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HomeMy WebLinkAbout2005-07-13 Utilities Advisory Commission Summary MinutesAPPROVED ON AUGUST 3, 2005 Page 1 of 8 JULY 13, 2005 COUNCIL CONFERENCE ROOM PALO ALTO CITY HALL – 250 HAMILTON AVENUE 7:00 P.M. I. ROLL CALL The Utilities Advisory Commission meeting was called to order at 7:02 p.m. Those present: Chair Dexter Dawes, Vice-Chair George Bechtel, Commissioners Dahlen, Rosenbaum and Melton. Bern Beecham was absent. II. ORAL COMMUNICATIONS No oral communications were received from the audience. III. APPROVAL OF THE MINUTES Melton approved as noted. A Motion was made by John Melton to approve the June minutes. Dawes seconded. The Motion was approved unanimously. IV. AGENDA REVIEW AND REVISIONS No changes to the agenda. V. REPORTS FROM COMMISSIONER MEETINGS/EVENTS: No meetings or events since the last UAC meeting. VI. DIRECTOR OF UTILITIES REPORT John Ulrich distributed copies of the new Utilities Connection which contains comprehensive information about what has been going on in Utilities. The most current rate changes are mentioned so our customers will have up-to-date information. He also noted that every Utilities employee received personalized copies from the Director. Bechtel asked if we would use this communication on an ad hoc basis or on a more regular basis. Weekly cost effective compared to direct mail? He asked how effective is this type of distribution as his inserts are usually discarded very quickly. John Ulrich answered that a lot of people read the Weekly, it goes to every home and so we do not have to pay a higher postage to deliver it. When it falls out, it gets your attention. He estimated that it would probably be close to double the cost to mail (now $6,000 up to $10,000 range). Bechtel commended the work on this item. Rosenbaum asked to have the City Manager Report on automatic meter reading added to the next UAC packet. City of Palo Alto Utilities Advisory Commission APPROVED ON AUGUST 3, 2005 Page 2 of 8 VII. UNFINISHED BUSINESS 1. CIP’s Effect on Rates ……………….DISCUSSION Melton led the discussion on how CIPs are handled. We have had extensive discussion of the management of the CIP funding in the Utilities and Enterprise funds. He has spoken with staff on numerous occasions and they have told him CIPs are the main drivers (with commodity costs). One issue deserves more attention: the City’s current budgeting policies and procedures require the enterprise funds to collect the full cost of the CIP in the same year it is initiated, even if it is a multi-year project and most of the funds will not be needed until future years. Utilities cannot solve this problem by itself, Melton said it is a City problem. He wants to propose a motion that … Dawes interjected that a motion would be out of order as this topic is not listed as an action item. We can list at the next session and have as an action item if needed. Rosenbaum said normally we would have a staff response he would look for. He does not feel it would be obvious to make any difference. The CIP is planned so it runs at the same amount each year, Melton’s suggestion wouldn’t make any difference, wouldn’t really matter. Melton said at the end of the day yes, it would be the same amount of money to pay cost of CIP, it’s a timing issue, a cash flow issue. Collecting money sooner than we need it is not a good policy. Bechtel reinforced Rosenbaum’s comments. He said this wouldn’t make a lot of difference to our Utilities rates. In some cases there might be an extraordinary project where a project should be funded on an as-spent basis rather than up-front. He supports staff responding tonight or in the future to talk about the CIP. Melton said for standard stuff – that is right. We’re talking about big multi-year projects, design phase to be followed by construction money, the current policy requires we collect 100% of that money in the first year. Dahlen said in the past we’ve discussed this where the money may not be approved for all the years, we are funding the projects up front – staff breaks up projects into manageable phases. We don’t want a project that doesn’t get finished due to unfunded or under-funded projects. Melton said the year you start the design phase, you could also collect for the construction phase. Dahlen said you could approve the first phase, you wouldn’t be approving phase 2 or 3 as the funds may not be approved for one reason or another. Maybe a concept – we will approve in concept. Construction contracts have to be funded at the time. APPROVED ON AUGUST 3, 2005 Page 3 of 8 Melton suggested that during the 1st year, build into the rates only the money that is for the design. The second year we would build into the rates the money for the next phase. Dexter suggested staff think more about this concept and come back with an agenda item if it is appropriate. He said to leave to the staff’s judgment if there is a process and can this can be done feasibly within the structures of the process. Ulrich said it might be helpful to get some background to get some of these questions discussed. Keep in mind that the way we budget has been very appropriate. In this budget time, with rate increases, we have not had a rate increase for gas distribution portion of the rate for some time. It was now time to catch up and raise the rate. In the past, this has not been a big problem. Problem is supply costs have been raising drastically. It moves out of a well lets’ just go ahead and do it, to we better think about how to go ahead and plan and stage these projects. The rate making has to be coupled extremely close to this and next year’s budgets. Think of it from that standpoint, of looking at how we budget and collect money from our customer so we are not asking too much too soon. Dexter clarified that the funds go into a CIP pot rather than general reserves. They are set aside for those projects but they are in the reserves. We know where it is allocated to spend. Rosemary said it’s listed in the CAFR. She explained encumbered and unencumbered. Bond financing that required us to create a reserve. Everything is separated, it sits there until ready to use. CIP budgeting, we do separate design and construction and we only encumber a year at a time. We stagger the projects. The five year plan in the CIP budget describes this process. Contracts are based on a scope of work – that contract is encumbered the year we go out to bid. The money has to be available when we cut the purchase requisition when we go out to bid. Melton said from a rate standpoint, the entire amount is collected (not encumbered yet). The construction portion is in concept only. Council approves on an As and example; a $5 million project. $2 million is encumbered for the design. The design is during the first year. Now council approves and we approve the contract to do $3 million of gas construction which will take place over 2 years. Sometime during that second year, a Purchase Request will be cut. Construction dollars would be approved the next year and would be set aside. Melton’s issue is when does it go into the rates? Dexter suggested how the information is displayed. All info he’s seen has RSR’s for each enterprise fund as a single number. A good portion is pre-committed? No. Bechtel said the issue he recalls from previous years is how fast you spend the money. He believes it may be useful to see the CIP reserves and how that money is being spent. If not being spent that is a sign there APPROVED ON AUGUST 3, 2005 Page 4 of 8 are problems doing the project. It’s unfair to punish the rate payers if you are doing a bad job. Seeing those reserves would allow us to see how we really manage our money. Previous year’s we’ve had an entire meeting devoted to CIP. Sometime splitting those two things might be better for the commissioners. Staff will come back to the commission if there is a feasible way - take a historical look at the size the last two years of what the cap ex reserves are. Ulrich said we can do that. He said if we collect more money than we can spend, we know where it is located, and we don’t go back and ask the customers for more. Any unspent money goes back into the RSR. Tom Auzenne talked about the two graphs distributed earlier at place. He commented that it’s good to note the CiP changes from year to year (as an attempt to minimize rate impacts). We are holding internal discussions about prioritizations of CIPs. Dexter said our allocated charges and rent are out of control. This commission has been concerned about these very things and have discussed on numerous occasions. Ulrich said focus on how to get all work done and get the most out of our CIP spending. Lucie Hirmina added that in earlier years we financed some bond funding CIPs. VIII. NEW BUSINESS 1. UAC Elections ……………………….. ACTION Dawes asked for nominations for chairman of the commission. Rosenbaum nominated commissioner Bechtel as the new Chair. Dahlen seconded. Unanimous. Select commissioner for vice chair: Bechtel nominated Elizabeth Dahlen. Rosenbaum seconded. Dahlen declined as she may need to step down before the end of the year. Bechtel nominated Melton. Dahlen seconded. Rosenbaum agreed. Unanimous. Dexter turned the imaginary gavel over the Commissioner Bechtel. Chairman Bechtel thanked Dexter and his colleagues for the confidence expressed in him. He thanked Commissioner Dawes for this past year of service. 2. Hydro Uncertainty …………………….. INFORMATION Tom Kabat and Karl Van Orsdol gave a presentation on the hydro uncertainty. Kabat said we’re seeking commission feedback on what information we need to explore. Hydro risk to the Electric Portfolio results APPROVED ON AUGUST 3, 2005 Page 5 of 8 when actual hydro received from Western and/or Calaveras is more or less than expected resulting in a commodity cost increase/(decrease). LEAP identified hydro risk and mitigation strategies. Current strategy is to hold reserves for 1 - 2 years of risk (identified risk = $17 million/year). Today’s discussion will summarize the timetable for the analysis and discuss in greater detail the Weather Insurance Strategy Summer/Fall – Continue Analysis of 8 Strategies with Recommendations  UAC Presentation on CHEX – last meeting  UAC Presentation on Insurance - today  UAC Presentation on Variable Rate Strategy  UAC Presentation on other Strategy Results  Presentation of Analysis and Recommendations to UAC and City Council.  Winter – Implementation of Decisions Strategies to mitigate hydro risk include: 1. Maintain reserves – current strategy, customers hold risk and spread risk over 2 – 3 years. 2. Purchase Call Options to exercise in Dry Years. 3. Buy more energy, assuming dry year – sell excess in Avg. – Wet Years. 4. Buy more energy and in addition buy put options to sell in Avg. to Wet Years. 5. Energy Exchange Agreement (details provided at last UAC meeting). 6. Purchase Insurance (Details provided today). 7. Lay-off Part of Calaveras (needs further exploration). 8. Variable Rate Design (risk pass through – details provided at an upcoming UAC meeting). Agribusiness, construction, transport, insurance, leisure and other weather-sensitive industry sectors also using temperature and precipitation risk management structures in enterprise risk management programs. Ski lodges buy snow insurance. Wine industry purchases temperature insurance during September. Construction companies buy insurance to pay for rain delays. A utility with hydro generation could hedge low precipitation. Buying insurance that pays on low precipitation while retaining upside revenue opportunities of wetter than normal conditions. Von Orsdol explained various types of insurance, risks and advantages of each type. Gave an example through a complex slide based on a butterfly type. Based on the past 15 years, Palo Alto would have received about $9m and paid out to insurer about $4 million. APPROVED ON AUGUST 3, 2005 Page 6 of 8 Bechtel asked for examples of other utilities around the country. Van Orsdol said SMUD has used them. Any regulatory issues? Van Orsdol said not that we have come across. SMUD has used for a series of years but not using right now. Does not know of any communities that are using them but there are relatively few communities that have the hydro exposure risk that we have. Relationship between inflows and precipitation variation is because of storage requirements of the reservoir – assessment – preliminary – limited data source – only have 15 years of data – may be other reasons we have not considered yet. Bechtel asked plotting generation against inflow. We cannot insure inflow, precipitation is the only thing we can get insurance on. Information Requirements: • Weather Measure Index: Temperature, Rainfall, Snowfall or some combination. Also Cooling degree days (CDD) and Heating Degree Days (HDD) are common. • Location: Weather station(s) - single site or basket of sites. • Period: Single or Multi-Season – 3 years • Notional: Payout per unit of weather index outcome (e.g. inch of rainfall. • Strike/Attachment point: Index deductible • Limit: Maximum payout protected Insurance – Reduce Hydro Risk. CPAU can develop insurance policy which can pay the dollar amount for each 0.1” of shortfall in annual rainfall from average, or from set point and target extreme dry conditions with large payout. Issues we face include; No perfect correlation between weather indices and generation, for Calaveras, Calaveras Tall Trees Ranger Station (CVT) provides good independent data source and tight correlation to inflows, CVT water basin accounts for 30% - 40% of total Calaveras hydro risk, or approximately $7 million/year, and there are no independent weather stations providing sufficient correlation have been found for WAPA headwaters – wide coverage of watershed is required. Other issues: • Credit Risk • Tenure of Contract. • Financial Instrument? • Costs not yet known. • Policy – is this a path to dependence? • Tie in to reserve policy and rate making • Predictability of generation. APPROVED ON AUGUST 3, 2005 Page 7 of 8 Features of CHEX and weather insurance: CHEX Weather Insurance Provides energy regardless of hydro conditions Provides cash during dry years to purchase additional energy Applicable to WAPA Applicable to Calaveras Has potential to hedge 60% - 70% of portfolio uncertainty. Has potential to mitigate 30% - 50% of hydro uncertainty Contract duration of 4 – 6 years Contract duration 3 years or less Conclusion and next steps: Both have potential of reducing different elements of portfolio hydro uncertainty. Trying to balance the level of reserves against the risks with prudent management – we need to do more work on this. CHEX and Weather insurance, both have a potential role in reducing different elements of portfolio hydro uncertainty Cost of CHEX and Weather Insurance need to be investigated further, and compared with cost of carrying internal reserves and the merits of adopting a hydro production based retail rate surcharge/(discount) policy. Additional Analysis updates will be provided to the UAC in the coming months. Other issues listed. Look at see if there is a better way of doing this. Ulrich asked Van Orsdol to go over the reasons we are accelerating this communication now to take advantage of this later in the year. Van Orsdol said for CHEX concept that Tom presented last meeting. It would behoove us if we want to get a good quote when the hydro year starts in October and not wait till February or March. We would have to send out an RFP. We wanted to go through one of these concepts that is relatively new through each of these meetings. Dexter asked about hard data, go out simultaneously for each of these approaches or could we issue something now for the CHEX proposal – why wait? Van Orsdol said he doesn’t think we know enough about which strategies will be most useful. We don’t want to put out an RFP that won’t meet our needs. CHEX would probably work well for WAPA and insurance would probably work for Calaveras. Melton said WAPA is a much bigger supplier than Calaveras, isn’t this more important to concentrate on WAPA? Van Orsdol said we could certainly survive either way, it’s a matter of cost and risk mitigation. We have not identified sufficient weather stations within the WAPA yet. Suspects it would be way too expensive. Expects Calaveras would be too expensive for us also. Van Orsdol said the next time we’ll talk about some more ideas and we’ll be coming back to you through out the end of the year. We have more water now than we thought we did in May, we have lower hydro risk than we thought we did. Kabat said we may want to do this analysis and wait, may not make sense to go APPROVED ON AUGUST 3, 2005 Page 8 of 8 ahead. When reserves are reduced drastically. Dexter said take reserves we would give back to rate payers and invest it in non-hydro resource. Rosenbaum mentioned Calaveras production, what is the expectation? Kabat said he has not been tracking this information. Ulrich said recent discussion say it’s been quite good but not as good as we’d like it to be. Ulrich said you can never have enough reserves. IX. NEXT REGULARLY SCHEDULED MEETING - AUGUST 3, 2005 X. FUTURE HIGHLIGHTS • Recycled Water Market Study and Cost Update • Utilities Quarterly Report • Risk Management Quarterly Report • Dick Rosenbaum will not be here in August. • CIP effect on rates – agenda item in August. Bechtel said there is an uncertainty on our parts on CIP reserves and spending and also, how that money is budgeted. As long as there will be questions, postpone until the next budget cycle next spring when we’ll have all the numbers. Or as John Melton suggested to looking at changing City policy. Melton said he would like earlier action because if we postpone until the next budget cycle, there won’t be time for staff to look into. Dexter said there may not be a problem – suggested earlier a staff presentation to see the size of the amount of CIP money collected and not spent it may give us a reason to say it is or is not a problem. Let’s look at the data first September meeting presentation on CIP. Status of CIP collection versus spending over the past 2 years. What is the size of reserves. XI. ADJOURNMENT Commission Dawes motioned to adjourn. Melton seconded. Unanimous. Meeting adjourned at 8:46 p.m.