Utility Sale Update

I’m sure many of you are interested in an update on the potential utility sale by now. Earlier I posted that I would address several questions to give you perspective into many of the considerations of any potential transaction. The reason those posts have not yet been shared with you is because there have been changing circumstances that have required a considerable amount of time and focus to work through. The change is being primarily driven by Rocky Mountain Power now showing an interest in purchasing our electric utility.

Logistically, Rocky Mountain Power’s interest in purchasing the electric utility has changed the dynamic of this transaction. With two potential bidders, the City Council will likely be faced with a significant decision at the August 19th City Council meeting.

If City Council decides to award the sale of the utility to one of the bidders, the decision will ultimately rest with you the voters. The sale will become a ballot question for November’s election and you will be able to tell us whether or not to continue with the transaction.

You will notice that I have not spoken about Questar Gas, and the reason is because there is no state statute that specifically governs the sale of a municipal gas utility. The sale of the gas utility will depend on the sale of the electric utility because the bonds are tied together and must be paid off together. If the City Council passes a resolution to award a bid on the electric utility and the public votes to approve the sale, then the City will move forward with negotiating formal agreement for each transaction. If residents vote to not sell the electric utility, or if the City Council does not pass a resolution approving one of the bids, then it is likely that neither of the utilities will be sold in the immediate future.

I am certain you have more questions and I will be doing my very best to answer them. This is an evolving process and I will provide updates as we have new information. I apologize for not being more responsive on the questions I have committed to answering earlier.  Ironically, it has been the utility sale that has prevented me from answering questions about the utility sale.

Sincerely,

Christopher Pengra

13 thoughts on “Utility Sale Update

  1. So what would be the biggest difference in RMP vs SESD? Is it basically same “deal” just with a different name on the bottom line, or are the 2 companies offering different reasons for us to sell to them?

    • Kathy, the biggest difference is that Rocky Mountain Power (RMP) is a private power company whereas SESD is a public power company or rather a public power district. Their formation was granted by the state legislature similar to Timpanogos South Sewer District (that serves part of our city). There are dozens of districts in the state that have been formed for various reasons. There are only two electric service districts. RMP and SESD offer verry different benefits. RMP has easy access to capital which is almost always preferable. Though they are a very large corporation who is likely to care about the bottom line first and willing to invest in new infrastructure only when it makes sense for them. Because they are a private company, we will have no say in how capital is invested. On the other hand, SESD has less access to capital because they are much smaller. Because we would have a seat at the table and a vote on the board, we would be able to help guide the organization and help to benefit our city. One of the major issues we are likely to face in the future is access to power resources. SESD started in the water business and has relationships with potential new resources for hydro electric generation in the state of Utah. This may be a size able percentage of SESD’s total energy portfolio. (That’s a good thing.). As regulations bear down on coal and other fossil fuels, RMP’s ability to change its dependence on coal will be a size able undertaking. (That may result in higher future prices. There are numerous other comparisons, though these are some of the major ones.

  2. Mayor,

    I posted this on the FaceBook post as well, just reposting here in case you don’t follow the City Hall’s Facebook postings.

    I was hoping you could address a few things. I was not able to attend the meeting held a while back, so maybe some of this was addressed there.

    1. According to Questar’s website, our gas bill would increase quite significantly after a sale to Questar. Although their website says it would only go up “only slightly”, that seems not true. Their page states that our EMC rate is $6.75 per decatherm. Under Questar that would increase to $7.79 in the summer and $8.94 per decatherm. This is a 15.4% increase in the summer and a 32.4% increase in the winter (when we use MUCH more gas). Based on my usage from last year, my winter gas bill would go up an additional $60 a month during the cold months. That’s HUGE! Please tell me there’s a typo on their page.

    2. Relating to (1). Why sell our utilities if it’s going to raise costs to the residents so significantly? To lower debt? Why do we care about our utility debt? If the income from our utilities provides enough cash flow to pay the debt payments while still providing lower rates for us, then I would say this is a great thing.

    3. I know the letter we received stated that we would break even or save a few cents each month if the utilities were sold. How did we come to this conclusion, how was it calculated? I don’t think we should base that on any potential savings from a lower electric rate as the SESD site says their rates are currently under review, which to me says that they’re likely going to go up.

    4. I feel that a sale of the utilities would be a low blow by the city. Last year we received a letter saying that the city was selling the fire department to United Fire and that our taxes would only increase very slightly (like $30) because city taxes would go down slightly and they were reducing utility rates. I disliked the idea because utility rates aren’t a tax and change often anyways. Anyhow, my tax bill went up $300 and I was not happy. I was angry, but I could at least cry myself to sleep by telling myself….’well at least my utility rates are slightly lower than before’. Well now a year later it seems that I’m being told: “Hey we just upped your taxes $300 and now we’re upping your utilities too.”

    Just my thoughts. Please let me know if you see any miscalculations or errors in my logic. This is meant to be constructive feedback. I’m just concerned about the impact this will have on my wallet.

    Thanks!

    • Jason,
      I’m not the Mayor, but I went to the meeting and this is my understanding of some of the questions you had. I hope you don’t mind me voicing my opinions and thoughts, but I know I like a quick response, and I’m guessing this post is going to require a lot of his time.
      On #1, Gas rates will be going up, whether we sell or not. Currently the city has purchased an allotment of gas at a low rate, once we complete that allotment we will need to purchase more. It will be at an unknown, but higher, (rates have risen significantly since we purchased) rate. I asked the city hotline on this one, and had it confirmed by the Mayor on another page.
      On #3, if you re-read back through the Mayor’s posts on this blog, he talks about how the savings were calculated in his Big News post. The letter was sent the day Questar changed their rates so it wasn’t printed totally accurately, but Mayor Pengra did his best to fix that “typo.” At the meeting SESD also stated that because they would be acquiring our debt as well our rates will be slightly higher than the other users for a time. Think of it as a higher base rate, but I think the usage rate would be the same for all customers.
      On #4 I agree the UFA/utility rate thing was a problem, it was poorly worded and in my opinion not entirely truthful. However, that is the past and all we can do now is to move ahead. Our current rates against a current selling option.

      • Thanks for the response Kathy. I hope you don’t mind me pasting your response into the FaceBook feed so others can see as you provided some great information.

        I did read the “Big News” letter, however it didn’t really provide details about how the ‘savings’ value was generated. After the UFA/utility letter, I just don’t trust the numbers without seeing detail.

        When I calculate my bills with the adjusted Questar rates, I’d be paying out hundreds of dollars more per year. I didn’t even bother looking at the electric rates because their website FAQ said something to the notion of “Our rates are currently under review” under the question “Will my rates go up as an Eagle Mountain Customer?”.

        Thank you for the gas rate explanation. I guess my follow up question to that would be: How long until our gas allotment runs out? What would our new rate be once it runs out (honestly)?

        I’m guessing that getting rid of the utilities would be a huge burden lifted for the city administration because I know they have gotten a lot of grief about it over the years, however in the end I hope a decision is made that is good for all of us.

    • Jason, Kathy & Mayor Pengra –

      I think there is some serious confusion on this because I understand things completely different than Kathy does.

      #1 – Is this truly the case Chris? When we discussed this on facebook last week you made it sound like the reason we hadn’t purchased enough gas to get us through the winter is because we weren’t concerned about prices going up….. so are gas prices expected to jump up when we need to buy more in November (if the sale doesn’t go through) if so then why didn’t we buy more when we had the chance, is it because we were planning so much on this sale going through that we didn’t want to buy more than we needed until we sold? Also, if gas rates do jump up won’t Questars rates go up as well? I mean if gas prices are currently $2 (example) and we are 32.4% cheaper than Questar in winter then when they raise gas prices to $2.20 won’t both Questar and Eagle Mountain need to raise rates to cover the cost increase (and therefore they’d still likely be 32.4% more expensive)?

      If you could clarify that so we all understand it would be very helpful!

      Also, on #3 I think it was the other way around – When I asked SESD they said we would keep .10459 usage rate but our base rate might go down to $9 or something (saving us a little over $1/mo on the base rate). They said it would be a slim chance our electric rates change at all from what they are right now. I think City Hall has that meeting posted online, I would highly suggest you go watch it because it might answer a lot of your questions.

      Really though I completely agree with all of your questions and assessments Jason!

      • Ashly, I believe you may be confusing some of the facts. We performed a partial hedge of 50% of November-January gas consumption at $4.78. This rate is fairly high from what we have paid in the past. We purchased the hedge because we were at 100% market exposure in a rising market. Typically the winter rates are higher than the summer rates due to basic demand principles. We sought to relieve a portion of that risk by purchasing a partial hedge for winter rates in case they continued to rise. Just today we purchased a 20% hedge for November-January, thus bringing our hedge up to 70% of consumption. That hedge today was purchased at $4.28. This method of dollar cost averaging brings our supply cost down for 70% of our projected consumption for that period. We can not hedge to 100% (or any higher than 70%) of projected consumption because if we have a warm winter we will not consume as much gas and will still need to pay for it at the contract price. If we leave 30% of our projected consumption to be purchased on demand, we may pay more for the gas, but we won’t over purchase which could damage us financially.
        We have also hedged 50% of projected consumption for January through March at the same $4.28 per decatherm. We refrained from hedging a full 70% position because we expect there is a reasonable likelihood that prices may still drop prior to the winter months. There is no guarantee, however. There are many influences on NG commodity prices. What I told you is exactly as I outlined above. We expected gas prices to retreat and so we waited to hedge our remaining consumption. The principle of dollar cost averaging is simply a method by which you can drive down the price of your investment by buying incremental positions at lower prices when available over time.

        You have made the statement now several times that we didn’t hedge because we were so sure this deal was going to happen. If my plan were to expose all gas customers to 100% market rate risk when the market prices are historically at their peak, and all because I was reliant on a complicated and difficult deal to go through, I would be foolish and irresponsible. The fact is that our BP contracts are fully transferable and Questar Gas is aware of our hedge positions. They are aware of our hedging practices and those contracts will be transferred if and when a deal goes through. It will not affect our deal or cost us money if we never get past January.

        As far as the gas rate increases are concerned, even at our current hedge, we are paying more for our gas supply than we have in the past years and this is what will have an effect on the customer rates. I hope that helps to clarify.

        The last issue, Ashly, is the matter of SESD’s rates. We have had this conversation many times now. I think we can both agree that it is unlikely that voters will vote for a deal that will represent a net increase in their combined utility bill. As we have discussed, my conversations with SESD have been driving hard to reduce our electric utility rate. There probably isn’t much point in discussing SESD’s rates this late in the game. SESD will need to come to the table with their rate proposal in their bid. They certainly have the prerogative to change their rates from what we have discussed in our negotiations, though I expect that will not be the case. I was surprised by the comments SESD made at the meeting because I had been operating under different assumptions. I believe Dan was a bit concerned to commit in a public meeting when negotiations were still ongoing. I can hardly blame him for being cautious. In any case, I am thankful that this will be going to a public vote now. That way, the voters can have the final word. If it doesn’t make sense for the city’s long term future, then I don’t want this to happen. If it won’t work for the customers’ pocket books, then I suspect it doesn’t matter what my personal view is.

      • Sorry Chris. I understood it different – you said “Rising prices did not warrant the cost of a hedge through winter months yet.” (and that was said a little over a week ago) So I assumed that we hadn’t purchased for winter months yet. I am very sorry if I misunderstood that post and I apologize. Out of curiosity the gas we are currently using was purchased at what price?

        I agree – there is no point speculating on what the price will be now since they will have to reveal that along with their offers now (thank goodness, because when I talked to SESD recently they still couldn’t commit on an exact rate so now I am glad that they will need one within a couple weeks) and now we will be the ones that get to ultimately make a decision.

        I do have one (or two) other question though – on the 14th when we get the offers (and the rates they will charge) will the public be immediately notified (so we can e-mail council) before council votes the following Tuesday? Also, will they have a certain amount of time they have to stick to the committed rate? Will they need to include that in their bid (how long they will stick to that rate)?

        Thanks for always putting up with me and my questions Chris! As you know from our previous meetings (and my million questions) I think this decision will have a HUGE impact on residents one way or the other and I just want to make sure that I (and everyone else) has all of the facts, the pros, the cons, so that come November we can all make a very very educated decision and know exactly what changes will follow either way so we have no surprises come next year. I agree with what someone requested on facebook and think it would be great if you could make a list of pros/cons and even get management and employees to help with the list of the pros/cons they think could arise from both situations and maybe even make a list things you will change if the sale doesn’t go through (such as rate studies every 6 months, and some of the other things we have discussed).

        Thanks again Mayor Pengra! Have a good day!

      • Ashly, it looks like maybe I did a poor job of fully explaining the gas hedge and the reason we hadn’t purchased a full winter hedge from our last conversation. When I stated “Rising prices did not warrant the cost of a hedge through winter months yet” I was speaking to the fact that the prices on gas were rising. Though our expectation was that prices would come down prior to the winter months, there is a significant risk an not hedging at all for the winter months and so we decided to take a partial hedge position and wait for the market to settle before taking a stronger hedge position. By leaving 30% of our typical hedge position open, we were able to layer the hedge and dollar cost average to bring our cost down for those months. I’m not sure if that makes sense or not. It’s pretty simple on a whiteboard, but not so clear via written word. You are correct though, when we were conversing about the hedge, we hadn’t hedged past January, and we hadn’t hedged the typical 70%.

        Anyway, to answer your other questions we are paying for gas at about $4.30 to $4.40 per Dekatherm right now, though August will likely be lower. We are purchasing 100% of our consumption at market rates until November.

        As far as the inclusion of rates in the bid that SESD and RMP may submit, I believe I overstated by saying “rete commitment”. I will post the “request for bids” that was sent to each entity as a separate blog post so that you can see what will be included in the bid. Obviously a bid is only a bid and not a legally binding contract, so I expect that both entities will indicate where they think their rates will be, but cannot commit firmly to rates that will not take effect until some time around January. If either entity were to present their bid without rate information, or if they gave rate information then changed the expectation without good reason, they would be jeopardizing the deal. There will be some element of trust involved in this portion of the transaction, though I have no expectation that a willful bait and switch would yield positive results. Ultimately, we will need to wait and see what their rate proposal is.

        The bid’s will be made public and I will be sure to have them posted for the public to examine on Thursday, August 14th via this blog, and other channels at the city’s disposal.

        Also, I am working on a more concise method of communicating these many considerations, pros/cons, and options for action. Perhaps even what we would change if we were to keep the utilities. Those are good suggestions Ashly and John.

    • 1. For the very short term, you are correct, but if you plan on living in EM for very long, our gas bills will also significantly rise when the city must bond millions of dollars to expand the infrastructure to accommodate the housing boom. You need to think a little more long term. I’ve been in the city a long time, and I remember when gas reached $16 a decatherm due to new infrastructure and the terrible fact that we have to purchase gas on the open market which is generally higher than Questar gas rates. Yes, Quester gas is higher now, but believe me, over the long term average, it is lower to go with Questar. It is also better to shed public debt. You may not know it, but if EM ever defaulted on their debt, a lien would be placed on your property to cover that debt and you would be required to pay your portion of that debt. I don’t know about you, but I believe in the private sector managing these types of utilities, and not putting up my property as collateral to secure these bonds as is currently the case. I also prefer to go with RMP for those reasons.

      2. I find all of this sadly ironic though, when just in February 2013 there was this huge brouhaha and media circus from a local resident about our out-of-control and sky high utility rates. Apparently, he was dead wrong as I contended all along based on actual data. Our rates were never sky high, but in a period of lower than average to average utility costs, yet the voters ate it up and tossed out much of the city council for what turned out to be misinformation.

      • I agree Shane and never bought into the utility report either. However, as far as our infrastructure goes we likely would not need any future gas infrastructure (or at least any major additions) for a VERY VERY long time. We have gas lines as far south as the public works buildings (a little south of the most southern homes in city center) as far north as the Eagle Mtn border goes, as far west as Sage Valley/Lone Tree, etc. and as far East as Silverlake (EM border). There would possibly be needs of a new meter for the high pressure line, or minor improvements but our infrastructure for gas is so built out that it would cover our growth for a VERY VERY VERY long time. I have no doubt in my mind the city selling the gas is going to hurt us (it is a very profitable utility (and we currently transfer a lot to the general fund from these utilities that will be a loss for us now and will mean there is $700,000 less to use on other things, not to mention the loss of the transfers to the GIS fund & utility billing fund), we have the infrastructure for growth, and we have MUCH MUCH lower rates than Questar). However, I do know that we cannot sell the electric without selling the gas as well (since the bonds are tied together), so I am still waiting for more info on if we will have low enough electric rates and get a good enough offer from an electric company to really make it worth it (in my opinion) before I decided exactly where I stand. If we could sell them separate though I know I would be against selling gas, but would still be not completely decided on electric.
        You are correct – I did not know a lien would be put on my property in that situation. However, these utilities currently cover their bond payments, transfer money to multiple other funds, and usually still have $$$ left over after all of that – so getting rid of them in my mind and still having half the debt but losing one of the biggest sources of revenue the city has doesn’t make me feel like this situation would be any less likely without these utilities, though I do know there are a lot of people who see it differently than I do – and all points of view are definitely valid! I think it is great we can all discuss our views on it, listen to others, research stuff, and in the end that we will get to make the final decision on what happens!

  3. Mayor Pengra,
    My husband is in the Marine Corps (active duty) and we were told by the city employees that if we moved to Eagle Mountain we would receive a $100 abatement for utilities until we moved away to our next duty station in a couple years. We asked if there was any reason at all we wouldn’t get the abatement the entire 2.5 yrs we were here and we were told as long as he’s active duty we will get it until he leaves. This was the reason we decided to buy a home in Eagle Mountain instead of the closer Saratoga Springs then the week we move in we get the letter in the mail explaining the possible sale of utilities. Will there be anything in place to protect those already receiving the abatement?
    Thank you for your time

  4. Suggest hiring a consultant firm to do a study and provided the city with the best alternative. The Dixie Escalante Coop may still be the best solution for the cit.

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