With big projects looming on the horizon and a financial trajectory that's not sustainable, Independence Power & Light is at a crossroads.
That was the basic conclusion several city officials heard at a committee meeting Wednesday evening, when representatives from Management Partners and Michael Bell Management Consulting summarized the IPL management and financial audit that had been conducted at the city manager's request. It didn't necessarily mean all doom and gloom, though.
“It was actually an excellent night,” Council Member Scott Roberson said. “It gave us a lot of good information, though sobering information. Obviously, that's why I wanted to wait on Missouri City.”
The City Council voted Monday to authorize a $9.7 million contract for demolition and remediation of the Missouri City power plant that had been shut down two years ago. Roberson and fellow Council Member Karen DeLuccie voted in dissent, asking for a postponement until the council had at least received the audit and the Public Utilities Advisory Board had more time to consider the contract with Environmental Operations versus another proposal for $5 million less. The majority of the council had directed staff to negotiate on the higher proposal and not the lower one, citing better credentials and a price tag still far below initial estimates on tearing down Missouri City.
IPL has the cash reserves for the project, but city officials want to replenish those reserves. Perhaps first and foremost, the audit team advises the city to complete its master plan for power generation to provide further guidance for the future. The city is scheduled to have a firm selected for that master plan next month.
City Manager Zach Walker said he had wanted the audit because of the new city management team this year, and the “crossroads” assessment is one he certainly agreed with, if not anticipated.
“IPL continues to be a reliable, high-performing utility, but in order to sustain it, we've got to continue to provide for it and give attention to move it,” Walker said. “It's like having a house or a car – you've got to invest in it.
“(The audit team) had some thought-provoking suggestions and provided some warning bells.”
MBMC consultants suggest that after receiving the master energy plan, the city should update its rate study from 2015 and incorporate some of the recommendations from that study, such as a simplified rate structure and fixed costs, into regular rates.
The audit shows IPL had a negative net income of more than $11 million in 2015 and nearly $14 million in 2016. Pruning some vacant positions helped get the projected deficit down to $5.5 million this year, but the figure would rise again if the city stands pat.
The audit team suggests IPL will have to raise rates to combat the negative cash flow and declining cash reserves, but also notes that doing so would reduce borrowing costs and mean less customer expense for future projects.
Other recommendations include implementing a diversion detection program – to catch customers who bypass the meter and access power illegally – and developing set policies for handling bill non-payments and discovered diversions.
The city soon will be faced with a decision to significantly repair or decommission the Blue Valley plant, as well as repair substations. The Advanced Metering Infrastructure is something the city also hopes to roll out in the coming years – a large up-front cost that eventually should pay for itself.
DeLuccie said the prospect of a rate increase is real, simply based on the utility's current financial path.
“I don't know what (that increase) would be,” she said. “But we need to get the master plan, in order to know where we're going in the next five years, the next 10 years.”
Walker said the city is dealing with 2017 expenditures at 2012 rates, and the cost of business has gone up in that five-year lag. The city has invested well in power distribution and reliability, but not as much in generation. Getting the master energy plan, he agreed, is essential for making future decisions, and the concerns of citizens and ratepayers must be at the forefront of those decisions.
If nothing happens with the rates, Roberson said, IPL could be heading toward junk-bond status down the road.
“In the past, we haven't had good management of financial expenditures coming down the road,” he said. “We've got some tough, important financial decisions to make. I hope we make smart ones.”
The audit surely will be a lot to digest, Council Member John Perkins said, but it gives good directions moving forward.
“It wasn't all negative, there were some positives,” he said. “We're going to have some major decisions to make. We've got to dig in and do our homework and analysis.
“If we didn't do anything already,” he said, referring to budget trimming and discussions about the power plants' futures, “five years from now, it would get scary.”
Andy Boatright, who joined IPL as deputy director last year and now serves as acting director following the recent retirement of Leon Daggett, said the audit is helpful for him as a relative newcomer who has to help chart and lead the utility's future path.
“To remain relevant, know we have to be more customer-centric, put forth programs that allow customers to control their destiny in consumption,” Boatright said.
The audit also included a culture assessment derived from individual management staff interviews and a departmentwide employee survey that had a 55 percent response rate. While results showed high trust level among co-workers and immediate supervisors but low trust rates with upper management less-than-ideal morale, Boatright sees that as an opportunity for him as a director.
“When a new person comes in, you look for where we can make a difference,” he said. “Taking nothing away from Leon – he did some great things for the department – there's always room for improvement, and I think staff is eager to improve and move forward.”