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.

5 comments

  1. Mark says:

    I don’t think we should wait till after the election. This question has to be answered before we vote, IMHO. As a small scale econonmist, ie, under 500 employees, under $30 million dollars, I don’t see that municipal owned assets have to go up in costs. No multimillion dollar bonuses or CEO’s making 600 times the lineman.

  2. JTF says:

    Charlie,

    Good blog but your sources have given you some bad information. Some clarification for your consideration:

    1) Xcel/SPS has never said they would not sell WTMPA power beyond 2019. Because of a case before F.E.R.C. in which WTMPA was not a participant, SPS agreed with their retail customers to phase out wholesale power contracts at “system average cost”. This means they can sell power to WTMPA after 2019 but not at current rates. System average cost is effectively the same cost passed on to SPS retail rate payers. Their retail customers felt the wholesale contracts raised the system average cost. It is possible to undo this current situation but an agreement between SPS wholesale and retail customers may be needed.

    2) LP&L did not pay more than market value for the purchase of the SPS system. The $64.2 million quoted is depreciated book value, not market value. Some of the SPS assets had been depreciated on the books to zero book value but of course still had market value. The range of market value by independent consultants for LP&L showed the true market value had a large range, the upper limit of which approached $300 million. LP&L purchased the system at a value in the lower end of the range. Because of accounting practices and settlement agreements with SPS customers, SPS had to show the difference between $64.2 million and $87 million as profit even though it really wasn’t. The system actually cost SPS much more than $87 million to build. In the end, the “market” dictated the final price. The LP&L Board, comprised of local business men and women believed it was a good deal. Had you been on the LP&L board at the time, there is no doubt you too would have voted in favor of the deal.

    3) It was stated that LP&L would not raise rates “as a result of the SPS purchase”. The additional revenue from the acquired SPS customers is enough to offset the additional expenses including the purchase price and no rate increase is or will be necessary as a result of purchasing the system. However, had LP&L not purchased the SPS system, there would still be a need for a rate increase primarily due to increased wholesale power costs. This was stated in presentations to the City Council and the LP&L Board.

    4) Xcel/SPS has never negotiated with LP&L for rate increases in Lubbock. SPS’s Texas tariffs apply to all of their Texas customers and the case is handled at the PUC after being deferred there by the cities SPS serves. When SPS files for a rate increase with the PUC, all of their customers intervene or are otherwise represented in the case. That usually results in a settlement agreement between the interveners before the PUC has to rule. That is why you think the PUC is utility friendly. In reality, it is SPS’s customers who approve the rate increase and the PUC only has to rubber stamp it.

    5) WTMPA has many options for a source of power for beyond 2019 including the continued purchase from Xcel if the price is right. The Southwest Power Pool has a new energy market that begins in 2014 which should prove beneficial and along with new transmission lines will give Lubbock more choices among wholesale providers.

    6) LP&L currently has the lowest rates in the state and the proposed rate increase should still maintain that position. If not, the rates will still be among the lowest in the state.

    JTF

    • C.Dunn says:

      1. I agree that Xcel can continue selling power to Lubbock after 2019 and in fact, they have every economic incentive to do so. My point is that everyone connected with the City, including the Mayor and every person on the City Counsel has said that Xcel is not going to sell wholesale power to Lubbock after 2019. The problem is that they did not tell us the “rest of the story” which is that they will sell us power, but at retail rates.
      2. The comment that LP&L overpaid for the Xcel system was made by an energy researcher and professor at Texas Tech. I simply restated his analysis. However, I would never have voted to pay any amount of money for the Xcel system. Competition is why our rates are some of the lowest in Texas and are the reason they will rise significantly.
      3. There was a wholesale power increase put in place by Xcel four months after the system purchase. Another increase will take effect in February. My point is that with competition, the wholesale price increase my not have occurred or if it had occurred, it would have been much lower.
      4. To say that Xcel and the City never had private discussions regarding rate increases is to ignore political reality and history. The ability to intervene and contest rate increases is one of the reasons we had low rates. That is gone now.
      5. I totally agree with you that we should look at many other options other than Xcel. We need to build a gas fired plant similar to the state of the art plant opened by Golden Spread in Abernathy. We need to look at wind sources and solar sources to compliment the new power plant. We need to control our energy costs rather than being at the mercy of Xcel. Xcel generates almost all of its power using coal, the dirtiest of available fuel sources.
      6. If these large increases ( 11%)continue, how long will we be the lowest in the state? That is why I am writing this blog, to raise awareness of this issue. Low rates are attractive to business and we need to keep them as low as possible. Thank you for your well thought out and well written comments.

      • JTF says:

        1) If power is purchased from SPS after 2019, it won’t be at retail rates. The new Southwest Power Pool market will provide competition on the wholesale side which will limit the upside of SPS’s price range.

        2) SPS rates are heavily regulated by the PUC with a marginal rate of return and those rates would have been no different over the years had LP&L not existed. LP&L has simply been able to match those rates as their costs (labor, materials, etc) are very similar to those of SPS. What competition did bring is better customer service. Retail rates are regulated by the Council and ultimately the people of Lubbock. SPS’s rates have been and will continue to be the benchmark by which LP&L is judged. If LP&L can’t provide power at or below SPS’s costs, there is no reason to exist.

        3) Retail competition has no bearing on wholesale costs. The costs of providing wholesale power has risen and SPS has passed those costs onto WTMPA which in turn passed them onto LP&L. Retail rates must eventually rise to cover those costs. By the way, the second stage of the rate increase for SPS takes effect Jan 1st.

        4) The ability to intervene and contest SPS rate cases is not gone. SPS still has territory within Lubbock. The City of Lubbock can and likely will intervene in their future rate cases. The City Council is LP&L’s PUC and always has been. Elimination of competition has not changed that fact. The ultimate intervention for Lubbock ratepayers is council elections.

        5) Coal may be dirty but SPS’s coal plants are better than most and coal is the cheapest form of energy in the region. SPS is planning to spend over $1 Billion in the next few years to modernize their coal plants and to clean up their emissions. Even with that expenditure, their coal power will be the cheapest power around (unless natural gas prices tank). Going forward, a diversified energy portfolio is the key. Only half of SPS’s energy comes from coal. About 10% comes from wind. The remainder generally comes from natural gas. Elimination of coal from their portfolio would easily cause rates to double.

        6) Lubbock’s competition to be the lowest in the state are typically San Antonio and Austin (both municipal utilities with no competition). Both have announced planned rate increases. Matching SPS’s recent rate increase will still leave Lubbock among the lowest if not the lowest in the state. It’s been this way for decades. There is no reason to believe that will change going forward. As LP&L’s normal and customary expenses increase, those expenses increase for other utilities as well. The proposed rate increase for LP&L is only the third increase since 1983.

  3. Jaboos says:

    All skepticism should be directed at Silly Hall (Lubbock City Council, City Manager, City Attorney). These people are determined to undo the vote of 2004 and bankrupt LPL again.