Trying to understand the utility industryยs jargon and practices is no easy feat. After a conference call with Memphis Light, Gas and Waterยs assistant manager of utility resources Bill Bullock, chief financial officer John McCullough, and the utilityยs director of corporate communications Mark Heuberger, the Flyer tried to shed some light on whatยs going on at the publicly owned utility. Unfortunately, sometimes getting an answer from MLGW only makes the issues more confusing.
First, according to the officials, the checkbook pain Memphians are feeling is due to an increase in gas prices , not rates . Semantics? Maybe. In utility-speak, prices and rates are different. But as the MLGW officials explained it, most utilities use a base rate (Memphisย is $2.10 per unit, according to these guys) and then add to that a Purchase Gas Adjustment (PGA).
Crystal clear, right?
They further explained that itยs kind of like the escrow account used for a house note. The base rate is billed in and then later the utility considers what was actually paid in and then tallies up or down from the $2.10 figure to set the gas price. If more is owed, the price is raised; if less, the price is lowered. Also, the city council has to approve the rate. Lucky for us, the council approved a rate decrease in May. If they hadnยt, the MLGW officials say weยd be paying even more now.
But if the price is going to be determined by how much is needed for the purchase of gas in addition to the rate amount, then the rate decrease that was hyped this year may not really mean anything at all to the consumer. Got that?
Things just get more confusing from here. A study of MLGWยs gas expenditures for 1989, 1994, 1997, 1998, and 1999 listed in the 1999 financial report reveals that in 1997 MLGW spent $145,562,708 for gas that was later sold to customers. This amount stands out because in the other years examined MLGW spent an average of $116,677,751 each year on the gas the utility bought from suppliers, a difference of $28,884,957. A nearly $29 million discrepancy is apt to raise some eyebrows, considering that this amount is almost half of what MLGW is borrowing this year to pay its own bills.
When questioned about the 1997 numbers the officials said they didnยt know why so much more was spent on gas that year. They did agree with the Flyer that consumer gas prices should have increased in kind if so much more was spent by the utility on gas that year. The officials said that they would call back with a complete explanation (at press time they had not) but surmised that it might be due to industrial customers opting to purchase gas from MLGW that year instead of procuring it on their own on the open market.
Are we then to assume that in 1997, and not in any of the prior or subsequent years considered, industrial customers chose to buy gas from MLGW? The officials didnยt know.
Further, according to the notes following the financial statements in the 1999 report, ยThe Gas Division enters into futures contracts for the purchase of gas to manage the risk of increases in the market price of gas on anticipated purchase transactions.ย
If this monthยs bill is any indication, the futures contracts concept doesnยt seem to be working very well.
The MLGW officials volunteered that these contracts are entered into up to a year in advance but typically six to nine months prior to delivery of the gas and that MLGW enters contracts with several suppliers to ยminimize risks.ย
So, if these contracts were entered into at least six months in advance, with the prices the utility would be paying for gas locked in, then the utility knew months ago that there would be a dramatic increase in the consumer cost of gas, right? Well, um, sort of.
And if the utility knew in June at the latest (thatยs six months before December, folks) that gas prices would skyrocket, why did they wait until October to say anything? And why didnยt they increase the price consumers pay for gas year-round to offset the winter increase so that consumers wouldnยt be hit so hard in December (right after Christmas, no less)?
The answer: They didnยt think it would be this bad.
The officials say that they didnยt purchase all of the gas the utility needed on the futures market because they hoped prices would go down. Fair enough. The $5-per-unit price that MLGW locked in this summer seemed awfully high compared to normal rates, so the utilityยs gas buyers took a risk that prices would get lower. Thatยs prudent, even if it didnยt quite work out like they hoped. In fact, when prices soared as high as $10 per unit, and now that theyยre about $8 or $9 per unit, MLGW and Memphis have been pretty lucky to have that $5-per-unit gas sitting around.
Score one for MLGW, no? No.
They still hadnยt answered the question about why the price increase wasnยt spread out over several months to lessen the blow. Oh wait, they tried.
Their answer: MLGW has offered a billing plan for a while now so that customers can pay an average bill amount each month. But that doesnยt answer the question.
Sorry, the officials have another meeting. They only have time for one more question from the Flyer . Here goes:
You told us the last time we talked (we said) that MLGW canยt borrow the money it needs to cover the cost of gas from the electric or water divisions because regulatory laws prevent one division from loaning money to another. You also told us this was why MLGW needed to borrow $20 million from the city of Memphis to fund the privately owned Memphis Networx venture.
Okay, but on your financial report thereยs a ยcommon accountย listed with $220 million in it. The report says this money is then put into revenue-producing safe investments like mutual funds and government bonds. If the utility can combine revenue from the three divisions to invest the money together, why canยt it inter-divisionally borrow money?
Their answer: ยCommon accountย is an accounting term, not a practical one. The money is separated back in the end.
But, hold on. Itยs separated back? So it was together at some point, wait …
They really do have to go now.
Hope that clears it all up. Let us know if we can help you with anything else.
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So it all makes sense now, doesnยt it?
( If youยve got any answers, or if youยve got more questions youยd like the Flyer to pose to MLGW, you can e-mail Rebekah Gleaves at gleaves@memphisflyer.com. )