Understanding how electric rates are set is fundamental to any discussion about electric rates in our state, and electric co-ops believe it is important for their consumer-members and policymakers to understand the basics. If one possesses knowledge on why rates vary from co-op to co-op, why co-op rates differ from investor-owned and municipal utilities, and why rates vary from state to state, then honest and informed discourse can take place for the benefit of all parties.
Even though all electric utilities deliver units of electric energy called a kilowatt-hour (kWh), the costs to produce and deliver this electric energy will vary. Each co-op and utility is impacted by many different factors that, in turn, impact electric prices. Many of these factors are outside the control of the co-ops and other providers and include:
- Power supplier and/or generation mix — What types and ages of generation does the utility, or its supplier, own and what fuel mixes are used to produce energy?
- Power supply costs fluctuate from minute to minute, day to day, month to month — They are not static. However, most consumers pay rates based on the seasonal cost of electricity. Changes in prices generally reflect variations in electricity demand, availability of generation sources, fuel costs, and power plant availability.
- System load factor — A measure of system efficiency or utilization, i.e., the percent of actual kWh sales to total kWh sales if peak demand lasted for the entire billing period.
- Customer density — How many customers does the utility serve per mile of line? The average consumer per mile of line for Kansas electric co-ops is 3 while other service providers average 32 consumers per mile of line.
- Customer mix — Is the customer base primarily residential (low load factor) or does it include large commercial and industrial customers with high load factors?
- Revenue per mile of line — Both the customer mix and the density drive the revenue generated per mile of line. Less revenue per mile means higher rates.
- Customer growth — Is the customer base growing, steady or declining?
- Property taxes — The utility has little control over the mill levy or property tax burden. Electric co-ops are not-for-profit, returning excess revenues to members when prudent ($34 million returned in 2021) but they still pay more than $50 million annually in local and state property taxes.
- Weather — Extreme hot or cold temperatures will result in higher volumes of electric energy sales.
Factual information is powerful. Next month I will address how electric rates are determined.
