FINAL – APPROVED BY BOARD 5/24/05

 

MINUTES OF THE BOARD OF COMMISSIONERS' MEETING

LANSING BOARD OF WATER AND LIGHT

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Tuesday, March 22, 2005

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The Board of Commissioners met in the Boardroom of the Administrative Offices, 1232 Haco Drive, Lansing, Michigan.

The Secretary declared a quorum present.

Chairperson Smith called the meeting to order at 5:30 p.m.

APPROVAL OF MINUTES

Motion by Commissioner Joseph, seconded by Commissioner Haggart, to approve the minutes of the regular meeting held January 25, 2005.

Carried unanimously.

PUBLIC COMMENTS

THE CHAIR ANNOUNCED THAT MEMBERS OF THE PUBLIC ARE WELCOME TO SPEAK TO THE BOARD ON ANY AGENDA SUBJECT OR ON ANY OTHER SUBJECT NOW, OR AT THE END OF THE MEETING.

Glen Kirk, Finance Director for the City of Lansing, asked the Board for another thirty days to complete final details of a development agreement for the BWL riverfront property at Shiawassee and Grand Avenue, known as the Coal Storage property.  At the regular meeting in January 2005, the Board approved a resolution requiring River Street Triangle, LLC (developer) to pay a non-refundable $100,000 deposit as a condition for the developer to retain its option through June 2005, which is the date the option is due to expire.  Mr. Kirk noted that there is much to be gained from the City by having the proposed riverfront residential housing developed on the site.  The project would generate additional property and income taxes.  (See discussion under Unfinished Business.)

Patrick Reid, attorney for River Street Triangle, LLC, also urged the Board to grant a thirty-day extension to finalize details to close the transaction on the Coal Storage property.  He said the developer wants to start construction on the riverfront residential housing project this spring.  Mr. Reid recognized developer Joel Ferguson who was present in the audience to respond to any questions the Commissioners may have. (See discussion under Unfinished Business.)

Joseph Davis, Business Manager for IBEW Local 352, spoke regarding the resolution under consideration concerning changes to the pensions of Defined Benefit Plan pensions.  He noted that although the union does not negotiate for pensioners, it does negotiate for active members who are covered by pension plans and that is why the time line referenced in the attachment of the November 25, 1996 Personnel Committee Report was set the way it was.  Mr. Davis urged the Board to maintain the same timeline and to review the cost of living issue for Defined Benefit pensioners on a regular basis.

James Chandler, BWL Lineworker expressed concern with the BWL’s new strategic plan.  He said he disagrees with the perceived organizational strengths and weaknesses pertaining to operational and manpower efficiencies.  He stated that if he is going to be required to work under conditions that are going to jeopardize his safety, then he is gong to have to step back and rely on the MIOSHA Rules to make sure he works safely around high voltage, hazardous conditions.  He suggested that if he is going to get moved around to where he becomes minimally responsible for what happens out in the field, then he expects the same things to be done in-house, such as outsourcing financial accounting. 

COMMUNICATIONS 

Letter from Nancy Duncan resigning as Commissioner from the Second Ward for the Board of Water and Light effective February 28, 2005.

Placed on file.

E-mail from Howard Gladding, 3506 Laureate Drive, Holt, dated March 22, 2005, expressing concern with the proposed water rate increase under consideration.

Placed on file.

COMMITTEE REPORTS

Resolution 2005-3-1

FINANCE COMMITTEE `REPORT

A meeting of the Finance Committee of the Board of Water and Light was held at the Executive Offices, Lansing, beginning at 5:30 p.m., Tuesday, February 15, 2005.

Committee Chair Nancy Duncan called the meeting to order and asked the secretary to call the roll.  The following members of the Finance Committee were present:  Commissioners Ron Callen, Nancy Duncan, Ifield Joseph, and Robin Smith.

Chair Duncan informed the Committee that for personal reasons, she is resigning her position as Commissioner from the Second Ward for the Lansing Board of Water and Light (BWL).  She expressed her appreciation for the opportunity to serve the residents of Lansing and the customers of the BWL and wished the Commissioners the best.

The Committee along with General Manager Novick and staff thanked Commissioner Duncan for her wise counsel and service to the BWL.

Public Comment

There were no public comments.

financial accounting statement (FAS)  No. 71 issues

Senior Vice President of Finance Dennis McFarland reported that in 2003, staff made a commitment to the Board of Commissioners that all future FAS No. 71 related items to be recorded in the financial statements would be approved by the Board prior to their use.  FAS No. 71 provides guidance in preparing general purpose financial statements for most utilities.  He noted that if costs are to be recovered in the future, those costs should be capitalized as regulatory assets.  If current recovery is provided for costs expected to incur in the future, those costs should be recorded as a regulatory liability.  The goal is to match costs and revenues.

Mr. McFarland clarified management’s current accounting treatment for all transactions subject to FAS No. 71 accounting.

1.                  Accounting for the Central Utilities Complex (CUC):  Certain items, such as revenue received from General Motors for debt service payment, are offset by the amortization of the CUC investment.  The current effect in net income is 5% profit margin or $444,356 in FY 2004.  This current treatment of FAS No. 71 was approved by Resolution 2003-8-3.

2.                  Contribution in Aid of Construction (CIAC) for Electric and Steam:  Electric and Steam services to large projects may require the developer to pay a CIAC based on the BWL’s estimated construction costs.   Rather than recognizing that as revenue, it is credited to the asset, thus reducing the amount of depreciation on a going forward basis.  This complies with Federal Energy Regulatory Commission (FERC) guidelines.  This current treatment of FAS No. 71 was approved by Resolution  2003-8-3.

3.                  Environmental Remediation of the North Lake Lansing Road Landfill:  FAS No. 71 permits BWL to record the estimated liability as a deferred expense.  This deferral allows the BWL to charge operating expense as the actual costs are paid out and recovered in rates.  This current treatment of FAS No. 71 was approved by Resolution 2004-11-2.

Mr. McFarland presented the following recommendations for applying FAS No. 71:

1.       Energy Cost Adjustment (ECA)
a.   Defer difference in energy cost and amount recovered in the rates

b.   Normalization of ECA revenues

c.   Track ECA to assure full recovery of eligible costs

2.        Contribution in Aid of Construction (CIAC) for Water

a.    Credit CIAC against the asset

b.    Allow for the same treatment of CIAC for Water as for Electric and Steam.

Mr. McFarland reported that in the past, management applied FAS No. 71 to the capitalization of interest during construction.  Justification cannot be made for using FAS No. 71 on a going forward basis for capitalization of interest.  He recommended discontinuing FAS No. 71 for this accounting application.   Staff is currently in the process of developing a procedure to support the capitalization of interest related to large projects. 

Following discussion, the Finance Committee voted to advance this recommendation to the Board for action at the March 22^nd Board meeting.

BUDGET ASSUMPTIONS

Vice President of Finance McFarland presented the Financial Plan and FY 2006 budget assumptions.   He reported that the financial goals are to maintain a strong credit quality, ensure adequate liquidity, maintain rate competitiveness, efficient and appropriate use of capital, and financially independent utilities.  Beginning July 1, 2005, staff will report on four separate utilities with a revised methodology for allocating overhead costs.

Mr. McFarland compared the sales forecast for FY 2006 over FY 2005

Electric:

§                Residential/Commercial/Industrial (excluding General Motors) on historical growth rates
normalized for weather

§                Trended growth rates:  Residential = 1.5%, Commercial = 2.05%, Industrial = 0.60%

§                GM: includes retirements and line reductions at Plants 1 & 6, increased production at Mid-MI Stamping Plant

§                Wholesale based on remaining generation availability

Water:

§                Residential/Commercial/Industrial based on historical growth rates with deductions for line reductions at GM Plants 1 and 6

§                Trended growth rates:  Residential = 0.98%, Commercial = 0.19%, Industrial = 0.0%

§                Wholesale based on historical and/or contractual commodities

Steam:

§                Residential/Commercial/Industrial based on historical growth rates with deductions for line reductions at GM Plants 1 and 6

Chilled Water:

§                Based on full year of all buildings on line, normalized for weather

Revenue assumptions for FY’06 were presented:

·      Rate increases effective July 1, 2005 for each utility:

-  Electric:  3%

-  Water:  6.5%

-  Steam (Central District):  33%

·      Chilled Water at minimum bill levels

·      2% increase in Electric Wholesale prices

Operating expense assumptions include:

·      No increase in full-time employees.  Given forecasted retirements at BWL and the time it takes to fill the positions, larger cost centers will budget for vacancies at the rate of about 10%.

·      Salary increases for the bargaining unit are based on the union contract and non-bargaining increases are based on market study to be presented to the Human Resources Committee in April for Board action in May.

·      Increase in health care cost of 11% for insurance premiums and Medicare reimbursements.  This includes the premium sharing that is currently in place for active employees.

·      Funding of retiree health care (GASB 45).  The recently published GASB standard requires that the accrued liability for non-pension benefits for retirees, such as retiree health care cost, be amortized to expenses, similar to pension benefits.  Currently that figure stands at an estimated $181 million for the BWL.  Amortizing the obligation over a 30-year period would result in an additional $5 million dollars of annual expenses.

·      Reallocation of discretionary resources.

Capital expenditures:

·      Revenue producing capital additions to be justified by cost/benefit analysis

·      Capital targeted an annual depreciation expense (FY 2006 budget ~ $29 million)

·      Ten-Year Lead Service Replacement Program

Other considerations include:

·      BWL participation in the Clean Water State Revolving Fund (SRF) funding

·      Payment in Lieu of Taxes (PILOT) to remain at 4%

By consensus the Committee concurred with the budget assumptions and directed staff to proceed with a proposed FY 2006 Budget.  A detailed O&M and Capital Budget will be presented to the Finance Committee in May for deliberation and recommendation to the Board.  

General Manager Sandy Novick reported that staff is preparing a rate case strategy presentation and a draft communication plan for various audiences on proposed rate increases for the Committee of the Whole meeting in March.

AUDIT CHARTER

Internal Auditor Holloway reviewed a draft Internal Audit Charter.  An Internal Audit Charter defines the mission, purpose, independence, authority, responsibility and scope, and standards of internal audit.  Mr. Holloway reported that the Board last approved an audit charter in October 1995.  Since that time, significant changes have taken place within the audit profession, partly driven by the Enron and WorldCom scandals.  These changes revised the International Standards for the Professional Practice of Internal Auditing by expanding the role of internal audit to include the evaluation of risk management and evaluation of internal controls and governance processes which expands it beyond traditional controls.  Mr. Holloway presented a Draft Internal Audit Charter (Attachment A) for consideration, which is based on recommendations by the Institute of Internal Auditors.  Mr. Holloway noted that he is in the process of finalizing a Records Retention Plan for his department to be distributed to the Commissioners at the next meeting.

Following discussion, the Finance Committee voted to recommend that the Board approve the Internal Audit Charter.  This item will advance to the Board for action on March 22, 2005.

AUDIT PLAN

Mr. Holloway reported that in order to develop an annual audit plan, internal audit standards require that the audit plan be based on risk assessment.   He reported on recent major milestones that have shaped our current view of risk assessments.  These include:

Sarbanes-Oxley (SOX) Act of 2002, which imposed new financial reporting requirements on listed companies.  SOX requires evaluation of internal controls over financial reporting based on a suitable framework.  Existing internal control frameworks include required risk identification and management.

International Standards for the Professional Practice of Internal Auditing.  The recently revised standards provide a new definition of internal audit, which include that internal audit activity should evaluate and improve the organization’s risk management, control, and governance processes.  An annual audit plan was also included based upon an annual risk assessment and additional risk-related guidelines.

COSO Enterprise Risk Management (ERM) – Integrated Framework.  The Committee of Sponsoring Organizations (COSO) ERM framework defines essential components, suggests a common language, and provides clear direction and guidance for enterprise risk management. 

Other milestones include (1) FASB 133 - This standard requires the method of evaluating the effectiveness of Derivative Instruments and Hedging Activities to be consistent with the entity’s approach to managing risks; (2) GASB 40 - Deposit and Investment Risk Disclosures modified standards requiring communications of these risks; and (3) Basel Accords – Impacts the banking industry and is effective in 2007 among the ten largest banks which operate internationally.  Risk identification and management is required.

Mr. Holloway then reviewed the results of his risk assessment based on interviews with Commissioners and management.  The top ten risks at a macro and micro levels were discussed.  He also reviewed his Internal Audit Plan (Attachment B) for the remainder of FY 2005.  Mr. Holloway reminded the Committee that special projects could surface requiring a slight modification to the plan.   The Committee requested information on the concepts of control and governance.  Mr. Holloway indicated that he would forward this information to the Commissioners. 

Following discussion, the Finance Committee voted as follows to recommend that the Board approve the Internal Audit Plan for the remainder of FY 2005.  This item will advance to the Board for action on March 22, 2005.

There being no further business, the Finance Committee adjourned at 7:39 p.m.

Respectfully submitted,

Nancy Duncan, Chair
Finance Committee

Motion by Commissioner Joseph, seconded by Commissioner Haggart, to receive the report.

Action:  Carried unanimously.

Resolution 2005-3-2

HUMAN RESOURCES COMMITTEE REPORT

A meeting of the Human Resources Committee of the Board of Water and Light was held at the Executive Offices, Lansing, beginning at 4:00 p.m., Thursday, February 24, 2005.