Electric City Power, Incorporated

JOURNAL OF BOARD PROCEEDINGS

April 6, 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: Vice-Chairman Bill Ryan, Bob Pancich and John Gilbert. Also present were the ECP Executive Director, City Manager and the City Clerk.

I.  EXECUTIVE DIRECTOR REPORTS

Executive Director Coleen Balzarini updated the Board on the following:

Year to Date Financials. Ms. Balzarini noted changes to energy imbalances under prepaid items and restricted cash and investments on deposit with others under long-term assets in the January and February preliminary balance sheet. She also explained that the difference between the pass through and blended rate agreements would now be held by Southern Montana so that ECP could build up its deposit for one month worth of expenses in the same manner as the member cooperatives.

Per Director Gilbert’s request for accruals on interest for the note payable to First Interstate Bank, Ms. Balzarini reported that $8,169 accrued for the month of January and a cumulative total of $16,338 for the month February. Two payments are made each year for the note payable to First Interstate Bank. By the end of the year there will be about $100,000 in interest paid to the bank.

The water credit will not increase. There is a possibility it could decrease if there is water being used during construction at Highwood.

Projected Financials. The Income Statement is now divided into three sections. Ms. Balzarini explained that the first and second quarters have been finalized; the third quarter is preliminary; and, that she set forth projections through June, 2009. She changed the way she was reporting operating revenues, costs of services and energy transmission to be more consistent with the way Southern Montana reports on its Income Statement. After making all of the debt service payments, the projected balance at year end will be negative net income of $61,489. Director Gilbert commented that the projection indicates recovery of half of the nine month loss in the next six months.

Energy Consumption Charts. Ms. Balzarini reviewed the hourly customer consumption charts for December 2007 and 2008. The temperature was colder in December, 2007, and consumption exceeded the flat block of power.

For calendar year 2008, Ms. Balzarini reported the total kilowatt hours consumed by customers, the demand kilowatts and the comparison regarding what was paid to Southern, what was collected from ECP customers compared to what ECP customers would have paid if they were still customers of NorthWestern Energy. For 2008, ECP customers would have paid $1,190,000 more if they would have been NorthWestern Energy customers. Director Pancich inquired if the City was the biggest customer. Ms. Balzarini responded that the Montana Refinery was the largest customer, Benefis was second, and the City was third.

Miscellaneous Reports. With regard to the Yellowstone Valley lawsuit, Ms. Balzarini reported that ECP has responded to discovery requests. All pleadings have been filed in District Court with regard to the PSC case. As of this date, NorthWestern Energy had not filed a response. That case is awaiting the judge’s ruling. All briefs have also been filed in the MEIC case and that case is also awaiting the judge’s order. Director Pancich asked if ECP was asking the Court to order the PSC to rule on the meters. Ms. Balzarini responded that ECP was asking the Court to rule on the meters.

Draft Pilot Program customer letter. Ms. Balzarini provided a draft letter to Pilot Program customers. She reported that all City employees have made their contributions to Opportunities, Inc., to a fund that is made available for low income people who are unable to pay their utility payments. No one requested changes to the letter. When the letter goes out, Ms. Balzarini stated that she would send out a report on individual meters.

II.  NEW BUSINESS

Accept Board Meeting Minutes of March 2, 2009. Bob Pancich moved, seconded by John Gilbert, to approve the March 2, 2009, Board meeting minutes.

Motion carried 3-0.

Generating Facility and Energy Supply Contracts Update. Tim Gregori provided an update of activities on the Highwood project. He showed a new artist rendering of the Highwood Generating Station property that included the approved landscaping plan from Cascade County. It also showed the relative size of a proposed gas fired facility and all the associated installations that would be necessary. The facility contemplated now is much smaller in size. His presentation included discussion on where SME is at with the project itself, what the results were of SME’s efforts to put in place predictability with regard to power supply until 2019, and how the project and future power supply dimensions work in tandem as SME moves forward.

With regard to the Highwood Generating Station project, Mr. Gregori reported that over the course of the last several months SME had made significant progress as far as development of the Highwood Station’s coal fired facility was concerned. Construction was commenced. A number of appeals on both the regulatory and legal sides slowed the development of that project down to the point that SME had to make a serious decision with regard to how to proceed. No firm decision has been made that the coal fired facility be shelved or scrapped. For the time being SME is focusing on the more immediate power needs. Mr. Gregori discussed the accomplishments made to date. In the interim, SME has kept focused on its purpose for existing; that is meeting the wholesale power needs of the customers it serves. A decision was made to go out for a request for proposals to get surety in the power supply portfolio needs moving out to 2019, as well as installation of a natural gas facility at the Highwood Generating Station.

To focus on its power supply future, SME is putting in place appropriate contracts for power purchases that will cover member needs until 2019; and, it is making a concerted effort to look closely at an opportunity to construct a natural gas fired facility that SME had originally intended to be reserve power or firming power for wind. That is now being contemplated as first in line with regard to construction activities.

Mr. Gregori discussed the economy and the volatile market times. However, some stability is starting to manifest itself in the bond market with regard to utility activities. He provided NorthWestern Energy as an example that recently issued $250 to $350 million in bonds. He reported that gas plants are being financed at reasonable rates.

There was a considerable amount of work that took place with regard to Highwood. The investment that the City of Great Falls made is imbedded in a lot of those activities. If a decision was made to move forward with a natural gas plant, a significant portion of those activities would be applicable to the gas plant.

Mr. Gregori discussed what was reported in the press versus what SME was actually moving forward on. With regard to a natural gas fired facility, SME is moving forward with a 120 megawatt combined cycle natural gas facility. SME’s proposed diversified facility will consist of two 40 megawatt simple cycle units, married to a 40 megawatt combined cycle unit. By capturing the wasted heat, the overall cost of electricity will be driven down. This facility being contemplated is different than that being contemplated by NorthWestern Energy. The proposed NorthWestern Energy facility will be a simple cycle unit only.

Mr. Gregori expects responses to the request for proposals to come in commensurate with the credit rating. With the rating and some indication what the interest rate will be, SME will be able to quote with far more accuracy what the project costs will be. SME has been approached by owners and operators of natural gas fields in Montana who have expressed interest in entering into long term contracts which will result in price stability and predictability.

Mr. Gregori explained financing during phases of construction. He expects the two 40 megawatt simple cycle units coming on first, and then increasing to a total of 120 megawatts about a year later. SME will not be building adequate capacity to cover all of the member needs. It will still need to make power purchases. However, the power purchase supply is secure until 2019.

The Western Area Power Administration has a fixed amount of generation that is fully subscribed for the next 20 years. It does not have any power to sell. The Bonneville Power Administration is fully subscribed west of the Continental Divide, with the exception of Glacier Electric and Vigilante Electric. By 2015, the Pacific Northwest is forecasted to be in an energy deficit.

Mr. Gregori discussed Southern’s rates compared to NorthWestern Energy’s rates. The cost to SME’s member systems at the end of 2008 was approximately $37 per megawatt hour for electricity versus NorthWestern Energy at approximately $65. The City of Great Falls’ base rate did not drop. The cooperatives’ rates were not raised to subsidize the rates to the City of Great Falls. The cooperatives’ rates were raised to cover the increased contract costs to meet their needs, increased costs to cover transmission expenses, and increased costs to cover other costs associated with Southern Montana. What happened with regard to the City is that, with the new request for proposals that is now signed and in place, the power supply pool for the City of Great Falls is essentially the same power supply pool for the cooperatives. In terms of the power supply costs of Southern Montana, if the decision was not made to build the gas facility, the power would come from the same source and should be priced the same to the City of Great Falls. The City of Great Falls is now transitioning to that rate and any residual monies in that transition rate go towards the City’s deposit.

Director Gilbert inquired when Mr. Gregori could tell the Board what the rates will be out till 2019. Mr. Gregori answered that the exact rate is covered under a confidentiality agreement. But the rate, as far as the customers of ECP are concerned, will remain very competitive until 2019. Director Gilbert expressed concern about ECP selling at a fixed rate to customers and not knowing what the rate will be when renewing contracts. Ms. Balzarini responded that ECP’s fixed rate contracts only go out to 2011. The renewal contracts will not be at fixed rates. Mr. Gregori opined that the rates will be about $55-$60 per megawatt hour, excluding transmission.

Vice-Chairman Ryan commented that the excess power from the contract would be sold back into the market to recover some costs. Mr. Gregori added that a gas and wind plant are very good partners. In essence, a gas plant represents wind being stored in a battery.

Vice-Chairman Ryan asked if there were any inquiries from the public.

Stuart Lewin, 615 3rd Avenue North, inquired if conservation was being emphasized and what was being offered as an incentive to customers. Mr. Gregori responded that Southern has planned for a requirement that contemplates conservation. If Southern had to go out and buy more power to meet a shortfall, there would be more of a cost to it. That is an incentive to customers to conserve.

Neil Taylor, 3417 4th Avenue South, asked why SME doesn’t drop coal altogether and just go with wind energy. Mr. Gregori responded that is an option. It could come to fruition. That is a decision to weigh very seriously going forward.

Rich Ecke, Great Falls Tribune, asked Mr. Gregori how many contracts were recently signed and what kinds of power were involved. Mr. Gregori responded one contract was signed with PPL Montana. He explained that an independent consulting engineering firm put a request for proposals out to 20 generators in the Pacific Northwest. There were eight responses. Of those eight, three were deemed qualified by the independent engineer. They entered into negotiations with those three to come up with the best price and resource mix. PPL Montana was the best candidate.

Neil Taylor, 3417 4th Avenue South, commented that in the past he doesn’t recall Mr. Gregori mentioning the gas fired plant firming up the wind. Mr. Gregori responded that the natural gas plant was not contemplated to be constructed with the initial construction activity. The natural gas plant was contemplated in the alternative evaluation study, as well as the operating scheme.

Ron Gessaman, 1006 36th Avenue NE, asked Mr. Gregori if he was going to offer his customers net metering, and if he was going to change the rate structure to encourage large users to conserve. Mr. Gregori responded that he is on the wholesale side. He doesn’t set the rates to residential customers. He only sets the rates to the member systems. In terms of the rate structure to encourage conservation, Southern encourages its member systems to work with its customers to invoke conservation. Net metering is significant at a residential system up to a certain point. Southern will buy wind electricity. To honor the All Requirements Contract, the member systems will still buy all of its power from Southern. But, Southern will buy wind power from a generator, blend it with the resource mix and spread it to its customers to keep the contract in place and provide an incentive for conservation.

Mary Jolley, City Commissioner, asked that a copy of Mr. Gregori’s PowerPoint presentation be provided to the City Clerk. Mr. Gregori responded that he would soon be making a presentation to the City Commission.

Ken Thornton, 31 Paradise Lane, commented about the contracts in place until 2019 and asked if those were firmed up with the 120 megawatt gas plant. Mr. Gregori responded the contracts were firmed up without it.

III.  BOARD MEMBER REPORTS - None.

IV.  COMMUNICATIONS

Public Comment.

Larry Rezentes, 2208 1st Avenue North, commented that he was floored that January and February were in the positive in terms of the results of operations of ECP. He also commented that the prospect of the engagement of a consultant was not discussed at this meeting. He was stunned that no one is troubled that ECP is operating in violation of its founding ordinance. Any decision to continue to pursue ECP should have citizens’ approval, unless the consultant is engaged to execute the shutdown of ECP.

Mr. Rezentes expressed the need to recover money from current and former employees that have benefitted from subsidized rates. He stated his objectives bringing this to the public were: (1) that there is an upcoming election; (2) to ensure the City doesn’t embark on another program without voter approval; and, (3) to express his opinion that ECP should be shut down.

Ms. Balzarini provided financial statements to Mr. Rezentes.

Ken Thornton, 31 Paradise Lane, commented that one good thing about a gas plant was its ramping capabilities so that it could be married to wind. He opined that the reason NorthWestern was building a simple cycle facility was because it ramps better with wind. Mr. Thornton believes a combined cycle unit will only be about 55-60 percent efficient. Mr. Thornton commented that if there was going to be a set based price for natural gas for a system, there needs to be another analysis done on that. He believes the price of wind will come down. Any natural gas that is burned needs to be designed specifically for wind and not for base load, intermediate load or peaking load. The fact that this plant is designed for that, he believes is a red flag. He urged the Board to consider hiring its own experts for an analysis of what the present technology is compared to what is down the road.

Ron Gessaman, 1006 36th Avenue NE, commented that Ms. Balzarini has been voting at the SME and Southern Board meetings. He read a portion of SME’s bylaws. Mr. Gessaman stated that the City Manager or a City Commissioner could be a voting member, but not the Executive Director of ECP. In response to comments that the two gas plants being built don’t have pending lawsuits, Mr. Gessaman opined it was because neither one was proposed on prime agricultural land.

Regarding the last meeting, Mr. Gessaman commented that the subsidy that should have been addressed was the comparison of the overall cost of the electricity to the City versus what the pilot customers were paying. Ms. Balzarini responded that matter has been addressed at past meetings. The pilot program customers actually paid more than what the cost was to charged by Southern Montana.

Mr. Gessaman reminded Vice-Chairman Ryan that he requested information at the last meeting. Ms. Balzarini provided Mr. Gessaman with a spreadsheet of the expenses and deferred imbalances paid to Southern, revenues collected from customers and the expense if served by NorthWestern Energy for 2008.

Mr. Gessaman discussed articles in the Billings Gazette and USA Today.

He pointed out the February and March rates that were represented do not include the deferred costs which are credited to NorthWestern Energy customers. The reduction was $2.70 per megawatt. Ms. Balzarini responded that report comes from NorthWestern Energy and was the tariff approved rates submitted to the PSC. Mr. Gessaman agreed, but stated it was not what actual residential customers were paying or any other customers because of the deferred contract allowance.

Stuart Lewin, 615 3rd Avenue North, believes it was egregious that there were people sitting on the Board that were working for large corporations that he believes benefitted at the expense of the City. He agreed with Mr. Rezentes that past employees should have to reimburse the City.

Mr. Lewin inquired if noise was being considered with regard to the gas plant. He agreed that cap and trade may be a dead deal, but believes a better system is cap and dividends.

ADJOURN: Vice-Chairman Ryan adjourned the meeting at 7:18 p.m. The next meeting is set for May 4, 2009, at 5:30 p.m. in the Gibson Room of the Great Falls Civic Center.