HomeMy WebLinkAbout2000-07-05 Utilities Advisory Commission Summary MinutesUAC Minutes – 07052000 Page 1 of 40
Wednesday, July 5, 2000
City Council Chambers
MINUTES
Item Page Roll Call . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Oral Communications . . . . . . . . . . . . . . . . . . . . . 2 APPROVAL OF MINUTES a. Approval of Minutes: June 7, 2000 . . . . . . . . . . 7 b. Utility Policy Advisories . . . . . . . . . . . . . . AGENDA REVIEW AND REVIEW AND REVISION. . . . . . . . . . . . . 9 CONSENT CALENDAR . . . . . . . . . . . . . . . . . . . . . . . 10 UNFINISHED BUSINESS 1. Electric and Fiber Quarterly Report . . . . . . . . . . . 11 2. Commodity Pricing Procedures and Guidelines . . . . . . . 38 3. Water Operation Report. . . . . . . . . . . . . . . . . . 43 NEW BUSINESS 4. Gas Cost Changes. . . . . . . . . . . . . . . . . . . . . 30 5. History of Utilities . . . . . . . . . . . . . . . . . . 6. Set Date for Strategic Planning Meeting . . . . . . . . . CITY COUNCIL REFERRALS
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Chairman Dawes called to order the meeting of the Utilities Advisory Commission on July 5, 2000 at 7:30 p.m. in the City Council Chambers, 250 Hamilton Avenue, Palo Alto, California. ROLL CALL PRESENT: Commissioners Bechtel, Carlson, Dawes, Ferguson and Rosenbaum ABSENT: None Chairman Dawes: I am pleased to note that we have a new member to welcome to his first meeting as a UAC member. He has a deep history with the Palo Alto Utilities, having served as the City Council member most closely involved with the utilities, including a period of chairmanship of the Northern California Power Authority, which is very central to our electric utility. We welcome you, Commissioner Rosenbaum. Commissioner Rosenbaum: Thank you. ORAL COMMUNICATIONS Chairman Dawes: We have three speakers under Oral Communications this evening. I will first call on Mr. Herb Borock, speaking on Future Meeting Minutes. Herb Borock, P.O. Box 632, Palo Alto: Good evening, Chair Dawes
and commission members. During the council's recent hearings on the budget that was adopted on June 19th, one of the issues was the extent of the minutes produced for boards and commissions that is supported by the General Fund. The city manager had recommended a decrease in funding for minutes so that they would not be as extensive as they are for either the planning commission or the human relations commission. The council, as I understood it, did not go along with that, in fact, there was discussion the following evening before the policy and services committee, and the committee unanimously agreed to keep those minutes in verbatim form. At that meeting of the policy and services committee, staff indicated that the minutes of this commission would also be affected. I was
disappointed, because I do not recall that issue's ever being on your agenda. It seemed to me that if it is in regard to the minutes of the commission, it should be the commission that makes that decision. I recall when the commission was first formed that it went to great lengths to discuss the kinds of minutes that they wanted to have, going through several iterations and having some kind of summary of policy issues, sort of a roadmap to the verbatim
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minutes, and also to have the verbatim minutes. So I believe that the minutes serve both the current commission and council in their present form. They serve them well. They also provide a historical record for the future, rather than relying upon the memories or inferences of current and future staff who may not be present at the time the meetings occur. I believe that if staff has a proposal for changing the form of the minutes that you receive, they should put it on the agenda. Otherwise, I would expect to see the minutes continue in their present form. Thank you. Chairman Dawes: Thank you for your comment. Frankly, I was not aware of any proposal to change the form and substance of the minutes, which as you know are verbatim. We initiated a supplementary item which is a one-page item call Utility Policy Advisories, a boiled-down summary that has been prepared by Commissioner Ferguson for the past year, and they are very useful. Mr. Ulrich, if you are aware of any move on the part of the city superstructure to curtail our minutes, we would be interested in hearing about it. Mr. Ulrich: Yes, there has been a recommendation by the city manager to reduce the minutes to those that are necessary to convey the message that is given by people that come before the City Council. I believe it is approximately a $40,000 annual savings. Unless it is mandated or there is a law requiring it to continue, particularly in the planning function, the plan is to eliminate verbatim minutes and to have sense minutes, which are obviously more annotated than the verbatim minutes. Chairman Dawes: Is that a decision that has been made, or is it still undecided? Mr. Ulrich: All I can say is that that is the proposal. I believe it is under way toward being implemented. Chairman Dawes: Then I feel that we should put that on the agenda for a subsequent meeting so that we have a chance to discuss that. Frankly, we are perhaps somewhat different from other committees in that we are strictly advisory. We have no power of decision-making, and for the council to receive the benefit of our discussions and questioning, a full set of minutes might be very useful. So before taking that step, it would be appropriate to put it on the agenda. Perhaps we can do that for the next meeting. Mr. Ulrich: Yes, and you should know that in the interim period, the minutes are being produced as you have had in the past, including those for this evening.
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Chairman Dawes: Our next Oral Communications speaker is Mr. Nelson speaking on water. Ignatius Nelson, 1039 Ringwood Avenue, Menlo Park: How are you doing, Dexter? Chairman Dawes: I am doing fine. Mr. Nelson: I would like to read a brief statement to you. Hopefully, this will be my last visit here, unless I get invited back. If you have any questions, I will be happy to answer them. After my last meeting with you on June 7, I e-mailed John Ulrich on 6/14 to refresh his memory of the chain of events regarding the THM issue. Larry Starr, not John Ulrich, answered the e-mail with some questions of his own that I would like to answer before this committee. My concerns for the residents of Palo Alto remain, even
though I am employed elsewhere. Being an outsider now, I can't monitor what Water Operations do, so I come before you in the hopes that you, residents of Palo Alto, ensure action is take over these matters. Mayfield Reservoir: Larry had said, "We can find no one at the city that indicates that you ever called and notified them that you were dumping chlorinated water into the bay. But the chlorine residual was not 0.0 mg/l as required." Larry, I have never dumped chlorinated water into the bay. Javad Ghaffari, manager of environmental compliance programs and water quality control, whose job it is to monitor such activity, will attest to my professionalism never to break such a law. I also informed the wastewater collection supervisor, Mike Haynes, who I was then reporting to, regarding water quality issues. The Palo Alto Daily News has become involved with this story. The reporter, Emily Richmond, was not given a tour of the roof in its usual condition. Rather, a team of workers was sent out prior to her visit to clean up the roof. This says to me that management knows there is a problem, but it takes the newspapers to get any action. It is my conviction that the residents need to be informed of the condition of their water and the people supervising it. What would the citizens say if they saw photos of what goes into the drinking water? I have attached my memo regarding the Mayfield Reservoir of a few years ago. THMs: I believe there should be an immediate investigation into the past sampling practices. For example, I have enclosed a memo dated June 24, 1999 from Rich Woolley to Bill Gray. The procedures
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spelled out by Mr. Woolley are highly unethical, and the DHS has never endorsed this procedure. Bill Gray had stated in a meeting with Emily Harrison, Larry Starr and myself that he had spoken to DHS, and they said it was OK. If this statement is true, DHS would be in gross violation of its own laws. I asked Bill if he ever endorsed this procedure, and he said yes. After the meeting, he called me into his office and said that he had just called DHS and they had "recommended" that the pumps should not be run prior to sampling. I have made calls to the Palo Alto DHS inspectors, and
they have stated that they never OK'd the procedures. The root of the problem is not the THMs at Montebello or the roof at Mayfield. Those are merely the effects of a greater problem. The root of the problem is management and their ethics. There are many more things I can share with you, but time will not permit. I would like to close with a quote from the American Water Works Association that I got in the mail today. It is called "Ethics in the Water Profession." "Ethical issues involve the public trust, and the public trust is a very fragile thing. The only way that we can build and strengthen that trust is through open communication. We need to work on strengthening that trust." And one more by the AWWA Executive Director, Denver, Colorado. "Ethical decisions are important in our everyday lives, regardless of what we do in the water profession. Your ethics, the culture of your organization, how your employees react, how your customers react, how your consumers react, all of these should play a role in how you make decisions." Do you have any questions for me? (Copies of his statement are submitted.) Chairman Dawes: Thank you for bringing this matter up again, Ignatius. Item 3 on the agenda tonight is a response to your discussion of last month. It itemizes the THM situation, the Mayfield Reservoir situation and the Grade Three Operator
situation. I don't know if you had a chance to read it, but I would commend you to it. (Mr. Nelson indicates that he has not read it.) It sounds to me, based on this report, that the city is addressing these issues with vigor. If you have additional comments after you have been through this explanation, please feel free to make them. Mr. Nelson: Okay. Let me just close with this statement. I really believe in my heart that the water quality of Palo Alto should be managed by water professionals. I understand that Utilities make a
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lot of money on the electrical side. We have just had a replacement
for Larry Starr, and I don't know how much water quality experience he has, unless he is a water expert, but I really believe that water quality should be managed by water professionals. Chairman Dawes: As the handout shows, we have hired qualified people as consultants to deal with the various tests. Staff is vigorously pursuing testing of additional individuals so that we have all of the requisite, tested skills in house. So I am satisfied that we are headed down the right path. Thank you, Ignatius. The last speaker is John Easter, speaking on fiber to the home. John Easter, 1175 Stanley Way, Palo Alto: I am here to inquire about the status of the fiber-to-the-home project. The specific reason why is that I understand that no acceptable bids were received for the construction of this project. I would like to know where we are heading. This is almost three years after this thing was proposed. What happens now? Perhaps you do not have answers, but maybe Mr. Ulrich does. Chairman Dawes: Item #1 on our agenda is Electric and Fiber Quarterly Report. We will be moving into that subject in a few minutes. Mr. Easter: Will this be a part of that report? Chairman Dawes: The issue of the pending contract to do the installation is not discussed, but that is not to say it will not come up orally. Mr. Easter: I see it as a separate subject entirely. This is a project to extend fiber from the dark fiber ring to homes. I do not know what is in your report relating to fiber, but if the report does not address it, then I do not have an answer to my question. Chairman Dawes: It will undoubtedly come up during our discussion. The report is directed at performance of the dark fiber ring specifically, which is what is in place, and it does not specifically address the fiber-to-the-home project. As far as I know, there has been a solicitation for bids, and there has been no official decision to accept or reject any of those bids. Mr. Easter: My reaction to that is this. This is a totally different subject. It has nothing to do with the specifics in your report about the fiber optics system. This is a separate subject. I can understand that if I were asking you about the dark fiber ring,
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then I would be out of order. But I am not. I am asking about the project relating to the fiber to the home. Ostensibly, it is supposed to be up and running in January. If, in fact, there have been no specific, acceptable bids for the building of this fiber-to-the-home project, I think it is important to get that information out and find out what the city plans to do. Chairman Dawes: As I have said, we will bring this up under the discussion of Item 1. It is not specifically addressed in the document that we have before us, but orally, it will come up. Mr. Easter: I appreciate that very much. Thank you. APPROVAL OF MINUTES Chairman Dawes: The next item is Approval of Minutes, a subject that was addressed in the oral discussion. It is the minutes of June 7, 2000. There is also a Utility Policy Advisory which is a summary of the minutes. We have not been officially adopting that advisory as a part of our record. It is just available for any staff or citizens to review. Are there any comments on the minutes? Commissioner Bechtel: Mr. Chairman, since I was absent last month, I read the minutes carefully to get a feel for what was going on, and there was one particular statement that was attributed to Mr. Ulrich, just before NEW BUSINESS (no page numbers shown) apparently following a discussion water quality. I would like to read this and see if perhaps the negative is what was meant. "Mr. Ulrich said, there was a comment made earlier about 26 percent of the customers not believing that Palo Alto water was safe to drink. I want to emphasize that that statistic was from major and key account water customers. We have very small numbers of them, so I hope you would conclude that the figure was reflective of large numbers of people in Palo Alto." Did you mean that the figure was reflective of a small number of people only? Mr. Ulrich: That is correct. It is a small number of customers. What we do not know is how many people within that small number of customers felt that way. The interview process talks to the customer as one unit, and what we do not know is how many people are within that unit. There could be several hundred people utilizing the water within that business. We do not have additional details, but I do have follow-up to the discussion which I will do during the water report. Thanks for bringing that up.
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MOTION: Commissioner Ferguson: I move approval of the minutes of June 7, 2000. SECOND: By Commissioner Bechtel. Chairman Dawes: Is there any interest on the part of commissioners or any observations with respect to having a verbatim transcript available to council members to study, or an apparent movement towards a summarized version of the minutes? Commissioner Rosenbaum: Historically, it is the council that has made that decision. I do not know if the council has specifically acted on it. I would hope that the council would take up this issue, and we will do whatever it is they want. Chairman Dawes: Do you feel that based on your experience in both houses, as it were, that it would make a difference as to the form of the minutes? Commissioner Rosenbaum: It has been our experience with council minutes that it is very difficult for staff. It would be particularly difficult, in the case of utilities, to produce sense minutes, which is what we do for the City Council. That being the case, it could be more difficult, and potentially of equal or greater cost to do sense minutes as opposed to simply the verbatim minutes. To that degree, I would think we would want to continue with verbatim minutes. Dexter, I think you could refer this question to Bern Beecham to try and get a council decision as to just which way to go on this, making the point about the difficulty of sense minutes in technical issues such as those we deal with. Commissioner Ferguson: One of the things that has become very clear to me during the last year on the commission is that probably our most important or productive or valuable role is as a sounding board, primarily to staff. My guess is that whether the minutes are "neatened up" or not, it is helpful for one or more staffers to be able to extract what was said or what was not said, and note how the by-play went back and forth. For that reason, more is probably more helpful than less, but that is a staff judgment call. MOTION PASSES: Chairman Dawes: All in favor of the motion, say aye? That passes on a vote of 4-0 with four commissioners voting aye and Commissioner Rosenbaum abstaining as he was not yet on the commission. Commissioner Ferguson: Due to recording problems, the meeting that we held with four people on April 12 has been difficult to
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reassemble, but it is almost done. My guess is that those minutes will come to us next month (just to fill the gap in the record). AGENDA REVIEW AND REVISIONS Chairman Dawes: John, I believe you had a comment to make. Mr. Ulrich: Under Item #4, Gas Cost Changes, that was a mincing of words to discuss the gas cost which would be an increase. While we are prepared this evening to make our recommendations, I had the agenda list this as an information item, and at the time, that is what I had planned to do. While you will see a recommendation in your package, I would recommend that since our public notice is shown as an information item, that you review the information but not take a vote on action. I would welcome your input on an information basis, and if you wish, you can come prepared to the City Council meeting where this will be agendized for July 24. I want to be most clear on that, and I apologize for listing this item as information as opposed to asking for action this evening. Also on Item #5, History of the Utilities, this has been planned for some time, however, Randy Baldschun is ill tonight, and I would like to have this item removed from the agenda. Chairman Dawes: I would like to have placed on the agenda for the next meeting the election of officers for the UAC for the fiscal year July 1, 2000 to June 30, 2001. If there is any citizen input to that, they would have an opportunity to address us. Mr. Ulrich: Since things change rather quickly, I have as an information item only a draft of the bill insert that will be sent out shortly. It communicates in more detail and more understanding primarily for our residential customers what can happen and what the impact will be if we have to initiate additional rolling blackouts due to lack of transmission of energy capacity in the Bay Area. It was a very difficult decision we had to make in order to conform with the ISO decision because of lack of generation, and in our case, capacity reserves. This has not happened in the 30 years that I have been in the utility business, and it has not happened on a planned basis in Palo Alto. I want to make sure that all customers are made aware of and are prepared for the event, if it has to occur again, which would be on a very hot day, particularly in the Bay Area. We may have more to come in the next few months. CONSENT CALENDAR Chairman Dawes: We have no Consent Calendar items. In fact, this
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is an inappropriate entry. It has always been on our agenda, but it is a council item and it is not really appropriate to the UAC. So I would suggest that we eliminate that from all future agendae. Mr. Ulrich: I will view that as a streamlining effort! Commissioner Bechtel: I was attentive to the request by Mr. Easter to a report on fiber to the home. I know that the quarterly report does not go into a lot of detail, and I know that when I ask specifically of staff, I get a lot of detail, but I am not sure that the public has access to all of that, so I was wondering whether we could at some point on our agenda when Mr. Ulrich thinks it is appropriate, include a status report on that issue. Mr. Ulrich: I would be glad to answer questions, and I can give a report to Mr. Easter that will bring him and others up to date. Probably the best time time to do that is before or just after the Electric and Fiber Quarterly Report.
Before Larry Starr joins me, I would like to introduce Larry's replacement. That is a hard word to say - replacement - because there will be no one who will be exactly like Larry. As you know, Larry is retiring effective this Friday, July 7th. He and his wife are moving to Montana to enjoy the good life of retirement. Over the last couple of months, Larry has worked closely with me and my other staff, looking for the appropriate replacement. His replacement, Mr. Scott Bradshaw, is here this evening, and I would like to have him come up and join Larry so that you will have a chance to see and meet Scott. He comes to us from another public power utility located in the State of Washington. He has had a number of years in the utility business, and I think you will find him to be an excellent new addition to our staff. I would also like to have Larry introduce our new Telecommunication Manager, Mr. Leo Creger. You will meet him this evening, and he will also be available in the future, particularly in the dark fiber business. I will now let Larry say a few words, and then we can have a brief synopsis of the fiber-to-the-home area and then move into the quarterly report. Chairman Dawes: I would like to personally pass on our sincere thanks for your long service, Larry, and the clarifications that you have brought to this technical and arcane business, at least as far as I am concerned, in some of our driving together up to some of the meetings, having you explain the ins and outs of the technical side, which has been extremely helpful. I am sorry that you are off to perhaps greener pastures or steeper mountains. We
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wish you and your wife well in your new life out of the Bay Area. Thanks for your help over the period. We welcome Scott to Palo Alto and hope that the sticker shock is not too bad for you. We are looking forward to hearing from you in the future. John, do you want to lead off with any summary of the electric or fiber report? Mr. Ulrich: One of the challenges of what we are doing is having full disclosure to our residents, particularly the people affected by the fiber to the home, in this case. On the other side of it, I think it is important that we provide our report to the City Council about our recommendations for the fiber-to-the-home trial. I will summarize it in this forum so that we can give the report on July 17th to the City Council. I believe Mr. Easter is correct in that we have gone out and have had rather than bids, as he talks about, we have had proposals from companies to provide basically a turnkey installation of a fiber network that goes to each home that would come off of our backbone system to the area where we went ahead and solicited interest from all of the residents. The positive part of all of this is that the residents have exceeded expectations in coming up with the number of people who want the service, and we have been very diligent in trying to find a company that would do this work. I would like to report at this point that we do not have a conclusion to that, but I would like to emphasize that we have not abandoned any interest or hope in getting this accomplished. Frankly, we have at least one alternative that we are pursing to help bring this all to fruition. Chairman Dawes: Do you expect that by the July 17th council meeting that you will have a position on the installation of this equipment? Mr. Ulrich: We will have a position but we will not have the final conclusion at that point. Chairman Dawes: It is a work in progress. Mr. Starr: The trial is no different right now from what has gone on from the start. Everything we have done has ended up taking longer than we thought. We had trouble getting our ISP contracts. We had to bid that twice. We had to expand the trial area to get enough customers. In fact, to get the count that we have today, we have a number of customers that are not even in the selected area. So it has never gone quite as we had hoped or predicted, and our time line keeps slipping, but we are not giving up. We are not abandoning this project. It just means we have to work harder in some different areas. As John said, the dilemma and the fine line that we walk is to try and provide full disclosure while not having
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the council read about what is going on in the newspaper before they get it in their packets. That is where we are currently. The trial is still in the works. We are not giving up but we may go in a slightly different direction. It is our intent to build the trial. Chairman Dawes: Are there any prepared comments on the electric report? Mr. Ulrich: No, we do not have any prepared comments, but you will see that it is a very comprehensive report, and we will be glad to answer any questions. At the beginning of the fiber report, I would like to have Larry introduce Leo Creger so that you will have a chance to meet him. Chairman Dawes: Initiating discussion on the electric report, are there any commission comments or questions? Commissioner Ferguson: I would like to address the electric portion first. On Page 4, you report on congestion reform and a short-term solution of adding a second 500/230 kV transformer at Tracy to be implemented within two years. Is anyone cooking up a long-term solution under transmission congestion reform? Mr. Balachandran: Those are being discussed right now at the ISO and various stakeholder groups, also in the legislature, Senator ___________________ has weighed in with his opinion. So there are long-term solutions being looked at, and the replacement for the transformer at Tracy is a longer-term solution, and the transmission lines into the Bay Area is a longer-term solution. Then there are some market reforms, pricing reforms, so that we can also have demand reduction in-state. Those are longer-term issues. Commissioner Ferguson: I wanted it to be clear for the record that in theory, Palo Alto owns enough generating capacity, or is entitled to contract electric supplies, sufficient to cover the city. If we end up short, it's because it is hard to squeeze it through the available wires into the Bay Area. Mr. Balachandran: That is true. That is one of the reasons. Commissioner Bechtel: I have a question on the attachment from the California ISO memorandum. The title of the report is "Preliminary Report on Circumstances of the June 14, 2000 Heat Wave." It is a growth rate of 6 percent per year. Have there been other studies about this growth rate? In other words, a little bit of history in the past as to what was the growth rate over the past few years?
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What is it anticipated to be over the next few years, and maybe what are some of the drivers? Is there any information like that available? Mr. Balachandran: Yes, there is, although I do not have a comprehensive answer for you, but from what I can recollect, the long-term growth rate over the last few years has been projected to
be between two to three percent. For example, Palo Alto's growth rate is projected to be about a half percent. The reason is reportedly driven by the new economy. So it is inter-related. Commissioner Bechtel: It is somewhat surprising. I can see a whole lot of servers and server farms growing, but there has also been a tremendous reduction in energy consumption and efficiency in power supplies in this kind of area. My reaction was that six percent seemed high. Perhaps if the growth rate is growing, then what could we expect in the future? So you are saying that historically, we are talking about just a few percent which is what we should anticipate. Mr. Balachandran: If you look back to the fifties and sixties, we used to have a six to seven percent growth rate. Then after 1973 when we had the first oil shock, the growth rate went down to about two or three percent. Now it has started to pick up again. We are talking about the Bay Area. Nationally, I do not have the figures, but I am pretty sure that the national growth rates are not six percent. They are lower than that. We are talking just about the Bay Area. California and the Bay Area have been growing faster than other regions of the country.
Chairman Dawes: I want to follow up on Commissioner Ferguson's question about the heat wave and the related outage in Palo Alto. While transmission issues are very serious, it was my understanding in reading this material that that was part of the program, but a major part was the 879 megawatts within the Bay Area itself which were out of commission. Some of it was a planned outage, but as I read this detail, the majority of it was unplanned. Had those units been on line or operating at full capacity, in the case of the Oakland units, we could very easily have avoided a rolling blackout in the Bay Area. Is that essentially the case? Mr. Balachandran: Yes, you are right. Here we were looking at temperatures that exceeded expectations. So it was a combination of units out either for forced maintenance or planned maintenance, combined with a very early heat wave. It was a combination. Chairman Dawes: So we cannot lay it totally at the feet of
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congestion on the transmission. Mr. Balachandran: Right, it is not only transmission. Electricity gets delivered over a network, and generation and transmission are necessary to deliver power. So you need the local generation to maintain voltage levels. If you do not have sufficient generation to maintain voltage levels, you are going to end up in a blackout situation. That is what happened. So they both work together -- generation and transmission. There has to be a sufficient amount of local generation to maintain the reliability of the system and maintain voltages. Chairman Dawes: You might also give me a technical education as to why augmenting the Tracy switching station is only a short-term solution. It would seem to me that that would be a long-term solution, particularly if it were accompanied by additional transmission lines. Mr. Balachandran: The Tracy transformer, just upgrading that whole transformer bank is going to last us for just a few years. It got overloaded last summer. Chairman Dawes: They are not adding sufficient capacity to it? Mr. Balachandran: Right. There is only so much capacity that can be added there in a certain period of time. They are going to add all that they can right now, but you have to add new transmission lines and new generation. Chairman Dawes: So the net add to capacity is very small. Are the transformers not in the most efficient status at this point and they have to be upgraded from a maintenance point of view? What is the situation there? Mr. Balachandran: They are perfectly okay right now. It is just that load growth is more than what was planned for. It is just being loaded up more than what was planned for. It was hitting emergency ratings. Chairman Dawes: I understand that, but I am unclear as to why putting money into the Tracy facility is only a bandaid. I guess the answer is that they are just not adding enough capacity. Mr. Balachandran: That is correct. Chairman Dawes: Do I read correctly that Palo Alto is thinking about including an interruptible rate schedule for large customers,
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under Item 2 in the report? Mr. Balachandran: What we are considering doing is basically offering a demand reduction rate. Some customers have backup generation available that they can crank up. To give them an incentive to the extent they can either cut load voluntarily or by contract or ramp up some generators, we can offer them some incentives to do that. Chairman Dawes: And can we actually monitor the extent to which they reduce their power consumption, when called upon to do so? Mr. Balachandran: Exactly. Chairman Dawes: So it is not possible for them to take the lower rate but not be audited on it. Mr. Balachandran: Correct. Chairman Dawes: So it is like a "half a loaf" situation. Mr. Balachandran: We would not give them a lower rate up front. That is a rate design issue. Right now, conceptually, to the extent that they lower their demand, there is generation freed up to be sold on the market. That money can be transferred to them. Chairman Dawes: Understood. I was also interested in seeing that CPAU was a net seller during the heat wave. Could you explain how our resource mix works that way? Mr. Balachandran: As Commissioner Ferguson said, we do have enough generation to serve our load, so to the extent that our load gets curtailed within the city, that generation still runs. By default, it gets sold into the market. During those hours when there were curtailments in the Bay Area, there was generation out there in the central valley and up in Stanislaus and Calaveras Counties that are still running and being sold into the market. Chairman Dawes: Did NCPA do a good job for us in terms of getting the best prices for that surplus? Mr. Balachandran: Those were market prices. They dumped it into the ISO market. I believe it was trading at $750.00. Chairman Dawes: So they got that spike that is on our chart? Mr. Balachandran: The chart actually does not show that price. The
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chart is indicative of the volatility. The chart shows the PX prices. I believe that NCPA got the ISO ex-post price, which is a real type price, and which is higher. Chairman Dawes: Regarding the explanation on munis and the ISO, I do not understand the critical issues there. Evidently, there was a movement, the net effect of which got us almost there, but I could not follow too well the description at the top of Page 3 as to what derailed the final solution. My feeling is that eventually, the munis are going to have to be in the ISO to make it a true system operator. Mr. Balachandran: It is my belief, too, that we will be in the ISO. It is only a matter of time and on what terms that we will be in the ISO. Mr. Balachandran: What was the key issue that caused this to be derailed? Mr. Balachandran: There was a difference of opinion. FERC, the Federal Energy Commission, came out with an order which is described in the next paragraph. Their order basically resolved certain issues and put certain issues basically carried forward for a settlement judge to resolve. So the settlement broke down, once that happened. A number of the issues that FERC ruled on have also been discussed in this legislative settlement. Palo Alto was not too keen on that settlement, because there was a transition period between our present transmission rate and the way we would finally end up, which is called the local regional transmission rate. The transition from where we are now to where we are going to be was not as favorable in the legislative solution. So we are basically taking our bets and trying to do it with FERC. Chairman Dawes: Is this the Southern California/Northern California feud that you described before? (Yes) I also did not understand the full implications of the CPU being deprived of its firm transmission rights, and if this is something that could be a real deal killer on this congestion reform issue. That would seem to me to be a pretty key right that we have, particularly when transmission is very central to our problems. Mr. Balachandran: We are fighting this in various forums. One is through negotiations with PG&E and the interconnection agreement. We have what is known as the Stanislaus commitments. We are trying to push that, where we are asking PG&E to provide us with firm transmission rights. That is one arena. We are also fighting it at
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FERC and also with the ISO stakeholder groups. I do agree with you. It is a very important issue for us. It is going to be decided through the FERC process. The ISO, at present, has come up with a proposal that we do not really like. Chairman Dawes: Is this something where NCPA, in its ordinary course of events, would be leading the charge for all of the munis? Mr. Balachandran: Not for all of the munis. NCPA is leading the charge for its members. Then we also have the Transmission Agency of Northern California (TANC) which is very active in this, we hope, in this arena. NCPA is very active on our behalf. In terms of priorities of the different issues being discussed at FERC, this is among the top two or three issues for NCPA. Chairman Dawes: I also fail to understand this Western temporary allocation recall. I am not sure if it is really germane to our issues here, whether it is an interesting item to be up to speed on but not really important to the governance of our utility operation. Is it important to us, Girish? Mr. Balachandran: I feel it is operational. We are reporting it to you because it rests on such a large share of our resource mix. We are basically continuing a layoff that we started about a year ago. We used to lay off 3.8 megawatts, and now we are laying off 3 megawatts to other customers. We get compensated by Western. Chairman Dawes: Once 2004 comes, and we are on run-of-the-river basis, does all of this go out? Mr. Balachandran: There will be new deals that we probably cannot see right now, but it could be something like this. Mr. Ulrich: I might mention that we will be bringing the Western contract forward to you at the next meeting to discuss where we stand on the negotiations, along with our recommendations. Chairman Dawes: A last observation, seeing that staff is assisting Western, it seems like our staff is always assisting other entities, NCPA being sort of a primary one, but now we are getting into the Western side. I think it is a great testament to the expertise of our group, but I worry about whether we are providing so much help to so many people that we do not get fairly compensated for it. Mr. Ulrich: This detailed analysis and work that is being done is clearly to our advantage when we work on these issues. I watch
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that, and Girish does also. It is an area that is very close to our pocketbook and to our future capacity and how much we are able to extract from the contract. So it is a very important time. We are also in this in support of other NCPA members, and that is what we do best. Chairman Dawes: So in your view, this is time and resources well spent, and inures to CPAU in great measure. Mr. Ulrich: Yes. Commissioner Rosenbaum: From the philosophical point of view, the utilities make a considerable marketing effort with our large customers to convince them that we have a distribution system that provides high reliability and well regulated power. Then something like the week of June 14 occurs which is out of our control. What was the reaction of our key accounts? Does an event like that undermine our efforts? How do they view that? Mr. Ulrich: I would like to speak to that because I have been out talking to some of them. That is one group of customers we are very close to, because we have key account reps who are responsible for each and everyone of those large customers. Frankly, (1) they did not suffer the outage themselves, but (2) more importantly, they contributed a significant amount to the voluntary effort during Stage 2. In the big picture, that probably reduced the amount and need for a rolling blackout. It could have been far more extensive. We are in the mode of thanking those customers for their continued effort to help. Many of them are well organized, because they have professional staff that looks at these things all the time. So they are very attuned to managing their electric load and are very supportive of helping us and themselves, even without these financial incentives that we are looking at. Chairman Dawes: I have a further question on that. Do you believe the pain was adequately spread between residential and commercial/industrial customers? Clearly the amount of load in mid-afternoon on a hot day when you unplug many hundreds of residential customers is very small in comparison to the large customers, yet, there is a lot of aggravation that is caused thereby. I would be interested in your views on whether you think that "pain" or inconvenience was spread adequately amongst the customer base. Mr. Ulrich: The straight answer is no, from a pain standpoint, it was not spread across our customers. We rolled two circuits in the first two hours, and then rolled two more in the second period which did not go for two hours. Those were predominantly, with few
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exceptions, residential customers. There were over 2,000 customers in Palo Alto that sustained upwards of two hours of outage in the hottest part of the day. So it was very inconvenient, and I would say painful for a number of those customers who were at home relying upon electric energy. On the other side, from a detrimental standpoint to the economy, it was probably less painful for the entire city than if large numbers of industrial customers who have a high amount of employees had had the power turned off. That could have had much more of a dire effect. I do need to point out that we have reviewed the outages, have talked to a lot of customers, and certainly heard a lot from them. We were able to critique and then change some of our procedures so that I feel it will be less painful, if you want to call it that, in the future. I do have to point out that the alternative to
shutting people's power off, even though it affects a fair number of people, would be far less than having the entire city curtailed if we did not get the reduction. Having it planned somewhat is easier to tolerate than having it just go off without any notice. So I think we were able to do better in our communication process, but I cannot tell you how much empathy we have for having to do this at all. We are looking for ways to not have to do it again. Chairman Dawes: You did mention that by discussing the problem during Stage 2 with large industrial customers, they were able to drop their loads down. Do you have any idea as to how many megawatt hours the industrial customers voluntarily dropped down, either through self-generation or by periodically turning off their air conditioning systems versus how much we gain by unplugging 2,000 residential customers? My recollection is that it was about 400 megawatt hours that we curtailed during that four-hour period. If you had to guess how much we got out of the residential side, I guess the assumption is that the rest of it came through voluntary load shedding on the industrial side. Mr. Ulrich: I do not have the numbers in megawatt hours very clearly, but it was 2,000 customers, and we got about a 3.3 megawatt reduction. That is what was ordered by PG&E. Coincidentally, because of the circuits that we selected, we were able to get almost exactly what PG&E was looking for. We were able to achieve it in a very short period of time. So from a process standpoint in getting results, we certainly were able to do it, achieving it quite accurately. Prior to that point, we had developed an algorithm or a load profile that was attempting to tell us what it would have been had we not curtailed. That is going to vary depending upon the weather and the time of day. We have been testing it since then and feel that it is quite accurate. On
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the day when we first did it, I do not have as much confidence in the accuracy of it, because we had not tried it before. It was somewhere around four to five megawatts of reduction, I believe, from our voluntary customers. Some of the data show that it was more than that. I am giving you a conservative number. Chairman Dawes: So on that basis, it sounds like it could be 50/50 between commercial and residential? Mr. Ulrich: I would suspect that because of the way in which we notified people, it is very hard for a residential customer to get the communication during Stage 1 or Stage 2 unless they are home and listening to the radio. With the commercial-industrial customers, we have almost instantaneous communication with the large ones. They are tied to us with pagers, cell phones and e-mail, so if we need results, we can get it quickly with that large group of customers. Commissioner Carlson: I have two questions. I was not quite certain whether this six percent load growth was growth from the peak or growth from actual kilowatt hour usage over the year. Six percent is a big number if it is actual kilowatt hour usage. Mr. Balachandran: I am supposing it is peak. Commissioner Carlson: That makes more sense. Mr. Ulrich: Typically, that is the way they measure it - the peak demand. The network strains the system, and that is what we measure, as that is all we can carry. Commissioner Carlson: That is what really matters with that kind of incident. One of the big patterns in the country has been for the peak to grow significantly faster than grand total usage. You just get more and more needle peaks. Mr. Ulrich: I want to emphasize that the problem we have in the Bay Area is congestion with the transmission wires and transformers, etc. Not getting the generation from the source to us is the problem, so looking at whether it is six percent or two percent, the paramount issue is on the short term and on the long term with the capacity here in the Bay Area. Commissioner Carlson: That is my second question. As I understood it, two of the long-run solutions are to significantly increase generation here in the peninsula. There is a PG&E proposal up in the city somewhere, and there is the CalPine proposal. My
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understanding is that local generation of that kind of magnitude would significantly solve these transmission capacity problems. Is that true, and are we taking a position on any of those projects? Mr. Balachandran: We have not take a position on any of those projects. We have the Metcalf energy project, which is the CalPine project down in San Jose. It is just running into difficulties. The
San Jose mayor has come out against it in favor of expanding Cisco's
campus. The project is in PG&E's territory. There is an emergency generator that they are just floating up on a barge from Texas. It will go through the Panama Canal and should be arriving in the Bay Area in about two weeks. There will be an additional 100 megawatts available there. That is a real short-term solution. Mr. Ulrich: The real dilemma is that we paid for and are paying for the generation in the capacity and the transmission of the energy to Palo Alto. We pay our bills every month, and we have entered into contracts that are supposed to deliver power to us. That is the area where we have to focus and get our reward for the amount of money that we have spent prudently in the past and currently to get our full energy resource delivered to us. Commissioner Carlson: The problem is that the system, as a whole, is overloaded, so everybody gets cut back. Mr. Balachandran: Yes. Commissioner Carlson: That is an interesting incentive to not make the investments. Mr. Balachandran: When we started off with this new market back in 1994, there really has not been any new generation built. Generators want to have the confidence that they will get a return on the investment. Then you have the regulatory structure in a complete flux. No one wants to make the huge investment that is necessary. Hopefully, that is going to change. We mentioned before that there are some legislative proposals to incent customers to come in and incent generators to site. At the same time, there are some disincentives also that generators are citing, for example, the price cap of 750 mils has been reduced to 500, and there is a move to drop it down to 250. Some generating companies think that is perfectly okay and they can make enough money at the $250 cap. There are other generators and marketers who do not think so. I do not have a definite answer other than that it is a problem for all of us. A number of people in different venues are working on it. Commissioner Carlson: I am concerned about this. I know that the
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CalPine-Metcalf project has had terrible permitting problems. I understand that even this proposed barge emergency project has permitting problems. It sounds like the usual Northern California disease. Everyone wants a general solution, but they oppose all specific solutions. Commissioner Ferguson: I have one final comment to perhaps wrap up this electricity discussion. We participated in a study session with the full council last Monday, and one of the topics that we had on our proposed strategy, which the council responded to with questions and comments, was our status as a municipal utility. I would like to connect it up with this by way of an example. You talk in one of the earlier bullets in the report about our relationship with the ISO, with legislative proposals to bring in the munis on some kind of acceptable terms or conditions. Let us just set aside for the moment our wonderfully beneficial price on power from Western. That is a big advantage. If that were to be set aside for the moment, in the relationship with the ISO, are we net at a disadvantage because we are a peculiar creature called a muni, or do you think we will be at an advantage in closing a deal with the ISO because we are one of several brother and sister municipals? Mr. Balachandran: If I understand your question, I think we are at a disadvantage right now in that it does not make sense for us to join the ISO now. The costs of congestion, for example, are higher than what we are paying right now. Our transmission costs basically increase, so it does not really make sense for us to run to the ISO with open arms. The reason we can afford to stay out right now is because we have our interconnection agreement. That will expire in March of 2002. So it is just a matter of time. Right now, we are trying to influence the ISO and stakeholder groups in changing the way, for example, that congestion zones get defined, and what the rules for allocating firm transmission rights. So in this transition period, we are trying to influence what that structure is going to look like when we join the ISO. It does not make sense for us to do it right now. Chairman Dawes: We will now move on to the fiber portion of Unfinished Business, Item 1. We welcome Mr. Leo Creger. Mr. Starr: Before introducing Leo, I would like to make a few comments on how the business is moving along, and what has gone on in the last three months since our last quarterly report. To sum it up in three words in this little business, business is booming. We run this on a calendar basis, so we are just a few days over six months into this year. Last year, for the whole year, we received
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46 requests for cost estimates for certain usage of our backbone fiber. As of today, July 5, we have over 80. These are serious requests. We have the customer pay $500 before going out to spend the time doing an estimate for them. So they are serious requests. Not everyone turns into an additional customer or additional business for us, but it is a fairly high percentage. So business is very good this year. In 1999, you can see that we had 16 customers, and in 2000, we only have 22. That looks like we only added six customers, but what it does not show is that some of those existing 16 customers have come back to us and purchased a large amount of other sections of fiber on the existing backbone as their business grows, using our fiber. So we have a lot of repeat business in addition to some new customers which are the six new ones. We also have quite a few that are in the works right now. So we are working quite diligently out there just to keep up with the business that we have coming in the door, let alone getting out there marketing for new business. Our former telecommunication manager left us in March. To carry things through in the interim, I made some inquiries of in-house staff. I ended up with my #3 selection, which turned out to be our senior engineer in the engineering department who did the fiber cost estimates for us. His name is Patrick Valath, and he was here the last time. This was not his favorite choice. Patrick did not
apply for the telecommunication manager's job, even though it is a higher level job than his senior engineer position. I wanted to share with you that Patrick did an outstanding job of holding things together. He processed all of the requests and kept business going for us with the high rate of business we had coming in the door. We did not have a lot of unhappy customers because we could not handle their requests. Although he is not here tonight, for someone who was just holding the place for us, he did an exceptional job. We now have our new telecommunication manager, Leo Creger, with us. Leo comes to us from Raytheon in Houston. He has an electrical engineering degree from M.I.T., and has an excellent technical background. He has had extensive service in the navy where he worked as a supply corps officer on active duty, so he has a good business background. He has a lot of technical experience in dealing with clients and firms as a consultant, so we are very fortunate to have Leo here to take over the project. He has a wide range of experience, and we are very pleased that he was willing to come to the Bay Area, bringing along his family. He is a native of California, originally coming from the Oxnard area, so we are
accepting a Southern California person, but that's okay. Leo has
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worked with Patrick going over the numbers in tonight's quarterly report. So if you have questions for the telecommunication manager on the fiber quarterly report, please address them to Leo. Chairman Dawes: Thank you, Larry, and Leo, welcome. We are delighted with the way we have apparently turned the corner. When I see black numbers at the bottom of the page, I am delighted. I was frankly quite perplexed to see in the future years (and I do not get very concerned about it because I know one cannot guesstimate very well out there) but I was surprised to see the number of licensed dark fiber miles declining and revenues declining even while customers increased. Clearly there is an assumption being made there, and I do not understand that. Perhaps you could illuminate that for us. Mr. Creger: Yes. It is a pleasure to be here. Let me address a few things. During the first couple of weeks that I have been here, the calls from new customers kept going up. We get new engineering requests almost every other day, as Larry has stated. In the assumptions that you see in the exhibit, one of the things I asked for in this report was the straight numbers, what we know, with little assumption in place. What you see a lot of in there are customers who have multi-year licenses that expire in the out years. As we start to get more customers with longer terms, you will see those numbers carry out even further. Some of our customers have only one- or two-year licenses in place. That is why you see the decrease in license customers. As we bring these new customers on and get a little more projection as to what type of growth we should expect, now that we have some historical data, we can start doing better trending out into future years. Chairman Dawes: It looks as though the expectation is that the customers who have licensed a high number of miles have their contracts expire, and they will either renew for a smaller number of miles per customer and that new customers will also basically be pretty small operators in terms of number of miles. Mr. Creger: Correct, or the same customers renew for an additional term. Commissioner Ferguson: Leo, I am not sure if it is fair to direct
these questions to you, but let's go ahead. Again, at the study session with the council, we got above-average interest from council members in developing the telecom market as an intentional part of the future of the utility. Have you tackled that yet?
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Mr. Creger: During the first few weeks that I have been here, some of the things I have looked at are the multi-service providers that are out there that could allow the city to provide additional services. One of the things we want to look at is getting this infrastructure in place solidly before we step up into another business. We want to make sure that we are getting the customers taken care of for their dark fiber licensing. Once we get that in place, we will start looking at these additional services. Commissioner Ferguson: Okay. Another comment on the UTS RFP: can we get a staff report on that, with the extended links to our projections on the use of dark fiber? Mr. Starr: With regard to the UTS, we have interviewed our candidates and we have a report going to council. We are back in the position of perhaps changing our course, taking a look at what is available. I believe that our staff report will indicate that we want to have a council study session and explore all of our options. Also our new director, John, has some ideas of his own that he would like to share with the council and take a look at some of these things, perhaps considering a new course of action. Commissioner Ferguson: Thank you. To be a little more specific, I just want to narrow into the connection to dark fiber. Is the general message that you got in the UTS RFP experience that the dark fiber asset was a useful piece for bidders to bid toward? Or was it beside the point? Mr. Starr: I believe it was something they all looked at as a part of their process, either a small part or a large part, but it was something they could not ignore since it is in place. Even if you did not like to use it all of the time, it certainly was easy to get started. So it is a valuable asset, and how we use it in the future, whether we choose to expand it ourselves or partner with somebody else, it is a good asset to have out there. It will simply grow in value. Commissioner Ferguson: Thank you. Another question relates to John
Easter's comment in Oral Communications, and touches on some of these other topics. Telecom, at one point years ago, was assigned and is parked under the electric-utility jurisdiction for the UAC. It has branched off in a couple of directions over the years, to a telecom advisory panel and then to an ad hoc committee that began while Mr. Rosenbaum was on the council. I honestly do not know where that sits now. I think it would be useful, in light of the comments made by council members at the study session, for us to
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agendize a discussion of telecom as an integrated business and technology topic, putting it on the agenda early in the fall, if
possible. Let's talk about the connections between home fiber around town and the results of the UTS RFP and the results of the ad hoc
committee. Let's try to pull these things together. Maybe they do not belong in front of the UAC any more, but I would like to have one, thorough, open-ended and coherent conversation on the telecom topic, if we could. Commissioner Carlson: I need to put this in context. How much did we invest in this system? I know this is operating profits, but I do not know how much it cost to put all of it into the ground. Chairman Dawes: It is in the schedule under Cash Flow. It was $1,954,000, and according to this forecast, it looks like we will have regained that investment back in operating profits by the end of 2002, if I am reading this correctly.
Commissioner Carlson: Great. That's very impressive. Commissioner Bechtel: I am interested in the types of customers that have licenses. You have said that the market is booming. Can you give me a feel for what sorts of businesses comprise the largest segment of inquiries or requests? Mr. Creger: Without divulging the names of who the customers are, it is quite a mix. They are service providers, multi-media companies, consulting companies, quite a wide variety. Everyone is starting to catch on to the fact that the city has this fiber in place, and they are looking for ways to use it. Commissioner Bechtel: Judging by that, assuming that the E-Commerce market does not totally collapse, there should be a continuing demand for service. Is there any reason, perhaps, on the length of contract, to increase? Are there some issues like that so that we can get a better feel for perhaps a more stable business? Mr. Creger: Right now, I would say that most of the customers that are in place like the service that they have and the term they are selecting. It might be because of whom they are doing business with. If they are still around, I would fully expect them to renew. The other thing to look at in terms of business opportunities out there are things that we can integrate internally with the city, as well as other business that we can market to. Right now, every leased line out there that a business uses is something that we can target as a potential business to use dark fiber.
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Commissioner Ferguson: One last comment on the public benefit program. In an earlier UAC meeting, we talked about setting up the green power program with multiple pricing points, multiple hybrids. So I was pleased to see the advertising campaign begin (displays mailer) with options from light green all the way to deep green opportunities. Thank you very much for that. Mr. Ulrich: Thank you, Mr. Ferguson. I want to ask your indulgence in changing the agenda. I have one staff person that I would like to be able to send home earlier rather than later. I would like to do the gas cost changes under New Business next. Chairman Dawes: If there are no objections, it is so ordered. NEW BUSINESS 4. Gas Cost Changes Mr. Ulrich: In looking at this item, you will find that it is comprehensive and explains the background, plus our recommendations and our implementation plan. If you had asked me or any member of the staff six months ago, or even three months ago, whether we would be coming to you to have this as a topic, we would have said no. When we put the budget together, we established what we thought was going to be a price so that we would be paying for gas within a range, because we have been able to look back historically and see that that came to pass. But we also included in our budget reserve funds on the supply side of the business and also on the distribution side for the possibility that rates would be higher than expected. The plan then was, as in the past, that we would keep our rates stable, hopefully for a two-year period, utilizing our reserve funds to balance the difference between the actual cost and what we were selling it for in the rate schedule. But that is not why we are here this evening. It is to discuss the need to increase the rates in the short term about 15 percent, but in the longer term, to have what looks like a steadier increase in the price of gas, which we would pass on to the residents and businesses. So the primary focus here is that the cost of gas has gone up, and we do not see it coming back down. If we did, we would wait for it to come down and buy lots of it. Since we cannot predict that, we feel that the prudent action, which we have
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already begun, is to purchase gas at these higher prices so that we can be assured that we will have gas at this price and not have it continue to go up. So we are here this evening to explain or go over the reasons, and then the implementation plan for passing on these additional costs to the residents and businesses of Palo Alto. We are ready to answer your questions. Chairman Dawes: Frankly, John, I was troubled that there was not a table here that showed the RSR levels. That surely is the nub of the issue. There are general statements about "dangerously low levels" etc., etc., but no numbers. Do you have a table that shows where we are with respect to that? What will this rate increase will do to our RSR figures and where we project to be at the end of the year with the rate increase and with our expected usage versus the min/max set forth? Mr. Ulrich: One reason they are not in the report is that it is a moving number. We can give you some estimates in order of magnitude with a fifteen percent increase effective August 1st that we would see our reserves go from their current supply, which is a little over $3 million. That is above our target. We are approximately at our target. Chairman Dawes: Is that where we are today? Mr. Ulrich: Well, yes, but I am hesitating as that is not exactly where we are at. I am giving you general numbers. Three million dollars. Chairman Dawes: But is that the RSR approximately as of June 30th? (Yes) And what is our min/max? Mr. Ulrich: The reserve minimum is $2,100,000. The target is $3,000,000 and the reserve maximum is $4,200,000. We are approximately at the target. Chairman Dawes: As we head into an escalating usage of gas as the season progresses. Mr. Ulrich: With the proposed fifteen percent increase, to put it in perspective, the prices of gas as of June 6th were 57% higher than in December, 1999. So we are starting with a very high increase in cost to us. What we are trying to do is to balance and utilize the reserves that we have already collected from our customers and to reduce those reserves, along with adding the fifteen percent increase on August 1st. That will not shock the customers during the initial stage, but it will take our reserves,
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and I am not exact as to when this will occur, but it is approximately December that the reserve will be a million dollars in the negative. We will have to find the money in another account to pay for it. The plan would be that at approximately the first of the year, we would increase the rates somewhere between 15-20 percent and get our reserves back up to about the middle of next year to a little over $300,000, thus close to a break-even, and the reserves would be close to zero. Initially, that may sound like we are on thin ice, or in the middle of a boiler if you want to be in a hot spot, but where we are moving towards is very similar to other utilities, and that is to float the price of the commodity at the price based on the cost that we have to pay for the gas. That is being done now in the City of Long Beach, PG&E Southern California, San Diego, they have all gone to that. So if you live outside the perimeter of Palo Alto, you already are seeing your gas rate change every month, based on the commodity price they are paying. We have not done that, and we believe that that should take place over a period of time. We foresee that we can do this over a one-year period of time before we get to that point. So the plan is to have this rate increase that would get people started towards paying for the actual cost of gas that we have to buy, but allow us to continue to find, if we can and if the market changes, to be able to get the advantage of lower prices in the future and be able to pass those on to our customers. Chairman Dawes: So is the intent to move towards a cost pass-through pricing structure rather than a fixed pricing structure? Mr. Ulrich: At least in the option we could also offer a way to hedge our risk by also having fixed price contracts. We would not have everybody going to these index prices. We would try to offer some other alternatives for customers also. Chairman Dawes: Would this then imply, as on the electric side, that we would go to a distribution charge and a commodity charge that would also facilitate the ability of large customers to move the commodity to another vendor? We may choose to bundle gas and electric in the future as we have discussed, but it would certainly sound as though we are heading not only in the direction of a commodity pass-through but as a separate billing rate for distribution and commodity. Mr. Ulrich: Yes, the quick answer is yes. We would have those
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alternatives. We also have them right now for some large customers who can separate their distribution and their supply, Chairman Dawes: Has anyone elected to take us up on that? Mr. Ulrich: No, you can see from the chart why they would not do that, at least today. Chairman Dawes: Give me an idea of the percentage of the total bill which is commodity versus the cost of transmission. It is bundled together now. Is it a 50/50 split? Or is it 70/30 in terms of what that typical bill would be? In other words, if we do a fifteen percent rate increase, would this cover a much larger increase in the cost of the commodity because we are raising our distribution component as well. Mr. Ulrich: When we talk about fifteen percent, we are talking about the entire bundled rate. Chairman Dawes: What I am saying is that that should cover, say, a 20 or 25 or 30 percent increase in the commodity cost, because we are raising both the cost of distribution and the cost of the commodity. Mr. Balachandran: A rough number is 50/50. Chairman Dawes: So basically, we are accommodating a thirty percent increase, and if you hit it again in January, it is another thirty to forty percent on a much higher basis. So from the levels of two months ago, you might be looking at maybe a seventy or eighty percent increase in the commodity cost. Mr. Balachandran: Yes. Chairman Dawes: To me, this again is a reason for moving towards a pass-through type situation. The flip side is that people like to be able to plan and budget their energy cost, but as I think about it, probably the ambient temperature in the winter, a cold snap is going to drive fuel bills much more than a commodity pass-through. In other words, it is very uncertain as to whether we are going to have a cold month or a relatively mild month, so commercial and industrial purchasers are still going to fight the issue of what their gas cost is going to be, even if it is a flat rate without pass-through. Mr. Ulrich: Before reaching a conclusion that we would go there, I want to emphasize that we do not necessarily have to nor want to
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provide that kind of a rate for everybody. There may be options that we can continue to utilize -- risk management products that would allow for either a balanced payment or a balanced cost for some period of time before it changes. We have to look very hard and close at the right kind of pricing that we should have for our products here in Palo Alto. Just because PG&E does it one way does not necessarily mean it is the best way for us. You will notice I am learning how to speak a different language now! Chairman Dawes: Yes. Are there other comments from commissioners? Commissioner Rosenbaum: I have a number of points. I was struck by
the difference between PGandE's expected bill and our proposed monthly bill. Historically, the differences in gas were not that high. What is going on? It is hard to explain on the basis of distribution, I would think. Ms. Dailey: Part of it is distribution, and part of it is the fact that we are really subsidizing our commodity rates with reserves. That is why it is so much lower. I have not looked back to see what it has been historically, but this is our best guess, based on what we knew about the market on July 6th and knowing that their cost is roughly that of pure market, although they do do some price fixing and different things like that. That would make the difference between our rates and their rates. Mr. Ulrich: As noted, they have already been passing on this higher cost to their customers. I would suspect that the next time when we have our next rate increase, that differential will get less and less. Chairman Dawes: We are seeing the results of sending $4 million of our reserve money to our customers. Commissioner Rosenbaum: They could feel that they contributed the money. Chairman Dawes: Exactly. It is their money. Commissioner Rosenbaum: I assume that you have considered a larger percentage increase at this time and rejected it? Mr. Ulrich: Yes, we did consider that. As I mentioned earlier, I think that is what the reserve fund is for. This seems like a better, less Draconian method of extracting the full cost of gas out of our customers. Ultimately, they are either paying it with the reserves that they have already put up, or paying for it as the
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price goes up. There is no reason why we cannot do this slower, rather than doing it all at once. Commissioner Rosenbaum: Well, we are cutting it pretty thin. If you look at Table 2, there is an easy number. The residential customer in December, for 100 therms, is going to be paying $49.60. In terms of units of thousands of cubic feet, that is $4.96 that the customer is going to be paying. We are talking about the commodity being on the order of $4.50, so clearly there is not much left over for distribution. That is not a situation that can go on very long. Another point is that there are going to be some customers, with a cold month or without one, that are going to be shocked at their gas bill. What are we doing to notify them and to encourage them to pursue some of the insulation options that the city is offering under the public benefit program? Mr. Ulrich: That would be the aggressiveness we would take towards communication between now and August. Candidly, by putting this into effect in August allows for us to collect some additional revenue. There probably will be very little financial impact during the latter part of the summer. So there is enough time to be able to get the message out to the people and to help them the best we can in mitigating it. If you have some time, you can do things about it. It is shocking them with the bill that comes after they have used the gas that is the worst possible alternative. You stand there and cannot do anything about it except to be told to pay for it. This gives us an opportunity to get the message out for people to try and conserve where they can. There are some uses where they cannot conserve. It is the best and lowest cost alternative for heating their homes, but it also allows them to consider alternatives like installing solar or photovoltaics, etc. Right now, that is not necessarily cost-effective, but it at least allows people to start making some choices rather than having none. Commissioner Rosenbaum: I was thinking more of the insulation option for those people who do not have well insulated roofs. I believe we have an inverted rate schedule for residential gas customers. Is that correct? There is a first block that costs less than succeeding blocks. Do you have that rate schedule? Mr. Ulrich: Yes, the first twenty therms are at a lower price, both in summer and winter, than when you go beyond twenty therms. Commissioner Rosenbaum: In winter, I believe it is more than
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twenty. Mr. Ulrich: It is ninety-six. The same differential occurs between those breaking points. In the summer, after you get twenty therms, the price goes up approximately twenty cents a therm. In the winter, after you reach 96, it also goes up twenty cents. Commissioner Rosenbaum: John, I would not be surprised that very few customers remember that there is that break point. I am wondering if we are planning on sending out the actual rate schedule. I know Randy always likes to present information in the form that we have it in this report. "If you use 100 therms, this is what it is going to cost you." Yet, if we are interested in conservation and if customers want to see the real effect of using less, I think it would be helpful to send out the true rate schedule to everybody, together with actually pointing out that there is this break if you use less. Do we have plans to do that? Mr. Ulrich: For the communication of it, it would be good to send it out. I also believe that when we send it out, we need to provide some explanation. It is not the easiest thing to read as far as a rate schedule. More importantly, and probably the best method is to not only send it out but be able to give some examples and explanation as to how to utilize the rate to further whatever usage you would like to have. Commissioner Bechtel: I have been wondering what alternatives we have for acquisition of gas. Any way to reduce our costs and negotiate pricing? What in general happens with our sourcing? Mr. Balachandran: There really are not too many options for us. There is a very liquid market out there. In terms of options that we could pursue, they all come with certain associated risk. We could, for example, buy a portion of a pipeline. We could contract with someone in the gas basin for long-term gas supply at a certain price. The seller would take the risk that they are not going to get a higher price than we contract for, and we do not take the risk that the market will not be lower. So it is a risk tradeoff. Given the volatility of the market and given that our customers have the choice of selecting another supplier, those have to be put together. As long as we have a certain term commitment from customers, we can go back to back and obtain resources to match it up. Those are the alternatives that I see for us. Commissioner Bechtel: What about storage? Mr. Balachandran: Yes, storage is also an option. So far, we have
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not elected to take the storage option. PG&E offers storage service, but it has not been economically feasible at their prices. Ms. Dailey: Storage does not provide a lot of reliability benefit for us. If you are going to do price arbitrage for storage, for instance, if you think prices are lower in the summer and you buy a bunch of gas and put it in storage, there are other ways to do that by fixing the price through contracts without having to physically put it in storage and then pay the price to take it back out again. For that matter, from what we are seeing this summer, it certainly would not be doing much good to be buying gas at these prices and putting it in the ground for the winter anyway. The difference between summer and winter is not very reliable, either. Chairman Dawes: This item was not indicated as being an action item, as it was not calendarized as such. But a sense of the UAC would be that movement towards a commodity pass-through is the appropriate framework as you have suggested you are doing, and a give-back of $4 million into a negative one-million dollar position is a pretty significant customer benefit, cushioning them. I guess we could always have relief from these prices which, as far as I read, have never been seen in the summertime. So perhaps things will not be quite as bad, but they could get worse if we do not have a fall runup in pricing, which is normal. If they run up from the 450 level, we may be in more serious trouble by December 31st than we now appear to be. Mr. Ulrich: Yes, we have a purchase strategy that would mitigate having a very high runup in gas prices. Chairman Dawes: We are hedging? Mr. Ulrich: Yes. UNFINISHED BUSINESS 2. Commodity Pricing Procedures and Guidelines Chairman Dawes: Are there any staff comments on this item? Mr. Balachandran: Nothing substantial, Chairman Dawes. This is basically a follow-up to a request that you made after we presented the long-term contracts report to you in February. The UAC expressed concern about a couple of things, one being the latitude that staff had in setting the term of the fixed term contracts. Initially, we had proposed three-year contracts, and based on your
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comments, we reduced that to two-year contracts. You also wanted to have a little more information on how the risk premium would be calculated, so we are providing that for you tonight. The conclusion of this report is that we are not going to charge any risk premium for customers taking electricity, because we do not really have any risk there, given that our prices are lower than the market. On the gas side, the only rate schedule where we contemplate adding a risk premium is the G-7 rate. That is because customers with that rate have the ability to switch suppliers. They do not have term commitments, so if market prices go below the rate, they can switch. It has been contemplated, but we are not going to put in that risk premium right now because they do not really have any other option. We are going to introduce fixed-term rate options on September 1, and we are going to have a rate increase on August 1, so we have decided we will not have a risk premium right now. That is a summary of this item, and we are open to your questions. Commissioner Ferguson: Thank you for the response to our request made earlier. One of the things we mentioned at the time was that it would be helpful to have an example, using real numbers, on how this calculation might be made, showing the swing and the risk, for better or for worse, taking us all through the process before we actually do it and actually make a mistake -- or perhaps be wildly successful. I would still like to push for that, especially in light of our gas supply story of the last few months. For example, on Page 3 of your Commodity Pricing Procedure, Item A, "The chance that market prices will change enough to draw some customers to select a different rate schedule...will be estimated." I would love to run through a scenario, pretending that we'd put this in place last September. We were making our assumptions and our predictions based on this natural gas price plot a couple of months before anyone started to detect this spike. What would have happened in the G-7 category? How many people might have opted for 12 months or 24 months? What would our projection have been? Go back to the minutes and see what you were telling us what you thought gas prices might do. How many people would have bitten on that, and signed up for two years? And if they had, what would our financial result be today, looking back? Would we be proclaiming victory, or would we be looking at an even worse hit in the reserve, based on a commitment we had made earlier? And is there an outside source where we can lay off any piece of this risk? Mr. Balachandran: We can provide you with a numerical example at a
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later UAC meeting. I apologize for not having that for you tonight. The basic philosophy we have been following is that we are not going to hold any risk. We are going to pass it on to our customers. That is background that we know about already. So I will take your comments, and depending upon how difficult or complicated it is going to be, or easy to explain whether to recount the example you just made or come up with a brand new example with fictitious numbers, I think I get the message of what you want us to do. Chairman Dawes: My assumption on G-8 is that we will only be offering contracts that we can fully hedge. In other words, buy them down, and we pass that cost on to the customers. Mr. Balachandran: That is correct. We will basically be offering them a price, a one-year price and a two-year price. We will give them 10-15 days to lock in, so we will be taking on some execution risk in the sense that the customers will have a certain period of time to lock in, and prices could go up or down. We plan to start the program that way, and we will see how it goes. The whole idea is to get a price from the market and pass it on to the customer. Commissioner Rosenbaum: Why even continue with the G-7? Mr. Balachandran: That is a good question. It has to do with customer perception and what we are hearing from our marketing folks. We talked to our marketing folks, and we did consider just yanking G-7 altogether. We have to have a replacement rate. We have to have something else to offer a customer. Customers do not like things being taken away from them. They do not mind additional services and additional rates being provided. So that was the perception issue and feedback we got from customers. Our plan was to add a risk premium to G-7. If the risk premium is so large that
they say, "Oh, I don't like this, I want to move to something else," we have to have something else in place for them. It is a perception and feedback issue that made us decide not to yank G-7. Commissioner Rosenbaum: How do you anticipate this working? I am having trouble figuring this out. Will you at some point offer G-8 because you go out into the market and see what it would cost to
buy a year's supply of gas? How would the G-7 rate you compute compare with that market price for a year at the G-8 schedule? Mr. Balachandran: Commissioner, this is still a work in progress, to some extent. We may get rid of G-7 next July when we finally go
to, let's say, a different structure of rate making where it is a
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cost pass-through, basically, offering customers different risk management tools. At that point, we may decide to just forget about G-7, so there is a certain education process necessary in talking to customers about why we are doing that. That is an option that we will look at again. In the interim, this is the procedure that we would use for a rate structure that does not have a term associated with it. As you pointed out, while there are lots of variables, it is not straightforward to calculate that risk premium. Commissioner Rosenbaum: Thank you. Commissioner Bechtel: Are we going to disclose to the customer the component breakdown in the rate? Mr. Balachandran: Are you referring to commodity versus distribution or commodity risk premium and distribution? Commissioner Bechtel: The latter. Mr. Balachandran: We will have to decide when we get to that. Right now, if we had to publish a rate schedule today, probably not. Commissioner Bechtel: Could it be a part of the negotiating tactics? Mr. Balachandran: Well -- Mr. Ulrich: You are moving quicker than we are. Commissioner Ferguson: To finish our discussion of the difficulty of forecasting, I would like to commend to you a book by a famous Palo Altan, Richard Carlson, entitled Fast Forward, 1994, especially the chapter at Page 167, "Energy Supply Meets Demand." There are several good prognostications here on where energy prices are going. It is a nice five-year test point. And darned if it
hasn't mostly come to pass. Good stuff. Chairman Dawes: I want to qualify in my own mind this G-7 so-called fixed rate. My understanding is that basically, that is what we offer now, and that fixed rate is subject to change at any time. We are not saying to a customer who signs up for G-7 that this is what you get for any particular length of time. In three months, if this thing really goes haywire, seven-dollar gas or something, we would be at them again with another rate change. I want to ensure that that reading is correct and that we are at liberty to change rates, the so-called fixed rate, monthly if we really want to.
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Mr. Balachandran: Yes, and the customer can also leave, in which case, we will not recover our cost. Chairman Dawes: I wanted to visit that. Basically, stranded cost at this moment (although stranded costs change depending upon what rates do out there) but basically, we are fully hedged, fully covered in stranded cost on the electric side. On the gas side, as far as I know, we have no stranded cost. We have a transmission tariff that people change to their own commodity supplier, and we recover our transmission costs, which include the cost of our assets in the ground, basically. So I do not get this stranded cost thing. Mr. Balachandran: Stranded cost is, for example, for the G-7 customers, if we offer them a price of thirty cents. The market prices go up to fifty cents, and we change the rate to fifty cents. But three to four months have passed, and we have been paying a cost of fifty cents and collecting revenues of thirty cents. Then the customer leaves. As soon as we change it to fifty cents, the customer leaves. Chairman Dawes: So he has hit our reserves, and when we go to catch up, he ducks out. Mr. Balachandran: And someone else will pay for it. It is a cost-shifting issue. Chairman Dawes: Again, to me, it is absolute proof positive that we move to a pass-through kind of thing. Commissioner Bechtel: Is there a stranded cost associated with (and of course, we do not do the contracts this way), but do we guarantee or do we have any contracts to purchase gas where we guarantee to buy so much, and if we did not buy that amount, our rate would change? Would that be an example of a stranded cost? Mr. Balachandran: Yes, that would be an example of a stranded cost. We do not happen to have any of those kinds of contracts, however. UNFINISHED BUSINESS 3. Water Operation Report Chairman Dawes: This is the item that was brought up in
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Mr. Nelson's discussion in Oral Communications.
Mr. Ulrich: When Mr. Nelson came to last month's meeting, he brought up some items and made certain allegations. Then this evening, he reiterated a few items. I notice that he is no longer here, so I will not focus on his comments except to say one thing. I want to make it very clear to the residents of Palo Alto who are paying for high quality water and to you as commissioners that his point about management, and he used the word and tried to define what he thought "ethics" were, and suggested that we attend some classes, and he provided you with some literature. I will not react to that, but I will say and I am very clear in this area that we in the utility area take the quality of the water and our service to the residences and businesses of Palo Alto very strongly. I will not tolerate or put up with allegations that chastise employees that have been doing a very excellent job, day in and day out, working at the quality of the water that is delivered. I want to make that point clear. I am sorry Mr. Nelson is no longer here. I had met with Mr. Nelson before he left his employ with the City of Palo Alto, and a number of the items that he has spoken to today and last month I heard about from him when he was here. During the time and also from communication with Larry Starr and others in management, those concerns and items that he has brought up have been investigated, reviewed and deliberated upon a number of times. The summary of those activities that we do, day in and day out, and our verification process, are included in our operations report. I welcome any questions that you might have. I do want to make another point and draw your attention to the letter that is attached confirming our contract with an engineering firm to ensure that we have adequate staff to do the tests while we are waiting for our own staff to have the appropriate license. This way, we can have a report and make sure that we get appropriate information and that our water is continually being tested to all of the standards of the State of California. Chairman Dawes: Thank you, John. Questions and comments from commissioners? Commissioner Ferguson: I appreciate the comments and presentations by Mr. Nelson, because in a roundabout way, he gives us an opportunity to state the facts. My guess last month was that this might generate a headline, and that that still might happen. The beauty of the water quality business is that you can just go out and measure it. We can retain an independent testing company to double-check the numbers. It is not that expensive to do it. The
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numbers will tell a good story, so I encourage you to treat this as an opportunity in that roundabout sense, to make the case and not to duck it, but to treat it head on. Secondly, I came on the commission in part from the fiber-to-the-home initiative, where we had our first acquaintance with Larry Starr. I just want to make the point here that we have now had the opportunity to hear from Larry many times, and to talk with Larry and work with Larry. I feel that Larry really knows his business. Larry is a tough manager, and I am glad we have had him around for nine or ten years. There is not a doubt in my mind that this is an ethical man, and any allegation to the contrary is way off the mark. So I wanted to be clear about that as well, from my 15-month experience here on the commission. Chairman Dawes: My belief was that this document addressed the allegations brought up. The "he-said she-said" discussion earlier tonight of Mr. Nelson I simply cannot calibrate. Do you intend to have another communication on this subject to address anything that came up tonight, John? Mr. Ulrich: No. Commissioner Rosenbaum: I have perhaps known Larry Starr longer than anybody in the room. We have had the opportunity to work together, travel together, and Larry, I have regarded you as the very model of a hard working professional with uncommon devotion to both the city and the utility. We have been very fortunate to have had you, and I want to wish you and Penny the very best in retirement. (Mr. Ulrich then submitted a future meeting agenda to the commission and also a draft of the material that discussed the power outage situation that occurred. He is looking for feedback on other items they may wish to have added, and the two items discussed tonight will be added.) ADJOURNMENT: The meeting was adjourned at ten p.m.