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~j <br />Elk River ---~ <br />Municipal Utilities <br />13069 Orono Parkway <br />Elk River, MN 55330 <br />May 9, 2006 <br />To: Elk River Municipal Utilities Commission <br />Jerry Takle <br />Jim Tralle <br />John Dietz <br />From: Bryan Adams <br />Subject: Midwest Municipal Transmission Group <br />phone: 763.441.2020 <br />Fax 763.441.8099 <br />As a municipal electric utility, our goal is to keep our electric rates as competitive as <br />possible. One of the outfalls of electric industry restructuring is the segregation of <br />distribution, transmission and generation portions of our industry. Transmission costs are <br />the concern of this memo. With the formation of transmission as profit centers for <br />generation and transmission companies along with MISO operating the transmission and <br />generation infrastructure, and the pending $3 billion of transmission construction due to <br />CAPX 2020, transmission costs are going to rise. How can Elk River protect itself from <br />these rising transmission costs? <br />FERC has established an approximate 12.4% return on equity for companies owning <br />transmissions as a way to encourage ownership and investment. Our transmission tariff <br />to GRE will include this 12.4%. Because ERMU is not an equity member of GRE, we <br />are in danger of not receiving benefit of paying higher transmission rates to cover the <br />12.4% return. If GRE returns the 12.4% to its members in the form of equity payment as <br />has been done in the past, ERMU will not receive benefit from paying higher <br />transmission rates to cover the return. If GRE uses the 12.4% return to reduce rates, <br />ERMU will then receive the benefit of the higher rate. <br />In telephone conversations on May 8, 2006 with John Gasal of Connexus and Terry <br />Grove of GRE, they assured me that under FERC guidelines, the return on equity must be <br />used to reduce rates, therefore, Elk River will benefit If this is not the case, Elk River <br />should be investing in the transmission system. Unfortunately GRE is not under FERC <br />jurisdiction. Currently GRE is highly leveraged. If we can borrow money at 5% and get <br />a 12.4% return, it makes good sense. <br />