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$150 million opportunity for Utilities



Nobody does a spending spree quite like Colorado Springs Utilities.

Besides borrowing $300 million in bonds this fall for the $2.3 billion Southern Delivery System water pipeline from Pueblo Reservoir, the city-owned agency might also pick up a power plant. Nobody yet knows how much it would cost to buy the gas-fired Front Range Power Plant south of Colorado Springs, but it could be around $150 million.

Utilities energy manager Drew Rankin calls the deal a "no-brainer, rock-solid savings opportunity" for the city. But Vice Mayor Larry Small says City Council, which doubles as the Utilities board, should think twice.

Adding debt could erode the agency's debt-to-equity ratio, which in turn could drive up borrowing costs. And now isn't the time to pay higher interest rates, Small says, with Utilities looking to borrow heavily to finance the water line. Higher costs would translate to higher utility rates for customers, who are already facing 12 percent annual water rate increases through 2016.

The 480-megawatt plant, near the coal-fired Ray D. Nixon Power Plant, cost $313 million to build in 2003. Utilities owns it in partnership with a private company, Mesquite Colorado Holdco, which is owned by insurance giant and taxpayer bailout recipient AIG and the Ontario Teachers Pension Plan, Utilities records show.

In summer 2007, AIG sold its share of Mesquite to UBS Americas, Inc., triggering the city's option to buy the entire plant, an option that expires Aug. 14. (Mayor Lionel Rivera, a UBS investment adviser, has recused himself from discussing the purchase.)

If the city decides against it, the next option-to-buy window opens in 2012.

In the past, Colorado Springs shared maintenance and other costs with Xcel Energy, which with the city used power from the plant. But Xcel stopped buying in April after the Comanche 3 coal plant southeast of Pueblo went into service in December. That means the city's paying 100 percent of the plant's costs, Rankin says, despite getting only 20 percent of its power from there last year.

Rankin champions buying the plant and selling excess power until the city "grows" into the plant, thereby delaying until 2024 the need for a new power source. He estimates buying the plant would save customers $150 million over a 20-year period, lowering electric bills, with part of the savings coming from refinancing the debt into tax-exempt, lower-interest loans.

Natural gas burns cleaner than coal, though power from coal is considerably cheaper ($15 to $23 per megawatt hour) than natural gas, at $35 per megawatt hour. (A megawatt hour can power 1,000 homes for one hour.)

Although natural gas prices are expected to climb, Front Range might wind up a good investment if costly coal sequestration requirements or cap-and-trade legislation escalates coal costs.

"It allows us to lower costs and get more capacity," Rankin says. "Risk? We have that now, but [a purchase] gives us greater flexibility with how we use that asset."

Small, who met with other Councilors in executive session last week to discuss the acquisition, says it might be better to wait. He adds: "There hasn't been a good cost-benefit analysis to convince the board we should move forward on it."

He notes the city might not be able to borrow at tax-exempt rates to finance the purchase, and "it could seriously impair the savings."

Not to mention erode Utilities' bond rating. Small says a lower bond rating could require higher interest payments on all of Utilities' debt, which stood at $1.747 billion as of Dec. 31.

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