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HomeMy WebLinkAbout2005-04-06 Utilities Advisory Commission Summary Minutes UAC Minutes from April 6, 2005 Approved on June 1, 2004 Page 1 of 17 MINUTES APRIL 6, 2005 COUNCIL CHAMBERS PALO ALTO CITY HALL – 250 HAMILTON AVENUE 7:00 P.M. THIS NOTICE IS POSTED IN ACCORDANCE WITH GOVERNMENT CODE SECTION 54954.2(A) OR 54946 I. ROLL CALL The meeting was called to order at 7:03. Those in attendance: John Melton, Dick Rosenbaum, Dexter Dawes, George Bechtel and Bern Beecham. II. ORAL COMMUNICATIONS None. III. APPROVAL OF THE MINUTES Bechtel motioned for approval of the minutes of the Utilities Advisory Commission meeting held on March 9, 2005. Melton seconded. Motion passed unanimously with Dahlen absent. Commissioner Elizabeth Dahlen joined the meeting at 7:06 p.m. IV. AGENDA REVIEW AND REVISIONS At place items: Email from Commissioner Rosenbaum dated April 6th, addressed to members to the UAC and a couple members of staff. Also budget highlights. We can include the email in our discussion. Any rate proposals staff noted will be presented at this meeting. Is staff not recommending any rate changes? We can discuss time for the next meeting and what we plan to prepare. Appropriateness of items being spent, we need to take more time. We plan to share with you where we’re at and ask for your advice, as well as council within the timeframe of the highlights and strategic plan. V. REPORTS FROM COMMISSIONER MEETINGS/EVENTS None. VI. DIRECTOR OF UTILITIES REPORT John Ulrich shared highlights of recent items that should help prepare for our discussion on the highlights. 1. Two weeks ago, we met with ISO senior management to discuss issues related to market design, uncertainty in delivery point and transmission planning issues. Uncertainty in the ISO’s market design is making it extremely difficulty to purchase power for 2007 and onwards. We greatly appreciated Bern Beecham’s participation. 2. Western put out its latest forecast on 4/1/05. It doesn't look good. For the next 12 months we are now projecting to receive 243 GWh (63% of long-term average), which is less than a critical dry year. We can expect to get 70 GWh less than Western's previous forecast, resulting in supply cost increasing by ~$5M ($1 M in FY 04/05 and $4 M in FY 05/06). We have a chart which shows how the forecast changes and we’ll get into that later if you’d like. City of Palo Alto Utilities Advisory Commission UAC Minutes from April 6, 2005 Approved on June 1, 2004 Page 2 of 17 3. Energy prices continue to rise. Over the last 39 months, since January 2002, energy prices for the post-2004 period have increased 120%, from about 33 mills to about 73 mills. Over the last three months, since January 2005, energy prices have increased 15%. 4. As I’ve mentioned in the last two Utility Director reports, the PG&E bill to Western for $51 million is still unresolved. If PG&E succeed in passing on these costs to Western customers, the potential Palo Alto liability could be as high as $12 million. Staff has kept UAC informed of the uncertainty in transmission costs through the UAC quarterly reports (August 2003 and 2004). A brief outline of the case is as follows: Western, through a series of invoices and verbal representations from PG&E, has been presented with alleged cost liabilities of approximately $51 million associated with retroactive GMC, SCS charges, transmission and RS charges for the period 2001 to 2004. Western is litigating the legitimacy of these costs in a proceeding currently pending before FERC and is now in the process of attempting to figure out how this cost would be apportioned among its customers. A FERC hearing on this issue is not expected until September 2005, with no resolution expected for a couple of years. However, there is a possibility that we may have to pay these bills, subject to refund if the case finally settles in our favor. 5. On February 22, Council approved Palo Alto joining the Central Valley Project CVP Corporation as recommended by UAC in the fall of 2003. Last night, the Finance Committee unanimously approved a staff recommendation to Council for subscribing the CVP Corp’s Seasonal Exchange program with Western. 6. As mentioned by Scott during last month’s Utilities Director report, double-digit rate increase proposals are possible for electric, gas, water and wastewater utilities in FY05-06. 7. Tonight we are bringing you the Fiscal Year 2005-06 Budget Highlights. This budget does not represent “business as usual”. Budget preparation this year has been particularly difficult due to: a) flat sales b) tremendous cost increases in electric supply c) need to maintain approved Reserve levels d) need for CIP projects deferred from prior years because of their impact on rates We will be bringing you both our “Five Year Financial Plan” and our Rate Recommendations before we meet with the Finance Committee in May. This delay is a result of: a) a second round of aggressive reductions or deferrals in Supply and Distribution budgets (including CIPs, such as Utilities Customer Information System) b) determination of strategies to implement Cost of Service reallocations recommended by the latest Water and Wastewater Study without causing “Rate Shock” c) additional financial analysis of Reserve Guidelines which cause upward impacts on rates 8. In our discussion tonight, we seek UAC input into cost containment priorities, strategies and objectives. We will be investigating: UAC Minutes from April 6, 2005 Approved on June 1, 2004 Page 3 of 17 a. CIP: ƒ Can CIPs be broken into budgeted phases, rather than needing up-front funding of entire projects? ƒ Can CIPs be funded at the Enterprise Fund level, rather than on a project-by-project basis, so that moneys can be moved among projects as needed? ƒ Should we seek a greater level of bond financing for CIP? ƒ Can Utilities infrastructure still be maintained if we switch to flat budgeting of CIPs according to a Five-Year Plan? ƒ Which CIP projects should be deferred until the financial climate improves (under- grounding, Automated Meter Reading, etc.)? ƒ How quickly should unexpended CIP funds be returned to Reserves in there are implementation delays in the project? b. RESERVES ƒ Supply and Distribution Rate Stabilization Reserves, Emergency Plant Replacement Reserves, and General Fund Transfer Stabilization Reserves will be reviewed and recommendations made to the UAC in May, 2005. ƒ What is an adequate amount of reserves to set aside for the identified risks including hydro, market and regulatory risk? c. COST OF SERVICE ALLOCATIONS ƒ Shall we perform Cost of Service studies on a new, 3-year cycle (water/wastewater supply and distribution, electric supply and distribution, gas supply and distribution) to determine proper allocation of rapidly changing Supply and Distribution costs? Commissioner Dawes asked for questions from the Commissioners: Melton asked for an elaboration on the Western’s forecast? What’s going on? Girish Balachandran stated that we prepared our budget using Western’s long tern average which was 400 gigs. Since then, Western’s forecast has dropped quite a bit. We’ve lost approximately 140 gigs x about $70/MWh, we’re talking about $10 million just from Western. Essential cost structure has changed, which we’ve known for a long time. Melton asked the reason for Western’s drop? South of highway 80 there is a lot of water when you look at the dam levels, but north… Kabat confirmed there is a Northwest draught taking out the snow pack in the upper Sacramento River region. There has been very low run-off to date and a low forecast for runoff so far. This Friday the Water Resources District will announce another forecast for the summer period. Dawes asked if the quotes were from Western average cost only? Girish said that was from the U.D. Report and is just the market price. It is the expected cost of what we buy from the market for replacement of power. Dahlen asked if this is just for the replacement of the delta (difference in volumes)? Girish confirmed. VII. UNFINISHED BUSINESS None UAC Minutes from April 6, 2005 Approved on June 1, 2004 Page 4 of 17 VIII. NEW BUSINESS 1. Budget Highlights INFORMATION We’ve submitted our budget highlights, but we are not assuming everything we’ve put in there is cast in concrete. We want to give you highlights of things that are significantly different from the past so you can have a high-level review. CIP Starting with the CIP. One of the big drivers is continual cost of doing our CIP work. In the past, we’ve put our projects together based on what we think is appropriate. But when we do that, if we cannot spend that money in an reasonable amount of time, we are putting into the rates the expectation we will be collecting from our customers. It’s important that when we put this into the rates, that we are actually going to spend that money. Can it be funded from a … level. Should we seek a bond level, we are currently on a pay-as-you-go basis. Can the utilities infrastructure be maintained if we switch to a flat level. Which CIP projects should be deferred until the financial climate changes? How quickly should unexpended CIP funds be returned to the Reserves and what are the implementation delays on the projects. Dawes asked if the Commissioners had any questions on the budget highlights? Bechtel asked John, given that there is a policy or strategy points you put out earlier, what assumptions did you use to put together the significant’ changes in the proposed budget. John said this was not budget as usual and that we are looking at projects as done and put it into the plan to look at what impacts it will have on our spending. Bechtel said it looks like you are looking at a 31% in revenue over last year and under the expense side; commodity cost is going up about 23%. Assuming if we were to, on the CIP’s, could be reduced but still need to raise rates considerably on the electric fund side. Seems like whatever we do we have to make a major change in how we go about our business. Those are my observations on how the numbers are going and we really need to talk about the strategy items. Very little we can do on the commodity purchase side, we will use our laddering plan, get the best price and risk management plan. Those costs are going up. Overall impact is the rates to the customers. We have to look at things we spend money on and we have some impacts on things we could change. Dawes spoke to the $12 million commodity cost, it seems we’d be looking at roughly a $10 million increase in our reserves less the change in our budget highlights. Significant reserve increase? Go into apparent large increase in our reserves. Ulrich said we can look at if our reserves are appropriate or do they need to be changed? This is a dry hydro year and maybe we should be dipping into our reserves. Ulrich said in some sense this might not be a dry hydro year. GB said that was just the 12-month forecast , it doesn’t have anything to do with Reserves. Isn’t that what we have large reserves for, dry hydro years, isn’t that what we have here? GB said the news isn’t good but it wasn’t news we are not prepared for. Dawes said interest rates, projected income on sales revenue is going down because the City’s portfolio is going down? Ralston said this projection is from ASD estimates and she understands everything is in the same pile. It is our utility funds but it is all together with the City’s invested all together UAC Minutes from April 6, 2005 Approved on June 1, 2004 Page 5 of 17 in one portfolio. The total figure is $15 million for the City and ours is a portion of that. Beecham said…. Dawes asked if the rate of return is less than last year? Rosenbaum said it should be the City’s portfolio income. It’s the $15m that is 4.84% less than last year. Dawes said if based on our enterprise value, which is higher than year before, that’s why I like to see last year compared to this year. Rosenbaum said total earned on all is less, we get our correct share on that amount. Melton asked about the other utilities. Gas fund 13% increase with a zero commodity increase……what’s going on in the other funds? Auzenne said CIP is just one of the cost drivers. In our reserves and our reserve guidelines we’re finding that the current methodology for setting reserves and guidelines is driving our rates. Melton said in water fund commodity purchase is lower, CIP is lower. Auzenne said the main driver is the commodity reserve has been below for years. In water it’s reserves that driving. For gas the driver is the CIP. Dawes said it must be reserves as well. Net of $2million. The bulk is in reserves. Modify your rationale. Auzenne said yes, that’s part of the rationale that we will be bringing back to you. Rosenbaum asked about line 26 and 27 EMA purchases. What is EMA? (electric master agreements). Why isn’t Western just 7M …$23M is made up of four components. ISO pass through from PG&E is $10 million. Transmission high voltages and low voltage charges, reliability charges, grid management charges. Microphones died: Rosenbaum asked if in joint agency debt, increase of $2.4 m same point we discussed 2 years ago, there is an off-setting increase in the Calavaras... GB said next month you will see the 5 year draw-downs. All these numbers are net, but not on debt services. GB said it’s not 3cents, it’s more like 4.5 cents. Rosenbaum Reality is the amount of money projected in capital improvements has been quite constant over the years. There might be flux year to year, the 3 m underground in the design phase, year to year averages out. Don’t see any big issues with Capital projects. Melton asked how do we do CIP’s now. Ulrich said once we agree on the project, may have multi year projects, that money is set aside and held for that project. We collect the total in rates to try to pay for that project. Melton said the year to year flux in CIP really shouldn’t have a big effect on rates since every CIP we’re working on has been going on for some time. We will be spending the money. ….the nature is to encumber the money then you have to encumber to make sure the contractor has the funds. It’s difficult for a contractor to bid on different pieces. We have a pay as we go policy, we will collect that money and within the first year, the project might not be complete… then we’ll have $25M in unexpended dollars. Once encumbered, it goes into an account that is drawn down, not part of reserves at all. UAC Minutes from April 6, 2005 Approved on June 1, 2004 Page 6 of 17 Dahlen asked about the summary. Why don’t we have fixed costs reflected in the table? In the write up in bullet items on page 2 it seems some of those items do get into costs; such as, fixed costs or labor issues. Tell us about fixed costs. Ulrich said labor increases where we know the salary and benefits are going up. Is that what you’re referring to as fixed? Dahlen said yes, and asked do any budget concerns for the coming year get into labor costs or manpower? Ulrich said we know that our labor costs are going up 3%. Our biggest driver is the expectation of what the cost is for doing the CIP, competitive nature of the contract we are letting out. We try not to have something slip by us. Do you have any other items you’re looking at? These costs are captured but we must continue to look at these costs. Ulrich said we do our best to estimate what we think those projects are going to cost based on the market and what we think those labor costs will be. Scott asked if they were specifically speaking about O&M? yes, those costs are captured. We must continue to look at those costs. We are also looking the other way around, reduce area and 5%- 10% what will the effect be. Dawes stated he is aghast at item called ‘rent increases’ due to reappraisals.’ Property next to the Nixon School which he understands is zoned for commercial. Most of our properties are in commercial areas, substations, water reservoirs, whatever, have got to be way down in appraised value. The hit commercial real estate has taken in our city has got to be very considerable. Does Utilities get a chance to negotiate these or is it a one-way read-it-and-weep. Ulrich said there is not a negotiation based on what we think but an independent appraiser values bases on highest and best use of that particular land. Mayfield is considered residential, how many homes could reasonably be put on that property and they base on that. We don’t negotiate a better deal. Beecham stated he has talked with Sharon Erickson about this issue to get assurance these charges are fair and reasonable. You may wish to invite her to chat with us. Dawes made one last observation on the Schedules. He initially thought this was a step in the right direction and a way to focus on the critical things in the budget. There are some very large holes in it. The reserves situation is being built very aggressively, In future there has to be all of the major changes, including reserves, can’t sweep under the rug, or move it to a later time, it doesn’t make for a good discussion if all major issues are not contained here. Let’s move on to policy issues, particularly CIPs and how they are accounted and budgeted for. Bradshaw said CIPs are being broken into budgeted phases. If we have a multi-year construction project, 2-5 years to construct, should we budget each year for that particular portion or phase rather than budget for full amount up front? Currently we budget the 1st year for engineering and then the second year for construction, and if the construction takes 3-4-5 years we still have to fund that up front. We could UAC Minutes from April 6, 2005 Approved on June 1, 2004 Page 7 of 17 budget on a year-to-year basis and that would save Tom collecting that amount of money for those phases, that is a policy decision. Funding at the enterprise fund level, we have a pot of money at the fund level, we can look at rather than accumulating $10m for 5 projects when we think there is chance only 3 projects will be completed, maybe we only need to budget $7million and we can spread that money between projects and not have to encumber that full $10million. That’s a lot of money to not have to collect. Bond financing is a way to defer costs out into the future. Can we maintain the infrastructure if we stick to flat budgeting. We have deterioration issues in some areas, gas – we have some old pipe, very substandard and needs to be replaced and taken out of the system. If we do flat budgeting over a period time are we going to loose ground to the breaks and leaks that are happening to that system? I think we will loose ground if we don’t keep working at the rate of replacement we have been working at. In the electric system, the present rate of replacement and repair of our system is adequate but we could look at something like deferring undergrounding into the future. It is a policy issue. This is a very special issue to a lot of our residents. They want to continue with a least some undergrounding on a year to year basis. If we defer, say a year or two out in the future, as project, that could save Tom from having to collecting. We would need to take a hard look at that. We have some issues with automated meter reading which over the long term may save us some money but we can put out into the future. We are converting our systems from 4kv to 12kv. Based on the fact that there are savings from operating at a higher voltage, for safety reasons and economic reasons is a better way to go. But again, we can defer. We’d loose some cost operating but save in cost construction. How quickly can we return the CIP funds we don’t use back into reserves. Every year we have projects that comes in under budget then we take that money and return to reserves. We spend a fair amount of time wrapping those projects up making sure all the bills are paid, then take that money and put it into reserves. We may be able to do that faster but again that is at the risk of missing something in the process that we’d have to go back and fix later. Bechtel asked if there are any contract issues involved from a council policy view that control how we set aside money for these capital projects or does basically your staff put together the way we manage these monies. Bechtel said if you set aside money every year and put into CIP reserve, then everyone decides how to spend that money (could that be done) or is it Council driven that controls how we handle these monies? Auzenne said yes there are. If we went to number two. We’ve been discussing planning at fund level. There are Charter implications. If we could move forward with that successfully it would probably take effect 2006/2007 at the earliest. Deferring CIP UAC Minutes from April 6, 2005 Approved on June 1, 2004 Page 8 of 17 projects, we can always defer, in the past from year to year we’ve deferred just on the impact on rates. Sooner or later it catches up with you. We are taking a look at all of our processes of trying get out of the loop of trying to manage pricing as opposed to managing policies. Bechtel asked about $25m in unspent CIP on average. Is that money that can be pulled back in, does it need to be that high, what financial rules govern that kind of money? Auzenne said that represents the total CIP. All monies that have been encumbered that are currently in process. If you don’t spend the money, everything gets shut down at this point. That is the function of the multi-year carry-over from different projects across of all the funds. Bechtel asked if we deferred something this year, we would spend down the $25M and make it some other number, say $15M or so. Auzenne said we could defer a project and it would indeed be deferred, the $25M would continue to go down as other projects came to closure. Bechtel said what he is getting at is the $25M is directly related to a long range CIP, some percentage of that. That $25M is not really a number that can be used for something else, it is definitely encumbered specifically for that project that you have already initiated. Auzenne said encumbered, approved and the customers have already paid for it. . Bechtel asked Auzenne if he had any specific proposals to make to us tonight or at next month’s meeting in answer to these questions? Auzenne said in regards to the CIP, we’ve had initial discussions with ASD, and a change would require Council policy change, perhaps Charter change. These changes would not affect just us. We will continue to go forward as that offers some options to us. Each project would have to be approved that could draw from the pot. Should CIP projects be deferred? It depends on the state of the system, wherever it might be at the moment. 5 year budget, we can implement. Out of the box would be funding at fund level and breaking the CIP into phases, the two can be mutuality exclusive. Rosenbaum said over the years he thinks we’ve been handling the CIPs just right. Staff uses their professional judgment to determine what the average CIP should be in order to maintain the system and we appropriate that amount of money each year. I appreciate this look at it but these are small details compared to that basic policy decision that we’re going to maintain he system. I don’t see, particularity in electricity, that is going to have much of an effect on rates as supply costs are driving. He doesn’t see the need for further discussion on this if we feel we have enough CIP to maintain the system. Melton disagreed. Present system of doing each CIP individually and having the impact on the rate of funding the whole thing in the first year makes no sense at all. Makes a lot more sense to try to even that out by doing an enterprise fund and having projects draw against or doing on 5-year plan. Agreed with present policy of pay as you go, does not recommend using bonds. UAC Minutes from April 6, 2005 Approved on June 1, 2004 Page 9 of 17 Dahlen said she agrees with Rosenbaum. Sees no evidence that we have a problem with funding the CIP. Identify and fund up front. Determining maximum and minimum on reserves that we need to look at because the environment has changed so dramatically, particularly with electricity. This is the foundation of why we are looking at the CIP, because it is a factor in the reserve analysis. Would it be helpful in going through how that analysis is done, i.e., the maximum and the minimum. Is the CIP a sensitive parameter that is more significant than other factors? Doesn’t see any need to change the method we do currently with the CIP. Ulrich said we are looking at phasing in, just recently due to the change in our supply and increased cost we’re looking at passing on some significant rate increases to our customers. It’s important for us to do due diligence to look at is there a better way of funding our CIPs not necessary changing what is important since that is the basis of our funding. If we are holding on to money we haven’t identified for use because we don’t need to go out and collect more money, if it fits within our accounting practices and it’s legal and appropriate to do. When we put the final number we want to be certain we are giving you alternatives. We are the only city that has all the utilities. It’s important to look at balancing all utilities and putting in proper funds. That will be part of our recommendation. We are the only place around that has these utilities in one city. It’s important to look at balancing, trade offs and of course, to keep monies in appropriate fund. That will be part of our overall recommendation. Beecham asked about the magnitude of the funds that are unencumbered that are unspent. Ralston said right now beyond the RSR, in the CIP for bonded, unbonded, encumbered, and unencumbered. Last time she looked in the electric fund the amount was $8M unencumbered. Last year was the implementation of SAP. It was the first year we did the project closing. We could not close any of these projects and we did make an attempt to return some of that money. If we close a project and return it, it goes to RSR. Beecham asked for the exact amount of what is encumbered. He said is this a small amount, large amount, anything to be gained? Beecham asked for the exact amount, is it small, large, anything to be gained to help with the rates? Dawes stated he was not quite sure what encumbered means. Ralston answered that encumbered means we've made a contract of some sort with purchasing and these funds are earmarked and assigned to that particular contract and project. Generally in the CIP’s they are very large contracts maybe $3 - $4 million. That money is encumbered or assigned to that particular contract and project. So every year when we close the books, we carry over the encumbered funds. The CIP’s are highly regulated by the Muni code because it is approved at a project level. Funding for CIP’s is carried over automatically 2 years according to the Muni Code unless we purposely release that money then it goes into the unencumbered Nothing is assigned to that money yet. Some of it has to do with City processes. We could have a contract in process right now, as Scott has, and the last step after Council approval is the encumbrance of that contract. UAC Minutes from April 6, 2005 Approved on June 1, 2004 Page 10 of 17 Dawes confirmed that we switch it over to this pot before the contract is issued so some of that $8M might be in anticipation of a $4M contract Council will approve next week. It may be $4M what’s left over when contracts are closed out and you haven’t moved back. Ralston said that’s right, if we free up the Capital, it goes into the RSR. If we carryover it goes into the other two. Ralston left the meeting to get more information on the exact amounts. Ulrich said it’s important that we are able to factor that into what we are doing. We can’t go out and collect money for something we don’t have approval to do. Some of the large say, water projects we thought we were going to do and receive Council approval a couple of years ago, we are out doing the EIR for them so those CIPs are not in our rates. That money is not in our pots. Bradshaw said that because of the EIR process we were told not to collect those funds. Encumbering is different than having the funds on hand. Ulrich confirmed the difference is that Council did not approve some of the projects and until the time we finish the EIR, we will have to come back to Council for approval. Dawes is saying the underground project is the biggest CIP. Dawes said he agrees with Rosenbaum that chopping it up into annual allocations rather than putting it all out until the CIP was authorized and this would result in small reduction in our CIP costs for a year or two and then it would level out. We have very conservative method pay as you go and not getting heavily into bonds. It would be a one-time pick up and would make it less conservative. We have very conservative accounting, pay as you go method, and we fund our projects when they are authorized. I would certainly recommend against not doing pay as you go, I could be persuaded on the year to year but it’s a one year pick up and this smacks of the kind of accounting they do in Washington to make the budget look better for this year and then next year you’re back in the soup. B. Reserves: Auzenne said there are a variety of reserves. Supply and distribution rate stabilization reserves, is the supply and distribution that are two different reserves for gas and electricity. Supply reserve, supply rate stabilization reserve, and the distribution reserve. Water is not, it’s one reserve. There is a wastewater reserve. There is also an emergency plant replacement reserve in the Charter of the City. It is designed for an emergency plant should a disaster occur. There are formulas in the Charter for funding that. Right now, the total amount of dollars is relatively small. General Fund transfer of stabilization reserve, another reserve set up in ASD funded by UTL in case for some reason Utilities is not able to make it’s transfer payment. It’s relatively small, but you should take a look at it. We are planning on doing both next month with you. We last revisited those guidelines December 2003, since then life has changed and it’s worth significant discussion and recommendations from the Commission on how we can structure that. Between rates and reserves it’s a cash management/flow issue. Reserves are there to help with that function. We don’t necessarily want reserves to be a driver of rates. There is certainly good reason why we have reserves at certain levels. Risk management, supply cost increases & CIP increases, and the like. We want to have a discussion about that. Auzenne said what is an adequate amount of reserves to set aside for the identified risks including hydro, market and regulatory risk? Is it prudent to have reserves below UAC Minutes from April 6, 2005 Approved on June 1, 2004 Page 11 of 17 minimum for a temporary period? If you have a payout of your reserves in any given year and it pushes you below the minimum then you increase rates that year or the following year to recover that you have rates increase driven by your minimum guideline. Some other issues we are struggling with are if in fact it is a stabilization reserve and you pay it out what is a prudent recovery period to put it back so it’s there for your use again. Dawes mentioned the gas fund a few years ago when we almost went negative on our reserves and had 3 or 4 rate increases in one year to catch up. That was a scary time. Dahlen asked what is the recovery time now? Auzenne said there is no set recovery time. We’ve been below minimum in water reserve for a number of years. We haven’t felt comfortable bringing the type of rate increases that would be necessary to bring it to target or above guideline levels. We recognize this is a cash management issue. We believe we have access to other funds in case something very bad happens. Dahlen asked where are these funds coming from, can we borrow from another reserve? Auzenne said no. The reserves must be in that particular enterprise fund. Dahlen asked how we would handle a major water issue. Ulrich said we have a fairly high level of disaster insurance but it would depend on the situation. Rosenbaum’s said that in his email he raised the question of how to deal with a hydro dry year, he suggested we simply adjusted the rates since we know a dry year is coming next year rather than use reserves for it. I assume when you come back to us next month we’ll have a discussion on it as to the two approaches. One way or another the customers are going to have to pay for a dry year. If you do it out of reserves, the reserves will shrink and the next year we’ll have to come back and want to raise rates to restore the reserves. Auzenne said we are looking at every opportunity we have to shrink the costs. Beecham responded to Commissioner Dahlen’s question about where does money come from if we don’t have the reserves for it. The options for the City are to issue a bond or for the City’s General Fund to lend money or to make an investment to the Enterprise. So it would be paid back by the ratepayers at a future date or it would be an investment by the City. Dawes asked for further information on the reserves balances. Ralston said movement to and from the reserves are usually done at the end of the year. Or if we do a Budget Amendment Ordinance in mid-year. And in the middle of the year when we do mid-year adjustments. Based on that caveat, this is not real time, not where we are right now in terms of profit and loss, but this is what is actually in the financial system. Electric fund reserve for unbonded encumbrances $3.8M, (commitments that we’ve made) unbonded reappropriation is $8.7 million. In water and gas we have one for bonded reappropriations… No bonds in electric. In the water and gas fund where we do have bonds we have two reserves. One for bonded reappropriation, one for bonded carry-over encumbrances and one for the unbonded. Basically this is just saying whether we have bonds out, if we have any commitments to those bonds. Since we deal with appropriated budget we get approval UAC Minutes from April 6, 2005 Approved on June 1, 2004 Page 12 of 17 anytime we carryover money that’s called a reappropriation and that’s pretty much free money. It goes into the CIP reserves not into the RSR. We have separate reserves for the CIPs than we do for the RSR. Dawes asked whether the CIP Reserve is now built up to $8.7M, that CIP Reserve in effect? Ralston said yes, pretty much. We have not made any mid-year adjustments in there. We were planning on returning some money at the end of the year. Dawes asked if that is typical, it builds up during the year and at June 30th you return it and you start over again on it? Ralston said it actually reflects the change at the beginning of the fiscal year, or any changes we’ve made with a Budget Amendment Ordinance or any mid-year adjustments. Every year we do a mid-year review of financials are we going to return money, do we need more money, we either add to or draw from the reserves. Those are windows that we do that. Dawes asked if the Electric CIP is projected at $12.4M for this next year in the proposed budget, could it be $8.7M of that will come from this carry-over fund? Rosemary said that is from prior years, it does not reflect anything in the budget right now. Dawes asked if theologically of the $12M we could get $8M from the carry-over funding. Ulrich said that $8 is there to pay for projects that are planned. It just means we have not encumbered the money yet. Because of the contracting, we budget but have not encumbered it yet. Rosenbaum said having a CIP reserve makes a lot of sense. That’s not a line item in any place is it in the10 year budget, won’t see anything that says CIP Reserve. Ralston said no, not that she knows of. Beecham said look at it like it’s the flow of your checking account. You’ve written a check, we’ve issued a contract but the check is not going to be paid until the project is done. Ulrich said we need to be sure we know where the money is going to be spent, and we’re clear that when we factor and calculate where the money is we know the money is going to be spent. If you’re going to assume that there’s no money is there and there is some level of risk, in reality the money is there so we need to adjust our minimum and maximum so we know what money is there. It all needs to be put in there and not having some hidden line. Dahlen asked Rosemary, when will some of that RSR money get back into the Reserve and how much is that on average per year? Rosemary said it varies from year to year, the project managers look at their projects at the end of the year to see if there is any money they are able to free up. This year we were unable to close out some projects due to the implementation of S.A.P. Instead of some of that money going back into the RSR as we wanted, it went into the unencumbered CIP. We plan to correct that this year. It is a manual review and we notify Accounting what we want to do with those projects. Dahlen asked if that come up as a line item for the forecast that says next year we expect to see a $4M return back into the reserve? Ralston and Auzenne said no, it does not have a line item. Ulrich asked about Rosenbaum’s question of how we pay for the dry hydro year, not using reserve, one way would be to have enough money set aside to handle that dry year, or was he saying when that dry year arrives, we forecast what that will be and then we raise UAC Minutes from April 6, 2005 Approved on June 1, 2004 Page 13 of 17 rates to pay for that? Rosenbaum said yes the later is his suggestion. We know what the supply cost will be and we set our rates appropriately. Balachandran said he doesn’t think that is possible to do. On gas, we have locked in our supply so we know it will be delivered at a fixed price. The comparison you are making is at this point in time in January though February we’ll know how much hydro we’ll get for July through June. Balachandran asked Tom Kabat to explain why we don’t know. Kabat said on gas, you know your loads and you can buy those volumes, you can go out 36 months or 18 as we’ve chosen to do. The problem on the hydro side is that we actually don’t know the hydro volumes in early April for the fiscal year that starts July 1 and ends in June because it includes a second hydrological season. We don’t know what will happen in the winter and spring. Rosenbaum said he doesn’t fully understand that. He assumes that Western generation starting July 1st is largely a function of the snowfall we’ve had this past year, correct? Kabat replied their generation for quite a bit is known. May through August is going to be mostly a function of the snowfall we’ve had, not just starting in July 1. Balachandran said at this point we only know July through August or September with some level of certainty. The other 8 or 9 months will be dependent on next year’s rainfall, which we don’t know at this point. Kabat said we don’t know when Western will release a lot of water for generation. He explained the major factor is that at Shasta Dam the flood rule curves * says when will the water come up and touch against that so they switch from hoarding water to releasing water. It tends to flip over in an average to wet year in January, February or March. “Should have been clear by saying “…flood rule curve is a moving level of allowed water storage behind the reservoir. Reclamation tends to hoard water until the reservoir level reaches the moving flood rule curve and then flips over into a releasing mode, suddenly producing more energy. Rosenbaum questioned the gas to water forecasts estimates. Balachandran explained in gas it is the forward 12 months in time that Western by contract has to provide us a 12- month forecast based partly on each of the 12th month out, which is next March that’s not based on actual rainfall that’s happened in these last few months. April and May is based on recent rainfall and snow position. Western, by contract, has to provide us a 12-month forecast at regular intervals. A bunch of this forecast is based on assumption it’s not based on weather. It’s quite different from the gas side. Rosenbaum said his point is that we don’t have to reserve for 100% for the potential shortfall because you do have a good idea if it’s going to be a dry year or not. Dahlen said we could make better rate estimates if we looked at them bi-annually rather than annually. For gas we’re good at projecting by year. Electric biannually? Balachandran said he doesn’t think we should compare gas and electric. Two different portfolios because of the uncertainty of hydro and being driven by nature. We can make a better estimate for hydro if we do it bi-annually. Kabat said it’s slightly more complex than that. Half the year is more unstable than the other half. Half the year is a little more stable and the other half is very unstable when they are trying to fill and all the inflow is coming. That is very hard to predict. We wouldn’t get UAC Minutes from April 6, 2005 Approved on June 1, 2004 Page 14 of 17 very far by breaking it into 6 month sections. Even when we break it into that half you’ll still have all that uncertainty. Dahlen stated that we would reduce the overall uncertainty if we break it out into two, because we have fairly high confidence on the first 6 months. Kabat said we already have high confidence. It’s already set. It’s not creating a large liability to the reserves. It’s the outer period that is creating the liability. Dahlen asked if we’re not any better able to predict or hone in on the uncertainty when we get closer to that portion of the year or are we just as uncertain doing it on an annual basis? Kabat said the range of outcomes is just as wide but probability shifts over to one side. If reservoir levels are very low, there is a high likelihood deliveries will be very low. Balachandran said this year as we’re going in month-by-month we have a good idea of what the increased costs will be for the remainder of this year. By the time we come to December 2005, you are entering a new hydro year and it’s like nothing has happened. The rest of this fiscal year is basically dry. Holding reserves for Calavaras and holding reserves for Calavaras hydro uncertainty for many years has been driven by the same kind of assumptions. What if it’s dry and then what if there is high market prices during the dry season? Dawes asked what if in the next fiscal year, our now critical dry year results in a reduction from 400 gigs to 250 gigs, roughly a 150 gig reduction. That is made up of two components, one we have the winter we have already experienced and the other is the amount of water that will be flowing from Western from July 1 though September. The second part depends on the 05/06 Winter. Either you or Western are making some assumptions. My question is of that 150 gig reduction in the 05/06 timeframe how much is related to the unknown 05/06 verses the quite clear hydro outcome from the last winter’s range of snows? Kabat said that Western is taking a look at the forecast of inflows for the April to July period and after July, Western uses a median of historic inflows. They consider that to be ‘normal’ weather after that. They are looking at a low inflow and drawing reservoir levels down and they are seeing they will need to hoard water. They are doing a simulation now of 12 months using a forecast from the Department of Water Resources of what will happen through July. We tend to use the median one for our planning. Shortfall is all applicable for this winter. Melton said as a policy matter would we be better off planning to set electric rates twice a year rather than once a year? Because of the availability of data, we review electric rates twice a year rather than once a year. Balachandran said he thinks there are alternatives to deal with cost uncertainty. To deal with hydro uncertainty you can use these reserves or look at hydro hedging products. Western themselves, has not been through this ever. They are going through a process of forecasting what amounts of power they will need, PG&E did this previously. To a certain extent this is a learning process. Auzenne added that depending on the level of reserves you choose to hold you could mitigate that. If you hold reserves at low level you’d need to adjust rates on a more frequent basis. UAC Minutes from April 6, 2005 Approved on June 1, 2004 Page 15 of 17 Melton remarked that we have better information on 6 month intervals than we do on 12 month intervals. Ulrich said you move into this area we’ve talked about, particularly in gas, how much of the risk or uncertainty do you want to have based into your reserves so you don’t have to make those trips telling the customer their rates are going up or down every 6 months rather than once a year. This is what our LEAP and our reserve policy and how we set rates. We’ve tried to do this once a year. I think it’s important to look at alternatives where you get price certainty for trading your product for something else and paying that price for it. We can sure discuss that approach of doing it twice a year but I recall our last rate increase proposal of how we went about doing it and the final outcome was. We made a proposal to do it once and then it finally came to doing it twice. I think you need to look at how well that worked before going forward. Bechtel said he goes with Commissioner Rosenbaum’s decision that if the CIP isn’t broken, perhaps our rate stabilization system isn’t broken either. Could we make our customers happy by looking at it on an annual basis? I’m more inclined to continue with our present system of using our RSR. C. Cost of Service Allocations Ulrich said we’ll mention cost of service allocations and what we’re looking at there. We’ve talked about cost drivers, risk reserves, CIP, and O&M. Another cost driver is allocations. We will be coming back to the Commission in the next several months. These are how we allocate those average system costs. A 10% rate increase would get spread across customers. Often there are mitigating systems for how you allocate your costs. Small water users do not pay the cost for us to serve them; we will be bringing forward a meter charge. This would include meter reading, customer costs, billing costs. It was originally removed due to concerns over Prop 218. We’ll propose to provide a minimum dollar charge on per month basis that includes water allocation which will be a more fair and equitable method of cost. Another method is based on volume. We are looking at proposing a 3 year cycle to determine proper allocation of rapidly changing supply and distribution costs. Looking at what is appropriate. Just completed a water gas wastewater study and those results will go into our consideration. We want to make this as transparent and accurate as possible. Wants to assure customers they are paying their fair share. Rosenbaum said why are you bothering to do this, who is unhappy, who is complaining? Ulrich said it’s not based on happy. We have customers who are in other communities, a change in our customer mix, and a change in our distribution system. We need to look at those variables to make sure we are allocating appropriately. It’s just something that needs to be done. Dawes asked are we proposing to change our rates? Redesign the rate structure? If you are going to reinstitute a meter charge for water or institute a fixed charge for customers, my implication is you are going to redesign the rate structure and make those proposals. Auzenne said correct. Probably in January at mid-year we will bring forth a proposal for a water meter charge. We’re trying to ensure everyone is receiving value for their money. If the business class complains they are subsidizing other classes, we could look them in the eye and say no, that’s not exactly true and that would be a business friendly position. UAC Minutes from April 6, 2005 Approved on June 1, 2004 Page 16 of 17 Rosenbaum understands this view, residents vote and commercial customers don’t and they think they pay more. Do we have a problem now? Auzenne said not necessarily a problem. It’s in the eye of the beholder. Some of the industrial customers are going up under revised cost service allocation. We should be able to open our books should it be necessary to show customers are being charged fairly, this is a basic concept and it needs to be done. Melton said try to identify fixed cost components and spread those over a certain number of fixed installations is, and then you will identify variable cost components and allocate those according to consumption. Auzenne said probably down the road this is where he is heading. Customers should be able to know what is driving the costs. Dahlen asked for the duration to do these studies? Why do we do these every 3 years and not every 5 years? Auzenne said just to alternate gas one year, water the next, etc. He is not suggesting a full-blown cost of service study but just an update. Ulrich asked for their feedback since we need to know your feedback. Dahlen said since no one is complaining about this, she suggests waiting until some group out there that is unhappy. She doesn’t see any reason to do this every three years. FUTURE AGENDA ITEMS FOR MAY 4, 2005 Commissioner Dawes stated that we may need a second meeting in May or this may be a prolonged meeting. Can decide at or during that meeting. Ulrich suggested if you would like to have two meetings have the second meeting on May 11th on the following Wednesday, and as we get closer to it deciding whether we need both of them or not. We want to make sure we have time before Finance committee time before to have a meeting. Bechtel, Dahlen, Melton and Bechtel available on the 11th. Dawes does not have his calendar but will keep the 11th in case we do need a second meeting. Ulrich clarified next meetings. Budget and the Rate Stabilization and our recommendations for rates and move the Utilities Quarterly Report and Risk Management transaction off for one month. Dawes finds the quarterly report to be exceedingly useful as a lead in to the start of the budget year, it particularly deals with the rates. Dawes: Rate changes and Quarterly Report at the second meeting? John suggested we have the Quarterly Report by the meeting that we are going to discuss the budget. A good idea would be to have the report as you usually do and use as background but to consciously decide not to go through the report as we usually do as an agenda item on that night. Use it any way you want to but then reserve time in June to go through the report. Dawes asked if any changes that occur by virtue of that Quarterly Report are plowed into the adjusted the beginning balance of next fiscal year’s budget or will there be a disconnect there? UAC Minutes from April 6, 2005 Approved on June 1, 2004 Page 17 of 17 Ulrich said it will all be included, as much as we can. Auzenne said the budget document that you will be seeing will not show Schedule B changes. There will be a disconnect between the budget numbers you see and the budget document as we go forward. Ralston said any changes after the print shop, we refer to as Exhibit B and as it moves on to Finance Committee and Council, the entire thing is the adopted budget. Auzenne said you will see our most current thinking on rates. We will take what ever comments you have and carry forth with the Finance Committee. There are usually ordinances with regards to the rates which we are asked to review. Rosenbaum asked about our review of the budget independent of the rates. Plus our review of the 5 year forecast plus our review of the reserve guidelines, which will be a full meeting. He was thinking the rate changes might occupy a second meeting. Auzenne said we can always take your comments depending on the time. Bechtel would not like to discuss rates after the budget. He would not want to separate the meetings. Auzenne said we will try to bring it all to you. Dawes said there is specific ordinance that is recommended by the Committee to go to Council, is that specific ordinance what we are discussing at the second meeting. Presumably it will be reflective of the analyses and conclusion of the first meeting. Bechtel said if in the budget discussion we could have consensus on the rates and the timing of the rates, then the ordinances could appropriately be handled later. On the other hand, if we spend as much time as we normally do on the rates setting and changing then the budget is no longer connected. But we’ve dealt with the before and it’s not insurmountable. IX. NEXT REGULARLY SCHEDULED MEETING ……………….MAY 4, 2005 X. ADJOURNMENT 9:44 p.m.