No Leeway for Electric Rate Reductions in Near Future

Rick Rigel, ARPA General Manager

The Lamar Repowering Project and the debt service needed to pay the construction bonds is here to stay, whether the plant is producing electricity or placed in cold storage.  And if the rates for purchasing power from a grid, as is being done now seem high, the rates would probably be higher if the plant was on line and powered by coal, according to ARPA officials. 

Rick Rigel, General Manager of ARPA, Arkansas River Power Authority, presented the history of the Repowering Project, associated construction costs and current finances, during a public hearing Tuesday, March 5.  The meeting was at the request of the Prowers County Commissioners and several major power purchasers after those business managers expressed concerns regarding the electric rates and inquired how they had become so high. 

Rigel recapped the origins of the Repowing Project, beginning in 1994 with a 10 year power supply contract between the plant and Tri State.  In 2001, the plant received notification of the contract’s termination due in three years.  Several attempts to find a new power supplier came up empty which left self-generated power as the only viable option, according to Rigel.  Motivated by the increasing costs of natural gas at the time, the engineering firm, ForeRunner Corporation, was hired to conduct a feasibility study on supplying power locally.  In 2005, an additional attempt failed to find a power supplier and the next year ARPA decided to secure $87.5 million in bonds to cover the cost of converting the natural gas plant to burn coal. 

Community Members Attend Fact Gathering Meeting

Construction problems developed stemming from under powered coal-moving equipment, not including ammonia injection equipment for the boiler, which later became necessary for the plant operation, changing coal storage silos to domes, modifications needed for the steam system, and a larger reverse osmosis system was required as well as other considerations.  Other cost overruns developed from the increasing expense of materials, particularly steel and concrete.  Delays on the project also developed with the retirement of key ForeRunner engineers and that company’s eventual financial demise in 2008.  As Rigel explained to a question, there were no performance bonds available to cover that specific contingency.  Through the midst of construction, additional bonds were voted on by ARPA members to cover increasing expenses with $28.6 million in 2007 and a third series for $23.2 million in 2008, as well as $17.3 million in 2010.  The total cost of the project is $156.6 million from the original estimate of $87.5. 

Rigel said there is little leeway when it comes to lowering rates, stating he was restricted by what was required by the bond covenants.  ARPA, which supplies power to several member communities in southeast Colorado and owns the boilers for the plant, has no leeway regarding any rate relief to customers.  The Light Plant is owned by the City of Lamar.  Citing the 2013 ARPA budget, he explained the debt service on the project is $10.2 million while $12.7 million is required for net operating revenue.  He said that’s coupled with $1.5 million in legal fees from three trials ARPA will face this year from WildEarth Guardians, an environmental group suing both ARPA and the Light Plant for exceeding emissions standards and with the City of Trinidad, an ARPA member.  Plant Superintendent Houssin Hourieh added that under a charter appropriation, the Plant pays the City of Lamar 1.5 cents from the applied rates per kilowatt hour from customers, for an annual fee at over $1 million, giving the Plant little financial room for rate reduction beyond the allowances they’ve recently made to the top level of power customers.  Rigel had even more sobering information, stating that the federal government is continuing to tighten EPA emissions rules on coal plants.  If the plant passes all current emissions tests and comes out of mothball status, it will probably have to be modified again to meet any new standards enacted while it was offline, adding to its operational costs.  Rigel explained that when the conversion to coal was being developed, the decisions made were based on the best information available in the industry regarding escalating costs of producing electricity with natural gas. 

Rick Robbins of Colorado Mills, Doug Morris of JBS Five Rivers and by phone, Jim Miller of Ports to Plains Travel Plaza, reiterated their earlier questions of why with these costs overruns, was ARPA even in existence?  The businessmen focused their questions on the bonds that were issued and how the electric rates that applied to them were structured, particularly the demand rate charge, running between 9 to 14 cents per kilowatt hour. 

Robbins stated, “I think we need to sit down with the ARPA board with regard to the rates and the bonds that were issued.”  Jim Miller of Ports to Plans asked Rigel who were the bond holders for the Repowering Project.  Rigel replied they were institutional and he didn’t have that information in general.  Miller said he would like to have that information with Rigel responding he thought the trustee would have that information, but he was uncertain if they did.  Miller replied the schedules for rate relief in 2025 wouldn’t help the present situation, given that some larger customers were investigating independent power supply options within a couple of years from now.  He asked, “What will happen if the revenues you need to sustain the project aren’t there,” claiming that the costs will be passed on to regular customers who don’t have options.  Rigel added that he thought some price relief would be available by 2017, but couldn’t promise it would come as quickly as that. 

County Commissioner Henry Schnabel asked how the bonds could be reduced to the 50% rate reductions that Miller was talking about.  Miller said the starting point would be to identify the bond holders.  He added that there are good and bad investments made and he was reluctant to bring out bankruptcy, but perhaps that was a consideration at this point.  Miller also said he believed there should be an independent investigation to review who made these decisions and what were the facts on which they were based.  Rigel asked, “Who would pay for that,” adding, “The costs of that study would go right back to the ratepayers, about six figures at least.”   

Garth Nieschburg, Lamar City Attorney, explained some of the mechanics involved in a bankruptcy of this nature, stating, “We’re bound by the terms of the bonds.  We can default on them and this thing will go into bankruptcy.  A judge would declare the boiler scrap metal.  He could void the contract between Lamar Utilities and ARPA and say the trustee who takes over the plant or boiler will also run the power plant.  I don’t think defaulting on the bonds is an option when we have revenue to pay the bonds.”  Robbins countered saying the only reason you have revenue is because we’re writing checks.  Nieschburg replied that as long as there is revenue, no bankruptcy court will say you can go ahead and lower your rates. 

A future meeting will be set up between the businessmen, city and county representatives and the ARPA board of directors.  Board members are comprised of representatives from the communities served by ARPA including Lamar, Holly, La Junta, Las Animas, Springfield and Trinidad.  No date has been made at this time for that meeting.

By Russ Baldwin