When you think of where electricity comes from, it’s easy to say “out of the wall outlet.”
There’s a lot more to it and no one knows that better than Jim Dickenson, CEO of JEA. There’s everything to be considered from carloads of coal to debt service.
The Daily Record staff sat down with Dickenson to discuss the business side of the largest publicly-owned utilities in the country.
Where does JEA fit in terms of size of operation?
Most people don’t know that it is the largest public power facility in the nation. There are some larger investor-owned utilities, Florida Power & Light and some others, but for a public power utility, for the scale and the size we are, to have one that big is pretty unusual.
We’re now in the fall season. Last year we hit winter electric peak. What’s the budgetary forecast as far as predicting (a) usage, and (b) fuel costs?
We’ve adjusted our fuel rate that began on Oct. 1. There’s two different things that really hit us. One of them is demand, and one is consumption. Demand is how much power our customers need at any one given time, so we have to have enough generation around to meet that demand. Consumption is just how much we actually use and this hits us a lot of times in winter when peak demand will go way up, but then drop real quick because of the way the winter load is. You won’t have as much consumption. A couple of years ago we really adjusted our budget moving into fiscal year 2009. We did it for two reasons. We expected at that time we were going to have a hard time accessing capital and capital markets and we did see some of that, so we really deferred a lot of projects. But, we also knew our consumption was likely to drop. And at that particular time, we saw our consumption drop over a couple year period about 4.5 percent. These are the total number of megawatt hours. We were up to selling somewhere as much as, the largest consumption of megawatt hours that we sold in any given year, I think was 2007, was 14 million and we dropped back to 12 million megawatt hours. And when you lose consumption, you lose revenue, so we had to adjust our budget.
What was the reason for the drop in consumption?
Number one is we weren’t growing anymore. The housing market went way down. You have to say if you don’t grow anymore, it’s going to stay at zero. But actually when you drop consumption, it means that you actually have lost some revenue. I would say we never really went negative from customers or customer count. We measure how many new meters we set, we measure how many active meters we have. So we can be setting new meters, but you can have foreclosures, you can have meters get turned off. So how many active meters we have, which is how many are actively spinning, is what produces revenue. So on active meters, on the electric side, our biggest year of growth, was around 2007. We set something like 9,000 new meters. Well, the following year, when the economy hit, we set less than 2,000 meters. That’s about an 80 percent drop in new meter sets, and that corresponds to an 80 percent drop in housing starts. Now it’s around 2,000 to 2,200 a year. When you’re used to having 8,000 or 9,000 per year, that’s a big change. And so that happened over about a two-year period. When we looked at that, and looked at the year we just finished, we prepared the latest budget a year ago we were expecting a 1 percent increase in consumption. What was driving some consumption was weather. We had the coldest winter and one of the hottest summers. We’re weather-dependent, so we really believe that when you analyze, when you look at heating and cooling days, we just kind of busted the roof out of that. Instead of increasing 1 percent over the previous year, we actually increased about 3–3.5 percent to get back some of that 4.5 percent lost.
Talk about rates.
You know, we got a lot of complaints from our residential electric customers, saying, ‘you raised the rate,’ when in fact, the rate for the year we just finished was lower than the rate the year before. We had actually reduced the electric rate last year because we dropped, so Oct. 1st (the start of the JEA fiscal year) of last year, we had dropped the rate, dropped the fuel rate about $11 per thousand. It was lower than it was the year before. People’s bills were higher because of the cold weather consumption. They’re weather dependent. The question is, as we’re preparing the budget for the year we just started, what were we going to do? We still think that projection of 1 percent per year over a 5-year period is where it should be. So in effect, what we should do in terms of the budget, year over year, is, we said we’re going to lose some of that 3.5 percent (consumption increase from last year.) In other words, we’re not predicting or projecting that we’re going to have as cold a winter as we did last year or hot a summer. On demand, is a little different story. Our demand, it is at any given time, how much power is our total service to our meters, so we’ve got to have enough generation, and that always happens to us in the winter.
Are fuel costs affected by economic fear? Do you have any projections on upcoming costs?
I’d say fear doesn’t really figure into what we are. We look on an annual basis at the next year coming and say, what are we projecting fuel costs to be? The year we just finished, you know we had projected fuel costs to actually come down, in certain areas, coal and some petroleum, and coke – usually what we burn at the northside plants. We projected that to come down, and so actually lowered the fuel costs for our customers in the year we just finished. As we’re going throughout the year, we found out that some of those costs didn’t come down. They actually went up, so we ended up with a gap. When we didn’t increase the fuel costs throughout the year, all we did was we drew from the reserve. So we’ve got to replenish the reserve. Of course, fuel costs continue to rise, so we actually, the year we just started, we increased fuel costs a little bit. I think we increased fuel costs about $4 or $5 per megawatt hour. But then we also had to build the fuel reserve back up. We elected to build it back up over a three-year period, instead of one. We’ll slowly build that fuel reserve and we feel pretty good about that because we don’t think fuel will be all that volatile. But that’s a little bit of a risk we take. It would have been a bigger hit for our customers to do it in one year. What we have seen is natural gas prices have dropped lower than what we forcasted, so we’re getting some savings on natural gas prices. Coal prices continue to kind of inch up in terms of cost. Petroleum coke, which is actually our lowest cost fuel that we burn in our CFBs out there, is actually contining to rise. That’s kind of a surprise to us, and when you study that market, if natural gas prices continue to stay low, and coal prices don’t creep up anymore, or petroleum coke prices stabilize, then we could go into the following year without having to increase the fuel rate. We won’t know that until we get into the spring.
Are new environmental regulations affecting what JEA does and can do?
Whether it’s coke, coal combustion byproducts or emissions, we’re really looking at emissions and getting to the point where we’re going to have to burn lower sulphur coal. There’s only so much lower sulphur coal out there. Although there are a lot of technologies that you can burn a higher sulphur coal, we just spent $3 million at our big coal plant to take out nitrous oxide. One of the plants that we own part of in Macon, Ga., it’s a Georgia Power plant, we own one of the units, and they’re doing a $3 billion project that’s just totally restructuring the environmental equipment on the back of that plant. That was a plant that was built in the 70s, before some of the environmental regulations. Our coal plant was built in the mid-80s. Every time you built a coal plant, you got your permit and you had to put in place the best available control technology at that time. Over time, the EPA and the legislature put out rules that said by the year 2010, all plants have to meet (current standards). If you didn’t put it on your plant back when you built it in the late 70s, you’ve got to put it on there. That’s another piece of fuel cost. That increases our capital costs and increases our debt service costs. How do we pay a higher fuel cost and so forth? I think we’ll see fuel costs continue to rise because of regulations.
And coal’s going to be the fuel?
Well, right now, coal accounts for 49 percent of all the energy created in the U.S. Nuclear is about 19 percent of the rest. I heard an interesting thing the other day. You hear a lot about how France is like 80 percent nuclear. Japan is heavy nuclear. Actually, the U.S. is the country that produces more nuclear power than any other country. You take the top four countries, combine the nuclear, and they don’t equal the U.S. and we haven’t built a new nuclear plant since the 70s. China right now is building 11 nuclear plants and they’ve got 33 in design. The U.S. is building one. It’s under construction in Georgia, and we have a contract to purchase power out of that plant in 2016. I think there’ll be a nuclear renaissance, but the question is how much? They’re expensive. Coal is cheaper. That’s really why we have 49 percent coal today. I do believe that the Obama administration is a little more pro-nuclear than what people would think that they might be. They’ve just been quiet about it. They haven’t really been pushing it, but they haven’t been stopping it. They have come across with some loan guarantees for some of these first-round nuclear plants. The issue is the waste. Somewhere in the long term, you’ve got to re-process it or do something.
What are some of the trends in water usage?
I think it was maybe 2006, we had our largest water production, something like 43 billion gallons of water. This past year, we were probably around 36 billion gallons. So we’ve seen an overall drop of probably close to 20 percent in water production over a four-year period. We’ve seen the drop on irrigation, residential irrigation and then some commercial irrigation. You know we used to hear 50 percent of our water was used for irrigation, I’d say it’s not that anymore. We’re seeing some change there, and actually that’s a good thing. From year over year, we lost consumption but it wasn’t as much as we had expected. This year, we’re expecting to lose another 2 percent (consumption) and then probably another year out is when we think it will stabilize and stay. On the one side, that’s very good for our aquifer, because we get all our water from the aquifer. The other side is that it affects our revenues. Our business model is based on consumption, and even though we’ve changed a few things, there’s some more fixed meter costs in there now. In the water business, you have bigger fluctuations, as opposed to the electric business.
Talk about the new solar farm. People ask why you didn’t get that done earlier.
I think we’re getting two sides of that story. We’re getting people that are criticizing us for doing it at all. And we’re getting people that are praising us. But then there are others that are realizing that this is the most expensive power that we have so why are we doing this? The cheapest solar that we found anywhere around, we did it. But over the next 30 years, it’ll cost me 21.5 cents a kilowatt hour; I sell it now for 12 cents. The solar plant is producing power all the time from sunshine, and I’ve got to buy it. That’s the nature of the business. The reason we did it was to get experience with it. It ends up producing 22 thousand megawatt hours a year, and so that’s only like 0.2 percent of my energy. It’s expensive energy, but it’s only 0.2 percent.
How many heavy manufacturers are in the system?
A lot of heavy manufacturers are in the interruptible class. (Interruptible means) the lowest rate we can have, because we can work with those customers—when you look at how our interruptible class is, and basically right now, that class produces about $68 million worth of revenue. Now they do have the lowest rate, which means that on a kilowatt hour basis, they’re paying a lower unit rate, say, than residential customers, because they are cheaper to serve. And they’re also interruptible. The interruptible class is a class of customers that, whenever we get up to that high peak. So if my peak is forecasted to be 3200 – another 15 percent that would be another 400 megwatts – I’ve really got to have another 3600 megawatts of generation. So on the interruptible class, what we’re doing is, rather than turn on and have those peaking units, then I can actually interrupt those customers during those hours, and then they get a cheaper rate, because I’m not charging them in their base rate cost to have that generation in place. That’s the concept of the interruptible customers. We have, about 68-70 million worth of interruptible customers. On a total electric revenue, that’s about $1.4 billion, somewhere in that neighborhood.
Have you talked to Gerdau Ameristeel on the decision to deny their request for a special rate. What was their reaction?
I haven’t talked to them since our board had made that statement. I talked to Lad Daniels (First Coast Manufacturers Association president) but I haven’t talked about this particular issue with him.
Did they say anything about such a deal setting a precedent?
I think that’s one of the things they said. I think, number one, it would set a precedent. I know for a fact that there would be other customers coming in the door and they would be asking for (a special rate). I had said in the board meeting, that Steve Halverson, CEO of Haskell, they have a steel manufacturing business here in town, and I had a conversation with him at one of our Jacksonville City Council meetings, and he knew this kind of issue. He said “Jim, if you all do anything like that, I’ll be the next one in the door.” In the conversation with Lad Daniels, he’s not just interested in Ameristeel. He’s doing this because he’s interested in a First Coast Manufacturers (Association) presence. He’s been very up-front about that.
How do you handle the critics? Do you ever feel like JEA is Public Enemy No. 1?
Probably. Sometimes you can pick up the paper and take a look and scan for those three little letters JEA, and see what we’re doing. I think at times we’re easy to pick on, one because we serve everybody. There’s not a person in this community that’s not affected by us. So we recognize that. I think we’re an easy target in that light because everybody is served by us and we have a responsibility to be accountable and do the best job we can, and then we try to put out the right information, sometimes the right information doesn’t get out there.
What’s next on the JEA board’s agenda?
This week we’re going to focus on a legislative update on what’s going on, on account of water, of wastewater, the electric side, a legislative update for the board. Our CFO is going to talk about financials on finishing out the fiscal year, and what kind of economic conditions we’re going to see.
We’re also going to discuss our pricing philosophy. We put together a pricing philosophy about four years ago when we did the base rate increase for the business, and we’re going to talk to the board about what we accomplished over that time by sticking to that pricing philosophy. We’re laying out assumptions for our presentation in early December, laying out for them what’s going to be the basic messaging from the financial side with the (bond) rating agencies.