Serving ‘one master instead of two’
At ODEC, the rural customers are the shareholders
As CEO of Old Dominion Electric Cooperative, Jackson E. Reasor faces the same challenges as many electric utility leaders: capacity, reliability, cybersecurity. But there’s one thing he doesn’t have to worry about: the pressure to make a profit.
ODEC, which provides power to 11 distribution cooperatives serving 1.2 million people in Virginia, Maryland, and Delaware, operates as a nonprofit, which is owned by its members.
“We’re fortunate in this regard in that we do not have to balance the needs of our customers on one hand and our stockholders on the other hand, because for us our members are both … So we’re able to serve one master instead of two.”
While ODEC doesn’t have to build profit into its costs and rates, “we have to cover our costs, and we have to build equity,” says Reasor. “Beyond that, excess profits … above and beyond our needs generally go back to the members.”
That difference aside, Reasor’s primary mission sounds similar to that of for-profit energy executives: “to provide reliable service that is environmentally balanced at the lowest possible cost.”
To do that in rural areas served by member co-ops is not always easy. A part of electricity costs for co-ops is the distribution side provided by the 11 members. The average cooperative in the U.S. serves about eight to nine electrical meters per mile, notes Reasor, compared with 50 to 60 meters per mile for municipal electric systems and 20 to 25 meters for investor-owned utilities such as Dominion Virginia Power. “So you don’t have as many meters to spread your costs for every mile of line. That has the tendency to increase the cost somewhat.”
Yet when it comes to laws and regulations, Reasor is on the same page as other energy executives. He serves on a national cybersecurity group, and he ponders what impact President Obama’s carbon emission reduction initiative will have on the electric industry. In June, Obama’s administration proposed a new Environmental Protection Agency rule that would cut emissions from power plants 30 percent by 2030, compared with levels in 2005.
Reasor came to the energy industry via a circuitous route. He grew up in Danville and began his career as a lawyer, practicing with a small firm in Grundy, not far from where his parents grew up in Lee County. Perhaps because of his upbringing, Reasor shares an affinity with rural areas and enjoys leading an operation that helps keep these areas competitive by providing reliable electric service and initiatives such as broadband.
Eventually, he got into banking and local politics before becoming a Democratic state senator for the 38th District in 1992. He resigned from that post in 1998 to become CEO of ODEC. By that time, Reasor had chaired a statewide committee investigating the possibility of deregulating the electric industry and had gained a lot of knowledge about the industry. So he applied for the job at the Richmond-based co-op and today is ODEC’s longest serving CEO.
Last year was a busy time for the co-op. The board approved a new rate design and moved forward on a new plant to boost ODEC’s generation capacity. Reasor and the board recently selected the contractor for a new $850 million, 1,000-megawatt, natural gas-fired plant in Cecil County, Md., that’s expected to be operational by May 2017.
Virginia Business sat down with Reasor recently at ODEC’s headquarters in the Innsbrook Corporate Center in Henrico County. Below is an edited transcript of the interview.
Virginia Business: How long have you been working in the industry?
Reasor: I’ve been here about 15½ years. That has been my involvement in the industry.
VB: What are the greatest challenges today in running a not-for-profit electric co-op?
Reasor: Probably our greatest challenge or challenges would involve our basic mission, and that is to provide reliable electric service that is environmentally balanced at the lowest possible cost. Being sure that our system is reliable — we feel like we’ve been pretty much 100 percent accurate on that over the last several years. But with everything from loads increasing, an older grid system, to cybersecurity … as well as regulations that sometimes limit our options, all threaten reliability.
To be sure that we are “environmentally balanced,” that becomes a challenge because so many people would define that phrase very differently. … The people, the members that own us, are outdoor people … These are people who are hunters, they are fishermen, they like the outdoors. They want to protect, we want to protect, the outdoors … The definition by regulation and law as to what is environmentally proper continues to evolve, and move, and change.
…How are we going to provide electric generation in the future and what will its cost be? That’s our greatest concern.
VB: How will President Obama’s recent carbon reduction initiative affect the co-op?
Reasor: I think it’s safe to say it will have an impact, and it will impact the future of electric generation. Of course, it is not the final regulation. It’s kind of the first shot. They’ll take comments and probably modify it, and then I assume it’s inevitable there will be court challenges. One of the interesting aspects is that they are leaving a lot of the final details to states to work either within your state or with other states in a region … So even after the federal regulation is final, which is probably several years down the road, it then will come to each state … There are a lot of unknowns, but clearly it presents new challenges.
VB: Is ODEC moving forward with renewables?
Reasor: Absolutely. Less than 10 years ago we had no generation or purchased any power from generation that would even come close to being defined as renewable. Today, almost 5 percent of our total generation and load comes from renewable types of generation. Now we don’t own any renewable generation at this time. … But we do have long-term contracts to purchase power from three wind farms, two in Pennsylvania, and one in western Maryland. And we have entered into long-term contracts to buy landfill gas generation.
VB: Earlier, you touched on the issue of physical [security] and cybersecurity. Can you say what ODEC is doing to ward off attacks?
Reasor: Sure, to some extent I can. … We don’t operate a lot of generating facilities, so we don’t have a lot of responsibility there … We are cognizant, though, of the gas plants that we do own and operate and the new plant that we are building … We have our own in-house IT system and program and employees. So, we deal with everything from our own Internet access and email processes to whatever types of computer operation would be involved … to communicate with our plants.We are constantly working with other parties particularly NERC, the North American Electric Reliability Corp. which helps set standards and has a very active cybersecurity program.
VB: Have you had to beef up your investment in IT infrastructure or bring in more highly trained employees?
Reasor: I can’t say that we’ve gone out and hired someone just because of cybersecurity, but I will tell you that we continue to change our programs and to do things. For instance, we hired a company a couple of years ago from the outside to attack our system to see if they could work their way into our system.
VB: And how did ODEC do?
Reasor: Well, they’ve done it a couple of times for us. The first time was a little easier than the second time, which is good news.
VB: You mean to get in?
Reasor: To get in. Their claim is they’ve never tried to get into a system they couldn’t get into. The question was how long did it take, how easy was it, and what recommendations came out of that exercise that you could use to strengthen your system.
We continue to work on those kinds of programs. I also have had the opportunity to serve on a cyber sub-council under the Department of Energy [Electricity Subsector Coordinating Council]. … This was an effort to bring CEOs from major utilities and organizations involved with the electric structure together and work with the Department of Energy and Homeland Security on addressing cyber issues. … We meet three or four times a year. There are representatives from the FBI also present. The main reason we come together is to share information from the private sector with the government. They’ve been very good about sharing information and what they know … They tell us ‘This is what we’re seeing, and you need to adjust accordingly.’
VB: Who sets the rates for co-ops?
Reasor: In our case, our distribution members only provide the distribution rate, and then ODEC sets the cost of the generation of the power. We pass that to our members. The distribution member rates are set by the State Cooperation Commission [SCC], not unlike AEP [American Electric Power] and Dominion Virginia Power. ODEC is not regulated by the SCC. We are regulated by FERC, the Federal Energy Regulatory Commission. We provide a formula to FERC, and then we plug in our numbers, and whatever cost comes out of that formula then becomes our cost to our members and our rate to our members.
VB: Have your rates been going up?
Reasor: They were going down. They went from $69.96 in 2011 [average total cost to member owners per megawatt hour] to an average cost in 2012 of $68.35. Last year it was $65.57.
VB: So that translates to about 6.5 cents per hour for 2013?
Reasor: That’s correct.
VB: But now rates are going up?
Reasor: Yes, they are going up. We increased our rate in April primarily because of what happened in January. This winter was just an unbelievable time for us as it was for every other utility. … It was probably a 7 percent increase in our cost, which is a hefty increase at one time. We’ve never done an increase at one time of that much.
VB: How will ODEC’s new natural gas-fired plant in Maryland help the co-op?
Reasor: Currently we generate about 50 percent of our members’ needs … Our board has set an informal policy that they think it would be to our advantage if we generated and owned generation of 50 to 70 percent, maybe as high as 75 percent. A little over a year ago, we issued an RFP [request for proposal] and asked companies to bid as to what it would cost us to generate some base-load generation for the long term, basically 10 years. We looked at the potential of building projects as well. We required our staff to respond to the RFP as if they were an outside bidder … We received almost 80 different proposals including our own two or three build projects … As we continued to look at the costs and the impact on us and our rates, it worked out that this was the best project for us.
VB: Tell me about the new plant.
Reasor: It will be a natural-gas plant, but unlike the peaking plants that we own today, this is called a “combined cycle.” It’s much larger, and it will be run pretty much on a regular basis like a base-load coal plant or a nuclear plant. Our projections are that it will have a positive impact on our rates because it will replace some contracts, and it will give us more reliability. We won’t be as subject to the daily market and contracts as we are today. This winter was a great example of what that can cost you.
VB: At one point, ODEC had considered building a new coal plant in Surry County. Is the natural-gas project a replacement for that or is the Surry project still on your drawing board?
Reasor: A little bit of both. Clearly, if we had gone forward with Cypress Creek [in Surry County], which was going to be a coal plant, we would not be doing this plant as well. So, in that sense, it is a replacement. We have needs of 800 to 1,000 megawatts. Cypress Creek could have met that need. This plant now will meet that need; however, we did purchase the property, both properties in Surry and Sussex counties. And we believe that down the road, they could provide good sites for some type of generation.
VB: Some people would say that the environmentalists killed that project.
Reasor: They worked very hard to stop the zoning process, and I would remind people that we received all of the zoning permits and requirements that we needed. What really stopped the project were two things, and maybe the environmentalists take credit for these … Understand now we are going back two or three years ago. There was a great deal of uncertainty as to what the EPA regulations were going to be. But I will have to tell you the greatest factor was the new gas finds across the country, and the low gas prices that we’ve seen over the past three or four years, and the belief that those prices will continue to stay reasonable because of the huge gas supplies that have been discovered. When you look at the cost of almost any other type of fuel compared to the cost and the projected cost of natural gas, it’s really difficult to justify economically any other type of generation.
VB: ODEC has an ownership interest in the North Anna Power Station in Louisa County. If Dominion ever proceeds with a third nuclear unit at North Anna, would ODEC be investing in that project?
Reasor: My answer today is different than my answer would have been about three years ago. When they first announced that they were looking to build a third unit, they came to us and said, “Under our contract on North Anna, you are entitled to an 11.6 percent ownership interest in this new unit,” because we have an 11.6 percent ownership interest in the two units that are there now. “So do you want to exercise that right, and are you willing to put in the money to do that?” Our initial answer was yes, we were very interested.
VB: How much of an investment would that have been?
Reasor: No one knows what that cost will be. I don’t believe they’ve yet made the final decision that they are absolutely going to build North Anna three. But they are continuing to do work at the site, and they are putting money in it …After we put $20 million or $30 million into the site for unit three with uncertainty as to whether it would ever be built, our board of directors said, “We’re not sure we can continue to make that kind of investment in an unknown project that may or may not go forward.” So, we decided to get out of the project.