Kirkwood Electric’s Problem is Not Unique

A couple of weeks back, first-term Kirkwood City Council Member Al Rheinnecker alerted the public via his re-election campaign newsletter that the Council had voted to implement a 14.8% electricity rate increase for the coming year at their October 17th meeting. The department will also increase the fixed “customer charge” portion of electric bills from $8 to $10.

This rate hike is the latest chapter in what has been a sharp run up in electricity costs for Kirkwood residents and businesses over a relatively short period of time. If a household consumed a fairly typical 850 kWh of electricity in July of 2021, their monthly electric bill would’ve been approximately $97. If they consumed the same 850 kWh in July 2026, they’d now be looking at a $142 a month.

So why are rates climbing yet again? Rheinnecker offered three main rationales:

1. Kirkwood Electric has undertaken significant capital upgrades to the city’s grid and distribution infrastructure over the past decade, which should save us money in the long term, but means we have a lot of short-term debt to pay for
2. The overall cost of electricity is going up due to drastically increased demand
3. Kirkwood Electric apparently has a $13.8 million cash reserve deficit that the Council just found out about at the end of August.

He then went on to explain the steps the city is taking to correct this issue:

Since August 28 when the council was first informed of the deficit position, the mayor and many members of the council have been trying to determine how this loss occurred and how it went unnoticed. In addition, we have been spending a lot of time trying to determine what reforms can be implemented so that this never occurs again.

Our first action was to hire Utility Financial Solutions (UFS) and ask them to evaluate the electrical department financial position and make recommendations. The investigation determined that the electrical department has lost money in 4 of the last 5 years… They recommended a 14.8 % increase in rates in an attempt to build back… $13 million in reserve by 2031. However it must be pointed out that the capital improvement figure (capX) and projected revenue calculations in the plan… came from the Kirkwood electrical department and are very optimistic projections…

We have hired an accounting firm to conduct a thorough audit of the electric department expenditures over the last 2 fiscal years and we will release those results in the next couple of weeks.

So all of this makes it sound like there’s a big mystery afoot, perhaps even a crisis! How does $13.8 million disappear?! The Council was apparently so alarmed that they forced Mark Petty —a graduate of MIT who has served as the Director of Kirkwood Electric with distinction for more than 20 years— into early retirement at a time when demand for experienced energy executives has never been higher.

The Big Mystery Revealed

But I don’t think any of this is nearly as dramatic as the Council would have you believe. In broad terms, Rheinnecker already explained what happened to the $13.8 million with his first two reasons:

1. Kirkwood Electric spent a bunch of money recently on needed capital improvements to Kirkwood’s grid
2. Electricity prices have increased as the supply of new power has failed to keep up with skyrocketing demand for power from things like electric vehicles, heat pumps, and data centers.

Reason number three, the $13.8 million drawdown of cash reserves, is not an independent cause for the rate increase itself, but rather mostly a symptom of factors one and two.

And indeed, the UFS slides he links to point directly to the cost of those recent infrastructure improvements as the primary culprit behind Kirkwood Electric’s deteriorating cash balance. By the end of the current fiscal year, Kirkwood Electric will have spent ~$48.78 million on major capital improvements over the past five years, while only borrowing ~$34.65 million via bond sales to pay for those expenses:

That means that the capital improvements were ~71% debt-financed, a very typical rate for municipal utilities. The remaining ~$14 million, the difference between the cost of the infrastructure upgrades and the bond revenue that was used to pay for them, had to be covered by drawing down cash reserves.

And if you zoom out a bit further and look at the total money in and out of Kirkwood Electric over the past eight years, you can see that this drawdown accounts for a very small portion of Kirkwood Electric’s overall cash flow situation:

The main story here is a boring one: Kirkwood Electric undertook significant infrastructure upgrades, as many private and public electric utilities across the country currently are, and it primarily financed those upgrades by selling bonds and drawing down cash reserves. The goal of these upgrades is that they make Kirkwood Electric’s operations more reliable and efficient in the long run, because as you can see from the above, the bulk of Kirkwood Electric’s financial standing is determined by two factors: 1) The price they buy electricity at; and 2) the price they sell it at.

What About Transfers?

Some other things are happening in here too, of course. Transfers from the Kirkwood Electric Fund to the city’s General and Streets Capital Improvements funds have spurred many questions from the Council. But transfers like these are fairly typical for municipal utilities. Sometimes they’re described as representing the dividends a private utility would pay to their investors (in this case, the citizens), and other times they’re described as payments in lieu of taxes, but in any case, the average municipal utility typically provides something like a 5% return on their revenue to their community and since FY19, Kirkwood Electric has provided just over 6%.

Now these transfers have increased in recent years, which seems unwise since Kirkwood Electric was in the midst of a cash-intensive grid-upgrade project, and I think it makes sense to bring that number back down closer to the 5% mark, but that’s politically difficult.

The City Council really does not like to lose access to the revenue sources because the state of Missouri makes it very difficult to find new sources of tax revenue. Munis are not allowed to increase property tax revenue at all except for any increases facilitated by new construction or major improvements (which we know this Council is opposed to), and any sales tax increases must be approved by voters, both thanks to the Hancock Amendment.

Rather than face an uphill battle to convince voters to raise taxes on themselves or further development, the Council can instead instruct Kirkwood Electric to do its bidding for them by raising rates. The faceless utility serves as a scapegoat —”Kirkwood Electric has lost money in four of the past five years, so now they have to raise rates”— and the Council gets to claim ignorance while using the infusion of revenue to pursue things they can then claim credit for, like fixing roads or pursuing pet projects.

If you stripped out the transfers the Electric Department has made to other city funds since 2019, their net income goes from -$7.68 million to a positive $7.57 million and they’d only have lost money in three of the past five years.

But it also doesn’t really matter. The simple reality is that we, as a city have two distinct financial holes to plug with any fund of our choosing.

1) We did a system-wide upgrade of Kirkwood’s electric grid to modernize it and make it more efficient. It’s over now, but we drew down cash reserves to pay for it so now we have to build them back up.

2) The wholesale cost of energy Kirkwood Electric buys to put into the system has risen faster than the revenue Kirkwood Electric makes from selling that electricity to customers. Kirkwood Electric has lost this arbitrage game three of the past four years, but the vast majority of the damage was done in a single year.

In 2022, the FY23 budget year shown above, Russia invaded Ukraine, leading to a massive disruption in natural gas prices, a key driver of Kirkwood Electric’s wholesale purchasing costs. Kirkwood Electric rates did not increase in time to make up for this global spike, and as a result a $7 million hole was blown in the budget.

A Crude Approach

To respond to this crisis, the City Council at the time tacked a “fuel charge” to each electric bill, a temporary 35% rate increase to all electric bills that was supposed to go away once natural gas prices moderated.

But instead of revoking the fuel tax once natural gas prices finally fell at the start of FY25, the current city council (then newly elected) and Kirkwood Electric decided instead to keep it in place indefinitely to try and pay down the capital improvement expenses the department had incurred.

But although natural gas prices stabilized after 2022, overall electricity prices continued to climb. The 2022 period of curtailed supply was almost immediately followed by an unprecedented growth in electricity demand. The growing adoption of electric vehicles, appliances, and the build-out of power-hungry AI data centers have all caused energy prices to keep marching up.

That meant the additional revenue provided by the fuel charge was needed just to keep up with Kirkwood Electric’s rising costs of purchasing electric on the wholesale market and by FY25, wholesale costs had once again outstripped meter sales. The fuel charge wasn’t enough for us to break even, let alone make progress in replenishing reserves.

This problem of rising rates is not specific to Kirkwood Electric. Utilities across the country have had to increase rates to keep up with rising costs and infrastructure upgrades:

So now we’re left trying to fix both problems —the capital expenditure hole and the rising wholesale costs— simultaneously. I haven’t heard a Council Member describe this very well yet —they often seem to conflate both of the problems and their respective solutions with one another— but the plan, as I understand it, is as follows:

• To rebuild the cash reserves we spent on grid upgrades and ensure we have sufficient funds for future upgrades (fixed costs), the fixed monthly “Customer Charge” will go from $8 to $10
• To cover the rising costs of purchasing wholesale electricity (variable costs), the rates you’re charged per kilowatt-hour (kwh) of energy used will increase by 14.8%
• The additional 3.5¢ per kwh “fuel charge” (yellow box below) will continue to be added on top of that new higher rate, meaning the new effective rate will be 15.5¢ per kwh in the Summer and 14.3¢ per kwh in the Winter

Again, this is definitely not how the Council is articulating it, but I’m hoping that’s because they’re confused since this is the most rational explanation I can come up with. But it’s still chock full of problems:

1. The 14.8% increase is going to be needed just to cover rising wholesale electric prices so it’s not going to be able to replenish capital cash reserves just as the fuel charge was not able to.
2. The $2 increase in the Customer Charge is the vehicle for replenishing cash reserves, but it is not going to be able to do that in the five years as the Council is stating, nor should that be a goal. There is no need to spike prices any time we need upgrades and then yank them back down when we don’t. Instead, it should rebuild them more slowly and smoothly over the full ~30-year lifespan of the grid we just upgraded. If a $2 monthly increase is not enough to rebuild our cash reserves, it should be increased. $12 would still fall into the very normal range for this kind of fixed fee.
3. It’s confusing and poor for transparency to have two different rates —the Fuel Charge and the Energy Charge— that you have to add together. They work the exact same way with the same goals (covering variable costs of wholesale electricity at a slight premium to cover admin costs) and should be added together.
4. The 14.8% rate increase, just like the fuel cost before it, is entirely random and has no connection whatsoever to the wholesale cost of energy. It could very well be way too high or way too low and we wouldn’t be able to make the appropriate adjustment until after the damage was done.

PCA: The Better Way

One way we can address this final concern —while improving transparency— is to implement something called a “Power Cost Adjustment” (PCA). A PCA means that if wholesale electricity winds up being more expensive than Kirkwood Electric expected, then the next month’s rates would rise to offset those additional unexpected costs. If electricity winds up being cheaper than expected, the next month’s rate would be reduced. In order to smooth these adjustments and make them more predictable to customers, utilities typically use a rolling average of the last few months, and, ideally, this adjustment is broken out separately on your monthly statements so that you can follow exactly what part of your payment is going where. In short, though, a PCA ensures electric rates are always pegged to the price Kirkwood Electric pays to acquire that electricity.

And indeed, the implementation of a PCA was one of the primary recommendations of the UFS report the city commissioned. To quote once more from Rheinnecker’s newsletter:

Another recommendation from UFS is for Kirkwood electric to begin implementing a cost of electricity adjustment each month.  The adjustment will use a 6-month rolling average of wholesale electric costs to determine the adjustment each month, the council is still discussing this option.

A PCA is fair, transparent, and easy to implement, unlike the across-the-board hikes the Council prefers, and it makes little sense to me why the Council would delay its implementation given the supposedly dire situation we’re in.

Pump the Breaks

Simultaneously insulating Kirkwood Electricity from future wholesale electricity cost volatility while ensuring the Customer Charge covers the cost of grid maintenance is the best way to make sure the utility remains viable while electric bills stay predictable and transparent. There are other long-term improvements we can make to try to bring these overall costs down, but those will have to wait for a Part 2. For now, what you need to know is that there’s nothing inherently wrong with Kirkwood Electric nor any reason Ameren would be any better, but there are meaningful reforms we can make to ensure it works better. For now, the Council seems more interested in throwing up its hands and casting blame.