HSUD in critical financial position

Representatives with the Tennessee Valley Authority were invited by Holly Springs aldermen Colter Teel and Dexter Shipp to provide an updated report of a financial assessment of the Holly Springs Utility Department (HSUD) at the Sept. 5 meeting of the board.

Aldermen have been seeking answers to the board’s questions regarding the financial health of HSUD.

Six representatives with TVA and Doug Peters, president/CEO of the Tennessee Valley Public Power Association, attended the meeting.

Representing TVA were Melanie Farrell, vice-president of External Strategy and Oversight; Kimberly Bolton, legal counsel; Julia Wise, senior consultant, communications; Ja Vonna Wilson, regulatory assurance; Amy Tate, government relations manager; and Derek McGill, with customer relations.

In a brief press release, Wise said TVA conducted a financial assessment of HSUD to ensure it is compliant with its wholesale power contract with TVA.

“Our findings indicate significant concerns with HSUD’s power contract compliance and financial health, including having insufficient funds for current expenses and necessary investments in the system,” Wise said.

“However we remain committed to working with city leaders to find solutions that support HSUD customers as well as the needed financial and operational improvements to the system.”

Farrell recapitulated the findings in the original TVA report before going into new material.

Briefly, the report included:

• a March 3, TVA issues and a HSUD Storm Restoration Report to the city and presented findings at the March 7 board meeting.

• the March 7 report cited 11 factors that contributed to prolonged power outages and 14 areas of improvements to provide safe, reliable power.

• listing TVA resources that TVA and TVPPA could provide to HSUD.

• requesting a response from the city within 45 days (mid-April). No written report was received, yet the volume of calls and outreach from HSUD’s customers continued.

• publishing TVA’s report on March 21 so customers are made aware of safety and reliability concerns at HSUD.

• publishing an update to the March report on May 10. TVA has received no written report identifying HSUD’s plan of actions to implement solutions.

“That is very disappointing to us, and I believe it’s disappointing for your customers,” Farrell said.

• listing progress TVA sees in addressing monthly financial reporting deficiencies. HSUD has completed all monthly reports for 2023. Outstanding reports include required external audit reports for years 2021 and 2022.

Farrell presented, in brief, the following regulatory compliance assessment of the wholesale power contract between HSUD and TVA that was begun in March. She said HSUD’s violations identified are clearly in the regulatory scope of TVA. The Authority will be taking progressive steps to enforce them.

TVA provides regulatory oversight of a local power company’s financial health, rates, use of electric system funds and service practices.

In the compliance assessment, TVA identified 27 actions HSUD must take to come back into compliance. Four recommendations were listed to improve financial acumen, to improve HSUD’s financial position and to improve understanding of of contract requirements.

TVA has concerns about the accuracy of financial information provided in HSUD’s monthly reports to TVA. Financial audits are not completed. And Farrell said TVA found some of HSUD’s violations may include artificially inflating the financial position of the utility.

Farrell said HSUD is in a critical financial position.

“We are very concerned about HSUD’s ability to operate and maintain the system on a self-supporting and financially sound basis going forward,” she said.

On its current trajectory, HSUD will not generate the necessary revenue to cover costs, Farrell said.

TVA requires local power companies to pay for electric system operating expenses cost of power, materials and supplies, salaries, wages, and insurance. After that, LPCs are required to pay down system debts (outstanding bonds). After these two requirements are met, LPCs can use remaining revenue to cover renewals, replacements, contingencies (a reserve) to cover operating costs for a reasonable number of weeks.

Finally, after LPCs have met these conditions regarding expenditures, any remaining revenue can pay PILOT (Payments In Lieu Of Taxes).

Farrell said HSUD is not expected to have sufficient revenues to continue to make PILOT payments to the city in the near future. PILOT funds make up a portion of the budget of the City of Holly Springs, Farrell said. TVA will monitor HSUD’s cash-on-hand and notify the city when funds are insufficient to make PILOT payments.

Other factors contributing to the electric department’s critical financial position include that no rate adjustment has been made by HSUD since 2009. Local rate adjustments are made by local leadership – which in this case is the Holly Springs Mayor and Board of Aldermen. And TVA found HSUD is not collecting all the revenue owed by customers.

For example, some businesses and people are not being disconnected for nonpayment, violating HSUD’s own rules and regulations, Farrell said.

“These practices also amount to discriminatory treatment under the power contract,” she said.

TVA will increase wholesale power rates by 4.5 percent beginning Oct. 1.

“Given that HSUD’s power cost is increasing, it will become even more important that HSUD is appropriately collecting amounts due from customers,” Farrell said.

HSUD was found to be out of compliance with power contract requirements in 11 areas:

• financial reporting

• payment of power contract credits

• account classification and rate application

• nondiscrimination in bill payments and disconnections

• accounting practices

• use of electric system revenues

• interdepartmental loan agreements

• reconciliation of electric system accounts

• service practice standards

• consumer billing

• financial standards and health. The next steps TVA recommends included:

• hiring an experienced and professional general manager is critical

• completing a full system assessment by TVPPA

• entering into a compliance agreement between TVA and HSUD that provides assurances that all violations will be remedied and prevented from reoccurring

• creating an agreement to a commitment that the city will work with TVA to resolve agreed upon compliance issues within 30 days. TVA asks the city to identify persons who TVA can work with on a regular basis to ensure the board’s commitment is carried out.

“Our commitment should be clear,” Farrell said. “We are committed to working with each of you to take the appropriate next steps. TVA stands ready, in coordination with TVPPA, to support the leadership of the electric department in developing long-term plans that address the condition of the system, which has clearly deteriorated over many years. If reasonable progress is not made, we will take any other necessary steps to enforce the contract.”

Aldermen’s comments followed.

Ward 4 alderman Patricia Merriweather asked what resources are needed.

Farrell said a list of resources shared among the various utilities at HSUD should show how costs are being allocated.

Ward 2 alderman Andre Jones suggested a resolution may be appropriate to rectify issues.

Ward 3 alderman Colter Teel said he is willing to look at any resolution.

“We are ready for something to happen. The findings are disturbing, but all we can do is go up,” Teel said.

He asked about discrimination in who is forced to pay (by cut-offs) and who is not.

“If we are in financial disarray, we are letting people not pay, it is alarming. How do we go back and recoup that?” Teel asked.

Farrell said that is an area where TVA can work with the utility to get data.

“It requires additional eyes and hands on it,” she said. She said procedures need to be in place to track which customers are not being billed, and to monitor to make sure people are being billed.” Rigorous policies must be in place to assure the bill collection is monitored and tracked, Farrell said. She said the cost to operate a utility have gone up significantly.

Investments will be needed, she said, to assure the reliability of the system.

Challenges of collecting revenue owed must be corrected. What is required to operate the utility department needs to be determined.

Teel asked how long would it take to get “boots on the ground” if the board passes a resolution to partner with TVA.

“We are ready,” Farrell said. “Some things may take longer than others.” Fountain asked how often will the board and mayor need to communicate.

Farrell said several times a week. Fashioning a new compliance agreement would be the first operative step.

Jones said a joint resolution between the board and TVA is needed.

“It should already be happening,” he said. “We need to go for it.” Gipson wanted to confer with attorney John Perry before crafting a resolution.

Jones said the resolution is only a page and a half.

“Procrastinating has not been our friend,” said Teel.

Merriweather said all on the board are concerned about the city and citizens – the stability of HSUD.

“Here we are six months and we still do not have a report in writing for TVA,” she said. “We are pushing the needle.”

Gipson said multiple individuals have been working with assets and audits for TVA.

“It is hard to respond to everything else and working everything else,” she said.

Teel seconded Jones’ motion to prepare a resolution and it passed 4-1, with Fountain abstaining.

Fountain said she wants to work with the attorney and did not think waiting another day would make much difference.

Jones said he is solution-oriented.

“It is a partnership that must be solidified between this mayor and board of aldermen,” Jones said. “It’s no excuse to be two to three years late on audits.”

In deference to Fountain, Jones rescinded his motion.

Gipson said her objection was to have an opportunity to review the resolution.

In anger, she said, “It is a board of bullies, but I’m built for it. It’s been years and years for the need to repair this system.”

Merriweather said the board is not interested in throwing blame.

“What we need to do is to get the utility up to standards. TVA and TVPPA are here to give us guidance. We are not here just griping. We want good services. That’s why we are sitting here talking with TVA, working with TVA.

“We’ve got to trust somebody. We have got to get this done.”