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HomeMy WebLinkAbout2014-01-08 Utilities Advisory Commission Summary MinutesUtilities Advisory Commission Minutes Approved on: February 12, 2014 Page 1 of 11 UTILITIES ADVISORY COMMISSION SPECIAL MEETING FINAL MINUTES OF JANUARY 8, 2014 CALL TO ORDER Chair Cook called to order at 7:03 p.m. the meeting of the Utilities Advisory Commission (UAC). Present: Commissioners Cook, Foster, Chang, Eglash, Hall, Melton, and Waldfogel Absent: Commissioner Chang and UAC Liaison Scharff ORAL COMMUNICATIONS None. APPROVAL OF THE MINUTES The motion was approved unanimously (6-0) with Commissioner Chang absent. The minutes from the December 4, 2013 UAC meeting were approved as presented. AGENDA REVIEW Chair Cook requested that the order for the two discussion items be switched so that Item #2 (Water Utility Cost and Consumption Benchmarking Report) would be heard before Item #1 (Proposed Utilities Reserves Management Practices and Financial Plan Templates). REPORTS FROM COMMISSION MEETING/EVENTS None. UTILITIES DIRECTOR REPORT On behalf of Utilities Director Valerie Fong, Assistant Director Jane Ratchye provided the following report: 1. Water Supply Conditions: Given the press coverage about how dry 2013 was, there is concern about the possibility of water shortages from San Francisco’s Regional Water System. While the start to the water year has been dry, it is too early to make a determination about the water year. On average, a little more than half the precipitation in the Hetch Hetchy watershed falls during December, January and February combined, with a few storms often making the difference between a dry year and wet year. Per the Water Supply Agreement, San Francisco will Utilities Advisory Commission Minutes Approved on: February 12, 2014 Page 2 of 11 issue an initial water supply availability estimate on February 1, an update on March 1 and a final estimate by April 15th. If there is a call for rationing, the declaration would be made around April 15th. 2. High Bills This Month A few residents have been concerned about their December and January Utilities bill being surprisingly high. The primary reasons for these higher bills are:  Weather—Extremely cold weather over the last couple of months has driven up heating costs. Extremely dry weather has, for those who keep irrigating, driven up water costs.  Estimated Bills—Out of 104 meter-reading routes, about 4% had to be estimated in November and December. Estimation is not common and only occurred due to a severe shortage of meter-readers. Estimated bills are automatically calculated based on the previous year’s usage. Since winter 2012 usage was lower for most people, their estimated bills were low. For these customers, the December or January bill included the difference between the estimated amount and the actual amount used in the previous month, along with their actual use in the current month. So the difference between the estimated bills and the trued-up actual bills was fairly high for some residents. We realize that it is hard for people to tell when their bills are estimated and we are looking into ways to explain in advance to people on estimated routes that their next bills may be higher. 3. Communications Update: Overview of Multi-Prong Outreach Approach—In an effort to better reach different customer types, in 2013 staff made a concerted effort to broaden our repertoire of outreach venues. Some specific examples of that would be:  Video—in 2013 we expanded our video library dramatically, taking advantage of student interns as well as in-house talent and local professionals. Examples of new videos created range from our “man on the street” interview series and Carbon Neutral Rap to a Great Race to Save Water documentary and the Pirate “Call Before You Dig” song.  Cable TV Outreach—since last summer we have been running 30-second spots on various Comcast Cable channels. Cable TV can target specific local areas for ads run during national television programs so outreach in this venue is actually less expensive and reaches a wider audience than many other methods. This month we’re adding a new spot---a “Pirate Call Before You Dig” video featuring singing children.  Twitter—our 2013 launch into the Twittersphere has netted us almost 400 followers so far, many of whom are local or regional media, as well as other big Twitter players such as the City Police Department. As a result, our messages are often “retweeted” to 10,000 or more people. We tweet about everything from outage updates to Utilities Advisory Commission Minutes Approved on: February 12, 2014 Page 3 of 11 events to relevant safety and conservation tips and links. Our Twitter messages also appear on our Facebook page.  Insert Ad Cards—these ad insert cards in the Palo Alto Weekly have elicited more responses than any print ads we’ve ever run. Therefore, over the past year they have evolved into one of our primary print ad venues.  Community Events—In addition to holding workshops on specific topics as we’ve been doing for years, in 2013 we significantly expanded our participation in already existing community events, using giveaways to make our booths among the more popular ones there. Examples include the Annual Chili-Cook Off, the Hackathon, neighborhood Safety Faires, and school Earth Day Events. 4. Events and Workshops: City Hall Water Efficient Demo Garden—In December the Mayor spearheaded a ribbon- cutting ceremony to celebrate the new water efficient demonstration garden on the Ramona side of City Hall. It took a “village” to make the garden a reality as it was put together by various public and private organizations including Utilities and Public Works along with volunteers from the community. The goal of the project is to demonstrate how beautiful water-efficient landscapes can be so that residents will be encouraged to develop their own water and energy efficient gardens. Free Holiday LED Light String Exchange—This annual event to get energy-guzzling incandescent light strings “off the street” and replaced with efficient LED strings was a huge success, with our stock of LED strings being fully depleted by mid-December! Customers could exchange their lights at a local hardware store rather than coming to the third floor of City Hall. Commissioner Melton asked if there was an updated hydroelectric generation forecast. Ratchye indicated that there was no updated forecast for hydro generation. UNFINISHED BUSINESS None. NEW BUSINESS ITEM 1: DISCUSSION: Proposed Utilities Reserves Management Practices and Financial Plan Templates Senior Resource Planner Jon Abendschein provided a presentation summarizing the written report. He explained that the first three recommendations in the report related to creating formal financial plans for each utility, adopting them by resolution, and including the reserves policies in those plans. The other major part of the proposal was to split the current Rate Stabilization Reserves (RSRs) into four separate reserves, each with a separate function. These include an Operations Reserve, a CIP Reserve, a Rate Stabilization Reserve, and an Unassigned Utilities Advisory Commission Minutes Approved on: February 12, 2014 Page 4 of 11 Reserve. The last three of those reserves would normally have zero balances unless needed for a specific purpose. The other recommendations related to several additions, deletions, and modifications of other miscellaneous reserves. The Emergency Plant Replacement reserve would be merged into the Operations Reserve. For the electric utility, an additional new reserve is a Hydro Stabilization Reserve, which would help to smooth out the costs that change when hydroelectric generation changes. This proposal was the first part of a more comprehensive hydro balancing proposal that staff planned to bring to the UAC. Lastly, staff’s proposal would clarify that intra-utility, inter-fund transfers were allowable between the supply and distribution funds for the electric and gas utilities. Commissioner Melton said that when he reviewed this proposal as part of the UAC Budget Subcommittee they had asked whether the City’s $1 million insurance deductible was for each utility or across all utilities. Abendschein said it was a total across all utilities, so if multiple utilities suffered losses related to an insurable event, the cost of the deductible would be spread across multiple utilities. Chair Cook stated that if there are several bad hydro years in a row, then the balance of a Hydro Stabilization Reserve would be zero and it then wouldn't be available to cover higher costs due to lower hydro availability. Abendschein said that was true. One of the things staff would evaluate as part of the upcoming hydro balancing proposal was how much from the current reserves would be used as initial funding for the hydro stabilization reserve. Commissioner Eglash said there was scenario under which there could be a sustained period of dry years that could wipe out a hydro reserve. Abendschein said that a hydro stabilization reserve would help with normal year to year variation, but under a sustained drought it would likely be exhausted and the City would have to raise rates to compensate. Commissioner Melton said he understood that the hydro balancing proposal would also include a rate adjuster that would increase or decrease as hydro generation varied. Abendschein said that would be part of the proposal, but it also would not be a perfect solution. The rate adjuster would help with year to year balancing, but it also might not be sufficient in the event of a sustained drought. This was where the annual evaluation of rates was important, since they might need to be adjusted in such a scenario. Commissioner Hall recommended also evaluating the use of financial instruments to mitigate the cost risk of hydro variations. Utilities Advisory Commission Minutes Approved on: February 12, 2014 Page 5 of 11 Commissioner Waldfogel said that he is not in favor of intra-year hydro rate changes since they can't be planned for and customers have no time to alter behavior to avoid the charges. Commissioner Eglash stated that the proposed changes added clarity, increased transparency, and increased consistency. He supported staff’s recommendations. Commissioner Waldfogel recommended that staff ensure that the City Auditor approves of the proposed approach. If so, and if it does not have material effects on rates or rate structures, he predicted that there would not be any opposition. Commissioner Hall commented that the proposal results in a large number of reserves and that managing all of them could be an issue. Commissioner Eglash said the number of reserves raised the question of whether the total amount of all the reserves in aggregate was too much. Commissioner Melton responded that the UAC subcommittee asked about that and stated that the overall size of the reserves should maintained at a high enough level to maintain the City's AAA credit rating. Commissioner Hall stated that he will be looking to see if these changes will lead to an increase in the overall total funds in reserves. ITEM 2: DISCUSSION: Water Utility Cost and Consumption Benchmarking Report Senior Resource Planner Jon Abendschein stated that at a May budget hearing the previous year the Finance Committee had requested that staff return to the UAC and Finance Committee to conduct a review of consumption and costs. The Committee had asked about why residential consumption in Palo Alto was higher than in the territories of members of the Bay Area Water Supply and Conservation Agency (BAWSCA), whether higher rates had an effect on consumption, and why the Water Utility’s rates were higher than those of neighboring agencies. Staff was providing a 2010 study that had looked at some of the cost questions, and had also done a review of the FY 2012 BAWSCA Annual Survey and the FY 2012 financial statements of some neighboring agencies. Abendschein stated that Palo Alto residents did use more water per capita than other BAWSCA agencies, but that was to be expected because Palo Alto has a hotter and drier climate and larger lot sizes than the other agencies. For example, Palo Alto's median lot size is 9,518 square feet while the lot size of the BAWSCA agencies plus the City of San Francisco is 5,600 square feet. Thus, while water use is higher, it may still be efficiently used. He also emphasized that Palo Alto has reduced its consumption dramatically over the past ten years, and at a substantially faster rate than the average BAWSCA agency. Commissioner Eglash asked if the SFPUC would consider factors like climate in allocating water in the future. Utilities Advisory Commission Minutes Approved on: February 12, 2014 Page 6 of 11 Assistant Director Jane Ratchye stated that during normal years, the City’s contractual water allocation is more than sufficient and that the allocation is perpetual. In droughts, she said that there was a contractual formula for water supply and depends on two factors that are fixed, one of which was based on the contractual normal year water allocation, and one factor that depends on recent water usage. Commissioner Eglash asked whether there were any conservation standards that would require Palo Alto to reach some absolute level of per-capita consumption rather than to decrease its per-capita consumption by a specific amount. Ratchye stated that she was not aware of any such standards. Abendschein continued the presentation, stating that Palo Alto's high water rates have likely reduced water use to some extent in the past, but that higher incomes have likely reduced the effect. He also stated that some of the factors he discussed earlier, such as larger lot sizes and the hotter, drier climate, meant that even though Palo Alto’s rates were higher than other agencies, its residential consumption would also remain higher. Commissioner Melton recalled in 2010 when the report was first discussed, the UAC talked about there being price elasticity for irrigation, but not for basic water use requirements. He believed that adding more tiers with a higher rate in response to a drought would have little effect in driving down consumption. Abendschein continued the presentation, moving to the topic of costs. He discussed the conclusions of the 2010 study, which found that Palo Alto has older facilities that cost more to maintain and replace, lower economies of scale, a more spread out service territory, and paid rent for the land for its facilities. The consultant also found that Palo Alto has fewer complaints and service outages. Palo Alto also has higher cost water since other agencies receive some water from the Santa Clara Valley Water District. Abendschein then discussed the recent update staff had done, reviewing the FY 2012 financial statements for various comparison utilities. He added that the most recent review had confirmed several of the findings from the 2010 study, and had added two insights: first, that Palo Alto delivers less water for every mile of water main it owns, and second, that difference in cost allocation among customer classes was also responsible for some of the differences. Commissioner Melton asked why Santa Clara is such an outlier with such low costs for all cost components—water supply, O&M, and CIP. Abendschein stated that there was a lot about Santa Clara’s operations that staff couldn’t explain. Utilities Advisory Commission Minutes Approved on: February 12, 2014 Page 7 of 11 Commissioner Hall stated that some factors to explain Santa Clara's costs may be its flat and compact terrain as well as having some very large commercial users who pay for much of the water. Abendschein confirmed that they were one of the most compact and delivered more water per mile of water main. Commissioner Waldfogel stated that for some cities, there is a mixing of Utility budgets with Public Works budgets that made it difficult to clearly compare the two. Abendschein confirmed that was the case. Staff had done the most recent comparisons based on the financial statements rather than the budgets because the costs were more carefully delineated between utilities, but there was less detail available. Abendschein continued the presentation, discussing cost allocation. He said that Palo Alto did not have the highest system average rate. Redwood City had a higher rate, and Hayward had a comparable rate. However, Palo Alto still had higher rates than those cities for a specific customer class, large residential users. For other customer classes such as commercial and small residential, Palo Alto did not have the highest rates. When comparing between cities it made a difference which rate class you looked at. Commissioner Eglash said he had expected to see evidence in the presentation that Palo Alto was allocating more cost to its residential users relative to other agencies, but he did not see that in this chart. Abendschein said that the factors underlying Palo Alto’s higher rates were different for each agency. In the case of Redwood City and Hayward, cost allocation played a notable factor, which was why they were displayed here. Redwood City, for example, had higher commercial and small residential rates, but lower rates for large residential customers. Hayward had “outside Hayward” rates not shown on the chart that contributed to holding down rates for large residential users. For Santa Clara and Mountain View, all customer classes had lower bills than Palo Alto. Commissioner Eglash said that cost allocation was going to be a very important topic the next time we had a cost of service study; that it was important to make sure costs were properly allocated between the commercial and residential users. He said that the system average rate looked pretty close between Hayward, Redwood City, and Palo Alto, but that Palo Alto was an outlier when it came to residential rates. He expected to see evidence that Palo Alto was overcharging its residential users and undercharging its commercial users. He did not see that evidence in the chart. Abendschein said that there was no claim in the presentation that residents were being overcharged. Staff had done cost of service studies that had confirmed the present allocations. There could be plausible characteristics of Redwood City and Hayward’s systems that would Utilities Advisory Commission Minutes Approved on: February 12, 2014 Page 8 of 11 lead them to have a different cost allocation methodology using industry standard methods. The differences in cost allocation did not mean that Palo Alto needed to change its cost allocation methodology. Commissioner Melton asked whether the bill comparisons included both fixed and variable charges. Abendschein said they did. Abendschein continued the presentation, talking about system average costs in the categories of water supply, O&M, and CIP investment. Palo Alto had the second highest O&M costs, comparable supply costs, and the highest rate of CIP investment. Commissioner Waldfogel asked whether the CIP chart included the costs associated with the emergency water supply project. Abendschein said it did not because the project was financed using debt. Abendschein introduced the topic of pipeline utilization, or how much water is distributed per mile of water main. If O&M costs were similar for each mile of main, but an agency delivered less water per mile of main than other agencies, the O&M costs per unit of water sold would be higher because they were spread over fewer units of water sold. He said the lowest cost neighboring cities, Santa Clara and Mountain View, distribute more water per mile of main, likely because the cities were built more compactly than Palo Alto. Commissioner Waldfogel asked whether there were high electricity costs associated with pumping water up into the foothills. Abendschein responded that he did not have that information readily available, but that the 2010 benchmarking study had shown higher costs due to Palo Alto’s hillier terrain. Abendschein continued with the presentation. With respect to O&M costs, Palo Alto has comparable costs per mile of main when excluding rent, but is in the middle when viewed on the basis of costs per unit of water delivered. He had done some basic comparisons of the costs underlying each city’s O&M costs, but the financial statements did not have sufficient information. It would require more research to find out more detail on how Palo Alto’s O&M costs compared to other agencies. Commissioner Hall asked whether energy pumping costs were a significant part of the utility’s costs. Abendschein said he did not have good information readily available, but did not remember seeing that as a major expense for the water utility. Utilities Advisory Commission Minutes Approved on: February 12, 2014 Page 9 of 11 Abendschein continued with the presentation. Palo Alto invests more in its infrastructure than other agencies because it has a higher average age of the water mains. Since Palo Alto developed earlier than the other cities, many of its mains are older. It has also grown more slowly than other agencies since the 1970s, which likely means that a smaller fraction of its infrastructure development would have been funded by developers as a condition new development. He summarized the differences between each agency’s costs when compared to Palo Alto. He said that everything discussed in the presentation was preliminary, and that staff intended to do more research and more regularly track some these benchmarks. In addition, staff was re-examining specific aspects of its costs, such as its water supply plan and its capital investment plan. Public Comment: A member of the public (who did not state his name) stated that he had called twice to get questions answered about his parent's bill and could not understand the answers he got from the customer service center. He said that Palo Alto is not alone in needing to spend money to maintain its water pipes—all agencies need to do this. The water rates should have a higher first tier allowance in the summer than in the winter. Commissioner Eglash commented that the presentation needs to be improved and the absence of any report in advance was disappointing. A report would greatly assist in public review. He said that some of the slides pointed to the fact that our comparison cities were not comparable. He suggested finding other cities that were more comparable, perhaps Atherton, Los Altos, or Los Altos Hills. He stated that what was presented was highly qualitative, not quantitative, but this study requires rigorous quantitative information to explain Palo Alto's costs and rates. He recommended adding specific numbers to the cost allocation slide. He said the questions to ask are 1) is Palo Alto operating efficiently; 2) is the CIP spending appropriate, and 3) are costs allocated appropriately. He thought that the presentation had a defensive tone that appeared to try to justify Palo Alto's costs and rates. He stated that the tone should be more of as an investigator determined to find the facts. Vice Chair Foster asked if there were better comparison cities. Abendschein stated that these cities were good comparators, but that each agency has differences and there are no perfect comparison cities. Vice Chair Foster asked what the Finance Committee originally requested. Abendschein replied that it requested a “deep dive” on water consumption and water rates. There were no specific topics requested by the Finance Committee, and staff had tried to interpret the preceding discussion to address some of the points the Committee seemed to be raising. Vice Chair Foster said it sounded like this was intended to start a discussion on costs, but was not intended to be the final discussion. Utilities Advisory Commission Minutes Approved on: February 12, 2014 Page 10 of 11 Commissioner Eglash stated that presentation will not feel like the deep dive that the Finance Committee asked for. He said that the Council and UAC needed to feel assured that the water utility’s rates were reasonable. He stated that there was not enough analysis to make that conclusion. He said it was in the right direction, but not quite there yet. Commissioner Hall said that staff was on the right track. He suggested some things that were worth eliminating from future analysis. Supply costs had been analyzed in the past, and he recommended doing no more analysis on alternate supply sources for the purpose of this study. He also suggested ignoring debt service. He asked whether it was possible to escape rent charges, perhaps by purchasing the underlying land. Commissioner Melton stated that the rent costs were inescapable since it was paid to the General Fund and the rent rates were set by the City Council. Commissioner Waldfogel recommended highlighting any transfers to the General Fund, like rent, and translating them into pennies per unit even if it was not likely to be changed. Commissioner Hall stated that the CIP spending plan merits deeper review and explanation. He said he had been concerned with the fact that personnel limitations had led to a drop in CIP spending in the current fiscal year. He said it was helpful how staff had illustrated the age of Palo Alto’s pipelines. He said that he supported CIP investment, and that it was not worth doing any analysis of whether the investment rate needed to change. It was a worthy expenditure. With respect to O&M costs, Commissioner Hall said that staff should break out those costs for a deeper comparison. He noted costs related to customer service, some engineering, administration, and resource management in the budget could be discussed in more detail. He said the total of $3-4 million for those items were worth explaining. Abendschein stated that these detailed costs were difficult to find in publicly available financial documents, and that it would involve reaching out to other utilities, something he was planning to do. Commissioner Waldfogel recommended discussing whether, with respect to administrative costs, the City can claim any multi-utility benefits since the utility had similar personnel working on all the utilities. Referring to how residential bills vary by consumption levels, he said that it would be useful to show how many customers are in each consumption level. He said there were political considerations, that they had received a letter regarding how expensive it was under the current rate structure to maintain landscaping on large lots. Abendschein reiterated that Palo Alto’s water rates were established in accordance with a cost of service study, and not with an eye toward penalizing any specific class of customer. Utilities Advisory Commission Minutes Approved on: February 12, 2014 Page 11 of 11 Commissioner Waldfogel said that the higher rates for those customers were why the topic kept coming back to the Commission. He believed there were different assumptions that could be used for the cost of service methodology. Commissioner Melton agreed that the reason the topic kept arising was that rates were higher than in neighboring cities as had been reported in the newspapers. Abendschein said that the newspapers had misinterpreted the 2010 benchmarking study and had overstated the degree to which Palo Alto’s rates were higher than neighboring agencies. Commissioner Melton agreed, but felt the average user would not understand that. The Finance Committee was asking for reasons they could use to explain Palo Alto’s rates to customers and really wanted some bullet point explanations. He said it would be helpful to talk about how many customers were at each usage level. It would be helpful to be able to say, for example, that 70% of customers in Palo Alto had bills comparable to neighboring cities, and that bills were only higher for heavier water users, or whatever the actual numbers were. Vice Chair Foster questioned what comments the UAC should provide to the Finance Committee as this item was for discussion, not action. Vice Chair Foster stated that he supports the next steps identified, which included: 1) completing an analysis of the use of groundwater to supplement SFPUC supply, 2) routinely monitoring most relevant benchmarking measures, 3) reaching out to other agencies to collaborate on benchmarking and sharing information on operating costs, and 4) completing a study of CIP investment rates. Commissioner Hall agreed that those were useful steps. ITEM 3: ACTION: Selection of Potential Topic(s) for Discussion at Future UAC Meeting No discussion ACTION: None COMMISSIONER COMMENTS None. Meeting adjourned at 9:35 p.m. Respectfully submitted, Marites Ward City of Palo Alto Utilities