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Preston Council and utility review proposed contract extension

Fri, Aug 21st, 2009
Posted in Government

The Preston Utility Commission and the Preston City Council met for a second week together on August 18 to study the analysis completed by R. W. Beck, Inc. The firm was tasked by Preston and several other communities that are currently members of the Southern Minnesota Municipal Power Agency (SMMPA) to help them weigh the pros and cons of a twenty year extension with SMMPA from 2030 to 2050.

Last week SMMPA company officers gave their sales pitch to encourage Preston, which is in a contract to 2030 with the agency, to extend that contract to 2050. The two largest of the 18 community members, Rochester and Austin, have indicated they don't intend to extend their contracts.

City Administrator Joe Hoffman discussed some of the facts and reasoning highlighted in the twenty-one page report. "Joint action" is expected to benefit members meaning it could be less expensive to be part of the larger agency than to operate independently and purchase and contract energy on their own. With the unlikely permitting to build new plants, other sources may be unwilling to sell their excess energy if there are few prospects for new generation coupled with a growing electrical load.

The report expects the 41 percent share of the coal-fired plant Sherco 3, which is the newest, (built in the late 1980s) and possibly last, coal plant to be built in Minnesota, to be a large asset. However, Hoffman noted while some see it as a real asset, others see it as a liability because of the potential for a federal carbon tax plus possible future low-cost technology.

The Sherco 3 plant has significant value if properly maintained since new generation facilities like it are unlikely to be built due to increasing environmental concerns. This in itself can increase the value of an existing operating plant and its transmission facilities. Hoffman explained how new transmission is a problem due to concerns of high voltage line impacts on "everything from grazing cattle to migratory birds."

The debt currently held by the agency on Sherco 3 is to be fully paid by 2030, suggesting that the cost of power for remaining members at that time would be competitive. Hoffman discussed the possibility of the coal-fired plant becoming uneconomical to operate at some point in time. He questioned how the agency would pay to decommission the plant at a future date, if it were retired. It has been suggested that the agency should start a fund soon so all current members would be contributing to a fund for this purpose, which could be decades in the future.

Unknowns to be considered before extending

If Preston were not locked into a contract until 2050, it would potentially have the ability to get a better price contract. Hoffman said the "big if" is the unknown of what future technological advances could mean. However, how can the city plan for the unknown?

With most of SMMPA's power coming from Sherco 3, the viability of the plant is a risk. Coal-fired plants cannot be easily shut down to work well with wind generation which produces an uneven flow of electricity.

Hoffman cited other agencies in the region which are more flexible, but may have more limited services. He noted that Harmony purchases its power wholesale. Hoffman is concerned about the cost of purchasing independently if and when power demand increases.

The lights will still stay on if the city doesn't extend, but the city could be more at the mercy of the market. The current contract was signed in 1981, making it a nearly fifty-year contract. Hoffman said even if they don't extend, the decision of what to do after SMMPA wouldn't come for about twenty years.


Ron Schroeder, Utility Commission, doesn't like the idea of entering into a new contract every year or two adjusting the rate for customers with each signing. Heath Mensink, Utility Commission, praised SMMPA for the "pile of money" that has been invested in Preston over his seven years serving on the commission. Schroeder added the agency has always been there to back them up and suggested there will be bumps no matter what their decision. Public Works Director Bill Cox said it is helpful to call other agency members for advice.

Councilman Dave Collett said there is security for the city in a long term contract. Hoffman remarked that those utilities that own nuclear plants will be better off. Councilman Robert Sauer predicted there will eventually be more nuclear. He asked if the contract with SMMPA would be the same with the extension? Hoffman replied that it would be. Sauer felt it was reasonable to be able to alter a contract in some way when looking at a twenty to forty year contract.

City Attorney Dwight Luhmann was directed to review the present contract. Schroeder made it clear, if the attorney doesn't have any problems with the contract, he was prepared to extend with SMMPA. Hoffman said the decision has to be made before the end of the year. He offered to provide any information the two city bodies needed, "that is anything that doesn't require a crystal ball." He suggested the relatively small size of the Preston Utility makes it more daunting to go it alone.

Another joint meeting will be held on September 21 at 6:00 p.m. in conjunction with the regular city council meeting.

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