REPORT OF THE CITY MANAGER’S
City Manager Bob Cass requested Mike Liner, Bob Matthews, J.Q. Warnick, Jr., and John G. Wilkerson, Jr., to serve as an oversight committee. We were requested to review and look into the contractual relationship between the City of Lubbock (COL) through its electric power department known as Lubbock Power & Light (LPL) and the West Texas Municipal Power Agency (WTMPA). The committee was also to examine the controls of the contractual affairs of these two entities as handled internally by the COL.
At the first meeting of the committee with Cass it was mutually agreed that we would serve with two concepts to be the goal and control of the committee effort. First, Cass would provide all the information available and requested with the concept in mind that the committee would finalize its effort with a written report and would simply in a straightforward manner relate what it had uncovered. Second, the committee decided that if in its review it found any item or action that even appeared to be of a fraudulent or criminal nature it would cease its effort and the matter would be referred by Cass to the appropriate law enforcement authorities.
The committee offers thanks to all who provided information and who assisted the committee in its efforts. Particular thanks are due to City Manager Bob Cass, Director of Finance Beverly Hodges, Assistant to the City Manager Harold Dominguez, Internal Auditor Hermun Boatman, and Contract Manager/Attorney Bill deHaas. Some of these five persons sat in on most of our meetings and discussions. Their efforts in providing information, guidance and insight were invaluable. Further, no person from whom we sought information refused or hesitated to cooperate in providing the requested information or documentation.
The committee also wants it noted that it has never discovered or uncovered any action or inaction by any person that could be considered criminal in nature.
FOR THE PREPARATION OF THIS REPORT, THE COMMITTEE HAS UTILIZED THE PROVIDED AND REQUESTED INFORMATION AND DOCUMENTATION AND NO OTHER SOURCES.
BACKGROUND AND HISTORY
COL and the cities of Brownfield, Floydada, and Tulia jointly created the WTMPA in 1983. The primary purpose of this corporate entity was to buy wholesale electric power and sell and distribute it to the member cities. By joining together the four cities were able to increase their bargaining power for the more economical pricing of electricity. Each city appoints two representatives to the WTMPA board of directors. The directors from each city serve two (2) year overlapping terms. One change has been made in this directors’ setup. The board now has a non-voting chairman, who presides at meetings of the board and performs any board assigned duties. In addition, four items, to wit: (1) WTMPA’s operating budget or any budget amendment(s), (2) capital projects, (3) certain energy sales or sale or exchange of property with a value in excess of $20,000, and (4) any amendments to the WTMPA rules and regulations require a quorum of seven (7) voting board members, an affirmative vote of six (6) voting board members, and an affirmative vote of the “majority in interest”. The “majority in interest” weighted vote is assigned according to kilowatt purchases by each city during the previous year. Lubbock has an 85% “majority in interest” vote since it buys 85% of WTMPA’s electrical output. Thus, COL has a veto power over these four specific areas. This concept of “majority in interest” was abandoned for a time, but has recently been re-instituted by WTMPA.
Sometime prior to 1998 after appropriate negotiations and with expert advice it was mutually agreed by the four cities that the building of a generating facility by WTMPA would be an additional
benefit in providing economically priced electric power. The COL administration also decided it gave an added advantage to COL since the WTMPA bonded indebtedness would not be on the COL balance sheets.
A plan was developed for WTMPA to issue up to $31 million in revenue bonds to construct the generation facility and to repair and update generation Units #6 and #7 belonging to COL. Each city signed an amended power sales/purchasing agreement to insure WTMPA would have viable customers for the life of the revenue bonds. COL also leased real property to WTMPA, which was to be the sight of the newly constructed generator. WTMPA entered into a contract with GE through one of GE’s subsidiaries to construct the turbine generator and update units #6 and #7. As a result of the cost of the construction contract WTMPA was only required to issue $28 million in bonds. Energas was to build a connecting gas pipeline from an LPL existing gas pipeline to the new generator. LPL contracted with WTMPA that on the successful completion of the construction project LPL would operate and maintain the new turbine generator and units #6 and #7 for WTMPA. The Ground Lease, the Power Sales Contract, and the Operation Management Agreement were all approved and adopted by the City Council of COL.
After the turbine had been installed, but before acceptance by WTMPA, GE was required to do tests and test runs of the entire system demonstrating that the system was operable to specifications. Unfortunately, the turbine did not perform as required. After several tests, it was determined on September 3, 1999, the turbine had been damaged. The damage was caused by debris that came from and through the gas pipeline. WTMPA and COL filed a lawsuit against GE and Energas. The claim against GE was that its filters were not of the proper type, had not been properly installed, and this was claimed as a cause of the damage. Energas was named as the source of the debris from its pipeline as a contributing cause to the damage. Energas claimed that the debris came from the LPL line to which it had connected. GE claimed the filters were appropriate, but the debris was so large it overwhelmed the filters. The lawsuit was settled with GE through mediation. COL and Energas officials settled the suit against Energas. The COL City Council approved both of the settlements.
WTMPA after discovery of the turbine damage had withheld the last contract payment to GE. The settlement awarded this sum to WTMPA. There appears to have been some informal discussions about WTMPA keeping this money on deposit. However, it was used to make a timely payment on WTMPA’s bonded indebtedness. Thus, the payment of $1.6 million on the bonded indebtedness was legal and valid.
As a result of the turbine damage and the required repairs to make it a usable generator, the unit was delayed by one year in coming on line. The four cities and WTMPA have been doing business allegedly under these contractual agreements since the turbine came on line.
CONTRACTS AND RELATIONS
GROUND LEASE CONTRACT
As previously noted COL leased the necessary premises to WTMPA on which to construct the new turbine generator. Pursuant to section 9.02 of the contract WTMPA was obligated to
repair, reconstruct, or replace any damaged or destroyed improvements on the premises. Under Section 12.02 WTMPA was to carry four (4) types of insurance. Those were (1) Comprehensive General Liability Insurance with COL as a named additional insured, (2) Owner’s Protective or Contingent Liability Insurance and Property Damage Liability Insurance with COL named as an additional insured, (3) Builder’s Risk Insurance with COL named as an additional insured, and (4) Worker’s Compensation Insurance to cover all contractors except COL.
When the turbine generator was damaged it was discovered that WTMPA did not have any insurance coverage for the loss of the turbine. COL negotiated with its own insurance carrier and by agreement acquired coverage for one-half of the repair costs which amounted to approximately $450,000. The insurance carrier was subrogated to a refund of this amount on settlement or judgment.
During the course of this committee’s review it was discovered that WTMPA even into 2003 did not have replacement insurance for the turbine generator. COL immediately acquired such coverage including COL as an additional insured. Cass and the COL Risk Manager advised the committee that WTMPA has been billed for the cost of this insurance coverage. WTMPA still does not have the other contractual insurance coverage. This is WTMPA’s failure to abide by the terms of the contract, but COL should have required proof of the insurance each year and has not done so. The insurance coverage is made effective by Section 12.01 of the contract, which is an indemnity agreement. Section 12.01 is WTMPA’s agreement to hold COL harmless from any loss, damage or injury occurring on or as a result of the use of the premises.
OPERATION MANAGEMENT AGREEMENT
This is the contract under which COL operates, and maintains the new turbine generator and the repaired units #6 and #7. Section 1.11 requires WTMPA to carry and maintain “comprehensive general liability, owner’s protective or contingent liability , fire and casualty, boiler and machinery, business interruption and other customary insurance for similar electric utility units.” WTMPA again failed to purchase any of these contractually required policies. However, COL has not done anything to require WTMPA to abide by its contractual obligation to carry the required insurance. Section 7.1 is another hold harmless and indemnity provision and is part and parcel of the insurance requirements.
Section 3.2 requires COL to present an invoice to WTMPA on the tenth of the month for the previous month’s costs of operation and maintenance of the generator and units #6 and #7. Under section 3.1 COL may add to this billing 5% for its overhead for COL’s administrative costs. Review revealed that probably these cost have never been actually calculated, but have been approximated and the 5% has never been included. Review revealed that at least on one occasion no invoice was presented by COL and WTMPA simply paid the same amount as was due in the previous month. City Manager Cass is having these matters recalculated and intends to present an appropriate recalculation so that COL may recoup the underpayments. This will result in the cities owing more on their utility bills since that is how WTMPA recovers its expenses.
The Committee met with Robert Massengale, one of the COL representatives on the WTMPA board. He informed us he thought this recalculation of expenses and under payments would present no problem, since the other cities recognized their responsibility to pay their assigned contractual costs.
Section 9.17 requires WTMPA to designate an authorized representative on whom COL may rely as to his statements and representations on behalf of WTMPA. No such person has ever been designated. However, COL has never requested that their be such designation. The committee was informed WTMPA has never in its history had an employee. We were further informed by Robert Massengale that WTMPA saw no need to consider the hiring of an employee in the future.
However, whether WTMPA has an employee or not, it does not abrogate the need for WTMPA to designate a representative with the appropriate powers.
POWER SALES CONTRACT
Section 6 obligates WTMPA to prepare each year a proposed Annual System Budget and present it to the member cities. The cities have a time period to file objections to this budget. After WTMPA has satisfied any city objections or the expiration of the designated time frame for making objections has expired then WTMPA should officially adopt its annual budget. Each city is also required to present WTMPA with its expected electrical needs for the coming year. These provisions have not been followed by any party to the power sales contracts.
Section 14 is the debt guaranty provision. Each city, by its separate contract for purchasing power from WTMPA, guarantees the bonded indebtedness, and operating and maintenance expenses of WTMPA. These guaranty provisions apparently had an important and vital impact on the marketability of the WTMPA being able to sell its bonds. Each city is initially only liable for a percentage of the debts based on their percentage use of electricity. It is the same formula used for the “majority in interest” weighted vote calculation. However, if any city defaults in its share then the other cities become liable pro-rata for that defaulted amount. By the contract it means one city could become a guarantor for 100% of all the WTMPA debts. As the bonds are paid down, of course, the contingent liability is reduced.
Section 23 is again an indemnity and hold harmless agreement. WTMPA is also required to carry fidelity insurance and bonds on all officers and employees responsible for handling the funds of WTMPA. This provision has never been complied with by WTMPA and COL has not required it to be done.
Since WTMPA’s inception, its accounting services have been provided by COL at no charge to WTMPA. There is no contractual provision for providing this service.
The committee was informed that after the first year of WTMPA’s operation the COL financial department required WTMPA’s accounting records in order to complete the city’s records. When it was discovered WTMPA had not done this job, a COL employee voluntarily on his own went to the WTMPA office and did the necessary accounting for them. Ever since COL has performed this service free-of-charge. This has never been authorized by anyone in authority at COL. At its regular board meeting on December 22, 1999, WTMPA passed a resolution authorizing the hiring of an accounting firm to do its routine accounting. In the WTMPA minutes of that meeting and the resolution, WTMPA recognized that COL provided it with its necessary accounting services. The Minutes recite, “;… and a resolution to transfer WTMPA finance management from the City of Lubbock to WTMPA (including the appointment of an independent accounting firm to render assistance as needed)…” The formal resolution stated, “WHEREAS, the City of Lubbock, as a member city of the WTMPA, has provided, as needed, accounting services for the WTMPA that are necessary and proper in owning and operating an electric power utility;…” While COL may not have known at the supervisory levels it was providing free accounting service, it is apparent that WTMPA knew where its accounting service came from.
To this date over three years after the December 22, 1999, accounting resolution WTMPA still has not hired an accounting firm to perform this service, but has continued to utilize the COL free accounting services. There is no record of anyone in authority over the books and records of COL or LPL having ever questioned these free accounting services.
WTMPA OFFICE DESIGNATION AND EXPENSES
At its December 22, 1999, meeting WTMPA by resolution designated the offices of Lubbock Councilman Ty Cooke as its official business address. Cooke was and is the non-voting Chairman of the WTMPA board. The resolution also authorized a monthly payment of $3,000 dollars to Cooke for, “establishment of the WTMPA office to be used for the reimbursement and expense of purchasing supplies and equipment and maintaining equipment, and the WTMPA office, and all necessary expenses related to providing equipment, supplies, and maintenance of the WTMPA office.” Apparently, WTMPA set up no accounting procedure to insure that the money was applied as authorized or that $3000 was the necessary amount to pay the monthly office expenses. Councilman Cooke requested a legal opinion from the COL City Attorney to determine if as an elected City Councilman it was legally permissible for him to accept the money from WTMPA and maintain the WTMPA official office. The opinion of the City Attorney advised Councilman Cooke he would be violating no laws to perform the designated services, provide the office space and accept the money.
It should be noted that the $3,000 in part is in effect a lease of office space as well as payment for other routine and clerical office expenses. Cooke was not an employee of WTMPA and the payment to him does not appear to have been for the rendering of personal services.
ACCOUNTS RECEIVABLE FROM WTMPA TO COL
In the fall of 2002 it was publicly reported that WTMPA owed COL approximately $5.3 million dollars. The audited figure as of February 28, 2002, was $2,900,536.89 for capitalized expenses incurred in the repair of the new turbine generator and $2,950,287.88 for amounts allowed to accumulate when WTMPA did not charge enough to the four cities to recover the costs being incurred through the Operation Management Agreement with COL. The figures were reported in an LPL “2002 BOND RATING PRESENTATION” as follows:
“For the year ended September 30, 2001, the City had accounts receivable of approximately $5.05 million from WTMPA and is approximately $6.04 million as of March 31, 2002. The West Texas Municipal Power Agency has also agreed to pay all current expenses and to repay the outstanding balance in 60 equal payments.”
Auditing reveals that the installment agreement is being kept. However, no one in authority at COL made the agreement and no interest on the past due amounts to date has been billed or collected. The other three cities are on their usual proportionate basis responsible to repay these debts through the electric rates.
There has been a total lack of contract management by both WTMPA and COL. COL has not required WTMPA to abide by its contractual agreements. COL has provided in effect loans and actual accounting services to WTMPA when it was not contractually required for COL to do either. It appears that as long as LPL made a profit and no problems became public then it was “business as usual.” It is difficult to understand why WTMPA’s failure to have replacement insurance on the turbine generator when the turbine tests damaged the generator was not a red flag that WTMPA was not abiding by its contracts as it should. Both WTMPA and COL were engaging in poor business practices. These are matters that surely should have been noticed following the annual audit. However, neither the internal nor the external audits revealed or identified the almost total lack of contractual compliance by both COL and WTMPA.
It is abundantly clear that COL has permitted by omission WTMPA to be in breach of a majority of the essential provisions of the three contracts. The failure of WTMPA to acquire the necessary insurance in all three contracts, pay for its own accounting services, have the necessary fidelity bonds, name a designated representative, adopt an annual budget, etc., makes it clear that the COL appointed members to the WTMPA board have never been fully instructed by COL as to their duties and responsibilities in protecting COL’s contractual interests.
INSURANCE AND FIDELITY BONDS
If COL intends to continue operating under the present contracts, then COL should immediately notify WTMPA that COL demands WTMPA live up to its agreements concerning insurance
and fidelity bonds as set out in the several contracts between COL and WTMPA. COL should give a limited time deadline to WTMPA to accomplish these matters and if not done by the deadline then give further notice COL will purchase the insurance and fidelity bonds and accordingly bill WTMPA for the total expense.
The COL City Council should by ordinance create an LPL board with authority (1) to operate LPL as a business, (2) hire/fire a CEO/executive director, (3) set LPL policies and (4) submit an annual budget proposal to the City Council for its approval. Thus, the final financial decisions concerning LPL would remain with the City Council. The COL Council should also require a person to have extensive business experience to be eligible for an appointment to the LPL board.
Have the LPL and COL audits done by different auditing firms. Try to use an auditing firm with utility experience for the LPL audit. Neither of these auditing firms should be the same firm used by WTMPA. This would constitute a better business practice.
ATTORNEY CONTRACT MANAGER
COL now has an attorney acting as contract manager and he should have the assistance and the authority he needs to insure that all COL contracts, not just the one being considered here, are being complied with by the COL and its appropriate employees, and the other contracting party.
WTMPA ACCOUNTING SERVICES
COL should immediately stop performing accounting services for WTMPA. COL has no obligation to provide WTMPA with accounting services. Since WTMPA at its December 22, 1999 board meeting authorized the hiring of an accounting firm to keep its books, then it should promptly do so.
WTMPA DESIGNATED REPRESENTATIVE
COL should require WTMPA to appoint a designated representative as set out in the Operation Management Agreement.
COL APPOINTMENTS TO THE WTMPA BOARD
In making appointments to the WTMPA official board, COL City Council should create a policy whereby no city employee or COL Council Member would be appointed to the WTMPA board.
The COL City Council should on a regularly scheduled basis have these representatives attend Council work sessions to give updates and consult with the Council on the COL relationship with WTMPA. These sessions would also be an opportunity for the COL City Council to assure that the COL board members are carrying out the COL policies in all respects.
WTMPA DEBTS TO COL
Have an accounting of the entire WTMPA financial relationship with COL completed. Then bill WTMPA for any amounts unpaid and with interest added where appropriate.
THE LEGAL RELATIONSHIP BETWEEN COL AND WTMPA
The broad picture of WTMPA and COL dealings and relations revealed two outstanding features. First, WTMPA has been treated as though it were just another department of COL. The COL contract attorney agreed with this appraisal. In addition, the Memorandum issued by the City Attorney on October 7, 2002, stated as follows: “Apparently, since the City had veto power over the budget, WTMPA could be considered a component unit of the City and thus WTMPA would have to be included in the City’s financial statements and audit.” WTMPA at the time of the legal opinion had abandoned the veto power, but as noted it has recently been re-instituted. The Council should insure that IF WTMPA is to remain in existence that in the future it will be treated as a separate legal entity and all COL dealings with WTMPA will be according to the contracts. It is also possible that COL could take over the ownership of the generation and distribution of electricity to the member cities, assume the bonded indebtedness, etc. and dissolve WTMPA. However, for that to be done, COL would have to insure that the other three cities would enjoy the same financial benefits they have under the present arrangement, since these cities have entered into this electricity purchasing arrangement in good faith.
Second, it appears no one at COL was specifically in charge of the WTMPA relations and dealings with COL. No one seemed to know what was actually occurring with regard to the contractual relations and dealings between COL and WTMPA at any particular time. Consequences did not seem to matter. It seems inconceivable that the “no insurance” on the generator caught no one’s attention. That alone should have created a notice that the WTPMA contracts were not being followed and needed someone’s immediate attention.
This constitutes the report of the City Manager’s Review Committee. It was our goal to ascertain the facts concerning this contractual relationship and uncover the problems while offering recommended solutions.
MIKE LINER BOB MATTHEWS
J.Q. WARNICK, JR. JOHN G. WILKERSON