HSUD's financial condition critical according to TVA
Seven representatives from the Tennessee Valley Authority attended the Oct. 8 special called working meeting of the Holly Springs Board of Aldermen. The meeting was called by vice mayor Dexter Shipp and Ward 4 alderman Patricia Merriweather.
Sharon Williams, with TVA regulatory assurance, provided an update on the financial condition of the Holly Springs Utility Department. Louie Smith, pricing specialist, TVA Rate Design & Administration, provided a rate analysis and proposal for the HSUD.
Kimberly Bottom, associate general counsel/rates and regulatory, presented a copy of TVA’s contract agreement with the HSUD and went to bat with Williams and Smith to defend TVA’s wholesale power contract with HSUD.
HSUD general manager Wayne Jones provided opening remarks and the purpose of the session.
Williams updated the board on it’s findings and the need for a local rate adjustment. She pointed out some facts about the local power company model:
• TVA is not beholden to investors.
• TVA isn’t a for profit agency.
• each local power company, LPC, makes its own decisions subject to TVA’s regulatory authority.
• all 153 LPC’s in the TVA system have local control.
• TVA exercises regulatory oversight over some of the aspects of the LPC, including the financial health and service practices of the LPC.
• each LPC is responsible to manage its own electric system operations.
“TVA has an oversight role,” Williams said. She said TVA has shared its concerns with the City of Holly Springs about the financial health of the electric department.
In August 2023, TVA provided a financial analysis, indicating that if HSUD did not improve operations of the electric department and strengthen its financial position, HSUD may no longer be able to pay operating expenses or pay its wholesale power bill.
On August 5, HSUD payment for the June invoice from TVA was returned because of insufficient funds.
HSUD made partial payment of $1 million for the June invoice.
On August 27, HSUD paid the remaining balance, $985,146, for the June invoice.
In September, HSUD was not able to pay the July invoice on time or in full. Two separate payments were made Sept. 17 and Sept. 27.
“We are here because the inability to pay wholesale power on time is a symptom of a much bigger financial problem with the electric department,” Williams said.
HSUD’s failure to perform audits for years 2022, 2023 and likely 2024 will be late, is a concern for TVA. Without these audits, TVA cannot get a complete understanding of the financial status of the HSUD, Williams said, making clear that TVA does not perform audits for LPCs.
Some important highlights in Williams’ report included: • the August power invoice for $2,115,620 was due Oct. 3. Nothing had been paid on the invoice as of the Oct. 8 meeting.
• HSUD has 13 bank accounts, none of which have been reconciled in over a year. Williams said it is difficult to know how much cash is available to pay operating expenses.
• HSUD’s financial records (accounts payable, accounts receivable) have not been reconciled, and could impact the ability of HSUD to obtain outside funding.
• HSUD currently has $2.4 million in outstanding vendor bills going back as far as Jan. 3. Some vendors have notified HSUD they will stop performing work until paid. HSUD lacks revenue sufficient to cover all its costs or to have an accurate picture of its financial position.
• meter reading, still behind, affects billing. “It is imperative that customers receive timely, accurate bills, Williams said.
• 79 percent of accounts receivable at HSUD are 30 days past due and represents $3.6 million in uncollected revenues.
• HSUD has been unable to confirm ownership of certificates of deposit of $1.5 million and $3.4 million. If determined, HSUD could make these funds available to cover expenses.
Williams listed contributing factors to the current financial position at the HSUD: • General Accepted Accounting Principles have not been followed, making it difficult for employees to understand the true financial position of the HSUD.
• HSUD has not had a rate increase in 15 years. Rate adjustments would provide additional money to operate the utility.
• inflation has increased the cost to operate an electric distribution system.
• storms in 2022 and 2023 depleted HSUD’s cash reserves.
• a TVA COVID discount rate of 2.5 percent ended in Oct. 2023, impacting HSUD.
• TVA adjusted its whole-
sale power rates for 2024 and will do so again in 2025, to pay for cost of generating power.
Williams said it is clear HSUD’s financial crisis cannot be fully mitigated by correcting metering and billing issues.
Even when metering and billing is caught up, TVA does not think revenues at HSUD will be sufficient to be financially sound or to meet the requirements of its Wholesale Power Contract, Williams said.
In summary, Williams said four indicators of poor financial health at HSUD include: • HSUD has not paid the TVA power invoice in full and on time for three months in a row.
• HSUD has $2.4 million in outstanding vendor invoices.
• HSUD is not collecting revenue properly due to meter reading and late billing issues.
• HSUD’s financial records and accounting is poor overall.
“We would not be here if we did not consider the electric department’s financial condition to be in a critical state,” Williams said. “Simply stated, HSUD must have in place rates that are sufficient to ensure that the electric department can operate on a financially sound and self-supporting basis.”
Williams provided data showing local power companies have taken 79 rate actions over the last five years, roughly 3 actions per LPC.
Guidelines for LPCs are calculated each year.
The increases are due to cost of transformers, equipment, line equipment and other expenses. The current guideline for HSUD is just under $1.8 million.
A 6.6 percent rate increase, or $150,000 a month, is needed to address system needs, operational costs, maintenance, and services at the HSUD.
The increase covering the period 2010 to 2021 came to a 16 percent increase in costs. Local rates at HSUD have
remained unchanged while revenue reports to TVA and power bills for fiscal year 2021 came to $7.37 million for power and $7.86 million in direct costs, which leaves a shortfall of about a half million dollars.
TVA recommends HSUD implement a rate adjustment of $1.8 million effective Nov. 1 (a 6.6 percent rate increase) to cover HSUD expenses, Williams said.
Had HSUD gradually increased rates over time, it would have resulted in a 16 percent increase over the last 15 years.
The rate increase would boost HSUD’s revenues to cover existing system costs, but falls short of funding for essential long-term electric system investments, Williams said.
A rate adjustment of $1,781,500, or 6.6 percent, would cover direct costs at HSUD. A customer’s bill would increase by about $15 a month or 49 cents a day, Williams said.
TVA’s Louie Smith said TVA’s wholesale power bill has increased by 10.3 percent with one adjustment from Oct. 2023 to Oct. 2024 of 5.25 percent.
He said a 6.6 percent increase is specifically for a local rate adjustment.
Alderman Andre Jones asked, if the board approves the rate increase, would it total 10.6 percent this year.
Smith said TVA’s rate increases are passed on to its customers.
Mayor Sharon Gipson said she is “definitely not sold on a rate increase.” “I don’t think anybody on this board is excited about raising the rates,” said Ward 3 alderman Colter Teel. “If anybody now takes a business approach, what you are paying now is nowhere near (what you paid) two years ago. Nothing stays the same. When election time comes up, everything gets really crazy.” He said cost of energy saving measures, such as adding insulation to reduce energy use, are also up.
“Sometimes looking at different things at home can help on this,” he said, and thanked TVA for its report.
Merriweather, in a response to a remark Gipson made about honesty, said, “honesty and transparency has to be there.”
“We have checks we cut to pay vendors and no money,” she said. “What do we do? They just explained it to us. I know some folks don’t want to read the handwriting on the wall. At the utility department we have been questioning the financial stability for at least two years.
“To tell the city it’s alright, it’s okay, that is disturbing to me as a leader in this community. The right-of-way, the multi-million we need to clear the right-of-way. Where is the money going to come from? This is some serious business. The $1.5 million worth of checks to vendors in the drawer (not sent to vendors) is a red flag. There’s the issue.
“We’ve got to get some money and the utility is behind $3 million (on payment in lieu of taxes to the City of Holly Springs). Where are we going to get the money to take care of the city of Holly Springs?
“This is not time for gas lighting and fear baiting.”
Vice mayor Dexter Shipp said he has had to raise his prices at the business he has operated 25 years in order to pay his vendors.
“There may need to be a rate increase, but I’m not sure how much,” he said.
Gipson continued.
“We also have a special account set aside for storms,” she said. “The utility department doesn’t bounce checks.”
Ward 2 alderman Andre Jones said he wants to make sure the utility department is doing all it can to collect uncollected debt first, before raising its rates.
Merriweather said she wants to make sure everything is out on the table including the $3 million HSUD owes the city, and the $1.5 million in checks to vendors being held in the drawers.
Williams said, even with the rate increase TVA recommends, she is concerned whether HSUD can operate the facility, even with improved collection efforts.
“You will not continue to be able to pay operating costs,” Williams said.
Shipp asked TVA and the general manager, Wayne Jones, if a sample bill could be prepared to reflect the rate increase.
“Yes,” said Jones. “The mayor is correct. I was for a rate increase before I took the job because I read the TVPPA report and the TVA assessment.”