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Utilities payment formula shortchanging Colorado Springs millions of dollars

June 16, 2017 Updated: June 17, 2017 at 7:28 am
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A loader moves coal outside Colorado Springs Utilities' Drake Power Plant in Colorado Springs in this 2008 photo. (Christian Murdock, The Gazette)

The formula determining Colorado Springs Utilities' annual payment may have cost the city $17 million over the past six years and could continue shortchanging it because there's no adjustment for inflation.

The money could have been used to chip away at a number of issues now appearing on a packed 2018 budget, including adding to the city's police force and revitalizing the city's aging vehicle fleet, Mayor John Suthers said.

On Wednesday, Suthers asked Utilities Board members - composed of city council members - to re-examine an annual payment Utilities makes to the city, covering what it would pay if it were not municipally owned. Since 2010 those payments have been relatively stagnant, hovering around $31 million, he said.

This year's payment was originally estimated to be more than $32 million, but that has been cut back to the $31 million range, Suthers said.

A review of those payments by The Gazette showed that, depending on the inflation rates applied, the city lost between $11 million and $17 million in purchasing power between 2010 and 2016. City Budget Manager Charae McDaniel confirmed the paper's estimate Friday.

The Utilities Board will discuss Suthers' request next week.

The city has received annual payments from Utilities for as long as the two entities have been around, Suthers said. Each year the money is deposited into the city's general fund.

"Basically payment in lieu of taxes," he said. "If we had a private utility like Xcel, they would be paying property taxes, sales taxes, things like that."

The way the payment, called a surplus, is calculated has changed over the years. In 2010, the city opted to use a volumetric formula, which takes into account how many kilowatt hours of electricity and how many cubic feet of gas utilities customers use each year.

For a number of reasons, that formula has not allowed the annual surplus payment to grow alongside Utilities, so the city is shorted each year, Suthers said. The formula is what he'd like Utilities to reconsider.

Though the number of Utilities customers has grown since 2010, they're using less energy, Bill Cherrier, chief planning and finance officer for Utilities, told the board Wednesday.

"We really encourage people to use less electricity, less gas, less water," said Utilities Board member and City Councilman Don Knight. "We're in a very funny business in utilities, where we're encouraging people not to buy our product."

In addition, energy efficiency education and more economical technologies, like LED lights, have kept the volume of utility's sales down, Knight said.

Despite that, Utilities is taking in more revenue because its customers and rates have increased since 2010, Suthers said, while the city's cut has stayed the same.

In that same time span, inevitably, inflation has decreased the purchasing power of a dollar. A $31 million lump sum won't stretch as far in 2017 as it would have in 2010.

Whatever the total amount of lost purchasing power is between 2010 and 2016 is gone for good, Knight said. Trying to catch up to what the surplus payment should be - he estimated between $43 and $48 million - at this point would cause a hike in Utilities rates, unduly burdening customers, he said.

Rather, the city needs to cut its losses and account for growth and inflation from this point on, Knight said.

"We're just going to go forward from here, starting with the formula we have now and apply an inflationary factor in there or find out what a PILT (payment in lieu of taxes) equation would be," he said.

With that in mind, Suthers suggested using either national or statewide inflation numbers, respectively called the Consumer Price Index and the Denver-Boulder-Greeley Consumer Price Index, to find a new formula that properly compensates the city.

Because inflation rates vary from year to year, Suthers also threw out the idea of a price cap, limiting the amount the surplus would grow each year. He said 3 percent might be a reasonable cap.

Knight said the cap would be his biggest concern.

"My biggest concern is capping it so we do not put an unfair jump or an undue burden on CSU customers with a large rate increase just because the economy does well," he said.

"We want to stair step this, so there are no rate increases if at all possible," Utilities Board Chair Tom Strand said.

For the 2018 surplus, Suthers estimated Utilities might have to cover an additional $600,000, while acknowledging that number could fluctuate.

Whether there will be an increase in Utilities' surplus payments remains to be seen, Strand said. The utility's board meets Monday and will vote on whether they want to direct city staff to re-examine the formula.

Suthers asked the board to see if they could find a new formula by July 15.

"That might even be a little bit aggressive," Knight said. "But as long as our finance folks on both side of the street, CSU and city side, know that the fee is going to increase with inflation in 2018, whatever it is, we can plan for it."

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