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					 Grievances and Remedies
                  Regarding the
        Failures of the Board of Directors
                       of the
       Pedernales Electric Cooperative, Inc.
                     to Reform
Fuelberg Era Unnecessary and Excessive Spending,
          Risk-taking, and Rate Design
                  and to Enforce
    Open Meetings and Open Records Policies


                 December 24, 2010



                   Mr. Merle L. Moden
               1111 Thompson Ranch Road
               Wimberley, Texas 78676-6129
                      512 847-1335
                  mlmoden@gmail.com
                                     Grievances and Remedies
                                    Regarding the Failures
                                             of the
                 Board of Directors of the Pedernales Electric Cooperative, Inc.
                                           to Reform
        Fuelberg Era Unnecessary and Excessive Spending, Risk-taking, and Rate Design
                                         and to Enforce
                          Open Meetings and Open Records Policies

General The Pedernales Electric Cooperative, Inc. (PEC) is a nonprofit corporation organized
under provisions of the Texas Electric Cooperative Corporation Act. It was issued Charter
Number 73364 on May 18, 1938 by the Office of the Secretary of State of Texas. The PEC’s
primary business is the transmission and distribution of electricity to its members. The seven
(7)-member PEC Board of Directors (Board) is the governing body for the cooperative.
Directors’ terms are staggered and elections are held each year.

The PEC is the largest electric cooperative in the U. S., serving all or part of 24 Texas counties.
An individual who purchases electricity through metered electric service with the PEC, is a
member and owner of the cooperative – a member-owner.

Most member-owners would assume that the primary mission of the Board is to ensure that
member-owners are provided low-cost electric service in a cost-efficient manner.
Unfortunately, neither the PEC Articles of Incorporation1 nor The Cooperative Principles2
contain such language. However, the preamble to PEC’s Bylaws effective November 15, 2010
contains this language, “The purpose of the Cooperative is to provide safe, reliable, low-cost
energy services in a fiscally responsible partnership with its Member-owners.”3 Whether
explicitly stated or not, PEC member-owners expect inherently that their cooperative is
operated in a efficient manner to provide low-cost electric service.

While the Board has delegated authority to a Chief Executive Officer4 to manage the affairs of
the cooperative, the Board is responsible for the decisions of the Board and the decisions of any
delegated authority. Consequently, the Board is ultimately responsible for all the successes and


           1
               http://www.pec.coop/Home/Your_Cooperative/Inside_PEC/Coop_Docs.aspx

           2
             http://www.pec.coop/Home/Your_Cooperative/Promise_of_PEC/Cooperative_
    Principles.aspx

           3
               http://www.pec.coop/Home/Your_Cooperative/Inside_PEC/Coop_Docs.aspx

           4
             The PEC Board at its November 15, 2010 regular meeting in Resolution (ID # 1475) replaced the
    title “General M anager” with the title “Chief Executive Officer”.


                                                                                              Page 2 of 20
all the failures of the PEC.

Financial Management It has been about two years since the court-ordered Pedernales Electric
Cooperative, Inc., Report of Investigation, December 2008 (Navigant Report) performed by Navigant
Consulting was released. The Navigant Report is now available on the PEC website.5 This
report reads like a horror story depicting, over many years, numerous examples of irresponsible
PEC management and irresponsible governance by the various PEC Boards. This irresponsible
management and governance was driven apparently by arrogance, greed, and hubris. The PEC
paid Navigant Consulting about $2.9 million6 to provide this court-ordered investigative report.
Its high time the Board paid heed to the findings in the Navigant Report. Referring to former
General Manager Bennie Fuelberg the Navigant Report states that “Throughout his tenure,
PEC’s focus was centered on customer satisfaction, but often at the expense of tighter fiscal
controls. With an emphasis on service and reliability, regardless of cost, the former General
Manager fostered management practices at PEC where cost controls, budgets and expense
management were secondary.”7 (emphasis added)

Prior to 2008, the Board fails miserably in its fiduciary duties to oversee the activities of the PEC
to ensure that member-owners were provided with low-cost electric service in a efficient
manner. The result occurs because General Manager Bennie Fuelberg is allowed considerable
discretion in managing the affairs of the PEC, resulting in a considerable waste of member-
owner money.8

In 2008, the Board fails to act to stop the Fuelberg culture of unnecessary and excessive
spending in 2009. In 2009, the Board not only fails to act to stop the Fuelberg culture of
unnecessary and excessive spending in 2010, but exacerbates the problem by granting a 5.8%
pay raise for PEC employees.

The current Board, while strengthening the rights of member-owners, is poised to continue the
Fuelberg culture of unnecessary and excessive spending for 2011. On December 20, 2010, at its
regular meeting a Board majority again exacerbated the unnecessary and excessive spending
problem by voting to grant a 5.5% pay raise for PEC employees. Directors Scanlon, Perry,
Fischer, and Cox voting for the pay raise and Directors Clement and Landaker voting against
the pay raise. PEC member-owners have pleaded with this Board to address PEC’s unnecessary


              5
                  http://www.pec.coop/Home/Your_Cooperative/Inside_PEC/Coop_Docs.aspx

              6
                  PEC response to information request from PEC member-owner Carlos Higgins dated December
    6, 2010

              7
                  The Navigant Report, December 2008, Page 20 of 390

              8
                  Navigant Report, December 2008, Pages 76-84 of 390


                                                                                             Page 3 of 20
and excessive spending. Its high time the Board rolled back the wave of unnecessary and
excessive spending from the Fuelberg era. Perhaps, the promise in the language in the
Preamble to PEC’s Bylaws – “The purpose of the Cooperative is to provide safe, reliable, low-
cost energy services in a fiscally responsible partnership with its Member-owners.” – is too new
and has not reached the operational stage yet.

Openness and Transparency PEC member-owners have asked repeatedly that the Board
implement the promise of openness and transparency. The current Board spends too much time
discussing PEC business in executive session. It remains to be seen whether this much PEC
business must be discussed behind closed doors. Large numbers of items continually posted in
the Board’s executive session agendas raises questions about the effectiveness and usefulness of
the Open Meetings Policy.9

The Board believes apparently that the adoption of the Open Records Policy10 somehow results
in compliance by PEC management. There is a disconnect between what the Board orders and
what the management carries-out. The reality is that PEC management does not necessarily
abide by this new policy for reasons of its own. PEC member-owners are denied access to
information with little or no justification. PEC member-owners wait for months to receive a
reply to an open records request. PEC management never intends to reply to some open
records requests, but fails to inform the member-owner of its intentions. The new PEC website
no longer provides as much information as the old website. It is unknown whether this is an
oversight , or a purposeful act to limit information available online.

PEC member-owners are aggrieved by the failure of the current Board to carry-out its fiduciary
duties and responsibilities. Such duties and responsibilities include ensuring that member-
owners receive low-cost electric service in an efficient manner, and adopted Board policies are
fully implemented. PEC member-owners believe that the Board has failed in carrying-out these
duties and responsibilities. Shown below are examples of such failures.

Note: The use of the words “the Board” refers to the current board unless the context indicates
otherwise.

Grievance A: Failure to Abide by Provisions of Corporate Charter The Board over the years
has failed to operate the PEC in accordance with its corporate charter. Specifically, the Board
has failed to abide by the provisions laid-out in Article VIII, Section 1 of the Articles of




          9
              http://www.pec.coop/Home/Your_Cooperative/Inside_PEC/Coop_Docs.aspx

          10
               http://www.pec.coop/Home/Your_Cooperative/Inside_PEC/Coop_Docs.aspx


                                                                                     Page 4 of 20
Incorporation.11 These provisions address the uses to which revenues and excess revenues (i.e.,
profits) of the PEC can be put. The Board, either through ignorance or wilful disregard, has
engaged and continues to engage in a pattern of behavior that authorizes the expenditure of
excess revenues for purposes not authorized by Article VIII, Section 1 of the Articles of
Incorporation. Some examples for which no authorization exists in Article VIII, Section 1 are
shown below.
   (1) Donations and Contributions In 2009, the Board authorized the expenditure of over
       $850 thousand12 in excess revenues for donations and contributions.
   (2) Employee Bonuses In 2009, the Board authorized the expenditure of a little over $3.0
       million in excess revenues for employee bonuses.13
   Remedy: The Board must cease immediately approving expenditures which are not
               authorized by Article VIII, Section 1 of the PEC Articles of Incorporation.

Grievance B: Failure to Enforce Policies The Board to its credit has established policies in an
effort to provide open and transparent governance of the PEC. Unfortunately, neither the
Board nor PEC management has performed sufficiently to meet the promise of these policies.
    (1) Open Meetings Policy The Board consistently loads its agenda with items slated for
        discussion in executive session. It is difficult to understand the need for so much of the
        PEC’s business to be discussed behind closed doors. For example, the executive session
        agenda for the December 20, 2010 regular Board meeting14 contains several items for
        which the need for confidentiality strains credulity. It’s one thing to have confidential the
        discussion of a particular individual under “Personnel Matters”, but the discussion of
        “Key Performance Indicators (K.P.I.)”; “Approval of Wage & Salary Policy, including
        Wage Scale”; “Employee Defined Benefit Plan Third Amendment”; “2010 Defined Benefit
        Plan Funding”; and, “Executive Compensation Study” are quite another matter. These
        important issues are not confidential and should be discussed in open session. It would
        appear that the promise of openness and transparency is compromised by so much
        discussion in executive session. PEC member-owners’ memories of exclusion from
        discussion of all PEC business by past Boards are still fresh. The current Board needs to
        earn more trust before executive session discussions are unquestioned. The question of
        trust came up in the punishment phase of the recent trial of former General Manager
        Bennie Fuelberg as Acting Chief Executive Officer Luis Garcia testified on December 13,


           11
                http://www.pec.coop/Home/Your_Cooperative/Inside_PEC/Coop_Docs.aspx

           12
            Information gathered by PEC member-owner M ilton Hawkins, as the PEC has not maintained a
    comprehensive list of donations and contributions including both cash and in-kind amounts

           13
                Key Performance Indicator Payout Estimate, October 2009

           14
             http://www.pec.coop/Home/Your_Cooperative/Inside_PEC/M eetings_and_Voting/Board_M eet
    ings_Notices_Schedules_Agendas_Videos.aspx


                                                  Page 5 of 20
  2010 that though Pedernales now conducts itself more openly, member trust the co-op far
  less than they did when he started there in 2002. “There’s been a sense of a breach of that
  trust with our members. Every board meeting we have now is attended by members
  who are suspicious of the decisions we make, even decisions made in the open.”.15 If the
  Board chooses not to discuss such things as “Key Performance Indicators (K.P.I.)”;
  “Approval of Wage & Salary Policy, including Wage Scale”; “Employee Defined Benefit
  Plan Third Amendment”; “2010 Defined Benefit Plan Funding”; and, “Executive
  Compensation Study” at regular meetings, it should schedule periodic public work
  sessions to hash-out these policies in front of member-owners. Continuing the practice
  placing such items in executive session will lead only to more member-owner distrust.
Remedy: The Board must place in the executive session agenda only those items which
         absolutely require confidence. The Board should err on the side of openness and
         transparency when deciding which items to include in executive sessions. The
         Board must schedule public work sessions to discuss policy development to allow
         the member-owners access to the underlying facts and reasoning by the Board
         members in such policy development.

(2) Open Records Policy There are two categories of unacceptable performance with regard
    to the Board’s adopted open records policy.
    (a) PEC management has refused to respond to open records requests made by several
        PEC member-owners. The basis for each such refusal is either not offered or is
        insufficient to justify denial of the requested information. The contribution of the
        Open Records Policy to achieve openness and transparency is only as good as both
        the Board’s and Chief Executive Officer’s commitments to actually ensuring a free
        flow of information. Currently, there is no mechanism to ensure that the Board’s
        directives are being carried-out. This member-owner currently has six (6)
        unanswered open records requests pending dating back to September 22, 2010.
    (b) PEC’s expensive, new website presently falls short in openness and transparency.
        Information that was available on the old website is no longer available, such as
        recent PEC’s IRS Forms 990 (only the 2009 is currently available). The current policies
        for retaining information on the website are unacceptable. Important information
        should remain available to member-owners on the website for extended periods of
        time. For example, the 2009 C.H. Guernsey Cost of Service and Rate Design Study
        disappeared from the old website (as far as I can determine) a few months ago. This
        study should remain available indefinitely, or at least until it is replaced by a new
        study. Also, financial information should be maintained on the website with the same
        monthly activity information presented at monthly Board meetings.
Remedy: The Board must establish immediately a procedure to ensure that the Chief


       15
            Austin American-Statesman, December 14, 2010, Page A01


                                              Page 6 of 20
                Executive Officer is requiring all PEC managers to enforce the Open Records
                Policy. PEC must either provide the information promptly, or respond promptly
                to the requester stating why the information cannot be provided as requested. The
                Board must direct immediately the Chief Executive Officer to place and leave on
                the website any and all information that was maintained on the old website to
                include the Lawsuit Settlement; the Navigant Report; the Guernsey Study; at least
                the last five (5) years of IRS Forms 990; at least the last five (5) years of annual
                reports, annual audit opinion letters, and audit management letters; at least the
                last five (5) years of press releases; and at least the last five years of monthly
                information including the Monthly Information Items shown on Board agenda
                items plus a synopsis of receipts and expenditures for the month and year-to-date.

Grievance C: Failure to Maintain the Uniform System of Accounts Required by Federal
Regulations Administered by the Federal Energy Regulatory Commission (FERC) or by
Federal Regulations Administered by the U. S. Department of Agriculture (USDA), As the
Case May Be The Board has failed to require PEC management to comply fully with provisions
of Title 18, Code of Federal Regulations (CFR), Part 101, Uniform System of Accounts Prescribed
for Public Utilities and Licensees Subject to the Provisions of the Federal Power Act, as
administered by FERC, or the provisions of Title 7, CFR, Part 1767, as administered by the
USDA. Most particularly, the PEC is out of compliance with the requirements in Account 368,
Line Transformers, as the PEC is unable to satisfy the requirement that, “The records covering
line transformers shall be so kept that the utility can furnish the number of transformers of
various capacities in service and those in reserve, and the location and the use of each
transformer”.16 This failure makes it impossible to establish fair and equitable electric rates that
accurately accounts for the demand costs attributable to the size of line transformer utilized by
each member-owner.
    Remedy: The Board must direct immediately the Chief Executive Officer to correct the
               defects in its compliance with the required Uniform System of Accounts.

Grievance D: Failure to Preserve the Assets of the Cooperative through a Long-running
Pattern of Reckless, Unreasonable, Unnecessary, and Excessive Spending The Board failed
and continues to fail to require that the PEC be operated in a cost-efficient manner. The Board
has authorized payments for goods and services which are not required to provide electric
service and payments for goods and services that are required, but the amounts expended are
unreasonable, unnecessary, and excessive. Some examples are shown below.
   (1) Controllable Expenses The Board has allowed its Chief Executive Officers to engage in
       unnecessary and excessive spending in the controllable expense categories of Customer
       Accounting Expense; Customer Sales & Service Expense; and, Administrative and

           16
            http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=a1c36a909490a7f1508137221b
    50c2c6&rgn=div5&view=text&node=18:1.0.1.3.34&idno=18


                                                Page 7 of 20
  General Expense as verified by the Navigant Report. The PEC’s annual expenditures per
  customer in these three (3) categories exceed those of its Peer Group17 (U. S. electric
  cooperatives with 100,000 members or more)18 Despite conclusive evidence of these
  unnecessary and excessive expenditures as shown in the Navigant Report, the Board has
  failed to direct its Chief Executive Officers to eliminate such expenditures. Had the PEC
  incurred expenses at Peer Group median values, an estimated $147.1 million19 could have
  been saved over the period 2002 through 2007 for just these three (3) controllable expense
  categories. Conversely, PEC wasted an estimated $141.7 of the member-owners’ money
  by not performing, at a minimum, at its Peer Group median values. Extending these
  findings to 2010 yields an estimated $245.0 million in wasted member-owners’ money for
  these three (3) controllable expense categories from 2002 through 2010. A substantial
  amount of the expenditures in these three (3) categories is attributable to the costs to
  operate and maintain seventeen (17) PEC offices20 throughout its service area. Rather
  than utilize area merchants, such as grocery stores, for accepting payments from
  member-owners the PEC chooses to use its own offices for such purposes resulting in
  unnecessary and excessive expenditures.
Remedy: The Board must direct immediately the Chief Executive Officer to develop a plan
          to be implemented within the year to reduce controllable expenses to a point at or
          below those annual expenses per customer incurred by PEC’s Peer Group.

(2) Essential Expenditures cf. No-So-Essential Expenditures The Board has allowed PEC
    management to set the PEC’s spending priorities in reverse order of importance. In the
    essential expenditure category of operation and maintenance expense the PEC compares
    favorably with its Peer Group, as annual operation and maintenance expense per
    customer for the PEC in the period 2002 through 2007 are mostly below and slightly
    above its Peer Group median value.21 This relatively good financial performance is
    contrasted with the poor performance for the not-so-essential expenditure category of
    Administrative & General. The PEC is well above its Peer Group in annual
    Administrative & General expense per customer.22
Remedy: The Board must instruct immediately the Chief Executive Officer to develop a plan


       17
            The Navigant Report, Page 109-110 of 390 and Appendix B, Page 32, 34, and 36

       18
            The Navigant Report, Page 108 of 390

       19
        Letter to the Board from member-owner M erle L. M oden dated December 14, 2010 and 1:00 pm
comments at the December 20, 2010 regular Board meeting by member-owner M erle L. M oden

       20
            http://www.pec.coop/Home/Your_Cooperative/Inside_PEC.aspx

       21
            The Navigant Report, Appendix B, Page 28

       22
            The Navigant Report, Page 110 of 390 and Appendix B, Page 36


                                              Page 8 of 20
                to be implemented within the year to ensure that essential services are adequately
                funded while substantially reducing not-so-essential services to a point at or below
                those annual expenses per customer incurred by PEC’s Peer Group.

(3) Legal Services The PEC has paid or has agreed to pay criminal defense attorney’s fees
    for individuals for which it has neither duty nor responsibility to pay.
    (a) The Board authorized payment of $272,125 in fees for criminal defense attorneys23 to
        brief, ostensibly, witnesses called to appear before a grand jury investigating possible
        criminal acts of PEC’s former General Manager, Bennie Fuelberg, and PEC’s former
        lead outside attorney, Walter Demond. These witnesses included former PEC Board
        members, PEC current and former employees, and at least one former PEC outside
        lobbyist/legislative consultant. PEC, as a corporate entity, was not a party to these
        legal proceedings and has no legal responsibility to pay these fees; and,
    (b) The Board has agreed, ostensibly, to pay the fees of criminal defense attorneys
        defending former General Manager Bennie Fuelberg tried and found guilty of
        criminal acts in Cause No. 1015 in the 424th Judicial District Court, Blanco County,
        Texas. The Board is relying, ostensibly, on a March 16, 1987 PEC Board of Director
        Resolution which states “11. RESOLVED BY THE BOARD OF DIRECTORS OF THE
        COOPERATIVE That Pedernales Electric Cooperative, Inc. indemnify and hold
        harmless, individually, all officers and directors of the Cooperative, General Manager
        Fuelberg and General Counsel Moursund against any legal action that might be
        brought against any of them in relation to their services to Pedernales Electric
        Cooperative, Inc.” The operative words being “in relation to their services to
        Pedernales Electric Cooperative, Inc.” Since the duties of the PEC General Manager
        include no services the performance of which would constitute criminal acts, PEC has
        no legal obligation to pay these fees.
Remedy: The Board must establish immediately a policy to eliminate any and all payments
            for services for which the PEC has no obligation to pay, or for services for which
            the member-owners receive no benefit.

(4) Outside Contractors The Board has authorized the Chief Executive Officer to enter into
    contracts with various consultancies to provide services to the PEC many of which are of
    dubious value to the member-owners. There were the employee and member-owner
    survey consultants, website design consultants, business software implementation
    consultants, business software implementation performance consultants, etc. One
    wonders whether the services rendered in these expensive contracts are worth the
    member-owner money expended on them. Some contractors whose services are
    questionable are shown below.

          23
               PEC response to information request from PEC member-owner Carlos Higgins dated December
6, 2010


                                               Page 9 of 20
  (a) Bridgepoint Consulting, LLC This contractor supposedly is functioning as PEC’s
      outside internal auditor providing oversight regarding governance and management
      issues. While this firm has produced an important report concerning PEC’s
      expenditure process, they have been strangely silent regarding the PEC’s continuing
      practice of unnecessary and excessive spending as reported in the Navigant Report;
      PEC’s failure to enforce its Open Records Policy; and, PEC’s failure to meet
      requirements in maintaining its Uniform System of Accounts;
  (b) Somerset Guild This contractor performed an employee and member-owner survey
      the value of which is yet to be determined. Such touchy-feely activities offer no
      concrete benefit for the economic and efficient provision of electric service to member-
      owners; and,
  (c) Tocquigny This contractor was engaged to design a new website for the PEC.
      Presumably, hundreds of thousands of dollars have been spent on this effort. With
      the exception of the e-mail capability, any additional benefit provided to member-
      owners by the new website remains to be seen.
Remedy: The Board must be more circumspect in engaging outside contractors to perform
          various services for the PEC. Only those services essential in the provision of
          reliable electric service should be considered. The nice-to-have, but not essential,
          services must be eliminated from consideration.

(5) Debt Service Coverage Ratio The Board has engaged in the practice of collecting excess
    revenues by the approval of the practice of setting its debt service coverage ratio (DSCR)
    far in excess of what is needed to serve current member-owners and meet its obligations
    to bondholders. The PEC, ostensibly, engages in this practice to generate excess revenues
    to fund service expansion for new member-owners, rather than requiring reasonable
    hook-up fees from new member-owners. The Board chooses through its high DSCR to
    extract unreasonable amounts of excess revenues from current members. This practice
    requires an unfair and unreasonable subsidy by current member-owners to benefit new
    member-owners. Bond covenants require the PEC to maintain a minimum DSCR of
    1.15.24 The PEC’s target DSCR is 1.7.25 PEC DSCR’s as reported in the Navigant Report26
    are 1.67, 2.46, and 1.66 for 2005, 2006, and 2007, respectively. However, the PEC reports27
    1.79, 2.58, and 1.77 for 2005, 2006, and 2007, respectively. Whichever set of data is correct,


       24
            BKD LLP, Independent Accountants’ Report, 2008 and 2009, Page 11

       25
       PEC response to information request from PEC member-owner M erle L. M oden dated
November 10, 2009

       26
            The Navigant Report, Page 120 of 390

       27
       PEC response to information request from PEC member-owner M erle L. M oden dated
November 10, 2009


                                              Page 10 of 20
  these DSCR’s have generated excessive excess revenues and continue to do so. The
  Lower Colorado River Authority (LCRA) by comparison has a target DSCR of 1.25.28
Remedy: The Board must adopt immediately a DSCR of 1.25, and instruct the Chief
         Executive Officer to adjust the budget and electric rates accordingly.

(6) Uncollectible Account Write-offs The Board has failed to adopt an aggressive program
    to address the unreasonable amounts of uncollectible account write-offs. In 2009 the
    Board approved a write-off in uncollectible accounts of $2.9 million.29 Despite repeated
    requests from member-owners to adopt a strong and effective program, the Board
    implemented a weak program which has minimal likelihood of success.
Remedy: The Board must direct immediately the Chief Executive Officer to implement a
          program to address the occurrence of bad debt by requiring full identification for
          all new member-owners and by requiring cash deposits for all new member-
          owners, similar to requirements for new customers imposed by other retail electric
          utilities.

(7) Lobbyists and Legislative Consultants Previous Boards have authorized expenditures
    for lobbyists and legislative consultants. The benefit to member-owners for these
    expenditures is unknown. Previous boards through their gross negligence had allowed
    the former PEC General Manager Bennie Fuelberg to hire his brother, Curtis Fuelberg, as
    a legislative consultant, and over the period October 31, 1996 through December 28, 2007
    surreptitiously, through PEC’s outside law firm, pay him $872,000 in PEC funds without
    the knowledge of the Board.30 Previous Boards through their gross negligence have
    allowed their outside law firm to place on a retainer, Bill Price, the son of a PEC Director
    (at the time), and over the period September 12, 2003 through December 28, 2007
    surreptitiously, pay him $106,000 in PEC funds.31 Bill Price testified at the trial of Bennie
    Fuelberg on November 30, 2010 that he provided no services to the PEC.32
Remedy: The Board must establish immediately a policy prohibiting the hiring of any
            lobbyist or legislative consultant, and prohibiting authorization of payments to
            individuals not providing legitimate services to the PEC.

        28
             LCRA Board Policy 301

        29
             BKD LLP, Independent Accountants’ Report, 2008 and 2009, Notes to Financial Statements

        30
         State of Texas v. Bennie Fuelberg, Cause No. 1015, 424 th Judicial District Court, Blanco County,
Texas, Notice of Specific Facts, Filed June 11, 2010, Table B

        31
         State of Texas v. Bennie Fuelberg, Cause No. 1015, 424 th Judicial District Court, Blanco County,
Texas, Notice of Specific Facts, Filed June 11, 2010, Table C

        32
          State of Texas v. Bennie Fuelberg, Cause No. 1015, 424 th Judicial District Court, Blanco County,
Texas trial testimony of Bill Price


                                              Page 11 of 20
(8) Excessive Management Salaries and Benefits The Board has authorized the payment of
    excessive salaries and benefits for PEC managers.
    (a) Austin Energy, a much larger utility with responsibility for generation in addition to
        transmission and distribution of electricity, recently hired a General Manager for a
        salary of $285,000.33 By comparison in 2009 the Board authorized compensation for its
        General Manager of $347,192 plus a bonus of $72,062 for a total of $419,254.34
        Compensation for PEC managers is excessive given income levels of PEC member-
        owners. For example, The estimated 2008 median annual household incomes35 in
        Blanco, Burnet, Edwards, Hays, and Kimble counties are $49,446; $48,321; $31,434;
        $57,410; and $37,046, respectively. The Board should be more mindful of the capacity
        of many of its member-owners to support the six-figure salaries for managers
        included in their electricity bills.
Remedy: The Board must direct immediately the Chief Executive Officer to:
              (i) establish a new lower salary schedule for managers patterned after a low-cost
                  utility such as Austin Energy;
             (ii) eliminate car allowances;
            (iii) change the super generous 5:1 401-K match to a 1:1 match;
            (iv) reduce the number of assistant/deputy general managers; and,
             (v) implement other measures to reduce employment-related expenditures
                  among senior managers.

   (b) The Board continues to authorize the payment of employee retirement benefits for W.
       W. “Bud” Burnett. Mr. Burnett became a PEC Director in 1968.36 He became
       President of the PEC Board in 1987 and at the same time became an employee of the
       PEC. He was hired by former PEC General Manager and convicted felon Bennie
       Fuelberg with a job title of Coordinator whose role was to “interface with legislative
       and regulatory bodies”.37 Although considered a part of Senior Management, Mr.
       Burnett apparently had limited or no involvement with the day-to-day operations of
       the PEC. He had no office at the PEC, no staff, and no functional or operational
       responsibilities that the Navigant investigators were able to determine.38 On
       December 17, 2001 the Board passed a resolution backdating Mr. Burnett’s

       33
            Austin American-Statesman, July 23, 2010, Page A01

       34
            PEC 2009 IRS Form 990, Schedule J, Page 2

       35
            http://quickfacts.census.gov/qfd/states/48000.html

       36
            The Navigant Report, Page 55 of 390

       37
            The Navigant Report, Page 55 of 390

       38
            The Navigant Report, Page 61 of 390


                                               Page 12 of 20
     employment year from 1987 to 1968 allowing him to collect additional retirement
     benefits based upon an additional nineteen (19) years of service for which he did not
     qualify.39 On February 23, 2009 the Board rescinded the December 17, 2001
     resolution.40 Based upon the information gathered by the Navigant investigators, it
     appears that Mr. Burnett either provided no services to PEC , or services that do not
     justify the salary that he was paid. Testimony in the Bennie Fuelberg trial supports
     the contention that Mr. Burnett was not performing his duties.41 At his trial Bennie
     Fuelberg contended that the reason he kept payments to his legislative consultant
     brother, Curtis Fuelberg, secret was to avoid embarrassing Mr. Burnett regarding the
     fact that he was not doing his job as Coordinator and not interfacing with legislative
     and regulatory bodies as expected.
Remedy: The Board must direct immediately the Chief Executive Officer to ascertain
         whether Mr. Burnett did in fact provide services to the PEC as an employee
         simultaneous with his service as President of the Board. Mr. Burnett should be
         given 90 days to prove that he worked 40 hours per week as an employee of the
         PEC – not to be confused with the hours he worked as President of the Board.
         Absent proof that he actually worked 40 hours per week as an employee of the
         PEC, the Board must reduce all or part of Mr. Burnett’s retirement benefits
         attributable to his “employment” as “Coordinator.”

   (c) Bennie Fuelberg was found guilty of misapplication of fiduciary property, theft, and
       money laundering in Cause No. 1015 in the 424th Judicial District Court, Blanco
       County, Texas on December 10, 2010. Under a legal principle called the “faithless
       servant doctrine” an employer may refuse to pay an employee for the time that the
       employee was disloyal to his employer, and recover through a forfeiture procedure
       all monies paid to the employee during the period of disloyalty. Mr. Fuelberg’s
       disloyalty with respect to his conviction began in late 1996. Under the faithless
       servant doctrine his employer, the PEC, can seek forfeiture of all compensation Mr.
       Fuelberg received since his disloyalty began. From 1998 through 2007 Mr. Fuelberg
       received about $5.4 million in compensation42 from the PEC. Mr. Fuelberg’s
       retirement pay from the PEC is $12,638.53 per month43 – $151,662.36 per year. Mr.
       Fuelberg participated in and aided and abetted others to participate in lavish,


       39
            The Navigant Report, Page 241 of 390

       40
            M inutes, PEC Board of Directors’ M eeting, February 23, 2009

       41
            Austin American-Statesman, December 9, 2010, Page A01

       42
            The Navigant Report, Page 235 of 390

       43
            The Navigant Report, Page 239 of 390


                                               Page 13 of 20
     unnecessary, excessive, and wasteful spending at the PEC for many years at the
     expense of PEC member-owners. His failure to perform his fiduciary duties in a
     responsible manner is documented in numerous pages in the Navigant Report. Mr.
     Fuelberg has caused the member-owners of the PEC substantial economic harm over
     many years, and presumably has accumulated significant personal assets at the
     expense of PEC member-owners. The Board at its regular meeting on December 20,
     2010 adopted a resolution seeking financial restitution from Mr. Fuelberg by directing
     legal staff to prepare a statement outlining how the PEC and its member-owners were
     victimized during Mr. Fuelberg’s tenure. The statement will include a dollar amount
     of requested restitution and will be presented at Mr. Fuelberg’s sentencing hearing
     before State District Judge Dan Mills.44
Remedy: The Board must direct immediately the Chief Executive Officer to engage the
         services of a law firm on a contingency fee basis to prepare to file a lawsuit against
         Mr. Fuelberg to seek forfeiture of all PEC compensation and benefits received
         during his period of disloyalty under the faithless servant doctrine. Such lawsuit
         must seek also forfeiture of his retirement pay. The judge in the recent Tyco case
         said that Tyco has no duty to honor compensation agreements made during
         former employee Kozlowski’s period of disloyalty. Similarly, PEC has neither the
         duty to honor Bennie Fuelberg’s compensation agreements during his period of
         disloyalty, nor the duty to reward his misdeeds with retirement pay.

(9) Management Bonuses The Board has authorized the payment of bonuses to PEC
    management whose performance in financial management compared to its Peer Group is
    abysmal. The fiduciary failures in financial management of both the Board and PEC
    management are explained to some extent by perspective. PEC management will look to
    the PEC’s J. D. Power ratings and, from this perspective, conclude that it has performed
    well and deserves bonuses. The Board apparently operates from this same perspective.
    Neither the Board nor PEC management look at PEC management’s performance from
    the perspective of cost-efficiency. The Navigant Report shows clearly that the PEC’s
    controllable expenses45 are substantially higher than its peers. An estimated $141.7
    million46 has been wasted over the period 2002 through 2007, as a result of PEC
    management failing to keep costs, at a minimum, at the level of it’s Peer Group in just
    three expense categories – Customer Accounting Expense; Customer Sales & Service
    Expense; and, Administrative and General Expense. Further, PEC management over the



       44
            Austin American-Statesman, December 21, 2010, Page B01

       45
            The Navigant Report, Pages 109-110 of 390 & Appendix B, Pages 32, 34, and 36

       46
        Letter to the Board from member-owner M erle L. M oden dated December 14, 2010 and 1:00 pm
comments at the December 20, 2010 regular Board meeting by member-owner M erle L. M oden


                                              Page 14 of 20
     period 2002 through 2007 shows total wasted member-owner monies estimated at $306.4
     million47 when comparing the PEC’s annual total cost per customer with its Peer Group.48
     This outcome is all the more surprising when noting that PEC’s Purchased Power Cost as
     a Percentage of Revenue is lower than its Peer Group.49 The vehicle used to justify
     bonuses is the “Key Performance Indicators”50 (KPIs) system which sets performance
     targets in five (5) general categories and awards points for three levels of performance.
     Out of thirteen (13) performance indicators, only one addresses the level of expenditures
     which is “Administrative and General costs per meter.” This is not the only area
     experiencing unnecessary and excessive expenditures. The KPI system does not address
     adequately the issue of cost-efficient operations. With respect to providing incentives for
     cost-efficiency, the KPI incentives are perverse.
   Remedy: The Board must immediately instruct the Chief Executive Officer to:
            (i) cease payment of management bonuses until PEC’s annual controllable
                 expenses per customer are reduced to at least the level incurred by the PEC’s
                 Peer Group; and,
            (ii) cease use of the present flawed KPI system.

   (10) Risky Investments Past Boards and the General Manager Bennie Fuelberg have
        engaged in risky business ventures which have failed. The most spectacular of which
        is the flawed scheme to acquire over a period of time the Envision Utility Software
        Corporation (Envision). This failed venture to develop the foCIS software product
        resulted in the PEC spending over the period 1990 through 2007 nearly $70 million51
        the benefits of which have failed to materialize.
   Remedy: The Board must stick to the business of providing low-cost electric service to
            member-owners in an efficient manner. Deviation from the PEC’s core business
            must be scrupulously avoided.

Grievance E: Failure to Provide Relevant Information Regarding Assurance of Cost-
effectiveness of Various Programs to Conserve Electricity or Programs to Secure Alternative
Energy Sources The PEC has embarked upon several initiatives to implement programs that are



          47
           Letter to the Board from member-owner M erle L. M oden dated December 14, 2010 and 1:00 pm
   comments at the December 20, 2010 regular Board meeting by member-owner M erle L. M oden

             48
                  The Navigant Report, Appendix B, Page 41

             49
                  The Navigant Report, Appendix B, Page 38

          50
                  Regular PEC Board meeting, December 14, 2009, Agenda Item 14 k, Supplemental #1, Board
   Package

             51
                  The Navigant Report, Page 22 of 390

                                                    Page 15 of 20
sold primarily on their merits for conservation, load shaving, social, and aesthetic purposes.
While these may be laudable programs, their acceptance by many PEC member-owners will
depend upon the cold, hard facts of cost-effectiveness. The first consideration in developing
these programs should be the financial benefit to the PEC. Such benefit should be the spelled
out in plain language at the beginning of the program description – not buried in mysterious,
incomplete and vague spreadsheet printouts presented for all practical purposes as footnote
afterthoughts. Programs touting electricity demand and energy reductions should present a
clear picture – upfront – of the saving in demand costs and the savings in energy costs. All
proposals for alternative energy should state clearly – upfront – the cost benefit to PEC,
preferably with comparative data showing why a particular proposal is desirable for the PEC.
Remedy: The Board must direct immediately the Chief Executive Officer to instruct PEC
           managers to use cost-benefit as the sole criterion for proposals for conservation and
           alternative energy.

Grievance F: Failure to Implement a Fair and Equitable Rate Structure The Board has
adopted and continues to employ a rate structure that does not reflect the cost of service. Some
examples are shown below.52
   (1) C. H. Guernsey & Company (Guernsey) Cost of Service and Rate Design Study (study)
       The Board adopted the results of this study in 2009, and those results continue to
       underpin the existing rates. The Board did not, however, adopt all the recommended
       rates. While there are numerous questionable allocations of costs to and among the
       various rate classes, shown below are several egregious errors made in this study. Please
       note that the overall revenue requirement established by the PEC would be unaffected by
       these errors, as the rate of return percentage would have been increased to reach the
       PEC’s target revenue requirement. These errors illustrate the flawed nature of the study,
       as they overstate operating expenses and understate return on investment.
       (a) Contributed Facilities (Contra Assets) These are contributed assets that are owned by
           the PEC for which there is no corresponding liability or capital. Such assets should
           have been excluded from the cost of service study; however, the Guernsey study
           erroneously included an amount for rate of return on net contra assets and an amount
           in operating expenses for annual depreciation.
       (b) Uncollectible Accounts The Guernsey study included in operating expenses an
           amount for uncollectible accounts. Uncollectibles are contra revenues – not expenses.
           They are accrued revenues which were not collected. The expenses necessary to
           provide electric service are accounted for in other categories.
       (c) Donations and Bonuses The Guernsey study included in operating expenses
           amounts for donations and bonuses. These items are not required to provide
           electricity to member-owners. They are dispositions of excess revenues – not

           52
                References to the Guernsey Cost of Service and Rate Design Study are unavailable, as the PEC
    has removed this information from its website.

                                                  Page 16 of 20
      expenses.
  (e) Interest The Guernsey study included interest on debt as an operating expense.
      Standard utility-basis rate-making practice recovers the cost of debt capital in the rate
      of return calculation. This peculiar hybrid treatment incorrectly increases operating
      expense and decreases the rate of return percentage.
Remedy: The Board must instruct the Chief Executive Officer to ensure that the next cost of
          service and rate design study is performed by competent professionals and is free
          from such obvious errors.

(2) Hook-up Costs Providing and setting poles, providing and hanging line transformers,
    providing and stringing cables, providing and installing electric meters, and making
    connections are hook-up costs. Hook-up costs incurred exclusively on the customer’s
    property should be the responsibility of the customer, as the customer has exclusive use
    of these assets. The PEC has failed to require each customer to bear a substantial share of
    these customer-specific costs. Rather, hook-up fees have been minimal or nonexistent
    until recently when new customers were required to pay more. The hook-up costs not
    recovered from new customers are allocated to all other customers in the cost
    determination process, or funded with borrowed money with the interest expense
    allocated to all other customers. The rapid growth of customers in the PEC service area
    coupled with insufficient recovery of hook-up costs has resulted in rates that are too high
    and the need to borrow substantial amounts of money to meet service demand. The
    result is an unfair and inequitable subsidy of newer customers at the expense of the older
    customers.
Remedy: The Board must direct immediately the Chief Executive Officer to implement
            hook-up fees to recover at least 50% of the customer-specific costs of a hook-up.

(3) Payment Centers These centers are utilized by a small fraction of PEC member-owners.
    Yet, their costs were included in the cost of service study and were allocated as if they
    were utilized by all member-owners. Common costs are those costs for labor, land,
    buildings, facilities and equipment that are shared by two or more member-owners.
    While the payment center costs are common costs, they are not shared costs in the same
    fashion as poles, wires, electric substations, and electric equipment, as these latter items
    are required for anyone and everyone to receive electricity. It is an unfair burden for
    those member-owners who pay their bills electronically or by U.S. mail to support these
    payment centers in their electric rates. Fair and equitable rates require that electric rates
    follow cost causation. Electric rates that impose a burden to cover costs which are not
    incurred by those paying such rates are unfair and inequitable.
Remedy: The Board must direct immediately the Chief Executive Officer to implement one
           of two options: Option 1 - Establish a surcharge for those member-owner making
           payments at payment centers to recover the costs of operating the payment
           centers; or, Option 2 - Close the payment centers and establish collection services

                                        Page 17 of 20
              in area businesses like grocery stores.

(4) Line Transformers The Guernsey Study failed to allocate demand costs in an equitable
    manner. A member-owner’s line transformer determines the member-owner’s maximum
    electric demand that can be placed on the generation, transmission, and distribution
    systems. For example, a residential member-owner with a 50 kVA line transformer
    places five (5) times the maximum electric demand on the system compared to a
    residential member-owner with a 10 kVA line transformer. The Guernsey study failed to
    address this fact and allocated a disproportionate amount of demand costs to small users
    of electricity resulting in a hidden subsidy for large users of electricity.
Remedy: The Board must instruct the Chief Executive Officer to ensure that the next cost of
            service and rate design study focuses upon cost variation among customers in
            order to assign demand costs more equitably.

(5) Three-phase Service The Guernsey study identified some, but not all, specific costs
    attributable to member-owners requiring three-phase service. Current PEC rates are the
    same for single-phase and three-phase member-owners. The cost to serve three-phase
    member-owners is higher than the cost to serve single-phase member-owners. For
    example, three (3) single-phase line transformers are normally used for overhead three-
    phase service,53 as compared to one transformer for single-phase service. The vast
    majority of customers require single-phase service. Rather than establishing a separate
    rate class for three-phase service member-owners, the Guernsey study presumably at the
    PEC’s direction simply dumped these higher three-phase member-owners’ costs onto all
    member-owners, resulting in a subsidy of three-phase member-owners by single-phase
    member-owners.
Remedy: The Board must immediately instruct the Chief Executive Officer to establish rate
            subclasses for member-owners requiring three-phase service.

(6) Power Factor Correction The Guernsey study failed to address the question of power
    factor correction. This correction to the bills of large customers with poor power factors
    is necessary to ensure that they cover their cost of service. The PEC recognizes the
    appropriateness of a power factor correction by providing for it in its current tariff
    schedule, but requires no such correction.54 The result is a hidden subsidy for large
    customers with poor power factors.
Remedy: The Board must immediately direct the Chief Executive Officer to begin


       53
             PEC response to information request from PEC member-owner M erle L. M oden dated M ay 27,
2010

        54
         http://www.pec.coop/Home/Energy_Services/Rates.asp , Tariff for Electric Service, Section 100,
Rate Schedules, Item 7

                                              Page 18 of 20
                immediately to make mandatory a power factor correction for all effected
                customers in accordance with the provisions in the current tariff schedule.

(7) Municipal Franchise Fees The PEC negotiates with the various municipalities in its
    service area under provisions of the Texas Utilities Code55 for the payment of franchise
    fees to these municipalities. In 2009 total franchise fees paid to municipalities was $5.0
    million.56 These franchise fees are determined by applying a percentage to the net
    receipts received by the PEC for electric service provided to its member-owners located
    within the corporate limits of the municipality. The percentage is typically 2%. The PEC
    makes no differentiation in its electric rates for member-owners located outside the
    corporate limits of a municipality and those located inside such corporate limits. Clearly,
    the cost to serve those member-owners located inside the corporate limits of a
    municipality are 2% higher than those member-owners located outside such corporate
    limits. The PEC Board of Directors has failed to adopt a fair and equitable rate structure
    to address this inequity. Failure to adopt electric rates which pass the cost of the
    franchise fees to those member-owners located inside the corporate limits of a
    municipality results in a hidden subsidy for these member-owners at the expense of those
    member-owners located outside the corporate limits of municipalities.
Remedy: The Board must direct immediately the Chief Executive Officer to reduce the
            electric rates for those member-owners not located in an incorporated city and
            increase the electric rates for those member-owners located in an incorporated city
            that collects a franchise fee from the PEC. The necessary rate increases and
            decreases must be revenue neutral.

(8) City Sales Tax Several cities within PEC’s service area levy a sales tax upon the retail
    sale of electricity. The list of such cities includes Bertram, Blanco, Burnet, Cedar Park,
    Leander, and Marble Falls. The levy is 1% of the net retail sale of electricity for member-
    owners located within the corporate limits of a municipality levying such tax. At the
    time of this writing it is unclear whether the PEC is acting as an agent of the State of
    Texas by collecting these taxes from the affected member-owners and remitting those
    collections to the Office of the Texas Comptroller of Public Accounts. Or, the PEC is
    making the necessary remittances to the Office of the Texas Comptroller of Public
    Accounts and dumping and spreading those costs on all PEC member-owners. An open
    records request mailed to the PEC on or about October 31, 2010 to clarify this issue
    remains unanswered. The PEC makes no differentiation in its electric rates for member-
    owners located outside the corporate limits of a municipality and those located inside


          55
               Texas Utilities Code, Chapter 33, Sec. 33.008

          56
               PEC response to information request from PEC member-owner M erle L. M oden dated October
4, 2010

                                                   Page 19 of 20
  such corporate limits. Clearly, the cost to serve those member-owners located inside the
  corporate limits of a municipality are 1% higher than those member-owners located
  outside such corporate limits. The PEC Board of Directors has failed to adopt a fair and
  equitable rate structure to address this inequity. Failure to adopt electric rates which
  pass the cost of the city sales taxes to those member-owners located inside the corporate
  limits of a municipality levying such sales tax results in a hidden subsidy for these
  member-owners at the expense of those member-owners located outside the corporate
  limits of these municipalities.
Remedy: The Board must direct immediately the Chief Executive Officer to reduce the
          electric rates for those member-owners neither located in a municipality nor
          located in a municipality that does not levy a sales tax on the retail sale of
          electricity and increase the electric rates for those member-owners located in a
          municipality that does levy a sales tax on the retail sale of electricity. The
          necessary rate increases and decreases must be revenue neutral.




                                      Page 20 of 20

				
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