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HomeMy WebLinkAbout2022-11-02 Utilities Advisory Commission Summary MinutesUtilities Advisory Commission Minutes Approved on: December 7, 2022 Page 1 of 19 UTILITIES ADVISORY COMMISSION MEETING MINUTES OF NOVEMBER 2, 2022 SPECIAL MEETING CALL TO ORDER Chair Segal called the meeting of the Utilities Advisory Commission (UAC) to order at 6:02p.m. Present: Chair Segal, Vice Chair Johnston, Commissioners Forssell, Metz, Scharff, and Smith (arrived at 6:03 pm) Absent: Commissioner Bowie AGENDA REVIEW AND REVISIONS None ORAL COMMUNICATIONS None APPROVAL OF THE MINUTES Chair Segal noted the October 12, 2022, draft minutes were not ready for review and would be available at the December 7, 2022, UAC meeting. UTILITIES DIRECTOR REPORT Dean Batchelor, Utilities Director, delivered the Director's Report. Gas Safety Outreach: Throughout the year, the City of Palo Alto Utilities (CPAU) delivers a variety of outreach materials to the community about utility safety. An important element of our public awareness program is the annual distribution of our gas safety awareness brochure. Per Federal Department of Transportation regulations, we directly mail this information to all customers, non-customers living near a gas pipeline, public officials, emergency responders, excavators, contractors, and locators working in Palo Alto. Gas safety brochures will be delivered in November. If interested in additional details about gas safety or this outreach, please visit cityofpaloalto.org/safeutility. Gas Safety Awareness Surveys: It is important to assess the effectiveness of our outreach for gas safety to guide our actions, and it is also required for public awareness per the Federal Department of Transportation. A primary way most utilities, including CPAU, do this is by 0 Utilities Advisory Commission Minutes Approved on: December 7, 2022 Page 2 of 19 contacting stakeholders through a randomized phone or email survey to ask questions about gas safety. Questions address items such calling USA 811 before digging, who to call and what to do in case of a gas leak, among others. Within the next month or so, we will engage with a contractor to conduct these stakeholder awareness surveys. If you get a call, we thank you in advance for helping us out by answering the questions! Water Efficiency Workshops: Tuesday, November 1 marked the last of a series of fall landscape workshops hosted by CPAU and the Bay Area Water Supply & Conservation Agency (BAWSCA). The workshops covered topics of rainwater harvesting, lawn conversion, and available rebates. Attendance was strong, with 91 residents participating over the course of the three workshops. These workshops are a great way for residents to learn from landscape experts about how to use water efficiently outdoors. One Water Plan: The One Water Plan is evaluating alternative water supplies to make the City’s water supply more resilient. Palo Alto is assessing key regional uncertainties and water supply risks such as projected shortages under multi-year droughts. The City will hold its second community workshop on December 6 at 5:30 p.m. to continue the conversation about water supply and conservation options and review draft evaluation criteria for the plan. The workshop will be at the Mitchell Park Community Center. Those unable to attend in person may join via Zoom. A link is available on our website at cityofpaloalto.org/workshops. Water Supply Update: The San Francisco Public Utilities Commission (SFPUC) continues to call for voluntary water use reductions for the Regional Water System. Palo Alto’s voluntary cutback level is 8%. The City has taken measures to aid in community water saving efforts, including increasing education and outreach, implementing water use restrictions such as limiting irrigation to two days per week, except to ensure the health of trees and other perennial non- turf plantings, and hiring a water waste coordinator. These actions seem to be making an impact. For January through April 2022, after the driest January through March in recorded history, Palo Alto’s cumulative usage was 17% above the cumulative water budget from SFPUC. Palo Alto has now reduced its cumulative water usage to 7% above the water budget for January through October 2022. For the billing months of July through October 2022, Palo Alto has reduced its water use 10% compared to the baseline of Fiscal Year 2020. Making Better Choices in Your Home Event: On Saturday, October 15, the City hosted a workshop titled “Making Better Choices in Your Home.” More than 100 community members attended and spoke with experts and staff about beneficial electrification, including heat pump water and space heating, induction cooking, upgrading electrical panels, electric vehicles and bikes. Twenty-two residents signed up at the event to learn more about the City’s new pilot program offering financing options for installing a heat pump water heater. Participants entered a free raffle to win sustainability-related prizes, and six community members won the top prize of a free Home Efficiency Genie Assessment. Electric Vehicle Events: On Sunday, October 30, 2022 hosted 2 events. Morning event from 9 a.m.-Noon: Utilities Advisory Commission Minutes Approved on: December 7, 2022 Page 3 of 19 Frunk or Treat @ Cal Ave*: Over 250 people came and checked out ten awesome EVs – Rivian R1T, Fiat 500e, Rivian R1S, Hyundai Ioniq 5, Mustang Mach-E, VW ID.4, Nissan Leaf, Tesla Model Y, Kia EV 6 and Ford F-150 Lightning – on display. The adults were very engaged with some even asking the EV owners/ambassadors if the cars were on display for sale and the kids enjoyed trick or treating in the frunks and trunks filled with goodies. We "sold out" of over 1.5k pieces of trick- or-treat candy and hundreds of City swag items like cute reminder tags related to water conservation (a project started by some students and provided to use for free), jar grippers, nightlights, cellphone fans, efficiency tips playing cards, hose nozzles, and reusable backpack- tote bags. This was an amazing pre-Halloween event for both adults and kids decked out in cute and cool costumes. *I staffed at this event. Afternoon event from 1:30 p.m. – 4:00 p.m.: EV Meet & Greet @ Congregation Kol Emeth*: Smaller event with about 50 attendees and fewer EVs on display, but there was a Polestar. This was an event geared more towards Congregation members. *We did not have City staff at this event. UNFINISHED BUSINESS None NEW BUSINESS ITEM 1: ACTION: Adoption of a Resolution Authorizing Use of Teleconferencing for Utilities Advisory Commission Meetings During Covid-19 State of Emergency ACTION: Vice Chair Johnston moved Staff recommendation that the Utilities Advisory Commission (UAC) Adopt a Resolution (Attachment A) authorizing the use of teleconferencing under Government Code Section 54953(e) for meetings of the Utilities Advisory Commission (UAC) and its committees due to the COVID-19 declared state of emergency. Seconded by Commissioner Metz. Motion carries 6-0 with Chair Segal, Vice Chair Johnston, and Commissioners Forssell, Metz, Smith, and Scharff voting yes. Commissioner Bowie absent. ITEM 2: ACTION: Staff Recommends the Utilities Advisory Commissioner Consider and Adopt an Attendance Policy Chair Segal requested any public comments. There were none. Vice Chair Johnston suggested indicating Section 3 requirements do not apply for people attending remotely pursuant to Section 4. Utilities Advisory Commission Minutes Approved on: December 7, 2022 Page 4 of 19 Commissioner Scharff questioned whether the new Brown Act requirements have a limitation on 3 meetings a year. Jennifer Fine, Deputy City Attorney, explained that the just cause provisions have a 2-meeting limit and an overall limitation of not more than 20% of the body's meetings solely remotely. Because this body meets 12 times a year, one cannot attend a third meeting remotely using these new provisions. Commissioner Scharff reviewed the approved reasons for meeting remotely and suggested removing the phrase "actively discouraged." He felt if requirements were met, someone should not be discouraged from attending remotely. Chair Segal proposed rewording it more positively that members are encouraged to meet in person. She stated a decision needed to be made on how many total meetings per year commissioners may attend remotely. She questioned if it was possible to go beyond 3 total. Ms. Fine stated that using the standard remote attendance rules, it is possible to go beyond 3 but once beyond 2, using the just cause or emergency provisions is not allowed. Commissioner Scharff questioned the reason for a third remote attendance. There was further discussion on this. Commissioner Forssell questioned if the UAC has discretion on a policy of how many meetings per year a commissioner can do standard remote attendance. Ms. Fine stated the Commission has the discretion to decide how many meetings and agreed that it was hypothetically possible to let commissioners attend every meeting remotely following the posting requirements. Commissioner Forssell stated the meaning of 2C was hard to understand. Ms. Fine suggested to edit that to read, "A commission member who has already attended 2 meetings remotely in one calendar year for any reason may not attend another remotely under Section 4." Commissioner Scharff clarified that the real discretion is how many commission meetings in total people would be allowed to attend remotely. He asked if there were any other discretionary questions besides that. Ms. Fine stated that the general policy statement on whether remote attendance is discouraged or encouraged is also discretionary and listed other minor discretionary items that are Brown Act minimums or streamlining options that could be edited. The included scripts are discretionary. Utilities Advisory Commission Minutes Approved on: December 7, 2022 Page 5 of 19 Chair Segal stated there was also the timing of notice of a commissioner attending remotely because of just cause or for emergency purposes. She felt the earliest possible opportunity was reasonable. Ms. Fine stated that requiring a particular minimum can ensure a quorum at the singular physical location because if there is not a quorum at the singular physical location, none of the remote attendees can attend under just cause or emergency circumstances. Chair Segal suggested going through the discretionary items. For 2B, one proposal was to delete the statement that attending remotely is actively discouraged and another was to state that commission members are encouraged to attend commission meetings in person. Vice Chair Johnston suggested stating that commission members are strongly encouraged to appear in person. Chair Segal asked if anyone objected to that phrasing. No one objected, and she requested to propose that. Regarding 2C, she asked if the commissioners were comfortable with limit of 3 combined remote attendances. Commissioner Forssell reiterated the clarification "for any reason." Chair Segal read the revision, "A commission member who has already attended 2 meetings remotely in 1 calendar year for any reason may not attend another remotely under Section 4." There was discussion on this. Commissioner Scharff suggested 4 since no one had a strong preference. Council Liaison Cormack suggested using positive wording for Section 2C as well. Chair Segal read the proposal, "Each commission member may attend up to 4 commission meetings remotely per calendar year. A commission member who has already attended 2 meetings remotely in 1 calendar year for any reason may not attend another remotely under Section 4." There was a proposal to leave Section 2D as a singular policy, that at least a quorum must participate from a physical location within the City. She asked if anyone felt strongly about splitting that policy. Commissioner Forssell stated it would be confusing to change the longstanding tradition of gathering in City Hall. Ms. Fine stated that the script was open for modification and that the Commission could require additional notice. Chair Segal felt the members could be trusted to notify the Commission as soon as reasonably possible. She asked if anyone desired changes to the prescription in Section 4C IV, reflecting the Utilities Advisory Commission Minutes Approved on: December 7, 2022 Page 6 of 19 statute in a way that makes it easy to follow and notify commissioners. Commissioners felt it was helpful. Vice Chair Johnston was concerned that it was not clear that it is not necessary to meet the requirements of Section 3 under Section 4. Chair Segal proposed the sentence, "The 3 different ways to attend remotely are as follows," listing each of them so it is clear they are separate. She restated the following modifications: Under 2B, commissioners are strongly encouraged to attend commission meetings in person. Under 2C, each commissioner may attend up to 4 commission meetings remotely in any calendar year. A commission member who has already attended 2 remotely in one calendar year for any reason may not attend another remotely under Section 4. The remote attendance policy does not apply to emergency situations. There was discussion on whether an action would be taken at this meeting. ACTION: Commissioner Metz moved Staff recommendation that the Utilities Advisory Commission (UAC) Adopt an Attendance Policy, as amended. Seconded by Vice Chair Johnston. Motion carries 6-0 with Chair Segal, Vice Chair Johnston, and Commissioners Forssell, Metz, Smith, and Scharff voting yes. Commissioner Bowie absent Mr. Batchelor added that once the changes are made, it will be an informational for next month so the Commission will be able to see it. If there is discussion, it can be brought back up then. ITEM 3: ACTION: Staff Recommendation That the Utilities Advisory Commissioner Review and Recommend the City Council Affirm the Continuation of the REC Exchange Program Chair Segal asked for public comments. There were none. Jim Stack, PhD, Senior Resource Planner, stated this presentation would be similar to those he had shared previously with some discussion on the program's impacts to date and projections for the future. He shared the results of the program so far. The program was adopted in the summer of 2020 and involves selling excess in-state renewable energy (bucket 1 RECs) and purchasing out-of-state renewable energy (bucket 3 RECs). These 2 products are equivalent in terms of environmental and climate impacts, but due to the State's RPS regulations favoring use of in-state RECs, there is a price premium for bucket 1 RECs compared to bucket 3. That presented the City with an arbitrage opportunity. In 2020, the Council directed that two-thirds of the net revenue the program generates for the first 2 years would be devoted toward supply cost reductions in order to keep residential rates lower, with the remainder allocated toward Utilities Advisory Commission Minutes Approved on: December 7, 2022 Page 7 of 19 local decarbonization programs. For 2022 and beyond, all revenue would be allocated toward local decarbonization efforts. The program has generated nearly $7M in net revenue to date. If the program is continued into the future, that amount would gradually shrink as RPS level requirements gradually increase every year, reducing the amount of excess bucket 1 renewable energy available to sell. Projected cumulative net revenue for the next 5 years is $9M to $10M, all of which would be devoted toward local decarbonization efforts, such as building electrification programs. Functionally, there is no impact on the environmental quality of the electric supply. With the REC Exchange Program in place, the emissions intensity is roughly the same as the statewide average. Staff recommended the UAC recommend that the Council affirm the continuation of the REC Exchange Program and that Council direct staff to return to the UAC and City Council by 2027 to provide another review of the program's impacts. Vice Chair Johnston felt the program had turned out very well and was pleased there has not been a lot of pushback from the community. He commented that pushing the next report out to 2027 is too long and would prefer sometime around 2025. Commissioner Forssell asked if before the REC Exchange Program, the City would buy RECs to get to carbon neutral. She clarified that the baseline without REC exchanges is not in opposition to the claim of carbon neutrality because in either case, the City is purchasing enough bucket 3 RECs to get to carbon neutral. Dr. Stack stated that was correct. Commissioner Forssell asked for clarification of the statement on packet page 19 that some of the City's older and smaller renewable energy contracts are set to expire, further reducing the supply of bucket 1 RECs. She expected that expiring contracts would be replaced with other renewable energy sources and questioned why the RECs from those energy sources would not be available to do the REC exchange. Dr. Stack stated that because there has been much surplus renewable energy, staff had not assumed in the models that they would replace those small contracts. If the load grows to the point where it needs to be replaced, it would be replaced with renewable energy. Staff will be coming to the Commission next month with a discussion on long-term load forecasts with exciting impacts from building and transportation electrification and some possible new commercial load growths. Commissioner Metz stated selling one financial instrument and buying another does nothing to advance environmental sustainability. He felt buying bucket 3 RECs provided no renewable additionality, which is the reason California sharply limits bucket 3 RECs and the reason bucket 3 RECs are so much cheaper than bucket 1 RECs. He felt this probably reduces renewable energy and recommended, if this plan goes forward, using the money to generate renewable energy locally plus increasing conservation rather than decarbonization. Utilities Advisory Commission Minutes Approved on: December 7, 2022 Page 8 of 19 Dr. Stack believed there was a reasonable debate to be had about the additionality question. He felt Palo Alto stepped up pretty early in renewable energy and had a big impact on that market. Bucket 3 RECs have increased substantially over the past few years. This makes a meaningful impact on the finances of the renewable energy developers. Commissioner Forssell remembered the Commission raising the same concern about additionality in 2019 or 2020. She remembered reading academic papers that indicated that bucket 3 RECs had the necessary qualities in terms of carbon reduction, also noting the fact that the California requirements may have been motivated by state legislators' desire to keep the economic benefits of these projects in state. Commissioner Metz stated electricity is about delivering energy at a certain place and time and the definition of bucket 3 RECs is they do not have that time or place connection. He felt there was an increasing problem with increasingly renewable resources being built and paid for and not contributing renewable energy. Chair Segal highlighted that multiple commission meetings were spent on this issue over time. She stated this policy has already been approved by the City Council, and the question is whether to continue it. On the question of whether the next review should be in 2027 or sooner, she proposed 2025. She hoped that some documentation or review of old meetings would make Commissioner Metz comfortable as it had been discussed previously. ACTION: Vice Chair Johnston moved Staff recommendation that the Utilities Advisory Commission (UAC) recommend that the City Council: 1) affirm the continuation of the “REC Exchange Program,” whereby the City exchanges bundled RECs from its long-term renewable resources (Bucket 1 RECs) for Renewable Portfolio Standard (RPS) eligible, unbundled RECs (Bucket 3 RECs),1 to the maximum extent possible, while maintaining compliance with the state’s RPS regulations, in order to provide additional revenue for local decarbonization efforts; and 2) direct staff to return to the UAC and City Council in 2025 to provide another review of the program’s impacts. Seconded by Commissioner Forssell. Motion carries 6-0 with Chair Segal, Vice Chair Johnston, and Commissioners Forssell, Metz, Smith, and Scharff voting yes. Commissioner Bowie absent ITEM 4: ACTION: Staff Recommends the Utilities Advisory Commission Recommend the Finance Committee Recommend That the City Council Adopt a Resolution Amending the E-HRA (Electric Hydro Rate Adjuster) Rate Schedule, Increasing the Current E-HRA Rate to $0.026/kWh Effective January 1, 2023. Utilities Advisory Commission Minutes Approved on: December 7, 2022 Page 9 of 19 Chair Segal requested any comments from the public, and there were none. Eric Keniston, Sr. Resource Planner, stated this is a proposal to increase the Electric Hydro Rate Adjustor, which was implemented several years ago to fund additional power purchases when hydro supplies are low. This is a very low hydro year that requires going out for more market power, which can be quite expensive, about twice what had originally been projected. Power costs in FY22 were about $16M higher than what was budgeted. All of the hydro stabilization reserve was used to help mitigate against that, and the existing Hydro Rate Adjustor was implemented in April 2022 to help offset the effects. Right now the supply operations reserve is only about 22M, with a minimum reserve guideline of around 18M. Because of regional and worldwide problems, a lot of the resources are incredibly expensive. The estimate is upwards of $9M higher than what is in the current budget. Without adding to the current Hydro Rate Adjustor, the reserve will drop below the minimum guideline level by the end of this fiscal year. Doubling the existing Hydro Rate Adjustor from 1.3 cents to 2.6 cents would bring in an additional $5M for the rest of this fiscal year and should keep it above minimum guideline level. With the upcoming electric rate increase in June, staff will likely bring in potential amendments to the existing Hydro Rate Adjustor method, something more flexible that takes the budget into account and a more fluid Hydro Rate Adjustor on customer bills. Vice Chair Johnston questioned if the new increased Hydro Rate Adjustor would be implemented as soon as it is approved by the City Council. Mr. Keniston stated ideally the proposal would be in front of the Finance Committee in November and to Council by December for a January 1 implementation. Within 6 months, if sales stay close to projections, there should be about $5M additional in revenue to help offset costs. Commissioner Metz asked if buying more gas-generated electricity with the fuel surcharge compensates for the extra expense. Mr. Keniston stated there is not a gas surcharge on the electric rates, just the Hydro Rate Adjustor tacked on to cover additional market costs beyond hydro generation. Moving forward, the existing Hydro Rate Adjustor may be turned to a Power Cost Adjustor to encompass the higher market-related costs of procuring supplies greater than budget. Commissioner Metz asked if the real problem is the large fixed cost for hydro and the variable supply. He stated it seemed like the reason for this problem was trying to match a fixed cost to a variable revenue source. Mr. Keniston stated the Hydro Rate Adjustor is meant to recover the costs of when there is no hydro. There are certain fixed costs related to hydroelectric, but the increased cost is related to the variable of the market-based power. In future rate actions, staff might suggest putting in a fixed charge for customers to better represent those fixed costs, but that will be forthcoming with the rate changes for July 1, 2024. Utilities Advisory Commission Minutes Approved on: December 7, 2022 Page 10 of 19 Mr. Batchelor added the Hydro Adjustor is flexible. When hydro is in good condition, these charges go away. He stated there is a question of looking for other renewable energy, wind or solar, to offset these costs. Commissioner Scharff cautioned not to assume current conditions will last forever. The only variable is if drought will be the new normal and then hydro would be a bad bet. He believed hydro has been a great positive for the city and that the savings have far offset the added costs in the dry years. He believed that increasing the Hydro Rate Adjustor was a measured response and that people would get the benefit in a non-drought year. He supported the plan. Commissioner Forssell agreed that the Hydro Rate Adjustor was a better tool than a complete rate increase. She looked forward to staff coming back next time with something even more flexible and supported this plan. Chair Segal also supported the plan and liked the flexibility. Council Liaison Cormack stated that the difference in the operations reserve balance needs to be highlighted in the staff report. ACTION: Vice Chair Johnston moved Staff recommendation that the Utilities Advisory Commission (UAC) recommend the Finance Committee recommend that Council adopt a resolution amending the Electric Hydro Rate Adjuster (E-HRA), effective January 1, 2023, to reflect current hydrological conditions and market purchase costs. This would double the existing E-HRA surcharges and discounts across all levels, increasing the current E-HRA rate from $0.013/kwh to $0.026/kwh. Seconded by Commissioner Forssell. Motion carries 6-0 with Chair Segal, Vice Chair Johnston, and Commissioners Forssell, Metz, Smith, and Scharff voting yes. Commissioner Bowie absent UAC took a break at 7:26 p.m. and returned at 7:41 p.m. ITEM 5: ACTION: Changes to the Utilities Rules and Regulations and Rate Schedules for AMI Implementation Chair Segal asked if there were any public comments. There were none. Dave Yuan, Strategic Business Manager, stated the items to discuss are deployment of Advanced Metering Infrastructure and build-overs. There was an addition of the definition of Advanced Metering Infrastructure to Rule 2. Regarding Rule 9, there was the new functionality of remotely Utilities Advisory Commission Minutes Approved on: December 7, 2022 Page 11 of 19 connecting or disconnecting without having to send out a crew. These remote connect and disconnect switches will be piloted. In Rule 10, customers may opt out of the AMI program, either before the installation crew comes out or after the advanced meter has been installed. The electronic transmission would be turned off, and the meter would need to be read manually with no data transmitting. There would be a one-time $100 fee and a $25 monthly fee to recover staff time for these opt-out customers, which will have to be manually reviewed and also physically audited every year. Rules 15 and 20 were about adding peripheral equipment for meters, the radial endpoints that will be part of the AMI infrastructure for gas and water meters. Regarding overbuilds, Rule 8 required customers to make sure there is unobstructed access to the meters and service lines. In Rule 20, the City has the right to relocate a service line or meter, with charge borne by the customer, if the customer has done something to obstruct access. Vice Chair Johnston stated it would be helpful to note in 9E that the same procedures as 9C would be followed. He questioned that it is $25 a month for 1 meter reading a year. Mr. Yuan stated the $25 is for manually entering and validating the customer's self-reported reads and following up with customers who do not submit their reads. The figure was based on staff time, estimating the amount of minutes per each staff member conducting each task. The fees are for cost recovery only and not to make money or discourage residents from opting out. Commissioner Forssell supported the fees but felt it would be worthwhile to revisit it after implementing the program and base it on actual costs rather than estimates. She suggested the definition of Advanced Metering Infrastructure be updated to include what distinguishes a "smart" meter and also that a tighter definition of "near realtime consumption data" would be helpful. Mr. Yuan stated there will be a 1-day delay because it has to be integrated back with the SIP system. It is not currently an instantaneous read. Commissioner Forssell suggested calling out the range as somewhere between daily and whatever aspiration this technology will ultimately support. Mr. Yuan also noted there would be a rate assistance fee, $10 monthly and $50 one-time instead of the $25 and $100. Chair Segal stated there was a change to 9E II to clarify that it is the same notice provided as in 9C whether it is remote or not. The AMI definition will be revisited. ACTION: Vice Chair Johnston moved Staff recommendation that the UAC recommend Council adopt the attached Resolution (Attachment A) amending Utilities Rules and Regulations 2, 8, 9 (Change request was to ensure that the notices for physical disconnect/reconnect also apply to remote disconnect/reconnect), 10, 15, 18, 20, and Utilities Rate Schedules C-1 and C-4, as amended. Utilities Advisory Commission Minutes Approved on: December 7, 2022 Page 12 of 19 Seconded by Commissioner Metz Motion carries 6-0 with Chair Segal, Vice Chair Johnston, and Commissioners Forssell, Metz, Smith, and Scharff voting yes. Commissioner Bowie absent ITEM 6: ACTION: Staff Recommends That the Utilities Advisory Committee (UAC) Approve a Recommendation That Council Recommend Building the Fiber Backbone and Options for Fiber- to-the-Premises (FTTP) Chair Segal requested public comments. Daniel Dulitz believed all the technical questions had been answered and there was no significant technical risk in this proposal. Areas served by AT&T fiber would likely receive better service if there were a true fiber competitor. He supported the FTTP recommendation, specifically Option 2, a phased build-out that would mitigate the primary risks of take rates and marketing. He believed wise application of phasing could support the vast majority of the City's needs in a relatively short time frame. Hamilton Hitchings stated staff has claimed a 25% take rate is necessary to break even. He asked the Commission and staff to provide a more realistic estimate of take rate to City Council, such as 20%. The cost estimates for the City have already increased 20% from 2021 to 2022, much faster than inflation. Estimating further cost increases, the necessary take rate will be much higher. He stated no other city in California has concluded that citywide, city-owned offering makes sense and successfully deployed it. He believed it may not be commercially viable for a third high-speed Internet provider to start in Palo Alto; however, he felt subsidies should be offered to entice companies like Atherton Fiber and gave examples of ways to do this. He requested staff add a subsidy for high-speed Internet for low-income households. He asked the Commission to recommend Option 3 to the Council to improve the city's fiber offering without the risk of borrowing money, and not Option 1, which could result in the City owing a large amount of money, requiring cutting of funding elsewhere. Jeff Hoel recommended Option 1. He stated the incremental Option 2 costs more and takes longer to implement, giving competitors more time to be competitive first. He described Chattanooga's network idea and how the FTTP alone made enough money to pay for it, and he felt that was an inspiration Palo Alto could take advantage of. Herb Borock agreed with Mr. Hoel but questioned if the Council and Commission would approve a 5-year project if their own neighborhoods were last. He was concerned about the cost estimates and stated adding up the amount of money from the fiber fund and the bonds is almost as much as the total FTTP cost, which did not make sense. He stated the depreciation rates do Utilities Advisory Commission Minutes Approved on: December 7, 2022 Page 13 of 19 not match the City's rates and listed several revenue concerns. He questioned the location of the fiber hut. Dave Yuan, Strategic Business Manager, was looking for UACs recommendation on how the City should move forward with FTTP and enhance broadband in the community. Staff returned with follow-up information from the joint session on September 19. There are 3 options of deployment: full deployment, incremental or phased build-out, and pausing and collaborating with the private ISPs. There is no city in California providing citywide municipal FTTP. Regarding whether microtrenching could help reduce construction costs and speed up deployment, he listed the advantages and disadvantages and stated staff does not recommend microtrenching in Palo Alto currently. In regard to the fiber reserves, the City has a very successful dark fiber business and has accumulated about $34M since inception. The dark fiber reserves generated so far can be used for any fiber-related projects, but it is uncertain how future revenues could be used due to recent litigation under Prop 26 and 218. For all 3 options, the staff recommends building out the fiber backbone and reinvesting back in the fiber network. He discussed this further. He detailed the advantages of Option 1. Chair Segal questioned the amount put in by the electric fund for this option. Mr. Yuan stated that the electric portion would be bond financed because the City would get a better rate because electric has a healthier financial record than fiber. Commissioner Forssell stated the fiber backbone recommended under all 3 options enables more connectivity for city departments but only Option 1 provides infrastructure for smart city applications. She asked about examples of what is available for all three versus only Option 1. Mr. Yuan stated Option 1 will fiber in the neighborhoods. More fiber would help with connectivity in certain neighborhoods, especially in the Stanford area during games and in the parking garages. It would be distributed throughout the city and not just along the corridors. Right now some of those initiatives cannot be connected because there is not fiber nearby. Parks also had requests for fiber to do Wi-Fi in certain areas. Transportation wanted to add some electronic signs in some areas. Commissioner Scharff questioned whether the general fund would be on the hook for this if fiber could not pay the interest on the bonds. Mr. Yuan stated that based on his understanding, the general fund would be on the hook if the fiber fund was not able to pay off the debt service at the end. He believed the bond holders could go after the electric fund as well if they were bond financed together. He moved on to discussing disadvantages of Option 1, including risk of competition and risk of the take rate. If the take rate is less than 25%, subsidies from the City would probably be required to cover the debt payments. Commissioner Scharff was concerned about the effect of rising interest rates. He felt this made a lot more sense when interest rates were cheap. Given the take rate is the thing that matters, Utilities Advisory Commission Minutes Approved on: December 7, 2022 Page 14 of 19 he believed 3 to 6 months should be offered free to the entire community, which would probably give a 100% take rate and people could then opt out later. Mr. Yuan stated there is $34M in the bank right now and interest rates could potentially be down in a year or two. He described Option 2, the phased deployment, including deployment options. Dean Batchelor, Utilities Director, stated in the past this Commission did not like the idea of building out in phases as it could take 10 to 14 years. One reason staff was asked to put this option back in was the potential for interest rates to continue to climb with a payback that would be even higher. The advantage of this is to have time to analyze if it makes sense moving forward. It also gives time for electrification with opportunities to build jointly from an electric and fiber perspective. This would not take 10 years because there will be some scale economies that to work with the electric side. Poles are going to have to grow, and space can be added for the fiber side. There will be cost savings with that. Mr. Yuan then talked about the advantages of Option 2. Chair Segal asked if there is a backup plan in case this is more expensive than initially planned and the money runs out before the 25% take rate. Mr. Yuan stated there is some contingency built in the financial model for construction costs. It is possible to do more marketing campaigns, slow down construction costs, slow down construction projects, or renegotiate with vendors. Chair Segal stated it is not known how long phase 2 could take if it depends on initial take rate to fund future projects and now combining it with electrification. Mr. Batchelor did not believe that was true. Using the synergies around electrification, the system needs to be rebuilt in a period of time, possibly 7 rather than 10 years. Vice Chair Johnston questioned what would happen if the take rate on the initial build-out was not sufficient. Mr. Yuan stated it would depend on the gap, whether or not to bond finance the rest of the project or do a slower build-out. The longest it would take is roughly 20 years. Chair Segal questioned the cost of the staff and the support and whether the customer or the utility would buy the boxes inside the homes. Mr. Yuan stated the City will provide the equipment. Staffing would probably start with an outsourcing model and pay based on phase or customer take rate. Utilities Advisory Commission Minutes Approved on: December 7, 2022 Page 15 of 19 Mr. Batchelor stated another option is to look for a third party to partner with because the most costly piece of the fiber system is the last mile and the operation portion. He did not believe the asset would be shut down. Mr. Yuan discussed the disadvantages of Option 2 and then Option 3's advantages and disadvantages. Vice Chair Johnston recalled talking to both AT&T and Google Fiber in 2016 and they were not interested. He did not expect the ISPs to act more positively now than 6 years ago. Mr. Yuan showed a cost comparison chart of the 3 Options. He stated the Option 2 model was built assuming aerial and the numbers would have to be rerun for underground. He stated aerial was the areas of lowest cost and highest density, but in underground areas with higher demand, the construction cost would go up as well and offset the savings. Commissioner Forssell questioned if the total cost of $20M would be split differently between the fiber and electric funds depending on which of the 3 options. Mr. Yuan stated for Option 2, $20M would be allocated but the number of customers may be less for underground versus aerial. There was discussion about this. John Honker, Magellan Principal, expanded on Option 2 as a way to start with fiber to the home rather than all at once with Option 1. There will be about $20M for a first phase of FTTP. He explained the options for phased deployment, showing a map of lowest-cost, highest-density areas and where AT&T fiber is reported based on survey results. He detailed the various areas on the maps and what the deployment options were in those areas. He felt the risk to the City is lower with Option 2 because there is no debt service attached to the fiber fund, which creates a more economical build that could potentially withstand lower take rates and also gives some opportunity to get into the market in a big way. Commissioner Smith believed there were at least 28 cities in the State of California with municipal FTTP service and questioned that. Mr. Honker stated a number of cities have started the process on a limited basis but none have built out to 100% of the city. Commissioner Smith stated there seemed to be fear about the City's ability to do this business. The City knows the residential side from electrical. The fiber is just one aspect, and partnering seems logical. He asked if the analysis showed the minimum possible take rate to be much higher than 25%. Mr. Honker stated the analysis came to around 40% after discounting for execution risk and inflation contingencies. Utilities Advisory Commission Minutes Approved on: December 7, 2022 Page 16 of 19 Commissioner Smith felt that was an important statistic and stated 25% represents the bare minimum. The citizen population is keenly interested in getting this done. For Option 1 or 2, the entire cost of the build, inflation, interest rate will be more. He liked that Option 1 forces building and bringing customers on at a take rate that can support the payments. He liked that Option 2 spends the money available today first and gets to the playing field. He suggested, if both inflation and interest rate costs are too great a burden to accept at this time, accepting Option 2 as a starting position and then in a year or two when there are better statistics and understanding as to how to run the business, reintroducing Option 1 for some type of revenue bond. Commissioner Forssell asked how many of the 740 deposits are being hit in the map under the areas of highest demand scenario. Mr. Honker stated the 740 deposits were distributed through the areas. Any areas that had less than 5 deposits were not considered in the analysis. There are about 350 in the areas of highest demand scenario, about half of the deposits. Commissioner Scharff also asked about starting with Option 2 and continuing to roll on if it is going well. Mr. Honker stated that assuming things are going well with the first phase, additional financing would happen and may create some opportunity, having a going concern business at that point. Maybe the fiber facility could stand on its own at that point because it has assets, revenues, and a track record. It would potentially open up more financing opportunities to mitigate some of the interest rate risk that is out there today. Commissioner Scharff wondered about the fear of AT&T, if it was a fear of being the third player. Mr. Honker stated there are not a lot of scenarios with 2 fiber competitors in the same market. The fear may be unsubstantiated, but it would be a substitute product in the market that could lower take rates. The other features may still influence people to buy from Palo Alto Fiber rather than AT&T, but the core product is very similar. There was further discussion about customers with AT&T service. When asked how long it would take to have fiber in people's homes if the City Council approved this immediately, Mr. Honker stated a conservative timeline would be 18 to 24 months. Commissioner Scharff believed that in that time, AT&T would have started moving into more of the green areas on the map. There was discussion about the best starting areas. Council Liaison Cormack believed this conversation and the map would be very important when the Council makes a decision. She encouraged staff to talk about the advantages and disadvantages when bringing this forward to the Council. Commissioner Forssell referenced the study showing very few people interested in faster upload speeds. She felt an indication of whether people have good broadband available is important, Utilities Advisory Commission Minutes Approved on: December 7, 2022 Page 17 of 19 instead of being solely focused on fiber. She felt the goal was not to win against other providers but for everyone in Palo Alto to have access to good-quality broadband. She was not interested in Option 1, which seems too risky. She wanted to see areas of need for Option 2. She also wanted a better understanding of how Internet works in multifamily buildings as multifamily housing is concentrated in certain areas of the city and that could affect the conversation. Vice Chair Johnston did not feel Option 3 moved toward the goal of getting high-speed broadband service to everyone in Palo Alto. He stated after listening to the discussion, he favored Option 2 with some additional thinking about where to start the build-out. Commissioner Metz wanted clarification that all the cities in California delivering residential high- speed Internet were partnering with an ISP. Mr. Yuan stated those partnerships are in targeted areas, not a full citywide deployment. Commissioner Metz referred to previous research that there is strong community support and the majority of residents have unbundled Internet from cable. He favored Option 2 and possibly in parallel partnering with a service provider. There is nothing to prevent accelerating this later. Chair Segal questioned when the electrification projects might start and also wondered why no city in California is doing what Palo Alto is proposing. Mr. Honker stated in almost every other state without restrictions, cities are providing service. Labor costs being higher has been a recurring theme from other cities that have considered or started to deploy FTTP. Mr. Batchelor stated there was not yet an estimate on when electrification would begin. Chair Segal stated switching over is not simple for everyone. If the goal is to get broadband to everyone, the areas of AT&T fiber reported would be the last ones to look at. After the discussion, she favored Option 2 and felt Commissioner Scharff's idea of free Internet to incentivize was intriguing. Commissioner Scharff stated he felt the Commission did not need to decide immediately about where to go but about which option. His concern was to demonstrate a viable business. Once there is a viable business, then Internet can be provided for those who do not have it. If it is not a viable business to start with, the whole thing will fall apart and will never go through the whole city. He made a motion to recommend Option 2. Vice Chair Johnston seconded the motion. Commissioner Forssell wanted to define Option 2 as having additional decisions to be made, with a more limited initial build-out that does not require bond financing. Utilities Advisory Commission Minutes Approved on: December 7, 2022 Page 18 of 19 Commissioner Scharff stated that going with Option 2 meant staff would come back several times to discuss the details. It is not a business plan fleshed out; it is a decision not to go for bond financing and to use the money already available. Mr. Yuan stated Option 2 is to have a phased approach without any bond financing. The $20-M is not fixed and more analysis is needed. Commissioner Metz favored the motion of Option 2 but wanted to highlight the ISP ingredients in Option 3 because that has not been discussed previously. Mr. Yuan felt that contracting out the ISP service part would come with the outsourcing model for Option 2. Vice Chair Johnston did not want to see the ISP be a condition of moving the project forward. Commissioner Smith stated voting Option 2 pushes the project forward, recommending to Council to spend the available money first, but he did not want to restrict the City Council or the individuals who run the business on how to run the business efficiently and economically. Chair Segal stated Option 2 does not even decide between which phased approach is recommended and she was struggling with whether to recommend fiber at all. Commissioner Forssell agreed with the motion as presented. Commissioner Smith did not agree. He questioned what happens in 2 years' time when interest rates collapse and the $140M investment is now $80M from an economics perspective. He felt the original Option 2 the way it was drafted in the packet seemed appropriate and did not think it was in the Commission's purview to direct Council how to fund a recommendation. There was more discussion about the language of Option 2. Commissioner Scharff amended the motion to say, "Use $34M from the Fiber fund and $13M from the electric fund to build the fiber backbone and build phase 1 of the FTTP distribution network in a phased approach." ACTION: Commissioner Scharff moved Staff recommendation that the Utilities Advisory Commission (UAC) approve a recommendation that Council recommend building the fiber backbone and the following option for Fiber-to-the- Premises (FTTP): Option 2. Build fiber backbone and FTTP under a phased approach without new bond financing. Use $34M from the Fiber fund and $13M from the Electric fund to build the fiber backbone and build phase 1 of the FTTP distribution network in a phased approach. Seconded by Vice Chair Johnston Utilities Advisory Commission Minutes Approved on: December 7, 2022 Page 19 of 19 Motion carries 6-0 with Chair Segal, Vice Chair Johnston, and Commissioners Forssell, Metz, Smith, and Scharff voting yes. Commissioner Bowie absent COMMISSIONER COMMENTS and REPORTS from MEETINGS/EVENTS None FUTURE TOPICS FOR UPCOMING MEETINGS: Commissioner Metz asked what issues Grid Modernization and the Resiliency update would address. Dean Batchelor, Utilities Director, stated Grid Modernization was to give an update on what was found by the consultant hired to do an overview of the system. It is mostly geared to the system and would touch on some issues at a high level. He stated the Resiliency update was about looking at resiliency around micro gridding and potential correlation with modernization and resiliency. NEXT SCHEDULED MEETING: December 7, 2022 Meeting adjourned at 10:07 p.m. Respectfully Submitted Jenelle Kamian, Program Assistant City of Palo Alto Utilities