Board Responsibility for Bond Rating

In the initial part of this series, we delved into how subpar work order processes can negatively impact the financial stability and asset renewal of electric co-ops or utilities. The second article examined the insufficient use of regulatory accounting. Now, we turn our attention to the necessity of maintaining rates that cover the cost of service delivery to customers and the adverse effects of postponing rate increases.

Why Are Rate Increases Delayed?

Several factors contribute to the postponement of rate increases, including:

• Poor management planning
• Inadequate financial reporting and business planning that fail to highlight necessary expenditures
• A cautious board wary of raising rates

Procrastinating on rate increases merely defers the inevitable. Conversely, routine rate adjustments can acclimate customers to how your co-op or utility meets their needs.

What Criteria Do Bond Rating Agencies Use?

Bond rating agencies emphasize the importance of regular rate increases in their evaluation process. According to Moody's criteria:

• AAA rating - "Excellent rate setting record"
• Ba rating - "Consistent record of insufficient rate setting"

Effective business processes should integrate planning and forecasting tools to provide concrete evidence to the Board that a rate increase is necessary, along with the consequences of not implementing such increases.

Regularly conducted cost of service studies, whether internal or outsourced to a consulting firm, can significantly enhance business planning.

What Are Customer Expectations?

Customers expect reliable service. While they may grumble about rate increases, they will express greater dissatisfaction if service reliability declines.

The rate increase process should involve public Board meetings, workshops, and listening sessions to help the public understand the need for rate adjustments. While these sessions might not always lead to greater acceptance, they demonstrate the co-op or utility's commitment to due diligence and public engagement in justifying rate changes.

Consequences of Delaying Rate Increases

Postponing necessary rate increases can lead to several negative outcomes:

• Reduced system reliability
• Increased employee turnover if salary hikes do not match those of peer utilities
• Deterioration of essential equipment needed for reliable service
• Inadequate planning for power supply or transitions
• Slower adoption of new technologies that could enhance long-term reliability and cost-efficiency
• Lower bond ratings

Review your systems and educate your Board and ratepayers to potentially achieve a more favorable outcome in the rate approval process.

Related Course

Strategies to Optimize Patronage Capital and Cash Reserves

1.0 NASBA CPE hours · On-demand access

View Course →