District 1 Lubbock City Councilman Victor Hernandez this morning released a wide-ranging statement that states why he is in favor of increasing electrical rates for Lubbock Power and Light customers.

The Lubbock City Council on Wednesday tabled a proposed increase and may discuss the issue again in the Fall.  Councilman Hernandez’s reasons include trying to avoid built-in losses for LP&L due to the wholesale rates they pay to Xcel Energy for electricity, preparation for potential large scale rate increases to Xcel in 2019 when the city’s wholesale contract expires, and the need to keep LP&L in good financial standing to keep the city’s bond rating high.

In March of 2011 the council approved LP&L to dip into cash reserves after voting down a rate hike. Rate hikes were considered back in September of last year as well.

Below is the full statement from Hernandez released late this morning:

I'm hoping to write a full-blown position paper on the LP&L electric rate soon.

In the meantime, the jist of my arguments in favor an increase in the electric rate is as follows:

1) LP&L purchases wholesale power from Xcel Energy and then turns around and sells the same electricty at retail rates to LP&L customers, you and me. Right now, and for some time now, LP&L has been purchasing power from Xcel and selling it to you and me for less than what they bought it for. The analogy that has been used is, a grocery store purchasing a loaf of bread from its' supplier for $1 and turning around and selling it to its' customers for 50 cents, thereby losing 50 cents on every loaf of bread sold. Obviously, the grocer will go out of business if they continue this practice indefinitely. (Xcel Energy has already implemented a two-step rate increase as of last year ((and early part of this year)) which, the City has failed to follow);

2) In addition, Xcel Energy (who we buy wholesale power from) will have an additional wholesale rate increase this July and in addition, Xcel will submit to the Public Utility Commission another proposed retail rate increase come February of next year. Bottom line, and using the analogy again, the price of the loaf of bread is going up from $1 to $1.50 and the City of Lubbock continues to sell that same loaf for 50 cents. The losses are getting bigger and bigger. Therefore, my position is that small incremental increases over a longer period of time is better for my constituents than being forced to make up the entire loss by increasing rates all at one time;

3) The current electric rate structure is doing nothing to prepare the City of Lubbock for 2019 when our wholesale purchase power contract expires with Xcel. In other words, after 2019, the power we purchase from Xcel, if we continue to purchase power from them, will not be at the wholesale prices we're being charged now, they will be higher. Also, Xcel Energy is proposing to build new generation which will have to be paid for through increases they charge their wholesale customers (City of Lubbock). Therefore, my position is that we need to start building a reserve for future needs which we know will arise in 2019.

Another option, aside from continuing to purchase wholesale power from Xcel is to build our own generation. The projected cost for us to build new generation could very well be $300 million or more. Should this option be exercised, another major rate increase would have to be implemented to service the requisite debt.

Again, small incremental increases now to offset the needs we will face in 2019 is part of long-range financial planning required in order to avoid what has happened, for example, in the water rate. The water rate increased dramatically as a result of not having a long-range financial plan in place for building the Lake Alan Henry pipeline to Lubbock. Which in turn, required having to pay for that expense right now and all at once, as opposed to having built a reserve fund for the last 15 years. A true rate stabilization fund built over time would have mitigated the huge rate increase the water fund required in order to pay for that one particular project all at one time;

4) The current reserve fund, set at approximately $50 million dollars, is for catastrophic events such as, a tornado or a huge spike in natural gas prices, such as the one we experienced in 2003-04 and not, for off-setting day-to-day operational expenses;

5) And last, the financial stability of LP&L affects the bond rating so, if LP&L continues to lose money and we continue to dip into reserves in violation of our city ordinance then, our bond rating goes down, and therefore, our ability to borrow money for major capital projects is impacted and the interest rate we pay on borrowed funds goes up. A symbiotic relationship exists as between LP&L and the City of Lubbock.

I know my constituents, and many in the city in general, will find it difficult to pay any additional increases. However, I'm convinced that small incremental rate increases is preferable over a large increase all at one time and which will have to cover all Xcel Energy increases of the past and the "hole" i.e. deficit which delaying the rate increases of the past have created. In the words of Mike Davis, LP&L board chair, "it's easier to drink water from a garden hose than a fire hose".

Finally, I think it proper to speak to areas where LP&L can cut as well. LP&L can: 1) get rid of the church rate as well as all other rates which give any particular group an advantage; 2) cut the LP&L advertising line item which is approximately $600,000; 3) stop LP&L from paying for the underground utility relocation project downtown and instead, transfer that expense to LEDA, since it is economic development; 4) transfer the street light expense back to the general fund; and 5) defease bonds early.

Small incremental increases over longer periods of time is better than huge increases all at once. No increase in the electric rate is not a realistic option unless, you want LP&L to go bankrupt. I was there in 2003-04 when that almost happened and I will not take an active part in ensuring that it occur again.

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