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Issue 8

BUY HIGH - SELL LOW: Making Money the Government Way.

With California's electricity problems in the news, there have been several interesting sideline stories published. Here's one of them.

If you have ever signed contracts that require some type of performance at some specific time, you most likely have always noticed a clause that would give you, the other party, or both of you an out in the event of some unforeseen circumstance. Most often, these clauses refer to some "act of God" that could prevent performance of the contract.

Generally, these "acts of God" clauses are required by prudent business people to limit risk to only those factors that can be controlled. And mortal man most certainly cannot control the weather.

But it does look like the U.S. Government thinks it can overcome "acts of God" and control the weather. Very recently there were news stories in the Los Angeles Times and the Wall Street Journal that indicate the government can't control everything they think they can.

Fifty years or so ago, the federal government began building flood control and hydroelectric generating dams on rivers all across the nation. The Garrison Dam here in North Dakota is one of these projects, and electricity from federal dams is allocated to public power entities. Rural electric cooperatives and municipal electricity systems receive preference to this federal subsidized power simply because of their cooperative or municipal structure, not because of any needs basis of their customers. Some of the cities that receive Garrison electricity are Grafton, Cavalier, Valley City, Moorhead, Alexandria, Marshall, and many more. Rural electric cooperatives in North Dakota also receive power from the Garrison Dam.

Electricity from these federal dams is made available to municipal utilities and rural electric cooperatives on a preferred basis and at preferred rates. For example, the federal government sells electricity from the Garrison Dam for about 1.5 cents per kilowatt, while similar wholesale power contracts from one of North Dakota's lignite fired coal plants would bring around 2 - 3 cents per kilowatt, much more than the government receives.

News services have published many stories about the drought in the West and the Pacific Northwest that is impacting the amount of water in the many rivers and streams. With severely restricted water flows, the hydroelectric dams are unable to produce enough electricity to meet the demand of consumers.

Clearly, this drought would be called an "act of God" that could have an impact on a contract's performance. But according to news stories in the Los Angeles Times and the Wall Street Journal, this "act of God" has no impact on the federal government's ability to perform on their electricity contracts. According to these published news accounts, the federal government has been purchasing power in the open markets at prices up to 35 cents per kilowatt and then providing it to their preference customers at the regular contract rate of some 2.2 cents per kilowatt. And the taxpayer picks up the tab.

This same scenario is played out in our area as well. WAPA, the Western Area Power Administration, regularly purchases wholesale electricity from North Dakota lignite fired power plants at market prices of 2 - 3 cents per kilowatt, and more, to meet their obligations to their preference customers. That power is then re-sold at the contract price of about 1.5 cents per kilowatt to municipal utilities and RECs. Again, the taxpayer to the rescue.

Obviously, situations like this cause cash flow problems for the federal power agencies and they are unable to stick to their payback schedules enacted when the dams were built some fifty or so years ago. In order to not get into trouble with the Congress and administering agencies, WAPA and other federal power agencies defer payments when situations like this arise. When the investor owned utilities in California had to defer payments on their obligations it led to bankruptcy filings.

Even though the dams were built some fifty years ago with a prescribed payback schedule, the dams still have not paid all the money back to the federal treasury and to the taxpayer. Fifty years of operations have only resulted in an approximate 30 % payback. Just try that with your local banker!

Clearly, while federal power projects have been effective in electrifying rural America, they have not been a financial success for America's taxpayers. In spite of this dismal payback record, the federal power agencies continue to sell their power at below market prices to their preferred customers and ask the American taxpayer to pick up the difference. What may be even worse, it is that these same federal agencies think nothing is wrong with selling surplus energy in the California market at the same high prices as the so called price gougers.

This just isn't right!