A weak economy and the cost of CPS Energy’s nuclear ambitions are forcing the utility to make some tough trade-offs.
CPS is expected to scale back its ownership of the proposed expansion of the South Texas Project when the board meets Tuesday, in an effort to lower its financial risk and tamp down mounting debt.
Utility officials also are talking about delaying the installation of scrubbers at its coal plants and pushing back the upgrade of its energy grid to save money.
Pressure from Wall Street may force city officials to consider a series of rate increases higher than the utility anticipated in the coming years, a realization that hit the City Council last week when CPS Energy leaders floated the possibility of a 9.5 percent rate boost.
The shifting landscape comes weeks before the city will decide whether to go forward with its portion of the proposed $13 billion nuclear expansion.
In two weeks, the City Council will vote on borrowing $400 million more for the STP expansion. CPS Energy’s board of trustees is expected to approve the debt Tuesday, a move that could put the utility’s total investment at about $680 million for a project that likely won’t have a fixed price tag until 2012.
But at the council’s five-hour meeting Wednesday, it was clear from the questions that members still are all over the map. Some said they haven’t had enough time together to discuss the issue.
“We need some final numbers, so we can hold CPS accountable,” said Councilman John Clamp, adding that he’s frustrated with what he terms the lack of information the utility has shared with the council.
He wants answers before he votes to continue funding the expansion, which he supports.
“We never go over the assumptions, we just see the bottom line,” Clamp said. “I want to see the assumptions they’re working from.”
Councilwoman Elisa Chan is comfortable with the information she’s received, but she, too, wants more council face-time.
“I don’t need to meet with CPS any more,” she said. “I have done my due diligence. Now I want to know where my colleagues are, and how we put this whole thing together.”
At stake is the future of San Antonio’s share of two new reactors it wants to build with partner New Jersey-based NRG Energy.
As it is, CPS Energy owns 50 percent of the expansion, and NRG is expected to sell 10 percent of that. But now CPS is considering selling down to 20 percent or 25 percent.
Without the $400 million infusion, the deal is dead, utility CFO Paula Gold-Williams told the council Wednesday. CPS Energy would lose its share of the project to NRG, and perhaps the almost $300 million it has invested so far.
Rates vs. bills
Much of the latest frenzy over the nuclear project began to take shape early last week when utility officials divulged they could be asking for a 9.5 percent rate increase — or more — in the spring. That number seemed to fly in the face of the line CPS officials have been toeing for months, that they would be able to pursue the nuclear expansion and several other large projects with bill increases of about 5 percent every other year for the next decade.
The 9.5 percent rate boost is in line with that pledge, says interim General Manager Steven Bartley, because pending reductions in the fuel charges on customer bills will keep the total increase on customers’ bills to about 5 percent.
But the nuance hasn’t gone over well with some council members, who said they think the distinction between rates and bills means little to their constituents.
“I believe this is a good project,” Chan said. “But the whole process has been confusing — and if it’s confusing for the council, it’s very likely confusing to the public. How am I supposed to explain this to my constituents?”
She may get the chance to do that several times in the coming years.
That’s because, as Bartley said recently, the utility’s management now is worried about keeping rate increases to the promised levels. The economic slowdown has hit the utility’s bottom line, particularly as natural gas prices have cratered and reduced the utility’s income from selling power to other cities and utilities.
It’s not just council members worried about rate increases.
COPS/Metro Alliance, a group that represents many of the city’s low- and middle-income neighborhoods, said a lot of customers won’t be able to afford the added burden.
Because poorer people spend a larger percentage of their income on energy, COPS leaders say, rate boosts particularly hurt them. The group plans to lobby the city and CPS Energy to fast-track and expand the utility’s program to weatherize homes, which currently is supposed to involve about 20,000 dwellings over the next 10 years.
Rising debt
San Antonio’s municipally owned utility already owns 40 percent of the two reactors operating at STP now, and decided to partner in the facility’s expansion in 2007 with NRG, which owns 44 percent of the existing reactors.
The partners currently each own half the proposed expansion, but want to bring in a third partner at 20 percent ownership, knocking down their share to 40 percent each.
That sale is the responsibility of NRG, which has until next June to do so. If it does not, CPS Energy would have to sell it.
Until recently, CPS’ strategy had been to sell half the power it generates from its 40 percent share of the two new reactors to other cities and electric cooperatives and use the rest to serve San Antonio’s growth. That strategy has shifted under pressure from Mayor Julián Castro and the pinched economy.
Now the utility hopes to sell about half of the 40 percent share to the same municipalities and cooperatives. That would help CPS Energy more quickly recoup some of its costs.
Even with its plan to sell off some of the project, the utility is looking to borrow vast sums of money to keep its other capital projects going.
These include an $849 million energy efficiency plan, funded by small increases in the fuel charges on customers' bills, and a project to meet a large renewable energy goal. Most well known is the $400 million bond issue for the nuclear project that the utility’s board is expected to approve Tuesday. But that’s only the first of several large bond issues that the city-owned utility could be looking for in the next couple of years, Gold-Williams said.
CPS is expected to take out another $400 million bond issue in the spring or summer to cover nonnuclear projects and maybe even another of unknown size in fall 2010 to finish them, Gold-Williams said. Finally, the utility may be looking at another bond issue in 2011 for the nuclear expansion.
In an effort to keep debt more in line with shrinking revenue, CPS Energy is considering a postponement of some of its larger environmental and distributed energy programs.
These include scrubbers to reduce pollution at the utility’s coal plants, an advanced metering program and enhancements to its grid needed to foster a series of small- to mid-sized renewable energy projects in the city.
The possible delay of the pollution control has infuriated some environmentalists who fought against CPS’ newest coal plant, which is expected to begin operating next year. They quit protesting once the utility agreed to install more pollution controls on its existing coal plants.
“It’s very discouraging after all the promises that were made by CPS Energy when they wanted to build a coal plant,” said Karen Hadden of the Austin-based SEED Coalition. “They’ve stalled. They’ve dragged their feet, and now they want to delay even further.”
Market pressure
CPS Energy’s potential lenders also are paying attention to the utility’s changing financial picture.
It’s highly rated and is seen as a good investment by Wall Street. Fitch Ratings, for instance, gives the utility its second highest rating — AA+ — and puts it in the top three of about 150 similar utilities Fitch follows, analyst Kathy Masterson said. This means CPS can pay a low interest rate on money it borrows when issuing bonds, saving millions in interest.
The official rating for its next bond issue won’t come out for two weeks, but Masterson said there isn’t any reason to expect a change.
The future however, is not so clear.
That’s because Wall Street analysts say they expect CPS Energy to pile up debt as it pursues the nuclear project, and the market is looking for a series of rate increases in the coming years to keep the utility’s books solid. If not, the utility could see a downgrade in the all-important credit rating.
“Reluctance to raise rates as expenditures are increasing could limit CPS Energy’s financial flexibility in the future and place pressure on the rating.” Fitch stated in its latest report on CPS, issued in May.
The sentiment was echoed in the most recent reports by the other major rating firms — Moody’s and Standard & Poor’s.
Masterson said the utility’s attempts and failure to persuade the City Council to raise rates by 5 percent last year caught analysts’ attention. The City Council knocked the increase back to 3.5 percent, even though it was the utility’s first rate increase in 17 years.
“It was surprising from our standpoint that they asked for a 5 percent rate increase that seemed to be justified from a cost perspective and only a portion of that was approved,” she said. “What we’re looking for is cost recovery, and that’s not always in line with ratepayers’ interests.”
Sunken costs
Given all the uncertainty, some in San Antonio think CPS Energy should just pull out of the project entirely.
Mark Cooper, an economic analyst at the Vermont Law School’s Institute for Energy and the Environment, agrees. Cooper, who’s investigating the situation at the request of the consumer advocacy group Public Citizen, said the market has changed since the boom days of 2007 and he doesn’t believe there is a demand in Texas for two more nuclear reactors.
He points out that Texas used 7 percent less energy this year than the year before, according to June through June data compiled by the Energy Information Administration.
His advice is to bail out and risk losing about $280 million already in the project. He acknowledges the move sounds drastic, but said the utility risks losing much more if it stays in.
“If you had to make this decision today, you wouldn’t do this,” he said. “You would not invest in a project that is equal your entire capital and faces all this risk. You don’t let sunken costs destroy your future.”
CPS management, though, is adamant that the nuclear expansion is a valuable asset that has to be maintained and protected. That’s why it wants another $400 million to continue with planning and engineering.
Still, Bartley agrees the economic situation has changed significantly since the utility decided to take part in STP expansion in 2007. That’s why it’s now looking to sell more of its ownership.
Castro, who’s also on the utility’s board, has pushed the change in strategy for months. He said that the economic realities of the project and the recession’s effect on CPS Energy’s finances forced the shift.
“It certainly is sobering, and more abrupt than I expected,” he said.
Castro also acknowledges the importance of council consensus for the upcoming vote. His most important job between now and the Oct. 29 vote, he said, is to ensure ratepayers’ interests are protected and marshal the council to speak with one voice.
Wednesday’s work session should advance both those goals. The council will hear proposals on expanding the utility’s existing programs that help low-income residents pay their bills. That’s been a priority of several council members and the mayor.
“I’m interested in seeing a multiplication of what we have in there now,” Castro told CPS executives last week. “If we’re going to spend $2.6 billion on this project, a few million more is not going to break the bank.”
