Future of Lubbock’s power supply efforts heads to court, with Lubbock citizens paying lawyers on both sides of case

Michael Giberson

In January I mentioned that a municipal utility agency created as a kind-of public-private partnership between the West Texas Municipal Power Agency and Republic Power Partners was taking off in an unexpected direction and leaving more than a few locals wondering what was going on. In brief, High Plains Diversified Energy Corporation, the partnership, was created a year or two ago to find or build power plants to serve the WTMPA’s post-2019 need for power – 2019 is when existing wholesale supply contracts will expire – but in January it suddenly proposed purchase of two large and somewhat distant power plants with more than 3-times the generating capacity and more than 7 years sooner than necessary.

It may well be, as the HPDEC maintains, that it is getting a great deal on the power plants. But a few problems have sprung up: HPDEC wants to borrow $1.5 billion or so in municipal bonds to finance the purchase of the plants and necessary transmission enhancements, the City of Lubbock asserts the group doesn’t have the legal authority to do so. There will be a lot of excess power, and selling the excess power is complicated since there are limits to the sale of power to non-municipal customers when the power plants are funded by tax-exempt municipal bonds. Meanwhile, the city of Odessa, Texas, home of the two power plants, doesn’t want that property taken off the city’s tax rolls and has convinced the state legislature to protect its interests. Lubbock, WTMPA, HPDEC, and Odessa, among others, are headed to court today to get some clarification.

Charles Dunn, a local attorney blogging the developments at Lubbock Power Grab, notices that because Lubbock residents make up 85 percent of the WTMPA load, we’ll be on the hook for legal fees on both the WTMPA/HPDEC and City of Lubbock sides of the issue.

Here’s hoping they come to a quick settlement.

ADDED: That was quick. Headlines after the hearing, from the Lubbock Avalanche-Journal, “Major electricity project can’t move forward, judge says“; from KCBD, “Judge kills $1.5 billion Lubbock power deal.” In essence the judge concluded that the public-private joint venture was not legally formed, so not only can it not be exempt from paying local taxes, not use eminent domain if needed for transmission, and not sell municipal bonds to raise oodles of cash, it can not and does not exist legally.

So, barring a rescue on appeal, the joint venture entity is dead and with it all the complications associated with the proposed power plant purchases.

Which just leaves the city of Lubbock’s municipal utility and the other members of the WTMPA with the complication of figuring how they will replace the wholesale power contracts with Xcel that expire in 2019.

Investors using municipal power company borrowing to maximize private returns?

Michael Giberson

Some regional power business developments have a few people in the area scratching their heads and wondering what is going on. An excellent article in Sunday’s Lubbock Avalanche-Journal explores the issue, yet still leaves local readers wondering what a quasi-public company is up to on our behalf.

In brief, High Plains Diversified Energy Company is a municipal utility company created as a public-private partnership between the West Texas Municipal Power Agency and Republic Power Partners, LP.  WTMPA is a generation and transmission collaboration among Lubbock Power & Light and three other smaller city power companies in the area. The point of HPDEC was and is to help foster development of area power supplies in advance of the loss of access by WTMPA to relatively low cost wholesale power from Xcel when contracts expire in 2019. Nothing particularly usual in any of this.

In the past few weeks HPDEC announced the purchase of two large natural gas power plants near Odessa, Texas. (Details from the HPDEC webite.) The deals are surprising in two ways: First, the power plants are in the ERCOT power system while Lubbock and the other WTMPA members are in the Southwest Power Pool. There is no way to get the power from there to here without spending several million dollars on transmission. Second, the two plants total about 1,500 MW in capacity, which by my rough guess is about three times the peak demand of WTMPA members. WTMPA members already have some generation capacity. Even assuming future load growth, the two plants may provide 1,000 MW more that current WTMPA members will need for at least two decades.

HPEDC’s business plans have always included the expectation that they would sell excess power elsewhere in Texas, but it is beginning to look like excess power is the tail that will wag the dog of supplying WTMPA members. As the newspaper story explains, WTMPA members are not yet sure they will want HPEDC’s power once WTMPA’s existing supply contracts run out in 2019.

Still, none of this would be particularly interesting except that it begins to look like HPDEC is not much more than a device used by a handful of private investors to leverage their money by using municipal bonds. And maybe that isn’t what is happening. As I understand it, so far, all the planning and development efforts have been funded entirely by the private investors. Maybe potential long term high returns are reasonable given the up front risks. But before WTMPA and local cities decide to support the municipal bond issuance that HPEDC needs to complete these two transactions, they should convince themselves that the long term value to WTMPA’s ultimate customers are worth the risks involved.

NOTES:

  • A local attorney, concerned about these developments, has established a website “Lubbock Power Grab: Electricity at What Cost?
  • The HPEDC website provides additional background.
  • I’d be less worried if municipal utility LP&L hadn’t recently become the monopoly retail power company in Lubbock. Up until about three months ago, power consumers in the city had a choice between LP&L and Xcel. If LP&L rates blew up because HPDEC investments go bad, consumers could have just jumped to Xcel.  Now consumers in Lubbock will be stuck with whatever the LP&L and WTMPA and HPDEC leadership gets us into.

 

Taxpayers, ratepayers, city government, municipal utilities

Michael Giberson

Cities have taxpayers and monopoly utility companies have ratepayers. When the city owns the utility, the taxpayers are – more or less – the same group of people as the ratepayers. In this case, does it matter which group pays how much for what? Should, for example, the municipal utility buy vehicles for other city departments? Should electric ratepayers fund improvements to city parks?

Elliot Blackburn has a long story in the Sunday Lubbock Avalanche-Journal exploring the relationship between the city of Lubbock and it’s municipal utility Lubbock Power & Light. While it may sound like, and is, a story focused on Lubbock, it is also a good case for meditating on the principles of local political economy.

ALSO in today’s A-J, the editorial board weighs in with “When it comes to LP&L and city, ‘us’ vs. ‘them’ should just be us.” Beyond the question of whether the city council and electric utility board should just get along, the editorial does raise an important question about electric utility rates, utility surpluses, and transfers to the city.  When the utility surplus is high, should rates be cut or the excess “shared” with the city? The newspaper says cut rates, and that is also the conclusion that makes the most sense economically.

(Is it too late to have Xcel buy LP&L’s assets in the city instead of the other way around? If we are going to have a monopoly utility in town, it might be a good idea to have a monopoly utility whose budget is a bit harder for the city council to dip into.)

Lubbock’s municipal utility fights city hall

Michael Giberson

Last week the Lubbock city council approved a plan to direct municipal utility Lubbock Power and Light to pay the cost of operating and maintaining the city’s street lights (see earlier post). This week the municipal utility fights back: “LP&L ready to fight city on street light money.”

The Lubbock Power and Light board met on Thursday in hopes of getting their voices heard.

“What we are trying to say as a board is that this is inconsistent with our charter and if its inconsistent with our charter then we don’t believe it is our issue,” said Rinehart.

As proposed by the city, almost $2-million of LP&L’s budget is set to power street lights, another million is in place for maintenance.  That’s $3-million Rinehart says LP&L should not be responsible for.

But also see this key bit of information, from the related Lubbock Avalanche-Journal story:

The vote [by the LP&L board] … would be largely symbolic. Though given great authority over the operations of the municipal power company, the council, not the appointed board, makes ultimate decisions on the budget.

PG&E spending big to protect its monopoly against municipal aggregation

Michael Giberson

For a number of years, state law in California has permitted cities or counties to arrange to become the electric power service provider for their areas – an arrangement where they would be responsible for acquiring the electric energy needed for consumers in their areas while the local utility would continue to operate the transmission and distribution.  (Consumer in the affected areas are allowed to opt-out, and stay with the private utility.) Only in the past few years have a few local government taken the “community choice aggregator”  idea seriously, and so only recently have the state’s privately-owned utilities worried much about the prospect of losing customer base.

San Francisco-based PG&E has initiated an effort to change the law so that local governments would need a two-thirds majority favorable vote from citizens in their communities in order to become a community choice aggregator.  Advocates of the local government-centered efforts worry that a two-thirds requirement will be insurmountable.  Details of the story are available at the Mercury News.  The state’s Legislative Analyst’s Office supplies a description.

Hat Tip for the link goes to Tom Fowler, NewsWatch: Energy, but he misleadingly styles the story as “California utilities spending big to block electric competition.”  For one, just a single utility – PG&E – seems to be involved. The state’s other investor-owned utilities appear not to be participating in the effort.  And the effort isn’t so much an attempt to “block electric competition” as it is an attempt by one monopolist to block other potential monopolists from horning in on its action.

Of course there has long been competition between private utilities and municipalities in the electric industry. According to Forrest McDonald’s biography of Samuel Insull, one reason Insull became an advocate of state-regulated private monopoly utilities in the late 1890s was as an effort to avoid municipalization of his companies.  Historically, municipalities were motivated by a hope of lower rates (at least that was usually the story for public consumption).  In the case of at least of few of the local governments exploring becoming an aggregator now, however, the announced motivation is to purchase a larger amount of renewable power, even though it can be more expensive.

As an aside: In parts of Texas with significant amounts of real retail electric competition, consumers can already choose the amount of their power that comes from renewable sources, with multiple companies offering contracts ranging all the way from 0 to 100 percent renewable energy content.