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HomeMy WebLinkAbout2002-12-04 Utilities Advisory Commission Summary MinutesCity of Palo Alto Utilities Advisory Commission December 4, 2002 ROLL CALL_______________________________________________________________________ 2 ORAL COMMUNICATIONS _________________________________________________________ 2 APPROVAL OF MINUTES___________________________________________________________ 2 AGENDA REVIEW AND REVISIONS _________________________________________________ 2 REPORTS FROM COMMISSIONER MEETINGS/EVENTS ________________________________ 3 DIRECTOR OF UTILITIES REPORT___________________________________________________ 3 UNFINISHED BUSINESS____________________________________________________________ 5 NEW BUSINESS ___________________________________________________________________ 5 FIBER TO THE HOME ____________________________________________________________ 5 WATER LEGISLATIVE UPDATE __________________________________________________ 15 ADJOURNMENT__________________________________________________________________ 27 UAC Mtg Minutes 120402 RF.doc Page 1 of 27 ROLL CALL Chairman Carlson called meeting to order at 7pm. Present are: Commissioners Rick Ferguson, George Bechtel, Dexter Dawes, and Dick Rosenbaum, Chairman Dick Carlson and Council Member Bern Beecham ORAL COMMUNICATIONS Carlson: Thank you. Do we have any oral communications? I don’t see any on non- agenda items. So we’ll go ahead and move through that. APPROVAL OF MINUTES Carlson: Minutes. Any proposed changes in the minutes? The minutes we have apparently are just the November 6th regular meeting. I don’t know --are we going to get minutes for the study session? Baldschun: It’s my understanding that you will. Carlson: Okay, any suggestions or motion for approval of these minutes? Rosenbaum: Move approval. Bechtel: Second. Carlson: All in favor? All Commissioners: Aye Carlson: Minutes are approved. AGENDA REVIEW AND REVISIONS Carlson: Any questions on the agenda? Do you want to change things around at all or should we just go ahead? Baldschun: I think we’re fine. Carlson: Okay. UAC Mtg Minutes 120402 RF.doc Page 2 of 27 REPORTS FROM COMMISSIONER MEETINGS/EVENTS Carlson: Were there any meetings? I don’t recall any, but if there are, I’d certainly like to hear about them. Why, a month without meetings; that doesn’t happen very often. DIRECTOR OF UTILITIES REPORT Carlson: Director of Utilities report. Go ahead. Baldschun: I’m Randy Baldschun, Assistant Utilities Director, standing in for John Ulrich, who’s in Washington D.C. He’s been there this week to work on behalf of Palo Alto and other member cities of Northern California Power Agency to help to persuade FERC, Federal Energy Regulatory Commission, to move a little bit slower on some of their proposals regarding transmission. Let me just read to you some of the comments that we’re dealing with. It’s on what they call “Standard Market Design.” This is what John’s been talking about this week with them. It’s a national issue. Standard Market Design, if it’s implemented as proposed, Palo Alto and other municipal utilities may be affected greatly. NCPA members are meeting this week with FERC Commissioners to apprise them of the issues that would affect Palo Alto and NCPA members. Some of these concerns include the benefits of Standard Market Design that need to be estimated before they’re implemented. There’s also a “one-size-fits-all” mentality that won’t necessarily work in California because of our physical transmission system. Then there’s Locational Marginal Pricing that should not be implemented before market power and transmission adequacy issues are resolved. A fourth issue is the transmission needs to be upgraded to remove current congestion areas prior to implementing the Locational Marginal Pricing. However, if FERC proceeds and does implement the Standard Market Design with Locational Marginal Pricing, there needs to be strict power guidelines that need to be enforced by FERC. There has to be a voluntary Load Management Program for participation by various utilities. And there has to be congestion revenue rights that should be allocated to the loads serving the entities as per their existing load and also accommodate their load growth. Those are some of the things that are going on in Washington this week with FERC. John’s back there and will be coming back Friday. Another item I want to bring to your attention. A press release went out Monday. I believe you were all copied on it, but for the public I’d like to read it. There was a joint act, joint agency cooperation in resulting in fixing a potentially very serious water main repair problem we had up in the Foothills. Thanks to the cooperation of a number of local agencies, a major water main in the Palo Alto Foothills received emergency maintenance repairs in time for the winter rainstorms and avoiding a potentially environmental and public safety catastrophe. The City of Palo Alto Utilities is extremely grateful for the cooperation and expedited help of the following organizations: the United States Army Corps of Engineers, the Regional Water Quality Control Board, the California Fish and Game, the Federal Fish and Wildlife, Stanford University, and the Santa Clara Valley Water District. This might not, this certainly wouldn’t have happened without some strong leadership we have right here in the City from Frank Benest and the UAC Mtg Minutes 120402 RF.doc Page 3 of 27 utilities staff. What we had, we had a buried 18-inch water main that ran along Matadero Creek right off of Page Mill Road and it was discovered as exposed and unsupported due to a creek slope erosion. Time-to-repair is paramount, because we don’t want to lose that water main. If we had then we would have had serious problems with water shortages up in the Foothills and in the Stanford Research Park. So the problem was fixed. We went through the, we got the cooperation of all these agencies and now we can breath a little easier. I just wanted to publicly acknowledge and thank the agencies I had mentioned before. That’s it for the Director’s Report. Carlson: Thank you very much. Rick, go ahead. Ferguson: Just one follow-up question on the water main repair. Congratulations on the good work. Did that require the intervention of any of the elected officials from the various involved agencies or was this done at the staff level? Bradshaw: We were able to use Mr. Benest’s intervention and John’s intervention in dealing with the agencies on senior staff level for cooperation. We were ready and the elected officials were ready to step in and help us out. In the end, we didn’t need their help, but they were ready to step in. We very much appreciated their willingness to help us out. Ferguson: Thank you. Carlson: Go ahead, Commissioner Dawes. Dawes: Randy, one question on the FERC thing. Is the study that you referred to what I think of as the “regionalization” of power distribution and power marketing that FERC has been sort of aiming at for a year or so? Baldschun: I have to speak on behalf of Girish, because he’s closer to this than I am, but I think you’re referring to the proposal to set up the country in these various transmission zones. I’m not exactly sure how all this relates to it. It sounds like it needs to be connected in some fashion, so I don’t want to speculate an answer. Dawes: As I recall, we were sort of supporting the idea of regionalization of the power grid, but I’m not clear as to whether this is involving that or not. Baldschun: No, I can only hazard a guess. Maybe, Richard, you’re fairly up to speed on some of these transmission issues of FERC. I think that the regional transmission proposal would have to, these proposals for locational, marginal pricing and for the Standard Market Design, I think would all have to be integrated. Whatever the FERC proposed, but I don’t know that these two are specific to the point you’re bringing up. Carlson: Any more questions? UAC Mtg Minutes 120402 RF.doc Page 4 of 27 UNFINISHED BUSINESS Carlson: Let’s go ahead. I don’t think we have any unfinished business, so we’ll move on to new business. NEW BUSINESS FIBER TO THE HOME Carlson: The first issue is Fiber to the Home, so I assume we have a staff report on this? Baldschun: Yes, while Blake and Scott come up here, this is an action item. Tonight, we’re requesting that you recommend to the City Council that we move forward with the next step, one of many steps along this path, to come in to a conclusion on a decision. The only decision tonight is -- should we spend some more money with a consultant to do some more analysis. We listened to you in the last meeting and we’ve attempted to reflect the comments and recommendations you made in terms of what you would like to see in this plan. Blake and Scott are here to answer any of your questions. Heitzman: To add to what Randy said, there are several items that came out of the workshop we had on the 20th, which you requested be added to the business plan proposal that existed at that time. They have all been integrated into the current report which you’ve got in your packet. Specifically, there’s some survey work. There’s a question as to whether Datacycles’ previous survey was statistically correct. We had, of course, a Statistician and the Surveyor make presentations to you in the past meeting and there is still some question. So it was suggested that we add a phone survey to the list of activities. That [phone survey] would not be done by Uptown; that would be done independent of them and also independent of Datacycles. Another possibility that was suggested was to pay a Statistician to review the work. The third thing that I wish to do is to go ahead and ask Datacycles to resample the DSL participants, which we have done. With 80% of the DSL respondents responding to the 2nd question, “who is your service provider?”, we have 34% of the population say that PacBell is their service provider. PacBell says 27%, so we’re slightly more DSL in our survey than PacBell claims, but for this particular proposal, we’ve added a telephone survey to substantiate the previous survey by Datacycles. There are several questions about strategies for competitive technologies and pricing. They’ve been added to the sections of the report specifically stated in here to cover those issues. Suggested or requested that 2 phases be developed and Neil’s new proposal has 2 phases. You’ll find on page 9 is the task of it actually listed and costed by 2 phases. There’s also the request to check out what other municipalities are doing and problems they’ve run into. He’s entered that and also specified in Phase 1 if you look on page 9. UAC Mtg Minutes 120402 RF.doc Page 5 of 27 There was a request for survey of small businesses and we’ve added a section for that and, again, to be done separate from Uptown. If the first phone test of the Datacycles proves true, I would prefer to use Datacycles to do the business survey, because they can develop a wealth of information in a very cost-effective manner, so that’s assuming that the phone survey verifies that their previous survey is correct, which it appears from our resampling of DSL, that’s highly likely that that will happen. So this has added some additional funds to the proposal, some of the work in Neil’s section, but largely the survey work. It’s my belief that this additional work should be done; we’re talking about eventually a $50 million proposition. I think everybody should be comfortable with the information they have at the time they have to make those decisions, so to me, spending money for information now is a wise decision. So anyways, that’s my overview presentation of what we have here. If you have any questions, I’ll be pleased to answer them. Carlson: Okay. Let’s start with the questions. Who’s got some questions? Go ahead, George Bechtel. Bechtel: Blake, I was interested in Neil’s proposal on page 6, which is the Service Delivery Plan. It said, basically, map all core processes and establishment of measurements and so on. I don’t think I’m trying to save money or anything, but it seems to me that that’s a task that certainly can wait until the very end until a decision is made to go ahead. To establish measurements, which assumes that’s part of the operating plan -- that’s an awful lot of detail. I would hope he wouldn’t spend a lot of time on that, that he would spend more time on some of the other areas. That’s my own personal feeling that we need to push him more, and you more, to answer some critical questions as opposed to developing an operating plan that defines what the responsibility, not responsibility, but performance measurements are for each of the staff positions. I don’t know whether you had discussed any of this with him before. Or you had some feeling that maybe that he’s talking about something else in this particular task? Heitzman: The thing that I wanted to do was to be sure that we understood all the costs and had a pretty good handle on it. The main thing is to understand the types of processes so we fully understand the costs of those processes. The measurements, I agree, could be left out and still understand the processes without having some measurement device to check to see that people are doing them. That’s something you do later on in the operations. We could take that out and add some emphasis somewhere else if we want to. The main thing we’re trying to achieve with these operation plans is, as I said, to come up with an idea of all the processes and so forth, staffing and costs associated with operating a business -- get a fairly sharp pencil on that. Because that is a major part of deciding whether it’s going to be a profitable business or not. Bechtel: I was looking also on page 9, Phase 1, which was his task layout. I’m looking at the dollars and relating dollars to level of effort. The total for Phase 1 is $38,500 and the Business Plan Development on Phase 2 is $85,000. Personally, I would like to see more emphasis on Phase 1. I would have expected perhaps more money in Phase 1 and less in Phase 2 -- at least, let’s put it this way, more money in Phase 1 than he’s showing UAC Mtg Minutes 120402 RF.doc Page 6 of 27 here. But we sat through several meetings with him and I’m sure we’ve conveyed a lot of information to him. Sometimes a consultant’s proposals don’t always detail exactly the final product as you go through the process. I noticed that there are a lot of interactions with staff. As you go through the process, and things change and move, I would hope that there would be some flexibility. It seems to me that that would happen in this particular case. But I would hope in the engineering analysis and recommendation part, for example, specifically that I’d like to see a little more effort. Heitzman: The engineering is for, I believe, 3 different analyses of 3 different systems on the same level of the current analysis. That’s a subcontracted portion for him, so he knows what his price tag is to do that. The other stuff is, a lot of it is his own work and his staff’s and so he doesn’t have a commitment or guarantee that it’ll be for this price and I’ll get this much work done. That’s why the price tag for the $13,500 is there. You are probably pretty much aware at this point in time that Neil is pretty interactive -- working with staff, the Advisory Team and also the Commission. That’s one reason why we would like to continue working with him and why we feel like we can get a good work product out of him. In my opinion, rather than look at the money there, what about the scope of work listed in Phase 1? Does it appear to be correct? If that scope of work is correct, I believe we’ll be assured to get that scope of work out of him and the price tag will be as he stated. We’ll get the work done that he proposed and pay less than half of the work if we decide that it doesn’t pan out and we don’t want to pay the other half. Then we’ve gotten a lot of work for less money. I guess that’s one way to look at it. My experience has been that he does the scope of work that you ask -- even reiterating if you have other questions. So, if the scope of work in Phase 1 appears to be correct, I think we can say we will get that work for this price tag. If we feel like the scope of work is a little light, we could ask him to beef that up with certain specific suggestions that you have and then appropriately change his price tag for that part of the work. Bechtel: You’ve answered this question. I looked at the scope of work and it addresses my concerns from before, so I don’t have any more questions on his proposal. Carlson: Commissioner Dawes. Dawes: I have just basically a couple areas that I would like to probe. I’ve voiced concerns about the legalities before and urged that we get our City Attorney, that I understand is going to be doing the research work on the legalities, to do that up front. In the -- I don’t know if it’s unlikely -- event that the City Attorney comes back and says well there’s no way the City can be in the telecommunications business because we’ve already franchised others to do this and there’s conflicts, etc, etc. I don’t know exactly how that can come down. But I do think that it’s a pretty critical “go/no go” point and it’s listed as item 5 in the tasks on page 8. It doesn’t seem to be clear whether that’s part of Phase 1 or Phase 2. But I would urge the staff to move that up to, sort of, the front end to see if there are any fatal flaws that we have to deal with in constructing this program. It may mean that we could only be a wholesale operation and not have any branded UAC Mtg Minutes 120402 RF.doc Page 7 of 27 products to offer. I have no clue on that, but I do think that the phasing of the legal analysis is important. I would feel it appropriate to push that, for the schedule standpoint, up more to the front, particularly because it’s likely to be done in-house. The second area that I’d like to address is the Peregrine Communications people who are going to be doing the engineering analysis. There have been various discussions by email, which actually I’ve found very helpful on some of the questioning the various configurations and pointing out that it’s very important that this aspect be done extremely professionally, because that’s where the big bucks are. In picking the equipment, you can really impact the capital costs and the performance of the system greatly. I don’t know anything about this group, but I just want to be assured that this is a group that does not have any axes to grind in terms of connections to vendors, that these are not only well qualified, but also without any potential business conflicts that would perhaps distort any recommendations as to equipment. And as part of this whole effort called “Systems Design Module” that they will be undertaking -- I don’t know if they planned to entertain any input from our community, but certainly there are lots of well-qualified people here. That would also be an appropriate way to go, to invite qualified, local, interested citizens to participate in some degree in that whole engineering systems design alternative analysis. Heitzman: First of all, Peregrine, at this phase, will be doing a comparative analysis on a “conceptual” design, so to speak. The results of their studies will not be the basis for any design. If we go that far, we will have a contracted engineering firm do a design and it may or may not be Peregrine. Certainly, if Peregrine has vendor relationships that would taint their equipment selection at the design phase, they would not be able to be selected to do the design work. The work they’re doing now is the cost estimation work and the comparison between different systems. They are experienced with design and HFC systems. They’ve done some design work with Fiber to the Home, which is limited work, because very few people have done that. So they are in a position to be knowledgeable about the various systems and the comparative costs and how to estimate those costs. That’s all they would doing in this study. They will not be making recommendations for a design. The design recommendations would come out of the functions that we want to provide and a functional RFP would be written saying we want to design a system that can provide these products and be established in such a fashion and various engineering design firms with a bid on doing that design work. I don’t think at this phase, if there is a Peregrine connection to a vendor, it would be an important issue because they’re not going to be selecting vendors. Dawes: I know that sometimes when you select a technical approach, basically you’re locking in certain vendors, because they’re the ones that have either developed that approach or are the leaders in it. Or something like that. If you pick certain design criteria, you are in fact locking out lots of other competitors. That’s basically all, why I was going down that path, why I felt that having interested citizens involved might be useful as any sort of check on the system, I guess. UAC Mtg Minutes 120402 RF.doc Page 8 of 27 Heitzman: Just a matter of reassurance. The typical Fiber to the Home systems are either 1 fiber or 2 fibers, so our studies would include a study of a 1 fiber and a 2 fiber. Both systems would be analyzed. Also, some of these emails have gone around and we actually have asked Peregrine to show us that they are unbiased and they have given us emails back stating that they are unbiased, that they have spent time with all the vendors and so forth. We could request that they demonstrate this, as well. If we feel that they can’t demonstrate a lack of bias, we can tell Neil that he needs to get somebody else to do the work. We can go about doing that prior to his contract being approved by Council. Dawes: The City Attorney’s role and timing thereof? Heitzman: Excuse me? Dawes: My first comment was about the City Attorney’s role and timing thereof. Heitzman: Oh, yes, excuse me. Let me address that. First of all, there was a report; the City Attorney gave his report in October. It was redrafted in a fashion that could be released to the public. I’m actually kind of surprised that you haven’t gotten it yet. I would have expected it to be in this packet or at least at the workshop. To paraphrase, which is unfair because I can’t give you all the data, -- basically there do not appear to be showstoppers for this project. We can make sure that that report gets into your January packet. It’s not a final report, but it does point out the mountains and the lay of the land, so to speak, the big issues and so on. Probably the biggest issue that would come out from that would be the need to have a separate Board that would determine the content of the video system. It would be determining what stations could be offered, what kinds of films could be offered. It would have to be separate from the Council, that Board. That’s probably the biggest issue, and will require some change to the City Charter. So that would be the biggest issue that would have to be addressed. Dawes: Thank you. Carlson: Commissioner Rosenbaum. Rosenbaum: When you talk about a change to the City Charter, that requires a vote of the public? Heitzman: Yes it does. In order to launch the business, you’ll have the vote of the public. Rosenbaum: All right. So aside from the question of securing an advisory vote on the revenue bonds, you’re suggesting there might be a more fundamental reason provided this has to go to the public. Heitzman: It’s based on what I’ve read, and I’m not going to say that I’m the final authority or whatever. But it appears that there would have to be a vote of the public to UAC Mtg Minutes 120402 RF.doc Page 9 of 27 change the charter and that could be viewed as a public yes or no to going ahead with the project, I believe. Rosenbaum: All right. Let me make a couple of other points. I think, George, you identified a key point about the business plan, as most of the business plan is what you do when you’ve already made a decision and you want to prepare something to take to the bank, or whoever is going to finance it, and this is clearly what Uptown wants to do. What we were successful in doing to some degree at the study session was suggesting that there’s some analysis that ought to be done. You were commenting, I think, that analysis doesn’t seem to take up a large percentage of the total funds that are being devoted to this. I certainly would sympathize with that viewpoint. Let me bring up something specific, which also ties in with George’s comments and questions that he presented in writing. George asked that there be some more scenarios prepared at different levels of penetration, perhaps different costs. My question to staff -- did you ever distribute them on the web? Heitzman: I requested the person responsible for doing that to go ahead and do that, at the time I sent those to you. I don’t know. Did everyone else get those? I don’t know. I haven’t checked the web to see. Rosenbaum: For the benefit of the public, let me just state my question. Palo Alto is in the utility business because we feel we can offer better price, service and reliability, while contributing something to the general fund. If we are going to go into telecommunications, we should be able to demonstrate a significant price advantage. In my view, a $30 charge each for cable and broadband Internet would provide the necessary price advantage. $30 is 25% less than the incumbent providers charge and also corresponds to what other municipal utilities are charging for service, and I provided a table. My question was could we design a system that will make money charging $30 for each service, assuming 30% penetration? I label that a “30-30-30 system.” I went on to say 30% penetration is arbitrary, but it represents about half the market. I expect that AT&T/Comcast and PacBell will vigorously compete with us on price to maintain market share. I thought the response -- which I assumed came from the consultant -- was somewhat curious. Let me just read that: We can certainly run the model for such an approach, but actually operating this way would create an unnecessary price war with AT&T and PacBell. The business plan will address competitive responses and the best strategies to counter them. And then it goes on. It seems to me that the purpose of competition is to lower price. To suggest that somehow this wouldn’t happen, that the 3 competitors would more or less agree to keep prices where they are, is unrealistic. I mean Ford and General Motors would like to have a similar arrangement, but that’s not the way our system works. So specifically, judging from the answer, Uptown isn’t going to respond to this question unless there’s some indication of support for this idea from more than me. I’m curious as UAC Mtg Minutes 120402 RF.doc Page 10 of 27 to what your response would be. Perhaps I could solicit my colleagues to see what their interest is. Heitzman: One of the advantages with continuing with Neil is that he does have a model which is very flexible. Commissioner Ferguson and Commissioner Dawes have seen the model with various scenarios being plugged into it, and also Councilman Beecham. Neil can, and actually he has run this 30-30-30 and he says it appeared to be close to workable, so he will do whatever scenarios we want. It’s not a difficult task to do that, so we could run a table, a matrix of various scenarios that are suggested or requested and that could be an integral part of his report. He would be willing to do that and there would be no problems with doing that. Rosenbaum: All right. So I can count on that being done, then? Heitzman: You tell me what it is you want run and he’ll run them for us. Baldschun: I’d like to address a policy question you raised. The current policy, Council policy, is we base our utility rates on cost of service. We don’t base it on what the market is. A perfect example is our electric rates. Our electric rates are based on cost of service. If they were based on market, we’d be 50% higher and making quite a bit more revenue than we charge, but that’s not our Council policy. So regard to telecom, I’m sure Council will weigh all the ratemaking policies available and at that time make a decision. The precedent is that cost of service has been the traditional way we price our services. Carlson: Commissioner Ferguson. Ferguson: Just to respond to Commissioner Rosenbaum’s comments on price. Mr. Rosenbaum puts a lot of credence in experience on the ground in other cities. We actually have a lot of experience on the ground in other cities where the municipalities have gone into plain-old-CATV service against an entrenched private sector competitor. In the vast majority of those measurable historical circumstances, the price wars were begun by the private sector competitor. In some cases, the muni followed. In some cases, they said the heck with it, and the muni ended up outlasting the private sector competitor, for what I’m sure are a variety of reasons. But the pattern is very clear. My guess is, part of Neil’s cursory response to your question was that he was probably aware of that history in head-to-head CATV competition. Maybe there are reasons to assume the analysis would come out differently in this case. But for some reason, the private sector people seem not to be willing to invest in outlasting the Munis in a price war. Carlson: Commissioner Rosenbaum. Rosenbaum: Let me respond to that because that’s an interesting point. I certainly think the private sector would be foolish to cut their prices somewhere because of the ill-will it would cause with respect to their other customers in adjacent cities. However, there’s one counterexample, which is with the biggest of the Munis that have gone into telecommunications -- and that’s Tacoma. There have been articles in the press about UAC Mtg Minutes 120402 RF.doc Page 11 of 27 AT&T recently raising their prices in Seattle, I think it was. They went to something like $36. The point of the newspaper story is that in Tacoma, they were only charging $27 because Tacoma -- the Muni system -- was charging $24. So there is an example where Comcast clearly made a decision that for whatever reason -- maybe that was too important a market to give up -- they were willing to compete on price in that area. I think Palo Alto would be thought of as a pretty important market. That’s why when I mention the $30, I’m really asking is can we make a living charging that amount. It would not surprise me that the competitors would really compete, and the way in which you compete in this business is on price. One other interesting point, at our study session, Rick, you mentioned, you brought in the Wall Street Journal article, which was a long story about Comcast. They had a relatively rapid percentage gain that they were making in cable modem service. I guess nationwide cable modem service far exceeds DSL, while the opposite is true here in Palo Alto. But the President or CEO of Comcast said he thought the magic point where the adoption of broadband would become very common is when the price got down to $30. That was what he had in the article. So for at least one other reason, I think the $30 price point is a very good one. We better have a system that can make money charging $30, in my view. Carlson: Okay. Bern, I think it would be very important to be sure that everything that the Council wants covered is covered and we would love to hear from you about that. Beecham: I’m not going to speak for the Council at this point, but I do want to weigh in on this discussion. In terms of the Commission asking for analyses, I think certainly that ought to be done. Asking for an analysis now is not tantamount to making a policy decision on pricing. But you should know those scenarios, and I certainly agree with that. I would also add though, that in the scenario where prices are driven down to $30 -- as one talks about the benefits to the community, one certainly needs to include the savings to every user, be it $5 or $10 or $15 a month, for anybody who was either a user of this system or the private sector. That’s a benefit that somehow should be penciled in as well. Carlson: Any more questions? I’ve got some of my own. I’ve got a couple of issues -- this is sufficiently vague -- but I want to be sure they’re covered. First of all, the experience of other communities. What we’re looking for are some very specific things: What are the numbers? What’s the market penetration? What’s the profitability? What’s the pricing relative to the competition? What’s the real hard dollar experience? I’m not interested in a list that 500 communities are “looking at” that -- who cares? I want to find out if anybody’s making money, and if so, how long did it take them before they were making money? If we only have experience for a year or two, how much are they losing? Are they losing 5 cents on the dollar or 25 cents on the dollar in the first 2 years? We need some real hard numbers. I want to be sure that’s in that vaguely stated “community analysis.” Heitzman: Our discussion about that was that we take a giant filter and first look at all the municipalities that have gone into this business, then find comparable size, populations and so forth, and then look at those. In particular, looking at the pricing, UAC Mtg Minutes 120402 RF.doc Page 12 of 27 talking to them about what are your key challenges? Were they legal challenges, competitional challenges? We’ll narrow them down to the ones we can compare ourselves to, and then look at the key issues in their development of the business. Carlson: So we’re going to get some of those, we’re going to get market penetration numbers and profitability? Heitzman: To the extent that we can get it. Some of those questions, people are going to say, “sorry, that’s none of your business.” But to the extent that we can get that or surmise that, we will definitely do that. Carlson: The next thing, there’s a financing discussion here. But again, that’s a little vague. There are a couple of potential financial structure issues that would be very interesting to look at. We’ve talked about partnering on the retail/wholesale area, but the issue of supplier financing we’ve mentioned -- it really does need looking at. If the business is as brutally as competitive as I suspect it is right now. and some suppliers are interested in doing some financing deals with us, that certainly does need looking at. Heitzman: We’ve already had a preliminary discussions with our finance department on several methods of financing, with their attorney and financial advisor there. Several methods of finance were discussed at that point in time. The objective that Neil will fill here would be to continue to talk to them to flesh out the major possibilities. Carlson: The other side of that -- that I think is very much worth looking at and, as a survey skeptic, an interesting perspective from the city finance side -- is to have a deposit requirement up front. I find checks much more impressive than responses to surveys. There are variety of activities that are financed that way. It needs a really hard look. I don’t mean $10; I mean something significant, up front, as a deposit. “Yes. I will sign up for this and here’s my deposit.” It’s a significant way to help refinance an operation like this, but also to limit our risk. The final area that I haven’t seen mentioned -- it’s a really messy one and you brought it up -- this is the cost-of-service issue. It’s a classical cost-of-service, but this is a very difficult service to price because you basically have 3 services sharing a relatively fixed infrastructure. They share everything in the ground and they share a lot at both ends, as I understand the technology. How are you going to figure out what the cost-of-service price is for the 3 different major categories of service? Heitzman: That could be done a multitude of ways. The idea of cost-of-service may be difficult to implement in this situation, so the idea of pricing to the market may be the easiest way to go about it. Some parts of the system are easily pulled out. The phone part, from what I understand, could be pretty easily pulled out, at least on each end. When you talk about -- do you want to share the line that goes between the head end and the individual customers -- is that shared equally by each business, or in accordance to its market penetration? There are issues. I suppose a scheme could be developed where we could have a cost-of-service model. But it would basically be applying a scheme or theory that you develop and say “this is the way I’d want to try to do that.” But it’s not UAC Mtg Minutes 120402 RF.doc Page 13 of 27 going to be a simple, straightforward thing like, the electric lines exist and that’s all that goes over it. Carlson: Part of my concern here is that the potential for cross-subsidy in this kind of system is significant, because of market forces and competition. We may be very competitive in the video area just because the competitors have been relatively weak. There’s a history and we’re the beneficiary of the history. At least currently, it looks that way. If that service becomes very profitable, then the temptation is, how are we going to use that money? Why not drop your prices in the more popular, naturally, theoretically more expensive services like high speed Internet and maybe telephone? That can be dangerous. At some point, you’ve got this one profitable thing. You just use all that money, you just kill the competition elsewhere. There’s a basic fairness question and that question is whether that is really proper community policy, in that kind of situation. You really have to look at that one carefully. Heitzman: One of the early-on issues that Neil would like to deal with is, of course, the policy issues -- whether we want wholesale/retail. He would like to kind of establish the parameters for that up front, before launching into some of the other more detailed analysis. Some of the things you’re saying though may go back to the argument of “let the market be the benchmark.” If you’re concerned about cross-subsidy and you’re using the market, well then, at least you know that’s something that the typical private industry has as a basis -- rather than try to dig into how to tease out the actual cost of each service, or possibly just looking at it as an entire service instead of 3 segments. It’s an issue that needs to be dealt with. Carlson: Okay. Those are my questions. Any more questions here? I think we’re ready for a motion if there are no more questions. Dawes: I move that the UAC recommend to the City Council to proceed with the business plan as outlined in the -- is this the City Manager’s recommendation here? I don’t know exactly what the name of the item is -- but to proceed with the proposed Fiber to the Home business plan in accordance with item 1 of the agenda. Bechtel: Mr. Chairman, I think we ought to clarify and say, “We are asking City Council to approve a contract.” That’s what we’re being asked to do, not a plan. Dawes: I agree with Mr. Bechtel and so revise the motion to propose to the City Council, recommend to the City Council, to approve the contract with Uptown Services, LLC. Carlson: Commissioner Ferguson, I’m suddenly lost. Go ahead. Ferguson: Let me, Commissioner Dawes, if you might, make a friendly amendment. We can simply move that we recommend to Council that they adopt the staff request? Dawes: That’s perfectly acceptable. UAC Mtg Minutes 120402 RF.doc Page 14 of 27 Bechtel: Second. Carlson: If you look close, what we’re approving here is both a contract and a process, because we’ve all clearly asked for some really important First Phase things. I don’t know if I can speak for the rest of the Commission, but there’s still some skepticism here. We still want to see more detailed results that this really does pencil out in this very dynamic and competitive environment, before we decide how many pencils we have to buy. This is a long way from writing checks with lots of zeros, but it certainly deserves more analysis from many perspectives. Okay. Motion is made and seconded. All in favor? All Commissioners: Aye. Carlson: Any opposed? We’re going ahead. Thank you very much gentlemen. Good job. WATER LEGISLATIVE UPDATE Carlson: With astonishing efficiency, we’re moving on to item 2. I assume Jane and there’s somebody here from, I haven’t learned the acronym yet, I want to call it “Son of BAWUA”. Jane, if you can start with the pronunciation recommendation, BAWSCA? Ratchye: Good evening. I’ve handed out a little matrix that sort of describes the differences between the 2 agencies we’re talking about - the Financing Authority and BAWSCA, the Bay Area Water Supply and Conservation Agency – and also another sheet that kind of lays out a preliminary timeline for when Council needs to take action and some preliminary Council dates for some of the early actions that are kind of in the, they’re preliminarily set at this point. The report pretty much explains what I wanted to say. But I was able to get Ray McDevitt here, who’s the BAWUA Counsel, who basically wrote the 3 bills and knows them inside and out. If you have any questions on the San Francisco propositions, he can probably give those a shot, too. I gave him a heads up on some of the questions you might be asking, but I’m sure I didn’t think of all that you will have. So we’ll just take questions. I wasn’t going to make a presentation. Ray, did you want to make any introductory comments? McDevitt: No, just to say thank you for inviting me and I’ll try my best to answer any questions you may have. Carlson: Who’s got the first question? Commissioner Ferguson. Ferguson: Thank you, Mr. Chairman. Once again, I just admire this legislative work of art. Ray, thank you very much for a job so well done. McDevitt: Oh, thank you. UAC Mtg Minutes 120402 RF.doc Page 15 of 27 Ferguson: I’m happy with everything here except for one item. Maybe staff can explain the rationale for it. There’s a staff recommendation that the appointee be a member of the City Council. I’d like to hear your rationale for that, and then I’d like to make some comments. Ratchye: Well, I’ll actually let Ray answer it. Carlson: Just a minute Jane. We’ve got some conversation going on in back that’s bothering some of our hard-of-hearing minds here. Thank you. Go ahead Jane. Sorry. Ratchye: We did recommend that because there are a couple of reasons. First of all, you think the weight of an elected member would give the entity more clout in some way. Just in front of San Francisco or any other regional group that this new agency would deal with. I think that the person, whoever it is, needs to have the authority to commit the City to paying back these bonds which could be quite substantial in size, as you’ve heard a lot. I’ll let Ray comment further on the question. McDevitt: Thank you. I think that the answer does come down to, well first of all, the question is one of policy. It’s a judgment call for the Council and for you as advisors to the Council. It’s not one that staff or BAWUA or I as Legal Advisor really have any particular expertise on. However, the history of BAWUA as an organization -- and it’s been a very successful one, with staff from the agencies essentially running it -- but the environment that this new organization is going to be operating in will have changed. I think the assumption has been, on the part of the people associated with BAWUA, that this will be a good thing. The involvement of elected officials will add an element of stature to both of these organizations and their ability to deal with San Francisco -- for example, put them on a parity with San Francisco Public Utilities Commission Board of Supervisors. Now there are few cities and no water districts that have an organization akin to the Utility Advisory Commission in Palo Alto, so Palo Alto is somewhat unique. In fact, perhaps Santa Clara has something comparable, but no one else does. So the choices in most cases are pretty stark -- it’s between an elected official or a staff person. Here, the City has an intermediate choice. All of you gentlemen are -- obviously just listening to the discussion that you’ve conducted -- have a great deal of experience and insider knowledge about utility matters. I would think that for Palo Alto, it would be a very legitimate, very reasonable sort of consideration to broaden the scope of who’s considered. In talking to Jane, that would be something, as Commissioner Ferguson mentioned, your Council has the luxury of being able to turn to members who aren’t on the Council, but who have substantial stature and intellectual power to bring to an organization of this kind. That’s really all the thinking that we’ve had on it. Also too, the issues that the organizations are going to be dealing with are really matters of policy. Elected officials and the few entities that have organizations such as yours are familiar and experienced with dealing with matters of policy. Ferguson: Let me make a couple of comments. First, at the global level, it’s important to understand what the job of the newly formed BAWSCA is going to be. And I’d like to UAC Mtg Minutes 120402 RF.doc Page 16 of 27 contrast that with the exercise that we just went through, where we were enormously well-served by Bern Beecham in getting the legislation in place. They’re different tasks. Part of the skill set is just the raw, technical talent or managerial talent, and I’m sure we’ve got plenty of people in town that can deliver that. But in the case of getting the legislation crafted, there’s no question that Jane came to us 2 or 3 years ago and said we need to go out of our way to get the electeds involved here, because this is going to take legislative action. When you’re getting legislation crafted, when those deals are being cut, when influence is being exercised directly and indirectly, it’s absolutely true that people that represent votes have a special currency, a lawful currency to offer in those tradeoffs. Bern was exactly the right person for that job and I’m delighted at the outcome. I agree that there are a number of policy matters coming up, but I see the next phase as, yes involving financing, but it also involves as much the design and management of this giant technical effort. This is more the Board of Directors of an operating entity now -- it’s less a question of shaping up political values tradeoffs. So at the global level, one job clearly called for all the electeds to participate. In this one, it’s less so. And it’s interesting that the legislature left it open. At the Palo Alto tactical level, we have a Council election coming up this year. Four Council members may or may not return to office next January. I would hate for the utility and this issue to get drawn, intentionally or accidentally, into the political debate this coming year. That’s one of the things that happen. If a Council competition emerges here, it might be most convenient for the Council to have a non-Council member offered up in this particular role. This is a time not to politicize some of the developments. I’ve had the same feeling about the Fiber to the Home development. Eventually there’s going to be an important political debate about that. But if that politicization happens too early, the baby dies. I’d hate for that to happen with this wonderful newly-crafted agency. I guess the legislation takes care of conflicts of interest -- they’re pretty much forgiven in the statute. But the final thing is that there’s a pool of people -- there may very well be some retired or not-so-retired civil engineering firm executive who’s perfect for a Board like this, who knows all about financing, all about management. Maybe that person is just out there in the talent pool waiting to be pressed into service, and maybe not. I’m sure the Council, in its wisdom, will make the best call on this. But you’re asking for advice and my advice is, leave the talent pool open. If the Council thinks it’s right for Council members to do it, they can do it. But my advice would be to open up the talent pool on this one. It’s a different job. Political skills are helpful, but they’re probably nowhere near as critical as they were as getting the thing created in the first place. Carlson: Thank you. Commissioner Rosenbaum. Rosenbaum: We do have a model in this area, in the Northern California Power Agency -- a joint powers agency that does a lot of financing, and each of the member agencies is recommended as represented by an elected official. But the reality is the work is done by staff and there are alternates, official alternates. Does this legislation have provision for alternates? UAC Mtg Minutes 120402 RF.doc Page 17 of 27 McDevitt: No, it does not. Rosenbaum: Do you have any feeling, was this an oversight, or can this be changed? The alternates at NCPA have the right to vote and Council members or individuals, if it were to be a UAC member, they’re not always available for these meetings. What was anticipated to happen if the voting member couldn’t attend? McDevitt: It wasn’t an oversight. It may have been a mistake, but it wasn’t an oversight. The experience with public entities and alternates varies quite a bit. In some cases, it’s extremely effective. The Coastal Commission, for example, is one where the legislation contemplates alternates. But it’s not common. Most organizations, as with your City Council for example, people either make it to the meeting and then participate or they don’t, and their voice isn’t heard. I doubt whether we would be successful in going back to the legislature for that particular change. I have no doubt that in 2 or 3 years, that there will be flaws detected in the legislation and how it operates. There will be people with the experience of seeing of how it runs saying this is really frustrating to have to operate this way, let’s go back and get the legislature to fix it. There may be 3 or 4 changes that would be accumulated that a majority of members would urge being changed. But that’s going to take that amount of time for that to develop -- unlike JPA’s, where it’s really a totally a creature of agreement, and they frequently do [provide for alternates]. I’ve certainly drafted them where they provide for alternates, but this legislation doesn’t. Rosenbaum: Just to briefly respond to Rick, I think the magnitude of the task, particularly the magnitude of the financing, is simply going to require that a Council member be the direct participant. Continuity is just going to have to be provided by staff. Staff is obviously going to be closely involved with this, and I would see that it probably ought to work in that manner. And on another topic -- don’t answer this question quite yet, I’m sure we all have this question -- both of these agencies have financing authority. It’s not obvious to me why there are 2 agencies. You can get to that at some point. Carlson: More questions? Commissioner Dawes. Dawes: That was my puzzlement here. Two major agencies both empowered to issue bonds. BAWSCA particularly is going to do eminent domain -- a very powerful agency. The recommendation is that one individual be on both the Financing Authority and BAWSCA, which I think is a very fine idea and hope that all the municipalities would follow that guidance. I guess it’s not a requirement. I’m still troubled by these agencies either competing or overlapping or being wasteful in time and efforts and generally adding to the confusion level. I assume that the legislature, in their wisdom, dealt with this. Frankly, I thought that only one of these two would survive the legislative process. I didn’t see why there was a need for both of them, but if you can elucidate for me, and us, it would be very helpful. McDevitt: Those were puzzling. Those same concerns puzzled the members of the legislature and everyone involved. The answer, I believe, has to do with the political UAC Mtg Minutes 120402 RF.doc Page 18 of 27 dynamics of the authors of the various bills. There’s a personal element in legislation that we just basically had to work with. Two separate authors wanted to have their visions implemented, and weren’t receptive to the idea of combining the bill. We started out with two and Senator Speier very, very helpfully and very constructively participated. It was with this third variant and then the two organizations began to diverge. So in the legislation, they’re distinct. One has really only one job -- and that’s raise money and make it available if needed for fixing the San Francisco regional system. The other has a broader purview and it’s not, although legislators were concerned about the very points that you raised. One of the thoughts is if the same individual was appointed to both, then it could operate really more efficiently in the way the City Councils frequently have, or independent districts or authorities such as Housing Authority or Redevelopment Agency. The same people essentially perform two functions and they’ll meet, operate as a City Council, then adjourn and reconvene wearing a slightly different hat. Foster City, for example, has an independent district called the Estero Municipal Improvement District -- it’s effectively their water department, it’s a separate district -- but it’s governed by the Council. So they simply meet once and the same people make the decisions. If most municipalities and districts follow the suggestion of Mr. Dawes, then that’s sort of how we visualize this could work pretty effectively. Dawes: Will there be one set of staff members or two? I view this as being very important in harmonizing the activities if BAWSCA staff, in effect, acted also as the staff of the Authority. Is that the way? McDevitt: That’s the vision. In fact, the Financing Authority probably in reality doesn’t need a significant staff. It has its job to do. A lot of it could be done by a very lean BAWSCA staff providing continuity. Then a lot of it is through outside advisors, bond counsel, underwriters, financial advisors and so forth, who would come into play while the bond issue was being shaped and then essentially depart. So the hope is that these two agencies would not duplicate themselves in any way, in any unnecessary way. Dawes: Thank you very much. I am heartened by the frank dissertation on how this is hopefully going to work. It certainly has the ability to cause a lot of mischief in making this more complex than they need to be. Another aspect that appears to be exceedingly complex -- I again hope that the legislature in their wisdom has got this thought through. I was trying to follow the money -- you know the old dictum here. Apparently the Authority raises the money, and basically they turn that money over to San Francisco to accomplish their CIPs for the entire system. San Francisco then bills the cities for the water and then apparently they turn around and remit money back to the Financing Authority. It seems very laborious and circular. I wondered if the bonding agencies have bought off on this whole process. It’s not like the Authority issues the bonds. They have the authority to send the bills out to their users, get the money, and pay the bonds. This has a number of skimming entities that get in the act. San Francisco certainly has been known to do that sort of thing in the past. McDevitt: You’ll be pleased to know, as I was pleased. This morning I met with two representatives of a national financial advisory firm and they were, of course, interested UAC Mtg Minutes 120402 RF.doc Page 19 of 27 in all of this for their own purposes, and they may have just been flattering. But they said, “This is a brilliant conduit financing. This is just the way it should be done.” Now, I was delighted to hear that, because it does have a “Rube Goldberg” quality to it. But of course it was vetted by bond lawyers in my firm and others and the Senate and Local Government Committees staff was very, very experienced in matters of this kind. They looked at it. I believe it will work. Its complexity reflects the political balkanization of the region and the regional primacy of San Francisco and the existence of a web of contracts that give rise to the money that would pay off the bonds. Again, it’s not an ideal structure, but it does, I believe, build on the political and economic arrangements that exist -- in a way that people will buy the bonds with confidence that they’ll get paid back. Dawes: Thank you. As I said, I hope that people had thought this all through, and it sounds as though they have. Hopefully it will be workable. Thank you. Carlson: More questions? Go ahead Jane. Ratchye: I just wanted to ask Ray a question while he is here. It gets to some of the question that you raised, Commissioner Rosenbaum, but there’s part of this that I’m struggling with. One key difference for me is that the Financing Authority is created and we will be a member, like it or not; everyone will be. BAWSCA has to be created by us. What happens if one agency, for example Palo Alto, decides not to join? BAWSCA then sells bonds. Are we obligated, having not joined BAWSCA, to pay them back? If you can answer that question. Hopefully, the plan is for everyone to join BAWSCA. We’re hoping that everyone will want to form and become a member of BAWSCA. So I have a couple of follow-up questions to that. If we don’t all join, then are we going to finance everything through the Financing Authority? If we all join, is there a better mechanism to finance it? Should it be the Authority or BAWSCA? And then, another question is, what if everyone does join, can we get out? Is there anyway to exit from BAWSCA? Those are some of the questions I thought you guys might bring up at this point. Anyway, I forwarded some of these questions to Ray in advance, so I’ll let him chew on those. Carlson: I’d love to hear the responses. McDevitt: The first question, I believe, was if an agency doesn’t join BAWSCA and BAWSCA issues bonds, is that entity nonetheless obligated to pay towards the retirement of those bonds. The answer is no, it’s not. The last question was if you join, could you get out? The answer is I believe you can, though it would require moving through the LAFCO [Local Agency Formation Commission] process as a detachment from an existing special district. This is all under the Cortese-Knox-Herzberg Government Reorganization Act which doesn’t apply to the formation of this entity, but deliberately does apply to everything else. Once it exists, there are established procedures for the changes in its membership of its departing members. It’s not as easy to get out as a JPA. But I suspect that if someone wanted to depart and was willing to honor the financial UAC Mtg Minutes 120402 RF.doc Page 20 of 27 obligations that they had accrued during the time that they were members, LAFCO would be satisfied to let that occur and simply condition it on their honoring their financial obligations. This is a typical requirement in a JPA contract, that you can leave on certain notice but that doesn’t absolve you of obligations where your proportion of share of obligations that were undertaken while you were a member. There was a question about what would happen if everyone didn’t join -- would that then argue for using one or another of the entities for financing? Well it certainly would. The Financing Authority is set up to do just that. It’s set up to finance, supplement, or be a complete alternative to San Francisco’s ability to finance the reconstruction of the Hetch- Hetchy system. That’s one reason why everybody is a member. It’s also why, even though CalWater and Stanford University have a unique relationship to it -- in that their representatives are appointed by their prospective Boards of Directors -- they are obligated on the bonds, as well, even though they don’t have a corporate officer there to vote for them. So everybody pays their share under Financing Authority legislation. BAWSCA’s a different animal. If everyone joins, then it would work similarly. If they don’t, then the question is how would you charge the members, how would you charge non-members for using facilities that you have constructed? You would have to think about not building facilities that you couldn’t exclude free riders from. A lot of what BAWSCA’s going to be doing is probably going to be non-capital intensive. It’s going to be programs of various kinds and it’s also going to be negotiations on your behalf with San Francisco; similar to what BAWUA has done for decades. The cost of those programs, either those are excludable, you can exclude people from free riding, or the marginal cost of conferring benefits on non-members is extremely modest. The hope is people will join. And what would happen is that BAWUA evolve from a non-profit corporation to a government organization with complementary powers and with additional powers. I don’t know -- did I answer? I may have missed some in the middle there. Carlson: We have some follow up questions here. Commissioner Dawes? Dawes: It would seem to me that would make sense for Palo Alto and probably any or all the other potential entities for BAWSCA to make their agreement to participate contingent on 100% of the other agencies similarly participating, so that we wouldn’t be, in effect, the last man out -- or be an disproportionate participant in financing activities. That would certainly solve a lot of problems. I can certainly see making our recommendation to our Council that we join, but only have that membership conditioned on a 100% representation. McDevitt: One thought along those lines is that the legislation already does that to a significant degree. It establishes a sort of a threshold, critical mass, below which the organization doesn’t come into existence. That is, 15 of the 26 public entities have to decide to join and they have to represent collectively 60% of the water use that the 26 agencies, public agencies, do. UAC Mtg Minutes 120402 RF.doc Page 21 of 27 Dawes: To me, that doesn’t do it. McDevitt: I understand. Then there’s a second component. Assuming that that threshold is reached, then CalWater and Stanford are automatically in. CalWater represents, alone, 20%, so you’re at 80% now, 85% counting Stanford. There are agencies whose water use is 1/10 of 1% of that of Palo Alto. They’re minute. Collectively, if you took the 5 smallest agencies, they’d be 5% of Palo Alto’s use. Palo Alto is the 3rd largest of the entities that would join, following only CalWater and Hayward. To look for 100% -- one gives veto power to entities that you don’t even know exist, because they’re so small. Dawes: If they’re so small, it sounds like a very good reason to hide behind big brother and get something for free. Why not insist upon everybody’s in and shares equally? We all have the same straw into the pipes, you know. Unless you can turn the valve off, and say “that’s it, guys.” McDevitt: They’re all in the Financing Authority. And BAWSCA is probably a non- capital intensive sort of organization. Dawes: So basically you’re saying BAWSCA is not going to do any bond financing. McDevitt: I couldn’t say that. It has that authority and it could build things. But it’s more likely to do something like this – arrange to buy water from an agricultural district that would be wheeled in to the Bay Area during a drought. That could be then made available only to the participants in BAWSCA, and perhaps, even only to a subset of them if it was a program that some wanted to finance and others didn’t. That water wouldn’t find its way to someone, one of the little... Dawes: So basically, you say you would shut off the valves? McDevitt: You would exclude non-participants from the benefit of water that ... Dawes: I don’t see how you could do that. Beecham: It’s not a matter of turning off valves. We all have rights to water and those rights are constrained. We don’t have infinite rights, even though we have a valve into Palo Alto. At some point, San Francisco says you don’t have any, you used up your rights, and you don’t get more water. This is nothing different than the current rights we have. It’s just there’s more or less water available to each member. Dawes: No, but what I’m probing, Bern, is the fact if we buy $1000 acre feet from an agricultural district during a drought and we want to bill it to all the participating members and they say we won’t pay. We won’t pay $1000, we’ll only pay the old way because we’re just using Hetch-Hetchy water, we’re not using any of this agricultural thing. It just seems to me an impossible situation. UAC Mtg Minutes 120402 RF.doc Page 22 of 27 Beecham: I think the logic is they would then be limited to the rights they have under the Hetch-Hetchy agreement with San Francisco, whereas those who were willing to buy into that have rights to additional water. Does that make sense? Dawes: If you say you’re never going to ration and they can refuse to pay for higher priced water, I just don’t see how those two mesh. Carlson: You ration. You do ration in a drought. Dawes: He says you’re not going to turn off the valve though. Carlson: You limit the amount. Ratchye: For example, in the last drought, San Francisco implemented a steeply inclining block grades where you were given your base allocations at one price and if you went above it, I believe something like 10%, the cost of the water doubled. Then it went up and it hit 10 times the cost of the water. No one ever turned off any valves or didn’t allow you to take the water. For example to implement what you’re talking about where this agency BAWSCA would bring in some amount of water, 10,000 acre feet or something, and distribute it to those who participate, either a subset or the full membership of BAWSCA. It would be very easy to track that water and charge people who would pay for that water -- for whatever allocation they signed up for out of the 10,000 -- and you allocate it to them. They would get their base amount from San Francisco, the amount that they got they participated in BAWUA and then you start charging the amount above that according to whatever San Francisco’s rate profile. I can envision that. Just how it was done in the last drought. Now whether something like that would happen in the future, I don’t know, but I can easily envision how you would separate out and could separate out participants from non-participants in that way. Carlson: We do it in electricity all the time. Dawes: You’re the expert Jane. I’ll buy it on your word. Just mechanically, I don’t see how it works, but if you say it works, I’ll buy it. Carlson: Some other questions? Go ahead, Commissioner Bechtel. Bechtel: We’re getting a little off the subject, because what we’re being asked to do tonight is just to recommend to the Council the type of person we appoint and not necessarily the procedures. It’s been really interesting about answering the questions about how this is going to work. Jane, we’re only being asked to recommend a person for the BAWSCA. Is that because the other Financing Authority hasn’t been created yet, but BAWSCA could be created sooner? Ratchye: The reason why I did not ask you to recommend that the Council appoint someone to the Financing Authority is because they have to appoint someone to the Financing Authority. They have to do it by May 1st . The Financing Authority is created UAC Mtg Minutes 120402 RF.doc Page 23 of 27 as of January 1st . The Council has to act to appoint someone to be the Director on that Financing Authority, so there’s no “yay/nay” or debate about it. I guess it doesn’t really matter what your opinion about that one is. But there is a question about whether we want to join BAWSCA, that we do join or not, and appoint a Director if we do join. The timeline that I handed out indicates that the question of for the Council to appoint someone to BAWSCA is months away at this point. It has to go through this entire formation process. We’ve got to start with the Alameda County Water District. They then send their resolution of intention to form to all of the eligible public agencies. Then we have a certain time limit. The Council has to resolve to hold a public hearing within 60 days of when Alameda County Water District takes its action. Then 30-60 days from that decision, or that resolution, to hold a public hearing, they have to actually hold the public hearing. Then I’m thinking that we ought to hold a public hearing and decide at that public hearing date whether to join BAWSCA, or not. We have 60 days from the point where we have the public hearing when we can decide whether to join or not. But there’s no point in waiting, so I’m proposing that the Council take that action on March 10th, which would be within the 30-60 days from my proposed February 3rd date when they resolve to hold the public hearing. So they have that public hearing on the 10th and then the San Mateo County Board of Supervisors has to collect all the resolutions as they come in from all the different agencies however long they take to go through that. Then they get some period of time to look through those and make a determination as to whether the 60% of the water and 15 of the agencies have done this and then they send that to the Secretary of State. Then the Secretary of State proclaims and certifies that the agency is formed. After it’s formed, then there’s some period of time 60 days after that, that the Council gets to appoint someone to that agency -- because now it’s formed. So if I had to do this UAC report over, I’d probably not ask you at this point to recommend that the Council appoint a Director to BAWSCA, because it doesn’t exist. That decision could be in May or June. One action you can take today is to recommend that we join BAWSCA even though the Council won’t be acting on that if they take this schedule until March 10th. This is not like a “you better hurry up today and do this”, but I would like to get a sense of whether the Utilities Advisory Commission does support the staff recommendation that we do form and join BAWSCA. Bechtel: We don’t have any details of what the new BAWSCA would be like today, but I guess, conceptually, I would be in favor of recommending basically a morphing of BAWUA into BAWSCA and so on. Perhaps that’s what we should do tonight. I’d be willing to go on and also support the second recommendation, which is the appointee be a member of the City Council. NCPA has worked very well, I understand, before. I also hear what Rick is saying, too, that if this is truly a Board of Directors, on the other hand BAWUA has served us very well. I met a number of the staff people, been on tours and all of that, so I feel comfortable that they know how to run a business. I basically would support your recommendation really, as drafted. UAC Mtg Minutes 120402 RF.doc Page 24 of 27 Baldschun: Let me suggest something a little bit different. The recommendation tonight is basically that you approve that we’re going to recommend to City Council to appoint basically a Council member to BAWSCA. The question of joining BAWSCA is going to go to the Council, and there’ll probably be a staff report with a number of, lots of various discussions. We’ve talked about a few areas tonight that merit more discussion, both by yourselves and the Council, so I’m a little uncomfortable asking you tonight to make a decision to join BAWSCA. I’d feel much better if you just made a recommendation based on the materials tonight to proceed with our recommendation to Council that we have a Council Appointed Officer be our representative on BAWSCA. Now, Jane and I haven’t discussed this, but I think it’s probably premature tonight to ask you to join BAWSCA. Carlson: Commissioner Dawes. Dawes: It seems like we’re putting the cart before the horse to recommend a Director for an entity that we will later entertain whether to join or not. It would seem to me that this would be an information item tonight, and that we would put both items on the UAC agenda for perhaps January, or maybe February, to do both the issue on joining and also the issue on the Director. Baldschun: I think that makes sense to me. Carlson: Any more questions? Commissioner Ferguson. Ferguson: I move that we continue this matter until the next staff report on the topic comes from staff. Dawes: Second. Carlson: Any more discussion on that motion? All in favor? All Commissioners: Aye. Carlson: I didn’t even get to the question. I just wanted to ask one question on this. Either or both of these agencies will be borrowing the equivalent of a few hundred million dollars in our name. Our share is a hundred million dollars plus. That money goes as checks to the City of San Francisco primarily who will then contract with others. We will not be hiring people to work on the pipes of the City of San Francisco. That’s right? McDevitt: They may wish you to and they may ask you to, but the legislation doesn’t. This is for the Financing Authority. Obviously with BAWSCA, anything that it finances, it’s going to construct on its own. The Financing Authority’s purpose is to provide money if needed supplementary to or in lieu of money that the City and County of San Francisco would otherwise raise. It’s not expected that the Financing Authority would UAC Mtg Minutes 120402 RF.doc Page 25 of 27 then be in the construction business. It would be in the construction management oversight business. Beecham: The basic purpose of the Financing Authority was to ease the burden on the City of San Francisco from having to raise the entire amount by their own bonding process. That was the basic purpose of it. As that Financing Agency raises the money and contracts with the City of San Francisco, that agency has the full right to protect its money -- our money -- however it sees necessary and appropriate in writing those contracts. There is nothing to prohibit that contract from assigning to the agency responsibilities of actual performance. It’s not impossible that the City of San Francisco would say, gee, we’ve gotten a lot of constraints in how we do business and, in fact, we’ve never done anything this large before and we need to find some way to get outside of our own procedures and this might be a mechanism for it. It’s not required. It’s not necessary. It’s a possibility. But the main point is that the Authority will be responsible for determining a contract that it believes is in its best interest. Until it has that contract, it does not need to sign anything and it does not need to send a check to anybody. Carlson: Okay. That’s the key thing I was asking about. That contractual control is obviously going to be very important over a great deal of what’s essentially our money. I want to understand the other part of it -- we have contracts directly with the City of San Francisco for our water. We are not contracting through BAWSCA or the Financing Authority for our water. We’re just agreeing per acre-foot, per thousand cubic foot, throw money back into the kitty to pay off the bonds. That’s the other direction the money goes. Is that basically it? McDevitt: It’s not contemplated that either of these agencies is going to supplant the bilateral contracts that you and all of the other agencies have with San Francisco. It’s not anticipated. Carlson: Okay. So we don’t directly pay, the money doesn’t go back through San Francisco again, is what I’m asking. It goes directly, there’s a meter and if you use so much water, you have to pay so much to ... well, that’s why I’m asking. McDevitt: The financing mechanism, the Financing Authorities, referred to as “Rube Goldberg” mechanism, and I think all you gentlemen are at an age where you understand the reference, appreciate the reference. Carlson: I think you’ve definitely defined “Financial Rube Goldberg”. McDevitt: The obligation, if the agency is going to issue bonds, it contracts with San Francisco in terms it finds satisfactory -- when it’s going to be built and all of the other controls that we want to have, many of which are required and spelled out in the statute. But it could go beyond that, to make sure that the money is used wisely and for the purposes intended. Then San Francisco is obligated to impose a surcharge on the water bills to all of the wholesale customers. It then receives that money, along with the water bill. There’s a component of the amount of payment that comes in, that’s attributable to UAC Mtg Minutes 120402 RF.doc Page 26 of 27 UAC Mtg Minutes 120402 RF.doc Page 27 of 27 debt service on Authority bonds. It sends the money back to the Authority. It sends that money to the Authority. The Authority sends it to the Trustee who pays the bondholders. Carlson: So both the outgo and the income go through San Francisco? Beecham: San Francisco is acting basically as a collection agency in that sense, but it is not San Francisco’s money. McDevitt: Yes. Carlson: Just wanted to be sure about that. Getting the motion we just passed makes sense at this point, but I did want to ask those questions. ADJOURNMENT Carlson: Any more questions? Shall we adjourn early, for once in our lives? Dawes: I’ll call the question. Carlson: All in favor of adjournment? All Commissioners: Aye.