SDS Connection to Pueblo Dam

Editor’s Note: This is the first in a multi-part series about the growth of Colorado Springs Utilities. Next week, challenges of the large-scale operations, Environmental Protection Agency mandates about coal and political opposition to the Drake Power Plant.

There is a company that has been headquartered in Colorado Springs since it was founded 91 years ago. It has thrived ever since, maintaining market share and selling its services every day to Colorado Springs residents. When launched in 1924, the company’s local customer base was less than 30,000 — today, that base has grown almost twentyfold.

With 2015 forecasted total assets of $4.6 billion, operating revenues of  $928 million, and cash/cash equivalent balances of $322 million, the company is vastly larger than any other locally based enterprise. It dominates its market as few local companies ever have or ever will.

Depending on the perspective, the company has either 465,000 shareholders or only one. The shareholders periodically elect an unpaid nine-member board of directors, none of whom are required to have any expertise in the various business operations of the organization.

Its parent company and nominal owner spun it off 22 years ago, and has since received what amounts to an annual dividend that has grown from $14 million in 1993 to $32.4 million in 2015.

Its market penetration: 100 percent.

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Behold the behemoth: Colorado Springs Utilities, the third-largest, four-service municipally owned utility in the United States.

Today’s CSU is born

Until 1992, CSU operated as a city department under the direct control and supervision of the Colorado Springs city manager. It wasn’t a particularly good fit.

Unlike other departments, CSU didn’t rely on tax revenue. The organization sold its indispensable services at fixed rates that were (at least in theory) determined by City Council acting as the Utility Board. If you wanted water, sewer service, natural gas or electricity, you had to pay based on use. CSU’s culture was that of a monopoly provider dedicated to system expansion, managed by employees with market-unique, specialized skills and fed by frequent borrowing in the financial markets.

CSU’s operations were unconstrained by TABOR, which began as a voter-initiated 1991 amendment to the City Charter. The measure’s arcane revenue limitations didn’t apply to an enterprise that received no tax funding, but it emphasized the growing administrative gulf between the two entities.

During Bob Isaac’s multiple terms as mayor, the difference between the laws the city was forced to abide by and the relative freedom of CSU weren’t really a problem — the two entities worked together.

“I think part of that might have been the personalities,” said Randy Purvis, who first served on Council from 1989-1999. “Isaac and (Utilities Director) Jim Phillips got on so well.”

Although Isaac had no defined administrative role in city government, City Manager George Fellows well understood that Isaac had the unquestioning support of Council on most issues, particularly those concerning Utilities. Every Monday morning, Isaac would meet in his office with Fellows, Phillips and the city’s CFO to decide on the week’s business. Council, as Mary Lou Makepeace found out when she first took a seat on Council, was expected to rubber-stamp the Mayor’s decisions.

“If you don’t know which way you ought to vote on an issue,” she was advised by her colleague Frank Parisi, one of the mayor’s principal allies on Council, “just ask Bob.”

As Isaac’s influence waned, a majority of Council agreed to refer a charter amendment to the voters that would make the Utilities director a Council appointee, thereby removing CSU from any but Council oversight — and hopefully increasing the power and influence of City Council.

The amendment passed easily, making CSU a de facto stand-alone, unsupervised and unaccountable entity. Bond underwriters recognized this, even if voters and elected officials didn’t.

In the preliminary official statement of a $48.9 million Utility System Revenue Bond issue dated Aug. 1, 1995, the underwriters discussed CSU’s management and governance: “The Utilities director manages the Utilities. Major policy decisions are subject to the approval of City Council.”

Colorado Springs Utilities’ water collection, storage and transmission system extends hundreds of miles across the state.
Colorado Springs Utilities’ water collection, storage and transmission system extends hundreds of miles across the state.

Politics and inexperience

While dozens of city councilors have come and gone during the last two decades, CSU has had comparatively little upper management turnover. Water Services Chief Gary Bostrom recently retired after 36 years with the organization, and his long tenure is scarcely unusual. CFO Bill Cherrier has worked at CSU since 2005; CEO Jerry Forte joined the company in 2002 as its COO, while Chief Customer and Corporate Services Officer Carl Cruz joined the company in 2000.

Such lengthy careers are common throughout the company. CSU pays well, and its employees, unlike those of its municipal parent, are seldom vilified by angry taxpayers.

And while Council retains authority over major policy decisions, it rarely exercises that authority, preferring to defer to managerial scripts. Yet utility managers are often constrained by long-term plans and projects that cannot be easily altered.

Projects such as the Southern Delivery System may take 20 years or more, while the continuous upgrading and expansion of wastewater, gas and electric infrastructure must continue on a daily basis. Systemic shortcomings in utility performance might escape Council notice, unless members are tipped off through informal networks.

Many major policy decisions escape public debate, since issues don’t come with labels — unless politicized. What once would have been a dry, technical cost/benefit analysis about the fate of the Drake downtown power plant became an all-out battle driven by competing national players, and it’s far from over. Council has also had extensive debates about the propriety of CSU’s contributions to various nonprofits and about solar tax credits — yet complex and arguably more important matters attract little public attention.

The past drives the present

Twenty years ago, CSU had total assets of $1.58 billion, long-term debt of $677 million and a debt service coverage ratio of 3.10. By 2015, the company’s assets had tripled, but so had outstanding debt, estimated to stand at $2.468 billion by year’s end. Such consistently high debt levels are manageable at today’s low interest rates, depending on service area demand.

System growth and expansion is driven by three long-standing policy mandates: Provide for future growth; keep rates low; and assure system reliability. Those policies have been in place at least since the early 1950s, when a fearless City Council approved a dramatic expansion of the city’s water system and thereby laid the foundation for the city’s explosive growth in the second half of the 20th century.

The city’s population grew from 45,472 in 1950 to 445,830 in 2014, a tenfold increase. CSU has always been a partner in that growth, ever expanding its infrastructure to meet developer demands. However, those long-standing assumptions — that system revenue can match both growth and maintenance of existing infrastructure, is no longer true. The company acknowledges the shifting reality.

“The utility industry is changing rapidly,” the company noted in its 2015 annual report. “Colorado Springs Utilities is no different than many other energy and water utilities across the nation that are experiencing relatively flat sales, additional regulatory requirements and increasing capital and infrastructure needs. To successfully meet customer expectations, now and in the future, Colorado Springs Utilities will need to continue to innovate the delivery of utility services.”

The new rules of the road mean Utilities has to cut costs, including the proposed elimination of 100 positions within the next two years and to “significant” reductions in operations, maintenance and capital expenses.

In common with many of its customers, CSU would welcome a new era of growth and prosperity. Yet despite the company’s past role in promoting, enabling and prospering from community growth, challenges await.

CSU is a legacy company, stuck with a vast, unwieldy and aging physical plant, carrying $2.5 billion in long-term debt, beset by federal regulators and forced to maneuver through a complex local and national political landscape. Can it accomplish those tasks, or will it meet the fate of another massive city enterprise, Memorial Health Systems?

The question: Is our local behemoth big enough and savvy enough  to survive and thrive in a changing world?