An article in the March issue of the Wisconsin Energy Cooperative News, “Powering Through the Potential Perfect Storm,” looked at how supply-chain woes affected Wisconsin’s electric cooperatives earlier this year. Seven months later, with forecasts complete for 2023, not much has changed.
The supply-chain crisis has contributed to high inflation, disrupted almost all industries, and wreaked havoc on the U.S. economy with no end in sight. However, electric cooperatives continue to weather the blows through careful planning and creative problem-solving.
Enter RESCO (Rural Electric Supply Cooperative), a not-for-profit cooperative headquartered in Middleton, that sells utility distribution materials and supplies to rural electric cooperatives. Created in 1936, RESCO supplies 260 members with distribution and transmission materials across nine states. It functions as a cooperative owned by the electric distribution cooperatives that purchase from it and has worked doubly hard the past few years to keep co-ops supplied with what they need to keep rural Wisconsin’s lights on.
“Obviously, we deal with other vendors, and not to knock anybody, but RESCO is definitely there for us,” said Danny Jordan, warehouse manager at Rock Energy Cooperative, headquartered in Janesville. “It’s a little different because RESCO’s a co-op, I feel. They want to help.”
Jordan recalled a specific job for new construction on co-op lines for an Amazon distribution center in Beloit. RESCO scrambled to get a larger transformer than it typically carries in Wisconsin from one of its warehouses in Tennessee. With little notice, RESCO came through for the co-op, helping the project to remain on schedule.
Matt Brandrup, RESCO president and CEO, confirms that he sees supply-chain issues continuing well into 2023 and likely 2024.
Brandrup cites significant product price inflation in 2021 and 2022 as one of the biggest headaches faced by the industry but has seen utility product inflation starting to level off a bit. In 2021, RESCO saw a 14% average cost inflation rate on all products it sells. Just the first five months of 2022 brought a 9% average cost inflation on products, with a forecasted inflation rate of 15–20% for the full year. So, in only 17 months, utility material costs increased by 23%.
To say that increase is a burden on cooperative budgets is an understatement.
Brandrup cites four main drivers behind the product price inflation: commodity price increases, wage inflation, freight and shipping cost increases, and a general supply-
Big parts of the supply/demand imbalance are demand drivers like an increase in new housing construction and larger home loads tied to EV charging needs, and grid modernization projects linked to renewables coming online. Add to those other industries competing for the same input materials, and the squeeze tightens. For example, new meters need the same computer chips other sectors like automotive production rely on, not to mention that industry’s need for steel.
“You kind of get a perfect storm of demand growth,” said Brandrup. “Obviously, the economy is strong. Associated with that strong economy—housing has really come back. With that comes demand for supplies to provide that new construction with power.”
But according to Brandrup, commercial growth is also increasing demand. “So, demand is very strong with single-phase transformers, which serve residential homes, but there is also incredible demand for three-phase transformers, which are the very large transformers that serve the local gas station or other large commercial or industrial facility, for example,” said Brandrup.
Aside from the significant increase in the cost of supplies needed to keep the energy flowing, the timeframe to get supplies in hand has also drastically increased.
As reported in March, the need for transformers is at record highs.
“Transformers are the biggest issue right now. You can’t put a new or upgraded residential or commercial service in place unless you have a transformer,” said Brandrup.
Typical lead times before 2020 were 10–12 weeks, which was the case for many years. Today, cooperatives can expect lead times of 1–2 years for the same transformers. Similarly, lead time for conductor typically averaged 8–10 weeks. It now stands at 40–50 weeks.
“We used to go week by week with a lot of things before. Now we’re thinking, ‘What are we doing next year?’” said Jordan of managing inventory at his co-op. “I know RESCO has upped their inventory. We have as well because we don’t know what tomorrow’s going to bring.”
The long lead time is not for lack of effort. Brandrup reports that all manufacturers have full plants and still can’t keep up with demand. He also notes that the utility industry, in general, is supplied mainly with products manufactured domestically.
According to Brandrup, though, there is a bright spot in 2023 due partly to the cooperative business model. RESCO will receive a significant increase in production allocation from ERMCO, another cooperative that manufactures transformers. ERMCO is allocating the vast majority of its 2023 production resources to its cooperative partner distributors, like RESCO.
RESCO stands to see a 35% increase in its 2023 single-phase allotment from ERMCO and a 65% increase in three-phase production allotment. “It’s going to help us, but it’s not going to take care of the issues that are out there,” said Brandrup.
To do this, ERMCO is stepping back from much of its investor-owned utility business opportunities and instead making sure they supply the nation’s electric cooperatives first. Owned and controlled by 17 Arkansas electric cooperatives, ERMCO works with eight other cooperative-owned distributors like RESCO.
“I’ve always said this. Co-ops have done such a great job of vertically integrating their businesses for the benefit of their members, and this is just another example of that. ERMCO was created by the co-ops to manufacture and sell transformers to RESCO. RESCO then sells those transformers, on a not-for-profit basis, to our member co-ops to provide reliable and very cost-effective service to their members. That is the co-op way, and it works very well, especially when there are challenges in the marketplace like we see today,” said Brandrup.
Therein lies the cooperative difference. ERMCO, acting as a cooperative, has consistently offered the most attractive product prices despite the opportunity to charge significantly more. Its long-term strategy is to take care of the electric cooperative family first.
RESCO is run much the same. Through the cooperative model, it passes back any excess margins to the members. Both entities charge enough to cover the costs, not to take advantage of the current supply/demand disparity.
“We have investor-owned utilities coming to us asking, ‘How many transformers can you sell us?’” said Brandrup. “RESCO is taking the members-first approach when it comes to materials. Yes, we’d love to help out all utilities, whether they’re a municipal, co-op, or IOU, but for us, being member-owned, we’ve taken the ‘members first’ approach in ensuring we have enough inventory for our members.”
That being said, there are some exceptions.
“All nine of the cooperative utility distributors around the country share inventory in times of need,” said Brandrup. “So, whether it be a large ice storm, tornado, or a hurricane, to the extent any of us can help and share inventory, we do that in an effort to take care of the co-op community as a whole.”
The fact remains that supply will continue to be tight and expensive heading into 2023.
- In the last 20 years, Wisconsin’s electric cooperatives have purchased almost $450,000,000 in materials from RESCO. RESCO has returned more than $15,400,000 in patronage refund dollars to them.
- RESCO is able to offer extremely competitive pricing on the material they sell to the co-ops due to their not-for-profit cooperative model, and RESCO passes back patronage refund dollars to the co-ops (if they do make any extra margins during the year).
- Co-ops get needed utility supplies/material at the lowest cost possible. If RESCO were not around, material/supplies would need to be purchased from a for-profit supply entity at higher prices.
- The savings co-ops realize by purchasing from RESCO is passed on to members by keeping rates as low as possible.
RESCO plans to continue to put members first, starting with carrying record inventory levels. Currently, RESCO has about $42 million in inventory, double the figure from a couple of years ago. And Brandrup stresses communication, communication, communication.
First, as a supplier, RESCO constantly communicates inventories to its distribution cooperative members. Second, distribution cooperatives are encouraged to communicate current realities with members and developers so no one is caught off guard by long lead times. Third, Brandrup values the communication he has with his suppliers, like ERMCO.
Another bright spot is RESCO’s planned 40,000-square-foot warehouse in Stanley, scheduled for completion in early 2024. Currently, most supplies for Wisconsin’s electric cooperatives come from their Middleton warehouse. Once complete, the Stanley location will allow RESCO to hold more inventory at a more geographically central location among Wisconsin’s electric distribution co-ops.
“That will put us halfway between there and Middleton,” said Matt Riggs, project supervisor at Oakdale Electric Cooperative. Riggs has worked at the co-op for 26 years and currently manages the warehouse. “But having another warehouse, it’s going to be advantageous to us because we’ll have two warehouses close.”
Other ways Wisconsin’s electric cooperatives have adapted and maneuvered to keep projects on schedule and power flowing are twofold. One is a more diverse brand acceptance. The second is a new trend to carry more material inventory.
“Basically, all of our 2023 transformer orders are in, and we have allocated much of our entire allotment of transformers to our members for 2023 already,” said Brandrup. When asked what that planning looked like before 2020, Brandrup replied, “When lead times were normal, we would receive a member’s order and ship transformers eight to 10 weeks later. So now we have to plan out most of our 2023 transformer shipments to our members six to 12 months ahead of time.”
RESCO President and CEO Matt Brandrup (left) reports that the not-for-profit
cooperative has $42 million in inventory on hand, double the amount from a
couple of years ago. Current supply-chain woes require advanced planning
and creative problem-solving.
Again, communication between members and co-op is critical.
“I don’t know if our members or new members realize that if they may want to build a house, we may not get a transformer for up to a year sometimes,” said Danny Jordan. But he also remains proactive. “I try to stay pretty involved with [the operations department]; it helps me know when stuff is coming up. I’m not waiting for operations to tell me we have a new subdivision. I’m asking, ‘When’s the next big project? What projects are we looking at for next year?’”
His advice? Contact your co-op as soon as you are considering construction to get in the co-op’s work plan.
Local electric co-ops have had to expand and reorganize their warehouses to accommodate the increased inventory they now need to keep on hand, which has some questioning if they are hoarding inventory.
“Yes, they’re carrying a lot more inventory material. But they have to because lead times have gone out so far. If you’re planning a utility project for six months out or 12 months out, you need to order and bring that material in much further ahead of time than you did before,” said Brandrup.
“We used to keep a minimum amount of supplies on our shelves because you’d send out an order for material, and you’d have it in a week or two,” said Riggs. “No matter what you had on the order, it seemed like it was just available. We never concentrated on having a lot on the shelf because it was just available. Nowadays, just forget it. A lot of stuff is a year out, or they don’t know when you’ll get it.”
Riggs reports that the demand for new services at Oakdale never slowed down due to the pandemic, and they keep the warehouse stocked to keep lineworkers on three construction crews busy and on schedule. When asked to compare what the warehouse looked like a few years ago to its current state, he said, “If anything, now, I’d say it’s more cluttered. Because before, you never had boxes of stuff sitting on the shelf. Where now you might have three extra boxes of something just because you better get it while you can get it.”
“I would call it being prepared,” said Riggs.
Riggs’ message to co-op members?
“Be patient and understanding,” said Riggs. “If we’re not able to get it done immediately, it’s probably all because of the supply chain.”—Dana Kelroy