Victor Hernandez Responds to City of Lubbock/WTMPA Relationship - KCBD NewsChannel 11 Lubbock

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Victor Hernandez Responds to City of Lubbock/WTMPA Relationship

City Council Member Victor Hernandez is issuing the following statement regarding the ongoing discussion of the City’s relationship with the West Texas Municipal Power Agency.  Mr. Hernandez had a prior commitment and was unable to attend Thursday's open executive session.

ACCOUNTABILITY? WHAT’S THAT?
and/or
I’M NOT SURE, BUT I THINK I’VE JUST BEEN ENRONED

The Lubbock City Council met at 4:00 p.m. on Tuesday, October 8, 2002, to discuss the West Texas Municipal Power Agency (WTMPA). At approximately, 10:10 p.m. the Mayor held a news conference during which he read a two page prepared statement to the press. I, as did the rest of the Council, helped wordsmith that “Update”. In addition, the Mayor fielded some questions from the press. Generally speaking, I agree with most of the answers given by the Mayor, however, he did state an opinion which I disagree with and which prompted this memorandum. That statement dealt with whether or not LP&L (and indirectly the public) has been damaged as a result of what’s happened.

I.

Where’s the Money? ($1.6M)

WTMPA issued $28.763M in bonds to finance a power plant at Massengale Station. The total power plant cost of $28.763M included the cost of the generator. The generator cost $16M and was purchased from GE Power Systems. Because of the problems with the generator, WTMPA withheld, in the Fall of 1999, $1.6M of the total generator cost from GE Power Systems, which equated to a 10% retainage. Retainage in this case, is 10% of the purchase price, which was withheld because the item purchased, the generator, did not work as expected. Normally, the retainage would have been set aside until the dispute with GE Power Systems was resolved either through litigation or settlement negotiations. Instead, the retainage of $1.6 million were used to make
WTMPA bond payments that became due in February 2000. So, since February 2000 WTMPA knew it had spent the retainage.

PROBLEMS: 1. Currently, there does not exist (to our knowledge) any record of WTMPA board action that designated these monies ($1.6M) as retainage for payment of this potential liability to GE Power Systems.

2. Currently, there does not exist (to our knowledge) any record of WTMPA board action that authorized WTMPA to use the retainage to pay bond payments that became due.

3. Even after these bond payments were made in February 2000, neither Ty Cooke, Paul Thompson or Robert Massengale informed senior management or the City Council of WTMPA’s action even though two of these three individuals had to have physically signed a request/approval for these payments. In fact, as late as the City Council meeting of September 26, 2002, this Council was repeatedly told that these monies were being held as retainage and could be used to pay off, as a result of settling with GE Power Systems, the attorney fees incurred ($150,000) and monies owed to the insurance company ($422,000). The reason for having to pay back the insurance company is, the generator in question was insured by LP&L in case it broke down. LP&L negotiated a deal with the insurance company whereby the insurance company would pay WTMPA $422,000 (1/2 of the total repair bill of $844,000) to help repair the generator provided, and with the understanding that, if LP&L/WTMPA should ever recover any monies from GE Power Systems or Energas, the insurance company would be reimbursed.

4. Since WTMPA spent the $1.6M, and since we only received $150,000 in cash from GE Power Systems, WTMPA no longer had the retainage to pay the insurance company back or pay LP&L some of the monies owed them by WTMPA.

Therefore, WTMPA’s defense seems to be that it doesn’t matter if WTMPA spent the retainage, it didn’t matter that WTMPA didn’t initially tell anyone about spending the retainage, it didn’t matter that WTMPA subsequently lied to us about the retainage, and it didn’t matter that the WTMPA board didn’t take any action in regards to any of this, because WTMPA used the money legally.

II.

Settlement with GE Power Systems

The City and WTMPA sued GE Power Systems as a result of the problems we had with the generator they installed at the Massengale Station. Negotiations were entered into and a settlement offer was approved by the City Council on September 26, 2002. As a result of that settlement, GE Power Systems agreed to forego its’ claim on the $1.6M it was still owed by WTMPA (as a result of having built the power plant at Massengale Station). The $1.6M is the retainage WTMPA was suppose to have held back, as a result of the problems we had with the generator. Remember, WTMPA had already spent the $1.6M back in February, 2000. In addition, GE Power Systems agreed to pay WTMPA $150,000 in cash.

On September 26, 2002 the City Council misrepresented to the public, based on misrepresentations made to us, that WTMPA had $1.6M in retainage, out of which the insurance company would be paid back and the attorney fees paid as well. The presentation looked something like this:

$1,684,000.00  Amount GE Power Systems agreed to not collect from WTMPA and supposedly held in retainage.
+ $150,000.00  Cash
-  $150,000.00  Attorney fees owed as a result of the GE Power Systems litigation
- $422,000.00  Amount Owed to Insurance Company as a result of payback agreement.
= $1,262,000.00 which was supposed to be transferred to LP&L because WTMPA owes LP&L $5.286M

Since WTMPA spent the $1.6M, no transfer to LP&L could be made. Furthermore, since I was part of the negotiating team with GE Power Systems and since I was not informed of the fact that WTMPA had already spent the $1.6M retainage, I am of the opinion that I would have negotiated differently than I did, had I been privy to this critical information.

In my opinion, the misrepresentation of the fact that WTMPA spent the retainage has cost the City $1.2M which could have been applied to WTMPA’s outstanding debt to LP&L and affected my negotiations with GE Power Systems.

Therefore, WTMPA’s defense seems to be that it doesn’t matter if they spent the retainage, it doesn’t matter if they misrepresented the facts to us, it doesn’t matter if the negotiations were affected, it doesn’t matter if WTMPA didn’t pay LP&L $1.262M because after all, we’re going to get it back through higher surcharge rates anyway.

III.

Amount of debt owed to LP&L by WTMPA

Yes, WTMPA owes LP&L $5.3M. The breakdown is as follows:

On October 8, 2002, I learned for the first time, that WTMPA not only spent the $1.6M retainage to make bond payments but WTMPA also spent $2.3M that they owed LP&L for capitalization to make bond payments. Again, they did not inform senior management or Council of this action until recently. The payment to LP&L for capitalization (reimbursing LP&L for paying a part of the construction of the power plant even though WTMPA had sold the bonds and had collected more than enough money for the power plant which was built under budget) was due in September 2000.
My understanding as to why LP&L even had to pay a portion of the power plants construction costs were that by the end of the construction project, WTMPA didn’t have any more bond money to pay for the construction even though they had received $28.763M.

$2.315M Capitalization owed to LP&L (due September 2000) + $2.971M WTMPA operating costs paid by LP&L = $5.286M Owed to LP&L

As can be seen above, LP&L is not being paid by WTMPA what it is owed, but is paying WTMPA’s expenses as well. LP&L is acting as WTMPA’s bank and not even charging interest on a $5.2M loan. Furthermore, there does not seem to be WTMPA board action as to any of these actions either. It should also be noted that this outstanding balance owed to LP&L by WTMPA does not and never did include the $1.6M retainage.

Therefore, WTMPA’s defense seems to be that it doesn’t matter if WTMPA not only, didn’t pay us $1.2M out of the retainage but another $2.3M that they owed us in September 2000, it doesn’t matter that we didn’t know about this additional expenditure either, it doesn’t matter that LP&L is having to pay WTMPA’s operating expenses to the tune of $2.9M and it doesn’t matter that after all is said and done, WTMPA owes LP&L $5.2M because after all, we’ll get LP&L’s money back
by charging higher surcharge rates.

 

IV.

WTMPA’s plan to repay the $5.2M

In March 2002, the surcharge paid by member cities was increased from 1.41 cents to 1.621 cents per kilowatt hour. This is designed to recover the principal amount ($5.2M only) in a 60-month period.

The rest of the story is that this increase in the surcharge would not have been needed (or not to as great an extent) if WTMPA had maintained the retainage and paid us the capitalization costs as well. Also, these increases in the surcharge are passed onto the consumer in higher utility bills. Finally, this increase does not cover the cost of the interest WTMPA should have been paying since 1999. Also, the other three member cities of WTMPA do not currently buy any electricity from WTMPA so, LP&L customers are paying the entire amount of these increases. It should also be noted that there is an unanswered question as to whether or not LP&L could be buying electricity from someone else at a cheaper rate and is not doing so because if LP&L doesn’t continue to do business with WTMPA, they [sic] won’t ever pay us what they owe us and WTMPA will go belly up.

Additionally, there are many more unanswered questions concerning the other member cities of WTMPA and whether or not they are benefiting from this relationship without having to pay any of the expenses associated therewith or even having to purchase any power from WTMPA thus, not
sharing in the increased costs.

Therefore, WTMPA’s defense seems to be that it doesn’t matter if they increase the surcharge, it doesn’t matter that the Council was not made aware that the deficit being experienced by LP&L is due in large part to WTMPA’s debt to us, that it doesn’t matter if WTMPA takes 60 months to pay us instead of a couple of years, that it doesn’t matter that WTMPA doesn’t pay interest on a $5M loan made to them by LP&L because the average LP&L customer “just doesn’t get it” anyway.

V.

What does WTMPA do/not do:

1. They don’t pay their bills (settlement proceeds and
capitalization costs – 1 + 4 = $5.2M);
2. They do lie (retainage and $3,000/month to Ty Cooke);
3. They don’t pay interest ($5.2 loan);
4. They do have LP&L cover their operating expenses (1 + 4 = $5.2M); and
5. They don’t take board action to do what they want to do.

VI.

The City assures the repayment of the debt of WTMPA

We’re done for.

VII.

Actions:

1. Request an independent investigation by the Public Utility
Commission of Texas and the Federal Energy Regulatory Commission;
2. Have the WTMPA issue placed as a work session item to have full
disclosure to the public;
3. Replace Ty Cooke as Chairman of WTMPA;
4. Replace the two City representatives on the WTMPA Board;
5. Stop the $3,000 monthly payment to Ty Cooke;
6. Distance the City from WTMPA, (i.e. have them do their own
bookkeeping/accounting, hire their own staff, establish interlocal
agreements, have them ratify past board actions if needed, etc…);
7. Not extend any more credit to WTMPA; and
8. Ultimately, have the City stop doing business with WTMPA.

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