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HomeMy WebLinkAbout2001-11-07 Utilities Advisory Commission Summary MinutesUAC Minutes 110701 1 UAC MINUTES NOVEMBER 7, 2001 ROLL CALL................................................................................................................................................. 2 ORAL COMMUNICATIONS..................................................................................................................... 2 APPROVAL OF MINUTES ........................................................................................................................ 2 AGENDA REVIEW AND REVISIONS ..................................................................................................... 3 REPORTS FROM COMMISSIONER MEETINGS/TRIPS ................................................................... 3 DIRECTOR OF UTILITIES REPORT ..................................................................................................... 3 UNFINISHED BUSINESS ........................................................................................................................... 6 NEW BUSINESS .......................................................................................................................................... 6 STRATEGIC PLAN MEASURES REPORT ............................................................................................. 6 UTILITIES FIRST QUARTERLY REPORT ............................................................................................12 PERFORMANCE REPORT ON CUSTOMER SALES CONTRACTS ...................................................26 ADJOURNMENT........................................................................................................................................29 UAC Minutes 110701 2 ROLL CALL The meeting was called to order at 7pm by Vice Chairman Richard Carlson. Also present were Commissioners Dick Rosenbaum and Rick Ferguson. George Bechtel and Dexter Dawes were absent. ORAL COMMUNICATIONS Carlson: Since there is no member of the public here to comment, I want to comment on some of the things people said about the utility in the papers and campaign mailings over the past few weeks. Some vocal members of the public claimed that the City and the utility made bad and irresponsible decisions on energy purchases this spring and summer, as if there were facts or formulas that these public “experts” had, and that the rest of us had somehow missed. I just want to urge the public, and these especially gifted and foresighted critics, that they come to these meetings and provide that knowledge. And it would be particularly useful if they would provide that knowledge and their solutions in advance of the decisions that are being made. Some of us went through great effort to provide opportunity for public comment during the time period when we were making some extremely difficult decisions. I do want to note for the record that no one, including the people that have criticized those decisions, made any public comment at all at the time when their data would have been useful. So I hope that pattern changes. APPROVAL OF MINUTES Carlson: And I guess we go ahead to the minutes. I just got off an airplane so I haven’t even seen them. So, my colleagues? Ferguson: I move approval. Carlson: Motion been made. And I second it. All in favor say “Aye”. Rosenbaum and Ferguson: Aye. UAC Minutes 110701 3 AGENDA REVIEW AND REVISIONS Carlson: Agenda review. Any additional items that need to be on the agenda? We’ll just go ahead. REPORTS FROM COMMISSIONER MEETINGS/TRIPS Carlson: There’s an item here on reports from meetings and I don’t even know if there were any. Ulrich: We had the NCPA Commission meeting, which I could report for Mr. Beecham later on if you’d like or now. Carlson: Why don’t you just launch into your Utilities Director report and you can cover that to the degree you think is important. DIRECTOR OF UTILITIES REPORT Ulrich: Sure. I hope we have enough time tonight to cover all the things I have on my list. Thank you for the time. Just a number of items I’ll cover. Additional ones -- we can discuss when we get to the subjects. First off, the FERC 205 case. You’ve all seen the success that we’ve enjoyed from that. As you can imagine, a tremendous amount of work and effort went in by a lot of people, and our attorneys. But the result is very favorable. In fact, the amount of money we had allocated for legal expenses is less, and the same on the bankruptcy. So we’re under budget in those areas with favorable results. On the bankruptcy case, on Wednesday, a group of counties including San Francisco filed a motion to ask the judge presiding over the PG&E Chapter 11-bankruptcy case to appoint a separate creditors committee comprised of local governments. According to reports, they wish to propose an alternative plan of reorganization and do not believe that the existing creditors committee adequately represents all the communities that PG&E serves. We don’t know how the outcome of that will play in the judge’s mind, but earlier in the case, a Judge rejected a request to form a ratepayer’s committee because among other things, none of the parties were actually creditors of PG&E. That may be a similar decision that he’ll make in this particular instance. PG&E as the debtor and its corporate parent PG&E have filed a proposed plan of reorganization and disclosure statement, and the bankruptcy court has set the following schedule for the disclosure statement hearing process. November 6 our adversary objections were due and such objections must be filed by any creditor who contends that specific relief sought in the plan can only be obtained through an adversary proceeding, in other words, a specific lawsuit and bankruptcy court as opposed to the plan confirmation process. I’m bringing this up because Palo Alto filed a UAC Minutes 110701 4 brief to assert our claims and concerns and we did it yesterday. We did it on the 6th. Discussion between our attorneys and PG&E, the high level attorneys are going well. There’s agreement that our rights are not to be sacrificed in the bankruptcy proceedings. But we will watch carefully to see that mid-level PG&E staff and others conform to the assurances that we’ve been provided by higher levels at PG&E. November 27th will be the date where objections to the disclosure statement are due. These objections include any challenges to the sufficiency of the disclosure statements in providing adequate information for a hypothetical reasonable creditor to vote on the plan and any challenge that the plan is incapable of being confirmed on its face. Palo Alto is preparing its objections to the disclosure statement. The next key date is December 4th at 1 o’clock and that’ll be a status conference, which must be attended by any party filing adversary objections to the disclosure statement. Then on December 19th at 9:30 AM, a hearing will be to consider approval of the disclosure statement. When the disclosure statement is approved, the debtor and its parent will be authorized to send out the plan and disclosure statements to creditors for voting. The court will then set a schedule for the plan approval process, and the debtor plans to file its transfer request with the relevant federal agencies, namely FERC, SEC and NRC, by the end of November. The debtor has said that it expects the process to be complete in the 2nd quarter of 2002. I read you a lot of that, because it’s got some specific dates and actions, and to show you that there’s still a lot to be done and that the filing that we made, our brief yesterday, is very comprehensive and raises a number of concerns that we have with the disclosure statement and its process. So we have our oar in the water and we’ll keep our focus even though we see significant, a lot of positive signs, the way the bankruptcy is going -- particularly at a high level in PG&E. A couple of other items... Carlson: John, let me just ask about that one, because it’s so important, because there are so many items you’re going to be covering. There are two issues that affect us: the contract that PG&E has with WAPA and the debts owed by PG&E to NCPA, Northern California Power Agency, that we’re a major member of. Ulrich: Correct. Carlson: Is their plan, in general, agreeable to us on those, on both those issues? Ulrich: I would say, yes, with the proviso that we have our concerns with this disclosure statement. The amount of money that is owed to us going through NCPA is about $2.5 million directly to Palo Alto. The reorganization plan talks about 60 cents on the dollar being paid and the other 40 cents is in the form of high grade or at least a commercial grade paper. So the intent is to have all of the money available to us, but it won’t be available for some time. We’d then have the option of being able to sell that paper within a 10-day period and getting whatever the proceeds are. So it looks rather favorable. On the other part, of course, is our contract and that I mentioned in a little more detail -- about the assurances we’ve been getting through the bankruptcy negotiations that our UAC Minutes 110701 5 contract will be looked after. Mr. Kabat may have some other comments he’d like to add. He is staff support to our member on the OC. Carlson: Please go ahead. Kabat: Yes, as John reported earlier, there are discussions going on between our attorneys and the high levels of PG&E staff and there are assurances being made that our rights will honored and that they won’t be trampled in the bankruptcy process. But there needs to be continued monitoring of that situation, just to see that that flows through to the level of staff who actually implement contract administration at the PG&E company. So it’s something we have to watch. But the part of the debt that’s over at the NCPA, just a regular straight cash debt, that looks fairly secure in the plan, as John mentioned. 60 cents on the dollar in cash, 40 cents in investment-grade notes. Carlson: Okay, but the contract issues are obviously the larger issue. I know there are at least tens of millions of dollars at stake in that issue. Any more questions on this before John finishes? Go ahead, Commissioner Rosenbaum. Rosenbaum: In the summer of 1999, NCPA and raft of other organizations including environmental organizations fought tooth and nail against PG&E’s proposal to divest its hydro facilities to an unregulated subsidiary. As I read the bankruptcy settlement, that’s exactly what they’re proposing to do under bankruptcy. Are we or other organizations objecting as strenuously now as we were at that time? Ulrich: There’s a different level of strenuous objection. Some are much more muted than they were before. There appears not as strong an interest in the divestiture of the hydro facilities as there was a couple of years ago, but there are parties looking at it. Because we’re on the OC, it does not make a difference whether we as Palo Alto or as NCPA or CMUA or any other entity protest or file an objection to any of these points. So we have some points that are in this disclosure statement brief that was filed and we are looking at additional areas to protest. We had a meeting today with CMUA Energy Committee where we discussed that and we’re putting together at that level and we’re also looking at it from the NCPA level on what specific points to make. But you’ve got to point out, there are the issues we just talked about on the financial benefit and assurance of getting our debt paid and our 2948A and our contract with Western. Those are our real key areas, but we still have time to look at the other areas too. But you’re absolutely right. If you’re looking at what they’re doing now versus what they tried to do 2 years ago, many parties have seen right through it. You can lay one on top of the other and see it’s almost a mirror or a match. Carlson: Commissioner Ferguson? Ferguson: Thank you. Assuming that the San Francisco Water and Power Agency Measure stays a winner by a hair over the next couple of days, is there any speculation on how that might affect the timeline on the bankruptcy resolution, or does it operate on a parallel track? UAC Minutes 110701 6 Ulrich: I was thinking of other things that, particularly in the water area, that we need to be diligent on. I don’t know the answer on what impact that would have on a bankruptcy. San Francisco is part of the group of counties that filed for separate creditor’s committee and so there may be some area that they could work on there. But the area that we have the most interest in at this point is the relationship with the vote and what it may do in slowing down or changing the direction of San Francisco’s initiative to improve the Hetch Hetchy infrastructure. That’s an area we have significant concern and we’ll watch it. Do you have anything more on that? Kabat: I would think that PG&E is likely to continue to proceed full speed ahead through the Chapter 11 restructuring, and I wouldn’t be surprised if they tried to slow down San Francisco and their efforts. So I see that bankruptcy schedule not being affected, that’s my guess. Ulrich: You’d have to recognize that, one, there’re very few times that this kind of vote has taken place with this result. Some people say it has to do with similarity with the way the City of Los Angeles Department of Water and Power was formed as a department of the city. It has an elected Board to it, but it has override and veto powers by the Board of Supervisors. So, how that all comes out -- I’m reminded by old-timers that once the vote took place in Sacramento to form their municipal utility district, it still took 20 years before the transition took place from PG&E, which was there before, to SMUD. So it’s not over, but we have to be really concerned about the delay at some of these very important things that we have in relationship with PG&E and City and County of San Francisco. A couple of other areas. I’m told that we are just about complete with the construction of our COBUG, the natural gas-burning, permanent 5-megawatt generation out at the MSC and I should be able to report at the next meeting that it’s up and running. We’re doing parallel testing starting tomorrow and we still have 2 of the diesel generators on site and those will be removed as soon as we get the gas generators running. So that’s a piece of information. Those are the things I want to cover at this point. UNFINISHED BUSINESS (Nothing to report) NEW BUSINESS STRATEGIC PLAN MEASURES REPORT UAC Minutes 110701 7 Carlson: Thank you. I guess we’ll just go along the items, which are primarily information items today. First of all, the strategic plan report that we started on last time and apparently there’s some updating of that. Ulrich: You have in front of you our latest iteration. It reflects the kind of measures that will give you a good indication of movement and change and improvements that take place as we implement the utilities strategic plan. There may be opportunities to improve on the performance measures, but we focused on trying to set these up so that they gave good indicators of change, and measurement of how well we’re doing in the financial reliability, customer satisfaction and the one called advantages of municipal ownership. So given your comments on the report (we gave you kind of a preview of it earlier) we made some refinements and there are some improvements, of course, that could still be made. But I wanted to give this to you, give you a chance to ask us questions, look it over and then we can finalize it, if you like, at the next meeting. That would give us the opportunity to do as we said we would -- and the UAC has this obligation too -- to report back to the City Council twice a year on how well we’re doing and give them a state of the utilities. Then we’d be able to make refinements from that. So I’d be glad to answer questions or go into more detail if you’d like. Carlson: Commissioner Ferguson. Ferguson: Thanks again for the improvements. Do we have any idea on when this might be agendized for Council? Ulrich: We’re talking about it for late December or early January. As you know the schedules will be getting tight around this time. Did you have a perspective on when you would like to come with your report? Ferguson: It’s Council’s call. We just guestimated that it would be November/December and we’ll do as they wish. But that gives us a little more wiggle room on the schedule. A couple of questions and comments on the second version are warranted, since some of these lines were printed in color, but they’re still invisible on our printout. Ulrich: You have the color version? Ferguson: No, see, maybe page 4 of the report, exhibit 4. Carlson: We don’t get the color version. At least I got the black and white version … Ulrich: To show that there’s no difference between us -- I don’t have the color version either. Carlson: Okay, as long as it’s not discriminatory. Ulrich: I have the same monochrome printer as you have. Excellent point. We will fix those charts. Mine look like they’re shades of gray and we don’t want that. UAC Minutes 110701 8 Ferguson: It’d be nice to make a good first impression when we roll this out for the public and the full Council. You eliminated the comments on equity transfers in this version. I know there’s a wonderful discussion of the status of the reserves in the quarterly report, which we’re also going to do tonight. Is there a reason for pulling the equity transfers out of this one? Ulrich: We’ve had a significant amount of discussion. One theory is that the way the equity transfer’s currently calculated, there is not much way of using that as a performance measure on the part of the utility. We’ve established the transfer point. What we should be measuring actually is the amount of earnings that we have, not the amount that’s being transferred. So we need to look at that a little bit more. If we gave you the report on the equity transfer, I don’t think there would be a cause and effect relationship, the way it’s done right now. Ferguson: Okay. On the advantages of municipal ownership, I’d made a couple of comments at one of the last meetings -- in the minutes -- about reporting on the advances (however incremental) toward goals under the heading of “regional cooperation.” Part of our extra leverage is that we are part of other multi-government associations. I’d offer as an example, elsewhere in the quarterly report -- I guess, where we talk about how we expect to see some overload on Path 15. The unimproved present version of Path 15 is going to creep up on us, but that’s a problem where we have significantly advanced, in part because we worked with TANC and NCPA. So I’d include it in the report to the Council; put that in “Advantages of Municipal Ownership” under that “regional joint action” heading. On the Leg-Reg front, again, we’ve had a couple of status report comments from the NCPA meeting in late September. It might be worth rolling those in as well. We’ve talked about them here multiple times, together in UAC and on the side, but only Bern has participated in that among the Council members. So it would be worth combining those bullet points in that section, and driving home the progress on those fronts. That’s it on that topic, Mr. Chairman. Carlson: Any others? Go ahead. Rosenbaum: I know my colleagues were very complimentary when they reviewed this last month. I guess my reaction is I have a little trouble trying to figure out what to make of it. If we look at price stability, the first item, there are 2 plots there. There’s no text that goes with it. I mean what is the City Council and the residents of Palo Alto supposed to make of this information with regards to the goal of maintaining price stability? Ulrich: The attempt here is to look at the variation in this average rate for each utility, and that’s what the graph is supposed to depict. Rosenbaum: It certainly does that. Ulrich: Now, I don’t think that price stability can be measured entirely by the graph. The graph shows what has actually happened. Part of the key to it is customer UAC Minutes 110701 9 satisfaction. You have to measure that at the same time, to get an idea on how important that is to each resident, at least on a macro basis in measuring it. Many of these have to be factored together the same way as reliability -- how frequently does the power go out. And we don’t have a whole lot of tools in our tool chest to be able to measure maybe the kind of feeling, perception, the value that the customer perceives in this price stability. So this is our attempt to show that in a graphical form. You have to look at all of the measures, probably, to get a comprehensive view of what the public, our customers, think of us. Rosenbaum: Perhaps you’re constrained by the necessity to come up with these 6-month reports on how we’re doing against our strategic plan and perhaps that’s the problem. In terms of public reaction or what’s really happened, I mean this has been a very exceptional year, and you’ve got this huge increase in gas prices and in electricity, we have the contract with Enron. None of that is reflected in these performance measures. One has to wonder as to the utility of these particular performance measures, but I understand that there’s a feeling that this is something that ought to be done, so you’re doing it and I’m perhaps questioning the value of the whole exercise. Ulrich: You raise some good points. We do have an exceptional period and hopefully this isn’t the way it’s going to be forever. But in a community the size of Palo Alto, the advantage we have is that not only do you make these measurements, but part of our report to the City Council would be the anecdotal and subjective type of review. You raise an excellent point that you don’t just walk in with “here’s the numbers” and either pat us on the back or tell us that we need to improve. This is a tool that probably more importantly would be able to show trends that are taking place over time. Since we don’t have anything to kind of look back on, it’s hard to just glance at these charts and say, well this tells you something significant. We are trying to make a very significant change in the way we work with the City Council and the community. Having a very clear strategic plan on why we’re here and where we’re going. It gives the community a considerable opportunity to say, “you ought to tweak this, you ought to change this, you ought to do something else.” And it gives us some clarity about our goals, where we’re going and what we’re doing. You raise an excellent point as I don’t think we can just mail this to the Council and say “well, here it is.” Adding those other points are going to be very important. As you can see lately, in particular, we read, listen to, talk to customers and try to understand what their concerns are. And frankly, we’re getting significant amount of kudos about things that happen. If you read the paper and look at each article, there’s as many really good ones and there are ones that I’m very pleased to read. You’ve seen the same ones. Rosenbaum: I’m in no way criticizing staff. Things happen and these are things that we have no control over. Ulrich: I know. I’m pointing out that you made some very important points and it’s good to clear up that we’re not expecting to live just by these, but they’re good tools and worth the time putting in to. UAC Minutes 110701 10 Rosenbaum: On the next page, under value to the residents, do we really want to claim that our customers saved $149 million because of our public system? I’m sure the arithmetic is right but I guess I question the comparison there. Ulrich: Well again, it’s a way of measuring it. It’s also a way to show some value of municipal ownership and another benchmark on how well we’re doing. Some people do measures in that particular way. Rosenbaum: What I’m saying is the most traditional way and the one we’ve always used is to compare our rates with PG&E’s. Why would you go and say, “our commodity costs us 3 cents and market price for the year average was 18 cents.” No retail customer buys the market price directly. Why would we claim that we’re saving essentially 14 cents per kilowatt hour -- rather than just compare to PG&E rates which certainly would show considerable value, but it would a more realistic and tradition comparison. Further in that paragraph, it says, “customers saved an estimated $149 million on their electric bills; reserves increased $44 million during the same period” and (I guess we’ll get to it in the next item in the quarterly report) it does not reflect an increase of $44 million in reserves. The balance as of June 30, 2001 does not show that $44 million, so I don’t know whether we want to discuss. Either I’m misinterpreting or there’s some discrepancy between what’s here and what’s in the quarterly report. Ulrich: Is your question about the fact that it’s an increase or the fact that it’s the $44 million? Rosenbaum: Well I assume the $44 million has something to do with our power sales. I’m just saying that when we get to the quarterly report, that $44 million does not appear on the tables. That’s my issue. Those were my main thoughts on the subject. Ulrich: Okay. Carlson: John, I have some follow up questions. I assume the savings is the difference between the rates we charge and the rates PG&E would have charged for the same customer classes. Am I not reading the fine print? Tell me what it means if it doesn’t mean that. Ulrich: Randy, do you have a thought on that? I believe that’s the way you would look at it. I don’t have the math in front of me. Carlson: Dick Rosenbaum implied that’s not the calculation and I’m just wondering, what is the comparison? Because assuming you have the data by customer class, you ought to be able to figure out how much people would have paid on PG&E’s rate structure, compared to how much they pay on our rate structure. And it’s a very useful number if you can compare that way. UAC Minutes 110701 11 Ulrich: We do know those numbers. I was trying to answer the question -- is it these numbers that are here in front of you? Baldschun: The foot note I see on the $149 million is at the bottom of the page saying it was a market price, which I assume means a wholesale market price, and so it would match Dick’s point that no retail customers were paying wholesale prices in California, not PG&E’s customers. Carlson: Well we should be comparing retail rates to retail rates and if we’re not, let’s get that number because we all have some combination of spot purchases and long term contracts et cetera. Customers just care what ends up in the grand total. Ulrich: Well that’s true. Sometimes it’s not important to a customer what somebody else is paying. It’s what you’re paying, what am I having to pay? You’re trying to find a benchmark here. Is that PG&E or is it the wholesale rate that you want to compare? Carlson: That’s certainly what Dick is saying, and I sure agree with him that the benchmark is the PG&E rate, because those wholesale spot market rates -- very few people pay those directly. Baldschun: Yes, that’s an absolutely relevant measure, the comparison between retail rates between Palo Alto and PG&E. So that’s something we’ll need to include. Carlson: Commissioner Ferguson? Ferguson: Let me close the comments on this with two observations to follow up. First, this is not the report against the strategic plan, this is just a report on the measurements that we’ve drafted up here to illustrate performance. So I’m assuming all along that there will be plain-English comments about the implications of these charts and arrows. One thing that will be useful is, wherever there is a trend line, at the end of the measurement year, it would be good to make a projection and use that projection as a point of departure for your discussion: What did that last quarter tell us and how are we changing our behavior? But I’m not sure that I would change the measures here a whole lot. Let’s get these in place and look for feedback from the Council on whether it communicates to them. In that regard, I sure assume we will continue to have a chart showing our comparative rates to PG&E. That is a beautiful “gee whiz” chart and I hope we’ll do it. We always do it. But in the recent political campaign, much was made of the $44 million loss, which of course is a phony number. But it reflects the reality that there are two levels of understanding about the performance of the utility. One level which is perfectly satisfactory is the one that Commissioner Rosenbaum was just talking about: the retail price in Palo Alto compared to the retail price in the PG&E jurisdiction. But another perfectly valid financial measure is the one that Commissioner Dawes has lobbied for, and that is the value of the business entity as a whole. That’s where these multi-million dollar figures crop up. Rather than let somebody else create false or misleading figures UAC Minutes 110701 12 there, let’s pick a measure or two on our own that reflect the general value of the business as a whole, and communicate that. That’s where you were headed here with this savings number. So it’s not that one is right and the other is wrong. We need both. I’m assuming we’ll continue with both. Carlson: I just want to mention that I love that grand total saving number’s value. But I want to see the grand total versus PG&E, not compared to these wholesale rates if that’s what this is. Any more questions on this issue? Any more comments? Let’s go ahead with our quarterly reports. UTILITIES FIRST QUARTERLY REPORT Ulrich: Thank you. As you can see, it’s broken down in sections as in the past, and you may wish to go through these by commodity if you’d like. We have all the staff support here to answer the questions that you may have. Carlson: Let’s just go ahead and do that. There’s so many things happening here, with water probably being one of the more important with things, wild things, happening in San Francisco that we’ve already had a few comments on. So let’s just start with water. Ulrich: Sure. For the voice record, I want to point out that Karla Dailey is here with us. Her voice may not be familiar on the tape so for help with that, welcome Karla. And Jane Ratchye is here also. Carlson: Jane, do you want to edify us on the wonderful world of water, post yesterday? Ratchye: Well, we don’t really know the impact of what’s going to happen with the Water and Power Authority vote. It’s clear that the focus is on power, as we knew when they drew up that ballot measure. It looks like an additional cause for delay. We don’t know much more than that at this point. BAWUA is having its symposium tomorrow and I know Commissioner Ferguson is attending that, and I believe he’s the only commissioner attending. We may get an update there about that, but I don’t really have much to say about it now. The other thing going on right now is probably the main one I want to point out tonight. We did have a town hall meeting here and Assemblyman Lou Papan organized it. It’s very clear that he will be pursuing some legislative action this coming session in January. We don’t know what form that’s going to take. We don’t know if it’s going to be proposing a special district or whether it’s going to be proposing some legislation that has somebody somehow compelling San Francisco to implement and construct the projects in their CIP. But we will be closely involved in that. It’s being driven by Assemblyman Papan, but it will require a lot of coordination. He can’t do it alone in the Assembly. We will be working on that from now through January and needing a lot of help from elected officials to help us shape that. At that symposium tomorrow for elected officials UAC Minutes 110701 13 that will be a main focus. We hope to get feedback. There is a strategy committee or a steering committee that has been formed by certain key elected officials at BAWUA including the Redwood City Mayor Ira Ruskin. He’ll be talking about that tomorrow at the symposium. That will probably be the group that will be the contact for that or somehow through BAWUA. We don’t know how that’s going to shape up but we are closely involved with Papan’s office in helping to shape that. And we’re trying to lay out now what sort of resources we need at BAWUA to help us in this whole process. More than anything, it’s going to require a lot of assistance in terms of time and effort by all of the elected officials in the BAWUA service area. So we’ll be watching that closely. It’ll be very interesting. Next month, there on your future meeting schedule, we’re calling it “water strategies” or “legislative initiatives” or something like that. At that next meeting hopefully we’ll have a better or at least more clearer statement of the direction. And we may need to communicate in between that time, because this is going to move very quickly, and there are, as you know, a lot of holidays in the next 2 months in preparation for the session. That’s about all I had to say unless you have comments on the water portion. Carlson: Any questions? Ferguson: Jane, thank you for the good progress on this. The pieces are really coming together. This is the required legislative component. We’re moving forward very well. At the town meeting sponsored by Assemblyman Papan, I was impressed by his level of open-mindedness and evenhandedness on the issues. He’ll be a good leader on it. Ulrich: I wanted to thank you for your time to attend and also Mr. Beecham. So I appreciate you going out to the meeting tomorrow. Carlson: I have a follow up question on this. I don’t know the numbers, but my impression is that legislatively, if San Francisco doesn’t like this, is there really anything very realistic here in terms of who’s got the legislative votes? It sounds like something the rest of the state wouldn’t really care about. Ratchye: San Francisco will have to be involved in this, and you can think about a lot of different potential structures. But to me, in order for something to happen, you have to get [Sen. John] Burton with you and you have to acknowledge San Francisco’s ownership of the assets, at a minimum, to get that. You can take either the collaborative or the coercive approach; one of them might be quicker. So we just don’t know where it’s going, but we do understand that it is San Francisco’s system. They’re going to have to be very involved. They are facing the same risks we are. The voters in the city of San Francisco, the businesses and residences, should be having a lot of common interests with us and parallel concern about the need to fix the system. So we’re hoping to ride on that. I don’t know. I guess you’re thinking that they’re just going to dig in their heels with a lot of opposition. But we have to get them on board somehow. That’s my personal opinion. UAC Minutes 110701 14 Carlson: The one key thing is that this project is so huge that they really need -- if you’re going to vote a bond issue, get a broader vote -- then some part of our money really will be useful for them, especially if they’re going to be voting additional bonds to buy PG&E’s electric plant. They’re just going to be overwhelmed with bond issues there. From that perspective, the vote yesterday might delay things, but might make a change in governance easier because they’re going to run out of bond capacity if they try and do it themselves. If there’s no more question on that, the next item is Gas. Did I guess right? Ulrich: Yes you did. Carlson: Good. Another wildly fluctuating market. Who wants to speak to this one? Dailey: I don’t have anything to present on this. I’ll be happy to answer any questions. Carlson: Any questions from commissioners? I’ve got a technical question. Could you give us a feel for the supply acquisition cost that we’ve got locked in so far, in terms of the rates? I know we’ve got a rate hike this year. Just give us a feel for, we know we’ve got 100% locked in at X and 52% locked in at Y -- roughly what are those numbers? Dailey: Off the top of my head, 01-02 is locked in at around $8/mmbtu. Does that sound right Randy? 88 cents. And that’s pretty darned close to the number for 01-02. We’ve locked in almost everything. 02-03 right now is about 50% locked in at -- boy, I just don’t have that number off the top of my head. It’s lower certainly. Carlson: So it’s going down. Dailey: What we’ve locked in is lower, and also our projected costs for the year are quite a bit lower, because 50% of that is not locked in -- and market prices are lower. So the overall cost projection for 02-03 is much lower than 01-02. And then... Carlson: So, melded, we’re looking at a very substantial reduction in 02-03. Dailey: That’s right. Carlson: Okay. Ulrich: We’re also currently looking at deviating from our laddering approach. Because the price has gone down so significantly, we’re looking at buying more than what would have been in our percentage in the ladder in our plan. We want to take advantage of what the market may be doing in our favor. Carlson: That was going to be my next point. It is a buyer’s market. It won’t stay a buyer’s market forever, and I certainly would encourage you to go forward a bit. Dailey: If I’m not mistaken, there’s a report coming to you next month about 02-03 and locking in more of our portfolio costs. UAC Minutes 110701 15 Carlson: Great. Ulrich: There’s an opportunity and we agree with you. Very similar to the kinds of opportunities we’re looking with a 25 megawatt electric contract, it looks so favorable that the ability for it to go down is much less than it would be going the other way. So we think it’s the opportunity to take. Within the authority that I have with the City Manager, we can purchase more gas, as long as it does not go outside of this 3-year limit that we have on how far out we can go on our contract purchases. Carlson: Well you certainly have our support, so I’d be glad to talk about it more next month. Baldschun: Let me add that our rate strategy for fiscal year 02-03 is to do exactly what you’re suggesting and John’s talking about -- using this window and acting fairly soon to assure a certain low cost as part of our portfolio, which we can then translate to a rate decrease in July 02 in the gas rates. Ulrich: The caveat of course is that you’ll remember this when and if the price of gas goes down more but we’ve already bought it. Do we have your promise? Carlson: You have our promise. Ferguson: Just make sure the difference doesn’t equal $44 million. Carlson: We had our discussions beforehand. We’ve been pretty good at not adopting much 20/20 hindsight here. Ulrich: Yes you have, and thank you very much. Carlson: Any more questions on gas? Let’s move forward to electricity. Baldschun: Could we back up to gas for one second? I wanted to point out something in reserves. Is this the time to talk about the gas reserves? Carlson: Yes. Baldschun: The adopted budget projections for the current fiscal year, the ending balance is for the rate stabilization reserves and the gas fund of supply and distribution two together totaled a balance of about 7.79 and that was driven by the 67% rate increase we had in June. What we’re seeing in the preliminary results of last fiscal year is more savings in the operations and some lower wholesale costs that occurred during the months of May and June in the projections. The bottom line, as you see in the tables here, is that the rate stabilization reserves for gas combined is going to probably go from the 7.7 up to about 11.1 based on these numbers today. They’ll change next quarter, but it is a good trend. There wasn’t a lot of publicity about it, but during the last fiscal year, UAC Minutes 110701 16 we did urge our employees to save any way they could on the gas because we knew the gas system was financially having some difficulties. You see some money that was left over in the budget there. About 1.7 million ends up in the gas distribution reserve. A lot of that is money we just didn’t spend because of the situation. Carlson: Thank you. Go forward to electricity. Electric questions? Ferguson: Yes, I have two comments here on electric and fiber. The first one is kind of a global comment. Since we started the evening tonight with a discussion on resolving the PG&E bankruptcy, I’d just like some assurance. Have we reevaluated Enron under our counterparty-risk rule? I mean, they’re just all over the headlines: “90% stock drop”, “$2 billion infusion by Dynegy”. Are we looking at any risks associated with our Enron contracts in this new light? Ulrich: Are you talking about the electric? Ferguson: All of the above. We’ll start with electric since that’s the topic in front of us. Ulrich: Well, yes, we do look at that. In fact, we’re discussing it virtually every day about what that impact is. So far we believe the electric contract is still good. Now in the worst case, it can only be happy news to us if something happens. However if they have difficulty, another party (you’ve probably seen Dynegy) is looking at some sort of an acquisition. If you have a combined company, an asset like this contract would be I’m sure looked at favorably by the party purchasing the contract. Carlson: John, let me follow up on that, because in that kind of financial circumstances, if Enron is desperate for cash, a cash buyout proposal from somebody like us might be a real interesting idea. Ulrich: Well they may be watching right now. I’m thinking I’ll get a call from them in the morning. Carlson: These things happen all the time. I remember the great gas disaster back there in the early 80’s. There are all sorts of special buyout deals that were worked out and we certainly have the financial capability to do it. And it’s worth a chat. Ferguson: But again the bottom line is we worried a lot and we spent extra money because we could no longer be assured that PG&E could deliver on its promises under contracts with us, so we’ve reevaluated the ability of Enron to deliver under its contracts with us and we’re not particularly newly worried? This requires no extra steps? Carlson: Well it’s the other way around. We’d love them to default. Ulrich: I was trying to make that point. I understand your point too, that there’s something here to look at. As I mentioned in the preface here, we’re looking at this and UAC Minutes 110701 17 thinking about this every day and doing this kind of analysis. But at this point, it looks as though this may be a very good piece of asset for whoever owns the contract. Ferguson: My second comment on electric and fiber. I appreciate the rapid staff work here on the Fiber-to-the-Home Advisory Committee, and the wonderful news on the positive cash flow. I also assume that we’re making money. Just as this is a nice buyer’s market for gas, this is also -- if we choose to do more telecomm or fiber buildout -- this is a nice time to be buying that kind of asset. Everybody else, all the suppliers are flat on their backs. So I’m glad the staff work has speeded up here, and if there is any business case to be made, we’ll see it sooner rather than later, and be able to take advantage of the buying opportunities that are out there. That’s it. Carlson: Mr. Rosenbaum. Rosenbaum: Rick, with respect to fiber optics, you are surely eternally optimistic and that’s always good to have optimism here. I did have some questions on the electric and the reserves as I have raised the point that there was a $44 million increase in reserves which I didn’t see in the table in the back on page 1 under the quarterly financial information update. Can you reconcile that? Baldschun: The $34 million is a net figure. If you go to page 2 of attachment D, it says that the figure of $34.9 is the net impact of the wholesale sales revenue minus the withdrawal of funds to pay for the COBUG which was about 5 million and the AEEP program which was about 5 million, so 44 minus 10 is the 34 what you see on the table there so that’s why there’s 2 different numbers. One is net. One is not. Rosenbaum: Alright. So you’re saying the 44 is in there, but it appeared as 34. How about the -- Ulrich: No it’s not. Well, the detail that Randy mentioned is shown on the bottom of page 1 attachment D. Rosenbaum: I guess I was surprised that the -- maybe it’s the $13,740,000 dollar number the adopted budget ending balance. That’s what we expected the reserve to be at the end of June 2002. Baldschun: These numbers were generated in the very early parts of the year 2001, and of course, that’s really in the spring when things really took off with the wholesale sales revenue. We knew at the time of the budgeted option that we were going to be higher. What we still have yet to get here is the audited number. This is what I was talking to John about briefly a minute ago. What’s absolutely critical here is to get the audited balances in the reserves in the last fiscal year. Because that’s what your base is. So what we’re doing here is assuming certain projections for that base. Not to beat this thing to death, we could have displayed this thing differently. We could have shown the $44 million. Then we could have backed out the COBUG, backed out the AEEP program. UAC Minutes 110701 18 The numbers would turn out to be the same on the bottom line. It’s just a matter of formatting. We didn’t want to put too much information in this table. Rosenbaum: Somehow I guess I have the idea that this particular reserve, the electric supply rate stabilization reserve, was running about $30 million and that was up about the maximum and then you proposed that we increase that number to $40 million. Am I mistaken there? Baldschun: We got the reserve guidelines increased during the budget process. Rosenbaum: From 30 to 40 million? Baldschun: I can’t remember the numbers, but I do know the guidelines did increase from where they were. So the guideline you see on the table there is the new guideline. That’s the maximum of 34 million. The old one was maybe in the 20’s -- my guess. Rosenbaum: Didn’t we always have at least as much? It seems to me we were always struggling to keep that reserve down. Let me get to what I’m getting at here. What we’re showing now is, even with that increased guideline, we’re projecting now an ending balance $10 million above that. And if that comes to pass, it would seem that we’d have to revise the guidelines -- or give $10 million back. But let’s think about rates. Remember when we increased our rates in July of this year? It was in anticipation of an increase of our cost of our Western resource. Did that increase ever occur? Baldschun: Western rates did increase based on a schedule. Now, did they increase as much as was built in to the wholesale rate projection? Maybe. Tom Kabat might respond to that. There were also some factors of market price power in the forecast. What you’re asking really is: is there room for a rate decrease -- given the information we have today. Based on the rulings from FERC that are apparently benign to us and assuming that the PG&E bankruptcy goes our way, what does that mean for a Palo Alto ratepayer? Rosenbaum: Yes, that’s what I’m asking. Kabat: We’ve been here before, Dick. It’s always your first question. We’ve been looking at this and if you look at the numbers here, you’ll see that in fact the rate stabilization reserve and supply is over its maximum, but if you look at the distribution reserve, it’s under its minimum. So there’s going to be some changing of the funds between the reserves. Now there’s still going to be some surplus there. When we get the audited results for the last fiscal year -- hopefully will get done by the time of the next UAC meeting -- we’re going to look at the prospect of a rate decrease. If the numbers indicate a rate decrease, then we would come back with a rate decrease. But we are not going to look at just this current fiscal year. We’re going to look over the next 3 or 4 years. And we have, as you know, the issue with the black hole in 2005. So we’ll UAC Minutes 110701 19 look at that. We’d love to decrease rates, but we don’t want to make a knee-jerk reaction without looking at all the numbers and all the revenue requirements. Rosenbaum: Alright, well maybe someone knows, I recall the Western rate had been 18 mils and then there was some concern that it was going to go to 30 mils and that was part of the justification for our rate increase. What’s the reality? Kabat: There’s been quite a lot of activity in the Western rates. They were reset on October 1st. Western is concerned that they may not be adequate right now. They’ve told us to plan for what they call a rate adjustment clause, which is a backwards application of an extra charge to us. Shiva Swaminathan on our staff has been incorporating all the known data that we have about the Western rates (our costs, our contracts, our loads, etc.) into a model and projecting what goes on. The results that he’s showing me are showing a consumption of the reserve. So the reserve balance is in decline with the current rates. Rosenbaum: You mean the Western reserve balance? Kabat: No. The City of Palo Alto’s reserve balance is projected to be consumed at something on the order of about $10 million per year -- given Western rates where we think they’ll be and other rates where they are, our retail rates where they are and our loads where they are. Rosenbaum: What is the current Western rate? Is that a definable number? Kabat: It’s on the order of 24 mils, with a possible extra 2 mil add-on. Rosenbaum: All right. So it didn’t go up at least to this point, it hasn’t gone up as much as was anticipated at the time we were talking about the rate increase. Kabat: Right. Rosenbaum: Then, see on the top chart for electric sales units and purchase cost. I looked at that for the first 2 months, the actual, where it says sales units roughly 200 million units. Do you have that table? It’s page 1 of attachment D. Ulrich: Yes. Rosenbaum: And the purchase cost is $6.4 million. Looks like roughly 3.2 cents a kilowatt-hour, 32 mils. And I assume we bought pretty much everything from Western during that period. Are we booking the Enron contract on a month-to-month basis? I’m sorry -- I got back recently from being away for the weekend, otherwise I would have called you up in advance. If that’s too hard a question to answer off the top of your head, just tell me. Ulrich: This is supposed to be the whole portfolio, not a portion of it, so with that assumption, the Enron contract should be in there because it’s a known cost. And of UAC Minutes 110701 20 course, we’re selling it. But we should be booking the current loss the same way we are with any of our other commodity purchases. Baldschun: Lucy advises me that, to our understanding, the purchase cost figures in the table do not include Enron, because we are not using that power in town. Because we have a surplus situation, we’re selling it on the market. Those purchase costs are for inside Palo Alto. Rosenbaum: Where would that be shown then, Randy? Baldschun: That I don’t have the answer for. We’ll have to follow up with Girish. Rosenbaum: So you’re saying that the system average rate includes only the sales within Palo Alto? And therefore it’s the purchases of energy for use in Palo Alto. Baldschun: Correct. The retail sales revenue is obviously Palo Alto retail sales. If you were to add wholesale sales revenue or not add wholesale sales revenue, but then take out the Enron cost and the purchases cost, you’d add apples and oranges. So what we’re trying to capture here is isolated to purchases and sales of electricity within the city limits of Palo Alto. And that would exclude the Enron wholesale sales revenue as well as the cost -- but I have to ask Girish how that shows up. We should have a footnote I guess, somewhere on the explanation. Rosenbaum: Is Enron booked month-to-month or day-to-day? How do we handle that? Baldschun: I can tell you how it shows up in the reserves. If you go down to the supply rate stabilization reserve, that’s where we’re showing the Enron cost. The 5.3 million -- that’s an annual cost estimate for the Enron contract. There’s also the associated projection for wholesales sales revenue that get reflected in that table. Ulrich: That amount is a constant, as you know. You should be able to tell what it is on a monthly basis because it doesn’t vary. Our cost to Enron is the same. The difference would be what we’re able to sell it for, and that would determine the actual amount of any loss on a monthly basis. Rosenbaum: Do we sell it daily or monthly? Or is it as situations require? Ulrich: We sure do. Depends on what kind of a sale we’re doing at that time. Could it be daily or a longer period of time? Carlson: Yes, I think.... Baldschun: No I don’t. Under the trading par order, I’d stay out of that. Carlson: What’s going on here is that effectively, we’ve now got two operations: We’ve go the retail operation we’ve always had, which is what this table shows. But we’ve now UAC Minutes 110701 21 really got a wholesale operation in addition to this. Maybe we just need a separate table to see what’s happening as the year goes on in that effective wholesale operation. Ulrich: The explanation indicates that the purchase costs do not include revenues or costs associated with the wholesale power. So if you’re looking for additional information, you can tell what the expense is, related to the Enron contract... Baldschun: Actually that expense is a net expense. It’s the wholesale sales revenue minus the wholesale cost of Enron. So we’ll have that for you every quarter. It’s 5.3 million to date that we estimate. Next quarter it’s going to change because our market price projections are going to change. It’ll be a different number. So you’ll have the information on that specific contract very clearly for our projections. Carlson: The number we have, the 5.3 million, that is the estimated total net loss for the year on that contract. It just would be nice to have the same level of detail that we have up above on our wholesale operations. That’s the idea. Ulrich: Well, our attempt to explain it, it’s on page 2. It says, “Other projected annual expenses to the budget reflect the increased net cost (wholesale revenues minus wholesale cost) of $5.3 million associated with the Enron contract”. It’s in the details. Carlson: I guess we’re just asking for more detail rather than a single number estimate. Baldschun: In fairness to Girish, let’s take it under advisement and discuss it with him and see what his --. We’ll commit to do that. Ulrich: It will probably be helpful for you to articulate what it is you want, that we’re not giving you, that you would like to see in an easier form. It appears that most of this information is here. It’s putting it in a usable form, where you don’t have to ask us questions. Carlson: What’s implied and what would be fairly easy is, we’ve got one table for our existing retail operations, so have one identical table for our wholesale operation. Same everything. Ulrich: We’ll figure a way. Sounds like we can probably have another line in the top graph or the top chart on Appendix D to break that out and exclude it or add it on so that you can get the total amount of the entire energy sale whether it’s wholesale or retail. Carlson: One line would be fine, but I don’t want to change the table we have here. I want to add something so we can come up with a grand total. And we’ve got a member of the public that wanted to comment on this. Do you want to go ahead because this is an awfully interesting issue; we’d love to get some comment on it. Herb Borock: Thank you Commissioner Carlson. What I’d be interested in seeing is for the Enron contract, how much it’s prorated to cost per kilowatt-hour per customer, UAC Minutes 110701 22 because and whether that’s being included in the rate? The rates that the customers are now paying were based upon an assumption that I guess is a worst case assumption: that rates would be going up as Commissioner Rosenbaum indicated (which hasn’t happened) and based upon the market rates (which a couple of the commissioners talked about we expected the rates to be falling). And that’s why we were concerned about even doing the contract in the first place. I saw recently in the paper that we’re saving half a million dollars a month and this is the same order of magnitude on the other side. So the question is, if the rate increase was based upon so many pennies a kilowatt hour with the worst -case assumption of the PG&E rates going up (which they have not done), are we in effect still having to pay that amount through the rate structure to pay for the loss in the Enron contract? And if we’re not doing that, then what’s happening to the money? Is that being accounted for some other way? There are also some numbers in the report on certain kinds of charges of assumptions. I guess this was in the WAPA contract, which I guess is also estimated that certain kinds of transmissions or distribution charges would have been increasing, and that also was put into the rate structure. The City Council agreed to rebate the utility tax increase based upon this increased rate, so if the rate goes down it becomes a wash. It becomes zero. It’s those kind of things. And now we’re being told that the reason that we have to look at the rates are the reserves -- rather than before when you were asked to increase them, it was based upon the supply cost -- and it had nothing to do with the reserves. So I’m not sure whether we’re talking about the same things you were talking about when the Commission and City Council was asked to raise the rates in the first place. Thank you. Carlson: You’re right. We do need to look at the grand totals in a disaggregated way. Ulrich: Of course we do look at the grand totals. Carlson: I’m sure you do. This is a quarterly report, we’re just asking for more detail. And the other part that’s more important for the long run, is that it looks like we’re in a situation where for a year or two we could probably cut rates, but then we have the potential increase in 2004-2005. An especially vital strategic issue is, over that multi year time period, do we want to stabilize rates? You can look at it from many perspectives. One is that rate stability is a good thing and cutting rates temporarily just confuses customers and sends the wrong long-term price signal. The other perspective is why should the customers that are here in 2002 and 2003 pay more than they really need to, to help out the customers who will be somewhat different here in 2005 and 2006? That’s going to be a pretty important issue that we need to start thinking about. Ulrich: You can imagine, we do think about that. If you look on our annual agenda plan, we expect to be back in about March to discuss the long-term energy portfolio which of course will impact rates. The questions that Mr. Borock brought up are good questions and interesting, and we can address those. There is a lot of interest in us going out and buying that contract. There’s a continued good story in it about that, and why we did it. There’s been a lot written in the paper about it. We put out a fact sheet on it and there’s been a lot of dialogue on it. We hadn’t planned on discussing that tonight. In the context UAC Minutes 110701 23 of the quarterly report, it surely doesn’t answer or get to those kind of questions. We had our quarterly blinders on here to give you the financial report which is our quarterly report, and we kept it in the same box that we always have. We’d be glad to go out of that box, and we’d be glad to do that now, if you would like to venture off into these other areas. Whatever your call. Carlson: Let’s finish up the quarterly report. I’m not sure we need to get into those details right now. I just want to be sure they’re there for the next go around. Ulrich: These are issues here we’ve increased the rates significantly. We’ve bought an Enron contract. We’ve also sold energy in the market and we have a number of factors that are going on, so that’s an area we should discuss at the appropriate time. Baldschun: I just have to make one point. The rate increase of 43% is not linked to the Enron contract. The reason is, the rate proposal went to the Council before the Enron contract was even close to being signed. If you look at how we’re paying for it, basically we’re paying for the Enron contract and the wholesale sales revenue that the utility earned went into our reserves, so the rate impact of the Enron contract is zero. It’s been covered by the surplus revenues from the wholesales sales revenue. Carlson: Of course, part of the problem there is that money does not come in different colors, and you can allocate it in many different ways. All the things are true, but you can also look at it from another perspective. They’re all useful in 20/20 hindsight. Right now I want to look forward and decide what to do. What do we do now? Ulrich: Keep in mind that when we talk about an individual contract, there’s pros and cons about that individual contract. We’ve done a lot of that discussion. But in this utility we look for price stability, we look for reliability and we look for the long range best interest of our customers. It’s real clear in our strategic plan. When you try to take one contract and look at it only, you can come up with all kinds of reasons maybe why we shouldn’t have done it, or the value of it. It’s important to look at the context of our overall energy and overall energy purchases and why we’re here and what we’re trying to accomplish. Carlson: Another way of saying that is that the contract only makes sense in a portfolio of all of the obligations and contracts. Ulrich: Absolutely. Carlson: Exactly. Ulrich: If you take it apart, you can have all different kinds of reasons. If we just stop talking about Enron, and all we talk about are the kinds of contract that we have with Western, and just kept talking about that, you’d get another picture, totally the other side -- just as misleading as looking at only the other contract. UAC Minutes 110701 24 Carlson: Exactly. Commissioner Rosenbaum had some more questions. Rosenbaum: In the end, what comes out in the wash is the reserve at the end of the year. If the reserve balance is too far over what we regard is reasonable, we’d have to adjust the reserve or give money back or adjust rates. I assume that’s the philosophy that we will continue to follow. If it results in a rate decrease for 2 or 3 years, then that’s the appropriate policy to follow. With respect to Herb’s point, there is an easy answer. At one point, we were projecting that the loss on the Enron contract was on the order of $1 million a month. $12 million a year. How many units of electricity do we sell in a year? Roughly 1.2 billion. So the cost of that contract if you want to just look at it in that fashion is 1 cent a kilowatt-hour, assuming things stay the same. Baldschun: The numbers don’t work. I think you’re off by a factor of 10. 1 million and we have about $80 million in revenue. 7 cents is our system average rate. Rosenbaum: No, no. It’s a million a month. 12 million a year. So that’s where you get the 1 cent per kilowatt-hour. Baldschun: Nice piece of math, Commissioner Rosenbaum. Ulrich: That does put it very well in perspective. The Enron contract is something like about 15 % of our energy, and our Western contract is more like 60-70%. Ferguson: Another way of saying it, is that that 1 cent is the cost of the insurance policy we purchased to cover 10 or 15% of the load for 3 ½ years, at a time when we were looking at about 20 cents uninsured. Ulrich: We’ll be pleased to go into more detail now about reserve projections and rates and all that, because we do study that. I don’t want to give you the impression that we’re here just to talk about the quarterly financial statement. We’ve sure thought about all these areas that Commissioner Rosenbaum has mentioned, and Mr. Borock, and we’d be glad to discuss those in more detail. Carlson: With that introduction, if you’re willing, what kind of philosophy is the staff proposing? Are you thinking about bridging at all across years because of the risk of a future rate hike? Or do you think the most sensible thing to do is to just follow the reserves, and cut rates to get the reserves back in line as previously defined? Ulrich: Well, the benefit would be to think of all of those, and explore a number of alternatives. Ultimately you have to come up with something that fits with why we’re here, what we believe is in the best interest of our customers. We would make our recommendations based on that and give you other alternatives as we have in the past. Tonight is not normal ratemaking time. Carlson: Amen to that. UAC Minutes 110701 25 Ulrich: Where we came from was, once every 2 years we said well, here’s the forecast. We have a lot more innovative ideas from the same people that have worked on the rates in the past, so we can do the same. But the decisions we make are not ones that you want to make without knowing what the long-term impact will be. At least based on the information we have today. We can show you the difference between what our forecast were a few months ago versus what they are now to show the dynamics of the changes that are taking place. If you’d like we can finish up the reports and come back to this, or stop right now and discuss this some more. Carlson: Let’s wrap up the quarterly report. In fact, I’m not sure if there any questions left on it. I just had a quick question on telecom. I’m not quite sure about the timing for this citywide Fiber-to-the-Home issue which is certainly a potentially very substantial issue. Is that something that we might be hearing about in the next few months, or is it going to take a great deal more time than that? This is a biggie, as I remember the numbers. Ulrich: Would you like to be a little more specific? What do you want to know? How the trial is going, or how we’re doing on developing the business plan model? Carlson: What I’m interested in is there’s a discussion here of a business case study for a citywide Fiber to the Home network. That is a very large potential expenditure for the city, an item of great interest. When are we likely to see the case study and a proposal in that area? Bradshaw: Scott Bradshaw here. I apologize -- I sent Blake home since we were involved in this earlier discussion. I thought we had been sidetracked on to something else and I sent him home, so I apologize. As Commissioner Ferguson knows, we have an advisory committee for the Fiber-to-the-Home put together. That advisory committee is working with Blake and the Fiber group to put together a business case plan. And as the trial progresses, we will be putting together this business case using the information we’re gathering from the trial, to determine if we should go ahead with a full business plan to roll out the fiber to the homes. We should, in my understanding, have information on the business case by the time we’ve completed the FTTH trial. Carlson: Which is? Bradshaw: We’re expecting that to be about July or August of next year. Carlson: So roughly a year from now, we might see a proposal in this area? Bradshaw: That’s my understanding, yes. Officially the trial infrastructure got in place approximately in the middle of September and we were given the trial period of one year to run with the 70 customers after we have them all hooked up. That occurred in the middle of September. UAC Minutes 110701 26 Carlson: It was just this tantalizing little line. I don’t know if it is going to be a Christmas present or we’re talking about next year. But thank you very much for giving us a feel for the timing. Bradshaw: Thank you. Carlson: Any more questions on electricity and Fiber-to-the-Home? Ulrich: If it’s alright with you, I’d like to do the some of the other reports, because we have staff members that I’d like to allow to go home. Can we do the next one- Customer Sales Contracts? Carlson: Go ahead. PERFORMANCE REPORT ON CUSTOMER SALES CONTRACTS Ulrich: Doug, can we answer questions about that or …? Carlson: I don’t know where it is. Ulrich: It’s shown as item, it’s item #3 in your package. Should be right behind the financial. I’ve taken mine all apart so in yours it may be further back. Carlson: I’m the one who just got off the airplane and has had 10 minutes to look at this, so any questions from my colleagues? Ferguson: You gave us a heads-up on this a month or so ago. Ulrich: Yes. Ferguson: The bottom line was, this was a plus or minus 20k swing? Ulrich: You can see the grand total at least on the gas contract on Table 2. Ferguson: And so the benefit of doing this, running this little risk of making or losing a little money, was that we accommodated these dozen customers. We ran our business in a more flexible way to make those customers happier. Baldschun: Correct. The decision to offer contracts was done in a context of offering customers choices: direct access gas or electric. So this is another product that we offer. Some customers really value price stability and that’s why they executed these contracts. Carlson: I thought we were stopping doing these for a while because the markets have been so crazy. And this is just a review of what we’ve already done? Is that right? UAC Minutes 110701 27 Baldschun: We backed off the pedal on electric contracts several years ago. Stepped off the gas and of course basically we really needed to do this. With the price of gas the way it’s gone this year, we weren’t about to put our other customers at risk on behalf of these customers so we really forced them to make an election to either buy gas from us or buy gas from somebody else and they ended up buying gas from us under contract. Carlson: Commissioner Rosenbaum, any questions? Rosenbaum: I remember the issue came up in connection with gas as to whether the people who took advantage of these individual contracts were going to be contributing to the reserves and the answer was no. So then I was curious as to what percentage of our big customers are taking advantage of this? I mean, it looks to me like it’s probably half. Is that right? Dailey: Ten out of ???? that are eligible for this rate took it. Rosenbaum: And they all did it in June and July because it seemed like a better deal than they were going to get by following the City’s rate structure. Dailey: Most did it in June or July. We started offering this rate in June for a July 1 start up, so that was the first date that it could start. We started meeting with customers and explaining the choices to them. The ones who could make decisions quickly and knew what they wanted to do signed up right away. Some others, it took them a few months to get it done, but October 1 was the last start date for one of these contracts. Basically this whole thing came out of a desire to mitigate our own risks, because the portfolio rate had no term commitment associated with it and customers can come and go off that rate as they choose. In the meantime, we were buying gas for the portfolio. So this is an alternative the customers had if they could not be on the G3 rate which is the one that fluctuates monthly. They could have a stable rate for 12 or 24 months, but had to make a term commitment for that 12 or 24 months. Rosenbaum: And it would appear that financially, it’s a wash and we feel it’s to our advantage because we’ve removed some risk of our having to buy gas and then losing a customer, is that? Dailey: Absolutely. If a customer chooses to be on the portfolio, they’re on the portfolio for a very long term. If they choose this rate, they commit to a term. We buy for them according to that term and so it is a wash for us. The reason that it’s not exactly a wash is that we base the rate on the load shape for the whole customer class so that on any given day we say, “Here you go, 11 customers. This is the rate today if anybody wants it.” We don’t say, “For customer A, the rate is this. For customer B, the rate is that. For customer C, the rate is that.” So if every customer signed up for the rate on the same day, net revenue would be zero. But because the shape of the prices changes a little bit as time goes along, when different customers sign up on different days, net revenue doesn’t come out to be exactly zero. There’s a few thousand dollars one way or the other that it can go, but that was the thought behind the design of the rate. UAC Minutes 110701 28 Rosenbaum: And there is no downside that we’ve identified with these large contracts? Dailey: One of the downsides which is pointed out in this report under the “lessons learned” is the volumetric risk. That is the idea that we’re giving these customers a single rate no matter what their usage is, so we do take on some volumetric risk. Theoretically, it’s equally likely their load can be higher or lower than what we projected. It’s also equally likely that the market price can be higher or lower than what it was on the day that they locked in. But we’re looking at that and trying to decide if should we be putting some sort of risk premium on this rate for the kind of free option that we’re giving them. Should we design the rate differently that they can lock in for a price, but they’d have to commit to a certain volume as well -- and anything over or under that gets bought or sold at some market price? I mean, there’re a lot of different ways you can address that issue, but that’s one of the things we’re looking at on this rate, certainly. The earliest that one of these will expire will be June of 2002. So it’s not too long from now that customers are going to be saying, “Okay, this rate’s about to run out for me. I need to make a decision again whether to sign up for another fixed term rate or go under the G3 rate or join the portfolio” or those types of decisions. So if we’re going to be making any changes to this rate, we’ll want to do it sooner rather than later. Rosenbaum: Thank you. Ferguson: You tried a product innovation. We’re better off. The customers are better off. We tried the experiment. Maybe we’ll continue it, maybe we won’t. But that’s the right attitude. The utility didn’t used to do that and I applaud this effort. It’s a nice little case study. You might want to put this in the Council report too. Thank you. Carlson: I have one question in the area and that is if you’re going to do it again, the markets are active enough that you can actually hedge the existing, individual contracts or groups of contracts. The cost of the hedge certainly gives you a good guidance as to whether you should charge a little premium there. You probably should. Dailey: Well we do hedge these. We hedge them on the day that the customer signs up. We hedge each one of these. Carlson: Excellent. Dailey: The alternative that you’re getting at is we could hedge exactly what it is that we’re selling them, which is an unknown quantity. That would be very expensive and but it’s an option. It’s certainly something we could look at. We could say, what we did was sell them a fixed price for any quantity that they used. What we hedged was our best guess of what they’re going to use. Carlson: Any more questions on this issue? UAC Minutes 110701 29 Rosenbaum: With respect to electricity, the one custom contract we have looked quite interesting: you’re saying that we’re going to start losing money because we raised our rates and the custom contract was based on the old rate. But we have the right to terminate that contract under the buy-out provisions. Is the customer going to be happy, or are we going to pay the customer money to get out of the contract? How is that anticipated to work? Baldschun: Yes, we’ll be paying the customer some additional amount to terminate the contract. Our projections are right now because of the electric rate increase. Now we don’t know again if we’re going to decrease rates soon or next year. But just looking at the annual cash flow, it’s about $90,000 difference each month. It’s a 3 year contract still left there. There’s no way we’re going to stay with a 3 year contract. That’s $3 million that we lose. The customers, you know, they went into this in good faith. This clause can apply to them as well. They can certainly terminate the contract and now, the ball’s in our court and we’ll be providing notice to them. Our electric rates are half of PG&E’s rates, so they’re not exactly going to be paying a large electric bill compared to what it would be in a PG&E service territory. Rosenbaum: Are there liquidated damages? Is it known in advance what the cost of the buy-out would be, or are you going to negotiate? Baldschun: Yes, it’s in the contract. Rosenbaum: Thank you. Adjournment Carlson: I think that’s it. I see no more items on the agenda. We meet again on Wednesday, December 5th at our new time of 7:00. A motion to adjourn is in order. Rosenbaum: So moved. Ferguson: Second. Carlson: All in favor? I declare us adjourned.