Watertown Electric Rate Study Recommends 5% Annual Increases Starting in 2027

Northeast Radio SD News – Watertown, SD - A new five-year electric cost-of-service rate study presented to the Watertown Municipal Utilities (WMU) Board on Monday, Oct. 26, 2026, recommends a 5% overall annual rate increase from January 2027 through 2031 to keep pace with rising wholesale power costs, transmission fees, and planned infrastructure investments.

Evan Leebens of Missouri River Energy Services (MRES) presented the findings of the third-party rate study, which WMU conducts on a five-year rotation to evaluate revenue needs and ensure each customer class is paying its fair share of service costs.

While the study models a 5% overall revenue increase each year for the next five years, WMU staff noted the board only approves one year of rates at a time. The board will review the 2027 rate proposal and budget during its Finance Committee meeting on Thursday, Nov. 19, 2026, before considering formal action at the November board meeting.

Impact on Residential and Commercial Customers in 2027

Because the first year of the study includes cost-of-service adjustments to align revenues with the actual cost of serving each customer group, the proposed 2027 percentage increases vary by class before leveling out to a flat 5% across all classes from 2028 through 2031.

Under the proposed 2027 rate schedule, customer classes would see the following adjustments:

·         Residential Class (4.7% increase): Residential customers make up about 80% of WMU’s roughly 12,000 total electric customers and account for about one-third of total energy sales. An average residential customer using 900 kilowatt-hours per month currently pays $84.28 per month and would see their bill increase by $3.95 to $88.23 per month in January 2027. The residential monthly customer charge of $13.85 would rise by about $1.30 in the first year, and energy rates—currently 9.1 cents per kilowatt-hour in summer months and 7.4 cents per kilowatt-hour during the other nine months—would increase by about 0.3 cents per kilowatt-hour.

·         General Service Non-Demand Class (2.5% increase): Accounting for about 16% of WMU’s customers, general service accounts are currently paying slightly more than their cost of service and would receive a smaller adjustment in 2027. An average general service customer using 1,200 kilowatt-hours per month would see their monthly bill increase by just under $3, moving from roughly $122 to $125.

·         Power Rate Demand Class (4.8% increase): Applying to commercial customers over 20 kilowatts—representing about 3% of accounts and 40% of total energy sales—the energy rate would remain flat at 3.7 cents per kilowatt-hour. The $54 monthly customer charge would increase by $3 to $4 per year, and the demand charge would increase by $1.50 to $2 per year. A mid-sized retail store using 120 kilowatts would see its monthly bill move from approximately $3,100 to just under $3,300.

·         Industrial Rate Class (6.7% increase): Applying to large users over 5 megawatts, which account for roughly 20% of total energy sales, the study found the class is currently slightly underpaying relative to the cost of service. The city would adjust rates through the customer charge, a 0.1-cent per-kilowatt-hour annual energy charge increase, and a $3 to $4 annual increase in seasonal demand charges.

·         Street and Security Lighting (12.1% increase): Street and security lighting would see the largest percentage adjustment in 2027 to align revenues with actual service costs.

Wholesale Power and Transmission Driving 70% of Costs

According to Leebens, approximately 70% of WMU’s electric utility expenses come from wholesale purchased power and transmission fees—costs determined outside of local control. WMU receives roughly one-third of its power from a fixed hydro allocation through the Western Area Power Administration (WAPA) and purchases the remaining two-thirds from MRES, with transmission handled through the Southwest Power Pool (SPP).

After nearly a decade of relatively flat wholesale power prices between 2016 and 2024, power and transmission rates have climbed across the industry:

·         WAPA Rates: Increased 16% in 2023 followed by a combined 14% increase over the past two years, with additional increases projected from 2028 through 2031.

·         MRES Rates: Projected to increase by approximately 4.5% annually from 2027 through 2031.

·         Transmission Costs: Projected to rise 5.5% in 2027 and about 7% annually thereafter.

Overall, WMU’s purchased power costs are projected to rise from 6.2 cents per kilowatt-hour in 2026 to 7.8 cents per kilowatt-hour by 2031. In dollar terms, annual wholesale power and transmission expenses are forecast to grow by nearly $7 million over the six-year window, rising from just under $26 million in 2026 to $33 million by 2031. With local operating expenses projected to increase by $1.6 million (from $6.3 million to $7.8 million), WMU’s total annual electric operating costs are expected to rise by $8.5 million by 2031.

$33 Million Capital Plan and Cash Reserves

In addition to operating expenses, the rate study includes $33 million in planned electric capital expenditures from 2027 through 2031, averaging $6.6 million per year. Because of WMU’s existing cash reserves and the proposed rate track, the utility plans to fund the entire $33 million capital program through cash reserves without issuing interest-bearing debt.

Substation and transmission improvements represent the largest share of the capital plan at $12.1 million, alongside overhead-to-underground line conversions and equipment replacements. That total includes an $8.8 million transmission and distribution reconductoring project initiated through SPP. Leebens noted that roughly $7.5 million of that project qualifies for transmission cost recovery, which is expected to return approximately $1 million per year in transmission revenue to WMU once it is in service.

Without any rate increases, the study projects WMU’s electric utility would begin operating at a net financial loss by 2028, reaching a $6 million annual net loss by 2031. Leaving rates unchanged would also deplete WMU’s projected 2026 electric cash reserves of $23.7 million entirely by 2030, leaving the utility with a nearly $9 million cash deficit by 2031. Under the proposed 5% rate path, WMU would maintain annual net income near $4 million and keep cash reserves within its target range of $20 million to $23 million, or roughly 50% of operating revenues.

Watertown Rates Remain Roughly 30% Below Regional Median

Despite the proposed increases, Leebens told the board that Watertown maintains the second- or third-lowest residential and general service electric rates among all 61 MRES member utilities across the four-state region. Watertown’s residential electric rates are about 30% below the regional median for comparable municipal and investor-owned utilities, while general service rates are about 24% below the median and power rate customers are about 25% below the median. Across all 61 MRES member utilities, average rate increases over the past two years have been about 5% as utilities contend with identical wholesale power and equipment inflation.

Next Steps

The WMU Board took no formal action on the rate study Monday. Board members will review the data ahead of the Finance Committee meeting scheduled for 7 a.m. Thursday, Nov. 19, 2026, in the Municipal Utilities Board Room at 901 Fourth Ave. SW, where the 2027 budget and 2027 rate adjustments will be prepared for full board consideration