March 21, 2007

FORGET THE $16,000 THAT ED FORD OWES THE MLGW AND PAY ATTENTION TO THE $18 MILION DOLLAR LOSS IN THE GAS DIVISION THAT YOU HAVE BEEN PAYING FOR FOR SOME TIME

Customers of the MLGW have been wondering why the MLGW lost $18 million dollars when their gas bills have been unusually high. Good question. So I finally got a copy of the November 2006 interim financial statement from a friend after trying for over two months to get it from the MLGW directly.

Here is what happened in the Gas Division of the MLGW. The story begins during the budget process for the 2006 MLGW budget which starts during July 2005. In August of 2005, Katrina happened and it looked like natural gas prices were going to go through the ceiling for a long period of time. Apparently the management of MLGW made some commitments for high priced gas for the future.

Henry Hub spot gas prices were high starting in August 2005 through November 2005 after Katrina. However starting in January 2006, Henry Hub gas prices went dramatically lower but MLGW gas prices charged to their customers were higher than the Henry Hub Index except for January 2006 and May 2006. 90% of gas revenues are billed during the 5 winter months, November through March and during the period November 2005 through March 2006 the MLGW prices was 6.4% above the Henry Hub Index. The MLGW tried to recoup their bad purchasing decisions from January to November 2006 but were unable to get it all back through their purchased gas adjustment mechanism (PGA) due to an outcry from customers about the size of their bills. Therefore a decision was made to put much of the recouping off until December 2006 and January, February and March of 2007, the biggest billing months. The average of MLGW gas prices versus the Henry Hub index for November and December 2006 and January, February and March of 2007 is 40% higher than the Henry Hub Index.

Looking at the November 2006 statement, they are working on a $33 million dollar PGA figure that they need to recoup in the last month of 2006 and during 2007. The MLGW management has denied that they made any bad decisions but the Gas Division has never had a year like this one and neither has any other professionally run utilities. The management of MLGW has a credibility problem and they need to come clean with the ratepayers and reveal the full story of what caused the huge loss in 2006. Also they need to explain why they are in violation of the City Charter because they paid $15.7 million dollars in a payment in lieu of taxes to the Administration without MLGW board approval. Here is what the City Charter says concerning PILOT payments.

(6) For the payment to the general fund of the municipality a sum not to exceed a cumulative return of six per cent (6%) per annum of the equity or investment, if any, of the municipality in the properties of the gas division, the said percentage to be fixed by resolution of the board of commissioners of the City of Memphis. Should the said percentage as fixed by the board of commissioners of the City of Memphis exceed a reasonable figure in the opinion of the board of light, gas and water commissioners, the amount to be paid by the board of light, gas and water commissioners to the board of commissioners of the City of Memphis shall be determined by a board of arbitration, consisting of one member of the board of city commissioners and one member of the board of light, gas and water commissioners who shall select a third member, and the findings of this board of arbitration shall be final and binding on both the board of city commissioners and the board of light, gas and water commissioners.
Provided that in no event shall the aforesaid payment to the municipality for any year exceed one-half of the net profits realized by the gas division during that year, unless the board of light, gas and water commissioners shall, by resolution, consent thereto.
(7) Any surplus thereafter remaining over and above safe operating margins, shall be devoted solely to rate reduction.



We attach for verification of the above the following chart of MLGW gas prices versus the Henry Hub Natural Gas Price Index. The designated column denotes the percentage difference of your MLGW gas bill over or below the Henry Hub Index. One can also look at the MLGW vs Henry Hub Prices and easily see that in 2006 MLGW was paying 21% over Henry Hub Prices for their gas purchases. From November 06 to March 07 they were paying 41% more than the Henry Hub Index. Contrast that to the 3.8% & 4.5% they were paying over the hub prices in 2005 & 2004 respectively.
Bottom line, ... the loss problem is all in the prices MLGW paid for gas which they did not recover from the ratepayer. They simply did not pass their true cost of gas on. Now, the questions are ... Why did they pay such high gas prices in 2006 and why was this not passed through??? This incompetence is costing the ratepayers of MLGW millions of dollars.

Also attached are the five key pages of the November 2006 statement showing the PGA figures and adjustments to sales.

Click here to see the MLGW gas cost versus the henry hub national gas index. See how the MLGW paid too much for their gas and now you are paying

Click here to see the critical pages from the November 2006 MLGW financial report showing how they lost $18 million dollars in 2006