Connecting Kirkwood to the California Electrical Grid – Decision on Oct 20th

KMPUD received verbal notification approving our loan applicationfrom the U.S. Department of Agriculture’s Rural Utilities Service (RUS)!

The loan provides long term financing for the current powerhouse and electrical assets including the Mountain Utilities acquisition and gives KMPUD the option of drawing funds to construct the Out-Valley project. Based on current trends in U.S. Treasury bonds, the interest on RUS loans drawn down in 2013 should be below 3.5%.

This is extremely good news.

The RUS financing makes the Out-Valley project a possiblity. After many years of research, design, negotiation and effort, the Kirkwood Meadows Public Utility District (“KMPUD”) will decide on October 20th whether or not to proceed with the Out-Valley project and connect our community to the California electric grid.

Your input on the Out-Valley project is needed at the community meetings to be held on:

• 8:00 AM Saturday, September 29 (Community input)
• 8:00 AM Saturday, October 6 (Community input)
• 8:00 AM Saturday, October 20 (Board discussion and decision)

If you cannot attend one of the community meetings, you can voice your opinion and questions either by sending written comments to the District or by posting to this blog (see below) and we will print your comments and deliver them to the meeting.

We urge everyone to weigh in.

Background

The KMPUD Finance Committee and Board prepared a set of background information papers that can be found on the KMPUD home page (www.kmpud.com):

Considerations on Proceeding w/ Out-Valley Project  – A summary of the issues

KMPUD Scenario Analysis In-Valley & Out-Valley Projects  – Charts showing various scenarios

Electrical Usage Data – Historic electricity usage data and projected future usage

Community Outreach FAQ Sheet – Commonly asked questions that will be discussed at meetings

Community Outreach Workshop Comment Sheet – A form for you to submit written comments

The analysis, “Considerations on Proceeding w/ Out-Valley Project” compares “In-Valley” versus “Out-Valley;” i.e., the current diesel generator facilities versus a grid connection with diesel generators as a stand-by, backup-up capability. The following items are considered:

1. Electricity rates through 2020
2. Volatility of electricity rates
3. Reliability
4. Debt Service
5. Project Management of Out-Valley
6. Environmental considerations including renewable power requirements

We encourage you to read the full analysis.

We have included below, the comparison between In-Valley and Out-Valley taken from the full analysis. It shows that Out-Valley in 2015, the first full year of operations, is likely to be intially less expensive than our current diesel power. By 2020, it will be significantly less expense:

Per kWh, except total debt	In-Valley Only	Out-Valley
Electricity rates in 2015	$0.62	$0.60
Electricity rates in 2020	$0.61	$0.51
2015 Fuel/procurement cost	$0.28	$0.08
2015 Debt service & Overhead	$0.34	$0.52
Total debt	$16,500,000	$50,000,000
Note: 2015 rates assuming 8.0 million kWh sold, $4.15/gallon for diesel in 2015 (assuming a 3% annual rise in diesel costs), a 3.0% interest rate and Out-Valley completed at a cost of $34.5 million.

 

The situation that cannot be predicted is the future cost of diesel. While grid power has a long history of predictable prices with fluctuations that can be managed through long-term contracts, diesel prices will continue to be volatile. While we would all enjoy price declines if the global price of crude oil dropped significantly, steep price increases could economically damage our valley and the viability of the ski resort. We personally think that getting off of diesel has compelling economic and environmental benefits. Those benefits – as well as others – are outlined in the analysis:

1. Multi-year wholesale power contracts mean more predictable prices
2. Off-peak consumption will give us some contract price advantages
3. Lower cost renewable energy sources
4. Greater reliability with two power sources
5. Accommodate growth without additional capital investments
6. Environmental benefits
7. Avoid linkage to volatile oil prices

The disadvantages of completing Out-Valley are:

1. Favorable diesel prices could result in lower rates
2. Significantly more debt required

Using reasonable assumptions, the Finance Committee found that the Out-Valley project is in most cases economically superior to our current diesel-electric system. In all cases, it is environmentally better.

Next Steps

We are at a unique point in time at Kirkwood for this project:

1. We have an approved environmental document for building the project
2. We have access to debt at exceptionally low interest rates (not seen since the War of 1812)
3. Construction costs and materials are low due to the global economic conditions
4. The analysis shows that Out-Valley is less expensive than In-Valley power under the majority of scenarios, and there is no case where it is materially more expensive.
5. With the ski resort under new management with significant financial resources, we can reasonably expect growth in the resort and in skier visits to Kirkwood.

It is our opinion as long-time residents of Kirkwood that the District should proceed with Out-Valley assuming construction bids are in line with the estimates,  the District has the proper structures in place to manage the contracts and supervise the project, and the project has broad support within the community. That is where you come in.

Please offer your opinion through this blog (see below) or through KMPUD – Community Outreach Workshop Comment Sheet. The Board will make a decision on October 20th and if the vote is to proceed, they will solicit bids for construction in 2013 – 2014 with a goal of grid power beginning in November 2014.

Thank you Leo

Leo Smith resigned from the KMPUD Board last month. We want to use this occasion to thank Leo for his many years of dedicated service to our community. He is a great friend to Kirkwood, and we will miss his presence on the Board.

Best regards,

Bob Epstein & Standish O’Grady

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Financing our Future

As we discussed in our last letter of March 2012, the Kirkwood Meadows Public Utility District (KMPUD) collaborating with our community has made significant progress with our electrical and propane systems. These accomplishments include:

1. Raising $22.1million in temporary financing
2. Purchasing the Mountain Utility assets (propane and electricity)
3. Upgrading the utility meters and starting in on deferred maintenance
4. Transitioning to a new General Manager
5. Receiving government agency certification for finalized environmental documents allowing us to connect to the California electricity grid
6. Going live with the new powerhouse
7. Implementing a new, integrated billing and customer care system

But we have not yet paid for any of the improvements!

This $22.1 million interest-only temporary financing is due 10 months from now on May 1, 2013. Our purpose in communicating today is to discuss our options for permanent financing and the impact on utility rates.

Permanent financing is logically divided into three components:

1. Propane assets, employee housing and vehicle loans
2. Current electric assets
3. Possible out-valley project to connect us to the California electricity grid

Fortunately there are two very attractive options available and a less desirable but affordable backup plan. The lowest energy rates will come from a combination of RUS and CFC financing. A municipal bond and a stand-by tax assessment should be our backup plan.

Electricity and Propane Rate

Before we can seek approval for any long-term financing, KMPUD and the Board needed to demonstrate the ability to set electricity and propane rates sufficient to make debt payments including both principal and interest, depreciate capital assets and generate sufficient margins to build equity and have some fiscal resilience to handle contingencies. In fact, during the 13 months since we completed the current loan (technically it is called a Bond Anticipation Note or BAN), we have not been required to pay principal nor account for depreciation.

At the June 9th Board meeting, the Board approved a rate increase (overall including current fuel adjustment costs) of 5.8% for propane to $0.0892/cubic foot and 5.8% for electricity to $0.5108/kWh. The increases cover the costs of:

1. Depreciation of assets acquired from Mountain Utilities, the new powerhouse and new electricity and propane meters
2. Additional interest expense related to the powerhouse completion
3. Margins required by our potential lenders
4. Costs related to the loans

You can find the complete analysis on pages 76 to 102 of the June Board Packet, or for your convenience, we have extracted those pages at  kirkwoodenergy.files.wordpress.com/2012/06/ratediscussionfromjuneboard.pdf.

Lenders

As we have discussed in previous community letters, KMPUD’s first choice for lender for the electricity operations (permanent financing for electric assets and possible out-valley project) is the United States Department of Agriculture’s Rural Utility Service (RUS). RUS has a charter to lend to small rural communities with very high electricity prices (sounds just like Kirkwood!). RUS lends money at an interest rate of the 30-year U.S. Treasury note plus 1/8^th percentage point. This is currently below 3.5%. KMPUD submitted our loan application in early April, and we anticipate a decision before September 30th. While KMPUD is under no obligation to use the full amount, our loan request includes money to pay off our current loan as well as sufficient funds to build the out-valley project.

Our first choice for lender for propane and other debt (RUS is only allowed to lend for electric operations) is a non-profit bank called National Rural Utilities Cooperative Finance Corporation (CFC). CFC specializes in lending to RUS customers. KMPUD has submitted a loan application to cover the debt related to propane and non-electric services, and we estimate the interest rate will be about 5%. KMPUD expects CFC to complete their decision process in July.

If both RUS and CFC approve our loans, we should secure our long-term financing at very attractive rates with lenders who specialize in rural utilities like Kirkwood. However, while we would all like the lowest cost financing and every indication is that RUS and CFC will finance our projects, we must have a backup plan.

Backup Financing

A municipal bond is the common way a public agency finances debt. The problem is cost. Interest rates on municipal bonds will be significantly higher than RUS – resulting in higher utility bills for all of us. In addition, the higher interest rates will make the out-valley project unaffordable.

The interest rate for a bond is dependent on the bond’s rating. The highest rating we can achieve is if the bond payment is secured first by a pledge of revenues and second by property assessment. The rates will be set to fully cover the debt service from the bonds. Under normal circumstances, the only reason the revenues would fall short is if significant customers (e.g., the ski resort) failed to pay their bills over an extended period of time. We would argue that this had some small chance of happening with KMR as the owner of Kirkwood but given the financial health of the new owner – Vail, the chance of non-payment is extremely remote. Note also that the District has the ability to stop service due to non-payment.

Again, a backup pledge of property taxes is only assessed if cash from operations fails to materialize after an extended period of time. Otherwise, the tax would never be assessed.

This gives us a choice as a community. We can have higher utility rates and no property assessment, or lower utility rates and the potential for a property assessment. It is also true that if the District did not have the ability to make a property assessment, they would instead collect the same amount through higher utility rates.

A property tax assessment cannot be done without approval in a special election. It takes 4 – 6 months to conduct a special election.  If RUS financing is not forthcoming by September, we believe the District must pursue a special election to decide the backup plan.  To meet a time schedule of repaying the existing debt by May 2013, that special election will most likely happen this winter.

Summary

The lowest energy rates will come from a combination of RUS and CFC financing. A municipal bond and a stand-by tax assessment are only a backup plan. We need to start discussing them as a community and make an informed decision. We have no doubt that a stand-by tax assessment will save us all money.

Your New Utility Bills

Your May utility bill marked the first time that all community services were on the same bill. Our new system also does what you expect these days – on-line access, paperless billing and automatic bill payment along with payment by credit card.

You can save the District, and yourself money by (1) signing up for electronic bill delivery and avoid getting a paper statement, and (2) signing up to pay electronically and avoid the writing and processing of a check. Check for details in your June billing statement.

We hope to see many of you at the July 7^th annual Kirkwood Wine, Beer & BBQ event to benefit our volunteer fire department.

Bob Epstein & Standish O’Grady

Kirkwood Community Update – New Powerhouse & Future Financing

	The new engines started powering Kirkwood on Monday evening, March 26th

On Monday night KMPUD completed a major milestone – the new powerhouse went live and the temporary generators that have been providing power at Kirkwood since the fire on Jan 1, 2010 are now a thing of the past.

We should take a minute to reflect on the accomplishments of KMPUD and the community over the last two years:

• Raised $22M in a successful bond offering
• Purchased Mountain Utilities from Kirkwood Meadows Resort
• Upgraded electric meters so estimated billing will no longer be necessary in winter (completed just in time for the driest winter in 20+ years!), and verified that all meters are properly measuring all customers
• Transitioned to a new KMPUD General Manager
• Finalized the EIR/EIS document that will enable Kirkwood to connect to the grid if we decide it is in our best interest

Most importantly to us, we have transitioned to active community involvement with regular participation. Last year, the committee structure of the KMPUD Board was redesigned to enable regular community involvement and contribution to decision-making and strategy. This year the Board decided to move regular Board meetings from Thursday evenings to Saturday morning to allow more community participation.

	State of the art emission control systems will be clearer and quieter.

We can all be proud of these accomplishments. Looking forward, we would like to comment on three critical next steps that will take place in 2012/2013:

1. Complete long-term financing
2. Decide whether to build the Out-Valley project or commit to long-term, local diesel generation
3. Begin to reduce long-term electricity rates

These topics are regularly discussed at the KMPUD Board meetings. The next meeting is coming up this Saturday at 4PM, March 31^st. You are invited to attend – either in person (winter is back and skiing this coming week should be excellent) or via the web.

Complete Long-term Financing

KMPUD is currently operating with $22.1M in debt financed through an interest-only loan due in May of 2013. The funds were used to (1) purchase Mountain Utilities, (2) build a replacement powerhouse, (3) fund the Out-Valley project design and environmental work, and (4) retire prior debt.

There are two approaches for long-term financing. The first, and most desirable is financing through the Federal Government “Rural Utility Service” (RUS). Communities like Kirkwood with less than 20,000 people and very high electricity costs are eligible to apply for RUS financing. The two main benefits of RUS loans are (1) very low interest rates – currently under 3% and (2) ability to pay-down the loan early with no penalties.

The second alternative would be a Municipal Bond (Muni) financing. It is likely that interest rates for a Municipal Bond would range between 6% and 7.5%. To achieve the lower end of the Muni interest rates, KMPUD would probably need to provide some form of “back-up security” tied to property taxes so even a 6% rate would be complicated and difficult to obtain.

At the March 31^st KMPUD Board meeting, the Board will consider and presumably approve resolutions allowing the RUS application to proceed. It is reasonable to expect a decision from RUS by September 30^th. If approval is not forthcoming, then a Muni financing is the back-up strategy.

Decide on Out-Valley

With the publishing of the final, approved EIR/EIS, the District has the approval to build the Out-Valley project. The estimated cost of the project is $34.5M and it will likely require two summers to complete the construction. If the construction starts in spring of 2013, the system would be operational in November of 2014.

A ten-year forecast will be presented at the Board meeting. This will be the first opportunity to see how a combination of the Out-Valley project, low cost RUS financing and expected growth in electricity usage will affect long term rates.

Begin Reducing Electricity Rates

The four biggest factors under our control affecting electricity rates are:

1. Reduce operating expense. Every $68,000 in annual operating expense adds 1 cent to the rates.
2. Reduce capital expenditures. Every $1,000,000 in capital expenditure adds 1 cent to rates, assuming RUS interest rates of 3%; or 2 cents assuming muni rates.
3. Secure RUS financing. RUS refinancing of the existing $22.1M debt is likely to be 30 cents/KWH less expensive than an equivalent Muni financing. Note that RUS financing of $55 million in debt for both In-Valley and Out-Valley projects results in similar rates as Muni refinancing of $23 million In-Valley debt (assuming the District receives a BBB credit rating).
4. Proceed with Out–Valley. Out-Valley with RUS financing reduces the variable cost of providing a KWH by 24 cents but adds debt financing costs. Each year financing costs can be reduced by using any surplus cash generated from rates to pay down principal beyond the minimum required. Of course a reduction in diesel prices would make this comparison less attractive. Out-Valley provides a stable, declining price of power that is initially comparable (i.e., 2013/2014) to In-Valley costs.

The following factors outside of KMPUD control will have the biggest impacts on rates:

1. Interest rates. RUS rates have ranged from 2.50% to 2.65% over the past 60 days. Each 0.1% increase in interest rates (10 basis points) adds about 1 cent to the rates. The District will have the ability to fix interest rates on the RUS debt for up to 35 years at the time of each capital draw.
2. KWH sold. KMPUD’s fundamental problem is a very large fixed cost that must be spread over a very small base. Electric demand will only increase with increased real estate development, more skiers or more lifts. A 10% increase in demand reduces rates by 6 cents. Correspondingly, a 5% decrease in demand increases rates by 3 cents.
3. Diesel prices. Should the Out-Valley interconnection project not move forward, diesel price fluctuations will have a major impact on the price of electricity in the future. For In-Valley generated power, a $1.00 per gallon increase in diesel costs roughly translates into an 8 cent per KWH increase in electric costs.

Summary

We believe the combination of RUS financing, the Out-Valley connection to the grid, and modest growth in demand in electricity through the expansion of the Kirkwood ski business will provide all of us with the lowest cost and cleanest power. We are basing our conclusions on the modeling that will be presented at the March 31^st Board meeting.

After the March 31^st Board meeting, we will provide an analysis of the data presented at the meeting in a subsequent letter to the community.

With the new powerhouse running, winter coming back, and Vail coming in, things are looking up!

Thanks for your interest and involvement.

Bob Epstein & Standish O’Grady

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 https://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:

https://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