Consider running for a director seat

Be a part of your cooperative’s leadership – Consider running for a director seat.

Hopefully, by now, you have noticed a couple of entries in this issue of the Neighbor on the subject of the upcoming board election. Every election is an important one because it’s your chance to appoint the leadership of your cooperative, but this election holds something that is fairly uncommon, at least here at Nodak. Two of the three director positions decided in this election will not have an incumbent in the race.

We have three districts in our service territory with three directors elected from each district for a total of nine board members. All board members are elected for staggered three-year terms, so each year we have one position in each of the three districts up for election. This year, we have the unique situation where two directors are retiring from service on the board and not seeking reelection.  District 1 Director Bruce Fagerholt and District 3 Director Donna Grotte have both made it known that their intention is not to seek reelection to the board of directors. Director David Kent will be running for reelection to his seat in District 2

Your board fulfills many vital roles for the cooperative.  Not only are they the ultimate decision-makers when it comes to policy-driven initiatives for the cooperative, they are also the local connection to the membership. Board members represent our eyes and ears out in the service area.  They bring back member concerns and suggestions, provide a local “neighbor” for you to discuss cooperative business with, and represent your interests at the board table.

If you have ever considered serving your cooperative through board governance, those of you living in Districts 1 and 3 have a unique opportunity. While board membership can be very challenging at times and certainly shouldn’t be taken lightly, it can be a very rewarding experience. Your cooperative can only be as strong as the people who actively participate in it, so if you have a strong commitment to Nodak and a desire to serve, I would encourage you to consider running for a seat on the Nodak board.  A position on the ballot can be obtained through nomination by the Nominating Committee, or by submitting a petition to the corporate offices. Please call the Grand Forks office if you would like more information on the process.

Also, please take note of the changes we’ve made to this year’s Annual Meeting.  For quite some time, the Annual Meeting has been held on the morning of the first Saturday in April. This year, we are moving the meeting to a Thursday evening. I know how schedules can be difficult to coordinate, especially with today’s busy lifestyles. Undoubtedly, moving the meeting to Thursday night will make it difficult for some that usually attend, but hopefully it will also open the door for others to attend that have not been able to come on Saturday.  Most importantly, we want as many of you as possible to come and participate in the Annual Meeting this year.  I’m looking forward to seeing you all in Grand Forks this April.

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Federal Funding Critical for Disaster Recovery

As I sat down to begin writing this column, millions of people along the eastern seaboard were without power as a result of Hurricane Sandy.  Pictures and reports of the widespread devastation were just beginning to filter their way through the national media, and the size of the recovery effort has now become apparent.

A natural first reaction when seeing this kind of devastation is one of disbelief. It’s hard to comprehend the enormity of the job that lay ahead for those involved in the cleanup.  It will be days before line crews get power restored, weeks before transportation is running adequately again, months until the debris is all removed, and probably years before life returns to normal in that part of the country.

One thing is certain when it comes to these types of disasters – the cost of rebuilding critical infrastructure is almost always too great for the local entities to withstand without the involvement of the Federal Emergency Management Agency (FEMA). FEMA assists in returning destroyed areas to pre-disaster condition. Without this federal assistance, 100% of the cost of the recovery would be funded by local taxpayers, businesses, and utility ratepayers.

FEMA has been involved in assisting local not-for-profits like Nodak for decades.  When we have had major storm damage, FEMA has assisted in the cost of reconstruction, thereby lessening the burden on our members. Like a lot of federal programs, improvements need to be made in the delivery of FEMA’s mission during and after presidentially-declared disasters. In fact, I would argue that in many respects, FEMA needs to be retooled and overhauled. However, FEMA’s public assistance program delivers much needed assistance to electric cooperative consumers restoring electric services and it needs continued funding and support from our federal government.  Without it, those of us living in disaster-prone areas would face additional burdens of longer waits for service restoration and most certainly higher rates.  As the election passes and a new congress takes over, encourage your elected leaders to pass a federal budget that continues strong support for this important mission.  Without it, recovery from these natural disasters would be almost impossible.

Our hats are off to the many volunteers giving their time to rebuild the devastated areas of our country. A special thank you and congratulations goes out to the many brave men and women that braved the storm, floods, fires, etc. to protect our fellow citizens and help restore their lives to normal.  Much of this work is done in horrible conditions and without any fanfare, but their efforts are greatly appreciated.

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Voting is your ‘civic duty’

Fall is in the air and with the change of seasons comes many changes in our lives.  Some have kids going back to school or young adults off to college.  Local schools are brimming with activity as concerts, plays, and sporting events are scheduled. Others have gardens to attend to, fields to harvest, or seasonal interests that need to be winterized and stored away until spring. The one thing that happens this time of year that affects all of us though is the upcoming elections.

Young or old, rich or poor, the election will have an impact on all of us because it will determine who sets the policies that shape our daily lives. Some of their decisions affect us directly, like tax or energy policy, and some are more indirect like environmental regulations. Collectively, these decisions made by our elected officials determine the environment in which we live and do business. You would think that every eligible voter would want to share their opinion about whom they want making those decisions on their behalf, yet almost half of us won’t cast a ballot this November.

Voting is often referred to as our “civic duty” and speaks to the idea that it’s our future, so we need to play a part in shaping it. Voting is our chance to do something to benefit our society through the democratic process, but it doesn’t stop there.  What’s equally important is what we do to engage in the political process after the election.

Once our elected officials have been chosen, they need to hear our concerns.  Elected officials run for office, not for fame and fortune but because of a strong desire to help mold the future. They can only do that effectively if they know what the people they represent want.

I would like to encourage everyone to embrace their duty to participate in the political process as an opportunity to be part of building the environment in which we live and work. Thomas Jefferson said, “We do not have a government by a majority of the people, we have a government by a majority of the people who participate.”  Be a part of your own future by calling your senator, writing your city council member, or visiting your co-op’s board members.  They’ll listen to your concern and value your feedback, and in the long run we will have elected officials doing the will of the people rather than what they think may be the will of the people.

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Reliability is a top priority

Decades have passed since electric cooperatives brought light to the rural parts of North Dakota. In the mid-1930’s, nine out of 10 rural homes in America were without electricity. By 1953, more than 90 percent of U.S. farms had been electrified. That was a long time ago, and as every day goes by, fewer and fewer members remember what it was like when the electric cooperative improved their lives by bringing light to the farm. It meant they no longer had to depend on kerosene lamps and wood stoves to accomplish daily tasks.

In this bygone era, members were grateful that they were able to get service from an electric cooperative and had certain expectations about price and reliability. Today, those expectations are decidedly different. Today’s member not only expects the lights to come on when they flip the switch, they expect the power to stay on so electronics, computers and high-tech devices work properly. This expectation we believe is very reasonable.

A high level of reliability is one of the main objectives cooperatives strive for in today’s market. Outage minutes are tracked and statistics with acronyms like SAIDI (system average interruption duration index) and ASAI (average service availability index) are used to compare system performance with expectations. When we compare Nodak’s ratios to other cooperatives in the U.S., we fare very well in these areas. Last year, our average member saw service disruption for 107 minutes out of a total of 525,600 minutes available in the year. This is less than half of the average interruption of 230 minutes other cooperative members across the U.S. saw last year.

Looking at it a little differently, our members had power available to them 99.98 percent of the time (ASAI), which places Nodak among the highest performing one quarter of U.S. cooperatives. That statistic in itself is something to hold out as a success story, but when you look at it a little deeper, the significance is apparent.

It’s important to first think about what causes disruption in service. Most frequently, outages are caused by things like trees contacting a power line, wildlife getting somewhere they shouldn’t be, equipment failure, storms, etc. The co-op’s exposure to these kinds of disruptions is proportional to the number of miles of line we have, the age of our system and how well the system is maintained.

At the end of last year, Nodak had 7,932 miles of power line in service. Out of the 814 electric cooperatives in the U.S., Nodak ranked No. 40 in terms of total number of line miles. The median value for all U.S. cooperatives was only 2,602 miles, or roughly one-third as many as Nodak. With more than three times as much line exposed to the elements as the average cooperative, one could assume that our service interruption would be much higher than average, yet it was less than half.

I don’t point this out to boast about Nodak or pat ourselves on the back. I bring it up to show that we take the issue of reliability very seriously and despite the enormity of the task at hand, we do a pretty decent job of keeping the lights on as compared to other electric providers.

Our reliability track record is something we are proud of, but it is an area where we continue to strive for improvement. Service interruptions can be just a nuisance for those of us who have to reset a digital clock now and then, or they can be something very serious for someone with a medical condition or a business with sensitive computer-driven machinery. All these are reasons we work hard to deliver power with a reliability level that meets our members’ expectations.

Some interruptions are largely beyond our control, so there’s not much we can do but keep our fingers crossed hoping Mother Nature will be kind to us. What we can do is continue to commit resources for maintenance and constantly improve our system to minimize the outages we can do something about. That is something we will do.

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Board approves rate adjustment

May/June 2012

By Mylo Einarson, President & CEO

In the latest Nodak Neighbor and in this year’s Annual Report, I alluded to the fact that several factors were putting significant pressure on our rates and that we may be forced to increase them sometime this year. I wish I had better news to pass along, but after closely monitoring the situation through the first four months of this year, it’s apparent our rates need to be adjusted. Beginning with the power bill you receive in late June or early July, all rate components and all rate classes will be increased by 3%.

There are a number of reasons we find ourselves in the unfortunate position where we need to raise rates. The largest factors are the increased power cost due to last year’s wholesale rate adjustment, lagging general service and heating sales, and losing one of our largest members due to a plant closure.

It’s been pointed out several times in our publications that the 30% rate increase in 2011 from our wholesale power provider, Minnkota Power Cooperative, was matched with a 17% retail rate adjustment by Nodak. Based on our cost of power, to fully recover that increase in power cost, the retail rate adjustment would have needed to be in the 22 – 23% range. Load growth across the system was slated to provide the extra revenue needed to make up the difference. While we have seen robust growth from some of our largest members, sales from the balance of our membership is down by over 15% for the year. Compound that with the fact that our second largest member, ADM’s ethanol facility in Walhalla, closed its doors in April, and it’s obvious a rate increase is necessary.

The bright spot in this is when you factor in the two mill reduction in the renewable energy surcharge we passed along in January, depending on your rate class, average member rates will be only slightly above or slightly below where they were at the end of 2011.

At its April meeting, the board of directors also discussed capital credit retirements. A capital credit retirement is the return or reduction of member equity that members typically see in the form of a check each spring. The board of directors has demonstrated a long standing commitment to retiring these capital credits each year. Over the last four years, the board has sacrificed margins in exchange for passing along lower retail rate increases during this time of rapidly escalating wholesale power costs.  At the same time, the board of directors has continued to distribute capital credit payments, but that has resulted in a decrease in total member equity.

The proper level of equity is an important financial consideration for the board.  Equity levels that are too low increase the cost of capital for the cooperative by way of higher interest rates from lenders. Equity levels that are too high needlessly restrict access to equity dollars by the member-owners. An equity level of 40% is what we feel strikes a good balance between the equity needs of the cooperative and those of the member-owner. For two years now, equity levels have sunk below that 40% target and it appears we will end the year 2012 in a similar situation.  Each year, the board makes budget, rate, and capital credit decisions with a goal to achieve and maintain that 40% target. After several lengthy discussions, the board has decided to take a year off from retiring capital credits in order to help that equity position recover towards that 40% threshold. I have a very high level of confidence that in 2013 our members will see a return to capital credit retirements once again.

We will continue to keep you informed about the status of our financial condition during the year. After this rate adjustment, we are currently projecting wholesale and retail rates to remain steady through 2013. However, projections are little more than a “best guess” and with new loads coming on, existing loads curtailing, and unpredictable weather, power sales can be a moving target. We will be sure to keep you updated on how close we are to hitting that target throughout the year.

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Message to our Members

January 2012

By Mylo Einarson, President & CEO

As we look back on 2011, it’s important to ask ourselves if we are meeting our members’expectations. Did we fulfill our mission of being “an efficient provider of quality electric service with leadership that demonstrates the highest regard for its member-owners?”

The year began with a series of member information meetings and Nodak Neighbor articles explaining the rapid escalation of the cost to generate electricity. Our power supplier, Minnkota Power Cooperative, in the wake of investing hundreds of millions of dollars on environmental upgrades, announced a rate increase of nearly 30 percent. This increase was projected to add an additional $9.5 million to our 2011 cost of power. While we were able to offset some of the additional cost with load growth, it was necessary to increase our retail rates by 17 percent. This rate adjustment was projected to bring in $8.6 million of the additional revenue needed. The balance would have to come from load growth and other efficiencies.

Midyear, we called upon all cooperative members to join forces and oppose the EPA’s plan to take over the state of North Dakota’s regional haze program. That program is intended to improve visibility in areas such as Theodore Roosevelt National Park in western North Dakota, which is an admirable cause. Where the heartburn comes from is that because North Dakotans are already good stewards of our environment, we have some of the cleanest air in the United States, yet EPA wanted Minnkota to spend $500 million on technology that would provide no perceptible improvement in visibility. So we stood shoulder-to-shoulder with our congressional delegation, Gov. Jack Dalrymple, state regulators and industry experts to tell the EPA that its one-size-fits-all approach isn’t good for North Dakota. We also asked our members to join us in sharing their comments on this issue at www.stopEPAnd.com.

The EPA announced in September that it would supersede the portion of North Dakota’s State Implementation Plan (SIP) that deals with haze partially caused by NOx emissions. Good news came early in 2012 when the EPA approved the North Dakota SIP regarding NOx emissions for Units 1 and 2 at the Young Station. That was a key victory.

In the meantime, energy sales proved to be a challenge throughout the middle and end of 2011. A wet beginning to the growing season lessened the need for irrigation. A dry harvest reduced much of the need to dry newly harvested grain, and a rather balmy winter dramatically slowed home heating sales. Although weather patterns like this can provide quite a challenge for an electric cooperative, we had load growth in other areas that helped offset lagging sales. In some respects, this is the best of both worlds – increased total kilowatt-hour (kWh) sales for the cooperative and lower total usage per member. That helps keep the dollars where they belong – in the pockets of our member-owners. We closed the year by reaching a milestone of having just more than one billion kWh of energy purchases from our power provider, Minnkota. This translates into just more than 976 million kWh in sales to our memberowners. This new record in kWh sales helped to provide much of the needed revenue to offset the large wholesale rate increase we started the year with and helped us finish the year with a positive margin. We encourage you to review the company financial reports, along with the report from Secretary-Treasurer Donna Grotte. We hope you will agree that Nodak ended 2011 in sound fi nancial position and that we fulfi lled our mission throughout 2011 by effi ciently providing you with quality electric service while keeping you, the memberowner, in the highest regard.

On behalf of the entire board of directors and all the employees at Nodak, we want to thank you for your patronage in 2011 and for the opportunity to serve you. We hope to see you at our annual meeting at the Alerus Center in Grand Forks on Saturday, March 31, 2012.

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Changes mark new year

January 2012

By Mylo Einarson, President & CEO

With my first entry in Perspective, I’d be remiss if I didn’t take a few lines to extend a heartfelt “Thank You” to George Berg for his 37 years of service to Nodak. George worked tirelessly over the years to ensure that our members received reliable, safe electricity at the lowest price possible and for that we are all very grateful. I want to wish George good luck in his retirement from all of us here at Nodak. It’s been well deserved.

In the November 2009 issue of the Nodak Neighbor, your then President and CEO George Berg announced the addition of a 0.5 cent per kilowatt-hour surcharge on all retail rates. That surcharge was a direct pass through of a 0.5 cent per kilowatt-hour surcharge from our power supplier Minnkota Power Cooperative.

You may not recall, but as George explained in his article, that surcharge was necessary to offset significant losses Minnkota was experiencing due to their investment in renewable energy. Minnkota is subject to a renewable energy mandate in the state of Minnesota and a renewable energy objective in the state of North Dakota. To meet these new renewable energy goals, Minnkota entered into 25 year agreements to purchase wind energy from large wind farms near Langdon and Valley City, ND. While it was necessary to secure this renewable energy to meet the mandates, only a small amount of the electricity generated is actually used to meet our member needs. The balance of this energy is sold into the regional markets at somewhat unpredictable prices. Prior to 2009, much of this excess power could often be sold at a profit, which helped to keep our rates low. Since the economic downturn, Minnkota has been forced to sell the excess power at a significant loss, in many cases for less than half of the contracted price to purchase the energy. For the past two years, the 0.5 cent surcharge has been used to off-set those losses.

The good news I have to share with you is that at their December meeting, the Minnkota board of directors set in motion a reduction of the 0.5 cent surcharge to 0.3 cents effective from now until March 2013. Your Nodak board of directors quickly followed suit and reduced the surcharge you will see on your monthly bill to 0.3 cents as well. While this is a modest decrease, it is welcome news. For someone using 1,500 kilowatt-hours per month, this will result in a reduction of $3.00 to their monthly bill. An electric heating customer using 20,000 kilowatt-hours will see a reduction of $40 in their annual heating costs.

At this time, it is still unclear if any other adjustment will have to be made to our retail rates for 2012. We are hopeful that with the projected growth in sales and no unexpected expenses, we can avoid the need for a rate increase this year. As you can probably imagine, a warm dry December and record high temperatures in the first part of January make meeting those projections difficult. These relatively balmy winter conditions can result in lower-than-projected revenues and a higher wholesale power cost per kilowatt-hour. Your Nodak board and staff are closely monitoring the situation and are committed to doing our part to keep expenses in line.  A decision will be made in the next couple months about what we’ll have to do with our rates, but Mother Nature will undoubtedly have a great deal of input into that decision. Until then, enjoy the warm winter and the lower monthly bills.

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A 37-year career comes to a close

September 2011 

By George Berg, President & CEO

Thirty-seven years ago this month, I walked into Nodak’s headquarters office to inquire about a job posted in the Grand Forks Herald.  I was about two years out of college, and I knew just enough about Nodak to guess it would be a good place to get a permanent job.  I had grown up on a farm near Edinburg, and I knew Nodak provided our electricity,but until then I didn’t know the main office was in Grand Forks.  The office at that time was pretty well hidden in a mostly residential area west of Washington Street and north of the railroad tracks.  Unfortunately, the job advertised was seasonal, but I did learn about a full-time position, which would soon be announced.  I applied for the full-time position and was hired two weeks later.

Earlier this year, I informed your board of directors of my intent to retire as of the end of the year 2011.  They are now in the process of taking applications for a new President  & CEO.  A letter from the board of directors, along with the announcement, has been posted on our webpage www.nodakelectric.com under the menu item “About Nodak.”  I have been fortunate to work at and manage Nodak during some exciting times.  When I was hired in 1974, underground distribution lines were a relatively new option.  Nodak was aggressively replacing hundreds of miles of World War II vintage overhead lines each year with underground rural distribution (URD) cable.  Also during the mid-1970s, Minnkota Power Cooperative and the 12 distribution cooperatives introduced the concept of “off-peak” heat as a strategy to build new load without creating the need for more generation.  This strategy would ultimately blossom into a program which would heat tens of thousands of houses and businesses in the Minnkota system with a low-cost alternative.

I began my employment at Nodak at a time when mainframe computers and data processing were changing the way all business functions were handled.  Nodak had recently purchased a mainframe computer from IBM, and most employees were learning new ways to manage data and perform their day-to-day duties.  Any one of the above changes by themselves would be enough to create some chaos in an organization.  Combined, they meant there were few dull moments, and it was not a fun environment for anyone resistant to change.  It was a great environment and a great time to be a new employee.

I hope new employees coming into our organization today will look back upon retirement and feel grateful they were part of meaningful change.  Maybe their experiences will be related to high-tech solutions and the development of what is now referred to as a “smart grid.”  The ultimate vision is that you, as a customer, will not need to think and worry about being energy efficient on a day-to-day basis.  Instead, you will buy and install appliances that can “talk to” an electrical grid, which will instantaneously price electricity based on various economic factors.  We all have to admit that kind of change sounds exciting.  Hopefully, it will happen because it will be a good way to save money and not only because of rapidly increasing cost of electricity.

I have never regretted my stop at the Nodak office in September of 1974.  I have had the privilege to work with and for many dedicated board members elected by you to govern the cooperative.  I worked alongside basically hardworking, conscientious employees that, like me, have felt fortunate to be employed by an organization like Nodak.  I always have and always will be proud to tell people I have been associated with this organization.

Good luck to the next fortunate person chosen by your board of directors to be President and CEO of Nodak.

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Generation costs drive rates higher

March 2011

Two months ago, this publication was used to inform you of rapid increases in the cost to generate electricity. Hundreds of

millions of dollars have been spent by our power supplier, Minnkota Power Cooperative, primarily for required environmental upgrades at their coal-fired power plants in western North Dakota. These expenditures don’t create a dime of new business, so obviously the cost is added to the business we already have.

Huge investments in generation translate into huge additions to debt service. Coupled with higher operating costs and higher cost of fuel, our wholesale cost of power has risen more over the last two years than the previous 20 years combined. We received wholesale rate increases of 5% in April 2010, 5% in January 2011, and will receive an increase of nearly 30% in April 2011.

For the last nine months of this year, excluding projected growth, our cost of power will increase from $32.8 million in 2010 to a projected $42.3 million in 2011. This additional $9.5 million needs to be recovered through a combination of higher retail rates and increased sales. While our forecast for increased sales is optimistic for 2011, the reality is that most of the added cost will need to be recovered through higher retail rates.

The Nodak Board of Directors has approved a rate increase of 17%, which will be added to the April billing period, and you will see the effect on the bill you receive around May 1. This increase will recover about $8.6 million of the $9.5 million adder to our wholesale power bill. The remainder will be recovered from increased sales, primarily to the Keystone Pipeline stations.

Prior to the year 2009, we enjoyed a 15-year period of incredible rate stability. The few rate increases we had during that period were far below the rate of inflation, even during a period of low inflation. We are now in a period of making huge investments in generation, which create immediate and dramatic upward pressure on our rates. We wish we could have had gradual investments and gradual rate increases over an extended period of time, but that isn’t the way power plants are upgraded. We can only meet all environmental standards as required, borrow the funds to do the work, and see that the added costs are recovered through our retail rates.

During the last part of April, we will be holding a series of member information meetings at various locations throughout our service area. We want to make ourselves available to give you a little more detail about this rate increase. More importantly, we want to answer questions in person about this or any other part of our business. We encourage you to watch for these meetings and attend if your schedule permits.

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Escalating electric rates

January 2011

We likely don’t need to tell you that electric rates have been on the rise the last couple of years and will continue to rise over the next couple of years. These increasing costs have been, and will continue to be, primarily from the generation side of our business. On the graph below, each bar represents the average price per kilowatt-hour for electricity purchased from Nodak over the past 15 years. The graph also shows each year how much of the revenue from each kilowatt-hour is used by Nodak and how much is sent to our power supplier, Minnkota Power Cooperative. Minnkota is owned and governed by 11 distribution cooperatives for the purpose of generating our electricity and providing the transmission lines from the power plants to our cooperatives. Nodak is one of these 11 distribution cooperatives.

The blue section of each bar reflects what is needed from each kilowatt-hour sold to pay Nodak’s expenses that particular year, plus margins. As you can see, this amount has remained remarkably stable. This doesn’t mean our operating expenses have not increased. Actually, our total expenses in 2010 are about 40% higher than in 1996; however, we have been blessed with kilowatt-hour sales growth, so we can spread these expenses over more kilowatt-hours.

The alarming part of this graph, and the part that reflects the upward pressure on your electric rates, is the red part. This section of each bar represents the wholesale cost of each kilowatt-hour sold. As you can see, we enjoyed relatively stable wholesale cost of power during the period from 1996 through 2008. Our average cost of a kilowatt-hour in 2008 was in fact only 25% higher than 12 years earlier in 1996. That computes to an average of about a 2% increase per year.

After 2008, our average wholesale cost of power began to rise dramatically. Based on the recent budget from Minnkota, we expect our average cost of each kilowatt-hour sold in 2011 to be around 6.1¢ per kilowatt-hour, which will be 50% greater than 2008. This computes to an annual increase of nearly 17% per year.

The reason Minnkota’s generation costs are escalating so rapidly are many, but are mostly related to environmental issues. Over a five-year period, Minnkota has invested over $420 million in environmental upgrades to meet new EPA emission standards. By the end of 2012, Minnkota will have spent an additional $400 million on new transmission lines necessary to deliver both wind and base-load generation into the Minnkota service area. These investments carry large debt service payments, which are driving up the cost of our wholesale power. Also, the new environmental equipment is more expensive to operate, further increasing Minnkota’s overall operating expenses.

Minnkota has also entered into long-term contracts for wind energy to meet future North Dakota and Minnesota renewable energy objectives. When these wind farms were built, it was anticipated the excess generation could be sold into the regional market at a profit, or at worst break even. Decades of historically market conditions made this a reasonable assumption. The severe downturn in the economy has resulted in power market conditions for the sale of excess energy. The sale of excess energy has become an economic burden for Minnkota, which will not be relieved until economic conditions improve in the regional power market.

The wholesale part of a kilowatt-hour sold has always been big, and it is getting bigger. In 2011, the Minnkota share will be about 78% of the cost of each kilowatt-hour we sell. Another alarming statistic is that Nodak will pay Minnkota more for a kilowatt-hour in 2011 than we actually charged for that kilowatt-hour only three years earlier in 2008.

Obviously, this article is about escalating electric rates. We increased our retail rates in 2009 and 2010 to offset our increasing cost of wholesale power. Our cost of generation through Minnkota Power will continue in 2011 and 2012. At that point, Minnkota will have adequate transmission facilities and adequate generating capacity, including recently contracted renewable energy through wind, and we have optimism we will return to a period of stable electric rates. This, of course, assumes there will not be severe federal legislations such as Cap and Trade or carbon reduction legislation that will place additional upper pressure on the cost to generate electricity.

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A balancing act

November 2010

A friend recently commented he was surprised to read that an electric cooperative such as Nodak would be putting ourselves at risk relying on market forces. The comment was in response to articles we have written recently about low market prices for excess energy and how this has cost Minnkota and Nodak cooperatives millions of dollars. His comment was that member-owned cooperatives had no business messing around with market driven sales and purchases.

Minnkota represents the side of our business that ensures we will have enough power available to meet our members’ needs every hour of every day. They can do this by building and owning power plants, by entering into contracts with other utilities to deliver energy needs, or they can rely on available power from the regional market at prevailing market rates. In reality, they always have, and probably always will, use all three of these options to balance the hour-by-hour availability and demand for electricity.

Whether Minnkota builds their own power plants, or they contract with someone else to deliver a specific amount of power, they will always have an imbalance between the amount of electricity available and the amount needed to serve your needs. When they have too much electricity, they sell the excess to the market at whatever price is available. If they have excess energy at 3:00 a.m., it is unlikely their power will have much value. If they have excess energy at 9:00 a.m., a normal peak usage time, their excess electricity may have value much higher than their cost.

When Minnkota is in the position of having excess electricity, they really have very few options. They can’t store it, and with mostly fixed costs associated with the generation, it does little good to reduce the amount generated. The only real choice they have is to sell the excess. Similarly, when Minnkota does not have sufficient generation to meet your needs, their options are few. Thanks to a very effective load management program, they can relieve some of the pressure by implementing load control; however, they still may need to rely on the regional market where some of the immediate needs are purchased regardless of the price.

On an annual basis, the net effect of buying and selling electricity through the market had little impact on Minnkota’s overall cost prior to 2009. Two things changed that year. First, Minnkota completed their plans to secure enough wind generation to satisfy existing renewable energy mandates and objectives in both North Dakota and Minnesota. They did this by entering into long-term contracts with NextEra Energy to purchase all of the output from wind farms near Langdon, North Dakota and Luverne, North Dakota. Second, the severe recession in 2008 and 2009 created a big drop in the demand for electricity in the entire Mid-west resulting in a depressed market for excess energy from the regional grid. Minnkota and many other electric utilities found themselves with more excess energy than normal and market prices that were less than half of the amount before the economic downturn.

The light at the end of the tunnel will come from continued growth within the Minnkota system, which will result in less excess energy to sell each year and a recovery of the energy market, which will come from an overall recovery of the economy. Each year, we expect the adverse impact from excess energy sales to be less than the previous year, and in fact, the situation could reverse such that the sale of excess energy becomes a positive impact on the cooperative.

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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.

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