WILLMAR -- The Willmar City Council has approved the Municipal Utilities Commission's request for a two-tier electric rate adjustment totaling 14 percent over the next 18 months.
A 7 percent increase went into effect Wednesday for the remainder of 2011 and another 7 percent increase will go into effect Jan. 1 for all of 2012.
The increases were approved by the utilities commission on June 13 but needed final approval from the council. The council voted 8-0 to approve the increases.
Without the increases, the city-owned utility in 2011 was facing a $1,070,200 loss in retained earnings -- equivalent to profit in a private-sector business -- and an estimated loss of $2.3 million in 2012, said Utility General Manager Bruce Gomm. He said the increases were due mainly to escalating transmission and power supply costs.
Even with the increases, the utility projects a loss of $393,513 in 2011 but an estimated gain in 2012 of $4,195 in retained earnings, said Gomm during a public hearing.
He said the increases should have been more like 8 percent and 7 percent to provide a conventional rate of return and keep the utility financially healthy. But the planning committee and utilities commission determined they were most comfortable imposing 7 and 7 and leaving the utility to "make it work.''
The average residential customer uses from 500 to 1,000 kilowatt-hours of electricity per month, said Gomm.
Under the July 2011 increase, the cost for 500 kilowatt-hours will increase from $48.90 to $52.35 per month. The cost of 1,000 kilowatt-hours will increase from $88.80 to $95.05 per month.
On Jan. 1, 2012, the rate for 500 kilowatt-hours will increase to $56.05 per month and 1,000 kilowatt-hours will increase to $101.75 per month.
Electric rates were last increased in 2009.
Gomm said the utility is doing all it can to cut and control costs, but said the increases just barely keep the utility at neutral. He acknowledged the times are economically challenging and said the utility looked at the minimum needed to keep the lights on.
"This is the best we can do, basically,'' he said. "If we do any more cuts, I'm concerned about the reliability of the utility. We're going to start jeopardizing the reliability of the utility.''
Jeff Nuytten, vice president of operations at Jennie-O Turkey Store in Willmar, said the company's biggest concern is the size of the increases. He said the combined 14 percent increase will add about $600,000 a year to the company's annual electric bill, which is $4.5 million to $5 million.
He requested the utility look for ways to control costs and he asked whether the increase could be covered with the energy acquisition charge.
Regulators allow utilities to impose an energy acquisition charge -- a surcharge added during a particular billing period to cover unforeseen power supply expenses.
"When these costs go up, it gives us an indication that the rates will go up in the future,'' he said. "I understand the utility has not implemented the energy acquisition charge and should be potentially looked at that could alleviate some major increases like these in the future.''
Denis Anderson said the council has asked the utility to try not to bring big increases to the council, such as the two-year, 20 percent water rate increase the utility requested and the council approved in January. He asked if the energy acquisition charge would have minimized the electric rate increases.
Gomm said the charge only picks up a portion of those costs. Gomm said transmission costs increased more than $1 million in 2010 as a result of the market structure of the Midwest Independent System Operator, which controls pricing for Willmar and the region's other utilities.
He said increasing costs are a fact of life in the energy industry. Up until now, Willmar had minimized market prices through contracts with major supplier Great River Energy. But he said a $1 million increase in a $25 million budget "is more than we can absorb, and energy prices as a whole continue to increase. Those contracts have been going up an average of 3 to 4 percent a year.''
Council member Steve Ahmann asked what else is causing rate increases.
Gomm cited factors including the state's renewable energy mandate that adds costs, increased regulation and pollution requirements for coal plants, and construction costs for the region's new power lines.
He said energy conservation is the cheapest form of generation. He said the utility is scrutinizing all contracts and is using vehicles beyond the 10-year replacement schedule. Also, employees have not had a wage increase since the beginning of 2009, but he said zero percent raises can't continue because of competition for skilled workers.
"Quite honestly, of all the places I have worked in my career, the employees here are the most frugal I've ever met,'' Gomm said. "I want to assure everyone I think we're doing a good job.''
Council member Rick Fagerlie said the city could drop the utility's annual payment in lieu of taxes, which was nearly $1.9 million in 2011, and raise property taxes, "but I don't think the people will be happy for that.''
Fagerlie said the city could sell the utility to Xcel Energy or Otter Tail Power Company, but rates would go sky high.
"It's unfortunate we have to have an increase, but we're still getting a good deal,'' he said.