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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!
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