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HomeMy WebLinkAbout2001-12-05 Utilities Advisory Commission Summary Minutes UTILITIES ADVISORY COMMISSION MINUTES December 5, 2001 ROLL CALL -------------------------------------------------------------------------- 2 ORAL COMMUNICATIONS ----------------------------------------------------- 2 APPROVAL OF MINUTES -------------------------------------------------------- 2 AGENDA REVIEW AND REVISIONS------------------------------------------ 2 REPORTS FROM COMMISSIONER MEETINGS AND TRIPS ------------ 3 DIRECTOR OF UTILITIES REPORT-------------------------------------------- 3 UNFINISHED BUSINESS ------------------------------------------------------- 12 NEW BUSINESS ------------------------------------------------------------------ 13 LEGISLATIVE PRIORITIES -------------------------------------------------- 13 LONG TERM WATER SUPPLY ISSUES ----------------------------------- 18 NATURAL GAS PURCHASE PLAN FOR FISCAL YEAR 2002/03 --- 23 NEXT REGULARLY SCHEDULED MEETING ----------------------------- 27 S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 2 ROLL CALL Chairman George Bechtel called the meeting to order at a few minutes past 7:00PM. Commissioners Dick Rosenbaum, Dexter Dawes, Richard Carlson and Richard Ferguson are all present. Council Liaison Bern Beecham is absent. Bechtel: All the commissioners are present and accounted for. I apologize for starting late. I understand that Council Member Beecham will not be present tonight. ORAL COMMUNICATIONS Bechtel: Are there any oral communications? I’ve not received anything at this point and I don’t see any strangers in the audience so I presume there are no oral communications. APPROVAL OF MINUTES Bechtel: Third item on the agenda. Approval of the minutes for the meeting held on November 7th, 2001. Comments on the minutes? Ferguson: I’ll move approval. Carlson: I’ll second. Bechtel: We have an approval motion by Commissioner Ferguson and a second by Commissioner Carlson. All in favor of approval of minutes say “Aye”. Commissioners: Aye. Bechtel: Passes unanimously. We have one abstention. Commissioner Dawes abstained. AGENDA REVIEW AND REVISIONS Bechtel: We’re down to item #4 Agenda Review and Revisions. I don’t have any comments on the agenda other than perhaps we talked about the next regularly scheduled meeting. There was some discussion amongst the members about present. We can discuss that later. Any other comments on the agenda? Ulrich: I have just one correction. Under item 2 under “New Business” Long Term Water Supply Issues; that will be an information item rather than an action item. Other matters I plan to report on under the Directors Report. S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 3 Bechtel: Thank you John. Any other comments? None. We’ll move to the next item, which is Reports from Commissioner Meetings and Trips. REPORTS FROM COMMISSIONER MEETINGS AND TRIPS Bechtel: And I believe at least during the last month, we had a BAWUA meeting and Commissioner Ferguson, you were planning to attend, as I recall. You have any comments on the meeting. Ferguson: Just a real brief comment. I actually attended by accident. BAWUA sent the notice directly to my house and it sounded interesting, so I showed up. It was a meeting convened primarily for elected officials. It’s actually a meeting that this Commission commented on and supported a year ago last August. Recall that if we were going to have any kind of legislative agenda with respect to water, it was important to galvanize the elected officials leading BAWUA and get them active on it. This was the first meeting of a large number of those officials, to focus on an embryonic definition of the objective -- which was to possibly change governance to a joint-action or multi-agency format, or form a special district, for delivery of water including but perhaps not limited to Hetch-Hetchy. It was just a very preliminary brainstorming session by the electeds, with very good turn out. Our Council Member Beecham, who’s not here tonight, again is taking a leadership position there, so Palo Alto is well represented. There was a follow-up meeting very recently, a strategic planning meeting with a smaller turnout. But it’s important that we have that commitment from elected officials, instead of just rounding up the usual suspects from BAWUA. So that’s forward progress. Bechtel: Good. Thanks very much Rick. Any of the Commissioners have questions of Rick about any other issues on the meeting? If not, we will move to the item #6 Director of Utilities Report. John? DIRECTOR OF UTILITIES REPORT Ulrich: Thank you. I have a number of items. Because of things that have occurred just in the last few days, I was unable to put them on the agenda. So if you’ll bear with me, I’ll focus on some of those -- they’ll jump around a little bit. The one that you’re familiar with because it had publicity in today’s paper (and you all received copies of our news release) is that the City of Palo Alto took action under the terms and conditions of our contracts with Enron to terminate them. Their deteriorating financial condition and creditworthiness gave us significant concern that they would not be able to provide reliable deliveries of commodities and services for the full duration of the supply and service contracts that we entered into with them earlier this year. In total, there is the electric contract (the 25-megawatt contract) and 3 gas contracts (a fixed commodity, a variable price and also a service agreement on gas). All of those we S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 4 terminated under provisions in the contract. We analyzed this, and at the time their deterioration became excessive, we terminated. The termination on the electric contract took place last Thursday, the 29th of November and the gas contracts we did the following day on November 30th, which is Friday. As you know, subsequently on Sunday Enron filed for bankruptcy relief in the state of New York and in Manhattan. Most of those comments that I mentioned are in our press release. I wanted you of course to be aware of it and we will follow vigorously this course of action and keep going with it until it’s all completed. We do not need the electric energy that was part of the 25-megawatt contract. We purchased that contract as an insurance policy, as a means of keeping us from having to experience the full market price of energy earlier in the year when we were concerned the contract between Western and Pacific Gas and Electric would have difficulty continuing, and we would be exposed to very high energy cost. We had a favorable result, as you are all aware, and thus far, the bankruptcy of PG&E is moving in a direction that gives us some level of confidence that we won’t experience problems with the contract that we have. So we have not gone and purchased replacement electricity. On the side of gas, we have gone and replaced on a short-term basis the gas, so there’s no problem with flow of gas into Palo Alto. We are looking at alternatives for hedging the future gas that was part of the gas contracts. We’ll do that with another supplier. There’s no expected impact on rates at this point and there’s no likelihood of disruption of service. The big focus will be on continued efforts to make sure that we are in a very good position in the termination of these contracts. Bechtel: Questions on this item from Commissioners? Mr. Dawes. Dawes: John, is it appropriate to talk about contingencies which may arise by virtue of this contract termination? There could be, it would seem to me, some liabilities that arise from the termination. I wondered if you had any plans for setting aside any additional reserves against a litigation award which might arise, should there be litigation involved in this. Ulrich: We have been working and are working on our strategy and alternatives for what we do next. That’s part of our strategy that we would work on from now on, but I’m not in a position to discuss what those strategies would be. That would not be appropriate. As far as funds, since the money to pay for those contracts are in our rates, we will of course keep track of that money and it will be available if necessary. Dawes: Would it be appropriate to have another discussion of reserves in light of this additional uncertainty involved? The reserve levels were discussed at the November meeting, but this is new data when it comes to that. Is it appropriate to sort of re-open that discussion with respect to electricity and maybe gas too? Ulrich: Yes, in context with all the other things that are part of our reasons for having reserves. We could have that at a subsequent meeting. S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 5 Bechtel: Other Commissioners? Mr. Ferguson. Ferguson: John, I just want to confirm that we weren’t unprepared here. We’re not scrambling to deal with the Enron bankruptcy. We saw it coming-- the Enron issue. Ulrich: Well, I’m not sure we could have predicted that they were going into bankruptcy. But we have been following this very closely for some time and it’s been very high on our radar screen, so to speak. The actions that we took were very well thought-out and very deliberate, based on the set of conditions that came to pass. We went and terminated the contracts. It was not spur of the moment. Bechtel: Mr. Carlson. Carlson: I'm really impressed with the staff’s flexibility and ability to move quickly on this kind of issue. Given the history here, it would have been real easy to act like a deer frozen in the headlights. We did just the opposite, and that’s exactly what we should have done. Additionally, for the time being, we are going to build up unusual reserves. I don’t see any way of setting a new reserve guideline or even enforcing the existing reserves until this all plays out. That may be many months. I certainly don’t want to spend the money, or assume we’ve got it, until the dust all settles, which will be some time, I’m sure. Bechtel: Mr. Rosenbaum. Rosenbaum: There is a difference between the electricity and gas contracts in that we don’t need the electrical energy, but we do need the gas. You mentioned there were 3 contracts that we cancelled; are they for this year or are they for 2002-2003, which is the subject of a report we have later on in the agenda? Ulrich: The gas contracts are for 2 supply contracts and a service agreement and those are presently being used or were used until they were terminated. So it’s not for the future, it’s for now and they went for some period of time. Not as long as the electric. They had various start dates and completion dates. Rosenbaum: But they are for this fiscal year? Ulrich: Correct. Rosenbaum: Now we had bought this gas and contracted for it last year at very high prices. We were told the average price of gas that we had contracted for this year was $8.80. Gas is currently available at a small fraction of that. Is there some implication that we’re going to be better off financially with the new supplies we buy, compared to the supplies from the contract that we terminated? Ulrich: The replacement gas is, yes, it’s at a lower price. Ultimately what the difference will be is unknown. S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 6 Rosenbaum: Thank you. Bechtel: Thank you, John. Enough has been said about our reaction to Enron with the termination. Next item. Ulrich: Yes, I have several other items. Thank you for the support on the termination that we just did. Just a few comments on FERC -- the Section 205 case. If you’ll bear with me, I want to be accurate, so I’m going to read some of this. PG&E has filed for a rehearing, as you may have heard (hard to believe), of FERC’s decision, and they did it on November 21st just before Thanksgiving. We saw the filing just after Thanksgiving -- all the documentation. Basically, they’re repeating their case without introducing anything new. With no new information or new argument nor any pointing out of any FERC error, PG&E seems to be simply asking FERC to reconsider its prior decision. Based on reading this, it would be hard to see that FERC would turn around and agree with PG&E, so we would say that it’s unlikely that there’ll be any change. Having said that, that still means we still have to pore through the documents, and have our attorneys keep very close to this and provide any information that is necessary. Any questions about that? PG&E’s bankruptcy would be the next item. San Francisco City and County, and some other counties, mainly rural counties and some cities, have filed a motion to form a separate "governmental-body" committee and is set for a hearing on the 7th of this month. The Judge said that it would not be allowed to generate into referendum on whether the OC had been tough enough on PG&E, so it’s a question that these counties would like to participate. In the November 6th adversary objection process (that’s a lawsuit within a bankruptcy proceeding -- you can see why I’m reading this) Palo Alto and NCPA’s filing took PG&E to task for inadequate disclosure in the disclosure statement. PG&E and NCPA members' staff have met to clarify interest and positions on the plan of reorganization and to look for win-win opportunities to simplify our relationship going forward. It’s not clear that PG&E understands the full extent of difficulties that could be faced in FERC proceedings by ignoring our interests. So to have a full win-win, there has to be some interest in doing so. Hopefully significant progress can be made when senior management of both municipalities, public and PG&E, meet on December 13th. So there is a negotiation and discussion going on and that’s a very healthy sign and we’re looking for win-win opportunities. An update on the hearings. December 7th as I mentioned, San Francisco and other counties will have a hearing on the proposal to form this committee. December 19th, PG&E files an amended plan and disclosure statement. In mid-January, adequacy hearings on the disclosure statement, and then in late January, a briefing on preemption issues raised by the State. So the process is in place, it’s moving along and that’s our update on that area. S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 7 Bechtel: Comments from Commissioners or questions on the PG&E bankruptcy? Mr. Dawes. Dawes: Do you expect, or do you hope this sort of summit meeting will result in a proposed modification to the reorganization and disclosure statement, which would tend to accommodate the needs of the Munis and NCPA? Ulrich: Well that’s our hope. There’s big opportunity for both. PG&E is looking for a way to do this reorganization that will take them back to being a viable, healthy company. There are a number of areas that are very important to us and Munis in continuing our coexistence and life with PG&E. So we just need a forum, and we’ll have that at our next meeting, to keep pressing those areas. Dawes: Clearly there are interests and very specific ones and transmission issues and so forth that are at operating levels. But there’re also really global ones like the transfer of the hydro to their proposed unregulated subsidiary. Are the Munis going to take position on the global things as well as on the specific things that involve how we operate our business? Ulrich: I can’t say much about the global side. I’m not sure I’ve got an understanding of how “global” global might be. But we are going to be looking at our specific issues and look for areas where all the Munis and all the parties would meet -- not try to have our own little parochial view that only applies to Palo Alto. I don’t think that would work. Bechtel: Other questions? John, it seems to me that at least in today’s paper that there seems to be a lot of discussion about disposing of assets, of the hydro and so on. Do you believe that there is enough pressure from other entities like ourselves but others to change the direction? Do you think a judge would be receptive to others like us, others throwing out that part of the organization plan? I know it’s awfully early, but it seems to me that that may be one of the universal arguments that we all have in common. Ulrich: Well, I need to preface this: I am not a part of -- and the people that are part of this negotiation have confidentiality agreements in place. If I knew all those areas, I couldn’t talk about them and I don’t know all of them. But there are areas that we can come to an agreement on and reach a conclusion. If they are truly interested in their plan of reorganization being successful, they need as many supporters as possible for it. I don't think the expectations that municipalities or Palo Alto would have, would be dealbreakers that they [PG&E] couldn’t accommodate. That’s the positive focus I’m going to have at this point. Bechtel: Thanks very much. Ulrich: I can be quick on some of these others too, but I want to make sure that I cover them in the depth that you like and that I’m able to talk about. The next one is just a final status report on the COBUG -- that’s the natural gas-fired turbine generator that we’ve installed out at the MSC, Municipal Service Center. That is a total of 5.4 S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 8 megawatts of backup power. We finished just as we speak earlier today and yesterday. They passed all the safety and circuit protection tests and we’ve gone through all the process for making sure they are going to operate correctly. We’ve filed and obtained all of our permits. The generators will be managed and operated as appropriate. We’re going to utilize them as best we can to generate electricity, but to have them obviously available as we need them for power shortages. I will attempt to put together a tour and some plans, so you can go out and take a look at them and see how they’re working. I’m very pleased with how they’re put together, managed -- another whole new field that we have become proficient in doing. So if you know anybody who needs generators installed, we are quite ready to do it. Bechtel: I can comment that the small company I’m working with is now on a generator similar to that, because of PG&E is taking a couple of days to replace some hardware, so those things work very well. And it’s a very quiet machine. I’m wondering during the tour if somehow we can have it fired up so we can hear whether it’s quiet or noisy, so that we can anticipate any comments? Ulrich: Sure, that would be interesting to hear. They do have some soundproofing. Depends on how close you want to get to them. Bechtel: Questions on the COBUG? Mr. Rosenbaum. Rosenbaum: John, your comments suggest that we would be able to use this at times other than emergencies, which was not my impression of our intention. Have we secured air board permits to use this at non-emergency times? Ulrich: These generators can be operated according to the air board permits at times other than these emergencies. We could not do that with the diesels, but with these we can. My note says here there’s a maximum of 2600 operating hours and obligations for recordkeeping, so we will try to operate these and use them as appropriate to maximize the benefits from the generators. Rosenbaum: Thank you. Bechtel: John, that’s 2600 hours “per year” I assume you’re talking about. Ulrich: I believe so. Yes. Bechtel: Thanks. Next item. Ulrich: The last item. At your places is a memorandum. It’s got a big Roman numeral VI in the upper right hand corner, and that corresponds to the same place on the agenda for the Director’s Report. We just received the supplemental study that you asked for. An additional alternative to the water well regional storage and distribution supply study. It’s basically looking at what we define -- and you do too -- as Alternative 5A, so it’s a variation over Alternative 5. Since you just received this material, I’ll be S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 9 glad to give a brief summary of what is in there. You can decide if you want to put this on a future agenda or give us some feedback on what you’d like us to do at the present time. If it’s all right with you, I’ll have Roger Cwiak join me and we can go through the high points. Bechtel: That would appropriate. Roger, you want to join us up here? Thanks. Ulrich: You should have a copy as part of this. It has Carollo Engineering in the upper left hand corner and it’s called “interoffice memo” that is written to Roger from David Kraska and it summarizes the Alternative #5. So we can have it in the record, let me just refer to basically the last 2 paragraphs on the page which is the summary. It says “therefore the major difference between Alternative 5 and 5A is that Alternative 5A increases the size of the pressure area 2 reservoir by the volume of water that Stanford is committing to the city’s pressure area 3. In addition, a connection would be established between the new reservoir and the University’s system to supply this excess capacity directly to the university. Another critical difference is the cost. Assuming the new reservoir is constructed in Coyote Hill, the capital cost estimate for Alternative 5 is $10.5 million without a pump station and $12.5 million with a pump station. The cost estimate increased by $3.5 million for Alternative 5A to $14 million and $16 million with and without a pump station respectively." And there are a number of more details, if you've had a chance to look at it or want some clarification. Feel free to ask, or if you’d like to put this off to another time…. Bechtel: Several times we’ve discussed this, so let me just open it up to questions from Commissioners about how they would like to deal with this. Basically, I guess this is for our information. We would like to take action to recommend that this proceed, I guess we could, but we probably should “agendize” it in some way (that’s not a verb that’s recognized by Webster, but we’ll use it). On the other hand, if the Commissioners feel that this may be enough information, we can just move ahead. I’m open to comments from the Commissioners on how you’d like to deal with Alternative 5A. Mr. Rosenbaum? Rosenbaum: I’d like to look at the report, and if there’s material there worth questioning, it could be suggested that it be put on a later agenda rather than try to make a decision right now. Bechtel: Other comments. Mr. Ferguson? Ferguson: I agree with that. My guess is that I may have a couple of technical questions which I could ask the staff by email without breaking any rules here, and save us from burning up extra time in January. Put it as an agenda item in January and hope that it’s a very short discussion. Bechtel: Other comments. One option, I guess, is we could read it and if there is a recommendation to discuss it, we can come back. Maybe that’s what Commissioner Rosenbaum was suggesting, that we hold off even a recommendation for putting it on S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 10 the agenda until we’ve had a chance to read it. We can always then propose putting it on the agenda, at let’s say next month’s meeting, and that would mean that we could discuss it perhaps in February or a meeting after. Is that what you had in mind Dick? Rosenbaum: Yes. Ulrich: I want to bring it to your attention because we just received it and, of course, you asked for us to do this, so it’s timely. This would not slow down or change our meeting schedule with Stanford to discuss alternatives, but it would be helpful, particularly in light of the direction that you gave at the last meeting to the City Council requesting a focused recommendation to Stanford, that when you feel comfortable, review this and give us feedback. That would help greatly in our final decision. Bechtel: Thank you John. If that’s the case, then we have some homework to do and then we can bring it up if you want to go... Ulrich: There’s not any intent to have to do it this evening. I just want to get it out to you. Carlson: John, I just have one question on this. I don’t find any summary comparison of the alternatives in terms of cost and so forth. Maybe it’s in here, I just couldn’t find it. Ulrich: Yes. One way that you can and it may take, you can look at the various tables. Each table in the final report lists each one of the alternatives and the cost so you can go through and see the cost and you can see the differences. Carlson: I don’t find the cost in the tables on the alternatives. I just don’t find the summary to give me a quick…. I find cost of reservoirs and I find…. I’m just trying to avoid mixing and matching. Ulrich: Bear with us a minute and I’ll see if we can…. Carlson: I’m just looking for a summary table that lists 5 alternatives and the capital cost of each, the operating cost of each and the quick summary of what they do. Ferguson: Page 16. Bechtel: I would agree with Commissioner Carlson. For example, Table 10 says comparison of key issues and so on. It lists 5 alternatives and I don’t even see the term 5A even referenced in that table. Except it’s in the leading first paragraph. Ulrich: There’s 2 ways of doing it. We can go back and summarize it, but if you look at page 16, Table 10 does give you the capital cost of each Alternative 1-5 and the relative operating cost. They’re not listed in dollars. They’re listed as relative operating cost. Then down under note #4, it mentions more about Alternative 5 with some reference, it doesn’t say 5A, but you can then compare that with the Supplemental Technical Final S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 11 Report that has more details that I just read the last 2 paragraphs for. So you can see the cost of 5A and merits of it and the additional risks in the storage of water with that option and then you can compare it with what’s on Table 10. Carlson: Table 10 was what I was looking for. I just couldn’t find it. Ulrich: And if you’d like, 5A could be added to that and sent out to you. Either that or look at the additional information that I gave you this evening. What’s your pleasure on that? Bechtel: It would be helpful for an information item to supplement Table 10 with a little more discussion pointing out about A and so on, so we'd have some sort of a guide to how we read this with respect to the first page of the report, of the summary report which talks about moving from 10.5 million with the pump station and so on and an increase by 3.5 million. I’m referring to the last paragraph on the note/memorandum from Dave Kraska. Somehow, tying that last paragraph to that table would be helpful, at least for tracking purposes. Ulrich: What we’re trying to do is add additional information and not put them all back together, because there’s a difference in time when they were put together. I would like to make sure you compare page 17, which talks about the challenges and opportunities with Alternative 5, and then look at the supplemental information that talks about 5A and you can easily look at those comparisons, if you’d like. Bechtel: Thanks for that guidance. Ulrich: Either individually or collectively, if you want to call or send me an email, I can answer, or actually Roger will answer questions or reconstruct this in a way that would be more helpful for you. Bechtel: Yes, clearly we need offline time to look this over and then come back next month and say, you know, what/how you’d like to handle this thing. Any other comments? We can certainly correspond. Ulrich: Sure. Don’t wait until then to let us know if you want something else. Bechtel: That’s a good point. So if there’s request to bring it back, we’ll know earlier than next meeting. Dawes: And just to ensure that reviewing this and perhaps scheduling it in January or February is not going to slow down the actual projects themselves. Ulrich: No, I plan to share all of these alternatives with Stanford and go through the review process with them. S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 12 Dawes: But we’ll start in on the well refurbishment and so forth. There’s plenty to do on the critical path, so that review of this won’t hold up any useful construction and planning and engineering? Cwiak: The items that you told us over a year ago that we could proceed with, we have been doing that. We’ll be awarding the contract for the design for the work in this year’s budget and we’re also about the award the contract for the, we’re putting the RFP out for the design work in this year’s budget and we’re about to award the contract through Council. We’re trying to get a date in January to award the contract for the design work. It took a year to go through the RFP process from the first year’s funding. The work that is on the pump stations and refurbishing the wells will be underway in the next few months. Dawes: I guess the key one is the El Camino Park Reservoir and whether or not a 2 or 3 month delay in reviewing this -- because that does figure in this whole set of alternatives -- wouldn’t be a major issue. Will it slow down that if we ultimately decide to go that route? Cwiak: We’ve structured the contract so that we can add it to the contract that we’re going to award in January. If we decide soon enough, we can add that in to the contract and continue with the design at that time. Dawes: So it sounds like we’re fine in terms of our pace here, and we’re not going to interfere with the overall project. Ulrich: The caveat would be, how significant are the changes we make in these alternatives, or ultimately get agreement on. Dawes: Certainly the idea of dispensing with the El Camino Reservoir is a very big switch. Ulrich: We’re not dropping that, at this point. Bechtel: That probably completes discussion. Thanks, Roger. I guess we’ll move on – John, was there any other business under your item? Ulrich: I’d be glad to talk about a lot more. But those were the items that I had. Bechtel: Great, thank you. UNFINISHED BUSINESS Bechtel: We’re under item 7 -- Unfinished Business. There being none, we’ll move onto item #8 -- New Business. S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 13 NEW BUSINESS LEGISLATIVE PRIORITIES Bechtel: First item there is Legislative Priorities, which is an action item. I’m not sure I can describe exactly what action is required. It says it’s requested that staff request the UAC review the attached report on Utilities Legislative Priorities. This report is provided for the Commissioners’ action. Mr. Balachandran has joined us, so however you want to handle it, you can outline for us exactly what action you expect us to take. Ulrich: From an action standpoint, one: we want you to know the kinds of priorities we believe are important and if there are any questions or changes that you’d like to make, I’d like to have that discussion. Then, two: at the conclusion, there would be an agreement that this is the right priority and the right legislative direction that we should be moving in. So that would be the kind of action that I’d like to have, and then we will move it on to the City Council. Bechtel: Great. Thank you. Had you planned to entertain questions or do you want to go through it? Ulrich: At your pleasure. Whatever you’d like. Bechtel: Commissioners, you have a feeling for how you want to look at it? We certainly, the priorities are broken down to categories of water, gas, electric. Under each one of those, we’re looking at priorities for each of these and then the resources by which the legislative action can be either implemented or addressed. Start with the water portion. There are 4 priorities listed there. Comments from Commissioners on any of either one or all of the priorities there? Mr. Carlson. Carlson: They’re fine. I recommend going ahead with them. Bechtel: Mr. Ferguson. Ferguson: Yes, the meaning behind them is all correct. I would change the wording on #2. Certainly Assemblyman Papan is first among equals in bringing legislation here, and I want to thank him for championing the issue. It would be better to say, “work with Assemblyman Papan and others proposing legislation in the next session.” I’d recommend that we drop the words “compel San Francisco” and substitute “to speed completion of needed improvements and change governance as necessary….” Compelling San Francisco is one way. It’s been on our agenda for a long time. But I’m not convinced yet it’s the only way. Ulrich: We’re action-focused here. S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 14 Balachandran: Commissioner Ferguson? Can I just repeat what you said? “Work with Assemblyman Lou Papan and others who are working to propose legislation in the next session.” Ferguson: "Others who propose legislation in the next session…." Balachandran: And others who propose…. Ferguson: "….(Jan-Feb 2002) to speed completion of needed improvements and change governance as necessary for more effective regional system management.” That makes a bigger tent. Bechtel: Thanks Rick, those are good suggestions. Any other suggestions on the wording? Girish, you have noted those? Okay. Ulrich: I would just like to, as Mr. Ferguson questioned, I think you said “others who propose”, may be appropriate to include organizations or groups that will help to advocate or work with legislation. They may be behind, or work in concert with, those that propose legislation. Ferguson: Actually that’s one of my global comments on this section. We’ll come back to this later, rather than write it into this one. I’d like to leave this bullet-specific change on working with legislators who bring legislation on this topic. But John raises an important global point and we’ll come back to it. Bechtel: Other comments or suggested changes? Any actions on any other suggested changes to any of the items under the water legislative priorities? No? Can we move to gas, on priorities? There are 5 priorities listed there. Comments on those priorities? I guess there are no other comments on that. On the electric priorities? There are 7-- obviously more there than others -- ranging from protecting our Western contract to promoting funding for distributed generation which is priority #7. Comments on those priorities? Mr. Dawes. Dawes: I don’t know if it’s appropriate to be more specific in these. Like, instead of just talking about transmission, talk specifically about Path 15 and the Munis' --specifically Palo Alto’s -- role in doing something in developing that. Also anything more specific in item 2 on the PG&E bankruptcy reorganization plan. That probably covers the PG&E one, but the…. Ulrich: Well, knowing how things change significantly from week to week or in this venue, it would better to leave it as open as this. Bechtel: Other comments on these priorities? Now, Commissioner Ferguson, you had one other comment you wanted to make as a general, as a global issue, and you want to tell us about that? S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 15 Ferguson: Yes, a couple comments generally and I’ll respond to John’s second here. The first one: it would be helpful to attach a couple example dollar figures to these items. Unfortunately, I didn’t brainstorm in advance which ones are the best examples, but maybe as a supplementary memo to this (rather than putting it in the bulleted list) identify just how many dollars are at stake if we have a legislative success or failure on some of these issues -- so we understand that this is not just plain politics. There’s a meaningful business outcome for the utility, and a dollar outcome for the city as well, so it’s worth pursuing these things. There are dollars at the end of the rainbow. I leave it to you to pick some of the best, maybe one example in each area of what’s at stake and how many years it might take for that to prove out. The second goes to John’s point, in that you've suggested here the organizations that we’ve worked through. That all makes sense as far as it goes. But we also have a lot of happy and important customers out there. Each of those customers is part of an industrial trade association, or in some cases, a professional association. Many of these associations are much more active than we are, than NCPA is. We can leverage that, to the extent we’re not allowed to buy lobbyists as a City. We’re certainly free to make our message clear. And so much the better if we can make it clear in our customer’s own setting. That may involve nothing more than making our expert staff available at a customer’s request, you know, when they’re having their association meeting or their legislative strategy meeting. Again, to the extent that we’re not breaking any rules, that will be a very good use of relatively little staff time, to get some traction on these issues and look for potential allies downstream, if any of this legislation takes root. So without formalizing that, I just offer it as a suggestion. Balachandran: We can just add it to “resources” over here, or “venue.” One of those. Just say “work through” customer groups and trade associations. Ferguson: Or "assist." Bechtel: Girish, I noticed under resources, I’m just looking at the last one, electric. It says “minor support" from Palo Alto staff. And it says that also, under the gas one, too. So look at the wording there because what Commissioner Ferguson is saying is maybe more than just minor. We might be a little more proactive in some ways. I’m not sure that’s what he means, but…. Ferguson: Well, we certainly want to make clear that the staff’s children are not being put to work here on this activity. But on the question of “minor staff” support, I raise a little more serious issue. I do think this is a very useful summary of the agenda, and this is the first time I’ve seen it in my 2 or 3 years on the job here, so I appreciate that. It needs to be attached to resource allocations, where you make those allocations -- whether they’re very deep inside the budget or whether you have to go to Council officially for that. It’s important to attach these specifics to a realistic resource allocation, whether it’s our staff time or our contribution to somebody else’s budget. I’d like to see that connection made a little more directly. S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 16 Balachandran: I need to clarify, then, something you said before about the cost. When I thought you were talking about cost, I thought you were talking about the value of actually…. Ferguson: I was. Balachandran: Okay, but you’re saying in addition to that, also talk about the resources involved. The cost of actually prosecuting some of these. Ferguson: Right. I strongly feel that we should pick a couple of examples and point out the benefits to the utility and the city, the dollar benefits of succeeding (or in some cases, failing) on some of these issues, so we understand what the stakes are. You understood that correctly the first time. When we’re talking about resources and venue here, I did make the point that I don’t necessarily want to see the budget items, but I recommend that somewhere in the process here, somebody sit down and look at our budget allocations in-house and through other organizations and make sure we’re spending enough on electric vis-à-vis water and so forth, so there’s a rationale to that spending and allocation. Balachandran: I’d like to address what you said and what Commissioner Bechtel said about the word “minor”. The reason it’s there is more who’s going to be taking the lead role, so to speak. We’re a pretty small player in all this and our view is we want to leverage the efforts of some of these larger organizations. So when we talk about a minor role -- for example, the APPA legislative rally -- we’ll have our elected officials over there. But it’s a minor role, it’s a supporting role. We are not going to be up forefront, necessarily, leading the charge. We are playing a support role. And our budget reflects that. When you look at the amount of money we spend at NCPA on the legislative front versus the amount of time and money we spend over here, it’s reflective of the influence and the leverage we have there. So would your suggestion also be, when we send this to Council, to have some examples of what we talked basically about how much money we’re spending at NCPA on this? Ferguson: I don’t have a strong feeling for whether you make that statement explicitly in this document. In fact, I hope this stays about 2 pages long, actually, when it goes to Council. But just be prepared inside the staff to say how and why you’ve allocated internal spending to these various topics, and match it to what’s at stake, and which things are coming sooner rather later on the agenda. Ulrich: I want to make sure we don’t lose sight of what it is we’re trying to accomplish here. Having this priority list is one that puts our focus, and as we’re doing tonight, you’re seeing how we’re going to prioritize it. It was not intended in a sense as a document to show how much it would cost. By being in this level of priority would be indicative of how much value we expect to get from spending our time there. In some cases, just what I’m familiar with is that when you look down at gas under priorities, one, it can have a very significant financial benefit. It could be item 2A-one, which has to do with IRS regulations for prepaid gas. We spend very little time on that, but there could a S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 17 very big payoff because we’re leveraging our association and our dues that we have with APGA. So I would like to focus on this document as a way of saying to you “this is on our radar screen. These have got high blips, and these [others] are things we are not going to spend as much time on.” But we can do more prioritization if you’d like. I just want to be clear that this isn’t “we will ask for budgets and resources and all that through our budget process”. Ferguson: Let me be clear about this. I am asking for a couple of dollar examples of what’s at stake in terms of benefits. That will be useful to Council when it sees this. And I’m just asking that, inside the staff, you connect up the priorities with the budget allocations you’re making. One of the reasons for doing this now is that we’re going into budget season. So to the extent we’ve established these priorities clearly, and we know what’s at stake, you’ll do the right thing in aligning the budget going into the new year. Bechtel: Other comments? Commissioner Rosenbaum. Rosenbaum: John, you did mention under gas 2A-I, and I assume the potential savings there is through the use of tax-exempt financing. Is that correct? Balachandran: Yes. Ulrich: But it’s afar, it’s not [immediate]. It’s when we’re working on looking at that, we’re a significant distance from whether that is going to be an appropriate way to actually buy gas. A lot of things have to be worked out, but it is very beneficial to be involved in the process, both in legislation where it is right now. Rosenbaum: From the parochial point of view, that’s a great idea. As a resident of the U.S. I’m not sure that it’s such a good idea, but what I would suggest perhaps just to make it clear to the Council in case any Council members has a concern, the word “tax exempt financing” should be included there. You know, support efforts to clarify IRS regulations to allow for prepay of gas commodity purchases so as to be able to utilize tax exempt financing. If Council members are unhappy about pursuing that, they’ll let you know, but at least they’ll know what’s going on there. Ulrich: Good point, thank you. Bechtel: Any other? Mr. Ferguson? Ferguson: Only if everyone else is finished here. Bechtel: I have really one more thought. It has to do with staff. One of the things that Council member Beecham provides -- and others, Mayor Eakins in the past -- has been advocacy for us too. Perhaps you should add in addition to resources from staff, the so-called "free" support resources from our volunteer elected officials, too. I would like to suggest you think about adding something along those lines, too. And particularly S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 18 when this is presented to the Council, then they might see that they’re also part of the resource team. Ulrich: We’ve just been trying to hide that. It’s been such a great benefit to have this great talent without having to pay a lot of money. That’s a secret we like to hold, but we’ll include that. Bechtel: Mr. Ferguson. Ferguson: Yes, just to kind of formalize this, I move that we recommend to Council that it adopt this "Utilities Legislative Priorities" list as part of the City’s legislative priorities for the coming year -- as we’ve reworded it tonight. Bechtel: Do I have a second? Carlson: Second. Bechtel: Mr. Carlson has seconded. Discussion? If not, all in favor of the recommendation that UAC recommend to the Council approval of the legislative priorities for 2002 -- the calendar year, all in favor indicate by saying “aye”. Commissioners: Aye. Bechtel: Any opposed? Passes unanimously. LONG TERM WATER SUPPLY ISSUES Bechtel: We will move on to item #2 under new business, Long Term Water Supply issues, an information item. And Jane Ratchye has joined John, so how do you want to proceed with this? Questions or some preface to the discussion? Ulrich: Just as a little bit of background, as you recall, we have a number of long-term water supply issues that we agreed we’ll have continued focus on and we will come back frequently to discuss those. So this is an update and also to be able to call your attention to the items that are very important to us to follow through with. So Jane can answer the questions, or if you’d like to have more of a summary, we’ll be glad to do that. Bechtel: The discussion of that was interesting, I like the formulation of the 3 track strategy. If you might just summarize how you see these tracks working and unfolding just briefly. Ratchye: The 3 tracks are: fix the system, explore governance options, and work on crisis-management -- some sort of crisis-management plan. S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 19 The focus is really on some way to fix the system. The first track is sort of a cooperative approach. Try to get San Francisco to fix that system somehow. Put pressure on them and support the CIP that they’ve developed. Try to encourage them. Support them to pass that, and to get the bond issuance as soon as they can, which will be almost a year from now. Do everything we can to get them to do what they should be doing. Alternative governance structure is another way to do the same thing -- fix the system rather than only relying on San Francisco to do it. That effort is really around “do we need to somehow step up the ante and ask for some legislative alternatives that will apply pressure to San Francisco to do that also?” So that’s basically that effort – the legislative proposals are pretty wide open. They can be a number of different things. I can talk about some of what they might be later. The crisis-management plan is really raising the awareness that that needs to be done. As the general manager of BAWUA Art Jensen said, “Being without water for 60 days is not a mere emergency, it’s a crisis. And we need to make sure that all the utilities in the Bay Area are coordinated and all the emergency services providers (Red Cross and others) understand the reliability risk and that we’re prepared or we understand how to react in the event of some event that would put that system out of service for an extended length of time.” The legislative initiatives range from trying to get a piece of legislation that forces them, for example, by a certain day to fix or make sure their system is up to some particular seismic standard. From that one, all the way to some sort of totally different governance structure that involves the whole region, that would be like setting up a special district. It could involve San Francisco. There’s certainly a lot of ways that can go, what sort of role San Francisco would have. Are they going to retain ownership of all the water rights that they have? In order to get them on board, you probably would have to do something like that. So there’s a lot of different ways that can go, too. I’m not sure -- am I answering your question? Bechtel: Yes, you’re answering the question and I’m sitting here feeling helpless as to how to help you and help us solve this problem, so -- questions from Commissioners? Mr. Dawes. Dawes: Jane, realistically speaking, if the Papan initiative started to get some teeth, wouldn’t that probably slow this whole process down? I mean if we’re trying to get this done as expeditiously as we can, given the threats we see, even though San Francisco moves at an elephantine pace, it seems to me that trying to introduce a whole new governance system and layer that on top of trying to get a major CIP going would be -- the end result would be further delayed. So am I off base here, or how do you scope out those 2 major alternatives in terms of getting the job done? Ratchye: Are you saying that, by applying the maybe-not-cooperative approach, they will stop in their tracks and not proceed on their CIP? S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 20 Dawes: If I were San Francisco, and there were a realistic likelihood that their PUC would lose control of the system, one way or another, I don’t see that as a major push for them to start work immediately on it. They would just, as I would say, lay in the weeds and see how it evolves and not try to pass bond issues which might be at variance with the way it settles out at the state level. It’s just rank speculation on my part. But you know -- you’re closer to people in the institutions than I am. Ulrich: Jane may want to elaborate more on what BAWUA and some of the members are thinking. I take more of the view that if I had a good plan and I had responsibility for doing something, and the state or governance was going to be a threat to my ability to manage an asset that we own, I would take a very strong stand to put that system in order and make it work. With that line, I would do everything I could, to show that there’s no need for any type of governance change, that I could go and do this, get it done. But regardless, this is a worthy effort for us to pursue, because we worked very hard trying to get San Francisco moving along. For whatever reason, they haven’t got it all together. So having our focus in a number of areas to try to make this work is important to do. But I don’t think we intend to have a governance change as our ultimate goal. What we want is Hetch-Hetchy to be rebuilt and to be safe, and reliable to serve us water. We should put the pressure and advocacy in support in multiple ways in order to get this accomplished. Bechtel: Other questions? Mr. Carlson. Carlson: Yes, I’m concerned that things are just not going to stabilize in San Francisco for a long time. My understanding is that there’s a good chance that there are going to be more initiatives on municipalization of the electric system -- which involves the San Francisco PUC powers, of course -- in either March or probably November. San Francisco is just going to stay paralyzed on this, because if that happens, it's a huge potential bond issue. And it's highly questionable whether there's bonding room to both municipalize the electric system and move ahead with the CIP for water. Ulrich: That’s an argument for moving ahead to support alternative governance as another means to keep them going. Carlson: I agree. Ulrich: You can see that scenario coming to pass. Bechtel: Other questions? Mr. Ferguson. Ferguson: Commissioner Dawes raised a good point. I wouldn’t say it’s a point that gives a reason not to go ahead. We do have the right objectives and the right thrust here. But it is possible for incompetently executed legislative strategy to have that kind of result. The right fix for that is not to pull out of the strategy, but to make sure that BAWUA or somebody else just hires competent legislative advisors on the ground in Sacramento, to think this through promptly, before we make such a mistake. It would S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 21 be a shame to waste the volunteer time of the electeds. We should get it right the first time. Bechtel: Mr. Rosenbaum. Rosenbaum: We were told that one of the reasons for the delay in San Francisco acting was issues that were on the ballot in November. That election is over. I have trouble even figuring out who won, but what issues were resolved? And why do you think they’re ready to move ahead and put the bond issue on the ballot this coming November? Ratchye: Indeed the reason that we felt that it was taken off that schedule to have the bond on the ballot earlier was because Willie Brown felt like to raise that issue of a large bond would make people vote for the 2 initiatives that were on the ballot. Now Commissioner Carlson is raising this issue, that if these come up again, are they going to pull the bond issue again for the same reason? Now I don’t know. I guess that’s always a possibility in San Francisco. We just need to build support for that, and support them. They have a new General Manager now, who seems to be working towards getting the CIP approved and proceed with the bond issuance as soon as possible, so I’m hoping that that happens. We’re in the “hoping” mode whenever we’re relying on San Francisco. Rosenbaum: Other than the possibility that municipalization would once again appear on the ballot, is there any reason why the CIP should not be on the November ballot? And if it were there and were to pass, would our concerns about the Hetch-Hetchy infrastructure then be resolved? Ratchye: Passing the bond issuance is a very large step. Another step is to adopt the CIP and commit to that schedule. They already passed 2 bonds before Measures A and B were passed, and they still haven’t spent the money. They passed those in ’98. Their problem has not been financing. They have $750 million and they can’t do anything. That’s one thing. But they really need to adopt the CIP and commit and do it and somehow transform their organization into one that can actually complete projects and get things built. We just haven’t seen that. You know, we’ve been waiting for not just a year or two, but probably ten years. And we just haven’t seen them be able to complete projects. Every year on their books, the depreciation amount is greater than their capital additions. How do you fix that? It’s not money, in the short term. Bechtel: Sounds like we need a new CEO. Any other questions? I noticed in the first, we’re talking about in the next -- I’m going to read a paragraph, “In the next year, the Commission should expect a conceptual discussion of water supply portfolios as a first step in completing a water integrated resource plan. Council and community input will be needed to define a direction for long term water supply development.” Sounds interesting, but I thought we already had a CIP ourselves and we were marching along on a plan for doing things. So could you elaborate a little bit on why this is, why we haven’t even taken the first step? S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 22 Ratchye: Where are you reading on page 6? Bechtel: I’m reading on the cover memo, memorandum item #2 under executive summary. Ratchye: I’d like to make a distinction between the Water IRP (Water Integrated Resource Plan) and the CIP. Right now, there’s an approved CIP to install improvements on the distribution system for emergency reliability enhancement and other improvements. What that refers to, what you’re talking about, is looking at the long-term water supply picture. Right now, we have 100% San Francisco for long-term water supply. It’s probably time to look at some sort of range of portfolio mixes that we can come up with, and try to gauge the community response to those. We haven’t looked at that for a while. We don’t have any unique decision out there that’s forcing us to make a determination or having to pay some sort of fixed cost for San Francisco water. So we’re not at a place yet that says you have to decide how much you want long-term because you’re going to have to pay for it. We just pay for as much as we use and it’s all a “volumetric” fee. There’s nothing that’s forcing this decision, but it’s probably time to look at some portfolio options. I went through some of the possible themes that you may come up with. One might be, for example, a “high water-quality” portfolio: we don’t want any water other than San Francisco water, even in a drought. In a drought, we’re just going to suffer. We’re just going to reduce. We’re going to have conservation. We’re going to have reduced supply availability but we’re not going to operate the wells because we don’t want quality any lower than San Francisco. Another “high-quality” scenario is high quality, but during a drought, we put a whole bunch of money into super-duper treatment of well water, to use it during a drought. Another theme might be "high reliability" where this is super valuable to us: We really want reliability. We want a connection to the treated water line from the Valley Water District. We want our wells. We never want to not have water. We want to have multiplicity of sources, whatever. Another theme might be an environmental theme where we have the highest level of conservation efforts we can think of: Change every toilet and showerhead. Landscaping in the city uses recycled water everywhere. Use the well water for enhancing return flows to the Creek. I don’t know -- just some sort of very environmental-type portfolio. Just present these almost conceptually, and try to get community reaction on what people value most. Is it price? You can sort of define the attributes. You can imagine some sort of matrix where you look at the cost of these different portfolios, the reliability in various scenarios, the water quality, just any aspect you can think of. And you try to see where the community wants to balance that choice. That’s what I’m talking about. So it’s not really the CIP. Maybe new CIP projects would emerge from the choice. S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 23 Bechtel: It’s going to be an interesting discussion. When do you think we might be discussing this? A couple months? 3 months? Prior to CIP? After? Ratchye: It will be 3 months, 2 or 3 months. This would still be at a fairly conceptual level at this point. Bechtel: Any other discussions on water? Being none, thank you very much Jane. We’ll move to item -- let’s see, why don’t we take a quick 5-minute break and then we’ll take the Natural Gas Purchase Plan. Ulrich: Can I just -- ? I don’t think we have far to go. With the staff here, I would prefer, if you don’t mind, to take a few more minutes on this. Bechtel: Yes, all right. Let’s move ahead then. NATURAL GAS PURCHASE PLAN FOR FISCAL YEAR 2002/03 Bechtel: We’ve got Natural Gas Purchase Plan for Fiscal Year 2002/2003, an information item. Ulrich: We’re dedicated, so I just want to very briefly…. Bechtel: We’re dedicated to moving ahead quickly with you…. Ulrich: We’ll be brief. We can be brief in this area because this is an area that we’ve had some discussion on in the past. What’s important here is that if it’s an information item, it’s within the authority level that we have to pursue it. But you need to know that in our strategic plan, we made a conscious effort to purchase in a laddering approach, so that we were not causing price-spike increases or drastic drops, but to stabilize and to buy a small amount a little at a time. Well, because of the way the market has changed significantly, we believe it’s appropriate to change from the laddering to buying a larger amount of gas in a more focused “let’s buy it soon” approach. That’s what we want to point out here. We'll be glad to answer questions related to the deviation from the laddering structure. Bechtel: Mr. Carlson. Carlson: Go for it. Ulrich: Thank you. Bechtel: Mr. Dawes. S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 24 Dawes: I would assume that given your comments at the outset that this is basically out the window? I mean all the contracts we had that were laddered for this year and next are cancelled and terminated. So we’re starting with a clean slate. I assume that when you say “we’re not laddering” that you can fill or replace those contracts pretty much across the board. Ratchye: We’re not starting with a completely clean slate, because Enron is not our only supplier. But out of the ‘02-‘03 amount that we had fixed for it as of when this memo was written, which was obviously before November 30th, out of that 52%, about half of that was Enron. So we’ll have to re-hedge some of that. Dawes: My comments about the electrical reserves are also applicable here. We’re probably flying a little blind as to what ultimate liabilities will be on this contract termination. Clearly we were rebuilding our gas reserves. We’ll now rebuild them much more rapidly, given the rate structure. I assume that staff is not intending, at least in the near term, to recommend any serious rate changes -- and that we will plump up those reserves so that we have adequate resources in the event that the liabilities come home to roost in the contractual dispute situation. Ulrich: Yes. Bechtel: Mr. Rosenbaum. Rosenbaum: Looking at attachment A, the plot, I was curious about the curve for projected market price showing prices $4 and over. Whereas, when I look in my newspaper, I can look at the commodity futures, and the price for that year varies somewhere between $3 and $3.50. Am I missing a point there as to why we can’t buy at those prices? Ratchye: What you’re probably seeing in the paper is the NYMEX price -- and that’s at Henry Hub in Louisiana, and this is…. Rosenbaum: No, this is New York Mercantile Exchange. Ratchye: Right [N.Y.M.Ex]. That delivery point is Henry Hub in Louisiana and this delivery point is PG&E Citygate. That’s the primary point that we purchase gas so that’s the benchmark that we use. Rosenbaum: How do those prices relate to one another? Ratchye: The difference between the two is what’s called the basis. Most generally PG&E Citygate is a higher price than Henry Hub on NYMEX. The relationship to each other is not constant. The difference changes, but generally Henry Hub is a cheaper point. S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 25 Rosenbaum: Maybe it’s too much detail. If I look for the price at Henry Hub today, it’s about $2, whereas if I look at the futures market for the current, not the forward, it’s about $2.80. Any explanation for that difference between the Henry Hub and what I can buy a futures contract for? Ratchye: Both of those prices are at Henry Hub. You’re looking at the difference between a daily price, what you can buy gas today, and what you can buy gas for future delivery. Both of those prices as reported in the newspaper are at Henry Hub in Louisiana. So if you wanted to buy gas at Henry Hub, that’s the price that you would pay, whether you’re buying it today or buying it for future delivery. We don’t buy at Henry Hub. We buy at PG&E Citygate, so that price is different. It’s a not a publicly traded delivery point. It’s an over the counter point, so you won’t see that price published in the newspaper. Rosenbaum: Is there any virtue to trying to hedge using the commodities markets? Bechtel: Girish, go ahead. Balachandran: A couple of things in answer to your previous question. The commodity markets on gas are in what’s called "contango" -- where the futures prices, the prices in future months, are higher than what it is today. That’s what you’re also seeing reflected in the forward strip we have in the report. In terms of your question, does it make sense to do commodity hedging? Is that your question? Rosenbaum: Yes. Balachandran: That’s essentially what we are doing. We have a retail customer base and we’re trying to balance our rates with our commodity cost. If you’re asking, are we planning to use financial instruments? The answer is no. We don’t plan on using them right now. We’re using physical gas and so far we’ve seen that’s sufficient for our needs. And if we use financial futures and try to hedge Henry Hub gas, there’s still the basis differential which varies and right now -- Jane gave me the number -- it’s about 50 cents or so for ’02-’03. That was today’s quote. The basis differential to get gas basically between Henry Hub and California PG&E Citygate is about 50 cents, but that changes all the time. It can go up to a buck. It’s gone up earlier last year. It went up to $10. So hedging at Henry Hub is one piece of it. You have to hedge the whole delivery. Rosenbaum: Commodity futures is clearly thought of as speculative, but on the other hand, they’ve always had a sound business purpose to hedge. That is, there’s two sides to the trade and one of necessity will be speculative, but the other serves sound business principles. So it’s not obvious why, if, for example, it would take us 3 or 4 months to complete our gas purchases and we felt that the price today was very low, it’s not obvious why we wouldn’t attempt to hedge. I mean, what is the current process if we don’t have Enron to deal with now? What is the process going to be to secure our future supply? S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 26 Balachandran: I think earlier John did mention that we have contracts with 2 suppliers, BP Amoco and Sempra, and we’re in the process of adding additional suppliers. So we are actually buying gas to cover the shortfall caused by the termination of Enron contracts. We’ve actually purchased some gas for this month and we have plans in place. We’re in contact with suppliers to essentially buy gas out in the future and reestablish our hedging positions. And it’s not probable that it’s going to take 2 to 3 months. It’s going to be, I’d expect, sooner than that. Rosenbaum: My comments are just motivated by the solid curve, the expected portfolio price for ’02-’03 which look like it’s $5. I would think given current prices, we ought to be able to do significantly better than that. Bechtel: Any comments? The question I have is, are we sure that we are doing the very best we can to buy the cheapest possible gas for our residents? Given the fact that if you look at how our rates have changed so dramatically, I’m sure that we’re not doing due diligence without asking the question. So maybe that’s part of the motivation for the questions by Commissioner Rosenbaum. Balachandran: Commissioner Bechtel, we have exercised due diligence. Actually we’re trying to meet certain objectives for buying gas for our customers. One of the objectives is stable prices, unlike PG&E which buys gas for its customers on a monthly basis. That’s the choice that they make and we can make the same choice. The con of taking the risk of doing that, is customers are exposed to long-term prices, and if we would have followed that, our customers would have paid for gas $14-15 per MMBtu last month, last year. Our strategy has been, we’re looking for stable prices. We’re not trying to beat the market and so we’re going to be using a laddering approach. Essentially the price that comes out of it is worth the laddering approach. By following the laddering approach, we have a set of stable prices. To find the best possible price, what we do is to go out to a set of suppliers and get quotes from them and we make sure that we enter into a contract with the lowest price, keeping in mind we want to do business with creditworthy entities. We have an approved counterparty list who we deal with. They have to pass that hurdle first. And then we go for the lowest price, after that. Bechtel: Thank you. Ulrich: I want to be real clear. We are not trying to follow them and get the necessarily lowest price. We are looking for a stable and trustworthy counterparty, and we don’t make a market on the gas. By looking at the chart, you can look at it all you want to. It’s not going to go up or down based on what we would like to have it. It’s what the market price is. So we’re not chasing the lowest price. Again, I want to be real clear on that. Bechtel: I recall the discussion in our strategic plan, specifically on this point: Are we looking for the lowest possible rate or are we looking for rate stability? Clearly, you’re S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 27 following our previously adopted strategy of going for longer term stability. So thanks, Girish, for explaining what the process is. Other questions on this? Ratchye: Can I add one more thing? I just want to clarify that this price shown on Attachment A is the market price at the point at which we need the gas. Even if we bought gas at Henry Hub, you still have to add that 50 cents on to get it to where we need it to be. So there’s no lower market out there that we’re not engaged in. This is the point where we have to buy gas. It’s where it needs to be delivered and this is the market price at that point. Bechtel: Mr. Rosenbaum. Rosenbaum: Yes, I was just commenting because my observation in today’s paper, the futures contracts for the month that make up the year ’02-’03 are all between $3 and $3.50. So if I add 50 cents to that, I get $3.50 to $4 which I would say is the market -- if you can guarantee that transportation or that basis charge into the future, which clearly you can’t. But are you saying that the price you would be quoted by our suppliers for delivery at our delivery point is currently on the order of $5 for the year ’02-’03? Ratchye: No. It’s currently on the order of $3.70 if you look at the graph. The projected market price is the thin solid line on the bottom. Rosenbaum: So that’s certainly consistent with the New York Mercantile Exchange Commodity Future. Ratchye: Absolutely. We look at that every day, too. We look at what NYMEX is trading at. We look at what the basis is trading at. We look at what gas is trading at in Malin, and we look at Southern California and PG&E City Gate. So we look at all those points and see how they’re relating to each other. Rosenbaum: Thank you. Bechtel: Thank you. Other questions? I guess that completes Item #3, the plan. NEXT REGULARLY SCHEDULED MEETING Bechtel: Next item would be our regularly scheduled meeting, which we had posted or had planned to have on January 16th. I have requested that we move that meeting up to January 9th. I’ve not talked to staff about that. There are 3 items that are proposed: renewable portfolio, which we’d postponed, the NCPA strategic plan update, recommendations on electric transmission alternatives. Interesting agenda. We should all be present, so if any discussion, on January 9th? John? Ulrich: From a logistic standpoint, our preference would be to continue on January 16th. When you look at a week earlier, it just moves a very large amount of staff processing S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 28 and development of materials earlier one week. With the meeting on the 9th, all the material would have to be prepared by the previous Friday and with the holidays, particularly with the furlough process that this city will be going through, it would be a very difficult crunch to put all of that material together to move it up earlier. Bechtel: Personally, I will not be present on the 16th due to long-term commitment I have. Mr. Rosenbaum, you too would have a conflict. So that would be 3 commissioners at that meeting if we hold it, remain on the 16th. I’m out the whole week. Ulrich: Another approach would be to reduce the expectations of what we were going to cover. I have the analysis of what some of the material as you can see is been close to completion and others would not be. Bechtel: Shall we postpone the renewables? That’s certainly probably ready. Is that right? Ulrich: Yes, it was just about ready before the other meeting. But I’ve got to keep in mind, too, how much do you want to accomplish? If you do it earlier, then we’re going to have more to do the following month. You can decide that. Our reason for being here is we’re staffed to get things done. So if you ask my preference, it would sure work out better the other way. Bechtel: Well, I can propose the 23rd, January 23rd. Ferguson: That’s NCPA. Bechtel: Which is NCPA also. Ulrich: We can have the meeting there, if you’d like! I know you’re all coming to that. Well, life goes on. The problem with the schedule is some things can move very easily, but as we’re getting prepared for the budget season and for these other initiatives, we have a rather elaborate process to go through. Once these items, if they’re action items, then they have to be scheduled to go to the Council and all that. Don’t let that get in your way. I’m just trying to say that, you’re just asking the question that which one’s better for us and I’ve given you that opinion, but we can work around your schedule. Bechtel: My preference would be to move to the 9th. Rosenbaum: With those items that you can conveniently have ready, which would certainly include the renewable portfolio report. Ulrich: That’s fine. I just want the ability to whine, when we can’t get something later in the year done and that you’ll be supportive of those recommendations. S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 29 Ferguson: Will you be able to extract NCPA strategic plan update information from NCPA over the holiday weeks? Get it in the packet? I know they’re just as hard working as we are, but, is that really going to slip? One of the reasons for having NCPA on the January agenda is because we’re going into the NCPA meeting a week or two later. So let’s be prepared, or else we’re just going to have to wing it there on 22 January. Ulrich: We can deal with that. What I’m hearing from you is that you’d like to have the meeting earlier because of your commitment to be here, and want to be here. All I can say at this point will be that I will put on the agenda what we can reasonably do, recognizing the priorities of things. Things that can't fit will follow later. If that’s fine, I’ll do that. Bechtel: Good. Well, thank you very much John. I appreciate it. Ulrich: We won’t let anything critical slip. Bechtel: Yes, I’m sure you won’t and all of us. Ulrich: We can always have a special meeting, if necessary. Bechtel: Commissioner Dawes pointed out about the other item on the water plan. I’m assuming that what we’ll do is we’ll read it and at that meeting in January, we’ll decide if we want to put it on the agenda, a future agenda, but we will not plan to discuss the water item in January so. Ulrich: Could you clarify that? What water item are you talking about? Bechtel: We’re talking about the Carollo update report. Carlson: Why not? That one’s done. Ulrich: Yes, I’d recommend that. Bechtel: We’re going to discuss that at that point? Carlson: Sure. We’ll have time to read it. Bechtel: My sense was earlier that not sure that everyone wanted, but let’s we can certainly put it on the agenda then and then if there’s no discussion, if there’s no discussion on the item, then we’ll pass so. Ferguson: Just a point of information. When is the new Council in place? When are the appointments made? Before January 9 or January 2? January 7 okay. S:\UTL\OldH\01DIRECTOR\U A C\UAC Prior to 2019\UAC 2000_2005\UAC 2001\2001 December\Minutes\UAC Minutes 120501.doc 30 Ulrich: January 7 would be their first meeting and then they would apparently be sworn in at that time. Bechtel: Any other additions to next month’s agenda, to make it even worse? If not, do I hear a motion to adjourn? Ferguson: Move to adjourn. Carlson: Second. Bechtel: Second by Mr. Carlson. And all in favor say “aye”. Commissioners: Aye. Bechtel: Thank you very much. Ulrich: Thank you, gentlemen.