[bouldercouncilhotline] Hotline: Questions for the City Attorney on the FERC ruling

[cmosupport at bouldercolorado.gov]

Sender: Darrow, Alisa


 
 
 
See below for a response to Council Member Ken Wilson’s Hotline question from Mr. Greg Booth, President, PowerServices, Inc. The response from PowerServices, Inc. appears below the question submitted by Council
 member Ken Wilson (listed below for reference).  The response from PowerServices, Inc. includes a copy of an article from McGuireWoods, which has been attached as a file to this e-mail (reference file “publicfinance spring2004”. 

 
Supplementary input from Mr. Michael Berwanger of the PFM Group is contained in the attached file (reference file “CAPI Follow-up final”).
 
Thank you
 
David Bannon
3rd Party Evaluator Project Manager
City of Boulder
1777 Broadway
Boulder, CO 80306
Phone:  303-441-3230
e-mail:  
bannond at bouldercolorado.gov
 
 
 
 
From: Wilson, Ken

Sent: Friday, July 26, 2013 11:30 AM
To: HOTLINE
Subject: Question for 3-rd Party reviewer on Municipalization debt deferral
 
I believe it is well known that the City's municipalization model shows payment of interest and debt on bonds for municipalization being deferred for more than a year.  The city's
 3rd party expert stated that this is common practice in the industry.  An expert who I generally rely on in this area (Kent Taylor of KTM Consulting in Boulder) says that it is not common practice for assets that are put into service and generating revenue
 on day one.  
 
Kent Taylor's general comment is as follows:
 
"Interest is the cost of using someone else’s money.  When the loan principal is related to assets that are providing the desired service to consumers, the interest should be
 acknowledged as a cost of providing the service and, in a utility setting, should be recovered from those receiving the service when the service is rendered.  Further, a portion of the loan principal (investment recovery) should also be recovered from those
 receiving the service.  That process aligns cost causation responsibility with those who are receiving the benefits.
 
Anything other than the process described above violates the matching principle."

 
My question for the consultant in this regard is as follows:
 
Please give six examples (three for Investor Owned Utilities and three for Municipal Utilities or REAs) where debt payment was delayed more than one month past the time the assets
 were put into service, where such assets were generating revenue for the utility on day one.  Please give the amount of the debt and the amount of time  that payment was delayed in each case.
 
Ken Wilson
Council Member
 
 
 
 
Privileged and Confidential
 
City of Boulder
Debt Deferral Response Presented to the Energy Futures Team
 

·        
Council member Ken Wilson’s hotline question regarding debt deferral.

 

1.     
PowerServices has not provided any examples for investor-owned utilities, since investor-owned utilities are regulated by state commissions and the actions of investor-owned utilities
 would be irrelevant to an unregulated electric municipal or electric cooperative transaction. An IOU may use several mechanisms for major construction projects, including Allowance For Funds Used During Construction (AFUDC) which are then capitalized and placed
 in the rate base which upon a new case may be allowed in the electric rates. 


2.     
The North Carolina Eastern Municipal Power Agency, a joint action agency for wholesale supply to electric municipals in North Carolina, acquired a portion of the Sharon Harris Nuclear
 Plant, Roxboro and Mayo fossil fuel plants, and Brunswick 1 & 2 Nuclear power plants from Progress Energy. As part of these acquisitions, they capitalized the interest after commercial operation or acquisition for those already constructed. Roxboro and Brunswick
 was for one year; Harris and Mayo was two years. After that time they began making principal and interest payments. These were three separate acquisition transactions which totaled over $3.6 billion.

3.     
North Carolina Municipal Power Agency 1

(a)     
A joint action agency providing power supply to North Carolina electric municipals acquired a portion of the Catawba power plant (in operation) from Duke Energy. As part of that of that
 acquisition, they capitalized the interest for the first two years. Year one was 100% capitalized; year two was 50% capitalized. After that point they began making principal and interest payments. This transaction was over $2.6 billion.

4.     
A&N Electric Cooperative purchased the Delmarva Power electric system on the eastern shore of Virginia. As part of that acquisition, they obtained a bridge loan and began paying principal
 and interest payments on their acquisition loan one year after the closing. The acquisition price was $44,477,493. Additionally, the first two years acquisition financing were interest only. Electric cooperatives generally take advantage of the Rural Utilities
 Service loan standard practice of a two year deferral on all loans, including for construction projects.


5.     
Shenandoah Valley Electric Cooperative acquired a portion of the electric power system from Potomac Edison in Virginia. They secured a permanent long term
RUS/FFB loan on June 27, 2011 and the first principal and interest payment was March 31, 2013. The acquisition price was $161,392,988.


6.     
Winter Park, Florida acquired the electric system of Progress Energy (formerly Florida Power Corporation) inside the city limits.  Winter Park borrowed $1.329 million for the transition
 until they could begin making their principal and interest payments on this acquisition.  The final purchase price was $49.8 million.


7.     
Attached is a paper by McGuire Woods which outlines common techniques in financing, which include as a choice the capitalization of interest.


8.     
Florida Municipal Power Agency (FMPA) has authorized multiple debt issuances. The more recent were for Cane Island 4 and Treasure Coast Energy Center. The Cane Island issuance was $455
 million with $58 million capitalized interest. Treasure Coast issuance was $259 million with $11.2 million capitalized interest. The capitalized interest was no more than 1 year after commercial operations, depending on the budget cycle. Previous debt issuances
 for other projects had capitalized the interest for longer periods based on information provided by FMPA.

9.     
PowerServices has requested Boulder’s financial advisor that provided originating support for debt deferral respond to Council’s question as an additional measure of validation.

 
 
-------------- next part --------------
A non-text attachment was scrubbed...
Name: publicfinance_spring2004.pdf
Type: application/octet-stream
Size: 133308 bytes
Desc: not available
Url : http://list.ci.boulder.co.us/pipermail/bouldercouncilhotline/attachments/20130805/847b9f59/attachment.obj 
-------------- next part --------------
A non-text attachment was scrubbed...
Name: CAPI Follow-up_final.pdf
Type: application/octet-stream
Size: 134380 bytes
Desc: not available
Url : http://list.ci.boulder.co.us/pipermail/bouldercouncilhotline/attachments/20130805/847b9f59/attachment-0001.obj