The Risk of Municipalization [Due Diligence]

by Osman Parvez

Ever since the movement began to create a municipal electric utility in Boulder, I've received a steady stream of emails from concerned clients. From a real estate investment perspective, the size and activities of local government have become an increased area of risk.   Comprehensive due diligence mandates that you understand the risk before the investment decision. 

After studying the issue for some time, here's my opinion: Municipalization feels good but lacks economic merit. It's a slippery slope. 

My concerns:  

1. Lack of Transparency

It took a lawsuit from a Boulder resident for the City to release their financial projections. The projections show estimated costs per KwH rising by 52% in less than ten years before leveling out. 

Households would certainly feel the increase but a larger burden would fall to the business community. The increased cost is far from insignificant and threatens our economic vibrancy. 

I'm not impressed a lawsuit was necessary for the city to disclose this information. It makes me wonder what else they're hiding. As always, there are vested and entrenched interest groups within government. If nothing else, more transparency is needed on the real costs and benefits of forming our own utility. Remember, we were promised exit points when we voted for the Municipalization process. Hiding cost data from the public isn't kosher. 

2.  Overvalued Assets

The spreadsheet released by the city contains the heading "Low Cost Option, Deterministic Modeling, Stranded and Acquisition set at $150M" (SIC).    Excel thinks the stranded assets are worth $255M, hence the likelihood a judge will decide the final number.   

What's the real value? Probably far less than $150M. See #3 below. 

3. Obsolete Technology

I'm deeply concerned that we're going to end up paying Tesla prices for technology that predates the Model T. Take a look at the following photos. 

The electric grid in Boulder dates from the 1890s. We're planning to invest in a distribution network that will likely be obsolete in the near future. Read "Why Elon Musk's Batteries Scare the Hell Out of the Electric Company."

4.  Mission Creep

From the Energy Services section of the city's Municipalization website: 
One of the ideas Boulder Energy Future is exploring is changing the traditional utility business model. Currently electric utilities focus on providing and selling energy.

We are considering a shift from this model to an "energy services" model in which a local electric utility would focus on meeting customer needs and wants rather than focusing on selling energy as a commodity. The utility could sell, or facilitate the provision of, the services that electricity provides—health, comfort, safety, and economic vitality—while reducing negative impacts on our natural environment and rapidly transitioning from fossil fuels to clean, renewable energy.

So instead of providing and selling electricity, the city would like to sell me health, comfort, safety, and economic vitality services? I don't even understand what that means. It sounds like mumbo jumbo. And nothing puts a damper on economic vitality like outrageous electricity bills. 

5. No Production Capability or Purchasing Power

I'm not a fan of Xcel, but Boulder seems far less likely to build a green production facility anytime soon - especially when we're blowing $150M to $220M on a obsolete distribution network and seeing our prices rise 52% as a result. It will leave us buying electricity on the spot market and with forward contracts. 

Without the scale of Xcel, how are we going to do so competitively? Keep in mind that regulators have a track record of screwing this up. See the soaring prices in California back in 2000 for an example.

6. Poor Disaster Response

It doesn't take a massive weather event like the fall floods of 2013 for the distribution network to go down. Regular storms regularly take down power lines. Xcel has the capability to pull resources from other areas, which is particularly helpful when we're dealing with large scale events.   

Can the City of Boulder offer the same? Of course not. I predict longer down times ahead.  

7. Demand Control Management

Boulder already owns a water utility and it has a very poor record of containing costs. According to one source, rates have increased 15 times in the past 16 years - and this is for a renewable resource that literally falls from the sky. 

Not too long ago, the city instituted water budgets - a form of demand control management. Here's how the budgets work, direct from the city's website.   

The City of Boulder has a water rate structure that uses "water budgets." Your water budget is the amount of water that you are expected to use during a specific month. Each customer's water budget will be different based on their unique water needs, as well as their past usage levels.

The water budget only applies to water-use charges and does not include other costs such as wastewater, stormwater, other fees, etc.

Water budgets help promote water conservation. If you stay within your budget, you pay less for the water you use. If you exceed your budget, you pay more for the water you use.

Sounds nice, right? Yet rates keep rising. Some business users are looking at a water rate increase of about $1,500 per month this year.

Want to know what your future municipal utility's bill looks like? Just replace "water" with "electric" and prepare not just for rapidly rising costs if you stay within budget but egregious penalties for exceeding your city determined electric budget. Energy conservation is a good thing, but not at the cost of having the city of Boulder micromanaging your home's energy usage.   I'm not a fan of giving big brother permission to enter your private residence.   It leads to bad things.

8.  Budgetary Bloat

The city budget grew 18% in 2015 and we are borrowing $4MM from the general fund for municipalization. Overall, the city plans to spend nearly $7MM on the municipalization process this year. This spending is on top of recent budget growth that is tracking 3.5 times CPI. Read City Budget Swells to Supersize

When it comes to money, here's what the municipalization process is starting to look like.

images credit:  Boulder Public Library
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The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties.   We strongly recommend conducting rigorous due diligence and obtaining professional advice before buying or selling real estate. 

Please Note

This document contains forward-looking statements. You are strongly cautioned that investment results are subject to business, economic and other uncertainties. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time. Always consult your financial advisor before making an investment decision.