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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A good time to invest in energy efficiency

May 2010

We are dedicating a large portion of this Nodak Neighbor issue to energy efficiency. The timely motivator for the subject is the recent unveiling of the State Energy Program. This program will use available stimulus money to provide rebate incentives for North Dakota residents and businesses to reduce energy requirements. The primary focus of the rebates will be efficient heating systems, insulation, and renewable energy.

There are basically two distinct approaches you can use to reduce your current electric energy requirements. They are energy conservation and energy efficiency. Energy conservation generally requires you to make some type of behavioral change. Examples are turning down your heating thermostat, turning up your cooling thermostat, and being more careful to turn off lights that aren’t necessary. The tradeoff is that you may be inconvenienced and in return will save money on your power bill. I would guess most of us would admit, even with higher energy costs today, we are not nearly as conservative with the use of electricity as were our parents or grandparents. We can do better if we really want to.

The second approach and the focus of this rebate program are to implement efficiency into our lifestyle. Contrary to conservation, no behavioral change is necessary, but rather an upfront investment is needed. The tradeoff here is an investment in upfront cash for future savings on your electric bill. Through the State Energy Program, the government is essentially “sweetening the pot” by funding a portion of your upfront investment with a rebate check.

Efficiency rebates often tip the scale to provide a good opportunity to make a good investment which will pay dividends. A word of caution is that you still need to do the math for your situation. The length of payback varies depending upon what you are replacing and the cost of money for your investment.

As you read through this material, you will note that while the rebate checks come from a state fund, it is necessary for you to make your application through your electric utility. We will provide the application forms and necessary information. Since there are limited funds available, we will provide a link to our statewide website giving the most current information regarding the balance of funds available. We will also have detailed information available, along with application forms, on our website www.nodakelectric.com.

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An Invitation to your Annual Meeting

March 2010

This issue of the Nodak Neighbor includes an invitation to our Annual Meeting on Saturday, April 10, 2010. We hope you understand the invitation is more than a compliance move “we sincerely want you to attend the Annual Meeting of the cooperative, and we promise to make it worth your time and effort.

We have a goal each year to keep our meeting short, but meaningful. The board chairman, Roger Diehl, and I will give a business report, which contains pertinent information that affects the cooperative from the past year. We take very seriously our obligation to share in a transparent manner any issue or event that has had a significant impact on the cooperative.

Coupled with our printed Annual Report, which will be mailed out next month, this is essentially our State of the Cooperative Report. As always, we will reward those who attend the Annual Meeting with coffee, cookies, and entertainment prior to the meeting, many door prizes during the meeting, and a great meal prepared by the Alerus staff following the meeting.

One of the most important parts of our Annual Meeting is that three of our nine board positions are up for election each year. The ability to choose who governs your electric utility is a privilege you should not take lightly. You will have the opportunity in April to either vote for the directors of your choice by mail, or in person at the Annual Meeting. At the very least, you should not pass up the option to vote by mail. Better yet, come to the Annual Meeting and meet the candidates. They have always been available and willing to talk to members before the meeting, and they will address the membership during the meeting.

Almost as important as the director election, I believe, is the opportunity for members to be heard during the question and answer period toward the end of each meeting. We, as employees and directors, fully understand we work for you, and it is our duty to give you an answer to any business-related question. If you stump us, we will get an answer to you following the meeting, and you may actually give me material for a later issue of the Nodak Neighbor.

In summary, if you are the type of person that likes good food, likes to win prizes, and needs to get out of the house, a great option on April 10 is to come to our Annual Meeting in Grand Forks.

Digging Out

During the third week in January, we once again had significant ice buildup on our overhead power lines in the western part of our service area. Fortunately, the wind stayed relatively calm, and our outage problems, while extensive, were minor in comparison to many other parts of the state.

After three long days of repairing wire breaks and nuisance outages, we received requests for help from other cooperatives who were suffering with hundreds of broken poles and thousands of members without power. We were able to send six men to KEM Electric Cooperative headquartered in Linton, North Dakota and six men to Mor-Gran-Sou Electric Cooperative headquartered in Flasher, North Dakota, along with lift trucks, digger trucks, and pickups. These men left their families and personal responsibilities to spend another week working in harsh conditions restoring power to appreciative members of those cooperatives.

We also are appreciative of the willingness of our men to extend themselves beyond our service territory, as often the roles are reversed and we need help from sister cooperatives to assist during ice storms in our service area.

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Wholesale rate increases and how it will affect you

January 2010

Over the past eight years and for at least the next three years, a rapidly escalating wholesale cost of power has been and will be our greatest challenge.

Minnkota Power Cooperative recently approved their 2010 Budget, which included a rate increase of 7.5% in March. Furthermore, they project needed increases of 9% in 2011 and 9% in 2012. This will mean for the 11-year period from 2001 through 2012, we will have had nine wholesale rate increases, and our average cost of power from Minnkota will have doubled. On top of this, as you probably know, we have added a one-half cent per kilowatt-hour surcharge in 2010 to cover losses from the sale of excess energy during the prior year.

Fortunately, we can offset a wholesale rate increase with a slightly lower percentage increase on our retail rate. This is because our wholesale cost represents about 70% of our cost to do business. For this to work, we need to either keep our distribution expenses down, or have growth in sales, which helps to offset distribution cost increases.

We understand the only thing really important to you as a member and customer is how all of this will affect your retail rate in the future. Our one bright spot is we are anticipating very high increases in sales in 2010 from the additional sales to Keystone Pipeline and other growth that has developed over the past year. While it will not generate enough revenue to offset the 7.5% wholesale rate increase in March, we can at least delay a rate increase until late fall or early winter. We then feel we can get by with an increase of roughly 10%, which will be enough to offset both the wholesale rate increases in 2010 (7.5%) and 2011 (9%).

I have attached a graph which puts into perspective our retail rates compared to our wholesale rates during this volatile time relative to our wholesale cost of power. The graph depicts the trend in cost of power from Minnkota and the cost of the power you purchase relative to the year 2001. It assumes that we will have a rate increase in late 2010 and another rate increase in 2012. The result is that while our wholesale power costs will have doubled over this 11-year period, our retail rates will have increased by less than half that amount. Also, this graph shows the trend in the Consumer Price Index for the period of time from 2001 through the end of 2009. As shown, our retail electric rates have followed the CPI for most of this period. Unless there is a steep increase in inflation during the next few years, it is likely our retail rates will increase faster than other consumer goods through the year 2012.

We will continue to keep you informed about the status of our financial conditions during the year 2010 and will notify you if and when a retail rate adjustment is needed later this year.

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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.

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Carbon legislation will drive up price of electricity

September 2009

It appears there will be a vote in the United States Senate before year-end on the American Clean Air and Security Act of 2009. This bill, which was narrowly passed in the House of Representatives in July, is commonly referred to as the “Cap and Trade” Bill. This term comes from the approach used in the bill to control and substantially reduce carbon dioxide emissions by the year 2030. The primary target for carbon dioxide emission reduction is coal-fired power plants. Most of the electricity consumed in North Dakota, and roughly half of the electricity consumed in the United States, is generated by coal-fired power plants.

The basic approach to the Cap and Trade scheme is to start out with the government issuing free allowances to industries that cause carbon dioxide emissions. The amount of free allowances issued from the government would be capped. Each year, the cap would reduce until all free allowances are eliminated. Industries having carbon dioxide emissions would need to either reduce their emissions to stay within the cap, or purchase replacement allowances through a market-driven trading system. These allowances in the market may come from other industries who have “earned” them by reducing their emissions below their cap, or more likely will come from a pool available from the government.

The inescapable problem for the electric industry is that affordable technology does not exist that would remove carbon dioxide from the generation process. The only option that is being researched is carbon capture and storage. Billions of tax dollars will be spent in an attempt to develop carbon capture and storage techniques in the coming years. However, even the most optimistic will acknowledge that at best this technology is many years in the future and will certainly add a huge cost, which will increase the price of electricity.

So, it seems there are two possible scenarios for the coal-fired electric generation utility if the Cap and Trade Bill becomes law. First, would be that the utilities would be forced to buy allowances or permits to continue to produce carbon dioxide. Experts believe the market-driven allowances will be very expensive. The second scenario will be that electric utilities adopt carbon capture and storage practices, which again will be very expensive. Both scenarios are sure to drive up the price of electricity, as well as many other forms of energy used by consumers daily. Compounding the issue is that virtually everything we buy has an embedded energy cost to produce the product and deliver it to the end user. Higher energy costs won’t impact us only at our meter or gas pump; they will impact most everything we buy or do.

The bill that was passed by the House of Representatives is of serious concern and either needs major modifications, or it ought to be defeated when it comes to the Senate. We can speculate that many congressmen voted for the bill for political reasons with confidence it will get amended or be defeated in the Senate. We were pleased that North Dakota Congressman Earl Pomeroy recognized the flaws in the bill and had the courage to vote against it despite pressure from his party.

Creating legislation with the intent to affect climate changes is about as big as an issue can get. It has the potential to do nothing with respect to its ultimate goal, but yet adversely affect an already weak economy. In that regard, it is important for us to pay attention to the issue and let our senators know if we want them to support or oppose the Clean Energy and Security Act of 2009.

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