January 2013, Issue 67: Editors’ Notes

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Increasing costs and lower demand for coal-fired power are unleashing a possible acceleration in CAP rates after 2013.

Data for this analysis came from a recent financial review prepared for the CAP’s Finance, Audit, & Power Committee.

Recent financial reports from the CAP reveal that some unexpected developments in the power market — specifically, developments related to Navajo Generating Station power — portend future increases in water rates. NGS, which supplies over 90 percent of the CAP’s power, is costing more in response to rising prices for coal, increasing emission-control requirements, and more demand for water deliveries (mostly to federal customers). On top of this, soft market conditions have resulted in lower-than-expected revenues from sales of NGS “surplus” power. Unpredicted even a couple of years ago, several factors — the low cost and increased availability of natural gas and the increased regulatory pressure on coal — have mostly erased the net revenue that was expected from the sale of NGS surplus power.

The CAP is in a unique position as the only federal Reclamation project that includes (and depends on) a coal-fired power plant, and this operation figures prominently in CAP’s debt repayment strategy. Because of reduced revenues from surplus NGS power sales in 2012, the fund that contributes to repaying the federal government for building the CAP currently has $10.7M less than anticipated. With continued reductions in NGS revenue, the debt repayment burden will need to be shifted back to the capital charge paid by the CAP’s M&I customers.

Additionally, for 2012, the CAP projected that $12.7M will be needed from SO2 credits and strategic reserves to maintain its adopted rates. This is a stop-gap solution, however; in future years, if the combined trend of a soft energy market and increasing power costs continues, the rate increases for all CAP customer classes — federal, M&I, and agriculture — will likely be higher than projected. The table below shows current projected rates.

CAP Water Rates (Firm & Projected), adopted June 2012, in $/AF

2012 firm 2013 firm 2014 provisional 2015 advisory
Capital charges $15 $15 $16 $17
Delivery charges
Fixed OM&R $73 $76 $79 $83
Energy Rate $49 $53 $59 $66
Total delivery cost $122 $129 $138 $149

Note that M&I subcontractors pay capital charges regardless of whether water is delivered; on the other hand, delivery charges only apply if water is actually delivered. Delivery charges include energy and fixed operations, maintenance, and replacement/reserve (OM&R) costs. In 2012, long-term subcontractors in the sector paid $122/AF for water delivery. Agricultural users pay only energy costs ($49/AF, which could be reduced to $43/AF with various subsidies).

So what does the future hold for CAP customers? Per Board policy, the 2013 rates cannot be changed. However, in 2014 and beyond, the Board may need to increase both capital and energy charges more rapidly than indicated by current projections, which would affect all customer classes. In addition, as energy costs rise, ag subsidies may need to be increased to keep CAP water affordable to these customers. Alternatively, there may be interest in waiving the requirement for irrigation districts to use all 400,000 AF in the “ag pool” before they can accept water as groundwater savings facilities. Because removing some portion of this requirement would free up supplies for other excess water users, interesting alliances could emerge.