LUBBOCK UTILITY BOARD LACKS TRANSPARENCY IN SEARCH FOR NEW POWER SOURCE

As everyone who reads this blog knows, LP&L must find a new source of electrical power by June 1, 2019. There are three options available to the Electric Utility Board, the designated city entity tasked with making this decision. The first option is to enter into a purchase power agreement with a commercial power provider such as Xcel Energy. This is the option chosen by most cities including Amarillo and is how power is currently furnished to the City of Lubbock.

The second option is for LP&L to build its own power plant to provide power to the city. The third option is to enter into a contract with private investors who will build the plant and lease it back to the city over a long period of time such as 40-50 years. At the end of the lease term, the city will own the plant. Because there has been almost no discussion of option one by the EUB or the City Council, I will discuss the remaining two options and the EUB efforts at providing information to the citizens of Lubbock regarding our future power needs.

The main purpose for writing this article was to determine the amount of information currently available to the citizens of Lubbock as it relates to this issue. One section of the LP&L website contains the information that the EUB makes publically available to the citizens of Lubbock dealing with the 2019 decision. The section I am referring to is the link “Power for Lubbock-2019 and Beyond.”

The first portion of the link deals with a September 8, 2013 update provided by Gail Kring, EUB Chairman, to the Lubbock City Council which is a brief 1:37 minute video of Mr. Kring presenting a timeline regarding the new power source decision. The video contains nothing new and the timeline slide is a general outline of the deadlines that need to be met in order for LP&L to have a power source available on June 1, 2019. To summarize, the EUB issued an RFP on April 24, 2013 and it closed on June 6, 2013. RFP stands for “Request for Proposal” which is basically a sealed bid process. Interested parties respond to the RFP and the bids are presented to the EUB for action. The timeline provides for a six month communication “blackout” period until January 1, 2014 when it is anticipated that the contract will be awarded. Apparently, the purpose of the blackout period is to allow for the selection of a contractor and the negotiation of a final contract. The interesting thing about the timeline is that it provides a deadline of January 2014 for when the “capacity and energy supply agreement” will be awarded. There is no explanation as to what is meant by that term. Does that mean that the decision has been made to build our own plant or does that mean the decision has been made to lease a plant from investors? No one on the EUB is explaining what that term means and I guess we as citizens will find out in January when the contract is signed.

The next portion of the link is a blank form of the RFP that was sent out on April 24, 2014. It is not very useful in providing information to the public.

The last link is a briefing done to the West Texas Municipal Power Authority on March 19, 2013 by the consulting firm of Black and Veatch. This link contains a lot of helpful information regarding the cost and operating requirements for a new power plant. In general, the study estimates that there are two choices for a new power plant. The first choice is a “simple cycle” plant that is less energy efficient but will be cheaper to build and more expensive (because of fuel costs) to operate. It will cost 420 million to build a simple cycle plant. The second choice is a “combined cycle” plant. It is more expensive to build but cheaper to operate. It would cost 735 million to build a combined cycle plant. The most important information is the “capital cost” of operating the plants. This is an accounting term that means the cost each year to pay the principal and interest on the bonds required to finance the power plants. For a simple cycle plant, the cost is 21.5 million per year plus 4.5 million for natural gas improvements for a total of 26 million per year. For a combined cycle plant the cost is a whopping 42.3 million per year. To that total you must also add the cost of maintaining the plants which is approximately 1% of the value of the plant per year. For obvious reasons the consultants recommended that LP&L either build a simple cycle plant or enter into a lease agreement with private investors who will build a plant for LP&L and lease it to us. Building a combined cycle plant is too expensive for a city of this size.

An interesting portion of the Black and Veatch study is the comparison between the current yearly costs for Xcel to provide power to LP&L verses the capital cost for LP&L to operate its own power plant. The capital costs for operating a simple cycle plant, which is our only viable option other than leasing, is 26 million a year, as stated above. The cost currently charged by Xcel to provide power is 36.5 million per year. On paper at least, there appears to be an opportunity for LP&L to save 10.5 million a year in power costs by building its own plant. However, certain variables need to be added to the equation for the real cost of power to be determined. One of those variables is whether or not LP&L can purchase natural gas at the same cost or lower than Xcel. Currently Xcel is charging 140 million a year for pass through “fuel costs” in addition to the 36.5 million to provide the power for a total charge to LP&L of 176.5 million. Can LP&L significantly reduce our cost of fuel? If so, how will they do it? The problem is that we don’t have answers to that question or many others. No information is available to the public which answers these issues and if a study has been prepared, it has not been released to the public.

If you depend upon LP&L for answers, you will find that there is very little information available to the public regarding this very important decision as to how we obtain power in the future. I would urge everyone who reads this blog to contact each member of the city council and EUB to urge them to put more information regarding the process of choosing power for 2019 and beyond on its website so that it is available to the media and the public. LP&L has no competitor. Information regarding individual bids, bidders, and all written communication between staff, board members, city council members, and private contractors is important information that should be available to the public to preserve the integrity of the selection process. For the public to have access to this information would not endanger or jeopardize LP&L’s competitive position in the marketplace. By continuing to withhold this information from the public and by excluding the city council members from EUB executive sessions, the EUB only fuels the fire of conspiracy theorists who believe all government is evil and up to no good. LP&L can quiet its critics by using common sense and releasing this information to the public.

Tail Wags Dog at Lubbock City Council Meeting

It has been a long hot summer for the Lubbock City Council. It began with a month
long council fight over the performance of city manager Lee Ann Dumbauld which
finally ended with her termination two weeks ago. The citizens of Lubbock have still
not been given an explanation of why she was terminated or the anticipated cost of the
termination. Council members have refused to comment and all discussion regarding
the city manager’s job performance was held behind closed doors. Only a brief motion
to terminate the city manager and a vote on the motion were made in public. All of
this political drama took place in the middle of budget planning sessions. The council
must finalize a new budget before October 1 and at the same time they must begin the
search for a new city manager.

On top of the turmoil surrounding the city manager and new budget, the city council
approved a rate increase and new tariff structure for LP&L which took effect in June.
Unbeknownst to everyone but LP&L management, a billing error caused many
citizens to be under billed for their June electrical services. Rather than convene a
press conference to announce the error and to alert the individuals involved, LP&L
management decided in secret to simply add the unpaid June charges to the July bill
which caused the under billed citizens to receive an astronomical utility bill in July.
Looking for political cover, the City Council called a special meeting of the council
yesterday evening (July 30) to discuss how to handle the situation.

The first item on the agenda at the council meeting was an amendment to the LP&L
rate tariff to delete the fee charged by LP&L when it disconnects service as a result
of its own error. Yes, you read that right. LP&L charges to reconnect your service
even if you are terminated because of LP&L error. You would think that it would be an
easy, quick vote for the council to amend the tariff and bring a little common sense,
positive PR and customer service back to LP&L. Instead, with the entire EUB board
looking on, the tail wagged the dog when the majority of the council voted to continue
to charge citizens the reconnect fee even if they were disconnected through no fault
of their own. The vote against the amendment was the same block of four that have
continued to allow the EUB to run LP&L with almost no council oversight. The four
are Todd Klein, Victor Hernandez, Latrelle Bright Joy and Floyd Price. The remainder
of the meeting involved listening to a long, wonkish, presentation by the LP&L rate
consultant from Denver who explained why LP&L bills were so expensive in July. After
his presentation, a vote was taken to delay the rate increase until October. The vote
failed with the same block voting to “stay the course” except that Jim Gerlt joined the
EUB block. The Mayor, who voted to delay the increase, echoed my thoughts regarding
the special council meeting when he told Adam Young of the Avalanche-Journal, “I don’t
think it was a benefit to anybody.” I agree with the Mayor.

Where do we go from here? It’s painfully obvious that there is not going to be a
political solution to the LP&L problem as long as the EUB voting bloc remains on the
council. Although Victor Hernandez faces a recall in November, and a recall petition is
circulating regarding Floyd Price, it is improbable that either will be recalled. Until City
elections in May, it appears that the status quo is going to be what we get.
The rate increase that was enacted in June and the additional rate increases that will
take effect in the next four years are the result of two factors. Previous city councils
refused to raise rates despite four years of repeated Xcel wholesale rate and fuel cost
increases which were being absorbed by LP&L. The second factor is that LP&L pays
10 Million a year in bond repayments to pay for the purchase of the Xcel customers.
As a result of these two factors, LP&L is losing $17 million a year and is dipping into
reserves to meet expenses. While there is plenty of fat in the LP&L budget in the form
of advertising and high salaries, the budget does not contain $17 million in fat. The sad
fact is that the rate increase was inevitable because of the bond payments and Xcel
wholesale rate increases. Rates are not going to be rolled back, and are only going to
continue to go up, even if a new council is elected in May 2014.

On top of this bit of bad news is the really, really bad news. LP&L can’t afford to provide
power in 2019 when the Xcel contract runs out. Well, let me put it another way: LP&L
can afford to provide it, but we may not be able to afford to pay for it. What I mean is
that the bids to build a new power plant to provide power to the City after 2019 were due
in May. To my knowledge, the bids have never been discussed in public and no agenda
item has been placed on the EUB agenda to approve a contract to build a plant. This
tells me that the bids to build the plant came in way over the anticipated amount. Again,
this is speculation because no bids have been released to the public and no public
discussion of how LP&L will pay for the plant has taken place. But since we are playing
the speculation game, let’s run the numbers on an 800 Million bond issue. The current
interest rate for municipal bonds is in the 3.5 to 3.75 range. Taking the lower interest
rate with a 15 year payout, the bonding cost would add 5.8 Million a year to the current
LP&L budget. The recent 25% tariff increase over five years will be insufficient to cover
the bond repayment requiring another increase of approximately 10%. My calculation
brings us to a base rate in 2019 that will be approximately 35% higher than our current
rate. And that increase is only to the base rate and does not take in to account fuel cost
surcharges or Xcel wholesale rate increases, both of which will be passed on to the
consumer. My prediction is that if we build the power plant, utility costs will more than
double in 2019 from current rates.

There is more bad news. There is nothing we can do to prevent our rates from doubling
short of selling LP&L. We can change the City Council, amend the charter to eliminate
the EUB and eliminate the reserve requirement and we will still have to either build a
power plant and pay for it with revenue bonds or we will have to have someone else pay
to build the plant so that we can purchase power from them over the next 40 – 50 years.
Either way, electric costs are going to at least double from current rates. The only other
choice is the one I favor but almost no one is talking about in public. That is, we sell
LP&L and purchase power on the market. Amarillo and almost every other city in Texas
purchase their power from private companies. Amarillo’s rates are lower than ours and
the statewide average cost is lower than ours. For those who resist the idea of selling
LP&L, I’m open to other solutions. But I have yet to hear any. The bottom line is that all
of us need to prepare for dramatically higher electric bills over the next ten years. There
is no political solution to our problem short of electing new council members who will
agree to put LP&L on the market and get rid of it once and for all. For many reasons, I
just don’t see that happening.

City Auditors Critical of LP&L Accounting Procedures

On March 27, 2013, City of Lubbock auditors completed their audit of LP&L. Their findings and recommendations are set out here.

As expected, the auditors found “deficiencies” in documentation for purchase invoices. The audit also found that procurement file documentation related to how winning bids are selected is deficient. In my previous article, I detailed some of the concerns voiced by City of Lubbock financial staff as well as the city manager regarding the lack of financial controls at LP&L. The audit report recommends that the LP&L purchasing manager, because of the significant amount of goods the purchasing manager purchases each year, report to an administrative position rather than a lower level employee. The audit also recommends that LP&L designate a finance level executive to approve large invoices before they are sent to the City of Lubbock for payment. This change would allow greater assurance by the City of Lubbock that the invoice had been approved at a high level and therefore was a legitimate invoice.

The most significant recommendation for LP&L is that the procurement system be updated and simplified, especially as regards to when a manager can declare an emergency and sign off on a no-bid service and when such services require job order contracts and competitive bidding.

The last recommendation is for the City and LP&L to enter into a formal service agreement to clearly delineate the duties and responsibilities of each entity.

The recommendations are a step in the right direction for LP&L. I hope that the LP&L board votes to adopt them immediately.

FRAUD LAWSUIT OVER LP&L COOLING TOWER WORK TRIGGERS AUDIT REQUEST BY CITY

On February 6, 2013 Talon, an Amarillo company which has a contract to provide LP&L with utility construction services, sued its Lubbock based project manager alleging fraud. The lawsuit alleges that Talon’s project manager, who was responsible for supervising the construction and repair work to LP&L’s Massengale Station cooling towers, created fictitious companies and invoices and submitted them to Talon for payment. Talon alleges that it was bilked out of more than $340,000 as a result of the scheme. The lawsuit can be found here.

When notified of the suit, the City finance department began to look into LP&L payments to Talon and other contractors currently being paid by LP&L for utility work. The results of the preliminary investigation are disturbing. Pamela Moon, Executive Director of Finance for the City reported that there were payments made without Electric Utility Board (EUB) approval and insufficient documentation of work done. Moon prepared a spreadsheet detailing payments made to Talon for 2012 and found that more than two million dollars had been paid to Talon for work on the Brandon, Massengale and Cooke stations. Of the amount paid to Talon in 2012, only $1,034,000 was approved by the EUB. More than 1.6 million was paid to Talon without EUB approval. According to LP&L guidelines, no purchases of more than $100,000 may be made by LP&L without EUB approval. Moon also found that several invoices appeared to be “split” to avoid the requirement of EUB approval. A split invoice is one for a project that is billed in stages instead of all at once in order to avoid the $100,000 EUB requirement. The spreadsheet is here.

Because of the large amount of money paid to Talon by LP&L in 2012, the City investigated the nature and amount of work performed on the cooling towers, especially at the Massengale station. James Gilmore, who is the Electric Production Superintendent for LP&L, told City investigators that some of the work on the cooling towers did not take place because it was determined that the “upgrades” to the towers were not needed. An e-mail from Steven O’Neal to Lee Ann Dumbauld discussing the cooling tower work can be found here.

Another contract which raised questions with City auditors is with a company called CII Cardinal (Cardinal). Cardinal is a small Illinois based company that specializes in industrial valve repair. On February 20th, City Manager Lee Ann Dumbauld sent an E-mail to Gary Zheng, CEO of Electrical Utilities. The e-mail questioned the amount of money paid to Cardinal since 2011, the failure of the contract between LP&L to be ratified before work performed, the fact that the contract had no terms, pricing, schedule of charges or deliverables. She also questioned why the contract was not sent out for competitive bid. Dumbauld expressed concern that she would not be able to certify the City financial statements to the City Council because of the lack of LP&L internal accounting controls. The e-mail can be found here.

EUB Chairman Gail Kring responded to Dumbauld’s e-mail the next day. His response can be found here. Kring takes the position that the amount paid to Cardinal was not excessive because the payments were for work performed over the course of three fiscal years. He also states that the projects were performed within LP&L purchasing authority and bidding guidelines and that any allegation of misappropriation of funds is “misleading and wrong.”

Pamela Moon responded to Kring the next day with the results of her investigation. She states that the contract approved by the EUB between Cardinal and LP&L did not include any terms, pricing or schedule of charges. She also states that the contract does not contain a reference to an appendix. She found that payments were made to Cardinal before EUB ratified the contract and that payments approved by the EUB were much lower than the amount of payments made. EUB approved payments of approximately $400,000 but actual payments made to Cardinal total almost 1.7 million. Moon also interviewed James Gilmore regarding the Cardinal contract. Gilmore told Moon that he was the one who entered into the contract with Cardinal and that the job was never released for competitive bid. He also told Moon that he did not get any competitive bids or solicit quotes. Gilmore’s statements to Moon seem to contradict Kring’s assertion that the Cardinal contract met LP&L bidding and purchasing guidelines. Moon’s e-mail can be found here.

In reviewing the documents provided to me in the light most favorable to LP&L it appears that there is a serious lack of internal accounting controls involving a large amount of money. The lack of accounting controls spans several years. If nothing else, there is an appearance of impropriety which casts a cloud of uncertainty over the entire LP&L organization. Without an outside audit of the Talon and Cardinal contracts, it is impossible to determine if funds have been misappropriated or if more serious financial wrongdoing or even criminal acts have occurred. The City Manager is charged with the duty to the taxpayers of the City of Lubbock to make sure that city funds are not being misappropriated or wasted. Serious questions have been raised regarding LP&L’s contracting and procurement procedures and the City Council should respond by immediately authorizing an outside audit of the Talon and Cardinal contracts. If the City Council refuses to authorize an audit, the City Manager should conduct one under the authority granted to her by the Texas Government code.

IT’S TIME TO ABOLISH THE LP&L BOARD

Less than ten years ago, Lubbock voters approved a charter amendment to ‘fix’ LP&L which transferred the day to day management of LP&L away from the city manager to an executive director who reports to a board of private citizens. The City’s experiment in allowing a public utility owned by tax payers to operate as a private business with minimal city oversight has been a failure.

Three years ago we saw the secret agreement by the LP&L board to issue 87 million in LP&L revenue bonds to buy out Xcel. None of the new debt was submitted to a vote of the taxpayers, but will be paid for by them over the next ten years. No public input as to whether or not the purchase was in the best interest of the residents of the City of Lubbock was sought or even considered. Instead, a small group of insiders, working with a unanimous city council, voted to eliminate all electrical competition within the city. We are now seeing the results of the new monopoly. This summer Lubbock has been hit with blackouts, rolling blackouts, boil water notices, business closings due to the blackouts and a public dispute between the Mayor and the board over LP&L accounting methods. Most disturbing of all is the fact that there is no board plan that has been made public for how LP&L intends to obtain power in 2019 when the Xcel power agreement expires. To my knowledge, the board has failed to even discuss in public its preference for our future power needs. The future power needs of our city are too important to be the subject of back room discussions and negotiations. In addition, Utility Director Gary Zheng has never addressed the council or any other city board in public as to his recommendations or proposals for LP&L after 2019. Complicating matters further is an expensive lawsuit involving the City of Lubbock, WTMPA, Diversified Energy and Republic Power Partners that was caused either directly, or at best indirectly, by the actions of past LP&L board members. How did we get here? I’ll give a brief recap below and then offer my solution for a path forward for LP&L.

In September 2002, the City Council was notified of LP&L spending irregularities. The spending irregularities were related to a 6 million debt owed by WTMPA member cities to LP&L for power service that had not been collected by LP&L and $800,000 in WTMPA expenses which were paid by the City of Lubbock rather than WTMPA. Additionally, it was determined that LP&L had failed to hedge against natural gas hikes which, in the winter of 2002-2003, were at all time highs. The projected deficit of LP&L for that year was 18 million. By February of 2003, the deteriorating finances of LP&L cost its director, Paul Thompson his job. Two weeks later, it cost the job of City Manager Bob Cass. In March of 2003, 69 year old Carrol McDonald came out of retirement to take over LP&L. He has now retired again and, at 78 years old, is a 2012 appointee to the LP&L board. The Mayor of Lubbock during the LP&L melt down was Marc McDougal. He is also a new 2012 appointment to the LP&L board.

As a response to the mismanagement of LP&L by it director and the person responsible for the director, former City Manager Bob Cass, it was determined that the solution to the problem was a charter amendment establishing a board of private citizens to run LP&L without the control of the city manager or the city council.

In 2004, the voters passed a charter amendment establishing a nine member Electric Utility Board appointed by the city council. The amendment gave the board the power to hire a Director of Electric Utilities and General Counsel for utilities, both of whom serve at the pleasure of the of the board and NOT the city manager or council. In addition, the board was given the exclusive authority to determine the transfer and disbursement of all net revenues of LP&L. The council did retain the ability to establish electrical rates, issue debt on behalf of the utility, exercise eminent domain and approve the budget of LP&L. These changes were incorporated into the code of ordinances along with a “reserve” requirement that before any payments are made to the City for franchise taxes or other purposes, LP&L must set aside three months gross revenues from electricity sales as a reserve. This sum is approximately 48 million.

Despite spending more than 4 million dollars over the past 8 years on advertising, LP&L is not well thought of among city residents. Complaints abound regarding the failure to read meters on a monthly basis, poor service response, poor customer service and heavy handed billing and collections operations. Although no accurate exit polling exists from the spring city elections, many veteran political observers credit the defeat of incumbents Paul Beane and Tom Martin to their vote to purchase the Xcel power lines and growing frustration among the voters that LP&L is being mismanaged from the top down.

Where do we go from here? I believe that there are three things that need to be done immediately.

The city council should schedule a charter election with the express intent of repealing Article XII of the charter. The current system in which non-elected individuals are responsible for the operations of an entity with the income, size and complexity of LP&L is not working. The citizens own LP&L and they should be overseeing its operations through their elected city council and its city manager. It should be made clear to the voters that if the charter election fails, LP&L will be sold to a private entity. Either way, voters should be made aware that the current system is not working and will not be continued regardless of the outcome of the election. I believe an overwhelming majority of citizens agree with this assessment.

Next, the city should withdraw from the WTMPA. Our association with a power partnership in which the other cities are Brownfield, Floydada and Tulia, makes no economic or political sense and has been a constant source of political infighting, lawsuits and accounting irregularities.

The city council should also commission an outside consulting firm with utility consulting experience to provide a top down evaluation of current LP&L operations. The emphasis of the evaluation should be focused upon improving consumer service and reducing complaints, improving scheduled maintenance to prevent future blackouts and moving the financial accounting of LP&L away from the Executive Director to a standardized accounting system overseen by city auditors.

There should also be a complete and thorough city council evaluation of LP&L management including Utility Director Gary Zheng. Zheng is paid more than the city manager, more than a federal judge or state judge, more than a congressman, more than most employees of Texas Tech with the exception of the Chancellor, and more than every county employee except the county coroner. Are we getting our moneys worth? That should be the question.

We can wait no longer. We must right LP&L’s sinking ship before it is too late. The Lubbock City Council should act now to implement these common sense recommendations so that we move forward in protecting and preserving one of Lubbock’s most important resources.

MEDINA MEMO CONCLUDES ELECTRIC UTILITY BOARD MEMBER CARROLL MCDONALD INELIGIBLE TO SERVE ON BOARD

At the last Electric Utility Board meeting on March 20th, we learned that LP&L has sustained operating losses of 4.9 million dollars from September 1, 2011 to date. Operating losses are projected to continue without a rate increase because of wholesale power increases by Excel Energy which the City Council has not passed through to Lubbock citizens. If that news isn’t bad enough, now it appears that one member of the EUB cannot legally serve on the board because he has a conflict of interest. In a memo obtained by Lubbock Power Grab, City Attorney Sam Medina concludes that Carroll McDonald, a recent appointee to the EUB, cannot legally serve because of a conflict of interest. Medina’s memo is here.

The problem with the McDonald appointment is that Carroll McDonald receives $2,500 per month from the city as “deferred compensation” pursuant to a contract he signed in 2005 when he was a consultant for LP&L. Although Mr. McDonald is no longer consulting for LP&L, the city is still paying him $2,500 per month. According to Medina, McDonald’s appointment violates the City Charter which prohibits any member of the ECB from having an economic interest in the profits of any public utility operating in the city. Because the city pays McDonald $2,500 a month for his past services to LP&L, he is deemed to have an economic interest in the profits of LP&L and he is disqualified to serve on the EUB.

Despite Medina’s opinion that McDonald is disqualified from service as an EUB member, no action has been taken by the city or the EUB board to remove him from his appointment or to make a new appointment to the EUB board.

CITY RISKS ANOTHER LAWSUIT WITH DOWNTOWN UTILITY PROJECT

The City of Lubbock and Delbert McDougal will have a press conference tomorrow at the Pioneer Hotel (tentatively renamed Pioneer Condos) to announce the beginning of the construction of the underground utilities relocation for downtown, the Pioneer remodel and plans for a potential downtown movie theatre. According to an e-mail dated 1-20-2012 from former City of Lubbock Chief Financial Officer Andy Burcham, the announcement will serve as a kickoff to publicly celebrate the utility relocation project. A good overview of the downtown redevelopment project is contained in this letter written to AT&T by Rob Allison, former Assistant City Manager, on November 29, 2010.

To summarize the downtown redevelopment project, the City Council entered into a five year contract with McDougal in December 2008 for McDougal to act as the “master developer” of the Downtown Revitalization Action Plan. He receives $30,000 a month, plus expenses, for his services. During the past three years McDougal and the City have adopted a plan for the redevelopment, passed a comprehensive downtown zoning ordinance for the redevelopment and have adopted a three phase plan for relocating the utilities from overhead to underground. The projected time frame for the design and construction to relocate the utilities is ten to fifteen years. Phase one of the utility relocation project will be announced tomorrow and includes a “utility duct system” in which all of the utilities will be moved from their present location and placed in a giant underground duct. The first portion of the duct begins at Ave. Q and runs down Main Street to Ave. O. It runs the length of Ave. O south to 19th Street. It runs the length of Ave. O north to 4th street then proceeds east to Ave. L and then south for one block where it ends. Plans, funding and a timeline for the other two phases of the relocation project have not been released.

The problem with the project is that the City expects each private utility to pay for the cost of relocating its utilities from the present location, whether the utilities are underground or above ground, to the utility duct. The cost of relocating the utilities is substantial and some of the private companies impacted have raised questions about the project. Connie Wharton, a representative of Suddenlink, sent a list of questions about the project to Rob Allison on February 25, 2011. A copy of the questions and his responses is here. The important points raised by Allison’s response relates to the cost of the project and AT&T’s participation. For phase one of the relocation the City has appropriated 7.5 million in funds and has a grant for 1.5 million bringing the city investment to 9 million. AT&T has communicated to the City that it will cost 40 million to relocate its utilities for all of downtown and that the initial phase will cost 1 million. AT&T has refused to participate in paying any of these costs.

According to Allison, representatives of the City have met with AT&T representatives Cameron Monroe (Amarillo), Robb Thetford (marillo), Bob Garza (Richardson) David Nichols (President, Texas) and Joseph Cosgrove (Associate General Council) and have failed to reach an agreement on reimbursement. It appears that AT&T broke off negotiations with the city on April 6, 2011 by e-mail from AT&T representative Robert Digneo in which he states, “We are not in a position to absorb any of the costs of the telecom facility relocation in this project.” In response to the e-mail, Allison threatens to turn the city lawyers loose upon AT&T. After telling Digneo that the city intends to go forward with the project anyway, he says, “It appears this will become an issue with the attorneys. I will notify our Team of your position.” A copy of the e-mail is here.

It now appears that the city has two choices on how to handle AT&T. They can absorb the cost of the relocation which will cost taxpayers 1 million in the first phase and 40 million for the entire project, or they can sue AT&T to force them to reimburse. Neither choice is acceptable. Making taxpayers pay for the AT&T relocation is not an option because it is not fair to Suddenlink, Atmos Energy, NTS and others who have agreed to incur substantial costs for the relocation project for AT&T not to pay its share of the costs. Yet, the last thing the city needs is another lawsuit. At any given meeting of the City Council there are behind the door discussions of numerous lawsuits that never seem to end, including the infamous AAG suit that has been ongoing for almost six years and has consumed more than 3.5 million in taxpayer funds to pay attorneys. Just recently the city was sued for 9 million over the Republic Power Partners failed partnership with High Plains Diversified and lost on appeal of a lawsuit filed by an employee who claimed she was denied a promotion because of retaliation. That suit will cost $500,000 in damages in addition to the attorneys fees incurred to defend the losing effort. Needless to say, the city does not handle litigation well. Nonetheless, the City Council has decided to proceed with the project so taxpayers should gird up for another lawsuit and protracted litigation with a well funded and aggressive opponent. It is a 40 million dollar bet that the city cannot afford to lose, but probably will.

REPUBLIC POWER SUES THE CITY OF LUBBOCK FOR 9 MILLION

In a twist of irony that could only occur in the politics of our city, the Lubbock City Council met behind doors on March 5, 2012 to discuss the Republic Power Partners lawsuit filed against the city. Former judge Sam Medina, who as District Judge signed a judgment authorizing the WTMPA to form High Plains Diversified and gave it the ability to issue public debt, is now the City Attorney advising the City Council on how to defend Republic’s suit against the city; a suit which alleges that Republic invested 9 million in the power project only because it relied upon Medina’s ruling that it could issue public debt. Where else but Lubbock could this be happening?

Another twist of irony is the quote from Mayor Tom Martin regarding the lawsuit in today’s edition of the Lubbock Avalanche-Journal, “I think it’s totally without merit; we intend to obviously fight it.” This is the same Tom Martin who enthusiastically indorsed the Hi-Plains / Republic Power Partners deal only one year ago and told a local talk radio host that it was a good public-private partnership with little risk to the Lubbock taxpayer.

Republic decided to go ahead with the lawsuit even though it must be anticipating that the city will raise the “Kent Hance” defense to get the case thrown out of court. As most of you know, the Kent Hance defense came about when it was used by Tech in the Mike Leach suit against Texas Tech. Leach acknowledged that the general rule in Texas is that public entities like Tech are immune from suits for breach of contract. However, Leach alleged an exception to the rule stating that because Tech acted in bad faith in terminating him, immunity does not apply and he should be able to get a jury trial on the bad faith issue and if successful, the doctrine barring suit does not apply. The Court of Appeals wrote an opinion stating that regardless of how badly the public entity treats you, you still cannot sue them. The Texas Supreme Court approved the Court of Appeals opinion and refused to hear the case. Thus, the Kent Hance defense has been approved as a powerful new weapon that public entities will use when sued for breach of contract. Expect it to be raised early and often in this case.

My take on this case is that Republic Power Partners is not going to go away quietly. They have the money and time to fight the city on equal terms. And like most lawsuits in which the city is involved, expect to see this one hang around a long time sucking tax payer money and time from the city like a giant mosquito. The investors in Republic Power Partners are very rich and politically connected and don’t like to lose. And they really, really don’t like it when they are made to look foolish. Republic Power Partners feel like the city supported their deal when it was politically feasible to do so, and then pulled the rug out from under them at the first sign of political heat. Don’t underestimate Republic Power Partners’ ability to use their money and political power to shoot down the Kent Hance defense and get their day in court. If that day occurs, anything can happen.

DID THE CITY OF LUBBOCK CONDEMN THE TRAVELERS INN TO BENEFIT A PRIVATE DEVELOPER?

North Overton’s signature street is Glenna Goodacre Boulevard. It is four lanes wide with a landscaped median in the middle and runs from University to Avenue Q. Curiously, the street narrows to two lanes one block before it reaches Avenue Q. The apparent reason for the sudden street narrowing is that when North Overton was being developed, the owner of the Travelers Inn chose not to sell his motel to developer Delbert McDougal at a price McDougal was willing to pay. The Travelers Inn sits in a prime location on the corner of Glenna Goodacre and Ave. Q. across from the Civic Center and is only a stones throw from the new Wal-Mart, a strip retail center and the new Walgreens drug store. All except the Civic Center were developed by McDougal.

When the City put in Glenna Goodacre Boulevard, it decided not to condemn the Travelers Inn to widen the road all the way to Ave. Q. It is my guess that the City realized it would be cheaper to just narrow the road to one lane each way for the single block occupied by the motel rather than purchase the motel and demolish it for a wider road. This was the correct decision and the proper use of taxpayer dollars because the narrowed road causes little inconvenience to drivers who use that portion of Glenna Goodacre. Most traffic on the street is toward the west closer to University and Texas Tech. The City also made the right decision for individual property rights. No government entity should take private property unless it is absolutely necessary for the public good. The City decided, when Glenna Goodacre was widened, that it was not in the public interest to take the corner where the Travelers Inn sits.

Somewhere along the way something or someone changed the City’s mind. In 2009, Mayor Tom Martin signed a resolution authorizing the condemnation of the Travelers Inn for the stated purpose of widening Glenna Goodacre Boulevard for one block to Avenue Q. The City hired Lubbock attorney Zach Brady to represent the City in the condemnation procedure and he filed suit against the hotel owner in 2010. A hearing was held before three private citizens as provided by law and the citizens determined that the property was worth in excess of $600,000. The City deposited the money with the Court hoping it could then immediately begin demolishing the motel. However, the owner appealed the award putting any demolition on hold.

On first glance, this all seems perfectly legitimate. The City apparently changed its mind and decided that Glenna Goodacre needed widening after all and that it would be a good and proper use of taxpayer funds to condemn the motel. But, as always when the City of Lubbock is involved, there is more to the story. While researching the downtown redevelopment contract, I ran across a couple of e-mails that shed a different light on the transaction. The first e-mail is from Delbert McDougal to Rob Allison, former Assistant City Manager. It is dated November 22, 2010. I will reproduce the e-mail here just as it was written:

Rob:

what is going on with the travlers inn?? can’t the city put some heat on the attorneys. this thing has gotten out of control. malouf is not happy nor am I. somebody needs to give zach a deadline??

Apparently when Delbert McDougal is not happy, the City of Lubbock is not happy.

Here is Rob Allison’s response. The e-mail is written to City Attorney Sam Medina with a copy to Delbert McDougal and Linda Chamales, an assistant city attorney.

Sam-as a follow up to our conversation yesterday. It has been several months since the condemnation hearing on the Travelers Inn was completed. It’s in appeal. Things are moving very slowly and I would like to ask for your help. First, could you check and see if their (sic) is some way to move the case forward at a faster pace. Second, the timing of this case becomes less sensitive if both parties could agree to demolish the building. The developer involved in a project with the adjacent property is not able to start a development until this case is settled or the property is demolished. This process has taken so long, I’m hearing this development may go away. Zach is aware of both of these issues. Let me know if you need more information.

Thanks for your help.

Several issues come to mind after reading the e-mails. The City of Lubbock is paying more than $600,000 in taxpayer funds for a corner of land for the stated purpose of widening Glenna Goodacre Boulevard to four lanes for a distance of only one block. Why is the project being done now? Is it a proper use of taxpayer money for such a short widening project? What is wrong with the street as it is currently designed? Also, why is a private developer involved in demanding that the City move faster on a road widening project? Was the road widening project just a subterfuge for the public paying to buy out the Travelers Inn so that McDougal could develop the adjacent property with Malouf Interests? If so, this is an illegal use of tax money. A public entity cannot condemn private property if the purpose is to benefit a private citizen. Private property can only be taken by a public entity if the purpose of the taking is to benefit the public. The e-mails seem to indicate that the real reason for the taking of the motel by the City was to benefit the adjacent property being developed by McDougal and Malouf. Nothing in the e-mails discusses the need to widen the road. The main push to complete the condemnation seems to be so that McDougal and Malouf can develop the pad for retail development.

Another troubling aspect of the e-mails is the apparent control that a private citizen has over an assistant city manager, the city attorney and a private attorney hired and paid for by the City. No citizen should have so much power that he can demand that a public condemnation project, paid for by taxpayer funds, proceed at a pace that suits him so that he can benefit from the public taking of private property. This is simply wrong.

Hopefully, this article will result in an investigation of the facts behind the sudden need to widen Glenna Goodacre Boulevard. If it is determined that the real reason for the condemnation was to benefit a private developer at taxpayer expense, then every effort should be made to hold those responsible for this decision accountable.

CITY OF LUBBOCK IN NEGOTIATIONS WITH XCEL FOR NEW POWER AGREEMENT

For at least two years officials with the City of Lubbock and its Mayor Tom Martin have stated that Xcel is no longer willing to provide wholesale power to LP&L after its contract expires in 2019. Golden Spread, which operates under the trade name South Plains Electric Co-Op, was also told by Xcel that it would no longer be provided power. SPEC has taken steps to build its own generating plant and to plan for its future power needs by building the new Antelope Generating Station near Abernathy which has the capacity to provide power to 55,000 homes. The Golden Spread Panhandle Wind Ranch near Wildorado will open later this year.

With the demise of the High Plains / Republic Power Partners ill-fated attempt to provide for Lubbock’s need for electricity after 2019, the question arises as to how Lubbock will provide electricity to its citizens. As readers of this blog will recall, the city paid Xcel more than market value for the lines and meters that serviced approximately 25% of the city. This was explained to us as a good deal and efficient use of taxpayer funds because the purchase price was “cheap.” Michael Giberson, an energy researcher and instructor at the Texas Tech Center for Energy Commerce in the Rawls College of Business, has stated that LP&L paid 87 million to purchase assets that Xcel valued at 64.2 million and questioned the price paid by LP&L. His blog is located at knowledgeproblem.com.

When the LP&L purchase was announced, some citizens raised concerns that the low electric rates in Lubbock were a product of competition between Xcel and LP&L and that with LP&L in a monopoly position after the new purchase, the price Lubbock citizens will pay in the future for electricity will increase. The city denied that rates would increase and continued to maintain that Lubbock would have the lowest rates in the state. The concerns of the citizens turned out to be correct. In March, the LP&L board voted to raise rates 11% across the board. However, when the increase was presented to the council, the recommendation was voted down and LP&L was forced to dip into its reserve funds for 4 million to subsidize the rate increase. Last month, LP&L again recommended a rate increase to the city council, this time 8.2%. Once again the council refused to raise rates and tabled the request for three months. The refusal of the council to pass on the rate increase is not surprising. The Mayor and three council positions are up for election this spring. Nothing would be more unpopular to voters than a large rate increase, especially when members of this council denied that creating a monopoly would increase rates.

Anyone who has an elementary understanding of economics could have predicted a rate increase for Lubbock customers. In the past, whenever Xcel wanted to raise rates, it would be necessary to negotiate with LP&L to get LP&L to raise rates at the same time or else Xcel would lose their entire customer base in Lubbock. Electricity is a commodity and no one is going to pay Xcel a higher rate if they can make a phone call and switch to LP&L at a lower rate. The market competition kept rates low. Now that Xcel no longer needs to compete with LP&L, it can raise rates at will. Of course, Xcel is nominally regulated by the Texas Utility Commission, but the PUC is a notoriously utility-friendly entity and Xcel has little trouble getting rate increases approved. In short, the lack of competition between Xcel and LP&L will result in dramatically increased rates, just as many citizens predicted. In fact, as discussed above, the increase has already occurred; it is just being postponed.

The LP&L purchase was completed in October 2010 and less than four months later Xcel increased its wholesale price 6.94 per average household. Another increase of 2.51 per average household will take effect in February 2012. For the time being, LP&L is absorbing the increases. But this cannot last and after the election next spring, expect the new council to immediately approve rate increases. This brings us back to the original question, where are we going to get power after 2019? I asked this question of the Mayor last week and he told me that he was in negotiations with a wholesale provider to provide power to the City after 2019. He would not tell me who the provider was because of a signed confidentiality agreement. However, it’s not hard to figure out with whom the Mayor is negotiating. There is only one wholesale provider in our grid and that is Xcel. An insider at the city confirmed that indeed, the Mayor is negotiating with Xcel for a contract after 2019. As it turns out, Xcel isn’t getting out of the wholesale power business; like a major league pitcher after a good year, it just wanted a new contract with a higher price. How much higher remains to be seen. Don’t expect any announcement until after the election.