It's simple! Districts remit a single premium at the beginning of the fiscal year for each enrolled meter. This premium covers all natural gas service requirements for the year (from utility expenses to the gas itself). Participants receive no gas utility bills.
The premium is based on historical usage, calculated as the gas prices the Iowa LGRP procures, plus a risk premium to establish a fixed budget. The wholesale gas cost itself is passed through to the premium with no additional markup.
All risks are transferred to the service providers so the district has budget certainty and known heating costs for the fiscal year.
As with other products that transfer risk, there is a tradeoff between cost and certainty. In most years, your district may not save money, but it will protect you from rare events such as super cold winters or the impact of hurricanes reducing production or other items that send costs soaring.
This is not an insurance program, according to the Iowa Insurance Division and Iowa laws. Rather, this is a local government risk pool through which governmental entities join together to pool and transfer risks.
According to an opinion issued by Iowa's Auditor of State, the premium may be paid from the district's Management Fund. If premiums are paid from the district's Management Fund, that will also ensure your General Fund will not be impacted regardless of weather events or the gas market supply, independent of any long run overall savings. It is important to note the Iowa Department of Education has not issued an opinion on the use of the Management Fund for this program.
How are premiums determined?
School gas expenditures historically are calculated by taking usage for each meter multiplied by the price of the gas itself (which includes margin for the gas supplier), transportation, tariffs, taxes, and administrative fees.
In our program, anticipated usage for each meter is determined by reviewing historical information and taking into account any known material changes anticipated by the school district (such as a building opening or closing).
The Iowa LGRP service providers lock in gas purchases for pool participants at a fixed price for the gas itself. The service providers assume the risk associated with winter heating needs that exceed historical usage.
The transportation costs, tariffs, taxes, and administrative fees from utilities are generally known, however, they can change. The risk of any changes would be borne by the service providers.
The Iowa LGRP limits underwriting profit of its service providers. In the event that profits exceed the profit threshold, the Iowa LGRP is empowered to distribute refunds of excess premium back to participants.
What happens if prices go up or down?
An illustration is shown in our Iowa LGRP FAQ PowerPoint Presentation. In general, if pricing and usage are exactly as anticipated the school district will likely pay a little more in this program than with traditional utilities. If pricing and usage increase, the school district will likely pay significantly less in this program than with traditional utilities. If pricing and usage decrease, the school district will likely pay significantly more in this program than with traditional utilities. But in all scenarios, the school district has budget certainty knowing their annual premium is fixed and has protected their General Fund.
What happens if a rare event occurs, can my district be assessed for additional premium?
The total premium defined in the Participation Agreement is the entire amount a school district will owe for participating meters during the term of the Agreement, unless the district experiences a "material event". The definition of a material event is defined in the Participation Agreement but includes adding or removing a building, changing equipment, etc. It is important to notify service providers right away if you experience or anticipate experiencing a material event during the term. Material events may result in an additional premium owed or a refund of premium.
Outside of material events, there will be no additional charges or assessments to the district. Risks are borne by the service providers.
The Participation Agreement commits a district only for the term defined in the Agreement. The district can choose whether or not they wish to participate in subsequent fiscal years with new Participant Agreements.
Is this an insurance program?
No, Iowa LGRP's Education Energy Program is not an insurance product according to the Iowa Insurance Division and State Law. This is a Local Government Risk Pool through which Local Governments join together to pool and transfer risks associated with natural gas. This creates budget certainty for Districts eliminating dramatic price swings (think Winter 2014 Polar Vortex), eliminates monthly gas invoices to Schools, and allows schools to focus on what is important; Education.
Iowa LGRP & Education Energy Group Resources to Share with your Board & Leadership Team
Download this Iowa LGRP Flyer
Learn How to Get Started with Iowa LGRP
Follow the instructions on the Getting Started page to join and participate in the Iowa LGRP's Education Energy Group Program