HomeMy WebLinkAbout2001-02-14 Utilities Advisory Commission Summary MinutesUAC Minutes 02/14/01 Page 1 of 51
Wednesday, February 14, 2001
City Council Chambers
Roll Call .......................................................................................................................................... 2
Oral Communications .................................................................................................................... 2
Approval of Minutes....................................................................................................................... 2
Agenda Review and Revisions ....................................................................................................... 2
Director of Utilities Report ............................................................................................................ 3
Unfinished Business ...................................................................................................................... 3
New Business and Reports ............................................................................................................. 4
BAWUA Report...................................................................................................................................... 4
Gas Rate Increase ................................................................................................................................... 5
Electric and Fiber Quarterly Report- Fiber ........................................................................................ 8
Electric and Fiber Quarterly Report – Electric .................................................................................. 9
Electric and Fiber Quarterly Report – Western-PG&E................................................................... 11
Northern California Power Agency (NCPA) ..................................................................................... 14
Recommendation to Fill The Electric Supply Portfolio’s Post-2004 Deficit ................................... 18
Guidelines For The Use of Financial Instruments for Managing Price Risk of Electricity and Natural Gas ........................................................................................................................................... 24
Adoption of Ordinance Authorizing The City Manger to Enter Into Long Term Contracts For The Sale and Purchase of Electric Commodities ............................................................................... 27
Adjournment................................................................................................................................. 51
City of Palo Alto
Utilities Advisory Commission
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Roll Call Chairman Ferguson called the meeting to order at 7:33 PM. Commissioners present: Rosenbaum, Bechtel,
Ferguson, Dawes, and Carlson. Oral Communications Ferguson: Good evening. We have a lovely group here tonight, which is good since our mission is to help
keep the Monday Night Ambush from turning into the Valentine's Day Massacre. I have no slips from the public for general comments at the top of the meeting, so let's proceed to approval of the minutes of the December 6th meeting. Approval of Minutes
Dawes: So moved. Rosenbaum: Second.
Ferguson: If there are no corrections or comments, all those in favor? Approved 5-0.
Agenda Review and Revisions
Ferguson: Commissioners and Director Ulrich, if there's no objection, I'd like to propose rearranging our agenda to lead more methodically and logically into our most important topic tonight, Item #6, Adoption of an Ordinance authorizing long-term contracts. As the Monday night Council referral and email traffic seem to indicate, we should give this some thorough consideration tonight and try to turn it around promptly to Finance Committee or wherever Council wants to see it next. I know it's tempting to make it
first up to bat in the agenda tonight. But to make best use of the time and staff we have here tonight, and to do a better job on our public information function, let's start instead with the non-electric topics and try to get them out of the way promptly so those folks can get back home. Then let's lead up to Item 6 with the other information and
action items related to electric power, using them to kind of set the stage, a launching ramp into our discussion of the proposed Emergency Ordinance. Specifically, I'd propose we start with the BAWUA report (New Item #1, originally Item 8). Then proceed to act on the Gas Rate Increase (New Item #2, old item 3) - we've seen that twice before recently and
should be able to dispatch it promptly, followed by the Fiber portion of the Electric Quarterly Report (New Item #3, old item 4-b). We can batch up the topics that give the context for the Ordinance by starting next with the snapshot of facts and figures from the Electric portion of the Quarterly Report (New Item #4, old item 4-a). Commissioner Rosenbaum has asked that staff give us and the public a refresher on the relationships among Western, PG&E and Palo Alto, so let's add that as Item #5 in the new
sequence. Then we'll move to the latest on Federal and State emergency legislative activity in the NCPA report (New Item #6, old item 7) which I'll give if Councilman Beecham hasn't arrived by then -- he's
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doing double-duty tonight at another Council meeting -- and then we'll collect the latest facts on the Transmission Agency (TANC) operations and prospects (New Item #7, old item 9).
With those facts and news items in front of us, let's then move to our electric Action Items in this order. We address the Post-2004 Supply Recommendations (New Item #8, old item 2) because that report discusses many of the same needs and options that justify the Emergency Ordinance. Then we cover the Financial Guidelines item (New Item #9, old item 1) because the report here shows staff's preparation to
manage risk, and this would be still another factor in enacting the Emergency Ordinance. We might want
to hold off taking formal action on those two items until we get through the Ordinance discussion, then perhaps entertain a coordinated motion covering all three. Finally I think we'll be ready next to tackle old item 6 (New Item #10) which is the Council referral on the proposed Ordinance. We'll wrap up the meeting with New Item #11, old item 5, the Public Benefit demand side analysis, which is a separate
action item.
Ulrich: Are we adding a new agenda item #5 with Tom Kabat's presentation? Ferguson: This is not a night when we are going to add things to the agenda. We are not adding things,
but it is an invitation to Tom Kabat under the Electric Quarterly Report to just give us additional
definition of the nature of the contracts that are in play here. My numbers are just for purpose of laying out the new sequence tonight. Ulrich: Rick, I have just one question here and that is the public benefit funding choices which I think is
an important area – what we do there comes out of what we do in everything else but let’s talk about it at
least a little bit. Ferguson: We can certainly talk about it, I just wanted to create a little more logical order. If the staff doing presentations on these items could please limit them to about five minutes -- a couple of good
slides, then give us a little time for Q&A. We'll spend a good long time on original Item No. 6, the
Ordinance here. Commissioners, does that make sense? Okay, thank you. Let’s start with our Director of Utilities Report; again try to keep this under five minutes.
Director of Utilities Report
Ulrich: I have about a forty-five minute update that I would like to give everybody, which I will do in just a couple of brief moments. You have all had a chance to talk with me and keep up to date on a number of items Commissioner Ferguson, the Mayor and Council Member Beecham back in Washington,
D. C. The point is a lot is going on. I think most of the areas that I would like to comment on and bring
the public up to speed on will be covered during the very extensive agenda items that we have tonight. Unfortunately, we were not able to have a meeting last month and that is why we have a number of things to cover this evening. So, if it is all right with you we will just move ahead and do the other items and I will bring comments in as we go along.
Unfinished Business Ferguson: Great. Thank you very much. There is no unfinished business here. Everything is fresh and new tonight. Let’s start with the BAWUA report original Item 8, now Item #1.
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New Business and Reports
BAWUA Report
Ratchye: I do not have a presentation but I would be happy to answer any questions. The report is fairly self-explanatory. We are expecting about a 3.5% wholesale rate increase from San Francisco.
Carlson: I have one question Jane, just looking ahead. When are we going to get the proposal, which I assume is in the works, from the SFPUC on the costs of the upgrades and repairs, who pays for it. What is the timing here?
Ratchye: The last time I checked, the SFPUC will take their combined financial and CIP plan to the
Commission at the end of this month. Carlson: Wow! Does that include our share? How do they come to us, through BAWUA or is it negotiated in advance?
Ratchye: What they will be laying out is a 10-year CIP and financing plan and I guess I am not understanding your question. Carlson: When do we find out how much it costs us? Will we know at the end of the month how much
they are proposing, how much will it cost us?
Ratchye: We will have a lot more information at the end of the month. How much they are proposing, all the different projects they are planning to do, the different costs, estimates that they have at this time and the plans they are bringing will be broken down into the Regional system and that is the part we are
interested in. They are going to take four plans to the Commission; one is called “clean water” that is
their sewer and their “in City service” water separately and the “Hetch-Hetchy water power” and then the “Regional water system” and so that part is likely the part we will pay around 2/3 of unless something changes.
Carlson: Thank you.
Ratchye: I am glad you brought that up. I will have to find out that exact date of that meeting for I think it would be a good meeting for some representatives from Palo Alto to watch the proceedings and encourage the Commission to adopt the financing plan and the CIP plan. They have never adopted a plan
like that. They need to commit to something and start building things. We might want to go up there to
support them in doing that. I will have to find out more information when exactly they are actually scheduled to adopt it. I am not clear whether they are just going to hear it for the first time. I don’t think they are going to be able to adopt it in two weeks.
Ferguson: Thank you.
Dawes: Good evening, Jane. Can you give us a short word on whether all the members have adopted the contract modification that I believe our City Council did a month or two ago.
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Ratchye: Are you talking about the Interim Water Shortage Allocation Plan?
Dawes: Exactly. Ratchye: I think all of the BAWUA members have, but I am not sure how many that represents in terms of the percentage of water usage. We could look back at some of Kirk Miller's figures.
Dawes: I guess more importantly, are there any issues that have been raised that would cause that to become a problem? Ratchye: I haven’t heard of any issues. Some of the cities got the short end of the stick there, one of them
is Daly City, and it has passed it as a good thing. Maybe Kirk can give you more of an update.
Miller: We are actually quite pleased with the progress we have made. We have over 50% of the signatures at this point, including Daly City, Stanford; many of the larger water users have signed on. There are a number of smaller ones that we are waiting on but given that we have through July to get all
the signatures, we think we are well ahead of scheduled so we are quite pleased.
Bechtel: Jane, just for my clarification, "suburban revenue requirement" -- is that what you would normally call revenue from us out in the suburbs.
Ratchye: Yes. That is a defined term in the contract, the whole contract pretty much is how to develop
the suburban revenue requirement, how things are classified and how you divide it up according to what allocation method and then you all end up with the total suburban revenue requirement, what they are allowed to charge the suburbs and then the rates of course, depend on projected consumption.
Bechtel: So that number is calculated for Palo Alto for our share. Is it the rates times our demand?
Ratchye: Right. They will collect that whole suburban requirement one way or another. If the suburbs in total, use less that than they anticipated they would, then next year there will be some balance in the accounting so we will have to pay for that eventually, even though the charge is just a charge per unit,
they will get the money that they are allowed to get. If not this year, then next year.
Bechtel: Thank you.
Gas Rate Increase
Ferguson: If there are no other questions, let’s proceed on to the next item, which was old Item 3, new
Item 2 – the “Gas Rate Increase”. Is there staff comment to kick that off, John? Ulrich: No, we do not have a prepared presentation.
Ferguson: Since this is a topic we have visited twice before in the last five or six months can we just
have a motion straight up to approve the staff recommendation and have our discussion inside that motion?
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Dawes: First I have one question on the subject. I noted that this increase will fix us through the end of the year. We will not be dipping into our RSR any more, but it says that we don’t have anything for post
June 30 when we face higher wholesale costs. Is there any update to that statement John?
Ulrich: It is my understanding we are out purchasing beyond the end of the year and we have purchased about 25% of our needs after and we are looking at changing our way of purchasing and making it longer term out to three years. So we will begin laddering our purchases so that we will be able to have less
dynamics in the price.
Dawes: Assuming that we go through and authorize the futures authorization, will this be material assistance in working out that supply program.
Ulrich: It may be the Ordinance proposal later on does not include what we are doing in gas, because I
have the authority to purchase out to three years in the laddering arrangement. I just have to be purchasing and our resources organization purchases out three years based on our forecasted need of customers. What I can’t do, is go out and purchase more than I think we are going to use.
Dawes: Thanks.
Carlson: I have an important observation to make on this one because I think it is a great, thoughtful policy. The part that I particularly like is that we are effectively perfectly hedged on these long-term contracts insofar as the gas would go to our large customers, which is explained on page three where we
ask them to enter into contracts with us. So we are sure, in this case, that we are not stuck with long-term
contracts -- which is exactly the kind of concept that I have been advocating that we use to some degree in electricity. So this sure looks nice to me. Baldschun: That’s our sentiment, although in the last week and a half as a staff we have planned to
propose a suspension of gas DA as well as electric DA within the next two or three weeks to the Council.
So the pertinence of that particular issue is going to be moot, because our gas customers won’t have the option to go direct access but if they did have the option, then we would like to lock in the contracts with them.
Carlson: So you are preparing to reverse what you were proposing here?
Baldschun: No, we are going to reverse the option of customers to go outside of Palo Alto to buy gas or electricity from other suppliers. That is not going to preclude us from having this rate increase.
Carlson: What I liked so much about this is that it spreads the risk beyond us. Conceptually, this is very
appealing. I don’t see any customers but there certainly would be a variety of opinions and a variety of contracts out there. I don’t see why it is a good idea especially in the gas area to cut off that direct access. If they want to make a contract then it is less of a problem for us.
Baldschun: The risk arises because of direct access. When you remove direct access the risk of the
customer leaving ceases to exist. They are now a captive customer. Carlson: But if we are telling them they have to contract either through us or directly, isn’t the risk removed? That is what it looked like.
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Baldschun: Yes, when they have to contract, it leaves them no other choice so we know they will be a
part of our customer load, so there is no risk on our part. Due to the previous risk we would put gas DA’s
at a serious risk and that is why this is in here. We don’t want to enter into contracts if there is a significant chance customers could leave the system. Carlson: Right, so you can fit together your purchase obligations and the guaranteed sales and they can
fit. And if someone does not want to be part of that then they can purchase directly, which also removes
our risk. Ulrich: Just to interject. We may be moving toward an area of rate options that can still be appropriate. You could have rate options if a customer wanted to move with the market whatever that might be we
would then not go out and purchase enough gas to serve their need along with the rest of our customers.
We would then purchase for them to rise and fall with the market. Those could be options that could be made available through rate schedules. But what Randy is talking about is that if we are committed to going out and buying gas on a long term, because what we believe, is the customer wants stability and reliability, then if we have gone out and purchased for their gas needs, we don’t want them to leave. So I
think we can give customers the kinds of options they want but we don’t want to sign up for long-term
gas if they are not going to be here. Carlson: Well that is the whole point. If we force them to sign long-term contracts, one way or the other, they either deal with the outside supplier – in that case we don’t have to worry about them, - or deal with
us so that we can match it would our purchase obligations, then our risk is gone. There is only a risk if we
contract long-term to buy the gas or the electricity and we don’t have long term commitment from someone to buy it. Baldschun: The City Attorney has advised that there is an implicit contractual arrangement with every
customer in the City that receives service from Palo Alto to the rate schedules and unless you remove that
obligation by giving them the opportunity to buy gas and electricity from an outside supplier -- which we have done through the gas direct access and electrical access program -- they are basically captive customers. We are planning to remove those two programs, so that customers will no longer have an option to go outside of Palo Alto to buy gas or electricity. That program will be suspended.
Ulrich: I think we have to keep this in context of what has been changing recently. We are advocates of customers having options, but with the dynamics of the price and market, we have to rescind or put in suspension open access -- we are one of the very few cities that currently has open access. Because of some of the electric supply decisions and gas supply decisions, we feel appropriate that it be suspended.
That does not mean that we cannot open it back up at some future time.
Dawes: I was just going to add that there is a third alternative you have outlined, too. Simply suspend it and they are locked in as customers and they will pay what we charge.
Rosenbaum: Two brief points and I don’t need any response. I mentioned at the time we did our first rate
increase. To the degree that we have this inverted rate structure that can encourage conservation. But if the customers don’t know about it, it loses its purpose. So at the time of the first rate increase, you did put something in the envelope informing people of the inverted rate structure. That did not happen with the
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second rate increase so I trust that it will happen this time. You can’t remind the customers too often about the fact that they can save gas if they cut their use because of the inverted rate structure.
The second point has to do with these cascading rate increases. We have had 15%, 25% now 25%, you put them all together and that comes to an 80% increase as a total. Taking out the distribution which I assume is still a constant cost, that amounts to about 150% of the commodity charge, I would estimate, and I know you are out purchasing for the next three year period. I would hope when it comes time to
consider the rate increase you are talking about for July 1st we would have some data as to what you
estimate the costs are going to be for the next year, and we can factor that in, helping to determine just how much of a rate increase we need next time. Ulrich: Yes.
Ferguson: Great, thank you. Motion? Dawes: Move that the UAC recommend the gas rate increases outlined in the package including the specific rates enumerated.
Rosenbaum: Second the motion. Ferguson: Any more discussion? The motion passes 5 to 0.
Electric and Fiber Quarterly Report- Fiber
Ferguson: Next item in the new regime is the Fiber portion of the Electric Quarterly Report. This document is stamped Number Four, and the fiber portion is toward the back.
Creger: I do not have a large presentation to put up tonight. Turn to page 7 and 8. What I would like to
do is highlight a couple of issues from the write-up in here. The first is really the table of “Key Accomplishments” for the year 2000 and how those compared to 1999. Dawes: Congratulations. Our hats are off to you. Very excellent performance.
Creger: The guys behind me have worked very hard to keep up, they have worked hard to do it. One thing I would like to point out is the high-probability customers in our discussion. Since I put this report together in January, two of those have now signed on and probably new one piece of information, which isn’t in here, is how the operations are going in light of the economic downturn for the technology
companies: we have lost only two customers at this point to the issues that have been going on.
Ferguson: Any other comments or questions on fiber? Thank you very much Leo. Dawes: We have authorized staff additions, have you had any success in finding them in this tough
market?
Creger: These are the applications. This is my next task is to get through these.
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Dawes: It looks thick.
Creger: It is thick. It look s promising.
Ferguson: Former Dot-comers back on the market. Let’s proceed now with the front end of this old Item 4 which is the Electric Quarterly Report. Can someone please give a quick recap on the quiet, peaceful, stable electricity market? Then, any questions on the report?
Electric and Fiber Quarterly Report – Electric
Rosenbaum: Page 9, Quarterly Financial Update; in that table it shows the actual purchase cost for the quarter was negative and the explanation is sales and surplus power account for the negative purchase cost. The suggestion just looking at the raw numbers is that we made 7.2 million from sales in that
quarter.
Ulrich: Yes Rosenbaum: Somewhere I had heard that the number was three million but I think that was the number
that was in the newspaper story awhile ago.
Balachandran: Correct. It was based on different calculations that we have done. The number that was provided to the newspapers was done from available information at that time. NCPA bills do not come out immediately; there is a lag, so you make estimates based on what you know at that time.
Rosenbaum: This is the correct number then. Balachandran: This is more recent than the other.
Rosenbaum: We are saying “from our hydro” -- that is the only thing we have to sell -- we made 7.2
transactions? Balachandran: And they are pool transactions.
Rosenbaum: Thank you.
Ferguson: Any more questions on the Electrical Quarterly facts and figures? Bechtel: These numbers are actually quite old now compared to where we are in the year. This was
through September. Any feel as to where it is going now, that is through December?
Balachandran: The numbers have not been updated yet. Todays are larger than these. Bechtel: The Operating Margin is going to be a lot less, I am assuming. Is that right? We need to just let
people know that these numbers are third calendar quarter of year 2000. The 4th calendar quarter of 2000
is over, and we are now in the next quarter so turn-around has to be fairly dramatic, am I right, in terms of the margin?
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Balachandran: Turn-around meaning?
Bechtel: Change in the direction.
Balachandran: Yes they have all just increased, sales revenue have increased. Bechtel: The cost has gone up.
Balachandran: That too. Ulrich: Many of the things we'll be talking about this evening are more forecasts and expectations of risk than things actually happening. So, yes these are very favorable from a standpoint of what we expected
them to be. But we see very dramatic changes coming along and that is what we will focus on later. So I
would not focus on these third quarter numbers as being indicative of anything for the future. Dawes: In another section of our material it forecasted that the RSR for the electric commodity side would increase about 7 million or so in the 12-month period ending June and it would appear as though, I
would assume that this level of excess revenue in Q-1 actually went into that reserve or reserves. Does
that imply that if Q-2 was pretty close to the same, that the reserve might be somewhat higher than is indicated? Balachandran: Where are these numbers? I can’t find them.
Dawes: This is in the last item we will discuss tonight. It has a Table 3 showing the reserves at 28.749 at the end of FY 00 projected to be 36.6 at 6/30/01 and the question is, it seems to me that that might be on the low side given Q-1 performance.
Balachandran: I think we tried to take into account the latest estimates that we had. I wouldn’t just
multiply what you had in the first quarter by four times. Dawes: No, I didn’t. I just said that you indicated that Q-2's were pretty close too.
Balachandran: No, I didn’t mean to say that. In fact what I mean to say is it is must less than that.
Dawes: Oh, I misinterpreted. Balachandran: Sorry for that miscommunication. It is much less. And I believe that the numbers will
increase in the latter part of this year. The Western rates are projected to go up in April of this year so as
purchase cost increases, they are going to lower the reserve increases that we may have seen earlier. Ferguson: On Page 5, there's a November update showing that under hot summer temperature conditions, statewide we'd have a 4000 megawatt deficit. In the Governor's executive order announcement February
8, he has managed to find 3700 megawatts of additional sources with on-line potential for July, and with a
little more arm waving, new generation with on-line potential of another 1300, so if we believe the Governor, perhaps we are almost there.
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Electric and Fiber Quarterly Report – Western-PG&E
Ferguson. John, is it possible here under this Item to have Tom Kabat give us an update?
Ulrich: This is an information item; No. 4 on the agenda and this would be a good time for Tom to bring in the Western-PG&E relationship. Ferguson: There's a lot of verbiage in the quarterly report about the state of these various contracts and I
thought an overview would be helpful here.
Ulrich: Would you like Tom to give a summary or were there some particular types of questions that you would like to make sure he covers or how would you like to cover this?
Ferguson: Let’s start with naming the players: who is involved here, what are the relationships between
NCPA, PG&E, Western, etc. and tell us what kind of services and contract resources flow along the dotted lines among them all. Then we will turn it over to questions. Kabat: The first slide is how things started out when Palo Alto was first signing into its Western contract
in the early 60’s. The Bureau of Reclamation was developing the Central Valley Project dams, they had
the Federal Hydropower and they marketed that directly to Utilities. They realized that with just a pure hydro system, they had no way to make it through the dry years and through the fall and winter when the water flows were low. So Reclamation proposed in the early 1960’s to build a thermal gas-fired power plant at Pittsburgh in the Delta. PG&E at that time did not like Western doing that. Western had done
that in the desert southwest, and PG&E would rather see more control by PG&E of the situation, so
PG&E instead proposed that Western enter into an "integration agreement" with them that would let PG&E build the thermal power plant at the Delta and PG&E would sell Western cost based power from thermal power plants. Western Reclamation would then have the same look and feel as owning thermal power plants.
That led to this model (shows slide). We have reclamation on this side and under the Department of Interior, the Bureau of Reclamation and they run dams and canals so they build the Central Valley Project Dams. They produced the Federal Hydro-power and they deliver it to Western Area Power Administration (referred to as "Western") all the time. Reclamation initially entered into this contract
with PG&E, and the Integration Contract, and that became a resource and an obligation in PG&E’s
portfolio. Now PG&E had other things in the portfolio – they had qualifying facilities, their own federally licensed hydro-sites that they developed, a Nuclear power plant, a number of gas power plants and geo-thermal
power plants and together the nuclear gas and geo-thermal plants are used to provide thermal firming
power to Western through the Integration Contract. So what you see down here on the slide is Western getting two sources of power, their Hydro power and the thermal firming. And then that is being marketed to Palo Alto and the other customers (the other 89 Western customers). I show a little line through the NCPA and that is a joint powers agency of Municipal Utilities and power districts. The
service they provide to us in this regard is a pooling service and an hour-by-hour scheduling of our
Western contract to cover our load. They also provide a number of other non-energy, direct energy services, such as legislative advocacy and consulting on those kind of things as well as alternative power plant development like our Calaveras project.
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So that is a brief overview of simply who the players are, mostly with respect to energy and the flow of energy. The dollars flow backwards on the diagram to pay for the energy so that Palo Alto pays Western,
and sometimes pays PG&E directly if that works to PG&E's interest in cash flow; we sometimes write our
checks directly to them. Sometimes Federal hydro power goes up towards PG&E if there is more Federal hydro-Power than there is load. PG&E takes it into their system under the Integration Contract and that decreases what they have to purchase and generate. And later, they return that. That is the players, the integration agreement, and a little bit of history.
Ferguson: Great, Tom. Could you slide the chart down a little bit so we can handle any questions from Commissioners? Bechtel: Tom, is it fair to say that PG&E transports all that power to us? Can you tell us something about
how it is transmitted to us?
Kabat: Right. I did not bring a map, but the transport mechanisms -- mostly the Central Valley Project -- are mostly in the north part of the state. Western has its own transmission system that transmits the power down to Tracy, which is pretty much due east of here. From Tracy it is wheeled across the PG&E system
and delivered to Palo Alto at our Colorado sub-station. So PG&E has a wheeling agreement with
Western and Palo Alto where we pay for wheeling service across their lines. Rosenbaum: I had the opportunity to speak with Tom earlier in the day and I learned things that I did not know -- and I am supposed to be well informed, so I thought this review might be helpful for all of us.
Tom, within the last 5 years I know that Western was securing firming power from sources from other
than PG&E and I now I guess it is done all from PG&E. How did that come about? And a second question would then be, what are the terms of this contract under which PG&E is supposed to provide firming energy and why are they so anxious to get out of that?
Kabat: Now I'll have to show you my hand-drawn notes. This is a little time line – we have 1960 to 2004
across the top. In about 1960, Palo Alto negotiated its purchase contract with Western. That contract became effective in 1964 with deliveries starting to Palo Alto. At that same time, Reclamation proposed the thermal plant at Pittsburgh and PG&E then proposed the Integration Contract. Now the Integration Contract is shown as starting to run in 1966 and it is scheduled to run through 2004. So all this blank area
is what we have been through and the green area is now in front of us. As Western marketed more and
more power and the power market has changed a bit – I think it was in the late 70’s that Western started entering into purchase contracts in the Northwest and they started purchasing up there -- but the chunk at the bottom is just a little sketch of what happened to wholesale prices.
Wholesale prices dropped along that period. As they dropped more and more, PG&E had a greater
interest in selling more of its power to Western. So PG&E and Western in the early 1990’s negotiated amendments to the Integration Agreement that made it more favorable for Western to start terminating its Northwest Purchase Contracts and PG&E would take over the supply obligation as we would terminate each contract. PG&E would fill in behind it. So this little wedge I have of Northwest purchases, you see
it declining, and it finished off in December of 2000. Again, it was something that was negotiated in the
mid 90’s in a very different environment, but it is still applicable now through 2004 under our existing contract. So there have been Northwest purchases but they have diminished to zero, and we do just little spot purchases now and then to meet other requirements. So PG&E is filling in a lot as envisioned in the contract.
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Rosenbaum: And then what are the terms of that contract and why is PG&E so anxious to get out of it?
Kabat: The contract, since PG&E proposed it as an alternative to Reclamation building its own gas-fired thermal plant in the Delta, is a cost-based thermal contract. It uses a couple of PG&E’s resources (it includes their nuclear plants, their gas-fired plants and their fuel thermal plants). It did not include the costs of their Federal hydro or the costs on their qualifying facility contracts. Under that Integration
Contract, Western pays all the costs of those thermal units. They pay the capital cost, the return on
investment, the debt service, the taxes, the fuel the O&M, they pay it all and it is all calculated every year. It is projected and then it is skewed up so there is a full cost recovery as there used to always be under a regulated environment. PG&E has had that contract for 35 years and they knew about it when they went in to negotiate AB 1890. AB1890 had a clause that said PG&E were required to reduce their market
power by selling one half of their gas-fired units so I drew a little box showing ½ of the gas-fired units.
They sold those off in 1998 and they got greater than book value. They enjoyed doing that. And they have reinvested that money in other parts of the country. They sold almost the entire other half of their gas units and also sold all their GEO units. So they sold quite a few plants in the late 90’s still knowing all the time about their 39-year contract that they have had with us that still has 3-¾ years on it. So despite
selling quite a few plants, they are now claiming that it is becoming costly for them to buy power to meet
their obligations under the contract -- after they sold the plants they used to use to provide the power. Dawes: How do they price it, then, if they don’t have any thermal or gas fired –
Kabat: They do have thermal plants – the thermal plants are still in the formula – the geo is gone and
almost all the gas is gone but for maybe two plants – Humboldt and either Hunter’s Point which are two small gas-fired plants, and Diablo. Now the formula is in the contract – the cost-based formulas are very explicit about it. You take these costs from the geo plants (they don’t have any geo plants so there is no cost), you take these costs from your gas-fired plants, so they take these costs from their Humboldt and
Hunter’s Point Plants and all their costs from the Nuclear Plants, so the formula is still working, it works
just fine. Their selling off resources did not alter the contract, by the way, nor did they give us the proceeds from the sales of the resource under the contract. That would not make sense either. All they were obligated to do is to perform under the contract, and the formula has worked and they have been performing to date.
Ferguson: Any other questions from Commissioners. Carlson: I guess the key question is if the contract is working, short of bankruptcy what other way do they have to get out of these contracts?
Ulrich: I think that is probably a question for another time – we have done a lot of analysis and have looked into that whole matter. Part of that is our reason for bringing our proposals forward is because, regardless of whether we believe they can and will abrogate their contract or their bankruptcy, it is of such critical nature toward our integration and such a significant part of our power that we get here, we have to
make some assumptions that something like this will happen. And that is what has led us to our proposal.
We will talk about that later. Ferguson: We thought we had the luxury of time between now and 2004 to replace the Hydro-Power through Western on the left side of that picture, filling the hole which we will talk about later tonight and
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what’s new in recent history is that for a variety of reasons for a variety of scenarios including but not limited to a bankruptcy there is problem with the thermal firming power on the right that we may need to
replace. We need to pay attention to that promptly because both these scenarios can unfold quickly. Any
other questions? Ferguson: For the record – Council member Beecham has joined us.
Beecham: I would just like to thank Tom for his corporate/municipal memory.
Ferguson: Great. Thank you, Tom.
Northern California Power Agency (NCPA)
Ferguson: In our new agenda sequence, we are going to address our NCPA topic here. Since Mr.
Beecham made it back just in time, would you like to give the NCPA report? Well, then let me do a summary. The Northern California Power Agency and its two dozen members deliver among other things to us a very well-organized set of relationships with legislators here in the State and in Washington DC. And a number of us attended their meetings in Sacramento in January -- Director Ulrich, Mr. Dawes, Mr.
Bechtel and I. We were able to visit with Senator Sher and new Assemblyman Simitian to discuss power
issues. Both of those legislators are completely and thoroughly engaged in the topic and are carrying bills or exercising leadership. Assemblyman Simitian wanted us to be sure to report back that he still understands that you multiply volts times amps to get watts; he replayed the formulas for us correctly, just as a rehearsal and to assure us that he has the concepts right. He is doing an excellent job. Senator Sher is
co-sponsoring the Burton Bill which would have the state buy the transmission assets in California, the
book value would be 3.8 billion. Rumor has it that there is a private entity that also would like to buy the transmission assets for about 5 and a quarter billion – so there is an interesting little game there going on between the legislature and private entities. Senator Sher is also the author of a bill to spend about a half billion dollars in demand side management, energy-efficiency technology in the state to as promptly as
possible get "negawatts" delivered with the application of general fund dollars. There are a variety of
other pieces of legislation slated for the middle term. I must say that the Legislature is completely focused on energy, and has about the right sense of priorities on bills that have to be passed to demonstrate action and to get things done over the next couple of weeks.
The Governor issued a series of executive orders last week, the common theme being that he is using his
emergency powers and basically waiving every other kind of regulation for the purposes of getting generation on line before July 2001. An interesting wrinkle in those executive orders is that he is proposing that the State use the same bonus-payment mechanism that was used in Los Angeles to get some of the freeways rebuilt promptly, and his proposal is to take the appropriation for the Department of
Parks and Recreation to fund those bonuses. He has waived all the competitive contracting rules.
Basically, the Governor has done everything in his power, short term, to get roadblocks out of the way for new generation, particularly where it has a prayer of being installed and on line by July 1st. Those actions by the State turned out to be enormously important for us to be able to refer to back in
Washington, D.C. where we were last week with NCPA and APPA. We went with Mayor Eakins,
Councilmember Beecham and the staff. We visited both Republican and Democratic members of California delegation as well as leaders from other states and key committees. In every meeting, whether it was with the California delegation or others, we found it useful first to eat crow as Californians and
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announce that there is plenty of bipartisan blame to go around as to how we got in this problem, but we are acknowledging it. It was so important to be able to point to local legislative action, Governor action,
to indicate that California was doing everything in its power to take care of these things in the short term.
That was important just to establish credibility with other Federal officials who we might need to take action in the next month or year to help get generation and transmission fixes in place. The NCPA position (I am going to oversimplify here) was that we wanted an interim wholesale price cap
-- so that some of that Northwest power we saw in Tom’s drawing can come to us at a finite price in the
near term, whether it is with PG&E or some other entity. We found a lot of Republican objections to price caps, but I think there is a crack in that policy if the caps can be "interim" enough and the cost-based formula can be clarified.
There is also an understanding that regional transmission is part of the problem. The reason that free
markets did not work in part is because transmission has a number of bottlenecks. One bottleneck is that the Bonneville Power Administration installed thinner wires to Canada, so today Canada really does not have enough copper pipeline to send much power down through Oregon, Idaho and Washington to help us. We have about 10,000 megawatts of power available from Arizona and New Mexico but they can't
ship it to us in Northern California because of a bottleneck known as “Path 15”. One of the things we
learned or at least clarified in this trip -- and it is important to pass along here in the City -- is that all of the Northern California rolling blackouts that we've suffered after last June could have been avoided, if that 10,000 megawatts available could have sloshed from the Southwest through Los Angeles and northward through Path 15. We were truly limited by that bottleneck from the south, and the power
supplies coming from the Northwest were not sufficient to help us and we just hit the blackout triggers.
Let me say that again – we could have eliminated all the rolling blackouts in Northern California, Palo Alto and her sister cities in NCPA and PG&E if Path 15 had been in place. That story was an important story to tell. It caught the attention of the new appointees in the Department of Energy, the career people
at Western, and Republicans and Democrats alike, whether in the energy committee, corporations or the
like. Everyone understood that Path 15 was something they could help fix in the near term. My guess is whatever California cannot do it by itself, we will probably get some Federal support one way or another. The Path 15 design and environmental impact statement is already prepared, so it is a product that is ready to go with the right kind of leadership and a supplemental appropriation. And that might help us a lot to
survive to a June 2001. So the trip did a lot more than help us establish relationships. I think we
identified the issues short term and long term. Mr. Beecham, would you like to add something to that summary? Ulrich: May I just add a couple of quick items on this. While we were back in Washington we had an
opportunity to have dinner and basically an evening with Senator Diane Feinstein from California and she
met specifically with the Northern California delegation and NCPA. And I believe as all of us do, that she has an excellent understanding of the issues in California and is there working on our behalf and all of California to help alleviate the situation with what help Federal Government can give. W met with her the following day and she is working on legislation more in this area of soft caps which you referred to. So, I
just want to point out the extreme benefit of staying active and having our elected officials, including the
Mayor, go and have direct contact and let them know what the issues are here in Palo Alto. Ferguson: Bern, I just see that Mayor Eakins just joined us in the audience and I would just like to thank you both for joining the team and making the visits. We had an effective week back there and I think
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when we need to ask for Federal help, we have set the stage for doing it. We were also able to pay a call on a Federal Communications Commissioner to talk about how some of our NCPA members are
interested in fiber and telecom.
Transmission Agency of Northern California (TANC) Ferguson: John, how about TANC? TANC is an entity that has been proposed by some as the
implementer of some pieces, if not all, of this transmission system purchase or the Path 15 build-out or
the like. I am just wondering John if you can comment on TANC. Ulrich: I will be brief. As you know we are partial owners in that transmission facility which is a 500,000-volt transmission project or line that comes from Oregon down to Tracy. The bottleneck that
Path 15 – frankly I should ask the Mayor to come up. She has become extremely knowledgeable in Path
15 and would be able to talk as she did with the Senator’s representative from Alaska on this particular subject. It shows how important it is where we have a good understanding and are extreme advocates for this. In California and also in Federal Congress their issues have been on the shortage of supply in California. We are trying to raise attention, as you have pointed out Mr. Ferguson, that the issue of
transmission is as important, if not more so particularly to Palo Alto.
Everything we are discussing this evening on getting additional supply does not do anything for us if we cannot get it here, and that is the cause of rolling blackouts. This Path 15 line would be basically reinforcement, putting a parallel line in between two 500,000-volt substations, one in Los Banos and the
other in Gates. This is a very rural area along Interstate 5 and it would require engineering and potentially
eminent domain from the Federal Government to get the project started. That was our focus and I believe we have educated and communicated well on that. Then the State of California would help us support the construction cost, which would be paid back by Palo Alto and other users of the transmission system. It is extremely important to move that along quickly so that line could be up and running and moving power
within a couple of years. So, we are going to keep high on focus -–this is extremely important to us and
we will continue to work on that. Bechtel: John, is the assumption about the creation of another transmission agency going to expedite or slow down, either one, or have no effect on Path 15?
Ulrich: It may have effect in a slow-down way if there is a protracted period of time it is going to take for figuring out who is going to own and maintain the transmission system. The Senate Bill 33X that Mr. Burton is moving along would have the ownership transferred to the State through revenue bonds and then be managed in some way by the IOUs like PG&E, so that may take some time. Currently PG&E is
saying that they are interested in doing Path 15. Well, there is a big difference between having interest
and having the money, particularly in their financial situation, and then going and building it. I believe that could be a problem in slowing it down, whereas if the Federal Government through Western took an active role and got engineering going and worked on the rights of way – they could “kick-start” that and then turn it over to the State. So I don’t think we should slow down.
Ferguson: Thank you. Beecham: I see in the paper that the Governor is also backing Path 15. So whereas a few weeks ago we were trying to round up some enthusiasm for it, now everybody is, in fact, jumping in I think. I am
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concerned that everybody is going to be trying to take charge and that will in fact slow it down. I wonder if there is a role for NCPA or TANC to play with Western, to try to control the situation if it is gets out of
our hands because Sacramento is now involved.
Ulrich: Good question. I don’t think it is out of our hands, and in fact we are meeting tomorrow in Roseville and then we are also meeting with Western tomorrow in Folsom. Part of the discussion will be about this and how we can move quicker. We think we have enough interest to move Western, if Western
felt there was enough support from Western's customers to move ahead with proposing and funding the
$30,000,000 to get this started. Beecham: Would Western, in a sense have preeminent rights on this issue over any other state authority?
Ulrich: I don’t know the answer to that. We believe that they have jurisdiction, or the Federal
Government through FERC who is responsible for Interstate transmission system. This would be an arm of the Federal Government and they may be the project manager for the Federal Government to make it happen. We think this is the right way to help it get started and the funding could probably be done much quicker than wading through this process in California. But ultimately they would have to work together
and coordinate it.
Beecham: As a note, when we were in D.C., one of the things we requested of a number of the people we talked with was roughly $20,000,000 for Western to kick-start the project there and I think we found support in quite a few of the people we talked to for that.
Ulrich: What we are looking for, I think, is around $30,000,000 which would allow the design and finishing up the environmental studies. Dawes: John could you clarify for me, does TANC carry the Western power from the Trinity-Shasta area
down to Tracy – is that the main activity of it or is it for importing northwestern power into California?
Ulrich: I am not sure I know how the flow takes place – maybe Tom might have a better understanding of that.
Dawes: Does Western have an interest – are they part owner as Palo Alto of TANC?
Kabat: Western is a part owner of the California Oregon Transmission Project – they are a member of TANC, they own at least 100 megawatts of it but the thing COTP does -- it is called the third AC intertie. PG&E built the first AC intertie to the northwest, Western alone built the second AC intertie and then
TANC built the third intertie which is called COTP. All three of those bring northwest power into
California and ship California power back to the northwest when they need it. So they are all just across-the-border transmission systems. Western also operates its own transmission system that brings power from Trinity-Shasta up in the north down to Tracy.
Dawes: Separately – not on the TANC or the three lines are in addition to the Western lines.
Kabat: Right, because the COTP is operating at 500,000 volts and the Western Transmission System is at 230 kv bringing that Shasta-Trinity power down.
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Carlson: One more question. My concern is the southern Californians, because the current supply/demand situation is such that if Path 15 is not improved, their market much of the time is better off
in terms of having more power available than they can use, which keeps the price down. Are they
supporting Path 15? Sounds like something we need, they don’t. Ulrich: Well, not necessarily. If there is Pacific Northwest power available and it can move all the way through the state and it can move down to the northern part of the state, that allows power from here to
move south. So I can’t say that everybody is in favor of it. I don’t know. But you have to recognize that
some of the reason that Path 15 is not been done before is the incentives between the utilities. The southern lines are owned by one utility and the northern lines are owned by another, and there wasn’t incentive for them to reinforce Path 15 and make it a superhighway for movement between their particular markets they were trying to serve. It is a whole new dynamics now. You can understand transmission
systems when they were first built were not contemplating as much flow back and forth as they are now.
Carlson: So in a wet year then, a normal or better year in the northwest, it would be shipping power all the way down to Southern California but in a drier year or time, it would be shipping in reverse?
Ulrich: All those things could happen. There is generation in the center. Diablo canyon is pretty much
right in he middle. The only response I have with any level of accuracy is there is power particularly in the southwest that is available and owned by some members of NCPA but they can’t get it here all the time. An example given to us by the Western Administrator that we met with is that during one of the rolling blackouts in Palo Alto there was surplus of several hundred megawatts at Parker Dam in Arizona
that they were willing and able to send but it could not get here because of Path 15. Those are the kind of
real examples that dictate the necessity of getting on with Path 15. Ferguson: Under the best of circumstances Path 15 might be complete by Fall 2001 -- sorry, 2002 -- if everything happens perfectly, but that's marginal.
Ulrich: The other reason it is beneficial for the Federal Government to be involved is that they have the power of eminent domain, which would be the expedient way of getting rights of way and the line moving.
Recommendation to Fill The Electric Supply Portfolio’s Post-2004 Deficit
Formerly No.2 Ferguson: The next item in our flow is old item 2, recommendations to fill the electric supply portfolio's post-2004 deficit. This was the problem that we had been approaching with the luxury of time, until the
events of the last few months.
Ulrich: Jane Ratchye will come up and go through this a little bit. I would like to draw your attention though to the dynamics as to what we are doing. When this was prepared, you will notice in the discussion in the second or third sentence, it says “due to rapidly changing power market prices, staff
recommends council delegate the responsibility to enter in the long term contracts to the City Manager
who may further delegate that authority to the Director of Utilities". I think that is an excellent idea. However, I think it is inappropriate and premature to have it right now in the post-2004 recommendation. It is more appropriate in what we are going to discuss later.
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Dawes: John, I think I need a translation – so you are not proposing a contract authority to solve this
problem in particular at this time. You are just going to concentrate on the nearer term problem.
Ulrich: Correct. And there is time through the normal, more thoughtful process that you can go through this discussion and still achieve the contracts that we are looking for, going through the UAC and Finance Committee and Council. There is enough time at this point to be able to do that.
Ferguson: Jane – you have already given us several good updates ramping up to the 2004 problem, so maybe we can focus tonight on only those things that are most relevant or most recently changed. Ratchye: I will just briefly go over some of the most dramatic slides that are found in the reports and talk
about the recommendations. This is a picture of where we are for a little while – you can see our load is
the gray bar and Western Energy provides almost all of our needs through 2004 when, as you can see, the base resource of Western starting at 2005 provides significantly less. So this is a good picture of the "hole”, as we like to call it. It does include the integration. But the hole does have a shape – it is not flat across every month. This is just a picture of what that deficit looks like and as you might suspect, you get
a lot more Western since it is hydro, you get a lot more in the spring than you do in the dry fall. The
“hole” is really deep there in the fall and in the winter. Ferguson: Palo Alto’s load is as level as that, at about between 140 and 150 – it is surprisingly level.
Ratchye: It is surprisingly level. The only thing about the “hole” is that this one shows a deficit, which
again is highest in the fall and winter and lowest in the spring. It is highly dependent on hydro year so the amount of resource we need is very dependent on hydro, especially since our other resource is also hydro: Calaveras. So we are changing after 2004 to being very, very dependent on the hydro year. This preliminary study that we did is kind of looking at different, almost generic options, including not making
any commitment at all; just relying on the spot market completely (an almost “do nothing” alternative);
and then fixing in some sort of long-term contracts at fixed prices or at some sort of market-varying prices with a cap – trying to set up some sort of a contract that mirrors the integration contract we have currently, as Tom has explained, with some other third party or maybe have Western do that somehow or have Western do that through a third party and buy that integration amount which would take out the
hydro risk either at a fixed price or a floating price; or building a thermal generation resource, something
that was tied somehow to gas prices and that would be either a participation in a big plant or just buying electricity at some gas price index; or building generation locally. This chart is in the report and it summarizes the different groups that we looked at. I am not going to go into the conclusions of study but you can see the more uncertainty in prices, well you see that inverse relationship between knowing what
your cost is and being far from market. So there is that.
Dawes: Jane, I could not understand this chart. Could you please lead me through it? Ratchye: Which chart?
Dawes: When you looked at the results from the study that showed the total cost to serve the load – I looked at two final ones – one was called the “cost of serve load” and the other was called the “mark to market” and that is how far you are from market. Are those numbers in this report here?
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Ratchye: They are in your report. So there are kind of two things – you like to have low cost. But we are not sure what that is going to be because we don’t know what the market prices are going to be. So if
you want a stable cost, you would lock in something. But market prices may dip a little, so your cost
could be above market at some point. So there is a risk to locking in forward prices. If you are most concerned about being always at market prices, whatever they were, then your best alternative is to do nothing and just rely on the spot market. But then there is a lot of volatility, as we now know, with that alternative. So this chart here just lists sort of 8 types of resource groups that could fill the hole. For
example, Alternative #1 is to get a 25 megawatt 10-year contract for fixed price energy and 25 Megawatts
for 5 years, buying electricity at an index with a cap, also investing in some sort of gas unit when your purchasing your gas at fixed price. And then whatever else you need is on the spot market. So do you understand the chart now, Mr. Dawes – this is just a chart of the 8 alternatives that were looked at in the study. The chart results that show the mark to market and the cost to serve mode are referring to these
alternatives.
Dawes: I think I do, but continue on. I am not afraid to ask questions when I don’t understand. Rosenbaum: Jane, if I might interrupt. I had perhaps the same sort of confusion. These 8 alternatives are
different combinations and my impression when I studied it for awhile is that Alternative #1is the best. Is
that correct? Ratchye: It depends on what perspective you have. Yes, but you are right.
Rosenbaum: At the beginning of the report there is a recommendation. Does that recommendation
correspond to Alternative 1? Ratchye: I don’t think we can conclude a whole lot from this preliminary study. A lot was characterizing the hole in terms of all the different things, the hydro uncertainty and the different months, and just
putting in different types of resources to see how they'd look. What we really think we need is a lot more
balanced portfolio since we are still hydro-exposed. We need something to be on the other side of that – some sort of gas prices that we can consider a natural hedge to hydro. It does not look good. But, just in terms of this preliminary study, what we are recommending is that – this is essentially what we are sort of planning to do, without having any actual deals in mind. Where we should be in terms of a good,
rounded, balanced portfolio is to purchase some amount, maybe 25 to 50 Megawatts of electricity at some
price tied to gas price, to somehow get some gas price exposure into our portfolio up to 50 megawatts for a fairly long term up to 20 years. But maybe hedge some of that gas for a shorter period of time, maybe 3 to 10 years. Either by fixed price mechanism or some call options in our gas prices. Then the next piece is to buy some shorter term, maybe 10 to 15 year electricity up to 50 megawatts, maybe 25 to 50
megawatts chunks at fixed or capped prices. And then the final one is to purchase another chunk, maybe
15 to 35 megawatts for a shorter term yet – 3 to 10 years – at fixed or capped prices, and the balance would be relying on the stock market or short term purchases. If you did that, you would end up having a portfolio that looks like that. The idea is that we would get some sort of a gas thing that is kind of round the clock and throughout each month you would buy something, 10 year for about half of the remaining
deficit and then another chunk for 5 years about half of the remaining deficit after that.
Dawes: Jane, I was confused by the amounts. It looked as though you were buying 130 MW above the Western, Calaveras, and SCL. That's only about 75 so I can’t relate those.
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Ratchye: If you look in this chart, it does not come up to that amount. The idea of this particular portfolio – is that you can see that 25 megawatt gas unit slice is pretty constant for every month and the
10 year (big purple slash there) that is half of the remaining deficit– so that varies from probably 75
megawatts in the fall-winter to probably maybe 5 megawatts in the spring. Dawes: It would average 50 – is that the idea?
Ratchye: Around that. The general idea is something like this – to have a portfolio of different products.
You don’t have to buy a block that is the same every single month. So you buy some sort of strip that you can shape. We want 50 megawatts, 50 megawatts, 25, 10, 5, 10, 15, 25, 50, 75, like that. We want that shape.
Dawes: Do you get into your analysis exactly when you would enter into these contracts? This, of
course, relates heavily to what we will discuss later on in the evening, because unless you buy a contract which is pegged through a varying cost basis, like gas which would be partially hedged under your analysis here. The thing I worry about is entering into all of these contracts on the same day – if you will – we lock in that pricing – we should not only have to layer them in terms of length but we also have to
layer them in terms of when we initiate them as well. Is this part of your recommendation.
Ratchye: That would be part of our plan. We would never want to peg the market at one time and buy all of our – fill in the whole deficit at that particular market because we are going to be wrong one way or the other – we will be either lucky or sad and so we would not want to do that. We want to spread out these
purchases into smaller chunks. We may want to buy the piece of the fall and then wait a year or buy 5
years of the fall or a 2-year piece or something like that. I think we need to buy them in a bunch of different pieces. We do not want to peg the market at one point. And then, Commissioner Carlson brought up the point that to make any of these purchases we are going to have to have customer commitments, if they are still eligible for direct access, to make sure that they are behind these long-term
commitments. I think that is a key part, too.
Ulrich: I would just like to interject and remind you that what we are here for tonight is to ask for your support of the plan which was conceptual recommendation and then at a later date we will come back with an implementation plan which would be far more detailed and would get more to the answers to your
questions, Commissioner Dawes.
Ferguson: Jane, I am just watching the clock here and I wanted to – Ratchye: That was my last one. As John said this was a very preliminary analysis. This is one possible
way to fill this portfolio. We want reaction of what this looks like to the Commission and support for a
plan that allows us for some sort, for the ability to act on some of these broad principles here which are: diversity, pieces, different lengths, different quantities, to fill this odd shaped hole that we have. Bechtel: Jane, I think this is an excellent analysis and I am assuming that the tactics of how it is
implemented would vary in certainly you can not put in a spreadsheet analysis all of our individual
assumptions about when, exactly what time of the month etc. to buy. But there was one thing that I really liked about this – it had to do with the fact that we are discussing gas today also for tonight. Is it possible that we can buy gas for a power plant and buy gas for here and get some discount based on volume of
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some sort? If that does happen, and I am assuming that it won’t happen, would it be a couple of a percent, what kind of price break would we get if we were to buy gas for both this and for heating?
Ratchye: I don’t know the answer to that question. My first guess is I don’t think we would get much. We are getting a pretty good market price right now with our current load. To double it, I don’t think we would get a better price.
Carlson: Jane, this is a very interesting analysis and there are a couple of parts – first of all, this load
shape –doesn’t the whole region face this same kind of hole because we have so much hydro, both here and in the Pacific Northwest. So isn’t everybody trying to fill a hole in October and September and to a lesser degree in the winter time.
Ratchye: I don’t know that everyone has the same shape. I know other NCPA members that have gas
units. And the reason our hole is so large, remember, is that we have such a relatively large fraction of our current load met with the Western resource, so to have it cut 60% is huge. To some other NCPA members it is a much smaller fraction of their portfolio today. They have a hole, maybe it is the same shape, but they have a portfolio that is already filled with a lot of other contracts or generation.
Carlson: So we are really the equivalent of a small town with a big dam that just runs some of the time. Ratchye: Yes.
Carlson: Let me ask about timing – you know we thought we had years or at least months to discuss all
of this – but in terms of timing, some parts of this would have to be committed to very quickly. The most obvious one of those is if we want to buy a gas plant. Now is the time to start checking it out and making the commitments for it. That is by far the longest lead-time item. And given the madness of the markets, the contracting is probably something we should avoid for quite awhile until things calm down. Is that
right?
Balachandran: I think we will take those factors into account. Again, we will be starting the post-2005 period that we are contracting for. We will have very high prices for this year and next year, but they but they are back down again for post 2005.
Carlson: "Backward dated” is that wonderful futures market term that about 4 of us understand. It means today’s prices are higher than futures prices – right? Balachandran: Correct. So we use a mixture strategy – there is a timing component to it in the sense that
there is no way we can do all this at one go, unless we hire 10 new people. In terms of the sequencing,
you are right, the gas unit will take the longest so we will start work on that and that is kind of what we are looking for here from you is approval of this kind of approach and the approach we are looking for here is diversified. We are diversifying the kinds of resources with Tom and so that we can start talking with different people to see what we can get from the market.
Carlson: Well, what I am thinking of is, I think this looks like a very thoughtful plan, because of its diversity and, but one part of it that would really help short-term if we can move it up as much as possible, is that it is cheaper to buy a gas plant than to buy the electricity that the plant produces right now. And that is a really permanent benefit and that is a really interesting item, to see how fast we can
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push it to get us out of the problems, if we are forced in the situation in 2002 or whenever. If we really pushed it how quickly could we acquire and/or build a gas plant? In fact, you could probably acquire it in
a couple of years. Could you permit and build one in 3 or 4?
Balachandran: That’s what we are working on, in 4 years we should be able to get it. And there are a number of options to do this. You can buy a "virtual" power plant or you can look at siting something within Palo Alto. I know it is a long shot, but it is something we'll consider and look at. You can look at
some of the Calamine plants that may be built in the South Bay. So the number of options are here that
we will go ahead and look at. I think that before 2004 we should have something in place. Carlson: Given our potential near-term problems, I am real excited about the virtual option, acquiring a share of a currently permitted plant, because everybody in this market is not only looking at how
expensive the power is today but how cheap it is likely to be in a couple of years – not for sure – but all of
the futures markets are telling that prices are going to be dropping like a rock somewhere in the next 18 to 24 months. Balachandran: And that is reflected in the market price today?
Carlson: Yes. Ferguson: Tell me, are the Commissioners comfortable enough with this report and this discussion that we can take our action now? Mr. Rosenbaum?
Rosenbaum: Yes, I propose a motion as written here that we recommend that the City Council approve the conceptual recommendations regarding how to fill the supply resource gap beginning in 2005 described in and attached to this memorandum. That's a motion.
Bechtel: Seconded
Ferguson: Any other discussion. Bechtel: Let me just make a brief comment Jane. I thought it was a very nicely written report and indeed
the one that preceded it on the use of financial futures – I thought that one was very nicely written too. I
thought perhaps an interesting point, which you pointed out is that there is two criteria by which you can use to judge this. One is: what is our price compared to the market and clearly if the spot market is a good deal less that your price, you wind up with people asking for deregulation. On the other hand, if you have a lot of price variability because you are close to market that makes people unhappy too. So if you can
find some way to combine those two criteria as we go forward, that might be helpful. And, John, I notice
there is nothing about coal in here. Ulrich: Well, if I was able to push my button and interject, I would have said that there should be a look at coal. We even had a presentation the other day about how it is time to look at nuclear again as an
alternative, neither one of which will probably be available in a couple of years. But if we have
transmission access, some of those alternatives are clearly worth looking at, particularly if we are trying to diversify our mix over a long period of time. Thank you for reminding me of that.
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Bechtel; I think John also you might be encouraged by Mr. Hassett's use of solar. I understand the end of this month, he is having a demonstration and he pointed out to you that he would even sell you the
equipment.
Ulrich: Yes he did, and I owe him a lot. His solar project is 32 kW – the largest between SF and southern California and I think the dedication is on the 28th . This is a good time to point out that a key component of future resources is the amount of "megawatts" or the amount of power that you don’t need to have if
you offer enough incentives and the right encouragement over a fairly long length of time to get
considerable amount of reduction so that you don’t have to go out and buy this peak power or power at marginal cost. Ferguson: Great. If there are no other comment, all those in favor of the motion?
Carlson: One question. My understanding is that we are approving this in concept but that staff is not going to go ahead and start contracting for this power; they are going to be looking very carefully to getting us into the power plant as quickly as possible. Is that correct?
Ulrich: As I stated earlier, we will remove the portion in the discussion about having this authority
delegated to the City Manager on this particular area but that our recommendation and the motion is to approve the conceptual recommendations regarding how to fill the supply resource gap beginning in 2005.
Ferguson: All those in favor? The motion carries 5 to 0. Thank you Commissioners. Let's take a five-
minute break followed by a five-minute grace period.
Guidelines For The Use of Financial Instruments for Managing Price Risk of Electricity and Natural Gas
Ferguson: We are picking up after the break here. We are back in session. And we are inviting the presentation on what had been old Item 1 – it is now item 9 in our renumbered sequence.
Balachandran: Alright Commissioners and folks – I am going to try to keep it under 10 minutes here.
This is an outline of what plan we are presenting and it is an outline of what is in your report. The reason to manage price risk is that customers value statement prices and the wholesale energy market of all time. And that is the reason why we would like to manage price risk. The way in which we manage price risk right now is through physical products, we basically buy energy, electric and gas at index prices or fixed
prices and that is how we manage our risk. We also at times we buy options – a physical product with a
capped price. The reason we would like to use financial instruments is that we basically get the same performance out of financial instruments that we would get out of a physical. It is possible to get the best available price in certain conditions where we buy energy from maybe one physical supplier. We may not get as good a price or a limited number of physical supplies or as good a price as going out to the market.
Credit risk is another point in today’s market, credit risk is a big deal and if you do deal with some of the
financial houses on the exchange your credit risks could be reduced. A number of products are available on the financial side that are not easily obtained on the physical side. One product that comes to mind that we have not been able to utilize what is known as bases and bases is basically another word for
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transportation. So, for example today there is a Natural Gas Futures Contract – you can buy the contract but you also have to hedge the transportation cost and that is a financial instrument. You can actually buy
transportation physically too. You have to go to 3, 4, 5 companies and get transportation. So it is just
very easy to do a financial instrument for bases. Well, today we can’t do that. So, that is one of the products that is out there right now that we would like to use. In our proposal, there has been a lot of concern about just the use of financial tools and we are limiting
ourselves to tools for purely hedging objectives and the three products we plan on using are a) financial
forward contracts, b)call options and c)collars. The repetition of what I just said – the point of using financial tools for us is it is just another tool to manage our risk and the term we are proposing would be limited to 3 years. Selling of instruments is prohibited except if you are unwinding a deal that you already got into and the 3 products that I talked about earlier. There are only 3 products that we are
proposing right now and the City Manager is responsible to oversee the implementation of this plan.
The next step in this initiative is to get the risk management systems and processes in place. When you are using financial instruments you have to make sure that all the controls are in place, we have to make sure that our Finance Department, Legal Department, all the recording systems must be in place, the
management structures, the internal oversight and number of steps to go through on that, have to make
sure that all the credit agreements that – we are figuring that it will probably take us close to six months between approval and actual execution of first financial contract. That is our estimate right now. That could change.
The second bullet deals with review of the City’s Investment Policy. We may need to change that policy
since we will be using financial instruments. We were talking to the legal folks about that and that may be brought back as part of the implementation process and we will return to the UAC and Council with the report on how these financial transactions have performed and in our spot for our regular process for reporting what we have been doing in Risk Management. I should have stopped to give you an update on
where our Energy Risk Management policies are. Those are policies that you approved I believe a couple
of months ago with one change and we have included that change and it is going to the Finance Committee next week, after which it will go to the Council. The present plan is to go to Finance on March 20. So that is the plan right now on this project.
Ferguson: Any questions from Commissioners?
Carlson: I just want to make a comment that this is clearly not an Orange County situation. This is hedging risk; and I think it is a great idea. It is something we are going to need a lot in these new circumstances and as long as it is something that is hedged rather than a pure investment, it is a great
thing to do.
Dawes: Clearly, you exclude selling short from this request. Actually, it seemed to me that while unlikely, the ability to sell short perhaps should be included here. We are owners of a supply facility, namely the Calaveras project, and not knowing how the portfolio will stack up against how hydrological
conditions actually appear or come about in any given year, we could end up with a surplus of power
because we are again a generator ourselves. So the ability to take advantage of a market by selling what we now perceive as surplus -- which is in fact a short sale financially -- maybe could be accomplished on a physical basis which you do have the ability to do. It seems to me that it could be added here. I don’t know if you have thought this through and what your belief is.
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Balachandran: Baby steps.
Dawes: Got it. Bechtel: Girish, I was wondering how this actually is implemented – the buying and selling of financial instruments. Is this the sort of thing that one of you on the staff does? Do you use a trader or several
traders of investment banker or just exactly how is this implemented?
Balachandran: We don’t have any of this in place right now. But what I visualize would happen is, yes, it would be someone on my staff who would do this. We have designated staff people who are designated as traders and they have the authority to trade physical products. So our risk management policies would
be updated to reflect what authority certain people would have and what products they could actually
trade. Depending on what products we are allowed to trade it could be through a broker who could place the trade maybe at NYMEX, we could do over-the-counter financial instruments, buying for example a basis product you could go out to an investment bank and ENRON or someone else (and there a number of people who do that) and do a deal with them so that is an “over the counter” product. And in terms of
actual implementation, yes someone would call these brokers and do the deal, there will be confirmations
from the counter party, there will be reviews by someone who is not the trader to make sure that they have actually executed what they have the authority to do, so that will be the back office to make sure that is done within approved authorities.
Bechtel: Would this be something where one could on a daily basis, you would monitor let’s say the
number of transactions, the value of the transactions, the value of the portfolio and so on. Is this a real time measurement? Balachandran: It is possible. My sense right now for a utility of Palo Alto’s size and the transactions we
are contemplating doing we don’t need that kind of effort. I believe larger trading organizations do have
to do that. We don’t intend to do too many of these trades. If circumstances warrant that, it is something we will do but at the present moment I don’t see us getting into that level of sophistication. Rosenbaum: I am ready to move the staff request: that the UAC recommend to the City Council that they
approve the proposed Amendment to the Municipal Code and the proposed guidelines for the use of
Financial Instruments to manage price risk of electricity and natural gas commodity purchases. That is a motion. Bechtel: Seconded.
Rosenbaum: Just one comment – Girish, on your last chart called “next steps”, the third bullet about reporting was not so much a next step – you were just telling us that something you planned to do and I just suggest that you incorporate this in the guidelines when this goes to Finance Committee or the Council that it would be clear that that is what you plan to do.
Dawes: I have difficulty in tracking how Attachment A -- which is the draft of the proposed ordinance -- is related to the presentation that Girish made and to the write-up that was included here. It looks to be a description of the utility manager's responsibilities. I just wondered if there was a modification to this
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item 10 which basically does weave in these financial instruments. But basically it seemed to be far removed from the balance of the text.
Balachandran: On page 2, item No. 10, the second half of that paragraph is where the reference you may be looking for resides. Dawes: It has no bearing to the restrictions you talked about. Basically, you said we will do these three
types of transactions but not other types of transactions like short sales, etc. you said not yet but
apparently this ordinance sort of says whatever financial instruments you want to do. Balachandran: My suggestion is that we get back to the attorney and have him compare what is in the report versus what is in the Muni code change. Maybe he has a sense that this is all that is necessary in
the Muni Code and the rest is through CMR and implementation process.
Dawes: So if I read this correctly there will be another document which formalizes the exact perimeters of this endeavor.
Balachandran: Actually, Jane just brought this to my attention – I believe it is the last few words of that
paragraph "as may be authorized and approved by the Council" – so the staff report talks about the guidelines, and it is those guidelines that the City Council is approving. Dawes: So it incorporates this item No. 1 by reference in effect – the ordinance. Attachment B explains
how the limitation works so I will retract my question.
Ulrich: I think the problem is that it is referred to as Attachment 2 in the document and it is actually shown as attachment B when you get to the attachment.
Ferguson: if there are no other questions or comments, all those in favor say “aye”. Motion carries 5 –
0.
Adoption of Ordinance Authorizing The City Manger to Enter Into Long Term Contracts For The Sale and Purchase of Electric Commodities
Ferguson: At last we are on to the meatiest topic of the evening – Original item 6, tenth in our revised sequence. And we do have a slip from the public – Mr. Richard Cassel. Mr. Cassell: Richard Cassel, 621 Wellsbury Lane. I am one of those people who do know the difference
between power and energy. I have built lots of big power equipment throughout my career. And
speaking at least for this public, I wanted to make a comment about this proposal, in particular because the public, that is me in particular, has always been told that we had this public utility and we owned all these power plants and there wasn’t a big problem. We owned it and there was not a problem. And the news media, both the local papers and the national news, look at this great example and it is Palo Alto,
how well it works compared to PG&E. It was then a shock to me to find out that we didn’t own half the
power or even more than that we were buying all this power from PG&E and that we had a long-term contract. It will come up in 2004 – fine, we have several years by that time everything will be cleared out and we won’t have any problems and now we are being told, “hey – that isn’t going to happen either
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PG&E is going to under and they are going to cancel all the contracts and we are going to have to buy this power at a higher rate.“ At least, from my perspective is that's what has been talked about in the City
Council. And all the information I have heard is what it is going to cost the utility to buy, not what it is
going to cost us, the people that supply this to these contracts. Especially, if we are going to buy 75% half of our power – 75 megawatts – half of our power on these contracts at 6 ½, 7 ½. 8 – I don’t know what the number is and that is going to last for 10 years. It seems to me is that the minimum that should happen for a public utility is that we, the people that are going to pay the bills, should be informed as what
that means to our bills. Are they going to double, triple, quadruple because of what this 6.5 cents that you
are paying is going to do to our bills. The other thing I wanted to say is that we have had other crisis in Palo Alto – that is the water crisis not too long ago. The solution which I thought was a good one that the City Council implemented was the fact that we need to conserve water and rather than in this case it seems that we don’t need to conserve energy, we just need to purchase more of it – that is someone else in
California not have the electricity. It seems to me that need to make a much more concerted effort to
conserve the amount of power we use. In particular, we should do the same thing we did with water. That is a low price for half the power if it takes us to reduce to half power to make the low price and then a very steep price for the other half of the power and essentially uniformly not make us all pay for this huge amount which I don’t even know what the number is because we have never been told, the for next
10 years. It seems to me that it is the responsibility of the City Council also to take the responsibility for
this and not just pass it on the Utility Department to go out and get the best deal you can and if it isn’t good, well that is just too bad for the customers. So, it seems to me that we need to look at this a lot harder and in particular before we do it. I don’t have anything against hedging. But it isn’t hedging as far as I am concerned when you are taking half the power in or willing at least to take half the power that we
are using and put it in a 10 year long-term contract at a rate which the terms at least show are much higher
than they will be in the few years. Ferguson: Thank you Mr. Cassel. There is another slip here from Herb Borock.
Mr. Borock: Good evening Chair Ferguson and members of the Commission. I believe that the City
Council should take the responsibility for approving contracts of the type that are proposed. I am also concerned that these contracts are for length of time that goes beyond the year 2004 when in an earlier agenda item I understood that you weren’t being asked to make decisions about energy supplies beyond that year – that those requests would come back to you at some later date. In addition, two weeks ago
when there was an information forum from the public, there were some documents handed out including
charts dealing with terms of power and I believe that the Commission and the Council should have both sets of documents. The information that you are getting in these reports and combine them with information in those handouts to get a better understanding of what is going on with our sources in demands for power. For example you saw this evening a relatively steady line across the year for energy
use as Commissioner Dawes pointed out. However, in terms of power, it showed that power fluctuated
over time in the calendar year. There were times where it was closer to 175 megawatts and times where it peaked at 210 megawatts and how do you match those two – that is related to a blackout. So the companies who use 50 percent of the power don’t have 50 % of the blackouts. It is more like 5% to 10% of the time. And I noticed in the previous agenda item in the staff report that indicated that the Utilities
Department plans to open its contract rates to its large gas and electric customers. If it was planning to do
that, it would seem that if you are going to go out and buy these kinds of contracts long-term that it should be matched with customers who are willing to commit to those kinds of prices in the future as well. And you should also take some time to see how our needs for power and energy have changed over time. Just a single internet server farm increases our annual energy, I calculated it, around 5%. You're talking about
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the internet exchange number 2, which was going on at West Bayshore with 6 megawatts, 24 hours a day, 365 days a year, Yipes Communications at 49 Wells is going to put in something that would have back-
up generators at 7.5 megawatts and so you are talking in that order of magnitude compared to the power
that is also at that point of increase, and it is more than the annual increases that we have been having – this is just for one customer. I think we need more thought and information on that. The bottom line is that these are kinds of decisions that the Council can and should make. We are not talking about purchasing on the spot market when someone has to make a decision right away. Once a contract is
offered for a period of time at a price that no one else is willing to pay, there is no harm done by having it
done in the public before the entire City Council and for the citizens to comment on. Thank you. Ferguson: Thank you, Mr. Borock.
Ferguson: If there are no other members of the public to speak, can we have a presentation on Item 6?
Ulrich: Good evening again. I will be moving around here a little bit to put a few slides up but what I would like to do is to follow very much what I had to say at the City Council last Monday night and try to put it in perspective of why we are asking for and I did ask for at the Council, for an emergency
authorization to go out and look for energy to replace the energy that would be lost if PG&E went
bankrupt or through some sort of abrogation of their contract that it would go to a much higher price than we were paying under a contract. I believe that is an appropriate action for the Utility organization to take, based on the best information that we have and to try to minimize the risk and the shock to rate payers, customers, both residential commercial and industrial in Palo Alto. And our reasons I believe are
very sound because we are not in control of what happens if PG&E goes bankrupt or if the contract gets
terminated. Rather than take no action or to wait some longer protracted period of time I feel it is very important that we begin to go out into the market and look for replacement. This requires us to have, in my opinion, the authority from the Council to go out and do that as opposed to talking out in the market and saying well we are thinking about doing this but we are going to have to go back and go through a
more lengthy process to get approval.
So that was the action that we decided to take and bring this very quickly as some of you pointed out and move it forward. The intent is not to do this in a secret manner or not to communicate it to the public, as the gentleman asked a few minutes ago, why should Utilities go out and buy this energy and commit for
10 years without some knowledge what impact this will have on the public. On Monday, we did have
material and some forecasts of what lack of decision, taking a middle of the road sort of decision or a very aggressive one would have on residential customers. We will repeat some of that material and we have some additional information that might make this a little bit clearer. So my focus here in this couple of minutes is to make sure all of you understand that the Utilities and our presentation is attempting to show
the risk of not doing something or the risk of waiting too long to do something verses the benefits of
being able to stabilize costs so that everyone knows what they will be and they can rely on us to be able to provide a continuous supply of energy to Palo Alto and the action that I would like you to take is to concur with our recommendation to allow us to begin negotiations for this additional amount of energy that we may need and to allow us to trade so that if we purchase it and we don’t need it and everything
just stays wonderful and we don’t have any concerns with the contract that we be able to sell it and
minimize the cost to the customers. A couple of more points is that Palo Alto may lose its low cost energy source if either PG&E files bankruptcy or the Federal Energy Regulatory Commission allows PG&E to charge market rates for
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energy it sells to Western. The cost impact if Palo Alto buys Western Energy at market price I believe is far worse than purchasing energy under long-term contracts. Depending on market prices and resolution
of the price for Western energy, Palo Alto’s electric retail rate may rise substantially in 2001 and 2002.
Our goal is to maintain stable rates through a diverse portfolio which ultimately reduces the risk of the city faces in a volatile energy market. I can assure you that no one in the Utilities would rather be standing here and making these recommendations verses being able to say we think that things will stay and that bankruptcy or contract changes won’t take place. There is a significant risk if we act or if we not
act , we need flexibility to maximize the benefits and minimize the risk . Rates will increase in Palo Alto
but should remain below PG&E’s rates and we will get into some of those specifics in a minute. Changing long-term contracts policy allows flexibility in this volatile market place. And also, key here is energy efficiency as the gentleman mentioned in his question, we did discuss this on
Monday and earlier tonight. It is a very key component. We have to find ways to reduce the amount of
energy in Palo Alto. You may be surprised at this next graph. This is so we are real clear. Mr. Borock mentioned this a few minutes ago. I apologize for it not being absolutely clear because I had not had this on my presentation earlier. What this shows is the last 18 years of energy consumption in Palo Alto and there is very little variation. You can see some load growth but in the last 4 years since 1997 the actual
usage in Palo Alto has gone down. Part of that is related to weather but very little weather affects our
electric use because we are not an air conditioning community and much of our heating is done by natural gas and the other part is there are forecasts have been extremely accurate. When we forecast that we are going to use 1161 gigawatts, we’re talking about the amount between our forecast and the actual, it is in the area of about .2 percent difference and last year’s difference was 1.6 percent. Our forecast for
this coming year 2001 is slightly less than what we actually used in 2000 so the trend is still to go down.
That includes all the server farms that come in and it includes all the energy conservation and load management that is currently taking place. So we are not in a situation as you see in other parts of Silicon Valley where they are forecasting much higher increases. So I think that puts a little bit of a perspective on it.
But, here is what we are facing, and again, you asked for this forecast several months ago we probably, in cost, these are costs prices since for kW hour over here and this is out in years and as you recall from last year and just until recently, our forecast costs, because we believe that corporation the size and reputation of PG&E would not be in a situation like we are able to talk today with owing over 8 billion dollars in
debt and 3 creditors saying yesterday that they are forming a Credit Committee to decide whether they
should take PG&E into bankruptcy. Well, those kind of things get my attention and they should get all of our attention. None of us can forecast accurately whether PG&E will go bankrupt but we should work any way we can to make sure we are covered and are able to continue to have appropriate prices for electricity should that occur. So this big wild spike here – who would have ever thought that would occur
– that’s reality up until we are where we are now which is a little over .22. So if we did nothing and those
contracts went away, or PG&E went bankrupt we would see immediately this kind of price verses .02. What we are contemplating doing and we are requesting permission to go and do this is I don’t believe the City Council thought and we sure didn’t that we needed authority to go out and negotiate 10 year contracts or be able to sell surplus power into the market. Why bother to do that if you have a nice stable
contract. Our plan would be to find the appropriate mix and the appropriate amount of energy that we
need in case the contract goes away and if you believe that this kind of price forecast curve is accurate we would be able to be, if we had surplus, be able to sell it back in the market and here is where the rubber meets the road. I think all of us would have a concern and will have that we know through a hundred percent fact that we are going to lose money as compared to the market at some point.
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By taking action now it is in essence of locking in that 30 year, or in this case 10 year mortgage at 8
percent and then we know out here if we wrote it up and down with a variable interest loan all our friends
could have homes that were paying 6 percent and we are still stuck with that 8 percent loan. But we do it because we are looking for stability and reliability – we know how much we are going to pay each month and we decide to do that. So, we are not asking to do this on one hundred percent, we are asking to be able to do it with a portion of our energy needs. Girish will give you a little more perspective about the
benefits of being able to have authority to negotiate these contracts and what the market place is saying
about the costs and the terms and the conditions. Balachandran: I have 6 slides but I am going to show you my last slide first which is the problem that we have right now, is uncertainty. I believe the solution is flexibility. The organization that has the most
flexibility is in the best position to take advantage of opportunities that may arise and mitigate risks. So
flexibility is the key. In all the numbers we presented to you there is a tremendous amount of uncertainty and there is no way we can present to you, I believe, all the potential scenarios because we are in a place today that we have never seen before, no one has seen this before and when we are in a place like this, I believe flexibility is important and so we will try to do everything in our control to get additional
flexibility. So my presentation is going to try and make that case.
The reasons to provide authority to staff to negotiate contracts should actually be the more flexibility one has the faster one can react. There is a premium for holding prices open, for example, if we have to come back to the Council or we have to go through a certain process of keeping prices open for a certain period
of time, there is a premium you pay for keeping prices open because trades are made over the phone and
prices are changing constantly so if one has to keep prices open, there is a premium to be paid. Here is a natural amount of work the premium would cost. Flexibility in an negotiation to an extent that we have the authority to actually act when you are talking to different suppliers, there are things that come up while you are talking to them that can’t necessarily be perceived if you go out for strict bid for example.
And so, getting more flexibility would give us more opportunity to take advantage of things that may
come up. Today, we have “seller’s market” and I guess just like buying a home, you have a pre-approved loan you just look much better to the seller. Similarly you get a pre-approved contract authority you look better to
the seller. Palo Alto is a small buyer – 25 or 50 megawatts or 75 isn’t very much in the grand scheme of
things given that VWR is going up by hundreds of megawatts. I will come back to that in a little bit. Credit checks are big time. Today the market credit checks that are being required are tremendous, much more than before. Suppliers are changing what their require offers day to day and so to the extent that we get a head start on getting pre authority, we can actually start some of these credit checks, etc., to actually
get a contract in place. There is no way, I believe, we can actually get a contract in place in a few days.
If you asked me right now how long it would take, maybe a month, if you are fast. The last bullet is that there are only a limited number of long-term contracts available on the market. I talked to a market earlier today, I talked to marketers in the United States, and they are willing to sell
between 25 and 50 megawatts for 10 years and that is it. In their portfolio, they don’t want to take any
more than that. So, there really isn’t too much going on around here so that is another reason to maybe buy a little bit right now and this is something I actually talked to a person today, NCPA has talked with two other marketers but exactly the same thing, almost verbatim report I got through NCPA’s staff about the same issue. While we are talking about NCPA, NCPA has entered into a 10 year contract for 45
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megawatts, I believe they entered into it last week. These are some of the concerns I have heard expressed from the UAC statements at the Council meeting and the last bullet is something that I heard
about from one of my staff.
The next couple of slides make an attempt to address these concerns (John reminded me that the 45 megawatts that NCPA entered into did not include Palo Alto and it includes 7 other NCPA members who have given NCPA the authority to act, so they have been working on this for a bit to have the authority to
act). One of the concerns was buy all 75 megawatts at one time, probably not a good idea, completely
agree with that. It does not make sense to buy everything at one time and have the market go the other way. So similar to what we presented in the Post 04 plan, we plan to enter into a bunch of contracts if need be over a period of time. So this is something that will be done in 25 megawatts blocks with different terms. If we work with NCPA there is a potential to get different sizes because NCPA would
buy a bigger block and we could split among members. The timing is bad for locked-in contracts. I
believe the concern is that market prices are very high right now, this is the worst time to have to have locked-in contracts. I think that is the market view and its an opinion and it is valid Prices could go higher than the stir because there is no price cap. It could go lower also so it could go either way. I believe we are in the business of providing stable prices to our customers and so the course of action that
we are looking at is buying something. I think if we go ahead and say the timing is bad for long-term
contracts, we don’t want to buy anything. We are betting, we are betting on market movement and there are folks who do that. There are speculators, some marketers but that is not the business I think we are in. I think the layered approached hedges against us which is you buy small quantities over a period of time. Lack of public process was another concern. We did have a presentation at the Council meeting. It is an
Emergency and Urgency Ordinance yet it is less public process than one would normally have and this
UAC meeting also serves pretty well to deal with that. Who is concerned about pricing policy? If we buy long-term contracts, we should have off-setting contracts with customers so there are a couple of ideas here, one is considering the suspension of direct
access and the number of policy issues associated with that, customer satisfaction issues so that is one
way of dealing with it and another way of dealing with managing this risk is what we presented in the gas rate increase CMR which Commissioner Carlson talked about at one point, that is another way of dealing with is to go to a customer and ask them, “do you want to be part of our portfolio” or do you want to be on the market, either one and so they make a commitment or an election to give up their right to direct
assess so those are ideas that are for consideration and we are looking at and we have been looking at
these for at least two years of risk management issue and we have come to you several times but when we buy wholesale power we won’t have off-setting commitments from customers so that is why we came to you with fixed general rate options and custom contracts etc. So that is on our mind, we are considering it and these are the different ways of dealing with it.
Another concern, which is dealing with I think market prices and what is the impact of fuel cells in this new generation? Maybe 5 years from now we are stuck with a 6.5cent contract, distributed generation is cheap, gas prices are low, people could leave us. I think that is again an uncertainty that could happen. Today’s forecast, I think it is probably unlikely that there is going to be a heavy penetration in five years,
but that could change so that is a risk. There are back up rates is one thing that we could provide. I
believe the customers are going to have the distribution of fuel cells to enhance their liability would want to have a back-up rate from the Utility. I don’t believe in 5 years, the industry for distribution of generation would be so mature that they would completely isolate from the grid, maybe 15 or 20 years
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from now that will happen but I don’t believe sooner so that is an uncertainty that we may have to live with or deal with.
The last concern was the fixed price contracts help if Western rates remain melded. Integration contract rate goes to market but Western basically melds the hydro power with the market price power they are getting from PG&E. What we will do is still sell the excess at market so the power we buy, so for example we buy 25 megawatts at 6.5 cents, and the melded Western rate comes out to be 11 cents, we
got new to take 11 cent power from Western and sell the 6.5 cents at whatever the spot market is. So that
is illustrated in the graph that John had presented we sell the excess power in the years when the market is higher than the price. So that’s basically my presentation. The problem is uncertainty and the solution is flexibility and I think Randy has some slides he would like to present.
Baldschun: Thank you Girish. I just have a few slides I am going to show you to indicate a range of bill
impacts on a residential customer using 500 kilowatts a month. We picked that as a means of comparison. The first one I am going to show you is probably the easiest one to understand. The other two are more complicated and I will have to go through those with you. The message I want to make first of all, is regardless of the uncertainties and regardless of whether we contract or not contract, whatever we
do we feel we are going to be below PG&E. And that is the good news. The bad news is that we are
going to have some rate increases in Palo Alto because every scenario we have looked at shows some rate increases coming down. And so in July, our plan will be to come to the Council in the spring with a rate proposal in electric and
that rate proposal as it is right now is 30 percent and climbing. The climbing piece will be based on any
information we get between now and then about any of our portfolio that happens to be secured with a fixed price and is also there is going to be a need to make sure our reserves are adequate in this highly volatile environment. Our Reserve Policy that we have right now is designed in the era of stable prices and that is not the era we are in right now. A current Palo Alto bill for 500 kilowatt hours is $24.00 a
month. PG&E’s is about $59. In the best case scenario, which is the one I mentioned is a 30 percent rate
increase, the bill would go to about $31. In another case it could go to $37. And in the worst case to $67. a month. So in even in the worst case we are below PG&E. When we talk about worst cases and best cases, I will get into that with the next slide. The point here is there is a big differential here between the worst case and the other two cases from Palo Alto’s perspective and it is really because of that worst case
that we are putting through this rush to get authority to enter into some long term contracts with some
flexibility because we are really trying to avoid that scenario – the $67. a month figure. That is what this is about. This is assuming we were to purchase a 25 megawatt contract and we were showing over a three year
period, five year period, 10 year period and the prices we are using are fairly common in the market right
now for these kinds of instruments. The current bill is in blue and it stays the same. The red shows the real heart of this matter which is the PG&E integration rate so if we assume it is going to go from the current 2.2 cents up to 0. 5 cents then the red lines would give you the bill impact. The yellow lines assume the rate of .11 cents for kilowatt hours for that 650 gigawatt hours that we purchase from Western
right now. And , of course, the worst scenario right now is the one PG&E would like to have which is get
approval from FERC to go to the market and that would be a .20 per kilowatt hour for the 650 kilowatt hours we buy. Now these rate projections are strictly on the first year and obviously there are some relevant factors with the 10 year contract you would have much more the first year but the purpose of these slides is to give you a means of comparison of what the initial impacts might be from a 25 megawatt
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purchase. You will notice that the three year and five year, there is not a significant difference in the bills for the customers, they go up a little bit but not by a large amount so in terms of the time of 3 and 5 years,
and to some extent, the 10 years, the bills are relatively stable.
Here is the 50 megawatt purchase. You end up with lower bills under this scenario than the previous slide primarily because you are displacing more of the higher cost market price energy coming from Western than coming from the market. So the pattern is the same as it was before which is the difference between
the 3-year and the 5-year contracts due to the customer bill impact are not significant. If I was to put the
two slides , one on top of the other, there would not be much of a difference in terms of the dollar amounts. I mean there would be a difference but it would not be anything major, so whether it is 25 megawatts or 50 megawatts and whether it is 3-year or 5-year we are not seeing any major swings in the bills. The major swing is obviously coming from not being prepared to displace the Western energy if it
goes to market and that is the problem. That is all I have and I am going to turn it back over to John if he
has any concluding remarks. Dawes: One question, Randy. Could you put the first or second slide up and I just want to clarify in my own mind, under the 3 year, the 5 year and the 10 year you say that, let’s just take the 5 year, that’s
assuming we buy a contract for 10 cents a kilowatt hour in lieu of using a integrated contract that
Western could provide us and then the bar show, assuming that Western provides power either and integrates it buying it from PG&E at .05 cents , .11 cents or .20 cents and then our alternative for substituting for that integration piece at .10 a kilowatt hour, I don’t know where that comparison comes in . Is my question clear? No.
Baldschun: I’m not sure I understand, but Dawes: In other words, it seems to me the alternative is we buy a contract which substitutes for the amount that PG&E would sell to Western, is that correct?
Baldschun: We are going to need 75 megawatts, so that is 25 which are going to come to from the market, 50 are going to come from PG&E integration agreements at whatever rate that is and for this example it is .20 cents a kilowatt
Dawes: I got it, so it is a blend of 25 that we would buy 50 from them and each slide steps off a different
and so that is why the 50 looks better than the 25 because we are displacing more of the Ferguson: And do the contract numbers, the .13 cents, the .10 cents and the 6.5 cents – are they sort of generally what is out in the market today?
Baldschun: I think Girish has his crystal ball out for that. Ulrich: I must say and point out that I have a considerable level of nervousness in reporting that what Randy showed is accurate to pennies because there are so many variables. The intent of this was to show
the differential and what happens if you go out in the market. We can’t report to you that 13.10 or 6.5 is
an accurate number that we are going to be able to get tomorrow. The reason for asking for the emergency ability to go out and get on with this is that it could change significantly in the next few days and next few weeks and the longer we delay in being able to go out and put together proposals puts us in the more potential volatility that you see here.
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Dawes: Is it possible to get copies of those because it is not in any of our material?
Ulrich: We just prepared them sort of a moment by moment – Dawes: They are terrific. This is just exactly that I felt needed to be done.
Ulrich: We are not trying to hold this back but I have got to continue to say I don’t like the idea of
putting numbers up here that we can’t say that we can go and get. The other thing that you should be aware of here is that there is a liberal use reserve funds to be able to do these and you may want to ask questions about how that would work but Randy could give you a little more than that area in the question and answer time. I just want to conclude by saying the objective tonight is be fully communicative but to
try to do it in as rapid manner to demonstrate that the staff sees this an extremely, can’t over emphasize,
that this is an extremely important area that we need to move quickly on, put together some proposals, look at what the impact of those would be and then try to make some appropriate and accurate decisions and we would like to be able to go back to the Council (we are on the agenda for the City Council on next Tuesday night) and we would like to take this proposal and request their approval to move ahead. So why
don’t you ask us some questions and we are ready to go.
Ferguson: Let me start with a little question. It takes about 5 days, under the Brown Act, to give notice of a Council meeting or an Council Committee meeting. So in a 5 day period, how much does the price on a 10 year contract change? How volatile is it over a 5 day period and contrast that to the 1 or 3 or 5 year
contracts?
Balachandran: I know I sound like a lawyer but it depends. It depends Ferguson: Give some recent numbers, give some recent variations.
Balachandran: It really has not changed very much in the last 5 days, it depends upon who you are talking to also and depends upon how serious you are about what you are asking. For example, you just ask for a price you can get a price pretty fast. But if you say I want a price and then I am going to buy it then you will get a different price. So given that, a few days, maybe about 10 days ago, the prices ranged
from 6.5 cents to about 7.5 cents for the same product. We have talked with some of the folks that
provided the higher numbers and they didn’t think those were serious buyers on the other end and that is why they provided those higher numbers. And today’s price is around the same. So it depends on a number of factors so maybe a mil or so in the last 5 days. All these contracts that the prices have been given you are starting at 2002. And, if you start this year, the price starts to go up because this year’s
price for the balance of the year. I don’t have the current prices, but I believe some are right now Q3 is
trading at around 32.5cents and Q4 is trading around 20 cents right now and then you look at the next year and the price has dropped quite a bit. All the numbers we are showing you are starting at 2002. Ferguson: So would you say that for contracts beginning this year, the volatility is about a mil over a 5-
day period.
Balachandran: Yes, a mil or two for contracts beginning 2002. Contracts beginning this year it would be even higher.
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Ferguson: How much higher?
Balachandran: Two mils or five mils or three mils. It is being averaged over a long period so it is an extra
they are adding every year – so just add another mil to it. And, I believe a mil works out to about close to 6 million dollars for 75 megawatts over 10 years. Ferguson: In rough terms, to honor a 5-day Council notice period, the price change risk for contracts
beginning this year is 6 million dollars?
Balachandran: 25-megawatt contracts. Let me see if I understand your question. In order to keep the price open – so you are saying if a marketer provides a price and wants to keep it open for 5 days, is it a mil premium? No. I think it is going to be higher than that. 12 hours is about a mil. So the first slide
that I showed you, when I tested out the market over here and asked how much would you charge to keep
the price open for 10 years, two or three sounds but one mil that sounds reasonable but again you have to go and test the market after that. Ferguson: For a 25 megawatt purchase, trying to hold the number steady for 5 days while we notice a
Council meeting, is at least a mil and for 25 megawatts is how many millions of dollars?
Balachandran: This is 2.2 million dollars over a 10-year period. Ferguson: So that is the cost of noticing a Council meeting to get our act together and make a decision.
Balachandran: Yes. Ferguson: Thank you.
Dawes: Yes, I had discussed this issue at the City Council Meeting earlier in the week or last week and
expressed my apprehension about the speed of putting it in place over the weekend and also the extent of the authority but agreed as to the proprietary way of doing this, in other words the uncertainty of our long-term contract in view of the potential outcomes of PG&E filing reorganization or FERC abrogating the contract in some other way, certainly made this a very appropriate matter to deal with. I guess I didn’t
make myself clear at the time but what my nervousness basically extends to the extent of the flexibility
delegated to staff and the oversight that should be required or was missing from the initial proposal. I was fascinated by Randy’s charts here because it did show the differences in basically in what I term, relatively short term strategy which is buying say the 3 year contract verses the 10 year contract, in terms of a 500 megawatt household purchaser and frankly while there are differences in the monthly bill they’re
not as large as I would have thought when you average in all of our sources that the Western Hydro that
will continue to get our own Calaveras product, etc. We have yet to hear from Dick Carlson. From what I have seen from his letter that he circulated prior to the Council meeting earlier in the week shares the same concerns about contracting for this, the extent of filling our entire hole over a relatively short period of time. In other words, it is just a terrible market to be buying this quantity of power and it is my feeling
that it would be more prudent to basically keep our portfolio short, pay a penalty in terms of pricing, I am
very interested in seeing Randy’s underlined computations which show how much reserves go into those rates which he set forth. Our reserves are relatively robust but on the other hand, reserves can get burned pretty fast at these huge amount of volatility.
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My feeling is that we need to delegate this authority – it can go either one of two ways. We can say fine, delegate a huge amount of authority and trust in the judgment of the staff that they will be prudent in the
way that was described here in terms of layering our resource needs in over varying lengths of time and
also layering in terms of the time over which those commitments were made. In other words, instead of issuing all the contracts over a period a week or month to anticipate buying and being in the market and filling our hold over a period of a year so that the dollar cost averaging effect of buying forwards is fully implemented, cause we are all nervous about the turmoil that exists in the market with the state and their
buying heavily people holding out for top dollar, etc.
So, one solution is to put into this resolution, this authority some direction in terms of granting authority to enter into a layered portfolio arrangement and mandating that there be varying terms and lengths and that these procurements be entered into long period of time and establish oversight via a committee
appointed by the Mayor which is what Councilman Beecham announced Monday night that he was going
to propose and perhaps that is all that is needed in this case to have a public official or officials monitoring and basically, in the final analysis, being responsible for taking the political heat if major commitments are made and it turns out the City is hung out to dry in terms of making long-term commitments at high prices which when the market falls away. I am inclined to as I circulated the E-mail
to I hope most of the members of the UAC although my E-mail was sort of messed up the last day or two,
I am not sure who actually did get it, but I do have some modifications here that refer to laddering or layering and varying prices in terms (I don’t know if it is appropriate to put those up). I would like to wait and see what other members have to say. But basically I feel it is a) it is a must do delegation of authority because of the timing issue as brought out very strongly by Commissioner Ferguson but
secondly I would feel much more comfortable if the Ordinance reflected more fully and completely what
the staff has stated it intends to do. Ferguson: Let’s call that the "Dawes Ladder" concept and we will get into the words if we need to at the end of the discussion.
Rosenbaum: A couple of points. Rick you mentioned 5 days for a Council meeting – I believe there are emergency procedures where it could be done much more quickly. Now I am not sure having the full Council vote is the right thing but I don’t think the 5-day is the issue. Let me bring up a subtle point which Girish, you attempted to address with one of your last bullets. The issue was if Western were to
insist on selling a melted product, which is what they do now because right now we buy at a price
determined by the cost based very low hydro plus whatever it costs them to firm up. If they have to go market for firming up that melted price will be 12 cents, 13 cents. Now if the assumption is inherent in everything you have presented is that we will be able to say to Western, “we don’t want your firming stuff, we just want the good stuff” and the real query is what evidence do we have that Western would be
amenable to that?
Balachandran: I’ll answer to that. Tom Kabat has my additional information. It will take some time for Western to actually implement a mechanism by which they will actually split up those rates so it is not going to happen overnight or its going to take a substantial amount of time, say up to about a year before
they could provide a two tier rate, I think which is what you are looking at. There will be one portion
which is a cost-based hydro and another portion is market. Ulrich: I would just like to say – I think that is an issue that needs to be worked on but it should not prevent us from going out and doing the negotiations and looking for appropriate replacement at the same
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time we are clarifying this and working with it and Western. I think there are a number of things that we are going to have to do. I think it is part of the due diligence that would have to be completed before we
wanted to enter into any kind of an agreement because that could be a very key component of that
decision. Rosenbaum: Yes, but remember this an emergency Ordinance suggesting that we are interested in acting quickly. I mean if we on March 1 were to go out and get a contract for 6.5 cents and then it turned out
that we had to take Western’s melded price that we weren’t in a position to get the 1.5 power then that 6.5
contract, we could sell it but it is worthless. That would be a case where we have no solution to a problem except to give up the 1.5 cents, that is Western’s price because of the very expensive firming energy is 11 cents.
Balachandran: We will sell at 6.5 cents at the current market rate so if we entered into a contract in a
week, we will take Western at its melded rate of 11 cents and we will sell that market portion at 20 cents. Rosenbaum: So, we would be speculating then on the market rate.
Balachandran: No. It is no more speculation than what we are intending to do right now. I believe what
we are intending to do right now is a hedge in transaction. We are not betting on the way market prices are going for a profit. We are entering into this transaction with the objective of trying to stabilize prices, so at the end of the day if we buy 25 megawatts and we get Western to provide us the melded price we have excess power to sell on the market then the position at that point would be do you want to sell to the
spot market or do you want to just sell it for 1 years out, two years out, or whatever. And that is just the
nature of the business and we will have to make a decision at that point as to what we are going to do. Rosenbaum: It seems to me your intent is too make use of the energy provided in this long term contract at whatever the rate is, rather than buy it, planning to sell it.
Balachandran: Right and but if we cannot make use of it because in order to get the Western Hydro we have to take market then we will sell it. The net effect after you do the math is the same thing. So the alternative is we don’t act until we have Western unbundled into two-tier rates. That is not going to happen for a year.
Rosenbaum: Alright, I think I see your point. You’re saying if Western is providing firming energy at market and we have a contract that also at market close to cost __________. Alright, let’s continue a little with the timing question. You mentioned the contract you were thinking would start in 2002. If PG&E went bankrupt next week what would we do for the rest of this year?
Balachandran: Well it is a combination of things. And that is where it comes back to the crux of what I believe we are asking for. It is flexibility. I really can’t give you precise on answers on every potential action we could take but I would say one of the things we could do at that time is enter into a long-term contract to that point. It may be 3 years, 5 years or 10 years and the price will be higher than what we
showed you right now if they go bankrupt tomorrow because we will include the _________ prices.
Ulrich: As I mentioned earlier there is going to be a number of these things and we will be able to come up with a number of them and we can go if we think it appropriate and try to have a contract that starts July 1, one that starts earlier than that will have a premium in them and that is something that you would
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have to evaluate because the whole point of this is to able to make sure that you don’t run the risk of being exposed to the market if PG&E does go bankrupt but we can’t be sure of that. We can’t be sure of where
the price of the Western Integration will end up. All these things we can’t be sure of. All I am asking for
is the authority to be able to go out and begin negotiations and look for this replacement. If you are looking for some way to have oversight or some other deal (it is a big deal for the staff to go out) it still doesn’t deter me from saying I recommend that we continue with this. If you are uneasy about that or if you have something else, you might think of what it is that should be put into place so that we could
continue to move quickly, do all the things we wanted to do, but give you piece of mind or some level of
that oversight and spend maybe some tie giving us some ideas on how to do that so we can move towards getting a solution that protects the customers here in Palo Alto that we can do it and that you are comfortable of how we do it and then go on to the City Council so that we can pick the kind of action.
Rosenbaum: One further question with respect to timing and this is all brought about by the fact that this
is an emergency Ordinance. It could be, although I think it is unlikely, that the governor and the heads of the two utilities on Friday will announce that they have reached some kind of an agreement on concept and the threat of bankruptcy might go away before this goes to the Council on Tuesday. We would still have this other problem with respect to FERC. Would this change your timing, that is in terms of going
out and buying energy if bankruptcy was not a problem, would we wait to see what happened with FERC
before we thought about entering these contracts? Or would you think it pay to do it in advance? Balachandran: Well, I believe that the PG&E bankruptcy is kind of like a rising tide, it is a macro event because it will effect all of California, maybe the Western markets, whereas the Western rate going to
market is more like a micro event. We don’t have the same impact so may not need to have the same
reaction. Rosenbaum: Alright, so if the threat of bankruptcy were to go away, you are suggesting you would kind of wait and see before entering into these long-term contracts.
Balachandran: That is my initial thought right now Commissioner Rosenbaum. Rosenbaum: All right, those are my questions. I do have this concern about, I guess you call it oversight, as others have suggested you know for a variety of reasons, there has got to be some Council buy-in on
these decisions. I think a sub-committee would do it. Perhaps – I guess I am thinking of Roseville.
Roseville has an oversight committee made up of two council members and two members of their Utility Advisory Commission. The reason they have two Council members is because they only have a Council of five. Now something on the order of three council members, maybe two UAC members requirement for a quorum of three, telephone communications, I mean this is a group, at least through telephone one
could get together within an hour, I would think. But I do think it is vitally important that the Council not
be out of the loop on something of this magnitude. We listened to Richard Castle and you know there hasn’t been any rate increase. There is going to be quite a stew if you start talking about not only 24 to 36 dollars, that is 50%. Our industrial customers do not have that much of an advantage with respect to PG&E right now. The 50% increase in industrial rates and now there is going to be quite a bit of talk.
So, I do think we should seriously some Council involvement.
Bechtel: I agree with what Dick has said. I think he has been on both sides of the fence and I think has considered both sides of the issues. I am concerned about the rates because I also look at them and as they show there is not a big change if you hold them up graphically against each other Randy that is not a
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big size inch wise but could you elaborate a little bit on the use of Reserves – let’s say there was a short term problem and we did have to do something and I guess our Reserves now with the non-Calaveras part
of the Reserves, I guess there is about a year ‘s worth of energy at today’s prices so we could buy
everything and bring our reserves down to zero. So what kind of assumptions did you make or could you make with respect to use of Reserves? Baldschun: I am glad you asked the question because I really should have made those remarks I showed
you those numbers. All those rate impacts included some use of the Reserves and what we tried to
assimilate was what would we really do in a situation like this? What I thought we would do and this is my assumption is we would in some cases go into the Calaveras Reserve. In the worst case, we took out 23 million out of the Calaveras reserve and we took out about 23million out of the Supply Reserve and that still ended up with the highest bill and that was the worst case. It came down from there, we actually
had some scenarios where there were rate decreases. I didn’t show you those but that was the situation
when we had surplus power for whatever the reason and we were selling that to the end of the market but I think it is fair to say that we are going to have to look at the Calaveras Reserve policy here again with the UAC and run the model again based on the new market forecast. I think that will free up some money in that reserve and I think we are going to need it. The Supply Reserve right now is above its maximum
guideline but that is a natural guideline which was designed in an era of stable prices so we will probably
going to bump up supply reserve some more. Right now, we have about 100 million dollars in Reserves between the Distribution, the Calaveras and the Supply Stabilization Reserve. You know, some of these scenarios in the Staff Report we mentioned that we could go through the Supply Reserve in about 3 months if the worst case scenario was to occur. So what would we do in a situation like that? I feel the
Reserves are there for exactly these reasons and it has to be a buffer between our anticipated cost and
keep our rates stable to our customers and in the Gas Fund, it seems to be working o.k. and we will be building up the Gas Fund Reserves again and perhaps Electric as well. Bechtel: that kind of makes me feel better about use of some of the Calaveras Reserve and some of the
other scenarios. I think the other issue has to do with the Oversight one and I think maybe the last
question I have is on Oversight. I guess if I had my druthers, I would like to see what happens and then all of a sudden have you magically come up with a contract. From the discussions we have had you know is some of the meetings, one of the problems we have is if the City wants to do something, we don’t we have not applied for credit. Because apparently we are not able to because the staff does not have the
authority to go out and execute a contract. So somehow, it seems to me that we need to establish a
procedure where we can apply for credit. We can almost go to the brink of doing something and then if we don’t need and then if we don’t need it we don’t have to do it and if we had to do it then we would have an oversight committee and the staff get together and say we really have to do this and somehow it seems to me there ought to be a practical way that we could have all of this come true and yet never have
to really execute on pushing that button. Surely, we must have considered something – I mean what do
you have along those lines? Balachandran: Basically, like I said it is a tight market, limited number of suppliers and they are going to apportion their time based on who is the best looking buyer. They are working with DWR right now and
from what I heard, not many deals have been signed yet because they do not consider the State a good
credit risk. Given what we have right now, you know, Maybe the Governor has to do some different things before we consider them. So, some of the credit work has started actually with Palo Alto. We have contacted some of the generators and our Finance Department has started to provide them some of the financials. But there are agreements that are being proposed. For example similar to the stock market the
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margin, like a margin account, it is what is called Commodity Collateral Agreement wherein if you buy power for 6.5 cents and the market goes to 7.0 cents the marketer would put ½ cent into an account where
if we go down to 6.0 cents we would have (250 #3) to an account. So to deal with those contracts, I
believe that a supplier is not going to come in and do that with us if we are not a serious buyer. Because these things take time and it is an opportunity for them right now. They would rather deal with folks who are serious. So it is not that they won’t deal with us, they will and that is why they are answering my calls right now, but they don’t have the same motivation, they are not going to respond as fast as they would
someone who has the authority and the intention of purchasing.
Bechtel: I would like to ask one last thing. I personally believe you when you say you will use a layered approach. I am not sure we need to tweak the Ordinance to assume that. I am assuming that is implicit in what is said in the Post 2004, what you have said here tonight about how you would act today. So I
would say what we need to include at least in the proposed Ordinance would be something along the lines
of what Dick has suggested in terms of oversight and I think that would be helpful in moving ahead. Ferguson: Great. Mr. Carlson
Carlson: Thank you, Rick. I've got a series of questions here but I think the clear thing is this is a really
unusual situation and I think we all need to remember that if you can get the permits and actually build the thing almost anybody can build a gas-fired power plant and sell the power for .04 cents a kilowatt hour and you are very profitable. So, all of these 10 and 20 cent kilowatt prices -- you don’t think that is true?
Ulrich: Well, you haven’t said anything about the price of gas will be to burn in that power plant.
Carlson: Well, I am assuming some half way normal price of gas. You are right. Ulrich: We haven’t seen half way normal gas prices. I don’t mean to sound argumentative but I think
where you want to go is where we want to go but we don’t have any level today that those kinds of things
could happen. We just learned the other day that in California it takes a minimum of 7 years, that’s what been happening, to get a power plant going. So to cut it to 3 ½ we would be happy but – Carlson: That is 5 years of paperwork demanded by the State for a variety of political reasons and two
years of construction.
Ulrich: Mr. Carlson, I couldn’t agree with you more and what I have got to do is get to a high enough level of emphasis that you and I and none of us here have control over those kinds of thing right now. We would like those to happen but we need to have flexibility to go out and try to do something for us today.
I did not want all this to happen nor did you but that is the issue we have to deal with right now.
Carlson: John, my point is that this is an extraordinary, temporary situation. And even the kinds of contracts that Girish is talking about probably won’t do anything for us in the next 6 or 8 months. You have to pay some additional premium and any kind of long-term contract we sign would be far above
normal long-term market prices. I have no argument with giving the staff some authority to negotiate and
sign contracts and do it immediately. My question is how much should we do right now, how long should those contracts be and I do think from a flexibility standpoint, we know we are making a bet here, we know we are uncertain and we know that 10 years from now when all of us look back on this we will wish we had done something else.
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We are going to be wrong to some degree and that is inevitable and I want the public out there to know
that this is really is uncertain and the disagreement to the degree it exists is in this highly uncertain
environment what kind of bet to make. Now the more I have heard tonight, I have heard so much outstanding analysis tonight is that there is a number of things we know will help us both right now and in the long-term that we can move on fairly quickly. One of those uncomfortable that might right now is a rate increase because there is nothing that would help smooth things out more than higher reserves which
we could build up for the time we have and we know because of our 2004 problems rates are going to
have to go up in the future and I don’t see any reason to delay a pretty substantial rate increase pretty quickly maybe even before July 1 because that helps everything short term, long term and sends out that really solid message to our people, Commercial, Industrial and Residential to conserve. And one price incentive is worth a thousand speeches.
The second thing which I thought was a very interesting part of Jane’s proposal is that would clearly help us very quickly is owning a thermal power plant or the equivalent which can be done on a purely contractual basis is really interesting. Right now, next year and for as far as we can see. The question and I think those are things we can move up in terms of time and the question I have is how much power
should we contract for the long-term right now and the 75 megawatts is 300 some odd million dollars
worth of power which was the original proposal authorization that was before the City Council. That just seemed way too much to me. Now I understand that you are not talking about doing 25 fairly quickly. I am even a little nervous about that until at least we find out whether the Governor has a deal which we will know in 72 hours or so, give or take. That’s my concern because I know any long-term contract we
sign now 5 years from now our customers are going to hate it. They will forget all the uncertainty and all
the problems we are facing right now and they will all be looking for ways of getting out from under it 5 years for, almost for sure. So, I thought Mr. Rosenbaum had some very good ideas for supervising , putting out these contracts and
one way to do it is just put them out to this wonderful financial term called “tranches” go out and buy 20
million dollars worth of power this week, get the best deals you can, the range you think is best and then come back to us and let’s talk about what’s happening. While we are watching this market and I really would like to hear more. I have read everything I can find and I have talked with a lot of people, I don’t think the probability of PG&E bankruptcy is really that high I would not give it even money right now. I
think everyone has given a lot of effort into not going bankrupt and I would love to find out why you
appear to think differently. Which are the key reasons for not doing something really bid right now? Ulrich: Well, my only retort of that is we talk to numerous people and have retained some very skilled legal assistants in this area and are making those kinds of investments daily and nobody has the answer to
it and so my only reason for nodding and saying where you can be of less certain of bankruptcy than I can
be of being more certain than I can be of being more certain that it is going to happen. What we are taking about is making a decision that protects us much better by making a decision and purchasing than by making no decision and using our hope as a strategy.
Carlson: I am not saying do nothing. I want to be clear about that. I would be very comfortable buying
10 megawatts for 10 years right now or as soon as you can negotiate the contracts and maybe 20 or so would not be a bad idea but 50 or 75 that makes me really nervous given the significant chance that they will work it out and we won’t need the contracts and the likelihood that 5 years from now those contracts will give us power at cost much higher than we really need. And so, I think timing really matters here,
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especially with all of the market data, including the futures market, which is real people spending real money saying a year from now the prices in this market are definitely going to dropping.
Ulrich: Well, of course the estimate of forward prices are all based on actual real stuff. This is what people are really buying in the market today. They are not somebody sitting in the back room kind of thinking what they are.
Carlson: I understand. They say prices are going down which means the longer you can delay the better
off you are, if we dare delay. I don’t want to delay completely, I don’t want to do nothing. My question is how much and can’t we just do some now and wait several months and then maybe do some more. Ulrich: Well, the way the Ordinance is written it gives us a years period of time in which to do all of that
and again we do not have the intention of going out and buying everything all at once and the layering
would be a far better approach. Carlson: If six months from now you bought 25 and PG&E is still going and bankruptcy does not look any more eminent that it does now would you go ahead and buy the whole 50 or 75? I mean, what is your
plan?
Ulrich: Based on that scenario, I can see no reason why we would but we are going to have more knowledge six months from now based on that scenario that you give. We are not looking forward to going out and buying any more than we think would be appropriate to have. So based on what you said,
I don’t think we would.
Carlson: So what you are really talking about is doing 25 or so in advance of some bankruptcy or other loss of the contract and waiting with the rest.
Ulrich: I think that would be our feeling today and we had a different feeling a few days and we will
probably have a different one a few days from now. What we are again asking for is the flexibility to be able to go out and look and be an active participant and try and find the best possible contracts and by having authority to do that allows us to go out in the market so but to answer your question as clear as I can, it is not our intention to take full extreme of our request and do it quickly.
Carlson: Let me tell you why I am asking all this is because I have worked in depth in energy through the last energy crisis and through a couple other corporate energy crisis and the power of the media in the field, everyone thought it was going to go to $100 a barrel. It is infectious. It has incredible power. I am proud to say that most of the times I did not get carried along but I saw some awfully thoughtful people
get carried into making multi-billion dollar really dumb decisions and I think the other thing is that from a
staff perspective, preventing a short-term embarrassment is much appealing if there is a long run cost. So, I am basically trying to provide some pressure on the other side and I am very encouraged from what you said a few moments ago. I am just trying to be an anchor to windward here.
Ulrich: It is clear to me that we have a very important role to hold the mirror up and say this is what
could potentially happen. And I think that is a role that is better than standing back and saying not much we can do about it. We are putting out the thoughts of alternatives to make this terrible situation as palatable and as easy for the community to tolerate and I think the extremes of doing nothing or the
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extremes in this case of going to 75 quickly is not the right decision to make. We are looking for the flexibility to be able to consider those but today that would not be a decision to go all the way to 75.
Carlson: Do you have a problem with the kind of control mechanism that Dick Rosenbaum has proposed? I find that along with what you said here a lot more comfortable than I did Monday night. Ulrich: Well, I think you are going to have to decide your comfort area. I am extremely comfortable with
the recommendation that I made. I have a tremendous amount of trust in the staff and our ability to
respect and to recognize our role in looking out for the citizens and the residents and businesses of Palo Alto. I am extremely confident in that. But you have got to have that because when the rubber meets the road, we all know that by going out and buying this long-term contract there will be a point where we are paying more than present market is. Just like the people who sat here in 1964 and said do we really want
a 40 year contract for some hydro power up in Trinity to help that go and there were times during those 40
years that I am sure that the price of Western power was higher than PG&E so I have no doubt about that. All I can say is that this is our recommendation and if you have some layer of oversight I would only request that it be something that allows us to be flexible, timely, gives you confidence and allows us to negotiate in an environment that people can’t second guess or as we are talking price that becomes the
floor that others are going to see and be able to not give us the best possible price that we could have.
Ferguson: One of the lessons of the AB1890 California energy fiasco here is that laws and regulations were responsible for encumbering otherwise professional energy managers and traders. In retrospect we say it was crazy to have prohibited long term wholesale contracts. So what we have here is indeed a
period of short term uncertainty. I come out in favor of giving staff a lot of flexibility over the short term,
I don’t know whether it is a 25 or 50 megawatt cap. But I am just looking at the lesson that we were just talking about in Washington and wondering why are we hobbling a very competent staff. John, since you have come on board here, whether it is the risk management process you took us through since the December 17 Rosenbaum memo launched us that path, or the water emergency back-up studies that we
have done there, you have laid out a path and you have delivered good staff and you have delivered up
good analysis and you have taught all of us that the staff can do this. I don't think it is too much to ask that the staff be given this extra zone of discretion, particularly as Commissioner Carlson said, in this temporary but enormously volatile environment. I think you have earned the trust that we should put in you to pull that off. I am not afraid of voting in favor of that and I just put that example against the back-
drop of AB 1890 where people cut off the discretion of energy managers. We have to be able to invest
enough time – the middle zone has been expressed tonight – it sounds like a 5 day wait or a 3 day wait or whatever it is , it is a couple of a million dollars in the scheme of things. So if the Council wants to put a couple of million dollars at risk to help reduce the risk of the chance that there will be an embarrassing error in judgment. That’s a reasonable trade-off too. I think it is time for us to respond in kind to a very
good job you have done of delivering staff and delivering the promises here. (The transfer study was
something you inherited from a prior era). Carlson: I would like to follow up on a couple of questions that Commissioner Rosenbaum raised on a question about timing and Western’s role. All of these analyses have had the underlying assumption that
the firming contract will go to market 20 – 22 cent power and basically the more I think about it I wonder
why is that the most likely scenario? It would seem to me that even if FERC stepped and ordered PG&E or gave them relief under their under their 2.2 cent contract that the natural attempt would be made on the part of the parties to at least I would think Western would say well fine. Let’s sit down and negotiate some sort of a term arrangement, There is at the minimum 3 years left on the contract assuming it
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happened some time quite soon what is a leveled long-term contract to fulfill that 04 term and that it would not automatically go to this 22 cent rate and continue at that point for the entire term. And I
wanted to know if that issue has been thought through or asked about or schemed about with Western or
NCPA. Balachandran: What we have presented here are extremes. There is a worst case scenario and we are only looking at first year so when you look at the 20 cents, yes it is a first year impact, like Randy
mentioned, since prices are expected to fall off after the first year the rate impact in succeeding years
would be less, the pattern would stay the same, the magnitude would be less. As far as what could happen between Western and PG&E, the Integration Contract – Western and PG&E are negotiating and have been in the process of negotiating over the last two years. Offers have been going back and forth. We are presently in a confidentiality agreement where we can not talk about the exact details of the offers but we
can talk about the on-negotiating going on. What we had to put down on paper are just numbers in
between just to give you an idea of here is the extreme case of .20 cents and we had another case of, I believe, .11 cents and .05 cents so Ulrich: That’s why I told you earlier that I was very uncomfortable about us focusing too much on the
idea is to give you the order magnitude and extremes and what you see there in the middle so that is an
attempt to be in the middle. Carlson: I understand but to me these are absolutely to me in forming an opinion about this whole issue. What are likely scenarios? When I made my opening statement I said I was torn about full delegation or
having some sort of modification knowing the professionalism of the staff. As I listen to Commissioner
Ferguson, it occurred to me that some of the most successful companies are run on the basis of extensive authority to operating managers because they are closest to the action because they know what is happening, but there is a fairly expensive and complete reporting system of what goes on to the people that have to be knowledgeable about the overall picture and so again I don’t think it is part of this
Ordinance but in the case of this extent of authority, you did mention that there would be reporting. I
think it should be complete, timely and accurate to the UAC and the Council as to exactly the extent of the contracts that have been entered into and I would think that from a confidentiality standpoint that this would not damage PAU to have this information public once it is a done deal. But it does give the elected officials and the commissioners the necessary and the extent of our risk profile. I don’t know if it is time
to make motions at this point but I think – one more point – giving up direct access –
Dawes: I think it absolutely mandatory that it be done prior to entering into any of these contract to start entering into contracts and still have a direct access out is very, very poor and we need to close that off prior to doing this. You can’t really go half way, you can’t really say to some of our biggest customers
well you can go do this now and then we will go the other way and go into long-term contracting. To me,
to build this portfolio we have to shut that door and do it prior to. That is my opinion on that. And lastly, I thought that the public comment about rates which encourage conservation very appropriate that I gave , I think it was Councilman Beecham or you, John the articles in the New York times about the San Diego experience where when the rates went up or went to market billing usage dropped and the Governor came
in and said the State will subsidize you, the rates went down, the usage popped right back to where it had
been before. The rate increase issues that were discussed and I guess Commissioner Carlson put in a plug for, as do I, that a back-ended scenario would be very appropriate to encourage conservation and you have to hit them in the pocketbooks with usage increase to make that happen. is there a motion?
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Rosenbaum: I was just going to suggest to Dexter that I think the suggested changes to the Ordinance would make a fine basis for a motion. Does everyone have a copy of what Dexter distributed.
Carlson: I don’t have a copy. Rosenbaum: Well, I think Dexter, am I correct, the basic difference is that instead of 75 megawatts you limit it to 50 megawatts?
Dawes: That is true and I also suggested that we eliminate to negotiate one or more contracts and simply say to negotiate a portfolio, I called it laddered contracts, whether it is laddered or layered, a definition that is appropriate in an Ordinance contracts for power and I added in varying terms and prices so that they are spread out over a period of time, I was inclined to put in with the average life of 3 years, but I
decided that I would not do that.
Rosenbaum: All right and then you also had a change at the end with regard to an Oversight Committee. Would you like to make a motion to that effect?
Dawes: Do I need to read it or should – how do we work this?
Rosenbaum: Why don’t you read it. Dawes: Alright. The changes for the Ordinance are only in Section 2, which would then read: The City
Council hereby authorizes the City Manager or Director of Utilities, for a period of one year after the
adoption of this Ordinance to, directly or indirectly, negotiate a portfolio of laddered or layered contracts for power of varying terms and prices (electric energy and capacity) with qualified power suppliers in incremental quantities up to 50 megawatts and for terms for up to 10 years and, as necessary and appropriate, to take all reasonably necessary steps to insure the continued availability of reasonably priced
in – state transmission. The terms and conditions of the power supply contracts and other related
contracts shall be approved as to form by the City Attorney and the funding of power purchases and other related purchases under these contracts and the arrangement for payment there of shall be approved by an Oversight Committee appointed by the Mayor, consisting of a mix of Council people and UAC members if desired by the Council. Any contract for a term longer than 3 years shall be approved by the City
Attorney as to substance and based on the advice of the Oversight Committee.
Ferguson: There is a motion by Mr. Dawes to approve the Ordinance as rewritten. Bechtal: Second
Dawes: Now that it has been seconded I would like to make one comment. The only additional thing that I would recommend that I don’t even want to bother to make an amendment is that there be some fixed increment like no more than 20 million dollars per group of contracts before further review by the Oversight Committee. I think that 50 million dollars at once is just a scary kind of number from a
Council and a public perspective and also from a substitute perspective if that would be acceptable if that
would be acceptable to you. Is that a problem? Ferguson: With a dollar price of 25 megawatts.
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Dawes: 25 megawatts cost 100 million dollars.
Ulrich: I guess I thought when you talk about the Oversight Committee that would be the place where we
would review whatever it is, whether it is 20 or 100 or whatever that is. Dawes: I am not amending this, it is just observation. Ferguson: Otherwise, I think it is a much-improved Ordinance. Any other comments on the motion.
Rosenbaum: Yes, I would suggest something more specific with respect to the Oversight Committee. Specify three Council members and two UAC members with a requirement that there be a quorum of three people be available for ____________ .
Dawes: I accept that modification.
Ferguson: The amendment has been accepted and seconded again so we now have an amended motion before us on the floor.
Rosenbaum: One further thought. Dexter I think we ought to put your thought about direct access into a
motion too. I mean I would offer Ferguson: Why don’t you do that.
Rosenbaum: I would offer an amendment that we recommend to the Council that before any contracts are
let, direct access be terminated. Ferguson: Does the mover accept that second amendment?
Dawes: If it is an amendment that is fine. If it is a separate motion, that is fine too.
Ferguson: Make it an amendment and second it. Bechtel: I will second it.
Ferguson: We have one modified motion now in front of us now. Ulrich: Let me make a staff observation for a moment. A couple of things. Some of the language you are suggesting Dexter may be better said by having you sit down with our City Attorney and go through
so that we have language that meets his concerns and interests but achieves the same thing that you are
trying to achieve. If this is acceptable to you to take that time so that we reflect what you are trying to get done but to say it in a way that may be better served as the way the Ordinance is written. Dawes: Absolutely. In fact we talked earlier about the Ordinance for guidelines for financial instruments
and that had, in effect, sort of an addendum to it or a attachment and if it is best to put these limitations
into an attachment that’s fine too. Ulrich: The other area I am less conversant in but I need to point out some review was done by the City Attorney on your proposal with the Oversight Committee and there would be some question about having
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a combined Oversight Committee that was made up of City Council and UAC because the City Council has different authorities and different responsibilities than UAC members and that in essence it may not
be appropriate to have the sub-committee or the Oversight Committee comprised the way that you
suggest. If I sound hesitant about the proposal it is because this is an area I am not conversant in. Before you lock something up Dawes: The approach was only to provide a level of expertise
Beecham: I would like to add something. I think the concern is whether or not the Council in fact delegate certain authorities to members not on the Council but I suggest that for tonight this might stay in as proposed and find out from the Attorney before it gets to Council on Tuesday.
Ulrich: My observation, I guess, is doing it this way would we have any difficulty in being able to make
whatever changes may be appropriate before Monday so that it can be reviewed and approved by the City Council. Beecham: I will make sure I talk to the Council about other alternatives if you have a problem before
Monday or Tuesday.
Dawes: John, one possibility here is to make the UAC members of the Oversight group ex-officio, non voting members so to make it clear that all of the ”legislative” powers is in the hands of the elected officials and I think that ought to satisfy any possible concern of the City Attorney.
Ulrich: Well, if this is truly going to be a sub-committee, it is probably going to be one that is open and that it will allow UAC or anyone else to participate. This is an area that I am very uncomfortable about because my objective is to be able to get on with this and to be able to have as few hurdles to have to overcome but at the same time to give you confidence that there is oversight but I don’t want to be in a
position of every nuance of the negotiation coming back through the sub-committee and all of the
requirements for due notice to the public and how much time that would take. It ‘s not trying to keep things from the public, it’s the negotiations like this I don’t think serve the best interest of anybody by having a public process while we are doing it.
Ferguson: Well, the UAC is not engineered to be doing ordinance-drafting under any circumstances and
certainly not under emergency circumstances. So under any scenario here, the City Attorney is going to have a crack at this before it gets to Council and Council is going to have a final crack at amending it so I am not worried that it will get fixed. You can count on some of us to be there Monday to communicate the gist of this to the Council members that need to hear it – or Tuesday because of the holiday.
Rosenbaum: It certainly is not my intent that this Committee would be a publicly noticed meeting. This is an ad hoc group and the City Attorney will certainly have something to say and in the end it is up to the Council. The Council is the one that has to decide whether they want to give carte blanch to a very excellent staff or whether they feel it is important that they have a role in this. You must have some idea,
this struck me from the beginning and indeed I sent the City Attorney an E-mail, why on a contract of
length over 3 years does it say the City Attorney has to approve it as to substance, I mean substance is term and price, that is not normally the role for the City Attorney.
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Ulrich: Good question. You notice there are other people in there also who have something involved in this. I don’t know the answer to that. Sorry, I have a one-track mind on this and I move in that direction.
Ferguson: We are running on fumes here, it's late. Is there any other question or comment that is going to improve the shape of motion here. Dawes: Let’s vote. This is as close as we are going to get. All those in favor.
Ferguson: Motion passes 5-0. Ferguson: What’s your pleasure, Commissioners? We have one other item which is an interesting item. Shall we do it and clear out of here by midnight before the date changes? Its original Item 5, it is the
Electric Public Benefit Funding choices based on avoided costs, which is a wonderfully insightful
proposal by Mr. Kabat. Ulrich: Do it.
Ferguson: Shall we do it and clear out of here by midnight.
Ulrich: Excuse me. I probably lost some track and I know you voted on one of the items, listed as 1 or 2 , the Financial Instruments and the other one was recommendation to fill the electric supply. Was one of those one you were going to come back to and take action.
Ferguson: No, we did them and we are comfortable with them. Ulrich: Sorry but I have a one-track mind on this and I am moving in that direction.
Kabat: Thanks for bearing with me. I think in the course of the meeting, you have laid a lot of ground
work for considering this proposal. As you recall, there has been quite a bit of discussion about the backward dated forward market curve and as we all know that is just the opposite of when it is in _______________. So prices are expensive now and headed cheaper and our retail rates are low now and we think they are headed up. So, we can start looking at the opportunities for energy efficiency , it’s the
gap between those two. There are chances for us to start sending signals to our customers through
incentives to get them to invest in more efficiency. Let me just put up two graphs. Saving you from a few slides here. Actually, the action is to, Tom Auzenne had written in a report that the request is that the UAC approve to develop cost effective demonstration programs which is a term which gives our Marketing Services Manager a lot of flexibility in how he implements programs. So he would be able to
use rebates or other incentives to capture Demand Side Management opportunities. So that is the basic
request but the situation we are seeing is steep accreditation in the wholesale cost and some rise in retail rates. So right now there is a chance to save money while customers save energy. We can just convert those annual prices into strips, so this is a one year strip, this is a two year strip that has the first year price and the second year price averaged and so we have been talking about these strips or these forward
contracts you could enter into. This is just another representation of the same kind of thing that has been
coming up earlier but now putting it in a kind of a Demand Side management of what it looks like. Down in the blue, we have the strips of retail rates that we think we will be charging and this was under one of Randy’s “not so bad” cases and then this gap is identified as the reproduction potential of conservation or DSM. And so if a customer were to cut their load it has a downward impact on everyone else’s rates so it
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is interesting if they cut their load for 14 years, there is almost no downward impact on rates over the long haul. But if they only cut their load for a few years there is a lot of downward impact and what
DSM is the utility intervening and trying to give incentive to the customer to do some efficiency
measures that we think they would do ultimately anyway. A lot of times that is the big debate in DSM is are we really getting them to do something they wouldn’t have done or are we just accelerating something they would have done anyway. And now the market is a wonderful condition, where at that debate you just say “well, I hope we are just accelerating them a little because if we are just moving items ahead three
or four years, we are really capturing the bulk of the savings. If they were going to do things anyway,
they would have done them in a few years so what we are looking at here is getting Council authority, and ask that you recommend that they grant that authority for the utility to simply compress a whole lot of the future DSM spending. Instead of dribbling out our DSM spending over the next 10 years as was recently required by SB 1194, Byron Sher Public Benefit fund, we thought maybe we should spend that money in
the next one to two years, do as much conservation now as we can and then count on collecting those
Public Benefit Funds from our customers to replenish our Reserves so it would give us use for some of the money we have in the Supply Reserve. We pre-spend Public Benefit collections. Another pot of money we might spend from is, soon the Senate will vote SB 5X which is an energy efficiency grant program funds and we hope to capture some of that and then also we can spend regular Utility Supply
Reserves that we otherwise would use to buy supplies. We could spend them on DSM because maybe it
is cheaper to buy 2cent DSM than 20 cent wholesale power and so those are the kinds of opportunities we are looking at and we are asking for wrapping up the deployment of DSM and then implementing an annual corrective adjustment because we have in place right now a number of programs that were optimized for 2 cent markets and we are thinking that perhaps we need to take a look at that more often
and crank up the DSM programs.
Dawes: Is there a dollar amount associated with this? I mean in these incredible circumstances we ought to do as much of this as we can, right now, yesterday. The alternate cost of power we are facing is horrible.
Kabat: Right. And we have not in this report identified dollar volumes or to many megawatt amounts. We are just trying to get different governing and advisory bodies on board with the idea that we do go forward and do this. We haven’t been taking time to do extensive planning so this has just a side project with all the free time I have.
Ferguson: Well, it is an important base to have covered. It was helpful for us to be able to speak knowledgeably about DSM and Public Benefits Programs in the past. Senator Sher’s bill is going to throw additional monies into it so let’s indeed be prepared.
Dawes: Would this substitute for what I won’t call “crazy programs” but which involve investing in
conservation measures. It seems I remember one that we did in Redding, CA perhaps always struck me as being very odd that we would take our energy conservation funds and invest it in far-away places. Kabat: That was an example of a program optimized for 2-cent markets and although that program might
still go forward since we made a commitment to fund that one. But I do share some thoughts on that. I
hear a lot of talk about photovoltaic as an example and since we have a really short term crisis problem in the next couple of year with shortness of supply, it seems the same amount of money spent on photovoltaic could save 20 to 100 times as much during the next two summers if it were spent on compact
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fluorescent light bulbs that last two or three or four summers. It is interesting, do we really want to build 20-year devices during a crisis to handle a 2-year crisis. Do we have that much money?
Dawes: Can we give you the guidance or just emphasize the short-term things that are really cost effective and I am afraid photovoltaic just does not make that list. Kabat: Even now, what I am finding in the study I was doing was that the short-lived that are the obvious
one and then the other is short accelerations of medium live measures. If you think the person would have
gotten around to replacing their fridge in 5 years but you get them to replace it now, then you have captured five years of savings. So the two items, it is short term measures and accelerations of medium term measures.
Ferguson: And we don’t have to pay the bonus of that refrigerator purchased by July 2001 out of the
Parks and Rec budget. We can pay it out of the PBP. Ulrich: As long as it doesn’t move to the garage.
Kabat: It may make sense to offer a “bounty on fridges” so that they come out of the garages.
Ferguson: I would like to be able to conclude our meeting on February 14 if it is possible. Any other comments on this motion?
Dawes: I move we encourage this program to move as quickly as possible, expand as much as we have
money, Ferguson: You mean you approve the staff request.
Dawes: Yes.
Ferguson: Is there a second to that? Rosenbaum seconds. All those in favor say aye. Motion carries: 5-0 Adjournment
Ferguson: Motion to adjourn? – Unanimous. Ulrich: Next meeting – March 7th.
Ferguson: Yes, for the record, the next meeting is March 7th. Thank you and we are done.