PUD cuts executive salaries, imposes wage freeze and adds temporary surcharge

By Rich Riazzi, General Manager

4/29/2009

As we discuss the PUD’s changing financial condition, I’d like to emphasize a point I’ve made at recent public meetings: This financial squeeze we are experiencing is within the range of possibilities we planned for as we started our detailed strategic financial analysis a few years ago.

We don’t like it any more than anyone else does in Chelan County. But we are taking steps to get through it.

The typical probability distribution used to model financial outcomes has two skinny tails on each side of the bell curve. Most of the time, normal financial activity falls in the range of and around the average or center. But when something unlikely happens, it is called a “tail event.” In other words, it is a rare event with low likelihood of occurrence but has a high financial impact. That’s what we’re seeing now with the rare combination of low snowpack, low market prices for the PUD’s surplus power and low interest rates for PUD investments. It’s squeezing our PUD budget, just like everyone else’s.

We knew it was a possibility when we looked at the financial structure of the PUD a few years ago – relying too much on extra revenue from surplus power sales to cover the unmet cost of delivering power to our local residential and business customers. Now we are seeing how a rare – but always possible – combination of circumstances can put us in a bind.

We are responding in several ways.

By delaying projects such as the automated metering system and part of our fiber-optics build-out, we are saving money we had originally planned to spend this year. We have asked all managers to trim their budgets to bare bones, recognizing that all the cuts cannot be sustained over the long term without sacrificing quality and reliability of services to our customers.

Now we are telling our employees to go further – that we must each take five days off without pay this year. That will save us about $1.1 million. Thanks to employee suggestions, we have also invited employees to suggest eliminating their own jobs if they see a way that can be done – with a year’s worth of severance compensation as an incentive. We are also inviting employees to shift from full-time to part-time if the necessary work can still get done.

In addition, the six members of the Executive Team (me included) are all giving back the wage increase they received in February and having their salaries frozen until February 2011. Executive managers will take off as many days without pay as are required to offset their 2009 raises. All other non-union salaried employees are having their wages frozen until August 2010, in addition to the five days of unpaid leave being required.

Yet all these steps – worth more than $27 million in all – have not been enough. The PUD still faces a projected $18 million loss at the end of the year. If similar economic conditions persist for another two years, the PUD could see more than $51 million sucked out of cash reserves. It is not prudent for us to allow this condition to occur unchecked. 

I recommended to the Board of Commissioners that we add a temporary electric bill surcharge for a year to bolster our revenues. The Board has agreed to add a 9-percent surcharge. During the year, we will watch financial conditions carefully, and we will be prepared to roll back the surcharge if conditions improve. If conditions deteriorate over multiple years, the surcharge may have to be increased or repeated in those years.

This has been a tough request to make, given the local economy and the stresses our customer-owners are facing. Yet it is one of the tools the board approved during strategic planning as a last resort when necessary to solidify PUD finances. Maintaining a strong local utility is still our number-one priority. The PUD has benefited local customers for nearly 73 years. We intend to do what’s necessary to keep it on strong financial footing.

Your perspective is always welcome. Thank you for your understanding during these challenging times.