February 2013, Issue 68: Editors’ Notes

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An accelerating cash crunch means the CAP Board will have to make some very tough decisions about water rates this year.

Last month, we noted that increasing costs and lower demand for coal-fired power might unleash an acceleration in rates for CAP water after 2013. Not only does the CAP’s late-January budget briefing to its Board of Directors confirm this speculation, but it also proposes immediate action to address the growing deficit.

The latest CAP projections show that financial reserves are currently 25 percent lower than the Board-established target, with little hope of recovery in the next few years. Furthermore, these projections do not appear to consider costs for implementing EPA regulations at Navajo Generating Station, the coal-fired plant that provides nearly all of the CAP’s power. On January 18, the EPA proposed new emissions-reducing requirements for the NGS that are estimated to cost a minimum of $500M. During this year’s rate-setting process, which continues until June, the Board will find it difficult to avoid the conclusion that the current revenue-water rate structure is unsustainable.

The January brief recommended adjusting water rates starting this year to begin to compensate for the shortfall. The proposed approach includes increasing energy rates for all customer classes, which will require increasing the subsidy for agricultural customers.

If the Board leaves rates alone this year, some customers may be temporarily satisfied. However, financial problems will persist and grow, adding to uncertainty for the future. The next few months will reveal whether the Board plans to endorse a wait-and-see approach or pursue a more aggressive course to address its long-term structural revenue deficit.

The Board brief from the January 24 Finance Committee meeting is worthy of review by anyone involved in budgeting for future CAP water use.