Elizabethton Electric System Study
by MTAS, July 2002
Introduction
EES Board Chairman Gary Nave asked MTAS to conduct a Ageneral overview@ study of the
Elizabethton Electric System. The two consultants assigned to the study were Bill Young, Utility
Consultant and Pat Hardy, Municipal Management Consultant.
The following methodologies were employed in order to conduct the study:
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Interviews were conducted with two Board members, including the Chairman.
Interviews were conducted with 7 staff members, including the General Manager.
Pertinent documents such as the Union contract, vehicle use documents, etc. were
reviewed.
Financial documents were reviewed, including the last few years budgets, audits,
financial statements, etc.
The Elizabethton Electric System was compared with other similar electric
systems.
Individual recommendations developed as a part of this study are highlighted throughout the text.
Management Processes
Strategic Management
There does not seem to be a clear direction, emanating from the Board, regarding the
long-range goals of the EES. RECOMMENDATION: the Board, in concert with key
management, should establish a clear set of long-range goals and objectives for the EES.
This is an important role of the Board, and in fact quality management of the system is difficult
to accomplish without this clear direction. For example, we identified a variety of opinions
regarding the financial management of the system and there appears to be a clear lack of
consensus regarding the system=s long-term financial management policies. This is discussed
later in this report, but for now it should be noted that long-range policies such as these will
provide important guidance for the EES staff. Once goals are established, accountability for goals
can then be tracked.
Such strategic goals should be accomplished in a retreat format, where brainstorming can
best occur and where a more relaxed atmosphere prevails. In addition, specific issues which face
the system can be addressed and solutions developed. The informal environment of such a retreat
can also serve to bring key staff and the Board together where the field of discussion is more
Alevel@. RECOMMENDATION: The Board and key staff should hold an annual
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Aretreat@ (one day, day-and-a-half, etc) in order to develop long-range goals, discuss
progress made toward achievement of those goals, address important issues facing the
system, develop new initiatives, etc. A part of this may include portions of an on-going ABoard
Orientation@ program where greater explanation of the System and its operations are explored.
Budgeting and Financial Reporting
In terms of the budgeting process it is our opinion that the current budget format is not
specific enough for Board members or staff to gain a comprehensive understanding of what the
budget is trying to accomplish (it should essentially be the translation of public policy into
numbers). But the current budget format only provides broad categories such as AMaintenance
Expense@, AMeter Expense@ or ACapital Projects@. It is difficult to know from these categories
exactly what is included in each. It is therefore difficult to determine with any great precision the
exact cost of providing certain services. RECOMMENDATION: A new budget format
should be developed which provides a greater level of line-item detail or at a minimum a
specific explanation of what is included in each (for an example of such a format, see the City
of Elizabethton Annual Budget).
An associated problem relates to the budget development and financial reporting process.
Given the current budget format we believe that key department heads are probably unable to
adequately contribute to budget development and to adequately track their division=s revenues
and expenditures. This inability means that department heads probably do not know exactly what
items are included in their department=s budget and thus cannot manage their division=s
finances through the course of the year. RECOMMENDATION: A new monthly financial
reporting format should be utilized which clearly details each department=s revenues and
expenditures. In turn then each department head should be held accountable for their portion of
the budget. This same format should be given to the Board on a monthly basis so that they too
can track revenues and expenditures.
All of this is also true for the budget development process. Department heads should play
a key role in this process. But in order to do so they must know the specifics of their
department=s revenues and expenditures. In other words the format must support the
development of the budget from the Aground up@, that is, from the department head level up
through the Board.
As a part of this process the EES accounting system should reflect the new format, and as
revenues come in and expenditures are made, each should be posted to the appropriate account
without exception (in this way the true cost of doing business can be determined).
Joint City/EES Operations Opportunities
There seems to be a continued question regarding joint operations possibilities between
the City and the EES. In particular there is a question regarding joint billing. This question must
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be resolved through an active effort. RECOMMENDATION: The City Manager, EES
Manager and key finance and IT personnel should meet in order to develop all alternatives
and recommendations for a joint billing program. Other joint operations programs should
also be explored on an on-going basis (such as GIS and CAD).
Service Policies
In many cases there are no written guidelines regarding services, charges, etc.
RECOMMENDATION: An AAdministrative Policy Manual@ should be developed which
details all policies regarding services, charges, etc. Such a manual will help both EES
employees as well as the general public.
Personnel
Personnel Policies
We did not find a comprehensive set of personnel APolicies and Procedures@ or a
APersonnel Handbook@. Such policies provide guidance to employees regarding the terms and
conditions of employment, and also serve as handbook detailing employment-related processes
(currently, the union contract is used for this purpose). RECOMMENDATION: A
comprehensive set of Personnel Policies and Procedures or Employee Handbook should be
developed and distributed to all employees. This document should be approved by the Board
and should provide information concerning all employment-related policies (such as Equal
employment mandates, maternity leave, the Fair Labor Standards Act provisions, Family and
Medical Leave Act, ADA provisions such as Areasonable accommodations@, conditions
authorizing overtime, policies concerning the use of system facilities or equipment, vehicle use
and take home policies, military leave, etc.). As a part of this process the Board should take the
opportunity to review key personnel policies such as the vehicle take-home policy (to be sure
these meet Board criteria).
Manager and Employee Evaluations
Another personnel-related function is the evaluation of the Manager. This is a key
responsibility of the Board. RECOMMENDATION: The Board should formally evaluate the
Manager=s performance on a yearly basis. Attached to this report (see Appendix A) is a
sample evaluation instrument. This instrument is Asoft@ in nature and deals primarily with key
management processes. It is designed to raise a Aflag@ early if there are areas in which the Board
desires improvement or change in the Manager=s performance. The results of the evaluation
should be discussed in a private meeting between the Board Chair and Manager.
We also did not find a substantive employee evaluation process. Needless to say this is an
important tool which should be used by all EES department heads and the Manager.
RECOMMENDATION: Employee evaluations which accurately reflect an employee=s
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performance should be completed each year. As well as corrective action, these results can be
used to identify employee development/training needs (including cross-training opportunities).
Accounting of Sick Leave and Health Insurance
The EES Board has agreed to pay the full cost of health insurance for the employee and
his/her family upon retirement and until the age of 65. RECOMMENDATION: A study should
be undertaken every 5 years which estimates the long-term cost of this benefit and which
identifies current funding levels which may need to be applied today in order to meet these
expenses. In short, the liability of this long-range benefit must be clearly identified on a yearly
basis.
The EES Board also provides a sick leave benefit which has no accrual limit except in the
case of retirement or termination. In this case the system is responsible to pay the employee up to
180 days (9 months) of sick leave pay. This benefit should be calculated on a yearly basis and
carried as a liability on the EES balance sheet (this is best carried out by the auditor). In this way
Board can clearly see the true cost of providing this benefit and can also be prepared on a yearly
basis in the event payment for this benefit is required.
Overtime
$227,000 in overtime wages were paid to EES employees in FY 2001. This is 10% of all
wages paid. Hourly overtime rates range from a low of $15.56 to a high of $42.72. Controlling
these expenses is important. RECOMMENDATION: A set of recommendations and
alternatives for controlling these costs should be developed by staff and presented to the
Board for consideration.
Alternatives should include but not be limited to:
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Elimination of overtime payments for employees who are exempt from the
overtime requirements of the Fair Labor Standards Act (the law which regulates
minimum overtime requirements).
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Controls placed on how overtime is authorized and who is used for overtime
work.
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A reassessment of services which will be provided after regular working hours
and a re-examination of what constitutes an Aemergency@.
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Consider sending one person, rather than an automatic two, on certain non lifethreatening calls.
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An examination of overtime policies/benefits. For example, overtime is paid for
all hours worked in excess of 40 in a week. But if a vacation day, sick leave day or
a holiday is taken during the week these hours are counted toward the 40-hour
threshold (this provision is in the union contract but is not required by the Fair
Labor Standards Act.). Thus overtime is being paid for hours which are not
worked in excess of 40.
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This effort should also include an examination of policies such as the minimum 2hour callout policy (it may be that a 1-hour callout is adequate) or the policy of
paying both standby and callout pay at the same time.
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Alternative work-hours policies should be considered. For example, if an
employee has worked 40 hours before the workweek is finished they can be sent
home, thus avoiding working longer than 40 hours during the week. Or, if an
employee is called-out and the minimum 2 call-out hours are reported, they can be
required to leave two hours early the next day, thus avoiding overtime.
During our interviews it became apparent that staff were unaware of the exact level of
overtime being used by themselves and/or their employees. It will be difficult to control these
expenses if supervisors do not know precisely the impact of their operations on the overtime
situation (and in this way they can also be held accountable for overtime use in their
departments). RECOMMENDATION: Key staff should receive monthly statements clearly
showing overtime use by their employees (such statements should show how much overtime
was used, who has taken overtime, when it was taken, and why it was used).
Wages and Benefits
As the chart on the next page shows, EES wages are in line with those of other TVA
electric systems (with a very few exceptions). EES pays the highest wages in four cases and the
lowest in two.
However during our interviews it became apparent that there may be some concern
regarding wages and benefits, and especially benefits. Per Tennessee Code Annotated the
establishment of wages is the responsibility of the Manager. But the establishment of benefits
and benefit levels is the responsibility of the Board. These are essentially policy decisions and
can be altered by the Board. This being the case the Board should review the benefit package
each year or two and make adjustments if they deem it necessary.
Though benefits are an important part of the union contract this should not be considered
a barrier to adjustment of such benefits. The Board must decide what kinds of benefits should be
provided, and at what level. These terms should then become a part of negotiations as reflected in
the union contract and should be viewed as a part of the full compensation package (i.e.
including wages).
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In terms of wages, it has been almost 10 years since a classification/compensation study
was undertaken. If concerns about wages continue it may be that a new Aclass/comp@ study
should be contracted which includes a wage comparison component.
Finance
Introduction
The Elizabethton Electric System provides electricity and related services to
approximately 25,000 customers. EES is a distributor, under contract for purchasing electricity
from the Tennessee Valley Authority, and, as such, is subject to the financial and statistical
regulations required in their contract. In order to do a comparative analysis, seven other
distributors were chosen by ranking sales of electricity in kilowatt hours and the number of
customers. Distributors chosen were Alcoa, Columbia, Lexington (Tn), Newport, Paducah (Ky),
Paris, and Weakley County. The comparison percentages are expressed as EES compared to the
seven other distributors average. Comparison information is taken from the Summary of
Financial Statements, Sales Statistics, and Rates, Distributors of TVA Power, Fiscal Year Ended
June 30, 2001.
Provided as an Appendix to this Report (Appendix B) are additional comparisons
presented in graphic format.
Comparisons
Sales (In thousands of Kilowatt hours)
Elizabethton 554,160
Average
Total Customers
Elizabethton 25,045
Average
539,379
21,386
Percentage
Percentage
103%
117%
Sales Revenue
Residential
General Power (50 & under)
General Power (Over 50)
Street Lighting
Outdoor Lighting
Total
Elizabethton
$20,485,320
$ 3,374,486
$10,513,237
$ 291,310
$ 397,487
$35,061,840
Average
$16,307,520
$ 3,504,479
$12,523,659
$ 282,956
$ 511,028
$33,129,642
Percentage
126%
96%
84%
103%
78%
106%
Compared to the other seven distributors, EES is realizing a much greater percentage of
revenues from the residential customers. This is supported by the customer breakdown showing
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that EES has more residential and less General Power customers than the average.
Expenses
Purchased Power
Operating & Maintenance
Depreciation
Taxes & Equivalents
Total
Elizabethton
$27,247,646
$ 4,346,474
$ 1,135,910
$ 953,717
$33,683,747
Average
$26,696,081
$ 3,906,265
$ 1,268,319
$ 696,361
$32,567,026
Percentage
102%
111%
90%
137%
103%
Total expenses for EES are just about average. The large difference in the Taxes &
Equivalents may be due to the fact that some distributors pay less than the maximum equivalent as
they have special agreements with the cities and counties.
Net Income
Elizabethton $1,994,408
Average
$1,263,647
Average
158%
Although EES has a substantially higher net income than average, the bulk of the
difference is in Other Revenues, made up of Pole Rental charges and reimbursement for line
extensions, a new revenue policy.
Purchased Power Cost As A Percentage of Revenues
Elizabethton
78%
Average
81%
TVA systems average approximately a 20% operating margin after paying the power bill.
Average Annual Residential Bill
Elizabethton
$973
Average
$932
Percentage
4%
Percentage
(79%)
Cash Reserves
Elizabethton $1,972,005
Average
$2,381,350
EES is well below the average in cash reserves, and did not have enough in reserve to
cover one months TVA power bill which averages over $2,000,000. Although there has been
discussion of using some of the reserve to pay down the long term debt, it does not appear at the
present time that reserves are sufficient to provide that option. RECOMMENDATION: The
Elizabethton Electric System should work toward funding a level of reserves equal to 10%
of revenues (approximately $3,500,000).
Rates
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As the chart below shows, Elizabethton has the same or the lowest rates of the average of
the comparison cities in all classifications except Aresidential@. And as mentioned above, part of
this is because Elizabethton must rely on residential customers for its income more than the
comparison cities. However the Elizabethton residential rate is only about 4% higher than the
residential rate of comparison cities. For this reason, we believe that EES rates are not out of line
and reflect favorably on the operations of the system.
Rate Class
Average of Other Systems
Elizabethton
Residential
$6.00
$6.25
GSA1: <50kw
$12.27
$12.00
GSA2: 51-1,000kw
$38.46
$30.00
GSA3: 1,001-5,000kw
$106.46
$80.00
GSB: 5,001-15,000kw
$1,500
$1,500
GSC: 15,001-25,000kw
$1,500
$1,500
GSD: >25,000kw
$1,500
$1,500
LS - Outdoor Lighting
$.044
$.043
EES Financial Data
Information from the TVA Annual Reports for F/Y 1997 through F/Y 2001 for the
Elizabethton Electric System:
Operating & Maintenance Expense
F/Y 1997
$4,452,406
F/Y 1998
$4,950,597
F/Y 1999
$3,945,842
F/Y 2000
$4,485,373
F/Y 2001
$4,346,474
O & M expense declined from F/Y 2000 to F/Y 2001. Also the F/Y expense was less than three of
the four previous years.
Total Expense (excluding Power Cost)
F/Y 1997
$6,454,596
F/Y 1998
$7,152,053
F/Y 1999
$6,250,754
F/Y 2000
$6,914,724
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F/Y 2001
$6,694,264
Total expense declined from F/Y 2000 to F/Y 2001.
Payroll expense
F/Y 1997
$1,245,104
F/Y 1998
F/Y 1999
$1,471,573 $1,351,573
F/Y 2000
$1,282,666
F/Y 2001
$1,178,290
Payroll charged to Operating and Maintenance expense declined each year from F/Y 1998 to F/Y
2001. In fact the 2001 payroll was the lowest in the comparison period.
Total Payroll (Includes Capital Projects)
F/Y 1997
$1,859,294
F/Y 1998 F/Y 1999
F/Y 2000
F/Y 2001
$2,180,689
$2,031,532
$1,909,703
$1,802,140
Total payroll declined each year from F/Y 1998 to F/Y 2001, and the 2001 payroll was the lowest
in the comparison period.
Payroll Expense as a Percentage of O & M Expense
F/Y 1997
28%
F/Y 1998
30%
F/Y 1999
34%
F/Y 2000
29%
F/Y 2001
27%
Capital Additions to Plant
Elizabethton $2,210,124
Average
2,035,930
Percentage
9%
Financial Examination Conclusions
Elizabethton Electric System compares favorably in financial operations with similar
electric utilities. MTAS would make the following recommendations:
RECOMMENDATION: Provide the Board with a more concise analysis of the cash
flow of the utility (including developing the relationship between Net Income, Capital Addition
and Retirements to Plant, and Cash Reserves).
RECOMMENDATION: Provide the Board and staff with a breakdown of payroll
by each segment or department of the electric operation. This breakdown should include
regular and overtime payroll as separate items. This information is currently being provided, but it
is difficult to determine the actual payroll by function or department.
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APPENDIX A
Draft Manager Evaluation
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Elizabethton Electric System Manager Evaluation
This exercise is meant to provide insight into the way the EES Manager=s leadership skills
are perceived by the Board. At your convenience, please complete the attached Worksheet and
return to
(do not feel the need to sign the form).
Please take your time with the assessment and be honest and objective.
If you have any additional comments, please provide those
on another sheet of paper or at the bottom of the Worksheet. If additional comments are added
you will need to sign your name.
On the attached Worksheet, please rate according to the following scale:
1.
Well Below Standard (Unsatisfactory)
2.
Below Standard (Marginal)
3.
On Standard (Satisfactory)
4.
Above Standard (Commendable)
5.
Well Above Standard (Outstanding)
Thanks for your time.
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Elizabethton Electric System Manager Evaluation
WORKSHEET
Rating
1.
Understands and identifies with the basic goals, philosophy, and values of
the EES organization.
2.
Anticipates problems before they occur.
3.
Collaborates with other organizations, both public and private, to achieve
common goals and objectives.
4.
Rating of overall attitude toward job.
5.
Makes good use of resources including employees, outside experts, supplies,
equipment, budget, etc.
6.
Obtains feedback for self improvement.
7.
Is responsive to requests and suggestions made by the Board.
8.
Considers several alternatives before making a decision.
9.
Deals effectively with the media.
10.
Has a genuine concern for people within the organization.
11.
Uses time effectively and efficiently: meets deadlines.
12.
Handles emergencies and crisis effectively.
13.
Has a strong concern for production.
14.
Writes effective memos, letters, reports and makes clear presentations.
15.
Has adequate job knowledge and skills.
16.
Has a positive attitude toward the public.
17.
Produces high quality work.
18.
Takes initiative, can act without instructions and has the ability to make
constructive suggestions.
19.
Produces a reasonable quantity of work.
20.
Actively develops teamwork and cooperation with others.
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Elizabethton Electric System Manager Evaluation
Diagnosing Performance Grid
5.
PROVIDE
MOTIVATION
PROVIDE ADEQUATE
RESOURCES AND
WORKING ENVIRONMENT
HAS ADEQUATE
JOB
KNOWLEDGE
AND SKILLS
3.
REASSESS/TRANSFER
PROVIDE ADDITIONAL
DISCHARGE
TRAINING
1.
1.
3.
5.
RATING OF OVERALL ATTITUDE TOWARD JOB
How To Use the Diagnosing Performance Grid:
Determine the average rating on question 15 ("Has adequate job knowledge and skills"). Find the
point between 1 and 5 on the side of the grid which corresponds to the average rating. Then
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determine the average rating on question 4 ("Rating of overall attitude toward job"). Find the point
between 1 and 5 on the bottom of the grid which corresponds to the average rating. Mark the point
on the grid at which these two lines meet.
The grid can tell you something about what should be done with the Manager in order to
maximize their benefit to the System. Depending on the section of the grid in which the lines
meet, the following will apply:
If the lines met in the section marked:
"Provide Motivation" - This indicates that the Manager was rated high in job knowledge and
skills, and low in overall attitude toward the job. In order to increase the Manager=s benefit to the
organization, a motivating environment should be provided.
"Provide Additional Training" - This indicates that the Manager was rated high in overall attitude
toward the job, and low in job knowledge and skills. In order to correct this situation, the Manager
should be provided additional training in order to improve job knowledge and skills.
"Provide Adequate Resources and Working Environment" - This indicates that the Manager was
rated high in overall attitude toward job and adequacy of job knowledge and skills. In order to
utilize the Manager=s talents to the fullest, the organization should simply provide the resources
necessary to undertake the job, and create an environment where the Manager can continue to
contribute.
"Reassess/Transfer/Discharge" - This indicates that the Manager was rated low in both job
knowledge and skills, and overall attitude toward the job. In this case, the Manager is obviously
not working in the right place, and the organization would be served best if they were transferred,
discharged, or at least reassessed in terms of where they are in the organization.
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Elizabethton Electric System Manager Evaluation
THE MANAGERIAL GRID
5.
COUNTRY CLUB
MANAGEMENT
TEAM
MANAGEMENT
IMPOVERISHED
MANAGEMENT
AUTHORITY/
OBEDIENCE
CONCERN FOR
PEOPLE
3.
1.
1.
3.
5.
CONCERN FOR PRODUCTION
How to Use the Managerial Grid:
Find the average rating on question 10 ("Has a genuine concern for people in the organization").
Find the point on the side of the grid which corresponds with the average rating. Do the same for
the bottom of the grid using the average score on question 13 ("Has a strong concern for
production"). The point at which the two lines meet will tell you something about the Manager=s
management style.
If the lines meet in the area of the grid marked:
"Country Club Management" - The average rating was high in concern for people, and low in
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concern for production. Perceptions are that the Manager tends to give thoughtful attention to the
needs of people. They believe that satisfying relationships leads to a comfortable and friendly
organizational atmosphere and work tempo.
"Authority/Obedience" - The average rating was high in concern for production, and low in
concern for people. The Manager is perceived as being largely concerned with efficiency of
operations which results in a tendency to arrange conditions of work in such a way that human
elements interfere to a minimum degree.
"Team Management" - The average rating was high in both concern for people, and concern for
production. Perceptions are that the Manager believes work accomplishment comes from
committed people; interdependence through a "common stake" in organizational purpose leads to
relationships of trust and respect.
"Impoverished Management" - The average rating was low in both concern for people and
concern for production. The Manager is perceived as tending to exert the minimum required effort
to get work done.
If the rating averaged "3" on both measures - This means the average rating was near a "3" on
concern for people and on concern for production. Perceptions are that the Manager believes
adequate organizational performance is possible through balancing the necessity to get out work
(production) with maintaining morale of people at a satisfactory level.
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APPENDIX B
Financial Comparisons
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