Manager’s Report
W. Leon Pexton, COO/CEO
Current Issues Facing UMPA
Management Report
Fiscal Year 2011 was a year of diverse issues. The economic recession and the subsequent slow and sluggish recovery are continuing to affect the entire electric utility industry including UMPA. Uncertainty in environmental regulations going forward and the increasing costs of mandated regulatory compliance has caused us to re-examine all cost centers and operational practices to continue to reduce costs and improve operational efficiencies without compromising our core mission to serve our consumers while complying will all applicable laws and regulatory requirements. The economy for our members is showing signs of strengthening. Utah’s economy continues to outperform the nation. Key economic indicators for Utah show most sectors are performing better with the exception of new housing construction.
There has been load growth in both the commercial and residential sectors. Member billed energy load increased 2.4% and member billed capacity increased 2.7% in 2011. Member billed energy reached an all time record high of 1,155,514 mWh surpassing UMPA’s previous high in 2008. A new fiberglass insulation manufacturing facility added a large load to Nephi City and has brought new jobs to the area. Other members saw mixed load growth within load sectors except for irrigation loads that were generally down because of increased snowpack and higher, longer runoff. Fiscal year 2011 load increase was consistent with our long term projections. The Agency is forecasting and planning for future load growth in the 2% to 2.5% range.
Billed member rates increased 2.9% in 2011. At the beginning of the fiscal year 2011 rates were adjusted to properly balance cost recovery between capacity and energy components. Some cost increases were passed to the members last year and some were mitigated using the Rate Stabilization Fund. Load decline in 2009, a decrease in wholesale off-system power sales margins and increased costs at owned generation resources and some contracted power resources required UMPA to increase its base rates to members.
In past years, off-system power sales margins have offset cost increases in generation and kept member rates stable. Decline in the wholesale market margins have effectively shifted costs to member rates. The off-system wholesale power market continues to be weak. Electric demand is down throughout the West impacting the Agency’s off-system sales. The market has been soft the last two years as the weakened economy has reduced the demand for power nationwide and in the western states. Natural gas prices have also been down making many utilities gas-fired generation units economical to operate rather than buy on the wholesale market. Market prices are somewhat seasonably stable and are expected to recover as the demand for power in the West increases. UMPA markets its surplus resource to other utilities when not needed to serve member load. Off-system sales decreased 41.5% in kWh during 2011 and 34.9% in revenue. We expect the market to remain weak for the next several years.
The Rate Stabilization Fund (RSF) was used to pay for $1.5 million of primarily environmental upgrade equipment at the Hunter 1 facility. In prior years, the RSF balance was increased during an extremely favorable economic environment. The RSF has proven to be a valuable financial mechanism for maintaining stable predictable electric rates to our member cities. We expect to continue to draw on the RSF in 2012 for environmental equipment upgrades at Hunter 1.
During fiscal 2011 the Agency considered participation in a wind project located in a neighboring state. However, the project analysis concluded that the project would not provide any operational, financial or power supply benefit to the Agency. Nevertheless, UMPA continues to explore viable, attractive renewable energy resources that will enhance our diverse resource portfolio and provide benefits and value to our consumers.
UMPA assisted member city, Nephi, in changing the point of delivery for receipt of power on PacifiCorp’s transmission system. The new manufacturing customer’s power needs exceeded the capacity of the line importing power to Nephi during the summer months. Also, the transmission point of delivery to Nephi was moved to the interconnection point with PacifiCorp’s transmission. PacifiCorp also had to upgrade their transmission delivery system to meet both Nephi’s and PacifiCorp’s future load growth. UMPA’s transmission agreement with PacifiCorp and UMPA’s power delivery agreement with Nephi required the Agency to assist in, and financially participate, in the process. The project was successfully completed at the end of the fiscal year. Other UMPA member cities provided line crews to help Nephi rebuild the line, saving Nephi and UMPA significant construction costs.
The renewal and modification of our long term, full-requirements, power sale agreement with a non-member municipal utility was completed near year-end. The agreement provides the non-member utility the opportunity to acquire their own generation assets, over time, while UMPA continues to supply all other power including scheduling, load following, ancillary services and other load growth. The agreement is beneficial to both parties assuring the non-member utility of power supply stability and UMPA a sale of surplus power.
UMPA continues to revise its Integrated Resource Plan. The plan provides a guide to examine all potential power supply alternatives comparing their attributes to the Agency’s long term requirements and goals. The plan provides a mechanism to compare various potential resources, attributes, and characteristics against each other and a base case resource from an operational efficiency and flexibility perspective as well as the underlying economics. The plan will also provide for flexibility to adjust the underlying power supply metrics for changing utility and regulatory paradigms.
Near year end PacifiCorp, UMPA’s primary transmission provider, filed for approval of a major change in its transmission rate methodology and structure with the Federal Energy Regulatory Commission (FERC) that, if approved, would increase the transmission and related ancillary services costs paid by transmission customers. The financial impact to UMPA would increase transmission and ancillary services cost approximately 60% over the existing rate structure. The proposed structure will also adversely impact how we schedule our resources both to load and off-system.
The FERC controls rate setting methods and must approve any rate changes for investor owned transmission providers. UMPA has intervened, as have other transmission users, at the FERC as an impacted party, and asks that PacifiCorp’s proposals be set for a hearing before the full FERC Commission. As part of that process UMPA, and other entities, will be allowed to enter into discovery proceedings with PacifiCorp which will allow all impacted parties to examine the details and underlying requirements, basis and justification, for the proposed change. Subsequent to year end, the FERC allowed the interventions and has set the case for a mid fiscal year hearing. In conjunction with the rate filing, PacifiCorp has notified UMPA that it intends to file with the FERC a modification of our transmission agreement with PacifiCorp that could result in significant changes to the way we move power from various resources to member loads and also off-system. UMPA is vigorously engaged in the case to protect our hard-won contractual agreements over the years and to protect our members and customers.
The Agency’s future involves many dynamic challenges and issues. We must continue to adjust to industry, regulatory, and environmental changes, plan for future load growth, and investigate, evaluate, and plan for additional resources. Our continued focus is meeting member and customer expectations in an effective and responsible manner. In order to meet the diverse needs of our consumers, we will continue to develop the necessary balance of maintaining a successful energy portfolio and a healthy electric utility.
W. Leon Pexton
Chief Operating Officer
General Manager