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What’s it worth? Study examines the value of Delano’s electric utility assets
Sept. 19, 2011
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By Ryan Gueningsman
Managing Editor

DELANO, MN – A study recently completed shows the book value of Delano Municipal Utilities at $11.6 million.

The Delano Water, Light, and Power Commission and Delano City Council met in joint session Tuesday night and reviewed an executive summary of the study, and heard a presentation from Larry Schedin of LLS Resources.

Delano Municipal Utilities is one of 125 municipal electric utility operations in Minnesota. Established in 1894, it is one of the oldest in the state, Schedin said.

Rochester is the largest municipal utility in the state, having about 43,000 customers, while Whalen is the smallest, having 35 customers. Delano has about 2,400 customers, which Schedin said is very close to the state average.

Delano has a generating capacity of 25 megawatts, all peaking with diesel fuel, Schedin added. Its annual load factor is 50 percent, which he said is low due to the industrial component.

There are 1,995 residential units in Delano, 238 commercial units, and 80 industrial units in the city. In his study of the municipal utility, Schedin said he and his associates examined books and accounting records of the utility, then estimated a value based on “booked accounting data and replacement cost.”

Schedin said an on-site visit by a registered electrical engineer to examine electric utility assets also took place, as did a comparative rate study with three neighboring utilities.

So, what’s it worth?

Schedin said a book value approach estimates the value of Delano’s municipal utility at $11.6 million.

For comparable sales, Schedin said the low range would be book value, all the way up to high range, or two times the book value, at $23.2 million.

The “expected value range” is $11.6 million to $16 million.

In the event a sale of the municipal utility ever were to take place, Schedin said a number of things would need to be considered, including electric utility debt refunding and retrofitting to certain standards.

“If you sold the utility, there would be some costs,” Schedin said.

Debt retirement fees, legal and transaction costs, employee obligations, the impact on the city’s water utility due to the loss of shared resources, and the potential transfer of the electric utility headquarters may negatively impact local jobs and result in lost revenues were also concerns mentioned by Schedin.

He said the potential future property taxes, if sold to a taxable entity, would add costs for a purchasing entity, but would add value to the city.

Schedin also said an increase in electric rate possibly resulting from a sale would negatively impact existing customers at the present time.

“The long-term rate impact on existing customers is likely to be a negative if a purchaser raises existing retail rates to area norms,” Schedin said in his presentation.

During the last 20-25 years, there has only been one sale of a municipal electric utility in the state, and that was a very small utility under very unusual circumstances, Schedin noted.

He said Delano’s service territory is relatively small and stable, with limited growth potential for a potential buyer. He said the comparative rate and reliability evaluations indicate the utility us “well-run, efficient, reliable, and competitive.”

No commission or council members discussed selling the utility.

In the utility rate comparisons, utilities selected included Wright-Hennepin Coop, Connexus Coop, and Xcel Energy. Comparisons were made for residential rates and business rates.

“You can sure see Delano is below the others, whether it’s the summer or winter,” Schedin said.

From the on-site observation that took place by Schedin’s associate, it was noted Delano’s system is “in really good shape.”

Schedin reviewed Delano’s connections to outside transmission systems, and said Delano has enough generation on site to generate for more than the peak demand. He added Delano’s “undergrounding” of the distribution system shows Delano is keeping up with the technology advancements.

An automation system is also being implemented in Delano, which eventually will allow utility customers to look online at real-time usage, and will “empower citizens to think about how they use power,” noted commission member Jonathan Ness.

Schedin said, as a member of the Central Minnesota Municipal Power Agency (CMMPA), Delano has joined with 11 other Minnesota municipalities to receive certain essential services it cannot provide on its own.

“These services are necessary to meet the need to manage its daily, monthly, and hourly obligations under the Midwest Independent System Operator (MISO), with headquarters located in Carmel, IN,” Schedin noted in his presentation.

These services include participation in MISO’s hourly energy and ancillary services markets, management of Delano’s transmission assets, hour-by-hour monitoring of energy deliveries and reliability, and wholesale billing, accounting, and market purchases of capacity and energy to meet member needs.

Schedin said Delano’s reliability is “outstanding,” and said his associates looked at how many hours the typical residential customer was out of power over the last two years. He said Delano’s reliability is due largely to the undergrounding of its distribution and also due to multiple connections to Xcel’s transmission system.

Schedin said the health and future of Delano’s utility was also studied, and noted Delano leveraged its on-site peaking assets to allow energy market purchases greatly reduces costs, especially due to a depressed energy spot market.

Schedin also recommended Delano closely watch the market as hourly market prices rise.

“Delano has to keep on top of how to make the best use of the market,” Schedin said.

Finally, Schedin noted Delano should develop a longer-term strategic plan.

He said the CMMPA is in the process of preparing such a plan, which means Delano’s should be in tune with that. He said it would also allow for the examination of further cost savings, as well as protect against losing spot market advantage.

Schedin also recommended the water, light, and power commission consider, as part of the strategic plan, an incentive rate above the marginal cost to attract new industrial customers, as well as the finalization of the distribution system undergrounding and automation system updates, which Delano Municipal Utilities General Manager Hal Becker said should be completed in approximately one year.

Following the presentation, a question-and-answer session took place, with discussion surrounding the understanding of Delano’s utility units and its value to customers.

Ness said this information should be utilized as an economic development tool. No formal action was taken following the presentation, and Schedin said the full reports will be available to local officials in a week or two.

Odds and ends

In other business, the council and water, light, and power commission:

• heard an update on a proposal to add more wind energy to its existing renewable energy portfolio.

• noted an upcoming information meeting the CMMPA hosts in late October.

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