Securing your co-op/utility debt repayment for large industrial customer facilities
Industrial customers - the economic drivers in your community
Industrial customers may comprise a large portion of the load and volume of your electric, gas, wastewater, and water services. They are the customers that can be economic drivers in the community. They can also be the customers that require specific services or expansion of your facilities.
For example, large electric customers may require dedicated line extensions or substation upgrades. Natural gas customers may require transport mains, dairy wastewater customers expanded treatment facilities, and water intensive manufacturers additional wells or source of supply facilities. The construction of this infrastructure may be expensive, require the issuance of debt to build and the facilities may be usable only by the customers requiring the expansions.
Negotiating an Industrial Service Agreement
It is prudent to hold negotiations with incoming large industrial customers on their needs and how the co-op/utility will meet those needs prior to providing service. The industrial customer will use these negotiations in making its locational siting of its facilities, but the co-op/utility needs to keep the interests of all ratepayers in mind.
A best-practice in this situation is to enter into an Industrial Service Agreement, that details the co-op/utility responsibility and terms for providing service.
The potential industrial customer may push-back on negotiating or signing an Industrial Service Agreement. They may also use the process as leverage, saying they may locate their facilities at a community other than yours. Confronted with that approach, keep this in mind - “How much will your co-op/utility need to increase rates on all customers should the industrial customer leave your system”? If you do not relish explaining that to your oversight board, keep negotiating.
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Types of industrial service agreements
The types of items in an agreement vary with the service delivered. Here are common contract points.
1. Customer commitment of xxx kW of load to be served, mmBTU of gas deliveries, or gallons of wastewater treatment or water to be supplied
2. Duration of expected load
3. Utility supplied facilities, included specifics on infrastructure costs, debt issued, and the responsibility of the industrial customer to pay its proportionate share of the debt through its rates
4. Provisions for payment of the proportionate share of debt, should the industrial customer curtail or close operations
In a co-op or utility customer rate, debt service is a fixed cost of the cost of service. So, a reduction by the customer in kW, mmBTU, or gallons will not reduce the co-op or utility’s cost of providing service.
Contracts with industrial customers for cost recovery of electric, gas, wastewater, or water services built to serve them provide more financial security to a co-op or utility if finances change for the industrial customer.
Move to the front of the line for debt repayment
Of course, if financial difficulties arise for the customer, they may declare bankruptcy. This is not an article on legal issues, but, the co-op or utility will become a general creditor in a bankruptcy filing UNLESS it has negotiated an Industrial Service Agreement with the customer. In that case, move nearer the front of the line for collecting on the customer’s contract commitment.
Industrial contracts provide more financial security for other ratepayers
Industrial contracts provide your organization’s other ratepayers with more (but not absolute) assurance that they will not be required to pay for infrastructure additions that benefit only one or a few select customers. Contracts promote equity and fairness in rate-making and lead to a cornerstone in just and reasonable customer rates.
About Russ Hissom - Article Author
Russ Hissom, CPA is a principal of Utility Accounting & Rates Specialists a firm that provides power utilities rate, expert witness, and consulting services, and online/on-demand courses on accounting, rates, FERC/RUS construction accounting, financial analysis, and business process improvement services. Russ was a partner in a national accounting and consulting firm for 20 years. He works with electric investor-owned and public power utilities, electric cooperatives, broadband providers, and gas, water, and wastewater utilities. His goal is to share industry best practices to help your business perform effectively and efficiently and meet the challenges of the changing power and utilities industry.
Find out more about Utility Accounting & Rates Specialists here, or you can reach Russ at russ.hissom@utilityeducation.com.
The material in this article is for informational purposes only and should not be taken as legal or accounting advice provided by Utility Accounting & Rates Specialists. You should seek formal advice on this topic from your accounting or legal advisor.