Coal II

As I noted below, David over at GreaterFalls.com recently posted the City of Great Falls' response to criticisms of its coal plant and electronic utility financing arrangements. I am certainly not an opponent of the coal plant, but the more I dig into issues the more questions I have. (The Tribune has now run the response as well.)

I can say that the City's response to the letter to the editor from local accountant, Lawrence Rezentes, does not necessarily assuage my concerns about the various issues, the largest of which is the fact that, after what are now a number of hours of researching the issues surrounding this matter, questions remain. Why? Why do we have to piece this stuff together like a giant puzzle?

Anyway, without further adieu, here is my piece by piece, devil's advocate, look at the City's response:

The City's financial statements "and the accompanying notes to the financials are included in the annual audited financial statements for the City as a whole. The City has just completed its annual audit for the fiscal year ending June 30, 2006. This audit encompasses all of its many funds and operations and received a “clean” audit opinion on those financial statements from the independent CPA firm of Junkermier, Clark, Campanella, & Stevens."

I think this is a red herring. To state that the financial statements are prepared in accordance with GAAP (Generally Accepted Accounting Principles) only tells us that the financials were prepared properly. It does not tell us that the actions taken thus far are good policy, or that they have been well-conveyed to the citizens. It merely means that the financial statements comply with the reporting requirements of (and I'm taxing my memory here) the American Institute of Certfied Public Accountants.

In fact, I don't think there is any question the financial statements meet GAAP. You can see here that the notes to the financials pointed up an inaccurate statement that has been repeatedly made about the City's investment in SME: that the City will be a 25% owner.

A cynic would argue that the lengthy discussion of an audit was enclosed merely to bolster the credibility of the City in a way unrelated to the criticisms. In fact, it could hardly be said that Mr. Rezentes was criticizing the financial statements themselves, since he relied on them in making his argument. This is what is known in logic as a straw man argument.

"Mr. Rezentes bases his questions on the assumption that the City’s electric utility business will cease to exist in the event that Highwood Generating Station is not built."

I don't want to get into an argument about semantics, but I do not believe this is an accurate statement. Mr. Rezentes makes a number of arguments about the whole City-owned utility issue, and raises questions that will need to be answered regardless of whether the Highwood Generating Station is constructed. An awful lot of strawman arguments so far...

One of the primary reasons the City has been involved in the effort to construct electric generation is clearly reflected in the Ordinance adopted by the City Commission on November 1, 2005. In that Ordinance the City Commission states “the continued growth, economic development and prosperity of the City and its residents requires the availability of secure, reliable and economic supplies of electricity at stable, cost-based rates for all residential, commercial, industrial and other electric consumers within the City”. The way to have cost-based rather than market-based rates is by having an ownership in the generation facility that produces the electricity.

Hmmm. Again, an unconvincing argument, based wholly on circular reasoning: The City found that it is important to chase cost-based power rates, therefore cost-based power rates should be found. That is not a logical argument and can be disregarded.

Further, the City and staff paint the notion of 'cost-based rates' as a panacea for what ails us in the electric markets. BIG UNSTATED ASSUMPTION ALERT: What if the City...ooops! What if SME cannot produce power at the Highwood Generating Station at a cost less than or equal to market prices? Oh yeah, that means they'll either be selling power at a loss, or will be priced over the market. (A recipe for great sales!)

Stability in rates is not necessarily good. What if there is some new cost imposed on SME like, oh, I don't know, a big class action lawsuit over its pollution?

The expenses of the electric utility fund are the responsibility of that fund and its customers. This is no different than the operations of the Water, Sanitary Sewer, and Sanitation funds of the City.

This is a true statement and a legitimate point. An argument can be made that the provision of power is simply a utility service like any other, and falls properly within the role of government.

That being said, though, a potentially persuasive contrary argument certainly exists. New garbage trucks do not cost half a billion dollars, and the cost/revenue equation of hauling garbage is not subject to an extremely volitile market as is the price of power.

Further, there is no other, private vendor of sewer services. It's the City, or nothing. Alternatively, in power, a competetive market exists.

Thus, while the point is legitimate, let's don't overlook the obvious counterbalance. We are being asked to do something new, different and expensive. When City staff minimizes risk, I get nervous.

It is accurate to say that the City General Fund has taken on a co-signor role for up to $2,000,000 in expenses related to the preliminary engineering, design, and permitting of the Highwood Generating Station.

What have our partners committed? We already know that we have committed to contributing 25% of the cost for a 17% share on the whole project. Is this true, too, of the preliminary design? How much have we spent?

If it is determined that the City will not move forward with plant construction one of two likely scenarios will occur. In scenario one, another entity steps in to own the City’s share of the plant. This would require a buyout of the development costs incurred to date by the City. In scenario two, the plant is not built at all and primary responsibility for repayment of the expense would be from the electric utility fund. If for some reason the electric utility fund could not pay the annual principal and interest expenses, then the General Fund, as the co-signor, would be responsible for that year’s payments. The City Commission approved this borrowing at its December 5, 2005 Commission Meeting.

So, if the Highwood Generating Station is not built, and if the electricity fund loses money, the General Fund will be responsible to pay the annual principal and interest for that year. And how much will that be?

"[A] recommendation will be made to hire an independent engineer to review and verify the cost estimates of the HGS project engineers on behalf of these investors and customers. The information from the independent engineer represents the City’s own due diligence in addition to that of SME. This second level of review is typical for projects of this size."

Wait a minute, this sounds like spin: la, la, la...nothing amiss here, nosiree, totally normal.

We're supposed to begin construction on a half a billion dollar investment in a few months, and we're just now going to do a study to decide whether it's feasible? Give me a break. This was not a decision made by City staff. This requirement was imposed by the bond counsel and/or the underwriter of the bonds that will be sold to finance the project. In other words, someone took a close look at this project before it came time to write the fat check, and said "whoa, we need to take a little closer look." This tells me the project is not the slam dunk that staff thinks it is. Ms. Balzarini's suggestion that a last minute feasibility study is just the ordinary course of business implies that we're not getting the whole story. Why wasn't this study done long ago, before the expenditure of significant sums? How much have we already spent on due diligence?

Mr. Rezentes also questioned the City’s use of future raw water sales to support the HGS as an offset to current electric rates for a group of its electric customers. The water credit only applies to a small portion of the City’s energy supply portfolio....When we started this venture we did not have reliable or sufficiently defined load information available from Northwestern Energy. The water credit covers any deficiencies in rates resulting from market purchases of electricity to cover periodic shortfalls. In other words, from time to time we have to purchase electricity in the imbalance market when we do not have enough from our normal SME sources. The water credit serves to cover it when market prices are unfavorable. In addition, we established our rates for the first batch of customers based on an estimated price from SME. The firm price turned out to be slightly higher than anticipated so the water credit was intended to make up for it. The water credit is a hedging mechanism to cover the uncertainties inherent in beginning an electricity program for our first group of customers where available load and pricing information were imperfect.

Well, how have they done since then? Now that they have less "imperfect" load and pricing information? How's our electric fund doing so far? Well, look here on pages 26 and 28. Last year our electric fund lost over $400,000.00 on operations. Boy oh boy, I can't wait to put these folks in charge of a billion dollars. Can you?

At this time, unfortunately, Montana law prohibits the City from serving residential customers. During the last legislative session, the City did request a change in law to allow us to serve residential customers within the City limits. The legislature opted to not approve that request. The City is considering making a similar request this session, but has not made a final decision to do so, and has no guarantee that even if the request is made, that it will be granted.

This is an issue I have alluded to before. Does the City intend all of us to be captives to its power experiment? Don't give me this "has not made a final decision" bullsh*t. Does the City, or does it not intend to ask the legislature to make us its captive customers? I think we're entitled to know, don't you?

I apologize for the length of this diatribe. I am really not sure if I support or oppose the Highwood Generating Station. But partial explanations and a condescending tone toward critics do not impress me favorably. How 'bout y'all?