HomeMy WebLinkAbout2005-08-03 Utilities Advisory Commission Summary MinutesAPPROVED Page 1 of 13
AUGUST 3, 2005
I. ROLL CALL
The August 3, 2005 Utilities advisory Commission meeting was called to order at 7:00
p.m. Those in attendance were: George Bechtel, Dexter Dawes, and John Melton.
Absent: Dick Rosenbaum, Elizabeth Dahlen, and also Bern Beecham. Commissioner
Bechtel announced that Commissioner Dahlen has resigned due to a relocation. He
acknowledged her many contributions to the Commission especially on the water issues.
The City Council will take up replacing this position.
II. ORAL COMMUNICATIONS
Members of the public are invited to address the Commission on any subject not on the
agenda. No comments received from the public.
III. APPROVAL OF THE MINUTES
Motion: Dawes moved for acceptance. Second: Melton. The minutes of the Utilities
Advisory Commission meeting held on July 13, 2005 were approved unanimously.
IV. AGENDA REVIEW AND REVISIONS
No changes
V. REPORTS FROM COMMISSIONER MEETINGS/EVENTS
Bechtel said Fiber to the Home came to the Council with a recommendation and with a
proposal from several of the Council members. George asked John Ulrich to summarize
for the group.
VI. DIRECTOR OF UTILITIES REPORT
John Ulrich thanked the Commissioners for the time they spend helping Dee Zichowic by
reviewing the monthly minutes. He mentioned Fiber To The Home report – last Council
meeting they approved recommendation of staff to curtail trial after it had run for a
number of years since the equipment is not owned by the City and we needed to return it
to Motorola. Also, since we’ve learned everything from the trial we were concerned that
if we continued to run it, some equipment would fail and service would go away and we
wouldn’t have the means or the funding to restore the service. People can make an
orderly transition to another kind of service.
Another proposal was that staff not continue monitoring the financial conditions and legal
situations of other utilities on a formal basis and would not come back to the Council on
an annual basis to make that report. Council seemed to be in favor of that but there was
a colleague memo that received support that was for staff/city to put together an RFP to
encourage a private investment and interests to come in and take over and do a
City of Palo Alto
Utilities Advisory Commission
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proposal for either a FTTH and/or running and managing the dark fiber. That was voted
on and approved by the Council. Staff is looking at what it would cost and how much
resources it would take and what would be involved. They will come back with that.
Melton asked if the concept was that some private enterprise would come in and put in a
fiber infrastructure on a wholesale model. It would just be the fiber structure and not
content. It would be contracted to whoever wanted to get on it. Is it a wholesale model?
Ulrich said it wasn’t any type of model, it would be a RFP that would be wide open that
would allow anybody to come in with either infrastructure, content, anything they felt
would allow them to come in and make money. No constraints were put on it. There
was considerable discussion about legal issues and what would be involved in having an
agreement with the City.
Dawes asked if there was a portion of the RFP that suggested the City would build the
infrastructure and lease it to an operator? Ulrich said he doesn’t think they got into any
detail like that. One of the council members did question the ownership. There was
discussion but he didn’t hear any agreement. A group is being brought together on how
the RFP will be done. The City Manager is concerned about resources needed to pull
this together and what priority this would be along with other already agreed upon
budget items.
Bechtel asked if there was a timeline in the motion? Ulrich said he doesn’t recall a
timeline. There was a lively discussion and proponents of the community came out and
spoke to this issue. Bechtel thanked John on the fiber report.
Energy Bill: Ulrich gave an update on the proposed energy bill that is expected to be
signed by the President in New Mexico next Monday. The key features of the bill
relating to CPAU are:
New 30% residential and business solar and efficiency tax credits for 2006 and
2007 then decreasing to 10%.
No federal renewable portfolio standards.
Production tax credits extended for renewable energy generation.
Adopts enhanced reliability standards and incentives for transmission grid
improvements
Authorizes FERC to establish rules that protect price transparency in natural
gas and transportation markets.
There are numerous other features, which are summarized in a 1700 page
conference report. We will discuss them with the UAC in the coming months as
we analyze them.
On July 19th FERC formally abandoned the 2002 Standard Market Design Notice of
Proposed Rulemaking (NOPR). As you recall there was a large public outcry to the
proposal, particularly from the West. Part of the timing of the announcement may have to
do with the appointment of a new FERC chairman. Modified versions of the original
FERC proposal are being implemented in California as part of CAISO’s MRTU process.
Keller Canyon: The final landfill gas supply contract resulting form the NCPA Green RFP
has been submitted to Council for Approval this coming Monday August 8. The Keller
Canyon facility is in Pittsburg, and will have a capacity of 2.8 to 4.1 MW, and expected to
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be on-line by the end of next year. Palo Alto and Alameda are each purchasing 50% of
the output. Some additional details are in the Quarterly Report.
Renewable RFP: CPAU has issued an RFP seeking proposals to provide electric power
generated by new renewable resources to meet the City’s renewable portfolio and Palo
Alto Green renewable retail rate program needs. Proposals are due August 30. The
timing of this solicitation is particularly advantageous because of the extension of
Production Tax Credits for renewable resources for the next two years, and the high
prices for market resources.
City-Owned Solar Power: The conceptual designs for three City-owned photovoltaic
systems are on tomorrow’s Architectural Review Board Agenda as a Study Session
item. The three locations are the Baylands Interpretive Center, Cubberly Community
Center, and the Municipal Service Center.
Hydro Hedging: The Request for Information from CPAU’s four electric master
agreement suppliers for the Complementary Hydro Energy Exchange Product (CHEX)
was issued and responses are due back on August 22nd.
VII. UNFINISHED BUSINESS
No unfinished business.
VIII. NEW BUSINESS
1. Recycled Water Market Study and Cost Update Information
Jane Ratchye presented the report on the recycled water market study and cost
update. Jane said we put out an RFP, we now have a consultant on board and
have begun the review the of the 1992 recycled water master plan. It feels a little
old to be looking at the 1992 study to determine economics of doing recycled
water here, especially what the interest is especially with the pipeline going in on
the bay shore towards Mountain View that may change the economics for Palo
Alto.
Melton commented that it appears the driver behind this issue is supply and
economics. He said if we are worried about supply or cost of supply from the
Hetch Hetchy system, that would be the driver that would push us to do
something like this. Is that a fair summary? Jane said in when the master plan
was completed in 1992 it looked too expensive, $30M for some trunk lines to
make a loop and that was too expensive without a huge benefit to the treatment
plant and it still isn’t to their thinking. At this time, there are several good reasons
to look at this again. This study is pretty old, we don’t know if the users are still
interested, if there are more that are interested. Stanford University was
interested but it looks like they are only using a fraction of what the study
mentioned (18 acre feet per year) and they don’t want that much. This new
pipeline we’re putting in makes it look better for us. The other thing is we’ve heard
a lot of interest from Redwood City, Los Altos Hills and others, that they are
interested in it, they need new water and they are interested in paying for it. There
are grant funds that we could possibly get but you aren’t going to get anything if
you don’t have a fairly recent feasibility study on the shelf. If you don’t jump on it,
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we won’t get in the queue to get any grant funds. San Francisco in their water
supply improvement program says there is regional benefits and they’ve put in
some water projects for all of us to pay in their program. We’ve got something
for other people to pay for also.
Page 2 of report lists the reasons Council said we need to look again at recycled
water. Council said don’t look at this now but if things change, look at again.
Things have changed enough that we feel it’s time to look at this again.
Melton stated the list of items (no.5) changes in supply side issues, strike him
SFPUC projection of tripling wholesale water price is a big issue. This is a very
powerful driver to convert over. Ratchye said yes but remember that as
Commissioner Rosenbaum has said, that if we do these 4.3billion water
improvement programs we’ll have to pay that same amount no matter how much
water is produced. It’s a complicated matter to say we are going to completely
save that variable cost. That will be part of the evaluation.
Dawes asked EIR status that might emerge from this study. They tend to be
pretty expensive. Last one was approved a couple of years after the study
commenced. Will the old EIR still hold or will we need another EIR? Ratchye said
hopefully the old program EIR will hopefully still hold validity for the program. We
may need to do a project EIR but this should be a fairly abbreviated process as it
was for the pipeline for Mountain View which was not an expensive, lengthy
process. They had a mitigated negative declaration there. Dawes asked is it
planned to have this study fully staffed? Ratchye said no, this study will not go
that far because she can’t see if this is going to look good yet. It could still be
fairly expensive, especially without Stanford having a significant involvement.
Jane said she anticipated this is not going to be a cheap project. there are
potentially a lot cheaper projects like Sunnyvale and San Joe with a lot of new
development. Jane said she doesn’t want to commit to going that far with this
project, just the first step with enough information to get a much better idea of the
market wants enough information to update costs and market investments and
then make a decision from there whether to proceed.
Bechtel asked what other cities in the local region have water treatment plants
with recycled water coming out of them. Jane stated that all of the South Bay
plants, Sunnyvale, Santa Clara and San Jose have very large recycled water
programs. Especially the San Jose plant has a flow cap caused by environmental
problems. It was relatively cheap to lay purple pipe for all the new developments.
Our plant really never had that kind of imperative on the water treatment side. No
problems with copper or any other heavy metals. Bechtel asked if any numbers
in the study about costs could be benchmarked or models from previous
installations, would this be helpful? Jane said yes, the other project relatively
newer is Redwood City. Their program is being driven primarily from the water
supply prospective because they have been using water in excess significantly
above their supply assurance. They have developed an extensive recycled water
project. They are going forward with their program and it isn’t cheap either.
Bechtel asked if the $85,000 for the project in the last sentence of this report is if
completed during this current fiscal year. Early or late in the year? Jane said near
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the end of this fiscal year, we should have some updates in the next quarterly
reports or earlier than that to show what kind of results they are finding.
2. Utilities Quarterly Report Information
Water
Bechtel asked for questions on the water report. He spoke of costs that have
sharply risen from 2010, he thought it would have been more gradual increase. Is
this driven by the CIP? Jane said yes, these costs are driven by the CIP and the
assumption is that how we pay for these things is how we pay for them under our
current contract. What you are seeing here is projects are finally starting to get
done, there is work going on but it’s not showing up in our rates. Instead, we
provide upfront capital financing for these things, that could be very different. Our
projectory is based on current contracts (which expires June 30, 2009). Bechtel
asked about is there discussion at BAWSCA about smoothing the curve with up
front financing to make it less shocking to us in 2011. Jane said no, the
discussion is more around ‘is this reasonable’. They are building a huge amount
of things in a very short amount of time and it is the opinion of some of the
BAWSCA consultants that they had a too aggressive schedule for completing the
water plan improvement program. They are questioning if they can complete the
rapid delivery of multiple very large unique complicated expensive projects. They
have not adopted their water plan improvement program. They are looking at
criticisms . this is based on their currently adopted capital improvement program.
Jane said she thinks the reality is some point or another, rates are going to go up.
Dawes asked about cryptosporidium. Does the new chloramination deal with this
and if not, is this something the City should worry about? Jane said that San
Francisco water has very low cryptosporidium and this is very unusual. The way
to deal with crypto is filtration and yes, people do get sick from this. In Milwaukee
100’s of people died, it is a very serious issue. San Francisco hasn’t had a
problem at all with this but their water is not filtered so there is always a concern
that this unfiltered water system needs some plan and monitoring for crypto in
case there is a break out. Dexter asked about the money flow on reservoir project
approved several years ago – bonded $13 – 15 million, a piece was bonded. The
engineering was started, project has slowed to halt due to EIR considerations,
Dexter is unclear have the rates been adjusted to reflect that capital spending, is
money flowing into the reserve which doesn’t show on our schedule, assumes we
are paying interest and principle on our bonding a. is this understanding correct
and if not, discuss how funds flow will continue as we have an improved EIR and
go forward. What money has been raised by bond issues and rate issues and
how much is in our reserves. John Ulrich referred to Item 4: in report – which
gives an update on why we are not moving as quickly as we’d like. CIP funding
update at our last meeting, we anticipated approval of some of the work a couple
of years ago but we had to stop because of the EIR. We can tell you where the
money is located. Lucie can you help us?
Lucie Hirmina said the $13 million was for CIP over a 3 year period and it was
already spent for 03-04. Any project that is kept on the books the money is sitting
in the CIP reserves otherwise it goes back to the water reserves. There is no
money left from the bonds at this point. Dawes said he doesn’t know if he should
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be worried or not, one of the primary reasons for bonding that (which was new at
the time) was to justify the bond on the basis of this pretty large project, the project
gets hung up and then the money vanishes into other places sounds a little scary,
can you allay my fears? Lucie said you shouldn’t worry, she does not have this
information at hand but will email answer to him. About how the bond money was
spent. What ever bond project the money was attached to – it stayed with the
bond project. John Ulrich assured the commission that the money has not been
used for something else. Dexter asked for more clarity in the ‘off balance sheet’
reserves which is the numbers we never see would be something that would be
more reassuring to us. Ulrich said we didn’t expect you would want details during
this report, we’d be happy to agendize to give you more information and have the
appropriate staff attend the meeting. Melton said at the last meeting we did agree
to agendize this topic and he expected to see it on the agenda. He said he
expects to see a full review of all CIP reserves on the agenda for next month.
Bechtel recalled that we did not raise our water rates as much as we might have
wanted to because we were not spending the money. The City of San Francisco
did not raise their rates as high either. Our rates seem to match the needs of the
budget for this year so I don’t know that we’re over collecting money but without
looking at CIP balances, we don’t know that. I’m in favor of looking at this next
month or certainly in the next quarterly report.
Jane made the correction on her report page 1 – words on page 1 and two reflect
the prior report that is not attached which was attached at the last minute. There
is a huge amount of water in the system right now. The total in storage now is
over 4 times the amount used annually.
Bechtel asked if we have a really wet year next year, what happens to the water,
does it go into the Pacific? Ratchye said yes unless Turlock and Modesto can
capture it down below. Bechtel asked if it could also go to Southern California as
well? Ratchye said potentially it could.
Gas
Melton asked Karla Dailey about page 4 of the report under regulatory issues; one
paragraph discussion regarding a $69,000 SGIP issue which it says we are filing
an application to re-hear admitted legal errors. My question is that sounds like a
big deal but is it really? It may be cheaper to just forget it. Karla said the problem
is precedence setting issues. We want to maintain that Palo Alto has its own
public benefit programs. When you cross that boundary and start having utilities
like Palo Alto pay for PG&E programs that is a very large open door. The principle
is big, we don’t want to set a precedence, we have our own programs.
Dawes congratulated the staff on the formulation and execution of the laddering
strategy.
Electric and Fiber Update
Shiva Swaminathan was asked about CRRs and Load aggregation point.
Divide PG&E territory into five regions. You can come up with different
transmission paths which will be assigned to the load. There will be more CRRs
or point to point paths.
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Dawes asked about PG&E territory, as a whole will be one LAP, no congestion
within PG&E. We are potentially asking that PG&E become one LAP region.
Swaminathan said the current thinking PG&E territory is one LAP. Proponents of
that school of thought is that breaking that big region into multiple regions is there
would be more CRRs for allocation as you break it down. We don’t like that.
Ulrich said the bigger the area, the bigger the group to share the costs rather than
having it all put on to the small number of customers we have.
Melton asked about page 11 of the report. Referral about SB1059 raising
concerns. What is SB1059? Ulrich said he will find out.
Bechtel asked Swaminathan about prices we pay (CRRs). If we were to buy
power where a generator would quote you a price, they would have to arrange for
transmission to us, which is not what happens today where they say it’s our
responsibility to get the power here. Why isn’t there a trend for a simplified pricing
so we wouldn’t have to worry about passing money back and forth? It would
eliminate a lot of the financial instruments that are used now to solve the physical
problems of transmission. How did we get to this point?
Swaminathan said he would try to explain. It started with Order 888 back in 1998
or 2000 where FERC thought the best way to open up the market was to free up
the transmission for anyone who wanted to use it so no one had a monopoly
power of locking it in. As an example, we had the IA with PG&E so we had to
negotiate with the transmission owner bilaterally to get that right. Order 888
simply opened up all transmission for whoever was willing to pay the most to
access that network. That resulted in all the transmission owners handing over to
an independent market and who ever pays the most gets access to that
transmission. Also, people don’t hog transmission when you open it up. You can
buy short term FTRs for three years. Bechtel asked if we were to tie up
transmission, we would still be bound by Cal ISO rules with respect to the grid with
transmission. Do we still deal with congestion if we actually have a contract, say
10% capacity? There would be no CRRs involved in any power transmitted over
that network? Swaminathan said existing transmission rights are protected, we
have held on to the COTP projects.
Bechtel asked about Western base resource, figures 1 and 2 (a Tom Kabat
question). Figure 2 on page 5: forecast. Bechtel said he assumes when we talk
about green book long term average, how many years is this based on and then
the green book long term averages are actual deliveries to us, is that right?
Kabat said the green book data is based on the simulated model results from 72
years of inflow history. Green book is a long run forward projection of what the
system would produce. The system is operating and Western is finding other
competing uses for power. Actual deliveries are coming up a little short of green
book. Deliveries for the second quarter were within 87% of long run green book
average (April, May, June) calendar year.
Bechtel said it seems like we don’t have a problem huge problem with respect to
our hydro resource problem but this chart – he’s trying to figure out the dotted line
on figure 2 is the long term average, the solid line is the current forecast for the
remainder of this year an next year. Is that right? Monica Padilla said yes. We’ll
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have a shortfall where the gas is. It looks when you go to figure one and where
we are today, the top red line is the long term average and we’re below that line?
Padilla said no, the 87% is what we received for the second quarter of 2005 (April,
May, June). Figure one represents on a rolling forward 12-month basis, we expect
to get about 91% of long run average.
Bechtel asked about the page 7 analysis conducted by staff with the Rocky
Mountain Institute with co-generation. Relationship with cogeneration and our
gas purchases. If we go to cogeneration, gas powered cogeneration, correct?
Karl Knapp confirmed yes, this is gas powered cogeneration. Bechtel asked if that
means we would be buying on average more gas per year for our normal users?
Knapp said there would be more gas coming into Palo Alto but not necessarily
more gas going into the overall state system because the net rate of the
cogeneration system when you give yourself credit for the heat you are getting out
of it is like a 60-65% efficient system. The gas used to generate the electricity
plus the gas the customer would have used if you generated that electricity
outside of the state you would have used more electricity overall but because
we’re doing it in town, there is obviously more gas used in town. That is
independent of who owns it. We should be able to make that work economically if
you own it and charge the customer some fraction of what they would have had to
pay for the gas.
Bechtel asked if we can really do this. Knapp said yes, he believes this is do-able.
Knapp said we could probably site this in Palo Alto. Ulrich said that was the
purpose of this study, there will be a lot of dimensions to this over if the customers
like it, the siting of the plant and we’ll be very methodical. Dawes asked if the
customers were close together so we could provide steam to a number of
customers from one plant or would it be a number of tiny plants? Knapp said both
of those. He cautioned the commission to remember that Stanford tends to be
more nervous when you talk about crossing property lines they may wish to
redraw in the future.
Dawes asked about the energy bill talked about earlier that says no reserve
requirement mandated. Page 3 talks about. Next paragraph says in the event
there were to be a clause put in, staff believes we have the electric portfolio has
sufficient capacity to meet system ARA. What is our capacity as percentage of
our maximum load is at this point?
Padilla said it depends on which month you are looking at. During peak month, of
summer we’re looking at approximately 156%. A lot of it has to do with the
assumptions we put in and the credit we get. Dawes asked if there was a
mandate put in for hydro reserve requirement, could we sell our position as being
a hydro heavy utility and that our resource was adequate to meet their
requirements. Padilla said she believes if the ISO recognizes full credit for those
resources and the market evolves we would selling capacity credits on the market.
Padilla said our maximum load is pretty constant. Our maximum load is pretty
constant throughout the year. Most of our resources are being made up of our
market purchases.
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Local Load Generation: Dawes asked about 60% of the load needing to be met
by local resources. How do we come to grips with this in resource requirements,
do we tie in with Santa Clara?
Swaminathan said this ties into what Padilla said. Overall we have subscription
capacity. But for the Bay Area as a whole we have only about 50% capacity of
transmission of our load served from outside the Bay area. This other proposal of
each load requiring 50% of the load of the Bay area being met, we think we may
have to buy capacity within the area. Right now there is no capacity market, only
an energy market. The importance of the capacity market is to maintain reliability.
Right now, the ISO contracts with generators which have to stay on to meet our
needs. ISO will pass on this and says you guys have to show that you have
enough capacity to serve your load and also depending on where you are located
at. Dawes asked if this is under contract or do we have to go out and buy which
means if there isn’t enough generation in the Bay Area (which is the case), people
will be bidding up those resources. Swaminathan said we think the capacity
market will be independent from the energy market. Swaminathan said that’s
correct, what you see what we purchase will be broken into two pieces. We
expect the capacity market to range from $1 to $10 per MW hour. Dawes said we
wouldn’t have to have a firm purchase of that power, it would be a standby
commitment. Swaminathan said it would be a capacity tag (green energy tag and
production tag to be the same). ISO will have the market set up to clear the
capacity contracts. Our wind projects could potentially get 15-20% of their main
play assigned to that. ISO will decide what we can sell then an audit mechanism
will match up with energy tags. The expectation is that the ISO will match load
and generation.
Dawes asked if this would drive up our costs? Swaminathan said yes and no. Yes
because right now, for example, ISO is contracting for generators in the Bay Area.
There have been attempts to pass on that cost to everybody but there is litigation
regarding this on who should pay that cost. But from this point forward they are
saying ‘we’re not going to bear that cost anymore, you guys are going to have to’.
So our costs would increase. We have budgeted about $3 an hour in our long term
budget whether we pay the ISO, PG&E or we contract directly. The fact remains
retroactively, PG&E is also trying to pass on these costs. The trend would be our
costs would be higher.
Dawes asked about the upgrade to 230 KV, what is the ballpark figure on this?
Ulrich said we haven’t got that far yet, we don’t know but it would be very
expensive. It will all have to be in context (to go to 230 is to reduce the
transmission cost). More than transformers, we think the line is owned by the
Federal government, what relationship would we have with them and then the cost
with PG&E and then the cost to connect 230 after it’s been transformed to move it
into our distribution system.
Dawes asked about Western selling surplus power on the open market – isn’t this
highly restrictive? Kabat said they have an operational issue where they set
schedules to their municipal customers a day ahead but then there are certain
changes in the operation which are beyond Western’s control which are done for
fish and wildlife reasons. As each heat wave hits, a sudden change occurs in the
system where they have to release more cold water to keep the temperatures
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even. We are their primary customers. Kabat thinks NCPA does transactions
out of Calavaras.
Dawes asked about LEAP. Renewables have some potential for impacting our
rates with a minus after it. Are we exploring these resources diligently? Ulrich
said earlier he spoke of reduction tax credits for renewables. Dawes said this
energy bill has the potential for restructuring our LEAP program because it
changes the economics of renewable suppliers. Knapp said yes, there is no
sense in stopping at 20 if the resources are cheaper.
Dawes asked why do we need a Public Involvement Facilitator in this community?
Knapp said it is a matter of engaging the public not just waiting for them to show
up. Ulrich said we’ve learned a lot about the need to communicate well and early
with the public. It is very important to have public participation and understand
what people are thinking about.
Melton (pg 2) competitive transmission path assessment: this is an important issue
for the City. Melton wants to know more about the importance and what decisions
it may drive us to make.
Swaminathan talked about local capacity requirements. FERC and ISO before
they design market rules, they have to make sure it’s workable. Melton said if the
market is competitive, all price controls will go away. Swaminathan said ‘correct’.
Melton questioned the line chart on Electric Service Interruption on last page of
report. Our outage data took a big jump upward in November of last year and
stayed up there. Has something fundamentally changed? Melton commented that
it looks as if it went up and stayed up. Ulrich explained this chart is total minutes
accumulative.
Ulrich answered earlier question about SB1059, which has to do with electric
transmission corridors. This is an attempt to streamline and make transmission
process easier. The League of California Cities and Palo Alto may be concerned
about this as it takes away some land rights of some cities.
Financial Update
Bechtel asked for questions or comments. Melton said it applies to all of them but
what is the definition of purchase cost? Is that just the commodity costs or does it
include all of the cost to get the purchased item to us for distribution? Lucie
Hirmina replied this is bringing the commodity to Palo Alto.
Bechtel commented that since we had the CIP discussion last month, as he reads
through the changes to the reserve balances it is pretty clear now how the money
comes back out of closed projects and goes back in again. Thanks for the words
that describe that process.
Dawes made observation the primary focus is on the projected ending balances of
the reserves. Very important subject. Finds self going back to favorite 10-year
plan that Lucie puts together “which is the greatest schedule we have of all our
financial schedules”. Dawes said it would be very helpful if on each of the
quarterly reports there were a box that said this is our 10-year plan balance at the
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end of the fiscal year; this is the end of the first quarter, we thought the balance
would be this, this is the end of the second quarter, we thought the balance would
be this, Taking the data and putting it all in one place. This would be a very
useful way to capture this data to see how our ending balance is tending. Suggest
a little box under each of our reserve boxes. Melton agreed that would be a
valuable metering tool. Bechtel said he isn’t that interested in seeing that as the
10-year is a forecast, not a proforma or financial plan. The City is operating on a
budget, when I see budget this is what Council has adopted and these are the
figures we are dealing with. What we do lose is when we look at this quarter to
quarter we don’t know what we said last quarter. So taking the budget you have
and saying what you said last quarter and then move on, perhaps we would get a
picture every three months of how it’s changed. Dawes said he thinks we are
saying the same thing.
First chart on electric supply rate stabilization reserve. Instead of having one line
there have 4 or 5 lines, first line would say ‘Estimated 04-05 balance for the 10-
year forecast published in March of last year’. We would be adding the interim
quarterly report numbers, no extra work just taking the numbers.
Bechtel said we are in agreement on how it’s changing during the year.
Melton commented that seeing the roll out from closed CIPs to the Electric
Distribution Rate Stabilization Reserve this year was $5.9 million makes me all the
more eager to delve deeply into these CIP reserves next month because that is a
big number. Bechtel said it is good that we closed projects out with money coming
back in.
Bechtel looked at the water bill comparison, we’re so far ahead of everyone else,
Bechtel said he thinks we’re going to have to address this issue. Either find out
what other cities are doing or what we aren’t doing and need to do differently.
3. Risk Management Quarterly Report Information
Karl Van Orsdol said we are in good shape that we have strong counterparties, we
have increasing purchases out into the future (locking in more), risks have gone
down, that is all good. Concern is the extent of exposure we have with Coral, a
subsidiary of Shell. We are monitoring very closely but we are working to ensure
we are adequately protected.
Bechtel asked about figure 9 the history of gas and electric value at risk. The
electric supply reserves as risk we are low percentage but if you draw a straight
line through all points from October 04 up to today at over 6%, that line keeps
going… is it because our reserves keep going down? I’m not sure if risk is
increasing or reserves are falling. Van Orsdol said it’s neither. It’s a reflection of
the increasing the value of gas moving out into the future and over time. Bechtel
asked the threshold for concern is 10%? Van Orsdol said correct. Bechtel said
we’ll get to the 10% in 3 or 4 months. Van Orsdol didn’t agree for a couple of
reasons. Additional purchases will be made, there have been particularly high gas
prices recently so there has been less opportunity to purchase out in the future
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and there are some considerations of making our gas laddering strategy more
aggressive and more forward thinking.
Bechtel commended Karl for doing such a good job in analyzing some of the other
subsidiaries of the big companies. He also liked the summary that was added at
the end of the report.
Melton asked about the corporate status of Coral changing. They were corporate
before 50-50 between Shell and Becktell, basically Becktell was bought out.
Melton asked if having a wholly owned sub of Shell as opposed to this partnership
arrangement improve or ‘deprove’ their credit? Van Orsdol said he thinks it
improves it as it’s bringing Coral into a group of companies that trades around the
world. Coral Energy Trading represents the key subsidiary that markets itself all of
Royal Dutch Shell production in the United States. In addition, being owned in
part by Bechtel, which is a private company, limited Palo Alto’s ability to review the
financial records of the parent organization. Owned by Shell we have more of an
open look at the books of the corporate parent than when Bechtel was part owner.
What happened with the ‘sawed-off’ companies, did the parent walk away from
their debts, do you have any knowledge of this? Van Orsdol stated he wasn’t
working in the United States at that time but he would certainly say Coral is quite
separate from just a trading organization that might have been set up buy another
company to buy and sell power it did not own. One key point of Coral is that they
sell gas and electricity that their parent company produces. Dawes was trying to
get to what the general policy on the part of the wholly owned subsidiaries that get
into trouble and may have to cease operations. If you look at what happened four
or five years ago, you might get a clue as to how big companies view these issues
and whether or not they feel it is in their best interest to cover those liabilities even
though they had not guarantee them.
Van Orsdol said he can talk about that in the next quarterly report but he’s not
sure how much value an occurrence that took place in 2000 would be on this
market. The second thing he would say is the parent of Shell is a global
organization that dwarfs pretty much, any utility company in the United States with
operations around the world. While research supported the credit risks, their
credit score of 4.7 gave Van Orsdol the indication that he needed to investigate
further. When VO spoke to the head analyst at Standard and Poor, he explained
the K&B model he used, they were not surprised by that and he focused more on
the strategic reliance that Shell places on Coral. He also put this to the CFO for
Coral, 4.7 refers to Coral as an independent company. Shell provides a parental
guarantee for $6.1 billion worth of Coral tolling agreement. Shell does back
Coral in many ways but it does not back our contract with Coral. It’s not hands off
at all, in fact the reporting structure, the risk reporting structure, the financial
structure of Coral ties in very directly from Coral Energy Resources on the electric
side to Coral Energy Trading to the Chief Financial Officer for Shell Energy
Trading Network, which is the twelve companies around the world, to the Chief
Financial Officer at Royal Dutch Shell.
Dawes asked if Van Orsdol had asked the CFO why he couldn’t arrange to have
the obligations they were selling to us guaranteed by the parent if they are
guaranteeing all these other things, why couldn’t they guarantee ours? Van
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Orsdol responded that he didn’t ask him although he asked the Head Originator at
Shell Energy Trading on electric side what they could do to shore up a guarantee.
In a conversation yesterday with Coral, he pointed out that because of the high
mark to market we may begin at some stage to move towards (i.e. transact with)
other counterparties preferably because of the high exposure with Coral. We
made an incredibly good deal with Coral three years ago for $37 power, a price
that is half the current market price. So while it is a credit exposure, it also
represents a very good transaction that took place. In a conversation with Coral,
Van Orsdol discussed the upcoming CHEX project, and perhaps a longer term gas
contract might be in the office. In either circumstance, the City’s credit exposure
with Coral could be an issue if they were to be awarded either contract.
IX. NEXT REGULARLY SCHEDULED MEETING
SEPTEMBER 7, 2005
Commissioner Rosenbaum will not be available September 14th but due to
needing a quorum, Bechtel recommended staying with the 7th for the next UAC
meeting. Melton, Dawes, Rosenbaum will be available for the 7th.
October meeting: Dawes will participate from the East Coast for the October
meeting.
Commissioner Bechtel confirmed the September meeting will include:
discussion on the CIP
summary of hydro hedges analysis.
feedback on CHEX.
X. ADJOURNMENT
Meeting adjourned.
Respectfully submitted,
Dee Zichowic
Administrative Assistant
City of Palo Alto Utilities