Blog Archive

Wednesday, June 20, 2018

June 2018 EPB Board Meeting

JUNE 26, 2018, 6:00 pm








A. CPD CHARGE STATUS                            



TO:                       Members of Glasgow Electric Plant Board                 
FROM:                  William J. Ray, PE                 
DATE:                  6/21/2018    
SUBJECT:            Board Meeting Information                                          

June has been a relatively calm month, but it has also had its share of difficulty. The extremely hot weather, personnel retirement/transition issues, and difficult issues relative to rate transition have all been frustrations this month. I’ve presented our lessons learned relative to non-volumetric rate design to a couple of seminars, and there is great interest in the LPC community. We’ve been hammering away at our plans for the electric retail rate change that will be necessary for the fall, including the implementation of the TVA rate change that you considered last month. As I’ve said before, you will see rate matters on the agenda each month for the remainder of the year.   

We’ve got a couple of issues relative to bad debts and our need to get proper deposits/security from customers before setting up accounts for them, that will dominate the agenda. These matters are always of importance to us as a business. The meeting might be a bit long, so try to grab a snack before you arrive. Now, let’s move on to this month’s agenda!

July 1 FCA
As we continue the third year of our new retail rate designs, July 1 will bring us a very small increase in overall power cost due to an increase in the FCA. The FCA calculation always trails actual TVA fuel expenditures by a couple of months, so July will see us getting a small increase, due to the record May heat and the increased fuel expenditures to meet that demand. The July 2018 FCA is going to increase very slightly, to 1.892 cents per kWh, and that increase, when blended with our other wholesale costs, will bring about a roughly .1% increase in overall energy costs to us and our customers. As usual, I am attaching the narrative on the FCA from the TVA portal. On July 1, the energy component of our retail rates will be adjusted to reflect this increase to the wholesale cost of energy.
Bi-Annual Bad Debt Consideration
Twice a year we ask you to consider moving the un-collectible accounts for the last six months, into the written-off column, from an accounting perspective. This does not mean that we are giving up on collecting these amounts. It just means that these accounts will no longer clog up our system by being treated as active accounts.

As you will see in the attached listing of proposed accounts to be written off, these accounts present a very significant annual expense of about $110,000. This being on the agenda for June also gives us the chance to consider the bigger issue of bad debt, and the need for more security to protect the EPB customers who live up to their obligation to pay for what they use, from having to shoulder this cost. This expense is completely without value to most of our customers, as it does not finance additional equipment or manpower that may provide enhanced reliability of our services. To the contrary, this expense, and the overhead costs associated with pursuing payment of these debts, puts upward pressure on the rates paid by all EPB customers, while taking manpower away which could otherwise be used to make happy customers.

It is in this context that we have a proposed change to our Rules and Regulations later in the agenda for this meeting. However, at the meeting I will recommend that you allow us to classify the attached list of accounts and amounts as written off, even though we will continue to vigorously pursue collection of these amounts.

2018 Budget and 2017 Budget Reconciliation
A few years ago, the Kentucky Legislature passed a law that was designed to reign in and hold accountable the many small political boards, commissions and non-profits in the state. Municipal corporations, like EPB, got caught in that net as well. Shortly thereafter, the Kentucky Department of Local Government (the agency assigned this new regulatory role) decided that they could not possibly provide the very extensive oversight suggested by the law, so they modified their requirements considerably, especially the ones applicable to Glasgow EPB.

One of the requirements that remains is that we submit an annual budget using their format, and that we always modify the budget before the end of a fiscal year such that no budget categories finish the year in the red. To that end, at the meeting we will present proposed budget amendments for FY 2018 and we will present a recommended budget for FY 2019, using their budget template.

It is likely this can be accomplished relatively quickly to remain within compliance as dictated by the law. Copies of the various required exhibits will be available at the meeting.

Rate Design Fundamentals and the TVA Wholesale Changes

While I will not go over all of the rate design slides, unless you want me to do so, we will spend some time discussing the variables that are being solved relative to the equation for our needed retail rate change for later this year. The elements of the rate change we will recommend to you later in the year include:

·         Increased fixed costs due to three-year lapse since last design of retail rates.
·         CERS increased cost, which will not be as large as we feared thanks to the Kentucky Legislature overriding Gov. Bevin’s veto of a bill which allows the CERS agencies to limit their annual contribution increases to a much smaller amount.
·         TVA wholesale rate change, as we have already discussed. The main issue here is how we account for the wholesale changes in our retail rates.
·         Implementation of gradualism, in our process of removing delivery charge markup to kWh and moving the remaining fixed cost revenue collection to the Customer Charge, as we initially envisioned. There are also considerations about the optional fixed rates we created in 2016 that need to be addressed.
·         Additional personnel cost, as we have discussed, to recognize the cost of hiring and training new personnel to replace numerous upcoming retirements.
·         Capital projects, and the Board’s vision of how aggressively EPB needs to move in upgrading the resiliency of the EPB grid.

This month we will mainly be discussing the increased fixed costs we are experiencing since we designed our variable rates in 2015. While it would be pretty simple to just adjust the customer charge to reflect updated costs, there are other complicating factors.  

As we discussed last month, TVA is establishing a new rate mechanism. In short, they want to start collecting some of their revenue through a fixed charge (they are calling it the Grid Access Charge) while reducing their kWh charges, resulting in a net zero effective rate increase. The TVA Board approved this plan at their May board meeting, and now it is up to each LPC (Local Power Company) to decide how to pass this new wholesale architecture along to consumers, so that has to be incorporated in our plans.

At this meeting I will continue the process of reviewing the mathematics relative to these issues. My team is working closely with TVA to make sure that our calculations, and our upcoming recommendations to you, are in line with what TVA feels they can approve. This process will likely continue through September when we should be ready to present recommended changes to each of our tariffs for your consideration.

TVA has informed us that the crush of LPCs who will also be making changes to their retail rates, has eclipsed their capability to approve them for October 1 implementation, so our change will likely need to fall on November 1 or December 1. We’ll just have to see how the design and approval process goes for the next few months. After this year, we will need to conduct this review annually in July and August, such that we get into a pattern of retail rate adjustments each October, in line with the TVA wholesale adjustments.

I look forward to discussing this at the meeting.

Rules and Regulations Change Relative to Deposits/Security
As discussed above, we’ve had an unusual amount of problems of late relative to securing proper deposits (or other security) relative to new commercial accounts. Some of the problems come from customers who just do not think they represent a risk to EPB and should not be asked to provide security. Other problems might be related to the language in our Rules and Regulations that could possibly be clearer on the distinctions between residential deposits and the security necessary to protect EPB customers from larger losses associated with commercial accounts. It is the latter that we feel you should consider addressing.

Working with TVA’s regulatory staff, we drafted the following suggested changes to our Rules relative to deposits (underscored words are to be inserted, while stricken through words are to be deleted:

A deposit, or suitable security guarantee, approximately equal to twice the estimated average monthly bill, shall be required of any Customer before service is supplied. Deposits are based on several factors and may vary with the class of customer being served and the financial risk to EPB attendant thereto. However, the amount of the deposit for Residential Customers only, may be reduced based upon the results of a credit check on the customer/customers wishing to establish an account.

For Residential Customers – Deposit requirement will be based on such factors as credit rating, credit history, and/or old balances owed to EPB from previous accounts left unpaid by Customer or resident. Customers applying for residential services will be subject to an online credit check when applying for service, providing one of three results:
- Excellent credit will require no deposit.
- Average credit will require a deposit equal to a one-month average electric bill.
- Poor credit or no available credit history will require a deposit equal to a two-month average electric bill.

For Commercial and Industrial Customers – Deposit requirement will be based on such factors as demand and energy load projections, previous business history and/or billing history for similar businesses. Deposit amounts shall be determined by EPB so as to provide security equal to the EPB’s estimate of two-month cost of electric service to a business based upon any and all data available to EPB for its use in establishing the risk to EPB, and its customers, resulting from non-payment of amounts billed to the account.

A deposit or suitable guarantee approximately equal to twice the average monthly bill may be required of any Customer before service is supplied, depending on credit rating, credit history, and other factors, including old balances owed to EPB from previous accounts left unpaid by Customer or resident. An online credit check will be performed when applying for service, providing one of three results:
-  Excellent credit will require no deposit.
-  Average credit will require a deposit equal to one-month average electric bill.
-  Poor credit or no available credit history will require a deposit equal to a two-month average electric bill.

EPB may, at its option, return deposit to a the Residential Customer after one year or at any time EPB deems appropriate, otherwise, Residential deposits will be held until account is terminated. Deposits shall earn annual non-compounded interest at a rate, adjusted annually, to equal the published rate on the first business Monday each year on One Year U.S. Treasury Obligations. Interest will continue to accrue and is prorated if Customer leaves after anniversary date. Interest will be credited annually to the account on December 31. However, upon demand by the Customer, interest which has accrued through the anniversary date of deposit will be paid at any time during the following year. Deposits may be returned based on excellent payment history of twelve (12) months; otherwise, entire deposit will be held as security. The Customer’s deposit balance, including earned interest, is subject to review by the Customer and the EPB.
Commercial Customer Deposits will be held until account is terminated. Interest will accrue until that time. The EPB may require any Customer to increase their deposit if the Customer becomes delinquent, if their credit report indicates greater risk to EPB, or if inflation or increased use of service has caused the deposit to be less than adequate to provide proper security for EPB. Alternatively, should actual energy usage reveal that a Commercial Customer’s Deposit is greater than needed to provide EPB the two-month’s bill security level required, Customer may request, and EPB may grant, a reduction in the required deposit and a corresponding alteration of the power contract between EPB and said Commercial Customer, including a refund of the amount held in excess of that which is determined to be necessary.
We can discuss this fully at the meeting, but this general direction will be my recommendation (and that recommendation has already been tentatively approved by TVA). Pay particular attention to the highlighted word in the first sentence. Deciding whether you want “shall” there or, alternatively “may” will determine whether you want my team to have any flexibility on this matter or not.

Comprehensive Customer Service Policy
This item is on the agenda just because I said it would be here last month. You will recall that I submitted a proposed Customer Service Policy document and asked you to review it. If you have comments or suggested changes, please let me know about them at the meeting. I want to get this policy document ready to publish as soon as possible.

Safety Report. I will review our latest Workers Comp modifications at the meeting. We were really doing well and our W/C cost was decreasing each year, but the last fiscal year included a couple of expensive accidents that will cost us. I’ll have more detail at the meeting.

CPD Charge Reserve Fund Status. Last year, when we agreed to limit peak prediction days to four per month, while stipulating that customers will only pay for their demand which is coincident with the highest system peak hour during one of our predicted hours, we were forced to establish a kW demand markup over the TVA wholesale cost, to accumulate funds to use when TVA bills us for a peak which is higher than one we are billing our customers for. We knew we would make some mistakes and miss some peak hours, and that has come to pass.

So far, the projected cost of mistakes, and the actual cost of mistakes, have aligned well. From October 2017 through April 2018, we have collected $55,704 to fund that account. Missed peak predictions have cost us $48,765 during that period, so we have a positive fund balance of about $7000 at the end of April. I will keep you posted regularly as this fund moves toward a full year of experience.

EPB Team Staffing Master Plan. I want to review the situation with retirements/resignations and our long-term staffing plan with you. It has been a few months since we discussed this, and things have gotten a bit worse since our last review. A couple of retirements of critical staff members have been moved closer, and a surprise resignation happened, so our hiring plan has been moved forward as well. I’ll have an updated chart at the meeting.

EPB Version 4.0. Inspired by the process of PEER certification, I’ve challenged the team to make steady progress toward the 4th iteration of Glasgow EPB. The first version of our utility encompassed the totally analog format that existed from 1962 until 1988, when we became an electric power and cable television utility. Version 2 (electric/cable television) lasted until 1996 when we added internet to our offerings and began to transform the broadband network to support a wide variety of services as well as all electric power telemetry. We entered Version 3 when we implemented cost-based electric rates that are designed to make the local grid sustainable.

Looking forward to Version 4.0, we will be using everything we learned and implemented since 1962 to transform the resiliency and reliability of our services. We can now support truly rare and advanced technology that will begin to make our grid smart and self-healing. We are ready to begin the process of installing technology that will recognize fault conditions on our grid, and isolate those faults to a small area, while redirecting power to the un-faulted line sections so as to maintain service to more customers, during and after grid damaging events. This new version of EPB will not arrive quickly. Rather, it is a direction that might well take the next decade to fully implement, but I am excited about sharing these new concepts and potential direction with you at the meeting.
Well, that ought to be more than enough to set your head to spinning for this month. Let me know if you have any questions before the meeting.