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.