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05/09/1996FISCAL REVIEW COMMITTEE CITY OF CLEARWATER May 9, 1996 Present: John Rich Member Janet MacNutt Member Daniel Moran Member Daniel Fleck Member Carol Warren Member Tina Wilson Budget Director Chuck Warrington Managing Director, Clearwater Gas System Jim Lewin Assistant Director, Clearwater Gas System Bob Bublitz Controller, Clearwater Gas System Gwen Legters Board Reporter Budget Director Tina Wilson opened the meeting at 8:00 a.m. at City Hall. In order to provide continuity for research, the items listed were not necessarily discussed in that order. Ms. Wilson stated the Fiscal Review Committee has been newly created and will function similar to a Budget Advisory Committee. This committee may meet as often as 2 or 3 times per month. Today’s topic is review of Mr. Warrington’s presentation of CGS (Clearwater Gas System). Members are free to ask questions during the presentation. Information from this meeting will be forwarded to the Commission. A recommendation may be presented to the Commission regarding strategic plans of various entities reviewed at all Fiscal Review Committee meetings. Ms. Wilson noted the Sunshine Law states committee members must discuss issues only at official meetings. Ms. Wilson introduced City Manager Deptula. Ms. Deptula gave a brief overview of her background. She said the FRC will be helpful in scrutinizing budgets, determining the long term financial health of the City, and planning of strategies, principles and philosophies needed in the City. Long range vision is necessary to assure the stability of government. She noted Ms. Wilson is always hard at work and has a bright future with the City. Discussion ensued regarding CGS rates and operations. CGS is an enterprise fund, which is a propriety fund or business. Making a profit and providing a quality service to citizens is CGS’ objective. Five years ago, the Commission reviewed the gas system and its performance was very poor. Staff was asked to obtain proposals for selling the business. An RFP was developed and 10 to 12 responses were reviewed. Employee benefits and other areas were also reviewed. CGS management problems were discovered, but it was decided not to sell the business due to its potential profitability. Mr. Warrington was hired to manage the system and make CGS profitable. Chuck Warrington, Managing Director of CGS, introduced Mr. Jim Lewin, CGS Director of Marketing & Planning, and CGS Controller, Bob Bublitz. Mr. Bublitz gave an overview of the business. CGS has been in business since 1923 as a manufactured gas plant facility on Myrtle Avenue. Manufactured gas was produced through a chemical process involving coal. When gas lines were available in Florida in 1959, CGS tapped into the natural gas pipeline. The City’s previous finance director evaluated the system, arriving at a net value of CGS at $24 million. Consultants at R. W. Beck determined CGS was worth more than $14 million, and if managed properly, could become profitable. Mr. Warrington joined CGS in February of 1992, at which time he embarked upon reorganization of CGS. He presented slides, handouts and a notebook scrutinizing rates and revenues. CGS’ original service area included central Pinellas County, Oldsmar and Tarpon Springs. In 1993, the strategic plan expanded into Pasco County. People’s Gas filed objections against CGS with the PSC (Public Service Commission). The PSC determined CGS was better able to provide service to the Pasco area than People’s Gas. The PSC limited CGS to a boundary almost to US 41 in southwest Pasco County and up to State Road 52. CGS was granted Holiday, New Port Richey, Port Richey, and the area east of Little Road to the Saranova site. A new transmission pipeline built by Florida Gas Transmission lies in the area and CGS has three service points off the line. When the system is down, all pilot lights must be turned off, and CGS must go to individual homeowners and businesses to restore service. In 1990, this occurred and it took CGS 2 days to restore service in the Clearwater Beach area. Should St. Petersburg lateral experience damage, the capability of connecting to the northeast corner as a backup will enable CGS to feed gas into the north end of the system. People’s Gas has all territory to the east and north of State Road 52. They are building a line from Hudson Road down the highway to intersect with CGS. They have informed the Pasco County Commission they would only serve residential loads in that area with propane. People’s Gas does not allow customers with less than a half million therms a year to utilize interruptible rates. CGS allows customers with 100,000 therms to take advantage of interruptible rates. Interruptible means should CGS reach peak load, customers on interruptible rates may be asked to use an alternate source of energy for a specific period of time. Summer and winter flow rates were discussed. The PSC regulates maximum flow rates, which is why interruptible customers are important. CGS sells both natural and propane gas, and is a full service company, selling appliances and serving residential and commercial accounts. CGS’ total service territory to date is 252 square miles, with 500 miles of main pipelines serving thirteen municipal areas and 13,000 customers. It was noted the City receives $3.2 million per year in transfer payments from CGS. Over 50% of sales revenues are obtained from customers outside the City. The business is very competitive. Rates are not established by the PSC, but by the City Commission. The PSC regulates safety and territorial boundaries. A strategic plan was presented to the Commission in August of 1993 and plans were formulated through the year 2000. Three major issues will be presented by Mr. Warrington to the Commission: 1) strategic business plan update to the year 2002; 2) gas rate case, Phase II; and 3) process for gas revenue bond sale. CGS’ strategic plan objectives are to accelerate Pinellas County growth, expand into Pasco County and develop new gas markets. A seven year payback must be obtainable prior to offering service in an area. It was noted gas units are higher than electric units due to lack of mass production and the fact that units are basically on-site generators. Member Rich questioned the feasibility of communities to establish their own power plants due to deregulation. Mr. Warrington responded deregulation will allow communities to purchase transmission, distribution and energy as bundled items from power companies. CGS could potentially become the marketer of energy to citizens. The power company would remain the distribution source. The Federal Regulatory Energy Commission has not made a determination in this area. The law currently allows customers to purchase gas from a third party marketer and transport it through CGS pipes to customers. This process is called retail wheeling. Currently, 10% of residents in Pinellas County can use gas. If gas lines are not available in an area, propane may be used. Mr. Warrington said although growth is anticipated, outsourcing will be the key to keeping CGS personnel levels reasonable and efficient. Reducing cost per customer from $444 to $392; increasing customers served per employee from 130 to 233; expanding main extensions to ten miles per year; and tracking existing plans and increasing Pinellas County growth by adding 5,300 customers to bring in $3.1 million in non-fuel energy revenues are priority objectives for CGS. CGS plans to add 117 miles of main in Pasco County, which will add 4,500 customers by the year 2002. Over the next seven years in Pasco County, CGS will acquire $9.5 million in capital expenditures, and add $2.6 million in non-fuel revenues. Gas air conditioning and other high tech markets are great opportunities for CGS. Mr. Warrington reviewed the gas rate case. Implementation began in October of 1995. Phase I rates were recommended based on a study done by a CPA firm, C&L (Coopers & Lybrand), and Phase II was recommended to become effective October 1, 1996. Phase II residential rates were already codified by the Commission in 1995 to become effective in 1996. An increase of $2.25 per therm in residential base rates was realized in 1996. Phase II is being corrected in two areas. Multifamily therm rates were treated as a general service therm rate when initially implemented. After implementation, problems in numbers were discovered in 1996, and C&L found therms for commercial customers were calculated the same as residential rates. An example given was Mission Hills. Commercial rates will be increased slightly in 1996. A shortfall of $1.3 million in revenues has occurred in 1996. An increase of $900,000 should have been realized, according to C&L. C&L worked with Utility Customer Service personnel to breakdown CGS’ numbers for the rate case. The numbers are flawed and it is unclear why. Another study would cost CGS, therefore an in-house study will be done. Member Warren suggested employing a firm with expertise in the utility area for future studies. Mr. Warrington noted there are a number of firms who specialize in utility studies. C&L was considered one of those companies. Previous rates were based on the C&L study. Due to the study, CGS will have a shortfall of $200,000 in the gas fund for 1996. Next year will improve slightly, and the following years will show marked improvement. Cost comparison charts were reviewed. Advance re-funding of CGS revenue bonds were discussed. CGS owes the City approximately $2.5 million. After bonds are sold, profits will be realized in the next few years. Discussion ensued regarding salary increases for CGS employees. Mr. Warrington suggested a marginal portion of pay dependent upon achievement of goals. He discussed the sustainability of the gas system. It was noted public regulatory agencies directly affect CGS. Mr. Warrington noted In October of 1996, Morton Plant will receive a York engine driven chiller unit, which is the newest class gas air conditioner marketed in the country, and the second largest unit ever sold in the country, as well as the largest unit in Florida. This is a very large score for CGS and encourages future gas applications throughout the state. Mr. Warrington gave everyone his telephone number at CGS and encouraged members to visit the gas sales office for a tour. The meeting adjourned at 10:24 a.m.