Presentation by Board Member Eric Richert

KMPUD Board Member Eric Richert presented this analysis of three alternatives together with estimates for the cost of electricity. The three are (1) original KMPUD in-valley proposal from September, 2010, (2) a revised alternative that significantly reduces in-valley costs, and (3) an estimate of power costs from a grid connection.

Board Presentation 120910

Bodington Study of Energy Alternatives – September 2010

The District hired Jeff Bodington to study energy alternatives are report to the Board at the September 2010 Board meeting:

Bodington Study of Energy Alternatives 9-24-10

Observations About Long Term Electric Power in Kirkwood

To: Tom Henie
From: Bob Epstein, Homeowner
Date: September 1, 2010

Additional Observations About Long Term Electric Power in Kirkwood

One year ago I wrote a memo discussing the long-term trade-offs between local electricity generation and connecting to the grid. One year later, we are close to having all the data to make an informed decision. We also no longer have a local powerhouse to purchase. I believe this complicates the situation and may force the evaluation of a third option:

1.     Full local power

2.     Full grid and full local power as backup

3.     Full grid with minimum stand-by local power

I believe this third option is a result of the January fire, the very high replacement cost and the fact that there is a limit to our borrowing capability. I believe the starting point is to define the financial objectives for the power project.

Financial Objectives

There are three financial objectives that could be the priority for decision making (assuming various project options are feasible and provide the necessary reliability).

1.     Short-term price of power (i.e. 2012)

2.     Long-term price of power (i.e. 2020)

3.     But do not exceed our borrowing capacity.

I believe we should have targets for all three that are used to guide our decisions. The targets should also include some sense of the risks of achieving the pricing. In the case of local power, we are currently dependent on the price of diesel that in turn is dependent on the price of crude oil. Oil is currently $72/barrel although a few years ago it was over $140. The U.S. EIA forecast is $190/barrel in 2030. For crud oil, there is no organization that has a track record of predicting future prices and historically there have been huge fluctuations. The official source in the U.S. is the EIA and their official forecast can be found at www.eia.doe.gov/oiaf/aeo/

By contrast, electricity is regulated and is based on an increasingly diversified mixture of fuel inputs. As a result it is less subject to large fluctuations – assuming no market manipulations such as the 2001 energy crisis. Over the last 30 years, the California grid has historically seen an annual price increase (without inflation) of 1.6% per year.

I have tried to estimate the relationship between current MU power prices and the price of diesel. Using the “DFBAs adder” formula in the most recent MU filings with the CPUC, I come up with the following estimates that are based on a home in winter using 500 KWH/month and electric generators that produce 13.7 KWH/gallon:

Price of crude	Estimated price of diesel	Estimated price of MU power
$70/barrel	$2.64	$.49
$150/barrel	$4.50	$.70
$190/barrel	$5.42	$.81

There is a price of power at which the Kirkwood resort will have trouble competing with other resorts that are paying rates from the grid. I believe this is another factor that should be considered since an uncompetitive ski resort will both make it hard to cover the debt for the power improvements as well as depress market values for the homes in the Kirkwood community.

These numbers lead me to the conclusion that we should target power prices at or below $.60/kwh maximum for the short term. My most recent bill from MU worked out to be $.53/kwh. We should target a price in 2020 (without inflation) that does not increase by more than 2% per year or $.70 in 2020. To achieve this with diesel-electric, we are betting on crude oil prices that stay at $70/barrel and very gradually increase but not exceeding $150/barrel between now and 2020.

By contrast, a grid connection is by definition a competitive price but we need to add to that the debt payments. Once the debt is paid off, Kirkwood prices should be no different than Truckee or any other municipal utility.

Borrowing Capacity

The lowest risk to meeting the financial price objectives is to connect to the grid and to minimize debt.  The sum of the costs of purchasing grid power, operating the facilities and making debt payments should not exceed the price targets. This is one limit on the amount of debt we can absorb.

The second limit is how much we can actually borrow. I am not familiar with municipal debt markets but assuming they are similar to other debt markets, there will be a point at which the debt rating deteriorates because KMPUD is over extended and the interest rates become unaffordable. We should understand where that limit is.

The Lack of an Operating Powerhouse add significant costs

Prior to the fire, I assume the focus would have been financing the grid connection and making minimum investments in the current facility. Once the grid is operational, the local facilities are only for emergencies. As the current power situation demonstrates, in an emergency, the rented equipment is adequate to overcome a “significant event”.

Spending significant funds on a replacement powerhouse apparently adds a lot of debt. The money invested in a local facility becomes a “stranded cost” once we connect to the grid. It is not an efficient use of capital. The cost of the local power house combined with the costs of connecting to the grid, could create a situation where the total debt service causes us to exceed our electricity price targets. That leaves the two choices mentioned in the beginning: (1) use only local power and be totally dependent on future oil prices or (2) connect to the grid but do not build anything beyond a minimal local facility.

Use of Property Tax Revenues

I am not familiar with how we use property tax revenues currently but I would encourage the Board to consider using some property tax revenues annually to pay down debt and as a consequence help keep electric rates lower.

Summary

I suggest the board establish “not to exceed” price targets for 2012 and 2020 and use those targets to guide decisions when all the cost data is available. Consideration should also be given to minimizing risk of a total dependence on the price of oil. Lastly, we should be careful not to overbuild local facilities whose eventual function is only for emergencies. There is a possibility that the debt associated with the local facilities may be so large as to preclude financing for the grid connection. In addition, it is an inefficient use of capital to invest in the local system as if it is the primary facility but in fact use it as a backup. Lastly, we should consider using property taxes as a way to partially finance the debt.

Bob Epstein
142 Glove Rock Road
Kirkwood
bob@bobepstein.to