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Home My WebLink About2000-11-01 Utilities Advisory Commission Summary MinutesUtilities Advisory Commission 11/01/00 Page 1 Wednesday, November 1, 2000 City Council Chambers MINUTES CALL TO ORDER ____________________________________________________________ 2 ROLL CALL ____________________________________________________________________ 2 ORAL COMMUNICATIONS ______________________________________________________ 2 APPROVAL OF MINUTES ____________________________________________________ 3 AGENDA REVIEW AND REVISIONS ___________________________________________ 3 DIRECTOR OF UTILITIES REPORT ___________________________________________ 3 UNFINISHED BUSINESS _____________________________________________________ 4 1. Gas Quarterly Report _________________________________________________________ 4 NEW BUSINESS _____________________________________________________________ 4 1. Gas Rate Increase for January _________________________________________________ 4 2. Approval of the BAWUA/SFPUC Interim Water Shortage Allocation Plan (IWSAP). __ 13 3. Strategic Plan ______________________________________________________________ 16 4. Fiber Business Plan __________________________________________________________ 33 REPORTS OF OFFICIALS/LIAISONS _________________________________________ 56 1. Northern California Power Agency (NCPA) Commission Report ____________________ 56 2. Bay Area Water Users Association (BAWUA) Report _____________________________ 56 3. Transmission Agency of Northern California (TANC) Report ______________________ 56 ADJOURNED ______________________________________________________________ 56 Utilities Advisory Commission 11-01-00 Page 2 CALL TO ORDER Chairman Ferguson called to order the meeting of the Utilities Advisory Commission on November 1, 2000 at 7:30 p.m. in the Council Chambers, 250 Hamilton Avenue, Palo Alto, California. ROLL CALL Ferguson: Alright, let’s call to order the November 1, 2000 meeting of the Palo Alto Utilities Advisory Commission starting on my right, if the Commissioners would state the name. Thank you. PRESENT: Commissioners Richard Carlson, Richard Ferguson, Dick Rosenbaum, and Dexter Dawes ABSENT: Commissioner George Bechtel COUNCIL MEMBER PRESENT: Bern Beecham Ferguson: Before we get to Approval of Minutes we have one request for a non-agenda item, Oral Communications. Mr. John Easter of 1175 Stanley Way. ORAL COMMUNICATIONS Mr. John Easter, 1175 Stanley Way, Palo Alto: I seem to be missing the ice-cream mike but we’ll try this one. I see that its working a lot better than it has a couple of weeks ago. I’m here to remind you folks that I am strongly in favor of a telecommunications advisory commission. I think that the time has come. I’ve been listening to you meditate, cogitate and speak about your responsibilities as an advisory commission for utilities which takes in electricity, something especially controversial and important to this City at this time, gas and water. Telecommunications probably should become a separate utility. I’m certainly in favor of it and I want to hope and keep prodding you folks because it will go through you first, will consider that the management of that eventual utility will be advised by the telecommunications advisory commission. Now I realize that some of you for various reasons might not want to do this but certainly its important enough that with your busy schedule, you probably would want not to be involved in the telecommunications advisory because that would probably double your workload. I will keep coming before you and stating the case. Thank you very much. Ferguson: Thank you Mr. Easter. Next time on our agenda is the approval of the minutes. Utilities Advisory Commission 11-01-00 Page 3 APPROVAL OF MINUTES Ferguson: Can I have a motion to approve the minutes? MOTION: Carlson: Can I say one thing. BAWUA has a U in it. We may as well get the right acronym right, (spelt) BAWUA, otherwise, I will move we approve the minutes as corrected. SECOND Ferguson: Is there a second? Rosenbaum: I wasn’t here and will abstain. Ferguson: Well, let’s see, the Chair seconds. Members of the Commission can vote as a matter of necessity in order to move this along. There’s no reason to abstain unless you insist. If there is no discussion of the minutes, all those in favor of the motion say aye. Rosenbaum: I’ll abstain. MOTION PASSED Ferguson: Okay, three plus one, the motion carries, thank you very much. Agenda review and revisions. AGENDA REVIEW AND REVISIONS Ferguson: Let me make a proposal here for the Commissioners. I believe the discussion is relatively short on Items 1 and 5, both gas utility topics. I also believe, since we have discussed it at great length the Interim Water Shortage Allocation plan that there will be relatively few comments on that as well. I know we have several speakers from the public on the strategic plan and fiber business plan and I think we may be able to dispense with those items right at the top of the meeting. Any discussion on that proposal? Okay, there being no objection, we’ll treat 1 and then 5 and then 4 and then proceed to 3 and 4 and the balance of the agenda. Mr. Ulrich, is there someone to give a presentation on the Director of Utility Report? DIRECTOR OF UTILITIES REPORT Utilities Advisory Commission 11-01-00 Page 4 Ulrich: Well, that would be me. I have very little formal discussion tonight. We have quite an extensive agenda. I would like to point out that many of you have seen from the newspaper that the Federal Energy Regulatory Commission has ordered the California ISO to get a new seven person board and put in what they call a soft price capital of 150 megawatts. Its quite interesting that FERC would come to California and abolish the board that was set up given any number of reasons why so it shows the dynamics of what is going on in the energy market and how the federal and the state are handling it so there will be more to come on that. That’s not the purpose of this evening’s meeting. If its all right with you I will move ahead with the business at hand tonight. Ferguson: Great, thank you very much for a quick summary. Gas Quarterly Report first. Any presentation? UNFINISHED BUSINESS 1. Gas Quarterly Report Ulrich: Nothing specific but there’s a potpourri of items in there, you may wish to ask some questions about it. Ferguson: Okay, Commissioners with burning questions on the gas quarterly report and then we’ll proceed with the gas rate increase next. No questions or comments on the quarterly report. Let’s proceed to Item 5, the proposed gas rate increase. NEW BUSINESS 1. Gas Rate Increase for January Ulrich: As you recall, in fact back in June and July, we came to you to advise you that… Dawes: One thing, I’m sorry, I was fumbling to find the area and it could either be here or under the Rate Increase but I want a discussion on the RSR status as of the current day and its expected prohibitions through the second rate increase, the end of June of next year. Ferguson: I agree and we are on the gas rate increase. Ulrich: We can do that and answer specific questions if you like or meld it in. Just a brief background, we were here advising you and subsequently the City Council, that the supply cost for natural gas were increasing significantly far beyond what we projected in our budget. We requested and received approval to start the rate increase back effective August 1st and supplementing the additional cost of gas through the reserve accounts that we had. That way, we may be able to reduce the impact on customers and we said that we would be back at this time for an additional rate increase request to be effective Utilities Advisory Commission 11-01-00 Page 5 January 1st and our recommendation for this second increase would be for 25% average to recover the market supply cost. Also, to avoid having a deficit at the end of the year in our reserve. I would like to point out before we begin that there is a typographical error on Table 1 on Page 3. You can find that its on the 4th column from the left on the bottom row and it says in there parenthetically, negative 300, that should be replaced with 4,560 and I believe you have a new page at your seat for that. If you like to ask any questions or we can go into more detail on the request. Ferguson: Let’s go directly to questions and I share Commissioner Dawe’s question. You want to pose it again on the projected reserves balances? Dawes: Yes, could you give us a rundown on where we are in terms of our reserves balances for both the rate stabilization and distribution reserve. I am concerned that we are burning through it at a pretty rapid clip, given the financial performance shown in the quarterly update. Related question is concerns the switch of the large industrial customers and some of the other large customers to a cost pass through. This is the last sentence on Page 4 there of the proposed rate increase, where it says “large industrial customers 9 may be required to select either at the rate schedule G-3 or a commodity pass through. In the event that they were forced to go to a pass through, which seemed to me, and this is in July of next year, if they went to that, they would then be exempted from the increase which is directly directed at replenishing our RSR and in effect, we are subsidizing them during this period. Then at the time when others get an increase to the point where we start rebuilding our reserves, they flee to a cost pass through thing, which exempts them. So, those are the kinds of related questions. Balachandran: I can answer the latter one, Lucie I guess can give you some numbers on the actual reserve numbers. The large customers are going to be faced with the rate increase right now. The reserves that they paid into over the years is what is being used right now to meet our supply cost. Post July 2001, we are going to be hedging all their costs. In a sense, they’ll either have to get on an index rate or they will have to sign up for a 12-month or 24-month fixed term rate or a custom contract. For all those options the need for reserves are greatly diminished. The only reason we need reserves for that portion of our load is for a variation in the customers load due to weather and for that purpose we are collecting a small reserve. Dawes: So, it seems to me that your expectation is that by six-thirty, that the large customers will be, quote, “even with the box”, unquote, where reserves that they have paid into and built up will be exhausted but will not be negative at that time and I just, I guess I hope that’s the case. I don’t know if there’s any assurance or if you’re sort of building a process whereby we are darn sure that we have not subsidized them and do not have the ability to bring it back to zero, if you will. Balachandran: That’s the plan. By June 30, 2001, we should have collected all our deficits so to speak right now and we should be going in an even slate at that time. Utilities Advisory Commission 11-01-00 Page 6 Dawes: This writing seems to imply that the reserve buildup doesn’t start until after that 71 25% hit and it talks about then allowing the reserves to build up to minimum levels again. Balachandran: Right, and that will be mostly for the customers for whom we are still going to be full service providers and they don’t have any choices. They don’t have choices for direct access so for about 75% of the load, yes that is true, we’ll be building up the reserves for them. The other 25% of the load, the customers will have direct choices and they can actually take direct access. There’s going to be a completely different price increment for them. They’ll either be on a completely floating rate in which case you don’t need a reserve for that or they select a rate at fixed price at a certain point in time and we go ahead and buy gas at the same time so the need for reserves to stabilize the rates is not needed for that 25% of the load. The other 75% of the load we still are in the ‘let’s take care of you’ mode. Dawes: I understand that. I am just emphasizing that let’s make sure we’re square with the box when we cut over and you assure me that we are so I’m a happy camper. Balachandran: Yes, that’s the plan and that’s how Lucie’s been working the numbers. Hirmina: As of now, I have to just finish working on the actuals for 1999-2000 with the Administrative Services Department with their accountants to close the books. We haven’t started to look at the reserves for the first quarter of the year but I have the projections as of June 2000-2001, the end of June, the projections would be that we would have about 899,000 in the distribution of RSR and 147,000 in the supply of RSR. Dawes: And how does that compare to our minimum levels, Lucie? Hirmina: That’s very much below the minimum levels that was established by the accounts approved by Accounts. Dawes: And is it expected that the reserve will still be declining in Q1 and Q2 of calendar 01 in other words, the 3rd and 4th quarter of this year? Hirmina: Of zero 2000-2001? Yes. They will be at this level, 899,000 for the distribution and 147,000 after the approval of 25% increase that is proposed. So if we don’t raise the rates 25% then we will end up in the negative. Dawes: Thank you. Ferguson: Any other comments. Mr. Rosenbaum. Utilities Advisory Commission 11-01-00 Page 7 Rosenbaum: Following up on Dexter’s question. Looking at utility rate schedule, G7, which is near the back of our package, I see that the commodity charge is 30 cents per therm. and clearly, that doesn’t cover our commodity charges, our commodity cost. I was wondering what the philosophy is there and when you speak of a 37% increase for these customers, is that in the distribution and commodity charge or how is that all worked out? Hirmina: At this point we are trying to align the rates to make the distribution rates whole and then we are transferring money from the distribution reserve to the supply reserve until June 2001 and then after that their commodity price would be based on the market as Girish mentioned before, it would be either a pass through or a fixed up. We are increasing G7 distribution rates to be able to recover the cost on G7 for the distribution and the supply would take care of itself by the end of June or July 2000. Rosenbaum: For the rest of the year, we’re clearly selling to the large customers at a loss. Hirmina: Not just the large customers, all the customers. We are not adjusting the commodity at this time. We are transferring money from the distribution reserve because in the beginning we had the funds in the distribution reserve was over the maximum. It was one reserve before, we split it into the two and the reason they were over the maximum is a few years ago, the cost of gas was below what was projected in the budget so we ended up with more money in the reserve. So, now we are subsidizing, not subsidizing but transferring money from the distribution reserve to the supply reserve. Rosenbaum: Alright. I guess it’s more apparent here in G7 where you break out the commodity charge from the distribution where it’s all bundled in the other rate schedule. All right, a second unrelated question. You mentioned that you have purchased supplies, 83% of the supply for the rest of the year, and then in the report, I expected to see the terms of that purchase. How much did we pay? Balachandran: Well, we purchased it at various times during the year to lock it in and typically in a report like this we don’t talk about what prices we purchase gas at. Rosenbaum: It would be pretty interesting information. There’s no confidentiality issue is there. I mean, why wouldn’t that be available information? Balachandran: We have made several transactions at several times so its not one block purchase that the utility makes. We’ve made, maybe a dozen different times, at least. Rosenbaum: You don’t have an average cost for those purchases? Balachandran: You know, if I have to ramble at the top of my head maybe 450 so 45 cents and since then around 45 cents and the market has gone up to about 60 cents, its Utilities Advisory Commission 11-01-00 Page 8 come down in the last week or so maybe about 55 so given when we purchased it we are still in the money so to speak compared to the market. Rosenbaum: I was noticing the prices in the papers today at Henry Hub, I like that name. It was $4.34 cents, it was $4.58 cents on Monday so clearly it is quite volatile. Any explanation as to why it is, I guess there’s been really a rapid decrease in the last week down to the 4.34. Balachandran: Well that’s at Henry Hub. There’s a basis differential that transported to California and so there’s a basis from Henry Hub to the California border and there’s another basis you get from the California border to the Citygate and the total transportation cost over there can vary anywhere from, depending historically, you’ve seen numbers right from about say 20 to 25 cents to up to a dollar. So we can be anywhere in that range. So when you say Henry Hub, Henry Hub will give you a good idea of the trend whether its going up or down but it doesn’t really give you an idea of the cost that we are paying because we have to pay transport from that point to here. Rosenbaum: Yes, I was interested to see Henry Hub in the paper because that’s the price you use in the graph you gave us in the quarterly report is the Henry Hub’s prices so I thought there’d be some comparability but you are saying actually the price we pay is not as shown in that chart but there’s an additional charge for transportation. Balachandran: Exactly. I think the chart that we showed you was for general trend so that you can see the Citygate prices following pretty much the same trend so say for example last year or earlier this year, Henry Hub was trading around 2.50 2.70 or so and then went up to about 4.30 so basically close to 100 percent increase. While Citygate also was about 100 percent increase but back from about 2.80, 3.00 dollars to close to 6.00 dollars. Rosenbaum: Thank you. Ferguson: Any other questions or comments? Commissioner Dawes. Dawes: I’d like a statement from staff that the depletion of our reserves and the negative cash flow on this particular utility has not impacted our capital expenditure program for this year. As a result of that nothing has been delayed or deferred? Ulrich: That is correct. Dawes: And secondly, questions of the timing of the second rate increase, I am concerned that the two reserves are way way below their minimums and why delay that second kick till 7.1 when we can roll it back to say 3.31.01 and not have those two reserves get so what I term dangerously low. As Girish point out, the volatility of these commodities are such that bad month, even though we’ve locked in the vast bulk of our Utilities Advisory Commission 11-01-00 Page 9 purchases, we got to buy more than what we contracted for prices are in orbit, we could be hung out to dry. So, I would feel much more comfortable if we were looking at a pricing scenario that didn’t deplete our reserves so much. Ulrich: What we are just discussion is when we put in the plan together, four or five months ago, we just thought that looking at it in this fashion and raising the rates, it was appropriate to have a six-month difference or at the time. We have gone and purchased virtually all the gas through June 30 so we could do it earlier. It would really be up to us, I think, to come back with some recommendations if you’d like to consider doing it earlier than June 30. That was the plan we laid out to you first time around, we are just following through with that timing. Dawes: Now that the gas has been purchased, it looks like the reserves are lower than we thought so at least this Commissioner would be much happier if you were thinking about pulling that increase in so those reserves wouldn’t be so low. Ulrich: We would look at it if that’s the wish of the Commission to look at initiating a rate increase earlier than June 30. Ferguson: Commissioner Carlson. Carlson: I’d like to join in. I think that would be a good idea. I’m glad to approve this immediate rate increase but I think you should seriously look at the next rate increase earlier. If the commodity cost is 45 cents, why are we selling it for 30? Ferguson: Commissioner Carlson, would you be willing to put that as a form of a motion? Carlson: I move that the staff come back with an accelerated rate increase proposal. Ferguson: Could I amend that motion to recommend approval to the City Council of the rate increase in question. I guess we didn’t ventilate the idea of instead of saying 25%, maybe it should be 30%, if our concern is reserve levels. Why not pull it up a little bit more, we are still way below the PG&E column here and I certainly would be happy to entertain a 5. higher rate increase at this point. Ferguson: Well, lets see if we can get a motion and a second on the floor here. Commissioner Carlson, do you want to leave your motion as is or withdraw and recraft it? Carlson: I didn’t understand exactly what Dexter was proposing. I would be glad to hear his motion. Utilities Advisory Commission 11-01-00 Page 10 Ferguson: Okay, would you like to withdraw your motion. Great. Commissioner Dawes, we have an action item from the staff. Dawes: Yes, I was attempting to recraft the motion to address that and is the motion now withdrawn? Ferguson: It is. Dawes: To lay a motion down to adjust the proposal made by the staff to the City Council for the 12-31 rate increase from 25% to, I’ll pick 30% as a number pending discussion among the Commissioners as a expression of concern about our reserve levels. Ferguson: So, that’s a motion to approve the staff report and recommendation with that change? Dawes: With that change. Ferguson: Is there a second to that motion? Carlson: I’d like to amend it to include a request to the staff to come back with an accelerated further second stage rate increase. Dawes: I accept that revision. Ferguson: We have a motion amended. Is there a second to the motion as amended? Carlson: I’ll second. Ulrich: May I make a comment before you vote please? Thank you. From a process approval standpoint, going back and doing the calculations and recrafting a CMR to go to the Council as its planned to go very quickly and by your affirmation of our recommendation if that’s what you planned to do would then allow us to get on the calendar, have it approved by the City Council, so we know it and go off and be effective along with our communication to our customers to be effective by December 31. By changing that to some number other than our recommendation, potentially can delay the approval of the rate increase and make it a little more difficult for the communication with the customers and having it go in effect on December 31. Anything can be done, I just caution that that change, at this stage, would be more difficult to do, I believe, than if we came back with your other part and request it and edit an accelerated rate increase sometime after the first of the year rather than wait until June 30. Carlson: Are you saying that you might lose more from the delay than you would gain from some modest increase? Utilities Advisory Commission 11-01-00 Page 11 Ulrich: I think that’s possible. Ferguson: Mr. Rosenbaum. Rosenbaum: I think I’m comfortable with the staff’s proposal as is. However, Dexter did bring up a point about the possibility of an exceptionally cold weather and the need for more gas, which might put more of a strain on reserves than staff has contemplated in its calculations. I think that could be taken care of by staff considering acceleration if that were to be necessary. So, Mr. Chairman, I would suggest we might want to break the motion up into its two distinct parts. I think they are independent. Ferguson: Okay, Mr. Beecham. Beecham: Also, I would suggest that if it’s the Commission’s desire to recommend an increase or a consideration of an increase in rates, that the Commission directs staff or requests staff that when they go to Council, to have additional data showing the effects of an increase in rates and what that would do to the reserves as well as maybe some small consideration of possible variations in terms of showing how that might be affected. Ferguson: Any more discussion on the motion as crafted? Any desire to amend it in light of Mr. Beecham’s comments? Rosenbaum: I would ask that the two parts be separated. The two parts being one, a greater rate increase, January 1 and the second part being an acceleration of the second rate increase. Dawes: Agreed. Ferguson: Okay. So two-part motion, the increase rate for 12-31 and the second part? Dawes: Acceleration of the second increase to 3-31-01. Ferguson: Okay. John. Ulrich: Just a point of clarification, it would be the proposal that we have before you going as is to the Council and then coming back with an accelerated increase sometime after July, pardon me, December 31 but before June 30. Dawes: Currently, the motion is for a higher rate of increase of 12-31 and it’s now separate from the motion to accelerate the second increase. Perhaps we need to have a vote and if its voted down we can circle back and do it again. Ferguson: The vote on Part A is for the increase from 25 to 30 percent as of 12-31, all those in favor say aye, one vote, all those opposed, 3, one to three, that part of the motion Utilities Advisory Commission 11-01-00 Page 12 fails. Second part of the motion would then be to approve the staff report with an adjustment after 3-31 and before June 1. Dawes: Well we have a second part of the motion, maybe you should hit that one and circle back to the recommendation for approval of the staff report for the 12-31 as is. Ferguson: Okay, I would like to ask the mover to state the second part as we go into it. Dawes: The second part of the motion is to accelerate the next subsequent rate increase, actually it’s the third round in the second because we already had one back last June from the 7-1-01 to 4-1-01 in order to ensure that our two reserves do not reach such dangerously low levels as the current projection show. Ferguson: Okay, all those in favor of that proposal, say aye, all those opposed, no? Carlson: Yes, I am going to vote no too because I thought we were requesting the staff to come back with a specific acceleration proposal rather than stating a date. Ferguson: Okay, the second part of the motion fails as well. One to three, Commissioner Rosenbaum, you want to try? MOTION for Part 1 Rosenbaum: Well, let’s make it simple. I recommend the staff recommendation with respect to the increase on December 31. SECOND Carlson: I’ll second that. MOTION PASSED ON PART 1 Ferguson: Okay, all those in favor of the Rosenbaum motion, seconded by Carlson, say aye. Rosenbaum: Okay, let me make another motion which is to ask staff to consider the possibility of accelerating the June 30 rate increase should conditions change so that the reserves would fall lower than the current estimate of where they would be. Dawes: I’d like to propose an amendment to Commissioner Rosenbaum to stipulate the reserves not fall to the levels that are projected but should be much closer to our minimum targets. Rosenbaum: I would not accept. I think that’s a different motion. Utilities Advisory Commission 11-01-00 Page 13 Ferguson: Is there a second to Mr. Rosenbaum’s motion? No second? Carlson: Dexter, why don’t you try? You want me to try? Okay I will try. Dawes: I’ve been voted down twice. MOTION OF PART 2 Carlson: I move that the staff be asked to come back with an accelerated second rate increase proposal that would leave reserve levels significantly above those proposed in the staff report. SECOND Dawes: That I will second. MOTION PASSED ON PART 2 Ferguson: Any other discussion? All those in favor of the Carlson motion, seconded by Dawes, say aye. 4 to 0. I think we’ve got action on the gas rate increase. Thank you very much. Commissioners, I do want to take best advantage of the people that we have here from the public on these items. Do Commissioners Dawes or Rosenbaum have many comments on the interim water storage allocation plan? No. Its interim water shortage. Okay, if there aren’t a lot of comments, I would like to proceed with that Item No. 4. 2. Approval of the BAWUA/SFPUC Interim Water Shortage Allocation Plan (IWSAP). Ferguson: Let me start with my own short comment on that. I went up with staff to a San Francisco meeting and there are two items where some clarification on that. I’ll make a motion and insert those clarifying items pending some additional comments here from Kirk. Miller: Yes, I do not have a presentation. What I would like to do is briefly discuss the context and describe some of the status on which I would answer some of your questions, Mr. Ferguson. What we are presenting to you is some of the Tier 1 and Tier 2 parts of the Interim Water Shortage Allocation Plan and Tier 1 is the plan between San Francisco and BAWUA and that’s the main structure of the plan including the bank and the transfer of provisions and the split of water between San Francisco and BAWUA. The second part is the interim BAWUA plan. It’s essentially how the BAWUA agencies would split up the water among ourselves. Utilities Advisory Commission 11-01-00 Page 14 The two plans go together and there’s also the draft resolution which we are also asking that you approve and recommend to Council and that would have Council approving both the Tier 1 and Tier 2 plan and that would be one of the 29 BAWUA agencies to approve it. We need all 29 to approve it in order to get the whole thing in effect. The items that would go to Council would be a CMR which will draft the two plans and the finalized resolution of which you have a draft in your packet. The present status is as Commissioner Ferguson said he did come to the San Francisco PUC on October 24th and I’d like to thank him for that. It took his entire afternoon and was very helpful in getting approval from the SFPUC on this item. We have been working at it for a couple of years and it was useful to have him there as a presence from Palo Alto. The SFPUC approved it on a 4 to 1 vote with some minor edits. The edited section is 4.1 which deals with the access use charges and that is the Tier 1 plan, I believe, which is Page 6 of the handout. They didn’t want to have the actual access use charges included in the Plan. They wanted to leave themselves some flexibility. Subsequent to the vote, staff from BAWUA and San Francisco, the attorneys have worked out wording that basically eliminates the numbers but says that the plan would have access use charges that would be developed when they are needed and they would apply equally to the BAWUA agencies and San Francisco. That seems quite acceptable to both BAWUA and San Francisco staff. The issue that remains is what exactly did the SFPUC approve. Their secretary had signed off on a resolution that they approve but didn’t attach the plan so BAWUA is working with SFPUC staff to make sure that the amended plan gets attached to the SFPUC resolution so that we don’t have to go back to the SFPUC and so that later down the road there’s no ambiguity so we are working on that right now through BAWUA. Once that gets resolved, then we would bring the amended Plan, that one minor modification that I mentioned to the Council and that is the present status on that. So what we are requesting is that you recommend to the Council to approve the shortage allocation plan and pass the resolution similar to the one that is attached and that ends my comments and I’m available to answer any questions that you may have. Ferguson: Any questions from Commissioners here? Mr. Dawes. Dawes: I so move that the UAC recommend to Council the approval as set forth in Attachment 3 to the package. Ferguson: Is there a second? Rosenbaum: Yes. Ferguson: Commissioner Rosenbaum second. We’ll have a vote shortly. I want to make one comment. If staff can weave it in to the resolution. One of the questions is what does interim mean? I think it may help if we include some definitions on what interim means. Coming out of our official resolution, it will give it a little focus and impetus to the final negotiation and I am not asking for any change in the motion. I am simply suggesting that we include language like in the resolution on the second page, in Utilities Advisory Commission 11-01-00 Page 15 the bullet just above ‘now therefore, be it resolved’, let me propose that the last bullet read, it is quote “interim” close quote in that it remains in effect for less than 9 years, spans only one likely drought cycle, last or less than half the total term of the master contract, and may be reevaluated concurrently in the December 2009 expiration of the Master Contract. That gives us 4 arguments for selling this as an interim measure to SFPUC. I will leave that as a staff discussion. Miller: Okay, we will look at that. I think we understand the intent of this discussion and that was something that was brought up at the SFPUC meeting was the question of what is interim so we can address that in the resolution. Ferguson: Good. If there are no other comments, Commissioner Rosenbaum, sorry. Rosenbaum: I was curious the example given us for 23.6 average suburban reduction. The agreement isn’t suppose to apply to the reduction over 20%. Miller: The plan is intended to apply for a system-wide cutback of no more than 20%. The difference in the water use between San Francisco and BAWUA and the historical water use, BAWUA takes a larger percentage cut than San Francisco does and this is reflected in the 23.6% cutback in BAWUA. Rosenbaum: You are saying that this example really corresponds to the 20% system-wide? Fine. All right, there’s some typos on Page 2 of Attachment to the years, there’s some extra digits. Miller: Yes, we caught that one already, thank you. Rosenbaum: Good and I would like to comment that Dick Carlson and I went on a BAWUA tour last week and Art Jensen, the Executive Director of BAWUA, was quite complimentary about Rick Ferguson’s comments and appearance and did indeed feel was very helpful so thank you for doing that. Ferguson: I’ll take a four to one vote any day. Mr. Beecham. Beecham: I’d like to offer staff the opportunity to explain what Palo Alto’s role has been in getting this agreement to us today? Miller: Our role has been fairly active. This plan has gone through the Water Resources Committee of BAWUA and also the approval through the BAWUA board. We have representatives on the BAWUA board, Jane Ratchie is on the board and very active and I am presently the Chair of the Water Resources Committee so a fair amount of Palo Alto’s staff time has been spent on getting this plan in place. Utilities Advisory Commission 11-01-00 Page 16 Ferguson: One of the subject at the PUC meeting was which Commissions had faith in the diligent work that their staff had done and I voiced faith in the hard work that our staff had done and San Francisco commissioner voted four to one to reflect faith in their own staff work so we try to spin it as a water supply team building effort so I am glad it all worked. Any other comments. Vote on the motion, all those in favor – 4 to 0 the motion carries. Let’s move on to, I think its Item 3, the Strategic, Item 2, I’m sorry, the Strategic Plan. 3. Strategic Plan Ferguson: Let’s move on to Item 2 the Strategic Plan followed by the Fiber Business Plan. There is a logic to this. The Strategic Plan really should serve as the umbrella under which things like the Fiber Business Plan align themselves. So to the extent we can hammer out some of the larger principles in the Strategic Plan I think our discussion on the Fiber Plan will be a little easier. John is there a presenter? By the way, our minutes are being taken by Zariah Betten tonight so I’d like to be sure we get a good recording for her sake. Ulrich: Thank you. Mr. Chairman, in an effort to move this along I will sit here and Dee will move the mouse as we go along. You have our proposal and that is to approve the Utilities Strategic Plan and direct the City Manager to have Staff return with an implementation plan. So this evening we will not be discussing an implementation plan. This is a significant recommendation that we are asking for your approval. We would like to review this. I have a presentation that will summarize much of what it is the report. We would like to take this to the City Council for the full City Council’s review and hopefully approval on November 13th. So it is a very short turnaround time and included in that will be our recommendation for the Fiber Plan. Both of those have a lot to do with each other. I think the order we are taking helps it to fit together. We have worked on this for a number of months. We went to you in May of this year with our initial proposal. You gave us some recommendations and we then followed that up with a study session with the City Council in June. The crux of what we would like to do is a strategic plan, in our belief, is nothing more than a way to streamline, organize and look at the way we are currently governed to be able to compete in a competitive environment that gets closer to Palo Alto every day. We see that competitive challenge coming. The strategic plan is attempting to work on that and be competitive over at least the next five years. We’ve developed a mission. We have, I believe, clear objectives and strategies so that we will be successful. The recommended actions that would be carried out in the plan and we would develop a communication and public outreach plan so that all of our customers, those that own the utility, would have clarity about what we’re doing and why we believe it is in the overall best interest of all of us to have a strategic plan in place. Utilities Advisory Commission 11-01-00 Page 17 We’ve had discussion here. Randy Baldschun gave all of you a very clear and a very good history of our utility. We were founded on principles that are listed here. We do have low rates. We have reliable contribution to the general fund. We clearly have local control as exemplified by this evening and our relationship with the City Council. The programs that we’ve developed and continue to do are built around community values. We are clearly focused on our customer convenience and the type of operation they would like us to have. The roll of the strategic plan is basically as our blue print over the next five years. The challenges will be the future market environment, the threats and opportunities to the utilities, the strength and weaknesses of the utility organization and plans to meet customer needs and respond to competitive threats. The actions needed to secure a success. As you see every day and based on many of the items that we bring to you, you’ve helped us a lot in being able to focus on the competition that is here and continuing to increase. Customer demands are rising. Every customer is looking for the value proposition and as time moves on that value proposition increases. There are competitors that are large and diverse. We’ve had discussions about the price volatility and the risks that are inherent with that. Competitor penetration will rise as our surrounding investor owned utility rate freeze is in and that will come. Emerging technologies, the fascination of distributed generation, e-business, have the clear potential to transform our industry. Here are some examples of the demand and the opportunities we have in energy services. We are looking at and plan to implement a 24/7 service in Palo Alto where you can have your pilot lights lit at 2:00 in the morning if you like. Aggressive energy management programs, green energy, many options in paying the bill, and power quality and lots of price options. All of those just expand our opportunities to be able to provide competing alternatives that are out there. Examples of some of the key players, we see them every day, Enron, Duke, Dynergy, Reliant, Southern, Williams. We see Williams, they are right out in front of City Hall. We had an example of them just a few weeks ago when they were installing a fiber optic system through the City. Commodity prices are highly volatile. We had some discussion about that. Other than that spike in 1-1-99 when everybody thought there was going to be a significant shortage of energy here is what has happened with gas prices. They have stayed relatively stable. As you can see from the first quarter, about the beginning quarter of this year, they have had a steady and precipitous increase. They will come down sometime but we are not sure when. Here are the same in the electric. Much more volatility as you can see on the right-hand side. We have our own local issues that have come home very clearly particularly on June 14th when PG&E and Palo Alto Utilities were forced to cut some of our customers through a rolling blackout because energy demands have increased significantly. They are growing at 6% 200-300 megawatts per year. That’s probably conservative depending on where you are at. Keep in mind that the entire load of the City of Palo Alto peak demand is Utilities Advisory Commission 11-01-00 Page 18 only slightly above 200 megawatts. We have to cope with this situation is a part of the reason why we have the strategic plan. Onsite generation, we hear about this all of the time and it is getting closer. After 2004 we expect a significant increase interest in distributed generation. The reasons for that I’ll go through in a few minutes. We find that reliability, not cost is the concern of many of our customers. The price, they are very happy with it but they would much rather trade that lower price for higher service reliability. Technological advances have reduced the size of onsite generation all the way down to 100KW. 150KW units are currently being installed in all regional stores of a very large electronics supplier who is not very far away from here. Their entire reason is to ensure reliability and in some areas to reduce costs because the supply costs have been passed on directly to the customers, not as we’re doing but that’s becoming very common, and they want to have full control over their power supply. We are blessed with having major strengths to meet that competitive threats. We do have highly skilled and experienced workforce. We have our federal power allocation keeps and we foresee certain supply costs will be below market. We have a very solid financial position, currently with low debt and strong reserves. Stranded costs are fully paid off. We believe and hear everyday that we have high customer satisfaction. Gas and electric reliability is above average. Status as a full-service community-owned utility provides convenience to customers and low customer rates. Now, our weaknesses are common in other utilities similar to ours. We are all experiencing aging distribution systems. Much of our distribution was installed in the 1950’s and 1960’s. Much of it is reaching its useful life. We have a very aggressive infrastructure plan to replace it. We have declining supply cost advantages. We have organizational and process inefficiencies and based on many of the competitors we are being limited in some of the product and service portfolios. We are all facing the difficulty of retaining key personnel because of costs and in this job market alternatives to working in the City of Palo Alto Utilities. Here is where the beginning of our strategic plan is trying to overcome. We need to have additional capital investments. We are working on and for our new supply arrangements, particularly after 2004, and gas opportunities. We are looking at and will expand our product and service offerings. We are engaged in new and expanded fiber services. These will be opportunities to help us replace some of the lost opportunities in the electric and gas business. We are looking at and initiating internal streamlining governance changes. And of course, the best of all, lots of hard work. We believe that we should have a full-service utility model. We believe that having full- service is what our customers are interested in and believe that’s the way a utility in Palo Alto should operate. This model that we have, we believe, will meet and beat some of Utilities Advisory Commission 11-01-00 Page 19 our competitive threats. We will be able to retain high levels of customer satisfaction and loyalty and continue to provide superior financial returns to the City. We have summarized our mission here. I think it is quite clear and would not leave very much ambiguity. To provide the maximum benefit to the customers of the City of Palo Alto Utilities and to be the preferred full-service utility provider. We are one of the few, if not the only, municipal utility in the State of California that provides electric, gas, water, waste water and currently dark fiber. All of those are opportunities for the future and that’s where we see our being a full-service utility provider. We’ve gone through and looked at all of the key objectives that we should be focusing on. While some of these sound and look very familiar, I think it is important to reaffirm what we are here to do. Enhance customer satisfaction by delivering valued products and services. Invest in our utility infrastructure to deliver reliable service. Provide superior financial performance to the City and competitive prices to our customers. To identify and maintain the unique advantages of municipal ownership and there are many. I will not attempt to read every one of these but the key seven strategies are very important in how to achieve these objectives. We have to enhance our distribution reliability and we have to do it so there are competitive costs. Preserving a supply cost advantage. Streamline and manage the business process. Deliver products and services for the competitive market. Attract and retain employees with critical skills and knowledge. Maximize the owners’ value and maintain financial strength. Implement programs that improve the quality of the environment. We’re not going to be able to do this without having a clear and supportive communication and outreach to all of our customers explaining what we are doing, soliciting their help and support, and understanding of why we are doing this. Here are our recommendations: approve the City of Palo Alto Utilities Department Mission Statement, Key Objectives and Strategies. Forward to Council for review and approval. Recommend that the City Manager direct the completion of an implementation plan including proposed governance, policy and organization changes, financial projects and impacts, it is important that you see what these benefits both in the financial and the operational side, and if there is any resource requirements that those be articulated and included in the recommendations. I’ve summarized those. There is far more detail in your package. I solicit your questions. Ferguson: Just at the top here let me make sure we understand what action you want us to take and the relationship with what I see is now four different documents under this heading. First let’s just enumerate the documents. We have tonight’s November 1 slide presentation called the Strategic Plan. In our packet we have under Item 2, the report asking us to approve the Utilities Strategic Plan which runs about seven pages. That is Utilities Advisory Commission 11-01-00 Page 20 followed by a more detailed earlier version of something called the Utilities Strategic Plan, that’s bullet points one through seven. Then a fourth and final document called the Context and Purpose of the Strategic Plan. So if we were to approve the Staff recommendation tonight, are we approving the contents of all four of these documents or does one amend another? Dawes: I couldn’t find the fourth one, Rick. Ferguson: In the packet following the bullet points that we’ve seen a couple of times before. Strategy four, five six, seven pages. Dawes: Okay, I viewed that as part of the…. Ferguson: There is a third part after that called Context and Purpose that we’ve never seen before. So is the request to approve the November 1 summary and carry that to Council with the rest of this as interesting background. Ulrich: Yes. Specifically the recommendations that are found on page two of the report dated November 1 where the subject is Approve the Utilities Strategic Plan and direct the City Manager to have Staff return with an Implementation Plan. Everything else that you mentioned is clarification, information and some detail on it. Specifically we are asking that the Staff is recommending that the Council approve the City of Palo Alto’s Utility Department Mission Statement, Key Objectives and strategies. And two, direct the City Manager to return with an implementation plan that includes proposed governance, policy and organization changes, financial changes and impacts, resource requirements and other related proposals to enable the City of Palo Alto Utilities Department to continue to function effectively as a customer driven and competitive business operation. Ferguson: And you’d like Council to get that proposal from you on the November 13th? Ulrich: That’s correct. Ferguson: Okay. Let me divide our discussion into two parts then. If there are Commissioners that would like to comment on the high-level implications here of request one and two, let’s have that short high-level conversation first before we jump into some of the details of the individual paragraphs or bullets. Any comments on the high-level requests on page two? Dawes: The only question I have is with this very short time schedule it basically I have a lot of comments about it. I don’t know if anything is going to get incorporated in here or you are going to ask for an up or down recommendation of UAC endorsement, or is it endorsement with changes. How do we come to grips with this? Utilities Advisory Commission 11-01-00 Page 21 Ulrich: Well my belief is that we’ve had discussion in May on this subject and some of you participated in the discussion with the City Council, and we’ve attempted to incorporate all of those questions and concerns in the documents that you have. What I think the strength is at this point which I think would allow you to approve this, hopefully unanimously, is that we would like your support to move ahead and develop the implementation plans. So the devil is always in the details and you would have opportunity to critique and to modify or do whatever you wish in the implementation plan. I think the key thing here is, do you believe that it is appropriate for us to go off and do this because of the external marketplace and the potential benefits that would be gained to the City by having a organization that is more akin to the way the competition works rather than to have it as it currently is function more as a department in the government structure of the City of Palo Alto. All of those things can be debated and worked on in the implementation stage. I don’t think it is appropriate for us to go off and work on those if we don’t have your support and conversely the City Council’s belief that this is the appropriate thing for us to venture off and do. Ferguson: Any other high-level comments on the direct request or the process? Mr. Rosenbaum. Rosenbaum: I’ll make an overall comment. I sat through the development of a Comprehensive Plan for the City, as did Council Member Beecham. I tend to see this as the same sort of document. John spoke of the devil being in the details and until you get to the implementation, in my view, there is really nothing to dig into. I think sufficient time has been spent on developing the current recommendation and we should be ready to move on and get to work on the real meat of it. Ferguson: Any comments? Okay. I have no other comments on the high-level so let’s proceed to any particular bullet points in the proposal that anyone feels strongly about correcting or adding since our last two visits here. Mr. Dawes. Dawes: This may be a little on the late side but frankly in the Mission Statement I’m concerned that some stakeholders are conspicuously omitted. I think that, at least from my standpoint, the employees of the enterprise and the City as owners are important elements of the Mission Statement. In other words, I see one of the major reasons for this continuing on is to provide the benefits which it has provided the City over these years and it doesn’t exist simply to please our customers and to do a good job, provide service levels and low costs for our customers. It also is there to provide a return for the owners, the City, and indirectly the citizens. I think also it is not uncommon in Mission Statements to include a nod to the employee, management, operational employees of the enterprise and providing a stable workplace with opportunities for growth and advancement. So I would simply say that, to me, it is too limiting and I would like to see a broader one. Utilities Advisory Commission 11-01-00 Page 22 Moving on to some other specifics. As I mentioned, John, in an e-mail and I’ll pass this on to you. I recently participated in a lengthy process which resulted in a blue ribbon commissioned report for the National Association of Corporate Directors called the Roll of the Board in Corporate Strategy, which I find exceedingly…it’s brief, it’s got big print, it is very direct and has war stories. I’ll pass it on to you as an aid here. Looking at some of these other issues, in the strategies to accomplish key objectives you talk about maximizing the value of CAPU. To me, that’s like saying we’re going to get the stock price as high as we can and that’s not really applicable here. What we are talking about, or what I think about, is maximizing the transfers. In other words, it’s a cash flow look rather than a market value approach. We should be talking about maximizing cash flow from operations rather than market value. I also think that we are ignoring, this whole thing ignores, the fact we are actually in the generation business today. It talks about distribution objectives but I think we should be talking about generation objectives not only with respect to what we have, the Calaveras Project, but that we should be keeping a major open mind. This is under strategy 1, I’d put an objective 1B which says, to investigate expansion of generation resources to add to our Calaveras resource. Given the situation we have in the state I see no reason why our strategic objectives should foreclose being in the generation business either by ourselves with a box out in our parking lot out on the other side of Bayshore or in tandem with some of the other large munis having a bigger box someplace. Or maybe even joint venturing with some of the Enrons or whatever of the world to bolster our ability to have resources available to ourselves. So I wouldn’t be so narrow as you have shown in Strategy 1. I’d also add under Strategy 2 that we should be working effectively with our Muni agencies and CPA and BAWUA. They are very important to us in terms of our strategic survival, long term growth and so forth. Under Strategy 3, Streamline and manage business processes, I guess I would be more sort of global in that look. Rather than talking about service level agreements with the City departments I’d talk about optimize the organization of support functions for cost and efficiency. That covers the bailiwick of working with City agencies or bagging it and going back to the old way and having our own or even sub-contracting them so that we’re not in the business at all. But be more general in that regard. I’d talk about our abilities to ….under C I’d reword it rather than reviewing the City Charter for changes I’d say, propose and obtain approval for City Charter changes which could improve utilities success under deregulation. More proactive in that regard. I’d make part of C, F, which is investigation of the regulatory process where confidentiality is possible. Utilities Advisory Commission 11-01-00 Page 23 Under Strategy 4, Delivering products and services, as you went into this I get very excited about changing lemons into lemonade with respect to distributed generation and envisioning us using our financial power in terms of our investment grade paper, our tax exemptability to issue paper, to actually go in the business of owning and operating distributed generation facilities for some of our large customers. In other words, instead of competing with us we are helping them compete and up their reliability all on a basis where we are making margins on the use of our capital and the use of our people. I don’t get that flavor in that strategy. I would certainly urge that in there. Strategy 6, Maximizing the owners’ value and maintenance of financial strength, you talk about monitor, monitor, monitor. I’d talk about maintain stable and growing transfers. You are not just looking at it; you are going to do it. And similarly with B, maintain reserves within established guidelines, goes back to our discussion earlier about the gas situation. Rather than just monitoring them and say, oop we’re off the chart, we ran out of money, we’re negative, you say we’re going to maintain them. And B, we are going to balance transfers between enterprise funds to provide flexibility. I think that’s certainly a long term goal of mine is to get out of our little box of having people, the Johnson’s of the world, complaining that the water fund is getting raided and so forth when we could be looking at this thing as our financial….our balance sheet as an integrated entity and the financial strength of the whole company, and being able to afford a dividend flow commensurate with our entire operation rather than cherry-picking each little guy. F, instead we are evaluating economics, we’re optimizing the economics of buying rather than leasing property. And that goes to this maybe setting up a leasing company to facilitate our customers getting into distributed generation issues. Anyway, I’ve rattled on here quite at length and actually I have a heck of a lot more here but time is wasting. Perhaps I’ve done enough of it and I think you get the idea of how I would propose strengthening this as a document. I think it is still a little flabby and wishy-washy. Ferguson: I’d like to ask Councilman Beecham for a little guidance. What, other than a straight up approval, what could we do tonight that would be of incremental benefit to Council when it hears this on the 13th? Beecham: Curiously, that was running through my mind as well. When the Council reviews this, the Council I expect will recommend to the Utilities Department any changes that Council thinks are appropriate. The Council, I think, will appreciate the advice of the Commission. It is best if the advice is clear. One thing certainly we can do is just read the minutes and pick up everything. If there are certain points the Commission as a whole wants to emphasize it helps to have that pointed out to us. I think the types of comments being made so far will be useful to us. At a minimum I would urge you to continue that kind of comment and discussion. If it is possible for you to key in on certain improvements or changes or issues that need to be identified and resolved, picking those out clearly would help. Utilities Advisory Commission 11-01-00 Page 24 Ferguson: Thank you for that guidance. With that, our former Councilman Rosenbaum, now Commissioner Rosenbaum, do you have some comments? Rosenbaum: As I mentioned earlier I went through the Comprehensive Plan process and my forte is not in changing the wording. I respect what Dexter has done and I’m trying to see way in which we can make direct use of that. I think Dexter has great experience in just this area and formulating Mission Statements and Strategic Plans. But given the schedule that the Staff has I’m trying to think of a way to incorporate those. Would it be possible for you to type up a list of suggested changes and present it to the Staff and have that go forward with the Staff report? Dawes: Sort of minority report? Rosenbaum: I wouldn’t say it’s a minority report. I have no objection to anything you said and I think it does strengthen it. I respect that the Staff has spent a great deal of time. Different people will come to the different wordings and different emphasis. I think it would be helpful to Staff that is Staff might well want to incorporate some of your specific recommendations. It’s a little difficult for them to pick it up in this manner. Dawes: Be happy to. Rosenbaum: If we could get something from you to Staff on a timely basis I think it would be very helpful. Rather than us going through one by one your recommended changes. Ferguson: Thank you. Mr. Carlson, any comments on the bullet point presentation? Carlson: The only comment I have, and I’m not sure where it is, I just want to be very sure that in the end we in the Council have a good picture of what this utility will look like post 2004 when the major change in the WAPPA contract and in the water capital improvement plan is fully implemented. I think it is a dramatic change and we need to look at exactly what it means both financially and then also what the secondary implications are. Ferguson: I’ve got one strongly held preference although it could be implemented in many different ways here. That is, as I looked at tonight’s slide presentation I don’t think I saw the word “telecom” or “data” at all. I think it really does need to be raised up on the short form for several different reasons. One, let’s just start with the Mission Statement. We talk about becoming the preferred provider for full-services utilities. That implies a kind of bundling which we’ve talked about before and there are lots of advantages to that. I think we have a wonderful opportunity here in the sense that AT&T is now dividing itself up into four companies and one of the reasons for that giant strategic change at AT&T is that they discovered that bundling all the telecom related Utilities Advisory Commission 11-01-00 Page 25 services didn’t turn out to be a strategic advantage at all for the company over the last year. Crazily enough the interesting bundling success was bundling long distance service with coupons at Jiffy Lube. That is to say there is creative remarkable surprising kinds of bundling that are going to pay off better than the ones we kind of rationally expected. I think telecom related bundling, data communication related bundling, is one of our best prospects for growth. I don’t think it is a slam-dunk. I don’t think the business case is made yet. But I think it deserves a place here at the high-level summary bullets. Another good place to consider it is when we talk about, I guess it’s your slide 7 where you talk about the large financially powerful firms that dominate the energy industry. We look at Enron and Williams and we got two companies here who have made enormously powerful strategic decisions to build data businesses. That should tell us something about the linkages between companies in the energy business and the way they think of their future and the way we should think about our future. I agree completely that energy belongs at the top of all of our priority lists but we just completely lost the data and telecom component here. A final comment on the recommendations. Something in me wants to see a slide for each of the three recommendations with the final recommendation summary wrapping it up. For example, under the proposed governance policy and organizational changes I think at this high level you might include a slide that talks about such things as keeping inside the City the distribution business and spinning off to some kind of hybrid organization the supply business or the network administration business. Give a picture or snap shot of what we mean by governance changes. Another option is to include bullets like Grant’s memo here. Financial projections and impacts, I think even at the high-level presentation a couple of “for example slides” that talk about financial projections if gas prices keep marching up, financial projections if we have to buy our own local generation or pay a particularly high charge to solve the transmission problem. Or again, just one snap shot summarizing the fiber business plan talking about the dark fiber prospects as well as the best case and worst case lines on a residential build-out. I’d like to see most of those things addressing the prospects for telecom woven into the top-level presentation. Past that, at the last meeting I asked for a set of clear bullets about what really are the competitive advantages of a municipal ownership whether it is energy or fiber. I was pleased that on page four of the Staff report there is a pretty good set of bullets there, competitive advantages of the City of Palo Alto Utilities. I think that list of eight or nine bullets is worth putting in the high-level presentation. Some sub-set of those are advantages that are unique to Munis. Whether we are talking about growing a variation of the electric business or growing a variation of the fiber business, we are going to need to keep coming back to those unique advantages because those are the things that are going to push our business plans into the believable zone. They will be there because just as a favorable energy prices have helped us run the electric utility, those are the kinds of advantages that will make business plans more believable and more saleable to Council. Utilities Advisory Commission 11-01-00 Page 26 So with those suggestions for additions and emphasis and content to the high-level plan, I’d be prepared to support the recommendations. Any other comments? Rosenbaum: In the text, I assume will be the report that goes to Council. On page three, the first bullet, under the heading Marketplace Changes Erode CPAU Advantages we have, “Changes in the federal government contract will result in a significant reduction in Palo Alto’s electricity commodity price advantage beginning in 2005.” In reading the minutes from last month I think this is the one that led to some discussion about Bern taking some hot milk to relieve anxiety. I think with good reason. I don’t think that’s a correct statement. I believe the Utility Advisory Commission has had some discussion about this before. That with some minor reduction the energy we are going to get is the same. Western has been firming up this energy. They are not going to do that, we’re going to have to do it. You know all the arguments. Western has been going to the market. We’re going to go to the market. So price volatility may well be an issue but it seems to me that to the Council and other lay people who read this it is precisely the wrong information. Is there any comment from Staff on that? I know you are trying to make a case but I don’t think that’s an appropriate bullet to use. Ulrich: I think you are seeing it differently than we intended. I believe that what we said is very true and we articulated that in our report to the Finance Committee and the City Council on its approval for our base contract with Western that they approved just last week. What we meant by “significant reduction” is that we cannot take the firming at a favorable price because of the contract that Western had with Pacific Gas & Electric in the interconnection agreement which had accounts in it where they were able to store energy in a bank account. That has been depleted or will be very soon. That part of the firming is not there. I do not think that it is being over dramatic by saying that significant reduction in the commodity price advantage is not true. We’re not trying to scare anybody but you’ve got to remember that the City of Palo Alto’s major commitment in its contract with the federal government assured us virtually or close to 70%-90% of all our energy needs because of the great decision that was made 40 years ago. So for Palo Alto that change in the Western contract will probably be more significant that other municipals because of our high percentage of Western. So again, it was not an attempt to scare anybody but I think there is a case for being concerned. That’s why we developed and will pursue a plan to find alternatives that are very good for the future and not rely on somebody else firming for us or just waiting around for that to come to pass in 2004. Rosenbaum: Well, maybe it’s the definition of significant. What’s going on in the industry and what happened to the customers of San Diego Gas & Electric, that’s significant. We’re not anticipating difficulties with the interconnection agreement or that going away. I think that’s __________ might expect. Utilities Advisory Commission 11-01-00 Page 27 Ulrich: I think my role and attempt here is to emphasize the need for a strategic plan and to get on with organizing so we can be as effective as our competitors. This particular point is extremely important. We’re finding every day letters and correspondence putting the preference issue up at a very high level of consciousness throughout the United States. That is something we don’t have a whole lot of control over and may not. So I think it is important to bring these potential risks up not to foretell that they definitely will happen but I think it is something we have to be very aware of and work to mitigate. Rosenbaum: All right, I won’t pursue that point any longer. The second one is one that has always been of interest and UAC has discussed it before. Improving distribution reliability. We always say we are going to do this. Why is this going to keep an energy customer who can buy the energy for less from someone else? Ulrich: As you know energy is divided into two parts here. We have the supply side that we have open access in Palo Alto. One of the few municipalities that do that for very large customers. So if our price of our commodity is higher than somebody can deliver it well a customer will quickly go to that. The other key component that has come up very clear to us fairly recently is the reliability of the supply which is basically controlled by how reliable our distribution and delivery system is. Whether it is PG&E’s transmission or the ISO allowing the energy to come here or our distribution, that’s where I believe the competitive advantage is going to be for those of us that invest prudently in a reliable distribution system so we can deliver it. That doesn’t mean that we’re not reliable now but our customers frankly are willing to pay for a higher amount of reliability to their business. The loss of business is significant when they lose power for whatever reason from the City of Palo Alto. I believe that is a strategic advantage we can have by making our service reliability meet what the customer wants and will pay for. That was the reference to the reliability side. Rosenbaum: I guess I’m looking for quid pro quo here. We can contract with the customer to provide facilities within their buildings to improve their reliability. We can make improvements in our distribution system and the customer can pay for that and then go off and buy the energy somewhere else. On the other hand, if we say we will make these improvements if you sign a contract for a certain length that might make sense. I’m not getting that from your comments. Ulrich: Part of that is I don’t deal out all of our hands in this environment. I think there is a strategic advantage in doing some of the things that you are talking about and some of the things that Mr. Dawes talks about. I have to assure you that we think about these things very, very clearly and all of those things that you mentioned are things that we would be prepared to do. Rosenbaum: All right, that …. Ulrich: Plus several others. Utilities Advisory Commission 11-01-00 Page 28 Rosenbaum: Fine. All right, I know you are always thinking one step ahead of us, John. Ulrich: I work in an environment where you keep a lot of your trade secrets and not spread them around. But I’d be glad to discuss some of those. You are right on point with your observation. Thanks. Ferguson: Okay, that said, Mr. Beecham. Beecham: If you don’t mind I’d like to go through probably a laborious process perhaps. I’ve got comments, not so much on the slide type description of the plan but more on the text in the Staff report. With your tolerance I’d just go through and make either comments or questions in the text. For example on page three in the top paragraph it does say in the last line of that paragraph, “customers will leave or take services from other providers if those expectations are not met.” How readily do you think customers will make a decision to leave and go to another provider? Presuming that their decisions are based on reliability, on cost, on convenience, and I presume on other factors as you mentioned 24/7 on service and things of that nature. Ulrich: Would you like comments back? Beecham: If you can, yes. Marshall: Currently we know of customers that are not leaving our system but are providing themselves with full back up generation simply because they don’t want to skip a minute or even a cycle of power. So the leaving currently isn’t going to be to go to somebody else but to start providing for themselves and there are some customers that have set this kind of generation facility at their facility in order to provide themselves assurance that they would not lose even a minute of power. Such customers as Alta Vista. So that’s the current threat. I assume as our Western advantage becomes maybe less than it is now prices may go more towards market then you have other reasons why they might choose to leave. I don’t those are things we have to deal with immediately. I think it is more provide the 100% reliability in the power quality so they can do their process that are so delicate and require such good service. Beecham: So as you talk about leaving, one part is they will spend additional resources on their own for backup which is not necessarily leaving our system but is an added cost for a customer that if we can help them avoid that would be nice. Marshall: You are correct. If we could do that for them we could probably do it cheaper and probably better. The other aspect is once they got a gen set sitting there they would Utilities Advisory Commission 11-01-00 Page 29 start thinking about using it more. So by doing it ourselves that is something that we can avoid. Ulrich: Part of this is being able to sit down with a customer and listen to what they need and then be able to react and provide support and service whether that’s an engineering detail to do the analysis to see what’s the benefit of the customer and to the utility and then make a decision to go ahead and do it. Some of those may be a financial instrument help them with a long term contract that they pay it back. All of those things currently take a very long time under our current policies to be able to do that. So that would be an example of how we could go in solve this and have a customer for a long period of time. They’d be happy. Beecham: I do know, John, that as part of your objective that we become as light on our toes as a ballet dancer so we can react quickly to whatever our customers request. But as you talk about customers leaving I’m not sure that I didn’t hear customers either a) physically leaving and going someplace else or b) they take power from an alternative supplier. Ulrich: Both of those are possible. Part of the thing of leaving is that one; they may never come here in the first place. We’ve had examples of, which are not necessarily related to the utility, where somebody comes here and wants a particular type of service and if they can come and be assured of it then they’ll make their financial decision to move and put that load into Palo Alto. So in this case we’re probably not as explanatory as you’ve led our discussion to be. We probably should write some of the words in there a little bit more clearly because leave means not be connected at all or leaving and doing it themselves or in some cases getting up and take their business and go somewhere else. I think the last one you alluded to was some other way for a competitor to directly connect to that customer. Beecham: As you mentioned, I would like to get some idea on the probability of each of those happening. More realistic risks or more highly probable risks we need to respond to more clearly than those that are less likely. Ulrich: You’ll notice through this that there is not a clear timeline when some of those things will happen. Some of these can happen now, some will happen more as our prices increase or other factors come in. What we’re again trying to show here is that it is not just the same old business any longer not to get into the details of when those things might happen. Our point is to let’s change and to put all the processes in place so when they come next week we can do it, or if they come two years from now we can do it. Beecham: Also, Rich mentioned that some customers may never come. One thing that came up recently at a NCPA meeting, I think, was that Santa Clara Power or Silicon Valley Power of Santa Clara their energy requirements this past summer was significantly higher than their projections because of new demand coming in. I’m happy Utilities Advisory Commission 11-01-00 Page 30 to see that Palo Alto’s forecast was pretty exact. We didn’t have any surprising new demand coming in. So for Santa Clara they had new users coming in and I don’t know if they were server farms or of what nature. Philosophical question is, how much do we want new customers especially when part of our issue now is in fact procuring sufficient supply and a part of the future may be the additional marginal power that we get is at a higher cost than our average power? Ulrich: All those things are important. You could theorize that there are some classes of customers that you’d very much like to have because they help us in our load shape and we’re able to buy energy at a much cost because their load demand is at a particular time of day or particular month. That’s many of the reasons why we should be looking at our self as an energy company as opposed to electric and gas and water uniquely. You look for those synergies that will help someplace else. So part of that would be a business development plan where you are looking for particular types of load and you work with the community and zoning and planning ordinances to be able to facilitate those type of changes. Beecham: Moving down, and hope this isn’t too nit-picky, as you get into the bullet points the second bullet point talks about electricity prices increasing in California. I would think you primarily mean wholesale energy prices. Since for example and other constrained providers they are not yet passing those prices on to their customers. At least not clearly. Ulrich: That’s the way I read it when we put it in there and Gary has just confirmed that. Beecham: Coming down to the second to the last bullet you talk about customers, and I would say some customers require higher levels of reliability and will buy it any price. You might find some other way of putting that since that’s Ulrich: We studied that and if you listen to some of our customers the kind of number they throw out as the alternative to paying for service reliability is so astronomical that it virtually reaches at so-called any price. We’re talking half a million dollars to five million dollars an hour for a loss of power even if it’s for a few milliseconds because of whatever their process is. That was not intended to be too dramatic but it is awful close. Beecham: You might want to clarify that as you just described it. That rather than lose it for four milliseconds or for a few minutes they are willing to pay substantial additional price for that value. That’s part of the reliability that you’re talking about. In the last point you talk about advances in distributed generation. You quote up to 90% of our load entirely at risk. Marshall: When we say entirely at risk we mean both supply and distribution. The numbers are just simply run from the size of the generator that is now available. This is Utilities Advisory Commission 11-01-00 Page 31 more theoretical than actual at the moment. We say as small as 100KW, they are down to 30KW at this point. So if you look at our load 90% of our customers at 30KW or larger load. So those would all be able to set a gen set at their facility if they so chose. You could set three or four and you don’t need a system backup. So the potential is there. I’m not saying it is going to happen or that they are all going to want to do that but the potential is there. Beecham: Just because there is a technological possibility would still not lead me ever to conclude that 90% of our load is entirely at risk. There are so many other factors in there in terms of the Bay Area Air Quality Management District allowing it, practicalities, do they have places to put the equipment. As I go through this I’d like to be sure that whatever I read I entirely believe and at this point I can’t entirely believe that. If you still believe it is entirely true then please convince me of it but at this point I’m not convinced. Marshall: As I said it is a technological possibility and that’s what is intended to be said here. Not that it would happen or that it’s a high probability that it would happen. Beecham: In that case I find that not to be a very high value statement in the document. I want to know what is realistic. I do appreciate that DG is getting much better than it used to be and that in fact we should look at it as options in serving our customers. But still to say that that’s putting our load entirely at risk kind of costs a little bit of credibility in at least my mind in how to interpret some of these things. On the next page the first set of bullet points, the third to the last, electrical reliability is in the upper quartile nationally. Do you have any estimate of what it is locally? Marshall: The only document that we have that tells us about this is the TBA study that was done in 1996. It was a national survey and that’s all we have. Ferguson: Councilman Beecham, let me interrupt here just for a second. I’d like to make best use of time particularly since we have a bunch of people in the audience that want to address the Fiber Business Plan. Can we interrupt this and finish this after Fiber Business Plan? I agree we should make a record here of ….. Beecham: For myself, I’m happy just to sit down with Staff and go over these comments as well. There is no need for me to do it here publicly. MOTION Ferguson: Would you be willing to put together the same memo as Commissioner Dawes? If you are willing to do that then let me propose that we just have a motion to approve the Staff report here with the understanding that the Staff will to the greatest extend possible reflect in the written document to Council the comments and additions made by the Commissioners tonight, and to the extent they can’t be incorporated into the Utilities Advisory Commission 11-01-00 Page 32 bullet points per se, that you just do a good job of excerpting the minutes for the benefit of Council. I’ll make that motion. SECOND Rosenbaum: Second. Ferguson: Any other comments? All those in favor? I’m sorry, Commissioner Dawes had a comment. Dawes: Could you restate what the status of these appendages are, Council Member Beecham’s and myself? Ferguson: Yes. The understanding here is you are going to prepare a memo reflecting your comments as well as the comments that we didn’t get to tonight. And it will be appended to our recommendation to proceed to Council with this. We are inviting Staff to incorporate them directly into their materials and to the extent they can’t Dawes: I will vote aye to the motion. Ferguson: Any other comments? Public Speaker: Are you accepting public comment? Ferguson: Public comment on the Strategic Plan? Public Speaker: Yes. Ferguson: Fine. Arthur Keller, 3881 Corina Way, Palo Alto: I’ll be brief. A couple of comments. First of all I didn’t hear anything about conservation the whole discussion tonight. I think that should be conservation – reducing usage – saving energy. That should be an important part of what you are talking about. Second thing is about distributed generation; I didn’t hear anything about the impact on the environment of distributed generation. The third thing is the City Utility is very good about having a process of electric generation through solar power. I actually did some research on that. I found out I could put 8KW on my house. It would cost me net of the four dollars a watt that the City will give me as a rebate, $50,000 to do so. I don’t know how many decades but at least it was more than the life of the house is expected to be till I receive that money back in reduced energy cost not withstanding the expected increase in electric charges. I think things like Utilities Advisory Commission 11-01-00 Page 33 that might be considered since the process of solar power has a great benefit toward shaping the load as was mentioned earlier tonight. Thank you. MOTION PASSES Ferguson: Thank you very much for your comment Mr. Keller. Okay let’s see if we can wrap this. All those in favor of the motion? (ayes) It passes 4-0. Rosenbaum: For Mr. Keller’s benefit I don’t know whether you had an opportunity to look at the report but strategy seven does address exactly what you say, implement programs that improve the quality of the environment. How this gets worked out will be part of the implementation but it is certainly included here. Mr. Keller: Thank you Mr. Rosenbaum. Ulrich: May I just make a process statement? It is important that your participation and support be heard at the City Council meeting. I will commit to giving you a copy of the recommended changes from Mr. Dawes and Mr. Beecham and others that you might have and put those all together before this is all finalized and send it to you so you can have a good idea of what is in the report. You would even have an opportunity to give me comments back before we finalize it and put it in the CMR so that you see what is reflected in your comments. It is important that you feel comfortable with it and that we are representing the views that you have. Ferguson: I’d like to propose that we take a strictly limited five-minute break here. We are at the two-hour point. But before we do, for the members of the public that wish to speak, I have one note here from Arthur Keller on the Fiber project. We are going to have a slide presentation of the revised Fiber Business Plan. Would you like to comment before that or would you like public comments after you see the slide show? After the slide show? Okay. Let’s take a strict five-minute break here and we’ll start with the slide show on the Fiber Business Plan. Thank you. BREAK 4. Fiber Business Plan Ferguson: If anybody else wishes to speak on item 3, the Fiber Business Plan, at the close of the slide presentation, please pass a slip up here to one of the Utility Staffers. Leo do you want to just launch into it? Creger: What I’d like to present is really a revision to the plan from the last meeting in October. It has undergone changes in lieu of the recommendations made previously as well as some other thoughts as to how to present this and an argument to support what it is we want to do with the fiber business. Utilities Advisory Commission 11-01-00 Page 34 We start off by calling this a fiber utility. I think that is definitely more indicative of what we want to be. Not just necessarily a dark fiber lease service. The Mission Statement, Be the premier utility of fiber optic services in the City of Palo Alto with a high level of commitment to the community. Offered services will have high customer value with quality of service that exceeds our customer’s expectations. The market summary, somewhat similar to what you had seen previously. The City of Palo Alto’s dark fiber highway is a reliable infrastructure that enables the interconnection between telecommunication service providers and City of Palo Alto businesses. There are multiple service providers that lease dark fiber from the City of Palo Alto to market their services to local businesses. These service providers tend to focus on potential customers fitting specific revenue characteristics. Due to financial profiles that they select many small, medium and home-based businesses are not being served or even solicited. Many growing City of Palo Alto businesses may also rely on the dark fiber as a means of providing facility interconnectivity between their buildings. The fiber business unit offers a high level of expertise in the design, construction and operation of a fiber optic communication network. Businesses contract with the City of Palo Alto to install and receive access to a dark fiber network with high reliability. There are many reasons for this motivation including to provide a competitive high quality service for the City of Palo Alto, to fill a void in the Palo Alto telecommunications market with a locally owned, managed and operated fiber utility in lieu of some of the comments we’ve read we really value the importance of this, leverage on similarities in operating an electric and telecommunications utility which when combined may provide for improved asset utilization and efficiency, and to generate revenues to be added to the City’s General Fund. The issue of risk. We must realize that a municipal owned fiber utility is a new business concept. There are inherent risks. Competition has a growing number of companies that are trying to become a part of this business every day. I know it; I’m getting the calls. Technology shifts are also a risk. What we have today in terms of single mode fiber, infrastructure, equipment, the technology shifts can actually be competition. Service failure. The risk that the venture could fail resulting from system failures, inadequate customer support or lack of planning. That is a risk. The financial risk. There is the risk that the venture may not generate the revenues to cover the implementation or ongoing support cost. I’d like to talk a little bit about the competition. They vary in type from the local exchange carriers to wireless solution providers. They compete by providing services to companies based on global alliances and national service agreements. They also compete by leasing limited fiber infrastructure and using technology to maximize lease bandwidth to a larger number of customers. Something when the fiber plan was first developed Utilities Advisory Commission 11-01-00 Page 35 probably wasn’t conceived. As equipment and technologies continue to evolve present equipment and infrastructure can become obsolete. Dawes: Can you disclose specific names of these competitors or no? Creger: If we think about how we minimize these risks there are a couple ways. In the risk of competition many companies out there provide bundled services and charge by bandwidth. We have a different model and I’ll show those models here briefly. Their customers are solicited selectively. We don’t target a specific customer. We want the open access. We want any business to realize they can come to us for service or we want to go out after those businesses. The criteria that the competition uses typically leaves out a large number of small, medium and home-based businesses and dismisses any fiber to the home program. It is not in their interest to do that today because they have revenues they want to generate for stockholder value. We don’t have that same scenario to achieve so again, we have a means of minimizing that risk. Service failure, our dark fiber leasing program has had customers for over three years without a single connectivity failure. We need to build a fiber utility staff to assure continued high customer service levels. That’s imperative. To minimize the financial risks, knowing that the existing leases for the dark fiber are sufficient to cover the initial project investment and that future growth from this point on will lead to additional revenues for the City above the initial investment. [Bear] model. What I show here is a typical model of the competition where they are a single service provider. The page shows four single customer connections. For the City of Palo Alto their backbone, two strands of fiber leased, one customer connected to the City of Palo Alto. A common package provided by the service provider can include Internet, installation and bandwidth leasing. The technology out today can support many more customers than the four you see there on the existing lease pair. In our model the single service provider or the exchange if we think of the Palo Alto Internet Exchange will service single customer connections similarly. The difference here is with us in this scenario we have eight leased fibers for the City of Palo Alto and we connect four customers thereby diversifying our customer base, minimizing the risk of any single industry affecting us more than another. When we lease the dark fiber to the customer, the customer is responsible for the equipment to generate the desired bandwidth. The City of Palo Alto will charge a fixed price for the fiber regardless of the bandwidth used by the customer. So what is the difference? Well, in their model as the demand for bandwidth or Internet usage increases their revenues should ideally increase. As bandwidth compression equipment advances they are able to support more customers without increasing their leased fiber requirements. In our model, our increase in revenue is dependent on the increase of customers leasing the dark fiber. We lease dedicated secure fiber at a fixed cost regardless of the bandwidth increases the customer requires. Utilities Advisory Commission 11-01-00 Page 36 What’s nice about this for the customer, for them to increase bandwidth becomes a one-time customer expense to upgrade equipment that they use. Ferguson: Leo, can I interrupt right here because this is the right place to answer this question. How in the world do we enforce the use of our model as against their model? Why doesn’t everybody just gravitate to their model? What is our ability to induce if not enforce the use of our model? Creger: The two big ones that I mentioned there. One is the secure fiber. A customer likes, believe it or not, even though you try and convince them that with virtual networks and even though they are sharing bandwidth on fiber that their path is secure to them only they still have the notion that if they are the only ones on that fiber they feel secure knowing that only their access to that fiber is going to be allowed. That is one thing we offer. The second one is back to the bandwidth side. If they want 100-megabit bandwidth connection, they buy the equipment to do that. If they want a gigabit bandwidth connection, they buy the equipment to do that. We lease the fiber to them at the same cost regardless of their bandwidth requirement. In the competitors model as their bandwidth requirements go up their lease rates go up. The more bandwidth they use the more cost. Additionally, the difficulties are the time delays that might be experienced in provisioning additional bandwidth when you have multiple customers on those fiber strands. There is some more effort involved in making sure that that bandwidth is available for them in the shared fiber model. Ferguson: Thank you. Creger: What do we need to do? We need to establish a fiber utility and augment the staff to support marketing and increased customer requests. We need marketing sales representatives, estimators, planners, administrative support, installers and maintenance support. We will continue to have ongoing interface with the other departments within the City, Finance, Public Works, people who assist us today in our fiber endeavors. We also need to market, market and market. We need to focus on the unsolicited businesses to secure long-term leases. Those will include small, medium size businesses, home-based business. We need to try and provide alternatives for construction and installation financing. One of the roadblocks to a smaller company establishing fiber service with the City is the large interconnection cost they might incur to hook up initially to the fiber. So if we are actually creative in trying to work with them to finance that with them, that would be a solution that we could offer. We need to conduct some marketing research and review the legal issues related to developing a high speed internet service for businesses with minimal employees. So for those companies that have just a few employees and could never envision needing a gigabit bandwidth, do we want to pursue that other model for those type of businesses if they are not being serviced today? That is something we should do some research and Utilities Advisory Commission 11-01-00 Page 37 look into down the road. We need to investigate partnerships with businesses by providing infrastructure in return for a percentage of revenue. That might be another avenue that we can pursue. We need to leverage our dark fiber to minimize the proliferation of other networks being installed in the City. We already know of two major carriers that will be doing installations in the City that we could possibly minimize some of the road dig ups and construction efforts if we were able to work a deal with them to utilize the dark fiber. My third item here of what we need to do, we need to proceed with a fiber to home trial. We need to do this for a number of reasons. One is to evaluate the construction methodology and determine feasibility for a citywide rollout. We need to determine what is required to maintain a high level of reliability in this system. We need to determine what the customer expectations are and their satisfaction levels with the service. We need to develop cost models and business plan for a citywide build-out. We need to determine if there are other services other than just Internet that are readily available and help those providers develop cost models. They don’t have cost models today either because they don’t have a place to put their service. We need to future-proof the network by building more than what is needed today. We need to uphold the image that the City of Palo Alto strives to lead technological change. I added this last one that I like. We need to market our lessons learned. We get a lot of demands from outside groups, other cities, businesses about what is the City of Palo Alto doing with fiber to the home. I think there is a big benefit in trying to share some of those things later on. Other opportunities. To expand into other fiber related services by leveraging current relationships with businesses and other utilities. Enhance the City of Palo Alto’s scope of service offerings by developing strategies to maximize the use of dark fiber. Develop a strategic alliance and partnerships with various service providers that can promote a mutual long term revenue stream and increase the City of Palo Alto’s scope of service offerings. Ideally, two of the big carriers coming in would be a possibility. If we could provide turnkey infrastructure solution and consulting services to customers without the expertise or resources to do this, that would be another opportunity that the City could offer. We need to investigate the possibilities to interconnect with neighboring fiber networks to increase the dark fiber utilization in the City of Palo Alto. Thinking of Silicon Valley Power, PG&E, other people who have dark fiber. We have customers who want to get other places. There are customers outside who want to come here. What are our concerns? I mentioned previously that the larger branded competition is here. They are starting to compete in our area. These larger branded competitors are typically the regional and national competitors that offer services we presently can’t compete with or they have a national agreement with some company to provide all their fiber services wherever they are. The increasing real estate costs will drive businesses to nearby cities. The impacts of losing a PAIX II facility to a neighboring city is big concern. High workload demands on the present staff. Marketing may bring in a customer that operations is unable to accommodate presently. And ourselves, the City of Utilities Advisory Commission 11-01-00 Page 38 Palo Alto has imposed policies and practices which may impede our ability to respond quickly to competition and the loss of key employees may result in lost accounts and lost expertise. As I mentioned before we have to build a group that is exciting, dynamic, fun to work at, to hopefully minimize those losses. Goals and Objectives. From previously 22 customers with 6% network utilization during initial efforts which is prior to 2000. In 1999, 45 engineering requests, over 180 to date in the year 2000. There is a comment here that a number of requests submitted this year were to develop cost estimates for our customers marketing efforts. If they had the cost information up front to go to a customer they were a few steps ahead and could respond to that customer’s demand a little quicker. So they have actually paid to have estimates done for key customers in advance. Break even revenue equals expenses was achieved in February 2000. Goals over the next three years. One million dollars in revenue in the year 2000 with 20% growth on out. I mentioned 20% growth, in the first two years we had 100% growth. It is pretty easy to do when you are going from nothing to a little and a little to a little more with the number of competitors that are in the marketplace we are going to see that the number of customers that are approachable will soon drop. We also think that there will be some implications of consolidation as some of these businesses tend to merge as they seem to do quite often. We may find that some customers fall out or other may join up. So what I’d like say is a 20% growth rate now is a good conservative estimate that supports the financial model for moving forward. I don’t think it’s unreasonable at this point to believe 20% is unachievable. A positive cash balance in the year 2000. Net income more than 33% of sales in the year 2002. Two new long term customers a quarter. Long term being defined as greater than a three-year lease. Most of them we are seeing now are five to ten years. Client diversity with less than 40% concentration in any single industry. And to expand our fiber into remaining areas of Palo Alto. The revenues and expense projection, if you recall last time I had discussed the fact that I was trying to pull together a number of the revenue figures for the year 2000. This is at this point our best effort and continues to be refined. For the year 2000 we are over one million dollars at this point. So in effect we have met our 2000 goal to date. What I would like to point out is the expense increase and the net revenue decrease that you would see in the year 2001 is based on the fact that I’m assuming that I will have a staff that grows from where I am today. Then it carries out from there. On the second graph there, net revenues and balance, which is the one that I am particularly more interested in. You will see the result of the 20% annual gross taking into account the expenses of the included labor, connection costs, and everything else that goes into the dark fiber program and the leasing there. By the year 2005 we are projecting a balance of four million dollars. Utilities Advisory Commission 11-01-00 Page 39 Rewards. Why do we want to do this? We want to provide another service to the City that generates revenue for return to the City of Palo Alto General Fund. We want to provide a highly reliable communication infrastructure for both the businesses and the residents in the City of Palo Alto. We want to provide a network that promotes and supports open access for service providers and a choice of providers for the end users. The satisfaction of knowing we created positive results out of what was once thought a highly unlikely venture. Lastly, we want to be recognized as a City with innovative programs, striving to set the lead for other municipals to follow. Key Issues. Near term, establish the fiber utility and the staff. Market, market, market. Refine our process within the department integrating a central management system to keep track of our customers. Evaluate our in-house and outsourcing capabilities associated with our fiber teams, our construction efforts, our consulting efforts. And we want to develop a beneficial partnership alliance for the City. Over long term, obviously continue to market. Integrate a fully capable consulting staff that will provide turn-key solutions, recommendations for prospective customers, be recognized as the experts in the fiber optic industry in the City of Palo Alto, use the revenues for expansion into remaining residential and business neighborhoods, and evaluate future service offerings as market conditions allow. If I can point out in the long term, that second from the last there, the intention isn’t to suggest that we would take the revenues from dark fiber and build out a fiber to the home. We realize that while the revenues are there we would rather use that build out our existing infrastructure and support that. To do a fiber to the home we fully believe if it is going to be a citywide rollout some other alternative for funding is going to be required. That concludes this brief. Ferguson: Great. Thank you Leo. As promised this is time for public comment. I have two slips here. Let’s start with Marvin Lee. Mr. Marvin Lee, 1241 Harker Avenue, Palo Alto: I live in the center of the community center neighborhood. I’d like to compliment the Staff on the work that they did. I would however, at the same time like to point out that a point could have been made also when you were in your discussion earlier on strategic planning that the one element that was missing was continual community input. The interesting thing is that Monday night the City Manager held a meeting, John you were there, Rick was there, Bern was there. I don’t know if the others were there. In any event the entire City Council and the entire Senior Staff for the City was there. What the City Manager announced with the support of the entire City Council as expressed by Sandy Akins was that we have come to a turning point. That from now forward because of some major errors on the part of the City Council and Staff we were going to turn increasingly to the community for discussions of priorities, for discussions of what should be done and how it should be done, and that this will be the mode of operation. They have, according to Emily Harrison’s report this morning, asked for additional meetings with the community to Utilities Advisory Commission 11-01-00 Page 40 discuss priorities and Emily Harrison reported they had 85 invitations to hold meetings in homes, which they can’t possibly do. Nonetheless, it gives an indication that the community wants this. We want to be participants in the process. Since we’re just about to step into a new era, the era of telecommunications, it is time for us to face up to the fact that we have a community that is more knowledgeable than the Council, more knowledgeable than the Staff. And as Gary Fazzino put it one day from the Mayor’s position, people come up to you as members of the Council and they think that they are smarter than you are and the fact is they are. We have an incredible number of highly skilled and highly intelligent people in this community and they want to be part of that process. John, this is aimed at you. We have asked you many, many times on behalf of [PA Fibernet] to be participants in the discussion in the shaping of this process. The most that I’ve received from you personally is a phone call. I would like then to make a new offer. Since one of the items that came up Monday night was a criticism of the City for using and extensive number of very high cost consultants. I have been authorized by many of the people in the community to offer our services as consultants, professional consultants of the highest possible level, on all levels of engineering and technical design, to you for one dollar a year. Now, that should not be too exorbitant a figure for you to be able to handle. It is a way for us to indicate to you that we are dead serious that we want to be part of this process. And we will be part of this process, if necessary we will do it in spite of your objections. So I would like to compliment the Staff on what they did do. I would like to point out that if John had incorporated the community early we would have been able to tell you that you did not have in your strategic planning telecommunications as a necessary future component, and we would have been happy to elaborate on it. Thank you very much. Ferguson: Thank you Mr. Lee. Arthur Keller. Mr. Keller: Thank you very much. We have the opportunity here to build a utility for the 21st century and beyond. We have to thank Marks and Spencer about 100 years ago for having the foresight for the City of Palo Alto to own its own utilities. As we heard, I noted from Mr. Rosenbaum earlier tonight, the Western Power Association or whatever exactly it is called is going to bring our electric wholesale rates to the City in such a manner that the surplus currently from the electric utilities that it partly goes to the City of Palo Alto coffers will decrease. We have an opportunity in the next 100 years to replace. We can do so in a few years by building out a fiber at home project which will be profitable once it recovers costs in about five or six years, based on the projections that were done and were shown for other statistics that were done earlier. I know that I myself want to and am willing to pay for fiber at home if it were available today I would write you a check. In fact, if you want, here is my checkbook. The fact of the matter is that right now I am paying $90 a month for 600 and some odd kilobits per second which is one-thirteenth of what I could get with a fiber at home project at the lower speed rate. The price would be somewhat comparable to the $90 a month I’m currently paying, maybe $10-15 more or less. Utilities Advisory Commission 11-01-00 Page 41 When the study was done where the utilities asked in a not very well publicized letter that was a bill insert in the utility bill, my understanding is about 1,000 residential utility customers were interested in having fiber to the home delivered to their home and having high speed access. I think that there is an opportunity here to capitalize on that. As time goes on, some of those people are finding alternatives. But I, nonetheless, think that with the cost effectiveness of fiber at home the greater speed and not much more cost, people will opt for fiber because of its great speed and cost effectiveness. I want you to think creatively. Think about possibilities for revenue. For example, if fiber to the home were a reality today there are other companies out there, competitive local exchange carriers, that would love to use fiber to the home in order to provide residential telephone service. Do you think that Sprint or MCI would like to provide residential telephone service by leasing capacity on a fiber to the home service? I think that they might well be willing to do that. That can provide a significant revenue source to the City, not merely data access but simply leasing capacity in that fiber. I think that we could think about using revenue bonds or similar financial techniques for providing a funding mechanism for a fiber to the home initiative. I for one would be willing to buy some of those bonds. Thank you very much. Ferguson: Thank you Mr. Keller. We have a third note here from Herb Borock. Mr. Herb Borock, P.O. Box 632, Palo Alto: Good evening Chairman Ferguson and members of the Commission. I’d like to talk to you about three different things. One is the availability of documents related to agenda items as required by the Brown Act. The second is a couple items related to the fiber backbone. The third is the business plan before you. I understand that you have copies on paper of this slide show that we were viewing. Under the Brown Act that means that they should have been available for the public as well to be looking at the past three hours. There is no reason why this is the first time to do it. I hope that in the future that material is available on a timely basis. I know that there has been a cycle as there always is in government with getting those kinds of rules implemented. I know it has been an up and down thing with the Utilities Advisory Commission in relation to the Utilities Department from the beginning when this Commission was formed as it has gone through different directors of the department. The second thing I would like to refer to and to get information on by the time this goes to Council are two items related to the fiber backbone. The first is the network that was adopted by the Council for implementation included some fiber backbone run from the utility substation at Newell and Embarcadero, continuing down Embarcadero to Middlefield Road, and down Middlefield Road all the way to the substation at West Meadow. It was indicated that a portion of that would be delayed so that it could be implemented at the same time as the underground district in Leland Manor. One of the last things when Mr. Star was still the Assistant Director was we were told that that wasn’t gong to be implemented because there wasn’t demand from residents. But there Utilities Advisory Commission 11-01-00 Page 42 was never any Council direction to change that. So I need to know how much of that originally adopted link along Middlefield Road has not been implemented. For the part that has not been implemented whether there has been conduit installed for it, and how much it would cost to implement what was originally approved. The second thing has to do with the change in the pricing structure. I don’t recall whether it went through this Commission but there was a change made at the Council for long term contracts for a large customer. Although Staff and Mr. Star had decided that he did not want to say who it was for, he did discuss it at the meeting with the Vice-Mayor who felt that she had a potential conflict. It would seem to me it would be for PAIX who had intended to install a server farm on West Bayshore Road which they are now not going to do. I think that pricing structure needs to be reviewed again because it may have been structured to serve a particular client who was available rather than making a decision for any client. The third thing has to do with the Fiber Business Plan. I agree with Mr. Keller that one possibility is revenue bonds. But the question is where does the money come from to pay off the revenue bonds? It seems to me that you can’t separate the fiber utility as it is being used now from the various implementations of it, whether it is fiber to the home or universal service, that what the current revenue begins provide is a bootstrap to help start paying off revenue bonds. That if you start parceling out the funds it becomes less likely to implement a universal system. So really the question is all of this information and analysis is excellent but you have to make a bold move. And the bold move is whether or not you want to go ahead and do a universal service fiber to the home and then find the means to make it happen. I’m concerned that the most risk averse group in the process is going to drive it. That is, if the Utilities Department is more risk averse than the City Manager’s Office, the proposal that you are going to get is what the Utilities Department wants. And if it is vise versa, if the City Manager’s Office is more risk averse that’s the proposal that would come before Council. If it is the Council that is the most risk averse, that’s what we are going to end up getting approved. Unless the public is brought in, as Mr. Lee has suggested, early in the process in an active way because I believe that in the community there is strong support for this if people are permitted to participate in the process in a full way. Thank you. Ferguson: Thank you Mr. Borock. Just as a point of information, John. It is true at the last meeting we didn’t have advance distribution of the first draft slides on the fiber business plan but we did play the slides and collect good comments. In the intervening month did the Utility Department get any written or email or telephoned comments or additions to that document which was publicly available at the meeting? Ulrich: I don’t believe so. We’ve had people talk to us and we are well aware of the general comments and consensus of the community because it is active and they do talk to us and we do have communication. But I don’t have specific written comments as you asked. Utilities Advisory Commission 11-01-00 Page 43 Ferguson: Okay. Commissioners, any comments on the Fiber Business Plan? Dawes: AT&T is supposed to building a much more advanced system partially fiber, partially co-ax to address some of these needs. Has there been any thought to talk with AT&T about joining forces to build an advanced state-of-the-art thing in a way that would optimize both of our….minimize our inputs and maximize our outputs? Creger: There has been discussion in fact we have talked with RCN as well. We have looked at talking to AT&T about that same idea. What we are finding in our discussions though it that they do not lend or they do not tend to want to support open access which is one of our primary goals and objectives of a fiber to the home program. It would seem like they are willing to support City initiatives, i.e., meter-reading and other things that are conducive to the City but I would tend to believe that they would want be able to preempt some service that we want to put over in favor of them doing that service first. Dawes: Thank you. Ferguson: Mr. Rosenbaum. Rosenbaum: John, what is the specific action you are requesting of us? Ulrich: At the last meeting we provided a draft and specifically it would be to embrace the strategies and the plan as outlined tonight to have us go forward and proceed to develop an organization built around expansion of the dark fiber system and begin moving into the rest of the community and look at fiber to the home trial as the beginning of further expansion to try out and utilize the technology that we learned and meet the commitment that we’ve been attempting to do to serve the neighborhood area with our first trial. Rosenbaum: How about the issue of establishing a separate fiber utility distinct from the electric utility? Is that part of the plan? Ulrich: That would be addressed in the Strategic Plan. As you know we are not technically a telecommunication utility because it is not listed specifically in the charter. So we would have to explore how to do that. In the meantime we believe we can expand and actually establish a fiber backbone without content by just being an infrastructure provider and do that as an adjunct to the electric business. Rosenbaum: So more specifically there is no recommendation at the current time to establish a fiber utility. Is that understood by everybody? Ulrich: Based on lack of it being in the charter, I think I can ask that be done at this point but that is our intent as we move forward. Utilities Advisory Commission 11-01-00 Page 44 Rosenbaum: It is not in the charter but it would be easy to recommend that the charter be revised to establish a fiber utility. It is not clear to me whether you are making that recommendation or we have sort of a general business plan that is going to involve hiring more people and hoping it all works out. Ulrich: Well, the latter is more correct for this evening. I am not sure whether I can ask you to embrace us as being a fiber utility at this point but that is our intent. That is the direction that we are moving in and will be back to ask for that more specifically at a later date. Rosenbaum: Well, I guess I’d be happier if there were a request for a fiber utility in this business were to be set off by itself and were to have to produce a profit and transfer to the general fund and if there were some arrangement to pay back the electric utility their two million dollars, I think it would focus us. You have a request in here to hire some number of people, I don’t want to get into that, that is your business but I am a little concern about doing that as a part of the electric utility. Ulrich: I think we have taken this a step as you noticed there is no request here to go to the Council and ask for increased funding or additional budget or additional resources. I can’t hire anybody or expand the organization without approval of the City Council. My intent was to finish putting this together and then come back with a specific number of people but in the meantime begin the expansion by filling in the fiber system. As we currently have, in order to make more revenue off of what’s existing there now through a marketing effort and expand what Leo and his team are doing and also to come back as our commitment, as you recall, we went out with a second RFP in August and we evaluated those and received them back and we are close to making the recommendation which we would fold into the fiber-to-the-home trial and come back to the Council with a recommendation for expansion and building that out. Ferguson: Is that something that you want to have complete by the council meeting of November 13? Ulrich: I am not sure that we are able to do that. We are actively negotiating discussion with the parties that responded to the RFP and I’m not sure we’ll have that completed. Ferguson: So help me understand and correlate the data that Commissioner Rosenbaum’s comments and questions. What about this fiber plan do you want to present next to Council. If we said this looks good tonight, what would you do with it next to Council? Ulrich: I would take this and have it on the agenda for the 13th of November at the Council. Utilities Advisory Commission 11-01-00 Page 45 Ferguson: Is it fair to say that our acting on this simply approves a more detailed expansion of the fiber utility bullet in the larger strategic plan. Ulrich: Yes. Ferguson: So, another way of saying it is on November 13th you’d like to be able to go to Council and say here’s the Strategic Plan as the UAC finally got comfortable with it, what do you think of it in general and that in specifics, as a for example, here’s one of the innovative new things we would like to explore more fully with your advice and approval as one component of the Strategic Plan. Ulrich: I think the answer is yes. As you recall these two areas, the Strategic Plan and the Fiber Plan have been going along in parallel. In the Fiber Plan, several people mentioned that they didn’t see it in there, but it is, in my mind, and it is in the Strategic Plan as an additional service that we would get into as additional revenue to the city as the change in the electric or the gas business would reduce the amount of return that we could get from that business. It seems to me to be a very appropriate type of adjunct in addition to our other infrastructure and our other business by moving into the fiber business. So I see it clearly as part of the Strategic Plan and as an addition to what we are currently doing. Great business that we ought to be moving forward with. We have not at this point as alluded to by a number of speakers tonight as we have not found a way to finance the significant of our cost that will be to totally build out a total fiber system to the community. The problem is the same as everyone else has is they have not found the need that can be supported by revenue to build out immediately fiber to everybody in the community. There’s clearly people that would benefit from it, that would want to pay for it and would be a great value. So I think that’s the goal that we should have to move towards and get that done. That’s why the Fiber Plan is written the way it is. We can expand what we currently know how to do and do well. Start rolling in additional revenue. What was pointed out by Leo and a couple of the speakers, you’re going to have a dynamic and bold move to find a way to finance this and have a risk model that you are comfortable with, that the City’s comfortable with and how it will be paid back. I have no doubt in my mind that this is an opportunity for us and we should be moving ahead on it. What we are trying to do is go through a planning process like this to make sure that everybody in the community is interested in it and our role of doing that is to bring it to you and onto the Council. Ferguson: So given the timing that you had just outlined, is it fair to say that the decision to sign the contract with one of the fiber-to-the-home bidder, that decision is going to come to the Council in November, first of December? Ulrich: Yes, I would like to very much be able to do that. It’s only a matter of getting it all together and coming forward. Frankly, we have a recommendation that we are trying to put together and be able to present it. Utilities Advisory Commission 11-01-00 Page 46 Ferguson: So one of the useful things that we could do here is to make sure that the larger utility strategy is understood and agreed to by Council and under that strategy we have our first draft strategy for defining and building a fiber utility business whenever it gets divorced officially in the accounting system. But that all sets the backdrop come November 13. It sets the backdrop before the Council’s decision to finally sign a contract to build out the fiber-to-the-home trial. Is that correct? Ulrich: Yes. Like I said I will categorize it that way. Maybe in one sense we are moving too fast and I’ve heard tonight that maybe we are not getting enough public support and comment. I believe, contrary to that, that we will have plenty of opportunity to design and build an appropriate fiber system that will meet the needs of people and will be willing to pay for it. I think categorically, the bad decision to go and build something without having customers support it and want to have it in the community itself must be part of that decision. Ferguson: Okay, that’s helpful context. I really hope that the strategic planning and the fiber planning here don’t inadvertently get in the way of driving home the decision to sign a contract to build out for the trial. Thank you, Commissioner Rosenbaum for the trial. The RFP that is out now is for the contractor to build out for the trial so do you see a risk of that? Are these things flowing in a logical lockstep? Are we increasing the risk of a delay in the fiber-to-the-home trial? Ulrich: I don’t think there is a risk in a delay if you are comfortable to approve as we recommend in this format to move ahead with the fiber plan and put the meat on the bones and to make it work. Again, the commitment for resources and for funding as what we would bring back in a very clear Plan and cost and how it will be done and hopefully, find a way to pay for it. Ferguson: I hope we can stay on that schedule and its time to come to a closure on the launch of the fiber-to-the-home trial. Ulrich: What we did was, I went back and looked at the correspondence file and in August we wrote a letter to all the people that have diligently put their money up and have very active in trying to have us build this. In that letter, we said we would be getting all the proposals back and evaluating it, which will lead to a construction contract in November. So I am pleased that we are moving as quickly as we said in that letter because we have had a lot of correspondence and a lot of delays. I think if you look back at where we were at a year ago, just after I got here, we were talking about whether everything should be paid for and that there would be absolutely no risk to the City and we’ve moved a long way from that so I plan to keep on focusing on it and getting it done. Ferguson: Great. I have several comments and I’ve hogged the microphone here too long so I’ll turn to the other Commissioners. Any other comments on the Fiber Plan? Utilities Advisory Commission 11-01-00 Page 47 Carlson: I’ve got some here, if I can go ahead. I think you’re asking for three things here. You’re asking to move ahead with more staff, more marketing for dark fiber, sounds great. You’re asking to go ahead with the fiber-to-the-home trial, I thought we already approved that, but there’s an implication that we’re going to go ahead with full scale planning for full scale fiber-to-the-home. We got these two tiny molehills; we’ve got this big mountain here. I’m much more interested in the mountain and I ‘m hearing some extremely contradictory things about exactly what this mountain looks like. I’m hearing that we don’t really know what the demand is and what the uses are. I know from all the work I’m doing in this area that the private sector is uncertain, pulling back, losing their bond ratings, nobody is really quite ready to step up and put the big dollars into doing this on a broad basis. I’ve got all these enthusiasts waving their hand and saying its wonderful, there’s a huge demand out there, boy, this is one of the best justifications that I’ve ever seen and sitting back and saying if its all that great than the private sector is going to do it and we shouldn’t be taking that kind of risk. Is it like easy falling off a log, automatically profitable, everybody loves it, or is it very risky, which is it? What exactly is the reason for the Government doing venturing into this clearly pretty uncertain area where certain some enthusiasts think it might be? Ulrich: That is an area we think about an awful lot. As I mentioned a few minutes ago, some people have brought it up, its going to be very expensive, its going to be multi million dollars, 25 million dollars plus to build out a full system and a lot of benefit technology has made big leaps since we first started talking about the fiber-to-the-home. One of the reasons we want to start conquering the molehill side of it is to learn more from it, minimize the amount of money, but also to make a commitment that we are here to try new things because people of Palo Alto want it and we also know the real business need as our other utilities may not be able to bring in the same revenues because of competition, we need to be able to look at ways to expand revenue opportunities that can take the place of it. We feel very confident that we’ll be leaders in doing that in the fiber area but how to finance it and when people are ready for it, and how to pay for it, that’s the bold leap that was suggested earlier and we are going to have to evaluate quite a bit and have tremendous amount of input from our customers to know that that is where they want us to go. It can be a role, and you have heard me talk the opposite side of this before, it can be a clear role of a government and a city-owned utility to make some of those bold areas and not expect to have an immediate return but will be willing to take the long road to get that money returned that something that a private business couldn’t afford to do. We should be able to or should be willing to look at that and decide whether that’s an area that our customers and citizens want us to do. Then we’ll be able to go after the big mountain. Carlson: I’m delighted to do that experiment and find out what the demand really is but this is nothing close to our strategic plan that justifies going full scale. We need a tremendous amount of data to go after that mountain. Utilities Advisory Commission 11-01-00 Page 48 Ulrich: I agree. That would be the plan to gather that information and again not make commitments for spending this bold amount of money and making something much bigger than we know about until we evaluate it further. Ferguson: Any other comments? Commissioner Rosenbaum. Rosenbaum: Just a general comment first. I am sure, John, you appreciate the irony of hoping to increase revenues out of concern that we no longer have a monopoly on electricity by entering a very competitive business with little companies that have people who work twelve hours a day, six days a week. This is a real nut to crack. My concern is a more basic one. We’ve got something in front of us which I assume you plan to take to Council that says City of Palo Alto Fiber Utility. That’s pretty clear and then you tell me that that is not what you are asking for now. I guess what I would like to say, I’m sort of in sympathy with Dick Carlson, there’s a couple of molehills, one we are going ahead with, presumably if we can work out the contract for the fiber-to-the-home trial and I think what you’re really asking for at this time is whether to expand the current effort to use the dark fiber and I think and believe that the Council would appreciate a very focused report saying that this is what we want to do and we want to hire some more people and what its going to cost and we recognize its going to cost more but we think that this will expedite the recovery and at least our initial investment and getting something back. Make a good case of that. I don’t have that in front of me now and I don’t know what I would recommend to the Council based on what you have presented to us so far and you want to go to Council on November 13 with something on fiber. Ulrich: Well, I do and I think I can understand what you’re driving at. I think what we are doing is putting out in front of us where we want to go and have clarity about that direction but to get to the mountain, I am not prepared to have a plan that says we are going to do that but to do the molehills along the way the fiber development trial and expansion of the dark fiber is clearly something we want to move ahead with. I think you have to put out, as we did in this document, a more general direction, what the big picture is, where we are going to go but we are not prepared to be able to say specifically how we are going to get there, at this point. So I would appreciate any help and support you can focus back at us to help us get that moving along and suggest clear directions that we can ask for from the City Council. Rosenbaum: Let me follow up on what Dick Carlson said. There are a number of things. One is the establishment of a fiber utility that’s not a trivial task, in terms of promoting fiber. It has both advantages and disadvantages. A fiber utility is an enterprise that would have to stand on its own and would be expected to return profit and to really focus your interest on whether or not to hire these extra people because you’ve really got to be convinced that they are going to be bringing in more than they would cost. So I see a fiber utility or the establishment of a fiber utility which Council would like to see the establishment of a fiber utility that shows vision which gives them an opportunity to show they are looking into the future. That’s one issue. That is independent on whether Utilities Advisory Commission 11-01-00 Page 49 or not you go out to hire some more people to promote the dark fiber program which I see more likely to succeed. I see that as a separate issue. On this big issue of fiber-to-the-home, that’s way off into the distance, 25 million, 50 million, you’re not recommending that. I think that you have made it very clear in here that you are not at this time recommending fiber-to-the-home and I think the people in the audience that have waited all this time, recognize that. The fiber-to-the-home trial, that’s going on anyway. So, if you want some feedback from me, I would say to focus on what it is that you want to do right away which is the dark fiber further implementation, prepare something and present that to us and then send that on to the Council. Ulrich: I think the latter part is articulated in the document because we are specific about the additional people and the expectations from the revenue stream that Leo has laid out. I think I can do that without an agreement from Council that we move in and become this full fledged fiber utility and the boot strapping that we are doing is using the revenues that have been generated from the initial investment was made by the electric fund into the establishment of the dark fiber system. I think that would be an excellent next innovative step that we would take to expand, be more profitable with the existing assets, the 31 plus miles that we put out by the additional marketing and the additional support folks that we need to make that happen and to increase the revenue. That’s in the plan. Rosenbaum: Dexter, I suspect that you have a lot more experience than I do in evaluating business plans essentially. Folks are coming to us and we are almost like venture capitalists here. Here is our plan, how do you evaluate this? Does this make sense to recommend to Council that we hire these expertise? Dawes: To me, the business has progressed enough and it shows considerable promise beyond where it is and I think the request for additional people to accelerate marketing and deployment of our assets is as made clear, the operations people are getting backed up and we need to put some muscle behind it. This is a very modest proposal. As far as any next steps, I think to rename it as utility, I don’t think that pertains to anything momentous at this point. I’d like to know when we think we are going to break ground on the trial. It’s been a couple of years and going this basically says we are still working on it. I’d like to know when we are going to start work on it, so I could get some feedback from our universal RFQ. That whole thing just went into a huge black hole and maybe we’re sworn to secrecy by the offers but I’d like to get the wisdom of what was proposed or not proposed in that. Ferguson: I’d like to pose a question to Councilmember Beecham. At our last meeting, you asked a long series of very good tough critics that was questions. Just give us your top-level guesstimate of what percent of the criticisms and your questions that you made were answered and reflected in this draft? Utilities Advisory Commission 11-01-00 Page 50 Beecham: Well, let me doubt that question. I will follow up more directly with John and staff and otherwise, tonight I am looking forward to your advisement and consideration. Ferguson: Okay that was well done. Any other Commissioners have comments on the Plan? Let me offer some small changes. I think as a standalone document, this was fine as a second draft. I just don’t think its ready for Council. One thing that would help a lot and might make it a nifty addition to the November 13 meeting if it’s possible, is to restructure the facts that are in here. I suggest restructuring them according to the structure in the Strategic Plan itself. In other words, start with Mission Statement, where this Mission statement says we are one of the bundle in the full service and we think that’s an advantage and that’s jumping off point and proceed immediately as you did in the Strategic Plan to Key Objectives and say we are going to enhance utility customer satisfaction. In the case of fiber, what does that mean? What does it mean for the industrial customers and suggest what it means to residences. The City committed in the satisfying residences in the telecom policy decision in 95-96. You may not have data for it but at least put the bullet in here. One of the key objectives is investing in the utility infrastructure, deliver reliable service, show us what that high level strategic objective means in terms of the fiber business plan. Provide superior financial performances that the City in competitive prices to customers. We actually know a few things about that as a result of all the back and forth we did on the fiber-to-the-home trial debate. Suggest that here. We learned a couple of things about it, we are about ready to build it and learn a few more, hear some of the implications for a larger residential build out. It could be this bad, might be this good, give it some practice. The last key objective, which is my favorite, the one think I asked for and pleaded for the last time, I didn’t see it in here at all and that tell us, particularly in the case of fiber, what are the key unique advantages of municipal ownership that are going to give us at least a half leg up over the little startups as well as the big billion dollar telecoms who might also be angling to provide broadband connectivity here. Similar that major efforts that are needed to strengthen our competitive positions. Follow the bullet structure that you have in the strategic plan and pick those that apply particularly to fiber and just knock them out. If you use that same structure, which you’ve presumably just sold to Council, in the first half of the November 13 session, than the fiber plan fits in, as an example. If the Council bought the high level strategic plan than you’ve got a ready made argument for fiber and it may be just an information item to go forward to Council at that point but at least we’ve started the show that we are going to start recasting all of these new utility behaviors whether its electric or fiber. We’re recasting them in terms of a larger strategy and I think if you do that instead of working at cross-purposes and maybe endangering the decision a couple of weeks later on fiber-to-the-home trial contract, it might give it a little more momentum. We start to get a shared analytical framework for thinking about all the new changes in the utility business. I’m convinced that the City Manager means what he says when he said the Utility Department is a place that looks good to try a whole bunch of innovation whether its administration or business or better administer staff rewards or whatever it might be, I think he means it. It’s a great place to start and our job to help him succeed at Utilities Advisory Commission 11-01-00 Page 51 that is to help make sure that we get strategy right in each proposal under that strategy following that same framework. So, with that structural change I could get behind this as an information item for the 13th. My preference if we can’t get that structural change, would be even to hold a special UAC meeting, mid month, get a better version out there and get it to Council along with or in time for fiber-to-the-home contract approval decision. I’d like it to be a best foot forward event rather than something we’re kind of explaining away and apologizing for because its not quite fully made. Do you need us to pass something formally here? Ulrich: Well, I think all of you had excellent comments. We can clearly make improvements. I’m just debating here and probably not the right form but I feel compelled and the back of my neck says we need to keep moving on this and not delay it and I know how the process works because there’s only a limited amount of time between now and the end of the year and the first of next year to have thing go in front of the Council for approval. As an information item, I don’t know if that takes the same impact than what we are trying to accomplish with having the fiber plan reviewed and okayed by the Council. The other side of it is I think it would be foolish to take it forward and give them something that have holes in it or problems with it so that is what I am sitting here and staring back at you trying to figure out how to do both and keep this moving along. Ferguson: Well, let me try to get us through the action item because its late here and we’ve got a couple of tiny little agenda items and we can finish up before 11 and call it quits. Let me move that the UAC approve the content of this fiber business plan as an information item for Council on the 13th provided that it be restructured to parallel the key features in this strategic plan and let me leave it at that that be the UAC decision tonight. Rosenbaum: Is that a motion? Ferguson: It’s a motion. Rosenbaum: Second. Ferguson: Any other discussion? Is there consciousness at work here? Rosenbaum: I guess I am not prepared to support that. I don’t think there is a service to the City Council in presenting this to them and telling them now we are not interested in the fiber utility now. I think the staff is interested in something very specific and that is what ought to really go to the Council and we can have a whole list of things but this is what we are going to be proposing but we right now are interested in further augmenting the staff to better use of our dark fiber. That sort of thing I can support, I just don’t know what to make of this entire slide presentation so I would not support that motion. Utilities Advisory Commission 11-01-00 Page 52 Ferguson: Any other comments to the motion? Dawes: I agree with Mr. Rosenbaum. Ferguson: Okay, the motion is not going to pass. I will withdraw it. Does anyone here wants to offer another motion that gets this item closed? Dawes: One comment. From what I’ve heard from the discussion, it seems to me that we need to augment this business that is starting to run now and if we don’t add critical skills, we are not going to satisfy our customers. We are going to take a hike and go some place else so if this is a request for additional headcount, I think certainly I would subscribe to that because I think we need, I mean we’ve labored for two years to get this thing profitable. It is, the number of requests for engineering support is sky rocketing and we are sitting with the same headcount as we had before. I mean let’s support this thing. We’ve got two million bucks and its going to languish and now its rolling and suddenly we’re pulling back and saying we’re not going to do anything. I don’t understand it. If this is a support or request for hiring people, I don’t know how you want to make a motion for that or what, but I think we ought to get on with it. Rosenbaum: I will try a motion. The UAC recommends to Council that steps be taken as necessary to augment the, well, that is not the right word. Steps be taken to further the use of the dark fiber that we already have. Dawes: I don’t know what that means. Rosenbaum: Well, let’s try some other wording. I think you are right, Dexter Dawes: We are ready for hiring the people that they’ve asked for, how about that? MOTION Rosenbaum: That language is fine but I think the intent here is to say the UAC supports the necessary steps to advance the utilization of the dark fiber as recommended by staff. Let’s try that. I would move that the UAC recommends to Council those steps recommended by staff to further the utilization of our dark fiber backbone. Dawes: Would you specifically refer to what we need to do page and the presentation? Rosenbaum: Well, I would like to do that but the main bullet is establish a fiber utility. I think staff can run with that motion. So that is my motion. SECOND Carlson: I’ll second on that one. Utilities Advisory Commission 11-01-00 Page 53 Ferguson: Okay, I’ll support that but it needs to be abundantly clear that we are already on track for the fiber-to-the-home trial build out decision by supporting this, the UAC supports the decision there as well. Ulrich: I think if you’d be willing to add what you just said to Mr. Rosenbaum’s motion, it makes it clearer to me and I hope to the Council that you’re supporting the fiber backbone to bring as much revenue and to maximize that asset one of the things that we would expand to do would be to do the fiber-to-the-home trial. Ferguson: That is what I don’t want to get lost here. If Commissioner Rosenbaum would permit that amendment, that would be terrific. Rosenbaum: Give me some words for that amendment. My assumption is that the fiber- to-the-home trial has already been approved. We are not being asked for that but you are worried, John that an action of the sort my motion suggested might lead to the Council thinking we did not support the fiber-to-the-home trial. Ulrich: Well, I am trying to get as much as I can this evening, but that is my objective. AMENDMENT Rosenbaum: Furthermore, the UAC continues to endorse the fiber-to-the-home trial. I would add that to my motion. Ferguson: Great, that will do the job. SECOND Carlson: I’ll second. MOTION PASSED WITH AMENDMENT Ferguson: Okay the motion has been amended. Is there any more discussion, if not, all those in favor say aye. Thank you. That’s 4-0. Ulrich: Well, the latter is more correct for this evening. I’m not sure I can ask you to embrace us being a fiber utility at this point but that is our intent. That’s the direction we’ve been moving in and we’ll be back to ask for that more specifically at a later date. Rosenbaum: I guess I’d be happier if there were a request for a fiber utility and this business were to be set off by itself and were to have to produce a profit and a transfer to the General Fund and if there were some arrangement to pay back the electric utility their Utilities Advisory Commission 11-01-00 Page 54 two million dollars. I think it would really focus us. You’ve got a request in here to hire some number of people, I don’t want to get into that that’s your business, but I’m a little concerned about doing that as part of the electric utility. Ulrich: I think we’ve taken this a step. As you notice there is no request in here to go to the Council and ask for increased funding or additional budget or additional resources. I can’t hire anybody and expand the organization without approval of the City Council. So my intent was to finish putting this together and then come back with a specific number of people. But in the meantime begin the expansion by filling in the fiber system as we currently have. In other words, make more revenue off of what’s existing there now through the marketing effort and expand what Leo and his team are doing. And also to come back as our commitment if you recall we went out with a second RFP in August and we evaluated those, received them back, and we are close to making the recommendation which we would fold into this fiber to home trial and come back to the Council with a recommendation for expansion and building that out. Ferguson: Is that something that you want to have complete by the Council meeting on the 13th? Ulrich: I’m not sure I’ll be able to do that. We are actively negotiating discussion with the parties that responded to the RFP. I’m not sure we will have that completed. Ferguson: So help me understand as a corollary to Mr. Rosenbaum’s comments and questions. What about this fiber plan do you want to present next to Council? If we said, this looks good to us tonight, what would you do with it next with Council? Ulrich: I would take this and have it on the agenda for the 13th of November at the Council. Ferguson: Is it fair to say that our acting on this simply approves a more detailed expansion of the fiber utility bullet in the larger Strategic Plan? Ulrich: Yes. Ferguson: So, another way of saying it is on the 13th of November you’d like to be able to go to Council and say, here is the Strategic Plan as the UAC finally got comfortable with it. What do you think of it in general? And then in specifics, as a for example, here is one of the innovative new things we’d like to explore more fully with your advice and approval as one component of the Strategic Plan. Ulrich: I think the answer is yes. As you recall, these two areas, the Strategic Plan and the Fiber Plan have been going along in parallel. In the Fiber Plan several people mentioned that they didn’t see it in there but it is in my mind in the Strategic Plan as an additional service that we would get into as additional revenue to the City as the change Utilities Advisory Commission 11-01-00 Page 55 in the electric or the gas business would reduce the amount of return that we could get from that business. This seems to me to be a very appropriate type of adjunct in addition to our other infrastructure and our other business by moving into the fiber business. So I see it clearly as part of the Strategic Plan as an addition to what we are currently doing. Great business, we ought to be moving forward with it. But we have not at this point, as alluded to by a number of the speakers tonight, we have not found a way to finance the significant amount of cost it will be to totally build out a total fiber system to the community. The problem is the same as everyone else has, they have not found the need that can be supported by revenue to build out immediately fiber to everybody in the community. There are clearly people that would benefit from it, that would want to pay for it, and would be a great value. So I think that’s the goal that we should have to move towards and get that done. That’s why the Fiber Plan is written the way it is. We can expand what we currently know how to do and do well, start building additional revenue, but as pointed out by Leo and a couple of the speakers you are going to have a dynamic and bold move to find a way to finance it and have a risk model that you/ the City are comfortable with and how it will be paid back. I have no doubt in my mind that this is an opportunity for us and we should be moving ahead on it. What we are trying to do is go through a planning process like this to make sure that everybody in the community is interested in it. And our role in doing that is bringing it to you and then on to the Council. Ferguson: So given the timing that you’ve just outlined is it fair to say the decision to sign a contract with one of the fiber to the home bidders, that decision is going to come to Council in the November or first of December? Ulrich: Yes, I’d very much like to be able to do that. It is only a matter of getting it all together and coming forward. Frankly, we have a recommendation that we’re trying to put together and then be able to present it. Ferguson: So one of the useful things all of us could do here is to make sure that the larger utilities strategy is understood and agreed to by Council and under that strategy we have our first draft strategy for defining and building a fiber utility business whenever it gets divorced officially in the accounting system. But that all sets the backdrop come November 13th. It sets the backdrop for the Council’s decision to finally sign a contract to build out the fiber to home trial. Is that correct? Ulrich: Yes. Maybe in one sense we are moving too fast. I’ve heard tonight that maybe we are not getting enough public support and comment. I believe contrary to that we will have plenty of opportunity to design and build and appropriate fiber system that will meet the needs of people and they are willing to pay for it. I think it would be categorically a bad decision to just go and build something without having customers support it and want to have it. The community itself must be part of that decision. Utilities Advisory Commission 11-01-00 Page 56 Ferguson: Okay. That’s all for context. I really hope that this Strategic Planning and the Fiber Planning here don’t inadvertently get in the way of driving home the decision to sign a contract for the build out. Thank you Commissioner Rosenbaum for the trial. The RFP that’s out now is for a contractor to build out for the trial. So do you see a risk of that? REPORTS OF OFFICIALS/LIAISONS 1. Northern California Power Agency (NCPA) Commission Report Ferguson: Do you want to say anything about NCPA? Ulrich: Mr. Beecham and I have been participating significantly but I don’t think we have any specifics that can’t wait. There’s a number of legislative areas that and we are going to have a rally back in Washington D.C. in February but we have time to discuss those particulars to solicit your support and understanding of what’s coming down the road. We can do that at a later date. 2. Bay Area Water Users Association (BAWUA) Report Ferguson: Anything more on BAWUA? We have the annual report here at our desks. 3. Transmission Agency of Northern California (TANC) Report Ulrich: No and the same with TANC. Ferguson: Okay, there is no additional business, we are adjourned. Thank you very much. ADJOURNED 11:02 PM.