Coal II

I was fortunate enough this afternoon to be in a position to ask John Lawton and Coleen Balzarini some questions about Electric City Power, Inc. (ECP) Given the context of the discussion, though, I had to keep relatively focused on the matters under consideration at that particular time, so while some questions were answered, some remain.

In an earlier post, I quoted in its entirety a letter from a local CPA, Lawrence Rezentes. You will recall that Mr. Rezentes suggested that ECP was incurring ongoing debt to SME in order to artificially depress electrical rates to ECP's customers. Mr. Rezentes contends that the City of Great Falls is incurring debt which "is in fact financing the losses incurred by the city electric utility ($425,000 in fiscal year 2006 and an additional $200,000 in losses since then) resulting from underpricing of the electricity, representing sub­sidies it is providing to its cus­tomers relative to its cost from SME."

He goes on to suggest that these depressed rates are an "an enticement, based on current low-priced electricity sustained by nonexistent “cred­its” [the debt] that must be repaid, to con­vince the public of questionable economic benefits supposedly to be provided by the plant in the form of lower bills for electricity­."

I asked Mr. Lawton and Ms. Balzarini about this. Here is, to the best of my ability, their explanation. When the City first decided to get into the power business, it marketed power to governmental units, specifically the City, the School District, and the Airport. This first block of power was a 5 megawatt load.

Since the City was new to the business, they were not sure of the demand or pricing for the power. Thus, while they locked in the rates to their customers, they did not have 'locked in' prices for their supply. Thus, the existence of the credits to be repaid with City of Great Falls water rights was included as a 'shock absorber,' which would allow ECP to provide power at the contracted price without incurring significant cash losses in the present period. It was, so to speak, a way to defer losses until later as the City worked through a 'learning curve' on the first block of power.

In other words, if ECP agreed to sell power for X, but could only purchase it for X+5, the difference of 5 would be repaid later to the supplier with water. Thus, even though ECP lost 5 in this period, it won't need to come up with the 5 until later, and that will be in water, not cash. (I forgot to ask what the interest rate is on the deferred amount, as well as what is used as the fair market value of the water to be given SME in repayment.)

Mr. Lawton made another point. The water that will repay these credits to SME, if and when the Highwood Generating Station is built, is a public asset owned by the City of Great Falls. Further, the recipients of the benefit of the reduced or subsidized rates are all public entities. Thus, we have public assets being expended for public purposes. This is a fair point. (Assuming, of course, that this 'public water' is not being diverted from some other 'public use' to compensate for the losses. Assuming, too, that the HGS is actually built; if not, I guess we owe the money?)

I do not think the City's position on this is per se unreasonable. Of course, the cynic in me points out that even assuming Mr. Lawton's and Ms. Balzarini's explanations are true, which I do not doubt, according to Mr. Rezentes' article the City as a power utility is losing its ass to the tune of approximately a million bucks so far.

So, the operative issue, I guess, is this. Has the City learned enough over the last few years that we can expect that the results of operations of ECP will change in the future? Or, can we expect that ECP will continue to lose money, only to find that such losses in the future will not be offset by water credits but will be paid by tax dollars?

I learned more today, but this is enough for now.