Tuesday, February 24, 2015

SHOULD WATER UTILITIES PROVIDE FOR A WORKING CAPITAL REQUIREMENT?



Like many situations in life, success can be a matter of timing. In normal operations, water utilities can experience a significant timing issue. In any billing period, receipt of operating revenues lags operating expenses incurred to provide the service being billed, as water utilities usually do not bill in advance of service. In the case of monthly billing, the lag in receipt of revenue, or the lead in operating expenses, roughly reflects a the 30 days of the billing period plus a portion of the time for payment of the billings.

Regulated water utilities can request a cash working capital allowance as part of a proposed rate increase. Regulatory commissions have approved such an allowance computed using a simple formula method such as one-eighth of test year annual operating expense. In the alternative, large utilities may be required to perform a formal lead/lag study taking in account each line item of expense.

The working capital allowance is included as a component of rate base in recognition that investors are funding working capital for the revenue lag period. Regulators that have approved the formula method often state that it provides a reasonable estimate of working capital requirements without the time and expense of performing a formal lead/lag study.

Unregulated municipal-owned water utilities that use the "utility method" to calculate costs of service and rates may consider including a working capital allowance in rate base. An alternative for some municipal-owned utilities may be to establish an operations and maintenance expense reserve funded from revenues. Such a reserve may offer benefits particularly when revenues seriously lag higher operating expenses such as during high demand summer months.

Monday, February 16, 2015

CLIMATE CHANGE: HOW DOES THE WIND BLOW?



Midwestern states in the United States again are under attack from the Arctic Vortex beast. As was the case in 2014, bitter cold this month has plunged temperatures below zero degrees Fahrenheit, with howling wind chills of 20 to 40 degrees below zero. Again, it is the wind that is cold's messenger.

It came as no surprise, therefore, to read a report that, since the late 1990s, global warming has not increased.* Apparently, the forecasted rise in global surface temperatures has not occurred for some 15 years.

Now, scientists have come up with their explanation why forecasts of warming have not come true. According to the report, they assert that unusually strong winds over the Pacific ocean have pushed surface water of the ocean to the west, causing cold water from the depths to rise to the surface. In turn, the newly cold surface water pulls heat from the atmosphere, thereby changing global atmospheric conditions.

However, this wind process accounts for only about one-half of the stall in global warming, according to the report. The cause of the other half was not suggested.

The cause of these strong winds apparently is not known, but may have some connection to the so-called El Nino and La Nina effects. The report states that the winds are expected to reduce as the earth warms. However, according to the wind argument, the earth has not warmed because of the winds.

As the cold north wind numbs much of the country, one wonders how much the global warming assertion is written on the wind.

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* Sumner,"Drought Linked to Warming Pause",
Science Newa, February 7, 2015, p.15

Sunday, February 8, 2015

INTENTIONS OF LETTERS OF INTENT


Water utilities, and business entities in general, often sign letters of intent or memoranda of understanding as part of a contract negotiation process. Typically, parties may have had discussions resulting in agreement as to some terms of a proposed contract but need more time to resolve remaining issues and terms. To memorialize the understanding so far, they may enter into a letter of intent.

Depending how a letter of intent is drafted, it may have become or may not have become an enforceable contract. A letter of intent generally per se is not a contract. Enforceability of such a document depends on whether a court can find an intention to be bound by its terms and that those intentions and the stated terms are sufficiently definite and specific.

The most common method employed to assure that a letter of intent does not become a contract is to insert a provision to the effect that it is not a contract and there is no contract until and unless a written definitive agreement is developed and mutually signed by the parties in the future.

Even with such a provision, however, a non-contract can become an enforceable contract as to certain terms within the letter of intent. For example, it may include an agreement for a deadline in negotiations or preparation of a definitive agreement; or it may provide for confidentiality as to the negotiations or information exchanged between the parties; or it may include a prohibition against negotiating with other possible parties. These sub-agreements within a letter of intent may become enforceable by themselves, even if the letter of intent has not become enforceable as to the substance of the proposed underlying transaction.

As is true for all contracts generally, parties to a letter of intent must draft their document to clearly evidence their intent-- so clearly that a court can interpret the language as the parties truly intended and not order a result that no party ever intended. The road to court often is paved with the best of intentions until a pothole of un-clarity is encountered.