Explanation of electric bills received in August 2009 by Paul Hermanson

We are keenly aware that several residential customers of Lake Mills Water & Light (LMLW) have called to either inquire or complain about the cost of electricity on their most recent bills. This memo is to provide some insight as to why bills are higher than expected.

LMLW received approval from the Public Service Commission of Wisconsin to implement a rate increase in late May to take affect with energy used after June 1, 2009. This is the first bill received under the new rates. The effective rate increase for residential customers is approximately 8%. This includes a $1.50 increase in the customer Charge ($5.50 to $7) and an increase in the effective rate of $.0953 to $.1028 per kWh (approximately 7.9%).

When the rate increase was approved by the PSC it assumed the Power Cost Adjustment Clause (PCAC) would be close, or equal to zero. However, the most recent billing included a PCAC of $.024. Consequently, the effective rate at which customers were billed was approximately $.1268. This is an increase of approximately 33% from the previous month.

Here’s what is driving the cost increase:

First, it is important to note that the LMLW portion of the increase was maintained at approximately 8%.

However, there are three basic reasons for this month’s larger than expected electric bills.

1 – Weather – This billing period includes part of June and part of July. The last couple weeks of June were extremely hot and humid. This causes more fans, air conditioners, and dehumidifiers to operate and, ultimately, customers use more kWh.

2 – Weather again - What also happens because of the hot weather is that energy demand increases dramatically, but overall kWh consumption is increases only slightly. Energy demand is the instant requirement of electricity, consumption is the use of energy over a period to time. This high demand, but comparatively low consumption results in a higher cost per kWh, because power plants must burn more fuel to meet the demand and transmission line become more congested.

In real terms, under this scenario our power supplier, WPPI Energy, charges LMLW a higher purchase cost per kWh, because their cost to generate electricity is higher than expected. The difference between the estimated cost of electricity and actual cost is what determines the PCAC. In other words, we simply pass along WPPI Energy’s increased generation cost as the PCAC. LMLW has no control over the PCAC, and receives no additional revenue.

3 – Timing – In our July billing we collected revenue on the sale of approximately 4.5 million kWh, but we were billed from WPPI Energy for approximately 5.5 million kWh – a difference of 1 million kWh. This does not mean we were over billed. It means the timing between when we read meters and bill customers is different than when WPPI Energy reads our meter and bills us.

For example, we read a cycle of meters from the 15th of June to the 15th of July, while WPPI Energy reads from the June 1st to June 30th. Over the course of a year, this all evens out. Once again, our purchase cost per kWh is affected because we’re billing for less kWh than we’re buying for in this particular time period.

What all this means is that this billing is exceptionally high, and it’s entirely probably that the next billing may be considerably lower. We’ve already been informed that the WPPI Energy bills may potentially result in a negative PCAC for September. We also understand that we’re not alone in this predicament, and that WPPI Energy CEO Roy Thilly will be sending a letter outlining next steps.

As you recall, one of the reasons for adjusting our rates was to level out the PCAC so we don’t get these large swings in cost. Unfortunately, instituting our rate increase corresponded with one of the highest PCACs WPPI Energy has passed along in years. This is a rough start under the new rates, but we remain confident our effort to level costs will take effect over the course of the next 12 months.

Finally, I want to note that the rate increase does provide considerable value to the utility and consumers, and that we are working to use the revenue wisely and efficiently.

1 - We will complete our new substation soon. When the substation goes on line we will immediately reduce our power costs by as much as $500,000 per year because we no longer have to pay WE Energies to provide back-up service.

2 - This new substation will greatly increase our reliability because we won’t have to rely on 40 to 50 year-old equipment. Our capacity will also increase allowing us to grow readily.

3 - Because of the timing of building our substation now we got very good prices on the equipment and construction. We will be at least $500,000 below estimated cost.

4 - We are in the process of replacing our electric and water meters with new remote read meters. This will allow us to reduce meter reading costs and time, and we anticipate it will help us bring our meter reading timing more in line with WPPI Energy’s meter reading.

5 - And finally, we are in the final stages of implementing a mapping system that will allow us to be more efficient on maintain the distribution system. We will be able to respond to outages quicker, control our inventory better, and plan for line replacement in a more timely fashion.