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HomeMy WebLinkAbout2002-05-01 Utilities Advisory Commission Summary MinutesUAC Minutes 5-1-02 Page 1 of 37 UTILITIES ADVISORY COMMISSION MEETING MINUTES MAY 1, 2002 ROLL CALL ________________________________________________________________________ 2 ORAL COMMUNICATION ____________________________________________________________ 2 APPROVAL OF MINUTES ____________________________________________________________ 2 AGENDA REVIEW AND REVISIONS ___________________________________________________ 2 REPORTS FROM COMMISSIONER MEETINGS/EVENTS __________________________________ 2 DIRECTOR OF UTILITIES REPORT ____________________________________________________ 3 UNFINISHED BUSINESS _____________________________________________________________ 3 NEW BUSINESS _____________________________________________________________________ 4 UTILITIES THIRD QUARTER REPORT _______________________________________________ 4 FY 2002/03 OPERATING/CIP BUDGET AND RATE PROPOSALS _________________________ 17 ADJOURNMENT ___________________________________________________________________ 37 UAC Minutes 5-1-02 Page 2 of 37 ROLL CALL Meeting called to order at 7:00 pm by Chairman George Bechtel. Commissioners Ferguson, Carlson, Dawes, Rosenbaum are present. Council liaison Bern Beecham is present. ORAL COMMUNICATION Bechtel: Do we have any oral communication from the audience? APPROVAL OF MINUTES Bechtel: Seeing no indication of that, we’ll move to item #3, which is approval of minutes of the meeting held on April 10, and any comments, questions, corrections to the minutes of April 10? None. Dick? Rosenbaum: Move approval. Dawes: Seconded by Dawes. Bechtel: All in favor please say “aye”.(All Commissioners: Aye). Motion approved unanimously. AGENDA REVIEW AND REVISIONS Bechtel: Item #4, agenda review and revisions. Any? I don’t have any recommendations on changing. Any of the commissioners or staff have any comments on the agenda? Being none, we’ll stand with the agenda as listed. REPORTS FROM COMMISSIONER MEETINGS/EVENTS Bechtel: Let’s see, item #5 reports from commissioner meetings and events. I’m not aware of anything specifically. Mr. Beecham, were you? I’m not sure -- I know you’ve been active an awful lot, so maybe there’s something newsworthy from you? Beecham: There’s one bit from NCPA that I’d like to convey. I’m the Chair of the Finance Committee on NCPA and over the past 6 months, we’ve been working on refinancing roughly $95 million in bonds on the Harger project. We completed that refinancing this past month and we have saved a net present value of more than $10 million on this refinancing. We get roughly 10% of that, John, or more? Ulrich: That’s correct. It’s slightly more than that. But it’s interesting, the other rate numbers, the fixed amount is something like 4.01 or … UAC Minutes 5-1-02 Page 3 of 37 Beecham: The rate we got was around 4.05, quite a good rate. Also what we did, the series of bonds goes out for quite some years. We have spread the savings into the latter part of the payment scheme, so that rather than taking money up front and keeping a high load on the end, we’re reducing the load on the system in the latter years of that obligation. So anyway, I’m happy to report we completed that and got a really good rate out of it. Bechtel: That’s marvelous. Any other, anything else Bern? Beecham: There’s quite a bit going on with the Hetch-Hetchy system. Where we are supporting three bills that are being evaluated in the Assembly right now and in the Senate in Sacramento. We’re being successful at this point in getting approval in all of the bills. We have a nearly 100% approval rate on the votes as long as one doesn’t count the absentee voting. We still have a number of hurdles to go through to get these ultimately passed. If we’re successful, these bills in total will ensure that San Francisco does upgrade the Hetch-Hetchy system in the next ten years. That will help ensure that we have reliable supply even in the event of a significant earthquake. Bechtel: That’s great. Thanks very much, from me anyway, for your participation in these legislative actions. DIRECTOR OF UTILITIES REPORT Bechtel: Next item is Director of Utilities Report. John, the microphone is yours. Ulrich: Thank you. My report is rather short tonight because there are details much of what I could talk about that are in the Utility 3rd Quarter Report. You may want to ask some questions about it when we get to it. I would like to amplify on what Mr. Beecham reported on our local participation in this pending water legislation. The City Council passed a resolution in support of the Assembly bills and the Senate bill. To back that up, Council Member Beecham as well as members of other local city governments -- these are all Mayors or City Council Members -- have repeatedly gone to Sacramento over the last month. Council Member Beecham has been there twice for two days in a row overnight to make sure he’s at these meetings. He’s had opportunity to meet with our local Assembly member, Joe Simitian, who is on some of these committees and has also attempted to have more support from our elected officials to go to these hearings. It’s resulted in significant momentum, these committees are reviewing and passing through to somewhere else in the process. Realizing the amount of time that that takes, it should be pointed out how important it is and the role that Council Member Beecham is playing in doing that, along with other members. So we do have momentum and it’s extremely important to us that these measures get passed. Other areas -- I’ll be glad to discuss later on. Bechtel: Good. Thank you John. Now questions, comments from Commissioners on John’s remarks? UNFINISHED BUSINESS Bechtel: Let’s move on to unfinished business. There is none. UAC Minutes 5-1-02 Page 4 of 37 NEW BUSINESS UTILITIES THIRD QUARTER REPORT Bechtel: So we’ll move to agenda item #8 new business and we have two items. The first item is the Utilities 3rd Quarter Report which is an information item. It covers all of our utilities. We have a very complete report including both financial and breakdown by various issues. I’ll just entertain questions of staff from the Commissioners on this. Perhaps we can take Attachment A, the Quarterly Water Report, which is the first out of the chute. Questions of staff or comments on Quarterly Water issues? Mr. Ferguson. Ferguson: First, just a thank you for the graphs to the water reports as well as the others. Somewhere in the last two years,, iin the charts, you’ve added “customers affected” by the various leaks and outages to the number of outages, and that’s a nice addition of a weighting factor. Second, a follow-up on the earlier reports here on the legislative activity. I’m just delighted that we’re executing on the legislative plans. This is almost perfect. I almost don’t want to recommend changing anything at this moment. But one piece of the art of legislative advocacy is choosing the right name for a piece of legislation, choosing acronyms. I notice here, now that we’ve got our line up of three bills, there’s a pronounceability risk with some of these. AB 1823 (WRWSSRA) is pronounced “WurWissRa”. AB 2058 (BARWSCA) is pronounced “BarWiska” and Senate Bill 1870 (BAWRFA) unfortunately is “Barfa”. My guess is at some point in the legislative process there’s another opportunity to combine a couple of these bills and rename them. We can give them a name that invites affection and commands respect. Then we’ll have a perfectly executed legislative strategy. Bechtel: Mr. Ferguson has a good point for the legislation to have some sort of pizzazz to it. It needs something more than AB 1890 or whatever some of these numbers. It would be great to have ANWR -- or something else -- so that we can remind ourselves which bill is which. Ulrich: Commissioner, if you don’t mind, we would be than more than glad to have Mr. Ferguson come and join us at a staff meeting and we can work on that together. We have not much else to do, and we’d be more than pleased to do that. Rosenbaum: Just a comment, Mr. Bechtel. We all remember Proposition 13 and that very famous number. Numbers in themselves are not necessarily a bad thing. Bechtel: Point well taken. If there are no other questions on the water report? Mr. Dawes. Dawes: Yes. A query on the wholesale rate adjustment, which is on page two, kind of the middle there. Was that error one that, in effect, was against San Francisco and in our favor and has resulted in no wholesale water rate adjustment? Balachandran: Yes, a BAWUA staff member discovered the error where we were being double charged on something. Dawes: Is this just PA, or all of the BAWUA people? Balachandran: All of BAWUA. UAC Minutes 5-1-02 Page 5 of 37 Dawes: That must hurt quite a lot for San Francisco. Balachandran: Yes. Dawes: Another query, I was looking at the charts, and with respect to the first, the big bump up in incidents 21-24, it’s noted that hours are due to the disinfection requirements, but were those related items? Ulrich: Excuse me. You’re asking if the ones that are listed up there, 32, 34, 36 and 36. Dawes: I was just looking at the bottom of the chart. It says 21-24. It looks like the incidents are numbered consecutively, but were they related to one another? Ulrich: I’ll ask Roger if he knows that. My suspicion is that they are. Cwiak: The question was the length of time or the number of customers? Dawes: No. Whether the incidents were related. There were four of them that are very huge impact on customers. Cwiak: They were, because they were the type of break where after the system broke, it was damaged so badly that when they went to do a shut down, they were not able to control the water effectively -- to make the repair in a manner that did not allow the mud and everything in the trench to fill up the main. Once that happens, you have to disinfect the main and it takes a much longer time to put it back in service. A minimum of 24 hours after you get it repaired. Dawes: Were all these four in the same sort of trench or were they in different parts of town that just happen to all just come together? Cwiak: They were not in the same part of town. They were the same type of cast iron pipe. Dawes: So it just happened that they were all in sequence there. One other question, looking at the next chart (water main leaks by type of pipe). I was worrying about why the red line, which is the total, was so high for the last three years. I got to looking at which types of pipes were causing the problems and all of a sudden, it occurred to me that the numbers for the last three years don’t add up. Ninety nine and prior, they all add up, in other words, the number of incidents by each pipe adds up to the total, but for 2000, it doesn’t. If you add up the four items there, 12, 11, 1 and 0, you come up with 24 and not 34. Next year, you add them all up, 18, 15, 6, and 0, you come up to 37, not 33 and 13, 7, and 0 and 13 is 32, not 35. Cwiak: All I can say is that the database that these numbers are recorded in, I have to go back and look and see what’s wrong there, why it’s not displaying it correctly. Dawes: Because actually, the totals, they’re not as bad as they look. That’s what excited my interest. That’s all I have. Bechtel: Roger, while you’re there, I have a question on this chart. Basically, in looking at the long range CIP, we’re spending on many projects every year, on replacement. In your experience, would you expect these numbers to go down as a result of our current replacement, or is this going to be sort of an ongoing set of numbers? Usually you try to look for payback on UAC Minutes 5-1-02 Page 6 of 37 replacement in some way or another. I’m not sure I can judge whether these numbers are extraordinarily high, low or how they fit. Would you say that we’re going to get better as time goes on with the amount of money we’re plowing back into our infrastructure? Cwiak: There’s no doubt that we will. When the City started this program, I was very excited when I saw the first few years of this graph. We were dropping off and I was so worried that people were going to get very comfortable with the idea: “We’ve done it. We’ve licked it.” The problem is that we took care of the very worst pipes during those first few years and they weren’t breaking. A little bit of change in the ground around here with the water and temperature; we start having a lot of breaks. I mean these pipes are like eggshells and just a little bit of stress like a change in water temperature will set off a series of breaks. Within the next seven years, we’ll have the cast iron out of the system. Then we’ll be looking at other types of methods to determine the next set of pipes that we may want to replace. Right now, we’re still going under the direction that the Council gave us in 1992, which was to get rid of all of the 4-inch cast iron mains, and we’re almost done with that project within the next seven years. After that, I would expect that the main breaks would be at a much lower level, or at something probably approaching what we had after about the first four years. Bechtel: Thank you. Any other questions on water? If not, we’ll move to the Gas Report. Questions from Commissioners on the Quarterly Gas Report? Mr. Rosenbaum. Rosenbaum: On page 1, under supply acquisition, there are some numbers given for the gas commodity cost for future years, but it’s in terms of total. I wasn’t sure how many units to divide that by. Do you have those numbers in terms of cost per million btu? Balachandran: We do. Let me see here. I don’t have it at the top of my head, Commissioner Rosenbaum, but essentially if you divide by somewhere between 36 and 38 million therms. Rosenbaum: All right. I can do that, but that’s our total usage. Are there still some industrial customers that are kind of off on their own, or is 36 million the number to use? Balachandran: Good point you make. No, that isn’t the right number because there are industrial customers who have their own fixed rate, so the number should be a little lower. Dailey: This includes industrial customers in our estimate for our cost of serving those, so Girish is right. The first answer he gave you, this is a total cost for total customers and it does include all the industrials. We don’t have any industrial customers who have gone Direct Access. If that were the case, those customers would be removed from this number, but the other rates that they can choose from are included in this number. Rosenbaum: All right. So if I wanted to compute the average cost for fiscal year 2002-2003, I would divide 15 million by about 35 million? Dailey: Probably a little higher than that. More like 36 million, but yes that’s correct. Rosenbaum: All right. Then I would get a number close to $4 for a million BTU? Dailey: Right. Which year are you talking about now? Rosenbaum: 2002-2003. The upcoming year. UAC Minutes 5-1-02 Page 7 of 37 Dailey: It’s probably a little bit higher than that. We’ve locked in 100% of the needs of the portfolio for 2002-2003 already. We did that several months ago, so the number is probably higher than $4. Rosenbaum: Is it something other than dividing 15 by 36? Dailey: That’s approximately right. Rosenbaum: Fine. Thank you. Bechtel: Other questions on gas issues? Mr. Carlson. Carlson: The question to ask at this point is, are we starting to purchase gas further out for 2003- 2004? I understand we’ve got everything for next fiscal year. Are we starting to purchase for 2003-2004? Dailey: Yes, we’re trying to, we’re sticking to the laddering approach that we’ve spoken about in the past and the general concept is the first twelve months, the nearest twelve months were 75%, next twelve months out is 50%, 3rd twelve months out is 25%. Of course, we’ve deviated that for 2002-2003, so we’re 100% for the whole year, but if you overlaid the laddering strategy starting with June 2002, all of the months that are past ’02-’03, we are still sticking to that laddering strategy. So the answer to your question is yes we’re buying gas for ’03-’04 and we’re buying gas for ’04-’05 right now. Carlson: Okay, so we’re about getting close to 50% for ’03-’04 at this point? Dailey: That’s correct. Carlson: Great. Good. Bechtel: Other gas questions? Mr. Dawes. Dawes: Under the new operations manager paragraph on page 2, it talked about providing gas through monthly and daily fixed and indexed price purchases. It seems a little contrary to the last statement about we’ve locked up through all of this next year and the year after. Balachandran: This is just for operation services. We do have enabling agreements presently with Sempra and BP, so we make our fixed price purchases through those suppliers. Dawes: What’s the difference between operations purchases and the long term ones? I’m not familiar with that terminology. Balachandran: Essentially, we need someone to do our operations. This entity would be someone who actually nominates gas into the system for Palo Alto’s account, balances supply with load, and deals with PG&E on unbalanced trades. Now that same person, same entity that will provide us those services will also provide residual gas. So any gas that’s not bought at a fixed price, they’ll provide it at a bid-week index or a daily index. Dawes: Ditto if they’re selling excess gas? UAC Minutes 5-1-02 Page 8 of 37 Balachandran: Yes, that’s true. Dawes: So they basically balance from long term guesses to daily fluctuations. Balachandran: Yes, we’re the ones who make the decision on how much to buy fixed. We buy our fixed purchases. Say we buy from Sempra and we buy from BP for a certain month; they look at the operations provider with just fill-in-the-balance gas, so they’ll be talking to Sempra and BP, nominating it to the City’s load, and then any delta to that would be traded at a daily index price or a bid-week index price. Bechtel: Thank you Girish. Other questions on the Gas Report? Let’s move on then to the Electric Report. Electric and fiber issues update. Questions from Commissioners on this quarterly update? Mr. Ferguson. Ferguson: Just one question. It leads into our budget discussion later, so if you want to save your comments until later, let me just bring it up now. On page 2 on the discussion, at the end of the discussion on the Interconnection Agreement, you speculate that the PG&E ISO charges might end up as bad as $25 million on the Palo Alto account. I didn’t see any footnotes in the budget discussing the reserve funds for next year. How have you prepared for that, the expected value of that $25 million risk? Have you rolled it into the reserve calculations for the coming year or two? Balachandran: The NCPA Commission discussed this a couple of months back and had decided that we’ll create an escrow account where we put away about 10% of this total. We’ve put away $2.5 million and that’s included in our budget. One of the reasons why our purchase costs are what they are today is due to about $2.5 million being in a fund for an escrow account. So it’s not dealing with the entire amount, just a portion of it. Baldschun: Let me add that the financial strategy would be, if it was approved and we did experience these very high transmission costs, it would be on an ongoing basis. We’d want to get them into our rates so we’d probably come back with a rate proposal at some time. Dawes: I wanted to clarify. This is just transmission issues that this 25M relates to? Balachandran: Yes, this is the outcome of what’s called “scheduling coordinator costs” where PG&E has essentially said that they’ve incurred these costs to serve all the pool members and they’re trying to pass this cost on to us. The opposition is, our Interconnection Agreement protects us from this kind of pass through. This is essentially the cost that the ISO passes on to PG&E when they were scheduling power to us. It’s the “scheduling coordinator cost” that they’re trying to pass on, so it’s “ancillary services,” whatever the ISO has charged them in order to make deliveries to us, everything outside our cost in the Interconnection Agreement. Bechtel: Mr. Carlson. Carlson: This is a very big number. Is this a one-time charge or might we be hit with this every year? Balachandran: This is actually the sum of three years of charges. UAC Minutes 5-1-02 Page 9 of 37 Carlson: Oh, okay. Balachandran: And the prices were very high in the last year, because all energy prices were equating at very high prices. The year before was $44 million, NCPA’s total charge was -- and the year before that -- actually, I don’t recollect the other two years’ numbers. They were a bit lower, but it was basically because the energy prices were so high. Carlson: The $25 million is just our piece of this thing? Balachandran: That is correct. Carlson: Ouch. Balachandran: $25 million. The total outstanding for NCPA is $75 million or something like that. Santa Clara is in the same position as the NCPA pool. They have a little larger number, about $35-40 million. We have our attorneys in Washington DC fighting this case. You’re right, the numbers are large, but we have a lot of resources making their best efforts to make sure PG&E cannot pass these costs to us. Bechtel: Expensive resources, no doubt, I hope we’re reserved adequately for our legal fees. I noticed there was a comment and we are planning there. Other questions on this report? Mr. Dawes. Dawes: Western Area Power Administration page Roman 3, the temporary allocation, and the first item, the post 2004 power contract. It sounds as though Western is sort of getting into the position of substituting the thermal power that had previously come through the integration contract. I wanted to find out what the status of those discussions were, whether Western was going to provide that. Is it just a special service which we could either buy or not at our pleasure, which is what we’d like to do where we might make our own purchases in lieu of it. Where does that stand now? Balachandran: Are you on page 6? Dawes: Yes. Balachandran: Okay. We’re still in the process of talking to Western about this. The plan is sometime before the end of the year, they’re going to come out with a custom contract. There had been some discussions but some of the smaller customers want Western to integrate some resources for them. There’d been some discussions about what to do with Pacific AC Intertie Line. We’ve essentially told Western we’d be interested. We want them to develop some of these custom products, and depending on what’s developed, we may sign up for some. It’s going much slower than expected but they haven’t changed the timeline. Dawes: Is it your guess Girish that we may be able to take a piece of it that we would like and then buy the balance ourselves, or will it be all or nothing? Do we have enough input into Western to guide those negotiations the way we would like? Balachandran: Our present plan in June and July (you’ll see more of our long-term resource plan later) is to go ahead and fill most of the resource deficit through our individual efforts, individual and with NCPA also. So that’s essentially what we are planning to do right now. We don’t see UAC Minutes 5-1-02 Page 10 of 37 anything that Western has offered. There’s no custom product on the table. We don’t see anything in the near future, in the next six months or so. Bechtel: Mr. Rosenbaum. Rosenbaum: Just to follow up on that. At one point, I thought it made a lot of sense for Western to continue to provide a complete resource. Staff was of the view, and some of the other large customers have the same view, that they could do it better for less. Is that still your view? Balachandran: We haven’t. We are going forward with making our own plans and several large customers do not want Western to make purchases on their behalf. Though exceptions to it, for example, the transmission product, the Pacific AC Intertie Line is one product that some of the customers would like to get a piece of. Some of the smaller customers are looking at Western to integrate some power through that AC Intertie Line. But I don’t see anything right now and I don’t see any of the larger Western customers waiting for Western to come up with a custom product. All the large customers are actually doing something on their own to fill in that resource deficit. Rosenbaum: If the large customers signed contracts for future power, that’s going to eliminate the possibility of anybody taking a product from Western. Ulrich: Girish’s point about what we need to do is, look at both routes. What we have not seen is Western coming out with something real clear on what kind of services they would offer and it’s appropriate to know that the larger customers in particular have significantly different needs and different interest in doing things on their own simultaneously with whatever Western is doing and we’re basically taking that tact too. So it would be wonderful if they came up with those products, but we’re moving along at our pace also. Rosenbaum: Thank you. Bechtel: Mr. Dawes. Dawes: As another follow up, how does NCPA play into this? I mean, it sounds almost as though where always in the past, the munis have acted in concert through NCPA and now it seems that maybe we’re drifting apart in buying this large amount of power on our own or is this all through and coordinated through NCPA? Balachandran: It’s going to be both ways. The City of Alameda and Plumas-Sierra just bought some power from two power suppliers. NCPA assisted them with that. NCPA has also looked at some joint generation projects and that’s still in progress. There is a move towards doing more on our own. For one reason, risk management. All suppliers want to be dealing directly with the end user, the City Councils who are actually going to be paying the bills. So even though NCPA assisted Alameda and Plumas, it was more in terms of putting the RFP out, the contracts and helping them in some of the resource planning. The contracts are going to be signed by the individual City Councils and votes. Ulrich: We’ve been working on a number of proposals with NCPA on joint ventures on power plants and others. It’s becoming very difficult to find a group within NCPA that’s interested in exactly the same kind of product or service or power plant configuration. I don’t have significant expectation that those joint items will come together in time for us not to consider UAC Minutes 5-1-02 Page 11 of 37 very strongly having some of these products ourselves. We’ll keep working with everyone, but I would not put all our eggs in one basket. Bechtel: Mr. Rosenbaum. Rosenbaum: Page 8, the telecommunications update, the last paragraph refers to exhibit A which is the telecommunications income statement. Clearly I’m missing something. If we look in the electric report that comes later, there are some expenses in the order of $1 million which don’t show up here. The income statement for some reason looks like we’re doing much better than a future chart will indicate. Is there some explanation for that? Ulrich: Excuse me. Could you make a reference to the other document you’re talking about? Rosenbaum: The electric fund, page 4, which comes later. Ulrich: The issue is that they’re done on a different basis, one’s on a cash basis and the other one is on a different basis. The budget is put together differently than this income statement. Rosenbaum: There are customer design and connection fees listed under commercial telecommunications on page 4 of the electric fund, which is on the order of $863,000 (the proposed budget) and then (operations) $1.1 million. Those numbers don’t seem to have any relation to this income statement. Baldschun: I wasn’t involved in this, but let me try to guess what the answer is here. When I look at this, I see depreciation expense. This is an income statement as opposed to the budget which is a source of uses and funds. When you look at the proposed budget, there is no depreciation in a budget. There’s a CIP, but this statement was derived perhaps by the previous telecom manager. He was trying to do a business-like financial statement, so he had an income statement format. There’re some difference in the accounting treatment between what’s presented in the budget and the way it’s presented in this income statement. Ceyda Can: Sorry, I’m going to make a little correction. The income statement here has been prepared by our accounting staff in the Administrative Services Division. It’s the first attempt that we’re going to make: an income statement using the City’s actual accounting system, rather than some internal paper trail from the previous telecom managers. Until last year, previous telecom managers were accumulating information and using simple spreadsheets to provide some actual dollar amounts, income statements for the telecom services. We thought that there were some estimations and projections involved in those statements. The magnitude of the business that was circulating around was able to be handled by an individual to prepare such an income statement. Right now, the situation is not like that. We have a big amount of paperwork that’s circulating within the group. We really need our accounting system support and this is the first attempt to put an income statement together. The effective date that this was done was through the end of 2001. I was not able to follow the initial question, I’m afraid, but some of the information here is simply basically putting together the accounts payable and accounts receivable for the telecom accounts. The operating expenses are basically salary of individuals from the group and outside of the group that is related to telecom services. Revenues are simply summarized as cash flows including the accounts receivable, not necessarily the amounts collected by the city as of 12/31/01. I hope that clarifies the question. UAC Minutes 5-1-02 Page 12 of 37 Rosenbaum: It is presented as Exhibit A. Without any explanation, people might think we’re making $1 million every six months on fiber optics and I don’t believe that to be the case. So I mean this chart by itself has the potential to be misleading, and I was just looking for some explanation for it. Ulrich: Maybe what it needs is an explanation that goes along with each presentation. As I recall, we’ve been through some of this before and this was an attempt at a pro-forma income statement, looking at this as if this was a real business -- not the normal way we do accounting and budgeting in the utilities. Dawes: Actually, I usually am the one that has problems tying things out, but this actually does tie for me. The place that it does is, you have to look at the 2001 full year actual on the electric fund. You compare that to 6/30/2001, you take the expenses of 307, you back out the depreciation of 70, you get 237, which is what the operations expenses are. What they don’t do is they need another line under the net income or loss, which says CIP, which is on the next line above in the electric fund summary. So if the CIP, the cap-ex, were included in this, it would be a true tying out, the cash flow as well as accrual income statement. Rosenbaum: Dexter, if you look at the next column 2001 to adjusted budget, that operations number is 1.48 million. Dawes: I was just looking at ’00-’01 and not trying to piece together because this shows six months worth of activity. You can’t, there is no full year of ’01-’02 to compare to the adjusted budget of ’01-’02. So it’s improbable that if we spent $267 thousand less depreciation of $57 or $210, in six months then we’re going to spend $1.488 million in a year, I’ll agree that that’s improbably but you can’t tie it out. You just simply say that that seems a little out of whack. Ulrich: Your point is, it should just stand on its own and not have to be able to go through these interpretations between the two of you, or anyone else? Bechtel: I was going to suggest exactly that, John. There’s input enough from several Commissioners that having two ways to account for something is confusing. I would suggest that next Quarterly Report, you’ll have fixed the problem and everything will tie together. Ulrich: As you recall, it hasn’t been too long ago, we got accolades for putting it together this particular way. But what we missed was tying this together with the electric report. That was not the objective, but I see the point. There is this difference between receivables and the actual money that we have. Can: It was also the only way the Accounting Services were able to provide us any cash flow statement, so that’s why we weren’t able to tie in the numbers. So I wasn’t even able to follow your $1.48 million actually because this is the only statement we have seen. My apologies on that, but you know this is as good as we can see what is our income and what is our cash flow in and out. The only misleading at this point that you wouldn’t be able to see here is actual revenue collected, accounts receivable, which this statement doesn’t reflect and should reflect when we invoice the customer. This statement assumes that it’s a sale to a customer. What it doesn’t reflect is whether we collected that money or not. Bechtel: And in these times, it’s important to understand whether we actually are collecting our invoices. UAC Minutes 5-1-02 Page 13 of 37 Rosenbaum: You can see, if I was a brokerage firm analyst, and I was trying to determine the correct stock price for this enterprise, I might have some trouble figuring out the proper value for that stock. Can: Sure. In fact, there were two other sheets that were prepared by our accounting staff that I see are not included in this quarterly summary, and I don’t know why. But the actual value of telecom services as our accounting staff reports to us is $3.4 million book value so we are in good shape. Even though this might have hurt a lot of telecom companies, we did do good. In fact, we were positive. That’s a success in this economic environment. Rosenbaum: I’m glad to hear that. On telecommunications, let me ask a brief question. There was a newspaper story today about the Fiber to the Home trial and in it, Peter Allen, who’s one of the major advocates for rolling out the system, said that nobody’s been billed yet. Is it true that the seventy trial participants haven’t been billed yet? Ulrich: That’s correct. Rosenbaum: I asked this question in February and I was told that the bills were about ready to go out. What’s the problem been? Ulrich: Excuse me, I didn’t mean to interrupt you. It’s not that the bills are not ready to go out. It’s that we have to have an approved rate schedule approved by the City Council and that part is pending. We have to go through a rate approval that sets the rate and terms and conditions for the customers before we can bill them. Rosenbaum: The customers were expecting to pay $85 a month and this is the number we have in February and you’re saying that wasn’t an approved rate and that no rate has gone to the Council in this time? Ulrich: Not an official rate. As you recall, that information was given to the City Council as part of the proposal, but that has to be reflected in and turned into an actual true rate schedule that is approved. That’s part of the municipal code to do that. Baldschun: Any rate has to be approved by Council. That particular rate was never taken to Council for approval although they’re aware of it, the customers are aware of it. There’s going to be a staff report prepared for Council approval within thirty days or so, if I understand it. Rosenbaum: And then are you going to try to collect the back amounts due? Ulrich: No. Rosenbaum: Mr. Allen, as one of the big advocates of the system, made a very good point in the newspaper. He said we’d find out whether people were really that interested by finding out if they’re willing to pay the bill if the City would send out the bills. Ulrich: That is clear objective and it’s part of the trial to provide the bill and the customer could see the value for the money paid, and that’s how we came up with the rate. It’s going to be important to get that in the hands of the customer so they see the bill and relate it to what they get and pay the bill. That’s what we’ll try. The downside is that the rate schedule should have UAC Minutes 5-1-02 Page 14 of 37 been approved some time ago and it hasn’t. So that’s an issue that we’re clearing up. To overcome that, we will have the rate schedule and a service in place long enough to be able to determine the value to the customers. That’s really the point of it. We will do that. Rosenbaum: You’ll have to agree that the process seems to be dragging. Bechtel: On that, will we see that proposal before the UAC, John, before it goes to Council? Ulrich: Yes, I don’t think it was part of the plan to bring it here. It’s a rate schedule, as you all know, it’s clear what you’ve agreed for us to do. This is something that has to be done according to the Code. It’ll be reflected in a proper report to Council with the rate schedule laid out. Bechtel: So we would only see it in the future if it were changed, I assume. Is that correct? Once it’s established two, one year down the road, would it be part of the electric rate schedule? Ulrich: Sure -- if it continues. As you recall, this is a trial and it is only available to a certain select group. What we’re talking about is a process issue that needs to be done. You’ve already approved what we’re going to do. And as Mr. Rosenbaum pointed out, we’re not moving fast enough, so that’s the issue, not whether you’ve looked at the rate schedule or even if the City Council has looked at it. They’ve already seen what the number is, but it has to go through the formal process to be approved. Bechtel: And I assume those people that have signed up also are under some general idea of what it might cost. Any other questions? I have a couple of questions on the report, back to high voltage and not photons. There was one disturbing thing and it has to do with the update on Path 15 and I’m wondering, it’s my ignorance, who the Office of Ratepayers’ Advocates, ORA, is? It seems they submitted a brief saying that since they don’t back Path15, because there’s no support by PG&E, the CPUC and applicant and so on. Then later it goes on in the report and talks about PG&E load forecasting for transmission planning. That’s on page 5, and it says the lower forecast translates to 4-7 years shift in time and so on. This whole issue of transmission, it seems like we’re losing momentum on this. That’s what got us into trouble in the first place, not having Path 15. Now here this organization, ORA, whoever they are, we’re in a brouhaha over this and we’re going to be stalled out again, so can somebody fill me in as to what the background is on this? Balachandran: The ORA is a division of the CPUC. It’s the Office of Ratepayers’ Advocates and name is self-explanatory regarding what they’re supposed to be doing. As far as PG&E, and it’s a different group that’s working on the PG&E transmission expansion plan. That’s PG&E staff and this is ORA. So this is just their pitch and they talk to the PUC because before this line can be built, the PUC believes it has to issue a CPCN, a Certificate of Public Convenience and Necessity, and as part of that process different intervenors including ORA can make their pitches as to whether this makes sense or not. The PUC will look at it and say okay you have a certificate or not. Just remember about six months or nine months ago, PG&E had said that they didn’t need a CPCN, but the PUC forced them to make a filing to do that. From our perspective, we’ve told you, we believe that makes sense for the line to be built and we’re willing to pay for it as part of the transmission access charge and we are part of, let me see here. On the previous page, we talked about the CPUC proceeding on AB 970 and in those proceedings, which are quite focused on PATH 15 and a couple of other major projects, that’s where we get to provide some input on whether it makes sense to build PATH 15 or not. In different forums, we continue UAC Minutes 5-1-02 Page 15 of 37 to say that it should be built, but loads in California are down. You go to the forecast and you look at that. We have been trying to talk to PG&E and talk about Peninsula forecast and talk about the problems in the Peninsula. That’s pretty much what I have to say. I’m not sure we are going to get too much traction on getting the PUC to approve that line and actually get that line built as fast as we thought it was going to be built maybe about a year ago. Bechtel: Are we going to have to bring Spencer Abraham out here again to cut a deal? Balachandran: He’s working on his energy bill right now, so… Ulrich: We have to recognize on Path 15 what it is we’d like to be done. We only have a relatively small voice in it. We were not willing and still are not, to participate in a significant financial basis beyond paying for our share of energy that passes over the line in a fair and equitable way. It’s losing interest on the part of parties willing to invest in that line. That’s what you see is happening is people are backing away from that. They’re looking for return on their investment and PG&E has a whole level of reluctance in spending more than the amount they committed to which is basically improvements of the substations building at both ends. So you don’t have the people with the money willing to step up to it, as an incentive. That’s the way this market works. There’s no control. There’s no mandate from the government that tells anybody to build it and those costs will be passed on to everybody in a fair and equitable way. They’re all standing back waiting for the market to dictate, make it beneficial for the parties to invest their money -- and it’s a significant amount of money. Bechtel: It seems like we’re moving from crisis to crisis and we’re not in a crisis period today. But somehow if we could get the State or someone to step up to some sort of energy plan that we can all agree to -- it doesn’t seem like that’s going to happen, in my lifetime on this Commission anyway. Ulrich: It would probably be nice if they were sitting out here answering these questions for you. As we make these reports, we’re not trying to convey that everything is wonderful. We’re trying to report where there are potential risks and dollars to the residents of Palo Alto. Sometimes we don’t believe we have a whole lot of control how the outcome of some of these will take place. Bechtel: Thank you. My last question on the report: I just want to say nice work on the residential energy workshop that you held in March. Looking at the attendance, I noticed that there were 110 people if not more present and I thought that sounded to me like that was, as you commented, feedback from residents was overwhelmingly positive. At the same time, I got this week this brochure in the mail, Palo Alto’s Smart Energy Program. At the same time, I got from the City of Santa Clara, Facts Worth Plugging, their own brochure and they talk about awarding $12 million to customers like yourselves in the forms of rebates and so on from their Public Benefits Fund. And I scale that to where we are and we are substantially under the $12 million or so that Santa Clara had. I don’t know whether I’m scaling wrong or whether they have a more ambitious program. Randy, could you comment ? Baldschun: I didn’t see the Santa Clara piece, but as far as loans go, we have a loan program as well. Our annual expenses, that’s the key. Our budget’s around $2 million for public benefit dollars and I don’t know what their budget is, but I doubt it’s $12 million. Bechtel: Thank you. Mr. Beecham. UAC Minutes 5-1-02 Page 16 of 37 Beecham: I’d like to just make a couple of comments on the energy picture. You picked up in here and you talked about some of the risks and uncertainty. In the public’s mind, the energy crisis is over. It’s all finished and things are running fine. On the reliability side, we’ve talked about the Path 15 circuit for the coming year with demand down. Reliability is not such an issue. But in terms of a crisis, there’s still a range of issues that are facing us, facing our department. I’m just beginning to make a list here: congestion charges for us here locally, increased Western charges, the ISO market design, continued issues with the IA- Interconnection Agreement, PG&E bankruptcy is still going on, we’ve certainly got a large oar in that water both in terms of our activities as well as risk, fighting with PG&E on the Stanislaus commitments on 2948A, we’ve got things happening in DC on the Trinity River, which affects the water available for Western and so on. There are a number of issues the staff is working on that is impossible really to predict what’s going to happen. An example in here is the $25 million worst-case past charge for the IA. That’s without regard to what might happen in the future, and the door’s wide open on where it can go. Staff is working very well with NCPA and with our legal staff and DC, as well, on many of these issues, but there is still uncertainty in our future on a wide range of issues, that we’ve been quite successful and I hope we are in the future, but we just have to acknowledge and understand that there is still quite a bit of financial risk out there. Bechtel: Thanks Bern. Girish. Balachandran: I could add a comment on this. Commissioner Bechtel, you’ve really hit on a point that is of concern to us. We’re potentially going to be in a double bind where with the ISO’s new market design, they may force a system of locational marginal pricing -- nodal pricing -- where we’ll get hit with congestion costs. At the same time, there isn’t a rational transmission expansion planning process in the state. We’re going to get hit with congestion costs and we don’t have a process to actually expand the transmission grid. There are two places where we are intervening on this. One is in the ISO is what they call “Market Design 2002” process. The other is: FERC has put out a paper called Standard Market Design for ISO’s all over the country. Last week, John, the Director of Utilities of Alameda, Director of Santa Clara and the Energy Policy Chief at the City and County of San Francisco sent a joint letter to the ISO governing board. In it, we make these points including saying this is going to affect our customers greatly, you need to figure out, estimate, what the cost impacts are to all consumers and provide that to policy makers before you make these decisions. And you need to have a transmission expansion plan process in place before you actually implement such a thing. So we’ve provided the governing board, we are going to follow up by trying to get some consumer groups including Silicon Valley Manufacturers’ Group, and talk to our legislators, both the state level and federal level, to see if we can get some rationality back into this process. You’re right. The way it’s heading right now, there isn’t a coherent plan or leadership to prevent another energy crisis from happening again. Ulrich: Maybe we don’t emphasize that enough at each of the meetings. As most of you know who’ve attended the strategic planning meeting in Sacramento, we heard significant feedback from the invited legislators. The summary of all that is there is no leadership and no attempt this year for meaningful legislation to solve this. As Council Member Beecham said, many people think this has all gone away and it’s now time to look at other things, particularly in election period, and the renegotiation that’s taken place in the state has had some success in reducing the contract a little bit. It’s given more of this feeling of panacea, that everything is getting better. Now if we should be conveying that message back at each one of these meetings a little bit stronger, we can do that. When you read through the report, you can see a significant amount of work is being done by the staff in all these kinds of areas. In a sense it is daunting and UAC Minutes 5-1-02 Page 17 of 37 overwhelming in some areas because you only can go after things in the form of letters in trying to influence others. There is no leadership in the state – no agency, no place that is really looking out for the overall energy picture in California. Do you have more guidance for us and more information that you’d like to have in this area? We can keep telling you all the stories, things that are happening, but the attempt in this quarterly report is to bring some of this up. Bechtel: I appreciate that John. I am always amazed at how much detail there is on a large number of issues. Any other questions on this, because we are moving along into the evening and we haven’t discussed the quarterly financials yet. So let’s move quickly to that. I want to say on that, we have the financials, but we’re also going to deal with the longer-range financials later and rates. So if we can keep our discussion on this particular item and maybe combine it with some of the other discussion, I’d appreciate that so we can get through the evening. I’ll entertain questions; comments on the electric quarterly financial update Attachment D? No questions on that. There are reports, this lists, what I’m referring to is the revenues, sales and so on -- the analysis of the reserve for each of the 3 funds. I don’t hear any questions, so we’ll just complete the discussion of the Quarterly Report. FY 2002/03 OPERATING/CIP BUDGET AND RATE PROPOSALS Bechtel: And we’ll just move on to the next item #2, the FY 2002-2003 operating and CIP budget and the rate proposals. Ulrich: This would be item #2. Bechtel: Item #2 on the agenda. Ulrich: Do you want to do them, we’ve got them listed as A through E or do you want to do them that way or what would your preference be? Bechtel: I have notes from looking it over. It looks like for example there is a summary report on the enterprise funds that lists all of the funds including some of those that are not under our review. That’s the summary and it’s page 1. Then there are discussions of the reserves for each of the funds and then we move to individuals so I’m open to comments from the Commissioners as to how you would like to proceed with next year’s operating budget and then at the same time we can look at the CIP. Comments on how you would like to handle this? Mr. Ferguson. Ferguson: Just a question at the top here. As I read item 2, what we have here is 4-5 requests for the UAC to approve proposed rate increases, but there is no staff request here for the UAC to approve or discuss the budget items. So do we want to proceed directly to the rate discussions, or should we have some global discussions about the implications of the budget? Ulrich: If I can just make one point. The reason for putting it together this way is, we brought the major changes and major items in the budget to you before. We’ve had good discussion on that and our agreement was we would hit the major changes, because as you recall, this is an interim year budget. This is not starting all over. You asked questions and we went through that last time. My commitment to you at that time was I would give you the latest draft of the budget. That way you will not be surprised when it moves on to the Finance Committee and it all gets UAC Minutes 5-1-02 Page 18 of 37 approved. But it’s not intended that we would go through each of the items unless you had questions and wanted to get into more detail. We had attempted to do those items early on. Ferguson: Good, I just wanted to clarify that, because my preference is to proceed ahead directly to the discussion of the various rate proposals. Bechtel: Mr. Rosenbaum. Rosenbaum: I did have one question on the text associated with the Electric Fund. This is page 3, next to the last paragraph, it starts off in 2001-02, a 43% increase in rates was adopted and then it goes on to say at present there is uncertainty regarding a potentially significant impact related to supply contract settlement provisions and other outstanding supply issues. What is that issue? Which one is that? Baldschun: This relates to the cancellation of our Enron contract. Rosenbaum: You’re suggesting there is some uncertainty? We’ve heard otherwise, we don’t think? Baldschun: Oh no. Our position is of course that there’s not going to be any, you can’t assume any liability here, but you never know. So the prudent thing to do is don’t react too quickly. We’re not going to be assuming anything. We’re just going to keep the reserves where they are and not propose to reduce rates. There’s some other factors too that are...[interrupted] Rosenbaum: All right, but you are suggesting the concern about the eventual outcome of the Enron contract had some effect on your decision with regards to rates? We haven’t heard that before. Ulrich: You mention “concern”? Rosenbaum: Yes. Ulrich: It says “uncertainty,” and there is a level of uncertainty. I wouldn’t raise it. We did exactly the right thing. We’ve had significant discussion here and communication about why we did what we did. I feel very confident that what we did was appropriate, but it is important that there’s always a level of uncertainty. With this significant amount in that contract, it’s important to list it here. I would not say in the sense of concern that we think we did something inappropriate and we’re waiting for something to happen. Rosenbaum: I wouldn’t suggest that, but at the meeting, either last meeting or 2 meetings ago, I did ask the question and the answer was we had not put aside anything and we were not contemplating putting aside anything. Baldschun: That is correct. We have not specifically set aside any funds for that. Rosenbaum: But this should be an argument for maintaining a healthy reserve. Baldschun: Like any other cost uncertainty, absolutely. We have, Bern mentioned, half a dozen that potentially that could impact us so it is the prudent thing to do, and the reserves are not exactly that healthy. If you look at the electric fund rate stabilization reserve in the budget and UAC Minutes 5-1-02 Page 19 of 37 given the fact we’ll be pulling out substantial amount of money in this proposed fiscal year, this whole discussion is explaining why we are not going to reduce the electric rates. There have been some perceptions that we were automatically going to reduce our electric rates 43% in this year, which would not be a wise thing to do. Rosenbaum: All right, but if I look forward to next year and some of these issues go away, we’ll have another discussion about electric rates then. One other issue where I know there was some concern. Dexter and I both went to the NCPA strategic planning session. In conversations with some of the other NCPA members, we got the idea that some of them were unhappy with what we had charged them during the height of the energy crisis and were attempting to recovering some of those funds. Is this the $6 million that we talk about as the NCPA settlements, or is this still an outstanding issue? Ulrich: What you’re referring to is what happens in a pool. A pool has a certain set of agreements. Occasionally and sometimes quite frequently it goes through discussion about whether the pool agreements are being followed, what are the changes to be made. That is a healthy thing that is done all the time. That may be the area you’re referring to. Yes, significant discussions have been on that, and some expectations on what we think the settlements will be are reflected in the budget and in this document, so that there is no shock or surprise if or when that occurs. And with the significant price increases last year, these numbers are much higher than they would be in a calm year. But we go through the same process and the same settlement. That’s an experience the pool has all the time. Rosenbaum: We’re still on good terms with everybody? Ulrich: You bet. Rosenbaum: Good. Bechtel: All right then. Mr. Ferguson. Ferguson: I was just going to propose a motion on 2A, if you’re ready. Bechtel: First of all, for the interest of any viewers or for the minutes, let me just talk about 2A. Item 2A is before us and it says staff requests the UAC recommend that the City Council approve amended Utility Connection Fee Rate Schedules and they are listed here to be effective July 1. And just a little bit of background, it says current fee schedules were last revised in 1998, so it’s appropriate to raise the rates at this time. So that’s the background on the first rate schedule we’re looking at 2A. So, Mr. Ferguson? Ferguson: I move approval of the staff recommendation on item 2A. Bechtel: Mr. Ferguson recommends 2A to Council, that the fee schedules listed become effective. Do I hear a second? Rosenbaum: Second. Bechtel: Second by Mr. Rosenbaum. Any discussion on the proposed increase to the Utility Service call and connection fees? UAC Minutes 5-1-02 Page 20 of 37 Dawes: This looked pretty straightforward to me. Basically cost of service, updated hours and pay rates -- it has my support. Bechtel: Any other questions of staff on their justification? If not, I’ll call for a vote. All in favor of the UAC recommending that the City Council approve these rate schedules please say “aye”. All Commissioners: Aye. Bechtel: Any opposed? None opposed. Motion is approved unanimously. Moving next to item 2B. 2B, there are 2 items here and this report requests that the UAC recommend that the City Council 1) approve revised electric rate schedule to update the public benefit charge and the unmetered electric service rate schedule, which would be effective July 1, 2002 and 2) transfer $4 million from the supply rate stabilization reserve to the distribution rates stabilization reserve. So there are 2 issues here on this recommendation from staff. Questions on this before a motion? Mr. Dawes. Dawes: I was a little confused as to how the arithmetic worked on the 2.85%. I had assumed that that’s what we were charging as an override all the time. But the last paragraph on that page starting 2B seemed to imply that we weren’t. Or maybe it’s just simply an issue of kilowatt-hours versus percentage of dollars billed. If you could elucidate, Randy, I’d appreciate it. Baldschun: AB 1890 was passed to require utilities to automatically charge a public benefit fee and implement programs. The problem was you couldn’t implement effective programs in a very short period of time. It took us a year to roll out the Advantage Program. So for the first year or two, we had a surplus in the public benefit reserve because we weren’t spending as much as we were collecting. So it didn’t make sense for us to raise the public benefit charge percentage to 2.85 when we had the 43% rate increase. After the energy crisis, we pretty much almost depleted the public benefits reserve. Now there’s a good use and need for that money, so we’re going to be collecting that. Dawes: So there was a gap where we were collecting less than 2.85%? Baldschun: That’s correct. Dawes: Where we increase the ratio? Okay. That answers my question. Baldschun: Actually this fiscal year, we’re collecting less than 2.85 %. Bechtel: Other questions of staff at this time on 2B? Let me just take a sense of the Commission on separating these 2 issues, 1 and 2, separating the rate schedules from the transfer. I’m assuming unless there’s some other discussion that we’ll handle both of those items together in the same motion. Do I hear a motion? Ferguson: Move approval. UAC Minutes 5-1-02 Page 21 of 37 Bechtel: We have a motion from Mr. Ferguson that we recommend to the City Council that they approve a revision to the Electric Rate Schedule and that they approve a $4 million transfer between reserves. Do I hear a second? Rosenbaum: Second. Bechtel: Second by Mr. Rosenbaum. Any other questions? Discussion? Mr. Dawes. Dawes: Traffic lights. When we converted, we paid a lot of money to convert over to LEDs which were going to reduce the amount of electricity that they used, and here we’re hitting up the City for a $32 thousand a year increase. I don’t get it. Baldschun: Some of you on the UAC reviewed our enterprise transfer methodology. Part of that transfer methodology recommendation was for the Utilities to charge the City for traffic signals capital cost. Up until that study was done, the policy was not to charge the City for capital cost in the traffic signal system. They recommended and Council approved that we do collect capital cost. Council approved a three year transition to what was presumed to be full cost capital recovery and it was $32,500 a year. We’re just following that. But to get to the point, you’re not the first person who has brought this up because our energy usage in these traffic signals, we just saw an email, it’s gone down 2/3. Our cost of service, as it currently stands, we’re not recovering our full cost and we can’t...[interrupted] Dawes: That’s including the CIP which installed them. Baldschun: Right. Dawes: We don’t get all the cost of the electrical service back. Baldschun: The energy costs are really insignificant in terms of the overall traffic signal operation. It’s really the capital cost that is the issue. So we’re going to follow what Council approved and in another year or two, we will look at the full cost of service and we will make a recommendation if we feel we need to continue to increase those rates. But it’s a policy decision that really only the Council can make. We’re just following what they’ve approved two or three years ago. Dawes: Thank you. Bechtel: Other questions on proposal 2B? Then I’ll call for a vote for the proposed revision to the electric rate schedules and the $4 million transfer between reserves. All in favor, please indicate “aye”. All Commissioners: Aye. Bechtel: Any opposed? Passes unanimously. Moving on to 2C. That’s the proposed gas rate decrease. This report requests that the UAC recommend to the City Council that they approve a $12 million retail gas revenue decrease effective July 1, 2002. The proposed revenue decrease represents approximately 26.7% decrease system-wide. That’s the issue before us. Discussion from Commission? Mr. Ferguson. UAC Minutes 5-1-02 Page 22 of 37 Ferguson: Thank you Mr. Chairman. I’m a great believer in our reserve approach -- using the reserve as a shock absorber in the overall pattern of rate increases and decreases. We had a couple of opportunities in the last year to talk about increasing the size of the reserve maximums and minimums across programs. In the case of the electric fund, we did accommodate the wild swings in electric energy prices. I recall, Girish had a nice little table showing the new factors that justified changing the overall range in the reserves. This year, what we have is a gas fund that’s going to be $3 million above the max. Did I read that correctly? If we’re operating on the usual, reasonable assumption that we want to keep rates stable over a multiyear period, it might have made sense to leave $3 million above the maximum in the till. But my guess is gas prices are going to be much more stable, in the coming year or two, especially if we do laddering, than the experience we had before -- wild swings, where they took us by surprise. So I’m inclined to stick with the reserve guidelines that we adopted, kept in place for several years. Rather than hold $3 million back above the maximum guideline, let’s just roll that into the overall decrease and adopt a reduction of revenue of $15 million instead of $12 million. If I’m just reading those numbers wrong, I’m happy to be corrected. But it looks like we’re keeping an extra $3 million in the supply reserve above the maximum guideline. Baldschun: On which document are you looking at? Is it in the budget or in the rate proposal? Ferguson: In the gas fund, page 4 or in the text at the bottom of page 2 on the gas fund. Baldschun: Let me direct your attention to page 2 of the Enterprise Fund Reserves in the budget. If you look at the projected reserve balance for the supply rate stabilization reserve, there were a number of changes that occurred and have been occurring in the recent weeks and that’s why I’m delaying my response because as I indicated to some of you earlier today, I’ve got some revised reserve balances and one of them is the supply rate stabilization reserve. But on page 2 of the enterprise fund reserves, you see an ending balance of $4,989,000. Ferguson: Yes. I’m reading the extra $3 million in the Distribution Reserve. So my apologies. Baldschun: So that one’s within the range. Yet the statement you pointed out says it’s above the maximum guideline and that’s because there were some changes that have been occurring. If your point is are we going to change the guidelines or should we keep them, we changed the guideline formula for electric and for gas last year. The impact was that it didn’t change the actual guideline amounts in the gas while it did in the electric. So where we are now is we’ve got new guidelines as of last year, but it’s not resulting in any significant difference at all than the old guideline. If you’d like, I’ll talk about that particular reserve because in the accounting in the budget process, there was a double entry in the bond proceeds related to our soft engineering costs. Ferguson: Let me just correct myself first. There is an extra $3 million in the distribution reserve, not the supply reserve. So there really is $3 million there above that guideline and that’s what I’d prefer to send back to the ratepayers. But maybe there’s more to the story? Amy Javelosa-Rio: Good evening. I’m Amy. I’m with the budget accounting and I’m the one responding for preparing the budget documents. First of all, I would like to point to your attention that there is a change in the reserve balance. We originally gave you a draft document UAC Minutes 5-1-02 Page 23 of 37 on the fund reserves. This has been amended, so for your discussion purposes, I would refer you to the amended, which is a part of the document this evening. Bechtel: You’re referring to page 2 of the summary sheet enterprise fund reserves? Javelosa-Rio: That is correct sir. Bechtel: And that has electric fund at the top, gas fund in the middle, wastewater...[interrupted] Javelosa-Rio: That is correct. We have an amended statement. Baldschun: While she’s putting that up, I’ll talk in terms of what the impact of what the changes are. Essentially, a change in the balance in the Gas distribution RSR resulted in a drop from $7.8 million down to $5.2 million. That’s about a $2.6 million decrease in the gas distribution RSR and it relates to an accounting oversight with certain CIP bond costs going into that reserve which is incorrect. The other change is in the water fund that is a change in the budget draft. It shows an RSR ending balance of $14.586 million and there were two changes that brought that down to a level of $10.2 million. So that’s a total of a $4.3 million drop in that projected reserve balance. Now what that essentially does is bring that reserve below the maximum guideline in the water fund. I apologize for...[interrupted] Bechtel: So let me understand. Let me summarize what I have heard and that is that on the gas fund that the distribution RSR for the projected ending balance ’02-’03, you’re saying is $5.2 million as opposed to almost $7.8 million. Is that correct? So $5.2 million is about $1 million or maybe it’s $900,000 above the reserve guideline of $4.382? That’s what we interrupt. We’re still a million dollars above the maximum. Baldschun: Correct. Bechtel: Okay. Under the water fund, which we’ll talk about, that is the projected ending balance, I assume that the first column which is ’01-’02 is 10.2 down $4 million so that brings for next year, that brings that down to below 11.4 million. Baldschun: Correct. Bechtel: Okay. Let me come back to Mr. Ferguson’s question . Where he was leading on the gas fund, why wouldn’t we want to give back a million? He was going to give back 4 million. Why not 1 million? That’s where the discussion was when we got onto this. Baldschun, The way we sized the rate proposal was we wanted to be prudent in terms of any cost contingencies and there’s one outstanding uncertainty that we wanted to plan for just in case and that’s approximately $7 million above our target level. What we did was we took that target level and we added $7 million. Lucie, you can correct me if I’m wrong here. That was what we want to end fiscal year ’02-’03 with. Hirmina: The plan was to leave $7 million above the target level on the supply side. The distribution is only $785 thousand over the maximum at this point. We’re waiting to see where all the expenses are going to be with those issues. We’re waiting for them to settle. If they settle as we think they would, then next year we would have another decrease. UAC Minutes 5-1-02 Page 24 of 37 Baldschun: I hate to do this because we have so many financial statements with different goals in terms of presentations. The budget is based on certain assumptions. Then we have the 10-year financial forecast. The 10-year financial forecast is a document we use to develop the rate proposal. The difference between our 10-year financial forecast reserve balances and the reserve balances you see here, are significant in that the budget proposal was developed over a period of months, finally getting to the point where we put it in draft form. In the meantime, we have been updating on an ongoing basis, including the most recent being the quarterly report, what we project to be reserve balances. Maybe it might help if we turn to the supply rate stabilization reserve ending balance, let’s see what that looks like. The example in the quarterly report, the supply rate stabilization reserve for fiscal year ’01-’02 is rising from an adopted budget figure of $1.9 million to $6.8 million. A lot of that increase is based on the staff’s internal assumptions about events that some of which are reflected in the draft budget and some of which are not. In terms of the rate proposal we base it on the most updated information. It would be imprudent not to use the most recent information we have. This budget document, the way the City process goes, is you have a mid-year report in which adjustments are made and becomes the adjusted budget. When that happens, the process takes in November, December and then finally the Council approves it and it’s not until probably February or March where it’s released. A lot of things happen in between, so we don’t just use the adjusted budget. We keep on updating that adjusted budget in terms of our projections for our rate requirements and that’s what we use the 10-year for. I apologize for dragging this out, but the 10-year financial forecast indicates from our best information that we can end fiscal year ’02-’03 with this 27% rated decrease, where the supply reserve will end up at a balance somewhere around $7 million over target -- which was the defining factor. Next year, we’ll have a lot better information on what’s going to happen with regards to that cost contingency and we’ll also have more information on the cost for ’03-’04 which we’ve talked earlier about. We purchased up to half of that fiscal year at this point. So next year, there’s a very good possibility we’ll have a subsequent rate decrease if the cost contingency is not required and purchase gas costs continue to fall below current gas costs. Bechtel: Mr. Ferguson, follow up to that, since you’ve kicked this one off? Ferguson: Yes. I’m trying to do the right thing here. Maybe I shouldn’t have kidded myself that there would be $3 million lying on the table at the last minute before budget approval. But let’s go back and focus on what’s really going on here. We do have reserve guidelines. The reserve guidelines are there because there are generally external factors that bounce supply prices around, or bounce around the distribution cost experience. We want to accommodate those things without having annual rate increases or decreases. Makes plenty of sense. I’ve always assumed that those brackets were created based on experience and mostly because of external factors; things beyond our control; things we can’t plan and manage for on an annual basis. Sounds like here, we’re talking about a couple-million-dollar swing that’s entirely inside our accounting system. Maybe we ought to rethink our reasons for having max’s and min’s here. If part of the max and min calculus is that it’s just mechanically impossible to close the books, or to get a good number here at budget time, to the nearest 1 million or 3 million -- then so be it. Let’s build that into our reserve guidelines, as well as our usual provision for external factors. Am I reading that correctly, or was this a one-time event? Baldschun: I understand it’s a one-time event. UAC Minutes 5-1-02 Page 25 of 37 Bechtel: Mr. Dawes. Dawes: I have the same line of thinking as Rick. Obviously these new figures are new data, but sort of going backwards a year and half or so, I was certainly very strong on inserting an extra rate increase in our series of either 4 or 5 increases in one fiscal year when the gas was just running away from us in our reserves headed toward and actually got to zero at that time. My message here is, we have to do the same thing again, but on the down side of the curve. As I read the quarterly reports on the gas reserves, it looks as though we’re considerably ahead of where we thought we would have been on the enterprise fund reserve schedules. Randy, you’ve confirmed that. We’re doing better than we had the opportunity to put in the enterprise-fund budget cycle. Rather than suggest something different than the rate adjustment that’s on the table, I would like to re-emphasize the appropriateness of revisiting this in 6 months. It’s great to have things stable for a year. But if it goes the way I sense it is going -- and you also said you’ve got our purchase prices locked up for this coming year -- this should be a fairly calculable thing. Other than the same issue in the gas fund as we have in the electric side, vis-à-vis contract termination -- which to me says we should have a little more robust fund there -- but again over time we’ll know more about that. So let’s look at it again in 6 months. Baldschun: I absolutely agree. We should look at it on a quarterly basis. The end of this fiscal year is going to be real critical for us, as every end of fiscal year is, because that’s where you find that there might be CIP projects deferred. Or there may be other costs, or that’s when our sales revenues come in. That’s when our actuals are known, and you really have a foundation of going forward to propose any rate changes. We can propose rate changes anytime. We don’t have to do it in July. If we get good contracts in ’03-’04 and we end this fiscal year as we’re hoping we are, then there’s nothing preventing us from coming back with a rate change if the financials indicate that. Dawes: Yes, one item I did forget to mention is that the rate of change of those reserves is very high. I mean, we got about to zero and we’ve restored them in virtually in one year to where we are today. It would seem to me, gas isn’t varied that much on the cost side, so we should be adding very rapidly to that. Again, we should look at it quickly. Bechtel: Other discussion, more discussion on the gas rate decrease? Mr. Rosenbaum. Rosenbaum: Rick, I just wanted to commend you for looking so carefully at this. It would seem that if we are using the new number, the 5.2 million, and you add that to the supply rate stabilization number, the sum of those two is about equal to the maximum for the sum so we’re about in the ballpark using that number. So perhaps we should wait and we’ll remember staff indicated that it is indeed possible to have rate changes in the middle of the year. Bechtel: Other discussion? Lucie, while you’re here, could you update the last line of the enterprise fund reserves with the numbers that you have on the table here? I’m looking at page 3 and what I’m noting is if you take a look at all of the enterprise funds, all added of course together, our reserves are dropping $24 million according to the numbers we have in front of us UAC Minutes 5-1-02 Page 26 of 37 and dropping to $154 million. Do you have what that number would be? Really what do you think our projecting currently what or how our reserves are going to drop or increase? Ulrich: Just say, Amy will give you an answer to that. Javelosa-Rio: The $154 million that you saw here includes enterprise funds other than the utilities department and with the new numbers I have given, this will definitely be updated. So the $154 million will decrease approximately by the difference of the numbers that I gave you previously and the new numbers and it’s approximately $6 million. Bechtel: So $154 will drop to $6? Javelosa-Rio: That is correct. Bechtel: Okay, so there’s been no. At least from that point of view, the City is not deteriorating too rapidly even with decreasing the rates at this point. Any other discussion? I’ll entertain a motion on the proposed gas rate decrease. Rosenbaum: I move approval of the proposed gas rate decrease. Dawes: Second. Bechtel: Moved by Mr. Rosenbaum. Seconded by Mr. Dawes that we recommend to the City Council to approve a rate decrease effective July 1, 2002. All in favor please indicate “aye”. All Commissioners: Aye. Bechtel: Opposed? None. Then motion passes unanimously. Moving on to item 2D proposed water rate increase. What the City giveth, the City taketh away. We are being asked to recommend to the City Council that they approve a 20% water rate increase effective July 1, 2002 and there’s a basically part of the reason for this is the revenue bonds and other issues associated with our long-term water cost. Discussions or questions of staff on this item? Mr. Rosenbaum. Rosenbaum: The water rate increase was in part predicated on the increase in the wholesale rate from San Francisco. We’re told that the increase from San Francisco is not going to occur. Are you going to propose reducing the rate increase request? Baldschun: No we won’t. Again, timing is everything. We got the proposed rates from San Francisco indicating a wholesale rate increase and went through the budget process as the staff does. We prepared the language that we’re expecting this and also indicate that as the reason for the rate increase because it’s a $400 thousand hit and that adds to the rate increase. With Schedule B changes, we will revise this downward to reflect no increase in wholesale costs. But if you look at the rate issue here, it’s certainly not SFPUC. Even in ’03-’04 when there is a planned SFPUC increase. It’s the CIP. The CIP is going up so much in one year that we need to transition to that through a combination of the bond proceeds, using the reserves and two rate increases. Now, what this means in terms of the impact on the customer from San Francisco not increasing their wholesale rate is, it should reduce the size of our retail rate increase if we have to have a rate increase next year. Our projections are that we’re going to have another rate UAC Minutes 5-1-02 Page 27 of 37 increase in ’03-’04 of 25%, but I don’t think that’s going to materialize given the fact that SFPUC is not going to have a wholesale rate increase this year, which tells me that we’re going to have at least $400 thousand, perhaps $800 thousand more in the reserves as a result of that action. So that should have some favorable impact on our rate proposal for next year. Even taking out the San Francisco issue, you still are left with this very large CIP and we need to do the CIP. Rosenbaum: I recognize that the CIP impact is there, but I guess I made the same comment last year: if we were the California PUC and you gentlemen were PG&E and you came to us and said we’ve got this rate increase based on certain estimated increases and costs. And, oh by the way, one of these increases ain’t going to occur, but what the hell, we won’t take that into account. The members of the CPUC would kind of look askance at that and suggest that you adjust the rate increase to reflect your true increase in costs. Baldschun: The rate proposal is not based on the requirements for this fiscal year. That’s obvious. If you look at the budget document for ’02-’03, you don’t even see the CIP going up much compared, but if you look at ’03-’04, that’s where you see it. So I don’t know how PG&E plans or how the PUC wants them to plan to have levelized rate adjustments, but that’s what this is all about. We’re trying to levelize the impact of this huge project that’s coming up, not in this fiscal year, not in the proposed budget, but in the following year and Council’s approved the CIP. We’ve issued bonds for it. Everybody is on board to do it and this is simply the plan to fund it without having more of an adverse impact on the ratepayers. Rosenbaum: Sure, but it would seem that your CIP would be in exactly the same shape if the rate increase were reduced by $400 thousand. I don’t want to belabor it. At some point, I’ll offer an amendment to reduce the rate increase by that amount. Baldschun: Okay. Ulrich: Your analogy, Mr. Rosenbaum, with CPUC and PG&E, the one difference is in maybe the CPUC would not approve the rate increase because they know that additional amount of money on rate of return would then go to the shareholders of PG&E in the form of additional dividends or higher profits, whereas, the kind of money we’re talking about here whether it is a lower rate or it goes into reserves or we spend it on CIP is all the money of the customers in Palo Alto. It goes nowhere else. So your point about whether there should be $400 thousand more in the reserve is a good point, but it is one that is not going to go somewhere else and it won’t be diluted by dividends to somebody in Kalamazoo, Michigan. Bechtel: Other? Mr. Ferguson. Ferguson: I’d like to connect this up to the legislative effort. I don’t have the answer right now, but let me just pose the question. What’s the message that we convey vis-à-vis the other San Francisco suburbs, the way we increase our rates this year or next year or levelize them? Is there a wiser way, a more judicious way of incurring this increase inside Palo Alto for purposes of making our case stronger in the legislature? Is it better for us to take a big painful hit next year, all at once? Do we look like we’ve had a kind of cushy time of it, if we levelize it over two years -- where the other suburbs are incurring a painful increase forced by San Francisco next year? I’m wondering how the message works outside the city? UAC Minutes 5-1-02 Page 28 of 37 Beecham: I’d say there may be some small political benefit if we say that we have or we are now in the process of recommending a rate increase to fund our own CIP that does take into account reliability for our own distribution system. Whether we say we have the rates this year or that we have approved the CIP for ’03-’04 is probably a small difference actually. Ulrich: As you also recall when we had this discussion about the 10-year financial forecast, it showed in here, correct me if I’m wrong Randy or Lucie, but it showed 20% this year, 25% next year and then several years of zero and then an actual reduction and one of the ideas is to be able to smooth out these rates so that the increases are not jumping all over the place. So this would fit in with the smoothing part rather than have the 25% next year, it may be less than that. So this is our judgment area on what the appropriate way to handle this lack of an increase from the City of San Francisco. Bechtel: Thank you John. You raised a good issue. If you look at long-term, and actually, we’re looking at another increase next year. Mr. Dawes. Dawes: Yes, I wanted to raise similar questions on water as we did for an earlier fund. I noticed in the quarterly update that the water fund, water RSR is projected at 10.5 at the end of this year and then if I fast forward to the water fund in the draft budget, it shows a 14.586 balance at the end of this year and wondered if looks like there’s been substantial slippage in that area. Same as we have so that this would be another reason for adhering to the rate increase, which absorbs the San Francisco adjustment. Baldschun: Let me just clarify, the 14 million is now right around 10 million based on Amy’s comments which is consistent with the 10-year financial forecast and that’s below the maximum guideline of 11 or some million. I don’t want to focus too much on this SFPUC. We talk a lot about this huge project and the based on the projections we’ve gotten from San Francisco, they have proposed rate increases from now through the next 15 years, but they’re really not significant until 2008-2013 according to their schedule. So if we can just get the SFPUC wholesale rate increase out of our consciousness for a while and focus on what’s really driving this and that’s our capital program. Dawes: I only mentioned it because Commissioner Rosenbaum indicated he was going to try to get it back a little bit later. One last question about the bond proceeds and again on the water fund summary, it shows that at the end of next fiscal year, which is at the time we will be starting to spend at our peak CIP rate for the big hole in the park and all that stuff. We only have $584 thousand left of our bond proceeds. Basically we’ve spent $13 million. I realized that soft cost got reimbursed out of it right at the outset, but to blow through $13 million in two years when before any of the big bucks start hitting seemed a bit of a problem. Baldschun: The timing and use of those funds is not so much trying to use those in the very specific year in which that project’s going to hit. You really have to look at it in terms of where did we start from and where are we going to end up at? We started with no water rate increase. This was last year. With a CIP escalating over a 3-year period up to $22 million, we’ve got bond proceeds of $11 million. Now we can use those in the last year and all that’s going to do is make our reserve balances quite a bit lower in these early years. At the end the 3-year period, we’re going to be exactly where we would be whether we used the money early on, over a 3-year period or we use it at the end. The reason we’re using it early on is because we want to keep the reserves healthy. From our financial advisor’s UAC Minutes 5-1-02 Page 29 of 37 standpoint, we want to have healthy reserves for our ratings, so there’s no reason for us to hold back on using those funds. If we did, we’d probably have to have a larger rate increase. Essentially, those bonds are buffering the size of these rate increases that we’re proposing. Dawes: Thank you. Bechtel: Any other questions of staff on this? Mr. Carlson. Carlson: This applies to all these reserve issues. It must be in the budget here somewhere, but our reserves are so large, the interest we’re earning on them has to be pretty significant item. Baldschun: We do get interest income from all of our utility reserves. The yield varies. The yield these days, the weighted average let’s say of the portfolio for the City, what is it Amy? Javelosa-Rio: The interest income is actually reflected in the summary. We are showing an interest income here and how it’s computed is based actually on the average balance on the cash and not on the reserves. So while we may be showing a reserve balance here, the accounting is using the daily cash balance or the monthly cash balance to compute the interest income. Bechtel: Out of curiosity, what is the difference between our daily balance and our reserves? Are we talking about $50 million or $10 million? Javelosa-Rio: Sir, the difference is when we have the cash balance, when we compute on the balance sheet, there might be, this is not a question of the cash basis and accrual basis of accounting. So for example the rate stabilization reserve is computed on a full accrual basis, which has some accounts payable, while we compute the interest base on the cash balances of a certain month. There may be some accounts payable sitting there so if we compare the cash and the reserve on two different reporting basis, they don’t match. That is the difference. Bechtel: I understand. Any other discussion on this? If not, I entertain a motion to increase our water rates on an average of 20% effective July 1. Do I hear a motion? Dawes: So moved. Bechtel: Moved by Mr. Dawes. Do I hear a second? Carlson: I’ll second. Bechtel: Seconded by Mr. Carlson. Any other discussion? Mr. Rosenbaum. Rosenbaum: I would propose an amendment to reduce the rate increase by the size of the reduction of the proposed increase of the San Francisco wholesale rate. Bechtel: I have a motion, an amendment to reduce by approximately $400 thousand; it was approximately that to be applied in some way across that. Do I hear a second? Carlson: What percent is that? Bechtel: There is 3.1 million is the rate increase according to the report. UAC Minutes 5-1-02 Page 30 of 37 Baldschun: It’s 2.6%. Bechtel: 2.6? Baldschun: $400 thousand and you’re taking it from 20 down to 17.4. Bechtel: Not hearing a second on the motion to amend, we’ll move on to call to question. All in favor of the proposed water, that we recommend to the City Council to approve the rate schedule, all in favor please say “aye”. Carlson, Ferguson, Bechtel, Dawes: Aye. Bechtel: Opposed? Rosenbaum: Nay. Bechtel: The motion we have passes on a count of 4 to 1, Mr. Rosenbaum voting in the negative. That completes the agenda. No I’m sorry. One more. We have wastewater collection 2E. This is a request for us to recommend to the City Council that we approve a 25% wastewater collection rate increase to be effective July 1, 2002. Questions of staff on this one? I entertain a motion to approve that we recommend to the City Council approve the 25% rate increase. Rosenbaum: So moved. Bechtel: Mr. Rosenbaum moved. Second by? Dawes: Dawes. Bechtel: Mr. Dawes. All in favor please say “aye”. All Commissioners: Aye. Bechtel: Any opposed? Being none, motion passes unanimously. And I’ve reached the end of my report, end of my agenda, so that completes our new business item for tonight. Next regularly scheduled meeting is June 5th and which we will talk about the electric long-term resource plan. Randy, you have a question? Baldschun: You need to take action on the operating budget and the CIP. You’ve approved the rate proposals, but unless I missed something, I don’t think you’ve taken any action on the operating budget and the CIP. Bechtel: You’re right. I guess we need to. Ferguson: Where’s the agendized item? Ulrich: It’s listed under 2. It says Fiscal Year 2002-2003 Operating/CIP Budget and Rate Proposals and it’s shown as an action item. Bechtel: Okay. UAC Minutes 5-1-02 Page 31 of 37 Ferguson: That was my question at the top of this discussion! I’m happy to take action. I just want to make sure we’re not going through a useless motion here. Bechtel: So basically we’re looking at the draft budget. Ulrich: As you recall...[interrupted] Bechtel: Beginning with item #, yes, it’s listed as agenda item #2 and all the way through up to we reach the point of the rate increases. Ulrich: As you recall, this has been an ongoing process. This is not an attempt to show you this at the last minute of course. In years past, we’ve had very limited discussion because the way the city budget moves by the time you get around to discussing these items, it’s being printed and put into the manual. So we started a number of months ago, as you recall, talking the individual CIP areas and focusing on the ones that are a change from previous years. If you have any questions on it or issues, we are glad to answer them. Bechtel: Mr. Ferguson. Ferguson: Mr. Chairman, I really don’t want to belabor the details of the budget or the CIP project list.. I did ask the question at the beginning of our agenda because I did have a couple of questions on things we visited a couple of times before. Maybe there’s a new wrinkle in the story. It crops up in most of the fund budgets, so let me ask the question generically: There’s a one-time facility rent charge that crops up for all the funds, for example on the electric fund on page 6, the ongoing facility rent is $255K. There’s a one-time charge of $561K. Why is the one-time charge so much larger than the ongoing charge, and is this part of the process where the City charges us market rate, top dollar rates for the use of the City office buildings? What does that number mean? Ulrich: It’s what you just described. It’s the rent that we pay to the City for the use of City’s facilities. Utility in most cases does not own facilities. We pay rent to the owner, which is the City and there is a market evaluation done. There was also an attempt to mitigate those costs because of the economic situation in the market and the fact that rents didn’t change much. So we did not have the same amount of rate increase in the rents in past years. It’s now catching up and it will be an increase in the budget in July that will reflect that change up to market. Ferguson: Can you explain why there’s an ongoing charge and then there is a one-time charge that’s so much bigger? Ulrich: As you recall, this is a two-year budget so they deferred last year and we’re now going to pay it this year. Ferguson: Okay. My second question that applies to almost all the funds, is the allocated charges. There’s a note 11 indicating that there is something, perhaps related to software and computer systems. that’s allocated as some City central staff computer charge. Is that being applied ratably? Is it applied across City Departments based on their base budgets, or how is it allocated? UAC Minutes 5-1-02 Page 32 of 37 Ulrich: That’s correct. It is allocated, actually, in the case of the new program that we’re working on that will have a significant cost to the City is the ERP which is the replacement for the current accounting system and it will also include a job management system. So we’re paying in Utilities, we are paying a fair share of that based on the expected use of the system. So in the case of like the job management system, we would be paying a fairly percentage proportion of that because of the amount of CIP work we do and how it will be used. Baldschun: Let me just elaborate on this because it’s a very important application. I know Bern is well aware of it. I don't know that this has come to the attention of the UAC, but the City’s financial accounting system is called IFAS. That was installed a number of years ago and it’s going to be replaced. They went out to bid. There are still two vendors that they’re looking at to replace it, or what they call ERP, or Enterprise Resource Plan, it is. But as John said, it’s the general ledger, it’s all the financials, it’s the payroll, it’s fixed assets, inventory, purchasing and it’s a huge application and it’s expensive, but it’s one that will benefit the Utilities immensely as well as other City departments so that’s what you’re seeing with these increased allocated charges. Bechtel: Question in general on the budget preparation process. Have you taken a look at this with regard? You certainly, the Utilities have their own revenue, but with respect to overall, just looking at this from the top down or bottom’s up view, that we’re doing the best we can in managing the expenses and overhead and that these are tough times for most companies. The City, of course, benefits. The Utilities benefits from what we see having gone through the revenues, but I can see a lot of other things where the City can benefit from just reduced expenditures here and there. What sort of guidelines did you use for yourself in looking at all the discretionary spending? Ulrich: We attempt to follow the same guidelines as the general fund in looking at ways of deferring some work. Most of the savings you’ll see in there are from not filling positions. We are by far the largest organization or the largest number of vacant positions so we’re looking at each one. Our goal this year, was not to add positions unless we were able to find a way to either pay entirely for that additional position or additional revenue to offset those costs. As you can see, it went very well in that area. At the same time, we’re increasing the amount of work we’re actually accomplishing. So we’re looking at everything. We’re also candidly looking at ways we can help the general fund and the rest of the City get work done. We’re all part of the City and we are finding the synergies around how to do things for the general fund that will also help our utility customers. Bechtel: On a procedural issue, should we, we have before us an operating budget for next year. We also have a long-range CIP. As part of our process, our recommendation tonight to the City Council, do we include the long-range CIP as a recommendation or are we just looking at next year’s operating budget? Ulrich: The budget approval is just for this year, but in order to give you an idea of why we’re spending the money, you have to look at the Capital Improvement Program for much longer periods. For example, the water, you have a good understanding of how much it’s costing for the water CIP and it’s not just a commitment to fund it for next year. Next year fits in with the entire plan, but technically you’re only approving the actual expenditures for the forthcoming year. Bechtel: I’ll entertain a motion then that UAC recommends to the City Council they approve the Utilities Operating and CIP Budget for fiscal year ’02-’03. Do I hear a motion? UAC Minutes 5-1-02 Page 33 of 37 Ferguson: So moved. Bechtel: Mr. Ferguson moved that we recommend to the City Council. Do I hear a second? Rosenbaum: I’ll second and make a comment. Bechtel: Second by Mr. Rosenbaum. Further comments? Rosenbaum: UAC has been looking at this information and making recommendations to the Council since the UAC started. This is perhaps as cursory a look as we’ve ever given. George, are you going to the Finance Committee to represent the UAC? Bechtel: Yes. Rosenbaum: The Finance Committee doesn’t know that we looked at that as cursory as did, and I don’t know that you want to tell them. I’m not quite sure how to proceed. Is it any different this year than it has been in past years? Clearly it was hard to get a second, because I suspect none of us are terribly comfortable with making that recommendation. Ulrich: Let me make a comment. I would say I’m very disappointed in that perspective is that I thought exactly what we did is we actually spent more time on it, because we went back and started much earlier in the process and brought forward all the work we did last year and that this is the second part of it so this long-term plan you did see last year and portions of it the year before and on specific major areas, for example, the water area, we went through a lot of study sessions and discussions on it. So I thought we had spent time on this and we devoted the last meeting as I recall, no the meeting before that, to the highlights to the changes. The other reason we spent time on it was we put a lot of time and effort into the Strategic Plan, which called for in this matrix, the things that were important to do and we tried to relate all the work that we’re doing to those Strategic Plan initiatives so that we’re not off trying to sell you, doing something that doesn’t fit in with reducing, keeping rates low or improving service reliability. So if we’re not doing a good job in communicating either on specific projects or where we’re spending the money, then we ought to get back together and discuss how to do a better job of that. We do not want you to go to Finance Committee if you’re not comfortable with what we’re doing. Rosenbaum: You make a good point, John, and indeed two months ago, we discussed significant changes from year to year in the budget. That was helpful. What you’re saying from a macro level, we’ve looked at the budget and compared it to the Strategic Plan and surely didn’t find anything out of place so I would think George when you speak to the Finance Committee, that you emphasize that from the macro level, we’ve looked at it and it seems fine without suggesting that we’ve gone through the details of the line items in the budget. Bechtel: Dick, I agree with you. I certainly can give you the floor. The process by which we went through this is -- Rick and I were talking earlier in the meeting about having gone through this in previous years line item by line item, and that is certainly a process by which I’d be prepared to do so. That’s why I encouraged everyone to do their homework prior to this meeting and I felt that everyone had done their homework and had looked at this thing. There seemed little motivation for going through details at this time, so some of it is cursory. I certainly did not spend a small amount of time looking at this prior to the meeting. Mr. Dawes. UAC Minutes 5-1-02 Page 34 of 37 Dawes: I’d like to put in a plug for the process. In years past, when we have gone through a book much thicker than this it seemed, CIP by CIP, frankly the input that the Commissioners can make on that kind of a thing is minimal. To characterize our process as cursory is wrong. I rely not only on what we have seen tonight, but what we have seen and been through in previous meetings. Frankly, I’ve said this before, and I’ll say it again, the 10-year forecast, which Randy had at hand, and which the staff has done an incredibly good job in putting together, it’s the most valuable piece we have and we started with this 6 months ago. I’ll note that the rate increases, which are really one of the bottom, bottom lines of what we do is fly-specking those, are totally consistent with the 10-year forecast that we went through. It’s been an excellent way of going through policy issues, which face the Utility and have gotten deliberately away from the detail, so I would commend this process myself. Bechtel: Mr. Carlson. Carlson: I missed the last meeting because of a funeral, so I don’t know if you went over this. I’m very uncomfortable with approving this kind of budget with this level of discussion because there’s some resource management operations goes up by 150% in 2 years. I mean that’s a pretty big item. I don’t remember ever discussing anything like that and there’s some similar increases in the operations side and then there’s the rent item, which Rick properly called out, which rents are not going up, they’re going down. They’re collapsing right now. This is obviously a general fund bail out. Maybe that’s not a bad thing, but that’s where it is. I just feel very nervous. In my understanding of the agenda was that we were just starting to look at the budget and what was being approved, the way I read the agenda, was the rate increases, which is why we jumped to that and boy I sure would like to discuss this a little bit more, but here we are at 9:35 so I don’t know what to do. Bechtel: Mr. Ferguson. Ferguson: The process unfolded pretty much as I expected. There were a couple of procedural missed cues here. I don’t think tonight’s missed cue was fatal -- although it’s a bit of a stretch to say the “budget” was an action item proposed tonight. I guess we can float a Supreme Court opinion on that somewhere. Mr. Carlson did miss the Strategic Planning discussion where we did talk about some significant changes and items in the categories you indicated. It wasn’t in the context of the budget dollar layout in this chart of accounts, but we hit the high points in those earlier discussions. So I agree, the process is an improved process. The other missed cue here is that it wasn’t clear, to any of the Commissioners who wanted to talk about a couple of specific projects, when the invitation was extended. I would have come up with a few more comments and Mr. Rosenbaum wanted to make a few more comments. So maybe there’s a better way to lay out the agenda given the major improved changes that we made in the process. Maybe there’s a better way to define these things in lock-step, so that there are no missed cues the next time around. I’m happy with where we are, all things considered. Bechtel: Thank you Mr. Ferguson. Other comments? We could have tried a systematic going through page-by-page, which might have been instructive. We did have in front of us, in proper order anyway, the details of the budget and then the back up being the rate proposals that we’re too basically fund next year’s budget. Every year, we seem to learn a little. At least, I’ve learned from my mistakes having gone through 3 of these sessions. This year, looking at the long-term plan as we did several months ago and then strategic plan certainly gave me plenty of background. Certainly the material as presented here, there was plenty of detail. And we have UAC Minutes 5-1-02 Page 35 of 37 our email system. I encourage all of us to use that system to bring up points you didn’t understand so I’m a little unhappy that some of the Commissioners felt that there needed to be more discussion on specific items. You’re certainly welcome to come forth with those. At this point, I sense at least some level of comfort with the budget the staff has put together. There may be some specific questions on some of those items. We certainly have time to talk about them. Then certainly next year, we can come back and address them again. Any other comments before we vote on this recommendation for next year’s operating budget? Carlson: Can I just ask the one question? Bechtel: Yes. Carlson: Why does resource management operations go up by 150% in 2 years? Ulrich: Some of that maybe Girish wants to answer that, but you’ll notice that the legal fees are some of the significant...[interrupted] Carlson: So that’s legal fees? I mean I just want to know what’s going on. It goes from $2 million back in 2000-2001 to $5 million. Ulrich: I can go through the details, but that as you recall we’ve had discussions about the additional legal charges. Carlson: So that’s where it is? Balachandran: That’s one major part. The other is NCPA cost. NCPA cost has also gone up significantly and the previous budget, that was not as high. Carlson: Our payments for membership as opposed to power purchases? Balachandran: Oh yes, power purchases are just pass through. It’s the services like power pooling and legal expenses and everything else. So those were, from a resource management perspective, legal expenses are a large chunk of new cost and NCPA cost if you look at just the NCPA staff cost that gets passed on to us, not the power cost. That has taken a pretty large increase too. Carlson: Well, after we get through this craziness, I assume that item ought to go back down? Balachandran: Yes, I was just reviewing. I’m not sure when that craziness is going to get over like Commissioner Bechtel talked about a little while ago. Nothing’s been fixed. Ulrich: Maybe I’ll wait until after you have your vote, then I would like to comment a little more discussion on this budget area. Bechtel: Okay. Any other specific items or questions? Then all in favor of recommending to the City Council they approve the utilities operating CIP budget for next year, please say “aye”. All Commissioners: aye. Bechtel: Opposed? None. Motion passes unanimously. We’re close to wrap-up, John? UAC Minutes 5-1-02 Page 36 of 37 Ulrich: Sure, just a couple things on the budget. One, my sense is -- and I articulated it a few minutes ago -- is that we followed the budget process and in fact made significant improvements over prior years. Even though this is an interim budget year where we’re not basically zero- based budgeting. It’s an attempt to have a 2-year budget cycle in the City, so there should not be any major surprises. Last meeting, we did not discuss the budget. That was the strategic plan meeting. It was the meeting before that where we brought all of the items that were significant changes including the legal and others and that’s where we had, I thought, a pretty detailed discussion. What I’d like to have some discussion or future meeting is the process for next year. The last thing I want to do and I am conveying some disappointment in not meeting the needs that I thought you all wanted to have and the confidence that you have in the budget process that we followed. So if we can have some more discussion on that, because we have protracted this out over a much longer period of time rather than hitting it all at one meeting and going through it item by item. We took the high level and moved it through that way. So I appreciate your support on that, but on how we did it, but I’d also want to meet the needs in the sense that some of you were disappointed in something that we didn’t do in this process. Bechtel: We can certainly do some homework and let you know what we can do for next year’s process to do this sort of thing. My guess is this is a process that can change as we can change rates in midstream, we can certainly change the process. Randy? Baldschun: Having gone through this a number of times, every year, it is a crunch. And the truth is that you have this Palo Alto process where we go to the UAC, Finance and the Council. So you really have to back up from the Council date and that’s June 17 this year. Then you’ve got the Finance meeting. Finance needs to have enough time to have a meeting between them and the Council so the Council can digest the minutes. And every year, we end up with this problem with the UAC meeting -- and more so this year. What is different this year, and by the way, it’s better this year, is we don’t have the detail. You don’t have and we don’t have the functional detail. Some printer has it right now and he’s printing up hundreds of copies. Finance will have it next week. It will have the same information you have, plus functional detail. What you have is the big picture. In my opinion, that’s appropriate for you. Now the detail -- usually you don’t really get into that much, frankly. What we’ve tried to do from the very beginning here, we’ve really bent over backwards, particularly John pushing us, is to get you the information early. We had to do our rate proposals back in March, all 5 of them. We’re normally doing them in April. The idea was to give you an early heads-up on what’s coming. You had a chance to digest the rate proposals. You had a chance to look at the 10-year, and at the operating budget, which was reflected in the 10-year for ’02-’03. I don’t know how we could have done it otherwise, given the fact that you’ve got a May 1st meeting, they’ve got a Finance meeting and you’ve got a schedule that’s got to flow all the way to the Council. Bechtel: Mr. Dawes. Dawes: One area that would be exceedingly helpful -- and this has come up in the past -- is much more standardization in the format of the financial reports. One of the things that we have spun wheels on both email and here in session is not being able to bridge from one report to the other and drawing misconclusions about it. If there was one format, it would be vastly easier for the staff to deal with too because if you’re dealing with one format for quarterly reports, for UAC Minutes 5-1-02 Page 37 of 37 budgeting, for all purposes, it would be you’re operating off the same database. You make one forecast based on actuals, year to date, forecast of balanced year and that serves for every purpose. That’s confusing. For instance sales revenues are different in one report versus the other. So I would put in a very big plug for standardization of financial formatting both as a way to save staff time, but to increase depth of understanding on the part of Commissioners, Finance Committee and Council. Bechtel: Mr. Rosenbaum. Rosenbaum: Let me try to amplify a little on my concern. I actually agree with Dexter. These 10-year reports or 10-year forecasts are by far the most interesting thing we go through and we ask a lot of questions. I personally had difficulty understanding certain aspects of it, and I’m going to try to meet with staff to better my understanding. I found that all helpful and that’s high level. But the Council Members and the Finance Committee, they’re going to have this printed budget and that’s a hell of a lot of work to go through. It’s very tempting for a Finance Committee member to say, well the UAC has already gone through this and that in a sense relieves me of some of the burden, just as the full Council might well feel that way after the Finance Committee has reviewed it. There’s only a certain amount of time in a day, and my discomfort is that we clearly haven’t done that. The things we’ve done are more important than attempting to go through line-by-line. My point is that you somehow convey to the Finance Committee that we’ve done very useful things -- but we have not done a line-by-line review. Whether we should or shouldn’t is hard to determine, but I don’t want to suggest that staff hasn’t been very helpful presenting us with important issues, and we’ve had a chance to debate those. Ulrich: Would you like me to mention next meeting for the record? Bechtel: For the record. Ulrich: The next meeting for June is Wednesday, June 5 at 7 o’clock in this room and the item that’s on the agenda now, subject to additions that you’d like to make, is the electric long-term resource plan. This would be the next stage of the discussion that we had 3 months ago on various alternatives for the long-term resource plan. We’re getting closer to our recommendation and it’s time to have that discussion with you all. Bechtel: All right. Any suggestion? Any other items for next June’s meeting? Ulrich: Just probably a reminder, Mr. Bechtel, that the Finance Committee meeting for the Enterprise Funds, which will include us will be May 14 here at City Hall. ADJOURNMENT Bechtel: Yes, you alerted me sometime ago. No other items. I entertain a motion to adjourn. Rosenbaum: So moved. Bechtel: Moved by Mr. Rosenbaum. Second by Mr. Carlson. All in favor please say “aye”. All Commissioners. Opposed? None. We’re adjourned.