Money woes at BWL

In advance of a Monday public hearing on a 2.5 percent rate increase, and a Tuesday commissioners meeting to approve said request, BWL has issued to us the contents of two memos from Peter Lark to BWL staff. See them below in their entirety:

"In yesterday’s e-mail regarding the challenges confronting the BWL this fiscal year, I emphasized the importance of weathering this economic storm together.

 Times like these demand difficult choices, and, yes, sacrifice.  However, I will not ask others to sacrifice unless I, too, am willing to make personal sacrifices.

 I want you to know that my team of executive directors and I will reduce our salaries by 5 percent through this fiscal year.  This decision has the full support of the entire executive team. 

 Together we will continue doing the hard and necessary work on behalf of our customers, and together we will move forward to what I am confident is a bright future.

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Every challenge in life presents an opportunity.  This country’s economic downturn is no different.  The BWL is well positioned to weather this economic storm – just as the BWL has weathered all sorts of bad news throughout its 124-year history.

 We’ll get through this – together.  I cannot emphasize that last word enough.

 Is the BWL feeling the impact of this troubled economy?  Of course, and, it’s not just the home mortgage crisis or the Wall Street meltdown.  

 For instance, last summer’s revenues were 15 percent less than anticipated due to cooler than normal temperatures, and environmental remediation expenditures at the

Lansing

landfill have significantly exceeded initial estimates.  Plus, natural gas prices have fallen this year.  Natural gas prices set the market price for our wholesale electric sales, so while our sales volumes have been excellent, we have not made nearly as much money in the wholesale market as we would have liked. 

 Nevertheless, what the Wall Street crisis did do was erode our investments in our Defined Benefit Pension and Retiree Health Care Plans.  Because investments have taken a hit, we’ve had to increase our contributions to the Retiree Health Care Trust (VEBA) this year and will be unable to make our annual transfer from the Defined Benefit Plan to the VEBA trust.  The bottom line: The BWL must contribute $700,000 a month to the VEBA trust – that’s $8.4 million a year, $6.4 million more then we had anticipated in our original budget.

 Let me be clear about one thing, though.  The BWL will weather this storm.  I am fervently optimistic about the BWL’s financial health.  Yet, we cannot stand on the sidelines and blithely watch the recession play itself out.  We have to act prudently, but aggressively, to reduce spending wherever and whenever an opportunity appears.

 Just so you know: We are planning to seek a modest rate increase next week.  But given these difficult economic times, I find it unacceptable to ask for rate increases of the size that were approved in the 2009 budget.  My recommendation is to seek a 2.5 percent increase for each of our utilities.

 Those are modest increases, and, one might argue, not enough to meet our budget needs. However, as I said, the state of the economy dictates we help our customers by continually seeking ways to cut spending.

 I’m sure you’re all aware of some of the efforts already underway.  Travel and overtime have been curtailed.  We are reorganizing and combining some departments to find ways to operate more efficiently.  We are creating a motor pool.

 We are evaluating the manner in which we utilize our electric generation units.  We are moving forward with the elimination of most of our purchasing card (P-Card) system and your share of health care benefits have increased.

 I’m convinced there are many little things – lights that can be turned off, paper that doesn’t have to be used – along with bigger items that can add up to substantial cost-savings. We need to identify those items.  How are we going to accomplish this?  I return to that word I used earlier.

 Together.

 I am asking each of you to do your part. We are a team, and the only way we’re going to succeed is if we stand shoulder to shoulder, as a team.  We need the cooperation of every employee to make sure we “live within our means” and that of our customers.

 Exceeding our budget is not an option.  In fact, we are already half way through our 2009 fiscal year and I have asked all our directors and managers to reduce their budgets by 10% by year end.  As a public utility and especially during these difficult times, we must be as scrupulous in all our spending as our customers are in maintaining their own budgets.

 I expect we will all be hearing more about “living within our means” in the coming months.  It’s the new reality.  The BWL has to adapt, and work within a leaner, more cost-conscious budget.  I am asking – not merely for your support – but for your help in accomplishing this critical task.  In fact, I welcome your ideas on how we can proceed in a smarter, leaner fashion without sacrificing safety and quality.

 But there’s another motivation to stay on budget.  Exceeding our budgets puts additional strain on our cash reserves that will have a negative effect on our current excellent AA- bond rating.  When we issue bonds, we must be able to demonstrate to bond rating firms that we can live within our budget and maintain sufficient cash balances to support our programs.  If we cannot make these showings our bond ratings will drop.

 The lower the bond rating, the costlier it is for us to borrow money.

The BWL must continue to maintain its ability to borrow money at reasonable rates to keep our system operational, replace aging infrastructure, and, perhaps in the future, build a new power plant.

The storm will pass. And I have absolutely no doubt that the BWL will thrive in spite of the lagging economy. While the obstacles are before us, so are the opportunities.