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HomeMy WebLinkAbout2003-03-05 Utilities Advisory Commission Summary MinutesApproved UAC Minutes of 3/5/03 Page 1 of 47 MINUTES Utilities Advisory Commission MARCH 5, 2003 MINUTES APPROVED ON APRIL 2, 2003 Call To Order ______________________________________________________ 1 Director of Utilities Report____________________________________________ 4 General Fund Long-Range Financial Plan ________________________________ 5 Utilities Long Term Financial Plan Review______________________________ 13 Utilities Strategic Plan Update ________________________________________ 23 L.E.A.P.__________________________________________________________ 29 Adjournment______________________________________________________ 45 Call To Order Carlson: Commissioner Bechtel Present, Ferguson Present, Chairman Carlson Present, Council Liaison Beecham Present. Thank you Gentlemen. We assume Dick Rosenbaum will be here shortly but in any case we are going ahead. First Item is Oral Communications. I do not see any slips so we will move to approval of minutes. Any suggestions for changes in the minutes? Certainly awfully good unless somebody found something. Do I have a motion of approval of the minutes? Then I move the approval of the minutes of the UAC of February 12, 2003. Bechtel: Second. The motion is made second to accept . Any questions? All in favor. I Okay. Agenda Review; Anything that we are missing that somebody noticed? Carlson: Okay. Ulrich: I don’t have a recommendation for changes except to make one correction down under special meeting which is listed as Fiber to the Home rather than being in the First Floor HR Conference Room we were able to move it to the Council Conference Room and of course we will make that change and when we put the notice out we will indicate where it is going to be. I would also like to point out that we will have additional items on the Agenda on March 19th. On April 9th we will attempt to have the final report of Phase I for Fiber to the Home Business Plan City of Palo Alto Approved UAC Minutes of 3/5/03 Page 2 of 47 on the Agenda and then also on May 21st which will be the final report of Phase II we will include that in the agendas for our later meetings. Carlson: Since we are on that item lets move to it. Unless I would have missed something I did not know anything about that meeting and that is Birds and Baseball week for me and so I have to be here by phone. What is the status for everybody else for that meeting? Okay for you George? Bechtel: Yeah, I will be here. Dexter? Dawes: I think so. I don’t have my dusty palm pilot with me. I believe so. Carlson: Commissioner Ferguson? I mean Rosenbaum? Rosenbaum: I am younger. I happen to be available. But before scheduling a Special Meeting, don’t they usually try to poll the Commissioners to find out their availability? Ulrich: Excuse me. That is my reason for putting it on here. If you would like to have it at another time, feel free to do that. We arranged and we thought you were interested in moving this as quickly as possible and so we negotiated time for our consultant to come out. This in an interim report which would give probably half the materials so it gives an opportunity for you to give thumbs up or down to what we are doing. The concern on the data and all that information we think it is important to keep it rolling along. Rosenbaum: I don’t question any of that but I mean you might have found out that you had two Commissioners available and we aren’t going to be able to hold the meeting. The question is I guess one of protocol. Don’t you usually poll the Commissioners before scheduling a Special Meeting? Ulrich: Well let me back up. I will change the meeting. My apologies. I used this form as a way to do it for you to say ‘Yes’ or ‘No’. I did not intend it to be a protocol issue. Carlson: No. I just said it seems to me in the past you attempted to do that informally by phone before putting it out on the agenda. I will have to be on phone because I am out of town that week and completely scheduled up and somebody will have to communicate to me the precise rules for phone meetings so we don’t inadvertently break them as we did last time. The fact is that there is a sign you need to give me John? Approved UAC Minutes of 3/5/03 Page 3 of 47 Beecham: I can advice you the rule that you need to post it at the location – 3 days in advance and the meeting probably should need to be open and available if anybody should wish to come and participate. Carlson: Define “post”. Beecham: In a place where the public could see it if for example this is at a condo or something. At your front door to the condo if that is accessible to the public. Carlson: Anything else I have to do? 3 days in advance. Okay. How big is the sign has to be? Sounds great. Okay. Another question? May 21st is that a Special Meeting in addition to the May meeting. This is for the second FTTH Trial Report. Ulrich: May 21st would not be a normal meeting. Carlson: That would be a Second Special Meeting? Ulrich: Correct. Again, if these dates are a problem feel free to let me know. I feel it is important to have these discussions and bring this up in a public forum and that is why I am using this as a way to do it. Carlson: John. I think there was another Special Meeting where you wanted at least some of us to come to the City Council Budget Meeting in May which is the 15th. Am I right? Ulrich: That’s correct. Okay? Carlson: Did you also mention April 9th as a meeting date? Yes, that will be our normal meeting day. Rather than April 9th? I planned on the 2nd for that. Ulrich: I will attempt to have that on the 2nd rather than the 9th. Carlson: Good. So that would be the regular meeting date? Ulrich: Correct. Carlson: Okay. That’s it. Anything else for this Agenda that needs to be edited? In that case we will move forward to reports and meetings and events. Anybody put to together any meetings recently? Okay. I guess it has been a quite month. John, Director of Utilities Report. Approved UAC Minutes of 3/5/03 Page 4 of 47 Director of Utilities Report Ulrich: I do not have a formal report. I would like to take this opportunity though to introduce a new member of the City staff, Karl Van Orsdol who has agreed to be our Energy Risk Manager. He started on March 2nd. He will look after Risk Management Procedures and Policies. Karl, if you mind standing up. I think you have met Karl in the past. He was an employee of Deloitte & Touche and will work with us in that capacity on the Energy Risk Management Policies and Plans. Carlson: John, that brings up an obvious question that I think would be I use for introduction to the rest of the material and that is just in this last week that has been this wild spike in natural gas prices which affects, if it last more than days, starts to affect some of our strategies. How big is it? Does it look like it is going to last a while? Are we heading back into 2001 again? Ulrich: That is hard to say. I don’t think we expected the spike that with all the turmoil in the world that is going on. It seems to be a result of that. That’s one reason we have policy in place to purchase gas on a lateral approach so that we are not trying to time the market. Naturally with the price up as high as it is we are not going to go out and make purchases. At his particular point we do think that it is not going to stay as high as it has and you noticed that the price did go down from 11 down into back to then about 7. So big spike up and you know it has come down significantly since then. Dawes: Could you review the supply portfolio in terms of the Second Quarter and then starting on into the next fiscal year in terms of what is firm and what has yet to be bought? Carlson: We are firm for the rest of the fiscal year aren’t we? Balachandran: For this year FY 02-03 we have basically brought all our gas on expected load basis. For next year we have locked in about 65% of our needs. So we are about 35% exposed for 03-04. Dawes: Does that vary by quarter or is it basically annual contracts you are buying. Balachandran: We haven’t bought any annual contracts. We tend to buy both by month and sometimes by strips. It is all over the place. But I don’t believe that we even bought one annual strip. We have just gone in and locked in a rolling twelve month basis filled in the deficit and as of today, the deficit for 03-04 is about 35%. Approved UAC Minutes of 3/5/03 Page 5 of 47 Dawes: Would that be back loaded in terms of months. Most of that would be in that fourth fiscal quarter of next year? In other words July through October, November is pretty well filled up and beyond that it drops off? Balachandran: Well, a load actually the majority of our load is between November and March. So now that we get to about a 65% hedge we have hedged a bunch in winter months also. Dawes: What is your profile of hedging? Balachandran: I don’t have that on the tip of my fingers right now. I have an annual number for you now. Carlson: What about the electric issue. Last time the state was very vulnerable to gas price jumps on electric side because electric prices were frozen and we have had chaos. Are we as vulnerable again this time? Or are things more stable? I haven’t heard any screaming on the electric side but is it going to happen in another week or what’s happening? Balachandran: Prices are rather high right now than the seven cents range when just four months ago this probably in the 3 ½ to 4 cents range. We don’t see anything and it is mostly driven by gas prices what’s driving it, but we don’t see a repeat of what happened previously both in terms of exercise of market power to very high prices or withholding of capacity that could lead to any kind of reliability problems. This just seems to be a supply demand issue where the cost of gas driving up the price of electricity at this point. The northwest is dryer than normal, so that is another cause for it. Carlson: It shows the whole Rocky basin, the whole Rocky Mountain basin is very dry plus the Pacific Northwest. Balachandran: Right now we have. That’s true. As far as state concern in a reliability side – they don’t foresee any issues. And from our perspective for Palo Alto we don’t have necessary cost impact because we have our Western contract in place. General Fund Long-Range Financial Plan Carlson: These are the same people they didn’t say anything two and a half years ago. I am not all nervous and pushing. It sounds like if it is a short spike we survive but things could get interesting. Let’s go ahead with the new business and we will start with the Long Range Financial Plan. Do we have a Presentation or what do we do? What happens next? Approved UAC Minutes of 3/5/03 Page 6 of 47 Saccio: This is a brief presentation on a General Fund Long Range Financial Plan and I believe what follows is the Utility 10 year forecast and what the City Manager asked the Administrative Services Department or people who wrote the Long Range, the General Fund, and the Final Long Range to come and talk to all the Boards and Commissions in the City to keep you informed about what was going on in the General Fund side and hopefully for you to convey that to all the people that you know within Palo Alto. So I was going to give a very brief 10 minute presentation, a little talk. I think at one point you may have got a long range financial plan that documents about what we presented this in November so it is a little old. But I have copies of it if you didn’t have a chance to read it or haven’t got copies. Carlson: Would you identify yourself. You are supposed to identify yourself. Saccio: I am Joe Saccio and I am the Deputy Director of Administrative Services. I work for Carl Yeats. Carlson: Okay. I am going to send these around. I think it is a very useful context. Saccio: When we wrote and prepared this to the Finance Committee, we were hoping that the economy would get a little better. I am afraid that hasn’t happened so we painted a pretty dim view of the economy and this financial plan and that hasn’t really improved very much. Unemployment back then, and now and Santa Clara Valley is you know in the mid seven percent range and California unemployment rate is about six percent and the US unemployment rate is not much better. Today the Federal Reserve Board in San Francisco, the president of that board thought that unemployment would be really weak throughout 2003 and in addition to that you probably read recently in the newspapers that unemployment figures that were announced were probably understated and particularly in this area. In addition to that you are involved in keeping track of the consumer confidence that is permitted to all times lows. You know that business spending is down with no prospect of it going up. Already what was mentioned tonight about the uncertainty in the international arena certainly keeps consumers and businesses from spending anything. So that’s a little bit of an overall picture of the economy. You also know that this is probably one of the worst hit areas in the country and for example even within California, the third clear sales tax for the Santa Clara County had the worst performance relative to the last third quarter in a one than any other county in the State of California. So the picture locally has not been good. Couple of trends that are impacting what areas in the General Fund or not doing well in revenue areas that is sales tax and occupancy tax have been hit pretty hard compared to the boom year of 2001, our sales tax declined by nearly six million dollars and our transit and occupancy tax Approved UAC Minutes of 3/5/03 Page 7 of 47 declined about three million dollars. So we got some pretty big hits from the boom compared to the boom years. Just a couple of pieces of interesting information that concern us not only are we concerned about the comparison to the boom years but we are also keeping a close eye on whether there are any structural changes in the local economy that may permanently affect our sales tax and to a lesser extent TOT. Recently one of our better auto dealers moved out of the city, Carlson Porsche, and may be as much as 350,000 dollars or so that in sales tax revenue that left the city and we are concerned about another one like the Anderson Honda leaving as well. Couple of interesting statistics automobile dealerships overall in Palo Alto generated about 2 ½ million dollars. Approximately the 25 higher sales tax generators generate nearly 50 percent of the sales tax in Palo Alto was very vulnerable and concerned about that sales tax space. We are also witnessing a lot more competition to our Stanford Mall particularly with the improvements over in Valley Fair and with Santana Row. So we are concerned about some threats to our economic phase. The other very elastic revenue is transit and occupancy tax. As I mentioned before we saw about a three million dollar decline from the boom years and in 01-02 we saw the decline. Occupancy rates, which we thought and hoped, were kind of bottoming out at about 58 percent have really dropped to about 52 percent in the last few months. So we have seen a little more deterioration there. So far, property tax which is next third to the outside largest source of revenue has been holding pretty steady but we are concerned about is the very high occupancy rates in the commercial area. The other threat that you also heard about is the Governor’s proposal about the backfill for vehicle license fees. This year what we still don’t know exactly what is going to happen but this year he proposes to take back 1.1 million and for an annual basis thereafter if his proposal went through we would lose a little over about 2 ½ million dollars. So what are some of the conclusions what I am telling you. We see that there is going to be we were projecting that if we did absolutely nothing which we will not do there would be about 6 ½ million dollar deficit in 03-04. That is without the vehicle license fee being taken away and that would grow to about 15 million dollars ten years from now that‘s if we did absolutely nothing which of course we are not going to do. So I am here to tell you a little bit tonight about what the process are to that we have been going through to close that gap for next year. The City Manager asked all the departments to put together a plan that over the next two years we would reduce our deficit and we are asking over that time for about a 5 percent reduction in expenses. 3 percent for next year 2 percent for the following year. On March 18 the departments and the City Managers will bring all of his proposals for reductions to the Finance Committee and will review them with the Finance Committee and get feedback from the Finance Committee on the reductions that are being proposed by the City Manager. It is a sort of a prioritization session if you will on reductions. We are definitely looking at the cost side I mentioned the revenue side but we also obviously looking at the cost side and that will be Approved UAC Minutes of 3/5/03 Page 8 of 47 apparent on the 18th. Some of the reasons that we are in trouble with the expenditure increases that have taken place, we have to look at our pension cost, our health care cost, retiring medical costs. One big factor is that our contribution rates for health care cost increased by 25 percent this year with the performance of the Pers portfolio being very poor our pension contributions have also risen creating that deficit that I spoke to you about a minute ago. So we are hopeful that with the cuts those reductions that the City Manager will propose on the 18th will bring the budget in alignment in future years. We have a lot of work to do but the City Manager has been meeting with unions as well as Management Confidentials and tends to go out to the community to speak to members of the public about the situation and that is part of the reason I am here tonight. So if you have any questions I will be happy to answer them. Carlson: Commissioner Ferguson. Ferguson: Yeah. Thank you Joe. When you talk to or hear about people leaving the revenue base like the car dealerships, is there any connection to the performance or the relationships with the utility? Saccio: No the issues that we hear about and also I forgot to mention but we do have what is called economic base committee which council member Beecham is a part. We have been going out and actually visiting quite a few businesses to see what some of the issues are and my understanding is the issue with the dealership is not Utilities but is one of space location is very important to them as you know the businesses have grown and part of their volume is extremely important and they need a lot of more space to store those vehicles and they just don’t have it where they are. And they also want a lot more visibility along the expressway. So to my knowledge it is not utility issue at all. Beecham: I agree. The Porsche dealership moved to Redwood City. Redwood City I understand has bought 4 acres land for dealers to park their inventories. That is something that is not available in Palo Alto at almost any price. That’s an issue. One of the big trends of course in dealership is auto malls. Every dealership helps by having other dealerships nearby one this year, two next year and so to begin with. That’s an issue. A trend that might help us is Internet Sales where it does not really matter where the dealership is. Anderson Honda does have a sales operating site on Embarcadero and that ought to be a benefit to us or may be able to leverage that into something else. Dawes: This leads me to the third of the three questions I had. But let me do the second first because it touches on real estate. I can pick out in Exhibit I of your November presentation. Your recap of the city budget projections for the city budget I can pick out a well known general fund transfer from the Utility into the Approved UAC Minutes of 3/5/03 Page 9 of 47 City. Where do I find in that Exhibit I if you had it handy there. It is kind of in the middle of the document. Base forecast. My specific question is where would I find the rent payments that Utility makes to the City? Where do those show up here? Saccio: In the transfer fund. Ferguson: So you treated it just in the transfer. Saccio: That’s right. Carlson: And my third question which Bern has already touched on. Is if the traditional sources of revenue aren’t there what’s the range of new revenue sources that the City is considering other than tax increases? Saccio: We are not considering any tax increases. The general strategy right now is to bring the expenses in alignment with projected revenues. The City Manager is definitely interested in enhancing revenue and training as well. Our IT services is extended out now to Los Altos and East Palo Alto. Some of our HR services are being extended out to Sunnyvale recruitment. Those are relatively minor revenues but we are trying to do that but we are not contemplating any new taxes at the present time. Carlson: I understand the new tax provisions. But I was looking for those other kinds of revenue increases 5 percent here-5 percent there. Every little bit helps. Thank you. Bechtel: Joe, there has been a number of local people in the community or some anyway who talked about the expenditure per citizen of Palo Alto and benchmarking us against other cities. Is that part of your analysis at all? Saccio: That analysis is not in the long range financial plan. You did see if you read the weekly, there were two series of articles or editorials one by Mr. Alexander and one by three council members that addressed that to some extent. The city auditor’s report, the SEA report, I don’t know if you have seen that, to some extent, provides statistics and information comparing Palo Alto to other cities. We also are probably going to be writing a report on a very very high level comparing Palo Alto services to those and other communities like Mountain View, Santa Clara, Fremont and Sunnyvale. But a very high level. There are great difficulties in making those comparisons for quite a variety of reasons but I am truly not prepared tonight to do that. I do have opinions but I don’t think that’s what your question is. Approved UAC Minutes of 3/5/03 Page 10 of 47 Carlson: Thank you. Saccio: Sure. Carlson: Any questions? I have got one. I think it is not a comment but it is a question. From the overall city perspective there are really three giant pots. There is the Utility, which is what 190 dollars or something close to that, and we are in pretty good shape and because in many sectors our rates have been lower, they got to stay modestly lower. We are this one prosperous island in the city which is doing significant cut backs but they look feasible or not they are painful but they are not cutting into mountains they are school district that under the Governor’s proposal that is the worst budget nightmare by far ever even thought of this at all possible but much lesser officially proposed by the States’ Governor. So here we are from the citizens perspective, somebody has to start thinking about ways of connecting those things. I am not saying there is anything obvious or something should be done and it is much easier to run them separately, but that high quality school district not only serve our kids, mine are gone, that’s okay, it is still worth a couple of hundred thousand dollars in property value to everybody here whether their kids are in at the school or not. It is a very very serious situation and I don’t know what you can do or how. It’s sure not easy to try and think of them together. And I know it’s nobody’s job but I am just pointing out this extreme contrast between those and they are all roughly hundred million dollar organizations. Saccio: The only thing I would say to you is that the City Manager has made a very strong commitment to maintaining the payment that we currently make under the covenant I do not know if you are familiar with that. The covenant not to develop and that’s about 6 million dollar payment that basically drives from the utilities users tax and he does not intend to erode in any way that contribution even what is going on with the school district despite the budget problem. I can’t comment on what some of the department plans are yet until the 18th but we also make contributions as you probably know for the maintenance of the athletic fields as well. So at least for the services that the city is currently providing it is certainly that the larger payment to the school district will be and he wants to maintain that and as far as other more minor, they are not minor in dollar terms but the other contributions I am not quite sure how that’s going to go out. Carlson: I am glad you mentioned that because I had forgotten that. It was so many years ago when we did that. I had forgotten that connection. I am glad that you mentioned it. Okay we feel better. We are healthy in a significant way but it is a very difficult situation. Saccio: Sure Approved UAC Minutes of 3/5/03 Page 11 of 47 Carlson: Commission Dawes. Dawes: Just a quick question and again looking at Exhibit 1. We talked about the tax decline and so forth and spending reductions but yet I look across the total taxes collected from 01-02, 02-03, 03-04 and is just a steady climb upwards ditto for the expenses I assume that this somewhat dated in terms of the current forecast for numbers? Saccio: Well you are aware that Exhibit II shows the reductions. Basically you will see Exhibit II has 3 percent reductions and in 03-04 and 04-05 has 2 percent reductions. Carlson: Not in the revenue side. Saccio: The base forecast on the revenue side, we basically transposed the numbers that we had already evaluated. The numbers and in what we thought what were realistic forecast were little less. We are making some adjustments in the budget that will be proposed to the council compared to the forecast. Dawes: As for instance on page 5 it shows sales tax declining from 26 million to 20 million dollars from 01 to 02 and yet on your Table here in Exhibit II it says 20.0 to 20.3 I tend to connect the dots here but it does not make any difference but it doesn’t look consistent to me. Saccio: Well it went from 26 to 20 so that’s a 6 million drop. Dawes: How does it show on this Table? Saccio: Well you don’t actually see these 00/01 number on Table on Exhibit I but we mentioned in the tax that is basically dropped from 26 million roughly actuals. Dawes: Okay. I apologize. Saccio: 99/00 it was 26 million and 01/02 we are dropping it down to 20. The basic premise of the report was erasing the peak revenues and 99/00 and 00/01 and returning back to 1998/99 levels and frankly we were little concern that at least when we did this report compared to now that some of those forecast we are probably witnessing a little more weakness that we are trying to adjust for it in the coming budget. Dawes: Thanks. Commissioner Rosenbaum. Approved UAC Minutes of 3/5/03 Page 12 of 47 Rosenbaum: The increase in pension costs is often cited as one of the reasons behind our deficit. If one goes back say to 1990 the Dow was 2000 today it is about 8000. Normally you would think that it is the sufficient rise in the value of investments so that the pension shouldn’t be any problem. But the council has approved some significant pension increases. They have approved them relatively recently. I am not being critical of you but you are here as the messenger and I appreciate you taking the time but it seems to me at some point it would be beneficial if the City Manager and the Council would step up and take some responsibility for the situation that we find ourselves in both pulses both in regards to pensions and with regards to salaries. I mean two years ago the bloom was long off the rose; they approved a three year contract with our major union which provides 5 percent of salary increase I guess next month. What are you going to do about that? Saccio: Commissioner Rosenbaum what you are saying is accurate in terms of the contracts that were locked into for the Fire Department and the SEIU and to lesser extent Fire but as we go back and negotiate with the unions, there will be the comparative studies and they are typically done negotiating with the unions and if they are we do two things we will look at those and if they are out of line, I would imagine that Human Resources Department would bring that to the attention of the unions. We are I am understanding too that we are trying to shift over to a total compensation package to look at for employees to take into account the benefits that are there in terms of the pension. So we are talking of entire big picture rather than by item by item. It is ironic that when you go out you do look at the ratings. It is the rating agencies when you tell them you are locked into a three year contract their faces light up with smiles and we are now in a situation where we question that but I think that the City Manger has definitely entered into discussions with the unions about our current situation and we will be talking with everybody about what needs to be done to bring the costs in alignment. I think council member Beecham is here and heard what he had to say. Carlson: Thank you. Any more questions? Dawes: I will be Ferguson today. I want to connect Mr. Rosenbaum’s question about the pension performance. Again just focusing on Utilities. It is in our jurisdiction. Liberations are not labor cost item is certainly before us. Does the Utility Pension Profile, Age Profile differ from the rest of the City. Is the utility less burden, more burden than rest of the city? Saccio: I am really not prepared to answer that. I am not aware of any dramatic differences between the utility population and the general fund population. I am really not. Nothing at least comes to mind that there is a big difference. Approved UAC Minutes of 3/5/03 Page 13 of 47 Ferguson: Well this is a closing comment. I like Chairman Carlson’s description of the overall budget problem is 3 different pots of money in spending and activity and I am as much a protector of the utility caucuses as the next commissioner in the panel here. I think this is an opportunity for little brainstorming. There are probably some things we can do in kind. As utilities are already making inter- fund transfers to the city, we will talk about that later in the budget items. But I wish I had 3 good ideas to put before you now but maybe there is something we can do, we can think creatively about trading a tradition from one part of the city to another. It seems it is an opportunity to improve relations, to come with a couple of good ideas I would like to encourage that as we get deeper into the budget process. Thank you Joe. Utilities Long Term Financial Plan Review Carlson: Thank you very much for that sober introduction and let’s go on. I assume to our actual long range financial plan. Ulrich: Yes. Thank you again Joe for coming this evening. I appreciate it. Yes, as we do every year and we have an item on the agenda. This is listed as an information item because it gives you an opportunity to observe the information give us a feedback on it and start give you a prelude of where we are going with rates proposals forecast for work and start to get an idea of the changes that we see are going to take place over this timeframe 10 years and as usual we have the smart people that have worked on this to put together have come this evening and will be led by Randy who will go through the material and you will find some differences in the material that we are sharing tonight as compared with last year with an attempt to. It is clear and forth write and forward looking as possible. So we would appreciate your feedback on that. Randy. Baldschun: Good evening commissioners. I am going to share with you our thinking before we get into some of the details kind of 10,000 foot overview. Obviously the economy is hurting the residences, businesses, the schools and the utilities. Our sales are down. This is the worst I can recall in my 32 years with the City in terms of the impact in this particular area. With that in mind we have been very cognizant of raising rates. This is not the time when you want to raise rates. At the same time we know and we know for sure that we are going to have some increase costs and we have to offset those costs we have to share some responsibilities to do that. So we are managing this and balancing this, tried to spread these rate adjustments over a period. And if you want to look at the end result of that, there is a table that shows the average projected residential monthly utility bills which captures the projected rate increases and decreases over the next 10 years. If you look at the impact on the customer’s bill the proposed FY 03-04 which starts July the 1st you will see that we are proposing a 15% percent water rate increase, 15% gas rate decrease and 15% sewer rate increase and at this point Approved UAC Minutes of 3/5/03 Page 14 of 47 we don’t have any information that refuge is going to go up and certainly storm drains rates are likely to go up. We are not proposing electric rate increase so the bottom line for our customer in Palo Alto is about 3 tenths of one percent increase in the utility bill for all six services in the upcoming fiscal year and you will see that as part of the budget proposal. And if you continue on down the years you will see the increases go as high as 6 percent down then 4.1, 2.5 and 3.6. So this is one of our main objectives, which are to try to even these things out. Now to do that it means that some years you are going to have the reserves below minimum, some years reserves are going to be maximum so that’s what you are going to see tonight when you look at the 10 year budget forecast. You can see particularly in the wastewater collection you will see it below the minimum and the reason we are not raising the rates right away because of 2 reasons. One is the economy, we are trying to reduce the impact on our customers and two; as we found out the gas crisis. We have your support, we have the community support, we have the council support to raise rates when in fact we have to raise rates which we did in the gas situation to build up the reserves. So I have no doubts that if we need to raise rates to build up the wastewater collection reserves again then we will be able to do that. We would have regulatory support. On the gas situation, Girish mentioned that we are right now 35 percent exposed for FY 03-04 and we have been meeting quite recently to try to determine if this is the time to lock in. Obviously it wasn’t last week or last couple of weeks so we didn’t lock in. We were having those discussions we decided to hold off. But we will lock in if we can lock into a good rate. And hopefully we will be able to do it as you could see we are fluctuating quite a bit and when the price is right we are going to lock in and try to get this gas rate decrease to. But depends on the market as always. In the meantime our gas rate stabilization reserve and supply reserve is always maximum guidelines and that is okay because we have saying as you mentioned very volotog gas prices so now is not the time to reduce that reserve. I am not on electric side and Girish will probably give you a lot of background on the electric side but we are expecting as you are all aware after 2005 some very large electric rate increases in the wholesale costs as you try to replace the energy from the cheap energy we are getting from Western and there is 71 percent increase in purchase power costs. Coming down the road in 2005 and 2006 excuse me there is 71 percent increase in Calaveras Debt Service and there is 20 percent increase in purchase cost in 2004-2005 and then another 23 percent in 2005-2006. So that’s going to drive electric rates up and in terms what is means to the ratepayers it will mean increasing some rate increases but we are planning to gradually put those rate increases in fact and use the surplus in the stabilization reserves to cushion the impact on our customers. On the water side we are planning to have some more rate increases I mentioned 15 percent rate increase. That is still due in fact to a very sharp rise in our CIP which you are all aware of and we talked about it at great length and to keep the reserve at a healthy level. Originally we were going to go over the 25 percent retail rate increase July the 1st. In fact that was in our Approved UAC Minutes of 3/5/03 Page 15 of 47 budget last year but again because of this problem that we are having with the economy right now, we reduce it to 15 and we are going to stagger the rates a little bit more. So that takes care of water. I talked about water and gas and so now we have got Girish here and others to talk about the financial situation that is opened up to questions. Carlson: Any questions? Dawes: I think I asked the question last time Randy about Reserves. Having sat through a session at the NCPA Strategy Session and Meeting in Sacramento in January the discussion about reserves. In going through the numbers I do see the fluctuations you talked about and you can follow the dollars as they move from revenues and so on. But what I am not sure I have heard or saw in any of the assumptions you made in the initial was any strategy about reserves other than keeping them in some sort of guidelines and I am just wondering whether in the budget process over a 10 year period we shouldn’t have some kind of a strategy on some reserves that such reserves that look at the reserves in terms of what we think the prices might have, might be for the commodity or what our expenses might be. I guess what I am looking for is maybe some discussion or at least some algorism that you would use to look at reserves on a better way like as a percent or a factor or as opposed to just having a number and having for example you have the men the normal target level and a max level. But I don’t remember us discussing how those level were set. I hope they are not arbitrary but they may. So could you talk to us about the strategy you used for setting these reserve levels. Baldshun: Yeah. George this was before your time and Dick I am sure is probably familiar. We periodically we examine our reserve policy and the council approves the reserve policy. The policy the way we use reserves is to cover one time extraordinary events or to cushion rate adjustments but you don’t use them for recurring expenses that’s kind of a nutshell in our policy. So what we do to come up with these limits is we do detail costs contingency analysis where we look at if it is a supply reserve we look at the supply related contingency and we will assign probabilities to them. If it is under the distribution side of the business we do the same thing except it is the distribution type of events such as a decline in sales revenues like we are experiencing now. That’s what you would use reserve for to shore up your revenue requirements through reserves when your sales are down. We do a very detail. I t is based on numerical accrorythmes. You don’t see those formulas in the spreadsheet but I can point you to CMRs that council has approved for each of the reserves that show you exactly what the guideline formulas are. Now the question that arises often is. Is it time to reexamine the reserve levels? Some think it is fine some think it is too low, and sometimes it is too high. My feeling is I don’t think council wants to revisit the reserve policy anyway. I think in my opinion the reserve guidelines are almost Approved UAC Minutes of 3/5/03 Page 16 of 47 self correcting and the reason I say that is because they are based on the percentage of revenues or percentage of purchases cost and as purchases cost rise or as revenues rise the guidelines levels will rise and you see that in the 10 year financial forecast. The guideline changes every single year because the revenues change every year. So there is the self-correcting mechanism. Carlson: Go ahead Dexter. Dawes: Randy is there any difference in the bonding assumptions I didn’t drag out my last year’s 10 year plan to compare the two but we had a real run around when it was through the 10 year plan that the whole concept of bonding CIPs which had not been done for number of years kind of popped out so are we planning to float more bonds in the utility or are we standing pat on what we did? Baldschun: Our council policy has always been to use current revenues. We deviated from that policy for one time and that was a good reason to do that. But I don’t think that there are any of us that are considering more debt financing. The problem with that is in the long run it catches up with you. In the long run you have to pay interest cost as well as the principal so your rates go higher up. We done the rate analysis and it ends up adding more rate pressure than otherwise would be the case. Dawes: So there is no more bonding bonds sales other than what we did last year. Baldschun: The distribution side of the business is none now. There is always the potential restructuring or refinancing on the TANC and the Calaveras side but other than that none. Dawes: Second. I was looking at the volume numbers in the various plans and electric particularly shows no real decline in sales volume and I wondered if you thought that was really realistic and what you know now in its optic between last year and this current fiscal year and then it is basically sort of flat going into next year. But you mentioned in your preamble that you were seeing some pretty significant volume declines and I guess that was mostly in electric. Balachandran: It looks pretty flat but actually there is about a 14 percent decrease in energy consumption after the energy crisis. Dawes: 40? Balachandran: 14. And we expect that to go back to normal level so pre-energy crisis level by 04-06 period and then we also factored in a 2 percent reduction Approved UAC Minutes of 3/5/03 Page 17 of 47 based on conservation measures that may hot ride into our system. So there is a reduction that we had taken into account. Dawes: Year to date in fiscal 02-03 we are experiencing a year over year decline? Is that what I heard correctly earlier in electric sales? Balachandran: Can you tell which line you are looking at? Dawes: It is 64 on electric sales and GWH. Balachandran : If you look at 001 which we don’t have over here it was about 1100 gigs. We used to be at about 1100. Dawes: No But I am just relating to the comment that Randy made earlier that sales are down this year. Baldschun: If you go through the quarterly report of last month, you will see that the sales revenues were down I believe but they are less than 5%. If they are less than 5% we don’t make any revisions to the forecast. This is a snap short. We will wait and see what will happen for the rest of the year. At least for this particular fiscal year they are below are projections. Now these numbers here that reflect that I think Lucie might be able to answer that. Ulrich: I think you will also notice that there is a slow increase from 981 and into 10 years you are still up at 10.50, which is up. Dawes: Normally utility electric sales are pretty predictable in terms of year to year increases and this matches what I would suspect but times have not been normal for the last few years and certainly from 001 and then to the next year with the big drop and this year it looks like we are having another drop but I would normally expect 2 percent change through typical additional consumption. Ulrich: As you know in the electric area 60 or 70 percent sales are large customers and I would agree if there is something significant that does damage to one of our very largest customers it would reflect in our sales. But what we have seen in the downturn it has been about 0-12 percent reduction in energy set holes to that market. Most of it has been hit in the small to medium size commercial customers, which is a smaller percentage of our total. This is an attempt to have as accurate forecast as we can. I think you should be aware of that if something dramatic happens to large customer it would ripple right through this. Approved UAC Minutes of 3/5/03 Page 18 of 47 Dawes: I know that Calaveras Debt Service is lumpy. I never really understood why other than somebody wrote it down in a bonded denture at some point but Dr. Rosenbaum, I think, yes he has an answer to that. Negotiated with NCPA. Rosenbaum: No. Actually it was quite complex. In 1998 there was a major restructuring of our bonded debt and a number of the cities were very much interested in minimizing cost up to the year 2004 and it had nothing to do with the WAPA Contract. It had to do with the pay of on the debt on the GEO thermal. So there was an effort to lower debt payments until roughly 2004 and there is a spike up. So I think that is an explanation for that. So there is a further difference. In our Calaveras. In 04-05 we recover the part of the Calaveras that we had laid of to Roseville. So we go from 38 megawatts up to 54 megawatts and that is reflected in the debt payments to. Carlson: Okay any more questions on this material? Ferguson: The other side of the rent payment. Question? If you look at the electric utility for example, the rent item line 48 went from 2 ½ million to 3 ½ million from 01 to 02 to 03 and then it seems to stick about at 3 for the next 10 years and there is somewhat similar story for other utilities. I know we had a discussion about the rent payments, the inter fund transfers intercity transfers and the argument was made that the utility was paying what clearly was the market appraisal of the city property that the utility was using but it would seem that the appraisal should come down a little rather than stick at the peak level for the next 10 years. Baldschun: We don’t recall the exact adjustments. There was a one time rent adjustment. That is why it bumps up. Joe Saccio is still out here? Put you on spot. Ulrich: Well we have been quite involved in that. The reason we look at it quite closely. But the agreement with the city is that much of our facilities are on lease and rented land. So there is a process that goes through, looks at the value what that land could be used for if it was not used for utility purposes. In other words it is the highest and best use and that’s with formulae works out and that is where the adjustment came from. Ferguson: But for one of the utilities it does drop after 02-03, 03-04 but for the big ones it sticks up at the peak level and I am just curious why we can’t at least encourage it to drop after the city gets through its current dog budget days. Carlson: Why don’t we research and let you know at the next commission meeting. Great. Approved UAC Minutes of 3/5/03 Page 19 of 47 Baldschun: It will be part of the budget. Ferguson: My second question in on the Telecom Revenue Expense and Commissioner Rosenbaum do you want to follow this one up. I will be delighted to turn it back to you. This was your question. The question is what is included in the Telecom Revenue, What is included in the Telecom Expense. In my recall the expense got bumped up in the CIP O& M 03-04 why does it stick there? I don’t know that we are doing any more big CIP on that. I hope you do some big CIP on Telecom but that’s not on this particular proposal. Carlson: You want to follow up with this Rosenbaum? Rosenbaum: I had a question last month as to whether the numbers that would appear in the 10 year forecast could be compared to the numbers we were given last month about the performance of the fiber loop and I don’t know whether there is a real answer to that question. Carlson: Okay. Any new questions? Okay Dexter go ahead. Dawes: Given the City’s budget crunch and given the intense discussion that the rental rates raised on annual basis seems like it might make sense to entertain sales or some of the properties from the city to the utility is this been factored into any thoughts? In fact having Joe here maybe I propose to bring that up. Ulrich: I can answer that. We are discussing that as other means of not only getting away from rents but trying to find a way to help the general fund and that is going on. You asked the question earlier Mr. Ferguson. All of those many good ideas have been moving back and forth between utilities and general fund departments are trying ways to do that. I think there is a benefit in the long run and you probably heard me say that here before is that utility such as ours that owns and has significant infrastructure is usually better of being on land that utility owns. So we are actually looking at that. Carlson: That’s excellent. Go ahead. Rosenbaum: I was thinking just along the opposite line. You had mentioned earlier being creative and I am sure one way the City would like to be creative at the expense of the utility is to raise the rent as high as possible and I suspect that in terms of sales I don’t think a willing buyer would pay for that land the amount of money that would justify these rents. I think it would be very difficult for the city to make any money going that way. I did have another question. Getting back to the debt service. Staff did single out as part of the rationale for an increase next year the 71 percent increase in the Calaveras Debt Service. But if you look at the Approved UAC Minutes of 3/5/03 Page 20 of 47 chart and it is something we all know there is a corresponding increase in the draw on the Calaveras Reserve and indeed that’s just the way the system is supposed to work so that Calaveras stays as a 3 cent source for us. So if you look you will see that’s exactly what happens. And unless I am missing something there may well be other good reasons for having one increase the electrical rates but I don’t think it is one of them. Baldschun: The withdrawal of the Calaveras Reserve and the sequential schedule of withdrawals you see over the period here are based on what council approved back in 1998-99 when we established the concept of the cost reserve and at that point in time we had a target. I think it was 65 and at present we have 70 million and we had a table from 1998 to the 2032 I believe it was and that schedule that the council approved is what we show here. So we are not adjusting that any more for the debt services. Yeah there is a rise in the debt services as you pointed out but it is based on the schedule. This schedule is previously approved by council prior to this restructuring of the debt service that happened through NCPA. Carlson: My point is that the debt is pretty much constant. The difference between the Calaveras Debt Service and the draw from the reserve is about constant which is what it should be because we want to make believe it is a 3 cent resource. Baldschun: If it is constant. You are right. It is not going to have an adverse rate impact. So I stand corrected. It is going up but it is not the cause of the rate increases because it is being funded out as reserve. Rosenbaum: There was a minor point. I know some people appreciate visual aids. So you went and prepared the bar charts. Personally I am very happy with the Tables but I understand that people see it differently but when I looked at the electric fund 10 year financial analysis it didn’t seem to be right. It was certainly visual but I think you would have hard time showing in 03-04 purchases were going to be 70 percent of that total which is what it shows there. It is all in the nominator and denominator but I think you want to check on those because someone probably made an error. Baldschun: You can certainly talk us out of these additional graphs. We are trying to show you something in visual format just to glimpse at what is happening. This particular graph is not the one that readily gives you a message because it is all based on relative percentages of each cost item to the total revenue climate. The more tallying one would be where you see that the gas price purchases rise quite readily. And in fact originally we printed out a number of Approved UAC Minutes of 3/5/03 Page 21 of 47 required items but there was not much of a message in the graphs so we didn’t show them. Carlson: More questions here? Bechtel: I have one question. I noticed that Randy had a trend that bothers me a little bit. And if someone pointed out before there is a jump for example and I was particularly looking at the administration on cost side. Administration Operations and other Maintenance items and all of the funds and some of the funds is larger than others but in case of gas utility I am looking at 1.1 million increase from 01- 02, 02-03 that is about 20 some percent. If you look at the electric I didn’t do the calculations but it is comparable kind of numbers. Yet further in out years it is all flat what it is going to be it ends up this year. Well I am not sure I believe that’s what is really going to happen because if it jumped up so much from last year to this year why do we believe why it is going to be flat just in gradual increase for the remaining years? Can you explain whets in those items? I am looking at the line number 29 on the electric it is probably not the same line but it is comparable average. Can you explain those expense items? Baldschun: As far as Admin goes Lucie you can correct me. We assume that aren’t going to be any increase in salaries for couple of years at least. So there is not going to be much of an increase in that. We will talk to you on this on the budget process but we have been cutting back certainly a lot for the proposed budget but even going back a year or two the difficulty for you and all of us you don’t see it because you have got other revenue required for purchases for example that are going way up and you don’t really notice some of this smaller ticket items that are going down that we cut but we are cutting quiet a bit Consulting Contracts, Travel and Training all the discretionary expenses, EPRI. We may even find ourselves discontinuing our membership in EPRI. All those kinds of things to us tell us that Admin is going to be relatively flat. The other problem and we have done this in the past when we make assumptions but those kind of expenses going up anyway it has compounded affect on your rate projections and you start seeing this relatively large rate increases and you don’t really understand what is driving up your rates because you have got not only purchases which is typically what drives them but you have got CIPs and other things and then it becomes very difficult as a financial analyst to look at this stuff and try to figure out what is driving itself. The way that the utilities revenue climbing is structured is that salaries are very small piece of the total operation. Our biggest cost is Purchases Cost in the CIP and so whatever you assume on administration is not going to have a substantial impact on the rates but it can if you start plugging in numbers to it every year automatically so we don’t and it has worked out fine. Approved UAC Minutes of 3/5/03 Page 22 of 47 Bechtel: If I go back to the previous year which would be 2000-2001 what was the line 29 on the gas which is the page I am just looking at was this substantially lower about 4.2 million what has been the trend in that particularly category over the last couple of years. Carlson: George you don’t want to know the answer to that. Baldschun: I think we have to research that. We don’t have the details. O&M and Administration includes everything. We have to research that. Bechtel: I guess we will talk about it when we are looking at the Operating Budget and I’ll be satisfied to talk about it at our later meeting. Carlson: Okay any more questions? I can’t help commenting on this item. I think it gets back to Rick's comment about being creative. There is always call it discussions between the Utility Representative and the General Fund Representative about how much the utility should be charged for services that are being provided by mainly the Administrative Services Department and as far as I can tell and Dexter and I met with staff and discussed this the general fund departments won in 1999 and 00 and so when I say you don’t want to know the numbers I have the 10 year forecast from a couple of years back and sometimes I think it would be more useful and we have gone back and forth to include a number of prior years as well as future years. But if you look at the number for Administration, Operations and Maintenance in 1999 and 00 for the gas it was 3.3 million and next year it was 4.6 million and then 5.3 so I think that battle has been lost and there is no more battle to lose there so that is why the number stays constant but it is the part of creativity, it is the utility helping out the general fund who is to argue that the big picture is not a good thing. Bechtel: I have discussed this to raise it myself in a couple of meetings ago about helping the general fund summary so whether that is all of it or whether in fact what concerns me is that in I know how much effort we put into purchasing our commodity. I look at the amount of research that is going into the agenda item that is coming up and that is going to be expensive from the labor point of view, resource point of view to do all of that and as we get into that we are probably going to fight face more operating expenses and so I am not sure and I think all of it is related to transferring to the general fund. I think our risk factor is that our utilities are going to get more expensive to operate in this new world. Baldschun: We just addressed Dick’s assumption about the way the cost allocation process works. It is not where they just give us the number and we are Approved UAC Minutes of 3/5/03 Page 23 of 47 stuck with it. It has never been my understanding. It is very detailed cost allocation accounting matrix. In fact they had a consultant very recently just do it for the city and it involved not just utilities it involves every city department. It is about formulae. It is valid process and it results in higher costs now. City is obviously reducing this cost quite a bit and in the upcoming budget years. So we are going to obviously see some costs going down because city has frozen positions, not filling positions and that should help the utilities. At the same time there have been a lot of comments about how difficult the financial situation is in the general fund and we are going to do things that are legitimately proven to help them. For example when we have a power line down the street and they send down the police in the field to regulate the traffic they don’t charge us for that. If there is a gas leak the fire department shows up and they don’t charge us for that. It is in the cost allocation plan. Well, I think we should pay for that if we are getting that service. We are going to look at those kind of things and we have are very own scrutinizing eyes in our department as Jose Saccio would attest that we go over these things with a fine tune comb. Carlson: Any more questions? Any questions on water? I know Jane is here and so? Okay I guess there is no further questions on this side. The next one is related. That’s the in fact I don’t understand the difference between the long range financial plan and the long term financial plan. Okay I see. So we have our strategic plan update on top of this then? We have talked about the financial side? Utilities Strategic Plan Update Ulrich: Yes we do. As you can tell we have a full evening. As part of our obligation and communication plan is we put together a semi annual update on our Water-Gas-Electric Strategic Plan and since we have a very detailed strategic plan that you all are familiar with, it allows us to take those strategies and convert them into measurable performance and what you have this evening is another attempt to quantify and take the quantify results and put them into a way that is easy to track and give you and City Council and the residents of Palo Alto a good idea of how well we are doing, or what areas we are not doing as well. So the report this evening is broken down into two parts. The first part deals with the Implementation approach for the tracking progress on the Strategic Plan and referring to that is a balance scoreboard card. This approach will be implemented starting in the next semi annual update. For the second major part of this report deals with on reporting on the accomplishments. We are going to focus on the balance scorecard for the brief presentation that Girish will give you and then that will jump of into questions and answers. Balachandran: I would like to introduce Kevin Kelly who just helped me with this heavy equipment. He prepared this presentation. He was the main staff member who developed, who coordinated this report. Your report actually has two Approved UAC Minutes of 3/5/03 Page 24 of 47 sections to it. Basically one section talks about the balance score card. The second section talks about accomplishments over July 02 through December 02. I am not going to spend anytime actually going through the accomplishments. I will be open to questions. I am going to limit this presentation to the balance scorecard approach. In past strategic plan updates we have given you, we have told you that we would be working towards developing measures and concentrate on some targets so that you know qualitatively in some cases and quantitavely in some other cases how we are doing and also we needed a way to present to the public integrating our performances over several areas and previous attempts tend to be pretty verbose is what we have come up with. This chart basically shows 4 different perspective of the balance scorecard. Customer and Community, Environment, Financial and People. What you see in fall is essentially this chart with a plus zero or minus attached to each box that is going to be basically an appraisal of the utility’s progress in these four perspectives. So it doesn’t get any more compressed than this. But below this if you drill down into each of these perspectives it gets into a greater level of details. Each of these perspectives map into the seven strategies and objectives as this slide and the next one we show you. We have these four objectives and on the left hand side and on the right hand side we have the map into which we bounce our four perspectives it maps into. And the other piece that we couldn’t put up on the chart over here on the slide because we didn’t put it up on the slide but you have it in your report and we also have it on the extreme left of those handouts stuck up against the wall which under each of these perspectives we have a set of measures and we have given a plus and minus to each of those measures and essentially at the end of the year we fall in between the plus and the minus we can say okay we have a neutral score on that particular measure. We do better than the plus then we give a plus and so on. So that is essentially, we also plan to have the budget key impacts, impact plans and the measures replace with the balance score card measures so that the entire utilities department will have essentially one set of measures where you can look at across the divisional work that goes on in the utilities department. That’s basically it and the only other thing I need to mention is in future maybe reintegrating what John already said is the future reports that you are going to get you where essentially we are going to is the balance score card, the four boxes of the pluses and minuses and then you are going to get this table which is in the extreme left of the wall with how we have done with each of those different measures. That is all that I have in my presentations. Open for questions. Carlson: Okay, go ahead Dexter. Dawes: I think this is terrific. The list of accomplishments in prior years has left me sort of cold. It looked very awesome and overwhelming but you never know what you really didn’t get done or it is stacked up with others and the way I look at your detailed list is basically benchmarking what it does on lots of different levels Approved UAC Minutes of 3/5/03 Page 25 of 47 for each of these items. I think it is an outstanding approach and I am looking forward for the first actual one. I hope that you do it at the same level that you show on the Table in other words customer satisfaction is 3 grades reliability to 6 and so forth. You don’t try it summarize at all into just a few line items. I think that having that level of detail is absolutely necessary. Balachandran: We will have both. Dawes: Thanks. Great job. Ferguson: Also great job. Progress in the right direction. I guess a question and a comment. The question is when you look at the balanced scorecard design, does it move us closer to the way other utilities really do measure themselves. Dexter mentioned benchmarking, does it really get us squarely in the benchmarking regime? Balachandran: Actually I would say, probably be among the minority of utilities that measure themselves this way. We are going to be taking a lot of information from APPA standards benchmarks to measure ourselves, but the structure, the model that we have chosen lends itself to policy level folks like you, and the council and the public being able to see what direction we are going. There are not too many public utilities which do this. But the data that is going to feed into this final measurement is used by many utilities. Ferguson: And the comment or suggestion is that you are suggesting putting the table page following the scorecard, what I would like to suggest that the page following the scorecard be nothing more than the minus items with your proposed action for cleaning those acts and then proceed on to the bragging rights page 3. Balachandran: Actually I forgot to mention one thing which is actually when we have the pluses, the zeros and the minuses the next thing that we also have is the Action Plan. Essentially, what are we doing to maintain the pluses and what are we doing to move us from the minuses and the zeroes to a plus? That is our goal to have a plus in each of the different perspectives. So there will be an Action Plan associated with that. Ferguson: Again, it is all headed in the right direction. My preference would be zero in the minuses. The average will always going to be a plus on Page 1 but turning immediately to the things that deserves attention and then the rest follows logically. Balachandran: Thanks. Approved UAC Minutes of 3/5/03 Page 26 of 47 Ferguson: Great stuff. Carlson: Go ahead Dick. Rosenbaum: Staff was kind enough to present everybody with this Auditors Report that came out in January, the service efforts and accomplishments. In it as I am sure you probably noticed there was a plot of the average bill for 10 different communities. I know I previously brought up if we wanted to continue simply comparing our rates with PG&E rather than saying including Santa Clara and similarly placed Muni. Are you having any second thoughts about them? That is including another comparison in addition to the comparison with PG&E. Ulrich: I don’t think we have any second thoughts in the sense of dropping a local muni from a comparison. I think it is good to. Rosenbaum: The other way around. Your report just includes PG&E. It was the auditor that said. Ulrich: I think ours does include, if not should include the comparison you are referring to. Rosenbaum: But, I mean it doesn’t and the last time I brought it up there was some reluctant on part of the staff to include comparisons... Balachandran: If you look at Attachment B. Look at C4. Items 2 and 3. There are comparisons to Munis. Ulrich: Of this Attachment B, page 2. Balachandran: We do have a comparison with PG&E. We continued comparing with PG&E but we are also including the average of the NCPA Members. For gas it is more difficult because there is no real competitor. Rosenbaum: There is only one other competitor. I appreciate that one had gone right by me. I do think direct comparison with Santa Clara might help. Actually I ordered a chart. Santa Clara is showing lower residential costs than ours and I think Randy had some concerns whether or not that was really accurate. Thank you. Carlson: Any more questions on this item. Go ahead. Approved UAC Minutes of 3/5/03 Page 27 of 47 Dawes: C4 again you talk about electric supply versus PG&E are you talking about our purchase cost or are you talking about our billing to our customers versus PG&E bills. Balachandran: Yeah, we are just talking about commodity costs. If you are talking about what we charge our customers versus what it costs us? Dawes: I am trying to figure out whether or not C1 for instance Electric Supply Versus PG&E you are comparing our costs of electricity to PG&E’s cost or prices we charges our customers to the prices that PG&E charges its customers. Balachandran: Well, in PG&E’s case, I think it needs to be apples to apples. We don’t get. Let’s look at another Muni. Say you are comparing ourselves to the average; the only data we get relatively easily is the price they charge the customers. We can’t go in and then. Dawes: That’s what I hope the answer would be. It says supply would be electric rate versus PG&E. Balachandran: Here we are just talking about the supply component of the rate. Dawes: So you are going to try to discover what PG&E pays for their electricity. Balachandran: Yeah, that is easily discoverable. Because we know what they charge their customers for supply is pretty easily discoverable on my electric bill at home I see that. They tell us what the distribution rate is and what the supply rate is. Dawes: Are you also showing what we charge versus what PG& E charges? I think that is much more relevant to our customers. Balachandran: Maybe an intense agreement over here Commissioner Dawes. Dawes: I see one is rates versus local utilities. But it doesn’t talk about then you are averaging normal rates rather than specifically against PG&E, Santa Clara and others And I think it would be as fix as more relevant to have the specifics. Ulrich: We can do about anything you want. This is our approach we are bringing. I personally don’t have a particular bend why we want to compare with Santa Clara but if that’s what you want to do that’s what w can do. So? Dawes: I would benchmark that’s all. Approved UAC Minutes of 3/5/03 Page 28 of 47 Balachandran: There are additional rate comparisons if you look at C1. I compared rates and that’s the entire bundle rate comparisons. Dawes: So one set of data shows rates versus rates and another set shows supply costs versus supply costs. Balachandran: The way it is written may be, I would say at this point would be supply prices, the price we charge for supply versus the price that PG&E charges for supply what C4 is. Ulrich: It is the rate minus the distribution cost. So you are just looking at the supply component of the entire rate. It is in C4. The supply part of it. The C1 part is the entire cost that the customer pays and their rate. Beecham: As I understand that it follows the fact that your strategic objective which is lower supply cost. So you are measuring your supply cost. Ulrich: Correct. Dawes: Thanks I would be interested to see how the first one works out. I think there will be a lot of wrinkles to iron out. Balachandran: We completely expect that. Ulrich: We will be pleased to reduce the amount of these that we look at. Let me just go back and as I think as a reminder of what we are trying to do is that we want to and my goal and the departments goal is to have really 4 key items that we measure. Let me see if I can count them all in one hand and they should be reflective of why we are here and be able to measure that. Then below that is all of the measurements that we have to build up towards this balance score card so you should be able to drill down and look at all the details. But our objective is not to build so many measurements that when we spend huge amount of time trying to gather all the data then we start to lose focus or we divert our resources of people into measurements rather than going of and doing a high priority work. So if you have ideas on things that are more important than what we have the way to build up towards these score cards then that would be great to. Carlson: I just want to add the comment that there is clearly a lot of thought that went into this. I think it is a great job. It is important to include the two different aspects like the grand total rates. Are we getting lower supplies too? And measuring against IOUs and Northern California Munis. It is a great combination of things so it is pretty good. Approved UAC Minutes of 3/5/03 Page 29 of 47 Ulrich: The whole idea is that you want to have trust and confidence of your customers that they are getting great value for the money they pay. Where else in California any way do you have a utility that provides virtually all the utility services that you can make comparisons with and we sit here and methodically try to work out the rate structure so that we are not blasting the customer with significant rate increases. So I think this is a whole attempt to try out measure and balance that and be able to answer questions and give the customers confidence that we are doing a great job or that if we are not in some areas then we have a plan to make improvements. I just returned from a trip where I was with about 70 other utilities comparable size and they were all municipalities like Palo Alto. There were few other cities that have measurement systems. But when you talk about strategic plan and while you are here there are very very few utilities that have gone to the point of being as clear about why we do things and then get to buy in and report to the City Council on the strategic plan. So it is quire a direction that we have gone, taken. L.E.A.P. Carlson: Okay. Any more on this? Long Range Electric Plan. Last but by far the least a very important item. Ulrich: I think by far the most important area that we have for the foreseeable future. You know our supply is going to change significantly at the end of 04. We think it is extremely important to communicate into the community of about what is happening with our energy supply at the end of 04. As you know that and it gets confirmed to me virtually everyday is I talk to others there is probably no other utility in a very big geographic area that has had a four year contract to supply its virtually all of its energy on around the clock firm bases for the last 40 years. Now that has been an extremely important asset for us but we are going to go into an area where we have enjoyed such good rates that anything that we go out and replace a portion of it is going to come at a higher price and additional risk because of the diversity and because of where that energy comes from, reliability of the transmission system to deliver it, the impacts that FIRK is trying to have with locational marginal pricing and a number of other factors that will increase cost. So if there is one area that we have to do an extremely good job is one to have a very well thought of plan for the long term supply. Because commitments that will be made in the next year or so will live with us for a long period of time particularly if we take an aggressive role in renewables and make commitments on energy resources that we purchase have long term contracts or equity shares. So you are going to see tonight the next step and that methodical process to plan and execute this and you will see on the first page under progress to date, the items that are in yellow have been accomplished and what we are doing now on the presentation this evening will be the final LEAP implementation process and this Approved UAC Minutes of 3/5/03 Page 30 of 47 evening is a expectation that this is presented as an information item but with gathering input of various you think a week or need more work need to be explode more or focus that says we are going in the right direction. Because then our next step would be to take this forward to the City Council and put this all in place. So Jane is here with us. She and other members of the supply staff have put a lot of time into this and we are here for a dress rehearsal. Jane. Balachandran: Just an introductory comment over here. Of course you know Jane Ratchye, but you also know Swami Shivanathan sitting right back there, Karl Knapp upfront and Tom Kabat. They were all involved in putting this together. Jane did pretty much all the modeling and putting the report together. It was a team effort. I think John mentioned that this is a presentation and the report is also for information and we are looking forward for a feedback from you. We plan to come back next month pretty much incorporating your comments. The report that will be an action item and then taking it to the City Council. With that I hand over to Jane. Ratchye: Good evening and it was a kind of big report and it had a lot of detailed appendices and I don’t know how detailed you want to get today but this presentation just kind of walks through the main body of the report mostly the main conclusions and the main topics we went over. The first one John already talked about the actions we have taken to date and we are in this process of looking at our big post 2004 resource hole. There was a lot of analysis done on the long term. The whole 20 year period starting in 2005 for which the Council has adopted the approved LEAP guidelines so we developed a number of different portfolios to meet those guidelines. We will go over what those portfolios were and the analysis it was done to date on those portfolios and the preliminary recommendations we have at this time. And as Girish said this is kind of an initial report and we are hoping to get some feedback from you tonight and then we are going to return next month with actual action item for you. But this is a sort of preview of that. Then as you will see some of the long term actions that we will likely take probably wont be in place in the first few years and so we have looked more closely at the first two or three years of the post 04 period and we did a little bit of analysis on that period given that we may not have a thermal plan component as part of the long term portfolio so we looked at that and did some analysis there and we have some recommendations that we are looking at this time. There are also some operational considerations, some staffing concerns and expertise and skills and we look at that and then the next steps. John already talked about that what we have done and what we need to do. When you look at the LEAP guidelines, they do provide quite a bit of specificity really about what we want and how we want to break up our load after 2005. There are some things that are pretty concrete such as the renewables, accusation plan to have in place and that we want between 25 and 50 megawatts something like a thermal plant or Approved UAC Minutes of 3/5/03 Page 31 of 47 something that looks like that and if you combine all those different pieces of the LEAP guidelines, you get a picture of the future that looks something like that. You can see that Calaveras is at the bottom, it is kind of a big slab, Western is there and we are actually assuming, it is hard to see in this graph, but we are assuming that the availability of that power actually declines slightly over time just what regulatory pressure, and other pressures sort of expecting it to decline. This is the picture of how much would be available on an average hydro year. We are showing the two slices of new renewables that add up to 20 percent by 2015 as in the guidelines. There is the yellow little 25 megawatts piece that has already been purchased that is a five year product. I know you have heard about that particular product in a fair amount of time. The guidelines says that we are supposed to leave 10 percent of the portfolio approximately for the years 2 to 5 open or exposed so that the years 2 to 5 leave that exposed to market gas market or electric market one of those and from 5 years on have about 10 or is it 25 percent exposure to the market. So these are the top two slices. The red bear is the thing where we have the resource deficit. So if you look at that you can still construct that fit that quite the different portfolios. And these are the portfolios that we looked at. We tried to get a broad range not slice it and dice it too much and I think that is the next step. And all of them except for two comply with the LEAP guidelines. The first one that do nothing does not, and then we devised another one called the Green that doubles up on the renewables and that also does not comply because we expect that to exceed that cost that was allowed for renewables. But if you look at all of them, they all have Western except for the portfolio that we call the Hydro Hedge Portfolio and in that somehow we are able to find the product we are assuming where we trade money for a guarantee that we get the average amount of Western every year, instead we are buying an insurance policy and someone else is taking the risk on all the hydrologic uncertainty. Assuming that is available at some affordable price or some price. The Calaveras that we have is available on all of the portfolios except for the one call minimum Hydro. In that portfolio we assume that we have laid of the Calaveras in its entirety at the market value at the time we get the model. All of them have the 25 megawatts Q1 Q4 5 year purchase. They all have the Seattle lights; they all have the renewables as I talked about except for the super green that has twice as much. There is also a portfolio called minimum congestion that has an additional amount of 5 percent of sort of an expanded demand side management program and that’s also component of the super green portfolio. Forward purchases in the amount of about 25 megawatts are components of a portfolio that we call max fixed price and the minimum hydro portfolio because that is when you are laying of Calaveras that is sort of to replace that. Then maybe I should actually go across the other way. I don’t know probably started this backwards rather than come hack to the theme. The 25 megawatts of thermal generation is in all of the portfolios except for the tolling portfolio but that is essentially look alike for that and the super green does not have any thermal generation. In the base case there is 25 megawatts of Approved UAC Minutes of 3/5/03 Page 32 of 47 generation located outside the Bay Area, let's say the Central Valley. In the max fixed price that is the same as that then there is the maximum thermal portfolio and in that case we have 50 megawatts instead of 25 of that same kind of outside the Bay Area generation. The towing portfolio has the thermal in the form of a towing contract. We are calling another portfolio max local and there is 50 megawatts there but it is sited in Palo Alto. The main hydro that we lay of Calaveras portfolio has 25 megawatts located outside the Bay Area. The minimum congestion portfolio has 25 megawatts of thermal generation located inside the Bay Area and then the Hydro Hedge Portfolio we are able to somehow lose the hydro risk associated with Western has its 25 megawatts of generation of outside the Bay Area. In all the cases we are assuming that the gas price for the toll or thermal generation is floating on the market except for the max fixed price portfolio. Of course we would in practice even if you bought something like a 30 year commitment to a plant you at all times have the option of fixing in the gas price for some creative time you may want to fix it for the first one or two years or whatever the lateral is and some gas. But for this analysis we assume it was floating in the market. Then we took these portfolios and tested them under future scenarios which include a lot of uncertainties. And the main end certainties are hydro electric year, gas and electric market prices. We also tested some other variables that did not turn out to be as significant. We did look at how much Western would cost because that remember that contract which is take or pick contract. You just pay your share and you get your share from the output of the project. So we really don’t know. We don’t have a whole lot of control of what the cost is and how much that cost increase over time is another unknown and how much in an average year the Western availability sort of declines in time. The pressures you can see from here and you can’t really see from here. Then one very large uncertainty for us as you have heard many times is congestion cost and when we looked all that and we stepped up these portfolios they looked like this in the preliminary analysis and I am not sure how well you can see this picture. The portfolios are at the bottom and they are in order of the expected value that means of the cost of the portfolio. The cost of the entire portfolio whatever it would take to serve our projected loads to meet our projected loads. The band I showed at 10 and 90 percent band. The bands get thinker for some of the portfolios for example if you look at the minimum hydro portfolio you will notice that the bands sort of tighten in and so you can see that there are some risk advantage at least to laying of Calaveras. So that’s generally how they stack up when you look at the cost to serve load as an objective function. Bechtel: Can we ask questions? I was surprised at how really close the median or the expected value was. I first looked at it and I said I could see that but then I noticed that you have an offset, a scale that starts at 45. We are really looking at really 10 million dollars swing but from all of the options this surprisingly tightens in my view. Did that surprise you or given all the different portfolios. Approved UAC Minutes of 3/5/03 Page 33 of 47 Ratchye: Well it doesn’t surprise me that much because they don’t differ that much. They pretty much all have Calaveras, they all have renewables, they all have Western, that a big component of the cost those resources and they all have not different amount of energy on the market. Some of them have more thermal than others and the thermal and the model is dispatched as needed and so when for example gas prices are low and you can produce the energy for better than the market price for electricity then the thermal is dispatched. So if you look back they all meet the LEAP guidelines, they all meet that big overall load resource band I showed. They are not that dramatically different. If you look at the do nothing that one does not have any thermal component. It is the most exposed to the market. But even that one on the last chart, that one if you look at the risk band is wider for that but the expected value isn’t because the expected value is the likelihood of each outcome times that outcome. Bechtel: Well I guess what my conclusion was after looking at that is that it may be a tough call to make some of these choices but on the other hand if we make the wrong call it won’t be disastrous either. Balachandran: I think you are right Commissioner Bechtel and actually it is not really a surprise. We have gone through a long process to come here and we have defined alternatives and narrowed down the options to get more and more to the 7 guidelines. Jane made a presentation to you maybe a year or year and a half ago where we had analysis which is much broader one which said 100 percent floating, 100 percent fixed then we narrowed it down to the primary objectives then to the 7 guidelines so within those already narrowed down field now you have 10 portfolios so it is getting down to a more granular state right now. Bechtel: Thank you. Ratchye: I think that one of the conclusions here is that we do need to do some more analysis and I think some of the interesting ones is to stress these portfolios and find out when they, what makes them look good or look bad. For example what is congestion have to be to make the minimum congestion portfolio for example or the local generation look good. What the gas prices have to do, what the spark spread had to do. Then after you do that you still don’t know how likely that is but that kind of analysis I think it might help differentiate some of these. As you say they don’t differ a whole lot by expected value but they do differ by some degree by risk on the cost. And let me get to that slide. This is just another way. This is mark to market value for the same portfolio. So that if you were to serve that load entirely at market minus the cost that we are going to serve the load and the thing of course you don’t want to see is your mark to market value going below zero. Approved UAC Minutes of 3/5/03 Page 34 of 47 Dawes: I was perplexed as to how you assume what the market was versus what the assumption of what our cost would be. I mean they are both sort of wags when you come right down it. I understand the theory but the practicality of now plugging it into the model and saying well the market cost of this in an out year versus the cost to serve the load and the out year for this particular approach I don’t know how you made those assumptions. Ratchye: Well you have the electric market which is a large variable in the model and it is going to be high or low in any of the years. And so when it is high when the market cost is high then the market cost which is the first part that you have to calculate to subtract cost to serve load from to get from mark to market. Because mark to market is the market cost or the market value of your whole load minus the cost of the portfolios. Dawes: So it is what we had with our Enron Contract when we were upside down. I mean that was very easy but we knew what the numbers were. But now you are projecting out in the future what the market. Ratchye: Are you asking why our load generally is positively mark to market. Dawes: If I was making this chart I would say we are always going to be less than the market. Ratchye: Well that is the thing you find. If you lock in for example if you buy a thermal generation plant and gas prices are high and electric prices are low you are out of money on that particular product. You are unlikely to be out of money on Western and Calaveras because we have prepaid a lot of Calaveras cost or generation cost. Western in a low dry year that could easily be out of the money. Dawes: You added a 33 dollars so that it seems like it could always be in the money but a dry year would affect the cost. Ratchye: Then if you stack on the worse side of everything for example Western availability declines dramatically over the years. The cost is on the high side. Dawes: Again in a typically dry year the market prices are going to be very high too. So it is just a question on how you pick up your assumptions. Ratchye: And as you see the result will show just what you think that we are really in any of the portfolios negatively marked mark to market. Approved UAC Minutes of 3/5/03 Page 35 of 47 Dawes: My final thought was I really didn’t weight this slide highly in my probability because assumptions upon assumptions were just too query. Ratchye: This is a sort of interesting slide from my perspective because you are plotting both key features that you want to make your decision on. The cost. So you want to go towards left of the chart, you want the lowest cost and risk. That means the difference between the highest cost the 90 percent and the lowest cost that band that you could have, so you want rour risk to be down. So your happiest place would be to the left and down. So if you kind of have a hate to call a fish and front frontier but you have some portfolios that are clearly inferior to others for example the maximum local looks both higher cost and higher risk than minimum congestion portfolio. The base portfolio looks fairly bad the maximum toll also looks pretty terrible. Hydro hedge looks expensive even though its risk is lower than some. So this is sort of an interesting way to display the results but remember this is a preliminary analysis and certainly since I have done this market prices have changed quite a bit. But let me get there is the picture o the best 4. But basically what conclusions can we make from the analysis done today? It looks like the best one was this maximum thermal the 50 megawatt portfolio. So it lights a greater commitment the 50 megawatt than the 25 megawatt and it liked it located in the Central Valley of course it has totally highly dependent on congestion cost and we have a huge amount of uncertainty on that. But the problem is you know as far as the implementation, these plants don’t come every day. They are very lumpy; these are big commitments so we need to have actual projects to look at with actual cost, actual proposals. So we have to look at that a little more and as I said hopefully over time the uncertainly around congestion cost decline. Is that true? We do not know how much time. Time will help some of it I imagine. So basically a lot of exercise was developing this model in a way to look at this stuff so when we do get proposals in we can test them in this sort of framework that was developed. The initial recommendations that we do have for this long term perspective are to initiate the procurement process for the common elements. Did I miss something? Oh yeah. The things that we have already done, or things that are clear with no further analysis are that we need to one action we have already taken actually is to buy this 25 megawatts piece of power for 5 years. We have already executed that. The next thing that is very clear with no further analysis is to begin enquiring the new renewables to meet the guideline #7 and NCPA is coordinating this activity right now and we are very involved in that and we are going to go forward with looking at that and acquiring that probably through NCPA and you will be hearing about that as it gets further along. So those are the things we have done and the things we recommend going forward right now is to prepare some sort of an RFP announcing to the world in a more formal way than we have done. We have had many informal conversations with lots of marketers and suppliers and other municipalities and NCPA people looking at where the site power plants and how to get interested enough to get them build. Approved UAC Minutes of 3/5/03 Page 36 of 47 So making that formal announcement to try to acquire some amount of thermal generation for a tow in contract. So that’s the next thing we would like to do. We also like to identify specific opportunities for local generations and there is already a CEC funded study underway to help us look at that. We are looking at that trying to find sites that would provide high value for the distribution system for adding reliability and so those sites whether they are those may be sites for distribution generation, cogeneration maybe even renewables where we can put some renewables locally. So we are looking at those sites and are underway right now. Then the last thing we already mentioned is that we need to refine the analysis that we started here and get more information about certain projects particularly different ways to hedge the hydro risk because as you noted they look very similar and it is the hydro risk which is the driver between most of the risk that we are seeing here because there is a huge amount of uncertainty about how much we have to buy and then of course there is market price risk too but they together is mostly driven by the hydro risk and so we want to do some additional stress testing sensitivity analysis. Now I do not know if you have any questions at this point I am going to turn more of looking at the first three years of the period. Carlson: Any long range questions. Go ahead Dexter Dawes: Actually I wanted to ask an ultra short range question. This obviously starts in 05 when our world changes. Our world may change before that. I read in the newspaper the judge is ordering another conference to push the PG&E reorganization forward. Are there any aspects of any of the plans that are been sorted out which would cause our existing structure to be changed markedly in other words obviously Western Contract wouldn’t it would be some of the supplementary contracts which PG&E is in the hook for and how variable is that? Balachandran: We don’t think it is very likely under any kind of PG&E or CPUC reorganization plan through 04. We feel pretty safe. Now there is always the risk of PMA being privatized things like that. Even those risks don’t seem to be any higher than previous years so you are looking at ultra short term we don’t see any heightened risk in Western Contract... Dawes: Uncertainty in congestion cost given as the reason for not pursuing a thermal plant at this time. But why does the congestion cost affect the thermal plant anymore than the contract we signed with Carl? Ratchye: I don’t think that it is stopping us from going forward. I think we are going forward but not going to sign up for something tomorrow. It will take us a while to get around to making a commitment to some piece of equipment. But the reason that the uncertainty and congestion has something to do is where would we look for that thermal. Do we want to get something inside the Central Valley or Approved UAC Minutes of 3/5/03 Page 37 of 47 concentrate more on something in the Bay Area which we know is more expensive or even try to locate something within Palo Alto which is more expensive still? And so the reasons we don’t want to spend that money is if you thought or knew that congestion cost were going to be high. And how long are they going to be high for. Twenty years, are we going to solve some of the congestion problems with additional transmission or additional generations in the Bay Area. How much more would you spend to site it within Palo Alto, within the Bay Area that depends a great deal on what you think congestion is. Rosenbaum: I guess that the numbers you have the incremental cost of sting here versus the central valley is considerably larger than what your congested costs are likely to be. Balachandran: For the purpose of this analysis we used is assumption. But we are also caviating very strongly, that congestion could be much higher and that is some of the analysis we have to do. That is what Jane mentioned what congestion cost have to be on a sustained basis to justify a plant within the Bay Area or in Palo Alto something like that. So there is more analysis that needs to be done. We had to use some assumptions. We used that but we also have estimate of congestion cost go much higher than the tough average long term estimate that we used just for the study. Rosenbaum: Am I correct that congestion cost will affect every source of electricity except for local sited generation? Western or any contracts that we enter into Calaveras they are all subject to congestion costs. Balachandran: Yeah you are correct. And we talk about local that is within Palo Alto and within the Bay Area, and then the Central Valley and so if you site something in the Bay Area and you buy power from there our exposure to congestion would be less than in the central valley and of course the least exposure to congestion would be in Palo Alto. Now in terms of mitigating that risk this is a supply resource kind of official stand we can take but also on the regulatory side we will continue to interweave with FIRK, John has been to Washington DC recently and I think Bern was there too talking about SMD with Senators SMD is Standard Market Design which is basically the grandfather of MDO2 which is California version of Standard Market Design. So that is another area where we spend resources to try and mitigate that damage that location market pricing may cause. Rosenbaum: The reason why I bring all this up based on the numbers you have. The capital cost of a thermal plant today if you are assuming 4 percent interest is marvelous and are we passing out an opportunity that might not be available later? Approved UAC Minutes of 3/5/03 Page 38 of 47 Balachandran: I think John wants us to move like three months before today. I mean the dollars we are talking about are pretty substantial so we our recommendation here is to actually go out to the market and look what is available out there in terms of generators. W will be also talking to folks who own generators close by. We have talked to them as reported to you on several meetings. But if you are going to get formal about them is coming to a point of taking some action, getting some feedback from you today, action item next month you will have more behind us to go out and get something in place. Rosenbaum: Thank You. Carlson: I want to add to Dick’ point that only if you have this window of focus at money that is not going to last forever, there are a lot of generator units that were ordered and sitting on GE shelves, I am sure you can get a hell of good buy right now. So it is a buyers market from a couple of perspective for a while and that window will close. Carlson: Any other questions in the long range issues here? Go ahead Dexter. Dawes: I wanted to follow up again on Dick's questions on the thermal plant issues. I actually didn’t get the idea that congestion was the primary reason, that a deal was not eminent or under serious discussions with some entity but there was unnamed reasons and I wanted to explore what those unnamed reasons were and it was certainly clear relatively from the analysis that we should be heading in this direction and from some comments from last year I know that intuitively we all had the thought that moving towards ownership of a plant or a piece of plant would be a very good approach to take and I am disappointed that this discussion seemed to have flurred away, stopped I do not know what the proper terminology is or why that is the case and what we can do to get it going and I might also add that in terms of location one of my portfolio company said that a 35 megawatt plan I have seen Stanford 509 megawatt plant and they are basically pretty small and we have a utility yard that we have a real small one right now and obviously has the gas hook up as connections to our own utility yard. I don’t know if they are big problems that are a trump that is a location but I would be interested in the views of that as well. Balachandran: Basically, in terms of going forward to follow through our sentiments that’s one of the recommendations. That maybe slower I guess than what you are expecting. We are heading in that direction, to get back, put an effort to get some responses from the market. One thing we need to understand is we don’t drive too many generation projects, we are too small. We are looking at a plant of between 25 to 50 megawatts. We are going to write and curtail someone else’s project. It is difficult to build generation of this size that we modeled over Approved UAC Minutes of 3/5/03 Page 39 of 47 here. With us being the prime role of the project. The assumption used assumed 250 megawatt plant and there is no way that Palo Alto is going to be forefront of that. It is going to be some kind of a joint project and I think I hear what you are saying not to flutter away chances and to move forward quickly. Dawes: Exactly and I certainly assume that NCPA has been very involved in these discussions. I am sort of surprise with the number of entities involved in that and other Munis that are not involved that are we haven’t had some coalescing of schisms that it would invest in a project and particularly given the spot issues that we have today with equipment that is already at penalty payments paid it is sitting on the shelves and all sort of those things. Balachandran: Somehow in reality it is more difficult. I have expected the same thing. The industries, turbines ________ etc. we would really easy to get something in the Bay Area but it has not but regardless at the end of the April meeting to the extent we get approval and we move forward we will be moving to the right direction to get something in place. Dawes: One last comment I am fascinated by the SCLTO and that is the kind of thing it would make a thermal plan much more attractive to us. We leveled out or hold somewhat they are still with us because we are going to be hydro depend for a long long time and I don’t know how one would go to find a counter seasonal user of our power that would team up with us and take a big lump in the summer while we take winter time deals but I don’t know if SCL is in the market to do something like that. We have transmission capacity, but if we could advertise or do research with a corporator, municipalities that would be counter seasonal I think it would be an interesting project. Swaminathan: We have looked at some renewable projects where we could take a larger chunk during the winter months winter and fall months and a shorter chunk for the summer months when we are in surplus. Most of the analysis we have done is base load plants that is where are needs are in terms of low high efficiency base loaded plants and they tend to come in 150 to 250 megawatts sizes. Santa Clara is building a 130 megawatts plant and at an average cost of about 7 cents. Market can buy a 10 year product around the clock of about 5 cents. So the ones we model was like the base load plant which Alpine is building in the area Alpine kind of plants and those have to come in big chunks they are low heat rates low 7000 rates that is what we are pursuing. The smaller ones tend to be more expensive. That is the dilemma we are facing. Dawes: Even taking a 10 percent piece of a bigger plant is that just people won’t listen to us if we try to buy a fairly small size of a plant like the Alpine Operation. Approved UAC Minutes of 3/5/03 Page 40 of 47 Swaminathan: We have talked to different folks. The minimum quantity they are looking at is about 50 megawatts and that again if we want to buy an existing plant and we do not quality for tax exempt financing of existing plants. So the 4 percent borrowing rate would not be applicable to buy an existing plant but we are exploring such opportunities to buy out completely build plants. Dawes: Have you been imaginative in thought of the idea that we have significant reserves and obviously it is a long term investments but the rates could be higher than probably what we are getting in T bills and so forth through our ASD friends but clearly there is one hand can wash the others when you have a pretty good balance sheet. Swaminathan: We have negotiated through NCPA with specific merchant plant developers but they have broken down in terms of there were no agreements. So we haven’t quite. Again our interest is only 25-50 megawatts so we have to be a part of the consortium and ASD recognize that we have reserves and potentially we don’t have to issue bonds to finance these resources. In fact some of other utilities are drawing down on this cost reserves to pay for these investments. Carlson: Does it count if you buy a plant that is under construction? Can you use buy bonds for that if not completed yet? Swaminathan: Some portions I guess. All the plants that we have looked as is combustive turbine but the steam turbine has not been put in place. That portion we can finance it. I think there is room for that. But a completed plant which is in operation can’t do it. Carlson: Can’t do it. Okay there are such bunch of plans out there being completed well that are half way of that, the company who needs cash has to be a way. Swaminathan: Again partnership also becomes less attractive with the counter party not being too great worthy. There are only 3 or 4 entities in this area that own generation other than outright buy out, counter ship with those entities are not necessarily too attractive. Carlson: Well, it puts you in a very great bargaining position. There is a kind of piece of possibilities out here. Good Luck on this. I think we have pushed enough on this. Dick go ahead. Rosenbaum: Some of my confusion was due to the fact that I didn’t see anything in here in your cost saying that they were for a 250 megawatt plants. I guess the one inside the Bay Area is more expensive and you say it is for 50 megawatts. Approved UAC Minutes of 3/5/03 Page 41 of 47 Swaminathan: Also for 250 it is not a 50 megawatt plant. It is a combined cycle of 130 to150 megawatt plant. In general ball park it is 800 dollars of kw for central valley plants. For 1200 within the Bay Area and within Palo Alto it is probably going to be higher. Rosenbaum: And that is not simply related to the size of the plant those cost differential? Swaminathan: All above 150. All combined cycle plants some of very good heat rate of low 700 and others are about 1500, 150 megawatts but heat rate of high 7000. Rosenbaum: I guess that there is one sentence that says here that its heat rate is consistent with the combustion technology for a 50 megawatt unit in a locally sited generation. Swaminathan: Correct. Rosenbaum: It might help if you in Attachment C you made specific cost. If you had to build a 250 megawatt plant to get these efficiencies then clearly introduces all of the problems that you have been talking about. Carlson: Dawes go ahead. Dawes: I want to thank you for considering some options where we bought 50 megawatts but we did it in 2 megawatt pieces one inside and one outside the Bay Area. I think it is too easy to lose sight of this great worthiness problem that we have seen. In just a very recent memory, it may just be that the transaction costs and the number of players out there dictate that when we do it we have to do a 150 megawatt deal with somebody, but I would like to keep that option open of diversifying among suppliers among different positions on the quire worthiness scale high congestion, low congestion risk, high terrorist low terrorist risk the whole portfolio until its abundantly clear that the best deal is the single purchase so thanks for keeping that diversification alive. Balachandran: Back to short term now. Carlson: Back to short term. Go Ratchye: Well as we just talked about we are thinking that we might not having this 25-50 megawatts piece in place by 2005. If that is true then we have considerable exposure. We are looking into that later. Until we have that in place. Approved UAC Minutes of 3/5/03 Page 42 of 47 So to say lock our purchases. We modeled three different purchases looking at sort of a lateral approach. One is a three year product, then the second one is a two year product and the third one is a one year product and it looked like that. This is an average hydro year again and every year. So that is what the 3 block purchase look like and when you look at them there is also the analysis Commissioner Bechtel you probably noticed is probably even worse. You can’t tell any differences between these and what really is the hydro risk just overwhelms everything. So you can’t see much difference at all between these in terms of the differences to risk or even as to expected value. Basically it is saying buy more, it is best to do bigger blocks and that is basically because prices can go a lot higher than then they can go down so just Fix Fix Fix from a risk perspective. Dawes: I was interested in all three of these you were doing fixed gas rather than market gas. Can you elaborate on that reasoning. It is just what you said Fix, Fix, Fix. Ratchye: This analysis didn’t change anything as to gas. These were only looking at electric block power purchases and they were just fixed price blocks 25 megawatt blocks of power either round the clock but no heavy load Dawes: But with no fuel adjustment provisions. Ratchye: No. They don’t. They have no relationship with gas prices. Dawes: Is there a reason why you picked that approach with the one that would flow with gas? Ratchye: Like a short term toy you mean. We just did t look at that. We could look at that for this year. But if you did that. I think that what we would look for is to fix something. We are looking for reducing the exposure for the first period. So if you had a toll and you fixed the gas price then you might just fix on the electric side. You are jogging about fixed costs and so there is no point in having a toll if you fixed the gas price for the entire term of it. Dawes: Is the imputed gas price in the 3 blocks fairly attractive? Ratchye: The toll would be priced. Dawes: Have your priced these 3 blocks yet? Ratchye: Yeah Approved UAC Minutes of 3/5/03 Page 43 of 47 Dawes: Is the gas price implicit in that fairly attractive? Or you can back in what the gas prices are. Carlson: I think it was probably a couple of weeks ago is it 4 dollar gas or? Ratchye: It would just be market price gas. I am not understanding exactly your question. Because if you were to buy a product that was based on gas price and you wanted to fix the gas price you would pay the same amount. Dawes: I am changing my question. If you look at the cost of the 3 blocks you have that is basically you are saying that you want to buy these lets do it. What is the implicit price of the gas in those blocks? Ratchye: That depends on the heat rate. Dawes: Do you have a quote for these things cost? Ratchye: Yes Electric prices. Dawes: You can back into what gas prices are? Ratchye: I have electric 4 prices and I have gas 4 prices and I can tell you what the implied cheap rate is. Dawes: So it is market price gas what you are saying. Carlson: Okay why don’t you keep going? Ratchye: I guess the results are what I said the more you fix in the more your cost of reducing the risk will reduce to. Although you still will have this huge overwhelming hydrologic risk. The other thing that we noticed is that we need to look again pretty hard at the appropriate levels for the supply rate stabilization reserves. We are thinking of some guidelines like assume that the next two years will be dry for example and what sort of reserves you might need for that. We do not have any recommendations for that. But given these risks, given this portfolio we are going to have to be taken care of. But we do think for a number of reasons maybe we can speed up the commitment to the thermal plant you seem to be recommending but we do feel like that we need to protect against price exposure in the first few years by making some more commitments beyond the 25 megawatt commitment that we have already executed and possibly something like these three blocks that we proposed and analyzed for these reports. The other key thing that we are moving forward now is to get a group of master agreements with qualified count4r parties with whom we can transact and execute block purchases Approved UAC Minutes of 3/5/03 Page 44 of 47 like this. So we are going to be seeking council approval of a set of those and I am sure you will hear something about that if you have not already. It is the same sort of approach we are taking with our gas utility to. Just to get a wide group, a good group of qualified credit worthy counter parties so that we can have competitive bids whenever we want to transact for sure term. In other words less than three years deals. Shiva, do you want to talk about this? Swaminathan: Right now we have two major resources which we spend our time, we try to manage, the Western Contract and the Calaveras Resource. As you see Post 05 will have more number suppliers so we are just looking at staffing needs how we can streamline, maintain the overheads at measurable levels and what type of models we would need to attract these performances as a report and manage risk. So that’s what we are looking at. We are confident in utilizing NCPA resources to transact up to a year and then use our master agreements to transact for duration greater than a year similar to all purchases and the purchases we are recommending. We think one we can keep our overheads and staffing levels at the present levels and still manage this portfolio and to also modify models to the extent we transact more in the market. We need to revamp our models to get them streamlined and so we can report and tract our portfolio more closely and we do it now. So that was the planning which went into that and we are talking to suppliers in terms of models which are out there in the market. We pretty much have excel based spreadsheet models which talk to one another. They are pretty detailed and has optimization tools in them. So we are exploring, retaining them, modify them into another set of models. So that is the consideration that is going into this. Ratchye: This is a sort of an outline of the different things that are coming down the line soon. I think I have mentioned all of them. But the first one of this is very critical for us. It is to get the master agreements in place and we are hoping to get Council Approval sometime in the fall. The short term block purchases, I think we will be coming back in April with a recommendation on that and hopefully get that to Council in June perhaps and we will be able to execute those after we get he master agreements approved. We are already proceeding on acquiring the renewable resources through NCPA that process is underway now. Proposals are due probably around in June this year. We hopefully be able to bring you an update on the process in May and we may seek council pre-approval as early as June. The local generation study is underway and that is the site study that we were talking about, the technology is not decided but they are looking at optimal sites of a variety of different technologies. Hopefully we will have some results by July from that study and the other item that you seem to be more interested is in getting out some formal RFP to the market to tell people we are formally interested in this, to take up a level from our more and formal conversations we had with lots of suppliers and other developers in NCPA. To Approved UAC Minutes of 3/5/03 Page 45 of 47 look forward to thermal generation and also hydro hedge products and we are hoping to get that ready by this fall with subsequent recommendations to council perhaps as early as the winter of 2003. So coming are briefly then, next month you will be having an action item on the legal implementation plan then we will take that on to the council and then we will have the council approve different transactions as needed after we get the Master Agreements in place and that is the end of my presentation. Carlson: That is a really impressive job here and we really want to compliment you. Any more questions? Go ahead George. Bechtel: Jane or Girish. I was noticing on Page 9 on the report it is saying that on the green portfolio it is likely to pay a cost premium of a cent kilowatt hour as opposed to I think the council has approved half a cent. So you have to expect not to do anything better than that and the council will have to probably change that premium or what. Girish you are shaking your head. Ratchye: Where are you seeing this? That is the premium for the actual energy itself. But as a premium over our retail rate. Remember we are only buying 20 percent at that price so the cost if you divide by our wholesale it is not going to be that much. So we are hoping tot be well under the council approved maximum impact on rate. Carlson: Anything else. Go ahead Dexter. Dawes: I propose that same paragraph. It says attempts to build a plant in Lodi or buy a merchant plant in the Bay Area have not been successful. I kind I got the impression from this discussion that they have not been successful as yet but they are still ongoing. When I read this, and underline it, and put an exclamation I thought it was dead but it does not sound like it is dead. Balachandran: We are going to name our plant Phoenix when we get it. Carlson: Has it burnt already? Balachandran: Basically it is what it says. We are going to talk to people again. The negotiations haven’t been successful but that does not mean that we are not going to beat the bushes again a try to get some thermal generation close to us. Adjournment Carlson: Is that it? I guess it is time for motion to adjourn in that case. Moved that we adjourn the meeting of March 5th. Approved UAC Minutes of 3/5/03 Page 46 of 47 Bechtel: Second. Carlson: All in favor. We said adjourned. Thank you. Approved UAC Minutes of 3/5/03 Page 47 of 47 I