Denton Municipal Electric customers needlessly picked up the tab after the city utility “significantly understated” its transmission costs in state filings, an outside accounting review found.

The action cost Denton an estimated $440,000 in revenue it could have collected over a four-year period from other utilities that used its electric transmission lines, city leaders say.

But city Finance Director Bryan Langley said that represents a fraction of the $500 million in revenue DME brought in during that time. The loss had little or no effect on customers’ electric rates, he said.

“It’s $440,000 that we should have captured, but in the scheme of things, it’s not as significant as you might first expect” in terms of electric rates, Langley said.

The accounting review also identified $1.3 million in assets booked in inappropriate accounts, a lack of written accounting procedures, inconsistent handling of costs from year to year and other practices that allowed mistakes to go undetected.

“In summary, in order to protect DME ratepayers and maximize the benefit of DME to the city, proper utility accounting records and procedures are necessary,” says a report on the review, conducted by R.J. Covington Consulting based in Austin.

The review exposes the need for better communication between utility and city managers, especially related to recording and tracking fixed assets, Langley said.

“They [R.J. Covington] have come up with some recommendations to improve our accounting processes related to DME,” he said. “We’re going to be working with DME, our external financial auditors and the city management team to carefully consider each recommendation.”

The problems stem from changes to state law in the mid-1990s, when the Legislature opened Texas’ wholesale electric market to competition, according to the Covington report.

The Public Utility Commission, a state regulatory body, started regulating transmission services rates for all electric utilities. The Denton City Council continued to regulate DME’s distribution rates.

As a result, DME had to begin separating its transmission and distribution costs and reporting the transmission expenses to the state. State regulators use the data to set a transmission rate for the Electric Reliability Council of Texas, which administers much of the state’s power grid.

But DME underreported transmission costs in early state filings, according to the report. The issue is important because DME receives revenue from other utilities that use its transmission system based in part on the amount of transmission costs it reports.

“This resulted in having to recover costs from DME ratepayers that could have been recovered from other utilities in ERCOT,” the report says.

Langley said the city would correct the underreporting in its next state filing later this year.

Charldean Newell, chairwoman of the Denton Public Utilities Board, which advises the City Council, called the lost revenue troubling.

“It’s a very complex system, but I think everyone agrees that we want to get reimbursed for everything we’re entitled to,” Newell said. “We’re very proud that we’ve been able to maintain the lowest electric rate in this region, and we want to stay there. We don’t want to be passing any costs to the ratepayers that we don’t have to pass on.”

Sharon Mays, who retired earlier this month from her position as Denton’s electric utilities director, blamed the problems on overworked staff members and a lack of accountants who specialized in electric utilities. DME now has such a specialist in Phil Williams, who started work as finance and accounting manager in November, she said.

“We’re making great strides in improving all this stuff now that we have the right personnel in place,” Mays said in December.

The accounting report includes 16 recommendations to improve DME’s practices, including providing more timely financial reports to the city utilities board.

Board members discussed the accounting review during their meeting Monday. City employees first informed them of the review’s findings Dec. 10 but did not provide copies of the report for that meeting.

Newell said board members would continue to monitor city leaders as they address issues identified in the report. But she said she has faith that Langley, who came to Denton from Addison last summer, and the rest of the city’s finance department could make any needed changes.

Langley said he agreed with most of the report’s recommendations. But he said some of them conflict with generally accepted accounting principles.

“You can’t simply take this report and implement it word for word,” he said, noting that Covington is a consulting firm, not an accounting firm.

In the report, the firm describes its recommendations as a “guide” and says the city should review them with its internal and external auditors.

While the review related to DME, it suggested changes that could affect other city utilities. Langley said he and other city leaders would evaluate any changes in light of how they would affect overall city operations.

LOWELL BROWN can be reached at 940-566-6882. His e-mail address is lmbrown@dentonrc.com.