06-29-2009 ERMU MIN SPECIAL SPECIAL MEETING OF THE ELK RIVER CITY COUNCIL
AND ELK RIVER MUNICIPAL UTILITIES
HELD AT ELK RIVER CITY HALL
MONDAY, JUNE 29, 2009
Members Present: Mayor Klinzing,Councilmembers Zerwas,Motin,Westgaard, and
Gumphrey,ERMU Commissioners Thompson and Dietz
Members Absent None
Staff Present: City Administrator Lori Johnson and City Clerk Tina Allard
ERMU Staff: Director of Operations Troy Adams,Office Manager/Finance Director
Theresa Slominski,and Special Projects Consultant Vance Zehringer
1. Call Meeting To Order
Pursuant to due call and notice thereof, the joint meeting was called to order at 5:32 p.m.by
the Council and by Elk River Municipal Utilities (ERMU).
2. Electric Utility Long-Range Planning
Mr.Adams presented his staff report which outlined various power supply options for the
city to consider along with the pros and cons of each option.He further discussed the
benefits of a municipally owned utility.
The following general discussion took place:
Scenario#2(participation in Big Stone II with ownership in otherpeakingplant)
Item#7:
Mr.Adams stated approximately 2.7¢of the rate to customers,beginning in 2018,would be
fixed in order to pay down the bond debt over a 30 year period.He stated the other 50%of
the rate would cover fuel,operation and maintenance,and transmission costs which would
fluctuate depending on market conditions.
Mr. Zehringer stated the city is currently paying over 6¢a kilowatt hour on a wholesale basis
and Big Stone II is projecting a 5.30 kilowatt hour in 2018.He stated half the rate would be
fixed.
Mayor Klinzing questioned what the$2.6 million is to be used for and who would by paying
this amount at the financial close.
Mr.Adams stated the$2.6 million would be the city's share of the cost for all the studies and
permitting that must be completed for the Big Stone II project. He stated Elk River
Municipal Utilities would be making payments of about$51,000 per month and then would
have the option to roll the loan into construction bonding. He stated more research would
be needed to determine the best option for obtaining funding for this loan.
Ms.Johnson stated$51,000 per month would need to be paid for 10 months until the
financial close.She stated there would be$8,000 in accumulated interest on the $2.6 million
loan and$41,000 that the city will not get back because it would be for ongoing legal and
development expenses. She stated Elk River Municipal Utilities staff was considering
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June 29,2009
financing the$2.6 million internally and would have the opportunity to roll the loan into the
$90 million loan when the plant opened.The$2.6 million loan with interest would be about
$3.2 million.
Councilmember Westgaard stated there is the risk of owing$3.2 million if the financial close
does not happen and the city would be in a worse position because it would still need to find
a power supplier and owe back the$3.2 million.
Councilmember Zerwas stated another risk with Scenario#2 is that Elk River Municipal
Utilities would fold because he doesn't see how they could pay back the$3.2 million loss.
Utilities staff disagreed.Mr.Zerhinger stated an additional penny per kilowatt hour could be
charged to customers.
Mr.Adams stated they recently bonded a$3 million loan without any issues.
Councilmember Zerwas questioned what the collateral would be for this loan.
Ms.Johnson stated the city would need legal authority to issue the bonds.She stated this is
not a typical capital project for bonding purposes;possibly a short operating debt could be
obtained but more research would need to be completed to determine if such debt was
allowed through special electric bonding authority by statute.
Mayor Klinzing stated all the scenarios addressed potential changes and that Scenario#2
didn't address potential changes. She stated it should be noted that there will be changes that
should be added to the risk list.
Mr. Zehringer stated if the Big Stone II project didn't move forward,and the loan had to be
paid off;the Utilities would still be competitive in the market with its rates.
Mayor Klinzing noted that with Scenario#4 the city would have options for negotiating
rates.
Councilmember Gumphrey questioned if the$1.8 million bond on the city hall building
(noted in the handout)is calculated from today's rate or from 2018.
Mr.Adams stated it is the portion that is owed currently.
Ms. Slominski stated it would be paid off in 2022.
Ms.Johnson noted there is no bond on the City Hall building;only on the Utilities building.
Mayor Klinzing asked if the Utilities Commission had a recommendation for Council.
Commissioner Dietz stated he has mixed feelings on whether to join the Big Stone II
project.He stated it sounds like a good deal but noted there are many unknowns. He stated
the rate Big Stone II would charge in 10 years would be less than what the city is paying
now.He stated he is encouraged that Connexus may be more willing to negotiate with the
Utilities.He stated he sees advantages to both sides.
Councilmember Gumphrey stated he liked the idea of negotiating with Connexus.He stated
he had concerns with Ottertail backing out of the Big Stone II project.
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June 29,2009
Commissioner Thompson stated concerns with Connexus truly wanting to negotiate with
the city if the Big Stone II project is off the table after July 15.He stated the city has this
opportunity to participate in the Big Stone II project and should really take the time to
consider it.
Mr. Zehringer stated there are many unknowns in staying with Great River Energy. He
stated they will be raising rates 25%over the next two years and have had Power Cost
Adjustments every month over the last year with the exception of one.He noted the Big
Stone II plant will burn coal much more efficiently than any existing coal plants and the city
will need to get some of its power from coal.He stated the city needs to seriously consider
the Big Stone II option. Mr. Zehringer stated there is a position by the power suppliers that
they don't want to sell to municipally owned utilities because supplies are getting tighter.He
discussed options with other energy companies.
Councilmember Gumphrey noted Elk River Municipal Utilities rates may be the same as
Connexus next year.
Councilmember Westgaard questioned if the Council would rather be owners than renters in
the future when there could be shortages in power supply.He felt there would be more
options with owning rather than renting. He stated there wouldn't be much bargaining
power with Connexus.He agreed with Commissioner Dietz that the Big Stone II project
seems like a good deal but he has concerns with the risks.
Mr.Adams addressed inconsistencies in a handout that was sent out over an Internet blog.
He stated Big Stone II will be a new plant that will burn coal more efficiently than existing
coal plants. He further noted that they are also pursuing green alternatives such as wind
power.He stated coal is an important base load and noted that GRE is 85%coal.Mr.
Adams stated alternative sources of power are available but can be expensive.He stated only
0.26% of city residents are volunteering to pay more for wind power versus the cheaper
alternative of coal.
Mayor Klinzing stated the city has been very proactive at working on alternative energy
options and listed some of the projects they have worked on as Energy City.She stated she
is concerned about the use of coal as a power source and had concerns with pending
legislation. She stated she also has concerns with alternative power sources such as nuclear
and wind turbines.She stated the Big Stone II project is risky due to all the issues remaining.
She stated she isn't outright advocating that the Elk River Municipal Utilities be sold off but
felt that all alternatives must be considered.
Councilmember Motin questioned whether Connexus would truly be open to any
negotiation once the July 15 letter of intent date has passed.He stated the city needs to be
careful of its coal usage due to the Energy City designation.He stated he didn't believe the
Big Stone II project was geared up to be flexible with alternative energy resources.He noted
if Elk River Municipal Utilities were to remain in business,he would want them to continue
to acquire additional territory.
Councilmember Zetwas stated it's hard for him to support a$100 million project with the
risks involved.He stated he is also concerned with Connexus willingness to negotiate with
the city.
Councilmember Gumphrey noted the city has nine years to figure out other alternatives.
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June 29,2009
Mr.Adams stated the city should get more information from GRE and Connexus prior to
making a decision on the Big Stone II project.
Commissioner Dietz stated he would like any information provided by GRE and Connexus
to be run by the city attorney.
Council asked for the following information to be addressed at a follow-up meeting.
• Flow chart showing where and when funding would need to be committed.
• How much interest the utility would have paid in the 10 years before the Big Stone
Project is ready to move forward.
• Tracking of upfront costs.
Mayor Klinzing asked anyone in the audience if they had any comments.
Anna Pisola,Elk River Resident—Stated she would like to learn more about Energy City.
She noted it was hard to ask people to pay for wind power due to its cost.She asked the
Council to not close the door on other alternatives.
Wade Lovelette,ERMU employee—Stated the Big Stone II plant would bum leaner and
more efficiently.
A citizen stated the city should consider wind power.
Mr.Zehringer stated Elk River can only produce about 17%wind power from the turbines
in this area,whereas the wind farms in southwest Minnesota produce about 35-40%power.
He stated another problem with wind power is in transmitting it.He further noted that Big
Stone II is also looking into harvesting wind power at their plant due to their location.
Rob,a citizen stated someone has to take the lead on alternative,greener power sources and
asked why not Elk River.
Bob Schulte,CEO of CMMPA—Stated his company is available to help the municipal
utilities.He stated they are big into renewables but that coal is still a needed source. He
stated they are assuming they will meet the state's 1.5%energy savings goal in their planning.
Councilmember Zerwas questioned if the city would be out the$2.6 million if the project
was a no-go vote in September 2009.
Mr.Schulte stated no. He stated the$2.6 million wouldn't be committed by the city until the
financial dose was completed in fall 2010.
A citizen stated the MN Public Utilities passed a mandate on cost caps for construction and
permitting costs for transmission lines in Minnesota and she asked if the cost caps would
apply to the city and affect its rates.
Mr.Schulte stated this condition only applies to 12%of the Big Stone II project and only
affects Ottertail's customers.
MOVED BY COMMISSIONER THOMPSON AND SECONDED BY
COMMISSIONER GUMPHREY TO CALL A SPECIAL JOINT MEETING OF
THE ELK RIVER MUNICIPAL UTILITIES COMMISSION WITH THE CITY
COUNCIL ON MONDAY,JUNE 13,2009,AT 6:00 P.M.,OR IMMEDIATELY
Special City Council and ERMU Commission Page 5
June 29,2009
FOLLOWING THE EDA MEETING(WHICHEVER IS LATER)AT CITY
HALL TO CONTINUE DISCUSSION ON LONG RANGE ELECTRIC UTILITY
PLANNING. MOTION CARRIED 3-0.
3. Adjournment
There being n further business,Mayor Klinzing adjourned the meeting at 7:30 p.m.
— /-7 ( ,
Tina Allard,City Clerk
. L'eSteph 'e Klinzing,MaytrI