BreakDown: Danville Utilities’ Power Cost Adjustment Fund

Being $10.7 million in debt is bad, but it’s better than being $19.1 million in debt. That’s where Danville Utilities finds themselves in their Power Cost Adjustment fund. In this BreakDown article, we’ll take a detailed look at that fund and see exactly what it means to Danville Utilities and their customers.

Let’s start this BreakDown off with one very important thing that you need to hear directly and clearly. Danville Utilities is not “in debt” nor are they in a bad financial situation. Danville Utilities has plenty of operating capital and is in good financial shape. That being said, let’s take a look at the Power Cost Adjustment fund recap.

(Editor’s Note: I’ve condensed this financial report to fit on your screen by removing columns that had non-important information in them. What you see here is still the accurate fund balance. I’m also rounding dollar amounts to whole numbers to make it easier to read.)

That’s a lot of numbers, so let’s pull out a Big Board to take a comprehensive look at what they all mean. We call this a BreakDown.

• The Power Cost Adjustment fund is an account to capture the net profit of Danville Utilities’ electricity casts and revenue. This fund is part of the overall Danville Utilities financials.
• Yes, you’re reading it right. At the end of November, Danville Utilities was in the hole to the tune of $10,718,627 , but that’s significantly down from the worst month-end amount of $19.1 million back in July 2014.
• You’re probably saying “How in the heck did they get almost $20 million in debt?” and that’s a good question with multiple answers. The first answer is that they took horrible advice from their electric rate consultant and failed to raise electric rates a little at a time to cover increased costs over a multiple year period. The consultant advised that they believed that wholesale electricity prices would come down in the long run and there was no need to pass the extra costs to the customers. Danville Utilities now realizes that was bad advice, but the decision was made… and there’s no going back on that.
• The second answer to that question is The Polar Vortex. Back in the winter of 2014, the nation’s electrical grid came very close to running out of electricity. When supply is scarce, demand drives the prices up. In this case, Danville Utilities got hit with $4,792,537 in “congestion charges”. That means they had to pay a lot more to get the electricity to here on the national and regional transmission grid. Those congestion charges were billed out over a six-month period and you can see that in the six charges of $798,756 from February to July 2014.
• If you’re wondering what the “transmission grid” is, it’s the national network of high-voltage lines that transfer electricity from power plants to electric company substations. That’s a simplified definition, but it’s good enough for our purposes.
• The third answer to the question is that Danville Utilities bought percentages of new power plants through their membership in American Municipal Power (AMP). Some of those investments worked well, but one of the proposed power plants that Danville bought into never got built. There were still costs associated with the failed project, and Danville Utilities has to pay back their proportional cost of those expenses. That ongoing monthly payback comes to $96,218 and that started in May 2014.
• Because they took the bad electric rate advice and didn’t raise electric rates in small increments for a long time, the deficit got out of control, forcing a larger-than-normal rate increase last year. That was forced because they had to get a handle on the rising deficit and the plan has worked so far. Yes, it’s extra “profits” because of the rate increase but that’s being used to offset the losses incurred over the past few years.
• The amount gained on the deficit is different every month and that’s expected because of wholesale power costs. You can see that progress in the POWER COST OVER/UNDER RECOVERY line item. A positive number means that’s how much the deficit was reduced, and a negative number means that they lost money that month in electric sales. Overall though, the deficit is coming down fast despite losing money in some months.
• In August 2015, the Utilities Commission voted to use $2,000,000 of Danville Utilities’ general fund to write-off part of the Power Cost Adjustment fund deficit. In other words, they paid themselves their own money.
• It took a long time to get almost $20,000,000 in the hole, so it’s going to take a long time to get back to zero. Danville Utilities has a budget plan to continually shave part of the deficit off month by month. The goal is to have it down to $7,800,000 by April 2017. Of course, that plan has so many variables in it that it will never be exactly as planned. Each month, the Utilities Commission looks at the projections and can make changes to keep that goal on track.

And that’s your BreakDown of Danville Utilities’ Power Cost Adjustment fund. Whew!

Now you know where Danville Utilities made mistakes. You also now know the transmission charges that were unexpected and blew the deficit wide open. You can see why rate increases were necessary. You can see that Danville Utilities is nowhere close to being out of the big deficit… but it’s better than where it used to be.

Now you know the facts… and you’ll only find a detailed analysis like this here on SouthsideCentral.