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HomeMy WebLinkAbout2002-06-05 Utilities Advisory Commission Summary MinutesAPPROVED 7/10/02 1 UAC MEETING MINUTES JUNE 5, 2002 ROLL CALL.......................................................................................................................2 ORAL COMMUNICATIONS............................................................................................ 2 APPROVAL OF MINUTES .............................................................................................. 2 AGENDA REVIEW AND REVISIONS............................................................................ 2 REPORTS FROM COMMISSIONERS MEETINGS/EVENTS....................................... 2 DIRECTOR OF UTILITIES REPORT.............................................................................. 4 UNFINISHED BUSINESS................................................................................................. 9 NEW BUSINESS................................................................................................................ 9 BAWUA ANNUAL WATER SURVEY.............................................................................. 9 POST 2004 ELECTRIC PORTFOLIO PLAN UPDATE ............................................... 14 NEXT REGULARLY SCHEDULED MEETING – WEDNESDAY, JULY 10, 2002... 37 ADJOURNMENT............................................................................................................. 40 APPROVED 7/10/02 2 ROLL CALL ORAL COMMUNICATIONS APPROVAL OF MINUTES (Audio and video tapes began recording meeting at this point.) Bechtel: Mr. Rosenbaum moves. Seconds? Dawes: Dawes seconds. Bechtel: And with no other discussion, all in favor of approving the minutes of last month’s meeting say “aye”. (All Commissioners: Aye) Passes on unanimous vote. AGENDA REVIEW AND REVISIONS Bechtel: Agenda review and revisions. I have none. Anyone have any recommendations? John? Ulrich: None at this time. We have two items. I would suspect that item one will take the most time and it would be appropriate to have it in the order that it’s listed. Bechtel: Okay. Thank you. REPORTS FROM COMMISSIONERS MEETINGS/EVENTS Bechtel: With that, we’ll move to item #5 reports from commissioner meetings and events. Dexter mentioned that he had attended the Silicon Valley Manufacturer’s Association meeting on Energy on May 17. Included among the speakers was one of our own, Mr. Carlson, who gave a presentation on the California power situation entitled “The Death Spiral”. Maybe Mr. Dawes can introduce the subject and then introduce Mr. Carlson. Dawes: Will do. Some very, very interesting speakers. Mr. Smith, the Chairman of PG&E, Mr. Brown from the PUC, Mr. Lurie from the California Energy Commission and Mr. Cartwright, Chairman of Calpine were among others joined by our own Mr. Carlson of course. Smith talked about, obviously he’d like to get his plan approved, but really pushed the idea that transmission was a critical item and noted that the Path 15 upgrade would be managed by WAPA, was signed and going forward very shortly before that meeting. He APPROVED 7/10/02 3 also talked about starting on, and having under construction now, a Northeast San Jose link that would be completed in ’03 and would add 800 megawatt transmission capability into Silicon Valley, which, perhaps, would ease some of the congestion that Palo Alto has at its city gate from power coming across the bay. He noted that PG&E has the lowest rates of all the big 3 in California. Was distressed that 11,000 megawatts of new construction have died, of the 57 projects that had been announced. Basically pushed that idea that generation was going to be lacking, but transmission bottlenecks should be somewhat eased. Brown of the PUC was a very realistic guy. Didn’t wholly blame Enron and the crooked companies. He felt that California had made a mess of its situation. Pitched very strongly that competition should be maintained and it wouldn’t go back to the old fully regulated way. He was encouraging distributed generation. He wanted to put emphasis on renewals. Suggested that there would no exit tax for renewable generation but not the case for distributive generation projects. Believed that government had a real role to play. He also made an interesting comment about the potential RTO and suggested that California should be very wary of joining an RTO; in that states surrounding CA that would be members would out-vote CA; they’re very upset at what they believe CA did to their power situation, having a misguided deregulation policies that had the effect of running up prices in their states as well. I know staff here have more of a belief that an RTO would be better, at least as far as the Munis are concerned, than the existing setup in California, but that was his guidance. Mr. Lurie of the CEC believed that there would be a shortage in the summer of ’03, as Mr. Carlson in his Death Spiral speech will also talk about. He thought it was absolutely inexcusable and unbelievable that there was no policy direction. The whole energy organization at the state level was in chaos and that there was no end in sight. Basically, a very downbeat assessment of where we are, and he didn’t really see any efforts to put it right in Sacramento. So that was basically the highlights. As far as “intro-ing” Mr. Carlson, his session included Bob Lurie, the Commissioner of the CEC, Peter Cartwright- President/CEO of Calpine and Ralph Cavanaugh, the Senior Attorney from the National Resources Defense Council. Bechtel: Okay. Dick, the floor is yours. Carlson: I’ll just do a quick review. These are sets of problems, which are very serious from the state prospective. We Munis may be able to avoid much of them, but my concern is that the state’s going to be in so much trouble, there’s so much potential for continuing state electric problems, that they’re going to try to haul us in. It’s a very unusual situation. I’ve been able to look at the numbers quite a bit before their presentation, and since then. You’ve got problems on both sides. If demand is less than expected, and I believe it will be, then since most of your costs are fixed, every time demand is lower than expected, you have to raise rates and you have to keep on doing that and the industrial sector APPROVED 7/10/02 4 growth is basically stopped and it has reversed and there’s no sign of turnaround in industrial consumption. That’s a big chunk of demand and my concern is that on top of all the other state problems of extremely high housing costs, congestion and all the rest, and regulatory uncertainty, that we’ve become the industrial location of last resort. Now a “death spiral” occurs when people start to leave, your costs are fixed, you have to raise rates that force others out or others to use extreme conservation measures or distributive generation and you can get in real trouble. In the state, to solve this problem, it’s got all of these exit taxes proposed, but you can’t tax somebody from just plain leaving the state. And in many ways, the way the state policies are working out, they’re effectively giving major industrial customers two extreme choices: stay here and pay the highest industrial rates in the country or leave, with no wiggle room in between. That’s the potential “death spiral” risk. On the other side, the commercial/residential growth is coming back, especially if we have a warm year obviously. At the same time, the generation projects are basically evaporating. The great majority of the major suppliers are being cut off by the capital markets. Their bonds are being downgraded to such a degree that, in many cases, they don’t want to shut down these projects that they spent years trying to get the permits for, but they’re being forced to do so. And as of right now, about half of the projects that were anticipated a year ago, which is about 20,000 megawatts to be completed in the next two years, are cancelled, on hold or delayed with no new date set and the little tiny footnote is suppliers consider the market so uncertain that they’re unwilling to set a new date for the supplies, and that’s 10,000 megawatts worth of power. So we can have both more blackouts and a loss of industrial jobs, which means the state stays in recession, which is not a fun combination. Everybody was very honest and open and definitely skeptical and concerned. Then I got to trump it all by pointing out all these interactions. Now if we get into a shortage situation that affects us, my concern is that, with this huge overwhelming $25 billion worth of power that nobody wants, the state is going to be desperate to force as many people as possible to buy that power. We’re definitely on that list. The situation is very fluid. Nothing close to stability here. It’ll be a year or two before this thing shakes out and it is a very difficult situation. What we’ve been seeing is a series of short-term reactions that look like solutions right now, but just create problems the next go-around. We’re tied up in that. Not a fun time to be on the Public Utilities Commission. I’m glad I’m not there. Bechtel: Thanks Dick, for your gloomy report. Perhaps as we talk on our portfolio plan, maybe we can apply some of your wisdom to that. DIRECTOR OF UTILITIES REPORT Bechtel: Next item is Director of Utilities Report, item #6. John, the floor is yours. APPROVED 7/10/02 5 Ulrich: Thank you very much. It was interesting to hear Dick’s report and it’ll help, I guess, somewhat in context with one of the subjects we have tonight in talking about our portfolio plans for the future. I want to thank Dick for those comments. I might point out a couple things. Out in the lobby, you’ll see a demonstration of the Fiber to the Home typical installation. You’ll see something that most homes won’t have, a large plasma type screen that we purchased for residents and interested parties that come in to the lobby of City Hall to be able to get a very good, clear picture of what they’ll be able to see if they had Fiber to the Home in their house. It also has a switching program that will move between websites every few seconds so you’ll be able to see how lickety-split the time is to move between sites and get an idea of how fast it is. Yet to be completed is an installation that would allow you to see high definition television. There are ways to do it, but some of those are rather expensive and we’re looking for a way that will demonstrate it without putting a whole lot of money in to it. What we’re trying to do is to show what it could be, not necessarily what is available now, so it would give the public an idea. We’ve also finished some surveys and we received somewhere in excess of 400 replies and we’re evaluating those and they’ll be part of our analysis and our business plan on whether there’s a benefit of doing more with the Fiber to the Home or otherwise and that’ll be coming. If you get a chance, take a look at it. We’ve left the screen on during the time of the UAC meeting and we’ll turn it off. We plan to have somebody available prior to Council meetings and other public programs to be able to answer questions. There’s also a so-called hotline there if people have questions. After they look at it, they can pick up the phone and get connected with a Staff over at Ellwell Court or more likely get a message that says, “please leave your questions and we’ll get back to you”. There’s also a fact sheet about the Fiber to the Home program. Bechtel: Hopefully, we don’t have a telephone tree you have to go through on this hotline -- similar to our current “service provider” -- where you have to wait 15 minutes plus in order to get a response. Ulrich: Our attempt is to do better than the current service provider, even though that isn’t necessarily our objective. I think you’ll find it very good service. A couple of other areas: An update on water legislative efforts. You probably have seen in the paper both in the Chronicle and in the San Jose Mercury and in our own local paper, an update of how much positive response we’re all getting to the water legislation efforts. Bern Beecham has spent considerable amount of time, along with other local elected officials, in Sacramento walking these bills through. The activity, the presence of legislation has done much to move San Francisco to talk about alternatives -- as evidenced by the discussion between Senator Spier and Mayor Brown regarding acceptable amendments to the Senator’s bill SB1870. As of May 30th, all 3 bills have passed through several policy committees and the floor in the house of origin, and have been referred to committees in the other house. Very briefly, Senator Spier’s bill 1870 would create a San Francisco Bay Area Regional Water System Financing Authority is now awaiting assignment to APPROVED 7/10/02 6 policy committees in the Assembly and there have been a number of amendments that are both satisfactory to San Francisco and to BAWUA so these should have an evolution and hopefully get incorporated and the Bill passed. The Papan bill AB1823 has passed through 3 committees and received unanimous votes in each: Assembly Local Government Committee on April 10th, Assembly Committee on Water, Parks and Wildlife on May 7th, and the Assembly Appropriations Committee on May 22nd. On May 28th, it was passed from the Assembly floor to the Senate. AB2058, which is Papan’s bill enabling formation of the Regional Water Supply and Conservation Agency, and after passing out of the Assembly Local Government Committee on April 10th, the Assembly on Water, Parks and Wildlife on the 23rd and the Assembly Appropriations Committee on May 15th, it was heard on the floor of the Assembly and passed on consent to the Senate on May 22nd. It was assigned to two Senate policy committees and is scheduled to be heard in the Senate Local Government Committee on June 19th. These are very good omens of positive results that can come about from passage. The other good news is that the San Francisco PUC on May 28th adopted their CIP financial and strategic plans. Now this isn’t the first time we’ve made this progress, but in addition, the Commission urged the San Francisco Board of Supervisors to adopt a bond measure of up to $3.6 billion. This amount represents the total CIP less the $1 billion that was designated for the in-city sewer system improvements. So the next key area is that the Supervisors have until July 26th to put a Bond measure on the November ballot. We will see. A couple of other quick items. The next phase in our Emergency Water Plan was to have a contract to do engineering, outreach, and environmental studies. I don’t have the specific amount, but it was a little in excess of $2 million, and was awarded to Carollo Engineering, approved by the City Council on May 20th. Carollo is putting together their outreach plan and their plan for implementation for their part of the work and we’ll be able to review that shortly. Then we start the community outreach, and all the other due diligence that we should do. Bechtel: John, before leave that topic, can you fill me in to the status of site locations for wells and some of the other issues that have come up? When is that, and how is that being handled at this point? Ulrich: The discussions on that have been held between staff and Stanford. I’ve had a couple of telephone discussion meetings. There has not been conclusive confirmation about where the storage facility would go to serve Zone 1, but those discussions are having some progress. It’s been slowed down because there’s been a change in management of the organization within Stanford that’s responsible for the approval of this. The new folks are getting up to speed on it and trying to understand what it is we’d like to do. So there is some progress, but it’s not been conclusive. Stanford hired another engineering firm to come in and look at the Carollo plan and what our recommendations APPROVED 7/10/02 7 are. They’re still awaiting some feedback from that company. That company has contacted us and has been working with our staff to understand the plan. I can’t tell you whether they’ve contacted Carollo, but we’ve been in contact with them so we have an idea that they’re working on this. Briefly, another area that is very much of interest to all of us is termination of the Interconnection Agreement between NCPA and Pacific, Gas & Electric. We’re part of that Interconnection Agreement that NCPA has on our behalf. In addition to that, there’s Silicon Valley Power and also the City of Roseville. Those negotiations have got to a point because they’ve been pressed upon by FERC staff who has taken a very strong proactive approach in getting the parties together and has held technical conferences and has made considerable effort in getting people together. There are pros and cons to this. I won’t go into a lot of detail because some of those are still privileged and confidential to the work group. The plan is to convene the NCPA commissioners -- we’re looking at a special meeting somewhere around the 19th of June -- to review the proposed settlement ask commissioners to vote on that and give the General Manager of NCPA authority to finish up the negotiations and execute a contract. If those are what all the members want and believe is appropriate, then the next step would be to come back to all the individual cities -- because we’re all individual signatories to the Interconnection Agreement -- for review and approval, with the attempt to get all of this done by September 1st. The idea is that the Interconnection Agreement would go into affect on September 1st simultaneously with Pacific, Gas & Electric’s IA agreement being terminated. There’s been this continual extension past April to try to work all this out. The new agreement would become effective on the date the old one would terminate. Dawes: John, there was some discussion about having, in effect, a Muni government grid setup that would get us out of the PG&E lines, with SMUD and Western and the other municipal estate entities. Is that going anyplace? Ulrich: I’ll ask Girish to comment on what could be said publicly, if anything, on this and maybe fill the Commissioners in. Balachandran: A lot of that work is still in process. Going down that path is not precluded by going down this one. Essentially, the fuse is burning right now because September 1 is when FERC’s extension on the Interconnection Agreement termination is done. So September 1, we have to have some agreement in place. I believe that Western Area Power Administration is looking at a Federal control area in concept, and we are involved in those discussions along with NCPA. Dawes: But it wouldn’t be mutually exclusive? In other words, if we sign a new IA, it wouldn’t preclude doing something with the Feds or SMUD or some of the others? Balachandran: Correct. Ulrich: I’d be glad to answer any questions on any of these subjects. I ran through quite a few. As you can imagine, there’s a number of other things that we’re working on, in APPROVED 7/10/02 8 progress. You tend to read about them in the paper, about the same time we hear about them. So we’re working on all those areas as they come up. Bechtel: I have one question, John, and maybe it’s just a reporting problem. This power outage the other day, they said a wire fell out of something or other. Is that bad reporting, or is it accurate that a wire fell out of something? Ulrich: Scott may want to give you more details, but it is true that the way many wires are connected is through a crimp type of a connector. They’re not glued or otherwise, so you can call them -- the connector came apart. I think that’s what happened. Why it happened and whether that was through age or otherwise is still under investigation. In fact, Scott and I discussed that earlier this evening. Unfortunately, the timing of that outage was not very great -- as reported to me by some people. It was at a key moment in a television program that was going on, so my apologies to everybody. You can see that we restored power rather quickly. On the scale of power outages, it was not a large one. We are learning from that, though there are communication things that occurred and customers being able to get in and talk to us about it. It was a good way to test our system and we’re making some improvements as a result of that. Bechtel: Thank you. Ulrich: If you’d like more details about the connector, I’d be -- Bechtel: I think connector disconnect makes sense. Bradshaw: If you would like, I will bring it to the next meeting. Ulrich: Oh, I was afraid of this. Next you’ll want to bring the section of water pipe. Bradshaw: I love to show pieces of material. Ulrich: We’re at your service. What would you like? Bechtel: Sounds like we’re in the automobile repair business. You get all the spare parts. The citizens who buy them. Ulrich: That’s correct. We put them in a paper bag and hand them back. Bechtel: Thanks for reporting. Ulrich: On a broader basis, there will be a time shortly when we will to revisit our rehabilitation plans in the city. We plan to go out and spend time in the community going over our rehabilitation program; what we do and why we do it and what we don’t do. So people get a better understanding of what streets are being torn up and why, and the difficulty in being able to do multiple utilities on the same street at the same time. A number of things that lead to better communication, if we get out there and do that. APPROVED 7/10/02 9 Bechtel: Thank you John. Any questions of John before we move on? Mr. Carlson. Carlson: Yes, just one question. Last week, I think it was Thursday, there was some kind of statewide power alert. Was that just Northern California or what happened? I missed the details. Ulrich: As I recall, it almost went hand in hand with the testing of the system. The ISO began testing the communication system, so we started to get a number of test messages. We were able to verify that our notification process works here in Palo Alto. We made some changes and improvements as a result of that, and then just after that, we were getting several notifications. One, there is a shortage, I think it had to do with Path 15. Then in the last couple of days, we’ve been getting these things called generation notifications, people doing maintenance and operation, taking outages or doing other type of maintenance on their generation during these shortfalls. But they’ve not gone down to a critical level. We’re preparing a communication that will go in Frank’s memo in the next week or so to remind people about conservation, load management and where we don’t want to have a “death spiral”. It could occur, but it’s a situation where there is not as much new generation come on as the Governor has said would happen. Others, still these bottlenecks like Path 15, that are still the same, as they have been for a long time. We don’t know what the weather is going to be like. We’re already starting to see a potential for more drought conditions coming this summer. So we’re also back looking at our plans for notification of the public and other standby measures, in case we do have to go into curtailments. Carlson: Thank you. Bechtel: Other questions of John? UNFINISHED BUSINESS Bechtel: Okay, moving on to unfinished business. I don’t believe there is any. NEW BUSINESS BAWUA ANNUAL WATER SURVEY Bechtel: So we’ll move on to New Business and the first item, we have two information items, the first is Post 2004 Electric Portfolio Plan Update. In reading through the material, it’s a very complex issue. It seems to me that our task tonight is to give you as much feedback as possible on the various scenarios and so with that, why don’t we just move right into it. Ulrich: At your pleasure. I recommended earlier that we keep the same order, but now that we have a couple more staff members that are here, if it’s all right with you, I’d like APPROVED 7/10/02 10 to just reverse the order and do the BAWUA material first and then move into the Electric Portfolio. Yes, I do agree that this evening is an information meeting. It’s a lot of information and we want to solicit your comments and feedback and then, of course, we’ll be back and I’ll go over that kind of schedule at that time. If that’s all right. Bechtel: That’s all right. Then let’s talk about item #2 under New Business first-- the BAWUA Annual Water Survey. Turns out I have a number of questions on that as well. Ulrich: I might point out, before Jane starts, that this blue binder each of you have, if there are others who need it, we can make them available. Bechtel: If any of the public would like to have that, excuse me Jane, I have an additional copy of the entire package and you have them there too, so if anyone needs some, I have an extra copy up here. The floor is yours. Ratchye: This is the annual survey that the Bay Area Water Users Association provides and this year, it’s pretty much like the past years. They’ve added a new session on the BMPs- the Best Management Practices for water conservation so I don’t really have anything to add from the report. I’ll just try to answer any questions you may have on the survey. Bechtel: Commissioners? Questions on the report? Mr. Ferguson. Ferguson: Thank you Mr. Chairman. As I scanned and looked at the memo, it appeared that there was no really big change in the monitored parameters. System looks pretty stable, pretty normal. The one significant event connected to the appearance of this particular report is that we are in the legislative season and we’re executing on that strategy. I’m just wondering whether any thought’s been given to framing this, or extracting data from this, as the San Francisco PUC recommendation goes before the Board of Supervisors locally --and in parallel with that, as the 3 pieces of legislation move their way toward their final conclusion in Sacramento. Is there some lesson that we can draw from that compendium that helps make the case? This is a new report. It’s fresh data. It’s nice because there are several nice snapshots comparing all the different suburban uses. Again, I’m just wondering if anyone’s thought about using this as another piece of ammunition or argument in making the legislative case. Ratchye: I’m not really sure what you mean in terms of how this, the data, presented in this report could bolster our legislative arguments. Do you have any? Are you pointing to? Ferguson: If only in painting a picture of the number of users and the variety of users. When I look at the tables, I see these nice summaries of lots of voters consuming water. Ratchye: We always talk about how many voters in the area. Ferguson: I understand. But it’s a fresh piece of data. APPROVED 7/10/02 11 Ratchye: Okay. We’ll think about that. Bechtel: Other questions? Mr. Carlson. Carlson: Go ahead Dexter. Dawes: I just wanted to explore a little bit, the overall pricing. Palo Alto is, I guess, characterize it as the top of the bottom third of cities and districts when it comes to cost per unit and average cost per household. Actually average cost per household is a lot lower than that. Over the years, I’ve kind of begun to feel it. It’s not terribly relevant how we stack up versus say Santa Clara, which is really quite reasonable in terms of water. There’s been some discussion in the past about Palo Alto has a rather high transfer out of the water front in comparison to other cities and that is part of the reason. But we look at utilities as a whole and the electrical rates being very favorable, it kind of makes it less severe. I guess my comments are observations rather than questions, Jane, and I would certainly like to see our rates be more competitive, I guess, although I know they are going to go seriously the other way as we get into our CIP program and San Francisco rate increases and I guess maybe my only question is...is there any concern that our rates are basically pretty high in comparison to these other cities and particularly put in the context of the rate increases we know we’re going to have to make for the CIPs and San Francisco rate increases that it would put us in a difficult position with respect to rates? Ratchye: You’d be in a better position to comment on whether the rates are too high or too low. But you make me think of possibly another good question for a future survey, which would be “what’s your general fund transfer?”. That may be of interest, if we can get that for the 28 agencies. Dawes: I remember seeing in one compendium that that data was included, but I can’t remember where it was. We talked about it about a year or so ago, but maybe you can recall. I’m afraid I can’t. Ratchye: I don’t know. This seems like a good place to put something like this. Dawes: I think it would be, too. I would suggest making that suggestion to your BAWUA friends to include that. Ulrich: The surveys in the past that I’ve seen have been more related to the electric utility. I don’t recall a survey that shows the transfer from water utilities, but we can go back and look. Dawes: I remember we discussed it at some point, John, but I can’t recall just when. Maybe Dick does. Bechtel: Mr. Carlson, you had questions on the report? APPROVED 7/10/02 12 Carlson: Mr. Dawes anticipated exactly what I was going to ask about, so we’re done. Bechtel: Any other questions? Mr. Rosenbaum? My questions. I was looking at first two things. One is recycled water. I’m looking at Exhibit 7, who has recycled water and who doesn’t. It does point out that Palo Alto has recycled water, but we don’t count it because it’s used. I have forgotten what the text says in the report, but compared to Santa Clara, for example, do you have any feel for why Santa Clara has such a high amount of recycled water as one of their sources? Ratchye: The primary reason is because they have a huge imperative on the treatment side to restrict the flows that go into the bay. The San Jose/Santa Clara plant has a flow cap on it, so there can’t be any more development; they have to stay under flow cap, so if development climbs to that, they have to use recycled water. So the recycled water makes a lot more sense financially down there. And it’s cheaper because they have more new-development areas. It’s not a retrofit project like it would be in Palo Alto. Bechtel: I see. That makes sense. I was wondering whether it was because of some industrial use of recycled water or so on. The other question I had. I also share concern over the fact that our rates are among the highest of the BAWUA members, but the other is our usage per capita. We have talked about being proud of the fact we’ve conserved and so on, but we are still fairly high on the list of users. I was wondering if we could look at it from a demographic point of view and look at it by a lot size. Our lot sizes are not very large so from an irrigation point of view, I don’t know that we have a high usage for that compared to let’s say Purisima Hills, and our friends in Purisima Hills have a lot of irrigation and their usage is high, but I don’t understand why ours is. Relative to other cities we should be very close to say Menlo Park, Redwood City, others. What’s going on there? Ratchye: Menlo Park has actually more per capita use than Palo Alto. And, I think Redwood City. I don’t know, I really can’t tell you why. This is only the data so I can’t really make conclusions as to why. I found it interesting too. I was actually surprised that we were 24th out of 29 in terms of per capita use and there were two that were extremely high, Hillsborough and Purisima Hills that just have giant lots. So if you take those out, we’re 24 out of 27 really. I can’t tell you why. I don’t think we have particularly large households. Bechtel: It’s possible that the data is misleading in some ways, or there are some other issues, but it seems to me that this is an area as much as anything, we’re putting a lot of money into our water system basically to supply water. Of course, with conservation measures, then it would seem to me that we would have less demand and less need for some of the things we’re doing. I’m just wondering if this is something we bring to the public’s attention, whether we should be doing more in the area of conservation? Particularly if we’re facing a drought. Certainly today seems to be the warmest day of the year already and it all sort of goes hand in hand. Tom? APPROVED 7/10/02 13 Auzenne: This is the first time I’ve stopped to actually take a look at the data. Looking at the residential consumption, I assume that the data is accurate, but generally speaking in Palo Alto, water consumption is about 50/50 split between residential and commercial/industrial. My inclination would be to sit there and start rummaging around the data to see if in fact that per capita is real. There’s a lot of differential between apartment dwellers between some of the other cities and Palo Alto. We have a lot of irrigation – irrigable lawns and we have enormous amount of parks that should not be included. Bechtel: I guess my inclination is to move on from this, but at least from a BAWUA point of view, I’m just wondering if this report, if anyone ever looks at some of these conclusions and if there are ever any discussion or workshops on management of the water amongst the BAWUA members, to surface some of these issues about what we’re doing and what they’re doing and so on? Ulrich: Mr. Chairman, I might point out that there are a couple of measurements there. Maybe you’ve already taken this into account. You’re looking at, I think, a column of residential per capita consumption, which is at the 128 and you look at the far right column, the single family average monthly use is 15 and there are a number of other communities that are in the 13, 14, 15 range -- including those that are per capita consumption is less or considerably less than. So there is some difference there in the way they’re looking at the usage. It would appear there’s a difference between the number of people in each household, because one column is looking at the amount of water going through a meter and the other one is looking at an attempt at the population itself. There could be a difference between how many people are on a meter and we’re now moving into a different era. I’m not sure if it’s getting to your point particularly, but it’s important to know the difference in how these things are measured. We’re adding customers, particularly those new homes that the university has put up across from Stanford Shopping Center. There are many multiple dwellings on each water meter so we’re moving into that kind of a difference. So we probably need to focus on one of those measurements over the other. Bechtel: I’ll just come back to the fact that our water bills are high and our per capita usage is high. Everything just seems like we’re on the high end, and it just alarmed me. Mr. Rosenbaum. Rosenbaum: Dick Carlson had spoken earlier about a “death spiral” in electricity, but the real problem occurs in water to the degree that you had significant conservation. You would see the rates really jump up because it’s in water that we have the very high capital costs per capita. So you have to be careful about what you wish for when it comes to water conservation. We had very difficult times when we had the drought. Ulrich: It’s a point to keep in mind, that all the requests for additional budget funds -- whether that’s going to be the Hetch-Hetchy rehabilitation or our emergency water plan around $16 million, -- all of those have very little relationship to water usage and APPROVED 7/10/02 14 consumption. They’re all rehabilitation areas. We’re obviously going to keep our eye on consumption, but the big ticket items are unrelated in many ways to water usage. Bechtel: It seems like we are definitely caught in some sort of spiral. We’re more like probably a water balloon where you push on one end of it and the other end pops up. I don’t have any other questions on the report. Any other questions? Thank you Jane and thanks to BAWUA for putting a lot of effort into a lot of data collection. I guess we all respond to this filling out a questionnaire so this is interesting. Next year, hopefully, we’ll see maybe some improvement somewhere along the line. That completes item #2. POST 2004 ELECTRIC PORTFOLIO PLAN UPDATE Bechtel: We’ll move back to item #1 post 2004 electric portfolio plan update. I saw a PowerPoint presentation in our handout so I’m assuming that we may have some PowerPoint slides coming up. Do you want to proceed? Ulrich: We are going to have multiple presenters and multiple screens going simultaneously. We’re moving into high visual. I wanted to form an introduction to make sure we get a good feel and understanding of why we’re here and how important this is to us. There’s only been several times, probably in the history in the City of Palo Alto, in this case electric utilities, where we are at the forefront of making some decisions that are very, very important and will be up with us for a long time after those decisions are made. Earlier in the life of the utility back in the mid-60’s, the discussions and the commitment for purchasing 175 megawatts for the Western Area Power Administration foretold a 40-year contract that has been extremely beneficial to Palo Alto and then, of course, the decisions to become owners to the Calaveras Hydro project and several others were very important. Now we’re moving to a point where at the end of 2004, we’re going to have a significant change in our supply and all of those in those areas are going to be very important in the decision process that we make on where to replace the power from Western as it goes away. Reflecting on why we’re here, looking at the next page, page 3, we’ve been in business for over 100 years. We can take a long term view of our energy needs and make some commitments for resources that some other businesses may not be able to do. We do not have to make decisions that are just great for the next couple of years, but we should take a very, very hard look at what our long term needs are and reflect on what we believe are in the best interest of our customers and the residents and businesses in Palo Alto. Our objective here is to provide a valuable, a reliable service to our customers and adequate return back to the city, and then being able to help sustain the environment. Many of the decisions we’re going to be making impact all of those parts of the mission. As a reminder of our strategic plan, our objectives are to enhance customer satisfaction by delivering valued products and services. We’re here to invest wisely in utility infrastructure to deliver reliable services. We’re here to provide superior financial performance to the city and competitive rates to our customers. Identify and maintain the APPROVED 7/10/02 15 unique advantages of municipal ownership. That’s why we’re here across the table this evening. The key strategies that we’ve agreed on are operating the distribution system in a cost effective manner. Preserve a supply cost advantage compared to the market prices. Streamline and manage business processes to allow City of Palo Alto Utility to work efficiently and cost-effectively. To deliver products and services for competitive markets. Attract and retain employees with critical skills and knowledge. Maximize the General Fund transfer to maintain financial strength and implement programs that improve the quality of the environment. Now we’ve been through those many times and we report back to you periodically on our performance in those areas. We’re here tonight to look forward to managing resources that we need into the future. On the next slide, we navigated the energy crisis as a community. It’s important to look at what we’ve accomplished in the last couple of years, not from the standpoint of the individual accomplishments, but more of an understanding of the kinds of dynamic environment that we all live in and we expect to live in high in the future. I suspect that next year, these 6 bullet points are going to be replaced with some things that are probably is dramatic, hopefully not as quiet as some of them on here, but we expect this is going to continue. Out of all of this, our objective is to have a reliable power delivery to the community and all of the decisions that we made around whether to purchase an Enron contract or invest significant money into our customers’ energy efficiency programs or build the COBUG or our laddering strategy in our gas and electric purchases. All of those have a common bond together. Again, that’s one of the real strengths of having a community owned utility, but all that means that we, as a community, have to decide about what we’re going to do. The issues and uncertainties that we’re going to have to face, probably today we can add even a couple more: The bankruptcy issues that have impacted us, the bankruptcy of PG&E. Uncertainty in Bay Area congestion and ISO costs. Need for improved transmission reliability in the Bay Area. Lack of coherent, not sure if that word is even strong enough, Federal and State energy/electricity policies. Replacement, as we talked about, of the Interconnection Agreement and the Metered Sub-System agreements. New FERC, ISO market redesign proposals. And the one that we have a lot of people very concerned and wary of, market manipulation in the deregulated markets. And investment uncertainty in the power business and cancellation of 44% of planned plant power generation that we were aware of. That was a significant change. So huge amounts of uncertainty, but regardless of that uncertainty, we have to move ahead and make some decisions and in our public dialogue, we need to make those rather quickly so that we’re ready to go and will have everything in place for a smooth transmission for our post- Western integration agreement at the end of 2004. We have done a number of things to protect ourselves and to help this transition: Completing the Transmission Interconnection Agreement. Having more certainty around the Stanislaus commitments. New gas operation service provider. More in depth and energy risk management plan to manage these risks. Significant amount of legal APPROVED 7/10/02 16 intervention to protect our interest. The price tag of that keeps going up and is reflected in our budget. We’re now at a point where we have to have post-2004 portfolio input so that we have a clear understanding what our customers are willing to tolerate and what their expectations are for firm energy sources into the future. The last slide I’ll comment on -- and then I’ll turn it over to Girish to go more in depth -- and this should be right up indelibly in all of our minds as we go forward -- is that with the Western contract changing at the end of 2004, we basically have a hydro resource that is going to go up or down or be available or unavailable based on the availability of water and on how the hydro system is managed which is not for power production, but for reclamation and agriculture water use. So if you take the average hydro year, appropriately, we have the red area noted as our deficit so in an average hydro year, we’re going to need 45% of our energy from someplace else. And the assumption here is that we finished up the purchase of the 25-megawatt contract that was approved back in September for us to go out and purchase. Bechtel: Is this our integrated usage over an annual usage? Ulrich: Yes. This is annual so this does not take into account the months where there is over amount of hydro or the months where there is less. This is not a demand profile either. It’s an energy. Dawes: This is what I termed the “hole-filling 25 megawatt contract”? It’s not the old Enron contract that got cancelled? Ulrich: No. Dawes: The numbers looked the same. It was a little confusing there for a minute. Ulrich: That’s one area we do not want any confusion whatsoever on. Dawes: Amen. Ulrich: Did I answer the question? But the contract hasn’t been purchased. Just to finish this up and you can see the dynamics in a dry hydro year. We’re going to need 66% of our energy will be energy deficit under those conditions. So with that as a kind of a beginning point, on the next slide that I’ll ask Girish to go through, you’ll see what we’ve already accomplished in the earlier meetings we’ve had on this to kind of give you a layout of where we’re going. Is there anything I can answer before we get started on that? Bechtel: I had one more question on joint usage, joint action or so on. We talked, I guess, with Santa Clara and some others and I haven’t heard any discussion about some of those other management meetings and so on. Is it truly been inactive? APPROVED 7/10/02 17 Ulrich: No, I wouldn’t say that. Girish will review some of those. I don’t think we’re in a position where we can talk about specific things tonight, but this is a combination of a number of ways to get the energy and transmission capacity that we need and that would be one of the alternatives. But we’re very reluctant into putting all our eggs in one basket so as we’re negotiating and discussing one area, we’re also looking and putting together other alternatives to do that. Dawes: Coming back to the 25-megawatt contract. You discussed it as if it was a done deal, but I gather it’s not yet a done deal. So actually under the average year, we really only have 46% and we’re looking for 54% because at some point, we intend to place that contract, but it really is part of the overall portfolio that will be put together. Ulrich: That’s probably a good summary of it. I would probably take this in a more positive note that we have between now and the end of 2004 to put this 25-megawatt contract together. We had every expectation of doing that soon and, as you recall, the idea of that was that energy prices are down and so, ideally, and it makes it a “sense and no-brainer” decision to go out and do it now and I have every expectation that we’ll finish that up soon. We may not get the same prices that we looked at a few months ago, but I don’t expect that this is going to be protracted and we won’t fill that 25 megawatts a long time from now. It’s going to be done something rather soon. Bechtel: Girish? Balachandran: I’d like to introduce Ken Goeke from NCPA. He’s here to witness our discussion and also to provide some back-up if necessary. Ken has been assisting us in providing us with some information to the analysts in our group. Dawes: Could you spell Ken’s last name please? Balachandran: Goeke. Dawes: Thank you. Balachandran: And I also want to acknowledge that we have several staff members over here who have worked on putting this presentation together: Shiva Swaminathan back there. We have Karl Knapp over here who is involved in the renewables side. And we also got input from different divisions. We had Joe Saccio here from the Administrative Services Division also take a look at this. So I’ll go through the presentation and when questions come up, it’ll be a team effort in answering this. I’m going to skip ahead to the last slide, slide 28, to kind of tell you where we want to end up today. So the idea is to get comments from you today and we’re going to take it back and we’re going to have continued discussion with the Risk Oversight Committee, other stake holders, and then come back to you in July as an action item. So these guidelines will come back to you at the end of July or maybe August as an action item. So that’s bullet #2. And then after that, we’ll take it to council, depending on scheduling APPROVED 7/10/02 18 and vacation probably in September or October. Between now and that time, we plan on having several public meetings to obtain public input mostly on not only the over all supply plan, but specifically on the renewables piece. There’s still more research and input that’s necessary. I’m going to introduce Tom Auzenne our Marketing Manager. He’s going to assist us in getting some of that information from our large customers and we plan to have, we’re thinking of maybe some web surveys, some phone surveys and also some energy forum- like discussions. We plan to outline the options for the renewable portfolio standard that’s in the appendix over here after getting that information. We’ll present the recommendations in two pieces. One is just options on the RPS in Fall 2002 and we’ll ask for a recommendation on the RPS later. We just figure there’s going to be a lot of discussion and input required on the renewable piece. The final implementation plan will be presented to the UAC and Council in Fall 2002. This is the overall idea of where we want to go. In terms of today’s meeting, we’re looking for as much input as possible and we’ll take that in and come back with more analysis in July and August. Ulrich: Is there anything you want to add or subtract to that, because we’ll come back to that in the end? We have a lot to do and I want to focus on the right steps so that we don’t go out into areas outside of the scope of this meeting unless you want to. Is this satisfactory? Bechtel: Comments from Commissioners? We should just proceed with this. Ulrich: Great. Balachandran: This is the overview slide, essentially setting the stage for the different pieces of analysis that have been presented to the UAC and Council through boxes one through four. Today we’re in box #5. The next slide, I’m going to talk about Box #2. Kind of just revisit some of what we have done and essentially we have these objectives that have been approved by you and have been approved by Council. The guidelines that we are going to present to you today are an attempt to get into more detail on these objectives. So we need these guidelines to provide us more effective guidelines, more specific direction and to facilitate the implementation of our plan in a timely fashion in the next two years. Just the nature of those four objectives is they tend to be conflicting, and so we need more guidance in how to move forward. We’ve come up with these six guidelines dealing with different aspects of our supply portfolio. The next part of the presentation, I’m going to divide into two parts. This slide essentially has all six guidelines in one page kind of as shorthand. The next three pages, we are going to go into a table, which shows the alternative guidelines that we explored for each of these different themes. For example, managing a supply portfolio independent of Western, so this is the table I’m talking about. Now after this table, the remaining slides of the presentation go into detail on the rationale as to why we actually selected one of these guidelines. So this particular table, I’ve got some questions on it in some of our discussions so it may not be as clear as we thought it was when we first put it together. APPROVED 7/10/02 19 Guideline one is dependence on Western. The way this table is set up, we have the four objectives as columns and we want to rank in a, over here in a qualitative fashion, how each of these guidelines meet those four objectives. So over here on dependence on Western to fill the energy deficit, we’re looking at three different options. On one end of the spectrum, we can rely on Western to provide an integrated energy product relying on Western completely to do that. There’s some rationale as to why that makes sense and doesn’t make sense and the details of that are on pages 16 and 17. Over here on the other extreme is for us to develop an independent portfolio without relying on Western for additional products. And guideline one, the row labeled C, is what we are recommending, which is manage a supply portfolio independent of Western while maintaining the flexibility to adopt favorable custom products beyond the base resource contract. In terms of how we are going to go through this presentation, just asking questions as we’re going along and I think I’m reading some body language here. Rosenbaum: Those are minus signs and plus signs? Two dashes means minus 2 for that strategy? Balachandran: Yes. And essentially over here, we’re not wedded to the number of minuses necessarily, but essentially, I’d say if there is a minus, it’s essentially on the minus column and they’re relative to each other also. Dawes: And Girish, you developed those minuses or pluses by the rationale that is listed later on as a “for instance” under guideline one, independent of Western, where you have page 17 gives rationale on discussion on guideline #1. It talks about the Federal Funding issues; it talks about “credit counterparty” issues, city control over timing and so forth. It’s interpolating those reasons gives rise to the minuses and pluses that you show on this chart? Balachandran: Correct. Dawes: That’s the way I interpreted it and I guess to me the reasons that the minuses and pluses got put down based on these statements on fact and rationale is sort of the guts to this whole process. In other words, we’ve relied on Western for 40 years for the full package. The basis of it is gone away, but they’re going to offer an alternative. Basically you’re saying the alternative that they’re proposing, we’re pretty leery about. Now the funding issue has been one that has been with us for many years-- I don’t know how long, as long as I’ve been involved with the UAC-- it’s something that, depending on the administration and the budget cycles and so on and so on, it can or cannot be an issue. To me it’s a little bit like a straw man, because there really is no money that the Feds authorized. It’s essentially a working capital thing that goes into the budget because that’s the way the budget works. But it’s not Federal dollars that come to Palo Alto and Roseville and Santa Clara and so forth. Basically, they pay for the entire system, at least the power side of the thing, and therefore I’ve got to think in the back of my head that if there is no Federal dollars involved in this thing, somebody could solve the budget issue. I mean that’s got to be solvable. Maybe not, then it could be too simplistic. Western has APPROVED 7/10/02 20 been a solid part of our portfolio and essentially we are backing away from it a lot. We need to explore that a little more. Balachandran: There’s a fundamental change happening. It’s not like the Western resource is essentially staying the same and we’re backing away from it. Dawes: No, it’s very different. Balachandran: It’s very different and essentially the firmness that we have today comes from PG&E and the 2948A contract. It was a balance of benefits and burdens that was being negotiated. That was the ironclad contract that brought us this firm, great resource to Palo Alto. Now going into the future, there are two kinds of contracts. There’s the base resource contract that we’ve already signed, which is going to get us a big chunk, about 45% of our energy need in an average year. And then depending on the kinds of products that Western puts out, #C – Guideline 1C, essentially, we are looking for opportunities that Western, if Western comes up with some products which we think is a good opportunity, we’re going to jump on that immediately and go for it. We’re going to encourage Western to market certain kinds of products. But the very basis of the existing product is not really there. Dawes: I understand and I have been trying to think through –how can we as a city, in effect, replicate that PG&E contract in some way? Now the 25-megawatt hole-filling contract is a huge step in that direction if we can negotiate one that makes sense from a cost standpoint. Balachandran: That’s the basis of this entire plan. Dawes: Right. I understand. Balachandran: You’re right. This is a certain fulcrum right? We’re going under the assumption, going under C if we decide to do that, which is taking an independent path but still keeping our eyes open for opportunities. We’re going to do all these other things, which is all the other guidelines, which talk about how we’re actually going to manage our portfolio. Dawes: Yes, I’m actually getting away from the process and trying to focus on sort of the logic of the situation -- how do we get a thermal capability to replace 2948A? Bechtel: Dexter, that’s part of the next step. I don’t think it’s all tied up. It’s not part of Guideline 1 to solve that problem. Mr. Rosenbaum. Rosenbaum: I agree with Dexter that this is one of the key decisions and you see evidence on both sides of it. As I read my Public Power Weekly, I recall several months ago, the administration offering legislation to cure this funding problem. Do you recall that? The Bush Administration was interested in a system where the customers would indeed be able to finance these purchases. APPROVED 7/10/02 21 Balachandran: That’s still in the works. We have a purchased-power and wheeling agreement between a number of customers including SMUD. That’s a vehicle that we would use to actually fund Western’s expenses, that’s in place right now. That’s not necessarily legislation. That’s something we did on our own. We do work with the legislators to allow us to fund Western cost that way. Rosenbaum: As I said, I was just reading Public Power Weekly and it seemed to me that there was legislation that was supported by the Bush Administration, which would cure this particular difficulty. Western clearly has many small customers who are not in the position to act on their own and Western almost certainly is going to provide an integrated product for those small customers. I don’t know that there is any other choice. The concern I’ve always had is we’re going to have a lot of cities that are going to go out and out of necessity have staff working on essentially duplicative efforts to provide the firming for what we get from Western. On the other hand though, there was just a story in this week’s Public Power Weekly about the customers of the Bonneville Power Administration. They have an integrated contract and they want to get out of it. They want essentially what’s going to go forward with Western. They want a slice of the hydro and they say they don’t want Bonneville to provide firming anymore. They want to do that on their own -- so that’s the other side of the coin. Swaminathan: Western -- in their custom product discussion -- they have said that they are not willing to provide an integrated type of product for customers of loads greater than 50 megawatts. Now even an integrated product, as Western defines now, is very different from what we have with PG&E. All the big firms -- the Williams and the Dynagies -- we’ve talked to. The risk profile of the Western hydro system is too big for anyone to provide the type of integration product PG&E offered 20 years ago. We are not going to have the firmness, the banking, the ability to take out energy at different times and put it in at different times without a huge insurance premium built into it. No one is talking about a replacement to PG&E 2948A. That product is not available in the market. Even when Western talks about integration product for smaller customers, they’re essentially talking about buying block powers. For the smaller customers, Western is their scheduler, so Western has obligation to meet their load. That’s the type of contract that they have. They’ll meet it with a combination of the hydro piece. They’ll buy block power in the market and they’ll buy [inaudible] power and bill it to the customers. When Western is providing custom product to meet the entire load, they will be doing pretty similar stuff as we are doing, proposing for this [inaudible]. There is no question. No one expects, at least for the whole Western system, an integration product. Now we have been talking to NCPA’s other customers to try to form something similar, so that there is some sort of firming up piece within the NCPA pool, that kind of arrangement. But there is no PG&E 2948A replacement product out there. Bechtel: Any other discussion -- shall we stay with Guideline 1 for a few more minutes? Other questions? APPROVED 7/10/02 22 Dawes: Coming at it from an entirely different direction -- and I will back off this approach -- but it seems to me that we’re talking about maybe 80 megawatts of power on the average per year. We’re talking about a thermal resource. We’re talking about something that is very variable and to me this presents a huge opportunity to be a part of a power plant situation. I gather that we have had some discussions. When I go back to the 11,000 megawatts that are being deferred, and I look at the reasons for that deferral, much of it turns on financing required. I think about what we bring to the party in terms of our financing and our ability to have a piece of that power plant done on tax-exempt bonds. I home in on a resource that we have considerable control over as my own preferred solution. I’ve certainly made this known over the last several years, looking ahead, that being in the power business was a way we can gain control. It avoids all this comparison of things and tries to get at the nub of the issue. The nub of the issue is we need to have 80 megawatts of power under our control, and I’d love to see us buy into the Metcalf plan. Let’s talk wild ideas. Maybe we’re talking to them, you probably don’t want to talk about that, but there may be ones that are cancelled where we could bring our credit rating to the party and really make something happen. Bechtel: Let me just follow up on Dexter. I’m not sure. I’m looking ahead at these guidelines and I’m not sure under which guideline we’d put the discussion of what Dexter just talked about, which was investing in a hard asset somewhere. Where would we put that now? I know we have 6 guidelines here. Balachandran: Let me tell you where it is. It’s in Guideline 2C. Guideline 2 deals with managing the risk of hydro variability. The 3 ways we think you can do it again is spanning the spectrum. You purchase financial hedges to reduce hydro risk. The problem with that is you’ll have stable rates, but not necessarily low rates because buying a financial hedge where the hedge is pretty expensive. You can do it completely through reserves and the problem with that is you won’t have stable rates because your rates are just going to move, but it will be competitive with the market. Now the last guideline comes to Dexter’s point of you can manage hydro risk by diversifying to fossil and renewable generation technologies and also maintain some adequate reserves. So over here when you get into more detail of what we’ve been talking about is a thermal resource of about 25 megawatts. Dawes: I don’t understand why it’s so low. I mean, 46% or 44% of our average load is up for grabs, very variable from year to year. Balachandran: Actually it goes to Guideline 3 also where we talk about managing market risks by adopting a portfolio strategy for electric supply procurement. Our thinking at this point is, again, we don’t want to put all our eggs in one basket to the extent we buy a plant for all our needs. We’re stuck with the capital and fixed cost of that for 30 years and so it may manage certain risks. It may meet certain objectives, but it won’t meet other objectives. So again, over here, all the guidelines are a balancing act between the objectives so somewhere in the middle of the road is where we’re headed. Again, when you look at the kind of thermal generation, you also have to balance where are you going APPROVED 7/10/02 23 to site that generation to the extent that you can site it within Palo Alto. You’ll get some incremental reliability benefits and maybe some reduction in transmission cost. But if you site it in Palo Alto, you’ll also pay more for it, as opposed to sitting it out in the Central valley or buying system unit or buying a tolling contract. So our plan over here when you’re looking at Guideline 3C, I should say option C, is taking a portfolio strategy. Bechtel: Mr. Rosenbaum. Rosenbaum: Just to follow up on Dexter’s point, the Western need to firm has been recognized forever and as I understand the situation, Western originally proposed to build a thermal plant and PG&E came along and said, “You don’t have to do that. We’ll take care of it.” And that led to 2948. Had that not happened, Western would have built a thermal plant and I think what Dexter is suggesting is why don’t the major customers get together and build a major thermal plant? You’re suggesting that there might be some high capital cost. Due to market fluctuations we might be able to buy energy for less than if we’re stuck with the capital cost of a plant which will run a variable number of hours each year depending on hydro. I think that’s the point you’re getting to and perhaps it’s not clear from the material presented that that alternative’s been [inaudible]. Swaminathan: I would agree that that does not address that in a comprehensive manner, but if you look at those pie charts, about 35% of our needs will be met by Western. Anywhere from 35-45% depending on how Western interprets the base resource contract. We will assume 35% for the moment. If you will recall, base resource contract is hydro production less project [use/yield?] is what gets to us. Total hydro production less the project has obligation to meet, the hydro system has obligation to meet pumping loads and the rest of it is what we get. Now Western has interpreted this base resource contract which is a net which comes to us to mean that they can well go ahead and buy power in the market to meet the project use need which means we get the entire hydro piece. If the way we interpret it is we’ll get net of project use which is about 400 gigs a year, 400 giga-watt hours a year, if it is net, but if Western goes ahead and buys in the market to meet the pumping loads, then we will get about 500 gigs a year. This assumes for the moment that Western will not buy a major chunk of that. We expect anywhere from 400- 500 gigs from Western. That will make up about 35-40% of our needs. That’s a 20-year contract. Then we have the Calaveras resource, which is a 30-year contract. You could call it a 30-year resource, which meets another 10%. So if you look at 45% of our needs are met with resources which are long term and then what we anticipate or we think we should do is lock in some kind of physical asset, another 25 megawatts, which is about 200 gigs, or another 15-20% of our needs, which brings us to a total of about 65% of our load met with long-term resources, as in 20-years plus. The portfolio approach we are trying to take is there are different lengths of time for different resources with a certain amount of shorter-term resources to reflect, to give a market flavor to our portfolio. Dawes: I would suggest probably the most critical aspect of our deliberation would be to make recommendations if that 65% is right or whether it should be 80%. That to me is the range. I agree that there should be a market segment here, because you never know how much the run of the river is going to give you. You don’t know what pricing is APPROVED 7/10/02 24 going to be and so on and so on, so you don’t want to put, as Girish said, all your eggs in one basket. But it’s very important that we consider what that percentage is—the 45+20 or 30 or 35—that to me is the range there. And secondly, how we contract for that. In other words, do we own and control? Is it local? I’d love to get a piece of that Metcalf Plan, particularly since they’re putting wires heading up this way from the Valley and so forth. Girish is shaking his head. But you know things are changing very rapidly in terms of downgrades, and sometimes the timing can be very propitious, when a certain company has downgrades and can’t finance the way it has expected to and costs suddenly take an adverse turn. I’m sure you’re probably exploring these as we speak. I would urge, urge, urge you to use what we have at our command, which is credit rating and low cost capital. Absolutely critical to cutting great deals for our city. I would also urge us to go on the high side on that percentage instead of 60-65, I’d go more 75-80. That’s just the stomach talking now. Swaminathan: Yes, we would agree. The market prices and the cost of construction, there’s a big gap there. The [inaudible] capital cost includes for a base load is somewhere in the $55-60 megawatt hour range, amortized over 30 years, whereas the market is in the $40-45 range. So the question is do we pay the premium? Dawes: Today. Swaminathan: Yes. Dawes: Not last year. Swaminathan: No. We know as it stands today, given the contracts has its own risks, operational, delivery risk and so on and so forth, but in that spectrum, given where we are today, we tend to be on the low end, not wanting to pay too much of a premium to have control. Bechtel: May I suggest -- we’re never going to get through this. That many of the questions will come up also in your discussion. You’ve got lots of slides and discussions. We can come back to these points so let’s move through these guidelines as much as we can and your rating system and then let’s get to the meat of this, which is your conclusions. But Mr. Ferguson, you had a question? Ferguson: No, my question is going to lead to a more global discussion, so you’re right, let’s stick with page by page for a while. Balachandran: Okay. So we are done with Guideline 2. Guideline 3, we just went over, which is managing market risks and Guideline which we are recommending, which by the way, is on the other screen there, is adopt a portfolio approach. The next guideline deals with transmission reliability and over here we look at again, it’s a go along strategy. It’s aggressive implementation, investment and advocacy or rely completely on joint power agencies to advance our objectives or what we are APPROVED 7/10/02 25 recommending, which is ensure reliability of supply at fair and reasonable transmission cost through advocacy and/or investments, which is pretty much the direction we are headed right now. Going on to the next guideline. It deals with distributive generation and over here, if we take A, distributive generation A, which is aggressively implement local generation, it meets some of the objectives. An objective of reliability is met, but you’ll have probably stable rates, but not low rates and you probably won’t have competitive rates too. Item B is essentially to explore the potential of local generation options to meet customer needs and that’s pretty much what we’ve found in our analysis so far, that these technologies are not yet totally economically viable, but they may be initial opportunities that we want to explore. The last guideline, which we may be one that we think is going to involve a lot of discussion, again the three, we’ve talked about Item A, which is pursue aggressive renewable portfolio development and it doesn’t meet Objectives One and Two, which is low and stable rates and/or competitive rate, because renewable resources at this point are more expensive than brown power resources. It doesn’t meet Objective Four also, because Objective Four, as approved by you and the Council, is a balance between the environment, local reliability, rates and cost impacts. That’s what Objective Four is, so it doesn’t meet that guideline. B is pursue opportunities in accordance with customer preference and allocate costs accordingly. So this is a more market based approach. We’re depending on which customers want to pay for renewables. You allocate the cost to them and buy resources for them and that meets these 3 of 4 objectives as up on the table. The last, Item C is what we are recommending, not recommending, we’re just putting it out here as a “straw-person” is when investing in renewable resources and energy efficiency ensure that any adverse retail rate impact is limited to .25 cents per kilowatt hour on the average. So this is basically an envelope of what we think the maximum system average rate increase ought to be. Now I want to guide your attention, we also handed you an Appendix, which is another 28 page PowerPoint presentation. The only 2 slides I’d like to point your attention to are slides 27 and 28 of the Appendix, which talks about four renewable portfolio standard options and also some questions that we brought both to you when we provided the renewable portfolio report. We brought you some policy questions. You added some addition policy questions to it and all those questions were forwarded on to the Council. Those still need to be fleshed out, but we just wanted to lay the stage and talk about our thinking of how we’ll structure our thinking here. This four renewable portfolio standard options span from doing a residential only portfolio standard where residents seem to be very interested in it compared to commercial and industrial customers. They would pay for it and they would get the benefits off it. You have Options 3 and 4 on the other end of the spectrum where the city would set a standard essentially saying 10 or 20% of all the city’s energy will be purchased renewable energy source and the certain rate impacts associated with that. This is going to involve quite a bit of discussion, but anyway, what we have suggested over here is .25 cents on the average would be the cap on any kind of renewable portfolio. APPROVED 7/10/02 26 Dawes: But the retail is all customers, it’s not just households? Balachandran: Exactly. It’s all customers. This would be the cost impact to all customers. This doesn’t talk about how the costs are going to be allocated. This is how much the City of Palo Alto would be willing to spend. Dawes: And it leaves absent for the moment, who pays for it. Balachandran: Right. And just to give another metric over here .25 cents per kilowatt hour works out to about 3.5 % of our rate and it also works out to about...you can have a renewable portfolio where you buy 10% of our load through renewable resources for .25 cents per kilowatt hour. Swaminathan: Or for an additional premium of $2.5 million a year. Balachandran: Just different ways of looking at the same thing. Bechtel: Girish, why is there no marks for reliability on the renewable portfolio? I understand hydro and so on, but when you’re buying it from someone, don’t they provide it as you request it? Balachandran: Well, here, the reliability that we are talking about is improving the reliability of delivery of energy to the end use customer. So over here, the way we’ve been thinking about renewables, especially when you’re thinking about pretty substantial amount of renewables, they’re all going to be outside Palo Alto. We’re still going to depend on the grid to have it delivered. Bechtel: Why isn’t it a minus sign? Why did you just ignore it then? Balachandran: It doesn’t degrade reliability. It doesn’t necessarily improve it, but if anything, maybe I’d put a plus. I don’t think I’d put a minus on it. If anything, I’d put a plus. Bechtel: Mr. Ferguson. Ferguson: Just to make sure I heard this part of the discussion correctly. I’m assuming that a blank spot here in your qualitative evaluation chart means no big effect, plus or minus. You thought about it, but no big win, no big change in the system. Balachandran: Yes. Ferguson: Thanks. Bechtel: Mr. Rosenbaum. APPROVED 7/10/02 27 Rosenbaum: Just on this allocation on the $2.5 million. My assumption was that everyone would pay for it. Why is there some indication that might not be the case? Balachandran: Well, because if large customers essentially could say, “I don’t want to be part of any renewable portfolio and I just want plain brown electricity.” Rosenbaum: I thought this was going to be a compulsory. I thought this element was going to be compulsory. We’d go out and buy the energy from some windmills and it would just be an additional generation cost that will be reflected in our power cost. Balachandran: I don’t believe that’s been decided yet. That’s the policy decision that the Council would have to make so that’s the part, some of the policy questions that we’ve laid out on the last page of our Appendix, that’s one of the questions we have to take to the Council, and based on input that we got from all classes of customers, the Council would then make that decision whether it’s a voluntary or involuntary program. Rosenbaum: I was hoping that from the staff prospective, you’d settle that issue and I’d be happy to go along with a .25-cent kilowatt-hour. I’d be happy to get away with that and hope that that would fly with everybody. Balachandran: One of the important things from this meeting is to get your input on things like that and that’s going to influence the decision making, your input is going to do, influence it so. I hear what you say. Swaminathan: And how we see this guideline to be is, at least Guideline 6, to be an upper bound, whereby Council, after which will work out the details as to how it’s going to be shared or whether that .25 cents or the $2.5 million premium. We’re prepared to pay the cities whether it’s 2.5 or it’s a million dollars and how it’s split between different parties is all subject to Council guidelines. This is essentially a straw-man proposal for an incremental cost premium. Bechtel: Mr. Carlson. Carlson: I really like the approach here because it’s if you want to pay this much extra, this is what you get. So it’s like good guideline concept, but on renewables, you have to look at the reliability problem, because most of what you’re going to be getting is wind. And wind is a very erratic resource and you basically need thermal to fill in the wind gaps, which are brown. Unless you’re willing to accept the very erratic system, you need something fill in that’s even worse than the hydro in some ways. Swaminathan: We think we can fill, given the energy limited hydro resource. We have a large capacity with no energy under it. We could combine the hydro system and the wind system to work in combination. Carlson: Are you talking about Calaveras? APPROVED 7/10/02 28 Swaminathan: Yes. Carlson: That’s a good idea. That’s a good point. Swaminathan: And Western. Because Western also we have the flexibility on a day ahead basis to shape what Western expects to on a week ahead, a month ahead, there’s so much energy you have for the next week. Then a day ahead, we’ll say, “okay, you have half a gig of 500 megawatt hours the next day.” And resources, some suppliers can reasonably predict the wind pattern for the following day. So we can use it in combination and we can tell Western, “dispatch it this way” to complement the wind pattern. Carlson: Okay. You thought it out very well. Very good. Swaminathan: That’s one aspect, but also I had something else to say, but... Bechtel: All right. So where are we? I’m hearing lots of good ideas, but not any of them are written down here on the list of what we’re going to do. So where are do we go? Balachandran: What we’re asking for, maybe this is going smoother than expected... Carlson: We’re going to get back to Dexter’s question. Balachandran: Because essentially now we’ve gone through these six guidelines and the last option of each of these guidelines is what we put out as a straw man proposal. We’ve discussed the rationale for why we put this out as a “straw” proposal. We plan to bring this back to you in the July meeting for approval and then take it on to Council at that point. And once it goes to Council, certain aspects of the guidelines are going to result in an implementation that would end up with certain contracts being purchased, going into thermal resources, etc. Maybe we should go back to maybe outstanding questions. Get your input. Is there further analysis you’d like to see prior to your action item that will come up in your July meeting? Bechtel: Mr. Ferguson. Ferguson: I’ve got several questions that kind of cut across all these pages. Let me take a couple of them before Dexter weighs back in. The first one: I agree completely with the notion of diversification. I agree with Dexter that this is a wonderful time to be using our special resources in solving the firming problem with thermal supply. But I like the trend -- reflected in so many ways here -- of slicing and dicing the way we get our diversification. There’s diversification across fuels, across weather, across geography, across time. I like having all those variables in play. A decision to get 80 megawatts of thermal from one supplier -- who 10 years from now will behave like PG&E but for different reasons -- loses us the benefits of diversification. I’d almost like to see us have the opportunity to pick up 5 or 10% of a thermal project this year, and then 5% in a different variation of a thermal project consortium 3 years from now -- with a different APPROVED 7/10/02 29 geographical risk component, for example, a different organizational risk component. So I’m applauding the diversification theme here. I would like to resist in a friendly way the temptation to solve the problem in one fell swoop. We’ve all learned our lessons. Even PG&E and even Enron, for all their organizational and financial skills and magnitude and press, ultimately fell apart -- and we got hurt. So err on the side of diversification. A second comment. We didn’t dwell much at all on the transmission issue here, and it crops up in a couple of your examples. I don’t know whether it got lost in the middle of the pack because that’s just the luck of the draw. It seems to me that almost any way you measure it -- whether it’s time invested by our staff in buying diversification or providing solutions or pathways to multiple options -- fixing the transmission problem is central here. I don’t think it’s the most expensive chore in front of us. But boy, if you fix it -- if you get a 2nd or 3rd reliable transmission route that’s not congested by contracts and costs and other people’s political games -- you’ve essentially bought the city many additional options and much more reliability. Balachandran: Commissioner Ferguson, that’s Guideline 4. The shorthand form on the left hand side screen didn’t really go into detail but this is Guideline 4 we are proposing. The point you’re raising is in A- supporting through political and technical advocacy and/or direct investment. So to the extent that this guideline is approved, it essentially gives us the green light to go ahead to actually work on getting direct investment on transmission options. This is pretty much more of an extension of what we’re doing today, but it solidifies it and clarifies it. We’re looking at options of connecting up the Western part of Palo Alto to a totally different circuit. Looking at upgrade opportunities. At the last meeting, we talked about having discussions with the City of Alameda, City of Santa Clara and San Francisco. Those discussions haven’t gone too far, but we are in the process of developing a study to evaluate some transmission improvements to increase reliability. Ferguson: I agree with that. My point is that, maybe not from a cost standpoint or even from a risk standpoint, but from a leverage standpoint, a dollar invested today or on a sustained basis for 3 years, or a staff hour invested on a sustained basis over 3 years, opening up transmission has a multiplier effect. It gives us many more options to participate in a thermal consortium. It gives many more opportunities in participating in wind projects that work better in different geographical locations. I’d just like to get transmission out of the middle of the pack, that’s all. Balachandran: One of the things in terms of just the kind of input we want is if there’s some discussion from the UAC. If you want, how would you like these guidelines changed? That kind of input. Is it not strong enough? Do you want to make it stronger? And if so, how would you make it stronger? That would be, if there’s some suggestion on that. We’d get a sense from you, both individually and as a group, the information, we’re going to take it as information. We’ll bring it back to you as action after considering the ramifications of what you’re suggesting. I guess what I’m hearing from you Commissioner Ferguson is to clarify, maybe make more explicit, the benefits of leveraging transmission investments. APPROVED 7/10/02 30 Ferguson: If that’s all that survives, that’s good enough. Mr. Chairman? Bechtel: Let me give you some feedback. I like the idea of how you proposed the quarter cent per kilowatt for renewables. I’m used to seeing long-range proposals on allocating dollars across. To me it would be helpful that if you say if we were to take some chunk of money every year and say, this year over the next 5 years, we’re going to spend it in this way. That would be a concrete dollar proposal that people can take a look at. We have contracts, of course, which we have to buy, but something like transmission is where there’s an asset to be purchased to sold is much better in my view looked at in terms of “how much will it cost us? How can we do this?” and put it on the table as projects or something like that. I would find that much easier to analyze or at least to give guidance on how we can deal with the laddering and so on. Tying it to dollars is much easier than going through the “straw man” we had earlier and then narrowing it still down the guidelines and so on because it seems to me that it gets to the bottom line – is how much are we really willing to pay for some of these things? Balachandran: Actually you’re talking about renewable resource component or are you talking about the entire portfolio? Bechtel: I’m talking about the entire portfolio. You put on the table, let’s spend $2.5 million a year. Balachandran: In terms of renewables. Just the renewable portfolio. Bechtel: We just talked about transmission. Balachandran: Right. Bechtel: So why don’t we say, we’re willing to spend a million a year if that’s what it would take to do something to improve the reliability, to participate in a consortium. We’re willing to spend $5 million a year on a thermal plant or so on. I know that’s coming downstream once you make the policy decision, but I would like to see it quantified in terms of dollars in some way. Perhaps a cost/benefit analysis. Balachandran: Well we can move to the Appendix where we have a couple of slides which actually talks about both the cost break down, basically a supply cost break down. We also have 2 slides where it talks about the variability in rates depending on what kind of portfolio you’re looking at. Maybe jumping ahead too, the kind of data you’re looking for, we’re seeing as coming as a logical outcome of the next step of the process. It’s like we need to get a sense of...there’s just infinite possibilities and so we need to start honing down and we have the 4 objectives, the portfolio objectives, which balance these different criteria. And so it’s a process of narrowing down the matrix and we are going to come to you with several options, of technologies, for example. When it comes to thermal, here’s what the costs are and here there are going to be trade-offs in terms of operations too. Similarly with renewable resources also. It seems to us we need to have APPROVED 7/10/02 31 some kind of envelope within which we can present your options otherwise it’s going to pretty unmanageable in terms of the number of options we’ll have to show you. Bechtel: I understand. We did talk earlier this year and looked at a rate, the impact on rate of various options and I’m not proposing that we develop the cost of proposals specifically by July. I understand there is a process. But it seems to me that the outcome of all of this would be better served by seeing some specifics and how much it’s going to cost and that perhaps is the October, the fall meeting. So I understand what we have to do. Balachandran: We’re going to try and pull up a slide, which we’ll show you then. Ulrich: While they’re looking for that, I guess maybe I can ask a clarification question. When you say set aside a certain amount of money and your example is a million dollars, that doesn’t take into account alternatives on how to purchase or obtain this resource. For example, you can spend a million dollars towards interest payments on a bond or a loan or you can invest a million dollars and increase rates a certain amount. To me it’s a bit confusing to understand using that as a form of measurement when the million dollars depending on how it was invested could do a number of different things. It seems like it’s starting, in a sense, backwards. You want to find what kind of resource you’d like to have and the kind of mix that you’re looking for and then put a various financial alternatives on how to reach that goal. So maybe you could clarify, at least for me, a little bit more of the benefits of setting aside a certain amount in the budget for this, if I’m reading you the way you’re describing it? Bechtel: I guess what I would look for is that once we have some alternatives on the table to discuss, is what they’re going to cost. We’ve seen the impact on rates, but some of these issues can’t be determined strictly on the basis of just the rate. It has to do with the total capital cost and it seems that when you’re making an investment, you just allocate the investment in different ways and I, as I say, was intrigued by the notion where you had said what we’re going to do for renewables and maybe the best way to propose that was to set aside the money. So maybe there are some other examples that we can do the same thing. Swaminathan: In term of renewables, our proposal is a long-term commitment. When we say .25 cents, to make any significant contribution to the renewable technology industry, you have to commit for 30 years and we are well equipped to do that for low cost of capital and as a city [inaudible] the proposal is that percentage and dollar amount was essentially derived to be able to commit to some projects in a meaningful way over the long term. Balachandran: In terms of dollars over here, we have a cost breakdown of what our cost in the year 2005 would be. Commissioner Bechtel, I’m having a little difficulty in part of what I think you’re suggesting, which is for example how much will we be willing to spend on transmission? So over here, there’s an estimate, we have COTP debt. We have an estimate of what the transmission access charge is. That’s not in our control. And APPROVED 7/10/02 32 then you have ISO reliability and congestion charges. Again, that’s not in our control. What we can spend money on is -- how much money are we going to be spending on advocacy efforts? Changing market structure, which essentially is legal consultant and staff cost? And we can say, “you know what, be very aggressive on that.” And maybe today we spend probably $400,000 on that just in Palo Alto. Now at NCPA, we have the legislative and regulatory share of the budget. We spend money over there too. So one thing we can do is, if you say, “increase, it seems you guys need to increase your present level of effort substantially versus marginally. That gives us a sense of...we can come back to you with plans of, yes, we’re going to hire a new person, a Transmission Planning Engineer or we’re going to hire a Legislative and Regulatory person or we’re going to increase the NCPA budget on these areas to focus on getting more transmission. So we can react to that. So the guideline, to a certain extent, is asking you to tell us “okay, how far do you want us to go in pursuing these opportunities?” Bechtel: Dick? Rosenbaum: If we could, I’d like to take a look at page 20, electric portfolio planning guideline #3, because that’s really, as Dexter pointed out, the nub of the decision-making. Item B is limiting additional thermal plant ownership commitment to 25 megawatts and that’s the 25 megawatts that you were talking about previously. That’s a base load. It’s got nothing to do with the 25 megawatt shown on that pie chart. Then Dexter was suggesting, “Should that be 35 megawatts?” Is there some rationale analysis that one can do that might help answer that question by next month or the month after? Swaminathan: Not between 25 and 35. It is in the ballpark. It’s essentially if you look at the, it’s essentially a term commitment which we, for example, 25 megawatt purchase, contract purchase is approved is for a 5 year duration. That’s what was approved 6 months ago. This 25 megawatts we’re talking about here is a resource commitment, so as it says, it’s approximately 25 megawatts. It could be anywhere from 20 to 40, I guess, but it depends on how the deal is structured. For example, if it is in our backyard and it’s a great plant, lot’s of good features, we could go up to maybe 40. But if it’s a marginally [inaudible] it’s okay, maybe it’s 20. So it depends on the resource, but in the guidelines we are asking for is “should we look at long-term resources? Should we invest in thermal plant?” That’s one question we’re asking. And what the approximate 25 megawatt guideline tells us is “go look for long-term resources.” It does not preclude us from going to 35 or 40 and coming back and getting your approval to do it and justifying it as “hey, the guideline was 25, but look at this deal. It’s good. We need to commit to it.” It does not preclude us from doing that. The 25 megawatt number was essentially was derived to say it will satisfy about 15% of our energy needs, 15-20%. We already have 45 % of our energy met through long-term commitments of 20 years plus and we want to commit too much more than another 15-20% for another 30-year resource. Rosenbaum: Yes, but as Dexter pointed out, we have the advantage of tax-free bonds, so you would think, on average, the price of natural gas is going to be the same for every generator. We ought to on average be able to get a better price by building our own rather than by buying, but then you point out this disconnect. Right now you can go out APPROVED 7/10/02 33 and buy it for 4 cents, where as if we build it, it’s going to cost 6 cents. On the other hand, I don’t know how anyone is going to sell it for 4 cents if gas is really 4.50. Swaminathan: The problem with buying contracts is the delivery risk, credit risk. Ideally, if we can get ironclad contracts, we want to lock in extra long-term stuff for some portion of it. Given that we have lots of capacity, hydro resources, to provide all the ancillary services and flexibility we need. We have 50 megawatts of Calaveras. We have 175 megawatts of Western capacity available to shape any way we want subject to the energy limitations. So we are not after capacity. We are after energy. And how best we get it... Dawes: You just put your finger on a very important aspect of this, which to me is again goes to what are the right proportions here? Market versus own and control? And basically, you said I don’t trust the market, because you can make a contract but given uncertain credit risks out there, what you thought you had, you really don’t have and I guess what I’m saying is looking over our history, long-term commitments have served the city and the utility very well. To basically own and control, even though it’s been with NCPA importantly or through the Western resource, but I in the back of my head put that down in the own and control arena because we are so close to it and I just think that at least in today’s world, the market for power is such a turmoil that to make long- term plans in a bed of quicksand is difficult and risky. And again, for that reason, I would err more towards all things that we can control or we are a partner of and have a voice at the table and we’re not trusting in making contracts which we have seen, we’ve broken them ourselves for good and useful purposes and that’s a surrogate for can happen in the future. Obviously, we need a market-based component. It’s just a question of how big. I’m arguing for smaller than bigger. Balachandran: We hear that when we present our recommendation to you next month and then take it on to the Council. It’s going to be presented in the framework of “how do these guidelines meet the four objectives?” So in some cases, they meet the stable rate objective, but they may not meet the competitive rate objective and that’s the balance. Dawes: Again, you talk about this 4 versus 6 cents now. This is a transitory thing. I would much prefer to even take a step further and get into the gas business as I’ve said in the past. John’s suddenly wide-awake there. Ulrich: I thought I heard you say coal, I’m sorry. Dawes: But there are times, particularly, if you are a part owner of a power plant and let’s say 10 years down in the future, had we been through a couple more yo-yos in the energy cycle, somebody’s tanking and you can pick up an interest in the gas field at a very compelling price. And again with our cost of capital, we can do that and to me owning is more flexible rather than less flexible. The closer you get to the full resource, at least for a good slug of what we’re doing, the better it is. APPROVED 7/10/02 34 Balachandran: At the next meeting, we’ll have an opportunity when it comes in for an action item to put firm numbers on it and then we’ll get each of your opinions and vote on what percentage we should be following. Bechtel: I like when you say firm numbers. Now you’re resonating again. I’m just looking at say slide 21, rationale and discussion of Guideline 3, which you have there. And if we put dollars on the right hand side of how much it would cost us to do each of those or so on, maybe that’s the next step after we’ve approved the guidelines or at least given you the feedback. But as I said, I guess I’m looking at that right hand column that quantifies what’s the impact? What’s the cost? Some of these are, of course, no cost to us. Others do have a cost. Advocacy, as you mentioned earlier, I believe that was on the transmission slide is the one maybe it’s $400,000 for advocacy. That’s an expense item. It’s not a capital item. Some of them are capital items and then so on. I guess that’s where I was coming from earlier, Girish. Rick? Ferguson: Before we leave page 20 and 21, the same bullet appears at the bottom of both pages. I want to be sure I understand what you’re saying there. You’re recommending that we avoid contract-based purchases for periods over 10 years. Now let’s say this had been on the screen in 1960 when the Western and the Federal contract was in front of us, Randy is the historical expert here, but at the time, the counterargument to signing that contract was “well you know this isn’t exactly a bargain” in the market prices of that day. I’m sure we wouldn’t want to allocate 50% of our needs to another 40-year contract like that, but if we saw a 40-year contract with a good price, why wouldn’t we take it, for 5 or 10% of the load? Balachandran: And that’s always an option. None of these guidelines are written in stone. If someone comes to us with a great, I mean, if Western comes to us “we found this new resource” or whatever, we’ll come back to you and change it. Just like gas. Gas prices today are running what $3.50 range or so. If gas goes down to $1.80, we’ll probably come back to you and say “you know what, we have a 3 year laddering structure. We’ll probably want to buy some long-term gas.” And that will be a discussion we’ll have where we present the strategy to you and to the Council again so it’s totally locked in. Ferguson: Maybe we can eliminate the “greater than 10 years” rule in the guideline? Balachandran: On this one, it’s because we have Western which is a 20-year contract and that’s a fixed cost contract. Calaveras is a 30-year contract. Ferguson: So you’ve burned up, you’ve already allocated space for a long-term deal. Got it. Balachandran: And we have a thermal resource, if you buy 25-megawatt thermal resource, it’s another 30-year contract. So we say, well we can go to some mid-term contracts now. APPROVED 7/10/02 35 Ferguson: That leads me to a related comment, and then I’m done with my punch list for tonight. As I read between the lines here, I’m sure you meant these to reflect a diversification across multiple dimensions. It would have been nice for presentation purposes to have another table. Maybe fewer words in one sense and one more picture that showed some of the key dimensions across which we’re diversifying. I mentioned some earlier -- fuel use, weather, geography and time. That particular chart might have been useful, for example, when Chairman Bechtel was talking about spending a million dollars for this or two million dollars for that. When you look at the different options in incremental dollars spent pursuing the next increment of that option, what does that buy us in terms of risk reduction? What does that buy us in terms of broader diversification? If you have the diversification chart up there, you can say, well I can spend another $10 million here on thermal but I’m missing the opportunity to spend $10 million to buy diversification on a different place on the chart. Again, diversification is a winner. I’d like us to use that word in the strategic plan somewhere in the next amendment to that plan. Maybe this is a good place to introduce that, in some kind of one-page snapshot. Balachandran: Let me call your attention to 2 charts that were developed here by Shiva. One over here is the annual cost variability of different energy portfolio strategies. Essentially from the left hand side of the chart, we can go 100% spot to the right hand side, you can buy financial hedges to eliminate our hydro-risk and you kind of see what you’re getting for the incremental dollar that you’re spending over here. This is a total cost chart and this chart shows the rate impact of those different strategy options. Bechtel: How come we didn’t talk about this earlier then? I happened to see it, but you didn’t, I was just reminded that it was here. Can we look at this next time in the context of your final recommendations? Balachandran: Sure. We’ll do that. We’ll take in to account what Commissioner Ferguson has suggested and also what you have indicated interest in having maybe a column of numbers that give you a better feel for what each of these different guidelines actually mean in terms of total cost. We’ll look at that and see if we can bring that back to you. Dawes: What really struck me is how absolutely linear it is until you get out to Portfolio 6 where you get stuffed with the financial hedges which do not look very attractive. But the expected case looks like it’s absolutely level. It’s fascinating. Swaminathan: No, that’s by design I guess. It assumes all market-based purchases. All of these assume market-based purchases and no premium for the flexibility of the control we talked about in terms of investing in a plant, which is above market. What this is essentially trying to illustrate is the hydro variability and variability of prices with the different hydro conditions and for the different options. Bechtel: So where do we go from here? APPROVED 7/10/02 36 Balachandran: Well, we’re looking for...actually let me go to the last slide of the previous presentation. We asked for your comments today and we got comments on several areas. The general sense that I’ve got over here is the guidelines that we have, I put here as a straw-man, which is on that second screen up there. We’re essentially, what I’m hearing from you is, you’re going in the right track. There needs to be some more information provided on certain of the guidelines. We’ve already told you that we need to be spending more time on Guideline 6. I think Commissioner Rosenbaum said that he’s expressed his preference on what he’d be willing to pay for Guideline 6. Actually to put some order to it, let me just go from top to bottom. Guideline 1, in terms of comments I heard from you. It’s actually a combination of Guidelines 1, 2 and 3. The essential thing I’ve heard from both Commissioner Rosenbaum and Commissioner Dawes is why don’t you look at the cost of your capital, your credit rating and also look at the potential of having a large plant being developed by Western. We’ve answered to a certain extent on them. We’ll address that; we’ll bring that back to you with some more thinking and address that in more detail. On Guideline 4, from Commissioner Ferguson, we’re going in the right direction, but it needs to be amped up another level essentially. And I’ve heard from Commissioner Bechtel on that one which is a comment to all the guidelines which is to the extend you can, put costs associated with each of these guidelines. Haven’t really heard much on Guideline 5. It’s essentially staying the way it is. Guideline 6 is there’s work to be done and we’ve laid out some of what we plan to do and I think what I heard was go ahead and do that. Dawes: I haven’t weighed in on Guideline 6. I’m worried about our industrial customers, which are 70% of our load or something like that, that who are apparently not interested in the political correctness of having green power. They just want it to be reliable and the best price they can get it and to, in effect, stuff down a quarter of a cent to be good guys is something I don’t think they would appreciate and so I would be a proponent of a green power program such as we have had in the past which is if you want it, make your wishes known and you pay for it. Balachandran: That’s the intent of this. The intent of this guideline is not that everyone is going to pay for it. We believe that is still a policy decision that has not been made. Dawes: It seemed like it was advising this and it was going to go down this way. Balachandran: I think we should change... Dawes: It’s like only a quarter cent on the sales tax. It’s not really very much. APPROVED 7/10/02 37 Balachandran: We can change the guideline is written. For example, we can say “spend not more than $2.5 million a year” “don’t buy more than 10% of your resources”. That doesn’t talk about allocation, whereas this seems to imply an allocation. Dawes: I’d add, “if there’s demand for it”. Auzenne: Being probably the large proponent of customer opinion, I would agree with both of you and disagree with both of you. Each of our largest customers also has various in sundry sustainability policies, environmental policies, that they scribe to. A lot of the people that we do business with are the ones that pay the bills. That’s not necessarily the final arbiter or decision-maker, so there is some wiggle room. Bechtel: Tom, are you saying that there may be some corporate directives from their home office that might work in our favor to get them to look at some of these green programs even though maybe the local people are always watching their local budgets? Auzenne: I would say so especially as long as we maintain a cost differential with our neighboring utility. So as long as it’s not onerous, I would say so. Bechtel: Thank you. Do you want to wrap up at this point or are we wrapped up? NEXT REGULARLY SCHEDULED MEETING – WEDNESDAY, JULY 10, 2002 Ulrich: We can or we can go through those steps or if you just want to look at them and see if there’s anything we missed or any suggestions you have. You might also give us some feedback on what we’re talking about here is the next meeting. Rather than wait until that part of the agenda, kind of putting that in context with what you’ve learned tonight and whether to schedule a special meeting in July beyond the normal one that we are going to have on July 10 or wait until our regular meeting on August 7. If you want to have a special meeting, looking over my calendar, looks like something Wednesday, July 24th would be kind of in the middle between our regular July and August meetings. So maybe if you want to have a little discussion about that and expectations that you’d like to have that we deliver. Girish just outlined those. If you have any more comments, we can come to that kind of a decision if you’d like. Bechtel: John, are you saying that the regular agenda is too full to accommodate this or is it we’re looking at a time constraint? Ulrich: Before this meeting, we probably anticipated that putting both the present topic, the risk management procedure and then something as weighty and long-term as the resource plan, putting those both together might be more than you want to tackle. But after some of the discussion we had tonight, I’m not so sure that we couldn’t do both those at the same time. I’m kind of testing you out here. Part of it is, we’d like to get some time to get public input and talk about that a bit. APPROVED 7/10/02 38 Bechtel: I’m concerned about the public input. I’m not sure that after going through this tonight that if you can distill in such a way to present it, I’m afraid this will just overwhelm the general public. There may be some interested people here, but if you had smaller, more specific proposals or so, you might get some quality feedback. Ulrich: We’ve had some discussion on that. One on the methodology and how to do it, but clearly we gave you a lot of information including all the appendix area and we would not have that kind of presentation for the public. But we would need to be prepared and would expect that some members of the public would come ask some pointed and in depth questions, so we’d want to be prepared to do that. But you’re right, we would not say/ “well, okay, come on over and visit with us” or “we’ll come out and see you and we have a 3 hour technical presentation”. But we need to be prepared for that. We have very sophisticated and interested people in the community and let’s face it, we are a community of community power city. This is the kind of thing we do well is to let the public know what it is we’re doing and it’ll help in the decision process if you have a better idea of what the public’s expectation or their willingness to pay a higher price. They’re the ones who are going to pay the bill so this is the perfect item to talk about. Bechtel: I’m not sure it’s a perfect time with the city considering putting a Bond measure up to talk about any other increases, but that’s another matter. That’s very worthwhile and it probably will take some thought to put together an input gathering system. So we’re back to the item of whether we need a special meeting or not. Other Commissioners? Mr. Dawes. Dawes: I’ll be out of town. Bechtel: Mr. Ferguson. Ferguson: There’s one other invitation for public input scheduled now for the August 7 meeting, which is the first public comment on the Fiber to the Home survey results. If I read the recent email correctly and under any scenario, it would be good to limit the public byplay to one event per meeting. We’ll end up with 2 unhappy sets of attendees if we dropped both into the same agenda. Ulrich: I thought frankly just the opposite. Ferguson: I know you would, but my guess is it’s going to be a different set of audiences. Somebody is going to have to make priority decisions on who can speak, how long and on what topics. My guess is they deserve different dates even if it means a special meeting. Bechtel: Rick, you were referring to a special meeting in August. We’re talking about July. I’m not sure. APPROVED 7/10/02 39 Ferguson: The August 7 meeting currently has slated a report of the draft results of the Fiber survey and that’s also an opportunity to collect public comment on that. That being the case, no matter the scope of the public comment on this, it might be worthwhile limiting that to renewables, the .25 cent number debate. I’d like to have that on a different day. If that means we have to have a July 24 meeting, I’d vote for that. Bechtel: I understand. I would agree. These are 2 separate issues and we need separate...Dick, you have feeling on a special meeting? Rosenbaum: Can we put off that decision until the July 10 meeting? Ulrich: We can, but from the planning standpoint, it’s almost like a microsecond between those dates from a planning standpoint. You don’t have to make the decision. We’re trying to be responsive. This is big-ticket stuff and whatever’s in the meetings is going to be indelibly there for a long, long time, so that decision process, you may find it something you’ll cover rather quickly. On the other hand, I want to make sure we have enough time to cover whatever the public’s interest is and your interest so that when we ask for the vote, the next step is going to be taking all of this to the Finance Committee and the City Council as soon as we can after the meeting. I guess I’ll just make the recommendation that you plan on a special meeting and that’s a rather easy thing to cancel, you know, if you don’t need it. That way we can plan around. If we find that we can cover it and have better, more input from the public, we’ll either attempt to include it on the agenda for July 10 or make a recommendation that we move it out to August 7. This would just be good hedge in the middle. Now do we have members that would be able to attend? Rosenbaum: I’m available. Bechtel: I will be available, I believe, for all 3 meetings, 2 or 3, and I think Mr. Dawes indicated that he will not make the end of July. At this point, we will move to have, we’ll try to cover this topic again on the 10th as well as the other 2 items. If that doesn’t seem to work out, then somehow in the next few weeks, we’ll move when we talk about a special meeting. Ulrich: Sure. Also, Girish pointed out that we are not locked into the 24th. You can do it the Wednesday before on the 17th. That’s another alternative. We don’t need much time since it’s totally separate topic. We wouldn’t need too much time between the 10th and the 17th to put it together. Is that better, would that allow you, Mr. Dawes, to be there, or does that matter? Dawes: Maybe, we don’t have real firm plans. We’re going east middle towards the end of the month, whether it would be then. It’s a better shot, let’s put it that way. Ulrich: The 17th? Bechtel: 17th. APPROVED 7/10/02 40 Ulrich: Okay. Let’s, if it’s all right with you, we’ll keep those 2 dates and work towards one of those and do all the public notice and everything appropriate. Bechtel: And then for the July agenda, we will have the election of Officers for the Commission, as well, but that should not take long. Ulrich: That would be in addition to the APPA update and the assessment of utility risk management procedures from the auditors report. Bechtel: Right. Ulrich: And we’ll have the regular scheduled meeting also on August 7. ADJOURNMENT Bechtel: All right. Any other items? Not? Then we will... Dawes: Move to adjourn. Bechtel: Move to adjourn. Second? We are adjourned.