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HomeMy WebLinkAbout2005-10-19 RMLD Power Contract Rate Setting and Customer Choice Subcommittee MinutesRMLD Board of Commissioners Power Contract, Rate Setting and Customer Choice Subcommittee Minutes Date: October 19, 2005 Time: 7:00 p.m. Place: Cafeteria Attendees - Commissioners: Messrs. Pacino, Soli, Herlihy* and Hahn Ms. Kearns Citizens' Advisory Board: Mr. Carakatsane v~ Staff: Messrs. Cameron, Fournier and Seldon Mses. Antonio, Gottwald, O'Leary and Parenteau *Chairman Herlihy arrived a t 7:20 p.m. Commissioner Hahn called the meeting to order at 7:00 p.m. Mr. Hahn mentioned there were a couple of issues that needed to be addressed this evening. However, the first order of business, which will be looked at, is the guidelines for RMLD entering into power transactions without obtaining a priori approval of the Board. Mr. Hahn understands this is subject to additional negotiations. Mr. Cameron explained that the Twenty Year Agreement, Attachment B, outlines what types of power transactions RMLD can currently make without going to the Board for approval. Mr. Cameron spoke with Rubin and Rudman and they stated the Twenty Year Agreement should be amended if the Department is going to change the guidelines regarding such power transactions. In order to achieve that, the Department needs to come up with a definition of what the new guidelines would be, and they would come to the Board with and to try to incorporate that into the Twenty Year Agreement. Mr. Cameron would recommend this since the interaction with Twenty Year Agreement is with the Citizens' Advisory Board (CAB) and it should be discussed with them and see if they wish to do this. Mr. Hahn stated the CAB has voted to accept this proposal in concept. Mr. Hahn asked about the process for this and who is the signatory? Mr. Cameron explained that in order for this to be amended, it requires the four towns and the RMLD Board to agree on the amendment. Mr. Hahn asked does this require a vote of the Selectmen in every town in the RMLD service territory? Mr. Carakatsane replied it is a vote of the Selectmen; most of them had the vote of Town Meeting as well. Mr. Hahn asked if the Department should do this? Power Contract, Rate Setting and Customer Choice Subcommittee Minutes 2 Ms. Kearns asked why would the Department do this? Mr. Cameron replied this would enable the Department to be more flexible with its power supply portfolio by expanding the guidelines for the types of power transactions that RMLD may enter into without coming to the Board for approval. Ms. Parenteau explained the Department's current power supply has changed since these existing guidelines were developed in 1996. The market has changed significantly. Standard market design came to fruition in 1998; and day-ahead markets and real-time markets have evolved considerably. Ms. Parenteau pointed out the Department has also grown as a system. Ms. Parenteau pointed out one thing the Department in trying to evaluate is- its power supply, it would like to lock into some advantageous transactions, but they are restricted by the current transaction guidelines. They have come to the Subcommittee in hopes of changing those parameters so they have the ability to transact on a large scale in the short-term power deal market. Ms. Parenteau said there was agreement in the Subcommittee. However, the need to amend the twenty Year Agreement brought up by the new CAB member Mary Ellen O'Neill. Ms. Kearns asked why wasn't this language put in the Twenty Year Agreement in the first place? What was the purpose of it in the first place? Ms. Parenteau replied she was not at the Department when this occurred, and therefore does not know all the nuances of why something was put in or omitted in the Twenty Year Agreement. Mr. Cameron said he would like to table this (referring to the Twenty Year Agreement) before any decision is made. Mr. Cameron is preparing a memo that lays out the facts on this issue. Then this will allow the Department to explore its strategy going forward. Mr. Hahn said it is okay with him. It seems to him a rather arduous process to get all four towns to get the vote of the Selectmen then eventually Town Meeting. Mr. Carakatsane explained that the Town Meeting vote was an extra stamp but is not a requirement although some towns opted not do this. It is Mr. Carakatsane's sense that the current CAB would endorse amending the guidelines; therefore they would be willing to amend the Agreement. This is achieved by a formality of explaining this by presentations. Mr. Soli asked Ms. Parenteau to explain what happened with the Wisconsin deal? Ms. Parenteau explained that this past summer she and Mr. Seldon prior to the July/August period were evaluating the Department's power supply. In part of the analysis they determined there was approximately a thirty-five megawatt need during the off peak period. It would be prudent for the RMLD to engage in an off-peak transaction. However, based on the current policy, they were limited to transacting up to ten percent of the peak or the UCAP responsibility. The Department was only allowed to purchase seventeen megawatts. The savings for the ratepayers as a result of this deal was $114,000. Had the Department been able to purchase the thirty-five megawatts those savings would have been increased accordingly. Mr. Hahn reiterated until the guidelines are amended the Department has to live by it. Ms. Parenteau agreed. Power Contract, Rate Setting and Customer Choice Subcommittee Minutes Mr. Carakatsane pointed out the current guidelines were crafted in the early nineties. Mr. Carakatsane said the Twenty Year Agreement was the late eighties. Mr. Cameron clarified that the current power guidelines were developed in 1996, and the Twenty Year Agreement was signed in 1990. Mr. Carakatsane asked how did this language get in there? Mr. Pacino said the Twenty Year Agreement was developed in the late eighties. Ms. Parenteau explained that the reason for the Twenty Year Agreement was there was not a very trusting relationship between the Department and the surrounding towns. Ms. Parenteau was not here at the time, as it has been explained to her they wanted items hard coded into that Agreement due to the lack of trust. Subsequently, the CAB was formed from the Twenty Year Agreement. Mr. Cameron stated there is no real mechanism to amend this Agreement other than going back to the four towns, which is another offshoot of the trust factor. The people that crafted this Agreement for the towns even though they had the CAB they did not want the CAB to amend this Agreement. It was never contemplated. There was a level of trust that was lacking. Mr. Cameron did speak to Rubin and Rudman about this issue. If the Agreement is not amended, but the CAB did something along with the RMLD Board relating to expanding the guidelines outside of the Twenty Year Agreement, this is not the legal way to do this. If anyone made a complaint a strict judge would say the contract was broken. A liberal judge would say no harm- no foul and you are just trying to save the ratepayers money. Having the RMLD Board and CAB handle this is not buttoning up this by not amending the contract. Mr. Carakatsane said to amend the contract whoever has the legal authority to contract for the town; most times it is delegated to the behest of Selectmen to the Town Manager or Town Administrator. Town Meeting is an extra icing on the cake. The timeframe on this could be potentially one month. Mr. Hahn inquired of Mr. Cameron if Attorney Barna at Rubin and Rudman has given him any timelines? Mr. Cameron replied it would be time consuming. Mr. Pacino said that he was involved with crafting the Agreement but cannot remember why this language is in there. Mr. Cameron will put a fact sheet together for the CAB and see how they would like to proceed. Mr. Soli made a motion seconded by Mr. Hahn to table the Twenty Year Agreement issue. Motion carried 2:0:0. Ms. Kearns explained to Ms. Parenteau what helps her make decisions in matters like this a comparison to what do other municipals in such situations. Ms. Parenteau said the Twenty Year Agreement is exclusive to the RMLD. Power Contract, Rate Setting and Customer Choice Subcommittee Minutes Ms. Kearns stated other municipals would have purchased the thirty-five megawatts. Ms. Parenteau added this would be with the approval of the Subcommittee then the full Board. Ms. Kearns does not understand the trust issue. Mr. Pacino explained this issue. The second matter to be addressed is the possibility of a refund. Mr. Cameron said at the last Rate/ Power Supply Subcommittee, which met with the CAB on October 5, the issue of the refund for 2005 was addressed. Mr. Cameron explained that the Department was going to come to them on a recommendation on the refund for 2005. In prior years the refund went out in November. The fiscal year has changed and the recommendation is not to make the refund because it is too early in the fiscal year. Mr. Cameron said the Department has spent a lot of money on the Fuel Expense over the last nine months. The Department's Deferred Fuel Reserve is in the negative. Mr. Cameron explained that Mr. Fournier developed a cash schedule from September 30 to the end of the calendar year. The balance in the Operating Fund is projected to be about $6.7 million after a transfer $1.7 million to the Deferred Fuel Reserve. Mr. Cameron said Ms. Parenteau performed an analysis last year that given the Department's present power supply portfolio the Department should have a little under $2 million in the Deferred Fuel Reserve. This helps balance the monthly Fuel Expense by smoothing it out and abating spikes. In the past, the Department has always used the Deferred Fuel Reserve as a balancing fund for the Fuel Charge. The Department is proposing not give a refund, but take $1.7 million and put it in the Deferred Fuel Reserve so these funds would help abate price spikes if they occur. If the Department does not make this transfer, then there will be a need to get this money somewhere; and it will be from the customers. What the Department is charged with at the end of the fiscal year is have a little under $2 million in the Deferred Fuel Reserve. If the Department does not make the transfer between now and June they will have to get this money from its customers. Mr. Pacino asked where the Fuel Charges are going? Ms. Parenteau answered there is a lot of uncertainty even the with ISO New England from a reliability standpoint because of storms Katrina and Rita and the natural gas supply is a concern for everyone. Last January when there was cold weather a lot of the generators in New England found it financially beneficial to sell off their gas to the heating market at a profit so they were unable to generate electricity. This created reliability issues. The ISO is planning on natural gas shortages and what will happen if that occurs? Ms. Parenteau said Mr. Seldon has been attending meeting in terms of revising operating procedures. Governor Romney is considering lifting pollution restrictions for generators. They are gearing up for the worst, but hoping for the best. Based on those projections, as Mr. Cameron indicated, the Department is in the red for the Deferred Fuel Cash Reserve. In order to get that out by the end of June, it is projected the Fuel Charge can go as high as 6.9 cents per kWh in the January-February time period. Mr. Pacino asked where the Department is now? Ms. Parenteau replied that 5.41 cents per kWh in October and are anticipating a half of one cent increase in both November and December. Mr. Pacino added a two-cent increase, which translates into a forty percent increase. [.05'r + .05(r=1.0(V which is 18.5% of 5.410 Ed] Power Contract, Rate Setting and Customer Choice Subcommittee Minutes Ms. Parenteau stated that is assuming no transfer takes place. Mr. Seldon agreed with Mr. Pacino's figures. Mr. Soli said June, July and August Fuel Charges were pretty much flat. The month of August's cost to the Department was eight cents. The Department went through $3 million in three months. Mr. Soli added the Department did not do much in terms of raising the price. The Balance Sheet is ugly. On page 3a, Change in Net Assets, the Department is $2.3 million behind where the Department should be. The reason the Department is that far behind because the Department did not charge the full fuel expense. The Department tried to be "Mr. Nice Guy." When the sky is falling this cannot be done. Mr. Soli then went to page 1, of the August financial information, Net Assets; the Department is behind $1 million compared to last year. Even though the Department is putting in multi million dollars in assets in construction. Assets are below because of that. The Change in Net Assets are below last year. The Department cannot be a "Mr. Nice Guy." Mr. Pacino asked of Mr. Soli what is he saying? Mr. Soli said the full fuel expense has to be collected from the customers. If this is not done then the Balance Sheet will look awful. Further, if the transfer of a little bit over $1.6 million then the money Department has over collected $850,000 has to go somewhere. Mr. Soli stated Mr. Cameron is proposing to transfer $800,000 of what could be Return on Investment to the Town. Again, more "Mr. Nice Guy." Mr. Soli said the Department shouldn't do this. Mr. Pacino said by stating he did not understand Mr. Soli's logic. Mr. Soli explained the Department over collected $850,000. The Department is taking the $850,000 plus an additional $800,000 and what is proposed to be the return to the town and is putting it in the Deferred Fuel Reserve. Mr. Soli hypothesized to call him a stockholder of the Town; the $800,000 is profit the company earned. The Department deserves to keep it as well as its eight percent. Mr. Pacino added the Department will be keeping the eight percent. Mr. Hahn said out of the eight percent the Department makes a payment is made to the town. There should something over and above that which goes back to the Department for the business. Whether it goes into building new poles and wires or elect to as a Board transfer to the Deferred Fuel, then those are legitimate uses. Mr. Hahn is puzzled because Mr. Fournier prepared an analysis, which said they could transfer the $1.6 million and be okay on a cash basis. Mr. Fournier replied yes. Mr. Cameron added the payment to the town is included in the cash flow. Mr. Hahn does understand Mr. Soli's point on the Balance Sheet but the Department is not Excelon Corporation, therefore does need to concern itself with shareholder equity. As long as the Department is cash healthy and producing an adequate return, where to put the money is up to us. Power Contract, Rate Setting and Customer Choice Subcommittee Minutes 6 Mr. Pacino said if the Department has extra money he hates to say to the ratepayers, we have all this extra money, oh by the way give us more. It makes no sense to him. Mr. Soli stressed we are subsiding $3 million. Mr. Pacino stated, no we are not subsidizing, we are putting the money to the Fuel. Mr. Soli said in the three months, June, July and August we subsidized the customers for about $3 million. There was $3 million more of fuel bills than the Department collected. Mr. Soli pointed out the Department made them a short-term loan to stabilize things. Mr. Pacino said that was because there was money available. Mr. Soli added those funds lowered the fuel costs. It is supposed to be breakeven. The Department did not breakeven. The Department lost $3 million. Mr. Pacino reiterated that was because there was money available. Mr. Hahn stated that is the whole idea for the Deferred Fuel Reserve is to level out the price spikes. That is what we have it for. Mr. Carakatsane said his understanding is that during that period the Fuel Charge went up the maximum it could. Mr. Soli replied he does not think so. Ms. Parenteau said in June and July the Fuel Charge went up a quarter of a cent then up a half cent, which is the maximum amount allowed without going to the Board for approval. Mr. Soli stated the futures in New York, for January are projected to be nineteen cents short term. Mr. Carakatsane added that natural gas is up whereas oil is not as high. Mr. Soli said where the sky is falling in we cannot support the local economy. That is what we tried to do here. Mr. Carakatsane said an option is upping the Fuel Charge and you would be robbing Peter to pay Paul. Mr. Pacino stated he does not agree with refunding the money to the ratepayers then the next month ask for it back. Mr. Soli said the net of this the residents subsidize the commercial and industrial in the amount of $131,000. Mr. Pacino asked how does Mr. Soli come up this figure? Mr. Soli replied he will show them. Ms. Parenteau said this is based on Mr. Soli's allocation methodology. Power Contract, Rate Setting and Customer Choice Subcommittee Minutes 7 Mr. Soli replied it is very plain. Mr. Pacino said all the businesses and customers should be treated evenly. Mr. Pacino pointed out that it should not just be for the residents of the Town. Mr. Soli said this takes $131,000 from residents and subsidizes the businesses and commercial. Mr. Pacino added are you-proposing that we give this money back to the residential customers. Mr. Soli replied that is not cost of service. Mr. Pacino hypothesized we take from the business and give to the residents. Mr. Soli replied he did not say this. We are asking each household to give approximately $4.50 to the businesses. Mr. Cameron clarified there are three methodology methods that can be used. Mr. Cameron pointed out the methodology that Mr. Soli utilizes gives more to the residential than if the refund is done purely through kilowatt-hours. Ms. Parenteau replied it is art more than science; there is not a perfect solution in terms of cost of service. Mr. Cameron agreed with Ms. Parenteau. Mr. Cameron asked eight other municipal managers how they return money to their customers. All eight managers replied they refund money through kilowatt hours either through the Purchase Power Adjustment or Fuel Charge. Mr. Cameron commented there are different ways to do this. The refund methodology used for the refunds, which Mr. Soli came up with, was through base billing. The deposit into the Deferred Fuel Charge is not a refund. This is recharging the Deferred Fuel Reserve. If the market turned around the Department would have money in the Deferred Fuel Reserve and it would float to the end of the fiscal year. If the Department needs it this year it is available, this not new because the Department has been done before. In 2001, when fuel prices spiked, monies were taken from the MMWEC Funds and deposited to the Deferred Fuel Reserve. It is the right thing to do. Charging customers for the Deferred Fuel Reserve when you have money in the bank to recharge it is not the right thing to do. Mr. Cameron added it is going to be a long, hard winter. Mr. Cameron commends the Department, Ms. Parenteau and Mr. Fournier for being proactive in bringing this to the Board. Mr. Soli replied the Department had a good summer and the Department went through $3 million in three months. Mr. Soli added the Department could not keep up in the summer and a hard winter is approaching. Mr. Soli said that the summer says to him our method is not working because we are supposed to collect for what we sell and this method did not work. We need to change this. There was too much lag. Mr. Hahn pointed they are restricted from by how much they can change the Fuel Charge. Mr. Soli said by Board motion they could change that direction. Power Contract, Rate Setting and Customer Choice Subcommittee Minutes Mr. Hahn agreed. The alternative is not restore the Deferred Fuel account. Restore it by taking some of the Departments' eight percent earnings and restore it that way or raising the Fuel Charge and hope you catch up. If you raise the Fuel Charge now and it gets worse then you have boxed yourself in and eliminated your options. The fair course of action would be to restore the Deferred Fuel Reserve as recommended. Mr. Soli asked how does the Balance Sheet back $2.3 million off? Mr. Fournier replied if you look at the Balance Sheet you can see where the effect is. It is in the cash balances. The plant and receivables are up. The $2 to $3 million going to the Deferred Fuel will keep the bills steady for the ratepayers. Mr. Soli pointed to page 3a $2.3 million in the red. Mr. Fournier replied it is because of the Fuel. Mr. Soli asked how do we make that up? Mr. Fournier said you could go the Board and raise the Fuel Charge. Mr. Soli said it is everyone's Fuel Charge. Mr. Cameron said as the year goes on, the Fuel Charge will be at a level hopefully that will pay y for itself on a monthly basis. Mr. Soli added it does not impact this number (referring to the bottom line). Mr. Soli asked you if we make this transfer, how will you recover the $2.3 million? Mr. Cameron added do we need to recover it? Mr. Soli asked why do we make budgets? Ms. Parenteau added budgets provide guidelines. Mr. Soli said it is a nice idea, maybe we can meet them, but we are not going to try to meet our budgets? Mr. Cameron replied maybe the budget is at a deficit because of where the fuel is. What we need to do is manage it from this point forward. But to do this the Department needs the $1.678 million in the Deferred Fuel Reserve. Mr. Soli replied no you do not. You ran this month in the red. Mr. Pacino added $2.3 million is the difference between the budget and the actual. Mr. Pacino pointed out that the deficit is $200,000 considering it is only two months. Mr. Pacino added we are in a fiscal year. What we are seeing is some of the aberrations of the fiscal year shift. That is why the numbers are difficult to compare because of the fiscal year shift. These are only July and August numbers. In the past, there would be a different number and it would be in August, which represents eight-month number. It is difficult to draw conclusions because of the fiscal year change. Power Contract, Rate Setting and Customer Choice Subcommittee Minutes 9 Mr. Fournier said in 2001, the Board took a vote at its July 30 meeting, to transfer $1 million into the Deferred Fuel Reserve. Mr. Carakatsane commented to smooth out the Fuel Charge this is the way to do this. In Middleton it has not been done and their bills have increased substantially based on the fuel. Mr. Hahn said if not having the spikes smoothed out by the Fuel Charge, which is avoidable, it is difficult to see how not funding this benefits the customers. Ms. Parenteau added one thing; if you speak with the Customer Service Manager and the Key Account Manager the Departments' customers like smooth billings without huge spikes. Mr. Soli replied they have been subsidized $3 million. Ms. Parenteau said that was the intent of the Deferred Fuel Charge. Mr. Hahn made a motion seconded by Mr. Soft to accept the General Manager's recommendation to transfer $1.678 million from the General Fund of the Reading Municipal Light Department to replenish the Deferred Fuel Account. Motion failed. 1:1:0. ATTACHMENT A RMLD RATE REFUND CASH SCHEDULE 9/30/05 Operating Fund Balance: Estimated 9/30/05 Operating Cash Fund Balance $9,883,185 (including Deferred Fuel Cash Reserve) Add: Estimated 3 Month's Receipts: October $6,000,000 November $6,000,000 December $6,000,000 $18,000,000 Less: 13 Accounts Payable Warrants (13 warrants @ 1.375M) ($17,875,000) Less: 7 Payroll Warrants (7 warrants @ 230K) ($1,610,000) Estimated 12/31/05 Operating Cash Fund Balance $8,398,185 Recommended Balance Deferred Fuel Cash Reserve $1,750,000 Estimated Deferred Fuel Cash Reserve Balance 12/31/05 $71,120 Transfer amount from Operating Cash Fund $1,678,880 Estimated 12/31/05 Operating Cash Fund Balance $8,398,185