20080204_2162.pdf

DECISION MEMORANDUM
TO:COMMISSIONER REDFORD
COMMISSIONER SMITH
COMMISSIONER KEMPTON
COMMISSION SECRETARY
LEGAL
WORKING FILE
FROM:PATRICIA HARMS
TERRI CARLOCK
DATE:FEBRUARY 1 2008
RE:ATLANTA POWER COMPANY'S REQUEST TO ENTER INTO TWO
PROMISSORY NOTES TOTALING $110,000; CASE NO. A TL-08-
Atlanta Power Company filed an Application on January 22, 2008 requesting authority to
enter into two Promissory Notes for a total of $11 000. Atlanta Power Company is a public utility
electric corporation within the meaning of the Idaho Public Utility Law and is engaged in
conducting a general electric utility service business in and around the community of Atlanta in
Elmore County, Idaho, having its principal office and place of business in Caldwell, Idaho.
According to its Application, the Company currently provides electric service to approximately 84
residential and commercial customers.
In early June of 2007 the Company s hydroelectric turbine at the Kirby Dam on the Middle
Fork ofthe Boise River failed. As the Commission is aware, Atlanta s power system has a single
source of generation. Because it is not interconnected with any other electric supply system, the
entire system is without power if the turbine fails. The Company, in order to provide continued
service to customers, arranged for the temporary rental of a diesel generator and then purchased and
installed a permanent back-up diesel generator. The diesel generators provided electric service to
customers while the hydro turbine was removed and repaired. The turbine has been repaired and
returned to service. In its Application, the Company has stated it incurred extraordinary costs of
$119 922.49 for the repairs to the turbine and the acquisition and operation ofthe diesel generators
while the turbine was out of service. Attached to its Application as Exhibit No., is a detailed
schedule of the costs incurred.
DECISION MEMORANDUM - 1 -FEBRUARY 1 2008
According to the Company, no drafts of the Promissory Notes associated with the requested
borrowings are available. In its Application the Company characterizes the Notes as follows:
A $100 000 loan for a term of seven (7) years at a rate of 14% per annum with
monthly payments in the amount of$1 874 and
A $10 000 loan for a term of one (1) year at a rate of 10.75% with loan repayment
accomplished through monthly electric service credits of $882.65 for the
customer.
In its Application the Company requests authorization to borrow $110 000 to pay
extraordinary costs experienced in the year 2007 due to the failure of its hydroelectric turbine. See
Company Exhibit No.1 for a list of those $119,922.49 costs as identified by the Company. The two
largest costs listed on Company Exhibit No.1 are vendor payments to repair the turbine ($43 000
and $10 000) for a total of $53 000. This Exhibit also lists generator rental, generator purchase
fuel, crane, labor, parts, financial consultant and other costs as related to the turbine failure. In its
Application the Company states that these costs were paid through temporary loans from the owners
and deferred salaries and wages.
In its Application the Company states that the $9 922.49 extraordinary costs in excess of
these loans amounts will be treated as a temporary loan to the Company from the owners at an
interest rate of 12% annually. Interest will accrue on the temporary loan to the owners until such
time as the cash flow of the Company will allow the Company to repay the loan to the owners.
The Company s Application does not list any other loan attributes, such as a Lock Box
arrangement that prescribes the order of expense payments from the utility if the loan goes into
default or any securitization/collateral. As a result, Staff considers these Notes/loans to be
unsecured and absent any Lock Box arrangements. Promissory Notes are sometimes secured by
means of a separate Lock Box agreement. A Lock Box Agreement is an agreement that generally
prescribes the order or priority of payments made from the utility s accounts receivables and makes
those payments. In these types of arrangements, customer payments are deposited into a Lock Box
and all disbursements from the Lock Box are made pursuant to the pre-set provisions ofthe Lock
Box Agreement. For example, the $57 000 Note approved by the Commission in Order No. 29636
Case No. ATL-04-l includes a Lock Box arrangement effective only upon a default in making
the monthly payment of principal or interest when due.
DECISION MEMORANDUM - 2 -FEBRUARY 1 , 2008
The Commission exercises authority over the issuance or assumption of debt for public
utilities pursuant to Idaho Code ~ 61-901. The Company has submitted the appropriate fees for this
requested borrowing under Idaho Code ~ 61-905.
RA TEMAKING
Staff emphasizes that approval of these loans should not and does not constitute a finding of
prudency and/or allowability for inclusion in rates of items listed on Company Exhibit No.
Instead, the determination of whether each item should be included in rates and if so, in what dollar
amount, will be made when the Company files its next general rate case. As with all rate cases, the
reasonableness of the amounts expended will be analyzed for appropriateness and may result in
disallowance of a portion or all of an amount for which recovery is sought. This evaluation
includes whether there is sufficient and competent evidence to verify the nature of the cost and its
appropriateness for the delivery of electric service to customers. For example, a detailed invoice
from the originating vendor is required and not just a credit card receipt authorizing the charge or
returned check evidencing that a financial transaction has occurred.
Interest costs the Company lists in Exhibit No.1 payable to an owner and an owner s non-
regulated business is not eligible for an additional layer of interest through the Notes and temporary
loans of the owners.
Staff believes the interest rate of 14% on the $100 000 Note is high due to the structure and
purpose of the loan along with the lack of collateral. Staff notes that the 14% interest rate on the
$100 000 Note will not be utilized by Staff to establish customer rates as discussed with the prior
loan (Case No. ATL-04-1). A debt rate based on loan options will be evaluated to determine the
maximum loan rate to be reflected in rates. Atlanta Power s return on equity rate allowed in future
rate cases should be the maximum rate allowed as a debt cost for ratemaking purposes.
Atlanta Power Company, based upon its 2006 Annual Report, does not have sufficient cash
flow to meet the payments in these two Notes; the $57 000 Note approved in Case No. ATL-04-
1; and its reported Operating Expenses (exclusive of depreciation). In its Application, the Company
identified that it is currently working on a recovery proposal for these costs and will file another
application in the near future for that purpose. Because the results of such a future proceeding are
unknown and may include disallowed costs and costs that are recovered over an extended period of
time, Staff recommends that any cash flow issues associated with loan payments for items
disallowed for ratemaking purposes permanently reduce the temporary loans provided by the
DECISION MEMORANDUM - 3 -FEBRUARY 1 2008
owners. More specifically, if costs that are the subject of these loans are disallowed in a ratemaking
proceeding, the repayment of that portion of these loans is solely the responsibility of the
Company s owners.
STAFF RECOMMENDATIONS
Staff recommends that these unsecured Notes with no Lock Box provisions be approved
only if cash flow issues caused by ratemaking issues (disallowance of costs, for example)
permanently reduce the temporary loans provided by the owners. Additionally, Staff recommends
that if costs that are the subject of these loans are disallowed in a ratemaking proceeding, the
repayment of that portion of these loans is solely the responsibility of the Company s owners.
Staff also recommends that copies of all executed versions of the Promissory Notes and any
and all renegotiated or resale contracts for the Notes be provided to the Commission within seven
(7) days of execution.
Staff recommends that the 14% interest rate on the $100 000 Promissory Note not be
utilized to establish customer rates in the Company s next general rate case. Staff will recommend
a more reasonable rate based on market borrowing costs. Atlanta Power s return on equity should
be the maximum rate allowed for ratemaking purposes.
Staff further recommends that items listed on Company Exhibit No.1 not be utilized to
establish customer rates until a finding of prudency and a dollar amount for recovery is established
for each item in the Company s next general rate case.
COMMISSION DECISION
Does the Commission approve authority for Atlanta Power to enter into the $100 000
Promissory Note?
Does the Commission approve authority for Atlanta Power to enter into the $10 000
Promissory Note?
Does the Commission accept Staff s proposed conditions?
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Patricia Harms
PH:udmemos/AtlantaPower 08
DECISION MEMORANDUM - 4-FEBRUARY 2008