HIBBING - Hibbing Public Utilities (HPU) is facing the reality that it may breach its Laurentian Energy Authority (LEA) agreement in terms of energy production.
Pat Garrity, council representative to the Public Utilities Commission (PUC), noted in a recent public meeting that the utilities payments for receivables from LEA were supposed to decrease by 2016.
"And to my knowledge, they're not decreasing," he added.
LEA was formed in 2004 by a joint powers agreement with Virginia Public Utilities (VPU), and it subsequently entered into a 20-year contract with Xcel Energy to produce 35 megawatts of biomass-generated electricity each day.
Garrity stated that HPU has had a decrease in steam customers, which may result in the breach of agreement with Xcel Energy.
"That is causing a severe financial risk for us," he said. "At some point Hibbing could get hit with a $5 million payment, and that's a payment that would be a severe embarrassment to us. But in reality, it's in the agreement."
LEA has an obligation to establish a $10 million reserve account in case the biomass energy requirements to Xcel Energy aren't met and because it was required in order to receive bonds to finance the facilities, said Nick Dragisich, executive vice president of Springsted Inc. Springsted recently conduct studies of HPU's cost of services and organizational management.
Dragisich also discussed energy production with LEA Manager Terry Leoni.
"The reserve balance is currently at $4.2 million and LEA is on target to achieve the required amount by the end of the contract. Mr. Leoni was very confident that LEA would reach its $10 million reserve and have that money available should a penalty go in," he said. "He was also very confident you'd meet your 75 percent biomass integration requirement. It looks like it won't be an issue, but it's out there and it has the potential to be. It appears to have been managed to this point."
Dragisich opined that the bigger concern is the decreasing volume of steam customers since HPU has an ongoing obligation to buy steam from LEA.
"That presents a challenge to the utility," he said. "There are two things that could be done. More people could be convinced to go on steam or a large industrial company could be found that would have a need for that volume of steam."
HPU's decision to move forward with the LEA agreement was based on a detailed, long-term analyses of energy production and supply.
The LEA agreement has three key provisions related to payment to HPU for the generation of biomass electricity and payments by HPU for steam purchased from LEA, Dragisich said. They include:
Payment for direct and indirect labor necessary to operate and maintain the biomass facility.
Minimum steam purchase agreement by HPU.
Annual payment by LEA to HPU for operating costs other than labor for the biomass facility.
"HPU has ongoing receivable from LEA dating back to at least 2008," he said. "Mr. Leoni indicated this receivable will be retired by 2018 absent to any unforeseen catastrophes."
Annually, HPU's receivables from LEA are traditionally higher than VPU's. In 2015, HPU's receivables were at $4.5 million while VPU's were about $2 million, according to Dragisich.
The basis of reimbursing HPU and VPU for operating costs has been adjusted three times since
"Initially, it was based solely on electric. The second adjustment split LEA's operating costs between HPU and VPU 50/50," Dragisich said. "The most recent adjustment and the current cost sharing arrangement has LEA paying all the fuel cost for the biomass generations with the remaining operating costs split between HPU and VPU 50/50."
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