MiddletownsElectric

DistributionSystem
Past, Present, and Future
Councilman Benjamin Kapenstein

History

Middletown entered into electric supply contract in 1906 with York Haven Electricity Transmission
Company (now known as Met-Ed).

The contract allowed Middletown to purchase electricity at a rate of 1 cent per KWH in
perpetuity (forever).

While this rate may have been considered the market rate when the agreement was signed, as
time went on, the market rate of electricity increased.

This gave Middletown the opportunity to make a profit off of the electric system that could be
used to fund other government activities.

To illustrate, the Borough would buy electricity for 1 cent, then re-sell it to residents at 6 cents (for
example). The 5 cent profit could then be used to fund things such as police services or to pave
streets. The 6 cents that residents were paying was still less than what people in neighboring
communities paid.

Due to the cheap rates that residents were paying, many people decided to install electric
heating systems and not insulate their homes as well as they should.

Needless to say, the contract with Met-Ed was very profitable and beneficial to the Borough
and its residents.

History(continued)

Beginning in the mid 1990s, Met-Ed brought suit against Middletown, alleging that the
supply contract had terminated .

Middletown denied the claims and eventually on September 8, 1998 the two sides
reached a settlement agreement.

In order to void the contract, Met-Ed was ordered to make periodic settlement payments
to the Borough. This is what we now know as the Electric Trust Fund.

The problem that arose from the settlement, was that now the Borough had to purchase
wholesale electricity in the market like everyone else.

Unfortunately, this took away the opportunity for the Borough to make a profit while still
charging residents less than what the market was paying.

This put a strain on other government activities because there were substantially smaller
profits to be transferred to the general fund from the electric fund.

Today

The electric rates we pay today in Middletown, are slightly below, but very close to what
the market pays.

Even with the settlement being a huge bump in road, our distribution system is still a
healthy asset to the Borough and more often than not provides profits that can be
transferred to the general fund.

The general fund is dependent on these profit transfers to stay in balance every year.

Its also important to note that the Electric Trust Fund has in excess of $8 million that can
be used only for specific expenditures relating to purchasing electric.

MillStreetSubstation
Move

Presently, there is an imminent need to complete a very expensive capital project, the
moving of the Mill Street Substation.

Borough officials were advised by FEMA that because the substation is in the flood plain,
it must be lifted or moved. If not, FEMA has said they will not reimburse the Borough for
any future damage to the substation due to flooding.

Cost estimates for the project are still preliminary, but go as high as $15 million.

Unfortunately, waiting is not an option.

Whyshouldyoucare?

At a recent Middletown Borough Council meeting, an idea was brought forward to lease
the electric distribution system to a private company to help pay for the project.

A focus group consisting of various decision makers in the Borough are being tasked with
studying whether or not a lease of the system makes sense at the current time.

As always, it is my belief that as a public official that represents the people of

Middletown, it is my duty to at least explore every option available when big issues such
as this come up.

On the next page, you will find a brief summary of various options for the financing of the
substation move.

Its important people realize that we DO have options. A lease of the electric system is
only ONE of those options.

ESTIMATED FOR DISCUSSION PURPOSES ONLY

MIDDLETOW BOROUGH
SUMMARY OF PROPOSED SUBSTATION FINANCING

Financed by

Estimated total annual tax

increase per household
(assuming $100,000
assessed value)

OPTION 1

OPTION 2

OPTION 3

OPTION 4

OPTION 5

Tax Increase

Tax Increase w/Pension Savings

Electric Rate Increase

Outright Sale/Lease of Electric System

Hybrid P3

TBD

TBD

TBD

*There are financing models available that

would create a public/private partnership, but
would not necessarily sell or lease the system.
Specifics of such a deal would have to be
worked out in the future.

* Due to the up-front payment from the water/sewer lease, our

pension system is now fully funded which therefore requires us to
contribute less each year. We could use these savings to pay for
a portion of the debt service for the new borrowing.

-Keeps control of electric distribution system

-Keeps control of electric distribution system

-Upfront considertion (money)

-Keeps control of electric distribution system

PROS

-Tax-exempt financing

-Tax-exempt financing

-Allows for pension savings to be used elsewhere in budget

-Minimal tax increase

PROS

-Covers the cost of substation move

-Covers the cost of substation move

-Opportunity for ongoing revenue sharing

-Keep control of electric system

-No tax increase

-Ability to get out of the electric business

-Lose control of electric rates

CONS

-Significant tax increase

-Restricts pension savings from being used elsewhere in budget

CONS -Electric rate increase

-Creates a budget hole due to
electric profit transfers
-Lose a valuable asset

-Revenue sharing with P3 Partner

-Potential for job losses

-Uncertainties of PUC regulation
-No immediate needs for upfront consideration

StayInvolved
I urge everyone to stay involved in this process.
Your input and opinions are important and will help
determine which course of action is taken.

I will continue to provide updates on the process

whenever possible.

If you have questions or concerns, please feel free

to contact me at bhk5014@gmail.com.