State scolds PUD for buy-back program decisions

By John Hanron
Methow Valley News

5/31/03

Methow Valley, WA - A report by the state auditor’s office claims the Okanogan County Public Utility District incurred more than $1 million in unauthorized contractual commitments relating to its 2001 energy buy-back program.

In addition, the state said the PUD provided a "gift of public funds" of nearly $30,000 to one commercial customer that ended its buy-back contract early but did not reimburse the district for the full unearned portion of the contract.

The PUD, in a reply to the auditor’s report, "respectfully disagree[d]" with the findings.
In February 2001, faced with skyrocketing wholesale power rates and the prospect of decreasing amounts of electricity coming from a drought-stricken Columbia River, the PUD board implemented a program that would pay customers 10 cents per kilowatt hour for electricity not used during the coming year. The total amount paid would be based on average use during the two previous years.

But the PUD terminated the program a month later, after hearing from citizens who were concerned that the program would be an incentive for businesses to close their doors, worsening an already struggling economy. The PUD board voted to end the controversial program at a meeting March 27, 2001, but stated it would honor all legal commitments already made. In the three days that followed, the PUD entered into agreements with 66 additional customers–72 percent of the total number of contracts–mostly businesses and irrigators.

The buy-back stemming from those last-minute contracts added up to more than $1 million, according to the state auditor’s office.

While the state claims those contracts should not have been signed after the board’s decision, the PUD staff, in a written response to the auditor’s findings, said it had already invited customers to contact the district until March 30, 2001, and believed it had an obligation to keep the program open until that date.

PUD board member Don Johnson, who declined to sign the PUD’s response to the state auditor, said he believed that the intention of the board was to stop the program immediately.

"That’s why we made a motion and passed it on the 27th," he said this week. "The program was already scheduled to end on the 30th."

PUD attorney Michael Howe sent a letter to the auditor stating that it was his opinion that the invitation to apply for the program until the 30th constituted a verbal agreement that needed to be met.

The auditor disagreed, and labeled the $1 million "unauthorized contractual commitments."

The other finding reported by the state auditor involved a buy-back contract with Beebe Orchard Company. Beebe had signed up to disconnect its account for one year, and was paid $127,992 in advance for doing so. Six months into the contract, the company had an offer from Trout-Blue Chelan to purchase the property affected by the contract. Trout-Blue, however, wanted to restore the electrical account, which would necessitate terminating the buy-back contract.

By that time, however, the wholesale price for electricity had dropped to between 1 and 2 cents per kwh, according to the PUD’s response to the state, and "the customer was not interested in paying the 10 cent/kwh contract price back to the district." The district, hoping to recover some of its costs, agreed on a 5 cent/kwh rate payback rate.
So, although the PUD calculated that Beebe had $59,592 of unearned credit remaining on the agreement at the time it was terminated, the company was only required to repay $29,796 to the district.

"If we were not able to terminate the contract, they would have kept the whole $59,000 and the district would have been out $59,000," explained PUD manager Harlan Warner Tuesday. "We figured we had an interest in stopping this. Let’s get a dialog going. Going halfway is normally not a bad way to settle a conflict."

Warner added that opening the account also increased revenue to the PUD, since the new owners started purchasing electricity at about 5 cents per kwh.

But commissioner Johnson said this week that the buy-back contract states that parties need to reimburse the district for all payments made if any provision of the contract is violated. There is no specific guideline for payback for a mutually agreed-upon termination of the contract.

Warner said the decision was in the best financial interest of the PUD.
"We can say, ‘no we’re going to be tough and follow the contract’," he said Tuesday. "That didn’t seem to be in the best interest of the district when they were sitting there ready to write a check. Any contact can be modified if both parties agree to new language."

"It was a giveaway," said Johnson.

After reviewing the district’s response, the state auditor’s office agreed, reaffirming its finding. Though "[d]istrict employees believed they were acting in good faith and were trying to maintain good relationships with customers," the district in effect made a "gift of public funds." The action, the report said, violated the Washington State Constitution, which forbids public bodies to give any money or property to any individual, association or company except for the necessary support of the poor and infirm.

Though not an official finding, the auditor’s office also took issue with the process the PUD used in its $10.8 million purchase of 16 diesel generators in 2001. In a letter to the PUD, the auditor stated that "all 16 generators should have been purchased using a competitive bid process." Further, it stated that the district could have met emergency power needs through temporary leasing of generators rather than by purchasing units.

"By not following bid laws the District could not be assured it obtained the best possible price, nor were all possible vendors provided an equal business opportunity," the letter stated.

"All I’m going to say is there was correspondence (with the auditor’s office) and we got no response and there was no finding," he said.

Warner said the PUD received quotes from two companies, but believed it did not have the time to go through the bidding process.

"We didn’t have time to do that," he said. "The only economical to do, like everyone was doing, was to acquire them."

Six rental generators ran steady for three months, Warner said, but the 16 purchased generators have been sitting idle since the price of electricity dropped.