Posted 09/28/2009
Dear VEC Members: 

As the CEO of your electric cooperative, I would like to take this opportunity to report to you on VEC’s current financial status and steps that are being taken to lessen projected financial shortfalls.

It is no secret that 2009 is proving to be one of the nation’s most challenging years due to unprecedented setbacks in the financial markets. VEC has not been immune to the effects of the economic downturn.

Like utilities throughout New England and the Nation, VEC is experiencing a significant decrease in projected revenues. Quite simply, businesses and residential customers are using less electricity than expected. VEC’s commercial and industrial revenues are presently running 12% below projections. As a result, VEC has had to sell excess power on the open market at unfavorable rates. Additionally, the costs of running our business continue to increase in areas such as transmission costs and employee benefits like health and pension costs.

To offset the unexpected shortfall in revenue, VEC is taking swift and strong action to reduce and control expenses. Without action, we would have been faced with a budget deficit of nearly $2M at the end of the current fiscal year.

VEC management and staff have engaged in a rigorous, company-wide process to identify expenses that can be eliminated or temporarily delayed. From tightening the use of office supplies to adjusting VEC’s power purchase strategy, all areas of the business are engaged in this process. Many employee suggestions have resulted in changes that have reduced costs.

All financial contingency decisions were weighed against VEC’s commitment to its members to provide reliable service at reasonable rates, along with excellent customer service in a socially responsible manner.

As VEC members face job losses and reductions in work hours, we took a hard look at our labor costs. As a result, a pay freeze for all VEC employees has been implemented, service quality and reliability incentives have been foregone, and other benefits have been reduced. VEC management worked closely with union and non-union employees to identify savings.  By agreeing to a pay freeze, members of the IBEW Local 300 helped VEC avert layoffs that could have negatively impacted member service. I am proud to say that VEC employees pulled together to find solutions that will help the Coop move through this difficult time.

There are bright spots despite the difficult financial conditions we are facing. In May, Standard & Poor’s upgraded VEC’s financial rating and outlook. VEC exceeded thresholds in all service, quality and reliability benchmarks for the year ending June, 2009 (see related article). We have seen significant reductions in both the frequency and duration of outages, and have installed approximately 30,000 smart meters within the service territory that are resulting in cost savings. At a time when many organizations have struggled to stay alive, VEC finds itself in a stronger financial position, able to weather this passing storm.

VEC remains committed to performing capital projects which will improve our infrastructure and increase efficiency and reliability in the long-run. As indicated by the Vermont Public Service Board, these projects all will promote VEC’s future stability.

“The costly capital investment that has prompted this rate increase is long overdue, and inopportune at best, given the prevailing economic conditions in Vermont and the country at large. With that point noted, it bodes well for VEC's ratepayers that the need for this investment has been identified and assessed as a result of rigorous organizational scrutiny that VEC's management team undertook in cooperation with the appropriate regulatory supervision exercised by the Department of Public Service. This top-to-bottom organizational review has produced significant changes in VEC's leadership practices and strategic planning that are enabling VEC to move toward becoming a stable, productive utility.” {Excerpt taken from PSB 7/31/09 Order in Docket No. 7488, Petition of VEC Requesting 9.24% Rate Increase, page 23}

One of the greatest challenges for VEC will be around managing future rate increases in a financial environment that has proven to be volatile. In the face of increasing costs and diminishing revenues, the fact of the matter is that rate adjustments will be unavoidable.

As noted by Michael T. Burr in Public Utilities Fortnightly magazine, September 2009, “Utilities need regulators to make them whole for lost revenues, and also to finance the industry’s transition to a greener operating model. The result will be rising rates – an unpopular move in any economy, and a political nightmare during a recession. Continued strong performance will depend on balancing customers’ need for clean and affordable energy supplies against utilities’ need for low-cost capital.”

VEC is identifying strategies that will promote financial balance by enabling us to plan for and respond to economic volatility promptly and effectively. One option is to seek alternative regulation with the Vermont Public Service Board (PSB). This would enable VEC to adjust rates either up or down on a regular and more frequent basis (VT’s two largest utilities are currently operating under alternative regulation plans) without undergoing costly rate cases. Such a plan would still be subject to the approval, oversight and scrutiny of the PSB, and would require approval of the VEC membership.

Another option being explored is to move to annual rate cases that reflect the most recent economic conditions and needs.  Instead of seeking larger increases every two to three years, smaller increases would be sought on a yearly basis to minimize the impact of rate increases to VEC members.

VEC has made significant strides in improving reliability and member satisfaction during the past few years. By taking a fiscally responsible and aggressive response to the current financial challenge, I am confident that this Cooperative will continue to meet the energy needs of Northern Vermont.

I will keep you informed about VEC’s financial status in the coming months.

Sincerely,

David C. Hallquist
Chief Executive Officer