Memorandum
City of Lawrence
Finance Department
To: Dave Corliss, City Manager
From: Brian Watson, Assistant Finance Director
Date: September 4, 2012
Subject: Cost Benefit Analysis for Purchasing Westar Energy Leased Streetlights
The City provides street lighting throughout Lawrence with lights installed, owned, operated, and maintained by Westar Energy. The utility owns 3545 streetlights and bills the City for their use at over $500,000 a year to provide this service.
In response to the recommendation by City Auditor Michael Eglinski that the City Manager should evaluate the feasibility of acquiring the street lights from the utility company, staff has prepared an analysis to determine the cost benefit for purchasing Westar Energy Leased Streetlights. This analysis was done to determine an estimated purchase price of the system and to determine whether or not it would be economically viable long-term for the City to operate such a system.
When calculating the cost component of the cost benefit analysis, six factors were taken into account; the overall purchase price of the system, the yearly maintenance and repair costs for the poles and bulbs, the average yearly new infrastructure cost for new system expansion, the yearly metering fee, the yearly administrative costs for City employees to field calls and create service tickets and the yearly bond interest cost.
- The Overall Purchase Price
At the end of 2011, the new book value of the overall leased streetlight system was $2,856,728. Assuming Westar Energy was to sell the system at the book cost, the average cost per pole would only be $797 dependent upon the mix of steel versus wood poles. In comparison, The City of Lenexa paid $899 per pole in 2008 and The City of Leawood is expected to pay $1,027 per pole in 2012. The mix of pole types in these cities is likely different from Lawrence.
- Yearly Maintenance Cost
Based on industry averages as determined by Burns and McDonnell, the yearly maintenance cost is expected to be $50 per pole or $177,250 total cost for all 3545 poles. This service would likely be subcontracted to an outside agency and would cover any necessary repairs to the streetlight poles and replacement bulb changes needed.
- Average Yearly New Infrastructure Costs
On average, Westar Energy has been adding $182,303 in additional infrastructure costs to the system yearly. This fee is comprised of the costs for new wood or metal poles in addition to installation costs and additional costs to relocate service poles. The City would be required to cash flow all new infrastructure additions upfront as compared to paying Westar Energy for it over time through monthly billings. Part of this new system expansion could be billed back to developers or landowners.
- Yearly Metering Fee
Westar Energy currently charges $19 per pole to meter energy consumption. The Public Works Director estimated that on average, we could chain at least 8 poles together to reduce costs resulting in a per year metering fee of $101,033. However, the actual number of meters required to measure usage has not yet been determined. This fee should be a strong negotiation point since it is something Westar Energy wants to require of the City.
To reduce this cost the City of Lawrence could model what the City of Lenexa developed when the City purchased their leased streetlights. The City of Lenexa metered each unique fixture and bulb combination to determine standards costs for poles that had the same head fixture, bulb, and base. By doing so, the City of Lenexa could measure the energy consumption of each type and KCP&L would charge the same rate for the remaining poles without requiring that the poles be individually metered. However, KCP&L also required the City of Lenexa to begin metering each new hook-up after the system was purchased incurring additional costs to the yearly infrastructure of the system.
- Yearly Administrative Cost
The $55,000 administrative costs incurred would be to employ at least one full time employee with benefits to field calls and create service tickets for citizens. This cost would also include additional time required of Public Works staff to oversee the operations of this newly created position in addition to verifying that all work completed by the outside maintenance vendor has been performed to City standards and citizen satisfaction. In addition, office space and equipment would be required.
- Yearly Bond Interest Cost
Using the interest rate percentage as a guideline from the City’s last bond sale, the calculated average per year interest cost would be $31,872 for 20 years.
The benefit component of the cost benefit analysis takes into account the yearly cost savings on Westar’s material and maintenance that they are currently charging us in our monthly billings. Westar Energy bills the City approximately $25,408 a month for maintenance and new infrastructure costs of $304,896 a year. This maintenance and new infrastructure costs would only be partially offset by the City through the new subcontracted yearly maintenance cost of $177,250 and average yearly new infrastructure costs of $182,303.
Staff has calculated the initial purchase price of the system to be $2,856,728 based on the current book value of the system as given by Westar Energy. The cost benefit analysis assumes a dynamic system matrix where the value and cost of the system will continue to increase annually due to additional yearly costs such as maintenance, new infrastructure costs, metering fees, administrative costs and bond interest costs. It is estimated that the additional costs to maintain the system beyond the initial purchase price of $2,856,728 will be $242,562 per year.
The yearly cost of $242,562 may decrease over time as the interest on the bond payment decreases, the yearly metering fee is reduced or eliminated by using alternative metering methods, and the yearly infrastructure costs are more closely monitored and controlled. However, any additional savings could quickly be eroded by increasing administrative costs and increasing maintenance costs through inflation over time. Additional cost savings could be realized by looking into alternative energy reduction sources like the use of LED lighting that will work to reduce the second component of the overall system cost, the cost of energy use, and may result in a net savings to the City of Lawrence. However, the cost of LED lighting is significantly higher than the bulbs currently installed.
It is staff’s recommendation at this time that the purchase of leased streetlights from Westar Energy not be pursued. Staff believes that it would not be economically viable long-term for the City to operate such a system due to the potential additional yearly cost of $242,562 above the initial $2,856,728 purchase price of the leased streetlight system to the City.
Staff would recommend that interim steps be implemented in an attempt to continue to monitor this project for future potential costs savings. The first interim step would be to work with Westar Energy to determine the cost and potential timing requirements to meter unique streetlight types in an attempt to derive an established standard charge rate for similar lights throughout the system. The second recommended interim step would be for staff to consult with Kansas Corporation Commission (KCC) to determine the best approach for ensuring consistency in non-metered streetlight usage among Kansas electrical providers.
