PUEBLO, Colo. (Sept. 18, 2019) – If the City of Pueblo forms a municipal electric utility, it will cost at least an estimated $402 million in acquisition and transaction costs to purchase the Black Hills Energy system. Residential electricity customers can expect to see average bill increases ranging from an estimated $138 more per year in the first year to $330 more per year in the 20th year, because the city’s estimated cost to operate the system will be $38 million more per year on average than Black Hills Energy’s operating costs over the same period. Rather than saving money with a municipal utility, Pueblo customers will pay more.

Those are among the key findings of a new study detailing the costs and risks of forming a municipal utility in Pueblo, developed by Concentric Energy Advisors, an independent management consulting and financial advisory services firm focused on the North American energy and utilities industries. Black Hills Energy Colorado Electric commissioned the study and released the findings today. The full Concentric study is available at:

https://ceadvisors.com/wp-content/uploads/2019/09/Pueblo-Feasibility-Study.pdf.

Concentric Energy Advisors, founded in 2002 and based in Marlborough, Mass., has provided valuation, advisory, analysis and transaction support services for public and investor-owned utilities, renewable energy and generation companies, pipeline operators and other energy industry and utilities clients throughout the U.S. and Canada. Concentric’s work has included assisting cities and towns with feasibility studies and assessments to help inform decisions about formation of municipal utilities.

“Our independent analysis of the costs of acquiring and operating the parts of the Black Hills Energy distribution system needed to serve customers in Pueblo projects higher operating costs and higher monthly bills for customers under a city-operated utility scenario,” said Ann Bulkley, Concentric senior vice president and co-author of the study. “We encourage customers, community leaders and elected officials to read the report and decide for themselves whether municipalization makes sense.”

Concentric’s preliminary estimate of the cost of acquiring the Black Hills Energy distribution system (poles, wires, substations and other infrastructure) needed to serve customers in the City of Pueblo is $402 million. The estimate does not include the cost of the generating plants, wind farms and solar gardens that supply power to Pueblo or the cost of transmission lines that bring power to town.

The $402 million estimate also includes stranded costs for generation facilities and certain substations, which Pueblo would be required to pay; the cost of physically separating the Black Hills Energy system from a new city-run system and then re-integrating the pieces to serve Black Hills Energy customers outside of Pueblo; transaction costs like legal, engineering and bond underwriting fees; and start-up costs to establish an entirely new electric utility, including inventory and cash reserves.

The Concentric estimate of $402 million in acquisition and transaction costs does not include additional expenses related to the going concern value, which the courts may require Pueblo to pay to compensate Black Hills Energy for the loss of assets that have value as an ongoing business, beyond the value of the assets themselves. For comparison, Xcel Energy has estimated the value of the going concern in Boulder’s effort to municipalize at $350 million.

The annual cost of operating a municipal utility in Pueblo during its first year is projected to be $131.4 million, which would need to be paid for by customers. This includes the cost of purchasing power from outside providers and paying to have it sent to Pueblo over transmission lines the city will not own; the costs of operating and maintaining a new municipal electric system; interest on borrowings to finance the $402 million acquisition; taxes and fees to replace those currently paid to the city by Black Hills Energy; and costs for programs such as energy efficiency and assistance for low-income customers.

The projected cost of having Black Hills Energy continue to provide service in 2024, the study’s baseline year, is $114.5 million -- $16.9 million less than the cost of the city-run option.

Two factors contribute to the study’s projection of higher annual operating costs for a city-run utility compared with Black Hills Energy. The first is annual debt service costs, estimated at $23 million in principal and interest payments for acquisition and transaction costs in the first year of a municipal utility alone. The other factor is that Black Hills Energy has lower than average operating and maintenance costs compared with the municipal and cooperative utilities used in the study for benchmarking. Black Hills Energy serves more than 1.2 million customers in eight states, so certain costs can be spread over a large customer base.

“The high cost of acquiring assets from an existing investor-owned utility and forming a new municipal utility – in this case, more than $400 million, and possibly much more – is one of the reasons why no new large municipal utilities have been formed in Colorado in many decades and very few nationally,” said Toby Bishop, Concentric senior vice president and study co-author. “Even these acquisition cost estimates are uncertain because key questions about the value of assets sometimes can be answered only in court, after years of costly legal proceedings.”

While Black Hills Energy commissioned and paid for the Pueblo study, the results and conclusions are solely those of Concentric, operating as an independent consultant and advisor. Black Hills Energy has made clear its Colorado electric utility is not for sale.

“We appreciate the insights provided by the team at Concentric,” said Vance Crocker, P.E., vice president of Black Hills Energy Colorado Electric. “The study makes clear that there is a better path forward for Pueblo. Our hope is that this independent study and its findings of higher costs will help Pueblo citizens and leaders alike to make informed decisions. We look forward to sharing the findings with community leaders, elected officials and our Southern Colorado customers, whom we remain committed to serving for many years to come.”