Electric City Power, Incorporated

JOURNAL OF BOARD PROCEEDINGS

February 2, 2009

Electric City Power, Incorporated (ECP): Regular meeting of the Board of Directors
Great Falls Civic Center, Commission Chambers Gibson Room

CALL TO ORDER: 5:30 PM

ROLL CALL: Directors present: Chairman George Golie, Bob Pancich, John Gilbert and Lee Ebeling. Also present were the ECP Executive Director, City Manager, City Attorney and the City Clerk.

I.  EXECUTIVE DIRECTOR REPORTS

Executive Director Coleen Balzarini updated the Board on the following:

Blended Rate Status Update. Ms. Balzarini reminded the directors that the ECP Board previously recommended that the City Commission approve the blended rate offer from Southern Montana. It was pulled from the City Commission’s agenda in January. After discussion it was determined that a rate rider, rather than an addendum to the existing contract, was the appropriate document to formalize the blended rate. That item, Contract Rate Rider #2, is on the City Commission’s agenda tomorrow night for review and action.

Southern Montana has completed its annual budgeting process. There will be an 8% rate increase. Even with that increase, the blended rate will still be less than what the pass through rate has been in the past. A majority of Southern Montana’s contracts are in place through 2011. As a blended rate customer of Southern Montana, ECP will also be participating in margins (patronage capital) that are calculated annually. With the exception of one year, Southern Montana has made a profit annually and has allocated those profits on a pro rata share of consumption to its members.

Cogeneration Billing Procedure. Contract Rate Rider #1 sets forth the procedures to allow Southern Montana to report and receive information regarding what is being generated from the cogeneration facility at the Wastewater Treatment Plant. This item is also on the City Commission’s agenda for approval tomorrow night.

Year to Date Financials. Ms. Balzarini reviewed the preliminary financials through November, 2008. The major activity on the balance sheet is the water credit and cash flow, due to the timing of billing and collecting. Ms. Balzarini explained that the revenue and expenses reported from July – October are final numbers inclusive of the imbalance expenditures and revenues collected from customers.

Energy Consumption Charts. Ms. Balzarini noted that the average customer rate billed in 2008 was $56.73 including transmission, electricity and administration fees, compared to $56.03 in 2007. The average supplier rate paid to Southern was less in 2008 due to the imbalance sales proceeds.

Pilot Program. Ms. Balzarini reported that the pilot program is a small group of residential and commercial customers that the Public Service Commission licensed Electric City Power to serve. The original intent was to use the pilot program as a test to establish the methodology for servicing small customers. Subsequent to the PSC’s approval of that, HB 25 came into effect which prohibited ECP from serving any new small residential or commercial customers. She noted that the pilot program is less than 1% of the total customer base of ECP. The customers of the pilot program pay for the cost of consumption as well as their pro rata share of the surplus sales and purchases that ECP incurs. The customer rate that the pilot program pays is higher than what ECP would make by selling that power on the imbalance market.

Director Gilbert stated that he has received several complaints regarding the pilot program and the appearance of a conflict. Due to a full agenda, Director Gilbert requested this item be on the next meeting’s agenda for further discussion.

HGS Status Update. Tim Gregori, General Manager of Southern Montana Electric Generation & Transmission Cooperative and SME Electric Generation & Transmission Cooperative, reported that a decision was announced today to analyze in great detail an alternative technology for the use of the generation site – a 120 megawatt combined-cycle natural gas fired power plant, in addition to erecting at least six megawatts of wind towers, rather than the 250 megawatt coal fired facility.

Mr. Gregori explained when the Southern Montana Board gathers, they continue to refresh the basis of their alternative evaluation study that led them to the selection of a base load coal fired resource as the preferred option for the long term power supply needs at the Highwood Generating Station. The decision announced today wasn’t a reflection that there has been a change in the value of the information in the alternative evaluation study or even the conclusions in the alternative evaluation study. It was a pragmatic decision to put in place a generation resource that could be permitted in a reasonable timeframe.

In terms of alternative technologies, the decision also wasn’t based on economics. A natural gas fired facility is more expensive than a coal fired facility. But, a gas plant can be built and on line by 2011. Regulatory concerns weighed heavily in the decision to change direction. SME went through an extensive permitting process from 2004 to 2007. He hopes in time that people will come around to the idea of a more diversified portfolio that includes coal.

The findings and conclusions of the Environmental Impact Study under the direction of the Montana Department of Environment Quality and United States Department of Agriculture Rural Utility Services remain valid. Highwood Generating Station will not have an adverse impact on air, land or water. The only adverse effect that was found was the size of the facility could be seen. The gas fired facility will be a fraction of that size.

Mr. Gregori explained the unresolved item with regard to the Section 106 process. Ultimately, a Memorandum of Understanding will be offered. A meeting is scheduled for March 12, 2009, to continue the Army Corps of Engineers process.

Mr. Gregori discussed the accomplishments of HGS made to date. Much of the work completed at HGS will transition over to a combustion turbine based generation platform. The CFB contract with Alstom will be put on hold based on the recent announcement.

For 17 months and 25 days of the 18 month period that HGS had to commence construction, the permit was tied up in the appeal process. Concrete was poured on November 26, 2008, which did perfect the air permit.

Mr. Gregori reviewed PowerPoint slides and explained the economics. Coal was and still remains, from a cost of fuel perspective, a more efficient fuel to use as a resource. Because of the passage of time and the escalation of costs, the cost of HGS is now roughly $950 million dollars, which does not include interest during construction. Comparing that to a gas turbine facility, including interest during construction, will be $210 million. The difference is capital costs of the coal project is significantly higher, but the fuel costs are lower. Capital costs of a natural gas fired facility are significantly lower, but fuel costs are significantly higher.

A combined cycle gas system is being proposed for HGS consisting of two 40 megawatt simple cycle units, a 40 megawatt combined cycle unit and, in total, will have 120 megawatts of generation capacity. The two 40 megawatt units will be built first and will take about 24 months. Adding the heat recovery system and bringing the combined cycle system on will take another 12 months, making the total construction period about 36 months.

Wind generation, that has already been approved, will be added. He is hoping there will be other monies available to keep the cost of wind down. Southern members will need electricity by 2011. This configuration will not cover the entire needs. They will still have to buy roughly half of the electricity on the open market.

In closing, Mr. Gregori commented that supply options all have a high level of risk and price uncertainty. That is even greater today than when they started. At earlier meetings the projected busbar cost was about $35 per megawatt hour. Today, that cost is about $64 per megawatt hour. In the interim, a request for proposals was sent out to 16 qualified electric generators in the region to propose pricing to meet all of the generation needs out to 2019.

Chairman Golie asked if the Board members had questions for Mr. Gregori.

Director Gilbert asked where the wind farm would be located. Mr. Gregori responded that it will be on the property that was purchased, but it is a goal to locate it outside the landmark. That decision hasn’t been made definitively yet.

Director Gilbert inquired about the status of the financing for the natural gas facility. Mr. Gregori answered that a meeting with bankers occurred last week. Natural gas fired projects are being financed in a fairly rapid fashion.

Director Gilbert asked what the life of a gas plant was compared to a coal plant. Mr. Gregori responded that a coal plant is 40-50 years versus a gas facility at 30-35 years.

Director Ebeling commented that the megawatts were going from 250 to half. Mr. Gregori stated the balance would be covered with contracts. That is why the RFP went out. The net demand will be over 250 by the year 2017.

Chairman Golie asked how long Mr. Gregori thought it would take this facility to get permitting. Mr. Gregori answered that Southern representatives already met one time with the DEQ to introduce the concept, and have another meeting scheduled Thursday. A consultant was hired to develop the air quality permit application for the facility. It is his hope this facility will be permitted in 4-6 months. He reminded the Board members that an Environmental Impact Statement had already been completed. There are three major gas lines that come within close proximity of Great Falls. They, likely, will have to drill a line underneath the Missouri River.

Director Gilbert asked if contracts have been firmed up. Mr. Gregori answered that the consulting firm, Jetco, has been hired. They were members of the Montana Power Company gas trading group. They have said that, at the 10,000 foot level, the same analysis that lead SME to select this site for the coal facility exists for natural gas as well.

Chairman Golie asked if local landowners would be given the opportunity to build wind turbines on their property. Mr. Gregori answered if someone wanted to build a wind turbine and approached SME for firming power, the answer to that would be yes.

Six megawatts of wind are already in the plan. SME understands from the congressional delegation that there are two avenues for additional funding for wind generation.

Director Gilbert inquired about the inaccurate information reported in the newspaper regarding the cost to the cooperative members. Mr. Gregori stated the information he reported was, had SME proceeded with the development of the coal plant to completion, due to the delays incurred driving up the cost of the project, would have cost the average member upon completion an additional $30 of that electricity cost for the next 35 years.

Director Gilbert inquired if the gas plant would change the terms of the fire contract with the City. Mr. Gregori responded that he would ask for some consideration since the level of construction changed. If the City responds negatively, SME will continue to pay the amount specified in the existing contract.

Director Gilbert asked if the water credit would be an issue. Mr. Gregori answered that the water needs are a third of what was needed before which means the repayment terms will stretch out a little longer.

Director Gilbert asked, since the RFP, does he know what the blended rate will be in a few years. Mr. Gregori responded that both had to be done at the same time. Now, the result of that will dovetail to cover any interim needs SME has. Plus, if SME had 120 megawatts of its own generation, it could layer in other megawatts of purchase power to put the blended costs together. The City will be able to take advantage of the blended rate.

Director Ebeling asked if the carbon sequestration issue has been approached yet. Mr. Gregori responded yes. The natural gas emissions from a combustion turbine are equal to the emission standards of California, Oregon, Washington and Idaho. SME is building to the standard.

Director Pancich asked about the estimated taxes. Mr. Gregori said he would rather not guess. Director Pancich asked where the gas unit would be situated. Mr. Gregori responded, due to the issues raised with regard to the Lewis and Clark landmark, the gas plant will be positioned back further. His guess is you won’t be able to see the top of the turbines. The stacks are only 80 feet. It is a much lower profile system. The gas combustion turbine is being situated so as not to interfere with the coal plant if and when SME gets to that point.

Director Gilbert requested an explanation of the transaction that spun SME out of Southern and where the City stands. Mr. Gregori responded that it is common knowledge that one member voiced concern with the decision to continue with the development of Highwood Station over a year ago. To honor that member system’s request, the Board formed a separate company to insulate that member from the financial risk associated with continued development of the Highwood Station. SME was that cooperative that was formed to add a separate corporate entity and separate financial entity from Southern Montana to carry forward with the project. The City of Great Falls invested approximately $2 million dollars when the effort was wholly under the umbrella of Southern Montana. Based on communications with the City, the City was not in a position to make any additional investments in the activities of SME. At one time, the City had an 11% investment in the development. As SME makes additional investments, the City’s investment amount won’t shrink, but its percentage of investment and the right to cost based power shrinks. That doesn’t mean that the City doesn’t have an entitlement to the blended cost of what it costs SME to get the other amounts of power. If 11% of 120 megawatt plant is roughly 13-14 megawatts, then the City gets 14 megawatts of power at the cost of the gas plant, and the other power will be priced at the cost of acquisition.

Director Gilbert commented that Southern has a note receivable from SME for the cost expended to date. Mr. Gregori responded that today all of those costs still sit with Southern Montana. At the point SME completes its financial transaction, then everything will be moved over to SME and SME reimburses Yellowstone Valley for its investment.

Director Gilbert stated that the City’s investment is permanent then, at this point. It just owns a shrinking share of the coal plant as others make investments and the City makes none. Mr. Gregori responded that the investment entitles the City to a piece of the WAPA and Bonneville allocations. Those have far greater value than the $2 million invested in the plant.

Chairman Golie asked if there were any questions from members of the public.

Commissioner Jolley inquired about a clause in the blended rate contract that goes before the Commission tomorrow. Mr. Gregori responded what the Commission is voting on tomorrow is whether or not it wants to take advantage of the blended rate or continue as a pass through customer.

Larry Rezentes, 2208 1st Avenue North, commented that one of the issues in litigation from YVEC is the availability of the WAPA rates to the City. He doesn’t believe it is one hundred percent clear that the City will get that advantage. Mr. Gregori answered that is a subject of litigation and this isn’t the right forum to discuss that subject.

Richard Liebert, 289 Boston Coulee Road, asked how many wind turbines SME plans on expanding the wind farm to. Mr. Gregori answered that is a function of financing. Mr. Liebert noted that Mr. Gregori mentioned going back to coal. He asked if it would be a CFB facility or a gasification facility. Mr. Gregori answered that if SME were to resume activity on the coal plant, they would have to perform a new best available control technology analysis and whatever was deemed as the best available control technology at that time would be the technology SME would have to use. Mr. Liebert asked if coal would be brought in by train. Mr. Gregori responded that was a way to get it here now. It won’t require any rail to put the natural gas plant in. Mr. Liebert asked if the SME cooperative members considered putting wind farms in their own service areas if the transmission was compatible with putting up turbines in Fergus County or other places. Mr. Gregori responded that the driver is the wind resource and where it makes sense to put the wind turbines. The ideal compliment is to be able to use the same substation for both the wind resource and the combustion turbine resource. Mr. Liebert commented that the old air permit said the cost per megawatt would be $70+. He and Mr. Taylor forecasted it to be over that. Mr. Gregori responded that the number he was referring to wasn’t the cost of the generation at Highwood Station. It was a levelized, forecasted price of the market so they were able to determine what the cost was for decreases in generation capacity at the facility.

Stuart Lewin, 615 3rd Avenue North, wondered whether the cooperative, in its application for the new air quality permit, would be willing to consider buying and replanting trees in order to make a zero carbon footprint. Mr. Gregori expects there would be some consistency in how air permits have been dealt with in the state because CO2 is clearly a global issue. There has been no agreement from NorthWestern Energy to have a zero footprint at its plant in Anaconda, no agreement for Basin Electric’s Plant near Culbertson, Montana, and no requirement at the state level from a regulatory perspective that there be a zero footprint. SME does not see that as a condition of its air permit. SME is very considerate of the carbon issue. From a carbon footprint standpoint, the gas plant will produce half the carbon of a coal fired facility.

Neil Taylor, 3417 4th Avenue South, disagreed with Mr. Gregori’s statement regarding when construction began. He believes construction started on October 15th. Mr. Gregori responded that the legal definition that DEQ uses and the date they state for commencing construction is November 26. Mr. Taylor asked what kind of conservation program were SME and the cooperatives anticipating. Mr. Gregori answered that, in terms of controlling peaks, SME has a fairly sophisticated real time telemetering system placed on 70% of the substations and delivery points. That allows SME to not generate any electricity that isn’t needed in real time. That means the amount of generation that SME will produce from the facility will be exactly what it needs. There will be no surplus power being generated, which means they can keep the costs down. As far a member system conservation programs are concerned, Mr. Gregori stated that conservation programs are implemented at the distribution system level. On an annual basis, SME exceeds the amount required to spend by state law on conservation and renewable resources, because it is already built into the rate that went to fund a lot of programs.

Ken Thornton, 31 Paradise Lane, asked if the 120 megawatts would be used to back up other wind projects. Mr. Gregori responded yes, SME will make the maximum use of that capacity as much as possible. For every megawatt of wind SME is able to firm, justification for this facility is more appropriate.

Stuart Lewin, 615 3rd Avenue North, stated that it is his understanding that ECP actually had to buy contracts. If ECP goes to the blended rate, it will be losing something in those contracts vis- a´-vis what is going on with SME. Mr. Gregori answered the City has specific contracts that Southern Montana went out and got on behalf of the City’s projected load. Those contracts expire in the 2011 timeframe. By blending ECP’s load with SME’s load and going out for new contracts that would start in 2011, then the benefits are shared moving forward. The blended rate will be less than what the City would pay if it just had the pass through contracts.

Ron Gessaman, 1006 36th Avenue NE, commented that it was his understanding that the air permit for the coal fired plant had an 18 month suspension. He asked how that had a bearing on the new plans. He also asked for clarification on SME’s relationship with the Big Sky Sequestration group. Mr. Gregori stated Mr. Gessaman was correct on the 18 month issue. He thinks they will have to work out an arrangement on the control technology analysis during that period because they will have to be able to demonstrate the control technology hasn’t moved beyond what they have proposed. Highwood Station is considered the best available control technology for a conventional coal facility. As far as the Big Sky Sequestration Partnership, that partnership is one of seven United States Department of Energy funded initiatives to look at opportunities for carbon capture, storage and sequestration at various locations across the United States. Mr. Gregori stated that SME hired members of the Big Sky Carbon Sequestration Partnership to complete its business plan.

Miscellaneous Reports. Executive Director Coleen Balzarini provided the Board members with copies of the ECP’s Answer to the YVEC lawsuit. She also updated the Board regarding the MEIC records lawsuit.

Ms. Balzarini noted that she purchased the Guidebook for Directors of Nonprofit Corporations for each Board member.

II.  NEW BUSINESS

Election of Chair and Vice Chair. Bob Pancich moved, seconded by John Gilbert, that George Golie remain Chair for his second year, and Bill Ryan continue as Vice Chair. There were no other nominations.

Chairman Golie asked if there were any public comments or discussion amongst the Board members. No one responded.

Motion carried 4-0.

Accept Board Meeting Minutes of January 5, 2009. Lee Ebeling moved, seconded by Bob Pancich, to approve the January 5, 2009, Board meeting minutes.

Chairman Golie asked if there were any public comments or discussion amongst the Board members. No one responded.

Motion carried 4-0.

ECP Structure and Authorities. Executive Director Coleen Balzarini explained the chronology of organizing Electric City Power. In November, 2005, the City Commission adopted Ordinance 2925 creating Electric City Power. The Commission also adopted Resolutions 9529 and 9530 approving the Articles of Incorporation and the Bylaws of Electric City Power. The Articles of Incorporation and the Bylaws establish the Board of Directors. On February 6, 2006, the Board elected its initial officers and appointed her as the Executive Director as mentioned in the bylaws. The responsibilities of the Executive Director are also in the bylaws.

Rules of Operation. Executive Director Coleen Balzarini stated that the rules that ECP operates under are governed by the Wholesale Power Agreement with Southern Montana and the contracts with customers. The City Commission needs to adopt the Rules of Operation by a Resolution after this Board creates them. She provided the Board with language extracted from said documents. She requested guidance from the Board on whether to refer to the contracts or write specific rules.

Director Gilbert commented that there are approximately 35 customers and he is happy with the way it is.

Chairman Golie inquired if there have ever been any complaints. Ms. Balzarini answered no.

Director Pancich asked if the rules of operation would change if they accepted the blended rate. Ms. Balzarini stated that nothing would change with regard to the contracts with ECP’s customers. Any change between the City and Southern Montana is itemized in the rate riders.

PSC/NWE/ECP Customer Meters. Executive Director Coleen Balzarini updated the Board on the Public Service Commission case. The PSC denied ECP’s request to reconsider. The options are to file a Motion to Reconsider with the District Court or go to the legislature and ask for a statutory change that would clarify that, not only was ECP authorized to serve customers as of October 1, 2007, but any new meters of its existing customers. Benefis is concerned that it doesn’t have the ability to have all of its meters served by the same supplier. Benefis is in support of ECP pursuing this to the extent that they are willing to commit financially. She estimated the cost not to exceed $10,000 if the matter was filed in District Court. The deadline to file is February 17th. She suggested pursuing it on both fronts and asked for guidance from the Board. After discussion, it was the consensus to pursue those options.

George Golie moved, seconded by Bob Pancich, that the Electric City Power Board recommend that the City Commission retain legal counsel to pursue the PSC matter through the District Court for clarification of new meter hook ups for existing customers, along with any available legislative remedies.

Chairman Golie asked if there were any public comments.

Neil Taylor, 3417 4th Avenue South, suggested the Board read the Assignment and Assumption Agreement. He doesn’t believe recommending this to the City is in the best interest of the taxpayers.

Stuart Lewin, 615 3rd Avenue North, asked Ms. Balzarini if Benefis indicated it would go directly with NorthWestern Energy if it couldn’t get all of its meters served by one entity. Mr. Lewin also inquired when ECP’s contract with Benefis expires. Ms. Balzarini answered that Benefis has expressed the fact that they do not want to be served by NorthWestern Energy. Benefis opted not to sign a long term contract at this point. Their contract expires in 2011 or 2012.

Sandra Guynn, 3624 9th Avenue South, commented that if she understands the motion right, the Board indicated that the City Commission would have to take into consideration the Board’s recommendation. The earliest the City Commission could do that would be on February 17th, the date of the deadline.

Ms. Balzarini commented that, up to this point, an attorney has been engaged in this litigation. This is a continuation of an existing process. If this is something that has to have Commission action, a special meeting will be discussed.

Director Gilbert commented that he believes there is an advantage to pursue this to protect a major customer. Ms. Balzarini commented that Benefis and Southern have indicated a willingness to participate in the related costs to move forward with the suit.

Motion carried 4-0.

III.  BOARD MEMBER REPORTS – None.

IV.  COMMUNICATIONS

Public Comment.

Larry Rezentes, 2208 1st Avenue North, commented that he didn’t hear any discussion about numbers. It appears to him that there is an attempt to not disclose information that is available to the Board members and not available to the public. Mr. Rezentes wants to know what ECP is losing on a cumulative basis. His last calculation was $1.8 million dollars since inception. He also does not know what is owed for the water credit. Mr. Rezentes inquired if the Board was considering whether there was an advantage to continuing the operation of ECP. He also asked that the financial statements be posted on the City’s website and be distributed to the Tribune.

Director Gilbert responded that the financial statements are public documents. He offered his copy of the financials to Mr. Rezentes. The fact that specific numbers weren’t talked about doesn’t mean the Board was trying to keep anything secret. Secondly, a meeting was scheduled with the City Commission to discuss the future of ECP. That had to be deferred because of the YVEC litigation. It will be rescheduled and that will be an item of discussion.

Ms. Balzarini added that, when the minutes are approved, the board packets are attached and posted on the City’s website. The financials are part of the packets every month. Extra copies of the financials were made in the past and virtually none of them were taken during meetings. She also offered her copy to Mr. Rezentes.

Neil Taylor, 3417 4th Avenue South, commented that the cost of wind versus coal was inaccurate as shown on one of the slides presented. Mr. Taylor stated that wind is almost half the cost of what a coal plant costs. He also noted that when a wind farm is built the energy is relatively free after that because coal or fuel doesn’t need to be trucked in.

Stuart Lewin, 615 3rd Avenue North, requested that the YVEC litigation documents also be posted on the City’s website. Mr. Lewin inquired if anything was done about his suggestion of the City and ECP having separate lawyers. Additionally, he asked if the Board considered making the City a party to the lawsuit to protect ECP. He asked if the Board considered paying back the City of Great Falls for the amount of losses by ECP and, if so, where was the money going to come from. Mr. Lewin commented about the Board keeping the same officers in place and noted that the chairman is one of the people that have been getting power cheaper than what the City is paying for it. Ms. Balzarini responded that was incorrect and that information on that subject was also in the board packet.

Ron Gessaman, 1006 36th Avenue NE, commented that he is concerned about the comments made about the rules of operation. He referred the Board to Ordinance 2925, Section 5.20.080 and § 69-7-201, MCA. He stated he was further disturbed about Item B 3, ECP’s structure. He challenged the Board to show him where the executive director’s duties were set forth in the bylaws. He believes the information presented to be incorrect. He suggested the Board investigate this issue further.

Ken Thornton, 31 Paradise Lane, commented that he was happy to hear about the switch to a natural gas plant because the CO2 produced would be significantly reduced. Mr. Thornton discussed technology and how it was changing. Mr. Thornton voiced concerns about efficiency and stated that a combined cycle gas plant will reach efficiency close to 50%. It was something that could be captured as hot water. He also reported that these plants are being placed close to industries that can use that power. He suggested a great place to change locations of the plant would be the Industrial Park north of town. Mr. Thornton discussed the smart grid. He suggested ECP hire an analyst to find out what the best efficient technology is. Mr. Thornton concluded that cogeneration in Great Falls is the best bet.

Stuart Lewin, 615 3rd Avenue North, commented that if the ECP Board is going to continue, it should unwind from Tim Gregori and go out on its own.

ADJOURN: Chairman Golie adjourned the meeting at 7:52 p.m. The next meeting is set for March 2, 2009, at 5:30 p.m. in the Gibson Room of the Great Falls Civic Center.