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Exhibit 1 - Agenda Information Sheet - Amendment 3City of Denton ____________________________________________________________________________________ AGENDA INFORMATION SHEET DEPARTMENT: Procurement & Compliance CFO: Antonio Puente, Jr. DATE: June 11, 2019 SUBJECT Consider adoption of an ordinance of the City of Denton, a Texas home-rule municipal corporation, authorizing the approval of a third amendment to a Professional Services Agreement between the City of Denton and Deloitte & Touche, LLP, amending the contract approved by Purchasing on May 25, 2017, in the not-to-exceed amount of $26,000, amended by Amendments 1 and 2 approved by the City Manager and City Council, said third amendment to provide professional services related to the assessment of the Energy Management Organization for Denton Municipal Electric; providing for the expenditure of funds therefor; and providing an effective date (File 6469 – providing for an additional third amendment expenditure amount not-to-exceed $192,500, with the total contract amount not-to-exceed $423,500). INFORMATION /BACKGROUND Staff contracted with Deloitte and Touche LLP (“Deloitte” or “D&T) to perform an independent assessment of the estimated savings and model of the Energy Management Organization, an in-house division of Denton Municipal Electric that was created in 2014 to manage the utility’s electric supply portfolio and perform all required scheduling, regulatory, and settlement activities. A goal of implementing the EMO was to achieve cost savings compared to outsourcing the function to a third party, as had been done previously. Deloitte performed a retrospective assessment of the savings calculations and model used by the EMO for FY 2015 and FY 2016. Deloitte presented their findings to the Public Utilities Board on September 11, 2017 and to the City Council on September 12, 2017. Below is a brief summary of the findings that were presented:  The model validation and calculation re-performance identified only small differences in the cost savings as reported by DME and re-performed independently by D&T.  The two main drivers in the cost savings are (1) the heat rate and (2) the ancillary services cost. Both were quoted by the previous outsourced counterparty. o There are two elements of the heat rate that when further analyzed result in a reduction in savings of between $6 and $7 million per year. At an initial estimate of $12 to $13 million of savings per year, that results in a revised savings of approximately $6 million per year. The two elements are:  Using an around-the-clock heat rate vs. an on-peak heat rate  Using a thorough historical analysis rather than relying on a single data point o The ancillary services and QSE costs account for more than $3 million per year in cost savings when compared to the actual ancillary services and QSE cost incurred by the EMO. City Hall 215 E. McKinney Street Denton, Texas www.cityofdenton.com  D&T reviewed the EMO costs and identified some potential costs that may not have been considered during the creation, implementation and operation of the EMO, including governance costs, costs due to potential personnel gaps, and data, license, software and systems costs. Deloitte further performed a retrospective analysis and assessment of the EMO Model that included:  FY 2017 Benchmark Analysis: An analysis of alternative benchmark calculations to be used in the cost savings calculation.  EMO Risk Assessment: An independent assessment of the EMO’s current and future capabilities required to support the EMO’s mission, energy management and risk management activities. On December 11 and 12 of 2017, Deloitte presented their report to the Public Utilities Board and City Council. Staff has attached Deloitte’s presentation and management’s response from those presentations. While a number of recommendations were made by Deloitte and staff has been working to implement those recommendations, chief among those recommendations was the need to update DME’s Risk Management Policy and the replacement of the Energy Trading and Risk Management (ETRM) system. Staff is pleased to inform you that the Risk Management Policy has been revised and adopted, and staff is currently evaluating proposals for a replacement ETRM. As part of our ongoing process to improve transparency and accountability within DME and its EMO operation, staff is proposing to re-engage Deloitte for additional services which include: 1. FY 2018 Benchmark Analysis. 2. Review of the Implementation Status of Previous EMO Risk Management Recommendations. 3. Provide Quarterly Support to the Risk Management Committee. The three tasks outlined above are further detailed in the scope, approach and assumptions section of the attached Statement of Work from Deloitte. PRIOR ACTION/REVIEW (COUNCIL, BOARDS, COMMISSIONS) September 12, 2017 – Deloitte presented their assessment of the cost savings model for the EMO for FY 2015 and FY 2016 at the September 12, 2017 City Council meeting. September 11, 2017 – Deloitte presented their assessment of the cost savings model for the EMO for FY 2015 and FY 2016 at the September 11, 2017 Public Utilities Board meeting. On October 10, 2017, Council approved Amendment No. 2 with Deloitte & Touche, LLP, in the not-to- exceed amount of $145,000 (Ordinance 2017-289). December 11, 2017 – Deloitte presented their FY 2017 Benchmark Analysis and EMO Risk Assessment for FY 2017 to the Public Utilities Board. December 12, 2017 – Deloitte presented their FY 2017 Benchmark Analysis and EMO Risk Assessment for FY 2017 to the City Council. On June 10, 2019, this item will be presented to the Public Utilities Board for recommendation to the City Council for consideration. RECOMMENDATION Award Amendment No. 3 with Deloitte & Touche, LLP, for professional services related to the assessment of the Energy Management Organization for Denton Municipal Electric, in an amount not-to-exceed $192,500, with the total contract amount not-to-exceed $423,500. PRINCIPAL PLACE OF BUSINESS Deloitte & Touche, LLP Parsippany, NJ ESTIMATED SCHEDULE OF PROJECT It is estimated that the services described in the scope of work could take approximately six (6) weeks to accomplish and quarterly support to the Risk Management Committee will be ongoing for the next year (4 quarters). The agreement is planned for consideration at the June 11, 2019 City Council meeting. Deloitte expects that they could begin work within two (2) weeks of Council approval. FISCAL INFORMATION These services will be funded from account 160099.7808. Purchase Order # 181607 will be revised in the amount of $192,500 to include the third amendment upon approval. EXHIBITS Exhibit 1: Agenda Information Sheet Exhibit 2: Original Contract and Amendments Exhibit 3: Presentation – Dec 11 & 12, 2017 Exhibit 4: Ordinance and Amendment Respectfully submitted: Lori Hewell, 940-349-7100 Purchasing Manager For information concerning this acquisition, contact: Antonio Puente, Jr. at 940-349-7283. Legal point of contact: Mack Reinwand at 940-349-8333.