,000
450,000
Operating Equipment
There is a program AAMDC, Alberta Association of Municipal Districts and Counties, which
should be contacted regarding the purchase of a fleet of vehicles. As we have mentioned briefly
before, the terrain of the service area should be taken into consideration in the selection of the
type and number of equipment pieces that PCREA would require to service the area.
Operating Equipment
Tandem Axle Digger
Bucket Truck
Service Trucks with Equip Racks 5 trucks @ $50,000 each
Trailers 1 pole trailer
Total Operating Equipment
300,000
200,000
250,000
20,000
770,000
Brushing Equipment
PCREA has been contracting this task. As part of the Self-Operating model the REA will
purchase brushing equipment. NPPREA and LLREA have taken on these duties completely,
hiring a UTT Utility Tree Trimmer (works around live wires) and a UTTW Utility Tree Trimmer
(works below the wires). The daily tasks or area of focus is directed by the REA. WRREA has
contracted the monitoring and day-to- day direction of their brushing duties. The workers take a
course offered out of Olds College.
Brushing Equipment
Skid Steer
Bucket Truck
H D Trailer 30 ft
Chipper 4"
Truck 1 ton 4 wheel drive
Deck
Safety Equipment
Total Brushing Equipment
115,000
140,000
16,000
8,000
70,000
6,000
6,000
361,000
18
Shop Equipment
LLREA does a significant amount of vehicle maintenance in their shop. The type and extent of
the shop equipment needs to be assessed as the complement of the staff becomes realized. A
lineman could be receiving compensation at $35 to $50 per hour. How does this cost relate to
making an arrangement with a fleet servicing company in Grande Prairie? Having a wellequipped shop and an area with a workbench and other equipment will likely improve the overall
wellbeing of the staff. A key to the successful operation of PCREA is to have happy and content
staff. By providing adequate shop and service truck equipment, the linemen will be content, safe,
and more willing to go the extra mile to complete the job correctly and efficiently.
Shop Equipment
Power Washer
Welding Machine
Grinder
Etc
Total Shop Equipment
75,000
75,000
Office furniture and Equipment
Office equipment is another area that can vary substantially depending on the duties and tasks
that PCREA decides to pursue. Billing is a task that could be subcontracted. South Alta contracts
their billing at a cost of $4.00 per service per month. The number of staff in the office would
vary depending on the extent of the O&M functions.
Office furniture and Equipment
Office Desk and Chairs
Postage Machine
Office Renovations
Office furniture and Equipment Cost
600
2,500
1,900
5,000
Communications Equipment
Modern communication capability is important. Cell phones are needed but how much farther
should PCREA go? We heard from WRREA that having GPS in a service truck might have
saved the life of a lineman. The lineman had fallen and broken his leg. As the protocol was to
call in every ½ hour, no call was received, and the cell phone was in the truck, the GPS system
was used to locate the truck and the injured lineman. At this point, we do not feel it necessary to
include laptops in the trucks.
Communication Equipment
8 GPS transponders @ 300 each
8 Cell Phones @ $75 each
Communication Equipment Cost
2,400
600
3,000
19
Computer Equipment
The number of computers, printers and other computer equipment required by PCREA will vary
depending on the size of the office.
Computer Equipment
2 computers @ $1,500 per computer
Server Printers Scanner
Computer Equipment Cost
New Loans
Building and Structure
Loan
Operating Equip Loan
Brushing Equipment
Shop / Office / Com Equip
3,000
3,000
6,000
Term
of Loans
Years
Original
Amt of
Loan
30
10
5
3
450,000
770,000
361,000
89,000
1,670,000
Deposit
Reserve
Applied
Balance
of Loan
After DR
300,000
200,000
89,000
589,000
450,000
470,000
161,000
0
1,081,000
The above chart lays out the Financial Plan. The REA can borrow money against cash at a rate of
Prime + ½, or 3.50%. The REA has a deposit reserve that earns 1.5%. To reduce the monthly
payments and the overall loan interest, the Committee has proposed using $589,000 of the
deposit reserve to pay down the initial loans. It is thought wise to maintain a healthy deposit
reserve to cover any unforeseen circumstance.
Deposit Reserve Balance Dec 31, 2011
1,822,873
Applied to Purchase Additional Assets
589,000
Balance of Deposit Reserve after
the Application of the Funds
1,233,873
These proposed additional assets, the effect on the deposit reserve and the additional bank loans
were added to the balance sheet of PCREA.
The loan repayment schedule shows the interest and principle payments that the REA will incur
each year through 2033.
The loans have an interest expense charge of 3.5%.
The loans have a fixed term and therefore a fixed month and yearly repayment amount.
20
Loan
Payment
Schedule
New Loan
Principle
Payment
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
Total Payments
New
Loan
Interest
Total Interest
& Principle
94,200
94,200
94,200
94,200
94,200
62,000
62,000
62,000
62,000
62,000
15,000
15,000
15,000
15,000
15,000
15,000
15,000
15,000
15,000
15,000
37,835
34,538
31,241
27,944
24,647
21,350
19,180
17,010
14,840
12,670
10,500
9,975
9,450
8,925
8,400
7,875
7,350
6,825
6,300
5,775
132,035
128,738
125,441
122,144
118,847
83,350
81,180
79,010
76,840
74,670
25,500
24,975
24,450
23,925
23,400
22,875
22,350
21,825
21,300
20,775
931,000
322,630
1,253,630
15,000
150,000
150,000
Payments of
15,000
10
21
Creating a Pro-Forma Budget Model Profit and Loss Statement for PCREA
Peace Country REA is again fortunate. We received P&L statements from North Parkland Power
REA and South Alta REA. The rational is to use the financial performance of these established
and successful REAs as validation of our model for the financial performance of Peace Country
REA.
Each of the REAs method of recording revenues, costs, and expenses were different. We have
realigned the statistics for each REA for several years to arrive at a common format.
We then took these statistics and pro-rated them to a membership level of PCREA or 3,186
members. Based on the number of years we had available, we then averaged the statistics.
The resulting statistics are displayed in the following chart for validation of the pro-forma profit
and loss statement developed by the contracting committee. The whole point of this exercise is to
glean an understanding of what the P&L of PCREA would look like.
Notable points of the Pro Forma Financial Statements
•
•
•
•
•
•
•
•
•
The source statistics for validation of the committee Profit and Loss statement are
provided from the P&L statements over several years for South Alta REA and from
North Parkland Power REA.
The averages of the validation statements have then been prorated to the 3,186
membership level of PCREA
The Statistics in the chart can be used as a budget or model for the 2014 year
The Energy and Transmission costs as a percentage of Energy Revenues should be
relatively consistent. The energy revenue charge for each customer-member is calculated
based on individual usage at the energy rate charged REA. The REA secures its position
to ensure that customer charge or a hedge covers all energy purchases.
The Energy Margin of the REA is consistent and includes significant input from the
Board of Directors.
All PCREA members will operate as an RRO member or as a contract member. It is
assumed that not many members will contract with other suppliers. There are significant
economies of scale in this industry and it does not make any sense for a member of
PCREA to contract with a supplier other than PCREA.
PCREA can be financially successful by charging equivalent or less than other contract
suppliers.
After achieving full membership participation, revenues should remain consistent, as the
members typically will consume a consistent amount of energy each year.
Field Labour is the variable. When the linemen are working efficiently, the overall
viability of the REA is secure.
There was considerable discussion over the statistics. The Committee received the amount of
energy use for the 2011 year from ATCO. From these statistics the estimated RRO and contract
22
revenues and costs were developed. The committee reviewed the “worked up” statistics and
compared them to the statistics developed through the prorating and averaging numbers derived
from NPPREA and SAREA.
Pro Forma Profit & Loss Statement for PCREA
The Statistics developed by the committee were used as the base statistics of the Cash Flow
worksheet.
Source of Funds
Energy
PCREA
Committee
Other REAs
Averaging
RRO
Contract
Transmission Charge
Total Energy Revenue
2,216,263
1,078,523
1,251,880
4,546,666
4,200,000
Cost of Energy
RRO
Contract
Transmission Charge
Total Cost of Energy
1,902,445
915,376
1,251,880
4,069,701
3,700,000
476,965
10.49%
500,000
11.90%
Operational
Deposit Reserve
O&M
Levies
Atco D52 Rate
Administration Fee (Billing)
Total Funds Available
440,000
1,510,000
230,000
240,000
230,000
2,650,000
210,000
2,070,000
230,000
240,000
0
2,750,000
Cost of O & M
Atco D52 Rate
Linemen Wages
Brushing Wages
O&M / Brushing Material
Equipment Maintenance
Total O&M Costs
240,000
800,000
150,000
300,000
290,000
1,780,000
240,000
950,000
150,000
390,000
300,000
2,030,000
870,000
32.83%
720,000
26.18%
Margin on Energy
Margin on Operations
4,200,000
3,700,000
23
Total Funds Available Energy & O&M
Overhead
Admin Expense
Admin Salaries
Facility Expense
Billing
Total Overhead
Gross Funds Available
1,346,965
1,220,000
295,000
250,000
145,000
230,000
920,000
315,000
260,000
150,000
165,000
890,000
426,965
330,000
Energy
The committee spent a significant amount of time researching the electrical costing and selling
relationship of RRO (Regulated Rate Option) and contracting electricity. The key to adding
Energy Sales as Revenue Stream of PCREA is to go through an administrative process to
become a retailer to the Members of PCREA.
Three Components of an Electricity bill:
Energy Rate per Kilowatt Hour – With deregulation in 2000, came the choice to get a
retail contract or to remain on a floating rate (RRO). Retail contracts are currently
available for approximately 8.8-cents/kilowatt hour.
-
The RRO rate goes up or down based on the “forward price” for the following month.
For some months, some people are paying up to 15-cents/kilowatt hour, but these are
people who have chosen to be on the RRO rate. The parallel is that if someone
chooses a floating mortgage rate over a fixed mortgage rate.
Distribution fees – These are fees for the maintenance of the poles and wires, controlling
vegetation, meter reading, etc. For REAs, the Board of Directors sets these rates. For
Fortis, ATCO or municipal utilities the Alberta Utilities Commission (AUC) sets them
after the utility makes an application. REAs have lower rates than do Fortis or ATCO.
- Fortis and ATCO do have both “farm” and “residential” rates. This is because it is
less costly to service residential areas where for example one transformer can serve
many customers whereas that doesn’t happen on a farm. The criteria as to what is
“farm” and what is “residential” are set by the AUC.
In Appendix A6 is a comparison prepared by South Alta REA that compares average
current monthly distribution charges by REA’s in comparison to ATCO Farm Rate. This
does not include the impact of the PCREA proposed purchase by ATCO on the ATCO
Farm Rate. The average REA rate is lower!
24
Transmission Rates – These are set by the AUC after application by the AESO (Alberta
Electric Systems Operator). Two years ago these averaged 1.6-cents per kilowatt-hour.
Today they are about 3-cents/kilowatt hour. They are adjusted quarterly. One concern is
that when the major transmission lines begin construction the rates will rise much higher.
These rates are slightly higher for farm than for residential, but only by a very small
amount.
The Web Site of South Alta REA contains their Energy Policy (http://www.southalta.com )
“All members have the option of purchasing energy contracts. Members who do not purchase
contracts are charged the “RRO Rate.”
This stands for “Regulated Rate Option.” This is a rate that fluctuates each month. The RRO rate
is based on the “forward price” for the next month.
The margin achieved and shown on the financial model has been consistently slightly better than
11% for several years. This margin represents all energy and transmission revenues and costs for
both RRO and contract revenue streams.
Transmission Charges
We have analyzed an electrical bill and determined that the transmission charge represents
approximately 3.3 cents per Kwh. This is considered a flow through charge. The consumer is
charged what the PCREA is charged.
Distribution Charge (O&M)
We have created a 10-Year Cash flow statement that shows the projected revenues and costs for
both energy and O&M. The statement shows the anticipated overhead expenses, the finance
charges on the loans and the bank loan payments.
The 10-Year Cash flow also shows the Use of Available Funds to
•
•
•
•
Replace any operating start-up costs
Equipment replacement costs
Increases to the Deposit Reserve
AND DISTRIBUTION RATE reductions such to the approval of the Membership and
the Board of Directors!
25
10-Year Cash Flow Projection for PCREA
Pro Forma Cash Flow Projection for Peace Country REA becoming a Self-Operating REA.
Year
Year
1
2014
2
2015
3
2016
4
2017
5
2018
6
2019
7
2020
8
2021
9
2022
10
2023
Participating REA Members
Est total Energy use Kwh /yr
2,676
2,676
2,676
2,676
2,676
2,676
2,676
2,676
2,676
2,676
44,894,031
44,894,031
44,894,031
44,894,031
44,894,031
44,894,031
44,894,031
44,894,031
44,894,031
44,894,031
1,733
943
2,676
1,733
943
2,676
1,733
943
2,676
1,733
943
2,676
1,733
943
2,676
1,733
943
2,676
1,733
943
2,676
1,733
943
2,676
1,733
943
2,676
1,733
943
2,676
Source of Funds
Energy
RRO
Contract
Transmission Charge
Total Income
2,216,263
1,078,523
1,251,880
4,546,666
2,216,263
1,078,523
1,251,880
4,546,666
2,223,663
1,082,615
1,251,880
4,558,158
1,887,670
896,803
1,251,880
4,036,353
1,895,046
900,895
1,251,880
4,047,820
1,906,573
907,272
1,251,880
4,065,724
1,938,785
925,075
1,251,880
4,115,739
1,972,169
943,542
1,251,880
4,167,591
1,999,961
958,900
1,251,880
4,210,741
2,000,132
959,219
1,251,880
4,211,230
Cost of Energy
RRO
Contract
Transmission Charge
Total Cost of Energy
1,902,445
915,376
1,251,880
4,069,701
1,902,445
915,376
1,251,880
4,069,701
1,909,772
918,034
1,251,880
4,079,685
1,572,753
736,021
1,251,880
3,560,654
1,577,638
738,678
1,251,880
3,568,195
1,589,848
745,321
1,251,880
3,587,049
1,621,597
762,592
1,251,880
3,636,068
1,655,787
782,521
1,251,880
3,690,187
1,685,093
779,598
1,251,880
3,716,570
1,685,093
779,598
1,251,880
3,716,570
476,965
10.49%
476,965
10.49%
478,473
10.50%
475,699
11.79%
479,625
11.85%
478,675
11.77%
479,671
11.65%
477,404
11.46%
494,170
11.74%
494,660
11.75%
Estimated RRO Customers
Estimated Contract Customers
Total Customers
Margin on Energy
26
Year
Year
1
2014
2
2015
3
2016
4
2017
5
2018
6
2019
7
2020
8
2021
9
2022
10
2023
Operations
Deposit Reserve
O&M
Levies
Atco D52 Rate
Administration Fee (Billing)
Total Operations Revenue
440,000
1,510,000
230,000
240,000
230,000
2,650,000
440,000
1,510,000
230,000
240,000
230,000
2,650,000
440,000
1,510,000
230,000
240,000
230,000
2,650,000
440,000
1,510,000
230,000
240,000
230,000
2,650,000
440,000
1,510,000
230,000
240,000
230,000
2,650,000
440,000
1,510,000
230,000
240,000
230,000
2,650,000
440,000
1,510,000
230,000
240,000
230,000
2,650,000
440,000
1,510,000
230,000
240,000
230,000
2,650,000
440,000
1,510,000
230,000
240,000
230,000
2,650,000
440,000
1,510,000
230,000
240,000
230,000
2,650,000
Cost of O & M
Atco D52 Rate
Linemen Wages
Brushing Wages
O&M / Brushing Material
Equipment Maintenance
Total O&M Costs
240,000
800,000
150,000
300,000
290,000
1,780,000
240,000
800,000
150,000
300,000
290,000
1,780,000
240,000
800,000
150,000
300,000
290,000
1,780,000
240,000
800,000
150,000
300,000
290,000
1,780,000
240,000
800,000
150,000
300,000
290,000
1,780,000
240,000
800,000
150,000
300,000
290,000
1,780,000
240,000
800,000
150,000
300,000
290,000
1,780,000
240,000
800,000
150,000
300,000
290,000
1,780,000
240,000
800,000
150,000
300,000
290,000
1,780,000
240,000
800,000
150,000
300,000
290,000
1,780,000
870,000
870,000
870,000
870,000
870,000
870,000
870,000
870,000
870,000
870,000
1,346,965
1,346,965
1,348,473
1,345,699
1,349,625
1,348,675
1,349,671
1,347,404
1,364,170
1,364,660
Overhead
Admin Expense
Admin Salaries
Facility Expense
Billing
Total Overhead
295,000
250,000
145,000
230,000
920,000
295,000
250,000
145,000
230,000
920,000
295,000
250,000
145,000
230,000
920,000
295,000
250,000
145,000
230,000
920,000
295,000
250,000
145,000
230,000
920,000
295,000
250,000
145,000
230,000
920,000
295,000
250,000
145,000
230,000
920,000
295,000
250,000
145,000
230,000
920,000
295,000
250,000
145,000
230,000
920,000
295,000
250,000
145,000
230,000
920,000
Standard or Normal Profit
426,965
426,965
428,473
425,699
429,625
428,675
429,671
427,404
444,170
444,660
Margin on Operations
Margin Energy and
Operations
27
Year
Year
1
2014
2
2015
3
2016
4
2017
5
2018
6
2019
7
2020
8
2021
9
2022
10
2023
Overhead
Admin Expense
Admin Salaries
Facility Expense
Billing
Total Overhead
295,000
250,000
145,000
230,000
920,000
295,000
250,000
145,000
230,000
920,000
295,000
250,000
145,000
230,000
920,000
295,000
250,000
145,000
230,000
920,000
295,000
250,000
145,000
230,000
920,000
295,000
250,000
145,000
230,000
920,000
295,000
250,000
145,000
230,000
920,000
295,000
250,000
145,000
230,000
920,000
295,000
250,000
145,000
230,000
920,000
295,000
250,000
145,000
230,000
920,000
Standard or Normal Profit
426,965
426,965
428,473
425,699
429,625
428,675
429,671
427,404
444,170
444,660
37,835
34,538
31,241
27,944
24,647
21,350
19,180
17,010
14,840
12,670
Loan Payments
Total Debt Servicing
94,200
132,035
94,200
128,738
94,200
125,441
94,200
122,144
94,200
118,847
62,000
83,350
62,000
81,180
62,000
79,010
62,000
76,840
62,000
74,670
Cash After Debt Servicing
294,930
298,227
303,032
303,555
310,778
345,325
348,491
348,394
367,330
369,990
Use of Available Funds
Operating Start-up Cost
Equipment Replacement
Deposit Reserve
Rate Reduction
Total Use of Funds
200,000
0
94,930
0
294,930
0
0
298,227
0
298,227
0
0
253,032
50,000
303,032
0
0
253,555
50,000
303,555
0
181,000
79,778
50,000
310,778
0
295,325
0
50,000
345,325
0
0
298,491
50,000
348,491
0
0
98,394
250,000
348,394
0
0
117,330
250,000
367,330
0
0
119,990
250,000
369,990
Finance Charges
Deposit Reserve Balance
Balance of Deposit Reserve
Add to the Deposit Reserve
1,233,873 1,328,803 1,627,030 1,880,062 2,133,617 2,213,395 2,213,395 2,511,886 2,610,280 2,727,610
94,930
298,277
253,032
253,555
79,788
0
298,491
98394
117,330
119,990
28
Year
Year
Effect of Loan Payments
Loan Balance New Loans
Principle Payments Made
1
2014
2
2015
3
2016
4
2017
5
2018
6
2019
7
2020
8
2021
9
2022
10
2023
1,081,000
986,800
892,600
798,400
704,200
610,000
548,000
486,000
424,000
362,000
94,200
94,200
94,200
94,200
94,200
62,000
62,000
62,000
62,000
62,000
Cash Flow Assumptions and Estimates Chart
The chart below shows the assumptions and the Rates used in projecting RRO and Contract Energy Revenues and Costs in the Cash Flow Projection.
Year
Year
ENERGY
Total Members Accounts
RRO or Contract Member %
1
2014
3186
84%
3186
84%
3186
84%
3186
84%
3186
84%
3186
84%
3186
84%
3186
84%
3186
84%
3186
84%
# of Participating Members
Average use per Member
2,676
14,091
2,676
14,091
2,676
14,091
2,676
14,091
2,676
14,091
2,676
14,091
2,676
14,091
2,676
14,091
2,676
14,091
2,676
14,091
65%
35%
9.08
8.12
3.32
7.79
6.89
65%
35%
9.08
8.12
3.32
7.79
6.89
65%
35%
9.11
8.15
3.32
7.82
6.91
65%
35%
7.73
6.75
3.32
6.44
5.54
65%
35%
7.76
6.78
3.32
6.46
5.56
65%
35%
7.81
6.83
3.32
6.51
5.61
65%
35%
7.94
6.96
3.32
6.64
5.74
65%
35%
8.08
7.10
3.32
6.78
5.89
65%
35%
8.19
7.22
3.32
6.90
5.87
65%
35%
8.19
7.22
3.32
6.90
5.87
% RRO Members
% Contract Members
Selling RRO Rate (cents per Kwh)
Selling Contract Rate (cents per Kwh)
Transmission Charge Rev & Cost
Cost of Energy RRO (cents per Kwh)
Cost of Energy Contract (cents per Kwh)
2
2015
3
2016
4
2017
5
2018
6
2019
7
2020
8
2021
9
2022
10
2023
29
Impact of a Sale of PCREA on ATCO’s Farm Rate
The Alberta Federation of REA’s had an analysis completed of the impact of $66 million
purchase of PCREA on ATCO’s rates. This was completed by the Alberta Federation REA’s
consultant, Mr. Russ Bell. CMA who provides expert utility regulatory evidence and assistance
in Alberta. Recently Mr. Bell provided expert evidence in the Utility Rate Regulation hearing for
The Office of the Utilities Consumer Advocate in the Regulated Rate Initiative Hearing. In the
analysis the $66 million for the PCREA purchase is allocated to poles, towers, fixtures, overhead
conductors and transformers on the same basis as other Farm Customers for ATCO.
Purchase Price
Revenue Requirement
Return
Income Tax
Depreciation
$ 66,083,158.00
$
$
$
$
4,777,812.32
558,451.18
2,014,083.25
7,350,346.75
Scenario 1 - Assume asset costs of purchase of PCREA allocated to all rate groups
Scenario 2 - Assume asset costs of purchase of PCREA allocated to Farm Customers only
Revenue Requirement Comparrison
Residential Rate 11
General Service Rate 21
Irrigation Rate 25
Irrigation Rate 26
Industrial Rate 31
Industrial Rate 32
Main Tx Rate 31T & 33T
Oilfield Rate 41
REA Farm Rate 51
REA Farm Rate 52
Farm Service Rate 56
Street Light Rate 61
Sentinel Light Rate 63
Scenario 1
Scenario 2
%
%
2.53%
2.48%
2.34%
0.00%
2.47%
0.38%
0.24%
1.96%
0.17%
0.00%
2.21%
1.78%
2.23%
-2.92%
-2.84%
-2.46%
0.00%
-2.78%
2.39%
1.88%
-1.76%
2.03%
2.39%
120.06%
-1.35%
-2.28%
There are two scenarios; the first assumes that all PCREA purchase costs are allocated across all
customer classes. The second assumes that all PCREA purchase costs are allocated to the
farm rate. The second is most likely!
30
The first scenario allocates the $66 million to all rate classes and indicates an increase to
ATCO’s Farm Service cost allocation of 2.1%. Other rate classes also experience cost allocation
increases such as Residential 11, General Service Rate 21and Industrial Rate 31 increasing by
2.5%. Clearly these allocation increases to other rates are NOT caused by cost increases in those
allocations rates so why should they subsidize ATCO’s purchase of the PCREA!
The second scenario is the most likely and indicates an increase to ATCO’s Farm Service
allocation of 120% that is more than doubling the current allocation for all ATCO Farm
Customers. Under this scenario other classes of customer allocations would decrease as adding
$66 million to the cost allocation of ATCO Farm Service rates results in the allocation attracting
much more of the other costs to the Farm allocation. Realizing that some ATCO customers are
currently served by PCREA distribution lines the 120% increase was reduced by 19% to an
allocation increase of 97%. Further realizing the number of ATCO customers under the ATCO
Farm Service increases by the former PCREA members results in a 16% increase reducing the
expected allocation increase of up to 82% for the ATCO Farm Rate. This allocation increase
results up to 82% increase in the ATCO Farm Service Rate. This increase has been used in the
Member Rate Comparisons.
Under the Alberta Utilities Commission current rate setting process in Alberta ATCO would
have to file applications for both total revenue requirements and then how this revenue would be
recovered from each rate class. This is a lengthy process and the impact of REA purchases on
ATCO Farm Rates would be applied one or two years after the REA purchase was completed.
This is why the ATCO Farm rate has not seen the rate increase of recent REA purchases.
This impact is still to come! In 2013, ATCO will be under performance-based regulation that is
pending an Alberta Utilities Commission Decision. ATCO has applied in this hearing to directly
flow REA purchases to ATCO’s rate base immediately upon the closing of any REA sale. The
analysis is included in Appendix A7.
Member Rate Comparisons
The committee has compared the differences in proposed PCREA RRO and Contract Rates with
ATCO Farm Service Rates and Direct Energy. The lowest cost is the Self-Operating PCREA
rates under both the RRO and Contract Rates. In this option, PCREA becomes the default
supplier of power (RRO) and provides a contract supply of power option. Power contracts could
be available through other retailers, but PCREA would price its contracts below or equal to the
other retailers. Both the RRO and Contract rates being charged by other retailers would be an
ongoing benchmark comparison.
The committee also included a comparison of future estimated Farm Rates with the inclusion of
the PCREA assets if sold to ATCO. This represents up to an 82% increase to ATCO Farm
Distribution Rates for all of ATCO Farm customers. Savings are also realized on Direct Energy
Rates.
31
Self-Operating Rates vs. Impact of PCREA Purchase on ATCO Farm Rates
RRO Monthly Rate Comparison
In all sizes of transformers the RRO PCREA Self-Operating rates are lower ranging from over
$53 per month to $165 per month. This is a savings of $619 to $1,942 per year based on
transformer size.
Contract Monthly Rate Comparison
In all sizes of transformers the Contract PCREA Self-Operating rates are lower ranging from
over $51 per month to $162 per month. This is a savings of $602 to $1,902 per year based on
transformer size.
Other comparisons are in Appendix A8
32
Monthly RRO Rate Comparison
Days in Billing Period
Breaker kVA Capacity
Kilowatt Hours Consumed
Description
TRANSMISSION Fixed
TRANSMISSION Demand
TRANSMISSION Energy
31
7.5 PCREA Rates apply to 3 - 10 kV.A only
1300
D52 -PEACE COUNTRY REA (Self Operating)
Usage
Factor
Charged Unit Price
Amount
31
1
0
0
7.5
31
7.5
0.0921 21.41325
1300
1
1300
0.0083
10.79
Subtotal
DISTRIBUTION Fixed
DISTRIBUTION Demand
DISTRIBUTION Energy
32.20
31
31
1
1
7.5
1300
31
1
0.2028
6.2868
7.5
1300
31
1
1
1
0.336
0
10.416
0
1300
31
1
1
1300
0.165
0
5.115
0
7.5
1300
0.70365 21.81315
0.044
10.23
0
0
Subtotal
32.04
ATCO Rate D52
Subtotal
DEPOSIT RESERVE Demand
DEPOSIT RESERVE Energy
Subtotal
ASSOCIATION LEVY Fixed
ASSOCIATION LEVY Fixed
Subtotal
Net Amount
PCREA Billing charge
PCREA RRO Cost of Electricity
Total
Total with GST
Days in Billing Period
Breaker kVA Capacity
Kilowatt Hours Consumed
Description
TRANSMISSION Fixed
TRANSMISSION Demand
TRANSMISSION Energy
6.29
10.42
31
1
1300
5.12
86.06
6.00
117.98
210.04
220.54
0.1936
0.09075
31
15 PCREA Rates apply to 15 kV.A only
3000
D52 -PEACE COUNTRY REA (Self Operating)
Usage
Factor
Charged Unit Price
Amount
31
1
0
0
15
31
15
0.0921 42.8265
3000
1
3000
0.0083
24.9
Subtotal
DISTRIBUTION Fixed
DISTRIBUTION Demand
DISTRIBUTION Energy
31
31
1
1
15
3000
0.70365 21.81315
0.044
20.46
0
0
31
1
0.2028
6.2868
31
1
0.42
13.02
31
1
0.165
5.115
Subtotal
42.27
ATCO Rate D52
Days in Billing Period
Breaker kVA Capacity
Kilowatt Hours Consumed
Description
TRANSMISSION Fixed
TRANSMISSION Demand
TRANSMISSION Energy
6.29
15
31
1
3000
5.12
134.42
6.00
272.25
412.67
433.31
0.1936
0.09075
31
25 PCREA Rates apply to 25 kV.A only
3000
D52 -PEACE COUNTRY REA (Self Operating)
Usage
Factor
Charged Unit Price
Amount
31
1
0
0
25
31
25
0.0921 71.3775
3000
1
3000
0.0083
24.9
0.303
0.09483
127.46
9.39
123.279
260.14
273.14
Based on PCREA cost being recovered over all ATCO Farm D56 customers
D56 - COMPANY FARM (Impact of PCREA Purchase)
Usage
Factor
Charged Unit Price Amount
31
1
0
0
15
31
15
0.0921
42.8265
3000
1
3000
0.0083
24.9
Subtotal
67.73
31
1
0.550186 17.055766
15
31
15
0.223678 104.01027
3000
1
3000
0.006916
20.748
Subtotal
141.81
31
1
0.5551
17.2081
Subtotal
17.21
31
31
1
1
25
3000
0.70365 21.81315
0.044
34.1
0
0
31
1
0.2028
6.2868
31
1
0.63
19.53
31
1
0.165
5.115
Subtotal
55.91
ATCO Rate D52
6.29
25
Net amount
DER Fixed Charge
DER RRO Cost of Electricity
Total
Total with GST
31
3000
0.303
0.09483
226.75
9.39
284.49
520.63
546.66
Impact of PCREA Purchase on D56 - Company Farm 82%
96.28
25
3000
Subtotal
DEPOSIT RESERVE Demand
Subtotal
ASSOCIATION LEVY Fixed
Subtotal
Net Amount
PCREA Billing charge
PCREA RRO Cost of Electricity
Total
Total with GST
31
1300
13.02
Subtotal
DISTRIBUTION Fixed
DISTRIBUTION Demand
DISTRIBUTION Energy
Net Amount
DER Fixed Charge
DER RRO Cost of Electricity
Total
Total with GST
Impact of PCREA Purchase on D56 - Company Farm 82%
67.73
15
3000
Subtotal
DEPOSIT RESERVE Demand
Subtotal
ASSOCIATION LEVY Fixed
Subtotal
Net Amount
PCREA Billing charge
PCREA RRO Cost of Electricity
Total
Total with GST
Impact of PCREA Purchase on D56 - Company Farm 82%
Based on PCREA cost being recovered over all ATCO Farm D56 customers
D56 - COMPANY FARM (Impact of PCREA Purchase)
Usage
Factor
Charged Unit Price Amount
31
1
0
0
7.5
31
7.5
0.0921 21.41325
1300
1
1300
0.0083
10.79
Subtotal
32.20
31
1
0.5502 17.055766
0
31
7.5
0.2237 52.005135
1300
1
1300
0.0069
8.9908
Subtotal
78.05
31
1
0.5551
17.2081
Subtotal
17.21
Based on PCREA cost being recovered over all ATCO Farm D56 customers
D56 - COMPANY FARM (Impact of PCREA Purchase)
Usage
Factor
Charged Unit Price Amount
31
1
0
0
25
31
25
0.0921
71.3775
3000
1
3000
0.0083
24.9
Subtotal
96.28
31
1
0.550186 17.055766
25
31
25
0.223678 173.35045
3000
1
3000
0.006916
20.748
Subtotal
211.15
31
1
0.5551
17.2081
Subtotal
17.21
19.53
31
3000
1
0.1936
0.09075
5.12
183.12
6.00
272.25
461.37
484.44
Net Amount
DER Fixed Charge
DER RRO Cost of Electricity
Total
Total with GST
31
3000
0.303
0.09483
324.64
9.39
284.49
618.52
649.45
33
Monthly Contract Rate Comparison
Days in Billing Period
Breaker kVA Capacity
Kilowatt Hours Consumed
Description
TRANSMISSION Fixed
TRANSMISSION Demand
TRANSMISSION Energy
31
7.5 PCREA Rates apply to 3 - 10 kV.A only
1300
D52 -PEACE COUNTRY REA (Self Operating)
Usage
Factor
Charged Unit Price Amount
31
1
0
0
7.5
31
7.5
0.0921 21.41325
1300
1
1300
0.0083
10.79
Subtotal
DISTRIBUTION Fixed
DISTRIBUTION Demand
DISTRIBUTION Energy
32.20
31
31
1
1
7.5
1300
31
1
0.2028
6.2868
7.5
1300
31
1
1
1
0.336
0
10.416
0
1300
31
1
1
1300
0.165
0
5.115
0
7.5
1300
0.70365 21.81315
0.044
10.23
0
0
Subtotal
32.04
ATCO Rate D52
Subtotal
DEPOSIT RESERVE Demand
DEPOSIT RESERVE Energy
Subtotal
ASSOCIATION LEVY Fixed
ASSOCIATION LEVY Fixed
Subtotal
Net Amount
PCREA Billing charge
PCREA Cost of Electricity
Total
Total with GST
Days in Billing Period
Breaker kVA Capacity
Kilowatt Hours Consumed
Description
TRANSMISSION Fixed
TRANSMISSION Demand
TRANSMISSION Energy
6.29
31
1
1300
5.12
86.06
6.00
105.53
197.60
207.48
0.1936
0.08118
31
15 PCREA Rates apply to 15 kV.A only
3000
D52 -PEACE COUNTRY REA (Self Operating)
Usage
Factor
Charged Unit Price Amount
31
1
0
0
15
31
15
0.0921 42.8265
3000
1
3000
0.0083
24.9
15
3000
1
15
3000
0.70365 21.81315
0.044
20.46
0
0
31
1
0.2028
6.2868
31
1
0.42
13.02
31
1
0.165
5.115
42.27
ATCO Rate D52
Days in Billing Period
Breaker kVA Capacity
Kilowatt Hours Consumed
Description
TRANSMISSION Fixed
TRANSMISSION Demand
TRANSMISSION Energy
6.29
15
31
1
3000
5.12
134.42
6.00
243.54
383.96
403.16
0.1936
0.08118
31
25 PCREA Rates apply to 25 kV.A only
3000
D52 -PEACE COUNTRY REA (Self Operating)
Usage
Factor
Charged Unit Price Amount
31
1
0
0
25
31
25
0.0921 71.3775
3000
1
3000
0.0083
24.9
17.21
Net Amount
DER Fixed Charge
DER Contract Cost of Electricity
Total
Total with GST
31
1300
0.303
0.08418
127.46
9.39
109.434
246.29
258.60
Based on PCREA cost being recovered over all ATCO Farm D56 customers
D56 - COMPANY FARM (Impact of PCREA Purchase)
Usage
Factor
Charged Unit Price Amount
31
1
0
0
15
31
15
0.0921
42.8265
3000
1
3000
0.0083
24.9
Subtotal
31
1 0.550186 17.055766
15
31
15 0.223678 104.01027
3000
1
3000 0.006916
20.748
Subtotal
31
1
0.5551
17.2081
Subtotal
67.73
141.81
17.21
31
31
1
1
25
3000
0.70365 21.81315
0.044
34.1
0
0
31
1
0.2028
6.2868
31
1
0.63
19.53
31
1
0.165
5.115
Subtotal
55.91
ATCO Rate D52
6.29
25
Net amount
DER Fixed Charge
DER Contract Cost of Electricity
Total
Total with GST
31
3000
0.303
0.08418
226.75
9.39
252.54
488.68
513.12
Impact of PCREA Purchase on D56 - Company Farm 82% Increase
96.28
25
3000
Subtotal
DEPOSIT RESERVE Demand
Subtotal
ASSOCIATION LEVY Fixed
Subtotal
Net Amount
PCREA Billing charge
PCREA Cost of Electricity
Total
Total with GST
78.05
13.02
Subtotal
DISTRIBUTION Fixed
DISTRIBUTION Demand
DISTRIBUTION Energy
32.20
Impact of PCREA Purchase on D56 - Company Farm 82% Increase
67.73
31
31
1
Subtotal
Subtotal
DEPOSIT RESERVE Demand
Subtotal
ASSOCIATION LEVY Fixed
Subtotal
Net Amount
PCREA Billing charge
PCREA Cost of Electricity
Total
Total with GST
Based on PCREA cost being recovered over all ATCO Farm D56 customers
D56 - COMPANY FARM (Impact of PCREA Purchase)
Usage
Factor
Charged Unit Price Amount
31
1
0
0
7.5
31
7.5
0.0921 21.41325
1300
1
1300
0.0083
10.79
Subtotal
31
1
0.5502 17.055766
0
31
7.5
0.2237 52.005135
1300
1
1300
0.0069
8.9908
Subtotal
31
1
0.5551
17.2081
Subtotal
10.42
Subtotal
DISTRIBUTION Fixed
DISTRIBUTION Demand
DISTRIBUTION Energy
Impact of PCREA Purchase on D56 - Company Farm 82% Increase
Based on PCREA cost being recovered over all ATCO Farm D56 customers
D56 - COMPANY FARM (Impact of PCREA Purchase)
Usage
Factor
Charged Unit Price Amount
31
1
0
0
25
31
25
0.0921
71.3775
3000
1
3000
0.0083
24.9
Subtotal
31
1 0.550186 17.055766
25
31
25 0.223678 173.35045
3000
1
3000 0.006916
20.748
Subtotal
31
1
0.5551
17.2081
Subtotal
96.28
211.15
17.21
19.53
31
3000
1
0.1936
0.08118
5.12
183.12
6.00
243.54
432.66
454.30
DER Fixed Charge
DER Contract Cost of Electricity
Total
Total with GST
31
3000
0.303
0.08418
324.64
9.39
252.54
586.57
615.90
34
Other Areas of Focus for Changing the Business Model of PCREA to Self-Operating
Finding and Hiring a General Manager
The general managers of the four REAs that we have visited are business executives and do not
necessarily have an electrical background. Finding an individual that can make this project work
could be challenging. Once the REA chooses to go the Self-Operating route, choosing the
General Manager should be the highest priority. This employment opportunity could be available
for a PCREA member.
Finding and Hiring Linemen
The ideal linemen would be journeyman or red seal accredited. Ideally they would live in
strategic areas of the service area. Most employees of large companies work out of a populated
area such as Grande Prairie. We should prefer employees that are located in the outskirts of the
service area. This employment opportunity could be available for a PCREA member.
SAREA and NPPREA are each paying a journeyman wage of about $46.00 per hour. REAs pay
rates and benefits are very competitive to Fortis and ATCO Electric.
Again, the generosity of the other self-operating REAs have come through. We received a copy
of the job description for a lineman from the administration at Lakeland REA. The job
description is attached as in the Appendix as A9.
Finding and Hiring Administration Staff
PCREA is offering a competitive salary and great working conditions. We do not foresee any
problems securing enthusiastic and qualified staff to work in the administration area of PCREA.
By providing a quality workplace and competitive compensation, this area is not a concern. This
employment opportunity could be available for a PCREA member.
Timing of the move to a Self-Operating REA
The current ATCO Energy and O&M contract expires December 31, 2013. We have identified a
method of segmenting the overall contract into several independent functions. Each of these
functions could be addressed and handled separately.
Becoming a “Self-Operating” REA is a two-step process. There is actually more profit in
becoming self-operating on the energy side. This would involve retailing electricity to the
members.
O & M – Peace Country REA should begin to orchestrate the O&M function as soon as possible.
There may be concerns on timing, and one of the best remedies to avoiding and maneuvering
around concerns is to have the time to find the best solution.
35
Potential Enhancements to Self-Operating PCREA
A key benefit of PCREA moving to a Self-Operating REA is that the members would be in
control and can add or adjust programs that will benefit the members. We have listed a number
of programs, but others could be considered. A key benefit of PCREA being Self-Operating is
that we can add and streamline programs that will benefit Members. We have not included the
following list of potential programs in the economics, but any number of these can be offered
based on Member input.
New Construction at Reduced Cost
New members would be able to have new construction completed at a reduced cost with a cap
on the maximum. This could now be accomplished because we are in control of our lower
installation costs. Another variation or addition would be to offer financing options for the new
installation costs.
Upgrade of Transformers and Breakers at Reduced Cost
This would impact existing Members and provide them the ability to upgrade their service
capability to meet their increasing demand at reduced cost. This again can be accomplished
because we are in control of our lower costs.
Back-up power options buy/rent
Volume purchases of back-up generators can be purchased by the member or rented. This service
is offered by other REAs.
Discussion and Evaluation of Option 3 (Selling Assets to ATCO)
ATCO has made an offer to the membership of PCREA to buy the assets of the REA,
compensating each member with a taxable income of $20,742.
PCREA has considerable assets and significant equity. The industry and conventional practice
created a formula to establish the value of the distribution system owned by the REA.
The Formula is:
RCN – D
Reconstruction Cost New - Depreciation
36
The reconstruction costs will continue to increase. The Alberta Economy drives the cost of
labour ever higher. The poles, wires, equipment prices are increasing. The value of your asset is
projected to increase every year.
Do not sell an asset that is increasing in value.
“Selling out to ATCO is like selling the farm and then being forced to buy back the crop each
year.” This option would be a one-time non-reversible sale. Putting $20,742 (pre-Tax Dollars) in
Members pockets today will cost Members later.
The arrangement that ATCO has with the Alberta Utilities Commission is that whatever they
spend on purchasing an REA is rolled into their “rate base” – meaning that they are entitled to
earn a GUARANTEED “rate of return” – “profit” on whatever they pay you! This is up to 9%.
That means that, when they offer you $20,742 for your service, they are guaranteed as much as a
profit of $1,800 on your service. This money comes from all of their customers. If you sell to
ATCO then you become one of the customers and every month, some small portion of your
ATCO bill will go towards repaying ATCO the $20,742 that they gave you, plus the $1,800
profit they are making off of you!
By holding the PCREA membership until you sell the farm this would be taxed as a capital gain.
In the eyes of Revenue Canada, selling your membership in the REA would be taxed as income.
Furthermore, if they were to buy other REAs in the future, some part of your bill will also go
toward repaying ATCO for that purchase – plus their guaranteed profit.
Conclusion
This Feasibility Study was developed to aid the Members of the Peace Country REA determine
the direction of their REA.
The study evaluated three options as outlined by the contracting committee:
Option 1 (Basic Case): Continue with operations as currently structured, which are to
contract with ATCO for most operations, maintenance, and new construction.
Option 2 (Project Case): Change to a self-operating business model. Self-Operating is
defined by PCREA as managing all aspects of the REA operations in-house or on a
contract basis.
Option 3 (ATCO Case): Sell the REA to ATCO and continue under the ATCO Electric
tariffs.
Option 1 (Basic Case): Contracting operations to ATCO is a self-defeating proposition. The
financial objective of ATCO is to maximize profit for their shareholders. ATCO will sell its
services to the REA at a similar cost as what it would sell to its own customers. This means that
the Peace Country REA is standing still and standing still seldom leads to success. Remaining
37
under the ATCO umbrella underutilizes the PCREA assets. ATCO is a monopoly supplier and
they will always try to maximize the benefit and profit to themselves. The only control is the
Alberta Utilities Commission. Under the contract, there is little that the REA can do except to
pay the bills. The PCREA must take control of its future.
Option 3 (Selling Assets to ATCO): ATCO has made an offer to the membership of PCREA to
buy the assets of the REA compensating each member with $20,742. The arrangement that
ATCO has with the Alberta Utilities Commission is that whatever they spend on purchasing an
REA is rolled into their “rate base” which means that they are entitled to earn a GUARANTEED
“rate of return,” or profit, on whatever they pay you. This guaranteed profit is up to 9%.
When they offer $20,742 per member, they are guaranteed to make a profit of $1,800 per
member. If you sell to ATCO, you become one of their customers. Every month some portion of
your ATCO bill will go towards repaying ATCO the $20,742 that they paid plus up to $1,800
profit.
Option 2 (Project Case): This option is the most ambitious but best accomplishes the objectives
of the REA.
There are seven, viable, self-operating REAs in the province of Alberta. PCREA and Pathfinders
selected four REAs that were of comparable membership size to PCREA. We were fortunate to
be allowed to visit these facilities and be provided with financial statements of several of these
REAs. With this information, a model was developed for PCREA, which avoids the costly “trial
and error” scenarios that are part of most start-ups.
We developed a chart that showed the additional assets that would be required to move to selfoperating REA. We proposed a financing arrangement using a combination of deposit reserve
funds and bank loans.
The contracting committee created a pro-forma Profit and Loss Statement that was validated by
the statistics received and averaged from the financial modeling. From the committees statistics
we created a 10-year cash flow statement.
The additional revenues earned from retailing energy and taking control of all operations outweighs the costs.
Pathfinders Recommendation:
Pathfinders Profit Consultants recommends Option 2 (Project Case), which is a change to a
self-operating business model. We have determined that this is the most profitable option.
38