4.2. ERMUSR 10-8-2019 Elk River
Municipal Utilities UTILITIES COMMISSION MEETING
TO: FROM:
ERMU Commission Troy Adams, P.E.—General Manager
MEETING DATE: AGENDA ITEM NUMBER:
October 8, 2019 4.2
SUBJECT:
Payment in Lieu of Taxes and Other Donations to the City of Elk River
ACTION REQUESTED:
Direction from commission.
BACKGROUND:
As documented in the ERMU Payment in Lieu of Taxes and other Donations to the City of Elk
River policy:
The success of ERMU is linked with the success of our community. And the success of our
community is linked with the operation of our city government and ERMU. ERMU was
purchased by the City of Elk River in 1945 and separate governance was created per
State Statute in 1947.Although governed separately, ERMU is still an important
component of our local government and our city services.
It is typical for a municipal utility to provide a Payment in Lieu of Taxes (PILOT) and other
donations to their city, regardless of a separation of governance. Although typical, this
contribution should never inhibit ERMU's ability to make repayment on debt, cause
ERMU to become non-competitive, or inhibit needed investment in personnel or
infrastructure which may hurt ERMU's ability to meet the needs of their customers. For
these reasons the PILOT and other donations should be reviewed at least once every five
(5)years by the ERMU Commission.
Transfers, PILOT, and other donations from a municipal electric utility to the city are not a legal
obligation or requirement; however,they are common practice. The current ERMU PILOT and
other donations are comparable within national pool data for revenue class as well as
comparable to a regional pool data.The total transfer of PILOT and other donations for 2018
was$1,403,958 which was 4.7% of Elk River electric revenue. The year-to-date transfers for
2019 are trending to be higher than 2018.
The city council has discussed asking for an increase in the transfer.The commission discussed
this policy at the September commission meeting and then tabled the discussion for October.
The Payment in Lieu of Taxes and Other Donations to the City of Elk River Policy is attached for
reference.
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DISCUSSION:
With consideration to transfer benchmarking data, staff presented to the commission an option
that would increase the PILOT transfer to the city by approximately$169,000 annually during
the remaining years of the 2015 electric service territory transfer agreement payment schedule.
This option would release PILOT from recent electric service territory transfers significantly
sooner than agreed upon. The option would result in an estimated $1,500,000 impact on ERMU
by diverting revenue intended to pay for electric service territory loss-of-revenue payments to
the city's general budget.
Although the proposed option for increasing the transfer does shift city general budget costs to
electric customers, the electric utility is in a better financial position than five years ago. The
transition from Great River Energy (GRE) to Minnesota Municipal Power Agency (MMPA) has
resulted in wholesale power savings.The more than $20,000,000 agency buy-in cost was
financed with two bonds, a 20-year and a 30-year, in order to structure the debt so those who
benefit from the service pay for the service.
When compared to the neighboring utilities and with the members of MMPA, ERMU's rates are
within an acceptable range. Using 2017 sales data, the most current information from the U.S.
Energy Information Administration (EIA), ERMU was below the neighboring competitors. Note
that in 2017, ERMU was applying a demand credit for the commercial customers because of
rate competitive issues with service territory transferred customers.The demand credit was
being funded from reserves and not from rates which skews the EIA data slightly. Compared to
the other members of MMPA, ERMU rates are still high. The ERMU electric rate comparison
data is attached for review.
In 2018 the demand credit initiative expired. Additionally, electric rates increased by
approximately 1%. Then the transition to MMPA happened in October 2018. The projections for
2019 power costs with the bond payments were forecasted to be lower than previous
wholesale power costs by enough that ERMU lowered electric rates by 5%for 2019.This
reduction in rates has put ERMU in a more competitive position.There will be a minimal
electric rate increase proposed for 2020.
ATTACHMENT:
• Payment in Lieu of Taxes and Other Donations to the City of Elk River Policy
• ERMU Electric Rate Comparison
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4 --
Elk River ----
Municipal Utilities
A.17—Payment in Lieu of Taxes (PILOT) and Other Donations to the City of Elk River
1.0 Purpose and Summary
The success of ERMU is linked with the success of our community. And the success of our
community is linked with the operation of our city government and ERMU. ERMU was
purchased by the City of Elk River in 1945 and separate governance was created per State
Statute in 1947. Although governed separately, ERMU is still an important component of our
local government and our city services.
It is typical for a municipal utility to provide a Payment in Lieu of Taxes (PILOT) and other
donations to their city,regardless of a separation of governance. Although typical,this
contribution should never inhibit ERMU's ability to make repayment on debt, cause ERMU to
become non-competitive, or inhibit needed investment in personnel or infrastructure which may
hurt ERMU's ability to meet the needs of their customers. For these reasons the PILOT and
other donations should be reviewed at least once every five (5)years by the ERMU Commission.
2.0 Payment in Lieu of Taxes (PILOT)
The PILOT transfer from Elk River Municipal Utilities to the City of Elk River shall be four
percent (4%) of the revenues generated by ERMU's electric customers within the corporate
boundaries of the City of Elk River which are not subject to a loss of revenue payment resulting
from the March 20, 2015, electric service territory transfer agreement with Connexus Energy.
3.0 Donated Electricity
Elk River Municipal Utilities shall donate all electricity to the City of Elk River for street lights
and signal lights.
4.0 Donated Water
Elk River Municipal Utilities shall donate water for use by the Elk River Fire Department
(ERFD)for the purpose of extinguishing fires within the City of Elk River and other cities under
contract with the ERFD.
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For the purpose of creating ice rinks for public/non-enterprise use, ERMU shall donate water for
use by the Elk River Parks Depai liuent.
Elk River Municipal Utilities shall donate water for the use by the Elk River Streets Department
for the use of street sweeping.
5.0 Donated Labor
Because of specialized skills and equipment, ERMU may be able to provide a better value to our
community by donating labor to the City of Elk River. For example, ERMU has trained
employees and the equipment to hang banners where the City does not. In this example, ERMU
is able to provide this donated service to the City for less cost than a third party, creating greater
value to our community. For such situations, ERMU shall donate labor to the City of Elk River,
as appropriate,where a greater value is created for our community and where ERMU is not
subjected to undue burden.
In addition to hanging banners, other examples include: maintenance of street lighting,relamping
signal lights, locating underground fiber optics and/or other facilities, administration costs
associated with the billing of city franchise fees, installation of temporary lighting,relamping of
city ball field lighting, installation and/or maintenance of city warning sirens, meter reading for
wastewater, assistance with tree trimming, etc...
Adopted December 6, 1994
Revised June 6, 2008
Revised July 2, 2013
Revised October 13, 2015
Revised January 1, 2016
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ERMU Electric Rate Comparison
2017 EIA-861 All Rate Classes Blended
Utility Customers Sales(MWh) Revenues Average Price
($Thousands) (cents/kWh)
Anoka 12,105 268,852 $ 27,493 $ 10.23
Arlington 1,134 15,679 $ 1,519 $ 9.69
Brownton
Buffalo 5,935 109,253 $ 13,739 $ 12.58
Chaska 10,231 354,975 $ 38,323 $ 10.80
East Grand Forks 4,387 157,583 $ 14,127 $ 8.96
Elk River 11,448 313,953 $ 35,320 $ 11.25
Le Sueur 2,216 95,637 $ 9,245 $ 9.67
North St Paul 6,503 68,238 $ 9,273 $ 13.59
Olivia 1,262 26,205 $ 2,501 $ 9.54
Shakopee 17,118 427,960 $ 45,479 $ 10.63
Winthrup 786 14,305 $ 1,784 $ 12.47
Connexus 132,289 1,918,613 $ 235,678 $ 12.28
Wright-Hennepin 52,144 868,989 $ 97,031 $ 11.17
Xcel 1,279,507 29,746,782 $ 3,224,654 $ 10.84
MMPA Ave $ 10.81
ERMU vs MMPA 4.0%
Neighbors Ave $ 11.43
ERMU vs Neighbors -1.6%
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