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Home My WebLink About2001-08-01 Utilities Advisory Commission Summary MinutesUAC Minutes 8/1/01 1 of 43 Utilities Advisory Commission Minutes of August 1, 2001 The meeting was called to order by Vice Chairman Dick Carlson at 7:30 p.m. Present were: Rick Ferguson, Dick Rosenbaum, Dexter Dawes, and Council Liaison, Bern Beecham. George Bechtel was absent. Dick Carlson presided. Carlson: We have at least one new face in our audience, which I understand is our City Auditor. I don’t even know your name yet. Ulrich: Well, for the record this is Sharon Erickson and maybe she would like to come up and introduce herself. The only way you can hear is through one of the microphones. Carlson: Please. Ms. Sharon Erickson, City Auditor: Hi, my name is Sharon Erickson. I am the new City Auditor. I have been here all of two weeks so I am just interested in learning what all the Commissions are about. I have a lot to learn about Utilities and I look forward to anything you can teach me. If you have any concerns or issues that you want to bring to me, please know that my office door is open both for you to teach and for me to listen and I would be pleased to talk with of you at any time. Carlson: Well, we have all kinds of questions, like if you could tell us how much of our money the Governor is going to be able to steal, we would love to know. Erickson: You know that is one of those things that auditors are not really into predicting the future. Ferguson: I am happy to say that the Commission has no authority whatsoever to bind the City to any financial deal, … Ulrich: But that has not stopped you from … Ferguson: From expounding, true. So the UAC will have a wonderful relationship with our new Auditor. Carlson: Well, thank you very much and welcome. Oral Communications Carlson: O.K. oral communications. If there are any oral communications, you may speak now on general items or you may speak later on specific agendized items. If UAC Minutes 8/1/01 2 of 43 anybody wishes to do so please state your name and address for the record and then someone can bring that up later. Mr. Wayne Martin, 3687 Bryant in Palo Alto: I just wanted to mention that reading this article about the Remote Renewable Program in today’s WEEKLY, I was a little amazed at the decision of this panel two years ago, different people I know, but still nonetheless to use money that were paid for the by the ratepayers of this utility that you are supposed to be representing to transfer that money to individuals and corporations outside the City for no particular value, other than some sort of “do-good” kind of feeling. I don’t know if any of you backtracked. There is a CMR that outlined this particular program. It is CMR:136:99, and there is a little bit of history where the panel was in fact, a little bit opposed to this program. It split 2-2 when it went to a panel vote. I don’t know how much money is left in the program but I believe that whatever is left should be diverted to photovoltaic here in town since there is probably not that much left out of the money and I think this program is supposed to go away anyway in 2002. I would like to point out that when people like yourself are representing the City you should be representing the City since that is the boundary of the Charter by which you operate, not some sort of global nonsense that says that people all over the world should benefit from what we do here. The Charter for the City is very succinct as our article charters are from the Federal down to the Municipal level. At any rate, I am a little dismayed, although I suspect the amount of money here is not very much. Thank you. Carlson: Does anyone want to comment on that program? In case everyone does not realize it, we were and still are operating under a state mandate. We had to spend the money in some very restricted ways, and we just did, as I understand it. We did not have the applications in town to use that money and basically, the State regulations forced us to go elsewhere. It would have been great if locals had wanted the money and sent in reasonable applications, but it didn’t happen. With 20-20 hindsight, it is too bad, but it is what we thought. We had little choice at the time. Review of Minutes Carlson: The next item, the minutes of our July 11th meeting Ferguson: I move acceptance. Dawes: Second. Carlson: All in favor of acceptance. Carried. Agenda Review UAC Minutes 8/1/01 3 of 43 Carlson: Agenda review. We have a fairly short agenda but some important items tonight. Are there any items that anyone wants to add to the agenda? None. In that case, we will just go ahead. We do have a new section here about reports from meetings or visits to facilities that any Commissioners did in the last month. Does anybody have anything to report? If not, we will go ahead and finally we get to John and our Director’s Report. Go ahead, John. Director’s Report Ulrich: Thank you Mr. Chairman. I have just a couple of items that I would like to go over and appreciate the time to do that. It is broken down into two parts, one regarding the subject that Mr. Martin brought up when he came up here, and that is the Remote Renewable Program. Having looked at the editorials in the newspaper or one paper, some letters to the editor, telephone calls from several people, as a staff we could have done a far better job in having an updated communication about the Remote Renewable Program, probably on several occasions over the last couple of years. As you recall and Mr. Martin pointed out, the program started back in 1998. We had a staff proposal on how this would be done, and had review by the UAC, and then the program was put into place. It had extensive advertising, it had quite a bit of very positive feedback from organizations such as the NRDC. What may not be well known -- and again this is a communication issue -- is that we are dealing with times today that are significantly different than our Strategic Plan would have said back in 1999. This was a time when we all believed that competition was going to be here. We felt that it was important that there be a name recognition for the Utility, that by going out and doing remote renewables, it was not the objective whatsoever to spend money on frivolous activities and as some seem to point out, using taxpayers money to do something for somebody outside. This clearly had, and we still believe it has, a direct positive impact back on ratepayers in Palo Alto. The Public Benefits Program was intended, and still is, to provide benefits in a number of ways from funds that are collected from each and every customer in Palo Alto and in the rest of the State. This money is to be used in various activities, including photovoltaic. But clearly in the Assembly Bill there is an area there for doing research and development and trying new ways that will convince people that something that is not necessarily economical to do would be in the best interest of the environment and the long-term sustainability of energy in California. So, while many of us were not here, I am sure the plan still looks like a very good program for doing Renewables, whether it is in Palo Alto or in some place else. Unfortunately there are small pieces of data out there, and with small amounts of data, people reach conclusions -- Why would Palo Alto give money to the Federal Government? -- as the comment about money going to NASA Ames. Again, the staff should have done a better job in communicating why that was taking place, rather than UAC Minutes 8/1/01 4 of 43 somebody reading it in the paper that the money was used in this manner. Going back a couple of years, we were looking for places to provide these additional renewables, and we found much more interest outside Palo Alto, because it is a much larger geographic area than Palo Alto. Palo Alto has had a very low price for its energy for a number of reasons so it was not always a cost-effective program. We finally found that, by increasing that amount of incentive (it currently is $4.00 a watt), we are now starting to see interest in doing it. But when the cost of energy people pay -- say it is eight cents now versus about twenty five cents for photovoltaic -- it is still a very hard area to get people to do something. So the intent was to get it out there. We have achieved that, and people in Palo Alto know the money has been spent to get 170 kw of additional photovoltaic . In the case of NASA Ames, again with more communication we would have got this message out: the Federal Government is not able to take, nor did we offer them, grant money. They had to give us something in exchange, so the money that was paid -- the $20,000 -- actually went to purchasing green tags, the green energy output from this photovoltaic. So what it should have said was, here is the $20,000 in exchange for that, you get ten years of green tags equal to the amount of calculated energy coming out of the photovoltaic cells. That is not the case for all of those remote renewables, but in the case of this program, it is. While $20,000 is a very significant amount of money in relationship to if you have zero and somebody gives you $20,000, but for what we put the money out for, we got extremely good results. The average amount of the incentive was something less than $2.00 a watt. As I recall, it is about $1.80 and the program is $4.00 so we got significant amount of return for the investment. Also, Public Benefit Program dollars come from all customers. I woke up the other morning and thought, “where do we get this money from?” If you go out and look, from customers -- like the Federal Government. They have a very large installation here at the VA Hospital, and looking at the amount that they pay to the City of Palo Alto, it contributed about $90,000 towards Public Benefits dollars. If you add up all the customers, there is a very large population that have contributed about close to ten million dollars into the plan. In addition to the remote renewables, which is reported and probably will be $300,000 when the last grant is paid for and the program is closed, it works out to about three percent. Other programs like the commercial DSM (Demand Side Management) Rebate Program is more like 39 percent or close to four million dollars. There are a number of other ones -- Residential is 14 percent, 1.4 million. So there are a number of very effective and very important Public Benefits programs right here in Palo Alto. A very small percentage are in the Remote Renewables. When I have gone back and talked with the staff, and this is my feeling also, there are very few power generation opportunities in Palo Alto, so Palo Alto has relied on other areas of the State and elsewhere to provide generation and transmission facilities to get the power here to Palo Alto. I don’t think it is an issue of whether the installation of UAC Minutes 8/1/01 5 of 43 photovoltaic is in Palo Alto or it is in a remote location. It is that the benefits flow to the State and back to the Palo Alto residents, and was this the right thing to do? I have been conveying this, that it has been very effective. Again, if we had done it again, I would have had better communication and done more outreach and come along the way as the program progressed feedback to the community. So, that is my comment. I would be glad to answer any questions that you might have, and then I have one other topic. Dawes: I just think I heard you say that the program to fund projects outside the City has been fully subscribed and that there will be no additional projects funded outside of the City. Ulrich: It is like many of the programs: you are not quite sure how many people are going to take advantage, and this program started some time ago. It took awhile to get communication out and for people to send in their applications. We reviewed those and then decided that that was enough for the program and cut it off. And, so the last remaining ones are commitments that were made some time ago. They are finishing the installations and if they are not completed by, I believe September 1st, then there is no other funding that would go out. So the $300,000 is an estimate of what we have already paid out plus an estimate of those we believe would be completed. Dawes: But no new programs. Ulrich: No new programs. Ferguson: John, does a renewable program within the City boundaries contribute in its own small way to reducing the chance of a rolling blackout? Ulrich: If you considered small - I would say very small – I would say “yes”. And they are still very small compared to the total load of the City. Ferguson: But, it is a positive contribution? Ulrich: Oh, of course. That is the whole point, getting that positive contribution out. Ferguson: And because we are all part of the same grid within the Bay Area here, particularly on the peninsula, doesn’t a remote renewable project of the same magnitude in Mountain View contribute about as much to the overall risk reduction, reduced risk of blackouts in Palo Alto? Ulrich: Well, I have to get into a little more detail, as some of the projects do not provide excess beyond their own use. So, what it does, it reduces demand on the system, not necessarily feeding power back into but it would be power that otherwise would have to come over transmission line to get to that customer. UAC Minutes 8/1/01 6 of 43 Ferguson: But to the extent that we are all on the same grid, even though we have legal boundaries around Palo Alto, we are on the same grid with our neighbors and we all rise or fall when we start bumping up against the Stage Three limits. Ulrich: That is correct. Ferguson: So to the extent that we have subsidized some of those projects outside the boundaries only because we did not get proposals from people inside the boundaries doesn’t mean we have lost something. We still, in effect, delivered a benefit to the City in some incremental way. Ulrich: That is correct. Then there is in another direction. We have to continue to purchase green tags or green energy to deliver back to Palo Alto for the people who have signed up for the green energy program. So there is a connection there also. Ferguson: Let me make one other follow-up comment and then I am done on this topic. When it is time for us to talk about Palo Alto or make a case for Palo Alto outside our boundaries, whether it is in a SFPUC meeting or in Washington, D.C., sometimes we get challenged about Palo Alto’s wealth or Palo Alto’s peculiar characteristics. I found that it is useful to be able to point out the many ways in which Palo Alto does share staff resources, dollar resources, outside its own jurisdiction. It may be a small absolute magnitude of sharing, but it usually diversified and they are usually well thought out projects. It is good to be able to point those things out to counter the false argument that we are insular in the way we conduct the business. Ulrich: Of course I agree with that. There is very little activity we do that does not have some impact on something else. In this case, I want to applaud the staff for this kind of innovative thinking. This program and others were initiated during the time when we were trying very hard to have our contract with the Department of Energy or Western renewed. At the time, the deal we had was a program called “One Million Solar Roofs.” DOE were very encouraged by the proactive steps we took to put out the photovoltaic program, whether it was in Palo Alto or outside. You take a little piece of that and you add it to a number of other things, all of those things had positive impact on our ability to renegotiate that contract. There are all of these little activities that are going on and this happens to be one of them. It is a little harder to look backwards, now that we have that 20 year renewed contract. But that is what I keep pointing out: if you look at this as of today, it is a whole different story as exemplified by reading the newspaper, than it was when these programs were put together. So you have a very innovative staff and people who really thought these ideas through. Rosenbaum: I was on the Council at the time this was approved and I must say that I have no recollection at all of the UAC having a 2-2 vote or Council considering it. So I UAC Minutes 8/1/01 7 of 43 am free to say what I would have said had I had a recollection of it. There would have been some interest in projects of regional or state or national importance, a fuel-cell development project requiring the cooperative efforts of a number of cities. But it is easy to understand why there might be some objection to simply putting solar panels on other people’s or other organizations’ roofs. All of the solar panels we supported were, of course, in PG&E cities and I assume these people were also getting the PG&E subsidy for solar in addition. Is that a likely conclusion? Ulrich: I don’t know the answer to that. I would suspect that if someone qualified for whatever they could get, they would go after it. I don’t think it would be unusual for these to qualify in the PG&E area because the cost of energy is considerably higher than it was in Palo Alto. So there is more financial incentive to do those. Here is an expert who was here at the time, who might have a better memory of how it was all put together. Tom Kabat may be able to answer this a little better for you. Kabat: Yes, those who could apply for those, did. We took into account where they were getting money from, how much money was needed, took a look at the economics to see if more money was needed to make it economical or to improve its economics. Sometimes our grant was on top of theirs. There were lots of different cases. The NASA one was one where they could not apply for other grants. They asked us, we helped them. We also had other interesting benefits. NASA is a fellow Western customer with about an 80-megawatt allocation. After the approval of the grant, we started getting a lot of more information from NASA and cooperation from them, through Western, as to when they would run some of their equipment. That freed up some power for us. So there were some significant benefits that came along with the relationship-building just in that one case. But we did look at the economics of projects, the sources of funds, and two projects were declined. They showed up in a strange way in the newspaper today, not that the applicants had infinite money, but the projects looked like they were economic without a grant. That is why they were congratulated, and declined. They were two landfill gas projects in another county and they looked good on their own. Rosenbaum: I appreciate that information. Now you indicated that this project is not going to be continued. That is, our Public Benefit money, with the rates going to be forty-four percent more than it used to be. Are we going to be able to spend that money? Ulrich: I have no doubt about that at all. There were comments that it was difficult to do this back in the latter part of the 90’s. It is not the same any more. We have other programs. But what may happen is that we are going to try programs that somebody else has not done before. That is an appropriate thing to do; they may work and some of them may not. There is a tremendous amount of incentive to try things that have not been tried before, to see if it will do what the Public Benefits dollars were intended to do. There will be mistakes and some public perception of it will be incorrect or have a different view than the objective. That that may happen. We’ll try very hard not to allow UAC Minutes 8/1/01 8 of 43 programs to go out that don’t have good communication behind them. That is clearly a lesson learned. In one sense, this is a positive discussion. We are being able to tell you about something that has worked very well. It is just how it was perceived is the result that we need to work on. So it gives us an opportunity to talk about that and I appreciate that. Rosenbaum: I am not sure you were as clear as I thought you would be. Are you saying these other projects, which may or may not be successful, will be within the boundaries of Palo Alto or might they continue to be outside the City? Ulrich: No, I am sorry. I thought I was being clear about that. This is the only program that is outside of Palo Alto and the program has been closed some time ago. Rosenbaum: Alright. So the future project, I mean there may well be what some people might interpret as mistakes with respect to the spending of Public Benefit dollars but those mistakes will be within Palo Alto. Ulrich: Yes. Unless we come back with some other idea. We have nothing planned or contemplated like that. But you have to look at it, whether the money is spent here in Palo Alto, or money leaves Palo Alto and goes someplace else. It can be installed here but the contractor that did the work may have their business in Milpitas, so we would have to be clear about the definition of those things. Let me just read a few things to make sure we are clear about them. There is a commercial demand side management rebate program, a residential DSM program, the photovoltaic rebates at $4.00 that is up to $816,000 at this point (the photovoltaic demonstration grant program is one that is in Palo Alto), auditing services, the traffic signal LED retrofit, the City facilities lighting retrofit, load curtailment program design, some electric vehicle infrastructure work and some electric vehicles. There is even some money in here for staff salaries in City allocated expenses that are part of our allocation process. There are reimbursements due on some of these. That will actually get some money back from the California CEC for all those LED’s that I mentioned earlier and under Senate Bill 5X for lighting retrofits. So it is a very extensive program. As ironic as these things may be, you will notice on your future agenda there is a whole time set aside to go over much of what I just reviewed. So there will be more communication on this. Rosenbaum: Thank you. Carlson: John, I would like to move on to the other 99.9 percent of your report. Ulrich: I just had one other item if there are no more questions, a very brief update on what is going at FERC and on the PG&E bankruptcy. It will be very quick. Not a lot has changed. UAC Minutes 8/1/01 9 of 43 There is still a key date of October 28th and we will have more discussion about that in a few minutes. If by then the FERC Commissioners have not made a decision regarding the application of PG&E to raise or to eliminate 2948A, these very high additional costs of energy from PG&E will take place, and our costs will go up dramatically. The hearing judge, the ALJ, has indicated that she will put this on a fast track. Hearings begin on August 16th and if she is able to make her determination, she will then forward that to the Federal Energy Regulatory Commissioners and they may or may not make a decision prior to October 28th. If they do not, then the rates go into effect. If they do, then it is whatever their outcome decision will be. Also, we are a member of the Committee with the Bankruptcy Court and are working very closely on that Committee with PG&E. PG&E is putting together their reorganization plan and that has a timing, probably sometime in December, before much more detail comes out. As you can imagine, these are very confidential negotiations and discussions under the auspices of the Bankruptcy Court and Grant Kolling is a member of this official committee. We believe that we are on the right track. We have retained appropriate legal council for bankruptcy and FERC and I believe that we will be ultimately successful. I will discuss some more of these details a little bit later in another topic but I wanted to give you a little bit of an update of where we are at. That concludes my report. Carlson: John, I have just one question – that even if FERC does not meet the deadline and the requested rate increase goes into effect, it is subject to rebate if there is an opinion in our favor later on. Is that correct? Ulrich: Yes, that is my understanding. Dawes: John, sometime ago, we talked about some “what-ifs” if the decision was adverse on the 28th of October. I want to explore what the current situation was vis-a-vis not purchasing that PG&E power via Western at the time, assuming we are offered this high-priced product from PG&E. At one point, you said, if my recollection is right, that we would have no choice, that we were contracted through Western through 2009 to buy from PG&E. But now, particularly since we have our own long-term contract, the 25 megawatt 24x7 deal, it occurs to me that if that is a lower price than what PG&E is pushing through Western to us, do we, in fact, have the option to take down our 25 megawatt product and say “no thank you” to Western on the high price PG&E stuff? And then sort of extending that even further, saying that in the event that that contract is sufficient to replace all the PG&E’s, can we go on the open market and buy it if it is less? Ulrich: We were just discussing the right time to answer that, because we will have some of that a bit later. First of all, we are very cognizant of that, and are working with Western and our other partners on this to see what kind of options we would have, UAC Minutes 8/1/01 10 of 43 keeping in mind that if we do certain things, will we still be eligible for the refund if it ultimately goes our way. If you do certain things, you may not be eligible for the refund. Dawes: Even if we have not bought any PG&E power because it was too high-priced. I mean we would not need a refund if we did not buy any. Ulrich: If we do something (you can’t articulate that necessarily) that is determined or interpreted to be voiding the contract, and we don’t meet the obligations of the contract, then you don’t have 2948A anymore, PG&E no longer has that contract with Western, then that would change things considerably. Dawes: Of course I won’t get into the issue, but it looks to me like PG&E has blown it away already and the question is whether the judge reinstates it through this whole process. Ulrich: Sure, but of course you can imagine that while we feel very strongly about it, we don’t plan for and do something that would turn it the other way or make it easier to go the other direction. Dawes: In summary, we really don’t know but we are working through the problem, very cognizant that we would much prefer to take the contracted power that we already have, particularly if it is a lot less pricey than what PG&E would be supplying. Beecham: John, maybe I can jump in here on the question you had indicated, whether we might be better off not taking PG&E’s power and not getting a rebate. The power we buy in the market, whether it is from our long-term contract or market power, is likely to be higher than our contract price with PG&E. If we were to take PG&E’s contract price, 2948A and pay for some period of time a higher rate, and then get refunded to the previous rate, that previous rate is lower most likely than anything we will get on the market today and next month. So, if we can stick out the probability and get rebated to the existing rates, then that is to our advantage. But in general there are many discussions on how best to play the scenario. NCPA and our other colleagues and our legal staff are well aware of this option. We want to preserve our options and wind up at the end of the game in the best situation. So, that is one strategy that is being evaluated, but I don’t think that it is time yet to come to an answer on it. Dawes: Thanks. Rosenbaum: At the time this went before FERC we were worried that PG&E was going to try to get market prices which were estimated at 130 to maybe 400 dollars a megawatt hour. Market prices are way down. Is our exposure correspondingly reduced, even if FERC rules adversely? UAC Minutes 8/1/01 11 of 43 Ulrich: Well, you may want to see the rest of our next topic. In general, sure, the price has gone down. But as Mr. Beecham pointed out, that may not be the cost that we would be expected to pay. PG&E -- this is where I am reluctant to get into details of their strategy because I don’t know what they are -- but we sit and think about the strategy that they may think about and try to come up with ways that they won’t work. So I am sitting here discussing this, but the idea maybe is that market price may not be the price that they would expect us to pay, or we would have to pay because of the State of California’s contracts that have been purchased on behalf of PG&E, which are far higher than market. So it would be very difficult to answer your question. But you are seeing exactly what everyone else is seeing -- that prices are going down. Carlson: I just want to be sure that I understand, because that is very important. Because the State has contracted for so much high-priced power that PG&E has to buy, the price PG&E would expect from us would then likely be well above the market. Welcome to the future of California electricity, I think. Ulrich: Well, we strategize about those things and possibilities. That is why you want to have a lot of options to be able to consider. Carlson: That circumstance really emphasizes the point both you and Bern were making. That even a FERC compromise, even some modest amount above the existing contract, is likely to be dramatically better than anything that PG&E would offer if they had control. Ulrich: Could be. Carlson: Any more questions on this topic? We’ll get more of this later. Let’s go ahead. Unfinished Business Streamlining UAC Procedures. And I hope we have a report from Rick Ferguson. I know Rick and Chairman Bechtel have been working on the UAC role and improved procedures. Do you have something for us, Rick? Ferguson: Yes, just an interim report. We will have one more meeting with the staff and hopefully this will become an action item at the September meeting. But let me just give you the high points. In fact, the staff has prepared a draft year-ahead agenda at our places, so I will talk you through it. Let’s treat the annual cycle first. Since we have a commitment now, both within the UAC and to Council, to review performance against the Strategic Plan twice a year, what we tried to do is work out the most sensible way to align that with the Budget Cycle and steer clear of other scheduling land mines. Where we came out is that we will have the UAC review with Staff on performance against UAC Minutes 8/1/01 12 of 43 Strategic Objectives, trying to do it at the September meeting but no later than the October meeting. The result of that -- we’ll recommend that Council take it up, inviting us or not as they see fit, at their mid November meeting before the holidays kick in, Council willing, of course. November is important also because budget line-items are bubbling up from the staff in the early fall, and they kind of surface in November, so this is a very opportune time to redirect, to make midcourse corrections with everybody more than half way up the learning curve at that time. So if we are trying to align Budget cycle with our new commitment to review Strategic Plan, that is the way that sorts out. The next question is how do we avoid annual budget review conflicting with the Strategic Plan update. The staff proposal here, although my recollection differs by a month, is that UAC look at performance against Strategic Plan in March, and then we slate the Council update in May. That’s being brave, since that’s really an incredibly thick budget season for Council, but in the absence of better information from Council on how to manage that, that’s our proposal. Those are the anchor points for the agenda. The staff has noted our very important NCPA and APPA activities, aligning ourselves with our brothers and sisters around the State and the nation, and those are generally fixed. Those are there just as our reminders. The Legislative Rally again is February 6th so as we recommended earlier, our best time to focus on the specifics of a legislative agenda ought to be the December 5th meeting; That also makes sense because we will have come out with any Council comments in November, so we will know if we are on firm ground come December 5th. One of the outcomes unstated here is that, for those interested in utility-specific meetings, that leaves us with the UAC meetings in November, January, February, June, July and August. So you could have one each, twice a year utility-specific Meetings. And again I want to stress, as we did at the last meeting, that just because we declare it a utility-specific meeting, does not mean that we are going to be insulated from the ordinary press of business. There will be items that come up, and they simply need to be addressed on time. There is an advantage here to trying this utility-specific focus so that we can really hone in. Let me pick off the other comments or progress points and then we can kick it around here. The second one was on the format for papers. The staff gave it a little try here on the Utility Customer Information System Project memo tonight. The proposal, either at the top or at the summary of any one staff report, is to cite the one or two strategies best served by the proposed action, whether it is a surprise item or just a continuing item in service of the strategies we have in place, just to kind of remind us of how these pieces fit together. The fact that the item comes up, the reason for it coming up, is not going to differ than it has been in prior years. It is just that when it does come up, the staff will try a little harder to point out where it fits in the strategy, and frame our discussion. That is not an attempt to reduce the amount of detail that we can discuss, just to frame it in terms of our strategy. You notice here on this information system memo on the back page, the UAC Minutes 8/1/01 13 of 43 top of the second page, there is a Utilities Strategic Plan discussion. Maybe there is a little chart or logo we could create that does that visually. We’ll talk about that again. The third one was the budget review. Commissioner Dawes suggested that we look at more than three items on the Quarterly Reports. Staff made a point to us (I don’t know if they have made the case earlier in one-on-one meetings with Commissioner Dawes) that there are just some budget items in the various information systems that are either difficult to extract or, even if you extract them, they are not as meaningful as you might want to believe. Rather than go through a meaningless exercise or a quasi-meaningless exercise, maybe it is better to start with more than three items and fewer than the entire stub on the 10-year report. We don’t have an answer to that but we will thrash it out again between now and the September meeting. The last item is on meeting agendas. We do want to compress the front end of the reports; trying not to let the Director’s Report turn into an ill-defined, all-encompassing agenda item. We do want, especially when we have visitors -- whether it is a BAWUA visitor or a consultant giving a part of a report -- to get those things up earlier on the agenda and let the more proforma items spill over later in the meeting. So, just in the nature of a progress report, that is where we got so far. I would welcome any more comments. I am sure Chairman Bechtel and I will do our best to get in and turn this into an action item in September. Carlson: Any comments? Beecham: The effort to tie in the UAC’s assessment of the Strategic Plan biannually with what the Council does is a very good idea. You have been sensitive to how the Council works, you’re sensitive to the budgetary process and I’ve been trying to think of the time and you’ve got it about as well defined as possible. Especially both in the fall as you indicate that’s when budget planning happens in Staff and in springtime that’s when the Finance Committee gets the budget, in May, and it’s all wrapped up by Staff at that time. Finance Committee would not have time in May to look at comments except as may be in the whole budget process, but if indeed, by the UAC looking at it in March and it can get to Council and the Finance Committee in April that may work in terms of workload. So I really do think you’ve done a lot of good work on that. Near the end of your comments you mentioned the Director’s Report perhaps taking over issues that are coming up later. You have at your option to move the Director’s Report from Item 6 to perhaps Item 7 or 8. New Business Gas Quarterly Report Carlson: Let’s go ahead with the Gas Quarterly Report, the first New Business item. UAC Minutes 8/1/01 14 of 43 Ulrich: Thank you. We don’t have a prepared additional report. Karla Dailey is here and Girish Balachandran who would be glad to try to answer your questions. Ms. Karla Daily: There are actually a couple of written questions emailed in to us today. If you want me to I can go ahead and answer those. Carlson: Please go ahead with those. Dailey: Okay. The first two were from Mr. Bechtel. The question was the chart in the report shows the natural gas wholesale prices historical and projected, are the projected prices what our contracts plus market purchases are or are the projected prices index prices only? The answer to that question is those are index prices only. It is the chart that has the actual and then projected line on it that he is referring to. Carlson: So those are just actual market prices that are quoted today. Dailey: That’s right. Well, historical up to the big thick vertical line, and then projected from that line out to the right. Then his second question was, our acquisition agreements look good but I would like to know if our long-term purchases are above, at or below the market index projections. The answer to that question is that our purchases are above the market right now. Carlson: So how far out are we purchased right now? Dailey: We are going out three years but it’s stepped, so we buy more for the nearest term and less for the second year out, and then less again for third year out. Carlson: Does that mean we’ve purchased one-third or two-third of next fiscal year? I’m not quite sure how these things stage. Dailey: That goes to Mr. Rosenbaum’s question which was with 90% of the gas costs fixed for 2001/2002 we should have very good supply costs per therm for this year. That 90% number that was in the report, a couple of things changed in the last two weeks. We had a lot of customers migrate from our portfolio rate to our fixed term rate and our variable rate which are non-portfolio rates. So in the report, the 90% was referring to our portfolio. But an update of those numbers is that for FY 01-02 we are 100% purchased, locked in, for 02-03 we are 37% locked in, and for 03-04 right now we are 38% locked in. Those are our projected load, so there are some volumetric differences that could happen when we actually get to those months. Those are also an average over the whole 12 months of the year, so single months might be higher or lower. We tend to like to buy in strips, so it is not exactly that same percentage for each month. UAC Minutes 8/1/01 15 of 43 Carlson: Roughly, what does our wholesale cost look for 01-02 at this point? Can you give me a feel for the average? Are we around five dollars or six dollars? Dailey: For our portfolio right now we are at about $8.80. Rosenbaum: That’s with 100%? That is the number? Dailey: That is the number with the exception of volumetric differences. So yes, for what our projected load is, that’s the cost, that’s the price. That was the second part of your first question. The second question that you had was, do the rates for the non- portfolio customers include a contribution towards the supply rate stabilization reserve fund? The answer to that is no, they do not contribute to that fund. Rosenbaum: Has Staff given some thought as to the equity? I’m not sure what the answer is, but if the reserves have to be pumped up as we are doing only from portfolio customers, I don’t know what the percentage is, but that is a greater burden clearly on the portfolio customers. Balachandran: Randy can add to this if he wants, but our thinking was that we are purchasing gas only for our portfolio customers. All the direct-access eligible customers would sign contracts and they maintain their DA eligibility that way. So we are not maintaining reserves for them. This is just on the supply side. On the distribution reserve, all customers contribute to reserves. Dailey: Pretty much the logic behind it is they don’t contribute to the stabilization fund because we are not providing any stabilization for them. If they commit to a contract term, then we price that accordingly and they sign the contract. But at the end of that term, they have to either make some more choices, but they don’t have any guarantee for rate stabilization. Rosenbaum: That sounds reasonable going forward. I’m curious about last year. Clearly, we used reserves to reduce rates for everyone and I assume some of the people who were not going to be in our portfolio next year were in our portfolio last year and benefited from our use of reserves. Is there some way to take that into account? Balachandran: We haven’t yet incorporated into the rate the raise. We could look at it and see if that’s something that we want to bring back to the City Council at the next rate change or sometime in the mid-year. That’s something we need to look at. Rosenbaum: Well, Bern was just whispering to me that everybody paid into those reserves so maybe there is no issue there. They paid into it, they were entitled to the use. UAC Minutes 8/1/01 16 of 43 Ulrich: That’s correct. As far as last year the non-core customers did pay into the reserves and they did benefit. Now when you go forward, you raise a question and yes, we have given thought to whether there is some equity concern. Currently we are not collecting a reserve component for the supply reserve. We may decide whether we need to add something, to the extent that we want to have some kind of contribution. The problem of course is that there may be a circumstance when we ask the benefit by coming back on to our full-service rate schedules but there may be times when those full-service rate schedules are contributing quite heavily to reserves. It gets to be a matter of timing, and they don’t have much of a choice on the timing issue because their contracts are for very fixed periods. It is only by chance that they may game the system, but there is the advantage or disadvantage that will occur if we don’t collect some contribution to the supply reserve now. I just want to remind you that we do collect from distribution rates a stabilization reserve component from those customers. Dailey: There is only one chance to game, as well, because the way the rules are set up now, the customer can’t flip back and forth between the portfolio rate and the DA eligible rates. Once you get on the portfolio rate, you are there for the duration. Rosenbaum: I don’t really think it is an issue of gaming. I don’t think customers are making any decisions based on whether or not they have to contribute to the reserves. Dailey: That’s true, but all kinds of other things go on in differences between the portfolio rate and the other rates, besides that reserve. So that’s why the rules are set up the way they are now. Rosenbaum: Alright, I’ll have a more general question after everybody has their chance to question the specifics of the report. Dailey: One other thing I want to mention is that it looks like the graphs from engineering were left off of this report, at least in the packet that I received. So I apologize for that. I don’t know where they are. Balachandran: That was inadvertently left off in our copying process. We’ll add it to our report next month. Dawes: The plan with this last rate increase that went in either the first of June or July was to start adding to our rate reserve. Have we in fact added to the rate reserve going forward? The second question is, given the $8.80 supply that we’ve locked in -- is that consistent with the rates we currently have, or do you envision a rate adjustment required for the balance of 01-02 consistent with building our reserves? Ulrich: The answer to the first question is yes, we are building reserves effective with the June rate increase. I’ve looked at our contribution on that revenue calculation, or UAC Minutes 8/1/01 17 of 43 sometimes marked-to-market, and it is in the positive territory with the 67% rate increase. So yes, the reserves are building. As far as projecting a rate decrease, the approved budget did not include a rate change for fiscal year 02-03 but on our ___________ budget forecast we did project a rate decrease in the gas in 03-04. Dawes: Actually, I was inquiring about 01-02. Given our $8.80 supply, are rates now satisfactory where they are or would we need an adjustment up or down? Staff: We are going to be fine. There is no adjustment up or down for the current fiscal year based on what they have locked into. You mentioned .88 per therm and that is what the budget was based on, that’s what our retail rate increase was based on. Dawes: John mentioned earlier the need for clear communication with all of our ratepayers. There certainly has been a number of articles in the paper about gas being more available in California and prices coming down in the wholesale market. Do you plan a press release, an explanation, a dissertation to our ratepayers about the fact that we will be holding this rate that we established in June through the whole year, notwithstanding what they read in the newspaper? Basically, explain what the situation is and how they got a great deal last year, and this year it is maybe higher than what the market would have been -- or something? Ulrich: I’ll back up what you say. Staff: John is going to do a press release on that subject. Ulrich: No, we haven’t planned anything, but I see your point: the public is going to anticipate a gas rate decrease because all they hear about is falling gas prices. It is a good suggestion and we’ll have to give that some serious consideration on how we notify the public about our gas strategy for this year. I am hopeful that we will have a decrease next fiscal year if we are able to lock in for that other 60% that is still out there for 02-03 at a price that’s considerably lower than what they had budgeted for the two-year budget. That remains to be seen but the current market is favorable for that kind of event happening. Dawes: I assume those out years, the 37-38%, is also in the eight to nine dollar range. Dailey: No actually quite a bit lower. For 02-03 is about .54 and 03-04 is .48. So quite a bit lower. Ulrich: Just to add on the communication: we did take initiative and we will probably continue doing this. You described talking about the value that has been achieved and having lower rates earlier, while PG&E rates were higher, and we used those reserves to do that. Now we are replenishing them. What we tended to do was to look at an annual UAC Minutes 8/1/01 18 of 43 bill, taking into account the savings that people have had in the past few months, and tending to roll it forward rather than just look at what the rate is today. We are looking at the value that’s been achieved over last year and then adding it to what is going forward. Dawes: There will be some real invoice shock come November/December when people are looking at, what, three rate increases between last November and this November. So there will be a 200% increase. Ulrich: A 200% increase is significant. That’s why as we had the rate increases we tried to communicate it, but the difficulty is when you have a rate increase in June, there is very little gas usage taking place. Dawes: I understand. I am suggesting that a well-crafted explanation to our ratepayers would tend to head off some issues. Ferguson: My biennial pipeline safety question. The Department of Transportation took flack in today’s paper for having an under-funded, under-performing pipeline safety inspection program, 50 inspectors allocated across the nation. Can someone describe today or at the next quarterly report what we do routinely to inspect for decrepit pipelines? How do we test? How do we make sure that nobody in this City is exposed to that kind of a unsuspected, unexpected, un-inspected explosion potential, corrosion potential? Ulrich: We will be glad to have that as a topic. Maybe that is one that we ought to have on a biennial basism for our annual agenda plan. Carlson: Scott, go ahead. Bradshaw: Very quickly. We do have a replacement program right now under our gas main replacement program where we are replacing all of our old ABS pipe that was installed in the 1950’s. That right now is our major problem that we have with the gas system. It is a pipe that was put in in the 1950’s under the assumption that it would be long-term lasting, high-quality and it has not lived up to expectations. So we are in the process of replacing all of that at this time. We also have the cathodic protection program. We have a cathodic protection professional who manages that program on a day to day basis and checks our cathodic protection constantly on our metal pipeline. I would be glad to, at our next gas quarterly report, have something on our protection system program. Ferguson: Thank you. Beecham: A quick comment on that. I presume that within the City of Palo Alto we have very little of the high-pressure gas lines under our control. Is that correct? UAC Minutes 8/1/01 19 of 43 Bradshaw: That is correct. The highest pressure we have is about 26 pounds. Beecham: That is relative to what on the major gas lines? Bradshaw: At the PG&E gate I believe it is 300 pounds. We reduce it down to our distribution pressure. Three hundred pound pressure is fairly low for a transmission line system, too. So we are in good shape as far as pressure. Ulrich: That distribution pressure is about half of what PG&E has in its lines. So this is designed for lower pressure. Ferguson: We have no direct jurisdiction over PG&E and others but how many other larger pipelines pass through our jurisdiction? Bradshaw: I do not know the answer to that question, but I can find that out. Ferguson: It would be great if it was a cooperative or coordinated effort to reassure the people that live here that we’ve got the explosion potential minimized. Ulrich: I want to make sure we say that in the right way here. There are transmission lines owned by PG&E and some of them go through because they go through communities but there is not a big extensive amount of those. PG&E has to conform to, and I presume does, the same pipeline safety requirements as anybody that is in the gas distribution or transmission business. Carlson: Any more questions on this? Rosenbaum: Yes, my general comment. Our retail rate for gas once you get beyond the baseline is a $1.80 a therm and for all I know that may be the highest rate any utility has ever proposed for residential customers ever. In the winter time 200 therms is not unusual to heat a house. The bill is going to be $310 and last year it was $140. We have had our 40% electricity increase without anybody seeming to notice. I cannot imagine that this is going to happen in gas and I’m just wonder how is Staff going to present this to the public? Does the City Council know that this is going to happen and that people are likely to start complaining in December? Are we going to make a big effort to offer this plan where you can average your utility costs over 12 months? Are we going to do something in advance of the problem becoming apparent to everybody? Ulrich: Communication and education is a very important part of what we do. This isn’t something that’s just occurred now. We didn’t have expectations when we went out and bought the gas that the price was going to go down. We had expectations it was probably going to go up. So while the price compared to the market is high, our plans for UAC Minutes 8/1/01 20 of 43 communication would still have to be as aggressive now as we thought about when we came forward with the rate increase. That is why we have very aggressive conservation programs -- to try to get people to do something that will reduce their cost by putting more insulation in or doing things that would reduce their usage. So I would agree that there will have to be much more communication and ideas. The time to do that is between now and the time winter starts. Candidly, there are not going to be an incredible amount of things that some people will be able to do to drastically reduce. The best part is having forewarned knowledge, to be able to make some decisions that are discretionary. Rosenbaum: In making that comment I’m not at all critical of the policy that was adopted for purchasing. I think it makes a lot of sense. It just happens this year it may not work out well, and it is going to be difficult to explain to people. Ulrich: Of course, I didn’t want to imply otherwise. Your questions are always good and to the point, and you are looking out for the consumer, the one that is going to get the bill -- and sometimes the most difficult part is to be able to pay the bill. So we do have the programs that would help them, including the balanced payment plan. In some cases, the cost of gas is going to impact people and their lifestyle, and we have to be there to try to help them through that. Dailey: Not to state the obvious, but market prices next winter could be much higher than .88 too. So we might not be above market then, just because we are today. Carlson: Any more on this subject? Bern. Beecham: Would you remind me when and how you decide to make your forward purchases on gas? What is your timing on doing that? The scheme we had in mind was 100% for the coming year, two-thirds for the next, and one-third for the third year out. We are currently at 100%, one-third, one-third. So I wonder how you decide when to make a buy? Balachandran: This kind of strategy is rule-based but at the same time it allows some flexibility for Staff to make a judgment based on market conditions and what information they get. There is some flexibility as to when we actually pull the trigger on those purchases, as long as the guidelines are met. These are conceptual guidelines, they are not really written in stone. Right now, we looked at the market earlier this summer and we locked in about 35% and we decided to wait through the end of September before locking in that other one-third for the second year. We are going to revisit that and if it makes sense to wait a little longer, then we will. These are conceptual guidelines, and we go back to our risk oversight committee to change those guidelines if it is warranted. UAC Minutes 8/1/01 21 of 43 Beecham: So on the conceptual guidelines what is your period in which you intend primarily to make these purchases? Dailey: It is always a rolling 12-months, so when I say near-term -- one year out, two years out -- that doesn’t mean fiscal year 01, 02 or 03. It is always a rolling 12- and 24- and 36-month period. That’s why, when it is reported by fiscal year, it looks a little different than it would be if I was telling you those same numbers on a rolling basis. So every month that goes by the month that is 13 months out gets bumped up in how much we want to buy for that month. Beecham: So how much have we bought for the 13th month, roughly? Dailey: Fifty percent. But at the same time, as I said earlier, a lot of time we want to buy in strips so we might want to buy a winter strip so those numbers might not be exactly what the rule-based approach says they are, because of the fact that we buy in those strips. Beecham: Have you also taken questions on the other items on the report? Carlson: Go ahead. Beecham: I’ve got a question on the post gas-accord negotiations. I want to make sure I am interpreting this correctly because I don’t know for sure. Can you explain “vintage pipeline capacity” and how all that works and what is happening to us? Dailey: PG&E has what they call their backbone transmission pipelines from the California border to the City gate which is a trading hub. The Redwood line and the Baja line are those two. When the gas accord happened in the first place, there were two pipelines that went from point A to point B. They were parallel pipelines which is now called the Redwood Path. One pipeline was old and cheap, and the other pipeline was new and very expensive. Part of what the gas accord did was roll those two together and come up with a melded price. But in negotiation with PG&E’s core procurement group there was a piece of that old pipeline set aside for the core. Since Palo Alto is a wholesale customer with core load we got a piece of that as well. It is part of this pipeline transportation system at an old or vintage rate. So it is much less expensive than the full tariff rate and certainly much less expensive than the going market rate for that capacity. Beecham: So we should expect that post accord, our transmission costs will be going up? Dailey: A little bit, yes, but PG&E is still telling us that they are going to propose at least that the core and Palo Alto still get some less expensive transportation. UAC Minutes 8/1/01 22 of 43 Beecham: Is there any question on having adequate capacity for Palo Alto? Dailey: No, from what they have shown us so far it looks like they are setting aside an adequate amount to serve our base load, which is what we want. Carlson: Anything else on gas? Go ahead, Dexter. Dawes: One off-the-wall question. I assume Palo Alto has no facilities for inventorying gas in the City. Has there ever been any thought given to that? Does it have advantages in terms of off-peak buying? Are the practicalities and dangers too great? I don’t want a big, long answer, but just sort of a two-minute summary. Dailey: No. We revisit that question all the time. I have actually been looking at it the last few weeks. The way PG&E’s rules are right now and the reliability that we get because of the way their rules are set up, and the way we have written our supply contracts storage, it has not been economical for us up to this point. Dawes: Thank you. Carlson: Any more on gas? Moving right along, Utility Customer Information Systems. Utility Customer Information Systems Ulrich: We have a brief report to give you an update on changes and improvements for the customer information system. I thought you would like to have an update on it. I’d like to introduce Ron Fong, the Information Technology Applications Manager who is the project manager of the CIS upgrade and the customer web access. He is here to answer any technical questions. I’ll try to answer the rest. Let me give you an overview first of what this report is for. It is an informational report. We have been talking about providing internet access to our customers to the billing system for some time. As you know, the old billing system couldn’t do that. The new billing system will be able to do that. I say new -- it is two years old almost. The company that built the billing system we have is Systems and Computer Technology. They have a product called Customer Web Access and there is a brochure attached to the report that will tell you a little bit about it. It allows our customers to access their account over the internet, find out their usage information and they can sign up for utility service or they can terminate utility service over the web. It is very convenient. They can pay their bill with a MasterCard or bank draft. It is not really a bell and whistle today, it is expected of utilities. So we are trying to catch up here. It is not an easy application to put into your system. It is a complex system to begin with and there are modifications that we have. Part of this report talks about the Customer Web UAC Minutes 8/1/01 23 of 43 Access product that we want to deploy. and that’s about a seven to ten week project. Before that can happen we have to upgrade the current billing system to the next upgrade path and that’s about a six month project. We will do that first to correct some deficiencies of the current system, add some functionality that the current system doesn’t have. With that, we are here to answer any questions. Carlson: Let me start out. Is this going to include the ability to make online bill payment? Ulrich: Correct. Carlson: Outstanding. Go ahead, Dexter. Dawes: I can’t let the opportunity to speak to the information system pass without reiterating my wish list that we have more complete and detailed financial reports. Having our former Chairman say that part of the issue is that the information doesn’t exist in our data processing system, and hearing that there are upgrades in process, I certainly want to put in a plug for having our system spit out information that provides what I would call absolutely routine, absolutely necessary timely information on our utility operation. Ron Fong, IT Manager: I can briefly address that. ITE Division is currently doing an RFP for an ERP system, Enterprise Resource Planning, and that is to replace our financial systems, our human resources system, our payroll systems and will give us a fully integrated database, you might say, from which all that information can be drawn. That seemed to be about a two to three year project, phased in, and that will give you that timely reporting that you require. Staff: Yes, and Utilities is involved in that project. That is City-wide, so the utilities will have to wait for the rest of the City to come in and have it all done at once. Ulrich: We are going to be coming back to UAC next month with some proposed financial information. Keep in mind the two-year financial forecast is done outside our current system. We are going to continue to do that. The question we have to answer is how frequently we should do that. We want to get to the ERP but the next two years we are going to continue. Dawes: I just want current historical information in the same categorization as the ten-year forecast. What I call the stub, the left-hand side designation, but for actual performance. Do I make myself clear? Ulrich: You’ve made yourself clear for some time on this. You are talking to people who would like to have the same information. What we are conveying, even though this UAC Minutes 8/1/01 24 of 43 isn’t the subject of the evening, is that we are all part of one City and we are going to share and participate in the project described by Ron, which will give us a far better financial system. There are a number of things -- for example, collection of work-order costs and project costs -- that need to be done in a more efficient and accurate manner. So you have to start at the beginning of collecting the appropriate information and being able to process it on a timely basis. The Utility has different needs than some other parts of the organization. All those have to be accumulated together and a system robust enough to be able to handle all those differences put together. Dawes: Fine, I won’t beat a dead horse anymore. Ulrich: Everybody at this table and in this room is focused on that as an objective. It doesn’t happen as quickly as we would like. Fong: There is another initiative that might assist in that exercise and that is we have a mirrored system of the customer information database. The proposal there is to use that mirrored system as a repository, a data warehouse, from which we can extract information and do ad hoc reporting. So that may be an interim solution there. Ulrich: Just be clear: the CIS is only for billing and sales and revenues. It has nothing to do with all the other items that we look at and talk about here. So it is only one piece that we are going to have from the CIS. What we really want is when the ERP is integrated with the CIS and other systems in the City, and we can print out on demand very customized financial statements every month that are accurate and up to date. Ferguson: You may well have this covered already, but I would like to suggest that when you take it to Council for contract approval and certainly when you sit down with the contractor for the kick-off meeting, you make the protection of privacy, the privacy of the data in the system one of the top ten features. Don’t leave it to last in your discussion of how to design the project. There are a lot of technology issues we certainly don’t want to discuss today, but if you make sure that privacy protection’s built into the contract, priced realistically in the contract, and then communicated to the public from Day One, we’ll avoid having to swat that fly as an issue downstream. We can say “We have addressed it, we have a solution, and we are at least as good as the people in Nebraska” with their Nebraska Public Power billing system, or better. Beecham: Mine is a very simple question I’ve asked before. As you talk about online payments, one variation of that is that the customer gives you one-time authorization to deduct from their checking account, it takes no online activity thereafter. Will the system allow you to do that? UAC Minutes 8/1/01 25 of 43 Fong: We currently have a modification to the customer information system that will allow that to happen. It is called bank drafting. That is going to be implemented in a few weeks. It is in the final stages of testing right now. Beecham: You can use me as the first test customer. Carlson: Make me the second one. Ulrich: What he is talking about is bank drafting. What you are talking about is online automatic bill payments or one-time bill payments. Beecham: Bank drafting is what I’m thinking of, yes. Carlson: Okay, anything else on this item? If not, let’s move on to our electric contracts. Electricity Sales and Purchase Contract Liabilities Ulrich: The report is in a couple of pieces. First off, just a review and summary. You recall at the last meeting and at various times before that, we had questions about what occurred and how it occurred and what did we conclude when we purchased a 25 megawatt contract for basically a hedge and insurance against the draconian things that could happen to us in the marketplace from the FERC filing and also from bankruptcy. We divided the report into a couple of phases. One, I told you in the past that even though some of you were privy to information and participated in the overall decision to go after this contract the condition of the contract as negotiated had a confidentiality provision in it. I talked at some length at the last meeting as much as I could about this contract and then subsequently we went back to the supplier, as the contract provides for, to give them notice that we would like to release the information and be taken out of in this contract from being confidential. After some letters and discussions with them they agreed to do that. So we put on the agenda today that contract or a summary of it so we could tell you about it, answer questions that you might have and then probably more importantly, what are the implications of this contract versus the sales of energy that we’ve made recently and the liability or the costs associated with this contract and other things on the supply side. So we’ll go through that and probably from a question and answer standpoint, probably do this on a page basis or if you are willing to go through several pages of it and then ask your questions. We’ll see where we go. I’ll talk a little bit about it and maybe Girish can put the pages up and we’ll try to do this in a point and shoot. First off, there are copies up here for those that don’t have it. The report is as of today, so it is as up to date as the market information that was available. UAC Minutes 8/1/01 26 of 43 The contract was approved by the SOC and UAC in a joint meeting that was held on April 24, 2001. It was for purchases up to 50 megawatts for a term of up to ten years. We took that approval and we went out with an RFP for a contract and decided that, based on input and feedback from all of you and your direction, the contract quantity would be for 25 megawatts and the term would be for approximately three and one-half years to get us through the end of the Western contract. This was an insurance policy, and we decided that it would be only an insurance policy and not a medium or long-term contract for energy. So the contract term is for June 1, 2001 through January 31, 2005 and the quantity 25 megawatts, and it was for around the clock, was the way it was described, delivered at MP 15. Around the clock meaning that it is 25 megawatts contract, 24-hours a day, seven days a week for the term of the contract. In the supplier selection process ten suppliers were contacted, eight parties indicated interest to supply the energy. Of the eight interested suppliers five suppliers were pre-qualified on the City’s counterparty credit policy. We were also qualified by the supplier as a party they wanted to do business with. It was quite an elaborate and major opening of our books, to communicate and provide information before the parties would agree to do business. On May 7, 2001 five qualified suppliers submitted their bids ranging from the price that we paid -- the lowest bid -- to $104.50 a megawatt hour. The lowest-cost bidder was selected. That supplier was Enron Power Marketing Incorporated. We selected the lowest bid which is a flat price of $95.00 a megawatt hour with a monthly cost of approximately $1.7 million and total cost of the contract of $77 million. As we all expected, the value of the contract changes day to day, and the value of the contract has dropped considerably since the purchase on May 7, 2001. Although the price went up somewhat after we purchased it, over the short run since that time the future value beginning on August 1, 2001 is estimated to be $29 million as compared to the cost of $73 million, a value reduction of $44 million. The net cash flow related to this contract in June and July is approximately still a plus from $60,000. The chart that is on your first page has been blown up on the screen. If you looked at the chart that we gave you as a piece of information for determining what the market said the prices would be over the term of the contract and beyond it would be the top graph which is dated April 15th. It is a little hard to see on the screen but it is the upper-most red line. Where a flat price of the market at the time was, the 25-megawatt contract would be for a price of $116.00. Then in the next snapshot is May 7th and it was the same thing, it was $116.00 at the date we purchased it at the $95.00. Dropping down to the second to the bottom, the forward price curve on June 7th dropped it to $59.00. Then as of yesterday’s price it was $38.00. With the lower market prices the estimated impact of paying market prices for energy from PG&E under contract 2948A beginning October 28th, the day the rate would go up if there is no definitive decision from FERC otherwise, is not as drastic as it was estimated in April of this year. Hence, Staff does not expect to execute any additional contracts that were approved by the SOC/UAC. The surplus energy from the 25-megawatt contract will be sold and is being sold in the forward spot market until UAC Minutes 8/1/01 27 of 43 October 28th of this year. If the uncertainties related to the contract 2948A diminish substantially, a longer-term forward sale of part of the entire contract will be considered. I made a point of reading most of that to make sure I said it accurately, since there are a lot of numbers there and we’re talking big dollars. If you’ll flip the page you’ll find an attempt, and hopefully a very clear one, to show the graph of the benefits on the left side and the costs that we have on the supply side of our business, electric only, on the right-hand side. Maybe you can point to them, I’ll work up from the bottom. The bottom is a relatively small amount of benefits. That’s approximately $2 million from other market sales. So what you are seeing here as we go up are the sales of excess energy that we have or have had. The next one up is benefits from our NCPA pool. These sales to members according to previously agreed upon pooling agreements. That’s about $14 million. Moving up from there, we differentiated this so you would get an idea of the benefits that we’ve had from sale to the state of energy that we have. Of course, subsequent to June 1st the sales of the Enron 25 megawatt contract, a little bit of that is in there. That’s about $6 million. The next one is a significant amount, $22 million, this is market energy sales of the energy that’s been saved by Palo Alto residents and businesses for the annual period of July 2000 through June 2001. That is approximately about a 10% reduction in energy use over this period. Since that requires us to use less of the energy that we either own or contract for we sold that back into the market. So the total from the bottom of the cost of the benefits is about $44 million. Now the top one that looks purple or blue on your copy is approximately $12 million, which is the value of Palo Alto energy savings over the next five years. That is an important part of it because our expectations are that the money that has been spent over on the cost side for some expenditures like the AEEP are expected to be ongoing and stay in place. They are not just temporary. Carlson: John, I forgot what the AEEP is. Ulrich: Accelerated Energy Efficiency Program. I’ll mention that in a minute. So the net benefit of all of this is approximately $56 million. So it is important to see the costs and the benefits and get an idea of the magnitude of some assumptions that people might have of the sales of our excess or energy that we don’t need at a particular time. On the cost side working from the bottom up, and we made a point of picking the colors that indicates the cost side and the liability side, are the estimated value loss of the contract that was moved from the other page. As I mentioned was $44 million and that is on the bottom. There is just a little box up there that says legal staff cost -- a very insignificant amount of money which is our salaries and other costs. Then the big one and the one that we need to clearly understand is about $70 million, which is the potential value loss due to PG&E’s cancellation of the Western contract. The two that are on the top of that are the Accelerated Energy Efficiency Program, which was approved and has UAC Minutes 8/1/01 28 of 43 been extremely successful. That is approximately $5 million. Then the top one for insurance help in prevention of rolling blackouts is the COBUG or the generators that are currently diesel and they are being replaced with natural gas out at the MSC. That’s for five megawatts. So you get the idea of what the total costs that we have and the liability that can be there and then the benefits that are listed on the left. Ferguson: John, can I interrupt here while you have that picture on the screen? It is an instructive graph and I’m glad you put it together. Are these, to the extent that each of these blocks represents a future stream, are they all converted to present value? Are we comparing apples to apples here? Or does each component of the block mean something different? Balachandran: It is not present value, but it is just three and one-half years of cost streams added together. Ferguson: Thanks. Beecham: Clarification. This then is the cost running through 2004? Ulrich: Yes. Beecham: And the benefits? Ulrich: Yes. Ferguson: And this the 100% expected value of the losses that we are looking at? This is the 100% potential value of PG&E’s cancellation of the Western contract, that’s not corrected for the probability that it would happen? Ulrich: There are some scenarios that are worse than this but the one you point out is the one that is used here. Rosenbaum: On the benefits side, the first four boxes, the market sales, NCPA pool, benefits from sale to the state and the other one, my impression from what you had said is that those have already been realized. Is that correct? Ulrich: That’s correct. Rosenbaum: So there is no future consideration involved in those. Balachandran: They are in a sense related to the fact that it was accrued during the high-price period. So for our purposes they are in our pockets right now but a potential liability is related to that. UAC Minutes 8/1/01 29 of 43 Rosenbaum: But if we look at the first four, the purple one on top is future, that’s $44 million. Balachandran: Yes, that is illustrated in the next chart too. That’s correct. So that’s more than what we had projected 12 or 18 months ago. Rosenbaum: My impression is that the only energy we have to sell is from Calaveras. Balachandran: We also have Transmission and also we had sales of surplus energy which we had a result of conservation. We had seen the past three months close to 13% conservation effort in the City. Rosenbaum: Nevertheless, we cannot sell Western. We can only sell Calaveras regardless of what our use is, is that not correct? Balachandran: Western is dispatched in the NCPA pool. So within the pool there is sharing. Within the NCPA pool there are transactions which take place. So it falls into the category of NCPA benefits, the pooling benefits. Rosenbaum: Well, that’s not clear to me. The Western energy cannot be sold except to other public entities. Balachandran: That’s correct. Rosenbaum: And you are saying there has been some money made in our dealing with our other NCPA members? Balachandran: That’s correct. The energy is scheduled to the NCPA pool in total and not to Palo Alto individually. So it is scheduled as a total to the pool and then the pool benefit sharing algorithm essentially allocates it to different members. Even if a load reduces we do capture some of the low cost benefits by transacting with other NCPA members. Rosenbaum: So you are saying we are free to sell Western energy at more than our cost to other preferential customers. Balachandran: NCPA pool members, yes. Rosenbaum: And they are happy to buy it from us at more than our cost? UAC Minutes 8/1/01 30 of 43 Balachandran: That’s correct. It is according to a preset algorithm of NCPA market clearing prices and NCPA/Western allocation methodology, which was approved back in 1996-1997. So that algorithm takes care of the allocation. That’s correct. Rosenbaum: Thank you. Carlson: I just want to be sure that everyone understands that we have accrued the money, but this one is subject to the treasury rate that the Governor and others have proposed to get the money back. Balachandran: But we think that whatever has been filed with the FERC and our understanding of transactions, not the $6 million sales to the state qualify for a refund. That is our impression at this point. Carlson: But the other market energy sales, which is a larger amount the $22 million, isn’t that part of the attack also? Balachandran: Yes, the refund issue is still not totally decided. The landscape keeps changing every two weeks or so. There is another chart, which will come up after this that shows the uncertainty band around these estimates. So what you are asking is, is this money definitely with Palo Alto right now? Yes it is with us right now but there is uncertainty in terms of refunds, there is uncertainty in terms of negotiations with the NCPA pool. We constantly negotiate with the pool where the billing algorithms get changed and settlements are done. So it is not over until it’s over. Dawes: I’d like to explore some of these relationships here. I understand on the left side, the first four items are “actuals” subject always to uncertainties, and we booked $22 million when we were selling excess power at very high rates. That’s basically in one year and now we expect over five years that we’ll get about half of that same amount of money presumably because the rates will be a lot lower in the next five years. I can understand that. What I’m having a little difficulty with is the large pink block under the PG&E cancellation. It implies to me that the assumption is, that obviously we lose on October 28th and, we lose, lose, lose right down the track. PG&E is able to bill to Western and hence back to us power at some assumed number. The first question is what is the assumption on that rate absolutely? Then I want to try to tie that back to the rates that you have used in the assumptions on the five years, $12 million savings because it seems like there is going to be a big disparity. You’ve assumed under the penalty side that PG&E may be charging and collecting $95 per kilowatt-hour and yet on our savings side when we resell our excess power we are only getting $35 for it. I’d like those absolute numbers, and then I’d like to explore the rationale and the likelihood that actually might happen. UAC Minutes 8/1/01 31 of 43 Balachandran: The $70 million estimate was based on if PG&E was going to charge us market rates, this number was calculated two weeks ago, if PG&E were to charge us market rates for contract 2948A for the next three and one-half years the increased costs we estimated to be over $45 to $50 million. Then there was another estimate if PG&E were to load all Governor’s contracts onto the charge, we estimated it to be about $100 million. So this was kind of the midway mark, a $70 million estimate, over three and one-half years. So that’s about $20 million on average per year. That’s about two pennies of rate increase. Dawes: What would be the average megawatt hour charge? You talked about $100 million on the high side, $45 on the low, we picked $70 million, how does that relate to megawatt hour pricing? Do you think in those terms or did you calculate in those terms? Balachandran: It was calculated on those terms. I can’t recall well but the $44 million number was calculated at like a $45.00 per megawatt hour rate which was about two weeks ago. So we now pay $22 and it goes up to $45, that’s doubling. The $100 million was some $60 or $70 I guess. Dawes: The $12 million in future five year savings were based on a market rate of $22? Balachandran: No, of $45. An average three and one-half year market rate of $45.00. Dawes: So basically we are saying under the cost side, this graph shows or projects, that there will be a gap there of $25 million that we will be billed and can’t recover because it is below market. I guess I’m just trying to think through in my own mind how likely is it that the system -- FERC, court, state, this whole ball of wax -- would end up with a result which has PG&E and the state hanging in there too, charging these large amounts to utilities and not permitting us as a muni to charge anything we want. We don’t have to charge market to our customers. We’ve shut off the access to the outside market, I could see a scenario where the $12 million savings over the next five years could grow to equal that same red number over here simply because that’s what we’d charge people. They may not like it, but I’m struggling with this large cost and very little benefit. Balachandran: It’s the blue value, the $12 million, is essentially the rate as it stands today. So the rate as it stands today versus the market. The difference between those two is essentially the value savings. So instead of selling it to the customer at two and one-half or three cents of commodity we sell it to the market and make the difference. Dawes: So this assumes that we would set our rates at PAU at the “market” and not recover the costs of our supply. Balachandran: No. We set the rate. The present rate for energy is about 2.7 to three cents. Anything we save, if Palo Alto residents save a penny we don’t charge them three UAC Minutes 8/1/01 32 of 43 cents but we sell it at the market at 4.5 cents. The 1.5 cents is extra dollars we make for the City and 1.5 pennies times the energy savings over that period is the $12 million. Dawes: In the past it worked in the way I would think it would work. I’m saying in the future it is going to work the same way. In other words the $12 million is either way too low versus the $70 million charge on the right hand side or vice-versa. The $70 million is way to low and will shrink down to something very close to the $12million. In other words this is a very scary chart. This shows us blowing our entire electric reserve. I don’t think that that’s where we are, at this moment. Ulrich: It is a little premature to say that. If we could go through the rest of what we are going to say. Dawes: That’s what the chart says. Ulrich: I see what you mean. A certain level of assumptions which I should explain what we used. Your point is that they could be different than that. It just shows a band of probability or possibilities that could occur. Dawes: As a UAC member I would recommend rates, if we got into this situation, I would say we have to raise our rates. We won’t be bleeding to the extent that this chart shows. Beecham: Could I jump in on this chart as well at this point? I also had a great problem with the pink section. My analogy is we are comparing apples and peaches. The timeline indicates this is a performance update. All these items except for the PG&E contract valuation result from actions we have taken and energy we will save because of action we have taken or energy we’ve bought and we know we need to sell. We have reasonable valuations, we know we have that energy one way or another, we saved it or we bought it. For the PG&E cancellation, that is not in the same ballpark. That is a risk that is out there but it is not something we’ve done, it’s not our performance. It is a risk we all acknowledge is there. As informative as this chart is, I would say it is quite misleading to use this chart to indicate our performance update. If you want to talk about risk, then certainly put the PG&E on there and show it as a risk. But if we are talking about this Utility’s and this City’s performance, we are working hard to avoid that risk. I would not have it on this chart. Balachandran: There is an uncertainty around the cost associated with the PG&E contract cancellation. If the contract goes away there are two different costs we talked about. It is either California DWR or the market, or the best case scenario is if it stays at 2.2 cents. So there is a range over there. This is somewhere in the middle. Even if we go to market we pay about $45 million -- it won’t be $70 million, it will be $45 million. UAC Minutes 8/1/01 33 of 43 So there is chance that we would have increased costs. Similarly the three and one-half year contract, the estimated loss on the Enron contract, that is an estimate at this point. Beecham: But that is not the point I am trying to make. I understand there is variation in valuations on all of these items. Some actually, the estimated value of the three and one- half year contract you’ve got at market numbers. So you used market for the valuation of that, that’s great. I’m not questioning what the value is of the PG&E loss. I’m questioning that it’s on here at all, because it is not the same kind of activity. This is not the activity of this chart otherwise purports to report on. Balachandran: In other words, Council Member Beecham, you are referring to the fact that that is not something which we could control. All other items on this bar was within the City’s control. Is that it? Beecham: That’s basically it. If you’ve talking about performance it is what we’ve done and what we are doing. Balachandran: We started off labeling this chart to be the performance due to energy crisis. So all the PG&E bankruptcy and all that was due to energy crisis. ut you are right. If this chart is performance, then we shouldn’t put that in. Beecham: I kind of worked out numbers here. If we talk about benefits we’ve gained and costs we are suffering because of what we’ve done then the benefits are roughly the $56 million and the costs are $54 million. It is a far different thing than including an unknown risk that we are not responsible for, but certainly we know is out there and we have to plan for it. Dawes: Bern, you have to take the $12 million out of the left side, too. So it is really $44 million versus $54 million. That $12 million is in the future, too. Beecham: It is not being in the future. The future is not the problem, it is performance. We have gained that value in the future because we have saved energy. We spend $5 million in AEEP and that $5 million is future benefit of what we’ve done, what we’ve performed. So that’s why I don’t mind that being in there. Carlson: Let me suggest something here, because Bern has identified a real problem, and that is just putting the whole PG&E issue as a third column as a future risk column; show the whole range. Show PG&E at market at $44 million and show PG&E at Governor’s cost at $100 million and just make it a third column of future risk. We’ve got reasonable estimate on the benefits of what we’ve done. We’ve got reasonable estimates on the costs of what we’ve done. And we’ve got this huge uncertain monster out there. Ulrich: You may have a different view as we finish going through this. UAC Minutes 8/1/01 34 of 43 Carlson: Let’s go through the rest. Ulrich: The point of putting this in here is to tell you what we believe is the full story. I understand Council Member Beecham’s point about what that $70 million represents and it is not the same as some of the other items. I do need to say that we probably would not have gone and bought this contract, the one that has the $44 million liability down there or what it is going to cost us as of today, without having that big potential up on the top. So I thought that was the point of having those two together because they are tied together. You wouldn’t have probably bought one without the other being a potential threat. Much of our decisions are based on that threat. Beecham: The apple and the orange are linked in that regard, but still they are apples and oranges. Ulrich: Yes, we agree with that. The next one is just a price trend chart as opposed to the snapshot that you saw on the first page. It is quite a graphic scene of what the market sees the future to be in prices right now. If there is no question on that we’ll go to the last page. You may get more out of this by asking questions. This is the first time you’ve seen it. In our test marketing of this it does not come across as a chart that looks rather friendly, however, our thought was that because of your nature of asking questions you’ll be able to get to whatever clarity you’d like to have on this chart. If you look at what the graphs are supposed to represent we are looking at our reserve balances. On the left side starting in July 2000 the reserve is slightly less than $30 million. First down at the lower real dark bar that is labeled, “Commodity Reserve Target Of The City,” where you see $20 million on the left side and then you see it spike up a little bit on July 1st and then being constant going to the right. The spike is where we went back and recommended and it was approved to increase our reserve target. So that is a good point to compare everything with. That is where we would be if we were at target, in a range on both sides of that being a minimum and a maximum. As you can see we are starting above the target at $30 million and because of the sales that we described earlier and the conservation results our reserves have gone up significantly. At the current moment it is around a little over $70 million. Now, where the interest is and you see these very sharp sinking graph points, the first one is April 1st projection of the Western contract if it was nullified in April 2001. As you all know that time has come and past and that resulted in a five-month delay and the decision in October. So that has come to pass but it was good to show that. If that was triggered at that point with the PG&E portion of the Western contract going to market that’s the forecast of what would happen to the reserve. UAC Minutes 8/1/01 35 of 43 Following it up further, when you get up to the top you’ll see that there are three different scenarios. Up at the very top going from left to right is labeled, “July 1 Projection Reserve – Preserve the Western Contract.” This is the most optimistic outcome. That is where we all define as life is good but there is no change in the Western contract and we continue to enjoy it to the end of 2004. Now all of these, this one has the rate increase that went into effect on July 1st and we now at that point would have very significant reserve balances but they would, as you go to the right, would continue to sink to the tune of the net of the Enron contract that we are continuing to pay for. It does include savings from the benefits that we described earlier, the $12 million. So the one that is also blue that drops very precipitously is labeled, “July 1 Projection – Western Contract Nullified in October 2001.” We decided that we would not have the rate increase. So if, for example, we decided now to remove the rate increase and the decision is to nullify the Western contract this is clearly a very pessimistic view. By about September 2002 the revenues would drop below the target reserve. The one that is red is basically a status quo in the sense that if nothing happens to the contract on October 28th the new rate would go into effect and it subsequently stays there. The reserve reaches target at about June of 2003. So you are getting an idea of what those scenarios outcomes would be projected to be and uncertainties around the reserve balances. If you go all the way to the right the difference between the top blue and the red is about $70 million. That’s the number that we talked about as the loss to us through the cancellation of the Western contract. If all of this happens we would of course at some point have to have an additional rate increase. If you saw that the contract was nullified and we were going to have to pay the additional costs, assuming it is the $70 million, to make sure we stay at the target reserve you would have to have a rate increase of about $45 million. In addition to the reduction of the reserve you’d have to have a rate increase to be able to get a $45 million return by the end of October 2004. So I have thrown out a few numbers and it’s probably not as many as you’d like to have but that gives you an idea of what we see in the future. Carlson: Any questions? Dexter. Dawes: The top blue line, Preserve Western Contract, where PG&E is selling at cost, presumably a cost that we project that would be in constant with what the formula is today and that rate is? Balachandran: $22.00 per megawatt hour. Dawes: And the next red line down you had given market at $45, state at $50 and we picked $70 million and corresponding megawatt hours were .22, .45 and .60 to .70. Which range was that that you picked for that next red line? UAC Minutes 8/1/01 36 of 43 Balachandran: $60 to $70.00 per megawatt hour. Dawes: So that’s the state level. Balachandran: Correct. Dawes: The state is recovering all its …. Balachandran: Part of the state. If the entire state contracts were passed on, it would be higher. This is midway between passing all the state costs versus market. Dawes: Thanks. Carlson: The state contracts are estimated to be around $85 or 90.00 a megawatt hour? Balachandran: In the short term yes, but the state contracts are over five, ten and twenty years. For this period, yes. Carlson: Okay. Beecham: I presume that if in fact we lost the Western contract or 2948A and we were no longer in a mode of trying to preserve a refund, as we talked about recently, it is presumed likely that we could structure it so we keep our rights to Western’s hydro but we do not have to take energy from PG&E. Ulrich: That scenario could work out to be to our best advantage if we were able to make that happen. When the price of electricity was much higher than it is today there as probably a point where the value of the hydro was pretty insignificant but that would clearly be our strategy to try to put into place. Carlson: As I understand it there is a risk that the Feds would sign some contract with PG&E that would result in a melded rate that is above market but that could be offered on a take it or leave it basis, all or nothing. Correct? Balachandran: It’s possible. Given the customers’ interest, I doubt they will do that. Beecham: One could assume that Western would have its customers’ interests at heart and not PG&E’s interests at heart. Balachandran: That’s right. All the large customers, SMUD, Palo Alto, Redding, we all will be working towards getting something like what Council Member Beecham was talking about. UAC Minutes 8/1/01 37 of 43 Ferguson: Am I correct that a conclusion that one might draw from this final chart is that there really is no reason for the UAC to address this until budget season 2002? We’ll look at the numbers again, because we are unlikely to crash through the reserve minimum until July 2002, even if the event is this fall. Ulrich: If you are asking are we asking that you make any decisions regarding rate changes or reserve policies the answer would be no, we think it would be premature to do that. One, this is a snapshot and we’ve sure seen some dramatic changes. Our attempt tonight was really to answer one specific question and that was the terms and conditions of the contract. But we felt that if we just stopped at that, that wouldn’t give you the benefit of this additional information, particularly in light of the reserves and the idea that there are sales taking place that are very high, and what are we doing with the money and what may happen. This is really an attempt and a very good one in my opinion to let everybody know where the money is, and what the risks are out there. They are different than they were when we bought the 25-megawatt contract. Ferguson: There was a lot of scurrying about earlier this year as we all kind of set the stage to weather whatever came our way. What this says is that except for the projection that everything got nullified in April 2001 (which is not quite true anymore), we have battened down the hatches and we can survive in terms of policymaking until budget season 2002. Ulrich: We would always want the ability to come back at any time as we did in the energy crisis and say we’ve got some information that requires some decisions to be made and we’d come forward and do that. Ferguson: The conclusion I am drawing is that we were successful in setting things up, so we don’t have to worry about this on a month to month or even a quarter to quarter basis, although data is always helpful. Rosenbaum: I do appreciate the information and indeed the presentation. It has all been very helpful. You’ll recall the final motivating factor in entering into this Enron contract was our concern about bankruptcy and here you talk about the October 28th date and concern about FERC. What is our current feeling about the contract being abrogated by decision of the bankruptcy judge? Ulrich: We have some more optimism than we did when we entered into this contract because bankruptcy was very much a big black hole out there. We know more about it and know more about how the process takes place and the decision points. Also having a member on the OC gives us another level of assurance that we would have information and be able to understand where things are going. Not that we are privy to the day to day discussions. So there is a higher level of optimism there. But if you are leading to the UAC Minutes 8/1/01 38 of 43 idea that once we get through 2948A that life is good forever, that just gets us through the Western contract. We would still have the outcome of the bankruptcy. It is possible that the decision process is that FERC’s decision will be made, and then PG&E and all of us will have the benefit of that decision, and they may and will use it in their bankruptcy. So it could be a new piece of information. They’ll use it however they can to get their view approved by the bankruptcy court. You are absolutely right, it is not out of the woods until the bankruptcy decision is complete. I need to say that it is to our best advantage to have the decision take longer, than it is to get something very quickly that is not in our best interest. Rosenbaum: Thank you. Carlson: I am a little more afraid about the other side. The problem is that we are going to be building up this huge reserve by the fall if the gas prices really hit and the electric prices hit for some customers. Our customers are going to be feeling a lot of pain and they are going to be looking at this huge reserve. We are going to have to tell them or try to get across to them that it could all evaporate if the courts and FERC go against us, and it will not be an easy position to be in at that time. Ulrich: Well, we couldn’t agree more. That’s why we laid out what could happen. This is not the time, today, to try to change those reserve levels because of the uncertainty. You may find that we’ll know a lot more in October, November, December. Then you may want to recommend changes in the reserve and be able to reduce the price of electricity. That’s an unknown that we don’t want to try to make a decision on now. Carlson: This is a very good presentation. Any more questions? Rick. Ferguson: Tomorrow at 4:00 p.m. are you going to flash this last curve up on the screen and give people an idea of when, under current projections, we start dipping into our surplus? Ulrich: We wanted to test it tonight to see how well it went. We have an hour tomorrow. The idea, of course, of having an energy forum is to communicate where we are at on all these areas plus a number of other ones including ones we talked about earlier this evening. Yes, we will use something very similar to this. You are all welcome and hope you can attend tomorrow and participate and maybe help answer some questions that the public might have. Dawes: An unsolicited thought. For a lay audience I would surely not show that curve and attempt to explain it. Ulrich: We thought of variations of it. I do understand that. That’s why we tested it here. We do want to convey and it is very important to me and the Staff that we continue UAC Minutes 8/1/01 39 of 43 to have credibility and clear understanding from consumers and public and the owners of this, this is a lot of money. We want to make sure that everybody understands that we’re managing it well, we know what we are doing and we’re trying to make sure the risks to this very important business doesn’t get lost. So I’d rather go to the side of trying to say more and be able to convey that kind of strength that we have. Beecham: We were talking about when to make a decision and what decisions are out there. I can see four major milestones coming up. One is September 17 when Judge McCartney at FERC makes a decision, her preliminary decision on PG&E’s filing, on whether or not they have a right to file their rate increases. So we should know that by about September 17. Certainly by October 28 we will either be faced with or not rate increases subject to refund. So that is another date to watch out for. At the FERC level presuming in the case where do have rate increases go into effect subject to refund, a track two that otherwise determines what the rate ought to be should be resolved by April 2002. So by that time we’ll know if we get a refund or if we keep on paying. So those are on the FERC side. The other milestone of interest perhaps on the bankruptcy side is as you probably know, PG&E has filed for an extension of the exclusivity period, they have I believe through December 2001 exclusive right to come in with a reorganization plan. I don’t quite know how that would relate to our contract but that’s a major milestone in the bankruptcy case. Ulrich: We think that as of today it is the first week we may have some preliminary knowledge around the first week of December. So you are right on, those are the four key times that we can see now. Beecham: If we are making comments on these charts for presentation tomorrow, I agree, the last chart is difficult to understand for a lay person and I’m expecting also for the media. I would strongly suggest on your chart with PG&E that you break it into two charts. You have one chart for the City’s performance and an additional chart that shows additional risk due to PG&E 2948A and that then would lead to your other discussions as you may have here. Balachandran: So you are saying three bars or three charts? Beecham: This would be one chart losing the pink. Then another page showing additional risk due to PG&E. Balachandran: That’s where we will have the band, the low to the high. Carlson: Sounds like a good idea. I actually like the last chart. The last chart reserve balance is a pretty specific number. It shows the incredible range of outcomes. The range is actually larger than what you are showing here. UAC Minutes 8/1/01 40 of 43 Ulrich: Having been to the energy forums, we get some very sophisticated questions and I’d like to be prepared for some of those. That doesn’t mean we have to throw this up and expect everybody to understand it. Ferguson: I also like the chart. Certainly it can be simplified and you can simply state it as a conclusion rather than ask for questions on it. It gives a timeframe of when a rational person could make decisions on a rate decrease or rate increase. And point out the fact that the surplus, or the large reserve, today is earmarked for a parade of horribles that may still be before us. Carlson: And it is justified, too. There will be some eyebrows raised as to why we are sitting on top of this money, and the reason is that it is very justified. Ulrich: This emphasis is that at the last meeting one of you said to me, you shouldn’t be defensive about the subject. To the contrary, now when you can see this, that the reserves and the sales that we’ve made, and this insurance contract in a sense are falling into place. They are pleased that we have it. I’m not pleased with some of the cost side of it but it clearly shows that this is the right strategy to be following. That’s what I want to get across, that this is the appropriate way to go. And, you’ve got the ability to make some decisions, as you point out. We don’t have to do them today but we have the time to do it bringing in the new information that we will have around bankruptcy or around 2948A or the changes in the market. So I appreciate your support on seeing this as the kind of tool that it is meant to be, a way to communicate. Beecham: Thinking of the forum for tomorrow that is primarily a forum to discuss the 25 megawatt contract, I believe. Is that right or not correct? Ulrich: It was intended to be a comprehensive discussion about the energy situation. Beecham: That makes some difference. I guess I had in my mind the 25 megawatt contract. The final chart here does not relate to that contract. So if the intent were to explain that contract to put it in context the final chart detracts from that discussion and leads to a whole different discussion on rates, on reserves, and as we talked about also decision points in the future. So if it is your interest to ensure that the public and the media understand the discussion and the benefits and costs of the 25 megawatt contract including this chart detracts from that objective. Carlson: As I understand it, this chart is the grand total result of everything including that 25 megawatt contract. Ulrich: That’s correct. UAC Minutes 8/1/01 41 of 43 Carlson: So in terms of the summary of everything that is happening including the effect of the 25 megawatt contract, I think this is the bottom line. Ulrich: The objective tonight was to, because it was requested to go through the contract, but also wanted to put it into context of where it fits in the financial projections and reserves. So this is an attempt to do that. Tomorrow I want to be sure that we are responsive to what the community wants to know about so the first part of the meeting is to solicit questions to make sure we cover the kinds of topics that the public that comes wants to hear about. So we want to be responsive to that. I don’t want to have a one- topic discussion unless the public comes and talks about it. Beecham: I can guarantee that if you have this chart it will not be a one-topic discussion. Carlson: Any other questions on this? We have a couple more items that I sure would like to finish off tonight. Reports on Agencies and Commissions NCPA Report Let’s go ahead, NCPA – anything happening of significance there beside all these contract uncertainties? Ulrich: Bern and I had a travel adventure last week. A number of things have happened. Beecham: I’m not sure how detailed to go. We did meet with Western ___________ with Western, SMUD and a number of other Western customers. We were discussing some fairly broad aspects of how to prepare for what happens should in fact we have higher rates from PG&E’s 2948A on October 28th. To some degree they were focused on whether or not we need additional authorizations from Congress and the quantity of roughly a half billion dollars, worst case, and having that authorization in hand by October 28 or thereabout. There were a lot of discussions on different scenarios. None of them for sure, none of them accepted as how we want to go. One of the main purposes of the meeting of these people was to try to get all of us going in the same direction. We don’t all necessarily have the same specific objectives but coming out of the meeting we all saw that we were indeed in the same boat and I hope we work together. One organizational item to mention and that is at the last meeting we elected new officers at NCPA. Palo Alto now has its Commissioner as Vice-Chair of NCPA. Ulrich: That’s the important announcement that I wanted to make sure came out. Bern, as Dick Rosenbaum knows, this will be a time and resource-intensive honor. Beecham: I trust there are appropriate funds to do that. UAC Minutes 8/1/01 42 of 43 TANC Report Carlson: Anything else on that? The next item is TANC. I understand we are getting very close after I don’t know how many years to a Path 15 contract. Balachandran: You put it pretty well, maybe, close, something like that. Western had put out a notice in the Federal Register asking for interest. We responded, several other folks including private entities responded including I believe PG&E. It was one of their affiliated companies and a consortium of other utilities. We haven’t heard anything back from Western as to the results of that process. They have actually asked us for additional information which is being answered through TANC. We were very broad in our response, we basically said that we were interested but there is no commitment at this point. So we are moving it forward but we don’t have a firm answer. Another item that is coming up where TANC is assisting us, is the transmission access charge settlement. The next settlement meeting is going to be the end of August in San Diego. This is something that has been going on for the last two and one-half years. The basic point is what transmission charge would we pay to us the ISO grid. AB1819 basic said do a certain thing and we are negotiating what the actual rate is going to be. So the settlement talks are going forward. The same judge who was dealing with the refund issue is the judge who is involved in this. He was kind of busy the last two months so he hasn’t been dealing with this. Carlson: Any questions on that? Otherwise we will move onto BAWUA. BAWUA Report Ulrich: Just a couple of brief things. The focus right now in Palo Alto is to help move the San Francisco Public Utilities Commission to make a recommendation to approve the capital improvement project, which would include the Hetch Hetchy infrastructure. It is about $4.4 billion. In order to try to help that decision get made and move along so the Board of Supervisors in San Francisco can get a hold of it and approve it and also the Mayor, there are a number of fronts that are being made by BAWUA. Primarily to let the San Francisco Public Utilities Commission know that we are in full support of getting this moving along and that we as members of BAWUA expect to pay probably two-thirds through our rates for a long period of time for this water and that we are fully committed to doing it. So in an effort to move that along our Mayor, Sandy Eakins with six other city mayors traveled to San Francisco for the last Public Utilities Commission meeting hearing, and got up and stated those positive commitments to the Commission. They were very pleased to see that support. We are going to continue to do those kinds of UAC Minutes 8/1/01 43 of 43 activities to move this along. The next step is a letter that is being prepared for a meeting with the Mayor of San Francisco. I would expect that we would attempt to do those same things with Board of Supervisor members. Our Mayor spent time down in Monterey talking to other mayors that are part of the cities that are BAWUA members, to increase awareness and support for what we are trying to do. We are also looking at discussions with doing more outreach to other areas to get more support. So a lot is happening in that area. Carlson: I’ve got one question on that. There are a couple of ballot proposals kicking around in this area. The major one I’m thinking of is the one to form an independent elected utility commission for the City of San Francisco. Is that really going to be on the ballot and wouldn’t that have the potential for delaying this whole thing? Ulrich: Just before the last, so I guess it is two weeks ago, the Board of Supervisors approved for putting on the ballot a somewhat modified commission and the commission would be, I’m not sure if it is elected or appointed, but this initiative would have to be voted on. What it has though, is a limited authority on the part of this Board to make decisions on capital expenditures. So they would not be able to approve any expenditure greater than $100 million without going to the Board of Supervisors. So the Board of Supervisors would then have obviously a whole new level of authority on public improvements related to Hetch Hetchy. That would essentially eliminate or remove the San Francisco Public Utilities Commission. There is also another one that I don’t have a lot of knowledge on that has some similarities; that would form a Public Utility District. So you can see some levels of uncertainty and concern on the part of the Public Utilities Commission on what their future is. Carlson: Any more questions on this item? Beecham: I have a comment. I want to reemphasize John’s point of the value of the Mayor going up to the San Francisco PUC recently. It does have a strong impact. I want to also emphasize our Mayor’s efforts as the focal point of causing that to happen. It was she who went out and called all the other mayors and got them to join in that effort. Her efforts have made a difference in how this is going to work out. Next Meeting; Adjournment. Carlson: Any more questions? In that case is there any problem with September 5? I’ll move around my schedule to make sure I can make it. So we will see everybody on September 5, and this meeting is adjourned.