No, it’s not too late for Electric City Power to go down the tubes, but the taxpayers won’t know about it.
At the Electric City Power Board meeting this past Monday night, City Finance Manager and Electric City Power Executive Director, Colleen Balzarini presented the financial results of operation for Electric City Power.
I spoke at that meeting and pointed out:
· If you reduce April’s supposed “profit” of $39,043 by the amount of the "transitional rate” “savings” for the purchase of power by Electric City Power that are still paid to SME as a “deposit” ($55,409), the profit turns into a loss of $16,366.
· If you increment the reported fiscal year-to-date loss through May of $7,261 by the amount of the “transitional rate” “savings” for the purchase of power by Electric City Power, that fiscal year-to-date have been paid to SME as a deposit ($288,742), the loss increases to a loss of $296,003.
These facts (coming directly from the financial reporting presented at the meeting) went unreported by the media present at the meeting.
The city has negotiated (if that’s the right word) a deal with Southern Montana Electric that results in its payment to SME of the same “pass through rate” for power purchases as before, but with the difference between the amount actually paid at the “pass through rate” and calculated at the “transitional rate”, reflected as a “deposit”. Oh what a deal! The city pays the same as before, but gets to reflect a deposit on its books for the difference; an amount available to it at the earliest at January 1, 2011.
The advantage (if that’s the right word) to Electric City Power, is the ability to mislead the taxpayers as to the financial results being generated by Electric City Power by the fact that it can (using a stretch of accounting principles) reflect a lower cost of power purchases in calculating its monthly “profit” results at the lower cost, even though it pays the same amount as it would have before to Southern Montana Electric. It is also the basis for the supposed profits forecast to be generated by Electric City Power as represented in the proposed Fiscal 2010 Great Falls city budget.
The ultimate receipt of these “savings” and achievement of the supposed resulting “profits” is highly questionable, speculative, and unlikely. The assumed “savings” will sit in the bank account of SME until at least December 31, 2010, and SME, ECP AND THE CITY are subject to litigation from Yellowstone Valley Electric Cooperative based largely on the provision of this rate to ECP.
Who in good judgment would use this rate as the basis for calculating financial results of operation of any business? A deal where the price of the product you are buying supposedly drops, but where you continue to pay out of pocket the same price for the product, but are to receive in two years the supposed benefit of the “price reduction”, with the availability of that rate the subject of a lawsuit.
Further, the recording of the economic results biased by this decision regarding recognition of the “transitional rate” cost of power purchases, is biased, additionally, by decisions to defer recognition of a number of expenses and costs, as was recently brought to light by Ed McKnight in an e-mail exchange among Mr. McKnight, City Finance Manager Colleen Balzarini and City Manager Greg Doyen.
Expense deferral, together with acceleration of revenue recognition, are the two most common methods of manipulation of enterprise financial results. Such methodologies have been recognized with their own humorous term as the "cookie jar concept" in statements by the Securities and Exchange Commission, among others. The analogy is apt. In the case of accounting for ECP, the approach is one of deferring expenses (meaning reflecting them as an asset on the ECP balance sheet rather than as an expense) until ECP can "afford" them (keeping them in the city’s financial cookie jar until you can “afford” them): that is, as the City Finance Director herself describes it (in the e-mail exchange) "The prepaid deferred energy imbalances occurred as a net result of cash out-flows (energy supply contracts, market sales of surplus energy, general and administrative expenses and transmission expenses) exceeding cash in-flows (customer sales) from FY 2005 through FY 2008. A large portion of the deferred expenses are related to net imbalance transactions, but not all. They will be expensed in future periods when existing customer contract rates increase and existing supply contracts remain relatively the same or decrease." (Emphasis mine).
Non-acceptability of this approach is true whether or not this is acceptable, at the margin, under GAAP. The issue here is one of accurate accounting for the impact of the operation of Electric City Power on city cash flows and impact on the taxpayers, not what is acceptable at the margin to present a biased, best possible representation of results for Electric City Power.
I call upon the city to include in ECP’s monthly accrual-based financial reporting a cash flow statement prepared under (in accounting parlance) the “direct method”. The suggested supplement would show the payments that Electric City Power received from its customers in that month, fiscal-year-to-date, and cumulatively from Electric City Power’s inception, and what Electric City Power paid for power to Southern Montana Electric over this same period and to others for all other expenses of ECP.
I encourage candidates for Great Falls public office, and incumbents, for that matter to consider the above and make their views known on the subject.
Lawrence C. Rezentes, CPA
Monday, July 20, 2009
OH, WHAT A DEAL!
If you attended or watched the City Commission proceedings from Tuesday, July 7, you know that Larry Rezentes, CPA was shut down during his presentation pertaining to ECP. Following is his explanation of the goings on pertaining to the financial statements of ECP as presented by Coleen Balzarini: