[bouldercouncilhotline] Hotline: Cost model questions and suggestions

[kohls at bouldercolorado.gov]

Sender: Wilson, Ken

We were told on Tuesday evening that we can't really promise not to raise rates if the city municipalizes because we can't put money from the City's general fund into the Muni (not that we would want to do that anyway).  This means that we must keep working on the cost model to get it closer to reality.  Even though we have off ramps, if our assumptions on fuel prices, operations and startup costs are too optimistic, we could see dramatic rate increases.  We would be, afterall, a small muni with a large debt burden that loses Xcel's economies of scale.  While other Muni's in Colorado have figured out how to deal with economies of scale, we would be new at that game.

I see the current base case for the cost model as being too optimistic.  The areas of concern where I see it as possibly being optimistic are listed below.  I will put some detail on each of these points and may put additional detail on later.  I don't believe changes to the model will really be at issue on 2nd reading, but I think we need to keep working on it.  When I was at Bell Labs, for two years I managed a group that was working on very large business cases.  We had a very complex model that we modified and ran new versions on almost daily.  That's what the models are for.

Payments in Lieu Of Taxes (Pilot)

Funding the equivalent of the Xcel Solar Rewards program and Conservation Rebates (with appropriate multipliers based on our use of those programs

Long term prices for natural gas

Staffing not accounted for

Debt service for large bond to acquire assets and invest in startup

Replacement of aging infrastructure

Separation costs

PILOT -  We should put full value on each of the following taxes that we need to replace and show them as line items in the model (or have text that describes them).  Property tax for the City, County and BVSD.  Afterall, we don't want to be accused of municipalizing on the backs of school children by costing BVSD $2 M in lost taxes per year.  Sales Tax.  Use taxes.  4% Occupation tax.  And we should really put in $1M per year for undergrounding as we are losing that by not being in franchise.

Funding Solar Rewards and Conservation rebates -  The expectation is that we would have programs that are better than Xcel's.  Right now we don't have anything spelled out in the model.  Boulder currently uses 4 times our proportional share of Solar Rewards and 2 times our share of conservation rebates.  We should at least build in these amounts.

Long term prices for natural gas.  I received the following note from a person who is very knowledgable in energy prices:  I went to the Council meeting last night and heard the guy delivering the feasibility study for the City in support of municipalization
I’m pretty sure he did not adequately evaluate the impact of higher gas prices on electric rates in a municipalization scenario versus staying with Xcel
With the Xcel franchise, higher gas costs are spread over a very large base (and produce relatively modest rate increases); in contrast, if Boulder municipalized, higher gas prices / costs would comprise a large portion of the system expenses and would potentially result in a very significant rate increase
The City’s “expert” just ignored this, asserting that higher gas prices would raise rates in both the Xcel franchise and muncipalization scenarios in an identical manner


Staffing not accounted for:  I am concerned that the staffing levels are inadequate, especially for startup.  I don't believe enough staffing has been allocated for maintenance, repair and new installations.  Some of this could be contracted out, but the money then needs to be identified.  Just throwing extra money in a pot isn't a good way to look at this in the model as different people viewing the model will have different ideas about where to spend the money, adding up to several times the ammount in the budget line.  For example, everyone is assuming we will do all these whizz bang things once we have a muni.  Where is the budget for staff to evaluate those great ideas and implement them?

Debt service for large bond needed to acquire and startup.  We have discussed how we won't know the actual cost of acquisition or stranded cost payment for some years as this will need to go through state and federal litigation.  I actually think that 8% for the bond is optimistic.  Interest rates now are at historical lows and can only go up.  What would the model look like with 9% interest on the taxible acquisition bond?  We also need to remember that we would probably not be issuing these bonds for 4 years, plus or minus one year.

Replacement of aging infrastructure.  We know that much of the Xcel distribution grid is composed of old equipment.  This equipment will need to be replaced over time.  I have been in several meetings in the past year where Utility executives have talked about the huge expense that will be needed in the US over the next 20 years to replace aging infrastructure - in the Trillions of dollars.   I would like to see adequate amounts put into the model for equipment replacement.  We currently don't know what % replacement is being anticipated by the model and how this translates into $$$, and if this is adequate.

Separation costs:  The model does not include the Leggett substation.  That substation has multiple feeders that serve the City.  The acquisition costs for that substation and higher separation costs should probably be included in the model.

The estimates for acquisition costs between Xcel and the City are on the order of $600 Million.  While I have no doubt that we would not see the final bill with this full amount, it will certainly be higher than our starting number.  I have been in too many utility hearings to think otherwise.

These are my current thoughts on the model.  I'm sure I will have more as we go along.  Having multiple model runs is a good thing.  In addition, I still think we should test our model by comparing it with existing utilities like Ft Collins, Longmont and Colorado Springs.  Right now it is floating in the air a bit.

Ken Wilson