September 21, 2006

MoPEP Rep Offers Little Immediate Relief For High Electricity Rates

Hoping to find ways to lower their electric bills, residents that joined the Memphis City Council on September 13 to listen to representatives of the municipalitys power supplier, found little immediate relief in the report.

Duncan Kincheloe, CEO of the Missouri Public Energy Pool (MoPEP) a consortium of 31 municipal electric providers, met with the board of aldermen to discuss the citys electric rates.

The MoPEP representative offered explanations for the recent cost spike for wholesale power.

Really the last big production unit to go in was the Calloway nuclear plant back in the 1980s, he stated. We have been enjoying a surplus market of electricity the past two decades in what was a buyers market. Now the demand has caught up with the supply and we are seeing large increases in the price of power.

Since 2001 when the city established its current rate schedule for electricity, Memphis has experienced a 71-percent increase in the wholesale cost of power. According to an independent report from the citys engineering firm of Barnes, Henry, Meisenheimer & Gende, Inc., the city went from paying $700,000 to buy power to $1.2 million in 2006.

The report noted that during that time the city had reduced its operating budget by more than $85,000 helping to maintain the targeted operating margin while keeping rates as low as possible to pay the rising wholesale costs.

Kincheloe pointed to the government deregulation of the utility industry that coincides with this market upswing. He noted that industry consolidation has also decreased the number of wholesale power providers, meaning fewer options for shopping for lower rates.

MoPEP rates gradually moved upward in 2003 and 2004. By August of 2005 the MoPEP all-in costs had jumped from under $40 per MW to just under $60 for the same quantity. By the end of 2005 that figure had fallen back to roughly $45 per MW before 2006 brought further woes for customers.

From January to February of 2006 the rate leapt from approximately $45 per MW back to $60 per MW. It didnt stop there. By April that figure had gone beyond $70 per MW before falling back to the $60 range.

There were a number of contributing factors that led to that unfortunate price spike, Kincheloe explained. There were a large number of wholesale contracts expiring at that time, meaning there was additional competition to buy power on the open market. At the same time, one of our main suppliers, Sikeston, was down for regular maintenance, and it stayed out of service longer than expected. So we had to buy power on the spot market at a time when prices were very high. The combination really hit us hard.

Kincheloe explained however that this industry trend was not totally unexpected. He assured those at the meeting that MoPEP was taking steps to remedy the problems and added that the group was at the forefront of movements to provide more stable supplies of electricity that should insure customers rates at times when other providers likely will be experiencing further price hikes.

Costs are rising precipitously for virtually all electric utilities, he stated MoPEP has absorbed the worst of these cost impacts already and we believe costs will now be more stable and a long range strategy that we began implementing several years ago should result in moderate cost reductions beginning in about three years. I realize that relief in the long term does not offer much satisfaction in dealing with the immediate impacts that all customers are feeling. We are working to find every additional cost containment measure possible in the nearer term. Despite these severe challenges, non-MoPEP cities with expiring supply contracts are continuing to find MoPEP as their least-cost alternative.

The biggest cost-containment strategy for MoPEP has been involvement in the creation of new power sources. The consortium has stakes in four power plants being built across the Midwest. Kincheloe stated MoPEP will buy 55 MW of the estimated 446 MW total power purchase from the Nebraska City 2 coal power plant that is scheduled to come online in 2009. A joint venture with the cities of Independence and Columbia will provide MoPEP with 30 more MW from the Iatan 2 power plant that is set to begin producing in 2010 the same year the Plum Point power plant in northeast Arkansas will start producing 50 MW annually for MoPEP. The Peabody Energy Prairie State plant is scheduled to be operational in 2011 or 2012 and will supply MoPEP with 82 MW annually.

By 2012, 85 percent of MoPEPs energy is expected to come from owned generation or long-term contracts, Kincheloe stated.

He noted that MoPEP is at the forefront of the movement to add supply sources and suggested that other power suppliers will have to take similar steps in the not-to-distant future which will likely mean higher rates for their customers at times when MoPEPs rates are stabilizing.

Kincheloe noted that the plants were being funded by the sale of bonds, which defers all costs of the projects until after the plants come online. At that time the bonds will pay interest to the investors.

The long-term projections based on these new power supplies has MoPEP anticipating its wholesale power costs dropping into the four cent range per KWH from the current 6.5 cent rate. At the same time, MoPEPs projections point to wholesale market prices continuing to increase possibly as high as double what the MoPEP rates are projected at as early as 2020.

Unfortunately the MoPEP projections call for continued increases in wholesale prices in 2007 and 2008 before the first power plant comes online in 2009 and offers some relief.

The city council is working to schedule an informational meeting with representatives from Tri-County Electric Cooperative in the near future.

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