HomeMy WebLinkAbout2001-04-01 Utilities Advisory Commission Summary Minutes
UAC Special Meeting 4/10/01 Page 1 of 38
UTILITIES ADVISORY COMMISSION
SPECIAL MEETING
April 10, 2001 at 7:00 PM
Call to Order
Ferguson: Good evening. Looks like we have a quorum so I would like to call to order the
specially scheduled April 10, 2001 meeting of the Palo Utilities Advisory Commission and
Commissioners, if you could announce your presence starting with my right. Three
Commissioners were present: Dick Rosenbaum, Richard Carlson, and Richard Ferguson. Two other Commissioners joined a few minutes later.
Changes To The Agenda
Ferguson: We're here tonight to finish off the items from last week's meeting. We reconfigured
the agenda a little bit so we could have the information items up front and save a couple of action items last -- to set the stage properly.
I'd like to propose one more minor change. That is, that we take our reports of officials and
liaisons, the NCPA and TANC report and move that up immediately following oral
communications.
Councilmember Beecham has joined us, and two other Commissioners are here, too so with that NCPA and TANC modification, I'd just say Commissioner Dawes and Commissioner Bechtel have joined us. So, we have a full house. I see two members of the public, Mr. Cassell and Mr.
Borock. Did you want to speak generally to the agenda or to a particular item? Start with Mr.
Cassell. Same address as last time.
Mr. Cassell: Same address as last time. I just wanted to say something about the thing that you passed last week. This is the generators that you're putting in for this so-called emergency. At one point in my career a number of years ago, I was responsible for making sure an emergency
generator was always available. It was a reciprocal engine like this at about a megawatt. It was a
pain. It was a pain year after year trying to keep this thing running, because you run it all the
time and the motor never started right.
You had to do things with the carburetor. It was a real pain. I think you should think real hard in the second phase of this, in getting a reciprocal 5-megawatt generator on a permanent basis that
you're going to have to maintain for the next ten, twenty years; whether that is really what we
should be doing for what hopefully is only a two to maybe three-year problem.
Ferguson: Great. Thank you, Mr. Cassell. Mr. Borock?
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Mr. Borock: I thank you. The last meeting I submitted a letter, and one of the things I suggested
was thinking of some creative ways to generate power. I was reminded that just last the City
Council had on its agenda a contract with a private party that's generating electricity from the
landfill--methane. Essentially, there's money going into the general fund from that. As far as the
general fund's concerned, whether it's coming from a private company or from our Utilities funds, it's still money to the general fund.
That's a mixture of methane gas from the landfill plus natural gas, and, I believe, over the course
of a year it's about 75% of it is methane. So, at one point a possibility of a source of alternative
power that we could generate ourselves, that's a 2-megawatt generator that's there at the landfill.
Mr. Cassell reminded me about the action on the backup generator. When these are going into private companies, we're concerned about how often they're tested. In this case, we're also concerned about how many hours we're allowed to run them. That is, I guess, diesel. There's, I
guess, a 200-hour limit during the year, and I suppose it doesn't matter whether we rent it for a
month or rent it for the entire year. I don't know with natural gas if there's any such limit.
Ferguson: Thank you, Mr. Borock. Okay, we'll start with the NCPA and TANC reports. John, do you want to use NCPA as a good way to give us the news on PG&E as well?
NCPA
Ulrich: Mr. Beecham and I attended the last NCPA meeting. I'll ask Mr. Beecham if he has
some comments. A number of things that we have done are really the ongoing issues, some of
which we'll discuss a little bit later.
Beecham: Well, of course, we did talk about the PG&E situation. I'll leave that to John until later. Certainly, our coordination with NCPA on the PG&E bankruptcy is critical. Also, at this point we are beginning to schedule our trip to D.C. for the American Public Power Association
visit there in June. These APPA meetings in D.C. are always, I think, very important for giving
us the chance to meet with our representatives including Senators Boxer and Feinstein,
Representative Eshoo, and actually quite a number of other representatives and members of the
administration. So, it's always a fairly intense visit, but I'm certainly looking forward to the opportunities it may offer.
Ferguson: On that point, did anyone from Palo Alto go down to San Jose for the hearings? TV
said the Feds are in town. FERC and members of Congress are in town to talk about California
energy.
Ulrich: No, the one that was held yesterday or the day before.
Ferguson: Today and tomorrow?
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Ulrich: No.
Ferguson: Anything on TANC and transmission?
TANC
Balachandran: Yes. TANC is requesting that its members participate in some environmental
work to upgrade Path 15, and we plan on participating in that study. Lots of TANC members are interested in it. We won't get first rights to this project because we didn't participate in what's known as the "South-of-Tesla Agreement," which is basically transmission between southern
California and northern California. We get a chance to participate if all the TANC members
have participated already, and there's excess capacity left. So, we're going to bring this to the
Council. The dollar amount is about $50,000 for all of TANC, so our share is just going to be a
few thousand dollars if we actually get selected or if we get selected to participate. The money's at TANC already. The lawyers say we have to bring it back to the City Council because it's a new project, and it's a change with the existing participation agreements.
Beecham: Just for clarification, that $50,000 is for an initial study, I presume. If things were to
continue, the numbers are substantially higher.
Balachandran: That's correct.
Ferguson: Mr. Dawes?
Dawes: Here is it just the idea that TANC, which, as I understand it, is from the Oregon border
down to the Tracy area would expand its operations and participate financially and in electrical
capacity for southern California up to, I presume, Tracy via this Path 15 expansion? Balachandran: It's Los Banos to Gates. That's two substations. TANC is in a good position to
actually finance this project and get it built unlike the other parties who are traditional
transmission builders like PG&E. So, if we actually want this thing to get built, TANC is in a
great position to actually do it now.
Dawes: Are there any other competitors to build it?
Balachandran: Yes, actually the PUC has part of PG&E to file papers to go ahead and do the
environmental work, etc. So PG&E would also be competing for this project, but it's something
that the environmental folks will have to decide and other folks will have to decide who's
actually going to build it. The idea is this transmission line will be turned back to the state at a later date once the construction is done, so it wouldn't be like the COTP where we've basically owned this land. The idea over here is TANC would facilitate the building of the line, and the
state would reimburse us for this at some future date.
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Ferguson: Thank you. You want to save PG&E comments for another part of the agenda?
Ulrich: I will do it after oral communications. If that's through I will give a director's report.
Ferguson: That's where we are, then.
Director of Utilities Report
Ulrich: Alright. I have a couple of items. We have been meeting and actually had one meeting last week with other local municipal agencies that have interest in improving reliability into the
Bay Area, and those are places like City of Alameda, City of Santa Clara, San Francisco, and
several others. We've agreed to form a Bay Area Reliability Group, and we're putting together a
memorandum of understanding on how we would work together. We would primarily be a group
on the same focus on improving reliability with the objective of actually doing something in that coming up with a project or projects that we all believe are important to our reliability in our communities. Then, we would work in concert to see that those were done.
Now, that would be through the state agency that would take over the transmission line if that
comes out to pass, or something we do ourselves, or we would go out and get support from
others that would be interested in it. So, we have gone through working on a draft MOU and would like to put that together rather rapidly.
Other areas, last evening at the City Council meeting we had a discussion with the Council in a
closed session regarding pending litigation, and as a result of that meeting we requested and
received approval to increase our budget for litigation expenses that presently exceed the
authority of the City attorney or the City manager. The City Council has given approval for us to
fund additional legal support for both the FERC and the bankruptcy proceedings. That came after the Council approved that we would be allowed to be interveners in both of the
FERC and bankruptcy litigation. So, we are moving ahead with our legal team that has been
formed some months ago in working on the Chapter 11 and the FERC filing. The public
information that I gave last evening, I would like to repeat; and if you bear with me, I'll read most
of this so I'm as clear as I was last night and to be as succinct. The message last night in summary on where we're at and where we believe we're going on the
FERC filing and PG&E is that since the FERC filing was made on March 27, we had the
bankruptcy filing just a short time later, last Friday. As you know, these were not unexpected.
We've had discussions with you, the City Council, the SOC; that those were likelihood’s and had
all different estimates of probability. Now they're 100%. We knew that these events were likely to happen, and we are prepared to confidently deal with
the resulting uncertainty. We've established that the Council has the Strategic Oversight
Committee to provide closer Council involvement in dealing with long-term contracts in light of
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the energy crisis. We've retained legal representation to help Palo Alto deal with the
uncertainties of PG&E's FERC filing and bankruptcy proceedings.
We've kept the City manager, City Council, SOC, and you the UAC, and the public informed
about the possibility of the worst-case scenario and the potential impacts to Palo Alto. We've
been working with energy suppliers and becoming prepared to enter into long-term contracts if appropriate.
And of course, we're working with our other municipal utilities in northern California and
southern California and elsewhere to coordinate and leverage our efforts to mitigate these cost
increases. Now, the cost impacts with the bankruptcy filing, PG&E will attempt to obtain
protection from its creditors and back out of existing supply and transmission contracts with other utilities.
The FERC filing, if it is settled completely in favor of PG&E, would allow PG&E to charge
market rates for energy it sells to Western, which could increase wholesale costs to Palo Alto
from 2 cents or 20 mils to approximately 200 mils or 20 cents as of today. However, we believe
we have a strong case to protect our rights, and we are willing and able to go to great lengths to maintain the benefits of the Western contract. We will actively pursue all available remedies in bankruptcy court and FERC.
Now, in the area of rates, rates will increase in Palo Alto in light of recent changes in the energy
market resulting from PG&E's bankruptcy filing. But, we're uncertain of those financial impacts
at this time. Our existing inverted rate structure combined with our proposed rate increase will
send the appropriate price signals that energy costs have dramatically increased, and customers must pay more, especially if they use more.
Next steps, implementing these actions will take a tremendous effort, and the Utility Department
is beginning to implement these initiatives in partnership with other City departments, Western
customers, and municipal utilities. Of course, we will keep the public, City Council, UAC
informed of our progress. That's what I said to the Council last night, and also we had yesterday a very good public meeting
that was started at four o'clock and was over at about five thirty where we went through in detail
about the COBUG, the backup generator that you all had a chance to review at the last meeting;
and also more detail about the new conservation load management programs that we hope to
implement and get under way and have substantially done by the end of May. So, we went through that and entertained a number of questions. Three of our Council members,
including Mr. Beecham, our Vice-mayor and Mayor were in attendance and participated in the
meeting. So, we are getting the message and communication out, and also as you've seen lately,
significant amount of articles in the local newspaper: Far afield, all the way to the Wall Street
Journal, and articles about these activities in the Mercury News and the Chronicle so, we have a
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lot more communication to do, but I think our position on the FERC filing and on the bankruptcy
needs to be made very clear to everybody and show that we're actively trying to make things
happen.
Ferguson: Great. Any questions, Commissioners? Mr. Dawes?
Dawes: John, is it at all clear how these two major parameters interplay with each other? In other words, PG&E went to FERC, said basically, "Change our contract with Western." They go
to the judge and presumably are going to make a request, either sever that contract and will start
over, or you judge unilaterally change it. Now, these sound like they're a quagmire of legal
judgements and court proceedings. Do you have a reading from our legal team as to which is
likely to prevail here, and will there be any difference to Palo Alto if one or the other approach is successful or is adopted?
Ulrich: I don't think I can give you a definitive yes or no or probability answer. We discussed
every one of those items and issues that you talked about, the probability of how successful the
FERC would be and also the bankruptcy. They both have different risks, different types of risks,
different strategy that you'd follow to win and get our point across. The bankruptcy court is totally different than having any discussions with FERC. They each have a different timeline that they're working on. We have affidavits to submit so that we can intervene in both areas, and
you'll recall that we don't have a direct relationship with PG&E on these matters. They're all
through Western, so our strategy and legal discussions are all working in a team effort as
customers with Western so that we coordinate our efforts. We each take a different role and a
collective role in those proceedings. So, I think we would say we're organized.
We're putting committees together, having meetings, and discussing strategy. Then, unilaterally
we have our own Council that is representing us as specifically and is at the hearings on the
bankruptcy and is participating. We're having daily discussions about what those areas are so
that we have both a short term and a long-term strategy on working forward.
Dawes: Does NCPA have any role in this, or are they basically a bystander because we directly contract with Western?
Ulrich: No, I would not say they are a bystander by any means. They have retained legal
counsel. You may have had a chance to meet them. He was Mark Gorton who was at strategic
planning meeting in Sacramento.
Dawes: But they're not actually a party to it? They don't contract with Western specifically. They coordinate for Western's customers who are ourselves and the other Muni's. It's all
funneled through NCPA, but they're not a contractual person.
Ulrich: I don't believe so, but I'll have to look.
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Dawes: Just to ensure that I understand this fully, you said a week or so ago that our hands are somewhat tied in this regard because our contract with Western is for a specific amount of
energy, whether or not it comes from Western Dams or from the PG&E integration contact. So,
we cannot what I'd call "single screen" our power. Yes, we'll take the Western Hydro at 2 cents,
but no, we won't take re-priced integration power.
It's not likely that Western would simply say if PG&E wins that they'd say we'll just do it ourselves rather than have an integration contract. In other words, they'd buy long term power on
the best deal that they could get from out-of-state or from other generators but not necessarily
PG&E.
Ulrich: I think what you're saying is true to the extent that Western looks at us as their customers, and they have a contract with us. They're actively looking at alternatives to continue to supply us power regardless of the outcome of the bankruptcy or the FERC filing. All of those,
of course, would come at a price.
Dawes: Has there been any discussion that FERC says all PG&E power is going to be at daily
rates, the current 22 or 23 cents, whatever it is that Western would have the privilege under that circumstance since PG&E broke their side of the contract through bankruptcy or FERC filing, that Western could say, "Well, just stop buying power and buy from other providers who may
have better prices."
Ulrich: Well, I think you're now moving into it sounds like a strategic area. I'd rather not even
comment on that or even imply that that's the direction we're going. I think it would suffice to
say that this is a very high priority, and we're looking at all alternatives. We will take any appropriate action that protects our contract with Western, and I believe Western will attempt to do the same thing on our behalf.
Dawes: Thanks.
Ferguson: Commissioner Bechtel? Bechtel: John, I was interested in what you said about the Bay Area Reliability Group. I'm not
sure how you defined the title of it.
Ulrich: We're looking for a catchy acronym.
Bechtel: Maybe not as catchy as COBUG. Will the MOU cover joint litigation? Is that your intent under your MOU?
Balachandran: The MOU is pretty broad. The idea is to have some level of formality, but not so
much that it's going to stop us from actually joining together and doing something. The more
formal we get, the more layers we have to go through. The idea is get a forum where we can start
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talking to each other when an opportunity is identified. If the opportunity is litigation, that
becomes a project. We'll deal with that project as that case would merit.
Bechtel: Thanks.
Ulrich: The point of this is not to get into a financial relationship with anyone; it's to identify a project. If there is a need or a benefit to form a joint action agency or do something else that ties us closer together, then we would do that at a appropriate time.
Ferguson: I have one final question before Girish escapes.
Ulrich: He's going nowhere this week. Ferguson: At our Valentine's Day meeting the cost of a ten-year contract for 25 megawatts was
about $100 million present value. That was the round number that we used. Correct?
Balachandran: Yes, for a 25 megawatt block, there's actually a little more than that.
Ferguson: Two months later, the day after the bankruptcy, what's the price of that contract?
Balachandran: If Shiva has an answer, he can come up and answer it. I know we did get some
quotes. I don't know if they're the same time period.
Shiva: The bankruptcy hasn't changed prices as of last week versus Friday versus today, but
overall the market has moved slightly. Outer years are remaining the same, but the summer prices have gone up considerably.
Ferguson: So, the ten year decision issue hasn't swung incredibly far one way or another in light
of this?
Shiva: That's correct. Ferguson: So the market predicted the filing. Thank you. Let's move on to our next items.
Again, a couple of information items and then let's move to our pair of action items tonight.
There's the ten-year financial forecast, our multi-colored document, and then our two-page
spending summary for the next fiscal year. John, do you prefer taking these in a particular order?
Ulrich: You mean between the forecast and the budget?
Ferguson: Yes, between the ten-year and the one-year.
Ulrich: I think it's beneficial to probably go through them as we've listed the financial forecast
area and get all those questions and answers out.
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Ferguson: Drop back to the details of the one? Okay, is that your presentation?
Financial Spending For the Next Fiscal Year
Ulrich: Yes, just briefly, Randy Baldschun will have some remarks first. Baldschun: Every year we bring you these ten-year financial forecasts so that you can get a
picture of the long-term financial outlook. Typically, these are preliminary estimates that we do
prior to the budget process, so the numbers that you see do not include the pending SEIU
management negotiations for salaries so they're understated in that regard. There's some other
items in here that are not included, but what we try to do is provide the best estimate at that time of projected expenses. Ratemaking is, after all, a prospective exercise and what you think the future's going to look like.
I'd like to bring to your attention one change that we've done today. There may be others before
the formal budget proposal is submitted in a few weeks. The change we did today was to change
the water collection rate increase from 40% in 2002-2003 to 20%. We split that up into two consecutive years. In the ten-year financial forecast you see it's 40% one year and zero in the next. We split it into two 20s. There'll be more fine tuning as we go along, and that's all the
comments I have.
Ferguson: Any other presentation comments?
Ulrich: None specifically. We received some questions from some of you by e-mail, and it may be better if you'd like to ask them in a particular format or a different sequence. Then, we can answer them as they're appropriate.
Ferguson: Commissioners, let's try general questions first and then drop down to the utility
specific questions on this ten-year forecast. I know we had a spate of questions about the CIP.
Mr. Bechtel will go first tonight. Bechtel: Could you summarize the assumptions that we talked about before last week in terms of
financing? We've used financing on a pay-as-you-go basis in the past with some debt financing.
Could you just summarize briefly what is in here so we don't have to look at every line item here
and point us to where those built in assumptions are listed?
Baldschun: Sure. I'd be glad to. What we're planning to do this year is depart from our long-standing practice of paying for the CIP out of our current rates. The reason is because we're in an
energy crisis, and the ratepayers in Palo Alto are going to see some very high escalating bills. So
we thought what can we do to help mitigate those rate increases. One common tool that utilities
use is to bond finance a CIP because what that does is relieve pressure on the commodity rate
increases.
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What the customer sees, and that's all they care about, is the overall bill impact. We've looked at
the electric fund, water fund, and gas fund. The electric fund we're proposing to finance $9
million, and you'll see that on Line 27 as the bond proceeds come into the fund as a resource.
We have $9 million coming in that particular year. We're going to take $3 million out of that to
finance a portion of the CIP. If you look at the line next to that, excuse me, the column next to that, you'll see a $2,400 figure. That's the balance. That's the second year of CIP bringing the bond proceeds back into the reserve to finance $2,400. The third line $3,600 is how much we'll
be using to finance the CIP for the third year.
The three columns are not additive in terms of how much we're going to go out and issue bonds.
We're going to issue bonds for $9 million, and it's just showing how that would allocated and used in that three-year period. The annual debt service is about $719,000. In the electric fund it's about 42% of the CIP we're proposing to bond finance, and that is based on the electrical
engineer's estimate on the kinds of CIP projects that are extraordinary the reoccurring type.
It's a relatively small amount in terms of the revenue impact on the fund. The gas utility is a
different story. The gas utility we're proposing to finance 100% because the gas utility is certainly in need of some rate relief and certainly in need some financial resources coming into it.
I keep restating that this is a three-year plan, and after three years our plan is not to continue to do
debt financing. I personally don't think it's a good tool to use on an ongoing basis, but I think it's
an excellent tool to use strategically when times call for it; and I think the time has come.
The gas fund we're proposing to finance $12,698,000, of which the first year we'll spend $4,368,000 of the $12.7 million. The following year it'll be $4.1 million. The following year $4.1 million, so that's how that would be used up. That's basically 100% of the CIP if you look at
the lines for system improvement on Line 29 for the years 01-02, 02-03, and 03-04. You add
those numbers up, and you come up with $12,698,000.
The water fund, as you are well aware, has a big kicker coming in 03-04. The water engineer reviewed the CIP for this three-year period, and he recommended $6 million be bond financed to represent some of the extraordinary expenditures that would be coming about over the three-year
period. This $6 million represents about 27% of the overall CIP in the water fund for that three-
year period. The annual debt service is about $479,000.
What that means to the Palo Alto ratepayer, which is really probably the key question, is if we didn't do the debt financing; our rate proposal for the electric would go from the current 43% to 47%. If we didn't do the gas bond financing, our rate proposal would go from 67% to 77%. If
we didn't do the water bond financing, our rate proposal this year would go from 0% to 11%.
Bechtel: Excuse me, Randy. Which years are you talking about in each of those cases?
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Baldschun: I'm just getting to that. That's fiscal year 2001-02.
Bechtel: I'm a little confused. The gas doesn't show any 01-02 rate increase.
Baldschun: That's right. We're doing it in June. We're doing it in the fiscal year before. We're a
month off, so technically it's in this current fiscal year. The water fund, as far as fiscal year '02-'03, the difference between bond financing and non-bond
financing; it doesn't make any difference in the electric or the gas; but in the water you'd have to
add another 6% to the already 11% that we would have had to have in fiscal year '01-'02. So, for
the residential customer what it means is roughly about $10 a month is saved this fiscal year, or
excuse me, fiscal year '01-'02. An additional $2.60 is saved on their bill each month in '02-'03. The present value now I'll indicate that it was a good decision to make. That's our proposal. The
accountants, being an accountant myself, love to see the benefits streamed along over the years of
the asset. That's what this does, but that's not why we're doing it. We're doing it because of the
rate relief.
Ferguson: Mr. Dawes?
Dawes: Basically, this is an extension of the discussion we started having at the last meeting,
Randy, and it's my thought that the way that these schedules read there may be something wrong
with the way I do it. The way I look at it, I look at a combination of the bond financing and the
change in reserves, and my thought at our last meeting was that much of the bond financing, and
this sets aside the amount of the bond financing that goes into reserves simply because it gets spent over a three year period; that in effect the bond financing serves to increase the reserves over the year. If we chose to be a little, if you will, not fatten up the reserves as quickly as this
scenario does; that we could, with the exception of water, and the way I looked at it, not do a
bond for electric and gas.
I guess one outcome there is we get to a very small bond issue for water, and that may be uneconomic because of the size. I don't know if the reason you are proposing bonding all three utilities here is get that size up to a critical mass in order to be economical about it. I wouldn't,
again, have a problem if we could invest these idle funds, if you will, in taxable issues so that we
made a spread or at least got all our interest, costs, and expenses back via our interest income.
That would sooth my thought considerably, but I gathered from what you said before we can't do
that. If you could go through the arithmetic of how the change in overall reserves and the bonds play out, and at this point let's disregard the change in the proposed reserved guidelines which are banked into the minimum reserve numbers which you have here which is the subject of the next
discussion.
Baldschun: I'll try to answer it simply which is when we make decisions on reserves, it's really
the last step in the ratemaking thinking process. We plug in the numbers, including debt
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financing, everything, and then we look at how short we are in terms of our minimum guideline
levels in the reserves. Then, we figure what kind of rate increase do we need to achieve some
kind of acceptable minimum guideline level or whatever we need to do on reserves.
That's how we think, and that's how we do it. In fact, we don't do it as you implied at the last
meeting, I think, which is we decide all of a sudden to have some money in the reserves and so we're going to go out and do some debt financing. That is totally incorrect if that was your implication.
Dawes: It wasn't.
Baldschun: Okay. I don't know if that answers your question. Dawes: Let's look at the electric. The electric starts '01-'02 at $102 million reserves. It ends '03-
'04 with $122 million in reserves. That's $20 million reserve increment, and during that period
we have raised and spent $9 million in bond funds presumably for Cap Ex. My thought is if we
were satisfied with increasing the reserves from $102 million to $113 million, in other words,
that level of increase in reserves and obviated the bond funds, we'd be fine. Is there anything wrong with that logic? Line 73 is the total reserves?
Hirmina: Excuse me. The $122 million we're discussing here, that includes Calaveras.
Dawes: I understand. It's the total reserves.
Hirmina: To pay the debt, that has to be there. Dawes: I understand.
Hirmina: That was approved and agreed upon.
Dawes: That is increasing by $6 million over the period, so let's say instead of going to $102 to $113, if you backed off the entire increase in the Calaveras reserve, you're down to $107 so you're increasing from $102 to $107 "X" any change in the Calaveras reserve. Again, a reserve
increase.
Baldschun: Let me talk about the Calaveras reserve. The presumption here on this document is
that the Calaveras reserve balances, as you see, each year are the correct balances. The reason is because that's the schedule the Council approved when they adopted Calaveras reserve policy. That's why you see the reserve increases. It's supposed to increase in those years because the
debt service schedule for the Calaveras project is not an even debt service schedule. It goes up
and down. We did the present value analysis. I don't know if any of you were on the
Commission at the time.
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Dawes: I'm exempting that, Randy. I'm saying let's just set that aside. The reserves exclusive of any change in Calaveras increase by $4 million over the period.
Baldschun: If the other reserves increase, as long as they're within the guidelines then that would
be appropriate. If they're to the extent they go over the guidelines, then that would be something
we would be looking at probably coming back with either a lesser rate increase in future years or some kind of a decrease. That's how we think. There's nothing wrong with the reserves increasing.
Dawes: No, I'm a great fan of reserves, but I'm also not a great fan of bond issues. Basically, my
point is if we didn't float these bond issues and we didn't take into any consideration of the
Calaveras reserve, all the other reserves in aggregate; plan, distribution, supply; reserves and these other two little guys, would go up by $4 million. Again, I don't see the need. Your contention is we have softened the rate increase by taking on these bond funds. I'm saying that
even with the softened rate increase, if you will, the lower rate increase, we're still adding to
reserves exclusive of Calaveras. So again, I come back to the point. I don't see it. I don't
understand it.
Beecham: If I could follow up on that with some other questions that might help.
Ferguson: Mr. Beecham.
Beecham: For example, on Line 67 on distribution RSR in your L001 it goes from $3 million
and within two years is up to $10 million. So, an increase of about $7 million? I'm trying to
figure out (A) how that does fit in with the Council guidelines, but (B) even if both numbers $3 million and $10 million are in guidelines, why at this point do we want to increase that reserve?
Baldschun: The guideline is on Line 78. That's the maximum guideline, and so it's being
increased up to a little below the maximum in that year. Now, we can debate whether it should
be raised that fast, and I think the whole issue of this uncertainty that we're in can be debated.
This is what we feel is a prudent proposal, and it's based on at least getting the distribution reserve up there fairly quickly. There's really not that much money in that reserve right now, and it can be eaten up pretty quick.
We've got a lot of possibilities for future projects that we haven't talked about because they're
still on the drawing boards. The MSC is one that could hit us about four or five, maybe nine
million dollars--the MSC rebuild. It's not safe for earthquakes, and there's going to be a sharing of the expenses for that project sometime in the future. We don't know what the effects are of conservation in terms of the distribution revenue. We don't know with this crisis to what extent
how much customers are going to conserve. That's not factored in here. If our sales erosion
occurs, then we going to be having to dip into the distribution reserve as well as the supply
reserve. So, there's a lot of uncertainty here, and what we're trying to do is get all the reserves
UAC Special Meeting 4/10/01 Page 14 of 38
strong on a fairly expedited basis because we don't see a real rosy future with all the surrounding
events happening in the industry right now.
Beecham: So, as our supply guidelines, as those calculations show that our reserves should go
up over the next two or three years, and for example, the supply RSR, more than doubling in two
years; staff is recommending that we do increase the reserves to around the maximum for each of those reserve levels. Because the calculations increase, staff is recommending that we actually do put more money into those reserves.
Baldschun: The guideline is approximately doubling in the electric fund supply reserve, and it's
based on the analysis which will be taken up next. If you notice this rate increase, the 45% rate
increase, we are not putting money into the supply reserve with this rate increase. If you look at Line 53, it says "reserve funding." There's a zero for the supply reserve. So, my point is that whether we change the reserve guidelines or don't change the reserve guidelines, that wouldn't
affect this proposal. We're not planning on putting money into the supply reserve with this rate
increase. In future years, you'll see it start to climb up, but a lot can happen in twelve months.
These numbers, I would imagine, in twelve months in two years from now will be totally
different. You didn't see these numbers last year. These forecasts are always wrong. It'll take full credit for that.
Ferguson: Commissioners, any other questions on this information item? Mr. Carlson?
Carlson: I just want to make sure I heard correctly because I think it's an important point, you're
basically assuming no price elasticity, no demand impact of the 43%?
Baldschun: The 4% reduction in sales is in the model. We took off 4% of the forecast.
Carlson: So, a 43% increase in rates gets you 4% in demand decease. Short term elasticities are
really tough, I know.
Baldschun: Our economists looked at this, and they didn't have any definitive data to use. It was a judgment call. It's subject to interpretation, and we're obviously going to have to monitor the gas and electric sales rate closely given these kinds of rate increases. The two of you can expect
to see some drop in consumption.
Carlson: Let me come at this from another perspective. We can move around the bond, and we
can move around the reserves, and we move around the rate increase, and finally, I guess, the demand estimates. Those are all pretty unknown at this point. We can guess on what the power's going to cost us, too. You've got 7.1 cents as an average rate. Is that on the low end of range, or
is that the high end of the range of what you think we'll ultimately have to move to? This implies
we'll ultimately have to move to around 8 cents in the long run.
UAC Special Meeting 4/10/01 Page 15 of 38
Baldschun: This is a very, very conservative scenario. John was talking about the FERC and the bankruptcy. He was talking about how there's been numbers of $120 million increase to Palo
Alto in commodity costs. Well, you can see that this is assuming an increase in commodity cost
of $17 million, so that gives you a perspective of how far away we are from the worst case
scenario, 17 versus 120.
Well, you can see that this is assuming an increase in commodity cost of $17 million, so that gives you a perspective of how far away we are from the worst case scenario, 17 versus 120.
Carlson: Well, I'm not talking about the worst case. I think I'm more looking at the lower one.
If we've got a lot of reserves and it looks like what we're going to pay for power is going to do
this, like it's clearly doing for gas, then there's reason to shave the peak. If it looks like we're at least going to go to 7 cents in a few years anyway, and it might be more in the near term just looking at it from a rate stability perspective. We've got enough reserves that running down the
reserves to pay some temporary jump in power costs makes sense, but it doesn't make sense to be
super conservative and have to come back in a couple of months later for another big rate
increase.
I think that's a perspective that argues for something like picking the rate and deciding on your reserve policy out of that. From that perspective 7 cents doesn't look so crazy because it's likely
to be in a reasonable range of what the long term rates are going to have to be.
Baldschun: You've been involved with some of our discussions on long term contracts. In light
of recent events it looks like long term contracts are becoming more and more a potential reality,
and you've seen the prices of these long term contracts. They're anywhere from 7 to 12 cents, so you start cranking those numbers into our revenue requirement and you're going to see some very large rate increases. This 43% doesn't even include that. 7.1 cents is the future. In fact, the
future's going to be higher than that. That's our best guess.
Ferguson: Mr. Rosenbaum?
Rosenbaum: Yeah, one question about the Calaveras reserve: I assume you did go to the Council last year and there is some understanding. It isn't evident from the numbers how the
Calaveras reserve is being used, and if there in the simple answer perhaps you can provide that
information off-line.
Unless my colleagues are interested, but I think you'll agree when one looks at this ten year budget it's hard to decipher just how that's working. I'll check off-line here. This is nominally not an action item. Is the budget going to come back as an action item? Because I would like to
have a sense of the UAC motion that I'm prepared to offer here.
Ulrich: Are you referring to the CIP and the expense budget item or are you talking about
something else?
UAC Special Meeting 4/10/01 Page 16 of 38
Rosenbaum: Well, I'm interested in making a general motion about the use of bonds for CIP.
Ulrich: We have an item later on just after this that talks about the changes in the budget for next
year so that you have a chance to see what those are. Then, at the next meeting prior to the
meeting prior to going to finance committee, we will come back and give you the budget. The point has been in the past that by the time we get to that point it's all bound and ready to go. So, we want to give you the highlights of that this evening if that answers your question.
Rosenbaum: At some point I would like to see a motion to the effect that we recommend to staff
and Council that bonding not be used for routine annual CIP expenditures and further I would be
willing to make an exception this year for gas because of the magnitude of the rate increase. So, whenever you think a motion of that sort would be appropriate, tonight or next?
Ulrich: I'm sorry, I'm not sure what you would like to have. We do have an item tonight. It's in
your package, which is the budget overview. Last week it was item number 5, and it's the second
part of this item 3. It was found under the tab for last week -- five.
Rosenbaum: I understand that. That didn't seem to be the appropriate place for a general motion, but if you'd like let's put off that discussion until we get to that item.
Ferguson: I think the interesting issue tonight is that bond financing is being proposed in
conjunction with the rate leveling process. That's being done because we're in very uncertain and
volatile circumstances. So, tonight's action items are focused on dealing with those volatile
circumstances, whereas Commissioner Rosenbaum's interesting motion proposal deals with a general statement of policy. I'd like to get past the immediately volatile assignment first.
Ulrich: As I mentioned last week and it's worth reiterating again because Randy mentioned it, it
is we're not asking for a policy change that would have us continuously bond all our CIP work.
You were very accurate, Mr. Ferguson, in the intent that we're trying to get across and tried to
have that as the cornerstone of our rate increase proposal this year to use bond financing to spread for our important CIP work over a thirty year period. There's not an attempt to say that we would come back and do this again next year or three years from now.
Frankly, our hope is and our expectation is, as Mr. Carlson points out to us numerous times and
in fact has the overarching hand that shows that the retail and wholesale price, pardon me,
wholesale price of electricity is going to come down. As you can tell when you look at the forward pricing on energy, that's exactly what's going to happen. Some of these power plants and transmission lines have to be built the sooner the better. That will reduce the price of our supply.
In this uncertain market if we can use the bond financing to have an overall reduction or less than
we would have to have otherwise in our distribution rate, we expect that the supply cost given
everything else but the FERC and the bankruptcy if the market prevails we'll be able to have
UAC Special Meeting 4/10/01 Page 17 of 38
lower supply cost. We would be back to a point where we could finance future CIP work and not
have to have a rate increase at that time. So, our hope is that the reduction in the distribution
costs now, or the price that we have to add into the rates, would be offset at a later date by
reduction in the supply price of electricity.
Ferguson: Mr. Dawes? Dawes: I just want add that I think this is a fabulous presentation. It ties together the entire
revenue expense reserve funding levels. It's sort of a combination of balance sheet and operating
statement. To me, it just so easily read. It's multi-year. It has all the data. I think it's terrific.
Ferguson: Mr. Bechtel? Bechtel: I'd like to come back to Commissioner Rosenbaum's question about when we should
address the issue of bond financing. I'd like to suggest, first of all, I would not like to see the rate
increase held hostage to that issue; but I think when we're talking about reserve guidelines, I
think later on the agenda we could discuss that as a policy issue because we're also asked, I
believe, to approve those reserve guidelines, or at least asked to make a recommendation. Perhaps we could address your issue at that point on the agenda.
Ferguson: Motions are always in order inside any item, so we'll get both of those places. I'd like
to proceed through the information items here so we can get focused on our action items. The
next information item is the '01-'02 proposed budget changes. I'd like to thank staff for creating
this new presentation. It was our first attempt at linking the big items to the strategic planning
objectives. Ulrich: At the risk of bringing back the subject on bond financing so soon, Joe Saccio, I believe,
Deputy Director, as of today or yesterday, of Finance is here. He's worked with us closely on
looking at bond financing and what the benefits are in going out in the market. If you have any
questions on that, if you'd like to have them now Joe could attempt to answer some of those.
Then, he'd be able to leave, and we could get on with other areas. If you'd rather not and you've heard enough about it and it's not an issue, then we won't proceed with that.
Ferguson: Do me the favor of moving with me to this '01-'02 item, and on the '01-'02 item Mr.
Dawes happens to have a question on CIP financing. Maybe that's a good way to pose the
question.
Dawes: I think it would be appropriate to start out with an introduction to and rationale for doing this in addition to build on what the utility staff has talked about.
Saccio: Well, I have a couple of observations. I have to defer to Randy and utilities staff on the
ten year forecast and what they have in there. There are a couple of observations. I think, Mr.
Dawes, your observation about if there were any flexibility with reserves that we would always
UAC Special Meeting 4/10/01 Page 18 of 38
try to optimize or lessen the financing if there truly were some reserves that were available to use
for capital expenditures. I think that's worthwhile looking at. As Randy said, and that's not the
piece I'm as familiar with as Randy, that you need to look at what's built into those reserves for
any contingencies and the volatility in the market.
I think it's worth coming back based on Mr. Rosenbaum's question about whether it's worth acting. I thing the Utilities Department is going to be bringing back the budget again to you which will include the CIP at some point, and it may be an opportune time to revisit this question
again and think about it. I think we do need to make a distinction, and I think they have the
expertise between maintenance CIPs and capital intensive CIPs that have to do with mains and
replacements and things like that that are so capital intensive, perhaps, that the bond financing
may make some sense in order to reduce some backlog or capital work that needs to be done. I would distinguish that from the maintenance CIPs. Randy did make a good point before that there is an intent to pay as you go for the maintenance type work, but as I understand it at least,
it's the capital intensive work or the work that needs to be augmented to keep the systems
functioning correctly that they were targeting for the bond financing.
Another observation before was that, yes, I think that there are certain fixed costs associated with, and this is a minor point, fixed costs associated with the financing so that when you spread those over a larger financing it's optimal to do a larger rather than a smaller. I don't think that's a
really critical point here, but I do think it would be worth giving more thought to this and perhaps
revisiting it when the budget with the CIP comes along a little bit later.
Dawes: Could you go over the issue of investing on the short term basis, the unused proceeds,
we're talking about a two, three year period here for expending these funds, and whether or not we could take advantage of that?
Saccio: Well, you have arbitrage requirements. The federal government feels strongly about
taking the proceeds of the bonds and investing them for the benefit of the City. You can't take
the proceeds and make a profit, so to speak, on those. There are requirements that you really
can't exceed the interest rate that you're paying in debt service. So, you do earn interest on the proceeds. You could speak of it as a cap.
Dawes: It's your policy as Finance Director to ensure that the amount we earn off the funds
which have not yet gone into CIP does equal the expense of the interest that we pay out on those
funds?
Saccio: I'm not the Finance Director, but the Deputy Director, but you're correct. There are requirements written into the bond indentures that you cannot exceed. There's a certain cap on
the interest. You cannot exceed that otherwise you have to return that money to the federal
government because these are tax-exempt bonds.
UAC Special Meeting 4/10/01 Page 19 of 38
Ferguson: And that's the three-year rule as well, Randy? You have to spend the money within three years? You can't play with it any longer than three years under any circumstance?
Baldschun: Right. There is a little bit of flexibility beyond three years but not much, and we
would try to adhere to that three year time frame. The City has a financial advisor that we use in
looking at these projects as well, and we've discussed that at length. The Utilities Department is aware of that three year requirement.
Ferguson: Any other questions for Mr. Saccio? Mr. Rosenbaum?
Rosenbaum: Just a comment: I think the reason this issue has come up is because when you
look at the ten year plan, the expense item called "system improvements," which is the mains that you spoke of, not just maintenance, it appears to be constant over the next ten years. That's why it creates some concern as to the wisdom of using bond financing as far out as the eye can see.
You're planning to spend pretty much the same amount every year.
Saccio: Again, that's probably where it might be best to come back to you and talk about that; it
would seem to me unless the Department can talk about it right now. Ferguson: We've covered that base. Let's proceed to the '01-'02 budget review. John or Randy,
did you want to introduce this?
Ulrich: I was just going to thank Joe for coming down this evening and spending time with us.
Are there any other questions you might have for him?
Ferguson: Thank you.
Ulrich: Thank you. We do get good advice on work that we do.
Dawes: Are rates favorable now for bond financing?
Saccio: We talked with a financial advisor about it. The rates are very favorable. Because of the volatility in the industry rates are generally favorable. That's the plus side. They're really low.
On the not so favorable side is perhaps there might be some premium built in for a utility
issuance because of the volatility in the market. I'm sure the rating agencies are taking a close
look at all of the localities.
Dawes: Would these be G.O. for Palo Alto itself, or would they be specially designated as Palo Alto Utility Bonds and much more limited in scope and does that change our rating at all?
Saccio: Every indication we've always gotten from the financial advisor whether it be COPs, a
golf course or we issued bonds for the Water Quality Control Plant a year or so ago; it's that
when Palo Alto goes out to issue bonds, they're very favorably looked upon and taken in pretty
UAC Special Meeting 4/10/01 Page 20 of 38
quickly. So, I think they do a hard analysis of revenue coverage on the operating budget and debt
service and they also look at the reserves. We have always had very healthy reserves, and that's
looked upon favorably.
Dawes: Another area that's a much broader concern is that any entity that is selling bonds has a
debt capacity that's related to its bond rating, and certainly there are a large number of Cap Ex that are outside the utilities for libraries and police stations, etc., that are in effect on the griddle. One of the concerns way in the back of my mind is that if we start bonding I'd call routine CIPs
in the Utility Department, we may elbow out a project in another part of the City that is truly a
once in a decade or two kind of expenditure. I'm not privy to, and I assume you're privy to, this
sort of overall picture of what bonding might be. I guess I'd be interested in a general word are
we very far from that practical limitation or would an additional, I don't know what this is, $20 million from the utilities make a significant dent in our available capacity?
Saccio: Our understanding is that this would not be a significant debt dent in the utilities' ability
to raise funds for debt financing. This is not a very big issue in terms of it being in the $27
million range. The only debt that we have outstanding right now within the whole seven utilities
is some Water Quality Control Plant debt and we have some on the storm drain. Dawes: We're on the hook for Calaveras, too.
Saccio: That's correct. That's not direct debt of the City, but indeed that's embedded in our
operating budget. That is a responsibility of the City, so you're correct about that. In terms of
direct debt, the two that I mentioned, you're not referring to the General Fund. The General Fund
has a very, very low debt compared to other cities in other areas. I don't know if you're referring to that at all.
Dawes: I was referring to it collectively in saying that there's a lot on the griddle that are looking
at bond funding, and I just wanted a general idea of whether or not we would be getting
anywhere close to practical limitation.
Saccio: When we did talk with the financial advisor, they thought there was quite a bit of capacity to absorb debt within the City of Palo Alto within the utilities. I would say that's partly
a consequence of not debt financing in the past.
Dawes: They don't have any IPOs to do, either.
Saccio: Let me point out one thing, though. The financial advisor that we use is not our underwriter. We've separated the function of the underwriter and the financial advisor so the
financial advisor doesn't benefit from the advice that they're providing.
Ferguson: Thank you, sir.
UAC Special Meeting 4/10/01 Page 21 of 38
Budget Review 2001-02
Ulrich: Thank you, Joe, for coming. Would you like to move into the budget item? As you
know, particularly Mr. Ferguson and Mr. Bechtel and Mr. Beecham, have been working with
Utilities on the strategic plan, and I believe what we've done here is an attempt to utilize where
we're at in expectations on the strategic objectives. I've taken the significant changes from last year's budget and put them into prospective on why we would want to spend money as an increase and where it would fit in benefits that the community would get under our strategic
objectives.
So, this is our first attempt and one I hope you like. Rather than going though every item in the
budget, it's to show you the significant changes why we planned to do it and a bit of a description of what it is. Now, what is missing from this is still the measurement of after we do it are we getting what we pay for, and that would be part of the strategic objectives as to have reliable
measurement to show that we're getting value for the money that is being spent, whether that's in
the form of increased customer satisfaction or that's a financial performance benefit or it fits this
area of municipal character or in reliability.
Ferguson: Mr. Bechtel, a question?
Bechtel: John, or I guess maybe Randy, are there any other large dollar items that are missing
from this just because they weren't considered strategic? I see the bond proceeds, and I see
revenue, and I see a number of items well over $100,000 in value. Then, I begin to look at the
ten year projection and I see a hundred line items there, and so my question is are there some
things missing here that we also should take note of but they're not strategic? Baldschun: Well, there's a couple that come to my mind which you're familiar with, and that's
the COBUG, which is going to be about a $3 million hit on the supply, grade stabilization
reserve. That'll occur if the Council approves it this fiscal year, so you don't see that either. We
just basically forgot to put that in there, so the reserves you were talking about earlier, well, it's
$3 million less once that goes through. There's a BAO for the Advanced Energy Efficiency Program for about five. It's going to be $3.5
million this fiscal year and $1.5 million we're going to add to the budget. So, that's an item
you're not aware of. $1.5 million more for public benefit funds will be in the proposed budget
you'll see next month. It's not in these financials. We did put all the $5 million in the current
fiscal year, but what we're going to do is split it up between two years. We looked at everything that had potential change. I think the level is roughly a half a million
dollars, and that's how we filtered all these things and came up with this list.
Bechtel: Thanks.
UAC Special Meeting 4/10/01 Page 22 of 38
Ulrich: Of course it is none of the uncertainty we've discussed on the Western or the FERC filing except for what we forecasted in the rate increase.
Bechtel: I guess maybe as a follow up question or comment in that if we look at this and go over
this in detail as we had talked about doing, does that eliminate one or the other steps in the
process we normally have every year which is going over, sometime hours, going over both the CIP. Of course, we didn't go over line by line the ten year forecast, but I think my feeling at having gone trough the strategic planning process was that the more time we spend on strategic
issues as opposed to the nitty-gritty, perhaps the better off we are. On the other hand, as you've
just pointed out, there's some items that are missing from this that we have been talking about. I
wouldn't want to overlook those. We can get blindsided by some particular item on there.
I view this as a process. We'll look at this every year and do something similar to this. Perhaps we'll refine it after having gone through this in one more year. Looking at this sheet with the
comments and so on I think is very instructive so I like it. I'd just point out that I don't think
we're doing our job completely if we only look at this.
Ulrich: I guess the comment is I think there will, with the volatility and the changes going on, always be something that going to come along, and it's of significant change as this document is supposed to have we would of course bring that to you and discuss it in detail and get your
advice. My preference, of course, is that the best value that we and the staff at the utility can get
from you as utility advisors is the advice role as opposed to looking at individual projects and
working on those. So, if you look at the strategic objectives and you look at, "Are we going the
direction that you believe we should?" in representing the residents and businesses of Palo Alto; that's the kind of feedback and that's the kind of questions we want you to ask. If you're comfortable with the significant changes at least as a beginning, it will clearly focus on
those areas that are of major importance. Now, how far you want to borrow down and move
down into those particular topics or subjects would be up to your level of comfort on how well
you think we're managing to get towards getting the success and the strategic objectives that
we're all agreeing to do. Ferguson: Any other comments, Commissioners, on this? Mr. Rosenbaum?
Rosenbaum: Just a general question: Is the complete utility budget going to be before the UAC
at the main meeting, or not?
Ulrich: That's our intent because we will take the budget. We're scheduled to go to the Finance Committee on May 24, and so the ideal time would be to bring in as much as we have completed
by the May 2, which I believe is our next UAC meeting.
Rosenbaum: That would be for action and recommendation by the UAC?
UAC Special Meeting 4/10/01 Page 23 of 38
Ulrich: Correct.
Rosenbaum: I think my concern about bond financing would be appropriately handled at that
time, but I do have the question as long as we have the significant changes in front of us. Fiber
to the home was a $400,000 item. Fiber to the home was increased by $300,000 in December to
$680,000. There was no mention of any further expenditures. Is this to be a bottomless pit? What's the purpose of that $400,000?
Male Speaker Staff: When the original BAO was approved, that was for the construction of
infrastructure. At that time it was intended that the studies for the finance plan and the marketing
plan be done by staff internally. So, an additional $300,000 we received from that BAO was
intended to complete the actual construction of the project and once that was completed spend a year running the test and during that time use staff to compile those studies.
Consequently, due to all the things that have come about because of changes that have happened
with everything going on, we basically don't have the staff capability to do that. So, in next
year's budget we put in enough money we felt would be able to take care of those studies. One
thing you need to be aware of is that in the past couple of days there have been some changes in our fiber management, and we're going to come back and take a hard look at these numbers. There may be some changes in these numbers before the budget presentation next month.
Ulrich: What in the management change he's referring to is that our Telecommunication
Manager, Leo Creger, has tendered his resignation last Friday. As a result of that we've taken
interim action. Scott has appointed Blake Heitzman who is our Manager of Competitive
Assessment, who is here this evening to discuss the strategic plan. He will be taking on in an interim basis the role of Telecommunication Manager. Girish Balachandran will take on the responsibility of Competitive Assessment along with his role as Resource Manger, and he will
become on an interim basis Assistant Director. Then we'll have some additional changes at that
point. So, we made those changes on Monday so we're going to be able to keep on going and
keep the work moving.
Rosenbaum: A general comment: I guess I view the fiber to the home as something that the Council has approved, and if the Council wants to put another $400,000 into the project I guess
they certainly can do that. I can write letters as long as there's visibility here, and I know Bern is
here. As long as the Council is fully aware you're asking for another $400,000, I think that's the
best I can do, sir.
Ferguson: That's one of the points to bubbling up the most significant projects and attaching them to strategic objectives that the Council and the UAC have both signed on to. Any other
questions or comments on this two-pager? Mr. Dawes?
Dawes: I didn't go back and check with the presentations on what I call our $13 million multi-
year plan for emergency and meeting the Department of Health and so forth and so on. I'm just
UAC Special Meeting 4/10/01 Page 24 of 38
looking for assurances that the water projects which are beginning up rapidly are, in fact, in
accord with what we have talked about over the past year.
Ulrich: If you notice, existing well rehabilitation and the outcoming of Park Reservoir and Pump
Station are directly related to that, and they are bubbling up to the top of next year's engineering.
Dawes: We're pretty much on schedule on those?
Ulrich: We have some ongoing talks with Stanford that we're working on, and until those get
resolved we can't say for sure that we're on schedule.
Dawes: Any progress on that entity which would ease some of our emergency reserve requirements and might even obviate excavating the entire El Camino Park for reservoir?
Ulrich: I have had some discussions on that.
Dawes: Are they alive or dead, or is that improper to ask?
Ulrich: The parties including myself are very much alive so we're moving on.
Ferguson: The price tag on the entity was $15 million, I think Jane said six months ago.
Ulrich: I'm sorry. I want to be sure. I'm not talking about the entity with Santa Clara Water. Is
that what you're referring to?
Dawes: No, I was with Stanford emergency backup system. Basically, we're putting that reservoir in to deal with the shopping center, fires, and that sort of thing. If we could tie into
Stanford, we could maybe get around that whole Cap Ex.
Ferguson: Any other questions of the two-page budget review?
Dawes: Is this an action item, or not?
Ferguson: This is not an action item. This is an information item just to warm us up on the high
points on the budget item next month, or May the Second. If there are no other comments, let's
proceed to the next item, which is the proposed revisions to the reserve guidelines. Staff, I guess
you've set the state for this discussion pretty thoroughly. Is there any more presentation on the reserve memo, Girish?
Balachandran: No more presentation; we're just open for questions.
#6 Revised Supply Reserve Policy Guidelines
UAC Special Meeting 4/10/01 Page 25 of 38
Ferguson: It's document marked "6." So, the staff proposal on the electric supply reserve is to change them into target maxed to 40%, 60%, and 80% of the estimated electric supply cost
budget.
Ulrich: Yes, those areas are summarized under minimum target and maximum found on page
one. Ferguson: Then, parallel for gas it's a 20,30, and 40% increase with the plain understand that this
is to get us through a time of price volatility, and we'll revisit this again in a couple of months or
a couple of years.
Ulrich: Yes, until the next time we propose revisions. That's correct. Ferguson: If there are no questions or comments about the facts and figures in the staff proposal,
can we have a motion to approve and have our conversation inside the motion?
Carlson: Do you want to do that?
Ferguson: If there's no screaming dispute, let's just answer the question inside a motion and move along. Is there a motion to approve the staff proposal?
Rosenbaum: I'll make such a motion.
Ferguson: A second?
Carlson: I'll second it.
Ferguson: Motion by Rosenbaum seconded by Carlson. Let's have our discussion. Mr. Dawes?
Dawes: I know I'm probably in the minority here, but I tend to view our reserve situation in
general as a collective reserve rather as a individual line item with the exception of the Calaveras bonds, which is a very special deal. Plant replacement distribution supply, PB reserve balance, and so forth; I again tend to intellectually group together as a prudent collection of funds to
cushion each of our funds from financial shocks which can come from any direction.
For instance, a cataclysmic explosion in our switchyard which caused a $7 million repair bill
wouldn't be slowed down simply because the plant replacement reserve was only $2 million. We'd take that money from some other place, and we'd do what we have to do similarly for pipelines in the ground, for wires over head, for paying three dollars per kilowatt-hour for one
month. Whatever it is we're going to deal with it, and it will be a combination of the reserves we
have in the bank and rate changes and so forth.
UAC Special Meeting 4/10/01 Page 26 of 38
So, with that as a background I tend to feel that the reserve changes are too aggressive for me,
though. I look at each fund as different because it has different volatility items. The volatility in
the supply side is different with unknowns as far as capital expenditures and repairs and so forth
are concerned. In the electric side this year we have a $78 million proposed revenue item,
adjusted base sales revenues, and exclusive of Calaveras we have a $45 million reserve which is
60% of our revenue base. Those kinds of figures to me are very reassuring, and it's one thing that makes this utility company so strong that it's so well reserved and it is, I guess, typically the job of the Commission to urge that those reserves be guarded and strengthened.
In this case, I feel notwithstanding the added volatility that collectively the reserves are in good
shape, and that I am an skeptic and need to be convinced more than the write up presented to me
that this is prudent step. Ferguson: Mr. Carlson?
Carlson: I think the issue here is more one of timing. I think Dexter's got the proper philosophy.
You ought to look at the grand total, but things are just going to be so nuts in next couple years
that this is one time I don't mind erring what I think is way on the side of higher reserves, at least from a planning perspective. Nobody knows what will actually happen. Once we have some long-term contracts in place and know what WAPA's going to do, etc., I'd be the first to propose
to cut them. I just don't feel good about doing it right now.
Dawes: Well, I respond to that by saying here we are raising our electric rates absent any firm
price increase on the supply side, and I think that it's a very prudent thing to do and I endorse it.
There are remedies for supply shocks, and that it rate change which can be implemented, as we know, fairly rapidly, not as rapidly if some of the strategic plan things were implemented, but nevertheless a couple months we can put through rate increases. Again, I don't see the urgency
just because of rate shocks.
Balachandran: If I may comment on it. This proposal doesn't deal with that issue of Western and
FERC. Basically, market prices have changed so dramatically. The same uncertainty that we had in the 3-cent market is magnified in a 20-cent market. We're looking at one-time or maybe two-time contingencies of a dry year, etc., so things like if PG&E prevails at FERC and there's a
large Western cost increase we intend to come to you with a rate increase proposal. That's not
included in the reserves. We've not building up reserves to take into account worst case
scenarios under FERC or bankruptcy.
Ferguson: I'd like to connect this back up to the COBUG discussion, and Randy pointed out the other day that there is $3 million missing from this document that was prepared a week or two
ago because of the COBUG. The reserves are there because that project makes sense in the short
term. And the uncertainty that $5 million or $10 million might be required all of a sudden in
these crazy circumstances is, at this point, very believable. I don't think our judgment is a whole
UAC Special Meeting 4/10/01 Page 27 of 38
lot better or different than yours. These are a reasonable set of numbers, and I'm prepared to
support them.
Baldschun: There is so much uncertainty right now, and hopefully things will settle down.
When they do settle down, I think that's the time you really have to take a serious look at all the
reserves including Calaveras. Now's not that time because there's too much uncertainty. We've reduced rates very aggressively when we've had to. We had a 15% electric rate decrease two years ago. We had a $37 million refund for electric rate payers in '93-'94.
We're not shy about returning the money, but we're not shy about collecting it either. There is a
balance here that we're tying to achieve between the reserves, the rates, the this uncertainty; and
that's what we're all struggling with. Ferguson: The refund in prior years is a real important credibility-building point that needs to be
made in this string of unfortunate headlines about rate increases. It does go backwards in Palo
Alto.
I'm going to call the question. If there are any other comments from Commissioners, all those in favor of Mr. Rosenbaum's position? I'm sorry, Mr. Dawes.
Dawes: One more comment: This subject of course is inextricably tied to the bonding issue, and
one of the justifications for bonding routine CIPs is to accommodate these reserve maximum
increases. So, I want the Commissioners to realize that a vote for these changes in reserve levels
also means that makes more sense to bond routine improvements and betterments in the system.
Again, we've had discussions about that. Ferguson: All those in favor of the motion for the staff proposal say "aye." Any opposed?
Dawes: Opposed.
Ferguson: The motion carries four to one. There were no abstainers. Thank you very much, Commissioners. Let's move to our last action item for the evening which is the proposed electric rate increase. This is calculated to give us enough funds to insert the letter "t" in the word "rate"
in printing future schedules. Is there a staff presentation on this?
Proposed Electric Rate Increase
Baldschun: You're going to see this proposal formally next month with a budget. You'll see the
final late proposal. This is a heads up to you, and it's a chance for you to give us feedback which you've given us some already. That's what we're asking for is your feedback on our proposal, and then next month you'll vote formally on it.
UAC Special Meeting 4/10/01 Page 28 of 38
Ferguson: So, this really has changed from an action item to an information item. Okay, we have a member of the public that would like to speak on this. Mr. Cassell, come on up.
Mr. Cassell: I wouldn't be commenting on this if we were three or four years down the road, or if
we didn't have a power crisis going on in all of California in which we are, we the public,
everyone is asked to cut back on their electrical usage so that in fact we can survive the next couple of years with this power shortage.
It seems to me therefore the rate four or five years from now that doing it this seems okay, but
with this requirement, or this necessity, for us to cut back I think the rate is in fact done
incorrectly. Let me show you why. This is simply plotting the usage last year against the
percentage that you'd have to pay basically for the commercial market because it was easy.. That is, there's the old rate which goes up here. Of course, it's 100% and 100%, and here's the new rate which goes up like this. Here's the 43% increase, but as you well know, as far as I
understand it at least, half of power we're getting at 2 cents and the rest of it is going to come in
probably at 7 cents. Therefore, the way the power company's going pay for it and probably the
utility's going to pay for it looks like this curve. That is, half of it is at the old rate, half of it is at
the new rate. If everybody was really using 100%, then it doesn't make any difference. The two curves
intersect, and would be no problem. If we really conserved like we were supposed to do, like our
Governor wants us to do, to go down to 20%, what is happening? Well, what is happening is
that the utilities are getting our money for us reducing our rates. That reminds me of the Fiddler
on the Roof comment that in fact just because you're having a hard day why should I. So, the
result is that this much difference is actually going, if we reduce to 80%, this much is actually going to utilities, to the City, rather than their reducing their income; or the utilities reducing their income because we reduced ours.
I think that you should really consider this. Now, this is based taking half of last year's usage,
and we all get that in our little report every year how much we used last year, at the old rate and
then the rest of the usage at the higher rate. The other point is that of course if people use more than they used last year, they're going to even pay more because this rate goes up faster. For those of us who are paying less, I don't see why we should have to pay for those that are using
more.
Now, for the residential rate it turns out that you've almost got that built in right now. That is,
the average usage, as you well know, is right here. That's one of your break points, and half the average is right there. That's the other break point. Instead of doing this curve, which is what is being proposed, if you simply did this curve, that is keep the old rate for the 300 kilowatt-hours
and up it from then on, then in fact we would be fair to the residents that actually reduce the
amount of power. For those that use exactly the same power, it's exactly the same money. You
don't lose anything. For people who use a lot more, they pay more. Thank you.
UAC Special Meeting 4/10/01 Page 29 of 38
Ferguson: Thank you, Mr. Cassell. Any staff comments or questions from Commissioners here? John?
Ulrich: You've had an opportunity to look at the rate proposal and our recommendations. I think
it is an appropriate mix of support for the small residential users. As I recall, at the last meeting I
have you a little bit of demographics about how this impact would be on the residential customers. The numbers and the dollar amount that would be associated with what appears to be a large percentage since the rates started at significantly low price below the market, particularly
PG&E, the impact of a typical customer, and if you would refer to those as those that use the 650
kilowatt-hours that are in Table 1, it would be about a $14 and 38% price increase in their bill
which at this point it would still be 50% below Pacific Gas & Electric. You can use that as a
benchmark. Dawes: At what point is that PG&E reference with the 10% baked in but before the 36%
additional that's coming on?
Hirmina: That bill in comparison with PG&E is actually based on this month's rates including
also the increase. Dawes: The first 10%?
Hirmina: The full increase. The 10% plus the 36%.
Ferguson: Okay, Mr. Bechtel, go ahead.
Bechtel: I'm not sure I heard the answer clearly about what the PG&E rate that is referenced here.
Ulrich: Just to point to it, it's down on the bottom of page 2 of 4. Table 1 shows the impact of
this rate proposal on a typical monthly bill for the various customer class. The rate comparison
includes a projected 40% increase in PG&E retail rates under consideration by the CPUC. Ferguson: Mr. Cassell made the proposal that we might consider a tiered rate structure as part of
this. We did tiered rates in the drought years. Is there a limitation in the billing system on
separating into tiers?
Baldschun: It's not an issue of the billing. The billing would do it. For residential customers we already have the tiered rate structure, and per our proposal we're proposing to apply a larger rate increase on the larger users compared to small users. The percentage variance from 35 to 48.
Now, commercial industrial customers: The electric industry does not have tiered rates for these
kinds of customers because the load characteristics vary so much. You can imagine trying to
UAC Special Meeting 4/10/01 Page 30 of 38
develop a fair rate structure for a Macy's and Hewlett-Packard all in one tiered rate structure. It
just can't be done.
So, what's a better rate structure for them is time-of-use rates, and that's what we plan to
introduce this summer. It's not part of the budget proposal, but we do want to introduce time-of-
use rates; make it mandatory for every customer over 500 kilowatts. Dawes: Is that planning to be revenue neutral, Randy?
Baldschun: I will be revenue neutral, absolutely.
Dawes: Because we haven't recorded time of use for these large customers before, are we going to be guessing?
Baldschun: No, actually we have good load profile. We've been collecting this information for a
number of years, and so we do have their load profiles to help give us the billing determinants to
do the rate development.
Dawes: By individual customer?
Baldschun: By individual customer, a number of them.
Ferguson: Mr. Rosenbaum?
Rosenbaum: With respect to Mr. Cassell he did make the point at our last meeting about the inverted rates, and I think staff has pointed out that we do have what I regard as quite significant inverted rates for the residential customer. Perhaps more important, residential usage is only
15%, so there isn't much to gain by trying to squeeze out the residential customer. Whereas, in
water, if you remember, it was about 50% so there was real savings to be achieved there.
With respect to Richard's point tonight, I think there might be some confusion. We have a melded rate from our customer, but we don't really see a 2 cent rate for half of our use in something else. For the rest of it it's all one rate. The analysis might well not be appropriate.
Let me ask a question: Given this PG&E bankruptcy which, John, you certainly did your best to
warn us about, but I think the general view was it was a low probably of that; but it has
happened. My view is that we are in the soup. At the SOC meeting of March 7 you had a foil which addressed the possible costs. The bottom line was that it may result in Palo Alto retail rates escalating to 12 cents. This was based on Western going out and getting a three year
contract at current rates, that's probably about 15 cents, and you average 15 cents with the Hydro
which is 1.4 cents probably. That comes to an 8 cent energy charge and then 4 cents for the rest
of the system.
UAC Special Meeting 4/10/01 Page 31 of 38
It seems to me that there's a real good chance of that happening, and when it will happen is
unknown. I'm wondering what your philosophy is. Why are we having this rate increase which
really has no rationale anymore? At the time you planned it, maybe a 1.2 cent increase on the
part of Western might have seemed like a likely solution to the FERC filing. I think that's all out
the window now. So, why do this?
Ulrich: I think this is clearly a very prudent step in the increasing costs of electricity being passed onto customers because it always turns out the customer ends up paying. Here in Palo
Alto, I'd just like to point out, it might help to answer the question that the rate increase is not the
only action that we think is appropriate to be able to take a full impact of higher costs if they
come.
I want to be real clear here that we are not giving up on our case on our actions with FERC or with the bankruptcy. I think as someone pointed out, and I know Randy feels this way, that if the
circumstances warrant, we would come back with a rate increase request based on facts on the
outcome of any negative actions from either the bankruptcy or from the FERC filing. We'd be
able to go in front of this City Council in a very short period of time with those facts and put a
case for increasing the rates. In the meantime, I think what we proposed here still is appropriate today as it was a couple of
weeks ago. It is taking an educated and a prospective view of what we think the costs will be
from Western and rolling that in and putting that into this rate request. If we learn of something
else between now and the time the rates get approved by the City Council, we will update them.
If something happens after that, we'll be right back again.
We're learning very well on how to react and also to be very far-thinking in trying to put contingency plans in case they do happen. This reverse pyramid, and we're still looking again for
the right acronym for this, gives an idea of a couple of things. That is, at this point steps to
achieve optimum power saving and reliability. We believe that it's in the strategic plan that
reliability is the most important things that customers want and need both in reliability and actual
physical delivery of electricity and gas but also some reliability in the price. The rate increase which you have in front of you is the top part, and it is giving a pretty clear
signal at 43 and some percent that prices are going up. This will add to customers' knowledge,
and it will give them a price signal. They will start to reduce and utilize their energy more
efficiently. At the same time, the accelerated programs that we described at the last meeting and
that you gave us full support on moving ahead is a very aggressive way of sharing conservation and load management amongst all our customers.
So, we will have a major impact, we believe, on those 75 or 80 some percent of our load which
are commercial industrial customers where they can effect the most change. They will be able to
keep their costs and start to contribute towards improved reliability.
UAC Special Meeting 4/10/01 Page 32 of 38
The next tier down has been described, as Randy pointed out, as further implementation of time
of use rates and tiered rate structures. We are in the process of installing more meters in our
larger customers, and as you know when you get down to the next one, the load management, is
where we have a very aggressive, up to 20%, voluntary support from our large customers where
they'll reduce their loads up to 20% in exchange for not being on a rolling blackout schedule.
So, all of those things that I've just described so far are ways of reducing, conserving, and managing energy and also giving very strong price signals without shocking the customer so
much that they're forced to trade off paying their electric bill versus doing something else.
If at a later time with these other factors, we have to come back and raise rates, then that would
be another tier up. It would also give us an opportunity even at time to increase our contributions to load management and energy reduction. Then, the last areas are the COBUG that we've described to minimize or have some assurance against the rolling blackouts and ultimately the
black hole of reliability when there's no reliability and the power has to be turned off, so I'm
pointing all this out.
You've seen the aggressive nature of how we are going about sending the right price signal and showing at the same time we have an understanding and support for our customers on ways to reduce energy which would be at these very high prices and pass on those savings in the form of
increases in rates. I don't mean to belabor this very much, but I think you can't just look at the
rate increases by itself. It's one component of all the other activities.
Ferguson: Mr. Rosenbaum?
Rosenbaum: Let me continue this. At the last meeting Girish identified certain cost increases that were not related to a commodity price increase, and I think those came to about $10 million
which you could consider distribution. That's about 1 cent on our rate. That's fixed, and we
understand that.
The commodity cost increase is so uncertain, I guess I'm having trouble understanding why I would approve this. If we were the PUC, I know we're not the PUC and staff is not PG&E coming to us with a rate increase request; but if that were the situation, the PUC would say, "Yes,
we understand that there's uncertainty in the market, and you're very likely to have significant
commodity cost increases. At the time that you know what those increases are going to be, we're
prepared to increase the rates so you can recover those costs."
It seems to me that that's the way one ought to go about this, and it may require 100% rate increase. I don't even see this as the worst scenario. You've been talking about Western having
to buy at market. I don't see that, but I think the 12 cent rate is a higher probability than we used
to think. Anyway, that would be my preference, and as Dexter often says, I may be in the
minority on that view.
UAC Special Meeting 4/10/01 Page 33 of 38
Ferguson: Mr. Dawes?
Dawes: I'd like to point out that the last motion that Mr. Rosenbaum approved to increase and
fatten the reserves was directly related to this. Some of it flows into increased reserve funding
which you approved on.
Ferguson: Mr. Carlson?
Carlson: Well, I think the risk here is you wait a couple months and current reserves, whatever
hits you hits you, and you're likely to be forced into an even larger rate increase than you
otherwise would in those circumstances. Since it's extremely unlikely that we'll end up
significantly below 7 cents somewhere this year, why not do it now which gives us a better probability of saving some peak later on? That's why I'm supporting this. The reserves just provide a band around this. Who knows what those reserves will exactly end up, but if there's
any time to put a little money in the bank ahead of time, this is the time.
Ferguson: Mr. Bechtel?
Bechtel: I agree with Mr. Carlson. If you look at what the average rate is, for the small residential we're looking at 6 cents and our average residential is 7 cents a kilowatt-hour. 7 plus
cents, I guess. I didn't have a calculator for that, but that number is still below any number that's
been surfaced at this table tonight. We're talking 12 cents, 20 cents, and all of that. I have the
inclination of it's better to be safe now than sorry.
I've looked back, and you can see that we've lowered our rates. The City has been very good. The Council's been very responsive to looking into financials. We're being very diligent into looking at the reserves, so I believe that if things don't come to pass that we can correct to the
benefit of the citizens. Right now, I'm going to vote to support the rate increase when it comes
before us I guess next month.
Ferguson: Mr. Beecham? Beecham: I'm going to get back to Mr. Cassell's presentation to us tonight. I thought that the
core point he was making is in fact accurate, but I would it in a bit different direction. I don't
know if this direction is feasible, but it's in the direction of charging our customers marginal cost.
If in fact the marginal cost for what we buy on the market or what we buy through an adjusted
PG&E through Western is substantially higher than average and is higher certainly than the hydro, I wonder if there is some way that we can have a rate basis for our customers so that for each customer the first 50% that he uses is cheap power. The last 50% of what he uses is a much
higher rate. That way their average cost is not changed significantly from what they're paying
today, but with a high marginal rate their incentive to conserve is equal to the cost of the
resource.
UAC Special Meeting 4/10/01 Page 34 of 38
Ferguson: John?
Ulrich: There's probably a group of customers that may be appropriate for. We'd have to do
some thinking about that, but at first thought the hydro portion of your Western is going to vary
as a percentage of your total load based on time of year and weather condition. So, you may get
in a situation, which all these things are doable, is that the marginal cost is going to, in the amount that each customer is going to get, is a share of the lower cost with change. It could gyrate around significantly throughout the year. All those things could work. Our goal has been
not only stability of cost but to try to keep those as few changes as possible and then adjust them
accordingly.
It also runs to a doctrine of everybody shares in some level of the good and not so good price energy. I think we've discussed on some occasions that there could be a class of customers that take a larger share, or they have some detrimental financial impact on the rest of the customers.
You could look at how to segregate those customers from others in some sort of way, but that
would be something we have to look at.
Beecham: The concept is, if one makes it too complicated it is difficult to administer and may not improve the objective. The objective is merely to have a person's last kilowatt-hour cost the true cost of the resource, and whether one averages that out over the year or for each month
doesn't make a difference because I don't think people will be reducing down to the point of
where they'd only be using hydro even in the best of our models.
I think one can just take an average through the year. That would work; but if the last kilowatt or
the last 5% is in fact based on the marginal cost, it is in fact at a quite high rate, much higher than what we pay today, their average cost wouldn't change but they would see the direct benefit of conservation.
Ulrich: I think that many of us have been around of some time and have seen a number of those
things work and some not work so well. When you generalize them like this, they sound very
good. When you get down to specifics, and I'll just give you my brief story which may or may not relate, when we had the energy crisis back in the late 70's which was related to oil prices, I had to frequently discuss the kinds of we had three rate blocks. The last one was extremely high.
The intent, of course, was to get people to conserve, but it was a very difficult proposition when
somebody that lived in a house that was quite large because they had a large family, or they were
in an economic situation where they couldn't afford to put insulation in or do some of the other things; they were ending up with a very high bill and not much opportunity to do much about it except if the utility would then go out and do insulation and do the things, and so there's a cost
involved with that.
I've got several examples dealing with that. I can still remember how those were very difficult on
people to do, and I think you can say that for certain types of businesses where energy is a very
UAC Special Meeting 4/10/01 Page 35 of 38
high component of their business proposition. We have an opportunity to help them with
conservation measures, but at some points it's very difficult to generalize and put everybody into
those kind of categories until you go back and start, as we ended up doing, making these kind of
exceptional arrangement that made it very tough to administer.
I can even talk about prohibitions on log lighters and all those kinds of things. It becomes a very difficult thing to work on.
Ferguson: Mr. Dawes, you had a question?
Dawes: Yes, to support the increase my rationale is that the consumer side is a relatively small
proportion, 15% of the total. I think the current rate variation between large and small is a sufficient incentive. I had actually brought this up at our last meeting and had the same response to it at that point, so I think that that's a fair approach.
I do also want to point out that of the $22.7 million increase half of that is due to the fact that the
budget shows a very significant drop in our wholesale revenue, and staff did an unbelievable job
this last year in selling the power that we couldn't use in some cases because we were having a rolling blackout and couldn't use what we had contracted for. We had 13.6 in revenues last year and are looking at only $3 million this year, and to there's $10 million plus that vanishes on the
revenue line that is proposed to be made up through commercial, residential, and industrial
customers.
With luck, I guess, we will be able to sell some of our power that we don't use if we have a poor
hydro year and Calaveras doesn't pump out as much and Western has a bad year, that won't be the case. I'll keep my fingers crossed for us.
Ferguson: Any other Commissioner comments on the rate proposal which is not an action item
tonight, after all, but to send the staff away with instructions for tweaking it? Mr. Carlson?
Carlson: I just have a question, and that is: Are you going to come back with a specific rate structure?
Baldschun: You'll see the rate schedules next month.
Carlson: Okay.
Ferguson: If there's nothing more on this one, let's proceed to our final item for the evening which was the strategic plan update.
Strategic Plan Update
UAC Special Meeting 4/10/01 Page 36 of 38
Heitzman: I'm going to make this very quick. First of all, you will see the strategic implementation plan coming to you at the May meeting, and what I'm going to give tonight is
just an overview very quickly of the process and some of the items that you'll see in that plan
when it comes to you.
As you recall, the strategic plan was approved by Council in November. In January we formed an advisory team, the composition of which two members of this group, one Councilmember, the Assistant City Manager, the Director, and his assistants. Below that were several design teams,
which looked at strategic initiative that would propose to the advisory team. The advisory team
was a decision-making body.
The initiatives by the design teams were submitted in February and were worked over through February and part of March. In March the advisory team selected a limited number of these to be presented in the implementation plan. The idea of the limited number is to have a doable number
and the top items. So, we prepared draft reports in March. This month I'll present hopefully the
final draft to the advisory team and get their final comments, and then in May we'll present to you
guys and get your comments in group and then the 14th of May it will go to Council.
So, that's the schedule. Here's kind of what we looked at. The design teams came up with eighteen initiatives. Some of those were grouped together to make a smaller number. Six of
those were ongoing things you've heard about tonight, and five were new things. Some of the
new things you've heard about already, so I have the privilege next month of coming to you with
general information about things you've heard specific information about.
It's good that it's happening that way. It shows that actions we're taking are following the plan. Here are the six ongoing things. Some of those you'll recognize: distribution system
improvement; financial planning, you've heard some ideas there; energy efficiency programs, you
heard about that last Wednesday; the dark fiber program, continuing with it; customer product
planning, which is a lot of customer survey work in developing new rate schedules and products,
some of the energy efficiency products for our customers; then commodity supply planning, the
process you've heard about tonight and on other occasions. The new initiatives you'll see proposed, some of these you've seen already as well: local
distributor generation; expanding customer service to a 24 by 7 service; load management, you've
seen some of that already; for the dark fiber, some innovations there to make it more attractive to
customers; and then with the risk management for commodity supplies they'll be some ideas
there. Along with that we've developed some performance measures, one for each of the key objectives
in the strategic plan. These performance measures are proposals at this point. There's one
measure for each strategic objective. Customer satisfaction: We have an idea called "gap
analysis," and it basically is how was the service that customers received compare to what they
expected. Was it below what they expected, and in which case we need to lower the gap.
UAC Special Meeting 4/10/01 Page 37 of 38
Reliability: We've suggested adopting national standards that we have been using to compare
ourselves both statewide, locally, and nationally using those standards that are set standards.
The other two ideas: Financial performance was one of the objectives, and we have an idea
called "value creation." You look at each of the business units and see whether they're adding
value as a total does the utility add value. Then, the last objective was to retain the municipal character, and so there's an APPA document on the ideas of municipal power and we'd look at that as possibility to compare Palo Alto to the national standard, so to speak, presented there.
As I said, these are proposals, and we'll talk about them more at the presentation next month.
Finally, very quickly there's a table hopefully you can see fairly well that we developed.
Hopefully, there'll be a couple of tables. This table cross references those initiatives down the column on the left side and the strategies and the plan on the right side and just gives you a little check box for where the initiatives meet some of the strategic goals that we set out in the
strategic plan.
There will also be one of these that cross references the initiatives versus the objectives of the
strategic plan. I'm still developing that one, but your budget proposal had kind of a reference in it tonight where you had the budget items cross referenced with the objectives. I'll do that with these initiatives as well.
I've already kind of covered the last five, but I'll do it quickly again. This is the schedule. We
believe we're on track to get us to at your May 2 meeting. Hopefully, we'll still be on track for
the 14th for the Council, and where there are budget amendments needed we should be able to
mesh with that as well. So, that's an overview of where we're at and what we'll see next month. I think I did it in a short time.
Ferguson: Thank you, Blake. Any questions or comments from Commissioners? If there are no
other items of business, our next meeting is Wednesday, May 2. Is there any sense here that we
ought to start at seven next Wednesday? Is that possible?
Dawes: No.
Carlson: I suggest we start at our regular 7:30.
Ferguson: 7:30 it is. Mr. Rosenbaum?
Rosenbaum: I will not be here.
Ferguson: Will everybody else be here May 2? Yes.
Adjournment
UAC Special Meeting 4/10/01 Page 38 of 38
Ferguson: I think we're there. No other items of business? We're adjourned. Thank you all very much.
Ulrich: Thank you.