Friction Focus on BB & KCEC BB: National and Local Issues

By: Bill Whaley
12 October, 2012

(Updated 10.13. 5 AM)

(Good news) The San Francisco Giants, thanks to Buster Posey’s grand slam, made history on Thursday, coming back from two straight losses at home and sweeping the Cincinnati Reds three straight to win the first National League play-off, 3-2 on the road. The Giants will face the winner of the St. Louis—Washington Nationals play-off series beginning on Sunday.

(National News) During the Thursday night feisty Vice-Presidential debate, demo Joe Biden, the incumbent, reassured democrats of continued support for Medicare, Social Security, a women’s right to choose, and winding down the war in Afghanistan. Challenger Paul Ryan reiterated his belief in proposing legislation that outlaws abortion (except in cases of rape, incest, and threats to the mother’s life). Ryan opposes Obamacare and seeks both the privatization of  Medicare and social security, according to his record. The refusal of the Ryan-Romney team to provide details regarding the economy suggests that tax cuts for the rich and out-sourcing jobs will continue under a potential republican administration.

(National and Local) On Democracy Now yesterday, hosted by Amy Goodman in Los Alamos, the internationally known journalist featured a ten-minute conversation with Mike Reynolds of the Greater World Earthship Community in Taos. Amy popped in to visit Reynolds when she drove down to Taos from Colorado to support Cultural Energy’s construction of a new public radio station in Taos and spied the eccentric community west of the Rio Grande. She happened to meet Mike and learned about his ongoing thirty-year experiment with alternative living.

Reynolds spoke specifically about the self-sustaining environment of “biotecture” or how earthships reflect a commitment to building with indigenous material–bottles, cans, tires– and use water from the sky four times–even using it to grow tomatoes and bananas inside the dwellings and nurturing outside vegetation at the end of the cycle.

Kudos to the man–an artist and a visionary.

(Local Melodrama) Here in Taos the Kit Carson Electric Coop’s melodramatic battle concerning Broadband continues. Yesterday, KCEC issued a desperate press release, based on an Oct. 10 letter from RUS, the Coop’s lender. The letter from RUS (see below) suspends funding until the NMPRC backs off a request to spin off Broadband, a current KCEC division, into a separate subsidiary. Apparently, KCEC did not notify RUS of the PRC’s request for the subsidiary, which violates the Broadband–RUS contract, according to the letter.

(From the Taos News: Oct. 12, 2012)

“Reyes said the co-op had been in touch with RUS officials, including a conference call in June, about the PRC order, which required the co-op to spin-off the Internet business or justify why it could not be done. Reyes said there was no indication from RUS that there was an issue. “You would think if it wasn’t a problem in June, it wouldn’t be a problem now,” Reyes said.

“We don’t know what triggered this,” Reyes said.”

(If Reyes doesn’t know, why did he issue a garbled press release and attack activists? One thing we know, the activists are no more powerful than pesky insects or protest signs!)

The Letter

RUS makes clear in the letter that it has little faith in an independent entity and relies on electrical Coop’s assets to collateralize the funding–confirming activists’ fears about the financial risk of Broadband. ( The Coop itself continues to fall below mandated RUS benchmarks and is inching toward financial insolvency. According to its August minutes, posted on the web, the Coop and RUS are working on a four-year plan to increase cash flow and RUS has suggested raising access fees by $1 per meter.)

USDA Letter

OCT 10 2012

Notice of Suspension  and Default on Broadband Initiatives Program  (“BIP”)  Award

 Dear Mr. Reyes:

This letter is to inform Kit Carson Electric Cooperative, Inc. (“Kit Carson”) that the Rural Utilities Service (“RUS”)  did not receive official nor timely written notice from Kit Carson of the order of the New Mexico Public Regulation Commission (“PRC”) requiring Kit Carson to divest its broadband assets into a separate subsidiary.  Pursuant to Sections 5.6(c) and (d) of the Loan/Grant Contract, dated as of December 3, 2010, between Kit Carson and the RUS, Kit Carson was required to notify the RUS of any Material Adverse Effect or regulatory action which shall have “a material adverse effect on, or change in, the condition financial or otherwise, operations, properties, business or prospects of [Kit Carson] or on the ability of [Kit Carson] to perform its obligations under the Loan/Grant Documents as determined by RUS.”

Your June 18, 2012 email to the Electric Program’s  General Field Representative only inquired as to consent and process of the RUS on such a transfer, and did not lay out the effect the transfer would have on the condition of its operations.

Clearly, an order to divest all broadband assets into a separate operating subsidiary  has a material . adverse effect on the financial position of the company upon which the RUS BIP award was made.  The RUS relied on the resources, personnel, and financial strength of Kit Carson in making the award.  Given that the New Mexico PRC has ordered a divestment of significant capital, Kit Carson has not demonstrated that a subsidiary would have the ability to go forward with this project and to repay the BIP loan portion of the award.

Should Kit Carson not challenge the divestment order, unless and until it can demonstrate, and the RUS agrees, that such subsidiary would have sufficient operating capital, resources, and other means to perform the obligations under the BIP award, pursuant to Sections 4.3(b) and (c) and Sections 8.1(i) and (j) of the Loan/Grant Contract, no further advances will be made on the award.  A business plan and pro forma financial analysis of the subsidiary must be submitted to the RUS covering the next five years, with supporting and detailed assumptions, in addition to binding commitments of capital infusions for operating expenses if such infusions are not provided by Kit Carson.  If such capital infusions are to be provided by Kit Carson, a letter from the New Mexico PRC approving such action must also be submitted to the RUS.

Given that time is of the essence in this matter and that the BIP project may not be feasible if action is not taken immediately,  the above information must be submitted to the Broadband Division within thirty (30) days of the date of this letter.  Otherwise, the agency will have no choice but to terminate the award pursuant to Section 9.4 of the Loan/Grant Contract.  Note that submission  of the requested information does not guarantee that the RUS will agree to transfer the BIP award.

If Kit Carson intends to challenge the divestment, no further advances will likewise be made on the award until it has remedied the effect of the New Mexico PRC order, given that the order still. presents a Material Adverse Effect.  Either way, Kit Carson must immediately advise the RUS as to whether it will divest.

Notwithstanding  the above, the RUS understands that Kit Carson has submitted a request to the agency for reimbursement of funds for work already performed on this project.  As a result, the agency is willing to review and approve only proper expenditures currently before the agency. However, the RUS will not consider any further requests for funding until the issue of divesting the broadband operation has been settled with the New Mexico PRC and a decision has been made regarding the financial feasibility and resources necessary to complete this project.

Also note that in the future, Kit Carson is required under Section 10.1 of the Loan/Grant Contract to give notice to Mr. Kenneth Kuchno of the Broadband Division, which issued Kit Carson’s award, not the Electric Program.  If you have any further questions, please contact Mr. Kuchno at (202) 690-4673.

Sincerely,

 Telecommunications Program

Rural Utilities Service

cc:  CoBank, ACB

Reyes Testimony, etc.

In Reyes written testimony to the PRC re: Broadband, the CEO of KCEC, clarifies and confesses to the marginal condition of the Coop’s cash flow. Reyes notes that it is standard practice for RUS to require 100% of a Coop’s assets for loans. He also states that $2 million of the $17 million loan for Broadband will be used to install “smart meter” systems for the electric side. Reyes worries that a change in administration at the federal level, due to November elections, could jeopardize the $64 million project.

Poor Public Relations

But the real problem at KCEC is due to secrecy and ineptitude—and a tone-deaf public relations campaign. Coop trustees and management have ignored members and turned good will into paranoid melodrama—not unlike the way the County Commissioners began shooting themselves in the foot last summer by firing staff (and lately proposing to name rest room stalls after themselves, according to The Taos News).

Reyes blames interveners—local activists for its troubles—but during the last decade the trustees and the CEO have mismanaged and misrepresented the Coop’s policies and procedures, expenses and budgets. The Coop delayed reporting the facts on $10 million in Propane and Internet losses to the public (except for Horse Fly–RIP) until the PRC forced the Coop to come clean during a rate hearing. Further, the Coop has bamboozled the Town of Taos into subsidizing the Command Center folly—an unnecessary $3 million structure that will increase town operating expenses for  E911 services.

Reyes and the Trustees had nine months to negotiate Broadband compliance with the PRC but ignored the mandate  until the deadline approached and the crisis occurred. Now they are using the RUS letter that suspends funding as a cudgel to force PRC and community concurrence.

Prior to the rate request, the trustees rewarded Reyes with a salary increase. After voting for the rate increase, some trustees and the CEO met with members and discussed Propane and Internet losses with critics. But they refused to make public the Broadband business plan. Then trustees and the CEO further antagonized members by arrogantly certifying less than ten protests against the rate increase, while more than three-hundred members contacted the PRC with concerns. There was SRO at the first PRC hearing.

Reyes and the Trustees could have saved Kit Carson hundreds of thousands of dollars in legal fees by openly and transparently discussing the issues of Propane, Internet, Broadband, Command Center, and travel with the members. Rather than take responsibility for their decisions and address the members, they hired attorneys to fight members in court or at the PRC. Indicative of their contempt for members is the refusal of trustees to redistrict the coop to reflect fair and equal voting districts.

Read the minutes of KCEC board meetings and you will see how ineptly the Coop tries to either “explain” or “cover-up” what they are doing. One never knows whether it is conspiracy or incompetence—like notarizing signatures when the signatory is absent. Below is an excerpt from KCEC’s posted minutes, basically verbatim. The lack of paragraph breaks, punctuation, and attribution makes a muddle of the report. What the excerpt confirms is that RUS requires 100% collateral of a Coop’s assets, according to RUS agent, Larry McGraw. The Coop spends a ton of money on salaries and legal fees but nothing on the common practice of issuing succinct and clear accounts of its activities. Why are they so afraid?

(The horse is out of the barn: Pray for us.)

Here’s the excerpt. (Go to the KCEC website for the rest.)

“Mr. McGraw [of RUS] stated since KCEC did not meet the financial ratios for three consecutive years a request for a lien accommodation must be submitted and approved by RUS. A lien is similar to a loan; therefore, it would take about 60 days to get approved. Mr. McGraw stated utilities have to have debt to be in business. The 4 year work plan reflects system improvement projects that are needed to provide adequate and dependable electric service. Margins are not able to cover the cost of the 4 year work plan; therefore, KCEC would request a 35 year loan which keeps the cost to the consumers as low as possible. The loans from FFB are 100% financed. Loans are no longer 70% from RUS and 30% from a supplemental lender. Long term interest rates at 2.29% help keep the rates down. Utilities have to have debt to provide adequate and dependable electric service, especially if the utility is growing. The more you borrow the more impact it has on your equity level. KCEC builds plant with general funds and then RUS reimburses the general funds; whenever you advance loan funds you increase cash which increases assets without any change to the equity amount. KCEC should not expect to maintain a certain equity level if advancing loan funds. KCEC should be concerned about cash flow not equity level; the higher your margins are the higher your equity will be. The more capital credits you retire, the lower your equity will be. Equity should not be a driver for financial decisions. Mr. Ortega stated if there is a cooperative that has $60 million in debt vs. a cooperative that has $10 million in debt the cooperatives are going to be obligated to RUS for their entire assets. Mr. McGraw stated that is correct, RUS has a lien on everything except general plant. Mr. Ortega stated the reality of it is any cooperative that has debt is going to have all their assets tied up to that loan. Mr. McGraw stated that was correct. He stated RUS doesn’t want to own a cooperative. Mr. Ortega stated it was an important point because there is a lot of criticism, certain people stating the Board in their official capacity has leveraged this cooperative in debt and all of their assets. You are stating it’s not uncommon because that’s how it is everywhere. Mr. McGraw stated every cooperative that he deals with borrows 100%.”

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