An agency that provides power to Denton and three other Texas cities is facing a legal challenge over its plan to refinance millions of dollars in debt.

The city of Bryan sued the Texas Municipal Power Agency and its other members, Denton, Greenville and Garland, alleging the three North Texas cities conspired to temporarily lower the agency’s debt payments to serve their own interests. The four member cities each run their own electric companies but collectively pay the agency’s debt.

The suit accuses agency leaders of other ethical lapses, including a violation of the Texas Open Meetings Act, and says their actions could cause electric rates in all four cities to skyrocket after 2018.

Agency leaders deny the claims and say their financial plans are sound. The agency has filed two lawsuits in Travis County asking a judge to validate its plans to sell $433.5 million in bonds to retire old debt and pay for new equipment. The first suit is tentatively set for trial this winter.

The flurry of litigation is the latest clash between Bryan and the other three cities, following a decade-long dispute over the payment of transmission rates. That case, which is unrelated to the bond lawsuits, is pending in a Grimes County district court.

One attorney for Denton called the Bryan suit a misguided attempt to block the agency’s financial plans. The state attorney general must approve the bond sale and won’t act while litigation is pending.

“They’ve thrown everything — including the kitchen sink — at TMPA and the three northern cities,” said Michael Copeland, who handles utility issues in the Denton city attorney’s office. “It’s a rather complicated fact situation, but I doubt that the TMPA board is manipulated by the northern cities.”

Pooling operations

The cities jointly manage the agency through an eight-member board of directors. Each city appoints two board members; the board oversees a general manager and an annual budget of about $200 million.

The agency owns and operates the Gibbons Creek Steam Electric Station from its base in the Grimes County town of Carlos, southeast of Bryan.

The coal-fired plant provides as much as 60 percent of Denton’s power. The city buys the remaining electricity needed to serve Denton Municipal Electric customers through the wholesale market.

The seeds of the agency were planted in 1960, when the cities commissioned a survey that found they could save money by pooling electric operations. Bryan, Garland and Greenville joined with the Brazos Electric Power Cooperative in 1963 to form the Texas Municipal Power Pool, which Denton joined six years later. In 1975, the four cities voted to create the agency and build the Gibbons Creek plant, taking advantage of a new state law that allowed cities to form joint agencies with most of the same powers as a city-owned utility.

In 1976, the agency entered into identical power sales contracts with each member city that required the cities to pay the agency’s bond debt from capital projects, among other responsibilities.

The power plant, built next to a lignite mine, started commercial production in 1983. By 1995, though, the agency was upset with the quality of the lignite and switched its fuel source to Wyoming coal.

The change improved the plant’s efficiency and extended its life to at least 2035, said Gary Parsons, the agency’s general manager. The agency’s debt was set to expire in 2018, along with the cities’ power sales contracts. But during planning for the current budget year, agency officials suggested extending the debt payments to more closely match the plant’s lifespan — an action Bryan leaders strongly opposed.

Extending debt

Throughout last winter and spring, staff members presented the board with several options for extending the debt but ignored Bryan’s request for an independent analysis, according to the Bryan lawsuit. Bryan officials then hired a consultant to perform a separate study, which raised several red flags about the agency’s plans.

The study found the debt refinancing would lower the rates the cities pay to the agency from 2008 to 2018 before causing them to “increase sharply” through 2030, when the debt would be paid off. That, in turn, would mean higher rates for customers and higher financial risk for the agency, the lawsuit says, “because other factors such as a carbon tax and increasing rail costs for coal delivery already are expected to increase rates.”

Bryan officials also questioned the agency’s rationale for extending the debt. The lawsuit alleges that the stated reason, to match the useful life of the coal plant, doesn’t apply because much of the existing debt is related to assets that are “fully depreciated, no longer in service, or ‘stranded assets’ having no useful life.”

The agency’s plans “add a tremendous amount of debt to this coal-fired plant even though it’s projected that in the future the costs of coal are going to rise,” said Bryan attorney Lin Hughes of McGinnis, Lochridge & Kilgore LLP in Austin. “The cost of transporting coal is going to rise; the cost of cleaning up coal emissions is going to increase; and when you add all those costs on top of the increased cost of the debt, it’s very likely that the plant will become uneconomical to operate. So it will have to be mothballed, and you’ll have all these cities paying off this debt and they’ll have to buy their power somewhere else.”

Bryan’s board members conveyed their concerns in a Sept. 5 memo to Parsons and fellow board members. The board met Sept. 11 and voted 4-2 to approve the bond sale and debt restructuring, with Bryan’s members voting in the minority. Two members, James Ratliff of Garland and Phil Gallivan of Denton, abstained from the votes because of potential conflicts of interest. Records show both board members have a financial interest in Berkshire Hathaway, an investment holding company that agency leaders mentioned as a candidate to insure the bonds.

The board also voted 4-2 to allow any legal action needed to uphold the validity of the bonds. Again, Bryan’s representatives voted against the measure, and Ratliff and Gallivan abstained.

State law allows entities that issue interest-bearing bonds or other public securities to file lawsuits seeking judicial support of their plans. Through these actions, called bond validation lawsuits, entities can ask a judge in Travis County or their home county to validate their authority to issue debt. A favorable ruling reassures the market that it’s safe to buy the bonds or other securities and blocks future lawsuits challenging their validity.

Bryan officials claim the board vote to approve a bond validation suit violated the Texas Open Meetings Act, because the action wasn’t explicitly posted on the meeting agenda.

The act requires government bodies to post all subjects they will consider, but Parsons said no breach occurred.

“It was not specifically posted,” he said. “But we did have discussion that we believe the posting was proper to allow the board to vote on a resolution to move forward on a bond validation suit.”

The next day, Bryan sued in Brazos County to stop the bond sale. When the agency filed a bond validation suit Sept. 19 in Travis County, Bryan dropped its Brazos County case and filed a counterclaim in Travis County.

Agency leaders then called a board meeting for Oct. 10 to revisit the financial plans. Parsons said the meeting was needed because Bryan “expressed questions about the wording” of the bond resolution. Bryan officials saw the move as an admission that the September votes were faulty.

The board voted 6-1 to approve a new resolution allowing the bond sale and some of the planned debt refinancing, along with any legal action needed to support it. One Bryan representative was absent; the other voted against the resolution, which replaced the one passed in September. The board also rescinded another month-old resolution that would have refinanced some short-term debt.

The new bond resolution included only minor changes, Parsons said. It would allow the agency to refinance about $185 million in debt, extending the maturity from 2018 to 2027, and spend about $248 million on new capital projects, including a turbine upgrade and a new scrubber to reduce plant emissions.

Parsons said refinancing the debt would lead to higher electric rates for the member cities after 2018, but he doesn’t expect a dramatic increase. With the bond sale, the rates the cities pay to the agency should drop $10 to $12 per megawatt-hour between now and 2018 before increasing by an average of $15 to $18 per megawatt-hour through 2035, he said.

“We think it will be in line with what market rates are at that time,” Parsons said.

Also Oct. 10, the agency filed a second bond validation case in Travis County. Parsons said the two cases likely would be combined.

Conspiracy alleged

Bryan’s lawsuit accuses the three North Texas cities of conspiring to use their majority position on the board for their own financial interests. It points to documents prepared for a Garland City Council meeting on Aug. 14 that show the agency’s debt refinancing plan would create $14.5 million in savings for Garland Power & Light in the 2009 fiscal year, nearly enough to cover a projected $15 million shortfall.

“Part of the principle is, if you’re a board member you have a fiduciary duty to TMPA,” said Hughes, the attorney for Bryan. “They’re supposed to act in TMPA’s best interest, and it looks to us like the members of the board appointed by the northern cities think that whatever is good for the three northern cities is what’s good for TMPA. And Bryan just disagrees with that.”

However, Hughes could not cite any evidence that Denton or Greenville planned to use the bond sale to cover budget deficits.

“Pending further discovery, that allegation is confined to Garland,” she said.

Garland Power & Light spokeswoman Elizabeth Kimbrough said the utility would not comment on the pending lawsuit. Attorneys from law firms representing the North Texas cities did not return calls.

The Bryan suit also accuses attorneys from three law firms of ethical breaches, saying they concurrently represented the agency and Denton, Garland and Greenville without disclosing the potential conflict of interest. The board defended its use of the law firms in a resolution passed Oct. 10, calling the allegations unfounded. The firms are Lloyd Gosselink of Austin; Fulbright & Jaworski LLP, an international firm with four Texas locations; and Tiemann, Shahady & Hamala P.C. of Pflugerville.

Denton’s role

Former Denton Mayor Perry McNeill, the board’s chairman, voted with the majority on each of the issues. He canceled a scheduled interview on the votes and directed all questions to Lisa Lemons, a spokeswoman for Denton Municipal Electric. Gallivan, Denton’s other board member, did not respond to a request for comment.

Denton Municipal Electric released a statement defending the agency’s financial plans and accusing Bryan of trying to “rewrite its agreement and obligations.”

“The city of Denton remains convinced that the recent bond resolution offers an excellent opportunity for the agency to favorably restructure its debt obligations while preparing the future use of the agency’s electric generating plant to be more operationally efficient and environmentally sensitive,” the statement said.

The statement did not address many of the allegations raised in the Bryan lawsuit or say how much of the debt Denton would assume. In an e-mail, Lemons said city officials would have no further comment.

Hughes, the Bryan attorney, said Bryan’s share of the total debt would be about $95 million, and Denton’s would be slightly less.

Contracts require each city to pay a certain percentage of the agency’s costs in exchange for an equal percentage of its power. Garland pays 47 percent of the expenses, followed by Bryan, 21.7 percent; Denton, 21.3 percent; and Greenville, 10 percent.

In the meantime, the cities will have to deal with mounting legal fees.

The Denton Public Utilities Board voted last month to endorse a contract with the Dallas law firm Walker Sewell LLP worth up to $90,000. Copeland, Denton’s utility attorney, said the city hired its own legal counsel to avoid the appearance of a conspiracy.

“We did that just because we’re unsure how many suits Bryan is going to do,” he said.

LOWELL BROWN can be reached at 940-566-6882or by e-mail at 

lmbrown@dentonrc.com.

POWER AGENCY TIMELINE

Key dates in the history of the Texas Municipal Power Agency:

1960: The cities of Bryan, Denton, Garland and Greenville commission a study that determines they could save money by pooling electric operations.

1963: Bryan, Garland and Greenville join with the Brazos Electric Power Cooperative to form the Texas Municipal Power Pool.

1969: Denton joins the pool.

July 1975: The four cities create the Texas Municipal Power Agency and approve construction of the Gibbons Creek power plant next to a lignite mine near Carlos; the cities agree to pay all costs of the agency, allowing it to sell bonds to finance expenses.

September 1976: TMPA enters into identical 35-year power sales contracts with each city.

Oct. 1, 1983: Gibbons Creek plant starts commercial production.

April 1996: Gibbons Creek plant begins to run fully on Wyoming coal; lignite mine is closed.

July 1997: Bryan and the three North Texas cities clash over the payment of transmission rates, starting a legal dispute that is ongoing.

Sept. 11, 2008: TMPA board votes 4-2 to sell bonds to refinance debt and fund new projects over Bryan’s objections.

Sept. 12: Bryan sues to stop the bond sale.

Sept. 19: TMPA files a bond validation suit in Travis County.

Sept. 29: Bryan files a counterclaim in Travis County against

the agency and other member cities.

Oct. 10: TMPA board approves a bond resolution superceding the Sept. 11 resolution with a few changes; the agency also files a second bond validation suit in Travis County.

SOURCES: Texas Municipal Power Agency, staff research