Duncan’s Digest – 2020 Outlook – Rising Costs

The costs of virtually everything required to operate a modern electrical system are increasing rapidly. Our 2020 outlook is a mix of good and bad news. The good news is wholesale power costs are stable, so we’re able to apply a higher, member-favorable Power Cost Adjustment (PCA aka Hot Bucks) credit to your bills starting January 1. The bad news is the customer charge component for both residential and certain commercial members is increasing. The residential increase is 17 cents a day and the commercial customer and demand charge increases vary by rate type.

SECO’s mission is to construct, maintain and restore the electric system. We construct new facilities to meet growth demands. We upgrade and maintain the electric system to prevent outages. When an outage occurs, we restore as quickly as possible. Unfortunately, the costs associated with our three mission-critical focuses are rising at an alarming rate.

The 2020 construction work plan tops $55 million to construct new and upgrade existing infrastructure. Tree trimming, storm hardening and system maintenance work is performed largely by contract labor.

Construction and maintenance costs are rising by a whopping 25 percent in 2020. The job market is tight and contractors who perform system reliability maintenance are paying higher wages to keep workers on their payroll. This isn’t just a Florida utility phenomenon – it’s happening nationwide and was spurred when California utility PG&E was court ordered to significantly beef up their tree trimming and system maintenance programs to reduce fire risk. Florida lost a significant amount of its utility-related contract labor workforce to California and we are paying the price despite a booming economy.

SECO Energy is experiencing systemwide growth. Every part of our service territory requires infrastructure additions, system upgrades, storm hardening, tree trimming or communications improvements whether you live north, south, east or west of our headquarters.

You may be wondering why the financial benefit of customer growth isn’t covering rising costs, and it’s a valid question. The answer lies in the low average residential member’s energy consumption. In our service area, the average kilowatt hour (kWh) monthly consumption today is 1,037. This average consumption is much lower than our cooperative peers due to the growing Central Florida trend of energy efficient homes and businesses, use of natural gas appliances, and a strong increase in solar installations. Low energy consumption equals a lower monthly bill – that is good for our members. Less energy consumption and use of solar are also good for the environment. So, what’s the downside?

There are significant financial challenges to low kWh sales, even for a not-for-profit electric provider in a growth environment. We must adjust the monthly customer charge that is collected to cover the costs associated with the delivery of power and system reliability maintenance.

A recent cost of service study indicates that the cost of delivering power and maintaining infrastructure in the residential sector is nearly $35 a month. Currently, we apply an average residential customer charge of $25 a month (83 cents a day). We are bridging that gap by increasing this customer charge by 17 cents a day. Commercial account customer and demand charge increases vary based on the cost of service study. Those adjustments are detailed in our rate tariff online. These collective increases will raise total revenue by about 3.5 percent.

We have tightened our corporate belts to carefully monitor controllable expenses while striving to maintain system reliability, but as I mentioned previously and as you can see on the 2020 Project Map, new construction, upgrades and maintenance are required across our entire service territory.

In response to growth and to preserve reliability, we must build new substations, add power transformers at existing substations, upgrade voltage and conductor and convert critical overhead facilities to underground. The work plan includes building new communication towers, upgrading our radio system and installing fiber-optic cable and microwave backhaul for automated communications that facilitate faster outage restoration. To storm harden, we must support an aggressive pole replacement and vegetation management program systemwide. All of these components play critical roles in the delivery of reliable power and speedy restoration in the event of an outage.

The bottom line is that none of us like having to increase the customer charge, but it is quite necessary to ensure continued service reliability. At the same time, we are pleased that stable fuel costs are allowing a larger Hot Bucks Credit (PCA) that will offset most or all of the increase depending on your respective usage level. These changes reflect the difficult balance between affordability and reliability.

Sincerely,

Jim Duncan

Chief Executive Officer