Councilmen's Take on Electric Power Issue

The following are excerpts from Councilman Fought's newsletter.

Should we sell the Electric Utility...or what..??

Ever since the financial difficulties with GUS-Electric have become known, I have stressed we should keep our powder dry until we have a thorough understanding of what actually went wrong.  It's not my style to go "ready, fire, aim" -- I like to know what I'm aiming at before I pull the trigger.  

As such, I have consistently advocated we should stabilize the situation, take appropriate near-term corrective action, and then look at the fundamentals.  Among the fundamentals, I believe we have to question whether or not the objective of achieving long-term rate stability, which was the driving factor in purchasing "long" positions, is either appropriate or attainable in the face of the current energy market.  Coincident with examining the strategy, we need to revise the charter and the composition of the GUS Board, with the idea of changing it from being an Advisory Board to being an Oversight Board.  Those examinations are underway, as discussed in a previous newsletter. 

Readers have also raised a question of whether or not the City ought to own and operate an Electric Utility at all, or, if it does, whether or not that Utility ought to be required to operate in the open, competitive market.  I believe it is time to begin to investigate these latter two questions. 

I have therefore asked that an item be placed on the upcoming City Council Legislative Agenda to begin that process.

The process would begin with a Council discussion and potential decision to direct the Staff to develop a study-plan to investigate the various

propositions.  If that is approved, the Staff will bring the plan back at a Council Workshop for discussion and at a regular Council Meeting for a decision to proceed. 

The narrative on the Agenda Item Summary Sheet reads as follows: 

Subject:  Discussion and possible action to direct Staff to prepare a plan for a feasibility study on the subject of the structure of GUS-Electric and to present that study plan at a future workshop.  

Item Summary: GUS-Electric's on-going financial difficulties have prompted a serious, and probably long-overdue, public discussion with regard to the ownership, operations, and configuration of GUS-Electric. The purpose of this item is to ask the Council to direct the Staff to present a plan for a feasibility study of the GUS-Electric configuration at an upcoming Council Workshop. The Staff plan, and potential recommendations, would include: How the study might be conducted; the alternatives to be considered within the study; the impact of those options on a range of factors; a plan for Georgetown-resident and GUS-customer participation; and the estimated cost of the recommended approach.

More specifically:

-- The Staff Plan should make a recommendation on whether such a study might be best accomplished in-house or through a consultant.

-- The study would include at least the following options:

§  Retain GUS in its current form with its current strategy (i.e., the long positions, etc.)

§  Retain GUS in its current form except return to the pre-2015 approach of matching supply with demand (i.e., eliminate the strategy of having "long positions" and selling those positions into the market while growing into the excess).

§  Retain GUS-Electric in its current form, minus the long positions, and open the GUS market to competitors.

§  Sell GUS-Electric in its entirety and rely on market forces, or the strategy of the GUS-Buyer, to supply electric to the current GUS customers.

-- Among other things the study would examine the impact of each option on:

§  Georgetown Property Taxes (given that GUS contributes an average of $5 Million annually to the General Fund which, in turn, reduces property tax).

§  Overall GUS operations, including personnel and various overhead costs.

§  The fixed and variable rate structure.

Submitted by:  Steve Fought, District 4 Representative

I anticipate this item will be on the City Council Meeting, Legislative Agenda, for the 26 March Meeting.  In the meantime I encourage you to offer your inputs for additions, deletions, or amplifications to this proposal.  I believe the time is right for these discussions, and we are best served if we get the process started now.  

Cause, Effect, and Prevention -- By Kevin Pitts, District 5 Representative

(This is a "Guest Editorial" by Fellow Council Member Kevin Pitts.  Kevin is a seasoned banker and financial expert.  I referred to his analysis in a previous newsletter, and then invited him to publish his analysis in this newsletter for your consideration.  His conclusion is that there is more to consider in producing a remedy for GUS's financial situation than just changes in the "trading accounts".  In fact, the "trading activity" may have contributed less to the current difficulty than an earlier decision to cash fund, rather than debt fund, infrastructure projects.)

The City of Georgetown Electric Fund has been a topic of discussion in the news, social media, and amongst residents. The amount of information floating around has created confusion amongst many. I was one of those, and was under the impression that our electric utility had lost anywhere from $6 million to $26 million, as reported by multiple sources.  I am a commercial banker and review financial statements on a daily basis. Being on council since May 2018, I did not have any historical knowledge of the electric utility performance. I asked city staff to provide me with the approved budget and the year-end actual fund schedules (or financial statements) from 2014-2018. I wanted to review the numbers for myself, without any outside influence. My goal was to try and answer three questions: 

1.  What happened? 

2.  Why did it happen?

3.  How can council set policy to ensure it does not happen again?

When reviewing the fund schedules one must first understand how to read them. The way I view a fund schedule is by breaking it into two sections. The first section is essentially a traditional income statement (revenues minus expenses). The second section is similar to a statement of cash flow that reflects sources and uses of funds. Sources of funds are operating profits and bond proceeds. Uses are operating losses and Non-Operating Expenses (Capital Improvements, Debt Payments, and Debt Issuance Costs). Below are the fund schedules that were budgeted and another that reflects what was actually booked at fiscal year-end.

 Actual Year End

Three observations in regards to the actual fiscal year end numbers: 

1.  Our fund balance started at almost $12 million in 2014, and was just below $2 million at year-end 2018.

2.  The electric fund had an operating profit (a term I added for my analysis) in 2014-2017 and a $3.2 million operating loss in 2018. The fund had not lost money outside of 2018 as was my previous impression.

3.  The Purchased Power* line item 
increased substantially from 2016-2018.

My first question was to find out what happened. Based on my analysis of the actual numbers the electric fund brought in $15 million in operating profit from 2014-2018, however, our fund balance decreased by roughly

$10 million. As mentioned above, operating profit is a source of cash to our electric fund. So what happened to the fund balance?

Below is a chart I created to track the fund balance in order to locate the use of the funds:

I made another chart to determine the difference in bond proceeds, which are used for capital improvements, versus the amount of capital improvement. As stated previously, capital improvements are one of three line items that make up the Non-Operational Expenses.

Based on the above chart, the primary reason our fund schedule was reduced by roughly $10 million was to cash fund our capital improvements. I observed what appears to be a change in strategy starting in 2017, which also coincides with a change in leadership in our finance department. I wanted to understand why we chose to cash fund approximately 30% of our capital improvements, instead of funding the entire amount from bond proceeds. The below charts helped me locate a reason for the cash funding.

The above charts show that if the approved budget would have been achieved over a five-year period, we would have produced $22.7 million more in cash than we actually did. Therefore, I would assume that the decision makers at the time made the assumption that the electric fund would be replenishing its cash at a much higher rate than what actually occurred. The largest deviation was in the purchase power cost line item. Our forecasting appears to have been very poor.

After this review and analysis what are the answers to the initial questions?

1.   What happened? - The city electric fund was reduced by roughly $10 million from 2014-2018.

2.   Why did it happen? - It appears we cash funded our capital improvements at too high of a rate because we assumed our operations would be a source of $37.8 million in cash rather than the $15.1 million that was actually generated. The primary cause for missing the projected operating performance was poor forecasting of our purchase power costs.

3.  How can council set policy to ensure it does not happen again? - My fellow council members and I will continue working on this question. However, the city currently has two request for proposals ("RFPs") outstanding.  One RFP seeks an outside firm to manage our electric portfolio and should help our forecasting of purchase power cost.  The other RFP is for an outside firm to assess our management within the electric utility and should help with forecasting and overall management.