Gloomy days for CWLP

Utility faces financial storm

ENERGY | Patrick Yeagle

Eric Hobbie calls it “a perfect storm.”

One of the biggest squalls in the history of Springfield City Water, Light and Power looms large while Hobbie, chief utility engineer at CWLP, tries to steer the ship to safe harbor. CWLP is facing its second “technical default” – failure to maintain required debt coverage – in four years, which could have far-reaching ramifications for the utility, its investors and Springfield residents. The utility must come up with $8 million by February.

Although CWLP’s state-of-the-art coal plant helps insulate Springfield from volatile energy prices in the open market, the debt that came with the plant hangs like a weight around the utility’s neck, thanks in large part to bad timing. The proposed solution – a rate restructuring, as Hobbie calls it – is barely more palatable politically than doing nothing. Meanwhile, CWLP is beset by public criticism over issues Hobbie says are out of his control.

“I can’t change history,” Hobbie said at a recent public meeting. “I just can’t.”

Timing is everything Hobbie, 45, started in his current role as chief utility engineer in May 2009. He’s an electrical engineer by training, with a bachelor’s degree from Southern Illinois University and an MBA from the University of Illinois Urbana- Champaign. Before joining CWLP, he worked as a union electrician for about two years.

“I always joke around that I’ve only applied for one job with the city, as an electrician,” Hobbie said. “Every job since then, they’ve asked me to do it.”

He says many of the decisions that brought CWLP to its current circumstances happened before he was in charge of the utility’s electric division. Still, Hobbie doesn’t blame anyone for the mess CWLP is in. He spoke publicly at the Oct. 24 meeting of the Citizens Club of Springfield, explaining the utility’s predicament and lobbying for a rate increase.

“Where we’re at today isn’t a surprise,” Hobbie said, referring to allegations that the utility previously tried to hide its fiscal trouble. “It’s nearly a perfect storm of events.”

Hobbie says the trouble in CWLP’s electric division started between 2006 and 2008, when bonds for the new Dallman 4 power plant were being sold. Energy prices at the time were strong, at around $70 per megawatt-hour. Meanwhile, demand for power had grown steadily since the 1980s and showed no signs of slowing down. Revenue seemed stable, Hobbie said, and the annual debt payment on Dallman 4 would be around $6 million.

“You need six million dollars a year, but you’re going to have thirty million dollars a year in revenue,” he said. “Anybody think that would be a good time to ask for a rate increase with the financial information available to those people?” However, shortly after the final bond for Dallman 4 was sold in 2008, the Great Recession struck, and energy prices slumped to around $35 to $40 per megawatt-hour, cutting CWLP’s revenue nearly in half.

“Anybody that knew that was going to happen, I hope you own your island in the Caribbean, because you made your investments to recognize this collapse,” Hobbie said. “Nobody in the market knew there was going to be a collapse.”

Additionally, electricity demand has leveled out nationwide and may even be falling, a condition that holds true for CWLP’s customer base. Lower demand and lower prices inevitably mean less revenue. Hobbie says a major part of the decline in demand for electricity in Springfield has been state government offices moving to Chicago. CWLP has lost 40 accounts associated with state offices since 2008, representing about 15 percent of total demand. As revenue fell, Hobbie says, the cost of running a power plant continued to rise.

“The cost of copper, cost of transformers, cost of other material – that’s not gone down or flattened out,” he said. “They continue to go up, while our main revenue source has flattened out and maybe gone down.”

While extreme weather usually means higher electricity demand because of more air conditioning and heating use, Hobbie says this year’s mild summer did the utility no favors. The summer was the coolest since 1975, he says, and power demand was 17 percent below what CWLP had budgeted for. As a result, revenue was about $7.5 million short in July.

“The big problem this summer is the summer never happened,” he said. “I was down at UIS for my daughter’s softball game on Fourth of July weekend, and people were wearing coats. I’d never seen that before.”

While CWLP’s water division is flush with cash, the electric division owes the water division – the two are legally separate entities – about $6.8 million. The two divisions pay one another for any water or electricity they use respectively, and the electric division has fallen behind.

Additionally, the electric division can’t currently satisfy a requirement in its master bond issuance agreements that it keep enough cash on hand to cover 125 percent of its debt.

“What that represents is the ability for us to reinvest in our system to keep it operating for the next 30 years, because these bonds are 30-year bonds,” Hobbie said. “This isn’t a home loan where they have a lien on our assets. The only thing the bond owners have access to is our revenue, and if our revenue stream is not enough to pay them, they can’t come after our power plant. They can’t come after our transmission or distribution system. We’ve agreed to create enough revenue to be able to pay that.”

The electric division’s debt coverage is currently at about 101 percent and is expected to improve to 118 percent by the end of the fiscal year in February, but that will still leave the electric division about $8 million short of 125 percent, Hobbie says. Failing to meet the required debt coverage would result in a technical default, which Hobbie says would likely get CWLP’s credit rating downgraded to B.

“That would be the lowest in CWLP history,” he said. “Two more downgrades and we’re at junk bond status.”

A lower credit rating would mean higher borrowing costs in the future, Hobbie said, and CWLP bonds would lose value for investors.

Wind energy and hot air About 15 percent of the electricity sold by CWLP in 2013 came from the Hancock County and Crystal Lake wind farms in Iowa. CWLP purchases wind energy pursuant to an agreement reached with the Illinois Sierra Club in 2006, prior to the opening of the Dallman 4 coal plant. The Sierra Club promised litigation if Dallman 4 went forward without a renewable energy component, so CWLP agreed to supplement its coal power with wind.

The agreement has been unpopular with the public from the beginning, and the controversy has intensified in recent months because of CWLP’s financial position and the cost of the wind power CWLP purchases. In 2013, the utility paid $18.2 million ($52.42 per megawatt-hour) for wind power and sold it for $4.3 million ($12.25 per megawatt-hour).

Based on those numbers alone, it appears CWLP lost almost $14 million in 2013 thanks to the Sierra Club agreement. However, CWLP finance director Craig Burns says the difference is made up through a “fuel adjustment” that appears on each customer’s bill. In the energy sector, a fuel adjustment or similarly named charge commonly includes the cost of a plant’s fuel or any energy purchased from other entities, which includes wind energy in CWLP’s case.

“The wind contracts do not have a negative impact on the electric fund’s bottom line,” Burns said. “With no wind contracts at all, the financial position of the fund would be exactly the same as it is today.”

Ch-ch-changes If it’s clear CWLP’s electricity division is in financial trouble, what changes should be made? Bob Gray, president of the Citizens Club of Springfield and a member of the Citizens Efficiency Commission for Sangamon County, says before any decision is made about a rate increase, CWLP’s governance model should change.

Currently, the general manager position at CWLP is vacant, leaving decisions about the electrical division primarily to Eric Hobbie. The utility reports to the Springfield City Council periodically, and any rate changes must be approved by the council. Gray and others have called for oversight of the utility by a board of citizens independent of the city council.

Gray points to City Utilities in Springfield, Missouri. The utility is similar to CWLP in several ways: it is owned by the city, it generates and distributes electricity, has a similar customer base and opened a new coal-fired power plant around the same time CWLP built Dallman 4. One difference, however, is that City Utilities is overseen by an 11-member Board of Public Utilities, made up of the utility’s customers. Members are appointed by the city council and have the final say on policy decisions other than rate changes.

Although Gray doesn’t fault Hobbie’s work as chief utility engineer, he is less confident in the oversight provided by the city.

“It seems to me that, even over the last couple of decades, we’ve proven more than once that the city government and part-time city council are incapable of running an electric power-generating plant in one of the most competitive enterprises in the country,” Gray said. “If we’re not going to go to any kind of extreme and say we don’t even want to do this anymore – which is not going to be the case – then we need to have serious discussion on how best to run it. Our model would seem to be the absolute worst.”

Among other issues, Gray says the city hasn’t done enough to court high-demand customers like computing centers or industrial companies. He says a citizen oversight board would put decisions in the hands of customers – which Gray notes are also CWLP’s owners – whose primary focus would be running the utility, absent any political concerns.

“Do you think anyone on the city council is going to be eager to vote for a rate increase?” Gray says.

Such a board, Gray says, would also provide more transparency and engagement with the community, making it less likely that future financial problems would come as a surprise to much of the public. While Hobbie contends he has been up front about the utility’s financial trouble since the previous rate increase in 2012, CWLP’s request for a rate change surprised Gray and others.

Gray isn’t the only one seeking changes to CWLP. The Illinois Sierra Club’s “Beyond Coal” campaign wants to see CWLP decommission its two oldest coal-fired units and replace their output with more renewable energy.

Rachel Goldstein, a field organizer for the Sierra Club, says the move would make sense because of EPA regulations that take effect over the next decade on carbon dioxide and other pollutants. Although all of CWLP’s generation units currently meet EPA regulations, the older boilers will likely require upgrades to stay in compliance when the regulations tighten.

Hobbie counters that CWLP was one of the first in the country to install pollution scrubbers on its coal plants, and the utility already provides 20 percent of its energy from renewable sources. That’s far in excess of the state’s “renewable portfolio standard” for clean energy.

“They (the renewable standard) don’t get to 20 percent until 2022,” Hobbie said. “We lead not only Illinois, but the country. Other people are closing their plants down because they did not invest in pollution controls.”

Additionally, Hobbie notes that wind energy is typically most productive when demand for electricity is low. During his Oct. 24 Citizens Club appearance, he produced a graph showing an almost inverse relationship between the wind power supply and demand for electricity.

Still, Goldstein says coal power is unsustainable in the face of the tightening EPA regulations, so CWLP will have to make changes eventually.

“Coal is facing a lot of challenges these days, as much as we might want to keep it as a large part of our energy supply,” Goldstein said. “CWLP has been a leader in the past. It might be time to start being a leader on this front as well.”

When in Rome With electricity demand stagnant and the wholesale price of energy at nearly half its pre-recession high, Hobbie says CWLP can’t expect a miraculous recovery to sustain the electric division.

“Our load is flattening, even declining, and as our costs go up, we can’t rely on increasing energy sales to cover our increasing costs of operating the utility,” Hobbie told the Springfield City Council on Sept. 16.

Instead, he says the utility must restructure its rates to be more in line with the rest of the energy industry. Most utilities in Illinois have a significantly higher customer charge, which is the flat fee each customer pays monthly, while charging less for the electricity itself. Hobbie proposes raising the current residential customer charge from $5.76 to $17.76, an increase of $12. Ameren’s residential electricity customers already pay around $15 per month, he said. CWLP’s senior citizen customers, who receive a 10 percent discount off residential rates, would pay an additional $5 monthly.

CWLP spokeswoman Amber Sabin says a typical residential customer would pay roughly an additional $7 per month, depending on usage.

Hobbie also proposes pegging the customer charge to the consumer price index starting in 2016. That would allow CWLP’s revenue to grow with inflation, while avoiding what Hobbie calls “large step increases.”

To mitigate the increase in the customer charge, Hobbie asked the city council to lower the energy charge by 4 percent across the board. Currently, electricity costs residential customers of CWLP 11.62 cents per kilowatthour during the summer and 10.08 cents during the winter. A 4 percent reduction in the energy charge would bring the summer rate down to 11.17 cents per kilowatt-hour and the winter rate down to 9.69 cents per kilowatthour. The rate cut would take effect March 1, 2015, under Hobbie’s plan.

For reference, a 100-watt light bulb running for 10 hours would use one kilowatthour of electricity. With CWLP’s current energy charge, that bulb would cost about $1.01 to run for 10 hours during the winter and about $1.16 during the summer. After the rate reduction, the same bulb would cost about $0.97 to run for 10 hours during the winter and about $1.12 during the summer.

The U.S. Energy Information Administration says the average Illinois home used 767 kilowatt-hours of electricity each month in 2012, the latest year for which figures are available. The largest portion of that usage was air conditioning, the EIA says.

Hobbie says it’s nearly impossible to compare energy charge rates between CWLP and other electricity providers. CWLP both generates and distributes electricity, resulting in a single energy charge on a customer’s bill. However, customers of other utilities can choose from dozens of generation companies, meaning they see one charge from the company that makes their electricity and another from the company that distributes it. Additionally, the fuel adjustment and other charges vary greatly depending on the cost of fuel and several other factors.

“Every contract is different,” Hobbie said.

There’s no straight-up comparison we can do unless we have a specific contract that company signed into.”

CWLP’s current energy charge is slightly lower than the average for Illinois and significantly lower than the U.S. average, according to the EIA.

Currently 2.67 percent of CWLP’s retail sales go to the City of Springfield as a PILOT payment, which stands for “payment in lieu of taxes.” Hobbie asked the city council to eliminate the PILOT payment and instead create a 2.67 percent “municipal utility tax” to replace it. Under the current arrangement, the PILOT payment will provide between $6 million and $7 million to the city budget this year, Hobbie estimated.

Why not simply tell CWLP to cut costs?

Hobbie says the utility has already cut 140 jobs, delayed maintenance and canceled improvement projects.

“Everybody says ‘you’ve got to cut more; you’ve got to cut more,’” he said. “Our head chemist, who does our pollution controls at the plant, is retiring. I have no replacement. I have other people that are looking to leave. I have no replacements. We’re at dangerous levels of staffing as we sit today. We cannot continue to cut staffing. If you look at this historically, we’ve never been here before.”

Hobbie says he’s well aware of the criticism directed at CWLP in the community. “Nothing’s new,” he said. “It’s the same topic that’s been going for two or three years. We often view Springfield as being in a bubble, but this is a nationwide issue. The same thing is going on across the country. Anyone that owns generators right now is facing this. Springfield is not unique.”

Contact Patrick Yeagle at pyeagle@illinoistimes.com.