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HomeMy WebLinkAbout2017-09-27 RMLD Payment to the Town of Reading Subcommittee Minutes OFR O' ,. Town of Reading N ' P Meeting Minutes R E-C `.`V! J6J9r IN(ORQO�P i\E..1"�t S 3 Y;A, Board - Committee - Commission - Council: 2010 MAR 20 AM 9: 35 Payment To The Town Of Reading Sub- Committee Date: 2017-09-27 Time: 6:00 PM Building: Reading Municipal Light Building Location: General Managers Conference Room Address: 230 Ash Street Session: Open Session Purpose: General Business Version: Final Attendees: Members - Present: Philip B. Pacino, Chair, RMLD Board of Commissioners John Stempeck, Commissioner, RMLD Board of Commissioners George Hooper, Chair, Citizens' Advisory Board Neil Cohen, Member, Citizens' Advisory Board Dan Ensminger, Secretary, Reading Board of Selectmen Members - Not Present: Others Present: Town of Reading: Bob LeLacheur, Reading Town Manager RMLD Staff: Coleen O'Brien, General Manager Tracy Schultz, Executive Assistant Minutes Respectfully Submitted By: Philip B. Pacino, Secretary Pro Tem Topics of Discussion: Call Meeting to Order Chair Pacino called the meeting to order and had each attendee introduce him or herself. Presentation on RMLD Financial Status Chair Pacino announced that some attendees may have seen a previous presentation relative to the payment to the Town of Reading. However, this version of the presentation contains real numbers rather than estimates. Chair Pacino explained that RMLD's financial structure is based upon an actual budget that the Commission has voted for the current fiscal year, which ends in June. The RMLD budget includes power costs, operating costs, and the depreciation fund (which goes toward capital funding). These are taken out of the $65 million generated by rates. From these come the above the line payment, that is made to the four towns and was put in place by the 20 Year Agreement. It's two percent of the net plant, and is distributed among the four towns based on the previous year's usage. The RMLD is looking to replace the Wilmington substation because it is well beyond its useful life. Chair Pacino stated that RMLD anticipates the cost to be about $5 to $7 million to replace the station, either at a new location or its current site. Because of the two percent, that eight percent will then go up and there will potentially be more revenue for the towns. Where does the eight percent go? It is the return on investment to payment to the Town of Reading, some of it pays for loss disposal, and then it goes into the capital fund. That leaves a bottom line of Page 1 1 Presentation on RMLD Financial Status $1,064,622. That is the contingency fund for RMLD to use in the event that something goes wrong. Fuel costs are a pass through, if fuel costs for one month were more than we were taking in, then we would look to the bottom line for funds. If, at some point, there is surplus revenue, it is the Board's intent to put it against the OPEB liability. Mr. Hooper asked if the $4.3 million depreciation is added to the capital funding from the 8 percent of $2.5 million? Chair Pacino explained that $7.6 million has been set for the Capital Budget. The $4.3 million depreciation fund is three percent of plant that we're allowed under Chapter 164. From eight percent you saw $2.5 million and $650,000 from 'Other' (construction revenue).The net of$174,000 will be paid from existing funds. Mr. Ensminger asked if the eight percent is a stream of money. Chair Pacino answered that the eight percent is what RMLD is allowed to earn under net plant, by law, per court ruling DPU 85- 121. Mr. Ensminger asked who pays the eight percent to RMLD? Chair Pacino answered that it comes from the rates. Mr. LeLacheur asked, aside from items like substations, which are unusual, does this change much year-to-year? Is this wildly volatile or is this typical? Ms. O'Brien replied that since she has been at RMLD they've been putting $4.3 million in the depreciation fund and spending upwards of $10 million on capital improvements for the last several years to make up for system maintenance issues. We've maintained our substations. Substation 5 in Wilmington has been band aided. Now we're looking to replace it. At some point, probably within the next five years, we should be in better position in terms of mesh system integration and maintenance. Mr. LeLacheur then asked about the volatility of power costs as a percent of the rate. Ms. O'Brien answered it's typically 80 percent. Chair Pacino remarked that the cost of power is going up next year. Chair Pacino stated that technology is coming along that is going to affect our topline. Solar can lead to a one to three percent decrease in load. Mr. LeLacheur said that he knows a couple of years ago RMLD remarked about the challenge of selling enough power to cover fixed costs. The Town has a similar backdrop with water. Mr. Hooper remarked on the financial impact of energy efficiency and conservation. Ms. O'Brien stated that RMLD has a Strategy Committee. RMLD is speaking with different municipals for ideas on how to make revenue. Chair Pacino stated that based upon the June 30, 2017 audit, RMLD is in a $1.4 million ending net position. Power commitments are $1.2 million. Pension liability is $8.8 million. OPEB liability is $5.8 .million. Commitments to MMWEC are $1.6 million. That equals a negative $14.2 million. Chair Pacino then remarked on the need to provide reliability for all customers and to keep rates low enough for economic development. If the subcommittee comes to an impasse, the Department will pay for a facilitator, per the 1998 agreement. History of Return on Investment Payments to the Town of Reading Chair Pacino stated that in the earlier years, the payment was about 2.5 percent. It was up to four percent, but beginning in 2008 it went down due to the recession. Opportunities for Additional Revenue Streams Chair Pacino stated that the Board is looking at other revenue streams. Chair Pacino explained that the Board recognizes that as technology changes, there may be less load, and less revenue. The Board had a discussion on fiber yesterday evening. Chair Pacino asked Mr. Stempeck to continue speaking about possible sources of revenue. Mr. Stempeck stated that the Board considered what RMLD could offer through competencies that are here and what could be acquired. One of these is Community Solar. Instead of bundling services with all the electrical work that we do for industrial and commercial customers, breaking those out and charging for them independently was discussed. Ms. O'Brien mentioned Page 1 2 Opportunities for Additional Revenue Streams that.there may be a law regarding contracting out municipal employees. Mr. Stempeck stated that there are benchmarks and examples from other utilities across the country to consider. There's internet and fiber: RMLD is already making money from fiber but we may possibly be able to get more. Mr. Stempeck also stated RMLD could solicit business from other Towns and try to entice large customers to move into the service territory due to RMLD's low rates. Mr. Ensminger added that Reading also has low commercial and industrial property tax rates. Mr. Stempeck stated that electric vehicles are considered an opportunity, because all projections for the next ten to twenty years show their sales increasing exponentially. If this is accurate it will be a source of electric revenue. Costs will also go up, but it's a benefit to RMLD as a provider. However, this doesn't solve near-term issues. Increasing .our assets by building substations and other things allows us to generate more in the eight percent. Regarding raising the rates, RMLD has a charter that says that we provide the lowest rates among the contiguous towns. Mr. LeLacheur stated that the Town and RMLD both need to create revenues as is possible. Mr. Stempeck replied that we're trying to minimize the decrease to our revenue stream due to the technology that has come to pass. There have been major changes. Electricity is becoming much more efficiently used. We're on a downward track and we want to get it back up. Mr. LeLacheur said that he assumes that's an industry thing. Mr. Hooper stated that,yes, it's across the industry. Mr. LeLacheur stated that he regularly meets with the three town managers/administrators in the service territory and each of those communities is making a big push for economic development.The issue is regularly discussed. RMLD should be at the table at some point, since the Towns are marketing the electricity as a competitive advantage. RMLD should speak with the Town leaders. Chair Pacino directed the attendees' attention back to his presentation and referred to the LaCapra Study performed in 1994. In the Executive Summary it asks, 'what is a fair and equitable return to the Town of Reading?' It would be reasonable that the return to the Town be evaluated according to a formula for payment'. The payment was then set for 1997, and then suggested every year by CPI, because no one ever came up with a better formula. Chairman Pacino stated that he has talked to at least six selectmen in the past about having this Committee meet. Mr. Ensminger said that the original impetus for this meeting was the instructional motion at the April Town Meeting, which in its original form had the clause "consider the sale of the RMLD." It was amended out. The clear intent then was to follow up with this Committee, as per the 1998 CAB minutes, 'to mutually recommend a formula for a payment to the Town of Reading.' Mr. Ensminger clarified that today is the first day that this Committee has ever met. Discussion and Thoughts on Return on Investment Payments to the Town of Reading Chair Pacino stated that there is one comment that he wants to make about the Town Meeting. A comment was made that the RMLD is an ATM on Ash Street; Chair Pacino felt that this was very damaging and very offensive. Mr. Ensminger stated that was one individual. Mr. LeLacheur asked, forgetting the amount of the payment, how important is the predictability of the payment? Does it matter that you can't perfectly forecast it or is the payment to the Town a small drop in the bucket? Ms. O'Brien answered that putting aside that it's a voluntary payment, it's accounted for in the budget; we're not supposed to set the rates to come up with it. If we had a catastrophe we wouldn't be able to pay it. It comes out of the eight percent. Based on the numbers we have today, making the payment is doable. We're trying to fix the entire electric system, get everything back on track, be competitive, meet the future, revitalize revenue, pay the Page 1 3 Discussion and Thoughts on Return on Investment Payments to the Town of Reading payments, and balance it without putting a burden on the rate payers or incurring debt. So for it seems to be working. Mr. LeLacheur stated that from his perspective, the Town's budget consists of 30-line items of revenue in any given year. Forgetting the magnitude of what it is, the RMLD payment is lagging behind most revenues and expenses and so it stands out. Mr. LeLacheur stated that this is seen as an unpredictable revenue, especially comparted to property taxes under Prop 2-1/2. Ms. O'Brien stated that in the world of public power, in lieu of tax payments are typically below the line, because it's surplus. There's benchmarked ways to calculate it. They can be a fixed amount. In the American Public Power Association calculations, given as example; it's two percent of kWh sales or 2.5 percent of net plant. kWh sales are fluctuating and going down. If the formula were to be based on plant and then plant flattened out, would we meet again to change the formula? The point being is there is no sure predictability on electric calculations but that money has to correlate with some benchmark point indicating the health of the utility. Mr. Stempeck stated that people don't understand the magnitude of the issue. There are four towns involved. If we lose our main customer it's a real threat. Mr. LeLacheur said that the average Reading person would say you're in very good financial shape and in an industry that's growing. The reality is that it's declining. Ms. O'Brien had mentioned that growth was flat at the fall Town Meeting. Mr. Stempeck said that the reason RMLD obtains its favorable rates is that it serves four towns and can buy in quantity. Mr. Ensminger stated that one way to address concerns relative to this, is to have a predictable formula or a fixed number index to show the Finance Committee. The CPI has varied from less than one percent to more than four percent over the last seventeen years. Mr. LeLacheur stated that he thinks that the real issue is perception, not financial. The Finance Committee would be thrilled if they could get a floor, so every year would be no less than x amount.That would add predictability. Most of the Town's revenues are predictable. Mr. Ensminger said that a fixed formula for the Payment to the Town of Reading would give fixed predictability on the amounts each year added to RMLD's capital funding. It would benefit both sides. Mr.Stempeck stated that if RMLD were to consider that, obviously the four towns would have to be involved as well,since this affects all of them. Mr. LeLacheur said that this issue is as much about marketing as it is finance. The Finance Committee thinks of the rate of change. Mr. Ensminger asked Mr. LeLacheur when the payment amount is determined. Mr. LeLacheur replied that the CPI becomes available in April or May, and then he sends an e-mail to RMLD in May to confirm. Mr. Stempeck asked if the Town had a number in mind as their floor. Mr. LeLacheur asked if changing the formula is a simple vote of the CAB. Chair Pacino replied that under Chapter 164 the Commission has sole responsibility for the bottom line, but it would be ill-conceived not to listen to the recommendations of the CAB. That's why the CAB was created under the Twenty- Year Agreement. Mr. LeLacheur asked when the current agreement is good through. Mr. Hooper explained that it is renewed every ten years, it is coming up in the next two years. Page 14 Discussion and Thoughts on Return on Investment Payments to the Town of Reading Mr. LeLacheur asked if there was any possibility that RMLD could add to its service territory. Ms. O'Brien explained that it's hard for a town to come up with the capital that they would need to buy the equipment from Eversource. We have power supply entitlements because we were not deregulated. Eversource purchases every six months. You would have to buy all the electric infrastructure, and Investor Owned Utilities typically would not agree to that. Mr. Ensminger asked Chair Pacino how he sees this meeting going forward. Chair Pacino responded that there needs to be discussion amongst each of our respective Boards and having a discussion as to what the best course of action is. Mr. Ensminger asked how often do you think that this group should meet? Chair Pacino stated that he could always call a special meeting of the Commission to discuss. It's more important for the CAB to meet. Mr. LeLacheur stated that he and Mr. Ensminger have a responsibility to report at the November Town Meeting, even if it's just that these meetings are being held. Ms. O'Brien asked if tax revenue stays consistent. Mr. LeLacheur said that the property tax is two and a half percent. Additionally, there is a certain amount of new growth that is generally predictable,which brings it to three percent. Ms. O'Brien asked if there has ever been a time where it has been unpredictable. Mr. LeLacheur answered: never in a bad way.The two and a half is guaranteed. Mr. Hooper asked how the commercial property tax rate compares to the residential in Reading. Mr. Ensminger answered that it's the same. Mr. LeLacheur offered to send an economic development report that compares Reading to its twenty-five peer communities. Mr. LeLacheur stated that if there was a Town Meeting tomorrow, a Selectman could stand up and feel comfortable stating that the Town and RMLD are making good progress. In terms of money both are not that far apart. However, Mr. LeLacheur said he doesn't know how to dispel the myth that RMLD is financially lucrative. Ms. O'Brien explained most utilities have contingencies. We can't get a line of credit and we can't go directly to bond. It costs more than $50,000 a week for a mobile substation if one of our substations went down. For a worst-case scenario, you need to have at least $15 or $20 million just sitting in the bank for infrastructure contingencies. If you lose a substation you're going to go through $10 million quickly. Chair Pacino stated that there has previously been a mandate that the RMLD and Finance Committee meet every year. This has not happened, and should be an annual occurrence. Ms. O'Brien suggested having the Finance Committee come to the next Sub-Committee meeting and have Chair Pacino do the same presentation as this evening. Chair Pacino offered to go to them. Mr. LeLacheur said he'll ask them. Mr. LeLacheur added that he thinks the most important message to convey is that the Town isn't looking to empty the RMLD like a piggy bank. Mr. Hooper said that it's the same thing with the general fund in Wilmington. People are looking to spend it and throw it back into the tax base. Mr. LeLacheur stated that Reading just performed a survey. Out of 17,000 voters, 2,000 people responded. The financial awareness of how the town is ruri is somewhat low and that's a hard thing to bridge. With all the technology out there, it becomes difficult to get facts out once opinions are already out. Part of the solution is education for those who want it. Page 1 5 Discussion and Thoughts on Return on Investment Payments to the Town of Reading Ms. O'Brien asked why the CPI was picked. Mr. Stempeck stated that it is a well-recognized benchmark that is independently reported. Chair Pacino explained that before it was whatever the Department decided to do. Mr. LeLacheur said it's a good idea not to have it be the least bit discretionary. Chair Pacino stated that was the problem. Mr. LeLacheur stated he will broach the subject of a meeting with the Finance Committee at a later date. Mr. Stempeck stated that the CAB needs to be aware of the Sub-Committee meeting and discuss with the Board. Mr. Stempeck said that RMLD is a state mandated entity that must run. Mr. Stempeck said he doesn't even think you could sell it if you wanted to, because the sale would have to be in the best interest of the ratepayers. Chair Pacino said it is tough to take over another system due to existing power contracts. That was the issue with the Wilmington contracts. Mr. Stempeck stated that he did a search nationwide on whether any municipals have been sold or spun off and couldn't find any. Chair Pacino mentioned when Raynham was trying to withdraw its electric service from Taunton. That case went to court for thirteen years before they finally settled, and they're still together. Next Steps Mr. Hooper stated that the next CAB meeting is on the 25th of October. Chair Pacino could come and make the some presentation. Chair Pacino agreed, and stated after the CAB meeting the Sub-Committee will meet again. Adjournment Mr.Stempeck made a motion, seconded by Mr. Hooper, to adjourn. Motion Carried: 5:0:0 A true c he Sub-Committee on the Payment to the Town of Reading minutes, as ap r b ajority of the Committee. i p B. ino,Secretary Pro Tem -Co mittee on the Payment to the Town of Reading Page 16 ReadingMunicipalLight Department POWERRMLD RELIABLE • ' GENERATIONS i:� RMLD Financial Structure Rates $65,901 ,596 Minus Power Cost (38,088,975) Minus Operating Costs ( 16,303,061 ) Minus Depreciation Fund (4,362,000) Other 487,500 ----------------------------------- Net 7,635,060 Above the line payments ( 1 ,500,F000) ---------------------------------- Rate of Return 8% of net plant 6, 135,060 Return on Investment Payment to Town of Reading (2..419.,770) Loss Disposal ( 160.,668) Added to capital funding (2,,500,,000) ----------------------------------- Available to be Used by the Dept for various purposes 1 ,064,622 2 RMLD Capital Fundinq Capital budget $7,,686,,000 From Depreciation Fund (4,362,000) Capital funding from 8% (2..500..000) Other (650.,000) ----------------------------------- Net 174,000 Funded from existing fund ( 174,,000) ----------------------------------- Net - 0 - 3 8% RMLD Bottom Line Rate of 'Return 8% of net plant 6, 135,060 Return on Investment Payment to Town of Reading (2.,419.,770) Loss Disposal ( 160,668) Added to capital funding (2,.500,000) ----------------------------------- Available to be Used by the Dept. for various purposes 1 ,064,622 4 Financial Equity As of June 30, 2016 Ending Net Position $ 104.,000,,000 Power Supply Commitments ( 102,000'.000) Pension Liability (8..800,,000) O P EB (5..800.,000) MMWEC ( 1 ,600,000) Net $( 14,.200,000) Payments to Town of Reading Above the line $ 290,078 Rate of Return 2,370,445 5 Revenue Issues Reliability of electrical service to all customers Economic Development Subcommittee on Payment to the Town of Reading: • 2 members of RMLD Commission • 1 member of Reading Board of Selectmen • 2 members of the CAB Subcommittee can engage a facilitator 6