The City of Brownwood may be about to gamble that natural gas prices will continue to rise - a gamble that could save the city tens of thousands of dollars in electricity costs.
Brownwood City Council members took the first step Tuesday to enter a 24-year-contract with the city’s bulk power purchaser to pre-pay a portion of its electrical energy purchases at a set price. Based on current projections, the move will save the city an estimated $125,000 a year but will also obligate the city to pay its share of bonds issued for the prepayment.
Brownwood City Council members approved an ordinance on first reading for the contract with Cities Aggregation Power Project (CAPP). The matter is expected to come back to the council on Oct. 28 for second and third readings.
Brownwood, which is a member of CAPP, would be one of more than 80 cities that might participate in the purchase.
CAPP, which was created in 2001 to negotiate lower, more stable prices through bulk purchasing, according to a memo written by City Manager Bobby Rountree, City Attorney Pat Chesser and Finance Director Walter Middleton.
Council members gave their first-reading approval after mulling over information that despite some risk to the city, it is in city’s long-term best interest.
There are several questions regarding the financing and debt service that will be addressed before the council’s next meeting on Oct. 28, when the matter will be on the agenda for second and third readings, an agenda item briefing sheet states.
Final numbers in terms of savings to the city and the amount of its share of debt service on pre-payment bonds won’t be known until it is certain how many cities will participate.
Currently, the projected debt service for Brownwood over the 24 years is $2.6 million, or $211,824 a year, council members were told.
According to the memo from Rountree, Chesser and Middleton, CAPP has entered a power purchase agreement with Luminant Generation Company to buy up to 150 megawatts of power from seven companies over a 24-year period.
The contract commits the city to buying about 60 percent of its annual energy needs through the CAPP power purchase agreement and pay a proportionate amount of the debt service associated with CAPP’s prepayment.
“The price of natural gas is extremely volatile,” the memo states. “Energy experts, including the chairman of the Public Utility Commission of Texas, agree that this trend will continue over the long term.
“The CAPP long-term contract allows for better, more fiscally responsible budgets resulting from the stable nd predictable long-term energy costs that will be available to CAPP members …”
The power purchase agreement requires that CAPP prepay three-fifths of the total contract price. The pre-payment amount is likely to be $400 million to $524 million. CAPP will issue bonds by Dec. 23, and the bonds will be backed by individual participating cities.
City Councilman Dave Fair asked Middleton is he is comfortable with the proposal. “Frankly, no,” Middleton said.
Later, Middleton said he does favor the city’s participation and explained why he said he’s not comfortable with proposal.
“The issue is, there’s risk involved,” Middleton said. “For an accountant, any time a transaction has risk, you’re going to have a hard time getting to a comfort level for your client.
“Having said that, even though I’m uncomfortable with the risk, the potential benefits are going to be good for the city of Brownwood in the long-term.”
Fair initially said he couldn’t go along with a 24-year commitment given the “confusion and doubts” about national economic conditions.
Geoffrey Gay, an attorney from an Austin law firm that represents CAPP, responded to Fair’s statement. “I understand 24 years is a long time,” Gay said. “There is no risk-free choice. The most risky proposition is to do nothing.”
When it came time for council to vote, Fair said he will vote for the contract on first reading “out of deference for (city) staff.”