Councilman Fought's Newsletter on GUS

GUS is the Georgetown Utility System. The following newsletter deals with the electric utility part of GUS.

GUS Financial Issues

 

Nearly everywhere I go these days the conversation eventually turns to the Georgetown Utility System (GUS) financial condition.  Given the interest, and the far ranging perspectives of those who have weighed in on the discussion, I thought it might be useful to provide an annotated chronology of how we got here, as well as some clarifications along the way.

The discussion begins with an objective the City Council set in 2008 to have 30% renewable energy in the GUS portfolio by 2030.  Shortly thereafter the City Council became concerned about the long-standing relationship between its primary electrical provider (the Lower Colorado River Authority, or LCRA) and GUS.*

During this time there was considerable, and long-lasting, volatility in the energy market.  It got to the point that the City, along with the business community, found it difficult to do reliable budgeting or other financial planning.  Additionally, Federal policies were promoting renewable energy, and were generally not favorable to the fossil fuel industry. 

These and other circumstances combined to create an impasse between LCRA and the City of Georgetown on the energy portfolio.  The Council eventually decided to end that relationship and seek new sources of energy.  The formal GUS-LCRA "divorce" process was set in motion in 2012, at which point the City also undertook the task of renegotiating power contracts for energy that could be used in the ERCOT system. 

The City Council set three objectives** to be achieved following the separation from LCRA:

• Obtain relatively low cost power at predictable long-term rates.

• Mitigate the regulatory risks from the Federal government associated with fossil fuels.

• Reach and maintain the earlier objective of 30% renewable energy by 2030.

Now, let's step back for a minute and consider the setting at the time these and subsequent decisions were made because the environment in which decisions are formed can be every bit as important as the decision process itself.

• In 2012, oil prices had been hovering above $100 per barrel for the second year in a row.  Brent crude oil, one of two common benchmarks in the oil market, averaged $111.67 per barrel, slightly above the 2011 average of $111.26.  The other commonly used benchmark, West Texas Intermediate oil, averaged $94.05 per barrel in 2012, down slightly from $94.88 in 2011.

• The average wholesale price for natural gas at Henry Hub in Erath, Louisiana (a key benchmark location for pricing throughout the United States) was $4.02 per million British thermal units (MMBtu) in 2011 (although it did fall to $2.77 per MMBtu in 2012).

• The nationwide average price for a gallon of regular gas was $3.51 per gallon in 2011 and $3.60 in 2012.

• It was obvious that President Obama's Administration was going to institute aggressive environmental policies that would favor renewable energy and, most likely, penalize the fossil fuel energy producers (especially coal).

By May of 2013, which is when I was seated on the Council, the die had been cast: Georgetown was committed to the GUS-LCRA divorce; objectives had been set and passed to the new Council; and the search for new energy providers was underway.  After I was seated, I was made familiar with the terms of each of these activities.  I found the terms reasonable, given the circumstances***. 

During that same period several renewable energy companies were close to coming on line and were seeking long-term customers.  The Georgetown City Council took bids from many energy providers, including traditional generation companies and the new renewable energy companies.  The Council eventually decided upon long-term, fixed priced, contracts for both wind and solar energy that would meet Georgetown's growing demands over a 20-25 year period.****

• The fixed price contracts would assure customers a predictable price per KwH over the period of the contract (a highly desirable feature).

• Because the contracts were for renewable energy (solar and wind), the relationship would dramatically reduce the risk created by fossil fuel regulations (recall, this is a period when the federal government was proceeding to penalize coal plants, and was greatly restricting other forms of fossil fuel use).

• By purchasing an amount of power to meet the summer peak and accounting for the eventual demands of a growing region, the City strategy resulted in seasonal and off-peak excess power.  In Texas, all power is cleared through ERCOT at market prices.  The City's expectation was to sell the excess power (i.e., the "long" positions) back into the ERCOT energy market at or near cost and perhaps at a profit until a point where the excess was absorbed by the growing demand.

GUS retained the services of a professional energy trading consulting firm to manage the day-to-day market operations alongside GUS Staff Members.  GUS also retained a short-term contract with Mercuria Energy Group to cover a portion of immediate power needs through 2021 when the city was engaged in the lawsuit with LCRA.

 

By 2015, the renewable energy began to come on line, beginning with wind energy (2015) and followed by solar (early 2018).  By April of 2017, Georgetown was able to retire as many Renewable Energy Credits as it consumed, allowing the claim of being "all renewable." ***** 

Unfortunately over the last few years the turmoil in the global energy market has taken its toll.  Continued depressed energy prices are affecting all sectors of the energy industry across the globe. 

 

These price drops, in addition to cool rainy summers. somewhat warmer winters, and customer conservation efforts reduced overall electric demand.  GUS thus found itself selling the long positions into a market with depressed prices in the face of lower demand.  This produced substantial losses.

As mentioned earlier, the City does not engage in active energy trading or wholesale energy marketing.  Instead, all energy purchased under the various power contracts is cleared to and through ERCOT.  The City does not have real-time energy management or trading systems.  Monthly energy and ERCOT invoices, which typically lag about 30 days after the end of the month, provide the most accurate information to which the City currently has access. 

It is patently obvious that the current approach does not work in today's dynamic and volatile energy market, and that corrective action needs to be taken in a number of dimensions.  Among the necessary changes are: access to more detailed and timely information; a more dynamic way to clear excess power; and an overall, short-term reduction in the amount of purchased power.  As reported in an earlier edition of this newsletter, and in several media outlets, the following actions are underway:

• Reduce the impact of the long positions.  Several general approaches are available.  One is to sell a portion of the long positions to another electrical power company.  Another is to extend the time period during which the current level of long positions are purchased.  A third is to renegotiate the contracts to purchase less energy over the near term and increase the amount of energy purchased in the out-years.  These, and other, options are being pursued.

• Enhance the energy management function to take advantage of more detailed and timely information and more active and real-time methods for clearing power such as energy marketing and/or energy trading.

• Make near-term adjustments to the GUS budget by delaying electrical infrastructure projects, personnel freezes, and other reversible actions until the losses can be contained or eliminated.

These are essential changes, but while they are essential, there are also cautions to be considered:

• If we reduce our long positions to the point that we cannot accommodate the demands of growth, then we will eventually have to buy energy in the open market.  That will negate the objective of stabilizing prices over the long haul.

• If we are eventually forced to buy energy in the open market, we will likely be subject to whatever regulatory forces are in play for fossil fuels.

• Please click here, and watch Item "A", around the 5 minute and 30 second mark, to hear a discussion from the 27 November 2018 Council Workshop on these issues.

My bottom line is that we need to make the adjustments discussed above, but we need to do so in a manner that is mindful of the objectives of long-term rate stability and regulatory risk reduction set by the Council in 2012.  These are important strategic objectives.

I also want to point out one of the most prevalent comments I've seen in the public debate, especially on the NextDoor site.  Numerous contributors, on all sides of this issue, have pointed out that we would not even be having these discussions if the oil and natural gas prices had not fallen so far.  The corollary is that it is unlikely that oil and natural gas prices will remain at this low level forever. 

In my opinion, we need to keep our focus on what I think is a reasonable long-term strategy and set of objectives.  It's time to take a less aggressive strategy by reducing the long exposure, but not a totally passive stand and withdraw from the long market entirely.  Let's pull the throttle back, not bail out.

As of now, that will be my position during the Council debate.  But I'll also be attentive to the public discussions on social media, to your e-mails, and to the comments you make when we discuss these events in person.

 

We need to get this right.

____________________

 

*  The relationship between Georgetown and LCRA went back to the 1930s.

 

** To the best of my knowledge, the City Council never set an objective of becoming "100% renewable".  In my opinion those who assert the City had some sort of "All Green" objective are in error.  However, it would also be an error to assert that the outcome, which was indeed "100% renewable", is unimportant.  Quite the contrary, and given the publicity and even international notoriety Georgetown has received over the past 12 months, the "All Green" aspect is now an important part of any policy debate on the City's energy policy.

 

*** The primary task facing the Council that was seated in May of 2013 was to unravel the relationship between the City and LCRA.  That chore, which was essentially to complete the divorce, was tedious and contentious, requiring the participants to come to closure on such things as the value and ownership of assets, amounts due, and even service prerogatives.  That took a considerable amount of time, but was eventually completed in 2016.

 

**** The contract for wind energy, with Spinning Spur 3, was approved by the Council in November of 2013 and the contract for solar energy, with Buckthorn, was approved by the Council in February of 2015.  I voted in favor of both contracts.

 

***** One of the terms of the contracts was that the cost of energy was to be proprietary.  As such, and according to Texas law, that data is not subject to discovery through open records requests.  While I might personally feel as though that information ought to be part of the public domain, that is not what is written in the contracts, nor is it what is allowed by Texas Law.  Basically, my personal preference is moot -- the contracts say what the contracts say, and the law is the law.