Kirkwood Election Results

We are writing to communicate the results of yesterday’s Kirkwood election.

Approximately 244 ballots were received from 274 registered voters (89%). This is an increase of 142% over the 113 registered voters in the last election in 2009.

The unofficial results can be found at:

kirkwood_meadows_pud_unoffical_canvass_11-8-2011.pdf or http://www.kmpud.com

Director Seat No. 1	Robert Ende: 201	Larry Lacey: 40
Director Seat No. 2	Standish O’Grady: 199	Frank Majors: 39

We are very grateful to be elected to the KMPUD Board. We also want to thank Larry Lacey and Frank Majors for their contributions to the Kirkwood community and their many years of service.

This is the “unofficial canvass.” The “official canvass” will be accepted and announced on November 15th by the Alpine County Board of Supervisors. Newly elected board members will take office on December 2^nd, and their first meeting is December 8^th, 2011.

We are pleased to have achieved our goals of increased community participation and having more customers of the KMPUD vote on important matters such as election of the KMPUD Board.

We are optimistic that the whole KMPUD Board will be focused on encouraging community involvement while working to provide the most reliable, lowest cost services.

We look forward to continuing to work with the KMPUD’s staff, Board and the entire community for a better Kirkwood.

Thank you for all your support.

Sincerely,

Bob Ende	Standish O’Grady
rende@mac.com	sho@ogrady.us
(408) 931-1774	(415) 385-8213

The Economics of Power at Kirkwood

With the transfer of electricity and propane from Mountain Utilities (MU) to KMPUD now complete, and a few months of operations in place, much of the next year will be focused on improving the economics of power at Kirkwood.

The economics are divided into three primary issues:

1. Making sure we are getting the lowest cost of power and that the costs are fairly allocated across all customers
2. Establishing the lowest, long-term cost of borrowing
3. Deciding on moving forward with the Out-valley project

Proposed Rate Changes 

This Saturday, the KMPUD Board is holding a public meeting to discuss modifications to the electricity and propane rates. The changes have been reviewed by the Energy Finance Committee (EFC) and are all changes we support. The EFC has documented the changes and the rationale in a document posted at KMPUD.com:

 

www.kmpud.com/storage/ApproachForRevisedElectricityPropaneRates.pdf

We encourage you to ask questions and provide comments. The major changes are

1. A Fuel Adjustment Charge that covers the actual cost of fuel as compared to the budgeted amount.
2. A small reduction in the cost per kilowatt-hour for electricity and cubic-foot for propane coupled with a monthly fixed fee for service. This is consistent with the structure for water and wastewater services.
3. A rate for reimbursement for rooftop solar and other forms of “self-generation” that is based on the actual savings to the District.
4. A fixed charge covering the cost of replacing all meters with “remote read” meters that can be continuously accessed remotely – even in the middle of a Kirkwood winter! No more estimated bills.

While we are on the topic of rates, we would like to comment on a statement that appeared in this month’s KMPUD newsletter. It correctly states that the rates in July moved from the Mountain Utility rate of $.78/kwh to the KMPUD rate of $.53/kwh. While technically correct, by next month the MU rate would have dropped back down and would likely have been slightly lower than the KMPUD rate. The reason that MU rates sometimes spike in the summer is due to the fact that costs for buying diesel are not recovered in the same month they occur. This makes for very unhappy customers (i.e., us) and won’t happen with KMPUD. However, the KMPUD statement was misleading.

 

The main economic differences between KMPUD and MU providing power are:

1. Savings: KMPUD will not have the regulatory costs of working with the California Public Utility District.
2. Savings: The KMPUD equipment upgrade will provide for more efficient operations that will get more kilowatt-hours out of less diesel fuel.
3. Savings: KMPUD charges less for propane. MU marked up the propane to cover loses in electricity.
4. New Cost: The KMPUD has a lot of debt and the cost of servicing that debt will be a significant drag on the cost of energy for a long time. Debt service is currently about 13 cents/kwh.
5. Governance: It will be our community owned and operated power company that we all influence through public meetings and an elected board.

We are critical of MU as much as anyone in Kirkwood, but in this case, the newsletter contained a misleading comparison.

 

Long-term Cost of Borrowing 

To date, KMPUD has $22.3 million in debt and if the Out-valley project moves forward, total debt will exceed $54 million. That works out to be about $70,000 of debt per electricity customer. Numbers this big in a community as small as ours make us want to focus on the lowest possible cost of borrowing and doing very careful analysis and budgeting.

 

Earlier this week, KMPUD Board member Eric Richert wrote a very thoughtful article (see kirkwoodenergy.wordpress.com/2011/10/12/thoughts-about-change-for-our-kmpud) on how we got to this point. It directly counters the claims that you might have read in the KMPUD Fall 2011 newsletter that the new powerhouse is the proper size for our needs. It also documents the vital role of community involvement and activism.

Putting history aside for the moment, the key question going forward is finding the lowest cost of long-term financing. Our current debt of $22.3 million was done with short-term borrowing. We need to convert that to long-term debt by May of 2013. To assist with the analysis of our options and how it will affect future energy prices, the EFC produced a short paper that you can find at:

 

kirkwoodenergy.files.wordpress.com/2011/09/outvalleyandlongtermfinancing.pdf

 

We encourage you to read the analysis. The summary is that the range of costs for long-term borrowing range from 3% to 7.5% depending on our options. At the low-end, we would hope to get financing through a Federal Government program at rates tied to the U.S. Treasury notes (currently about 3.125%). At the high end the District would issue an unrated municipal bond at 7.5%. At the low end, it might be possible to build the Out-valley project and be competitive with current electricity prices. At the high end, the Out-valley project is not economical until there is significantly more power demand in Kirkwood.

 

The analysis shows there needs to be a much more sophisticated approach to financial management than what we have seen in the past.

 

Why We Have a Positive Outlook 

 

We now have a publicly owned and operated energy service! The community has come a long way since last September when the community concerns about the In-Valley project started to build. We encourage you to stay involved. We see a way to more affordable power and are determined to do what we can to help drive down costs and ultimately move us off of diesel to a cleaner, more affordable form of energy. This has been discussed since Kirkwood was formed in 1973, but this year we actually made an important first step.

Bob Epstein & Standish O’Grady

Thoughts About Change For Our KMPUD

By Eric Richert

 

In recent days I’ve seen a number of campaign related letters and emails that debate the need for “change” in the KMPUD. I’ve now been on the Board for nearly two years, and as (by far) the newest member of the Board, I may have a unique perspective on this question. I’d like to offer some thoughts with a focus on four areas:  Planning, Powerhouse Design, District Communications with the community, and Energy Financing. I welcome your thoughts.

 

Planning

 

Today, the Board does not engage in longer term planning activities:  financial planning, capital planning; or, in general, defining what needs to be accomplished over the next several years, and then planning the efforts and resources needed to achieve those outcomes.

 

A regular practice of longer term planning might have resulted in a powerhouse different from what we now have.  The fire of course could not have been foreseen.  But if we had an on-going planning process that included our energy future, we as a community could have quickly created a shared vision to answer the question of what is more important:  the interconnect, or a powerhouse sized for 11 MW of generation? We never had a timely, focused conversation on that question.  If the interconnect is more important, then perhaps we would have created a building sufficient for 5-6 MW, with ability to expand only if and when needed, and saved perhaps $5 million of borrowing capacity to go towards the interconnect.

 

A planning regime might have also allowed the “fair share” effort to yield results. The Fair Share effort was started some years ago by Jim Ansel.  His view was that the District should have regular reviews of what the community needs in the way of District services, what those services will cost, and therefore what “fair share” of our property tax revenues we should seek from the Counties.  Today, the Fair Share effort is fully stalled.

 

In contrast, the interconnect project has had aspects of longer term planning that have served us well. For example, the community was engaged early through survey and community meetings focused on alternative approaches to a long-term solution for electricity. Jeff Bodington was engaged to develop alternatives with analysis of comparative costs and risks. The result of this planning process, which included discussions of alternatives, has been a foundation of support for the interconnect effort, and provided clear direction for the KMPUD’s Board and Staff to pursue.

 

A risk we now face, with the new energy services and large debt, is significant financial risk.  This risk can be managed by on-going longer term planning for our capital needs, cash flow projections, and timely budgets and reviews of spending.  Risk can be managed by an on-going cycle of planning and forecasting followed by review and adjustments.

 

So:  a change we need is creation of an on-going planning process that goes beyond whatever needs immediate attention.  The closest we’ve come to “planning” in the past several years are the individual efforts of people like Standish O’Grady and Bob Epstein on electricity, Jim Ansel on Fair Share, and the early analysis of electricity alternatives that included the interconnect project.  Planning needs to be a strong (perhaps even the key) competency of the Board.

 

Powerhouse Design

 

No one could have foreseen the full destruction of the MU powerhouse.  But once that happened, a well-established functioning committee structure (that routinely includes non-Board community members) could have enabled quick discussion, debate, and recommendations to the Board for what a new powerhouse should be and what we could afford.  As it happened, the Engineering Committee did not get involved with the powerhouse design until the design was set, site graded, foundation poured, and walls and roof structure constructed.   Then the Committee, with Michael Sharp and PowerSecure, was able to take about $1 million out of costs.

 

Neither the Board as a whole nor the community had a real chance to influence the overall powerhouse design (size, capacity, shape) and, though concerns were expressed, some important aspects of the design (such as roof slopes and shedding snow) proceeded as originally proposed.

 

It was through the efforts and perseverance of people like Jan Hill and Dave Likins that  PowerSecure was engaged to provide generators and operations expertise, and alternatives (smaller Volvo engines) to five Caterpillar engines were considered.  This was a great contribution that I believe has not been adequately acknowledged by the Board or District staff. I am actually not sure that the Board would have authorized the Engineering Committee’s involvement if it had not been for the persistence of KMR and community members’ concerns about the cost of the powerhouse.

 

As noted above, the powerhouse could have gone in a different direction, one that conserved borrowing capacity while allowing for expansions if and when needed. To build an 11 MW capacity building when it is unlikely that capacity will ever be needed, at least for very many years, was probably not a wise decision.

 

So the change needed is a strong, efficient Board committee structure that enables quick but meaningful discussions about “big” things, and this structure should include interested, qualified non-Board community members.  The result should be wiser decisions that affect the entire community.

 

District Communications

 

An example of the effectiveness of such a committee is the improved District communications using the internet.  I give most credit to Anne-Flore Perroud for making this a campaign topic in the 2009 Board elections. Once elected, I picked up on it and proposed that we create a Communications Committee, conduct a survey, etc.  The result is a website that works well (many thanks to Drew Meteer), postings of agendas, meeting videos and Board information. I hope this month we will post Board packets prior to meetings and stream video of the meetings.  None of this would have happened without “change,” specifically Anne-Flore running for the Board and a Board member (in this case me) willing to take her new ideas forward.

 

Energy Financing

 

The most powerful statement I can make here is that I believe that our electricity rates today would be 15 to 20 cents per kWh higher if not for the non-Board community members of the Energy Finance Committee.  Without change including the creation of the EFC, giving the EFC broad enough charter (which was not easy given Board and Staff direction with the original underwriter Cantella), and having Bob Epstein, Bob Ende, Allan Sapp, Dave Likins and Tony Tucher on the EFC, we would not have a low 50′s cents per kWh electricity rate today.

 

Hopefully this accomplishment of low current rates will be followed by RUS (Rural Utilities Service) financing for both in-valley and out-valley projects. If it is, it will be primarily because Bob Ende on the EFC took leadership on pursuing this possibility, and now of course others on Staff (Michael Sharp) and Board are doing excellent work to hopefully make low interest RUS financing a reality.

 

This possible reality should be more of a sure thing than it is, and this is another reason why the way that the KMPUD Board treats community input can change for the better. About 3 years ago (before I was on the Board) I discovered RUS (when I was looking for solar grants for Kirkwood), thought this agency could be useful to the interconnect project, found the California RUS representative, spoke with him, got copies of the relevant information about financing requirements, summarized all this, and provided it to the District. I never heard about it again, until Raejean Fellows mentioned it in July, 2010. It took the creation of the EFC, comprised of community members with the interest and time to pursue this kind of possibility, to get the RUS effort onto a productive track. We lost many months, even years, in building a relationship with RUS that could have made financing our energy projects more certain. I believe this is because the Board does not always appreciate community input as much as it should, and at times even considers input “invasive” and an attempt to “micro-manage” the Board.

 

And here I close the loop with Planning.  I don’t think energy financing, for us, will be only two events over several years.  Financing our energy needs will be on-going for years and years. Managing the associated risk will require expertise and continuous attention, through a cycle of forecasting, reporting, review and adjustments.  I don’t think the current Board has sufficient sense of this, or sufficient sense of our Board responsibilities in this area.

 

This is not to ignore the many good things that the Board and District staff have done and continue to do with water, wastewater treatment, snow removal and other services, and now in gearing up operations of the new powerhouse. The District has a lot to be proud of, including its superb Staff.

 

This is to recognize that our financial risks have increased very significantly, our scope of services as measured by revenue has tripled, and interest within the community in the decisions KMPUD’s Board needs to make is high. Managing those risks and welcoming and making good use of community interest require some changes in processes and expertise.  I hope that the Board and District Staff will respond positively to the changes that are needed.

 Eric Richert  |  65 Sorrel Court  |  KMPUD Board of Directors Seat 3

209 258-8321 | 650 380-2008 cell and vmail | eric.richert@gmail.com

Transition from Mountain Utilities to KMPUD Ready for July

The final major steps needed to transition electricity and propane sales from Mountain Utilities (MU) to Kirkwood Meadows Public Utility District (KMPUD) have been completed, and operations should commence in July!

On June 23, the California Public Utility Commission (CPUC) approved the sale of assets by MU to KMPUD. On May 26, KMPUD completed the sale of $22.5 million in municipal bonds to finance the acquisition, complete the new powerhouse, restructure the existing debt and complete the design and permitting process for connecting Kirkwood to the grid. You can read a copy of the “Official Statement” for the bonds at www.royceprinting.com/jobs/FOSarchive/2011FOS/05_23_11_KirkwoodMeadowsFOS.pdf. The bonds are temporary financing to be replaced by permanent financing sometime during the next two years.

The project that started 5 years ago is ready to begin its first operations. In this letter we will present our views on what to expect and some of the remaining challenges. But first, we express our congratulations and thanks to everyone involved!

What will be different?

The first difference will be a single bill from KMPUD for electricity, propane, water and other services. Kirkwood will continue to operate on temporary generators until this fall when we start using new, more efficient diesel generators located inside the new powerhouse. The new generators are designed to be up to 15% more efficient than what we have been historically using.  This will help moderate electricity bills, as the cost of diesel continues to be very volatile and very expensive. The new generators’ improved emission performance will also help contribute to cleaner air quality within Kirkwood valley.

The cost for power is expected to be more consistent from month to month for two reasons. First, KMPUD can reflect diesel costs in a timelier manner because they do not have to apply for approval to the CPUC as MU currently does whenever there are fluctuations in diesel prices. Secondly, KMPUD will be installing wireless, remote-read meters. Currently, if your meter is inaccessible due to snow or weather, MU makes an estimate of your usage and makes corrections in later months when the meter can actually be read. With KMPUD providing our energy going forward, the meter will always be readable.

Remote-read meters also provide the eventual opportunity for homeowners to securely read their own meters via the internet. This can be helpful for detecting leaks and knowing if electric or propane fixtures are inadvertently left on when you are not there.

While we can hope that the transition from MU to KMPUD is seamless, we suspect there will be some “bumps in the road.” In the long run, we should all expect (and demand) the high level of service and accountability that comes with a public agency with an elected Board.

In-valley challenges

Over the summer the in-valley powerhouse facility will be completed and the new equipment installed. Power Secure will manage the construction and the powerhouse operations. This is the same company that MU has used for the last year to run the temporary generators. This will help provide for a smooth transition and minimize the risk of surprises that cannot be managed.

The larger challenge for in-valley will be financing. We need to secure the lowest cost long-term financing. The current financing is with short-term bonds that are due in two years. Our short-term interest rate is about 4.2%, and the long-term rate is going to be higher, adding to our cost for power. The most important way to keep costs down is to get a rating for our debt from one of the rating agencies. “Rated” bonds are those that have been analyzed by a rating agency and are considered lower risk than  “unrated” bonds.  In our case, the difference could be as much as 1.5%, or over $330,000 per year in interest expenses. This equates to about 5 cents per kWh at current levels of total electricity use.

The Energy Finance Committee is currently tasked with soliciting Requests For Information (RFI) from a number of different financial institutions to determine what is needed for us to get rated. You can read our RFI at http://kirkwoodenergy.files.wordpress.com/2011/06/kmpud-rfi.pdf. It defines steps we can take to secure affordable long-term financings. These include pledging to collect sufficient revenues to make our bond payments, holding a year’s worth of bond payments with a trustee, and having a “back-up” plan in the event a major customer fails to pay their electricity bills (e.g., if a financial issue with KMR prevents them from operating).

Out-valley progress

The out-valley plans consist of three components: (1) permitting, (2) financing, and (3) affordability. The permitting is very far along, and at the current rate of progress could be completed by November – assuming there are no protests. Historically this is a big “if,” but in our case we have very broad support up and down Highway 88.

We are just starting the financing process with the biggest unknown being whether we can secure long-term financing from the US Government’s Rural Utility Service or RUS. RUS was created to assist isolated, small communities with high electricity rates. If we can get low cost financing through this program, the out-valley connection would be much more affordable.

Affordability is THE major issue. With high, unpredictable diesel prices, the out-valley would provide more affordable long-term power than diesel. The real cost savings occurs as Kirkwood grows, and we support more homes and a larger resort with more chair lifts over the same interconnection line to the California electrical grid. According to Kirkwood Resort’s Master Plan, at full development there will be about 40% more electricity demand than at present.  This will significantly reduce the fixed costs per household of providing power. Until residential, commercial, and/or on-mountain lift operation growth resumes, we will need to carefully consider the costs.

Conclusion

Great progress has been made:

• Over the short-term, since community involvement and energy was initiated earlier this year, resulting in the formation of the Energy Finance Committee.
• Over the medium-term, since the powerhouse was destroyed 18 months ago, and
• Over the long-term, since the community and KMPUD initiated plans for the acquisition of MU back in January 2006.

The powerhouse destruction clearly resulted in higher costs than anyone expected. Electricity and propane operations will soon be transferred to our local public agency, which must provide increasing transparency and efficiency.  This unambiguously places control of electricity and propane operations with our own public agency, which “clears the brush” for moving forward more efficiently.  However, the “big calls” really are in front of us now:  whether we can afford to interconnect (or whether we can afford not to interconnect), and the model for long-term financing of whatever approach we choose.  These efforts are just getting started.

Thank you for your support– we plan to continue to keep you informed regarding efforts for a better Kirkwood.

Best regards,

Bob Epstein & Standish O’Grady

Proposed Electricity and Propane Rates for Kirkwood

March 16, 2011

Dear Member of the Kirkwood Community,

This Saturday at 8:30 AM at the KMPUD Board meeting, the Board will discuss the proposed rates for electricity and propane to take effect after the completion of the acquisition of Mountain Utilities by July 2011. We encourage you to attend.

To assist in understanding the overall approach to setting rates, the Energy Finance Committee’s subcommittee (EFC) on rates released a short paper explaining the issues and how they are addressed. The EFC is composed of representatives from the community, KMR and the KMPUD and is advised by the District’s bond council, Bob Haight and recently appointed bond underwriter First Southwest. You can find a copy of the paper at the District’s web site (www.kmpud.com) or click on our link:

http://kirkwoodenergy.files.wordpress.com/2011/03/approachforelectricitypropanerates1.pdf

In summary, the rates are similar to current Mountain Utility rates – slightly higher for electricity and lower for propane. Most importantly, the rates position us to access the municiple bond markets so we can get short-term financing to complete the In-valley project and when we are ready, long-term financing to complete the Out-valley project.

We strongly recommend you read the document. If you have questions, feel free to email us. More importantly, for any suggestions or responses you want to provide, please either come to the meeting on Saturday or post them as a comment below and we will deliver them at Saturday’s meeting.

We both support the decisions and recommendations of the EFC.

Sincerely, 

Bob Epstein and Standish O’Grady

Kirkwood Community Update – Results from Feb 26th Board Meeting

Dear Members of the Kirkwood Community,

There has been a lot of progress in the last two weeks. We start this letter with a summary of the February 26^th KMPUD Board meeting and then discuss what comes next.

Board Meeting

Over the last two weeks, the newly formed Energy Finance Committee (EFC) consisting of:

• Frank Majors, KMPUD Board and Finance Committee Chair
• Larry Lacey, KMPUD Board
• Tony Tucher, Homeowner
• Allan Sapp, Homeowner
• Bob Ende, Homeowner
• Bob Epstein, Homeowner
• Dave Likins, KMR representative

completed the competitive process for selecting an underwriter for the next bond issue scheduled for April 27^th. (See our previous letter to the community for background.) The EFC was unanimous in recommending First Southwest (FSW) as our underwriter, and in turn the Finance Committee made the formal recommendation to the Board. The Board unanimously voted to appoint First Southwest. The focus will now turn to completing the documentation so FSW can solicit buyers for the bonds and complete a final pricing in early April in anticipation of a close on April 27^th. 

This is significant for three reasons:

1. The Board used a competitive process for selecting the underwriter rather than their original plan of appointing an underwriter without bids.
2. Our financing costs are now lower. The fees charged by FSW are over $100,000 lower, and the Energy Finance Committee expects that FSW will be able to sell the bonds at a lower interest rate.Over the last six weeks, the 2011 financing structure has evolved from 40 year Certificates of Participation with estimated interest rates of 7.25% – 7.5%, presented at the January KMPUD Board meeting (see: funding options), to 3 year Bond Anticipation Notes with estimated tax-exempt interest rates of 3.75 – 4.5% (both based on current market conditions). Comparing mid-points of these ranges saves the Kirkwood community an estimated 3.25% of interest rates, which is about $680,000 of interest costs per year (or 10 cents/kwh) on $21.2 M of bonds.
3. The process allowed both the homeowners and KMR an opportunity to work collaboratively with KMPUD Board and staff to achieve a better result. We expect this new, collaborative process to continue throughout the project.

The Board also approved the contract with Power Secure to complete the new powerhouse and to buy and install the necessary equipment to connect and operate the new powerhouse. KMPUD will purchase the actual generators with funds supplied by the new financing, and Central Sierra Construction will construct the powerhouse.

Electric & Propane Rate and Expenses

The next focus is to examine all past and future costs associated with both In-Valley and Out-Valley programs. Cost will be allocated to one of four categories:

1. In-Valley electricity
2. In-Valley propane
3. Out-Valley electricity
4. KMPUD operating costs

The goals are to minimize all costs, defer expenses that are not critical and to make sure that costs are properly allocated. We expect all costs related to (1) and (2) to be fully covered by the electric and propane rates. We anticipate that costs for (3) and (4) will be covered primarily by existing revenues from property taxes already being collected. When electricity is provided by the Out-Valley project, then costs for (1) and (3) will be covered primarily by the electric rates.

The detailed information will be presented at a public EFC meeting scheduled for Wednesday March 2 at 1PM. Interested parties are encouraged to attend the meeting at the Kirkwood Community Building. After input is collected, there will be public hearing on the proposed electric and propane rates as part of the KMPUD Board meetings.

Summary

We want to recognize the significant progress made on both financial issues related to the In-Valley project and construction of the In-Valley powerhouse. In the next two months, KMPUD will finalize electricity and propane rates and issue bonds. In June or July, KMPUD is expected to take over the electricity and propane businesses from Mountain Utilities. By November, KMPUD will be operating out of the new power house. 

The final public hearings for the Out-Valley permitting will occur this spring. When permits are final, we will be able to request competitive bids for the construction of the Out-Valley project. Once we have bids, we will sell bonds for the Out-Valley construction – probably in 2012. Sometime between Fall 2012 and Fall 2014 we are likely to have power from the grid! Of course, many details remain between now and then. We will keep you informed and encourage your active participation. 

Sincerely,

Bob Epstein and Standish O’Grady

Kirkwood Community Update – Progress on Financing

February 8, 2011

Dear Members of the Kirkwood Community,

We would like to update you on the Kirkwood In-valley energy project. Several significant events have happened in the last few weeks that will be discussed this Saturday, February 12 at the KMPUD Board meeting scheduled for 8:30 A.M. at the KMPUD’s community services building. We encourage you to attend.

Many of you used the blog: kirkwoodenergy.wordpress.com to express your ideas and concerns. We encourage you to continue to do this. All information we collect will be posted there, and we will deliver comments from the blog at Board meetings. To add your comments please scroll to the end of this article.

The current focus is on the process, structure and costs for issuing approximately $21 million of bonds to: rebuild and operate local diesel generation ($7.6 million), refinance existing debt ($7.4 million), acquire Mountain Utilities’ electricity and propane businesses ($2.9 million), and continue progress on the Out-valley interconnection project ($2.8 million).   These are obviously large amounts of money for our community.   Getting it right the first time will be critical to our community for decades to come.

Energy Finance Committee

At the January Board meeting, the KMPUD voted to establish an Energy Finance Committee (EFC) that consists of 5 members from the community and two Board Members. After two preliminary meetings, the first official meeting of the EFC took place today at 2PM. The committee members are:

Frank Majors, KMPUD Board and Chair
Larry Lacey, KMPUD Board
Tony Tucher, Homeowner
Allan Sapp, Homeowner
Bob Ende, Homeowner
Bob Epstein, Homeowner
Dave Likins, KMR representative

All meetings of the EFC are open to the public. A subset of the committee also held conversations with three financial firms interested in supporting KMPUD financing needs for 2011. In addition to meeting with Cantella, the underwriter KMPUD used last year, we talked with First SouthWest and Raymond James. Both submitted letter requesting an opportunity to work with KMPUD. To read their letters, please click on the following:

First SouthWest Board Letter January 26, 2011
Raymond James KMPUD Board Letter January 26, 2011

This is a significant change from the January Board meeting where the Board voted unanimously to proceed with Bob Haight’s recommendation of an exclusive, non-competitive relationship with Cantella as the Bond underwriter. This change in direction has lead to an actual competitive process for bonds issued in 2011. All three firms will be asked to submit proposals in time for Saturday’s meeting.  We do not expect a decision at the meeting but rather we expect the EFC will have an opportunity to review the proposals and offer advice so a final decision can be made quickly. We strongly recommend that the Kirkwood community continue to urge a competitive process. We now know from both firms and from KMPUD bond council that it is possible to have a competitive process and meet the April 27^th Bond offering date.

Financial Plan

At the January Board meeting, KMPUD Bond Counsel, Bob Haight, presented financial options (see project financing alternatives). He concluded that 40-year “Certificates of Participation” (COP) were the best financial structure to use. There was no disagreement with this position. It requires that KMPUD guarantee that it will set rates for electricity and propane revenue such that KMPUD will collect 20% more than required to meet the debt service payments.

At the next Board meeting, Mr. Haight will present an alternative that we strongly favor to long-term COP financing. The alternative is to issue short-term bonds (three years maximum) that would then be replaced at a later date by long-term COP bonds. There are several possible advantages of this approach compared to the plan presented and approved by the Board at the January meeting:

1.     Significantly lower interest rates in the short term.  Interest rate costs are anticipated to be 4.2 – 6.0% under this alternative, compared to 7.4 – 7.5% under the January plan.

2.     Over $2 million less of bond principal issuance due to no Reserve Fund requirements.

3.     The combination of 1. and 2. above results in less than half the average annual interest rate payments; i.e., < $1 million compared to > $2 million.

4.     This approach allows KMPUD more time to develop a stronger offering that could be at a lower long-term cost.

Project Plan and Timeframe

At the January Board meeting KMPUD General Manager Tom Henie committed to provide a detailed project plan for this meeting. We look forward to seeing it this Saturday.

Summary

The EFC is a very positive development and it will provide a good vehicle to insure a competitive and cost effective financing for both In-valley and Out-valley projects. Board Member Frank Majors and Assistant Manager Michael Sharp have done a good job of pulling the EFC together.  The members of the committee are all willing to invest time and energy to help.

We continue to be greatly concerned about financing and management of the project. However, as a community, we have made progress since the last Board meeting.  We expect to be able to resolve these issues and achieve our ultimate goal of affordable, reliable, high-quality power for the Kirkwood Community.

Sincerely,

Bob Epstein and Standish O’Grady

Energy Finance Committee Meeting – Feb 1

As we mentioned in our summary of the January 15th KMPUD Board meeting, the Board voted to proceed with 2011 financing without considering a competitive process. They did vote to create an Energy Finance Committee, including members of the community and KMPUD Board members, to consider competitive bids and other financial matters for the 2012 financing.

Two financial institutions with significant experience in the Municipal finance market submitted letters requesting meetings in February so they can compete to be KMPUD’s financial adviser. Both institutions emphasized that they can provide assistance for the 2011 financing and meet the current schedule.

To read their letters, please click on the following:

First SouthWest Board Letter January 26, 2011
Raymond James KMPUD Board Letter Jan 26, 2011

A public meeting of the Energy Finance Committee will take place Tuesday, February 1, at 2PM.

We will report on the results of the meeting. We would like to avoid the mistakes of not seeking competitive proposals which have characterized the other parts if this project.  If you would like to see the same, please post your comments and reactions to the letters above at the Kirkwood Energy Future blog at kirkwoodenergy.wordpress.com

Thanks for your interest and support,

Bob & Standish

Letter to the Kirkwood Community – Results from the January 15th Meeting

January 18, 2011

Dear Members of the Kirkwood Community,

Thanks to all of 322 of you who signed the community letter to the KMPUD Board of Directors (kirkwoodenergy.wordpress.com). We would like to report on the many positive outcomes of that letter as reflected in last Saturday’s Board meeting. We will also comment on issues that have yet to be adequately addressed.

Many of you used the blog: http://kirkwoodenergy.wordpress.com to express your ideas and concerns. We encourage you to continue to do this. All information we collect will be posted there, and we will deliver comments from the blog at each Board meeting.

In-Valley Power Facility

KMPUD presented a revised plan for the In-Valley power facility that included all of the points we presented in our January 7^th community letter. Highlights include:

1. Construction and the first three years operations will be managed under contract with PowerSecure, Inc. (NASDAQ:  POWR) who will enter into a Service Level Agreement (“SLA”) performance contract with KPMUD.
2. Cost of the facility has been reduced by about $2M from the estimate presented at the last meeting. Estimated price for electricity was presented (see chart) as well as estimated price for propane (see chart). These prices make assumptions about the cost for financing that will need to be adjusted when an actual financial plan is developed.
3. The facility will use a mixture of large Caterpillar and smaller Volvo engines (referred to as the “hybrid” option) that can be tuned to be more fuel-efficient than either alone. The Caterpillars will provide the base-load power during lift operations augmented by the Volvo engines to cover the variable demands. During summer, the Volvo engines will meet the primary demand. During peak demand, most engines will be operating. The design has redundancy enabling it to supply full power in the event of an engine failure.
4. Both types of engines can be sold on the used market once we are connected to the grid – assuming we are convinced that they are no longer necessary for backup. Because they will have relative low usage, they should command good resale values.

Many of you commented that the facility is overbuilt if its primary purpose is for backup to the grid. In addition, the capacity of the powerhouse will be 5.1 megawatts while the maximum demand is under 4 megawatts. (In addition, KMPUD has 1 megawatt of generation currently in place that might be used as backup.) While these are valid criticisms, the final design is one we can support because it comes closer to a minimum cost and the possibility exists to recover money later if we downsize the equipment.

In summary, this portion of the project is substantially improved over what was presented last September.

Financial Plan

A portion of what was requested in the community letter was approved at the Board meeting. Board Member Eric Richert prepared a resolution and the Board approved a combination citizen and Board “energy financial committee” focused on the Out-Valley project and the electric and propane rate structures. The Board refused to force competition on funding the In-Valley project.

KMPUD Bond Counsel, Bob Haight attended the meeting and presented financial options (see project financing alternatives). He concluded that “Certificates of Participation” were the best financial structure to use. There was no disagreement with this position. It requires that KMPUD guarantees that it will set rates for revenues from electricity and propane such that it will raise 20% more than required to meet the debt service payments.

Mr. Haight proposed a series of bond offerings that will cover the cash needed for the next 12 -14 months. He claimed that in order to complete the first portion of an offering by the end of April, he needed to maintain his exclusive relationship with a financial institution called Cantella and any effort to solicit a competitive offering from Raymond James or First Southwest (firms that have written letters to KMPUD asking to bid) would prevent the offering from happening on time. He also claimed that his current structure would ensure a competitive offering.

We strongly disagreed with his claims; however, the Board voted for Mr. Haight to proceed with an offering to close by end of April under his proposed structure.

The rushed timing of the financing is directly due to the lack of planning on the part of KMPUD. The April date is driven by the need to refinance the $5.6 million “anticipation note” that was issued in August 2010 and is due on July 1, 2011. The timing is no surprise. The surprise is the fact that the financing was presented for the first time at this Board meeting with zero options for alternative financial advisors or a competitive bidding process among multiple underwriters to lower our cost of capital. Since this coming financing will be for at least $15 million, it is significant and two substantial bond firms, First Southwest and Raymond James have expressed interest and are now being excluded from any consideration. To read the letters click here for First SouthWest and here for Raymond James.

All KMPUD Board members bear substantial “fiduciary duties.” We believe these “fiduciary duties” can only be fulfilled with a competitive bidding process for underwriting services conducted by a reputable Financial Advisor.    We also believe that the structure and cost for the first $15 million of borrowing will drive the larger “Out-Valley” financing structure and cost, so it is critical to get this first piece right.

On a more positive note, there was general agreement that KMPUD should work towards achieving an investment grade rating so that long-term capital costs will be lower on the Out-Valley bond. In current market conditions, a long-term unrated bond is 7.75% while a BBB- rated bond is 6%.  If we have to use an unrated bond for the “Out-Valley” project it would cost us an extra 8 cents per kilowatt hour over a BBB- rated bond.

The Board approved an energy finance committee consisting of a representative from KMR, three community members, the Board Finance Committee (Larry Lacey and Frank Majors) and the Bond Counsel, Bob Haight.

Expansion of KMPUD Staff

By hiring Power Secure as the manager for the In-Valley construction and operation of the power generation for the first three years, KMPUD has significantly increased the expertise available and contractually accountable to the project. This is a very positive development. The Board declined to make any other decisions about expanding staff – in particular hiring expertise in-house for the power business.

Several citizens made the point during the meeting that existing KMPUD personnel already have full time responsibilities and overloading them with a $50 million project and a new power business was not advisable. While we cannot say this point was totally ignored, the Board did not take any action.

Much of the lack of transparency and competitive bidding on this project is due to the lack of resources with energy specific expertise dedicated to the project. Electrical and propane generation/distribution is a new business for our KMPUD. The debt associated with the project will impact our community for 30 – 40 years. It requires personnel with expertise in these businesses, and we should be bringing this expertise on board now.

Project Plan and Timeframe

In response to the community letter, an oversimplified timeline of the In-Valley and Out-Valley projects was presented (see timeline). KMPUD will take over electricity and propane services on July 1 and the new powerhouse will be operational by November 1.

Assuming a best-case scenario, the Out-Valley construction contract will be issued this Fall and some construction will start in 2011 with a goal of completion by Fall 2012. This is a best-case scenario and while unlikely it is in the best interest of the community to try to achieve it.

KMPUD General Manager Tom Henie committed to provide a detailed project plan by the next meeting.

Summary

This was the best Board meeting ever on the power project. A significant amount of progress was made since the disappointing December and November Board meetings. This positive change of events is due to many factors:

1. KMPUD did a lot of collaborative work with PowerSecure, KMR, and the KMPUD energy consultant Russ Givens. The collaboration resulted in much better communications and a better design.
2. Many members of the community pitched in from the sidelines to help, pressuring KMPUD to take actions.
3. The community, as expressed in the January 7^th letter, voiced intolerance with the current process. This pressure was apparent in the Board meeting and while it created some anxiety and some “strong language,” it did kick things into a higher gear that will benefit everyone.

We continue to be greatly concerned about financing and management of the project. However, as a community, we expect to be able to resolve these issues and achieve our ultimate goal of affordable, reliable, high-quality power for the Kirkwood Community.

Sincerely,

Bob Epstein and Standish O’Grady

Letter to KMPUD Board – January 7, 2011

This letter presents the opinion of the Kirkwood community and represents 308 owners and 217 properties, including 141 owners and 102 new properties that did not sign the October 29, 2010 letter. We ask for a financial plan, a better process to choose the most cost-effective in-valley power, an expansion of the KMPUD staff and a firm time-line for decision making.

This letter was  submitted for Board consideration for the January 15, 2011 regular meeting of the KMPUD Board of Directors. We encourage members of the Kirkwood community to attend the meeting and also to offer their additional comments by clicking on the “post comment” button at the bottom of this blog.

KMPUDLetter-Jan7-Final