HomeMy WebLinkAbout2003-11-17 Transcription November 17, 2003 Council Work Session Page 1
November 17, 2003 Council Work Session 6:30 PM
Council: Champion, Kanner, Lehman, O'Donnell, Pfab, Vanderhoef, Wilburn
Staff: Atkins, Helling, Dilkes, Kart, Matthews, O'Malley
Guests: Bob Latham and Louie Ervin (Latham & Associates)
TAPES: 03-81, BOTH SIDES; 03-83, BOTH SIDES
MUNICIPAL ELECTRIC UTILITY
Lehman/I want to welcome everyone here tonight. Tonight we arc going to be listening to a
presentation from Mr. Latham and Associates. As everyone is aware, we were part o£a
larger group of cities that had a preliminary study done on the feasibiIity of municipal
power. We received that report, I think in September. We have responded to that with a
number of questions that we submitted to Latham and Associates a couple weeks ago. In
the back of the room are copies of the questions and the answers that we posed to Mr.
Latham. Anybody who wants those, questions and answers, are certainly welcome to have
them. The report itself is available from the City Clerk for, I think it's a cost of $2. I 0, if
I'm not mistaken. So, what I'd like to do tonight is have Mr. Latham give us an overview
of what he has done, what his analysis tells us and him, go through some of the questions
that he feels were important enough to be reiterated tonight. Anyone from the public who
has a question for Mr. Latham needs to write that question down, and give it to Andy
Matthews, Assistant City Attorney, over here in the corner, and he will pose the question?
I'm sorry! Put them in a box there for Marian. Marian always gets everything right.
(laughter) Obviously the Council, if we have questions, will also answer those questions.
So, we're scheduled to run from 6:30 until 9:00. We'll kind of play that by ear so, would
like to.....it's your show, Mr. Latham. Take off and we're with you.
Latham/Well thank you very much. I'm Bob Latham, Latham Associates in Cedar Rapids. My
partner Louie Ervin is with me tonight, and basically the two of us did, much of the, most
all of the, analysis of it. In the study as a whole we used some other people who are really
specialists in, people actually been out on the lines for years and stuff, to look at the
condition of the properties and all, but mostly it's something that Louie and I had done.
Welcome the opportunity to be here, urn, whoever wrote those questions, spent a lot of
time, or at least had done some reading or something, and we appreciate those (laughter).
Took a lot of thought to be responsive to it, and we'd be happy to answer any follow up
questions you may have on those this evening. We also received some questions from the
citizens group, which we've responded, and we also received some from the University of
Iowa, in terms of its role. The fundamental question that we were asked to address in a
preliminary manner, is simply is it financially feasible to at least consider whether the City
should form a municipal electric utility. And what that really means is the process by
which the City would consider purchasing the local distribution system of Mid-American,
and operate it, either with its o~vn people or outsourcing some way to operate the system;
to have a power supply, either independent of Mid-American or possibly having Mid-
American as a power supplier, but fundamentally to operate the local distribution system,
you know, for the benefit of the citizens of the City, as well as the University. Very
significant parts of that, to be considered are, we're looking only at the local distribution
system. The transmission system, the high-voltage transmission system, is and presumably
would be, operated and owned by either Mid-American or its successor, such as TransLink
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or some other independent transmission company, but fundamentally we're talking about a
system that would be operated locally. The transmission system would be provided by
either who the current supplier is or whoever basically takes possession of that over the
next decade or so, and part of that will depend upon whether the new energy bill is passed
by Congress over the next couple of weeks in terms of what requirements there are, for
example, for Mid-American to integrate its system more intensively with other utilities, on
the transmission side. Because of changes in regulations, primarily in Iowa as well as the
federal government, over the last probably ten or fifteen years, when we look at the
opportunities that cities are considering today for possible municipalization, we compare
that to alternatives that were available to them perhaps fifteen years ago. That was the last
time any Iowa city, and that happened to be Sheldon, that was the last time any Iowa city
had considered municipalization to the extent that it had taken an application before the
State, in terms of the Iowa Utilities Board. The Iowa Utilities Board is the agency in state
government that decides basically does it seem to be reasonably feasible in the interest of
the city, and if so, at what price should the incumbent utility be compensated, you know,
for its local distribution system. So there's a whole process of that. But since the time of
the earlier agreement, I'm sorry, the earlier application by Sheldon, a couple of things have
happened. Iowa twenty years ago, or fifteen years ago, was an environment with
significant excess generation capacity. Biggest single issue of the 80's probably was
excess generation capacity in Iowa. It gave rise to issues such as is there stranded
investment, what if someone should leave? Are they responsible for the investment that
the incumbent utility, such as Mid-American, has invested in generation. Would the City
be responsible for some of those costs? At that time, the Iowa Utilities Board found that
there were strm~ded costs, and Sheldon would be liable for that. That's changed. As we'll
see as we go into more detail tonight, over the time period the City would be acquiring
generation capacity, or let's say acquiring a system. Mid-American, by its own statements,
is in a shortage position. There would not be excess capacity in our opinion. Iowa, in
terms of generation capacity, tends to be a shortage state rather than an excess state.
Champion/Can I just interrupt?
Latham/Sure.
Champion/Before you go on --- you're going to confuse me. Tell me, what do you mean as we
gain generation capacity? Tell me what you mean by that 'cause I don't think we're going
to build a plant.
Latham/No. All right, as, if the City were to chose to form a municipal electric utility, it would
have to have some source of generation, and presumably other than Mid-American. That
would be the initial suggestion. You know although, it would be some alternative, at least
not taking generation from Mid-American as a retail customer currently. They could be
the bidder for it. What I was really trying to say there is if you were to take generation and
let's say that you chose a power supply which happened to be, let's say Alliant, if they had
capacity. Would Mid-American be in a position of having a claim that by your leaving
them this would leave some of their generation as stranded and for which they would have
an economic claim for loss, and the fundamental comment I was making is that by their
own forecasts, as published by the Mid-Continent Area Power Pool, their own statements
and representations to the Iowa Utilities Board. The time period over which you would be
acquiring capacity, as an independent system, would be at a time that they are already in a
shortage position, in that future, and with or without you under their plans, they would be
in a shortage position.
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Champion/Okay, thanks.
Latham/Particularly for the critical summer time period. Yes?
Vanderhoef/May I just follow up on that? Uh, as I understood what I was reading in the report,
you're saying that that shortage is still going to be there even though they are in the process
of building new?
Latham/Yes exactly. When you look at the most recent filing that is available, as they filed with
the Mid-Continent Area, the Power Pool in which they're associated, and that's after
they've reflected the new po~ver station southeast of Des Moines, which is a gas-fired
system, plus Council Bluffs four, which is a new coal-fired system in Council Bluffs, even
after those are included, and it's obvious when you look at that as of 2007 or 2008, it's
obvious that their generation capacity increases nicely, like the ne~v coal-fired plant, but on
balance, let's say for the year 2009, there still am 293,000 kilowatts, or 293 megawatts, of
shortages on their own system, versus what they need you know, for the summer of the
year 2009. This is after they've already had this generation in place, you know that which
is already committed. Yes?
Kanner/Two follow-ups on that. One, this is not an accumulative total, this is each year of the
deficit?
Latham/Yes, that is correct.
Kanner/Okay, and then the second thing, looking at it from another point of view, if they're
projecting deficits, one of the arguments they're making is that it's going to be tough to go
out on the wholesale market. Is this something that's going to be seen all over the country,
that it might be tough? If there's such deficits, it might be hard for us to get reliable
contracts for electricity on the wholesale market if this is happening all over, in addition to
Mid-American.
Latham/Right. Well, it doesn't necessarily follow. What we're seeing here, in terms of these
deficits, are those for which they've made commitments to serve their retail load. Now
there may be other power supplies that are available from sources other than Mid-
American. Five years ago there was this wide concern, during the time of discussion, of
electric choice in Iowa. You'd have this great sucking sound of all this cheap energy
leaving Iowa and going to Illinois because they had electric choice going in there. That
turned out not to be the case at all. What's happened is because of the choice available in
lllinois, there's huge amounts of new capacity investment, and now much of the flow is
actually from Illinois into Iowa. In terms of, there are sources around. We've just
completed some power supply solicitations over the last six or eight months, and them are
people out there that want to sell capacity. We haven't obviously done anything
specifically for Iowa City to test that market, but the simple fact that Mid-American may
not be in a sho...may be in a shortage position, it means for all we know they have some
idea that they would acquire capacity from some supplier, some independent supplier, in
Illinois to meet that, as the time would happen. We don't know what Mid-American's
specific plan would be. But ~vhat we do know, is that based upon this, which the relative
question for this discussion, one primary relevant question is does an action taken by the
City, if it were so to choose municipal utility, would that lead to stranded investment on the
standpoint of Mid-American. The answer is no, by their own statements, and I've got that
stuff right here if you want to look at it, you know, that's the most recent stuff available.
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Now there's another suggested investment in wind systems that they have proposed which
would be like 310 megawatts, I believe, of capacity in wind. That would translate into, in
terms of a power pool allocation, of maybe 60 megawatts, 60 to 80 megawatts, out of the
300 would be a credited capacity. So, even though it's like 300 megawatts of wind system,
because it's not predictably available at time of peak, you can't get full credit for it for
accreditation purposes, it may swing this by 60 megawatts, maybe 70 megawatts, if it is
built.
Kanner/And just to clarify. 1,000 kilowatts is a megawatt?
Latham/Yes, yes it is. But, what I was, when we're looking at the types of choices available right
now, one is, is it economically viable to consider this, and I'm not going to come to a
conclusion and say clearly yes or clearly no, but the primary factors that do enter into it are
what are the prices of the energy that would be continually available from Mid-American,
versus what are the costs of energy that are available from other sources, and what are the
expectations of those and the price increases. Those are probably the two single most
important drivers from the overall decision. Um, let me just go over just a little bit of what
we did first before we get into a lot of other detail here. What we did ~vas we had people
come out and go through Iowa City, and we looked at the system and tried to get a sense of
in what condition is the system, is it good, is it ne~v, is it old, um, and basically is it
underground, is it above ground. We had people go basically up and down the streets, and
for every component, every part of the city, we identified ~vhat we thought was the
estimated age of the property, and it differs a lot. Some of the newer suburbed areas, the
outlying areas, would be newer generally than perhaps this area ~vhich is like right down
here and right southeast of do~vntown, which would be one of the older areas, one that may
have been 40 or 50, 60 years old. So we try to get a sense of the condition of the facilities
as they exist today. How old were they? Are they in reasonably good shape? And the
like. We did this for each of twenty cities. We went through every one of those towns so
we had comparative information on those. We asked how would a city like Iowa City
actually operate the utility system? Do you have to immediately purchase and o~vn your
own generation, or you know, invest in generation here today, which may be very, very
costly. The fundamental assumption we used is that you'd have opportunities to purchase
on the open market, not only power supply, but also be able to purchase line services, tree
trimming services, those are typically purchased form specialists anyway. Even the big
utilities oft times purchase those in the open market, but basically we made the assumption
that you would be able to purchase services, in this case maybe from Muscatine Power and
Water. My judgment, Alliant would be very willing to provide some services. They offer
it in their web site. Mid-American offers these same services, a lot of these services, to a
group of thirty municipal utilities that, of which we're aware. So we basically made
assumptions that you'd be operating at, not with an immediate infrastructure, but
outsourcing, and as opportunities came for improvement, you would presumably insource
that by equipment as you would need to do so. What we were trying to accomplish was, as
you look at the total cost to the City of purchasing electricity on a continuing basis from
Mid-American, year by year, compare that ~vith the full cost of these other alternatives, full
cost on a delivered basis, basically the same service reliability, same financial stability of
the supplying company, making sure we were looking at apples and apples comparisons,
what we did was look at the next twenty-five years, using our best judgment, and saying
what is the full cost from Mid-American versus from your alternative, for each of those
years, ~vhat would be the savings, versus the Mid-American alternative, and then taking
those savings by year and doing a discounted present value so that in an economic sense
you're saying yes, we have these savings that are coming out, or savings or higher costs,
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each of twenty-five years. You don't just add those up because those in the later years, you
know, the cost of money, and we took a discounted present value of that and we said, what
is the net present value of savings to the community if they to choose a municipal utility.
In this case it was, I believe, $61 million is what we said the net present value is. What
does that really mean? What it would mean is, you know, if you were to, if there were $61
million bucks, it's like Manna from heaven so to speak, you've got $61 million that
someone, whether it's the municipal utility, the City Council, whatever it is, has a
fundamental decision to make. Do they want to allocate that to reduced prices? You
know, through time for the citizens in terms of electric bill, or would that city chose to use
that alternatively, either for city services or for economic development, or for parks, or the
like, as is done in other cities that have such utilities. But, when we get into more of the
details, we're looking in both cases at what is the full cost from Mid-American versus the
full cost, basically on a basis as delivered to the meters of the City. We did twenty of these
studies at once basically, across the whole state of Iowa, and both on the Mid-American
system as well as on the Alliant system, and from larger cities to smaller ones. About half
were on Mid-American and about half of them were on Alliant. Mid-American has three
pricing systems. The east, which is what you are; the south, which includes Des Moines,
Council Bluffs; and the north, which includes Waterloo, Sioux City. You and Des Moines
tend to be the high-price zones, certainly versus Waterloo and Sioux City. As you look
forward in terms of rate expectations, how quickly would those prices be equalized?
Becomes a significant issue in terms of determining what is the net present value of
choosing whether or not, you know, to proceed with a municipal utility. If your
expectations are that those pricing differeotials will continue for twenty-five years, that's a
huge lump-sum loss to the community, versus that which you would see in Sioux City or
Waterloo. So one of the most significant determinants of the net present value ora city is,
you know, where are you. What is the price zone? If you're in Cedar Rapids or Kalona or
a place like that on the Alliant system, that again is the high-price zone. As compared with
a place like Wellman, which is in the Iow-price zone. Again, if you expect those price
differentials to continue you might as well, in a relative sense it's likely to be much more
feasible to create a municipal utility in Kalona than in Wellman, if the prices are otherwise
equal. I'm sorry, if the price expectations that they'll both change at the same time. So
that's one of the most significant issues. On that issue, Iowa City would be in the high-
price zone.
Kanner/Isn't the IUB trying to equalize all the prices across the state?
Latham/Yes, the answer is yes, and we've been really active in some of those cases. There's for
Alliant the cases tend to be tried in front of the Utilities Board, but Mid-American they
tend to be settled, and so there's an opportunlty for those things more so within Alliant and
less so within Mid-American. Under the current stipulation, the most recent stipulation of
a case for Mid-American, there's a fundamental statement that Mid-American expects not
to change prices here in terms of equalization versus other, versus let's say Waterloo and
Sioux City, as part of the stipulation, and I've got it right here if you want to iook at it later.
But, yes, the Iowa Utilities Board is on record of moving towards equalization. The
question is, is it two years, is it five years, or is it twenty years, before it happens. To the
extent it isn't equalized, obviously a place like this is disadvantaged on current prices and
going forward it tends to favor the movement towards municipalization, which is the
fundamental point.
Vanderhoef/Can you tell me again why it's moving faster in equalization to Alliant versus Mid-
American?
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Latham/Right, just very simply because they are having electric rate cases for which the Utilities
Board has discouraged attempts to have those decisions made only under stipulation. With
Mid-American, ahnost every case last two or three, they've simply been negotiated
settlements among the parties that were parties to the case, and the focus, in my opinion,
predominantly on the rate levels and not so much on equalization. Although there was
some equalization in Mid-American a few years ago, but this current case that currently,
the most recent stipulation does not have that. By contrast with the Alliant case, that was
resolved last spring, that was fully litigated and it was really the cities of Cedar Rapids
against Burlington and Centerville let's say. And there was a movement, probably getting
rid of at least half of the differential at that time, and that, but the primary distinction is, in
one case the Utilities Board was forced to make a decision and it choose equalization, the
path. It did not, if the Utilities Board is just simply looking at a stipulation all the parties
have signed, it's very difficult for it to independently demand, you know, something other
than that which was agreed to by the parties.
Kanner/So just to clarify, the bottom line is, is Iowa City, their rates expected to be different than
other regions for significant period of years, ten, twenty years, is that what you're saying?
Latham/Well, all I'm saying is the most recent stipulation specifically provides that the only
movement towards rate equalization would likely be in the southern system, which is Des
Moines, Council Bluffs, and the residential would reduce. Basically, it is absolutely silent
on the east, which is Iowa City, Davenport, and Fort Dodge. Yes?
Lehman/What is the rationale for these different rate structures?
Latham/The rationale is very simple. Fifteen, twenty years ago, Iowa had seven electric utilities,
investor-owned utilities, and as they merged together into two resulting utilities, you know,
when they're merged together, prices, they tend, the prices were different to begin with,
and then some movement towards equalization has slowed because a place like Centerville,
an extreme case, you know, wants to protect every differential it has, you know, versus
let's say Cedar Rapids, or in this case Waterloo would clearly want to protect itself against
Iowa City. Unless the Utilities Board is very insistent on equalization, or there are
consumer groups or whatever, that take an active role, there's a lot of people that don't
want to face those issues.
Lehman/Why wouldn't the Utilities Board insist on that? ! mean, after all, they are proving, they
are proving differential rates.
Latham/Right. The Utilities Board, particularly the only times they've really addressed that, !
guess there have been three or four times the last few years, what they've basically said is
we recognize that Iowa City takes generation from Mid-American under the same power
plants as do the people in Waterloo. Okay? We recognize there's a differential between
those in terms of what you're paying in rates, and the cost of service would be identical.
You cannot distinguish one cost versus another. The question is, in terms of the concept of
rate shock or something like that, you ~vant to move those together immediately and the
Utilities Board has been a bit reluctant to force a rapid movement. In the last Alliant case,
they were much more insistent on moving that quickly.
Vanderhoef/So you're saying in the example you gave, then as Cedar Rapids did, they went to
court to push it and we would have to do the same, similar, process.
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Latharn/Right, right, it would happen to cost $200-$300,000 but they saved, you know, millions
and millions and millions, you know, but those that took the position that you would be in,
in this case. But going back...yes?
Kanner/Well, sort of along the lines of this discussion, urn, the Council has asked staff to look into
a franchise agreement. Now I know that the IUB makes the final decisions on rates, but is
it possible to put in a franchise agreement that urn, Mid-American would ask for lower
rates for equalization for Iowa City? That could be part of a franchise agreement? And
then they would present that to the 1UB?
Latham/1 believe that, and I'm not really an economist, but basically you're talking about a
franchise, which is negotiated between you and Mid-American. I mean, I don't know if
the Utilities Board has ever turned a franchise dowm I mean, I don't know if there's a lot
of oversight on that. If you're to independently negotiate something with, say with Mid-
American on that, and in their perspective they would view it as a short-term, you know,
loss of dollars, you know, for which there would be no other obvious immediate source of
compensation. That's the way I would think someone like a Mid-American would look at
it. And so they oft times are reluctant to do that unless they know that there's some other
source of monies, you know, coming to replace that. But, it really depends on your
bargaining position, and the like. There's a lot of things you can do on that. Going back
then in terms of the fundamental issues that affect whether or not it is economically viable
for a city. The first one is simply, what are the prices? And what are the expectations that
there be equalization among the rate zones. The second is simply, what are the rate
expectations in terms of rate of increase through time, of say Mid-American and we'll go
into that in a second here, or the alternative, which is an alternative power supply. In the
study what we did is we basically assumed in the longer term for twenty-five years, it's
probably about a 2% per year increase in energy prices, whether that's high or low,
basically that's the fundamental assumption we used. Now, we immediately got criticized
by Mid-American that they had announced that there was a rate freeze. 1 don't want to
dwell on that right now; 1'11 come back to that with a lot more detail in a few minutes. But,
so we had to look at how sensitive is this analysis to the assumptions we're making about
the rate of increase in rates through time. Now rather than looking at just the first one year,
or two years, or five years, our study was over a t~venty-five year period. So a rate freeze
in one or two years may or may not be material when it comes to a twenty-five year
assessment. Just as a bit of testing, if we were to assume basically a rate freeze let's say by
Mid-American for a few years, and we recognize, we believe that if there is a rate freeze,
what you're doing is you're pushing dollars out, deferring for later collection, you know,
there's no such thing as a free supply. If you did that for about, if you said it's a rate freeze
for five to seven years and then you said well what is the payback? Is that maybe a higher
I% per year for the next seven years. You do that, look through the analysis, and it's a
wash. It doesn't affect the analysis more than $2 or $3 million dollars. We need to look
both at what the assumptions are for the future for Mid-American's rates, but also the
assumptions we make about what is the cost of the alternative power supply. Now we
assumed in one case on the Mid-American system, we'd have a rate freeze of at least a
couple years, then what we assumed is Iowa City's rates would fall to rate equalization
with other parts of the Mid-American system, you know, while maybe overall Mid-
American rates would go up at 2% per year. That worked out to be about no increase for
what, a couple years, about a 1% per year increase for five or six years, and then 2% per
year thereafter. Those are the assumptions ~ve used in the analysis. You know, if we had
started at Mid-American at 2% per year and gone all the way out, we're talking $120-$150
million dollars net present value, but that's not what we did. Conversely, had we assumed
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November 17, 2003 Council Work Session Page 8
that the cost of the alternative, let's say the alternative power supply, if it had gone up at
the same rate of increase as Mid-American's assumptions are, what's the impact there?
Well, it turns out to be about $85 million net present value. What I'm trying to point out
here is simply that the net present value analysis is significantly affected by the
assumptions on the future power supply. As you obviously know, but it really comes
through when you start looking at well what if you, you know, use the same assumptions
both for Mid-American as well as the alternative. I mean there's a pretty significant swing.
Kanner/What you're saying it's $85 million if the power supply goes up at the same 2%, versus
the $61 million that you ultimately projected? What was the rate you used for that?
Latham/Yes, yes, well, that's not exactly what I said. What 1 said is, if we were to have used the
same percentage increases for the altemative supply, as we did for Mid-American...
Kanner/The 2%, or...
Latham/Well, it was basically we used, we said there would be no change over the first two years,
then I% per year for five years or seven years, and then 2%. Okay? Had we done that in
both cases, then all of a sudden it was $85 or 90 million net present value. I can't sit here
tonight saying which is right, which one is going to go up higher or lower than the other
one.
Kanner/Well, but, what did you use in the report?
I~atharn/In the report we used 2% per year from day one.
Kanner/For the power supply?
Latham/For the alternative power supply, so that's starting today and going out, you know, for
twenty-five years. For Mid-American, we started wherever they were. For two years it
was flat, then basically the rate equalization offset, it was like 1% per year, and only then
was it rising at 2% per year. So we used, basically the assumptions we made were that the
rate of increase would be less for Mid-American than for the alternative, and we gave rise
to, I believe it was like a $61 million net present value.
Wilburn/In your assumptions then, did you assume, or presume, that the conditions that you
referred to that Mid-American said, whether it's state or federal issues going on, did you
discount those in your assumption then?
Latbam/Um...
Wilhum/You had referred to there were several conditions...
Latham/Oh, that have changed in years?
Wilburn/No, about federal, it was, I don't know if it was a federal reimbursement or um... let me
look for the question [ was talking about. There was a question about...go on I'll find my
question here. I highlighted some of these.
Latham/So, we've talked about actually three of the most significant factors that determines
whether there are expected benefits from municipalization. The first one, as I said, is the
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rate zone; second was the rate of increase, both from, let's say in this case, Mid-American
versus the alternative power supply. A third one, that may not seem quite so obvious, but
it is, you know, what is the composition of the electrical usage in the city? If you have a
city that's usage is predominantly either residential, which is fairly predictable in knowing
what the kilowatt hours are and what the prices are, and the balance of it say being heavy
industrial. Like Keokuk has huge amounts of industrial and residential, but relatively little
commercial. In that case, the prices for the industrials would be relatively low. They're
interruptible customers, they're process customers. Those prices are pretty low on average.
Conversely, and I used to be in rates in terms of identifying rates for utilities, and what you
would do is you faced competition in the industrial sector. You would make sure you were
as competitive as you possibly could be there, and you want to be decent in terms of
residential rates, but what was left, obviously, was the commercial. The smaller usage.
And those people have less choices, candidly, and that's where there's less price elasticity,
I guess you'd call it in economic terms, and that's where you would tend to put the prices
as much as possible. So when you look at the cities that are considering municipalization,
those that have a disproportioned amount of commercial tend to have in actuality,
relatively high prices for the commercial, and therefore, a higher possibility or probability,
that there will be benefits from a municipalization effort, and that's what we found in, let's
say like the city of Iowa City, we were able to obtain bills from individuals, individual
companies, businesses, to get a fairly good sense at what people were actually paying,
rather than the overall averages that were showing up on the books of Mid-American. So
on that area you tend to be relatively high in terms of the probabilities of making
municipalization pay. Iowa City tends to be relatively more of a commercial city certainly
than some like Cedar Rapids, but there are a lot of other small towns in Iowa that have that
same position. Those tend to auger in favor of municipalization. Yes?
Pfab/1 have kind of a thought here. If you're in charge of managing Mid-American's total cash
flow, how would you rate those cities that you were looking at as being most desirable to
hang on to, versus least desirable, according to the way this mix is coming out?
Latham/Okay, well, the ones...that's really a very good question (laughter). It's almost, the ones
for which there's the highest net present value, ifI were the utility, those would be the
ones I'd be really courting. I mean those are the ooes that give rise, in a normal sense, to
much higher margins.
Pfab/So, how would, you said half of the cities that you were looking at are, have their power
supplied by Mid-American, about half by Alliant.
Latham/Yes.
Pfab/So if you were going to rate those from the company's point of view, would you be willing to
give us some kind of a feel how you would if you were sitting in Mid-American's chair?
Latham/Sure, sure, well I would be looking primarily at the uh, at those cities on the Mid-
American system on the east system which Iowa City and Fort Dodge are two, those are
you know as ~vell as West Des Moines, you know, all those, not all those. Iowa City and
West Des Moines are obviously much more disproportionately commercial, certainly,
versus Fort Dodge, but they all have the same fundamental rate structures. They're all on
the old east system. Those are, of the cities we looked at. On the Alliant system, the
Kalona's, the Keokuk, the Perry's, would be in the same position as you are, as contrasted
with people like Sheldon, which is the low-price zone, or Amesburg is the lo,v-price zone
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up there, but that's a very good question. The same ones for which there's a higher net
present value are likely to be the ones, you know, where there's the best current cash flow
for them.
Wilburn/Bob? I found what I was thinking of. It was in the cities question, number 14, please
address the assumptions of frozen rates through 2005 and then the 2% annual increase
afterward as opposed to their claim that they've agreed to a rate freeze through 2010. Are
you saying, you said you're competent that they will not increase rates through 2005, and
that later it's conditioned on a number of assumptions. The wind energy, the federal wind
credit. Are you saying you're skeptical of their ability to hold to that, or?
Latham/Okay, when you look at the actual, the stipulation, and you know, to me that is not a rate
freeze, to be real blunt about it. It's not a real freeze, and I've talked to people at the
Utilities Board. We've talked to people in the office of Consumer Advocate. Privately
they're telling us it's not a rate freeze. Even people within Mid-American, candidly. So
when you look at this and look at those conditions, the conditions are that the federal tax
credits for wind energy are available for a minimum often years. I don't know, I presume
that's going to be in the new energy bill, but I don't know that it says it's going to be ten
years. Requires new legislation in Iowa that makes investor-o~vned utilities eligible for
investing in wind systems. There will be a lot of fight, I would think, by the wind lobby
because obviously that's in competition. Uh, there's a significant condition, uh, their
investments in abatements for coal-fired emissions at their coal-fired plants, be no more
than, I can't remember what the number is, 2 - 300 million or something over that time
period. That's an area that I believe to be very sensitive, and unpredictable. That is an
area which, in my opinion after talking with some others, they have pushed dollars into
later years so that's questionable. If their rate of return on equity falls below 10%, they can
go right back in for rate increase. That's a possibility, but perhaps the most difficult of all
these for them to realize, is access to transmission. When you look at the condition if the
rate freeze, they say they have to be able to find trans (tape ends) new wind system, and we
know there are other competing wind systems out there that are fighting for access to the
transmission grid, and we know right now, 1 mean we're involved in this every day in
terms of how available transmission is on the system, and I believe at this point, it would
be very difficult for anyone to obtain transmission. So I think that is probably, in my
opinion, that which is the most likely of the constraints not to be obtained, and that would
give rise, that would free them from any rate freeze.
Wilburn/You had also said that um, you disagree that there's a limited window of opportunity for
the City, for the Council, and the citizens to decide. And you said that you know, careful
review over the next year or so before making any yes or no decision, um, during that
period of time, I also think you said the most significant risk is the cost of power supply. Is
that what we'd be looking at during that time? What are other factors that we...
Latham/Right, l think what 1 had talked about...
Wilburn/Since there is no window of oppor...
Latham/Right, right, to me the most significant uncertainty is really not the availability of power
supply. I mean, we know you'd have eight or ten people who would love to serve one way
or the other. The more significant issue is the transmission.
Wilburn/Okay.
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Latham/Now even though you're currently using transmission and I believe in terms of the, it
would be the regulatory agency, you would have access to transmission, you know, on a
nondiscriminatory basis, you know, through the Mid-American system. I believe you
would have that. The most significant risk right now is all the dynamics of the integration
of these transmission systems in the whole upper Midwest, and let me just, I, rather than go
into a lot of detail on that, urn, Mid-American had proposed that its transmission system
become part of what is called Translink. Translink was going to be a regional transmission
company that would include Exell out of Minnesota, Alliant, a bunch of others going west.
Omaha Public Power District and Light. The Iowa Utilities Board had conditions on
approving Mid-American's participation in that, and also conditions on Alliant's
participation in that. And they basically, as we understand, that whole concept of this
particular Translink transmission group is, as of the last ten days, absolutely up in the air,
and may have already collapsed for all I know. Now if that's the case, then those, the
access to generation or to power, let's say on the Alliant system if that, as an example, is
very unpredictable at this point because, you know, we presume that all to be one system
with one transmission charge, but if it's now two or three transmissions to get it there, all
of a sudden the power supply costs of the alternative go up, and you know, there's no
power supplier in this country, including Mid-American, in its right mind that would offer
firm power supplies under those conditions. That's why I'm saying that I believe will
settle down in terms of some of the transmission market, but because particularly of the
current dynamic in Iowa, of the probably collapse of Translink, and then the other related
thing, it happens to be Illinois-based, but Excellon is buying, that's the owner of ComEd, is
buying Illinois Power and putting in another transmission group and all of a sudden the
dynamics, like may be dominos falling, of existing transmission relationships. And my
simple point there ~vas there are po~ver supplies available in the market on very competitive
terms from a lot of different sources. Some of those are Illinois, some are Missouri, some
are going west, but you don't have to. You can choose your time when there's a better
certainty in terms of the transmission market. That's my really fundamental point. So you
don't have to race into something, also that's the fundamental point.
Pfab/Well, I believe that the present energy bill, a couple things. There's tremendous focus on
the ability to transmit huge amounts of power because of this blackout. Also, you were
talking, you made a comment about the tax benefits to renewable energy.
Latham/Right.
Pfab/Now, I saw just a very brief comment on how the law presently is, or the proposed law, it's
not law. Is that renewable energy came out very much on the short end. They did not get
much tax benefits out of that renewable energy like wind and other things. That was my
comment.
Latham/I really haven't seen the final on that.
Pfab/I haven't seen it either but that was the comments that I came across.
Latharn/I understand. But even if they, even if the whole benefits, I was assuming the full
benefits are there, the biggest issue asked is availability of local transmission in Iowa for
that, and let me expand just a little bit on that. We're talking 310 megawatts of wind
capacity. Let's say it's installed up in Webster County, for example, and it would be
having access there presumably to the Mid-American transmission system. A Mid-
American transmission system, which already, apparently is burdened. You know, if
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you're talking about 310 megawatts of capacity that's quite a bit, but there's also a
competing project there for another 200 or 250 megawatts, another wind system project in
the same region, that is going to be competing against that. To be able to have 310
megawatts of wind capacity, you're going to be able to accredit that at only about 60 or 80
megawatts because it's not necessarily available at time of peak, but still, when it is
operating, you want to have the certainty you can actually get it delivered. You may be
actually needing transmission capacity for the full amount, or you're losing it. So my
simple point there is watch the legislation, and I agree with you watch your legislation very
closely, but more importantly when it comes down to it, watch the Iowa transmission
system. Because that becomes, if that's not available all of a sudden, all bets are off in
terms of stipulation or anything having to do ~vith a rate freeze.
Champion/So if we had one of those big grids, when the east coast had the big blackout, but that
was a grid that allowed many, electricity to travel in many different directions, without
having to pay, I don't know, do you pay a charge? It's a big grid and it's intemhangeable,
and you can, electricity can pass like a telephone wire does, or a telephone call.
Latham/Yes.
Champion/Okay, so what you're saying is that may not happen in Iowa, although it's a
possibility, and we might have to go through several different companies to get the
electricity transmitted.
Latharrd Right.
Champion/And that would be too expensive?
Latham/Let me just make this as simple as I can. A year ago if you asked the same question in
Iowa, you would be saying yup, Translink is going to be here. It's going to include all
these, it'll be Alliant, Mid-American, Exell, Omaha Public, Nebraska Pubic Power District,
those would all be in Translink which would become a part of MISO (Midwest
Independent System Operator), Ameren from the south and east is going to join that,
Illinois Power is there. You know, Synergy in Indiana, they're all part of this system.
Then what happened? ComEd decided it was bailing out, but under that broad MISO
system, it would have been supposedly one transmission charge. It's a one-stop deal, but
now if that's collapsing, it's almost like a vulcanization of the transmission system for
which there's all these called seams, you know, between, and any time you pass a seam
that's like a toll gate.
Champion/Right, okay.
Latham/Okay? That's what I'm saying. It's the current situation, iu our opinion, is not a viable
situation but it is the current situation, and people would be foolish in this market to you
know, to go up against that, on the transmission side of it right now. Two years from now,
my guess it will be significantly different. Congress, I think, will have to act. Yes?
Kanner/Just to switch gears a bit, you said we might want to wait awhile to see which way the
wind is blowing, literally and figuratively. Could you walk us through, what are again the
steps we would take. It's possible, is it not, to pass a municipal utility referendum in a city,
and then the city council can wait for how long, I don't know, before it goes before the
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IUB, is that right? And then, what is the appeal process ifum, one side doesn't like what
the IUB sets for its decision.
Latham/Sure, right - well perhaps the best example of what you're talking about right now is the
city of Emmetsburg. It's probably been a year and a half or two years ago, they did a
feasibility study. The voters voted, you know, to proceed with a municipalization. In that
case it's also a Mid-American system, and it's been now probably a year and a half or so.
As part of their diligence, in before they were to take it to the Utilities Board, they did a
power supply solicitation, and they asked for bids on that stuff. We were called in, you
know, to analyze the bids. And, in that case, there were at least three or four pretty viable
alternatives available in that case, to the city of Emmetsburg. They, however, then saw all
these other cities in Iowa doing these studies, and thought maybe we should participate in
that. They asked us to do their study over again, frankly, the initial one they had so as on a
consistent basis with everyone else. So they're in a position right now of having passed
this a year and a half or two yeas ago, they still haven't taken it to the Utilities Board. I
don't know of any necessary statute of limitations but, you know, I'm an economist but I
really don't follow that stuff that closely anyway. But I think what they're going to be
doing is watching what happens, you know, as these cities that have done similar studies,
they're going to come together. They're trying to meet, I think, sometime in December, to
see what interest there is in having, you know, any one city go first. How they would
possibly share costs and the like. But anyway, in direct answer to your question, I don't
know of any specific time deadline for it. I know that there's a strong interest in them
pursuing it yet, particularly at Emmetsburg. The city that goes first with Utilities Board,
you know, the process is a pretty intense process of cross-examination, testimony and the
like. The Utilities Board comes up with a decision. The parties have opportunities to
challenge that, you know, and ask for rehearing on it themselves before the Iowa Utilities
Board but then after that, any party can take it to the courts. And I would expect that,
particularly if it's a decision that would say go against a Mid-American or an Alliant, 1
would expect they would take it to the courts to, you know, get the, probably eventually to
Iowa Supreme Court, would be another step beyond even the initial Dislrict Court, you
know, for a final adjudication of that. So, it can be a long process. It could be a couple
years after the first uh, after the first city goes, but I do believe that once there is
experience, that other cities will, it'll be a lot clearer to them whether or not there are any
stranded costs, for example, or any, it'll be much more clear at that time as to some of the
issues that may appear to be open at this time, so it could be a couple of years after the
preceding.
Vanderhoef/You mentioned uh, redoing the study for Emmetsburg, but how long are these
figures good for? Are we talking six months? A year?
Latham/Uh-huh, I think in answer to that question, I said two to three years.
Vanderhoef/Without updating?
Latham/Well, uh, and you can do partial updating, but the real guts of it are all the analysis you
have to do to estimate the kilowatt hours and the prices obtained, and if Mid-American or
Alliant don't change their rates, and if there's not a huge influx of new people or new
industry let's say in Iowa City, the underlying data for usage really don't change that
much. And the load research data which says, you know, you as residentials tend to use
2.76 kilowatts of capacity per residential customer. That doesn't change that much over a
ten-year period. So, a lot of the really guts of the study really wouldn't change that much.
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All you would have to do would be to update, you know, ~vhat is the current replacement
cost. Well that's simply a question of getting the most recent data on prices of equipment.
What does change is the price of, the potential price of the alternative po~ver supply. Now
that's one that would most likely, could be changing. Since the time we did this study,
candidly the prices of that alternative power supply, have fallen. Okay? That would make
the study more attractive today than at the time we did it. So, but those are things that you
can change, and I hate to say it, but we could probably make those changes in ten minutes.
(laughter) Of course we'd charge you only for the ten minutes (laughter).
Wilburn/You mentioned that, someone had asked about the municipal work force, or potential,
how they would incorporate a municipal work force. You said that you were involved in
an electric territory sale where those, they were incorporated and they retained their union
representation, but you didn't say which city. Are you...what city is that?
Latham/Yes, okay, when I worked at Alliant, I was the chief negotiator on the purchase of the
old Union Electric system in Keokuk, purchased by the Old Iowa Electric, and one of the
conditions of that was that um, that the employees would come over, they ~vere different
locals in a couple cases, but they all came over, they all had opportunities to come across.
Kanner/So if we get to the point of negotiating with Mid-American, that could be part of the
stipulation, that can go back and forth between our negotiators saying, obviously there's
union representation out there tonight and they're concerned about their jobs, but Mid-
American can say okay maybe we'll give it to you if you take the whole, at this price, if
you take the whole union in, and that can be done, you're saying?
Latham/I'm saying it's not an uncommon practice, and frankly that's the only, that's probably
the only one of probably thirty negotiations I went to when I was with Alliant in terms of
buying individual properties, probably the only one that ever went through, and but that
was a very strong, necessary condition of it going through, frankly.
Kanner/Have you ever worked for Mid-American as a consultant, or any other...?
Latham/No, I did, well this is about eight years ago, I was retained, actually I was retained by the
Chairman of Mid-American, to advise them on strategy, but that was eight years ago.
Champion/It might be too early for this question, but l'm going to ask it anyway. You can just
tell me if it's too early. Your recommendation is that we would do nothing until this
transmission business is settled. What kind of things could we do to pursue this, um,
before the transmission thing is settled?
Latham/Yeah, the question of transmission settled is a relative question. It'll never be 100%
clear, but ir'II be more clear than it is today. And, over the next one month to a year, there
will be other cities in your same exact situation considering the same issues. What will
become more clear will be things like, what does the new energy bill do in terms of
providing more certainty, either for alternative energy, or for transmission. And I would
say you've got a window of you know, say six months to a year here of just simply fact-
finding, analysis, you know, pushing our assumptions. You know, are we making good
assumptions or bad assumptions. Asking us to do some simulations, like what if the prices
of such and such were, you know, 20% higher than you assumed, what is the impact of
that? Those are things I believe you should be doing in the meantime. But I wouldn't just
simply sit idly by, you know, for a year or something, waiting for something to settle
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down, and I'm not 100% convinced that it is the best for you to pursue right now. I'm not
100% assured of that. The biggest single uncertainties, as I said, are having to do with the
transmission, and what if we're wrong on, I'm sorry, what if Mid-American is wrong in
terms of stating its price freeze, and all of a sudden things change in terms of expectations
for the next ten months or so, or the other power supplies. So I wouldn't sit idly by. I
would actively participate with a group of cities that did these studies. I would recognize
where my relative position is, and the things I was talking about earlier, you know, you're
in the high-price zone, all those things. You're likely to be a beneficiary sooner than
probably half of the cities in the study, okay? Some of those had negatives. Yeah?
Lehman/In one of your questions here, your answer here, and this is relative to a question, about
Indianola. it says the net savings in the study are based on obtaining a power supply as
part of a purchasing pool of more than thirty Iowa municipalities. Do I understand
correctly that the study you gave us, if we participate with other municipalities, in other
words, not Iowa City doing this alone? As a participant with thirty other communities, we
could expect possibly savings as you've indicated in your report.
Latham/Right, I firmly believe that, yes.
Lehman/But that is as a part of thirty communities, not Iowa City doing it on its own?
Latham/That's correct, and what that would allow you to do would be to share like the power
supply solicitation costs. You'd be able to share transmission costs, and there's just a lot
of efficiencies you obtain from that, and you can join with, here, West Liberty, Amana,
places like that, that...at Coggon, Iowa, places like that, that are getting power supplies at
rates much lower than you are. It's real interesting, because of that.
Kanner/Are there barriers to becoming part of that group of thirty, whoever they might be?
Might they say we don't want you?
Pfab/We're better off without you (laughter).
Latham/It's kind of like...
Kanner/1 think what Ernie's saying, what if we're not part of that thirty. What if we have to go
by ourselves? That might throw your whole projection oft~
Latham/Like the priesthood, you know, when you're called, you are chosen (laughter). When it
really comes down to it, obviously, not obviously, but this particular group has
commitment for generation to match their load. Now, over the next few years, there may
be 20 megawatts or 30 megawatts of excess there, uh, available, but there are other sources
of that peaking capacity around here, and that particular example happens to be the Resale
Power Group of Iowa. Uh, obviously you would have to talk with them about what
conditions would be for you joining with that, but it's, particularly if you're just starting
something out, starting out and particularly doing power supply stuff; it's really easy to be
swayed, seriously, by consultants or by other interests like that, and lead you a way that
says one alternative is that you've got to have so much base load capacity, and you get that
from one source. Somewhere else for a second source or intermediate load capacity, and a
third source perhaps for peaking capacity. I mean, there are a lot of people who are really
in the business of selling, you know, selling their expertise in terms of it causing you to
build something. I just think there are a lot of alternatives well before then, and where
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Louie and I have been most successful, it has been in aggregation, bringing people together
for sharing the savings, but you'd have to be able to show that you can have savings to the
others, you know, from your participation there.
Kanneff And you think that can be done...?
Latham/Yes I do, yes.
Pfab/I have two questions. One is can the reverse of this be used against us in a sense that we go
as one block and we cause such a shock to the system by taking away the market from the
private power companies, and becoming our own market?
Latham/Well, that's a possibility, but nowhere have we ever assumed that you're going, that
you're going to be pumhasing only from public agencies. Um, I mean, I've never ~vorked
for a municipal utility. I've never worked for a public agency like that. The power
supplies that we've negotiated over the last eight years, have all been with private sources.
Ameren, People's Energy in Chicago, I mean, so I wouldn't presume that it would be a
public sector source of energy.
Pfab/No, I don't mean that you would necessarily go from a private producer to a municipal or
public supplier of the energy, but in other words is that something that, well if you do that
you'll shock our system so we just can't allow that to happen?
Latham/WeIl, but what would be the shock on the system? Let's just, and ! don't want to be
facetious but...
Pfab/No, I know, that's the question that 1 heard.
Latham/Right, what would be the shock on the system? 1'11 just be pretty blunt here. Well, it's
not transmission, is it? Because you're doing nothing really different in terms ofdellvery
of power to Iowa City versus what you're doing today.
Pfab/Iowa City uses, would use the same amount of power basically.
Latham/And they would use the same transmission system to get it here, so is there a shock?
There's really no obvious shock there. Is there a shock in terms of revenues, in this case,
that Mid-American would realize from its transmission? Not at all. It would be getting its
full payment for its transmission to you. Would there be a shock in terms of the generation
source somewhere? Well it may be that it's coming from, you know, Alliant rather than
Mid-American, or coming from Ameren from the south rather than Mid-American, but that
stuff' happens every day and the magnitude you're talking about here, and I think we're
talking like 145 megawatts, I think, is the amount of capacity you would need. We're just
delivering right now, I'm sorry, we have approval for movement of about 180 or 200
megawatts of capacity, say from St. Louis to Coggon, Iowa, and I don't view that as being
a particular shock on any system. Mid-American would be given the opportunity, you
know, to supply generation to you. In that case there would be no obvious shock anyway.
Kanner/Well the question perhaps, maybe this is what Irvin was getting at, and we've asked this
before. If all eighteen entities went municipal, that would be more than 144 megawatts. I
don't know what your figures, let's say 500 megawatts, then you can make a case for Mid-
American having, losing out, and they can make that case before the 1UB.
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Lehman/That question was in, he ans~vered that question in here.
Kanner/And could you go over again how you...
Latham/Sure I'll be happy to. Well, let's go back to one of the very first answers and that was in
terms of their, Mid-American's, summer deficits, and you look at the years say 2010, 2011,
those are 400, 500 some megawatts right now, and they would be presumably going up in
the latter years of the twenty-five year period. Okay? So first of all, there's a deficit to
begin with, and probably enough to accommodate almost, you know, ali of those things,
and there's no way, you know, that all ten of the Mid-American cities would chose for
municipalization, and all at the same time, and frankly some of those we found no savings
at all, dido't we?
Ervin/That's right.
Latharn/There were at least four or five of those for which savings were at best very minimal. So
just for starters...
Lehman/Why did you find there was no savings for those cities? Ho~v are we different?
Latham/Okay, okay, going back to those fundamentals, the rate zones.. You're in a high-priced
rate zone. Second, in terms of the expectations of price changes, going through time,
you're in a position where your prices would tend down toward the average, okay? Versus
those in the low-priced zones going up. We talked about rate zones. We talked about
concentration of commercial customers. There are a couple others. One is simply the
voltage level of the transmission delivery point. Do you have like a second transmission,
let's say to get it to Iowa City versus only a one transmission to get it to Kalona, Iowa, or
Sheldon, Iowa. Actually it's just the opposite. But, it's those types of things that give rise
to those differences, and I believe when we looked at those, of the Mid-American cities I
believe that were not more than half of those, there would be, which would be materialed
net present values. So, um, let me make just one other comment, and that is if you did free
up some capacity, and the city chose not to purchase from Mid-American, in a regulatory
sense that might be great for them because if they can delay a huge investment, particularly
in a coal-fired plant, that actually can increase their net income rather than decrease it.
Their rate of return equity, excuse me, their rate of return and equity. Yes?
Kanneff The other big uncertainty that we haven't talked about is how the IUB will value, I guess
you touched on it a bit, how they'll value the equipment and the distribution system.
Latharn/Right.
Kanner/Recently there was a court case Mid-American won that said their properS, we're
shifting to a different type of taxing system here from property tax to energy usage, and for
a few years the amount that we were supposed to get as a city was revenue neutral, but it
was based on the so-called property value distribution system, which will be the item in
contention before the 1UB. What, you mentioned one possibility as using one type of
figuring, would be about $11 million. What did the court case say, the property was worth,
that they won where they said it was lower amount than we were expecting?
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Latham/I'm sorry, but I really, there has been no case of which I'm aware on, in terms of
evaluation of properties for this, for municipalization, or just simply property taxes in
general?
Kanner/We were collecting at a certain rate, based on property taxes. Mid-American says their
property was not worth that amount. It was worth a lower amount. They went to court and
they won that case.
Champion/Right.
Latham/Uh-huh.
Kanner/So l assume that there's a figure out there about what they were saying it was worth, and
isn't that the same equipment that you were looking at. Couldn't one look at that case?
Latham/I'm sorry but I don't know the specific case, but I did try to answer, someone had asked
a question here that there was like a valuation in Iowa City of like $44 million dollars or
something like that. ls that related to that? What's that? It's one of the questions here
(someone speaking away from mic). Was, it was actually $44.9 million dollars is what the
valuation attributable, I'm sorry, the valuation of Mid-American property attributable to
Iowa City, was like $44 million dollars, according to the 2002, to a 2002 report.
Champion/But with full gas and electricity.
Latham/Right, and when I called the Iowa Department of Revenue to ask what about this, he said
wait a minute, that's both gas and electric, and second, it's not Iowa City only at all. It's
Iowa City's local distribution, plus Iowa City's allocation of the generating plants,
including the nuclear plants of Mid-American, and allocation of their transmission system..
So, basically that $44 million, when you trace through what percentage of it is gas versus
electric, so what percentage of the electric, and what percentage of the electric state wide,
is distribution. It translates to about 25%. It happens to be $11.2 million dollars is what
the assessment is. You know, of the local distribution system from the best numbers I can
come up with, but I'm not claiming at all that those are causal, you know. That just
happened that way. But it's identlcaI with what we came up with, frankly.
Champion/When you collaborate with other communities to form a municipal utility plant, do
these have to be contingent, is that the word?
Latham/Contiguous?
Champion/Do we have to touch each other? (laughter)
Latham/No, no they do not.
Lehman/As long as they have wires. (laughter)
Latham/Amana has its own peaking capacity. West Liberty has. They're obviously not touching
each other. The common connection is a high-voltage transmission system.
Lehman/Bob, I've had two requests to take a short break. What I would like during this time, if
members of the audience have questions, please get those questions to Marian and we will
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try to address those questions immediately after we get back, which will be in about eight
minutes.
(break)
Lehman/Okay, we need to get started again. Andy, do you have any questions from the audience
for Mr. Latham?
Matthews/Yes, yes, we do.
Lehman/Why don't we do those next.
Matthews/In no particular order, since there is no excess capacity as you said, this means Mid-
American has to go to the market to buy electricity. That means that Iowa City could buy
from the same market. Wouldn't Iowa City get better rates by cutting out the current
middleman, i.e., Mid-American? Isn't that what lndianola, Iowa, does in getting
residential rates 60% per month lower than Iowa City?
Latham/Well, that's in effect what lndianola has done. Um, but I happen to know something
about that particular situation, just as with Amana and places like that. They were able to
take advantage of prices five years ago that were incredibly attractive, but on a going-
forward basis, that will not be the case for Indianola. It is subject to the same market as
anyone else is. I happen to know that because they're one of our clients. Um, and we're
negotiating things on their behalf today, frankly. Urn, I'm not sure if it's a question of
cutting out a middleman. Basically, you know, if you have a significant enough amount of
load, let's say thirty cities am summing together, frankly you can probably be as
competitive in the market place, in many places, as Mid-American can be. I wouldn't
necessarily characterize it as cutting out a middleman, nor would I ever have the
expectation that somehow because of what you would do, you could someho~v reduce rates
by 30% or whatever that would be. We were able to do that for Amana, a 30% reduction,
and we're still waiting for our 10% commission on doing that. (laughter) But I wouldn't
hold out expectations. That's not we assumed in the study.
Matthews/Is there any reason why the city should not proceed with the referendum as soon as
allowed by law? Discuss the pros and cons of timing of a referendum.
Latham/We really don't have, you know, a position on that particular issue. The process that I
believe is happening, or will happen, right now ~vill be a number of Iowa cities are coming
together, probably over the course of the next month, to consider what their alternatives
really are. And, um, I think there are some uncertainties, frankly, right now in terms of,
you know, is Iowa City among the twenty cities for which we had prepared studies, is it the
one that should go first, and I really don't have a necessary feeling about that. That's
really up to you people, and I don't think it's up to us necessarily to say the timing of your
decision there. I do think our study is credible. I think there are probably savings, but also
as I stated before, you know, subject to some of these uncertainties about the power supply
alternatives, and perhaps most importantly today, the transmission.
Matthews/The probable collapse of Translink, as you described tonight, appears to substantially
put at risk the assumptions in the study. This has changed in a very short time and
demonstrates the volatility in energy markets. Does this expose the city to risks ifa
municipal utility was formed?
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Latham/Well, as I said, there are risks. In terms of what they really are today, say with the
collapse of Translink, I believe that Mid-American basically forced, either by economic
interest or by Congress, to participate in a broader transmission group. Now that may not
be this year, but I believe it's coming. I've talked to certain congressmen, people on that
issue, and I do have reason to believe it's probably coming. But it may not be this year,
and so I use the Translink as an example of expectations from a year ago where it looked
like it was going very quickly in a fast-track for a real simple transmission solution that, I
mean, I really don't believe it's going to be coming at least for another year or so.
Matthews/Could you discuss how Iowa City's reliability might be impacted if the generation is
outside the state of Iowa rather than close by, such as Mid-American's Louisa generating
station.
Latham/Sure, urn, in terms of the assumptions we made in the study, first is that, and perhaps the
most important there is the transmission quality be of the same level as that which Mid-
American has for its own purposes, for its own continuing retail operations. So, if for
example right now when you see what West Liberty is getting in terms of power supply, in
that case it happens to be from Mid-American on another system, on the Alliant system,
but the transmission it has, has exactly the same priority as does the transmission that, in
that case, that Alliant has for its retail customers or that Mid-American has. So built into
the study, you know, we have assumed that it's the same transmission quality.
Interruptions would be no more frequent than Mid-American's own customers would have.
It's the same quality. The oversight on that would be through FIR, Federal Intraregulatory
Commission. In terms of actual location of power supply, um, you know the locations of
that, if it's terribly remote, you know, one would have concerns about two or three
transmissions on that, but in terms of the power supplies we've been able to identify,
typically they're probably not more than one transmission, and so in terms of materiality, it
shouldn't, that's probably not one of the biggest concerns.
Matthews/With respect to the reliability for those retransmissions, is that an issue?
Latham/Urn, well, only to the extent that I was talking about earlier, with seams. You know, to
the extent that's there's say a seam between what's called the PGM pool, the Pennsylvania,
New Jersey, Maryland pool, which comes out potentially just across the river in terms of
Illinois, where that connects with Mid-American, for example. That's just right across the
river. There still is a seam between that and let's say the MISO pool which would be
where Alliant is, and as I said we don't know where Mid-American is on those issues, but I
believe it will be somewhere pretty quickly. But the point there is the reliability of the
transmission is probably more dependent upon whether or not there are seams between the
two, than distance, okay? As long as you have the same power grid without a seam, as
long as it's dispatched as one transmission system, that's more important than distance.
Vanderhoef/Excuse me. In the previous question you were talking about transmission priority,
and does that priority change as you go through these seams?
Latham/Well, although the transmission priority, let's ay in the PGM pool, potentially that would
be at the Commonwealth Edison interface between it and Mid-American, just right across
the river in Illinois, okay? On both sides of that you might have the same transmission
priority as the same quality as the native load customers (tape ends) both ways, but what
happens at a seam is you've got a dispatch of generation plants all the way, in that case,
from Maryland, New Jersey, and Pennsylvania, supposedly integrated with ComEd in
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~vestern Illinois, and I would be very reluctant to recommend that any client of ours would
accept that under the current situation. Conversely, because of that seam, and simply
because that requires that that power pool be able to, in a real-time dynamic sense, be
integrated with a pool in which a Mid-American is participating. I believe that what is
more relevant is, excuse me, I believe what is more reliable would be if you got the supply
from the same regional group and not, and if you did not have to go across one of these
major inter-regional seams. I don't know if that makes particular sense...
Vanderhoef/But, okay, then maybe my question is how do we reach the priority that you were
talking about with different transmission systems?
Latham/Right. Right now, urn, as I said, the easiest way would be if Mid-American, Alliant,
Ameren, Excel, all became part of the same independent operator, so it's integrated
transmission system, all dynamically scheduled in terms of dispatch or generation plants
through that whole system. In that case, you've effectively reduced the seams. You're
going to MISO, which is Midwest Independent System Operator, you're saying we want
power from Omaha, from Omaha Public Power district, delivered in Iowa City, and if it's
just one transmission, basically with a fully integrated system, that's realistically probably
as high a degree of reliability as maybe between here and Louisa. Distance isn't the key
thing. They key is, is there an integrated transmission system that has, you know,
reliability and more important in that case, you know, is are there a whole bunch of seams
you would have to get across to get here. It's an economic issue, as well as an actual real
liability issue, real reliability issue. Um, we're working today on some transmission from
Missouri up to here. It's all real time and like I'm not at all worried about the reliability of
the transmission from Missouri here. I am concerned if it's from ComEd here.
Vanderhoef/So you're equating reliability with priority.
Latham/Yes.
Vanderhoef/So you're saying priority in getting it here, not priority on who gets it first or...
Latham/Whoa, okay, the priority of the transmission that we would obtain, is the same priority,
you know, let's say there's a problem in the overall transmission system and say in terms
of the region you have to cut power somewhere. You want to be able to be at the high-end
of the priority list, and the highest end typically is that transmission which is the same as
the incumbent utilities around here. Let's say Mid-American, what they have for their own
native load retail customers, that is firm service, you know, on the transmission system,
and that's basically what, let's say, and Indianola has that on Mid-American. That's what
Amana has on Alliant. It's the very highest level. So that when an emergency comes,
when emergency does come, they are cut, they are not cut before say Alliant or Mid-
American, would cut their own systems.
Vanderhoef/ls there a difference then if you say I'm getting most of my power this way so I'm a
priority one or however you number them, and my secondary power like for peak, may be
a priority three. Do you buy it that way, or...?
Latham/We don't, we never have.
Vanderhoef/But is that the way it works?
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Latham/l don't, well, there are a lot of different circumstances for, say like when Alliant or Mid-
American, when they go out and purchase power. They may accept very different levels of
quality, you know, dependent on what they are looking for. If they've got a whole bunch
of customers who are interruptible customers, they can take greater risks. But in terms of
the municipal utilities for which we purchase power, and we purchase power right now for
probably fifteen hundred schools in Illinois, every day, we don't want to take any chances
that the mix, the portfolio of your power supply, we don't want to take any chances, at
least if it's firm service, that it's not the highest quality transmission. So, but in your study
we assumed the highest, you know, quality of transmission, and we have, you know, we
used the tariffs, you know, to come up with those numbers, you know, from real contracts.
Vanderhoef/Thank you.
Helling/According to your study, how long would Mid-American need to freeze its rates for your
savings estimate to be eliminated, and there's a postscript here, I'm not interested in
hearing that this is not going to happen. Please tell me the impact or savings if it were to
happen.
Latham/How many years would it be with no change in prices?
Helling/According to your study, how long would Mid-American need to freeze its rates for your
savings estimate to be eliminated?
Latham/Yeah, I did some playing with that and it's probably at least ten, twelve years.
Ma~hews/You have an assumed labor cost of $31 per hour. What is this based upon? Is this a
fully loaded cost, i.e., health insurance, vision care, life insurance, vacation, retirement
benefits, etc.? How does this compare to the current wage rates of other City employees?
How does this compare to the current wages of Mid-American's Iinemen? I'm not sure if
you have all that information to be able to respond to.
Latham/That's a good question. It also forces us, you know, to explain how we came up with
those numbers to begin with. We didn't look at what linemen are paid, okay, at all. What
we did look at is what people, at what rates would they supply services to Iowa City. It's a
very different subject, and so if you're operating a let's say municipal utility, or if you're
Mid-American, or if you're Alliant, with excess line services available, you're likely to
want to at least get some recovery of some of your costs by providing services to someone
else, and so the prices we use there aren't what linemen are paid, but what the market pays
for services that we're looking for.
Kanneff I wonder if you could clarify that a bit.
Latham/Well let me just maybe expand a little bit there. You know, the world doesn't require
someone to be compensated in the market, you know, for the full cost of what they're
producing. We know that around here they're probably five or six utilities including
Alliant and Mid-American, and Eastern Iowa Light and Power, and CIPCO, and a bunch of
others like that, and Muscatine, that would love to be providing some services to you. And
they wouldn't necessarily be charging you the full cost of what they're paying their
linemen. If only to get some dollars back, and partial recovery of some of their cost, if it's
line services that otherwise would have been idle, by selling it to you at 31 bucks, you
know, they're going to get something better than zero in terms of productivity, out of those
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November 17, 2003 Council Work Session Page 23
employees. But this is a market-based thing. We have actual bids of people willing to
supply line services or whatever on that, and are they union members? I believe many of
those are.
Kanner/So you're assuming this has excess capacity of workers?
Latham/Just look at Mid, um Alliant's web site. Look at others about, willing to sell wholesale
services. I mean Mid-American has been pushing us repeatedly in Amana, well all these
places, to be providing supplemental services, and not at necessarily full price. At full
cost, excuse me.
Kanner/But how do we get even greater savings, as you mentioned. You assume greater savings
if we do it in-house eventually?
Latham/Well...
Kanner/If we can get these great deals out of house.
Latham/You know, what you are really avoiding are a lot of the administrative overheads,
frankly. I mean that is one of the significant things you are avoiding. Um, I mean, actually
well, I guess we did use 40 bucks an hour here, that's what Louiejust mentioned, but
whether it's 40, whether it's 20, the same thing remains. The assumption we made is it's a
market-based rate.
Wilbum/So in other words, the wage is factored into whatever the going market rate is?
Latham/Urn, I don't know, I don't want, um, going a lot further on that specific issue.
Lehman/These are contract, these are contract...
Latham/What's that? These are contract prices, right.
Kanner/I think you said that we would see savings eventually when we moved in-house, and how
do we realize those savings versus what we just said now?
Latham/Yes. Well, from terms of the administration, in terms of computer systems, in terms of
billing, urn, in terms of the administration of you not paying for shareholders services,
you're not paying for some of the marketing. There are a lot of reasons why there'd be
additional savings through time from that. I...
Helling/Okay, your study indicates that there would be no stranded costs. In a worse case
scenario, if stranded costs weren't zero, how large would it need to be to eliminate all of
your projected savings?
Latham/Well, it'd have to be like $60 some million, and that's pretty....because we said, you
know, the net present value is about $62 million. That would mean, basically, you'd, and
that's a one-time lump sum day one price so you'd have to have stranded costs of probably
in the order of $60 million, you know, to make it zero, a wash.
Matthews/Is there any benefit to the City to negotiate and sign a new franchise with Mid-Am at
this time?
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Latham/And, I used to work with a utility, an investor-owned utility, and I could never in my
mind know why anyone would want to push to have a franchise, particularly from the
City's perspective. Um, and frankly, you would get a lot more attention from the
incumbent supplier without one. Once you sign it, it's amazing how quickly the support
dries up, or the willingness to be seen in the town, I'm not talking about Iowa City, I'm
talking about Iowa utility in general. You know, as long as you have potential alternatives
that are recognized as viable, legitimate alternatives, for which you would have credibility,
the other side of the bargaining table respects that, and so I see very little reason to pursue
a franchise, frankly, at all. A lot of cities have gone for years without them.
Helling/Do I understand your interpretation of the value of Mid-American's assets, to say that
any asset that is thirty years old has no value? Please explain since that would mean MEC
would have to give its system to the city for free. I doubt these assets truly have no
economic value. If I owned a house that I'd been living in for thirty years, and I've done a
good job of maintaining it, chances are its worth would be as much or more than it was
then. Why wouldn't this be the case for Mid-American?
Latham/Well, in this case, whether it's thirty years or forty years or fifty years, whatever, you
know, with equipment that's forty, fifty years old, if it really has that type of condition, that
if it looks, acts, and operates as if it's a forty year old bit of equipment, you know, Mid-
American itself would have fully depreciated it. It's not getting any return on it anyway in
terms of the rate cases. It's fully depreciated from their perspective already, and in many
cases, using a mass book depreciation, what happens is it just keeps depreciating, so in
many cases in terms of effectively on the books of Mid-American or Alliant, it's a negative
by this time. So it has really no net value. At least what we did was to look at the current
replacement value, as if it were new, and then went back thirty or forty years and basically,
I believe we used about a 3% depreciation rate, the same depreciation rate Mid-American
would use themselves. So, if something is thirty or forty years old, um, it may not have a
lot of value, candidly. As you leave tonight, look at parts of the city. There are parts of
this city for which the system is old.
Kanner/How long does a post last for instance? Those last fifty, sixty years?
O'Donnell/And what does a post cost?
Ervin/Some of them last that long, and some of them get hit by a car (laughter), or you kno~v, the
point is Mid-American has done depreciation studies and they came up with right at a
thirty year life, on average.
Latham/Some go a lot quicker than others. But, again, it's mass pooled depreciation, lt's not
individual pole, okay? It's looking at the group as a whole. And you can always find the
doctor, who, 1 know a pole who stayed longer than thirty years, but there's a bunch of
others that were much less.
O'Donnell/One of my questions was how many studies have you done over the past five years?
And you've answered twenty-five, and of the twenty-five, I assume none have converted?
Latham/Right, but of those twenty-five, most of those are right now.
O'Donnell/Most of them are right now?
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Latham/Yes, okay...
O'Donnell/Just a follow up, I think most people in Iowa City want to go to the wall, flick a
switch and have a light come on, or the garbage disposal. Urn, in 97 we had a straight line
wind go through Iowa City, wasn't that 97, Ernie?
Lehman/98.
Champion/Whenever, it was awful.
O'Donnell/Whenever, it was terrible. And I know we had a massive amount of outage in Iowa
City, and that was repaired, I mean, I thought incredibly fast. Can we guarantee the
citizens of Iowa City that we could be that efficient?
Latham/There's a number of sources of the reconstruction or the reenergizing services, whether
it's from other municipal utilities, whether it's from Mid-American, whether it's from
Alliant, on those things. I'm not aware of, at least municipal utilities of which I'm aware,
and again I'm not pushing for a municipal utilities. What I'm saying, I'm not aware of that
as a significant issue. You've got Muscatinejust right down the street here with very
capable line crews and the like. That's likely not to be an issue. In addition to them, you'd
have Eastern Iowa Light and Power Company, that's Wilton. Actually they're part of Iowa
City right now. So, there's a number of alternatives available right here, and one of which
would be other municipal utilities, but that's not likely to be your only source of that. So, 1
don't, to be real honest, I don't think that's the issue that would be determative for you
people.
O'Donnell/Another thing is, if you do indeed have a referendum and it is challenged in court, by
Mid-American...
Latham/It wouldn't be the referendum, you'd have that yes or no, then you'd go to the Utilities
Board, and after Utility Board decision, that decision could be challenged in court.
O'Donnell/And if that is challenged, that's what 1 meant, I'm sorry. Has that happened often,
and is there a length of time and a dollar amount we can associate with that?
Latham/Well the only case of which we're aware, goes back to 1988, the Sheldon case, and I
don't think that was actually appealed in the courts, so we don't have a lot of experience
with that. As I said, I believe that, whether it's AIliant or Mid-American, whoever has the
first case of the Utilities Board, I would be very surprised if the losing party in some sense,
doesn't ask for the courts to review the decision. That would cause additional dollars,
obviously, and delays there.
Lehman/Bob, Irvin, we have thirteen more questions from the public that I really think we need
to get through.
Pfab/Okay, go ahead.
Matthews/You stated that alternative electricity prices have gone down since the date of your
study, and that the net present value to Iowa City if it ~vere to municipalize has increased.
One, how much have the alternative energy prices decreased? Two, using your
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methodology, ~vhat increase in net present value for Iowa City does this reduction result
in?
Latham/Well, we haven't firmly tested the market on what the best possible alternative would be.
As we did last December, for example, we looked at eight or ten different sources of power
supplies, got all their bids in, and then we went after them for additional concessions. So
we really don't know the true impact of what the market would be today. All we do know
is from market sources, that prices are lower today than they were six or eight months ago.
Urn, as I said, just to give you a sense of, or a feel, if we were to use the same assumptions
that we did for Mid-American's power supply choice, rather than having a $62 million net
present value, it would be, I played with that, it was like $84 million. That just gives you
some sensitivity if you don't have an increase in the alternative, you know, for a couple of
years, all of a sudden it's 20 million bucks there. But, we, um, of course, we're available
as a consulting firm to really firmly test the market on behalf of any client (laughter), but
candidly we really have not done that, but we do talk about the market every day, I mean
we're involved every day.
Kanner/For the original study, you actually got actual bids from suppliers?
Latham/For your study, what we used, were, this was a power supply contract that we negotiated
over the winter, and becomes effective this January 1st. It's a five year, fixed price
contract. So that's the basis of your study. That's very real, and it was negotiated from,
we had about fourteen power suppliers offer, in this case, to provide electric power to the
city of Coggon, Iowa. Okay? That's what it was. So this is the power supply that
Coggon, Iowa, for example, would have, and that's what we used here. That is a
negotiated contract that goes into effect January 1 for five years.
Helling/Where would the City go to hire qualified employees, such as linemen?
Latham/A lot of times what happens is, the obvious thing, there would be people within Mid-
American that would want to stay in Iowa City. Um, so that's one source, and another
source would be you know, other, sometimes when you're just starting something up, there
are a lot of linemen who may be at the age of fifty or so, who would be getting full
pensions, you know, from an existing supplier, existing employer, that would consider
such an assigmnent here. This is an attractive city for people to retire. Not that they'd
sleep on the job in terms of the line (laughter).
Ervin/Another good source is if you start out outsourcing initially, and then bring in-house as
opportunities come up. A lot of the contractors that you would bring in, they may very
well not like to travel from town to town ~vith their contracting, want to settle down in a
nice community. I've hired a lot of linemen off from, you know, the cream of the crop off
from the contractors that come in.
Latham/Just as a bit of background, Louie ~vas the operations manager of much of eastern Iowa
on All/ant for a number of years, you know, handled, supervised the linemen and the like,
for a number of years, so there are sources of that available, but I would look first of all to
the people who are here. I look out in the audience, there's even a couple people's be just
absolutely wonderful, what do you call it, customer service people, that I happen to know.
Matthews/In the 1990 Sheldon case, the IUB found the valuation of the system to be about six
times the value of the city's consultant. If the same thing were to happen in the Iowa City
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case, value be findings the system's valuation to be six times that used by Latham, what
would be the impact on the savings estimate in the Latham and Associates study?
Latham/Right, I think I answered that, but that would go from $62 million down to $10 million.
Helling/You note that MEC has a generation shortage during peak times. How many days would
MEC have to have this shortage during the year, assuming that MEC has an excess
capacity during non-peak times, isn't this considered stranded investment?
Latham/The answer really is no. As you're investing in generation plant, and if you're at all
sensitive to the market, you recognize that currently the value of capacity in the six
summer months, and particularly the mass power pool, it's typically on summer period
versus a non-summer period, but the prices are probably eight times the value in the peak
summer than they are in the market value of capacity in the non-peak period. So, whoever
is doing generation planning, has recognized that. I used to be responsible for that at
Alliant in terms of, you know, the optimal mix of generation capacity. As you're doing
that stuff you recognize that stuff has a significantly different value, whether it's the
summer versus non-summer period. It may be nice to be looking at a summer after, and
forecasting the past, by looking back over a summer and saying there were four times
during that period for which we would have been at or near that peak, but you can't plan on
that basis. You've got to plan before the fact, and have capacity available to meet those
peaks. So that's why people tend to have either, certainly four months, if not six months
capacity at that peak level to make sure they're covering it. But the real answer to the
question is the market price differential. That summer stuff is worth a lot more than the
winter stuff. So the excess in the winter is worth ~vhat, twenty-five cents a kw month, but
the people who installed it knew that going into it. That's the way they planned, if they
were doing their job.
Kanner/What is kw month?
Latham/A kilowatt month.
Kanner/As opposed to a kilowatt hour?
Latham/Well, okay, kilowatt is simply a measure of capacity or instantaneous peak, but it's
basically a measure of capacity as contrasted with a kilowatt hour, it is basically, you
know, how much energy over the course of an hour, and basically having one kilowatt of
capacity operating for one hour is one kilowatt hour. So when you're purchasing capacity,
in terms of the summer versus non-summer for example, you're required to be able to have
enough capacity to cover your peak plus any required reserves in the event that one of your
units goes off line or the like. My simple point there was, in the non-summer period, if you
went out in the market today and said I want, you know, 141 megawatts, it'd be 144,000
kilowatts of capacity, during the non-summer period, it would probably cost you twenty-
five cents a kilowatt, it would be almost nothing.
Matthews/If the 1UB does find that Iowa City would have to pay costs related to Mid-American's
approved new generation, what impact would these costs have on estimated savings?
Latham/I'm sorry, please, could you repeat that?
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Matthews/Sure, if the 1UB does find that Iowa City would have to pay the costs related to Mid-
American's approved new generation, what impact would these costs have on estimated
savings?
Latham/I don't really have any sense of what, you know, the ordered magnitude would be, but
we just went through a question there that said what if it were six times what we came up
with, and even then it would be like a $10 million net savings.
Helling/It's estimated that electric usage will increase by 3% per year. Historically, Iowa City
population is increased by only 1% per year. What affect will this have on the net value if
the actual energy increase is less than 3%?
Latham/Well Iet's see. Well, in terms of the net value of what you would pay for the, you're
talking about the net present value? I presume the question is what would be the net
present value, you know, if it were a lower rate of increase because the net purchase price
presumably is what the current system is as depreciated, based upon conditions. Okay, so
if it were say a 2% per year increase rather than 3%. We've done a lot of these
simulations, but my judgment is it probably would reduce the net present value by $5
million, something like that. From 60 to 55, maybe it's from 60 to 50, but that's not, that's
really not difficult. All we have to do is put a 2 in versus a 3 in the model and it just spits it
out instantaneously.
Ervin/You would also not expect if the residential community was growing, or the population
was growing at 1%, there's, that doesn't mean that the usage is growing at 1% because
you've got a lot of commercial, industrial growth, University gro~vth. Even within an
individual household, over the years, there's a tendency to use more and more, so a 1%
residential population growth could very well translate to a 3% kilowatt hour energy use.
Kanneff And when you're talking about growth, you're only talking about usage of electricity,
not population at all, just to clarify?
Latham/Yes, that's correct.
Matthews/Would you go over who o~vns Mid-American? And what Mid-American owns?
Number one, does that mean that properties from Iowa City would be sectioned off to other
ventures all over the world? Two, isn't Iowa City put at risk by being part ora huge
corporate empire?
Latham/Well (laughter) Mid-American is a privately owned company. It's not traded on the
markets. 1 don't know of the exact ownership of it, you know, the, Berkshire Hathaway
has some of it, some of the rest of it is privately owned by a couple, a few individuals.
But, I believe that the Iowa Utilities Board takes that issue very seriously, and tries to make
certain that ventures, you know, such as a power plant in Brazil, or in the Mid-American
case, investment in generation and transmission in the United Kingdom. I believe that the
Utilities Board does a pretty good job of separating the investments and their
corresponding risk on that. So, I frankly don't view that as a significant risk now or the
future for Iowa City.
Helling/Are you aware under Iowa law and public workers, that voluntary recognition of IBEW
Local 109, the skilled workers of Iowa City, cannot be given. Your example of union
transfers from Alliant was private to private. Iowa law doesn't allow transfers of unions.
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Latham/I, I never have claimed to be an expert on that. All I do know is that, you know, when
we did negotiate that, and I don't know all the specific details of working with one local
versus another frankly, but I do know that we were successful in having everyone who was
a worker there, with a new job, and at least at the same benefits and salaries, in Keokuk. I
don't know all the specific details on that, nor would I claim to.
Ervin/The same IBEW continued to represent the same employees. Employees were not forced
to switch locals.
Kanner/This was going from a private to a public?
Latharn/No, this was from a private to a private. This was from the old Union Electric in, that
was in Keokuk, to Alliant, which is actually the old Iowa Electric.
Kanner/Louie, the questioner I think was saying that there's a difference going from private to
public.
Latham/I don't know.
Matthews/How would this affect residents of Iowa City that are supplied by electricity by
Eastern Iowa Light and Power, or REC? I'm not sure what by this means, whether they
mean moving forward and having a municipal utility.
Latham/Yeah, I think the question probably relates to the fact that part of Iowa City is served by
Mid-American, and the balance of it is served by Eastern Iowa Light and Power Company,
right in the city. Urn, the study we did, as I remember, we focused only on the piece of it
that was the Mid-American piece. It wouldn't necessarily follow that the city would
municipalize the Eastern Iowa Light and Power Company piece of this, although
presumably the City could. They need not be together. One can follow the other, frankly,
and so I see no obvious impact on Eastern Iowa Light and Power Company, but it could
very well be. That's really up to the City.
Helling/Two questions here that you've touched on. First, what affect will the NRG bill have on
transmission, and two, why did Translink collapse?
Latham/Okay, well in terms of the actual legislation, in terms of the impact, all I really know at
this point is what I'm reading and obviously we're talking to people all over the Midwest
in terms of utilities and transmission providers, and frankly I really don't know what will
actually become of this. As some of you may know, I have a brother that's a congressman,
and we've talked about that as well, and some of these issues, and I've tried to get some
sense from him as to what's really in that bill and how it's really going to come out, and
frankly, 1 really don't know at this point. In terms of the collapse of Translink, when it
really came down to it, I believe, is a lack of federal teeth to basically require utilities to
participate in regional groupings. There was a federal regulatory commission decision as
supported by, I think, one of the courts in Washington, D.C., that basically limited the
courts ability to mandate that utilities participate in regional transmission systems. I think
given that, and given, you know, I believe what is going on right now is a lot of the
individual utilities are saying, you know, why would I want to necessarily participate with
others unless I'm forced to, ill can get a separate transmission charge going through my
system, that 1 may otherwise perhaps forego. So I think it's an economic issue at this
point.
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Matthews/There are one hundred thirty seven municipal utilities in Iowa. They charge an
average 30% per month less than Mid-American does. Do you know of any reliability
issue or risk issue with any of these municipal utilities?
Latham/Yeah, as I've mentioned two or three times tonight, those municipal utilities would, and
I can't think of an exception, but would typically have transmission services at the same
level of reliability as their investor-owned counterparts. So I'm not aware of a differential
there, in terms of reliability, nor am I going to say that one, that they have a better sense of
reliability than Alliant or Mid-American. I don't know that, and I'm not going to suggest
that.
Helling/What Mid-American cities have minimal or no net present value savings in your study?
Latham/Uh, that's really something that, whoever asked the question, they should ask the
individual cities. I don't believe that's up to us, nor would, I don't think you would want
to have us talking about Iowa City and comparing you with other cities. We would prefer
not to answer that question, but that information is available by contacting the list of cities,
and that is public information. But we chose, you know, the cities are not actually our
clients in this, and we don't think it's our place to be comparing one or another. And I've
already summarized that there's some cities for which there are no savings, in our opinion.
Matthews/In recent years, some energy companies have experienced financial difficulties. You
state there are other suppliers as financially stable as Mid-American. Who are these
suppliers and how did you determine this? Have you examined their financial statements?
Have you provided this information to the City for its review?
Latham/Well the last, you know, no we have not provided the statements for its review, but as I
mentioned earlier, this was not eight months ago. We sent out requests for proposals to
about forty power suppliers in the upper Midwest, that expressed an interest in providing
service to Coggon, Iowa, I'll just use that as an example. And of those, when we asked
them to verify their financials, including what their credit ratings are, and give us their
financial statements, itwas incredible but we'd lost probably about halfofthose. We lost
about half of those as potential suppliers. Just one specific example of a company with at
least as high, probably a higher credit rating, would be Ameren, out of St. Louis.
Wisconsin Electric is at, is probably high rated. Wisconsin Public Service, I think, is also
higher rated than Mid-American, but those are examples of people with whom we deal.
Well, we deal with Ameren a lot. Wisconsin Public Service a lot. Peoples Energy out of
Chicago, I think, is at the same credit rating level too, but basically we would make
absolutely certain that we are looking at quality suppliers, and frankly, as I said, that
probably culled out well over half of the potential suppliers.
Helling/Two questions here. First, what is the projected 2% increase in Mid-American's rates
based on, is this reasonable? And the second question, in your opinion, is it worth
pursuing municipal utility option for Iowa City? What are the major obstacles? Are these
obstacles relatively straightforward and/or able to be overcome?
Latham/Well in terms of the first part of it, a 2%, I mean it could have been2 ½%, it could be
3%, it could be 1%, but we look at the power supply availability in the upper Midwest, and
we've had some run-up in prices, a little bit, due to the prices of natural gas and the cost of
that, particularly for some of the newer generating systems. Particularly in Illinois where
there's been new capacity, and the same type of problems that Mid-American will have
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with its new investment southeast of Des Moines. It's a natural gas fired system, they're
facing unfortunately very high prices of natural gas, and they have little control over that.
Alliant will have the same problem with its new power plant, they're just putting it in up
by Mason City. But, to come up with a 2%, we looked at the market, ~ve asked a number
of people that are colleagues in the power supply business, what they're expectations were.
We looked over at Illinois and said, you know, there's enough new generation in Illinois to
more than, be about one and a half times the total generation in Iowa. Just simply the new
stuff over there was huge, versus the existing stockpile in Iowa. So we know there's a lot
of people over there that are hungry, that are paying capital payments, interest payments,
on capacity for which they're not getting a lot of output. Just like the example of offering
say linemen's services, you know. They want to be able to utilize those services as much
as they possibly can. So putting that all together we came up with 2%, using the best
market judgment we had.
Matthe~vs/How and when were the wholesale prices in the study derived?
Latham/As I mentioned earlier, they were derived as part of a competitive power supply for firm
service, for, as if the city were to purchase all of the peaking capacity, or all of the
generation capacity, for firm service, you know, from some outside vendor, and the actual
po~ver supply is that of the Resale Power Group of Iowa which is negotiated on behalf of, I
think, thirty municipal utilities in this state. It was negotiated last winter. It becomes
effective on a five-year fixed price basis this January 1st.
Kanner/How did you use the study from the Iowa Association of Municipal Utilities? I thought
they supplied some figures?
Latham/They did, but we didn't use them, and frankly, I know that they believe that maybe the
prices we use are too high, but frankly, the prices that we used are ones that we know are
real, and we know that they're negotiated. We know that, you know, obviously Mid-
American, I can't represent anything about that, but they were a likely bidder. But
any~vay, we had gone through two or three sets of iterations on making absolutely certain it
was firm service and the like. We don't have that set of confidence, that same confidence,
in something that we know is done by someone else, frankly. We know these to be real,
and they may be better. But we've not been able to verify that, and we think these are
better data. They may be higher.
Lehman/Bob, I'm going to cheat. I have one question that I want to ask, that I don't understand.
Why is it that municipal utilities can contract at an absolute rate with, for example, Mid-
American or Alliant, but (tape change). In other words, if we were a municipal utility, we
could buy from Mid-American. We could negotiate, well whoever it would happen to be.
But we can contract at a specified rate for a specified time. Why is it that we cannot
contract with them if we don't own the distribution system? l don't think the state allows it
but I don't know why.
Latham/Well, they as a supplier are, you know, at the time they offer their services as a publicly
regulated, investor owned utility, you know, they offer their service in return for an ability
to be compensated through time.
Lehman/But they will sell it to a municipal utility, guaranteed rate for five years, but they won't
sell it to a city unless they, unless the city owns the transmission.
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Latharrff Well there are a couple things there. Just to be real honest. We have negotiated retail
contracts with Mid-American at fixed prices for five years.
Lehman/For cities?
Latham/I really don't, I really would rather not identify the specifics here.
Lehman/No, no, I'm not asking you that.
Latham/But yes, we've negotiated fixed price contracts. Whether for a city, I don't know of an
example of that. I don't want to use, I don't want to publicly talk about the other example.
Lehman/We're obviously, I think we could go for a long time. If there are, we have other
questions?
Matthews/Very few questions, a couple questions remaining.
Lehman/Two? Let's do the last two 'cause we're already about out...
Helling/There's about throe. I just wanted to note, the person who submitted the last question,
there were also questions submitted directly to Mid-American and Council on this. This is
not a form for that. You should submit those directly to Mid-American. Council will have
this on your upcoming agenda in the coming months, and that would be more appropriate
time for that. The question, how much could the budget of Iowa City be reduced if in
addition to municipal energy there was a switch to a municipal cable company? (laughter)
Latham/We have not done that analysis.
Lehman/What's the next question? (several people taking at once)
Kanner/Have you worked on cases where municipal cable was brought in? There are cities that
have both, and...
Latham/We really haven't. We focus on electric and gas.
Matthews/Since you based the wholesale prices in your study on the RPGI contract and RPGI
recently entered into an agreement for energy supply costs from 2004 forward, what was
the percentage increase in energy supply costs from their previous supplier arrangements to
the new arrangement?
Latham/It's probably 30%, something like that, in terms of, maybe even more than that, with
some individuals. As I, basically what we looked at, this is five years ago, the prices at
that time were reduced by about 35%, as I remember, and we just had a discussion on that
last week. And I believe that the new prices today under this current market, are going up
to almost what those people were paying five years ago. And what percentage that is
exactly, I don't know, but it, in terms of the energy component of it, it was at least, it was
at least 30% higher in the new agreement, reflecting market prices.
Hellingd Final question, since the study sho~vs Iowa City will save over a million dollars in the
first year, would Mr. Latham consider using these savings as his fee for the second study if
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November 17, 2003 Council Work Session Page 33
he is asked to do one? Would he agree to forfeit his fee, or reimburse the city, if the
savings fail to be achieved? (laughter)
Lehman/Okay. Thank you very much.
Champion/I just want to ask one clarifying question. We keep talking about no stranded costs
but you do include an $11 million stranded cost in the study. Isn't that...no?
Latham/That is not a stranded cost. That's simply the cost of buying the equipment.
Champion/Okay, okay, I just needed to have that clarified. Thank you.
Lehman/Bob, thank you very much for coming, and I'm sure there are going to be (clapping) a
lot more questions from all of us, but I really do appreciate your time. And if one thing,
we don't know anything else, we know how complicated this issue really is.
Latham/I need to answer that last question (laughter). Effectively, particularly, we purchase
electricity and natural gas today for say fifteen or eighteen hundred public schools in
Illinois, and maybe a thousand, 1 don't know where we are in terms of natural gas, we
provide like the City of Chicago public schools, and a bunch of other things right now, and
if we're not saving anything, we don't get paid. (laughter)
Lehman/Thank you again. Thank you, folks.
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