20080226_2176.pdf

DECISION MEMORANDUM
TO:COMMISSIONER REDFORD
CO MMISSI 0 NER SMITH
CO MMISSI 0 NER KEMPTON
COMMISSION SECRETARY
LEGAL
WORKING FILE
FROM:PATRICIA HARMS
TERRI CARLOCK
DATE:FEBRUARY 22, 2008
RE:ATLANTA POWER COMPANY'S REQUEST TO ENTER INTO TWO
PROMISSORY NOTES TOTALING $110,000; CASE NO. ATL-08-
Atlanta Power Company filed an Application on January 22, 2008 requesting authority to
enter into two Promissory Notes for a total of $11 0 000 to pay extraordinary costs incurred in 2007
associated with the failure of the Company s hydroelectric turbine. Atlanta Power Company is a
public utility electric corporation within the meaning ofthe 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.
The Commission exercises authority over the issuance or assumption of debt for public
utilities pursuant to Idaho Code 9 61-901. The Company has submitted the appropriate fees for this
requested borrowing under Idaho Code 9 61-905.
In early June of2007 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
DECISION MEMORANDUM - 1 -FEBRUARY 22, 2008
$119 922.49 for the repairs to the turbine and the acquisition and operation of the diesel generators
while the turbine was out of service. Attached to its Application as Exhibit No., is a detailed
schedule of the costs incurred. 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.
No finalized drafts ofthe Notes were available as of the close of business on February 21
2008. In its Application the Company characterizes the Notes as follows:1) 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 states that the $9 922.49 extraordinary costs in excess of
these loan 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 until such time as the cash
flow of the Company will allow the Company to repay the loan to the owners.
On February 5 , 2008 the Company requested an extension to March 2008 to complete the
loan approval process as Staff had requested details of the terms and conditions of the longer-term
loan. Specifically, Staff had asked about any Lock Box arrangements associated with the $100 000
loan.
LOCK BOX AND RELATED NOTE
Staff was notified that a Lock Box Agreement was planned for the $100 000 Note although
the Company s Application did not list this or any other loan attributes beyond those previously
described. 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 if the loan goes into default.
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 of the Lock Box
Agreement. For example, the $57 000 Note approved by the Commission in Order No. 29636, Case
DECISION MEMORANDUM - 2 -FEBRUARY 22 , 2008
No. ATL-04-1 includes a Lock Box arrangement effective only upon a default in making the
monthly payment of principal or interest when due.
Lock Box Agreements act as security for the individual(s) loaning the funds because the pre-
set disbursement provisions of the agreement include the monthly loan payments. Staff
recommends that the Lock Box agreement also contain pre-set disbursement provisions that ensure
the continued delivery of reliable electrical service to its customers. Based upon discussions with
the Company s owner, it is Staffs understanding that the Lock Box and Security Agreement will
contain the following provisions that prescribe the order or priority of expense payments made from
the utility s accounts receivable to ensure continued delivery of electrical service to its customers in
the event of a default on the loan.
1) First, a $2 100 reserve will be maintained in each and every month for the
purpose of making the payments due (by the due date) for applicable
insurance, property taxes, Forest Service special use permits, Idaho Public
Utilities Commission (IPUC) fees, and the minimum income tax payable by
Atlanta Power. This reserve was calculated based upon amounts reported by
Atlanta Power in its 2006 Annual Report to the IPUC and Staffs discussion
with the relevant property tax authority.
2) Second, an additional $1 100 reserve will be maintained in each and every
month to pay the monthly contract labor associated with meter reading,
billing, maintenance and duties necessary to operate the utility. Management
fees are excluded from this reserve.
3) Third, an additional $375 will be reserved each month until a balance of
500 is accumulated to pay maintenance costs necessary to maintain
electrical service to customers and office supply expenses necessary to bill
and process customer receipts.
4) Fourth, an additional $375 will be reserved each month until a balance of
500 is accumulated to pay costs to operate the back-up generator of the
utility, if needed.
5) Fifth, pay the monthly installment on the Promissory Note by the due date
established.
6) The remaining balance of the Lock Box funds is available to Atlanta Power
for payment of other operating expenses.
Staff recommends that the $100 000 Note and Lock Box Agreement include the following
provIsIOns.
The Lock Box will become effective only upon a default in making the
monthly payment of principal or interest when due.
DECISION MEMORANDUM - 3 -FEBRUARY 22, 2008
If a default occurs, the holder of the Note (Eric Alberdi) shall notify the
Maker (Israel Ray) and the IPUC in writing. This notice shall be provided at
least fourteen (14) days in advance ofthe establishment of the Lock Box
terms.
The Note and the Lock Box and Security Agreement contain at a minimum
the provisions contained in the IPUC Order approving the loan.
RA TEMAKIN G
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.
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, 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 owners. More specifically, if costs that are the subject of these
DECISION MEMORANDUM - 4 -FEBRUARY 22 2008
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 Notes be approved only if cash flow issues caused by
ratemaking issues (disallowance of costs) permanently reduce the temporary loans provided by the
owners. More specifically, 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 recommends that the $100 000 Note only be approved with the Lock Box and other
provisions as discussed in the Lock Box section of this memo.
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 allowed
in future rate cases should be the maximum rate allowed as a debt cost for ratemaking purposes.
Staff 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.
Finally, Staff 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 with no collateral beyond the Lock Box and Security Agreement and other
provisions as discussed in the Lock Box section of this memo?
Does the Commission approve authority for Atlanta Power to enter into the $10 000
Promissory Note?
Does the Commission accept Staffs proposed conditions associated with each Note? Those
conditions include the following:
DECISION MEMORANDUM - 5 -FEBRUARY 22 2008
Copies of all executed versions of the Promissory Notes and any and all renegotiated
or resale contracts for the Notes are provided to the Commission within seven (7)
days of execution.
The costs that are the subject ofthese loans (the 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.
The cash flow issues caused by ratemaking issues (disallowance of costs)
permanently reduce the temporary loans provided by the owners. More specifically,
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.
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. Atlanta Power s return on
equity allowed in future rate cases should be the maximum rate allowed as a debt
cost for ratemaking purposes.
Does the Commission choose to do anything else?
G((tJ)~; ~l N'f\/J
Patricia Harms
udememosAtlanta Power0801 2
DECISION MEMORANDUM - 6 -FEBRUARY 22 2008