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HomeMy WebLinkAbout2003-04-02 Utilities Advisory Commission Summary Minutes4/2/03 UAC MINUTES APPROVED Page 1 of 53 Utilities Advisory Commission April 2, 2003 Approved Minutes ROLL CALL__________________________________________________________ 2 ORAL COMMUNICATIONS____________________________________________ 2 AGENDA REVIEW ____________________________________________________ 2 REPORT FROM COMMISSIONERS_____________________________________ 2 DIRECTOR’S REPORT ________________________________________________ 3 BUDGET/CIP OVERVIEW _____________________________________________ 4 FIBER TO THE HOME, PHASE I_______________________________________ 11 Break ___________________________________________________________________________________38 NCPA MEMBER COST SHARING AGREEMENT FOR THE FINANCING OF THE PLANNING & DEVELOPMENT OF THE POE HYDROELECTRIC PROJECT ___________________________________________________________ 38 LONG-TERM ELECTRIC ACQUISITION PLAN (LEAP) IMPLEMENTATION RECOMMENDATIONS _______________________________________________ 43 RISK MANAGEMENT REPORT PRESENTATION _______________________ 46 RENEWABLE RESOURCE IMPLEMENTATION PRESENTATION ________ 47 ADJOURNMENT_____________________________________________________ 52 4/2/03 UAC MINUTES APPROVED Page 2 of 53 ROLL CALL Commissioner Rosenbaum present. Commissioner Dawes present. Commissioner Bechtel present. Commissioner Carlson present. Commissioner Ferguson present. Carlson: And our City Council liaison Bern Beecham is here. He will be with us shortly I’m assured. ORAL COMMUNICATIONS I don’t have any slips, so I guess we’ll go ahead to the minutes. Does anyone have any proposed changes to the minutes? If not, motion to approve the Minutes? Okay, moved and seconded. All in favor say “Aye.” Everyone: Aye AGENDA REVIEW Carlson: OK, Agenda Review: Anyone want to move anything around? We have a very significant agenda tonight. REPORT FROM COMMISSIONERS Carlson: I think two of you went to the California Public Utilities Commission. Dawes: Two day meeting, day and ½ meeting. Commissioner Bechtel and I attended. I will summarize the legislative committee and the resource adequacy discussion, PAU impacts with respect to legislation. First AB1078: renewable resource percentage legislation. Evidently the cities can interpret the way the definition of resources that applies to this percentage. In fact, Palo Alto could define its hydro resources , Calaveras etc, as meeting this objective if we so desire. The City Council’s objective was to get if from new renewables and our initial objectives of 10% in 3-5 years, and 20% in another decade. Electricity: Standard Market Designers, SMD, is the main issue. FERC is pushing this. Its promoters maintain it works in the East but it doesn’t seem to address the issues in the West very well . Council member Beecham wrote a very interesting article in today’s Palo Alto Weekly that addressed these issues and the potential cost on Palo Alto which is very significant. In Water: the Cal Fed Legislation is expiring. It will undoubtedly be refunded but it may not all the dollars it wants. It is supposed to include Federal dollars available for water recycling. The CVP would be involved. Potentially, Palo Alto could put in for dollars for using recycled water in the golf course and other park irrigation necessary. In Sacramento, the new Energy committee chairperson Sarah Reyes is apparently is well the word “anti-muni” was bandied about. She has said she does not want any more muni exceptions to rules and regulations passed by the State that applied to the IOU’s. The CMUA and will try to educate her, and they may try to load up muni’s with dollars to pay for the failed state plan. Secondly, in the Resource Recovery area we have the chairman of the California Energy Commission, CEC, says it looks reasonably good for 2 years. Two to four thousand megawatts per year are coming 4/2/03 UAC MINUTES APPROVED Page 3 of 53 on stream 10,00 watts over the next 6 years. [Room sound system picks up voices from eeting in adjoining room.] I detect a mystery voice. PUC Commissioner Carl Wood addressed us. He is the ex-electrician labor union individual and he said PUC is going to try and re-regulate the industry and entice IOU to build additional power plants. Bonneville General Manager discussed the budget problems and transmission problems and difficulties in shipping power to California. Nothing was discussed about the PGE bankruptcy which will affect Palo Alto probably the most or the Stanilaus commitments which addresses our transmission cost issues, or the renewed fight to terminate 2948A which PGE is trying to do through the bankruptcy. The SMD and Casio are trying to push through their SMD, SM02 with respect to transmission, which may potentially cost us up to 20% of our power cost. That’s my report. Carlson: Thank you. Any other major meetings over the last month? We’re getting the transportation hearing, unfortunately. Rosenbaum: Mr. Chairman, I would like to add something I recall re the CMUA meeting. That there is a bill now in the legislature that deals with the Dept of Energy. The interesting thing about it is this is going to take some duties and responsibilities of the CEC and the ISO and possibly the PUC. It will be interesting to see if this new Dept of Energy suddenly acquires it’s powers like the Federal Department of Homeland Security by coopting the responsibilities of various other agencies. So that is a quick way to build a power base. And I think the other note was in the afternoon . The speaker from the CEC did say that from a gas point of view the State is in pretty good shape. The gas for power for electricity generation is going down because of more efficient generation. Gas drilling is up. Storage capacity is up. So he seemed to be pretty bullish on that. On our gas hydro, it seems like it’s going to be a normal year. Carlson: Any more meetings? Okay I guess that moves us to Director’s Report. John, go ahead. DIRECTOR’S REPORT Ulrich: Thank you Mr. Carlson and my thanks to Commissioner Bechtel and Commissioner Dawes for attending the CMUA meeting. It takes us several days and you can tell from the report it was quite comprehensive. And that is just only one utility, electric, and many of the same issues are in the gas area and clearly in the water area. If you had a chance to read Council member Beecham’s article in the Weekly today you got an additional set of information about the kinds of changes the Federal government and State government are trying to make that will impact municipal utilities. It is a continual fight to in a sense protect the island of Palo Alto from the sharks that are completely surrounding the city., and our ability to get power, water and gas to all of our customers. So again I thank you for attending the meeting and participating. My report is rather short because we have a long agenda. In the electric area, there is a potential opportunity for us to get rights for transmission.. As you know we are a 4% owner of Palo Alto transmission agency of Northern California and as that partial owner. We will have an opportunity to participate in getting additional capacity rights which would give us 4/2/03 UAC MINUTES APPROVED Page 4 of 53 approx 10-15 megawatts of additional capacity on the pacific inter tie and the California Oregon project line. Right for about 30 years in exchange in participating in the capital Improvements that will take place under the auspices of western and the share of the cost to us would be approx 1.6 million dollars. That’s out of a 40 million dollar project. So there will be more to come to that as we get closer to it and understand what our obligations are and what we would get in exchange for that. The next area in water. The Santa Clara Valley Water District is organizing it’s 2003 water walk tour and this tour is for elected official, commissions, business and community leaders to hear experts on current water issues and tour the district facilities. And as you know while we cannot receive water from the Santa Clara Valley Water District, it completely surrounds us and is responsible for waterways and flood protection projects in provider Palo Alto. The tour will be offered 3 times: I will just give you the dates and confirm them later for you again: May 16th: Central and East County, May 23rd: Northern and West County which would include Palo Alto and May 30th for the South County . The next item and last item is the inauguration meeting tomorrow night of the San Francisco Bay Area Regional Water System Financing Authority and it’s scheduled for 7:00 pm on April 13th at the Foster City Crowne Plaza. Council member Bern Beecham is our representative and will attend the meeting along with Jane Ratchye. This will be the big kickoff and we have come a long ways to get this far. Now all we have to do is to actually do the work. That’s my report, Mr. Chairman. Carlson: Thank you John, and we look forward to a report from Bern, I guess, next month. That will be great. BUDGET/CIP OVERVIEW Carlson: I guess the first item is the budget, CIP overview. Ulrich: Thank you. You have the report and I would like to make it a point to the audience there are cards at the lectern and if some item or something you could fill it out and drop it off with me and I’ll see Mr. Carlson receives it. Since we have so much to do tonight, I would suggest on the budget and CIP review that this is the first look of the major changes from previous budgets and as pointed out in the strategic plan and as agreed upon last year we would get information to you early so you would see in as it outlines here in the attachment the highlights of significant changes that we forecast in the revenue expenses and in the capital improvement projects and how they link to the utilities strategic plan. This will be an opportunity for you to ask us questions about that and to suggest other things, so that when we come back in May, we will ask for more detailed review and approval of the budget. This year we will be meeting with Finance Committee on May 15th to review all of the budgets, primarily the Operations and Capital Improvement budget. The budget will be finalized after that and then go to the City Council in early June for approval. So I think we’ve made big progress in getting this information into your hands so you have a chance to look at it. We have members of the staff here to answer any questions you might have. 4/2/03 UAC MINUTES APPROVED Page 5 of 53 Carlson: Are there any questions on the budget items? Go ahead Mr. Rosenbaum. Rosenbaum: I thought the most striking items were Number 5 and 6. Streetlight reimbursement from the General Fund, traffic signal reimbursement from the General Fund. $1.6 million dollars. I guess Randy had indicated that the utility was thinking of picking up some costs that would normally be borne by the General Fund, but I didn’t realize something of this magnitude. Any comment from staff on this? Ulrich: It’s not as large a magnitude as you may think by looking at it. Randy is here to give you a little more detail, but the General Fund will reimburse the utilities 100% for these costs back to the electric utility that is under item #5 and also for the traffic signals that is under item #6. What we’re attempting to do, and you asked some questions about that at the last meeting, and it was covered in detail at the Finance Committee, that the budget for the Enterprise funds are actually accounted for twice: once in the enterprise funds and then in the general fund. So rather than continue that, the budget is being adjusted this year, so that the enterprise funds are paying directly for the expenses related to utilities activities -- rather than the general fund paying for them and then a reimbursement that goes from the utility fund over to the general fund. An example of that would be the accounting that is done by the General Fund for other work that in IT. So the net effect of that is in most cases is $0.00 -- rather than having cost allocation fund expense, we’re directly paying for the utility _____utility budget. Rosenbaum: I guess I’m suitably confused here. It is a revenue item and in the adjusted budget for this year there is 1.6 million anticipated revenue. In the proposed budget of 03-4, there is $0.00. Am I missing a point somewhere? Baldschun: That’s a result of the proposed change in policy where we’ll be asking the Council to approve the utilities to pick up the O& M expenses on the street light and traffic signal operations, which we are currently responsible for and our staff actually maintains them. At the same time, we are asking that the General Fund be 100% responsible for the CIP. The way it has been in the past, going back up until ’98, ’99, we had rate schedules which we currently have in force, which are designed to recover the costs for streetlight and traffic signals maintenance and operations. On the traffic signal capital costs, the policy has been that the utilities would pay for the capital costs. Then the Transfer Study came along and RW Beck said, “well, we gonna have the General Fund pick up that cost, but we are going to transition that.” We have not fully transitioned to that based on the time table. In the meantime utilities is not fully recovering the costs for capital costs in the traffic signal operation and streetlight operation. All that aside, some background on this particular proposal. The City manager asked for recommendations from the city staff on ways to help the General Fund. He asked not only to help the General Fund departments, he asked how the utilities could help the General Fund. This was one of many suggestions that came out of that process, probably hundreds of suggestions. Some we are not bringing to anyone’s attention. We flatly 4/2/03 UAC MINUTES APPROVED Page 6 of 53 threw them out - quickly. Some of them we studied. One of them was giving a discount to all the city facilities, 10%, 15%. We’ve done other surveys of other cities, some do it, some don’t. The traffic signal light proposal, some cities do it, some cities don’t. Of the cities that do it right now, Roseville, they pay 100% capital, 100% O&M on street light and traffic signals. Santa Clara (electric utility), 100% on street lights, and they don’t pay on the traffic signals. Ukiah (electric utility) pays 100% of O& M for street lights and traffic signals, does not cover capital. Our proposal is probably closer to Ukiah. There are a lot of derivations. There are some cities where the general fund is responsible for 100% for streetlights and traffic signals. In PG&E service territory, like in Menlo Park and Los Altos, PGE doesn’t contribute anything to those cities. Those cities have to pay for their traffic signals and streetlights, or they contract it out. Carlson: Any more questions on budget? Go ahead, Rick. Ferguson: I’m sure you’ve done a good job of trading off the risks and rewards of these changes, but I just had one question: the quantity purchase numbers here are enormous, of course, They dwarf all of the other revenue and expense items. But then you also cut our risk management consultant by about 20 or 25%. After many many meeting, one including our City Auditor, we all concluded and bought on to the idea that we have a very valuable risk management procedure that we out to put in place. That included the existence of a risk management consultant. I’m just wondering--do you see a connection between the amount of money that we spend on that consultant role, and our ability to control the risk in those commodity purchase numbers? Ulrich: There is clearly a correlation. We implemented the recommendations from the audit report. We are proactive in hiring a consultant that is listed here in helping us put together the risk management policy. What you see here is that we’re all through using the consultant. We’ve hired a city employee to do the risk management, and for about a month he is been here. He is the person whose title is Energy Risk Manager and reports to the Director of ASD functioning as the middle office in the risk management policy. Utilities handles the front and back office. So this is the change, no more consultant and we’ve implemented the risk management policies. There is clearly a correlation with the big bucks we spend on commodities. Ferguson: Great, thank you. Carlson: So John I just want to be sure about that. We’re still doing the work, we’ve just shifted to a salaried employee from a consultant. Because that’s an awfully important function. Ulrich: Well there is a change. The consultant was there primarily to help us put together to plan and make recommendations on how it should go together. That risk management policy was reviewed by all of you and approved by the City Council. Implementing the recommendations from the auditor, as part of that, that’s why we have the risk manager as an employee. 4/2/03 UAC MINUTES APPROVED Page 7 of 53 Carlson: Any more questions? Dexter? Dawes: Commissioner Rosenberg was addressing the numbers in the streetlights and traffic signals. Mine deals with legal expenses, $850,000 in electric and nearly $300,00 in gas , a total of 7 figures -- seems nearly astronomical. I’d like to do business with as little lawyer interference as possible, but we seem to be going in the wrong direction. What’s going on here? Ulrich: We’ve covered a number of those things already. This is a summary of a number of areas. The legal services are contracting out more works, specifically in the areas of bankruptcy and in some of the regulatory agency discussions, and in the area of gas changes with - they all focus around one large company. Dawes: In some situations, we are getting reimbursements from others, particularly in the PGE bankruptcy because we _____is this net of those? Ulrich: No, the revenues from that are not offsetting this expense. They do offset the expense, but this is the budget expense. Dawes: So there will be some relief from billing to other interested parties. Ulrich: That’s correct. We’re receiving that now. We have agreement from other parties, primarily in NCPA members for that. Dawes: I assume, for a point of clarity, that the accounting for the COBUG fuel is revenue to the gas fund and expense for the electric fund --that’s essentially a new item? Ulrich: That’s correct. It was there last year. It was significantly lower this year as you can tell we forecast more usage of the COBUG last year. So we see a revenue decrease in the gas. Dawes: I didn’t check specifically against the rate changes which are typically tracked through the 10-year forecast. Are these the same as the 10 year forecast we looked at several months ago? Ulrich: Randy’s going to confirm that. They are listed over the description on the right- hand side. Dawes: I just want to be sure that they were they same. Randy: We haven’t changed our mind in 30 days. Ulrich: That’s why I quickly jumped out here. 4/2/03 UAC MINUTES APPROVED Page 8 of 53 Dawes: It’s not redux in 2000. Ulrich: They may change though if Randy doesn’t watch me. Dawes: Lastly, I want to compliment Randy on this particular format -- rather than going through all the charts and tables to highlight these changes is particularly appropriate. The only thing I would add is that for each fund I would put the total change of revenues and the total changes of expenses so that you could look down , and see, “oh this accounts for 75% or so of the changes up or down.” It just gives a good reference point. Great summary. Ulrich: Thank you. Rosenbaum: I’d like to go back to the Risk Manager Position that is in ASD. Even though it’s in ASD, I presume that the risk manager primarily supports operations of utilities. Can you tell me where that salary winds up being paid? Ulrich: The salary is paid for out of the utility enterprise fund. Rosenbaum: Thank you. Carlson: Go ahead George Bechtel: A quick question on the CIP. I guess we will discuss the CIP later. Will these numbers be the same as what we will see later on? And I’m looking at because we have a significant jump upward in last year. I’m just curious as to whether those are going to be the same? Were those included in the long range plan. Is all the CIP along the lines of the long range plan? Baldschun: CIP figures are very close to what you see in the 10 year financial forecast. We have not made any significant changes in the CIP in the last 30 days. For example, the water we still have the pending reservoir build-out, there’s still some large underground projects, What you may see that is new is the automated meter reading project which is about ½ million spread across three funds. There are perhaps some new ones, but overall in terms of the big ones, those are the ones you have seen before. Bechtel: Thank you. Carlson: Okay, any more budget questions? I’ve just got one general one I just want to be sure we are not hurting the utility by symbolically trying to say we’re sharing some pain too. That’s a temptation in this kind of this situation. I want to be sure that there is nothing really important for the utility we’re cutting for symbolic purposes that might cause us longer run problems. 4/2/03 UAC MINUTES APPROVED Page 9 of 53 Randy: One of the criteria used is our rate competitiveness right now. Our water rates right now are not very competitive. Suggestions that came about to help in some fashion, for example, large transfer to the general fund, in the water fund. To raise that to help the general fund is not acceptable. The electric fund we still enjoy significant rate advantage under PGE. So the kinds of things we are suggesting here are not going to impact our business comparatively speaking because of the amount. Even though it sounds like a lot of money --it is 1.5 million-- but we have electric revenues of $60-70 million dollars and reserves of over $130 million, it is not a huge impact. But we are sensitive to having the utilities impacted adversely, financially, and in a business sense. For many of these proposals, we did view each and every one of them with that in mind. Ulrich: I have to add a little more to that. The word “symbolic” you may want to define that more. That has some implication to me that we do something that is not appropriate. We do not have the ability, nor would we utilize enterprise monies for something that is not related to utilities. If there is a savings, and this is an important area in looking for ways to reduce costs, those would come back in the form of reduced costs and ultimately flow back to rate payers in reduced rates or not having to increase rates. Carlson: My concern was the other direction, that you were taking some cuts in things, in expenditures, that would reduce rates in the long range but might also risk some service problems. Ulrich: It would not be my objective, nor would I recommend that we take service cuts out of the utilities to go over to the general fund. I don’t think that is appropriate to do. But all of the employees in the utilities work for the same employer, the City of Palo Alto. So changes to save money in the general fund, for example, that impact employees- - some of the ideas that are out now looking for furloughs of employees to save money, that would impact utility employees and in effect reduce the costs in the general fund. Save money in the enterprise fund, for those employees that charge their time to the enterprise budget. But those would not impact service. Carlson: Okay. I just want to sure about that. Anything more on this? Dexter, go ahead. Dawes: One question, John. I had heard from someplace that there was going to be a reconsideration of how employees were centrally grouped, primarily in ASD, and charged out to the various depts. This causes in effect a doubling up of budget expense whereas it’s shown in the centralized department and then as an expense in the receiving department as well. Has there been any changes in that regard and has it affected the budget numbers in the utility department? Ulrich: I tried to say a little bit about that earlier in answer to Mr.Rosenbaum’s question. The attempt is to not show an expense in the general fund, at the same time show the same expense in the enterprise fund. So the changes that are being made will just show the expense which will be employee salaries that have been in the general fund, and are part of an organization unrelated to utilities rather than having a transfer from the 4/2/03 UAC MINUTES APPROVED Page 10 of 53 enterprise fund over to the general fund, which would then pay those employee salaries. Now we’re going to pay from directly from the enterprise fund and show those employees as members of the utility. Dawes: Does that show up in these figures here or is it been adjusted out? In other words, under the staffing changes for the electric, it shows a $68,000 reduction. Is that net of these transfers which may have come out of ASD and then into utilities? Ulrich: I’m not sure they’re reflected directly in these numbers, but the net effect will be no change. Dawes: I understand that. I’m just trying to figure out how it was shown in these schedules. Ulrich: Just a minute, let me ask. Beecham: I would assume that if the utilities enterprise fund is paying a charge to the general fund that shows up as an expense. If we pay that directly, it still shows up an the same expense. The difference is in the general fund. Rather than the general fund showing an expense and then some income, both the expense in the general fund and the income are now off those books. So it takes that charges off the general fund, but should not change expenses in utilities. Dawes: Thank. John, Council member Beecham has straightened me out on it and thank you very much. Beecham: I’ll explain it later to you, John. Ulrich: The answer I gave you a minute ago was correct. The numbers are not in numbers that you have here tonight. Carlson: We have one public comment I got in the middle of the discussion, Herb you want to go ahead and say something. This is Herb Borock, Palo Alto Borock: Thank you. Chairperson Carlson, Commissioners, and Vice Mayor Beecham. My comments are in two of the capital improvement projects in the electrical fund, on the attachment they are Item# 24, Foothill System rebuild and Item #25 Foothill Communications Improvement Plan. I’d just like to start a conversation since the CIP document is not available to you at this meeting. However a draft has been prepared for the Planning Commission so I was able to refer to that. The first Foothill System Rebuild project T256 on page 116 on the draft CIP indicates that this is for the replacement of 35 year old underground utilities in the foothills. As I recall there are two underground districts, one covering the residences off of Alexis Drive by the Palo Alto Country Club and the other Foothills Park. They are served by a 12 kilovolt distribution line that runs through the Arastradero Preserve, with a branch going off to Alexis Drive from 4/2/03 UAC MINUTES APPROVED Page 11 of 53 _________?Arastradero Lake. And over a period of 10 years now, a number of some community has indicated it’s a mistake to be spending all the money to maintain at least the part that distribution line that continues from the point where it branches off to Alexis Drive all the way up because at some point, the utilities that are going to be underground are going to be replaced under Alexis Drive and could run that line there -- around the distribution line there. The city policy is to put lines up to 15 kilovolts underground. However there are a number of expenses in a sort of piecemeal fashion of building the road, and then rebuilding it and replacing the poles for that line all the way up to Foothills Park. I believe at this time those utilities on Alexis Drive are going to be replaced. We should think of a way of getting a distribution line, or a piece of it, underground as well. It would help the environment and the preserve. The second issue I have about this, is again, here’s another project that is being put ahead of an underground district in South Palo Alto. The first time a district was done, the second time to put itself ahead of #41, Oregon, Cowper, Middlefield, Colorado, was when City Manager June Fleming’s underground district was done for the second time. So I would hope some way to have some equity with South Palo Alto in this. The second project Foothills Communications Plan on page 109 of the CIP draft indicates that as part of this $550,000 project is a $150,000 fiber backbone between the city fiber ring and the Foothills. As you may know, cable co-op never built that far up, but these seems to be a way of getting, I don’t know how many parties that are interested, 100-150 homes that want to connect to the fiber backbone. It’s also a way of getting connected to the fiber to home trial. I’m interested in the economics of this. Is this something that’s part of the fiber to the home build out or is this just because somebody up there wants to connect to fiber and this is a way to get it done. It’s indicated that its done for connection to the SCADA system? But my recollection is that there is no sharing of costs down in the flatlands for the fiber that done for _______. That is a completely separate system from the fiber that used by the residents. So these are issues I wanted to explain, I wanted to let people know as far in advance as possible. I’ll know they’ll be coming back to the commission in the finance committee and the city council. Thank you. Carlson: Thank you Herb. I guess we can go to the next item here. FIBER TO THE HOME, PHASE I Ulrich: The next item is fiber to the home, Phase I. This was an item we were going to have at a special meeting several weeks ago, and so we have moved the schedule out a couple of weeks. You can see that this is an interim report -- that’s why it is listed as information. The primary objective this evening is to go through the five points that were requested that we go back and look at put into the business plan. Rather than waiting until the very end, it was I think it was important to come and give you an update on what has been found out on these items. There will be a report on each of these questions. It outlines what will be done to conclude Phase I, and then what will be done to conclude 4/2/03 UAC MINUTES APPROVED Page 12 of 53 Phase II. The list there is the schedule for completing all this work. I will ask Blake Heitzman, Manager of Telecommunication, to introduce the remainder of this report. Heitzman: First of all, at your place, you should have three documents. One is the City of Palo Alto’s update to the utility’s commission by Uptown Services. Another is the City of Palo Alto’s Fiber to the Home residential survey findings, it’s a new survey, and then a summary of the survey itself, which is “fiber optic system phone survey”. It shouldn’t say that anymore. I mistakenly left that on there making last minute adjustments today. These are also available to the public on the stand over here. I’d like to quickly go over the 5 questions the Utility Commission asked us to address before it moved forward to the second phase of the business plan. Of those, the fifth one, which is the legal and regulatory review, will have to come in the final report because the attorney’s need to have the answer to the third question before they can address that. Tonight, we will 1) go aver the survey work you requested -- which was an effort to verify or at least substantiate the findings of the first survey, 2) a consideration of engineering estimates of several alternative architectures specifically including the hybrid fiber co-ax. That part will be presented by UpTown. Then 3) the recommendations on wholesale and retail for each of the businesses: phone, internet and video. Then 4) the study they made of other utilities – things, issues, pricing and so forth -- that they’ve come up. Of course the last one, the legal analysis will have to be done after the attorneys get through the information that we are giving tonight. I’m going to start off with the handout the City of Palo Alto Utilities Fiber to the Home Residential Survey. I’m going to give you the non-statistician’s view on this. Our statistician is in Berkeley, and I don’t think he’s going to make it tonight. On the second page, we talked about the goal of this particular survey. [small talk] Because we are pushed for time tonight, we just want to collect your questions, comments, and so forth, and if you have follow up questions you wish to e-mail me during the following week, that would be fine. We just want to get all your comments back so we can make as valuable report to you at next month’s meeting as we can. The goals for this survey (break on tape……this went into the other meeting next door). The approach we took was to do a phone survey of 200 residents who had been asked to participate in the first survey, but who did not choose to do so. One of the things we have to recognize at the start is that we are selecting a specific group here. We excluded those who participated in the first survey so this is not totally random, what we have here. We were trying to find out what non-participants were thinking and that’s why we did it this way. One of the other problems we have with the new survey, because it is a phone survey, we have a limited number of questions we can ask. (Microphone problems). Sorry. This is the number of surveys that were completed, some were terminated by people not wanting to finish the phone survey, they didn’t want to do the paper survey , maybe they didn’t want to do the phone survey either. Some did qualify but refused to produce the (? ) situation. Total amount qualified were people who were contacted but 4/2/03 UAC MINUTES APPROVED Page 13 of 53 said they participated in previous survey. There were 26 that were discluded, we did not allow to participate because they have been on a previous survey. Phone surveys have to be limited in nature because the ability of keeping a person concentrating on the phone and their lack of something in front of them to really look at and concentrate on. We were only able to do 9-minute surveys. Here are some issues we have with the phone survey that we have to recognize as we look at the data. As we said, this is a selective survey, as we did not allow a general random sampling, only those who did not participate in the first survey were allowed. The second thing is that we were limited in time. We could only ask like 13 product questions versus 44 product questions which were asked in the more detailed survey. The way this comes out, just to give you an idea, is like on the previous written survey, we asked “How important was TV to them? How satisfied were they with their current TV provider? How important was programming to them? How satisfied were they with it? How important was customer support? How satisfied with them with it? How important was pricing? How satisfied were they with it? So you have 8 questions that you ask them, and when you ask these 8 questions, you lead them to think about the issues. In this case, we simply asked them, Would you be willing to change your provider? Would you be willing to change your provider at a 10% discount? So there is less cognitive process involved in answering these phone surveys so that may influence how they turn out. We also changed the wording on this survey, which I think was good, to ask them would they definitely switch rather than the more obscure question Are they very excited about, would they probably switch or they somewhat excited about? I think this was a better wording, but it’s also going to cause a more focused answer as well. Due to the way we did this survey, we were unable to capture the dial-up conversion information because we asked them would they switch to a high-speed provider if they didn’t have high-speed, we had about 37% opt out saying well I don’t have it, so I can’t answer that question. So we are going to address that between now and next month. Our opinion is that these results due support the business case. I’m going to go to the slide results graphically. When you look at this slide here, the greenish line is the penetration, the average penetration more or less, that other munis are receiving. The blue vertical line is the business case penetration level we’re projecting. So when we look at the bottom reddish bar that is the range of the first survey results. The next reddish bar above that is the second survey with no discount. Just “would you change providers with no discount.” You’ll notice the bar is wider because there are fewer participants therefore the range of 95% certainly is bigger, and when we asked if they would change with a 10% discount, the upper bar shows that. Obviously this was very supportive of the evidence we had in the first survey. So let’s go to the next one. The next one is Carlson: Blake, I just have a question of the first one. Does all cable mean most people already are… 4/2/03 UAC MINUTES APPROVED Page 14 of 53 Heitzman: Subscribers. So the questions were posed: would you switch from your current provider? That’s kind of an unfortunate thing we didn’t catch early on in the survey, we still feel like we have pretty good result. In this case , from a cable to a high- speed internet provider by the city. Again, the greenish bar is what other people are getting. The blue bar is what a business case suggests, and then again the horizontal reddish bars are the results of the 3 different levels of surveys. Now because Palo Alto is much more connected our consultants still like the higher level on the blue bar acceptable and do-able. Whereas in some of the other communities where they are doing broadband are much less connected than Palo Alto as we saw in our first survey, it was like 95% connected. Dawes: Do you have the numbers actually of cable users that represent this and ditto question for the DSL on the next line? Heitzman: In the results you have of the survey, they should be there. There should be a list of how many of each group are there, the demographics are there, I believe. If not, we can get that for you so we will include that information if it’s not here right now. Dawes: Thank you. Heitzman: This is not as strong but it still shows, particularly with the 10% discount, that we’re up in that range with the first survey showed, although slightly lower. But our consultants say it is still supportable of the business case. The next slide will show DSL. DSL same idea, the green bar and the blue bar are exactly the same, other munis on the green bar, the blue bar our business case assumption for penetration, At this level, we see again, that when you offer 10% discount it jumps up near what the first survey said but slightly below in this case. However it is still substantially above the blue bar, if you look at the middle of that orange bar, so it’s still seems to strongly support the business case. Next slide will show the phone service. Similar representation. There is no green bar because there isn’t much happening in muni phone service that we can hang our hat on, so we can just show our business case level there. Again,.when we offer the 10% discount you see a pretty strong jump up towards the same range of the first survey. Remember that those who responded to the first survey were not allowed to respond to this, so that would have probably pushed it up even a little bit more if they were allowed. And then the last slide, without knowing what the costs are, just philosophically whether a citizen supports the city of running this business, the first surveys shows between 65 to 75% believe we should run this business, and the second survey shows somewhere 52% or so and 68% say. So in both cases, a majority of the citizens -- without knowing anything about costs would support us operating this business. The rest of the data I have in this presentation is basically demographics. To save time I will just say, basically the demographics are very close to the first survey as far as age group distribution, zip code distribution, ownership of homes distribution -- slightly different but not statistically different. We’re getting the same sort of cross section in this phone survey that we did in the written survey, as far as those factors are concerned. That covers my part of the 4/2/03 UAC MINUTES APPROVED Page 15 of 53 survey information . If you have any questions now, we’ll write them down. If it requires a lengthy answer, I’ll try not to give it now because I know you need to get other business done. But we will try to answer in the final report. Carlson: Any questions on the survey? I’ve got one question. You included the characteristics of the people as to what kind of cable TV they had , but not the Internet, but we do need the Internet. Heitzman: We did have reference the cable modem Internet, the DSL Internet, but we don’t have the dial-up Internet. I’m going to go back and get that Carlson: I’m talking about the demographics Heitzman: We do have it and we will provide it. Carlson: I’m sure you’ve got it. I’d just like to see it. Let’s go on to something else, the next item then. Heitzman: Well, I got these guys… Carlson: That’s what I mean, the next phase of the fiber to the home report. You want to get out of here early tonight, John? Ulrich: No, we’re pleased that Neil Shaw and Dave Stockton are here tonight. They put a lot of effort into this. We’re paying for the consulting service so feel free to ask away with the questions. Shaw: As most of you know, I’m Neil Shaw with UpTown Services and I want to introduce our newest partner at UpTown, Dave Stockton. The reason that we asked Dave to join our firm is because he comes from ATT Broadband which was recently purchased by ComCast as everyone knows. He was responsible for all sales and marketing in the Atlanta system which had over 600,000 subscribers. So when Dave talks about marketing or sales or anything related to the cable industry, he knows what he’s talking about. That’s a big asset to UpTown and to Palo Alto, too. So Dave’s going to start off talking about the municipal scan --what we found out along those lines, and wholesale versus retail -- and then turn it over to me and I’ll talk about the architecture analysis as well. Stockton: We’ll start out with what we’re calling the “municipal telecommunications scan.” The purpose of this part of the initiative is to glean some learning, and to essentially just get some a sanity check if you will on some of the assumptions that are going into the business case and some strategic aspects like the business model that’s being pursued -- whether we go wholesale or retail, what architecture type that is pursued so in summary. I’m not going to through the slide in detail. Rather, I’d like to go through 4/2/03 UAC MINUTES APPROVED Page 16 of 53 each one of these in one slide to follow, provide you with a little bit more of quantitative feel for what we have seen here. We are looking at a number of business dimensions as we conduct this municipal scan. The first is to get a read on penetration and look at other municipalities that are actually offering broadband services in their cities and look at their actual penetration results for the services that we are talking about. The second would be to look at pricing levels and to get some comfort around our assumptions that are going into the business case here in Palo Alto around pricing levels and of course the effect that will have to revenues. Third, would be the network architecture. There are different obviously alternatives here in terms of what kind of network is pursued. We took a look at that as well and some interesting conclusion there. And then the business model: Do we go wholesale, do we go retail, do we apply different business models for the different lines of business. And then final regulatory. So if we go to the next slide, we’ll start with the penetration findings. You can see, we looked at 13 municipalities over all and of those 13, 7 are actually under way with enough level of experience in actually acquiring paying customers that we are able to report back to you on the results that they have realized. This is information provided by these municipalities. We are showing that, in general, for video and for internet, the results are actually quite strong. The average video penetration is 38%. You can see the number of years that some of these municipalities have been in this business. The corresponding penetration for Interest is 25%. Right now. Phone is still quite new. You have Grand County in Washington, you have Kutztown offering phone, but other than that it’s still pretty embryonic in terms of municipal activity. The interesting things that we are looking at here is at the bottom how do those penetrations results compare to the assumptions and inputs we are putting into your business plan. You can see for the year 5 penetration levels Video 27% looks very conservative and doable and internet as Balke showed you on the slide a few minutes ago we’re looking about 42%. We feel very comfortable there. Given the very high takeup of Internet in general, here but also broadband internet here in Palo Alto, and phone at 38%. We feel in addition to the second run of the market research, we have good validation of the assumptions. Dawes:These are straight arithmetic averages? Blake’s schedule shows the 38% average for TV penetration. It’s not shown on this schedule, but is that a straight numerical average or main or …? Heitzman: It’s straight, it is not weighted, that is correct. Stockton: It is not weighted by population? Heitzman: Correct. Stockton: Years in service , or…anything 4/2/03 UAC MINUTES APPROVED Page 17 of 53 Heitzman: Yep That’s exactly right. Very non-fancy. Carlson: Thank you. I’ve got a couple more questions, because I’m just not sure about some of these places. Grant County PUD is up in Washington, that’s a rural area, where Kutztown, is that Pennsylvania? Stockton: It is Pennsylvania, that’s correct. Carlson: Is that a suburb? Is that a rural area or what? Stockton: It is a suburb. It’s not really a rural area. Sizewise , let me just grab that piece of information. Carlson: Tacoma must be by far the largest, I mean that’s a community of 80,000 people. Stockton: That’s correct. The size of the broadband project there is reaching 130,000 homes Carlson: Sioux Falls, Iowa -- Alameda we all know. Braintree is Massachusetts, suburb, that’s a pretty small place isn’t it? Stockton: Braintree is about 12,000 homes and again, these numbers are reflective of their municipal project in the reach of the network, Kutztown is 1,600. Shaw: Kutztown is one of the only fiber to the home project underway besides Grant County. Carlson: Okay. And LaGrange is Illinois? Stockton: La Grange is actually Georgia. That’s an interesting case. That’s a hybrid fiber co-ax system and they are actually leasing back the network to Charter Cable. Carlson: Okay. Shaw: Would you like this just added to it rather than going through that demographics in more detail. Carlson: If we can just get a page on that quick, because I think the demographics are pretty important. In terms of size, the biggies are Tacoma and Alameda. Is that correct? Shaw: So you’d like the population so you’d be able to see the penetration. Dawes: And type of system too, whether is FTTH or Hybrid or … 4/2/03 UAC MINUTES APPROVED Page 18 of 53 Stockton: We’ll do that later. We have a matrix set and we’ll just include that in the handouts. Carlson: Dick Rosenbaum, you had a question too. Rosenbaum: Tacoma really sticks out. I wonder if you can say anything about that. They were very enthusiastic when they started this system. What has happened there? Stockton: More than anything else, as we just mentioned Tacoma is a very very large deployment relative to these other markets. I think you’re just seeing the law of averages there in terms of that penetration level. In talking to them and looking at that example, we’re not seeing an issue there. It’s just that they are, from a penetration standpoint, needing to obviously secure a lot of subscribers to even get 20% penetration level. Rosenbaum: I’m not sure you’re getting at my concern. I know that they have a very attractive price for video, and I think they’re Internet price is also very attractive. They’re a larger city, but I assume they have a larger sales staff. What’s really going on there? Stockton: Let me confirm the pricing here. Yeah, their expanded basic is $26.00. That would be pretty close to the average that we’re seeing – now in Tacoma for Internet, they’re actually wholesaling that, so they are not directly offering that service. They have 3 internet service providers that offer it and pricing varies there. So that could be one of the factors, and that’s something we’ll talk about when we get to the business model. Carson: Any other immediate questions? Go ahead. Sorry to interrupt, but this is very interesting. Stockton: That’s fine. The next dimension that we looked at was pricing. Again, just like on penetration, what we want to provide you with this evening is a summary view. Let me explain first across the top how we are presenting this information. So you see Video, Internet and Phone. The price range that we are showing there is the actual pricing levels that these municipalities are setting their pricing at. The next slide is then the average of that again, that is a straight forward average. The incumbent range is meant to reflect on a national level what you would see a cable operator like ComCoast or Cox set the pricing for these services, or if it’s appropriate to phone, and incumbent local exchange carrier like SBC or what have you. Finally on the far right, we’re including the input we’re putting into the feasibility study. Once again, here we’re just looking to see if the assumptions look in line with the current reality of the municipalities we explored. By and large, they seem to. For video we have yet to specifically determine digital pricing levels, but you can see for expanded basic, we’re a little bit on the higher end, but there is probably a little more discounting going on in some of these municipalities than might be needed. The average discount as you can see at the bottom is 17% for video. On Internet, we’re right in line. 4/2/03 UAC MINUTES APPROVED Page 19 of 53 You can see there is a very tight range in the top tier which would represent a 1 Megabit internet service. A few municipalities are also offering lower speed tiers. We’d be assuming a $40.00 price point if we go retail there. So that is right is line. And for phone, a broader range, $11.00 to $25.00, significant discounting on phone, the average discount was about 26%, and we’re assuming and recommending that a wholesale strategy -- that we’ll talk about in a minute -- where that wholesale price point would be about $12.00, assuming that that would be retailing at around the range of $20.00. It’s in line with what we’re seeing with these municipalities in terms of how we have set this up in a business case. The next dimension involves the architecture. This was pretty striking in terms of shift in technology in 2002. If you look at the market as we listed them here, the launch prior to 2002, as you’d expect, there are a number of hybrid fiber co-ax deployments, and there is also one fiber to the home at that time, which is Grant County. Since 2002 though, the opposite has occurred. The deployments have been consistently using fiber to the home technology. Glenwood Springs is using a gigabit Ethernet. Neil will go through some of the high level economics of where we think we’re headed with the archtectiture recommendation. Part of this task was also to show where some of these other municipalities are going and obviously you can see the clear trend here. Next slide is business model. Just to give you a flavor for who’s doing what, I’ll talk briefly in a minute about what we’ve looked at around internet because that’s the toughest question relative to the business model in these 3 lines of businesses. Video -- it is very apparent that retail is preferred and being pursued. The wholesale markets that you see there are largely influenced by some state Law in some of these situations, for example, Utah. But internet’s really a different story. It’s mixed, and there really isn’t a clear answer if you’re looking at any precedents that are out on in the market today. Phone like video is much more polarized, where you see a clearer trend towards activity of getting involved through third-party providers and taking kind of a wholesale model. And that makes sense given its complexity and some other dimensions involving phone. That kind of summarizes our municipal scan, and we’ll provide the further information requested. The second area that we were looking at in detail was the business model. And this summarizes our current thinking around our recommendation for the three lines of business that I was just mentioning. For video, we are going to recommend retail. The main rationale there is that is really is the best opportunity leverage to improve service performance for the local market here. In general, there is a lack of third party providers in that market. For phone, we’re going to recommend a wholesale partnership with a qualified local exchange carrier. The reason for that would be the operating complexity involved with phone, the commodity characteristics of that industry. It’s a harder business to make a good margin in, and then the capital intensive nature of that business as well. 4/2/03 UAC MINUTES APPROVED Page 20 of 53 On Internet, we’re recommending that Palo Alto offer a retail internet service. We are also recommending that we should explore in further depth, and we’ve done some work around this already and that is included in your handout. That we also explore wholesaling offering on the fiber network or whatever architecture is selected. For other Interest providers, be that AOL, or Earth link, or whoever would be involved. I think part of why we are recommending that is that it would be a good opportunity to accelerate broadband internet take rates here. It is already at 45% according to market research, but that would be something that would be a strategic advantage to even further accelerate the development of the market here. The next slide is specific to Internet but it goes into some of the work we have done around the financial modeling of trying to understand some of the financial and strategic differences between those two models for offering Internet service. I won’t go through all the details. But the take away from this -- in terms of what we found using some different pricing assumptions, obviously we using a retail price point of $40.00 we’re assuming a wholesale price of $27.50, a higher penetration level because you’d have more players in the market, more activity -- but the take away is that both are financially attractive. There really is no right answer here in terms of financial liability, so it’s an opportunity to explore a wholesale option as well. Where we’d like to go, if we’d go to the next slide, would be to have some initial discussion with some of these potential 3rd party players that already have some significant dial-up market share here and talk to them about their ability to provide broadband service. We do believe and we would propose that the city consider level agreements with these providers to make sure that they’re qualified, to make sure that there is an insurance around the service levels that have been provided to the customer by these ISP’s. These are some initial ideas just to characterize what we’d be thinking about in terms of service level agreements. That’s where we’re at, and we’ll continue to explore that with further feedback and input from you. That wraps up the third piece. Neil Shaw’s going to talk about the architecture analysis. Carlson: Just a minute. Are there any questions on this segment of the issue? Dexter go ahead. Dawes: It’s a very minor point, but it’s likely to be a huge one. Portability of e-mail addresses or lack thereof, could be a powerful detriment in switching ISP’s. I’m sure you’ve dealt with this before. What’s your experience there? Stockton: Yeah, that’s exactly right. That is one of the reasons. We don’t word it that specifically. but when we talk of some of the advantages of wholesaling internet that’s exactly why. There would be an opportunity to quickly convert the roughly 50% of the Internet market in Palo Alto that’s using dial-up into a broadband environment with a lot less hassle. That is the main transactional barrier, if you want to call it that, in the internet space, customers upgrading to broadband. The need to change e-mail addresses. 4/2/03 UAC MINUTES APPROVED Page 21 of 53 Dawes: Even if you’re on DSL or cable, you’d have to presumably give up your address as well. Stockton: Yes, you would. But the hope would be at least with the ISP community out there, like by partnering with an AOL, or an Earthlink, you would not have to go through that again. Beecham: And if understand from the previous slide, you’re recommending that we consider at least that we be both retail and wholesale, so there would be a Palo Alto brand out there that we support and we would find AOL or Earthlink, or someone else also to come in. Stockton: That’s correct. Carlson: Any other questions on this section? There’s a comment back here. If you can make it quick, go ahead. Arthur Keller: There are a number of companies ISP’s that provide through PacBell DSL phone lines. And those services are provided in a bundled, wholesale way through PacBell, ________ does that. It seems to me that a lot of those companies should be candidates for what you’re doing. People who have those services would probably be very easy to switch without the difficulty of changing their e-mail addresses or anything like that. Carlson: Thank you. Let’s go ahead with the next section, Neil. Shaw: The first thing I’m going to go over is the architecture analysis. Before we do that I want to provide some context – basically, how does this impact the business plan process, as a wrap up piece of the business case analysis that we completed last fall. What we really needed to know going into the business plan is, are we comfortable with Fiber to the Home or whether HFC is the way to go? In the context of this analysis it is not which Fiber to the Home system -- even though we’ll present different Fiber to the Home System alternatives that we need to decide on – but it is specifically whether hybrid fiber co-ax should be considered instead of Fiber to the Home in the business plan. Those are the key elements we need to know going into it. We evaluated 4 architectures, 3 fiber to the home systems (and we’ll talk about those two Wave 7 alternatives), and an active Ethernet system that employs two Fibers to the Home instead of a single Fiber. Then finally, the hybrid fiber co-ax or HFC network. The designs were completed by Peregrine. We still have some wrap-up to do on them, so these numbers are preliminary, in the spirit of this preliminary readout. They are all based on node sizes of 288 homes. We did two overhead neighborhoods and one underground neighborhood. As far as the equipment alternatives, the first equipment alternative is the Wave 7 optics architecture and that’s a system that we used as a reference for the business case last fall. It employs a single fiber per subscriber from the 4/2/03 UAC MINUTES APPROVED Page 22 of 53 active node to the network interface unit, so for every 288 home node there is a single fiber dedicated to each subscriber NIU (network interface unit). The active nodes are served with multiple GigEthernet connections. The connection from the home to the active node is shared by 16 network interface units and then as the capability of 500+ megabits per second, it’s bi-directional. So if you do the math, that means -- let’s say that everyone is watching a high-definition movie on the internet, if all 16 are, then they could have a maximum speed of 31.25 megabits per second on that system, given that it’s shared. But if one of them wants to blast away at 5:00 am, they can have 100 megabits all to themselves. That’s the limit of their network interface unit. We added to the architecture analysis an active Ethernet system design which is made by manufacturers such as WorldWide Packets, Harmonics, Cisco, Telcol Systems and the like. The reason that we looked at this is because it uses a 2 fiber technology which is based on Ethernet standards and this offers, for the most part the only interoperable alternative at this time. For example, you could inter op Harmonic’s with Telco Systems, and Telco Systems with World Wide Packets, and things like that on a limited basis. There are some advantages to the 2-fiber system. Most of these systems include analog video overlay, which is simply provided over a separate wave length as an option, and what these things allow you to do is, instead of sharing bandwidth to subscribers, each subscriber gets a dedicated fiber pair from the active node that has a capability of delivering 100 megabits per second all the time. Not literally all the time, but that’s both the shared with the non-shared, and that’s the maximum. So unlike the Wave 7 system where it’s shared between 16, you don’t have that. You will always have bottlenecks in the network no matter what you do. The other piece that we looked at in terms of Fiber to the Home Alternatives was the construction technique or the deployment technique. In the case of most fiber to the home systems, most fiber systems use a traditional fiber approach in which your fiber is bundled in a sheath. If it’s 144-fiber cable, it means you have 12 loose tubes with 12 fibers each in the loose tubes or 12 ribbons of 12 fibers each which is a traditional cable, just like you’d see up on the pole. In terms of what this offers, it is the predominant method of constructional. It’s been in use for 30 plus years. Typically what happens is you construct the network with very large fiber cables going past homes hoping that you sized the cables with enough fiber to serve the homes as you cut into them and connect the fiber by splicing. The advantages of this type of construction are hands down. It is 99.99% of everything that’s being built today. Things being built today are being built with traditional fiber construction. That offers you multiple suppliers; offers you 10 ways to Sunday as far as options in terms of options or enclosures and connectors and things like that for both underground and overhead scenarios. And you also got a situation where given the technology bust in the last couple of years, you’ve got struggling fiber suppliers that have admitted they’re selling below raw material costs. So it’s “Fire sale” 7 days a week. The disadvantages to this type of technology is that you do fiber splicing at the service pole location, which means you could be in someone’s backyard where some service poles are. It’s hard to get a clean environment where some service poles are, so it makes it a little more difficult and a little more time-consuming to make that connection. 4/2/03 UAC MINUTES APPROVED Page 23 of 53 If you don’t plan correctly, any expansion requires expensive wave division multiplexing equipment in the future to add more wavelengths. Or, it requires another build of the fiber cable on top of what’s already there. That’s basically it. There used to long lead times, it used to be expensive, which may come around in the future, but that’s not really the case now. The alternative that we talked about in the business case that is coming about domestically -- it has been going like gangbusters internationally --it is a technology called “blown fiber”. It’s an actually an approach that’s been around 20 or 30 years as well, but there are a couple of companies that are perfecting this for outside plant applications given the Fiber to the Home boom that’s expected to happen in the next 5 years. There’s over 200,000 miles of blown fiber deployed world-wide, mostly internationally obviously and underground areas. It uses a micro tube technology as the pathway for future fiber link. It’s blown down with an air compressor. Basically what you put in these microtubes that are in a little bit larger sheath that pass all homes in the neighborhood. Then you blow fiber from the node to the subscriber who signed on. I call this Plastics to the Home, instead of Fiber to the Home, because you’re really only putting in plastic until someone signs up. The advantage to this approach is that you pay as you grow, assuming that the cost of the plastic is less expensive than the cost of 144 to 288 fiber cable. This would be a good deal. It’s very effective in low penetration scenarios because the cost is lower up front, if you don’t get the kind of penetration you need. Its plastic tubes are (easier to manage than Fiber), especially when you’re looking at a service pole location. The tech is only going up and connecting a pneumatic connector to 2 3ml tubes. They’re working with Fiber at the node location, and at the home location. So when they’re up on a pole or up in the service space, they’re only dealing with plastic tubes, not fiber connections. Disadvantages. We’ve got limited domestic deployment and limited overhead deployment. The international deployment, for example, in Mexico City, is all underground, so they haven’t had to deal with the types of issues in the overhead areas like they will in the States. The economics of this approach really depend on the price of traditional fiber cabling. Since fiber cabling is at rock bottom prices, this approach is a little bit disadvantaged at this time. In moving from Fiber to the Home to Hybrid Fiber Co-ax, we’ll tie all these up with the economics in a minute here. With hybrid fiber co- ax, it is a shared system from the head end where all the contact is provided to the subscribers. It uses analog spectrum typically from 5 megahertz to anywhere to 870 megahertz for all the services. It is capable of providing video, voice and data. The advantage here is that the technology has been around since mid-80’s. I’m not talking about cable technology, I’m talking about the introduction of fiber optics into a cable plant. It tends to be, is certainly the least expensive broadband architecture to build initially. Your initial construction cost is going to be less. There is a large base of qualified technicians as the cable industry continues to consolidate. They tend to spin off some people, like my new partner here. It is capable of delivering all three services. 4/2/03 UAC MINUTES APPROVED Page 24 of 53 But the disadvantages here are pretty clear as well. You have higher life cycle costs because you’ve got metallic components. You’ve got metallic connectors that are shrinking or expanding in the heat , in the cold and they’re corroding. A small spur, an aluminum spur can cause all kinds of ingress and egress problems. You’ve got higher incidences of service interruption because you have all kinds of different opportunities for things to go wrong. It’s not really well suited for providing anything but broadcast video. It can provide 3 services, if you really jam them in there. But the system was developed for people who couldn’t get TV off of their home antenna, so they put an antenna up on a mountain and ran co-ax from the mountain to their TV. It wasn’t built to provide telephone or internet. So what you’re really doing here is trying to evolve a technology to serve something it was never built to do. Given that, it’s already straining from the load of internet and telephone services in terms of searching for that 860 megahertz spectrum. Now you’re talking about high definition television, video on demand, and we believe that any system you put in today is going to need to be upgraded within 10 years anyway. So in an architecture summary, given the numbers that Peregrine has done for the common neighborhoods, looking at the 1 fiber, 2 fiber systems using traditional fiber: The one fiber system with the blown fiber architecture and then the hybrid fiber co-ax system. We broke it into 2 sections: the first section is the network cost, which is the cost per meter passed, cost to build the system past every home, and then the new subscriber cost, and these figures are given below what’s in each category. The cost to each new subscriber includes the drop fee, will be the labor, the connectors, the network interfacing, and so on. And the assumption here is that we’re delivering all three services, video, voice, data. Dawes: What is the planning number that you used for the number of meters we would put in for the initial system buildout? Shaw: 23,500 + 3.900. Dawes: 23,500. Shaw: Yes, I think it’s 26,400. Dawes: And what was the second number? Shaw: 3,900 commercial meters. Dawes: So the number of meters we’re talking about is 27,400. Shaw: Yes. Dawes: So, in order to get.-- I’m interested in the capital cost, out of the box. Do you have a slide of it? 4/2/03 UAC MINUTES APPROVED Page 25 of 53 Shaw: Yes. Basically what I’m trying to set up here is why we continue to use the one fiber design. On the 2 fiber, and we’ll get to the summary here in a minute, but we’re continuing to go with the one fiber traditional because the fiber costs have literally been cut by 2/3rds, since we last ran these numbers. They were 4.5 cents a fiber foot, and they’ve come down to less than a penny per fiber foot. I’m not sure that’s going to last forever, but the indications are sure good that’s the way it’s going to go, at least till the end of the year. New subscriber costs are less as well. In terms of summary on the Fiber to the Home system issue, the blown fiber vs the traditional, the fiber pricing has dropped enough that the traditional method wins the financial battle. The single fiber vs two fiber: the two fiber is 11% more than the single fiber system, which adds a material amount, but not a material amount in the per subscriber cost. It doesn’t mean that the single fiber system is better than the two fiber system. It just means that, financially, it wins. For the current time we’re going to use that, those base line numbers in the business case and because the two fiber system still has some advantages over a single fiber, and that way and for that reason, we’re recommending we use the single fiber system as the baseline of the business plan. It will provide the same baseline functionality as a 2 fiber system but it doesn’t make any sense for Palo Alto to say we’ve decided on Wave 7 or World Wide Packets or what have you. Until the time comes to actually do it, and work with us to do it and get everyone’s best answers on that. The next thing we’re going to look at is comparing Fiber to the Home to hybrid fiber co- ax. On the network construction, this is the list of assumptions. On the network side, we are looking at $439 per meter path to construct the system, and $754 per meter pass to construct fiber to the home. Then we can go down the line. What we did add since we last talked last fall was upgrade numbers, because with the hybrid fiber co-ax system we’ve put in $400 per meter and in the seventh year, upgrade the system to a fiber to the home system for competitive reasons and life cycle maintenance issues. We’ve also added $350 per network interface unit to upgrade network interface units to move to fiber to the home. We also handicapped the fiber to the home somewhat by adding $100 to the meter and upgrade costs in the tenth year. That would not go towards new fiber, it would go towards upgrading the node equipment and the head-end equipment as required. We also added $150 per network interface unit interface unit in the tenth year to upgrade network interface units for new service or what have you. The maintenance requirements are more, the customer service requirements are more in hybrid fiber co-ax -- this is related to service interruptions. We looked at pricing to be the same on both, and the penetrations the same on both, except we gave fiber to the home about 10% bump penetration on Internet service because, let’s face it, that’s the where the advantages are going to come. Your television is not going to be – you’re going to offered more television services but we did not handicap HFC. We did not make HFC suffer any more, other than on internet. When you look at the bottom line numbers, the hybrid fiber co-ax system would have a bond of 17.1 million, the working capital would be 9.2. That’s because in the seventh year, you don’t have enough cash in the bank to cover the rebuild cost, so it has to come out as working capital, and that’s carried on the books as a loan. You’re total funding 4/2/03 UAC MINUTES APPROVED Page 26 of 53 over a 15 year period is 26.3 million, compared to 34.7 on the fiber to the home. The total revenue given that we haven’t handicapped the HFC systems isn’t quite as much as we could have, but total revenue is about the same. The operating income is more with fiber to the home because your expenses are less, your cash flow in the fifteenth year is actually less, but that’s because you’re still paying on a 32 million bond over an 18 year period. Once that bond is paid off, the cash flow is going to jump. You see the accumulated cash is still $38 million in the 15th year for fiber to the home. Your return on investment is fairly close – a little bit better with hybrid fiber co-ax, but your ______are higher, and you’re able to pay off. Your cash reserves reach the level of total outstanding debt in 12 years in fiber to the home. Just to wrap this up, hybrid fiber co-ax may be less expensive in the short run, but we see it just as expensive in the long run in terms of upgrade requirements, and higher life cycle costs. You got two phases of outside construction, with an upgrade, and this construction is in the backyards, it’s not down Main Street. You’ve got less upside potential in the short and long run and you’ve got limited expansion capacity for future services. Fiber to the home is more expensive in the short run, but also reduces or eliminates your construction mess over a 30 year period on your outside plant.. You upgrade the electronics -- not the fiber facilities. It offers a clear advantage over incumbent services, so we can see that our recommendation is the Fiber to the Home not HFC. I hope we were able to tie that off. I’ll take any questions. Carlson: Commissioner Rosenbaum, go ahead. Rosenbaum: When you were here in the summer, you estimated the cost of the fiber to the home system as $50 million dollars and now it’s 2/3’s. You want to go through the reasons for that? I assume it’s something more than the reduced price of fiber. Shaw: Yes, what we’re doing there is taking about $18 million dollars out of the project by reducing the fiber costs, and fine-tuning the construction methods based on experiences in Provo and Massachusetts, based on trial runs there with actual deployment of this new technology. Also we have taken about $200 out of the per subscriber incremental costs, in terms of the advanced splicing techniques, and things you can do in the initial construction phase to save that money in the per subscriber cost. All of that capitalization is coming out of the network bill; the network bill cost came down from $1,095 to $750 so about $300 there and about another $200 from a per subscriber level. Rosenbaum: When you speak of techniques used in Provo, what are you referring to? Shaw: When a lot of these engineering projects are done for new technologies, it’s done on the way they think they would do them. Since the numbers were wrong last summer, two of us actually had the opportunity work in Provo, stand alongside technicians that are doing things in the field. Different types of enclosures, different methods of drop and closures and things like that during construction that really help in reducing per 4/2/03 UAC MINUTES APPROVED Page 27 of 53 subscriber incremental costs -- like pre-connector splicing the fiber in an enclosure vs having the installer do the connector splicing in the enclosure is more efficient. Rosenbaum: You’re not talking about blown fiber there, that’s… Shaw: No this is traditional fiber. The blown fiber as you can see is still a little bit more expensive but we recommend we keep that in mind, especially as fiber prices go up, because it may still make sense in the future. Rosenbaum: And at some point, you don’t have to do it tonight, you’ll tell else how Provo is getting along in its decision making process. Shaw: Yes Carlson: Any more questions on this segment? Go ahead George Bechtel: Neil, I’ve had some discussions with some technical as a result of recent conference last week called the Optical Fiber Conference. They were telling me about some stuff in Japan and some of the prices and so on. Are you familiar with what Japan is doing in terms of network architecture? I hear things like single mode fiber, I hear 155 megabits, I hear 2 wave length systems, I hear all those kinds of things and some of the prices that they’re quoting are parts of a cent per ______. A company I’m consulting for is interested in these and they are very very low. You know and understand a little bit more about what those folks are doing. I think they’re going to be driving this industry more than the U.S. will be in the next few years. Shaw: Well, I know that Manuel Topete now with Blake’s group is researching Japan very heavily. When we talk about Japan they definitely will drive a lot of volume. In terms of their architectures they have a lot less, their density characteristics are a lot different than Palo Alto. I’m not really going to speak on Japan because I don’t really know much about that. But the things you’re mentioning are all things that are happening here as well. The 155 megabit system sounds like an ATM standard, which is things like Alcatel and Optical Solutions. Those are ATM standards, NTT, right, and the 2 wave length standard, that’s also something that is used on a single fiber system. I’ll have to defer to Manuel on that. I’m sure he’d be happy to provide. Carlson: Manuel, you want to go ahead? Topete: Certainly. I was not prepared with numbers or statistical figures or anything, but I can recall my research. Japan is basically offering just pure Internet service. That’s a very very big difference between our model here and what they are doing. Japan is 100% satellite. It has to do a lot with a lot of their idiosyncracy. I recently had an opportunity to converse with several Japanese representatives from different companies from Japan, and they were explaining that to me. They just conform. If they can’t get TV, well they don’t get TV, they read a book. Basically, that’s what he said. Whether if that’s true or 4/2/03 UAC MINUTES APPROVED Page 28 of 53 not, that’s a different story. In all reality, Japan is not offering video services over the Internet. It’s basically 100 megabits on the best-efforts basis, and that’s what they are doing. Recently there is a slight move towards single fiber services _____ and that will probably in the future bring video services through fiber to the home. But that’s where they stand at this point. Beecham: I would add on that Japan, their market is quite different from here. As he mentioned the density is quite different but also their regulatory structure is different, their marketing structure is different, their pricing structure is much different. What may be economical in Japan would be so for quite different reasons than we might find here. Carlson: Any more questions on this section? Go ahead Dick. Rosenbaum: In addition to the overall cost estimate being reduced, it seems to me you’ve reduced the basic charges, the monthly charges that you had estimate we have to charge also. You’re really talking about $27.50 for residential internet? Shaw: That’s if we were to wholesale that service. We’re talking $40.00 if we were to retail it. And that compares to, it’s well known that AOL is paying broadband providers $35.00 a month, so for access. But we believe the steady state will come down around $27.50 . Rosenbaum: All right then, for cable you’re now talking about $35.00 for expanded basic service. Shaw: That hasn’t changed. Rosenbaum: Thank you. Carlson: Anything more on this section? Thank you very much Neil. Are we going to talk about next steps at all? Ulrich: Well, I’ve outlined in last month and then it’s listed down here under May, you’ll give the final report at the May 7th meeting and then the final report, Phase II is scheduled is for the June meeting. As you can also see on Page 3 of the memo on this item, it lists the schedule. The final report of Phase II is slated for June 4th, 2003. Shaw: I’m sorry, given the fact -- I have to apologize for wanting to squeeze all this in . It was supposed to be 45 minutes. We were thinking we had a couple of hours two weeks ago, but we really did get snowed in. I think you saw it on the news. So we are kind of off by two weeks. What we’d like to do is just tie off the HFC versus Fiber to the Home, if we can assume we’re ok to go with Fiber to the Home, we will proceed on that with a business plan. Is that a safe assumption? 4/2/03 UAC MINUTES APPROVED Page 29 of 53 Dawes: Could you address the ROI’s and the time to have sufficient capital to repay all the debt? That was a key metric you had in the last time, and frankly, I can’t remember what those respective numbers that you had in the last presentation. But it seems to me that even though the price has come down mightily on the FTTH scenario that the payback has not improved. I can’t recall for sure. Could you…? Shaw: Well the other thing we’ve done on that Fiber to the Home , we’ve also adjusted the penetrations by using a different overstatement adjustment factor. Dawes: What is that? Shaw: That means that instead of, we’ve become a little bit more conservative on the number of people that say they definitely would or probably would. We’ve taken those conversion factors down somewhat. Before it was 75% and 40% of the top two boxes, now it’s 70%-30%. That takes the penetration down as the chart showed, that Blake showed in terms of the video, internet and phone penetrations. We streamlined that process a little bit and while the capital requirements have come down, the profitability has stayed just about the same. Dawes: So basically Blake’s slides which has the blue line, that is the reduced penetration rates that is implicit here? Shaw: Yes. Dawes: So that the payback and the ROI’s are apparently about the same, with the capital cost reduction and the reduced penetration? Shaw: Yes Dawes: Thank you Shaw: Where I’m getting at is: we’re allowed to go forward with beginning the development of a business plan with some basic assumptions that we’re going to go forward with Fiber to the Home, that the Palo Alto retail with wholesale partners is a good plan. Then we’ll be able to come to the next [May]meeting, with the final report on Phase I, which is the tie-off on the business case items. We’ll be able to give a preliminary readout on where we are with the business plan, so you can give course directions on that as well. Same as we asked for course directions tonight on these items. Dawes: I’m a little concerned about the legal input. I read that the lawyers don’t want to have any input until there’s a decision made as to whether it’s going to be retail or wholesale situation for each of the various services. To me the legal aspects bear mightily on this situation. If there are difficulties in offering in say retail services, then… 4/2/03 UAC MINUTES APPROVED Page 30 of 53 Uhlrich: We’re trying to sort out what it is you want to accomplish tonight and what input you can give to Neil so he can complete Phase II. Is you question related to trying to get the answer this evening? Dawes: Yes, it is. He’s trying to pin down the retail versus wholesale as I understand it. To me, the legal input is part and parcel of that decision. Yet the lawyers are begging off until a selection is made. They may come back and say, well you picked retail for cable TV but you can’t do it because the franchise…..it doesn’t make any sense to me. Ulrich: Excellent question. Let me just go back to Neil to make sure we find out what it is he wants from us this evening. Shaw: The work in progress read on the business plan at the next meeting will include from the attorney, and that will be included in the final report for this Phase. I guess the thing I was looking for is are we good to go on Fiber to the Home vs HFC. That’s the key issue. That’s the only thing we need to know tonight. If there are any open issues with that we need to know that will influence what we do going forward. Bechtel: I assume your plan at the next meeting is to give us a written report with more information to back up these view points Shaw: Yes, the plan will be to give a summary report of what we provided with enough information to back up what we’ve recommended. So the answer is yes. Dawes: I guess my personal preference, and I don’t know about my colleagues, would be to wait until I see more complete data before making the decision on Fiber to the Home versus the hybrid. I admit your arguments at the moment look very good. I would benefit from the opportunity to look at the data in a little more detail than what you could present here in preliminary form. Carlson: Anybody else want to weigh in on that issue? George?. Bechtel: I would be concerned for us taking a vote tonight since I think this was an information item, so I’m just looking . . . Ulrich: I think you’re correct. It would not be appropriate to take an action item. I think he’s trying to get some feedback which would help him on Phase II. You’re welcome to tell him to keep on doing what he’s doing and no decisions will be made tonight. Rosenbaum: Basically, that’s what I’m gonna say. I was gonna say so far. You still have a month to wrap up the entire project, as I look at the final Phase I goals and Phase II final report. So I agree with Dick that your arguments are very compelling. I’ve always been persuaded that HFC is not the way we should be looking at it, but I think you should just keep marching along, with most of your emphasis on looking at the fiber alternatives and so on, and that’s my feedback to you. 4/2/03 UAC MINUTES APPROVED Page 31 of 53 Shaw: I haven’t heard any red flags or any, “Whoa stop, this is not the way to go” for anything we talked about tonight? Ulrich: Mr. Chairman, since we put a lot of time into it and we’re spending a lot of money on it, I think it’s very important that you look at items 1, 2, 3, 4 to verify: Did Neil, Dave and Blake provide you the information that you asked for before? And if so, they can proceed. If there is any questions or things that are not clear, then they should try and clear those up tonight because that’s the main purpose of tonight’s meeting, to get clarity as to whether they fulfilled the commitment they you asked for, the move they got with Phase I. Carlson: On Phase I, right. Dexter, did you have a question on this? Dawes: Some observations and I’ll address these 1 through 5 as far as my outtake is concerned. I was probably one of the proponents for looking at the combination system, because frankly being spooked by a 50 million dollar number for a fiber system I am substantially relieved to see this new set of numbers and feel that many of my anxieties are addressed. Frankly the numbers are quite flexible because it really really depends on what year you pick to upgrade the combination system to a cable system is what drives the final numbers. If it’s year 7, it’s one number, if it’s year 10, it’s a very different set of numbers. So I don’t put a lot of credence in what the total 15 year number looks like. It’s more that the capital outlay for the fiber system is much more digestible. That is a great relief for me because I’ve always been a proponent of it.. I just felt that it was too big a bite of the apple to take and too big a risk for our rate payers if the thing doesn’t pan out. I assume we’ll have some sort of a sensitivity here at the final report , so that if we missed our penetrations and we come in like poor old Tacoma here, at 17% and 5%, what that’s going to mean to us in terms of how much cost is thrown over on to our electrical rate base and what kind of impact that has on our electric rates. So that’s the guide. When the citizens look at this and understand it they are going to say, “Well what if this thing is really off?” And if you can say well, it’s a ½ cent on the rate and that’s no more than we can tolerate for doing Green Power, and is this incredible fiber system worth as much to you as going into Green Power? That’s the kind of thing people relate to. It’s those kind of numbers I want to get at down the road. Going back to these items 1 though 5, the data survey, I’ve looked quickly at the actual numbers here. I didn’t see that it actually captured how many of the people that were encapsulated. The 200 were actually currently cable ISP or DSL. Maybe I’m not reading it right. Heitzman: I’m sure the data’s available. It may not all be there. We will get it in the final report. Dawes: A little clarification there but, also, again reassuring. Wholesale versus retail is coming down the line. I want more detail on the ISP combination of branded and 4/2/03 UAC MINUTES APPROVED Page 32 of 53 wholesale. And I’m trying to think through whether we’re going confuse the customer, whether we’ll dilute our brand, that sort of thing. More detail on that. The telecom is incidental. I think we subcontract although that’s where we could get a very bad name, if we subcontract to a bum, we could have a lot of people mad at us. So I don’t know what we do about that because I don’t think we’re going to go into the telephone business. And the legal and regulatory, I’d made my views known. I think these guys got to come out of the box so we know what our constraints are rather than having us say what we want to do and then telling us “No”, which is the usual way lawyers want to do it. Shaw: Just to comment on that, I think they gave us report back in December which is pretty broad. What we’re trying to do now is to get them to focus on the specific topics to see if there any other bumps they didn’t spot before. Carlson: Any more commentary? Go ahead Dick. Rosenbaum: I’m not sure at what point you plan to consider this but I did ask for the financial analysis of what I call the 30-30-30 system. $30 for video and internet, and 30% penetration. Is that going to be in Phase II? Shaw: We’ll run those numbers. We can run that scenario without a problem. Rosenbaum: That’s what you said you would do, so . . .good. You seemed a little hesitant. Shaw: And we still will, I promise. Rosenbaum: And then a broader issue. I did send a newspaper article to staff and my colleagues. The concern is with Wi-Fi. I don’t know if that’s in your bailiwick, but is someone on staff going to take a close look? Heitzman: We actually have done some talking to some Wi-Fi guys, but part of what they’re supposed to do in Phase II is a “competitor analysis.” One of the technological competitors would be Wi-Fi. The strategies for dealing with that would come out in Phase II. We could try to add something to this report, just kind of a preliminary discussion of what we’ve discovered so far as the next month’s meeting. Rosenbaum: I don’t think there’s any hurry. I just want to make sure. There’s a lot of hype about Wi-Fi. I only know what I read and it’s hard for me to determine what’s real. Heitzman: We’re experiencing the same thing. We actually interviewed some people who are proponents of Wi-Fi and you kind of read between the lines. It’s a very ill- defined as to what it is capable of and what it’s disadvantages are. Rosenbaum: This Wall Street Journal article specifically mentioned a company in San Francisco they say is planning to make a device that would cover a 4 mile circle. They’re 4/2/03 UAC MINUTES APPROVED Page 33 of 53 right here is San Francisco. I would think that if it’s possible, if they’re interested in talking to us that might be useful. Bechtel: Dick, do you really want to delay the system to 2010? (Laughter) Vivato I think is the company you’re referring to and I read their stuff, and being an old wireless guy it has promise. But there is one thing I wanted and maybe this is up in Phase II. I think there is a way we can get a revenue stream from Wi-Fi and the hot spots. Connecting them up and so think maybe that is something we could deal with at talking about products that we offer and so on. There may be a way to have them join our game an opposed to really being a competitor. Ferguson: Wi-Fi definitely belongs later in the analysis, but it’s an absolutely fascinating question. I look forward to kicking it around -- at the right time. Rosenbaum: I have heard there may be a local operator here in Palo Alto who’s trying to do a local trial with it. Carlson: I want to chime in on that because it’s actually fairly close to me. It’s behind the Thai City restaurant. Somebody is running an experiment. It’s for free right now and it is very high-end wireless. You can just sign up for it and do it. That’s a real interesting technology. It’s right here. Just go by the restaurant and you’ll see a bunch of funny looking antennas behind it. Apparently it covers a few blocks. I think that wireless area is a real, very fast moving potential competitive challenge. I do want to go back these issues 1-4 and give you my input. You’ve done a great job on hybrid versus fiber. I think we’re in good shape on that. But I’m still looking for more detail which I think you have, I just want to see it presented on what is happening in the other cities. How much have they spent? How big are they? How close are they to…I mean I want a page. I really think we need a lot of information on exactly what’s happening. Heitzman: We do have the detail. We will provide that. Beecham: If I could suggest too, this is a general comment, but at some point this commission will have to make a decision. There is never going to be enough information to take care of every option coming up of every city out there that does have experience Certainly in the business world that decisions are made on quite imperfect information. I certainly understand that each of you and on the council as well when it would get to us needs to have confidence in our decision. At some point, I probably would suggest that the commission needs to decide where that information that they have is adequate to make a decision and bite the bullet, and go either yes or no, whatever your decision is. But at some point, just say ok, let’s stop here and either say yes or say no, but not go on interminably. Carlson: Okay, I think that’s it. We can move on. Dexter, one more question. I’ve got two public things that came in the middle of the discussion. Go ahead Dexter. 4/2/03 UAC MINUTES APPROVED Page 34 of 53 Dawes: Apropos of the last comment, it would be highly desirable if expanded our dates to include a final decision point. Whether that is at the June meeting or the July meeting or whatever? Let’s nail that down and put it on our schedule so it becomes an immovable object. Ulrich: I don’t know if it can become immovable, but it is intended that June 4th be that date. If I may interject, again, it’s important I think that we clearly understand that you’re satisfied with items 1-4. If there is missing information or something is not clear, I’d appreciate that you make that real clear to us now. I do have start to wiggle here a bit about the kinds of money we’re continuing to spend on adding more to the analysis stream. If there are other things you want us to do, you know, how much in depth do you want us to go in this Wi-Fi area? And how far? We need some feedback on the depth that it’s going to take for you to feel comfortable with the information to ultimately make these decisions. So as much of that you can give us tonight so that when we come back next month, we’re taking the next step in providing you with that information. Rosenbaum: The only comment I would have on your schedule is that it is a little premature to make a decision at the June meeting because we’ll just be getting this second phase. We might want to have a little time to cogitate on that one. About another month or so would probably be alright. That’s why I wanted to give staff this report. I don’t know whether you’ve seen that. Neil Shaw mentioned at one point there were two guys at the University of Denver who had done a rather negative study of municipal's telecommunications. So I got a copy of it. You can look at it and see if it’s worth getting copies for other people. It’s kind of outdated and it does represent a point of view, without a doubt. Carlson: I think we’ll do a little Oral Communications here now, and move to the other. There are a number of people wanted to talk on this item. And I’ll start with those that haven’t spoken already. David Harris of 455 Margarita? Harris: Hi. There is an aspect of this that I don’t think is coming out and that is gradualness. Apparently economics change significantly if you think in terms of putting every single home with electricity in the city versus putting something down a street and having to attach individual people as a truck rolls slowly, the gradualness aspect. I’m not totally clear if whether this architectural and new subscribers summary which stalks about network and new subscribers, whether is that is some sort of average rate of gradualness. Relating to that is the question: Are there arguments in favor of doing the whole city at once? And the one that does come to mind is the power meter reading, that you could do hourly meter reads and therefore the time of day pricing and all the economic benefits that come to that, we thought about the shortage a couple of years ago. Is the city exploring the utility department I suppose could put input on that. Whether there would be reasonable benefits or explanation of the costs of having a meter reading incorporated therefore throwing the decision toward throwing everybody is big pass? Ulrich: I’ll take just a brief cut at that. You can see that there is no economics or expectation that there is a way of earning money in this Fiber to the Home. While I think 4/2/03 UAC MINUTES APPROVED Page 35 of 53 personally that there will be great opportunities for that and for the utility and the City to provide services that we haven’t thought about including meter reading. Unfortunately, the meter reading is still the holy grail. We haven’t been able to find an economic way that is less expensive than sending a human out to read 2, 3 or 4 meters at each home. Harris: You understand, I’m talking about a whole different kind of meter reading, hourly, minute, so that you could do the time of day. Ulrich: Absolutely. Once you have a connection to people’s homes, it’s just only a matter of finding the technology that will make that work. Thank you. Carlson: Okay.. Art Keller, 3881 Covina Way Keller: I’d like to say a couple of things. First of all, as a follow-up on his comment, I noticed that certain large businesses in Palo Alto with respect to electricity have agreements with Palo Alto Utilities on load shedding when there is power shortage. It is perfectly easy with a fiber to the home system where all of the homes are connected using internet to provide messages to people saying “We have a power shortage. Would you please reduce your usage?” To the extent that their computer’s on, they could shut down automatically and other devices could be adjusted automatically in people’s homes in order to provide voluntary load shedding to reduce the need as the power utilization grows for increased peak electricity provided to the City of Palo Alto. Because that extra peak electricity is what costs you a lot of money. So I’d like to make that point. I think it’s worthwhile. One comment about the City of Palo Alto utilities is I’d like to commend them for a great deal of care and particularly in terms of reliability and responsiveness. I think that one of the important things about an information utility is a great deal of people being able to rely on it and people being able to be responsive towards it. For example, if you think about a wireless environment, like a Wi-Fi, that reliability does not exist. Weather is a problem and there’s all sorts of other things that prevent Wi-Fi from being a reliable system. The consideration is that people who use the internet rely on it a great deal. A couple of days ago, my DSL line went down because my ISP had a problem with their attachment to the Pac Bell system. An hour and a half later, they had it fixed, which I thought was pretty good. In any event, it indicated the degree of reliability when that happened. A lot of people called up and said “what’s going on?”. Took their usual quick customer service, it took a little bit longer. I think that’s a certain issue that’s worthwhile considering is what can be done about reliability and with respect to reliability I’d like to understand with respect to the study that’s being done is what is the expected reliability is of a 100% fiber system versus an HFC system? Are there differences in expected reliability at network, particularly as the HFC system ages? Carlson: Thank you. Peter Allen, and then he’ll be followed by Sanford Forte. Can we keep these to a couple minutes please? 4/2/03 UAC MINUTES APPROVED Page 36 of 53 Allen: Absolutely. Hi I’m Peter Allen, I live on Hopkins Avenue by the Lucie Stern Center. I’ve got 3 things to say: First of all, I think you’re all doing a great job and you’re going about this the right way. I’m just here to try to help you go it along because I see the possibility of “analysis paralysis” here -- studying it to death -- when the answer really is right in front of your nose. You pretty much have the information you need to make a decision tonight, but if you really feel the need to move it out another month or two, go ahead. We’ll come back. Secondly, HFC networks, there’s never a time to do it right in this Valley, but there’s always time to do it over. Do it right. You need to take another month to decide to go with HFC? Do it. Thirdly, what I have in my hand is what is a simple antennae. It will connect to my notebook computer right here and while I sat back there I attached two wireless networks -- unreliably, but I was able to find two networks to attach to this evening. This antennae simply hooks up through a co-axial cable. It’s made out of a $1.50 soup can you can buy at Safeway. It’s about $5.00 of parts. I have fiber to my home because when I worked at Bell Labs the world was all wireless, or all fiber. You have to understand that if it doesn’t move, you should be a good citizen, wire it. Last time I checked my house doesn’t move. I don’t know how the two people whose networks I eavesdropped on from the back here would feel about my presence tonight, but I do know I feel really good that no one can eavesdrop on my fiber at my home. This has less capacity than HFC. We’re going to be going with fiber to the home, but wireless is a fascinating thing to play with and you’ll all love it and it’s great to roam around with your house wherever you want with one of these. But last time I checked, my house hasn’t moved. Thank you. OK, would anyone care to see this little thing here? It’s just a pasta can with a ¼ wave length stick in it. Carlson: Pass it around. Sanford Forte Forte: Thank you. Two things: First, I wasn’t going to speak but I noted that Dick passed over a study that some people had done about the relative value broadband municipal networks, whether they pay or not. I just wanted to caution the consultants, the utility, and the committee, that there is a lot of misinformation being published by consultants about municipal broadband networks on behalf of the major telcos who are fighting battles almost country-wide. Those battles are being fought - the latest one about was just again yesterday in the Tri-cities areas of Batavia. There are two other cities attached to the Tri-cities. Illinois. They want to deploy their own municipal network and I’m sure which telco has actually been fighting that effort, but there’s been a huge political battle for the last year. Very high priced, well paid consultants, academics amongst them have been asked to publish studies that essentially degrade the promise of municipally run telcos or broadband facilities. I just wanted to caution you on that one. Secondly, and very quickly, I understand that there are a lot question about Wi-Fi. We should be aware however that when the FTTH program started, wireless wasn’t even an issue. Wireless technology is moving at 1.7 times the rate of Moore’s Law. There are wireless technologies available right now that will very nicely satisfy 80% of the needs of Palo Alto’s broadband citizens. Consider that this deployment could be made for literally 4/2/03 UAC MINUTES APPROVED Page 37 of 53 1/10 or less of the lowest broadband estimate that you have come up with. My name is Sanford Forte and I am here as a citizen of Palo Alto, but I would be happy to address any questions that you have at a later date about those possibilities. Thank you. Carlson: And finally, Herb, did you want to say something? Herb Borock? Borock: Yes thank you Mr. Carlson. I want to thank Commissioner Bechtel for pointing out that this meeting was advertised as an information meeting. You might have many more speakers if this was an action meeting. The consultants suggest that the decision on architecture should be delayed and implies it should be made by staff. I believe the final decision should be made by the council. The suggestion is that wholesale internet shouldn’t been limited to the major ISP’s and I believe it should be open to all ISP’s. Thirdly, related to the third item for tonight on the type of business model, and partnering and branding. In the past on the retail model, I recall that the recommendation was that there would be partnering on the retail model and that operating functions would be off loaded to the partner. This evening on the wholesale retail comparison, that item in the chart for retail is blank. I don’t know if now utilities plans to be doing everything in house or what happened with the partnering, say RCN? Or somebody else?. I believe the commission needs more information on that, and hope to get that information and perhaps give direction to staff. Also I believe that on the fiber system that there is a guess of what the penetration will be, and instead of 100%, build out of the fibers that are necessary for all addresses, there would be some smaller percentage, and I need some clarity on that. Not 30% but 100% would seem to be appropriate. I want to thank Commissioner Rosenbaum for pointing out the decrease in the price of $50 million to $35 million and Commissioner Dawes for answering a question that elicited a response about the overstatement assumptions that were made into the model, so we can compare what we had before with what we have now. Finally, I want to point out that over 20 years ago when the city first started considering cable systems, that the city enacted lobbying regulations because of the amount of money involved and the kind of influence that would be put on the Council. However it was a difficult decision, and only 5 council members voted for it. Council member Kline and Witherspoon voted no, and Council members Cobb and Fazanino were absent. Five years later with Mr. Cobb as Mayor the Council repealed the lobbying regulations because they’d already made a decision. As you know, since then we’ve had two franchise transfers, we might have another one, and now we have a big decision on a fiber to the home system. Again where lots of money has been involved, I hope that the Council could enact lobbying regulations to cover this decision when it comes before the Council. Since there are no lobbying regulations now I suppose each of you as an individual can go lobby the Council since it’s not something you can act upon tonight. It means one more thing to put on the agenda but I believe it would be a helpful thing to have for when the Council makes its decision. Thank you. 4/2/03 UAC MINUTES APPROVED Page 38 of 53 Carlson: Thank you. I think it times to move to electricity. Yes. We’re going to adjourn for a couple of minutes here. Everybody’s getting exhausted. Break NCPA MEMBER COST SHARING AGREEMENT FOR THE FINANCING OF THE PLANNING & DEVELOPMENT OF THE POE HYDROELECTRIC PROJECT Ulrich: It’s always an excellent introduction. Thank you. In transposing these two what we have tonight is something that doesn’t come along very often and I hope all have a chance to read the report. This is a cost-sharing agreement for financing for the planning and development of the Poe Hydroelectric Project. And your first question is probably POE Hydroelectric Project? You probably have never heard of it before, yet it clearly was not owned by any municipal utility. It is owned by Pacific Gas and Electric Company and it is one of a number of hydroelectric projects that are in a cascade along our river system. The license was for 50 years. Unfortunately for PG&E, they did not renew the license as required by law. They have to file an application to renew it. So that has given an opportunity to others to come in and attempt to show reasons why license given to them. One of the players that would like to do that is NCPA. We’re asking tonight for agreement to move ahead with helping to fund the licensing process and make the step forward. So you may have some questions around that. Hari Modi from NCPA, who is intimately involved with this and who has been working on it, has joined us this evening to be able to answer some of your questions. Do you have anything you want to say before they ask questions? Carlson: Go ahead Dexter. Dawes: John, I’m fascinated that our long considered electric resource plan primary conclusion was that we needed to diversify our resource base. Ulrich: Yes Dawes: The first request we have is to fund more hydro. Ulrich: Yes Dawes: I know the answer is cheap power and you know I’ll probably go along with it but I just couldn’t pass up the opportunity to… Ulrich: Well, there’s this mantra that just keeps going on and on: “There’s no such a thing as too much 2 cent power.” 4/2/03 UAC MINUTES APPROVED Page 39 of 53 Dawes: I agree. I knew you’d say that. [The report] refers to NCPA’s appeal to the 9th Circuit Court of Appeals but it doesn’t say anything about litigation that’s involved here. I assume the PG&E has gone to court to try to overturn an arbitrary and capriouscious decision that some clerk, slept in on Saturday morning and caused them to lose a $100,000,000 asset so. Ulrich: You can imagine, it’s not their fault. Dawes: Of course not. Evidently the court decided that they would in fact let PG&E keep it and that is what NCPA is appealing, is that correct? Moti: It is slightly different. FERC allowed PG&E, in spite of them not filing on time, to go ahead and file a license application, even though PG&E was late in filing. We said to FERC, we meaning jointly the City of Fremont and NCPA, acting separately indicated to the agency that it did not have the right under the regulations to permit PG&E to refile that license application under the circumstance. So in order to appeal that court’s decision, we NCPA and City of Fremont, filed an appeal in the 9th Circuit Court. Dawes: What’s the probability of success here? There’s a fair amount of money being put up in legal fees and it seems to me a rational point of view that to deprive a struggling entity of an asset on technicality, is pushing things a little bit far. I don’t know if this has been reduced to probability of success but personally I’d say it’s gotta be less than 10%. There’s gotta be some logic and common sense out there. Moti: With respect to the probability the attorneys that are intimately involved in these kinds of cases, indicated to us that under the applicable regulations an entity is given two (2) years to prepare and submit the license application. When an entity such as PG&E in this particular case fails to deliver the license application on time, the law should prevail with respect to not allowing that utility to file. The 9th Circuit Court decision is the one that we have to really rely upon in order to draw the probability case because there are three probabilities: One is that 9th Circuit Court would listen to us, abide by the law, and give us the go ahead with respect to filing the application alone. The other possibility is that the 9th Circuit Court would rule in favor of what the FERC has decided meaning allowing PG&E to file the application and giving it the preference status. And the third possibility is that we both be allowed, both meaning on our side City of Fremont and NCPA, and on the others like PG&E equal consideration. Dawes: Is there any precedent that there’s been a late filing and the courts through all it’s due process has allowed other people to compete for it? Or is this attorneys who are attempting to be hired and want to paid 1.2 million to lead some gullible municipalities down the primrose path of appealing a lost cause? Moti: With respect to the 1.2 million dollars that is not the attorneys cost. That includes the cost of us on the Engineering side performing several required studies with respect to 4/2/03 UAC MINUTES APPROVED Page 40 of 53 the water temperature and other things. As to whether there has been a case like that, to the best of my knowledge, there was one small case, but I do not know the details of it. Dawes: And lastly, how did these percentages come about? Why isn’t Palo Alto in for 35% and Fremont in for 25% rather than the way it is? Moti: [To Ulrich] Should I go ahead and explain to them? Okay. Initially the desire on the part of Fremont and Butte, Butte being the county of origin, wanted to have equal percentage, that is 33 1/3%. But with the opinions and express desire on the part of the NCPA commissioners and the Utility directors, they directed staff to obtain higher percentage because they believed we held the knowledge to expertly move this process more efficiently then Fremont and Butte would ever have. So we negotiated with Fremont to reduce their percentage, and Fremont said that the minimum that they would be willing to go would be 25% and no less than that. Then there was the possibility that if we were to force Fremont to go less than 25%, the entire process with three entities competing with PG&E in this case, would become highly inefficient. So when at the staff level brought the idea of us and NCPA, us assuming the larger percentage 50% and sharing with Butte and Fremont, 25%, that was acceptable to the commission and utility directors. Dawes: Thank you. Carlson: Dick, go ahead. Rosenbaum: Hari it’s nice to see you. People may not know that Hari was project manager for our Calveras project, 20 years ago. So you’ve got another opportunity to pursue hydro -- though there isn’t much construction in this one. But where’s the City of Fremont come from? Why are they involved? Moti: City of Fremont found out about this project through an attorney by the name of Howard Golub who used to be the attorney for PG&E. When Golub noticed this late filing, he detected or his attorneys did and so City of Fremont as we know was desirous from about 2 years back to get a reliable power and was willing to pay a higher price. So Howard Golub approached the City of Fremont and said that would be their opportunity really take this project and reduce their price and perhaps get very reliable power. So that is the Fremont connection, with respect to the project. Rosenbaum: I mean Fremont does not have a municipal utility. What are they gonna do? Moti: Fremont has indicated to us that their desire would be over a very short period of time to make NCPA be the entity to really market it’s share of the project power. They would be the one obtaining the revenue which is what they’re after. However, their long term desire is to understand the power market and to be in that. Rosenbaum: Sounds like someone could write a novel about this. Maybe somebody will. 4/2/03 UAC MINUTES APPROVED Page 41 of 53 Moti: I’m just telling you everything. Ulrich: Who says this business isn’t fun? Carlson: Okay, any more questions on this one? Ulrich: If I could respond? Carlson: Yeah, go ahead Beecham: To Dexter’s questions, if you do look at expected value based on modest probability of success, we’re looking at the valuation of having a 2 cent asset out there. The numbers still look pretty good. Dawes: Even if they lose this re-licensing case, we can’t expropriate it. I mean it’s got to be bought and then there will be a protracted evaluation process of what’s the fair market value. I’m sure if its fair market value was estimated on the basis of current and expected power costs, that the amount that will have to be paid PGE is going to be vastly higher than the equivalent of 2 cents. I don’t see where this 2 cent thing comes from. Somebody’s invented out of whole cloth how much a judge is going to award PGE when they lose this license. I just don’t get it. Moti: There are governing regulations with respect to the competing applications. It’s that in a competition like this if you were to acquire the project from an entity you will be required to pay them the book value, the depreciated book value. The depreciated book value. Beecham: You know, it’s not so funny actually. Go ahead. Moti: The depreciated book value on this project is close to $17-$18 million dollars, and on top of that, there is a requirement that we pay for, what you call, the severance, and the definition of severance with respect to the entity to entity. So the 2 cent number that we have come up with is some basis to it. It is up to the 9th circuit to really agree with us or disagree with us, but the law and the regulations governing the transfer of of licenses under these circumstances is clear. Beecham: The issue hereis: who has the federal license for this? This isn’t an asset 100% owned by PGE, and it’s being put on the market as such. What we are competing for is the federal license and that’s where the value is. PGE’s book value in the actual facility…yes, we’ll pay them a depreciated cost, whatever it cost them. They won’t lose on that. They won’t lose anything, but what we would hope to pick up is the value of the Federal license. 4/2/03 UAC MINUTES APPROVED Page 42 of 53 Moti: You are absolutely right because this is a public resource on a public land, and that is what the government intended initially when issuing the license. Beecham: And in terms of the partnerships, Fremont has identified with what might be a good thing. But in terms of Butte County, working with them, there may be in fact some advantages in terms of going to the Feds and courts and saying. “hey, we’re working with the local county here.” They will get benefits out of this, so therefore, this is one of the benefits of us working. Now let me add in terms of the risks, there is not only a legal risk in the Court of Appeals, but there also may be legislative risk. And PGE can certainly go to Congress and say “hey, you know, write a law for me,” and that’s a risk also that NCPA’s looked at and has acknowledged and has taken into account. Carlson: Go ahead Rick. Ferguson: I move the staff recommendation. Carlson: Is there a second?. Rosenbaum: Seconded. Carlson: All in favor. Dawes: There is a little more discussion. Carlson: All right, some discussion. Dawes: I just want to summarize my feeling here. I think this could be a major blow to the whole municipal power operation. I mean there is reoccurring pressures legislatively in Washington to the effect that municipal powers unfair, two IOU’s, that the ability of municipals to get Federal power at cost, is a huge benefit that the Federal people should get the revenues at fair market values for it. I think if it would be publicized certainly by PG&E that this group of municipal entities is in effect stealing their asset at vastly less than fair market value, and oh by the way, one of them doesn’t even have a municipal power system, and they’re only in for the money. They’re going to get 25% of the power for 2 cents and sell it for 4-7 cents – would just make the whole municipal power movement look terrible and I intend to vote against. I’m not raising my arm. Beecham: If I could respond to that, this in fact not that situation. This is not power marketing administration, this is not a Federally owned facility, this is not a Federally operated facility, this is not the Western Power Administration. This is again an asset, a license that is offered to anybody. We are competing for it. Anybody else can come and compete for it, if they have been watching and careful. PG&E is competing for it. We’re doing that on an equal basis. There is no advantage given to us because we are municipal, this is not disadvantage given to us because we are municipal. This is the competitive 4/2/03 UAC MINUTES APPROVED Page 43 of 53 market. There is no subsidy here. There is no PMA Act issue here, so the issues that may be in some people’s minds and other cases is not relevant to this situation. Carlson: Any more discussion? Bechtel: I’d just like to respond. I think I’m going to support the motion. When it comes to licensing, think about it also, the FCC. All stations, radio, television require an FCC license. It comes up for renewal and if they’ve not done a good job in serving their listener or viewer base, then the FCC does something about it. The airways were ruled many years ago, so I’ll look at it in this way, if they fail to file a license application on time, then I don’t think we’re doing anything wrong by competing in the open market for getting that license. Carlson: Any more discussion? All I favor say aye. Ferguson, Bechtel, Rosenbaum, Beecham: Aye Carlson: I’ll say aye too. Dawes is Nay. Motion passes. Thank you very much Hari. This is going to be fascinating. It is probably worth the $143,000 gamble. Ulrich: Thank you Hari for coming down. I appreciate it. LONG-TERM ELECTRIC ACQUISITION PLAN (LEAP) IMPLEMENTATION RECOMMENDATIONS Carlson: The next item is electricity. The long term purchases, or the medium term purchases Ulrich: As you recall, at our last meeting, we came up with a number of discussion items and recommendations for the long range implementation plan for our future electric energy. This is of such significance, this will go down much like whoever’s on the City Council, and there wasn’t a Utility Advisory Commission, that I could imagine that the City Manager making a recommendation to purchase the Western contract somewhere around 1964. We’re moving into that era again, because of the Western contract portion of that are going away at the end of 2004. We’re here tonight to present and formally make recommendation on the implementation plan and request that you approve our recommendations, and go with us to the City Council for their discussion and approval. Since you’ve been through most of this before, I think probably the best way would be for you to ask us some questions, or if you like us to focus on one of the attachments or some of the items, we’d be glad to do that. Carlson: Go ahead Rick. 4/2/03 UAC MINUTES APPROVED Page 44 of 53 Ferguson: For the sake of meeting efficiency, we really have been together on this topic several times, so maybe I can lead off by asking: what is new in this proposal that we haven’t talked about before? Is there a specific number that’s been in the air, that’s finally came to ground here? Balachandran: Actually there is nothing new. If there’s anything it’s very minor. Changing in the wording, the way in which it is presented. We’ve gone through a very deliberate process and we came to you in that manner last time, basically laying out all of these recommendations, including the block purchases, and the long-term and short-term. So we’ve changed the format of how we’re presenting it, so you see that in the attachment but that’s gonna be our blueprint when we come back to you. The next item you’re going to be hearing about today -- the renewable resource implementation plan, so that’s gonna take a path of its own, that you’re gonna see. You’re gonna see a thermal plant ownership. That will take a path of its own. Certain DSM programs. That will take a path of its own. And we talked to all of you about these. So we just kind’a reformatted it in a way that we can look at that map as we go down the path. Ferguson: Thank you. Carlson: Any other questions on this one? We certainly have looked at it before but this is the final detail. Dexter? Dawes: More of a sort of administrative situation and that is we are going to be embarking on lots of purchases. It’s going to get very confusing about which purchase we’re talking about unless we come up with a nice way of identifying it. For instance, a month ago we talked about short-term purchases and we had 1, 2,3 and basically, we’ve done the one, which is the initial hole-filling purchase. Then we have these two additional ones, no, you’re already shaking your head. I’m already confused. Balachandran We came to you last time saying we planned on buying 3 blocks. The recommendation that we hope will go to council only requires two blocks to be approved by council. The third block council has already given the City Manager authority to do a 1-year deal. So that recommendation will be executed by staff. It doesn’t need to go to Council. Dawes: So you’ll be numbering them just by consecutive block purchases, so when we see things in the future, we’ll be talking about blocks 4 & 5, and we’ll be able to locate them on one of these wonderful charts here. Just so we can track it nicely. Balachandran: Well, I’ll tell you, we’ll look at that because you are going to see a number of reports, Risk Management reports which are gonna track power purchases and these are just the beginning. 4/2/03 UAC MINUTES APPROVED Page 45 of 53 Dawes: That’s right. Balachandran: Once you have, you’re getting to the basic hydro here, I mean you’re gonna get into a number of blocks. I think your comment is basically tracking the different recommendations as we go down. Dawes: And tracking the actual purchases you made. Balachandran: The purchases and how they perform. We plan on doing that. Dawes: Come up with serial number protocol. Balachandran: OK. We’ll take that as an idea and someway of easily identifying it and presenting that information to you. Dawes: Secondly, has this been run by our new Risk Management person? Balachandran: Yeah, the Risk Manager has reviewed this, as has senior management in different departments. Dawes: You’re capping the cost of this thing? Is that wise, given the fact that this may be 3-5 months out, that you’re actually going to make these? Balachandran: There’s a balance that we have to strike between how much flexibility we ask for, given the market price as it is today. I think we are comfortable with what we recommending at 6 cents. Dawes: Okay. I wanted to ask about the RFP for the windmills. That’s my terminology for the renewables. I’m a little unclear, maybe I shouldn’t even address that, because you’re really talking about just these 2 items. Balachandran: No it’s actually…. Dawes: Do talk about it. Balachandran: I’ll answer that actually. You’re gonna get much more information from Karl Knapp when he makes his renewable implementation plan. As far as authority we’re asking for, we’re asking for the two blocks and recommendation 1 is the approval of the plan as a whole. So the actual action item when it comes to buying, whether wind energy or any other renewable energy, that’s gonna come to you at a future meeting. So this is just the plan. The plan is one piece, which is the broad piece, and two specific transactions in that plan. Ulrich: You may want to refer to attachment “A” and the recommended implementation plan that is shown on that document. 4/2/03 UAC MINUTES APPROVED Page 46 of 53 Dawes: I couldn’t make some of the numbers come out. When you talked about, I guess, I don’t want to go into at this point. Balachandran: Commission Dawes, Karl Knapp will be here for the next item. He’ll give you information on the latest on the RFP, if that’s what your question is heading towards? Dawes: No it was more as to the what the coverage’s were? Block 1 looks like it’s about 11%, Block 2 is 4%, and Block 3 is 11% of our consumption. When you look at the table on Page 5, the costs don’t seem to reflect this. I guess it’s because one 24/7, one is On Peak, and so forth. OK, fine. That’s all I have. Carlson: George? Bechtel: Just a practical question on Block 1 and Block 2. Would those be 1 contract each or are we assuming multiple contracts under each of those, to total 25 megawatts? Is that how you would normally do it? I was just curious as to how the RFP process is. Balachandran: It could be multiple. Bechtel: Thank you. Carlson: Any more questions on this one? We need a motion. Go ahead, Rick. Ferguson: I move the staff recommendation. Carlson: Is there a second? Bechtel: I’ll second. Carlson: Any further discussion. All in favor? All: Aye Carlson: Go ahead. Good luck. Glad the prices are dropping. RISK MANAGEMENT REPORT PRESENTATION Ulrich: The next item 5, our Risk Manager is not available this evening and we recommend that we move that to the next meeting. Balachandran: Commissioners, could I just take a moment to introduce some of our staff over here who have worked on it - the previous report? We have Shiva Swaminathan, 4/2/03 UAC MINUTES APPROVED Page 47 of 53 Jane Ratchye, Tom Kabot, and Monica Padilla. They all on the Electric side and they have all contributed to this report and they have done an excellent job. Carlson: Thank you very much. This really is an impressive piece of work Ulrich: I think it’s important to say that the person who just said all that, Girish Balachandran had a lot to do with it too. I think you can see through all the comprehensive reports that being responsible for a utility that has electricity, gas, water, and waste water takes a lot of talent from a lot of different people, so I’m very pleased with the way the staff has put this all together. We will all look back at this a number of years from now and say this was a very important event. Bechtel: Well, actually the bigger step is beyond this interim period. The medium term is the long run. Ulrich: Have to warm you up for the power plant. Carlson: Okay great. RENEWABLE RESOURCE IMPLEMENTATION PRESENTATION Ulrich: Dr. Karl Knapp is here this evening to give you an update on the alternative energy implementation plan, a progress update. Carlson: John, one question – the printed material was of the March 5th thing was printed wrong, so every other page was omitted and I just want to make sure it was unchanged from the one that was actually handed out on March 5th? Balachandran: Yes, that was just an error in printing, and we just use the older one. The copies that we made for the public today had all the pages in it. Carlson: Right Knapp: I only have 40 or 50 slides (laughing), knowing that I was going to be at the end of a long talk. It’s really just an information update to let you know what’s going on with some of the alternative energy plans. I’m happy that it’s not 40 or 50 slides. I just wanted to remind you with the motivation of having environmental program in Utilities is summarized in the three tiers on the chart. Can tell you about what’s going on with _______? And NCPA. That’s the short version of the outline. Now what this diagram is supposed to represent: you know the City has quite a few sustainability policy statements. It’s mentioned in the Comprehensive Plan, you got it in the Green Government pledge we’ve signed onto, its in the utilities strategic plan and there’s a couple of unique opportunities in Palo Alto because we’re a combined electric, gas, and water utility, there are things we can do that don’t necessarily fall into the per view of what most regulations are set up for, which is electric program, and there are gas programs. 4/2/03 UAC MINUTES APPROVED Page 48 of 53 But today, I’m just going to talk about what we’re doing for electric. Later this year what we’ll talk is what we’re doing on a larger perspective. There are basically 3 different funding sources for doing programs. The alternative supply is a big piece of LEAP Guideline 6. It also addresses LEAP Guideline 5, which is local generation so some of the local distributed renewable resources also fall under alternative supply. It’s a portfolio of purchases that everybody shares the cost in. It’s not elective. The guideline stipulates no more than ½ cent per kilowatt hour rate impact. You know these targets are trying to get to 10% by 2008 and 20% by 2015. That’s managed by this group., Resource Management. So we are participating in an RFP that NCPA issued on March 11th, 2003. Responses are due the end of next week, April 11th. Then we’ll come back and tell you next month what we found out and what we think we ought to be doing. So that’s coming pretty soon. At the bottom, I put little notes on which state law is the primary one under which these programs have to operate, or regulate that we have to pay attention to. So that’s SB1078 the States renewable portfolio standard. The Green Power program that you saw recently it’s going to Council April 21st for final approval. Finance has approved the rate schedule changes. We selected a vendor to provide marketing services, 3 Phases Energy and that contract also goes to Council April 21st to get approval, so those go hand in hand. It is governed by SB 1305, the power content label and power disclosure regulations. That is a total voluntary program and those two don’t mix. The alternative supply is in addition to the voluntary program. Anybody who wants to sign up for 100% new renewable power can do it by paying an extras penny ½. Public benefits also is a completely different source. It’s mandatory, 2.8% of retail rate, it’s main goal is returning dollars to the customers in Palo Alto to due energy efficient program. Where it does cross over into alternative supply is monies spent on renewable energy can count towards your supply portfolio, but the intent isn’t to raid public benefits money to make that happen. So we have one project going on now that is funded mostly by the CEC, which is a renewable distributed generation local analysis of a distribution system in Palo Alto. Try to identify are there any locations where this is higher value to actually put some ______________? Or any other renewable generation in town. And that’s funded mostly by the CEC. Of course that fall us AB1890, restructuring how you spend public benefits money. So those are the main 3 funding streams that goes toward this. Alternative supply is going to be a big one, now that we have our own renewable portfolio guidelines. Carlson: You mentioned that public benefits funding was not supposed to be used for developing our alternative supplies, but can it be? Or is it precluded by statute or is this just something that we should prefer not to do? I just want to find out what’s mandatory and what’s desirable. Knapp: It’s the latter. It’s not precluded from spending. In fact, IOU’s are allowed to spend the public discharge for the amount of what the CEC decides at sometime is the fair market price for renewable energy. Right now they said at 5.37 cents, which quite humorously is below the current market price of regular power. So it is allowed to do 4/2/03 UAC MINUTES APPROVED Page 49 of 53 that, but the preference of the marketing department and utilities in general to have that money flow back to our customers, rather than use it to keep portfolios. Carlson: If we wanted to buy a triple wind turbine with part of that money, we could do it, we’re not precluded. Knapp: Right Ulrich: I think there’s another important part the investor owned utilities mandate percentage is limited by the amount of money they collect in the public benefits funds, so they are not forced to spend more than the public benefits dollars toward this renewable portfolio, so at the end of the period of time, if they’re only at 4% or some number, that’s all they have to reach if they can show that they’ve spent just the public benefits dollars. Knapp: So on this RFP, NCPA, Alameda, Roseville, a few others are all involved in trying to get the same type of thing for the same basic purpose, and if we do it all together, we think we can get a better deal is the basic idea. So I just wanted to touch on it sounds like 1/2 cent , and 1/2 cent doesn’t sound like much, but how much does that really cost me translated to contract value, and what do we get for it. I want to make sure when no one is surprised when we come back in a month to talk about 60 to 400 million dollar contracts. The rate impact depends on basically just two things: how much of a premium you’re paying over the market to get renewable energy and what percentage of your portfolio are you buying? Which is volume times price basically. And what the little table shows is for a low-end premium would be and the high-end of what we could spend, so from $10 to $25 per megawatt hour premium, with the rate impact and the actual cost per year, if you buy 10% of the energy or 20% of our energy, the little yellow box in comparison which is our total average supply. It could be as low as 1/10th of a cent per kilowatt hour if we get someone who has a nice $10 per megawatt hour premium, we only buy 10% of it. As you kind of move up that scale, the other end of the spectrum is the most that we’d be willing to spend is about 5 million dollars year more, or about 10% of our commodity cost. We actually think we can be a lot closer to the upper side based on the kind of indicative pricing we’ve seen lately. There are some things coming on-line right now, but we won’t really know until next week. So the total cost, the added costs here $1million to $5 million dollars a year, 10% of the commodity cost we anticipating to spend. It’s the long term commitment that makes the total contract cost look like big number. _________________________ commitment for some of these wind forms that are going to be built so that’s why the number comes up more like $60 million, if it’s that low end premium for 10 years, or $450 million dollars if your paying $15 million dollars every 30 years. Dawes: Could I go back to the table for a little bit? Let’s take that ½ cent box in the lower right hand corner, and then you have per year, plus $5 million and $15 million. The $5 million dollars is the amount equal to ½ cent per kilowatt hour. What’s the $15 million? 4/2/03 UAC MINUTES APPROVED Page 50 of 53 Knapp: 15 million is the actual cost of the contract. So it would be $15 million dollars a year which is $5 million dollars more than you’d pay for generic power. So $5 million is the premium. Right Dawes: And the $15 million dollar is the contract cost. The $15 million dollar contract would displace a $10 million contract is both from other markets. Knapp: I tried to use nice round numbers. Dawes: Is the intent here to buy a power contact x number of megawatt hours per year or is it the intent to buy the asset itself. You know, we’ll go and buy 5 turbines here and 3 over there, so forth and arrange for transmission into our city gate. Or are we just going to go the XYZ power company and say sell us certain number of kilowatt hours? Knapp: We actually asked for the whole range of proposals. Consider equity ownership in a power plant. Someone actually built it for us and we own the whole thing or a power purchase agreement. Sometimes these developers are better off selling us power, especially if they’re building a 200 megawatt wind farm. So I have to see what they come back to offer. We didn’t really have a preference. If our low cost of capital makes it smarter thing to go into a power plant, then we’ll come back and recommend that. Dawes: That’s what enters my mind. All things being equal, I’d much prefer, I’d prefer to own it than buy the output. Knapp: Let me point you when we come back, it could be a big dollar number that we’re recommending and I didn’t want anybody to be surprised that ½ cent could be $450 million dollars. I didn’t think you would be surprised but – so where we’re going from here? This is my last slide, it’s similar to the slide that was in the little LEAP diagram. It was back in April that we had the last real portfolio plan update. The DSM and public benefits plans are pretty much underway and they get brought to you separately. Green Power program redesign is pretty much done and that’s going to start kicking off as soon as approved by Council, hopefully in a few weeks. So the little dotted line is what I’ve been working on trying to make sure we can get the_______ along with the other people who are sticking around. To fulfill this renewable resource target at a cost we are all happy with, so we’ll be coming back after next week and let you know how it goes. That’s pretty much the update. I put a copy of the press release from NCPA at the very end, although it might have printed out as ½ a page. Carlson: Okay any more questions on this? Well I’ve got one that I’m afraid that’s going to create problems for you. That is, there has to be some way in the bidding process here that at least for us locally, probably not NCPA, for you to include megawatts, which are probably the most environmentally of power sources. Knapp: Actually, it turns out I address the separately and not through the RFP. That was brought up and none of the other NCAP member on this particular RFP were interested in 4/2/03 UAC MINUTES APPROVED Page 51 of 53 trying to get bids on efficiency, partially because it’s very difficult to meter that and then put in your power content. There are just some practical issues. Whereas we do want to go after cost effective efficiency under the Guideline number 7, which was a separate item, and in addition to that would be demand-response, which is another very cost- effective way to manage potential congestion costs, with almost no environmental impact. Balachandran: I’d like to add to that item. The long term plan actually spells it out for basically evaluating additional opportunities in investment in energy efficiency improvements and as appropriate additional funding will be recommended, and that’s the long term plan. The short term plan is the demand-response so it’s not off our plan. You’re going to have some implementation plans coming up. Carlson: I just want to say if we are going to be talking about $100 million dollar contact, it’s really sexy when someone comes up with $100 million dollars worth of portable tags. But if you’re going to spend that kind of money there is, in most cases these days, conservation is dramatically more efficient if you’re going to spend that kind of money. And I know it’s very hard to implement, hard to measure, and you don’t get any press for it -- you get lousy press for it. People are really more interested in press than a lot of this but it’s very real. Knapp: I’m sorry, even if we didn’t get a 5 or 10% load reduction, we’d still have to buy 18% of the 20% to make our renewable target. Efficiency doesn’t count as renewable energy, although we have some leeway in that. Carlson: According to what? Knapp: Well, according to the SB1078 we’re supposed to comply with the intent of -- However that does provide municipalities quite a bit of leeway on how we define renewables and we have some opportunities. The other thing on the list we’re coming back with is actually establishing how do we want to define an eligible renewable resource. I’m all for figuring out a way of how to make efficiency, well, whatever the most cost-effective environmentally friendly method of meeting the needs of the customers might be. Carlson: Since we’ve got the leeway, let’s try and at least open up the possibilities that someone’s got some dramatically more efficient technology they loved to implement here for the kind of subjects we’re talking about. Let’s make it possible. Go ahead Dexter. Dawes: Don’t forget the comment I made earlier about the CMUA meeting. If the legislation permits municipals to basically define them as they want and I’m just talking about, if it proves to be so expensive that we cannot possibly meet our 20%, we could simply define our Calaveras project as renewable energy, which it is, and meet the threshold. So I just don’t want make that completely obvious to people. 4/2/03 UAC MINUTES APPROVED Page 52 of 53 Carlson: Any more questions? Dick? Rosenbaum: This NCPA press release contains the usual list of potential sources. In reality, what it is you’re expecting to happen? Knapp: I actually expect to get probably 15 to 20 proposals. I know that for example a couple of wind developers building in Solano County have wind turbines coming on line starting in June. Rosenbaum: You are specifically expecting anything other than wind, really? Knapp: I think there are solar thermal developments that we’ve talked to along with Redding who is interested in doing something jointly with us, but it’s going to be mostly wind, some solar thermal, some incremental geothermal is the other. I’m not sure we’re gonna want to go for it but I believe there will be some proposals along those lines. Wind prices right now are lower than what you can do with a natural gas generator today. In the long run, that’s going to be a pretty interesting to do, to compare. Also, these wind generators are trying to come on by June, are trying to come on by the end of August because of the production investment tax credit that’s supposed to evaporate after that point. So now’s a pretty good time to try to get the opportunity to look at the proposals and decide if we want to do that now, or later, not. It could come up again. I would never hurry in just because of some investment tax credit going away. Rosenbaum: Well, I mean you show here purchase recommendations to the UAC in May, that suggests you’ll be making some quick decisions. Knapp: Well, I guess I am anticipating that there will be a handful of obvious winners, and may be difficult to choose between those. They tend to come in these clusters of “OK, well these are hard to choose from” and “these aren’t.” Maybe if we come back and say we have a recommendation, but it could be this, or could be that, and we’ll have a discussion about the relative merits of the different recommendations. We probably won’t have a single recommendation, unless something is really by far outstanding. Rosenbaum: Thank you. ADJOURNMENT Carlson: This is just an information item. We’re done. I move to adjourn. Is there a second? Dawes: Second. Carlson: An exhausted group -- all in favor? All: Aye 4/2/03 UAC MINUTES APPROVED Page 53 of 53 Carlson: Thank you very much.