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Desire for growth drives independence push by Bristol Virginia Utilities [Bristol Herald Courier, Va.]
(Bristol Herald Courier (VA) Via Acquire Media NewsEdge) Oct. 25--BRISTOL, Va. -- Intelligent Communities Forum cofounder Robert Bell lavished praise on the city and its utilities division when he visited as
part of a review for the Intelligent Community of the Year competition.
Bell's more weighty comment, however, might have been when he described what Bristol Virginia Utilities is not.
BVU CEO Wes Rosenbalm remembers the conversation well, and retells it enthusiastically while answering queries about the utilities
division's proposed spinoff into an independent authority.
BVU has outgrown its current structure, Rosenbalm said, and Bell noticed, commenting in March that the utility's future -- particularly its
broadband future -- depended heavily on breaking the bonds that constrained it.
"Growth has been limited and it has been governed," Rosenbalm said about BVU.
Since that visit by the ICF cofounder, Rosenbalm, his staff and the BVU Board of Directors have been working in earnest to do just that.
"We went through the thing in New York with the ICF and came away convinced this was no longer a matter of status quo," BVU General Counsel
Walt Bressler said Wednesday. "This was now a matter of survival."
Bressler said BVU must find a way to make broadband an integral part of Southwest Virginia's future, or "communities are going to begin to
die."
Detailed in a 21-page document, the spinoff plan creates an independent utility governed by an eight-member board that would acquire all of
the assets for the water, sewer, electric, telephone and broadband services provided to BVU customers both inside and outside of the city
limits. The authority would remain tax exempt, but minus the restraints of being an arm of city government it would have greater ability to
borrow money for expansion projects.
The plan has received unanimous approval of BVU's current board.
And a divided City Council narrowly approved the change on first reading Oct. 13.
A final city vote is scheduled Tuesday. But the key decision for creating the independent authority rests with the Virginia General
Assembly. The deadline for filing the authorizing legislation is Dec. 5.
A number of business and community leaders have expressed support for the plan. But the proposal has drawn opposition from the public and
some council members who worry Bristol would be surrendering substantial assets, its ability to guard against rate increases and ultimate
control of its electric, water, sewer and telecommunications future.
Former City Councilman Frank Goodpasture III, speaking during the Oct. 13 public hearing, urged the city to deny the request because the BVU
"asset" is far too valuable to give away.
In his remarks, and a letter to the council, Goodpasture noted that BVU and its OptiNet division have flourished under the present system
and city leaders have yet to deny any BVU request to pump additional dollars into the operation.
But speaking Wednesday to the Bristol Herald Courier editorial board, Rosenbalm said the taxpayers and the ratepayers lose very little, and
because the authority will be free to do what's best for both -- they have much more to gain.
"This about growth and business plans and making the region prosper," Rosenbalm said. "Access to resources gives us more ability to gain
customers, have new products and -- in the end -- everybody wins."
A broader reach
Under state law, BVU could theoretically offer Internet and telephone service -- through its OptiNet fiber-optic network -- to a 75-mile
territory outside its electric system footprint. That territory includes virtually all of Southwest Virginia to the borders of Kentucky,
West Virginia and North Carolina and northward along the Interstate 81 corridor to Wythe County.
BVU officials claim adding those customers would help them keep rates reasonable.
OptiNet currently serves about 280 business customers outside its immediate service area, in places such as Lebanon and Cedar Bluff. Its
penetration is much greater locally, with about 5,600 customers inside the city, 3,200 in Washington County and about 1,000 in Abingdon.
"There are restrictions on cable television and we're not asking for that to be changed, but [state regulations] don't limit broadband and
telephone," Rosenbalm said. "It's important to get to every home, but it's also equally important to get to every business, because that
creates jobs. The primary hindrance right now is access to capital to grow."
To date, extending the fiber-optic backbone into those outlying areas has been funded by grants -- primarily from the Virginia Tobacco
Indemnification and Community Revitalization Commission -- not city borrowing, BVU Chief Financial Officer Stacey Bright said.
BVU leaders worry that city officials -- who have borrowed liberally in the past to establish and supplement OptiNet growth -- might be
fiscally unable or politically unwilling to foot the bill for further expansion. For example, BVU already has applied for more than $90
million in federal stimulus grants to extend the fiber-optic network and install a "smart" electric grid in its city-county service area,
Rosenbalm said.
If approved, accessing those grants would require more than $34 million in local matching money and BVU would have to ask the city to borrow
that money.
"We could go to the city now and ask for money through a general obligation bond. As an authority, that option is no longer available and it
forces stewardship on BVU," Rosenbalm said. "The model we will follow is, if the revenue does not support it, it cannot be borrowed,"
Rosenbalm said.
Proponents also argue an independent authority is better positioned to access grants because it would be viewed as a regional entity, not an
arm of the city.
Necessary spending
BVU officials have identified potentially needing an additional $40 million for the water, electric and OptiNet divisions. Among the other
items identified are:
n $30 million to replace much of the city's water system, resulting in projected annual savings of $275,000 now lost to leakage.
n $6 million for "smart" electric and water meters to offer customers more control over usage and the utility better monitoring capability.
n $4 million to build an electric substation in Washington County, Va., should major business or industrial prospects opt to locate there.
"The city has a very old water system. Pipes are leaking and we have a 25 [percent] 30 percent leakage" rate, board member Kurt Pomrenke
said. "A study indicates for about $30 million we could replace a number of these pipes and virtually stop this leakage. This is something
we need to do soon, but we don't look forward to going before City Council to ask to borrow this money."
The savings and additional customers should allow BVU to cover that cost without raising water rates, Pomrenke said.
Also lurking in the background, Bright said, is that the federal Environmental Protection Agency can order localities to repair or replace
water systems if leakage becomes too great.
Additionally, Rosenbalm said, the Tennessee Valley Authority is expected to eventually direct utilities such as BVU to install "smart"
electric meters on homes.
And, if a large industry located in Washington County, he said, BVU would be obligated to provide service.
Washington County leaders "are aggressively trying to fill their industrial parks -- they would need additional electrical service,"
Rosenbalm said. "We have run some numbers and if we did land a large industry, it would take about $4 million to build a new electrical
substation and transmission lines."
Rush job?
Opponents have asked why the plan has seemingly been rushed. The proposal first surfaced publicly at a BVU board of directors meeting Oct.
5, when it was unanimously approved. But utility officials said the concept has been discussed for years.
The plan began taking root in May, two months after the ICF visit.
By July, all members of the City Council were apprised of the concept. And in September, they were furnished a detailed copy of the
authority plans.
If approved by the Virginia General Assembly in the next session, the authority would take effect July 1, 2010.
Opponents have suggested a May 2010 election that includes a majority of the City Council's seats has fueled the schedule, although BVU
officials deny that. Coincidentally, the current occupants of those three seats voted to support the plan.
Bressler said part of the urgency to create the authority was sparked this spring when BVU participated in the ICF's Top 21 intelligent
community program.
The city was recognized for its deployment of broadband Internet service and eventually named among the seven most intelligent communities
in the world for 2009. Last week, the New York City-based ICF again selected Bristol among its top 21 communities for 2010.
BVU assets
BVU's current cash, restricted funds and physical assets total more than $145 million and the utilities provider has $85 million in equity,
according to its Aug. 31, 2009, balance sheet.
BVU currently has $49 million in long-term, revenue bond debt, including $27 million for OptiNet and $16.7 million for its electric system.
Some opponents argue the city shouldn't relinquish control of BVU because of the value of its telecommunications, electric and other systems
or that BVU might opt to sell off all or some of its assets.
Bright said such prospects are virtually impossible.
"Of that $145 million, $111 million are plant assets that are out there providing the revenue to pay for the debt service obligation on our
revenue bonds," Bright said. "Those assets are pledged."
For example, BVU's $37 million in electric system assets are bound by TVA contract to remain intact, Bright said.
"Contractually with TVA, there is nothing we could do with those assets. TVA looks at it that those assets are there for the ratepayers, so
contractually we cannot dispose of, alter or change them in any way," she said.
And about a third of the OptiNet division's $52 million in assets are tied to grants from the Tobacco Commission and the city's Industrial
Development Authority.
"Under those two grant projects, there are stipulations we cannot sell or dispose of the assets," Bright said. "So well over 50 percent of
our assets are out of our control, that we could ever dispose of or liquidate [them]. I think a lot of people look at the balance sheet of
BVU like a for-profit company. But you really don't have equity in a municipal balance sheet. It's encumbered by contractual agreements or
bond covenants."
The city also has additional protection in the transfer contract, Bright said, because any sale of all or part of a BVU authority must be
approved by the authority board and the City Council.
The contract also spells out that the city would receive all proceeds if the entire authority was ever sold or half the proceeds if OptiNet
or the electric division were ever sold.
City borrowing
Under the plan, BVU's $49 million indebtedness would transfer from the city to the new authority. The change could benefit the city, said
Ted Cole of Davenport & Associates, the city's Richmond-based financial advisers.
"There is not general fund support from the city to the utility board. They [BVU] have demonstrated they can stand on their own. There is no
real change from our perspective," Cole said. "Financially, we don't see this as a negative."
Bressler said shifting the debt should improve the city's borrowing position.
"Our financial people tell us we [BVU] are way under-indebted for a utility our size. For an $80 million-a-year [business], we don't have
very much debt. But when you put that debt -- as is required under the current accounting -- into the city's books, it's almost half of the
city's debt," Bressler said.
"The city is struggling with their debt," Bressler said. "We're not struggling with ours because we've got the finances. If we get that off
there, there is at least some prospect that, if the city needs to borrow money, it will make their rates cheaper and the insurance companies
more willing to insure the borrowing."
Payments
According to the proposed contract, BVU would begin making two new in lieu of tax payments to the city, continue another as well as continue
funding economic development activities.
That includes:
n BVU will continue spending $500,000 a year for economic development on behalf of the city.
n BVU will continue to pay the city $350,000 a year in lieu of taxes for electric system property. A TVA formula prescribes that amount
could be as low as $187,000, but both sides agreed to the higher payment when the TVA contract was signed three years ago.
n BVU would begin paying $100,000 a year for 10 years in lieu of taxes for its water and wastewater treatment assets in the city.
n BVU would also begin making an annual in lieu of taxes payment for the assets of its OptiNet telecommunications equipment in 2013. That
payment is estimated at $100,000, but could be higher if the value of those assets increases.
Only the electric system in lieu of tax payment is required, Bressler said, and it is mandated by TVA.
"There is no requirement for the authority to pay any of those sums to the city, because it is now and would be a tax-exempt entity,"
Bressler said.
BVU currently makes smaller in lieu of tax payments to Washington and Scott counties in Virginia and to Sullivan County, Tenn., for its
electric system, because it serves a small number of customers in each, Bressler said. Those would continue under the authority.
BVU has paid the $350,000 in lieu of taxes payment to the city for a number of years and that would continue for the length of the TVA
contract, which runs for at least 18 more years.
"After 10 years, the TVA contract is a rolling contract, which means in a few years, it begins adding an extra year, so that ultimately it
never goes away unless we or TVA want it to," Bressler said.
Governance
The proposed new eight-member authority board would initially include the four current council-appointed citizen members -- Jim Clifton,
Faith Esposito, Paul Hurley and Kurt Pomrenke -- one additional city resident to be selected by the council, a city resident chosen by the
authority board, a member of the City Council as of May 1, 2010, and a member of the Washington County Board of Supervisors.
The current seven-member BVU board of directors includes two City Council members and one member of the county board.
Once the terms of current citizen directors expire between 2014 and 2016, the council and authority board would appoint three city residents
apiece.
Citizen directors are limited to two four-year terms and then must be off the board for at least one year. The appointed City Council member
can serve as many terms as the council decides, as long as he or she continues to be on the council.
The county board member would serve a four-year term, but can be reappointed.
In response to questions from Councilmen Guy Odum and Jim Heaney during the Oct. 13 meeting, BVU has added an item to the transition
agreement, Bressler said.
"The authority will not attempt to have the number, makeup or method of appointment of the members of the board of directors from that
contained in the original act, without the prior consent of the City Council," according to the agreement.
All board members would continue serving without financial compensation.
Tuesday's meeting is scheduled at 7 p.m., at City Hall, 300 Lee St.
| (276) 645-2532
To see more of the Bristol Herald Courier or to subscribe to the newspaper, go to http://www.tricities.com.
Copyright (c) 2009, Bristol Herald Courier, Va.
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