Lake Mill"s Wholesale Power Bill

This special Developments memo focuses on a single issue – rates. Our staff has received a number of questions concerning high average power costs reflected in wholesale power bills in July for June consumption. I’m sure members have received similar inquiries from their customers. This memo addresses the drivers behind our bills for June consumption, describes actions that WPPI Energy is investigating to mitigate wholesale bill volatility and identifies actions that members can take to lessen the impact on customers of power cost volatility.
Wholesale Bills for June Consumption
The high average power cost we experienced for June consumption was caused by a combination of two factors:

1. The deep recession our country is experiencing has resulted in significantly lower overall electricity consumption on the WPPI Energy system. Loads have dropped by 8 to 10%, primarily as a result of cutbacks in the industrial sector, and


2. Wisconsin experienced a much cooler June than normal, coupled with a few very hot, humid days at the end of the month.

These factors combined to cause significant declines in load factors for the WPPI Energy system as a whole and for many members. In fact, some members experienced the lowest load factors they have ever seen, with decreases of more than 20% compared with their May load factors. Because of the way electric rates are structured for all utilities, including WPPI Energy and its members, the higher a user’s load factor, the lower its average cost of power will be. This occurs because a high load factor customer uses electricity around the clock and thus takes a significant percentage of its energy in the off-peak period when the cost of energy is low. Conversely, a customer with a low load factor generally takes a high percentage of its energy during the high priced on-peak period. This increases its average cost of power.
Much of the load decrease WPPI members have experienced as a result of the recession has occurred off-peak because industrial firms have cut second and third shifts, as well as weekend shifts. Such customers are taking less low cost, off-peak energy, increasing their average per unit cost of electricity, even though the total amount of electricity they are using is less than before. The resulting impact is to lower our system load factor, as well as the load factor of the member serving such an industry.
The weather in June substantially aggravated this problem. We had very hot and humid weather in the last week of June which set high billing demands for members. However, member energy usage over the full month was much lower than projected as a result of very cool weather for three out of four weeks. The combination of high monthly demands and low energy usage resulted in even lower monthly member load factors than recession impacts, which in turn increased the average cost of power delivered by WPPI Energy.
To put some numbers on this situation, WPPI Energy’s load factor in June was 12 percentage points lower than in May. The impact on WPPI Energy of this lower load factor, taken in isolation, was a 5% increase in our average billed cost of power. However, some of our members experienced drops of 20 percentage points or more in their June load factors compared to May. When billed, these members experienced a considerably higher percentage increase in their average cost than the 5% experienced by the WPPI Energy system as a whole.
On the retail side, for example, we know of one industrial customer whose load factor dropped from 67% to 33% because it eliminated off-peak shifts. Although this customer used substantially less electricity than it had in the past, its average cost per Kwh of electricity increased by almost 20%, because of its substantially lower load factor and low off-peak consumption. The customer understandably perceived this change in its average cost as the result of a rate increase. It was not. In fact, had the customer maintained a 67% load factor, the increase in average power cost it would have experienced in June would have been very small. The same would have been true for most members. We recalculated one member’s bill where a 20% load factor decrease occurred and found that its average cost of power in June would have been almost identical to its May cost had the member maintained its May load factor.
Bills in August for July Consumption
We are in the process of pulling together the bills that will be sent next week to our members. July was also much cooler than normal, but we did not experience a demand price spike because of the few days of hot weather. While loads in total were down significantly, resulting in fewer billing units over which to spread our fixed costs than projected in our budget, this cost problem was offset by substantially lower market energy costs, also due to the recession. Our Operation Center was able to buy energy on the market for less than the cost available under our formula rate contracts with the IOUs and thereby achieved significant savings. As a result of these factors, our demand and energy adjustment clauses will be negative in August bills for July consumption. While all the numbers are not yet in, we believe our average power cost should be very close to budget.

Information from Roy Thilly memo dated August 5, 2009