During the City Council workshop in December, it was disclosed that the expenses in the electric fund exceeded budget. The following is the city statement:
"The Electric Fund experienced higher purchased power costs than projected. Capital improvement projects are also over budget due to a substation project and increased development. The fund is projected to be $6 million over expenditures. Staff are developing a plan to bring the fund into balance and to cover the 75 day contingency reserve.
During May through August of this year, power consumption was far below normal because the temperature averaged 5 degrees below normal. The city contracted for "near peak" power during that time and found themselves with excess power capacity which could not be sold at a profit on the market." This resulted in a loss. Keep in mind this loss is approximately 10% of annual operating revenues .
Since we have been told repeatedly that the city has a 25 year contract for wind generated electricity, presumably at a fixed price with inflation escalators, and it currently supplies 100% of Georgetown's demands, why is the city contracting with ercot for electricity at near peak rates? We have been told by city officials that these long-term contracts for wind and solar generated electricity would provide predictability and stability in electric rates.
Now we know why the electric fund lost more than $6M last year. On page 78 of the city's 2015-2016 Comprehensive Annual Financial Report, available on the city website, we find the following statement with highlighted words. "In an effort to mitigate the financial and market risk associated with the purchase of natural gas, energy, and congestion price volatility, the City has established a Risk Management Policy. This policy was authorized by the City Council to enter into forward contracts for natural gas, swaps, and congestion rights for the purpose of reducing exposure to natural gas, energy, and congestion price risk. Use of these types of instruments for the purpose of reducing exposure to price risk is performed as a hedging activity .At September 30, 2016, the City had multiple outstanding contracts, with wholesale customers to provide power supply and/or qualified scheduling entity services. For the power supply customers, the City charges an energy charge which is based on the quantity of power supplied multiplied by a fixed price, or multiplied by a fixed heat rate and a fuel index price. In order to hedge the City’s risk, the City has entered into corresponding power supply agreements with counterparties to hedge against energy price or heat rate fluctuation in the market.
These contracts meet the definition of a derivative instrument as defined by GASB Statement No. 53, Accounting and Reporting for Derivative Instruments (GASB 53). However, these contracts meet the normal purchases and sales exemption of GASB 53 as the City intends to use the physical commodity in its normal utility operations to supply energy to its customers. Accordingly, these contracts are not within the scope of GASB 53 and are not recorded on the City’s Statement of Net Position."
The appropriate questions to be asked are: Were any lessons learned from this experience? Have policies and procedures been instituted that will preclude such large losses in the future? What is the review and approval process for entering into these derivative contracts? The citizens of Georgetown need and deserve transparency into these transactions and the management thereof.