06-27-2007 HUCMRegular Meeting
June 27, 2007
Members present: President Donald H. Walser; Vice President David Wetterling;
Secretary Dwight Bordson; Commissioner Craig Lenz; Commissioner Robert Hantge;
General Manager Michael Kumm; Attorney Marc Sebora.
President Walser called the meeting to order at 3:00 pm.
Vice President Wetterling made a motion to approve the minutes of the May 30, 2007
Regular Meeting. Secretary Bordson seconded the motion and it passed unanimously.
Vice President Wetterling made a motion to move into closed session
to discuss union
at 3:03 p.m. Commissioner Lenz seconded the
negotiations(see July 25, 2007 minutes)
motion and it passed unanimously.
Members present for closed session: President Donald H. Walser; Vice President David
Wetterling; Secretary Dwight Bordson; Commissioner Craig Lenz; Commissioner Robert
Hantge; Attorney Marc Sebora; General Manager Michael Kumm; Recording Secretary
Lin Madson.
Commissioner Lenz made a motion to move from closed session back to open session
at 3:30 p.m. Vice President Wetterling seconded the motion and it passed unanimously.
Commissioner Lenz made a motion to ratify the payment of bills in the amount of
$3,608,731.52 (detailed listing in payable book). Vice President Wetterling seconded
the motion and it passed unanimously.
Commissioner Hantge made a motion to approve financial statements/budget year to
date. Commissioner Bordson seconded the motion and it passed unanimously.
No action was taken on the residential deposits section of the policies and requirements
booklet. Changes were noted and this will come back to the board for approval at the
July meeting.
No action was taken on the commercial/industrial deposits section of the policies and
requirements booklet. Changes were noted and this will come back to the board for
approval at the July meeting.
Discussion was held on the powerstat payment billing system in the policies and
requirements booklet. Changes were noted and this will come back to the board for
approval at the July meeting.
Discussion was held on renewable energy. General Manager Kumm presented a letter
to Missouri River Energy Services asking them to collaborate with HUC in developing
renewable energy strategies. Vice President Wetterling made a motion to send the letter
of June 27, 2007 to Missouri River Energy Services. Commissioner Hantge seconded
the motion and it passed unanimously. It was further decided that a copy of the letter
will be sent to each City Council member, the Mayor, and the City Administrator.
GM Kumm presented the request for proposal to Minnesota Energy. Commissioner
Hantge made a motion granting authorization for staff to restrict negotiations to proposal
number one to provide firm transportation service on the HUC pipeline to a proposed
Interconnect Station to be located near State Highway 212. Vice President Wetterling
seconded the motion and it passed unanimously.
GM Kumm explained the stabilization of wholesale power costs. If HUC unbundles the
electric wholesale, any profit in generation goes directly to HUC. If HUC bundles the
electric wholesale, any profit is applied to customers billing and the bills are reduced,
thus benefiting the customer. The result would be stable rates and our customers are
entitled to the savings. Commissioner Lenz made a motion authorizing staff to bundle
electric wholesale. Vice President Wetterling seconded the motion and it passed
unanimously.
Attorney Sebora informed the board that a council member has mentioned the idea of
selling Hutchinson Utilities. No direction was offered by the Utility Commissioners.
GM Kumm presented the proposal for architectural improvements at the power plant.
Commissioner Hantge made a motion authorizing staff to negotiate proposal with
changes mentioned in referencing HUC instead of referencing City of Hutchinson.
Commissioner Lenz seconded the motion and it passed unanimously.
GM Kumm discussed HUCs mid-year progress report.
GM Kumm presented a draft of a purchase power contract. Dan Lange explained that
its similar to what we have now. The price is better and it will be good for HUC.
Division reports
Electric None
Gas John Webster
Met with attorneys regarding the McCormick hearings
Business None
Unfinished Business
We have been generating
New Business
Amendment to Drug and Alcohol Policy:
This has come up as a result of the contract negotiations it should be in the
personnel handbook; not the Drug and Alcohol policy
Customer Credit Card Payments:
This will come back to the board at the July meeting.
Commissioner Lenz made a motion to adjourn the meeting at 5:12 p.m. Vice President
Wetterling seconded the motion and it passed unanimously.
_________________________________
Dwight Bordson, Secretary
ATTEST________________________________
Donald H. Walser, President
Regular Meeting
June 27, 2007
Members present: President Donald H. Walser; Vice President David Wetterling;
Secretary Dwight Bordson; Commissioner Craig Lenz; Commissioner Robert Hantge;
General Manager Michael Kumm; Attorney Marc Sebora.
President Walser called the meeting to order at 3:00 pm.
Vice President Wetterling made a motion to approve the minutes of the May 30, 2007
Regular Meeting. Secretary Bordson seconded the motion and it passed unanimously.
Vice President Wetterling made a motion to move into closed session at 3:03 p.m.
Commissioner Lenz seconded the motion and it passed unanimously. Lo discuss union negotiations
(see July 25, 2007 minutes)
Members present for closed session: President Donald H. Walser; Vice President David
Wetterling; Secretary Dwight Bordson; Commissioner Craig Lenz; Commissioner Robert
Hantge; Attorney Marc Sebora; General Manager Michael Kumm; Recording Secretary
Lin Madson.
Commissioner Lenz made a motion to move from closed session back to open session
at 3:30 p.m. Vice President Wetterling seconded the motion and it passed unanimously.
Commissioner Lenz made a motion to ratify the payment of bills in the amount of
$3,608,731.52 (detailed listing in payable book). Vice President Wetterling seconded
the motion and it passed unanimously.
Commissioner Hantge made a motion to approve financial statements /budget year to
date. Commissioner Bordson seconded the motion and it passed unanimously.
No action was taken on the residential deposits section of the policies and requirements
booklet. Changes were noted and this will come back to the board for approval at the
July meeting.
No action was taken on the commercial /industrial deposits section of the policies and
requirements booklet. Changes were noted and this will come back to the board for
approval at the July meeting.
Discussion was held on the powerstat payment billing system in the policies and
requirements booklet. Changes were noted and this will come back to the board for
approval at the July meeting.
Discussion was held on renewable energy. General Manager Kumm presented a letter
to Missouri River Energy Services asking them to collaborate with HUC in developing
renewable energy strategies. Vice President Wetterling made a motion to send the letter
of June 27, 2007 to Missouri River Energy Services. Commissioner Hantge seconded
the motion and it passed unanimously. It was further decided that a copy of the letter
will be sent to each City Council member, the Mayor, and the City Administrator.
GM Kumm presented the request for proposal to Minnesota Energy. Commissioner
Hantge made a motion granting authorization for staff to restrict negotiations to proposal
number one to provide firm transportation service on the HUC pipeline to a proposed
Interconnect Station to be located near State Highway 212. Vice President Wetterling
seconded the motion and it passed unanimously.
GM Kumm explained the stabilization
electric wholesale, any profit in gene
electric wholesale, any profit is appli
thus benefiting the customer. The re
entitled to the savings. CommissionE
electric wholesale. Vice President
unanimously.
of wholesale power costs. If HUC 'unbundles' the
-ation goes directly to HUC. If HUC 'bundles' the
:d to customers billing and the bills are reduced,
;ult would be stable rates and our customers are
Lenz made a motion authorizing staff to bundle
Vetterling seconded the motion and it passed
Attorney Sebora informed the board that a council member has mentioned the idea of
selling Hutchinson Utilities. No direction was offered by the Utility Commissioners.
GM Kumm presented the proposal for architectural improvements at the power plant.
Commissioner Hantge made a motion authorizing staff to negotiate proposal with
changes mentioned in referencing HUC instead of referencing City of Hutchinson.
Commissioner Lenz seconded the motion and it passed unanimously.
GM Kumm discussed HUC's mid -year progress report.
GM Kumm presented a draft of a purchase power contract. Dan Lange explained that
it's similar to what we have now. The price is better and it will be good for HUC.
Division reports
Electric None
Gas — John Webster
• Met with attorneys regarding the McCormick hearings
Business None
Unfinished Business
We have been generating
[1
New Business
Amendment to Drug and Alcohol Policy:
This has come up as a result of the contract negotiations — it should be in the
personnel handbook; not the Drug and Alcohol policy
Customer Credit Card Payments:
This will come back to the board at the July meeting.
Commissioner Lenz made a motion to adjourn the meeting at 5:12 p.m. Vice President
Wetterling seconded the motion and it passed unanimously.
Ii—JAi
Donald H. Walser, President
1
r
wig ordson, Secretary
�piCNINg ®y
dr�uttE$
Hutchinson
Utilities
Commission
225 Michigan Street
Hutchinson, Minnesota
55350
Date: June 27, 2007
Mr. Jeff Peters
Missouri River Energy Services
PO Box 88920
Sioux Falls SD 57109
Re: Renewable Energy
Dear Jeff
Hutchinson Utilities Commission has been, and continues to explore its
alternatives as it relates to renewable energy. At this point, we believe it is in our
best interest to examine all possible renewable generation opportunities and
narrow those opportunities down to potential candidates in order to develop a
renewable generation strategy that makes sense for the future of Hutchinson. We
would also like to start aligning ourselves with companies who have expertise in
developing these types of projects.
There are various energy conversion devices, and also various business models
that can be selected. We believe that it is in HUC's best interest, and perhaps
MRES S members' best interest to work together on projects so that regionally
many communities could benefit.
In effect, we are asking that MRES collaborate with HUC in developing
renewable energy strategies. This includes all venues of energy conversion.
Once a conversion technology is selected, we are interested in several different
business model that may include: contract for purchase, participation through
joint ownership, or we would even be interested in owning all of the facilities
with the potential of a contract sale.
In the next month, we would like to schedule a meeting with MRES to
Donald Walser determine how we can work together on renewable generation goals.
President
David Wetterling We appreciate MRES human resources, and recognize MRES is among the best
Vice President in the business. Your expertise in all areas of the electric industry is valued and
Dwight Bordson trusted. We have been and continue to be pleased with our relationship and also
Secretary proud to be a participating member of MRES.
Craig Lenz
Commissioner Sincerely,
Robert Hantge
Commissioner
Michael Kumm
General Manager Mike Kumm
Tel 320 - 587 -4746 General Manager
Fax 320 - 587 -4721
Cc: Tom Heller, CEO, MRES
11
Objective: Stabilize wholesale power costs.
Three of the last five months HUC has charged its retail customers a power cost
adjustment clause.
Month
Power Cost Adjustment Clause Charged to Customers
January
$0.00000
February
$0.00410
March
$0.00387
April
$0.00160
May
$0.00000
This is due to large percentage increases in the wholesale power market.
We have employed several strategies to offset the volatility in the wholesale electric
market, and they worked fairly well during 2006. During 2006, we charged a power cost
adjustment two times out of the twelve months. We will continue to employ these
strategies, however, we believe it is time to add to the tools that have already been
identified and implemented.
The strategy we would like to implement is to bundle our electric rates. At present our
electric rates are unbundled. There is a fundamental difference between these two
philosophies. Detailed explanations of these two methods are provided on the following
pages.
Other strategies have been identified, however, at this point would not be as effective as
the strategy of bundling our wholesale costs. It is important to mention that we will likely
present these other strategies to the commission as they are needed.
As mentioned, our objective is to stabilize our wholesale power costs. The benchmark
that we use for this is the power cost adjustment clause. In effect, the power cost
adjustment clause is what we are trying to control. Ideally, we would like the power cost
adjustment clause to be zero every month, however tempering the MISO market, and also
our baseload contract has proven to be quite challenging. However, we believe with the
proper application of various additional strategies, we will be able to squelch the
volatility effects.
As you recall, we try to revolve around $55.70/MWHR for our blended wholesale costs.
THIS YEAR—
LAST YEAR - -thru
thru May
May
$ /MWH
$ /MWH
Thru May
2007
$ 54.30
$ 51.85
o Increase Year over
Year =
4.710
We have employed several strategies to offset the volatility in the wholesale electric
market, and they worked fairly well during 2006. During 2006, we charged a power cost
adjustment two times out of the twelve months. We will continue to employ these
strategies, however, we believe it is time to add to the tools that have already been
identified and implemented.
The strategy we would like to implement is to bundle our electric rates. At present our
electric rates are unbundled. There is a fundamental difference between these two
philosophies. Detailed explanations of these two methods are provided on the following
pages.
Other strategies have been identified, however, at this point would not be as effective as
the strategy of bundling our wholesale costs. It is important to mention that we will likely
present these other strategies to the commission as they are needed.
As mentioned, our objective is to stabilize our wholesale power costs. The benchmark
that we use for this is the power cost adjustment clause. In effect, the power cost
adjustment clause is what we are trying to control. Ideally, we would like the power cost
adjustment clause to be zero every month, however tempering the MISO market, and also
our baseload contract has proven to be quite challenging. However, we believe with the
proper application of various additional strategies, we will be able to squelch the
volatility effects.
As you recall, we try to revolve around $55.70/MWHR for our blended wholesale costs.
Unbundled wholesale electric rates:
The idea with this type of cost structure is when HUC sells energy into the MISO market,
any profit or loss that is realized HUC keeps. Typically we do not sell energy at a loss, so
we should concentrate on the profit that is made. Following is an example:
This is what occurred at HUC on June 12, 2007.
In the example above, HUC retail customers would be charged a unit cost of
$64.59/MWHR to recapture the expense we incurred on their behalf totaling $76,478.06.
This would be called a blended cost, since it is made up of various deals that were put
together for that given day. The deals that we had on that day include the UP contract
(this is our base load contract) at a unit price of $60/MWHR, various purchases that we
made from the MISO market throughout the 24 hour period at a price of $27.78/MWHR
(settlement prices change every hour), and finally generated for self means that we made
357 MWHR for our retail customers at a price of $84.90/MWHR. The blended cost is
arrived at by adding up all of the expenses we incurred on behalf of our retail customers
and then dividing them by the total MWHR's we acquired on their behalf to arrive at the
$64.59/MWHR ($76,478.06 / 1184 MWHR's = $64.59 /MWHR)
The operating income of $25,802.43 would be HUC's to keep, since these were profits
realized from electricity sold into the MISO market.
The MISO market is similar to a stock market in that when you sell a stock, you seldom
know who is on the other end purchasing it. All that is known is you are willing to sell
stock at a certain price, and there has to be someone on the other end willing to pay that
price. The MISO market can be thought of in those terms, meaning we generate
electricity at a certain price, and as we are generating, there is someone on the other end
purchasing the electricity. The only difference is that our transactions are instantaneous.
Costs -- Unbundled
Unit cost
MWHR's
Expense
/MWHR
UP Contract
720
$43,197.75
$60.00
MISO Purchases
107
$2,972.51
$27.78
Generated for Self
357
$30.307.79
$84.90
Totals
1184
$76,478.06
$64.59
Generation
sold into
Per unit Revenue
MISO
and Costs
Revenue
382
$58,232.62
$152.44
Costs
382
$32.430.19
$84.90
Op. Income
382
$25,802.43
$67.55
This is what occurred at HUC on June 12, 2007.
In the example above, HUC retail customers would be charged a unit cost of
$64.59/MWHR to recapture the expense we incurred on their behalf totaling $76,478.06.
This would be called a blended cost, since it is made up of various deals that were put
together for that given day. The deals that we had on that day include the UP contract
(this is our base load contract) at a unit price of $60/MWHR, various purchases that we
made from the MISO market throughout the 24 hour period at a price of $27.78/MWHR
(settlement prices change every hour), and finally generated for self means that we made
357 MWHR for our retail customers at a price of $84.90/MWHR. The blended cost is
arrived at by adding up all of the expenses we incurred on behalf of our retail customers
and then dividing them by the total MWHR's we acquired on their behalf to arrive at the
$64.59/MWHR ($76,478.06 / 1184 MWHR's = $64.59 /MWHR)
The operating income of $25,802.43 would be HUC's to keep, since these were profits
realized from electricity sold into the MISO market.
The MISO market is similar to a stock market in that when you sell a stock, you seldom
know who is on the other end purchasing it. All that is known is you are willing to sell
stock at a certain price, and there has to be someone on the other end willing to pay that
price. The MISO market can be thought of in those terms, meaning we generate
electricity at a certain price, and as we are generating, there is someone on the other end
purchasing the electricity. The only difference is that our transactions are instantaneous.
1
Bundled wholesale electric rates:
The idea with this type of cost structure is when HUC sells energy into the MISO market,
any profit or loss that is realized HUC gives it back to our customers. Typically we do not
sell energy at a loss, so we should concentrate on the profit that is made. Following is the
same example used above, but with the operating income applied to the bundled
wholesale expense:
As can be seen above, the wholesale expense using the bundled format reduced from
$64.59 to $42.80. The $42.80 is the wholesale electric rate that would be used for June
12th if the bundled method is used. This represents a substantial decrease for our retail
customers for June 12th.
June 12th was selected for the examples, because it is somewhat of an extreme, we will
not see this type of income from all days. The operating income is dictated primarily by
two things.
1. The MISO sale price.
2. The cost of natural gas
Both the MISO sale price and also the cost of natural gas have substantial variability.
Both methodologies were calculated from June 1St through June 18th. Attached are the
summary calculations of each.
Costs- -
Unbundled
Unit Cost
MWHR's
Expense
($ /MWHR)
UP Contract
720
$43,197.75
$60.00
MISO Purchases
107
$2,972.51
$27.78
Generated for
Self
357
$30.307.79
$84.90
Totals
1184
$76,478.06
$64.59
Generation sold
Per unit Revenue
into MISO
and Costs
Revenue
382
$58,232.62
$152.44
Costs
382
$32.430.19
$84.90
Op. Income
$25,802.43
$67.55
Costs Bundled
Unit Cost
MWHR's
Expense
($ /MWHR)
Totals from
above
1184
$76,478.06
$64.59
Less Op. Income
$25.802.43
Unbundled
1184
$50,675.63
$42.80
As can be seen above, the wholesale expense using the bundled format reduced from
$64.59 to $42.80. The $42.80 is the wholesale electric rate that would be used for June
12th if the bundled method is used. This represents a substantial decrease for our retail
customers for June 12th.
June 12th was selected for the examples, because it is somewhat of an extreme, we will
not see this type of income from all days. The operating income is dictated primarily by
two things.
1. The MISO sale price.
2. The cost of natural gas
Both the MISO sale price and also the cost of natural gas have substantial variability.
Both methodologies were calculated from June 1St through June 18th. Attached are the
summary calculations of each.
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June 1St thru June 18th
The Unbundled Summary Report shows the cumulative Wholesale Cost thru the 18th to
be $1,020,111.80, the Price per unit is $57.539. This is $1.84 greater than our base rate of
$55.70, which means that thru June 18th we would have to charge another power cost
adjustment clause to recapture $32,550.80. Additionally, it reflects that HUC received an
Operating Income of $141,116.21 for its sales into the MISO market.
The Bundled Summary Report reflects a different picture. As you recall, the Operating
Income from energy sales into MISO are subtracted from the unbundled wholesale cost.
Following is how the arithmetic works:
Unbundled Cumulative Wholesale Cost = $1,020,111.80
Operating Income from MISO Sales = $141,116.21
Bundled Cumulative Wholesale Cost = X
X = $1,020,111.80 - $141,116.21 = $878,995.59
The $878,995 is then divided by the Cumulative Energy to give a price per unit of
$49.5755, which is less than our base rate of $55.70, so the power cost adjustment clause
would be zero, and $108,587.98 would be placed into the rate stabilization fund.
Effects on Electric Operating Income
One concern that should be noted is the impact on the financial statements. Meaning if
we switch to the bundled methodology, what impact would this have on the Operating
Income for the Electric Utility.
As the unbundled summary report shows, we would be giving $141,116 of operating
income, and also not collect $32,550 from the PCAC, which adds up to $173,366.
However, the bundled summary report shows that our wholesale electric operating
expense would decrease substantially, and we would be collecting $108,587.98. The loss
to the operating income is simply the difference between the two, or;
$173,366 - $108,587 = $65,079
The result shows the loss is significant, however is still very manageable.
Effect on Budget
Another concern is the effect on our budget, due to giving the operating income back to
our customers. For 2007, we budgeted approximately $200,000 worth of operating
income coming from Sales for Resale. While $200,000 is significant, we made a capacity
sale to Exel Energy earlier this year for $135,000. The capacity sale will place us with a
shortfall of $65,000. The shortfall, is significant, but once again is quite manageable.
Back testing
The Bundled method was back tested for calendar year 2006, and also from Jan. 1, 2007
thru May 31, 2007. While the method was not perfect, it did show that it was superior to
the unbundled format. Once again we used the Power Cost Adjustment Clause as the
feedback to tell us how this works.
Recommendation
We believe we have thoroughly analyzed the two methodologies, and we have also come
up with an implementation plan to bundle the electric rates. We believe that by
implementing the bundled format for calculating wholesale power costs, our ratepayers
will have more stable rates.
At this point, we are recommending to the Hutchinson Utilities Commission to authorize
staff to bundle the rates using the methods described above.
Sincerely,
Mike Kumm
General Manager