Minnesota Municipal Utilities Association

RESOURCE

Electric co-ops halt to service territory negotiations

A group of municipal utility and electric cooperative representatives met four times in 2008 and nearly reached agreement on a formula that would govern electric service territory transfers involving municipals and cooperatives.

The Minnesota Rural Electric Association (MREA), citing lack of agreement among its members, informed MMUA of its intention to “suspend” the talks on Dec. 17, 2008.

“We are disappointed in the decision to end the talks,” said MMUA Associate Executive Director Steve Downer. “We felt the package on the table represented an acceptable give and take between the two parties.”

The MMUA negotiating team identified numerous separate issues related to service territory. By its tally, the municipal and cooperative representatives had reached agreement on nearly all of those issues. The few remaining issues did not appear to be insurmountable.

With momentum seeming to build toward a settlement, both sides in July appointed representatives to a subcommittee to work on an appropriate formula for indexing the compensation rate.

It never met.

On Aug. 20, 2008 the MREA board approved action to call a recess and cancelled a scheduled Aug. 25 meeting of the full negotiating teams. On Aug. 29, MMUA told MREA that it was respectful of its internal political process and ready to resume negotiations whenever MREA was ready to move forward.

The next milestone was the Sept. 12 meeting of the Rural Electric Management Association, where the municipals had been informed the tentative settlement would be discussed. On Sept. 23, MMUA received an e-mail that MREA would send a questionnaire to each MREA member system, and that it expected to clarify its views by mid-December.

MMUA wrote to MREA on Dec. 5, reiterating its appreciation for the work MREA had put into the negotiations, its desire to resume talks and asking MREA to communicate the results of its December deliberations in a timely manner.

Twelve days later came the letter from MREA suspending the negotiations.

Court cases led to talks

A number of significant regulatory and legal proceedings set the stage for the talks.

Municipals hoped the era of contentious litigation was ended with an October 2002 Minnesota Public Utilities Commission ruling on a territory case involving Moorhead Public Service and Red River Valley Cooperative, where Commission staff scolded the cooperative’s apparent strategy of adding “delay and cost to the City’s efforts to provide service, without much compensating protection of the public interest.”

Only a year later, however, things changed with the ascension of former legislator Leroy Koppendrayer to chair of the MPUC.

In four straight territory cases (Buffalo, Grand Rapids, Redwood Falls and Otter Tail vs. Lake Region) the MPUC ignored the findings and recommendations of administrative law judges and came down squarely on the side of the cooperatives. In two other dockets, involving Staples and Two Harbors, the MPUC gave interim service rights to newly annexed areas to cooperatives. This allowed cooperatives to build the system to serve new customers, complicating municipal efforts and driving up eventual acquisition costs.

The municipals, under this increasingly troublesome regulatory regime, went to their other option under state law: proceeding through the eminent domain process in district court.

Here, the municipal reasoning—following standard condemnation theory that payment should be based on the property’s pre-annexation value—found fertile ground. Both Moorhead and Two Harbors received decisions from the court-appointed commissioners that followed their logic. However both municipals, while awaiting appeals to jury trials, reached compromise agreements with the co-ops to settle the cases.

The tentative statewide agreement reached by MMUA-MREA, perhaps not surprisingly, followed the basics of these compromise settlements.

In both the Moorhead and Two Harbors cases, the parties agreed to a payment of 15 mills per kilowatt-hour sold over a period of 10 years. If a new customer were to locate in the area five years into the agreement, the municipal would pay for the remaining five years.

Much work, many meetings

The MMUA-MREA negotiating teams met in St. Cloud four times: May 16, June 2, June 19, July 21.

The municipals came to the first meeting willing to listen. In an opening statement, the cooperatives said municipals and cooperatives were facing larger issues than territory, and needed to work together on these issues. The cooperatives agreed that the municipal utility has a right to grow with the city it serves. The municipals made a similar concession, agreeing to pay for bare ground. Several non-controversial items were also agreed to. The talks proceeded, sometimes with difficulty but always with an attempt to understand the other side’s position, from that point on.

The parties gradually built trust as the generally day-long meetings continued. The talks, almost without fail, were constructive. The two sides would often ‘caucus’ to consider an offer and return for further discussion.

It appeared that an agreement was within grasp on July 21.

“Little did we know we would not meet again,” Downer said.

In preparation for the meetings, the MMUA group met, either in person or via conference call, 15 times. MMUA prepared numerous papers, many of which were shared with the cooperatives.

The MMUA group included Arlo Rude of Thief River Falls, Gary Gleisner of New Ulm, Brad Roos of Marshall, Bill Schwandt of Moorhead, Steve Shurts of Owatonna, Al Crowser of Alexandria, Walt Lorber and Larry Koshire of Rochester, Scott Hain of Worthington and Bryan Adams of Elk River. Additional help was provided by the McGrann Shea law firm.

“MMUA owes a debt of gratitude to the members who put so much time and effort into these talks,” Downer said. “To say we were well-prepared for any eventuality is an understatement. That preparation helped move the talks along, and was largely due to the tremendous work done by the involved MMUA members. We owe them our thanks.”

MMUA remains willing to re-open the talks.

“We were on the brink of an historic agreement that would have put an end to years of conflict and bickering,” said MMUA Executive Director Jack Kegel. “The framework that we developed was carefully constructed to address the key concerns of both sides. We’re very disappointed that we were unable to complete the process with a settlement so close at hand. We hope that at some point we will be able to return to the table and complete the process.”

n By Steve Downer

Electric co-ops scuttled other service area settlement attempts

Besides the 2008 meetings (see preceding article), there have been two other significant efforts on the part of electric cooperatives and municipal electric utilities to seek a compromise on the service territory issue―the COURT process in 1998 and an effort at mediation in 2001.

The first of these efforts resulted from meetings of the Consumer-Owned Utility Restructuring Team (COURT), a group of representatives from municipals and cooperatives formed to discuss issues surrounding electric industry restructuring.

The COURT group held a total of 11 meetings (including one conference call) from May 1998 through January 1999.

The immediate purpose of the COURT meetings was to discuss possible areas of agreement concerning electric utility restructuring.

However, the cooperatives wanted to include a discussion concerning service territory expansion by municipal electric utilities after annexation. There was little difference in the positions of the two groups on restructuring, but there was no resolution of the disagreement regarding the service territory issue.

No compromise could be found due to the co-ops’ insistence that any amendment to the state law concerning municipal territory expansion after annexation include an eventual territory freeze for municipal utilities.

The municipal utilities refused to surrender the right to grow with their cities, a historical right which had been reaffirmed by the service territory law passed in 1974 and which the co-ops had accepted when the law was passed.

An effort to resolve service territory disputes in 2001 between municipals and cooperatives was initiated by a joint letter from the state legislative leaders of both parties. In a Sept. 15, 2000 letter to MMUA and the Minnesota Rural Electric Association (MREA), Senate Majority Leader Roger Moe (DFL, Erskine), Senate Minority Leader Dick Day (R, Owatonna), Speaker of the House Steve Sviggum (R, Kenyon) and House Minority Leader Tom Pugh (DFL, South St. Paul) stated:

“As friends of both the municipal utilities and the cooperatives, we believe the public interest and the state’s electric consumers would be well served if your organizations would begin discussions this fall in an earnest attempt to resolve the service territory issue before the start of the 2001 Legislative Session . . .”

Following several informal conversations, MREA formally accepted a mediation offer made by MMUA.

The MMUA mediation team made extensive preparations and engaged a mediation coach.

The parties agreed on the selection of a mediation facilitator but little else. After three meetings, this effort ended. The municipal team was prepared to look for common ground to serve as the basis for an agreement, but the cooperatives were focused on ending the municipal utility right to grow with the city it serves.

n By Steve Downer

Co-ops supported municipal right to grow

Throughout the history of the electric utility industry, public policy in Minnesota has provided that a municipal utility may grow with its city.

The electric service territory law, enacted in 1974, recognized and preserved the long-standing right of cities to provide electric utility service to all city residents. The law seeks equitable treatment of all electric ratepayers and taxpayers. It ensures that all city residents will receive the benefits, or carry the burden, of the utility they own.

The primary proponents of the current service territory law, which assigns each electric utility a geographic territory, were the rural electric cooperatives. They were planning to build a major new generating facility, the Coal Creek Generating Station, in North Dakota. They knew that they would have to increase rates to pay for the new facility, according to legislative testimony, and they wanted service territory protection so that they would have a guaranteed customer base to service their debt.

The municipal utilities were willing to agree to the proposed service territory law, provided that the law preserved the right of municipal electric utilities to grow with their cities following annexation. The co-ops accepted this compromise and the bill was enacted, providing service territory protection for the co-ops while preserving the municipal utilities’ right to grow with the city.

Harold LeVander, Jr., speaking for the cooperatives before the House Committee on Governmental Operations on April 19, 1973, said, “We’re providing in this bill, because of the public nature of the municipally owned system, that they can buy out based on a formula that’s provided in here, the facilities of any power supplier in their area—if they expand. In other words, we’re preserving, really, the right of municipally-owned systems to continue to expand with their corporate borders should annexations occur.”

State law lists four factors to consider when determining the price a municipal should pay to acquire the territory of another utility. The law does not contain a specific formula, however.

Over time and a due to a number of regulatory rulings, municipal utilities routinely pay, for sales in bare ground areas, as if the area had been fully developed.

Even the Minnesota Public Utilities Commission (MPUC) has acknowledged, in the Rochester ‘North Park’ case, that “the co-ops are now receiving significantly greater compensation than that which was envisioned at the time the law was passed.”

Some semblance of balance has swung back toward the municipals with recent district court eminent domain cases.

That chain of events led to the 2008 talks between municipals and co-ops. A solution, however, remains elusive.

n By Steve Downer