By Kate Klimesh,
“The Decorah Municipal Electric Utility Task Force recommends that the City of Decorah hold a referendum on municipalization at a time of its choosing,” was the final recommendation to the Decorah City Council from the MEU Task Force at the Dec. 21 council meeting. The referendum would be the next step in pursuing a city-owned electric utility company and gaining additional information towards establishing the MEU, as outlined by the Iowa Utility Board.
In a lengthy document illustrating all the Task Force has learned through listening sessions, educational sessions and conversations with both Alliant Energy and the Iowa Utilities Board (IUB), the Task Force outlined their understanding of the many factors involved in the decision, as well as many considerations for the city council members to discuss before making the final determination as to whether to pursue a city-owned electric utility company.
The Task Force was created February 2021 with a goal of advising whether Decorah should pursue establishing its own electric utility company. The issue, brought in referendum on the ballot, had been voted down in 2018 following two conflicting feasibility studies with vastly different information presented.
The largest piece of information missing from the decision was Alliant Energy’s costs, revenues and anticipated rates. On July 11, the IUB concluded it did not have the statutory authority to compel Alliant to furnish this data prior to a successful public referendum vote to establish a city-owned electric company. The report, available on the Decorah City’s Dropbox, stated, “Because of this, we ultimately decided not to ask the city to expend the resources needed for conducting a feasibility study (estimated at $43,000 to $75,000). If the city council decides to hold a second referendum on municipalization, this is an issue that the Decorah City Council may want to revisit at that time.”
The MEU Task Force reported key findings for consideration by the city. All quotes are from the printed report from the MEU finalized at the Dec. 21 council meeting.
Rates key findings
• In all customer rate classes, Alliant’s (also known as Interstate Power and Light, IPL) Iowa “all-in” costs per kilowatt hour are higher than those of the other investor-owned utility in Iowa, MidAmerican Energy.
• Alliant’s residential rates are approximately 60 percent higher than those of MidAmerican Energy, all of Iowa’s Rural Electric Cooperatives (RECs) and higher than nearly all of Iowa’s MEUs. The average rate increase per year has been 2.51 percent over the past ten years.
• 136 MEUs operate in Iowa, each authorized to create their own customer classification systems and rates for those customer categories. These rate decisions are made by members of local MEU Boards, accountable to local elected officials and the communities they represent.
• On average, Iowa MEU Residential and Commercial customers pay substantially less for their electricity than Alliant’s residential and commercial customers. Industrial/Large User customers served by a MEU in Iowa, on average, pay slightly more than Industrial customers served by Alliant.
• The four MEUs had four to six rate classes ranging from residential to large commercial/industrial. Residential rates among the four ranged from $0.0615/kWh to $0.124 kWh.
Reliability key findings
• In 2020, publicly owned utilities nationwide had better average reliability scores than investor-owned utilities nationwide both with and without major adverse events.
• The Iowa specific data available is based on SAIFI scores. Alliant’s (IPL) SAIFI score was slightly higher than Iowa’s average SAIFI score, indicating a slightly higher frequency of interruptions than the state average.
• The Task Force found Mutual Aid Agreements with other utility companies work reliably to restore service after natural disasters. The Iowa Association of Municipal Utilities (IAMU) facilitates and coordinates mutual aid agreements, including maintaining an inventory of equipment and backup generators.
• Reliability and mutual aid agreements – Several MEUs have focused on investing in undergrounding to decrease chances of storm damage to overhead wires and increase the energy efficiency of the system.
MEU key findings
• All MEUs participate in a buyers group to purchase energy. Most have invested in some level of energy production (wind, solar, coal, or at least back-up diesel or natural gas generators). These MEUs are sometimes asked to contribute any local energy production to stabilize the grid during peak demand hours.
• MEUs provide net revenue to their city governments. The amounts of revenue most often are assessed directly as a payment in lieu of taxes (PILOT). Among the MEU communities in the education sessions, the net revenue to their communities ranging from $147,000 to $600,000 annually. This represents two to five percent of the communities revenues, and some MEUs provided free meters to municipal entities, such as pools or rec centers.
The Task Force suggested some solid action steps to the city, should they decide to move forward:
• Proactively investigate potential partners, buyers’ groups and sources of energy. Decorah could be part of a joint action agency like WPPI (member-owned, not-for-profit energy collaborative of 51 locally owned electric utilities) or UMMEG (locally-owned utilities in IA, Minn., and Wis.) to take advantage of economies of scale and negotiate low rates. MiEnergy has also offered to assist with any transition and supplying power to a Decorah MEU.
• Critical leadership and staff – the city will need to hire employees with unique skill sets and they will need to be trusted by the community. Wages and benefits are important to retain talent and experience. They will need a Board of Directors with members who are knowledgeable and focused on making long-term decisions.
• To compare MEU revenues earned, also consider the fees that Alliant pays annually to the City of Decorah. It was confirmed that Alliant customers pay, and Alliant collects and transmits to the City of Decorah, a Franchise fee of 4 percent, which in 2021 was $267,632. Alliant also pays an annual “Excise Tax” of $154,125, totaling approximately $422,000 in annual contributions from Alliant to the city budget.
Local concerns heard
Large employers are concerned about the rates they pay, but most are willing to pay a premium kWh rate if reliability and similar energy efficiency programs can be assured. Most of the small business owners who responded to the open-ended survey have been satisfied with Alliant’s service. Although many are frustrated with rates, the majority did not express support for municipalization, instead suggesting that Decorah focus on other priorities including road/street improvement, housing for lower-income employees and downtown development.
Residential customers, on the other hand, are also concerned about reliability, but they are most frustrated by the high residential rates they are currently paying. Most would only support a Decorah MEU if they could be assured of lower electrical rates. Some expressed environmental concerns related to carbon emissions and wondered if an MEU might be better suited to pursue renewable energy goals.
Speaking of renewable energy, several community members expressed concerns regarding net metering for customer-owned solar installations. This is of particular concern in Decorah, a city with the highest per-household rate of solar installations in Iowa. Many community solar owners are counting on net metering to offset the significant financial investment they have made, however providing net metering does increase costs for electricity utility providers, which may affect its ability to maintain reasonable electrical rates for all customers.
All groups want assurances that a Decorah MEU would hire an experienced staff to support the utility. They also want to know that multiple mutual assistance agreements are in place should Decorah experience a weather-related event that results in loss of electrical power.
Funding a MEU
Decorah City Manager Travis Goedken outlined the process the city would take to fund the municipalization process. Goedken’s discussion of the funding process was categorized into stages: funding for the process of developing an application for municipalization and defending the application in the courts funded by general obligation bonds, and funding for start-up costs, including acquiring the electric infrastructure, funded by revenue bonds if the application is approved. The city of Decorah has the ability to borrow money and may potentially have availability of Sustainability Commission funds.
The pursuit of some of the primary goals of the MEU could potentially increase revenue to the city and reduce costs to customers (for example, keeping electricity revenues in the community, payment in lieu of taxes that could potentially exceed the fees that Alliant currently pays to the city, and fully utilizing opportunities presented under the Inflation Reduction Act). Other goals (rate relief, energy efficiency and net metering programs, and infrastructure “hardening”) could be associated with increased costs.
“These priorities need to be carefully considered and clearly stated in an application for municipalization, should the City decide to pursue it. There may also be some funding potential from the Inflation Reduction Act, which creates a provision that will allow MEUs to receive the federal
incentive as a fully refundable tax credit. This provision is permanent for the 10-year life of the IRA provisions.”
MEU startup/buyout costs
While start-up/buyout costs are estimated, true costs could skyrocket depending on legal fees and costs set by Alliant for the buyout. In the 2018 feasibility studies, these costs ranged from $7.6 to $51 million. Basing a correlation between a 2015 southern Minnesota sale of Alliant’s electric service territory to a cooperative of 12 smaller agencies, the Task Force estimates similar startup/buyout costs of around $10.8 million. This would include regions beyond the Decorah City limits, “Within acquisition costs,” the Concentric/Alliant study also lists very high costs for “separation/reintegration,” and for “going concern.” The separation/ reintegration figures assume the Board would only allow a MEU to serve customers within the city limits, and that Alliant would need to build new infrastructure to serve out-of-town customers. It is wrong, however, to assume the Board would limit a MEU to the city limits.
The Task Force explained, “Neither of the 2018 studies, however, considered the specific option of a partnership with MiEnergy Cooperative and Dairyland Power, which the Task Force has investigated. If a referendum passed, the specifics of any Decorah MEU partnership with MiEnergy and Dairyland Power would need to be negotiated while the city was preparing further feasibility analysis and an application to the IUB for service territory. The information learned by the Task Force, however, suggests that significant power supply and transmission savings potential exists through such a partnership.”
“An effective petition to the Iowa Utilities Board will need to include all the elements referenced in code, and all elements discussed in detail in the Board’s 2008 decision. These elements include the motivations for the city effort, the full economic analysis of costs and benefits, and a full technical analysis of how the city would take over and manage the system, among other issues. This will require extensive technical and legal work and expense and could take at least a year to prepare.”
Another factor detailed was higher interest rates, which could raise the overall and long-term costs to the city for borrowing money and servicing the debt.
The Task Force encouraged the city to seek the consultation of experts to investigate more thoroughly. Energy markets have seen significant disruption over the course of the past year, and these energy market changes may continue to impact electricity costs.
“Electricity consumption patterns are changing. Electricity sales have seen relatively little growth for the past decade, and this has presented financial challenges to some utilities. The increased electrification of buildings and transportation widely predicted to occur over the next generation could present significant opportunities for a new municipal utility not locked into existing generation and grid assets.”
The recommendation also encouraged the city to consider the increasing frequency of weather-related disasters with an aging electrical grid infrastructure. With an MEU, this aging infrastructure could require investment of significant resources to modernize.
An additional point shared by the Task Force would be the unknown cost to the city of the application process, purchase/buyout and legal proceedings, which could be volatile.