REPORT ON TENNESSEE MUNICIPAL ELECTRIC SYSTEMS AUTHORIZED TO PROVIDE CABLE AND INTERNET SERVICES

Transcription

1 REPORT ON TENNESSEE MUNICIPAL ELECTRIC SYSTEMS AUTHORIZED TO PROVIDE CABLE AND INTERNET SERVICES COMPTROLLER OF THE TREASURY STATE OF TENNESSEE June 30, 2005 Division of Local Finance Suite 1700; James K. Polk Building 505 Deaderick Street Nashville, Tennessee

2 REPORT ON TENNESSEE MUNICIPAL ELECTRIC SYSTEMS AUTHORIZED TO PROVIDE CABLE AND INTERNET SERVICES COMPTROLLER OF THE TREASURY STATE OF TENNESSEE June 30, 2005 John G. Morgan Comptroller of the Treasury David H. Bowling, Director of Local Finance Joyce M. Welborn, Legislative Auditor Division of Local Finance Suite 1700; James K. Polk Building 505 Deaderick Street Nashville, Tennessee phone: fax:

3 John G. Morgan Comptroller STATE OF TENNESSEE COMPTROLLER OF THE TREASURY STATE CAPITOL NASHVILLE, TENNESSEE PHONE (615) June 30, 2005 The Honorable John S. Wilder Speaker of the Senate The Honorable Jimmy Naifeh Speaker of the House of Representatives and Members of the Tennessee General Assembly Ladies and Gentlemen: Transmitted herewith is the Report of the Office of the Comptroller of the Treasury with regard to municipal electric systems that have submitted business plans to provide cable television and internet access services to customers of the electric system, pursuant to the authority granted by the General Assembly in Public Chapter 481 of The authorizing legislation states as follows: On or before June 30, 2005, the Office of the Comptroller of the Treasury shall prepare a report to the General Assembly evaluating the operations of municipal electric systems offering services permitted by this part, which shall include a recommendation as to whether the authority to provide such services should be expanded, restricted or terminated. I hope that this report provides useful information to the Members of the General Assembly with regard the authority of municipal electric systems to provide these services. Sincerely, /s/ John G. Morgan Comptroller of the Treasury

4 COMPTROLLER OF THE TREASURY DIVISION OF LOCAL FINANCE REPORT ON MUNICIPAL ELECTRIC SYSTEMS AUTHORIZED TO PROVIDE CABLE AND INTERNET SERVICES INTRODUCTION In 1999, the legislature enacted Public Chapter 481, which includes authority for municipal electric systems to provide cable television service and internet access service to customers within the electric system s service area. This legislation has subsequently been codified as Title 7, Chapter 52, Part 6, Tennessee Code Annotated (Attachment A.) TCA (c) states as follows: On or before June 30, 2005, the Office of the Comptroller of the Treasury shall prepare a report to the General Assembly evaluating the operations of municipal electric systems offering services permitted by this part, which shall include a recommendation as to whether the authority to provide such services should be expanded, restricted or terminated. 1 The authorizing legislation requires that any municipal electric system that desires to provide any of the authorized services (referred to in this report as cable/internet services ) must submit a proposed business plan to the Comptroller of the Treasury. After reviewing the plan, the Comptroller is to prepare a report concerning the feasibility of the business plan. Immediately following enactment of the 1999 legislation, the responsibility for reviewing the business plans and issuing the feasibility reports on behalf of the Comptroller of the Treasury was assigned to the Director of the Division of Local Finance in the Comptroller s Office. Guidelines were prepared describing the process municipal electric systems must use in submitting their business plans (Attachment B.) At the time of preparation of this report, fourteen electric systems in Tennessee have submitted plans. The Comptroller s feasibility report has been issued for each of these plans by the Director of Local Finance. These electric systems are as follows: Athens Utilities Board Jackson Energy Authority 2 Bolivar Electric Department McMinnville Electric System Bristol Tennessee Essential Services Morristown Utility Systems Chattanooga Electric Power Board Pulaski Electric System Columbia Power and Water Systems Springfield Electric Department Covington Electric System Tullahoma Utilities Board Fayetteville Public Utilities Winchester Public Utilities 1 Subsequent to enactment of the 1999 legislation, the General Assembly has authorized the establishment of two pilot projects whereby municipal electric systems may provide cable television and internet access service to residents outside the electric s system s service area. The electric systems selected to be the pilot programs are the City of Covington and the City of Morristown. A separate report from the Comptroller of the Treasury concerning these pilot projects is required by January 31, Jackson Energy Authority was created by private act in 2001, and is required to submit a business plan to the Office of the Comptroller pursuant to the provisions of TCA

5 RECOMMENDATION It is the recommendation of the Office of the Comptroller that there be no changes to the existing statutory language, thereby continuing the authority for municipal electric systems to provide the authorized services pursuant to the requirements of these statutes. LEGISLATION TCA states as follows: Each municipality operating an electric plant described in has the power and is authorized within its service area, under the provisions of this act and on behalf of its municipality acting through the authorization of the board or supervisory body having responsibility for the municipal electric plant (herein sometimes referred to as "governing board"), to acquire, construct, own, improve, operate, lease, maintain, sell, mortgage, pledge or otherwise dispose of any system, plant, or equipment for the provision of cable service, two-way video transmission, video programming, Internet services, or any other like system, plant, or equipment within and/or without the corporate or county limits of such municipality, and, with the consent of such other municipality, within the corporate or county limits of any other municipality. A municipality may only provide cable service, two-way video transmission, video programming, Internet services or other like service through its board or supervisory body having responsibility for the municipality's electric plant. A municipality providing any of the services authorized by this section may not dispose of all or substantially all of the system, plant, and equipment used to provide such services except upon compliance with the procedures set forth in The major provisions of this legislation are as follows: 1. A municipal electric system desiring to provide cable/internet services must submit a proposed business plan to the Comptroller of the Treasury. After reviewing the plan, the Comptroller is to prepare a report concerning the feasibility of the business plan and submit such report to the legislative body of the municipality and the governing board of the electric system within sixty days. Upon receipt the Comptroller s feasibility report, or if the sixty-day period elapses and no report has been issued by the Comptroller, the electric system may proceed with implementation of the business plan. 2. If the governing board of the electric system decides to proceed with the plan, a notice must be published in a local newspaper stating the board s intent to offer cable/internet services and including a general description of the business plan. The notice must also specify a date on which a public hearing will be conducted by the electric system s governing board to discuss the business plan. Subsequent to the public hearing, the electric system may proceed to implement the plan only after it has received approval to do so either by a two-thirds majority vote of the chief legislative body of the municipality or in a public referendum if such referendum is requested through a majority vote of the chief legislative body of the municipality. 3. A separate division must be established within the municipal electric system to deliver cable/internet services, and a separate accounting and record-keeping system must be 2

6 maintained to report these activities. As an entity of the municipality, the cable/internet division is subject to the audit provisions applicable to all municipalities in Tennessee. Its financial records must be maintained in accordance with generally accepted governmental accounting principles, and the audit must be performed in accordance with standards established by the Comptroller. 4. Revenues from the electric system s power or other utility operations may not be used to directly subsidize the operations of the cable/internet division. However, such revenues may be used to make inter-fund loans to the cable/internet division, provided the rate of interest applicable to these loans is at least the highest rate earned on invested electric system funds. The cable/internet division may use the inter-fund loans for capital expenditures or as working capital. 5. The municipal electric system must establish rates that cover all costs incurred in providing cable/internet services, including interest expenses for inter-fund loans. 6. The chief legislative body of the municipality may incur debt through the issuance of bonds and notes to finance the cost of construction, acquisition and improvement of the cable/internet system. The bonds or notes must be issued pursuant to the provision of Title 9, Chapter 21 or Title 7, Chapter 34, Tennessee Code Annotated. Such debt obligations may be secured (1) by a pledge of the municipality s power to levy ad valorem property taxes on all property within the municipality, (2) by a pledge of the revenues generated from providing the cable/internet services, or (3) by a combined pledge of both property taxes and cable/internet revenues. DISCUSSION Notwithstanding the prohibitions in the statute, there has been much discussion about (1) the possibility that cable/internet operations will be subsidized with electric system revenues and (2) the possibility that costs which should be charged to cable/internet operations will be allocated to other functions of the municipality, such as the general government or the electric system. The authorizing legislation requires that all costs of providing cable/internet services must be allocated to the operation of a separate division and be included in determining rates charged to customers. As part of the municipality, the cable/internet operations are subject to the accounting and audit provisions applicable to all municipalities in Tennessee. The Office of the Comptroller of the Treasury, through the Division of Municipal Audit, is responsible for reviewing the audit reports submitted by independent Certified Public Accountants for all municipalities in Tennessee and determining that they are in compliance with governmental auditing standards. In adhering to these standards, the independent auditor s examination will include a review of the financial records related to the cable/internet operations in order to determine that they are maintained in accordance with generally accepted governmental accounting principles. The independent auditors responsible for reviewing these municipal electric systems have been made aware of the specific statutory prohibition relating to subsidization of cable/internet operations with electric system revenues. To our knowledge, no reports have included any instances of non-compliance with the statutory provisions relating to 3

7 municipal electric systems providing cable/internet services. Furthermore, the operations of municipal electric systems are heavily regulated by TVA--the Tennessee Valley Authority. The standard power contract executed between TVA and municipal electric systems includes the following terms and conditions relating to financial and accounting policies: Except as hereinafter provided, Municipality.shall establish and maintain a separate fund for the revenues from electric operations, and shall not directly or indirectly mingle electric system funds or accounts, or otherwise consolidate or combine the financing of the electric system, with those of any other of its operations. The restrictions of this subsection include, but are not limited to, prohibitions against furnishing, advancing, lending, pledging, or otherwise diverting electric system funds, revenues, credit or property to other operations of Municipality. Municipality may use property and personnel jointly for the electric system and other operations, subject to agreement between Municipality and TVA as to appropriate allocations, based on direction of effort, relative use, or similar standards. Of the five systems that are actually providing services authorized in the 1999 legislation, none have been fully operational longer than three years. These systems are Chattanooga, Columbia, Covington, Fayetteville, and Jackson Energy Authority. Similar to any enterprise operation, a period of time should be allowed for the system to be constructed, customers to be recruited, and initial start-up costs to be absorbed before any conclusions can be made regarding the ultimate financial success of these operations. With regard to the systems which are providing cable/internet services, their original plans indicated it would take from two to ten years before a system would reach its break-even point: the point at which current operating revenues are sufficient to meet costs of operation, including depreciation and debt service on all debt obligations. Recognizing this need, the initial legislation authorizes inter-fund loans to be made from the electric system to the cable/internet division for working capital and other financial needs. 3 Based upon our initial review, the current results of operations for some of the electric systems providing cable television and internet access services do not conform to the projections in their business plans. We are of the opinion, however, that these differences can be explained and are reasonable. Some are the result of a faster-than-expected development of the cable/internet system which consequently resulted in revenues and expenditures greater than was projected in the plan for a specific period of time. Similarly, some systems developed more slowly than expected for one reason or another resulting in revenues and expenditures being less than was reflected in the business plans. In some cases, interest rates on debt obligations issued were less than was projected, resulting in actual debt interest costs being lower than that which was projected. In some cases, debt obligations were issued for a longer or shorter period than was projected which also 3 A similar situation exists in Tennessee statutes which place financially distressed municipal wastewater systems under the review of the Water and Wastewater Financing Board. The statutes specify the criteria for determining which systems meet the financially distressed definition, which is primarily based on multiple years of operating losses or defaulting on debt service payments. However, TCA (a)(3) provides that, for a period of seven years following construction of a new system, certain operating costs will not be included in determining whether a system can be considered financially distressed. This exception is to permit and encourage the orderly development of wastewater facilities capable of meeting anticipated growth without overburdening initial users of the facility. 4

8 results in differences in the annual debt service requirements from that which was projected in the business plans. It does not appear that any of these differences are material, however. While the recommendation of this report is continuation of the authority as provided in the statutes as they were prior to the moratorium legislation which was adopted during the 2005 legislative session, 4 the best policy direction for Tennessee remains unclear. Too little time has passed to accurately judge the likelihood of ultimate financial success of these municipal systems. However, the policy issues that must be addressed may reach far beyond the single question of whether or not governmentally owned cable/internet systems should be permitted. As communication technology rapidly advances, the desire by citizens for new and better cable/internet and other broadband services is likely to present continuing challenges for governmental and private service providers. Moreover, communities in Tennessee and economic development professionals as well as educational providers are recognizing that the well-being and economic future of our citizens will be substantially impacted by the availability of reliable and universal high-speed telecommunication systems. Not only is it in government s best interest to facilitate universal deployment, but in order to guarantee its citizenry opportunities to jobs in the 21 st century economy, government should ensure access to a network of real-time, always-on broadband services. The United States is falling farther behind every year in per-capita investment in broadband infrastructure. At one time, the United States was considered to be the world leader in internet development. Now, by some polls, we have fallen to 13 th in the global rankings of broadband internet usage. 5 In much the same way that roads, rail, water, sewer, and electricity infrastructure has enabled businesses and citizens to develop and advance economies, broadband communications can provide opportunities for one end of the state to address the needs of the other end of the state almost instantaneously. We would encourage any future electric systems, where feasible, to give consideration to a program in which the electric system provides the basic telecommunications infrastructure throughout its service area---similar to a main highway artery---and then allows private cable companies and other service providers to be the actual suppliers of cable television, internet access and other services to customers throughout the service area over this basic infrastructure network. Public Chapter 413 of the Acts of 2005 created the Tennessee Broadband Taskforce to consider these and related issues. The Taskforce will include members from virtually every perspective---public and private. It may well be that the Taskforce can and will 4 Public Chapter 362 of the Acts of 2005 provides that, with certain exceptions, subsequent to the effective date of this act, no additional municipal electric system shall apply or be granted authorization to provide services until February 1, 2006, at which time the General Assembly shall receive and consider the comptroller's report. 5 Thomas Bleha, Down to the Wire ; Foreign Affairs, published by Council on Foreign Relations; May,

9 address the rational roles for government and the private sector to play in the essential development of a 21 st Century communications system for Tennessee. BUSINESS PLANS Attachment C provides information relating to five electric systems which have built cable/internet systems and are providing services. Attachment D provides information relating to three electric systems which are in the process of providing services: one has selected its prime contractor and has enacted the appropriate debt resolutions; one is in the final stages of preparing the RFP for construction and equipment; one is currently engaged in the hearings/approval process at the local level, as required by law. With regard to the remaining six systems which submitted business plans, received feasibility reports and subsequently determined not to proceed with implementation of their plans, the following are comments received from these systems during the preparation of this report: Chairman, Athens Utilities Board--- AUB is constructing a central fiber backbone to bolster our Supervisory Control and Data Acquisition system for our various infrastructures (substations, treatment plants, pump stations, reservoirs.) When we have completed the central fiber project we will again revisit the possibility of providing telecommunications services to our customers. We have many customers and even noncustomers that continue to urge AUB to get into the internet and cable business. We feel that our state legislature made an excellent decision to allow municipal utilities to participate in the telecom business. The very threat of AUB competing with the incumbent provider resulted in a much needed upgrade to the outdated telecom infrastructure in Athens. General Manager, Bolivar Electric Department--- Bolivar Electric Department attempted to sell revenue bonds in the first quarter of This was the beginning of the market slide and due to the volatile nature of the bond market at that time we were unable to complete the bond financing. While Bolivar Electric Department has no immediate plans to re-enter the telecommunications market we believe that option is important to the future economic growth of our community. General Manager, McMinnville Electric System--- At this time, McMinnville Electric System has elected to put our Telecommunications Business Plan in abeyance. If in the future we decide to move forward with offering broadband services to our customers, we will contact your office for guidance on how to amend our Plan to reflect current business conditions. Mayor, City of Springfield--- The City of Springfield has elected not to offer telecommunications services to the public at this time. We greatly appreciate the opportunity the State Legislature has afforded municipal electric systems in Tennessee to offer these services, as we believe such opportunities will ultimately benefit the public in terms of lower rates, quality of service, and customer choice. Our decision not to offer these services is in no way a reflection of the potential value of these services to the community. We simply felt that this project was too much of an undertaking at this time 6

10 considering our current and proposed capital projects. Should we decide to offer these services in the future our Business Plan will be updated accordingly. Chairman, Tullahoma Utilities Board--- On June 1, 2000 Tullahoma Utilities Board voted to temporarily halt its telecommunications initiative. This action was taken following interactions with the Board of Mayor and Aldermen from which TUB concluded that the Mayor and Aldermen did not fully support TUB s initiative nor appreciate the value that this initiative would bring to Tullahoma. General Manager, Winchester Public Utilities--- We were unable to implement our proposed Internet Service Provider business plan, as we could not get the necessary City Council Approval to go forward. Our Board of Public Utilities will continue their efforts to convince the City officials of the great opportunities this technology would bring to all our customers.. 7

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12 Attachment A TENNESSEE CODE ANNOTATED CABLE TELEVISION, INTERNET AND RELATED SERVICES Authority to operate services. (a) Each municipality operating an electric plant described in has the power and is authorized within its service area, under the provisions of this act and on behalf of its municipality acting through the authorization of the board or supervisory body having responsibility for the municipal electric plant (herein sometimes referred to as "governing board"), to acquire, construct, own, improve, operate, lease, maintain, sell, mortgage, pledge or otherwise dispose of any system, plant, or equipment for the provision of cable service, two-way video transmission, video programming, Internet services, or any other like system, plant, or equipment within and/or without the corporate or county limits of such municipality, and, with the consent of such other municipality, within the corporate or county limits of any other municipality. A municipality may only provide cable service, two-way video transmission, video programming, Internet services or other like service through its board or supervisory body having responsibility for the municipality's electric plant. A municipality providing any of the services authorized by this section may not dispose of all or substantially all of the system, plant, and equipment used to provide such services except upon compliance with the procedures set forth in (b) The services permitted by this part do not include telephone, telegraph, and telecommunications services permitted under part 4 of this chapter. (c) Notwithstanding the foregoing, a municipality shall not have any power or authority under subsection (a) in any area where a privately-held cable television operator is providing cable service over a cable system and in total serves six thousand (6,000) or fewer subscribers over one (1) or more cable systems. (d) Notwithstanding the foregoing, a municipality shall not have any power or authority under subsection (a) in any area of any existing telephone cooperative that has been providing cable service for not less than ten (10) years under the authority of the federal communications commission. (e) (1) Notwithstanding the provisions of this section, the comptroller of the treasury shall select, not later than August 1, 2003, a municipal electric system providing services in accordance with this part to provide, as a pilot project, the services permitted under this section beyond its service area but not beyond the boundaries of the county in which such municipal electric system is principally located; provided, that: (A) The municipal electric system receives a resolution from the legislative body of the county regarding service in unincorporated areas of the county, or any other municipality within such county regarding service within such municipality, requesting the municipal electric system to provide such services to its residents; and (B) The municipal electric system obtains the consent of each electric cooperative or other municipal electric system in whose territory the municipal electric system will provide such services. 9

13 (2) The comptroller shall expand the pilot project established in subdivision (e)(1) to include one (1) municipal electric system located in the eastern grand division of the state that proposes to provide services in accordance with this part. Not later than August 1, 2004, the comptroller shall select the municipal electric system pilot project pursuant to this subdivision (e)(2), subject to the requirements of subdivisions (e)(1)(a) and (e)(1)(b). (3) The comptroller shall report to the general assembly, not later than January 31, 2008, with recommendations regarding whether the pilot projects permitted by this part should be continued or expanded to other systems. The comptroller shall evaluate the efficiency and profitability of the pilot project services of the municipal electric system in making such recommendation; provided, that the comptroller shall not so evaluate a pilot project system that is not providing service in competition with another cable service provider. (4) There shall be no other municipal electric system selected to provide pilot project services until the comptroller issues the recommendation required by subdivision (e)(3) Business plan - Public notice and hearing - Referendum. To provide the services authorized under this part, the governing board of the municipal electric system shall comply with the following procedure: (1) Upon the approval and at the direction of the governing board, the municipal electric system shall file a detailed business plan with the office of the comptroller of the treasury which includes a three-year cost benefit analysis and which identifies and discloses the total projected direct cost and indirect cost of and revenues to be derived from providing the proposed services. The plan shall also include a description of the quality and level of services to be provided, pro forma financial statements, a detailed financing plan, marketing plan, rate structure and any other information requested by the director of the division of local finance; (2) After review of the plan, the comptroller of the treasury shall provide a written analysis of the feasibility of the proposed business plan to the chief legislative body of the municipality in which the municipal electric system is located and the governing board within sixty (60) days; provided, that the calculation of the time to file the comptroller's written analysis shall not commence until the business plan is complete. Upon expiration of the sixty-day period, the governing board may proceed without the written analysis of the comptroller; (3) If the governing board determines to proceed, it shall publish in a newspaper of general circulation within that area a notice of its intent to proceed with the offering of additional services. The notice shall include a general description of the business plan and a summary of the governing board's findings on such plan. The notice shall also specify a date on which the governing board shall conduct a public hearing on the provision of such services; (4) The governing board shall conduct a public hearing on the provision of such services. No sooner than fourteen (14) days after such public hearing, the governing board may consider authorizing the provision of additional services. A municipal electric system may provide additional services only after approval by a two-thirds (2/3) majority vote of the chief legislative body of the municipality in which the municipal electric system is located or by a public referendum held pursuant to subsection (5); and (5) Upon a majority vote by the chief legislative body of the municipality in which the municipal electric system is located that a public referendum should be held on the 10

14 question of whether the municipal electric system may provide additional services, the chief legislative body of such municipality may direct the county election commission to hold a referendum on such question. In order for the question to be placed on the ballot, the chief legislative body shall so direct not less than sixty (60) days before a regular general election. Upon receipt of such direction from the chief legislative body, the county election commission shall place the question on the ballot. The referendum shall only be held in conjunction with a regular general election being held in the municipality and only registered voters of such municipality may participate in the referendum. The question to appear on the ballot shall be: "FOR THE MUNICIPAL ELECTRIC SYSTEM PROVIDING ADDITIONAL SERVICES" and "AGAINST THE MUNICIPAL ELECTRIC SYSTEM PROVIDING ADDITIONAL SERVICES." Separate division to provide services - Costs and charges. (a) (1) (A) A municipal electric system shall establish a separate division to deliver any of the services authorized by this part. The division shall maintain its own accounting and record-keeping system. A municipal electric system may not subsidize the operation of the division with revenues from its power or other utility operations. (B) A municipal electric system may lend funds, at a rate of interest not less than the highest rate then earned by the municipal electric system on invested electric plant funds, to acquire, construct, and provide working capital for the system, plant, and equipment necessary to provide any of the services authorized by this part; provided, that such interest costs shall be allocated to the cost of such services. (2) The division shall be subject to the terms and conditions of those types of provisions generally provided in existing or future pole attachment agreements, including without limitation, allocation of costs for rates, insurance, and other related costs, and the responsibility for make-ready provisions, that are applicable to private providers of services provided by the division under this part. (3) In response to facility installation, maintenance, or relocation requests made under a pole attachment agreement by a private provider of services provided by the division under this part, the municipal electric system shall provide the same response times and service quality as the municipal electric system provides for requests of the division for such services and shall provide non-discriminatory access to these facilities. Nothing in this subsection shall impair the rights of a municipal electric system under its pole attachment agreement with the private provider of services. (b) A municipal electric system providing any of the services authorized by this part shall fully allocate any costs associated with the services provided under this part to the rates for those services. (c) A municipal electric system providing any of the services authorized by this part shall establish and charge rates that cover all costs related to the provision of such services. (d) A municipal electric system shall charge or allocate as costs to the division the same pole rate attachment fee as it charges any other franchise holder providing the same service. (e) Any fee imposed by the municipality on a private provider of cable services, shall also be allocated to the division. 11

15 Guidelines for accounting - Audits - Financial reports. (a) The comptroller of the treasury shall adopt, after consideration of written comments submitted by any interested party, guidelines or procedures to establish appropriate accounting principles applicable to the division's affiliated transactions and cost allocation. The development of such guidelines or procedures shall not be deemed a rule-making proceeding under the uniform administrative procedures act, compiled in title 4, chapter 5. (b) A municipal division providing the services authorized by this part is subject to a finance and compliance audit under the provisions of , which audit shall be conducted in accordance with enterprise fund accounting principles under generally accepted accounting principles. (c) On or before June 30, 2005, the office of the comptroller of the treasury shall prepare a report to the general assembly evaluating the operations of municipal electric systems offering services permitted by this part, which shall include a recommendation as to whether the authority to provide such services should be expanded, restricted or terminated Powers and obligations of service providers. To the extent that it provides any of the services authorized by this part, a municipal electric system shall have all the powers, obligations, and authority granted entities providing similar services under applicable laws of the United States or the state of Tennessee or applicable municipal ordinances Tax payments - Payments in lieu of taxes. (a) A municipal electric system providing any of the services authorized by this part shall make tax equivalent payments with respect to such services in the manner established for electric systems under part 3 of this chapter; provided, that such payments shall not include amounts based on net system revenues as provided in (1)(B). For purposes of the calculation of such tax equivalent payments only, the system, plant, and equipment used to provide such services shall be considered an electric plant, and the revenues received from such services shall be considered operating revenues. The amount payable pursuant to this paragraph shall not exceed the amount that would otherwise be due from a municipality were it a private provider of such services paying ad valorem taxes. (b) In addition to the requirement of subsection (a), and notwithstanding any other provision of law to the contrary, a division of the municipal electric system providing the cable services, internet services, two-way video transmission or video programming services authorized by this part, is subject to payment to the appropriate units of government of an amount in lieu of the following taxes on that part of its revenues, plant and facilities dedicated or allocated to those services described in (a), to the same extent as if it were a private provider of such services: (1) Excise and franchise tax law under title 67, chapter 4, parts 20 and 21; (2) Sales tax law under title 67, chapter 6; and (3) Local privilege tax law under title 67, chapter 4, part Financing powers of service providers. Any municipality authorized by this part to provide any of the services described herein shall have the power and is hereby authorized to borrow money, contract debts and issue 12

16 its bonds or notes to finance in whole or in part the cost of the acquisition, purchase, construction, reconstruction, improvement, betterment or extension of a system or systems, or any part thereof, to provide any of such services, including the acquisition of land or rights in land and the acquisition and installation of all equipment necessarily incident to the provision of such services. Any bonds or notes authorized to be issued pursuant to this section shall be issued only in accordance with the procedures, requirements and limitations set forth in chapter 34 of this title, or title 9, chapter 21, as elected by the municipality issuing the bonds or notes. All provisions of chapter 34 of this title, or title 9, chapter 21, relating to the authorization, issuance and sale of bonds or notes, the use and application of revenues of the system or systems being financed, powers to secure such bonds and notes, covenants and remedies for the benefit of bond or note holders with respect to such bonds or notes, validity and tax exemption with respect to such bonds or notes, and powers to refund and refinance such bonds or notes shall apply to any bonds or notes authorized hereunder and the system or systems financed thereby with the same effect as if such system or systems were a "public works" if proceeding under chapter 34 of this title, or a "public works project" if proceeding under title 9, chapter Conflicting law or provisions. This part supersedes any conflicting provisions of general law, private act, charter or metropolitan charter provisions Civil actions. A franchisee under chapter 59 of this title operating in the service area of the municipal electric division providing services under this part may bring a civil action for injunctive or declaratory relief for a violation under this part, and may recover actual damages upon a showing of a willful violation under this part. Jurisdiction and venue for such action shall be in the chancery court in the county where the alleged violation is occurring or will occur. Such actions shall be scheduled for hearing as a priority by the court Liability of service providers. A division established by a municipal electric system to deliver any of the services authorized by this part shall not be considered a governmental entity for the purposes of the Tennessee Governmental Tort Liability Act, compiled in title 29, chapter Customer right to action for damages. A customer of a municipal electric system shall have a right of action to recover damages against such system pursuant to this part. 13

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18 Attachment B GUIDELINES FOR BUSINESS PLAN TO BE PREPARED BY MUNICIPALITIES DESIRING TO PROVIDE CABLE, TW0-WAY VIDEO, VIDEO PROGRAMMING, INTERNET, OR SIMILAR SERVICES (FINAL AS OF JANUARY 1, 2003) A. The electric system of a municipality desiring to provide cable service, two-way video transmission, video programming, internet services, or other similar services must first submit a detailed business plan to the Office of the Comptroller of the Treasury for the State of Tennessee. (Chapter 481, Tennessee Public Acts of 1999; Tennessee Code Annotated Title 7, Chapter 52, Part 6.) B. The business plan should be submitted to: Director--Division of Local Finance Office of the Comptroller of the Treasury 505 Deaderick Street Suite 1700 Nashville, Tennessee C. The business plan must meet the following conditions: Condition 1: The services included in the plan cannot include telephone, telegraph and telecommunications services which are permitted under the authority of Title 7, Chapter 52, Part 4, Tennessee Code Annotated. Condition 2: The proposed plan may not serve any area where a privately-held cable television operator is providing cable service over a cable system and in total serves 6,000 or fewer subscribers over one or more cable systems. 15

19 Condition 3: The proposed plan may not serve any area where there is an existing telephone cooperative that has been providing cable service for not less than ten (10) years under the authority of the Federal Communications Commission. Condition 4: The detailed business plan must be submitted to the Office of the Comptroller of the Treasury by the municipal electric system upon the approval and at the direction of the governing board. D. The detailed business plan must include the following, which must be clearly identified in the plan: 1. Management statement: A management statement regarding adherence to Conditions 1, 2, and 3 previously identified in Section C. 2. Governing Body action: A copy of action taken by the governing body of the municipal electric system adopting the business plan and authorizing its submission to the Office of the Comptroller. 3. Cost-benefit analysis: A three year cost benefit analysis which identifies and discloses the total projected direct cost and indirect cost of and revenues to be derived from providing the proposed services. (Although a three-year analysis is required by statute, a longer period may be reflected if it is considered helpful in determining the feasibility of the plan.) The analysis should identify each of the revenue producing programs included in the plan and should indicate the number of customers expected under each program and the fees to be charged for the services provided in each program. This analysis should also indicate any indirect costs being allocated between the electric system and the telecommunications 16

20 program, and the method used in calculating such costs. This should include items such as management, shared personnel resources, shared physical resources, information systems, supplies, communications, etc. If there are no indirect costs identified, it will be assumed that all costs will be directly accounted for. 4. Description of services: A description of the quality and level of services to be provided. 5. Pro forma financial statements. 6. Detailed financing plan. This should be prepared either by a financial advisor or by personnel of the municipality familiar with the issuance of municipal debt, and should indicate the type of debt to be issued (revenue, general obligation, revenue and g/o,) the amount debt to be issued, a use-of-proceeds analysis, an amortization schedule indicating annual principal and interest requirements during the life of the debt, the projected interest rates on the debt, the source used in determining such rates and a comparison to the interest rates for the most recent debt issued by the electric system and by the municipality. 7. Detailed marketing plan. 8. Detailed rate structure. This should include a summary projection of the rates to be paid by subscribers at each level of service basic, expanded, premium, pay-perview, limited use, unlimited use, etc. This should be provided for each year included in the cost-benefit analysis. E. The statutes authorize the Director of Local Finance to request additional information in determining the feasibility of the business plan. The following 17

21 additional information should be submitted, which will be considered as part of the plan: (1) the current addresses of the chief legislative body of the municipality and the governing board of the municipal electric system; (2) a statement from the chief operating officer of the municipal electric system pertaining to the following issues: the reasons for establishing a telecommunications program; a comparison of the proposed system to any incumbent system currently serving the area, including comparisons of charges, equipment, systems, customers, etc.; a description of the advantages subscribers will experience in choosing the municipal electric system s program over an incumbent provider s program; (3) a statement that the accounting and record-keeping system to be maintained by the municipal electric system for the telecommunications program will be sufficient to accurately reflect the financial operations of the division, and will be structured in such manner as to provide sufficient control against cross-subsidization of revenues/expenses of the telecommunications program by the electric system; (4) a statement concerning the most recent pole charges paid by any incumbent provider of these services and a comparison of these to similar charges included in the business plan, as required by law; (5) a statement concerning any in-lieu-of taxes to be paid by the telecommunications division representing excise taxes, franchise taxes, sales taxes and local privilege taxes, as required by law, and a comparison of these to similar taxes paid by any incumbent provider of these services; (6) a statement concerning tax-equivalent payments to be made by the telecommunications division to the local government, as required by law, and a comparison of these to tax payments made by any incumbent provider of these services; (7) a copy of the most recently completed audited financial report of the municipal electric system; (8) the name, address and telephone number of the 18

22 office in the municipal electric system where an interested party could go to examine the business plan. F. During the review process, the Director of Local Finance may request information from representatives of an incumbent provider of similar services in the area proposed to be covered by the plan; and, in requesting such information, may also provide information concerning the plan to such representatives. G. The Comptroller s Office, through the Division of Local Finance, will acknowledge receipt of the business plan and has sixty (60) days to review the plan and prepare a written analysis of its feasibility to the chief legislative body of the municipality and the governing board of the electric system. If the Comptroller s Office does not respond within the 60-day period, the governing board may proceed as provided in the statutes. However, the 60 day period does not begin until all information required by the statutes to be included in the business plan has been submitted to the Comptroller s Office, including any additional information requested by the Director of Local Finance as described in Section E. 19

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24 Attachment C Electric Systems Providing Cable/Internet Services Chattanooga Electric Power Board (Date report issued by Comptroller: May 13, 2002) The Chattanooga Power System proposed providing only internet services to commercial customers. No issuance of bonds was contemplated. They began serving customers in November, The fiscal year is considered the first year of operation. Projected in plan Actual for FY Revenues: Yr 1 321,450 78,000 Expenses: Yr 1 533, ,000 Net Income: Yr 1 (212,421) (65,000) Est. breakeven year (Profit) 2 Interfund financing - 157,000 Columbia Power & Water Systems (Date report issued by Comptroller: April 18, 2000) The Columbia Power System began providing services in April, The fiscal year is considered the second year of operation. Projected in plan Actual for FY Revenues: Yr 2 4,488,822 2,645,147 Expenses: Yr 2 3,142,851 3,655,337 Net Income: Yr 2 (252,492) (1,010,190) Est. breakeven year (Profit) 4 Bond Issue 16,840,000 15,000,000 Interest Rate 6% 3.25% to 4.875% Length of issue 18 years 17 years Type of issue Revenue Revenue/Gen. Oblig. Interfund financing - 1,250,000 Covington Electric System (Date report issued by Comptroller: December 9, 1999) The Covington Electric System began providing services in March, The fiscal year is considered the third year of operation. Projected in plan Actual for FY Revenues: Yr 3 1,106,759 1,110,694 Expenses: Yr 3 1,146,677 1,733,312 Net Income: Yr 3 17,025 (622,618) Est. breakeven year (Profit) 3 Bond Issue 5,410,000 5,530,000 Interest Rate 4.85% 4.75% to 5.4% Length of issue 15 years 20 years Type of issue Revenue/Gen. Oblig. Revenue/Gen. Oblig. Interfund financing - 368,000 21

25 (Electric Systems Providing Cable/Internet Services, cont'd) Fayetteville Electric System (Date report issued by Comptroller: October 27, 1999) The Fayetteville Electric System began providing services in July, The fiscal year is considered the third year of operation. Projected in plan Actual for FY Revenues: Yr 3 1,108,990 1,660,906 Expenses: Yr 3 1,203,189 1,367,681 Net Income: Yr 3 (94,198) (521,263) Est. breakeven year (Profit) 6 Bond Issue 5,415,000 5,310,000 Interest Rate 5.95% 5.2% - 6.5% Length of issue 23 years 20 years Type of issue Revenue Revenue Interfund financing - - Jackson Energy Authority (Date report issued by Comptroller: February 28, 2002) The Jackson Energy Authority began providing services in May, 2004 The fiscal year is considered the first year of operation. Projected in plan Actual for FY Revenues: Yr 1 1,031, ,703 Expenses: Yr 1 3,342, ,211 Net Income: Yr 1 (3,410,425) (157,134) Est. breakeven year (Profit) 4 Bond Issue 54,380,000 54,300,000 Interest Rate 6.00% 4.64% Length of issue 20 years 22 years Type of issue Revenue Revenue Interfund financing 6,000,000 9,300,000 22

26 Attachment D Electric Systems in Process of Providing Cable/Internet Services Bristol Electric System (Date report issued by Comptroller: October 7, 2004) Projected in plan Est. breakeven year (Profit) 10 Bond issue 20,000,000 Interest rate 4% Length of issue 20 years Type of issue Revenue/Gen. Oblig. Interfund financing 7,241,150 Morristown Utility Commission (Date report issued by Comptroller: June 16, 2004) Projected in plan Est. breakeven year (Profit) 6 Bond issue 17,640,000 Interest rate 3.5% Length of issue 20 years Type of issue Revenue/Gen. Oblig. Interfund financing 1,330,000 Pulaski Electric System (Date report issued by Comptroller: March 8, 2005) Projected in plan Est. breakeven year (Profit) 8 Bond issue 8,000,000 Interest rate 4.5% Length of issue 20 years Type of issue Revenue/Gen. Oblig. Interfund financing 1,100,000 23

27 COMPTROLLER OF THE TREASURY STATE OF TENNESSEE DIVISION OF LOCAL FINANCE This division is responsible for: a) reporting on business plans of municipal electric systems for providing cable television and internet services b) approving or reporting on certain debt obligations of local governments c) approving or reporting on budgets of local governments which have certain debt obligations outstanding d) reviewing and filing official bonds for counties, local education agencies, and emergency communications districts e) reviewing and filing debt information reports submitted by tax-exempt entities f) reporting on interest rate swap agreements and forward purchase agreements g) approving certain investments by local governments f) assisting local governments in debt management or in the preparation of realistic financial programs For information concerning forms and procedures regarding the issuance of notes, official statutory bonds, interest rate swap agreements, forward purchase agreements, investments and other information related to the Division of Local Finance, please visit our website: Comptroller of the Treasury; Division of Local Finance; Authorization No for 150 copies; June, This public document was promulgated at a cost of 1.27 per copy.