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HomeMy WebLinkAbout2019-12-02 RMLD Board of Commissioners Minutes j- EG -(V 'E1) K Town of Reading Tn'NNgC�E`AA F Meeting Minutes i021 Jar 13 hM 9� 32 Board -committee-commission - council: RMLD Board of Commissioners Date: 2019-12-2 Time: 06:30 PM Building: Reading Municipal Light Building Location: Winfred Spurr Audio Visual Room Address: 230 Ash Street Session: Open Session Purpose: General Business Version: Final Attendees: Members- Present: David Talbot, Chair; John Stempeck, Vice Chair; David Hennessy, Commissioner; Thomas O'Rourke, Commissioner; Philip B. Pacino, Commissioner Members - Not Present: others Present: RMLD Staff: Coleen O'Brien, General Manager; Hamid Jaffart, Director of Engineering and Operations; Charles Underhill, Director of Integrated Resources; Wendy Marklewlcz, Director of Business, Finance and Utility Technology; Tracy Schultz, Executive Assistant Vivek Soni, Citizens' Advisory Board Mark Dockser, Uasion, Financial Committee John Tzimorangas, President, Energy New England Minutes Respectfully Submitted By: David Hennessy, Secretary Pro Tem Topics of Discussion: Coll Meeting to Order Chair Talbot called the meeting to order and read RMLD's Code of Conduct. Chair Talbot announced that the meeting is being videotaped at the RMLD office at 230 Ash Street, far distribution to the community television stations in North Reading, Lynnfield, and Wilmington. Chair Talbot asked Mr. Hennessy to serve as Board Secretary. Public Comment There was no public comment. Annual Town Payment Study Presentation Chair Talbot introduced Mr.Tzimorangas, President of Energy New England (ENE) and explained that it is a coop of municipal right plants, of which RMLD is a member/co-owner. Mr. Tzimorangas stated that ENE was asked by RMLD and the Commissioners to do a study an the Town payment methodology.The current methodology,the methodologies of other light plants (troth in and outside of Massachusetts) were looked at.This is the third such study that ENE has done in the last three years.Mr.Tzimorangas highlighted the uniqueness of municipal right plants LLD'and s c rra ent past,futu a finnaanc ls anduthefand hthe istory of the payment} To owMLPS in the lt looked 1 Town back l 97, RM Po4e 1 1 Annual Town Payment Study PrnenfaBon when the consumer price index (CPI) formula was implemented. ENE sent out a survey to Massachusetts MLPs: it was difficult to get a sizable response. 17 respondents were fairly open with information and ENE had information available about others. ENE also looked of APPA data, which represents MLPs on the national level. There ore approximately 2,200 systems but their annual review is for a year back: 2017's numbers were avalable. Only 283 municipals responded to that survey: that's 12 percent. ENE looked at RMLD's financial obligations such as the pension, OPEB, and operating reserves. Chair Talbot mentioned that a freedom of Information request could be sent to the MLPs that did not respond. Chair Talbot mentioned Peabody, whose payment is lower but who undertakes certain services for the town. Mr. Tamorangas stated there is line value for those services when he was General Manager of Hingham. Chair Talbot mentioned that Braintree does IT for the Town. Mr. Tamorangas stated that's not included in their million$1.5 million payment. Mr.Tamorangas continued with his presentation,stating that kWh sales seem to be the preferred measure of the utility business. Out of the 17 respondents, ten used mils per kWh and four used net plant times tax rote. All the systems surveyed reported flat or declining sales. RMLD's current town payment Is based on CPI. CPI is a measure of economic indicators, labor and business:it's not o measure of the utility business itself. Mr. Tamorangas stated he didn't find any other utility using that formula. RMLD has two types of payments: a net plant payment that goes to all four towns which totaled about$1.6 million in 2019, and the annual payment to the Town of Reading for$2.149 million.At almost$4 million in combined payments,that's by far the longest payment in Massachusetts. RMLD's kWh sales have been declining over the last four years.Energy efficiency and solar installs have been the biggest drivers of declining sales. Reading's solar has tripled from 2015 to 2018. Mr. Tamorangas explained that ENE's study took a holistic approach and considered the pension, post-retirement medical, operating reserves, capital expenses, and rising transmission costs.There's a shift in power supply portfolios towards renewables and green energy, which costs more than standard power. ENE's recommendation for the Board to consider is to move away from the current formula. ENE's suggestion is to move to mils per kWh and consider a five-year transition period. The average is 2.5 mils per kWh,The current amount,If you take the payment to the Town of Reading and divide it by kWh sold, is 3.588. It's well above the average. RMLD could transition to 3 mils and still be comfortable. Mr. Tamorangas stated while transitioning, RMLD could establish a floor and tell the Town it would get no less than a certain amount. Mr. Tamorangas discussed RMLD's projected sales and stated that when Ms. O'Brien did a study about a year-anda-half ago, she showed sales declining about half a percent a year. The reason ENE's study shows flat sales because of the advent of electric vehicles and electric vehicle chargers. Electrification might add sales. Additionally, there are some large apartment complexes being built and the economy is good right now. Mr. Tamorangas then discussed the potential proposal of using the 3 mils formula. Mr. Soni asked about the current 3.588 mils number. He was getting 3.63 when he did the moth. Mr. Tamorangas said he would review the numbers. Mr. Tamorangas stated that part of the payments to the four towns is based on net plant:as net plant increases,so will that portion.That portion is not reflected in the presentation. The Board expressed their wish for a projected total of the payments. Ms. O'Brien stated that she is hopeful that sales will increase. Mr. Stempeck added that the previous payment model is not sustainable. Ms. O'Brien stated that many utilities use 2.5 mils because it seems to tolerate the ups and downs of the utility business. Mr. Tamorangas stated that some municipals don't pay anything because payment is voluntary. Some are also governed very differently and are governed by the Town Manager and are not considered an entity separate from the Town. Mr. Tamorangas explained that if RMLD were to keep its payment to the Town the some and keep its rate of return at eight percent, it would need to raise rates to fund capital improvements and other obligations (such as pensions and OPEB). Mr. Tamorangas expressed concern that the current payments don't leave a lot left for other obligations. Mr. Dockser stated that the OPEB and pension are scheduled to be fully funded in the not-too distant future. Mr. Tamorangas replied that OPEB has no end date. Mr. Dockser stated that municipatifies such as Shrewsbury and Hudson don't seem as formulaic and asked for an explanation of why their payments are dramatically higher.Mr.Tamorangas replied that ftW 12 Annual Town Payment Study Presentation Hudson's payment is negotiated.He is unsure how Shrewsbury's payment amount is determined. Mr. Tzimorangas added that Hudson is 90 percent nuclear. their rates are very stable. Mr. Stempeck expressed the need to ensure that the payment doesn't become an indirect tax. Mr. Dockser asked what the order of magnitude is for the net plant change and stated that the number is shocking. Mr. Stempeck replied that historically maintenance was lacking on RMLD's system for many years.RMLD needs to be operated as a business and can't lust keep paying out large amounts of money to the Town. RMLD needs to ensure the system stays viable. Mr. O'Rourke mentioned that RMLD services multiple towns. Mr. Trimorangas confirmed that there are very few municipal light plants that serve more than one town and for the ones that do serve multiple towns,the other municipals only receive service:they do not receive arty pay Establish process and timeline for determining Town Payment formula Chair Talbot asked Ms. O'Brien to prepare a presentation showing the total payment amounts for the different scenarios. The Board is responsible for making the decision. The Board would consider the scenarios and then possibly vote on a recommendation.Then that would go to the CAB. Input can be provided by concerned parties over a one to two-month period. Mr. Stempeck suggested a joint session with the CAB. Chair Talbot stated he wants the Board to make a recommendation and then have the CAB discuss if. Chair Talbot stated that after the recommendation is made, input can be solicited. It may not be the final method that is implemented but it will be a starting point far discussion. Ms. O'Brien clarified that the chart will combine the above and below the line payments and will show the full effect with the increase in the capital outlay and if sales go up, down, or remain flat. Chair Talbot affirmed. Mr. Dockser asked when the Select Board would be involved. Chair Talbot stated that this has been being discussed for three years, The Board of Commissioners will put something on table. The Board then needs to hear from the CAB and representatives of the four towns. Mr. Dockser and Mr.Trimorangas exited the meeting. Mr.Pocino added that the CPI payment formula is not a part of the Twenty-Year Agreement. Review of the General Manager a. Discussion of CY 2020 Goals and Objectives Chair Talbot stated this item is to discuss potential Board contributions to determining goals for the General Manager. Mr.Stempeck stated that this will be discussed at a future meeting.Chair Talbot explained that if's in the Board's mission statement to come up with goals. Mr. Stempeck suggested doing Ms. O'Brien's January evaluation first. Mr. Pacino stated that the Board should determine the new GM evaluation process before focusing on goals. Chair Talbot asked that each Board member think of three goals and send their suggestions to him for discussion at the next meeting. Is. RevWon to GM Pedormcnce Evaluation Methodology Vice Chair Stempeck asked Mr. Hennessy for some examples of the proposed evaluation methodology. Ms. O'Brien stated that when she came to RMLD there was not a strategic plan or a budget process. Ms. O'Brien stated that everything she has designed encompass what the Commissioners are now talking about. When the department heads make their monthly presentations to the Board, they are reporting on what Ms. O'Brien is managing for that month. There's already an ongoing process of evaluation that happens every month. Mr. Hennessy stated that is the way the Board evaluates RMLD as a whole, but what he is proposing is instead of doing an annual General Manager review, the Board will do a quarterly check-in. Chair Talbot mentioned externalities such as the RMLD campus and legislation that go beyond long- term plans. Ms. O'Brien answered that she has been rolling those issues into the budget.A lot of what the Board is asking is already being done. Vice Chair Stempeck stated that there will be three or four strategic items that will be addressed on a quarterly basis.Mr. O'Rourke added that the goal setting will be a collaborative process. nape 1 3 Review policy on handling of eommil lona quedions on MP and Payron Chair Talbot asked if the Commissioners want to keep reviewing the warrants. Mr. Stempack stated in the past there were concerns about staff competency: that's no longer the case. Mr. Pacino stated three commissioners used to be required to sign AP. It's a part of the internal controls. Ms. O'Brien stated that it serves the purpose of helping the Board to learn the business. Vice Chair Stempeck suggested tabling the issue. Chair Talbot stated if the practice is to continue language should be added to the Commissioners' job description and the full questions and answers should be included Board Back. Dlscusdon of RMLD overtime Chair Talbot explained that there have been some questions from Commissioners regarding the large amount of overtime that RMLD has been paying. Ms. O'Brien stated that overtime is pursuant to the collective bargaining agreements that are in place and the unions are responsible for keeping overtime lists.These lists control how overtime is allocated to employees. There appears to be a misconnection of the roles and responsibilities regarding the determination of eligibility and the management of overtime. Overtime needs to be provided and used on a transparent basis. Management has the right to ensure that the process and procedure for determining when overtime is needed, and the distribution of overtime, is fair. The RMLD is going to improve its payroll software system. Reducing pay codes and implementing procedures and policies to control overtime is critical. Ms. O'Brien stated that subject to the Board's agreement she will seek outside independent support to assist in ouditing and reconciling overtime payouts with union contract obligations. The outside consultant will be tasked with analyzing whether any overtime has been given to, or taken by, any RMLD employee that is not in accordance with union contracts. Recommendations will be sought regarding consolidating pay codes, reducing software costs, and creating transparency. Ms. O'Brien stated that she would report back to the Board with the audit's findings. It was determined that the Board did not to vote.The Board members expressed their approval. Adjournment At 8:19 p.m., Mr. Hennessy made a motion, seconded by Mr. Stempeck, that the Board go into Executive Session to discuss confidential, competitively-sensitive or proprietary information in relation to making, selling, or d'ntitbufing electric power and energy and consider complaints brought against a public officer, employee, Stott member or Individual and return to Regular Session fa the sole purpose of adjournment. Roll call vote: Mr. Pacino:Aye:Mr. Hennessy:Aye, Mr.O'Rourke:Aye;Vice Chair Stempeck:Aye; Chair Talbot:Aye. Motion Carded 5:0:0 At 9:15 p.m. the Commission returned to regular session for the sole purpose of adjournment. Upon taking no further action, a motion was made by Mr. Pacino and seconded by Mr. Stempeck that the Commission adjourn the regular session.. Motion Carried 5:0:0 A true copy of the RMLD Board Of Commissioners minutes as approved by a majority of the Commission. David Hennessy,Secretary Pro Tem RMLD Board of Commissioners Page 14 SIGN-IN SHEET FOR THE Town of Reading Municipal Light Department Date:y E In NAME (Please print) ADDRESS TOWN Town of Reading Meeting Posting with Agenda Board -Commlltea- commission-Council: RMLD Board of Commissioners :513 YU9 27 AM 10 52 Date: 2019-12.02 Time: 6:30 PM Building: Reading Municipal Light Building Location: Winfred Spurr Audio Visual Room Address: 230 Ash Street Agenda: Purpose: General Business Meeting Celled By: David Talbot, Chair Notices and agendas are to be pasted 48 hours in advance of the meetings excluding Saturdays, Sundays and Legal Holidays. Please keep in mind the Town Clerk's hours of operation and make necessary arrangements to be sure your posting Is made In an adequate amount of time. A listing of topics that the chair reasonably anticipates will be discussed at the meeting must be on the agenda. All Meaning PoaWlgs must by submhtad M tread farms!,hoodwrhbnr nolloe we nut be accepted. Topin of Discussion: READING MUNICIPAL LIGHT DEPARTMENT BOARD OF COMMISSIONERS MEETING 290 Ash Sbaat Reading,MA 01867 December 2,3019 6:90 p.m.Regular Session 7:90 p.m.Exsculhm Session 1. Call Meeting to Order 2. Opening Remarks 3. Introductions 4. Public Comment • Public Comment • Citizens' Advisory Board • liaisons to RMLD Board 5. Approval of Board Minutes(Attachment I)-ACTION REM July 18,2019 and September 19,2019 Suaoested Motion:Move that the Board approve the meeting minutes of July 18,2019 and September 19,2DI9 on the recommendation of the General Manger. 6. Annual Town Payment Study Presentation (Attachment 2)-John TdmOmngas,President, Energy New England 7. Establish process and timeline far determining Town Payment formula Tds spmga rase Man Praprea In aEvanw am repreamd a Iminp a wpla ant Ne tlwr reugnady awtlpa[n rgl M gln at an Imaang.H.r ax agents gxs rot Mraoat,Hnlase all mamea a1iM may M taken UP m ma meeang. Papa I g Town of Reading 0 Meeting Porting with Agenda 8. Review of the General Manager a. Discussion of CY 2020 Goals and ObjectWes b. Revision to GM Performance Evaluation Methodology 9. Review policy on handling of commissioner cruesNom on A/P and Payroll 10. Discussion of WILD overtime 11. Executive Session--ACTION ITEM Suaaested Motion: Move that the Board go into Executive Session to discuss confidential, competitively-sensitive or proprietary information In relation to making, selling, a distributing electric power and energy and consider comploints brought against a public officer, employee, staff member a individual and retum to Regular Session for the sale purpose of adjournment. 11.Adjoumment-ACTION REM 5uaaested Motion:Move to adjourn Regular Session. 'Executive Session is scheduled for 7:30 p.m.but may begin earlier or later. T 5 Apnea nes enn nWrea M Imn prtop"net tla t W rmooay r apxs win b dwrsses a'w meetlnp,HpwewrtM apma goes rKK nems uy Iname e2.rt whim a M Lebo up etina rrieepnp. np 12 READING MUNICIPAL LIGHT DEPARTMENT BOARD Of COMMISSIONERS MEETING Executive sedon 230 Ash sheet Reading,MA 01867 December 2,4019 7:30 p.m. 1. Call Meeting to Order-ACTION ITEM 2. Consider Complaints Brought Against a Public Employee 3. DPU Fling 4. Discussion S. Motion to Adjourn to Regular Session-ACTION ITEM READING MUNICIPAL LIGHT DEPARTMENT BOARD OF COMMISSIONERS REGULAR SESSION MONDAY, DECEMBER 2, 2019 APPROVAL OF BOARD MINUTES JULY 18, 2019 AND SEPTEMBER 19, 2019 ATTACHMENT 1 ANNUAL TOWN PAYEMENT STUDY ENERGY NEW ENGLAND ATTCHMENT 2 ENE eCRAFT Reading Municipal Light DeRartment Annual Town Payment Study The Reading Municipal Light Department(RMLD)asked Energy New England(ENE)to perform a study of the Annual Town Payment RMLD makes to the Town of Reading(and other towns). RMLD asked ENE to study its current methodology for the Annual Town Payment and determine the appropriateness of the level of the payment and the calculation used to determine the payment. Energy New England was also asked to make a recommendation to RMLD as to the calculation method of the Annual Town Payment going forward. Although most municipal electric utilities in Massachusetts serve the town in which it resides,the RMLD is unique since it serves four towns(Reading.Wilmington,Lynnfield and North Reading). What makes this arangement more unique is that the Town of Reading's electric sales compose approximately 21% of the total electric sales in the service territory with remainder of the sales coming from the outside towns. The RMLD makes an annual above the line expense payment to all four towns based on 2% of net plant payed out by load percentage of each of the towns,aside from the annual below the line voluntary payment to the Town of Reading. The other unique situation is that the rate payers in these towns are not the same as the taxpayer in the host community of the light department. There are only a few municipal electric systems in Massachusetts who serve multiple towns,none to the extent of RMLD and none that have agreements similar to RMLD and payments to other towns. This makes the 20-year agreements and "above the line" payments, a unique situation for RMLD, which must be taken into account when reviewing the potential options for annual town payment formulas. Therefore, when considering the annual payments, all forms of payments to the towns must be considered. A significant input to this study is the fact that the electric utility business has changed drastically over the last twenty years with the business model focus being on energy efficiency and conservation, customer owned generation and electrification (a nationwide push toward carbon free generation). This effort has spawned a business model in the electric utility industry that is inconsistent with conventional economic 1 + ENE DRAFT nerSy New England thought.These factors,along with the financial crisis in 2008,have led to declining sales in the electric utility industry. 1.0-Executive Summary The annual town payments are made by electric municipal utilities to the town where it resides and is treated in accounting terms as a voluntary "below the line" payment that comes from the Allowable Return on Equity as constituted by the Massachusetts Department of Public Utilities and Massachusetts General Laws-Chapter 164. Municipal electric utilities can also give additional payments or services to their towns such as discounted street lighting,tree trimming,or labor and materials supplied to the town for various projects,which can also be included in the total annual payment's calculation. Annual town payments also have several designations ranging from Return on Equity Payments, Town Payments and Payment in Lieu of Taxes (PILOT) among others. Regardless of the name of the annual town payment,it represents the financial benefit to the town for ownership of the municipal electric light plant and may also include covering the cost of support services (payroll, bill paying, human resources, etc.) performed by the town owning the municipal electric utility. There is no State statue requiring the municipal electric light departments to make these payments and the calculation used to determine the payments take on many forms, as will be discussed further in this report. There are a few methods used to make this determination and the local and national methods were reviewed. The following is an explanation of ENE's data collection,review of the respondent's data, analysis of the operating data, capital needs, RMLD annual payment history and a recommendation on a methodology on RMLD's future Annual Town Payment. 2.0-Initial Meeting As a matter of defining the ENE Scope of Work, ENE and the RMLD General Manager and Staff met to discuss the RMLD current voluntary Annual Town Payment methodology,its net plant calculation for all towns per DPU order,the budget projections for current and future state of kWh sales,the operation and capital budgets,their current liabilities and the future needs of the RMLD in order to maintain the system. These are 2 ENE Enegy New England all factors that help determine the health and stability of the organization and plays a factor into the methodology related to the annual town payments. RMLD provided the information on the items above for review. 3.11—Data Gathering.Review and Analy-sig Municipal electric utilities throughout Massachusetts were contacted by e-mail and asked to respond to a 2018 data request that included the following information. • Electric sales • Electric revenues • Number of customers • Peak demand • Number of employees • Annual Town Payment • Annual Town Payment calculation • Services supplied(electric,gas,water etc.) • Service territory in square miles ENE reviewed the data collected and developed a spreadsheet that includes the above listed operating data for the municipals who responded to the study in Table 1, Table 1 shows the town payment information the twenty-five responding utilities provided to ENE. Seventeen of the responding utilities have a formula in place to determine the annual town payment. Two utilities have a contract with their town and six utilities have no formal contract or formula in place. Table 1 Annual Rev. Annual kWh Ann.Town Pmt. Princeton Municipal Light Department $3,719,002 14,158,197 $0 Boylston Municipal light Department $4,129,978 32,248,264 $151000 Rowley Municipal Light Plant $7,200,000 49,514,742 $29,D42 Groton Electric Light Department $9,934,138 72,741,132 $32,720 Groveland Municipal Light Department $5,696,275 35,881,411 $35,000 Georgetown Municipal Light Department $7,940,419 48,851,623 $45,851 Ashbumham Municipal Light Plant $5,182,596 34,637,563 $69,275 Merrimac Municipal Light Department $5,029,340 28,212,233 $79,571 3 qj�ENEergy New England Middleton Municipal Electric Department $13,936,000 9,789,049 $176,100 North Attleborough Electric Department $33,399,000 227,867,000 $300,000 Hull Municipal Light Plant $8,298,731 50,918,038 $319,509 Ipswich Electric Light Department $17,000,000 110,000,000 $325,000 Marblehead Municipal Light Department $17,390,000 304,440,000 $330,000 Mansfield Municipal Electric Department $26,480,145 209,522,749 $354,850 Concord Municipal Light Plant $30,530,220 171,638,069 $452,000 Hingham Municipal Lighting Plant $26,018,304 201,632,234 $504,080 Belmont Municipal Light Department $24,862,172 125,598,043 $650,000 Danvers Electric Division $38,946,559 303,655,895 $758,900 Middleborough Gas&Electric Department $49,218,615 275,885,067 $817,040 Holyoke Gas&Electric Department $75,000,000 370,000,000 $1,083,320 Shrewsbury Electric&Cable Operations $32,129,248 288,749,998 $1,240,000 Braintree Electric Light Department $60,479,000 335,165,099 $1,500,000 Hudson Light&Power Department $24,658522 224,080,124 $2,060,728 Norwood Municipal Light Department $48,283,334 328,139,228 $2,905,963 Reading Municipal Light Department $91,822,764 675,536,970 $3,919,770 Table 2 shows a breakdown of the seventeen municipals who have formulas in place to determine the annual town payment. The formulas range from percentage of annual sales, unit amounts multiplied by the annual kWh sales, formulas based on electric municipal assets base and other formula-based payments. The data gathered in this study shows municipals electric departments that use a formula to determine their annual town payments favor a formula that includes energy sales multiplied by a mils per kWh rate. Table 2 Municipal Electric Department-Formula Breakdown Energy sales multiplied by mils per kWh 10 Net Assets multiplied by Tax Rate 3 Other formula 4 Formula based annual payments me very practical,since the payments are based on the performance of the municipal electric utility. Annual sales can be affected by several 4 qjENE JDzA 'r Energy New England factors including weather, local economic activity, commercial activity, and consumer spending trends, all of which can have both positive and negative effects on the annual sales. The energy efficiency trends by the utilities and the improved efficiency of equipment in the home and business have also contributed to a reduction in annual sales. In a study by the American Public Power Association (APPA), which represents 2,200 public power systems, 33% of the respondents to the annual survey about annual town payments, use a formula approach to determine thew payments. This survey is informative and interesting, but the caveat to the APPA report is that the systems in APPA all have very different governance structures and therefore the methods for calculating thew payments can differ greatly based on this governance. Even with that caveat,a third of the responding systems,used a formula for their calculation. Therefore, the responses to the data requested from the Massachusetts utilities carries more weight in this report,due to the similar nature of the governance of the utilities in Massachusetts. The use of the kWh sales formula makes sense for instance,if electric kWh sales increase 1% then the annual town payment will increase by its portion of the increase based on the formula. Both the municipal electric utility and the town share in the positive performance and health of the utility. Conversely,electric sales can decrease for the same reasons mentioned above and that decrease may also be reflected in a decrease in the annual town payment. It is critical to take the health and requirements of the light department into account, as the maintenance and upgrades of the system are important to the reliability of the system.This is funded by the revenue of the utility and hinges on kWh sales. Since the formula approach is based on kWh sales,an adjustment to the electric rates will have no effect on the Annual Town Payment other than possible price elasticity responses from the customer base. Another important factor effecting kWh sales is the business model that has emerged over the last fifteen years,which involves promoting energy conservation,evolving low energy appliances and lighting, along with customer owned -environmentally friendly generation. Electrification is an opportunity, due to the fuel switching availability, to increase kWh sales. 5 ENE L�` AFT Energy New England Energy efficient LED lighting uses about one-sixth the energy of traditional incandescent lighting. Home appliances (washer, dryer, ovens, air conditioning, water heaters, etc.) are all manufactured under energy efficiency guidelines. Commercial manufacturing applications have also embraced energy efficiency resulting in lowering unit pricing through lower electricity bills. Table 3—RMLlYs Annual Energy Sales shows the RMLUs annual kWh Was for the years 2015 through 2018 along with the percentage change for the years since 2015. The energy sales have decreased steadily from 2015 through 2018 with the overall cumulative decrease being-3.1%for the 2015 through 2018 timeframe. This is very consistent with the trend for most of the municipal utilities surveyed,who have seen very similar decreases in their annual sales. This can be traced to the items listed previously that have become a trend in the electric industry,with more efficient uses of electricity,driving down the kWh sales of electric utilities. Every year, more and more customers are installing solar energy installations at their homes and businesses which replace a portion of the energy that was once purchased from the electric utility. The result of this energy efficiency and eco-friendly customer owned generation is that the RMLD kWh sales have decreased steadily over the last three years. Table 3 RMLD Energy Sales(kWh) Year kWh Sales %Change 2015 689,722,742 2016 676,128,060 -1.019% 2017 675,536,970 -.0087% 2018 665,042,076 -1.554% The solar generation, as shown in Chart 1,within the RMLD customer base grew from 138,694 kWh in 2015 to 349,722 kWh in 2018,which is approximately 95%of the decrease 6 re qj ENE � � � : AFT Enema New England in sales during this timeframe. Customer owned generation is a large factor in RMIJYs recent decreasing sales of energy trend. This has been a significant trend in Massachusetts with other municipal utilities, as the State of Massachusetts has made great strides in solar installations for homeowners. Chart 1 RMLD kWh Solar Generated 1015.2018 SWAW BOOAW lmpm sWAW 1 saopm _ e Y .00aao MAW r }WAW WDAW \ d` OF JF J' ✓of �!' as• 74 .t M° .e t` 40 #* d' �' O 9' OF},� � .� .d The electric utility industry has embraced a different business model over the last fifteen years. Electric utilities are advocating,advancing and subsidizing programs that entice customers to purchase less electricity through the usage of energy efficient home appliances,low energy usage commercial processes and affordable solar generation. 7 ENE DRAFT Energy New England The RMLlys decreasing kWh sales are the result of energy efficiency measures it has seated and supported,therefore,annual expenditures need to be examined to see where the RMLD can offset the decreasein revenues due to its energy efficiency efforts, Chart 2-Annual Town Payments Over$5W OW, shows One municipal electric utilities from Table 1 that make Annual Town Payments over$500,000. ENE chose One$500,000 floor because many of the responding utilities are small and are likely not comparable to the RMLD's financial and operational structure. The RMLUs Annual Town Payment (above and below One line) of$3.92 million is the largest payment of the surveyed utilities with Norwood at$291 million being the next largest payment. Of the twenty-five responding utilities only ten municipals pay their towns more than $500,000. Hingham Municipal Light Plant, who pays$500,000 to the Town of Hingham,is at the bottom of Chart 2. Chart 2 Annual Town Payments over$500,000 Reading MunkJpal Light Department Norwood Munclpal Light Dperblent Hudwn Light&Power Depantnent Rx� Malntree Elactrk Light cepartment Shrewsbury Eletttic&Cable Oparatlom da r Holyoke Gas&Electrk Department a.ssrssa. Middleborough Gu&EleMk Department Damen EleMl,DMslon -•+tea+ BeImow MurMlial Light Department rte• Hingham MunkiPal Lighting Plant $D $I,oW,Ooo $2,00DpOo $3,wo," $C,M,M u Mnual Town Payment Table 4-RMLD Annual Revenues and Town Payments 2015-2018, shows the RMLD Reading Annual Town Payments and Annual Revenues. The table also shows One 8 + ENE DRAFT nerSy New England Annual Payment to the Town of Reading (not inclusive of the 2%net plant payment)as compared to the Annual Revenues. Table RMI D's Annual Revenues and Annual Town Payments 2015-2018 RMLD Below the Line Year Annual Revenue Annual Payment 2015 $83,985,195 $2,332,863 2016 $88,353,905 $2,370,445 2017 $91,822,764 $2,384,668 2018 $96,747,035 $2,419,770 In reviewing the data acquired from Tables 3 and 4, it is evident that RMLD had to increase its electric rates over the last five years to meet capital and operating expenses, which includes the Reading Annual Town Payment. The true annual town payments (above and below the line) would have to be increased from the $2.419 million listed above to the$3.919 million for the total actaul payments,which still comes from the same total annual revenue listed above,and is true for each prior years. As stated in the Executive Summary,the Annual Town Payment is paid from the RMLD's Allowable Return on Equity or Net Profit. The Allowable Return can be used to pay for capital additions, annual town payments or be retained earnings. Table 5-RMLD's Allowable Return and Annual Town Payments 2015-2018,shows the recent Allowable Return and the Annual Payments along with the percentage that represents Annual Town Payment as compared to the Allowable Return. 9 + ENEeSFr Table 5 RMLD's Allowable Return and Annual Town Payments 2015—201a Max.8% Year Allowable Return Annual Payment 2015 $3,241,276 $2,332,863 2016 $3,369,404 $2,370,445 2017 $4,472,650 $2,384,668 2018 $4,853,207 $2,419,770 It is evident that the Reading Annual Town Payment,coupled with the additional above the line payments, leaves a decreasing level of funds available for the other liabilities (Pension and OPEB payments,emergency and storm response)of the RMLD.Again,we would have to add the approximately, $1.5 million in annual payments to each of the 4 towns to the number listed above and further decrease the amount of funds available for capital and maintenance work on the system. The underlying issue in Table 5 is that the RMLD needs about an average of$8 million annually for capital additions and system improvements. According to Table 5,in 2015 and 2016 only about $1 million was left from the allowable return for capital improvements after making the Annual Town Payment, In 2017 and 2018, after a necessary electric rate increase, the net amount of money available for capital improvements increased to$2 million and$2.4 million,which still leaves a shortfall of$6 million. The detailed capital improvement plan over the next five years needs to be funded from the Depreciation fund and from operating income and as we can see in Table 5,there is a current shortfall when you include the annual payment. According to MGL Chapter 164,municipal electric utilities can depreciate their plant by 3% annually and this fund can be used for capital improvements. However, depleting this fund each year is not pendent for the financial health of the RMLD. 10 . Fr + ENE negy New England D 5.0 Financial Obtieations for RMLD A review of the current RMLD financial statements, capital plan,operating income and annual payment history,have led to a view that there is a financial convergence on the horizon. Even with a rate increase(s)for a period of time,this convergence continues to grow as an increasing concern. Add in the Pension and OPEB liabilities that exist for the RMLD, the rising cost of transmission and market volatility, along with the prudent desire to have at least 2 to 3 months' worth of operating income (est. $8$10 million per month) on hand to cover their expenses, this tightens the revenue stream in a declining annual sales market. This is good prudent practice in the event of an emergency or event. 5.1 Future Power Portfolio The RMLD,similar to other utilities in the State,continue to review and revise its power supply portfolios to a more non-emitting set of sources to cover their power supply needs into the future and these projects and contracts may carry a higher cost for these resources,which would increase the expenses to the utility.The power supply costs are pass thru costs to the customer and do not add to the reverme component of the department. This component,along with the other expenses that make up the rate,need to remain competitive and the rate impact should be managed closely. This adds to the revenue pressure for the light department and must be taken into account when looking at all the financial obligations of RMLD. 6.0 Alternative Annual Town Payments According to Section 3.0,of the seventeen municipals responding to the survey,ten used a formula to determine their Annual Town Payment, three used an asset and tax-based formula and four had other formula-based calculation. The following describes possible formulas and calculations to determine Annual Town Payments. 6.1 Economic Indicators Calculation The RMLD has used the Consumer Price Index for the Boston-Brockton-Nashua area to adjust the RMLD's Annual Town Payment to the Town of Reading since 1997. The RMLD selected the Consumer Price Index for Boston-Brockton-Nashua because it reflected economic activity in RMLD's service territory. 11 ENE DRAFT Energy New England The CPI based formula worked well in the past,however,as discussed earlier in Section 4.0,due to the present electric industry business model economic indicators do not reflect the performance of an electric utility.This method is more a measure of the economic and labor markets in its measured area and not necessarily the health and requirements needed of the utility. 62 Mil Rate Multiplied By kWh Sales An Annual Town Payment based on a mil per KWh is an appropriate calculation of the Annual Town Payment because it is totally based on the performance of the municipal electric utility. The mil per KWh is a constant factor and is applied to the annual kWh sales to determine the Annual Payment,the electric sales are affected by weather patterns related to hot or cold summers and winters and economic factors. Since this calculation is based solely on kWh sales,the Annual Town Payment will not be affected by rate adjustments. This represents the health of the utility and the trends of the consumers usage. This is the most widely used method in the surveyed utilities in Massachusetts and the one most used in the APPA study of public power systems in the country. 6.3 Percentage of Annual Sales Another formula that can be used to determine the Annual Town Payment is using a percentage that can be applied to the Annual Sales. The percentage in the calculation can reflect a present Annual Town Payment level or it can be a negotiated amount reflective of financial projections. The percentage should remain static in the calculation going forward and the future payments will be adjusted by the movement in the Annual Sales. The Annual Sales formula is different from the mil per kWh formula because annual sales can be adjusted through rate increases,which is different from energy sales adjustments based on performance factors. In simple terms the Annual Town Payment should not be adjusted due to a rate adjustments,bonding or fund transfers. 22 'q1ftENE ergy New England 6A No Formula or Calculation The absence of a formula or asset-based calculation can be detrimental to both the municipal electric utility and the town that owns it. The municipal electric utility and the town need to budget,both short and long term,and the absence of an estimate of future annual town payments can raise serious questions regarding the bottom line for both entities. It is also evident that the absence of a formula requires yearly discussions and negotiations between the Board of Commissioners and Town officials,which can be very time consuming and lead to disagreements on all sides. 7.0 Recommendations After reviewing and analyzing the data collected in this report ENE makes the following recommendations for the RMLD Board of Commissioners and Management to consider: 7.1 RMLD should consider changing its calculation of the Annual Town Payment from the present formula using the Boston-Brockton-Nashua Consumer Price Index to a mil per kWh rate multiplied by the Annual kWh Sales. • In making this change, the Annual Town Payment will be strictly based on the sales performance of the utility. • RMLD can develop a five-year forecast of sales and formulate an estimate of the Annual Town Payments.The current town payment is fixed for 2020. • The Town of Reading will also be able to include in their budgeting process RMLD's forecast of Annual Town Payments,which can be updated from time to time. • This approach should also help mitigate the convergence of the financials obligations discussed above and limit the rate increases for capital funding needed in the future. 7.2 The RMLD should base the mil per kWh rate in the Annual Town Payment formula on the 2018 Annual Town Payment/2018 kWh Sales. In 2018, the mil per kWh rate resulting from the Annual Town Payment and the Annual kWh Sales was $.00358/kWh. 13 ENE c+ r..r. ne + • The RMLD's 2018 mil per kWh rate of$.00358/kWh was in the median range for the data request respondents whose Annual Town Payments were over$500,000. • The RMLD should transition to a set mil per kWh rate,in the area of$.003/kwb, which would align the RMLD with the average unit cost.The transition could be the next 5 years,which aligns with the capital spending plan. 7.3 The RMLD may want to consider creating a floor for the Annual Town Payment at some point in the process,as the kWh sales flatten during this transition period. • The RMLD's present kWh sales has been decreasing and that trend may continue which would effectively lower the Annual Town Payment. • The Town of Reading budgeting process needs to account for the possibility of a decreasing Annual Town Payment. • While the Annual Town Payment may be decreasing due to the kWh sales going down,the capital plan increases to the system,will increase the 2%net plant above the line payment to the towns for a period of time. This needs to be taken into account,as it all comes from the same revenue source. 14