Milford will be able to get back most of the $1.7 million it paid out over the last month to satisfy energy contracts.

Milford will be able to get back most of the $1.7 million it paid out over the last month to satisfy energy contracts.

The Milford City Council voted Monday night to extend $45 million in credit to allow the Delaware Municipal Electric Corporation, which buys power for Milford and six other Delaware cities, to deal with “a very unusual set of circumstances in the power markets.” The DMEC cities have had to lay out $8.6 million this month to deal with those circumstances so far.

“DMEC gambled on the electric market and picked wrong,” Milford City Manager David Baird said.

Last year, when oil prices were sky-high, DMEC decided to get a new contract and lock in power rates of the time for the next three years, starting in June 2009, before they could get any worse.

But instead, prices fell. Today, a barrel of oil costs half of what it did last summer, power prices have fallen and the price DMEC agreed to pay is about 20 percent higher than the contract would have cost today.

Beginning in the second week of January, two large electric suppliers have made a series of “margin calls” on the DMEC contracts. The calls require the cities to pay, in cash, the difference between the market value of the contract and the agreed-on price – a total of $8.6 million so far.

“We have to get this under control and not let things keep spiraling,” Baird said.

For the power companies, this is a bookkeeping move. The contracts have a market value, which depends on the current cost of power, and a sale price, which is what DMEC agreed to pay when the contract was negotiated. When the difference between the two gets too big, whichever side stands to lose money on the deal can demand enough money to even the scales by issuing a margin call.

As long as DMEC buys the power as agreed, the money would be refunded eventually, but “eventually” isn’t quite soon enough with $8 million at stake.

“The only way we would have to pay back the difference permanently would be if we decided to break the contract,” DMEC President Patrick McCullar said.

According to McCullar, the power suppliers have agreed to take bank-issued letters of credit instead of making further margin calls. If all goes according to plan, the cities will get back the money that they laid out over the last two weeks as the letters go through.

The Milford City Council voted 8-0 to sign off on the plan, but it wasn’t much of a question.

“If we don’t sign, we’re not going to get the $1.7 million back, and we’re going to get more margin calls,” council member Irvin Ambrose said.

Letters of credit don’t get the city off the hook entirely, though. DMEC will have to pay 1 percent of their value per year to keep the letters active – that’s a total of $450,000 to be divided among the DMEC members in their monthly power bills. Milford’s share works out to around $90,000 a year, according to Baird.

That wasn’t the only rate hike announced this month, as the DMEC cities voted last week to adjust their rates. The vote was 6-1, with Milford the only dissenting city. Baird said he feels the new rates are higher than the market prices warrant.

“We agree with the goal of making the rates more stable, but we need to make sure we’re passing along the real costs,” Baird said.

Baird said the city would have a new rate schedule prepared to incorporate the changes within two months.

“The city is also looking internally at anything we can do to keep power costs as low as possible,” he said.