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.