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HomeMy WebLinkAbout2004-02-11 Utilities Advisory Commission Summary MinutesUAC Minutes 2/11/04 – Approved 3/3/04 Page 1 of 38 UAC MINUTES February 11, 2004 Call to Order Rosenbaum: Good evening. This is the regularly scheduled meeting of the Utilities Advisory Commission on February 11th. Let’s take the role. George, will you start? Bechtel: Commissioner Bechtel present. Rosenbaum: Dick Rosenbaum Dawes: Dexter Dawes present. Beecham: Mayor Beecham, Liaison present. Rosenbaum: And at the moment Commissioner Dahlen is not here. [Pause] Commissioner Dahlen has just stepped in so we are all here. Oral Communications The next item is the Oral Communication. Is there anyone in the audience who would like to address us on any item which is not on the agenda? Seeing none lets move on to the approval of minutes. Approval of Minutes Dawes: Move approval of the last meeting. Dawes Bechtel: Bechtel seconds the motion to approve the minutes. Rosenbaum: Alright. We have motion by Dawes, second by Bechtel to approve the minutes. Are there any comments? Seeing None. Let’s vote all in favor. Aye, Aye, Aye. That passes unanimously. Agenda Review and Revisions Next item Agenda Review and Revisions. Are there any suggested changes? Seeing none we will move on to Reports from Commissioners on Meetings and Events. Do we have anything to report? Seeing none lets move on to the Director of Utilities Report. John. Director of Utilities Report Ulrich: Good evening. I’d like to just preface to remind everyone that comes up to speak, should speak into the microphone and make sure it is operating as we are taking verbatim minutes of the meeting and we’d appreciate if you identify yourself and so that we can get it on our record. It has been a busy month. A number of Commissioners have attended our NCPA Annual Strategic Planning Workshop. Commissioners Bechtel and Rosenbaum, Mayor Beecham and Council Member Kishimoto also attended from Palo Alto and I do want to thank you for taking the time. It is the one event that NCPA where we are able to help set the direction and strategic planning for NCPA for the upcoming year. I think we learned a lot, we had some good speakers, our new NCPA General Manager, Jim Pope gave us a UAC Minutes 2/11/04 – Approved 3/3/04 Page 2 of 38 background on what accomplishments were of last year and talked about along with other members what our plans are for the forthcoming year. Guest speakers talked about the merits and problems with proposed locational marginal pricing. Good old L&P. They concurred that it may encourage load management but not encourage transmission upgrades. The issues that we have near and dear to our heart that we are going to potentially pay a lot of money and there will not be any significant of any transmission upgrades in order to reduce the locational pricing benefits that go to the people that only transmission of the transmission and will not encourage removal of the congestion. We had four members speak about their generations they are building in their cities and most of it is there to avoid additional regulation and some of the locational marginal pricing that will entail to all of us that continue to take our energy across the transmission lines specifically those that are at Roseville, Santa Clara, Redding and Turlock. I would like to report that participation in our Palo Alto Green is now up to 6 ½% approximately 1850 customers. Very high percentage. I think probably the top cities in the United States are right around 10% so we are not very far that same kind of record. I should just mention that the UAC vacancy replacement the Clerk’s Office has rescheduled candidate interviews for March the first. Ten applications were received and the City Council Ad Hoc Committee has selected 5 of the applicants for interviews. It is expected that the appointment of this one individual will take place March 15 at the Council Meeting and I am also attempting to finish Fiber to the Home Final Report. I sent some dates to all of you to consider for dates that we could have a special meeting with commitment that I gave that we would have at least two weeks between the time the report was made public and have a special UAC meeting to discuss it. So I need to coordinate those so that there is plenty of time out in the public and that’s my report. Rosenbaum: Are there any questions for John? George. Bechtel: John I want to just add an addendum to your discussion about the NCPA strategy session last month. It seems to me one of those things that I came away with was a lack of knowledge of what the governor has up his sleeve with respect to energy plans in the next year or two years or at least in the remainder of his term. So I guess we got no information about where the leadings are but the other is that we have two members of his advisory committee that are residents at Stanford Professor James Sweeny and Profession Frank Lolock who is well known before. So if anyone here or any of us have inputs we certainly have local people to talk to and hopefully we will find, meet with him at some point and get the insights as a deliberate. Rosenbaum: Any other questions? We do not have any unfinished business lets move on to new business. First item is Investment in Recycled Water Pipeline to Mountain View. We have a status update. Investment in Recycled Water Pipeline to Mountain View Ulrich: Thank you. This evening it is listed as an information item because at the last meeting we requested input and action on our recommendation for funding from the water utility investment and a reclaimed water line going to Mountain View. This evening is an update. As you recall the decision recommendation that you made that we would take to the City Council is an advancement or participation contribution of a million dollars towards that line and our recommendation was for two million dollars and the vote that you made was for the one million with the additional million if at sometime in the future we actually connected to the line and served the customers in Palo Alto from the reclaimed water line. The information report that you have in front of you has a different funding with a million dollars that was recommended from the Utility Advisory Commission in support by the staff that the additional million dollars that is needed would come from the Regional Water Quality Control Plant Reserve Fund and that is articulated in the recommendation pardon me in the information report. So I want to pass that on and UAC Minutes 2/11/04 – Approved 3/3/04 Page 3 of 38 this would be the information and recommendation that would go to the City Council from our Public Works and the Waste Treatment Fund. Rosenbaum: Alright. Do we have questions for John? John I did submit a couple of questions yesterday. One of them has to do with the nature of this loan that was not spelled out clearly in your status update. Loans normally have to be repaid yet doesn’t seem to be any provisions to repay this loan and in the event we do not hook up can you clarify that? Ulrich: It was my understanding that the million dollars that we were talking about from the utility fund would be used for that purpose and there was not a payback mechanism from the waste treatment plant to the water fund. If we decide that we want to contribute the other million dollars that would be a condition upon the decision that we made to connect up to it and then we’d make the contribution at that time. Rosenbaum: No I think my question was the other way around. If the water treatment plant is loaning a million dollars what expectation do they have that that million dollars will be repaid and how will it be repaid if we never go ahead with a connection? Ulrich: If your question is related to the use of the reserve fund and the waste treatment organization? Rosenbaum: I was just giving you a generic sense a loan normally has is involved in a commitment to repay. I do not see that commitment in the event that we do not connect to the system. Ulrich: Excuse me. I was just trying to get clarification of which million dollars you are talking about. I tried to answer from the water fund. You are therefore asking about the million dollars from the reserve fund at the waste treatment plant. As you know that is out of the purview of the utilities organization and of course the UAC. So I’ll ask Glenn Roberts to come and make some comments about that if you like from an information standpoint. Rosenbaum: Fine Glenn. Roberts: Thank you John. Mr. Chair. Glenn Roberts, Public Works Director. At this point in time the specific mechanics of that have not been worked out so what I can convey to you is what we would be our intent to recommend to the City Council and would be subject to of course their budgetary action. What I think might be helpful is for me to answer your question the long way around if you will allow me and give you a little more background in what was trenched for the past 30 days and what is in the memo alone. We met several times with the City of Mountain View both at staff level and they also had internal discussions with the City Manager and with a couple of members of their Council attempting to negotiate the position that the Commission recommended we pursue at your meeting last month. Mountain View came back to us and said they did not feel that was an adequate level participation from Palo Alto for them to be able just by going forward. The first million dollars they understand the incremental cost of the pipe itself. But they felt if Palo Alto would be a true partner in this project or had been a true partner in the project from day one that we would be doing far more than just paying the incremental cost of the pipe upsizing itself we would have a proportional share of the total contract cost including the contract mobilization, trenching, pavement repair and all those things and not just building a bigger pipe alone. So based on that they held firm to their position saying they wanted us to contribute two million dollars. On the other hand we heard from the Commission pretty loud and clear that you were all concerned about potentially impacting the water rate payers even though everything else is going on in the water system needs over the last couple years. So we looked for alternatives how to continue to pursue with this project to make it viable and we looked into our own treatment plant reserves. I need to make a slight correction to what the memo says. It is not a rate stabilization reserve. It is an equipment replacement reserve in UAC Minutes 2/11/04 – Approved 3/3/04 Page 4 of 38 fact. That is the source of these monies. That fund has a recommended balance range between 3 and 5 million dollars. It is currently funded at almost 6 million dollars. So there is money there available to use that can be taken without necessitating a recovery by rate increase. So using that money will not affect any other rate. In this case it would be the had it been in effect it would be the sanitary sewer collection and treatment system fund but that will not be the case since we are at that level of funding. And we also feel that this is something that the plant needs to ensure happens one way or the other. We much preferred to be a joint project and have it be used for future reclaim water for variety of reasons that we elaborated last month that I wont repeat. But in the meantime we were able to recommending that the treatment plan equipment reserve advance those monies now, front those monies subject to potential future repayments from the water fund should you ever decide to connect. If you don’t decide to connect there is no repayment. Rosenbaum: Good. I think that helps a great deal and I appreciate that explanation. Does an agreement to do that require that the partners specifically agree or is this at your discretion? Roberts: This is at the discretion of the City Council and at Palo Alto staff to recommend because that reserve is not aggregated money from the partners. That reserve is Palo Alto money alone. Should we use other monies like the two million dollars already coming from the plant budget which does not involve partners money then yes we certainly have the obligation to meet and differ with our partners and get their concurrence before making those kind of recommendations which we have done on the first two million dollars. But this million dollars is Palo Alto money alone. Rosenbaum: Alright. So this million dollars is really Palo Alto money and to the extent it is used for this purpose that will not be available for future Palo Alto expenditures. Roberts: Correct this reserve exist to replace pieces of equipment at the Plant like palms, filters, motors things that nature and has been scarcely utilized in recent past. The biggest piece of equipment replacement we did was to build our incinerators, which was a twenty million dollars expenditure and we took a bond measure to approve. So you’re correct but I don’t foresee a negative impact in that regard in the near future. Rosenbaum: Alright. Are there any other questions for staff? Elizabeth. Dahlen: Why don’t we just have the total two million dollars coming from that funding source rather than the one million coming from the utility. Roberts: I suppose that is a policy choice. The City Council could make if they wanted to do so. But I think you’ve heard from Utility Staff and from Public Works Staff about the potential benefit of reclaimed water and that is why we come down as we have. But you are correct. I suppose that could be done if the political decision wants to do so. Rosenbaum: I did . Dexter. Dawes: Elizabeth’s question makes me think of one which deals with potential future revenues from the sales waste water in the event that Palo Alto went ahead when we talked about this before. The concept was that the water utility would in fact be the source or the recipient of the revenues that came from those sale of waste water would that change with this situation or I guess now I can answer my own question if the water utility puts up the second million dollars and pays the advance from the waste water reserved fund then they would get the revenue so I would withdraw my questions on you. UAC Minutes 2/11/04 – Approved 3/3/04 Page 5 of 38 Rosenbaum: Mayor Beecham. Beecham: Let me provide some initial background here. This may or may not be relevant for what you need to decide to night. But it is more background on the situation for the treatment plant. The plant does have a discharge permit that requires to continue recycling the water from the tennis pipe. Tennis pipe is in its repair. My understanding is various estimate what it would take to simply repair the pipe if we were to environmentally choose to do it, it would be one or two million dollars. It is not an option to the City or to the Plant to find a way to continue sending recycling waters some place and the people would tend to want to use it ourselves. So some money must be expended some way or another it would seem. Also this past week at the invitation of the former Mayor of Mountain View I met with former Mayor Mike Kasperzak____ , the current Mayor Matt Pear_______ I believe to talk about it. What they conveyed to me was that from their point of view they do desire to continue using recycled water. They are not doing it for economic reasons because I think you’ve seen is not terribly economical, doesn’t pay for itself. But they do wish to continue using the water. There may be something in the future for them in terms of additional demand for water. They may have more constraint supplies then we have and so they may be backing on the future but that’s their option. Part of what they said though was as they consider the pipe line they are seeing some deep increase cost on their side that makes the project less economically desirable as low as might be currently and that is the reason why they are saying that they are looking forward to two million dollars in Palo Alto because it is not a great deal from their end and there may be some question on whether they continue at all if they don’t get some contribution from us. Rosenbaum: Good. I appreciate that input and perhaps that relates to my second question which I had submitted, which had to do with the use of this two million dollars. Glenn I think you told us that if the City of Palo Alto did not participate this project would go ahead with a 24 inch pipe and it would be Mountain Views’ Project. If we build the partial 30 inch pipe that was suppose to cost one million additional dollars we are being asked for two million dollars. What is the use of that second million? How is that to be used? Roberts: Again if its part of the construction cost of not only increasing the size of the pipe but doing all of the other ancillary functions associated with building the pipe line. It is more than just the million dollar cost of the material difference between 24 inch and 30 inch. It is the cost of trenching, cost of backfill, cost of repaving the streets and all those things that need to be done whether it is 24 inch pipe or 30 inch pipe. But the perspective from Mountain View side is an I technically is the project manager type have to understand where they are coming from that were to be partners in this project we would be sharing in those costs. So it goes towards those other related construction activities. Rosenbaum: Would it be fair to say that if we did not participate and there was no two million dollars that the cost of Mountain View would be one million dollars more than if we do participate? Roberts: I am not sure I understand your question. Can you restate that for me please? Rosenbaum: If we participate to the extent of paying for the 30 inch pipe we will be contributing two million dollars towards this project. The pipe itself is estimated to cost a million dollar. Is this additional million dollars going to reduce what Mountain View would otherwise have to provide if there were no Palo Alto participation in the project? Roberts: I think I would like to answer that question two ways. First of all directly I don’t believe so because in addition to the one million dollar just for the increase size of the pipe we now have to build a 30 inch wide trench instead of a 24 inch wide trench. So the other cost go up incrementally also. But UAC Minutes 2/11/04 – Approved 3/3/04 Page 6 of 38 moreover I think this is an indirect answer to your question. I think that there is a real risk that everybody’s cost will go down to zero because the project wont happen. Rosenbaum: Alright. Well I think based on that response and the Mayor’s comments what we have here is a situation in which Mountain View has become reluctant to fund this project on their end. I think they are bogging at the cost. I do not know exactly what went on but I did send everyone a copy of the Mountain View Staff Report that went to the January study session of the Mountain View Council and the Mountain View Staff I am sure was not happy to say that 3 months after their previous report the cost were essentially doubled for Mountain View. I don’t know how this came about but it must have been somewhat of a shock to them. And it would not be a surprise to me that Palo Alto was asked to participate or offered to participate in order to somewhat reduce those Mountain View Cost. There is nothing wrong with that but it seems to me if that’s really what went on that’s the way it should have been presented to us. Roberts: I have a different perspective on the background and the history of the project. This project has been in its formative stages for some time between the water quality plant/partners in Mountain View. Palo Alto water utility approached us asking how they could participate and how the pipe could be upsized? So we did not seek out additional funding in order to bounce a project. We were approached and asked what it would take to become involved? Ulrich: You recall the request that we made was for two millions and subsequently the action was to contribute only a million dollars to cover the estimated cost to up size the pipe from 24 to 30. So I would take from that the project million dollars portion of it is just for the upsizing. It is not related to other overruns or other reasons. That is why we are paying for out of the water fund. Rosenbaum: Right. It is that the second million dollars though that I was questioning. Ulrich: So you are questioning the second million not the million for the upsizing which .. Rosenbaum: Alright. I guess the Mountain View City Council has yet to make a decision perhaps they are waiting to see what the Palo Alto City Council does? Roberts: They are waiting to see what the recommendation will be from Palo Alto. Ultimately, of course this issue will not be decided until the City Council adopts a budget at the end of June. But they are not waiting for that. Actually they are waiting to see what the Staff recommendation is. They are scheduled to go back to the Council on February 24th I believe it is. I had preliminary conversations with their Public Works Director Cathy Lazarus and told her what our recommendation is in this regard. Rosenbaum: Fine. Alright. Well it will be interesting to see if indeed they were becoming a little dubious as you suggested about going forward if Palo Alto did not participate, it would seem that Palo Alto participation at this level may not make a significant difference in their decision but we will await to see that. Roberts: I have had feedback yesterday afternoon again from Cathy Lazarus after conversations with their City Manager and the same two council members that Mayor Beecham just referenced and they have indicated to me verbally that this recommendation is satisfactorily to them and they would recommend to their council on 24th to go forward on this basis. Rosenbaum: Fine. Elizabeth. UAC Minutes 2/11/04 – Approved 3/3/04 Page 7 of 38 Dahlen: I just wanted to make one point of clarification. If Palo Alto does not proceed with the two million, my understanding and I think the fellow commissioners would be the same that Mountain View would go forward with the 24 inch pipe as was originally planned assuming that their City Council approves that. Is that the correct description? Roberts: I think so. I can’t obviously commit on their behalf but in the conversations I have had Cathy has told me that they are looking at contingency plan options, cost reductions in other ways for example they might eliminate the extension to Moffett Field and try and do that at a later date and rescale the project in some way to reduce the cost and yet still be able to go forward at a reduced level. Dahlen: Okay so they are still thinking that through. I just wanted to follow up on one item that Mayor Beecham mentioned with regards to the treatment plant and they are meeting their permit requirement. I guess my understanding from our last meeting and from the write up that we had last time which is a month ago now and I have to apologize but I thought that there was in that write-up an indication that we were meeting our permit requirements and that is wasn’t a mandatory requirement for the City of Palo Alto. Is that an incorrect statement? Roberts: It is a combination of several things going on. What I spoke to you first last time as I recall was the original master plan and some questions were asked about why we were promoting this ten years ago and why it wasn’t permitted at that time. At that time we were facing a discharger climate in the treatment plant that would have mass loading limits on certain fluids or concerns into the Bay. And most of our treatment is able to deal with the concentration alone but at a certain volume there is not much you can do about mass loading. So water reclamation diverting the flow would have reduced some of the mass into the Bay and was a strategy that was proposed at that point in time to deal with potential mass limit issue. That mass limit issue has gone away that is no longer a permit requirement. We don’t face the need to expand water recycling in order to deal with a mass loading issue. However, we do have a permit requirements on us that require us to continue the historical levels of water recycling hence the problem with deteriating pipe lines that need to replace it in order to maintain the historical level of recycling. Dahlen: Excuse me. So the amount of recycling that we are currently doing is not enough to meet our permit requirements. Is that a clear understanding? Roberts: Right. We had to stop sending the water to the Mountain View Golf Course because that pipe line is failing. Dahlen: Right. But we have other water recycling programs within the City of Palo Alto and I take it that those are not sufficient to meet the permit requirement? Roberts: Correct We historically had a maximum utilization about three million gallons per day and one million that was for the Golf Course, One million to the Renzel Marsh and another million in miscellaneous places like your are getting your own Parks and Golf Course, it is cheap to use and all those things we are down to about two million now we need to get back to a three million level. Dahlen: Thanks. Rosenbaum: Alright. Thank you Glenn and John. This item is to be on the City Council Agenda next week. Is that correct? Roberts: We have an information report on the Council Packet for next week discussing this issue and telling them what our recommendation is going forward into the CIP Process. UAC Minutes 2/11/04 – Approved 3/3/04 Page 8 of 38 Rosenbaum: The council is not going to take a vote on a specific approval? Roberts: It is an information report and the actual would come during the budget process. Rosenbaum: Fine. So it won’t be necessary for a representative from the UAC to be present then. Ulrich: Yes. That‘s correct. Rosenbaum: Fine. Thank you. I think that finishes Item 1. Lets move on to Item II. The Comprehensive Power Plant Alternatives Feasibility Study. Comprehensive Power Plant Alternatives Feasibility Study Ulrich: Thank you. This evening is a next phase of look at replacement power for our Western Contract which leaves at the end of 2004. As you know we have contracts that we are working on to replace some of that power. But part of our LEAP or long range supply plant, we felt that it was important to look at other alternatives including what we are discussing this evening is requesting recommendation from the utility advisory commission to undertake a comprehensive study to explore the feasibility of constructing a power plant capable of serving Palo Alto which will include developing the parameters that would be required for feasible sites comprehensively evaluating the technical and economical environmental feasibility and community support for utilizing such sites, contrasting potential Palo Alto power plants sites with other alternatives and reporting findings and recommendations to the UAC and Council. I made a point of reading the first portion of the report that we have given you so that it shows that we are taking a comprehensive view in looking at the potential and the feasibility as opposed to jumping to a conclusion that having a power plant is the best thing in Palo Alto. I think it would be pre-mature to come to any of those conclusions or to the other way to dismiss that idea without having a study. This is going to be very important to us. We need to look for a reliability of supply and for reasonable low cost energy to replace the contract that expires with Western Area Power Administration. So we are going to do this in a two parts. Girish Balachandran will give you more of the background for those folks that need to have a better understanding how we are in this position and we are fortunate also to have this evening with us Paul Richins who is the Energy Facility Licensing Program Manager from the California Energy Commission and he will discuss the process for licensing a power plant and the regulatory process that takes place if it comes to a conclusion that we would want to site an construct a thermal power plant in Palo Alto that exceeded 50 megawatts in size. If it was less than that then the CEQA process would take place. While that is also rigorous I think it is important to know the differences and what the process would be if we find that feasibility study suggest and recommends that we build a power plant in Palo Alto. So I will turn it over to Girish and will allow plenty of time for questions. Balachandran: Good evening Commissioners. Good evening Madam. I have with me also here Karl Knapp. He was involved a lot in putting together the report and presentation and Paul has already been introduced so just head on into this presentation here. Two part presentation. Here is an overview of what we have done so far, what is coming up and what we want to focus on in today’s meeting. So essentially we have identified the need for some kind of thermal generation business case for thermal natural gas power generation has been completed. Had some preliminary analysis and we also we have been part of the NCPA RFP for thermal generation. You have been updated on that at your last meeting. Don Dame was here to provide you the results of that analysis. UAC Minutes 2/11/04 – Approved 3/3/04 Page 9 of 38 Dawes:: Girish I hate to interrupt up but I am confused about the relationship between John’s NCPA effort and our effort and whether these are separate studies or they are coordinated so that we can compare NCPA’s analysis and conclusions versus our analysis and conclusions. What’s the relationship here? Balachandran: NCPA’s RFP basically looked at thermal generation outside the city. So it was basically anywhere, it could be anywhere and it didn’t restrict the responses to natural gas by power plants they also requested contracts, gas tolling contracts which have characteristics of natural gas power plants. How this would be used? It will be used as a piece of information compared against sites that will be studied in Palo Alto and that’s part of the normal environmental process too as we go forward with that is what are your alternatives to a site in Palo Alto? Dawes: Could our study be simply sort of one fraction of the NCPA study in other words they are studying power plants economic sizing, location and it seem to me that if one of those locations is Palo Alto it would be just sort of chapter II or III whatever of their study but that is not the case? Balachandran:: There is some overlap. If you remember. Actually I will come to one of the slides which talks about the results of the RFP of the NCPA RFP and NCPA also evaluated generic sites that could be located within the member service territory and that was a high level screen analysis and actually the results of that analysis showed that a power plant within one of the member sites are shown positive economics compared to some of the responses that were received from the market. Dahlen: Excuse me Girish. Can I just ask one additional question? How much have we spent on the NCPA RFP? Balachandran: Can’t give you the exact number. But not much. It is staff time essentially sending an RFP out and getting responses. In terms of incremental cost there was some consulting dollars spent by engineers kind of going out looking at different sites to get an idea what a generic plant would cause. It is basically feasibility study kind of dollars very small. Dahlen: So it would be correct to say that this is something that builds off the NCPA of work and this is more comprehensive following that work or are the two unrelated? Balachandran: I’d say it is. But it is more jumping off, there is some overlap but I think finally at the end of this process we’d be looking at the results of both together and I think you are right. What we are proposing to do here is much more detail than what has been done by NCPA. Way more detail. Dahlen: Thanks. Balachandran: So the area in the box is essentially what we are talking about today. We are talking about a two phase study process. The first phase is essentially answering the question. Do we even want to look at a site in Palo Alto? And if both the recommendation to Council, and if Council says Yep it makes sense to do this and go ahead and look at a site then you go into Phase II where you actually look , see if there are adequate sites in Palo Alto. At the end of Phase II we’d come back to the Council Nope there weren’t any sites or there was one, two, three multiple sites and after Phase II if Council says Okay come back to me with a recommended site that’s when we would do that and depending on the size of the power plant at that point you’d go into the next step which is Design and Permitting. If it is greater than 50 megawatt plant you would go into the CEC process, permitting process if it is less than 50 megawatts the City would be the lead agency on the CEQA. I just want to re-emphasize what John said that what we are doing, what we are proposing today for action is the feasibility study, there are no decisions being asked with regards to actually building a power plant, it is only a feasibility study that the results of which UAC Minutes 2/11/04 – Approved 3/3/04 Page 10 of 38 will be provided to the Council and the Council will make the decisions as shown over here in the future. So I have a couple of more kind of overview slides and then I will jump into more details. This is essentially the request. You have seen it in your UAC report. I have gone through this what the two phases of this study are going to look like and this is what the presentation is going to go over. There are going to be four parts to the presentation and first look at how our supply picture is changing. Probably you will be familiar with some of the slides there. What we have done so far? Basically we have developed a diversified portfolio approach to meeting this deficit. Then talking specifically about one area of this portfolio which is thermal generation and then rounding of with our recommendation. So the first part you can see our deficit in an average here. On energy only would be about 46% our Western Contract goes from about 91% of our load to about 35%. Over here this chart basically says that prices still are variable, daily prices continue to fluctuate and this is a very long-term forecast from NCPA on electric prices and gas prices under different market conditions. Over here. The some objectives for Palo Alto. We must increase our supply to meet our load. We must maintain local reliability. Want to keep our rates competitive, demonstrate environmental stewardship address local congestion cost, the additional transmission cost have been instituted by the ISO, address transmission reliability and maintain adequate reserve margins. There are number, each of these are being discussed at different forums for example right now on the reserve margins the CPUC is coming up with rules as to what kind of reserve margins the IOU have to maintain and these are rules that used to exist in the past and through deregulation many of these rules got tossed out of the window and they are coming back. So our response to this deficit was to develop what we called the long-term electric acquisition plan and we used a diversified portfolio approach. This slide basically goes through a lot of history of the different reports that we brought to you for action and to the Council it shows that we built a very deliberate process right up to now and we plan to follow that kind of deliberate process going in to the future to implement the LEAP Plan. The slide talks about what our this diversified resource portfolio could look like. So this is just one view of this diversified portfolio under different hydro conditions. The new renewables about 10% City Council has approved but 20% renewable portfolio standard by the year 2015 Karl started work on negotiating wind and landfill contracts. You have seen basically the principles for this contract at the last meeting. So the 10% buy is going to move to about 20% in the long-term. This simple chart over here shows the connection between the LEAP Guidelines and the different parts of the Implementation Plan. Basically saying that different parts of our Implementation Plan affect different guidelines. And what we are looking at today’s meeting is thermal generation. So the point I am trying to make in this slide is a diversified approach. We are not looking at one way of satisfying this deficit. Should I move on? Rosenbaum: We might be willing to take your word for that without seeing a slide like this. Balachandran: I can go through the details on this. I can give you the...there is actually a meaning between the dotted lines and the solid lines but I will save that for the question part of the presentation. Another view of our short term portfolio what we plan to do Council has approved us purchasing three blocks of power for the next three years and there is still a deficit that exist and that will be filled with short-term purchases. Again this is average year. Remember anything we do with the power plant if it ever comes to fruition it is not going to happen before the hand of this slide it is going to be several years. Dawes: Girish your underlying assumption on this whole power plant discussion is that we will continue to buy these street blocks to fill the biggest parts of the holes and a power plant that participation or ownership would address the deficit part that goes along at the top In other words this is a permanent situation of buying blocks to fill holes. UAC Minutes 2/11/04 – Approved 3/3/04 Page 11 of 38 Balachandran: It is not. The size of the blocks will reduce if a thermal power plant a base load plant is actually if we buy it whether it is in Palo Alto or outside Palo Alto to the extent we get that resource we’d buy less from the market. Does that answer your question? Dawes: We still have the hydro facilities and the hydro facilities are very variable and if you look at the top of the blue lines there you know we don’t need very much power effect. This is a normal year. Wet years we are selling power without just through excess hydro power and so what I am getting at is given the seasonality that our current supply is it would seem that we would still need to buy block power either that buy block power or have our own base load plant which we only ran 100% for a few months of the year and then we’d run it at 50% because we get cheaper hydro power during the peak times. Balachandran: Sure. There is going to be an economic dispatch of the thermal plant just like the existing NCPA plant. You build it based on your long-term forecast. Long-term forecast of your needs. Long- term forecast of your natural gas supply. The actual operational decisions day to day, month to month will be made on gas prices. So it is like what you said in certain years if you have excess hydro you have low gas, you may not use your plant as much if there is a more economic alternative in the market. So coming back to your point on block purchases, we have our thermal and we will be filling it to certain extent with block purchases and if there is a lot of hydro and we are surplus yeah we will be selling. So that is going to be dynamic and there will be additional analysis provided as to what the sizing of the plant is as we go along. So talking about this is another view of a long-term, again an energy view of what our portfolio would like and over here right on the top of the chart we just added what this 25 megawatt thermal base load plant would occupy. And this is again what location it is. Whether it is in Palo Alto or outside Palo Alto. As you can see there is still a large deficit that needs to be filled. This is a chart you’ve seen last time. It was presented by NCPA talking about, what the pool load looked like on one particular day and what the daily and monthly exposure to the market looked like. Point of this slide is there is the flexibility of the Western resource is lessened going post 05 and we do need a load following units. This is a summary of the NCPA RFP. There were 17 entities that responded, majority of the proposals were power purchase with a fixed price of tolling. I am going to flip to the next chart which is more graphic. This is what I referred to earlier about the benefit cost ratio of all the different proposals that came in and on the right hand side proposals 30.1, 2 and 31 are generic natural gas plants within a member service territory and as you can see that’s going through this chart it looks pretty favorable. Looking over here business perspective of thermal resources and this slide talks about both whether in Palo Alto and outside Palo Alto. The plant size could vary the plant capital cost could vary between 25 to 50 million dollars, 12 to 25 million dollar annual fuel and O&M cost. The benefits are greater, operational flexibility reduce supply of credit exposure. It is a diversified portfolio and then the next benefits refer to a plant within Palo Alto boundaries which will increase local reliability and avoid a whole bunch of ISO charges and transmission charges. And currently the 5 dollar per megawatt hours is kind of the middle of the road. It is pretty conservative number the number could be it could go as much as nine dollar a megawatt hour depending on what PG&E ‘s reliability services charges run. So and the risk and cons to having a power plant. One is there is uncertainty related to the plant itself whether it is going to operate or not. The plant could basically suffer an outage. There could be new technologies that come in which have a better heat rate and another cost issue the plant within Palo Alto may cost more than a plant out in the Central Valley. Moving to the final part of this presentation we believe that moving forward is a community decision and the different phases that we have outlined in this proposed study endeavors us to reflect that belief. Going back to specific pros and cons of a local generation facility. Pros: Increase reliability, there is dependable capacity, local control, operational flexibility is increased. On the Cons: There is a whole bunch of environmental issues that have to be dealt with. We have just listed a few over here when Paul gives his presentation he will talk about I think there is 16 different factors, environmental factors that the CEC looks at in detail and all those would have be to be acknowledged and dealt with any kind of feasibility or environmental study that we do. There is also a UAC Minutes 2/11/04 – Approved 3/3/04 Page 12 of 38 long-term natural gas fuel risk, unit contingency and in Palo Alto as one can imagine limited feasible sites. So little more detail on what Phase I and Phase II would entail. We talked about setting up an inter- departmental committee, have a public outreach plan, solicit out public input. Have an open overview of environmental issues, not going to dig too deep into it and report those findings to Council and if Council at that point authorizes going forward with Phase the bullets on the Phase II tell, we are basically going to go higher degree of detail and actually looking to see whether the specific sites in Palo Alto that would be suitable. We have estimated the cost of the study to be about 300 to 500 thousand dollars. The design and the AFC is application for certification which is not something we are not even talking about right now but just to give you a sense of what it would cost. 800 thousand to about a million and a half that is on the cheaper side. I believe Silicon Valley Power has spent much more than that. And construction of course over here is much, the hundred and fifty million dollars is close as if you build a 150 megawatt plant for example Santa Clara’s Plant cost about hundred sixty million for 147 megawatt plant. So this may be a little higher than what we are actually looking at here. So I am going to close this presentation before handing it over to Paul. Repeating the request and ending with just this graphic about what exactly we are talking about in today’s what we are asking and in today’s item. With that I will hand it over to Paul to finish his presentation and may be take questions on the item itself after that. Rosenbaum: Paul let me first welcome you and thank you for taking the time to be with us to night. Richins: Good evening. I appreciate the opportunity to come and talk with you about the Energy Commission’s Licensing Process. We enjoy getting out and talking with the agencies, City Council’s perspective projective developers to explain our process and I think there are lots of benefits that you accrue when you do go through the Energy Commission’s process. So I will just go through on a slide presentation. It is more detailed than I want to cover this evening. So I will skip over some of the slides but you also have a handout up front there that has two slides per page. Elizabeth do you have a copy? My name is Paul Richins and I am the Energy Commission’s Power Plant Licensing Program Manager and I’d just like to go over some of the important aspects of the process. The Energy Commission was formed in the mid 1970’s. The Energy Commission has a number of functions and responsibilities. We do forecasting, we promote renewables, we promote research and development, energy efficiency, we have a function of establishing a building and appliance standards and we do supply demand forecast by 10, 20 years out into the future and the part that I am going to talk about this evening is the Licensing Process. So or Planning Agency with some regulatory responsibilities. On the second slide you can see there that there are four bullets there out of the public resources code. What are kind of main purpose and the process of reviewing and licensing potential power plants. One is to ensure reliable supply of electrical energy protect public health and safety and promote the general welfare and protect environmental quality. As stated earlier the Energy Commissions’ responsibility is for all thermal power plants 50 megawatts and greater. Natural gas power plant, Geothermal plant and so forth. A wind facility, solar plant would not necessarily come under Energy Commission’s jurisdiction. Since the mid-seventies we have reviewed more than 100 power plants in all parts of the state from the desert in the south to Redding in the north including cities such as San Jose in the Metcalf project which you are probably familiar with and projects in San Francisco. So we have a wide range of experiences dealing with public participation, environmental issues, public health safety issues and a whole wide variety of issues that are pretty much dependant on technology and the location that is selected. In our review, the review that we do is we act as a CEQA lead agency for the State of California not only we do the environmental review but if the project is approved and the environmental document is accepted you also receive a license or a permit to construct. This is different than a normal CEQA process. A normal CEQA process is that you would go through a CEQA review, CEQA analysis and certification of the CEQA document but then after that you would re-require to get permits from local state and federal agencies. Our process is a one stop process where we take all of those local and state federal permits roll them into one document and one permit. Also I want to emphasize that the process is a public process and we have a unique feature and UAC Minutes 2/11/04 – Approved 3/3/04 Page 13 of 38 that is we have a public advisor and the public advisor is appointed by the governor to assist the public and interveners in accessing the process and understanding the process. And as a minimum we have at least seven publicly noticed workshops, hearings and meetings where the public and any party that is interested is notified 10-15 days in advance of those proceedings. In our process there are two basic findings that the Energy Commissioners have to make and that is they have to determine that the project meets all laws, ordinances, regulations and standards. That’s both local, state and federal and so each technical discipline will have their own set of laws and those laws will be reviewed in the analysis and the findings will be made whether the project conforms to all those standards. Second finding the Commission has to make to approve a project is to determine that there are no significant impacts or if there are significant impacts there are mitigation measures and adopted to reduce those impacts to less than significant. However, if there are significant impacts Commission can decide to approve the plant if there are benefits that exceed using the balancing approach exceeds these benefits. So during that process the Energy Commission analyzes the construction and operation of the project. It analyzes the direct and indirect cumulative effects, it evaluates alternative technologies it identifies mitigation measures that will medicate any significant impact to acceptable levels and yet develop a set of recommendations and conditions and certifications. It is not unusual for a license that is or certification that is granted by the Energy Commission to have from a 150 to 200 conditions and certifications that the project developer must follow during the construction and through operation. Another feature of the process is that once the project has been approved then the Energy Commission monitors the project over its entire life so any complains that are raised by the public, any non-conformance, non-compliance issues are handled by our compliance unit in Sacramento. This next two slides just give you an idea of the areas we look at. We look at just about any imaginable potential impact that might occur from a power plant and I am not going to go through the list but you can see there is a list on this slide about 22 different disciplines that we look at. One slide 7 I like to think of our process is a four step process. The first step is a very informal process and it is a process pre-filing meetings before an application is actually filed and this process is at the request of the City, the County, the Power Plant Developer and that is what we are in now providing information about our process so that if you do decide to go further with such a project then you will have additional information on what to expect in the process. If the council makes decision to move forward with an application, I would expect that we would have other working meetings with the staff to go over what is required to be in an application so that any questions that your staff would have or your consultants would have we would provide answers and assistance before you spend time and money on putting together an application. So after an application is filed then the determination whether the application is complete, whether there is enough information in it for us to begin our review then once that determination that it is complete has been made then staff will do an extensive analysis of the project as we looked at the previous slides we will take a look at all those technical areas and make determinations as it relates to the laws and also environmental effects. It is a very public process. We will hold workshops and hearings. They will be locally held so they will be held in a community, where there is a large public involvement. Those subject areas will be held during the evening time so that the public can attend if that’s their desire. The staff documents that we will produce will be a preliminary staff assessment and then from that we will have workshops on that document and then produce a final staff assessment. The final staff assessment then goes to the Commissioners. And on each case there are two Commissioners out of the five that are appointed to oversee the sighting case and those Commissioners will conduct evidentiary hearings on the project and they will take testimony from sworn witnesses and then based on the evidentiary record make a decision on the project and if there are need for certain conditions or certification to medicate impacts. Now we skip on to slide 14 a little bit of information about our public process. It states that it is an open process, will hold numerous workshops, hearings and so forth and they will be in the community. We also at the time of filing establish a mailing list of property owners, federal, state and local agencies and any interested public that want to be involved in the process and notices that the application has been filed, notices of workshops, notice of hearings will be mailed to those people on the mailing list and also be advertisements taking out notices in the UAC Minutes 2/11/04 – Approved 3/3/04 Page 14 of 38 newspapers and also the application will be send to the library or to the libraries here in Palo Alto and then also around the state. The document will be on the Energy Commission’s website and in fact a person can tract the performance and the process from their computer at home. And then if you turn to slide 15 we are not going to go through the details scheduled there but I just want to say that we take the 12 months schedule quite seriously and do our best to maintain and keep with the schedule. So you can that it is laid out here for 365 day decision. I think we do a pretty good job at meeting the schedule although on an average it takes about 14 months not 12 months to process an AFC. Some go a little faster than 12 months, some take a little bit longer. It is really driven by the issues in the case and the issues are really driven by the location of the project and so each side will have its own set of issues and own set of impacts and so the selection of a site is very important. And on the last slide is just a contact. At this stage the contact would be made at the Energy Commission. I’d be glad to come down anytime and meet with you, with the staff, with the City Council on anything. Also Margaret Kim is the Public Advisor appointed by the Governor and she is the person that will assist the public in accessing the process. With that I will open it up and entertain any questions you might have. Rosenbaum: Thank you very much Paul. Do we have questions? George. Bechtel: Paul do you look at the business case for that probably precedes the application. For example we have projected our needs and our shortfall and so on. We look at the impact purchasing power and so on our rates and so on. Does your staff look at that business case as part of the licensing process? Richins: Not directly. The closest we would get to that is in the alternative analysis we are required, CEQA requires that there be an alternative analysis where we look at alternative sites and alternative technologies. So to the extent that your business analysis talks about or reviews different technologies, different sites then that information would be provided in a narrative form in the application. But we would not review that in depth as we would the actual project that is being proposed by the City. Bechtel: In your experience have you seen faulty business cases made for making a license application for a power plant whether it is either public or private? Richins: We really don’t get into the business plan at all to make those determinations. Prior to restructuring the Energy Commission had to have a finding of need. You are getting may be to that point a little bit we are no longer by law are required to do a need assessment. But as I said in my opening comments the Energy Commission does a forecast 5 year, 10 year, 20 year forecast for the supply and demand of electricity based on certain prices for natural gas and other cost. We still do a forecast but there is no requirement to make the linkage between a specific application and that forecast because we have gone to a market driven structure whereas we aren’t we are no longer required to look at that. However, I would just speak not as a member of the Energy Commission but just based on my past experience and that is municipal utilities, irrigation districts such as MID, TID, SMUD, LIDWP have and are in a good position right now to propose and bill power plants to help reduce some of their cost and to help reduce, as you saw on other slides, those block purchases and avoid a lot of transmission cost. So there are a lot of benefits for doing that but those are individual decisions of each particular entity. For instance SMUD, The Sacramento Municipal Utility District went through our process and received approval for a 500 megawatt power plant potentially a Phase II to add another 500 megawatts. TID, Turlock Irrigation District and MID Modesto Irrigation District have gone through our process three times on three separate projects. So we are seeing as a kind of second wave during this energy crisis of a municipal and public utilities coming before us and proposing power plants. Because they feel that it overall provides a benefit to their ratepayers and a benefit increasing relaibibity of their system. Bechtel: Good. Thank you. UAC Minutes 2/11/04 – Approved 3/3/04 Page 15 of 38 Rosenbaum: Do we have other questions? Elizabeth. Dahlen: I just had one question Paul and that was. What is the percentage of cases that come to you that do not ultimately receive permitting? Richins: That is a very good question and I didn’t bring the numbers with me and just of the top of my head since 1997 the Energy Commission has approved approximately 44 projects and I would say approximately 20 may be, may be that’s a little high may be 15 to 20 additional projects were not approved for a variety of reasons and those reasons were mostly that the applicant withdrew the project because of a variety of reasons. So I haven’t done a count recently but there is a good number that come with a proposal that hasn’t been fully thought out and there are some unresolved issues that weren’t adequately addressed and so they withdrew from the process. Dahlen: So we could take it that the success rate is high if we come forward with a good proposal. Richins: I think the success rate is high provided that you pick a good location and that you are willing to spend a little additional money to mitigate impacts. Being in an environment like you a city environment as opposed to a more rural there are going to be more sensitive receptors nearby and that it would cause additional mitigation but it is not unreasonable cost and it can be mitigated using basic business practices.. Dahlen: Thank you very much. Rosenbaum: Other questions? Paul let me ask one. Clearly some of the factors are location independent. That is I assume will propose a generating facility using the very latest equipment and most likely other people coming forward would do the same thing regardless where they are located. On the other hand air quality is clearly location dependent. Can you please tell us little about the problems that being located in the Bay Area relating to air quality and securing a permit. Richins: Yeah. As part of our process you would also submit an application to the Bay Area Air Quality Management District for a license and they would begin processing that concurrently with the Energy Commission’s process. We coordinate very closely with them. And they, in their process, make sure that their regulations are followed and there are certain requirements that you have to have the best available control technology to control emissions to the lowest level possible and then for those emissions that aren’t controlled then there is a requirement that you purchase air quality offsets so that there is no net increase in air pollution from the facility. Either it is been controlled to the lowest possible level and those remaining emissions are offset. So there are sophisticated models that our staff use, sophisticated models that the air district uses to make determinations on what is required and how much offsets are needed to mitigate the projects so that there are not significant impacts. Rosenbaum: Could you comment on just what you mean by offsets and to what degree they are readily available in the Bay Area? Richins: I couldn’t tell you the inventory that is available but the Bay Area Air Quality Management District maintains what they call a bank of offsets that have been reviewed by them, have been certified that are tradable or purchasable and so you would go to that bank and identify holders of those offsets certificates and enter into a negotiation process to purchase the adequate number of offsets for the knock socks, pamcam and so forth the emissions that you would need to offset. UAC Minutes 2/11/04 – Approved 3/3/04 Page 16 of 38 Rosenbaum: And just to continue I am not familiar with this process. What is it that you are buying and how does it reduce air pollution? Richins: I am not an air quality specialist but I’ll give you ten thousand foot level kind of perspective that I have on it and that is the air district. Each air district is required to come up with an improvement plan, a State or Federal. They call it SIP or a FIP. Federal Improvement Plan and a State Improvement Plan. Part of that Improvement Plan is to encourage the shutting down of dirty, inefficient sources of emissions. So they have developed the protocol and a process for closing these emission sources and then taking those emissions. Let us say you have a source that is emitting ten times of a certain pollutant. If that facility is shut down then they are allowed to take a portion, I can’t tell you what portion but a portion of that ten times and put it into the bank and so the ten times is now reduced to some number such as six times and that is available for future growth and future development and so the increment that has been realized by reducing the ten times down to six or five or whatever it is a growth factor or an improvement factor for the district and so the idea is that on a air district wide bases a plant that slowly closes down or inefficient processes and encourages the development of no more efficient less polluting processes. Rosenbaum: So there is a transfer of funds here. We presumably would pay another party to buy these. Who is the other party? The owner of the old inefficient polluting plant? Richins: That is correct and it is not a power plant necessarily. More than likely it is not. It is any manufacturing or any other facility that is required to get a permit from the air district and they have gone through a formalized process to shut down that particular source. And so the permit is no longer valid and they now receive a certificate for and the ability to sell that on the market. Rosenbaum: Thank you very much. Are there any other questions for staff in general? Dawes: Are these questions about this entire presentation or just about the CEC? Rosenbaum: I think we are ready to open out to questions about the entire presentation. Dexter Dawes: Okay. Why don’t you take somebody else. I have a number of comments but I am not organized. Rosenbaum: Elizabeth. Elizabeth: I’ll go quick. I had a question about and this goes back to your presentation Girish. On slide Number 18. you showed a chart there of the long-term base supply portfolio. Is that for Palo Alto alone or is that for the NCPA? Balachandran: Just Palo Alto. Dahlen: Just Palo Alto. Okay. So just to clarify. I think that this gets to the Commissioner Dawes’ point with regards to the slide 16 am I correct. This is our overall deficit and in the future provided we the overall deficit does not include the additional capacity we would have if we were to built the plant. Balachandran: You are talking about slide 18 Dahlen: Yeah. Balachandran: The slide 18 has the twenty five megawatt thermal resource right on top. UAC Minutes 2/11/04 – Approved 3/3/04 Page 17 of 38 Dahlen: Ah Okay. Dawes: That however doesn’t show the seasonality. That’s what really is the base of the problem. Dahlen: Yeah. I thought this was answering that. But you are right. Dawes: One is annual one is by the quarter. Dahlen: Yeah. Rosenbaum: Dexter are you ready? Dawes: Yes. More ready. Let us put it that way. First a comment about an article in the Wall Street Journal within the last week or so about plants power plants for sale and how we are reaching the bottom of the cycle on power plants and of course buying cheap assets is something I am always very interested in doing clue is not one for sale out in the Baylands some place which is a kind of a subject of our situation here but if the price is right it is better to pay to bring it into the city than to do it an oval thing whispering in the ear of an investment banker is normally type of thing one would do at this juncture and the question to the staff is have we done any whispering to say that our interesting deals, deals we would be interested in investing in if the price is right. Ulrich: When we saw that article, that triggered our thoughts too. The only problem you got is the location of it and what it is going to cost to get the transmission rights to move it into this congested area. I think the whole equilibrium of all this is to have a local power plant as close to Palo Alto as possible with a minimum amount of transmission cost or having the ability of a government agency or someone to control over time the cost changes to get that energy into Palo Alto. Of course if the price was right enough we may overcome that. Dawes: It definitely would overcome it if the price is right. Ulrich: You can also believe it that many other California utilities who are closer to these sources can also be quite interested in. Dawes: Right. I think of my conversation with Jim Pope about their buying into gas, excuse me, co- plants in Arizona and bringing power up to Santa Clara and diversifying their base and of course it is complicated and so forth but there is some charm to have a further diversification of your base resources. Ulrich: We would like to do and may be we can talk in more detail. But we are also planning a road trip so that we can drive around the country and look at them. Dawes: Right. And certainly advising our professional investment bankers that we could be interested is a step that is easy to take get them excited and probability of it coming to fruition is probably in the low single digits but one never knows and if you don’t put out the word you are guaranteed nothing will happen. Ulrich: Well you can. Closer to home we have had discussions with our brethren and part of the process is to look at ways of sharing power plants and those that have already committed. Because some of our other municipal utilities part of NCPA and others are long and they are in their power production or plants. We had some discussion of that at the NCPA Strategic Planning Meeting. UAC Minutes 2/11/04 – Approved 3/3/04 Page 18 of 38 Balachandran: Let me just add to the answer here. Most of that excess capacity was outside California, the southeast is very surplus and as far as California surplus the NCPA thermal RFP went to every supplier in Northern California who actually owned the plant, So open to Calpine and Duke and Muran and the results of those responses are what you saw last month and earlier today. Dawes: Another question. I wanted to talk about the proposed study itself. The 3 to 5 hundred thousand dollar proposal which will have a motion on it in due course. Is this proposal to be done by the Palo Alto staff or is this going to be a consultant pertain to do this and assuming that it goes forward where does the money come from in terms of which budget and is there an ability to deal with it budget wise. Balachandran: Well. It will come out of the electric funds budget. We put it into our proposed budget which will come before you I think in a month or so. The total cost over here are both Phase I and Phase II and regarding who will actually move forward with this. We managed this whole process. Parts of the work of Phase I will be done by us others by consultants. It depends on to a certain extent on what Council tells us to do. Council says here is exact. Make sure that in Phase I you do ABCD here. We will evaluate how much that is going to cost. So the five hundred thousand dollars is based on estimates of what other cities have done but the actual expenditure would be highly dependable on what Council instructs us to do. The level of details, the amount of outreach what initial environmental overview would mean. What in Phase II when we talk about environmental screening. What that would mean so it is going to be a combination of staff and consultants. Richins: Thanks Girish. Rosenbaum: George. Bechtel: Girish, I am looking at in the staff report page 4, next steps. Basically it follows up on a question that I would like to follow up on and get more information the exact way you are going to conduct the study. In Phase I and Phase II is this going to be more or less a level spending plan or a constant level of effort in each of these Phase I, less Phase II more have you thought out how this is going to be. Balachandran: Phase II will definitely cost more than Phase I. If we get to Phase II it is just the way we set it up Phase I answers a very broad question which is should staff be evaluating sites in Palo Alto? It is a kind of threshold question and so we basically go out and describe the problem as we have been describing to you in the last few years here is the change in the supply portfolio. We talked about the problem we have done so far in going out with the NCPA RFP what council has done so far get community feedback and report back to the council. So there will be some kind of environmental analysis that is pretty high level. That is not going to take as much money as what we are proposing to do in Phase II which is to answer the question of just read it out. Are there sites in Palo Alto that are suitable? When you get to that point you start to get into more detail feasibility studies. You start to look at technical aspects of transmission lines, gas lines, excess to water. You are going to look at many of the impacts that Paul laid out the environmental side. And it highly depends what exactly Council asks us to do in Phase II. That is why in each of these phases we are taking it to Council we hope we will have and we expect to get specific directions of what exactly Council wants us to look for and the level of detail they want us to examine different issues. There may be some environmental issues that may have a higher priority for Council and depending on that the budget may change. Bechtel: I think you are getting to what I am interested in. In the last paragraph you talk about parallel efforts as well. You will continue to monitor and evaluate compliments and alternatives. And I would like to see that diminished by focusing so much on the study because the LEAP had talked about local UAC Minutes 2/11/04 – Approved 3/3/04 Page 19 of 38 generation that is just one option and many of the others. Dexter mentioned earlier trying to find investment opportunities outside it could be much more beneficial if they were cost-effective without us having to do something here. So I would like to make sure though that if all this studies is going on that we continue an equal effort in other areas as well. So I guess if you are saying that in part of this the first effort likely will be done mostly in-house perhaps and then but that it would also probably going to be the same approach we would take for the alternatives is to use just yourself, your staff to look at those things. So I guess bottom line is we still need to look at all fronts. Look at all tactical ways of solving our gap problems. Balachandran: I could put up that simple diagram I referred to you before if you want. To answer your question. Yes. For sure we are going to be looking at all different aspects of the portfolio. We are all going to come back later this year with programs which include. We are going to look at demand response programs which basically help shave peak and high cost hours. Are we going to come back to you with comprehensive energy efficiency goals which are going to be integrated across utilities. Are we going to continue to look at block purchases what Commissioner Dawes and you said about taking advantage of market opportunities are we going to do that. So rest assured we are committed to a diversified approach. We think that’s the approach that is what Council approved, told us to do and that is what we are doing. So we will continue to do exactly that. Rosenbaum: Let me follow up on Dexter points. We all remembered that when PG&E went bankrupt there were certainly financial implications particularly for stock holders but the rivers continue to run and the generators kept spinning and as far as electricity was concerned it kept flowing. Now the end of 2004 the firming contracts goes away but the generators will still be there. What is going to happen and if we thought of looking to buy firming from the people who been providing up to date. Balachandran: You are talking about PG&E. Rosenbaum: If they are the folks. Yes. Balachandran: We don’t have an enabling agreement with them. They didn’t respond to our RFP. So we most likely want buy those blocks, definitely those big blocks from them. As far as within the day firming. NCPA is in charge of our book for less than a month. So if PG&E responds to what the schedule is put out sure we will buy from them. Western is offering custom products, day ahead firming and month ahead firming and if Council decides to enter into those contracts and by the way we will be bringing those contracts for Council approval and if PG&E is a successful bidder on those products sure we may do that. I am thinking if you are talking about the long-term replacement funding… Rosenbaum I was thinking from the broader picture. Is all of this generation that was previously used for firming is going to be thrown out into the market? Balachandran: It is still being used. I mean right now that is what PG&E is trying to do. They are trying to actually, they tried to pass on the cost of they have to incur to us. They tried to do over the years and we successfully resisted that because the contract does not allow it. But after 04 they have no obligation to provide at the prices that they provided to Western today. Rosenbaum: I understand that but will they be interested in providing it at a price that we might think attractive even though it’s greater than what we have been paying under the Western Contract. Balachandran: I believe and may be Tom Kabat can help me out with this. What they haven’t actually come up with any kind of comprehensive proposal. (1) PG&E doesn’t own the thermal generation that UAC Minutes 2/11/04 – Approved 3/3/04 Page 20 of 38 they used to when they actually entered into 2948A and maintained that contract for years. They got rid of all the thermal generation. So you will have to go to some one like an integrator and sign some kind of integration contract could be a combination of DUKE, MURAN or whoever it is. Now when you look at the large Western customers and what different folks have been doing, people have basically been taking a portfolio approach and building their own generation. I think that reflects a sense of we don’t think that it is in the offering. One of the guidelines that we provided was ‘be inter-dependent on Western’. It was not a total dependence on Western to address this exact issue. If there were integration opportunities that came up which we felt was a good price sure jump on that band wagon. But as of now I don’t believe we had that. Tom do you want to add anything? Kabat: Yes. I am Tom Kabat with Utilities Department. My understanding from talking with Western that today PG&E has expressed no interest in doing further integration or extending the contract. So as Girish mentioned they have spun of quite a bit of their thermal generation over the past few years. Rosenbaum: So somehow the demand that exist through 2004 is going to be absorbed in the market by other buyers starting in 2005. There will not be a sudden plot on the market because of the end of the integration contract. Kabat: I think the amount of firming is probably something in the order of 2% of the state’s energy loads. So it is just the 2% moving around it. It does not create a large grid. Rosenbaum: Alright. Thank you. Do we have any other questions or comments? Or are we ready for a motion? Dawes: Are you ready for motion Mr. Chairman? Rosenbaum: I am ready. Dawes: UAC recommends to the City Council to accept the staff proposal of a study to implement a power plant in the City of Palo Alto. Roseau: Do I have a second? Dahlen: I’ll second the motion. Rosenbaum: Alright. We have a motion by Dawes and a second by Dahlen to approve the staff recommendation is there any further discussion? If not let us vote. All those in favor. Ay, Aye. Rosenbaum: That passes unanimously. Thank you very much and Paul thank you in particular for coming to be with us. Richins: Well, thank you very much. It has been enjoyable. Ulrich: I would just like to add in. Thank you Commission for approval. Paul arrived much earlier today and spent time with us and the staff and I want to thank him for coming down and giving us a lot of insight into the process. I look forward in working with you. Richins: And yes if you do decide to go forward with the plant we will definitely be down here working with your staff and consultants. Thank you. UAC Minutes 2/11/04 – Approved 3/3/04 Page 21 of 38 Beecham: And Chairman Rosenbaum before we get to the next item I will be departing. Rosenbaum: Bye. Thank you very much for taking the time out of your busy schedule. Colleagues do you want to take a short break now? Or should we go right on? Bechtel If I could ask, are we going to see 54 slides? Rosenbaum: With that promise we will continue on. We will move to the III Item which is the Preliminary Gas Utility Long Term Plan Recommendations. John. Preliminary Gas Utility Long Term Plan Recommendations Ulrich: Yes. Thanks and we put those in there so you would get your attention. Are you going to do this Karla? Dailey: Yes. Ulrich: Karla Dailey will make the presentation. She should have a copy of it in front of you. Dailey Hello, I am Karla Dailey. The presentation that I am going to give is greatly reduced from the large 54 or 55 slides from the one that you have in front of you as backup material. But if you do have questions about slides in the large presentation is I move through if you notice I am skipping over some of you may have questions on please feel free to stop me and we can certainly answer questions on those. Dawes: Karla, if you could just mention the page that you move to next so that we can follow along without looking back would be great. Dailey: Okay. Certainly. I would also like to introduce two other folks who did a lot of work on this before I get started. Bernard Erlich right there virtually did all the analysis on this project. So some analytical questions I might defer to him. Also Shiva Swaminathan, I guess he is not here also did a lot of work. On Page 2 quickly the presentation outline is I will go over. Oh no. This is the wrong. This is different from….. Dawes: It is the same number as on our chart. Dailey: Ya there we go, here we go. Okay. Back to the short version again. The purpose. We will talk about the purpose of why we are here. The analysis and the preliminary recommendations and the next steps. On slide #3 our purpose this evening is to receive your feedback on the analysis framework and our preliminary recommendations. In the context of the objectives, three objectives and guidelines that have already been approved by the UAC and approved by the City Council. This report and analysis focuses on two of the guidelines namely asset acquisition and management and gas energy efficiency. Slide #5 the analysis and recommendations that we will talk about are in five areas and each one of these is associated with a recommendation. Namely, gas storage, gas pipeline capacity, gas reserve acquisition prepay and gas efficiency. Slide #6. The first one of those assets that staff evaluated was gas storage. Gas storage can be used for two potential things. One is for daily balancing. I’m sorry…. Dawes: Our packet here is entirely different from the slides you are having. UAC Minutes 2/11/04 – Approved 3/3/04 Page 22 of 38 Dailey: You have two packets. You have one that has 55 slides and you should have another that has 28 slides. No you didn’t receive that?. Dawes: No Dailey: I asked them to give them to you. Dawes: Thank you. Dailey: I’m sorry. So we are on slide #6. The first use of storage is for daily balancing and penalty avoidance. Basically on days when the PG&E’s system has too much or little gas and at PG&E will impose daily balancing requirements and if a customer uses more gas than they are bringing into the system or vice versa on a hot day a penalty will be imposed. Storage can be used to inject gas on days when a customer may have too much gas coming in for their needs and withdraw gas on a day that a customer does not have enough gas coming into the system to meet their needs. So that is the first use. The second use for seasonal price arbitrage. Dawes: Excuse me. What is OFO and EFO mean? Dailey: Sorry. That is Operational Flow Order and Emergency Flow Order. And that’s just the PG&E lingo for a day that daily balancing requirements are imposed. Dawes: Thank you. Dailey: Seasonal price arbitrage is the traditional use of storage and all this means is that an owner of storage may buy gas in less expensive periods and inject it into storage and then withdraw the gas during the more expensive periods. In Slide #7 in order to evaluate a storage contract we needed to determine what that contract would like. Storage is priced based on three basic parameters the size of the capacity, the withdrawal rate and the injection rate that is designated in the contract. So in order to come up with what a contract for Palo Alto would look like, we chose to model three contracts based on one in ten year demand events, one in twenty year demand events and one in 50 year demand events. What this means is that we would buy enough withdrawal and injection and storage capacity to meet both in one in ten year cold day and in one in ten year warm day and you can see the various const of those contracts. 200,000 for the one in ten, 250 for the one in twenty and 650 for the one in fifty. The one in fifty gas year is significant because that is the number that PG&E has thrown around as a possible standard for regulating customers to hold enough capacity to meet that kind of an event. So we wanted to make sure that we had a good handle on how much that would cost. Dawes: I am still confused about what this really means. Does this really mean that the analysis assumes that we will be withdrawing gas or injecting gas only once in ten, twenty or fifty years or is it 365 days in a ten year period I just don’t know what it means physically tell me what is going on here. Dailey: It means that we would hold a contract for capacity that would allow us to withdraw enough gas to meet a one in ten day event. The contract is for a year, and so the capacity that we would hold would allow us to cover our needs on an event such as one in ten year day. Dawes: So when we contract we say we need 200, 2000 therms a day coming out of your pipeline and that is kind of an average for everyday of the year or does the contract allow you to be seasonal. If you describe the basic contract and how we can vary from it I think I just need to get the basic down to understand. UAC Minutes 2/11/04 – Approved 3/3/04 Page 23 of 38 Dailey: Let me make sure. Let me punt this to Bernard a little bit. But I believe that we did various seasonally Is that right? That each month had a different injection withdrawal rate? Erlich: Yes. That’s correct. The one in twenty, one in ten and one in fifty scenarios are specified for each month. So the capacity that needs to be made available for injection or withdrawal in May is going to be different than the capacity that is going to be made available in June or July. Dawes: And what sort of just a sort of frame of reference. One in ten year variation would be what percentage of that monthly requirement? In other words if it is hundred thousand therms in May would the one in ten would be a ten percent variance, twenty, forty, sixty., a hundred percent just give me a ball park. Erlich: What the one in ten means is for any month only ten percent, there is a ten percent risk that the requirement is going to be above the one in ten capacity. So it’s an event that would have happen in one every ten year meaning that there is a ten percent chance that the capacity that is gong to be needed to cover such an event is going to be let me see if I am explaining this right,. Dailey: Do you have a feel Bernard for I know that one in fifty day event for instance is a cold January day of a use of about 30,000 mbtus and our expected is around 17,000 a day for the month of January so that gives you an idea of the order of magnitude of a one in fifty event. Dawes: So that is about a factor 3. Dailey: Right. Dawes: Okay. That is a kind of thing I am looking for. Gives me a feel for it. Thanks. Dailey: Slide #8 shows a historical look back that we did of what the total daily balancing cost would have been had we done nothing on these days that PG&E required daily balancing. And how much storage would have been worth for the use of daily balancing for the last four years and that is the time period that PG&E has had these daily balancing rules in place. As you can see from these numbers in the twenty thousand dollar range they are quite a bit less than the two hundred to six hundred thousand dollar cost of storage. In other words it wouldn’t have been valuable for the City to have owned the storage looking backwards for the past four years. Dawes: The twenty thousand is per day and the two hundred thousand is for year. Dailey: They are both per year. Dawes: Oh. They are both per year. Dailey: However history is not always a good measure to base decisions upon and so we did a stress test. PG&E can impose up to a fifty dollar penalty for one cold day in January if Palo Alto’s load for thirty two thousand MMBtu and we had only expected usage of seventeen thousand and weren’t able to get that extra gas either from storage or some other source to the city that could result in a 750,000 dollar penalty. That’s for a one day event. A little less drastic case would is the second one down penalty of 25 dollars of MMBtu which PG&E has imposed once in the past. Say it is a cold snap to last for days or usage is up from 17 thousand to 22 thousand that results in a 500 thousand dollar penalty. So kind of puts the 20 thousand dollar number into a little better perspective that these penalties could get high. However, on UAC Minutes 2/11/04 – Approved 3/3/04 Page 24 of 38 Slide 10 what we pointed out is that there are alternatives to storage for dealing with these daily balancing requirements and it is the way in which we have been dealing with them for the past several years and that is through contracts with the suppliers for the swing gas. And the cost for this service has been well below the cost of storage. Dawes: I take it that there should be a ‘U’ in the by in the second line there. Dailey: Yes. You are right. There should be. Thank you. We come to the second use of storage which is seasonal arbitrage and the way we did this analysis is by looking at a typical storage year which is April through March and the injection season being April through October and the withdrawal season being November through March and we looked at the forward curves as of in periods of time leading up to April through March time periods and found that although there were points in time when the seasonal price differential was large enough that it could have overcome the cost of storage that on expected bases the cost of storage was higher than the seasonal arbitrage benefit. Our conclusions regarding storage are as follows. Supplier arrangements provide daily swing services are much more competitive than storage that a summer gas price a dollar lower than winter would make storage attractive for seasonal arbitrage. The current differential is about 30cents. Our recommendation is not to contract for natural gas storage at this time. The second asset, sorry, go ahead. Bechtel: Karla, before you leave us. Storage. I want to ask. The PG&E involvement. Is that because they own the storage? Are there other alternatives to PG&E that would not be on one of these super cold days we would not have to pay a penalty? Dailey: There are alternatives to PG&E’s storage. The PG&E daily balancing rules are separate from the idea of storage. How a customer deals with getting gas to themselves or getting rid of gas on a oversupply day getting rid of gas is a separate issue. The PG&E daily balancing requirements are just a reality of being on PG&E’s pipeline system as we are. There is storage available from PG&E. There are also two other big storage companies. Lodi and Wild Goose, and Bernard I think we used kind of an average of the cost of those companies is that true? Erlich: Yeah. We used the average of the three storage contracts that were made available to us. One is PG&E, the other is Lodi and the third is Wild Goose. Bechtel: And may be a technical question. If we don’t have gas coming in does this just means pressure drops throughout the system and so therefore whatever we have gas we might have pilot lights go out and so on is that the hazard of exceed on a super cold day of not having enough? Dailey: The reality for Palo Alto is that we are in the middle of the system. So we are not going to have those problems, but folks who are in the outlying areas would for instance on a very cold day if gas prices are really high and nobody wants to buy gas and put it in to the system because on a normal basis the system is balanced monthly. So on any given day one doesn’t have to meet demand. But when too many people start doing that on a system, the pressures drop and the folks that are on those outlying areas risk not getting their gas. Moving on to the next asset that we looked at pipeline capacity and our objective was to determine if the City should look into acquiring physical pipeline capacity. Basically the value of a piece of pipeline is equal to the difference in the price of gas at the beginning of the pipeline and the end of the pipeline. We looked at price differentials across many different pipelines that might be of interest to Palo Alto and found that the tariff rates for those pipelines are across the board higher than the value of those pipelines. And this is consistent with PG&E’s view and the current view that at least for the next 7 to 10 years the State of California has more than enough pipeline capacity coming into the State. So from our perspective certainly a full tariff rates it just doesn’t make sense to make any sort of a long-term UAC Minutes 2/11/04 – Approved 3/3/04 Page 25 of 38 commitment to pipeline capacity. The other thing that we looked at in this analysis was the correlation between prices to see if there was any benefit to diversifying our purchasing points and we found that.. Dawes: I have a question on capacity first Karla. Couple of years ago during the height of the electric crisis gas also went sky high and one of the big issues was the prices at the California border versus El Paso and Henry Hub and so forth and apparently El Paso natural gas company was had bought capacity from their sister company and the charges for bringing gas into California were way out of whack I guess they have now been restored. But just thinking in a much larger term is it worthwhile to buy capacity to avoid such issues in the future or is t just assumed that there wont’ be such large disparities. My recollection is that two or three dollars in difference between those two prices and that the pipeline companies were really gouging the customers. Dailey: Right. And that case did get settled recently with a lot of money coming back. Dawes: Oh. They did. Dailey: Right. Do you remember the details of it? It was half a million dollars to Palo Alto from that case. Dawes So that problem should not exist in the future. Dailey: It should not That is correct. Dahlen: One question on that. What about supply coming from Canada? Dailey What’s the question? Dahlen: Any concern with regards to the security of that supply and how could that affect us? Dailey: The security as far as the reliability of it coming this way? Or I am not sure I understand your question. Dahlen: Yeah and just maintaining the volumes that are coming from Canada. Dailey: Certainly. Canada has other outlets now that they didn’t have ten years ago. They have pipelines to the Midwest and the Northeast so the days of Canadian gas being stranded and having nowhere to go but California are over. The gas market is really pretty much a spider web at this point and all prices play of each other. So there is no big advantage to Canadian gas anymore. It really kind of equals out at the borders competing with gas coming from some of the Permian basins, San Juan basin. The place right now that is interesting is the Rocky Mountains because some of that gas is still stranded and doesn’t really have a good market to get to and that gas is trying desperately to get to California but can’t get here yet. But I think when that happens it will just have an overall effect on all the border prices in California that there is not going to be a great boom if you have direct access to Canadian gas or to Rocky Mountains gas necessarily. It will just happen. Overall positive effect for consumers once it gets to California. Dawes: Are there any currency effects here Karla in terms of Canadian dollar versus US or looking in the future when we’re probably going to be having L&G coming in via Mexican ports does this play into the cost factor at all? Dawes: Not surely what the answer to that is. The Canadian dollar or peso exchange rate issue. UAC Minutes 2/11/04 – Approved 3/3/04 Page 26 of 38 Dawes: Please proceed. Balachandran: You are working on other issues not part of our diversified portfolio. Dailey: Slide 15 has our recommendation on this. Another non-action do not acquire additional natural gas line capacity at this time. Number 3 is a still more interesting I think. And this is something I know that Commission has expressed interest in the past. It is our analysis on gas reserve acquisition. In this particular study we were looking to understand the economics and the risks and rewards of reserve ownership and we tried to accomplish this in three ways. One was from looking into what SMUD has done in their fairly recent acquisition and another acquisition we heard about which was a group of Nebraska Munis that acquired some reserves back in 1999 I think it was. We analyzed the relative merits of reserve investments versus market purchases and we did a small amount of exploring potential market opportunities. Slide 17 shows our main conclusion regarding reserves. And that is in acquiring reserves one trades production cost uncertainty for market price uncertainty or vice versa. Get rid of market price uncertainty and take on production cost uncertainty if reserves are around. We did not draw our conclusion regarding relative expected price. In other words we are certainly not prepared to say that we think by owning reserves that our price will be less than the market price but that we believe that a range of uncertainty is smaller. Slide 18. Dawes: I can’t read the descriptions on the right hand side of that chart. The blue and the red cost of well and market cost is that what it is? Dailey: Yeah. Right. The red spike in the middle is the cost of reserve ownership and the blue is market cost. So the thing to draw from this graph is that there is much potentially much wider range for the market cost than for the well head ownership. And I might add that this study the way Palo Alto did this was based on SMUD’s project. SMUD’s recent acquisition. So a cold bed methane filled with the types of declined rates that SMUD is expecting from their wells was really modeled after what SMUD acquired. Slide 18 shows our findings from what we have done so far. The first one is that really each field is unique and it is impossible to say whether acquiring a well head is economically beneficial or not without having a particular property in mind to examine and evaluate. Just to give you an idea of the order of magnitude purchasing production deserve approximately 30 percent of Palo Alto’s load would require and investment of 30 to 40 million dollars. We also learned that there is definite benefit when you are looking at a larger amount of gas to buy and that those economy of scales would be achieve by partnering with other Munis or non Munis. But certainly other entities. We also learned that in order for tax exempt financing to apply that we would have to have physical transportation from the well head to Palo Alto and that trading market price uncertainty for production and certainty would help meet our objective of low and stable rates. We have the proposed project criteria for potential well head acquisition. The first is that it must be a partnership with one or more other entities. The second is that the field must be proven with a large number of wells. In other words we don’t want to go out wild catting. Just FYI SMUD’s project was a percentage of proven field with 200-some wells on it. The gas must exist in US producing region with physical pipeline access to California and that goes back to the tax exempt financing requirement. That Palo Alto would not operate the field. That is not our area of expertise. That whoever does operate the field needs to be a large experienced financial stabled company and that we would limit our share to no more than 50 percent of our estimated annual load requirement. Sorry I forgot to take this of. The steps we would go through in this kind of a project. For Palo Alto the first step would be to identify consortiums since we have come to the conclusion that we wouldn’t be able to do this on our own. The second step is to employ an Investment Bank to scope properties and based on what SMUD has told us this runs about 200 thousand dollars. From that we would identify opportunities that were attractive and then spend additional money studying the property and this includes reservoir engineering, UAC Minutes 2/11/04 – Approved 3/3/04 Page 27 of 38 land people and environmental people, lawyers and that was about 800 thousand dollars in SMUD’S project. Then the property is purchased and then after the property is owned there is asset maintenance both physical asset maintenance as far as maintaining the wells and new drilling but also administrative maintenance accounting, royalty payments etc. Our recommendation in this area is to pursue finding a consortium for potential reserve acquisition and if we were to find something that fit into our Palo Alto Plan that we could proceed in hiring an Investment Bank. We have a proposed budget in the FY 04-05 budget of 65 thousand dollars for this project and with the 200 thousand dollar requirement for hiring an Investment Bank if there were 3 or 4 of us involved, this 65 thousand should be able to cover our share of that. The fourth part of this analysis was to look at prepay contracts. You might remember back in the late 90’s there were a lot of these going on and then the IRS put a stop to that activity and after several years of studying the issue came out with an official regulation effective October 2003 that explicitly allows prepayment for electricity and natural gas. The basic ideas that the City could leverage are favorable cost of capital and return for a discount on the delivered gas. We think that this discount in the range of 1 to 10 cents for a 10 year transaction with an AA supplier. We would need a large volume to get the interest of suppliers which again lends itself to some sort of a consortium. We think that the deals can be structured in such a way that Palo Alto’s only obligation would be to pay for the gas if it is delivered and that we can structure a deal with minimal supply or credit risk. However, we have asked our Risk Manager and some other folks in ASD to help us study this more and look at exactly how these deals are structured and really get a handle on what our credit risk is or other risks that might be involved with this kind of a deal. Dawes: Am I reading this right that on this Nebraska thing that it would appear it is like a 2 ½% saving of price break you call it which to me even with Municipal Finance would be hard pressed to cover the interest cost on something like that. Am I reading this right? It doesn’t seem like hugely attractive proposition. Balachandran: Yes. It is lower than what we have seen in the past. And I think it reflects the lower interest rates and I think we are doing our due diligence over here and looking at all the alternatives. The areas over here which require a lot more analysis and so we are looking at that the savings jump look too great and we weigh that against the credit risk and we come back to you with our recommendations. Right now the recommendation is basically monitor I believe. Dawes: It doesn’t jump out at you at least this example. Balachandran: It doesn’t. That’s correct. Ulrich: Well when you go into other Municipalities people are buzz about this. This is one of these things that tickle with public gas. Organization is being working on it for sometime trying to get this approved. And we understand that City of Nashville is doing a deal which is even bigger than one in Nebraska so there is something worth evaluating. Dailey: Yeah. It is fairly interesting because if you look at an organization like SMUD they as far as I know, I don’t know what they are looking at but they have certainly haven’t done any prepay deals and they are very happy with their reserve acquisition and looking to another one. When we talked to the Nebraska Muni Aggregators they had very bad experience with reserve acquisition have no interest in ever doing that again and they love prepays and they just did one and they are looking to do another. So it is pretty interesting the cultural bias is to I guess that creep up within organizations once they have had one experience versus another. But the Nebraska guys had a prepaid deal with Enron and they claimed that when Enron deal went bad they lost nothing except a good opportunity. They stopped getting gas, they stopped getting the discount but they were out no money. So it is really if the structure can be set up UAC Minutes 2/11/04 – Approved 3/3/04 Page 28 of 38 that way and even if you only get 2 or 3 cents out of it. 2 or 3 cents is better than zero. So on Slide 23 is our recommendation investigate prepaid activities by other Munis and explore deal structure and credit issues and as I said by their final report that will come back to you we will have a section that has been crafted by our friends in ASD to better understand this. The last aspect we looked at in this analysis was gas efficiency and demand side management programs. Gas efficiency programs are not mandated by state law but have been ordered by the Palo Alto City Council. The programs have targeted residential end users with education and rebates and we have some evidence that these programs have helped to levelize the city’s gas consumption. One interesting thing that we ran across in looking at this was comes back to this idea of daily balancing requirements on PG&E’s system and thought it would be interesting to look at whether or not there would be a mutual beneficial program for large customers with discretionary load to reduce usage on days where there might be high penalty. Our overall recommendation on Slide 26 is to develop a comprehensive demand size management goals and implementation plan by the fall of 2004. and this would cover all three of the utilities Gas, Water and Electric. In the interim continue with the current plan which involves spending about 225 thousand dollars on rebates for efficiency and end use technologies. In summary the five recommendations are on Page 27. I won’t read through all of them again. But on 28 the next steps are to incorporate your input into these recommendations and come back to you with a final report for your recommendation for Council Approval. That’s all I had. Rosenbaum: Do we have questions for Karla? George. Bechtel: Karla, mine is I am assuming on Slide 28 the item was noticed as an action item. But I gather that from Slide 28 you are only asking for inputs tonight. Is that correct? Balachandran: Yes we are. But more in terms I guess the way, the reason we put it as an action item is we wanted to phase the decisions so to speak. These are preliminary recommendations to incorporate your feedback and take it to Council. So we will actually bring it back to the UAC I believe in April. Dailey: Yeah. It will probably be April since this February meeting is late in the month and I am not sure I can get it turned around quickly enough for the March meeting but I think in April. Rosenbaum: Are you asking for a motion or you are not asking for a motion? I guess that’s the question. Ulrich: What we would like is a feedback from you specific recommendations if you have enough information; but we will be back to you before we go to the City Council. Rosenbaum: Alright. Do we have any specific comments on any of the 5 preliminary recommendations on Slide 27? Bechtel: My only comment is it sounds like, it looks like a very thorough job 55 slides worth of analysis and I don’t have any input. I mean you studied it all. You got good recommendations and we will just wait to see the final product. Rosenbaum: Dexter. Dawes: I too would like to commend the staff. I have certainly surfaced questions about buying reserves and I never had done one about prepays because I had never heard of them but I am delighted that was included as well. So my kudos to staff and your analysis Karla and your team is real good and keep on charging. UAC Minutes 2/11/04 – Approved 3/3/04 Page 29 of 38 Ulrich: I think we need to look at the pace of arbitrage though a little more. Dawes: I think that is an excellent idea. But in a longer term this LNG thing is going to be a major situation and you know we do have a we could dig out the harbor in Palo Alto and bring LNG tankers in there and vow that’s subject for another discussion. Ulrich: Are you suggesting that it should be in our recommendations? Dawes: You can think about that John. Rosenbaum: Immediately after the power plant. Alright I think basically what we are saying that we appreciate all of the work that’s been done and we are happy with the preliminary recommendations. Thank you. Ulrich: Thank you. Thank you Karla and Bernard and Shiva. Thank You Rosenbaum: Item IV. We will go right on the Utilities Quarterly Report. Utilities Quarterly Report Ulrich: This is our quarterly report and it is in the outline that you are familiar with and it covers comprehensive information about each of the utilities and it is probably best have you ask us some questions and if you would like to do it by commodity or it would be fine too. Rosenbaum: Yes we will go through it in the order of water, gas and financial. Do we have questions on the water information. Elizabeth. Dahlen: Yes I have some question with regards to the water survey. Item 6. How many residents applied to the survey? Dawes: 838 it says on Page 7 Ratchye What was your question again? Dahlen: Is that right? Okay. Rosenbaum: Did you get this copy? Ulrich: Excuse me. Are you referring to specific page or item under the study? Dahlen: No I was and my questions has been answered by Commissioner Dawes. Thank you. Ratchye: We’ve gotten more responses since the writing of this report. Dahlen: Is there going to be a more comprehensive analysis of the results of the survey? Balachandran: Yes. It will be provided to you in March. Dahlen Okay and that will take into account the timeliness when the survey went out with regards to Hetch Hetchy being under construction at the time. UAC Minutes 2/11/04 – Approved 3/3/04 Page 30 of 38 Ratchye: I didn’t understand that question. Dahlen: Didn’t the survey come out at the point in time where there were some water quality issues with some work being done on Hetch Hetchy? Ratchye: Yes. Dahlen: Will that be taken into account in the analysis of the survey results? Ratchye: Everyone was responding with that same issue. That same water quality issue. We thought about delaying the survey until there were more consistency in water quality and that would be well after the chloromination conversion as well. But we felt like in fact probably was a good time to do the survey because people focus was on water quality at that time. It was sort of in the news. So I don’t think that the questions or the answers are really going to be impacted by the …I guess it is impossible for me to know how we can analyze or change the answers we received because of the environment in which it was the survey was done. I guess my believe is that we got lots of responses and lots of interest because partially because of the environment that we did the survey under. Dahlen: Okay but we had 838 out of 1400 responses right? Ratchye: We had almost a thousand. Ulrich: From a survey standpoint that is exceptionally high rate. It looks like close to half. Ratchye: It is a thousand almost. A very high response rate. Ulrich: It is important to understand that the perception that people have of the water. I think we all know that the water is of extremely high quality. We know that from analysis and price we paid to get Hetch Hetchy Water. What we want to know is the perception of our customers. What they are actually doing? And each year they are having those same issues with us providing water at certain times where it is coming from the reservoirs rather than from the Hetch Hetchy. Even though there is heightened interest in water at the particular time of the year. Dahlen: I understand the heightened interest with regards to water quality and the cost of water. There was an email that was circulated around from one of the residents who received the survey the question of the cost of water and my recollection serves me correctly that it was regard to the primary supply water as opposed to the drought supply. Were other customers, did others who responded to the survey raise similar questions? I know when we talked about the survey initially I had hoped that the survey may address more than just drought supply but water supply in general. Ulrich: I think your point is what did we get as far as notes on the bottom of the survey that may have gone into more detail and why they said what they said. Dahlen: That may be. Actually I did not receive the survey at that time. So I don’t know specifically what notes you are referring to but in general yes. Balachandran: You did receive the email which had the survey I think Commissioner Rosenbaum requested that and it was sent to all the Commissioners. UAC Minutes 2/11/04 – Approved 3/3/04 Page 31 of 38 Ratchye: It is also attached to your Quarterly Report. Dahlen: Yeah. I saw it when I got the packet. Ulrich: Are you interested in more details I think digging down deeper into what is in there then what we are showing you. Would you like to wait till March to see that detail? Or.. Dahlen: if March is the projected date to review then that would be great. Ulrich: Yeah. Rosenbaum: Alright. We have other questions on water? Dexter. Dawes: Probably the most disturbing thing to me was this Local 21 paragraph which ends with the sentence which says. “ There is a negative incentive to actually ever complete projects” I mean that is the most depressing thing I would come across. Ulrich: Could you so that we just get it in the record could you say where it is in the document. Dawes: It is on Page A6. Second bullet point. Dealing with the SFPUC’s problems of getting CIPs done and identifying this as being one of the issues. Can BAWSCA push them to have engineering work done outside or these people got to strangle hold on doing it in the SFPUC staff? Ratchye: Well there is some update from the conclusion of Brown and Caldwell reached to the point where they had made this presentation. The new Assistant to the General Manager at the SFPUC Harlan Kelly has been successful to greater extent that we thought possible in negotiating with Local 21. But it has come at some cost of they have essentially made this the engineers recognize that a lot of these projects in this Capital Improvement Program are unique, very large projects that take special expertise that they don’t have. And they recognize that. And so they recognize that something needs to go out from the PUC to be done but they are wanting to retain as much as they absolutely you know everything that they possibly can they want to do in house. But I know that he has completed a negotiation with Local 21 that is at least partially successful. So I am not as far as this compensation structure I am not sure that was addressed or that was part of his negotiation. But at the time Brown and Caldwell were doing their report when they uncovered that it was yes as Commissioner Dawes said fairly depressing. Rosenbaum: On the other hand the first sentence there says. “Engineers are a force to be reckoned with” You don’t hear that very often. On that same page where it says seismic risk there are some encouraging results that things are as bad as we tell everybody that they were. What does that mean? Ratchye: Well. I don’t think they have any conclusions here. But it does look like I think this has to do with where shaking occurs. I think they were looking more at surface shaking but it is not as bad where the pipes are. And so on additional analysis it looks likes not all the breaks may happen that they predicted in the one study where it said we would be out of water for sixty days. But they haven’t redone that. But it looked to Brown and Caldwell that perhaps those may have been overstated. Now of course as they go forward they are only going to do the projects that we need to do. So this may bring down the total cost of some of these projects or eliminating even some of them possibly. But we haven’t heard any conclusion like that yet. Rosenbaum: Good. Anything else on water? Alright. The Gas Quarterly Report. Questions? UAC Minutes 2/11/04 – Approved 3/3/04 Page 32 of 38 Dawes: Does this include comments or questions about the financial picture? Rosenbaum: No. Lets do the Finance at the end. Dawes: Okay. Rosenbaum: Alright. Seeing none. The Quarterly Electric Report. Dawes: Actually. I hadn’t gotten my place sorted out for the Gas question. But I did have a question. Is the fixed price pool purchases what I term the retail accounts and the expected pool of the large accounts that buy gas at the market price just a terminology question. Dailey: Right. The pool customers are the residential and small commercial customers and the large customers have the choice of either the floating market rate or a fixed term rate. At the time they choose that we lock in the rate for them. So the only customers that were buying for in our gas laddering strategy are the pool or the residential and the small commercial. Balachandran: Are you referring to the chart on Page B3 and getting the .. Dawes: Yes. Balachandran: Okay and that both those are referring to the same sets of customers. It is just that for the pool customers we purchased a certain portion of their needs at fixed price. But the expected weighted average cost of gas is the weighted average of the fixed price and the market price because we haven’t fixed all of the needs at the fixed price. Dawes: And this is what results in this big swing when we get into the expected balances of the rate stabilization reserves where we have the big pluses and minus between the pools? Balachandran: We are talking about the same pool over here. There are two things over here. This chart that you are seeing in B III is referring purely to pool customers. When you look at the reserves the swings occur because we are also buying for non pool and the cost are completely passed on to them but we have to increase our budget to buy for them and then get the revenues. Dawes: The last sentence on Page B4 it says Palo Alto chose not to contest the reallocation and the cost impact is 20 to 40K is that because we had a losing case. Balachandran: No Basically looking at the overall settlement that was reached. There were several elements. Karla you want to take that? Dailey: You are on a good roll. Balachandran: So just looking at the overall settlement. PG&E was proposing a very different market structure and many of the other end users also were proposing rates which would have negatively impacted Palo Alto and so the balance of the entire deal it seemed like…l Dawes: It was a basket situation Balachandran: Yeah. Exactly. UAC Minutes 2/11/04 – Approved 3/3/04 Page 33 of 38 Dawes: Thanks. That’s all I need. Rosenbaum: Dexter are you done with Gas? Dawes: Yes. Rosenbaum: Alright. Lets move on to the Electric Report. Elizabeth. Dahlen: I had a question with regards to the Chart on Page C2. This in the middle of the chart you can see a portion where the expected monthly peak demand is lower than the purchase amount. The existing forward purchases why, how much access do we purchase? And how do we factor that in? Balachandran: How much excess do we purchase? Dahlen: Yeah. Balachandran: This chart is capacity only. So it is not energy and the chart on Page C4 shows the energy picture. So anyway looking at this the capacity you have to look at it both together by month and by day. So here actually I thought the question going to ask is why are you so surplus? Why are you buying so much capacity? And the thing is that you have resources like Calaveras which with a 50 megawatt resource about one quarter of our peak needs but only supply about 9 to 10 percent of the annual energy needs. So that is why you got to look at it both together Dahlen: Thanks. I appreciate that. Rosenbaum: Dexter. Dawes: I was having terrible traumas relating these two charts and that explanation Girish was very helpful in doing that and so I think I am okay. The chart on C4 I think is the one I think is most important because it shows what our real picture is in terms of what we have what we need am I correct in this? Balachandran: They are both important. It depends. You need capacity in place as the hour comes about. Because if you don’t have enough capacity you are really going to be sunk. And the system as a whole needs them enough capacity. So you look at both. You look at I’d say capacity may be on a shorter term view. You want to make sure that there is enough capacity that meets your peak demand. Over here most of the analysis long range analysis we provided you has been focused on energy but as you even some of the PUC decisions and investigations on reserve margins they deal with capacity and that is pretty much more common related to what you just said rather than may be a specific answer. Dawes: Thank you. Rosenbaum: George. Bechtel: Girish or maybe Tom. On January lst, 2005 we will have a change in our contract with Western. Is this going to be a year 2000 problem? What physically going to happen that day? They are going to just adjust our rates or can you give me a sort of layman’s feel of what happens?… Balachandran: I am taking vacation. We are all gone. It is a Christmas break. Ulrich: You better purchase the new computer by then. UAC Minutes 2/11/04 – Approved 3/3/04 Page 34 of 38 Balachandran: Frankly there is not expected to be any change in the operations like Commissioner Rosenbaum observed before in the Power Plant. It is the same units running. The same thermal plants being fired up, the same hydro running so the dry runs that will be taking place in terms of process by which schedules get submitted between NCPA and ISO. Much of the transition has already occurred since we went from the inter-connection agreement to the metered sub system agreement and now Western transition will also take place this year. Actually NCPA is keeping a very close eye on that transition by Western. We expect it to be very smooth. Bechtel: That is very encouraging. Thank you. Rosenbaum: Dexter. Dawes: The failure to pass in the Congress the energy bill leaves the wind tax credit expiration in place. Has have we had any adverse consequences to the bids that we receive that probably depended upon tax credits to finance or help finance wind farms? And if so does this make a difference to us in our alternative energy acquisition program? Knapp: This is Karl Knapp. Nope. Dawes: So these are all existing wind farms. Nobody is planning any new capacity? Knapp: The selected proposer at high winds is already on line. So it was on line and qualify for the BTC already so. But we are kind of holding of in developing a new plant. So it would come back. Dawes¨ Thank you Karl. There is a item at the top of Page C5 which talks about the ending RSR reserve balance. But probably Chairman would want to wait on that. Rosenbaum: Yes. If there is nothing further on electricity lets move to the Financial Report. Dexter. Do you want to comment on that issue? Dawes; Yeah. Let me say. I am absolutely delighted that the rate graph of VZV PG&E shows us at about 55 percent on a monthly expected cost basis for our customers billing which means that our rates are terrific and I also see that our RSR through a number of very two of the circumstances including obviously excellent management on the part of our utility department. Ulrich: Thank you. Dawes: is surging to new heights and I just will make this comment and I don’t know if this will come again in our meeting in early March on another subject or what but certainly I view that as a piggy bank if you will as well as a perspective further rate reduction if that even makes more sense. But when one talks about financing either power plants or major capital expenditures within the electric utilities it is useful to have reserves that are as real busters as this one is or appears to be at the end of this year. Ulrich: I got to say I don’t expect that they will be making recommendations to reduce electric rates because of the reserve. Dawes: It certainly seems that we are ultra competitive at this point and from a rate stand point we are very well positioned. UAC Minutes 2/11/04 – Approved 3/3/04 Page 35 of 38 Ulrich: Of course we will get into that as we make our request for budget and bring those forward but I just need to point out that the detailed analysis that we did couple months ago were about reserve balances and risks one time and on-going risks are one to keep in mind. Dawes: I also just want to point out in passing that our discussion of a year or two ago about bonding cap backs in the electric utilities and that in effect we didn’t bond it and I think that was a very fine decision. Rosenbaum: Are there any other comments or questions about the financial report? Elizabeth. Dahlen: Yeah. I am going to make the same comment I made the last time on Page 6. If we could have a comparison chart on our water rates I think that would flush this out a little more to cover all the utilities. Balachandran: I may add a comment to what Commissioner Dawes had observed on electric rates. We have shared with you before that the trend in an electric rate is going up and so we will be competitive, we expect to be competitive with PG&E but you are not going to see these kinds of differentials. So that is one of those changes starting 05 our cost are going to go up a lot and primarily driven by supply cost and so the long-term view is from about 7 cents system average rate we are going to head to 10, 10 1/2 cents or so and PG&E is about 14 cents right now will come to about 12 cents. So we will have about a 20 percent give or take advantage. Dawes: Enjoy it while we can. Balachandran: By about 2008 or so 2007-2008 is when we will start to stabilize. Rosenbaum: Okay anything else? If not that completes our review of the Utilities Quarterly Report. Thank you. Our next regularly scheduled meeting is March 3rd. John do you want to say something about the proposed fiber to the home meeting. Ulrich: Nothing more than I made in my Utility Director’s Report earlier about the alternative dates. And as soon as we get those confirmed then we will set a date and go from there. Rosenbaum: Alright. It does appear at the moment that Dexter is not available the week of March 5th to the 12th. I am not in town on March 2nd nor is George Bechtel available. Elizabeth I guess we haven’t heard from you. Do you have something. Dahlen: That’s right. I was going to get back to you in the morning. I had a call out on some of those later dates then goes to the 9th if I would be available. I am uncertain at this point. Ulrich: It sounds like from that canvassing that those three dates that I sent out are not going to work for everybody. Rosenbaum: Yes I think we might have to look for the third week in March. Ulrich: Alright. I’ll look at that. We are going to bump up against the CMUA meeting in Monterey. I’ll come up with some more. Rosenbaum: Good. Dahlen: Can I just add to that. If you have the report ready. If we could get it as soon as possible I think that it would be helpful even if it is more than two weeks if it going to be ready for an early March UAC Minutes 2/11/04 – Approved 3/3/04 Page 36 of 38 meeting even if we do postpone that meeting to later in March if we could still get it at the earliest date I think I would certainly appreciate it. Rosenbaum: Alright John. Do you have a date when you plan to be ready to distribute the report? Ulrich: I would much rather set a date in which we are going to have the meeting so that I have plenty of time so that everybody has an opportunity to look at it. But we have a date certain in which we are going to get together so if you want to give me different directions feel free to do that. Rosenbaum: I guess the assumption of Elizabeth’s question is that the completion of the report is perhaps independent of the date at which we meet to discuss it and she was interested in having it distributed as soon as it is indeed available independent of the date that we are going to meet. Dawes: Should we consider having our next regular meeting which I think is the 3rd which will be the Fiber Meeting and have our regular meeting I don’t know what the business is that is on the agenda for the next meeting but in effect roll that into the April meeting? Combine those objectives. Ulrich: I will have to go back and look at the schedule. I wouldn’t recommend that because we have so much to do is we are now entering into the budget period and we need a series of meetings to lay these plans out. I think this is going to be a big enough issue that if you try to do all those things, try to do them all at the same time it is going to be difficult to do it at one time. Dawes: I know there is a lot of community interest in the Fiber Project and it seems to me to put that in a sort of higher priority than our regular March meeting and if we are having trouble getting a date I think everybody is here on the 3rd so may be do that for the Fiber Meeting and have the regular meeting either a special meeting during later on in March something like that. Ulrich: Well I will layout the things we have to do and make a recommendation to you. At this point I would not recommend that part of it because of all of the other things that will back up. Rosenbaum: One other thought John. It wouldn’t surprise me that it might take more than one meeting for the Fiber to the Home just because of the number of people who might want to speak to us so to the extent that you can and that you are planning you might looking for a second date. Ulrich: Sure Rosenbaum: Alright. With respect to future schedules I will not be here for the April UAC meeting so if my colleagues could check their schedule and make sure that we will have a quorum available. Ulrich: Excuse me. Would you like us to consider another date or you are going to be gone. Rosenbaum: No. No. I will just be gone that week. But I think you ought to meet on the regular date. Ulrich: Okay. Rosenbaum: Elizabeth. Would you like be the Commissioner who reviews the minutes of this meeting? Elizabeth. Would you like be the Commissioner who reviews the minutes of this meeting? Dahlen: Yes. UAC Minutes 2/11/04 – Approved 3/3/04 Page 37 of 38 Rosenbaum: Alright. So let Dee know that when the minutes are ready she should contact Elizabeth and that is all the business I have. Ulrich: Will do. Adjournment Rosenbaum: Fine. Thank you all and we are adjourned. Ulrich: Thank you Commissioners. . UAC Minutes 2/11/04 – Approved 3/3/04 Page 38 of 38 Dahlen will do final review of minutes after Dee completes staff review.