Xcel Energy and Boulder in conflict

City wants own utility, Xcel says city will pay dearly

Phil Carson | Jul 29, 2011

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One by-product of making the grid "smarter" is the fact that it can be contagious. The smarts, that is.

I recently posited that smarts will spread to all players on the system, from homeowners becoming more self-sufficient to cities breaking away. (See "Smart Grid: Utility Threat or Opportunity?") Defection—that is, "municipalization"—is always a possibility that could take a very large customer out of a utility's base.

Such is the case in Boulder, Colo., which is mulling separation from Xcel Energy, which has served the foothills city for decades. Boulder is home to about 95,000 people and the city estimates it delivers about $100 million in annual revenue to Xcel for electricity and natural gas. Boulder is also home to Xcel's SmartGridCity pilot that is on the cusp of reporting results, outcomes overshadowed by controversy over Xcel's pursuit of $45 million in cost recovery for the project.

Municipalization, in Boulder's eyes, would allow it to pursue higher penetration of renewable energy more quickly than Xcel plans to do so, which will require advanced elements of the "smart grid."

Officially, Boulder seeks to ensure reliable supplies while controlling consumer costs, reduce carbon emissions while promoting economic development and local control. But Boulder's fractious populace is anything but unanimous on the issue. 

Xcel's position is that it can help Boulder to attain its goals, but requires a fresh franchise agreement that would lock in Boulder as a customer for 20 years. Talks between the two parties broke down recently over prospective ballot questions pushed by both sides.

Next week, Boulder City Council will have a second reading of potential November ballot questions. One ballot question: Will voters authorize the end of the city's relationship with Xcel Energy and allow the city to issue bonds to pay for Xcel's assets in pursuit of municipalization? (One possible variant would be to cap that bonding authority, versus making it unlimited.) Another: Should the city extend and double its existing Climate Action Plan tax, due to expire in 2013, from a half-cent per kilowatt hour to a full cent? (The proceeds would pay the $1 million annual cost of legal and engineering fees to explore municipalization.) The city is also exploring whether to raise those funds through an occupation tax on revenue from the sale of electricity and natural gas. The latter burden would fall heavier on commercial utility customers.

Xcel had offered to build a 200-megawatt wind farm whose output would be allotted to the city and proposed that the wind farm offer and a renewed franchise agreement be presented to voters as separate ballot questions. The city responded that renewal of the franchise depended on the wind farm, thus the two should appear as a single ballot question.

The two sides have taken disparate views of the value of Xcel's assets, which yesterday led Xcel's incoming CEO Ben Fowke to tell the utility's investors that municipalization is a "bad idea," predict that Boulder voters will reject it, but, if it passes Xcel will "get the price we are entitled to" for its infrastructure.

Boulder has estimated the initial cost of municipalization at $6 million in upfront costs, $121 million for Xcel's infrastructure and $60 million in startup costs. Xcel puts the cost at more than $500 million. Boulder holds that Xcel's stranded costs are zero, while the utility values them at $355 million. 

Three local groups have taken divergent positions on the issue and letters to the editor at The Boulder Daily Camera reflect a wide spectrum of opinion among potential voters.

The Boulder Clean Energy Business Coalition, whose members include renewable energy companies that might benefit from municipalization, noted that Boulder has studied municipalization for five years and is committed only to exploring it, not implementing it.

The Boulder Smart Energy Coalition, formed earlier this month, urges caution and more fact-finding due to the risk that municipalization would result in markedly higher electricity rates that would hamper the local economy.

An existing group, known as Boulder Tomorrow, in May brought in a former Las Cruces, New Mexico, city councilman who said his city ran up huge costs—tens of millions of dollars—in both legal fees to get local utility El Paso Electric to sell its distribution assets as well as paying the costs of stranded assets, which it underestimated. The city councilman later told the Daily Camera that Xcel paid his travel costs to appear in Boulder but Xcel said that Boulder Tomorrow, of which it is a member, paid for the appearance.

Letters to the editor at the Daily Camera run the gamut of opinions on the topic, with a lot of emphasis on either mistrust of Xcel or mistrust of the Boulder city council.

Next we'll know whether questions regarding municipalization and its funding will appear on the Nov. 1 ballot and what those questions will be. One city councilman has proposed an "off-ramp" plan in case municipalization is derailed by further cost estimates and fact finding.

Phil Carson
Editor-in-chief
Intelligent Utility Daily
pcarson@energycentral.com
303-228-4757 

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Comments

Municipalization - Glass Half Empty

 

"Municipalization" is like a glass half empty or half full.  I say this because it is only part of a meaningful solution.  The" full glass" or other half of the equation that is missing in the discussions is "Aggregation".  The question that the leaders of Boulder must ask themselves is, which is more important to the city of Boulder, the end customers or the infrastructure?  Once they answer that question for themselves then I believe they will see and begin to use both parts of the solution together, "Municipal Aggregation". 

The reason that this is a viable option is for the same reason that we no longer talk about telephone long distance providers and how they are now transparent to the end user.  Smart Grid technology makes "Municipal Aggregation" a real option for energy markets, that is, if they are deployed and used correctly.  You can even satisfy Boulder's "fractious populace" with an Opt-Out clause for those who wish to continue with Xcel. 

 

Richard G. Pate
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Good comments, thanks

Two excellent observations, thank you.

The seemingly hybrid governance option is interesting, but unlikely to be appealing to either side, in my humble opinion.

Jack's options for evaluating the Xcel assets is a good insight. I believe I read that asset evaluation doesn't begin until after the Nov. 1 vote, if Boulderites choose to further explore municipalization. So the two-step here appears to be: Boulder city council determines what's on the Nov. 1 ballot, then the voters have their say.

At that point, maybe the appraisers move in and the dickering begins. I'm also interested to see if an "off-ramp" option is offered to voters and what they say. The clear danger here is that Boulder's enthusiasm for autonomy trumps either the technical case for realizing their low-emissions aspirations or the actual business case for municipalization. A vigorous exploration of the options should not be mistaken as momentum for a decision. Having a look over the edge doesn't mean ya gotta leap.

Thus, this is a fascinating case: the technical and business case is complex and, though supported by a consultant's analysis, far from certain -- and the complexities are diffficult to communicate to or be appreciated by the voters. Again, mistrust of city government is accompanied  by mistrust of the incumbent utility. More to come on this situation...

Regards, Phil Carson  

Boulder Municipalization

Entergy-New Orleans operated for many years as New Orleans Public Service Inc. (NOPSI), a privately owned utility. In 1985, the regulation of NOPSI was transferred from the Louisiana PSC to the New Orleans City Council, which perhaps could be a 'compromise alternative' for Boulder as well? This arrangement made sense here b/c New Orleans is a city/parish (county) - meaning that the city and parish/county boundaries are congruent - and which also define the Entergy-New Otleans service territory.

Since then, there have been several attempts by the NOLA City Council to wrest control away from Entergy and convert 'NOPSI' to a municipally-owned utility. But despite stalwart efforts to do so, they have never been able to make the numbers work, probably due in large part to Entergy-owned asset valuations and futher complicated by ownership arrangements regarding Entergy's Grand Gulf nuclear plant that go back to the early 1970s. Bottom line, IMO Boulder probably has a rough road ahead should they choose to pursue formation of a municipal utility from Xcel assets...

Municipalization

Boulder's success will, as the mayor of Las Cruces points out, turn on the valuation of Xcel's  distribution assets within the city limits.   From the standpoint of an engineer who knows almost nothing about appraisals, there appear to be four options.  The first is depreciated book value, which is how the assets are carried on Xcel's balance sheet.  The second is replacement cost, which is likely how Xcel will value them.   The third is based on a discounted cash flow (DCF) analysis that uses utility rates.  Finally, a professional appraiser could estimate what a financial buyer would be willing to pay for the assets, which might just be option 3 with some adjustments.

If I had to adjudicate this dispute, I'd use the DCF approach, but with a higher discount rate than utilities typically assume, because I'm becoming more and more convinced that falling rooftop solar PV costs are going to change the power business and take a bite out of the value of utility assets.

Jack Ellis, Tahoe City, CA