Dec 11, 2017 Public Utilities Board on 2017-12-11 9:00 AM

Okay, we do have a quorum, so let's call the December 11th Public Utilities Board to order. The first item on the agenda is to receive a report and hold a discussion of the energy management organization by Deloitte. Good morning. Brian Langley, Deputy City Manager. I want to take a few minutes to provide a brief introduction on this item. As you know, we've hired Deloitte on a couple of different occasions to help us work through our energy management organization. They've done a couple of different scopes of work for us. On today's presentation, they're going to be talking to you about the benchmarking work that they did for FY 2016-17 and also the review that they had of the energy management organization and all of the procedures and policies associated with that. Stephen Engler and Tim Metz are here, and so at this point, I'll turn over the presentation to them. Thank you, Brian. Good morning, everybody. Good morning, members of the board. My name is Steve Engler, and I'm with Deloitte's energy risk advisory practice, and my colleague Tim Metz is here with me as well. And we're here to talk about risk management, and Tim could talk to you about the risks of carrying a sleeping seven-year-old down the stairs. So if he hobbles around a little bit, it's because he's got a bit of an ankle issue. So thank you for having us here this morning. Happy to walk through our prepared remarks, but please feel free to ask questions at any time or save them to the end or both. All right. Okay. I won't read the legal caveats. Just to talk quickly on what we're going to discuss here, the objectives of today, we're going to kind of reframe the question that was asked to us the last time we spoke to you all. We're going to talk a little bit about risk uncertainty and how that relates to capabilities or expectations of capabilities in an organization. And then we'll go right into the results of the risk assessment itself. We'll tell you how we did the work and some of the outcomes of that. This presentation is kind of a summary of a more detailed report that's been prepared and presented to you all. Then the next piece we'll talk about will be some discussion of the benchmark and some recommendations there, an idea for an alternative benchmark , and then we'll talk about recommended next steps. So if that's clear, then we will move along. So just to reframe and remind everybody what we were asked, essentially one question that came to us the last time we spoke was, what are the risks that we've kind of taken on as an organization by bringing the EMO activities in-house where prior they were outsourced? So that was the first part of the analysis was to frame, and we'll talk about here in a minute, what risks existed before and are there any new or changing -- any changes to that set of risks since the EMO go live. Based on those risks identified and what's been brought in- house and being managed by DME, we then used that to form the basis of our assessment and our benchmark analysis and then following that, our recommendations. And then I said the last piece of this was to take a look at some different approaches for establishing a new benchmark going forward and make some recommendations as to how to proceed. Okay? All right. Let's talk a little bit about risks. Kind of a very consulting-y slide, but I think it's good to set the stage. We sometimes mix up the words risk and uncertainty, and I think it's important to understand kind of the differences, but also how they interrelate. A risk is really the possibilities of suffering an adverse outcome, higher rates, higher fuel prices, market changes, and the impact of that on the organization. Uncertainty while similar, it really refers to unknown events where the probability is difficult to quantify. So the risk of prices falling is related to the uncertainty of how much they could fall. Okay? While they both talk about expectations in the future, it's important to remember that risk can be mitigated. On the other hand, uncertainty will always exist. So it's that risk--it's that management or the mitigation of the risks that really is one of the charges of the EMO or DME more broadly. And so that's, again, a very important underlying concept for how we proceed, not just here, but when we do this work at peer organizations as well. And then related to that, and we're going to--you know, there's been a lot of talk about hedging and kind of optimization around the assets. It's important to note that managing or mitigating a risk does not necessarily mean forgoing an opportunity. And it's the infrastructure that enables all that, which is really what we took a look at as part of DME. Does that make sense? Okay. So another consulting slide, if you will. When we do an assessment like this at an organization, it's important for us to understand what's the objective, what's the transacting mandate is a phrase we like to use a lot of the organization because that helps us kind of frame the recommendations. Just to explain this chart a little bit, if you look at the x-axis on the bottom, we've got price taker, asset optimizer, and proprietary trader. And then the y-axis talks about the capabilities. And the capabilities in this context would be things around risk oversight, reporting, governance, systems, people. As you move on the x-axis from the left to the right, what we always try to keep in mind is that the risks really for all those organizations are very similar, the types of risks that they're--that organization is exposed to. It's the implication on what that means in terms of where do your capabilities need to be will vary. So if I'm all the way on the left as a price taker, meaning that I've got a commodity to sell or a commodity to buy, I'm just taking what the market offers me in terms of prices. And I'm not trying to do too much around that. All the way on the right hand side, we're a proprietary trader. That's where you're taking probably more speculative positions. You're in the market. You're--you know, an example would be large banks or the very large integrated oil and gas companies that really are, to use the word, trading. So they've got some assets but they don't even necessarily trade around those assets. In the middle is where we find a lot of the clients that we work with. And that's probably where DME is or requires to be. And that's to optimize around the assets and the positions that you own. So somewhere in between price taker and proprietary trader is where we see your organization and that's the context that we completed the assessment on. Okay. So now let's talk about the first question which is what risks existed before the EMO is established and what risks exist post. And the takeaway to this slide, I apologize, it's a little bit busy. The takeaway to this slide is that from our perspective and looking at the business before and now, there really are no net new risks in our opinion as to what the company or the utility has been exposed to. The difference is where were those risks managed. And prior to establishing the EMO, a lot of the risks were managed by the third party through that contract that was established. First go live or in the current state, those risks while they existed before are now being actively managed by DME. All of the risks down the left-hand side, if you look in kind of the bold or the big categories and then some specifics underneath it, these are very common to any company that's exposed to the commodity markets, particularly the energy commodity markets. So when we look at a company or utility such as DME, it could be bigger or smaller, those risks are fairly common. We have market risk in the sense of what's the price of the commodity, what's the liquidity of the products and the commodities that are out there. Do we have to deal with congestion risk and does that have an impact on pricing? One of the things to point out here, just in terms of changes with the anticipated move to 70% renewable and then potentially 100% renewable, it creates kind of a different load serving risk in our perspective. In other words, the availability of the renewable resources is something that is different than fossil fuel resources. And so increasing the footprint of that type of resource in your portfolio will probably create a different type of maybe even a more complex price risk than you've experienced before and also load serving. Do we know that the sun's going to shine tomorrow or is the wind going to blow tonight? It'll change a different dynamic for what the utility is trying to manage on a day-to-day, an hour-to-hour and really minute-to-minute basis. So those risks existed before, for sure. There's probably a different profile to those risks going forward as you move towards the more renewable plan. We highlight operations risk here and by operations, I don 't mean running the power plant or the transmission lines. Really what this means is more the organizational activities inside the EMO, forecasting the load, forecasting the supply, looking at the market dynamics, understanding the impact of that on the position on a real-time and go-forward basis , executing, entering and settling transactions, all those things that have to happen to support the EMO and the transacting and the risk management activity. There's a key focus of our assessment and some of the recommendations will relate to that as well. A couple at the bottom that we think maybe are slightly different than before, certainly, and I mentioned already the variability risk of the renewable resources is going to create a different load profile for DME. We talked a fair amount with staff around the Givens Creek asset and prior to or I guess up until this point, this is as we understand an asset that 's co-owned with three other entities. So there was, we say it was not actively managed prior to go live and that's important to point out because all those decisions weren't necessarily always in DME's hands. There had to be partner agreements as to how to move forward. I'll pause there to see if there's specific questions about any of these risks or anything I just mentioned. So again, this is the context for the assessment that we did. We looked at DME as we do many other similar organizations as to the capability to manage, monitor and mitigate these risks and really understand these risks. And again, in the context of where the organization is in terms of a transacting mandate or transacting profile. You're not trading, you're not market making, you're not speculating. So that was the context for our assessment. Okay. So what did we do? As I said, we were engaged to understand the existing energy and risk management program within DME. To do that, we were to collect and evaluate data, develop findings and make recommendations to this board and to the utility and those recommendations are available in this report and as well as a supporting detailed report. The scope included a review of governance, people, process and technology and we'll talk about that and how it ties into our capability maturity model. We specifically looked at the risk policy and the documentation supporting that. We looked again at the operations inside of DME for things like transacting processing and the entire transacting lifecycle. We talked a lot about where the utility is going in terms of the renewable dent in plan and the additions of those types of resources into the portfolio and the specific requirements that that brings. We talk a lot about the middle and the back office and just in terms of vernacular front office is the folks, that's the commercial end of the business. Middle office we refer to as the risk oversight function and then back office is typically settlements and accounting probably credit. We talked a lot with staff because as with other similar organizations, this isn't a very large organization so finding the appropriate way to create segregation between those functions is important and it sometimes poses challenges when there are fewer people to do that because sometimes you have people wearing multiple hats. And then we talked about risk reporting. The way we do the assessment is we talk to people, we assemble as much documentation as we can, we read the policies, the procedures, we ask about where the future state is, where is the utility going. Of course there's been a lot of discussion of that as of late and we were able to benefit from many of those discussions in terms of feeding our findings. And then there was a vetting process where we developed some initial recommendations, talked through those with staff and largely to make sure that we didn't get anything wrong or we didn't miss any details that are pertinent to the assessment, to our recommendations and we talked through a lot of comments and discussion around what we found. So Deloitte loves three letter acronyms so we use a CMM, a capability maturity model, to perform these assessments. And as I said we do it across four categories and that's down the left, governance, process, people and technology. And then we talk about three maturity scales. And I guess a couple things I'll point out on the scales. Just like the decision to be a price taker versus an optim izer versus a trader, neither of those decisions is wrong. It's just important to know where you are. As far as the maturity stages for an organization, there's nothing inherently wrong with being in the developing category. That's typically what we see for an organization and generally speaking we see that kind of evolution typically lasting a number of years. So you don't just start out in the middle of this maturity scale. A lot of the clients that have been up and running for some period of time, we find a lot of their activities fall generally in the prevalent scale and then leading would include kind of integrating technology and doing things more automated and more in a much more robust way that would be indicative of someone who's actively trading in the markets. When we do the assessment, we look across these four categories and in each of the categories there's a number of different elements and I think it's the last page in the report is the actual specific details of what we look at. We first look at where the organization is today and then through discussion and understanding of where the organization is going as well as our own opinion of where these capabilities need to be, we then make a recommendation as to what the future state should be. It's important again in the context of what the transacting mandate is, we don't always -- you might think that a consultant would say you always need to be in the leading practice category. In this case that's not necessarily true because there's not always return for the investment to put in processes, to put in systems, to hire a bunch of people to get to leading if the transacting profile and the risk profile doesn't warrant that. So that's important to keep in mind as we talk through the results in terms of where you think the organization is today and where it needs to be and all of that was informed by the types of risk that we just talked about, the trans acting profile that we talked about both today and where the organization is going. Anything I left out on that slide? I think so. Okay. Questions from the board? Let's get to the results. Okay. Now I'm going to hand it to Tim. So I'm going to try not to knock him over. Thanks Steve. So very similar slide to what we were looking at before. We've added a couple things here. The next column over from leading are the recommendations. So we've broken those recommendations out across each of the categories. And then we also prioritize them high, medium, and low based on our understanding of the direction that you're moving and our understanding of what 's common in the industry. And then we also, to kind of link it back to the conversation where we started in terms of what are the risks inherent in the organization, also wanted to link those categories, governance, process, people, and technologies to the risks that those recommendations are addressing. I guess the last bit of context, you know, in the black circle with the C in it, that's where we plotted the current state. And then the green circle is the future state. And as Steve said, that future state was informed by our conversations with staff, our understanding of the future mandate for the energy and risk management program. So in terms of governance, you know, kind of right there in the middle of the developing, I think it's one more piece on that. Where these, kind of where the current and where the future state line up, it's certainly not a science. It's not quantitative. What we'll do is, as Steve talked about, there are a whole bunch of different subcategories under each one of these. What we'll do is we'll look at each of those subcategories. So for example, risk management committee might be one of them. And we'll, you know, based on what we've read and everything we've heard from everybody we've talked to, we'll plot where the risk management committee capabilities currently are. And we'll do that for each of the other subcategories. And then we'll go back and we'll look at governance as a whole and each of the individual items and use that information to plot it kind of at the overall governance level. So as Steve mentioned, developing is not necessarily a bad thing, especially for an organization that has really just started down this path a little over three years ago. So it's, you're kind of right where we would expect you to be in that evolution of developing to prevalent. I think in terms of moving forward, what we've heard in the recommendations that we made would really move you to the right-hand side of prevalent. Seems like a big jump. I think when we get into the recommendations on the next slide, there are a lot of recommendations that can be implemented or acted on fairly easily that will have a lot of value and will really significantly move you across that evolutionary spectrum. So we'll take a look at those in a second. On the process, kind of right on the border of developing to prevalent, again, I think there are just a handful of recommendations here, only a couple high priority ones, that will have a lot of value and really help you move to the right. People, again, kind of right in the middle of developing, a couple recommendations that will help you take some big steps forward. And then on the technology side, I think there's kind of one primary recommendation that we'll talk about in terms of the system infrastructure and the tools available to staff that can have a really profound impact on the program overall. Any questions? Sure. Go ahead, if we ask the same question again. Oh, boy. Now, maybe you plan to answer this later, so if you do, then you don't need to answer this now. So of these four categories, which would you say is the biggest problem area in the status quo and which is our greatest strength in the status quo? I mean, I can get a sense just by looking at this, but going into more detail. On the other hand, if that's something you plan on talking about later. We'll go into a little bit more detail on the next slide. But I think in terms of, I wouldn't describe it as a weakness, but where I think you can make a handful of small changes and really have a big impact is on the governance side. So in terms of kind of rethinking through the risk management committee and kind of the governance hierarchy. So starting at the city council level, going down into the organization and into the day-to-day activities and oversight, I think there's a lot of benefit that can be achieved there. I think on the strength side, I think very clearly the processes. It's very clear to us that when DME started to go down this path of wanting to go live with the EMO, that there was a lot of thought given to kind of the day-to-day processes that would be needed in order to achieve that mission. And that's very clear in all the risk policy and all of the procedures manuals that we've read in that area. So it's very clear a lot of effort was put in that. Yeah, I'll just add, I'm remiss that I meant to give you a preview of the overall answer to Tim. When we started the assessment, there are certain basic things that we look for. We look forward with these assessments for an organization that has some purview over commodity price and liquidity risk management. We look for segregation of duties. We look for kind of a framework. We look for, as Tim said, processes. We look for people in certain spots. And I think in general, all of that is there. There were no gaping holes. There was nothing that jumped out as an organization or in terms of capabilities that gave us really serious concern. There are things, as Tim said, that I think can be pushed along with relatively light lifting. It seems to us that because there's been kind of an evolution in where the organization is going and the focus on renewables and there's been some personnel changes, that some of the documentation is just out of sync with what's actually happening. But again, the framework is there. And I think a lot of the recommendations really are to update the governance documentation, the policies, some of the risk limits, some of the reporting that's being done to match what's already happening. So just kind of getting that in sync and some of the things that we'll talk about. I guess the other -- I agree with Tim on core strength being processed. That's kind of the framework that we look for and that we see in place. And the people, I think, it's an experienced group. They understand the market. They understand the risks that are being managed. And pretty much without exception, what we always talked about in terms of objectives for the organization, and maybe we get into this with the benchmark a little bit, it's all about managing the price risk that flows through to the end-use customer. That's a central focus of the organization, came out in almost every discussion. And I think the experience of the group that's doing that will help as an asset to the utility, to the city. Any other questions? Okay. Okay. So now I want to take a couple minutes to walk through all of the high-priority recommendations. So again, most of them are focused in the governance area. And I'll kind of talk about the governance recommendations, I think, in four main groups. The first is related to -- and Steve mentioned this -- related to the risk policy and the governance hierarchy, the documentation that's in place, and the risk management committee. Going back and taking a fresh look at those, and really tailoring it to what's actually being done, what are the actual activities, kind of who's doing what, who's overseeing what and playing what oversight role. I think all those things were envisioned at Go Live. And over time, as the programs evolved and as you really got into the day-to-day, those things have changed a little bit. So it's simply about going back and taking a fresh look at them and understanding what needs to change. As it relates to the governance hierarchy, so currently there's the city council plays a role, you all play a role, and then within the organization, within DME, there's the strategy committee and there's the operations committee. So kind of taking a look at that and understanding and really making a decision as to what the role of the strategy committee and the operations committee are playing, and consider making that a single committee. There's a lot of overlap in who sits on both of those committees. It's our understanding that often those two committees will jointly meet. And if that's the case, recognizing the commitment of everybody's time in these matters, think about whether it just makes sense to kind of streamline that process, have a single committee with a single mission and oversight responsibility, and then simply make sure that that risk management committee regularly meets, has a standard agenda and reporting package that they follow, and just shore that piece up a little bit. The next group is update of Appendix A and Appendix E. So Appendix A is to the risk policy and it says, "Here are the limits. Here are the things that the front office or DME can't do." And Appendix E is here and talks about what the approved products are. So trading power or different fixed price instruments. Both of those exist. I think they can be built out a little bit more to be more specific. So everybody has a crystal clear understanding of what they 're authorized to do up to how much they can do those types of things. And it ties to the last bullet on here in terms of reconcil ing the DOA memorandum. So delegation of authority is DOA. There's some inconsistencies in a memo that goes out on a regular basis versus what's actually in the ERMPs is the risk policy document. So making sure that those two things are synced up so everybody's on the same page. And then I guess really the third group of these is the three of the final four bullets. So starting with designing and documenting a financial hedge program, quantifying the risk profile, and then establishing risk limits linked to objectives. So that's going back to the risks that Steve talked about a little bit earlier in terms of kind of the complexity of the price risk, the uncertainty of the renewable supply, really clearly understanding what risk that introduced into the portfolio, tying it to something specific like a rate at risk, and understanding what are the types of activities or what financial risk mitigation activities might we do to help manage that supply and that price risk. And that's something that we'll come back to here in a few slides when we start to talk about the benchmark as well. On the process side, it's really about reporting and communication. So making sure that there's a singular risk metric or a set of paired risk metrics that help describe what the risk is and where you are relative to that risk. And then being able to communicate what that is and provide daily reports to all stakeholders and everybody responsible for oversight. So each day everybody's on the same sheet of music. From a technology perspective, there is currently a system in place that doesn't have the capabilities that DME needs in order to execute what they need to on a day, their daily responsibilities. And so taking a look at that, identifying what else is out there that might meet needs and finding the right fit for purpose system to support the day-to-day activities. And then finally on the people side, as was mentioned earlier, there's been some turnover roles or positions have changed. Making sure there's the right redundancy across the front and the middle and the back office such that nothing falls through the cracks and there's a consistent level of execution of the program. Can you explain a little bit more what you mean by the right redundancy? Sure. Because redundancy tends to have negative connotations. Here I see it's a positive, especially when you're talking about staffing. So if you could explain. Yeah. In this case, I think redundancy is meant to be positive. So from a middle office perspective, for example, if I've got one person that's responsible for always preparing the reports that go out on a daily basis or on a weekly basis, to the extent that that person isn't available for some period of time, I guess the question is who is going to provide those reports? So making sure that you've got staff cross-trained to step into a role that maybe is not their primary or day-to-day role, but that they can fill in the event that it's needed. And on the governance, it looks like a long list, but it's a lot of low-hanging fruit that we can implement rather quickly to get from developing to a higher level of an organization. So in reading the report, the whole report, I'm impressed with where they are for a three-year organization actually. And just a kind of overarching comment on that and to follow up on a couple of Tim's points, what we try to do is identify things here that stitch together, hopefully, logically. In my view of how this can work, you've got a policy that outlines what are the risks that we're exposed to and what's our appetite relative to those risks. What are the tools that are available to the organization to manage that? So the policy is kind of the, it's the enabler for the organization to go out and manage the risk within whatever boundaries the organization and the board and the city council ultimately set. The RMC can act as the body just to be the oversight of that. Is that happening according to how we've laid it out? Are we within our risk tolerances? If the organization says, well, there's a new type of instrument or a new transaction we want to do that's not previously authorized, that would be the body to review that and make recommendations. And I would also see that as kind of the conduit of information to both the board and the city council and establish kind of a more regular update and information flow as to where we are, where are we going, what have we done, did anything unusual happen, all those kinds of conversations. The RMC can really be the engine to do that. And then a lot of the other pieces like to mention the system, that's another part of the toolkit, if you will, just to enable the organization to, you come in in the morning and are we long, are we short, where are our prices, can we execute instruments and have them go into the system so it's all a complete system of record. Those are all the things that kind of enable that, but the governance and the policy piece of this and then executed through the RMC is really what will drive it, I think. Yeah, it's huge. And then I think we made these points a couple times. Basically, it's our observation that even though they're on the system side, there's some work that can be done there and some additional infrastructure that should be provided. The organization is generally well positioned, well structured in staff and highly capable of managing the risks that the utility faces. And then again, just kind of coming back to that technology infrastructure, putting that in place would go a long way to really supporting the day- to-day. And now we get to move on to the FY17 benchmark analysis and we'll walk through this kind of in two parts. One is looking at a couple of alternatives for FY17 that have been, I think have been proposed and then also providing an alternative view on what that benchmark might look like going forward. So first, the two alternatives that we looked at, one, option one, looks at what the day-ahead price for power was during the year in question. So in this case, we looked back starting October 1, 2016 through September 30, 2017, would constitute the FY17 benchmark. And just what was the day-ahead price of power? So every day, ERCOT posts power prices for what they expect for the next day or the day ahead. So that meant if we just went back and we looked at what all of those power prices were versus how much energy or load there was, that constitutes the first part of the benchmark one. And then similarly to the contract that was previously in place, there's a heat rate adder or a premium that gets added into that to account for risk and profit. So option one, in a sense, is very similar to what the old benchmark looked like, except it's now based on the market price of power on a day-ahead basis. And so there's some advantages to this particular option. One, it's very simple to quantify and to measure. ERCOT posts those prices every day. We can go back and we can very easily capture them. We can add in the three and a half heat rate adder and we can get to what the benchmark is. There are also a couple disadvantages to that. One is that it does move with the day-ahead markets. We can only calculate it after the fact, after we know what all of those day-ahead prices were in any particular year. And it doesn't really require an active management. Because the benchmark is moving with whatever the price of power is for that year, if power prices go up, overall the benchmark would go up. If power prices go down, the benchmark would go down. That and I think given the direction that you're moving, moving further away from the previous benchmark and getting away from the idea of a three and a half heat rate adder probably makes a lot of sense. I mean, you're no longer in the situation where you have a full requirements contract with one counterparty and they're taking on a lot of those risks. You're managing those risks yourself now. And so that three and a half heat rate probably doesn't make as much sense as it used to. The second option is more of a forward-looking benchmark. So if we went out on the last day of September in 2016, we can look to the forward markets to understand what the expectation of power costs are going to be all the way through the fiscal year, all the way through September 2017 of the next year. And what we can do is we can take that forward curve and we can multiply it by the load, how much electricity you expect to need in that year. And that serves as the benchmark for on that day what it might cost to procure all of the power or all the electricity that you need in that year. And then as you go throughout the year and you buy in the day ahead markets or you know, the renewables, you have renewables at whatever the contract price is, you can then compare your actual costs back to that benchmark of what it would cost, what it would have cost to lock in all of your electricity on the day before the beginning of that fiscal year and you can get an understanding of how well you did relative to that benchmark. So again, this also has some advantages and disadvantages. The advantages is that it's market-based and it also sets a very clear target to be. Going into the year, you for the most part know exactly what it is you're managing to and you can actively manage it. The disadvantages, it doesn't consider what the objectives of the utility are, the risk or the uncertainty. So for example, if we simply have that benchmark and you know, set at the beginning of the year, even if the DME and EMO is actively managing that risk, if an event happens and prices go up, then it's going to be more costly to procure power and you may not be as accurately measuring the value that they're adding or how well they're managing those risks. So I think both of these have some advantages and they both have some flaws as well. So what we wanted to do next was then kind of look at the actual numbers. So we went back and recalculated the benchmarks and took the actual costs for the last fiscal year in order to calculate what the savings are. And similarly to what the news was the last time around, the good news is that under either benchmark there are savings. And so just to orient everybody to the slide, the top half is the calculation or the top third is the calculation of the benchmarks. And I'll come back to the one right there in the middle in a second. The middle of the slide is what the actual costs were as provided by DME and then the bottom third are the savings under each of the different options. So to kind of go back up to the top, that middle row here, what we did is we took option one, and as I mentioned before, about the three and a half heat rate adder, we simply took that out and said what would the day ahead benchmark have been if you didn't include that premium for risk and profit. And used that as just kind of another comparison or another alternative to look at. And as you can imagine, when you take that adder out, the savings on option one dropped from about 10.3 million to about 2.4. So the difference is purely related to that three and a half heat rate adder. And then when you compare that to the option two, which was the forward curve benchmark, the 10.3 savings under option one would have been $4 million. So just a little bit over $4 million. So either way you look at it, there are savings relative to either of those benchmarks. So pause for a second. See if there are any questions. Okay. So I wanted to think about it a little bit differently for a second. And if we go back to what's the purpose of the cost savings calculation, is it simply to save costs? Is it to add value? So if you assume, and we talked to, Steve mentioned earlier , when we had conversations with staff, it was very clear that the objective was to manage the cost to end users, to customers. And so if you assume that in order to assess the performance and the value of DME, kind of what we think the benchmark calculation, this cost savings calculation is doing, well, then it probably makes a lot of sense to think about it in terms of what the desired outcomes are and how well DME and the EMO does achieving those outcomes. And so if we hypothesize a couple, what would be considered good outcomes, one might be stable electricity rates when prices rise. Another might be competitive and lower rates when prices fall. So in other words, if you're protecting your customers against rising prices, you don't want to be blind to the fact that prices might fall and now you're passing along a higher than market rate of electricity to your customers. So it's really managing the pair of those objectives. And so how do you go about accomplishing this? Well, one, you hypothesize a set of paired objectives and you make sure that they're market compatible. In other words, if I'm managing too aggressively to prevent higher prices, am I losing out on opportunities to pass along lower prices to my customers ? And so the way that you make them market compatible is the second piece of this, which is by having a hedge strategy and risk limits that have been demonstrated to achieve those objectives. So you might do that by going back and looking over time and quantifying how a particular hedge strategy achieve those two objectives across a range of market prices. And the good news is that if we look back over the last 10 to 15 years, we've got a number of times when prices were really high and they moved really low or they went from low to high and vice versa. So it gives you a lot of data with which to understand that . And then the last piece, the way that you accomplish this is by having the risk infrastructure. So the ability to capture transactions, understand, quantify your risk, monitor where you are, so that when the time comes, you know when to act and you know how to act. And so kind of taking it back to the benchmark, it's really the first two of these, one and two here, that would form the basis for the benchmark and how you assess performance. So the way that you do that is kind of taking it back to the objectives. And really, it's -- we talked about two, I guess it's really three of them, and I'll explain why in a second, but they kind of all work together in order to provide a balanced approach. So the first is setting an objective around what we call portfolio risk or managing the customer's rate of risk. So if we don't want to pass along more than a certain percentage rate increase to customers, how do we manage that? Recognizing that you're going to have a lot of fixed price supply and recognizing that you might hedge at really high prices and then prices fall. The second piece of it is managing the hedges that have been executed. So if I bought power at $80 and the price of power today is $50, what should I do about that? How do I manage that or how do I prevent that outcome from occurring? And then the way that you do that is by having an options budget available to manage the tension between the two. And so what we mean is that, you know, every hedge that I place to protect against higher prices creates a likelihood or a probability that I might have been wrong. So options are the way in which you can balance those things out. And so when, you know, when you kind of take it through that process in the end, you know, this is, if you will, the benchmarks that you establish. So I might have my--the first piece of my benchmark might be I'm going to manage my energy cost adjustment so that the cost of serve customers don't increase by more than X percent with some confidence, with some level of confidence. The second piece of it is I'm going to manage my fixed price transactions that so customer rates aren't more than X percent above whatever the market- based rate is. So that's the competitive objective. And then finally, I'm going to set aside, you know, $500, 000 in options premiums to manage the tension between the two. And so you set these at the beginning of the year. Everybody--you know, there's general agreement as to what those limits are and what you're managing to. And at the end of the year, as you go back and you take a look at it, you can very clearly measure, "Well, this year, you know, I said I was going to manage to a 3 percent rate increase. I actually only had to pass along a 1 percent year over year rate increase. And here's why, because these are the activities that I did . Here's the outcomes that we realized as a function of them ." In some years, it might be that prices fell. And so, you know, what you'll be able to say in that case is, "Well, the market fell by 5 percent. And because I was actively managing my portfolio and my exposure, I was able to pass along 4.5 percent of that 5 percent drop in market prices." And then you can also very clearly say, "I spent $200,000 in options to do so, you know, less than the $500,000 that I budgeted at the beginning of the year." And so then each year, you'd come back and you'd reconsider these objectives, you'd reset the limits of what you're managing to, and at the end of the year, you can very clearly measure where you are relative to those objectives and those limits. And so this is the direction that we would recommend moving . You know, it's more -- it provides a very clear benchmark across multiple dimensions. It's -- you know, you can come to agreement on what those inputs are prior to the beginning of the year, and then you can very clearly measure them after the fact as well. Steve, anything you'd add? All right. So in terms of next steps, this is one that we had talked about at the last meeting we presented. I think if you -- you know, if you think about what the FY 17 benchmark, you know, is now and what you -- the direction you might take it, maybe for FY18, this would be what we would recommend -- the process we would recommend going through in order to be able to come to agreement on what those objectives are and then set realistic and market-compatible risk limits. So it would be about understanding what the exposure of the current portfolio of supply and load is, understanding how different hedge strategies help you manage the exposure in supply and load, and then using that hedge strategy to set risk limits, update those objectives so that everybody, you know, has a known set of objectives and limits that they're managing to as you go into the next fiscal year. Okay. Discussion? Well, I just want to say I appreciate the board's indul gence for fairly detailed information. I also want to thank Stephen and Tim for all their work on this and our staff. They've been great to work with, very professional and comprehensive in their approach. We've got a number of things to bring back to the board and the City Council and talk about that. We're going to be doing that in pretty quick order, in particular on the governance issues. This is something on the management policy that we have. We created that back in 2014, but really hadn't had a discussion with the board or council since that time. So we want to have a good discussion of what's appropriate, what are the recommendations that we want to put in there, and then on at least an annual basis come back and talk about that every year of what do we need to tweak, what are areas that we can improve on and how can we manage that differently, and to keep that really front and center for both the board and the City Council. But we've got a lot of work to do. We'll be bringing this back in future meetings with you. Again, just want to say thank you for your time, and Tim and Stephen, thank you for all your work. Thank you. Just in terms of I'm thinking what's a good nutshell bumper sticker takeaway for me to explain to a layperson who doesn't have time to read all of this. And I haven't yet been asked, so what do you, by the public , what do you think of this report? And I just wanted to run by you what I was thinking of saying, and so you could let me know if this was a correct assessment or not. My sense, and I think this is a little different than what Susan's sense of it, but maybe this is just two sides of the same coin, I'm not sure. From reading the report and from hearing your presentation that this is not a diagnosis of a terminal illness, right? It's not, so this is not your, this is a sick organization and it's in serious trouble, but rather, and this is what I was planning on telling people if this is correct, rather, you're in pretty good health, but you don't have a doctor and you need a doctor and a health plan in place and you're very lucky that you've been doing well so far and we're going to be fine as long as we have these things in place that we need. And so anyway, is that, or if you would want to tweak that, I mean, I'm not interested in hearing that that's a good example. I'm just thinking is this right and if it's not, well, what would be good, you know, in one sentence, kind of analogy for somebody who really doesn 't have the time to go into this at the level of detail that we do. I think it's a fair comment and, you know, in the doctor analogy, that's the kind of the governance and the policy infrastructure that needs a refresh. I think that's accurate. I think in general what I suggested, the assessment of the capabilities and then the benchmark discussion, they come together in terms of as an organization and as, you know, what are the objectives of DME as an organization through the city and what's the ultimate kind of metric or measurement of success. And if as an organization you can define that and that might be, you know, what are the rates that our citizens ultimately pay for electricity and there are other factors as well as where does that electricity come from and all those discussions around renewable are built into it as well. But I think gaining consensus on that ultimate objective can help then drive, you know, what's the framework within which we're going to expect the DME and the EMO to operate and as an aside, we started just talking about DME and then kind of this EMO is a separate entity I think should go away as a concept. I think it's all within, you know, the utility. If we can define the objective that will enable as a risk oversight function you to define what are the parameters within which they are going to operate and it also will help define how do we do and all those discussions kind of after the fact in the first part of the work that we did which is, you know, kind of digging into a calculation and you can always debate like the different variables that are used to do that calculation. Our recommendation to think about a performance-based benchmark is, you know, in some ways a departure from the cost-based benchmark that I think has been in place to date but maybe gets the organization back into the singular focus of we're trying to protect our rate payers and the citizens and they're not paying, you know, above a certain amount or that they can benefit from, you know, from market moves that are in our favor. I think that kind of as a goal post is the key takeaway for me and I think in order to get there, back to your question, the framework is there, the people are there, that, you know, it's kind of -- it's there. I think the goal is to identify what ultimately are we measuring and that will fill in some of the blanks. Very long-winded answer to your question. And, Deb, we're more in agreement than not. Yes. And I think I would just add one, you know, one piece to that and it's -- I don't think it's everything's your way or because you've been lucky. I think it's -- to date it's been a lot of individual, you know, a lot of individual effort and I think the governance recommendations I think will help make it less of an individual effort and more an organizational effort which I think will streamline and make that process easier and more transparent. We're lucky that we have the people who have been able to make these decisions on staff. That's all we have for you. All right. Thank you very much. Thank you. And I've been told that we are going to pull the closed meeting item and so that brings us down to the consent agenda and I've been asked to pull item B. That should -- oh, I'm sorry. Just curious how come we're pulling that. Larry, how come we're pulling the closed meeting? We can't put in a note, sir, so we decided years ago we'd take off those agendas. Okay. So it's a -- will be discussed by Council tomorrow? No. It's not. It's not. They're getting their -- they're going back to the old first. Thank you. Thank you. Okay. Consent agenda. Then we've been asked to pull item B off the consent agenda because that should have been an item for individual consideration. So that leaves one item A on the consent agenda. Does anybody wish to pull it? Or a motion to approve the consent agenda item A? I move. Okay. Do I have -- Second. Okay. All in favor? Aye. Aye. Okay. Items for individual consideration. Should we take B first? Okay. So we'll be taking, well, the consent agenda item B. I don 't know how to say it, so -- All right. Tidistus, City Engineer. I've also got the project manager, Lee Perry, here. I'm bringing to you today a project that is currently on our CIP. It was a bond funded project, I believe. Pack four, phases one and two, you've actually seen before. We came last month and actually got council to -- and you all to award the contract to move forward with construction on that piece of the project . Ultimately, this was all supposed to be one project. But for a lot of different reasons, funding being one piece of it, we were -- we weren't able to do all of that project at one time. Time has just not been our friend on some of these projects . So what we have today is the second phase of that project asking for the design contract to go forward. So this project in general -- let me go back a little bit here. It's a project that, like I said before, connects to the project that's currently going to construction. It'll start construction shortly after the first of the year, which runs primarily through downtown. And let's skip past a couple of slides here and get to the map. It's a little easier to follow. So phases one and two, the creek itself, peck four, Pecan Creek, tributary four is what that really stands for. Ties into Pecan Creek, a little bit off the screen here, comes up, crosses Locust and Elm and then follows to the north. And the creek itself actually runs through a couple of channels up north of Oak. No, we didn't make it that far, sorry. Up to Mulberry and then it goes just north of Mulberry, comes back across Carroll and all the way back over through this neighborhood. Is that Prairie Street? Bernard, sorry. It gets all the way back over to Bernard. Part of what happens here, and you don't see it on this map , is there is a floodplain that takes in a very large amount of this entire area, trying to outline it here as best I can so you can get a sense of the area. It takes into account a very large area of downtown and it inundates quite a few homes in the neighborhood back to the west of Carroll, this area back in here. So a lot of homes drain into this creek. What this project will do is it will remove a good number of those homes, I think all of the homes out of the floodplain, and then it removes the vast majority of the businesses out of the floodplain by taking everything into a box instead of it being an open channel. It brings it into a box so all those buildings, all the vacant land that's there for development in the downtown area on that south side is now available to be developed. We can do a lot more with it since it will be out of the floodplain and the floodway. The floodway is the key factor there. On the map there is a floodway, the FEMA map today, there's a floodway that runs through downtown, prevents a lot of development. Not put a structure in the floodway. So what this project does, phase one and phase two, is this green and blue line. That is ongoing right now, we'll be going to construction soon. Phase three and four, there's a couple of lines here. This yellow line is the original projection of phase three and phase four goes from Carroll back to the west to tie into the open channel just through this neighborhood. Now this, it's kind of a misnomer through here, I believe this is just a little drainage ditch, is that correct? That picks that up. It's a bit of a channel, but it is out of the floodplain by the time we get in there. So what we're looking to do with this project, and you'll see a dashed purple line here. As we originally looked at this project, it was remove the floodplain, putting the boxes in underneath the road, which is a lot easier for us to access because you know you're not going to get buildings, you're not going to get a lot of structures or homes or businesses that we got to interrupt to get in there. It's bad enough to interrupt traffic, we definitely don't want to do that on private property. The problem we're running into is you still have what's left of this channel that we can't completely take away because you still have to allow those homes and those businesses that have traditionally not had anywhere to drain other than that creek, we can't completely take it away. So we're still going to catch that water in this channel left on the north side here. So an alternative proposal, and that's part of the reason why the contract for basic services is just over $900,000, is to look at both the yellow ph asing and the purple to say that may be a better alignment from the standpoint that it still provides a lot better and potentially a lot less construction cost to us by leaving this drainage channel in place as much as possible. By the time we take the vast majority of the floodplain out , this really just becomes a little collector ditch. It's not a floodplain prone area. So that's why you see these two alternatives here. It's also partially why you see a little bit higher contract cost than we potentially would have seen. We also have, I need to go backwards, we got our slides a little bit out of order, I'm sorry about that. Some project costs as we estimate right now are looking at 1.2 million for design, which is what you have before you right now. That takes into account quite a few items. Now if you look at what that really runs on a project that 's not that unusual to see it running in the 10 to 12% range, when you also consider that there's a lot of potential properties, there's a couple of different scenarios we need to look at. And we've got some construction costs or construction administration services built into that contract. So the consultant will be working with us hand in hand through the construction phase to make sure this project gets done timely and effectively. A little bit spent on that will usually, by and large, save you quite a bit during the construction phase. We are looking at potentially $300,000 in property acquis itions. That's that purple line that you saw. We're meant to continue to get some easements. We are working with the county to try to get some additional aid and help there. And then the construction costs right now are currently projected at $9.3 million. So it's an expensive box. Anytime you start putting boxes of this size in, they're always expensive. We are going through the process. What's in that number is a contingency factor. So we're trying to give you the worst case scenario of what we think this is going to be. Of course, we will analyze all options to try to keep that cost down as much as possible. We are proposing to have Fris and Nichols, who did the design for phases one and two, they picked up where T. Nolan Perkins did the study for the entire street stretch of this creek. They picked up and did the design for the PEK4 phase one and two construction. So that is part of the reason why we selected them for three and four, is it's just a natural extension of this project. So instead of getting somebody else on board which would have taken longer, we'd potentially have some conflicts between the two, just trying to get them to marry up their designs. It kept this in one shop and kept it moving forward. They were very qualified. We used them on multiple occasions and they are known throughout the state for this type of work and more. We ran through quite a bit of that. So our recommendation is that we would ask you to approve this contract or recommend approval to counsel this contract for $1.2 million with Fr is and Nichols. If you have any questions, I'm here to answer any questions you might have. I'm going to leave Perry's here as well. Yes sir. So the way I see this is by doing this, you talk about removing the floodplain. Which allows land to be developed. So you have the cost side, but now you're going to have a revenue side. Because then with the developed land, you'll have increased property taxes. You'll be able to basically pay for over time the cost of doing this. And to the homeowners, it would seem like if they can even get insurance, their insurance cost, at least in that area, is going to go down because they're not being paid enough floodplain. Yes sir. So a lot of benefits for all of this. It also improves our rating standing with the Federal Emergency Management Agency. Okay. Thank you. Go ahead, Dan. I just want to clarify the construction costs. Yes sir. So is this, they've been approved or not approved? For this project, no. This is three and four. For phase one and two, yes. That contract asks. So you're going to present these in the 2020 bond package? Unless we can find other sources of funding, yes sir. We're constantly looking for other ways to fund this work. Grants, wherever we can find out their partnerships, we're constantly looking. But yes, right now the only source of funding we know of would be a 2020 debt program. So Derek, the one and two, the phase one and two was supposed to do the same things that you're saying the three and four is doing. Yes. So when did we realize that one and two wasn't going to do exactly what we thought it was going to be? I'm not sure how far back that history goes. I know when I got here in July, we went through and started going through every single project to look on how far they can go. And this was one of the first ones we looked at and said, " We're not going to get that far." I knew that, but to answer your question on how far back that went, I don't know. Okay. Okay. Thank you. Deb, did you have a question? Oh yes, I did. Well first I wanted to say thank you for this and thanks for pulling this from the consent agenda. I was going to ask to have it pulled and I was already planning on voting yes for it, but because of the cost, but also because it's such an important and timely issue. And I think it's important that the public see what the city is doing for flood preparedness. Yes. As most of you probably saw, there was a recent article in the Denton Record Chronicle about flood preparedness in Denton and a lot of people in the community were expressing concerns about that. So it's really reassuring to see that we have such plans in place moving forward. And it is a big expense, but it is extremely important as Alan was saying in all kinds of ways and in addition to the ways that Alan said it, save lives and save homes. And my question was, how is this plan connected to, or is this plan connected to a larger city-wide flood preparedness plan moving forward as considering all the growth that we're having in other parts of town, for instance around Bucky, the B ucky's area there was a lot of concern about the drainage of the homes around there. Is this tied into a larger plan for flood preparedness city -wide or is that something that would be created at a later date? It is something that we're working on and developing. It is one of those key components that after the 2007 floods that this was one of those areas that was identified real quickly that it was an issue . So yes, you have some revenue benefits on this, but the primary cause of this was a safety project and that's where this comes from. We are looking at all of our floodplains. We are required to do so annually. We are in a, because we are members of the community rating system with FEMA, we have to go through an annual audit process. And usually the five-year audit, because a five-year is a very detailed audit of everything we've done from a permitting standpoint with developers, with homeowners that have come in, they're wanting to build a brand new home. And on an annual basis, we just do a double check, make sure are we still doing everything that we thought we would do? And it requires us to look forward on what are we going to do over the next five years. So yes, this is a part of that plan, but it's an ongoing process for us of what needs to be done next. Yes, ma'am. Okay, any further questions? Do we have a motion to approve? And a second? Second. All in favor? Aye. Any further discussion? Let's see, then. Item A, consider the approval of the public utility board's minutes. Were there any changes that anybody saw? Okay, then it's approved as presented. And item for individual consideration B, receive a report and discussion, hold a discussion and provide staff direction concerning the approval of a contract for the radio network design and installation services. Good morning. My name is Tim Fisher. I'm director of water utilities. I've got a brief presentation on this project. The water production division uses licensed and unlicensed microwave radios for communications between their various facilities. Some of those are permanent or are staff 24/7, others are unstaffed. We use that communication system for the supervisory control and data acquisition or SCADA system, but we also use them for the security cameras and then for access control. The existing system tended to center around the northwest elevated storage tank up near loop 288 and interstate 35 on the northwest side of TAN. That tower was our highest tower and gave us the best line of sight to all the various locations until recently when we added the elevated storage at the southwest upper pressure plain, so that's a similar height location. Basically this is a shot of the northwest tower. Radio equipment is very small, compact. It's not real visible unless you look hard for it. Very directional from point to point. Arcadis Engineering, which is actually at the time was Malcolm Kearney, Arcadis later bought them out, did a SCADA master plan for us in 2012. One of the purposes of that study was to give us some assistance in how we sustain, maintain, and improve that system and then also how to budget for capital projects. A critical component of this was trying to develop improved reliability through redundancy. This is basically a redundant radio based system and a plan . This is the existing system. It all tends to direct its signal to northwest and then to each one of the various locations. The revised system will basically add a duplication in pathways and provide the redundancy that we're looking for reliability. So that helps us eliminate a single point of failure and gives us additional redundancy. We're proposing to use Johnson Technical Services. They're a Dallas-Fort Worth based area, a radio network provider. They are used by Denton County, DISD, City of Denton. They're also I think used by the Upper Trinity recently. They had a fiber based system. They were getting fiber cuts so they went to a radio based backup system. Project budget was 220. This is being procured through a Texas Department of Information Resources contracting mechanism very similar to a buy board so it meets the legal requirements for bidding. And with that I'll answer any questions that you might have . Is the water service or is that the only communication that happens on this? It is specific to the water department's needs, yes sir. And it's very focused on the security camera systems that we have. That was one of the bigger bandwidth issues that we needed. But then also for the control system. Some of our pump stations have supervisor decisions turn pumps on and off as opposed to having things automated. So those are run at the two treatment plants where we have staff and operations staff. Thank you. Any further questions? Move approval. Okay. Motion to approve. Move. Oh, he moved. We need a second. I'm sorry. All in favor? Aye. Okay. Thank you. Thank you. ACM, you're on, Maureen. All right. Thank you. Members of the board, in your packet there is a memorandum from George Morrow. He's our new general manager of DME and here to provide you with information about the Tesla roof tiles. If you have any specific questions related to what's in the memorandum, George is here to answer those questions if you have them. I'm just so surprised with all the roofs that had to be replaced that nobody replaced it with a solar roof. As far as, oh, I'm sorry. I would just like to just to say welcome to George and we 're so happy to have you here. Yeah, if you wouldn't mind saying a little something to us and to the public about this memo. Thank you for that opportunity, George Morrow, general manager of DME. Yeah, I'm very happy to be here in Denton. This is the start of my third week. I'm fighting down the urge to think I know everything already because every day I learn, wow, I'm so far down the learning curve. There's a huge process here. It looks like you were in competent hands in the interim period. I want to compliment the work that Brian has done. Everyday amazed that he is carrying all these different buckets of projects and things and he's done an extremely great and competent job. I think our staff very much appreciated his leadership during the interim period. They're also looking forward to the new general manager. There's a lot of prescriptive things that we want to get moving forward that I've learned from looking at some of the public utility board background and hope to be in front of you many times as we move forward the organization during this transition period. Thank you all for your support during that pretty complex interview process. One of these days my goods will get here. Thank you again. I'd like to thank Brian too for the -- I know how hard that is to wear that many hats. So thank you. Thank you. Appreciate it. I'm glad George is here. And then the only other thing I'd just bring your attention to is this is the last meeting of the calendar year for the PUB. Our next meeting will be January the 8th at 9 a.m. And then again, just a reminder that we'll be moving to an evening meeting on the second meeting of the month. So the January 22nd meeting will be at 6 p.m. We're actually going to be in this room. We're able to make arrangements with another conflict, another committee that meets in this room. So we'll be in this meeting room from here on out as far as evening and morning meetings. Okay. Demetrius. I believe with the exception of the DME substation costs, which I know George is working on and will be bringing forward some information to the board here in the near future, I believe everything is covered on the matrix from the things that have been requested in the past. I think, Brandon, I still owe you some information regarding metrics on viewership and downloads. And we've been working on that. And so we'll get that to you, get that to the board under separate cover. And then we'll add that to the as part of an update at the next board meeting on the matrix just so you have that information so the public can have it as well. Okay. Then we're on to concluding items. Is there any items that? Deb? Yes. I had a suggestion. I know that we have a policy where we don't turn off the power for people in conditions of extreme weather. And that's a very good thing. And I was wondering if we could consider in the future having some kind of grace period at universal times of extreme financial difficulty as well, meaning specifically this time of year, the December, the holiday season, you see a lot of people, spending goes up, consumption goes up, and everybody is enjoying the holidays, but it's also a really stressful time financially for a lot of people. And even poor people are buying gifts for their families. And I think it would make a big difference with not much of a loss, as I understand it, to consider a grace period of December for people who pay deposits. We can certainly bring back a discussion of that item. Any other items? All right. Approval to adjourn? So moved. Second? Second. Okay. We're adjourned. [end of transcript]