BREAKING NEWS: RETAIL POWER COMPETITION TO END IN LUBBOCK AFTER MORE THAN 90 YEARS

Michael Giberson

This morning, November 4, municipal utility Lubbock Power & Light and local regulated utility Xcel/Southwestern Public Service announced that the city utility will buy out the Xcel distribution system within the city and LP&L would become the monopoly retail power provider.

The press conference hosted by the city emphasized the costliness of maintaining duplicate distribution system. The announcement didn’t explain why it made more sense for LP&L to buy out Xcel than for Xcel to buy out LP&L.  A press release (reproduced below) contains more details.

(Oddly, the press conference held by the city seemed mostly focused on the redevelopment of Lubbock’s downtown area.  Apparently the costs of moving two sets of wires was a significant problem for the company in charge of redeveloping the downtown area; with that problem resolved the redevelopment should be cheaper to manage.  Will the developer be refunding the savings to the city?  As part of the deal Xcel will donate its downtown building to Texas Tech University and consolidate its activities at a southwest Lubbock location.)

One local commenter observes this will mean an end to the big advertising spending by LP&L and Xcel, to the detriment of local media companies.  A radio show host said on his blog:

Good bye Xcel Energy (at least in Lubbock) and good bye competition! Today Lubbock announced it was spending $87 million dollars to buy out the Lubbock customer base of Xcel Energy. According to the city, this is great for downtown redevelopment. OK, great.Mayor Tom Martin was quick to say at the presser that your rates won’t change because of this. Really? Does anyone buy this? LP&L has no competition in Lubbock (for the most part) and we shouldn’t expect rates to change? We shouldn’t expect customer service to change?

I’m sorry but the only people who will benefit from this buy out are the people in charge at City Hall. And how about the timing? The city keeps this whole thing quiet until after the bond election.

I can imaging that I’ll have updates once more information is available.

MORE DETAILS: From the LP&L press release:

Electric Companies Move to Benefit Lubbock

(Lubbock, TX) – Representatives from Lubbock Power & Light (LP&L), Xcel Energy and the City of Lubbock made an announcement today that will lay the foundation for the future of power in Lubbock.

LP&L and Xcel Energy have reached a mutually beneficial agreement that will allow LP&L to purchase Xcel Energy’s electricity distribution system within the city and to serve all of Xcel Energy’s Lubbock retail electric customers. Since 1942 Lubbock has been served by both companies, resulting in duplication of electric power services, lines, poles and substations. Both companies have determined this to be an inefficient and intrusive way to provide electricity to the community.

“The duplication of retail electric service in Lubbock has not been efficient, and we believe we can best serve Lubbock and our other Texas retail customers by only providing the low-cost wholesale electricity to LP&L,” said David Eves, president and CEO of Southwestern Public Service (SPS), an Xcel Energy company. “Xcel Energy customers in Lubbock will be served by LP&L, but Xcel Energy will continue to supply the wholesale power and transmission services.”

Currently LP&L provides power to more than 77 percent of households in Lubbock but purchases its power wholesale from Xcel Energy.

“It’s natural for LP&L to pick-up the Xcel retail electric service, since the City of Lubbock already provides utility service to all the properties in Lubbock,” Mayor Tom Martin said.

Because LP&L will use its solid financial position and bond ratings to fund the purchase through electric revenue bonds, electric rates for their customers will remain some of the lowest in the state.

“We want all our customers to know that your electric rates will not increase as a result of this new relationship. LP&L electric customers will continue to see low electric rates,” W.R. Collier, LP&L Electric Utility Board Chairman, said.

Electric customers in the Panhandle and South Plains enjoy some of the lowest electric rates in Texas because of Xcel Energy’s low-cost power generation system and abundant renewable resources. Xcel Energy will remain a significant part of the Lubbock community and will continue its civic involvement in Lubbock as a regional hub of operations and as a wholesale electricity provider for LP&L and retail provider in other areas of the South Plains.

Xcel Energy has received approval from the Xcel Energy Board of Directors to proceed with the sale of these assets, and the company is expected to gain regulatory approvals within the next nine months. LP&L will be seeking approval from the LP&L Electric Utility Board and the Lubbock City Council.

“This decision was made in the best interest of the citizens of Lubbock as well as in the best interest of dozens of Texas and New Mexico communities where Xcel Energy will remain the sole retail provider. This will not be an immediate change, and we will do everything we can to make this transition as smooth as possible for our customers,” Eves said.

LP&L and the City were advised by RBC Capital Markets with respect to financial matters, R.W. Beck with respect to operational matters and Vinson & Elkins with respect to legal matters.

Customers with questions regarding their service are encouraged to contact their current electricity provider.
***

Xcel Energy (NYSE: XEL) is a major U.S. electricity and natural gas company with regulated operations in eight Western and Midwestern states. Xcel Energy provides a comprehensive portfolio of energy-related products and services to 3.4 million electricity customers and 1.9 million natural gas customers through its regulated operating companies. Company headquarters are located in Minneapolis, with Amarillo serving as the headquarters for Xcel Energy’s regional operating company, Southwestern Public Service Company. More information is available at http://www.xcelenergy.com .

Lubbock Power and Light (LP&L) is the municipally owned electric utility of the City of Lubbock. LP&L provides electric service to over 70% of the electric market in Lubbock Texas and offers consolidated billing for City of Lubbock Utilities. LP&L has provided the lowest electric rates and most reliable electricity in Lubbock for more than 90 years. For more information, visit http://www.lpandl.com.

Ghana and its newfound oil: Can it use the Alaska model to avoid the resource curse?

Michael Giberson

A discovery of significant amounts of oil in Ghana has inspired a great deal of inquiry into how the country can avoid falling victim to the “resource curse,” the surprisingly low levels of economic development and weakening of political and social institutions sometimes associated with discovery and exploitation of valuable natural resources.

In a study, “Saving Ghana from Its Oil: The Case for Direct Cash Distribution,” Todd Moss and Lauren Young, of the Center for Global Development, assess economic and political conditions in Ghana and the prospects for the country avoiding the resource curse.  They recommend a variation of the “Alaska Model” in which oil royalties collected by the state are paid out directly to citizens.

From the report’s introduction:

In June 2007 a consortium of foreign oil companies announced a “significant light oil accumulation” at an exploration well in the West Cape Three Points license offshore West Africa. Ghana had found oil.

The economic implications were immediately obvious. Early projections suggested that Ghana could soon be reaping more than a billion dollars per year from this one discovery. Gold mining and cocoa, the major sectors of the economy for more than a century, would almost immediately be surpassed by crude. Not unlike a lottery winner who has to decide whether to keep a day job or go shopping, Ghana seemed to suddenly have a whole new set of economic choices. The political fallout was less obvious. Using the oil revenues wisely was a major theme of the 2008 presidential campaign, but there was also growing concern that oil could have harmful effects on the polity. While Ghana’s political classes have often felt in the shadow of Nigeria, there was also a strong sense of not wanting to repeat the mistakes of its giant oil-exporting neighbor.

The new government of President John Atta Mills now faces a set of demanding policy choices that will determine the future of the country. Ghana has about two years until the oil revenues begin to flow. Getting the framework right early is essential; once entrenched interests set in, changing the system becomes extremely difficult. The government is currently receiving a flood of advice on how to manage its new source of wealth, and especially how to avoid the so‐called “oil curse.” There are many good suggestions on the table that will enhance transparency, improve citizen oversight, and hopefully allow Ghana’s oil to benefit more than just a small elite.

[The article] draws out lessons from the experiences of Norway, Botswana, Alaska, Chad, and Nigeria, finding that one common characteristic of the successful models appears to be their ability to encourage an influential constituency with an interest in responsible resource management and the means to hold government accountable. [Moss and Young] propose direct cash distribution of oil revenues to citizens as the best approach to protect and accelerate Ghana’s political and economic gains, and as a way to strengthen the country’s social contract.

The authors suggest that Ghana is an ideal country to pursue a policy of direct cash distribution of oil revenues to citizens. The article provides summaries of the relatively successful approaches taken in Botswana, Norway, and Alaska.  Here is the Alaska discussion:

In Alaska, the Permanent Fund was set up almost immediately after oil was discovered in the 1970s as an investment base that would produce revenue even as future oil production decreased. The Fund’s principal cannot be spent without amending the state’s constitution by a majority vote of the population, and it must invest outside Alaska to help stabilize the state’s income. One of the immediate stimuli for the Fund was the public belief that Alaskan politicians had wasted a $900 million payment for exploration rights on unsustainable government programs. In 1982, the government instituted the Permanent Fund Dividend (PFD) program, a regular cash transfer of the Fund’s interest earnings to state residents, to give Alaskans an individual interest in protecting the fund (Fasano 2000). In recent years households have been receiving about 6% of their income on average from the PFD, as about US $1 billion per year is distributed among 600,000 citizens (Goldsmith 2002). The PFD is now a regularly anticipated component of household income, and most politicians consider it “political suicide to suggest any policy change that could possibly have any adverse impact today, or in the future, on the size of the PFD” (Goldsmith 2002). The dividend has been “extremely successful in creating a political constituency for the Permanent Fund that did not previously exist” (Goldsmith 2002).

The article contrasts these three relatively successful programs with “two obvious failures: Chad and Nigeria,” providing some elaboration on these points. The authors say the core justification for direct distribution of oil revenues in Ghana is to create a political constituency interested in responsible resource management:

Increased transparency provides useful tools but not immediate incentives for citizen action. In Norway, Botswana, and Alaska, resource wealth was well‐managed in part because institutions enabled groups interested in the sustainable management of oil wealth to influence policy. At the moment, Ghana does not have an interest group that will fill this monitoring and enforcement role.

Ghana can create just such a constituency by following a version of Alaska’s model of direct distribution. … Ghana needs [such a] system to give the entire population a sense of ownership over the fund’s revenues. In this way, Ghana can manufacture, from scratch, the constituencies that demand responsible resource rent management―and become more like Norway, Botswana, and Alaska, and less like Chad and Nigeria.

Direct distribution also increases the state’s dependence on its citizens. To get some of the revenues back, the state will have to tax them, and justify its taxes with public services. In fact, giving people more money will create additional incentives for the revenue authorities to improve tax collection. As we have suggested above―borrowing from Kaldor (1963), Tilly (1975), North and Weingast (1989), Ross (2004a), and Moss, Pettersson, and van de Walle (2008)―taxation is not just desirable, but essential to building a responsive state. Therefore, handing cash directly to citizens and forcing the tax authorities to find ways to tax some of it back is not a cost but rather a benefit of this scheme. [ed.: Emphasis in original.]

RELATED: The Fraser Institute has just released a study on a closely related topic, “Economic Freedom and the ‘Resource Curse’: An Empirical Analysis.”  A discussion on Seeking Alpha summarized the findings as:

The authors of the report, after considering new and existing data, come to the conclusion that whether a country benefits from natural resources depends largely on the integrity of its institutions and economic freedom — government bureaucracy, legal structure, property rights, monetary policies and international trade. Simply put, the higher the level of economic freedom a country enjoys, the greater the benefit from resources.

What’s more, the analysis suggests that a country with poor economic freedom isn’t necessarily stuck: according to the Seeking Alpha discussion, “the curse is turned into an economic blessing with relatively low levels of institutional development.”  Haven’t had a chance to read the Fraser Institute report, but it looks like a good complement to the Center for Global Development report on Ghana’s oil.

Natural gas from shale: long lasting or going fast?

Michael Giberson

Daniel Yergin and Robert Ineson have an op-ed in the Wall Street Journal discussing the development and implications of natural gas from shale in the U.S. market. Not much will be new to you if you’ve been following the commentary here for a while, but they do provide a very good, general overview.

The basic story:

The companies were experimenting with two technologies [to access shale gas]. One was horizontal drilling. … The other technology is known as hydraulic fracturing, or “fraccing.” Here, the producer injects a mixture of water and sand at high pressure to create multiple fractures throughout the rock, liberating the trapped gas to flow into the well.

The critical but little-recognized breakthrough was early in this decade—finding a way to meld together these two increasingly complex technologies to finally crack the shale rock, and thus crack the code for a major new resource. It was not a single eureka moment, but rather the result of incremental experimentation and technical skill.

The result: “The supply impact has been dramatic. … Proven reserves have risen to 245 trillion cubic feet (Tcf) in 2008 from 177 Tcf in 2000, despite having produced nearly 165 Tcf during those years. … With more drilling experience, U.S. estimates are likely to rise dramatically in the next few years.”

Yergin and Iseson assess the effects on electric utilities, energy-intensive manufacturing, and other parts of the economy.  They even claim abundant natural gas will help facilitate renewable energy development (but while there are complementarities between gas and intermittent power sources, renewable resources would be better facilitated in the short run by high gas prices).

The other natural gas shale story in the news concerns shale-resource-skeptic Art Berman who claimed on his blog that World Oil magazine killed his monthly column due to pressure from an executive at an independent oil and gas development company.  The tiff attracted commentary from Tom Fowler at NewsWatch: Energy (“Who killed Art Berman’s column?”) and Kate Mackenzie at FT Energy Source (“Shale gas row gets nasty”).

Berman has been challenging the shale boom talk for some time, saying that data he has collected indicates shale gas wells are peaking and declining much faster than expected and therefore the resource is not nearly as significant as some claim. Recently he presented his views at the Association for the Study of Peak Oil and Gas conference in Denver: “Shale plays: A time for critical thinking.”  (Berman has also published counter-arguments made to his position on his blog, “Rebuttals To Our Shale Play Research.”)

Fowler’s post seems particularly thoughtful – he has interviewed Berman in the past, he reports on responses from World Oil and Petrohawk Energy (the oil and gas development company fingered by Berman) – and Fowler promises more information to come.  Of course, the life or death of Berman’s column is the sideshow, but the main event is the substance of Berman’s claims.  I suspect there will be more information to come on the substance as well.

For what it is worth, it appears to me that oil and gas companies believe in the potential of shale gas in a big way. Many of the graduates of the Energy Commerce program at Texas Tech University (where I teach) work for companies heavy into shale gas plays.  The names of several of these companies show up on a couple of Berman’s ASPO-USA slides: Chesapeake, Devon, Petrohawk, Southwest Energy, Encana, XTO, and EOG Resources.  I don’t know if we have students at Range Resources or Newfield, the other two companies mentioned on Berman’s slides, be we probably do. These companies are spending their money on shale resources as if it is a real, long-term resource, and that’s as good an indication as any available to an outsider looking in.

One nit to pick with Yergin and Iseson: they claim that while the “revolution in shale” has been around since 2007, awareness of the issue only reached Washington in the past few months.  Maybe that point is true at the higher levels of Washington society, but down at the data and analysis level Washington has been aware of the issue at least since November 2006.

In November 2006 the U.S. Energy Information Administration produced a preliminary report on Bakken Formation production in Montana and the Dakotas called “Technology-Based Oil and Natural Gas Plays: Shale Shock! Could There Be Billions in the Bakken?” The article states up front: “The Bakken Formation of the Williston Basin is a success story of horizontal drilling, fracturing, and completion technologies.”  In June 2008 the EIA followed with a brief analysis called, “Is U.S. natural gas production increasing?“, which focused on Barnett Shale development in Texas and the potential elsewhere.  Analysts have known for years about the boom in shale gas resources.