The Issues: Hercules Municipal Utility

What should be done about the Hercules Municipal Utility and why?

Sherry McCoy

Based upon the MRG report, initial analysis of the Hercules Municipal Utility’s (HMU) finances, and city’s financial situation, the HMU does not appear to be viable for the city to continue. However, additional information suggests that further evaluation is needed to fully factor in the complete financial picture and new opportunities that may provide a means for the HMU to become self-supporting. The timing will be key as the city does not have money to support the HMU. However, a full evaluation is needed to ensure the best financial decision for the city is made.

If after further analysis, the city determines that it needs to disengage itself from the HMU, the city will need to sell the assets and work to achieve as smooth a transition as possible for HMU customers. The best means to accomplish this will require looking at options to ensure the path chosen for disengaging the city from the HMU provides the best balance financially and for the existing users of the HMU. There needs to be a clear plan for ensuring the existing customers are transitioned smoothly and without interruption of service.  

Our relationship with Pinole is not ideal, but it is evolving in a positive direction and if the new council implements increased controls, the relationship should continue to suit our needs for the foreseeable future.  The city can ill afford the costs to implement any other options at this time, especially building the infrastructure to go to Richmond. At this time, and in light of our current financial situation, continuing our relationship with Pinole is the only viable option. 

Hercules Municipal Utility  (HMU) has been a money pit from the day it was started.  The idea may have had merit but the implementation was done incorrectly.  The program was over designed and over engineered and the service area is too small to make it a profit center. 

The fact that the Waterfront development did not occur as planned was part of the problem.  In the previous two budget years, HMU cost the General Fund over $1.6 million to cover the losses incurred.  The General Fund, by agreement pays the annual debt payment for HMU if HMU does not cover its operating cost. 

There has not been a profit since the day it went into operation and as it is set up, it never will.  The Citizens Ad Hoc Advisory Finance Committee, of which I am a member, has stated that based on the financial information available and analyzed, the proposed expansion of HMU should not proceed. 

At this time, additional studies are in process to determine the next steps in the life of HMU.  If the Waterfront development does proceed in a timely manner, that and only that development could have the potential for making HMU profitable.  However , that could take years.

Dan Romero
Has not responded to questionnaire as of May 6. 

HMU has been a loser since day one.  The initial financial analysis and projections were very poorly prepared. We were told in 2005 that HMU would be in the black in 2007… And yet…

https://sites.google.com/site/gerardboulanger4hercules/toxic-projects

Not a single City council member dared to expose this failure to the residents, why? Should a city be in that business? In California, only Alameda makes money (10 percent profit) from a similar enterprise having a customer database 8 times larger than our HMU has. I believe HMU will never reach the “critical mass” of clientele to be profitable even if the Waterfront is built. Obviously, potential additional clientele will also require HMU to have more equipment, more infrastructures, more maintenance and more personnel.

Moreover, we were told HMU tariffs are 10% less than PG&E, which was true for 3 years, but now the HMU clientele pays more than PG&E clients. In any case, I am against any difference in services or costs paid by the Hercules residents and I am strongly against all residents subsidizing a service provided to only a part of the population.

To keep HMU alive, tariffs must be raised by 25-30 percent, so we would be 45 percent higher than PG&E...Our General Fund suffers today from having spent about $10M to keep the HMU alive. My recommendation is to get rid of this business. However selling the HMU is not easy, especially when PG&E could dictate their terms/conditions.

Keeping HMU will be a huge mistake. The ad-hoc committee already investigated all options and even the most optimistic one has been rejected as a loser. We better turn the switch OFF of the HMU instead of spending more on another consultant. We have enough problems to deal with. Let’s make our city simpler to manage: get rid of the HMU ASAP.

Joanne Ward

The Hercules Municipal Utility (HMU) was established to provide electricity to all future electricity customers in the city of Hercules. At the time that the HMU was established, the Hercules City Council believed that (in a reasonable amount of time), the HMU would, in fact, become a self-sustaining enterprise and provide a stream of revenue to the city's General Fund. However, as of this date, the HMU has a structural deficit of approximately $600,000 per year, and it does not generate enough money to pay for its operational expenses. Therefore, I believe that the city of Hercules should conduct a thorough analysis to determine whether or not the HMU can actually become that self-sustaining enterprise as envisioned much like some other California cities have done, e.g., the city of Alameda.  Otherwise, the city of Hercules should market and sell the Hercules Municipal Utility for a fair price to an interested buyer.

Don Kuehne

There are several options to consider for the Hercules Municipal Utility (HMU). The financial impacts of these options should be evaluated before making a final decision. The city could continue operating the HMU but should grow the customer base so that it is profitable or at least revenue neutral. To accommodate new customers, the HMU should construction a new substation. Bonds were issued for this purpose last summer but the Council decided to cancel the project earlier this year. The HMU could also be sold to another utility but its market value is unknown.  

Virgil de la Vega

• HMU has lost money each year since it started. It owes the city $4.57 million in loans. It will continue to incur losses in the future estimated at $4.8 million for the next 10 years, or about half-million dollars per year.
• HMU will need to invest $4.8 million just to operate at its current levels, money which the city doesn’t have and money that will not generate any profits.
• HMU will need multi-year rate increases to be profitable; these increases will hurt its customers, aside from being non-competitive.
• There is no imminent failure of the utility market that would justify why we have to be in this business. I’d prefer to leave the business to those companies who have the resources and infrastructure to support a capital-intensive business like utilities.