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Home My WebLink About2004-03-03 Utilities Advisory Commission Summary MinutesUAC Minutes 3/3/04 Approved 4/7/04 Page 1 of 27 UAC MINUTES March 3, 2004 Call to Order Rosenbaum: Good evening. This is the regularly scheduled meeting of the Utilities Advisory Committee Meeting of March 3rd. Lets have a role call. George would you start. Bechtel: Commissioner Bechtel present Rosenbaum: Dick Rosenbaum present Dahlen: Commissioner Dahlen present Dawes: Dexter Dawes present. And our liaison Bern Beecham is in Washington and will not be with us tonight. The next item on the agenda is Oral Communication. Is there any body in the audience who would like to address us on any item which is not on the agenda? Seeing none we move on to our approval of minutes. Are there any comments or corrections to the minutes? Dawes: Move to adoption. Bechtel: Second. Rosenbaum: We have a motion by Dawes and a second by Bechtel to approve the minutes. All in favor please say Aye. Aye, Aye, Aye. Rosenbaum: Those pass unanimously. Agenda Review and Revisions. John is there anything to revise? Ulrich: Just under future highlights I mentioned that May 11 is the operation capital budget review by the Finance Committee. It has been moved to May the 18th and it will be said more about that a little later. Rosenbaum: Thank you. Reports from Commissioners on meetings and events. Do we have any? Reports From Commissioners Dawes: It was at the NCPA meeting in town but I wouldn’t really classify that as a meeting or event. It will probably by covered by the UD and his discussions. Rosenbaum: Fine and thank you. Dawes: And I enjoyed it. UAC Minutes 3/3/04 Approved 4/7/04 Page 2 of 27 Rosenbaum: The next item then is the Director of Utilities Report. Director of Utilities Report Ulrich: Thank you. The meeting referred to by Mr. Dawes is the monthly NCPA meeting which is normally held in Roseville and we had the distinction as Mr. Rosenbaum has told me it has been a long time since NCPA has had a meeting in Palo Alto. So it was a pleasure to host everybody. We had a turn out probably around say 30 commissioners, elected officials and utility directors from other communities of NCPA attended the meeting. I want to thank those of you that attended and participated and they give us quite a good event in the sense of being able to see how the NCPA operates on a monthly basis. My report is to several items to bring you up-to-date. I will be mentioning a little bit later the release of the Fiber to the Home Final Report and it will be delivered to each of you early tomorrow morning and about mid morning around 9 o’clock it will be put on our website so that all 100 plus pages of the document can be reviewed by all. I have at the front by the podium a sign-up sheet that individual members of the audience or people that are watching from at home can sign-up and request a copy of the Fiber Report. They can obtain on the website if they like to have a copy, it comes in two forms a CD for the price of $10.00 or paper copy for the cost of $13.20. And if people would like one they could sign up for it. My understanding that the additional member of the Utility Advisory Commission interviews have been completed and the City Council is expected to make an appointment to the UAC on March 15th at the regular meeting. The NCPA Renewable RFP update member agreements the NCPA Commission had its meeting I just mentioned in Palo Alto approved the Phase II and Phase III member agreements last week to conduct due diligence and negotiate power purchase agreements to procure renewable energy supplies for LEAP program and one wind developer and two landfill gas developers. The participants in this will be two NCPA members Palo Alto and Alameda and there is different levels of participation but our fear of this contract expected to meet 8 to 12 percent of the city’s loads are for terms of 15 to 25 years which is Tier 1 of the Implementation Plan and a contract descriptions ought to come once negotiated. So I am pleased that we moved ahead and were going to have more renewables to meet our portfolio needs in Palo Alto. Council Report March 1st meeting was the LEAP Implementation and the Renewable Energy Supply Implementation Plan, an information report was given. Adoption of a resolution approval of contract for the option to purchase the excess capacity from Western was approved on consent. The WQCP recycle or the water quality control plant recycle pipeline participation both by utilities and by the water quality control plant along with Mountain View that was approved by the City Council. March 15 its expected approval of the NCPA renewal contracts that I just mentioned is an Action Item. And the long term water demand projection is an information report the gas laddering strategy that we discussed will be an information report and then at the April 19th meeting we will be giving a report on Palo Alto Green how things are going and the one that we presented to you I think at our last meeting the local generation alternative options will be hearing at the City Council. And then there is some mention in the front page of our Agenda the highlights for the upcoming budget and we will have presentations at future UAC meetings on the major events changes that will be at the next meeting and then a more detailed description of our budget request at the following meeting. I think that pretty well covers everything Mr. Chairman. Rosenbaum: Thank you John. Do we have questions for John? I have one. Remember there was this newspaper story about a study of the desalinization plant by three agencies and we had some email UAC Minutes 3/3/04 Approved 4/7/04 Page 3 of 27 correspondence going back and forth. Is there an executive summary or is there a report of the size that it could be distributed? I guess my concern and I am sure we are all thinking the same thing we got this 3 billion dollar rehabilitation project for Hetch Hetchy and desalinization plants are not cheap and I was just wondering what was going through people’s minds. So is there something that could be distributed from the study? Ulrich: We can take the information that was sent to all of you. Your question that you asked I think I sent information back to everybody on the UAC on the information that we knew from Jane Ratchye's participation and I can bring that back and we can have a discussion about that if you like. Rosenbaum: Yeah. I was just wondering is there a report? My impression was that there had been a preliminary study which was complete I assume there is a report. Ulrich: I am sorry. The curious thing here because you bit surprised me with that request because I sent all the information I had about it and I don’t recall that there is a report that is working some place that we haven’t distributed but as you recall it is a pretty long range study and it has very minor amount of our participation and obviously because we are a purchaser of water from the City and County of San Francisco and I mentioned to you the estimated cost of what we probably have to pay in our rates over a long term. So that’s a bit future and I don’t have any more to report on it at this point. Rosenbaum: Alright. Well if it turns out there is something of a size which is distributable to the UAC I am sure we would appreciate receiving it. Bechtel: Chairman. Rosenbaum: Yes. Bechtel: Before we leave that though, are we going to.. we will have more discussion of the long range water plan coming up at some point. Certainly in the next six months or so could you include as part of that perhaps description or summary of that. I am not sure it is in there it would be in our previous discussion that I think it might be useful to have Jane give us some information on that it is a part of the long range plan. Ulrich: We will take a look at it. Rosenbaum: Dexter. Dawes: One comment you made. It made me think about the electric supply situation in the Trinity Shasta Rewind Project which is now completed. Had pretty significant improvements and efficiencies for generating electricity I haven’t gotten really any report back on how it actually turned out and wondered if you had anything of the top of your head that you could add terms of how that was working in practice. Balachandran: I believe it is working pretty good. I think there is an extra 15 megawatts of capacity. What we can do to is at our next Utility Director report we will make it a point to report on that. Dawes: Good idea. Ulrich: Of course we are harvesting that as we can because of our participation in that project. UAC Minutes 3/3/04 Approved 4/7/04 Page 4 of 27 Dawes: I saw in the long range plan there is an entry on the loan deal and it will probably hit at that point too. Rosenbaum: Am I correct that the extra megawatts due to increase deficiency count as new recyclable or renewables? Balachandran: I will add that as part of our report next month. Rosenbaum: Thank you very much. Ulrich: You have all kinds of great questions. You fax all those to me or send them to me. I will be prepared at the next meeting to answer them. Rosenbaum: I am sorry. I just make these up on the spur of the moment. Ulrich: I have a few questions back to you out in a minute. Rosenbaum: Alright. I don’t believe we have any unfinished business. Lets move on new business. The first item is the Biannual Strategic Plan Report. John. New Business Biannual Strategic Plan Report Ulrich: Thank you. This is the report that we provide to you about our balance scorecard. And this of course is an attempt to translate our utilities strategic plan into measurable results and Girish will go through the slides that we have to give everybody an update and appreciate feedback from you. This is an attempt to take a 125 million dollar business that has quite a diverse activities and to synthesize it into how well we are doing in relationship to our charge and expectations from the City Council and our Utility Customers. So it is the balance scorecard it is an attempt to be able to look at and see on our big high level view how well we are doing and then be able to roll down into the details to see how individual issues are being resolved. So if you would like we will go through the highlights and then you can ask some questions if you like. Balachandran: I am Girish Balachandran acting as John Ulrich today. Your name is in there. Ulrich: Be careful how you are doing. Balachandran: Okay. Ulrich: High expectations. Balachandran: Alright. It is going to be a rather short presentation. Here is an overview of what we are going to be talking about and there is some information in here that is not in your report. The next two slides is just a background. I was just telling you that we have come a long way from starting on this strategic plan. Having that approved of course reviewed by you and then approved by the City Council. The next stage of evolution was moving to balanced scorecard. Response to a need to have something high level and understandable. So this is a second balanced scorecard report that you are receiving and it covers the period July 03 through December 03. This is a slide 4 that you have seen before that maps the balanced scorecard perspectives into the 4 strategic plan objectives and the 7 strategies. So this is what we have been waiting for. So slide 5 this is our report card from the last six months. It is a little different UAC Minutes 3/3/04 Approved 4/7/04 Page 5 of 27 from what you saw the last time. Last time we had one basic grade for each perspective and we thought that was maybe getting a little too simplistic so we are not going to bunch of pluses and minuses and zeros and I think it is simple enough but it gives you a sense of how we have done on these different categories. Because if you go into the detail of each of these grades the detail of each of these grades are in the report. So on the customer satisfaction, there are actually customer and community there are 14 measures that we are reporting on and that is in your appendix. So here the basic message is we are doing rather well in most categories in and that is referred to by a plus and in one we basically we have met the goal and in two areas we have not met our goal. Dawes: Girish do you want questions now on some of the underlying specifics for instance the reliability business customer perception of reliability as a negative and I couldn’t track that, didn’t understand why it was negative? Balachandran: Okay. I think it may be better if I just go through it quickly and then come back to it because I will be referring to that particular issue and while I am at it over here let me say we have a number of people who have worked on this. This is a multi-division effort. We have Scott and Tom here. And of course we have Taha and Karl who actually coordinated a lot of these efforts. We have people who can answer any specific questions you have. This is just another way of going to the next level of how we have done in the balanced scorecard basically saying the number of measures we have actually exceeded or not met our goals. We wanted to give you an update. If you remember last year when we gave you the update we identified action plans associated with each negative score we got. So this is an update on the action plans from the last down scorecard report. So we had three action plans including one on business customer reliability perception and this was a perception issue as opposed to the actual reliability statistics. So there were three actions that were proposed and we have taken action on each of them. The next time we are going to do a survey to update. This perception measure is going to be sometime next year. So that is one of the works of this whole balanced scorecard. Not all measures are being updated every six months. Because some measures we just get the data once every year and some other measures once every two years. So reliability perception we didn’t update for this update. Dawes: Specifically addressing this business customer reliability perception. The action Item #1 sort of is almost like a _______ make it more reliable by excluding certain events due to storm damage. Clearly storm damage is always possible but the stronger more robust the system the less damage you get in storm so I would not like to think that the utility is sort of sitting by its laurels and saying we only break when we break the system when we have storms and if you know we upgraded spend little more on maintenance it wouldn’t break during a storm so I’d like to know if there is any reaction to that? Ulrich: Well, Yes. When you look at the statistics you are able to make comparisons with other similar utilities either you would like with PG&E or other Munis because this is a common way that other utilities measure. So you can benchmark one thing to look at because it is very difficult to make good comparisons when you have storms because a storm may do significant damage in one place and not the other. So it is better to have a report in addition to the total amount that also looks at excluding storms that way you can make a comparison between various other utilities. So it is not to say that we are not going to look at the statistics with storms because that might look too bad it is not that way at all. Dawes: Thanks. Balachandran: So to continue here. One thing I want to bring to your attention is on action plan II we made a correction to the number of OSHA reported incidents and your updated report should reflect that. UAC Minutes 3/3/04 Approved 4/7/04 Page 6 of 27 Last time when we reported there was an error in collecting the data. We corrected it this time. Going on to the next this is basically the next slide. This is a summary of how we have done this last six months. This is a kind of a repeat of what we have already said and here the action plans we have, we have 5 action plans for the 5 negative scores we have received and updated measures. Promoting a safe workplace this is a measure that is a continuation from the last time and the actions we are taking, we have actually increased the number of actions we are going to take and Scott can talk on that in more detail if you like. On Water Quality too we this is a new negative measure I should say and we have taken a number of them we have identified 3 specific actions we plan to take in this coming 6 months period. On the gas commodity cost we got a negative score because we were 6 percent lower than PG&E cost rather than the ten percent which was the bar we set for ourselves. Basically the action is we have revised the gas laddering strategy but we don’t intend on taking any other action. The next two action plans deal with completion of budgeted CIP and we have specific actions on that regarding the underground district and we place to catch up on spending next year. Dawes: Was the PG&E resolution as favorable or equal to what the deal we had before? Or have they weaseled out and we are now at 120 years instead of 100 years or some such thing? Ulrich: Excuse me. Are you referring to the underground? Dawes: Yes. Ulrich: That issue had to do with the sharing of trench cost. As it turns out the negotiations they come up they virtually the same as they were before. Dawes: Thanks. Ulrich: And it did not relate to PG&E. It was.. Dawes: I meant Pacbell. I misspoke. Balachandran: Slide 11 is a repeat of what I have already talked to you about this. Here is a last slide. Next steps we expect this scorecard to evolve in response to what we find that is working and not working in response to your comments. And we continue to meet with the managers and we plan to roll out all employees in a periodic manner basically revisiting all the strategies and tactics and attempting to update them. We expect to come back to you latest at our next update which will be in October 2004. An update to the strategic plan so basically looking at the strategies again maybe proposing some changes in the strategies. Definitely proposing changes in tactics and that is about it. We are open for questions like as we said we have number of folks here who know the details of this report and will be happy to answer questions. Rosenbaum: Do we have questions for staff? Elizabeth. Dahlen: Yeah. I have a question Girish. In terms of the items that have shown up repeatedly. It is the safe workplace issue that comes up again. Am I correct? Otherwise what was previously on there either wasn’t evaluated within the last time frame or didn’t show up again? Ulrich: I think you will find it is worth repeating is that we have agreed that the safe workplace will always come up as a negative until we reach a zero and while we believe that’s going to be difficult to do we can’t see any other type of measurements to have and being satisfied with workplace that will provide for any injuries or accidents. UAC Minutes 3/3/04 Approved 4/7/04 Page 7 of 27 Dahlen: Okay. So do you think that the zero is realistic to have there or we were just kind of assume that this will always show up as a negative on the review. Ulrich: Well some of us have been doing this for a long time and part of it is an attitude and part of it is a walking the talk. We have to have expectations that we are going to have a safe workplace. It is worth we believe employees want to have and employees will work towards that and our obligation is to provide equipment or practices in an environment that is conducive to a safe work environment. So when you do anything other than zero it becomes well what will it be? Is one accident okay or two? What we do is we do set goals though that provide for something that we believe people can reach. And so each group particularly in Scott’s area have a goal that they are striving for so you can see an improvement. But the overall on the top level the one that we are talking about here we believe should stay at zero. Dahlen: Is there any common area that continues to be accidents? or incidents in the workplace that you may want to address? Bradshaw: Yes. I am Scott Bradshaw Assistant Director of Engineering and Operations. I think if you are looking for common problem, I think you will find this common problem throughout any type of workplace as back injuries. We constantly stress back injury protection. We work on stressing a number of ways to avoid back injury. But you will find back injuries in just about any line of business and we really are concerned about that. But I have to say in support of John’s comment zero is possible. It is possible it is something that we really want to reach and the goals that John is talking about setting. I have to say that just last fall our engineering excuse me our electrical engineering operations group had over 700 days without any lost time accidents. In utility business that is an extremely impressive figure. So those are the types of goals we set. We set goals for no loss time accidents, no backing vehicle accidents, things like that. So we are always striving to do that. But again things like safety meetings. Everybody has to go to safety meetings. The only excuse is vacation. If you miss a safety meeting you have to make it up. We have added situations where before tailboard meetings were verbal, now we are making those documented written tailboard meetings. So we are constantly looking for new ways to increase safety awareness and keep these people thinking number one is Safety. Dahlen: Okay. Thanks so much. Rosenbaum: George. Bechtel: My questions on the report are dealing I think it is ‘C’ Financial Perspective. Page 9 of 17 in the hand out we had. From a financial point of view we have all pluses and it looks quite good. There are a couple of measurements I am wondering whether we could report or may be you could comment on them. One would be I noticed we list under cost effective and efficient, the number of customers per employee on the electric side and is there some reason why we didn’t cover that on the other utilities? Ulrich: Are you referring things like O&M cost per mile a pipe or…. Bechtel: No. there is just this thing that says number of customers per employee – electric. Ulrich: This one on the top one it says see a note. Well we can do that it’s a little more difficult to do benchmarking there is not much other utilities other than very large ones like PG&E. Ulrich: I see so it is so question of having a reliable benchmark. Well it is probably also trying to limit the amount of things we measure. You might be interested to sit down with us and look at this matrix that UAC Minutes 3/3/04 Approved 4/7/04 Page 8 of 27 we have which do we have it with us? No? Thankfully we purchased a printer that will print three feet wide X three feet or endless length and it is getting bogged down with number of measures and I am a strong believer that I got to know what I can do about it. That could be added but currently don’t have it. Bechtel: Well I guess what I was looking for some measure of perhaps the overall utility in terms of the employees for example in a company you would use revenue or sales per employee as a measurement We don’t do that here and perhaps there is no benchmark but it might be interesting to compare us in some ways just having a number and I guess we could compute that. But I guess the core of my question really is trying to determine getting a measurement of how well we are doing at the cost line in each of the utilities given that much of our cost there is personal related cost. It would be useful to see how that is doing this day of trying to look at head counts and how that effects our budget and I don’t think. I have seen a measurement that we have that really tells us how well we have done in the past and how we are doing today and what we project in the future to be doing. So the number of customers per employee on the electric side may be a measurement there and may be if I actually saw the numbers I would have a better feel for what I am really asking for. Ulrich: Well we have those in are down deep in this. I will make a couple of comments. One I have done actually quite a bit looking at that as you recall last year there was a considerable amount of concern and interest about of how many people work for the City of Palo Alto as compared with cities of comparable size. So I went back and looked at it and I looked at it from the standpoint of utility. And there are ways to measure it but it is very difficult to compare it with somebody else because many of our employees particularly in Scott’s Organization are function of how much money we spend on capital and maintenance programs and I find it very difficult to find another city that has an infrastructure that is similar to us in its life and how they are doing repairs. But I have done all of that and I have looked at it. We can compare ourselves from year to year rather accurately and from my look at it and be glad to share that with you as you can see very clear correlation with our capital improvement budget and/or our maintenance budget and our number of customers as of function of how many employees we need to get the work done. Bechtel: Well in some way those measurements might be more instructive to me personally any way rather than failures and pipes and so on that we see in the quarterly report. So if we could substitute some of those for some of those reports personally I would like to see that. Ulrich: Well of course I take the operation of the organization and I am not sure worthy because operation is far away from the kinds of things we discuss with you as utility advisory commissioners. But operating this utility one of them the employee budget as compared with our total budget is about 10 to 15 percent of our total cost. So it is a very important component of it but where I get into difficulty in these comparisons is that having experienced in this area is if you decide that you don’t want to spend money for improvements you can spend the money on maintenance and operation rather than replace. The way we are doing business is that when we do replacement most of our capital work we hire, we put out a bid and hire a contractor to do it. So that if you have another utility or you chose to those with your own employees then you are looking at number of your employees versus the number of contractors are doing the work. Very difficult to compare apples with apples. And we have those same kind of things throughout the organization. Bechtel: I understand of course it is the same sort of issue we are facing in Silicon Valley without sourcing out labor is that when you look at measurements of companies with a substantial amount of out sourcing then you get the difference performance ratios and it can distort the picture. But always John when we raise some issue about looking at efficiencies and so on usually within a year or so you come out with measurements and we start to see those and perhaps that is part of my request for a long term plan is UAC Minutes 3/3/04 Approved 4/7/04 Page 9 of 27 that we look at that may be as you review this strategic plan and what goes on into perhaps as we go on we can look at some measurements like that. Ulrich: I think one way it is helpful. By the way we can do things I think less than a year. It would be to go back up to the strategies, the areas what is it that we are trying to accomplish and then work down to the tactics with the measurements to see those. That is why this is integrated together. The other side of it is I worry a lot about the reliability of the distribution system. And if you look at the budget say in the financial area is we are continuing to spend a significant amount of money on rehabilitation. I don’t expect that we are going to have to do that for decades but we have to do that probably close to a decade to improve our reliability so I can reduce our operating cost as the system gets older and deteriorates you got your choice. So I am going to focus on spending money on that to a point where you can see improvements at the best price. So there is going to be a number of measurements. I think that will be important for us to follow. reduce our operating cost as the system gets older and deteriorates you got your choice. So I am going to focus on spending money on that to a point where you can see improvements at the best price. So there is going to be a number of measurements. I think that will be important for us to follow. Bechtel: Thank you John. I don’t have any further questions on the strategic plan updates. Rosenbaum: Dexter. Dawes: As it is not unusual for me I would drill in on the reporting a little bit. One thing that would be very useful is in the write up if you add a second column instead of just this year’s or this semi-annual score just have a second a previous column and say this is last reports actual. So you can see physically what’s happening. I know it is in the detail here in the appendix and if you go down you can do that but I don’t think it would be a big problem. Just add that second column which really adds to it. Ulrich: No problem at all. Assuming that we did that measurement last year some of them are different very easy to do. Dawes: Yeah some of them are different. And the next series of questions deals with the attachment B and I just picked page 7 because Commissioner Bechtel was talking about that particular page as well. The balance scorecard for financial and frankly I am perplexed as to what the difference is between the two orange columns called particularly the column entitled benchmark goal statement. The proposed benchmark I get right that is the proposed benchmark but the proposed benchmark goal statements in all cases sound enormous like under cost O&M cost per circuit mile it says below APPA average I guess that would be where we would want to be in the future of our unspecified amount. Balachandran: Yeah. I can explain that. Dawes: And our proposed benchmark is where what the average is today. Is that the idea? Balachandran: The deal is the proposed benchmarks actually the plural is probably applicable here is here the potential benchmarks that one could use to measure our performance so we just threw in. You can use APPA, you can measure against your own performance in the previous period, you can measure against local utilities. So those are just proposed benchmarks. The next one benchmark goal statement is what we selected among the proposed ones as the benchmark that we will use. Dawes: So there is no stated amount lower it is just lower. UAC Minutes 3/3/04 Approved 4/7/04 Page 10 of 27 Balachandran: So it is below APPA’s average. Then you go into the next two columns. Dawes: Okay. Balachandran: which is what’s the goal statement. What’s the goal value. Dawes: I got it. When we tried it before you got this long sentence and it was just tough to look at. So once… that is the syntax of the statement. Dawes: I got it. That is well laid out. I just didn’t understand the normal criteria very well. The last question in just looking at the reports for instance on that the first item on Page 7 customer accounting ratio electric and under the current score it says minus but yet on the summary it says to be determined and you skip down to the last one and it says O&M cost per kilowatt hour sold it says N/A no benchmark yet and in the summary it says it is a plus so I am confused as to what the details says versus the summary. Balachandran: I think that was an oversight from the current score especially the one right on top if it was a negative it should have shown up as a negative in the report. Dawes: It says TBD. Ulrich: Oh no that’s the one further below right? Dawes: The first one is customer accounting ratio and that says in the summary here it says to be determined. Balachandran: Let me actually look for support back here and see.. Dawes: I am not trying to quibble but I just look for consistency. Balachandran: Oh no. Yes you get all the questions out and make sure this is valid. Ulrich: And that is valuable to us because as many times as we go through and look at this there are creeping areas that we find that this is.. Dawes: I have done a lot of reports in my times John so I have a lot of sympathy for it. Ulrich: Thank you very much. Fattah: I am Taha Fattah with the Resource Management Group and we had a hard time trying to come up with a value that would match the benchmark that is shown by the other utilities and this area should have actually had a DVD until we were able to break our costs. Dawes: You are addressing the customer accounting ratio. It looks way out of whack. 69$ or 69 I don’t know whether that is people or dollars or what versus 236. So there is obviously something out of whack and probably DVD would be a better… UAC Minutes 3/3/04 Approved 4/7/04 Page 11 of 27 Ulrich: Part of the difficulty is that we co-mingle a lot of our customer account when they are working on water, gas, electric and other utilities have only one commodity. So it is hard to make that comparison so we have to find a way to separate all those out. Dahlen: Is the problem coming up with the benchmark value? Is that the question or how we work up our… Fattah: How to take the description of the benchmark that we are using which is described by the APPA and using the information that we have from our financial statements to come up with the same meaning. Dahlen: So it is the question of comparing apples to apples. Fattah: Yeah. Right. Ulrich: Just for clarification APPA (American Public Power Assn.) is just looking at electric utilities. We have difficulties separating some of our cost between the various enterprise fund utilities that we have when it comes down to this type of a micro measure. Rosenbaum: For the benefit of the tape could the new staff please identify yourself once again. Fattah: My name is Taha Fattah and with the Resource Management Group. Rosenbaum: Thank you very much. Do we have further questions? Dawes: Thank you John. Rosenbaum: I was pleased to see Attachment ‘C’ which is current member rates versus PG&E rates pose bankruptcy I guess for all of the NCPA cities. Ulrich: I think we had a recommendation from a Commissioner to put that in. Rosenbaum: Yes and I certainly do appreciate that. We now have all our rates on our website and we have comparisons with other NCPA cities. My cup runneth over. But when I look at these numbers and the cities I always like to compare with are Roseville and Santa Clara. They are both actually they are somewhat bigger than we are now but they are comparably sized. We have a cost to get a much larger percentage of our energy from Western than either the other two cities do and all things being equal I think that our rates would show a greater differential than are shown here. I don’t want to get into a long discussion of this now but I assume that we will as the strategic reports go on continue to see comparisons and I would personally tend to concentrate on those two cities Roseville and Santa Clara as being of greatest use and as we will see in a later agenda item we show fairly rapidly increasing electrical rates and I would have to assume that either those two cities are going to have similar results or we will be well ahead of them in rates. So I am just making a point that I appreciate seeing these numbers and I think it is something we are going to want to follow is as time goes on. Is there any other discussion on this item? Dahlen: I just had one other question. This also goes back to the report. It has to do with the city facilities efficiency improvements. The fact that this measure is being transferred to the Public Works Department. Could you explain what that measure is and why it is not accounted for under the Utility? Ulrich: Could you mention the page and location? UAC Minutes 3/3/04 Approved 4/7/04 Page 12 of 27 Dahlen: Certainly. It is mentioned two times. It is at the end of Item #3 on Page 6 of 17 as well as Item #2 of Page 5 of 17 under the notes. Ulrich: Tom Auzenne, our Assistant Director in this area will answer the question. Auzenne: That is not necessarily saying that the city is giving up its energy efficiency efforts but rather the utility has stopped being the prime driver for such efforts. During the height of the energy crisis we participated with the City’s General Fund to identify and capture fairly significant amount of energy savings between this building that we are in now and retrofit of the traffic signal system from normal incandescent lights to LEDs. A lot of that was based on funds available either from the state or in conjunction with funds available from the state or from the utility. All of the state money has since dried up, a lot of low hanging fruit for such efforts have also been federally exhausted. We have gone through 69 different city buildings and retrofitted all of the lighting systems. And so now the remainder are fairly technically ambitious opportunities that are best handled out of the Public Works Department so that they can sit there in their scopes of work for letting contracts identify the types of life cycle, cost savings opportunities if they would like to see pursued. Dahlen: May be just to wrap up that point you want to mention what some of those items might be that they will be pursuing. Auzenne: Things ranging from continuing boiler change outs, chiller change outs, in this building the re- commissioning the systems. There is a lot of opportunities that Await the Public Works Department in terms of re-commissioning existing systems to bring them back them to their original operating condition on a holistic basis. Rosenbaum: Dexter. Dawes: Tom. Excuse me while you are standing up let me ask about the Public Benefit Programs. We’ve talk about these from time to time. Our Commissioner Rosenbaum has particularly pointed and some of his comments frankly on Page 6 of 17 I was not aware that we are have a public art component to our electric benefits. It seems a little far fetched to me given the heat and light that one reads in the newspaper occasionally about public spending and the utility spending, it seems to me that we are ought to put that on the table and figure out what it is about and see if is the highest in best use. Ulrich: Tom can give you some of the details. But I ask very much for the same questions about these kind of expenditures and I think we actually had discussions about the major item the one that is on California Avenue and if you go over and look at it has a very clear energy theme to it and the art is also powered by photovoltaic cell. So I believe that there is part of many other marketing and public awareness and in this case public benefits by having not only a support of something like this but it is a day to day reminder to people that go in the area that there is a plaque on there that you can see the relationship between art and the environment and how the use of these utility funds. Rosenbaum: You put that very well John. Ulrich: Thank you. Quarterly Risk Management Energy Transaction Report Rosenbaum: Is there any further discussion on this item. If not lets move on to Item II. The Quarterly Risk Management Energy Transaction Report. Second Quarter Fiscal 2003-2004. UAC Minutes 3/3/04 Approved 4/7/04 Page 13 of 27 Ulrich: As you can tell this was a rather easy report for utilities to put together in a cover sheet. This report was given by Administrative Services as their role in the Risk Management procedures and policies where utilities has the front and back of as and in the middle office Karl Van Orsdol assist us and give us oversight and support in our portfolio purchases as one of the objectives that was in the auditor’s report to be able to explain our energy transactions in a way how it is easy for the public to see. So Karl is here to answer questions you might have and give you some more in depth in understanding of what is in this report and what it can be used for. Van Orsdol: Great. Thank you very much. Karl Van Orsdol Energy Risk Manager. What I would like to do is just a moment summarize the report that you have seen and open for discussion for any questions. The report you have represents the second quarter of the energy transaction risk management report for the FY 2003-2004. In summary the report shows that CPAU portfolios for both electric and gas are well within the established risk limits as well as the risk policy established by the City Council. The current credit exposure is approximately 5.8 million for the electricity as measured by the mark to market value. Of course this figure as in all this entire report is as of the 31st of December. The equivalent credit exposure for gas has increased in the second quarter from approximately five hundred two thousand to about 2.5 million largely due to short term increases in gas prices and as I said to you before both the credit exposure for gas and electric are well within the current limits. The value at risk that is the management of the riskiness of the portfolio on purchased portion remains low. The value of risk for the electricity portfolio is 1.8 percent of the electricity reserves and the VAR for the gas portfolio remains at 2.1 percent of the gas reserves. Just to remind you again the limit for the VAR value is 10 percent. So we are very well below that. In summary the purchasing strategies that are employed by the utilities have maintained low levels of risk and the utilities are using the appropriate portfolio management techniques which are consistent with industry best practices related to risk management. So that is in brief what the report says so if there are any questions I will be happy to entertain them. Rosenbaum: Thank you Karl. Do we have any questions? Dexter. Dawes: In fact I was just having a little problem understanding the charts. Go to Page 2 of 6 Mark to Market for gas and first the left hand X’s are those dollars? Van Orsdol: Yes. They are dollars per month. Dawes: Okay. Dollars. Van Orsdol: And each column is broken down by the counter party. So if you look at say January 04. The mark to market exposure for counter party one BP is approximately one hundred thousand dollars. But mark to market exposure for SEMPRA is …. Dawes: That part I understand but the moving over lets say April 04 were it drops from 550 thousand to 55 thousand does that mean that we have now bought and consumed the gas and therefore we don’t have and we are buying gas at below market and in Jan, Feb and March of 04 and therefore we don’t have a mark to market big positive because we bought it and used it and in effect passed the value to our customers I guess where it goes. Van Orsdol: The drop in the mark to market value from April to May 2000? Dawes: I am doing March to April that is the big drop. UAC Minutes 3/3/04 Approved 4/7/04 Page 14 of 27 Van Orsdol: Oh I’m sorry. Okay. Yes. That’s a result of two factors. One of them is the reduction in forward gas prices because of the winter months are ending. And the second is because there is lower quantities that are purchased to meet the load. Dawes: Right. Turning to the next graph. The mark to market for the gas portfolio over time. Am I correct in thinking that the gap which is the difference between the zero line and any one particular point is the difference between what we actually paid in that period versus the spot market at that time. Van Orsdol;: Yes. Dawes: So basically from January through October we were to where we were sucking wind and paying more than the market at that point in time and that we switched positive and that we are burying at less than market. This is the results of our laddering strategy? Van Orsdol: Yes. I think it shows how the ladde4ring strategy is able to reduce the price exposure. Dawes: Yeah. I mean it goes both ways. Thank you. Rosenbaum: Elizabeth. :Dahlen: Yeah. I just wanted to ask about the gas laddering strategy. And what impact of the revision to the modified gas laddering strategy is going to have on our risk portfolio? Van Orsdol: Well I believe it will reduce the risk in a number of different ways. If we look at the gas purchasing strategy. There is greater opportunity to fill the load especially in the winter months when there are when we foresee or the front office foresees higher prices. So it gives them greater flexibility to make the purchases when the market conditions are most appropriate to do those purchases. Dahlen: Can you actually quantify how we might see a measurable effect in the VAR? Van Orsdol: Well. You would see the VAR if utilities purchased greater portions of the load further out. You would see a natural reduction in the value of risk. Because it would be a smaller portion of the portfolio that had been yet to be purchased. Dahlen: Thanks. Van Orsdol: So as you purchase more your mark to market becomes a greater factor than your value of risk does. Because value risk is the potential fluctuations for the unpurchased portion of the portfolio. Dahlen: Okay thanks. I had one other question on Gas since you are here. If you could just clarify a point in the Attachment ‘A’ when you show a negative for the volume of gas per day does that indicate that we are selling. Van Orsdol: Yes there were some changes in the capacity at the Malin delivery point and as a result the utilities sold some quantities at Malin and we purchase them at City gate. Dahlen: Thanks. I didn’t know we were selling gas. Rosenbaum: George. UAC Minutes 3/3/04 Approved 4/7/04 Page 15 of 27 Bechtel: Karl . On Attachment ‘A’ we list the prices of contracts. So this becomes public information. Is that right? Do we have approval from our suppliers to publish the details of the contract in this form. Van Orsdol: Yes under each of the especially under the new electric and gas master agreements, there is a provision that allows myself and the rest of the staff to release information in accordance to the policies and wishes of the City Council as well as other Advisory Bodies and specifically City Council Finance Committee and the Utilities Advisory Commission are all listed I believe in those contracts. Bechtel: I am also assuming that this information or does it not go on the web? Van Orsdol: Well it will be on the website for the report. Yes. But the information is less proprietary in the sense that it does not allow others to see what our fowa5rd curve is in the sense because the specific dates on when these purchases were made is not listed. Bechtel: Thank you. Rosenbaum: Are there any other further discussions of this item? Dexter. Dawes: Just to follow up to Elizabeth’s questions on the sales. Evidentially we sold January, February and March to SEMPRA all at 642 which looked like at the top of the market and if I read this right that is hats of to the utility management to sell surplus gas for two at this point. Am I reading this right? Van Orsdol: Well I think the utilities staff would appreciate your loyalty comments but it actually had to do with capacity. And there was less capacity on Malin and as a result it was the utilities more or less required to sell and then buy at city gate. I don’t think it was a strategic decision. Dawes: This is basically the same answer that you gave… So did we pay more than 642 at City gate. Did we being forced to sell it and repurchase it? Did we suck wind? Balachandran: We followed our strategy for our laddering strategy. So it is whatever the market price was at that time we bought it and I guess without getting to the right number we did pay more than 642. Dawes: So this is a sort of Enron type flim flam where it sounds like we are being forced to sell due to capacity constraints and then buy it at our higher price? Did somebody else set it up? Balachandran: No Van Orsdol: I would have to look at this slightly greater detail than I can right here. But if you look at the comparable purchases at City gate. They all have positive mark to market values. Therefore the contract is worth more now than when it was purchased. So you could say that by doing this the value was increased to the utilities. Dawes: I think I get it but I am not quire sure but I will pass by rather than belabor the point. Van Orsdol: I mean of course each individual transaction at each month is different. But if you look at for example you talk about sales in February. If you look at the City gate purchases in February from SEMPRA those were the purchases that were made to compensate for what needed to be sold at Malin. They all have a positive mark to market value. Therefore they are worth more now then when we purchased it. I guess I would disagree with the characterization that the utilities were sucking wind in doing this. UAC Minutes 3/3/04 Approved 4/7/04 Page 16 of 27 Dawes: So Elizabeth pointed out to me on the schedule here that we bought from SEMPRA 210080 (twenty one thousand 0 eight 0) MMBtu it is about the fourth fifth line down at 672 at the City gate and we sold it back to them 2100359 (twenty one thousand three fifty nine) very close at 642 at Malin. So it looks like we took a loss on that transaction or am I not reading this right? Balachandran: You are right. 280 dollars. We basically bought transportation. See what this deal is just selling transportation. That’s all the basis. Dawes: Okay. I am just trying to get out that it doesn’t appear as though we have been dealt with by the big energy guys. Balachandran: This is a one of situation where our Malin capacity was reduced from 6189 to 5600 whatever, about 500 to 600 less and so we had already purchased gas up to the higher amount at Malin and the capacity was reduced and this is by PG&E through the gas accord and so we just had to get the delivery of gas here. So it is all of 280 bucks. Van Orsdol: So sort of to re-emphasize. We provide or this data is provided to assure you and to assure the city council that the transactions are being done within the accordance of the risk management policy and guidelines. Dawes: It is great. I love the numbers. Van Orsdol: Like any portfolio any individual transaction may or may not make money or be of a greater value to the city. The key is in combination. Do all the different transactions that make up the portfolio, how does that portfolio behave? And that is really the key issue. Dawes: Thanks. Rosenbaum: Okay. I think that wraps up this item. Thank you very much Karl. Lets move on to Item III. The Water Preferences Survey Results. Water Preferences Survey Results Ulrich: Yes. The objective here is to look at the quality issue and the preference of our customers in a drought. As you recall we had this discussion about in a drought year there are opportunities either to mix the water with well water and what our customers would think of that versus not mixing water and just reducing and continuing to have more reductions in water supply. We are here to provide you with that survey results and let you know what we found out from our survey with our customers. I think you will also be pleased on how much participation we received from our customers. Very significant involvement by the people in this survey. Bernard Erlich is here and Jane Ratchye will be making the presentation. Balachandran: Actually, I think Bernard is going to do the presentation Is that it? Well it is a joint effort here. No. John is offering to make a presentation here. No John. Bernard actually handled the survey and tabulated all the results and developed most of the report. So he and Jane did this. I will just hand it over to him and go through the power point presentation and then we will be open to answering any questions. Erlich: There were two objectives for this survey. The first objective was to ensure that the City of Palo Alto Utilities’ drought-year water supply plans match the expectations of the community. and the second UAC Minutes 3/3/04 Approved 4/7/04 Page 17 of 27 objective was to obtain useful information for the decision making process on the use of ground water during droughts. The major findings from the survey is that a large majority of about 75 percent of the customers expect the City to provide the highest quality of water at all times. Palo Altans seems to be indifferent between treating ground water to a higher quality level before blending it with Hetch Hetchy supplies and imposing more severe restrictions on household water consumption. The least preferred drought time supply option is to blend Hetch Hetchy with ground water. However, the blending of ground water is only considered to be an unacceptable option by a relatively small fraction of the respondents: about 8 percent. Customer preferences for the three drought time supply options do not change significantly when they are analyzed in terms of locations, that means zip codes or in terms of the primary source of drinking water at home. . The first table summarizes about what Palo Altans expect the City to provide. As you see, a very large majority, 75 percent expect the City to provide the highest quality water possible at all times. The distant second is for the City to provide water that meets health requirements at the lowest possible cost, and the least important feature seems to be for the City to provide water without use of restrictions even during droughttimes. The second chart presents the primary sources of drinking water at home. A majority of respondents, 54 percent, consume unfiltered tap water as their primary source of drinking water. The next slide shows the three options that respondents were asked to rate. The first option is to blend ground water with Hetch Hetchy supplies to make up part of the supply shortfall. Under that option monthly water bills would increase somewhat. The second option is to use restriction on household water consumption rather than any use of ground water. This is the least costly option. The third option is to treat ground water to a high quality level before bending it with Hetch Hetchy supplies. This is the most costly option. This is a table describing the options in more details. Each respondent had the opportunity to review this table before voting on the three options. In this table, you can see the cost impact of each option, the impact in terms of cut backs, etc. This is a chart presenting the preferences of the respondents. You can see that the yellow bar, corresponding to Option C, which is highly treated ground water blended with Hetch Hetchy supplies, has been voted as their first preference by a majority of customers. The second preferred option is Option B, which is no ground water (Hetch Hetchy not blended with anything). The third preferred option is Option A, which is to blend ground water with Hetch Hetchy supplies. The results have been tabulated for each option. Another interesting feature of this chart is the “not an acceptable option” part of the chart; it shows that even though Option A is the least favorite it is not highly unacceptable. About 8 percent of the respondents consider this option unacceptable . The next four charts present the results that could be inferred with 95% certainty for the entire population of Palo Alto. These numbers are a function of the number of responses to the survey, , the variance of those responses, and the level of confidence chosen by staff. These numbers give an estimate of what we can anticipate with some level of certainty from the entire population of Palo Alto. You see that Option C, which is highly treated ground water blended with Hetch Hetchy is again the preferred option. A close second is Option B, which is not to blend ground water with Hetch Hetchy supply. Again if you look at the fourth item on this chart, which plots the unacceptable option; it seems that Option A is somewhat unacceptable. However, the level of rejection for this option barely reaches 10 percent. What we can show from these charts is that the customers are indifferent between Option C and B. The survey results indicate that there is noclear preference for one options compared to the other. The next steps is to evaluate whether ground water should be used to supplement supplies in a drought and if so should our ground water first be treated to improve its quality. I will entertain questions if you have any. Rosenbaum: Thank you Bernard. Questions. Elizabeth. Dahlen: I thought there were two key take aways that I observed from looking at the write up here. One is the fairly small difference in cost between the different options. I didn’t I wasn’t aware that the cost were so similar which I take this that these are the actual numbers that the staff has worked up and that there isn’t a big difference in the cost. Is that correct? UAC Minutes 3/3/04 Approved 4/7/04 Page 18 of 27 Erlich: Yes. Girish want to say.. It is correct in terms of the monthly bill impact but I think Jane has additional information. Ratchye: Yeah, it doesn’t look like a whole lot of difference between the alternatives but when you look for example at alternative ‘C’ it doesn’t look like much more per month but it is per month for every month for 30 years it is 4 ½ million dollars for the capital cost of the equipment and during the drought when you operate that it is very expensive and it uses a lot of energy which is part of that cost and so yeah it is hard to convey that. You know, I am not sure if we had asked in the survey would you like the utility to spend 4 ½ million dollars on this option. I am not sure what they would have said. On the other hand what people truly see are their bills and that is the difference. They are virtually all the same cost in a normal year except for option ‘C’ that one has, you have to pay for that capital forever or for some lifetime. The reason that the costs if you look can you flip back to the chart of the options? You will see in that chart that Option B costs a little bit more in a drought year. $50.50 cents a month so it cost another dollar a month and the reason there is, the reason actually that Commission Rosenbaum brought up the cost of water from San Francisco rises per unit in a drought. And then in Option ‘A’ the reason that one costs more is because you are buying more water. Your bill is larger but you are getting more water than in Option B and you are having to pay the pump tax for that additional water that you buy. But still it doesn’t look like much. It is only $2.00 a month but $2.00 for every month for all the people it is a lot of dollars overall for the City. Dahlen: Yeah, I mean I think the bottom line is how well the true cost are conveyed to the people taking the survey. I guess that, I mean you are right once you start adding this up month after month in a year it starts to look far more significant. Ratchye: Well, these are really as close as we know about the true cost. And the reason that blending Option A doesn’t cost much more or hardly anymore at all than Option B in a normal year it is because that would be we were hoping to have the well that we would used in a drought nearby a reservoir, nearby a Hetch Hetchy turnout so there wouldn’t be much pipe there would essentially just be a valve which doesn’t cost very much at all like $20,000 and so you can essentially get the ability to blend really cheaply and you don’t have really much capital expense at all to give you that option. If we were not able to locate the well right near a turn out as we were hoping, then that cost in a non drought year would go up a little bit but probably only may be 30cents or something. And so I am not sure when you are surveying you have to get into the terms of the people you are asking and these are those terms, these are the bills they would see. Balachandran: I just want to reemphasize that when you talked about true cost we didn’t think about it because we had the numbers we had the capital cost with these different alternatives. The survey was going to individual residents and we wanted to make it as meaningful for them the cost that they could relate to. So when they looked at their monthly bill so that is why we chose this. We wanted to keep it as simple as possible but also give them something that they could relate to. Dahlen: Thanks. The other observation that I had was somewhat striking is the number of people who responded that they drank bottled water and the correlation that had in it is written up on the bottom of Page 4 with those individuals preferring the lowest cost supplies generally given that they are buying bottled water for their own drinking water and there was a percentage I don’t see it in front of me now but even of those who preferred the highest quality water possible at all times there was a fairly large percentage of those respondents who are also drinking bottle water. I wonder what your take on that was with regards to our drought supply options and what makes most sense given that a fairly large portion of the community seems to be buying bottled water. UAC Minutes 3/3/04 Approved 4/7/04 Page 19 of 27 Erlich: It seems that when you look at the responses from respondents who drink bottled water at home, Option B is the preferred drought time supply option, by a very small margin. However, regardless of primary sources of drinking water, there is no clear winner between Option C and Option B. We have statistically tested for each combination whether Option C or B was the preferred drought-time supply option. With a level of certainty of 95 percent, we cannot reject the hypothesis that Palo Altans are indifferent between Option B and C regardless of their primary source of drinking water at home . Dahlen: Just to clarify one point on the Option A the blend option. I know we have seen the numbers before but lets say in worst case scenario a severe drought, what percentage of the supply would be ground water? Ratchye: It would be about 10 percent. Our annual consumption is about 15,000 acre foot and we did the ground water supply feasibility study to determine how much we could pump in a drought and the maximum that was determined to be safe and sustainable was 1500 and so if we didn’t have the availability and weren’t able to use ground water in a drought, we would be subjected to about a 20% cutback and if we could you would only have to cut back 10%. Now the question is you know would we really have to cut back 20% in a drought how about 30%? Why did you pick 20%? In the last drought our rationing goal from San Francisco was a 28% cut back. But because we adopted the water shortage allocation plan and we have a high supply assurance from San Francisco which is one component of the new formula we think that in a 25% region wide drought Palo Alto would only have to cut back 20%. So we cut back less than average for the region. Now I don’t know what the future drought would look like, could look worse than 25% regionally. In addition after 2009, when our contract changes, that water shortage allocation plan only runs through the end of our current contract. So we can certainly be facing more severe drought in the future maybe on a different formula the supply assurance as you know it may go away. So there is a lot of uncertainty around what we would really be subjected to. But I think for the purpose of this, this felt like a fairly reasonable, it is our best estimate that we have with the information that we have available now. Dahlen: Thanks Jane. Rosenbaum: George. Bechtel: Bernard, perhaps when you say in the survey your allotment could be limited to 90 of normal use as in the case of Option A. The monthly bill I actually assumed a 10% reduction in usage so that would also reflect the smaller difference between a normal bill of 49.50 and others. Okay. That helps. I was a little bit concerned too about why the differences were so very small. Thank you. Rosenbaum: Dexter. Dawes: Yeah. Thank you. To me the import of this and is laid out in the last slide is what do we do with this information and my out-take is given the fact that we have a large and continuing capital expenditure program and the water utility given the share of San Francisco PUC cost and the escalation of water price that it would be highly unlikely that I would see a 4 /12 million dollar capex for Water Treatment Facilities at the wells anytime soon. I guess if our financial strain on the water utility eases back it would probably be a nice to have thing. But given the very close relationship between Options B and C it is not a high priority for the City and given our strengths in that utility that we wont be entertaining that in the near future more of a speech than a question I guess. Rosenbaum: You are trying to influence a future staff decision Dexter? UAC Minutes 3/3/04 Approved 4/7/04 Page 20 of 27 Dawes: Perhaps. Rosenbaum: Alright. Do we have any other questions or comments? If not thank you Bernard and we eagerly await the staff recommendation on this very difficult issue. The survey was a nice try but my impression is it doesn’t provide any information that is going to be helpful to staff in making this decision. No need to respond here. Ulrich: We are ready. Rosenbaum: Let us move on to Item IV. The Ten Year Financial Forecast. Ten Year Financial Forecast Ulrich: Thank you. You have seen the reports before. This is the beginning of our budget cycle and an attempt to show you where we are forecasting this year in fixed expenditures and going forward for ten years and we have broken it down by commodity and this will lead into of course our recommendations for rate changes from appropriate. So we will go over the report might be best. If you would like to ask us some questions and focuses on areas that you would like us to either highlight or to emphasize. You notice rather than Randy Baldschun who has been here for a number of years Tom Auzenne is the new Assistant Director and this will be his first opportunity to talk with us about translating the financials into rate forecast. Lucie Hirmina is the Manager of Rates. So ready to go. Rosenbaum: Thank you. Lets start with Water. Do we have any questions? Dexter. Dawes: Cryptically, the question would be where is the Pig in the Python? The capital expenditure line which is 17 I have for the last couple of years thought of our roughly 14 ½ -15 million dollar plan for modernizing our well system providing for emergency storage. Expenditures which we bonded would come in a two-three year period which would have been the situation with the last ten year report and now the capital expenditures in the FY03-04 is 7 million drops to 4 ½ forward it just doesn’t seem to be as sharp in increase as it was is it been spread out deferred uncertainties, please bring me up to date on the CIP situation. Ulrich: I will give you a brief overview and then Tom and possibly Scott will give you more details. As you recall the primary money in the CIP beside the pipe replacement is for the emergency water supply system including the reservoirs and the pumps. As you recall that has slowed down because of the need to go and do more environmental analysis on the chosen sites before we fix on the appropriate one and built into the budget was the procurement of the land and also the detail engineering work which was expected to be done this year that has been moved on back and so those expenditures have been modified accordingly. So the plan has not been stopped it has just been moved of and of course there is no sense or need to show an expenditure if we can’t do it. Dawes: The dollars are still in for that entire program of emergency supply is just spread over a longer period and is not as obvious I guess. Ulrich: Correct. Dawes: The second question is again more of a statement. It repeats Mr. Commissioner Rosenbaum’s concerns and transfers in this water utility are approximately 20% of revenues and given the rate situation it is something that perhaps should be reviewed more critically at a later time. We have looked at policy. The policy of transfers but water consistently pops out as the one is being at issue and I don’t know if it UAC Minutes 3/3/04 Approved 4/7/04 Page 21 of 27 would be appropriate to think about that has a discrete line item but it certainly pops out to me that this is a very heavy load for this utility. Ulrich: I don’t have much to comment on that. That’s a policy area as far as the expectation of return to the city for the ownership of the water utility and also the other two utilities where the transfer takes place. Dawes: Incidentally, I really appreciate a breaking out the transfers into general fund rent and others. I think that is a huge great service to put on this. It is an excellent report getting better. Rosenbaum: Do we have other comments or questions? With regards to the point that Dexter made, if one does look at line 17 System Improvements you got 7 million in for this year but after that it almost looks as if the CIP reverts back to the normal every year expenditure. It is hard to see where there is a reservoir hidden in there. Am I missing a point somewhere? Auzenne: Allow me to take my first shot at it. The typical answer is it is Randy’s fault. But we will rely on that tonight. Ulrich: We can only do that for so many months. Randy may be watching right now. Auzenne: Thank you Randy. It is your fault. A number of things have happened with the CIP. And first let me say that this is also, other than the CIPs, a work in progress. There are a number of functions and costs that haven’t been updated, that haven’t been included in here and we do plan on once those costs become known to bring this back to you on some future dates so that you can get an honest and accurate shot at this. A number of things have happened with the CIP, and Scott can back me up. Last year the City Council had moved part of the emergency plan out of the CIP while they continued on debating it. That went into the reserve which helped to restore the reserve. That has come forward this time to the tune of 4.2 million dollars. We also got to the point where the CIP has actually caught up with our ability to implement it and so there was a comment earlier this evening about the capacity of the staff to do work. While at some point we have to sit there and the Python has to digest the pig and so that is probably what you are seeing for next years. Scott anything to add? Bradshaw: Well you pretty much hit it on the head. The dollars for this year include a lot of that work for the reservoirs that is 6,999 or that 7 million dollars and if we do not get that work completed it would be carried over. We will have to carry it over and you will see that in the next years when we adjust for next year. I think if you look back on the adjusted the actual for the 02-03 what we projected for 02-03 was less and we would have to carry some of it over into the 03-04. I expect that we will carry over some of this 7 million to 04-05. We would probably not get down because of this EIS work we have to do. Dawes: You can blame it on the weather too. Bradshaw: Thank you. Ulrich: I think one of the areas Mr. Rosenbaum that you should be aware of in looking at this report. If we set aside a certain amount of money for the budget and it is approved but we do not have the ability to spend it based on some of the things we talked about. It moves of into basically a reserve that would be used the money that is in the budget this year would be used in the subsequent year to do the work. So it is not shown here in the actuals or adjusted if that money is something that has been set aside so you can may give you false assumption that there is less money there on the table to be spent. UAC Minutes 3/3/04 Approved 4/7/04 Page 22 of 27 Rosenbaum: I guess the point of Dexter’s question or the actual question does the sum of the CIPs shown out for this year and the next few years cover the cost of all the improvements for the emergency water supply? Ulrich: Yes. Rosenbaum: Alright. Ulrich: Excuse me. I think the point of this is to say just to make sure it is very clear. We have no expectations of not doing any of the work. It is just being delayed. So there is no reduction in the money anywhere in here. It is there. It is just been moved out or as I mentioned in this reserve area pending the ability to spend it. Rosenbaum: I had a question and I don’t expect any answers or new information tonight. But if we look at line 39 sales units. You have got a number that continues to grow. It grows quite modestly where as I think more realistically one might expect the number of units to start going down in response to the very sharp increase in the price of water and if one were to take that into account if one were to make up a model with some levels of percentage reduction you would probably find that the rate required would be even higher what’s shown here and you might tend to approach the debt spiral but I am wondering if any calculations along this line have been made? Auzenne: Allow me to respond. As part of the long-term water demand study I think you will find that has been in fact been taken into account. Part of the other problem with water which makes it more problematic is after the last drought the City of Palo Alto in its inimical way tended to reduce the consumption by a fabulous amount in excess of 25%. Normally you would expect a bounce back from that. That never happened. So what you are seeing, I think, in terms of sales unit is basically a level of consumption that doesn’t have a lot of slop left built into it. Well, there isstill opportunities for water efficiency, water reduction, water consumption. I think it is probably not as great as some other communities. Ulrich: There is an interesting report that we are sending to the City Council. I think it is in two or three weeks. It is the annual forecast on water usage and growth. All communities provide that and it is a tool used by Hetch Hetchy. It is part of our obligation. There is a formulae built in there that looks at our growth plan of the City of Palo Alto and translates that into water usage and that’s part of the information that is used to go into this financial forecast and it is quite modest. Rosenbaum: I am sure any growth production would be quite modest. I guess my point is that with the increasing rates, the very sharp increase in rates. I think it would be astounding if we did not see a significant drop in usage and I just don’t see that reflected in these tables and I am asking whether that possibility is being taken into account? Ulrich: I am sorry. Jane is gone has left and Girish reminds me that it is on the agenda as an information report to the UAC next month before we take it to the Council. Probably a good time to ask some questions about it but the price of elasticity is built to some degree in there. And I believe that some usage regardless of price is still going to be, people are still going to use water. I think your question is more about what are the things that will stop using water for as the price goes up. Rosenbaum: Well, they will be much more careful with their landscaping irrigation once it is obvious. That is the obvious choice and that’s what I expect would happen. I don’t think water is like gasoline as I surely question the elasticity of gasoline demand with price. I don’t think that would turn out to be the UAC Minutes 3/3/04 Approved 4/7/04 Page 23 of 27 case with water. Anyway you do these things once a year for us and we find it very useful and perhaps next year we might take a look at the possibility of demand reductions and also we will have the numbers for 03-4. If you look at the actual for 02-03 it was a 5.6 million unit and for the 03-04 we are still predicting 5.9. Well we see what the number is for 03-04. Ulrich: I also think we will have some more discussion on this subject as we get to wastewater. Dawes: I propose that the staff look at potential household information in the city in terms of calculating these volumes because it seems to me with Rickey’s saying and may be the Elks and so forth we could have 5 800 thousand more housing units 5% over the next 3-5-8 years. So there is some volume issue there to. Rosenbaum: Alright. Lets move on to the gas utility. I have questions for staff there. Electricity. Dawes: Mr. Chairman. I am again it is nomenclature. I will just go back to the water. The very last line. It says the reserves available and then it says (over maximum) guideline and to me this is reversed. It is the way Girish is laughing you probably discussed this. Ulrich: Yes. Dawes: To me the brackets are bad. That means we are under performing and this is just the reverse and actually you are a little nomenclature to suggest this difference. So if you just look at this and it says under the rate stabilization reserve at the end of 04 it is projected to be 7 million dollars and the maximum guidelines is 13. We are under the maximum. So that’s a bracket which I guess that is properly reflected then under the stub you have over maximum in brackets and I would say that there is where the confusion comes. That you should say reserve available and it should say under the maximum in parenthesis it would then track. A small point but a confusion factor nevertheless. Auzenne: You are right and we did have a discussion about that and we will make it more clear in the future. Dawes: Thank you Tom. Bechtel: As long as we are discussing that it seems to me that one is maximum but we may never have problems. Lets not a real worry over maximums but in some ways from at least from a worried point of view is whether we are over the how much are we under the minimum we have set and you don’t track that particular line. You have to look at that and do a calculation on that but that seems to me that I would worry when our reserves below the minimum level and I guess I would be happy when they are over the maximum except if unless at the same time we are recommending a rate increase. Auzenne: That is true in itself. And normally when it is over the maximum that’s our signal to be looking at a rate decrease to sit and keep it within bands and yes we are always cognizant, believe me we are very cognizant, when anything is under the minimum. We are also looking at different ways of trying to make turn these vast tables and to perhaps do something more non tabular form and more visually understandable as well. Bechtel: I can give you. I can show you my example I did this afternoon because the numbers are really hard to follow. So I did my own excel table and I looked at it graphically and this is really helpful for me to look at things this way. So I encourage you to use graphical means and track three or four items like UAC Minutes 3/3/04 Approved 4/7/04 Page 24 of 27 that and then we can look at them at a glance. Unfortunately or fortunately the tabular data makes you look at it and that is probably better than looking at it in graph form. Auzenne: We feel your pain. Rosenbaum: The electric utility. Ten Year Financial Forecast. Do we have any questions there? Bechtel: My question on that or guess is on the size of the reserve there is a percent of sales. I think, I looked at that last year as well and is considerably higher than other utilities. I guess we talked about using Calaveras reserves which is certainly a major part of that. Has there been any thought about the size of the reserves in the electrical side and giving some of that back to the taxpayers or the ratepayers. Ulrich: As you recall my reference is back to the quite detailed analysis of why we have the reserve in the reserve policy and point out a number of various on-going risk and single contingency risk that were detailed and we use that as a way to determine what we believe is appropriate amount of reserve. And I think if you also look at the forecast for the increase cost in cost of providing electric services you see that there are rate increases forecast and we are also looking closely at whether the recommendations that are shown here are appropriate and whether we should be looking at rate increase earlier than what is shown on the financial forecast that you have in front of you. Balachandran: Excuse me. I think your question was if I understood right. The Calaveras reserve as a whole? Bechtel: Actually my question was the total electric fund reserves I wish but the Calaveras is of course is a good chunk of that is it not? Balachandran: The Calaveras reserve we still have outstanding obligations to pay the debt service and so it is essentially a one-to-one match of what are obligations are and to the extent that reserve is reduced the effective cost of our Calaveras reserves goes up. Today it is a 2 ½ cent reserves. That’s the extent of the stranded cost and with market prices being 5 cents essentially. Any reduction to the Calaveras reserve will lead to increase cost in rate increases. Bechtel: I understand that. But when you add that reserve in to the total reserves it makes it look higher compared to the other utility funds. Balachandran: That’s right. That’s what John answered. Rosenbaum: Elizabeth. Dahlen: I will just ask one more question on the total reserves just to follow up on that. If you look at the total balances for the water utility. You see them go up and then come back down what is the purpose what is the tracking I mean I see that it is largely the rate stabilization’s but that doesn’t correlate to the increases in the water rate. What is that tracking. Hirmina: I am Lucie Hirmina the Manager of Rates. And when we look at the 10 year financial forecast and we increase rates because of CIP budget is higher or the purchase cost is going to be high, then we look also at whether the reserve is going to be high enough and for the next year, it is going to be steady, the budget for the CIP is going back to normal, operations, the purchase cost, all the increases are already included in the rates so there are no more increases. So instead of raising rates we withdraw from the reserves. That is why the reserves were built up and eventually in the future we withdraw from it. But we UAC Minutes 3/3/04 Approved 4/7/04 Page 25 of 27 keep monitoring the reserves and if we feel like one year something is coming up other CIP projects coming up then we look at another rate increase. This is just like a draft for us to go by. Dahlen: Thank you. Rosenbaum: I just want to comment with respect to the Calaveras reserve that was set up in the era when we expected future energy cost used to be about 3cents a KWh and we worried about stranded cost and Calaveras had a very large stranded cost and that reserve is essentially spoken for basically two-thirds of the bonded each year is coming out of that reserve rather than coming out of rates and the intent of that was to keep Calaveras at a 3cent resource so that reserve will be spent down and it will evaporate at the time that the bonded indebtedness goes away. That policy could surely be changed but it definitely has in my mind it falls in a category that is different from the rate stabilization reserve. Do we have any further questions on the… Dexter. Dawes: Yeah. Could you go over that Calaveras set of numbers again because in my mind I have our average supply cost our revenues are 7 ½ cents something like that and our average supply is I thought I don’t know 4cents or something. I haven’t worked that out. I should have this in my mind but I don’t but this is what I am groping for. Calaveras is about a nickel. Balachandran: I think that rolled in. It is closer to about 9 to 10 cents in an average year. And now these are numbers let me step back a second. It gets a little complicated because there was a debt restructuring done. Dawes: Right. Balachandran: And so the amount of debt in the last few years and this current year are lower then you have a higher debt service payment in future years. But net present value wise it is essentially a 10 cent resource than an average year. Dawes: And our average cost purchase cost all in is what? Balachandran: 3 ½ cents So that is essentially is what Commissioner Rosenbaum said. We have brought down this reserves to essentially a 3 cent reserve. Dawes: When we were in the 15 cents world it looked like we might grab that reserve but it is not the case anymore. Balachandran: It didn’t have to do with what the market was. Here is the obligation. And we said okay we had the projection of what the market was and we said the projection was going to be on average 3 cents started of about 2 and went up to 4 ½. Good number is three. By collecting the CTC we have essentially have locked in the price of that resource at 3 cents. We pre-collected that 7 cents. Dawes: Yeah, I understand I just tend to relate it to market and if the 3 cents is under the current market I think you know we are making out. Balachandran: That is right. That is our portfolio today. So part of our portfolio is a 3 cents resource for about 10% of our total energy that is what Calaveras is. Dawes: When you said our average cost is 4 ½ cents that is taking Calaveras at 3. That is the brought down number not at 10. UAC Minutes 3/3/04 Approved 4/7/04 Page 26 of 27 Balachandran: Yes. I believe so. I have to check on that. But.. Lucie was reminding about the schedule of the reserves draw downs over the next 15 to 20 years that was based on the market price and there was a minimum maximum level. Hirmina: It was approved. The schedule of withdrawal from Calaveras was approved by Council and it ends at the end of the bond debt service. Dawes: Yeah. That was before my time. So I didn’t get the benefit of knowing about that. Thanks. Rosenbaum: Lets move on to wastewater collection. Do we have any questions or comments there? If not then I believe we have completed this item. Dawes: One question Dexter. The infamous wastewater improvement obviously is not in this in terms of capital expenditures. Rosenbaum: It is included under water. If you look at the small print in the footnote where the million dollars appear. This is collection as opposed to treatment. Dawes: No, No. But I am thinking of the capital expenditure to prevent flooding. The bond issue that was defeated and so forth. Am I not recalling right? Auzenne: That is storm drain. Dawes: So that is not part of wastewater? Auzenne: No. Dawes: Okay. I am totally off base. Rosenbaum: Storm drain runs from Public Works Department. Ulrich: We do not discuss storm drains in the utility department. Dawes: Thank you. Bechtel: We don’t have storms. We take them out of all our numbers. Rosenbaum: Alright. I think we are done with this item. Lucie and Tom thank you very much. That finishes our new business. Special Meetings. We think we are going to meet on Fiber to the Home on March 17 and March 18 John any further comment on that. Ulrich: Well. I plan to be here and you will receive the report very early tomorrow morning at your normal location where we deliver it to. It will be on the web as I mentioned later in the morning. So I have just about met my commitment to you to have this in your hands two weeks before the meeting. So the meeting is scheduled for in this location at 7 o’clock in the Council Chambers on the 17th and we have also reserved the 18th in case you would like to continue. We have our consultant from Uptown will be here on the 17th and will be a good opportunity for questions. He will be available on the 18th via a telephone so we may want to plan accordingly. UAC Minutes 3/3/04 Approved 4/7/04 Page 27 of 27 Dawes: Mr. Chairman. I have also made it clear just to remind you that my airplane arrives at 7:30 on Wednesday the 17th pm. So hopefully at 8:30 I will be here and be able to participate. Rosenbaum: Very good there will be at least three of us at 7 o’clock and the new member. And the new member may or may not choose to participate but I guess we will find out. Next regularly scheduled meeting April 7th. Any comment on that John? Ulrich: Excuse me. No I don’t have anything additional then. Rosenbaum: Alright. And as I mentioned last time I will not be here so Dexter will chair that meeting and if anybody else runs into a problem let John know quickly. We want to make sure we have a quorum. Future highlights. There are some dates. These are the dates which either the Finance Committee or the City Council is going to meet. Those dates don’t relate to us do they John? Ulrich: No except that they are probably an opportunity for UAC member to attend particularly the budget meeting on May the 18th. Rosenbaum: Alright. I will put that on my calendar. And I will plan to be there for that. Alright. I guess it is my turn to do the minutes. So let Dee know when the minutes are ready to give me a call and I think Dexter you are next. I think you worked it out to get the Fiber to the Home. Dawes: I didn’t recall that. Rosenbaum: No. Well that is because the Fiber to the Home is a month later than you might have anticipated. Any way perhaps we will share that burden because it may be well too large for anyone person to handle. Dawes: Both days Mr. Chairman? Rosenbaum: There may not be a second day. If we are very efficient and the public cooperates. We will see how well all that works out. Adjournment Rosenbaum: Alright. If there is nothing else we are adjourned. Thank you.