**FIN 06-30**

Directives and Standards

INTEREST ON INVESTMENT (IOI)

PROCEDURES FOR COMPUTING SPREADSHEET

1. GENERAL

This method recognizes that revenues from power and municipal and industrial water sales are collected and deposited with the Treasury monthly and therefore, monthly net revenues should be considered in the computation of the amount of interest on investment.

A. In order to eliminate the need for monthly computations, this method for computing annual interest assumes the following:

(1) Revenues are applied to O&M and other expenses (except plant depreciation) monthly.

(2) The remaining balance or net revenue is available monthly for repayment of the unpaid investment.

(3) Net revenues essentially flow uniformly throughout the year. Where this assumption is unreasonable, net revenues and interest should be computed monthly.

B. The priority of net revenue application is as follows:

(1) Current year's interest on the total Federal investment.

(2) Unpaid prior year expenses (deficits).

(3) Amortization of investment in descending order of interest rates, except that net revenues will be applied first to any required repayment of investment.

2. INTEREST COMPUTATIONS

A. An initial estimate of annual interest will be computed on the beginning of the fiscal year unpaid investment balances for each of the interest-bearing investments.

B. After deducting the total interest computed in 2A above from net revenues, the remaining net revenues will be applied to the amortization of the investment bearing the highest interest rate. The interest expense computed in 2.A. above will be recomputed whenever revenues are sufficient to fully and/or partially repay any investments.

The interest expense for investments not being repaid during the fiscal year will not be modified since there has been no reduction in the outstanding investment balance.

(1)

Investments Fully Repaid. Interest expense will be recomputed on 1/2 of the investment balance outstanding at the beginning of the year since revenues and therefore repayments are assumed to flow uniformly throughout the year.(2)

Investments Partially Repaid.The following equation will be used to recompute interest by modifying the investment balance from a beginning of the year unpaid balance to an average unpaid investment balance:I = (U - (

R-Ui))i

2

I = Recomputed interest on the highest interest-bearing investment for the fiscal year.

U = The beginning unpaid balance of the highest interest-bearing investment to be partially repaid.

i = The annual interest rate.

Ui = The initial estimate of annual interest per 2A above.

R = The annual net revenues after deducting (1) interest on investments not repaid during the fiscal year and (2) interest and principal on investments fully repaid during the fiscal year.

C. Figure 1 illustrates the interest computations.

D. If net revenues do not flow in a reasonably uniform manner during the fiscal year, the net revenues will have to be determined for each month, and the interest and repayment of principal computed on a monthly basis as follows:

(1) Compute one month's interest on all unpaid investment at the beginning of the month.

(2) Deduct that interest from the monthly net revenues.

(3) Apply the excess net revenues to the highest interest-bearing investment.

E. When the net revenues are negative, additional interest at 1/2 of the current interest rate as prescribed in the section in interest rates, will be charged on the deficit and the unpaid annual interest due on the Federal investments. This additional interest, the annual interest due on the investment, and the deficit will be deferred and interest charged at the current interest rate until repayment is made from net revenues.

(023) 6/30/96