Rate design is a balancing act between meeting revenue needs while minimizing
the overall financial impact to members.

As a not-for-profit organization, it is necessary to recover the costs of doing business, as well as maintain enough cash reserves (margins) to reinvest in the system.

Therefore, it is important to: 1) evaluate the cost of providing service to members, 2) determine the revenue required to cover the costs, and 3) charge rates that ensure the
required revenue is collected. The process involves completing a cost of service study
which is typically done every three to five years.

The study, completed by an independent and experienced firm, evaluates costs and identifies the total revenue requirement for the Cooperative.  The costs are allocated appropriately based on classifications such as residential, commercial, and industrial which are based on the type of service, equipment, infrastructure, and the capacity required to provide service. The results of the cost of service study are then used as
a tool to design rates.

The most recent cost of service study was used to prepare a five-year rate restructuring
plan and rate changes that will go into effect with usage beginning September 1, 2020.  People’s is committed to minimizing the impacts to our members by controlling costs
while maintaining the reliability, quality, and integrity of the electric system we all rely upon.

• To identify the cost of providing service based on customer class (residential vs. commercial), type of service provided (single vs. three-phase), and energy load characteristics (the demand and capacity requirements a service puts on the system).
• To provide guidance for distributing and allocating revenue requirements to ensure equity between rate classes.
• To provide guidance when designing individual rate schedules to ensure equity within each rate class and to ensure recovery of adequate revenue to provide service required by members.

1. Legacy and SMEC rates need to merge together for fairness and consistency.  The Alliant acquisition increased membership by 50%, but that didn’t translate directly into adequate revenue recovery due to rate stipulations imposed by the Minnesota Public Utilities Commission for the first five years after the acquisition. The process of merging SMEC and Legacy rates will ensure all members are contributing equitably to cover the costs associated with system improvements and maintenance, vegetation management, and customer service needed since the acquisition.
    
2. A recent class cost of service study indicated that rates need to be adjusted to align with cost drivers. This ensures that rates reflect the cost of serving consumers. In order to ensure enough revenue is recovered in a fair and equitable way, the rates are being adjusted to collect fixed costs in the fixed charge.
    
3. To appropriately align retail rates with how the wholesale power provider bills for them.

PEC's member-elected Board of Directors and executive staff continuously monitor the financial stability of the organization to determine if a rate change is necessary based on a cost of service study.

The Board of Directors then decides what the rates will be based on the following rate making principles:

• Rates should generate the revenue required to operate the Cooperative, including appropriate operating margins.
• Operating costs and margin requirements should be spread across all member classes equitably.
• Rates should reflect the cost of serving each member class.

• Making sure rates generate the revenue required to operate the Cooperative, including appropriate operating margins; 
• Spreading operating costs and margins equitably across all members; 
• Ensuring rates reflect the cost of serving consumers; and 
• Avoiding abrupt changes.

All electric utilities are different.  PEC serves rural area, has low consumer density, and few large industrial members to distribute the financial load.

For example: PEC serves an average of eight consumers per mile of electric line equaling just over $16,000 of revenue per mile of line.  RPU's average is 66 consumers per mile of line with average revenue over $200,000 per mile of line.  Regardless of consumer density, PEC is committed to meet each members' needs and expectations for reliable electric service.

The following table shows the difference in consumer density and revenue collected per mile of line in 2015 when the Cooperative acquired Alliant's service territory.

Legacy

A service location within PEC service territory that was served by the Cooperative prior to the Alliant acquisition.  Billing statements for these accounts have green colored headings.

SMEC

A service location within PEC service territory that was acquired from Alliant Energy in 2015.  The billing statements for these accounts have blue colored headings.

NOTE: Dairyland Power Cooperative is the power provider for Legacy members and Alliant Energy is the provider for SMEC members.

Accounts acquired from Alliant Energy have not experienced a rate change to their basic service charge or energy rates since 2011 with the exception of a 1% increase in 2018.  Due to PUC restrictions, the Cooperative has not been able to adjust rates until now.  The intent is to eliminate the two different rate designs and be one cohesive cooperative.

Many investor-owned and public utilities have a lower basic service charge because there are more consumers to cover their fixed charges.  In Alliant's case, they have nearly one million electric customers which equates to about 102 consumers per mile of line compared to our eight members per mile of line.

The charge ensures that member expectations for continuous power and outstanding customer service are met.

It provides the funds required to maintain the quality, reliability, and integrity of services that our members count on and have come to expect.  The expenses include items such as:

• Substations, wire, poles, transformers, equipment needed to distribute reliable electricity and members' power needs.
• Trucks, equipment and tools required to build and maintain the electric distribution system.
• Facilities that house trucks, equipment, and supplies, including the technology and office supplies needed to operate.
• Payroll for the wages of the professionals who design, build, maintain, and restore the system, as well as the staff needed to operate the business.
• Vegetation management and system inspections to ensure the safety and reliability of the electrical system.
• Liability insurance, interest on long term debt, and property taxes.
• New technologies to provide increased reliability and operational efficiences such as the automated metering infrastructure (AMI) system, outage management system, and investments in renewable energy.

Because all cooperative members benefit from having reliable electric service available when they want it, the basic service charge ensures that everyone pays their fair share of the basic costs - fixed costs that exist whether or not a single kWh is used.

The rate strategy is designed to recover fixed costs in a fixed charge to ensure the financial stability of the Cooperative.  The past legacy rate structure was designed to recover some of the fixed costs through the energy charge to meet revenue requirements.  Since energy use fluctuates it makes it unpredictable to know if the Cooperative will meet revenue requirements.  If costs were not recovered through the energy charge, they were recovered through the PCA.

The Alliant acquisition has significantly decreased the amount of fixed charges for legacy members who would have seen an even larger increase.  The previous cost of service study indicated the basic service charge should have been $74 for residential members.  By increasing membership by 50% in 2015, it helped spread these fixed costs over 6,700 more members, reducing the basic service charge to $52.

SMEC members may experience the most significant impact from the new rate design because it's been nine years since a formal rate change.  These past rates have not kept pace with costs and inflation.

On average, legacy members will experience a 1.3% decrease and SMEC members will experience a 14.3% increase which translates into the following dollar amounts.

• For members on Legacy Rate A, the average energy use per month is ~900 kWh which equates to an average monthly increase of $1.68.
• For members on Legacy Rate AU, the average energy use per month is ~750 kWh which equates to an average monthly decrease of $4.26.
• For members on SMEC Rate 160, the average energy use per month is ~700 kWh which equates to an average monthly increase of $9.71.

Yes, however, as part of this rate restructure it should be reduced.

Yes. The Board and executive leadership staff carefully and thoughtfully created a five-year plan to minimize a sudden impact of rate changes.  The purpose of the plan is to ultimately merge the Legacy and SMEC rates so the rates are the same between members that have the same service and to adjust rates so fixed costs are collected in the basic service charge (a fixed charge) and energy-related costs are collected in the energy charge.

Some rates will experience changes in two or three steps spaced a year apart until rates align and all fixed costs are in the basic service charge (fixed charge).  Analysis will be done before each rate change to ensure the planned changes align with revenue requirements and the rates paid to our power providers.

Typically, members are on a rate for 12 consecutive months before being moved to another rate.  There can be exceptions to this, like when a major load is added to your service which may qualify you for a new rate.

The Cooperative has several options to help members manage electric costs.  Services include energy management programs to help manage electric usage as well as flexible payment options such as budget billing and a pre-pay option.  The first step is knowing how much energy you are consuming.  This data is available through SmartHub.

Members can find helpful information about conserving energy on the "Home Energy Savings" page of the website which includes:

• Energy conservation tips
• Energy Star appliance guide
• Home Energy Guide
• Energy Calculator
• Locations of home energy savings kits that walk members through simple tools to evaluate energy usage

Home Energy Savings