How valuable will a monopoly be to Lubbock Power & Light?

Michael Giberson

After over 90 years of operating in competition with a rival electric utility in town, late last year Lubbock Power & Light and Xcel announced a deal in which municipal electric utility LP&L would buy out Xcel’s distribution assets and customer accounts in the city for $87 million, leaving LP&L as a monopoly electric utility in the city.

Regulatory filings with the state reveal much more of the details of the deal.  A newspaper story in the Lubbock Avalanche-Journal notes, for example, that the $87 million will buy assets that Xcel values at $64.2 million.  Lubbock’s electric power consumers may wonder what the city is getting for that extra $22.8 million payment.

It is a complex deal that, in addition to paying Xcel to get out of town, accommodates changes in numerous existing contracts between the two companies.  For example, a few years ago when LP&L was on the brink of bankruptcy, LP&L and Xcel entered into a deal under which Xcel controls operations at LP&L’s generating plants and LP&L began buying all of its power supply needs from Xcel.  That deal expires in 2019, but under the acquisition plan Xcel would continue to make available some wholesale power to LP&L.  Xcel purchases waste water from the city for cooling a power plant, and that agreement would be revised as well.  All the complexities make it hard to evaluate what, exactly, the deal is worth to citizens of Lubbock – putative owners of the municipal utility – and the value to be created by the deal (if any).

One question to be asked, as a starter, is why LP&L needs to pay anything above scrap value for the Xcel distribution system in the city.  After all, the city claims its existing system is sufficient to serve the entire city and that maintaining two utility systems is town is wasteful.  So LP&L doesn’t need Xcel’s distribution assets to take on current Xcel’s customers, and adding the distribution assets will simply result in a costly, wasteful, and over-built local distribution system.

Scrap value would be too low, since some of the Xcel distribution system may be incorporated into LP&L’s system (in cases in which the Xcel system is superior to the LP&L segment that it duplicates), but book value on the assets seems a reasonable upper limit.  In any case it is hard to believe LP&L should pay a premium over book value for Xcel’s assets.

Is having a monopoly going to be so valuable to LP&L that they are willing to pay Xcel a $20+ million bonus to get out of town? What does that imply for future electricity rates in the city?

BACKGROUND – Earlier posts on electric utility competition in Lubbock:

Note that, technically speaking, one or two small neighborhoods will still have a choice between LP&L and South Plains Electric Coop, but otherwise LP&L becomes the monopoly provider in the city of Lubbock.

ADDED: The related regulatory filings at the PUC of Texas can be found via the PUCT’s Interchange document system.  Start on this page, enter 37901 as the “Control Number,” and press the “Search Now” button.

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