PDF: TVA IG audit of EPB
Chattanooga's electric utility maintained surplus funds more than twice as much as is required, according to a new audit that found that EPB had excess cash in the fiscal year following its most recent rate increase.
In the first major audit of EPB, TVA Inspector General Richard Moore said EPB ended fiscal 2008 with $121 million in cash, suggesting that the city-owned utility might have been able to pay for its ongoing upgrade without its 2007 rate increase of just over 4 percent.
"We found Chattanooga had more than enough cash on hand to cover planned capital projects and provide a cash reserve (twice the minimum requirement)," the TVA auditors said in a 10-page report released this week.
But EPB officials said the cash reserves since have been reduced as EPB has deployed its fiber-optic network to most of its 169,941 customers.
EPB borrowed $220 million in 2008 to pay for a fiber-optic network to add smart meters and cable television service across the Chattanooga area. The installation of the new services initially was delayed because of a legal challenge from the cable TV industry, which EPB officials said caused what auditors said were excessive cash reserves.
"The cash balance that we had on hand when this audit was conducted was due to the bond issue we did a couple of years ago and not anything we charged the ratepayers," EPB Chief Financial Officer Greg Eaves said. "That money is now getting spent down."
EPB still enjoys the strongest balance sheet of any of TVA's major municipal distributors, reflecting the utility's aversion to debt through much of its history and management's decision to charge for some capital projects as they are built.
TVA requires distributors to maintain a 5 to 8 percent cash margin. But EPB had cash reserves equal to 13 percent of its revenues even after all of its capital improvements were paid in fiscal 2008.
By the numbers* $121 million: EPB cash reserves at the end of fiscal 2008* $87.9 million: Fiscal 2009 capital spending by EPB* $140 million: Fiscal 2011 capital spending by EPB, which includes $40 million in federal stimulus funds* $460.7 million: Fiscal 2008 electric revenues* 4.02: Percent increase in EPB rates in July 2007, which generated an extra $16.2 million in fiscal 2008Source: TVA Inspector General audit of EPB
TVA sets a minimum, but not a maximum, for cash and fund reserves for its distributors. At the urging of its inspector general, however, TVA is developing new guidelines to suggest when distributors should lower their rates, rather than just add to their reserves. TVA spokesman Scott Brooks said the TVA board will consider such policies at the December board meeting.
EPB also is benefiting by an extra $111 million awarded to Chattanooga last year in federal stimulus funds for EPB to install a smart electric grid.
"We have so much going on right now, but we were initially slowed down in deploying our fiber-optic system so the cash sat there for a while," EPB Chairman Joe Ferguson said. "Last year, our costs for repairing storm damages were $3 million more than expected so having extra cash can be a real asset."
EPB reported a drop in its net assets of more than $4 million in the fiscal year that ended June 30, Eaves said.
The TVA audit found 12 of EPB's commercial customers were improperly classified as residential customers for their rates and EPB lacked the required contracts with three major customers. EPB said it has corrected those customer classifications, which represent fewer than one misclassification for every 10,000 customers.