HomeMy WebLinkAboutStaff Report 2096City of Palo Alto (ID # 2096)
Finance Committee Staff Report
Report Type:Meeting Date: 11/15/2011
November 15, 2011 Page 1 of 2
(ID # 2096)
Summary T itle: Update Report on Electric Undergrounding
Title: Update Report on the Electric Overhead to Undergrounding Conversion
Program
From:City Manager
Lead Department: Utilities
Recommendation
This is an update report on the Electric Overhead to Underground Conversion Program for the
Finance Committee study session. No committee action is required.
Executive Summary
The purpose of this report is to provide information to the Finance Committee on the Electric
Overhead to Underground Conversion Program for the study session. Attached are two
previous UAC reports that were prepared by staff on the undergrounding program. These
reports provide background information, current status of the program, options for continuing
the current program, and an option for accelerating the program. Included in the report are
rough cost estimates for the various program options.
Staff will be returning to Council with a recommendation on a process to engage the
community in the discussion about the future plans for the Electric Overhead to Underground
Conversion Program.
Attachments:
·-a:Attachment A_UAC Underground Report -Sept 2011 (PDF)
·-b:Attachment B_City Map of Underground Conversion Areas (PDF)
·-c:Attachment C_UAC Undergrounding Report -Jan 2010 (PDF)
·-d:Attachment D_Excerpt of Draft UAC Minutes from September 7, 2011 (PDF)
Prepared By:Tomm Marshall, Assistant Director
Department Head:Valerie Fong, Director
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November 15, 2011 Page 2 of 2
(ID # 2096)
City Manager Approval: ____________________________________
James Keene, City Manager
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1
MEMORANDUM
TO:UTILITIES ADVISORY COMMISSION
FROM:UTILITIES DEPARTMENT
DATE:SEPTEMBER 7, 2011
SUBJECT:Report on the Status and Future Alternatives to Consider for Completion of the
Electric Overhead to Underground Conversion Program
_____________________________________________________________________________
The purpose of this report is to present options for changes to the Electric Overhead to Underground
Conversion for review and discussion by the Utilities Advisory Commission (UAC). This report is a
follow up to the status report presented to the UAC on January 6, 2010.
EXECUTIVE SUMMARY
On January 6, 2010, staff presented to the UAC a report on the status of the overhead to underground
conversion program and alternatives for continuing the program. That report contained background
information on the history of the program; benefits and disadvantages of underground electric
facilities; how underground districts are established, constructed, and funded; and alternatives for the
future of the program and is included with this report as Attachment B.
This report provides data on three alternatives for the Underground Program:continue the program on
the current time line, discontinue the program, or accelerate the completion of the program. The report
also provides some options for possible funding sources for the program. Undergrounding of the 60kV
transmission system and the overhead lines in the foothills is not included in this report; those poles
will remain in place.
BACKGROUND
Historically, approximately 2% of the annual electric revenue has been used for funding an
undergrounding program in an underground district,which typically takes three years to complete.
The undergrounding program was started in 1965 and approximately 46% of the City has been either
undergrounded through overhead to underground conversion or was originally developed with
underground utilities.
Most of the areas of the city that were converted from overhead to underground were considered
General Public Interest and Benefit Undergrounding (see Attachment B for definition) projects and
focused on highly traveled areas and business districts.Due to this status, AT&T reimbursed the City
for the cost of installation of their substructures.
As reported in January 2010, most of the remaining undergrounding will be in areas that are 100%
residential neighborhoods. The underground tariff under which AT&T operates,California Public
Utilities Commission (CPUC)Rule 32 (A)1, does not require AT&T to pay for telephone substructure
work in most residential neighborhoods.The funding restrictions in this tariff mean that any additional
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costs associated with AT&T work due to undergrounding of electric facilities will have to be funded
by the City and its customers. The funding change will increase the undergrounding substructure costs
by 20% and the overall construction costs by 10%.
In the past, AT&T funded its substructures in a small number of residential areas even though AT&T
was not strictly required to under the tariff. However, AT&T has indicated in discussions with Staff
that it will strictly follow the tariff in all future undergrounding projects.
It should be noted that the CPUC has not established contribution rules for cable TV so Comcast is still
required to fund its share of the undergrounding.
STATUS
Approximately 46% of the City’s electric, telephone, and cable systems are underground, the majority
in commercial areas of the city. Approximately 2,400 residences have been converted from overhead
to underground service and all new housing developments are constructed with underground utility
facilities.The overhead lines for approximately 14,050 homes remain to be undergrounded and the
current program undergrounds facilities for approximately 150 to 200 homes per Underground District.
It should be noted that an underground electric system has a design life of 40 to 50 years. While the
conduit and other substructure should last well beyond this timeframe, the electric cable and equipment
needs to be replaced about every 50 years. Currently, staff needs to rebuild one district each year at an
annual cost of up to $1.9 million to maintain an appropriate replacement cycle.
CAPITAL COST OF UNDERGROUNDING
The cost to complete the undergrounding of the entire city, excluding transmission lines and the
foothills, is estimated at present value to be $281 million. The Electric Utility would be funding
approximately $155 million of the cost, AT&T’s share is $28 million, and Comcast’s share is $28
million of the total. Property owners would be responsible for the remaining $70 million of the total
cost as they are responsible for the cost of conversion of their electric service from overhead to
underground. This is typically in the range of $5,000 to $10,000 per home, depending on the amount
of work required or desired by the customer.Table 1 shows a breakdown of the typical cost of
undergrounding per home.
If the City proceeds with the program at the present rate of one district every 2-3 years, it is expected
to take more than 70 years to complete the undergrounding of the entire city. The Capital and
Operation & Maintenance (O&M) Funding requirements for the Overhead to Underground Conversion
program are presented in Figure 1 (on page 6) and Figure 2 (on page 7).
Category Per
House
Total
Remaining
Approximate Total Cost $20,000 $281,000,000
Electric Facilities (55%)$11,000 $155,000,000
AT&T Substructures (10%)$2,000 $28,000,000
Comcast Substructures (10%)$2,000 $28,000,000
Customer’s Service Conversion (25%)$5,000 $70,000,000
Table 1: Typical breakdown of the costs of Overhead to Underground Conversion Projects
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COMPARISON OF OVERHEAD AND UNDERGROUND ELECTRIC SYSTEMS
The current makeup of the electric system is 54% Overhead and 46% Underground. The information
in Table 2 compares some of the key characteristics of the two systems on an annual basis:
Existing System
Description 54% Overhead 46%
Underground
100%
Underground
(Excluding 60 kV
& Foothills)
Difference
Capital Cost to maintain
Existing System (i.e. system
replacement, etc.)
$2,000,000 $1,900,000 $4,300,000 + $400,000
Operation and Maintenance
Cost $3,900,000 $3,700,000 $9,000,000 + $1,400,000
Reliability -total Customer
Minutes of Interruption for
FY 2011
1,557,311 334,874 728,000 1,164,185
reduction
Table 2:Overall annual cost of ownership of the electric system. Costs for “Existing Overhead”and “100%
Underground”include transmission line replacement projects.
Conversion of the remaining overhead system to underground would result in an annual increase in
Capital Cost of $400,000 and O&M cost of $1.4 million. Based on FY 2011 outages, the conversion
of the remaining overhead system to underground (excluding the foothills and 60kV lines)could result
in a reduction of 61% in the total customer minutes of outage.
FUTURE OPTIONS FOR PROGRAM
Staff has reviewed several options for the undergrounding program:
Option 1: Discontinue the program
There are costs other than the initial capital cost to place overhead facilities underground that need to
be considered in the decision to continue the program. These include maintenance, inspection,
replacement, and reliability. A comparison of the costs of Overhead and Underground electric systems
is provided later in this report and is summarized in Table 2.
Discontinuing the program could result in an immediate decrease in rates of up to 1% (amount
budgeted to fund this program). There would also be savings to the Electric Fund in later years due to
a reduction in underground equipment that needs to be replaced.
Option 2: Proceed at the current rate of construction under existing rules
Staff will continue to work with AT&T in finding potential non-residential areas for undergrounding
that qualify under Rule 32 (A)1. Once these areas are exhausted, reimbursement for AT&T’s
substructures would cease.At that point the program would be discontinued.
Option 3:Pursue CPUC rule change
In order to continue the undergrounding program as in the past, the City could try to obtain a CPUC
rule change that permits full cost recovery by AT&T and Comcast and appropriate reimbursement by
the City for AT&T’s and Comcast’s substructure costs. If a CPUC rule change is successful, then the
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remaining areas can be undergrounded in approximately 70 more years if conversion is done at a rate
of one Underground District per year.
It should be noted that seeking a CPUC rule change is a very complex process, and would require
significant time and a budget for dedicated legal resources. If this process is undertaken, the City
would need to align itself with other municipally owned utilities in California and it could be years
before any result is obtained, with no guarantee that the endeavor would be successful.
Option 4:Pursue AT&T surcharge from residents for AT&T Costs
In order to continue the program with AT&T participation, the City could request that AT&T pursue a
surcharge on their customers in the city to pay for the undergrounding costs. The funds collected
through this surcharge would be used to replace those reimbursed to the City under CPUC Rule 32
(A)1 and continue the undergrounding program as its current rate. This option puts the burden of
collecting the funds on AT&T and would impact only those residents who utilize AT&T land based
communications lines, which is shrinking due to increased use of wireless communications.The
amount of the surcharge would be based on the scope and schedule of future undergrounding projects.
Just as in Option 3, this could be a very complex process and require significant staff time and budget
to achieve.
Option 5:City funds costs formerly covered by AT&T
Continue the program with the Electric Fund funding the Electric cost, Comcast funding its costs,and
the City or the property owners paying the telephone substructure costs. This program would be
continued at the current funding rate.
Pursuit of Option 5 could be done in several ways, each of which would require additional legal and
feasibility research before moving forward. These include:
Assessment Districts –Establish assessment districts that match the underground districts. The
properties within a given underground district would be the only ones assessed for these costs.
Rate increase or fixed charge for all customers –The cost would be distributed to all electric
customers. An average rate increase or a fixed charge for 30 years equivalent to $32 (today’s dollars)
per year per customer would be needed to cover these costs.
Rate increase or fixed charge for residential customers only –The cost would be distributed only to
residential customers, as these are the areas where AT&T has indicated that it will not reimburse the
City. An average rate increase or a fixed charge for 30 years equivalent to $38 (today’s dollars)per
year per customer would be needed to cover these costs.
Bond financing –Pursue financing through city-issued bonds. Bond financing could cost $2.5 million
over the next 30 years.
Depending on which funding method is used,those that have already had their areas undergrounded
would not be assessed additional charges to cover costs formerly paid by AT&T. To date, a majority
of the funds collected for the undergrounding program have come from commercial customers,and
these funds have been primarily applied to the electric systems that serve commercial customers as
they comply with CPUC Rule 32 guidelines. In addition, there are some residential areas that directly
benefitted from the current program.
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ACCELERATION OF PROGRAM FOR EARLIER COMPLETION
Any of the options described above could be accelerated. At its current rate of construction,staff
estimates it will take 70 years to complete the undergrounding of all overhead facilities in the city. In
order to complete the program over a 30-year period, additional funding is required to fund the electric
substructures in addition to any costs associated with paying for AT&T substructures. These funding
options include:
Assessment Districts –Assessment districts could be established that match the underground districts.
The properties within a given underground district would be the only ones assessed for these costs.
Rate increase for all customers –A rate increase equivalent to an average of $210 per customer per
year for 30 years would be required to fund an acceleration of the program. This includes costs
associated with paying for AT&T substructures, but does not include the individual service conversion
cost (ranges from $5000 to $10,000) that each property owner would pay to connect to the new
underground system.
Rate increase for residential customers only –A rate increase equivalent to an average of $249 per
customer per year for 30 years would be required to fund an acceleration of the program. This
includes costs associated with paying for AT&T substructures, but does not include the individual
service conversion cost (ranges from $5000 to $10,000) that each property owner would pay to connect
to the new underground system.
Capital Costs
0
2000
4000
6000
8000
10000
12000
14000
16000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63
Years
In $000 Dollars Current (70 yrs)
Discontinue
Accelerated (30 yrs)
Figure 1:This chart compares the annual capital required if we discontinue the undergrounding program,
continue at our current rate (70 year completion), and continue at an accelerated rate (30 year
completion). Dollars are not escalated (today’s dollars).
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O&M Annual Expense
0
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6000
8000
10000
12000
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61
Years
In $000 Dollars
Current
Discontinue
Accelerated (30
Years)
Figure 2:This chart compares the annual O&M required if we discontinue the undergrounding program;
continue at our current rate (70 year completion);and continue at an accelerated rate (30 year
completion).Dollars are not escalated (today’s dollars).
Cumulativ e Capital Cost
0
100000
200000
300000
400000
500000
600000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63
Years
In $000 Dollars Current (70 years)
Discontinue
Accelerated (30 years)
Figure 3:This chart shows the cumulative capital required if we discontinue the undergrounding program;
continue at our current rate (70 year completion); and continue at an accelerated rate (30 year completion). Dollars
are not escalated (today’s dollars).
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Cumulative O & M Expense
0
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200000
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600000
700000
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61
Years
In $000 Dollars
Current (70 Years)
Discontinue
Accelerated (30 Years)
Figure 4:This chart shows the cumulative O&M required if we discontinue the undergrounding program;
continue at our current rate (70 year completion); and continue at an accelerated rate (30 year completion). Dollars
are not escalated (today’s dollars).
The charts in Figures 3 & 4 show the cumulative effect on cost of the three alternatives over time.
Accelerating the undergrounding program could result in an extra $200 million in Capital Cost and
$100 million in O&M expense when compared to the current rate of construction.
NEXT STEPS
A recommended next step is to obtain public opinion on the different options and the overhead to
underground program in general. This could be accomplished through phone, mail, or online surveys;
social media; town hall meetings; or during Council meetings. The fundamental questions to be
answered are:
·Should CPAU continue with program?
·How much are customers willing to pay to continue program?
·How should future projects be funded: rate increases, bonds, special assessments, other
methods?
Staff will return at a future date with a report on the public’s opinion.
RESOURCE IMPACTS
Funding and staffing needs, as a part of, and a result of, the Overhead to Underground Conversion
Program will be impacted by the future policy decisions on the direction of the program.
The program cannot be completed in 30 years with existing resources. Initially acceleration of the
program would require the addition of 3 Engineers and 1 Engineering Tech/Estimator. Operations
would need 2 inspectors initially and one 4-man crew for construction of projects in year 3 of initiating
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the undergrounding program when electrical construction commences. Additional resources may be
required in subsequent years.
POLICY IMPLICATIONS
This project supports Utilities’ Strategic Objectives C1 –Provide Reliable Service and BP3 –Replace
infrastructure before the end of its useful life.
ATTACHMENTS:
A:Map -Existing Underground Districts
B:Staff Report to the UAC dated January 6, 2010 on Current Status and Future Alternatives to
Consider for Continuing the Electric Overhead to Underground Conversion Program (without
attachments)
PREPARED BY:PATRICK VALATH, Management Specialist
TOM TING,(Acting) Electric Engineering Manager
REVIEWED BY:TOMM MARSHALL,Assistant Director, Engineering
APPROVED BY:__________________________
VALERIE O. FONG
Director of Utilities
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DRAFT
UTILITIES ADVISORY COMMISSION MEETING
EXCEPTED MINUTES OF SEPTEMBER 7, 2011
NEW BUSINESS
ITEM 1: DISCUSSION: Report on the Status and Future Alternatives to Consider for Completion
of the Electric Overhead to Underground Conversion Program
Assistant Director Tomm Marshall introduced Senior Electrical Engineer Tom Ting, who provided a
presentation on the information contained in the written report.
Chair Foster opened the floor to clarifying questions from the commissioners.
Commissioner Eglash asked if other cities do undergrounding, or have overhead systems, and
does it depend on if it's a new development. Marshall responded that underground utilities are
required in new developments in Palo Alto and other cities, but PA has many older neighborhoods
that would need to be converted from overhead to underground.
Commissioner Melton asked for clarification on prior information regarding funding the AT&T costs.
Could Utilities pay for these costs or would they need to come from the general fund? Marshall
responded that he would need to clarify with the City Attorney’s office, but if they cannot be
collected from rates, there may be other ways, such as assessment districts. Commissioner
Melton asked if every property owner must agree to an underground district and how do you work
with customers who refuse conversion. Marshall stated that the decision on an underground
district is the Council’s. Staff will survey customers in an underground district on their level of
interest and provide the results to Council who make the final decision. Once established, all
customers must convert from overhead to underground service.
Commissioner Waldfogel asked if the $5000-$10,000 cost of conversion is a cost that the
homeowner has to pay. Marshall responded this is correct. Commissioner Waldfogel asked if the
substructures work was done concurrently. Marshall stated that the cost estimates are based on
joint trench construction which provides significant savings on costs. The primary cost of the work
is digging the trench and restoration. Commissioner Waldfogel stated that if AT&T does not
participate in the undergrounding with the other utilities it could put them at risk for a higher cost
should there be a City rule change that requires undergrounding of facilities in the future. Marshall
stated they would likely fall back to the CPUC rules on undergrounding.
Public Comment
Jeff Hoel asked why anyone would do an underground district if the cost to maintain it was higher
than aerial systems. The current report indicates a 10% AT&T, 10% Comcast, and 80% CPAU
and customer split. It was previously reported that cost was split into thirds between the three
utilities.
Gary Lundgren recommended accelerating the undergrounding program. He recommended not
pursuing the option to change a rule at the CPUC as it would be too costly for legal fees. He stated
that the AT&T cost was only 10% of the cost so the City or customers should pay that. He also
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noted that it is a good time to do undergrounding projects as there is the possibility of getting
federal stimulus grants and installation costs can be low in this economic environment.
Herb Borock noted that the useful life of an undergrounding is identified as 30-40 years in one
report and 40-50 years in another. He stated that it should be at least 50 years. He asked who
paid for the Electric Fund’s share of the costs – residents, businesses, or all customers. He stated
that the rebuilding of underground districts delays the construction of new districts. These should
be done in addition to the new projects. He suggested an alternative, which we may not like, is to
underground just the electric service and retain the AT&T lines on the aerial poles. He stated that
the main concern is the equity with the entire City paying for the undergrounding in certain areas.
Commissioner Discussion
Chair Foster asked for clarification on the split of costs between the three utilities. Marshall stated
that the 60-20-20 split that was previously reported was only for the substructures. It did not
include the cost of electrical facilities.
Commissioner Eglash stated there is a question of equity and fairness across the City. Residents
appreciated the aesthetic benefit and any decision to stop leaves some with and some without. A
decision to discontinue the undergrounding program may need to be brought to a vote of the
people. He is struck by the cost of completing the program ($281 million) and ongoing
maintenance. He does not see a sensible way to proceed given these costs, but we need to
involve public in discussion.
Commissioner Keller was struck by the cost and concerned about the equity issues. She stated
we should try to quantify the value of the benefits – property value, safety (fire, etc.), improved
reliability; less exposure to EMF’s – noted in the report from January 2010, and maybe ask real
estate professionals for advice to better compare the costs and benefits.
Commissioner Waldfogel asked what is or was the rule that required undergrounding at homes.
Marshall replied that there was a rule that required boxes be placed in the sidewalk and that
services be underground, but this was changed about 10 years ago since facilities were in wrong
place and had to be abandoned.
Commissioner Melton agreed with speaker Lundgren not to pursue any changes with the CPUC.
He stated that we need to proceed under our existing rules. He is torn between cost and desire to
have facilities undergrounded and felt that it would be best to put the alternatives before the public
to decide which direction to move in. We should move as quickly as we can to a decision.
Commissioner Keller stated she is not necessarily a proponent of undergrounding, but wants to
see benefits quantified. She also felt that we should look at how else we could spend the money
needed for this program.
Commissioner Waldfogel stated that the accelerated program would cost $17.50/month per
customer so should show the public this as it may be affordable.
Commissioner Eglash asked how much of system is already underground. Marshall stated half of
city, but only a small amount of residential areas.
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Commissioner Melton stated that the remaining areas to be undergrounded are residential and
primarily a residential issue. It is not just $17.50 per month per customer, but also the cost of
converting their services.
Commissioner Eglash stated that approximately half of the city has underground facilities which
should be kept in mind in terms of equity. Marshall stated that some of these facilities went in
underground when the area was developed and that a majority of the money for undergrounding
has come from business customers, collected through the rates, who make up 80% of our revenue.
Commissioner Cook disagreed with AT&T’s position that the residential areas were not of public
benefit, felt that we should continue the program with all customers paying for cost, we should not
vote to discontinue the program, and advocates moving forward with the accelerated program.
Commissioner Keller asked if we always know that maintenance cost was higher for underground
systems. Marshall replied yes, this was not a surprise as this was noted in reports in the 1960’s.
He also mentioned that the old cables lasted 30-40 years, but new ones are expected to last 40-50
years.
Commissioner Keller felt that we should sit back and reassess for residential areas. The fact that it
was a good idea in the past is not a reason to continue now.
Chair Foster requested clarification on costs. All customers would pay $230 (if paid by residential
customers only) per year for 30 years and those being undergrounded would also have to pay to
underground their services. Marshall stated yes.
Marshall stated that we will return to UAC after discussions with Finance Committee.
Commissioner Melton wanted to go on record that the UAC is in support of staff pursuing a survey
with the public with a sample size large enough to adequately represent how the community feels
about this item.
Commissioner Keller would like the opportunity to review the questions prior to starting the survey.
Chair Foster would like to see the underground program move forward but is cognizant of the cost;
he is supportive of surveying customers to try to reach as many people as possible and asks that
we not rely on getting comments at a Council meeting. He realizes that $210 (if paid by all
customers) per year is not an insubstantial sum of money.
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