CEO’s Message – December 2022
Budget Tightens as Input Costs Increase
Over the last couple of months, your cooperative has been heavily engaged in planning and developing the budget for 2023. Throughout this process it has become very apparent that rising costs are not just confined to one or two items, but nearly everything. Most of us are frustrated hearing, seeing, dealing with and experiencing cost increases, so I feel it is important to explain how the current power supply landscape, supply chain issues and overall economy is affecting your electric cooperative.
In 2023, it is projected that 67% of every dollar you spend on electric service with Stearns Electric will go towards purchasing electricity from our wholesale power provider, Great River Energy (GRE). GRE has made many beneficial changes with their power supply resource portfolio over the last few years to not only keep rates down for members like Stearns Electric, but also meet renewable and environmental mandates. With that said though, GRE will have to pass along an increase of over 6% in rates to Stearns Electric in 2023. In addition, GRE is experiencing the same supply chain issues and cost increases that we are. For GRE, forecasted energy market prices are a large driver in the rise of wholesale power costs. Natural gas is used to generate almost 40% of the electricity in the United States and therefore, energy markets are closely tied to natural gas prices. Forecasts indicate that natural gas prices will stabilize a bit more in 2023 than the volatility experienced in 2021 and 2022, but the days of $2/MMBtu are likely behind us. Projections at this time point towards 2023 natural gas prices around $7/MMBtu in the winter months and approximately $4/MMBtu the rest of the year.
The remaining portion of every dollar you spend on electric service, approximately 33%, goes towards operating the Cooperative, receiving power at one of our 33 distribution substations and reliably delivering that power to your home, farm or business. We are seeing costs associated with almost every aspect of distributing electricity rise and anticipate this will continue throughout 2023.
For example, quotes for poles, wires, transformers and meters show that Stearns Electric will pay an average of 60% more in 2023 for construction material compared to 2021 and approximately 30% more compared to 2022. Due to labor shortages, national weather events, and recent incidents abroad, lead times have also extended considerably. A 25 kVA pad mount transformer in 2021 cost $1,400 with a lead time of two months. In 2023 that same transformer will cost over $2,500 with a lead time of at least 12 months.
Transportation expenses and fleet equipment prices have also increased substantially over the last couple of years. Mainly driven by fuel costs, in 2023 we are anticipating a 10% increase in transportation expenses compared to 2022. Additionally, the cost of a digger derrick or aerial lift truck has gone up by 20% since 2021 with lead times ballooning out to approximately two years.
Wholesale power, construction material, and transportation are just a few areas we are experiencing cost increases. Other areas that are just as crucial to operating the Cooperative where we are seeing cost increases include: property taxes, insurance (property, health, liability, cyber, etc.), contracted maintenance and construction activities, software and hardware services, and general materials and supplies.
The 2023 preliminary budget was presented to the Board of Directors in November and their final review will be during the December board meeting. Your member-elected Directors are very engaged in this process, digging in and asking good questions. In early 2023, a Cost-of-Service study will be completed by an independent consulting firm. The goal of the study is to ensure Stearns Electric remains financially stable and rates remain competitive, while also maintaining the quality, reliability and integrity of the electric distribution system and the services we provide. Until the study is complete, we will not know the extent or the implementation timeline of a potential rate increase, but I believe some sort of adjustment will be needed in 2023. These are challenging times and the last thing anyone wants to hear about is another cost increase, but as our members, I want you to be prepared for this likelihood. If a rate increase is needed, this would be our first adjustment since 2018. Please know that however this shakes out, we will continue to do our best to minimize the impact on you and all our members.
All of us at Stearns Electric want to sincerely thank you for allowing us to serve your energy needs this year. Have a joyous holiday season and we wish you all the best as we move into 2023.
Chief Executive Officer
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