Management alliances: the case of Dakota Valley Electric and Northern Plains Electric.

• Author: McKee, Gregory
• Position: Case study

Jay Jacobson hung up the phone with Richard Schlosser, a member of the board of directors he works with at Dakota Valley Electric Cooperative. Richard had asked Jay to consider pricing alternatives for the increasing power loads requested in their service territory. Although Jay is always increasing sales, this request was another chance to consider whether he had the resources, both in equipment and manpower, to provide the technical service the members of the cooperative wanted.

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Four years earlier, Jay had worked with the board of Dakota Valley Electric to consider ideas for increasing his resources through achieving economies of scale and expanding the cooperative's member base. The general manager of Northern Plains Electric was about to retire and the general manager designee, Lowell Stave, had called him to inquire if the members of Dakota Valley Electric were interested in developing some sort of working relationship with Northern Plains Electric short of consolidation. Several years earlier, after talks carried out between the two cooperatives, the boards of both cooperatives decided not to consolidate. Now, with this opportunity, the boards of the two cooperatives decided not to consolidate, but rather to form an alliance and a separate management company to oversee both cooperatives and the alliance arrangement. In this arrangement, Jay and Lowell would jointly be the general managers at two cooperatives and report to two boards. They would work to develop common approaches for engineering, purchasing, marketing, accounting, and other functions to achieve economies of scale. Both boards liked the idea, but decided they would review the progress of the alliance after five years and decide if the relationship should continue. Jay and Lowell needed to provide some information to the boards to help them decide whether the alliance was a good structure for the members to capture the benefits of interfirm cooperation.

Background and Setting

The North Dakota electricity network is complex. The cooperatives participating in this network are vertically integrated. The cooperatives jointly own their own power supply, including mines, power plants, transmission lines, and a distribution network. Wholesale power is generated and transmitted by five user owned utilities, such as Basin Electric Power Cooperative and Central Power Cooperative, which, in turn, provide electricity for distribution to sixteen other cooperatives, which then sell power to retail customers. The retail customers own the distribution cooperatives, which own the transmission and generation cooperatives. The cooperatives compete with investor-owned utilities and at least one municipal utility which, together, supply just under 50 percent of all retail electricity in North Dakota.

North Dakota's electricity distribution system is confronting a major technical challenge as it tries to allocate a relatively fixed total amount of power to an increasing amount of demand. In 2007, Dakota Valley Electric Cooperative obtained 61 percent of its revenue from commercial customers and 36 percent from farm and residential customers. Northern Plains Electric Cooperative obtained 64 percent of its revenue from farm and residential accounts and 31 percent from industrial customers. Both cooperatives are facing demand growth from their smaller groups of customers.

Dakota Valley Electric Cooperative serves eight counties in south central and south eastern North Dakota. These counties are producing increasing amounts of corn. This fact, in and of itself, might not seem particularly significant, yet it is a significant driver of Dakota Valley's projected demand growth.

Corn is physiologically mature when the ears contain 35% moisture. Since corn harvested with this much moisture tends to spoil, corn above 15% moisture is usually discounted in the market. Moisture levels can be reduced by leaving the corn in the field. A typical harvest begins when the moisture content is around 22%. The rest of the drying process is done in storage through using a combination of ambient air, heaters and fans. Energy for the heaters and fans is usually provided from fuel oil, liquid propane (LP), electricity, or natural gas. The total costs associated with drying grain are functions of energy costs, the amount of moisture to be removed, capital costs, and labor costs. For example, to dry a bushel of corn from 22 percent to 15 percent moisture, a column-type dryer operating at an airflow rate of 100 cubic feet per minute per bushel and at an air temperature of 180[degrees]F, 12,589 BTU are needed (Uhrig and Maier 1992). A kilowatt hour (kWh) of electricity contains 3,413 BTU. Hence, 3.69 kWh are needed to dry one bushel of corn. If, in 2003, all of the energy needed to dry the corn was provided by electricity, over 266 million kWh would be needed, over 66 percent of all sales by the cooperative. If only 25% of the energy were provided by the cooperative, nearly 67 million kWh would be needed, nearly 17 percent of all sales. By 2007, providing 25% of the energy would have accounted for almost 26% of all sales.

Increased grain drying had also required new equipment. For example, farmers historically could be served by a 25 kilovolt Ampres (kVa) transformer on their property. In contrast with a kilowatt (kW), which is a measure of the amount of work electricity can do, kVa is a measure of the maximum amount of electric flow an object can accommodate, with some of the work potential possibly being unused. By 2009, more than 500 members of the two cooperatives had 37.5 kVa transformers, allowing more current to meet the member's needs. In 2010, a new, encapsulated, single-phase transformer could cost in excess of $1,200. A new 35kVa transformer could cost as much as $19,000. The cooperatives were beginning to constantly face the question of how to maintain seasonal capacity at affordable prices. Furthermore, as the size of farms in the counties becomes more heterogeneous, larger farms will require still larger transformers.

Northern Plains Electric Cooperative serves eleven counties in eastern central North Dakota. These counties, together with those served by Dakota Plains Electric, lie along the path of the Keystone Pipeline, currently under construction, and the Enbridge Pipeline which has recently been upgraded in capacity. The Keystone pipeline will carry crude oil from Alberta, Canada to refineries in Texas; while the Enbridge Pipeline carries oil from fields in western North Dakota to processing facilities near the Great Lakes. Hundreds of megawatts of electricity will be required to pump the oil. The Enbridge pipeline requires two pumping stations in the service territory of Northern Plains Electric and the Keystone pipeline has one pumping station in the territory of Dakota Valley Electric, with substations and distribution lines recently built to power the stations. I addition to the added load from the pipelines, retail customers replaced fuel heating systems with electric heat, or increased the sizes of their drying systems for grain.

The challenge of providing adequate power to retail customers affects the requirements on physical technologies used to distribute electricity and the soft technologies used to manage that distribution. New power production and distribution equipment, such as smart meters and small-scale generation devices, are recent innovations. The soft technologies used to manage the distribution of electricity are also changing. Customer billing and data protection are critical services for rural electric cooperatives. Two-way load management systems communicate information from the end user to the utility, such as on/ off status, current power usage, and meter readings. This information can be used to...