TODAY’S STUDY: BOULDER CONSIDERS A MUNICIPAL UTILITY

Boulder’s Energy Future Municipalization Exploration

February 26, 2013 (Boulder City Council)

Executive Summary

The City of Boulder has embarked on a significant undertaking that could change the future of electric service and energy management for its residents and businesses. As directed by council, city staff has been analyzing the viability of various options to help the community achieve its Energy Future goals. The process is grounded in commitments to be objective, to include as many alternate viewpoints as possible, and to project out not only the results on the first day of potential service from a municipal utility, but for 20 years into the future.

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The analysis presented in this memo was designed to answer a critical first-level question:

• Can the city municipalize? In other words, is there at least one form of municipalization that meets the prerequisites that voters approved as part of the City Charter?

If council decides that the answer to that question is yes, staff will continue its work with the community over the next few months to answer equally important second-level questions:

• How can the city best achieve its Energy Future goals? Is a city-owned utility the best path to accomplish the broad set of goals the community set for its Energy Future? Would a city-owned electric utility provide value sufficient to offset potential risk and distinguish its services from those that Xcel Energy currently offers or could offer in the future through a new partnership? A question the city has posed in the past is, should we form a municipal utility? Staff believes the answer to this question will become more clear as the analysis continues and as part of a series of future decisions. The previous questions, however, are the ones the community and city officials should be starting to assess now.

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Based on the current analyses, the answer to whether it is possible to municipalize is yes, and the findings to date are promising in terms of the potential value a local electric utility could bring when compared to other alternatives. The results detailed in this memo indicate that a local utility could operate effectively with cost savings and flexibility, creating significant advantages. Certain options for the local electric utility would meet the Charter metrics and with a very high likelihood be able to:

• Offer all three major customer classes (residential, commercial and industrial) lower rates than what they would pay Xcel, not just on day one, but on average over 20 years;

• Maintain or exceed current levels of system reliability and emergency response, and, if the community chose to, use future investments to enhance dependability;

• Reduce harmful greenhouse gas emissions by more than 50 percent from current levels and exceed the Kyoto Protocol target in year one;

• Obtain 54 percent or more of its electricity from renewable resources; and

• Create a model public electric utility with leading-edge innovations in reliability, energy efficiency, renewable energy, related economic development and customer service.

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The Electric Utility of the Future

At the core of these analyses is a vision of “the electric utility of the future” that is bold and exciting. No matter which energy path the city chooses to take, it strives to be a leader in reducing the impact its electric use has on climate change and in providing local energy services that meet the unique needs and community values of Boulder. For traditional electric utilities, “managing energy” is their core competence. Xcel has repeatedly said it is limited in its ability to shift from its current trajectory. The question Boulder faces is whether it wishes to be beholden to this antiquated business model for the next 20 years, while also recognizing community concerns that change represents risk.

Public utilities are not regulated at the state level in the same way as investor-owned utilities, but they are subject to local oversight that in many ways ensures the utility is held to a higher standard of service. Locally controlled public utilities, because they are not regulated by a state Public Utilities Commission, have the freedom to design programs and services that directly match the needs of the geographic and demographic area served. A regulated utility must provide more generalized services that are designed from a top down view of its entire service area. Typically, what the investor-owned utility offers to one set of customers it must offer to all, making customization difficult.

Boulder’s vision for the future requires a utility willing to phase out the old business model and aggressively pursue a new way of operating. The community’s Energy Future goals prioritize a cleaner energy supply; the ability to develop innovative energy efficiency and demand-side management programs that enhance customers’ control; a structure that supports economic vitality through low costs and high reliability, as well as the creation of a high-tech test bed; and the opportunity to work with energy consumers to meet their diverse needs. Boulder’s vision, either in partnership with Xcel Energy or through a municipal utility, is to transform from a utility model centered on selling more electrons to a new business model in which the mission is to collaborate with customers to provide options to use fewer electrons.

The opportunity exists for Boulder to transition to a new sustainable, low-carbon emission society, and it is coming much faster than anyone had anticipated just a few years ago. The growing differential between the rising costs of fossil fuels and the declining costs of renewable energy technologies is setting the stage for the emergence of a new economic paradigm for the next century. Boulder is poised to drive this process to tackle climate change, secure energy independence, and grow a sustainable 21st century economy all at the same time.

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Public Outreach and Working Groups

Given the potential impact of a decision to create an electric utility on residents and businesses, more than 50 individuals, many of whom offered significant industry expertise, participated in developing the options, vetting assumptions and providing specific data inputs. Five working groups were formed, representing the major areas of finance, reliability, resources, decision analysis and public outreach (see Attachment A). The city staff extends a huge thank you to the community members who gave significant amounts of time to help ensure the integrity of this process. Draft recommendations included in this memo have been vetted with these work teams. Additionally, extensive community outreach will take place between the Feb. 26 study session and April 16 council meeting.

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The Modeling Process

The analysis incorporated five major areas of focus: financial, reliability, resource mix, asset acquisition and legal issues. Models were designed to span 20 years, from 2017 to 2037. An extensive list of inputs, which were vetted by community working groups and consultants, drew upon current market pricing, analyses by federal laboratories, benchmarking from American Public Power Association and regional utilities, and a diversity of other sources to ensure that data was accurate, realistic, conservative, and locally relevant. A smaller number of high-impact variables were modeled with wide cost ranges to show the risks associated with future uncertainty. These variables included gas prices, wind prices, interest rates, operations and maintenance costs, stranded and acquisition costs, and the ability of the utility to generate sufficient debt service coverage. Although the models are robust, they have limitations—for example, they do not allow for the types of course changes that might happen in reality. The significance of this is that a city-owned utility could start on a path of least-cost power and move to more renewable energy based on changing market conditions, just as Xcel could.

The structure of the modeling for this phase was driven by the first-level question of whether municipalization is feasible under the conditions set by the City Charter. Staff modeled an Xcel Energy Baseline, based on publicly available documents and Xcel’s own projections, for comparison to five municipalization-driven options that combine different resource packages and energy efficiency investments. The Xcel Baseline was modeled as conservatively as possible, giving Xcel a notable benefit of the doubt; significant cost increases, such as a planned $3.5 billion capital plan, may not have not been fully incorporated as not all of Xcel’s forecasting information is available or accessible. The utility’s latest rate increase was not included in this phase of modeling.

No alternative partnerships with Xcel Energy have been modeled at this time because the city does not have sufficient information from Xcel about the type of agreement—from among those proposed by the city in December 2012 or new ideas the company might have— Xcel would be interested in pursuing. It is possible that Xcel, working with the city, could become the utility of the future. In fact, it is possible that some of the municipalization options presented in this memo could be implemented in partnership with Xcel, if the company is willing and able to make some necessary changes. Staff is hopeful that Xcel will come to the table to develop these ideas more concretely in the upcoming months.

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Reliability

Reliability was raised as a key concern by both the business community and by residents. Given its importance, a separate analysis and working group was formed to address this issue. Engineers were hired to evaluate the system and its current condition, provide recommendations about needed improvements, identify regulatory reliability requirements and recommend best practices to ensure the acquired system would be just as reliable, if not better, than it currently is. The city recognizes that it is fortunate to have major employers who are industrial customers, and these customers have processes that require high-quality power and a reliable supply. Power failures can have significant financial impacts to these customers. Therefore, it was critical to not only talk to these companies about their needs and concerns, but to have equipment, systems, and processes in place to meet those specific needs. All models assume that reliability is a requirement and are based on separation and service area recommendations that participating engineers have indicated will achieve this goal.

Conclusion

Results presented later in this memo show that three of the five options for forming a local electric utility could achieve all of the Charter metrics with medium to high likelihood. In all cases, except the Xcel Baseline, a significant reduction in greenhouse gas emissions and increased renewable resources could be achieved. Two options that were modeled to prioritize greenhouse gas emissions reductions did not meet the Charter requirement of rate parity at the time of acquisition, while a least-cost power option was able to bear even the highest cost stranded and acquisition rulings under certain conditions.

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