The Time Has Almost Come

City staff and administration have been working hard to wrap up the remaining details of the proposed utilities sale.  As we begin to discuss those details in coming days, I would like to make a personal request from each of you. I ask that you would, for the next month, devote a small amount of your time to better understand the proposed utility sale, and plan to get out to the polls on November 4th to vote on the issue.  I make that request with the full understanding that it is my duty to provide you with the details and explanations so that you may understand what is truly at stake here.

From where I sit, I believe the proposed sale of the utilities is one of the biggest decisions Eagle Mountain has ever faced. This decision will surely play a significant role in our future. I do not intend to lobby for your support or for your rejection of the ballot proposition. I do intend to lobby for your participation in the dialogue and in casting your ballot. Up to election day, I intend to provide updates related to the sale via this blog. There are two details I want to provide you here today.  Currently, the natural gas prices have moved up, thus increasing the cost the City pays for the gas it delivers to residents.  The cost to the residents has not been raised, and as a result, we are currently subsidizing customer gas charges.  If we retain the utilities, we will be looking at raising gas rates as early as next year. This is important for residents to be aware of when comparing current rates.

I would also like to clarify that Utah State law requires the sale of an electric utility to a private company to be on the ballot. There is no such requirement or allowance for the sale of a gas utility.  This is primarily because there are very few municipally owned gas utilities in Utah.  Because of this, only the electric utility sale will be on the ballot, though a vote to sell the electric utility will result in the sale of both.  In short we will sell both gas and electric, or sell neither.

Soon, you will receive in the mail a voter information pamphlet with two opinions that have been presented about the ballot measure for the utility sale. Both statements are written by Eagle Mountain residents-one statement in favor of the ballot measure, and one against. These arguments will also appear in the October City newsletter, that will be mailed with your utility bill, along with a statement from the City as is required by Utah State law. Additionally, a rebuttal was written by the same author as the “against argument”. This too is allowed for by state law. I would like to remind every resident that these statements are the sole opinion of the authors, and that their accuracy or opinions are not expressly agreed upon by the City. I appreciate the authors of each statement for participating in this process as we work toward the best solution for Eagle Mountain’s future.

I look forward to digging in to the details about the utility sale and answering the questions you may have. Thank you for your patience!

 

 

18 thoughts on “The Time Has Almost Come

  1. I have heard that there is a conflict with the sale of the electrical utilities. It is my understanding that the city has a contract to buy electricity from UAmps and that UAmps will not allow the city to transfer that contract to anyone and that city will still be on the hook for about $10 million dollars. I may have bad information but will you please address this concern.

  2. TB, this is a great question. I can tell you that this is not the case. The City does have contracts through UAMPS which we are still working to divest ourselves of by arranging to sell the electric output upon the conclusion of a vote to sell on Nov. 4th, along with satisfactory execution of legal contracts. A vote to sell does not commit the city to sell if the terms for some reason change and cost the City an unacceptable sum of money. The City is working to fully resolve the contracts and may have to lower costs in order to make the energy more desirable, though any final agreements will pay off the full 26,000,000 and leave the city with somewhere from 9-14 million in cash. I hope that helps. If you have additional questions, I’m happy to answer.

  3. Mayor, I appreciate your information and look forward to reading more about what we need to know as we approach this decision.

    I doubt this is part of the process, but I would find it very valuable to have the “for and against” letters, along with the rebuttals, go through a fact-checking process, so that we can be confident that we are getting good information instead of hearsay and incorrect opinions. Is this an option, as we receive this kind of communication with our utility bills?

    • Drew,

      I will be providing you all the information you need to see quite clearly where the facts and discrepancies lie. I am doing what I can to clear my schedule from all non-essential tasks so I can devote more of my time to sharing details with you. There will be lots of information coming to you over the course of the next 30 days.

  4. $9M to $14M is a big gap, curious why a more exact number is not known? More importantly, I would also like to where will the money be spent. Please note top 3 areas where the money will go, since taxes are going up, utilities are going up and most recently agreed 6% increase for the utility non-tax tax.

    • Isaac, That is a fair question. I suppose my effort to be very conservative may have backfired with using such a wide range. My intent was specifically to leave more than enough room for contingencies and not over commit to a net figure. I have little expectation that the net revenue would be anywhere near 9 million. The fact is however, we are working through the details of the remaining contracts which we need to subsidize to some degree. My assessment is that we will be looking somewhere in the range of 13-14 million in net cash. I am of course going to remain somewhat non-committal until those remaining contracts are completely wrapped up. I hope that helps.
      Your other question is also a good one. Where the money will be spent is ultimately up to the city council, though I’ll tell you what principles will guide my what I bring to the council for a vote. First, I’ll tell you that the funds will need to be programmed in to a written plan which will need to be prioritized. That plan would need to be approved by council and of course their input will need to be given.
      The principles that will guide my suggestion of the funds use will be this. #1 Use the funds in the most efficient manner possible and seek to do the greatest amount of good for the greatest number of people. #2 Look for opportunities to invest the funds wisely in projects that will position the city well to avoid significant future expenses. #3 Be intentional with the funds and don’t be in any hurry to spend it all. What that all means to me is that we would spend some funds on solving some internal process challenges, potentially through software solutions, some investment in consultant work, etc. I expect that the expense of those types of priorities would likely pay more dividends over the long run than the initial costs. This would represent only a very small percentage of expenses, and by far the smallest of any programmed expenses. I see spending funds on finishing much needed road maintenance in several areas that will cost much more if not addressed. I also see spending money on mid-valley park. bringing the current facilities up to an acceptable level of quality. This would include parking, curb, gutter, asphalt road, turf maintenance, and likely some playground equipment. Wherever we spend YOUR money, it would be intentional and with the purpose of either offering residents direct benefits (as through park improvements) or through saving taxpayers long term expenses, through more efficient operations. I hope that is helpful.
      You addressed a couple other points which I would like to clarify as well. You stated that taxes are going up, though this is certainly not the case. Perhaps you can provide some clarification on that and I can offer insight if needed. Your reference to the non-tax tax, I believe I understand however. I am assuming you are the same Isaac that I had the opportunity to speak with at a recent council meeting. To clarify the point I believe you are trying to make, Eagle Mountain currently charges a 6% sales and use tax on utility bills for gas and electric utilities. I would love to discuss the appropriateness of the tax or what it is used for some time, but for now I’ll stick to how it plays into the utility sale. The 6% utility sales and use tax, when charged on third party providers (Questar Gas and RMP) must be adopted by city council and recorded with the state. In contrast, the tax charged against internally operated utilities, is simply an accounting entry. Back in 2006, city council approved a budget in which the rates were set at 6%. While the budget is indeed adopted as an ordinance, there was not a specific ordinance adopted and recorded with the state. As a result, the internally run utilities have been charged 6% from that time, where externally provided utilities have been taxed at only 3%. A good example is White Hills, which is where you live if you are the Isaac I spoke to a few weeks ago. This tax has far less to do with White Hills and far more to do with the rest of the utility rate payers. If the utility sale goes through, and we do not formally adopt the 6% rate, then the entire city will drop to a 3% utility sales and use tax. While I don’t want to be alarmist over the impact this would have on the city, it would be a very big (negative) impact. To clarify, the adoption of the 6% rate is not to gain tax revenue from White Hills, it is to prevent loosing it from the rest of the city. The hit would simply be too large to absorb over the short term.
      I’ll end with one last thought. I want you to understand that I am staring down the barrel of some very big problems, and the conservative in me does not want to increase fees, taxes, charges or otherwise, ever. Unfortunately, inaction would be a decision in and of itself, and it may prove to be detrimental to everyone. More detrimental than the 3% utility sales and use tax would be. That is the reason for the proposed change. I really hope that made at least some sense, though if it didn’t, I am more than happy to speak to you further about it. You can call me on my cell at 801-564-9342. (thanks for reading this long post)

  5. It was repoted on the news today on the radio station I listen to that gas and heating rates were expected to drop significantly this winter. This is in direct contrast of your statement.

    • Jellysprite007, (thats kid of fun to type), I’m going to do my best to explain this in a way that makes sense. First, here is a link that supports what you have said about the gas costs for this winter. http://www.eia.gov/forecasts/steo/
      Now I’ll try to explain what all of this means in context of our rates. Eagle Mountain City’s gas utility purchases natural gas (NG) and delivers it to your house and everybody else’s. We don’t produce any of it which you probably understood already. The amount of gas we purchase changes every month, especially according to the weather. If its cold you use more gas and we purchase more, etc. The utility has information from every year we have operated and we use that historical information to project how much we think you (and everyone else) are going to use. Then we graph that usage. As we grow as a city, the base demand grows too. That means that with 6500 houses in the city, we have never used less than “x” NG. We use that information to look forward in the gas markets. I’ll tell you what that means and why we do it, then I’ll come back to the original point.
      When you run a business where more than 50% of your operating expense is a commodity that changes price by the minute, you have to do whatever you can to build in some predictability. A good comparison would be if your monthly mortgage payment moved up and down every month. It would be difficult to plan yes? Well, the same is true for the gas utility, so instead of leaving that price to chance, we sign a contract with British Petroleum to lock in the price of the NG over a longer period of time. This way, we know exactly how much a portion of the NG we deliver to homes is going to cost us, though we can never sign a contract for all of it because it is purchased in large blocks and if we purchase more than you use (like if there is a cold month) then we will have spent money on something we have no way to get rid of. This process is called a “hedge”. It is a practice used to limit risk agains volatile commodity markets where the prices could spike as they did in 2007, 2008, and 20012. If we didn’t hedge, then we would be purchasing all of the gas we sell to you at whatever the price is as of that day on the open market.
      I really hope this is still making sense.
      Now, we are going to look back in time to where we had locked in the price of our gas for a significant portion of our base demand. The price at which we locked in that gas was lower than the prices are today. Those contracts are not forever contracts, the simply say, “you can buy this much gas, for this long.” then the contract expires, as it did a few months ago. When the previous contracts expired, we then were purchasing 100% of the total gas usage at the market rates, which again change daily depending on supply ad demand. Last November, the previous administration lowered the NG rates. The cost of purchasing the gas was simultaneously creeping up. The result is that the cost of the gas we purchase to supply to the customers is more expensive relative to what we were paying before through the contract. The price compared to the short term rates is not nearly as relevant. At the same time as our cost were going up, our revenues were going down because we had lowered the rates we were charging to customers. As the expenses went up, and revenues went down, this has an impact, which in this case has been just under 1 million in under a year. One other note worth mentioning, is that the radio may have been speaking to a drop in cost from the same period last year, though not necessarily from summer. As I’m sure you can imagine, the NG consumption is quite a bit lower in the summer than in winter, and production of gas is quite a bit higher in summer than in winter. It is typically the case that winter NG rates increase in the winter and decrease in the summer, though this is not always the case. Phew! I hope I din’t lose you with all that, though if I did, I’m happy to speak to you over the phone or even meet in person. Sometimes it’s easier to explain the dynamics of commodity markets and hedges with a white board at my disposal. My number is 801-564-9342 if you want to call.

      • Mayor –

        Despite the revenues going down $532,188 in 2014 and the invoices going up $405,383 (making a difference of $937,571), I still don’t understand why we would need to raise gas rates because of that. Even with this change gas had a debt service ratio of 1.748 for FY 2014. The Rate study shows the reason we had to adjust rates was so we could make sure and meet the 1.25 debt service ratio – last year gas/electric had a 1.319 debt service ratio (Projected 2014 income $3,511,473 divided by projected 2014 debt service payment of $2,661,967 = 1.31912717……) so we were still priced ABOVE what we needed to be, even with this million dollar difference you are talking about. Or am I missing something with those numbers?

        For 2015 yes, that could possibly change – guess it will depend on if gas prices go up or down for our next hedge, if we hire additional employees, etc. In reality the gas price does affect how much income we have, etc. but how can you guarantee we would need to raise gas rates when we have been meeting and exceeding the debt service ratio even with the higher gas prices and lower rates for citizens?

      • Ashly, as we are in the midst of our annual audit, we currently have unaudited numbers for the FY 2014 year and they are different than the information you are using. From our email conversation, it appears that you are using the year to year change in BP invoices and the year to year change in revenue from the sale of that gas that the Mayor used to illustrate the market changes over the last two fiscal years. If that is the case, that does not take into account the O&M costs for the Gas Fund or the other sources of revenue in the gas fund (which are minor compared to the receipts from customers, but includes connection costs and in-house construction, etc.). At the present time, we are showing a revenue total for FY 14 in the Gas Fund of $4,994,662 and an expense total of $5,213,570. This would mean that we subsidized our residents’ gas costs by a total of $218,908 in FY 14. Again, these are unaudited numbers at the moment, but should not change materially as we are well into our general ledger analysis and have turned the information over to our auditor for his analysis. This is not a calculation of the debt service coverage, but a snapshot of the overall performance of the fund. The $218,908 shortfall would be covered by the fund balance in the Gas Fund – which at this time remains healthy, but cannot be relied upon indefinitely. The hedge for our purchase of gas for the first part of winter for the FY 15 year was even higher than the purchases in FY 14 were. With the information we have right now for FY 14 and the hedges already made for FY 15, it would indicate the need to analyze our gas rates and possibly raise the rate. This analysis would need to happen early next year if Eagle Mountain residents vote to retain our Electric and Gas utilities. As we move forward, our cost of service will match the rate charged to our residents. We need to run our utilities like any business and not subsidize rates.

      • You’re the best Paul! Thanks for all the information! Those numbers are quite different from the ones on the budget online so I guess I will wait a couple months and review the audited version!

        So just to be clear though – we would POSSIBLY need to raise rates, if rates don’t go down in 2015. If rates continue to go up then we will have to raise rates, in which case Questar would also have to raise their rates as well – right?

        I 100% agree in the future we need to charge rates that are accurate with our costs – so we don’t have times like this year where we should be charging a little bit more or times like the few years before that where we should have been charging less. I am excited for the changes that the administration/mayor will make if we keep the utilities. I think if we can implement these changes it will make our utilities more profitable and efficient and help keep the costs what they should be for residents.

        Thanks again Paul!

      • Ashly,

        That would definitely explain the differences between the information you used and the information I have now. Those projections in the budget are done well in advance of the budget adoption and is really one of the first steps in the budget process. In fact, those projections are done about six months before the end of the fiscal year and about 11 months before our audit is finalized. As City Council needs budget information as soon as possible to familiarize themselves with what the new year budget will look like, the projections are only that – projections.

        To address your comment about Questar needing to raise rates, Eagle Mountain City does not own any gas resources whereas I believe Questar owns as much as 98% of its own gas. Therefore, Questar would be more insulated from commodity prices in the open market than Eagle Mountain City would. That said, I cannot speak to any correlation between Eagle Mountain City’s potential need to raise rates in response to market fluctuations and Questar’s.

        Thanks,
        Paul

      • Thanks Paul! That helps a lot and does explain the difference.

        Yes, Questar does own gas – but if you look at their financials you will see that only about 1/2 of it comes from Wexpro, the other half they purchase on the market (which actually the last 5 years has been cheaper than the cost of the gas from Wexpro anyways).

        I just get concerned when I see residents all over the internet saying “well we have to raise rates, our rates will be higher than Questars, etc” when we know they are going to go up past what Questars winter rates are. Even if our prices were at $4.50 for the full year this would only increase our cost $670,623 (since the rate study shows that costs of $3.37 would put us at $2 million and therefore $4.50 would put us at $2,670,623). Yes that is a lot, but would not justify raising rates up to Questar rates, plus there are other ways to absorb that cost – such as we have lost a gas employee which would cover a huge chunk of that, or there is a huge amount in the budget for the fleet fund for Gas so we just don’t get new trucks right now, or there are 7.25 employees in the budget but not nearly that many in the gas dept right now.

        I am not saying there is no way there is no way we need to raise rates (even with the things to save money above), just saying it probably won’t be raised to much higher. Plus, I am just pointing out that Questar changes their rates multiple times a year to follow the cost of gas – so if gas rates go up they will raise their rates as well. Just trying to make sure no residents are scared into voting for this, and they know that while we may have to raise rates – it is very very likely that Questar will have to as well.

      • Ashly, I am equally concerned that residents may be scared into inaction by the information you are presenting. I believe your comments are well intentioned and have value. They are important questions to ask, however you seem to be operating with partial information and calling alarms before you understand the entire scope of the challenges. To be clear, Questar Gas has a rate structure that moves with their gas cost forecast every quarter if necessary. They additionally have a “balancing fund” which is the variable amount tagged on to the end of the rate every month. While Questar’s rates account for these fluctuations, and their rates are in step with the market, ours are not. There is no such tool in our rate structure to account for this variability. Where we are a step behind Questar’s rates, our increase is already reflected in their prices. I can tell you that if we stay in the utilities, we will hire new employees to take some pressure of our currently understaffed gas and electric departments. We can’t continue to operate as we are currently. We have held off on additional vehicles for the energy department in this budget cycle because of the pending sale. That would be an additional expense. We will be hiring an analyst or signing a contract with an energy analysis firm. Either way will present additional cost. I won’t walk through the entire operational model of what the energy department will look like if we keep the utilities because much more work needs to be done if that becomes our reality. One thing is certain however, the fundamental structure of our rates will change, our operations will change, and the cost of doing so will increase. This is not a scare tactic, it is direction based in part on the third party rate study, and sound business principles. We will run the utilities as their own businesses and the rates will reflect the real cost of the services and product provided. If we do not operate in this manner, we increase our already significant risk from market exposure. It takes only one bad decision, or even unlucky timing to absolutely devastate our fund balances, which would out of necessity be passed on to customers. This happened in Eagle Mountains history when we were charging around 12.00 per Dekatherm for gas. The bigger we get, the more devastating inaction gets. Government is supposed to be risk averse. For good reason. It’s not our money! It’s yours! So please be mindful that when you ask the government to keep cost down, and to provide utilities at the lowest possible rate, that is exactly why we have presented the utility sale to you. It is easy to get bogged down in the details of the budget line items, and how you believe the government will be effected, I will tell you that this is why I was elected. To solve problems. I am confident in my ability to do so.

    • Oh, yeah, I almost forgot something. I have never traded commodities directly, though before taking the job of Mayor of this awesome City, I was a broker and I traded stocks, bonds, and every other type of investment you can imagine. I only say that so you know I’m not making things up as I go… What I forgot to say was that investment analysts have the impossible job of predicting the future. (which is not an insignificant factor in the challenge of running a small utility) Analysts base their projections on observable data as well as market indicators which may point to one likely outcome or another. Analysts projections are not foolproof by any stretch, and all it takes is a winter that gets a little colder than expected and the analysts projections go right out the window. They may be spot on too, but I thought I’d put the role of analysts projections, and their reliability in context.

  6. I am for the sale however I fear that there may be some members of the city council that will want to increase our debt in coming years. For example, “We have cut our debt in half so lets buy stuff.” For this reason and EM’s disaster preparedness abilities, I am considering running for city council. You Sir are doing a fine job. Thanks

    • Well Tim, I guess I just say thanks to that part about me doing a fine job. I’m not sure about your assessment of the council’s willingness to go into debt, but I would encourage you to email each of them to share your thoughts on what you would like to see from them if the sale goes through. You can certainly email me too, I’d like to hear your perspective. I’d like to hear more from you on disaster preparedness too, which I think you brought up in our emails some months ago, though maybe my memory is off. As far as running for council, I encourage you to do so! It is probably one of the most deceptively difficult, though gratifying ways to serve your community. I say go for it!

  7. Mayor Chris Pengra, Your comments about the importance of protecting and restoring starlight over Eagle Mountain City are being circulated globally already. I’m writing to tell you thank you! I hope that mayors worldwide follow your lead. Please talk about the need to reduce light pollution– especial over cities– during the Conference of Mayors! cheers+stars, Audrey [writing from Chicago, documented the most light polluted city in the world.]

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