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Home My WebLink About2006-10-04 Utilities Advisory Commission Summary MinutesUtilities Advisory Commission Minutes : Approved Page 1 of 27 UTILITIES ADVISORY COMMISSION MINUTES OF OCTOBER 4, 2006 CALL TO ORDER Commissioner John Melton opened up the Utilities Advisory Commission October 4th meeting at 7:00pm in the Council Chambers: Mr. Bechtel present, Melton present, Rosenbaum present, Keller present, Liaison Beecham present. ORAL COMMUNICATIONS The first order of business is Oral Communications. If any member of the audience wishes to address the commission now is the time. I do not have any sign-ups so I will assume no one has anything to talk about tonight. We will move along to approval of minutes. APPROVAL OF THE MINUTES We have three sets of minutes to approve. Special meeting of August 2nd, the regular meeting of August 2nd and the regular meeting of September 6th. I believe all those minutes have been reviewed by one commissioner or another can I have a motion regarding the Special Meeting of August 2nd. Bechtel –move, Rosenbaum second. Motion is made by Commissioner Bechtel and seconded by Commissioner Rosenbaum on the Special Meeting of August 2nd. All in favor say ‘Aye’ Next is the minutes of the regular meeting of August 2nd. May I have a motion on those minutes? Bechtel - Minutes Approved. Rosenbaum – Second. Moved by Commissioner Bechtel and seconded by Commissioner Rosenbaum to approve the minutes of August 2nd. All in favor say ‘Aye’ Minutes of the meeting of September 6. May I have a motion? Moved to approve. Melton I second the motion. Rosenbaum: Let me just make a comment if I might. I reviewed that set of minutes and as I mentioned to Jennie Castelino those were the clearest set of minutes that I have ever seen from the UAC and I think it is to her credit to have been able to do that. Jennie: Thank you. Melton: Do we have a quorum who were here on September 6th? So we cannot approve the minutes of September 6. There were only two of us who were here at the meeting. Is that true? Bechtel: I read the minutes they were very clear and I am very happy to vote for approval. Approved on December 6, 2006 Utilities Advisory Commission Minutes : Approved Page 2 of 27 Beecham: As a point of order I believe you can vote on the minutes you were not in attendance as long as you are comfortable with the minutes. Melton: I have a motion and a second to approve the minutes of September 6. All in favor say ‘Aye’ so approved. AGENDA REVIEW We have three items on the agenda for this evening. Any changes in the agenda. Seeing none we do it in the order they are listed. REPORT FROM COMMISSION MEETINGS/EVENTS Reports from Commissioner Meetings and Events. There have been several meetings and that one or other of us has attended. Starting with the NCPA meeting in Murphy which Commissioner Bechtel attended and maybe you would like to give us your comments on that. Bechtel: It was some time ago but I would say one of the highlights of the meeting was that I met our new Utilities Director Val Fong who attended. I did not get a chance to chat with her. But I was quite impressed with her. So I look forward to her joining us. I was not sure as I recall from the minutes I think either Girish spoke to the happenings of that meeting. I don’t think I have anything to add to that other than that I did attend, and it was a very straight forward meeting. What I do recall is that the General Manager, Jim Pope outlined that future agenda of the NCPA, which is to focus more on green energy as I recall,. going to be the highlight of the annual meeting which was held in September in Silverado. I think that was certainly noteworthy and probably any new news would probably come from your folks who attended. Melton: Okay. I will just move down the line. Commissioner Rosenbaum and I attended the annual meeting of NCPA in Silverado only last week, the focus of the annual meeting was indeed meeting the challenge of climate change. It was focused very much on climate change and green house gas and renewable energy and those issues were pertinent. Only the day before the governor had signed the clean air greenhouse gas act for the state so NCPA was able to build on that what the electric utility industry is going to have to do is going to pick up its part of the State goals. One of the things I learned at that meeting was that second only to the transportation industry, the electric utility industry is the largest producer of the greenhouse gases in the State, and therefore is going to have to play a large role in meeting the State goals. I guess another thing that came out of the meeting, is that the transmission is going to play a huge part in the electric utilities ability to meet those goals. Primarily, because a lot of the wind generated renewable power is going to have to be imported from a long way, away to the point that PG&E is considering running an undersea cable from British Columbia to the Bay Area to import wind power. I think that transmission is not going to be a major issue for us – for Palo Alto Utilities because we have our renewable energy lined up much closer to the home, and we don’t have to go to British Columbia to get that kind of power. But on the state-wide basis it is going to be a much more difficult issue for the IOU’s than it has been for us. We also did meet Val at the annual meeting, and spent some time talking with her. I am very pleased with her enthusiasm getting here; and taking the new challenges she will have in Palo Alto. Rosenbaum: I would just add that quite often I learn things from random conversations with other attendees. While I was having dinner, a very fine dinner in NAPA as they all seem to be. I was talking to the Assistant Director of Utilities at Redding. Solar energy and wind power came up. He mentioned that Utilities Advisory Commission Minutes : Approved Page 3 of 27 during the big heat wave we had in the middle of July, out of 2000 megawatts of wind power available only 45 were actually generating energy. I later found out that this was not a random affect. But that there is a high correlation between very hot weather and very low winds. I thought that was quire interesting and it related to the question I had asked Girish at our last meeting – how in the world do the IOU’s going to meet these 20% renewable requirements if indeed, on the very hottest day when you need everything you are not going to get much wind power. You suggest that you need a capacity reserves in addition to the wind. If you got too much wind this becomes very expensive. The Assistant Director from Redding also told me that solar thermal; which is done on an experimental basis in the Southern California, did seem to make a lot of sense. He spoke of efficiencies on the order of 40% for solar thermal as opposed to whatever they might be for solar cells maybe 10%, and they thought that the IOU’s were seriously looking for large solar thermal plants which of course, they just work by focusing the sun on the central boiler essentially so you are replacing gas with solar energy. I thought that was interesting. I assume Karl knows all of these things but you never know what you are going to learn when you go to these meetings. Beecham: Even though I am not a Commissioner let me add few more comments from that. One of the talks discussed are where we already are in global climate change. What we put up there is there and what we are expected to put up there at the next decade will stay there for 200 years. That’s put us on a path that it does seem likely to change our climate. Some of the projections they had talked about the effect on the snow pack in the Sierras, which is where we get both our water supplies as well as our hydro, and the issue is we may perhaps have some precipitation in the future as we have had in the past. It will be as rain and not snow. Our reservoir capacity is substantially not in the reservoirs we build but in the snow pack itself. So if we have all that precipitation as rain or snow melts early as happened in 2002 when we had the January floods, all that hydro runoff and we have neither for drinking nor for harder production and Dick I had heard otherwise by your comment on the wind doesn’t blow when you have I resume stable high pressure zones sitting on top of us. So if we get into situations where we have high temperatures, steeper higher pressure zones and no snow pack we are up the creek so to speak. Melton: All in all the NCPA Annual Meeting was very informative on a number of fronts. It seems like this year was the focus on climate change and green house gas that was even more timely than it has been in earlier years. UTILITIES DIRECTOR REPORT Melton: Ok. If no more meetings or events to comment on we move to the Director of Utilities Report Bechtel: [Inserted by Bechtel for clarity: With regard to the NCPA Legislative Tour on October 4-6.] I am available after about 1:45pm tomorrow afternoon not earlier. Melton: I am not available. Can you give us something on the timing Bern? Beecham: My understanding is that we will be at the Cabaña between 11:00am – 1:30pm and then departing for the visit to Roche to look at their distributor generation and combined Stanford Ice Plant. So there are tours after that from 1:30pm – 3:00pm as well. Bechtel: So excuse me. Would it be possible for me to catch up with Cabaña at 1:30pm or so if I could? Balachandran: Little correction. They hope to leave Cabaña between 12:45 and 1:00pm. So if you can. Utilities Advisory Commission Minutes : Approved Page 4 of 27 Bechtel wanted to know if he could go directly to Stanford. Girish answered that there are some issues on parking. There is limited parking so all of us are urged to get into the bus that NCPA is bringing in, and afterwards we will be dropped back in the Hotel and utilize our vehicles to come back. Bechtel said it sounds like it is not going to be feasible for me. Bern responded that it would be nice if someone could join but it is not essential. Melton said he could come to the first part of the meeting at the Cabaña but I have an afternoon conflict so I will not be able to go on a tour. I can come at 11:30 at the Cabaña part of it. Balachandran: The program says they are going to be there somewhere between 11:00am – 11:30am. Beecham: My part is minor. Girish will be doing the main presentation for us. Melton: Ok. Carl are there other comments that you wished to make as a part of the UD Report. Carl responded that Melton covered it very well. Melton: The next item on the Agenda is Unfinished Business. UNFINISHED BUSINESS Melton – I will take the opportunity of unfinished business to inform the rest of the Commissioners some information that I heard from Jane a couple of days ago that the draft Environmental Impact Report for the Emergency Water Storage, which was the last time we heard from Jane was scheduled to be ready about now or last week is now further delayed. I think the new target date is November the 8th. So we do not yet have a completed draft EIR so that is just an update on some old business. Would anybody like to bring up an item for the unfinished business? Okay we move on to New Business. NEW BUSINESS The first item on the Agenda: The Recycled Water Market Survey Results and Jane has just given us a handout on that so I will turn the meeting over to her: I have a brief presentation that doesn’t provide a lot of background. I think this group already knows the background of this project. One person I want to introduce is Phil Bobel, the Environmental Compliance Manager at the Regional Water Quality Control Plant, which is certainly aware of and very supportive of this project. I will go over briefly the objectives of this survey, the results and my recommendation for the next steps. The survey was done because we hadn’t looked at recycled water since 1992. We wanted to reaffirm the potential for recycled water use within the boundaries of Palo Alto and to update the 1992 cost estimate for a pipeline to distribute that water and any other facilities that would be needed. We found that the market for the recycled water is much less than estimated in 1992. The total potential was 1870 acre feet per year, but the recommended project serves only a part of that – about 840 acre feet a year – with the primary use area the Stanford Research Park. We also found that these customers are very concerned about the recycled water quality, particularly the salinity levels. The other study result is that the project’s capital cost is estimated to be about 17 million dollars. Most of the water is for irrigation and most is at commercial sites. The estimates for this market survey are based on better information than that available in 1992. For example, there are many dedicated irrigation Utilities Advisory Commission Minutes : Approved Page 5 of 27 meters now and examining the seasonal usage pattern was used to make these estimates. It is lot different from what was done in 1992. The identified project is a pipe line coming down East Meadow to Alma and then to the Research Park. This connects into the pipe line that is hopefully going to be built along Bayshore to Mountain View and Moffet Field. The plan also identifies future areas for expansion at a conceptual level for an overall Master Plan update for the ultimate build-out of the system. This project costs about $2000 per acre foot and since our current cost for water from San Francisco is about $500 it does not look that good. Even though San Francisco prices are expected to increase to $1600 an acre foot because of the capital program that San Francisco PUC is implementing it still doesn’t look that good. Although expensive, this project costs less than some other projects being planned or developed by other entities. For example, Redwood City’s project costs about $3800 per acre-foot and they are going forward with that project. San Francisco’s recycled water projects are projected to cost about $7000 an acre foot. What that tells me is those certainly shouldn’t be done before ours is done. But it does not tell me ours is cost-effective yet. My main conclusion is that this does not look cost-effective if you expect the City of Palo Alto Water Utility to foot the entire bill. In order to go forward other beneficiaries must be identified. There is a good possibility of getting Federal and/or State grant funds to cover part of the project’s capital cost. Other partners may include the Santa Clara Valley Water District and the San Francisco PUC. I am recommending that we do take the next step of completing a facilities plan including preliminary design and completion of the environmental documentation for this project. This study would cost $150,000, of which half, or $75,000, would be taken care of by a grant from the State Water Resources Control Board. The net cost for Palo Alto is $75,000 to proceed with this step. In order to be eligible for state grant funds, you must take this step of completing a facilities plan. It seems well worth that additional expenditure of money and to get further along in the project and to make sure we are in line to get some of these funds. In addition, the study may develop more information that can be used to make the next decision. Melton – So the $75,000 state money to do the facilities plan – is that is guaranteed? All you have to do is apply for it? Ratchye – That does seem to be the case. Daisy Stark, the Plant Engineer, confirms that these grant funds for planning are available if you submit the required information in the application. The planning grant is not competitive. We do need to work with Treatment Plant and the partners to address the salinity problems of the recycled water produced there. There is a chance we would use more recycled water if the salinity level decreased. In fact about 180 acre feet of additional recycled water could be used at our municipal golf course if the salinity level was reduced down. Melton: How does the salinity get into the water – we start with fresh water – so how are we increasing the salinity of the water. Ratchye: You are right. The source water for the service area of the Treatment Plant is very high quality. But when it is used things are added to the water that are not taken out during the treatment process. Perhaps the primary source of salinity in the wastewater stream is infiltration into the collection pipelines, particularly the ones that are along the bay where very saline bay water comes in that contaminates the water. The amount of salinity that is coming in from Palo Alto’s collection system has decreased as a result Utilities Advisory Commission Minutes : Approved Page 6 of 27 of the capital programs that the utilities has done on its collection system, but probably there are improvements to be made. There are pipelines that come in from East Palo Alto and Mountain View along the bay that have infiltration. Phil Bobel has more information on the situation. Bobel: The plant has studied the salinity issues. To get the biggest bang for the buck, infiltration must be controlled in the pipelines coming in from Mountain View’s North Bayshore area and from East Palo Alto. We are currently working with Mountain View and I hope that we can report some major improvements there. Mountain View has a huge old landfill and they are doing a lot of pumping adjacent to that landfill into the sewage treatment system. About 5% of our salt is coming from that one source alone. I think we can make some strides there. East Palo Alto will be much more difficult because it is a dispersed collection system and the salinity there is coming from much larger dispersed area and there is a much higher capital cost to deal with it. Rosenbaum: I guess I always had the impression since the salinity is well known problem with recycled water that pretty much most of it is due to the process of treating sewage that is what you get left. Bobel: It is not always the process of treating it. We don’t add anything at all to the salinity as it goes through the Plant. Rosenbaum: Given what you start with, regardless of salt intrusion, you are going to come up with a product that contains a whole bunch of what we consider salt. Bobel: To put some numbers on it, we are around a 1000 parts per million of salinity. Sewage treatment plants that don’t have an infiltration problem are more like 600. Our goal should be to come much closer to 600. We used to be at 1200, but are down to 1000, partly because of Palo Alto’s good projects that have controlled a lot of that infiltration. As a comparison, the Colorado River water is 700 parts per million. So if you could get to around 600, most people should be satisfied. Ratchye: Phil I believe we have the highest salinity level of the south bay treatment plants, which have lower quality source water. Bobel: That’s right. We should have the best water around because we have a highest percentage of Hetch Hetchy Water and we just need a little more help working with our partners. Ratchye: Phil can also add some information on the plant’s salinity management Initiative. Bobel: We are looking for grant funds. One possibility is reverse osmosis, but getting rid of the brine is a very difficult situation for us. So we are exploring all the options. We are focusing on the source control end first as opposed to the treatment. We really ought to have as good as water as anybody in the bay area because we have better source water than anybody in the bay area. Ratchye: Thank you. My recommendation is to complete a facilities plan as the next step for this project. I would like to entertain comments or questions on this. Bechtel: I would like to ask some technical questions. What does it take to make recycled water portable and where are we in the state of the art in USA, or in the world to make it potable water so that it could be used in homes and so on as drinking water and so on. Utilities Advisory Commission Minutes : Approved Page 7 of 27 Ratchye: I think that technology is there but I think it is a tough sell. There are strict regulations that require the water to be very highly treated and then injected in the ground, after which it can be drawn out some distance later and some time later. Bobel: In Southern California they are now doing exactly what Jane suggested. Agencies in the LA basin treated water to a high level, then infiltrated into the groundwater and then use that groundwater. The newer projects are not allowing percolation into the groundwater but are actively pumping it into the groundwater fairly close to the extraction wells. So now in the Los Angeles basin you got the situation where they are pumping into the same ground water basin without too much transit time and further filtration by the soil. That is occurring in Southern California today. We don’t have a good way to do that even if we want to because we are not using groundwater sources. Further south in San Jose they are seriously considering using recycled water for stream augmentation, some of which would end up as groundwater. They are doing it in Southern California. Another thing that is being done in Southern California is using recycled water in commercial buildings for toilet flushing. This requires a separate dual plumbing system. Palo Alto may have to consider getting ready for that in the future. Bechtel: My line of questioning is based on rather than spending 17 million dollars on a new distribution system just for recycled water could 17 million dollars be spent on making that water potable such like the water goes into the home. I expect it would be a down payment of some sort. But if you have so few customers and can’t come up with more customers for recycled water if we can get back into our regular distribution system in some way I would support spending a $150,000 on studying those possibilities rather than proceeding along the line. I am really skeptical about recycled water being cost-effective for us. A net of $75,000 is not a lot of money; we spend a lot of money on studies. I would rather look forward to see whether we can use the water directly for as a replacement for Hetch Hetchy water. You mentioned Southern California and I suspect that if you look around the world and other very arid areas recycled water is being used. Is there any hope in the horizon for any of that bearing fruit here for us even if we do not live in the desert? Bobel: I think it is very hard to predict when the comfort level would be high enough for direct potable use of recycled water without going through the natural filtration in the ground to disinfect that water. The fear of virus and diseases exists and people will want a one hundred percent guaranteed insurance that none of those virus are present in the water and that none of that disease is transmitted from a pipe to pipe system. We are just not there as yet. I cannot predict when we could be there. Beecham: If I could jump in. The issue is not technical. It’s clear that there is a technology there to make the water as clean as necessary. The issue is public reception and that the toilet to tap water approach is a killer when you go to the public and say we want to put your toilet water back into the sink. It is a matter of public reception, not a matter of technology that it cannot be done. My sense is that unless there is a dire need to do it, a simple campaign will prevent the public from accepting it. Melton: Following up on George’s thought, if like Southern California if we take a reclaimed water pipe line out to the Research Park, maybe today irrigation is all that people can foresee but if every new building in the Research Park had a dual plumbing system built into it and we got the pipe line out there then we are right where Southern California is where we are starting to get new buildings set up to accept the dual water system. Utilities Advisory Commission Minutes : Approved Page 8 of 27 Ratchye: I think that it is very true. The recommended project does not have any storage so the pipes are sized fairly large to meet the peak needs for irrigation. In the future, if storage were added, the pipes could deliver two or three times that much water for future loads in that area. I agree with you that over time we will find the uses for recycled water. It certainly can be used in the buildings for toilet flushing if we have proper separation between potable and non-potable water. However, it is not cheap to retrofit existing buildings but future buildings could be addressed. The Council has already adopted the Ahwahnee Water Principles and one of the implementation principles is to encourage new buildings to be dual plumbed to accept recycled water for those kinds of non-potable needs. Over time the potential for recycled water will grow. Melton: Has Palo Alto’s Planning Department has this on their radar? Are they looking at this not for retrofit but for new buildings? Bobel: Ironically Jane and I are meeting with the Planning folks next week to start that dialogue on the Ahwahnee principles. As Jane points out one of those principles is to try to get new buildings ready for the future and I don’t think that there would be fundamental objections from the planning department. Keller: I actually called the Planning Department today asking about that very thing because I was aware that there is about 350 homes by the East Meadow Area that are recently approved and all together about 2000 homes. I was wondering what the trade off is for the cost and new plumbing versus a number of units in one area? Another question is what are the constraints of the salinity? What issues were, how far down you have to reduce the salinity to be adequate for cooling towers, if there was a corrosion issue or scaling or what the issues are because then you can approach it from the other side. Cooling towers versus abatement of the actual water? Ratchye: Regarding your first question about the new homes being approved that you are talking about. Use in residential settings is a little more difficult than in a commercial setting. That would be potentially problematic unless it is one big development that has one common area, which could be a good candidate for recycled water. About using the recycled water in the cooling towers, the issue would be that you would have lot fewer cycles before you have to throw the water away as you can get six or eight cycles with Hetch Hetchy water and you may get two or three so you would be using more water in the cooling tower. Keller: Okay. Melton – Any other questions? Rosenbaum: There seems to be a discrepancy between your slides on the process use where you say look at the market survey finds process use of 39 acre feet and on page 3.2 in the report, it says 326 acre feet per year. Ratchye: I reviewed the numbers to determine the breakdown between irrigation and process use and I believe the ones in my slide are correct. I do not think the numbers in the report are correct. The study shows seasonal use, which was partially attributed to cooling towers but I don’t believe it is as big as what is in the study. Rosenbaum: So it is a trade of between irrigation use and process use. Marilyn do you want to finish? I do have a few more questions. Utilities Advisory Commission Minutes : Approved Page 9 of 27 Keller: I am sorry – I just have one other question. Why can’t fire meters use recycled water? Ratchye: One type of meter we have is for fire sprinklers in buildings so if there is any flow through that meter they assume that it would not be recycled water potential use. Rosenbaum: Let me continue. On page 2 of 4 of the City Manager’s Report. The last sentence of next to the last paragraph says another one million will be paid if Palo Alto connects to the pipe line to serve recycled water loads in Palo Alto. Maybe you answered this question for me once. When Mountain View came to the Water Control Plant and said we need some more money, staff came to us and said we would like to put two million dollars into this Plant and the UAC reacted negatively to that. We finally said we put in a million dollars now and a million dollars if we ever connect and I remember Glen Roberts going to Mountain View and coming back and saying that amount would not be acceptable to Mountain View. But he finally decided to put a million dollars from the contingency reserve funds of the Water Treatment Plant, now is the understanding here that if we ever do connect the water utility will essentially repay the Water Treatment Plant that million dollars? Ratchye: From the perspective of this project the water utility would be paying another one million dollars if and when we connect to that new pipeline. Rosenbaum: That was the agreement with Mountain View. Ratchye: We agreed to pay one million dollars of the capital cost to cover the cost to up-size the pipe to handle future Palo Alto load and an additional one million dollars at the time we connect. Rosenbaum: That is not my understanding but it is not reasonable. You raised another issue. It is my understanding that the bids for the Mountain View were all rejected because it was something like four million dollars over the amount of money that they had and things are up in the air. I am hopeful we would get our million dollars back. (Jane said we haven’t spent it yet) Will be getting back the million dollar commitment. What is your understanding of the status of that? Ratchye: As I understand it, you are right. The bids came in much higher than anticipated and they needed to have this project done in a certain time in order to get the $3.8 million state construction grant fund that they were promised. They told the state look of the problem and received an extension to the grant deadline. Bobel: We got that extension from the state grant funding essentially for a year in which to look for more funding. There is a possibility of more federal and/or state money. We are going to spend next year examining that and we will be reporting that through Mountain View since is it their decision. Rosenbaum: Another question Jane. On Page three of four in the last paragraph there is a sentence, there is an implication I did not understand. ‘However other benefits from the project may exist if the project is examined from a broader perspective’ In this sentence I do not understand for example the marginal cost is new water resources for the region maybe much greater from the cost of water from SFPUC. What does that mean and how does that relate to us. Utilities Advisory Commission Minutes : Approved Page 10 of 27 Ratchye: Well, if you look at from just a City of Palo Alto perspective our avoided cost is whatever the average cost from the San Francisco is. That might be $1600 per acre-foot, what we expect in 10 years (it’s $500 per acre foot now). But where is the State of California or the Bay Area going to get new water? The cost is probably a lot higher than that. So the question is what is the proper avoided cost to use when you are looking at this project – should it be the societal perspective? If it were funded regionally then it is appropriate for the region to look at where is we are going to buy our next amount of water. Santa Clara Valley Water District has done this. They have pegged it on the cost of building a reservoir to get more seasonal storage and that is essentially new water produced that can be used. I think it is much higher than $1600. I think it is more like $2500. I actually would have to double check and see what that calculation is recently. I haven’t seen a number on that in the last couple years. But I do think that it is appropriate to look at that number. In addition, the State of California is looking at very expensive projects to try to increase the water available in the State and so those are appropriate benchmarks to use. We can examine the regional benefit of the project and sell it that way to get regional funding. Bobel: Just to add to that. That is the selling point that might work in terms in going back to the State for more money. If the State is giving money to all kinds of different places, you would think that they would want to give it to the place that they think it is getting best bang for the buck – the smallest cost per acre foot. To the extent that we are connected into the regional systems of San Francisco and the Valley Water District, then the State should really be looking to find the places to put the money that they get the lowest cost per acre foot for the next increment of water. That is why we should have a good argument and go back to the State and say this Mountain View pipeline project for example has got a better return than some other projects being done or considering for funding. Rosenbaum: Thank you for that. I guess my reaction is that those arguments sound pretty forced. I think it is going to be tough to go to the State and say Gosh we need all this water because it is going to be cheaper so that we can water commercial landscaping. One response might be in the one that Planning Department is already following for new buildings. They strongly encourage drought resistance landscaping which makes a lot more sense. I think those are all my questions and I am ready to make a motion. It is not the motion that staff is recommending. So however you would like to proceed John. Melton: Are there any other questions or comments? Balachandran: Commissioner, I would like to make one comment just to highlight a point on one of the slides here which is the cost of Hetch Hetchy water is estimated at $1600 an acre foot, but only 4% of San Francisco’s capital program has been completed. With any long term Public Works project the cost tends to go up. So when I look at these cost too, we don’t have an estimate of how high the ultimate cost could be. Rosenbaum: If I might reply – you are not suggesting that the $1600 acre feet is associated with the capital cost of 4% of the project. You are saying that at this time there is some uncertainty what the total cost might be. But based on the current estimate, the cost of the water will be $1600 and not estimate might change. Balachandran: That is correct. Utilities Advisory Commission Minutes : Approved Page 11 of 27 Rosenbaum: As we found out with the Mountain View pipeline the cost estimates for this pipeline might indeed change and I guess just for argument purposes the timeline for the project like this sort is not that long. If we did find out in future years that the cost of Hetch Hetchy water was going to be higher than $1600 then this project is suddenly cost – effective why? No problem in proceeding at that time assuming Mountain View goes ahead with that. We would also know that and who knows we might even have a handle on how much it is going to cost to reduce the salinity of what the plant is putting up. The salinity problem has been with us forever and I guess I am at a loss in understanding why if it is really doable at a reasonable cost and it hadn’t been done before and why this particular project should suddenly be served as the impetus to take a more serious look at it in reducing the salinity. John what would you like? Melton: I think Commissioner Beecham has a comment before we take a vote. Beecham: Formally liaison Beecham here. I do have a couple of questions. One I presume the anticipation of the staff is the cost of this is rolled into our average water rate paid for by a typical ratepayer is that correct? Ratchye: If we go forward with this project, there would certainly be policy issues to be addressed in that regard. The Council could decide to have recycled water cover the entire cost of the recycled water system or decide to discount the cost of recycled water from potable water rates – this may require potable water users to subsidize recycled water users. Beecham: So it could be even more then just rolling the cost of the project into the recycled water rates. We could be forced to discount to some degree to get people to use it. Ratchye: That would be a policy choice. Another thing that council could do is this is for the Council to declare that recycled water is the only water available for irrigation in a specific area. For example, if you want to irrigate in this defined target zone area, this is the water that you will use or no water. Beecham: Second question. In this case we are pumping water uphill which we don’t have to do through most of the city going from the day up to somewhat low on the hills is there any significant pumping cost associated with this. Ratchye: That cost has been estimated in the study, but it is not significant relative to the capital cost. Beecham: Does this include in the $1600 or $2000 rather? Ratchye: Yes. Beecham: In a couple of comments you talked about the potential for much higher cost of additional water supplied through the Hetch Hetchy system through BAWSCA and Jane is working on this too. We are working on both environmental reviews for the whole Hetch Hetchy system as well as looking at what additional water supplies there may be for growth that will occur in this area. For Palo Alto we do not accept our water demand will increase. We think that with conversation that will pretty much match our population growth and so on and so on. There is no long term increase in Palo Alto Demand but that is not the case of other cities. BAWSCA agencies are in fact growing and I think even San Francisco may have some growth planned. There will be some need to find some additional water supply for the Hetch Hetchy system. It will cost more depending on how they do it. If there is an environmental reason not to take any Utilities Advisory Commission Minutes : Approved Page 12 of 27 more water out of the Tuolumne River, you will have to find it elsewhere. So the potential for the Hetch Hetchy System to need to find more expensive water is genuine. I don’t know if there is a way that we can do water trading for example water more or less can bank here and offset someone else’s growth and they pay for it that might happen in the future as we do contract negotiations there is a possibility for not necessarily out there yet but in any case for the Bay area we will be short on water. Compared to other options others are considering for the marginal cost of water this is cheap. One of the flaws in our system is we are charged by the Hetch Hetchy average cost. They just as we may hear take their high marginal cost of their supply and potentially charge all of us that as we may do here. Finding the right economic mechanism to find the right person to pay for this maybe difficult. But in terms of the Bay area to find additional water this is cheap. Melton: Any other comments before we go to motion? Dick you said you have a motion, lets put it on the table. Rosenbaum: This will move us along. I want to say a few things if there is a second to the motion. I would move to recommend to Council that we discontinue further work on a recycled water project until such project becomes cost effective in line with guidelines free of the Water Integrated Regional Plant (WIRP) Melton: Is there a second. Motion fails for the lack of a second. Is there another motion. Bechtel: Just for clarification so Jane what you are asking us to recommend to the Council is the approval of $150,0000 study program of which $75,000 are net cost maybe as low as $75,000 is that what you are specifically asking. Ratchye: Yes. Bechtel: Then I would move that UAC recommends approval to go forward with the preparation of a Facility Plan Development and Environmental Documentation for expanding the Recycled Water Distribution System in Palo Alto at a cost not to exceed $150,000. Melton: Is here a second? Keller: I second it. Melton: There is motion made by Bechtel and seconded by Keller to recommend to Council approval of staff recommendation. I believe that recycled water that something that we are going to have to do in the future. I don’t know whether it is going to be on Bay Area life bases or as opposed to just local Palo Alto. It is pretty clear to me that the new water resources are going to be needed and I think it’s a crying shame that we are dumping Hetch Hetchy water on the vegetation. So I agree with the motion on the floor that we should move ahead to take what I think is a pretty small incremental step in bringing recycled water on line for the city. Rosenbaum: As I indicated I will oppose this motion. I think it is highly unlikely that we would ever consider sticking the water users of Palo Alto with a cost of a $16 million bond. I just don’t think that is ever going to happen. Recycled water is a wonderful idea. We used it on our Golf Course, we use it on Greer Park maybe the Mountain View project will occur and they happen to have a Golf Course and a Shoreline Park and a Shoreline Industrial Park all properly located. At some point even if you have a wonderful Utilities Advisory Commission Minutes : Approved Page 13 of 27 concept like recycled water, you just have to look at the economics and if doesn’t make sense, it doesn’t make sense and to me this project simply doesn’t make any economic sense. Bechtel: I believe that Dick in large measure I agree with you. I mentioned earlier that I was skeptical about this as well. I look at this as keep alive project. I think we talked about BAWSCA, how San Francisco has to consider new sources but also recycled water and I believe that the investment in the study will help. Say the study goes on another year keeps the project alive long enough perhaps we can on a regional basis put more minds to work and find let’s say more financially feasible way of how actually using the water. I don’t believe that you opposed the concept of recycled water. Probably from economic point of view it is just a real reach for it to make sense. But I would like to keep it alive. Keller: I think California has always has had a shortage of water in the recent past and it will only get more serious and I think it is a good investment in the future. The other benefits that are listed in the report are something to consider as well. If the water cost keeps escalating as it seems to be I think I would be surprised how soon this might make sense. I also feel that if you can start encouraging the use of the recycled water before the buildings are built in terms of these large developments that will become more economically viable and I think we need to do anything we can to conserve water. Melton: Okay let’s vote. All in favor say ‘Aye’ Bechtel ‘Aye’, Keller ‘Aye’ Melton: All opposed. Rosenbaum ‘No’ Melton: Motion carries by vote of 3 to 1. Next item on the Agenda: The Approval of the Ultra Clean Local Distributed Generation and Incentive Program. Karl Knapp has prepared some presentation on this. Balachandran: I am going to start of with a couple of slides and then turn over to Karl Knapp. Dr. Knapp will get credit for the acronym up there. I just wanted to go through a couple of slides just giving you an overview. It is more of a reiteration of some concepts we talked about before. It is basically big picture concept and motivation and then the rest of it including the recommendation will be handled by Karl. We have come to you several times with the slide with what a long term resource plan looks like and we have a long term shortfall in our energy situation. There are many uncertainties that still exist and will continue to exist in the long term with our portfolio and the current market design, hydro uncertainty, transmission and regulatory uncertainty. Our LEAP Plan is a diversified plan that looks at number of different elements. It summarizes into 7 different elements that we look at and today we will be talking about the third element, local cogeneration, actually one part of the third element. We have been coming to you over the last several years the LEAP guidelines were approved by the Council in 2002. The Implementation Plan has been updated as recently as in April 2006 was presented to the public through Utilities Advisory Commission and the Council and we have been reporting on all the progress of the different areas twice a year. You have seen this basic long-term load-resource balance has been updated to assume that the NCPA Green Power Pool project which was approved by the Council back in July is in place, assuming that we actually get the 15 megawatts that we signed up from NCPA and so this shows our energy balance in Utilities Advisory Commission Minutes : Approved Page 14 of 27 different kinds of hydro years in the long term. The policy motivations I did mention Clean Distributed Generation is also supported by several other implementation tasks. We have several City Policies right from Greenhouse Gas Principles which were adopted by the City Council to the Comprehensive Plan which has several elements which support this initiative. The state-wide level and also Federal level have policies which support this program. With that I am going to turn over to Karl Knapp to get into more details on the program and make a recommendation. Melton: Before Karl starts I would like to just ask an overview question which was not clear to me in reading the material. This is called the title of this is Approval of a Local Distributed Generation Incentive Program. My question is really about the word ‘Incentive’ and I am looking at this from the corporate perspective. We have corporate customers out there who are going to work with us to do these cogeneration plants on their site. They will do that if it makes economic sense. There is pretty long history on gen. This is not rocket science anymore. What we are leading up to here a financial incentive program to get companies to do this? Why on earth would we need to tap an incentive program? Because it seems to me that this makes sense without any incentive from us. Knapp: Actually it is a financial incentive program and it is the combination of rates, rules and incentives. Actual incentive is a small piece of it. The largest companies don’t need as much of an incentive upfront. This is not only for just one or two customers but it is to provide the ability to and to make it economic for them to do when there is an upfront cost that is pretty big. It becomes a big hurdle for not only small companies but large companies. Without specific retail rates, the design for the kind of load shape that the cogeneration system has, or incentives for innovative technologies like fuel cells or renewable supplies, those other innovative technologies don’t take place. There are some other benefits similar to what we have with energy efficiency in cogeneration that warrant an incentive especially since most of these incentives paid upfront allows us to avoid transmission cost for the duration of the project. The idea is to actually have it pay off to us in the long run by paying up a little upfront to make it cost-effective for customers but we also save money. Melton: I guess I am not convinced that if it really is a cost-effective win-win situation that companies won’t step up to it. If they are going to save money and if they got a good return on investment, we don’t have to do it. Balachandran: We have a tag team on this. He gets to think while I talk. I think you are right on the face of it. The companies should be doing what is in their economic best interest. There are additional benefits that we get that we wouldn’t normally see and it enhances the reliability of the distribution system. We have certain policy goals on greenhouse gas emissions which from their point of view, they would not necessarily see some of the benefits of that. In addition to the answer that Karl gave that this program is not purely a financially incentive program. It is also a program that would include the kind price signals through rates. That would incent them to put up their own capital. So the program that is going to be in place which will include rates that would incent them to do it. But at the end of the day when you look at the benefits for actually installing a distributor generator in customer facility there may be some net savings where there could be split benefits for both parties. Maybe some of those will get clearer there, Karl does have some slides which shows how the economic works to the benefits of both parties and how it gets split. That gets into some pretty heavy details and maybe we can get to that later on in the presentation after we get through the slides. Utilities Advisory Commission Minutes : Approved Page 15 of 27 Knapp: Maybe a simpler answer, we will save money if our customers do it. Sharing some of the savings to make it cost-effective for them, that is the incentive part. They may not save money while we would, and by sharing what we will save, we can get them do it. That is good for everybody. This is a repeat. I am pretty much following what is in the report but not in the same order. This is a list of benefits that were highlighted. by Joel Swisher who was here back in November and again in the LEAP up date in March. So cogeneration is going to achieve higher over efficiency and reduce emissions. I will not read all the bullets. One key piece is near the bottom, it is just not the city but also some of our customers have environmental goals of not only reducing gas (C02) emissions but also eliminating refrigerants from other facilities because those are also fairly important Greenhouse gases and we found in our local generation feasibilities study that small scale system are those that might actually be feasible to help us meet some of our resources locally that can provide reliability and transmission cost avoidance. The typical sizes for the Palo Alto customers that were identified in that feasibility study somewhere between three and 10 megawatts that were each estimated at 4 ½ megawatts. When we got into more details what those really look like, it depends strongly if you look at the monthly average gas bills as opposed to what is your peak gas load during the day. So if you are trying to match your daily steam requirements during the day, you might have slightly larger system to match that. That is the kind of range we are looking at. Also it is just not cogeneration but there a lot of non cogeneration technologies like fuel cells. There are not many renewable resources in Palo Alto that we can really deploy other than solar and solar is not going to be a part of this program; that is really going to be rolled into the other solar programs. But if somebody wants to get a windmill site in Palo Alto they can do it. That would be great. We would like to facilitate that but I do not think we are going to try to build a wind farm in Palo Alto. We don’t know what is going to be around in five years. So we want to make it available for people who can. There is a longer list of tables and some program principles that we developed over with people from several other different departments and divisions as well as some large customers and some of the vendors who sent us information in response to a Request for Information. These seem obvious in hind sight but it took a while to develop some of the details on how you might keep it simple by copying or building some other similar programs and using standard rates and interconnection standards. We felt that community acceptance, cultivating environmental improvement, achieving the high efficiency, realizing cost effectiveness and reducing risk, benefits to reliability and security and safety are all important. There are lots of reporting requirements that are now coming out of the California Energy Commission and it goes all the way down to one megawatt size power plant. We want to make sure that does not become an administrative burden for us by having the data required for these generators from customers. So we have to make sure that they are going to help us by doing the reporting as required. We also want to encourage these new technologies and kept them out so that people can see and find out how it really works. The proposed guidelines that are in the report have a lot more details than this. But basically just fell into 5 fundamental categories. There are the technical guidelines meaning what kind of system is going to count, what fuels, make sure you meet high efficiency and environmental standards and how big can they be and one of the issues that came up from the other departments was not to have any water load to the system if it requires clean water. In terms of reliability there are some guidelines which are listed in terms on how it gets operated: what is the availability going to be, uptime, interconnection, the city having ability to call that it is not running, to ensure that it actually provides reliability benefits that we listed on the slides (2 slides ago). Under the financial section, how much you spend and make sure you have enough different systems: setting limits on the maximum size not only the program and individual systems, also try to make sure we maintain Utilities Advisory Commission Minutes : Approved Page 16 of 27 competitiveness, who owns it, rules on can customer use it to meet their load or they have too much to sell it back to utilities which we would like to encourage. What rules you have to follow for retail rates? We already have rules and regulations having to do with customer contracts. Procedural gets into some of the nitty gritty of everything from California ISO scheduling protocols to our own inter-connection standards and contract length to warranty insurance. These may seem a little nitty gritty but we wanted to make a list of guidelines that were general enough to give some flexibility to design but specific enough to design an implementation plan. If it met these guidelines it would be pretty easy to implement. Of course all the materials would be reviewed by City Attorney’s office. We are trying to make it so that there aren’t too many of those but there are going to be some agreements that are required to do a program like this you need 5, 10, 15 year agreements sometimes. To get to the Resource Impacts. This is just a bulleted form of the last paragraph in the report. But we are looking at potentially 5 million dollar incentive program over 10 years. About $500,000 a year program and we have identified that out of the 5 million perhaps one million dollar be funded through public benefits for those R&D or renewable projects which are legitimately public benefits funded. So anything from fuel cells to renewables, and right now the idea is that the incentives may be paid initially out of supply reserves but also we are looking at the performance basis incentives, which we are also looking at for solar rather than paying up all front you pay overtime based on how it actually performs. The idea is that the incentives are paid out of the savings realized from avoided transmission costs. So it is either paid upfront and paid back out of savings or you actually pay slowly overtime out of your savings. Of course the on-going cost would be reflected in the applicable electric and gas rates that you will all see on a regular budgetary cycle basis and that is where f the rules how you quality will show up is in the rate and not in much complicated programs manual (I am hoping). The worst case would be if you spend all these five millions dollars and you did not realize any savings at all, that would translate to .05 cents per kilowatt hour rate impact. It is worth at least looking at the extreme. About ½ percent. We hope to have all this together to start in the FY 07-08 so we will be working to get the program in place so we can start by July. So that is the end of my presentation and I figured that I could open up to questions. I would like to take approval of these guidelines to Council in November and so I am asking the UAC to do is to recommend approval of these guidelines for the program which will then allow us to finalize exactly what the program design should be to meet these guidelines. We got a start on it but we kind of want to wait to make sure what the guidelines would be. Then approve it sometime in spring. In parallel, which I mentioned in the report but not in the presentation, one of the recommendation is to update the zoning ordinance to include in addition to what is now in there under Resource Conversation they have thermal energy storage some other exemptions from the floor area ratio is to include cogeneration and systems that would qualify for this program also under that. Because in order to maintain the noise low you have to put an enclosure. Once there is an enclosure it could count against floor area issues. We would like to encourage quiet ultra clean cogeneration by including that in the zoning ordinance so the Building and Planning Department are planning to work on doing that as part of the zoning ordinance update and get the program effective by July. So now I am open to questions. Melton: Questions comments from Commissioners. Rosenbaum: Karl I always appreciate your presentation and plans and I have developed a fair amount of confidence that you know what you are doing based on past performance. There seems to be some arbitrary elements here and perhaps you can comment on the 5 million dollars, 20 megawatts, on an Utilities Advisory Commission Minutes : Approved Page 17 of 27 average 250 dollars a kilowatt is that what you are contemplating with. Where do these numbers come from? Knapp: The 20 megawatt came from that is the actual size of that red block in the center of the first slide meaning there is our long term positions. If this program got fully subscribed 20 megawatts would make us exactly 100 percent balanced on annual basis so this seems to be a good limit. Don’t buy more than we need in a normal hydro year. The 5 million actually came from taking a look at what the Rocky Mountain Institute did and trying to estimate what we actually expect people to sign up for this and so it came from say one 9 or 10 megawatt system, a couple of 4 megawatts systems, half a kilowatt of fuel cells, perhaps 500 hundred kilowatts of smaller system that worked out. Using the current rebate levels that IOU’s used similar programs called SGIP, that works out for the 5 million dollars. So if it is comparable to the incentive programs that are elsewhere in the state that would be a 5 million dollar program what we want to set as a limit not as the minimum. Rosenbaum: Maybe that is the answer. This SGIP Program is this PG&E’s? Knapp: It is all of the investor-owned utilities. Rosenbaum: All right. They are essentially offering up to 250 kilowatt incentive. Knapp: It depends on which type of technology. Fuel cells are $2.50 a watt or 2500 dollars a kilowatt. The cogeneration systems are 600 dollars a kilowatt. It ranges but there is a cap at one megawatt – so if you put in a 5 megawatt system, you only get one megawatt worth of incentive. Rosenbaum: What is the incentive to go from 1 to 5. Knapp: The economy of scale makes it. It is mainly for the smaller systems that aren’t quite as cost effective. It pushes them over the edge. It encourages the smaller distributed generation to get implemented it is a higher percentage of the cost. Rosenbaum: You speak of this as a 10 year program. How do you think that the money would actually go out? Why couldn’t all five million dollars be spent in the first year. Knapp: Theoretically, I don’t think anyone other than one large customer got it seriously. It would necessarily be a 500 hundred thousand dollars per year for 10 years straight line. If you could get this done in 10 years would be great but if it is done in two years instead fine too. Rosenbaum: Why is the 10 year mentioned why not call it a five million dollar program and when the 5 million dollar is up we should have our 20 megawatts and independent for how long it takes. I promised to have a 10 year cogeneration plant so it you could call it 10 or more. Rosenbaum: So the money will go out as money goes out. The $500,000 is just a sort of an average annual commitment for 10 years. Knapp: The idea is also to have a sunset date. So you don’t have an infinite potential program that goes on forever after 10 years. Someone will have to take action to renew the program. Utilities Advisory Commission Minutes : Approved Page 18 of 27 Rosenbaum: Now in terms of the expected energy to be generated you are talking about 20 megawatts and 14 to 17 percent of the city’s energy needs which on the order of 160 thousand megawatt hours. Knapp: 17% would be pushing it. Rosenbaum: It seems to me that would be required running 20 megawatts 24 hours a day. Is that your anticipation of how these would be used? Knapp: 14 % is closer to a little under 80 percent capacity factor. Some do run 100 percent. So it is close to 100 percent. It is possible that you could get into 20 megawatt as running over 95% capacity factors. But more realistically, it would be closer to 75 or 80 which is where the 14 percent number comes from. Rosenbaum: To the extent where the cogeneration makes sense when you have processes going on to these industrial processes that we have here in Palo Alto really run 24 hours a day 7 days a week. Knapp: I think it would be closer to 75 percent, closer to 14 percent number Rosenbaum: 75 % is 18 hours a day for 7 days a week is that realistic? Knapp: Correct. Although some of the smaller biotech companies turn out to have a pretty steady, 24 hours 7 days a week thermal load. I am not exactly sure what they are doing. Growing bugs. It depends on who ends up doing in. Also once you have a cogen system people tend to change how they operate to make a better use once you have the better equipment. It is more efficient. Rosenbaum: Do you think you will be able to control how this money goes out so that it ends up with 20 megawatts. If you got a whole bunch of fuel cells proposals or are we going to use up five million dollars and produce a good deal less than 20 megawatts, you would say ‘No’ how are you going to work that out? Knapp: I think that is the limit on the subsidy portion being about a million dollars is once that part is gone; it will be a different amount of money for the different technologies. We haven’t actually set that part as yet. It wouldn’t all go to one technology. Rosenbaum: Maybe that was a poor example but conceivably the five million dollars could be spent before you got 20 megawatts of generation. Depending on what choices are made. Is that going to be acceptable? Or are you going to pick and choose. Is that going to be acceptable or somehow you are going to pick and choose and say ‘No’ to people because there is not enough bank for the incentive buck what they are proposing. Knapp: I think the idea is to set the incentives so that you are saving money. At least breaking even regardless of what size it is. Instead of 5 million dollars you got 10 megawatts instead of 20. You are still saving money then it may be time to expand the program. I think if we follow the guidelines, the intent of sharing the cost savings to pay for the incentive you may not get the 20 megawatts. But to get the 20 megawatts or 5 million dollars first, you stop. Rosenbaum: So we are not necessarily going to get 20 megawatts, Knapp: Right. I cannot guarantee that. Utilities Advisory Commission Minutes : Approved Page 19 of 27 Rosenbaum: Maybe that wasn’t clear in the report. Because you want to get 14 to 17 percent of our load that requires 20 megawatts and we are supposed to spend five million dollars and now you are telling me well we may only get 7 to 10% of our load for 5 million dollars. That does not sound good. My question is how can you control some of the projects will probably require a smaller incentive to get it to work than others. Are you going to influence those decisions in some ways so that we will get what is setting out to get. Knapp: I think we can control the outflow of the money so that it is actually net inflow. Primary goal is not to get 20 megawatt but to get as much as internal generation from ultra clean distributed generation as you can spending the 5 million dollars in a cost effective way. Rosenbaum: Alright. Thank you. Bechtel: Karl this seems to be a very complex program to put together and administer and so on. Have you looked at the internal staffing requirements or external staffing requirements going to be required to administer these programs? I looked at the list of permitting on procedural access dispatch, safety scheduling, reporting credit insurance warranty and all of those factors I see. I feel to deal with our state bureaucy created by our deregulation, I see many many hours of staff. Am I right or wrong? What is it going to take to administer the program? Knapp: Actually doing the ISO piece is the scheduling which would be done through NCPA. Luckily we have some experience with their day-to-day scheduling protocols which they deal with. Everything from small one megawatt, landfill l generators up to Calaveras. Whoever owns the generator follow these procedures and they are not that complicated: let people know when you are going to shut your equipment down, when it is going to run tomorrow. If it goes down you have to notify within half an hour. That is not Palo Alto staff. That is whoever owns the generator. We can facilitate that because we have a SCADA system, because we have a UCC dispatch center that is manned 24 hours a day. The other rules like dispatch have to deal more with communications with people who are already on staff because when dispatch is going to shut off a switch for example near Stanford Research Park and you’ve got a generator running you need to know it is time to turn it off. It is more coordinating with our Utility Control Centers for most of the other safety and reliability issues. Staff time it turns out does not look like it is going to be much more than it takes to manage a new large photovoltaic rebate type of program. Because the on-going operation would have to be taken on by either the company or the third party that would actually put a system in for them. The larger systems would probably be more like Chevron Energy Solutions, or Real Energy or Fuel Cell energy, who own cogeneration systems all over the country. In this building we deal more with a month ahead and our day-to-day goes through operations and NCPA and they seem to think it is not a big deal. We are also expected to 4 or 5, not hundreds of cogeneration systems. Bechtel: So that is 4 or 5 and you divide 4 and 5 into 20 megawatts and those are pretty good size (co bug) systems. Knapp: I do not think we will have four 5 megawatt systems. We might have two that are over megawatt and a couple of small ones. The small ones that are under megawatt you do not have to do any of the scheduling. It is just like behind the meter. Utilities Advisory Commission Minutes : Approved Page 20 of 27 Bechtel: Distribution system in which you are pumping power in when there are various pumps it may not be a big deal. It seems to me though it is going to take a lot of work. From the way you are answering the questions it sounds like you thought thru all these requirements. In regard to what stages and our focus passing down for local generation I am trying to catch up with that are we going to be satisfying some requirements that are ready. Are we ultimately going to do this anyway in terms of local generation? Where are we now in requirement to have local generation? Knapp: We have actually two requirements that I listed. One is the Public Utility Code requires that we have a public hearing and we review our rates, rules, and regulations on facilitating distribution generation. But you are not required just necessarily have it. So part of this program is to actually facilitate those who want to do clean distribution generation to do so. But actually having to put it in is not part of the law. The Energy Policy Act has two sections that we are supposed to be doing which is increase the efficiency of our fossil fuel generation which we don’t have any. So any fossil fuel generation that we do get on line would be extremely high efficiency if it is this. I forgot the other epact standard. I think I have listed this for you. Standard 12 having to do with diversity and that for me is having power purchase agreements with couple of co-generators accomplishes many of the same goals of buying say a tolling contract or gas power plant contract outside Palo Alto so you get the same type of diversification of your resources as you would if you just did a spot purchase from the market. You get a little bit of natural gas component of your portfolio. So those are kind of general requirements as opposed to being specific. There are a few others and nothing mandates that we have self-generation incentive programs. It was a discussion in there about as already being billed for not having one and getting the money back. Bechtel: Lastly, what are we looking at in terms of cost for let’s say one of our customer puts in 5 megawatt generator or some sort can you give me a range of $ per megawatt. Knapp: Around $2000 per kilowatt. So you look at up to 10 million dollars for 5 megawatts system. You can also go from 5 to 10 and you will only go from like maybe 8 or 11 million dollars. There is a large difference in dollars per kilowatt as you jump from 4 up to 10 megawatts. Bechtel: If someone installs lets say 5 megawatts I don’t know what the total load would be right on the top of my head, what would be their annual electricity bill. Knapp: Someone who has 10 megawatts. Probably around 3 million bucks? Bechtel: I am just trying to get a scale of what kind of dollars we are looking at for this particular… Rosenbaum: 10 megawatts is 80 thousand megawatts hours. That 80 dollars of megawatt per hour …it is 6.4 million dollars a year. Bechtel: So if the bill is about 6.4 they are going to be paying let say about 10 for something like that so okay. At least from the scale point of view and so on the numbers ran the right range so this is serious stuff. Knapp: Most of the savings actually comes from the reduced use of gas and the boiler. Utilities Advisory Commission Minutes : Approved Page 21 of 27 Bechtel: What I was getting at is what is the likelihood what if you had to go to your boss and you have to go to division headquarters or corporate headquarters for approval of a project like this you want to have big numbers that you can toss around about what kind of a scale you are talking about here. Thank you. Beecham: John, I need to go. I apologize. Keller: I have a couple of questions. My understanding which may not be right is that commercial, industrial customers tend to be subsidizing residential customers base. Is that true here? Lucy: ‘No’ Keller: It use to be true in PG&E land 10 years ago. I am all for cogeneration. I am puzzled by if you encourage more cogen and somehow it has been subsidized which is a little over my head here, are you also losing some of the subsides that provides for residential base. Is that something that would continue on forever, is that something that would continue on forever. Has that being compensated for in these rates that you will be developing? Does that make any sense? Knapp: I do not know if I can answer that subsidy question. Most of the people have very similar rates. The goal of the guideline as I stated here is not have any cross subsidy and that is basically they would pay for the gas just like they are any other customer with a load shape that a co-generator would have. Keller: I don’t mean the difference between cogen and non cogen. Is this industry commercial vs residential aren’t the rates different? Aren’t they such that the residential rates are lower because of the presence of the industrial and commercial ratepayers. That is how it was an experience that I had before. Balachandran: The way the rates are done is done on cost of service basis. So to the extent that we have a lot of industrial commercial customers with flat loads. The overall cost for the entire system is lower compared to if you had a load that was peaky. So you look at the total system cost then there is cost allocation mechanism that happens on allocating those costs to customers. So overall system cost would depend on the ratio of commercial customers to residential customers but more important is the load shape that would matter, Keller: What I am thinking about is my manager was describing at Dust borough if you start losing commercial and industrial customers and the residential rates have to go up they are start losing them to other this is when deregulation was hitting and this is what was described. So my question is if that is the case which perhaps not appropriate here, how do you compensate for that loss to the residential side if the cogen plants are successful to last 20 years or whatever. Are you saying that is not the issue on this case? Knapp: The commercial distribution rates in Palo Alto are lower than residential rates. Keller: Are we losing some of our loads by encouraging cogen where they produce their own power and you do not have them as customer anymore. Knapp: All of the customers that we have spoken to prefer are basically to continue to buy electricity from Palo Alto and sell electricity directly to Palo Alto from cogen unit. I will explain that. Their gas requirements actually goes up by using cogen but their overall bills ends up going down. What happens is it is basically is a power purchase agreement between the utility and cogeneration unit. They buy the mix so what Utilities Advisory Commission Minutes : Approved Page 22 of 27 happens is nearly half of their load is coming from Western (37%). Our avoiding cost is the market price which is pretty high: 8 cents these days. But our average cost is very low. So they are better of taking the retail rate and selling it at wholesale than they are self producing. They don’t really want to be in the generation business either. So it is a kind of funny position of our avoided cost being higher than our average cost and so we have a unique opportunity to have someone who owns a generator basically to sell power to the city and they buy it back. So it is not necessarily a loss of revenue. For those customers who do want to have behind their meters they are certain non-bypass able charges that you would have. You still pay for the public benefits on the total load and not just on your net load and a couple of things that I thought would be included for the smaller systems. Melton: So can I jump in to get a clarification on that because it was one of the questions I was going to ask anyway. You made a point in here that the access on line load, excess load, generation capacity they sell back to us at what rate? Knapp: I will let you know when Lucy is done with her cost of service study that includes cogeneration. She has a consultant working on that now to figure out what would you have as a cogen gas rate, what would you have as an electricity buy back rate, and how you would tie them together. Because one could be a fixed price but may actually be a multiple of gas price. Like a tolling contract. Melton: My question was really simpler than that. Maybe all that I am looking for is the word ‘wholesale’ or ‘retail’ I read somewhere in order to incentivize people to put in systems like this or photovoltaic the sell back rate to the Utility has been the retailed rate, has been the directed things so that if a company produces power and puts it back on the grid they get credit at the retail rate. That does not make any sense for us if that is the plan is it. Knapp: That is only true for solar and wind. Qualifying facilities which is the fancy word for cogeneration or other facilities, SRAC which is a sort run of avoided cost which is big long formulae which is basically gas price times the heat rate. For PG&E it is not the retail rate, it is basically the wholesale avoided cost. That is how we want to design ours is to reflect our total avoided cost with some shared savings and how much we are saving on transmission. It is not just cost of NP-15 electricity in Bakersfield but all the losses from Colorado to wherever you are generating it. We have fairly high losses in Stanford Research Park for example so there are few bonuses that we get for every one Kilowatt we don’t buy say at HP or something, it is 1.1 kilowatts we are not buying in Colorado. So when we add all those up. That is the cost that we would like to be paying for that electricity and no more. Keller: I have one very small point. Would we be ever be required to buy back the power? PG&E was required to buy back when they were dumping power. Palo Alto has never been that position with the cogen? Knapp: Actually as I understand it, . we would be required now if someone put in a co-generator and said I want to sell you the power. Keller: Would we be required to buy it? Knapp: The host utility is required to buy at their short run avoided cost, and then you get to define what that is. Utilities Advisory Commission Minutes : Approved Page 23 of 27 Keller: Would there ever be a scenario when you will not want to buy that power? Knapp: You are not required to buy it if you do not need it. Keller: We are always required to purchase it when the co-generator wants to sell it to us. Knapp: Until the California ISO has a two-day ahead market and then PURPA is being changed right now. The Public Utilities Regulatory Policy’s Act having to do with just that issue right now which is they are redefining what is useful thermal energy and redefining when does the utility have to buy back. So there is a possibility that we wouldn’t have to. But we like to because we get all these other benefits like reliability, we can actually save some money. Melton: Any other questions? Can I have a motion? Rosenbaum: Mr. Chairman. This is a pretty complicated proposal but I was quite serious when I said I have a lot of faith in Karl based on (you too Carl Yeats) but in this case Karl Knapp based on his past performance and I am sure he anticipated these sorts of questions that we have raised so I will be happy to move the staff recommendation which is that we recommend to the City that the City Council approve the program designed guidelines for Plug-In power from the Local Ultra clean Generation Incentive Program. Bechtel: second Motioned by Rosenbaum and second by Bechtel and all in favor say ‘Aye’ Bechtel ‘Aye’ Keller ‘Aye’, Melton ‘Aye’ Rosenbaum ‘Aye’ carried unanimously. Next item on the Agenda: Discussion of the Implications of the Big Horn Case. Yeats: It has been a long day so I will make this as brief as possible. It really comes down to four issues that this case has brought to the City. The biggest portion of the decision is the fact that water rates now fall under Prop 218, which has long been contested whether or not they were what the decision basically says that water rates are property related charges that I completely disagree with, but last time I checked it was on the Supreme Court. The second provision is based upon that then the aspect of increasing water rates fall into some of the provisions of prop 218, and it falls under the provision where it is not an act for mail in ballot election, but it is a notification process that takes 45 days. Council must then hold a protest hearing if there is not a majority of the people that were notified, and show up at the protest hearing then they can impose the rate increase. Bechtel: Excuse me Carl, you are saying then majority of the people notified not people that show up at the meeting. Yeats: They would have a little card, they would register with the Clerk, go through the whole process. On Point #1 I should also say that included in this, is the implication that it would also apply to wastewater rates and refuse rates because it is kind of property related. Utilities Advisory Commission Minutes : Approved Page 24 of 27 The next point is that Prop 218 does allow an initiative to reduce the existing rate. So in other words there could be a process where the rates that were implemented could reverse the initiative process or voter turnover. Finally the one that may or may not impact – this is something that the attorneys are looking at we have external attorneys that are looking at this issue is what is actually included in the rates? And whether acquity transfers or transfers that were in question can be included in the rates. Our acquity transfer methodology as you are probably aware is based upon the net value of the water utility assets we started this methodology is 2000-01 and based upon the methodology, the transfer increases at a fixede3% per year. The attorneys are looking to see whether or not that is still a legal methodology for doing the transfer. If not, there are other methodologies that we could have put into place, and Commissioner Rosenbaum probably remembers that the actual methodology that was recommended by the Consultant at that time would have dramatically increased the transfers to a level of almost 20 million dollars, and we did not feel that was feasible at that point in time. It is still not feasible. So staff will be looking at that trying to determine if that methodology is still feasible and legal. This is a legal issue that the attorney is working on and will come back in some point in time and make a recommendation on what will occur. There are other questions that we have is what is the timing related to further water rate increases? If we went ahead with water rate increase at this point in time without knowing the answer to that other question, we could subject ourselves to legal challenge and so we want to make sure, that we have that question answered prior to moving forward. We are well aware that water rates, the reserve levels are a little bit low and we do have plans to raise the water rates and so we know that we have a 45 days notification process and then a period of time after that it must be gone through prior to raising the rates. So there is a window of time that we are looking at, and again as I said we will come back to the UAC when we have answered all of those legal questions and give the timing. I have asked Tom Auzenne. Unfortunately as you are aware Tom is not doing that great and so he was going to be here tonight I sent him home. So the timing of it is if we decided that we needed a water rate increase by mid-year which the mid-year report generally comes back to the Council in the January time frame we would need to start working on that at least by mid-November so we know that is the time frame. We need to have some answers from the City Attorney’s Office. That is really all I had to say. I attempt to answer any other questions that you have about it. Melton: My first question was going to be the one that you tried to answer already which was you sort of put us on notice that we need to consider a mid-year water rate increase, and there was some indication that maybe on that November Agenda, and that seems to be pretty aggressive at this point; considering that they have been legal questions and so should we assume that is more likely going to be on a December Agenda. I am just trying to plan our Agenda for the next few months. Yeats: At this point in time it is probably too early to say. I have been meeting with Grant, Gary Baum and we have scheduled a session with an external expert on Prop 218 to talk about this whole process. I was really hoping, being that we are in a window now where the new Director will be here next week. That we would schedule it after the new Director got on board because we fully intend to have a transfer of how when she arrives here. She is also new to the water business and so this will be a real learning experience for her. Probably her first exposure to Prop 218 in the utility business. It is a good opportunity to bring her up to speed on what we want to do and what this will mean in terms of rate increases for the water utility and wastewater collection in the future. Melton: If I understand what we know so far about this thing is that we can do a rate increase, we are subject to the 45 days period, we are subject to a challenge at the end of that period, and we are subject at Utilities Advisory Commission Minutes : Approved Page 25 of 27 any time to an initiative process all of those things are pretty clearly called out but we can initiate a rate increase and whether we do or not doesn’t change anything. What is it that is we need to know before we initiate a rate increase? Yeats: I think the point that needs further clarification is related to equity transfer methodology. Because that is included in the water rate and so based upon my conversations with the City Attorney, we would want to ensure that we are on reasonable or solid legal foundation path of moving forward with the rate increase. That is really a hurdle that we are working on right now. Based upon what I read recently or heard recently from them, they are reasonably sure that we may still be a under a solid footing where we are right now. Because the real issues with transfers is that when it came into question it was an arbitrary amount that was being established by the governing body. In this case it was the City Council in Fresno I believe, and they would really look at their deficit on a yearly basis and say how much do we need and that is how much we should transfer. Certainly that has proven not to be prudent. We long ago established a transfer methodology and it is not arbitrary, it not that something Council adjust every year based upon the needs of the General Fund and so again they believe that we are on pretty solid ground but we want to ensure that we are on the path of moving forward with a rate increase. Melton: There was in a conversation that you and I had and I know it was a non answered question at that time if it has been answered yet. The question of 45 days comment period whether that could begin by the UAC approval or does it have to go to the Council twice? Yeats: The City Attorney would still not give me an answer on that. Preliminary he said that the City Council is in fact the governing body and they do establish the rates. Your role is to review the rates and make recommendations to the City Council. So based upon his preliminary review, it would be the City Council. Melton: So it has to go to the City Council to both begin and end the 45 days period. Yeats: I do not know if it has to go to begin the process, I think we could use the same process that we have used in the past which is we brought a rate recommendation to the UAC. The UAC reviewed it, we have taken it to the Council then joint recommendations or whether there has been a difference of opinion in some cases that would start the public hearing for that rate increase would start the 45 days period. Melton: Any questions on 218. Rosenbaum: Clearly, the big one is Item 4 the concern about the transfer. Has the City Council been informed about this? Yeats: There was a confidential letter sent to the City Council from the City Attorney. Rosenbaum: Alright. I know you and the staff, and Council are struggling over this 3 million dollar issue, no one suggested that this might be a 5 million dollar issue yet. Yeats: That could have occurred ‘yes’. Again it is a part of the confidential memo so I am not going to talk what was in the memo, but certainly that is an issue on my mind is that as I look at all sorts of issues Commissioner Rosenbaum, I look at the cable franchising initiative that was signed by the Governor that opens up the cable market just to anybody that come along and how is that going to impact our cable Utilities Advisory Commission Minutes : Approved Page 26 of 27 revenues. I look at the telephone portion of the utility users tax that as you now that market has rapidly been changing and we are out of 8 million dollars a year from cable telephone revenue, and I am concerned about that. As we go through all these things it adds up rapidly where we can have significant issues. All of these things have an impact on the General Fund. The General Fund is what provides the bulk of the services that the community enjoys and so it is under tremendous pressure. Melton: Thank you. In thinking about the initiative process I know you pointed out there is question how fare rates could be reduced. I remember in reading some of these things about his decision on the web by other legal authorities but one of the things that comes to mind, is that the water utility does have some bonded debt and the debt services on that bonded debit is also a part of the rate, and I know that there seems to be a fair amount of opinion that I read that said it would be absolutely impossible to reduce water rate to a point where it couldn’t service its legally obligated bonded debt. Is that opinion shared widely throughout the state government community? Yeats: We are all hopefully sharing that opinion. I have to say again that Prop 218 is one of the messiest pieces of legislative law that has come down. Every time we have a court decision there are as many questions as there are answers. This one is the same. There are also other cases that are still yet to be decided that are out there. The thinking right now is that you could not do two things through the initiative process. (1) You could not overturn bonded indebtedness. That is a provision of Prop 218 as it sits right now but this initiative process was not brought up at that point in time. So that is added to the mix. The other point is that you also couldn’t lower rates to the point where you jeopardize the financial health of the utility, and thereby endanger the service to all the ratepayers. I am sure some point in time those two questions will be fully answered but until they are we can only move ahead with what we believe to be the common thinking out there. It would certainly be a strategy in the future and I am sure that this will be employed as laws have come about and changes have come about to local government, we have always come up with ways to move forward with the changes that we are faced with, and so that may be a strategy by certain entities is that we issue debt on a annual or cycle basis so that you always have a certain level of debt in your rate and that way rates can never fall below a certain point. Melton: Sounds like good financial engineering thing. Any other questions. (Melton and Bechtel said ‘Thank You’ Carl.) Last item next regularly scheduled meeting November 1st. Again I think it is probably addressed to you. Looking back looking through some of the minutes from the past, couple of meetings there was an indication that the November 1st meeting would be the meeting for which targeted was the final Financial that they should have the books closed and the 10 year forecast and the long awaited discussion of reserve levels. Are those items still on the Table for November 1st? Yeats: I do not think so. The financial documents are not actually done until December 1st. We go the first meeting for the Finance Committee in December and get the authority to send the Financials to GFOA. So we actually deliver the year end reports to the Finance Committee in December. I will check with Tom and see what his progress is. I know that he has been working on the 10 year report. One of the things that I do hope that we can bring to you in November is we talked at some point in time back about this report to the community, which is a report which would actually cover all the utilities and the enterprise funds. We have been working on that and we may have a draft of that report that we would bring to you in the Utilities Advisory Commission Minutes : Approved Page 27 of 27 November time frame part of sending it out to the Public, get your input on it and talk what the intent of that report is. I know that Tom has been working on reporting and we still have an obligation to set up a meeting between I think Commissioner Rosenbaum, yourself and the Council member Beecham and Council member Mossar to talk about reporting and so he has been working on that. Again we have been giving Tom a little break away from work. He has not been feeling as well as possible and given what he is going through right now. Melton: The other item was Reserve Levels which is Karl Van Orsdol issue of program and I know he has long said in the fall in the fall. Yeats: I was not here but they took the preliminary step to go to the Financial Committee 9/17 or two weeks ago at the Finance Committee and it is referred now to the UAC and he is working on the report now. We talked about it briefly. I have to check with him and see if we are looking at 1/1 as the date. I also owe you an item checking on EIR for the water storage facility. Melton: Sounds like the November/December meetings are going to be interesting and Val will be here starting with the November 1st meeting. Yeats: Val’s actual start date is October 16th. November lst she will be totally broken in. Melton: She will have learned everything she needs to know about water by then. So you are not here for the November 1st meeting and Dexter is back both of you are here, sounds like we do have a quorum lets plan on November lst meeting. With that this meeting is adjourned. Respectfully submitted, Jennie Castelino City of Palo Alto Utilities