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