Loading...
6.2. ERMUSR 07-11-2006.''` ~/ Elk River ~Vlunicip al Utilitie s 13069 Orono Parkway Elk River, MN 55330 July 5, 2006 To: Elk River Municipal Utilities Commission Jerry Takle John Dietz James Tralle From: Bryan Adams, P.E. Subject: Electric Utility Issues Attached are two pieces of information worth your time to read. phone: 763.441.2020 Fax: 763.441.8099 The first is public announcements from Midwest Municipal Transmission Group, Cap X 2020 and Excel Energy reflecting the start of transmission projects. This is an important first step in securing reliable power for Minnesota. The second set of information is from MMUA board discussion materials concerning miscellaneous electric utility issues. west icipal nsmission roup MMTG update June 9, 2006 First, thank you for your continuing membership in support of MMTG. Our activities have shifted now from fighting for transmission ownership to implementing transmission ownership - in both the MidAmerican and Xcel systems, and on a large scale, in CAPX 2020. I'll start with MidAmerican as those agreements seem furthest along. MidAmerican upgrades: FERC recently approved MEC's filing for the Quad Cities West upgrades. At the same time, we have received Letters of Intent to Invest in MidAmerican facilities from a number of municipal utilities, at around 260 MW of interest, and there may be a couple of additional utilities interested in investing. We have not yet been notified by MEC about the timing of our investment. We also have agreements from all the MEC network customers to have the Iowa Public Power Agency act as agent for them for the purposes of these investments. I want to thank each of these utilities for taking this step. We anticipate that there will yet be more paperwork from IPPA for these investments. Allen Bonderman is working on this with Duane Armstead and Lance Coppock. At the same time that we are working on these investments, MidAmerican is moving ahead with its contractor, TranServe, which will be its Independent Transmission Coordinator. MEC has scheduled a meeting with us for July 18, in the afternoon, in Ames. I have sent a separate notice of this meeting to all the MEC network service customers, and to the MMTG operating committee. If you are interested in attending this meeting, please let me know. Xcel Energy: We have been meeting with Xcel representatives on several issues. My biggest goal this year is to get Xcel to the same point we reached with MEC -that is a broad agreement on how municipal joint ownership of transmission will be treated, and how municipals can recover their investment with an appropriate margin. On top of that, individual cities have specific transmission issues with Xcel, and those need to be solved. Agreement with Xcel on municipal ownership will underpin our CAPX investments. First, we are grateful that the city of Glencoe MN has been willing to serve as our example of transmission cost recovery. Glencoe is about to put in service a 115 kV upgrade. Paul Reising has developed Annual Transmission Revenue Requirements calculations for Glencoe, and sent these to Xcel. We are now discussing the approach with Xcel. Secondly, we have started working with an Xcel transmission planner (Walt Grivna) to develop and review plans for transmission upgrades to serve the City of New Ulm. This MMTG c/o IAMU 1735 NE 70th Avenue, Ankeny Iowa 50021 Phone: 515/289-1999; FAX 515/289-2499; Anne Kimber email: akimber@iamu.org is hopefully going to be an example of joint planning for a city's benefit, where the city would eventually have the option of ownership in the upgrades. Third, CMMPA has been working with Paul Reising and Bob Jablon to resolve with Xcel the termination of its black box settlement. This settlement was terminated by Xcel on Mar 31 of this year. The settlement included significant transmission credits, and CMMPA is now negotiating for a reinstatement of some portion of the credits. CAPX 2020-the "faith-based organization" continues. CAPX has sent out a significant press release today (June 9) about the first transmission project it plans to construct -the "Brookings to Twin Cities" project. This is a 345 kV line estimated to be in service 2012, and MMTG will be one of the investors. It represents a significant investment for us - roughly $26 million, with a MISO approved Return on Equity of 12.38%. There is a lot of discussion among the CAPX members about how the underlying agreements for ownership and cost recovery will work. CAPX has recently engaged the law firm of Fulbright and Jaworski to work with all CAPX members. MMTG will be using Kaela Brennan from McGrann Shea as our legal contact point for CAPX. CAPX expects to have a Memorandum of Understanding in place that has been signed by all participants within the next two-three months. It hopes to have project agreements signed by the end of 2006. As CAPX struggles through the significant questions of how exactly it will work together, so we MMTG members must also figure out how our investments will work in CAPX. It is possible (even likely) that we will have opportunities for investments beyond our load ratio share. Alliant and ATC: After Alliant failed to develop legislation to satisfy Iowa Utilities Board concerns over jurisdiction over ATC facilities, progress seems to have stalled between ALT and ATC. The Organization of MISO States meeting at the Iowa Utilities Board: This is a parallel concern for MMTG. The MISO OMS represents regulators from all the states in which MISO operates. The OMS recently filed comments to FERC giving its opinion on long term transmission rights, and frankly the comments were not friendly to load serving entities like municipal utilities, who need long term transmission rights to parallel their investment in baseload and renewable generation. Without these rights, municipal utilities could face huge price risk getting their generation delivered. Anyway, the chairman of the IUB, John Norris, has initiated an advisory group of Iowa utilities to advise the Iowa representatives to the OMS about Iowa concerns with MISO. The first meeting was held June 2 in Des Moines. While it was mainly a set of presentations from MISO and IUB staff, it does hold promise for a better discussion about our MISO cost/benefit concerns and protection of our consumers. We took advantage of John Norris' offer to send him written comments and we did so, taking exception to the OMS comments on long-term rights. Please contact me with any questions or concerns: akimber e,iamu.org or 515 289-5213 For more information, contact: Building Electric Transmission We All Will Rely On June 9, 2006 Therese LaCanne, Great River Energy Office (763) 241-2280 Cell (612) 804-4532 Mary Sandok, Xcel Energy Office (612) 215-5329 Media Line (612) 215-5300 CapX 2020 utilities announce plans for new transmission lines to ensure reliable, low-cost electricity in the future ST. PAUL, Minn. -- A group of regional utilities today launched an effort to ensure their customers in Minnesota and neighboring states will have access to reliable, low-cost electricity in the future. The CapX 2020 utilities - an alliance of electric cooperatives, municipals and investor-owned utilities -took the first step in the regulatory process for three new 345-kilovolt transmission lines. A preliminary filing for one of the three lines, which lays out plans for notifying local governments, landowners and residents, was made today with the Minnesota Public Utilities Commission. "CapX 2020 is a collaborative effort that aims to support customers' growing demand for electricity by upgrading and expanding the backbone transmission system in Minnesota and neighboring states," said Terry Grove of Great River Energy, a co-leader of the CapX 2020 effort. CapX 2020 is short for Capacity Expansion needed by 2020. The approximate lengths and general locations of the proposed lines are as follows: • A 200-mile, 345-kilovolt line between Brookings, S.D., and the southeast Twin Cities, plus a related 30-mile, 345-kilovolt line between Marshall, Minn., and Granite Falls, Minn.; • A 200-mile, 345-kilovolt line between Fargo, N.D., and the St. Cloud/Monticello, Minn., area; www.capx2020.com • A 150-mile, 345-kilovolt line between the southeast Twin Cities, Rochester, Minn., and La Crosse, Wis. -MORF~ www.capx2020.com CapX 2020 transmission lines -page 2 of 3 Great River Energy filed a proposed public notice plan for the CapX Brookings, S.D.-southeast Twin Cities transmission line with the Minnesota commission today. Xcel Energy plans to file similar notice plans for the CapX Twin Cities-Rochester-La Crosse line and the CapX Fargo-St. Cloud/Monticello area line in the next few weeks. While Great River Energy and Xcel Energy are taking the lead on the three 345-kilovolt lines, other utilities also will be involved in permitting, building and financing them. A fourth line - a 230-kilovolt, 70-mile line in the Bemidji area of north central Minnesota -also is among the CapX 2020 Group 1 projects. The first four projects represent a combined investment of approximately $1.3 billion. Xcel Energy, Great River Energy and Otter Tail Power Company are committed to financing a majority of the cost. The balance will be covered by other project participants in various amounts. Group 2 and Group 3 project phases are planned through 2020. "These transmission capacity upgrades are needed to deliver new electricity generation to support economic, job and population growth in the future," Grove said. "Additionally, key sections of the proposed lines are needed to deliver the rapidly expanding wind energy from this region to our customers." The utilities expect to file a single request for a Certificate of Need for the three 345-kilovolt lines and associated system interconnections with the Minnesota commission late this year. Following a rigorous public process, the commission is expected to decide on the need for the lines sometime in 2008. If the commission certifies need, it then will determine routes for the new lines in subsequent separate proceedings. As soon as routing decisions are complete in 2009 or 2010, construction will get under way, and the lines are expected to be completed three or four years later. "We are just beginning a lengthy journey and are committed to working with landowners, local officials and other interested parties at every step of the process," said Laura McCarten of Xcel Energy, a co-leader of the CapX 2020 effort. "Anyone interested is invited to comment on our notice plans." www.capx2020.com CapX 2020 transmission lines -page 3 of 3 After Minnesota commission approval of the plans, Great River Energy and Xcel Energy will mail letters to potentially affected people in each of the broadly defined transmission line corridors to let them know how they can learn more and get involved in the state's decision-making process, McCarten said. "Public meetings will be held in the potentially affected communities to describe the projects and answer questions," she said. "We will post information about the projects and updates on the CapX 2020 Web site at www.capx2020.com, and we will begin building mailing lists to keep people informed as the long regulatory process unfolds." Portions of the lines also will require approvals by federal officials and by regulators in North Dakota, South Dakota and Wisconsin. Along with Great River Energy, Elk River, Minn.; Otter Tail Power Company, Fergus Falls, Minn.; and Xcel Energy, Minneapolis, utilities or groups that expect to participate in one or more of the CapX 2020 projects are: Dairyland Power Cooperative, La Crosse, Wis.; Midwest Municipal Transmission Group, Des Moines, Iowa; Minnesota Power, Duluth, Minn.; Minnkota Power Cooperative, Grand Forks, N.D.; Missouri River Energy Services, Sioux Falls, S.D.; Rochester Public Utilities, Rochester, Minn.; Southern Minnesota Municipal Power Agency, Rochester, Minn., and Wisconsin Public Power Inc., Sun Prairie, Wis. The Minnesota Legislature adopted a new law in 2005 that encourages investment in strengthening power delivery systems by, among other things, allowing investor-owned utilities to recover costs as lines are being built. ### www.capx2020.com Xcel Energy U.S. Bancorp Center 800 Nicollet Mall Minneapolis, MN 55402-2023 June 9, 2006 Xcel Energy announces participation in CapX 2020 transmission projects MINNEAPOLIS -Xcel Energy (NYSE:XEL) and several other regional utilities today launched the first of three groups of transmission projects that aim to ensure their customers in Minnesota and neighboring states will have access to reliable, low-cost electricity in the future. An alliance of electric cooperatives, municipals and investor-owned utilities including Xcel Energy -- the CapX 2020 utilities -- have identified three groups of transmission projects that they propose to complete by 2020. A preliminary filing for the first line in project Group 1 was made today with the Minnesota Public Utilities Commission. The filing lays out plans for notifying local governments, landowners and residents about the utilities' plans. "Legislators and regulators in several of the states we serve in the Upper Midwest recognized the need for additional transmission investment and took action to support its development," said Richard Kelly, chairman, president and CEO of Xcel Energy. "Group 1 project investments will total about $1.3 billion, with major construction starting in 2009 or 2010 and ending three or four years later. Our share of that investment will be about $700 million, with the balance funded by other CapX 2020 participants." Kelly said the timing of CapX 2020 investments works well for Xcel Energy because the company's investments to complete its Metro Emissions Reduction Project in Minnesota and the Comanche 3 power plant in Colorado will be winding down as spending on CapX 2020 projects picks up. "CapX 2020 is the type of investment that supports our Build the Core strategy," Kelly said. "The investments are in fully regulated utility operations, they benefit our customers, and the regulatory recovery mechanisms are in place." The approximate lengths and general locations of the proposed lines in Group 1 are as follows: • A 200-mile, 345-kilovolt line between Brookings, S.D., and the southeast Twin Cities, plus a related 30-mile, 345-kilovolt line between Marshall, Minn., and Granite Falls, Minn.; • A 200-mile, 345-kilovolt line between Fargo, N.D., and the St. Cloud/Monticello, Minn., area; • A 150-mile, 345-kilovolt line between the southeast Twin Cities, Rochester, Minn., and La Crosse, Wis. • A 70-mile, 230-kilovolt line in the Bemidji area of north central Minnesota Along with Xcel Energy, utilities or groups that expect to participate in one or more of the CapX 2020 projects are: Dairyland Power Cooperative, La Crosse, Wis.; Great River Energy, Elk River, Minn.; Midwest Municipal Transmission Group, Des Moines, Iowa; Minnesota Power, Duluth, Minn.; Minnkota Power Cooperative, Grand Forks, N.D.; Missouri River Energy Services, Sioux Falls, S.D.; Otter Tail Power Company, Fergus Falls, Minn.; Rochester Public Utilities, Rochester, Minn.; Southern Minnesota Municipal Power Agency, Rochester, Minn., and Wisconsin Public Power Inc., Sun Prairie, Wis. More details can be found in the CapX 2020 news release issued today and at www.capx2020.com. Xcel Energy is a major U.S. electricity and natural gas company with regulated operations in 10 Western and Midwestern states. Xcel Energy provides a comprehensive portfolio of energy-related products and services to 3.3 million electricity customers and 1.8 million natural gas customers through its regulated operating companies. Company headquarters are located in Minneapolis. More information is available at www.xcelener~y.com. This news release includes forward-looking statements that are subject to certain risks, uncertainties and assumptions. Such forward looking statements are intended to be identified in this document by the words `anticipate," "estimate," "expect," `projected," "objective," `outlook," `possible," `potential"and similar expressions. Actual results may vary materially. Factors that could cause actual results to differ materially include, but are not limited to: general economic conditions, including their impact on capital expenditures; business conditions in the energy industry; competitive factors; unusual weather; changes in federal or state legislation; regulation; risks associated with the California power market; currency translation and transaction adjustments; the higher degree of risk associated with Xcel Energy's non-regulated businesses compared with Xcel Energy s regulated business; and the other risk factors listed from time to time by Xcel Energy in reports filed with the Securities and Exchange Commission. For more information, contact: Xcel Energy Investor Relations Dick Kolkmann, managing director, (612) 215-4559 Paul Johnson, director, (612) 215-4535 Xcel Energy Media Relations, (612) 215-5300 Xcel Energy Internet address: www.xcelener~y.com This information is not given in connection with any sale or offer for sale or offer to buy any security. Introduction These materials are intended to spur thought and discussion about where MMUA might go as an organization in the future. As always, these materials are not intended to represent a complete inventory of all our activities, nor do they represent an exhaustive list of all the questions we might ask. I hope that these materials will suggest additional questions or lines of inquiry to you. Please feel free to raise items or issues for discussion that are not addressed in the materials. High Wholesale Power Costs A number of disturbing trends have emerged in the last year or two to suggest that the favorable wholesale power deals available to Minnesota municipal utilities for the past 20 to 30 years may be disappearing. Probably the most visible and notorious is the development of the MISO market. Prices under this market are much higher than they were under the old paradigm. A number of factors contribute to this rise in prices: • For much of the last year natural gas prices have been at historic high levels. Since the MISO market price is driven by the highest bid price, high gas costs for combustion turbine generation have driven the whole market sharply upward. As gas prices trend down toward the $5 range, MISO market prices should moderate. • It's a new market, and MISO is still figuring out how to operate it. Hopefully, with experience, MISO will become better at managing the market and eliminating some of the price spikes and volatility. • The market is so focused on real-time prices that it favors high-cost generation that can be brought on and off line in a minute or two. The market undervalues and underutilizes more efficient steam and combined cycle generation that requires significant lead time before coming on line. • The market is intended to produce high prices. It's designed to provide a revenue stream that will encourage mythical investors to develop new generation resources. As long as we retain a market design that pays all generators the market-clearing price regardless of cost, it's hard to foresee a time when market prices come down to traditional levels. The only players likely to step up to the plate to invest in new generation are the existing utilities, and it's to their advantage to maintain fairly tight supplies so prices remain high. Some of these factors are likely to moderate as gas prices come down and MISO gains experience in operating a market. Nonetheless, it seems likely that for the foreseeable future, being a net seller into the MISO market is likely to be a very profitable proposition. Being a net buyer from the MISO market is likely to be a very costly position to be in. We've seen some examples of what can happen when municipal utilities are exposed to market prices under the new MISO regime. The CMMPA members have for years operated under the model of buying interruptible energy and self-generating with local plants when they are interrupted. They don't currently own any central station generation, although the agency is buying into both Big Stone 2 and Nebraska City 2. Many of the CMMPA members have experienced brutal wholesale power increases due to their broad exposure to the MISO market. City councils and consumers are expressing frustration and anger over suddenly high power bills and wondering why they have a municipal electric utility. These utilities have always been significantly lower in cost than their neighboring IOUs and co-ops. Now they are suddenly significantly higher. It's a very uncomfortable position to be in. In a similar but less drastic circumstance, SMMPA experienced both a planned and an unplanned outage at Sherco 3 last year, and the unexpectedly high cost of replacement power put a real strain on the agency's finances. There are other factors beside MISO that will likely drive municipal wholesale costs upward. IOUs and co-ops that have provided pretty favorable wholesale power deals over the years now see a tight market and the potential to make a lot more money from the market than they can get from long-term fixed-price contracts. Municipals looking for power supply are seeing much shorter contracts, at prices that are market-driven or at much higher levels than previous contracts. Municipals looking for power supply down in Iowa have been seeing offers in the $50 to $60 range. Another factor putting pressure on prices is the fact that we are about to enter a period of significant new generation and transmission construction. The CapX 2020 study estimates that we will need about 6,300 MW of new generation over the next 14 years. That will have to be accompanied by roughly $3 billion in transmission investment. Add the wind development necessary to meet a 10% to 20% renewable energy mandate, and there is going to be a lot of investment being recovered through wholesale power rates. Take all these factors into account and we may be in for a major upward adjustment in prevailing rate levels, comparable to what occurred in the late 70s and early 80s. This will actually please most of the environmental groups, since it will make both renewables and DSM more cost-effective. It will likely make utilities the target of public outrage and put a lot of pressure on small town municipals to keep costs down as best they can. Some suppliers will probably encourage municipals to sell out rather than have to keep operating in a high cost environment. What role should MMUA play in helping educate and prepare municipal utilities for some tough sledding ahead? About 45 of our municipals have no active agency affiliate and will likely be out there on their own looking for reasonable power supply deals as their contracts expire. Some thoughts that come to mind are: • Put together a workshop on power supply costs and alternatives. The Iowa association did something like this last month and had very good attendance. Put together an RFP for consultants to provide power supply consulting services through MMUA. A consultant might be willing to bid low in the hope of getting multiple clients through MMUA. ~ Do a series of regional meetings devoted in part to wholesale power costs and the need to anticipate a tight market for some time to come. • Explore the possibility of joint municipal power projects, such as the one that New Ulm is considering. • Some form of contract management, discussed below, may help cities deal with complex power supply options. MMUA has been instrumental in working with Congressman Oberstar and potentially Senator Dayton to request a GAO study of MISO procedures and costs. APPA helped develop the list of questions and Michael Nolan is working with the offices that will be making the request. By the time of the planning session the request will probably have been submitted. What else should MMUA be doing to help municipals deal with and prepare for potential increases in power costs? Climate Change and Renewables As much as we might like it to, the issue of climate change won't go away. Over the past ten years opinion in the scientific community has coalesced solidly around the dual propositions that climate change is real and that it is driven at least in part by release of greenhouse gases from automobiles, power plants, manufacturing facilities, and other man-made sources. It also appears that we're approaching a tipping point in the prevailing opinion among two other important constituencies -the general public and elected officials. As an example, in the past year or so a number of religious denominations have adopted positions supporting the need to take action on climate change. In short, we seem to be approaching the point at which global warming, and the need to do something about it, will be accepted as established fact by most people. And where the general public goes the legislature and Congress are usually not too far behind. At the end of this year's legislative session the DFL-led Senate passed a mandate for 20% renewables by 2020. The Republican-led House ducked the issue by burying the omnibus energy bill, but there is no guarantee that we would see the same outcome next year. Most prognosticators think that this will be a tough election year for Republicans, and if the DFL picks up even a few house seats, they could control both chambers of the legislature. Even if the Republicans retain control of the house, support for renewables in the Republican caucus could build. Wind power is extremely popular in the Republican- dominated farm country of Western and Southern Minnesota, where it is seen as a potential economic development boon for farmers and the rural economy. This sets up an interesting opinion battle among Republicans between wind advocates and traditional business interests like the state Chamber of Commerce, which generally opposes mandates that will increase costs. A similar dichotomy exists on the DFL side between Metro area legislators, who generally favor wind development, and more moderate DFLers from Greater Minnesota who are usually more cautious about new mandates. A theme that Republicans seem to have picked up, taking their cue from President Bush, is that energy independence is a national security issue. We heard this very clearly from Senator Coleman during our visit with him at the APPA rally. This theme could play out in the national campaign this fall, which would tend to bolster Republican support for alternative energy programs generally. So going into next year's legislative session, we can assume that the 20% by 2020 proposal, or something quite like it, will be back. Legislators will be aware that public support for action on climate change is growing. Rural legislators will want to work with their municipals and co-ops, but they will also feel heat to do more on renewables from agricultural interests and the general public. How should we respond? • We could attack the science and contest the validity of climate change theory. Personally, I don't think this argument gets us very far in this political climate. • We could concentrate on presenting straightforward information on potential costs, to demonstrate the financial impact of increased reliance on wind. • We could pursue a "half a loaf' strategy, arguing for a compromise such as a 15% renewable portfolio standard by 2020. • We could develop a priority list of what we want in a 20% by 2020 bill and presumably sign off on the bill if we get what we want included. The Government Relations Steering Committee is planning to meet later this summer to begin the process of developing our wish list. What provisions should we hold out for? Rail Competition The issue of rail competition (or the lack of competition) is beginning to gain some traction. The railroads are very powerful in Congress, but there are also some powerful players among the rail shippers who are tired of getting marginal service at exorbitant rates. It's an issue that impacts virtually all of our members, since they all rely in one way or another on coal shipped via rail for generating power. A number of our members, including the members of MRES and SMMPA, Hibbing and Virginia, and Willmar, have pretty compelling stories to tell about the problems they have getting coal shipped at a reasonable rate. Minnesota Congressman Jim Oberstar, as the ranking minority member of the House Transportation Committee, is a key player on the issue and a strong proponent of captive rail legislation. With a strong champion in our delegation, we should probably take 4 advantage of our position and provide him with as much assistance as we can to move the ball on captive rail legislation. The one quirk we need to be aware of is that talk of captive rail in this region often leads to a discussion of the DM&E rail project. Most MMUA member cities along the DM&E route don't seem to be taking a strong position one way or another, but in Rochester both the Mayo Clinic and the city government have taken strong positions against the DM&E unless it agrees to some mitigation. This puts Rochester Public Utilities in a tough position and makes it virtually impossible for RPU to accept an association position that supports the DM&E. To make matters a bit more complicated, our two US Senators have been having a public spat over who is doing more to help Mayo fight the DM&E. It seems to me that we should keep our eyes on the big picture and concentrate on the need for relief for shippers on the BNSF and other existing railroads. How active should MMUA be on the captive rail issue? Should we consider joining CURE, the captive rail lobbying group? Should we do some targeted Washington visits on the issue? Service Territory The Minnesota electric utility service territory law has been on the books for 32 years. Initially, transfers of territory from co-ops to municipals following annexation were straightforward and noncontroversial. In the late 80s and early 90s co-ops began pursuing ever greater compensation awards, and we have been fighting about it ever since. Several years ago the co-ops began a new strategy that has been working well for them. They have apparently concluded that they don't have the votes to freeze service territories legislatively, so they are trying to do it de facto by ratcheting compensation awards up into the stratosphere. They selected a couple of cases, Buffalo and Grand Rapids, in which the prevailing compensation formula could be argued to produce very high payments. They basically forced these cases to hearing by refusing to negotiate. In each case the hearing officers issued an opinion favorable to the municipal, and in each case the MPUC abandoned the hearing officer decision and basically gave the co-op everything it was asking for. Both cases have been appealed to the Court of Appeals. The court just issued a decision affirming the MPUC in the Buffalo case. Buffalo is appealing that decision to the Supreme Court, where we remain hopeful that the court will take a fresh look at the situation and see things our way. The Grand Rapids case has been on hold pending the Buffalo decision, and it will now proceed to briefing and oral argument. In light of the Buffalo decision, I don't think anyone is expecting much from the Court of Appeals in the Grand Rapids case. 5 It seems clear that, for the foreseeable future, the PUC is not a good venue for us on service territory issues. The current chair, Leroy Koppendrayer, is a lifelong farmer whose bias in favor of the co-ops is palpable in the hearing room. PUC and DOC staff also seem to be entirely behind the co-ops on this issue, which likely sways the other commissioners, none of whom actually understands the compensation formula.t Another set of cases is proceeding down a different track that has not been utilitized before. Minn. Stat. section 216B.47 provides: Nothing in this chapter may be construed to preclude a municipality from acquiring the property of a public utility by eminent domain proceedings; provided that damages to be paid in eminent domain proceedings must include the original cost of the property less depreciation, loss of revenue to the utility, expenses resulting from integration of facilities, and other appropriate factors... . For purposes of this section, a public utility includes a cooperative electric association. Moorhead is preparing to go to trial in June on a large annexation that will be decided by the condemnation court in Clay County, rather than by the PUC in St. Paul. The Moorhead case is a very good one to litigate from the municipal perspective. It is a large annexation that is virtually all empty. The area is zoned by the county for one house every 40 acres, so it would never have undergone extensive development absent the annexation. The initial trial will be to a panel of three commissioners with some background in business valuation. Assuming one side or the other appeals the initial decision, the appeal is to the local district court and may be a jury trial. An appeal from that decision goes to the Court of Appeals. Several other cities, including Two Harbors and Staples, are lining up to do condemnation proceedings following Moorhead. Redwood Falls is proceeding through the PUC because it needed to get interim service rights, which are not readily available through the eminent domain process. The Redwood Falls case does present an interesting new angle in that the city is developing the property. It appears that for the next several years at least, there will be a flurry of service territory cases making their way through various levels of hearing, trial, and appeal. It remains to be seen whether any clarity will emerge from all this effort, but it's going to take a lot of time and expense to find out. One of the impacts of this lengthy and costly struggle is that a number of cities have simply decided not to serve newly annexed areas, due to the cost and the hassle. Others have been coerced into signing a freeze agreement to reach a settlement on a single ` Dave Berg of R. W. Beck tells me that there are only four people who understand the formula - he and Kevin Favero of R. W. Beck, Walt Lorber of Rochester, and Dennis Eicher of PSE, the co-ops' expert witness. 6 annexation. What started out as a straightforward legal process for municipal utilities to grow with their cities has become a serious impediment to cities' ability to exercise their legal rights. The service territory issue is generally acknowledged to be one of MMUA's highest priorities. MMUA's role in the service territory issue can be summarized as follows: • MMUA's reinvigorated Grow With Your City Committee oversees the development of strategy and provides direction for research and other staff activities. • Staff conducts research in a variety of directions in the hope that the results of the research will be useful to the cities in their proceedings or potentially in the legislature if we ever wind up in a pitched battle there. • Staff works with individual cities with service territory issues to provide advice and strategy on how to proceed. • Staff works with legal counsel (typically McGrann Shea) to provide suggestions on strategy, brief points, etc. • MMUA provides financial support to cities pursuing service territory litigation in the form of contributions from the MMUA Legal and Legislative Fund. It may be difficult to maintain a significant level of litigation support to multiple cities at the current level of the legal and legislative special assessment. See the special assessment discussion below. • We meet with representatives of state government and the Minnesota legislature and Congressional delegation to educate them about the problem and show them the results of our research. Is there anything else that MMUA should be doing in support of members' efforts to grow with their cities? Legal and Legislative Fund and Special Assessment Last year the MMUA membership approved a five year special assessment equal to 10% of electric regular member dues. In developing this new assessment program, the board set a goal of achieving a $250,000 legal and legislative fund. The assessment for the current fiscal year, which is scheduled to be approved by the board at the summer meeting, is budgeted at $64,466. The invoices would go out immediately after the summer meeting. As of April 30, the L&L fund balance was $102,249. We have made commitments for prospective spending that will take the fund down further. I'm concerned that various expenditures from the fund in connection with the service territory issue will be greater than the contributions from the assessment, and that we will be depleting the fund rather than recharging it. It seems to me that there are several things we can consider, both on the supply side and the demand side. 7 • The board could ask the Grow With Your City Committee to develop clear guidelines and standards for MMUA assistance to individual cities in service territory cases, which could have the impact of lessening MMUA's overall level of expenditure on individual city litigation. o The amount of assistance to any one city might be capped. o Assistance might be limited only to cases with significant precedential value. • We could consider raising the amount of the assessment on a short-term basis, to bring more money into the fund. As an example, a 15% assessment would bring in about $97,700 this year. • We could consider approaching the joint action agencies for contributions to the fund, which we have not previously done. There is a clear benefit to the agencies, since service territory expansion represents a major portion of their future potential growth. Should we pursue any of these approaches regarding the L&L fund? Are there other things we should be considering? Contract Management Most municipal utilities are very small. About 83% of Minnesota's municipal electric utilities have fewer than 5,000 customers, and 66% have fewer than 2,000 customers. About 40% have fewer than 1,000 customers, and 22% have fewer than 500 customers. Municipal pay scales in Greater Minnesota are pretty low, and it's difficult to keep qualified linemen, much less managers. Most managers in small towns are working supervisors who have to spend the great bulk of their time keeping the system operating, hanging Christmas decorations, and doing all the other day-to-day tasks of operating a utility in a small town. There is not much time for planning, filling out reports, developing customer programs, working on the next power supply contract, etc. It's hard for small towns to raise the level of a manager's salary, since that would set a precedent that could push wages up in other city positions and departments. Sometimes it's easier to pay someone from outside to do the job than to raise the salary of a local employee to a competitive level. As an example, MRES provides line crews for several of its member communities. It's easier for the cities to pay MRES to hire linemen at a competitive wage than it is for the cities to raise the salaries of their own employees. There are several different scenarios that could all potentially benefit from some level of contract management or operations services. A number of small gas utilities, particularly those that were established in the 1990s, are operating systems with little training or background for the task. Some of them would probably be happy to keep the system but contract out the management and operation. • Many small systems (Lanesboro is an example) don't have much in the way of customer programs, and suffer in comparison to the local IOU or co-op. A contract service that provided and administered customer programs would help maintain customer satisfaction with the municipal utility. • We have a number of areas in the state in which there are a lot of small municipals that could easily be operated or managed jointly. The Iron Range, the area south and east of Rochester, and the area around New Ulm and Fairfax are examples. An experienced and capable manager could oversee the operations of several systems, improving their performance and likely saving the utility money at the same time. • A similar program could be established for line crews, which is essentially what MRES is doing for some of its members. An appropriately-sized crew could support several local utilities, improving efficiency and perhaps lowering costs overall. Is it time for MMUA to take a serious look at offering contract management and/or operations services? Gas Agency One of the issues that surfaced during our involvement in the Aquila gas system sale over the past year is the potential benefits of establishing a municipal gas agency in Minnesota. There are a number of services that a gas agency could provide, including: • Provide technical and operations assistance to small gas systems. • Provide contract management and operations services to systems that would like to essentially turn the operations over to someone else. • Provide an existing system that cities considering the development of a municipal gas utility could tap into. (A few years ago, Thief River Falls decided not to exercise abuy-out window in their gas franchise, because they didn't want to take that task on without a support system. Their decision might have been different if there had been an operating gas agency.) • Provide schedule and balancing services for small gas systems. • Provide a mechanism for joint purchase of gas supplies. o Joint purchase should offer benefits due to larger volumes as well as geographic and climate diversity. o The agency could also purchase gas for agencies or municipal utilities that need gas for electric generation. Adding summer generation load to winter heating load would improve the collective load factor and benefit all participants. Under this scenario gas systems would be able to choose the level of service that they want. Our gas circuit rider program might also be transferred over to the agency. 9 MMUA past President Jerry McCarthy, who is slated to begin serving on the APGA board later this year, has volunteered to serve as the convener of an effort to explore the development of a gas agency. Should MMUA explore the development of a municipal gas agency? Finance Program We're approaching the halfway point on committing the current $50 million bond issue. Things have been a little slow this spring as a number of projects we have been working on with cities have slowed down. Anthony does expect to be doing a significant number of projects between July and the end of the year. We also expect to do our first out-of- state financings for small projects in Cavalier and Lakota North Dakota. One thing we've learned is that we are quite competitive for small projects, but we have been just losing out on some projects in the $4 million range on fixed rate deals. (We are still the best game in town for projects in that range if the city is willing to look at some or all of the project with variable rate debt). When we start working on the next bond issue, I hope to work with the various members of the finance team to squeeze the costs a little tighter in order to make us more competitive for those $4 to $5 million projects. Is there anything else we should be doing to build support for the program? Awards MMUA currently has two awards -the lifetime membership and the President's Award. This seems a bit skimpy sometimes. We don't have any awards geared to public officials who are helpful to us, nor do we have any awards for utility staff or commissioners who have a long history of working with their utilities, even though they may not have a long history of involvement with MMUA. We also don't have any program for recognizing milestones of staff service or exceptional performance. It seems to me that some expansion of our awards program makes sense, though we don't want to go overboard. Attached is a proposed awards program that Steve Downer developed and circulated for discussion with the Communications and Member Services Committee awhile back. It is modeled on the APPA awards program. It may be more comprehensive than we need as a state organization, but it serves as a good starting point for discussion. Should we expand our awards program? What kinds of service should we be prepared to recognize? 10 Other Programs and Activities Here's a quick rundown on other association programs and activities. JTS. Gas Circuit Rider. We plan to implement two additions to the program in the next few months. We will be joining MEA, which will give us access to training modules and excellent web-based record keeping system. LMC Training Partnership. LMC has told Mike that they are committed to keeping the program in place with some modest changes for at least the next two years. Electric JTS. Once Vernell Roberts gets settled in doing compliance work, he will be doing some advanced technical training, which will improve our capabilities in this area. Training Center. Kevin is now doing compliance for Pipestone and Litchfield, which provides a good supplement to training revenue, and should keep the training center at or around the break even point. Meetings, Workshops, etc. Winter and Summer Meetings. We made some changes to the timing and format of these meetings several years ago, in connection with the change in our fiscal year. They seem to be working well in the current format and time slot. Are there any suggestions for improvement? Superintendents Meeting. This meeting is intended to provide useful information that supervisors of hands-on crews need to get the job done. It should be one of our largest meetings, but it hasn't grown as fast as we anticipated. This year we held it in the Twin Cities and heard from a lot of people who want us to keep it in St. Cloud. We also raised the price significantly, which might have been a disincentive for some members. Does anyone have any thoughts about how we can grow this meeting? Regional Meetings. After our recent experience in taking our show on the road, I don't think we get much mileage out of doing regional meetings just to do them. I think we are better off waiting until we have a topic with strong interest to drive attendance, or focusing on meetings with members and their legislators. Does anyone have any thoughts on how we can best meet the need of the members for information from and about MMUA? Communications, Publications, etc. Our copier lease is ending, and later this summer we plan to bring in a new color copier/printer/scanner that will give us much greater ability to produce professional quality materials in-house. 11 Web site. We recently did an overhaul of the web site appearance, and we are now going through the site section by section and revising and updating the content. Dave is continuing to look at various options for developing amembers-only section. Are there other things we could be doing with the web site to make it more useful? Directory. Our 75`h Anniversary Directory just came out. Steve and Dave put in a lot of time to make it a special product. Are there any features of this directory that should be carried over in the coming years? Other publications. Any thoughts on what we could be doing better to communicate with our members and with government and the general public about MMUA, municipal utilities, and the issues that concern us? Conclusion I hope these materials will be helpful to you. Please feel free to give me a call prior to the planning session if you want to ask questions or get further background on any of the matters discussed. I look forward to seeing you all at the Arrowwood June 21-22. 12