7/16/2007

Why, why, why...

Let's assume you are a businessman, and you entered into a contract with a supplier to sell you widgets. You carefully considered this supplier's price for widgets and the payment terms. Finally, you entered into a contract with your supplier to buy a certain number of widgets every month for a certain price.

A couple years later, you wanted more widgets, so you negotiated to buy more widgets from your supplier, and signed a written Addendum. A year after that, you negotiated for even more widgets, and you entered into another Addendum to the first contract to buy the widgets at a fixed price for the next 10 years. Throughout this time period the payment terms remained the same. The widget manufacturer sent you a bill for the widgets, and you paid him in full within 10 days of receiving the bill.

Now mind you, you weren't getting any sort of special deal on the widgets. You were basically paying market price for widgets, but for purposes of convenience and continuity you stuck with this supplier. You could get the widgets for a set price for a set period of time. You had a binding legal contract. You performed. He performed.

One day he comes to you and says he has decided that you now need to give him a deposit on your widget orders. Your 10 day payments are insufficient. In fact, he wants you to deposit the cost of two months of widget orders in an account so he can feel secure. Now this is no small order; you checked your records and two months of widget orders is 1.4 MILLION dollars. That's an awful lot of money to have tied up in an account so a guy you have paid faithfully for years can feel "secure."

You go to your attorney. He tells you that you have a legally enforceable contract without any obligation to put up a security deposit. He tells you that a term of this importance should have been negotiated in advance, not after the fact. He asks whether your supplier has any unusual leverage over you outside of the terms of the contract. When you reply that he does not, your attorney suggests that you ever so politely tell your supplier to pound sand.

While that 1.4 million dollars belongs to you, it is important to other people, such as your employees and your family. You do the responsible thing and inform the supplier that, as much as you like his widgets, you are going to simply perform the agreement that is negotiated. In the alternative, if he really, really needs the security deposit, you might be willing to consider it if he will sweeten the pot in some other way, perhaps with a better rate on widgets. This is, after all, a contractual business relationship, not a friendship where we expect favors and gifts.

Right?

Incredibly, if we are discussing City government, this is wrong. In City government, with our money, it is easy to do favors. Because that is exactly what the City proposes to do tomorrow night. Our City Manager is asking the City Commission to give what is essentially a gift promise to SME. He is asking your Commissioners to do something that they have no obligation to do in order to benefit the members of electrical cooperatives from Billings, Bozeman, and elsewhere in Southern Montana.

How, you ask? It's not so hard to follow.

On September 29, 2004, SME and the City entered into a Wholesale Power Contract. That contract says the following about payment for power: "Southern Montana shall read or cause to be read each meter on approximately the same date each month. Electric energy and related services furnished hereunder shall be paid for by the member at the offices of Southern Montana monthly within ten (10) days after the bill therefore [sic] is mailed to the Member. If the Member shall fail to pay any such bill within such ten-day period, Southern Montana may discontinue delivery of electric energy and related services hereunder upon fifteen (15) days' written notice to the Member of its intention to do so." Nothing in the Contract requires the City to put up two months' billings as a deposit.

The City and SME entered a later agreement, and two separate addendums (here and here). Nothing in these agreements create in the City an obligation to put up a security deposit.

Yet tomorrow night our City Manager is asking the City Commission to agree to do just that. Why in the world would the City agree to tie up 1.4 MILLION dollars of its money when it has no legal obligation to do so? Just what, pray tell, is SME doing for us in exchange?

Contracts are not friendships. They create binding relationships based on mutual promises. You get what you negotiate, no more, no less. You don't give things away to be "nice," especially when it is someone else's money (like the taxpayers'). (Imagine if you bought a car, and a year later the dealer tried to raise the price.)

The City Manager will claim that the security deposit is a "standard business practice in the energy industry." If so, why was it never negotiated before now? Are Electric City Power's customers going to pony up their two months security deposit to us?

It doesn't matter if it's standard business practice. They didn't negotiate it. It's too late to sweeten their own pot now!

Is there anyone on our City Commission who can stand up for the taxpayers of Great Falls? Won't someone on the Commission at least ask the questions:

1. Do we have any legal obligation whatsoever to agree to put up a security deposit?
2. If not, why would we ever agree to do it? What exactly do the taxpayers get in return?
3. Why, all of a sudden, is SME having cash flow problems?
4. If this is a "standard business practice," have all of Electric City Power's customers agreed to make corresponding security deposits?
5. If we're just doing this to help out SME, can we expect them to release us from the Water Service Agreement if we change our minds?

Why is our community trying so damn hard to make life easier for electrical customers in Billings, Bozeman and the rest of Southern Montana?

13 comments:

Anonymous said...

Good question GGUY. SME is a speculative venture-and this transaction is reversed from how it should be working--the City should be getting a deposit from SME to assure it will be there for the CITY in the future.

Anonymous said...

If the security deposit is accounted for and the City receives interest on it--how does this-in any fashion-have anything to do thw the "cash flow" needs of SME. Will the funds be segregated? Will we receive an accounting of the interest accrual?

GeeGuy said...

It will help the cash flow of SME because, apparently, SME is presently using its own money to put up its deposit with PPL. At least that is what appears to be happening if one reads between the lines. If we substitute our money for theirs, then theirs is free to them.

Anonymous said...

Nothing to add other than a nice little article on mercury in the Healer's Corner in today's trib. ( section L) Lest we forget, the health effects of this proposed coal monster are NOT theoretical. They are verifiable! And deadly. Simply because it passes federal muster is NO reason to allow it. Rotten Lotten and co. must be held accountable. We must demand a vote. They can't arrest us all! Geeguy, stay on these people. I think it's time for some civil disobedience.

LK

Anonymous said...

From the GF Trib - QUOTE:
Gregori also questioned whether opponents to the Roundup plant had much to do with its problems getting off the ground. He said Roundup's troubles "had more to do with finance."

Anonymous said...

At the end of this Highwood mess somebody or several people will be accountable. Any guesses?

mary jolley said...

Your question:
Is there anyone on our City Commission who can stand up for the taxpayers of Great Falls?
My answer:
Not yet, and there has not been anyone for the past 4 years, at least.
As for the questions - please show up and ask them. I get tired of asking questions that are answered with evasion and shrugs and outright falshoods.
Our present Mayor and commissioners were content with an accounting of this plant that would fit on a post it note with room to spare. How insane is that?

Anonymous said...

Free business idea for a novelty shop!

"My parents visited Great Falls and all they got me was this sooty t-shirt!"

Anonymous said...

So, am I understanding this correctly? Mr. Lawton is asking the City
Commissioners to give SME $1.4 million to “hold” as security. Nothing
additional is given in return. SME uses the funds instead of their own, thus,
freeing up $1.4 million of their own funds for other uses while tying up the City’s
potential use of those funds elsewhere(i.e. investments).

Nothing so far indicates that the City receives interest off these funds that are
being “held”. Assume a conservative rate of return of 5% per annum. The City is
giving SME at least $70,000 per year and is receiving nothing additional in return.

The City Commissioners and Mr. Lawton stand in the role of fiduciaries to the
taxpayers. They are stewards of the taxpayers’ funds. At what point do they
breach their fiduciary duties to their constituents and become personally liable for
giving away taxpayers’ money?

GeeGuy said...

I'm going to take issue with a few of your statements, previous Anonymous. I don't know that you can say that we are giving SME money.

What the proposed agreement says, is "The City shall upon execution of this agreement provide PPL Montana with letters of credit or other security satisfactory to PPL Montana and SME to satisfy the security requirements under existing contracts between SME and PPL Montana for power purchased by SME on behalf of the City." It's fairly vague just what the City will do to satisfy the newly created security "requirement."

The Agenda report also states that interest earned will be credited back to the City, although I don't know if that is more or less than the City could earn on the money elsewhere (or more or less than the City is paying to borrow money).

Finally, I disagree with your assertion that Mr. Lawton and the City Commissioners are "fiduciaries." That is a very specific legal term, and unless and until you want to show me some law creating a fiduciary duty, I am going to disagree with your calling them fiduciaries.

Anonymous said...

From the GF Tribune: MARCH 11, 2007

Business Coal-fired power plant would be built in Great Falls even if city didn't participate, backers say

By Jo Dee Black - Tribune Business Editor:

"We went down that road far enough to realize we needed to take care of our business," Gregori said. "Besides, isn't it time that Montanans did something for themselves and stopped being renters?"

Anonymous said...

?

Anonymous said...

Looks to me like a guaranteed fund for SME to get back the water credits the city will owe them when the plans for this plant go belly-up! Why can't the customers of ECP put up this security-they are the ones currently benifiting from our water credits to get so-called cheap subsidised power from ECP..........