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Q&A on the Perkasie Borough Electric Program
May 19, 2010
Photo by Andy Stettler
This story and the accompanying information was compiled as part of the News-Herald’s Ben Franklin Project, which is designed to open up the news process and get the community involved in generating story ideas, asking questions and supplying information about life in the area to create a more interactive newspaper in print and online that reflects the community it serves. Most of the questions, besides preliminary background, answered in this story were generated by residents and shared with the News-Herald via our Facebook and Twitter accounts or via e-mail over the past several weeks. The answers are the result of a three-hour interview between News-Herald Editor Emily Morris, Perkasie Borough Manager Dan Olpere and Assistant Borough Manager Andrea Coaxum held Thursday, May 13.
Why does Perkasie Borough operate its own electric department?
Perkasie Borough has operated its own electric company since about the beginning of the 20th century, when it was created to supply electricity to the populated borough when no other electric suppliers existed. The borough built its electric department, including a coal-fired generator just along the train tracks, according to Perkasie Borough Manager Dan Olpere. At the time, there was no alternative. This is the same reason Quakertown and Lansdale boroughs created their own electric departments and continue to operate them to this day.
Gradually, over time, electric began to move in throughout the neighboring towns, but stopped at the borough line. Perkasie Borough maintains ownership and maintenance of its power lines and poles, along with the staff and equipment and vehicles necessary to run the electric department, Olpere said.
Would the borough be better off not running its own electric company?
Olpere says no. The borough uses the profit made from its electric company to transfer into its general fund budget. From there, that money is used to offset almost 100 percent of the capital improvements made in the borough, Olpere said, including road paving, vehicles like police cars and trash trucks and costs to maintain the parks.
Due to lower electric rates outside the borough currently in some areas, Olpere said many residents assume costs would be lower elsewhere. While that may be true right now, Olpere feels it is only “in the short run,” given the fact that some area utility providers like PPL and PECO will or have shown increases as the rate caps come off in the coming years.
“But when you look at the long-term picture, we offer such a better deal that it would be foolish, in my opinion, to give up the electric department,” Olpere said.
However, Assistant Borough Manager Andrea Coaxum noted that profits made on investor-owned electric companies go in large part to those investors, the profits on the borough electric are largely used to offset tax rates and provide services in the borough.
The borough electric program also covers the borough’s debt service for the most part on its three facilities it continues to hold debt for — borough hall on Chestnut Street, the police station on Ninth Street and the Menlo Aquatic Center on Arthur Avenue. The total for that debt service is approximately $601,500 annually, according to Shannon Drosnock, finance director for the borough.
The only exception to that, Olpere said, is the pool. The aquatic center has its own enterprise fund, which allows the borough to track profits and losses — not standard in a government budget — to try to run the pool economically like a business. The pool earns about $80,000 a year (although it varies) above its operating expenses, but that does not cover the full $280,000 debt service the borough pays annually on the pool. That $80,000 is transferred from the pool fund to cover a portion of the borough’s total debt service, Olpere said, while the remaining debt service is paid for with electric profits.
The other option, Olpere said, to cover those capital projects and debt service is to raise taxes or eliminate some services or offerings.
“The borough could not supply the service and the amenities that it does without raising taxes tremendously,” Olpere said, noting to pull in the same amount of money, it would likely result in a tax increase of “hundreds of percent.”
The borough’s current tax rate is 5.75 mills – a mill is a tax of $1 for every $1,000 of a property’s assessed value. Currently, for every mill the borough charges on all of the properties in the borough, it levies $82,905, Drosnock said.
How much have electric rates increased in the borough under the new contract?
The borough’s wholesale rate — the rate at which it purchases electric from suppliers — went up 82 percent, Olpere said. A 42 percent rate increase for residents and businesses — the “retail rate” — was approved in November 2008, effective for the December 2008 bill. Another 17 percent hike was approved at the same time that went into effect with the December 2009 bill.
A history of wholesale electric rates versus retail rates is available by clicking here.
Why did the borough lock in to the contract rate when it did in 2008?
Olpere’s history of the situation went back to the fall of 2007, when he returned to work after nearly a year off due to medical leave. During Olpere’s time out, Bob Romancheck, the borough’s then-electric consultant was serving as the interim borough manager three days per week.
Olpere said he approached Romancheck in December 2007 first.
“I said, ‘We need to get started putting a quote document together,’” Olpere said.
Olpere said he followed up with Romancheck in January, February and March of 2008. Around that time, another municipality had locked in to a rate that made the borough concerned, and Olpere said council was getting concerned.
“‘We’re getting nervous about not getting started with the process,’” Olpere explained was the sentiment he passed on to Romancheck.
Romancheck has said he was working with another borough’s contract in western Pennsylvania at the time and could not respond immediately to Perkasie’s request.
However, the borough council voted to terminate its relationship with Romancheck and hire a new consultant, Quad3 Group of Wilkes-Barre.
“We had to start over with a brand new electric consultant who knew nothing about the borough,” Olpere said.
Olpere said council had watched electric rates climb throughout 2008, along with gas prices, which had neared $4 per gallon. When the borough sent out its request and received rates, it locked in, Olpere said, he thinks because council felt they would only climb further.
The vote on the wholesale contract was split 5-4, with then council members Eadie Burke, Bill Delaney, Harry McGonigal and Chris Nicolosi voting against the contract. Nicolosi still serves on council.
“There is no doubt, and if we had a crystal ball … the rates did come down,” Olpere said.
But unlike many, like Burke and McGonigal, who at the time said council should have waited longer to lock in, Olpere thinks council should have started the process earlier.
“We should’ve started earlier and we didn’t,” Olpere said.
Why would council lock in to a five-year contract knowing rates were high?
“They’ve always gone five-year contracts,” Olpere said.
Coaxum said the five-year contracts help the borough in budgeting.
“By going out five years, the borough has some stability,” Coaxum said.
In the future, knowing what he knows now, Olpere said he would recommend council not lock in long contracts when the old one is near expiration, but monitor the rates a couple years in advance of the expiration and decide how to proceed.
Why did the borough lock in a two-year extension for the years 2014-15 on the contract?
Olpere said the decision to approve the two-year extension came after the borough council set out to look at the rates in mid-2009 in the future and found that they had come down 10 cents a megawatt.
“Morgan Stanley presented them [borough council] with the opportunity to smooth the rates,” Olpere said.
While the borough contracts for electric with AMP-Ohio, financial firm Morgan Stanley is who actually deals with the power purchased. Because of this, Morgan Stanley offered the borough the chance to restructure its rates a bit as part of locking in another two years.
The borough had several options when it restructured, Olpere said, as to how to incorporate the costs over time, including choosing whether to let the rate drop over time, leave it flat or raise it up a bit at the end. In the end, the borough locked in to what puts them at about $95.50 per megawatt hour over the next six years, Olpere said.
“They didn’t feel it was going to go any lower than the mid-80s,” Olpere said of why the borough council extended it when it did. “We signed when they were high, so we wanted to take advantage of the fact that there was a drop in price.”
“Is there a little bit of guesswork? Yes, there is,” Olpere said.
What is different about the borough’s current contract?
The borough’s previous contracts for electric, most recently with DTE and prior to that with PPL, were fundamentally different from its current contract with AMP-Ohio, Olpere said.
“It’s a completely different way to buy your electricity,” Olpere said, noting the previous way is no longer an option and the new way is much more complicated.
The previous contracts, like the last one with DTE, were “Full Requirement Supply Contracts,” Olpere said. The borough purchased electric at one rate, one number.
“It didn’t really matter what we used or not, that’s what we paid,” Olpere said.
The industry no longer offers that contract. Now, the borough has to work on purchasing power in advance, which means it is buying blocks of power in a complicated system that requires it to estimate its power usage for blocks of time.
To show what he means, Olpere draws a curve on a graph that represents the borough’s electric use. Underneath, he places a long rectangular block at the bottom — a “7 x 24” — seven days a week, 24 hours a day. That block of power costs $80.25 per megawatt hour. The borough will buy a set amount of those blocks anticipating it will use that much at that price over a seven-day, 24-hour period. It will then supplement with other sizes of blocks — there are some 2 x 24 blocks that represent weekend use, some 5 x 24 that represent the five-day work week and others. All of these blocks must be estimated based on current use or expected use and carefully fitted under the curve. This estimate varies by month — some months like August will see a lot of use to account for air conditioning, and some winter months will see spikes relating to heat use and shorter days requiring more lights on.
Those charges do not account for all that the borough is paying, however. The borough has several charges on top of that $80.25 that it pays for a 7 x 24 block for example, Olpere said.
First, there is a demand charge paid to PJM, the “traffic cops of the electric world” that monitor the electric traveling through lines in the region constantly over time, Olpere said. The borough pays $90,000 to $100,000 per month just in demand charges. The borough always paid these demand charges, Olpere said, but “it’s broken down differently in the new contract.”
Then, the borough pays a transmission charge, which basically accounts to pay the company that owns the wire to get the power across Pennsylvania or wherever it might be originating to Perkasie. These prices don’t fluctuate, but there are variables that the borough “is getting smarter and smarter about,” Olpere said.
The borough also pays a “congestion charge” on the system, and it has to cover overhead costs for the borough electric system like the maintenance of the substation, the wires, the crews and the billing.
Why is the borough selling electric back at a loss?
Because the borough is buying blocks and the use is a curve and because it is trying to foresee future electric use, it will occasionally end up with more or less electric than it needed, Olpere said.
“If we buy too much, we wind up having to sell this much back,” Olpere said pointing to a section above the curve. “If we don’t buy enough, we have to buy it on the spot market.”
When the borough buys too much power, it has to sell it back at a loss, Olpere said. Although, in some instances, its membership in AMP-Ohio has allowed it to sell the power back at cost because AMP can get it to other members that may need extra power in that same period. AMP-Ohio is a nonprofit, “a member-driven organization,” Olpere said, making it different from investor-owned organizations like DTE or PPL.
“Now we’re heavily involved with constantly monitoring and analyzing the quantities,” Olpere said.
This became an issue shortly after the borough signed the contract because 2009 offered up a very mild winter and cooler summer, so the borough had expected to purchase much more power than it used.
“The use curve dropped,” Olpere said of that curve he drew. “That caused us to have to sell some electric back, and you don’t sell it at the cost you buy it.”
Additionally, due to the rate hike, residents and businesses began conserving electric, which also dropped the use curve.
If the residents and businesses conserve electric, won’t the rate go up if the borough is already contracted to purchase a set amount of electric in the future?
“To some degree, that is true,” Olpere said.
Because residential rates are set, if the borough’s rate is fluctuating or increasing because it is selling power back at a loss, it cannot simply pass those costs on to residents even though its effective rate goes up.
It can also cut into the profit the borough makes on the electric department, which it uses for the capital projects in the borough, but there, Olpere said, the borough has the choice to simply not profit as much and cut costs where it might have used those profits.
Olpere said there is also some ability to adjust the curve over time so it better reflects the borough’s use and can reduce the shortage or overage of electric purchase.
So are the borough’s electric rates too high?
“Are our rates too high? No doubt,” Olpere said. “But given where we came from, I don’t know how anyone would have done any differently.”
Olpere said the borough can budget based on the stability of having six years ahead of it with known electric rates. He said it is also getting better at estimating the use and understanding the system. Its current electric consultant, Jim Havrilla of Utility Engineers, also is familiar with the nuances and difficulties of the new electric contract style like the borough has with AMP-Ohio.
Still have questions? Reach out on our Facebook or Twitter pages, or contact us via e-mail at perkasienewsherald@gmail.com or emorris@montgomerynews.com.
We also asked questions from residents pertaining to the borough public works and electric department staffers’ vote to join a union last year and the question raised by some residents as to whether someone may have benefitted from the electric contract as negotiated. This is the next story we will begin to research, so please contact us if you have questions or concerns regarding that so we can gather as much information as possible and share it with the community.
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