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05-19-2014 HUCM MINUTES Special Meeting/Workshop Hutchinson Utilities Commission/City Council Monday, May 19, 2014 Call to order— 9:00 a.m. President Hanson called the meeting to order. Members present: President Anthony Hanson; Vice President Monty Morrow; Secretary Mark Girard; Commissioner Donna Luhring; Attorney Marc Sebora; Interim General Manager John Webster. Members absent: Commissioner Dwight Bordson — due to a conflict of interest. Others present: HUC Staff - Jared Martig, Randy Blake, Dave Hunstad, Dan Lang, and Kim Koski; City of Hutchinson Staff - Jeremy Carter, Melissa Starke, and Andy Reid; City Council Members - Bill Arndt, Mary Christensen, Gary Forcier & Mayor Steve Cook. President Hanson explained the purpose of the workshop is to present information to City Council relating to potential changes in HUC's electric industrial rates. This was prompted by 3M's discussions with HUC of 3M potentially building their own natural gas-fired, 6-megawatt generator. HUC then formed a subcommittee to review the financial impact 3M's self generation would have on HUC. The subcommittee also hired a consultant to do a rate analysis. The analysis outlined the financial impact to HUC if 3M self generates along with outlining the financial impact on HUC if changes were made to the electric industrial rates. Information presented to 3M in January, 2014, showed a proposed reduction of about one cent per kilowatt hour. Mr. Craig Lenz asked what percentage of users are industrial. Vice President Morrow responded 40% to 50% of electric consumption. Mr. Lenz, who had served 14 years on the commission, said he's heard of similar 3M plans for years. Mr. Robert Hantge asked what the timetable was for 3M to self generate. Randy Blake estimated three years, depending upon the regulatory permitting process. Mr. Hantge also questioned if the Commission foresees a rate increase in the next three to five years. President Hanson responded, yes. Hantge stated if rates stay stable then 3M would be in a good position as the benchmark would be different. Mr. Marlin Torgerson voiced his opinion that 3M is using the potential to self generate as leverage to receive lower rates. Mr. Paul Ackland said 3M has regularly talked of self generation since at least the 1980s. His opinion is that HUC needs to call their bluff. Mr. Ackland questioned if negotiations were with the local 3M plant or corporate. The Board responded the negotiations were with the local plant but they know corporate was involved. Vice President Morrow stated 3M shared their plant costs with the subcommittee. HUC's rates are not the lowest in the nation. Vice President Morrow also spoke with Missouri River Energy Services (HUC's power supply partner) regarding their analysis which showed HUC's rates were higher than regional rates. Mr. Lenz asked if HUC reduces the electric industrial rates if there was a guarantee 3M wouldn't come back and request another decrease. President Hanson responded there are no guarantees. HUC Finance Manager Jared Martig presented HUC's 5 year financial projections along with a few options for implementing proposed rate changes with their financial impact to HUC. Two-, three- and four-year phase-in options were discussed. The projections included the installation of unit 6 at Plant 1. President Hanson said HUC would like the industrial rate reduction to be phased in over three or four years. Interim General Manager John Webster explained HUC currently transports natural gas for 3M and it would be a significant loss of income to HUC's Natural Gas Division if 3M were to self generate. President Hanson explained the rate information presented to 3M at the January 22, 2014 meeting, reviewing three rate scenarios: 1) if 3M should self generate; 2) 3M self generates with an adjusted backup charge; and 3) unbundled proposed rates assuming 3M does not self generate. Vice President Morrow mentioned HUC has not proposed anything to 3M yet. The City Council will need to approve the proposed rate changes first. Attorney Sebora explained per City Charter, HUC needs to make formal recommendation of the change in industrial rates to City Council. The City Council has 30 days to veto the proposed changes. If no veto takes place, the changes are implemented. Attorney Sebora also spoke to the question of a conflict of interest with 3M representatives voting, explaining as long as they don't benefit monetarily from what's being voted on, there is not a conflict of interest. City Council Member Bill Arndt questioned the impact on the PILOT (Payment in Lieu of Taxes) which HUC pays to the City each year. President Hanson responded it may need to be discussed as HUC looks at expenses. City Controller Andy Reid requested to see a model and how it would impact the City if the rates were changed. HUC may approve a rate change at the next regular commission meeting. The City Council will then be asked to approve the rate change. The votes of four council members are needed to veto a rate change.