HomeMy WebLinkAbout2013-04-10 RMLD Board of Commissioners Minutes - Joint with CAB Reading Municipal Light Board of Commissioners
Reaular Session
230 Ash Street
Reading,MA 01867
April 10,2013
Start Time of Regular Session: 7:14 p.m.
End Time of Regular Session: 9:50 P.M.
Commissioners:
John Stempeck,Chairman Philip B.Pacing Vice Chair
Robert Soli,Commissioner David Talbot,Secretary
Staff:
Kevin Sullivan,Interim General Manager Beth Ellen Antonio,Human Resources Manager
Nick D'Alleva,Technical Services Manager Jeanne Fort,Executive Assistant
Tom O'Connor,General Line Foreman Jane Parenteau,Energy Services Manager
David Polson,Facilities Manager Peter Price,Chief Engineer
Kathleen Rybak,E&O Operational Assistant Mark Uvanni,MIS Manager
Citizens'Advisory Board:
John Norton,Chairman George Hooper,Vice Chairman
Thomas 011ila,Secretary—Absent Tony Capobianco,Member
Dave Nelson,Member
Public:
�eter Hechenbleikner,Town of Reading,Town Manager,David Mancuso,Mike Prisco,Fred Van Magness,Marsie West
Call Meeting to Order—Fiscal Year 2014(FY14)Capital Budget—Joint Meeting with RMLD Citizens'Advisory Board
Chairman Norton called the meeting of the Citizens'Advisory Board to order at 7:11 p.m.
Fiscal Year 2014(FY14)Capital Budget—Mr.Sullivan
Mr. Sullivan gave a brief overview of the proposed FY2014 Capital Budget which is at $5.9 million, approximately 7%below the
FY2013 Capital Budget of$6.4 millmn. Mr. Sullivan introduced four managers who are not very familiar to the Board; Mr. Mark
Uvanni, MIS Manager; Mr. Peter Price, Chief Engineer; Mr. Tom O'Connor, General Line Foreman; and Mr. Nick D'Alleva,
Technical Services Station Manager. These managers presented much of what is included in the Capital Budget.
Ms.Felt noted that the Board of Commissioners meeting had not been called to order.
Mr.Van Magness pointed out that at the earlier meeting there was not an opportunity for public comment and asked if there would be
an opportunity for public comment at this meeting.
Chairman Stempeck called the meeting of the RMLD Board of Commissioners to order at 7:14 pm.
Chairman Norton stated,by way of explanation,that the CAB will conduct its second half of the budget review(the Capital Budget)
tonight. At the conclusion of that review, there will be a motion made to be passed onto the Light Board of Commissions for the
bottom line, if that is agreed upon by the CAB. At that point,the CAB will conclude their portion of the meeting of which there will
be no public input. It will be turned back over the Board of Light Commissions for their Agenda. Chairman Norton asked Mr.
Sullivan to begin.
Mr. Talbot asked why we would not have public input. Chairman Norton stated that not during budget discussions,we do not have
public input. Mr.Van Magness noted that his comment was not relevant to the CAB it was relative to the Municipal Light Board. He
staled that he had served on the CAB and doesn't ever recall having a public meeting where public comment was specifically
w1toled,if there was any. He further stated that it certainly takes away the reason for having a public meeting,but that is obviously
the will of the Chair. Chairman Norton asked Mr.Sullivan to begin the presentation. Mr. Sullivan introduced Mr. Mark Uva um to
present Project 27(Hardware Upgrades)and Project 28(Software Upgrades).
Regular Session Meeting Minutes 2
April 10,2013
Fiscal Year 2014(FY14)Capital Budget—Mr.Sullivan
Mr. Uvarim reported that the MIS areas are pretty standard each yew to accommodate necessary upgrades to hardware and software
systems. Beginning with Project 27,Item 27a)is about the same amount each year and includes,but is not limited to upgrades and/or
replacements for monitors, printers, etc. Item 27b) creates an additional virtualized cluster at the North Reading substation for
redundancy,load balancing and disaster recovery. This will literally be a duplicate of the Ash Street cluster, which has worked well.
Item 27c)is to replace the current digital phone system.
Mr.Talbot asked about the security protections in place. Mr.Uvarm provided a brief overview of the security measures in place.
Mr.Talbot asked about the procurement process. Mr.Sullivan responded that we go out to bid for purchases$25,0004100,000 as per
M.G.L.Chapter 30B.
Mr.Uvanni moved onto Project 28: Software and Licensing. Some of these items are directly related to the hardware projects. Item
28a) is for routine software purchases and user licenses. 28b) is in conjunction with item B on the hardware side. 28c) is for
development work that we cannot do and which is contracted out to local developers. Item 28d) is a product that allows the cluster
replication to take place. 28e)is the licensing fee for some antivirus and malwwe.
Chairman Norton asked if there were any questions.
Mr.Capobianco asked if we were going to deploy Windows 8 workstations. Mr.Uvanni replied that we have done some.However,it
is a huge learning curve for users.
Mr.Soli asked if Item 28d)was new. Mr.Leaned answered that this is the license for the new(second)cluster.
Mr.Soli asked about 28c). He had thought GIS was done. Mr.Uvanni stated that it is an ongoing process. We are trying to build the
base map which would be the jumping off point for all other systems. We do have a GIS administrator who has made huge inroads
getting the base map and the electrical connectivity model built. Mr. Uvanni noted that this is a lot of work,but that we are going*
the right direction.
Mr. Sullivan introduced Mr.Peter Price and Mr.Tom O'Connor to present System Upgrade Projects.
Mr. Price reviewed Project L 5W9 Reconductoring-Wildwood Street, Wilmington. This circuit has seen a lot of load growth and
approximately a megawatt of additional load is anticipated over the next fiscal year with the addition of a Target and a mini-mall in
that area. Mr.Hooper asked if this will double the current carrying capability into that area. Mr.Price answered,yes,on that circuit.
Mr. Hooper noted that this is one of Wilmington's industrial areas and feels this upgrade makes perfect sense considering the growth
in that area. Chairman Stempeck asked if it should be even higher than what we are projecting;will we need to go back there because
of the growth? Mr. Price responded that we can only max out the circuits to 15 megawatts and this will bring that circuit up to 15
megawatts. If there are additional needs,we will need to bring in another circuit. We do have two other circuits up there,so there are
things that we can do if we have to add a circuit.
Mr.Talbot noted that he had forwarded a memo(referencing this project). Mr.Talbot questioned if there is a strategy,when we know
we are at a limit with a particular circuit, for how demand response in that particular area could be deployed m relieve what's
happening. Mr. Talbot commented that when he raised the issue,he was not aware that there was a Target and mini-mall going into
that area,which changes the thinking. However,as a philosophy,has that ever happened;we see something cresting or peaking,and
consider demand response or other programs in that particular area Mr. Sullivan noted that it is not something that we have
considered,but it may bode consideration in the future.
Mr.O'Connor presented Project 2: 4W4 Reconductoring—Wilmington. This feeder is approximately 40 years old. The upgrade will
double the capacity that is there now and the materials will be more storm hardened and resistant to weather. It also gives us options if
we need to move load in the summer. Mr. Hooper noted this is also a commercial area,and asked if this is proactive in terms of the
aging areas. Mr.O'Connor confirmed,this is near the end of its life and the upgrade gives us a lot more options if we need to switch
load. Every year at this time we look for vulnerability,develop our priority list,and address those areas.
Mr.Soli asked what happens to the old wire. Mr.O'Connor replied that it goes to a scrap dealer for recycling.
Regular Session Meeting Minutes 3
April 10,2013
Owed wed Year 2014(F'Y14)Capital Budget-Mr.Sullivan
Mr. Price presented Project 3: Upgrading of Old Lynrdield Center URDs. This is a carryover for the Trog Hawley area. There is
always a carryover in these projects; we start work in May and the work runs through the summer into September (the next fiscal
year). Mr.Price went onto Project 4: Upgrading of Old Lynnfteld Center URDs(Cook's Farm). This is the last of the three Lynnfield
Center URD upgrade projects.
Mr. Price presented Project 5: 4W5 -4W6 Tie. This project will cream a tic in allow more flexibility in move load around in this
area. We don't have that capability now which was not required until they started developing the Addison Wesley Property.
Mr.Price presented Item 6:URD Upgrades. In talking with Mr.Sullivan,we decided to cream capital projects as a catch-all for URD
projects(and Step-down Area Upgrades) rather than having them time under routine concoction. This project will address some of
the older underground subdivisions which need to be upgraded due to bad transformers,cable failure,or voltage complaints.
Mr.O'Connor presented Item 7: Step-down Area Upgrades. This is similar to the URD upgrades presented by Mr. Price. These are
older overhead subdivisions. Some examples include Haverhill Street(Anthony and Peter Roads)area; in Lynnfield,the Essex Street
mea near Evans Drive;in Reading,the West and South Street meas.
Chairman Sm ni eck inquired,if by getting rid of the step-down transformers,do we eliminate a point of failure. Mr.Price confirmed;
if we lose a step-down area,we could lose power to 300-400 customers.
Mr.Price reported that items 8,9 and 10 will be presented by Mr.D'Alleva.
Mr.O'Connor presented Project 11: Station 4 Getaway Replacement 4W9. This is an underground getaway which runs out of Station
4. We will replace this underground cable which will increase capacity.
Soli asked if there is an outage associated with this work. Mr. O'Connor stated no, we switch the circuit to another circuit and
do the work.
Mr. Price presented Project 15: Station 5-Getaway Replacements 5W9 and 5 W I0. The getaway is the underground cable coming
out of the substation. The 5W9 upgrade goes hand-and-hand with Project 1 to get to a 15 megawatt rating. 5 W I0 is an old direct
buried underground circuit; that breaker position is open and that cable has been taken out of service. This project will allow us to
create an extra spare breaker position in the 5 W I0 position and cream more flexibility. We already have conduit and a breaker; it is
just a matter of pulling in the wire.
Mr.Price presented Project 16:Transformers. This item is budgeted annually to replenish transformer stock.
Chairman Stempeck questioned what the typical life is for a transformer; are there any manufacturers that produce a premium quality
transformer that will last longer that you pay a little bit more for,but you get extra life out of them. Mr.Price replied that we have had
old transformers that last forever;the only thing wrong with them is that they are rusting.There are new ones and they have lightning
strikes that wipe them out.
Mr. Soli noted that three years ago,between Katrina and China,transformer prices skyrocketed;are the prices more reasonable now or
are they still high? Mr.Price responded that due to metal(copper)costs and the cost of petroleum,prices are still high,but not as bad
as it was then.
Mr. Price presented Project 22: Engineering Analysis Software and Data Conversion, which was approved with the FY13 budget.
We got a late start on this project. The vendor is currently working on the data conversion,but this project will carry over into FY14.
Project 26: Communication Equipment. Mr. Price reported that as we connect to our fiber loop for better communications between
our devices in the field and our SCADA systems,we will need certain equipment. This is a line item for that purpose.
Chairman Stempeck asked are there airy limitations on the fiber optic cable in terms of capacity. Mr.Price answered that we have not
4w�m into it with the projects that we have been working on.
Mr. Talbot noted there is a lot of talk about regionalization of procurement; is that done by RMLD. Mr. Sullivan stated that it has
been discussed,but in situations like this it would not work. We realize there are synergies out there that would make it more efficient
to get together with other municipalities to make purchase in volume.
Regular Session Meeting Minutes 4
April 10,2013
Fiscal Year 2014(FY14)Capital Budget-Mr.Sullivan •
Mr.Sullivan introduced Mr.Nick D'AOeva,Technical Services Manager.
Mr.D'Alleva reviewed Project 30: Remote Terminal Unit Replacement-Station 3. Mr. D'Alleva noted that we recently had some
issues with the SCADA system and we could not get the system back up and running until we found the missing piece of the puzzle
that was broken. We realized that it would not work with the existing system.
Chairman Stempeck asked if there are more of these out at the stations that we should get rid of. Mr.D'Alleva responded that Station
4 has just been upgraded. Station 5 is in this year's(FY13)budget and we anticipate having it done. Station 5 is a lot smaller and not
as involved as Station 3 or 4. This(Station 3)would be the last.
Mr. Sullivan presented Project 12: Service Installations -Commercial/Industrial. Last year's budgeted amount was $63,074. We
have not seen many upgraded or new services within FY13 due to the economic situation. However,we do need to budget this item in
expectation of projects that will come up.
Mr. Sullivan continued with Project 13: Service Installations Residential Customers. Last year's budget was$207,923. This item has
been affected by the economy year of over year. As of the beginning of March,we are at about$160,0004170,000 in expenditures.
Mr. Sullivan presented Project 14: Routine Construction. This is the project where we carved out our underground and step-down
areas(as reported earlier)to have more specificity. Routine Construction had become a catch-all and many times we end up eclipsing
what we have in the budget. We hope that the tact that we have taken will yield the way it should. Last year's budgeted amount for
this item was just under a$1 million.
Moving back to Project 8: Relay Replacement Project-Gaw Station,Mr.D'Alleva reported that this is a partial carryover. We have
purchased all the relays, and the carryover is for labor related to the installation, testing and commissioning of the relays on
approximately 16 circuits. There may be some incidental material in addition to what has been purchased. •
Chairman Stempeck stated that he understands that these are solid state relays replacing electro-mechanical and questioned the
reliability of solid state versus electro-mechanical. Mr. D'Alleva stated that they are newer technology. If you are going to replace
one for one you we replacing a 30-year old relay with a 30-year old relay. The new relays are in a box,rather than individual relays.
They are programmable with a lot more features that you can program into them and a lot more information that you can get out.
Mr.D'Alleva continued with Project 9: Gaw Station 34kv Potential Transformer Replacement. The current transformers are 30 plus
years old and are oil filled. The new transformers would be solid dielectric; there would not be any oil in them. There are currently
no leaks on these transformers,but they are old.
Mr. Hooper asked if the transformers contain PCBs. Mr. D'Alleva responded that it is unknown; there is no way of sampling them
while they are in service. They contain very little oil,maybe two gallons at most. When they are taken down they will be tested prior
to disposal.
Project 10: Station 3 - Replacement of Service Cutouts. This is a small equipment upgrade. We have not had any problems with
these cutouts,but they are similar construction to the line cutouts that we have issues with in the field. We would like to be pro-active
with these.
Mr. D'Alleva continued to Project 17 (A, C and D) related to the meter upgrade project. Nate: 17B will be completed by the end of
FY13. 17A is a line item for meters purchased for stock. Mr.Talbot asked how many TOU meters are currently in use. Mr. Sullivan
answered that there are approximately 300 residential meters in place.
Mr. D'Alleva stated that 17C is a partial carryover. We anticipate that the commercial upgrade will not be completed by the end of
this fiscal year. We will carry over some of the installations to larger customers that might need outages. 17D is the upgrade of the
"500 Club." This is a small number of meters,but they are the large revenue customers. This will be the last of the meter upgrades.
Mr. Soli asked Mr. Sullivan for an explanation of the "500 Club." Mr. Sullivan stated the "500 Club" consists of customers o
500KW,or the larger users of power. There are currently approximately 65"500 Club"customers.
Regular Session Meeting Minutes 5
®April 10,2013
,Kal Year 2014(FY14)Capital Budget—Mr.Sullivan
Mr. Sullivan introduced Mr. David Polson, Facilities Manager. Mr. Polson presented Project 18: Purchase of New Pick-up Trucks.
Chairman Stempeck asked if the 4x4 was all-wheel drive. Mr. Polson replied that the vehicles are two-wheel drive with four-wheel
over-drive.
Mr.Talbot asked how the vehicles are purchased; is there a State program. Mr. Polson reported we look at the State contract and we
go out to competitive bid as well to get the best pricing. Mr.Talbot asked for clarification on the State contract. Mr. Polson replied
that the State has a number of dealers with whom they feel they have leveraged the best price; they do recommend though that you
look around in confirm that you are getting the best price.
Project 19: Line Department Vehicles. Mr. Polson noted that this item is similar to a carry-over. The process to order and receive
these vehicles is in excess of 240 days. We will be presenting to the Board at the end of the month the purchase of these two vehicles,
which will be received in FY14. This project ensures that we have funds appropriated for the vehicles when they arrive.
Mr.Talbot noted that it is his understanding that much of the time the diesel engine is running to power the bucket truck equipment.
He questioned if we have looked into hybrid bucket trucks. Mr. Polson stated that we have done a very exhaustive search,meeting
with different vendors and users of the hybrid vehicles. There are different types of vehicles;some that are higher maintenance,some
that are truly hybrid (they recharge the battery system through the engine.) The technology for these vehicles really isn't fully
developed; the batteries don't live up to the advertised life and there are issues with the transmissions. These vehicles are more
expensive and they really don't live up to expectations.
Mr. Hooper asked about the age of the trucks being replaced, and what we are doing with the vehicles we are replacing. Mr. Polson
answered that the vehicles being replaced are approximately 10 years old. These vehicles will move back into the fleet as a spare or
used less frequently. If these vehicles are the vehicles with the highest maintenance and are unreliable, we may move them off the
fleet and surplus them. Mr. Hooper asked if they had any value that could be used for a trade-in or put out to auction for another
ommunity that may be looking for something. Mr. Polson noted that we have not traded vehicles, but we have tried to sell them;
�yending on the vehicle,we may offer them to one of the towns.
Mr. Polson reviewed Project 20: Build Covered Storage,which is a multi-year project. The building would be 80x120 feet and used
for storage as we start to move out of the Barbas building. It would be located on the northerly portion of the lot by the garage and
would provide approximately 9,600 square feet of storage space. It would be covered storage with sides, in keep our material out of
the weather.Mr.Polson reported that this would cost approximately$88.50 per square foot to build.
Chairman Stempeck asked if we have looked at alternatives;for inventory storage,this seems like a large number on a square footage
basis. Chairman Stempeck noted that if it is for specialized needs and proximity he certainly understands, but stated that he had
looked at storage space not nearly as large,but in the$14-20 per square foot range. Mr.Polson responded that we would keep the
materials that we use frequently in this building; we want to make sure we have something on the property so that the rocks can go in
and out. Mr. Polson noted that the cost comparison was lease space versus cost to build. Chairman Stempeck noted that amortized
over time,it would drop down. Mr.Polson confirmed and added that we would be getting out of leased space.
Mr. Capobianco asked how much equipment is currently lost or degraded because we don't have appropriate storage. Mr. Polson
reported that almost everything is under cover either in the garage or the leased space with the exception of some items at Station 3.
Mr. Soli noted that this is the fust he has heard of this; when does this go out to bid so that we can hear more about it? Mr. Sullivan
responded that this is really an open building with a fagade in the front to match the front of the buildings on Ash Street. It has a
roofing system that has a beefed up capacity to carry a solar array in the fixture. We are also trying to make a move to get out of the
leased space and the rest we pay. The design on this is planned for Q4. Mr. Soli asked if the Board would get more information on
this prior to bid? Mr. Sullivan said, yes. This is a multi-year project. The expectation is that we would move out of the Barbas
building FY16(July 1,2015).
Mr. Polson reviewed Project 21: HVAC system Upgrade(Multi-year Project). Mr. Polson noted that there was concern raised about
the replacement of these items. This project is tied into making the building more energy efficient. There are some changes in
chnology and some things that we can do to improve efficiency.An energy audit will be done by Energy NE(there was one done in
107). The building's control system needs to be updated and replaced; lighting changes, water conservation, insulation, and other
work also needs to be done.
Regular Session Meeting Minutes 6
April 10,2013
Fiscal Year 2014(FY14)Capital Budget—Mr.Sullivan •
Mr. Talbot thanked Mr. Polson for the detail and noted that there are three big projects happening on the campus: a garage (with
excavation), station one, and the main building. Mr. Talbot wondered if there was a comprehensive overview of how to have the
whole campus tied in;since we are doing excavation any way,can we look at a ground source system that would tie all three together.
Mr.Talbot noted that it seems like there is an opportunity to do it once,do it deeply,and do it so that we save huge amounts of energy
for many decades. Mr. Polson agreed; the plan is to hire an engineering company to come up with a design and make
recommendations on what we should do; we can certainly bring that into the design and evaluation Mr. Polson noted,however,that
we should not delay the mechanical system work on these two items in this building. Mr.Polson stated that he has been trying,since
beginning at RMLD eight months ago,to get a grasp on all the systems that need improvement and to address energy efficiencies,but
the systems are at risk right now. The plan would be to hire a company,come up with design recommendations,and come back to the
Board with a plan.
Mr. Talbot stated that that would be great; that by approving this budget we are not setting in motion a plan to put just boilers and
chillers out to bid and that gets done in the absence of a larger plan that we have all reviewed. There is a huge opportunity for large
energy, cost, and emissions savings over a long period, great public relations for RMLD and to set an example to other companies,
customers,and buildings.
Mr.Sullivan noted that we are cognizant that this really needs a comprehensive analysis and that Mr.Poison is going to head that up.
Mr. Polson noted his goal would be that over a three year period everything in the building would be addressed, HVAC, lighting,
water conservation. We will have a building and a campus that we can be very proud of.
Mr. Talbot stated that this would not go out to bid until we have a larger report and a presentation to the Board. Mr. Polson
confirmed.
Mr.Hooper asked what type of fuel is used for the boilers. Mr.Polson replied,gas. Mr. Hooper noted that condensing boilers might
be an option to consider. Geo-themno would be a great option,but where there is an urgency,condensing boilers may be some"
we want to consider.
Mr. Polson presented Project 23: New Radio System, Mr. Polson noted that the current system is about 20 years old and uses old
technology. We are currently evaluating a digital system that we have had good luck with so far. We are looking at leasing a radio
system; we would buy the equipment the that year and after that it would he substantially less (we would pay just a leasing fee
thereafter).
Mr.Talbot asked if this goes out to bid. Mr.Poison responded that this company is on the State bidder's list,and that there are limited
vendors that provide this service. We would be able to leverage the State pricing.
Chairman Stempeck asked if the system communicates with fire and police. Mr.Polson was not aware of that capability;it depends if
we are tied m the same network. Mr.Hooper asked if we utilize cell phones or direct connect. Mr. Polson said that we do use Sprint
with direct connect. This new radio system has multiple channels were people can talk in group talk and there are individual
frequencies, or they can use direct connect; the system offers a lot of Flexibility. Mr. Hooper noted that he uses direct connect to
communicate with staff and just wondered if this is something that is needed or is it going to be outdated over time.
Mr. Poison presented Project 24: Repairs—226 Ash Street, Station One. There has been an architectural evaluation performed and
they recommend that, in order to maintain the building from further deterioration, we should repair the roof as well as the exterior
masonry,and windows. We can then determine the best use of the building and the cost associated with that. This budget imm is a
multiyearproject to start the exterior work. In FY14 we would start the masonry work and in FY15 we would do some windows and
the roof. Over a period of two years,we are looking at$1.5 million for the exterior work,with additional cost for the interior work.
Mr. Polson clarified the cost structure; the exterior renovation would be$1.5; the (additional) interior renovation cost would be $1.1
million if the building were used for smmge,or$2 million if the building was used for occupied space.
Mr. Talbot asked about the process m determine the use of the building. Discussion ensued. Charman Norton stated, with all due
respect,this discussion would be more appropriate for an RMLD Board meeting. Mr.Talbot agreed. Mr.Soli noted that he would Al
m
anxious hear from the CAB members on this issue because it may look loo much like we are doing wonderful things for ReadiMW
and we're going to make you outside guys pay for it.
Regular Session Meeting Minutes 7
April 10,2013
®
�Fiacai Year 2014(FY14)Capital Budget—Mr.Sullivan
Mr. Hooper stated that he thinks preservation of the building exterior before it deteriorates beyond repair is a smart move as it can
deteriorate pretty fast. Mr.Hooper questioned the bidding process used for anything ova$100,000;do we go DCAMM certification.
Mr.Polson replied that we do.
Mr. Hooper further stated that if you are using the building for storage that's one thing,but if we are planning to lease it out as office
space that is something totally different. Mr.Hooper stated that he can understand the need for storage
Mr.Nelson stated the preservation of old buildings is a great thing and if the Town of Reading wants to preserve the building that is
something they should really consider. What you do with the building; if it is going to be used for storage space or public
presentations and public learning remains to be seen. The focus is,do the right thing for Reading because it is in Reading and it is a
possibility that it is good overall.
Mr.Capobianco questioned the cost of removing the building and putting up a new structure;is that significantly more expensive than
renovating an older building. Mr.Polson did not have that information. He did not know if that had been evaluated.
Chairman Norton noted that Mr. Soli's point was well taken,but that it would be better if at the next CAB meeting the CAB has a
presentation from Mr. Polson and a discussion of this issue. The CAB can then make a recommendation to the Board of
Commissioners. Mr. Sell said that they would appreciate the CAB input. Chairman Norton stated that he believes the building is on
the National Register of Historic Places so it could not be demolished.
This concluded Mr.Poison's presentation.
Chairman Norton asked for a motion on the Capital Budget.
Hooper made a motion that the Citizens' Advisory Board recommend to the RMLD Board of the Commissioners Draft One of the
14 Capital Budget dated March 29,2013,in the amount of$5,952,008,as presented. Any significant changes are to be submitted
to the CAB for review and recommendation.Motion was seconded by Mr.Nelson. Hearing no further discussion,Motion carried
4:0:1(4 in favor;0 opposed; 1 absent).
Scheduling of May Meeting—J.Norton,Chairman
After discussion the CAB members agreed to meet on May 15,2013,at 6:30 pm,at the RMLD.
Motion to Adjourn—J.Norton,Chairman
Motion to Adjourn the Citizens' Advisory Board meeting was made by Mr. Hooper, seconded by Mr. Nelson. Hearing no further
discussion,Motion carried 4:0:1 (4 in favor;0 opposed; 1 absent).
The Citizens'Advisory Board Meeting adjourned at 8:41 p.m.
Chairman Stempeck said that the Board will return to its Regular Session to discuss two items that are on the agenda.
Mr.Solt left at this point in the meeting.
Discussion of Middleton Overpayment—Mr.Sullivan
Mr. Sullivan reported that he has been in discussion with Middleton Municipal Electric Deportment, General Manager, on an
overpayment to Middleton that the RMLD has been incurring since July 2007. The invoices received were for the supply of power to
two homes on the border of Middleton and North Reading. The power being supplied to these two homes is being fed by Middleton.
The amount owed to the RMLD is in excess of$330,000. Middleton is proposing to pay$130,000 within this year to clear up 2012.
Middleton would like to have a payment plan for the remaming balance.
Mr. Van Magness said that he assumed that these invoices have been approved by the Board during their usual reviews. Were there
any questions in the lest five years about these invoices in terms of relevancy? Mr. Sullivan responded,no. Mr. Sullivan pointed out
Qat the Board would not know who was being served on the invoices. Mc Ven Magness said that the Board approves invoices,and the
ayables,therefore,(he Board has been paying these bills. Mr. Van Magness added that this is quite interesting because it is similar to
the issue of$1 million that the Board had been approving.
Regular Session Meeting Minutes g
April 10,2013
Discussion of Middleton Overpayment—Mr.Sullivan •
Mr. Van Magness stated that of the$1 million the RMLD is out$800,000,which was approved by the review of the invoices that the
Board had been making monthly and annually. This is coupled with another$300,000 being approved by the Board with Middleton,
which has been exponentially increasing.
Mr. Van Magness questioned the Chairman of the Board,on what processes will the Board put in place to preclude these overpayment
situations from happening in the future. Chairman Stempeck replied that there are two processes that they are assured as a Board.
First,is the internal operation the RMLD walks through all the invoices before the Board sees them. Second,there are multiple reviews
because the invoices are seen by numerous people. The Board trusts the internal people to do the rightjob.
Mr. Sullivan stated that he does have a solution. Mr. Van Magness said that he understands, it is honorable that Middleton is coming
forward and working on a payment plan. Mr. Van Magness stated that he is concerned that there is a fundamental breakdown in the
accounts payable process within the Department. There have been two instances that have happened,and he understands new systems
coming in,but it should be a warning sign for the people reviewing these invoices. Mr.Van Magness said that what he is interested in
is what specific actions the Board is going to take to ensure that these types of situations do not happen again. The Department is out
over a$1 million,which bas been funded at the ratepayers'expense.
Chairman Stempeck said that he is in agreement that there is some breakdown in the system. Chairman Stempeck stated that it will
take time to rectify the situation by performing a root cause analysis. This will entail what the problem is, and how this happened it
will be addressed. Mr. Sullivan stated that the RMLD had radial transmission lines fed from NSTAR to Station 4. Those lines, in
2002,became Imp conductor lines,and are entitled as Pool Transmission Facilities. The RMLD continued to pay as if they were radial
lines,which were not picked up by Energy Services or whoever else was part of the validation process. This continued for nine years.
It was noticed in 2011 that this overpayment had been occurring. Discussion ensued with NSTAR. Within NSTAR's contract, it
indicated that the RMLD would get paid for eighteen months. Retrospectively speaking there was a loss there.
Mr.Van Magness said that as part of the root cause analysis,that is going to take place,it would fundamentally seem that these rout
payments that happen every single month or quarterly should get a periodic review. This would ensure the validity of those payme'
whether it be by the Board member approving the payables or the Department people approving them on you behalf. That type of
review should be systemic,and engrained in the process. Chairman Stempeck agreed that it needs to be addressed.
Chairman Stempeck said that there are no excuses when things slip through the system. Everyone makes mistakes and tries to do better
tomorrow. Mr. Van Magness said that he is not trying to play Monday moming quarterback;this is the second time this has happened.
It says something that needs attention drawn to this. Mr. Sullivan said that one of the first things that he will do is have the RMLD's
auditors,Melanson Heath,provide an audit as to this process. Chairman Stempeck said that he thought that was a great idea.
Discussion of General Manager Rotation
Mr.Pacino said that he had put this agenda item on when he was Chau. He has some concerns that need to be mired about the rotation
of the Interim General Manager. Mr. Patin said that this has not been fully defined as to what the rotation is going to be, how it is
going to work,and the time period. The discussion at one of the previous meetings was for fifteen minutes. Mr. Pacino has concerns
how this will work going forward. Mr. Pacino said that the effective date is m of April 16,and is requesting delay at this point. Be
would like to defer this until the meeting at the end of April. This will allow for full discussion on how it is going to work because it
has not been thought out completely. This has affected the search process adversely by this action. There is a need to hold off until the
April 16 date and have a full discussion because there are different members. It is too bad that Mr. Soli did not stay for this that is his
feeling.
Chairman Stempeck said that as long as they are discussing feelings, it is his sense he does not agree with Mr. Patio's opposition.
Chairman Stempeck pointed out that they spoke about different methodologies to handle the Interim General Manager position.
Chairman Stempeck said that the minutes of the meetings reflect that it had been discussed.
Chairman Stempeck commented that there are enough issues to go around for everyone, including the former General Manager, in
terms of grooming the right individual to step into that post. Chairman Stempeck said that this is what exactly happens when you are
searching for an individual that you want to come in at a very senior level within an organization. It can take up to a year or longer
get the right individual,especially in the northeast with high housing costs. The process has not been compromised whatsoever. T
are good people within the RMLD;it could serve as a good learning role for them. It is a good role in the sense to see what they can
when they are in a position to tan the RMLD effectively. Chairman Stempeck said that Mr. Sullivan has done an excellent job so far.
To provide rotation so other people can try out that position until they find a General Manager is appropriate. It is very possible that
people,certainly within the realm of possibility that can grow into the position.
Regular Session Meeting Minutes 9
Circassian
10,2013
Discussion of General Manager Rotation
Mr. Hechenbleikner said that he has a letter,addressed to Mr. Pacino because he thought he would be the Chair. Mr. Hechenbledmer
said that his letter addresses his concern with the validity of the vote taken by the Light Board on March 27,2013,related to the Interim
General Manager.
Mr. Hechenbledmer stated that on February 20, 2013, three members of the Light Board met and discussed the appointment of an
Interim General Manager of the Light Department until such time as a permanent replacement to retired GM Viunie Cameron can be
appointed. Mr. Soli made a motion that"the RMLD Board of Commissioners pursuant to Commonwealth of Massachusetts General
Laws Chapter 164, Section 56, appoint the troika of Bob Fournier, Jane Parenteau, and Kevin Sullivan to the position of Interim
General Manager."
Mr. Hechenbleikner said that the motion was defeated by a vote of 12:0. Then Ms. West made a motion that"the RMLD Board of
Commissioners pursuant to Commonwealth of Massachusetts General Laws Chapter 164, Section 56 appoint Kevin Sullivan to the
position of Interim General Manager"and that motion was approved on a vote of 3:0:0.
On March 27, 2013, at the end of the meeting, the RMLD entered into discussion about the Interim General Manager position, even
though that item was not on the Agenda. With little debate,the RMLB considered a motion by Ms. Snyder that"the RMLD Board of
Commissioners pursuant to Commonwealth of Massachusetts General Laws Chapter 164,Section 56 appoint senior staff on a rotating
basis to the position of Interim General Manager with Mr. Sullivan and Ms. Parenwau in these roles, and that Ms. Parenteau be
appointed for the 3 month period starting April 1 to May L" The motion was approved by a vote of 3:0:1 (the motion was amended to
provide April 15 start date.)
Mr. Hechenbleilmer stated that he has two concerns with the process; he said the emphasis is on the process not the results which is
completely up to the Light Board. He consulted Town Counsel because there were concerns about the process. He believes that the
March 27 motion on this matter was null and void. The motion made on March 27 is virtually the same made on February 20 where
he motion failed. Under Roberts Rules of Order the action on March 27 would be considered a reconsideration. There was no motion
reconsider. A motion to reconsider must be made by someone on the prevailing side of the initial vote(Mr.Pacino or Ms.West)and
a motion to reconsider takes a 2/3 vote. There is a parliamentary flaw in taking that action. Even of greater concern,this action is in
violation of Section 3-5 of the Reading Home Rule Charter. The third paragraph in Charter,the section that deals with the Reading
Municipal Light Department reads that"The Municipal Light Board shall hire the General Manager of the Reading Municipal Light
Department and set his compensation; the General Manager shall serve at the pleasure of the Board and may be removed by vote of a
majority of the entire Board after notice and hearing." Mr. Hechenbleikner said that it was his emphasis on"after notice and hearing".
There was no evidence of any notice or any hearing. The appointment of the Interim General Manager on February 20 was done under
the section of the MGL that addresses the appointment of General Managers;there is no separate section for appointment of an Interim
General Manager. In effect, on February 20, Mr. Sullivan was appointed as a General Manager. However, the actions on March 27
were to remove him,and you can only remove him by notice or by hearing. Mr. Heclimbleikner again stressed that his concern is not
the end result,but is the process that is used. Mr. Hechenbleilmer is asking that the RMLD Board acknowledge that their decision on
March 27 is not legal and the action be declared void by the Board. If you choose to rotate the Interim General Manager position,he
requests that they do so after notice of the existing Interim General Manager with a hearing to remove him from that position. Mr.
Hechenbleikner is willing to entertain any questions.
Mr.Talbot asked if this was the first the Board box heard and seen the concerns, in writing. Mr. Hechenbleilmer responded, yes. Mr.
Talbot said that obviously there is a search for a General Manager; what is being discussed is someone to hold the spot. He takes Mr.
Hechenbleikner's point, that the distinction is that the language in state law does address the existence of the position of Interim
General Manager. However,the spirit of this(although Mr. Talbot was not in office for the March 27 meeting)is bit of a technicality.
If you are hinging this on the fact that there is no language for the Interim General Manager defined in the law,that therefore, another
lawyer may disagree with you and say it's fine to appoint an Interim person without that person being regarded as the General
Manager. It would therefore,be difficult to void the vote based only on Mr.Hechcnbleikner's letter.
Mr. Hechenbleikner said that he is making it very clear that he is not a lawyer. Mr. Talbot stated that the letter is written like a
lawyerly letter. Mr.Hechenbleikner said that he has spoken to Town Counsel and the reason the Board did not hear anything before is
that he spoke to Town Counsel yesterday. This has been an emerging situation. Town Counsel's opinion is that what the Board has
wne,which is contained in the letter,is in violation of Reading Home Rule Charter and probably Robert Rules of Order.
Mr.Hechenbleikner stated that it is the Charter that he is most concerned about because in twenty six years he has been administrating,
abdicated and protected the Charter. This is a violation of the Reading Home Rule Charter. Town Counsel is not counsel to the Light
Board, Mr. Hechenbleilmm suggested that the Board should speak with their counsel. Chairman Stempeck said that is exactly what
they are going to try to do,check with their own counsel,and review this.
Regular Session Meeting Minutes 10
April 10,2013
•
Discussion of General Manager Rotation
Chairman Stempeck said that he would not interpret it the way Town Counsel's attorney has interpreted it. Chairman Stempeck said
that there were two very different types of scenarios, in terns of presentation. Chairman Stempeck added that if we examine the
minutes of those meetings, one will find that the term used was Interim General Manager in every single discussion. Mr.
Hechenbleikner stated that state law, does not provide for an Interim General Manager, it applies to General Manager. The minutes
show that the intent was for an Interim General Manager be appointed until a General Manager is in place. Mr.Talbot clarified that the
technical spirit of your comments is that there is no General Manager right now.
Mr. Hechenbleikncr responded, that is correct Mr. Hechenbleikner added that the motion that was done was under the article and
section that is for an appointment of a General Manager,direct quote out of the motions made by the Light Board. Chairman Stempeck
said that they will retain thein own counsel to re-examine this;counsel differs all the time. Mr.Norton said that when this discussion is
finished he has a comment.
Mr. Hechenbleikner said that it is important that this process should be somewhat expeditious (for removal of the Interim General
Manager and replacing him). Chairman Stempeck asked when this was brought to Mr. Hechenbleikner's attention. Mr.
Hechenbleikner said that he received a call last Thursday or Friday; in the last five or six days. Chairman Stempeck pointed out that
Mr. Sullivan was appointed on February 20; it has been quite a while. Mr. Hechenbleikner stated that was not the precipitating issue.
His sole source has been reading through the minutes, reading them with Roberts Rules of Order, the law, and the Town of Reading
Home Rule Charter. Mr. Hechenbleikner did not see anything beyond February 20, in terms of appointing the Interim General
Manager as to what precipitated the issue. It was the March 27 actions, where you in effect removed the General Manager, and put
someone else as General Manager effective April 15. Chairman Stempeck stated that they will retain counsel to test that. A municipal
light board is a separate entity from the Town of Reading,so the question becomes what is the effect of the Town putting judgments on
the Municipal Light Board when we are trying to follow the letter of the law. We will retain counsel. Mr. Hechenbleilmer responded
that is a very good question. The RMLD is subject to the Reading Home Rule Charter,that is what establishes the Reading Municipal
Light Department and Light Board. In addition to special statute,you are governed by Charter for the Town of Reading. There wa
long debate on that issue after the previous General Manager left before Mr.Cameron was appointed. The terms of the Reading Holl
Rule Charter provisions to the Light Board was discussed. Mr.Hechenbleikner said that his role is that he does not have authority over
the Light Board; it operates as an independent department; Town Manager does not have responsibility over the Light Board or
Department. Mr.Hechenbleilmer's concern is that he is guardian of the Charter. There are parts where he has responsibility. He views
the Charter as part of their Constitution. If he sees anything,whether the department is responsible to him or not, he feels he needs to
bring it to the attention of those who can deal with it. The Light Board is the body that has to do that. Chairman Stempeck said that it
is unfortunate that there will be an additional expense. If they find a General Manager that accepts the position tomorrow, then what
was the whole point of the effort? Mr.Talbot asked Mr.Hechebleikmer what he would suggest before getting the lawyers involved and
it becomes a long dragged out process. Is there a way out of it this evening, although he is not saying there is a problem? Mr.
Hechenbleikner said that he does not want to get into a discussion as to whether the General Manager position should be rotated. The
Charter and law do not deal with that which is completely the Light Board's business. The process is what he is most concerned about.
Mr.Talbot said that a suggestion would be to extend this to the April 24 meeting, for the opportunity to give notice and be done more
properly. Mr. Hechenbleikncr pointed out that the Chairman will have your attorney review this because the Charter is silent on this.
You can use the Town Manager section which is very detailed,but the Charier is silent in terms of the General Manager position of a
Light Department. What would notice and hearing mean? It means that some sort of hearing needs to take place. Chairman Stempeck
stated that it is unfortunate that they are at this point in the relationship between the Town Manager and the Reading Municipal Light
Board in that it has to generate this type of document. We are all trying to do the right thing in terms of taking Reading forward. We
all took the oath to do that.
Mr. Norton stated that to follow up on what Mr. Hechenbleikner mentioned towards the end about possibly holding this decision off
until the regular Board meeting at the end of the month. With reference to the March 27 meeting, he called the Secretary of State's
office regarding the way the agenda was handled,and the way the vote was taken,and you are in violation of the Open Meeting Law.
Mr. Hechenbleikner said that he would take exception to that. He talked with the Attorney General's office to confirm there are two
issues on that. Mr. Hechenbleikner explained that he speaks with some expertise where he is a member of the Open Meeting Law
Advisory Commission.
Mr. Hechenbleikner said that there are two potential issues. One is that the Open Meeting Law says that the agenda must be pose
forty-eight hours in advance, it has to have all the agenda items that the Chairman knows are going to be on agenda It does not
preclude however, new business coming up from a member of the Light Board or from the public. More often, it comes from the
public.
Regular Session Meeting Minutes I I
April 10,2013
discussion of General Manager Rotation
Mr. Pacino stated that the motion that was read at that meeting was never presented to him in advance of the meeting. Mr.
Hechenbleikner said that it is his point,the Chair,who was Mr.Patin,did not know about this. It is not good practice. However,it is
not a violation of the Open Meeting Law on that issue. Mr.Hechenbleilmer said that what he does not know is whether the three that
voted,or if any members,talked offline about this issue. That could be a violation of the Open Meeting Law. He has not spoken to
any of the three and there is a manner for addressing that. If someone wants to allege that, then they can make a complaint to the
Attorney General's office,which is investigated. Mr.Hechenbleikner stated that he is not alleging that.The fact it is not on the agenda
is not a violation of the Open Meeting Law. Mr.Hechenbleilmer said that he did not intend to be adversarial with the Light Board,nor
was it his intent to be adversarial. He hopes this is not taken adversarially,but he is a stickler for process,for the laws and charters that
govern us.
Chairman Stempeck thanked Mr. Hechcnbleikner and will take that under advisement. Because it is so new the Board cannot role on
this;nothing they can do this evening,but take it under advisement. Unfortunately,it wines at a difficult time obviously;it comes back
to how the rules of order apply. As he has mentioned at previous meetings,that of any board,the vote of majority shows the will of the
majority of the board to try to accomplish the right thing. What he is interpreting is that there are people who did not agree with the
vote and are trying to fad nuances to rescind the vote. Chairman Stempeck said that there is more effort being put into this than into
finding the right person to head up the General Manager position; it is flat out wrong. Mr. Hechenbleikner stated that he wanted to
assure Chairman Stempeck that is not his motive. He stressed in the letter that he is not dealing with the issue;he is concerned about
the process.
Mr.Talbot said that he is concerned about not taking action this evening. It has been raised that there is an allegation that Mr. Sullivan
has been illegally removed from office as of the April date. We leave the meeting this evening, this happens and he has some legal
case against us,does it open us up to a lawsuit. Mr. Hechenbleilmer stated that he felt this was a violation that could be possible. Mr.
40albot said that he would be in favor of extending to after the next meeting. Mr.Hechenbleilmer commented that there is a correct way
do this which is by notice and hearing then that issue is removed as far as the process.
Ms. West stated that she wanted to express her concern on the process which she had expressed last week She said that Mr. Sullivan
was confirmed as the Interim General Manager by the majority of the Board by five votes at its meeting in January. In February,there
was a meeting with discussion about a rotating process that was voted down,by 3:0:0 vote. Two members were not present and did not
participate in that discussion On February 27,there was a motion to vote for the rotating process. It is not new business-it was old
business, it was the resurrection of something that was already voted down. There proceeded to be no discussion as to why Mr.
Sullivan was being removed. It was only discussed because it was a learning opportunity,but no discussion of why someone voted as
Interim General Manager was being removed. Chairman Stempeck pointed out that the discussion the month before was to provide a
learning opportunity for other individuals besides Mr.Sullivan. Chairman Stempeck said that it is not a reflection on Mr. Sullivan,it is
a learning opportunity. Ms. West said that she watched that meeting and there was very little or no discussion at the last meeting.
Chairman Stempeck said that he is expressing his opinion because he was at that meeting; Ms. West was not present at that meeting-
she responded that she watched it. Chairman Stempeck said that it is in the eye of the beholder in terms of what the discussion was.
The minutes can be looked at it is on video m well. Charman Stempeck said that the point is that we have other issues to deal with.
Ms. West said that she finds it distressing that the Board's erratic behavior has impacted the General Manager search. Chairman
Stempeck asked Ms. West to explain what she meant relative to the General Manager search. Ms. West explained that one candidate
pulled out based on the knowledge after the last meeting. Charman Stempeck asked if this is new information,he is not aware of this.
Chairman Stempeck said that Ms. West was a Board member up until a week ago and did not share it with the Board. Ms. West said
that she did not have an opportunity where she could present this.
Mr. Van Magness said that he has a couple of comments. Earlier in the meeting there was discussion from Mr.Patin. His comment
was that actions had already had an impact the General Manager Search. Mr.Van Magness asked Mr.Patin if that is true.
Mr. Patin responded that it is true. Mr. Van Magness said that what Ms. West referring to was Mr. Pacino's comment. Mr. Van
Magness noted that Chairman Stempeck said that he was not aware of anything. Mr. Van Magness said that maybe some members of
�.'e Board are aware of this. Chairman Stempeck responded that the word maybe is conjecture.
Regular Session Meeting Minutes 12
April 10,2013
Discussion of General Manager Rotation •
Chairman Stempeck said that he did not know. If there is information to be had,than it should be shared with the entire Board. If Ms.
West or Mr.Pacino had information,not sharing it is very disturbing.
Mr. Van Magness said that he is concerned about some of the comments Mr. Hechenbleikner brought up. He has a concern that
Chairman Stempeck had expressed that it was unfortunate that it is late in process. As a ratepayer,the comments he would make is that
the entire process has been a total fumble by the entire RMLD Board. The General Manager gave his notice well over six months ago.
The responsibility here is on how the process has been handled. The Human Resource Manager came forward and provided an update
on where they are in the process with the executive search firm.
Mr. Van Magness said that you have heard all the points the Town Manager has brought up. Mr. Hechenbledmer presented good
information to the Board. One of the concerns he has right now is the transition date is April 15. It is five or six days away and the
Board is not meeting. You can consult with your counsel - the vote stands. If it is determined in the future,a violation of regulations
and Reading Town Charter,a mistake has been made. Mr.Talbot asked how you can fix that.
Mr. Van Magness responded that maybe you should be considering a vote this evening to at least delay the effective date of that
decision tonight. You can delay that pending information from your counsel. You do not want to create any more problems. Maybe
consider doing that and setting up a date for a meeting next week after obtaining input from counsel. Then you can decide how to carry
forward on this thing.You do not want to wail until the end of April and you do not want to muddy up the water any more. It is just a
suggestion.
Chairman Stempeck thanked Mr.Van Magness. Chairman Stempeck said that he is in one hundred percent agreement that the process
has been fumbled,not once,but multiple times. It started with our former General Manager. Someone should had been groomed at
very beginning because we knew about this a long time ago. The Board should have absolutely put something in place that forced
General Manager to groom someone. It did not happen.
Mr. Van Magness said that he appreciates Chairman Stempeck's comments fully. A post mortem should be done for the General
Manager search process. Hopefully the Board will do this. In the future,there should be an Assistant General Manager. The town has
an Assistant Town Manager by virtue of the search moved up in the Town Manager's position. That process should have been done a
long time ago.
Chairman Stempeck wanted to pose a question to Mr. Van Magness, what is most important for RMLD, the purchase of power or
distribution of power? Mr. Van Magness replied that he does not think that you can qualify that;they are equally important. Chairman
Stempeck agreed that they were equally important and that is equally important for the value of those individuals that perform those
functions to see a role for advancement in the organization. Should the former General Manager have groomed individuals for
replacement? He completely agrees. All his clients do this, the first tenant of management is to replace yourself. That was a huge
failure.
Chairman Stempeck thanked Mr. Van Magness for his suggestions; and will take them under advisement. Chairman Stempeck said
that there is another element served this evening that caught them by surprise. It falls within the same plane. It was a surprise such as
having an attorney telling us what our rights are, someone coming in and giving us another piece of paper. There is some issue how
you did this, it is the Town's opinion that it is incorrect and they are forced us to get an opinion to counter that. Chairman Stempeck
asked Ms.Antonio m give him and update on the General Manager Search.
Ms.Antonio staled that the General Manager Search Committee is trying to set up a meeting next week to review resumes submitted by
the executive search firm. Because of this evening's meeting, and not knowing who was going to be in what Board position,she did
not contact everybody. Next Thursday, they anticipate getting a presentation of the resumes to be interviewed by the commit
Chairman Stempeck asked if Ms. Antonio knew how many there will be. Ms. Antonio responded that the executive search perso
conducting interviews this week. Ms. Antonio said that she did get a call from the search firm. After hearing what was going on wit
the Board's decision,a candidate withdrew.
Regular Session Meeting Minutes 13
April 10,2013
®
—Discussion of General Manager Rotation
Chairman Stempeck asked Ms. Antonio if she had any idea how that information got to that individual. Ms. Antonio replied that is a
very small world in the municipal utility business;phones ring on a daily basis in the business and that is her assumption.
Mr. Mancuso opened by extending his congratulations to the entire commission members who got elected. Mr. Mancuso went on to
say that there was something he heard this evening that has concerned him. The specific comment was made adhering to the letter of
the law and another comment having to spend time to dig into details. Mr. Mancuso said that this is a regulated, legal entity that
represents 29,000 people, which is worth$96 million. Mr. Mancuso pointed out that Mr. Talbot made a very good point in that the
liabilities this organization faces if it does not stick to the letter of the law. Mr.Mancuso said that the whole point of those things is to
make sum[his kind of silliness does not happen. By this he means debate,who is right and who is wrong. That is what adherence to
good process will prevent from happening. He has a great deal of respect as a ratepayer for what they are attempting to do. He
strongly suggested that the Board spend time with Roberts Rule,with Chapter 164,with ISO New England,and with the organizations
that make up this industry. It is a small industry. There are a lot of smart people within and outside that are can help get through these
experiences so we as a community do not have to experience this-them is no room for it. He is encouraging all commission members
to take their jobs very seriously and try to embrace the notion that, although the n les are annoying, to embrace them to prevent this
type of situation.
Mr. Prison apologized for not being at the meetings on a frequent basis as the liaison. However,Mr. Norton does a great job to keep
him informed. Be has a few questions before he makes any comments. Regarding the rotation, is it everybody that submitted an
application for this position,going to rotate through,is that your concept. Chairman Stempeck replied perhaps not because there is not
enough time. Mr. Prisco said that he is asking this question because he is having a hard time trying to understand how you got to the
point where you made the decision because it seems a little unfair to the other applicants that submitted for the position. One or two or
three people that are internal to RMLD m float through this as Chairman Stempeck terns for education. You have an Interim General
Manager for education so they can learn the position. Mr.Prisco does not believe that is why you have an Interim General Manager at
I. You have an Interim General Manager when you do not have a General Manager. To make this as an educational position brings
great concern to him, his town and as a person to take that approach. As an individual he owns five businesses. It would make no
sense to him that you would only let a few rotate for education. How do you compete if you am one of the applicants? Chairman
Smmpeek responded that you do not open it up to the entire community. Chairman Stempeck said that them are certain senior level
individuals you fust with the responsibility. You choose which of those individuals you think would gain a good position and a
learning experience by going through this.
Chairman Stempeck stated that he does not quite understand why you would open it up to anyone who wished to apply. Mr. Prisco
responded that if Chairman Stempeck does not understand,he apologizes. If them were five or six applicants,and they all did not get
the opportunity to sit in that seat,with the concept you created,aren't you creating an unfair advantage for someone to compete for that
job by the nature of the way you are handling it? Traditionally,when there is a vacant position for a municipality of this size,you need
to put in an interim to get through the process. Mr. Prisco asked Chairman Stempeck if he understood what he has said, Chairman
Stempeck responded,no. Mr.Prisco explained,if you have six applicants,they are supposed to be given a fair opportunity for this job,
is he correct. Chairman Stempeck said that they all may not be qualified. Chairman Stempeck asked,if someone after one year would
be just as qualified as a ten year expert on the operation of the distribution system would that person be just as qualified as the person
that purchases power supply be just as qualified. There are different levels of qualifications.
Mr. Talbot suggested that since Mr. Prisco is a Selectman,and nus businesses, we would love the input. Why not tell us what your
advice 6 from where we are now and we can take that under advisement. Mr. Prisco said that it makes no sense m him why you are
taking this approach. How do you have continuity? You are going through the budget cycle. Mr. Sullivan must be receiving a
tremendous amount of feedback from department heads, with questions being asked, and working towards finishing up this process.
Then you switch someone out, all this continuity, all the discussion and feedback that has been worked through one individual goes
away. Mr.Talbot said to sum up Mr. Prison's suggestion is that there should be one interim General Manager and leave it at that. Mr.
Prisco agreed.
`,r. Prisco added, let the process compete the way it is supposed to when you running municipality continuity is a big part of it-you
are making a great mistake. Mr. Prisco addressed Chairman Stempeck and asked if he had been a chair on a board like this before.
Chairman Stempeck answered,no.
Regular Session Meeting Minutes
April 10,2013 I4
Discussion of General Manager Rotation •
Mr.Prisco said that the manner which Chairman Stempeck reacted to the Town Manager is of concern because you seem to have taken
offense m it. Chairman Stempeck responded it is not true at all. Mr. Prisco said that the body language and the way that Chairman
Stempeck shook the paper in frustration were indicators to him. Mr. Prisco said that Chairman Stempeck should be thankful that
someone brought this to his attention. Chairman Stempeck stated that he appreciates Mr. Frisco's input- he is entitled to his opinion.
However,he completely disagrees.
Chairman Stempeck called for a motion to adjourn.
Mr.Talbot asked if Mr.Pacino had anything to add. Mr.Pacino said that to check with legal counsel;with his preference to push off to
have another meeting next Wednesday. However is unsure if a legal opinion could be rendered that quickly.
Mr.Talbot stated that he was unable to meet next week to fix something they me uncertain about concerns him. Mr.Pacino said that he
has another concern. We have appointed a different person to be Acting General Manager. If I were that person,I would be concerned
on the level of support. Mr.Talbot polled Mr.Sullivan and Ms.Parenteau for their opinions.
Mr.Sullivan responded that this is the single hardest thing he has had to go through in his career.
Ms. Parenteau said that she is happy to help the Board in whatever manner they need help,she welcomes the opportunity, if it causing
problems,for the Board she has no problem.
Mr.Sullivan also wanted to introduce Mr.Fournier into this. He has twenty-two years with the Department and should be part of
Chairman Stempeck agreed. If the Board is for a rotational process, he should be part of it. Chairman Stempeck agreed it should
senior individuals.
Chaimtan Stempeck said that they do not need m make a decision tonight because there have been too many things placed on the table.
Chairman Stempeck stated that we need to speak with counsel.
Mr. Pacino said that the appointment should be held oil one week. Mr. Talbot asked for Mr. Hechenbleikner's input. Mr.
Hmhenbleiknar would not make any suggestion to the Light Board. Mr.Talbot added Mr. Hechenbleikner put this on the table,he is
the expert. Mr. Hechenbleilmer said that you do the process in accordance with the Charter. What the Board wants to do is fine, his
problem is the process.
Chairman Stempeck said that counsel needs to interpret this. Mr.Pacino asked what happens on the 15u. Chairman Stempeck replied
it moves on exactly as planned.
Mr. Pacino made a motion seconded by Mr. Talbot that the Commission defer the transition date from April 15 to April 29 of the
Interim General Manager.
Motion carried 3:0:0. Mr.Soli was not present for the vote.
Mr. Pacino said that he owes the Board an apology. He screwed up on the search process. He has heard it was a botched process.
Quite truthfully it was a botched process. Mr. Pacino said that the candidate that pulled out at the last minute really messed us up
beyond belief and would like to speak with him some day.
RMLD Board Meetings •
Wednesday.April 24,2013,RMLD Spurr/AV Room,7:30 p.m.—Regularly Scheduled Meeting
Wednesday,May 29,2013,RMLD Spurr/AV Room,7:30 p.m.—Regularly Scheduled Meeting
Regular Session Meeting Minutes 15
April 10,2013
®
Adjournment
At 9:50 p.m.Mr.Pacino made a motion seconded by Mr.Talbot to adjourn the Regular Session.
A we copy of the RMLD Board of Commissioners minutes
as approved by a majority of the Commission.
David Talbot,Secretary
RMLD Board of Commissioners
Jeanne Foti
From: John Stempeck <John@avalonassociates.com>
Sent: Wednesday,April 10, 2013 5:26 PM
To: Jeanne Foti
Cc: Kevin Sullivan
Subject: FW:Capital Budget Questions
Kevin, could you have Jeanne also print out for the CAB tonight? thanks.
John Stempeck
From: Kevin Sullivan [mailto:ksulllvan@RMLD.com]
Sent: Wednesday,April 10, 2013 6:32 AM
To: RMLD Board Members Group
Subject: RE: Capital Budget Questions
Commissioners;
Good morning. I thought there would be value to having the answers to Commissioner Stempeck's questions ahead of
tonight's meeting. See responses below and feel free to comment on this tonight.
Reading Municipal Light Department
Interim General Manager
From: John Stempeck fmailto,John@avalonassociates com]
Sent: Tuesday, April 09, 2013 4:30 PM
To: Kevin Sullivan
Subject: Capital Budget Questions
Kevin,
I had a few questions on the capital budget that I thought I would send ahead of the meeting. Most of
these are for increasing my knowledge base and understanding of the complexity of preventative
maintenance, and have nothing to do with the cost. I am not looking for extremely detailed answers.
Feel free to address these during the meeting if you wish and/or to share with the rest of the Board.
Thank you.
System Projects
Capital Project
# 1. 5W9: How much does this re-conductoring increase the capacity carrying ability of the system?
The reconductoring of this feeder effectively doubles the current carrying capability.
#3. What is the difference between this and the next one, #4? Project#3 is a partial carryover that will
get underway in FYI (May and June). It is Phase 2 of the Lynnfield upgrades. Project#4 is for
Phase 3 and a completely different subdivision. Reads as if the same general area. Are there
®problems there now? Currently no problems have been experienced. Also, it is stated that 'could
result in outage for some customers.' What is 'some customers'? I know 40 years is a long time and
1
it probably needs updating, but my question centers around whether there has been a need there in-
the past and how critical was it. This work aligns with predictive and preventative maintenance. An
underground failure will most certainly be untimely, interrupting service for approximately 30-50
customers depending upon which neighborhood the failure would occur.
Also, in #4, it is stated that if customers want to upgrade their service: what does this mean, moving
from 100 amp to 200 amp service? Yes, more than likely or it could just be the installation of new
underground secondary conductors. What would this entail for the customer and what are ballpark
costs associated with them upgrading their service? An underground service upgrade could run in
the $1,500—2,000 range. The variables are: what components would be chosen for replacement,
length of the underground secondary conductors, #of circuits and location of the existing panel
(finished basement), etc.
#6. 65 underground residential subdivisions that are over 25 years old. What is the lifetime of an
underground service? Depends upon the installation. In the 70's an aluminum uncovered concentric
cable was the preferred installation. Over time, the aluminum has reacted with soil and air causing
the aluminum concentric to erode, resulting in failure and section replacement. The new cable is
covered concentric which avoids the premature degradation. Have they been experiencing
problems? Yes, we have been replacing transformers and cable in underground developments year-
over-year. This item has been developed for that. I have decided to remove this work from 'Routine
Construction' and use this for the upcoming year's underground work.
Station Upgrades
#8. Are the new relays also electromechanical, or solid state? Solid State
#g. 30+ year old potential transformers; are they failing? No. Again, more predictive and
preventative maintenance. This is not a big $job and the untimely failure of a potential transformer
would not be crippling, yet if it occurred in the Summer months probably would result in a more $
spent switching out feeders to balance the station. ( Are new transformers significantly better than the
old ones and less prone to failure? Transformers of 30-50 years ago did not have the materials, heat
transfer, nor the tolerances that the new transformers have. Hands down, new transformers are of
higher quality, although certainly not made with the weight of the vintage models due to the core
materials being different. (I ask the question because in other electronic areas, the old system was
built much sturdier than the new ones; this may not be true for transformers.)
#10. Underground feeders from 10MW to 15 MW. What are their utilization now? 6 MW? 8 MW? I ask
the question because if overall usage is going down, why make these significantly higher
capacity? We do one or two of these upgrades each year due to the age of the cable. Increasing the
capacity results in the ability to support a transfer of one feeder to another that is carrying its own
loading. Or is this in an area that is growing? Load always grows. Just prudent business
practice. One and done every 40 years. Predicting the future is no easy task. Our vision has to be
beyond the current economic situation. Special customer needs? Nothing special.
SCADA Projects
#30. Are these the last obsolete SCADA's in the system? Supervisory Control and Data Acquisition
(SCADA) is a system that provides remote control and indication for each of our 3 substations. The
data flow is via the RMLD's fiber-optic ring which encircles the service area. This item is for
replacement of the Remote terminal Unit (RTU) which in effect is a termination point between the
substation and the communication system. If not, where are the others.
Routine Construction •
2
I would like to sit with you for a short tutorial on how these budgets are constructed. Maybe the entire
board would benefit if you could do it for all of us. Again, just trying to be efficient in understanding the
elements of major costs. Routine Construction is for any unplanned work that arises during the fiscal
year.
Other projects
#16 Transformers: We know these fail periodically due to many reasons. Does anyone manufacture
significantly better transformers that have much better lifetimes? As we all know, going for the lowest
bid, it is amazing the guys landed on the moon. A real example, steel used for railways in Japan is
much more expensive than that used in the U.S., but the failure rate is 100 times lower. The RMLD
crafts a specification to provide our customers with the best products possible. The RMLD's
transformers fail due to lightning, age, contamination or wildlife.
#171); commercial meters; What is the total population of commercial meters and what percent lend
themselves to remote reading? There are approximately 3,000 commercial meters. We are hopeful
to have all commercial meters remotely read.
#19: New line vehicles; there seems to be an issue surrounding the ordering and delivery of the
vehicles from a funding perspective. Is this really a problem or a nuisance? As you will be told this
evening, the Department has a plan to move funding and delivery into the same fiscal year.
#20. Covered storage; Can this be expanded to eliminate the need for renovating 226 ash street? I
am not sure. Again, we will discuss this tonight.
#21. HVAC upgrade; can this become part of a plan to make the building a model for the rest of the
®community? I am not sure about being a model for the rest of the community. However, Facilities is
working toward a plan for a more efficient Ash St. campus. This will be discussed tonight.
#23. New radio system; leasing is usually better when the technology changes rapidly; your
thoughts? Agreed. We are planning to lease the radio system. We believe there is only one vendor
who provides what we need.
#24. 226 Ash St Station 1 renovation; I was initially told it was $400,000, but now I see $520,000;
which was it? $400,000 was a budgeted value. The RMLD had a building assessment and feasibility
study performed which was delivered to the RMLB late in 2012. The budgeted value was approved in
March of the same year. What are planned for the other phases? Masonry would be done first due to
the lower cost between that and the roof($520,000 masonry and windows vs. $820,000 for the roof).
I would like to reconsider what can be done to the building to make it more than a grossly expensive
warehouse. Has any more thought been given to this? I did look into providing energy storage within
Station #1. Cost/benefit for the installation of a 3MW battery system would be realized in year 10.
#27. Replication of system; excellent idea. Can you describe how it will be tested? This will be
explained tonight. I know when companies put in backup software systems, or generators for
electricity, they never test them adequately and always seem to fail the first time. I would like to
understand this better at the appropriate time (maybe not at the budget meeting).
®John Stempeck
3
O
TO: RMLD board and staff
FROM: David Talbot
April 10, 2013
Dear Colleagues,
In advance of tonight's Capital Budget meeting,attached (below)are three points of discussion
on certain proposed expenditures. To my mind these are also key policy questions.
I look forward to the public discussion tonight. It seems likely that we will need a deeper look at
certain items than is possible in one evening.
Also,while I'm sure you've seen it, 1 am also passing along a recent EEI report on"disruptive
challenges." The topics mentioned here are relevant to long-term capital planning.
htto'//www.eei.ore/ourissues/finance/Documents/d isruptivechallenL,es.pdf
Thank you.
Sincerely,
David Talbot
QUESTIONS ON CAPITAL BUDGET •
BUDGET PROPOSAL: $275,000 for HVAC at HQ Building
The Ash Street headquarters building has major efficiency issues. Given our mission, it
important that we get this right—and even set an example for customers--as a matter of policy.
My understanding is that no building audit or comprehensive recommendations are in hand,akin
to what Mary DeLai did for the Reading town buildings. Until this information is on the table for
review, I respectfully oppose budgeting$275,000 and putting new chillers and boilers out to bid
for the Ash Street building.
Discussion: At a public meeting a couple of years ago, Jared Carpenter stated the building scored
an 1 I out of 100 on an efficiency rating—very bad. Others have cited even lower numbers.
More recently, including today, Kevin Sullivan mentioned to me there may be inadequate
insulation in the building. Anecdotally,on weekends, the heat is not only on,but makes the
building uncomfortably hot. I personally noticed that the lights in the glass-walled vestibule stay j
on all day, when a daylight sensor could keep them off much of the time. In short,the building
has many obvious issues, beyond whatever is wrong with the existing chillers, and beyond the
fact that the existing boilers are 84 percent efficient rather than 92(or whatever)percent. •
In our conversation today Mr. Sullivan mentioned that any new equipment would probably be
sized based on a square footage calculation. But if the building is poorly insulated and may have
control and other issues that we don't yet fully understand, we may end up with systems that are
too high in capacity. What's more--there may be an argument against conventional systems,
and instead favoring an air-source or ground-source system that handles both heating and
cooling, and does so for decades.
We can afford a long payback period (10 or more years)to win ultra-high-efficiency and make
the building an example of what is possible.
So, my feeling is that we need an audit and the development of a full plan before putting
equipment out to bid.
BUDGET PROPOSAL: 5W9 reconductoring(and similar projects)
This$169,494 item is a proposed a capacity upgrade serving what 1 take to be a small slice of the
district.The budget states this doubling in capacity is needed to deal with "heavy loading during
summer peaks." But 1 take it this line has not failed. If that is true, wouldn't a moderate effort at
peak demand management in that area reduce the pressure, and risk of failure,and save a lot of
money along the way?
•
® Stepping back: RMLD routinely spends six-figure sums on various capacity upgrade projects of
this nature that serve slivers of the district. At the same time,existing demand-management
programs are modest in extent. We have 200-odd electric water heaters rigged up with RMLD-
run controls,with customers incentivized to allow this. But I think that's it. Done right, more
such investments and incentives to customers could delay---or even avert---traditional
upgrades while also helping with peak-shaving, reducing ratePsYar
costs reducing capacity
costs, and reducing emissions.
Do we have a strategy to develop such options? Do we have enough staff on board to do so?
My sense is that the answer to both questions is"no"and that there is a policy question here.
TOPIC: REC proceeds
I don't think anything on this is in the budget.
Do we have a strategy or plan for the REC proceeds? To my understanding, Board discussion
last year centered on redirecting these proceeds toward other forms of renewable generation.
What options exist? In particular, is there an estimate and cost/benefit analysis in hand on some
type of PV installation?
•
Edison Electric
Institute
Power byAssonation,
i
44
Prepared by: Peter Kind
Energy Infrastructure Advocates --
j,.
Prepared for: Edison Electric Institute
January 2013
Edison Electric
Institute
Disruptive Challenges :
Financial Implications and Strategic
Responses to a Changing Retail
Electric Business
Prepared by:
Peter Kind
Energy Infrastructure Advocates
Prepared for:
Edison Electric Institute
January 2013
•
0 2013 by the Edison Electric Institute(EEI).
All rights reserved.Published 2013.
Printed in the United States of America.
No pan of this publication may be reproduced or transmitted in any form or by any means,electronic or mechanical,including
photocopying,recording,or any information storage or retrieval system or method,now known or hereinafter invented or
adopted,without the express prior written permission of the Edison Electric Institute.
Attribution Notice and Disclaimer
This work was prepared by Peter Kind,Energy Infrastructure Advocates for the Edison Electric Institute(EEI). When used as
a reference,attribution to EEI is requested. EEI,any member of EEI,and any person acting on its behalf(a)does not make
any warranty,express or implied,with respect to the accuracy,completeness or usefulness of the information,advice or
recommendations contained in this work,and(b)does not assume and expressly disclaims any liability with respect to the use
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The views and opinions expressed in this work do not necessarily reflect those of EEI or any member of EEI. This material
and its production,reproduction and distribution by EEI does not imply endorsement of the material.
Published by:
Edison Electric Institute
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Phone:202-508-5000
Web site:www.eei.org
•
Disruptive Challenges:Financial Implications and Strategic Responses to a Changing Retell Electric Business
Table of Contents
ExecutiveSummary............................................................................................................................. 1
Background..................................................................................................................................................3
Disruptive Threats—Strategic Considemtions............................................................................................6
Finance 101 -Introduction to Corporate Finance........................................................................................7
Finance 201 -Financial Market Realities....................................................................................................8
Finance 501 -Financial Implications of Disruptive Forces......................................................................11
TelephoneIndustry Parallels.....................................................................................................................14
Strategic Implications of Distribution 2020 Disruptive Forces.................................................................17
Summary....................................................................................................................................................19
Edison Else*Institute iii
Disruptive Challenges:Financial Implications and Strategic Responses to a Changing Retail Electric Business
Executive Summary
Recent technological and economic changes are expected to challenge and transform the electric utility
industry. These changes(or"disruptive challenges")arise due to a convergence of factors,including: falling
costs of distributed generation and other distributed energy resources(DER);an enhanced focus on
development of new DER technologies;increasing customer,regulatory,and political interest in demand-
side management technologies(DSM); government programs to incentivize selected technologies; the
declining price of natural gas; slowing economic growth trends; and rising electricity prices in certain areas
of the comity.Taken together,these factors are potential"game changers"to the U.S.electric utility
industry,and are likely to dramatically impact customers,employees,investors,and the availability of capital
to fund future investment.The timing of such transformative changes is unclear,but with the potential for
technological innovation(e.g., solar photovoltaic or PV)becoming economically viable due to this
confluence of forces,the industry and its stakeholders must proactively assess the impacts and alternatives
available to address disruptive challenges in a timely manner.
This paper considers the financial risks and investor implications related to disruptive challenges,the
potential strategic responses to these challenges, and the likely investor expectations to utility plans going
forward. There are valuable lessons to be learned from other industries,as well as prior utility sector
paradigm shifts,that can assist us in exploring risks and potential strategic responses.
The financial risks created by disruptive challenges include declining utility revenues,increasing costs,and
® lower profitability potential,particularly over the long-term.As DER and DSM programs continue to capture
"market share,"for example,utility revenues will be reduced.Adding the higher costs to integrate DER,
increasing subsidies for DSM and direct metering of DER will result in the potential for a squeeze on
profitability and,thus,credit metrics. While the regulatory process is expected to allow for recovery of lost
revenues in future rate cases,tariff structures in most states call for non-DER customers to pay for(or
absorb)lost revenues.As DER penetration increases,this is a cost-recovery structure that will lead to
political pressure to undo these cross subsidies and may result in utility stranded cost exposure.
While the various disruptive challenges facing the electric utility industry may have different implications,
they all create adverse impacts on revenues,as well as on investor returns,and require individual solutions as
part of a comprehensive program to address these disruptive trends.Left unaddressed,these financial
pressures could have a major impact on realized equity returns,required investor returns,and credit quality.
As a result,the future cost and availability of capital for the electric utility industry would be adversely
impacted.This would lead to increasing customer rate pressures.
The regulatory paradigm that has supported recovery of utility investment has been in place since the electric
utility industry reached a mature state in the first half of the 20'"century. Until there is a significant,clear,
and present threat to this recovery paradigm,it is likely that the financial markets will not focus on these
disruptive challenges,despite the fact that electric utility capital investment is recovered over a period of 30
or more years(i.e.,which exposes the industry to stranded cost risks).However,with the current level of lost
load nationwide from DER being less than 1 percent, investors are not taking notice of this phenomenon,
despite the fact that the pace of change is increasing and will likely increase further as costs of disruptive
technologies benefit further from scale efficiencies.
® Investors,particularly equity investors,have developed confidence throughout time in a durable industry
financial recovery model and,thus,tend to focus on earnings growth potential over a 12-to 24-month period.
Edison Electric Institute 1
Disruptive Challenges:Financial Implications and Strategic Responses to a Changing Retail Electric Business
So,despite the risks that a rapidly growing level of DER penetration and other disruptive challenges may O
impose,they are not currently being discussed by the investment community and factored into the valuation
calculus reflected in the capital markets.In fact,electric utility valuations and access to capital today are as
strong as we have seen in decades,reflecting the relative safety of utilities in this uncertain economic
environment.
In the late 1970s,deregulation started to take hold in two industries that share similar characteristics with the
electric utility industry—the airline industry and the telecommunications industry(or"the telephone utility
business").Both industries were price-and franchise-regulated,with large barriers to entry due to regulation
and the capital-intensive nature of these businesses.Airline industry changes were driven by regulatory
actions(a move to competition),and the telecommunications industry experienced technology changes that
encouraged regulators to allow competition.Both industries have experienced significant shifts in the
landscape of industry players as a result.
In the airline sector,each of the major U.S.carriers that were in existence prior to deregulation in 1978 faced
bankruptcy.The telecommunication businesses of 1978,meanwhile,are not recognizable today,nor are the
names of many of the players and the service they once provided("the plain old telephone service"). Both
industries experienced poor financial market results by many of the former incumbent players for their
investors(equity and fixed-income)and have sought mergers of necessity to achieve scale economies to
respond to competitive dynamics.
The combination of new technologies, increasing costs,and changing customer-usage trends allow us to
consider alternative scenarios for how the future of the electric sector may develop. Without fundamental •
changes to regulatory rules and recovery paradigms,one can speculate as to the adverse impact of disruptive
challenges on electric utilities, investors,and access to capital,as well as the resulting impact on customers
from a price and service perspective. We have the benefit of lessons learned from other industries to shift the
story and move the industry in a direction that will allow for customers,investors,and the U.S.economy to
benefit and prosper.
Revising utility tariff structures,particularly in states with potential for high DER adoption,to mitigate(or
eliminate)cross subsidies and provide proper customer price signals will support economic implementation
of DER while limiting stress on non-DER participants and utility finances.This is a near-term,must-consider
action by all policy setting industry stakeholders.
The electric utility sector will benefit from proactive assessment and planning to address disruptive
challenges. Thirty year investments need to be made on the basis that they will be recoverable in the future in
a timely manner. To the extent that increased risk is incurred,capital deployment and recovery mechanisms
need to be adapted accordingly.The paper addresses possible strategic responses to competitive threats in
order to protect investors and capital availability. While the paper does not propose new business models for
the industry to pursue to address disruptive challenges in order to protect investors and retain access to
capital,it does highlight several of the expectations and objectives of investors,which may lead to business
model transformation alternatives.
•
2 Edison Electric Institute
Disruptive Challenges:Financial Implications and Strategic Responses to a Changing Retail Electdc Business
Background
As a result of a confluence of factors(i.e.,technological innovation,public policy support for sustainability
and efficiency,declining trends in electricity demand growth,rising price pressures to maintain and upgrade
the U.S.distribution grid,and enhancement of the generation fleet),the threat of disruptive forces(i.e.,new
products/markets that replace existing products/markets)impacting the utility industry is increasing and is
adding to the effects of other types of disruptive forces like declining sales and end-use efficiency. While we
cannot lay out an exact roadmap or timeline for the impact of potential disruptive forces,given the current
shift in competitive dynamics, the utility industry and its stakeholders must be prepared to address these
challenges in a way that will benefit customers,long-term economic growth,and investors.Recent business
history has provided many examples of companies and whole industries that either failed or were slow to
respond to disruptive forces and suffered as a result.
Today,a variety of disruptive technologies are emerging that may compete with utility-provided services.
Such technologies include solar photovoltaics(PV),battery storage,fuel cells,geothermal energy systems,
wind,micro turbines,and electric vehicle(EV)enhanced storage.As the cost curve for these technologies
improves,they could directly threaten the centralized utility model.To promote the growth of these
technologies in the near-term,policymakers have sought to encourage disruptive competing energy sources
through various subsidy programs,such as tax incentives,renewable portfolio standards,and net metering
where the pricing structure of utility services allows customers to engage in the use of new technologies,
while shifting costs/lost revenues to remaining non-participating customers.
In addition,energy efficiency and DSM programs also promote reduced utility revenues while causing the
utility to incur implementation costs. While decoupling recovery mechanisms,for example,may support
recovery of lost revenues and costs,under/over recovery charges are typically imposed based on energy
usage and,therefore,adversely impact non-participants of these programs. While the financial community is
generally quite supportive of decoupling to capture lost revenues,investors have not delved into the long-
term business and financial impact of cross subsidization on future customer rates inherent in most
decoupling models and the effective recovery thereof In other words,will norI participants continue to
subsidize participants or will there be political pressure to not allow cost pass thm over time?
The threat to the centralized utility service model is likely to come from new technologies or customer
behavioral changes that reduce load.Any recovery paradigms that force cost of service to be spread over
fewer units of sales(i.e.,kilowatt-hours or kWh)enhance the ongoing competitive threat of disruptive
altematives. While the cost--recovery challenges of lost load can be partially addressed by revising tariff
structures(such as a fixed charge or demand charge service component),there is often significant opposition
to these recovery structures in order to encourage the utilization of new technologies and to promote
customer behavior change.
But,even if cross-subsidies are removed from rate structures,customers are not precluded from leaving the
system entirely if a more cost-competitive alternative is available(e.g.,a scenario where efficient energy
storage combined with distributed generation could create the ultimate risk to grid viability). While tariff
restructuring can be used to mitigate lost revenues,the longer-term threat of fully exiting from the grid(or
customers solely using the electric grid for backup purposes)raises the potential for irreparable damages to
revenues and growth prospects.This suggests that an old-line industry with 30-year cost recovery of
investment is vulnerable to cost-recovery threats from disruptive forces.
Edison Electric Institute 3
Dismptive Challenges:Financial Implications and Strategic Responses to a Changing Retail Electric Business .
Generators in organized,competitive markets are more directly exposed to threats from new technologies
and enhanced efficiency programs,both of which reduce electricity use and demand.Reduced energy use
and demand translate into lower prices for wholesale power and reduced profitability.With reduced
profitability comes less cash flow to invest and to support the needs of generation customers. While every
market-driven business is subject to competitive forces,public policy programs that provide for subsidized
growth of competing technologies and/or participant economic incentives do not provide a level playing field
upon which generators can compete fairly against new entrants.As an example,subsidized demand response
programs or state contracted generation additions create threats to the generation owner(who competes
based upon free market supply and demand forces).
According to the Solar Electric Power Association(SEPA),there were 200,000 distributed solar customers
(aggregating 2,400 megawatts or MW)in the United States as of 2011.Thus,the largest near-term threat to
the utility model represents less than 1 percent of the U.S.retail electricity market.Therefore,the current
level of activity can be"covered over"without noticeable impact on utilities or their customers. However,at
the present time,70 percent of the distributed activity is concentrated within 10 utilities,which obviously
speaks to the increased risk allocated to a small set of companies. As previously stated,due to a confluence
of recent factors,the threat to the utility model from disruptive forces is now increasingly viable.One
prominent example is in the area of distributed solar PV,where the threats to the centralized utility business
model have accelerated due to:
• The decline in the price of PV panels from $3.80/watt in 2008 to$0.86/watt in mid-2012'. While
some will question the sustainability of cost-curve trends experienced, it is expected that PV panel
costs will not increase(or not increase meaningfully)even as the current supply glut is resolved. As a
result, the all-in cost of PV solar installation approximates$5/watt, with expectations of the cost •
declining further as scale is realized;
• An increase in utility rates such that the competitive price opportunity for PV solar is now"in the
market"for approximately 16 percent of the U.S. retail electricity market where rates are at or above
$0.15/kWh'.In addition,projections by PV industry participants suggest that the"in the money"
market size will double the share of contestable revenue by 2017(to 33 percent,or$170 billion of
annual utility revenue);
• Tax incentives that promote specific renewable resources,including the 30-percent Investment Tax
Credit(ITC)that is effective through 2016 and five-year accelerated depreciation recovery of net
asset costs;
• Public policies to encourage renewable resource development through Renewable Portfolio
Standards(RPS),which are in place in 29 states and the District of Columbia and which call for
renewable generation goals within a state's energy mix;
• Public policies to encourage net metering, which are in effect in 43 states and the District of
Columbia(3 additional states have utilities with voluntary net metering programs)and which
typically allow customers to sell excess energy generated back to the utility at a price greater than
the avoided variable cost;
• Time-of-use rates,structured for higher electric rates during daylight hours,that create incentives for
installing distributed solar PV, thereby taking advantage of solar benefit(vs.time-of-use peak rates)
and net metering subsidies; and
Source:Bloomberg New Energy Finance,Solar Module Price Index •
' Source:Energy Information Agency,Electricity Data Overview
' Source: Database for State Incentives for Renewables and Efficiency,wwieAsireusa.org
4 Edison Electric Institute
Disruptive Challenges:Financial Implications and Strategic Responses to a Changing Retail Electric Business
• The evolution of capital markets' access to businesses that leverage the dynamics outlined above to
support a for-profit business model. Examples include tax equity financing,project finance lending,
residential PV leasing models(i.e.,"no money down'for customers),and public equity markets for
pure play renewable resource providers and owners.As an illustration,U.S.tax equity investment is
running at$7.5 billion aunualized for 2012<Add other sources of capital,including traditional
equity,and this suggests the potential to fund a large and growing industry.
Bloomberg New Energy Finance(BNEF)projects that distributed solar capacity will grow rapidly as a result
of the competitive dynamics highlighted.BNEF projects 22-percent compound annual growth in PV
installations through 2020,resulting in 30 gigawatts(GW)of capacity overall(and approximately 4.5 GW
coming from distributed PV). This would account for 10 percent of capacity in key markets coming from
distributed resources and even a larger share of year-round energy generated.
Assuming a decline in load,and possibly customers served,of 10 percent due to DER with full subsidization
of DER participants,the average impact on base electricity prices for non-DER participants will be a 20
percent or more increase in rates,and the ongoing rate of growth in electricity prices will double for non-
DER participants(before accounting for the impact of the increased cost of serving distributed resources).
The fundamental drivers previously highlighted could suggest even further erosion of utility market share if
public policy is not addressed to normalize this competitive threat.
While the immediate threat from solar PV is location dependent,if the cost curve of PV continues to bend
and electricity rates continue to increase,it will open up the opportunity for PV to viably expand into more
regions of the country.According to ThinkEquity,a boutique investment bank,as the installed cost of PV
• declines from$5/watt to$3.5/watt(a 30-percent decline),the targeted addressable market increases by 500
percent,including 18 states and 20 million homes,and customer demand for PV increases by 14 times. If
PV system costs decline even further,the market opportunity grows exponentially.In addition,other DER
technologies being developed may also pose additional viable alternatives to the centralized utility model.
Due to the variable nature of renewable DER,there is a perception that customers will always need to remain
on the grid. While we would expect customers to remain on the grid until a fully viable and economic
distributed non-variable resource is available,one can imagine a day when battery storage technology or
micro turbines could allow customers to be electric grid independent.To put this into perspective,who
would have believed 10 years ago that traditional wire line telephone customers could economically"cut the
cord?"
The cost of providing interconnection and back-up supply for variable resources will add to the utility cost
burden.If not properly addressed in the tariff structure,the provision of these services will create additional
lost revenues and will further challenge non-DER participants in terms of being allocated costs incurred to
serve others.
Another outcome of the trend of rising electricity prices is the potential growth in the market for energy
efficiency solutions.Combining electricity price trends,customer sustainability objectives,and ratemaking
incentives via cross-subsidies, it is estimated that spending on energy efficiency programs will increase by as
much as 300 percent from 2010 to 2025,within a projected range of$6 to$16 billion per years.This level of
" Source:Bloomberg New Energy Finance,Renewable Energy-Research Note,July 18,2012
All s Source: Lawrence Berkeley National Laboratory,The Future of Utility Funded Energy Efficiency Programs in the United
States:Projected Spending and Savings 2010 to 2025,January 2013
Edison Electric Insalute 5
Disruptive Challenges:Financial Implications and Strategic Responses to a Changing Retail Electric Business is
spending on energy efficiency services will have a meaningful impact on utility load and,thus,will create
significant additional lost revenue exposure.
The financial implications of these threats are fairly evident. Start with the increased cost of supporting a
network capable of managing and integrating distributed generation sources. Next,under most rate
structures, add the decline in revenues attributed to revenues lost from sales foregone. These forces lead to
increased revenues required from remaining customers(unless fixed costs are recovered through a service
charge tariff structure)and sought through rate increases.The result of higher electricity prices and
competitive threats will encourage a higher rate of DER additions,or will promote greater use of efficiency
or demand-side solutions.
Increased uncertainty and risk will not be welcomed by investors,who will seek a higher return on
investment and force defensive-minded investors to reduce exposure to the sector. These competitive and
financial risks would likely erode credit quality.The decline in credit quality will lead to a higher cost of
capital,putting further pressure on customer rates. Ultimately,capital availability will be reduced,and this
will affect future investment plans. The cycle of decline has been previously witnessed in technology-
disrupted sectors(such as telecommunications)and other deregulated industries(airlines).
Disruptive Threats—Strategic Considerations
A disruptive innovation is defined as"an innovation that helps create a new market and value network,and
eventually goes on to disrupt an existing market and value network(over a few years or decades),displacing •
an earlier technology.The term is used in business and technology literature to describe innovations that
improve a product or service in ways that the market does not expect,typically first by designing for a
different set of consumers in the new market and later by lowering prices in the existing market."
Disruptive forces,if not actively addressed,threaten the viability of old-line exposed industries. Examples of
once-dominant,blue chip companies/entities being threatened or succumbing to new entrants due to
innovation include Kodak and the U.S. Postal Service(USPS).For years,Kodak owned the film and related
supplies market. The company watched as the photo business was transformed by digital technology and
finally filed for bankruptcy in 2012.
Meanwhile,the USPS is a monopoly,government-run agency with a mission of delivering mail and
providing an essential service to keep the economy moving.The USPS has been threatened for decades by
private package delivery services(e.g., UPS and FedEx)that compete to offer more efficient and flexible
service.Today,the primary threat to USPS' viability is the delivery of information by email,including
commercial correspondence such as bills and bill payments,bank and brokerage statements,etc.Many
experts believe that the USPS must dramatically restructure its operations and costs to have a chance to
protect its viability as an independent agency.
Participants in all industries must prepare for and develop plans to address disruptive threats, including plans
to replace their own technology with more innovative,more valuable customer services offered at
competitive prices.The traditional wire line telephone players,including AT&T and Verizon, for example,
became leaders in U.S.wireless telephone services,which over time could make the old line telephone
product extinct. But these innovative,former old-line telephone providers had the vision to get in front of the
trend to wireless and lead the development of non-regulated infrastructure networks and consumer marketing •
skills.As a result,they now hold large domestic market shares.In fact,they have now further leveraged
technology innovation to create new products that expand their customer offerings.
6 Edison Electric Institute
Disruptive Challenges:Financial Implications and Strategic Responses to a Changing Retail Electric Business
• The electric utility sector has not previously experienced a viable disruptive threat to its service offering due
customer reliance and the solid economic value of its product.However,a combination of technological
innovation,public/regulatory policy,and changes in consumer objectives and preferences has resulted in
distributed generation and other DER being on a path to becoming a viable alternative to the electric utility
model. While investors are eager to support innovation and economic progress,they do not support the use
of subsidies to attack the financial viability of their invested capital. Utility investors may not be opposed to
DER technologies,but, in order for utilities to maintain their access to capital,it is essential that the financial
implications of DER technologies be addressed so that non-DER participants and investors are not left to pay
for revenues lost(and costs unrecovered)from DER participants.
Finance 101 - Introduction to Corporate Finance
Investors allocate investment capital to achieve their financial objectives consistent with their tolerance for
risk and time horizon.Fixed-income(i.e.,bond)investors seek certainty as to(investment)returns through a
guarantee by the debt issuer of timely payment of principal and interest. Equity investors seek a higher
expected return than debt investors and,accordingly,must accept increased risk."Expected"return refers to
the distinction that equity investor terms are not guaranteed;therefore,equity investors bear a higher level
of risk than bondholders. The expected return on equity investment is realized through a combination of
dividends received and expected growth in value per share(which is achieved through a combination of
growth in earnings and dividends and/or a resting of return expectations as a result of investment market
forces).
® Corporate Financial objectives focus on enhancing shareholder value through achieving long-term growth
consistent with the preservation of the corporate entity. Corporations develop financial policies to support the
access to capital to achieve their business plans.For utilities,these financial policies are consistent with
investment-grade credit ratings. Since practically all utilities have an ongoing need for capital to fund their
capital expenditure programs,the industry has developed financial policies intended to support the access to
relatively low-cost capital in(practically)all market environments. Under traditional cost-of-service
ratemaking,customers benefit through lower cost of service and,therefore,lower rates.
In order to retain the financial flexibility required to maintain investment-grade credit ratings,the rating
agencies prefer policies that promote the retention of corporate cash flow and provide a liquidity cushion to
support fixed obligations.Prudent corporate financial management disdains significant fixed commitments to
investors—since such commitments limit management flexibility and increase capital-access dependency
and risk.While paying dividends to equity investors is not a legal obligation,the rating agencies and
investors view dividends as a moral(or intended)obligation that management will not reduce unless it bas no
viable alternative to preserve long-term corporate value.The corporate financial objective of retaining cash
from operations to support credit quality limits the potential to pay dividends to investors.Thus,growth of
investment value is required by equity investors(as discussed above)to achieve return expectations
warranted by the increased risk taken and investment return expectations relative to fixed income investors.
It is important to highlight that the rating agencies' rating criteria and associated target corporate credit
metrics reflect the credit risk of the industry environment of the corporation being rated. Thus,due to the
benefits of a stable regulatory environment,utilities are able to maintain(for a given rating category)
significantly more debt relative to cash flow than competitive industries.However,if business risks were to
increase for utilities in the future,as we will discuss in the next sections,it would be likely that utility debt
leverage(i.e.,debt relative to cash flow)would need to be reduced in order to retain credit ratings.
Edison Electric Institute 7
Disruptive Challenges:Financial Implications and Strategic Responses to a Changing Retail Electric Business •
Stable,mature industries—those that have a proven product, stable product demand,and low volatility
related to their revenues and cash flow(the"defensive industries")—are attractive to investors as they offer
more certainty and fewer business and financial risks.As a result, investors in these stable,defensive
industries(such as utilities)will require a lower expected return compared to investors in less mature and
mora volatile industries. We describe this lower expected return requirement as a lower cost of capital.This
lower cost of capital associated with defensive industries is manifested in lower borrowing costs and higher
relative share values. In addition, in difficult financial market environments(such m we experienced in
October 2008 through March 2009),these stable businesses typically experience less adverse stock price
impact due to investors fleeing in order to reduce risk.Thus,in difficult markets,mature companies have
demonstrated ongoing financial market access(investor demand)when those in other industries have not.
This is the benefit(or the"insurance policy")of an investment-grade credit rating—lower capital costs and
more stable access to capital despite market conditions.
The benefit to customers of cost-of-service rate-regulated utilities is that a lower cost of capital contributes to
lower utility rates.Also of importance,but often taken for granted,is the comfort that comes with knowing
that utilities will have capital access to support the reliability and growth needs of their service territories
and,thus,will not adversely expose customer service needs, including customer growth plans.
Finance 201 - Financial Market Realities
With the exception of a very few periods over the past century,utilities have experienced unfettered access to
relatively low-cost capital.Even during challenging financial market environments when many industries •
have been effectively frozen from capital access,utilities have been able to raise capital to support their
business plans. The primary reason for the markets' willingness to provide capital to the utility sector is the
confidence that investors place in the regulatory model,particularly the premise that utilities will be awarded
the opportunity to earn a fair return on investor capital investment.
However,at times of regulatory model uncertainty,we have seen the financial markets punish utility
securities.Examples of periods of investor uncertainty would include the timeframe post the 1973 oil
embargo,which was prior to the enactment of fuel adjustment clauses for purchased power;the nuclear
power plant abandonments and cost disallowances of the 1980s that led to multiple bankruptcies and
financial distress for quite a few utilities;the PURPA cost fallout of the 1990s;and the post-Enron
bankruptcy collapse of the merchant power sector in the early 2000s,which challenged merchant energy
providers and heavily exposed utility counterparties.These events led to bankruptcies, longstanding financial
distress for impacted utilities,and ongoing erosion in credit quality and investor confidence. These examples
highlight that regulated businesses are vulnerable to risks related to business model changes,economic
trends and regulatory policy changes. When investors focus on these issues as being material risks, the
impact on investors and capital formation can be significant.
8 Edison Electric Institute
Disruptive Challenges:Financial Implications and Strategic Responses to a Changing Retail Electric Business
® Exhibit 1
Dow Jones Utility Index: 1965-2012
Great
Recession
aW
3W 1 Y
l00
aurum,
Pruden Ramr.111
y 250Duallowan es
n
Z00 ', eanEtl DiHtlentl R<tlu[tion
cIN
iW
Be I Mertha noun
0 ' __ _. _ _....
Jan 156 Jan 70 Jan 75 Jan-0 Jan 15 Jan'90 Jan Jan'00 Jan'M Jan'10
hl IndevM to V2/19M pnee
® Source:Bloomberg
Prior to the 1980s,the utility sector was dominated by"AA"credit ratings. Power supply-side cost
pressures,declining economic and customer growth trends,inflation in cost-of-service provision,and an
evolving industry and regulatory model have resulted in steady erosion in credit quality over each of the last
five decades.(See Exhibit 2 for a credit-rating history of the electric utility sector.)Investors responded to
these periods of significant industry challenge with a rethink of their"blind" faith in the regulatory model
and became more focused on company selection as they approached investment strategy.But, for the most
part,as utilities and regulation adjusted to political,regulatory,and economic challenges,investor faith in the
regulatory model has been restored.
After five decades of decline in industry credit quality,a potential significant concern now is that new
competitive forces,which have not been a concern of investors to date,will lead to further credit erosion.
The industry carrot afford to endure significant credit quality erosion from current ratings levels without
threatening the BBB ratings that are held by the majority of the industry today.Non-investment grade ratings
would lead to a significant rerating of capital costs,credit availability,and investor receptivity to the sector.
The impact on customers would be dramatic in terms of increased revenue requirements(i.e.,the level of
revenues required for a utility to cover its operating costs and earn its allowed cost of capital),customer
rates,and reduction in the availability of low-cost capital to enhance the system.
Edison Elecbic Institute 9
Disruptive Challenges:Financial Implications and Strategic Responses to a Changing Retail Electric Business •
Exhibit 2
Electric utility industry credit ratings distribution evolution
(S&P Credit Ratings Distribution,U.S.Shareholder-Owned Electric Utilities)
t00X
TOR
80% 'A
i
60%
tl11
.: r
40%
20%
0%
1970 1980 1990 2000 2011
■ AAA AA+,AA,AA. ■ A+,A,A.
■ BBB+,BBB ■ BBB- ■ BB+, BB,BB, B+, B, B-,CCC+
Source:Standard&Poo/s,Macquarie Capital
As we look at the electric utility sector today,investors,for the most part,remain confident that the
regulatory model will be applied fairly to provide them with the opportunity to earn a reasonable and fair
return on their investment.Those states that have experienced prior upheavals in their regulatory model(e.g.,
California)have had to tighten their approach to regulatory cost recovery to convince investors that past
problems have been addressed.If a state has not been as receptive to addressing its approach to past
problems,then investors will be highly reticent to deploy capital in those jurisdictions.
In reviewing recent sector research reports,the majority of security analysts continue to project future
earnings levels based on assumed capital-investment levels and projected costs of capital(a bottoms-up
approach). While analysts acknowledge that each rate case carries some degree of uncertainty,there appears
to be limited focus in their analysis on service area quality,competitiveness of customer pricing,and the
drivers for future service territory growth.No other significant industry is analyzed by Wall Street on a
bottoms-up basis;the basis for analysis of non-utility industries is competitive position, sales prospects,and
sales margins. In addition,the threat of disruptive forces is given no(or almost no)printed lines in utility
sector research.This approach to investment analysis is based upon confidence in utilities' ability to earn a
fair return on prudent investment. But, it may expose investors to the future economic risks posed by rapid
growth in DER.What will happen as technological advancement in the utility sector provides customers with
viable competitive altematives?
•
10 Edison Electric Institute
Disruptive Challenges:Financial Implications and Strategic Responses to a Changing Retail Electric Business
Finance 501 - Financial Implications of Disruptive Forces
As discussed previously,equity investors expect and will value an equity security based upon growth
attributes as a major component of the expected total return investors require. Growth in utility earnings has
historically been realized by a combination of increased electricity sales(volume), increased price per unit of
sales(higher rates),and/or expanded profit margins on incremental revenues achieved between rate cases
reflecting the realization of operational/overhead efficiencies. Earnings levels and growth are also impacted
by changing costs of capital due to market forces—this is currently a depressant on utility earnings per share
(EPS)levels due to the sector-wide decline in authorized returns on equity (ROE)realized over the last
several years.
First,let's review the current climate for the utility sector. While valuations are near all-time highs,the
headwinds facing the sector are significant.Concerns start with the anemic electricity demand,which has
been primarily impacted by the overall economic climate but also impacted by demand-side efficiency
programs and the emergence of DER.Next,there is the need to deploy capital investment at almost twice the
rate of depreciation to enhance the grid and address various regulatory mandates. Soft electricity demand
plus increasing capital investment lead to rate increase needs and the investment uncertainty created by a
future active rate case calendar.While sell side analysts are expecting EPS growth of 4 percent m7 percent
overall for the regulated sector,this is likely to be quite challenging. If investor expectations are not realized,
a wholesale reevaluation of the sector is likely to occur.
® So,what will happen when electricity sales growth declines and that decline is not cyclical but driven by
disruptive forces,including new technology and/or the further implementation of public policy focused on
DSM and DER initiatives?In a cost-of-service rate-regulated model,revenues are not directly correlated to
customer levels or sales but to the cost of providing service.However,in most jurisdictions,customer rates
are a function of usage/unit sales.In such a model,customer rate levels must increase via rate increase
requests when usage declines,which from a financial perspective is intended to keep the company whole
(i.e.,earn its cost of capital). However,this may lead to a challenging cycle since an increase in customer
rates over time to support investment spending in a declining sales environment(due to disruptive forces)
will further enhance the competitive dynamics of competing technologies and supply/demand efficiency
programs.This set of dynamics can become a vicious cycle(See Exhibit 3)that,in the worst-case scenario,
would leave few(er)customers remaining to support the costs of a large embedded infrastructure system,
some of which may be stranded investment but most of the costs will continue to be incurred in order to
manage the flows between supply and customers.
10
Edison Electric Institute 11
Disruptive Challenges:Financial Implications and Strategic Responses to a Changing Retail Electric Business .
Exhibit 3
Vicious Cycle from Disruptive Forces
1
1
When investors realize that a business model has been stung by systemic disruptive forces,they likely will
retreat. When is the typical tipping point when investors realize that the merits of the investment they are
evaluating or monitoring has been forever changed?Despite all the talk about investors assessing the future
in their investment evaluations,it is often not until revenue declines are reported that investors realize that
the viability of the business is in question.
An interesting example is the story of RIM,the manufacturer of the Blackberry handheld information
management tool. From its public start in the 19905 thru 2008,RIM was a Wall Street darling.Its share price
was less than$3 in 1999 and peaked at$150 in 2008.The company started to show a stall in sales in 2011,
and,now,despite a targe cash position and 90 million subscribers,the market is questioning RIM's ability to
survive and RIM's stock has plummeted from its high.
What happened to this powerful growth company that had dominant market shares in a growth market?The
answer is the evolution of the iPhone,which transformed the handheld from an email machine to a dynamic
Internet tool with seemingly unlimited applications/functionality. When the iPhone was first released in
2007,it was viewed as a threat to RIM,but RIM continued to grow its position until the introduction of the
iPhone 4 in June 2010.The iPhone 4,which offered significant improvements from prior versions,led to a
retreat in RIM's business and caused a significant drop in its stock price.
It seems that investors have proven to be reasonably optimistic on selected industries even though the
competitive threat is staring them head-on. However,if we can identify actionable disruptive forces to a
business or industry,then history tells us that management and investors need to take these threats seriously is
12 Edison Electric Institute
Disruptive Challenges:Financial Implications and Strategic Responses to a Changing Retail Electric Business
® and not wait will the decline in sales and revenues has commenced to develop a new strategy or,in the case
of investors,realize their loss.
As discussed above,investors in the utility sector seek increased certainty(or less risk)than in other
industries and have confidence in the consistent application of ratemaking recovery models to provide a
lower degree of investment risk.As a result of this confidence,when instances have occurred in the past that
have not provided consistent application of expected cost recovery models, investors have responded and
have caused significant adverse impact on entities' ability to raise incremental capital. But,with the
exception of the California energy crisis in the early 2000s, these events reflected embedded cost issues that
had defined exposures and time frames.Disruptive changes are a new type of threat to the electric utility
industry. Disruptive changes lead to declining customer and usage per customer levels that cannot be easily
quantified as to the potential threat posed to corporate profitability.This type of problem has not been faced
before by the electric industry and, thus,must be understood as to the strategic issues and alternatives that are
raised.
The new potential risk to utility investors from disruptive forces is the impact on future earnings growth
expectations.Lost revenues within a net metering paradigm, for instance,are able to be recovered in future
rate cases.However,without a shift in tariff structures,there is only so much of an increase that can be
placed on remaining non-DER customers before political pressure is brought to bear on recovery
mechanisms.Once the sustainability of the utility earnings model is questioned,investors will look at the
industry through a new lens,and the view from this lens will be adverse to all stakeholders,including
investors and customers. While we do not know the degree to which customer participation in DER and
behavior change will impact utility eamings growth, the potential impact,based upon DER trends,is
® considerable(as stated earlier,industry projections propose that 33 percent of the market will be in the
money for DER by 2017,assuming current tax and regulatory policies).Today,regulated utilities have seen
allowed retums on equity decline to around 10 percent,a multi-decade low point, as a result of declining
interest rates(See Exhibit 4).The cost of equity has also been growing. However,the risks in the business
have never been higher,due to increasing customer rate pressures from capital expenditures required to
upgrade the grid and address environmental mandates,inflation,low/negative demand growth from active
customers,and the threat of load lost due to the rapid development of DER and disruptive forces. The impact
of declining allowed returns and increasing business risk will place pressure on the quality and value of
utility investments. How large of an impact on investment value will be a function of the impact of disruptive
forces described herein.But, lower stock prices will likely translate into lower levels of capital spend, lower
domestic economic growth,and fewer grid enhancements.
Edison Electric Institute 13
Disruptive Challenges:Financial Implications and Strategic Responses to a Changing Retail Electric Business •
Exhibit 4
History of Allowed ROE's(U.S.Shareholder-Owned Electric Utilities)
(Based on regulatory rases settled each quarter)
14
13
X 12
w
O
rc
11 _.
10
9
01 01 01 01 01 01 01 01 01 01 01 01
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source:SNL Financial/Regulatory Research Associates(RRA),EEI Rate Department •
Telephone Industry Parallels
There are other examples in other industries that can provide lessons as to the risks of disruptive change
confronting the U.S.electric utility industry. The once fully regulated,monopoly telephone industry provides
one clear example.The telephone industry experienced significant technological changes that led to
deregulation—initially in the long-distance sector and then followed by the local exchange market.
Beginning in the 1970s,the impact of an array of new technologies(e.g.,satellite,microwave,and fiber optic
technologies)led to increased telephone system capacity and a reduction in the cost of providing telephone
service. These technological changes provided the opportunity for competition by new entrants using newer
technologies,while the monopoly service provided by AT&T used older analog technology. In 1974,MCI,a
new entrant, filed an anti-trust case challenging AT&T's monopoly powers in long-distance telephone
service. The U.S.government ruled against AT&T in 1982,which led to a negotiated plan to break up the
Bell system,which was completed in 1984.As a result,long-distance telephone service and the Bell Labs'
research arms were housed in AT&T.The local provision of phone service(i.e.,intrastate regional calls)was
to remain regulated and was to be provided by seven Bell Operating Companies("the Baby Bells"). By
1996,the Telecommunications Act opened the local telephone market to competition and allowed for
Internet providers to acquire spectrum services.
Dramatic technological change has evolved over the past 35 years,which has led to the development of a
new infrastructure system;new services that are providing abundant transfer of information;and the •
convergence of voice,data,and entertainment into one combined service from what had previously been
14 Edison Electric Institute
Disruptive Challenges:Financial Implimgons and Strategic Responses to a Changing Retell Electric Business
• viewed as separate and distinct services and industries. Today,the number of customers who utilize the
previously exclusive"copper wire"telephone system represents a rapidly declining percentage of the market
for telephone services. (Verizon Communications,for example,has lost approximately 45 gement of its wire
line customers over the past five years)Today,many customers access voice services exclusively through
mobile cellular(wireless)phones,a technology that became commercially viable in the mid-to late-1980s.
In addition,the advent of cable-based phone service has sped the decline in copper-based services.
This transformation in the telephone sector of pre-1982 to today has not been smooth or easy. Significant
capital investment has been made to develop new technologies and related infrastructure—it is estimated of
that more than$300 billion has been deployed to build out new telephone infrastructure.New entrants have
experienced booms and busts as the supply of capacity outstripped demand,leading to bankruptcies and
mergers.The original AT&T,the seven Baby Bells,and several large independent monopolies(e.g.,GTE,
Citizens, United Telephone and Alltel)have merged into four independent companies. The sector today is
dominated by wireless and cable-based technologies.
Exhibit 5
Verizon Stock Price vs. S&P500 from 2000 to 2012
-Veno,1oxs-45%or wirelea cusromeo
Verlione MrO Ieatli,,Mwirelessshare
120 + Ver1wnnperkrcesln01tle,owe,In Pber'a W.b
/ 1
2°
0 '
Ox'W Oec'01 oec tl] NCO Cec'O] 08C-0 Oac'11
IIIIMexetl to A/WD. 1. —Verl— ---e1P50°
source:Factset
Them am important lessons to be learned from the history of the telephone industry.First,at the onset of the
restructuring of the Bell System,there was no vision that the changes to come would be so radical in terms of
the services to be provided and the technologies to be deployed. Second,the telephone players acted boldly
to consolidate to gain scale and then take action to utilize their market position to expand into new services
on a national scale.Finally,and most important,if telephone providers had not pursued new technologies
and the transformation of their business model,they would not have been able to survive as viable businesses
today. So,while the sector has underperformed the overall market since 2000,and as shown in Exhibit 5,
even a leading industry participant like Verizon Communications has not been able to perform in-line with
Edison Electric Institute 15
Disruptive Challenges:Financial Implications and Strategic Responses to a Changing Retail Electric Business
the overall market despite its growth,market share and solid profitability outlook due to the competitive
uncertainties inherent in the business. However,those telecom providers that have embraced new
technologies and addressed the competitive threats they faced have managed to survive and to protect
investors from a"Kodak moment."
Exhibit 6
Credit Capacity of Regulated vs.Competitive Industries
Miscdb/s $aP RPO/Debt OeWEBITOA
Regulated Utilities
BOPIDern Company 563 Baal A 25% 3.Sa
ConEd 27 Baal A 25% 33r
%rel LnprgV 24 Baal A- 23% 3.8a
III Utilities
Eaelon Carp 48 Baal 8B8 55% 3.1a
PSEG Resources 23 Baal BBB 38% 2.3e
Telephone
AT&T 266 A2 A- 54% 2.1r
Verizon
Communications 222 A3 A- 63% 1.9.
DDM COE o Debt/EBITDA Implied Debt
Capitol Pro Tax WACC
•
Regulated Eme, 104 3.5 50% 10.20%
Competitive Telco 12% 2 34% 13.811%
Competitive Sector Cos[
Premium 3.60%
%Change In WACC 35.80%
(1)'DW OOP Is dividend elecouMmoeel cMtorequiy
From being led by a"AAA"rated company with monopoly powers(AT&T),the telecommunications
industry looks very different today. Services today are often comprised of a bundle of telephone, Internet,
and entertainment options provided on an unlimited basis by a monthly fee(relative to usage-based pricing
prior to 1982). The market has seen significant new entrants,capital investment,and boom and bust periods
leading to bankruptcies and/or mergers to enhance scale.Due to the increased competitive business risk,the
credit-rating agencies have downgraded the credit rating of AT&T from"AAA"in 1981 to"A"today.In
addition,due to competitive business dynamics,the credit rating agencies expect to see significantly lower
debt leverage(thereby,raising the overall cost of capital)in order to support the credit ratings assigned.To
compare with the electric sector,a comparable rating in telecom would bear approximately 50 percent of the
leverage level of a regulated electric utility—resulting in an approximately 35 percent higher pre-tax
weighted cost of capital for the telephone sector based on credit-ratings metrics(See Exhibit 6).
While customers have benefitted from a proliferation of new services provided at a lower cost, investors •
have not done as well in financing a transition to a competitive industry. These lessons should be fully
16 Edison Electric Institute
Dismplive Challenges:Financial Implications and Strategic Responses to a Charging Retail Electric Business
® considered as stakeholders shape the approach electric utilities pursue in participating in an environment
where disruptive technologies may transform the provision of services and the providers of these new
services.
One significant difference between the electric sector and the telecom restructuring example is the value of
the respective infrastructure following the disruptive threat.In the telecom situation, the original copper wire
phone network is of no/low value in a wireless,Internet protocol,landline world. However,the value of the
electric grid to the customer is retained in a distributed generation environment as the grid provides the
highway to sell power generated by the DER and the back-up resource infrastructure to deliver power
required when the DER is not meeting the load obligation of its provider. In essence,while a wireless user
does not need a landline, an electric consumer-generator will not be able to and will not necessarily want to
achieve full independence from the"wired"utility grid. So,while the telecom example is a tale of
responding to the threat of obsolescence,the near-term challenge to the electric sector is providing the proper
tariff design to allow for equitable recovery of revenue requirements to address the pace of non-economic
sector disruption.
Strategic Implications of Distribution 2020 Disruptive Forces
The threats posed to the electric utility industry from disruptive forces,particularly distributed resources,
have serious long-term implications for the traditional electric utility business model and investor
opportunities.While the potential for significant immediate business impact is currently low(due to low
® DER participation to date),the industry and its stakeholders must begin to seriously address these challenges
in order to mitigate the potential impact of disruptive forces,given the prospects for significant DER
participation in the future.
One example of a significant potential adverse impact to utility investors stems from net metering.Utilities
have witnessed the implementation of net metering rules in all but a handful of states.Lost revenues from
DER are being recovered from non-DER customers in order to encourage distributed generation
implementation.This type of lost revenue recovery drives up the prices of those non-participating customers
and creates the environment for ongoing loss of additional customers as the system cost is transferred to a
smaller and smaller base of remaining customers.
Utility investors are not being compensated for the risks associated with customer losses resulting from
increasing DER. It is difficult to identify a rate case in which the cost-of-capital implications of net metering
were considered.At the point when utility investors become focused on these new risks and start to witness
significant customer and earnings erosion trends,they will respond to these challenges. But,by then,it may
be too late to repair the utility business model.
DER is not the only disruptive risk the industry faces. Energy efficiency and DSM programs that promote
lower electricity sales pressure earnings required to support capital investment Without a tariff structure that
properly allocates fixed vs. variable costs,any structure for lost revenues would come at a cost to non-
participating customers,who will then be more motivated to find alternatives to reduce their consumption.
While it is not the objective of this paper to outline new business model alternatives to address disruptive
challenges,there are a number of actions that utilities and stakeholders should consider on a timely basis to
align the interests of all stakeholders,while avoiding additional subsidies for non-participating customers.
Edison Else*Institute 17
Disruptive Challenges:Financial Implications and Strategic Responses to a Changing Retail Electric Business •
These actions include:
Immediate Actions:
• Institute a monthly customer service charge to all tariffs in all states in order to recover fixed costs
and eliminate the cross-subsidy biases that are created by distributed resources and net metering,
energy efficiency,and demand-side resources;
• Develop a tariff structure to reflect the cost of service and value provided to DER customers,being
off-peak service,back-up interruptible service,and the pathway to sell DER resources to the utility or
other energy supply providers;and
• Analyze revision of net metering programs in all states so that self-generated DER sales to utilities
are treated as supply-side purchases at a market-derived price. From a load provider's perspective,
this would support the adoption of distributed resources on economically driven bases,as opposed to
being incentivized by cross subsidies.
Longer-term Actions:
• Assess appropriateness of depreciation recovery lives based on the economic useful life of the
investment,factoring the potential for disruptive loss of customers;
• Consider a stranded cost charge in all states to be paid by DER and fully departing customers to
recognize the portion of investment deemed stranded as customers depart;
• Consider a customer advance in aid of construction in all states to recover upfront the cost of adding •
new customers and, thus,mitigate future stranded cost risk;
• Apply more stringent capital expenditure evaluation tools to factor-in potential investment that may
be subject to stranded cost risk,including the potential to recover such investment through a
customer hook-up charge or over a shorter depreciable life;
• Identify new business models and services that can be provided by electric utilities in all states to
customers in order to recover lost margin while providing a valuable customer service—this was a
key factor in the survival of the incumbent telephone players post deregulation;and
• Factor the threat of disruptive forces in the requested cost of capital being sought.
Investors have no desire to sit by and watch as disruptive forces slice away at the value and financial
prospects of their investment. While the utility sector provides an important public good for customers,
utilities and financial managers of investments have a fiduciary responsibility to protect the value of invested
capital.Prompt action to mitigate lost revenue,while protecting customers from cross-subsidization better
aligns the interests of customers and investors.
As growth in earnings and value is a major component of equity investment returns,what will investors
expect to see as a strategic response from the industry to disruptive forces?The way to realize growth in
eamings is to develop profit streams to counterbalance the impact of disruptive forces. Examples of new
profit sources would include ownership of distributed resources with the receipt of an ongoing service fee or
rate basing the investment and financial incentives for utilities to encourage demand side/energy efficiency
benefits for customers.From an investor perspective,this may be easier said than done because the history of
the electric utility industry in achieving non-regulated profits/value creation streams has not been a pleasant
experience. So,investors will want to see very clear cut programs to capture value that are consistent with
the core strengths of utilities:ability to execute construction projects,to provide dependable service with •
high reliability,and to access relatively low-cost capital.
18 Edison Electric Institute
Disruptive Challenges:Financial Implications and Strategic Responses to a Changing Retail Electric Business
Summary
While the threat of disruptive forces on the utility industry has been limited to date,economic fundamentals
and public policies in place are likely to encourage significant future disruption to the utility business model.
Technology innovation and rate structures that encourage cross subsidization of DER and/or behavioral
modification by customers must be addressed quickly to mitigate further damage to the utility franchise and
to better align interests of all stakeholders.
Utility investors seek a return on investment that depends on the increase in the value of their investment
through growth in eamings and dividends.When customers have the opportunity to reduce their use of a
product or find another provider of such service,utility earnings growth is threatened.As this threat to
growth becomes more evident, investors will become less attracted to investments in the utility sector.This
will be manifested via a higher cost of capital and less capital available to be allocated to the sector.
Investors today appear confident in the utility regulatory model since the threat of disruptive forces has been
modest to date.However,the competitive economics of distributed energy resources,such as PV solar,have
improved significantly based on technology innovation and government incentives and subsidies,including
tax and tariff-shifting incentives.But with policies in place that encourage cross subsidization of proactive
customers,those not able or willing to respond to change will not be able to bear the responsibility left
behind by proactive DER participating customers.It should not be left to the utility investor to bear the cost
of these subsidies and the threat to their investment value.
This paper encourages an immediate focus on revising state and federal policies that do not align the interests
• of customers and investors,particularly revising utility tariff structures in order to eliminate cross subsidies
(by non-DER participants)and utility investor cost-recovery uncertainties. In addition, utilities and
stakeholders must develop policies and strategies to reduce the risk of ongoing customer disruption,
including assessing business models where utilities can add value to customers and investors by providing
new services.
While the pace of disruption cannot be predicted,the mere fact that we are seeing the beginning of customer
disruption and that there is a large universe of companies pursuing this opportunity highlight the importance
of proactive and timely planning to address these challenges early on so that uneconomic dismption does not
proceed further. Ultimately,all stakeholders must embrace change in technology and business models in
order to maintain a viable utility industry.
•
Edison Electric Institute 19
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E
ITown of Reading
16 Lowell Street
Reading, MA 01867-2685
FAX: (781)942-9071
Email:townmanager@cl.reading.ma.us TOWN MANAGER
Website: www.readingma.gov (781)942-9043
April 10, 2013
Phil Pacino, Chairman
Reading Municipal Light Board
230 Ash Street
Reading MA 01867
Re:Appointment of Interim General Manager
Dear Mr. Pacino:
This letter to the Reading Municipal Light Board is to bring to the Board's attention my concern
about the validity of votes taken by the RMLB on March 27, 2013 related to the Interim General
i` Manager's position.
`E►- On February 20, 2013, three members of the RMLB met and discussed the appointment of an
Interim General Manager of the RMLD until such time as a permanent replacement to retired
GM Vinnie Cameron can be appointed. Mr. Soli made a motion that Rhe RMLD Board of
Commissioners pursuant to Commonwealth of Massachusetts General Laws Chapter 164,
Section 56 appoint the troika of Bob Fournier, Jane Parenteau, and Kevin Sullivan to the
position of Interim General Manager.' The motion was defeated by a vote of 1-2-0. Ms. West
then made a motion that 'the RMLD Board of Commissioners pursuant to Commonwealth of
Massachusetts General Laws Chapter 164, Section 56 appoint Kevin Sullivan to the position of
Interim General Manager' and that motion was approved on a vote of 3-0-0.
On March 27, 2013, at the end of the meeting, the RMLB entered into discussion about the
Interim General Manager's position, even though that item was not on the agenda. With little
debate, the RMLB considered a motion by Ms. Snyder that 'the RMLD Board of Commissioners
pursuant to Commonwealth of Massachusetts General Laws Chapter 164, Section 56 appoint
senior staff on a rotating basis to the position of Interim General Manager with Mr. Sullivan and
Ms. Parenteau in those roles, and that Ms. Parenteau be appointed for the 3 month period
starting April 1 to May 1." The motion was approved by a vote of 3-0-1 (the motion was
amended to provide an April 15 start date.)
There are two concerns with the process that resulted in this action, and in consultation with
Town Counsel, I believe that the March 27, 2013 motion on this matter is null and void.
1. The motion on March 27 was virtually the same as the motion of February 20 that failed.
,- Under Roberts Rules of Order, the action on March 27 would be considered a
reconsideration. There was no motion to reconsider. A motion to reconsider must be
made by someone on the prevailing side of the initial vote (Mr. Pacino or Ms. West) and
the motion to reconsider takes a 2/3 vote.
2. Of greater concern is that this action was not taken in accordance with Section 3-5 of the
Reading Home Rule Charter. The 3r0 paragraph reads: "The Municipal Light Board shall
hire the General Manager of the Reading Municipal Light Department and set his
compensation; the General Manager shall serve at the pleasure of the Board and may
be removed by vote of a majority of the entire Board after notice and headna'There is
no evidence of any notice or hearing. The appointment of the Interim General Manager
on February 20 was done under the section of the MGL that addresses the appointment
of General Managers — there is no separate section that deals with an Interim General
Managers. Therefore the action of the RMLB on March 27 was to remove the (Interim)
General Manager who was appointed on February 20, and the process Included in the
Charter was not followed.
My concern is not whether the RMLD could take the action that they did on March 27, but that
they did not follow the process required by Charter.
I therefore ask that the RMLB acknowledge that their decision on March 27 is not legal and that
the action of March 27 be declared by the Board to be void. If you choose to rotate the Interim
General Manager position, I request that you do so after notice to the existing Interim General
Manager, and a hearing on his removal from that position.
Thank you for your attention.
,noerely,
I
Peter 1. Hechenbleikner
Town Manager
cc: Board of Selectmen
Town Counsel