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Mesa could pull plug on utility customers
May 6 - McClatchy-Tribune Regional News - Jason Massad The Tribune, Mesa, Ariz. Lately, Mesa officials are managing the city's affairs a little like someone who's losing at a game of Monopoly. And the city is in serious discussions to sell its electric utility -- a reliable money maker in the time-honored board game and an important piece of Mesa's financial puzzle. It's still unclear whether a sale will actually occur. City officials and Salt River Project executives met behind closed doors in February to discuss a possible sale. But any deal would definitely be a roll of the dice. For years, Mesa has relied on millions in profits from its 16,000-customer electric utility to keep its libraries and city offices open and to pay its police officers and firefighters. As a result, Mesa has invested little to maintain its electrical infrastructure, leading to an aging network of transmission lines, transformers and substations. Some of the technology dates backs to the 1950s. Sale of the utility would free Mesa from making future repairs that could take decades and millions of dollars to finance. Those upgrades inevitably would drive up electrical rates for Mesa electric customers, who have paid up to 8 percent more than SRP customers in recent years. However, a sale of the utility presents an entirely different set of financial problems for Mesa. The city has traditionally relied on $5 million to $7 million in annual profits from the electric utility, which serves a roughly 5-square mile area in central Mesa. In concept, Mesa could invest the sale proceeds to create a yearly revenue stream from interest on investments. Those dividends could match the annual revenue the city reaps from the electric utility. However, the utility likely is not worth enough to create a large enough investment pool to equal the city's reliance on its electric revenue, city officials warn. "That's the whole key," said City Councilman Kyle Jones, a leader on the city's infrastructure subcommittee. "Unless you make a really good profit on the sale, you're throwing money away 20 years down the road, and you're going to have to supplant that somewhere." Plus, any sale of the utility to SRP creates uncertainty for Mesa's electric customers. SRP could upgrade Mesa's neglected electric infrastructure and then pass those costs directly to only Mesa's customers -- which could lead to an increase in energy costs. "It's a question of whether they would finance the necessary improvements through the Mesa ratepayers instead of spreading them over all of their customers," said Dave Plumb, Mesa's utility director. DIVESTURES, ACQUISITIONS Mesa invited SRP last fall to discuss a possible sale of the electric utility. However, it's unclear what SRP would gain in such a transaction, unless it acquired it at bargain prices. SRP is the fourth-largest public power utility in the nation, serving around 900,000 customers and providing jobs for 4,400 people, according to the American Public Power Association. By contrast, Mesa has less than 50 employees in its electric division and a relatively small peak-power load. "You can see that our resources would not be a big deal to them," Plumb said. SRP officials met recently with city management to discuss SRP's valuation of Mesa's electric system. SRP said they are now waiting for a response. "The ball's in their court," said Jeff Lane, an SRP spokesman. For customers, SRP service has the potential to be a better deal than Mesa. How much better is the subject of debate. City utility officials say Mesa's rates recently have been 8 percent higher than SRP's. City budget officers, meanwhile, produced a recent rate comparison that's more favorable to the city's electric utility. A 2007 analysis of electric rates showed the average Mesa household paid $92.85 per month, according to estimates from the city's budget department. SRP customers, meanwhile, paid $88.42 per month, nearly 5 percent less. But those estimates can change. Mesa holds a portfolio of long-term power contracts that command predictable prices. But in times of peak demands, Mesa is forced to buy short-term contracts that can be volatility priced, based on the regional energy market. The costs of those shortterm contracts are passed directly to Mesa's customers, which makes it hard to predict what they will be charged for electric service from year to year. "We were getting to the point where electrical was no longer profitable," said Chuck Odom, city budget director. "We're not a monster that can go out and make the volume buys." BUCKING THE TREND Mesa's pitch to sell its utility bucks a trend across the power industry. As a result of the fallout of the California energy crisis in 2001, local governments across the nation have explored operating their own utilities to avoid the pitfalls of for-profit, investor-owned utilities, said Madalyn Cafruny, director of communications for the American Public Power Association. "The mission of a public power system is to serve it customers and its community," Cafruny said. "Investor-owned utilities are there to create profit for its investors." The decision to sell Mesa's utility, however, will come down to basic economics. In a way, Mesa is looking at a sale the way someone might look at selling an aging car. Get rid of it before the repair costs eat you up. But Mesa may have to shoulder the costs of those repairs even before it considers selling the utility. Or it may not, said City Manager Chris Brady. "The deal is not how much money we make on the sale, but how much it would cost us to bring it up to standards," Brady said. "We won't make any decision to upgrade the utilities if we feel like we could get a better deal if we could have someone else do it." CAPITAL IMPROVEMENTS In the upcoming budget year, Mesa plans to pump $3.9 million in capital improvements into the electric utility's aging infrastructure. The following year, $12.3 million from the sale of bonds approved by city voters last spring are slated to finance basic electrical improvements, in an effort to reduce local power outages and allay safety concerns, officials say. However, the largest improvement that's needed in Mesa's electrical system hasn't even been priced yet. About one-third of Mesa's system operates on 4-kilovolt transmission lines and transformers, said Marty Hunter, electric division director. The industry standard is 12 kilovolts, a much more efficient system for delivering power that would "significantly reduce power losses" and would be a key point in a deal with SRP, Hunter said. THE BOTTOM LINE Mesa's electric utility assets were valued at roughly $63 million in 2006. The profit for the utility next year is projected to be less than $900,000. The sale of the utility might not create a sufficient investment pool to allow Mesa to replace the revenue from it. As a rule of thumb, the city can make 5 percent on its investments every year. The city would need to reap $120 million from the sale of the electric utility to create an investment pool that could generate the $6 million it now receives annually in revenue. Plumb said he did a "backof-an-envelope" analysis on creating the investment pool several years ago. It didn't add up. "I don't know what the number would need to be," he said. "But the city makes $5 million to $7 million on the transfers." -- CONTACT WRITER: (480) 898-6842 To subscribe or visit go to: http://www.evtrib.cvom |