[Watchdogs] An Open Letter to the New Board of Directors
Dale Rodman
darodman at zeecon.com
Mon Jun 29 20:55:59 CDT 2009
Milton - A great letter. I would like to add several items.
To Mr. Garza - We have a new board. What happens at PEC going
forward will totally be on your watch. You are now responsible. Be a
true General Manager and get back to running the business.
You should address all costs are every
level in the country and ensure they are justified. The management
employees who have been there for years are very highly paid, are used
to a growth system where
revenues constantly increase and therefore
costs go up as well. This is a sickness of all growth businesses and
can only be stopped by strong leadership at the top. The PEC
patronage system, with it's
excessive nepotism operating the business
the way it always has been done, has to change before costs can be
brought under control.
A few years ago I had the experience of
dealing with engineering and then operations to get a job done. They
did not work together. The estimate to move a transformer given to me
by engineering was
nearly double when completed by
operations. At a meeting I requested, it was very obvious that
although they work out of the same office they do not communicate. It
took a regional manager to come
in and resolve the dispute. This is an
example of compartmental departments which is not cost effective.
Expense reduction cannot be done without
some major management changes. This is the only way all employees
will get the message that it is no longer business as usual. I have
to question why Mike
Vollmer is still at the PEC. As Chief
Financial Officer, he was and is responsible to know all financial
transactions within the company. How can funds be paid without him
being aware of the
transactions? If he knew and did nothing
he was complicit. If he did not know then he was incapable of doing
his job. Either way he is part of the problem. You need a very
strong Financial Officer who
is experienced in cost management and
controls. His recent involvement with the $50000 expenditure at Lake
Buchanan is another example of weak leadership and doing business the
old way.
Any assets of the PEC that are non-
performing and are not capable of having revenues in excess of costs
should be removed off the balance sheet. From what I have read it
appears that the Junction Utility
fits that description. If this is true,
then sell it, take your loss and reduce your costs while strengthening
you balance sheet.
In this electronic age we have a number of
offices and people spread across the PEC area collecting money for
electrical bills. Many of these are on very expensive real estate. A
good business person
would review the dollars received compared
to the costs involved and make the proper decision. This is a 1960
type utility operation. It cannot be cost effective. PEC spent
millions developing the
electronic customer billing system in New
Mexico. Let's use it.
I read where we are spending over
$1,000,000 per month to purchase 90 MW of Wind Power for the PEC. I
do not think this is required by law. Are we selling these kilowatts
for their true costs
or are we subsidizing them in order to be a
green utility? I realize this is a controversial issue among some
members. If you polled the 220,000 members, and gave them the choice
of higher electrical
costs with subsidized wind or reduced
electrical rates, you would get a large majority asking for lower
rates. Why spend the money until we are required to spend it?
I understand we are buying Hybrid
Vehicles. I trust that was a properly analyzed economic decision.
The real issue is how many vehicles do we have and can we reduce the
number?
One Friday afternoon around 2 PM, I stopped
at the large car wash at Bee Caves and 71 to get my wife's car
washed. I do not do this very often because of the cost but I did get
a senior
citizen discount this day. If you are not
familiar, while your car is being washed, cleaned and dried, you sit
on the front porch is a large rocker and watch the process. It
usually takes about
20 minutes. While sitting there I saw a
white PEC pickup being given the full treatment. I must say it looked
good. When I saw the driver, a young man in a PEC shirt, I asked
about the process
he was using. He told me that the PEC has
an open account there and they can take their vehicles there whenever
they need to get them washed. Where are the fiscal controls in this
type
expense? This is probably only one of many
similar type expenditures across the PEC.
The PEC is not a big business. It is a big
electrical co-op but it is not a big business and should not be
treated like a huge corporation. The PEC does not produce anything.
It is a simple business where
the major cost should be the purchase of the
electricity. Once that is contracted then the majority of the efforts
should be on managing the costs to deliver it. With it's size, the
PEC should have major
scale advantage and therefore have the lowest
non-electric or delivery cost in the industry. PEC is fat and easily
has 1 or more cents per kilowatt excess cost. Cost reduction has to
be the major focus
of all the management of the PEC.
On Jun 29, 2009, at 5:13 PM, Milton Hawkins wrote:
>
> From: Milton Hawkins [mailto:mhawkins at tstar.net]
> Sent: Monday, June 29, 2009 4:59 PM
> To: Larry Landaker (larry.landaker at gmail.com); 'Cristi Clement';
> Kathy Scanlon (kathy at planningworks.biz); Patrick Cox (patrickcox7 at gmail.com
> ); OC Harmon (och44 at verizon.net); James Williams (fromthisdesk at yahoo.com
> ); Renee Oelschleger (renee.oelschleger at peci.com)
> Cc: Lamont Ramage (lramage99 at yahoo.com); Juan Garza (juan.garza at peci.com
> ); Paul Hilgers (paul.hilgers at peci.com); Mike Vollmer (mike.vollmer at peci.com
> ); Luis Garcia (luis.garcia at peci.com)
> Subject: Open Letter to the New Board of Directors
>
>
> Directors,
>
> Today represents a new beginning. You have the opportunity to set
> the right course for the future of our cooperative. Don't waste an
> opportunity to demonstrate that unlike some who served on previous
> Boards, you can put the interests of the cooperative and its owner/
> members ahead of your own. As I told you today, I wish you well.
>
> Milton
> An Open Letter to the New Board of Directors
>
> I trust you will agree with me that one of the first things the
> Board of Directors needs to do is strengthen the financial condition
> of our cooperative. That will mean, among other things, examining
> and controlling expenditures.
>
> Fortunately, the Navigant Report has identified some areas for
> urgent attention. One of the most important is Administrative and
> General (A & G) expenses. Here’s a small portion of what the Report
> has to say on this topic:
>
> As a company grows, its Administrative and General expenses, as a
> percentage of total revenue, are typically expected to decline. This
> is due to increased economies of scale and the ability to spread
> expenses over a larger base of operations. However, with notable
> exceptions in 2005 and 2006, PEC experienced exactly the opposite
> effect, suggesting that as the size of the organization increased,
> its efficiency decreased.
>
> A review of PEC’s income statement shows that PEC’s Administrative
> and General expenses more than tripled from $21.1 million to $68.7
> million during the period 1998 – 2007 with total expenses for the
> time period totaling over $442 million. A review of the KRTA [Key
> Trend Ratio Analysis] reveals that compared to other large electric
> cooperatives during this time period, PEC consistently had the
> highest or second highest Administrative and General expenses per
> consumer. Administrative and General expenses include compensation
> and expenses of PEC’s Senior Management and Directors, as well as
> various other related expenses incurred in relation to the
> management of the Cooperative. [pages 107-08]
>
> Clearly, you are going to have to give serious consideration to
> cutting expenses in this area. And in fact, the Board acted in July
> of 2008 to reduce expenses in this area by reducing the compensation
> of its own members. Acting on the recommendations of its
> Compensation Committee, with additional recommendations from
> Director Cox, the Board agreed to make significant reductions in
> director compensation, reducing the monthly fee from $2,000 to
> $1,500, reducing the payment for each committee meeting from $750 to
> $500, allowing compensation for only one meeting per day, and
> eliminating PEC’s payment of all health, dental, and life insurance
> benefits for Board members and their dependents.
>
> At that time, Director Cox said, “It is beholden on us to make a
> statement to our membership. Every business I know, every family I
> know, is making belt-tightening decisions. We need to make a
> substantive reduction.”
>
> I’m going to suggest, in light of the very real need for cost-
> cutting in the A & G area and other areas as well, that the members
> of the Board again lead the way by demonstrating that they are
> willing to tighten their own belts, by doing just what they will
> soon have to ask the rest of the cooperative to do.
>
> As it happens, even after the reductions in 2008, the compensation
> of the PEC directors is still much greater than the average
> compensation of cooperative directors in Texas, or across the
> nation. With the monthly fee and a single Board meeting per month,
> our directors make $27,000 a year, already several thousand dollars
> more than the average yearly compensation detailed in the Navigant
> compensation report, which showed yearly averages, based on
> 2005/2006 IRS Form 990’s, of $20,887 for directors at the largest
> cooperatives in the United States, and only $19,317 for directors at
> the largest cooperatives in Texas.
>
> Add an additional special Board meeting every two months, and the
> total jumps to $31,500 annually. Throw in four committee meetings a
> year, and the total climbs to $33,500 per year, not counting
> reimbursed expenses for travel, meals, and so on.
>
> Clearly some additional reductions are in order, all the more so
> given the need for the directors to demonstrate by their actions
> that they are serious about reducing costs and improving the
> financial health of our cooperative.
>
> A number of compensation plans would serve the purpose. For
> example, a monthly fee of $1,000 and a fee of $500 for each Board
> meeting would provide a yearly total of $18,000 even if there were
> only the required single meeting per month. Given the work that
> must be done, it is not unreasonable to expect that the Board will
> have at least six additional (special) meetings, for another $3,000,
> or a yearly total of $21,000.
>
> Committee work is going to be more demanding as this new Board takes
> on the tough issues it faces, and a fee of $250 per committee
> meeting, with payment for up to one meeting per month, or twelve per
> year, would add another $3,000, bringing the yearly total for each
> director to $24,000, which is still above the averages indicated in
> the Navigant compensation report. Other payment plans could produce
> the same or similar reductions in director compensation.
>
> In addition, the Board should further limit its own expenses by
> eliminating all paid advisory directors and then not appointing new
> ones.
>
> Last year, Director Cox asked the Board to “make a statement” to the
> membership. This year the Board should make a statement to the
> employees as well, showing that it is willing to light the way and
> share the pain.
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