Electric City Weblog

An Unimpressive Report, Part 1

As I read and re-read the Burns & McDonnell Organizational and Financial Review of Electric City Power, I kept coming back to the fact that the City paid sixty grand for this report. I certainly understand the need for context, but did we really intend to spend that much money for an outline of historical events that I, or most of you, could sit down and write dang near from memory? The stuff that we did want, the analysis, appears to be inaccurate or, if it is accurate, it is almost completely unsourced.

Burns & McDonnell is a reputable outfit, and I know from personal experience that they do good work. Even at a rate of $200.00 per hour, though, I simply cannot imagine that they spent 300 hours putting this together.

Also, contrary to what some of you might think about me, I am not usually a conspiracy nut. I do not think that certain members of City staff dictated the outcome of the report. I think that the consultants necessarily obtained much of their information from staff members and I think that they simply adopted the spin we have heard from the outset. I guess for $60,000.00, I thought we would buy some independence. I don’t think we did.

That is not to say, however, that the conclusions and recommendations are wrong. They are forecasting events that will occur in the future; no one has a crystal ball. I really can’t even say for sure that their analysis is incorrect because they do not provide references to the various documents and other sources they rely on. It’s tough, then, to criticize them about using inaccurate numbers when they don’t tell us what numbers they used. I will try not to second guess their numbers too much but, even assuming their numbers are accurate, some of what they say does not seem to make sense.

I apologize if I retread old ground since Travis has already posted on the report (here, here, and here). I’ve tried to bring ‘fresh eyes’ to the report, but this post is probably both hampered and helped by my familiarity with the subject matter.

• City Costs

The report does a good job of outlining for the reader just how much the City has spent on this project exclusive of operations (although the consultants seem gloriously unconcerned with these expenses and just as willing as staff to shrug them off as history…maybe these guys do too much work for governments!). So far, the City owes SME about $1,200,000.00 for the water credit. The City owes $1,431,491.00 on the First Interstate Bank loan. Electric City Power owes other City funds about $1,500,000.00 for money borrowed to cover cash deficits in operations. The City owes “the cost of Bonds required for participation in HGS” in the amount of $394,000.00. The City paid $5,000.00 in borrowing costs on the First Interstate loan. For this investment in excess of $4,500,000.00, the City has had the good fortune to lose just under $2,000,000.00 on operations.

But don’t worry. The City made a ‘profit’ of $212,000.00 on operations in FY2009. At that rate, taxpayers will be even in a mere 30 years, excluding interest of course.

• Imbalances

As most of you know, the City has to purchase a set amount of power from SME every month, regardless of whether the City’s customers use it. Even if the customers don’t use it, the City buys it and sells it on the open market. If the customers need more than the City has purchased, the excess must be purchased on the open market.

This results in the concept of an effective rate. As I noted from a Tribune story about a year ago (that has now been pulled down):

The City is committed to buy a fixed amount of electricity from SME every month. If the City’s customers do not use, and therefore purchase, all of this power, the City still needs to pay for it. Now the City can turn around and sell this power into the imbalance market, but it usually does so for less than it pays for it, losing money on it.

Ms. Balzarini indicated that the City thought they would have enough customers, but that, when their ability to sign up new customers ran out, they had not signed up enough customers to consume the City’s entire power package purchased from SME:

Balzarini said the city’s per-unit power rates remain lower than those of NorthWestern. She said the problem was that the city obtained fewer customers than expected, in part because the 2007 Legislature restricted the city’s ability to gain new business. The lack of customers meant the city had to buy more electricity than it needed; some of that power was sold at a lower price on the spot market, which increased the city’s total costs.

Thus, while the City’s contract price to its customers might be lower than Northwestern Energy’s price, when the unsold power that the City is committed to purchase from SME is factored in, the City’s effective rate for power increases. The City takes this loss, not the customer.

The consulting report pointed out the City’s activities on the imbalance issue: “Each month, ECP receives a credit for any excess power sold into the open market and a debit for additional power purchases from the open market. The combined result of these transactions is known as ‘net imbalances’. Net imbalance transactions complicate ECP financial reporting because ECP is not informed for several weeks after the sale what the actual price was for electricity. Consequently, ECP as a practical matter records the current month’s electricity purchase and then records the net imbalances later when they are informed of the actual value purchased and amounts resold. In fact, there is always a lag time of six to eight weeks between time [sic] electricity bills are payable to SMEC and when the electricity revenues are received from ECP customers.”

Yes, that’s a very nice summary of what the City’s imbalance payments are. I think we all knew that. What the report does not contain, though, is any sort of analysis of the imbalance payments over the long haul. The report does not tell us whether, on average, we are making or losing money on our under- or over-purchased power. The report does not tell us whether a poor correlation between the needs of the City’s customers and its purchase obligations from suppliers is costing taxpayer dollars.

Fortunately, though, the City has already done this math for us. We know from over a year ago that the City, by interposing itself into the wholesale power business, has lost money over and above what the result would have been if Northwestern Energy had simply supplied the power.

Thus, whether the City is buying additional power on the open market to supply its customers, or whether the City is selling its excess power on the market to minimize its losses, it’s losing money on the proposition.

A complete analysis of the situation might have actually helped the City save money. Perhaps if we knew what customers were consistently high, or what customers were consistently low, we might actually be able to plan changes in our base. We might know whether to secure more or less power on our next go ’round. Instead, our sixty grand bought us several iterations of what imbalances are.

• HGS Ownership

This is a truly mystifying portion of the report. After initially noting that the City has “opted not to participate in new [sic] HGS natural gas-fired generating plant,” the report goes on to value our “ownership” in the plant and discuss guaranteed power rates.

We will not own a direct interest in the Highwood Generating Station. Remember that SME formed a second entity, and it is this entity that will build the plant. ECP and the City will not own an interest in this second entity except so far as an interest in the second entity is owned by SME. As far as we lowly citizens and taxpayers know, none of this is in writing, and SME’s ownership interest in the second entity, whatever it might be, does not, according to any written documents that have been released to the public, provide SME with any direct, titled or transferable ownership interest in the actual gas-fired plant itself.

Nevertheless, the consultants have concluded “that the City’s owenrship share of the on-going [sic] HGS project will range from 3.5% to 5.0%.” They value the City’s share in the HGS, which the City will not own, between $2.2 and 7.3 million dollars.  Apparently, because the consultants sure don’t say this, the City’s part ownership of SME will, in turn, give the City an indirect but partial ownership (like the way a stockholder in Google owns a part of YouTube’s office building) in the actual gas-fired plant.

Clearly, the consultants have either been given access to contract documents that have thus far been withheld from the public, or they (like the City Commission before them) are simply accepting the assurances of Ms. Balzarini and SME staff.

Neither is a pretty picture.

• Rate Increases

The consultants propose that one solution to the City’s fiscal problems with ECP is to simply raise the rates it charges its customers by 10% across the board. A cynic might call this magical thinking.

First, the customers have contracts, generally through June 2011. These contracts already have rate increases included in them. How, pray tell, is the City going to raise the electricity rates of, say, Benefis Healthcare by 10% when those rates are already dictated by contract? Pretty please with sugar on top?

Seriously, why would Benefis or any other customer agree to a 10% increase in their power bill when they entered a long-term contract? Answer: they won’t.

Second, the 10% rate increase will eliminate any competetive advantage the City has. According to the report, in FY2009, the only year in which ECP has not lost money, ECP’s revenues were $9,497,000.00.  If ECP’s customers had purchased their power from Northwestern Energy, the customers would have paid $10,182,000.00. Now, if we increase ECP’s revenue by 10% as the consultants suggest, ECP’s revenue is $10,446,700.00. In other words, if we increase ECP’s rates to a break-even point, its power will be more expensive than Northwestern Energy.

Two quick points: Electricity is fungible. NWE’s power is just as good as ECP’s. Price is what matters. Second, the foregoing analysis is just a shorthand way of demonstrating that ECP cannot operate as efficiently as NWE.

We’ve been saying all along that the only reason ECP offers such low rates is becuase those rates are subsidized by the taxpayers. Remove the subsidy, and they’re not cheap any more. Guess what…it’s not working!

That’s all I can do tonight. I’ll get more up when I can.

Posted in Coal Plant, Great Falls City Government, Open Government | 7 Comments »