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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Cap-and-trade bill a major concern

July 2009

A recent survey was done to see how many of the public had any idea as to what the recent proposed Cap and Trade Bill is about. The surveyor made it easy by asking a multiple choice question with only four choices. Less than one in four (24%) knew that it had something to do with an environmental issue, 29% guessed it was related to Wall Street, 17% thought it was about healthcare reform, and 30% admitted they had no idea. The point here is that the public needs to pay more attention to this Bill. It is sometimes referred to as the Waxman/Markey Bill after its primary sponsors, Representative Henry Waxman from California and Representative Ed Markey from Massachusetts. If passed in its present form, it will result in a huge tax on coal-based electricity. This bill is challenging in that it is extremely complex, and it is proposed to solve a very complicated concern – that of global climate change. You may want to learn more about this Bill, and if you have concerns, you may want to express them to our congressional delegates.

On a more positive note, it appears Nodak’s net margins through the first half of 2009 will be substantially higher than budget. Our margins through the end of June will be approximately $750,000 greater than budgeted, which is about three percent of the gross sales through that period. We are going to say that the extra margins come from higher-than-expected sales, as well as brilliant management. You will probably make the observation that they may have come from us overshooting the rate increase last January. The truth is, it has a lot to do with above normal sales, somewhat to do with overshooting our rate increase, and very little to do with management. In any event, if our good fortune continues, you can expect a larger-than-normal capital credit check next spring. A word of caution is that a return to $4.50 diesel fuel, a minor ice storm, and reduced sales during the second half of the year can eat up excess margins in a hurry. Hope for the best during the last half of the year.

North Dakota was declared a national disaster area this spring due to the extensive flooding problems. With this declaration, FEMA funding is available to cover much of the cost of restoration due to flooding, as well as mitigation measures to prevent reoccurring flood damages. Nodak, as a not-for-profit entity, is eligible to apply for FEMA assistance. We often have poles taken out when the Red River of the North expands and ice begins to flow far outside its normal banks. We are in the process of applying for assistance to cover the cost of mitigating damage potential for future years.

We are very thankful to our members who have worked with Minnkota Power Cooperative to provide easements allowing for transmission line extensions to serve three new pumping stations for the Keystone Pipeline. We trust that Minnkota has been fair and upfront with all of the landowners when securing these easements. I know there was some misinformation that the cost of easement is simply passed on to the pipeline company. In reality, procurement of easements is a cost to do business for Minnkota, and is ultimately included in the rates we pay. The bottom line is that every one of us buys electricity that comes from transmission lines going through someone else’s property. While landowners need to be treated fairly, we all want the cost of our electricity to be as low as possible.

With the late spring, it took longer than normal for the frost to leave the ground, and it also took a long time to dry up so we could begin our construction season. Like the farmers, we are getting an extremely late start on what will be a busy construction season. We already have some of our crews working overtime, and we have hired an outside contractor to try to catch up. For those of you who have requested new services or modifications to your existing services, we ask for your patience while we try to cram a lot of work into the next few months.

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Energy conservation and efficiency

May 2009

Perhaps you have noticed in recent years our emphasis on marketing and load building has decreased and for all practical purposes has been eliminated. At least recently, we have begun putting more emphasis on promoting energy conservation and efficiency which of course, if effective, will reduce our energy sales.

Being a business administration graduate, this has been somewhat of a tough swing for me. Electric utilities are businesses with large amounts of fixed costs. Fundamental 101 Economics dictates that the best way to reduce per unit cost in our type of business is to increase sales and spread those fixed costs over more kilowatt-hours. So, why are we and most other electric utilities getting away from the traditional best practice for this type of business?

As it turns out, there are two basic driving forces for this change. First, virtually all electric utilities are in need of added generation capacity to meet our growing demand. New generation is always more expensive than existing generation, and with the newer environmental regulations, it is expected to be a great deal more expensive. This has spawned the theory that it may be less expensive to “find” generation capacity in our own system by incenting existing customers to use less energy. The theory could hold true even if the electric utility needs to spend money providing these incentives. What it really means is that from the utility standpoint, encouraging energy conservation and efficiency may have an adverse effect on our system requiring higher electric rates. Ironically, it still may be a good idea because the alternative of building additional expensive generation will increase our rates even more.

The second basic driving force toward energy conservation is the American Recovery and Reinvestment Act of 2009, otherwise known as the Federal Stimulus Package. Included with this Act is an allocation of millions of dollars for each state to be directed toward the energy sector. The funds allocated to North Dakota will in turn be distributed through a state program. The North Dakota State Energy Program is currently being drafted, but it is almost certain to contain incentive money to promote efficient use of electricity. Likely uses of the funds will be rebates for the purchase of efficient energy devices, such as compact fluorescent light (CFL) bulbs and programmable thermostats. There may be incentives to install geothermal or high efficiency air source heat pumps.

When the state program is developed, we intend to be at least one source of information as to how you can take advantage of the program and cut your energy usage. We hope to do this by including information in the Nodak Neighbor, providing information on our web page, and having knowledgeable people who can answer your questions about energy saving opportunities. Watch for this information, as it will be useful if you wish to mitigate higher energy prices in the future with more efficient use of this energy.

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Facility charge: a fair and equitable way to recover fixed costs

March 2009

Without a doubt, the most despised part of our electric bill is the facility charge. This is the part of your bill you pay each month, even if you don’t use any electricity. I was once told it is kind of like having a cover charge to come to Nodak and do business.

Facility or fixed charges with electric utilities are necessary for rate equity among ratepayers. For each of the 16,000 metering points in our service area, we make a significant investment, and we must maintain that investment to ensure reliability and safety. We also must have a system of meter reading, billing, and customer service functions in place to take care of customers. This system includes trained people, office facilities, and state-of-the-art technology to provide the level of service expected by the general public. The cost of all of these facilities and services must be maintained, even if you elect not to buy any electricity during a specific period. The cost of these services are appropriately billed on a per customer per month basis rather than in proportion to the amount of electricity purchased.

A common question is, “why do some consumer classes pay a different facility charge than others?” The answer is that required facilities tend to differ among different consumer classes. In high density urban areas, accounts require less distribution line per account, and they are typically served with multiple accounts per transformer. For this reason, urban accounts require a lower monthly facility charge than rural accounts. Commercial accounts require large transformers, more expensive metering, and often require three-phase service and specialized equipment. For these reasons, commercial accounts require a higher monthly facility charge than residential accounts.

Following our recent rate increase, one member asked why his facility charge increased when nothing changed at his account. The answer is that the facility charge is an average of the cost to provide facilities for all consumers, and it covers the cost of owning, maintaining, and supporting these facilities. The total of these fixed costs does in fact increase every year, and this component of our rate needs to be periodically adjusted.

Roughly 10% of our annual revenue is billed through the facility charge. If we eliminated the facility charge, we would need to increase our rate per kilowatt-hour a proportional amount. While we would receive adequate revenue to pay all of our expenses, there would be some consequences. Those who use at or near average consumption would see little change in their total bill. Minimal users would be getting a free ride, as they would be paying little or nothing for the facilities serving their account, along with the billing and support required to serve their account. The free ride would be picked up by the larger users who would pay more than their share for these costs.

As you can see, it is our responsibility to not only have a facility charge in our rate structure, but to do the best we can to ensure it is designed to be fair and equitable among the different rate classes.

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Rate changes effective January 2009

November 2008

There’s no way to sugarcoat this article. In fact, maybe the word announcement better describes this particular communication than the word article. The announcement is that we need to increase our retail rates in January 2009. For residential accounts, the rate increase will average about 8.5 percent. You will first see the effect of this rate change on the electric bill, which is payable during the first part of February.

By far, the majority of the revenue that is needed with this rate increase is because of higher wholesale electric bills we will be paying to our power supplier, Minnkota Power Cooperative. In March of 2008, Minnkota increased our wholesale rates by 3 percent. We made no changes to our retail rates at that time. In March 2009, the Minnkota wholesale rates will again be increased, this time by 13 percent. The effect of these two wholesale rate increases will be that our 2009 wholesale power bill will be at least $5 million greater than our wholesale power bill in 2007.

For our general service, typically residential accounts, the monthly facility charge will increase by $2 per month in 2009. The per kilowatt-hour used charge will be a flat 7¢ per kilowatt hour. In 2008, you paid 6.5¢ for the first 4,000 kilowatt-hours and 6¢ for anything over 4,000 kilowatt hours. The percentage increase on your power bill will depend upon the amount of power you use and which of the three general service categories you fall under.

Our off-peak rate for 2009 will increase from 3.6¢ to 4¢. This is a lesser increase than the general service rate increase on a cents per kilowatt-hour basis, but on a percentage basis, it calculates out to 11.1 percent.

If there is a bright spot in all of this, it is that electricity still has the best price stability of any form of energy. Also, electricity from any utility in North Dakota is far less expensive than many other parts of the country.

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