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Council inks Empire deal

Wednesday, April 27, 2011

An ordinance finalizing months of negotiations with Empire District Electric Company for the purchase of wholesale electricity by the City of Monett reached the Monett City Council this week. The city's 20-year contract expired in April 2009 and interim rates have been in place since August 2010.

"It's been a long time in coming," Utilities Superintendent Pete Rauch told council members. "It's good for Empire, and it's good for us."

The interim rates charged a higher amount than the old rate. The city passed along the difference to its customers. In November, Rauch said it appeared the final cost would be less than originally proposed by Empire. After Dec. 1, 2010, the city absorbed that increased amount. Empire will reimburse the city for the difference between the interim rate and the new rate. Customers will get a credit for the increase during four months of payments they made.

"When the old contract expired, the rules had changed on how Empire and the entire electric industry did business," Rauch told The Times. "We had to reformulate the rates."

During the 1990s, the electric industry had been unbundled. Companies were now breaking out and billing the separate component of their operation, such as the cost of power generation, transmission, distribution, natural gas and substation expenses.

As a full service customer, Monett got one bill each month. When the new interim rates began on Aug. 1, 2010, the city began receiving separate bills for electricity and for transmission costs which average an additional $94,000 per month.

The interim rate dropped the energy charge from 2.9 cents per kilowatt hour to .023 cents per kilowatt hour. The demand charge jumped from $7.50 per kilowatt hour in May to $13.11 per kilowatt in August. In addition, the fuel charge which varies month to month became the largest single component of the bill. The total cost jumped from 5.6 cents per kilowatt hour in July to 6.55 cents per kilowatt hour in August.

"All this happened when we hit the hottest month of the year, when we had the highest demand in a month that we've ever had. For nine days temperatures were over 100 degrees and the average temperature was 95 degrees," Rauch said. "Our bill from Empire was almost $1.7 million. We billed out a little over $2 million. Our phones rang continuously."

The previous contract was figured much the way Empire had done business for the previous 50 years. A contract was presented to the Monett City Council in 1989 and accepted. Now Empire had to determine the cost of each of its operations.

"Empire made a proposal," Rauch continued. "We went to the Missouri Public Utility Alliance, a statewide organization we belong to, and asked them to review it and intervene on our behalf with the Federal Energy Regulatory Commission (FERC). They have attorneys and consultants to advise them."

Unlike retail electric rates, which are­ determined by the Missouri Public Service Commission, Monett's wholesale electric rates come under the supervision of FERC. The Missouri Public Utility Alliance hired the engineering firm of Reising and Reising to review the proposal piece by piece and the law firm of Spiegel and McDiarmid to negotiate a counter-proposal with FERC in Washington, D.C.

Rauch said FERC has its own rules on costs and would inject its own standards where necessary or determine a fair rate where the two sides disagreed. Talks worked around issues such as a fair depreciation rate, capital costs and all other costs of doing business.

"These issues were incredibly complex," Rauch said. "We could not have done this on our own. We were very well represented by the Alliance."

Monett is one of three Missouri cities who buy electricity wholesale from Empire in Missouri, the others being Mt. Vernon and Lockwood. The three cities negotiated for a new rate together. The cost of engineering and legal fees has been shared by all three cities based on the volume of electricity used. Monett paid 73.5 percent of the bill.

What emerged from the negotiations was a formula based on the cost of generating electricity. The formula will stay the same for the 10-year duration of the contract, running from Aug. 1, 2010, to July 31, 2020.

From year to year the various costs such as capital improvements, fuel, operations and maintenance applied to the formula will change. In the coming year, Rauch said half the cost of Empire's IATAN 2 coal-powered plant near Kansas City and the coal-fired Plum Point Energy Station in Osceloa, Ark., will be added. The other half of Monett's cost for the two plants will be added in the following year.

"For the first couple of years, our rates will go up," Rauch said.

New rates, which will go to engineer Paul Reising for review, will be released annually on May 15. If the two sides do not agree on a fair rate, FERC will intervene. Rauch was hopeful the parties could negotiate a fair rate on their own.

"We talked early on about the number of years in the contract," Rauch said. "Ten seemed to be the number everyone was really comfortable with. We could have negotiated with other suppliers on a short-term contract for lower rates, but that's risky. In two years, who knows what will happen to natural gas prices, which are completely deregulated, and natural gas is a major fuel used in generating electricity.

"For a town like Monett, our industrial customers need to have a stable base. I think a 10-year term will serve Monett well," Rauch said.

Other changes will come to the electricity industry in that time. Rauch indicated Monett will eventually become a customer of the Southwest Power Pool for transmission costs. Presently, payment for transmission service goes to Empire.

Legislation could also further deregulate electricity sales. In that case, Empire could negotiate directly with Monett's largest industrial customers. Rauch hoped that would not happen.

"I think we're all smarter now than we were a year ago," Rauch said. "I'm pleased that we were able to arrive at terms acceptable to the cities and to Empire and that we will continue to be an Empire customer. I think we both did well."

The Monett City Council will accept public comment on the rate plan at its meeting on May 20. Passage is also expected at the meeting, so that the pay formula will be in place for the new rates on June 1.

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