FAQ–Georgetown Energy Contracts
Download a copy of the electric purchased power costs presentation given to residents at the Sun City Town Hall meeting Jan. 24 here: Sun City Town Hall electric purchased power costs presentation.
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1. What is purchased power?
Purchased power is the cost incurred by the City to buy electric power and bring it to Georgetown. It covers the cost to produce and transmit large amounts of electricity from power plants to Georgetown.
It is the City’s single largest expense. In 2018, the total cost for purchased power was about $53.6 million.
2. Where does Georgetown purchase its power?
Georgetown is under contract to purchase power from four different providers. Our two largest energy providers are Spinning Spur 3, a windmill farm and Buckthorn, a solar farm, both located in West Texas. The wind power covers the bulk of the city’s energy needs. The solar farm provides energy needed during peak times of the day and year (primarily summer during the daylight hours).
The third source of energy is a smaller wind farm operated by American Electric Power (AEP) which primarily covers Southwestern University’s energy needs.
Our final energy contract is with Mercuria for natural gas-based energy. This contract was initiated in 2013 with the former JP Morgan following our termination of our relationship with LCRA. It was intended as a short-term power supply and is set to expire in 2021.
3. How long are these contracts?
Our two largest contracts are for 20 and 25 years. The contract with Spinning Spur 3 started in 2015 and runs until 2035. The contract with Buckthorn started in 2018 and runs until 2043. The AEP contract expires in 2028 and the Mercuria contract ends in 2021.
4. Is the City of Georgetown losing money on all its purchased power contracts?
No, not at all for the power that is used to meet the demands of the City’s electric customers. The average cost of the power supplies is well within the City’s current rates.
As for the excess power, not all the time or all year long, it is time-of-day and season dependent. But on average for the year, yes. However, over time, the losses will lessen. The biggest relief will come in 2021 when the last Mercuria contract expires. That will create a savings of over $10 million per year.
While our original strategy worked well when fuel prices were high, the state’s energy market is in turmoil with a drop in fuel prices. At the same time, we are seeing a drop in consumer demand which is largely driven by conservation efforts, energy-saving technologies, and more energy-efficient new construction. Due to these two factors, the City is projecting a $6.7 million shortfall in the electric fund. It is important to note that renewable energy is not the issue at hand, but the long-term, fixed-rate contracts.
Additional relief will come as electrical demand in Georgetown grows. The less electricity the city needs to sell back to other electric providers, the better the financial outlook.
5. Why are most of these contracts so long?
Long-term contracts are standard practice among municipally-owned utilities and the best way to negotiate lower, fixed rates. Going back to the table every five or 10 years increases the city’s exposure to what can be a volatile energy marketplace.
Leading up to 2012, electric power prices were fluctuating widely and extremely unstable. At the same time, there was uncertainty in how federal and state regulatory policies might impact traditional power generation via coal and fossil fuels.
6. Was the current situation created by the city’s move to all-renewable energy?
No. The current challenge has nothing to do with renewable or non-renewable energy sources. The outcome would have been the same if we had used the strategy with other sources of energy. Simply put, we are buying more power than we currently need. We did not anticipate disruptions in the market and overstated the projected growth in demand.
At the time, and based on a 20-year forecast of continued city growth, it was only logical to anticipate the need for more energy. Georgetown continues to be one of the fastest growing cities in Texas, so we remain ready to serve demand from consumers and businesses. At the same time, we are planning several steps to adapt our strategy.
7. Why do we have such an excess in energy and what can we do about it?
In addition to preparing for city growth, a few other factors have led to the excess in power supply:
- We were to have a partner purchase a similar share of the Spinning Spur 3 wind contract, however, that partner pulled out last minute. The City was left with two choices: either cover both shares or walk away. If the City pulled out of the wind farm project, there would have been a substantial delay in procuring another source of energy. At that time, there were also federal tax credits for renewable energy set to expire. Without the tax credits, the costs associated with the wind farm could have gone up 20 percent.
- In addition to having 50 percent more power than the City needed coming from the wind farm for the short-term, the City also contracted with a solar farm that was larger than it needed in the short-term. Contracting for the larger solar farm allowed more purchasing power at cheaper rates. At the time, it made sense to purchase for the more power for the longer term.
- Smart technology and improvements in new home and commercial construction have slowed the growth in local energy consumption. Energy efficiency is indeed a good thing, but until we have a larger population to serve, we will continue to have excess power.
The City sells our excess power back into the marketplace. Because of the lower energy market costs across the board, we are selling at prices below our contracted rate. That will change when prices for power increase. In the meantime, we are adjusting our original power strategy.
8. Wasn’t the original intent of these long-term contracts to stabilize energy pricing?
The contracts guarantee a fixed-rate for energy. However, when the market price of power decreases, the City is still obligated to pay the fixed-rate for power. When the contracts were executed, the City did not expect power prices to decline and remain low for years.
If energy prices had maintained the trajectory they were on in 2013, the City would be experiencing a very different financial reality. However, the strategy does not work when energy prices are depressed and remain depressed for several years.
9. What is the solution?
The City is working through several approaches to address this issue. One or all of these tactics will be used to address the electric fund’s current financial position. Note that City Council must approve any contractual changes.
- We are working to renegotiate the two long-term power contracts to extend the life of the contracts in exchange for lower costs for the next few years.
- We must curtail operating expenses in the electric department. This includes not issuing any new debt for capital projects, halting current projects, a temporary hiring freeze, and limiting non-critical expenditures.
- The Power Cost Adjustment (PCA) charge will continue for the foreseeable future. This is the charge which allows the City to recover costs associated with purchasing power. The PCA is an adjustment to rates to compensate for fluctuations in purchased power cost caused by market prices as we are currently experiencing. It is a means to pass through the impact of short-term market factors without constantly changing the energy rate.
- Lower the annual Return on Investment (ROI) payment into the city’s general fund.
10. Didn’t Georgetown electric rates just increase?
Yes, the base rate customers pay will increase by $4.80 starting Jan. 1 to cover costs associated with operating the electric department — not in relation to the current budget shortfall. The City has experienced a large increase in fixed-costs over the last few years related to the electric infrastructure within Georgetown. For example, think of the power poles, power lines, and transformers you see around town.
The base rate increase is to help cover costs associated with maintaining and growing the system in Georgetown. These costs include large projects like providing power to new subdivisions, burying overhead electric lines, and upgrading aging infrastructure.
The rate change also includes consolidating the State’s transmission charge (TCOS) with the current energy charge.
11. Is the City anticipating another rate increase?
The City of Georgetown will increase the power cost adjustment or PCA on customer’s electric bills starting Feb. 1. The PCA allows the City to recover costs associated with purchasing energy.
Customers will incur an increase of $0.0135 per kilowatt hour, resulting in a new PCA of $0.0175 per kilowatt hour through September. The average customer uses 949 kilowatt hours per month and will experience a $12.82 increase on their monthly bill.
The PCA is one tool to ensure the solvency of the electric fund should renegotiating the energy contracts take longer than expected. The City has increased and decreased the PCA several times over the years in response to changing energy prices.
12. Why is the city just now addressing the increases in purchased power?
Over the past few years, the energy market in Texas experienced a fundamental change. Forecasts provided by ERCOT, the State’s energy grid operator, have proven to be unreliable. What were perceived as anomalies in 2016 and 2017 (e.g. reduced consumption, unpredictable pricing, unusually cold weather) masked the true impact of a depressed global energy market. The effect of depressed energy prices became abundantly obvious in 2018.
However, this effect was not the obvious root cause of shortfalls previously. Looking back, it is apparent that a longer-term trend of lower energy prices is the driving factor of the electric fund’s current finances.
In 2016, 2017, and 2018, the City addressed these ongoing challenges with “one-time” solutions, including adjusting how the City financed electric infrastructure projects (i.e. cash vs. debt financing), adjusting the timing of projects, increasing the PCA on electric bills, and completing a rate study. All these efforts were intended to resolve what was previously perceived as one-time problems.
These efforts did not resolve on-going financial arrangements with the city’s energy providers. This year, the priority for the City is to change the on-going financial obligations of the electric fund. This could involve reducing the energy Georgetown is obligated to purchase, selling a portion of the energy to a third-party, adjusting the terms of some of the financial obligations, or some combination of all these efforts. The City is also exploring options to better manage the energy portfolio day-to-day.
13. What factors led to the growing underestimate of energy costs from FY2016 through FY2018?
The City has traditionally estimated its future energy costs based on market projections provided by ERCOT. Since 2016, these projections have proven to be unreliable.
Going forward, the City will estimate energy costs based on the previous year’s performance, while taking into account the anticipated revenue from customers. Any shortfall will need to be addressed by restructuring the financial arrangements the City has with its energy providers and increasing or decreasing the PCA to account for fluctuations in energy costs.
14. Is $44.5 million a good forecast for net electric costs in FY2019?
The $44.5 million budget number assumes that the City addresses the financial arrangements it currently has with its energy providers. This could involve reducing the energy Georgetown is obligated to purchase, selling a portion of the energy to a third-party, adjusting the terms of some of the financial obligations, or some combination of all these efforts. The city is also exploring options to better manage the energy portfolio day-to-day.
The City will need to implement a PCA to address the immediate financial concerns of the electric utility. The PCA can always be reduced after other financial obligations are mitigated.
15. What is the status of the negotiation for the energy contracts? When will more information be available?
The negotiations are on-going. More information regarding the negotiations will be made available as they come to fruition.
16. How much energy does the city receive in Georgetown for customer consumption? How much energy did the city purchase from its energy providers?
Per state law, the city is not permitted to release information on specific energy generation units or certain pricing information for purchased power. The city is able to provide consumption data and purchased power data in aggregate. Again, the City cannot provide information by generation source.
- In FY2016, the city received 629,466,273 kWhs to meet customer demand. In FY2016, the city purchased 741,941,320 kWhs.
- In FY2017, the city received 648,988,325 kWhs to meet customer demand. In FY2017, the city purchased 969,244,339 kWhs.
- In FY2018, the city received 678,759,571 kWhs to meet customer demand. In FY2018, the city purchased 1,067,365,337 kWhs.
- In FY2019, the city anticipates selling 680,000,000 kWhs to retail customers. In FY2019, the city projects purchasing 1,113,209,000 kWhs.
17. How much money did the city spend on energy? How much revenue was collected from customers?
The city can share net purchased power costs (the cost of our energy contracts less CRR credits). The city can also share electric customer revenue. Please note that revenue from customers not only covers purchased power, it also covers personnel, operational, and capital costs in the electric fund.
- In FY2016, net purchased power cost $40,321,083. Electric customer revenue was $61,570,923.
- In FY2017, net purchased power cost $46,038,447. Electric customer revenue was $65,001,374.
- In FY2018, net purchased power cost $52,536,250.* Electric customer revenue was $69,170,340.*
- In FY2019, net purchased power costs are budgeted to be $44,500,000. ** Electric customer revenues are budgeted to be $73,100,000.
*Preliminary, unaudited numbers
**The $44.5 million budget number assumes that the City amends the arrangements it currently has with its energy providers (i.e. mitigates the long-position).
18. What is a CRR?
A CRR is an “insurance policy”, or prepaid right, to utilize available transmission to move your power generation into and around the ERCOT grid at a known price.
19. What were the one-time adjustments made to the budget for FY2019?
The City amended the following revenues related to the electric fund budget: recognized the full year impact of continuing the PCA, reduced bond proceeds to zero, and recognized a portion of the proceeds from the Bloomberg Grant.
The City amended the following expenses related to the electric fund budget: reduced the transfer to General Fund by $1.2 million, reduced salary and benefits related to three vacant positions (an analysts, an engineering supervisor, and a journeyman electrician) for a savings of $316,488, deferred the purchased of a pressure digger vehicle for a savings of $434,050, eliminated the $60,000 transfer to the Main Street Façade fund for the holiday lights, deferred $222,000 worth of radio replacements, and saved $156,000 for deferring the issuance of bonds.
The total capital improvement project budget was also reduced to $4 million.