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HomeMy WebLinkAbout2003-11-05 Utilities Advisory Commission Summary MinutesNovember 5, 2003 --- APPROVED 12/03/03 --- Page 1 of 33 UTILITIES ADVISORY COMISSION MINUTES NOVEMBER 5, 2003 I. ROLL CALL Rosenbaum: Good evening ladies and gentlemen. This is the regularly scheduled meeting of the UAC November 5th. Commissioners will you please announce your presence? Rosenbaum: Commissioner Carlson Carlson: Present Bechtel: Mr. Bechtel present Rosenbaum: Dick Rosenbaum present Dawes: Dexter Dawes present Dahlen: Elizabeth Dahlen present. Beecham: Liaison Beecham present II. Oral Communications Rosenbaum: Alright the next item is Oral Communication. Is there anybody in the audience who would like to address us on any topic which is not on the Agenda? Seeing none we will move on to approval of minutes. Do I have any comments or motion to approve? III. Approval of Minutes Bechtel: Vote to approve the minutes of the last meeting held October l, 2003. Rosenbaum: We have a motion by Bechtel and a second by Carlson to approve the minutes. All in favor. Bechtel: Aye Carlson: Aye. November 5, 2003 --- APPROVED 12/03/03 --- Page 2 of 33 IV. Agenda Review and Revisions Rosenbaum: That passes unanimously. Agenda Review and Revisions. John do you have anything there? Ulrich: I do not have any Agenda changes. I would ask just for the audience and everyone here that all of this is being recorded and we won’t be able to hear you unless your red microphone is lit and for the audience that is not a member of the UAC if you will announce your name before you speak that will make it easier for us to do the minutes. I’d also while I’m mentioning that request, that consideration be given from a member of the UAC to go back to the plan we had a year or so ago where a member of the UAC participates with the staff with the review of the minutes before they are finalized that way we can make sure that we are catching everything that was intended to be said. If you would be willing to do that I would like to send that of to the Commissioner. V. Reports From Commissioner Meetings/Events Rosenbaum: Alright. Thank you John for that reminder. The Commissioners will check to see who would like to take on that responsibility. Reports from Commissioners meetings or events. Do we have anything? Seeing none let’s move on to the Utilities Director’s Report. John. VI. Director of Utilities Report Ulrich: Thank you. First thing first. Our congratulations to Mr. Beecham, Commissioner of NCPA and Council Member who has just been reelected. I look forward to keep working with you for the next four years. We have got a lot more to do. My report has a number of items and got a number of dates and times and I will send you a note with the dates and if you don’t catch some of them I will fill you in. Items that are scheduled for the Council action items are ratification of the PG&E Natural Gas Service Agreements that will take place that took place on November 10th. Resolution regarding the Utilities Rate Stabilization Reserve Guidelines and suspending Gas Rate Schedule G7 that was approved by the Finance Committee on October 28th and that will go to the City Council on December 15th and thank you to Chairman Dick Rosenbaum for attending the Finance Committee Meeting and participating in the discussions on several of the items. We had approval of the utility electric master agreements. There were seven of those and the Finance Committee will have that on November 18th. Those were reviewed and then they will go to the City Council on December 15th. A Resolution of Intent to form a Underground Utility District Project 39. This is a Sherman El Camino Real, Page Mill and Park Boulevard. There will be a public hearing and adoption of the resolution on December 8th. Approval of the Water Integrated Resource Plan Guidelines on 11/18 to Finance and 12/15 to the Council. Approval of the Utility Gas Master Agreements, five of those that were approved by the Finance Committee on October 28th. Council is November 24th. The Central Valley Project, or actually the CVP Corporation, went to the Finance Committee on 10/28 and there will be a hearing at the Council on December 8th. And I’d appreciate attendance by the UAC at that meeting. We did not have unanimous approval by the City Council Finance Committee and therefore there will be a hearing and a report from the staff at the December 8th Council meeting. The last item in action November 5, 2003 --- APPROVED 12/03/03 --- Page 3 of 33 is Fiber to the Home Phase II Final Report. As noted we will be changing the date to go to the Finance Committee and Policy and Service Committee and then on to the City Council sometime in the later part of January. I would like to discuss scheduling the special Fiber to the Home Meeting with the Utility Advisory Commission. I can do that now if you like. Couple of information items, the Utilities Public Benefit Plan for 03-05 will go to the City Council on November 17th as an information item. The Annual Performance Report on Customer Service, pardon me Customer Sales Contract, which we do annually will go to the Council on December 15 and then we will have a Strategic Plan Update to the Council on November 24th. I appreciate you following me along with all these dates. I think it is important to communicate the activities that we are doing. Regarding the special Fiber to the Home Meeting, I’d like to propose that we have that scheduled for January the 28th. That would give us we would distribute the final report two weeks before hand and still allow us to have the normal UAC Meeting for January and I would propose we would have that on the second Wednesday of the month which would be January 14th and then the special meeting for Fiber to the Home would be on January 28th. Rosenbaum: Excuse me. The NCPA meeting and the Strategic planning when will that occur? Ulrich: That is on January 22nd and 23rd. Thanks for bringing that up. That is the reason why we are suggesting having the normal meeting on the 14th. Rather than as we normally have the first meeting of the year on the third Wednesday of the month. Hope that all those dates are clear. The February Commission Meeting I would propose be on the 2nd Wednesday which would be February the 11th and then all of the remaining dates of the year would be the first Wednesday of the month. Another highlight that I would like to point out in this meeting tonight it is FERC issued their order on Market Design 02 better known as MD02 on October 28th and their action essentially represents a conceptual plan rather than a detailed comprehensive tariff revision. In the order among several other actions the Commission accepted the California’s ISO’s proposal to implement locational marginal pricing or LMP and what is known as the Integrated Forward Market in redesigning its congestion management system. Directed the California ISO to complete the study of a proposed congestion revenue rights allocation process and require the California ISO to file detailed information on the proposed first year allocation and direct the California ISO to make an initial filing of this allocation information at least three months prior to its tariff filing. If it sounds like I am reading from the order that’s correct. There are a number of other details and I won’t go into that but the order is here, we are going to have to determine what impact, if any, it will have on Palo Alto. Dawes: John my recollection was that was thought to be serious financial penalty for us that locational marginal pricing. Is this a big loss for us or we just don’t know enough about it at this point or what the issue is? Ulrich: We know quite a bit about it. But if it is in our own perception of what we think is going to happen. We need more work to determine what will actually happen. If you November 5, 2003 --- APPROVED 12/03/03 --- Page 4 of 33 are looking for good news on this, location marginal pricing essentially puts congestion charges where supposedly congestion exists. If there is good news in this the way it is going to be calculated appears to be spread over a large group of customers rather than being node specific. So instead of charges all being put into Palo Alto, it would be spread out under a much larger group of customers. Dawes: Is it clear where the use of proceeds would go? Because initially there was that sort of going into the general pot rather than going into specifically relieving congestion where the people would have to pay for it. Is there anything new on that? Ulrich: I don’t believe that there is any more clarity on that. I would take the negative view of that there is anything that is going to specifically require every cent that is spent on congestion to go into a particular project to relieve congestion. Dawes: Are we going to be actively involved in trying to work through this to our best advantage? Ulrich: Yeah we are. Dawes: Thank you. Chairman. Bechtel: John, there was a story I believe yesterday in the Wall Street Journal which I forgot to bring in that talked about FERC and Standard Market Design and the opposition by a number of Western and other utilities around the U.S.. That seems to me to say that the SMD and all of that is going to be strung out for many more years. Particularly I noted that Senator Maria Cantwell of Washington was prominent in taking on this issue right away. Is what we just talked about in FERC order of October really going to be happening? Ulrich: Well it appears that it is. Our staff is attending a FERC technical conference tomorrow in San Francisco to learn more about it. But I think you can see no matter how much push back there is from our senators who have done a lot of lobbying in this area that FERC is pushing us right into California and California is going to do it. Bechtel: Thank you. Ulrich: And we will have more to say I think during the Quarterly Report if you like more details. Do you like to add something to the Directors Report? Balachandran: This is Girish Balachandran. Just add a couple of sentences over here to address what Commissioner Bechtel said. You are right in that there is a lot of opposition to SMD but MD02, which is the California’s restructuring proposal, has been initiated by the State and the Federal Government and legislators differed to State rights. So SMD and all the Energy Bill Legislation that negotiation were there to slow down SMD, the potential of that wont affect the speed of implementation of MD02. November 5, 2003 --- APPROVED 12/03/03 --- Page 5 of 33 Bechtel: Okay Thank you. Ulrich: Couple of other items: The winter national gas usage that we are going to see; if the winter is going to be like what we have seen in the last few days we are going to see a lot of more gas usage in Palo Alto and other parts of the state and this will be another example of the differentiation between the way PG&E and other Western Utilities purchase natural gas as compared with our laddering strategy. Currently, our forecast shows that 100 therms of gas in the winter and 30 therms in the summer our Palo Alto residents will be paying $67.07. while PG&E residential customers will be paying I am going to gulp at this because I am paying it $102.63 based on November prices. So residents of Palo Alto if they use this magical 100 therms will be paying 35% less than a PG&E customer across San Francisquito Creek. Dawes: Sorry I am jumping ahead a little bit because it is in the Gas Report but if it is right what I recall and we use more gas than we have contracted for say in November and December both do we then have to buy that extra at market rates spot market? Ulrich: Yeah, if it goes beyond what we have contracted for that’s the part will be at the market. Dawes: Thanks. Ulrich: Now the laddering and I always have to say it is not a panacea for anything. It just shows that what we are attempting to do is to stabilize rates by buying the gas at various incremental times in this laddering.. So there will be times that we saw in the last couple of years where the Palo Alto rates could be higher than PG&E because spot market at the time PG&E buys happens to be less than our melded average cost. But we believe in and I know you do that it is appropriate to go forward on buying gas and doing it in a way it has some predictability and stability in it. You have in front of you a copy of the “My Utilities Account” which is, I believe, the screen announcement that our customers will be able , effective November 1st which is already past will be able to go into our website, view your current account balance and due date, access your billing history including payments and charges, view historical consumption data update or add your telephone number or email address, access program and rebate information, sign up for Palo Alto’s automatic bank drafting program and send a secure message to us for questions. And we expect sometime next year the ability where people actually pay their bill directly to us on line rather than doing the automatic bank-drafting program. And for those who would like to look at the actual rate schedule and go through therm by therm every single rates schedule we have is up-to-date and is on our website and therefore any residential, commercial or wannabe a customer that would salivate to have rates in Palo Alto can look at it. Whether you are here in Palo Alto or you are in Nairobi. That is my brief report and I will be glad to answer some of the questions either now or during our quarterly report. Rosenbaum: I want to commend the staff for getting this on line utility account information available and I am particularly pleased that our rates will now be available on November 5, 2003 --- APPROVED 12/03/03 --- Page 6 of 33 the website. With respect to the very busy meeting schedule when is the APPA legislative sessions scheduled? Ulrich: The one in Washington DC? I have that, I think it is the first week in February. Do you have specific questions on that? Rosenbaum: Well I was just trying to fit that in with everything else that is going on. It would appear if that’s the case that there are five weeks in a row with significant Utility business going on and I would just express my concern for our newly reelected Councilmember who will be closely involved with all of those activities five weeks in a row possibly while being Mayor also. That is quite a burden. Beecham: It is a challenge towards which I look forward. Regarding the trip to DC APPA has been somewhat disassociated with NCPA trip to DC. So NCPA will be having its treck to DC in late April and that’s so in fact we do not wind up being there with all the other APPA members and have our boards and our issues diluted. Ulrich: That’s correct. We will be participating in both events and it’s true Council Member Beecham is heavily involved in water in addition to electric but he has staff here to help in any way we can. Rosenbaum: Alright. Any questions or comments on John’s report? If not, oh I had one further question on fiber to the home. I have to assume the consultants have finished their work and there is a report available. Would it be possible to get something in advance of getting the whole package? Ulrich: Well the report isn’t complete until we finish our also internal report because he has to work with us completing it and so he will be done when he makes his report and answers your questions and finalize the document at the time of the Special UAC meeting. VII. Unfinished Business Rosenbaum: Okay. Thank you. Alright. Unfinished business. I am not aware of any unfinished business lets move on to new business the Quarterly Report. John. VIII. New Business IX. 1. Quarterly Report Ulrich: Staff is here to answer questions and as we have been doing for the last number of quarters, we broke in the report as you recall we used to do one a month. Now we are doing it once a quarter and we are putting all the water, electric, gas and financial issues all into one report. So at your pleasure we could go through each attachment starting with the quarterly water issues update and then moving through the four items or anyway that you’d like to do it. November 5, 2003 --- APPROVED 12/03/03 --- Page 7 of 33 Rosenbaum: I think we have often done this just by asking Commissioners if they have questions. Would that be acceptable or would you like to have a presentation? Ulrich: Jane is standing here and so I would suggest maybe doing the water and she could answer those questions. Rosenbaum: Alright. Why don’t we start out with water issues. Do we have questions for Jane? Ratchye: Can I just start off with a couple of words? Rosenbaum: Oh. Pardon me. Go right ahead. Ratchye: Sorry. I guess the main theme of this quarterly report this time is to see the ramping down of BAUWA as an organization and the ramping up of BAWSCA and at the same time that the San Francisco PUC is ramping up all their activities and starting to act and get ready to implement their Capital Improvement Program and so that’s the main, most of the activity that is discussed in this report. I did want to mention that besides all those electric meetings, Councilman Beecham will be very busy as the Vice Chair of BAWSCA and also a member of the start up committee for BAWSCA. And there is one thing I wanted to note that has changed on Page 5: the arbitration status. The first issue that is Septic Design Cost Issue, BAUWA has now come up with a proposed settlement for that and that will be discussed with San Francisco. The item where the other issue which is not likely to be settled will go to arbitration has now been pushed to probably February or March as opposed to December as I noted in this report. That was my only comments if you had any questions. Rosenbaum: Do we have questions for staff? Elizabeth. Dahlen: I had a question with regards to the implementation of AB1823. Has the staff had the opportunity to review the San Francisco’s Draft Emergency Response and Recovery Plan and I was just curious if their response was what we would have anticipated? Ratchye: Yes. It has been reviewed. I think Roger Cwiak here reviewed it. It is a very large document. BAUWA has also reviewed and provided comments and is certainly a lot of work put together and a lot of it is going to be implementing it. They are planning, there is a test drill plan in a couple of weeks that’s part of implementing that and so yeah I think we are generally pretty pleased with that submittal of what they have done. Rosenbaum: Other questions? Dexter. Dawes: Yes Jane. These are items that I have just picked up so I will be hop- skipping around. Could you give us a little more insight on this desalinization November 5, 2003 --- APPROVED 12/03/03 --- Page 8 of 33 potential CIP that’s popped up. That is the first I heard of it and those things are (on A 2 under SFPUC CIP) usually not very efficient and it seems to me a big waste of money even to look into that kind of thing. Ratchye: I really haven’t heard much about that. I don’t think it is very far along. I think it is one of those things that everyone feels that they need to study and look at it again all the time. There is a desalinization plant that just came on line that is run by the Alameda County Water District and that is to desalinate not sea water but brackish water to use because in some areas they have salt water intrusion and somewhat brackish ground water and so they are having that plant there. But I don’t think this particular one is that. Everything I have seen is very expensive to operate. On the other hand recycled water used to look extremely expensive to us but now it looks relatively close to the sky rocketing rates from San Francisco. So this may be the same but I don’t know. It’s still far away. We will be able to see that coming. Dawes: Okay. Maybe Councilmember Beecham will have something as that develops at BAWSCA. The second item is sharing of the Tuolumne Water with the farmers in tight supply years. I have always felt that a economically rational farming community could find a way to sell water in dry years. Is this a real possibility? Ratchye: Well, it’s certainly a possibility. It is the best source for us. It is the best source for the San Francisco Regional System for dry year water supplies. But negotiations have stalled. They have been going on I would say as long as I can remember between San Francisco and the District and really gotten nowhere. They claim they don’t have any water to spare. Dawes: Usually means it is the matter of price. Ratchye: Yeah. It is worth a lot more to us than for example Delta source water. And I haven’t heard a lot of activity around that recently. I don’t think San Francisco is focused on that right now. But it remains an issue. I know that Art Jensen periodically speaks to the General Manager of MID and TID to discuss that issue but we have only heard that they aren’t very interested. Dawes: Thank you. The next item is the Pipeline Replacement from the Waste Water Plant to Shoreline Park. It seems to me that the Shoreline Park development is only ten or fifteen years old and it seems like a pretty short time to have to replace that. I assume it is recycled water that they are using on that golf course down there. Is this turned into Swiss cheese? Ratchye: Actually it is a very old pipeline. It is a pipeline that was installed there actually by the Santa Clara Valley Water District and it was a line that they had, they built the recycled water plant at the Palo Alto Regional Water Quality Control Plant, which is in an additional stage beyond the tertiary stage. The district built that and built this pipeline down south and the idea was to have water be injected into the groundwater to form a curtain to stop salt water intrusion. Actually I don’t know the November 5, 2003 --- APPROVED 12/03/03 --- Page 9 of 33 date of that but it is a long time ago and that thing never did work. So when they started needing and deciding to actually use recycled water down at Shoreline then they used that pipe, that was there for that earlier purpose and wasn’t being used, to serve Shoreline park recycled water for several years. It’s in terrible shape, very, very leaky, and it is so bad that they have not been delivering recycled water for the last couple of years and they actually have a condition of their permit where they have to maintain the amount of recycled water that is being diverted and so it is almost a matter of permit requirement to serve that load, that old historic load again. And that pipeline is in a terrible location environmentally and so they are going to align it probably along 101 and take it down past Shoreline and to serve NASA AMES as planned and they are in process right now with the Facilities Plan and they have had State grant money pay for half of that, pay for $150,000.00 of it, and they are hoping to get done with that shortly, I think in January or February, so that they can be in line for grant funds for construction of that pipeline. Dawes: So this is not Palo Alto expenditure, CIP expenditure. Ratchye: It is an expenditure on behalf of the owners and partners of the Regional plan, which Palo Alto is 38% or 40% owner. Dawes: So will that be indirectly contributing to it? Ratchye: The sewer ratepayer. I am not sure how the financing is going on that or what they are going to do. They are still not certain how much money they may get from grant funding and I don’t believe they put together a financial package as yet. That’s probably going to be part of the conclusion of their Facilities Plan in February. Dawes: Thanks. The comment about examining a range of new well and reservoir sites. I thought the wells were pretty well established, the reservoir sites I know we are going to look at the new clinic site situation but it sounds suspiciously like we have opened the door to whatever; is that the case? We are still up in the air or we just have the two sites that we are dealing with? I mean this is a CIP that is going to start pretty soon. Ulrich: As you recall we went to the City Council in our budget process and the two CIPs for the wells and the storage were not approved by the Council. One of the reasons was that we have not completed the environmental reports so we went back and modified our contract with our consultant that had the contract for doing this work. So they were moving forward in doing the environmental work related to all the sites and in doing so… Dawes: How many sites? Ulrich: We are actually doing so for this report. You go back and look at all of the sites that were in the report and then you go through and discuss what the benefits November 5, 2003 --- APPROVED 12/03/03 --- Page 10 of 33 and risks of using those. It doesn’t mean that we wont reach the same conclusion but you have to go through and do that and then as part of the final decision about where the wells would go and where the storage would go we are doing the test wells at Roth and over at El Camino and those are going to be starting in the next week or so. So this is all part of collecting data and putting it into our report before we come back to Council to request approval of those CIPs. Dawes: Reservoir sites. Are there two or more than two? Ulrich: Well the reservoir sites as you recall in our recommendation was that we put a reservoir at El Camino Park. Subsequent further looking at it, there is and I reported to you about the possibility of putting either all of it or portion of it on the Roth property prior to it becoming a park and there is advantages and disadvantages in doing that and that’s what we are doing right now. Dawes: So it sounds like the two ______Harbor Ulrich: That is correct. Dahlen: John, can I ask one question on that? Are you considering the Terman Middle School Site? Ulrich: I think it was in the report as an earlier area but it is not one of our top spots. Dahlen: I was just thinking from the timing perspective with the construction there this may be an opportune time. Ulrich: Well as you recall, the report said the distance that it is away from the downtown area just adds to the cost of the pipeline and that made it not the most economical location to put it. Dahlen: With regards to this topic in general what is the estimated timeframe of when this project will get off the ground given the current delays? Ulrich: I will have to look at that. I didn’t bring the project report with me yet. Scott do you know that? Bradshaw: This is Scott Bradshaw. I believe the EIR will not be finished until summer of 2004 so we won’t be able to proceed until after we present the EIR and get the approval on that and we will proceed from there. So the schedule of course has slipped that much. Rosenbaum: Thank you Scott. Do we have any other questions on the Water Quarterly Report? Elizabeth. November 5, 2003 --- APPROVED 12/03/03 --- Page 11 of 33 Dahlen: Yeah. I had a question. In the overall report and this is later on in the report on Page 6, sorry it doesn’t have a header on it, but we have these great charts showing the residential electric bill comparison and the residential gas bill comparison. Rosenbaum: Elizabeth, shall we wait till we get to gas and electric? Dahlen: We can. My only comment here is could we also have a chart with residential water bill comparison? Ratchye: Are you looking at the Financial Report? Ulrich: Could you for the record just say what page you are referring to? Dahlen: It says Page 6 and it is just following Attachment D. Rosenbaum: Yeah that’s part of the Financial Report. Dahlen: It is at the end of the Financial Report. Rosenbaum: And I think we’ll probably discuss the Financial Report separately. I have got one question Jane. You mentioned on Page A-5, Palo Alto submitted three recycled water projects basically phases of the 1992 Master Plan Project. Could you tell us a little about what those are? Ratchye: Yeah. I mean we didn’t submit them to any outside agency or the state for funding. We just put those down as potential projects that we wanted the consultant that we hired to look at to see if there are any joint action opportunities because the project here was for consultant to ask all BAWUA agencies to submit projects or to list projects, identify projects and in what stage they were in whether they were in conceptual or in planning or what and then he was to look at all the different funding sources, the potential funding sources and try to identify whether they may be eligible for any of the number of state and federal programs that are out there and try to identify whether there were some projects that could be grouped together and best done regionally i.e. maybe through BAWSCA. And so we identified those projects that were previously part of our master plan in 1992 recycled water master plan and put those in there. And I did notice one fairly significant typo here in the last paragraph under that section on A 5. It says grants are currently available for feasibility studies but Prop 50 funds are currently unavailable for new projects and then what is written there is those which have completed Facility Plans it should have been those that have not. Ours don’t. They haven’t gotten that far. So it is unlikely that the current grants would be available for these projects. Only the one that goes down to serve Shoreline and Moffett Field NASA AMES. November 5, 2003 --- APPROVED 12/03/03 --- Page 12 of 33 Rosenbaum: Fine. Thank you. Anything else on water? Lets move to the Gas Quarterly Report. Thank you Jane. Do we have any questions on quarterly gas issues update? Dexter. Dawes: The graph on B-2 I can’t understand. These are BTUs per month and it shows the actual fix price purchases band of our expected usage. Then you have this expected pool customers load way up above. Is that the large customers that contract in effect directly for gas but through our books so that these people are not counted as part of the laddered gas purchase arrangement? Dailey: The pool customers are. Dawes: Excuse me, Karla, can you identify yourself? Dailey: I’m Karla Daily, sorry about that. The pool customers are the residential small customers that we buy for according to the ladder. I guess I can’t stand over you to see exactly what you are looking at but the expected pool customer load is just that and so in the near months since we made a decision to buy 100 percent of the expected full load for the months of November through March those are the same lines. Dawes: Okay I think I get it. Starting in January of 05 to November 05 we have purchased the amount shown in the gray area but the amount in the white area that is underneath the expected pool customer load and the top of the gray area that’s the part we have not yet purchased through our laddering arrangement? Dailey: The gray area is the range within we can make operational decisions about where we want to be. There is a minimum and a maximum that we will buy ahead of time according to the ladder. So that is the gray area. The red line is what we have purchased. Dawes: No it is the blue line up top is what I don’t know what that means. Dailey: That’s the… Dawes: Because you said the gray area is the min and the max you expect to purchase but then you had this huge amount that is outside of that and I don’t know what that means. Dailey: Right. This is a rolling time period. So right now we are looking at a three year time period that begins in November 03 and ends in October 06. So remember how the ladder is divided into three time periods. In this middle twelve months the plan is to be at 50 percent of the expected load. Here is the expected pool load that you are seeing here and here in the red line is what we have actually purchased and the kind of slashed pink line represents that 50 percent plan. The gray area is the November 5, 2003 --- APPROVED 12/03/03 --- Page 13 of 33 min and max. Within that for that twelve month time period we have had to have bought at least 40 percent but no more than 60 percent of the expected load. Dawes: So that’s the min and max of the ladder policy. Dailey: That’s right. Right. Dawes: Okay I understand. Dailey: Down here at the bottom what I tried to do is in addition to the gray shown on the graph it is just spelled out with what those numbers are. 60 to 100 percent for the near twelve months, 40 to 60 for the second twelve months, and 20 to 30 percent .. Dawes: So when you said min max I was thinking that was what we would expect for our entire year but that’s not the case. It is submitted max of what we have bought. Dailey: It is the min and max of the ladder strategy. Dawes: I got it. Dailey: Okay. Dawes: One other comment. I relate to cost of purchases versus our pricing policy and the chart on B-3, it shows the WACOG (Way Cog, I guess), as a wavy line rather than as a straight line and basically we will be, what I relate to is what’s our average purchase price versus what we are charging our customers and when you do it showing I guess it is a twelve month moving average or maybe it is just the I do not know what the.. Dailey: It is just a monthly WACOG. So it is not a rolling average. It is just that month. Dawes: Because the contracts overlapping in different ways. Dailey: That’s right. And so I am just trying to show when the forward market price is obviously a monthly thing as well I am trying to show. Dawes: Maybe to add another line somehow in a different color, which says this, is the long-term average for the whole season would be. Dailey: Right. On the page before I did point out the Dawes: Yeah it is in the text right. November 5, 2003 --- APPROVED 12/03/03 --- Page 14 of 33 Dailey: If is for 03-04. Right. Dawes: Thank you. Rosenbaum: Any other questions on gas? If not lets move on to electricity. Thank you Karla. Dawes: One question about the graphs. On B-9 It looks like there are 24 outages instead of 12 because you have these six little bar graphs each go to four so I do the multiplying and it seems like there are 24 outages I guess I am missing something but I don’t know what. Dawes: Commissioner Rosenbaum has illustrated me on how to read this graph, which is difficult I think. See I thought each bar represented a series of outages but it doesn’t only the dark represents the outages and then the light green tells what flavor they are. So that’s okay. Thanks Scott. Rosenbaum: Alright. Lets move on to the Quarterly Electric and Fiber Issues Update. Do we have questions for staff? George. Bechtel: I have a question on Page C-3 and basically it is the first chart that talks about 36 months projected energy load resource balance and I think this is a very interesting chart and it elucidates, I can use that word as well, for me for what our situation is but what I am interested is in the first months on there show that we have purchased more than we actually used but perhaps what I am looking at is the projected load and so therefore I am assuming that we bought more because our load was high or was our load high enough to absorb and I guess that’s what I am looking at is the very first couple of bars on there show that we actually, our purchases, I believe were more than the projected load. Ulrich: Mr. Bechtel could you say which chart that is and I’ll look at it. Bechtel: It is the top chart on Page C-3. Ulrich: Thank you. Bechtel: I am looking specifically at the time period, I guess, September and October, where if you look at the sum of our Western purchases, Calaveras and the forward purchases, those three bars, those three segments all add up to more than the projected load. So I am assuming that our load must have been higher. Is that right? Or why would be buy more? Or why is that happening? Balachandran: There are some months that we are surplus and some months we are deficit. There is a load forecast difference. Sometimes you have more hydro than you expected. There is more Western access capacity available. The kind of stuff November 5, 2003 --- APPROVED 12/03/03 --- Page 15 of 33 that you are looking here is what we call just incidental kind of surplus. It is the nature of the business to have swings in both loads and in supplies especially when you’re so hydro heavy. This is relatively inside of the noise range. Bechtel: Do we try to sell it back in those periods? Or is it just that we’ve… Balachandran: This is taken care of through the NCPA pool. So to the extent that we have ownership to say Calaveras that is excess to our load just gets sold in the pool. Bechtel: I understand. Thanks very much Girish. Rosenbaum: Elizabeth. Dahlen: Thanks. Could I just add one question on that same Chart. The projected load is exactly tracking the Western, the amounts from Western, is that right? That’s planned? You could just explain how you are plotting the forward purchase sales? And specifically with regards to how you are tracking that from November through March. Balachandran: November through March of which year? Dahlen: 2004. You see them at the bottom. Balachandran: Okay. So you are looking at the forward November 04 through March 05. Dahlen. Excuse me, that starts November 03. Balachandran: Okay, November 03 through. Could you just repeat your question? Dahlen: I just wondered how you are tracking that there. Why you’re showing the forward purchase on the bottom of the chart? Balachandran: Oh. I see. It is forward purchases all sales and to the extent we are making a sale that goes to below the zero line. Dahlen: Thanks. I understand that. Rosenbaum: Dick. Carlson: I have a question on the bottom part of that chart. I want to be sure that I understand the status of the new block purchases. Obviously, in fact, we need more than that. Where are we? What is the status? We are fine for next year, basically a little over another year, but after that we need to make significant purchases. What is the status of those purchases? November 5, 2003 --- APPROVED 12/03/03 --- Page 16 of 33 Balachandran: Well. Actually, if you look at the Chart on the top of your page you will see that there is a pretty large deficit. Both yourself and the City Council has approved buying these three blocks back in June but also that we had to enter into Master enabling agreements with supplies before we could actually execute on these approved purchases. Negotiations on those contracts are basically winding up right now. We plan to go to the Finance Committee on December 9th and then to the City Council on December 15th. So very similar to the gas master agreements that we took to the Finance Committee on October 28th, we will be taking these master agreements. After that is done assuming that the council approves it on December 15 because it is an ordinance it will have a second hearing or second reading on January 15th and after that we can execute on these three block purchases. Now the term that Council approved was that the three block purchases had to be executed by June 30th 2004. Carlson: Fine. Rosenbaum: Any further questions on electric? Dexter. Dawes: Some questions about what Commissioner Bechtel calls bluebirds which are on the bottom of C-4 and a possible raven on C-5; the two bluebirds being the big increments to the RSR Reserves and the Western Refund and the Western Capacity Reduction Contract. The first I think I understand, the second I am not sure that I understand. I really couldn’t figure out on the SCS tariff which is a part of the whole bankruptcy situation and the IA and so forth as to whether or not we have accrued or paid this potential 7.8 million dollars or whether that is a potential cost to us that would come out of the positive pops that we have experienced. Balachandran: That 7.8 million is just an estimate right now. Dawes: We haven’t been billed for that? Balachandran: Well PG&E has provided what they call an informational invoice, something new to us. Usually we get an invoice which is an invoice. This is called informational invoice. It is being fought out at FERC right now so these are estimates. The details and the billing was not provided for each member or each signatory to the Interconnection Agreement. It is just a bill provided to NCPA so we have done some back engineering and we have come up with an estimate of what may be owed to PG&E but there are a number of issues we had with the invoice and those issues are being dealt with at FERC. Dawes: When is FERC supposed to pontificate about this? Balachandran: Spring 2004 is when the initial decision is expected to be known. November 5, 2003 --- APPROVED 12/03/03 --- Page 17 of 33 Dawes: Okay. So that it could be a hit against the positives of the capacity reduction and the Western refund. Explain the capacity reduction situation, why is that a bonus for us. Balachandran: The Western capacity reduction, we were able to reduce our Western capacity by about 15 megawatts. Dawes: When we did this we in Palo Alto or NCPA? Balachandran: Palo Alto along with some other NCPA members and we provided back to Western and Western credits us a certain amount in our bill each month. Dawes: So basically we pay a smaller proportion of the operating cost of Western which is how they bill us because we have less of a proportion of the power generated. Balachandran: They actually provide us a credit and the credit works out and you kind of play it out through the end of the year. It is about 2 ½ million dollars. Dawes: Is this a permanent reduction that we have done or just a temporary? Balachandran: It is a temporary reduction. The contract is very clear about that. Dawes: We haven’t given up power in the future. Balachandran: No and this is similar to a reduction we entered into in 1995. We did a 3 year reduction of about 35-40 megawatts. In 1999 we did another one for 25 and just recently we have done … Dawes: My memory is weak. The base contract is 175, is it? Balachandran: Our current contract is 175 megawatts. Dawes: Okay. Great. Thank you. Rosenbaum: As I recall there was a time when the market price was less than the Western price. So we were able to reduce what we took from Western and Western put up with that which always amazes me. I had a question also on this Page C-3 on these charts which show the Western resource satisfying our entire load, of course, with the integration. I was not aware that we were always in that situation. Is that new or has Calaveras always been surplus to our needs? Balachandran: No, not always. It just depends on how. There have been years and months in which we have scheduled Western such that we minimized Western in several months and used up Calaveras and bought substantial portions from the market. I don’t have the exact numbers but Western tends to be you know November 5, 2003 --- APPROVED 12/03/03 --- Page 18 of 33 somewhere ranging from 80 percent to 100 percent depending on the kind of the year you have, what the market prices are. What you are referring to is back when market prices were below Western. We went down to maybe 60 because the contract also has a minimum take provision and we hit the minimum take at that point. Rosenbaum: But there is a maximum capacity of 175 megawatts? Balachandran: Yes. Rosenbaum: And from time to time we must use more than 175 megawatts. Balachandran: This is an energy balance. The 175 is the capacity balance So we are always using Calaveras for capacity in summer months on peak hours. Western is very rarely dispatched at 175. It tends to be dispatched around 155 or so is probably the max we would go it and we use up all the energy we can and then we use our contracts, we use our resource like Calaveras and any other contracts, we have Seattle City Lights or Pool Resources to meet the capacity needs. Rosenbaum: Fine. Alright. I guess Dexter you did bring up the question about the increase in anticipated reserves for the electrical rate stability fund and it just struck me it is a little early in the year to be able to say that we are going to be 9 million dollars better off than we expected at the start of the year. Now I do realize that the budget is set somewhat earlier than the start of the fiscal year but is there some explanation why we were not able to anticipate these changes at the time that we established the budget? Balachandran: We’ve stated this in two different places both in Attachment C and D. At the time we do our budget we make our best estimate of what our costs are going to be and PG&E Western cost through our process is difficult to estimate when FERC is going to come up with an order and essentially so we did not know when FEFC was actually going to come out with an order. They do not give us an inkling when it is going to come out so that was not anticipated., The Western Capacity Reduction Contract was something we were thinking about it at that time but the negotiations and the contract, the negotiations with Western etc. took quite a bit of time and we didn’t know all this information at the time when we got the budget done. And the Western Excess Capacity Purchases also depends on the kind of hydro year and what our staff especially Tom Kabat can negotiate on our behalf with Western. So this is our projection as of today. The only thing I am sure about we will be wrong about this. Rosenbaum: Alright. In the past I have expressed concerns about the appropriateness of the electric rate and I didn’t want you to think I’d lost interest in that subject and you know at the end of the year we will see where the reserves are and if perhaps some of the legal and regulatory concerns that are currently uppermost in our minds are then resolved, then perhaps we will want to look more closely at the rates for the following year. Anything else. Anything else on electricity? George. November 5, 2003 --- APPROVED 12/03/03 --- Page 19 of 33 Bechtel: I have got a question on Page C-7 on the Electric Public Benefit Program Update. I was looking at the table and it looks like our Rebate Program is working very well. But I suddenly looked at this Chart and I guess I have seen it before. But I am not understanding the last column that says customers savings and dollars per year. Can you tell me how it is calculated and in words what does it mean? Baldschun: Hello. I am Randy Baldschun. I believe that is a saving on the customers utility bills calculation. I am not certain of that because Tom Auzenne is the one who calculated. Ulrich: That is my understanding too. If the customer didn’t participate in the rebate they would pay more money and so therefore this is the savings is attributed to the energy saving device or equipment they purchased. Bechtel: I see fine. I understand. I guess that probably it would work out to about, lets say maybe less than a hundred dollars per year if I take 2003, 470 rebate measures, 35 thousand or so. I guess that makes sense. I have a second question not really related to the report but maybe for you Randy or John or whatever. I was looking at the Santa Clara Valley Water District monthly or quarterly news I guess annual issue. It talks about construction of a solar energy plant 4.6 million dollar project to harvest cleaner more reliable energy. Apparently what they are doing is putting in a photovoltaic cell very nicely located on the top of a carport arrangement here. But in combination with the gas-fired cogeneration plant for their campus. I am thinking, I mean City Hall is sort of a campus, one building campus or so is this a sort of thing we can do here, cogen plus solar. Baldschun: It is funny you should ask but thanks in large part to Anna Eshoo. City of Palo Alto has gotten a 2.8 million grant from federal government to install photovoltaic systems on city facilities. In fact we have been meeting this week and we have already identified a number of facilities. I cannot specifically say City Hall is one of them. But it could be. It is a three-year project. We are going to Council for approval of the CIP. It looks like it is a good way to leverage federal dollars with City of Palo Alto Utility Rebate Program. Because we do have an existing PV program for any customer including the City. We are going to use that program. The difference in this program and with other customers is that we do have a $10,000 cap for any one customer. We are going to wave that cap for the City because if we wave that cap we can leverage 1.4 million dollars coming from the federal government to install PV facilities in City facilities. Bechtel: The interesting part I thought about this, I can see the electrical part from the PV, is what Santa Clara Valley Water District is doing for the heating and cooling of this building which I am assuming is substantial. It is something that if could add something to this whether the whole package would make sense for one of our larger facilities. Has this ever been considered? Stanford of course has a large investment and facility in cogen. November 5, 2003 --- APPROVED 12/03/03 --- Page 20 of 33 Ulrich: I am not sure this building would be the best place to do it. As you recall, we spent significant amount of money putting in a control system in the building last year. I do not recall how much it was but it reduced our demand significantly in the building and it makes the building much more energy efficient. We would look around for the right place to do that. But keep in mind public benefits dollars are little over 2 million dollars a year and what we are trying to do is to use those public benefits dollars in the best possible way including sharing some of that money with the schools and appropriate public facilities. So that would be something we would look at. Bechtel: I am encouraged tonight. I forgot I think you announced the solar program some few weeks ago at the meeting I think on the Green day, whatever you called that. It is a great thing to move forward on. Thank you. Rosenbaum: Elizabeth. Dahlen: I just had two last questions on the electric issues. With regard to the block agreements that are going to take some time to move forward. Is there any risk in losing these agreements? If this doesn’t, assuming everything moves forward in the positive way from Palo Alto side, is there any concern from the purchasing side whether or not we could lose the agreements or anything could change? Balachandran: You are talking about the 3 block purchases that we plan to do. Dahlen: Yeah. Balachandran: The agreements are being negotiated right now. The agreements that are being negotiated are just master agreements which is essentially the boiler plate and everything that is necessary. The structure of the agreements. The actual transaction will execute only at the end of January or February. Dahlen: So that is when the dollar amount will be established? Balachandran: Exactly, so the only risk at this point is market price. So the market price keeps changing and it will be what it is on that day. Dahlen: Okay. Thanks. The other sort of risk side of things. I just wanted to know what your feel is with regards to the issue brought up on C-5, the Western PG&E dispute. What is the likelihood or what do you think the likelihood is that PG&E will prevail on this issue? This represents a substantial lot of money for Palo Alto. Balachandran: Our attorneys have had a very good track record in prevailing in cases like this. I can’t actually answer your question directly to give you a sense of probability of success in this. November 5, 2003 --- APPROVED 12/03/03 --- Page 21 of 33 Ulrich: I think it is appropriate. I think our role is to point out these risks and what some of these costs could be but it is very difficult for us to forecast particularly in the public record what we think those end results would be. I think we tend to take the biggest conservative role. We cannot overestimate revenues and not underestimate the potential cost that may occur. Rosenbaum: Anything else on electric. If not let us move to the Quarterly Financial Information Update. Do we have any questions? Elizabeth. Dahlen: I will just repeat my previous question and that was can we include a chart in this report with regards to the residential water bill. Ulrich: Sure. Dahlen: Thank you. Rosenbaum: Dexter. Dawes: John will not like me saying this probably. But I want to go on record and will into the future. Ulrich: Sure. Dawes: To me this is a great improvement over what we used to have but we still need to go a lot further in our Quarterly Reports and the thing that bothers me mostly is that we start out with a table which shows retail sales and purchase cost and something called operating margin. First, this does not represent all our sales because we have wholesale sales too that are involved and wholesale purchases. So this does not represent our income for cost of sales. And I think that we need to have an all inclusive electric schedule just like the schedule is laid out in my favorite report which is the ten year report and then you notice we hop to the reserves. There are numerous expenses between the operating margin which is our contribution, if you will, to cover our overhead, all our administrative costs, and are CIP expenses. There are numerous line items which are laid out on the ten year schedule which then ends up showing what our residual cash is which flows either into or out of reserves and I think that this quarterly report should be laid out that way so that we can see where our estimates are versus what we thought our budget was. Clearly we have made all those calculations because we couldn’t have projected our plus or minus into the reserves without making some sort of assumptions. I think there is no reasons why those assumptions can’t be set forth for the Commissioners and for the public as to how we stand. As you get into looking at the reserve changes there are references made to line items which are explained in general in the text, I will admit, but I see no reason why we couldn’t set up a standard quarterly report which has a format similar to our ten-year forecast. I am just talking now about the line items that are on that report obviously have different times covered in the columns but that November 5, 2003 --- APPROVED 12/03/03 --- Page 22 of 33 to me is a proper and appropriate schedule to present the true financial situation of our Utility. I have said this before and I will keep saying it until we have a more satisfactory report. Ulrich: Our attempt of course is to try to make it the way you like to have it. But then Randy will give you some of the specifics but what we are trying to give you is the actual numbers that we know as far as financial forecast is trying to forecast what we don’t know we are trying to do in a way of giving you good estimates. Dawes: I understand and I said that there had been estimates made on all of these line items you couldn’t have made any estimate of the reserve changes if you hadn’t made those estimates and I said I think that those are appropriate to set forth in the schedule. Baldschun: I think we have captured what you have asked for. This is my view and you may disagree. I think what we have is we have captured even in the wholesales sales I believe you are correct what we need to differentiate between retail and wholesale sales at least in electric fund for the next few years and then they are going to go possibly go away but we do that in the table in the text. In the first chart I am not sure why we don’t have any wholesales revenue on Attachment A on the first page, Page 1. It seems to me in the past we have shown wholesales sales revenue but in any event if you read the text and you go through the tables the final answer is the same. You are going to get to the final answer. Which is what is the impact on reserves and this is really what it is all about and so it is a good vehicle to get there because if you show it in your financial forecast format for all the funds first of all on a quarterly basis the seasonality involved and there is all kinds of different time and issues with the way our expenses and revenues are incurred in the utility business. So it could be misleading to take just a quarter snapshot of all our expenses. For example CIP is a huge expense but they don’t do it necessarily on a quarterly basis. I mean they may do 75% in the summer season and 25% in the winter season. So you could end up with some rather significant results. I think this is a great report in my view because you can look at this and you can see what our forecast was with our budget and you can follow all the changes to it and you can read the text about those changes and you can get to our most recent updated forecast what our reserves going to be. I think that is what is important for you to focus on without getting into lot of details perhaps misleading information on quarterly financial ten year financial forecast. I think in my opinion would not get you to where you want to get but this is my last UAC meeting. I am glad to meet with you in the next thirty days if you want to convince me otherwise. Ulrich: I think it is the same thing that we have been uncomfortable with is that the data on quarterly basis is not the accuracy you would like to have it. So that is why we are putting in other format. We are giving you the best information that we have. Dawes: I understand. We have ploughed this ground before. November 5, 2003 --- APPROVED 12/03/03 --- Page 23 of 33 Ulrich: I know. But we need to keep trying to find a way that will satisfy you and make this to be the best report that it can be. Dawes: The assumptions are made and I am just saying that it might as well be spelled out but I understand. Ulrich: You notice we are not saying just wait for SAP to be completed. Dawes: Is SAP completed? Ulrich: No. It is not. Dawes: And when will this be completed? Ulrich: I can’t give you the date. It is being done now. Bechtel: I am just jumping in on the side of Commissioner Dawes to one point. I believe this is good information but too long. In this City or actually in government we are always waiting for the next brand or version of software or upgrade to get the numbers and it tends usually just keep putting it off and off. But in this case what is missing of course sometime is the expenses. I am sure every month you have given a report of what your utility department expenses are in salaries, fringes, office supplies and all of those things and those some of the things that are not captured in this report except through the changes in the reserves. So we really don’t get a feel for how the utility is operating from the overhead point of view and those kind of things and if you are in a company you would see a monthly P&L in which some of those things would happen or whatever. So I think that those of us who have been in business and sat through these laborious meetings every month with our boss we know that we get hammered on a lot more details that are shown here. And so I think the closer we can get to that situation looking at those things and I think the closer we, as Commissioners, can advise you and advise the Council and the public as well on how well we are operating this business. I am content with this. This is a big improvement over when I first came on we saw and maybe another year or two when our financial software is here will be okay. Ulrich: I’ll quickly take that compliment and take it back and reiterate with what Randy said. I think we are trying the best we can to give you accurate information I think you need. I will give you my quick version here. City of Palo Alto is not in its entirely a utility company. It is a City government and the financial accounting system that has been in place was not specifically designed for a utility and SAP does not. It bridges the gap and it is going to make it far better particularly in the area of accounting where we spent our money on projects and the work we perform. That is our big ticket item that we have and it is imperative that we have that kind of information and know where we are spending our money and also where are revenues are. But unfortunately in this business the billing, particularly in the wholesale side, the bills that we get from the federal government and elsewhere November 5, 2003 --- APPROVED 12/03/03 --- Page 24 of 33 don’t always flow in the speed that we would like to have it and we also don’t pay for something until we get the bills. So I am not sure this is going to be the state of the art. But we all like it to be because of the nature of the business. But I got to tell you we have been doing a phenomenal job of forecasting well and keeping track of the money and the best assurance I have is if the money isn’t in the hands of our customers it is either paying for our commodity or it is in our reserve. So we can follow the money it may just not be as fast as you like it to be. Rosenbaum: Anything else on this item.? Dexter. Dawes: On the supply rate stabilization reserve first paragraph. Next to last sentence. More current estimate of the closing balances is 53.4 million dollars and in the table up at the top of the page the estimated ending balance is 60.4 and I don’t understand why there is the difference there. Balachandran: Two different years. 53.4 is 02-03 and 60.4 is 03-04. The 02-03 year hasn’t been closed yet. Dawes: Oh, I see the sum of 34.4 and 15.8 is the 53.4; the opening balance in effect. Balachandran: Right. Dawes: Okay. I got it. I might just point out that the table on the bottom of Page 3 should have brackets around the one million three twenty three number, was it an error? 2. Utilities Biannual Risk Management Report Rosenbaum: Anything else on this item? If not lets move on to the next agenda item. The City of Palo Alto’s Energy Transaction Activity Report for the first quarter for the FY 2002-03. Ulrich: We have a report from Karl Van Orsdol, Energy Risk Manager. Orsdol: Good evening. I am Karl Van Orsdol, Energy Risk Manager for ASD. What I have done in this report is to initiate quarterly transaction reports using the Financial Investment Report as a model. While we have not exactly duplicated the analysis carried out in that report, we are attempting to providing greater insight and analysis of the City’s energy commodity transactions. In this report, we evaluate on a quarterly basis the investments that City makes in terms of gas and electricity treating them as though they are specific investments like the financial report and report on their market value. So what I would like to do tonight is first give you a transaction summary where we stand in both gas and electricity. Then I consider CPAU’s current risk measures both looking at “mark to market” and “Value at Risk (VaR) measures. Further to this, I also present the analysis of our credit risk and then provide you with an update on some counter party diversification that we are undertaking. To begin “Why am I giving this report and why now”. First of all the November 5, 2003 --- APPROVED 12/03/03 --- Page 25 of 33 policy which has been approved by the City Council requires that I provide accurate and timely information as the Energy Risk Manager. Secondly, it is important to provide an independent verification, an independent reporting from the utilities who are implementing the energy purchases and transactions. And third because as you know the City Auditor has recommended that we develop these quarterly reports so to enhance the transparency of the transaction process. So let us first look at our open transactions and by open transactions I mean those transactions which we have purchased but for which we have not received the supplies yet. On the electricity side as you know currently our market supply consists largely of WAPA and Calaveras with NCPA providing within months balancing. We do have one outstanding contract which is a 25 MW purchase for calendar year quarters one and four for the year 2005 to 2009. The fixed price on this transaction is 20.6 million dollars that has been committed. Dawes: To clarify this we talked a little about the issue of having the vendors approve by the City Council and I know that work was going forward. Is this particular vendor being vetted in that way and this is in fact a firm fixed price contract and not subject to this approval process that is ongoing. Orsdol: Yes. The contract was approved by City Council late last year I believe. Dawes: That was my recollection but then there is subsequent discussion about this vetting process about a number of vendors. I guess those are vendors in addition to this particular one. Orsdol: Yes. Let me explain that for just a minute. The utility secured this one large contract for the Q1-Q4 period. To help enhance diversification we issued this RFP for both gas and electricity and through that we are finalizing master contracts with five gas counterparties and six electricity counterparties to continue to do transactions in the future. This was a very specific deal, this electricity transaction and it was approved by the City Council. The Master Agreements for gas have been approved now by the Finance Committee and we will be presenting to the Finance Committee and the City Council the contracts for the electricity suppliers as well. Dawes: And is this vendor in this group of six that you talked about. Orsdol: Yes. Dawes: So each sort of have been through at once. And this is the second time for master agreements. Orsdol: On the gas side we currently have 44 open positions, open transactions, which include deliveries of gas up until June 2006. We have purchased, will be delivered 5.8 million MMBtus which we purchased for 25.6 million dollars and so the average price we have is 4.36 dollars for MMBtu. So that is our portfolio at a glance. What I would like to do now is just for a moment talk to you about how we, November 5, 2003 --- APPROVED 12/03/03 --- Page 26 of 33 on an ongoing basis, are valuing that portfolio. We use the term mark-to-market and mark-to-market is really just a comparison of the current market price with what we actually paid for the actual cost of the transaction. If this is positive from Palo Alto perspective it means that the value of the contract is worth more now than when we paid it. If it is negative it is worth less. Remember that the mark-to-market value is really only a snapshot. It is taken at a specific time or on a specific day and it can change very rapidly either because the forward price curve might change due to some action or some economic situations that develops or because deliveries are being made. Now we would expect given the utilities laddering strategy that on an average that mark-to-market should be close to zero. That is because the utility is constantly buying some gas and some electricity and not trying to maximize value but trying to provide low and stable rates. So we would expect that the mark-to- market would be somewhat around zero level. There may be a small negative number because there may be a premium that we would pay for the reduction of the risk in terms of buying a long-term contract at a fixed price. Dawes: A query on the open positions. Obviously this excludes the infamous Enron contract and I would guess you probably don’t want to talk about and John doesn’t want to talk about it but is this anywhere near resolution. Can you give us a sense whether this is likely to be a known quantity in the next three to six months or does it look like it is going to be a multi year phenomena. Ulrich: I think it is better that we don’t go more into that because of the litigation that is going on. Orsdol: So to continue lets look at the mark-to-market results that we have for the existing portfolio. As of September 30th we have as I said we have only one transaction in electricity. It has a mark-to-market value a 6.7 million dollars. That is the value of this contract. To replace it today it would cost us 6.7 million dollars more than we paid for it. So we are well ahead on that. On the gas side the mark-to- market of both open and current transactions in the portfolios is about 1.5 million dollars. By open and current I mean that a contract which is open is a contract for which we have signed the transaction but the entire delivery point is in the future. A current contract is the contract that we have signed and the delivery point is started before September 30th and continues out until the future. Given that, the mark-to- market of the open and current together is 1.51 million. The mark-to-market of solely open positions for which deliveries have not been received in this quarter is $557,000. This provides an illustration of the volatile nature of the mark-to-market figures. Just because of the deliveries in that two months period the mark-to-market can change quite dramatically which is why mark-to-market is a useful measure to monitor the absolute value at any one time is of limited value. So let me turn to the second measure and that is the value at risk. Again the analysis that I have done is carried out is on yet to be delivered supplies. So with regard to open and current transaction the two key measures are of course the electricity and the gas supply reserve levels, that is the funds against which we measure the risk of the portfolio. Our assessment of market risk is the risk that worsening market conditions would November 5, 2003 --- APPROVED 12/03/03 --- Page 27 of 33 require CPAU to utilize these reserves in order to cover cost over what is being charged to the ratepayers. This measure is referred to as “net revenue value at risk”. Now why do we use the net value revenue risk? First of all it is one of the many risk measures that we track in the risk management program. Why? It is universally reported within the industry so it is possible to benchmark our performance against others. I should say in looking at this value risk analysis we only focused on negative effects. That is what market changes could impact the reserve funds negatively. We don’t look at the impacts of the positive ones. And the definition of what we use here is that the “net revenue value of risk” is the amount of money that CPAU would need to take out of the reserve funds due to adverse market change. And following the nomenclature and best practices approach within the industry we use the possibility of a market change occurring within a one week period and assuming that the worst case phenomena, a change in market prices so drastic that it would occur only once in twenty times or 95 percent of the time. We take this approach looking over market prices for the next twelve months. So it is a little complicated but basically what we are saying is looking at the next twelve months what could be the worst possible change in market prices over the course of a week and how would that impact us having to rely on the reserve levels, reserve funds to stabilize prices and not raise charges to the ratepayers. Dawes: And the funds that you talked about are those calculated over what time period? In other words if that sudden rate change negative rate change happened and I am sort of peeking at slide 10 how long is that measured over? Is that one-year period? Orsdol: We would take whatever the estimate was for the supply reserves. Dawes: You can walk us through the Chart. It is probably more illustrative. Orsdol: Okay. What this shows is sort of two separate variables. But the ones that we used together to look at value at risk. The red line is the electricity supply reserve in millions using the budget estimates and I noted your discussion today about what will happen about the budget reserves for this year going up. That is not reflected in this slide. So that is the red line that starts of at about 20 million and currently finishes of at 42 million. Then we take the value of the portfolio and every week we carry out an analysis of the value of risk of that portfolio. We take that number and we divided by what it is at that time the current reserve levels. So a value and the percentage of the SRRR is on the right side going from 0 to 14 percent and that is the purple line that varies. So you can see that in general the value of risk for the portfolio has varied from as little as almost 0 percent to as much as 12% of the reserve level. Dawes: Could you give and lets look at Jan. 01 and where it spikes up like that to 11 ½ percent, something like that. What are the numbers that give rise to that 11 ½% it says percent of S the supply rate stabilization reserve percent of annual cost. November 5, 2003 --- APPROVED 12/03/03 --- Page 28 of 33 Orsdol: What could give rise to that would be . .. Dawes: So if we have say a 50 million dollar annual cost of electricity and this jumps up to 12 percent, we are talking about a 10 million dollar number. How do you get that 12 million dollar? What do you multiply together to get the 12 million dollars? That is what I don’t understand. The changes that could be developed that could cause an increase in the value. Dawes: Start at the basic. What are the numbers you multiply together to get 12 percent? Or to get to the 10 million dollars which is the 12 percent? So if I can understand the mechanics than I can deal with it. Orsdol: What you do is you take the portfolio which comprises of a number of transactions and you look at the forward price variability and you calculate what would be the worst of an increase in prices over the course of the week given the volatility f say electric prices. So we take the 95th percentile level, that is, out of the hundred times when there was a change in prices 95 percent of the time the change in price would be below a certain level. Dawes: Close to 30 dollars to 50 dollars. Orsdol: Correct. So you take 50 dollars and then you calculate the value of the portfolio based against that predicted price. Dawes: So that is however many megawatts you have committed to buy. Orsdol: That is correct. Dawes: Okay. I got it. Orsdol: At whatever prices. Then you take that value you sum it up for all the transactions within the portfolio and then you divide it by what is the reserve fund level at that moment. Dawes: So in that period where it spikes up that means the price is very volatile. When it is down in the noise level at 2 percent that means the price is pretty stable. Orsdol: Yes the price is more stable and lower. Again this is a measure of how much risk we are taking in the supply reserve. If you turn the page I have a similar graph for the gas reserve. But I would like you to note that this level of percent of the SRR is now on a log scale rather than a straight scale. That is because in the period of Jan. 01 to Jan. 02 during the energy crisis of course we had the spike in prices and it would go off the graph if I used just any other percentage scale. So while the log scale tends to minimize small changes, but of course the changes are very small. Again this shows, as you are aware that the decision by the utilities in late 1999 to use the supply reserve because of the increase in prices and then in 01– November 5, 2003 --- APPROVED 12/03/03 --- Page 29 of 33 02 to again increase rate to replenish the reserves. But if you look again at the purple line you can see how the value of risk has changed from being really quite high, well over hundred percent. Very volatile prices, very high prices the reserves essentially are completely at risk down to where we have only about 2.8 percent value at risk. So it is much more an approximate to the electricity reserve fund and I should note that both for the gas and electricity our internal limits are 10 percent. So we are well within our limits for both gas and electricity. Rosenbaum: Dick. Carlson: Does the value at risk jump because when we don’t have much of a contract we are subject more to market prices? Or does the value at risk jump because of the variability jumps? Orsdol: Actually it can jump for both reasons. If you look at the last part about June 03 to present the last few points you will see there is a fairly dramatic downward trend in the far end. That is because the decision was made by the utilities to purchase the winter gas supplies rather than wait to completely fill the reserve needs. As a result what we needed was reduced so our rate went down. Carlson: So the variability is really applied to the amount of market gas we have to buy, not what we have on contract where we are. Orsdol: Exactly. Carlson: Okay. Rosenbaum: Along that point, on the chart entitled market risk you do say analysis carried out yet to be delivered supplies. By that do you mean that we have to go and buy at market? Orsdol: No I am sorry I wasn’t clear. It is yet to be delivered but transacted and confirmed for. Rosenbaum: But why is there a market risk if we have already purchased and agreed to a price? Orsdol: There is no market risk or VaR? Rosenbaum: I am talking about market risk which goes into the calculations of VaR? Orsdol: The VaR is only on positions for which we have not yet contracted. It is our susceptibility to changes in market prices because we have not purchased portions of the load yet. Which is why the VaR declined recently because we purchased most of our winter supplies. November 5, 2003 --- APPROVED 12/03/03 --- Page 30 of 33 Rosenbaum: I guess I am just referring to the first bullet on page 8 of your presentation where you do say analysis carried out on yet to be delivered supplies which strikes me as different from yet to be contracted-for supplies. Knapp: I am Karl Knapp. As you know I was kind of filling in for the other Karl before he came and also since I was an acting risk manager during the time when things were bouncing around. This is the net revenue risk on the entire portfolio, which includes those that you fix and those that are open. So the more short you are the more exposed you are to market risk. If we had locked in all of our load you would have had a zero bar. But you may have a very large market exposure. But whereas if we bought everything on the market you would have a zero bar at the market measure and a very high VaR measure. So you end up trading of mark-to- market type of fluctuation for a cash flow actual hit-you-in-your-pocket type of risk which is what VaR is measuring. This also takes into account change in revenue so we have about 25 % load is on G 3 gas rate that also reflects a zero VaR because the revenue perfectly matches the market purchases. Once the customer locks into a G 11 rate then there is a bar associated with their revenue because that is related to the load variability and not to the market risk. Dawes: It makes some sense. Knapp: So when a customer goes from G 3 to G 11 ideally there will be no change here but the risk is that they don’t use as much or use more than we locked in for and we still have to buy gas for them. That is not reflecting that. This is pure market price risk. So we see a diving down when we are locked in for gas. The other thing worth noting is it creeps up over time because what happens is if reserves get made you got a rolling 12 month time for rising. So with the laddering strategy as it comes in you have more and more short gas which is also 12 months out because of higher standard deviation of volatility of 12 months is much broader. It creeps up over time then you see you buy a little more of the fixed price gas it drops down a little. Creeps up, drops down so those are the features that I like to point out. Orsdol: So does that answer your question? Rosenbaum: Not quite. But what I gather is you are going to be coming to us with this every three months. Orsdol: I am developing a report that will more or less follow the Investment Report. So right now we just have it as a portfolio. What we will give you is the actual individual transactions. And the mark-to-market for each transaction we make on both electricity and gas. Rosenbaum: I guess I was just thinking that it might be useful at least for me to have a specific numerical example where you say this is the assumption that we make and based on this assumption this is how we do the computation. November 5, 2003 --- APPROVED 12/03/03 --- Page 31 of 33 Orsdol: Okay. I can do that. Dawes: I would second that. Orsdol: Okay. Actually because the first time I spoke with you I talked a little about VaR so I skipped too quickly over that thinking that my previous explanation had been sufficient but I guess not. Rosenbaum: I am sure it was but that was several months ago. Orsdol: Absolutely. Ulrich: I think this is a valuable feedback because it is important you are getting a report that you will find valuable. Is the report, other than comments made about having specific numeric values, do you find this gives you some confidence? Or is it too complex for just taking a shot, taking a look at it, and saying yeah everything looks fine. Rosenbaum: Personally once I understand it I think it will be very useful as a quick way to measure where we stand. Dawes: But as also pointed out you got to take both this and the mark to market at the same time because they shift from one to the other depending on what you have on the contract versus none. Orsdol: Right. And just another thing I wanted to point out. This is a front page from San Francisco Chronicle October 14th. Natural gas bills to soar this winter, PG&E says. Discussions here at the UAC and actions implemented by the Utilities to purchase the entire amount of gas required for this year means that Palo Alto was able to stabilize prices on short term and reduce the risk to ratepayers without incurring the risk PG&E customers will. So that is again one of the advantages of the laddering strategy. Stabilize prices and reduce risk. Let me just briefly sort of summarize where we stand on credit risk On the electricity side, Western which is one of our largest suppliers of course, we essentially have no credit risk because they are a federal agency. We do have one contract which I spoke about earlier which has mark-to-market value of $6.7 million so that is really our current credit exposure with that one client. Post 2004 on electricity because we will be moving away from governmental suppliers more toward private sectors for suppliers our credit risk by necessity will increase but it can be managed through counter party diversity and will be monitored as part of the risk management program. So the credit risk is something that is increasing in importance and you will continue to see on a regular basis. On the gas side we have two parties currently, for which we have credit exposure. This figure is presented by S&P rating. We have approximately 8 million dollar exposure to a double A rated company and a 10 million dollar credit exposure to a triple B plus rated company. And then finally in terms of counterparty November 5, 2003 --- APPROVED 12/03/03 --- Page 32 of 33 diversification as John said the master agreements for the gas supplies have been completed. We are almost finished with the electric master agreements. We expect those be presented to the City Council in December of this year. When those are concluded we will then have sufficient gas and electricity suppliers to ensure that we get both competitive rates and can manage our credit exposures rationally. So if you have any more questions? Rosenbaum: Alright. Any further questions for Karl. Dawes: A good report. Rosenbaum: I do have a specific question? Coral we have our electric contract with them and it says rated A - Baa1. We met with some of the Coral people at the NCPA meeting in 2002 and they were very nice gentlemen and they gave us their card and they had the Shell Oil Company logo on their cards. My impression at that time was they were AAA counter party. Have I missed something? Has something change there? Orsdol: Yes their credit rating company has slightly changed. I am not sure what year exactly you’re referring it. Rosenbaum: 2002. They were affiliated with Shell. Are they still affiliated with Shell? Orsdol: Yes Rosenbaum: And now they are in A- Orsdol: Actually they are AA in the Chart. If you turn to the chart. Rosenbaum: Yes. I am looking at your report on Page 4. It says Coral near the bottom of page 4 of the CMR. Orsdol: I am sorry I am referring to the wrong chart. Yes that is their current credit rating so they have gone down in credit. They are owned by Shell, but our corporate guarantee does not come from the Shell Company. Rather the guarantee comes from a subsidiary of Shell. We rated each counterparty based who provides us the corporate guarantee. Not necessarily rating of the parent company. Rosenbaum: I can understand that. I am just wondering was I misinformed at that time or has there been a significant change does anybody know? Orsdol: I do not know I mean I would have to look at the business card to see what part of the Coral organization that your contact came from. I do not know personally of a downgrade since 2002 but I do know what their current rating is. So it is possible that it has gone down since then. November 5, 2003 --- APPROVED 12/03/03 --- Page 33 of 33 Rosenbaum: Thank you. Any other questions here? I think that finishes that item. Orsdol: Thank you. X. Next Regularly Scheduled Meeting Rosenbaum: Thank you very much Karl. Next regularly scheduled meeting is December 3rd. We are going to have a good agenda for that John? Ulrich: Of course. Rosenbaum: Otherwise you will be happy to cancel the meeting and John did send us all a notice of the CMUA Legislative day. Is it alright if everybody comes? Or what is your view on that? Ulrich: There will be no problem if everybody wants to come I just need to know and then we can arrange transportation and pay the fees associated with it. XI. Adjournment Rosenbaum: Fine. Alright so we will all notify John as soon as possible about our interest in attending that event. Is there anything else? If not then we are adjourned. Thank you. Ulrich: Thank you.