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HomeMy WebLinkAbout2006-05-03 Utilities Advisory Commission Summary MinutesPage 1 of 11 Draft Minutes May 3, 2006 at 7:00 p.m. Council Chambers Palo Alto City Hall – 250 Hamilton Avenue THIS NOTICE IS POSTED IN ACCORDANCE WITH GOVERNMENT CODE SECTION 54954.2(A) OR 54946 I. ROLL CALL Meeting was called to order at 7:05 p.m. Those in attendance were: Commissioners: George Bechtel, John Melton, Dick Rosenbaum, Dexter Dawes and Marilyn Keller. Bern Beecham absent. II.ORAL COMMUNICATIONS None. III.APPROVAL OF THE MINUTES Minutes of the Utilities Advisory Commission meeting held on April 19, 2006 were approved unanimously. Change March to April. Motion: Commissioner Rosenbaum Second: Melton. IV.AGENDA REVIEW AND REVISIONS Emily Harrison asked to move Action items 4 & 5 to the beginning of the agenda. Commissioner Dawes said the 5-year projections are useful and he’d like that up front. V. REPORTS FROM COMMISSIONER MEETINGS/EVENTS None. VI.DIRECTOR OF UTILITIES REPORT Carl Yeats distributed a handout, which was mostly informational. Commissioner Dawes asked about interim resource adequacy – an expensive item. Girish Balachandran said at this point, this year, the ISO just withdrew for 2006 but the process continues into 2007 with some resource adequacy issues showing. City of Palo Alto Utilities Advisory Commission Chairman: George Chairman Bechtel y Vice Chair: John Vice-Chair Melton y Commissioners: Dexter Commissioner Dawes, Marilyn Commissioner Keller, Dick Commissioner APPROVED ON JUNE 7, 2006 Page 2 of 11 VII. UNFINISHED BUSINESS None. VIII.NEW BUSINESS 1.Five Year Rate Projections Information Tom Auzenne clarified previous packet and this packet; we took the 5-year plan and separated into two components for ease of understanding. The 5-Year projections are not embedded in the Cities Enterprise Accounting Program, SAP, the projection represents new information as we receive it and may not be the same numbers in the budget. The information remains as accurate as it has always been. Chairman Bechtel asked this will be the format from now on, should we expect to see this in the next few years? Auzenne said it is always an evolving process. Commissioner Dawes found material very confusing because quarterly reports have no relationship to the budget figures. It is almost impossible to track what has happened in the quarter. This report is not presented in a consistent pattern quarter-to-quarter, year-to-year and year over year. Thinks this is non- intelligible. Auzenne agreed. When we do budget we do in January, February. When we do the CIP it is even earlier in December. We recognize this as a problem. We need to present the financials as accurately as we can, and that comes out of our accounting system. Until we decide internally, we need to decide ‘these numbers are good as of this date’. Commissioner Dawes understands projections, actuals and forecasts. Track the differences in each quarter. Then report it and show changes. Commissioner Dawes said he spent 30 years doing this and would be happy to sit and share his experience. Yeats said we operate fund accounting as we are a governmental entity and comply with governmental accounting standards. We have to report to rating agencies, and we’re audited by these standards, we operate under these standards. Commissioner Dawes said pick a system and stick to it. Yeats said it is a snapshot in time, the reports you are getting on a quarterly basis, and the budget document is not as current as what you are getting in the quarterly report. It is a timing issue. We’d like everyone in utilities to have the same starting point when they give you the figures. Without accurate reporting current actuals with forecasts, we don’t know where we are at. Commissioner Dawes said freeze a format, the last 10 year was great, if you want to go with this 5 year that is okay also. Just stick with the same format. Commissioner Rosenbaum said he has similar problems as Dexter. Plans are done for our benefit. Council never sees these. He is used to the old 5-year plan. You have made the decision to eliminate some of the 98 line items and reduce it to 27. Why was this necessary Page 3 of 11 when you have not input from us? Staff has always been responsive to our requests for changes but you’ve gone and changed it with no input from us. Not happy with the changes. Auzenne said 5-year rate forecast, 98 line version is just as inaccurate as the 27 line version. We don’t use for our own internal purposes. We look at the best available information when we’re doing the budget. We are always six months out of sync with reality. We can modify the report again if you wish with a document that meets your needs. Commissioner Rosenbaum said they have not had a problem recognizing the differences. Forecasts now called projections. Not obvious why changes have been made since this report is for us to help us make recommendations to the Council. Two member sub-committee to work with staff to come up with a format on which line items would be most helpful. Vice-Chair Melton clarified the Commissioner’s concern. The Commission is not talking about the accuracy of the numbers. The format is important because it helps in looking at the document quarter after quarter, year after year. We are concerned the format keeps changing and we can’t track from one version to another version. Supports suggestion to form a sub- committee to work with staff to design a format that is understandable to us that doesn’t cost staff hours and hours to produce. Yeats said Auzenne was trying to produce a report that meets UAC needs and the needs of staff. Auzenne said he accepts the offer regarding the subcommittee. Commissioner Dawes asked about gas utility in proposed 06/07 change in retail rate. 10.5%, then changes in retail sales revenue which is not a 20% increase and total change in retail revenue doesn’t seem to track very well. Why doesn’t 20% give us more revenue. Hirmina said the rate is only 10% because it is a pass-through and the 20% is only for the load customers. Retail revenue includes revenue from the G-3 customers and it is all included. We expect gas prices to increase due to supply. Commissioner Dawes asked if big customers paying cost, don’t they pay their share? Hirmina: Yes. Why our sales dollars don’t go up more? Commissioner Dawes said he is having problem understanding. Chairman Bechtel asked about gas utility. Supply RSR appears if we raise our rates in the next three years at 20%, 15%, 5% then no increase afterwards. Looking at electric RSR is 37million against revenue of $28 million. Building RSR faster but with less revenue. Getting rate increases in the next three years and nothing after that. Couldn’t we do a better smoothing job so we don’t build our reserve too fast and punish the customers now? Auzenne said if we extend our laddering strategy out, all these numbers would change. We are not adjusting the figures in the projections downward to flatten in the out years. Chairman Bechtel said the long range forecast addresses how we are looking at our reserves. Page 4 of 11 Chairman Bechtel asked about CIP for water utility. EIR for building the reservoir, do we have any numbers in estimating? Numbers are not included in projections, as we have not decided yet. Chairman Bechtel said we need the reservoir, seems we would put money in the 5 year plan, as we will need that money. We should be talking about what the effect would have on rates. The Commission is looking at the strategic point of view. Include some things that are likely to happen. Auzenne said we have not decided how to fund. Bonded indebtedness will only be a small amount, if we front-load the operating budget with the reservoir costs we’ll all run for our lives. Until that strategic decision is made, we don’t know where to put the cost of the reservoir and wells. Harrison said we have not funded the reservoir at this point. We don’t have any figures to land cost or capital costs. We need to start factoring assumptions into the forecast as we are going to build it. Chairman Bechtel said put debt service in there. Commissioner Rosenbaum said the commission has been told the money has been set aside and in a special account. Harrison said we do have money set aside. Cwiak said we partially funded reservoir project into a reserve but it won’t be enough to build the reservoir since it was funded several years ago. Increased costs in labor, materials and others are cost increases. Once past EIR we will be able to decide if we have a place and how much that will cost. Vice-Chair Melton asked about the water – last two columns the amount of money is starting to step up. Is that when we expect SFPUC to start cranking up their rates? Hirmina said yes. Commissioner Dawes said he expects we will raise we should freeze the transfer from the water fund to the general fund until we have a chance to catch up. Rents and transfers to the water fund will impact rate increases and will lock in for the long-term health of this fund. 2. Operating and CIP Budgets Action Auzenne gave the Utility Department fund overviews. Major highlights this year include reorganization, reevaluation, position changes, zero-based exercise, review of the base budget for Engineering and Operations and a review of the base level CIP costs. The Utilities Oversight Committee was established to focus on risk, rates, long-range financial plan and the CIP. Strategic plan benchmarks have been incorporated into the budget and tied to the SEA report. Staff proposes a $4.9 million increase from the 2005/06 adjusted budget. 2006/07 expenditures increased $10.5 million from the 2005/06 budget. Total reserves of $119.54 million are projected at year-end 2006/07, a decrease from the 2005/06 projected year-end balances. Page 5 of 11 Commissioner Dawes asked if the CVP loan is rolled over every year and is not an incremental increase. Balachandran said this has been approved by Council and it’s not the same amount. Increase of $400,000 of what it had been before. O&M Board determines total number for all participants and this is our share. Auzenne said we could always make adjustments in January. Increase in gas of $3.8 million from the 2006/07 budget. Expenditures increased, salary and benefits and non-salary increased. Projects 16 and 17 increased $2.9 million. Total reserves are projected at a 11% decrease from the 2005/06 projected year-end balance. No questions from the Commissioners. Water Fund: 2006/07 revenue increase of $2.4 million (11.7% increase). Expenditure increase of $1.8 million. Total reserves of $8 million are projected at year-end 2006/07, a $0.5million or 6.7% increase from the 2005/06 projected year-end balance. We have sufficient funds to cover our debt service. Commissioner Dawes noted the modest differences between slides and 5 year rate projections. Auzenne said it is timing issues and projections are probably better figures. Chairman Bechtel asked about fixed and variable expenses – can we look at? We may get more efficient but our expenses go up. We need to think about this, we can’t just keep raising our rates because we can’t shrink expenses. We need to do what the general fund has done, don’t know how to do but we have to see what we can do with out utilities. Chairman Bechtel mentioned citizens who have mentioned selling the utilities. Having conscious effort every year, we need to do this where we have declining consumption. Vice-Chair Melton encouraged staff to look at water fund we made a mistake a few years ago removing the fixed meter charge. As a policy matter we should go back and take another hard look at that and look at our fixed and variable costs. Harrison said the operating cost of the water fund; staff changes cause contractual expenses we should not have over the long term as we bring our employees up to certification. 68% in Utilities is non-personnel as opposed to a flip of 68% personnel in the General Fund. Commissioner Dawes asked if we would implement the zero based budget exercise in other utilities? Auzenne said yes, we do look at fixed and variable costs. We did eliminate a $5 per month water meter charge on the advice of our Attorney’s Office. All of our water sales are now volumetric bases on that decision. Commissioner Rosenbaum directed to the meeting to page 193 and 194 of the Budget document. The water fund has 40 full time employees. On page 193 2006/07 proposed budget it is hard to reconcile expenses associated with 40 employees. We need to look at the cost drivers in the water utility. Page 6 of 11 Chairman Bechtel said in the operating budget, page 151, water fund re-implementing fee. Auzenne said “My bad”, he missed that statement and indicated it was from an earlier draft. Wastewater Collection Fund: No questions. Chairman Bechtel asked if there are any questions on the CIP document? Harrison said we intend to approach our work in conjunction with the Public Works Department. The original recommendation was to divide the city into sections - we are going to coordinate with the street program and depending on where we most need work and then they will go in and pave. Commissioner Rosenbaum went back to the operating budget. Components into the purchasing budget for the electrical system. 8 or 9 items and bring to next meeting. Thank you. Vice-Chair Melton asked for more information on electric CIP items. Budgeting to spend to move the Alma Substation, is that a definite go? Harrison said there are multiple points between now and Council vacation where we will check in to get approval. There is a lot of coordination to get everything in order. Colorado Substation overview. Tomm Marshall said We are coming to Council next Monday to do a study with PG&E and looking at an interconnect with PG&E. We are moving ahead on both of those projects. Vice-Chair Melton said 115 to 230 transition is dependent on this substation? Marshall said we are also looking at the option of using SLAC. We will have one path, will look at substation consolidation. Commissioner Dawes went back to Alma Substation – disposition as real estate site. Offsetting the capital costs. Targeted for subsidized housing. Transfer price was negligible to the electric fund. Still situation? Will it cover the cost of relocation the equipment? Marshall said it should eventually pay off (18 years) the cost. Harrison said we usually transfer the land over a long period. Commissioner Rosenbaum asked if the GF is implementing a proposal that will result in a reduction to the General Fund? Yeats said yes. Project will result in a loss to the General Fund. Yeats said the Utilities are part of the city and we are trying to have the utilities operate on a balanced budget. Commissioner Rosenbaum said take Dexter’s fixing rent and transfers seriously. Yeats said equity transfers are Council policy and if that is what they direct them to do, that is what we will do. Motion: Recommend to Council to approve the operating and CIP budgets. Commissioner Rosenbaum motions. Commissioner Dawes seconded. Passed unanimously. Page 7 of 11 3. Rate Schedules Action Wastewater rate increase of approximately 5% effective July 1, 2006. No questions. Vice-Chair Melton moved recommendation of this rate increase. Commissioner Rosenbaum seconded. Unanimous approval. Water rate increase of 7% of total system sales effective July 1, 2006. Commissioner Dawes moved recommendation of approval. Commissioner Rosenbaum seconded. Unanimous approval. Gas rate increase of 20% on total sales effective July 1, 2006. Vice-Chair Melton clarified we are all clear that the 20% rate increase is not 20% across the board; it is 30% for residential and 10% for commercial. Commissioner Dawes said it is more than that as the utilities tax drives it even higher. Should be consideration of easing the burden on the customers by reduction of the user’s tax. Commissioner Rosenbaum said Page 2, second paragraph allocation of revenue increase. He said this is a very general explanation, staff needs to be more direct in explaining the increase and what is behind those increases. Hirmina said it is not to make our large customers happy, if we don’t allocate the cost in the correct method, one class would be subsidizing another class. Every class has to cover their cost. Rate request should state the business – what we are doing and why. Commissioner Dawes asked why the contract customers get a reduction and more than the residential. Hirmina said the load is more steady and more peaky for the residential customers. Study is conducted by a consultant and Dr. Hirmina updates every year to achieve equity between customers. Motion to approve by Commissioner Rosenbaum . Vice-Chair Melton seconded. Unanimously approved. Updated electric revenue requirement and bill comparison – information only. Auzenne said this is to acknowledge our discussions on April 19th to say we are not going to have any electric rate increase. Commissioner Dawes asked 04/05 and 05/06 overall impacts of rate changes on residential bills? Auzenne and Hirmina directed to put in memo to Council. Increased 12.6%, it’s less this year. Commissioner Dawes remarked on the 5-Year plan. Discussion Harrison and commissioners had earlier on the water bond – targeted for certain initiatives. Reserve for capital funds, he embraced this issue repeatedly over the years that any excess bonds go into our regular reserves and so there is no reserve for our reservoir and well infrastructure. We do not have any left over water bonds. Commissioner Rosenbaum didn’t agree and asked staff to clarify at the next meeting. Yeats said the capital improvement reserve balance was $9.3 million. Any reserves you have are in that fund. He will ask accounting staff to break it down into what is encumbered and Page 8 of 11 unencumbered. Commissioner Dawes gave a brief synopsis of what Rosemary Ralston has presented to this Commission on previous occasions. Bond funding pot has been depleted. Other capital funds set aside to replace those bond funds and those were earmarked for the reservoir and other things. If in the budget process, council approved and those funds have not been encumbered, those funds would be returned to wherever they came from. 8:50 p.m. Break - 8:57 p.m. Resume Meeting 4. Utilities Quarterly Report Information Water: Vice-Chair Melton directed to page 3 of water report. Graph on wholesale water prices. Newspaper reported Menlo Park said wholesale rates from SFPUC would triple over the coming years. This graph says they will quadruple, is this correct? Ratchye said it is more than triple and getting close to quadrupling. Vice-Chair Melton asked about Hetch Hetchy note saying study being delayed indefinitely. Ratchye said several studies were done on this subject (draining Hetch Hetchy). She has not heard when they will be completing this project. It is still an active issue in Sacramento, but it’s lost its ‘right-up-front’ ness. Commissioner Rosenbaum asked about page 5 recycling water and stated he finds it hard to believe we use 1400 acres of recycled water. Ratchye said the amount of recycled water being used now is much greater than several years ago. We are still waiting for the final report and it will be to the Commission in July when we will be recommending next steps. Commissioner Dawes asked about page 5; mixing systems at various wells, is this sufficient to blend water with Hetch Hetchy. Engineering had left so Ratchye will communicate that question to them. Commissioner Dawes asked why we need the Bay Area Water Forum, covers the 8 bay area counties. Ratchye responded the primary function is to try to get state grant funds to the Bay Area and they have been very successful to date. Chairman Bechtel remarked about an article regarding using chloramines disinfectant. Have we reduced our use? Ratchye did not know but said water is from Hetch Hetchy and it is unfiltered. Gas: Commissioner Dawes asked about attachment B – the trend is down, very different, what are the implications? Auzenne said part is weather, reduction in field staff due to illness and worker’s comp. There is not too much you can do when you lose manpower except juggle. Electric: Commissioner Dawes asked about the resource adequacy program asking us to adopt a $4 million program by May 12th. Balachandran said Council adopted what the UAC approved last month. Chairman Bechtel remarked that PaloAltoGreen continues to do very well. Page 9 of 11 Auzenne said 83% of our load is commercial and industrial and we will direct staff towards that market. Commissioner Rosenbaum directed staff to page 7, figure 4. Balachandran said there is an error in label – numbers are correct but labels in Excel didn’t show. Commissioner Rosenbaum said Calaveras and Western come to 700,000 megawatt hours, in calendar years? Balachandran said this is the same as Commission has been seeing for the past year. Balachandran said we use actuals to a certain date and then we use projections after that date. Kabat confirmed that the Central Valley Project has been spilling quite substantially. On the Trinity side the decision requires flows of 5 per second and are currently at about 33. The spill is about 36% of the total. Balachandran said it is 700 gigs, we normally get 300 from Western. Commissioner Dawes asked for a short recap of why we bailed out of the Sutter Plant. Balachandran said it is in a different control area. We are working with Santa Clara on seeing what we can do to move Los Asteros. Financials: Attachment D – Electric Report. Chairman Bechtel asked about tables, new format. Budget shows total for the year and actuals show just for the three months. Auzenne said this comes directly from SAP. Actuals are stated as part of the adjusted budget. Commissioner Rosenbaum again remarked on the way we used to do this report and would like to go back to what we used to do. Auzenne introduced Sharon Bozman, accountant, to the group. Commissioner Dawes said he doesn’t understand the new method of reporting. Bozman stated these figures are booked in our financial system. SAP never got the input for these figures. Hirmina said wholesale is included in net sales but in actuals it is shown as a line item. Wholesale and wholesale cost would be net against each other. Balachandran said the report is a combination of budget numbers plus adjustments made during the year. We don’t budget for wholesale revenue. This is what was adopted by Council. The detailed version has additional line items that don’t show up in the budget. Commissioner Dawes repeated this is another example of totally confusing information. Not a report in our accounting system. The number may have been plugged in but they are not in our accounting system. Commissioner Dawes asked if it shows up when the money comes in? Yeats asked if Commissioner Dawes was implying there was some impropriety? Commissioner Dawes said no. Chairman Bechtel said we have already agreed to meet with staff and it seems to be what staff has presented to us. Gas: No questions. Page 10 of 11 Water: No questions. Vice-Chair Melton said our water rates are on average 31% above our neighbors. We need to look at every cost driver in that utility including internal cost drivers. 5. Risk Management Quarterly Report Information Karl Van Orsdol gave a summary of the risk management for the 3rd quarter of FY06/07. No exceptions on any transactions, mark to market value of all contracts has declined from $43.2 million to $23.5 million. Credit exposure continues on a downward trend from the last quarter. The value at risk remains very low for electricity and has declined significantly for gas but remains slightly above benchmark of 10% of supply reserve. The supply reserves are very well funded for electricity and below established policy minimums for gas but sufficient for a 12- month risk exposure. Van Orsdol went over new sections to his report which include summary tables to provide greater details of volume purchased, headroom available and mark to market value. A reserve adequacy assessment will be conducted each quarter. The reserve assessment for electricity shows our current reserves of $44 million, minimum required under current policy $27 million and a 12-month risk exposure estimated at $20.6. The gas reserve have current reserved of $4.5 million, minimum required under current policy of $7.8 million and 12 month risk exposure estimated at $3.4. Balachandran explained the timelines of actuals to budgeted and how the dates reflect in the staff reports. The CAFR will only reflect what happened through June 2005. The latest numbers are reflected as adjustments. February report reflects CAFR report plus six months of data. Van Orsdol said his report is completely independent of what staff reports are on purpose. His function is to not use their figures but come up with actual numbers from what is booked into our systems. Chairman Bechtel remarked that staff could make recommendations to the sub-committee what figures they should actually see. Vice-Chair Melton asked in September we would see a revised risk model? Van Orsdol said yes, this is one of the ways we will look at but final report has not been decided yet. Commissioner Dawes remarked about the regulatory arena we operate within with considerable risks, and are these things factored into our risks? Van Orsdol said yes, he includes but it is a very qualitative part of this report. Page 11 of 11 The graph in the Commission packet shows the spot market as what needs to be sold to be balanced. Commissioner Dawes complimented Van Orsdol on the chart. Commissioner Rosenbaum asked about the mega watt hour price which is no longer included. Prices are listed for high and low volume market prices. These figures will be included in the future. VIII. ADJOURNMENT AND NEXT SCHEDULED MEETING: Meeting adjourned at 10:25 p.m. Next meeting on June 7, 2006 in Council Conference Room. Next Meeting Agenda Includes: Green power pool Respectfully submitted, Dee Zichowic