A review of public documents show that Public Works Wheeler, City Attorney McSherry, and Finance Director McCoy grossly overestimated the cost savings associated with the Dalkia streetlight project. Each promised that the project would pay for itself in six years, with future savings accruing to the city’s benefit. A correct accounting shows that project savings will require at least 17 years to pay-off the loan financing the project.
Today we review the cost savings associated with the Dalkia streetlight upgrade. Tomorrow we discuss the discrepancy between our estimate and the estimates made by Wheeler, McSherry, and McCoy, pointing toward the likely origin of their overestimate of savings.
Introduction: Financing the Streetlight LED Upgrade
In February 2021, Santa Fe entered into a contract with Dalkia, LLC, to upgrade 3,355 of the city’s streetlights to LEDs, and to maintain them for 15 years. The up-front after-tax capital expense of the streetlight upgrade is approximately $2,880,000. The resolutions approving the Dalkia contract and financing were both introduced by Mayor Webber.
The city is financing the cost of the upgrade as part of an 18 year loan from Sterling National Bank. That loan, which is for a substantially greater amount, is also financing the capital expenses associated with a separate project with a different contractor. For this discussion only the $2.88 million committed to the streetlight upgrade is relevant. The total cost of the loan for the streetlight upgrade only – principal plus interest – is approximately $3,530,000.
The streetlight upgrade part of the Sterling Bank Loan is secured by the streetlights themselves: after the upgrade, these will be owned by Sterling National Bank and leased back to the city under a lease-purchase agreement. When the cost of the loan is paid off the city will once again own the 3,355 converted streetlights.
As part of the approval process for the loan and the Dalkia contract, Public Works Director Wheeler wrote in a memo to the Governing Body that the streetlight project’s “on-bill electric savings will pay for the conversion” by Dalkia. In the same memo Director Wheeler estimated those savings as $550,000/yr.
Every proposed bill or resolution brought before Santa Fe’s governing body requires a Fiscal Impact Report, describing the the proposal’s direct impact upon the City’s operating budget. The purpose of these reports is to assist the City’s oversight committees and the Governing Body in deciding upon the bill or resolution. Following the preparation of these reports, presumably at the direction of the City Finance Director, they are reviewed by the City Attorney and Finance Director, who must sign them before they are presented to the oversight committees and Governing Body. In the Fiscal Impact Report addressing the Dalkia streetlight upgrade and its associated financing, City Attorney McSherry and Finance Director McCoy asserted “[t]he fiscal impact of the streetlight upgrade and the maintenance will generate savings over the current contract with PNM that will pay for capital expense in six years, yet the City will be financing the purchase 15 – 18 years.”
Payments on the Sterling National Bank loan are made every six months. To meet the “six year” pay-off commitment made by City Attorney McSherry and City Finance Director McCoy the City must realize costs savings from the streetlight project of approximately $3,530,000 in either 12 or 13 payments, which requires annual savings of between $543,000/yr and $588,000/yr. A 6.5 year pay-off is consistent with both the “six years” of the McSherry/McCoy Fiscal Impact Report and the savings estimate made by Public Works Director Wheeler.
What are the Savings? A Summary Overview
Here we summarize the cost savings associated with Dalkia’s conversion of the 3,355 city streetlights. Details and links to relevant documents are provided in the sections that follow.
Savings can accrue from two places: reduced utility cost savings associated with the more efficient streetlights, and other conservation-related costs savings – e.g., maintenance costs – associated with the new lighting.
The Dalkia contract shows the city’s street light energy use before the streetlight upgrade and the energy savings promised by Dalkia. From these and the PNM charge for streetlight energy use the utility cost savings available if Dalkia meets its energy savings target is calculated to be approximately $209,000/yr.
Prior to the upgrade of the 3,355 city-owned streetlights, the city paid maintenance and other connection related charges to PNM. After the upgrade the city is paying maintenance charges to Dalkia, and reduced connection related charges to PNM. The difference in the amount the city will pay to PNM for the city-owned streetlights Dalkia is converting is $211,000/yr. (These costs and cost savings are described in a spreadsheet provided by PNM to Public Works Director Wheeler, which we obtained in response to a public records request.) The after-tax cost of the Dalkia maintenance contract is $194,000/yr. The difference between the $211,000 no longer be paid to PNM and the $194,000 that will now be paid to Dalkia ($17,000/yr) is the total conservation-related cost savings.
The total savings – utility cost savings and conservation-related cost savings – is thus $216,000/yr: less than 40% of the savings promised by Director Wheeler, City Attorney McSherry, and City Finance Director McCoy.
As we discuss below, the city ordinance authorizing the Sterling Bank Loan did not pledge the $17,000 in conservation related savings to the loan payback; so, only $209,000/yr is potentially available to pay-off the loan. Assuming all these savings do materialize the loan financing the lighting upgrade will not be paid off for 17 years, which is far in excess of the 6 years promised by Wheeler, McSherry, and McCoy.
As an aside, even if the new streetlights were “magic” and guaranteed to consume no electricity, there would be no more than $370,000/yr in utility cost savings available to pay-off the loan financing the project, far short of the $550,000/yr promised to the city councilors by Wheeler, McSherry, & McCoy.
A more detailed discussion of these estimates follows.
Guaranteed Utility Savings Contracts
For the protection of taxpayers, state law requires cities like Santa Fe live within their annual tax-base incomes: i.e., each year’s expenses must be paid with that years tax and other revenues. Under ordinary circumstances the large up-front cost of major energy conservation measures make it difficult – in many cases, impossible – for a city to make the necessary investment.
In 1978 the State Legislature, recognizing the importance and benefits of energy conservation measures, and the significant up-front costs of implementing these, authorized municipalities like Santa Fe to enter into what are referred to as “guaranteed utility savings contracts.” In these arrangements the contractor agrees to guarantee that the energy efficiency measures they implement will generate sufficient utility cost savings, and other conservation-related cost savings, to fully finance the conservation measures. The law allows the city to commit certain future cost savings to paying-off the financing required to fund the work. The law governing these contracts and their financing is found in NM Stat §6-23-1 to -10.
As City Attorney McSherry has pointed out, the Dalkia contract is a guaranteed utility savings contract.
Unless carefully managed, guaranteed utility savings contracts can expose taxpayers to unacceptable risks. NM Stat §6-23-8, titled “Municipalities; use of certain revenues authorized,” appears to be especially germane to this discussion of the financing of the Dalkia contract. In a plain reading of NM Stat §6-23-8 three requirements stand-out:
- Entering into a guaranteed utility savings contract requires an ordinance or resolution of the Governing Body that specifically designates the source of the revenues the city may pledge to pay-off the contract financing;
- Only “utility cost savings”, “conservation-related cost savings”, or otherwise uncommitted revenues from gross receipts taxes may be pledged; and
- The municipality may not use any revenues not named in the ordinance to pay-off the project’s financing.
NM Statute §6-23-2 defines what is meant by “utility cost savings” and “conservation-related cost savings.” The definitions are short, straight-forward, and worth quoting in their entirety:
- “‘utility cost savings’ means the amounts saved by a governmental unit in the purchase of energy or water that are a direct result of energy or water conservation measures implemented pursuant to a guaranteed utility savings contract;” and
- “‘conservation-related cost savings’ means cost savings, other than utility cost savings, in the operating budget of a governmental unit that are a direct result of energy or water conservation measures implemented pursuant to a guaranteed utility savings contract.”
What did the City Pledge Toward the Financing?
As highlighted above, NM Stat §6-23-8 requires that the city specify, by resolution or ordinance, exactly which funds will be pledged toward the cost of financing of a guaranteed utility savings contract. Santa Fe did so in city ordinance 2021-05. For the streetlight project the ordinance pledged only the electricity utility cost savings of the Dalkia component toward payment on the lease-purchase agreement. (See ordinance §1 Definitions, “Pledged Revenues” page 8 line 25, and “Utility Cost Savings” page 10 line 1, and §7 Special Limited Obligation, pg 13 beginning line 7. Also, for what it is worth, see the “whereas” clause beginning page 5 line 7: note that energy cost savings are noted, and water conservation-related savings are noted, but not energy conservation-related savings: while not binding, the whereas clause is indicative of an intention.) Note especially that no electrical conservation-related cost savings or other city revenues are pledged and that, in the language of NM Stat §6-23-8, “the municipality shall not use any other revenues to make such payments.”
What are the Streetlight Utility Cost Savings?
As highlighted above, the utility cost savings associated with the streetlight project are the amounts saved in the purchase of electricity that are a direct result of upgrade associated with the Dalkia contract.
The Dalkia contract covers the conversion of 3,355 city-owned streetlights. Contract Appendix 3A to Schedule 3 identifies the guaranteed energy savings on those streetlights as 2,234,042 kWh/yr (“Ke”: see page 57). To convert those energy savings into dollar utility cost savings we must consider the cost of the electricity required to power these lights. The total cost of the electricity charged to the city by PNM has three contributions, each set by the New Mexico Public Regulation Commission (PRC): Rate 20, Rider 23, and Rider 36.
- Rate 20 specifies the base per-kWh energy cost for streetlight service. It is adjusted periodically and is currently set as $0.0561839/kWh.
- Rider 23, also known as FPPCAC, is an additional per kWh energy charge authorized by the PRC to allow PNM to recover or refund, as appropriate, additional fuel costs above or below the base fuel cost in Rate 20. It is currently $0.0354238/kWh. Presumably because a certain fraction of power provided by PNM is provided by renewables and is not fuel-related, FFPAC is currently charged only on 81.7% of the kWh used by the streetlights.
- Rider 36 covers the per-kWh costs associated with renewable energy resources: e.g., wind & solar energy production. It amounts to $0.008816/kWh and is charged on 100% of the energy used by the streetlights.
From the Dalkia guaranteed energy savings and the PNM/PRC utility rates, the utility cost savings available if Dalkia meets its energy savings target is equal to $209,000/yr.
What are the Streetlight Conservation-related cost savings?
The city ordinance authorizing the streetlight project financing is clear that only the electrical utility cost savings will be used to finance the Dalkia component of the Sterling National Bank loan. For completeness, and because it will be important when we discuss the Wheeler/McSherry/McCoy promise tomorrow, we include here an estimate of the streetlight project’s conservation-related costs savings.
New Mexico Statute §6-23-2 defines conservation-related costs savings as “cost savings, other than utility cost savings, in the operating budget of a governmental unit that are a direct result of energy or water conservation measures implemented pursuant to a guaranteed utility savings contract.”
There is a PNM charge for every streetlight connected to municipal power. The amount of the charge, which can be found in PRC Rate 20, depends on each streetlight’s rated wattage. The newer LED streetlights all operate at a lower rated wattage than do the streetlights they are replacing. Correspondingly, the difference appears to qualify as a conservation-related cost savings.
In addition to this “connection charge,” prior to the streetlight upgrade the city contracted with PNM for the routine maintenance of the 3,355 city-owned streetlights covered under the guaranteed utility savings contract. That maintenance charge for each streetlight depends on the type of streetlight (e.g., LED, high-pressure sodium, mercury vapor, etc.) and its rated wattage. The connection charge is folded-in with the maintenance charge when maintenance is contracted to PNM. Following the upgrade streetlight maintenance will be contracted with Dalkia.
The difference in the maintenance and connection charges paid to PNM before and after the upgrade is $211,000/yr. The after-tax cost of the Dalkia maintenance contract is $194,000/yr. The difference between these – $17,000/yr – is the total conservation-related cost savings. The calculations leading to this estimate are found in the “Conservation-related $ Savings” tab of the attached excel workbook. (The details in this workbook are based on the current PNM/PRC Rate 20 and a spreadsheet of costs provided by PNM to Director Wheeler and received by us in response to a public records request, which will be described in more detail in tomorrows post.)
Note that the streetlight project’s conservation-related cost savings of $17,000/yr are negligible compared to the utility cost savings.
On behalf of Mayor Webber, Public Works Director Wheeler, City Attorney McSherry, and City Finance Director McCoy each assured Santa Fe’s Public Works and Utilities Committee, Finance, Committee, and Governing Body that savings from the streetlight LED upgrade project would generate at least $550,000/yr in savings and that these savings would, upon authorization of the loan financing the project, pay-off the capital expense of the upgrade project in 6 years.
In fact, the Dalkia project will provide at most $226,000/yr in savings. Furthermore, the actual savings pledged by the city in the ordinance authorizing the financing – $209,000/yr – are barely sufficient to pay-off the capital expenses of the streetlight conversion over the 18 years of the financing.
This is no small error: in presenting this estimate, Public Works Director Wheeler, City Attorney McSherry, and City Finance Director McCoy substantially misinformed two city oversight committees – Public Works and Utilities Committee, the Finance Committee – and the Governing Body.
Where did the Wheeler/McSherry/McCoy gross overestimate come from? Spoiler Alert: it’s not pretty.