E-1 HONORABLE CHAIRPERSON AND MEMBERS OF THE AZUSA UTILITY BOARD GEORGE F. MORROW, DIRECTOR OF UTILITIES

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1 E-1 SCHEDULED ITEM TO: FROM: HONORABLE CHAIRPERSON AND MEMBERS OF THE AZUSA UTILITY BOARD GEORGE F. MORROW, DIRECTOR OF UTILITIES DATE: OCTOBER 26, 2015 SUBJECT: UPDATE ON DUE DILIGENCE REVIEW OF PROPOSAL BY SENSUS USA, INC. ON ADVANCED METERING INFRASTRUCTURE (AMI) PROJECT, AND CONTRACT WITH UTILIWORKS TO ASSIST AZUSA LIGHT & WATER TO DEVELOP AN AMI CONTRACT WITH SENSUS USA, INC. SUMMARY: In October 2014, Sensus USA, Inc., proposed (through a competitive process) to implement an AMI project in the Azusa Light & Water (ALW) service territory. In March 2015, the Utility Board authorized staff to conduct a due diligence review of Sensus qualifications. This report summarizes some findings with respect to the due diligence review and recommends that the Utility Board approve a contract with UtiliWorks, Inc., for assistance in negotiating a performance-based agreement with Sensus USA, Inc., to implement the proposed AMI project. UtiliWorks will also verify the business case for the AMI project, including costs and benefits. RECOMMENDATION: It is recommended that the Utility Board approve the attached professional services agreement with UtiliWorks in a not to exceed amount of $48,000, plus travel expenses/business license cost. DISCUSSION: Background In June 2014, the Utility Board approved a Request for Proposals (RFP) to automate meter reading and other field service functions performed by the Customer Service Division and to modernize operational management of the water and electric distribution systems. The RFP was released on July 14, 2014 and 6 proposals were received by the RFP deadline in October 2014.

2 Page 2 Each proposal was analyzed and three firms were interviewed in January In March 2015, staff recommended that ALW conduct a due diligence review of Sensus, USA, Inc. s proposal and qualifications, and consider different electric meter options. Sensus basic cost proposal is summarized below: One Time Costs 10 Yr Operating Costs 10 Year Total $9,249,773 $1,857,313 $11,107,086 As part of the due diligence process, staff traveled to North Carolina and South Carolina in May 2015 to visit Sensus Research and Development facilities and a couple of area electric utilities. Staff reported on the outcomes of that trip to the Utility Board in June 2015, and indicated interest in visiting a local water utility served by Sensus. As such, in July 2015, ALW staff visited the City of Fountain Valley s water utility. The City of Fountain Valley conducted a pilot program to test three different AMI vendors. The Sensus network and AMI system outperformed those of the other vendors tested, and resulted in Sensus being selected as Fountain Valley s AMI vendor. The Sensus iperl water meter was also selected and installed throughout Fountain Valley s service territory. ALW staff has also been monitoring the efforts by two other local utilities working with Sensus. The City of Long Beach selected Sensus, MeterSense, and Utility Partners of America (UPA), to implement an AMI project for its Gas utility. These are the same vendors that teamed up to submit a proposal to ALW. Staff also notes that the City of Glendora approved a contract in July 2015 with Aqua Metrics, a Sensus representative, to implement an AMI project for its water utility at a cost of $3,682,828. The Glendora project involves installation of 8,312 Sensus water meters and the system will make use of the same FlexNet network infrastructure that Sensus proposed to ALW. In July 2015, a Press Release announced that Sensus and GE were collaborating to create a residential electric meter that would communicate with Sensus FlexNet network. GE s i210 electric meter has a proven reliability track record and will host a FlexNet card in it to communicate with Sensus wireless network for meter reading and other purposes. Results of Due Diligence ALW staff has learned several lessons from the Due Diligence process, and a few highlights are noted below: 1. Sensus FlexNet licensed frequency communications network should be part of project as it has very strong signal propagation characteristics and will minimize the amount of field devices that need to be deployed and maintained. 2. While staff believes that Sensus has overcome concerns about its icon Generation 3 & 4

3 Page 3 electric meters and may indeed have one of the most advanced AMI electric meters on the market today (Stratus), staff is interested in using the GE I-210+c meters to serve the bulk of ALW customers. The GE meters were presented as an option in Sensus proposal and are slightly higher in cost. While the GE I-210 meter has been in the field for some time, the I-210+c meters with FlexNet cards are just starting to be produced and so will need to be tested by ALW. See attached press release. 3. Staff proposes that the Sensus iperl meter be used to replace ALW s current water meters. The iperl meter appears to be highly accurate and does not include moving parts which can slow down over time and result in revenue losses and unaccounted for water losses. In conjunction with the FlexNet communication system, the meter will be able to detect leaks at the customer premise. (Sensus also has a prototype remote shut off water meter, which may be selectively used in the future.) 4. Staff also proposes that the MeterSense Meter Data Management System (MDMS) be part of the AMI system. The MeterSense MDMS was demonstrated at one of the utilities visited and worked very well and is compatible with ALW s Customer Information System (CIS). The MeterSense MDMS was an option in Sensus proposal and is slightly higher in cost than the originally proposed MDMS. 5. ALW staff proposes that the AMI System and MDMS be hosted offsite with servers maintained by Sensus with software provided to ALW online as a contract service. This has some big advantages in terms of security and reliability and avoids the need for inhouse support of hardware and networking devices. 6. ALW proposes that a pilot program be launched to develop and demonstrate the functionality and reliability of equipment and services desired and previously specified in the RFP for this project. Rather than concentrate on one particular area of ALW s service territory, the pilot area should include meters dispersed to the far reaches of our service territory and represent the most difficult to read geographic areas to fully test the network signal and to ensure that there are no delays during full deployment. 7. Performance criteria needs to be set forth in the contract for the pilot project, and only after the criteria is met, should ALW commit to the fuller deployment throughout our service territory. The pilot should be completed within one year. 8. There appears to be a significant opportunity to reduce installation costs. These opportunities should be fully explored and used to negotiate lower installation costs with UPA. Staff determined that UPA is open to these discussions. 9. Detection of hot meter sockets, and meter sockets with loose lugs, should be part of the installation protocol for electric meters. Independent electricians should be on call as part of electric meter replacements process to change out these problem meter cans, even though these are typically the responsibility of homeowners.

4 Page 4 UtiliWorks Contract The contract to be developed with Sensus and its subcontractors (MeterSense and UPA) is a fairly large technical undertaking. As such, it is recommended that the City obtain specialized technical assistance to develop and negotiate the scope of work and contract with Sensus for the AMI project. As you may recall, UtiliWorks was selected by ALW through a competitive RFP back in September 2012, to provide AMI technical assistance. UtiliWorks has worked since that time to help ALW develop the AMI RFP used in soliciting proposals from AMI vendors, and then helped ALW to analyze proposals received and assisted with the interview process. UtiliWorks also helped to setup meetings for the due diligence process. Staff believes that it makes sense to continue to have UtiliWorks assist ALW in negotiating and developing the technical aspects of the contract documents to implement an AMI Project with Sensus. In order to continue to have UtiliWorks assist ALW, a new contract with UtiliWorks is necessary as the previous one has lapsed and did not include the contemplated scope of work, which is as follows: Support and guide contract negotiations with Sensus and its subcontractors, including negotiation of reduced proposed pricing for equipment and services. Develop technical scope of work for the pilot project and full deployment phase of project. Scope of work to include technical acceptance criteria for all AMI system components, i.e., meters, wireless network, communication standards, meter data management system, customer information system (CIS) and billing integration and web portals for customers and ALW s Customer Service Representatives. Develop high level system integration requirements for all system components to ensure that all system processes work together and provide desired functionality according to established standards. Develop and provide important deliverables, including Gantt Chart of Project Schedule, Cost Breakdown for Pilot Phase, Acceptance Criteria for Pilot Project, and similar documents for full deployment. Proposed scope includes review and verification of ALW s forecasted financial benefits from project (see next section of this report). The above proposed scope of services is to be performed through a not-to-exceed contract in the amount of $48,000, plus travel expenses and business license cost. Financial Benefits of AMI Project During its March 2015 meeting, the Utility Board asked about the potential financial benefits of this project. Staff formulated a draft financial forecast of the benefits of this project over a 10

5 Page 5 year period. Financial benefits would include increased revenues from more accurate water meters, reductions in staff costs over time for meter reading and field services, as well as reduced vehicle replacement and maintenance costs, fuel cost savings, and avoided annual meter replacement costs. Other cost savings would be realized by eliminating use of handheld meter reading devices and software to download reads from hand held devices. Selected items are described in more detail below, but generally, staff estimates that this project could become cash flow positive on an annual basis shortly after full deployment, and result in cash flow benefits on the order of about $1.4 to $1.5 million annually. The forecast indicates that the initial capital cost would be fully amortized by year 9. As noted previously, the proposed contract with UtiliWorks seeks to have UtiliWorks verify the validity of this financial forecast before any contract is approved with Sensus as part of the policy making process. Water Losses Water Losses are derived by comparing the amount of water produced from water treatment plant and wells, to the amount of water consumed by customers as reported through meter reading and billing reports. Below shows the average water loss of 11.8% on an annual basis for the past four fiscal years using this methodology: FY CCF Production Billed Loss CCF PCT CCF LOSS ,771,491 7,598,788 1,172, % ,172,105 8,094,072 1,078, % ,039,583 8,020,459 1,019, % ,953,970 7,094, , % Avg 8,734,287 7,702,063 1,032, % Much of the water loss as calculated above is believed to result from slow water meter registers and from leaks on the customer side of the meters. If 75% of the water loss is the result of slow meter registers due to aging meters and from leaks that can be found/remedied, then ALW is losing about $962,000 annually in unbilled water usage charges. A similar figure was previously identified in a prior consultant study performed for ALW, and UtiliWorks also believes that the amount of water loss noted above from unmetered water flow is a reasonable estimate. Labor Cost Savings The AMI project will eliminate the need for dedicated Meter Readers to manually go out to service locations and read meter registers. In anticipation of this project, ALW has been reluctant to hire new full-time Meter Readers in recent years. Currently there are 3 part-time temporary Meter Readers and 3 full-time Meter Readers. The part time meter reading positions

6 Page 6 could be eliminated as a result of this project and one full-time person could help with drought patrol during regular hours. This could reduce part time labor costs by about $208,000 annually, and potentially could be fully implemented by year 3 of the project. The City has an obligation in Section of the IBEW MOU to work with full-time staff on training that might be suitable to transition full-time Meter Readers into other jobs or vacant positions they may qualify to perform, and so ALW will work with current full-time employees on this. Management staff has already met with field services staff and union representatives on this topic and parties agreed to continue to meet to develop a transition plan. However, for financial modeling purposes, it seems reasonable to assume that the field services budget could be reduced by 2 full-time positions by year 3 of this project or after full deployment, and an additional position may be lost due to attrition by year 5. Based on these assumptions, full-time labor costs could be reduced by $221,000 annually in year 3 and by about $345,000 annually by year 5 and each year thereafter as a result of this project. Vehicle Cost Savings With the reduction of each field position, vehicle operating and maintenance costs, as well as vehicle replacement costs, are avoided. With ALW s currently aging fleet, vehicle replacement costs are imminent, and so at least 2 vehicle purchases could be avoided by year 3 of this project, and potentially 2 additional purchases could be avoided in year 5 of this project -- a total of about $90,000 in capital costs could be avoided; annual vehicle maintenance and fuel cost savings would be about $16,000 in year 5. Draft Financial Results While a financial forecast is subject to a number of assumptions and variables, the table below illustrates that the initial cost would be fully amortized by year 9, and that net benefits would continue thereafter at about $1.5 million per year. Please note that the AMI Project/Operating Cost as set forth below is based on the existing cost proposal; some one-time costs in years 1 and 2 are subject to negotiation and possibly amortization over 10 years with ALW taking ownership of all facilities/equipment after 10 years. AMI Project/ Net Annual Net Aggregate Year Revenue Savings Operating Cost (Cost)/Benefits (Cost)/Benefit (900,616) (900,616) (900,616) 2 240,564 - (9,532,691) (9,292,127) (10,192,743) 3 962, ,743 (198,211) 1,382,786 (8,809,957) 4 962, ,317 (202,175) 1,342,396 (7,467,561) 5 962, ,373 (206,219) 1,523,409 (5,944,152) 6 962, ,594 (210,343) 1,485,506 (4,458,646) 7 962, ,040 (214,550) 1,479,745 (2,978,901) 8 962, ,715 (218,841) 1,487,129 (1,491,773) 9 962, ,623 (223,218) 1,494,660 2, , ,770 (227,682) 1,515,342 1,518,230 Total 7,938,600 5,714,175 (12,134,546) 1,518,230 n/a

7 Page 7 Other notes on above table: (1) the system cost shown above is based on using GE meters and the MeterSense MDMS, both of which are slightly more expensive than other options included in Sensus base proposal; and (2) the above table assumes the pilot program would be carried out in year 1 and full deployment would be completed in year 2; this timeline may be optimistic. FISCAL IMPACT: The fiscal impact of approving the new agreement with UtiliWorks is $48,000, plus travel expenses and a minor amount for any City business license. Staff has reason to believe that these proposed costs will be fully offset by the results of contract negotiations. The fiscal impact of the AMI project itself will depend on negotiated outcomes, and would occur over a period of years as described in this report. Because this is a capital intensive project, much of the cost of the project will be incurred within the first couple years. The table below shows a cost breakdown in the first two years based on existing proposal, including meter and MDMS options desired by ALW: Equipment/Service Year 1 Year 2 AMI Head End Hardware 59, ,600 AMI Head End Software Set up+ Annual Fee 103,800 49,500 Electric Meters* 99,283 2,601,369 Electric Meter Installations 49, ,493 Water Meters 57,948 4,271,290 Water Meter Installations 30,802 1,498,137 Other Professional Services 116,886 Integration Services 71, ,000 Meter Sense MDM# 309,723 98,500 Ongoing Maint. Fees 2, ,802 Total 900,616 9,532,691 When staff prepares its report to recommend approval of an AMI implementation contract, staff will propose a financial plan to pay for the project based on negotiated outcomes, and some of the above costs may change or be amortized over a 10 year period as noted in this report. It is anticipated, however, that it may be prudent to use reserves to purchase meters and to pay for meter installation costs in years 1 and 2 of this project. This is discussed on next page.

8 Page 8 To illustrate how ALW might fund the cost for meters and meter installations, these costs are set forth below for each utility/fund (Water and Electric) based on current cost proposal: Cost in Water Years 1 & 2 Water Meters 4,329,238 Water Meter Installations 1,528,939 Water Fund Potential 5,858,177 Electric Electric Meters 2,700,652 Electric Meter Installations 629,383 Electric Fund Potential 3,330,035 Total of Both Funds 9,188,212 Funding these costs out of reserves appears possible because reserves in each fund currently exceed reserve policy requirements. For instance, at fiscal year end , the Electric Fund had an estimated balance of $20.3 million and the reserve policy is $12.6 million; this is more than adequate to fund the cost of meters and meter installations without a rate increase. And while the drought may be affecting our Water Fund balance presently, the Water Fund had an estimated balance of $21.7 million at fiscal year-end With the reserve policy set at $19 million, the Water Fund had $2.7 million in excess of the reserve policy at the end of last fiscal year. While this is short of the amount needed to pay for new water meters, the water fund revenues would likely increase by about $1 million annually as a result of this project, and so this revenue stream would likely replenish the Water Fund to meet the reserve requirement within 2 to 3 years following full deployment. Hence, at this time, a rate adjustment is not expected to be necessary to pay for this project. Prepared by: Cary Kalscheuer, Assistant Director Customer Care and Solutions Federico Langit, Assistant Director Electric Operations Attachments: 1. News Release on Sensus and GE Collaboration 2. Professional Services Agreement with UtiliWorks