Electric Use Surcharge: What, When & Why?

November 2009

With regret, I am using this issue to notify you of a rate surcharge that will be added to all electric bills beginning with the January 2010 billing period. That’s the what and when. While very complicated, I will attempt to explain the why.

Our power supplier, Minnkota Power Cooperative, is subject to a renewable energy mandate in the state of Minnesota and a renewable energy objective in North Dakota. While these generation requirements are not immediate, it became clear in recent years that this power would need to come from wind, and that the cost of wind generation is likely to increase in future years. Minnkota has been very aggressive in securing enough wind energy to satisfy both the North Dakota and Minnesota requirements. They have done this by contracting to buy all of the generated electricity from large wind farms near Langdon, North Dakota and north of Valley City. The contract price for this energy is fixed for a 25-year period.

At this point in time, Minnkota needs only a small amount of the electricity generated from these wind farms to meet the needs of our users. The larger share is excess energy, which is sold into the regional market at variable market prices. Prior to 2009, the excess power could often be sold at a profit, which helped to keep Minnkota’s wholesale rates and our retail rates low. Then came an event that none of us could have forecasted – the worst economic recession in the past 70 years. While the economy is quite stable in North Dakota, that is not the case in many mid-western states, which are part of the regional electric grid. With a depressed economy, the demand for excess electricity from the regional market has dropped. Now, instead of selling electricity in the market for a profit, Minnkota has been selling most of their excess electricity in 2009 at a loss. On average, the market price has been about two cents per kilowatt-hour less than the price Minnkota is paying for the energy from the wind farms.

The severe downward trend in the market could not have come at a worse time. Minnkota has larger-than-normal amounts of excess energy they must sell, and the average price is lower than it has been in years. As Nodak and the other 10 distribution cooperatives in the Minnkota system grow, there will be less excess energy to sell. Also, as the economy recovers, we expect the regional market to recover, and once again, Minnkota will be selling at least some of their excess energy at a profit. In the meantime, Minnkota has an unexpected expense that will be passed on to Nodak in the form of a five mil per kilowatt-hour surcharge. We, in turn, will pass through the five mil per kilowatt-hour surcharge on all of our retail rates.

The obvious question is why did Minnkota secure so much wind energy so fast when in fact they could have met the requirement by adding a little each year for the next 10-15 years? The answer is that there have been many indicators that the earliest built wind farms would be the least costly, and we believe that is still the case. Supply/demand issues, location issues, and availability issues point toward higher costs for renewable energy in the future. That is a very big concern knowing that a utility needs to contract at a fixed cost for up to 25 years. Even with this unfortunate bump in the road, we believe Minnkota has made a good long-term decision by securing the needed renewal energy as early as possible.

One bright spot for Nodak is that we are projecting our largest increase in sales ever for the year 2010 with the addition of three Keystone pumping stations and other growth in our system. In the event the market price for electricity remains low in 2010, this will help to reduce the amount of sales, and it will also provide added margins for Nodak, which helps to cover ever-increasing operating costs.

The five mil surcharge will add $7.50 to a monthly bill for someone using 1,500 kilowatt-hours. For an electric heating customer using 20,000 kilowatt-hours, five mills would add $100 to an annual heating bill; however, since the surcharge is not going into effect until January, it will not impact the entire heating season for this year.

In addition to the unavoidable five mil surcharge, we have two rate related concerns for the year 2010. First, while we hope the surcharge can be dropped sometime in 2010, that is dependent upon the market returning to normal, which is not a guarantee. If the market continues to be low, the surcharge will likely be continued beyond the end of 2010. Second, Minnkota is projecting a 7.5% increase in April 2010. We are hopeful we can absorb some or all of that increase without another retail rate increase during the year; however, we need the growth that is projected from Keystone and other sources, and we need no unexpected expenses, such as an ice storm for that to occur.