Taos KCEC Detail

As the number of empty store fronts increases and tourism continues to decline, the second homers scatter, and Native Taosenos move away to find jobs, one can only wonder if we are going to see an updated version of the thirties and forties—deja vue—all over again in Taos. Surely Taosenos need to stop fighting with each other and turn their eyes outward to consider the future. Perhaps today’s community leaders are visionaries and preparing not for the next decade of stagflation but for the mid 21st Century or even the 22nd Century. In any event, it would be nice if they shared their plans with us Coop members and local tax payers.

One can only wonder how local government’s tax and spend policies or the Coop’s rate increases and long-term indebtedness will affect the future cost of doing business in the private sector. Right now the economy resembles an inverted pyramid. The town, county, schools, Coop, and Hospital are the major employers and owners of vast capital improvements in the community. The increasing amount of publicly funded square feet, some of it idle, situated within the town limits, is mind-boggling.

We agree with most people that local government and public-private entities like the Coop should not be operated strictly as cash cows for elected officials, who have a vested interest in construction, finance, advertising, etc. Mainstream news reports about the way public officials ignore “conflict of interest” claims suggest an ethically challenged generation of elected officials is in charge of decision making. It’s the new oligarchy.

KCEC

The Kit Carson Coop, CEO Reyes and the Board of Trustees, are involved in a controversial rate request to increase electricity rates at the Public Regulation Commission. In response to the hearing examiner’s request, trustees submitted their per diem and travel expenses for the month of July. Trustees charged members over $7000 for the month. Some of the costs are directly attributed to attendance at the July hearings. Here’s the list, which reflects an arbitrary and capricious approach to expenses. Apparently, the board’s policy is: ”Let you conscience be your guide.”

1. Bruce Jassman; $2098.43
2. Manuel Medina: $2,090.00
3. Jerry Smith: $1797.00
4. Ambrose Mascarenas: $1622.00
5. Robert Ortega: $1421.00
6. Art Rodarte: 1148.00
7. Virgil Martinez: $1114.00
8. Toby Martinez: $840.00
9. Francis Cordova: $626.00
10.Luisa Mylet: $581.00
11. Chris Duran: $418.00

Below is an excerpt of the staff recommendation and comment on the most controversial part of KCEC’s current game plan: the general diversification plan (GDP). Among other comments, the staff recommends keeping the members informed of side ventures into Propane, Internet, the Command Center, and Broadband. The Coop’s Propane Division has some 3600 customers and Internet 1688. So far, according to filings, the Coop has lost $10 million in side ventures. Currently, the Coop is on track to rack up another $20 million in Broadband debt.

According to news reports, the Town of Taos will join in subsidizing 50% of the Command Center loan at about 59,000 per year for its E911–PSAP communications facility. In effect, Town of Taos taxpayers, who are also Coop ratepayers, get to pay twice for the facility. Most of the paperwork on the proposed merger of the town and Coop in this venture from KCEC reflects 2006 figures.

The Command Center project  does not include support from the town’s 50% partner, Taos County, which suggests an ongoing turf war has begun. Currently the town pays zero for its accommodations. E911 staff have indicated their satisfaction with the current digs.

Neither the Town nor Coop have presented ratepayers and citizens with a study of utility and remodel costs at the Command Center. According to New Mexico’s Department of Finance and Administration, the move will cost the town and county some $800,000. The Mayor says, reportedly, that the move will cost $50,000 or less. We don’t need no stinkin’ studies.

Below is an excerpt of the staff report regarding final recommendations for the rate increase as well as an analysis of KCEC’s GDP. You can find all the documents related to the hearing on the New Mexico Public Regulation Commission web site.

IV. GENERAL DIVERSIFICATION PLAN

On February 25, 2011, Kit Carson filed a GDP [general diversification plan] containing the information outlined in Commission rule no. 17.6.450.10(B) NMAC as an informational filing to avoid controversy. Kit Carson does not concede “that the Commission has the authority to regulate or otherwise provide over sight of transactions involving Kit Carson’s affiliates, given the authority granted to New Mexico electric cooperatives under the NMRECA to engage in the creation of and operation of subsidiaries engaged in energy services, telecommunications and communications services without prior Commission approval.” KCEC Exh. 2 (Reyes GDP testimony), p. 2.

However, even if a coop doesn’t need prior approval to form an energy or communications subsidiary, it still needs to submit a GDP for approval. Rural electric cooperatives are subject to the Commission’s policy and requirements concerning Class I and II transactions as set forth in Commission rule no. 17.6.450 NMAC (“Rule 450”). The section covering the scope of the rule states that Rule 450 “applies to all water, electric, gas, and rural electric cooperative utilities subject to the Commission’s jurisdiction.” 17.6.450.2 (emphasis added). Compliance is necessary to “assure reasonable and proper utility service at fair, just, and reasonable rates; to require reasonable access to the books and records of a utility and its affiliates so that such an assurance can be made; to assure that appropriate cost allocations are made; and to assure that no cross-subsidization occurs between the utility and an affiliated interest.” 17.6.450.6.

Just recently, on December 16, 2010, the Commission issued a Final Order approving the GDP of a rural electric cooperative, Lea County Electric Cooperative, Inc. (“Lea County”). Lea County recognized that the formation of a subsidiary to own and operate a gas-fired power plant in Lea County and incur associated debt would constitute a Class II transaction pursuant to the Public Utility Act and be subject to the requirements of 17.6.450 NMAC. See Case No. 10-00241-UT. The Commission ordered that “[p]ursuant to Rule 450, LCEC [Lea County] will not, without the prior approval of the Commission: (a) loan its funds or securities or transfer similar assets to any affiliated interest; or (b) purchase debt instruments of any affiliated interests or guarantee or assume liabilities of such affiliated interests.” Recommended Decision, p. 21. Lea County was further specifically ordered to not, without prior approval of the Commission, guarantee or assume any of its subsidiary’s financial obligations. Id. at 23.

Kit Carson’s GDP covers its wholly owned propane service subsidiary, Kit Carson Energy, Inc. (“KCEI”), which was formed on November 24, 2009 when Kit Carson determined to move its propane services business into a wholly owned affiliate. Currently, KCEI has 3,600 customers. Kit Carson states its membership authorized its entrance into diversified businesses by a vote of the quorum of its members at its June 17, 2000 Annual Meeting. KCEC Exh. 2 (Reyes Direct), pp. 2 -3.

Just before that, in August 1999, Kit Carson’s Board of Trustees approved that Kit Carson proceed with telecommunications ventures. Kit Carson began its internet business activities in September 1999, and currently has 1,688 internet subscribers. Kit Carson acquired a CLEC [competitive local exchange carrier] license in NMPRC Case No. 3406 in 2001 to offer competitive local exchange telephone service. In August 2010, Kit Carson was awarded $63.8 million in federal American Recovery Reinvestment Act funds (approximately $44 million grant and a $19 million loan) to work in conjunction with other entities to build and operate a fiber-to-the-home broadband communications network for its members and communities in Northern New Mexico. KCE Exh. 2 (GDP), pp. 2 – 4. Kit Carson anticipates that its internet, telecommunications, and broadband services and businesses will be transferred to a subsidiary when they become viable standalone enterprises. KCEC Exh. 2 (Reyes Direct), p. 6 and GDP, p. 3.

Kit Carson generally commits that it will comply with Rule 450 requirements, such as stating it will not without the prior approval of the Commission loan its funds or securities or transfer similar assets to, or purchase debt instruments or guarantee or assume liabilities of any affiliated interest, or stating that it will seek any required Commission approval for transactions involving KCEI or its other subsidiaries. KCEC Exh. 2 (Reyes Direct), p. 8 and GDP, p. 8. However, Kit Carson qualifies its commitments by adding that it will seek “any required Commission approval” “[c]onsistent with the provisions of NMRECA, when required by New Mexico law to do so” or “when not otherwise authorized by NMRECA”. Id. The Commission should caution Kit Carson that its affiliate transactions are subject to all Rule 450 requirements but for 450.10(A) which would have required Commission approval before Kit Carson formed and operated its propane and communications businesses. Thus, Kit Carson may not loan its funds or securities or transfer similar assets to, or purchase debt instruments or guarantee or assume liabilities of any affiliated interest, without prior Commission approval, period. Such Rule 450 provisions are necessary for the Commission, its Staff and more importantly, the general public, including the members of the Cooperative, to have the information they need to consider whether Kit Carson’s diversified activity could have material and adverse effects on Kit Carson’s ability to provide reasonable and proper service at fair, just, and reasonable rates, and if so, what measures need to be taken to avoid or eliminate such effects. 17.6.450.10 NMAC.

Kit Carson’s propane and broadband activities have lost $5.6 million and $2.1 million respectively through 2009 and members now have $7.7 million of their capital tied up in those businesses. Members have invested an additional $2.3 million in the Command Center. Therefore, in Staff’s view, “[t]o the extent that rates generate revenue that not only cover actual costs incurred but also provide a return on a rate base, it is clear that rates are central to the provision of capital that, to the tune of $10 million, is currently funding diversified activities. . . . without the existence of KCEC and the security of its electricity revenue, these diversified activities could not have been sustained to their current point.” Staff Exh. 9 (Reynolds Direct), p. 39. “While the future of these diversified activities may result in the appreciation of patronage capital, the existing patronage capital remains necessary to sustain these activities for the time being and patronage capital would not exist without its incorporation in the rates paid by members.” Id. at pp. 39 – 40.

Therefore, in light of the central role of patronage capital in sustaining diversified activities and of the unclear extent in quantifiable dollar terms of the investment approved by members or trustees, and to promote the interests of the Cooperative and its members in accountability and transparency, Staff recommends that Kit Carson provide regular updates in the future that break down in detail how members’ capital is invested among regulated and unregulated operations.

Specifically, Staff recommends that Kit Carson provide to each member a history of their patronage capital investments in the last 10 years, year-by-year, and that Kit Carson provide to each member, from now on, annual patronage capital allocation statements that include a breakdown of where the capital is invested as well as a comparison to how it was invested one year earlier. Id. at 41.

Staff recommends that Kit Carson’s GDP be approved by the Commission subject to revision to include its Taos Regional Command Center activities. Kit Carson testified that its electric utility operations will occupy only approximately 40% of the Command Center. Kit Carson’s own website, http://www.kitcarson.com/ , currently contains the following description of the Command Center:

State-of-the-Art facility that will have the ability to house all emergency services such as E-911, Electric COOP dispatch, Forest Fire command, and all home land security initiatives as required by each participant. This system will also be responsible for monitoring Cyber Security tied to smart grid and green grid systems.

TRCC will also be the Network Operations Center for the Fiber to the Home Project.
It is clear that the majority of the Command Center is not exclusively related to utility functions. Pursuant to Rule 450.10(E): “The Commission may require the modification of a general diversification plan and may attach conditions to the approval thereof in order to make such plan consistent with the public interest or to avoid material and adverse effects on the utility’s ability to provide reasonable and proper service at fair, just, and reasonable rates. Therefore, it would be in the public interest and reasonable for the Commission to require Kit Carson to file a revised GDP that includes its Command Center activities, and further to require Kit Carson to send out annual patronage capital statements to its members (regardless of whether any member’s account is in the negative) that report the information as described in the preceding paragraphs.

V. RECOMMENDATIONS

Staff supports Kit Carson’s proposal to increase its annual revenue requirement by $4.8 million necessary to reach a TIER of at least 1.63 based on the 2009 test year subject to the following conditions:

1) The customer charge for residential customers should be $17/month. Volumetric kWh rates should be adjusted to generate $1.7 million in additional revenue based on the 2009 Test Year as originally proposed by KCEC.

2) Budgeted expenses should be reduced by $155,299.00, the proposed pro-forma adjustment to the 2009 Test Year to increase labor expenses across the board.

3) Kit Carson should be required to file a report with the Commission that includes a list of cost saving measures and the associated savings that the Cooperative intends to employ for 2012 – 2013. This report should also address and identify any changes to its Board travel and per diem expense reimbursement policies and practices. Kit Carson should examine ways to further reduce board and other expenses by considering, among other measures, a clear “per diem” travel reimbursement policy, if there is none, as well as alternatives to travel such as online or web attendance to meetings and conferences; and reasonable limitations on the type of meetings for which board members are compensated.

4) Kit Carson should file a revised GDP that includes the Command Center. Kit Carson should be expressly cautioned that its affiliate transactions are governed by Rule 450, specifically including, but not limited to its Class I reporting requirements, and the requirement for Commission approval for Kit Carson to loan its funds or securities or transfer similar assets to, or purchase debt instruments or guarantee or assume liabilities of any affiliated interest.

5) Kit Carson should be required, as a condition of GDP approval, to provide its members with an annual report or statement of how their patronage capital is invested , including an allocation breakdown of where, among its regulated and unregulated activities, that patronage capital is invested. Historical information over the last 10 years about this breakdown should also be provided.

RESPECTFULLY SUBMITTED,

UTILITY DIVISION STAFF
NEW MEXICO PUBLIC REGULATION COMMISSION

_________________________
Cydney Beadles
Staff Counsel
1120 Paseo de Peralta
Post Office Box 1269
Santa Fe, New Mexico 87501
505-827-6905
Cydney.Beadles@state.nm.us