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Line Upgrades and Cost Allocation

Southwest Iowa REC has a proven track record of supporting economic development, while simultaneously delivering power that is affordable, safe, reliable and environmentally responsible. Through our programs and services, we help new businesses to locate in our service territory and assist existing businesses, including agricultural operations, to expand their operations.

To ensure all electrical needs are adequately met, we plan for system reliability and safety. Electrical systems must be installed according to applicable codes and maintained and operated in compliance with established standards. Southwest Iowa REC and CIPCO, our generation and transmission cooperative, have robust plans for the construction, operation, inspection and maintenance of our systems. The state of Iowa provides regulatory oversight of all electric utilities’ written inspection and maintenance plans. While the regulation for safety and reliability resides at the state level, your locally elected cooperative board members are typically responsible for the economic regulation, including policies for line or system upgrades.

When line or system upgrades are necessary to serve load growth, some costs are assigned to specific groups based on the configuration of our electric delivery system. This can vary for residential, commercial and industrial member-owners. For example, power line upgrades may be necessary to effectively meet the demands of load growth in a commercial or industrial setting. In those instances, when a concentrated area such as an industrial park is being served, it is generally easier for Southwest Iowa REC to plan for load growth and the subsequent costs of upgrades, which may in turn be shared among that specific customer group. When initially designing the electric delivery system to serve a large load center, we have an enhanced ability to anticipate and plan for load growth, which can help to minimize the cost impact of future upgrades.

In our more rural, agricultural settings, member-owners are more geographically spread out or closer to the “end of the physical power line” configuration. When we have a farther distance to build or upgrade lines, the more cost-intensive the project is for Southwest Iowa REC. In these cases, oftentimes only one or just a handful of people will benefit from system upgrades. Therefore, it may not be appropriate to charge all member-owners for these costs. For example, if a member-owner builds a home into a very remote area of the woods, should that person pay for the cost to get the line into the woods or should that cost be borne by all member-owners?  Electric utilities review who benefits from the extensions or upgrades, and then the costs are generally assigned to those that benefit.

If you are considering a significant change to your electrical needs, or if you are planning to add a distributed generation system on your property, contact Southwest Iowa REC at the outset of your planning process. By being able to plan for your service needs, we can continue to provide you with safe, reliable and affordable electric service.

 

 Beyond the basic costs of building and maintaining infrastructure, many factors are currently  placing additional cost pressures on providing electric service, including: 

  • Reduced energy sales or limited kilowatt-hour sales growth. 
  • Technology changes. 
  • Increasing federal and state laws and rules from the legislative, judicial and executive branches of government. 
  • Requirements related to electric facilities such as burying lines underground for aesthetic reasons. 
  • Installation of distributed generation from various fuel sources, including wind, solar and methane. 

 

 

Understanding the Cost Allocation Process

Iowa’s electric cooperatives serve fewer than three consumers per mile of electric line (Southwest Iowa REC serves 2.3), compared to investor-owned utilities and government-owned municipal utilities that serve up to 60 consumers per mile of line. Because electric cooperative consumers are spread out geographically, cooperatives must be diligent in controlling costs and methodical in setting rates.

Regularly, a cost-of-service study is conducted to determine the cost of providing electric service to all of our member-owners. Once we analyze the costs to serve all members on a cooperative-wide basis, we study what it costs to serve certain groups of members. These groups are determined based on electric usage characteristics, and customers with similar electric usage characteristics are grouped together, such as all single-phase residential members may be grouped together.

As part of the study, we determine if we can directly assign some costs to an individual member or group of members, such as:

  • Assigning to one member-owner. If a customer builds a home way back into the woods, he or she is responsible for the line extension costs above the average or normal amount built into the electric rates.
  • Assigning to a specific group of member-owners. If a city ordinance requires that electric facilities must be buried underground, then those member-owners in that city are directly allocated the costs.
  • Assigning common costs. This necessary multistep approach allocates common costs to those who benefit, recognizing that it is not always a black and white situation.

After the costs are allocated to the various groups, then the rates are designed to recover the costs to serve the groups. 

For residential member-owners, traditional rate design includes a fixed monthly charge and a price per kWh for electricity used. This approach has been widely used by the U.S. electric industry for decades, and it works very well when all customers are served from central station generation, such as a coal-fueled or hydro-powered facility. 

Industry rate setting experts apply several key principles in the process, including:

  1. Providing rate stability.
  2. Ensuring that rates charged by an electric utility for providing electric service to each class of electric consumers are designed, to the maximum extent practicable, to reasonably reflect the costs of providing electric service to the class.
  3. Designing rates to reasonably approximate a pricing methodology for any individual utility that would reflect the price system that would exist in a competitive market environment.
  4. Creating an ease of understanding about the rates for customers.
  5. Developing an ease of administration of the rates.

Rate setting is a detailed process that your board of directors takes seriously. As the electric industry changes to include more on-site generation at homes and businesses, the rate setting process will be examined to ensure that those who directly benefit from service are paying an appropriate share of the costs. 

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