I received the following Letter To The Editor via e-mail. It is from Coleen Balzarini, who is the Fiscal Services Director for Great Falls (although she is not the one who sent it to me). I don’t know if the Trib published it. I am publishing it in order to let as much information as possible be available to anyone who wants to learn more about the proposed Highwood coal plant. I remain agnostic on the issue – don’t know enough about it to make an informed judgment. Now on to the letter from Coleen Balzarini…
December 15, 2006
To: The Editor, The Great Falls Tribune
Mr. Rezentes’ guest opinion appearing in the December 9, 2006, Tribune editorial has raised questions that he suggests Great Falls citizens should ask about the City’s participation in the Highwood Generating Station (HGS). His questions are primarily financial in nature. Therefore, it seems appropriate that as the Fiscal Services Director for the City, I answer those questions as I understand them to be presented.
It should be noted that the questions Mr. Rezentes poses in his letter are derived from the draft financial statements presented to the City Commission and the Electric City Power Board by City Staff and made available to the public. These financials 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. This audit report will be officially presented to the City Commission on December 19, 2006, and will then be submitted to the Government Finance Officers Association and the State of Montana for additional review by those independent parties as well.
Mr. Rezentes’ negative characterization of the financial reports, including adjectives such as “misinformation”, “incorrect”, “misleading”, “mischaracterization”, and “superficial consideration” are themselves incorrect in as much as the reports were prepared and presented in conformance with Generally Accepted Accounting Principles as prescribed by the Financial Accounting Standards Board and the Governmental Accounting Standards Board. These are the national organizations responsible for the rules, regulations, and requirements of government financial reporting throughout the U.S. and Canada.
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. That is not the case. The City has been providing electric energy to its growing customer base since October of 2004. It has done this by entering into long term energy supply contracts. While we have been able to demonstrate cost savings for our customers, those supply contract rates are priced based on the market conditions at the time the contracts are executed.
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. If for some reason, the City does not participate as an owner of the Highwood Generating Station, the electric utility fund will continue to have a customer base that will be served by supply contracts or some other form of generation in the future. 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.
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. These preliminary development costs must be incurred to answer pertinent questions before proceeding further into the process of construction and ownership and would be reimbursed at the time of construction financing. 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.
The cost of operation, construction, and ownership of the City’s share of HGS is something of importance to those who will be investing in the Revenue Bonds, and to customers who will be purchasing electricity from the City. These sophisticated investors will have familiarity with the energy production market, both nationwide and within the Northwest. The customers will be large customers, familiar with the energy supply market and the costs and risks associated with that market. In addition to the existing finance team members currently comprised of Bond Counsel, Underwriter, Financial Advisor, and City staff, 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. At the end of the day, the rates charged from the plant to pay for operations and costs of construction must be competitive to attract investors and customers.
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. The City has every intention of continuing to serve its existing customer base and to expand that base of government entities and large customers as the opportunities present themselves.
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. The entities receiving the subsidized rate are primarily tax supported, public agencies. Included are the City, Great Falls Public Schools, Great Falls International Airport, and the Montana Air National Guard. The City Commission was made aware of this arrangement when the original Wholesale Power Purchase Agreement was approved on September 21, 2004. Further Commission action on March 15, 2005, October 18, 2005, and November 8, 2006 was taken reaffirming the initial action.
The “water credit” was used for the following reason. When we started this venture we did not have reliable or sufficiently refined 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.
Up to this point, the City has provided information to the general public via over fifty public meetings, citywide newsletters, over 175 news stories on its energy activities, service group presentations, and neighborhood council meetings. In addition, the City has participated in each of the scoping meetings and public hearings held by the State of Montana and the U.S. Rural Utility Service relating to the Highwood Generating Station. There is a great deal of interest in this project and I appreciate the opportunity to provide information to the citizens of Great Falls on the financing of this project.
Coleen Balzarini, Fiscal Services Director, City of Great Falls