Strategies to minimize the financial hit are still being weighed, but time is running out and decisions will have to be made soon. In the end, it will cost and, depending on the decisions made, those costs could be spread over as long as 30 years.
Formed in 1978, FMPA is a wholesale power agency made up of 31 city-owned
In 2006, the economy was roaring and construction was booming. When FMPA completed its legally-required cycling plan to forecast energy needs for the next 10 years, it realized it would not have enough power generation to keep pace with the boom. So, the 14 members, including
To pay for the plant, the ARP would have to borrow the money, so it began searching for good interest rates. Rather than choosing a fluctuating interest rate that would destabilize utility customers' electric rates, it opted, instead, to lock in a steady interest rate to help keep electric rates stable. The ARP bought 14 interest contracts called "swaps." Each contract was for
"We were using that as the mechanism to finance the
But something happened in 2007 to disrupt those plans.
"I still have the interest-rate lock, but I no longer have a project," Brower said.
But the economy tanked and unemployment soared. Federal policymakers, hoping to encourage business investment that would result in more hiring, held interest rates low. And that added to ARP's problems.
"It has kept the market that impacts interest-rate swaps low," Brower said. "They are worth less than what we paid for them."
A small bright spot shone in 2009 when the swap market rebounded briefly. At that time, ARP was able to sell off five of the 14 contracts. There was no gain on the sale but ARP was able to cut some of its potential losses. But ARP is not off the hook.
"What we will owe is the termination cost for the remaining nine contracts," Brower said.
The question now is how can ARP use the swaps before
"The problem is the economy is still struggling, the demand for electric is down and there's no need to build any new plant now," Brower said.
FMPA considered buying prepaid natural gas because gas prices are low now but decided against that. To buy the gas in huge quantities, they would have to borrow the money and pay the interest on that loan. And, if the gas prices fell, they stood to lose more money.
FMPA currently is considering another option, which may or may not be doable.
FMPA in the past issued bonds to pay for other projects and is looking at refinancing its debt using the interest rate swaps. But the problem with that is that two of the FMPA bonds cannot be called for 10 years, which means they cannot be financed until 2018 or 2019. And non-callable bonds can only be refinanced once.
"I would be earning less interest than I am paying on the debt," Brower said.
But the numbers are still being crunched and Brower said he may know more on Thursday when the FMPA executives are scheduled to meet.
"We're going to have to take our medicine. It just depends on how much," Brower said.
So, if the ARP has to pay termination costs, how will that affect
There are two variables, Brower said. One is that the termination costs change daily. Right now, they are about
"The question is: Do we terminate now or do we wait to see what the market is going to do, to see if it will recover?," Brower said.
If the economy recovers, termination costs would be reduced and the impact on electric rates would be lower.
"There's a risk to that," Brower said. "What happens if the market sinks?"
And the Feds have indicated that they intend to keep interest rates low until 2015 or 2016. Brower called the outlook "murky."
"We are a public entity and have no business being speculative," Brower said.
He said FMPA likely will narrow its options down to one choice later this week and will instruct its staff to prepare for that option. At a follow-up meeting in the fall a "trigger date" to put the option in motion will be set.
If ARP finances an estimated
Of course, the city has a rate stabilization fund but how much, if any, of that money the city would use to pay for the swap termination fees will be a decision for the
"That's your nest egg," Brower said. "It's there for emergencies."
Brower said the city's rates have gone down since 2008, when there was a huge spike, and the current rates are competitive. The city was able to squirrel away that "nest egg" because natural gas prices dropped considerably.
But electric usage has been flat since 2001 because people have used less power not only because of the depressed economy but also because appliances are becoming more energy-efficient. So, at some point the
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