Look for the silver lining

September 2010

As we reported two months ago, our wholesale cost of power from Minnkota Power Cooperative is escalating, and we reluctantly have adjusted our retail rates. The rate change will go into effect on September 20, so you will first see it on the power bill you receive in late October or early November. For most typical usage residential accounts, it will increase your monthly bill by about 8.8%. If you use 1000 kilowatt-hours, the rate increase will be between $6.90 and $8.50 per month depending upon which rate class you are in.

The obvious question is why are our wholesale costs going up so dramatically in recent years? The graph below shows the percentage increase for each year since 2001 for our wholesale power rate in blue and our retail rates in red. As you can see at this time, our wholesale rates are roughly 70% higher than in 2001, while our retail rates with this rate increase will be 30% higher than 2001. The number one reason Minnkota’s wholesale rates have been increasing is due to required environmental upgrades to their power plants costing hundreds of millions of dollars. These upgrades result in higher debt service, higher depreciation expense, and even higher operating expense than in previous years.

A second reason for Minnkota’s higher cost of power is related to the market value of excess energy in their system. Over the past several years, Minnkota has secured over 358 megawatts of power from large wind farms to satisfy present and future state renewable energy objectives in Minnesota and North Dakota. Most of this energy comes through agreements with NextEra Energy Resources, a world leader in building wind farms. While the added wind related capacity satisfies Minnkota’s need for renewable energy, it also gives them hundreds of millions of kilowatt-hours of excess energy, which they must purchase at contract rates and resell into a depressed market at prevailing market rates. The market rates the last two years have been extremely low due to the recent downturn in the economy. As you probably know, the losses resulting from resale of excess energy is being recovered through a five mill energy surcharge on your electric bill. We had hoped the market would recover by the end of 2010, but we now forecast it will remain low likely through the end of 2011.

We can understand how frustrating it is to receive notification of an electric rate increase. We can assure you there is no pleasure in dealing with the costs that have been and will continue to put upward pressure on the cost of generating electricity. While much of the cost increases are related to environmental requirements, we still have not been impacted with what might be coming down the road relative to reduced carbon emissions. This legislation sometimes referred to as Cap and Trade legislation, will only further escalate the cost of generating electricity in this country. The only silver lining in the cloud is that we are still fortunate to live in North Dakota where electric rates continue to be among the lowest of any region of the country.