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5.3. ERMUSR 02-12-2008~i Elk River -=~ Municipal Utilities 13069 Orono Parkway • P.O. Box 430 Elk River, MN 55330-0430 February 6, 2008 To: Elk River Municipal Utilities Commission Jerry Takle Jerry Gumphrey Jim Tralle From: Bryan Adams Subject: MMUA Position Papers Phone: 763.441.2020 Fax: 763.441.8099 MMUA is in the process of developing position papers on specific issues that relate to municipal electric utilities on both the state and national level. These papers are in preparation to our legislative rallies on February 25 - 27 in Washington D.C. and March 12 - 14 in Bloomington, MN. Attached is the agenda for MMUA's 2008 Winter Legislative Conference. Please let me know if you plan to attend so the appropriate arrangements can be made. Also attached is MMUA's draft position papers for your review. M1-: ~~ Position Statement Minnesota Municipa/ Uti/ities Association Federal Incentives for Renewable Energy With last year's passage of Minnesota's aggressive renewable energy standard (RES), federal support for renewable development by Minnesota municipal utilities is more essential than ever before. Two federal issues important to Minnesota municipal utilities should be addressed in any energy legislation passed by Congress. They are Clean Renewable Energy Bonds (CREBs) and the Renewable Energy Production Incentive (KEPI). Unfortunately, only the KEPI program was reauthorized by Congress last year; CREBs was dropped from inclusion in the new energy bill, as part of the energy tax title. Accordingly, we urge Congress to pass a new energy tax title in 2008. Minnesota municipal utilities have long embraced the use of renewable generation to meet the electric energy needs of their communities. They have been motivated by the need to secure wholesale power that will result in reliable and reasonably priced service to their customers. It was for that reason, more than 50 years ago, that municipal utilities in western Minnesota began making commitments to purchase wholesale power from federal hydroelectric dams at a time when power from conventional sources would have been less expensive and, it seemed, possibly even more reliable. It is with this same sense of responsibility that municipal utilities are approaching the effort to develop wind and other renewables in order to meet a portion of their electricity needs. Last year Minnesota enacted the most comprehensive renewable energy standard (RES) law in the United States. Patterned after a comprehensive proposal developed by the Minnesota Municipal Utilities Association (MMUA) and passed with the support of both utilities and environmentalists, the new law: • Requires investor-owned utilities*, generation & transmission cooperatives and municipal power agencies to produce 7% of their electricity from renewable resources by the year 2010, 12% by 2012, 17% by 2016, 20% by 2020 and 25% by 2025. (*Xcel must produce 30% by 2020.) • Connects Minnesota with neighboring states in a renewable energy credit trading system so that energy from wind turbines, landfills, biomass plants and other renewable sources can be shared and sited in optimal locations. • Phases out the current green pricing requirement in the law, which requires utilities to provide electricity from renewable sources to customers who request such service. A green pricing mandate is no longer necessary, given the aggressive implementation schedule of the RES. Not surprisingly, power from renewable resources and advanced technologies continues to be more expensive than power from traditional generation sources. Federal investment Minnesota Municipal Utilities Association February 2008 incentives are needed to encourage the construction of these facilities. The federal government has determined that tax policy is a viable mechanism to encourage renewables and provides private developers with the Production Tax Credit (PTC), a federal tax credit for electricity generated from qualifying renewable energy projects. However, investment tax credits made available to privately-owned utilities and energy production companies do not create incentives for the publicly-owned or rural electric cooperative utilities that serve 25 percent of the nation's electricity load. With the passage of Minnesota's aggressive new RES law, federal support for renewable development by Minnesota municipal utilities is more essential than ever before. Clean Renewable Energy Bonds (CREBs). To address this lack of equity, Congress enacted the CREBs program in the Energy Policy Act of 2005 (EPAct 2005). CREBs is a debt instrument which can be offered for qualified renewable facilities under Section 45 of the tax code; the program is administered by the IRS under the supervision of the U.S. Department of Treasury. Investors receive credits against their federal income tax liability instead of the traditional interest that is usually paid by the issuer. The municipal utility or cooperative is liable for the face value of the bond and saves money by owing no interest on the bond. The federal government essentially pays the "interest" in the form of tax credits. The CREBs program will provide public power systems greater certainty and affordability in both planning and investing in renewable resources. However, due to the statutory program cap and the Treasury allocation methodology that selected smallest projects first, the awards for governmental entities were capped at $3.2 million -with the vast majority of funded projects being proposed by non-utility governmental entities such as schools and libraries. Consequently, the program fell short of providing an effective financing tool to utility-scale investments. These problems were corrected, however, when a bipartisan effort in the House, led by Reps. Jim McDermott (D-WA) and Jim Ramstad (R-MN), developed energy tax legislation last year. The measure, which ultimately passed both the House and Senate, proposed a higher $2 billion cap on CREBs and called for the appropriation to be equally divided among three groups (municipal utilities, rural coops, and other governmental bodies). The proposal also included an improved allocation methodology. Unfortunately, like all other energy tax provisions, CREBs was left out of the energy bill. In order to win final passage, the Senate dropped the energy tax title from the Energy Independence and Security Act of 2007. MMUA urges Congress to support the new CREBs program along with production tax credits and investment tax credits for the for-profit utility sector. Renewable Energy Production Incentive (KEPI). The KEPI program was created by the Energy Policy Act of 1992 and reauthorized in 2005. It authorizes the U.S. Department of Energy (DOE) to make direct payments to publicly and cooperatively- owned electric utilities at the rate of 1.5 cent/kWh (indexed for inflation) for electricity generated from solar, wind, and certain geothermal and biomass electric projects. KEPI has been the only incentive available on the federal level for these utilities to make new Minnesota Municipal Utilities Association February 2008 investments in renewable energy projects and has been instrumental in making public power wind projects viable in Minnesota. Congress implemented the KEPI program with two goals in mind: 1) to assist public power utilities in overcoming economic barriers to greater renewable energy use; and 2) to ensure equity between investor-owned utilities that receive energy tax credits and not- for-profit utilities that are unable to do so. For the past 15 years KEPI has been the primary federal program for assisting public power systems in overcoming economic barriers to greater renewable energy use. But the program has been consistently over-subscribed and under-funded, and needs to be funded at a substantially higher level to accomplish its purpose. Unless Congress steps up to the plate with adequate funding through the Energy and Water Development appropriations bill, KEPI will receive only the FY 20061eve1 of $4.96 million again as it did in FY 2007. For real renewable energy growth, Congress should fund the KEPI program at substantially higher levels than DOE has requested for the past several years. Minnesota Municipal Utilities Association February 2008 Minnesota Municipa/ Uti/ities Association Climate Change Position Statement Minnesota's public power systems recognize that that Congress is placing a high priority on global climate change as one of the most significant environmental policy issue confronting the nation. In response to these concerns, the 2007 Minnesota State Legislature passed several aggressive legislative proposals dealing with the climate change issue, including: • a renewable energy standard for electric utilities of 25% by the year 2025, • annual conservation savings for electric utilities of 1.5% per year, • a limit on new base load generation after August 2009 unless there are carbon offsets, and • an aggressive climate change stakeholder-based study to assess appropriate strategies, including a Minnesota, region-wide, or national greenhouse gas cap- and-trade program. These are aggressive state level actions directed toward reducing Minnesota's greenhouse gas emissions at a time when other states are also moving to address potential climate change. However, a patchwork of single-state or even regional fossil fuel registration and cap-and-trade programs would not be an effective nor economical approach to the climate change problem. Such unilateral action or action even by groups of states would not correlate to large regional wholesale electric markets as they exist. Such efforts would not take into consideration the fact that small scale programs cannot influence international cooperation. Furthermore, they would not recognize the competitive disadvantage such unilateral action may place on businesses and jobs in Minnesota and all other states. We need to respond to the climate change challenge as a series of issues that transcend state boundaries. Toward that end, we need to develop comprehensive and forward- looking national solutions that ensure a reliable and cost-effective supply of energy. We believe that Congress should concentrate its efforts on pushing for smart and effective national climate change legislation that confronts all economic sectors, recognizes the country's crucial need for fuel diversity, offers appropriate incentives and credits, and acknowledges potential adverse impacts to U.S. energy security and the economy. Minnesota's public power systems would support and participate actively in these efforts. Minnesota Municipal Utilities Association February 2008 MMUA believes that effective climate change policy must: • Be national in scope. • Be economy-wide and apply to all industry sectors, including transportation and manufacturing as well as electricity generation. • Protect the ability of U.S. and Minnesota industries to compete in regional and global markets and carefully consider the competitive impact on jobs. • Develop a robust national greenhouse gas registry, such as the National Climate Registry, to track and benchmark carbon contributions and mitigation actions. • Allow credit for early actions taken to reduce greenhouse emissions. • Maintain reliability, protect national security and avoid over-reliance on any single fuel by recognizing the importance to the nation of preserving a diverse mix of electricity generation fuels, including coal, nuclear, natural gas, and all renewable energy sources including hydro. • Pursue efficiency improvements for all types of energy uses. • Ensure that tax-based or other incentives for the development and deployment of renewable and clean energy facilities and programs are provided on a comparable basis to the public power sector of the utility industry. • Ensure that any cap-and-trade allowance allocations are available across all electric industry sectors while demanding that consumers and the economy remain protected during the transition to lower carbon emitting generation. Any transition from allocations to auctions should include protection against unanticipated impacts from runaway auction markets that would threaten consumers and the economy. • Recognize and address regional differences that can impact the fairness and effectiveness of any program designed to address greenhouse gas emissions. • Include additional and expanded federal support for research, development and deployment of cost-effective technologies to reduce, capture, transform or sequester greenhouse gases from emission sources throughout the national economy. ~ Ensure that any generation portfolio requirements permit all low emission technologies. Minnesota Municipal Utilities Association February 2008 M~:~::~~ Minnesota Municipa/ Uti/ities Association Position Statement Lack of Rail Competition Hampers Coal Deliveries Railroad transportation is the principal method of delivering coal to the electric generation facilities that provide power to Minnesota municipal electric utilities and their customers. This heavy reliance on rail has left these utilities vulnerable to significant market power abuses caused by the absence of competitors in the railroad industry. Those utilities and other rail commodity shippers, including those who are served by only one railroad and are often referred to as captive shippers, are facing significant rate increases due to the lack of competition in the railroad industry. The consolidation of the railroad industry that has occurred over the last twenty-five years has been stunning. When Congress passed the Staggers Rail Act in 1980, the resulting industry deregulation was supposed to have ushered in a new era of competition that would benefit customers. However, instead of experiencing the intended result, shippers endured a period of unprecedented consolidation as the number of Class I railroad companies in the United States was reduced from 42 to 5. This has resulted in a duopoly of two major railroads serving the Western regions of the U.S. and a similar duopoly of two different railroads serving the East. The federal government has been ineffective in its effort to control these uncompetitive rail transportation practices. In 1995, Congress abolished the Interstate Commerce Commission and gave the newly created Surface Transportation Board (STB) authority over mergers, rate and service disputes, construction, and operation and abandonment of railroad lines. Since that time, the STB has declined to use its legal and regulatory authority to protect railroad customers from the monopolistic practices of the railroad industry. The lack of real competition in the railroad industry, coupled with an absence of effective regulation of industry operations, has had a negative effect on many Minnesota municipal utilities. Shipping costs are skyrocketing as current contracts expire and new rates are set. Furthermore, even as the railroads dramatically increase their rate, they have begun refusing to provide service commitment guarantees or remedies for service failures. In 2006, the General Accountability Office (GAO) issued a report titled "Freight Railroads: Industry Health Has Improved, but Concerns about Competition and Capacity Should Be Addressed "which validated rail customer concerns. The report described a lack of competition in the national railroad industry, inadequate STB efforts to ensure rail customer access to competition and to protect rail customers from monopoly abuse, failure of the STB to collect adequate data from the railroads on all of their annual revenues from rail customers, and uncertainty about the national rail system's capacity to provide sufficient, reliable service in the future. The railroads argue that any rail customer relief legislation is an attempt at re-regulation. However, the goal of rail Minnesota Municipal Utilities Association February 2007 customers is not re-regulation but merely a national rail policy that will ensure reliable rail transportation and reasonable rates for all rail customers, particularly for those without access to competitive transportation alternatives. There are a number of examples of the adverse impact caused by the lack of railroad competition on joint action agencies and Minnesota municipal electric utilities. Missouri River Energy Services (MRES), supplying wholesale power to 23 member utilities in Minnesota, is a co-owner/participant in the coal-fired power plant near Wheatland, Wyoming know as the Laramie River Station (LRS). Burlington Northern Santa Fe Railway Company (BNSF) currently transports some 8.3 million tons of coal per year 175 miles from coal mines in Wyoming's Powder River Basin to LRS in rail cars owned by the LRS participants. After along-standing contract for that service expired in 2004, BNSF published new "common carrier" rates for the same service that more than doubled the prior rate, increasing costs to LRS participants by about $1 billion over 20 years. Believing that the imposition of these unreasonably high rates was the result of the exertion of monopoly power, the coal providers and the plant operator filed a complaint with the STB in 2004 on behalf of LRS, spending more than $6 million and three years on the case. After all filings were submitted, the STB put the case on hold while it developed a new rulemaking on captive shipper cases and then decided to retroactively apply the rule to the case, rejecting the complaint finally in 2007. The STB did provide the LRS partners the opportunity to appeal for a rehearing at the STB based on analysis performed by the LRS partners in consideration of the new STB rules. The LRS partners have recently filed that appeal. Unfortunately this process will likely cost the LRS partners another million dollars, and a decision on the appeal could be another year away. While LRS is paying significantly higher rates, service levels from BNSF have been erratic. As was widely reported, in 2006, coal reserves at the LRS site dropped to dangerously low levels that necessitated the development of a plan to curtail the operation of the plant. At one point, on-site coal reserves dropped to a five-day supply and plant owners were hours away from curtailing operation at LRS by 20 percent. Because turn-around time from BNSF has increased from 37 hours to more than 50 hours per train, the LRS owners decided to acquire a fourth unit train at an additional cost of $1.9 million per year with no long-term guarantee that BNSF would sufficiently schedule the additional train to improve the coal reserve pile at the plant. Southern Minnesota Municipal Power Agency (SMMPA) supplies wholesale power to 18 member municipal utilities in Minnesota. It is a 41% co-owner of Sherco 3, an 884 MW coal-fired power plant near Becker, Minnesota. SMMPA buys coal from the Absaloka mine in Montana. That coal is delivered by the BNSF to the Sherco 3 site. BNSF is the only railroad that serves Sherco 3. Recently SMMPA was informed by BNSF officials that coal transportation rates to Sherco 3 would increase 55 percent. Minnesota Municipal Utilities Association February 2008 Individual municipal utilities have experienced similar problems with coal shipments to their local plants. Hibbing and Virginia, two small communities located on Minnesota's Iron Range, enjoy the benefits of owning and operating their own municipal electric utilities. Unfortunately, both communities have recently been forced to give up their rail service -they have resorted to trucking coal from Superior, Wisconsin to their respective towns to fuel small coal plants rather than deal with prohibitive rail transport costs. The Virginia Department of Public Utilities, for example, now pays upwards of $44 per ton of coal, but only $9 is for the coal itself. The remaining $35 covers the costs of transportation. Willmar Municipal Utilities was informed that a renewed coal and transportation agreement for the years 2006 and 2007 would result in a 39% increase and that the offer was non-negotiable. Legislation to address the concerns of rail customers has be introduced in the 110~h Congress. HR 2125, the Railroad Competition and Improvement Act of 2007 has been introduced by House Transportation and Infrastructure Committee Chairman Jim Oberstar (D-MN) and Representative Richard Baker (R-LA). S 953, the companion bill in the Senate, was introduced by a bipartisan group of Senators led by Senators John Rockefeller (D-WV) and Byron Dorgan (D-ND). This legislation would require railroads to quote rates between any two points on their system where traffic can originate, terminate or be interchanged, and to remove "paper barriers" that prevent short-line railroads from connecting to more than one major railroad (thus allowing short-line carriers that contract with major railroads to engage in competition without being penalized). The legislation also contains a clear statement of the railroads obligation to serve given the essential service they provide to many sectors of the economy and directs the STB to take action to investigate railroad practices that result in abuse of market power. Additionally, the proposed law attempts to develop a workable rate challenge process at the STB. Legislation has also be introduced in both the House and the Senate to eliminate the exemptions from antitrust law that the railroads currently enjoy, including exemptions relating to mergers and acquisitions, collective ratemaking and private antitrust lawsuits. MMUA strongly supports both the antitrust bill and the rail reform bill. In the spring of 2006, the railroads began to express interest in receiving a federal Investment Tax Credit (ITC) of 25 percent to apply to new investment in rail infrastructure. Any additional federal subsidy for infrastructure improvement should not come without guarantees that dollars will be spent to enhance reliability, especially in captive shipper corridors. Minnesota municipal utilities and captive shipper groups like Consumers United for Rail Equity (CURE) support an ITC for the railroads only if STB reforms are enacted at the same time that provide relief for rail customers. The captive shipping issue is not limited to utilities and affects many other large segments of our economy including agriculture, wood products and chemicals. This is best illustrated by the list of organizations supporting rail competition reform. Supporting organizations include: Minnesota Municipal Utilities Association February 2008 • American Chemistry Council • American Forest and Paper Association • American Plastics Council • American Public Power Association • Edison Electric Institute • Fertilizer Institute • National Association of Wheat Growers • National Barley Growers Association • National Industrial Transportation League • National Rural Electric Cooperative Association • Portland Cement Association and others. MMUA supports legislation that encourages structural and policy changes to promote competitive transportation alternatives for rail customers and improvements in the rail customer protection mechanisms that are implemented by the STB. We oppose, however, enactment of a federal ITC for the railroads without these STB reforms. Minnesota Municipal Utilities Association February 2008 Tentative Program WEDNESDAY, MARCH 12 ':30 MMUA Board of Directors Meeting 12:00-5:00 Registration Desk Open 2:15-3:00 KODA Energy - Ag Byproducts to Energy Dale Lundquist, Rahr Malting 3:00-3:30 Refreshment Break 1:00-1:45 Climate Change Activity in Minnesota 3:30-4:15 Energy Self Efficiency at U of M Morris RobertJagusch, Mora Municipal Utilities Lowell Rasmussen, U ofM Morris 1:45-2:30 Reforming Electric Markets to Protect 4:15-5:00 Excelsior Energy Project Thomas Micheletti, Principal, Excelsior Consumers E..eryy, Irtc. Elise Caplan, APPA Track 2 2:30-2:45 Refreshment Break 2:45-3:30 Customer Service Policies in Troubled 1:30-2:15 Conserving Energythrough System Economic Times Improvements Mark Kotschevar,' RochesterPUC ..Panel: Xcel Energy, lnc, CenterPointEnergy &MNPUC 2:15-3:00 New UIm Long-Term Power Project ..3:30-4:45 Legislative Briefing Patrick Wrase & Gary Gleisner, New Ulm Public Utilities Dinner on yourown. 3:00-3:30. Refreshment Break THURSDAY, MARCH 13 3:30-4:15 Best Value Contracting Kathleen-Brennan, McGrann Shea 30-8:00 Breakfast Buffet at Hotel Anderson Carnival Straughn & Lamb 7:30-5:00 Registration Desk Open 4:15-5:00 ` Innovative Low Income Housing 7:00-8:30 Shuttle Buses to Front Steps of Capitol Conservation Project RickGoodemann, Exec. Dir, SW Minnesota (Front Entrance) Housing Partnership Schedule: 7:00, 7.•30, 8:0~ & 8:30 Dinner on yo ur own. 7:00-11:30 Meet with Your Local Legislators at Capitol FRIDAY, MA RCH 14 9:00-11:00 Visits with Legislative Leadership at Capitol 11:00-12:45 Shuttle Buses Return to Ramada H t 8:00-12:00 Registration Desk Open oe (Capitol Front Steps) Schedule: 11:00, 11:30, 12:00, 12:30 & 12:45 12_:00-1:.15 Hosted Luncheon Buffet at Hotel Thursday afternoon will have two concurren t tracks of programming. Track 1 j0-2:15 Wind-to-Hydrogen Here Today Brad Stevens, Energy & Environmental Research Center 8:30-9:15 Legallssues Kathleen Brennan, McGrann Shea Anderson Carnival Straughn & Lamb 9:15-10:00 MMUA CIP Efforts 10:00-10:15 Refreshment Break 10:15-11:00 Issues Roundup: MMUA staff 1 1:00-11:45 Rally Recap 12:00 Hotel check-out LOZb 65ti0-155->:9L ~o~ xe; a0.08Z l- C55-89L ao 6l l0-ZZ~-008 .auoyd ap Zt~lS-Lb°b55 NW'4~noua~(Id • OOt~ a~!ns'y~aoN aue~ aogaeH SZO~ • a~y}0 df1WW ~aa; }sanno~ ao~ gZ ~(aenaga j ~(q wao~ uoi;ea~si6aa pa~a~du.~o~ uan}aa #'Od ~(uedwo~/~1!I!~fl II!8 aW il!8 (LZ ~aenaga~ aa~e ao uo) yea 00'OOZ$ ~p suo!~ea}si6aa aano~ o~ $ II!q/pasohu3 (9Z ~aenaga~ aao;aq ao uo) yea 00'SL l $ ~p suo!~e~~s!6aa aano~ o~ $ Iliq/pasol~u3 '800Z'ti 4»eW uo `ua'd OF.~~(q pa~!~ou s! a~y~o d(1WW ay;~! suoi~ea~s!6aa a~uenpe uo uan!6 aq II!nn (aa~ 6uissa~oad 00'SZ$ snu!ua) pun}aa i~n~ y :pun;aa d!Z a~e~s ~(~!~ ssaappy 6u!IliB ~(ueduao~/~~~~!~fl 3o auaeN aweN :a~uaaa;uo~ an!~els!6a~ aalu!M 8002 aye ao} {s)uosaad 6u!nnollo; aye aa~s!6aa ~Z ~(aen~ga~ aa~}e ao uo aa~ uo!~ea~s!6aa 00'OOZ$ 9Z ~(aenaga~ aao~aq ao uo aa} uo!~ea~s!6aa a~uenpy 00'SL l $ saa~ uoi;ea~si6aa WNO~ NO111dN151J3~ ~~~.Ie®~ ,~ rririv,~~ Minnnesota Municipal Utilities Association , ~J ~ J i ,,.~,,, `~ e~ K _. ,~