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HomeMy WebLinkAbout2012-02-01 Utilities Advisory Commission Summary MinutesUtilities Advisory Commission Minutes Approved on: March 7, 2012 Page 1 of 8 _______________________________________ FINAL UTILITIES ADVISORY COMMISSION MEETING MINUTES OF FEBRUARY 1, 2012 CALL TO ORDER Chair Foster called to order at 7:05 pm the meeting of the Utilities Advisory Commission (UAC). Present: Commissioners Foster, Cook, Eglash, Keller, Melton and Waldfogel Absent: None. ORAL COMMUNICATIONS Herb Borock spoke about the informational report on the progress of evaluations of a new transmission line to SLAC. He commented on the lack of detail about potential cost savings from avoided transmission access charges. He also opined that SLAC should share in the costs if they are to receive a benefit from the connection. APPROVAL OF THE MINUTES The Minutes from the December 7, 2011 UAC meeting were approved as presented. AGENDA REVIEW No changes to the agenda were proposed. REPORTS FROM COMMISSION MEETING/EVENTS None. UTILITIES DIRECTOR REPORT Utilities Director Valerie Fong delivered an oral report on the following items: 1. Hydro Update – Conditions continue to be significantly dryer than average (60% of average to date) with a precipitation forecast of only average for now through April. This will leave the spring runoff below average and make the Central Valley Project reservoirs dip into their large (110% of average) current storage volumes. The Calaveras project has a smaller storage reservoir and is located on the cusp of the below average spring precipitation leading to an expected low generation year. 2. Status of Renewable RFP evaluation – Staff has reviewed all 60 proposals and has had follow-up discussions with the 15 proposals that scored best for price value, viability and portfolio fit. We have selected the best two or three proposals and plan to begin negotiations next week for contracts to take to Council in the spring. City of Palo Alto Utilities Advisory Commission Minutes Approved on: March 7, 2012 Page 2 of 8 3. NCPA 1998 Hydro Refunding Achieved – Last week NCPA successfully priced the refunding of the 1998 Hydroelectric Bonds that have been under review for over a year. After a lot of ups and downs over the last year, the rates rallied over the last few weeks and NCPA was able to exceed the minimum target of $4 million PV savings or 5% PV savings. The final results were: Bonds issued: $83.8 million Overall True Interest Cost: 3.93% Gross Savings over 20 years: $14.4 million PV Savings: $9.4 million Percent savings of refunded bonds: 10.6% Since Palo Alto owns about 22.9% of the Calaveras Hydro project, the City’s share of the savings is about $100,000 per year for the first 10 years, then about $250,000 per year for the remaining 10 years. 4. Demand-Side Management Updates: a. Solar and Energy Efficiency Demonstration in Development: Utilities staff is coordinating with vendors and other teams to put together a demonstration of solar and energy efficiency technologies for an Earth Day event on Saturday, April 21. This demonstration, planned for Rinconada Park near the Girl Scout House, will include a small “Eco Home” and several other new technologies. b. The new residential “same as cash” loan for natural gas upgrades is underway. Four contracting companies have qualified to be on the approved list, and others are being added. Residents are already beginning to work with these contractors to upgrade furnaces and other systems. c. Home Energy Reports continue to get news attention. Utilities statewide are adding and expanding their usage of these reports, as the City of Palo Alto has been doing for the last year. KQED had an excellent report on these programs Monday morning on “The California Edition”. Chair Foster asked if the KQED program included a discussion of the experience of other utilities with the OPOWER reports. Commissioner Eglash responded that he heard program, which was very positive on the OPOWER reports and concluded that competition between neighbors for most efficient energy use is a powerful incentive. UNFINISHED BUSINESS None. NEW BUSINESS ITEM 1: DISCUSSION: Regulation to Implement Cap-and-Trade Program to Reduce Greenhouse Gas Emissions and Impacts on the Operation of Electric and Gas Utilities Director Valerie Fong introduced Scott Tomashefsky, the Regulatory Affairs Manager for the Northern California Power Agency (NCPA). Mr. Tomashefsky presented an overview of the California Air Resources Board’s (CARB’s) cap-and-trade program that is designed to reduce greenhouse gases (GHGs) to meet the goals of the Global Warming Solutions Act (AB 32), and explained the potential impacts to Palo Alto. He described the background of the regulation, the entities that are included in the cap-and-trade program (which includes the City’s electric and gas utilities), and the compliance instruments or allowances that are Utilities Advisory Commission Minutes Approved on: March 7, 2012 Page 3 of 8 authorizations to emit GHG. Mr. Tomashefsky then explained how electric utilities will be allocated allowances free of charge for the benefit of their electric customers. The allowances allocated to the City’s electric utility can then be sold in the CARB auctions and the proceeds used exclusively for the benefit of the utility’s electric ratepayers, consistent with the goals of AB 32. Mr. Tomashefsky then described some of the implementation details of the auction and activities that need to be completed by CARB before the first auction scheduled for August 2012. Commissioner Cook asked for details on how the proceeds could be spent, for example could it be used for energy efficiency rebates. Mr. Tomashefsky confirmed that energy efficiency expenditures could fall under the guidelines. Commissioner Waldfogel asked where the UAC could look for guidance on how to spend the funds. Mr. Tomashefsky replied that the utility’s and NCPA staff are closely following the regulations and will be able to give advice. The CPUC is also working on guidelines for the investor owned utilities and that could provide more guidelines for publicly owned utilities such as Palo Alto. Ultimately CARB will be reviewing the reports from the electric utilities on how the funds are being spent, and if CARB finds that the regulations are not being followed they can change the rules and make them more prescriptive. Commissioner Eglash asked what is likely to happen in 2015 for the gas utility and how will this affect Palo Alto? Mr. Tomashefsky replied that the gas utility would have a compliance obligation based on sales to the utility’s customers and the City will have to find/purchase allowances to meet this compliance obligation. It is unclear at this stage if any of the allowances allocated to the electric utility could be used for the gas utility. Eglash pointed out that if the electric utility is selling and the gas utility is buying allowances, there could be an exchange of value between the two funds and the City’s electric and gas funds are not integrated. –Director Fong explained that the debate about how gas utilities are dealt with is yet to be decided at CARB. There are other utilities such as SDG&E that have the same issue. Palo Alto will be aligned with the concept that gas customers should not be harmed. Commissioner Eglash commented that cap-and-trade looks like a wealth transfer to electric ratepayers, but asked who is paying for the allowances. Mr. Tomashefsky explained that ultimately, the consumer pays. Senior Resource Planner Lloyd explained that, within the electric industry, generators and importers of electricity have a compliance obligation based on the carbon emissions of their facilities, these generators have to buy allowances to cover their emissions and they pass these additional costs on to distribution utilities, such as Palo Alto, who are purchasing the electricity to serve their customers. Commissioner Eglash then summarized that this would mean that Palo Alto’s costs for market purchases will go up and asked if it was possible to use the revenue to cover these additional costs, and thereby reduce rates, instead of spending more on renewables or pursuing a carbon neutral policy. Mr. Tomashefsky replied that was the investor owned utilities were proposing. Commissioner Cook asked if rates could be held stable by locking in more long term renewable contracts. Lloyd explained that more stability could be achieved by locking in renewable contracts, but assuming that prices for brown power plus allowances converge to the price of renewables, then the City would still be paying more to acquire electricity for its customers. Council Member Scharff asked if the carbon price is incorporated into brown price, wouldn't the price of renewable power be the same as the price of brown power plus the embedded price of carbon and questioned if the City should still be including a green premium when evaluating renewables? Lloyd explained that staff wouldn’t be making the decision on whether a green premium still existed, but would be monitoring the market prices to see if the prices were converged or not. If the market demand for allowances was below the cap, this could depress the value of the allowances so that combined brown power/allowance price was still below the cost of renewable Utilities Advisory Commission Minutes Approved on: March 7, 2012 Page 4 of 8 construction. Mr. Tomashefsky pointed out that there are still other policies in play, such as the 33% RPS, that will continue to drive the demand for renewables and possibly account for a continuing green premium. Commissioner Waldfogel asked about possibilities for reducing the impact on gas customers and whether the City could bank allowances allocated to the electric utilities for potential use by the gas utility. He expressed concern that guidelines would not be clear enough to make the banking decision this year. – Mr. Tomashefsky explained that the regulations for gas utilities are not fully baked, but hopefully more information will be available by next year. ITEM 2: DISCUSSION: Water Utility Financial Projections (FY 2013 – FY 2017) Senior Resource Planner Ipek Connolly provided a summary of the written report. Connolly advised that the cost increases for water purchases that were anticipated last year are materializing. Of the $13.5 million in additional revenue requirement in FY 2017, $10.8 million is due to the increase in water supply costs. The other $2.7 million is due to the general inflationary cost increase of 2% per year that is built into the forecasts. She also stated that the price of water from San Francisco is expected to increase even more than expected last year. Under the latest rate projections from SFPUC, supply costs for FY 2013 are expected to increase by $4.0 million from their current levels of $14.7 million. Connolly said that in FY 2014 and FY 2015, CPAU's capital improvement project (CIP) costs are higher than the normal annual CIP expenditures. The utility spends about $5.0 million annually for its ongoing CIP projects, but there are plans to increase that amount to double that in FY 2014. These are for the Seismic Improvements, Reservoir Coating, and Turnouts Regulator Station projects. These are one-time projects related to safety and reliability improvement of the system, which may be potential candidates for bond financing, rather than rate financing. Staff did evaluate a bond-financing scenario starting in FY 2014 which is presented in the report and may come back to the UAC next year with an updated evaluation based on updated financials at that time. Connolly stated that water demand in the City has been on the decline, and since last year, water demand projections have declined significantly, which has led to higher costs per unit (ccf) sold. The demand forecast greatly influences the revenue increase required. In order to analyze the sensitivity, staff evaluated three alternative demand forecast scenarios and presented the results in the report. In summary, there is a need for an additional revenue increase of 20% in FY 2013 followed by an additional increase of 24% in FY 2014. If demand projections change during the course of the fiscal year, the projected rate adjustments may vary by as much as no rate increase for FY 2014 or 36% under the high demand and low demand scenarios, respectively. Connolly noted that the financial forecast is provided for information only and staff will return to the UAC with rate adjustment recommendations at the special meeting on March 27. After review by Finance Committee in April, rate changes are expected to be adopted by Council in June to be effective July 1, 2012. Commissioner Eglash commented that the focus on rates obscures the fact that the bill changes depends on usage changes. It is frustrating for customers to reduce usage, then see rates increase. We need to communicate that reducing usage will reduce the impact of a rate increase. We need to separate the price of the commodity from everything else and we need to talk about the bill and not just the rate since the average usage has gone down as evidenced that the overall city demand has declined. We need to get the message to customers that the issue is how much the commodity price from SFPUC is influencing the rate increase while our other costs are being managed closely. Utilities Advisory Commission Minutes Approved on: March 7, 2012 Page 5 of 8 Connolly agreed that this was an important part of the communication of the projected cost and rate increases to the public and needs to be highlighted in the presentation. She pointed out that this analysis was provided in the report that while rates increase by 98% by FY 2017 under the low demand scenario, customer bills increase only by 54% due to lowered water use by the average customer. Commissioner Eglash expressed concern about the public relations fallout of these incredibly large increases in water rates, specifically that CPAU would be blamed for it when these cost increases are largely externally driven by the price that we are paying for the commodity. A chart showing higher rate increases as a result of lower consumption will lead people to say that they use less and now we are telling them that as a result we now have to raise rates. For the Finance Committee, the Council and the public, he suggested that perhaps the staff needs to show separately what is going on due to the price of the commodity which we are just stuck with, and the contribution of everything else. Assistant Director Ratchye agreed and suggested to show average bills over time, along with how usage per customer is declining, and even though the rates are going up over time, the average bill is not going up as much as the rate increases. Commissioner Eglash agreed and added that because the price of the commodity is going up so dramatically, for sure the bills will still go up for almost everyone in the City, but a hypothetical bill would be separated into two components, the commodity and everything else, showing that the bill increases separately for the commodity portion and for everything else; then it would be clear that only the commodity cost is going up, and we don’t control the commodity cost. Commissioner Melton said that he supported issuing bonds, but that a $6.5 million bond issuance may not be of sufficient size - should be a minimum size of $15 million to cover the financing costs. He pointed out that if there are other costs in other utilities that make sense to bond finance and we combine and come up with a $15 million or over, then it might make sense to issue a bond. Commissioner Melton also noted that in FY 2012, we did not fully implement the fixed charge increase recommended by the cost of service analysis and asked if we will address that for FY 2013. The plan last year (FY 2012) was to implement the second phase of that this year (FY 2013). Director Fong said that the subject for this meeting is the financial projections overall and that the issue of fixed charges versus volumetric charges will be revisited in late March when we return with water rate proposals. Commissioner Waldfogel said he was struck by the scenarios that differ by demand, sales volumes were plus or minus 20% up or down depending on the scenario, but the difference in costs between the scenarios was so small. He pointed out that this showed that essentially the commodity is free and what we are paying for is the distribution. He suggested staff look at internalizing fixed costs into the rate structures. He acknowledged that rates are moving in that direction but w that a change of 1000 ccf or so only changes costs by 2%. He advised that communications reflect that the cost of the system is plumbing and not the commodity. Commissioner Keller said that predicting use is the big dilemma and asked whether there are any tools that can be developed to improve that. She noted that the report stated that a price elasticity of -.2 was used, but she wondered how firm that number is. Connolly stated that staff uses a variety of tools including monitoring and forecasting of large customer consumption. This includes review and discussions with large customers regarding their historical water usage and plans for the future. Staff also uses statistical models that use time series data relating water use to weather, economic conditions, and rates. But weather is a significant factor in determining water consumption. Director Fong added that other agencies are in the same situation as Palo Alto. Connolly added that Palo Alto came within 2% of expected for the fiscal year. On the price elasticity issue, Connolly stated that this was a well studied area with results varying depending on indoor vs. outdoor use or high income vs. low income households etc. Staff used -0.2 as an Utilities Advisory Commission Minutes Approved on: March 7, 2012 Page 6 of 8 assumption based on available literature in this area. Connolly pointed out that it is difficult to estimate this relationship for Palo Alto Utilities customers as they get their bills for multiple utilities all in one bill. Commissioner Keller asked if larger customers could be issued separate water bills so that their water usage would stand out. Director Fong said that large customers get combined bills, but those customers may be more focused on their usage levels. Commissioner Keller also suggested more effort on communicating the rate increases. Most people don’t seem to be very aware of future water price increases, and it seems this could be an opportunity to improve communication to encourage water conservation. Commissioner Eglash noted that the cost for the purchase of water does depend on water usage so the price of the commodity is actually a large amount. Ratchye replied that the costs of the supply are actually fixed, but since the wholesale price is volumetric, it seems like customers would save money by saving water. However, since San Francisco’s costs are actually all fixed, and not dependent upon the volume of water sold, these costs must be paid regardless of usage levels. To the extent that wholesale revenues do not cover San Francisco’s costs, the costs will be paid in the following year. Connolly pointed out that staff evaluated commodity costs under different scenarios and, in these analyses, what changes is not the absolute demand levels in Palo Alto but the City’s share of total wholesale purchases from SFPUC. Commodity costs to Palo Alto will only vary based on Palo Alto’s share of total water purchases from SFPUC; otherwise, even the commodity costs are fixed. Based on the analysis, and depending on the assumption regarding the share of City’s purchases from SFPUC, supply costs in FY 2017 can be $6.2 million lower or $7.5 million higher than the $25.5 million projected in the base case Vice Mayor Scharff said that since all costs are fundamentally fixed and Palo Alto continues to charge a volumetric rate, the only way for a customer to save money is to save more than his/her neighbor. Commissioner Waldfogel stated that he supports bond financing to mitigate future rate increases and recommended adding CIP projects from other utilities (e.g. gas, wastewater, electric) for a bond of sufficient size to justify financing costs. Director Fong said that the City will be looking at a bond, but it will likely be next year so as not to interfere with the potential bond issuance for the City's General Fund as recommended by the Infrastructure Blue Ribbon Task Force. ITEM 3: DISCUSSION: Wastewater Utility Financial Projections (FY 2013 – FY 2017) Senior Resource Planner Ipek Connolly presented the five-year financial projections for wastewater. She noted that after two years with no revenue increase, the City needs a 5% revenue increase in FY 2013 to cover costs. She added that actual rate proposals will be presented to the UAC on March 27. Commissioner Melton noted that this fund has stable costs and the issue is really reserve management. Rather than having bumpy projections for the five years (5%, 7%, 11%, 5%, and 5%), that it would be more acceptable to smooth out the rate changes over the five year forecast period so that there is no double digit increase in the forecast. Commissioner Cook asked why the treatment costs are going up so much over the next two years. Connolly explained that the Regional Water Quality Control plant expects future increases to continue at the 5% rate that has occurred in the past several years. Commissioner Cook pointed out that the amount of increase was higher for FY 2013 than for the following years. Connolly stated that for treatment costs, Utilities Advisory Commission Minutes Approved on: March 7, 2012 Page 7 of 8 budget proposals for FY 2013 were presented as proposed by the Regional Water Quality Control Plant Manager as of December 2011, including an assumption of 5% annual increase for future years. Vice Mayor Scharff asked what caused the operations costs to increase so much from FY 2012 to FY 2013. Connolly stated that the increase in costs could be due to special studies or possibly include a request for new employees for FY 2013. The specifics of FY 2013 budget requests would be reviewed by the UAC during the budget review process in May. Director Fong stated that some of this was driven by the increases in regulations regarding compliance requirements and increased reporting requirements. Commissioner Eglash pointed out that one take away from the Councilmember’s question is that a couple of line item costs are jumping between 2012 and 2013, specifically in treatment and operations areas. He stated that it would be interesting to get more information in these areas in future meetings. Senior Management Analyst Dave Yuan explained that $90,000 was due to the evaluation of wastewater collection system efficiency, and $140,000 was due to the two new potential positions, a Business Analyst and a Water/Gas/Wastewater Inspector. Director Fong pointed out that budget proposals are still under review by management and may change before they are reviewed by the UAC in May. The budget proposal is included as indicative for financial projections purposes only. Commissioner Keller asked why revenue does not change as much as the rate. Connolly stated that, unlike the water fund, for the wastewater fund, the revenue is collected through fixed charges from the residential customers, and for some large commercial customers it is based on water consumption during winter months which tends to be more stable. ITEM 4: ACTION: Election of Vice Chair ACTION: Commissioner Eglash made a motion to nominate Commissioner Cook. Commissioner Melton seconded the motion. The motion passed unanimously (6-0). ITEM 5: ACTION: Potential Topic(s) for Discussion at Future UAC Commissioner Waldfogel stated that with respect to natural gas, there are environmental concerns with regard to new technologies with respect to shale gas extraction. He asked if the UAC should have a study session, or analysis to determine if we want to make a policy choice. Commissioner Eglash responded there is much environmental analysis and general convergence that the environmental impacts of "fracking" can be managed or mitigated. Vice Mayor Scharff stated that he didn’t see that it's worth it to spend staff time on this since this is very theoretical. Commissioner Waldfogel added that, with such a controversial topic, it deserves analysis. Chair Foster said that he shared Commissioner Waldfogel’s interest in the topic, but suggested that, perhaps, the UAC itself could do some research on the topic. ACTION: None. COMMISSIONER COMMENTS Commissioner Eglash expressed his thanks to the Infrastructure Blue Ribbon Committee (IBRC) work on infrastructure as the report highlighted the need to keep the City’s infrastructure up to snuff. He added that it's worth pointing out that Utilities did recognize this need and has been implementing infrastructure upgrades for many years. Utilities Advisory Commission Minutes Approved on: March 7, 2012 Page 8 of 8 Commissioner Melton, a member of the IBRC, stated that after 13 months of work, the committee delivered its report. He read a paragraph that indicated that Utilities did not have an infrastructure issue that the IBRC needed to deal with. He noted that the 30-page executive summary as well as the full report can be found on-line. Commissioner Eglash added that when he was on the UAC’s budget subcommittee, he saw that the Utilities CIP plans and programs were well managed and well thought through. Meeting adjourned at 9:28 p.m. Respectfully submitted, Marites Ward City of Palo Alto