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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 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 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. Or l - r r N N N 6o O N CM OO tnNrr 0 OO(O(000 V. . V UoMO00 V V MNN C Otirch000 . MMf+')I�N V 6oNOtoCOtO Cp M V N o o N to m w N V CO r N Ep r 0 0 0 0 0 0 0 0 O tO M CO N O Cq r Clc -7 06 V V V V 0- r r r r 69 643,613,61% 69 614 69 613,619- 613161),64!) 60-64 CA 611.6-i ER OCO�� �COOOMOM W 00NNCOrO W000N0�000N00NM0N W N(O . . . . . L O O CO V 0 CO N0N0 0O Cp V 0 M 0 M CO O r- 0 V M V 0 to r CO V 0 rCOCOLgC" tf LO V rrOCOCOUO d C U�t�N ��N V V V t0 CO v(M co co co � U- r r v O F. 6Pr611) 60i6964 04u46 %6R696A69696t)61 -?6469 613 Q'OV COCO&000to V rl��(p ^NOV =OMOON V Or CO CO V to cl? V N00 0 Cp M r r 0 0 0 r r r O O r v v v v r 6R 0), 6- , 6H 6A 6R 6A 69 69 6H 6A 69, 6A 6A 64 6R 613.64 609, m o00000000000000000 U-) to to LO t`n t`n t`n 6`On t`On t`On to t`o 0 V) LO LO u) 6`0 y N � m 64 6:9, 61), 6R 69 6A EA 6A t4 6A 6A 6A 6H 69 6R 64 6R 61% IX CD =MCCOO - CC)LOO -O -0)NN�O r -O0)M oD M CO to OD O V to 0ti Lo �NOCM ` 00 � r- 0 N CO CO OD O N N O r M r OD In y > Uo000COto0O V M V toCO1-1�w(O1�1� r E9 M Lo 6o 0 Uo tO to to to tO to 0 tO 0 U) No Uo to c 5 aCNo -3 E(D :3 co oU y 6) o ct L 66, 61), 69 6% 6R 6-> 6-1 69- Q9, b'} 6% 6» 6A 6A 0. 6% 69 c0 CD co LO V V V O1`ONO W NN co fl- O E CD r N CO 0 V CO V r- r r 0 N 0 0 0 W O r-: r-00 V � -0 ODO1-- �OMr M r N (O 0 to 0 0 00 Cn to N r 0 N f� M r C/J MI�OOtoNODOO V V1�f�NOpOCOrODr 'O LOOON 0 It MN V V 0CM0 V0 N too V _0 NN V MCMCO«O(Dr-r-WM00 NNMM V V to CO1�1400000 O d'i b9 6A f!•T vi 6A EA 6R 6A 6A v> 613, 64 ER fA to r 7 yg L C � N > O m � E m UL 60- N CO CO MOO V 0 O0 Mt`0M V M V0 > 0000r tot -l-0MM OCON V COm :. >, 0 I' V M M N N 0 0 0 N CO V CO CO CO t- C6 o) rNM V LO COr- ODCD0 NCOV toCOn E c EW U A ca � V/ C 2 6 L L w L.•+ L O L f r N L M L 4 L L 6n (L � L 00 r N CM V n CO L h CO 0) r r r r r r r r r 1 1 0c 00 � M� 1- r rq- N M r r N m N r w 00M000Mrr1-M0p)r I-rI�OInO . . . . . . . . L 00 cP ,4 V M t7 N� 1� O r ti N N (O O I-- 03 t O IT O d LO r N V O O CO O LO M q M 00 Lo to O CA P' O O ti tt) O O ";t LO -0 Lv d r N co r 00 LO tO NN t! CN� O O O O 0) C LL O F- 64 EA 64 64 64 EA 64 64 63 64 64 64 64 64 64 64 64 64I � N Cfl CO f� CEO 00 CO � 00 CO CO f� � O) r LC) ti N ?j O O O O O r �- r V- LO LO (O 1l- CO CO CO D Ef-) E/-} 6R 64 64 EA 6q 64 64 6Ri 64 64 64 64 64 d} 69 64 64 O 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 LO m LO LO LO U') LO LO Lt j LO LO Lf) U') LO U') LO LO LO N m X64 64 69 69 64 64EgGg64Ef36461,? 649, E19, Eo!?EAER64 Q r t0 O (D Lf) O O M O CA 00 q 00 d' 0 t- (O LO 2 r I*- M 1- (O Cl) M Lo O) r IT N 1- O 00 00 0) LO �Nto(OCOLONqtLOr T V- MN000ITNII- M V M 'IT 1- O It d' ti O Iq LO (O N LO O� U) j 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