Colorado Springs Utilities gives Microchip Technology Inc. confidential deal to cut rates

January 8, 2017 Updated: January 8, 2017 at 7:11 am
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photo - Microchip employee Yvonne Roberts, right, gives a thurmbs-up as she's photographed along with fellow employee Gonie Ryden next to the newly-unveiled Microchip sign Friday, July 15, 2016. Photo by Mark Reis, The Gazette
Microchip employee Yvonne Roberts, right, gives a thurmbs-up as she's photographed along with fellow employee Gonie Ryden next to the newly-unveiled Microchip sign Friday, July 15, 2016. Photo by Mark Reis, The Gazette 

Colorado Springs Utilities is giving a secret deal to Microchip Technology Inc. to reduce its payments of higher commercial rates that kicked in Jan. 1.

The Utilities board doesn't vote on these "economic development special contracts," which are deemed confidential by the publicly owned Utilities and by city economic development officials.

Instead, Utilities staff follows a policy set by the board that allows for the contracts, which must be reviewed and approved by the City Auditor's Office.

A city document on the Microchip deal says the company will get three years to phase in the higher rates for electric, water and wastewater services because otherwise it "could elect to move plant operations" out of the city.

Similar special contracts have been issued for the University of Colorado at Colorado Springs and other customers, and a few of the city's biggest electric customers pay a reduced rate, said City Councilman Don Knight, chairman of the Utilities Finance Committee.

Microchip had objected to Utilities' base rate increases during an Oct. 25 City Council meeting.

The company was paying $11.1 million a year for utilities and would have to ante up $1.4 million more under the new base rates, testified Dan Malinaric, vice president of operations for Microchip.

Water and electric rates around Phoenix and Portland, Ore. - near Microchip plants in Tempe, Ariz., and Gresham, Ore. - are much lower than those in Colorado Springs, Malinaric told the council.

He did not return calls from The Gazette regarding the special contract.

Under the contract, the 900-employee company "agrees to retain operations in Colorado Springs," the document says.

Also objecting to the rate increases at the October meeting was dpiX LLC, a digital-sensors manufacturer with about 130 employees.

The extra $205,000 a year it would spend for utilities "translates to four production people on our line," Chief Financial Officer Jason Lachance said. "Our even greater concern is for the competitiveness of our community. We benchmark across the country; CSU typically has compared competitively. This makes us less competitive."

Whether dpiX or other companies also received special contracts couldn't be determined.

Lachance could not be reached, and Utilities rejected Colorado Open Records Act requests from The Gazette for the Microchip contract and a list of its 10 highest-paying commercial customers.

Utilities rules allow such contracts if the customer "offers significant risk or opportunity to Utilities" because it might discontinue the services, provide its own utilities, seek alternative utilities or increase its use to benefit Utilities and its ratepayers. All such special contracts are reviewed by the City Auditor's Office.

The $1 billion city enterprise, which is owned by its ratepayers, is a monopoly in Colorado Springs providing electric, gas, water and wastewater services.

By contrast, when privately owned utilities want to execute special contracts, they must obtain approval from the Colorado Public Utilities Commission. State law says such deals must not undercut the variable cost of the utility service, must be in the public interest and must not adversely affect other customers.

Although the Colorado Springs Utilities board doesn't vote on the economic development special contracts, it does get a monthly briefing on them, board chairman Andy Pico said.

Utilities CEO Jerry Forte is "pretty good" at bringing such contracts to the board, Knight said.

"We've done economic development contracts with UCCS, and that one was a cash-flow issue," Knight said. "It allowed us to upfront the money, and they paid us back over several years. We did an economic development contract with a couple of other large firms in town. This is nothing unusual; the board is generally apprised of those."

The three or four largest electric customers all pay about 80 percent of their costs, up from about 75 percent last year, under a long-standing rates arrangement, he said.

Knight said the identities of those large customers are "protected information."

"We have, as a board, given (Forte) the box to play with. As long as he stays inside those rules, he's free to do those contracts. We did vote on it when we set the boundaries. It does benefit the ratepayers, because they're using a steady load. They're helping CSU get more revenue because they buy so much power, and that helps our overall financial picture and helps us keep the rates low.

"Plus it provides jobs and has benefits to ratepayers beyond just their rate."

Councilman Keith King, though, advocated for more transparency.

"If they deserve a special deal, then we should publish it. We should let people know," King said. "We definitely want them here in town. If that (rate increase) is a deal breaker, we need to see what we can do to keep them. I think they're the largest user of electricity in the city.

"They should just put it on the agenda and let us know. Be transparent about it. If they're following policy, then they're living within the rules."

"There probably is a legitimate reason for this contract," said former Mayor Mary Lou Makepeace, who headed the Utilities board from 1997 through 2003. "But there needs to be some transparency. It shouldn't be (city economic development manager) Bob Cope, and it shouldn't be Jerry Forte. It should be elected officials.

"The Colorado Springs Utilities board is our local version of the PUC. Otherwise there is no oversight. There has to be somebody representing the people's interests."

Microchip, meanwhile, is poised to also get a package of tax breaks from the city.

The company bought Atmel in April for $3.56 billion, making it the world's third-largest producer of microcontrollers - tiny computers on a chip used in industrial, consumer, communications, computing, automotive and other industries that provide about two-thirds of the company's revenue.

Cope said then that the city would restructure Atmel's tax breaks for Microchip by the end of 2016.

Wednesday, he said that agreement still hasn't been completed.

The Atmel pact was to slash taxes by $339,070 on $25 million in equipment and capital spending planned for 2011 to 2015. The city since has eradicated its tax on business personal property.

In return, Atmel was to spend the $25 million and keep the 1,300 local jobs it had then.

City tax incentives packages are not confidential.

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