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Surging
Costs Likely to Make Municipal by Harry Messenheimer, Ph.D., Senior Fellow, NMIRI |
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Are Las Cruces taxpayers about to receive a jolt? For us to find out, the City must bring updated cost projections of its proposed takeover of El Paso Electric (EPEC) into the light. The original 1994 cost estimate for the takeover was $27 million. And post takeover savings to Las Cruces customers' electric bills were forecast to be at least 20 per cent. The frequency with which these estimates were broadcast by city officials resonated with voters in the election of '94. But now it appears likely that the cost will far exceed even the $90 million upper threshold "worst case scenario" pledged in '94. So, it may be time for the voters to put up resistance to the takeover. Consider these estimates gleaned from various press accounts of public statements by City and El Paso Electric officials:
Add these figures up and we get a conservative estimate for the cost of the takeover: more than $140 million. The difference between the original cost estimate and this current estimate is over 400 per cent! And the potential difference is even greater. I make no apologies for El Paso Electric. It has not been a friend to its captive customers, and those customers and City officials are understandably upset. Electric rates have been way too high as a result of unprofitable investments that are now being paid for by those customers. Unfortunately, such is the nature of the regulated-utility beast. Fortunately, however, the rules for electricity supply are changing to a more competitive environment. New Mexico and Texas have both passed bills deregulating access to electric power. In less than two years customers of El Paso Electric in New Mexico will be able to choose among alternative power sources. They will be able to short-circuit El Paso Electric if it charges too much. They will be able to do so without intervention by the City. And they will be able to do so without the risk to taxpayers of the enormous investment in El Paso Electric's infrastructure. So the question that must now be revisited is: Will Las Cruces customers be better off if El Paso Electric is taken over by the city? Steady-state Financial Projection for 2004 The purpose of this analysis is to provide a preliminary answer to that question. As a basis for the analysis I use the City's consultant's report of projected volume and costs, amended only to adjust for the higher up front costs that now seem inevitable. The target year for the analysis is 2004. Any steady-state out year in which the City has taken over electric supply and must cover its costs would be okay, so 2004 (five years hence) seems as good as any. The following best case scenario assumptions for the City are used:
Now we can see what it may cost the City to provide electricity in 2004: We have the operating cost estimate of $36.9 million from the City's 1994 study (assumption 3 above). And we have estimated debt service costs of $15.6 million (see assumption 5 above). Therefore, total 2004 spending by the City may be $52.5 million for producing electricity. Revenue from sale of electricity must be collected to cover these costs. Using assumption 3 (volume of 530,000 MWH produced in 2004), we see that the City would have to charge an average price of at least 9.9 cents per KWH in order to cover its costs. That price gives us a benchmark to assess the potential savings to electricity customers resulting from the takeover. The 1994 forecast by the City was that it would charge 7.7 cents per KWH on average. Notice that the best case scenario for the city, as concluded above, will result in 2004 rates that are 28% more than those forecast in 1994! Moreover, the City estimated in 1994 that the comparable rate charged by EPEC would be 11.2 cents per KWH. What are latest forecasts for comparable rate charged by EPEC? Or, perhaps the more relevant question, given open access to all power sources within two years, is: how much will customers in Las Cruces be charged for electricity if the city does not take over EPEC? The answer to that question is likely in the range of 6 to 7 cents per KWH. For sake of argument, let's use 6.5 cents. In that case the City's customers would pay rates that are over 50% higher than they would face absent the takeover. What is the maximum takeover investment that would allow City taxpayers just to break even in 2004? Assume that the City (because wholesale power would be less costly for it too) could reduce its operating costs from $36.9 million to $33 million in 2004. In that case maximum investment by the City of $13.6 million would enable taxpayers to break even * . Anything more than that means taxpayers would be the losers. The $13.6 million maximum is a far cry from the $142 million estimate advanced in this study. Concluding Comments There are other significant risks City taxpayers would face after the takeover, given the changing regulatory landscape for electricity. Those increased risks are beyond the scope of this brief study. But it should be clear from this study that the taxpayers of Las Cruces may be stuck with a big bill for nothing. If the City can really save its citizens 20% on future electric bills as currently claimed, City officials need to show us updated facts and forecasts that will lead us to that conclusion. The preliminary estimates cast into the light by this study suggest that takeover savings are probably impossible, and taxpayers will likely be stuck with a significant additional burden. * If 530 million KWH (assumption 3) are sold at 6.5 cents per KWH, then total revenue would be $34.5 million. That leaves $1.5 million available to service debt ($34.5 million revenue minus $33 million costs). Since debt service is 11 percent of total capital investment (assumption 5), maximum total capital investment is $13.6 million. |
It
appears likely that a takeover of the electric system could exceed the
original cost estimate of $27 million by as much as 400%!
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©1999 New Mexico Independence Research Insititute
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