Pueblo, Colorado weighs high cost of creating municipal utility
Pueblo, Colorado will consider establishing its own municipal electric utility and ending its contract with Black Hills Energy in a May 5 referendum, a lengthy and complex endeavor that would require significant acquisition costs and lead to higher utility bills.
A Sept. 2019 feasibility study conducted by Concentric Energy Advisors found the municipality would have to spend $402 million to acquire the necessary assets from Black Hills Energy, causing an increase in customer bills.
According to the study, the acquisition costs include $188.5 million in physical assets from Black Hills (poles, wires, substations, and other infrastructure), $107 million in stranded costs, $63 million in start-up costs, $28 million in separation and reintegration costs, and $15 million in transaction costs. The estimate does not include the cost of the generating plants, wind farms, solar gardens, or the cost of transmission lines.
The study found that because there is estimated to be a net cost to the city if it were to municipalize, electric customers would be projected to pay more than if service were to continue to be provided by Black Hills. The city’s 10-year agreement with Black Hills Energy ends on Aug. 11.
In a statement, Black Hills said residential electricity customers could expect to see an increase in their average bill at $138 per year in the first year to $330 per year in the 20th year, “because the city’s estimated cost to operate the system will be $38 million more per year on average than Black Hills Energy’s operating costs over the same period.”
“Our independent analysis of the costs of acquiring and operating the parts of the Black Hills Energy distribution system needed to serve customers in Pueblo projects higher operating costs and higher monthly bills for customers under a city-operated utility scenario,” said Ann Bulkley, Concentric senior vice president and co-author of the study. “We encourage customers, community leaders and elected officials to read the report and decide for themselves whether municipalization makes sense.”
The study found the projected cost of running the local utility in the baseline year would be $114.5 million for Black Hills Energy and $131.4 for the city of Pueblo.
“What Pueblo proposes through a costly and risky government takeover would not save money,” said Julie Rodriguez, program manager of community affairs and economic development for Colorado at Black Hills. “The Concentric study found that if Pueblo formed a municipal utility, bills would go up, not down.”
The study found two main factors for higher operating costs for the city-run option: debt service costs and higher average operating and maintenance costs.
The first-year annual debt service cost (including principal and interest) for the city municipality is estimated at $23 million for acquisition and transaction costs. Black Hills Energy also said its average operating and maintenance costs for the region are lower than other municipal and cooperative utilities used for benchmarking, partially because the company can spread some costs over the eight states it serves
Rodriguez also said Black Hills Energy (BHE) is in a better position than a municipal utility to focus on growing renewable energy in the area.
“Black Hills Energy has a modern generation portfolio of wind, solar and natural gas. Our coal plants have already been retired. We have proposed our Renewable Advantage program where, once built after approvals, could bring up to 200 MW of additional renewables and make BHE up to 65 percent renewable by 2023,” she said. “A municipal utility would take years of legal battles without any guarantee (or disclosure) of its ability to add renewables. The scale of a municipal utility would be smaller adding to the challenges of a municipal utilities ability to add renewables.”
The city of Pueblo commissioned its own study, conducted by EES Consulting Inc., which found ratepayers could save 10-12 percent each year on a municipal utility. The study also estimated the range of upfront costs at between $255 million and $334 million.
Rodriguez said the Concentric study looks at multiple scenarios based on changing variables, while the city’s study underestimates the cost to run a utility.
“The city’s study includes errors, relies on unrealistic assumptions for O&M costs and power supply and does not address the significant risks involved,” she said.
For example, the city’s study relies on an operation and maintenance (O&M) cost per customer of approximately $290 whereas an American Public Power Association survey shows the West Region (including Colorado) with an O&M per customer of more than $600.
The city of Pueblo is currently working with EES Consulting on a second phase of the study.
