PRC Staff on GDP, Town of Taos “Unethical” and “Irresponsible”

Taos Friction recommends KCEC members pay close attention to the (PRC) “STAFF’S EXCEPTIONS TO THE RECOMMENDED DECISION,” posted below. Basically the staff report summarizes the local Coop’s economic adventurism in its “General Diversification Program” (GDP), which includes losses of about $10 million. In addition, the Coop is currently speculating that a government grant of some $40 million for Broadband expansion that includes an additional commitment of about $20 million for a loan, based on the Coop’s members’ assets, will fund the $60 million project in total.

Historically, the board of trustees and its CEO have misrepresented the losses and associated costs of diversification into Propane, Internet, and the Command Center. Now, members are saddled with a problematical and speculative venture into Broadband. While KCEC’s competitors in Propane and Internet have skimmed off the cream or profitable sectors, so members can expect competitors like Century Link (Qwest) to skim off the profitable customers for the expanded Broadband venture.

KCEC has a monopoly in electricity and is successful but where it must compete in the open market, it has failed. No amount of fancy accounting on the balance sheet can change the facts. Regardless of the Coop’s success in seeking rate increases for electricity to assure its continuing solvency, the “Traveling Trustees” and their CEO have lost the confidence of the community. Indeed the PRC, the general public, and the mainstream press have recognized the foolhardy nature of the Coop’s failed ventures as well as its incompetent public relations effort aimed at spin and deception.

Despite the tarnished record of the Coop, the Town of Taos, two councilors, Michael Silva and Rudy Abeyta, have joined Mayor Darren Cordova in an effort to “bail out” the Coop Command Center. Despite protests from PSAP-E911 employees, a paid for building with adequate space, and murmurs of protest from its partners, the town has plunged ahead to incur more debt—some $60,000 a year in rent and hundreds of thousands of dollars in reported remodel and moving expenses—which effort is seen as an attempt to shore up the image and dangerous fiscal policies of the Coop.

Due to political gerrymandering i.e. disproportionate representation, KCEC members can do little about the current state of the elected officials at the Coop, a quasi-private public entity until the spring 2012 elections. Even the courts have sided with the trustees against the members. But public officials at the Town operate under New Mexico statutes that give citizens legal redress. Town officials are accountable to citizens in the town, taxpayers in the county, and members of KCEC who have an interest in fiscal stability affected by the Command Center decision.

There is no need to wait until municipal elections.

Remember: The deal between the town and the Coop at the Command Center has not been vetted by an engineering or financial study. There were no public meetings to discuss the costs of moving to the Command Center or the effects on public safety. Similarly the Coop avoided holding public meetings about the ultimate costs and plans for Broadband.

The Command Center decision was an exercise in power politics but for what reason?

According to employees, public welfare and safety are not an issue at the current facility. In fact, the Mayor himself held back a crucial state document, estimating costs for the move of $850,000, from the public and the council prior to the vote. One councilor, who voted in favor of the move, has already revealed how he has and may again benefit financially from the Command Center deal. A second councilor is considered a rubber stamp for the Mayor. But it’s the Mayor himself who must answer to charges of either incompetent leadership or other unknown motives, including the effect of advertising contracts for his privately owned radio stations from the Coop.

When public mandates result in profits or benefits to private parties, the actions indicate unethical conduct at the very least and reckless disregard for public probity at most. During these hard economic times, local government leaders should be thinking about fiscal responsibility. The leaders in charge of the Coop and the Town are picking the pockets of the citizens via rate increases and tax revenue. The network of mutual aid—advertising contracts, excavation and construction contracts, taxpayer and ratepayer revenue exchanges, travel expenses–have been transformed into private benefits for the few. If you have a vested financial interested in a project and/or its ancillary divisions, an elected public official must either recuse himself from voting or admit to engaging in a conflict of interest, which is confirmed by the very public and obvious conduct of a few elected officials at Town Hall.

As Virgil Martinez used to say, “I feel sorry for Taos County.” And the Town and the Coop.

PRC Staff Recommendations

BEFORE THE NEW MEXICO PUBLIC REGULATION COMMISSION

IN THE MATTER OF KIT CARSON ELECTRIC )
COOPERATIVE, INC.’S ADVICE NOTICE NO. 57 )
) Case No. 10-00379-UT
KIT CARSON ELECTRIC COOPERATIVE, INC., )
)
Applicant )
)

STAFF’S EXCEPTIONS TO THE RECOMMENDED DECISION

COMES NOW the Utility Division Staff (“Staff”) of the New Mexico Public Regulation Commission (“Commission” or “NMPRC” or “PRC”) and, pursuant to 1.2.2.37(C) NMAC, hereby submits its Exceptions to the Corrected Recommended Decision of the Hearing Examiner (“Recommended Decision”) issued on September 6, 2011.

The Commission Can Approve Kit Carson’s GDP
Staff takes exception to the Hearing Examiner’s decision to decline consideration or action on the GDP [general diversification plan] filed by Kit Carson Electric Cooperative, Inc. (“Kit Carson” or “KCEC”) on February 25, 2011. The Hearing Examiner explained that possible GDP approval was not one of the six issues that the Commission specified would be considered in this case. Recommended Decision, p. 40.

Staff respectfully disagrees. One of the six issues specified by the Commission in its March 10, 2011 Order Granting in Part Motion to Narrow the Scope of Rate Hearing was “whether the cost of service reflects any cross-subsidization from the electric utility to other services.” The Hearing Examiner correctly observed that “the testimony from Staff and Kit Carson witnesses shows that expenses related to the diversified activities are not included in the test year expenses used to determine rates.” Recommended Decision, pp. 40-41. However, Kit Carson’s independent consultant, Dr. Martin J. Blake, admitted on examination from the bench by Commissioner Marks that but for the accumulated operating losses sustained by their diversified activities, Kit Carson would have had an additional $7.7 million cash in the 2009 test year which could have reduced their borrowing needs and consequently their interest expense. Tr. Day 3 (7/7/2011), pp. 153-160. This testimony raises matters that clearly relate to the cross-subsidization issue specified by the Commission. Therefore, the Commission can approve the GDP filed by Kit Carson in the record of this proceeding.

Although Kit Carson states that it filed a GDP only as an informational filing to avoid controversy (KCEC Exh. 2 (Reyes GDP testimony), p. 2), rural electric cooperatives are subject to the Commission’s policy and requirements concerning Class I and II transactions as set forth in the Commission’s Affiliate Transactions 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). 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”).

Rule 450 compliance by rural electric cooperatives 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. While Section 62-15-3.1 of the New Mexico Rural Electric Cooperative Act, NMSA 1978, permits cooperatives to diversify into energy and communications services without prior Commission approval, it also grants substantial authority to the Commission with respect to coop diversification. Coops must ensure that subsidiaries fully compensate the cooperative and that total subsidiary “investments, loans, guarantees and pledges” do not exceed 20% of the Coop’s assets. If not, the Commission may investigate, order adjustments of inter-company charges, and even order divestiture.

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.

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 Taos Regional 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.
Staff recommends that Kit Carson’s GDP be approved by the Commission in this proceeding or, in the alternative, issue an order requiring Kit Carson to file a GDP for Commission approval within a reasonable amount of time — up to one (1) year.

However, the alternative would require the Cooperative and its members to bear the expenses of another proceeding. The Commission would promote administrative efficiency and economy by acting on the GDP in this case. Additionally, the Commission may attach conditions to its GDP approval “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.” Rule 450.10(E).

The Commission should condition its approval of Kit Carson’s GDP on the following. 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 Kit Carson should provide regular updates that break down in detail how members’ capital is invested among regulated and unregulated operations. Specifically, Staff recommends the Commission require as a condition of its approval of Kit Carson’s GDP that Kit Carson provide annual patronage capital allocation statements (regardless of whether any member’s account is in the negative) to each member that include a breakdown of where the capital is invested as well as a comparison to how it was invested one year earlier. Staff Exhibit 9 (Reynolds Direct), p. 41.

WHERFORE, Staff respectfully requests the Commission to approve the Corrected Recommended Decision of the Hearing Examiner with the following modification — approve the GDP filed by Kit Carson in this case on February 25, 2011 and require the annual patronage capital statements described above as a condition attached to GDP approval. Such a condition would promote transparency and accountability with respect to the Cooperative’s diversification activities and go a long way towards making the GDP consistent with the interests of Kit Carson’s members. In the alternative, the Commission should order Kit Carson to file a GDP for

Commission approval within a reasonable amount of time — up to one year.

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