Denton Municipal Electric’s new gas-fired power plant is expected to make money when it fires up this summer and next, but that’s because the bills for its $265 million in financing don’t come due until 2020.
After that, the power plant’s financial performance looks to be in the red.
How that financial performance will affect ratepayers remains to be seen. On Monday night, DME laid out a number of cost-savings plans for the next five years, including reducing the utility’s debt from nearly $1 billion to about $848.9 million by the end of next year.
The Public Utilities Board got the first eyes-wide-open financial projections for DME and the new power plant during a special meeting Monday night. The Denton City Council will receive the same presentation today.
DME General Manager George Morrow told board members forecasting the Denton Energy Center’s financial performance depends on a crystal ball that’s a little foggy.
“As the big generating units [coal-fired power plants] retire, that’s what’s generating the crisis now,” Morrow said, referring to fears of high electricity prices this summer.
ERCOT predicted tight supplies for the Texas electricity market earlier this year, fueling speculation electricity prices could spike this summer. DME expects to net about $20 million from the power plant in 2018-19 using conservative projections, Morrow said.
But by 2020, when the first full debt service payments come due, the plant is expected to operate at a loss. The first year’s loss is projected at $1.8 million. As the Texas electric marketplace settles in after all the changes happening now, DME’s financial projections show the power plant losing $12 million in 2023.
“We’re predicting that all the debt cannot be covered by market revenues,” Morrow said.
In other words, the new power plant may not make and sell enough electricity at a cost-effective rate to pay for itself.
Larry Lawrence, a consultant with Enterprise Risking Consulting, told board members that the Texas electric marketplace is going through one of its greatest periods of uncertainty in about 20 years.
“That makes it very challenging to make financial projections,” Lawrence said.
Previous consultants have told city leaders that the power plant may not make money if natural gas prices remained low, Lawrence said, adding that he agreed with that analysis.
In addition, Lawrence said he expected natural gas prices to remain low for the foreseeable future.
To manage that tough financial position, DME will pay back some bonds early and reduce the department’s debt, said Tony Puente, the city’s finance director. In addition, DME will pay cash for needed power lines and substations.
“For the next five years, we’re minimizing the amount of debt issued,” Puente said.
DME does not plan to increase its base rate for electric customers next year. It will also suspend charging the statewide transmission costs directly to ratepayers.
The net effect for the average residential customer could be a lower electric bill, from the current average of $129.26 to a projected $124.74, Morrow said.
Costs would also go down for commercial customers, he added.
But DME also recommended that the Public Utilities Board and City Council change the way the city charges its energy cost adjustment (ECA) rate on future utility bills.
For next year, the ECA charge wouldn’t change, Morrow said. But in the coming years, the cost of running the new power plant would become part of the ECA charge on the bill.
When the new power plant makes money, those earnings would get passed on to the customer in the form of rate relief, Morrow said.
But when the power plant loses money, the effect was less clear. The board’s vice chairwoman, Susan Parker, asked that the Public Utilities Board be able to review that information often, perhaps quarterly.
“I’d like to see that ECA charge come back [to us] often,” Parker said. “I expect volatility there.”
The Denton Energy Center is about 98 percent complete and construction is ahead of schedule, Morrow said.
The power plant is preparing for its emissions testing, which should be completed before the end of the month. The plant is expected to be operating commercially early this summer, Morrow said.
Other rate reductions ahead
Other city utilities are also shelving some capital improvement projects for a while, paying down debt and providing some relief to ratepayers.
Although budget talks have just begun, utility officials have tentatively planned on a 2 percent reduction in water rates and a 5 percent reduction in sewer rates next year.
The city’s solid waste department adopted a rate reduction earlier this year. City Manager Todd Hileman said it’s possible another reduction could be proposed from that department for next year.