Akron (Ohio) Beacon Journal (pg. A1), October 1, 2006
WILL AKRON UTILITY EVER BE SOLVENT?
Akron Thermal Owes City, State, Others Millions In Unpaid Taxes, Fees, But Has Never Been Audited
By John Higgins, Beacon Journal Staff Writer
The long-range plan for downtown Akron that the city started in 2004 promotes Akron Thermal -- the company that provides steam heat to 85 percent of the core district -- as an important tool for economic development.The utility's customers include city and county buildings, three hospitals and the University of Akron.
And because so many businesses depend on Akron Thermal, its management "is appropriately supervised by and accountable to the City through routine audits and other due diligence," according to the plan, known as Imagine. Downtown Akron: 2025.
But the city has never performed an audit of this important resource, even though the utility owes Akron $5 million in unpaid sewer and water bills, $845,000 in unpaid rent and $80,000 in unpaid franchise fees.
Akron Thermal also owes the state $3.2 million in unpaid utility excise taxes, Summit County about $300,000 in unpaid public utility personal property tax and First-Energy about $4 million in electric bills, according to the company.
The debts have been accumulating for years, but the last financial statement the city received from Akron Thermal was for 2001.
Audits on demand and annual financial statements -- along with rent and franchise fees -- are examples of due diligence spelled out in the city's 1997 lease agreement with Akron Thermal.
"This may be a case where there wasn't the oversight that the issue deserved," said Dave Lieberth, deputy mayor, chief of staff and the city's point man on the Imagine project. "But we certainly have been trying to provide it over the last three years, tying to work out of the problem."
Last year, the city quietly hired a financial consultant to take a look at the utility's internal records because creditors wanted to know where all the money was going.
The stakes are high.
Major steam customers Akron Children's Hospital and Akron General Medical Center have no permanent backup system. Summa Health System (City Hospital) and the University of Akron do have backup systems. But so far Akron Thermal -- which has never turned a profit -- has offered low enough rates to keep them from switching to their own boilers.
Taxpayers and utility rate payers have essentially been paying a hidden tax to support Akron's downtown.
"The city, FirstEnergy, the state have subsidized the artificially low prices charged to Children's, General, Summa and the University," Lieberth said.
The chairman of City Council's public utilities committee, Dan Horrigan, D-1, said last week that he wants some answers about Akron Thermal before he hits up Akron sewer customers with a proposed 7 percent hike and he doesn't expect counsel to take it up for at least two months.
Mayor Don Plusquellic recently named former Mayor Roy Ray to chair a committee of Akron Thermal's major customers to suggest alternatives before the winter heating season begins.
Ray, who is director of state governmental affairs for the University of Akron, was Akron's finance director in the early 1970s when the city took on the responsibility of running the steam system.
"Ohio Edison owned the plant at the time and they abandoned it," Ray said.
The city faced the same difficult choices back then when a shutdown of the utility would have affected the O'Neil's and Polsky's department stores in addition to the hospitals and university.
"It was more cost effective for the city to take over the system," Ray said.
City builds plant
The city built the Recycle Energy System plant and turned it over to a private contractor to run, although it was still considered a city division.
"I was financial director when this debacle took place," Ray said, referring to the concept of burning trash to fuel the boilers to create the steam.
An explosion in 1984 killed three workers and injured seven others, caused by hazardous waste from a New Jersey company that should not have gone to the incinerator. A decade later, a scam to avoid paying plant fees resulted in the arrests of a dozen haulers and plant employees. The city lost $500,000.
The plant racked up a $750,000 annual deficit that sucked money directly out of the city's general fund to make up operating losses.
And that's not counting the nearly $100 million the city sank into the plant in technological investments.
Company takes over
In 1995, at the recommendation of a blue-ribbon panel, the city chose Thermal Ventures out of Youngstown from among five bidders to take the plant off the city's hands and burn primarily wood chips and low-sulphur Ohio coal instead of trash.
A promise to freeze rates for three years made Thermal Ventures' bid especially attractive, but may also have contributed to its financial woes.
That freeze led to losses of between $2.5 million and $3.3 million a year, then-CEO Carl Avers told the Public Utilities Commission of Ohio in 2000.
Avers could not be reached for comment for this article.
In December of 2004, Thermal Ventures II exercised an option to acquire Akron Thermal from Thermal Ventures.
The city's Imagine report that promised routine audits and due diligence also notes:
"There are thousands of downtown employees whose workplaces are heated by Akron Thermal. Interruption of service would cause significant disruptions to business, as well as serious health and safety concerns."
The city would never leave the hospitals literally out in the cold.
"If you shut off Akron Thermal, basically, you hurt the hospitals. That's a problem," said city finance director Diane Miller-Dawson. "If they were to step out, obviously the city would have to step in or find another operator quickly."
The unpaid public utility excise taxes have been accumulating since 1997. Senior deputy attorney general Sue Pohler said she cannot talk about specific cases, but she said it's common to work out a payment plan with larger debtors rather than shut a business down.
Does the Ohio Attorney General's Office see light at the end of the tunnel for Akron Thermal?
"If I didn't on any case I would either have written it off or sued," Pohler said.
FirstEnergy also is working out a payment plan with Akron Thermal, which a spokesperson says is not uncommon with large commercial customers.
Lieberth said that Akron Thermal's $4 million debt to First-Energy at least isn't growing: the utility has kept current on its bills for the last 18 months.
"Ohio Edison-FirstEnergy has been very patient and very responsible in working with Akron Thermal," Thermal Ventures II CEO Jeffrey Bees said.
Plusquellic has said the city is third in line behind the state and FirstEnergy to collect its debt.
"The mayor's been instrumental in kind of leading the charge and assuring those issues have been addressed," Bees said. "A lot of things were kind of shifting ground completely unrelated to the city's oversight."
Bees said he's also getting more money from the hospitals and the university through re-negotiated contracts and is on track to show a profit this year for the first time.
"They've been working towards what we believe are fair rates that do put Akron Thermal on a stable basis going forward," Bees said.
Firm reviews utility Last year, the city hired SS&G Financial Services to review Akron Thermal's internal documents, interview the current and former CEO and "gain a reasonable, general understanding about Akron Thermal's ownership structure and operating and financial issues," according to the contract signed April 19, 2005.
"There were creditors asking the question: 'Where did the money go?' " Lieberth said.
The city wanted to verify that Akron Thermal's revenues have been applied to its expenses.
"We didn't want anyone carrying money out of Akron and leaving bills behind," Lieberth said.
The initial analysis did not reveal any obvious problems with the books, Lieberth said.
He said the review showed that the records that could be verified were accurate, but the paper trail prior to the change in ownership was incomplete.
"The records weren't kept according to generally accepted accounting principles," Lieberth said.
A more detailed review is in the works as well as an examination of the utility's infrastructure, which includes two steam plants and about 18 miles of steam pipes.
"We're happy to provide the information," said Bees.
Report given orally The utility also is preparing an audited financial statement for 2005.
Lieberth said the city specifically asked SS&G to present its findings in an oral report, which was delivered to him, finance director Diane Miller-Dawson and assistant law director George Bozeka on March 28.
"We did not accept a written report because we didn't want to generate a written document that (the public) would be able to review and look at," Lieberth said.
The city contends that the work was done for the law department in anticipation of possible lawsuits and therefore is not public record. The Beacon Journal disagrees and has requested the supporting documentation for the oral report.
The city agreed on Friday to make the documents available, but did not concede that they were public records.
Lieberth said a written report would have contained many caveats because of the incomplete financial records prior to Thermal Ventures II taking over. He said the city didn't want "unscrupulous" administration critics exploiting the information.
"It was adequate for our purposes to have an oral report," Lieberth said. "It wasn't anything deceptive."
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