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HomeMy WebLinkAbout2002-02-13 Utilities Advisory Commission Summary MinutesUTILITIES ADVISORY COMMISSION FEBRUARY 13, 2002 UTILITIES ADVISORY COMMISSION _____________________________________________ 1 ROLL CALL _____________________________________________________________________ 2 ORAL COMMUNICATIONS _______________________________________________________ 2 APPROVAL OF MINUTES_________________________________________________________ 2 AGENDA REVIEW AND REVISIONS _______________________________________________ 2 REPORTS FROM COMMISSIONER MEETINGS/EVENTS ____________________________ 3 DIRECTOR OF UTILITIES REPORT _______________________________________________ 4 UNFINISHED BUSINESS __________________________________________________________ 8 NEW BUSINESS__________________________________________________________________ 8 UTILITIES SECOND QUARTER REPORT ___________________________________________________8 CAROLLO WATER SEISMIC STUDY______________________________________________________27 NEXT REGULARLY SCHEDULED MEETING______________________________________ 29 ROLL CALL The meeting was called to order at 7:00PM by Chairman George Bechtel. Present are Commissioner Dexter Dawes, Commissioner Rick Ferguson, Commissioner Dick Rosenbaum, and Commissioner Dick Carlson. Bechtel: All the commissioners are present and Council member Beecham. ORAL COMMUNICATIONS Bechtel: The next item on the agenda is oral communications. I don’t have any indication of anyone wishing to speak but anyone who would like to speak before us is welcome to do so. APPROVAL OF MINUTES Bechtel: Having no indication, we’ll move to item #3 on the agenda, which is approval of the minutes of the Utility Advisory Commission held on January 9, 2002. Any comments on the minutes? Dawes: Move for adoption. Rosenbaum: [seconded off screen/off microphone?] Bechtel: Mr. Dawes moved to adopt it. Mr. Rosenbaum seconded. All in favor say “aye”. Commissioners: Aye. Bechtel: Approved unanimously. AGENDA REVIEW AND REVISIONS Bechtel: Next item, #4 - agenda review and revisions. No one let me know in advance of any changes to the agenda. Any changes tonight? [No answer from commissioners] So we’ll proceed with item #5. Carlson: One second. I thought we were going to have a little discussion on the bond issue, the gas bond issue. Bechtel: We can cover that maybe under the Director of Utilities report. If that’s okay? 2 REPORTS FROM COMMISSIONER MEETINGS/EVENTS Bechtel: Reports from commissioners. We did have a legislative rally for APPA and we have Council member Beecham who attended. Dawes: With Rosenbaum and Dawes. Bechtel: With Rosenbaum and Dawes on APPA? I think you’re referring to NCPA. I’m referring to the Washington meeting. Beecham: Yes. The Washington trip was at the end of January, beginning of February. Mayor Ojakian did join us. We had very good meetings with Senator Feinstein and with Eshoo. We joined a number of our colleagues at their meetings with their legislature as well as meetings with members of FERC, Department of Interior and Department of Energy. Overall, I would say it was quite a productive session. The main issues for us during the trip was #1, there is the potential during the ?? decrease to a restructuring of the electric industry in DC in the House and Senate. Our concern there is that they would repeal the Public Utility Holding Act of 1935 known as PUHA. We understand that restructuring is unlikely to happen because of Enron. And this occurs because PUHA actually occurred in 1935 because of a former Enron friendly demise and so the current Enron is preserving protections of the Holding Company Act. The second thing before us is on Western’s allocations from the Federal budget. In the past, we’ve had issues because it’s scored on the Federal Budget, even though we fully paid for Western’s expense, it has been counted in the past against budget. That has been fixed. We did not expect an issue this year, but apparently there must be somebody in OMB that hates PMA, the marketing arrangements, so they have rather than working on the budgets for Western and others, they have put a spending limitation. It’s not to say they don’t have the budget. They just can’t spend the money. So we’ve alerted [inaudible] that we’ll be coming to them later in the budget process [inaudible] so that we can take care of that millstone around our neck. A number of other issues were talked about included Path-15. Of course, we talked to FERC about the many issues going on around there as much as we could. We had some constraints, because of some ongoing legal constraints. At DOI, Department of Interior, there are some curious issues going on about their auditor, their attorney? I forget which office. There’s one there in office that’s asking that they basically go through past expenses and reallocate them. That could mean as much as $1 billion reallocated to some of the programs that are near and dear to our hearts. And if that were actually to happen, that can have a large economic impact on Palo Alto. So we’ve started the process of talking within the department to try to find out more of what’s going on and also try to control the process as much as can be possible. Carlson: Let me guess. It just happens to be a proposed reallocation from irrigation water users to electric payers? Beecham: We did not know. I do not know exactly whether that is correct. Carlson: Dollars to ?? 3 Beecham: But anyways, I thought it was a really good trip. We had a good turnout from NCPA. Our Mayor would say is a very quick study in these issues and certainly more than carried his weight down there. Bechtel: Any other questions, Bern, on the meeting? Ulrich: Can I just add a couple of things? First off, I couldn’t be more pleased with the support of Bern and Dick, our mayor. It’s impressive when you go to see one of our legislators who’s been elected by everybody whether it’s Senator Feinstein or House member Eshoo . When one of our elected officials arrives, for some reason, they treat them far differently than when a staff person like myself arrives. I mean that in a positive way. They understand who they are and whom they represent. Very good communication, as you see, took place. So it’s very important who’s there to deliver the message and have good communication. The staff who work with the Representatives or the Senators are very quick studies and they listen. Also, we had an opportunity, since we are a member of the American Public Gas Association and one of only 3 cities in CA that sells and distributes natural gas, is that the Mayor and Bern were able to talk about pending legislation that we support regarding pipeline and safety and they were able to communicate well to them on that important issue. So it’s good to be in Washington. We got an opportunity to talk about a number of things. Bechtel: I think you were there at an opportune time too. Ulrich: The weather was wonderful. Bechtel: Well I wasn’t thinking about that John. I was thinking about the President’s speech before Congress. I’m sure the city was filled with people on the streets. Ulrich: The security was incredible. DIRECTOR OF UTILITIES REPORT Bechtel: Any other questions? Thank you very much Mr. Beecham and Mr. Ulrich. Next, John, you’re up next on the agenda with the Director of Utilities Report. I guess there was a question about the bond issue that maybe we can talk about. Ulrich: Sure. We do have those in highlight. I’ll go through some of my notes. On the PG&E bankruptcy update, as you probably have been watching, a lot has been going on in that area. The bankruptcy judge has told Pacific, Gas and Electric that their plan of reorganization would have to be in competition with the State of California’s plan of reorganization and also that he will not usurp state law in bankruptcy and tell the State of California that they do not have rights over PG&E in the final outcome of the final plan of reorganization. So he’s going to expect that PG&E will come before the Court and demonstrate why each portion of the plan of reorganization is in the best interest of the creditors and allow the State of California to have it’s say. So I think that’s probably significant. The final outcome is basically up in the air until we see California’s plan and how that will turn out. We are working very actively at the same time with PG&E on the Interconnection Agreement. As you know it expires at the end of April, pardon me, the end of March and that needs to be negotiated before that time runs out. We are 4 cautiously optimistic that a workable agreement will be reached with the ISO at least on a temporary basis with some sort of exit provision, which you know from previous report, the information report we provided last month. Sure there are a number of possibilities, but the one that we do not want to get into is to have to join the ISO without having a clear understanding of that ; 1) we’d be able to retain local control over things that we do and 2) also that we understand what the cost and provisions would be for ongoing. We’re really concerned about “pan caking” or additional costs being added on to get delivery of transmission service to Palo Alto. On the other hand, with this tariff, we would like FERC to intervene and either extend the tariff or give us, give PG&E more of an incentive to negotiate with us on what the appropriate contract should look like and we’d like to, of course, go out to about 20/50, something like that. But from past discussions, you know that the Stanislaus commitments are there. We will probably reach some kind of an agreement, we’re hoping, but it will not entail commitments of firm transmission. Those will still be up in the air and they may be for some time. Regarding the bond rating and the bond issuance, we received an excellent credit rating on the $26 million worth of utility debt that was approved by the Council. The city received a “double A minus” rating from Standard and Poor’s and Moody’s awarded a “double A3” for the revenue bonds. These are described as “fall in the high quality grade” rating category and are particularly meaningful given the volatility in the market. We believe it’s very unusual for a utility to get such a high rating on bonds. The proceeds on these bonds, as you know, are going to be used for gas and water capital improvement infrastructures. The city still retains an overall “triple A” rating and to our understanding, there are only 2 other cities in California that have such a high of rate. We believe that we received the rating because one of our strong reserves, solid revenues and, of course, sound management. They were able to look back and see the kinds of decisions we made on protecting our customers and protecting our resources and prices and that those all have a factor in leading to this decision. On February 7th, the revenue bonds were sold in competitive bid process. The winning bid went to Solomon Smith Barney and resulted in a true interest cost to the city of about 4.7%. The other part, to my understanding, is that included in that price is bond insurance that typically is an additional cost. The favorable rating and low interest cost on the bonds, of course, is going to keep our utility financing down. Dawes?: How many years is it at now? Ulrich: I think it’s 30 years, isn’t it? That’s an update on that area. The last quick item is we’ve talked at some length about what’s going to happen with gas prices and, as you know, we went out and purchased a good portion, if not all of our gas needs, at a very favorable price. We deviated from our laddering approach, as you know, and in fact you encouraged us to go out and buy more, I think were the words. So we went out and bought more and, consequently, we’ll be coming to you next month at the UAC meeting to indicate our rate proposal plans for fiscal year ’02 and ’03 and we will also include in that, the 10 year financial forecast and reserve levels as part of that discussion. As based on how I’ve just described it, looks like we’ll be having a request for a gas rate decrease and we’d like to move that obviously rather quickly so that it can be considered by the finance committee and the budget and for approval action when the Council approves the budget in June 17th. That way the rate can go into effect July 1st and while typically in July is not a heavy gas usage time, it’ll send a signal that the prices have gone down from it’s unprecedented rates that we’ve experienced this 5 winter. We will also be coming and talking more about water and other commodity issues. So I wanted to give you that update. I have a couple of other items that were asked for by Commissioner Ferguson regarding the gas distribution system and I can cover those at a later time if you’d like. Do you want to do that? Ferguson: What about the gas report? Bechtel: We can cover other more specific utility issues during the individual reports. Mr. Ferguson. Question? Ferguson: Can we get an NCPA report from our attendees? Bechtel: I guess we had. Ferguson: This is the first meeting since the NCPA meeting. Bechtel: It is true. We did have the NCPA meeting in January and Mr. Rosenbaum and Mr. Dawes attended. Comments from either or both? Dick? Rosenbaum: I think there was a lot of self-satisfaction from the part of NCPA members. Since we last met, PG&E had gone bankrupt and Enron had gone bankrupt and we were still alive. They had the pleasure of pointing that out. Carlson: So the strategy worked. Rosenbaum: I think the most significant thing was they really are serious about building a 100-megawatt gas fired facility. NCPA would do this next to a facility already existing in Lodi and because this would be of some interest to us, we might or might not choose to participate in the “virtual plan”. Bechtel: Did they have people signed up already to take some of the output from that or was it still fairly general? Rosenbaum: There wasn’t anything specific mentioned along those lines. Dawes: From my understanding is that the folks that are in the peaking units there have an incentive to sign up for the base-load plan which is a combined cycle operation of, I thought, 120 megawatts, and that there would be some efficiencies through sharing the control station and maintenance people between the existing peakers and this new station. There were some discussion about the economics of any new person coming in that was not involved in the peaking units and taking advantage of the cost that they absorbed in their own units and maybe charging other guys more money for it and that certainly is a disincentive to become involved. There’s considerable talk on the transmission issues and it involves nothing more than what John related in his discussion, but clearly a huge interest to all the people there and discussion of whether some of the NCPA members can be served, in effect, by SMUD and Western’s power transmission facilities because some are actually physically connected to them and they may be able to seal themselves off from the PG&E carriage, if you will, and just deal within the Western-SMUD deal. And I guess SMUD is trying to find a way to include 6 others such as ourselves in the arrangement by leasing PG&E’s line, block space, whatever. I can’t remember all the bells and whistles in there, but certainly a lot of energy being directed to the issue that actually came up there that I guess is ongoing and I don’t know if it’s been resolved and that was the issue of NCPA members that had surplus power and sold to other NCPA members during the power crisis and the issue of rates that were appropriately charged. Has that been resolved John or is that still an ongoing issue? Ulrich: Well as you know every year, you’re talking about the pool and pool members get together and work through those. That’s just about completed. Dawes: So those issues have been resolved? Ulrich: Not totally, but they are being completed. Dawes: They’re taking a considerable amount of margin by virtue of those sales and is that margin going to be substantially retained? Ulrich: Well as soon as all the discussion is done, we’ll know, but I know where our interest is. Beecham: We also had a couple, since we were in Sacramento, we had a couple of legislators come and talk to us and in general, they were not optimistic talks. There is pessimism about the fact that nothing really has been fixed yet. Many of the problems we had 2 years ago are still there. And also pessimism that anything will be fixed this year, in an election year. So 2 years ago, we had the perfect storm come up in electricity and since then, this past year, we’ve had moderate weather, recession. The perfect storm has turned into a calm but if we go back into a situation where we’ve got bad weather or some other bad luck befalling us, many of the structural issues that caused us our problems last year, well they’re still there, still waiting for us. Dawes: I didn’t comment on the legislator that spoke to us, but I’ve never heard such a down beat and confused presentation of what is happening in Sacramento of [inaudible] power. Ulrich: Well it’s clearly become a low interest area and the last time I heard the Governor speak, he never mentioned one thing about it. Carlson: Surprise surprise. Ulrich: Before when I met with them, totally different. So I think it was, I agree that it was very valuable to hear from these legislators even though it was, in a sense, down beat of getting any meaningful change in the energy legislation this year. Frankly, the biggest concern I heard from that was, “what’s going to happen with the ISO?” and it was a lot of talk about what should be done but will it be done and will there be effective change enough to give us a way to have a free market for energy at a reasonable price? 7 Bechtel: Was there any discussion of the new power agency headed by Freeman, about the charter, is there going to be any more flushing out of what’s happening there? Ulrich: Well the impression I get is that their charters seem to keep changing and not much clarity about what they’re really going to do. Dawes: The biggest issue is that they’re what, 15 or 18 agencies that deal with power one way or another and they’re overlapping and nobody basically knows what the charters are for each group and how they relate to each other. Ulrich: It just confirms to me is that part of the, since the backslapping that Dick points out is that we’ve been doing a lot of things right by not getting involved or trying to stay away the ISO. We have our own problems trying to deal with it, but it would be much more catastrophic if we had got ourselves embroiled in those issues or have the CPUC involved. Local control seems to be a far better way to manage. Bechtel: Benefits of municipal ownership. Part of our strategic plan. Any other questions on the NCPA meeting? Rosenbaum: One thing we ought to mention is that we won the wine tasting contest. We made the white or red? I forget which one it was. Ulrich: It was in the red. Rosenbaum: John picked the wine and we came in first. That hasn’t happened previously. [Some friendly chit chat about the wine.] Bechtel: Terrific. Ulrich: I have to point out that this was in the evening after. Beecham: No city funds were used in this exercise. Ulrich: I can assure you that. I knew exactly where the money came from. Bechtel: Well, next year, hopefully, I’ll be able to attend and participate. Thanks very much. UNFINISHED BUSINESS Bechtel: I will move on to any unfinished business and I don’t see any listed here on the agenda. Any unfinished business? Then we’ll move to new business. NEW BUSINESS UTILITIES SECOND QUARTER REPORT 8 Bechtel: And the first item there is our Utilities Second Quarter Report which is a report from the 3 plus utilities and that’s an information item. Ulrich: Well as you can tell from reading it, there is a lot of information and it’s broken down by commodities and as we agreed, we were going to put all of this together so this is basically, this month is, the first part of it is the water report. There’s also a quarterly gas issues update and these are all by appendix. So water is “A” appendix, “B” is Gas, appendix “C” is electric and appendix “D” is financial information update. So there is a lot of materials here and I guess we’d entertain, staff is here, and entertain questions that you might have. Bechtel: I suggest that we take it from the point of view of Commissioners having questions on specific items, that we address them that way with the help of staff. Ulrich: Can I just ask that if the staff members come up to either step up the microphone here or use this and so we can have a recording of communication? Carlson: Start with water? Bechtel: Let’s start in the order of the handouts. So we’ll start with the quarterly water issues update and maybe I’ll start to my left first and then move around the table if Commissioners have questions. Rick? Ferguson: Just a comment really. I’m pleased to see the progress on legislative advocacy. It’s definitely opened up the third front in this campaign. I’m delighted to see real legislation there. Do we see a parallel legislative sponsor other than Simitian and Papan? Beecham: You mean a Senator? Carlson: A Senator or another Bill in the Assembly or is that the leadership on this issue? Beecham: BAWUA is certainly heavily involved. We’re working through BAWUA, in particular, with Art Jensen. They have staff on board, Bud Wendel and Ray McDeavitt, offering legislative aide as well as legal advice in terms of legislation. BAWUA is assisting and has assisted as it may have been requested for the Papan legislation. They are assisting other Senators or anybody else who may be coming in looking for assistance. We are not at this time tying our wagon to any particular act or approach. We do think that Papan and Simitian’s Bill 1823 certainly has objectives we’re looking for and the city will be sending a letter when it is appropriate indicating our support of it. BAWUA is aware of other activities that may be going on. BAWUA is working with other entities throughout the state that may have an interest in one fashion or another with Hetch-Hetchy upgrade. I think it’s going to be a long issue. It may or may not be resolved this year and I think our approach is keeping our eye on the long-term objective. Ulrich: We had meetings in Sacramento with Senator Sher and I think you met with Senator Sher on the telephone. 9 Beecham: I talked with Senator Sher yesterday about AB 1823. He indicates that he expects to be able to support it and certainly he also, I think, supports the objectives of AB 1823. Ulrich: The primary objective of course is to get San Francisco to get to work and we’re going just keep pushing in all these various areas to get that accomplished. Ferguson?: That’s a real good, real confident first step. Nicely done. Bechtel: On a comment going through this, I just remembered that all the financials are lumped together on one report at the end. We might want to address those all together and then just cover maybe more of the strategic specific questions on operations and save the financials and look at them all at one time. At least it makes it easier to go through the report so we don’t have to go back and forth, if that’s okay with Commissioners? Dick, you have questions on the water issues? Carlson: Yes. I expect to know a little bit more about the protective bond issue, San Francisco’s bond issue. Does that require a majority or 2/3? Ulrich: I think it’s 2/3. I believe that’s it. Kirk Miller: I do not know the answer to that question. Carlson: It’s not going to be a great time in that “town?” from a budgetary perspective which could call for a whole discussion. Kirk Miller: It’s a huge bond issue and it’s something that BAWUA is paying close attention to. There are questions whether or not they should separate out the regional issue, the regional system and have a separate bond for that or bump it all together, but when it’s lumped all together it’s a billion dollars bond issue and there’s no guarantee that that’s going to get passed by the San Francisco voters so it’s a big concern. Carlson: By November, you’ll just be coming out of the recession up there and the city budget crisis that will be really crunching. Beecham: It’s very difficult for us to anticipate what the San Francisco voters will do in November. We just need to be prepared either way to continue forward. But I do know that the new Director of the SFPUC is saying many of the right things in terms of getting a plan together, getting a [inaudible] together, revising the staff and making what will appear to be sincere attempts to the program moving forward. Ferguson: But I’m thinking almost the reverse if the bond issue fails in some point. That almost forces looking for new financing mechanism, which requires a new governance mechanism. It actually gets very interesting, but that’s the beauty of the proposed legislation. The proposed legislation maps out what the alternatives are to the city so it lets the proponents of the bond issue in the city make a case to the voters “look we can do this and we can be in charge of it or we can look irresponsible and it’s going 10 to default to some other process as laid out in the proposed legislation”. So it’s an interesting set of tools there, billion dollar sized tools, to get the result that we want. Carlson: So the legislation actually has a “caking” provision? Beecham: AB 1823 talks about an outline of events that we expect, we hope, the city to follow in upgrading the Hetch-Hetchy. It’s a reasonably aggressive schedule, actually, and I think perhaps the stick behind it is the premise of another agency, not quite defined yet, that might be able to step up to assist in the financing if the San Francisco voters themselves are not able to do it. Carlson: So it’s actually a trigger mechanism to create this new agency in the legislation? Beecham: 1823 talks about here’s the schedule we expect, that we believe is necessary to upgrade the system. There are also other bills that may be in process that perhaps more completely talks about other mechanisms. That I’ve heard, there is nothing in here that would give anybody the right to go in without San Francisco’s acceptance and acquiescence and cooperation to force anything to be done. Bechtel: You’ve attached a copy of the legislation and it’s quite interesting. Ulrich: It’s interesting reading and you may want to have further discussion later on about it. I think that’s the whole idea is to have a number of fronts that we can move forward if one of these fails. I think it’s got to be a real clear focus to us. We have to have the Hetch-Hetchy water system built and we have to show as much aggressiveness as necessary to make that happen and be willing to pay, as we have been, our fair share of what it takes to get that done. Failure, as you can see from the other reports in here, the amount of days the system is out of water, is just not acceptable. It won’t be acceptable to our customers, nor to our health and welfare in the community. Bechtel: Mr. Dawes. Questions? Dawes: Yes, I was looking at the water charts and was taken by the main line leak repairs. Evidently, I assume, it’s 2 or 3 significant problems in 1821 and 22. I don’t understand the reason that the chlorination process on these 3 events are hugely long and are not long on others. I guess it’s basically an education issue for me. Ulrich: Well the chlorination process referred to is that, Scott you may want to come up and talk about that, but this is a time when if we lose water, if the break is so significant that we lose pressure so there is a way for infiltration for ground water to come in, then we’re obligated, once the repair has completed, to seal it and super chlorinate it. It has to stay in there for a period of time to make sure there is no bacteria. Dawes: So it just depends on the type of break that it is? Ulrich: Right. The fact that there is a negative pressure where water from outside can come in, then we don’t take any risks there at all, we seal it and super chlorinate it. 11 Dawes: I would have thought that the system was always under pressure, so that if it got broken, it would always get pushed out. Ulrich: Unless the break was such that it evacuates the pipe altogether. Dawes: The other side of it I guess. Bradshaw: What happened in two recent breaks was we had to take out, remove a section of pipe and replace a section of pipe. When you do that, you have to shut down the mains and when you shut down the mains, the water and the contamination of the soil in the rest of that area can get back into those pipes. The process is you make the repair. Then you repressurize that particular piece of pipe. You super chlorinate for 3 hours. It has to sit. It has to super chlorinate for 3 hours. Then you flush the pipe and you test the water that is in the pipe. The test takes 24 hours to run so from the time that you finish the super chlorination until that time that the test comes back negative, which is 24 hours, you cannot turn on the system for the customers. So basically, we’re making absolutely sure that we do not have any situation where we have a citizen or customer become sick from the water contamination. Dawes: Were these contractor accidents or pipe failures? Bradshaw: One was a pipe failure where we had a pipe that over time had deteriorated to such a point that it failed and we had to replace a piece of main. The other incident was we had a contractor who was actually boring for soil samples and bored right through the top of our 16-inch main and caused a tremendous problem for us. You got it. Ulrich: If you want to stop by my office, I’ve got the piece of pipe in there that’s cast iron that was on Amherst and it’s got a big hole on the bottom. Dawes: So these spikes, we shouldn’t read anything into it about the pace of our preventative maintenance, the infrastructure upgrades and so forth. One was wear and tear, I guess, and the other was. Bradshaw: Actually, the one incident on Amherst because that was...we normally do our replacements based upon the number of incidents that has occurred over a period of time on a particular piece of section of pipe. This particular section of pipe, because of that incident and because of what we found when we took it out, raised that particular section of pipe higher in the priority list for a replacement. So that particular piece of pipe has moved higher on the list for replacement. Bechtel: Mr. Rosenbaum. Questions on water report? Rosenbaum: No. Bechtel: Okay, let’s. 12 Ferguson: One final question since everyone’s had a shot. I think it was Mr. Dawes asked at the last meeting and it was fresh news. And that was whether we are charging the contractor the right kind of remedial fee for this and there was a little bit of conversation of that. We’ve since heard from Council member Lyttle. Is there a way that A) we can increase the fee without crossing the line into it being a tax or criminal penalty and can we communicate that this fee has been imposed so that the contract community gets a little reminder once or twice a year that there are better ways to plan their jobs than to do experiments with the city’s mains? Ulrich: Well, we’ve had those questions and other than being vindictive, as I would on this, you cannot charge more than, according to the municipal code, more than the cost of what it will be. I use my terms more because no matter how much you charge, the inconvenience, whether it’s health or safety or just not having water, is far greater of loss to the customers than it is the amount that we can collect from the contractor. Some of these things, if you want to go into detail into some of these things we can, but basically they’re very inconsiderate and not thoughtful contractors because the one where the hole went through the 16 inch, this is a concrete steel reinforced pipe, the entire street was marked. It had all the visual signs of where that pipe was and the person set the equipment up and decided to drill right through it anyways. So that part there and but the full cost of everything that we can possibly think of goes to the customers and the other reminder is everybody that comes in, the contractor has to go and get a permit and they have a permit. They were told at the time of the permit, what their obligations are. And they also have to post a bond. These are fully licensed contractors, so you get financial information and financial resources, before they go out and start the work. But it was work unrelated to utilities, unrelated to any city type of work, for them to do some type of checking the soil conditions and they drilled the hole. Ferguson: Well it seems like somewhere in the city, we’ve got somebody who was creative enough to expand the definition of cost to fit within the municipal code. Ulrich: We’re working on that. Ferguson: We just need to communicate the lesson. I think there is a general contractor community and if we make the case clearly, whether we win or lose on some new cost definition, it’s worth communicating that lesson. Ulrich: Well it’s high on our priority. All you have to do is spend time talking to customers who have their house flooded from this or feel they’ve lost fire protection or that their business is being affected significantly. They are not happy. When they’re not happy, we’re not happy. Bechtel: Do we have a contractor’s black list that possibly we can publish? Ulrich: Now you’re getting into the area that I would like to work on. Beecham: Have you checked with the Attorney’s office on whether or not there’s any kind of penalty in the sense of misdemeanor charge or other things we can enact that would allow us to get more money out of these incidents? 13 Ulrich: I don’t know if I can explain it adequately by the law, but unless it is shown that it was willfully malicious done and it’s not a misdemeanor or a felony. The law does not allow you to charge for punitive damages. There is a law, for example, if somebody steals electricity or gas from us and you prove it, not only do they have to pay for the electricity and go to jail or whatever might be the penalty, they also have pay triple damages, so there is a punitive action under that. But under this kind of scenario, there is not a punitive process. Ferguson: That’s true, but again, we’re looking out for the customers here and this was an example that is clear here. The contractors inconvenienced an enormous amount of customers and it cost us the overnight stays in the hotels and what not. As long as the perceived cost of the contractor community is a couple thousand bucks for this error, they’re just going to continue to make the errors. So it’s incumbent on us to somehow increase... Ulrich: There are other things that can be done that we’re looking at. For example, if you get a permit, you have to pay to have a full time city inspector on your job sight all the time. If you’re working 24 hours a day, there has to be somebody there. Before you can cover anything up, it has to be visually looked at. Those are the kind of things we’re looking in. ??: You’re looking at those. Those are not in place today. Carlson: That may be the type of things to attach to the black list, so to speak. What about adding the customer cost? Because you can put estimates on business disruption and so forth. Ulrich: Well the part that we do is that we tell the customer who the contractor is and they are fair game to file a claim. Customers will file a claim against them. We can’t be in between the customer and the person who does it. They demonstrate what their damages are and we refer them to the customers’ insurance companies and they go at it. These are not, don’t turn out to be cheap for the contractor. But whether it’s expensive or not for them, because it does effect their insurance rating also and bonding. Bechtel: Okay. Can we move to the gas quarterly issues update? I’m looking at attachment B. Questions on the gas issues for the last quarter? Other than the good news, over-all the prices have declined. There’s a nice chart that if you go back to September ’99, we’re back on track with this slight [inaudible] increase there with this big spike for a year or two. Other questions? Ulrich: Would you like me to address the question that Mr. Ferguson had? Bechtel: Yes, go ahead. It’s a safety issue. Is that correct? Ulrich: As you recall, Mr. Ferguson brought up, I think it was the last meeting or the meeting before that, the question about inspection safety of the gas lines in Palo Alto. And his questions were more specific around high-pressure gas lines. We got into a discussion. I’m not sure how we got to it, but it was an understanding that in Palo Alto, 14 we own the distribution system and the gas in our distribution system is approximately 25 pounds per square inch. That is not a very high pressure for a gas distribution system. Pacific, Gas & Electric is somewhere around 40-60 pounds, but a decision was made primarily for safety and construction methods that were used some years ago that we would have a lower distribution pressure, which means you have to have larger volume pipes, but it allows you to carry those lower pressure. We have gas leaks and as you know, we have very extensive gas pipeline replacement program to replace older pipes that are leaking. So we do have an inspection program. It’s based on a 5- year cycle where we take 1/5 of the city each year and do what’s called a “mobile gas leak survey” that is both driven by a vehicle and a walking survey. And of course, we also respond to leaks of odors that people have and we classify these leaks based on how much their leak rate is. The Public Utilities Commission has a safety order that determines the classification of these leaks. Based on the leak classification, it depends on how quickly they have to be repaired. Everything from immediate to several weeks, actually several months and these are of course very small leaks. So we do have an inspection program. The state’s Public Utilities Commission which one area that we’re obligated to follow. It’s a safety order and that covers that. Now the other gas line that are in Palo Alto are not owned by us. They are owned by Pacific, Gas & Electric and they are defined as high-pressure transmission facilities. In the case of the lines owned by PG&E, they’re between 300 and 400 psi and they are larger in diameter. They’re 24 inch and 36-inch lines and I have a description of where they’re located. I won’t explain where those are located for some obvious reasons. But to say that PG&E has got the same obligations under the national Gas Pipeline Safety Act and the PUC to do surveillance and inspection of these gas lines, which includes surveillance, patrolling, leak surveys similar to what I described. They have somewhat of a different criterion obviously. So those are done. They report to the Public Utilities Commission the results of their surveys just as we do. So the inspections would be subject to the PUC’s review. Your other question was “are the inspectors different from the operators?” and the answer to that is yes. You also asked “is there outside money to do a better job on this?”. I’m not exactly sure by what you mean by that. If it’s because, as I surmise, that if you can have somebody else do it and spend more money, would you get a better [inaudible]. Ferguson: Or is there a federal grant program? Does “RESPA?” have some? Ulrich: I don’t believe so. Ferguson: [inaudible] gas pipeline? Local grant program for running [inaudible]. Ulrich: Then your last question was “have we done things differently post 9/11 regarding gas main security?” and I’ll answer that succinctly. You bet. Ferguson: I asked for a “yes or no” answer, but I’ll accept “you bet”. Bradshaw: The maintenance of our lines and survey of our lines are accepted as operating cost we had occurred as an operator of a system. And we just completed our gas survey for this year and we look just about on track with our historic number of leaks that we found. The classifications are A, B, C, with C being the ones that have to be repaired immediately, B - we have to monitor and watch and repair within 6 months 15 and A - we just have to monitor. And we are right in with our historical numbers and doing pretty good. Ferguson: The thing that I’m most interested in is “do we bring an independent set of eyes to look at the work?”. That was the question about the inspectors different from the operators. If the inspectors and the operators are all part of the same Palo Alto. Bradshaw: We actually hire a contractor to perform the survey for us. The contractor is with one of our employees. They make the survey. They turn the report into us and, in fact, in the next couple of days, I should be getting that report. Ferguson: Do we know if PG&E hires a separate set of eyes? Or does PG&E just do its reports and send it onto the CPUC? Bradshaw: I don’t know the answer to that question, but I... Ulrich: I couldn’t speak for what they do now. They used to have it done by the same contractor. There’s of course economy of scale. They have specialized equipment to do it. Just like can hire people to come in and do investigations of your electric system. I thing I can say that you’re probably not aware of is that we’re just putting it into place now is that we’ve increased our gas support staff. We now operate in Palo Alto on 24 by 7 so we have a gas service person who’s available and a stand by crew that’s in the city at all times 24 hours a day. I think Randy’s got a number. He can tell you about how we’ve improved our response time to this. This also allows us to provide service. If you’d like to have us come out and adjust your pilot light at 2am on a Sunday morning, we can do that now. Baldschun: The Council approved 3 new field service positions. These are the fellows that were on the cover of the Palo Alto Daily yesterday. Jason Strickland, Field serviceman, you might have seen the picture of him flying off the water. But they’re also the first ones to respond to a gas leak when they get the calls from communications and John with the PG&E experience really stress the need to get gas safety under control and what we did was we got Council to approve these 3 positions. Now we operate 24 by 7, which means we get a gas leak on the weekend or in the middle of the night, we don’t have to call somebody from San Jose to come in to respond to the gas leak. Our statistics indicate that was like 28 to 30 minutes time from the time we contact until we’re actually on the scene and effective January 1st, we began the program and our statistics so far indicate a 14-minute response time. Ulrich: Randy leaves his house and... Carlson: (finishing off Ulrich’s sentence) ...in a beam of light. [Laughter and some joking around] Baldschun: You know what I mean- 14 minutes. So that’s great news and we’re going to have a press release within 30 days on this new service level, not on the gas leak, but on the whole range of things we can do anytime now. 16 Dawes: Are they general service enough so that they can deal with electrical problems or are they just gas only? Baldschun: Field service, I have limited capabilities on dealing with electrical problems. It depends on the problem. They do have training and respond to certain kind of electrical outlets of the house. But they certainly don’t climb poles and do service drops. That would be in Scott’s group and we’d call them in for that. [inaudible comments] Bechtel: Are they cross-trained on water by any chance? Baldschun: Absolutely. Ulrich: Did you see Jason in the front page of the paper? Bechtel: I did. Oh I did see that. Dawes: Is he the gas guy? Baldschun: He’s water, gas, and electric, the whole thing. Ulrich: That’s one of the guys. Bechtel: Great. Great. Thanks for the report, Rick. It think you, it was a really complete report on what we’re doing on the gas safety and response. More emails from us. We get better when we get more and more detailed information. Any other questions on the gas report? If not, let’s move to the electric issues and the quarterly fiber update. Questions on the electric side of our business? I noticed that one thing; I think reading this morning’s paper that the bankruptcy judge did approve PG&E’s participating in Path 15. I guess it was something about approving something like $75 million, so Path 15 can be dealt with by PG&E while still in bankruptcy so. Ulrich: That’s correct, but you should know that there’s still negotiations going on between PG&E and other members of this consortium on how and what and how much and who and when. I would not construe by reading that article that everything is wonderful. Bechtel: At least they have no excuse for not participating, I suspect, from by pleading bankruptcy. Other questions on the electric or the fiber? Rick? Ferguson: A couple of little questions on electric. On page 4 and 5, you talk about the ISO Market Design 2002 Budget and I understand the bullet points here, but I just like to connect this up. In the NCPA report and in some of Don Dame’s conversations to us, we’re not exactly speaking highly of the ISO. But here we’re talking about the ISO’s Market Design 2002 project, so what’s really going on here? Is this a plausible, credible, well thought out proposal that we ought to support? Or is this just information on more smoke and mirrors on the part of the ISO? 17 Baladchandran: This is on the table right now. It’s presented to the ISO governing board and essentially the ISO has to respond to FERC’s order to come up with an alternative congestion management policy. The rate caps are going to be removed at the end of September so they have to come up with market mitigation strategies, etc. So this is their attempt to do it. At the last Board meeting, which was last Thursday, MichaelKahn was saying that he had some problems with some of these and he said, “Well we need cooperation from so many different agencies to actually implement a viable plan that it’s going to take a lot of work. Now this is what’s on the table and we have some problems, especially on the congestion management area, which could expose us to quite a bit of cost.” As a matter of fact, we’re meeting with the ISO tomorrow to give them some alternative proposals. One of the difficulties with all these proposals are that we have to fight these battles at different places at the same time so is the ISO going to be viable in the long term and would this plan actually be something that’s a serious one? At this point, we have to assume that. The plan is not going to be adopted, all the elements of the plan will not be adopted and that’s what’s going on right now. [The state hold and reviews and we accept it.] Ferguson: My second question is on page 7 on the PG&E bankruptcy proceedings. On that 60/40 cash stock split. Roughly how many dollars does Palo Alto have at stake in that 60/40 formula? Baladchandran: I believe it’s between 2 and 3 million dollars. Dawes: Is that via NCPA? Baladchandran: Yes. Ulrich: I think it’s the same number that we’ve had for some time. It’s based on the energy sales that took place. Beecham: And I think as I recall on the notes, the intent on the notes, and correct me if I’m wrong John, is that they are trade able. So you don’t have to hold it for another 20 years before you can cash it. You can go and actually cash them out at the market place. Bechtel: Other questions on the electric report? Dick? Rosenbaum: On fiber, I was talking to one of the participants in the trial and I asked him how much he was paying and he said as far as he knew, he hadn’t received the bill yet. Heitzman: They haven’t received the bill yet. The payment is $ 85/month. It’s been discussed in meetings. We’re preparing the billing process. I didn’t want to bill them until they had the service up and as of December, most services were up so they will get billed. Rosenbaum: So they’re going to get a large bill for several months? 18 Heitzman: They’ll be billed from the point of time that the service was up which would be December. Bechtel: You said two services by the way. What are they? Heitzman: There is the phone, which is being tested, and then there’s the internet. The video we can’t offer because of legal reasons. Rosenbaum: Let me pursue the video question. Common sense suggests that if we get into the telecommunications business, we’re going to have to offer video. It’s not likely to be much of a business if the only thing you’re offering is bandwidth greater than that available through DSL. What is the legal concern? What are our attorneys telling us on that? Heitzman: That’s a difficult question to answer because I don’t understand it. Anyways, the issue seems to evolve around the idea that we have to have a franchise agreement, but we can’t give ourselves a franchise agreement. Beecham: It’s a catch-22. As you talk to Grant, he is firm on yes this is a catch-22 on [inaudible]. ??: Alameda has started their own. Beecham: They’re not exactly the same organization we are, but you’re right Alameda and others are doing it, but because we, this body, the city and City Council as the body who issues franchises. We cannot issue a franchise to ourselves. And that is the crux of the issue. I’d be happy to have Grant come down here and explain to us again one more time why we can’t do this. Ulrich: I think Dick raises a good question and of course the idea of having a trial is to try to work out all of the steps so it doesn’t have a plan where a week from now, we’re going to do item X. We’re going to try to learn how to do it to meet the specific needs that we have in Palo Alto. Now I won’t speak for Grant either, but the issue centers around you have to be totally fair in your dealings, so if there is already a franchise in place, if we want to do the similar, we have to treat ourselves exactly the same as someone else to be fair. The dilemma at this particular point is that contrary to Alameda, utility is a department of the city, so the city would have to find a way to issue us a franchise that is negotiated at arms length. They cannot be making an offer even though one of our plans is we pay exactly the same amount as the other party that has a franchise to do it. So we’re trying to work that out. I think there’s probably a solution to it even though the amount of money is basically a minimum. What are talking, $5 thousand? A relatively small amount if you prorate the trial area. But we want to do it right and we don’t want to get in a position where instead of working on this particular trial, we divert ourselves off into some legal morass that another party might think to take action on us. Dawes: I just want to follow up on Dick’s comments that my sense is that the trial will be a failure unless this issue is worked out. I assume that staff is taking the approach that Council is not charged with telling us what we can’t do but is charged with telling us 19 how to do it so that we can offer the service and should we choose to make an investment in an expanded service, that this would be part of it. Ulrich: Yes. Heitzman: Just for your information. Tomorrow morning, we’re having bidders meeting for the business case of RFP and proposals. We’ll probably have 20 proposals there based on the phone calls that I got and part of that business case study is to find out the legal issues and how to resolve those. And to Grant’s credit, he has said there are ways to solve this. We just haven’t figured it out yet. So the trial itself physically may not have video happen, but the resolution of how to make video happen will be resolved before the end of the trial. Dawes: And we will also find out what various offers are proposing in terms of the economics so we can attempt to scale up a system and have real numbers to work with? Heitzman: There will be part of this proposal process will be an engineering stage to figure out how to build a system out most cost effectively. Not necessarily the way it will be built, but to determine if there is a way to build it cost effectively and also to look at the revenue streams from various products, one being video and so forth. So all those aspects will be built into it and the legal issues to resolve some of those aspects, so the business case should resolve whether or not it can be done economically, what products will be offered and whether it can be built economically. So all those issues should be resolved. Bechtel: When is the closing date for, I guess, when do you anticipate the study phase to begin? Heitzman: Actually, we are doing some of this study work ourselves through other contractors like the customer survey where we’ve already started building that process and the engineering guys are interviewing engineering people. They may be hired separately or they may be hired through the RFP process. The closing date for the RFP is February 28th. Given the stack of proposals I expect to see, I’ll probably be burning the midnight oil for several days to sort out which ones we want to talk to. From all over the country, we’re getting people who are interested and some of them have a lot of experience with the whole process, the business process, the legal process and the whole thing, so we should have some pretty good proposals in there. Bechtel: What was the length of time that you put in, that you requested for the study itself? Heitzman: Within the proposal, there’s kind of a time line. If this gets finished, that happens, and so on. It looks like it’s going to take 4-5 months to finish the process and that’s assuming that everything falls into place and we know that that never happens so that’s why we’re trying to get this customer survey work going before we even have people on board. Bechtel: So that means that sometime in the Fall, we should have some results. 20 Heitzman: I’m hoping August. That’s my goal to have it finished in August so that’s what I’m whatever it takes to get it done and still do a good job, that’s what we want to do. Ferguson: What about the phone side? I know you’re having trouble with video. Are you going to be able to provide? Heitzman: Well we’re doing phone right now, but it’s not charged, because we don’t want to do have to face the [??] issue, so it’s as if they were within the city services themselves. Carlson: That’s interesting. So we’ve got PacBell is [inaudible] Heitzman: Well, the trial is not a money making proposition. Bechtel: I hope you’re limiting your overseas calls. Heitzman: No, it’s just local calls and the charge is for internet service. There’s a pretty healthy internet service charge, let’s put it that way. You can understand what I’m saying. Ulrich: Well I think that we should make sure we have the right perspective here. Being a trial, you’re going to expect that when Blake comes and talks to you about things, it will not be everything’s cut and dry. We’re going to learn and make mistakes. If we get into this business, it’s going to be getting expensive venture and we want to make sure we cover all the ground and turn over all the rocks before we do. Heitzman: The operation of the trial is more to learn the physical plant and the design work and how the equipment functions and so forth. We’re not really learning a lot about pricing. The customer surveying portion and also we’ll be looking at other service territories that are offering the same thing such as Alameda and Tacoma. So we’re going to learn what other people are offering these services for and that’s where we’re going to learn the pricing. What our customers will pay and what other people are offering it for and so forth. That’s where we’ll get the pricing for the things. During the trial with 70 customers, it will be virtually impossible to find a good pricing point. Ferguson: The interesting data that came up during the task force meeting with the Alameda people that supports I think our decision to do this on a trial basis rather than wait for some outside proposer to come in to negotiate with us to wire up the whole city. And Alameda did start out by wiring up the whole city and they made a number of mistakes, which they admit to, and they learned a few lessons. They got shaken up on the play. They learned a few lessons on how to deal with their contractors and so forth. And I think it just confirms that learning how to deal with the contractors and making a few mistakes on how to slice fiber at a smaller scale makes us smarter people given when it’s time for us to be negotiating with third parties whether they’re video content providers or contractors to pull fiber. I’m happy with the progress so far. On the technical front, Blake didn’t say it, but whenever the official legal decision comes out on whether and how we can do video, the technical staff here in utilities is ready to push a 21 button in about a day to get version one out there and maybe 5 days to get version two of video. So we’re not behind the curve for any technical reason. Dawes: One last question. Customer sign up rates? It’s only been 2 months now and it’s probably too short a time, but is there any indication that greater penetration because pleased neighbors or people signing up and now dropping out? Heitzman: Well we had a couple of dropouts, but they’ve been unusual situations. One was a death in the family so and we do have, we know that the neighbors are very interested in getting the service. In fact, there may be some activity going on they’re getting the service, but we’re ignoring that they’re getting the service. For instance, at the library, we did have a wireless situation where people can come in to use it just to test it. I don’t know that’s it’s happening, but there’s a couple of our customers that are very savvy and may be letting people use wireless off of theirs. Dawes: [So the home price is right around the library started it?] Heitzman: Maybe so, but certainly this brings to point that there are certain issues that have to be dealt with when we build it out. We can’t allow that kind of pirating to happen, if people would understand that. You know, it costs money to build this thing and the best way to kill it is to not follow the rules and so forth. There will be certain rules that we are learning that we’ll be adding to our procedures and so forth when we want to build this out. Bechtel: Well Blake, you talked about something at the library. What about the Civic Center here, in the lobby, have you had anything else? Heitzman: Oh we do have, we are looking towards, we do need to make sure we have all the okays and being very careful to make sure that I don’t get something going and not have the approvals. We hope to put a display here at the Civic Center, which would have a test video signal and an internet signal and a kind of diagram of how the system works and so forth. We hope to have that up pretty soon, but I’m kind of been well ready to go but I need to make sure that everybody’s on board. I don’t want to stick it out there and find out that not everybody’s on board. Bechtel: Good. Any other questions? Dick? Rosenbaum: At the library, historically, there have been 5 internet terminals at the main library. Is this one of them? Heitzman: This would be an additional one. Rosenbaum: Is it there now? Heitzman: Yes, it’s there now. Rosenbaum: It’s identified as the fiber terminal? 22 Heitzman: Yes. You can go to the front desk and actually get a book on how to operate it and so forth. There’s a manual up there. Rosenbaum: You need a manual? Heitzman: Well, no, but just to, if they want to use it and they want to bring their wireless machine and they need to understand the components, they have to have to. They can take the portable with the wireless anywhere in the library and use the system, so that’s described in the manual. Rosenbaum: But otherwise, I can sit at the terminal and make my own determination on whether I think it’s faster than the other service available. Heitzman: Yes, absolutely. One of our survey activities that we want to do is to put a survey on that so that people who come in and use it can tell us what they think about it. We want to put that in there as well. We’re trying to capture every bit of information as we can for people to use the system. Bechtel: Thank you very much. Let’s turn now to the financial reports and I guess in this case, the first one I see is the electric funds financial information. Questions from Commissioners on the electric finances? Basically, I guess this is what 6 months or first 2 quarters of the year, is that correct? Baldschun: It’s through November on the electric side and the reason is we don’t get all the NCPA bills in a timely manner. Actually, this includes estimates for October and November that are estimated costs of NCPA now. We know the numbers are not right because we’ve got information that would indicate that the costs are going to be higher than what we estimated. I wanted to bring up in the beginning, but it is our best guess through November at the time we prepared the report, which is last week. Bechtel: Who wants to lead off on this item? Questions? Carlson: I guess the obvious question is we’ve got this substantial rate stabilization building up above guideline and we have some legal contingencies. How long are we going to keep doing it? When do the contingencies go away so we can readjust rates? Baldschun: The guidelines that you saw last year, Council approved last year, and established maximum/minimum guidelines based on a set of contingencies. Now those contingencies change quite frequently. We don’t change the guidelines frequently and we’re not proposing to change the reserve guidelines for the rate stabilization reserves in this budget cycle. But next month, you’re going to see the financial forecast and they’ll include all the guidelines, all the reserve levels, our rate proposals. At that time, we can discuss what our plans are to bring this reserve down to within the guidelines and if we’re not going to bring it down to reserve guidelines, we’ll tell you why we’re not going to do that, so that discussion is coming up next meeting and during the budget process in April and May. Carlson: I assume the big issue is a reserve for our potential contract agreements with Enron. I’m just wondering what is that something we need to reserve for 6 months, for 5 years? What’s the timeline? 23 Ulrich: I think we’d be prepared to put all the together next month. I can tell you candidly you can see from all the discussions we’ve had whether it’s from bankruptcies or whether is from Enron or whether it’s from future power contracts that we’re going to be entering into soon or some of these other risks of higher costs whether it’s transmission or ISO. I think it needs to be an analysis to show where that reserve level should be based on the risk so there’s clearly a risk assessment. Some of these are frankly low risk, but if you lose, are big, big dollars. Or some may be somewhat high risk, but maybe the dollars are not so much. So I think you’ve got to do an analysis that would be part of the financial forecast that you can look at and work on. Carlson: Well I’m perfectly willing to accept higher than previous guideline reserves for quite a while. I just think that we need to explain that to our customers. We’re building these very large reserves for this time period because we have this big risk, this big risk, this big risk and we just don’t know. Ulrich: I think you’ve seen the risk profile of the utility, particularly the electric and gas, has increased. Some of these we’re not going to be able to forecast. We are moving away from and have moved actually traumatically away from the old utility concept where everything was very clear. There was a rate increase based on looking back at our cost and said well this is what it will be and we can guarantee that. So we may not be able to articulate maybe as much on where all those risks are, except you’re going to find the staff and particularly me saying we ought to err on the side of keeping the reserves even if I can’t articulate precisely what all the risks might be. And I think that’s going to be a judgment call on how far you want to do that. I think keep in mind that whatever the reserves are, they belong to the customers and the customers can be assured where that money is and what it’s going to be used for. And we had an opportunity, as you recall, to use the reserves to lessen the impact of gas costs last year. I would suspect that the year before that, we’d never have in the wildest imagination we’d ever use reserves for that kind of support to our customers so that will be the kind of dialogue we’ll have. Baldschun: We’ve never been too good with forecasting events and I can say that with confidence. I get reminded frequently of the time that I pushed for us to give back $37 million as a refund in 1993 to our ratepayers and there were other people on the staff, felt we should keep it, because you don’t know what’s going to happen. Well 2 or 3 years later, deregulation came and then we had to raise rates to build up the Calaveras stranded cost reserve. So we raised rates and had we kept $37 million we wouldn’t have had to do that. And this is the difficult part about the reserve policy is that we have these contingencies. We give our best guess. We know we’re going to be wrong going one way or the other, but it’s better to err on the side of having too much than not enough. We saw that in the gas fund. Where would we be right now if didn’t have the reserves to provide a cushion last year? Where would be the ratings? We probably wouldn’t have had a good bond rating if we didn’t have some reserves, so there’s some real positive reasons to have healthy cash reserves for a number of reasons, not the least of which is the general fund transfer. It’s important to the general fund more than ever and it’s important that we’re healthy as a utility for the general fund’s sake if for nothing else to keep the schools, the libraries and the parks going. 24 Ulrich: This is kind of a hint of what we’re going to be talking about next. Beecham: We don’t fund the schools. Bechtel: Okay. Other questions on the electric reserves stabilization rates? Mr. Beecham? Mr. Dawes? Dawes: I just wondered Randy if you’re planning to do any changes in the format for the next round still experimenting with how these charts are presented. Baldschun: Glad you brought that up. I appreciate the suggestions. Dexter recommended we break out our wholesale operations from the retail operation in a manner on the table here. Is that what you’re referring to? Dawes: Yes. Baldschun: What we show here is we show the operating margin and that’s basically the retail side of business typically. But what we have in here which makes it a little confusing I think is we also got part of the cost of the Enron contract which was not to cover retail sales within the City, but it turned out to be sales from outside the city. So what we’ll do in the future is we’ll break out in our purchases cost component in this table. We’ll break out the purchases cost within the city and then the purchase cost for sales for outside the city and then we’ll have an operating side for the wholesale side of the business. I think it might bring some clarity. I tried to capture some of that in the tables by indicating the amount of revenue we got from the Enron contract $4.3 million, but I think in terms of how it might flow, it would be easier to understand if I made it how you suggested. Dawes: My biggest problem was that you noted that the margin had declined by 21.8% and that’s basically only because wholesale costs were there and no revenues and, in fact, the margin went up. Baldschun: That’s right. In terms of the presentation, it won’t affect the bottom line, but in terms of understanding the presentation, I think it will be an improvement, so we’ll take that into consideration. Bechtel: Good. Thank you. Ferguson: So we’ve got a tracking stock for our wholesale market. Bechtel: Other questions on the electric side of the utilities? Dawes: On the RSR, the balance is projected to be relatively low and I guess that’s essentially because the projection for the balance of the year shows a reduction in the 2.683 million and in part that’s an allocation between the supply reserves and the distribution reserve and I don’t know if that’s something that you can think about changing the allocation or what. Baldschun: If I understand your question, what is the $2.683 million dollar decrease? 25 Dawes: Well the ending balance is projected to be $875k versus a minimum of $5 million so. Baldschun: What’s going to happen and we’ll talk about this next time. Dawes: It’s just the allocation between the two. Baldschun: It’s partially that, but we’re going to be making some recommendations to shift some funds from the supply RSR and the distribution RSR. But there is an allocation process that we go through. It’s really not important anymore given the fact that direct access is pretty much it. Dawes: [inaudible] Bechtel: Okay. Can we move to the gas side of the business? Questions on the gas financials? Baldschun: I want to point out one correction. It’s minor, but on page 4 in the paragraph, supply rate stabilization reserves, the very last sentence says “an increase in supply rate stabilization about of 6.1 million” it’s “to”, just replace the word “of” to “to 6.1 million”. The increase itself was not 6.1 million. That was the ending balance. Bechtel: Is that same statement would apply also for the last sentence in the next paragraph right? You have on the distribution side “the net impact is an increase by 4.8 million”; I think you mean, “increase to 4.8 million”. Baldschun: Yes. Bechtel: Other questions on the gas? Let’s move to water. Questions on the water side of the business? Well I’m really surprised gentleman that we got through the financials as quickly. Dawes: Just one quick question. You mentioned you probably will have a recommendation on gas rates for the next meeting as part of the 10 year forecast. Any indications of whether water or electricity will be in that category as well? Baldschun: Well the only one we’re anticipating going down is gas. We’re expecting water and sewer to go up, but not electric. Rosenbaum: It’s not going up. Baldschun: Electric is not going to go up. It’s not going to change. The recommendation will be unchanged. You can’t tell from these numbers but when we look at it next week or next month we’ll see it. Bechtel: Okay. Thank you very much. Mr. Ferguson. 26 Ferguson: Just one rapid comment on it. We switched our meeting cycle and since we are looking at all 3 utilities on a quarterly basis and I for one like this. I like the layouts. I like the punchy reports. They’re well written. It’s a good digestible bite into the operation. Dawes: Just the last, on the last page, the statistics has no reference either to last year the budget and that would be useful just for reference purposes. Baldschun: Those are fiscal year ’00-’01 stats. That’s just the number of customers and it has nothing to do with the budget of course. It’s annual historical data. Dawes: I tend to look at year over year statistics which might be more useful for me, but that’s okay. CAROLLO WATER SEISMIC STUDY Bechtel: Okay. Next item on the agenda under new business is the report from the Carollo Water Seismic Study. An information item and Mr. Bradshaw is joining us here to answer questions. Do we have questions on this? It seems to me that what I see is that this is a report that’s done every so often. The last report was dated ’88 and it seemed like there was a lot of reference to this. Is that sort of the frequency which we do these things? Bradshaw: I think the frequency is based upon need and realization that we have a need to relook at our systems right now because of the repairs and CIP process that we’re in. We need to take another look at our system to make sure we were making some of the right decisions. Ulrich: You might, Scott and I both received a copy of the executive summary today and I apologize. We’ve been discussing it so much, but I didn’t make copies, but I can do that and fax it to you. We can kind of whip through the executive summary. I can orally do that. If you would like to have that as additional information as opposed to going through each section of this. But if you’ve gone through it and have some specific questions, we can do it that way also. Bechtel: Questions from Commissioners on the report? Personally I think seeing the executive summary would be useful to do that sometime in the near future if you can forward a copy onto us. Mr. Dawes has a question. Dawes: I noticed that they had some recommendations on the Mayfield reservoir and we’ve just gone through that re-roofing exercise and I guess they’re saying basically we should do more and that we didn’t do enough on hammering the roof to the base and so forth. Bradshaw: Basically the whole intent of the roof repair was exactly that, to repair the roof. We hadn’t at that time looked at any structural repairs for seismic concerns. The report does say/recommend that we go back in there and recalculate the forces on the 27 structure and make sure we strictly enforce slab and roof as needed so can meet the new seismic loading standards. We will do that as part of that. Dawes: Are you making any of this part of the $13 million package? Obviously, the pump stations were redoing. You fixed them. Some of the others like the Mayfields, which didn’t have any CIP with the big project. Are you going to put that in? Bradshaw: We are going to go ahead and do that work. It’s not part of the present CIP plan we want. We will be adding that work, but the recommendations for the pipeline, we slipped joints at the reservoirs and the work at Mayfield, we definitely want to get on that and have that part of the Carollo engineering study that we do. Engineering inspections. As you must know that the new facilities will all be meeting or exceeding seismic standards. Bechtel: Okay. Dick? Rosenbaum: My conclusion from reading this is that there’s no big deal here. Is that the correct conclusion? Bradshaw: I wouldn’t put it as no big deal. I think that, I would say that we don’t want to run around yelling, “the sky is falling”. Rosenbaum: I mean the cost of making the necessary repairs is modest. Bradshaw: It is definitely modest compared to the CIP plans, yes. The initial look at it is that it is very modest compared to the CIP overall. Ulrich: I think the important of this is to although small is that each of those items that are not part of the current CIP, they’d be important to incorporate so that we don’t have a weak link that would be a problem. That’s the real value of this report. I think, you may want to comment, there is a couple of things that are in here that we can’t quantify very well and that is it talks about pipe that connects Foothill Reservoirs and there’s a recommendation if the pipe needs to be repaired or replaced, that they recommend that it be changed from, I guess it’s currently, concrete cylinder pipe to welded steel. Now that would probably be difficult to justify and going and putting a project together. That could be a lot of money. We’d have to evaluate whether that recommendation is one that should be done any sooner than they’re recommending which would be as it deteriorates, replace it. That could be 20 years or longer. Bechtel: Mr. Ferguson. Ferguson: One other measure of the importance of this report is setting an example for San Francisco. It would be nice if most of the 20 million BAWUA members can have up to date reports like this and have commitments to spend, to say look, we’re taking care of our own seismic problems. San Francisco, balls in your court here, so that there’s no sense of political unfairness between the regional water companies and San Francisco. So this has that extra benefit that’s worth doing. 28 Bechtel: I have a question Scott or John and that’s with some of the projects on the water side that we have been budgeted and discussed. Could you give us a brief status on how we’re doing on spending the money on some of those projects? Maybe some of this will come up next month, but I’m thinking of wells and so on. On the smaller activity, that was ongoing, was going to be done, are we getting bids out, getting bids in and so on and things under way? Bradshaw: Well, Carollo’s been selected as the contractor to do the engineering design for all of the CIP replacements in the Carollo study, so they are and we’ve contacted them and they are starting any day now to start the engineering work. As soon as they get work completed, then we’ll be putting out that work for bid. Other than that, we are still proceeding forward with the plans, but again, we’re in the engineering stage right now and so we’re waiting on that to be completed and that should take anywhere from 6 months to a little bit longer than that to get that engineering completed for us. So that’s where we’re at right now. I would say that we’re probably a little bit behind schedule in getting the money spent but again it’s a process that we’re working through and we’re trying to get the next step which is to get the engineering in and then get the contracts out for bid. Ulrich: There’s one other one, the one we talked about at some length and that is getting the land acquisitions for the locations of the reservoirs. As you know, that is pretty well in the hands in negotiations between us and Stanford on property that they have. That could become a critical path item rather soon but we still have time build into it and a fairly large amount of money is in the budget for those particular items. So that money has not been spent at this point so that’s a budget item. NEXT REGULARLY SCHEDULED MEETING Bechtel: No other questions on the seismic report. I guess that brings us to discussion of next meeting, which is going to be March 13th. Of course, the meeting has been slipped a week from originally planned and basically I guess there is a CMUA meeting in Monterey at the first part of the month of March. Ulrich: That’s why it’s moved out 1 week. Don’t expect that to continue. Ferguson: Is that unusual? Ulrich: We just like 13th. February 13th. March 13th. Bechtel: And there are 5 items proposed on that and among those the 10-year financial forecast, which is always interesting to look at, plus we’re starting the budget discussion and so presumably all Commissioners will be prepared for that. Any other issues? Ulrich: I would just like to point out that the preview of the major budget change, this is going to follow the format that we used last year where it will be the big ticket items or the differences between what was in the budget for last year versus this year so you can see the big items. It will not be the detail. We wanted to give you a head start on that so we’re talking about that in March instead of waiting until after we’ve gone through the Finance Committee or get further along so you’ll have an opportunity to 29 30 review that and we’ll put in perspective with the strategic plan so it should all fit together. And then we go to the Finance Committee in the middle of May and it will be ready for approval in June with the rest of the budget. Bechtel: I noticed that according to the longer-range agenda plan, we’re going to look at rates in April, but those I think, we’ll be looking at next month as well. Ulrich: I think it’s important to get moving on that instead of it, so we can finalize what that rate change will be. Bechtel: I think that’s. Ulrich: That’s probably going to be good news. Bechtel: That will be good news. That completes the agenda so with that I entertain a motion for adjournment. Rosenbaum: So moved. Bechtel: Second? ??: Second. Bechtel: All in favor please say “aye”. Commissioners: Aye.