The Burns & McDonnell Report, A Waste Of $$s

In today's Tribune is an editorial by Larry Rezentes on the Burns and McDonnell report:

Consultant report on Electric City Power incomplete, whitewash

By LARRY REZENTES (A certified public accountant who works for the U.S. Department of Justice, Office of the United States Trustee. The views expressed herein are his own and are not intended to represent the views of the Department of Justice of the Office of the United States Trustee).

At a cost of $60,000, Burns and McDonnell satisfied city government's need to self-justify, but missed the mark recommending that Electric City Power continue in business providing electric power to its 18, primarily business, customers.

In supporting the city's history operating ECP while it generated large losses in violation of Ordinance 2925; of botched investment; and of wasting millions of taxpayer dollars; the report is a whitewash, and unconvincing.

The consultants acknowledge the city's violations of Ordinance 2925; as do auditors' "Special Emphasis" reports on ECP and prior City Attorney David Gliko.

The only valid use of the consultant's services would have been development of an exit plan. Ironically, but not surprisingly, such a plan was not prepared.

The consultants reported to the city commissioners and mayor and had as primary sources of information, together with them, city managers (current and past), and the city finance director/executive director of ECP.

Other than Commissioner Mary Jolley, these are the very individuals who spearheaded the program; supported its continued operation in violation of the ordinance; oversaw and managed the program; and watched as millions of taxpayer's dollars were wasted.

The city engaged the consultants to provide support for a decision that under city law they had no right to make, and stacked the deck to assure they would obtain the recommendation desired. The report, touting savings for ECP's customers (the list including big business enterprises such as FedEx and General Mills), ignored that those savings occurred at a cost to the taxpayers of millions of dollars, and resulted from initial subsidized pricing to these customers.

What benefit did the taxpayers of Great Falls get from these losses and subsidies? How did any such supposed benefit compensate for loss of the ability to fund (without proposing additional tax burden rejected by the voters) needed hiring of police officers and firefighters? What benefit will the citizens and taxpayers of Great Falls receive from continuing this diversion of city time, attention and finances?

Now the theory is that ECP is in prospect of making money. Is this prospect real, and enough to justify the continued diversion of the city's attention in light of its history of misspent millions? Is the consultant's solution of negotiating rate increases to existing customers (suggested at 32 percent but settling at 10 percent to avoid loss of customers) realistic given existing contractual rate commitments to customers?

The report erroneously states: "In the last full fiscal year alone that trend reversed and ECP for the first time showed a positive cash flow by collecting more revenues from its customers than the amount paid to SMEC (Southern Montana Electric Generation and Transmission Co-op) for power purchases."

In fact, ECP financials show an excess of payments over receipts from customers of $318,885 for the fiscal year ended June 30 ($9,027,329 customer receipts and $9,346,214 payments). The cash drain has continued.

Further, Burns and McDonnell's assessment of ECP profitability is based on use of the "transitional/blended rate" for ECP cost of power in ECP's financial reporting. Out of pocket, ECP in fact continues to pay for power what it paid before.

Recognizing the full cash paid for power, ECP continues to lose taxpayer's money. ECP's reporting may, at the margin, conform to acceptable application of accounting principles, but does not conform to reality for the taxpayers.

Year-to-date ECP financial statements continue to reflect this fiction. Adjusting ECP financial statements to reflect full cost paid for power, ECP continues to lose money.

It belies common sense for ECP to recognize benefits from the "transitional rate," assuming ultimate recovery of the associated "deposit," pending resolution of the Yellowstone Valley Electric Cooperative lawsuit challenging its availability to ECP, among many uncertainties.

Repayment to SME of a $1.2 million liability for the "water credit," resulting from initial subsidized ECP customer pricing, is a major such uncertainty.

Unstated is that the zoning of the land owned by SME, to be used for Highwood Generating Station, is currently under appeal before the Montana Supreme Court to overturn the resultant conversion of farm land to heavy industrial use.

Should the justices conclude the zoning was improper, the project itself, even as currently configured as gas-fired, would fail.

Repayment would be demanded from ECP without the consumption of water by HGS in prospect as the source of repayment, placing deposits in the hands of SME in jeopardy.

Overstated are risks of claims resulting from a shutdown, including that of a claim by SME for "stranded cost." ECP in fact possesses limited assets as a source of recovery for such claims, should it simply be liquidated.

Additionally, the consultants mislead when they state that "...Ordinance 2925 does not state any time period for its criteria of 'revenues sufficient to pay all ECP expenses,'" without continuing the citation to include "at all times."

They take the position that the break-even requirement does not state a time period and "has been an ineffective tool."

What do the consultants not understand about the meaning of "at all times"? Their recommendation that the city amend (they say "update") the ordinance ex post facto,seemingly to render "matter-of-fact" the city's violation, is outrageous. The major deficiency in the report, in fact, is its lack of a plan to exit Electric City Power, given the requirement to comply with Ordinance 2925.

Our new mayor and city commissioners will need citizen support to terminate ECP despite the recommendation of the consultants, and without such a plan. I suggest that they first ask Burns and McDonnell to "update" (in fact to complete) the report to include such a plan, at no further cost to the city.