Part II: Supply chain and inflation

The world changed five years ago when the coronavirus pandemic entered our lives. It disrupted everything, from the way we learn and work to the price of groceries and gasoline. While many facets of our lives have returned to normal (or a “new normal”), the American pocketbook is still wishing and waiting for the return of pre-pandemic pricing.

So are electric cooperatives.

“From a personal standpoint, all of our cooperative employees are feeling the effects of inflation, just like every other American,” says Mick Kossan, CFO of Central Power Electric Cooperative in Minot. “From a cooperative as a business entity standpoint, we are feeling the effects like any other business during this time.”

Supply chain issues and inflationary pressures are having a widespread impact on utilities.

Over the past five years, electric cooperatives have seen drastic increases in the cost of materials. They’ve also adjusted to supply chain challenges and shortages, which have extended lead times for parts, materials and equipment.
 

SUPPLY CHAIN
In 2019, Central Power Electric, a wholesale power supply and transmission cooperative serving six distribution cooperatives in North Dakota over a 25-county area, ordered its annual supply of conductor, which took six to eight weeks to arrive. By the end of 2021, the lead time for that same conductor was 60 weeks.

COVID-related supply chain challenges coupled with the substantial increase in demand for electric utility products in 2020 and 2021 created a “perfect storm” of excessive demand and insufficient supply in the marketplace, says Matt Brandrup, president and CEO for Rural Electric Supply Cooperative (RESCO), a member-owned, not-for-profit electric material supply distributor whose members include electric cooperatives in North Dakota and nine other states.

“The COVID-19 pandemic exposed and exacerbated (supply chain) areas of risk, highlighting vulnerabilities and inefficiencies at a new level,” adds Aaron Jahner, Bismarck branch manager for Border States Electric, another supplier of electric cooperative materials in North Dakota.

Suppliers and purchasers were forced to adjust to the new instability in the market for electric utility materials.

RESCO began increasing inventory levels toward the end of 2021 and built new warehouses or expanded existing ones, including its Moorhead, Minn., facility.

“We have always carried substantial amounts of inventory for our electric cooperative members, but have boosted levels even more,” Brandrup says.

Many distribution cooperatives followed suit, increasing their on-hand inventory, thus reducing cash on hand.

Material availability is critically important for cooperatives. It is considered when determining a co-op’s capacity to serve growth areas and members’ evolving power needs. It is crucial for storm preparedness. And it factors into co-ops’ five-year construction workplans, which detail the maintenance and upgrades needed to keep their systems reliable.

“The danger of not building out the grid to meet demand is our (member-cooperatives) won't be able to meet the needs of any potential new loads. Additional kWh (kilowatt-hour) units to spread increased costs over keep rates stable, so in most instances, growth is good,” Kossan says. “This isn’t an ‘if you build it, they will come’ scenario. It’s more of an ‘if you don’t build it, nothing is ever going to come’ scenario. The longer a transmission provider delays line rebuilds and upgrades, the more risk they are taking on, and could end up in a scenario where they can’t realistically ever catch up.”

In the current materials supply environment, preplanning for construction projects is essential. Members are encouraged to contact their electric cooperative in the early planning phase of a project, whether that be building a farm shop or adding a grain bin, to ensure the availability of materials. Electric co-ops can review the project’s electricity requirements, discuss potential money-saving programs and make recommendations for lighting or energy-efficient heating and cooling systems.

“With the supply chain volatility we have been experiencing, it’s essential to consider and plan for future projects much sooner,” Jahner says.

And when preplanning isn’t possible, both RESCO and Border States have storm response mechanisms in place. RESCO’s storm response trailers are loaded with storm restoration materials and positioned throughout its service territory to respond quickly to members’ material needs. Border States leverages its storm stock in emergencies, which is dedicated inventory to support storm response and restoration efforts.

Electric cooperatives also have mutual-aid agreements in place with other cooperatives that are exercised when storms hit and during major outages. Cooperatives share resources, equipment and personnel to shorten outage times and restore power for co-op members.

Fortunately, the supply chain situation is improving. Many essential items that were hard to get in 2022 and 2023, such as transformers and underground cable, saw improved availability and lead times throughout 2024.

“Lead times have returned to more manageable levels, and we expect this trend to continue into 2025,” Brandrup says.

“All core markets we serve (utility, industrial and construction) have seen improvements in material availability and lead times decreasing over the last 12 months, but most are still above pre-pandemic levels,” Jahner says.
 

INFLATION
While the supply chain situation is improving, cost inflation of electric utility materials over the past four years remains a key challenge for electric cooperatives.

“From January 2021 to January 2025, the average cost of these materials has increased by approximately 51%. (Some items) have even seen price increases exceeding 51%,” Brandrup says.

“The cost of pretty much everything has increased, from day-to-day inputs like fuel and office supplies to fixed assets like trucks, trailers and heavy equipment,” Kossan says.

One example is substation power transformers. Central Power Electric purchases both distribution and transmission substation transformers, which step up or down high voltages before being carried through overhead or underground power lines. Kossan says the cooperative has seen transformer cost increases of 61%, 85% and more than 100%.

In September 2020, Central Power Electric purchased 10/14 MVA (mega volt-amperes) distribution substation transformers for $265,568. By August 2023, those transformers more than doubled in price to $549,937.

At the same time, electric demand is increasing and infrastructure is aging.

“Some of our (transmission) lines have been standing out there in the open prairie for 60-plus years, and could hang out there for several more. However, the longer you wait, the more risk you take on, and the cooperative boardroom is not a good place to make an ‘it costs too much to replace it’ excuse,” Kossan says. “Central Power has been on a very aggressive line replacement program over the past several years, recognizing that we have pushed certain line segments past their estimated useful lives.”

While now, economically speaking, may not be the best time to build new or update existing transmission infrastructure, Kossan says Central Power Electric’s member-cooperatives recognize these projects are necessary to maintain the electric grid.

Beyond material cost increases, electric cooperatives feel the impact of increasing interest rates, just as Americans do when they take out a car loan or home mortgage.

Most cooperatives in North Dakota have loans with the U.S. Department of Agriculture Rural Utilities Service (RUS) – which replaced the Rural Electrification Administration or REA – to finance their construction and infrastructure projects. Some cooperatives also have loans with national cooperative banks, including CoBank and the National Rural Utilities Cooperative Finance Corporation.

Through participation with these lenders, electric cooperatives have historically enjoyed low interest rates. However, interest rates have risen in recent years.

Central Power Electric drew down RUS loan funds from the Federal Financing Bank (FFB) in November 2019 at 2.009% and 2.023%, in March 2020 at 1.569%, in January 2021 at 1.573%, in January 2023 at 3.665% and in April 2024 at 4.79%. Current long-term rates on FFB funds are 4.78% and treasury rates are 4.82%.

“While still favorable, this is a significant increase over 2019,” Kossan says.
 

LOOKING AHEAD
How might supply chain and inflationary pressures be felt by electric cooperative members? Ultimately, it comes down to a local electric cooperative’s ability to absorb these higher costs while still delivering reliable electricity. The reality is forces outside of local cooperatives’ control are having an impact.

“It impacts the costs we have to charge our members for power directly, as we build all our costs into our rate we charge the members each year,” Kossan explains.

Kossan is hopeful the pledge by the new administration in the White House to unleash energy independence and reduce regulation will be fruitful in reducing energy costs, which will play a large role in getting other costs to level off and start to decrease, he says.

“The hope is that, regardless of political affiliation, the economy starts to grow and recover. If inflation can be contained, the Federal Reserve could continue lowering interest rates to keep the economy growing, which will have a positive impact on cooperatives,” Kossan says.

Find the next feature in the “Cost of Your Power” series in the March issue of North Dakota Living.

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Cally Peterson is editor of North Dakota Living. She can be reached at cpeterson@ndarec.com.

EDITOR’S NOTE:
In North Dakota, electric cooperative rate making is a function of local electric co-op boards of directors, which are democratically elected from the membership by the co-op members. Electric co-op boards weigh many factors when determining rates and balancing reliability, safety and affordability.

Across the country, many electric cooperatives (though not all) have implemented, are considering or will consider a rate increase. The “Cost of Your Power” series will present some of the current industry-wide, high-level pressures which factor into rate-making decisions by electric cooperative boards. This series will not include information specific to your local electric cooperative. Contact your local electric cooperative for information about your electric rates.