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Preston considers its energy future

Fri, Aug 14th, 2009
Posted in Government

The Preston City Council met in special session with the Preston Utility Commission to hear a presentation from the Southern Minnesota Municipal Power Agency (SMMPA) early on August 10. Four officers of the company, including Ray Hayward, CEO, Larry Johnston, development and public relations, Dave Geschwind, COO, and John Winter, director of financing and accounting, gave their pitch to encourage Preston to extend their current contract which runs until April 1, 2030, to April 1, 2050. As the contract is written now, after 2030 the contract could be continued on a year to year basis.

SMMPA was formed about thirty years ago following a period when fuel supplies were scarce and when demand for energy was increasing. Communities came together to form SMMPA in order to supply reliable and affordable power. SMMPA has eighteen municipal members including Preston. The three largest current members are Rochester, Austin and Owatonna, which are all permanent board members with four other members taking turns to make up the seven member board.

Hayward explained the contract extensions were needed for planning, so they can forecast how much energy would be needed and how they could meet the need. The extended contracts will provide certainty and predictability. The future makeup of their membership past 2030 is needed to provide information and a business plan to allow debt to be serviced over a greater number of years at a more economical rate and to purchase additional resources to meet future increased demands. SMMPA has invested $100 million in its transmission system, $5.7 million of this in the Preston area. The difference in servicing the debt over 30 years as opposed to 15 will save the members $3 million with lower rates. Rochester and Austin have indicated they do not intend to extend their contracts.

SMMPA's Value

Post 2030 assets stay with the agency and those members that wish to extend. SMMPA owns a 41% share in Sherco 3, a 362 MW coal-fired plant, with the remaining share being owned by X-cel Energy. SMMPA is working to meet the renewable energy requirement, the 25% by 2025 put into law by the state. SMMPA produces currently 8.5 MW from a wind farm near Dexter.

Geschwind, speaking of the significant ownership in Sherco 3, stated, "I doubt Minnesota sees any new coal-fired generation." The reason is the difficulty and feasibility of meeting all the regulations. Johnston commented that the possibility of a new nuclear generation went farther in the legislative process than he would have thought.

Johnston suggested communities face conditions similar to those of thirty years ago, including decreasing availability of resources, increasing rates, investor-owned utilities having difficulty keeping up with demand and a difficult regulatory environment. The team warned of the possible increase in the cost of electricity due to the climate change bill recently passed by the US House of Representatives. Other factors to be considered include renewable energy costs, transmission needs and the economy. He added there has not been investment in the region in the transmission infrastructure to deliver power in the last decades.

Winter explained SMMPA, a tax-exempt, non-profit organization, has provided competitive rates and is financially stable. They foresee no major "bumps" unless cap and trade becomes law or a carbon dioxide tax is imposed on the agency. All existing, non-refinanced debt is to be paid off by 2030. SMMPA has provided the Catch Savings project for Preston providing free CFL bulbs to 569 households, which is expected to save the average customer $100 annually on their utility bill.

What to do?

Ron Schroeder, Preston Utilities, asked if the agency plans to find members to replace Rochester and Austin. Hayward said they will know more when they know how many members intend to extend, so they can determine what excess production they may have. They could get new members or find other communities to buy the excess. City Administrator Joe Hoffman noted there currently is a market for excess generation. The extension deadline is September 1, 2009.

Hayward stressed it has become harder and harder to build new power generation sources, which may make the base now owned by the agency more valuable in the future. If they have excess power, they could enter into a long term contract to sell generating capacity or also to buy generating capacity if they needed more power.

Councilman Robert Sauer asked about Owatonna. Hayward says they will meet with the city soon, but he expects they will extend their contract.

Sauer asked about the statute to reduce mercury emissions by 90% at coal-fired plants. Hayward said there is a question whether that would only apply to the 59% owned by X-cel Energy, parsing the law and the wording of the statute. He added they support doing mercury recapture for all and are working on an agreement with X-cel.

Each member that chooses not to extend past 2030, and chooses to leave the agency, gives up their access to the benefits of the assets of the agency. Hoffman compared it to a divorce where only one spouse gets all the assets.

A report by R. W. Beck to be considered by the council and utility commission concludes that the risk is lower for each member to extend rather than independently securing power from the market. However, the report adds the caveat, if Sherco 3 became expensive to operate due to operating costs or environmental legislation, members may find more cost effective sources of power.

Hoffman said Preston, along with other communities, had requested the Beck study to help decide what to do. The council and the utility commission will meet again Tuesday, August 18, 7:00 AM, to consider the analysis of the report. Each member of both was given a copy of the analysis detailing the pros and cons of contract extension to examine before next week.

This is a decision affecting the distant future of Preston which is beyond some of their life expectancies. Twenty years out is very hard to predict with any sense of accuracy, forty years, who knows with the rate of technological change.

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