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HomeMy WebLinkAbout2008-01-09 Utilities Advisory Commission Summary Minutes FINAL UTILITIES ADVISORY COMMISSION MINUTES OF JANUARY 9, 2008 CALL TO ORDER Chairman Rosenbaum called to order at 7:00 P.M. the scheduled meeting of the Utilities Advisory Commission. Present: Commissioners George Bechtel, Marilyn Keller, John Melton, and Dick Rosenbaum. Absent: Commissioner Dexter Dawes ORAL COMMUNICATIONS NONE APPROVAL OF THE MINUTES The minutes from the December 5, 2007, were unanimously approved. AGENDA REVIEW REPORT FROM COMMISSION MEETINGS/EVENTS There were no reports. UTILITIES DIRECTOR REPORT Utilities Director Valerie Fong gave the following updates. California-Oregon Transmission Project Asset Lay-off: Staff is exploring laying-off the City’s 50 MW share of COTP as the transmission is likely to be more valuable for members within Western-SMUD control area. The stranded cost analysis provided to the UAC in December showed the market value of the transmission in the near and intermediate term is projected to be well below the cost of the asset. Any agreement to lay-off the asset will require Council approval. Seattle City Light Energy (SCL) Exchange Contract: Under NCPA’s 60 MW SCL contract the City receives energy for 18 MW of capacity (18% share) during the summer and returns energy to Seattle in the winter months. The City and other NCPA members are exploring options to terminate this agreement because the contract is not economically favorable and the periods of energy exchange do not fit well with the rest of the City’s electric portfolio with the 2005 change in the Western Base Resource contract. Upcoming Meetings of Interest: Fong mentioned NCPA’s upcoming Annual Strategic Planning Meeting in Sacramento on Jan. 23-25 (Chair Rosenbaum and Vice Chair Dawes will be in attendance), and CMUA’s Capitol Day on Monday, January 14 in Sacramento (Fong, Assistant Director Jane Ratchye, and Sr. Resource Planner Debra Lloyd will represent the City). Storm Response: Fong advised the Commission on the City’s successful response during the early January storm and the cooperation with all City Departments on restoration and make safe attempts. Fong noted that all of the outages were caused by water in equipment or wind-blown tree limbs. Utilities Advisory Commission Minutes Approved on: February 6, 2008 Page 1 of 5 Energy Partner of the Year Award from the US EPA Landfill Methane Outreach program: Fong informed the Commission that Dr. Karl Knapp was in Washington D.C. accepting USEPA’s Landfill Methane Outreach Program “Energy Partner of the Year” award on behalf of the City .The award is shared jointly with Alameda Power & Telecom and recognizes the two utilities for their efforts in achieving renewable energy goals by contracting for power purchases from three new landfill gas to energy projects (Santa Cruz County (operational), Half Moon Bay (under construction), and Pittsburg (under construction), CA ). The output from the three facilities will deliver approximately 6% of Palo Alto’s annual energy need. Budget/Rates Schedule: Fong provided the following schedule for upcoming budget and rate proposals:  February 6 UAC meeting: cost drivers and trends; annual risk assessment; workshop discussion on 5- year financial forecasts and scenarios for electric rate increases;  March 5 UAC meeting: proposed budget and retail rate adjustments  March 25 Finance Committee meeting: proposed budget and retail rate adjustments  April 23: Proposition 218 notices mailed to customers announcing water rate increase  June 9 Council meeting: budget adoption (and Prop. 218 hearing) UNFINISHED BUSINESS NONE NEW BUSINESS ITEM 1: ACTION ITEM: Utilities’ Legislative Priorities Report: Staff answered questions on the Utilities’ Legislative Priorities for 2008. Director Valerie Fong opened by stating that ongoing monitoring activities by staff were not included in the legislative priorities. Fong also noted an error on page one: item two of the legislative trends should be “east/west coast differences” not “east/west cost differences”. Regarding the Water Legislative Priorities No. 5, Commissioner Bechtel asked if Palo Alto has any ownership or contractual rights on the SFPUC Hetch Hetchy system. Assistant Director Jane Ratchye replied that the City does not have rights per se, but that the SPPUC has an obligation to provide water deliveries to the City and its water customers.] Commissioner Bechtel then followed up on the Water Legislative Priorities and asked if Palo Alto had ever worked with other local agencies in its advocacy efforts for water utility issues, and should there not be an item under the Water Legislative Priorities allowing such actions. Staff stated that such collaboration occurs with BAWSCA and pointed out 1) that the list was intended to identify priority issues and did not necessarily preclude other actions; and 2) that under the general “All Utilities” section there is a Legislative Priority to advocate for goals through joint action efforts. Commissioner Melton noted that there were a large number of legislative priorities listed and could staff indentify two or three of the most pressing issues. Senior Resource Planner Debra Lloyd responded that Green House Gas (GHG) regulation and the allocation of emission allowances would continue to be a major issue, along with efforts to keep municipal utilities independent from CPUC regulation and program requirements. Commissioner Keller asked for further explanation of the conflicts between energy sectors over GHG controls. Staff explained that while the State had set goals for reducing GHG emissions, how these reductions would be “shared” amongst industry sectors (e.g., the reductions that the electricity sector will have to make, vs. Utilities Advisory Commission Minutes Approved on: February 6, 2008 Page 2 of 5 manufacturing, vs. transportation) has yet to be settled. It can be expected that each sector will try and minimize their costs of compliance, but reducing the burden on one sector will necessarily shift the burden, or cost, to other sectors. Even within the electricity sector there are conflicts between utilities with large hydro portfolios and those with relatively large amounts of coal in their portfolios (which generally splits geographically between the hydro intensive utilities in the north of the State and the more coal intensive utilities in the south). The model currently being developed in California would allocate emission allowances between Load Serving Entities (LSEs that include the large IOUs such as PG&E and municipally owned utilities). The method for allocating allowances will have significant impacts on the cost of compliance for each individual LSE. For example, if allowances are allocated based on retail sales LSEs, such as Palo Alto, with a lot of hydro electricity or other zero GHG emitting resources, could be allocated more allowances than needed to cover their emissions and will be able to sell these excess allowances and use the revenue to help pay for further reductions in GHG emissions from their portfolios, thus giving recognition for early investment in clean generation. If allowances are based on past emissions then the LSEs that have had the highest emissions rates will receive the most allowances, and, depending on the base period that is used to determine the past emission rate, the historically lower emitting LSEs may have to purchase allowances from the higher emitters. There are arguments for and against both models, but it comes down to how will the state pay to reach the GHG goals and how will the costs be allocated between and within industry sectors? Similar conflicts are likely to arise between the coal intensive and hydro intensive states under a federal mandate to reduce GHG emissions. Commissioner Bechtel moved to recommend that the City Council approve the Utilities’ Legislative Priorities. Commissioner Keller seconded the motion. The motion passed unanimously. ITEM 2: INFORMATION ITEM: Gas Utility Long-Term Plan (GULP) Guidelines and Implementation Recommendations: Karla Dailey, Resource Planner, provided a presentation to the Commission, which closely followed the written report on the subject. Dailey noted that Council approved three GULP objectives and GULP Guidelines in July 2003 and approved six implementation recommendations in September 2004. In April 2005 and April 2006 informational reports were provided to Council and a decision was made to abandon gas reserve acquisition. Reasons for revisiting GULP now include: (1) changes in the gas storage marketplace, (2) new opportunities and favorable economics and contracts terms for gas pre pay deals, and (3) the arrival of renewable gas resources to the PG&E pipeline system and the developing credit and offset markets for green gas. The two new Proposed GULP Guidelines are to make GULP consistent with the recently adopted ten-year efficiency plan and the Climate Protection Plan adopted by the Council in December 2007. Implementation recommendation #1 addresses the new Renewable Gas Supply Guideline and refers to low- carbon gas alternatives. Commissioner Keller questioned the term “low-carbon,” and staff suggested that “non-fossil fuel” may be a better term. The commissioners also questioned the “CO2 reduction” benefit since methane is burned whether from a renewable resource or a traditional resource. Cow gas (methane recovered from cow manure) is most promising physical renewable gas resource. Costs are estimated at $2 per MMBtu premium on top of an $8 per MMBtu gas price. The methane capture credit costs $5 per metric tonne CO2 equivalent. 100% of portfolio purchases results in an approximate 14% rate increase. Utilities Advisory Commission Minutes Approved on: February 6, 2008 Page 3 of 5 The commissioners expressed a preference for physical biogas supply over offsets and financial credits. Staff stated the cost, quality, and appeal to potential Palo Alto participants will be considered when designing the voluntary program. Implementation Recommendation #2 relates to the pursuit of cost-effective opportunities for natural gas storage capacity. Storage holders inject gas into storage during summer when prices are lower and withdraw gas from storage during winter when prices are higher. Recent evaluations show storage available at economic rates (cheaper than difference between expected summer and winter prices). Commissioner Keller expressed concern about the environmental impact of storing gas. Staff stated that losses and fuel requirements were small but may need to be tracked once greenhouse gas reporting requirements go into effect. Implementation Recommendation #3 is to take steps to analyze Palo Alto’s tax-exempt status to realize a discount to the City’s gas cost by: a) identifying risks and costs associated with prepay transactions including required modifications to City policies and operating procedures; and b) exploring alternative pre-pay structures. Gas prepay deals provide a way for municipal agencies to leverage ability to issue lower cost, tax-exempt debt. In return for pre-payment, gas suppliers provide discounts on gas deliveries from indexes (current at the time of fuel delivery) in the range of $0.60 - $1.20/MMBtu (7.5% to 15% discount on $8.00/MMBtu gas). Projected annual savings are up to $3.5 million. Larger volumes and longer terms increase savings but require larger up-front financial commitments when issuing debt. Many factors have changed since 2004 to improve the cost-effectiveness of gas prepays including: (1) higher interest rates and gas prices yield bigger discounts, (2) the IRS 2003 Regulation was further clarified under the 2005 EPAct, (2) contracts terms have been standardized, (3) There is less risk to gas buyer, and (4) smaller volumes are now transacted. There are a variety of structures including: (1) Palo Alto acts alone to issue bonds and prepay for gas, (2) Palo Alto joins a consortium of municipal utilities to issue bonds and prepay for gas, (3) Palo Alto purchases prepaid gas through a conduit (either traditional or corporative buying pool) or (4) Palo Alto shops for excess prepaid gas arising from operation changes. Palo Alto already does #4. Next Steps for Prepay: 1. Continue to analyze prepay structures 2. Continue to investigate use of financial transactions by other munis and evaluate appropriateness for Palo Alto 3. Evaluate system needs relative to various prepay arrangements 4. Identify applicable City policies and any needed modifications 5. Issue RFI or RFP for gas purchase through a prepay conduit 6. Evaluate prepay structures relative to each other 7. Make recommendation for action Utilities Advisory Commission Minutes Approved on: February 6, 2008 Page 4 of 5 Utilities Advisory Commission Minutes Approved on: February 6, 2008 Page 5 of 5 Commissioner Rosenbaum expressed concern about the complexity of the transaction and the risks associated with a 30-year gas prepay deal. He also indicated that the transaction is very complicated and difficult to explain and he’s not convinced that staff thoroughly understands all aspects of the issue. Rosenbaum requested that the staff recommendation and related motion be broken out to allow a separate vote on the GULP pre-pay issue. The Commission agreed with Rosenbaum’s requests. Melton moved and Bechtel seconded a motion to recommend that the Council approve the 2 GULP guidelines and implementation recommendations #1 and #2. The motion passed unanimously. Melton moved and Bechtel seconded a motion to recommend that the Council approve implementation recommendation #3. The motion carried on a 3-1 vote with Commissioner Rosenbaum voting “no.” Meeting adjourned at 8:50 P.M. Respectfully submitted, Marites Ward City of Palo Alto Utilities