appraisal of electric cooperatives in texas

Wild, Wild, West……Appraisal of Electric Cooperatives in Texas

Bwembya Chikolwa Property Tax Assistance Division

Texas Comptroller of Public [email protected]

512-475-5677

29th National Conference of Unit Valuation StatesHilton Garden Inn, Austin, TX

October 29 – 31, 2013

mailto:[email protected]

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Wild, Wild, West……Appraisal of Electric Cooperatives in TexasDisclaimers

The statements made or opinions expressed by the author/presenter in this presentation or related materials do not necessarily represent a policy position of the Texas Comptroller of Public Accounts’ Property Tax Assistance Division.

As such, the presented material should not be quoted without prior consent of the author/presenter.

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Presentation Outline

1. What Are Electric Cooperatives?

2. Characteristics of Electric Cooperatives

3. Legislative Background

4. Historical Background to Methodology

5. Texas Appraisal Methodology

6. Case Study 1: Valuation of Pedernales Electric Cooperatives

7. Case Study 2: Valuation of Brazos Electric Cooperative

8. Controversies & Open Discussion

9. Appraisal Methodology: Other States

10. Data Sources

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Wild, Wild, West……Appraisal of Electric Cooperatives in TexasWhat are Electric Cooperatives?

Electric cooperatives are democratic, tax-paying, not-for-profit businesses governed by member-elected boards of directors. As member-owned utilities, the distribution systems are self-regulating. In addition to providing electricity and other products and services to their member-consumers, electric co-ops adhere to a proud tradition of community service.

Cooperatives bring electricity to rural and suburban Texas, turning on the lights and improving quality of life – Texas Electric Cooperatives

NRECA: The Electric Cooperative Story: http://www.youtube.com/watch?v=tenKnIx4ouY

http://www.youtube.com/watch?v=tenKnIx4ouY



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Wild, Wild, West……Appraisal of Electric Cooperatives in TexasCharacteristics of Electric Cooperatives

Characteristics:

Larger investment in distribution facilities required per customer:

- Low density per customer- Seasonal demand

Types of customers:- Electric Coop’s: rural customers- IOU’s: Commercial & industrial customers

Non-profit organizations:- Rates set to cover O&M and debt service- Operating margin/net income is very small &

doesn’t provide market rate of return-on-capital

Few comparable sales/market data.

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Wild, Wild, West……Appraisal of Electric Cooperatives in TexasLegislative Background

Federal Statutes:

- The Rural Electrification Act of 1936 with amendments

- Federal Power Act and major amendments

- Energy Policy Act of 2005

Texas Statutes:

- Public Utility Regulatory Act (Chp. 41) and Electric Cooperative Corporation Act (Chp. 161), under the Texas Utilities Code

- Public Utility Commission (PUC) rules (Chapter 25 – Electric) under Texas Administrative Code, Title 16, Part II.

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Historical Background to Methodology

“…the evolution of a ‘generally accepted’ appraisal methodology required a concerted effort by all parties involved. In essence, to avoid costly litigation, the valuation methodology should be not only legally valid but also developed and supported by both the taxpayer and the appraisal authority”.Source: Smith, M. & Nabors, W. (1994), The Appraisal of Telephone and Electric

Distribution Cooperatives in Texas, Proceedings of the 1994 Public Utilities Workshop Appraisal: Communications, Energy and Transportation Properties for Ad Valorem Taxation, July 24-28, 1994, Kansas, Wichita. pp. 86- 91.

1979: Inception of the “standards” method as the “generally accepted” methodology.

1993: A task force was assembled to analyze the “standards” method problem and formulate a new valuation methodology. No alternative valuation methodology was endorsed widely and various concerns were raised.

2009 to date: Various inconclusive meetings held by the PTAD/ Industry Electric Coop Sub-committee on revising valuation methodology.

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Texas Appraisal Methodology (1) Since Coops are nonprofit organizations and rarely sell; it is

difficult to perform an income approach or gather market derived information for use in their valuation.

The General Appraisal Manual (GAM) concludes that market data or comparable sales approach is very difficult to perform due to scarcity of sales and that the cost approach is the only one which is readily applicable.

The cost approach can best be described as net-book less economic obsolescence.

- Assumptions under which Coops can be compared to IOU’s:

1. IOU’s operating under good conditions will be worth net book since this is the theoretical earnings base.

2. Several measures of operating efficiency will provide “standards” against which all companies can be compared.

3. “Standards” will be operating factors which are representative of utilities operating efficiently and under good conditions.

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Texas Appraisal Methodology (2)

Measures of operating efficiency provide comparative measures of “standards”.Standard Operating Efficiency Measure

MWH / Customer Density or volume of business

MWH / Net Distribution Plant Cost efficiency

MWH / M & O Expense less Power Expense Efficiency of operations

MWH / Distribution M & O Expense Efficiency of operations

Customers / Net Distribution Plant Density or volume of business

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Texas Appraisal Methodology (3)

Ten major differences between IOU’s and Coops:

1. Density of customers

2. Volume of power sold

3. Types of customers

4. Predictability of load

5. Sources of funding

6. Accounting methods

7. Ownership

8. Line loss

9. Purpose

10. Profit motivation

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Case Study 1: Valuation of Pedernales Electric Cooperatives (1)

Pedernales Electric Cooperative, Inc. is a not-for-profit electric cooperative corporation serving approximately 247,000 members and has 17,453 miles of line. PEC purchases its electrical power from generating source suppliers and delivers service to consumers through its transmission and distribution systems. Pedernales serves 24 counties in the central Texas region.

Income & cost approaches used; most weight given to cost approach. Standards used:

IOU’s: CenterPoint Houston; Oncor Electric; Texas-New Mexico Power; Southwestern Electric Power; Southwestern Public Service.

PEDERNALES1 MWH / Customer

2 MWH / Net Distribution Plant

3 MWH / M & O Expense less Power Expense

4 MWH / Distribution M & O Expense

5 Customers / Net Distribution Plant

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Case Study 1: Valuation of Pedernales Electric Cooperatives (2)

Cost Approach: APPRAISAL CALCULATIONS

% Good CalculationIOU Standards

% GOOD 1 (MWH/CUST/ 47.68614517 ) = 0.419394723% GOOD 2 (MWH/NDTP/ 0.0255648 ) = 0.205925563% GOOD 3 (MWH/OPEX/ 0.102041313 ) = 0.456626128% GOOD 4 (MWH/DTEX/ 0.547690141 ) = 0.197791421% GOOD 5 (CUST/NDTP/ 0.000540611 ) = 0.486914057

AVG % GOOD 0.353330378

PERSONAL PROPERTY DISTRIBUTION W/O SUBS.987,498,245 LESS 169,861,492 = 817,636,753

PER POLE MILE = 47,678 PER METER = 3,299

PERSONAL PROPERTY TRANSMISSION W/O SUBS.38,092,756 LESS 6,445,436 = 31,647,320

PER TRANS. MILE = 104,103

PERSONAL PROPERTY SUBSTATIONS137,928,893 LESS 14,127,367 = 123,801,526 44,366,667 LESS 7,848,734 = 36,517,933

PER KVA = 1

CWIP 39,621,497 = 39,621,497

SITUS PERSONAL PROPERTY89,837,514 LESS 44,164,828 = 45,672,686

MATERIALS & SUPPLIES 20,908,875 = 20,908,875

Net Book Value = 1,115,806,590

LESS: Economic Obsolescence (1 - 0.35333) 721,558,225

Indicated Value 394,248,365

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Case Study 2: Valuation of Brazos Electric CooperativeBrazos Electric Power Cooperative, Inc.’s facilities include generation, transmission, distribution, and general plants. All sales are to customers who re-sell the electricity to ultimate users and are primarily other cooperatives.

Income & cost approaches used. Most weight given to income approach. Standards used:

IOU’s: Southwestern Electric Power; Southwestern Public Service; AEP Texas North

BRAZOS1 MWH (T)/OC Transmission

2 MWH (T)/Transmission M & O

3 MWH (P)/NPIS

4 Adj. Operating Revenues/NPIS

5 (Operating Revenues/T MWH) x 1000

6 Return to NPIS

7 Load Factor*

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Historical Value Trends: Pedernales & Brazos Pedernales Electric Power Cooperative: Most weight given to

cost approach.

Brazos Electric Power Cooperative: Most weight given to income approach.

Is quisnam adveho in justicia must adveho per tersus manuum.

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Controversies & Open Discussion (1)

Some controversies and points of discussion:

1. Determination of capitalization rate.

2. Exclusion of common carrier IOU’s located in the ERCOT system (i.e. they are prohibited from buying and selling power).

3. “Second adjustment factor” - obsolescence factor should be adjusted by the average level of the market value to net book ratios of the IOU’s.

4. Only Standards 1-3 are pertinent as they offer meaningful results:

- Stnd 4 is actually accounted for in Stnd 3. The whole essence of making this adjustment is to account for T&D only, rendering Stnd 4 irrelevant.- Stnd 5 has some serious correlation issues with Stnds 1 and Stnd 2, hence the absurd unexplainable result. Stnd 5 is circular as it combines elements of Stnd 1 and Stnd 2 and is ultimately captured in Stnds 1 & 2

The fact that we’re averaging these IOU Stnds to get Avg % Good, muddles our result. We should, thus, strive for independent uncorrelated Stnds.

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Controversies & Open Discussion (2)

Cont’d. Some controversies and points of discussion :

5. Is adopting Avg % Good using IOUs technically right when we’ve 71 electric coops in TX to compare with? These two electric sectors have very different risk-return profiles. Electric coops benefit from having a different rate regulation regime and are availed with high cost assistance.

6. RUS Reports present some interesting ratios, which with aggregation can be another route to coming up with Stnds. The following ratios can be useful:- Ratio 31: Plant Revenue Ratio One Year- Ratio 33: Total Operating Revenue Per KWH Sold (Mills)- Ratio 35: Total Operating Revenue Per Customer- Ratio 57: Total Margins Per Customer

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Valuation Methodology: Other States

February 2012 PTAD other states survey results:State Methodology Allocation Comments

WA Data from 2 IOU's to devlp. rates & ratios

Agreed weightinng to determine assessed values.

Agreement with Rural Electric Coop Association.

OR 4% of gross revenue from T&D operations minus cost of power

Real MV - 85% of HCLD and 15% Income Approach. L & B removed & billed seperately.

Valued under statutues that use gross revenue tax (ORS 308.805)

UT Income, cost & stock and Debt Approaches.

Contibutions-in-aid of construction and Deferred Taxes not in cost approach.

Administrative Rule R 884-24p (Rule 62). Valuation of state assessed unitary properties Pursuant to Utah.

MT Primary weight on cost approach. HCLD 50% + Income Approach 50%.

Intangible assets deducted: software, copyrights, licences, patenst, franchises, goodwill, stocks, bonds & notes, operating lease adjustment.

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Data Sources

USDA Rural and Community Development, Utility Services:http://www.usda.gov/wps/portal/usda/usdahome?navid=UTILITY_SERVICES&navtype=RT&parentnav=RURAL_DEVELOPMENT

USDA Rural Development, Cooperatives: http://www.rurdev.usda.gov/LP_CoopPrograms.html Federal Energy Regulatory Commission (FERC)http://www.ferc.gov/market-oversight/mkt-electric/overview.asp Federated Rural Electric Insurance Exchangehttp://www.federatedrural.coop/ Cooperative Finance Corporation (CFC)http://www.cooperativefinancecorporation.net/

National Rural Utilities Cooperative Finance Corporationhttps://www.nrucfc.coop/content/cfc.html

Public Utility Commission of Texashttp://www.puc.texas.gov/Electric Reliability Council of Texas http://www.ercot.com/Texas Electric Cooperatives http://www.texas-ec.org/

http://www.usda.gov/wps/portal/usda/usdahome?navid=UTILITY_SERVICES&navtype=RT&parentnav=RURAL_DEVELOPMENT



http://www.rurdev.usda.gov/LP_CoopPrograms.html



http://www.ferc.gov/market-oversight/mkt-electric/overview.asp

http://www.federatedrural.coop/

http://www.cooperativefinancecorporation.net/

https://www.nrucfc.coop/content/cfc.html

http://www.puc.texas.gov/

http://www.ercot.com/

http://www.texas-ec.org/

http://www.texas-ec.org/

appraisal of electric cooperatives in texas

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