The Water Flows Like Money – Conclusion

It’s been a hot budget week in Texas. Big news is that the Legislature is moving to tap the Texas Economic Stabilization Fund aka the Texas Rainy Day Fund. Not that this action was not expected, but conservatives expected a thorough budget review of each department by expense line and to make cuts prior to agreeing to tap this fund. We are not even mid way through the session and lawmakers are caving in now. Empower Texans has a tight article on this and other Texas Government waste – http://empowertexans.com/issues/Drinking_From_The_RDF.  Now Teachers are being threatened with job loss and Texas is not even close to cutting the glut of administrators it has. The Ft Worth Star Telegram has a juicy article on this topic as sides are squaring off on the number of admins to teachers. http://www.star-telegram.com/2011/03/18/2933254/schools-dispute-conservative-groups.html. Regardless of who is right, we do know we need the teachers more than the admins. Sorry if you fall into the latter category.
 
The bottom line – Texas legislators have not whipped out the budget cutting knife yet. When and if they do, the Texas water authorities are a prime area of waste that always escapes the eyes of the media as well as budget committees. My ire is focused on the Brazos River Authority or the BRA for short.
 
One big Texas snow job in the fall
I left you last time with the weirdness of HB3793 and its impact on how monies can be obtained. I also showed you where the BRA still has 3.8 million in unspent bond money from a 2005 bond issue that still floors me that no one on the Board in under investigation. The final topping on this meat lovers pizza is how the BRA is running off revenue from the cleanest source of energy we can get and adding to water issues on the Brazos River.
 
The BRA Board of Directors held 2 meetings on the topic of de-commissioning the hydroelectric power units at the Morris Shepherd Dam at Possum Kingdon Lake on 10-25-2010 and again on 11-8-2010.  Here are the links: http://www.brazos.org/board_audio/10-25-2010-BOD10.mp3, http://www.brazos.org/board_audio/11-8-2010-BOD02.mp3. These are long, boring, and best listened to on a serious caffeine boost. Here is a summary of what these hour plus long boratoriums discussed:
  • The hydro units are a 1940’s Ford that need rehabilitation to make them work another 40 years. Cost 19.6 million
  • FERC fees and surveys will cost another 8.1 million to rehab, plus 12.7 million in fees over 40 years
  • Operating costs are estimated at 450000 a year
  • Interest on the rehab would be issued at higher rates (6.5 & 7.2%) because the work did not qualify for tax free bond. Add 62 million for interest.
  • Total project cost – 104 million
  • Estimated revenue from electricity sales from the hydro units starting at .047/kwh and end at .07/kwh at the end of 40 years would produce only 87 million in revenue and therefore the project must be scrapped.

Oh, there was plenty of ringing of hands and comments of “doing the right thing” and thus the reason for calling the November meeting. That meeting was a regurgitation of the first. This topic had been brought up a year earlier and the only reason decommissioning had not occurred then was that pesky lawsuit. BRA President Chris DeCluitt commented on the Board making this tough decision for the good of all, etc, etc.

Excuse me while I go wretch.

Where did you guys learn accounting and forecasting?
There are a couple of key components in the BRA math that I have to call bullsh@t on right away. Lets start with the basic accounting principle of depreciation. If you are going to present a cost model to folks, be complete. The rehab of the hydro units allow for depreciation on the books for the BRA. All assets depreciate and proper balance sheet accounting of assets requires the factoring of the depreciation of the asset. The BRA presentation makes no mention of depreciation in the model it uses. Why no mention of the 3.8 mill from the 2005 bond issue? That could offset some of the cost, correct? Is financing the project the best option when the BRA has 140 mill in the General Fund? I had to back up and replay that section a few times. BRA has 140 mill in the bank and we need 27 mill to rehab and pay fees to save 62 million in interest. The explanation on the interest rate of the bonds made sense and using the General Fund money, which is not making the interest the bonds would cost, is a smart move. So why not use it?  And how about that revenue projection! The BRA model starts at .047 cents per kilowatt-hour (.047/kwh) and only goes to .0768 over 40 years and thus projects a loss. Boys and girls, I want you to go pull out your electric bill and look under what you pay per kwh. Most everyone will be from .9 to .11 or higher in the Texas markets. Wholesale re-sellers of power are not making a nickel or more on the retail spread. It is usually 1 to 1.5 cents at best as a re-seller. That clouds what the low-end of the wholesale rate would be. Research I have done shows the low-end closer to .06/ kwh to start and that would bump the revenue on that alone. However, even if I give them the .047/khw for starting, if you think that a de-regulated market will only increase a little over 3 cents per kwh over 40 years – you’re on crack!

Energy & Growth in Texas that expose the revenue forecast from the BRA
Texas populations is around 25 million and is forecast to double in the next 50 years. Texas has some serious energy needs and will pull from every resource available to meet the demand. Oil, gas, nuke, renewable – it will all be used in the state and we may still not have enough. What expansion or closings of nuke facilities occur from how the Japan earthquake exposed serious issues with nuclear energy is difficult to gauge. However, you can bet permits will be few and far between for now. As such, we are going to be looking at lengthy, expensive construction processes of all forms of energy to meet demand. Does the BRA and its advisors think this will be free and will not push power costs upward? You can google this topic all day long and see where the trends are going, so don’t take my word for it.   Every forecast model in existence shows estimates of wholesale rates in excess of 10 cents per kwh or greater in the next ten years. The BRA estimate of income is conservatively off by 30%. Would an additional 30% of revenue changed the process of decommissioning? So, lets put forth what the BRA should have done:

  • 19.1 million in rehab cost and 8.1 million in FERC fees and surveys to get running again.
  • Take 3.8 mill from the 27.2 mill because that 2005 bond money has not been spent and is sitting somewhere.
  • Take 23.4 from the General Fund to save a boatload of interest.
  • Have 40 year revenues closer to 100 million which will cover the 12.7 mill in additional FERC fees and the 18 million in other operating costs. Gosh, could this help the budget????
  • Project makes money (even with depreciation), more power is returned to the Texas Power Grid, and the Brazos has help in a controlled flow again.

Golly, gee whiz Darren. Why won’t the BRA do this?
In my opinion it can only be because Luminant wants the water to stay at PK Lake for the Comanche Peak Nuclear Power Plant in GlenRose. When former State Senator Kip Averitt became chair of the Texas Natural Resource Committee in 2006 , he had a defined change in his path for Luminant’s prior owner TXU. TXU applied for the permits to build additional reactors at Comanche Peak in 2006 and they needed Averitt to help push through the Texas side of the legislation. It was not an expected move and most of this has been scrubbed from the web. Here is one post from a left leaning post at the time: http://salon.glenrose.net/default.asp?View=plink&id=1707. In that same year, TXU pushed for 11 coal plants, 5 of which were to surround Waco and were dubbed the Texas Ring of Fire. While only one ended up being built around Waco, it was apparent that Averitt was TXU’s bud. A year later, TXU sold Comanche Peak to Luminant and the new reactors potentially coming on-line with applications in the pipeline and friends in the Texas legislature made it an alluring deal. That was the same year that the BRA shut down the hydro units at PK Lake…… . The BRA Board was selected by Averitt for appointment….. 

Is keeping water at PK Lake help Comanche Peak better than having a greater flow down the Brazos for reactor expansion? I have not seen the benefit yet. If it’s there, please show me.
 

This is just one example
While I have chosen the BRA as the focus of my rant, they are not alone in poorly managed Texas water authorities. Texas has numerous water authorities like the BRA that operate  with very little apparent oversight to see what money is being spent on, how debt and assets are being managed, as well as prevention of killing revenue sources like the hydro units and the sale of electricity at PK Lake. I find it difficult to listen to any fiscal banter coming out of Austin right now when not one state legislator is reviewing these departments to get a real handle on what is going on.
Until that time, taxpayer dollars will continue to be siphoned out of our pockets and will keep the water flow of money moving on.

 

 

 

 

 

 

 

 
 
 

 

 

 

 
 

 

 

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