FPB staff discusses budget needs with Board of Directors
/Board members make recommendations for final plan due at end of June
In dual sessions on Tuesday and Wednesday, Frankfort Plant Board staff presented its proposed 2018 Annual Operating Budget to its Board of Directors. The budget and the encompassing five-year financial plan focus on bringing value to customers. The goal is to maintain system infrastructure that will provide reliable services at affordable, competitive rates while ensuring a sound company financial position.
FPB Finance Director David Denton, CPA led the budget review by starting with an overview of the company and the budget process. He noted that FPB is a non-profit Special Purpose Governmental Entity (SPGE) that is not a component of the City of Frankfort. As an SPGE, FPB must have a board-approved budget prior to the start of the fiscal year on July 1. The approved budget must be submitted to the Kentucky Department for Local Government.
Denton described the four components of the budget as operating costs, infrastructure costs, debt service payments and reserve fund requirements. Each department (Electric, Water and Cable/Telecom) took the opportunity to present its budgetary needs to the Board.
During the next 10 years, the electric division will continue to perform upgrades of transmission/distribution lines and facilities, specifically breaker replacements and implementations of Advanced Metering Infrastructure (AMI) and additional smart grid technologies. By 2019, FPB electric will finalize the system voltage conversion. Converting the entire distribution system to one voltage has been a 30+ year project that will improve voltage quality, load capacity and switching flexibility. It will also reduce transformer and inventory costs.
The electric division will continue animal guard installation, tree trimming and spray programs to maintain low incidences of tree-related outages. FPB maintains reliability indices about four times better than the national average, and the aggressive line maintenance and tree-trimming program contribute to that success.
Kentucky Utilities will continue to implement annual rate changes that the Board must pass on to its customers. This pass thru and periodic cost-of-service studies ensure that the Board’s retail rates will generate adequate revenue based on consideration of wholesale power costs through KU, operating expenses, as well as adequate working capital and reserves.
In 2019-20, FPB will change power suppliers from KU to the Kentucky Municipal Energy Agency (KyMEA). FPB will join with other municipal utilities to take control of their own power supply. This will improve the Board’s ability to set and adjust its energy course as the community sees fit in the years to come. With this change, there is an estimated $5 million reduction in wholesale power costs in each of the last three years of the budget plan. Additionally, FPB expects to maintain rates at levels below the national and regional averages and reduce the recent trend of large annual electric rate increases.
The water division is focused on maintaining and improving the aging infrastructure of the water system. To that end, major initiatives of this fiscal year include enhancing water quality and flow characteristics through the systematic elimination of dead ends, the replacement of deteriorating mains, and the addition of mixing systems in our tanks; completing Phase 1 of the reservoir replacement project; and continuing to replace aging subsystems original to the water treatment plant.
Replacing the reservoir will require additional financing in order to maintain acceptable cash flow and reserve levels. The water division faces rising operational costs, minimum reserve levels established by the Board, and higher debt service requirements through 2020 due to recent debt financed capital additions.
In addition to rising operational costs, the water division has continued to see water consumption drop by approximately 1 percent per year due to customer conservation efforts, more efficient appliances, and sewer rates linked to water usage that are almost two times the water rate. Based on these challenges, the need to implement regular rate adjustments annually is anticipated.
Denton warned that careful attention needs to be paid to spending decisions that impact the water division, as there is a deficit in cash reserves for the division. The five-year financial plan projects a decrease in the water reserve shortfall as incremental rate increases are implemented and debt is retired. The water division is estimated to have a positive cash reserve position in year five of the budget.
Staff recommended the primary focus of cable/telecom division through FY2018 should be the outside plant infrastructure improvements. These improvements would replace end-of-life amplifiers and line extenders, which has an immediate impact on system reliability. These replacements would increase the system capability to provide faster and more reliable broadband and to offer potentially required 4K broadcast TV channels to customers.
In the first quarter of the new fiscal year, FPB’s infrastructure improvement consultants will present recommendations to the Board. Staff expects to spend a portion of the year engaging community stakeholders to determine the best path forward to improve the telecommunications infrastructure with a fiscally responsible, customer-oriented plan. Before the end of the fiscal year, staff expects to retain an engineering firm to design FPB’s 21st Century network design. The proposed budget includes funds for the initial design in year one with additional funds designated in years two through five.
As more video products move to the internet, cable TV service staff has budgeted for subscriber losses in all video products throughout the five-year plan. The rollout of the TiVo product is an effort to bring value to a segment of the subscriber base.
Cable TV programming costs will continue to increase throughout the five-year plan. The required renewal of all Lexington and Louisville broadcast stations is a particular concern in FY2018. Staff has planned for significant increases in broadcast TV cost as negotiations begin in September and must conclude by Dec. 31, 2017. Staff recommended eliminating duplicate network affiliates in order to control cost.
In an effort to slow the cable TV subscription losses, staff recommended absorbing cable TV programming increases throughout the five-year plan. Not passing these increases to subscribers equates to $15 per subscriber savings per month, at the conclusion of the five-year plan.
Staff did not recommend absorbing the cost of broadcast channel pass thru fees through the retransmission consent process, but seeks to limit these increases through the removal of the duplicate broadcast networks.
Modest growth is anticipated in broadband and high capacity Ethernet services. If funds for the outside plant infrastructure upgrades are approved, staff anticipates faster internet speeds will be rolled out to the subscriber base on a neighborhood-by-neighborhood basis as the infrastructure improvements are completed.
Staff proposed increasing the multi-service discount on broadband service to those customers who subscribe to broadband, cable TV and/or phone service. This would go into effect January 2018.
Residential landlines continue to decrease nationwide as more customers use mobile devices. FPB expects businesses to keep lines and looks to gain customers as incumbent telephone providers exit the market in the next three to five years. By selling voice, internet and security packages to business customers and improving product offerings though Hosted PBX solutions, staff expects to provide business products that save customers money and bring more value to offset residential phone losses.
The Board also reviewed budget presentations from directors in the companywide administration including Human Resources, Customer Service, Meter Reading, Support Services, Fleet Services, Finance, Information Technology, Safety and Public Information.
After hearing staff presentations, the Board made recommendations on language and initiatives to consider in the upcoming budget. These included moving the timeline of AMI implementation from 2019 to 2018, considering colocation options for the data centers, utilizing energy efficiency opportunities, setting up infrastructure to accept credit card payments, implementing a customer survey for feedback on cable skinny bundles, re-examining the employee compensation plan, planning for sidewalks at the new building and exploring energy assistance programs.
FPB staff will incorporate these recommendations and present the final draft of the budget at the Board’s regular monthly meeting on June 20.