UPDATE: May 6, 2020: Pueblo voters shot down city leadership's efforts to form a municipal utility, with 19,727 against the measure and 5,930 for it as of Tuesday evening, The Pueblo Chieftan reported.

Dive Brief:

• Pueblo, Colorado, is set to vote Tuesday on whether it should leave the service of investor-owned utility Black Hills Energy and instead form its own municipal utility.

• Black Hills estimates that forming a municipal utility would cost the city at least $402 million in acquisition and transaction costs. But Pueblo, in its own feasibility study, found ratepayers would save money through leaving the IOU, because of lower operation, capital and power supply costs.

• High power bills are what motivated the city to begin exploring the exit in the first place, as Pueblo officials have become concerned in recent years about rate hikes granted to the utility by Colorado regulators. The city of 111,000 also has a goal of reaching 100% renewable electricity by 2035, and Pueblo officials think forming a municipal utility will create an easier path toward that goal.

Dive Insight:

Efforts to form a municipal utility began several years ago, prompted by concerns from social services and religious groups about high electric bills, Pueblo Mayor Nick Gradisar told Utility Dive.

The South Dakota-based IOU first expanded into southern Colorado in 2008 and quickly began requesting rate hikes from state regulators to build out new gas plants, transmission upgrades and other investments. Residential customers in Pueblo pay an average of $0.16/kWh, 41.97% greater than Colorado's average electricity rates and almost 40% greater than the national average, according to Electricity Local which tracks local electricity and usage rates across the U.S. City officials say the municipality cannot afford those rates .

"Pueblo's sort of a poor community, 25% of our people live at the poverty level or below," said Gradisar. "So it became a real problem for the charitable organizations that try to help people with their utility bills … and Black Hills was not responsive to the elected officials in terms of trying to work with the community to change the policies or to lower the rates." And the utility's shutoff policies are "Draconian," he said.

Black Hills spokesperson Julie Rodriguez told Utility Dive the utility is in the top quartile for reliability, and that it has made strides to reduce customer bills.

"Black Hills Energy is an integral part of Pueblo's economy future through our economic development recruitment efforts, our contributions to low-income energy assistance, significant charitable support toward education and youth programs and our energy expertise," she said in an email. "We remain committed to lowering costs for our customers and helping our customers manager their energy usage is a top focus. In fact, our customers' bills today are the same or lower than in 2012."

The utility entered into a 20 year franchise agreement with the city in 2010, but under Colorado law, cities have the opportunity to exit those agreements at the 10 and 15 year marks. On Tuesday, the city will decide whether they want to flee the franchise early.

If that happens, the city's Board of Water Works will take over the local distribution system. Though immediate rate reductions are not guaranteed, the city's feasibility study found Black Hills' rates could decrease by 10-14%, under conservative estimates. Ratepayers won't have to pay for the takeover as long as the cost to acquire assets remains under a $900 million to $1 billion range, said Gradisar.

"There's no doubt that there'll be rate reductions. How quickly they occur, I think remains to be seen," he said.

Black Hills, for its part, estimates annual residential electric bills could rise $138 in the first year and up to $330 some 20 years from now "because the city's estimated cost to operate the system will be $38 million more per year on average than Black Hills Energy's operating costs over the same period."

"It is understandable that people are searching to save money, unfortunately a municipal utility takeover is too risky and too costly," said Rodriguez, citing the study. 

But Gradisar disputes Black Hills' numbers, noting the utility uses historic power prices to forecast power prices. Meanwhile, Pueblo requested information from companies that supply energy to cities, to get future price estimates for various energy portfolios. In one scenario, they found a 70% renewable energy portfolio would cost $25 or $30 less per customer than what the city is currently paying Black Hills. And a higher level of renewable energy is exactly what the city is aiming for in its 2035 goals for 100% renewable power.

"We believe that this effort can enhance that [goal] because it will allow us to go to the market and get bids from energy companies that have large renewables in their portfolio," said Gradisar. Black Hills generation portfolio currently includes 400 MW of oil-fired power plants, plus a 100 MW oil-gas hybrid, 348.5 MW coal, 442 MW gas and 50 MW of wind.

It's in the process of adding 200 MW of renewable energy in southern Colorado, which Rodriguez said can also help save customers money and will bring that territory to 65% renewables by 2023. The project selections and projected savings are expected to be announced in July.

"Giving the city a voice and giving them their own say in where their energy comes from is a step in the right direction instead of having to be handcuffed to a utility and just hoping that they do the right thing, but not really being able to have a say in anything that they do," Sierra Club Colorado chapter spokesperson Vanessa Cordova told Utility Dive.

Boulder, Colorado, has also been working toward exiting the service of Xcel Energy and forming its own municipal utility, in an effort to get more control over its resource mix. Chicago has also considered taking over Commonwealth Edison's assets and San Francisco last year offered Pacific Gas & Electric $2.5 billion to take over its grid.