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HomeMy WebLinkAbout2004-11-03 Utilities Advisory Commission Summary MinutesUAC MINUTES OF 11/03/04: APPROVED 1/12/05 Page 1 of 14 APPROVED UAC MEETING MINUTES November 3, 2004 ORAL COMMUNICATIONS ___________________________________________________ 1 APPROVAL OF MINUTES ____________________________________________________ 1 REVIEW AND REVISIONS ____________________________________________________ 2 COMMISSIONER’S REPORT __________________________________________________ 2 DIRECTOR’S REPORT________________________________________________________ 2 UNFINISHED BUSINESS______________________________________________________ 3 NEW BUSINESS _____________________________________________________________ 3 NO. 1: UNDERGROUNDING – Informational ___________________________________ 3 NO. 2: QUARTERLY RISK MANAGEMENT REPORT – Informational _____________ 5 NO. 3: UTILITIES QUARTERLY REPORT - Informational ________________________ 6 Water: __________________________________________________________________ 6 GAS____________________________________________________________________ 7 Electric and Fiber _________________________________________________________ 7 Financial ________________________________________________________________ 8 Gas ____________________________________________________________________ 9 Water___________________________________________________________________ 9 NO.4: PROPOSED GAS RATE INCREASE - Action_____________________________ 10 ADJOURNMENT____________________________________________________________ 14 The UAC meeting was called to order on November 3, 2004 at 7:02 p.m. Those attending were: Melton, Dawes, Bechtel, and Dahlen. ORAL COMMUNICATIONS None. APPROVAL OF MINUTES MOTION: Melton moved the minutes from October 2004 be approved as written. Bechtel second. MOTION PASSED: Unanimously UAC MINUTES OF 11/03/04: APPROVED 1/12/05 Page 2 of 14 REVIEW AND REVISIONS No changes. COMMISSIONER’S REPORT None. DIRECTOR’S REPORT Ulrich thanked three Commissioners who attended the training session yesterday on Commissions and Committees; Melton, Dawes, and Dahlen. There was a review of the Brown Act and policies and procedures to follow. Bechtel and Rosenbaum have signed up for training in February. Commissioner Dawes suggested that conflict of interest could be expanded upon by the City Attorney. If the attorney could provide guidance to the Commissioners, particularly on equity holdings, it would be most appreciated. Ulrich said Gary Baum will be glad to sit individually with each Commissioner. Commissioners who have any concern should contact the City Attorney directly to arrange a meeting. The test for having a conflict has become more stringent. A good way to look at it, as an example, you should take your home and draw a 500 foot circle around your house. As an item comes up to the UAC, look and see if your proximity to that project would make it difficult for you to make a decision. John used an underground project as an example. Ulrich updated the Commission on upcoming City Manager Reports which include contracts for renewable power, 20mg wind energy beginning in December to help meet 6% of the City annual load and a contract for gas starting in 2007. Fixed prices for both contracts. Additional contracts are in place to fix energy sources. Staff will ask Council for approval on a contract to administer the Western Reserve Base Percentage and another for $300,000 to Roseville. CPUC Utilities staff is following procedure, we do not carry those levels of planned reserves, margins. We would look at what impact cost and reliability would be. John directed the Commissioners to contact him for more details.. Commissioners Dawes mentioned that the wind power pricing – electric side, wind in non-peak resource. , Looks like a good deal for the City. Bechtel discussed reserve capacity and required date. City Attorneys are following this. Is there more political pressure to do something about this (legal pressure) over the next year or so? CMUA legislative briefing session in January. Is that the appropriate time to discuss this with our legislators. Ulrich said a good time would be in January, will continue to monitor and if necessary, report back sooner. This would have an effect on every Muni utility in California. UAC MINUTES OF 11/03/04: APPROVED 1/12/05 Page 3 of 14 UNFINISHED BUSINESS None NEW BUSINESS NO. 1: UNDERGROUNDING – Informational Given the interest in the community, Dawes found the report very interesting. John offered to summarize some items in the report and give a chance to answer any questions. Staff are here to outline the summary and answer questions. Plans outlined in the summary: SBC allocates money under their tariff under the PUC. 40 underground districts have been formed. The status of uncompleted projects are listed on page 5. A brief description of underground district was included. This is a general public benefit – taking an area and deciding with Council whether that area should be placed underground, then going to the community and securing their agreement. This process requires agreement with SBC and the cable folks. It is a several year project both in scheduling and budgeting. CPAU attempts to provide minimal disturbance to the streets (which is not always easy) and requires a sharing of cost where the homeowner pays for work on their property. The 1998 funding level was reduced to 1% per year in order to accelerate the repair of the earlier undergrounding projects deterioration of other infrastructure. By 2008 we plan to come back. Marshall estimated that it will take approximately 72 years to complete all undergrounding. Melton remarked that the report shows only slightly more than 10% of residents have been undergrounded so far. Mostly industrial and commercial areas. With respect to the price of $58 million for the homeowners, Melton thinks people are aware this is a shared cost but does not believe many people have a sense of what their financial investment will be. Has this been well communicated in the community? Ulrich introduced Bradshaw and Marshall. The project is similar to what is being done all over California. The Sharing process is virtually the same all through the State. Homeowners and commercial businesses will benefit (aesthetics and financial benefits on value of their homes). Melton’s concern was about communication. It is his impression that people don’t realize what their part of the price will be and if they did, they might not be so eager to get it completed. What kind of response does staff get from homeowners, are they surprised, outraged, whatever? Marshall said first thing we do is go to each home and give them an estimate of what the cost will be. This is before the public hearing. Homeowners know what their costs will be early on in the process. We have not communicated to the entire community, only affected ones. Dahlen asked if residents vote need a 2/3’s majority? Marshall stated if there was a vote, it is an advisory, Council can still make the decision to go forward, it is their decision. UAC MINUTES OF 11/03/04: APPROVED 1/12/05 Page 4 of 14 Dahlen asked for the typical cost to a residential household. Marshall said between $3,000 and $7,000. Dahlen asked if prices were uniform by neighborhood or varied. Marshall said it varies, depending on what homeowner needs done. Dahlen asked for clarification on the white areas in the map. Marshall said the reason commercial and industrial are done is that the rules are in favor giving preference to heavily traveled streets. There is not much commercial left to be undergrounded. The white space area on the map is not scheduled for undergrounding yet. Regulation No. 17 defines districts for undergrounding plus negotiations with PacBell. Rule 17 decides is in the attachment. If a neighborhood wants, there is a way to form a new underground district, but it is a complicated process. Bechtel remarked that a typical underground district has a fewer number of homes that would be cost-effective (around 200 homes). Is that cost effective? Marshall said it is cost effective, it’s a lot of trenching in the neighborhood. These are extremely difficult projects on the neighborhoods and are very stressful for a lot of the customers. If we did many more than 200 homes, it would be extremely difficult. Bechtel asked if staff is considering coordinating other utilities joint projects that could be done at same time? People don’t like a lot of construction being done. Could we get it all done at the same time? Marshall says we have coordinated some in the past (District 35) but the problem is we are not moving as fast as other construction projects. When we see an opportunity, we make every effort to coordinate with them. Bradshaw talked about construction methods which make it much easier to do single utilities at the same time. Having several contractors on the job site at the same time can prove very problematic. Dawes noted the change in 1998 to 1% of revenues to invest in the City’s underground system was required because earlier undergrounding project had exceeded the expected life. Part of the current program is to rebuild earlier underground systems which became unreliable. Marshall said the undergrounding program has been running since 1965 (30 years old). Newer cables are lasting a 40 year range. A lot of infrastructure was installed in the early 60’s and 70’s and we are beginning to see increases in failures. We have had to deal with a back-log of work to catch up. We are close to being completely caught up with the work. Dawes asked if overheads are on the same kind of depreciation cycle? Marshall said yes, it’s a little different on overhead, where the poles are what deteriorates, wire doesn’t wear out on overhead. Underground is more reliable but is not maintenance-free. Dawes asked if underground is cost-effective. Marshall said he thinks not but it is what the community is asking for. Dawes asked if the cost of tree trimming gets rolled into the overhead versus the undergrounding. Marshall answered yes, it is considered. UAC MINUTES OF 11/03/04: APPROVED 1/12/05 Page 5 of 14 Dawes asked about the alterative approach for forming a district. Has there ever been a group that has petitioned Council to form a new underground district? Marshall said yes, at least two and they were successful. Dawes thanked staff for the briefing. NO. 2: QUARTERLY RISK MANAGEMENT REPORT – Informational John introduced Karl Van Orsdol to answer questions. Bechtel had no questions on the risk management portion but asked about transactions, more from the resource side. He wanted clarification on prices; some contracts – prices might be $20 apart in electric. Bechtel gave an example of price differences that has a large price differential. Van Orsdol explained these transaction as off-peak and on-peak hours. The product is different in these cases. Bechtel questioned other sections where he did not understand prices – page 1 on electric transactions - products look identical with different prices. Van Orsdol explained that the timing of the purchases effected the prices. Time of purchase was not put into the report for confidentiality reasons. Could have been purchase in 2002 or 2003, which would effect the price. Dahlen complemented the report but questioned the cost for the renewable energy and the comparison prices. Van Orsdol said staff has done a great job of negotiating, and mark to market cost is going to increase since we have negotiated such a good price. Karl Knapp added that the wind is fixed for 20 years. Ulrich stated there is a 1.5% increase per year for landfill gas. Dawes asked about page 5 figure 6 – what does this mean? Van Orsdol said this is an indication of forward gas price. This shows strip purchases for 2005, 2006, 2007 and 2008 and is tracking the price of those strips at different times for forward purchases. Every day there is a change in the price for delivery of gas for these years. This graph is tracking those changes, it tells why mark to market prices have gone up, to give sense of the movement of the market. Melton asked for a brief tutorial in market; for most of time tracking for 3 years, forward strips had very little price differential. Suddenly in the last year, the lines have started separating. What about the market caused it to change? Van Orsdol listed reasons for the change: • oil prices of both gas and electricity, there have been dramatic changes in the last 12-18 months. • International events. • Political issues. • Market variations. Melton asked why the prices for the outer years were lower than prices for the short term.. Swaminathan explained that the natural gas forward curve followed the crude oil price patterns with outer year prices being lower than near term prices. He also explained how long term UAC MINUTES OF 11/03/04: APPROVED 1/12/05 Page 6 of 14 supply expectation in the form of LNG imports and expected recovery from lost production after Hurricane Ivan were reasons for forward prices to be lower in the outer years. Dawes thanked staff for the informative report. NO. 3: UTILITIES QUARTERLY REPORT - Informational Ulrich made the suggestion to go through each section and ask questions. Handout of Attachment C is “at place.” Water: Dahlen asked Jane to summarize any issues that has been found on chloramines and health effects. What is general feel? Ratchye stated she has no additional information. There has been no answer from public health officials, they are still studying the issues. Bradshaw stated there has been some concern in other areas of the country of additional problems of leaching of lead out of the system. Palo Alto’s recently completed Lead and Copper tests are extremely good. Because of the good results, the Department of Health Services said we don’t have to test again until 2007. Dahlen asked about an oily, grease residue coming through distribution system coming through the bathtub of one of our residents. A filter was able to pick up black discoloration on filter. Bradshaw said this is the first one he has heard of like this. Bradshaw and Dahlen will follow up after this meeting. Dahlen asked if Hetch Hetchy water will be receiving more treatment – is that in the plans? She wondered if a filtration plant would be required as BAWSCA General Manager Art Jensen spoke of at last month’s meeting. Ratchye thought Jensen might have been talking about the proposal to restore the Hetch Hetchy Valley, which would require a big filtration plant. Otherwise, Hetch Hetchy plans to retain its “filtration avoidance” status. Ulrich said he thought Jensen said they are exempt from filtration. The SFPUC does operate the Harry Tracy Water Treatment Plant that filters water coming out of Crystal Springs and the Sunol Valley Water Treatment Plant that filters water stored in the system’s East Bay reservoirs. Bechtel asked about the water availability numbers on the 1st page of the water report. The last paragraph shows that 286,000 acre-feet was delivered in FY 02-03 to SF as well as to the BAWSCA agencies. The second paragraph indicates that SF received 331,000 acre-feet in the 2004 water year, which was only about 42% of normal. So it seems that even in a marginal year, SF gets substantially more than current demands. Ratchye said that this is correct. However, since SF’s water right is junior to Modesto and Turlock Irrigation Districts, their inflows are highly variable. MID and TID get the first water and SF’s entitlement is only to water that runs off at a rate that exceeds flows set aside for MID and TID. SF needs these years where they are getting runoff above the line to ride though some dry years where they may not get any or may get very little water. UAC MINUTES OF 11/03/04: APPROVED 1/12/05 Page 7 of 14 Next quarterly report, Ratchye will show a graph of actual run-off over the years to demonstrate the variability of supplies that flow to San Francisco’s regional system versus flows out of the watershed. Bechtel referred to the first paragraph on Page 3 of the report: wholesale rate projections increased 25% from last year’s report. Ratchye stated that BAWSCA was not happy about the increase either. SFPUC has stated that the increase is partially due to the earlier estimate being in error and also due to a 7% increase in the capital cost estimate for the CIP. BAWSCA has not seen exactly how they came up with their figures at this point. Bechtel asked how much SFPUC transfers to its General Fund from the water utility. Ratchye replied that this issue is one for residents of San Francisco. BAWSCA is not concerned about this since our contract solidly addressed cost allocation issues. In addition, BAWSCA audits SFPUC every year to ensure proper revenue calculations. Dawes asked about the Palo Alto emergency water storage situation. Considerable Engineering and an EIR are involved. Location issues are a major question. Dawes believes location will be the largest issue we face. What is the status? Bradshaw explained the EIR is in progress. A number of locations are still being considered including El Camino Park and Heritage Park. Until Palo Alto Utilities is further down the road it will not have to determine the location of the reservoir. There are also other sites being looked at under the EIR. In the 1999 report, most locations listed were on Stanford property, all of which have negatives, due to distance and cost. They have to be factored into the EIR. GAS Dahlen asked that the projected prices in the report seem to mean average projected price – what we purchased or what we expect market price to be even though we’ve already purchased. Dailey said $6.55/mmbtu is the projected market price for the next 12 months. $ 5.20/mmbtu is Palo Alto’s projected pool cost for 04/05. We’ve locked in 100% for November through March. Market exposure remains a possibility April through June. We are also buying gas on the daily market to adjust for imbalances. Dahlen complimented staff’s laddering strategy. Dailey said the WACOG is the fixed price pool purchases where contracts we’ve executed are locked in. While the fixed prices are locked in the expected is the solid line – there is some exposure. Karla reminded the Commission this is a three-year ladder. Dahlen asked if this is the decreasing percentage of what we expect to do? Dailey said we don’t know exactly what our cost or usage will be. Electric and Fiber Bechtel asked about congestion revenue rights. How can there be arbitrary allocation as if there is a real thing, explain CRRs and the rate impact. UAC MINUTES OF 11/03/04: APPROVED 1/12/05 Page 8 of 14 Kabat said he doesn’t fully understand CRRs and that there is a plan by regulating entities to regulate CRRs. Shiva Swaminathan explained that the concept of Congestion Revenue Rights was related to the market design concept of generators being paid Locational Marginal Prices. He explained how CRRs will enable the City to hedge congestion costs between Tracy Substation, where Western power will be delivered, and City’s Colorado substation. IOU generation of Western or Calaveras that gets connected at Tracy gets paid the LMP at Tracy, say $55/MWh. Our load at Colorado substation may have to pay the LMP at the Colorado substation, say $65/MWh. Having CRR provides the City the tool to hedge this $10/MWh cost differential, since congestion revenues collected by the ISO are allocated for CRR holders. Congestion during peak periods means there will not be enough transmission from Tracy to Colorado, and not be sufficient CRRs to go around. Some months we will get all we need but in the summer months, we’ll probably get 75 – 80% of what we ask for. Bechtel remarked that it should be called transmission revenue rights. Dahlen asked about resource adequacy costs. Swaminathan said they are designed to make sure loads have sufficient supply resource contracts in place to ensure gird reliability and to mitigate market power of generator owners. Palo Alto will have to show the ISO that we have sufficient megawatts lined up to meet our load and reserve requirements (can show by CRRs, and must show we can bring down to the peninsula.) Qualifying capacity – what is considered qualifying? The grid operator will decide which generation will be countered towards resource adequacy. For example our wind contract is 20 MW, but only 10-28% of that capacity is expected to be qualified by the ISO since wind is a less reliable intermittent resource. . Dahlen stated it forces us to keep a diverse portfolio. To ensure liquidity in the market for electric capacity, it must exhibits characteristics of a commodity market and may be best done through a central clearing house. Dahlen referred to Page 7 of 14 – Western and CAISO on exchange of transmission. Western gives up capacity and rights on that line, is this a very good deal? Kabat said this is similar to what’s been in place for a number of years. Financial Melton’s focus continued to be on the Electric Supply Rate Stabilization Reserve. The reserve is still $16 million above the maximum guideline and is increasing this year. Melton asked for an update from the Director on this issue on continuing to increase the size of this reserve. Ulrich said we asked for the rate increase to be effective last July because the increase would start to cause the supply rate to go down and it would very quickly get into the range of minimum and max. Based on the UAC recommendation, it was postponed six months. Facts have not changed as far as the direction this reserve will go. We think we should stay as high as possible in the reserve guidelines. The forecasts for increased supply costs are going to go up, particularly in fossil fuel supplies. UAC MINUTES OF 11/03/04: APPROVED 1/12/05 Page 9 of 14 Melton asked if we anticipated if Rate Stabilization Reserve would increase this year? Auzenne said the 2004/05 Electric Supply Rate Stabilization Reserve guideline maximum is $38 million. For FY 2005/06 the guideline goes to $52 million. Page 6 of 14 of Attachment C -Electric: indicates right now there is $8.5 million of that that is at risk, just sitting there. Melton assumed $52.4 million starting number already had 8.5 million subtracted out of it. Auzenne said that was correct. Dawes asked if these figures cause staff to reconsider the January 1 price increase, amount or timing. Ulrich said no. Bechtel questioned allowing our reserve to stay high as we weren’t sure what was going to happen with Western. Electric supply resources shows 11% deficit but only 1% this year. We haven’t determined where we’re going to get that 11% next year. Is this enough reason to keep our reserve running above maximum? Swaminathan said electric costs are going up (chart on page 5). Costs and uncertainties are going up which is one of the main drivers to maintain a stable reserve. Bechtel asked if there is still enough uncertainty out there that there is no reason to reconsider changing our schedule in January? Swaminathan explained risks that could make our costs increase by $10 million in one year. Gas Dahlen asked if charts reflect the proposed rate increase. Dawes asked for a figure. Ulrich said that information will be provided in the next report. Water Dahlen inquired about the residential water rate comparison chart. Some of the cities we compare to are not using Hetch Hetchy water, could we focus this comparison on sources so people can have a clear understanding of where the water is from? Auzenne agreed to do this with whatever information is available to us. Menlo Park has a mix of water supply which is combined, served by Cal-Water and Hetch Hetchy but billing is being done by Cal-Water. Ulrich discussed money we are putting in for CIPs but it is very difficult to tell what other cities are putting in. Dahlen asked which cities are allocating money to their general funds. For a better comparison on rates Auzenne agreed to see what he can come up with. Dahlen asked about 5/6 vs. 7/1. Very similar to gas situation, digging into reserves which are projected to be below guideline. No call for increase, why is this less important? UAC MINUTES OF 11/03/04: APPROVED 1/12/05 Page 10 of 14 Ulrich said the risk in knowing what the risks are between us and our water suppliers are far less than what is with our electric suppliers. We stated in our financial plan how much we calculate the water reserves will go up. NO.4: PROPOSED GAS RATE INCREASE - Action Lucie Hirmina handed out materials while Ulrich began the presentation. Ulrich explained that a month ago staff did not think a gas rate increase would be needed. Staff now believes it is appropriate to have a rate increase at an average of 17 – 22% ($10.40/month for average residential customer beginning January 1, 2004. Ulrich gave a brief summary of the report including a graph which details the differences in estimated annual purchase costs of gas. The graphic illustrates the future purchase costs of gas; June 2004 it will be about $17 million, June 2005 close to $20 million, and June 2007, the purchase cost will be at $22 million. Staff have been looking at how are we going to collect that kind of revenue. Currently we are collecting with about $7 million left in the reserves. With the current rate, the reserves will become negative beginning 2007. Palo Alto is virtually at the minimum now. Staff’s recommendation is to have a 17 –22 ($10.40/month for average residential customer% rate increase (to the customer) that will allow us to pay for the gas and get closer to the reserve target by June 2007. Other alternatives staff looked at would be a 30% increase (supply cost). Which would be a $9.29 increase per month for the average customer. Ulrich pointed out that the Commission can see the need for the rate increase based on staff’s recommendation. Budget projections in January 2004 – by October 25th there is a much higher forward price curve. A gas rate increase is needed to pay for future purchases of gas that the City needs with the goal being to maintain a reserve as close to the reserve target as possible. The net effect is the reserve rate will still be about 20% below PG&E rates in the surrounding communities. We’ve updated our monthly utility bill projections to see what the impact will be on the customer. $10.40 increase per month for gas for a 20% overall increase to the customer to get the 30% increase in supply cost. The impact overall to the customers will be about $15.30 for the next option Dawes stated that at the time the budget was put together a certain percentage of gas had been purchased and since then have purchased more. He asked what percentage had been committed at the time the budget was put together and are these figures the balance of the unhedged portfolio? Auzenne replied that it was about at approximately 75%. The laddering strategy calls for a minimum un-hedged balance of about 40%. Ulrich asked the Commission to direct their attention to the Quarterly Report, Page 2 of 10, Attachment B as Karla Dailey describes our laddering strategy and what we are trying to buy. Dailey said we are not in terrible shape at the end of 04/05 but because we plan for more than one year at a time, if we don’t do something about our rates now, in the next three year time frame the City will be in bad shape. UAC MINUTES OF 11/03/04: APPROVED 1/12/05 Page 11 of 14 Dawes asked about the magnitude of the price increase. Daily reiterated we are talking about three years out, our current fiscal year and the next fiscal year as well. Dawes asked about the distribution RSR and lack of plans to add to that reserve. Ulrich said we always have the ability to ask to move from one area to another. The Commission should understand that when Karla is buying gas, she is buying out 1, 2, and 3 years going forward. We are in the real-world with prices that we don’t have any control over. The City has the advantage by laddering to analyze and look forward and tell what is going to happen if we don’t raise the rate reserves. Dawes asked about the recommendation: 17-22% increase based on customer class use and the 58% increase for the City. Ulrich and Auzenne explained that rate G-6 rate will apply to service buildings and facilities owned and/or operated by the City of Palo Alto is going forward – since they were being dramatically undercharged. Melton said we are all aware of the petroleum market. He thinks what we see is that it has been fluxuating broadly in the past couple of months. Since a lot is driven by factors of supply and demand, his concern is that we may be over-reacting to what is a very volatile spot in the market. Melton stated we need to recognize the market may go down in the future and he doesn’t want to go overboard on this. The market moves a lot faster than the rate-setting mechanism moves. Auzenne agreed the market is volatile, which is why there is a purchasing strategy in place. We have no risk going forward for the remainder of the year but we bought at a high price. We are doing cost recovery plus building the reserves. We are already committed to $1.7 million. This is a lower price than the forward market is now. Ulrich said our cost of gas is less than the current spot market but a couple of years ago we drove down our reserves in order not to shock the customers with a rate increase. Our strategy with laddering is to purchase relatively small amounts to not shock our customers each month with the change. Risk is current spot market will be more than cost of buying gas. Dahlen expressed concern about the electric rates going up in January, could we post-pone another six months? Ulrich shared that staff gave this much thought. He reminded the Commission that staff recommendation was to have the electric increase earlier. He pointed out that we know that’s where the price is going to go and all of our replacement electric energy is at a higher price. We know we’re going to have to have another rate increase. It’s important to be as upfront with our customer as we can. We can help the customer but we have to pass on the higher price of the commodity. It’s better to pass this increase on now rather than have a higher increase later on. Bechtel said part of the reason of having reserves is to weather a storm. Looking at a 2007 purchase (projection), we’ve already deferred some purchases hoping prices would go down and next year we’re not fully exposed to the market. Given that we have a rate stabilization reserve to weather these things, perhaps we should look at this in June and not today. We don’t know what this winter will be: a severe winter would drive the prices up. We could use our stabilization reserve and let it fall to $5 million, if we did nothing it would fall to $2 million by June 2006, which would be a disaster but it would still be a $2 million reserve. UAC MINUTES OF 11/03/04: APPROVED 1/12/05 Page 12 of 14 Ulrich called attention to how we developed the RSR-Stabilization reserve guidelines. These were put together based on a number of estimated cost contingencies. Bechtel read from the report CMR 483:03, December 2003 on Reserve Guidelines (distributed earlier at places by Lucie Hirmina and asked for clarification. Ulrich said it’s a matter of whether you agree with what we’ve been following or do you want to go back and change the methodology for determining the RSR. The City is at the minimum right now and the only direction to go is down. If the Commission decides you don’t want the increase now, we’ll have to go back and collect the money later or you’ll have to direct us to go to Council and ask them to lower our reserves which would be putting the customers at market risk. PG&E changes their rates every month. Hopefully we change annually unless an emergency. The purpose of a reserve is to weather two years. If prices do not drop in six months or one year, our reserves will fall well below where it is today because we’ve already committed that money. Most likely we will have to increase our rates again. If we defer this six months we’ve always allowed our reserves to cushion our bounces. We don’t want them to fall below the minimum. Dawes talked about prior years of getting behind the curve. Once you get in that position, you are in serious trouble. We must not let this get out of hand. He feels it is too risky a strategy to not raise rates. MOTION: Dawes called for a motion. Seeing none, Dawes motioned that the UAC recommend to the Council to accept the staff recommendation starting January 1, 2005 with an additional adjustment for the City price increase. SECOND: Bechtel seconded the motion. Karla explained that what the PG&E customers pay is mostly a market cost. They will be paying $7-9 per MMBTU. Even with the proposed rate increase, Palo Alto customers will be paying less than PG&E customers. If you miss this opportunity, the City will be in a bad position. Karla continued by saying there is a very strong feeling in the market that this is not a spike but a fundamental change in the price and it is here to stay for several years. The mean has gone up and supply is so tight there will be additional rises. The prices we see today are our best guess for prices for the City. They are not wild estimates. The reality is our reserves are not in the condition to handle what we think it needs to be in the next three years. Melton wanted to talk about the overall impact of gas and electric. Might want to think about, given the condition of the gas reserves, did we consider deferring the planned 1/1/2005 electric rate increase. Since this is not on the agenda, we can’t consider tonight. But Melton asked if the Commission can direct John to bring this to us next month on the agenda. Other point is total utility bill impact, remind the next Council meeting there will be consideration of a ballot for increased storm drain fees that is not reflected on this sheet and that increase is supposed to happen in the February-March timeframe. That is yet another factor that City Council will be considering with both the utility rate increases and the decision from that election. This will be another hit to the Utility bill that is not reflected in the handout here. Dahlen noted that the projected utility bills looks quite high. If we go with Dexter’s thoughts to be prudent here to prevent being negative on the reserve, could we do so in a gentler way with a UAC MINUTES OF 11/03/04: APPROVED 1/12/05 Page 13 of 14 reduction in the amount of the rate increase. She asked about an amendment to the motion, what percentage would keep us at the minimum? Dawes asked to look at the numbers again. Auzenne stated that the numbers on the quarterly report were done before this current analysis. We were doing this analysis up to yesterday. Hirmina said the $5.2 million projection is too low because it would be below minimum. Dawes said if we do implement a 20% price increase, the ending reserve will stay at $5.2 million. He questioned the consistency of the two charts. Ulrich and Auzenne clarified the chart lines. What we have on this chart is the increase to the supply, not the rate increase. It is a 30% increase in supply. Discussion and clarification were held regarding the chart. The red line is 30% supply cost increase. Reserve is after a 20% reserve increase. The Commission asked if they estimate a 10% increase would result in the blue line. Hirmina said that would be 20% rate (blue line). Ulrich outlined the three options (A, B, C) on page 4 of 5 in the Proposed Gas Rate report. Option B is an increase of 20% in gas supply rate rather than 30%, average residential bill of $9.20 which is 18.6%. There is a $1.10 difference to the customer. We are melding the winter and the summer together to get the $10.40 rate increase. MOTION: Dahlen motioned to go with Option B. DAWES: Consented to the modification of his earlier motion. SECOND: Melton seconded. Ulrich says while this looks like only a $1 difference we’d have to come back with another recommendation for another rate increase in June or July. Staff decided to tell the UAC what we think is the appropriate amount and then showed these options to show you we also looked at other options. Dawes said the discussion seems to revolve around the idea of a lesser rate increase resulting in a plateau of our RSR rather than an expansion of our RSR is the way the Commission is thinking. Ulrich said the other main part of this is we’ve set aside money for one-time cost contingencies that are in the RSR and you should be aware of that. The other reminder is the reason we went to the laddering strategy is to keep staff from trying to speculate on buying gas, to avoid opinions of where the market is going to go. Melton said if we go with Option B now, we could always do another rate increase next spring when we review all rate increases. That is acceptable. Melton said he would rather have it then than a larger one in January. If the market forces it, then we could consider it next summer. Hirmina said staff will be proposing both a water rate increase and a waste water rate increase in the summer. Dailey said it will have a larger impact on our revenue to have a rate increase in January. If you postpone a rate increase to the summer, the volume of sales is so low that the revenue will not be sufficient, UAC MINUTES OF 11/03/04: APPROVED 1/12/05 Page 14 of 14 Dawes called for a vote on the earlier motion He reviewed the earlier motion: REVIEW OF MOTION: The UAC recommends Option B for proposed rate increase gas utility, and to approve the new G-6 rate for the City. MOTION PASSED UNANIMOUSLY. Melton asked if there was any interest in asking John to bring a review of the electric rate increase for January 1st to the December UAC meeting. Bechtel said that would take an emergency action of the Council which would be hard to pull off. Dawes and Dahlen were both against asking for a justification for the electric rate increase in January. No motion. Ulrich told the group the December meeting will include the annual public benefits plan update and a revisit of the strategic plan and measurements. He asked for any concerns about the meeting schedule of December 1, 2004. No problems expressed.. MOTION: Motion made to adjourn by Dawes. SECOND: Dahlen MOTION PASSED UNANIMOUSLY. ADJOURNMENT Meeting adjourned at 9:54 p.m. Respectfully submitted, Dee Zichowic