Current Issues Facing UMPA

Management Report

Fiscal year 2009 presented a variety of challenges in the electric industry as the economic downturn led to difficult circumstances for many companies and concern for the stability of others.  While many industries felt the impact of these hard times, UMPA is well positioned to navigate the tumultuous period.  UMPA’s conservative operating and financial principles helped the Agency avoid some of the financial pitfalls that have befallen other companies.  While the future is uncertain, we are confident that the core financial principles that guide the Agency will continue to direct us toward success.  Notwithstanding the economic downturn, the Agency still faces rising costs for fuel, capital, operations and maintenance.

Member energy load decreased 2.6% and member capacity decreased 1.8% during fiscal 2009 reflecting the nation-wide economic recession’s impact on our member cities’ customers.  As expected, most of the load decrease was in commercial and industrial customer classes with residential loads remaining relatively unchanged.  Overall, Utah’s diversified economy has fared better than the nation’s.  As the national economy recovers Utah is expected, as it has historically, to respond at a faster pace.   While the short-term and long-term recovery rates are yet to be determined, UMPA’s current resource portfolio will provide adequate electric capacity and energy to its members for several years.

Near the end of the year, the Agency revised its future load projection to reflect the decrease in member loads and establish a new base year for future load growth at a less robust growth rate than historical as the economy begins to rebound.  UMPA expects member loads to grow at a manageable 2.0% - 2.5% annual rate over the next five to seven years.  Even with the revised load growth projections, UMPA will need additional base load generation resources to serve load growth in future years. 

It takes years to develop a major new power resource, so UMPA members are planning ahead, working today on plants our customers will need in the future.  In the long term, the electric needs of our members will continue to grow while contracted resources will diminish.  Investments in utility resource infrastructure will be necessary to maintain excellent system reliability.  During the year, the Agency continued to evaluate the waste-coal fired Two Elk project in Wyoming.  Near year-end, the UMPA Board of Directors voted to withdraw from the project due to transmission issues in delivering the output to load concurrent with project completion.   Further complicating the decision was environmental regulatory uncertainty at the federal level.  The 86 MW circulating fluidized bed project near Bonanza, Utah continues to be considered.  The Environmental Appeals Board within the Environmental Protection Agency (EPA) remanded the permit back to EPA in late calendar 2008 for additional determination and consideration regarding CO2 output and control.  The EPA has yet to rule on the remand.  Subsequent to year end, the project sponsor, Deseret Generation and Transmission, applied for a Department of Energy grant to add carbon capture and sequestration technology to the project.

 The Agency continues to evaluate other generation resources.  During the fiscal year nuclear generation options began to be evaluated.  The evaluations are long-term and any potential development would be several years into the future.  The Diamond Fork Hydro Project near member city, Spanish Fork, is also being evaluated.  This project would provide capacity and energy during the summer peaking months.

Congressional consideration of carbon cap-and-trade legislation is ongoing.  The legislative outcome will impact the Agency’s current and future generation resources.  New environmental regulations are poised to increase operating costs during a slowing economy. There are no inexpensive options for UMPA’s coal base-load portfolio.   The overall impact on UMPA’s cost structure will depend on final Congressional action and regulatory rules. 

UMPA utilizes PacifCorp’s transmission system to move power into and out of Utah as well as to our member cities.  PacifiCorp’s $6 billon Gateway Transmission Project will add needed transmission capacity to the Utah system, the Northwest states, and ultimately into Nevada over the next several years.  Construction is underway on the first major segment between Utah and Idaho.  The construction completion schedule for various segments ranges from 2014 through 2019.  While the construction schedule appears long, it is the largest transmission project in the West and possibly the nation.  The Agency, and other utilities, will benefit from the additional transmission capacity for new generation resources as well as the purchase and sell of electrical energy.

Major capital and maintenance investments are to occur at the Hunter 1 unit in the upcoming fiscal year, which included contractual progress payments in the current year.  These projects include an anticipated 17 MW turbine upgrade, main controls upgrade, and environmental upgrades.  The Agency’s board has elected to fund these projects from the Rate Stabilization Fund to mitigate the financial impact on current and future rates. 

The Agency’s fiscal year 2009 member cost per kwh, an important benchmark of financial and operating performance, was 41.71 mills compared to a budgeted cost of 42.49 mills.  Billed rates to members were at budgeted rates in accordance with the Board established Rate Stabilization Fund, which is essentially budgeted rates less actual costs.  The purpose of the fund is to preserve UMPA’s competitive, stable rates and mitigate contingencies and risk.  It enables the Agency to realize budgeted rates while allowing operational savings and marketing margins to be set aside for the future benefit of members.

Beginning in January, 2009, short-term electric wholesale market prices began a sharp decline that continued through the end of fiscal 2009 as the economic recession took its toll in reducing commercial and industrial electric demand.  UMPA margins earned from off-system sales of surplus capacity and energy declined.  By March, and continuing through year-end, market prices reached a level that it was cheaper for the Agency to buy some power needed for load rather than generate from higher incremental cost resources, thereby creating displaced capacity.  Simply stated, UMPA bought on the open market when it was cheaper than generating.  Market prices continued lower throughout the summer with a small rebound in early fiscal 2010.  Decreased margins from off-system sales are expected to continue in fiscal 2010 putting upward pressure on Agency net costs.

A new 6-9 mW industrial load in member city Nephi is scheduled to come on line in December, 2009.  A multi-million dollar transmission upgrade by PacifCorp to serve Nephi is in its final stages of design.   UMPA, Nephi City and PacifiCorp have worked together through the year to finalize rights-of-way, transmission line and other issues involved in changing Nephi City’s point-of-delivery to provide for future flexibility as the city’s load grows.  The terms of UMPA’s transmission agreement requires PacifiCorp to provide needed transmission system improvements to the new point-of-delivery.

Retail customer interest in behind-the-meter solar and wind generation has grown over recent years.  UMPA is working with its member cities to create a framework program, currently not possible under existing agreements, which would allow retail customer net-metering programs on a member city by member city election.  At year-end the framework program investigation was well underway with Agency adoption anticipated in early calendar 2010.

UMPA’s goal of providing low-cost, reliable power supply has always guided the Agency’s decision making processes since its inception.  Although the idea is simple by definition, developing the necessary balance is the key to maintaining a successful energy portfolio and a healthy electric utility.  UMPA and its member cities face tough decisions as we strive to balance the diverse needs of our consumers. We are guided in this process by the needs and input of our member cities in order to achieve the optimal resource portfolio.

W. Leon Pexton
Chief Operating Officer
General Manager