Being an owner in ‘grid’ would increase revenues for Willmar Municipal Utilities
WILLMAR — Willmar Municipal Utilities’ electric customers would benefit if the city-owned utility becomes a full owner and not just a market participant in the region’s transmission grid.
Utilities such as Willmar pay a delivery charge for the electricity they buy off the grid. In return, utilities that own assets in the grid receive revenue from payments made by transmission users for shipping that electricity over the grid.
“For every kilowatt that is delivered to Willmar Utilities, we pay a transmission charge based on whatever the pricing is going on out there in the grid,’’ says Willmar Utilities General Manager Wesley Hompe.
He said transmission costs will rise, and he said the best way for Willmar to deal with those extra costs is to become an investor in the transmission system because those costs come back in the form of revenues.
Since 2009, Willmar has received an annual revenue credit allowed by federal energy regulators that allows Willmar to recover some of its transmission-related expenses and receive a return on its transmission assets.
However, the credit does not cover all of Willmar’s transmission expenses.
In 2013, Willmar paid out more in transmission charges — $1.9 million — than it received in revenue — $1.6 million. Analysts say that $300,000 deficit, subsidized by ratepayers, will widen as transmission rates increase an estimated 11.5 percent a year to 2022.
In an effort to reduce or eliminate that widening deficit, the Willmar Municipal Utilities Commission is considering the possibility of becoming a full transmission owner in the grid. The commission will make a decision on that possibility at the Monday noon meeting.
“Our goal is to have our transmission costs equal to our transmission revenue,’’ said Hompe. “We know transmission is going up. All we want is to get involved in it so we don’t have to pay as much.’’
Hompe said if revenue equals costs, it won’t affect local rates. But if costs exceed revenue, then local rates will be affected.
“The utility has to budget for those costs. We still have to pay those costs, and if we don’t invest in there and get some sort of returns, those costs are still there,’’ said Hompe.
Willmar is underinvested
Willmar buys about half of its power from Great River Energy, Minnesota’s second-largest utility.
Willmar has $4.2 million in transmission assets in the GRE pricing zone. That may sound like a lot. But a recently-completed study says Willmar is currently underinvested in transmission compared to its electrical load in the GRE pricing zone.
A recent study by MCR Performance Solutions of Deerfield, Illinois, said that Willmar’s transmission investment is 3.2 percent of the pricing zone. But Willmar’s share of the total load in the pricing zone is 4.2 percent.
“That’s where the $300,000 difference is,’’ says Hompe.
In order to move that deficit toward zero or possibly to the plus side, Willmar would need to invest in more transmission and become an owner in the Midcontinent Independent System Operator (MISO). MISO manages the transmission grid in all or parts of 15 states including Minnesota and the Canadian province of Manitoba.
GRE’s pricing zone lies within MISO. Over the long run, Willmar would like to increase its investment in the GRE pricing zone to at least its 4.2 percent load share.
“The goal is not to make money on the transmission piece but to break even. That’s all municipals want to do is break even or just make enough for the next year’s investments,’’ Hompe said.
‘Grandfathered agreement’ to expire
Willmar’s transmission assets are currently administered by GRE under a long-term power supply contract that was struck many years ago with GRE to supply 30 megawatts of energy to Willmar.
Under this “grandfathered agreement,’’ GRE reimburses Willmar for GRE’s use of some of Willmar’s transmission assets and Willmar receives a payment every year which is paid against the transmission costs that GRE was charging Willmar.
This credit will continue into the future, whether or not Willmar becomes a transmission owner.
Also, the agreement somewhat protected Willmar against high congestion charges in the market place. Those charges are imposed when demand for power exceeds the available facilities for sending that power to customers.
That protection will disappear when the grandfathered agreement expires Jan. 1, 2016. Hompe says Willmar doesn’t have much choice in the matter.
“We’re going to be exposed whether we go as a transmission owner or not,’’ he said. “That exposure will appear on the first day of 2016.’’
In place of most of the 30-megawatt grandfathered agreement, Willmar negotiated a 10-year, 20-megawatt agreement with GRE.
In addition, Willmar diversified its power supply portfolio with contracts signed with other energy sources.
Ownership has benefits
MCR analysts say Willmar will benefit in several ways by being a direct owner in MISO rather than being a market participant through GRE.
If Willmar remained a market participant and wanted to propose any transmission projects to be built in the GRE pricing zone, Willmar would have to go through GRE and GRE would propose it to MISO on Willmar’s behalf. GRE would be like a gatekeeper.
However, if Willmar itself becomes a MISO transmission owner, then Willmar has standing in MISO to propose projects on its own behalf.
“That is a key assumption in the incremental difference between status quo ... and becoming a MISO transmission owner,’’ according to MCR’s Ron Kennedy.
Hompe says being a MISO transmission owner “gives us the opportunity to become more involved so we can invest more into the transmission system, which will then give us more return.’’
Also, being a MISO transmission owner gives Willmar “a seat at the MISO transmission owners’ table,’’ which will allow Willmar to better anticipate and shape issues and opportunities affecting Willmar.
“We’ll have to staff up with somebody who can be an active, useful transmission owner representative. That person will have to know the transmission lingo and defend Willmar’s interests,’’ said Hompe.
“It will be a significant step for Willmar.’’