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Home My WebLink About2004-05-05 Utilities Advisory Commission Summary Minutes_________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 1 of 56 UTILITIES ADVISORY COMMISSION MEETING MAY 5, 2004 APPROVED UAC MINUTES Call to Order Rosenbaum: Good evening. This is the regularly scheduled May 5th meeting of the Utility Advisory Commission. Can we take the roll? John, would you start please? Melton: Melton, here. Rosenbaum: Rosenbaum here. Bechtel: Bechtel here. Dahlen: Dahlen here. Dawes: Dawes here. Beecham: Council Liaison Beecham here. APPROVAL OF MINUTES Rosenbaum: Thank-you. This is the time in the meeting when anybody that wants to address us on any topic not on the agenda, may do so. Seeing none, let’s move on to the approval of minutes. Rosenbaum: Do we have any comments or corrections? Dawes: Move for adoption. Dahlen: Second. Rosenbaum: We have a motion by Dawes and a second by Dahlen to approve the minutes. All in favor, please say Aye. All (in unison): Aye Rosenbaum: Passes unanimously. _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 2 of 56 AGENDA REVIEW AND REVISIONS Rosenbaum: Agenda review and revisions, is there anything we should think about John? Ulrich: I listed something that is a little bit abnormal. I put under item 3 and 4 in asterisks, both information items, one the Utilities Quarterly Report and #4 the Energy Risk Management Report, 3rd Quarter Report, and suggested that we have the discussions and questions related to that at the June agenda. With some assumption that we will spend more time on items 1 & 2. And since these are quarterly reports, see if having questions at the next meeting would be an appropriate alternative. Rosenbaum: Good. I think that is an outstanding idea and if there is no objections, then if there are no objections, then that is what we will plan on doing. Dawes: Mr. Chairman. Rosenbaum: Yes Dawes: Mr. Chairman, one question. I think the quarterly reports are germane to the rate increase issues. There are some figures in there that I think do relate to the rate situation. I don’t know if this would preclude bringing those into the rate discussion or what? Rosenbaum: Oh, no. Not at all. One can certainly reference those documents. We just won’t have a discussion of the Quarterly Report as such, but the numbers contained therein, are surely fair game for discussion tonight. Rosenbaum: Reports from commission meetings or events. Do we have any? DIRECTOR OF UTILITIES REPORT Rosenbaum: Seeing none, let’s move on the Director of Utilities Report. Ulrich: Thank you Mr. Chairman. I do have just a number of items in summary. The council meeting on May 10th, there was an adoption authorizing the city manager to execute a custom product contract for the option to purchase custom products from WAPA? We also had a local generation alternatives feasibility study. That will be on May 10th and a strategic plan update. May 18th Finance Committee we’re going to be presenting the Enterprise Operating Budget. Gas, electric, water rate changes and adoption of a resolution for change to fees for the dark fiber. So you might want to keep _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 3 of 56 that in mind as we go through the items tonight. Appreciate response and support when we go to that meeting. Also on May 24th, at this point we anticipate the continuation of the fiber to the home, going to the Council. June 7th adoption of the resolution affirming prior commitments for 2005, 2006 and making new commitment for Palo Alto’s contribution level for 2007 to the funding of O&M for the Central Valley Project power facilities. This is one we have done for a number of years. And then June 15th would be the budget adoption. We are also, as Mr. Dawes alluded to, when we are talking about the rate proposals; I’d like to call your attention to some items in the quarterly report which I think are going to be indicative of the kinds of concerns we will have for going forward costs. Both in transmission and other deliveries of energy to Palo Alto. And specifically, FERC is expected to rule on May 6th on regarding the question whether PG&E has the right to pass on prior charges to NCPA members loads. And that can have an impact, of course, depending on how that is concluded. FERC had an administrative law judge ruled in favor of PG&E on the western PG&E transmission costs dispute. I won’t go into all of those details, but it does have an impact on the ruling we had earlier about passing on charges for 2948A. So these are costs that are, depending on how litigation comes out, will be impact to us going forward on cost. ISO, we keep hearing from them on an almost daily basis now. While they forecast ______capacity and resources to cover expected loads, barring as they define transmission outages, natural disasters or local and national catastrophes. Even though we predict an all-time record peak for August, which will be 4% higher than last year’s peak, and it all depends on weather and other conditions, there is only 1600 megawatts of cushion or reserve for variations in actual operating conditions. Forecasts for narrow margin leave little tolerance for variances in peak demand transmission outages and constraints, and or availability of generation. I frankly like to quote that, as I could not find all of those words on my own to describe what may be coming. It is clear that we need more generation, particularly in the Bay Area, and elimination of transmission constraints in order for us to feel comfortable that we can have an adequate energy supply. Also we have heard from Governor Schwarzenegger, announced on August 28th he wrote a letter to the president Michael Peavey of the PUC where he sought some direction on electricity issues. They include allowing IOUs to develop diversified portfolios, entering into long term contracts without risk of after-the- fact reasonableness review. Same kind of thing we think is important. Implementing a competitive procurement process to obtain least-cost prices, adopting the energy action plan recommendations that prioritize energy efficiency, conservation, demand, response real time pricing and renewable energy over fossil fuel power generation. Supporting the procurement of 15% reserves. Accelerating the phase in of resource adequacy requirements from the current 2008 _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 4 of 56 deadline. Acting now to take advantage of relatively low wholesale prices. Supporting creation of a core/ non-core retail market structure. And non-core customers should bear full responsibility for risk. And fostering competitive wholesale and retail electricity markets that are appropriately monitored by regulators can lead to California becoming the job creation machine it once was. These all seem quite clear and areas some we have heard before and looks like an attempt to foster both the wholesale and retail competition and monitored by regulators. Ulrich: The last item is Trinity River the draft supplemental environmental impact statement was released on April 23rd. It included updating to the alternatives described in the original October, 2000 EIS for the Trinity River and identified preferred alternatives. It included the same alternatives, with a couple of revisions as the original EIS with one additional alternative. The designed preferred alternative is the same as in the original 2000 EIS the Tully Valley Relations alternative, which according to the summary does not appear to have been modified from its original version. All of this can, will most likely reduces flows and the amount of energy in our western contract. Any Questions? Rosenbaum: Thank you John. Do we have questions? George Bechtel: John, the Governor’s energy task force presented their report, I believe, two weeks ago where it was the letter you mentioned coming from the Governor to the PUC the entire recommendations or report, or is that a separate issue? If it is a separate issue, have we looked at what possible impact it might have on us? Ulrich: We have not done that. We got this report when we were back in Washington, DC. NCPA, as you know, is looking at these are some pretty broad statements. But the overall package appears to be looking at ways to make the market work. And particularly allow for large customers to have more choice. And with focus on energy conservation and renewables. So what that really means to us, how much that applies to municipal owned utilities, we will have to look at. It is his letter that I am quoting from, not any earlier report. Bechtel: So then basically then you are saying that you will continue to look at it, but you don’t have any specifics at this point. Ulrich: Unless you Girish, you have any updates in the last few minutes? Balachandran: No. NEW BUSINESS 1. Fiber to the Home _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 5 of 56 Rosenbaum: Are there any other questions for John? If not, let’s move on. I don’t feel we have any unfinished business. The first item of new business is fiber to the home. The council met and heard a report from our financial experts and essentially they referred the financing aspects of fiber to the home back to the utility commission which is the purpose of the meeting tonight. John do you want to start off? Dawes: One second, I lack the handout which all the other commissioners have and which was not at my place. Ulrich: I’ll bring one up. Sorry. Ulrich: Joining me this evening, Blake Heitzman who you know, Manager of Telecommunications. And my primary partner this evening Joe Saccio, Deputy Director of Administrative Services. I’m sure that you are aware that this has not been, particularly in recent months, a utilities only project. We have been working closely with other departments of the city. And particularly as we have attempted to move toward how to make a proposal and project as fiber to the home, financially viable. I have leaned on Joe and his staff under Carl Yeats to help. And you have heard from them before both in the development of the business plan and the risk management view and this evening Joe is going to move further into ways to finance the project. We are going to discuss the financing options for fiber to the home. Going into some detail why the business plan based case financing option, at this point, is not viable. Look at some of the available options. What additional analysis we believe is needed before staff makes a specific recommendation on the future of fiber to the home. And then present some next steps in the process. In our report, we thought it was important to go back a step. You listened to a lot of input from the public. You received our staff report and our recommendations at the last UAC meeting and voted to move this forward to the City Council. Subsequent to that, and at the Council meeting we presented information that you’re not privy to, because it was not a part of our UAC report. We felt that and pointed out to the council that we should bring that back and make sure that we presented it to you and you knew everything we know about it. Then allow you to make additional judgments or have us do additional analysis on the product. So we are back this evening. In a little while after Joe’s discussion of alternatives, we can talk about next steps and what to do going forward. So we are going to present the fiber financing options and go into closer scrutiny that was shown to the Council. You have a copy of it in front of you. Additional work has been done on it since the council meeting. We will answer questions about these options, discuss a new financing option, explain why fiber financing is different. Given the legal terrain in raising resources, money in _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 6 of 56 California newness of public fiber offerings to the bond markets and discuss why a revenue source or security other than fiber revenues is necessary. So I will turn to Joe and thanks for coming and go for it. I’ll point out that copies of the presentation are up here in the front as well a copy of the financing options. If you don’t find one available, share it with someone as we go through this and let me know if you would like to have a personal copy if one is not available to you, here. Saccio: Thanks John and good evening. As John mentioned, we are going to go through the options presented to the Council last week. John’s last point was why does a new revenue source or security or pledge other than FTTH revenues necessary. This Graph shows you what we have here are the net 20 year cash results. As you may remember, a 6% interest rate was included in the model and as a consequence of that and holding every other variable steady, it was expected that in year 20 the bonds would be paid off. As I discussed in the model, as well as a positive cash flow of $54 million. So that line, it should be, right after the 5, the line going up shows at 6% it was $54 million and the reason we have that is the interest rates on the X axis show you how the net cumulative cash flow decreases as the interest rates go up. This is just one variable that we are talking about here. So with that as a backdrop, you have one chart in front of you that lists all of the options and we broke it down into individual components because last week it was difficult for the audience to see. So I am going to go through each option as I did last week and answer your questions afterwards. I mentioned last week that the base case scenario was a utility revenue bond and that what was incorporated in the model. We’re familiar with utility revenue bonds, the Commission and Council and public is. We have used those for water improvements, etc. The reason for coming back and saying that this wasn’t a viable option as it was before, and that is basically is that you cannot charge the electric customers that are unrelated to the utility. If you are charging them for a service that is not related necessarily to the electric fund, you’re basically charging them for something that is not related to that particular service. That is an issue that defined more clearly. _Dawes: Could I ask a question on that Joe? How are we able to support our current dark fiber utility in “ under the electric fund” today? Ulrich: Do you want me to answer? Saccio: Sure Ulrich: That was my first obvious question. If you go back through the recommendations back in 1997 and then again subsequently in 99 and beyond, these were beneficial projects related strictly to the utility. The utility had a dark _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 7 of 56 fiber system in place and it was justified for use in operating the utility. Subsequent to that, and it is a key area to consider going forward, is that it is appropriate to utilize that asset once you own it for other purposes. In this case there was a loan made and subsequently being paid back for this additional venture, the dark fiber. The trial also been considered an appropriate use of funds to try out this project as a relationship with the electric fund. But further expansion of that into something that expands the business, of only the use of fiber, not related to use for operating purposes for electric, gas or water system; is not an appropriate use of those enterprise funds. That’s my non-legal feedback on it. Dawes: Thank you. Dawes: Could I ask a follow-up on that John? You mentioned there was a loan made at the outset of this process. Could you describe that and who was the lender and who was the recipient and how that worked? Ulrich: In simple terms I know was about $2 million that the electric fund loaned it for use the purpose of developing and building the connections and the work related to the dark fiber. As revenues have been received, money was paid back for that $2 million. As you recall, quarterly we give you a quarterly pro forma showing those cash flows and the expenses and costs related to that. The money goes back to paying back the loan. Dawes: Yes, it’s a very good report. But I wanted to clearly understand the situation with the loan. In your earlier statement you suggested that this loan was made solely for the purpose of building a dark fiber ring to service the utilities needs or was to connect the operation on the other side of the freeway to the city hall and the other operations of the utilities. Ulrich: No the dark fiber ring was built with enterprise funds for the operation of the enterprise funds. The loan was for the dark fiber business venture that goes beyond the operation of the fiber system for the utility purposes. Dawes: That sounds suspiciously like going into the communication business via a loan from the enterprise fund. How does it differ from that? Ulrich: I don’t mean to mincing words I know how to say it other than it was for the business that was defined and outlined for and approved by the City Council for the use of those funds. It was not to go off and do the kind of business in the fiber to the home. _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 8 of 56 Dawes: Was there a statement that supported that loan at the time? I was not on the UAC at that time and I would be very interested to see the verbiage, because it does again that this is a communications enterprise that was being launched with a loan from the electric fund and my thinking is that we are going down the same path and if it is not possible to go down that path I am very curious to understand why the earlier load is different from say a loan that might be made to permit citizens to enter the fiber ring and not just businesses which that earlier loan was for. Ulrich: Do you want to say anything Blake? Heitzman: I can say that there is a document, that I don’t have with me, but in 1997 -98, that period of time, there was a city council report that described the process and the given the money to the project. I would have to bring that to you at another meeting. Ulrich: I think it is important. Of course, you can proceed any direction you want, but the decisions were made back in 97 shouldn’t be a way of interpreting how the decision should be made in 2004. I think a lot of addition thought and additional rules have changed and interpretations so. I think today’s recommendation by our legal staff is based on recent analysis and very recent decisions. Dawes: I understand what you are saying John. Was the earlier decision vetted by the legal department as well? They did not raise these issues at that time. Ulrich: Well as you know, I wasn’t hear either so I couldn’t answer it from personal knowledge, I would have to go back and review the report and ask some questions about it. Heitzman: There was extensive correspondence between legal and staff when the report was written but the combination of all of those parties you would have to go back and dissect the report to see the conditions that were set forth. But there was certainly involvement at that time, but the legal staff, the utility staff are all different people, the laws have changed since then. Dawes: I would assume that our current legal analysis would have outlined the changes that would cause a different decision to be made at this time. Ulrich: I think you have to reach that conclusion. There has been very thorough work done in this area and we don’t think we would be here telling you what we are telling you this evening. _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 9 of 56 Dawes: I guess to cut to the chase, without a revenue bond solution, that this is a project that is not going to happen. I think that it is very important to understand the differences between launching the communications service in 1997 and launching the communications service in 2004. And whether or not if there are new laws passed decisions handed down, FCC or whatever have changed the conditions. At this point, I haven’t heard what those conditions might be other than the legal staff have studied it now and they think it is a poor idea. And it’s not clear to me what conditions have changed between then and now. Ulrich: I think I know that I probably share some of the same questions that you have. One think I have learned when you find out new information and you look at the amount of work that has been put in by legal staff and financial staff you better stand back and listen to it and very strongly consider it. The best I can do is provide them with material and the latest thinking and assure this has not been done in a low key manner. So I would suggest we go through those financing things and if you still have the same conclusion then we will just keep working on it. You know that it is just part of the public process that we need to do. This is a big deal. SOMEONE? Good. Let’s do that. Rosenbaum: Before we carry on I recognize we are interrupting your presentation but clearly in the minds of the UAC, this is the big deal. For several years we have taken it for granted that this is the obvious way to finance fiber to the home, we have all read anecdotal accounts of what has gone on in other cities. There are dozens perhaps over a hundred municipal utilities that have gone into the telecommunications business. My reading of their history is that many of them did just this, they pledged the revenues of the electric utility to fund telecommunications. So I guess, my question is where is the hang-up? Is it in the city code? Is it state legislation? What is the problem and why can’t it be overcome? Ulrich: Unfortunately, I tend to be in this case more of an optimist than I should be. I think you can see from the amount of work staff has done over the years, we have looked at it as a way to move into this business and provide this service to residents and businesses in Palo Alto. We have been moving in that direction been pretty clear this has been the way to go. Looking at the work that has been done, my best summary is that there are things that either decisions or analysis that’s been done recently to show there is areas by doing something in moving in utilizing enterprise funds there’s a level of risk that would not be there if you followed the other financing options. _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 10 of 56 Rosenbaum: The risk being what? Ulrich: The risk being that its an inappropriate use of funds that are being paid for by electric or gas or whatever enterprise funds you use towards a business that is not the same as the one they’re buying service for. Rosenbaum: Inappropriate as determined by what body? Is there something that one can point to which says precisely this you can’t use electric revenues for telecommunications? Saccio: I think where it cuts here the ideas where we do a utility revenue bond your pledging the utility revenues both the revenues as well as the reserves as a security for the bond. And is it appropriate to use rate payer money when for that security when the rate payers are not necessarily approving of the use of that money for it. One could think of the incremental amount that is being used through the rates or being charged to the rate payers as something of a special tax. Or incremental amount that needs approval and we are going back and looking at various propositions that have been passed and the law where there’s a determination that these relationship is quite a different magnitude than in the past. The city has made transfers, the term transfers must be used, not loans but transfers to other funds. As you may remember, with the general fund used some money for the assessment district for the garages as seed money, some money from one of the parking in lieu funds for that. They were in the million, two million dollar range all together and the dark fiber was two million and one could said that order of magnitude, as long as those monies are paid back, you have an interest in it and can use those monies for those purposes. But what I think we are talking about here when we talk about a thirty two million dollar capital project it bears a level of scrutiny that some of the smaller transfers that are paid back are little less open to scrutiny but would be paid back. But I think one of our original desires was to try to create a link with the electric fund but we found that legally that couldn’t be the case. What I would say that I read the preliminary official statement in Alameda today for their 2004 bond anticipation notes and they state very clearly that they are not pledging the revenues of the utility itself as any obligation for issuing those notes. Ulrich: May I suggest that we finish part of it because there is maybe some potential sunlight there to discuss and I think you should have a full part of it and then you can burrow in on these areas back again and we’ll try to solve it. Rosenbaum: Fine. A good suggestion. Joe, please carry on. _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 11 of 56 Saccio: Thank you I believe we have talked about this. Let me just go down that column for you under A because those columns will be carried across. The tax exempt has a question mark next to it and it says TBD. Just in general, without getting into the specifics, if a general rule of thumb if 10% of the activity of the enterprise were to be for private purposes then we get into an issue that it would have to be a taxable bond as opposed to a tax exempt bond. We faced that issue when we built out from the garage over on Lytton Avenue. Is the city required underneath that base case to finance the project if it defaults? Well yes that’s where the electric fund and we thought was the scenario it would work that would be the case. Obviously the primary source to pay all of the expenses and debt service are FTTH ___________ is the financing costs are always determined, or at least the interest rate costs on the debt service are determined at the market at the time the bonds are sold or bought. We believe that one of the reasons we went down that path was because we always got really good ratings on utility rating bonds at the low end or the end the tax exempt rate we believe when we looked at it was 5.6%. The upper end for taxable would be 8.25%. One point we would like to make when we issue a bond it can only be for capital requirements and you can not issue a bond for operating expenses. And we still have a challenge in finding in how to fund money for the operating and non-capital needs so that other piece is a challenge. We as I explained last week, we have talked with, this is what Alameda used with bond anticipation notes, while mainly working with private placement or private investors. You may have heard financial advisors say last week it has been difficult to find a private investor, although it is not impossible but he also believes the interest rates we would face for this venture would be high. Between 7-14% if not higher. One of the advantages of this is that there is not a legal requirement since this person is putting up their capital and is receiving a reasonable return on their investment that we are not legally obligated to pay back their equity but that does raise questions about future debt issues and our credit rating. The certificates of participation, or as the newspaper referred to them today as the certificates of appreciation, the certifications of participation are basically a lease arrangement. We have used these to fund improvements to City Hall. There you are basically pledging an asset of the city, such as City Hall, as collateral to the purchasers of these certificates. This does involve the general fund, It doesn’t require a vote of the residents. This is one vehicle that cities use to get around the need to have a vote. But there is no new revenue source to pay these certificates. It has to come from somewhere. Either it is a new revenue of some kind or you need to reduce expenses in the general fund to pay for this. We did use certificates for that build-out on the garage and the revenue source to pay for those the rent we expect to get. In this instance we don’t have that. The attraction again of this is when you pledge an essential city asset, if the interest rates are relatively low as shown over there in row 7 and the people that are _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 12 of 56 investing have a high degree of confidence that you are going to meet your obligation. Enterprise debt, if this were a separate enterprise the idea here again to enhance the credit reduce the interest costs and attract the investors you’re obviously going to be using the revenues from the fiber to the home system to pay your expenses and debt service but that would to an outside investor rather than weak credit you would have to have something in addition to that and a special tax would give investors a greater degree of confidence. A special tax in the State of California means a tax dedicated to a very specific purpose like fiber to the home or a libraries or whatever needs a two-thirds vote as a result of proposition 218. We again with a special tax, a dedicated tax you’d experience a low interest rate of 5.8% tax exempt. Next, we discussed this last week an assessment district. The closest example in this city on an assessment district, at least in my memory and we used this both in the California Avenue as well as downtown is the garage is University Avenue down town assessment district. That is a very small segment of the city area and we went through rather extensive procedures as outlined in proposition 218 and note that we have great support from major property owners downtown. But assessment district where you basically have to have a ballot whereby and your need 50% plus one approval. I won’t go into the arcane aspects of an assessment district, I can if you like, but basically the idea here is that the assessment to the parcel is proportional to the benefit that is received. So if a parcel were getting two times the benefit of another, they would have to pay two times the amount and they get two times the vote underneath this arrangement. Giving you some of the basics of 101 on this assessment districts. We believe the interest rate as we experienced with the bonds for the downtown district generally is a lesser credit, so to speak and the interest rates would be slightly higher there – if that were the case. A question was asked last week if, and I think we need to clarify that by the council members, the assessment would envision, at least at this time, would be for the capital piece. When you have an assessment district, everybody is basically buying in to the idea they are going to be accessible to everybody in the city and you would be build it out to every single home. At least that assessment would be to meet the costs of building it out. The other piece, the service everybody would have a choice to either use it or not use it. In terms of the service itself. And that would be a different charge to each person so that as we envision it right now, the assessment we also hope that this a lot more broad council because assessment districts are doable, but they’re complicated. Melton: Joe, before you move off assessments we go back. Is what you are envisioning a single city wide assessment district? That is one assessment district that funds the entire build-out of the backbone of the FTTH? _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 13 of 56 Saccio: That’s a very good question Commissioner Melton? We did talk a little bit last week about rolling it out as smaller assessment districts. And we have to talk a lot more, but in our last discussion about it, it probably makes more sense to do it as one whole assessment district. The complication is that if a little district were far away from the ring and you had to build it out to them, the cost to them has to be proportional again mentioned before it would be higher. So then suppose you then institute then if they would be closer. So if another district comes along and they are closer to the system then they need to pay back your first district some money. Because you now have a new user of the system so administratively it’s something of a nightmare. That makes it more complex. So the recent thought is to do it as one whole district. I would say one other thing about assessment district and leave it there, that basically there represents a lien on a property in an assessment district, it actually the only major distinction between that and a properly related fee which I will discuss right now. You may be all familiar a properly related fee because we went through this with the storm drain. Basically that what the financing for the storm drain improvements was a methodology that was a property related fee. That’s a different financing mechanism, according to proposition 218. It’s really not much different than the assessment district. There is still the idea that the fee someone pays has to bear some relationship to the service they get. It’s not a lien on the property, it’s a fee and that fee could be put on the utility bill, much like we envision for the storm drain and there are probably other ways of doing it as well. The voting requirements are pretty much similar to an assessment district. It is sort of a half a dozen of another on that. But it is something that we got guidance on that is also available and we have to do a little bit more work to define the differences but I guess from what I can gather there aren’t really that many differences. The only one maybe there may be a little bit more flexibility under the property related fee to have somewhat more similar charges as opposed to the assessment district. In the assessment district there is something called the general benefit. So if an assessment district we go to levy something on a post office, they can turn around and refuse to pay that then the city would have pick that cost. Just to summarize, there not terribly different and we are going to have to do a little more work defining that for you. Someone? Joe is that a mail in ballot for the property owners or how do they vote on that? Saccio: It’s a mail in ballot on the property and it was a mail-in ballot under the assessment district as well. That’s correct. With that, any questions? Ulrich: I think this would be a good time to quiz Joe these items and see what you think. _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 14 of 56 Rosenbaum: Do we have questions, Dexter. Dawes: Joe I would like to discuss C a bit more, the city certificate of participation. Actually I was forwarded some material today that indicated that Tahoe Donner is pursuing this route and actually is not pledging any enterprise funds or city guarantees. It seems to me that we are building an asset which we can pledge. We are building an asset which will generate revenues which we will pledge. The Tahoe Donner bonds are listed as tax exempt, I guess they are TBD came down on the side of tax exempt, and I have no clue as to why they are and maybe we would not be but I would assume at the end of the day ours would be to. As a person that was involved in the corporate finance for some time, clearly there is more risk here than there are for bonds that are supported by other revenues be it that are enterprise or general fund. And the new business would expect to pay higher rates. Could you develop the scenario more fully under C. It seems like a relatively attractive proposition, less so than A but depending upon how the details would be worked out could be an attractive proposition. Saccio: Perhaps a first time on Tahoe Donner, we tried to investigate that and don’t have a lot of information on it. It makes sense, from one approach, to use a certificate of participation because you do have the higher interest rates and they are very attractive to investors. I don’t know what source of revenue Tahoe Donner would use to pay for that. That would be a very interesting question to ask. Dawes: It’s the revenues of the system. Now the term sheet is available on the internet and I am sure can be forwarded to you if you don’t have it. Saccio: I would wonder, my understanding of the Tahoe Donner that it is a relatively in need of having some kind of communications and I don’t know what their penetration rates are? Dawes: It’s an overbuild as well. Saccio: It’s an overbuild as well. The model as it stands does not seem to indicate that there would be sufficient revenues at least in the early years, to cover the debt service on this. I understand your question about whether the asset in the ground could be used, and we did talk about with bond council and the financial advisor and their response was that it’s a very different asset. It’s a new under the ground asset. It is a very different from an essential asset like City Hall and therefore the credit may not go over as well as an essential asset on the city for COP. I think the _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 15 of 56 central question here is, at least in the early years and until those revenues come up, what revenue source are we going to use to pay debt service and costs? Dawes: I understand that working capital and start-up costs are a different issue. I haven’t investigated that situation enough to understand how they expect to cover that other than they do have holiday on paying interest as a roll up for two years they start in on servicing that. So it looks like it is probably tailored to special purpose investors. But again I don’t know. Have you ruled out certificates of participation? You sound sort of cool to the idea. Another thought on the pledging of assets, communications assets are bought and sold all the time. We had a local situation here where the system has changed hands twice in five years at stepped up values at each time the Cable Co-op which some termed not a very successful operation. Mr. Moss of course would disagree with that. What sold for substantially more than it cost to build it. Even though they had operating problems throughout the period. To me it’s a very pledgeable asset, practically if it includes the customer base that would naturally go with it, so it seems to me to be a natural thing to look at very closely. Saccio: Well we are laying it our as an option to be considered. That’s why it is down there. This isn’t meant to be pessimistic in any way, but ultimately if any enterprise were to fail who is going to pick up the cost for that? If everything when very well obviously there would be no problem, but if it were not to succeed the general fund would be on the hook for that. Dawes: Not if you didn’t pledge the revenues. The Tahoe Donner situation they very clearly in bold face all caps say These do not carry any guarantee by either the enterprise funds or city revenues. Saccio: So they pledge no revenues? Dawes: No revenues other than the revenues that the asset produces. Saccio: Well we can do additional research and get more information for the next go around. We can look at that. My understanding was because it was not an essential asset that it would be a weaker credit. Dawes: Has there been any sensitivity analysis other than the one chart you showed about the disappearance of the surplus cash at the end of 20 years to financing? Aren’t there many variables that come into play here including things that I mentioned earlier – stand-off and payment of principal and some cases interest, often interest is paid out of bond corpus for the first couple of years. And it very clearly states that in the prospectus. That may be the case in your garages, _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 16 of 56 I’m not sure. But there are financing techniques that look at the sensitivity of a project, particularly in the first five years, that’s where it kind of makes or breaks it and it’s often a 150 or 200 basis points doesn’t make a lot of difference in that initial time frame as far as the overall success or failure. Mean looking at a 20 year cumulative thing the numbers get very large, if you are looking at dollars per month income vs. what you are paying out in expenses including interest. That gets to be a very small number. So, I would be most interested in thinking or looking at sensitivity analysis before things were completely dismissed as being to expensive. Saccio: Well I think we need to take a look at it and come back to you on that. Rosenbaum: Mayor Beecham wanted to comment? Beecham: I have some slightly more current information on Truckee Donner. I spoke with them this past week when we were on a joint trip to DC. My understanding is that they have not consummated their financing arrangement. Their financial advisor advised them that they had a potential investor who is heavily considering it. At this point, the investor is not being made public, necessarily, even to the people within the Truckee Donner utility. So until that financing is consummated, we don’t really know if this is possible. The collateral they are talking about is strictly the system. They do have some other things that are a bit unusual. They have a very weak system and are poorly served in a number of different areas so that may make the system inherently more valuable. Not to say that it can’t be done here. And certainly not to say that if they are successful there that is a major indicator that we should consider more. It just that at this point we don’t know yet. Dawes: Sorry it’s very clear that it has not become a done deal and I didn’t want to imply that. This is a term sheet which specifies the terms and conditions of the proposed financing. Ulrich: Maybe we have repeated what was said at earlier meetings. I think if we had been able to find in California that is a similar financing situation that meets our needs and has been vetted through a number of places, we would be here with a proposal that was much clearer. But as Mayor Beecham points out and Joe Saccio that everyone of these financial ideas are either not similar to Palo Alto or they haven’t been done. Either we spend more time looking at it or as you can see from this discussion we are pointing out the weaknesses and laying out a very conservative approach on going forward. Saccio: We did get a question about Provo, Utah. That they are using sales tax, I _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 17 of 56 don’t know the details as a back up or I take it as a pledge as some time. It is interesting to note that and in California I don’t know how they are doing it in Utah, but in California you have very strict rules about what you can use or where you can go for your resources to be able to have a credit like that. As John was saying, we operate in as a backdrop, a very unique environment in order to find resources. Rosenbaum: Do we have further questions for staff? George Bechtel: Joe I wanted to talk a little bit about or ask questions about the sales tax approach. I also, courtesy of one of our residents, mentioned the Provo system and it just my information was sales tax. But we get $18 million a year from sales tax into the city of Palo Alto that goes into the general fund for many, many uses. You’re saying that California is very restrictive. Are you saying that if sales tax goes into the general fund it can only be used for certain things within the general fund? Saccio: It’s a general tax and can be used for general purposes. It is not for any specific purpose. What we are saying is that the $18 million is already called upon to provide all the services. I am sure all the commissioners realize that we are in a difficult financial situation right now so I would just say that those resources, just like another general tax, a documentary transfer tax, a transient occupancy tax have dibs on it to provide all of the general funds services. If in the event that a service went away, or that there was some windfall in taxes it is a policy decision on the part of the council to determine how to use those revenues. Bechtel: So basically we are back to the point of saying that we will be hard to investor or bond purchaser or whatever that the fiber revenues could be guaranteed. So we would need a back-up. So we can’t use our current enterprise funds and we are back to general fund, or to some special tax. So on D, let’s talk about the enterprise debt back by a special tax which is option D. If the primary revenue would be fiber to the home revenue, secondary would be special tax revenues. Now could it be put that such that those special tax revenues could be placed on our monthly bills if and when the fiber revenues were insufficient. That would probably be the scenario; we would not have to have that special tax from the get-go. Is that correct? Saccio: Yes I think that in all of the scenario’s from D thru F the assessment or the property related fee or the special tax would actually decrease as long as FTTH revenues increased. The whole purpose of a special tax is to provide the investors with a sense of security. That they will be repaid and to keep interest low and to have, basically a back-up. So it’s an additional pledge. But your absolutely _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 18 of 56 correct, if the fiber to the home revenues were to be able to cover all of the costs and debt service or part of it then that special tax would go down. Bechtel: If in fact we were able to have a holiday on payback as was mentioned by Mr. Dawes as Truckee Donner is trying to get. As we build out our system becomes more valuable. As we get customers, even though it might be 5% penetration, it becomes much more, it becomes an operating business. What about financing at that point? Is it not possible that we can make a deal where our investors see a more valuable asset, interest rates would drop, it would be possible going with an ordinary plan, no extra bonuses are sold from extra subscribers, or whatever an improving California economy. Do you thing that something like that could be sold to investors? Saccio: Well I think that’s something that certainly could be explored. I’m not saying at all that our financial advisor said no to this. He thought it would be difficult to find an investor and he did have experience with the Alameda deal. So I don’t think you could exclude that. And that I think your question and Commissioner Dawes’ question is a legitimate one. Somebody would have to evaluate how rapidly you get subscribers. It is possible you can do small financing like Alameda did and piggy back and then do another financing that is based upon the results of the program. So that’s a possible scenario. Bechtel: Thank you. Rosenbaum: Further questions? Elizabeth Dahlen: Just to follow-up on that comment, then you are talking about not building out the entire system in one point in time but actually like Alameda piecemeal. Is that the logic? Saccio: That’s the way it is done in Alameda – I believe that was done and I guess it depends upon the confidence of the investor and they probably would not want to provide some $30 odd million in capital would probably would be but rather in smaller increments over a period of time less than five years. Dahlen: The only reason I bring that up is that substantially changes what was presented in the business plan in how this model would move forward. Doing this in a piece-meal fashion is completely different than our understanding of what was being proposed. I just wanted to point that out. Ulrich: I’m sorry was that a question? _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 19 of 56 Dahlen: No just a point I wanted to make that it is a very different concept than what we understand to have been the proposal. Ulrich: Yes the concept is to build it our to everyone in a relatively short period of time. Rosenbaum: Are there any further questions for staff? Ulrich: We have a bit more in our presentation, but I wanted to make sure. Rosenbaum: Well why don’t you continue? I guess you have some options and a schedule there. Why don’t you tell us what you anticipate going forward. Then we have a few people from the public that would like speak to us. Ulrich: You have heard alternatives and as you know made clear comments about it a month ago or just a few weeks ago, we didn’t have those on our radar screen. And we think it is important to do is to take a short period of time additional to complete the financing options analysis utilizing the feed back and comments and information from all of you. Assess alternative financing which may be based on also on utility related uses. That’s been brought up a number of times. Some of you have brought it up as how much and alluded to it in the discussion about the dark fiber. Whether that’s appropriate to look at some additional utility related uses and the ability to quantify them. And determine if that changes the financing options or the cash or the economics of it. Also to continue doing research and potential for partnerships on some of the services. As Mr. Beecham pointed out earlier that the mayor had discussions with others that are experts in this field while we were back in Washington. And we had meetings with others set-up in the forth-coming weeks. I wish we were able to give you more information. What I am trying to point out is that we are committed to doing additional work. We are still committed to take this information and your comments and recommendations to the city council on May the 24th and will also allow us to answer the questions that the council would solicit from its members and committee and give us an opportunity to answer those. And then we would recommend that after that, depending on the outcome of the meeting on the 24th, would be to come back on July 7th which would be the normal July meeting with staff recommendations with all the material information we learned including if anybody has been able to finance with we endeavor to do. And then go back to the council in August with specific recommendations with regard to the future of fiber to the home. _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 20 of 56 Now this looks like one – additional work and a commitment of a number of people but it also demonstrates that we think its important to finish this off with the new information we have so that decisions something that we have put a lot of money, time and effort into and community participation gets heard and then gets finalized. The last part is that we also believe by doing this limited amount of work it will not impact some of the high priority work in its top 5 or top 6. Going beyond this and with support form the city council would give us direction on where to go and spend money on this going forward. Rosenbaum: All right, before the commission takes any action, let’s hear from the members of the public. I would urge you to be as brief as possible. For us we have this as an extra credit activity tonight. We have the utility budget that has yet to be considered. Bob Evans to be followed by Bob Smith. Bob Evans: Thank you. As many of you know that I am in favor of fiber to the home, just critical of the business plan. Dexter and I actually had a discussion or somewhat of a debate at a neighborhood meeting. It is clear to see where this business plan is going. We have progressed to the point where we have figured out how we are going to finance it. So in order help assist it become very viable what I would like to do and suggest based upon my experience which goes back to 93 when I established the first ISP storefront in Palo Alto and the cable Co-Op. Helping it become the first cable modem on the planet. There were five. I too have a little cold, like John. Although we haven’t met to discuss any of this. Just joking. Business customers have a more critical requirement for network connectivity than home users that are doing their homework with Google. Fiber internet center proposes a solution that will address the fact the current business plan is under staffed and under budget to address the critical business requirements. Specifically to the current business plan page 25 city offers businesses six megabits of bandwidth for $99. Ten megabits of bandwidth for $149. And then the other concern on page 65 where the city plans expect and states that it expects to pay upwards of $250 per backbone megabit connectivity for bandwidth. I am sure that you can see from A and B the correlation there of the negativity. And then on page 85 at the same time projects for this critical need they only need only one data technician for the entire network. So what FIC proposes, that like the telephone service section in the business plan, that wholesaled, outsourced or whatever to a SELC ?; the city do the same thing with the business network offering and FIC will pay the city the highest fee stated – the $149 for each business customer regardless of the business level of service purchased. The burden this reduces is pretty large in the plan. The city experiences zero backbone connectivity costs at this rate. You see this is number B goes away at the 250 _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 21 of 56 megabits for the businesses. And it also reduces the additional staffing of the one data technician to address the concerns of the business critical needs while at the same time it allows this one data technician to focus on the connectivity needs of the home network user. With this proposal the business plan will realize and additional savings, as it relates to business product offering expenses, sales, marketing, payment center and other general sales administrative expenses. This approach will help make the plan more viable in its efforts to provide its citizens a more community focused solution with realistic fiber to the home financial goals. I have that in writing for all of you. Rosenbaum: Thank you Bob. If you leave your handout it will be distributed to everybody. Bob Smith to be followed by Bob Moss. Bob Smith: Good evening. The discussion earlier about the appropriateness of using utility funds for the dark fiber project also raises a similar question about the use of that money in a trial. My understanding was that $600,000 was spent subsidizing the trial initially and about a million dollars in salaries. That may not seem like much compared to $32 million, but it is an awful lot. Somebody has to be looking at the appropriateness of that as well. Plus the appropriateness of the base case. Also someone mentioned the sensitivity analysis and since there was no sensitivity analysis in the business plan of what would happen if certain assumptions were incorrect. I have reversed engineered the plan and looked if the rollout was not as optimistic as it had been proposed in the attachment D and I found that was a very huge factor, especially in the first few years, Because the plan does indicate that you are going to have the majority of the roll out by 2007 with 2006 the largest year. I toughly question the marketing assumptions on that, but that’s not really germane to the points here tonight. But I think it is important if you are asking about sensitivity analysis that’s something that needs to be done as well as looking at the costs of the resources as it were in the plan. With respect to the funding options, two of them require two thirds vote, I believe that to be completely infeasible and I think putting that to the voters is simply a matter of killing the project. The two that require 50% would require a little more scrutiny but I believe we would have a great deal of difficulty. We are looking at perhaps a 30% market share for these services. In another words, thirty percent of the people will buy one or more services. To believe that 50% plus 1 person are going to pay for a tax or an assessment a fee when only 30% plan to use it, sounds infeasible. So if in fact, if this is a critical project for the future of this city as we have been told and a risk free project, then I would say _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 22 of 56 option C is the only viable one left here. And if city hall has to go, it has to go. Presumably if it as safe as we have been told, then it is not a problem. I do invite you to look at the entirety of this plan . I was not particularly happy that there was no more detail in the plan in Attachment D, than there was. I think we are beginning to see some of the problems coming out in that plan. Thank-you. Rosenbaum: Thank you Mr. Smith. Bob Moss to be followed by Sandford Forte. Bob Moss: Thank-you Chairman Rosenbaum, commissioners and Mayor Beecham. Since we are talking primarily about financing tonight, I am going to concentrate on the economic issues. First getting back to the dark fiber, when that was approved in 97, the basis was not that it was going to be serving or even primarily city facilities. They we were going to be serving city facilities, yes. But you don’t need 288 strands to carry information between the municipal service center and downtown. It was predicated on subleasing dark fiber to industry and businesses in Palo Alto. Those leases would pay the capital operating costs. And that is exactly what has happened. So we have a precedent of selling revenue bonds from the electric utility to put in fiber. If we put in a fiber to the home project, we could use that dark fiber not only to service the homes and businesses but also for utility purposes. Real time monitoring of electric use, for example, and doing load management in real time in addition to of course doing meter reading. Now these are not high value revenue producers, but they are definitely related to the utilities and they justify utility revenue bond. You already heard about the fiber to the home trial which was also approved even though it was not what I would call strictly a utility issue. So I think there is adequate reason and justification the council, if they wish to issue revenue bonds against the electric utility. And finance if from that. In that vein, I want to make it very clear that having a fiber system in Palo Alto is going to make this a more business friendly community. Now I know that Mayor Beecham is worried about getting people to shop Palo Alto, to be in Palo Alto, to use Palo Alto. Let me give you an example. About fifteen or twenty years ago, Chop Keenan told me that because we have a city utility and we are more efficient and lower cost, he could charge 39 cents per square foot per month more for commercial property in Palo Alto than he could in Menlo Park or Mountain View. That was in a time when the average commercial rent was under $2.00 a square foot. This is a significant benefit to businesses in the community. Having the fiber system here will be a significant benefit to the community businesses. And the most important factor you have to keep in mind is Sacramento can’t steal the money from us as they can from property taxes, as they can from sales taxes, as they have been doing. That’s money we can keep here at home and use for our own benefit. Very important. Let’s talk about the various _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 23 of 56 funding options. E & F are basically non-starters and the reason is that the vote goes to property owners. Not residents, not even Palo Alto registered voters. As an example, on the mail in ballot for the storm drains, we were sending ballots to India, Hong Kong, Germany – people who owned property here but didn’t live here. Jim West, a local developer, happened to own 14 properties at the time; he got to vote 14 times. He voted no, he didn’t want to pay any property tax for storm drains. So that’s a very bad idea. You don’t want to do that. The two proposals B & D that talk about two thirds vote, you can hardly get a two- thirds vote tonight is Wednesday in most towns. So I don’t think we want to do that. The only ones that are viable are, my favorite which is A & C which is at least viable. And I would suggest we look at a way being creative and issuing revenue bonds against the utility and using that money so we can go straight forward. Now Mr. Dawes had an interesting question about residual values, cable systems are bought and sold regularly. There is an established market value for the standard cable system. That’s only video. Systems which also offer VOIP, telephone equivalent, and data are even more valuable. The range of value for a cable system, over the last eight or nine years, has been between $2500 and $5000 per subscriber. The low end is for systems that are technically not very good. The high end is for the higher Rosenbaum: Bob you’ve had five minutes – could you please? Bob Moss: I am finishing up, almost done. Higher value systems. If we only had 5000 subscribers and we had to bail out for at least $4000 per subscriber or $20 million. We would be able to, at least half of our money back. So it is a very low risk investment. I urge you to go forward with it. Rosenbaum: Thank you Bob. Sanford Forte to be followed by Alan Rogers. Sanford Forte: Thanks. One of the things that strikes me about this conversation is that it begins to sound more and more like a private business competing with private information utilities. It’s a public business. When to go talk of sensitivity analysis, as one of the commissioners spoke of earlier, you can’t ride good sensitivity on faulty market assumptions. And what we really need to do if we are going to be able to go forward with this utility an information utility in Palo Alto and take some time that of our major utility manager and suggest we go out to August. We need to do some work and help the various institutions, the schools, the library and other institutions serving the general populace to understand from the point of view of opportunity costs what the benefit of this is. That makes a lot of the _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 24 of 56 problems go away relative to where the money is going come from. Because typically what has gone on here with this plan, and I understand why it has happened, why the plan has been rolled out the way it has been rolled out. We are in a situation where no one, or very few people in Palo Alto relatively speaking understanding of FTTH. So it sets the plan to go out for a vote to get slammed by the major telecommunications providers because the basis for the plan is a cost- benefit analysis. You can take any cost-benefit analysis out there and turn it on it’s head if you are using market assumptions, even if they are good market assumptions, which they are not in this plan, to justify the numbers. It’s a number driven plan. What needs to happen it needs to be a social benefit driven plan that’s understood by the major institutions in Palo Alto. Those benefits can be quantified. I have spoken to the people over at the Center for Social Innovation at Stanford. Why can’t we get some people doing a numbers based SROI social returns on investment analysis. Do some work with various institutions in the community, help them understand what the benefits are and even you have to put it to a vote you would have substantial backing for the constituencies that really count in this city. Constituencies like the schools, like the people who support libraries, and so on. It becomes an effort that brings the City together. Right now if you put it to a vote, it is going to get killed. Because it is a number driven plan, it is not social benefit driven. It can be a social benefit driven plan, I am repeating myself here, but I am doing so to make a point. It can be a social benefit driven plan if the people who it affects are helped to understand what the real benefits are and you can begin to put some numbers to those benefits. And that can be done. It’s been done all over the country. It’s been done in Europe. There are private institutions; private corporations for instance that actually do SROI analysis. They put those line items into their financial models and they are partially valued on those numbers. Partially, on those numbers along with hard revenue. So I think that is pretty much all I have to say, except for one other thing. I would hope that the commission or the utility would consider some version of private placement. It was discussed at our last meeting and I don’t see why we can’t consider selling shares privately to citizens here or in the region. Again if the rationale for the system can be born out through a social benefits rationale, the weakness of a cost-benefit plan goes away relative to full understanding by the community and it takes away from the weakness of the plan if it is ever sent out to a vote. This is something that Palo Alto could and should have. But it bothers me when I hear things like, well we only need 5 -20% of penetration to make this thing work. It sounding like a commercial business, like an asset that we are building. That a public entity that is publicly supported has no business building. We should be looking at this from another direction and rather than have it go out as something that is really going to upset a lot of people and create conflict in the community, find a way to make it work for everyone. Help everyone understand _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 25 of 56 how it works for them and then you have support and the thing passes. Enough said. Thank-you very much. Rosenbaum: Thank you Mr., Forte. Alan Rogers to be followed Herb Borock. Alan Rogers: Yes Commissioner. My name is Alan Rogers. For those of you who don’t know me or want to forget. I own the property on the corner of Wells and Urban Lane. And I guess I am the reason why the city isn’t wired up since 1997. I was in contract with Digital Equipment, was under contract to wire the city. Then Compaq Computer bought them. They were to use my facility. And apparently I might be missing something because I am misinformed, because I have been doing other things, but it seems to me that part of this $40 million or $45 million includes a facility like the Rock (?) an area switching facility or switch gear or something. My facility was to be used for that. After Digital left and was bought by Compaq and later bought by HP, I went out, out of my way as a matter of fact, to find somebody that wanted to replicate their business plan that was viable. Digital business plan, that is. And that company was Yipes. Which is now YC Communications. They were also in contract to acquire my property for the exclusive purpose of the switching facility. In fact the word went out city wide to find us a building that didn’t have any windows. I have the fortress for that purpose. Security being the issue. The location, available, etc. My building is still available after all these years, since 1997. Yipes at 2000. Both companies had the business plan, had money in the bank and were to wire up this town with high speed fiber and including the telecommunications business. Again I don’t know what the formula for the facility costs are, but my property is not going to last forever. Incidentally, the reason I bring it up, the City of Palo Alto ARB had approved a modification to my structure for Digital, six large climate changers on the roof, three huge diesel generators on the roof, and underground diesel tank all approved by the ARB. Since it was a modification to the existing structure. That was also approved, with a one year extension on that plan, by me. And then here comes Yipes, again a prettier structure, same thing six climate changers, three diesel generators, all approved by this fair town. They went bankrupt. They burned through $277 million of VC money. But again the facility is still available. Something to consider. Thank-you. Rosenbaum: Thank you Mr. Rogers. Herb Borock to be followed by Arthur Keller. Herb Borock: Good evening Chairman Rosenbaum and commission members. I am concerned that the process that has been followed for such a long here is going to lead to either a rejection of this proposal by either the council or the voters. At the beginning I would urge you to make a recommendation to council that for all _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 26 of 56 future meetings the council and commission that you receive written narrative reports from staff in your agenda packet. That if there is any legal advice, it is from the City Attorney or contract attorneys hired under the supervision of the City Attorney’s office and that no new information show up as an oral statement or in a slide show. Slide shows are fine if everyone’s someone is supposed to be doing them now for the past four years but they should just be a presentation of what you’ve already seen. The choices that have been given for funding, two or three of them I believe are straw men. That’s first the assessment district and property related fees. Proposition 218 prevents you from charging something that someone is not receiving. If seventy percent of the addresses are not receiving fiber to the home, you can’t charge them this assessment or property related fee. If there is no investment from the general fund, you can’t give them an equity transfer. And even the thirty percent who would be receiving the service and not all receiving it at the same time, if a few are receiving in the first year and then your ramping up. So, I guess maybe if you want to connect everybody, that’s another 70% of the homes and that’s another $20 million and that’s another business plan. And maybe you want an investment from the general fund, but if I am wrong about that I want to see a City Attorney’s opinion on the letterhead for the City Attorney or an attorney hired through the City Attorney’s office. Certificates of Participation may be the third straw man. This building is funded by certificates of participation now and I believe the building is what is pledged for certificates of participation. I wonder what asset we are talking about if we are going to be using certificates of participation? Partners have been discussed for some of the services. I believe that partners should be public and should be chosen in response to a request for proposals rather than having a private negotiation. The top level architecture of the system, I believe, should be public and should be chosen by the Council rather than making that after a decision after the council of voters say we should have fiber to the home. I believe it should switched at the ethernet rather than passive optical network system. And that is a decision that needs to be made ahead of time by the council, rather than make the decision after we make the decision to spend the money. The dark fiber quarterly report that you have tonight does not show cash flow because it omits the capital expenditures. Which include the original money of $1.8 million and the annual capital expenditures of $200,000 or $400,000 a year. Take a look at the CIP you have before you for this year, it includes two capital expenditures; one of which must be paid back by revenues from the dark fiber. In terms of other investors, outside investors; I would say don’t us some for profit service provider as a partner investor and don’t go out to look for other private investors. But rather use some public entity as the investor. It could be the general fund or it could be another level of government. Some state level entity or a federal level entity. If we are going to be doing the effort of putting so much money into an attempt to make this successful project, we need a fall back. The fall back should not be that _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 27 of 56 we suddenly have created a system for AT&T or SBC or some other private company. Finally, the last slide used, was shown, shows next steps. The order is complete analysis, council on May 24th and then UAC on July 7th. I wonder if that is the order in which this is going to be done? Or whether the complete analysis is going to follow the council meeting on May 24th? At the council meeting for May 24th it proposes next steps. I wonder what those next steps are, if they not are to complete analysis that’s been shown in the slide and why you don’t know what they are. And I believe that those things are important to know so you can advise the council for the next meeting on this on May 24th. Thank-you. Rosenbaum: Thank-you Herb. Finally, Arthur Keller. Arthur Keller: Commissioners , Mayor, utilities staff, I am quite pleased that this is moving along; although it is taken quite a few years for this to happen. I think there have been some comments about the feasibility of various funding options. And I would like to make a few comments. I understand the night is drawing late, although not as late as it was at the city council meeting a few weeks ago. One thing is that while it should not be required, I think there should be the opportunity for those people in the various neighborhoods who want to sign-up this service, to be able to assist the city in doing this by being able to pre-pay for some of those services for a period to time. In that way indicating our interest in having these services granted, making those communities that want to do this a priority for wiring in exchange for some suitable consideration in terms of pricing. I know for example the Community neighborhood was chosen originally for the trial precisely because a large number of people from that neighborhood signed up. I think that similar things can be done to engage the citizenry of the neighborhoods to try and get their neighborhood to come out first by signing up. That creates a very healthy rivalry among the neighborhoods as opposed to an unhealthy one. That might happen otherwise. I am also wondering whether there are opportunities to have a financing structure for building the system. Then a refinancing the system once the system is completely built. I know that there are people who build houses and they go to banks and the say give me a financing structure for building this house. And then once the house is completely built, that financing structure flips into a conventional loan for 30 years or whatever. Based upon the fact that the certificate of occupancy has been granted on the structure and the interest rate usually changes. So we might consider a hybrid financing structures as well as that. I endorse the idea of the city investing in where the city has investments in bonds for other funds, those investments can be made into bonds or financing for the fiber to the home system. And I think that, I agree with the idea that we best to avoid to have a vote of the population necessary in order to do special taxes. A votes, majority vote where it is to approve the concept of the city doing this is a possibility if necessary, but a vote of the population to vote on a _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 28 of 56 special tax seem like an unnecessary thing to do particularly when as was mentioned a large but not majority fraction of the population who will initially be taking advantage of this service. In any event, I appreciate your considering this. I hope sometime, in the not to distant future, I will be able to avail myself of high speed fiber internet to my house, be able to replace the ganging together of DSL and cable that I am doing in order to have reliability and speed. Avoid using the half a dozen phone lines that I have currently thru PacBell and transferring that over through the excellent services of the Palo Alto utilities. And also replacing my cable TV with that service as well. Thanks very much gentlemen. Rosenbaum: Thank you Mr. Keller. Ok let’s bring this back to the commission. We have a schedule under next steps and we also have a recommendation in the two page memo options A & B. Let me make a few general comments while we are waiting for this to come up. My assumption and I’m sure people will correct me if I am wrong, with regard to the basic issue of whether fiber to the home is a good thing, none of us has changed our mind based upon what has transpired tonight. Is that a reasonable assumption? I assume that is. So Option A would seem to be a good one, but then it seems to me that A&B is what we want to say tonight. My thinking was that I was anxious to move this decision to the city council. It has come back to us, but I want to move it back to them once again. Staff says they need a little more time to do a more complete analysis of finances and my view that is fine. They indicate this may make it possibly make it impossible do a November advisor vote. That may be just the way it is. So, given all that a motion incorporating our prior decision and encouraging staff to complete the necessary financial work, might be appropriate. Commissioners what are your thoughts? Melton: I feel like maybe we need to put forward our thoughts and recommendations the funding options that have been presented to us. I think the council referred this back to us to get our input on the funding options and perhaps by making a recommendation regarding those could cut down the amount of work staff has to do in analyzing these various options. I for one like some of the speakers from the public that the funding options that require a super majority vote, I believe options B&D, are not really viable options. We are just wasting more time and money if we continue to pursue this if that is the financing arrangement we were to come to, because it problematic that the voters of the city would approve that. So I would propose that in addition to what you already suggested, that we include in our recommendation that those funding options that require a supermajority vote be not be further considered. And limit the options to those funding mechanism that don’t require that. _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 29 of 56 Rosenbaum All right that certainly be accommodated in a motion. Are their other comments from the Commissioners? George did you have something. Bechtel: Since we have our Mayor here, I wanted to ask him a question or two. I was really hoping that when we referred it to the council, somewhere along the ideas that council would say then we need to a committee. Because so many of these decisions today are best addressed by the council and many ways and staff talking directly to the council and staff not only being the utility staff but being our legal staff and folks like Joe on the administration side. Because they can talk directly to the council, they can talk in private as they did last and those that kind of information is just we are not able to deal with it. So if we referred this to the council as Dick and John has said, would it be your recommendation that it go to the finance committee? And so the staff can really make their report and do all the additional work on behalf of the finance committee and that way the public can be heard there as well and we save coming back to this forum and basically eliminate some of the weeks involved. I guess that I am not as concerned to the voters in November when I ask about short circuiting the time, but I believe we have a lot on our plate here and there are other issues and think we have heard a lot and we have said a lot here. It’s really time to move on. Do you think the finance committee or some other mechanism to deliberate this in the future? Beecham: Well I guess the answer is perhaps. But in terms of what I think would be useful for the council to hear from you is your assessment of what you have in front of you. And how the council deals with it we will have to figure out in that case. If your recommendation or comments to the council is on the various aspects of the financing arrangements; do you think they work, do you think they don’t work. Do your think there are options that should be pursued, that would be useful. I am not sure if it makes much difference probably at this point whether in whether it is your advice is that it goes to a subcommittee of the council or to a different committee. What I think would be valuable, based the much period of time this commission has spent on considering fiber to the home, your assessment of what might work and might not work. Bechtel: Well I think in addition considering some of the financial arrangements, I think there were several additional recommendations, at least personal feelings that I and others expressed, that never really got carried forward in the sense of our motion from last time, which was basically to push for an advisory vote. But implicit in our vote, and this was pointed out various nice letters by one of the participants here tonight in a e-mail to us, that for example open access and other options were not succinctly addressed in a recommendation. And so if those are the sorts of things that you would also consider in addition to the financing, then I _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 30 of 56 would think we can move ahead, as Dick says, with by combining A & B and in some fashion but be a little more crisp than just A alone, for example. Rosenbaum: Dexter. Dawes: I’d like to follow-up on John’s comments. I also put E & F in his basket of not feasible options. E for instance requires a lien on property as Joe described it and I think if you went out for a vote to the citizens of Palo Alto to put liens on their property, that probably a failure. F does not require a lien, according to Joe, but the structure for fee for service received is so murky to me that it simply defies description. There was one comment made as to whether this really meant that only those people that voted yes would actually receive a fee for the service and people who voted no would not. I’m unclear about this. If it means that if 50 + 1 say yes everybody gets a fee, Joe is nodding yes. Is it yes? Saccio: Yes. Dawes: Then I guess that is less unfeasible, but I still feel that is a financing technique that would be very difficult to educate the community on and have them vote in favor of. It is one thing to discuss this with some commercial property owners visa vi parking that will enhance the ability for people to come and work in their facility, but for a service such as this, a city wide kind of thing, I find it inappropriate. The two left are A & C. I still believe that there is probably hope for A. From the previous discussion that has circulated around my head, the answer seems to be we can’t do what we did in 1996 because the project is larger. It is the same deal, but it’s just larger and it makes people nervous and that really is to me not a very good analysis. I had hoped that a representative from the attorney’s office would be here to address these head on, but that did not happen. I think that it is important that there is a very clear decision recommendation by the legal people was described initially a week ago as “not viable”. That doesn’t say that it is not possible or it’s illegal. Today, I didn’t hear today the words “not viable” come out of people’s mouths but it was described as we can’t charge for services that are not related to the underlying utility. Again we have already done that, so I guess where I come out with a combination of A&B. That would narrow down our staff analysis to simply A & C as the funding alternatives with the emphasis that the vetting of A has to be thorough, complete and unequivocal. Rosenbaum: Elizabeth? Dahlen: Yeah, I am finding a lot of the discussion tonight very murky. I think the business plan we were evaluating, that we made recommendations on and that we voted on in our April meeting has all but turned up in the air with regards to the _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 31 of 56 new information on the financing issue. I see option A as being clearly unacceptable to send the original recommendation as is. I think for B the issue here with regards to studying financing options further, with no committed delivery date at least not within the realm of what was presented in the memorandum. I understand in the next steps, there is somewhat of a delivery date but it seemed a little foggy to me that whole financing analysis is going to be done by the end of May. I am also trying to figure out what the value of UAC vote was back in April give the new information with regards to the financing. I find that concerning. I would like to throw out an option C that all other options appear less favorable than the one’s presented in April and hence UAC recommends termination of the DFCH business plan efforts. Rosenbaum: All right. Let’s see if we can put all of this together. George you indicated an interest in expanding further UAC discussion beyond financing. I don’t know that the other members indicated that interest. Would you be willing to abandon that thought? Bechtel: I would. Rosenbaum: Good. Alright then we have a concern with all funding options except for A and C. And it might be reasonable that we requested that staff do further work on only options A and C. Essentially we are making a political judgment which might best be made by council, but if you are asking us we are telling you that we don’t think the other four have a ghost of a chance. So you might as well stick with A and C. And then in response to Elizabeth’s question, if we look at the schedule the way I understand it, our recommendation of March is going to go to the council on May 24th and there will be UAC representatives there. And the council will be able to consider our three to two vote. They may decide to kill it in line with opinion of the two of us or they might be interested in getting more information. So the staff was not intending to complete their financial update by the end of May but rather by July 7th, when that information would come to the UAC. So I think the opinion that you and I shared at the March UAC meeting will still go in unaltered form to the city council where we are just responding the request by staff for some additional input on the financing options. So, Dexter I think you had in mind for a motion might read that we recommend to return the FTTH project to council with our original recommendation intact and request that staff conduct a more thorough review of financing options A & C so that the UAC may reconsider it’s recommendation to council based upon the best available financial information and financing options. Dawes: I would second that if that was a motion. _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 32 of 56 Rosenbaum: Well that’s a motion that you are making. The chair doesn’t make motions. So we have a motion by Dawes, do we have a second? Melton : Second Ulrich: May staff make a comment before the motion vote? Rosenbaum: You certainly may. Ulrich: I thought there was some interest in B in addition to C and also there were two other items up here. One was the second bullet that based on looking at additional utility related uses and also the potential partnerships. Are you in your motion precluding those or just focusing on the finance and let us move ahead with the other two if we think that is something we think is important to do. Rosenbaum: It was not my intention to preclude the bullets two and three. You would have to ask Dexter what he thinks of that? Dawes: It is not designed to preclude bullet points two and three and perhaps should be included in the motion, Mr. Chairman. Rosenbaum: I think it was our intention to limit the study of funding options in A and C there was no interest in an option that was going requires a two-thirds vote. So then we had a Second by Melton to a motion by Dawes and the complete motion now reads the UAC returns the fiber to the home project to council with it’s original recommendation intact. And requests that staff conduct a more thorough review of financing options A and C along with accessing alternative financing which may be based upon utility related uses and to further more research potential partnerships. Dawes: Yes Rosenbaum: Alright Dexter or John do you want to speak to your motion. If not do we have any – Dexter? Dawes: A brief comment. I felt that the last several weeks have been a set-back for this project. I am disappointed that the financing issues did not come to the surface sooner than they have. I feel that a good deal of time and cash was wasted because of the delay in having this come forward. I am not going to do a “who shot John” not John Ulrich. Ulrich: Thank you very much. _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 33 of 56 Dawes: I believe that this motion is the best way to try to push the matter to either a conclusion or an eventual cessation so it’s a to some extent, it is more delay and more analysis event after these two years that we have been at this, but I think its necessary. Rosenbaum: Alright is there any further discussion? If not let’s vote. All in favor of the motion. Please say “aye.” All Say: Aye Rosenbaum: All opposed say “Nay”. That passes unanimously. Thank you Joe, Thank you John and Blake and we will with you in July. The basic issue if the fiber to the home makes any sense will be on the council agenda May 24th. It turns out that I will be in San Diego on May 24th. Dexter has indicated that he will be available and Elizabeth Dexter: Correction I will be much further away than San Diego on May 24th. On May 15th I leave for Tibet. Rosenbaum: Well that’s further than San Diego, Yes. We are going to need two, Elizabeth are you going to be available May 24th? Elizabeth?: I will be available. Rosenbaum: OK George will you be available? Bechtel: I will be available Rosenbaum: Ok then Elizabeth and George will be the UAC representatives at the May 24th meeting. That completes our consideration for this item for tonight. Let’s take a short break and then we will go on to the utility budget. Thank you all. Ulrich: Thank you commissioners. 2. BUDGET AND RATES A. Capital Improvement Program _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 34 of 56 Rosenbaum: Can we reconvene please? Alright the next item is the budget and rates. And under that we will first consider the capital improvement program, John. Ulrich: I don’t have a specific presentation on the CIP, but we would be glad to answer questions you might have. Rosenbaum: Alright, last month we received a report on the major changes from year to year. We also have in front of us the proposed capital budget. Do we have any questions on either of these documents? Is everyone happy with the CIP? Ulrich: I know you had an opportunity, we discussed it last time about some of the big ticket items and we have taken that to heart. But if you have some questions about some of the specifics of the smaller projects we would be glad to chat about it. Rosenbaum: I am looking to my colleagues and I don’t seem to see any interest in further discussion of the CIP. Would you like a motion on each item or how do we normally proceed on this? Ulrich: Probably better to do one on each one that way you won’t have to go back again and put it all together. Rosenbaum: Alright could we have a motion recommending that the council approves the CIP for the enterprise funds. Bechtel: Mr. Chairman I have one question. Normally we only address electric, water and gas funds. And that’s what I have spent most of the time recommending. Should our recommendation include the other enterprise funds although they are not the responsibility of the UAC. Rosenbaum: That’s a good question. Ulrich: That depends upon what your recommendation is. No I’m not going to say that. No I think you should feel free. You know we bring the sewer the waste collection, and we understand that is not a purview but it is a utility and all the work you have been doing on the fiber is also new so feel free to give you advice and ask questions about those utilities too. Rosenbaum: Dexter? _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 35 of 56 Dawes: John I had sent an e-mail some time ago about a proposal to put on our agenda a review of the electric undergrounding project. To put it into perspective, I have had many citizens question me about it, it actually came up in the fiber discussion and it seems to me that a hundred year program should rate a review by the UAC may once a decade, or something like that. And I have been around six years or so and I just know that it is a hundred year program and its not on my street and that’s about all I know. So I thought it might be a very good thing to do and while we are talking about capital appropriations I just wanted to put another statement on the record and we should put this on the agenda and I appreciate your thinking about it and proposing it in due course of time. Ulrich: Yes in fact that was the call I made to you this morning. I had the answers and I apologize I was out of town the other week. Basically the question is, improved communication and I think the best spot would be on our web site where we have a little more dynamic model showing where we the locations of the underground districts are and the ones that are proposed. As you know in your binder that on CIPs you get a copy of it, but that is not necessarily easy for the public to look at. So, since I got your note, we are looking at how to do that. It is just another page to put in but it also requires once you do it, you want to keep it up to date. The other part that it is probably unclear to some people how the process works to get into an underground district. Dawes: Almost everybody. In fact I would say everybody, except Scott. Ulrich: You would be amazed at the number of people telephone that make a call, I may have had several today. And I think Scott may have to, So that when we are about ready to do an undergrounding, there are plenty of people in that district that learn about it. The point I was trying to make is that this is all articulated very thoroughly in rule # 17 that can be found by any member of the public that would like to move though the rate and rules schedule. However, having said that, there are a number of options and a number of things and we would be happy to have that as a subject matter. But it would be helpful, I think, for you to tell us the things you would like us to bring up. Dawes: Will do. Rosenbaum: John Melton: Mr. Chairman I move approval of the proposal capital budgets for the gas, electric, water, fiber and waste water utility projects. Rosenbaum: Do we have a second? _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 36 of 56 Dawes: Second Rosenbaum: Alright we have a motion by Melton and a second by Dawes to recommend to the council approval of the capital improvement program for electric, water, fiber, gas and waste water collection. Any further discussion? All those in favor, please indicate by saying Aye. ALL PRESENT: Aye. Rosenbaum: That passes unanimously. Let’s go on. Ulrich: Mr. Chairman. I think I neglected to mention that on May 11th, which is next Tuesday will be the review by the finance committee of the enterprise funds CIP program. And it’s your call, you may want a member of the UAC there. If not, I would be glad to convey your vote. Rosenbaum: Let’s see, the operating budget is going the finance committee on May 18th, is that correct. I was planning on attending that one. Ulrich: The one on the 11th is capital. Rosenbaum: Right, is someone one of the commissioners care to attend the May 11th finance committee meeting? Bechtel: I would be happy to attend. B. Operating Budget Rosenbaum: Alright, Commissioner Bechtel will be present at the May 11th finance committee meeting and I will attend the May 18th meeting. Let’s move on to the operating budget. John. And introductory remarks? Ulrich: No I do not. Rosenbaum: Once again we did receive a report on significant changes at our April meeting and we have the entire budget in front of us tonight, are there any questions? Bechtel: Mr. Chairman implicit in the operating budget are rate increases and I would suggest that rate increase also impact the CIP. So as I was thinking about _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 37 of 56 questions are on the rate increases. I am wondering how to proceed with the operating budget if the numbers all include revenue increases to fund the budget. Rosenbaum: You raise a good point, but I would suggest we ignore it and simply approve the operating budget with the understanding if any of the rate proposals are not approved why the operating budget will automatically be adjusted. Bechtel: That’s agreeable. Rosenbaum: Good alright. Do we have any questions on the operating budget? If not, can we have a motion. Bechtel: I move that we recommend to the city council that we approve the proposed operating budget for 2004 – 2005. Dahlen: I will second the motion. Rosenbaum: All right, we have a motion by Bechtel and a second by Dahlen to recommend to the city council approval of the utilities operating budget. Is there any discussion? All those in favor. ALL PRESENT: Aye Rosenbaum: That passes unanimously. C. Gas Rate Proposal Rosenbaum: Alright the next item C is the gas rate proposal. John. Ulrich: Thank you. The rate proposal that you have requests an increase that articulates the main reason is the commodity cost increase and the interest in having a financial going forward that not only pays for the gas and other services but also retains the reserve level that is recommended. I would be glad to answer any questions about that. The impact on customer bills are indicated on table one which more clearly translate a 9.9% increase to actual amounts of money that people would pay. And then it also gives a kind of a ballpark number comparing it with Pacific Gas and Electric for the same commodity and the same class of customer. Mr. Auzenne is here, our new assistant director, who is right on top of things. Dawes: It is my assumption that we have locked in this says about 73% of our gas for the next fiscal year, 27% is not least at the time of this writing. It was not clear _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 38 of 56 to me how much of the rate increase depends upon the gas we have already locked up vs. the gas we haven’t locked up presumably at a higher price. The amount that we haven’t locked up is relatively small even if we paid a fair amount more, it would not have a large impact on our rate for the year. Could you give me a sense to accommodate the locked in portion of the gas we have already contracted for. Ulrich: We are going to be working as a team because you are going back and forth between supply – next to me Lucie Hirmina and to left is Girish Balachandran the assistant director of supply. Balachandran: Let me rephrase the question, your question is what percentage of the rate increase is to cover the exposed part of 04-05. Dawes: That part we have already locked up. Yes Balachandran: I don’t have the exact number, we can back into this. We essentially, at the time the budget was put together we know exactly what our costs are, at least for the fixed portion of 04-05 load, we estimate at the day we provide the budget estimate we get the market prices and apply that to the exposed load. That is essentially what we do for a ten year period. And the rates group places it into the financial model, looks at reserves other cost changes and that’s how the rate increase gets developed. Its developed at the back end. I don’t think there is a direct correlation in the sense that this is your supply cost and this percentage. Dawes: No your have answered the question. Thank-you. That was great. Another question on the G3 people it says they will not experience a bill increase. Is that because we don’t set the rate, they basically buy for themselves and some have bought well and some may be paying more than our other customers, is that correct? Balachandran: G3 is the monthly varying rate so they just could pay market rate. Dawes: Pay market at the time. Thanks. Rosenbaum: Any other questions? Elizabeth? Dahlen: I had a question with regards to table 1 and the comparison to PG&E rates. Based upon my interpretation of this it looks like most of our rates during different portions of the year are going to be exceeding PG&E rates. How accurate is the PG&E rate that we are comparing to here and do we assume that _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 39 of 56 their rate is going up in a similar manner to ours so that our rates will actually ultimately likely be lower than PG&E. Hirmina: Sometimes it’s higher sometimes it’s lower because PG&E passes through the commodity price to customers and so their prices change on a monthly basis. The comparison here is based upon March prices. When this document was prepared. So every month is different. And of course in the winter time when prices go up, when PG&E market prices go up, our bills will lower than PG&E. Balachandran: If I can just add to what Lucie said. Essentially here is an apples to orange comparison because our purchasing strategies are different. But maybe a proxy way to compare it is to look at the quarterly report and you look at the gas on page three of attachment B there’s a chart market prices vs. pooled purchases. Page three of ten. Are you there? Dawes: Yes I am there. I am just trying to interpret what you are saying. Balachandran: OK right what Lucie tried to compare was its our rate at the time. Our rate was what PG&E’s rate in March. If you look at the forward market price, the dotted line, and the market price essentially stays the same way those are the prices that PG&E customers will see on a monthly basis. Dawes: The forward market prices. Balachandran: Exactly. Now we all know that changes every day. But this was the forward market price at the time that this chart was created. So if you are looking forward, that’s the price vs. if you look at the expected pool rate the solid line in the middle, that is what our customers will be paying. Dawes: But as I look at this and based upon this interpretation, we do start to see the same rates as PG&E. As we move out into 2006. Am I correct, the dotted line is tracking the solid line there? Balachandran: Yeah, if you skip one page back page two of ten, you can see it is a function of how much we have locked in. So you see when you go to 2006, the red line shows what percentage of the load we have locked in and so the remaining part is at the market so there is a greater portion of the load at the market and thus closer the weight market. Dawes: Got it, since you numbers so well if we bump out into 2006 how much of that we secured? Are we estimating at PG&E rates 50 / 60% ? If you can give me a feel for how much of the load we have locked in at that point in time? And just _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 40 of 56 to be clear, I am looking at that portion of the chart on page three of ten that is May 6th and forward. Can you give roughly give me an estimate of how much we have locked in at that point? I am trying to figure it out from the page before too. Balachandran: Actually I have to do the calculations. There is 47% for the period Nov. 05 through September 06 and about 27% in round numbers around 35. OK so basically we are paying the same price out there for the bulk of what we are estimating. Balachandran: Exactly for about 65% is exposed to the market at the current time but for the latter strategy we will be locking in prior to that period. Dawes: Thanks for the clarification on that. Rosenbaum: George Bechtel: Girish maybe you know. In Palo Alto we have a utilities user tax of 5% on three of utilities. In comparison with PG&E. So we actually our rates are a little higher than theirs if you take the 5%. How do you compare that with a PG&E rate? I’m not sure what other taxes or fees would be on a PG&E customer’s bill. Maybe John knows living in Menlo Park. Ulrich: Part of it depends upon the community. Most communities or a good portion of them have a utility user tax. It is not just in Palo Alto. So if the utility user tax applied in another community that would be added on top of a PG&E bill similar to the condition you describe in Palo Alto. George? I see thank you. Rosenbaum: Are there any other questions? Can we have a motion? Bechtel: I am prepared to make a motion to make the gas increase. But it says that we should approve a $2.5 million retail gas revenue increase. Effectively we can not do that, because we can not control that. But we are recommending a rate increase and so can we change the wording and maybe I will make the motion in the following way. Looking at your recommendation that the UAC recommends a city council approve a rate increase averaging 9.9% or a $2.5 million retail gas revenue increase effectively July 1, 2004. Dawes: Second _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 41 of 56 Rosenbaum: Alright we have a motion by Bechtel and a second by Dawes to approve the staff recommendation for a gas rate increase. Is there any discussion? If not, let’s vote. All in favor say Aye. ALL PRESENT: Aye Rosenbaum: That passes unanimously. Let’s move on to the proposed water rate increase. D. Water Ulrich: The recommendation there is requesting your approval of 10.3% or $2.1 million water rate increase effective on July 1, 2004. We articulate in there the reasons for it, primarily the increased costs of supply and our reliability work. Rosenbaum: Questions for staff. John Melton: John, the water fund. I’m trying to figure out why it is after having set this thing up a year ago for two sequential 15% increases, you are now proposing to decrease this one down to roughly 11%, 10 or 11% which is going to result in a decrease in the rate stabilization reserve below the minimum guideline, whereas if you stuck with original plan of 15% that would essentially would wipe out that decrease in the reserve and you would be within the guidelines. It seems to me you had this thought our correctly a year ago and now your screwing it up. Hirmina: Actually with the planned 15% rate stabilization reserve would have also been below minimum. It’s the same picture. What happened was there were cost savings and because we were planning an increase in electric and gas we did not plan an increase in electric last year and so this year when we looked at the increases we didn’t want to burden our customers with all those increases. Melton: That, of course, makes presumptions about an increase in the electric rate which is the subject of the next discussion. But you know independent of what is going on with the electric rate or the assumptions about the electric rate, just looking at the water rate it seems to me that the case is pretty persuasive that the 15% rate is a better rate as far as the overall financial health of the utility’s reserve is concerned. Auzenne: You are in fact correct sir. The water rate stabilization rate has been below minimum for some time. We have been slowly increasing that point to get to minimum. Our water rates are problematic in that we are historically above our neighboring communities and we hear that from our customers. Part of that is because of our aggressive infrastructure replacement program and the like. What we are trying to do hear is balance financial prudence with political realities – as it _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 42 of 56 were. One of the things you will probably notice in this document. Recent information from the public utilities commission changed our calculations of what in fact our wholesale rates are to be going forward for the next year. In fact it is lower than our original projections. So rather than sit there and modify our rate request, if those savings come true, then we will significantly close the gap to the bottom of the minimum rate stabilization guideline. So we didn’t see a need to overhaul as many documents. The budget process for Palo Alto is a very long ponderous process. So rather than sit there and change all of numbers we have been using going forward, since we have already been changing electric for you, we decided it would probably be prudent to stick where we are and we will capture those savings and the reserve will increase. Melton: One more point. Looking at it in a different context, my understanding is that we anticipate substantial increases in the water rates for the next several years as a function of our obligations under the Hetch Hetchy reconstruction process. That has to happen. Are we just setting ourselves up for a bigger increase in some future year by reducing the rate this year, are we just going to make life tough on everybody next year or the year after. Ulrich: Well as you pointed out, we are probably one of the few entities that forecast ten year financials as a utility you know out that far. Our expectation is that the rates are about to go up by 10% a year for the next decade. And so, yes the cost of water is going to be more and more infrastructure and less and less water. As Mr. Rosenbaum has pointed out a number of times, so as the cost of infrastructure goes up those will get translated very quickly into rate increases. When you do make a comparison with other communities and look at the overall rate impacts on customers, because you will find our position in our arguments about the electric RSR and electric rate a bit different than what we are saying about here on the water. Is we like to look at the whole thing and not make this a calculation that we say we calculated so this is what it should be. I think we need to meter it and mitigate it where we can. Rosenbaum: Dexter? Dawes: I’m concerned about the pace of the capital projects. Several years ago we bonded a fairly sizable amount in the water fund to deal with the $13 or 14 million package which dealt with emergency water and it’s totality. The wells, the big expensive storage facility and so forth. Some of that work has started. The biggest one has slipped quite a lot because of political issues and EIRs and what have you. I am not quite clear on how all of that is worked into this, and I am looking at the ten year plan now of March. Are all those projects incorporated in _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 43 of 56 this plan and in the rate assumptions, which is the 10% this year, the 15% next and then virtually zero out into the future. Ulrich: The answer is yes. The staff has put a lot of time one recognizing that we are spending and it is a lot of money so it impacts very quickly the rates and that has been factored in so that the delay or the money we expected to spend earlier on has been moved out. Dawes: My recollection is that in effect that unspent bond proceeds ends up in the reserves until it is actually spent on the appropriate capital expenditure. If that is the case, then I am uneasy that the RSR which doesn’t have anything to do with capital but it’s the largest reserve in the water system is below its minimums. Ulrich: As I recall, you asked us this before. As you recall the amount of money that was in the bond was a relatively small amount as compared to the percentage of money we spend on this type of infrastructure. So you can see that the last use of the bond proceeds is on line 12 actuals 0203 in going forward O3 onward there is no more proceeds being used. It has all been used up. Dawes: My recollection was that there was bond precedes 01-02 as well. More than the $3.2 million. Ulrich: I should point out that the money that we got is spent in the years that is not in these pages. Dawes: And on other projects. Ulrich: Appropriate for the use of the bond money, yes. Rosenbaum: Any further questions? Are we ready for a motion on the water rate proposal. Dawes: So moved. Bechtel: Second Rosenbaum: Have a motion by Dawes and a second by Bechtel to approve the water rate increase proposed by staff. Any discussions? All those in favor please say Aye. ALL PRESENT: Aye _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 44 of 56 Rosenbaum: That passes unanimously, let’s move on to the electric rate increases. E. Electric Rate Ulrich: This is a similar situation in the electric we are forecasting increase costs and we believe it is appropriate to raise the rates as recommended 8.5% we can go into more detail. I have a chart to pass out to you and we will discuss it in more detail. I think the big important thing is that we have been trying to convey for some time is that the end of the forty year contract with Western is over at the end of this year. So costs of supply are going up as we implement the long term supply plan, LEAP, and that what’s projected as the reason for this rate increase. So to give you a little bit added information. So we passed out some handouts, I’ll put them up the projector so the audience can also see as we go along. Would you like to ask some questions or focus us on the things you would like us to cover? This is obviously a very important commodity and it has revenue and therefore a big impact on our budget and also obviously the cost to our customers. In summary, I mentioned the Western contract is ending in December of 04. The long term supply trend is up. The regulatory uncertainty continues on several fronts. Your utility wishes ____ gradual rate changes for customers all price scenarios have a system rate of 10.8 cents per kilowatt hour by fiscal year 08/09 and that of course is significantly higher than it has been in past years. The supply reserve maximum guideline is changing in 04/05 to reflect rising supply costs. That’s a calculation based upon a percentage of revenues. Utilities strategy is to maintain supply reserves at or near the maximum guideline in order to have flexibility in mitigating unforeseen costs. And for more details on that refer back to report we gave you last year, I think that was in October which articulated all the single and on going contingencies for our reserves. So you probably want to talk in more detail the rate proposal and please feel free to ask. Rosenbaum: Questions for staff? Dawes: I guess it more of a statement there is no question looking at the ten year chart that things are changing very radically. What sits uncomfortably on the stomach is a forecast of $66 million RSR at the end of this fiscal year against a reserve maximum guideline of $28. In other words, it is more than double and we are suggesting at 8.5% increase. Then you look across the page and the reserve maximum guideline increases from the 28.5 this year up to 52 two years out 53 three years out so that doubles. Also, of course, supply costs double. _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 45 of 56 The Chairman has circulated a little chart which shows the forecasts of reserve levels made at various times at this time each of the last three years. Each of those reserve levels have been breeched, all gratefully on that side. There are issues and problems on the horizon that the utility director has drawn our attention to both orally and in writing. FERC gave us a great gift when they said that the PG&E could not unilaterally revoke its integration contract in bankruptcy which we thought they were going to do. But it looks like they are going to perhaps take us away a bit of that good news with these other decisions which are either about to be made or have been made which are subject to review or what have you. My assumption are those uncertainties are not baked into these as a debit to our reserve, but could amount to $7.5 million for one and there is a second one which could be somewhat more. You show the glide path of these curves coming together the increasing maximum guideline and reducing RSR itself due to these increased costs offset by the consistent higher actual reserve than what had been estimated – again offset by possible big hits out in the future. My feeling is that staff have been too aggressive in requesting an increase, I wouldn’t support the full 8.5% . Zero might be too low given these uncertainties. I think something in the perhaps the 4% range might be more appropriate for this commissioner. Rosenbaum: Further comments? Bechtel: My question addresses the reserve ranges you have set. I think you have talked about them in previous years. Tonight you mentioned that there’s the reserve guidelines are set at a certain percentage of revenues. Could you tell me exactly what they are? Because we are comparing reserves and if we didn’t know anything about the guidelines we might assume that $60 million was the right number. You call it a guideline, so therefore we compare that and are adjusting revenue to make sure that works. What is the rationale for those guidelines? And the second question is that you are using maximum, you want to target at the maximum. To me a maximum is a maximum. You have a target level there and why aren’t we shooting for the target level that the mid-point between min and max? You want to use the maximum as the target because you want flexibility in case of a downside. Well that’s the purpose of the minimum. So if we are right in the middle we are running a good ship if we have a lot, then we can give it back. If we have too little reserve then we took care of the down side. So I am not sure I understand the rationale on these guidelines. Ulrich: We’ll go over those guidelines in detail because they are listed in the October 1, 2003 recommendation and as you know when you look at the quarterly report we show where the money in comparison with those so my assumption is _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 46 of 56 your want to know of a reminder of how it is calculated. It’s a percentage of the supply costs up the revenue that I may have said a minute ago. So we will go through that. I think it is important for you to see the dynamics of just change in the reserve by looking at what happens if you don’t have an 8.5% increase and you pick something else. And I think it is appropriate to go through so you see the dynamics and see why our recommendation is to be up near this maximum and that for the foreseeable future is something we ought to maintain. Primarily for this uncertainty area that I continue point out. I don’t believe it appropriate to have any more of customer money than we should. That what’s the reserve is there for to take care of these unforeseen and unexpected problems that come along. I think the last thing we want to do is shock our customers or do something like we had to with the gas when we had some very significant unforeseen price increases and if it wasn’t for having those reserves we would have been in far worst shape in having to go to and get some very dramatic increases from our customers. So if you bear with us for a minute then we will go through those dynamics and then come back to your reasons for wanting to do something else. Tom and Girish, if you would like to go through that a little bit we can get some discussion about it. Auzenne: If I take your questions in the order in which I wrote them down. The purpose of a rate stabilization reserve is as it says is to stabilize rates. It’s not necessarily an additional funding mechanism for what ever you might choose. The term guideline, as it says, is a guideline. John spoke of the problem we had in gas in the year 2000. That is something we really truly want to avoid in the electric business because our exposure is much much more in the electric side of the house than in the gas. We wound up taking the rate stabilization reserve of gas to almost zero. And left ourselves open to second guessing as to when we initiated rate increases and when we should have been more aggressive in those rate increases early on in order to protect the reserve. So you can have a philosophic point of view or a philosophic discussion as to the efficacy of our efforts there. Our exposure on the electric side again is predicated on the fact that the maximum guideline as shown on that graph is currently being exceeded. That’s not necessary a problem of the size of the reserve, but rather a problem with the guideline. And we only adjust the guideline periodically. We only adjusted it, council adjusted it December after you saw it in October of 2003. So what we are on an upward curve to match the guideline to our economic reality. So that’s what happens when those points come together. Right now you could be saying that we are in a surplus position. On the other hand you see that line stays relatively flat and the guideline is in fact increasing. _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 47 of 56 We looked at a number of different scenarios and those are indicated on this chart where we are playing a zero sum game. At the end of the say the average retail rate is going from 7.3 to 10.9 cents per kilowatt hour. Under any scenario you care to choose. Under any mechanism you care to use. So it’s just a question of how we get there. Using our philosophy of trying to have gradual rate increases is what prompts our 8.5% rate increase at this point. If we in fact under scenario 3A as it was listed there, forego any increase in 04/05 then in order to sit there and maintain our other assumption which is we want to maintain the supply rates stabilization reserve at the upper level. Now we can have a discussion about whether that is a supportable philosophy but if we use that as a philosophic approach, then we are going to be looking at thirty six percent electric rate increase. And after that a four and then further out a six. Under scenario 3B we sit there and forego a rate increase and again in 04/05 and we try and mitigate or spread that increase out again and it turns out to be 17 then 12 then 36. Then the minus sixteen is because you overshot it at the back end. Again our system average retail rate is going to 10.9 and we don’t see anything changing that. The problem with the ten year financial forecast that commissioner Dawes indicated is also what prompts us to make a change in our presentation. What we are going to be doing is bring you a new ten year forecast on a quarterly basis. Because, as I said at the last meeting, this has now gotten totally dynamic. This is not your father’s utility. This not the Western contract with a nice smooth life span anymore. That’s why we are sitting there and trying to, not necessarily over capture too much money, but rather to be able to sit there and be able to have enough money to mitigate anything that happens. Questions? Bechtel: I am going to take the prize since I asked the question. Tom why don’t we use the mid-point? In another words you know today you have a great forecast of what our costs are going to be so why don’t we make the guidelines so we try to hit the mid point? We use the mid-point in the gas fund. And it didn’t work too well. I think this is a big question of concern and maybe a better approach is to go back and start over on how we got to the maximum / minimum because that’s set and the we try to work in it. And your push back is that we are above the maximum and I think we pointed out in the other chart, it’s not going to be there. That gap that we have is thankfully is that big of a gap for as the costs go up we are going to be able to use some of reserve to keep the increase from being any greater than it is. So this is supposed to be a positive thing, not some penalty we are going after our customers for. So we may be better off going back and articulating the guidelines and recommending go up higher so the number we actually have translates to these increases is somewhere in the middle. And I _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 48 of 56 don’t mean to sound like we will just jigger around. That’s the whole point of this to be able articulate why we need these kinds of reserves. I think we did a very good job in the October report pointing out the risks in this business and I would not be here recommending these numbers if I didn’t feel very strongly that this is the kind of levels that we need. Give where these rates are going to go. So that’s the rationale for it. Bechtel: I’m satisfied, I don’t have any more questions. Rosenbaum: John? Melton: Looking at the operating budget and the enterprise fund reserves, page 140 and when you established the budget, you and proposed this rate increase, you had as a target a $55.6 million ending reserve. With no rate increase you can still get there because your starting point is higher. You have a $66.6 million start. If you don’t do any rate increase your going to have a reduction down to $58.5 million. So what it looks like is, you’ve already gotten your rate increase this year. Because your beginning balance is $8 million higher than you expected it to be. So I’m at the point of saying, why do we need a rate increase this year when even without the rate increase this year you will have an ending reserve that is slightly larger than what you budgeted it to be because your beginning balance, your starting point is higher. You can end up where you want to be without a rate increase. Balachandran: I’m going to take a crack at this. I think I’m going to revisit, to a certain extent, some of the initial comments that John had made. We’re looking at this, not necessarily one year. This is a series of rate increases that are being proposed, over three years with the philosophy of keeping the reserves at the maximum level. You’re totally right if you look at just this year’s budget ending reserve balance. It’s huge. The delta is huge. If you look at the chart again 04/05, you see that’s high too. But scenario 3B is one where you forego that 8.5% increase with the current reserve balance, the 66 million including the additional money, and you have your rates at 17% and 12% for the second and third year of this three year increase stays exactly the same. What happens is you get your reserves drawn down a little below half way of the balance and then you impose a 36% rate increase to get back to the maximum. In many of these calculations you have to set one variable. Otherwise there are infinite possibilities here. I mean we can talk all night about 6% one year, 12, and tinker around the edges. Something needs to be kept fixed. What we kept fixed, and we strongly believe this is the right strategy, at this point in time where we still have the overhang of the energy crisis over us, in fact that to a certain extent explains some of the difference between forecast and actuals in our reserves in the last three years. If we forego _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 49 of 56 the 8.5% rate increase but we do the second and third year we will basically go to the bottom half of our reserve balance and then we have a rate increase. Again, what Tom and John said, regardless of how we go after, we’re going to end up at about 10.9 cents with certain uncertainties still unresolved that we hope will get resolved in the next years and some of these uncertainties that we have not budgeted for because they are one-time contingencies that we have just not budgeted for. We think the appropriate strategy and have a very strong recommendation is to maintain the reserve level at the maximum level during this historic transition time in our portfolio and coming off the energy crisis. Ulrich: Remember the reason for putting this together is that you’ve got two things that are going. Whether you think the guidelines are at the right amount. Here is the dynamics for following the guidelines and you’ve got to be up here. It’s not like this is staying straight and it just keeps on going down here where it’s always been. You could draw that because the last 40 years have been It’s not going to happen any more. I think you should be very happy that we’ve collected this money and it’s in the reserve to be able to take the delta that is getting smaller and smaller, and that’s with a 8.5% increase, so that it’s more of a glide path here rather than this big drop and then hitting people later on. That’s our recommendation. We think our customers should be treated as far as moving forward on the cost of energy going up and being able to doing it slowly rather than doing it as a higher rate later on. Melton: But just looking at your chart there, if you, even under scenario 3B, you end up out there in 06 and 07, is just about where Commissioner Bechtel described is where you’re supposed to be. You’re at the mid-point range. Hirmina: But at this point any market shock would eat up the whole thing. Ulrich: I think it’s important we go through in detail the recommendations that we made on the reserve and the risk in this business. I think it’s important that when you make a vote that you see those things out there. Hopefully, they don’t occur but that’s something that needs to be taken into account. We don’t make this recommendation to you lightly. Balachandran: If I may add, in the Quarterly Report which is the next item, on the regulatory side we have indicated a case, and Commissioner Dawes has referred to that in his comments, a FERC administrative law judge ruled about three weeks ago against Western and NCPA, and therefore us, the transmission rate case. This is part of the 2948A contract, the integration contract which we won the energy side of the contract that PG&E was proposing. On the transmission side, a district court sent it back to FERC and it was ruled against us. The process is going to _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 50 of 56 take 8 to 12 months before it comes to hearings and we figure out what the actual dollars are. This has not been included in our budget or our 10-year forecast. It comes under the category of one-time cost contingency and that’s again a hang- over of the energy crisis. There is the SCS ____, what I call the cousin of the transmission rate case, this is PG&E charging NCPA for very similar what they call new services. They sent a bill to NCPA a couple of years back a $45 million bill and a $45 million bill to Silicon Valley Power, they’ve now reduced it to $24 to NCPA of which the current estimate of Palo Alto’s share, according to PG&E’s calculations, would be about $8 million. We’ve reported that to you in public documents because PG&E sent us that letter. But that is not included in our budget because that is something that is being fought out, we spend a lot of dollars in attorneys and with NCPA’s legal staff to fight that case. There are contingencies that we have quantified and provided to you reports. We are also updating you in this quarterly report about some recent events. I think in a more generic basis back in October 2003 we’ve talked about our philosophy of one time cost contingencies. That is why I believe there is a pretty strong recommendation from the utilities staff to keep it at the maximum. Dahlen: When it comes to setting the maximum/minimum guideline level, I think a policy decision has been made that for this particular utility it is best to operate at the maximum level. We should probably revisit how the calculation is done to come up with a maximum and minimum so that what we currently consider the maximum becomes the mid-point. I think that is what Commissioner Bechtel is getting at. With regards to the water utility, we operate that utility at the minimum or below the minimum guidelines. Again, it may be time to revisit those calculations so we have consistency from utility to utility with regards to where our strike point is and we keep that to a minimum for those utilities based on the contingencies that have been brought up this evening. I think we’re getting hung up on the fact that we look at the large amount of reserves we have right now and we hear the justification that it’s best to operate at the maximum. It’s really a semantics question. I think what your advice is ,is that the maximum is truly the mid-point. We have to re-visit what the mid and max points should be and that there are significant contingencies and significant risks to this utility that you are justifying the rate increase by. I think it’s worth re-visiting that. Who makes the decision that we should target the maximum as our guideline? How is that decision come to and who makes that decision? Ulrich: I think ultimately the City Council approves our recommendation but the recommendation comes from, in this case, from staff and I guess from me. Dahlen: Very good, you answered my question. _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 51 of 56 Rosenbaum: Let me offer a couple of thoughts here. I did write a memo on the subject. The fact is that our estimated reserves at the end of the year are not at the maximum, they are $14 million over the maximum. The reserve guidelines look to just the thoughts of the issues that Girish was talking to, I don’t remember the exact number, I think there was something along the order of $10 million to deal with regulatory issues. You can’t very well put the same issue in reserves and say they need to be in rates too. In this coming year, the first six months under the old system, the first six months of the year is when we’re pretty heavy in hydro, which is a low cost resource. We have the Coral contract for the first three months of the year, which is a 3.6 cent resource. As John Melton pointed out, if we had no rate increase the reserve at the end of 04/05 will still be greater than the maximum specified reserve level. And further, it is my feeling, that next year we will have far more substantive and definitive information as to what our costs are going to be during the following three years. I think there is a speculative element to that right now. I don’t want to get into a long discussion of rates but the fact remains that we’re going to have 40% of our supply as a 2 cent resource and another 10% from Calvarias as a 3 cent resource and in order to get to the supply cost numbers that you are providing us, there’s going to have to be a lot of 10 cent energy and I’m not aware of any 10 cent energy at the moment. So I think in view of the $14 million surplus, $8 of which was unanticipated, as John Melton says, at the time you put the budget together and in view of the fact that next year we will have far better information on which to set rates that no rate increase is certainly required this year nor do I believe it is appropriate given the level of reserves. I don’t know if there is any further discussion or are we ready for a motion. Dexter? Dawes: I just wanted to point out a couple of other things. Both Tom and Lucie pointed out the fears of the gas situation of three years ago. I just don’t think there is a potential for that kind of problem for much of the reasons that the Chairman points out. Gas, we would have to have another wild ride in the electric market as we had in the same period in the gas thing. Gas we buy 100% off the market. Electricity we are over half between Western and ourselves. Under the new regime I just don’t see the swings in purchase costs that are being floated out here as a potential. I definitely, as I said earlier, feel the full increase is not warranted. Whether it’s 0 or 4% I think it’s a matter of judgment. Normally we have at least one utility that doesn’t have a rate increase or has a decrease. This year the proposal is for all of the utilities to have an increase. It would be a certainly lessen the blow to our citizens if we had a very modest or no increase in one of our utilities particularly in electric. Since I have the microphone, I will propose the UAC recommend a 4% electric increase to the Council and I will see if I can get a second for it. _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 52 of 56 Rosenbaum: We’ve got a proposal for a 4% increase. Is there a second? Hearing none, do we have another motion? Bechtel: Mr. Chairman, I move that we defer any rate increase in the electric fund to January 1, 2005. Rosenbaum: That’s a six-month delay. Alright, no increase for six months and reconsideration in time for the January bills. Is there a second to that motion? Dahlen: I have a question on that. Do we have a history of doing that in the past? Hirmina: During the gas crisis we went four times during the year to increase rates. We ended up increasing the rates 200% at the end of the year playing catch- up. That’s why we are asking for … Balachandran: I guess the majority of rate increases happen at this point in time. The energy crisis was a different situation that we hadn’t seen in decades. I’d just venture a guess that more than 90% of rate changes happen when they are scheduled. Rosenbaum: Do we have a second for the motion to re-examine the electric rate in January? Dawes: I’ll second that. Rosenbaum: Alright, do we have any discussion on this? Dawes: In my view, the UAC can bring up the questions of rates at any times just as we did several years ago. As I recall some of those increases did resolve from prodding of the UAC to staff to move things up. So I don’t feel that it’s technically necessary to defer for six months because it’s always able to be put on the table in a weeks notice. But I think it might perhaps be a showing staffs concerns are perceived and considered by the UAC so that is the reason why I support it. Dahlen: I think also the timing is important coming at the end Western contract seeing as we may have some new information at that time. Rosenbaum: Alright for staff’s benefit, what are we saying. We’re saying no rate increase with the issue to be brought up at the December UAC meeting. Would that be more specific? _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 53 of 56 Ulrich: Are you interested in our opinion? Rosenbaum: Not at the moment. I’m interested in trying to figuring what the motion means. We would be recommending no rate increase and then suggesting that staff make a new proposal in time to enact any rate change starting in January based on further information. Balachandran: If I may, in order to have a January 1 rate proposal, it would probably have to come to you in October because after that it has to go to the Finance Committee and then it has to go to Council. Given that Council is going to be coming back from vacation at the end of September, we have the Thanksgiving and holiday break. In terms of staff preparing it, we would probably be preparing it in September. Ulrich: I believe it’s probably also going to require a BAO, budget amendment ordinance. What you’re doing you’re not putting any money in the budget. By saying you’re going to want to look at it in six months there’s zero sitting out there. So if you’re doing it in October, what’s it going to be? Then you have to go back and do the analysis of what that rate increase will be and then you need to go back and attempt to change the budget. I don’t think you’re recognizing a need for any rate increase if you do what you’re doing as opposed to recognizing that there may be a increase and suggest what that increase should be a some future time rather than leave it in an abyss as it sounds like you’re doing. Rosenbaum: John? Melton: Another way to approach this thought is to, this is just a discussion I’m not proposing an amendment, it would be to recommend that the electric rate increase at whatever percentage level we choose, 8.5 or some smaller number greater than zero, would go into effect January 1st. In other words, agree to a proposed rate increase but not have it go into effect until January 1st rather than July 1st. In effect get half your rate increase corresponding to the end of the Western contract. Rosenbaum: That probably begs the question as to whether we need a rate increase. We’ve heard the comments from staff suggesting the complications involved in the motion by George seconded by Dexter. Do you have any second thoughts on that motion? Dawes: I don’t have second thoughts. If there is inconvenience to staff there is also the pocketbooks of our citizens. So I think one balances off the other. _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 54 of 56 Bechtel: In view of what staff has said, I would like to change my motion to defer the proposed 8.5% system wide retail electric rate to be effective January 1, 2005. Rosenbaum: So now your proposal is that the 8.5% rate increase go into effect in January rather than in July. You are withdrawing your previous motion and this is a new motion. Is there a second to this motion. Melton: Second. Rosenbaum: We have a second by John Melton. Is there a need for further discussion on this? I will oppose this motion because I don’t think we’ve established the requirement for a rate increase at any point this year. I guess I would almost prefer Dexter’s idea of 4% for the year rather than picking a number for the second half of the year the net effect would be the same. So I will vote against the motion. Any further discussion? Alright I think we are ready to vote on the motion for a 8.5% rate increase effective January 1st. All those in favor. Aye, Aye, Aye Nay, Nay Rosenbaum: John, how did you vote? Alright it looks as if this motion passes on a 3-2 vote. So the recommendation of the UAC to the City Council will be an 8.5% increase delayed six months. Do we have any further action to take this tonight? Dawes: Is a motion to adjourn in order Mr. Chairman? Rosenbaum: No, not quite. Ulrich: I just have one piece of business, it’s down at the bottom. Rosenbaum: John? Ulrich: Thank you. I don’t know if I mentioned earlier that, and I think I did, May 10th would be for the local generation alternative feasibility study. I think it would be helpful to have a UAC member there because we went to the Finance Committee and while they voted for it, they did not want it to be on consent. Rosenbaum: Alright, Elizabeth I think you agreed to attend? Dahlen: Monday May the 10th I am not in town. That’s not the one I agreed to go to. I believe that was the 24th or something. Let me check my calendar. _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 55 of 56 Ulrich: That’s right, to summarize; the 24th Commissioner Dahlen was going to go for the Fiber meeting with the Council. The May 11th the Capital Budget review by the Finance Committee, Commissioner Bechtel, and May 18th Commissioner Rosenbaum was going. Rosenbaum: This was the issue where you appeared before the Policy Committee that had to do with the prohibition of consideration of the Baylands as the site. Dahlen: I would like to but if that is May 10th I am not in town unfortunately. Rosenbaum: Is somebody else available? Melton: I’m in town. Rosenbaum: Alright, we can talk. The UAC took a position that we should look for a location without any restrictions. Ulrich: The recommendation was for a two-phase study. You did vote in favor of that. Commissioner Dahlen conveyed that to the Finance Committee. We can pass on that information and of course we have the minutes of the P&S meeting where Commissioner Dahlen was there. Rosenbaum: Alright John, I would suggest you talk with Elizabeth and you will be at the Council meeting on May 10th. I think the only other thing is I will take care of the minutes review for this month. Ulrich: Thank you. ADJOURNMENT Rosenbaum: Let Dee know. I think we’ve taken care of everything. A motion to adjourn is in order. Dawes: Is now in order and I so make. Bechtel: Second. Rosenbaum: Alright, we now adjourn. Ulrich: Thank you Commissioners. _________________________________________________________________________ UAC Minutes 5/6/04-Approved on June 2, 2004 Page 56 of 56