Power Play in Bankruptcy Court
Court favors COLO.com in dispute over utility security deposit

June 13, 2001 -- Utility security deposits are a hot-button topic for developers of new carrier hotels and data centers. But the need to put up large amounts of cash to ensure electrical service can even follow a company into bankruptcy court.
Shortly after COLO.com filed for Chapter 11 bankruptcy on May 8, San Diego Gas & Electric filed court documents threatening to discontinue electric service to COLO.com's San Diego facility unless the colocation provider supplied it with a $130,000 security deposit.
The request tested competing provisions of the U.S. Bankruptcy Code that provide financial protections for debtors and creditors.
COLO.com will be able to keep the power on at its data centers, courtesy of a ruling by U.S. bankruptcy judge Thomas Carlson, who granted COLO.com's emergency motion "prohibiting utilities from altering, refusing or discontinuing services" because of unpaid bills or unresolved disputes over security deposits.
That will allow the Brisbane, Calif.-based company to continue collecting rent from colocation tenants while it seeks to reorganize its finances - precisely the kind of relief envisioned under federal bankruptcy laws.
But bankruptcy laws also provide protections for electric companies. To insulate utilities against losses in bankruptcy cases, section 366 of the federal bankruptcy code allows power companies to seek post-bankruptcy security deposits equivalent to twice the debtor's largest monthly utility bill.
In most bankruptcies, that's not an enormous amount of money. It's a different story when the debtor is a data center operator.
Monthly power bills at COLO.com's San Diego data center have ranged between $35,000 and $65,000, according to San Diego Gas, which doubled that largest bill and requested a $130,000 security deposit "as a condition of SDG&E continuing to provide electrical services."
San Diego Gas' demand was made despite the fact that COLO.com had been current on its bills to SDG&E, with the exception of a $34,000 bill received just prior to the bankruptcy filing.
The utility cited its "significant risk of loss" and COLO.com's failure to arrange for debtor-in-possession bankruptcy financing, which SDG&E said left "no reason to believe (COLO.com) will have the ability to satisfy its post-petition obligations."
Court filings indicated COLO.com's debts include $300 million in senior notes, $42 million owed to contractors who have worked on their colocation and headquarters facilities, $11.3 million due to vendors and trade creditors, and $9 million for secured loans and vendor equipment leases. The company has 430 creditors, excluding employees.
COLO.com said that it continues to work to arrange debtor-in-possession financing that would allow it to continue operating and emerge from bankruptcy intact.
COLO.com chief counsel David Stanley and bankruptcy attorney Patrick Murphy did not respond to e-mails and phone messages from CarrierHotels.com seeking comment for this story. San Diego Gas & Electric attorney Elaine O'Neil declined comment.
Perhaps that's not surprising, given the increasing sensitivity of relationships between Internet hosting providers and their utilities.
As data centers require growing amounts of power, electric utilities have begun asking for substantial deposits - sometimes ranging into tens of millions of dollars - to commence service at levels of up to 200 watts per square foot and beyond.
At recent industry events, developers and operators of carrier hotels have emphasized the need to make friends with the local power company.
Utility costs now comprise approximately 35 percent of the cost of operating a colocation facility, according to a recent estimate by analyst Mark Langner of Epoch Partners. That figure could grow for some providers due to recent utility price hikes in California, including a 15 percent increase in January and last month's 50 percent hike for heavy industrial users.
"We think this issue is one that greatly impacts not just colocation providers, but broadband service providers and enterprises across the board, and therefore warrants investor monitoring," wrote Langner. "Obviously, providers with greater facility exposure in California ... will be affected more."
A third of COLO.com's active data center network is based in California, where the company operates facilities in Los Angeles, San Francisco, Emeryville, Irvine, San Diego, San Ramon and Santa Clara.