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HomeMy WebLinkAbout2006-02-08 Utilities Advisory Commission Summary MinutesUtilities Advisory Commission Minutes Draft: Page 1 of 12 UTILITIES ADVISORY COMMISSION DRAFT MINUTES OF AUGUST 2, 2006 CALL TO ORDER The Utilities Advisory Commission meeting was called to order at 7:00pm on August 2, 2006. Those in attendance were: Bechtel present, Keller Present, Rosenbaum present, liaison Beecham present, Melton Present and Commissioner Dawes is absent. ORAL COMMUNICATIONS The UAC Meeting was chaired by our newly elected Commissioner John Melton Second item on the agenda is Oral Communications. Any member of the audience would like to speak to the Commission regarding a subject that is not on the Agenda now is the time. Seeing no indication we will move on to the approval of the minutes of the June 7th meeting which was as there was no July meeting the June meeting was the last meeting that was held by the Commission. Can I have a motion regarding the minutes? APPROVAL OF THE MINUTES George Bechtel moved approval of the minutes of June 7th 2006. John Melton, is there a second? Marilyn Keller seconded it. Motion made and seconded to approve the minutes of June 7th 2006 as presented all in favor Aye, Aye, Aye Dick Rosenbaum said Mr. Chair note that I will abstain having been absent at that meeting. Melton said so three ‘Ayes’ in favor of the approval of the minutes and Commissioner Rosenbaum abstains due to not being at the meeting. AGENDA REVIEW Quick review of the agenda. Since we have only one item on the agenda, Tom I presume are there any changes to the agenda? Are we still a one item agenda? Auzenne – Yes, we are still a one item agenda. Melton – Thank you. APPROVED ON OCTOBER 4, 2006 Utilities Advisory Commission Minutes Draft: Page 2 of 12 REPORT FROM COMMISSION MEEINGS/EVENTS Any reports from Commissioners or has there been any meetings? Or events? In the past two months. Has anybody attended? Not aware of any? Moving on to the Director of Utilities Report. UTILITIES DIRECTOR REPORT Commissioners: My name is Tom Auzenne, the Assistant Director for the Customer Support Services Division and I am your host for the evening. There is no Director’s Report this evening. There was nothing of any importance that warranted bringing to your attention at this time. Bechtel: Tom I am just wondering is there anything to be said about how any particular problems how close we came to the Redline or any of that sort of thing during the recent heat wave? Tom – I can’t speak with any type of accuracy or authority because I wasn’t here for part of that time. The information I have as recently as today as seen was that PG&E had significant issues. We did in fact under mutual aid provide them with some equipment from Palo Alto. We did not have any substantive issues here in the City. Melton – Thank you. Melton – I noticed that there was a short article in the Weekly today reporting that Palo Alto did not have any outages during the heat wave and that two or three of our linemen actually worked with PG&E not only did we provide equipment but we provided man power to support PG&E in getting the lights back on in San Jose. UNFINISHED BUSINESS John Melton – next item on the Agenda is Unfinished Business. I am not aware of anything left over from the previous meeting. Tom, are you aware of anything? Tom – No Sir. I don’t think there is anything. NEW BUSINESS Melton- Then we will move on to New Business and the Agenda Item for the evening which is the Fiber Optic Rate Proposal. Tom, why don’t you lead us into this? Tom – The report that you have in front of you is of a relatively significant modification of the pricing of our Commercial Fiber Optic Rates. As indicated in the report we have retained the services of Consultants to sit there and take a look at prior pricing methodologies and offer us some suggestions on better ways to price our product to recover our costs and to improve the marketability. So that’s what you have in front of you. If you have specific questions we can go through those or if you have general questions we can respond to those as well. Utilities Advisory Commission Minutes Draft: Page 3 of 12 Melton – First I will ask if there is any member of the audience that wishes to address the Commission on the subject of the Fiber Optic Rates. Seeing None. Our next item will be any comments or questions from Commissioners for Mr. Auzenne regarding the proposal that the Utility Department has given us. Bechtel – John I have a couple of questions. Tom in the recommendation you talk about approving a $324,000 revenue increase in addition to the rate schedule. I assume that the new rate schedule is going to provide that. How comfortable are you with that $324,000 number since we are only changing lets say the existing customers by 3% or so if this is implying that this is all new customers or I know you are also talking about changing the rates for the City so I am assuming that the $324,000 is just for this fiscal year 2006-07 or does it include more? Tom – No. That is represented for the 2006-07 fiscal year. It represents an adjustment to those customer classes that you indicated and does not necessarily represent our anticipation of customer growth. So we do expect additional revenues through expansion of the system and increased numbers of participating customers. We have not included that projection in this. Bechtel – Does that mean if the existing customers get new fiber, he will pay the new rate? Pay rate EDF- 3 plus engineering cost? Is that what you are saying? Tom – That is correct. What we have done is – we have basically grand-fathered in existing customers on EDF- 1 that have long term agreements in place with us. We did not feel comfortable by unilaterally voiding those contracts although that was within our purview but that would represent a significant economic hit to them. It is our expectation that with the new EDF- 3 rate schedule which is essentially a month to month rate schedule as opposed to a long term lease or any other long term tariff that at some point because of the expansion of the system driving down our material costs, our operating costs and the like that there will be a crossing on the access for those customers that we have grand-fathered in and they will sit there and find that their costs under the new schedule whatever EDF- 3 or successors might be will be cheaper than their perhaps 5 years or 10 years lease costs. Eventually we want to get everybody on the same type of rate schedule which is going to be the ‘Pay-as you Go’ kind of thing similar to electric rates or gas rates or the other type. There were no benefits actually just the opposite that we found with long- term leases because we weren’t able to accurately gage or recover our cost under that model. Bechtel – How do you anticipate? Where the $324,000 is going to go? Is that going to go mostly to Reserves? I am assuming that to add a customer to buy additional strands of the dark fiber that is relatively minimal cost associate with it , is this money going to go to Reserve? Is it there that where it is going to head? Tom – Essentially ‘Yes’ It will go into reserves. It will be the opposite of other pricing. Utilities Advisory Commission Minutes Draft: Page 4 of 12 Raveen – Hi My name is Raveen and I report to Tom. Any additional money that does come through. We have the revenue and expense and any additional money that comes will go to Reserves. Bechtel: Ok now. Beecham – George – can you hold for a moment? Is there a financing cost that may be currently carried from the initial capitalization of the fiber optic from the general fund or electric fund? Has that been paid back? Tom – We do have a repayment schedule set up already. It is not necessarily obvious in any of the rate schedule but it is obvious in our budget. Bechtel – Tom are you saying then that any financing cost is being paid out of the budget as an expense item. In other words you would have been covered by existing revenue if we had not raised the rates? Tom – No. What I am saying – my apologies. All of our budget is covered by revenues. The carrying cost that we are currently returning or paying is coming out of the existing revenues.Current budget is based on revenues. Bechtel – Current Revenues but it is the existing budget. The other thing is that I was also looking at this. How much of that does additional revenue is going to come out from other City Departments or existing City Departments. You mentioned that and it also on Page three. I estimated 50% of this revenue coming from the City and 50% from customer adding a new application. Is that right? Tom – That is correct. Bechtel – So the city is putting money into and so half of the additional reserve is coming from the city. Tom – Well half of this increase is coming from the city. The reason why this is occurring is because the city has enjoyed significant discounts over the years that were not – could no longer be justified under our cost recovery methodology. Utilities Advisory Commission Minutes Draft: Page 5 of 12 Bechtel – Well Okay. What you are saying, I guess I am not comfortable with applying the same methodology with respect to rent that each department pays market price. So what you are saying now is that the city pays the market going rate for the fiber. Tom- What we are doing is we are considering the city as a regular customer. Not a discounted customer. Bechtel – City as a regular customer – not a discounted customer – okay. That is all the question I have for right now. Melton – Tom, just a follow up on that for just a minute. So there have been some other cases – as I recall gas when we did the gas rates few months ago -built into that was a cost of service analysis between the different classes of customers. Is what you are saying is we sort of done that again with the fiber optic and the cost of service to the city is substantially more than what we were charging? Is it not the cost of service issue? Tom – Dr. Hirmina will speak for that. Yes, we did quite a thorough cost of service study for fiber optic rates. Hirmina – Yes there was a consultant that was hired and the consultant did the cost of service analysis. The City and any public agency that served the community like the City Departments have a different kind of rate structure for which we consider like for public benefits because it serves the community, so it is charged based on slightly lower risks than commercial customers, but the discounted rate that the city enjoyed for sometime now was not cost justified. Rosenbaum – Council Member Kishimoto had an article in the Weekly today in which she spoke of the fiber loop being the cash flow positive which I assume is a terminology may or may not have anything to do with the profitability but I am also confused as to whether the fiber loop under the previously existing rates making money or not. Is the implication of this rate increase it would be really making money, is that rate increase necessary in order to make it a positive experience for the city? Hirmina – I did not read the article so I do not know actually from where she got the information. As I recently started to get involved in the fiber optic, my understanding is that the original rate schedule was not cost - based and it is not recovering cost. That is why we are adjusting rates now. I can go back and look into it if you need it. Rosenbaum – Well in the article she said no more than the fiber loop is cash flow positive. It is a term that may be subject to interpretation. Perhaps it does not include the payback of the initial capital. Utilities Advisory Commission Minutes Draft: Page 6 of 12 Beecham – If I can add to that In term of positive cash flow I think for the operating costs – it was covering operating costs positively but not necessarily the capital cost. Tom – One thing that you will see that as we close the books for the last fiscal year, we are working with the Administrative Services Dept. I would probably say we cleaned up a lot of the fiber financials and so when you see the capital figures you will see accurate numbers at the end of this fiscal year and then you would be very comfortable with that. Marilyn – Tom, How does the existing and proposed cost compare to the competition costs? Josh Wallace – Hi name is Josh Wallace and I am key account representative for the fiber optics loop. I am in the streets if you will – there is no apples to apples comparison in the dark fiber service that we offer and present competitors offering. Most competitors, virtually all except one, offer a lit service they bundle a bandwidth along with a fiber run itself. To say there were directly competitive is difficult equation to propose. But in terms of the customers that fit the profile for the dark fiber service and take advantage of it we are quite cost competitive. They would not be able to afford if they went with a competitor. In other words the advantage of dark fiber business being that you have it hung under the pipe you can put as much bandwidth through it as you wish whereas a competitor like AT&T meters that service. We are doing what Utilities does best - provide the pipeline. Bechtel - So are there lot of potential new customers that would find Palo Alto’s option would attract them that they might use. I am trying to get a sense of how many future customers that might be for this. Wallace – I believe that the answer is that there are many customers out there that would take advantage of our service. It is of course a niche service. We listened to the survey which showed that there we have a great majority of customers and business sectors in Palo Alto use lower band width product – a DSL cable modem. But there is a very strong niche such as Stanford Research Park corridor where there are many folks who would take advantage of our service and we are presently exploring those with a recent merger of the Telecommunications Group with Utilities Marketing Services to take advantage of the existing relationship within the Utilities Marketing Group and see if we can get those buildings connected. Bechtel- How many current customers do we have –commercial customers do we have on the dark fiber? Wallace – We have approximately 145 connections that include direct users as well as fiber optic resellers in our community. Utilities Advisory Commission Minutes Draft: Page 7 of 12 Bechtel – Can you clarify on Page 2 you say 27 customers is that referring only customers with EDF -1 pricing or that’s everybody? So what is the 27 and 100 something? Wallace – 27 includes the resellers of which there are multiple projects underneath the resellers. At the start of the business we considered having the resellers do all the foot work so our direct customer is the reseller and then they resell our service add value and provide the service complete to the end-user. Bechtel – so you are referring to any customers the base people plus the resellers? Wallace – That is correct and I also consider those customers because we are starting to see as the network matures many properties become open as tenant’s transition out and we have a line left into those buildings. So that is a very valuable asset for us. Bechtel – Thank you. Beecham – If I can ask a couple of questions also. On the resellers do you continue to see that as a kind of partnership with you guys or not? Wallace – Oh very much so. It is great because we do not wholesale to them. We are getting the same return as we would with an end-user. Beecham – I know at one time there were issues on the contracts; you had some old contracts, are they all cleaned up at this point? Wallace – Yes. We are actually even taking the steps further where we are anticipating even more streamlined contract in the next couple of months. Hit at the same time the new rates will. So that all along what we wanted to do is be like the other guys. We wanted to be smooth like the electric and gas. Beecham - At this hour if you got a new customer coming in and they don’t currently have a connection with you. If someone comes and they say they are going to be done renovating our building we want to have this building turned on in two weeks can you do it? Can you say ‘Yes’ I am here and we are done? Wallace – Well two weeks is a little tight. But we certainly have our business processes smoothed out considerably and we got a lot of more cooperation from the other departments that help us. Utilities Advisory Commission Minutes Draft: Page 8 of 12 Two weeks is aggressive but we certainly do turn the contracts around much quicker. I am also prepping the customers from the very first meeting on what is involved and really getting the whole idea of the timeline at various stages in place early. We have the expectations set correctly. Beecham – Good. Thanks. Rosenbaum – When you are dealing with both resellers and end customers there is always a potential problem. How do we know that our rates aren’t going to undercut the reseller’s rates and make the reseller very unhappy? How does all that work? Wallace – The reseller is adding value to our service. I do quite often get folks shopping around. Like any other consumer. The IT folks, the CIO’s are looking for the best price. So they see what it would be like to go directly with the city, buy the band width at Palo Alto Internet Exchange which is right around the corner where it holds still 120 ISPs which is another competitive advantage that we offer – the choice of ISPs, and I am looking at you, I am also looking at reseller X, Y and Z and it is up to X, Y and Z to put up the argument or propose an alternative to that customer. It is up to them to be competitive. We have a single service. We don’t negotiate and again we don’t discount for the resellers. But the point being that the customer has to get his bandwidth somewhere. He can get it from the reseller or he can go directly to the Internet Exchange. The advantage of the reseller is a turn- key is solution. The end-user customer doesn’t have to interface with the city. All of the resellers have contracts in place. I do not get into competitive situation if I can avoid it at all. I don’t want to know who the reseller’s customer is. Rosenbaum - I assume that if we were to offer a product that undercut the resellers you’d hear about that pretty quickly. Wallace – In that case you would be talking about apples to apples. Right now we are not so we don’t have that issue. But it is a situation where the reseller can be intimidated or feel that there might be a competitive issue with the city because they have a customer shopping around instead of coming to us they go to them. But the fact that it is not the same service it keeps us out of that sticky arena. Rosenbaum: Thank you. Beecham – I am curious if you know if the resellers provide service to any residential units or is it priced out of the residential unit market. Wallace – There are two or three out there. I do not believe that is a profit center for them. I don’t think that is a target for them because residential is a volume business and there is no volume in what we are doing. Utilities Advisory Commission Minutes Draft: Page 9 of 12 Keller – On Page four you describe that you expected an increase of about $163,000 projected from the new customers what is your basis for that? Did you audit the customers or how did you predict that? Wallace – That is a conservative estimate based on recent history. We always go for 10%. Auzenne – I would like to make a comment if I may about the whole marketing in Fiber Optics. As the group is now responsible for sales and marketing for commercial fiber optic services, we do not, I do not regard this as a matured business at all. If anything we are just having the possibility as Commissioner Keller said “who is our customer? Basically, anybody who has a lit fiber installation now is a potential customer for our service. If only for Risk Management because we are providing dark fiber to their business just in case something else happens, we are providing a negotiating tool for the next time that their contract with their current provider comes up for negotiation, there is a lot of opportunity that is why we were sitting there differentiating our sales force to be able to approach more customers. That is why we are looking at our CIP’s and our options for system expansion to drive the market there. We anticipate significant activity in this business as opposed to considering it at a plateau at this point. Keller – Do any other utilities do this? Wallace – Yes. Tom I can take that question. There are four or five Municipal Utilities that do handle telecommunications. Their primary role is for the folks that don’t have any kind of connectivity at all; Midwest, Rural Country and what not, there aren’t a lot of Municipal folks in an Urban Environment – Los Angeles Water and Power and maybe four or five others. Actually, City of Santa Clara Power, they are chartered as Economic Development only. It is certainly an advantage to them. Bechtel – Tom on a slightly different subject in Finances to customers. You are talking about the reorganization of the fiber and the moving of the marketing services to your operation basically. Where are the rest of the folks? Are they still in Engineering? Blake Heitzman and his group? Is it still being nourished by Engineers or I hope it is not being rolled out as a mature utility and splitting it up too much. Auzenne – No, there is one individual left in Electric Engineering, Electric Operations always handles the actual installation out of their traffic signal crews and what not. Mr. Heitzman reports to me. Mr. Wallace reports to the Manager of Utility Marketing Services where there are other Key Account Representatives that have on-going relationships with our largest commercial/industrial customers and I think they are doing some cross training now as far as the fiber business and the rest of the business. Raveen Maan who is handling the fiber contracts is still reporting to Blake. So we are not chopping it up piece meal. Utilities Advisory Commission Minutes Draft: Page 10 of 12 Keller – A question on a last page. You have quite a range of cost for the fees for the new contracts. Could you please explain a little bit why there is such a range? For example C-1, 213- 362 dollars it seems like a wide range. Hirmina – If I could answer this. Are you referring to EDF – 3? The range would be the lowest that would offer which would be for instance City Public Benefit to the Community and then the highest range would be the maximum that they would pay for the first fiber and then any additional fiber would be 142. So the ranges are always between what we can discount based on risk to customers and the regular price that the customers can pay. Keller – So the variations do the risk? Hirmina – Yes. Keller – Okay Hirmina – Any questions on the cost-of-service if you need more information I could get it for you. Melton - I just wanted to ask one question. It is a forward looking question. We have now new fiber rates proposal and I am wondering if going forward we are going to be able to see fiber included with the rest of the utility rates that we see at a certain time each year along with the budget process. It is a nice integrated package and this sort seems like an outlier and next spring can we expect to see it all integrated? Auzenne – Absolutely, the reason why this is a little bit out of cycle is because we were caught deep in the cost-of-service study, we wanted to make sure that we got it right because the objective was simplification and ease of understanding and to be honest the EDF-1 did not easily lend itself to transparency or understandability for either the customer or ourselves. So we wanted to make sure that if we did it we got it right. We are working with the City Attorney’s on the contracts and dark fiber licensing agreement which originally started out somewhere around 42 pages and Raveen is working with the Attorney now and is trying to get that down to perhaps more manageable level that again is easier to market, easier to understand for everybody concerned. If we are going to be taking care of our risk in our pricing then we don’t need to sit down and take care of our risk in our documentation. So simplicity is what we are striving. This perhaps may not be the ultimately simplicity price we are looking for but it is a lot closer than what we started with. To answer your question Commissioner Melton we will be bringing all of this forward next time. There are rules and regulations that also deal with fiber and that will also get rolled into the regular annual review package as well. Utilities Advisory Commission Minutes Draft: Page 11 of 12 Melton – Okay, Fine. If there are no other questions, we have been asked to recommend to the City Council that they approve a $324,000 retail fiber optic revenue increase and the associated rate schedules EDF 1, 2, 3. Can I have a motion to that effect? Rosenbaum – Mr. Chairman I would move the staff recommendation. Bechtel – Second. Melton: Then moved and seconded that the UAC recommend to the City Council approval of the fiber optic revenue increase and the associated schedules attached. All in favor say ‘Aye’ All said ‘Aye” Melton – Carries unanimously. Thank you Becthel - John, could I add a comment after this? I mentioned this before but those of you who put together these memos on rates I look at the revenue increase is being speculative and could you phrase it so that you say approve the rate schedule and the associated are the estimated rate increase of $324,000. Because that is really what we are approving – the rate schedule because the revenue is not cast in concrete as much as I would love it to be. So can you do this? Auzenne – Consider it done. Hirmina – As a rate person I will do that. Melton – Fine. So that item of New Business is completed. I think that completes all the businesses before the Commission tonight. Our next regular schedule meeting is a month from now, September 6th. (First Wednesday in September) I look forward to seeing you all then. Bechtel – John I will not be present. I will be on vacation for that meeting. Presumably there will still be a quorum. I don’t know about Dexter. Melton – it sounds like we can count on forum if Dexter will be here or not. Very well, thank you very much and the meeting is adjourned. Utilities Advisory Commission Minutes Draft: Page 12 of 12 Auzenne – Thank you. Respectfully submitted, Jennie Castelino City of Palo Alto Utilities