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HomeMy WebLinkAboutmin light commission 06/08/05 (' Mansfield Municipal Electric Department Minutes of Light Commissioners Meetin~:, l'l '9 June 8, 2005 lL .J "'- I 9:27 " " H:.L. U m~' cc: '~"I'Wi IS'EllS i""~ v ,," .i~l... ..1 j I..... .. " Present: Chairman Bernie Dolan; Vice Chairman Louis P. oruso; Clerk David McCarter; Commissioner Michael McCue; Commissioner Roger Achille; Director Gary Babin; Engineer Ann Langille; Engineer Chris Cox; Line Foreman Gary D'Ambra; Office Manager Laurie Anderson; Financial Assistant Jacqueline Lee and Manager John D' Agostino Light Commissioners Meeting The meeting was called to order at 7:50. Motion: To approve the minutes from May 4,2005 (Amoruso/Achille) Passes 3/0 (McCue and McCarter abstain) Motion: To approve the minutes from May 11, 2005 (Amoruso/McCue) Passes 5/0 Director's Report r Financial Statements for April 2005 - Director Babin reported that MMED's year-to- , date net income through April is slightly below the budget. Operating expenses are close to budget. Free cash stands at $1,350,675, which is moving towards MMED's target ofa minimum of $1.5 million, which represents approximately 3 months of operating expenses (excluding purchased power). On the balance sheet, Director Babin noted that the $365,000 in reserve for uncollectible accounts would be reduced to approximately $80,000, should the Board choose to approve writing off the $271,187.48 in uncollectible debt being proposed by the MMED staff at this meeting. Clerk McCarter asked if the budget was on track for this year. Director Babin said that sales were slightly below target. He also reported purchased power expense was slightly below budget as well. Administrative & General Expenses are up $70,000 year-to-date due to payrolllbenefits expenses. Overall, however, the budget is pretty much in line. Clerk McCarter questioned the prospects for the summer and the possibility of brown- outs. Director Babin responded that from what he's read, it is not expected that this will be a problem. He believes there is sufficient capacity to meet the load and the outlook is good, according to published information. Southwest Connecticut looks like the problem area, as it does not have enough resources to meet projected load. He did note however, that unplanned outages are impossible to predict and other areas could also be affected by unplanned outages of generating units. Clerk McCarter asked about borrowing capacity from another area to help the "..- Connecticut area. Director Babin explained there are transmission constraints to get into r .". r the area. He said the problem in Southwest Connecticut is partly a supply issue and partly a transmission issue. At the federal level, the FERC is pushing the Independent System Operator (ISO) to encourage the construction of generation in constrained areas through incentives provided by the Locational Installed Capacity (LICAP) proposal, which is now before the FERC for a ruling. The ISO claims that this will be the solution to the capacity problems in constrained areas, such as Southwest Connecticut. Vice Chairman Amoruso commented that this type of solution would probably mean increased prices, which could impact MMED's budgeting. Director Babin explained that based on the analysis that MMED has performed, the LICAP proposal would start at a cost of about $1 per kilowatt of demand, which equates to approximately a 1 % wholesale rate increase for MMED. This is just to have capacity payments to allow generators to payoff the fixed costs of the generators and does not include the variable costs of generation, such as the energy component. Collection Write-Offs - At the May Light Commissioner's meeting, MMED staff recommended that the Board approve writing off an amount of $271,187.48 in debt that the staff had deemed uncollectible, and which represents closed accounts for the period 1997 through 2003. At that time, the vote was tabled so that the staff could provide additional information to the Board. r The staff provided one chart in the Board package which summarized closed accounts with balances over $1000, and also provided notes as to whether the accounts were "protected accounts". Of the 61 accounts which exceeded $1,000 balances, 21 were protected accounts, including 13 of the top 19 accounts in terms of money owed to MMED. Director Babin explained that those accounts that were not protected, generally ran up big balances by not paying during the winter, knowing their service could not be terminated. Many had electric heat. Chairman Dolan and Clerk McCarter asked for an explanation of what the nature of the Massachusetts Department of Telecommunication and Energy (MDT E) protection was. Office Manager Laurie Anderson explained that the MDTE requires MMED customers requesting protection to submit paperwork, including evidence of financial hardship and either a medical form or a birth certificate for a child under one year of age, either of which qualifies a customer to be exempt from electricity shut-off for non-payment. If all paperwork is in order, the DTE will not allow MMED to shut off the electricity. Commissioner McCue questioned the quality control and commented that this requires a degree of discretion or decision-making on the Light Department's part. Office Manager Anderson said that if MMED feels the customer is not disclosing all information, the DTE is asked to get involved. Chairman Dolan questioned how long an account has protection. Office Manager Anderson answered that the papers must be updated every 90 days. She also noted that ifMMED shuts off a protected account, they could be fined. r I" 'II" ~ Commissioner Achille asked what the industry's approach is. Director Babin responded by saying that utilities have begun much stronger collections effort. He stated that at MMED, every Wednesday between April to November is shut off day. Notices are distributed and there is a very organized and disciplined approach to notifying customers of MMED's intent to shut off their electricity for non-payment, ultimately leading to the actual shut off on Wednesday. Office Manager Anderson explained the process. The customer's original bill serves as their first notice. Once their account becomes 45 days past due, they receive a red notice which requests payment on the following Monday. On Tuesday, those who haven't paid receive a hand delivered notice, dropped off by someone from the MMED's meter department. On Wednesday those who haven't paid or set up a payment plan with MMED are disconnected. Office Manager Anderson also noted that if the customer has not made a payment in the last 90 days, MMED requires the entire balance, in order not have their service terminated. Commissioner Achille questioned what kind of collections process exists for those who aren't present customers. Office Manager Anderson answered that MMED handles closed accounts through an in-house process. The billing person generates a list of closed accounts with balances, then another employee goes through it and sends a second notice and a follow-up letter. Collections companies are not currently used. r Commissioner McCue asked if someone does become financially solvent, where they had once been a protected account, does MMED go back and try to get payment. Office Manager Anderson answered yes, if it is still an active account. She said MMED will also make payment plans with the customers who have protected accounts and some do try to pay. The MDTE will also make a payment plan with a customer as well. She also noted that if a customer breaks a MDTE payment plan but has the appropriate paperwork, there's nothing MMED can do. Clerk McCarter asked if the auditors recommended that these accounts be written off. Director Babin answered that they do not do so directly, but each year the auditors recommend an amount to be held as a reserve for uncollectibles. In doing so, the auditors are basically saying they don't think MMED will collect that debt. Director Babin said he first noticed the problem in 2004, when finalizing the 2003 audit. The reserve for uncollectibles recommended by the auditors went from $200,000 to $365,000, increasing 83% in one year. Director Babin recommends writing off anything still outstanding prior to 2004 and establishing procedures, so as not to allow this type of problem to develop in the future. Director Babin reported that Office Manager Anderson, after going over the accounts and tracking people that had outstanding balances who had moved out of town and then back in again, was able to transfer their outstanding balances to their new account. Approximately $22,000 is now collectible that had previously been deemed uncollectible as a result of this process. r ... .... r Director Babin has looked at the percentage of what the Board is being asked to write off as a percentage of revenue, and it is less than ~ of one percent. He stated that MMED is slightly below the industry average in this regard, with $271,000 in bad debt on $110 million in billed revenue over that period. It's significant but it's the reality of the business. He explained that after one year, a debt is generally considered uncollectible. It is the staffs intent that in January 2006, the MMED Board would be asked to approve writing off everything still outstanding from 2004. Commissioner McCue questioned whether it would be necessary to ask the Board to do this or could it be automatic. Director Babin answered that it could be automatic based on a Board vote allowing the staff to write off an amount in January of any year, which was still outstanding from December of two years prior. Commissioner McCue said he was willing to approve the $271,187.48 write off with a grain of salt. He suggested that if the amount became excessive again in a couple of years, the Board would talk about it then. Motion: To approve the reclassification of $271,187.48, currently carried in Accounts Receivable for closed accounts from 1997 to 2003, as uncollectible for the purposes of writing it off as bad debt (Amoruso/Achille) Passes 5/0 r Review of Proposed Policies - Director Babin also brought two new policies to the Board for their review. The first Was a proposed residential customer deposit policy. He explained that some of the customers on the write-off list had a deposit with MMED when they first set up their account, but that it had been returned after one year, in accordance with the policy at that time. The newly proposed policy recommends holding the deposit until the account is terminated. A small electric account would be required to make an advance deposit of $150 at the time the account is set up with MMED, a typical electric account would require a deposit of $300 and a known electric heating account would require a deposit of $500. Instead of estimating the previous customer's last three months of usage to determine a deposit amount for a new customer, Director Babin indicated that the staff felt it would be much easier to simply set three different levels of deposits. The determination of the appropriate deposit amount for any account would be decided by the Office Manager. Director Babin said that until earlier this year, a 6% interest rate was required on security deposits under state law. This dated back to the early 1980's when deposits were initially allowed and when interest rates hovered around 18%. Under new legislation that was recently passed, the rate is now tied to one year U.S. Treasury notes and declared once a year, at which time the interest would be credited to a customer's account. Commissioner McCue asked how the deposit process would work. Director Babin stated the money would be held by the Treasurer's Office in a separate, interest bearing account. "..- . - r Since interest has to be paid by MMED, then MMED should also be able to accrue the interest within the account. Director Babin stated he was not looking for a vote this evening, only feedback. Clerk McCarter questioned whether it would require the Treasurer's Office to take on another function. Director Babin answered that it shouldn't, as they would just need to open a separate account, and that the Treasurer managed several accounts for the town already. Commissioner McCue asked if someone wanting to set up a new account had hardship and medical papers, would the account be set up without getting a deposit from them. Director Babin pointed out that many of the customers who had protected accounts on the write-off list had made deposits at the time they set up their account. He answered Commissioner McCue by saying MMED would request a deposit regardless of the situation. Chairman Dolan commented that 93% of the accounts being written off were residential. After speaking with Town Counsel, he learned that MMED cannot go after the owner for a tenant's debt. r Director Babin also brought to the Board a proposed write-off policy. Vice Chairman Amoruso said he thought the policy was a reasonable approach. He recommended, however, that after thirty days letters should be sent more rapidly and with greater intensity. He suggested that the letters be issued at 10 day intervals, if the initial final bill had been ignored, and that the letter should explicitly state that the customer would be turned over to a collection agency which would affect their credit rating. Director Babin thought this was a good idea. Vice Chairman Amoruso said he believed MMED should definitely write off on an annual basis. He noted that he would like to see the staff come back with a commercial deposit policy. Debt Service for MMWEC Projects and Long Term Power Supply Considerations - At the May Board meeting where he had presented a rate comparison of MMED's rates versus those of other utilities in the state, Director Babin was asked why MMED's rates were high when compared to other municipal utilities in the state. Director Babin's answer was direct: it was due to MMED's power supply costs. As a result of that question and answer period, Director Babin indicated that he had decided to present to the Board a primer on MMED's power supply situation to help them understand his statements at the May meeting regarding MMED's power supply costs. Director Babin reported that 77% of the operating costs for MMED are in power supply. The basis for the bulk of the costs were due to Power Sales Agreements (PSAs) which MMED entered into with MMWEC in the late 1970's and early 1980's, which were used to secure future power supply. Those PSAs require that MMED pay the debt service associated with the projects as well as the operating costs. In 2004, MMED paid $11.1 million on the projects covered by the PSAs. Of that ~ amount, $6.6 million represented the debt service on the projects, or 60%. Director 1'" ... r Babin then referred to a graph which he had provided in the Board package which showed MMED's debt service with MMWEC through 2019. Accompanying that graph was a table which showed the debt service numerically and by project. The trending of the debt service is that it is steady from now until 2009, when it drops significantly and again drops in 2010. This is timely since the Calpine contract will expire at the end of 2008 and that power will have to be replaced with higher cost power. Debt service is again level until 2014 and drops in 2015 and again in 2016. Large drops in debt service will be experienced by MMED in 2017 and 2018 and the debt service will finally go away in 2019. Director Babin told the Board that this information is important to consider in the context of the decisions the Board will make when considering future power supply contracts. He indicated he would be approaching the Board in the next few years about options to replace the Calpine contract, and that this was the start of the education process to help them make that decision. ~ Calpine has already approached MMED about buying out the current contract. Calpine is currently selling assets to gain liquidity because they are in financial difficulty. Director Babin believes that between now and 2008, suppliers will be gun shy about bidding on long term contracts because of the nature of the power supply market and how it has turned against suppliers. There will also be many changes in the market in the next couple of years due to LICAP and other ISO initiatives. To help avoid the sort of rate shock that can occur in the current marketplace when , moving from a low price contract like Calpine to a higher priced contract, MMED has built up a rate stabilization fund. This rate stabilization fund will help mitigate some of the impact of replacing the 4 cent/kWh power Calpine now supplies, with the 6 cent/kWh (or more) power MMED will be forced to buy to replace that power. Director Babin explained that, to the extent possible, his long-term strategy is to try to hold rates where they are now. He believes that ifMMED can do this, other utilities rates will go up and MMED's competitive position relative to those utilities will improve. Hopefully, MMED's rates will be middle of the pack at that time. It is conceivable that once the debt service from the PSAs goes away, MMED may eventually have some of the lowest rates in the state, dependent on making good power supply decisions between now and then. Director Babin recommends staying away from projects with significant long-term debt, as he believes MMED has already paid the price for that decision. Currently, 2/3 of MMED's power supply portfolio is long-term unit entitlement contracts and the remainder is in short term energy contracts. Based on feedback he has gotten from MMED's rate consultants, this is an appropriate mix and should serve MMED well in the future. r ,. , r Vice Chairman Amoruso inquired about financing the East Mansfield Substation. Director Babin said MMED would have to assume some debt service due to the expected cost of the station, but would try to build up cash in the depreciation fund to also help fund that project. Director Babin felt that the debt service for that project would have a minimal effect on rates. Commissioner McCue stated that there is always something new that comes up. He asked if Director Babin anticipated getting into long-term situations again, like Calpine. He wondered if what MMED has experienced with the debt service has been an anomaly. Director Babin agreed that it was, and noted that MMED has got to do it's best not to increase the debt service, which should allow it to improve it's competitive position. Vice Chairman Amoruso wondered if MMED would consider generating power. Director Babin said that is becoming a less and less attractive option in the current marketplace, as the dispatching of units is uncertain and if it isn't dispatched, you don't generate the revenue to cover operating costs, let alone debt service. Director Babin really doesn't see MMED being interested in that option. He also said MMED needs to start thinking about long-term power supply starting with the expiration of the Calpine contract in 2008. r Correspondence - Clerk McCarter referred to a memo from Manager D' Agostino requesting reimbursement of legal costs in the amount of $14,211.25 for issues related to the Light Department. Vice Chairman Amoruso agreed that reimbursement of Manager D' Agostino's legal expenses would be appropriate to take out of Light Department funds in this case. Clerk McCarter noted that this would be in accordance with the terms of Mr. D' Agostino's contract. Clerk McCarter also mentioned that Manager D' Agostino did not ask for the money he used for his legal defense up front, and that now he is requesting to be reimbursed. Clerk McCarter further indicated the fact that the ruling in the legal case, for which Manager D' Agostino was requesting reimbursement, was in Manager D' Agostino's favor. Motion: To reimburse Manager John D' Agostino for legal costs for issues related to the Light Department in the amount of $14,211.25. (Amoruso/McCue) Passes 5/0 Adjournment Motion: To adjourn the Light Commissioner's meeting at 9:00 Passes 5/0 Respec~1.: ~i~tted: Jacqueline Lee 7/06/05 ~~- Signature of Clerk r' T T