Boulder’s municipalization minefield

Could the city's plans for a new utility blow up in Boulder's face?

Jefferson Dodge and Joel Dyer | Boulder Weekly

The City of Boulder has reached another milestone in its effort to explore creation of a municipal electric utility company. Staff has prepared a 285-page memo for city council members explaining that it is, indeed, possible for the city to successfully create a municipal utility company that meets all the guidelines set forth in the city charter.

The findings in the memo were presented at a council study session on Tuesday, Feb. 26. The memo contained five different economic models based on varying criteria, including three different estimates of the acquisition and stranded costs from Xcel. Based on the city’s models, it appears that municipalization gets a green light at this point.

But not everyone agrees with the city’s findings or models. Municipalization tends be somewhat of a minefield. Just when you think it’s safe to move forward, another unforeseen and potentially explosive problem blocks the way. There is no question that city staff and their hired experts did a great deal of quality work to arrive at their conclusions. But even so, their report to council is based on several assumptions that simply are not as black and white as they would have us believe.

When the time comes, despite all the assurances from the city’s legal team that they are absolutely certain of the city’s rights under the law to take Xcel’s grid and customers for their own, Xcel will have several of the nation’s leading energy attorneys sitting on the other side, making very persuasive arguments as to why the city can’t do what it is trying to do — or at least has to pay far more for the privilege.

In the end, barring some sort of partnership between the city and Xcel, this will come down to a legal battle between the City of Boulder’s attorneys and those representing one of the most powerful and politically influential corporations in the country. And Xcel will not simply be fighting to keep its monopoly over Boulder intact, it will be fighting to keep its very business model intact, thereby maintaining the value of its shares. Xcel may lose, but it will not go gently.

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While the city’s economic models appear to be quite well-researched, conservative and therefore very feasible, there are several factors that could potentially alter or even derail the city’s ability to create a utility that have not been modeled to date.

One of the municipalization mines remaining to be defused is how the cost of creating a city utility would be divided among ratepayers if any of the major local energy users, like IBM, the University of Colorado, the federal labs and/or Ball Aerospace were to find a way to opt out of the city’s utility.

Heather Bailey, Boulder’s executive director of energy strategy and electric utility development, acknowledges that those entities have “pounded on us pretty hard” about the implications of municipalization, but she says they would likely come around when they see how low rates can be when buying wholesale power, as the city would do.

Still, Bailey acknowledges that there are fixed costs that would have to be split fewer ways — more per ratepayer — if one or more of the major players weren’t helping shoulder the costs. But city officials say they haven’t modeled that scenario because the large industrial power users don’t really have a choice under Colorado law. According to the city, they have to get their electricity from the city once a municipal utility is formed, unless, for instance, a company like IBM builds its own power generation plant. But this may be too simple of a reading on the situation.

While it’s true that, under the city’s interpretation of the law, the large users would have to stay with Boulder’s municipal utility once it is formed, it doesn’t speak to the distinct possibility that one or more of the largest users could attempt to separate themselves from a future Boulder utility — prior to the formation of that utility. In other words, they might be legally able to separate themselves now, or during the next several months. Such a move would be tricky, and would no doubt require the cooperation of Xcel, but it may be possible, and there is no reason to assume that Xcel would not be a more-than-willing partner in such an effort.

If the fixed costs were spread among fewer users, it’s unclear how much rates would increase, because this is not one of the scenarios that the city has modeled. Would it change the rates to the degree that they could be higher than those currently being charged by Xcel, a fact which would violate the city charter, which only allows for creating a municipal utility if the rates being charged to customers is less than those charged by Xcel? Again, it’s simply unclear.

IBM spokesperson Mike Stratton was noncommittal about the company’s position on municipalization when contacted by Boulder Weekly.

“We’re just kind of waiting to see what happens when it’s all said and done,” he told BW. “We don’t really have an opinion that we want to share publicly. Whatever we get is what we’re going to use.”

He declined to disclose how much electricity IBM uses, but he acknowledged that reliability is a big issue, considering the impact a power outage could have on its customers.

“It’s important for us to have reliable, cost-efficient power, that’s what we’re looking for, but it’s not like we’re looking at options or anything like that,” Stratton said. “We’ve got to work with whatever’s there.”

He acknowledged that IBM officials have been “sharing their concerns” about reliability, but he said he is not aware of any IBM threats to not be part of the municipal utility, or any plans to pursue another provider or build its own power generation facility.

Similarly, Frances Draper, vice chancellor for strategic relations at CU, acknowledged that CU officials had provided input to the city at the city’s request, but she stopped short of saying that university leaders had expressed any opposition toward municipalization.

“We are certainly monitoring it because one of our largest expenses for the campus is energy,” she told BW, adding that the campus needs a reliable source of electricity to support crucial activities like housing students and maintaining animal labs and other research projects. “We’re very concerned about reliability and rates, just like any other big user. I would not say that we have gone to the city and expressed our concerns and said this is a bad deal, or a good deal. We are really sitting back and watching the process evolve.”

Heather Bailey

Bailey said that while CU is limited by Xcel in the amount of self-generated power the campus can produce, the city might allow the campus to provide a larger percentage of its own electricity. But Draper said the campus is under no contractual obligation to Xcel for using a set amount of energy, and that while the campus would eventually like to get to the point where it could power itself if necessary, there is no scenario in which it would be disconnected from the grid.

“We have not gone to the city and said we’re going to pull out,” she said.

But Xcel Regional Vice President Jerome Davis tells a slightly different story, and he wonders whether primary power users are reticent to speak out for fear of retribution from the city.

“I can’t speak for IBM and I can’t speak for CU, but I’m pretty sure they’re exploring every other option,” he says. “We’re looking at a multitude of options from the companies’ perspective. We don’t see it as being as black and white as the city is portraying it.”

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Another point of contention between the city and Xcel is the extent to which the city would have to compensate the company for its substations and other infrastructure, like the Leggett terminal at Valmont Station, which is outside city limits. Xcel officials say that if the city condemns and takes one of its substations, it will have to give the company enough money to build a new one. Bailey, on the other hand, insists that it is common practice to co-locate multiple utilities at a shared substation, removing the need for Xcel to build a new one. (Naturally, there is a major cost difference, and this argument reflects what is sure to become a recurring pattern, with Xcel trying to collect as much as possible from the city, which for its part wants to limit its payout to the company any way it can.)

Davis says the company probably will need its substations physically replaced because it has no intention of being tied into Boulder’s system.

He says that Xcel is no different than many of the area’s large businesses that use industrial power.

Jerome Davis

“We don’t have any confidence in them running our utility,” he says. “We want a clean break.”

This could cause significant problems for the city’s municipalization plans. At the council study session, Councilman Ken Wilson pressed staff for what it would cost to replace Xcel’s substations if it turns out that the company can’t be forced to co-locate with the city after condemnation. At that point, Senior Assistant City Attorney Kathy Haddock told Wilson that the city hadn’t modeled scenarios that it knew wouldn’t occur based on case law. Wilson pressed the point for a dollar amount, just in case Xcel’s attorneys might turn out to be right. In the end, Haddock stated that the system doesn’t work without co-location.

If this is true, and the city’s models don’t work without co-location at the substations, then expect this to be a hotly contested point by Xcel.

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Davis also points to an April commentary written by Boulder City Manager Jane Brautigam and Boulder Mayor Matt Appelbaum in which they wrote, “If we take this action, Boulder alone will be responsible for the costs. We do not expect Xcel customers in other parts of Colorado to fund this enterprise for us.”

Davis says that, despite that statement, Boulder has now roped in about 5,700 Xcel customers from outside city limits who would be folded into the new municipal utility, even though they did not have a chance to vote on it. Those votes could have easily swayed the 2011 ballot questions 2B and 2C the other way, considering that the two initiatives passed by margins of 212 votes and 1,027 votes, respectively.

“We don’t see the steps we’re taking to define a service area plan that makes sense for reliability as something that goes against that pledge,” city spokesperson Sarah Huntley says when asked about Davis’ claim.

She adds that the city has the legal authority to condemn non-city lands for this purpose, and that the 5,700 people outside Boulder will have plenty of opportunities to have input on any municipal utility, from a nine-member advisory board to a March 13 open house. In addition, she says, the Public Utilities Commission (PUC) would step in if Boulder attempted to charge county residents higher rates than city customers.

Davis says that while the city has addressed “stranded costs” — the ongoing debt payments that Xcel will have to make on investments it made on Boulder infrastructure if the city pulls out — and the value of the Xcel property it intends to acquire, city officials have not sufficiently addressed the costs of separating its geographically irregular borders into its own grid as well as the expense of “going concern,” which is the amount Xcel stands to lose in rates that would have been paid to the company by Boulder customers over future years.

At the recent City Council study session examining the report on the feasibility of creating its own utility, city officials stated that the separation costs had been built into the models and were included in the acquisition and stranded costs estimates. They claimed that the detailed information on separation costs was intentionally withheld because it was considered a part of the city’s legal strategy that would eventually be used during negotiations with Xcel. Xcel says that the city has greatly underestimated the separation costs.

The company says that the city added the 5,700 non-Boulder residents into its plan purely for the reason of trying to decrease the separation costs, by including everyone on a line instead of trying to stop at the city limits, a process that would have required them to pay for another way for those farther down the line to reconnect to Xcel. Xcel claims that this tactic has backfired, however, and that it simply shifted and magnified the expense by greatly increasing the amount of “going concern” compensation that Xcel will be seeking from the city.

Even if separation costs are not a deal breaker, going-concern costs are.

Xcel officials estimate that the city will owe them $300 million in going-concern costs, should the city move forward to municipalize. And the recent addition of the 5,700 customers outside city limits could add another $17.2 million to that figure.

All of the city’s modeling to date has been based on three economic scenarios: a low-end total price of $150 million, a mid-range option at $277.5 million, and a worst-case scenario of $405 million to create a municipal utility. At even the $405 million level, it becomes far more difficult for the city’s models to work within the guidelines of the city charter’s utility requirements. So what happens if Xcel is correct about going-concern costs, and $405 million becomes $722 million? Like the other potential problems with moving forward on municipalization, such a scenario has not been modeled by the city, but it would seem to be a deal killer for sure.

However, Huntley says city attorneys don’t believe Boulder is liable for those going-concern costs, thanks to a state statute allowing recovery of those losses only when a rural electric authority is involved. She points out that one of Xcel’s own attorneys, in a previous job with the city of Loveland, successfully argued that if a utility is investor-owned, the municipality has no such liability.

“There are going to be issues where our lawyers say one thing and Xcel’s lawyers say another,” Huntley told BW. “We feel very confident in our legal counsel, and I’m sure Xcel feels very confident in their legal team. It will be a matter of taking these issues to court and making the best arguments we can and seeing where the court falls.”

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Another question being raised is whether Xcel’s ratepayers outside of Boulder might have to pay increased costs if the city pulls out of the system. Some suggest that the state’s major electricity users might object to seeing their rates go up as a result of the Boulder withdrawal.

But Bailey says there are regulatory processes, under the PUC and Federal Energy Regulatory Commission (FERC), that are intended to keep Xcel and its customers “whole, and not left holding the bag.” She notes that the PUC can dictate how Xcel uses its proceeds from a takeover to keep its rate holders from suffering.

Davis says he doesn’t expect Xcel customers to foot any of the cost of a Boulder municipalization, “because we’re going to get every dime” from the city.

Xcel and others have questioned the ability of a city bureaucracy to run a business and actually come through on its promises on such things as lower rates. Critics point to the glaring example that the city hasn’t even been able to stay on its budget for studying municipalization. In 2011, voters approved a $1.9 million annual budget, based on the former Xcel franchise fee, to be used to study the issue. But the city has already had to dip into the general fund to the tune of an additional $300,000 to pay for what city leaders now claim is just city employees temporarily reassigned to the project.

Huntley says city staff and the majority of council agree that the $1.9 million was to be used for external costs like hiring engineers, attorneys and Bailey. While the majority of the $300,000 is going to cover the regular duties of a public relations staffer and city attorney who have been reassigned to the project, she acknowledges that a portion has gone to consultants, such as the search firm used to recruit Bailey.

Call it what they will, but in business an expense is an expense and someone, usually the customer, or in this case the taxpayer, has to pay for it.

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Yet another possible unanticipated expense for the city is the money Xcel has spent dealing with the municipalization issue, including its legal costs. In the case of condemnation, Deputy City Attorney David Gehr told BW that the only way Xcel could collect legal fees is if the final valuation of Xcel’s acquired property, determined after litigation, is 130 percent of the city’s final offer for that property. In other words, the city only pays if it lowballs Xcel on what the system is worth, and Gehr says the chances of that are “very low” because the city has a good appraiser.

Davis agrees that the city’s offer will be “close to what they know it is worth.” But he didn’t rule out pursuing Xcel’s legal costs from the city, especially if municipalization doesn’t move forward.

“Our belief is we’d go after it,” Davis says of the amount the company has spent on legal fees defending itself. “The assumption is we’ll probably try to recoup our legal costs as we go forward.”

“We’re not paying Xcel’s legal fees,” Bailey counters. “Our attorneys say that’s not the case.”

Once again, all the attorneys, on both sides, are confident that they are correct, which usually only means one thing: It’s most likely going to get expensive for everyone.

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And while both sides accuse the other of not revealing specific figures for the possible scenarios of how this bout could end, the city is at a distinct disadvantage, being a public government agency that is subject to open records laws, while Xcel can hold its cards tightly against its chest. In fact, this week Xcel filed an open records request to obtain copies of the models the city used to create its recommendations for taking over the company’s system.

And Davis defends its right to do so, describing the city as a thief stealing his company’s belongings.

“It’s like if a burglar comes into your house,” he says. “You don’t say, let me show you around and tell you where everything is.”

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Obviously not everyone is as optimistic about creating a municipal utility as the city’s staff, but if the utility does come to exist, will it actually make a difference? Will it, in reality, help lower greenhouse gases and save the planet? That is the goal, after all. But as with other issues surrounding municipalization, the answer is not exactly clear.

Critics of the city’s plan say that Boulder’s proposed influx of renewable energy is not going to reduce the planet’s greenhouse gases. The logic behind such a view is based on the fact that a small municipal utility like Boulder’s won’t have the power to alter the mix of the larger companies in a world that already has too much excess energy.

Boulder says that it is going to use its power purchase agreements (PPAs) to actually cause more renewable energy sources to be added to the system, in addition to buying current idled capacity from, say, a wind farm at night. For this reason, Boulder staff claim that they will, in fact, be lowering greenhouse gases.

But is it true? Major players like Xcel make their highest profit on electricity created by dependable energy sources like burning coal. Their next most profitable source is electricity derived by burning natural gas. For this reason, those two sources of energy are always on and always being given top priority in the system.

On any given day, it is the less profitable renewable, less reliable resources that get turned on and off as needed to accommodate demand.

So critics argue that when Boulder contracts with a company somewhere to have more renewable electricity placed into the grid, the Xcels of the world don’t in turn reduce their amount of highly profitable coal-fired or gas-fired product in the system, and such a reduction would be the only way that greenhouse gases would actually be lessened. In reality, Boulder’s PPA that brings on more renewable electricity from a particular source into the grid may simply be causing other, less profitable, renewable energy somewhere else to be idled. In that scenario, the net reduction of greenhouse gases in the atmosphere is zero. In reality, the only thing that changes is Boulder’s ability to claim it is greener or is meeting the requirements of the Kyoto Treaty. To lower greenhouse gases in the real world, Boulder will need to construct nearby renewable energy sources such as wind and solar facilities, and use the energy it actually generates without uploading it to the national grid. The city acknowledges that this is the ultimate long-term goal, but says it will take a while to get there.

Davis argues that the infusion of renewables promised by city officials will not happen for a long time.

“You can throw in some flour and sugar, but the bottom line is you don’t see the real cake and ice cream for years down the road,” he says.

This explains why the city seems to be eying the gas generation facility at Xcel’s Valmont Station for possible purchase. It would supply the reliability for a large, local, renewable base of energy. But Valmont comes with its own set of risks for the city, should it move to attain the property from Xcel (see our other story).

Jonathan Koehn

Xcel officials argue that since electricity supply is never increased beyond demand, the city’s purported infusion of renewables will only cause an equivalent decrease in renewables elsewhere on the grid.

Jonathan Koehn, the city’s regional sustainability coordinator, says the theory is that as the city’s new renewable energy enters the grid, “the dirtier sources can be ramped down.” When asked why Xcel would dial down its most lucrative products, he declined to comment.

At the council’s study session, councilwoman Suzanne Jones asked city consultant Bob Lachenmayer of Schneider Electric, a global leader in energy, whether Boulder could reduce greenhouse gases faster by municipalizing its system or working with Xcel to cause the company to create more renewable sources. Lachenmeyer responded that one can’t optimize a system unless one controls the whole system.

City utility or not, Boulder will not control the whole system.

“It’s a shell game,” Davis says. “They’re not increasing renewables and not reducing carbon.”