4.1. ERMUSR 10-11-2011Elk River .=
Municipal Utilities
13069 Orono Parkway • P.O. Box 430
Elk River, MN 55330-0430
UTILITIES COMMISSION MEETING
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Phone: 763.441.2020
Fax: 763.441.8099
TO: FROM:
Elk River Municipal Utilities Commission Troy Adams, P.E. -Utilities Director
John Dietz -Chair
Daryl Thompson -Vice Chair
Al Nadeau -Trustee
MEETING DATE: AGENDA ITEM NUMBER:
October 11, 2011 4.1
SUBJECT:
Power Su ply Options /Resource Planning Update
BACKGROUND:
[n September 2008, Connexus Energy terminated the ] 0-year rolling "all requirements" power contract
with Elk River Municipad Utilities. In April 2010, the Utilities Commission authorized entering into
"Phase 1" of a resource planning study with a coalition which includes Central Minnesota Municipal
Power Agency (CMMPA) as a participant. In September 2010, the Utilities Commission authorized
entering into "Phase 2" of a resource planning study which includes the release of a Request For Proposal
(RFP). The RFP was issued on November 15, 2010. In May 2011, the Utilities Commission authorized
entering into "Phase 2b" of the resource planning study which will include risk assessment of the
proposals.
DISCUSSION:
As things progress with CMMPA and the Resource Planning Coalition, other opportunities have
presented themselves and other opportunities still need to be explored to do our due diligence in our
efforts to secure a future wholesale power provider. In the process of searching for ERMU's future, there
is a need to understand what we currently have and what the big picture differences are between the
options.
The option of renegotiating our current all requirements power contract with Connexus/Great River
Energy (GRE) is still a relatively easy solution. The advantages of this option are the simplicity and
relatively decision-free nature of the all-requirement type contract and no transmission interconnect issues
result from the renegotiation. There are significant disadvantages too. The renegotiation of this contract
will focus on limiting ERMU's legal right to acquire service territory within the corporate boundaries of
the City of Elk River. The relation of this type of contract would be that of customer and power supplier,
meaning ERMU would be a customer and not a "member". Elk River Municipal Utilities would not have
any local control to influence or direct the decisions made by Connexus or GRE. When ERMU's and
Connexus' and GRE's needs align and the wholesale power rates are good, this is would be a great
situation to be in. When our needs do not align or the wholesale power rates are high, ERMU would be
trapped with no options to correct the situation. Basically ERMU would be along for the ride.
Joining CMMPA would be very different from the all requirements contract option with Connexus/GRE.
Central Minnesota Municipal Power Agency is a project oriented joint action agency of 12 members.
They provide power project options that the members can choose to participate in. The members do not
necessarily have the same portfolios. The board does not make decisions on projects without the approval
of the member's governing bodies. The advantages to this type of arraignment are total flexibility and
local control. There are significant disadvantages too. There is more risk with the project oriented joint
action agency business model. Another thing to consider with CMMPA is their size. The total load of
the 12 CMMPA members is about the same size as ERMU alone.
Other options that need to be explored including but not limited to:
• Minnesota Municipal Power Agency (MMPA) -Owned by its 11 member municipal utilities,
provides an all requirements type service. The governance/management relationship within
MMPA is structured such that the agency is able operate like a business unencumbered by
governing body involvement. In other words, the governing body sets policy and the agency
management runs the day to day operation of the business. This agency is comprised of similar
sized municipal utilities mostly located in the metro area. There would be transmission
interconnection details to sort discuss.
Missouri River Energy Services (MBEs) -Representing 61 member municipal utilities within
North Dakota, South Dakota, Iowa, and Minnesota. Most, if not all of their members are eligible
for hydro power as part of the Western Area Power Administration (WAPA). Missouri River
Energy Services was really established to provide power to supplement the WAPA hydro
allocations.
• Southern Minnesota Municipal Power Agency (SMMPA) -Owned by 18 member municipal
utilities and a 41% owner of the Sherco 3 power plant. There may be opportunities to explore
with SMMPA because 3 of their member making up more than half of their total load have opted
out of renewing their contract. There would be details needing to be worked through regarding
timing of contracts. SMMPA has never added a new member before, but under the current
circumstances of losing 3 members this may be an option.
Xcel Energy and/or Minnesota Power -There are many municipal utilities that have power
contracts with Investor Owned Utilities (IOUs). Their business is not aligned with the goal and
values of public power, but that doesn't mean would be out of the question.
Ultimately, the wholesale power rates will be an important factor in ERMU decision. There are other
things to consider. Advocacy, size, transmission, adaptability, asset diversity, goals and values are all
important. The decision to join with like Cities or enter into a contract with IOUs or Coops will hinge
largely on the importance of having similar goals and values. The choice between entering into an all
requirement contract or participating in individual project and being independent will hinge on ERMU's
position on comfort level at a premium verses higher exposure to risk for lower costs. In the end, balance
and diversity help to eliminate the extremes.
Early this year ERMU requested a quote from SAIC (R. W. Beck) to analyze the results from the
Resource Planning Coalition Request for Proposal with CMMPA compared to renewing with
Connexus/GRE. The quote was very high and the Commission directed staff to seek another quote.
Since that time, SAIC has revised their quote. Staff has also requested a quote from Power Systems
Engineering (PSE). These quotes are attached for Commission review and consideration.
TASK AUTHORIZATION
Task Authorization Description
Effective Date:
Client Name and Number:
Contract No.:
Power Supply Analysis
September 9, 2011
Elk River Municipal Utilities
Consultant and Client agree that this Task Authorization will be governed by the terms and
conditions of the Professional Services Agreement dated July 11, 2011 unless specifically
modified herein.
Scope of Services
The Client is interested in having SAIC provide consulting services associated with an
evaluation of alternative long term all-requirements power supply including transmission
services. The Client currently purchases all requirements power from Connexus who obtains the
power it sells to the Client from Great River Energy ("GRE"). In 2008, Connexus exercised the
termination clause of the rolling 10 year all-requirements power contract effectively establishing
the contract end date as September 30, 2018. As a result of receiving this notice and other
factors, Client decided to join a Resource Planning coalition with Central Minnesota Municipal
Power Agency ("CMMPA") and others in a request for power supply process ("RFP") to obtain
alternative power supply options. Connexus would like to continue to serve the Client, however,
they are interested in renegotiating its contract terms. SAIC will provide the services to the
Client on a time and materials basis.
TASK -POWER SUPPLY ANALYSIS
Consultant will conduct an evaluation of alternative all requirements power supply arrangements
for the Client based on proposals received by the Client for the period January 1, 2019 to
December 31, 2028 (the "Study Period"). The analysis will be based on offers and information
to be obtained by the Client and provided to the Consultant. Services provided by the Consultant
will include the following.
1. The Client and the Consultant will participate in a kick-off conference call. The parties shall
agree on a schedule, review the proposed Task Authorization, and discuss the timing for
decisions by CMMPA on the RFP process and its recent discussion with the Client's existing
supplier.
2. The Consultant will prepare a data request for the teen of a proposed arrangement between
GRE and the Client to be provided to Connexus and GRE by the Client. The information
requested from GRE may include the following.
a. An electronic copy of the model of GRE's system including model inputs and
outputs
b. GRE and Client Annual Demand and Energy Load Forecast
c. GRE and Client Hourly load data for a typical year
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TASK AUTHORIZATION
d. Name of generation resource and purchase power contracts, unit ratings, full
load heat rates, forced outage rates, fuel types, and emission rates for SOz,
NOx and COz
e. Monthly average fuel prices by fuel type in $/mmBtu & monthly average
emission rates for SOz> NOx and COz in $/ton
f. Hourly market prices for the study period
g. Existing and future annual interest and debt rates
h. Most recent balance sheet
i. Latest Integrated Resource Plan
j. Projected monthly demand and energy rates and projected Client billing
demand and energy determinants
k. Copy of the existing contract or tariff between GRE and the Client
1. Annual projection of transmission services and ancillary charges on a per unit
basis
m. Projection and explanation of transmission congestion charges over the study
period
3. The Consultant will review the data, model, and projections provided by Connexus and GRE.
Based on assumptions provided to GRE by the Client, GRE will prepare projections of power
costs for the Client.
4. The Consultant will prepare a list of the principal considerations and assumptions for the
Client's review and approval.
5. The Consultant will prepare a 10-year independent projection of the Connexus and GRE
system power supply costs using a model prepared by the Consultant. The projection will
include fuel and market prices forecasts provided by CMMPA.
6. The Consultant will prepare a 10-year projection of the Client's costs of purchase power for
(i) a base case that will assume the Client continues to purchase power from its existing
supplier and (ii) up to three (3) alternative power supply portfolios based on information that
the Client obtains from CMMPA. It is assumed that the information from CMMPA will be
complete and include fuel and market prices forecasts and basic projected power supply
planning rates for each resource in the portfolios on a fixed ($/KW-mo.) and variable basis
($/MWh). The projections provided by CMMPA will include the cost of transmission
services and CMMPA's explanation the congestion pricing included for each
resource/portfolio.
7. The Consultant will prepare a 10-year projection of the Client's costs of purchase power
from Connexus/GRE and the CMMPA proposals. The Consultant will prepare a comparison
of the projected costs for purchase power including the cost of transmission services on a
nominal and net present value basis. This comparison of projected costs will be documented
in a brief letter report that will include a list of the principal consideration and assumptions.
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TASK AUTHORIZATION
8. The Consultant will review the results with the Client's staff. The budget estimate does not
include a presentation before the Utilities Commission.
9. The Consultant will provide other consulting services as requested by the Client as
Additional Services.
Deliverable
The assumptions and results of the analysis will be provided in a letter report.
Services Furnished by Client
The Client will:
^ Provide notice to proceed.
^ Provide input on assumptions.
^ Provide historical and projected data and information about the Client's system including
electronic load and other data in a format to be specified by the Consultant.
^ Provide required information from CMMPA and others necessary for the Consultant to
conduce the requested services.
^ Provide all legal services required to do the work.
Schedule
Consultant will provide deliverables on a schedule as-agreed to by the Client.
Fee for Services
Consultant will perform the services under this Task Authorization on a time and materials basis
in accordance with the terms of the Professional Services Agreement. The estimate for the
services under this Task Authorization is between $45,000 and $55,000. The fee for the services
will not exceed a budget ceiling of fifty-five thousand dollars ($55,000) without obtaining the
prior written authorization of Client. Consultant shall not be required to furnish services or incur
expenses above the budget ceiling without written authorization and additional funding from the
Client. The budget for this Task Authorization does not anticipate or include expenses for travel.
Assumptions
The Scope of Services and associated pricing are based on the following assumptions,
clarification, information, and assistance being provided in a timely manner. If these items or the
anticipated level of effort are inaccurate, additional services may be required.
1. Client shall provide information and data that the Consultant requests and on which it can
rely in performing services under this Agreement.
2. One draft and one final letter report are included in the estimate. Additional drafts will be
additional services.
3. Out-of-pocket expenses include all estimated costs for computer usage, telephone, fax and
reproduction equipment, and postage. These costs have been included in the fee for services,
including relevant software fees, if any.
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TASK AUTHORIZATION
Additional Services
Additional services can be provided subject to modification of the Scope of Services and
schedule, and establishment of a mutually agreeable adjustment to the fee for services.
Amendment(s) to Terms of the Agreement
None.
IN WITNESS WHEREOF, the Parties have signed this Task Authorization as of the date first
written above.
ELK RIVER MUNICIPAL UTILITIES SAIC, ENERGY, ENVIItOMENT &
INFRASTRUCTURE,LLC
Signature
Name
Title
%/ _ __'_
Signature
Name Steven Stein
Title Senior Project Manager
Page4
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Professional Services Proposal fo-
Elk River Municipal Utilities
Elk River, MN
for
Power Supply Analysis
September 27, 2011
Contact: Thomas J. Butz
10710 Town Square Drive, NE, Suite 201
Minneapolis, MN 55449
Office: 763-783-5343
Mobile: 612-961-9495
Fax: 763-755-7028
Email: butzt@powersystem.org
Web Site: www.powersystem.org
Madison, WI Minneapolis, MN Marietta, OH Indianapolis, IN
Via a-mail
September 27, 2011
Mr. Troy Adams, P.E.
Utilities Director
Elk River Municipal Utilities
P.O. Box 430
Elk River, MN 55330-0430
Subject: Power Supply Analysis
Dear Mr. Adams:
Thank you for taking the time to meet with Rich Macke and me on Tuesday, September 20,
2011.
We aze confident that Power System Engineering, Inc. (PSE) has the necessary skill sets to
provide strategic analysis to assist Elk River Municipal Utilities (ERMU) in making a power
supply decision. There aze many changes occurring in the electric industry at this time that
complicate the process of selecting a power supply resource. There aze also considerations as the
type of organization that is providing ERMU with power supply resources. As one example,
municipal and cooperative suppliers have greater alignment to ERMU in terms of not having to
satisfy both investors and customers at the same time.
Our understanding of the situation is that ERMU has been given notice on the power supply
contract from Connexus Energy that will terminate in September 2018. ERMU has also been
participating in a power supply evaluation with Central Minnesota Municipal Power Agency
(CMMPA) that is expected to include an adequate resource mix for the long-teen power supply
needs. An eazly decision is needed whether to continue with this approach, or evaluate other
options, with at least four other entities being identified as possible power supply providers at
this point.
PSE has extensive experience in Power Supply analysis with municipal entities, including with
Escanaba, Norway, Crystal Falls, and Gladstone, Michigan. Work in the 2003-2005 timeframe
focused on evaluating the power supply options for five municipals and two small cooperatives,
including purchase power options, and also considering aself--build alternative. Work with
Escanaba, Michigan has involved a wide range of power supply evaluations, including
demonstrating the economics of self-generation compared to market purchases, market-based
proposals vs. formula based proposals, impacts on the MISO mazket pricing from the supply
node to the purchasing party's load node on power supply alternatives (typically called basis
risk), evaluation of a fix for float financial hedging transaction, and negotiating contracts related
to the power supply issues. PSE also assisted Great River Energy (GRE) members in evaluating
the economics of purchasing 10 percent of their energy from an outside resource, and thus
2
Mr. Troy Adams /September 27, 2011/ Page 3
provided valuable project experience related to power supply evaluations in this region.
References can be supplied on these projects if desired.
PSE has the necessary experience base, in power supply evaluations, strategic planning, and
contract analysis to help Elk River Municipal Utilities with the current project. Our Project
Tasks aze broken out into an "ala cart" approach, where for the most part they can be selected as
individual items off the menu to allow the greatest flexibility in using outside resources.
Analysis for a decision stazting in 2018 will be a balance of both strategic and analytic
evaluations, knowing that there aze inherent uncertainties when making a long range projection.
Over-emphasis on the analytic evaluation for a long term projection can provide a decision
maker with a false sense of accuracy, and not take into account the strategic measures that aze
also important when making a power supply evaluation. PSE has sought a balanced approach in
this proposed scope of work.
Project Tasks
The following is a description of the project task azeas that can be provided by PSE.
1. PROVIDE INITIAL COMMENTS ON AVAILABLE CMMPA STUDY INFORMATION
CPPA has been conducting a power supply evaluation and ERMU is facing a decision
whether to continue participation, or move to consider other power supply alternatives.
Reviewing information that is available to date will provide necessary background for PSE to
"catch up" to your evaluation. PSE will review the study information and provide initial
comments in order to be prepared for the outcome of the study findings.
2. PROVIDE LIST OF VIABLE ALTERNATE POWER SUPPLY ALTERNATIVES AND PROVIDE
HIGH LEVEL SCREENING
In order to provide a means of comparing other power supply alternafives with the CMMPA
portfolio, PSE will screen the viability of a select number of entities that are likely to be
capable of providing the power supply resources to meet ERMU needs. The screening of
power supplier information will be conducted using readily available information and
summarized in both presentation and report formats. The alternative power supply
information will be compared to the CMMPA portfolio.
An important element in the screening analysis will be setting up the strategic scoring system
that will be used to evaluate all power supply alternatives available to ERMU. Elements of
the scoring system aze expected to include the comparison of the ERMU demand and energy
requirements to the power supply total resources, type of generation in the supplier portfolio,
resource development risk, amount of energy expected from the energy mazket, type of
organizational structure (Co-op, muni, Investor Owned etc.), governance structure, and cost
projections. This scoring system will provide amulti-dimensional basis for comparing
various offerings. PSE's approach is not to pour hundreds of hours into the numerical analysis
of the offerings, but to seek comparable projections from the parties, and use the scoring
system to provide a well rounded assessment to the ERMU Commission in making important
Mr. Troy Adams /September 27, 2011/ Page 4
resource decisions. Results from the scoring system at this point will be a "pass" or "fail"
approach to detemilne if the party needs to be looked at more thoroughly. At this point, there
isn't expected to have enough information to determine the continued participation in the
CMMPA Study.
3. EVALUATE FINDINGS FROM CMMPA STUDY
PSE will evaluate the findings from the CMMPA study to provide information to the
ERMU Commission to make the decision to continue with the evaluation. More detailed
information may be needed from the evaluation in order provide the summary
information. The scoring methodology will also be applied to the CPPMA study data,
and be used to work towazd the recommendation of continuing or not continuing the
evaluation study.
4. FORMULATE RECOMMENDATION ON FURTHER CPPMA PARTICIPATION
Results from the CMMPA study will be compared to the alternative resource screening
results to determine the key question of whether to continue participating in the CMMPA
portfolio development. This comparison will not be a full compazison of the results,
because altemative results won't be completed at this point. The decision to continue
with CMMPA will essentially be made without a full analysis of the alternatives. One of
the main criteria expected at this point in this project will be the viability of the CMMPA
portfolio development, compazed to the resource availability of alternative suppliers.
Other criteria will likely align with the scoring system. Presentation of results and
discussion with the Commission aze assumed to be part of this task.
$. IF CMMPA PARTICIPATION ENDS - PROVIDE A MORE ROBUST POWER SUPPLY
EVALUATION OF ALTERNATIVE
In order to provide a more robust power supply evaluation, more detailed information
will be sought from each provider that has passed the initial screening outlined in Task 2.
There may be other entities considered at this point to be added to the list of viable
providers. The main focus of this task is to perform a complete analysis including an
evaluation of projected cost and scenarios considering vazious environmental regulations.
The more detailed information will be included in the scoring evaluation for each
alternative supplier and combined into the evaluation in Task 7.
6. IF CMMPA PARTICIPATION CONTINUES- PROVIDE TECHNICAL SUPPORT IN
FORMULATING THE FINAL RESOURCE RECOMMENDATION FROM THE STUDY
PSE will work with ERMU and CMMPA to help finalize the portfolio recommendation as
needed and move the process into the project development phase. The analysis for this Task
will include working with the CMMPA staff and other vendors involved in the process to
make sure the study includes criteria required for the Minnesota Certificate of Need filing.
Mr. Troy Adams /September 27, 2011/ Page 5
Preparing for a filing would be a strategic move, and keep the process moving to the point of
seeking regulatory approval. More details on the financing will also need to be worked
through to make sure there aren't any fatal flaws with any of the parties in project
development. Assistance with the Minnesota Certificate of Need Proceedings will also be an
optional task that will need to be broken out into its own scope of work if desired.
7. FORMULATE THE POWER SUPPLY RECOMMENDATION
At this point in the process, it is expected to have enough information to make a power
supply recommendation. The power supply recommendation will be brought before the
ERMi.J Commission for approval, and all required information on scoring the proposals
will be summarized for discussion.
H. WRITE SUPPORTING REPORT IN L[NE WITH THE RECOMMENDATION.
PSE will summarize the analysis and recommendations of the power supply decision
process in a report, outlining the analysis, scoring system approach, comparison of power
supply alternatives, and recommendations. Consideration will be made regarding the
confidentiality of the information when writing the report.
Mr. Troy Adams /September 27, 2011/ Page 6
Project Costs
Billing for consulting services will be on an hourly rate basis
PSE Team Member Hourly Rate
Tom Butz $195.00
Administrative $80.00
Project costs are provided as a not to exceed total with cost per task as the following:
TASK COST
Task 1 3,000
Task 2 5,000
Task 3 3,000
Task 4 3,000
Task 5 12,500
Task 6 3,000
Task 7 2,000
Task 8 6,000
Suggested Totals
Continued CMMPA Participation Tasks 1-4, 6-8= $25,000
Discontinued CMMP Participation Tasks 1-5, 7-8=$34,500
PSE provides the fee estimate as a not to exceed value, and will bill actual costs based on
hourly rates. PSE pledges to work with the ERMU to minimize the cost without
sacrificing quality.
PSE is very interested in getting started with this work, and will attend the next Commission
meeting to allow for the opportunity to discuss the approach and introduce PSE to the
Commission. Again, we appreciate the opportunity to present this proposal. Please call me at
612-961-9495 if you have any questions.
Sincerely,
Thomas Jeffrey Butz P.E.
Senior Planning Engineer
5403/tjb