HomeMy WebLinkAbout1996-04-18 City Council (24)BTTDGET 1996-98
City of Palo Alto
City Manager’s Report
TO:HONORABLE CITY COUNCIL
FROM:CITY MANAGER DEPARTMENT: UTILITIES
AGENDA DATE: April 18, 1996 CMR:214:96
SUBJECT:BUDGET ISSUE: Proposed Electric Fund Calaveras Reserve
Policy
REQUEST
This report requests that Council approve the proposed financial policy for the Calaveras
Reserve to strengthen the Electric Utility’s competitive position under deregulation. The
proposed policy substantially extends the life of the Calaveras Reserve. It establishes a
target level for the reserve which will be reviewed annually and, if appropriate, revised
with Council approval. The Reserve balance would be depleted gradually over an
extended period, when the Electric Utility is predicted to face competition for customers.
Using this reserve as a source of funds will reduce the need to raise the City’s retail
electric rates in the future for the purpose of offsetting potential stranded costs associated
with the Calaveras Hydroelectric Project.
RECOMMENDATION
Staff recommends that Council approve the proposed Calaveras Reserve policy described
in this report and reduce the Electric Fund Rate Stabilization Reserve by $15.9 million
and transfer that amount to the Electric Fund Calaveras Reserve effective FY 1996-97.
BACKGROUND
In 1983, the City Council established the Calaveras Reserve in the Electric Fund to help
defray a portion of the annual debt service costs associated with the Calaveras
Hydroelectric Project. Because of its high fixed costs, Calaveras power is easily the most
expensive resource in Palo Alto’s supply portfolio. Recent State and Federal
developments to deregulate the electric industry have reinforced the need to extend the
life of this reserve to help position Palo Alto’s Utility for an era of increasing
competition.
CMR:214:96 Page 1 of 12
POLICY IMPLICATIONS
The existing Calaveras policy does not provide for a target, and depletion of the
Calaveras Reserve is presently anticipated by the year 2002. The proposed policy
provides a target and extends the life of the reserve through approximately FY 2019-20.
The proposed policy links the required balance in the reserve to an amount sufficient to
cover the potential stranded costs associated with the Calaveras Project. In this manner,
the need to raise rates in the future while trying to compete for customers is diminished.
DISCUSSION
Restructuring of the Electric Utility Industry
On December 20, 1995, the California Public Utilities Commission (CPUC) issued its
decision for restructuring California’s electric utility industry. The decision impacts how
electricity is sold, priced, delivered and used. It proposes a timetable to open the
electric utility industry to full competition by the year 2003, while allowing certain large
commercial customers the ability to purchase power from alternative suppliers as early
as 1998.
The CPUC decision introduces a number of new terms and concepts. Exhibit A is a
glossary of some of these terms. Also attached is an excellent pamphlet describing
restructuring of the electric industry.
The CPUC decision allows for investor-owned utilities (IOU’s) to recover 100 percent
of their transition costs, which arise from the industry’s change from a regulated to a
competitive environment. To pay for their above market generation costs, Pacific Gas
and Electric Company (PG&E) and other California IOU’s plan to collect such stranded
costs through a Competition Transition Charge (CTC) which will be an itemized charge
on all customer bills. The CPUC goal is for utilities to recover transition costs before
2003 but no later than 2005.
To strengthen their f’mancial position in a competitive environment, many IOU’s plan to
reduce operating costs, write-off assets, restructure and divest the generation side of the
business, accelerate depreciation, or sell generation facilities before 2005. In this
manner, expensive generation assets may not cause their retail rates to rise to
uncompetitive levels. Standard and Poors has acknowledged that the investor-owned
utilities’ potential ability to "divest" or "write-off" high cost generation assets may lead
to a cost advantage that municipal utilities will not be able to match (S&P, NY:
CreditWire 4-21-94).
CMR:214:96 Page 2 of 12
Although the CPUC does not have regulatory authority to apply its decision to municipal
utilities, most municipal utilities, including Palo Alto, are considering providing
comparable choices for their customers, including direct access and unbundled rates and
services, in a timeframe similar to that outlined for the investor-owned utilities. Given
the anticipated arrival of open competition in the industry, it is prudent for municipal
utilities, such as Palo Alto, to begin paying down their debt more rapidly, while there is
some window of opportunity before full retail wheeling arrives.
Stranded Costs
As the electric industry transitions toward deregulation, many utilities are saddled with
so-called stranded costs-billions of dollars of sunk costs (debt) of generation or
transmission resources with costs above market prices. These investments were made
under the reasonable expectation that customers would continue to buy power from the
local utility. However, under direct access, ratepayers may bypass the utility to purchase
less expensive power on the open market. In this situation, the utility may f’md it difficult
to recoup the costs of these "high priced" assets, since revenues will drop. Furthermore,
if competitors serve lucrative industrial customers, utilities may be left with primarily
residential customers to pay for those stranded costs.
Since the bulk of Palo Alto electric resources arise from wholesale contracts and are not
projects built by the City, the electric utility’s exposure to stranded costs is not as great
as most utilities, particularly the investor-owned utilities. Palo Alto resources such as
Western, the Bonneville Power Administration, and Washington Water and Power have
the potential to result in stranded costs, but the probability of occurrence and the cost
exposure is considered low at this time. Also, Palo Alto’s investment in the California-
Oregon Transmission Project may result in stranded costs; and staff may present a
recommendation next year to address this project. At this time, such cost contingencies
are estimated to be within a range of probability and cost that they could be covered by
the Electric Fund Rate Stabilization Reserve. However, the one generation resource in
Palo Alto’s supply portfolio, which has the potential to result in significant stranded costs,
is the Calaveras Project.
Calaveras Hydroelectric Project
To meet its forecast for electrical power requirements well beyond the year 2000, the
City of Palo Alto entered a long-term agreement in 1982 to purchase power from the
Calaveras Hydroelectric Project. The City’s decision to enter the Calaveras Project long-
term agreement was made in an era of double-digit inflation, when crude oil was
$35/barrel and was forecast to reach $100/barrel by 1990. However, in 1986 world oil
prices dropped substantially and today oil sells near $20/barrel. Because fossil fuel
generated power and other cost efficient power resources on the open market are expected
CMR:214:96 Page 3 of 12
to continue to cost less than Calaveras power for many years, Calaveras power, with its
high fixed costs, presents a potential problem for the City. This Calaveras Reserve
proposal aims to partially remedy this situation.
In 1983, the City Council established the Calaveras Reserve in the Electric Fund to
"apply periodically to the financial obligations of the City arising from its participation
in the NCPA Calaveras Hydroelectric Project." The financial obligations arising from
this project include a commitment by the City to pay its share of debt service costs, as
well as annual operation and maintenance expenses of the hydro facility. The total
project debt service obligation is approximately $1 billion through 2024 and is shared
among nine cities. This financial liability may change to some extent due to refinancing
or restructuring of the debt, but the liability will likely remain through the year 2024
unless the project is sold outright to another party. Also, there is a contractual obligation
referred to as a "step-up" provision for the project participants to assume additional debt,
if a partner city should default on their debt service obligation.
Palo Alto’s actual share of the total debt service obligation (Exhibit B) is approximately
$248 million, and current annual operation and maintenance expenses for the hydro
facility are approximately $1.2 million. These costs make the cost of power from the
Calaveras Project substantially more expensive than other power resources within Palo
Alto’s supply portfolio. More importantly, Calaveras costs are much higher than the cost
of power in the open market. Today the market price for similar wholesale power is
approximately 2 cents to 3 cents per kilowatt-hour, whereas the total cost of Calaveras
power is approximately 10 cents per kilowatt-hour. The wholesale power price in the
open market represents the price at which competitors will probably offer to lure
customers away from the Palo Alto Electric Utility.
When the total cost of Calaveras Power is higher than the market price for power,
pressure exists to raise Palo Alto retail rates to.cover the difference. However, raising
rates in a competitive environment can result in customers bypassing the system, which
can create more need to raise rates. By setting aside funds in the Calaveras Reserve to
offset the "above market costs" of Calaveras, a future retail rate increase which may
cause the overall price of power for sale by Palo Alto to be uncompetitive can be
avoided.
Calaveras Project Stranded Cost Calculation
The potential stranded costs are primarily the fixed obligations for the Project that are
above the cost to purchase equivalent power from the open market. This cost is a net
calculation, which subtracts the expected market value of the Calaveras power delivered
from the actual debt service obligation and other projected fixed and variable costs to
CMR:214:96 Page 4 of 12
operate the hydroelectric facility. This approach takes, into account the value of the
project to the City by placing a market value on the expected output of the project and
comparing that to what the City is actually obligated to pay. The difference represents
potential stranded costs. If the amount is negative, (i.e. Calaveras costs less than
comparable power on the open market), the difference may be referred to as a "stranded
benefit".
Stranded cost calculations are based on a number of variables and assumptions, as well
as information that is fairly certain. For example, the current debt service schedule is
not an estimate but an existing financial obligation. On the other hand, the projected
prices of power supplies on the open market for the next 28 years are highly uncertain.
Staff is basing its market price estimates on a recent forecast performed by Henwood
Energy Services, Inc. for the Northern California Power Agency. Such long-range
forecasts can be highly subjective and inaccurate over time. Recognizing the volatility
of stranded cost estimates, staff has developed alternative stranded cost projections (low,
medium, medium-high, and high), which vary by forecast assumptions for power prices
in the open market. The range of forecast assumptions under different scenarios is very
broad, and the potential stranded cost estimate under the worst case scenario is
considerably higher.
The stranded cost estimates for California Investor-owned Utilities range from a negative
$8 billion to $32 billion (CPUC Decision #95-12-063, page 125). For Palo Alto,
preliminary staff calculations of Calaveras stranded costs indicate a range between a
negative $38 million (low scenario) and $167 million (high scenario) in nominal dollars
for the period 2003-2020. The wide variance in stranded cost estimates only
demonstrates the need for more evaluation and questioning of the underlying assumptions.
However, even if the forecast proves totally in error and the City never incurs stranded
costs, the Calaveras debt service is a real obligation that regardless, requires funding
through rates or reserves. On this basis alone, it is prudent to plan to extend the life of
the Calaveras Reserve.
The estimate for Calaveras stranded costs, on which the Utility’s proposal is based, is
approximately $42.1 million between the period 2003 and 2020. The current forecast
indicates that after 2020 the Calaveras Project will provide stranded benefits and,
therefore, funds do not need to be set aside. $42.1 million in nominal dollars translates
to a net present value of $31.6 million in 2003 dollars and is based on the staff’s medium
scenario for stranded costs. Therefore, the recommended Calaveras Reserve target
balance at the end of FY 2002-03 is $31.6 million. The difference of $10.5 million
($42.1 million-S31.6 million) represents estimated future interest earnings on the
CMR:214:96 Page 5 of 12
Calaveras Reserve, which accrue on the reserve balance at approximately 6 percent
annually. This scenario relies on a median forecast of market prices that escalate
approximately 3.3 percent annually, in combination with other variables such as the
extent of surplus capacity in the Northwest.
Consistent with the original intent for establishing the Calaveras Reserve in 1983, this
reserve proposal funds approximately 26 percent of the Calaveras debt service obligation
between 2003 and 2020, which diminishes the need to raise rates for that purpose.
Although the debt service obligation continues to 2024, after 2020 the Calaveras Project
is currently projected to cost less than the price of power on the open market and
payment of the project’s debt service may be accommodated without raising rates.
Besides helping to position the Electric Utility for competition, establishing a reserve
specifically to cover a large portion of annual debt service obligations will be viewed
favorably by the rating agencies and bond market. This may help maintain or improve
favorable bond ratings and lower interest costs to the City on future revenue bond
f’mancings. Likely beneficiaries include possible Storm Drain and Wastewater Treatment
revenue bond fmancings.
It should be noted that the proposed Calaveras Reserve policy, as described in the
attached memorandum to the Utilities Advisory Commission, has been revised since it
was issued on March 6, 1996. The assumptions related to the output of the hydro facility
have been revised, which changed the stranded cost estimates. This staff report to the
Council contains the updated information.
Proposed Calaveras Reserve Policy
The proposed policy is intended to lessen the need to raise retail rates, when the Palo
Alto Electric Utility is expected to compete with alternative suppliers of electricity. By
accelerating the collection of above market costs associated with the Calaveras Project,
Palo Alto future ratepayers and the City of Palo Alto are favorably affected. The
following components are recommended as guidelines for the Calaveras Reserve policy:
1. Maintain a reserve sufficient to offset potential stranded costs and committed to
repayment of a significant portion of the principal and interest for Calaveras debt service
through 2024.
2. Establish an initial Calaveras Reserve balance of $31.6 million as the target level to
be attained at the end of FY 2002-03. The adequacy of this target level will be evaluated
during FY96-97 and annually thereafter as noted in (4.) below.
CMR:214:96 Page 6 of 12
3. Funds from this reserve may be withdrawn, as needed, to cover stranded costs.
4. Due to the unprecedented uncertainties the industry is facing in the transition to
competition, future revisions to the appropriate level of the target and the estimated
timetable for depletion of the reserve are appropriate. Among the events that may trigger
a recommendation to the Council for an upward or downward revision of the reserve
target and timetable include:
A significant deviation of electric prices from
the underlying forecast of market prices.
Calaveras debt service is restructured/refinanced.
The timetable for achieving market pricing changes.
Underlying assumptions for the projected output of the Calaveras Hydro
facility or other factors are revised significantly.
The fiscal year for achieving the Calaveras Reserve target balance is changed.
Potential stranded costs of other resources are identified and need to be
accommodated in the reserve.
5. To implement this policy, transfer $15.9 million from the Electric Rate Stabilization
Reserve to the Calaveras Reserve at the beginning of FY 96-97.
Next Steps
With issuance of the CPUC order in December 1995, profound changes in the electric
utility industry appear inevitable. The Utility’s Calaveras Reserve proposal is based on
its current understanding of the changes planned for the industry and their potential
impact on Palo Alto. As the industry begins the period of transition to a new market
framework, competitive forces will influence Palo Alto Utility’s business plans and its
underlying assumptions.
Presently there is a need for further review of stranded cost assumptions. This entails
a review and comparison for consistency of the market price forecast assumptions made
by PG&E in calculating their stranded costs with similar forecast assumptions underlying
Palo Alto’s .model for stranded costs.
When staff presented the Calaveras Reserve proposal to the Utilities Advisory
Commission (UAC) for input on March 6, 1996, members of the UAC supported the
proposal with basically one reservation (minutes attached). The UAC suggested that the
target balance for the reserve should be raised to a level closer to the high stranded cost
scenario, to minimize the Utility’s risk if stranded costs exceeded the Utility’s
projections.
CMR:214:96 Page 7 of 12
While this suggestion has merit, staff recommends that this issue be deferred until
additional information is gathered and further analysis is comp!eted. It is staff s intention
to review this subject and the underlying assumptions more comprehensively with the
UAC during the first half of FY96-97. Pending the outcome of this review, a rate
increase may be necessary, if it is appropriate to establish a higher target balance for the
reserve. This issue may be brought to the Council during the interim budget process for
FY97-98.
Some fundamental questions and assumptions related to the stranded cost issue that will
be explored include:
If stranded costs are higher than forecast, what are the negative consequences? What
is our exposure to stranded costs and to what extent, if any might this exposure be offset
by the utility leveraging its wholesale purchasing power to contract for power at a
percentage below the "open market price"? What other options might the City have to
address stranded costs? As a municipal utility, would the City have the option to
implement a Competition Transition Charge or similar charge beyond the timeframe the
CPUC has allowed? Would the Utility’s Transfer to the General Fund be affected if
stranded costs are higher than the amount set aside in the Calaveras Reserve? To what
extent, if any, could distribution system cost savings, revenue, or funds from a reserve
be applied to stranded costs? Is it feasible to pay off Calaveras debt with debt financing
of the Palo Alto distribution system?
If stranded costs are lower than forecast, what is the downside of overcollecting
revenue from ratepayers to fund the Calaveras Reserve ?
There are market dynamics that need to be evaluated. To assist, a forecast will be
developed that projects stranded costs by simulating different levels of customer load
being served by competitors in the open market between 1998 and 2003. In this
transitional phase, it is assumed that a Competition Transition Charge (CTC) will be
collected from Palo Alto customers who elect alternate suppliers.
~, Identify other stranded costs appropriate for transition cost treatment and inclusion
in the Calaveras Reserve.
FISCAL IMPACT
FY96-97: A window of opportunity exists to build up the Calaveras Reserve balance by
transferring approximately $15.9 million of surplus revenue from the Electric Rate
Stabilization Reserve to the Calaveras Reserve at the beginning of FY 1996-97. The RSR
CMR:214:96 Page 8 of 12
has accumulated a surplus primarily due to power cost savings as market prices for power
have continued to drop. It is appropriate to direct these power cost savings towards
payment of Calaveras power costs.
FY97-98: At this time, a rate adjustment for FY97-98 is not proposed. Pending further
review by staff and the UAC on the issue of stranded costs and the appropriate Calaveras
Reserve target level, the Utility will consider the need to recommend a rate adjustment
during the interim budget process for FY 97-98.
ENVIRONMENTAL ASSESSMENT
This informational report does not constitute a project under the California Environmental
Quality Act; therefore, an environmental assessment is not required.
ATTACHMENTS
Exhibit A (Glossary of Terms)
Exhibit B (Calaveras Debt Service Schedule)
"A Close-up Look at Restructuring our Electric Industry" (Pamphlet)
Memo dated March 6, 1996 to UAC
UAC Minutes of March 6, 1996
PREPARED BY: Randy Baldschun, Assistant Director of Utilities,
Administrative Services
DEPARTMENT HEAD APPROVAL:
Jo
Director of Utilities
CITY MANAGER APPROVAL:
City er
CMR:214:96 Page 9 of 12
EXHIBIT A
GLOSSARY OF TERMS
AGGREGATION- A number of customers or customer facilities leverage their combined
loads or sales to achieve a favorable contract with a sole supplier of electricity. A
hypothetical example is Taco Bell may contract with Enron to supply all the Taco Bells
in the country at a price which is lower than the sum of all individual Taco Bell electric
bills.
BYPASS- Describes a direct access situation whereby a customer, in order to lower their
energy costs, chooses to buy power from another supplier rather than from the local
utility. Generally, the local utility would provide distribution service only. However,
in a "total bypass" situation, the customer may have power generation equipment on site
or be able to connect directly to another power source. In this instance, the customer
would not require distribution service from the local utility and the utility’s ability to
recover costs could be adversely impacted.
COMPETITION TRANSITION CHARGE (CTC)- A nonbypassable surcharge collected
by the utility to recover stranded costs during the Transition Phase (1998-2005). The
CTC insures that the utility’s remaining customers will not have to pay for stranded costs
incurred on behalf of those who choose alternative suppliers during the Transition Phase.
Imposition of a CTC is a City Council decision. The fundamental decision to allow Palo
Alto residents and businesses a choice between suppliers will also be determined at the
City Council level.
DEREGULATION- Major regulatory reforms at the State and Federal levels are
restructuring the electric industry in a manner that will substantially reduce regulation of
the power generation function of utility’s. The goal of deregulation is to lower electric
rates for everyone by introducing competition into an industry which has traditionally
been a monopoly,
DIRECT ACCESS- Ability of a power producer or broker to sell directly to the retail
customer. The local utility is no longer the sole supplier of electricity although it remains
the sole distributor of electricity.
DISTRIBUTION- The infrastructure consisting of substations, poles, wires, transformers,
conduit, service drops, meters, etc. that distributes electricity to customers within the
CMR:214:96 Page 100f 12
utility’s service territory. This function will change least under deregulation. The costs
of distribution includes administrative overhead, customer service and billing, operation
and maintenance of the system. For Palo Alto, it includes the interdepartmental services
provided to the Utility such as legal and information services as well as the Transfer to
the General Fund.
NET PRESENT VALUE(NPV)- Measures the time value of money. To do this, a
discount rate or factor is applied to the stream of cash in future years. The discounting
of cash payments to be disbursed over many years helps to arrive at a sum total of cash
that is required at the start. This NPV at the start reflects interest earned on the fund
balance through the years.
NOMINAL DOLLARS- Unadjusted dollars for inflation or actual purchasing power.
Actual money spent. Ignores time value of money and interest that would be earned on
the cash.
RESTRUCTURING- Utilities would no longer be "vertically integrated" monopolies, the
sole providers of generation, transmission, and distribution services. Under
restructuring, these services would become three separate businesses for most utilities.
Generation would become a competitive "commodity" business with customers having the
option to continue to buy electricity from the local utility or avail themselves of "direct
access" and buy power from other suppliers. A competitive electric supply market will
emerge and a power exchange would be created to operate as a wholesale power pool.
RETAIL WHEELING- The act of using transmission and distribution services by a
generation company or broker to sell directly to retail customers. It is the use of the local
utility’s poles and wires to deliver someone else’s power to one of the utility’s customers.
STRANDED COSTS OR INVESTMENT- The cost of generation facilities that produce
electricity at above-market prices. When consumers are provided the opportunity to shop
for electricity, utilities which own or have long-term financial interests in facilities that
produce power at above-market prices may be unable to sell such power and could fred
it very difficult to cover their financial obligations. On the other hand, stranded benefits
refer to estimated dollar savings from generation assets that produce power below market
prices. The difference is the dollar savings.
TRANSITION COSTS- Today’s high costs that result from past decisions under a
regulatory scheme that were made pursuant to the utility’s obligation to serve its
customers. Some of these prior costs and commitments were reasonable and prudent
when approved, but in hindsight are well above mi~rket prices. Most notably includes
CMR:214:96 Page 11 of 12
stranded costs related to power generation and power contracts. The California Public
Utilities Commission has stated that all transition costs will be collected by 2005.
UNBUNDLED RATES AND SERVICES- Traditional utility services include a combined
rate for generation, transmission, and distribution functions. The rate is bundled since
all functional costs are included together. Unbundled rates are separate rates for
generation service, transmission service, distribution service and other itemized services.
In this manner, customers can elect distribution services from one company and
generation services (supply) from another company.
CMR:214:96 Page 12 of 12
Exhibit B (Calaveras Debt Service Schedule)
Calaveras Hydro Debt Service
PALO ALTO ROSEVILLE
FY SHARE ($)SHARE ($)
96’-97 7,004,400 1,980,928
97-98 6,890,280 2,112,925
98-99 6,750,518 2,237,102
99-00 6,633,999 2,368,977
00-01 6,559,776 2,517,690
01-02 6,378,780 2,535,954
02-03 6,645,116 2,641,839
03-04 6,665,452 2,649,924
04-05 8,020,100 1,329,884
05-06 9,380,239 0
06-07 9,495,068 0
07-08 9,528,073 0
08-09 9,528,073 0
09-10 9,564,287 0
10-11 9,600,959 0
11-12 9,792,570 0
12-13 9,840,702 0
13-14 9,893,876 0
14-15 9,893,876 0
15-16 10,010,092 0
16-17 9,742,473 0
17-18 9,823,505 0
18-19 9,913,917 0
19-20 10,012,645 0
20-21 10,120,794 0
21-22 10,223,713 0
22-23 10,174,354 0
23-24 10,037,577 0
TOTAL $248,125,214 $20,375,223
6.a.3
MEMORANDUM
TO:Utilities Advisory Commission
FROM:Utilities Department
AGENDA DATE: March 6, 1996
SUBJECT:Consideration of a Proposed Calaveras Reserve Policy
REOUEST
Staff requests input on a proposed financial policy under development for the Electric
Fund’s Calaveras Reserve. The policy under consideration would establish a target for
the reserve and provide for gradual depletion of the reserve during a 17 year period when
the electric utility is predicted to face competition for customers. Using this reserve as
a source of funds will reduce the need to raise the City’s retail electric rates in the future
for the purpose of offsetting potential stranded costs associated with the Calaveras
Hydroelectric Project.
RECOMMENDATION
This report is informational only. This report was prepared to allow additional time for
the UAC to consider the proposal and to provide staff with initial feedback. This May,
a separate staff report and recommendation on this subject will be presented to the UAC
during the budget process.
BACKGROUND
In 1983, the City Council established the Calaveras Reserve in the Electric Fund to help
defray a portion of the annual debt service costs associated with the Calaveras
Hydroelectric Project. Recent State and Federal developments to deregulate the electric
industry have reinforced the need to extend the life of this reserve to help position Palo
Alto’s Electric Utility in an increasingly competitive era.
POLICY IMPLICATIONS
The existing Calaveras policy does not provide for a target and depletion of the Calaveras
Reserve is presently anticipated by the year 2002. The proposed policy establishes a
target and extends the life of the reserve to approximately FY 15-16. The proposed
policy links the required balance in the reserve to an amount sufficient to cover the
potential stranded costs associated with the Calaveras Project. In this manner, the need
to raise rates in the future while trying to compete for customers is diminished.
~ISCUSSION.
Restructuring of the Electric Utility Industry
On December 20, 1995, the California Public Utilities Commission (CPUC) issued its
decision for the .restructuring of California’s electric utility industry. The decision
impacts how electricity is sold, priced, delivered, and used. It proposes a timetable to
open the electric utility industry to full competition by the year 2003 while allowing
certain large commercial customers the ability to purchase power from alternative
suppliers as early as 1998.
The CPUC decision allows for investor-owned utilities (IOU) to recover 100 percent of
their transition costs (stranded costs) under current rate levels until 2005. Transition
costs result from the industry’s transition from a regulated to a competitive environment.
To pay for their above market generation costs, Pacific Gas and Electric Company
(PG&E) and other California investor-owned utilitys (IOU’ s) plan to collect their stranded
costs through a Competition Transition Charge (CTC) on customer bills. The CTC will
appear as a separate charge on all customer bills.
IOU’s also plan to reduce operating costs, write-off assets, accelerate depreciation, or sell
generation facilities before 2005. In this manner, expensive generation may not cause
their retail rates to rise to uncompetitive levels. Standard and Poors has acknowledged
that the investor-owned utilities’ potential abilit~ to "divest" or "write-off" high cost
generation assets may lead to a cost advantage that municipal utilities will not be able to
match. (S&P, NY: CreditWire 4-21-94)
Although the CPUC does not have regulatory authority to apply its decision to municipal
utilities, most municipal utilities, including Palo Alto, are considering providing
comparable choices for their customers, including direct access and unbundled rates and
services, in a timeframe similar to that outlined for the investor-owned utilities.
The CPUC decision introduces a number of important terms, including direct access and
stranded costs.
Direct Access
Direct access refers to a customer’s ability to buy electricity from alternative power
suppliers and marketers. Under this arrangement, competing power suppliers are
provided access to the electric transmission grid which connects to the distribution
network of the local utility. With direct access, a customer contracts with a power
supplier for the commodity and, in addition, separately pays the local distribution utility
a rate designed to cover the distribution service function only. To provide direct access
requires that a utility’s "bundled." retail rate is "unbundled" between generation,
transmission, and distribution functions. In this manner, utilitys will offer separate rates
for generation service, transmission service, and distribution service. The term bypass
is often used to describe a direct access situation whereby a customer chooses to buy
power from another supplier rather than from the local utility.
Stranded Costs
As the electric industry transitions toward deregulation, many utilities are saddled with
so-called stranded costs-billions of dollars of sunk costs (debt) of generation resources
with costs above market prices. Under direct access, as ratepayers bypass the utility to
purchase less expensive power on the open market, the utility may find it difficult to
recoup the costs of these "high priced" assets since revenues will drop. Furthermore, if
competitors "cherry-pick" lucrative industrial customers, utilities may be-left with
primarily residential customers to pay for those stranded costs.
Since the bulk of Palo Alto electric resources arise from wholesale contracts and are not
projects built by the City, the electric utility’s exposure to stranded costs is not as great
as most utilities, particularly the investor-owned utilities. Palo Alto resources such as
Western, the Bonneville Power Authority, and Washington Water and Power have the
potential to result in stranded costs but the probability of occurrence and the cost
exposure is considered low at this time. Palo Alto’s investment in the California-Oregon
Transmission Project may also result in stranded costs but the cost exposure in not
substantial. At this time, such cost contingencies are estimated to be within a range of
probability and cost that they could be covered by the Electric Fund Rate Stabilization
Reserve. However, the one generation resource in Palo Alto’s supply portfolio which
is expected to result in significant stranded costs is the Calaveras Project.
Calaveras Hydroelectric Project
To meet its forecast for electrical power requirements well beyond the year 2000, the
City of Palo Alto entered a long-term agreement in 1982 to purchase power from the
Calaveras Hydroelectric Project. The City’s decision to enter the Calaveras Project long-
term agreement was made in an era of double-digit inflation in which crude oil was
$35/barrel and was forecast to reach $100/barrel by 1990. However, in 1986 world oil
prices dropped substantially and today oil sells near $20/barrel. Because fossil fuel
generated power and other power resources on the open market are expected to continue
to cost less than Calaveras power for many years, Calaveras power, with its high fixed
costs, presents a potential problem for the City. This Calaveras Reserve proposal aims
to partially remedy this situation.
In 1983, the City Council established the Calaveras Reserve in the Electric Fund to
"apply periodically to the financial obligations of the City arising from its participation
in the NCPA Calaveras Hydroelectric Project." The financial obligations arising from
this project include a commitment by the City to pay its share of debt service costs as
well as annual operation and maintenance expenses of the hydro facility. The total
project debt service obligation is approximately $1 billion through 2024 and is shared
among 9 cities. This financial liability may change to some extent due to refinancing or
restructuring of the debt but the liability will likely remain through the year 2024 unless
the project is sold outfight to another party. Also, there is a contractual obligation
referred to as a "step-up" provision for the project participants to assume additional debt
if a partner city should default on their debt service obligation.
Palo Alto’s actual share of the total debt service obligation (Exhibit A) is approximately
$248 million and current annual operation and maintenance expenses are approximately
$1.6 million. These costs make the cost of power from the Calaveras Project
substantially.more expensive than other power resources within Palo Alto’s supply
portfolio. More importantly, Calaveras costs are much higher than the cost of power in
the open market. Today the market price for wholesale power is approximately 2 cents
to 3 cents per kilowatt-hour whereas the cost of Calaveras power is approximately 10
cents per kilowatt-hour after including fixed costs. The wholesale power price in the
open market represents the price at which competitors will offer to lure customers away
from the Palo Alto Electric Utility.
Calaveras Project Stranded Cost Calculation
The potential Calaveras Project stranded costs are primarily the fixed obligations for the
Project that are above the cost to purchase equivalent power from the open market. This
cost is a net calculation which subtracts the expected market value of the Calaveras power
delivered from the actual debt service obligation and other projected fixed and variable
costs to operate the hydroelectric facility (Exhibit B). This approach takes into account
the value of the project to the City by placing a market value on the projected output of
the project and comparing that to what the City is actually obligated to pay. The
difference represents potential stranded costs.
When the total cost of Calaveras Power is higher than market prices for power, pressure
exists to raise Palo Alto retail rates. However, raising rates in a competitive environment
can result in customers bypassing the system which creates more need to raise rates. By
setting aside funds in the Calaveras Reserve to offset the "above market costs" of
Calaveras, a future retail rate increase of approximately 5 percent can be avoided by Palo
Alto. This is the reason staff proposes to fund stranded costs from a reserve rather than
increase rate levels.
Exhibit C provides an area graph depicting Calaveras stranded cost. It can be noted that
the market price of power is projected to rise above the cost of Calaveras power in
approximately 2016. Recognizing that this is only a projection which will likely be
revised, the significance is that in 2016 Calaveras is forecast to change from a stranded
cost to a stranded benefit and could trigger a rate decrease.
The potential stranded costs associated with the Calaveras Project are calculated based on
a number of variables and assumptions as well as information that is fairly certain. For
example, the current debt service schedule is not an estimate but an existing financial
obligation. On the other hand, the projected prices of power supplies on the open market
for the next 25 years is based on a recent forecast performed by Henwood Energy
Services, Inc. for the Northern California Power Agency. Such long range forecasts
prove to be inaccurate over time and must be updated.
Yet, even if the forecast proves totally in error and the City never incurs stranded costs,
the Calaveras debt service is a real obligation that regardless, requires funding through
rates or reserves.
As indicated in Exhibit B line 21, annual stranded costs are expected until FY2016-17.
For the period FY 1999-2000 through FY 2015-16, annual stranded costs total
approximately $49,683,000 in nominal dollars. This amount is based on an annual
escalation rate of approximately 3.29 % for the market price of energy in the open
market in combination with other variables such as the extent of surplus capacity in the
Northwest. The stranded cost analysis provides a low case (line 26), base case (line 21
or 27), and high case (line 28) scenario for stranded costs that only differ by assumptions
on market prices. Staff used the base case scenario based on a median forecast of market
prices.
As indicated in Palo Alto’s long-range financial forecast (Exhibit D), the stranded costs
are identified as withdrawals from the Calaveras Reserve on line 13 (spreadsheet 1).
Although the potential stranded costs total $49,683,000 from FY1999-00 to FY 15-16,
the amount which needs to be set aside in the Calaveras Reserve beginning in FY 1999-
2000 is $35,712,000 (line 18, spreadsheet 2). The difference of $13,971,000 represents
estimated future interest earnings on the Calaveras Reserve which accrue on the reserve
balance at approximately 6 % annually.
Consistent with the original intent for establishing the Calaveras Reserve in 1983, this
reserve proposal funds approximately 34 percent of the Calaveras debt service obligation
between FY 1999-2000 and FY 15-16 which negates the need to raise rates for that
purpose..
Besides helping to position the Electric Utility for competition, establishing a reserve
specifically to cover a large portion of annual debt service obligations will be viewed
favorably by the rating agencies and bond market. This may help maintain or improve
favorable bond ratings and lower interest costs to the City on future revenue bond
financings. Likely beneficiaries include possible Storm Drain and Wastewater Treatment
revenue bond financings~
Proposed Calaveras Reserve Policy
1. Maintain a reserve sufficient to offset potential stranded costs and committed to
repayment of a significant portion of principal and interest for Calaveras debt service.
2. Establish a target level of $35,712,000 to be attained at the end of FY 98-99. The
target level in successive years will decline in accordance with the projected schedule of
depletion.
3. Withdraw funds from this reserve, as needed, to cover stranded costs, including a
portion of debt service, of the Calaveras Hydroelectric Project. The anticipated period
¯ in which funds would be drawn is FY 1999-2000 through FY 15-16 but may be revised
as indicated below.
4. Due to the unprecedented uncertainties the industry is facing in the transition to
competition, future revisions to the appropriate level of the target and the estimated
timetable for depletion of the reserve may be necessary. Among the events that may
trigger a re-evaluation and possible recommendation for revision of the reserve target and
timetable include:
A significant deviation of electric prices from
the underlying forecast of market prices.
Calaveras debt service is restructured/refinanced.
The timetable for achieving market pricing changes.
Other potential stranded costs are identified that are significant.
5. To implement this policy, transfer approximately $14,000,000 from the Electric Rate
Stabilization Reserve to the Calaveras Reserve at the beginning of FY 96-97. This
amount, when added to the current Calaveras Reserve balance plus accrued interest is
expected to result in achieving the target balance at the end of FY 98-99.
FISCAL IMPACT
The suggested actions are intended to avoid the need to raise retail rates when the Palo
Alto Electric Utility is expected to compete with alternative suppliers of electricity. By
accelerating the collection of above market costs associated with the Calaveras Project,
Palo Alto future ratepayers and the City of Palo Alto are favorably impacted.
An opportunity exits presently to implement this proposal without raising rates. This
proposal requires a transfer to the Calaveras Reserve of existing funds in the Electric Rate
Stabilization Reserve of approximately $14,000,000 at the beginning of FY 1996-97. The
RSR has accumulated a surplus primarily due to power cost savings as market prices for
power have continued to .drop. It is appropriate to direct these power cost savings
towards payment of Calaveras power costs. With this transfer of funds, the RSR balance
is projected to float between the target level and maximuni guideline level as indicated
in the Long-range Financial Forecast, line 17, page 2.
ENVIRONMENTAL ASSESSMENT
This informational report does not constitute a project under the California Environmental
Quality Act; therefore, an environmental assessment is not required.
ATTACItMENTS
Exhibit A (Calaveras Debt Service Schedule)
Exhibit B (Stranded Cost Analysis)
Exhibit C (Stranded Cost- Area Graph)
Exhibit D (Long-range Financial Forecast)
PREPARED BY: Randy Baldschun, Assistant Director of Utilities,
Administrative Services
DEPARTMENT HEAD APPROVAL:
Direc~~Itilities
CITY MANAGER APPROVAL:
[NG
Manager
Exhibit A (Calaveras Debt Service Schedule)
CalaverasHydro Debt Service
PALO ALTO ROSEVILLE
FY SHARE ($)SHARE ($)
96-97 7,004,400 1,980,928
97-98 6,890,280 2,112,925
98-99 6,750,518 2,237,102
99-00 6,633,999 2,368,977
00-01 6,559,776 2,517,690
01-02 6,378,780 2,535,954
02-03 6,645,116 2,641,839
03-04 6,665,452 2,649,924
04-05 8,020,100 1,329,884
05-06 9,380,239 0
06-07 9,495,068 0
07-08 9,528,073 0
08-09 9,528,073 0
09-10 9,564,287 0
10-11 9,600,959 0
11-12 9,792,570 0
12-13 9,840,702 0
13-14 9,693,876 0
14-15 9,893,876 0
15-16 10,010,092 0
16-17 9,742,473 0
17-18 9,823,505 0
18-19 9,913,917 0-
19-20 10,012,645 0
20-21 10,120,794 0
21-22 10,223,713 0
22-23 10,174,354 0
23-24 10,037,577 0
TOTAL .......$248~1251214 $2,0,375,223
1’
ce.ge 1 of 6 EXHIBIT D
LHEFF3
Inflation rate 0%
CaJaveras reserve extended until 2016
Othe" revenues r efle~t Western r~unds
from FY 98/99 to 2003/04
3% RATE DECREASE FOR 97/98
800K decrease in the cost of powe~ starting 98/99 Adopted
1 FISCAL YEAR
2
3 FINANCIAL REV. RESOURCES
4 SALES
5 RATE ADJUSTMENT
6 DISCOUNTSAJNCOLL.ECT.
7 PRORATION IMPACT
8 TOTAL ADJUSTED SALES
9 INTEREST
10 OTHER REVENUE
11 FROM RESERVES
12 RATE STABILIZATION
CITY OF PALO ALTO 02f26,.~36
ELECTRIC UTILITY 01:19 PM
LONG-RANGE FINANCIAL FORECAST
BUDGET AND RATEMAKING PLAN
(S000)
95-96 £6-97 97-98 98-99 £9-00 00-01 01-02 02-03 03-04 04-05 05-06
63693 58825 59446 57987 58123 63860 63768 70809 71258 78437 78604
-4458 0 -1783 0 5754 0 6313 0 7055 0 3144
-275 -275 -275 -275 -275 -275 -275 -275 -275 -275 -275
186 0 74 0 -240 0 -263 0 -294 0 -131
59146 58550 57462 57712 63363 63585 69543 70534 77743 78162 81342
3500 &565 3576 ~227 2989 2807 2677 2633 2685 2758 2671
4560 7857 18,96 1904 2091 20£8 22£5 2328 2566 2579 264~4
11012 10269 3776 3946 0 1877 0 0 0 0 0
TOTAL FINANCIAL RESOURCES 78218 80241 70626 71449 73322 74916 78816 79675 86998 87951 91485
OPERATING EXPENSES
TOTAL FUND OPERATIONS 0 2543 2543 254.3 2543 2543 2543 254,3 2543 2543 2543
MAJOR ACTIVITIES:
19
20
21
22
23
24
25
27
25 TOTAL RESOURCE MANAGEMENT
29 DISTRIBUTION SYSTEM:
30 ADMINISTRATION
31 OPERATION & MAINTENANCE
32 CUSTOMER DESIGN & CONNECTION (CIP)
33 SYSTEM IMPROVEMENT (CIP)
34 TOTAL DISTRIBUTION
35 GENERAL SERVICES:
35 ADMINISTRATION
37 STREET LIGHT O & M
35 STREET LIGHT (CIP)
39 TRAFFIC SIGNAL O & M
40 TRAFFIC SIGNAL (CIP)41 COMMUNICATION O & M
42 COMMUNICATION (CIP)
43 TOTAL GENERAL SERVICES
44 SUPPORT SERVICES
45 CUSTOMER SERVICE
46 METER READING "
47 RATES
48 TOTAL SUPPORT SERVICES
49 TOTAL MAJOR ACTIVITIES
50 TRANSFERS:
~1 GENERAL FUND TRANSFER
;2 CIP TO GENERAL FUND
53 RENT
~4 TOTAL TRANSFERS
~5 TOTAL EXPENSES
;5
~7 NEY REVENUE AVAILABLE
;5 RESERVE FUNDING:
;~PLANT REPLACEMENT
;0 RATE STABILIZATION
~ 1 CALAVERAS
;2 TOTAL RESERVE FUNDING
:3 RECONCILE TO IFAS
!4 TOTAL RESOURCE USE
REVENUE SHORTFALL
;7
"0 RATEPAYER REVENUES
I " REVENUE REQUIREMENTS
2
3 DIFFERENCE (RATE COVERAGE)
RESOURCE MANAGEMENT:
PURCHASE POWER COST 35801 31126 32908 33533 33431 35810 37103 39206 41475 44335 46780
T~C 1219 1~17~17~17~17~17~1~17~1~21~
TOT~ COST OF PO~R ~114 ~8 41~7 42~41~~118 45245 47~8 4~~1 ~
ADMINIS~TION 0 1~195 195 195 195 195 195 195 195 195
SUPPLY ~D DEM~D ASSESSME~21~1~1~1~19~1~19~1~1~19~1~
LEGIS~EGU~ON 1 ~81 81 81 81 81 81 81 81 81 81
~421~~7~~~4~47~7 4~521~56~~
0 639 1150 1150 1150 1150 1150 1150 1150 1150 115032092673280528052805280528052805280528052805
1957 2115 2194 2276 2360 2448 2448 2448 2448 2448 2448
5418 2081 4106 4535 5270 5415 5415 5415 5415 5415 5415
10584 750~10255 10766 11585 11818 11818 11818 11818 11818 11818
0 114 112 112 112 112 112 112 112 "112 112
423 297 297 297 297 297 297 297 297 297 297435861677481838689919497
674 457 457 457 457 457 457 457 457 457 457
150 270 420 165 170 175 175 175 175 175 175
339 238 238 238 238 23~238 238 2~8 2~8 238
85 88 91 94 97 100 100 " 100 100 100 100
2106 2325 1682 1437 1452 1462 1465 1468 1470 1473 1476
398 261 250 250 250 250 250 250 250 250 250280149149149149149149!49 149 149 14913848108108108108108108108108108816555604604604604604. 604 604 604 604
59954 52488 56310 57073 57703 60264 61394 63780 66086 70478 74464
7200 7317 7560 7735 7996 8307 8604 8910 9218 9534 9844
155 112 4 14 0 60 60 60 60 60 6018151815181518151815181518151815181518151815
9170 9244 9379 9564 9811 10147 10444 10750 11058 11374 1168469144642756823269180~70057 72£55 74381 77073 79688 84395 88691
9074 159F:~6 23£5 2269 3265 1962 4435 2602 7311 3557 2794
74 59 58 53 65 68 69 69 69 69 690000114202629951581422341679900015907233722162058189417371582142712541046£074 15£66 2395 2269 3265 1952 4435 2602 7311 3557 2794000000000007821880241706267144973.322 74916 78816 79675 86.£98 87£51 91 485
0 0 0 0 0 0 0 0 0 0 0
RATEPAYER REVENUE AND REVENUE REQUIREMENTS (000S)
59,421 58,825 57,737 57,987 63,638 63,860 69,818 70,809 78,018 78,437 81,617
~ ~ ~ ~ ~ 72.955 ~ ~ 79.688 ~5 88.691
(9,723) (5,450) (10,495) (11,193) (6,419) (9,094) (4,563) (6,264) (1,669)(5,957)(7,073)
2 of 6
26-Feb-s6 CITY OF PALO ALTO
ELECTRIC UTILITY
LONG-RANGE FINANCIAL FORECAST
BUDGET AND RATEMAKING PLAN
($000)
SYSTEM AVERAGE RATE (MILLS/KWH)
RATE CHANGE
ENERGY SALES (GWH)
ENERGY PURCHASES(GWH)
PEAK DEMAND (MW)
NUMBER OF CUSTOMERS
RATE BASE(~
RETURN ON RATE BASE
Ad~opted
95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06
57 57 55 55 61 61 67 67 73 73 76
-7.0%0.0%-3.0%0.0%9.9%0%10%0%10%0%4%
1042 10~5 1046 1052 1054 1054 1052 1063 1070 1072 1074
1097 105~1101 1107 1110 1109 1108 1119 1126 1128 1!31
187 193 197 1£6 198 1£6 198 200 200 200 201
27190 27220 27240 27260 27280 28644 30076 31580 33159 34817 36558
76051 77098 79660 81503 84252 87537 90663 93891 97139 100461 103732
9.60%9.49%9.49%9.4996 9.49%9.49%9.4996 9.49%9.49%9.49%9.49%
RESERVE BALANCES
PLANT REPLACEMENT 2146 2205 2253 2316 2381 2449 2518 2587 2656 2725 2794
RESERVES MINIMUM
RATE STABILIZATION RESERVE
RESERVE TARGETS
RATE STABILIZATION RESERVE
RESERVES MAXIMUM
PLANT REPLACEMENT
RATE STABILIZATION RESERVE
CALAVERAS
12912 11518 11737 11701 12534 12£~6 13722 14516 15517 16373 16..q34
19368 17277 17605 17551 18800 19479 20583 21774 23276 24559 25357
21444 35761 34.339 32891 30236 27672 25074 22497 19299 15558
3262 3491 3575 3884 3771 3906 4101 4306 4521 4747 4985
25823 23036 23473 23402 25067 25972 27444 29032 31034 32746 33809
35712 35712 35712 35712 35712 35712 85712 35712 35712 35712
RES. AVAIL. (Qver Minimum)
RATE STABILIZATION RESERVE 17675 8800 4805 895 1205 -1125 767 924 5737 7115 8263
RES. AVAIL. (Over Tarqet)
RATE STABILIZATION RESERVE
CALAVERAS
11220 3041 -1063 -4955 -5062 -7618 -6094 -6334 -2C~1 -1071 -18~
2383 3973 3815 0 0 0 0 0 0 0 0
RES. AVAIL. (Over Maximum)
RATE STABILIZATION RESERVE
CALAVERAS
4764 -2718 -6932 -10806 -11329 -14111 -12955 -13592 -9780 -9258 -8641
23827 4022 2443 0 -2821 -6476 -8040 -10638 -13214 -16413 -20154
Lge 3 of 6 EXHIBIT D
LHEFF3
Inflation rate 0%
CaJaveras reserve extended until 2016
Other revenues reflect Western refunds.
from FY 98199 to 2003/04
3% RATE DECREASE FOR 97/98
800K decrease in ~ cost of power starting 98/99
FISCAL’YEAR
FINANCIAL REV. RESOURCES
SALES
RATE ADJUSTMENT
DISCOUNTSAJNCOLLECT.
PRORATION IMPACT
TOTAL ADJU STED SALES
iNTEREST
OTHER REVENUE
FROM RESERVES
RATE STABILIZATION
06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15
81944 82096 85605 86461 92565 934~1 100091 101092 102103
0 3284 0 5188 0 5609 0 0 5105
-275 -275 -275 -275 -275 -275 -275 -275 -275
0 -137 0 -216 0 -234 0 0 -213
81669 84968 85330 91158 92290 98592 99816 100817 106721
2498 2313 2115 1968 1882 1865 1920 1879 1882
2695 2804 2816 3008 3046 .8254 3294 3327 3522
91526 93730 94951 98178 99698 105057 106135 107744 112715
48298 49840 51470 53545 55703 57947 60283 62712 65239
2144 2144 2144 2144 2144 2144 2144 2144 2144
59937 61512 63142 65253 67448 69884 72268 74750 77277
195 195 195 195 195 195 195 195 195
1986 1986 1986 1986 1986 1986 1986 1986 1986
81 81 81 81 81 81 81 81 81
62199 63774 65404 67515 69710 72146 74530 77012 79539
1150 1150 1150 1150 1150 1150 1150 1150 1150
2805 2805 2805 2805 2805 2805 2805 "2805 2805
2448 2448 2448 2448 2448 2448 2448 2448 2448
5415 5415 5415 5415 5415 5415 5415 5415 5415
11818 11818 11818 11818 11818 11818 11818 11818 11818
112 112 112 112 112 112 112 112 112
297 297 297 297 297 297 297 297 297
100 103 106 109 112 115 119 123 126
457 457 457 457 457 457 457 457 457
175 175 175 175 175 175 175 175 175
238 238 238 238 238 238 238 238 238
100 100 100 100 100 100 100 100 100
1479 1482 1485 1488 1491 1494 1498 150~1505
250 250 250 250 250 250 250 250 250
149 149 149 149 149 149 149 149 149
108 108 108 108 108 108 108 108 108
76100 77677 79311 81425 83623 86063 68450 90936 93467
TOTAL FINANCIAL RESOURCES
OPERATING EXPENSES
TOTAL FUND OPERATIONS
MAJOR ACTIVITIES:
RESOURCE MANAGEMENT:
PURCHASE POWER COST
TANC
TOTAL COST OF POWER
ADMINISTRATION
SUPPLY AND DEMAND ASSESSMENT
LEG IS/REGULATION
TOTAL RESOURCE MANAGEMENT
DISTRIBUTION SYSTEM:
ADMINISTRATION
OPERATION & MAINTENANCE
CUSTOMER DESIGN & CONNECTION (CIP)
SYSTEM IMPROVEMENT (CIP)
TOTAL DISTRIBUTION
GENERAL SERVICES:
ADMINISTRATION
STREET LIGHT O & M
STREET LIGHT (ClP)
TRAFFIC SIGNAL O & M
TRAFFIC SIGNAL (CIP)
COMMUNICATION O & M
COMMUNICATION (CIP}
TOTAL GENERAL SERVICES
SUPPORT SERVICES
CUSTOMER SERVICE
METER READING
RATES
TOTAL SUPPORT SERVICES
TOTAL MAJOR ACTIVITIES
TRANSFERS:
GENERAL FUND TRANSFER
CIP TO GENERAL FUND
RENT
TOTAL TRANSFERS
TOTAL EXPENSES
10144 10443 10744 11050 11357 11665 11974 12284 12595
60 60 60 60 60 60 60 60 60
1815 1815 1815 1815 1815 18!5 1815 1815 1815
11984 12263 12584 12890 13197 13505 13814 14124 14435
90627 92503 94438 96857 99362 102111 104806 107603 110445
NET REVENUE AVAILABLE
RESERVE FUNDING:
PLANT REPLACEMENT
RATE STABILIZATION
CALAVERAS
TOTAL RESERVE FUNDING
RECONCILE TO IFAS
TOTAL RESOURCE USE
899 1227 543 1320 331 2947 1329 141 2270
69 69 69 69 69 69 69 69 69
0 521 0 900 0 2689 1135 0 2168
830 637 474 351 262 189 125 72 33
899 1227 548 1320 331 2947 1329 141 2270
0 0 0 0 0 0 0 0 0
91528 93730 94981 98178 99693 105057 106135 107744 112715
REVENUE SHORTFALL 0 -0 0 0 0 0 0 0 0
RATEPAYER REVENUES
REVENUE REQUIREMENTS
81,944 85,243 85,605 91,433 92,565 98,867 100,091 101,092 106,996
~~~96.857 99,362 102,111 104806 107603 110445
DIFFERENCE (RATE COVERAGE)(8,683) (7,261) (8,833) (5,425) (6,797) (3,244) (4,715) (6,510) (3,449)
4 of 8 EXHIBIT D
26-Feb-86
SYSTEM AVERAGE RA:TE (MILLSJ~’WH)
RATE CHANGE
ENERGY SALES (GWH)
ENERGY PURCHASES(GWH)
PEAK DEMAND (MW)
NUMBER OF CUSTOMERS
RATE BASE ($)
RETURN ON RATE BASE
06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15
76 79 79 84 84 89 89 89 93
O%4%O%6%O%6%0%0%5%
1077 1079 1081 1092 1103
1183 1135 1138 1150 1161
201 202 -202 203 203
1114 1125 1137 1148
1173 1185 11£6 1206
203,203 203 203
38386 40305 42820 44436 46658 48,.991 51441 54013 56713
106886 110044 113213 116437 119671 122917 126174 129442 132723
9.49%9.49%9.49%9.49%9.49%9.49%9.49%9.49%9.49%
RESERVE BALANCES
PLANT REPLACEMENT 2863 2932 3001 3070 3139 3208 3277 3346 3415
RESERVES MINIMUM
RATE STABILIZATION RESERVE 7444 18015 18741 19496 20282 21099 21949 22334 23754
RESERVE TARGETS
RATE STABILIZATION RESERVE 261 56 27022 28111 2£244 30422 31648 32924 34251 35631
12119 9110 6694 5001 3729 2571 1591 822 265
RESERVES MAXIMUM
PLANT REPLACEMENT
RATE STABILLZATION RESERVE
CALAVERAS
5234 54£6 5771 6059 6382 6680 7014 7365 7’733
34888 36029 37481 . 38992 40563 42198 43898 45668 47508
85712 35712 85712 35712 9.5712 35712 35712 85712 35712
RES, AVAIL (Ova" Minimum}
RATE STABIL’LZATION RESERVE 7329 7279 4722 4867 3140 5011 8296 3532 4780
_RE,~. AVAIL (Ov~,,Tar.qet)
RATE STABILIZATION RESERVE
CALAVERAS
-1393 -1728 -4648 -4561 -7001 -5,538 -5679 -7885 -7097
0 0 0 0 0 0 0 0 0
RES. AVAIL, (Over Maximum)
RATE STABILIZATION RESERVE
CA LAVERAS
-10115 -10736 -14018 -14828 -17142 -16088 -16656 -19302 -18974
-23593 -26602 -2£618 -30711 -31983 -3.3141 -34121 -348.90 -35447
~ 5 of 6 EXHIBIT D
LHEFF3
Inflation rate 0%
CeJaveras reserve extended until 2016
Other revenues reflect Western refundS
from FY 98/99 to 2003/04
3% RATE DECREASE FOR 97/98
80~ decrease in t~e cost of power st;artJng 98/99
FISCAL YEAR 15-16 16-17 17-18 18-19 19-20 20-21 21-22 22-23 23-24
FINANCIAL REV. RESOURCES
SALES 108280 109363 115980 117139 118311 124274 125516 126772 134441
RATE ADJUSTMENT 0 5468 0 0 4732 0 0 6339 0
DISCOUNTSAJNCOLLECT.-275 -275 -275 -275 -275 -275 -275 -275 -275
PRORATION IMPACT 0 -228 0 0 -197 0 0 -254 0
TOTAL ADJUSTED SALES 108005 114328 115705 116864 122571 123999 125241 132571 134166
INTEREST 1933 2048 2231 2300 2387 2497 2482 2519 2621
OTHER REVENUE 3564 8773 3818 3857 4045 4092 4133 4375 4427
FROM RESERVES
RATE STABILIZATION 0 0 0 0 0 0 1479 O 0
TOTAL FINANCIAL RESOURCES 113767 120150 121753 123021 129003 130588 133335 189465 141215
OPERATING EXPENSES
TOTAL FUND OPERATIONS 2543 2543 2543 2543 2543 254,3 2543 2543 2543
MAJOR ACTIVITIES:
RESOURCE MANAGEMENT:
PURCHASE POWER COST 67868 70604 73449 76409 79488 62692 86¢~4 89491 93097
TANC 2144 2144 2144 2144 2144 2144 2144 2144 2144
TOTAL COST OF POWER 80<322 82490 85417 88467 91645 94957 98..’.’.’.’.’.’.’.’~101809 105279
ADMINISTRATION 195 195 195 195 195 195 195 195 195
SUPPLY AND DEMAND ASSESSMENT 1986 1986 1986 1986 1986 1986 198~1986 1986
LEGIS/REGULATION 81 81 81 81 81 81 81 81 81
TOTAL RESOURCE MANAGEMENT 82284 54752 87679 90729 93907 97219 100664 104071 107541
DISTRIBUTION SYSTEM:
ADMINISTRATION 1150 1150 1150 1150 1150 1150 1150 1150 1150
OPERATION & MAINTENANCE 2805 2805 2805 2805 2805 2805 2805 2805 2805
CUSTOMER DESIGN & CONNECTION (CIP)2448 2448 2448 2448 2448 2448 2448 2448 2448
SYSTEM IMPROVEMENT (CIP)5415 5415 5415 5415 5415 5415 5415 5415 5415
TOTAl. DISTRIBUTION 11818 11818 11818 11818 11818 11818 11818 11818 11818
GENERAL SERVICES:
ADMINISTRATION 112 112 112 112 112 112 112 112 112
STREET LIGHT O & M 297 297 297 297 297 297 297 297 297
STREET LIGHT (CIP)130 134 138 142 146 151 155 160 165
TRAFFIC SIGNAL O & M 457 457 457 457 457 457 457 457 457
TRAFFIC SIGNAL (CIP)175 175 175 175 175 175 175 175 175
COMMUNICATION O & M 238 238 238 238 238 238 238 238 238
COMMUNICATION (CIP)100 100 100 100 100 100 100 100 100
TOTAL GENERAL SERVICES 150~1513 1517 1521 1525 1530 1534 1539 1544
SUPPORT SERVICES
CUSTOMER SERVICE 250 250 250 250 250 250 250 250 250
METER READING 149 149 149 149 149 149 149 ! 49 149
RATES 108 108 108 108 108 108 108 108 108
TOTAL SUPPORT SERVICES 604 504 604 604 604 604 604 604 604
TOTAL MAJOR ACTIVIT~ES 96215 9~:~86 101618 104672 107854 111170 114610 118032 121507
TRANSFERS:
G ENERAL FUND TRAN SFER 12908 13222 13537 1385.3 13992 14132 14273 14416 14560
CIP TO GENERAL FUND 50 60 60 50 60 60 50 60 60
RENT 1815 1815 1815 1815 1815 1815 1815 1815 1815
TOTAL TRANSFERS 14748 15062 15377 156~3 15832 15972 16113 16256 16400
TOTAL EXPENSES 113506 116291 119538 122<308 125229 12£685 133266 136831 140450
NET REVENUE AVAILABLE 261 3868 2216 113 2774 903 69 26.34 765
RESERVE FUNDING:
PLANT REPLACEMENT 69 69 69 69 69 69 69 69 69
RATE STABILIZATION 192 3789 2147 44 2705 834 0 2565 6~
CALAVERAS 0 0 0 0 0 0 0 0 0
TOTAL RESERVE FUNDING 261 3858 2216 113 2774 903 69 2634 765
RECONCILE TO IFAS 0 0 0 0 0 0 0 0 0
TOTAL RESOURCE USE 113767 120150 121753 123021 129003 130588 13.3335 139465 141215
REVENUE SHORTFALL 0 0 0 0 0 0 0 0 0
RATEPAYER REVENUES
REVENUE REQUIREMENTS
108,280 114,603 115,980 117,139 122,846 124,274 125,516 132,845 134,441
113506 116,291 11__!.~9538 122.908 126229 129685 133266 136831 140450
DIFFERENCE (RATE COVERAGE}(5,226} (1,688) (3,558) (5,769) (3,383) (5,411) {7,750) (3,984) (6,009)
e 6 of 6 EXHIBIT D
26-Feb-95
SYSTEM AVERAGE RATE (MILLS/KWH)
RATE CHANGE
15-16 16-17 17-18 18-19 19-20 20-21 21-22 22-23 23-24
93 98 98 98 102 102 102 107 107
0%5%0%0%4%0%0%5%
ENERGY SALES (GWH)1159 1171
ENERGY PURCHASES (GV’#t)1221 1233
PEAK DEMAND (MW}203 203
NUMBER OF CUSTOMERS
RATE BASE ($3
RETURN ON RATE BASE
1183 1195 1207 1219 1231 124,3 1256
1245 1258 1270 1283 1295 13439 1322
203 203 203 203 203 203 203
59549 62526 65653 56935 72882 76001 79801 83791 87951
136016 1&.9323 142644 145g79 149329 152694 156076 159474 162890
RESERVE BALANCES
PLANT REPLACEMENT 3484 3558 3622 36gl 3760 3829 38,98 3967 4036
RESERVES MINIMUM
RATE STABILIZATION RESERVE 24711 25707 26743 27821 28655 29515 30401 31313 32252
RESERVE TARGETS
RATE STABILIZATIONRESERVE 37067 38581 40115 41731 42983 44273 45601 46969 48378
o o o o o o o o o
RESERVES MAXIMUM
PLANT REPLACEMENT 8120 8526
RATE STABILIZATION RESERVE 49422 51414
CALAVERAS 0 0
8952 9400 9870 10363 10881 11425 11997
53486 55642 57311 5.9030 60801 62625 64504
0 "0 0 0 0 0 0
RES. AVAIL. (Over Minimum)
RATE STABILIZATION RESERVE 4014 6808 7919 6885 8755 8729 6365 8018 7774
RES. AVAIL. (Over Tar.qet)
RATE STABILIZATION RESERVE -8341 -6046
CALAVERAS 0 0
-5453 -70~6 -5573 -6029 -8836 -7639 -8,352
0 0 0 0 0 0 0
RES. AVAIL. (Over Maximum)
RATE STABILIZATION RESERVE
CALAVERAS
-20697 -18899 -18825 -2(~36 -1~£01 -20786 -24036 -23295 -24478
0 0 0 0 0 0 0 0 0
EXCERPT FROM MARCH 3, 1996 UTILITIES ADVISORY COMMISSION MEETING
6.a. (3) Consideration of a Proposed Calaveras Reserve Policy
Mr. Baldschun: Tom Habashi will join us for this item. His group
did the stranded cost analysis. Your questions involving this part
of the report are better answered by Tom or Jane Ratchye who did
the number crunching. This is a proposal that is Palo Alto’s
response to stranded costs under open access. Tom’s group has done
an analysis of potential stranded costs, looking at all of our
contracts. He has identified one that we need to take care of
right we may identify down the line and come back to you with some
proposals. We do not feel comfortable tonight saying that we.want
to set aside funds or raise rates because of potential stranded
costs that could happen, if this happens in the future. We do feel
comfortable with the Calaveras project. The reason is that there
is one paragraph in there that stands alone and is extremely
significant. It is on Page 5, and states: ~Yet, even if the
forecast proves totally in error and the City never incurs stranded
costs, the Calaveras debt .service is a real obligation that
regardless, requires funding through rates or reserves." There is
nothing we can do to get around that, other than giving it our best
guess. All of the experts in the world give their best guesses and
are still wrong. So recognizing that forecasts typically are going
to be incorrect, we know one thing for sure. The debt service is
not going to go away, unless we sell the project. So Tom’s group
has come up with some numbers and has come up with some realistic
assumptions on market prices all the way to 2020. There is
tremendous volatility with the model as you change those prices.
The stranded costs will change significantly, as well. We are
basing this proposal to set aside funds for the Calaveras project
on what we call a base case. That is based on market prices that
are not particularly !ow, not particularly high, but is our best
guess. It turns out that a recommendation is to build up the
Calaveras reserve to $35,712,000 at the end of 1998-99. We feel we
will be in a position between where we are today with the Calaveras
reserve balance and where we are projected over the next couple of
years to attain the $35.7 million without raising rates for that
purpose. That concludes my remarks, and Tom and I can answer
questions.
Chairman Johnston: I have several questions that should probably
be answered by Tom, as they are in regard to the forecasting model.
Before I get into it, I want to say that I support the proposed
transfer of money to the Calaveras reserve. I think we need to do
that. Randy, as you point out, regardless of what happens, that is
money that will be needed for that debt service anyway. I believe
we need to do that, so I support that. What I need to know a
little more about to fee! a little more comfortable is the
forecasting of the price of energy over the next 20 years. As you
mentioned, the model here is very sensitive to those asstunptions.
My biggest concern is that we have perhaps taken too optimistic a
view in assigning a value to what we will get out of Calaveras in
EXCERPT UAC:03/06/96
6.a.(3)Page 1
the future. If I understand the numbers, we are talking about a
melded market value going from $22 now per megawatt hour to $80 in
thirteen or fourteen years from now. That is almost a four-fold
increase in a relatively short amount of time during a period when
supposedly, we are moving to a more competitive environment,
opening up markets which one would have thought would lead to a
competitive energy market over the next time period. It is based
on that assumption that you have come up with your Exhibit C that
essentially shows that as we get far out in time here, the market
value of the generation catches up with our cost fairly quickly.
I know that no one has perfect insight into what is going to happen
in the future. My concern is that while I assume you will update
this from year to year, you are potentially painting a rosier
picture than might really exist in choosing this as a market value.
Maybe we need to make the transfer we are proposing now, which I
support, and maybe we ought to plan on making a transfer again in
the following year. With that, could you respond to why energy is
going where it is going?
Mr. Habashi: ! can respond to your first question. We have taken
a study that was done by Henwood for NCPA, in fact, we have revised
it somewhat to make it a little more conservative. Their estimate
of capacity cost was higher than what we have and what you see in
here. You are correct. We may be guarding the market price to
four-fours (?) In less than 15 years or so, however, we need to
take into account that the market price today is quite depressed.
What is being sold on the market is not likely to be what the cost
of new generation will be five years from now when the market dries
up and you do not have any more surpluses. Any way that you look
at it, due to the volatility of the market today, it is almost
impossible to predict with any degree of certainty what the market
price is likely to be. We think that what we have here is good as
far as we are concerned today. I think it provides a reasonable
basis for the conclusion that Randy came up with, however, as Randy
indicated, over time, we will come back and revise those studies
and do what we need to do at that time. My thinking is that three
or four years from now, we need to go back and look at that
forecast and do something with it, unless of course, we see a
significant departure from our assumptions next year or the year
after.
Chairman Johnston: I may be reading the numbers wrong, but it
appears to me as though there is something missing between the
chart that you showed us indicating the market value of generation
from Calaveras and how that raises about a four-fold increase over
this same time period. Then, if you go later to Exhibit D that
covers a projected budget going into the future, and you look at
what we believe the City of Palo Alto sales are going to be and
what our energy costs are going to be in that same time period, it
does not look as though they match up. We have sales going from,
say $64 million now to the year nine-ten(?), so they go from
$63 million to $86 million. I know that the cost of power is only
a part of what goes into that, but it is more than half of it, so
I am concerned that if we think the market value of generation is
going up that high, does that really tie in with the assumptions we
EXCERPT UAC:03/06/96
6.a.(3)Page 2
are using in our budget models?
Calaveras stranded cost analysis looked very explicitly at
projected costs in this region, the so-called market clearing
price, if you will, whereas our budget is based on our known
contracts and on the current contracts, assuming we keep the
current contracts and the known factors of escalation projecting
out 20 years. It is not a real sophisticated forecasting
technique, once you get past five years° I do not know if that
responds to your question.
Commissioner Grimsrud: I will defend you guys a little bit. I
will follow up on what Tom said. I guess Palo Alto’s costs are a
lot different from what the market is. The way the market is now,
there is a tremendous amount of surplus capaCity. Hydro energy
cost is low, capacity cost is almost zero. But as people start
retiring units in this market and as loads grow, I think that
surplus will eventually go away, but I am not sure of that. There
could still be a surplus, but the marginal cost of capacity and
energy is still going to be a lot higher than what the marginal
cost is now because of the surplus capacity. I think the marginal
cost of energy and capacity may be fairly similar to the stake unit
we were talking about a few years ago for a combined cycle gas
turbine ~unit that was 30 to 40 mils per kilowatt hour. I can
foresee at some point in the future, several years from now, that
there will be escalation in market prices, but it is very
uncertain. My feeling is that maybe we ought to do some kind of
uncertainty analysis, a DPL type of thing, a financial analysis
with some statistical variation to figure it out. This is your
best estimate, but maybe there ought to be a high and low kind of
thing.
Mr. Habashi: You have touched on a very good point, Paul. What we
intend to do over the next couple of months is to do a stranded
cost analysis and perhaps share it with you, not with the intent of
making any recommendations as far as what we do about reserves
otherwise. It would be more to give you a picture of what is
likely to be our exposure, given the conservative assumption that
Paul was talking about, the other side of the picture that you were
just presenting. So we are likely to say that our stranded
investments over the next so many years is likely to be between
this number and that number, and growing or declining. Then we can
draw from that whatever conclusion we want to draw. I will assume
that we can probably update that study every year or every few
years. From that, Randy can take over and figure out what he wants
to do with the reserves in order to account for these stranded
assets.
Commissioner Grimsrud: A couple of years ago, I was complaining
that the reserves were so high, but now, the competition is only
going to increase over time, thus if we err, maybe we should err on
the high side. These are things where if you did a probability
distribution type of analysis similar to the way we did it in the
IRP, then we could make choices like that. Do we want to take
extra money out now and save it so that we minimize our riskfive
EXCERPT UAC:03/06/96
6.a.(3)Page 3
or ten years from now? I think that would be worthwhile.
Chairman Johnston: I would like to underscore what Paul says. I
don’t think we are in a situation here with setting up Calaveras or
just in general, the stranded cost reserves, of taking the best
estimate, or the 50th percentile number. If you are too low, you
may never get an opportunity to recover that and remain
competitive. If you put more money away, maybe you did not need it
all, and at least, it could go to pay off the debt you have. So I
really support what Paul is saying. He is perhaps a better judge,
in terms of the methodology, than I am, but it is important to
realize here that we are not just shooting at a mean projected
reserve. That exposes us quite severely on the down side. Whether
we are at the 75th percentile or the 95th percentile, those kinds
of things can be debated and you can decide where you want to be,
but I don’t think you want to be at the 50th percentile.
Mr. Baldschun: Everyone has their own comfort zone with forecasts.
Clearly, some are more conservative than others. Taking the base
case I feel makes the most sense and is the most defensible. If we
took the worst case scenario, or even half way between the worst
case and the base case, we would be going to the Council to raise
electric rates. You are talking about taking money out of people’s
pockets, so you really need to have a strong foundation and a
strong forecast that you are comfortable with to justify using rate
payer funds for this purpose. I completely agree that there is a
chance that we could be in a situation that would be
disadvantageous which would otherwise be the case if we were to
build up this reserve. But you always have to base it on your best
guess, your best forecast. In years past, we used to forecast our
purchases on a conservative approach, and we found that that was
producing the large surpluses. Now we do not forecast on a
conservative approach. We use a base case, and we are coming
closer all the time.
Chairman Johnston: I have a real hard time agreeing with that. In
the old days, when we had a monopoly which was not threatened at
all, if we guessed too low, we could raise it the next year. If we
guessed too high, we could lower it the next year, and we were free
to do that. We are not moving into an era where there is a
particular time window, and the down side.risk potentially is that
we lose all of our customers. If we do not collect enough money
from stranded costs and we are not competitive going out the back
end of this process, you basically run the risk of losing your
electric utility. So I don’t think you are in a situation where it
is a matter of saying, we should use the base case because the base
case has the highest probability of being closest to being
accurate. I just don’t believe we are in that environment now.
What happens if we are wrong? It is not a matter of simply saying,
we will now raise the rates. At that point, we are making the
argument that people are free to leave the system.
Mr. Baldschun: I am not going to argue with you because I don’t
think I can convince you, but again, it gets to how comfortable you
are with the forecast. I will give you an example. The base case
EXCERPT UAC:03/06/96
6.a.(3)Page 4
was $50 million in nominal .dollars stranded costs from 2000 to
2016. The worst case was $176 million and climbing. There is no
end to it. It depends upon your assumptions. If electric prices
bottom out and stay bottomed out for 15 or 20 years, it would be
disastrous. If that is the scenario you want to build for and you
want to raise customers" rates today on that scenario, I think it
is going to be hard to sell. I feel that you have to use the most
reasonable estimates that your staff has. In this case, it is Tom
and NCPA and people that are supposedly experts in the business
that have come up with their best guess.
Chairman Johnston: It would be one thing if the best guess was
within the regime where one has had good data in the past and one
is using the same models to project into the future. We are really
in an area where either you or Tom earlier tonight said, nobody
really has a clue beyond five years. So it is not like you have a
tried and true proven model that has worked over the years, and you
are going to apply that model, and yes, you may be off a little
here and there. We are really in uncharted waters beyond five
years, and that is exactly the projection that is important here.
Mr. Habashi: ! suggest that there is a possibility of a future
scenario that will make this somewhat moot. If we keep our rates
flat and we find ourselves in a year or two having sufficient money
in reserves that will cover the 75th percentile that will get you
into the comfort zone in which you want to be, Paul, maybe that is
the scenario that will happen, and at that time, we will be all
right. I think it is important that we go on, taking the numbers
that we have now and revisit the issue perhaps next year.
Chairman Johnston: Let me suggest another parallel approach. As
I understood it, Tom, when you described the projected cost of
value of energy or market value of Calaveras, that was based on a
study done by NCPA. If that study is standing alone, then I am
particularly nervous. If, on the other hand, there are perhaps a
whole variety of studies that point in the same direction or might
at least give us some idea of a scattering of people who claim to
be the best guessers of the future we are talking about, maybe that
would be helpful to see a bit more of. One NCPA study makes me
feel even more nervous.
Mr. Habashi: Let me ask Doug Boccignone to shed some more light on
this question.
Mr. Bocciqnone: You are bringing up a lot of good points about
uncertainty. We have, in fact, already looked at the range that
Randy was alluding to. There is a wide range of possible outcomes.
Our low case scenario essentially looked at holding market prices
relatively flat over the next 20 years and assumed that capaCity
values do not go up. The base case assumed that over the next i0
years, there becomes a load resource balance and there is a
significant increase in the value of capacity. The difference
between those two scenarios was essentially doubling, so that our
stranded costs, instead of needing $35 million, we would need
EXCERPT UAC:03/06/96
6.a.(3)Page 5
$70 million in 1998. That gives you a little feel for the range.
On the other hand, in our high market scenario, where we tried to
do the 10-50-90 in the bands, a i0 percent chance that it will be
lower than the low price and a i0 percent chance that it will be
higher than the high price, I think the low price was maybe one-
tenth, so it would have been on the order of three or four---I’m
sorry. If the market prices are high, we might have $4 million in
stranded costs associated with Calaveras. JOYCE IS GOING TO LET
YOU FOLKS FIGURE OUT THIS CHANGE. It gives you a flavor for the
range. We did not go out and poll a bunch of experts. I don’t
think any such person exists at this point in time, but we did try
to come up with a pretty wide range of potential outcomes.
Mr. Habashi: Perhaps what we could do over the next few months
before bringing you the study we are talking about is to go back to
the market and get some more information. Perhaps that will help
us to know the difference between the high and low somewhat, so we
can all be a little more comfortable with the numbers that will
come up.
Chairman Johnston: That would be helpful for me. There is, in a
sense, another way of really judging whether other people truly
believe these estimates or not. You can look at the amount of
time, depending upon what type of power generation you are
building. It can take a considerable amount of time to bring new
capacity to market. If other people really believe these numbers,
it has gone up so fast that you might start seeing people starting
the planning process for building those units. In the absence of
that, you could make the argument, I suppose, that the units will
not be built, and therefore, there will be a shortage, or you could
make the argument that nobody is buying the numbers you are
suggesting. I just feel that we are in a very tricky situation
here, and I think we are doing the right thing for this year. We
have to look at the window of opportunity we have to basically
control our own rates. Right now, we are in a regime where we
truly do control our own rates because of the fact that we are
lower than the surrounding communities, etc. If we have additional
costs that are justified, we are pretty much in full control. Once
you get into the competitive market, we do not. We only control
our rates to the extent that we are willing to lose customers at
that stage, whereas now, we simply control our rates. So if you
are going to have some bad news, the sooner, the better. I just
don’t think we ought to look at a rosy scenario. I accept
everything you have said, but it looks like it needs more study.
Mr. Bocciqnone: To make one comment, in terms of our assumptions
on the value of capacity in the base case, at the time Henwood did
their study, they were assuming there would be a load resource
balance in the region around 2002. Since that time, more current
studies aresuggesting that it is perhaps as late as 2007 or even
2010, although people are now talking about shutting down nuclear
units. That may move things up several years, but it is not going
to be within the next three years. We assumed in this study that
it would be around 2010. In between now and 2010, you would get
sort of an escalation in capacity value slowly, thenincreasing
EXCERPT UAC:03/06/96
6.a.(3)Page 6
quite rapidly until 2010. So we assumed that this was going to
happen a lot further out in the future than some people are
assuming. That then tends to be a little conservative and lead to
a little higher number. You have a good point. There is a lot of
uncertainty, and that makes a big difference in the outcome.
Commissioner Grimsrud: I think we are all on the same wavelength.
We need to take this uncertainty into account, and we should be
given the opportunity to make judgments as to how we manage the
rate structure rather than just taking the expected value, and
that’s it. Maybe we manage the money going into the fund over the
next five or ten years in some different manner than what is being
proposed here. So I guess both of those things require some more
feedback.
Commissioner Eyer~: I have some questions. Exhibit A for the
Calaveras hydro debt service shows Roseville’s share and Palo
Alto’s share. The Roseville contract runs out in 2004 or 2005.
thought they were paying all of the debt service on the contract we
had with them. Are we paying the big end of it? I do not
understand the chart.
Mr. Bocciqnone: Of the fraction that we transferred to them, they
started out paying, I believe, 75 percent of the debt service
associated with that fraction, and that is climbing. That is why
you see their amount climbing over the period between now and 2004.
At that time, I00 percent of it goes back to us.
Mr. Habashi: Right now, they do pay about 75 percent of the debt
service. It will escalate to i00 percent of the debt service in
2000. From 2000 to 2004, they will pay the full cost of the
project debt service, and then we get it back in 2005.
Mr. Bocciqnone: The reason ours is the greater share is that we
have retained ownership of the greater share of the project.
Commissioner Eyerly: So over the period of time that they have had
the contract, what percentage ~of the costs, roughly, over that
period of time have we been liable for? Have they taken 75 percent
for the past 15 years, or what?
Mr. Habashi: Over the 15 years, we assumed 6.52 percent of the
project. We had 22.92 percent, so I guess what they have is one-
third or a little less than one-third of our share. For that, they
started paying 50 percent of the debt service in 1990 plus
i00 percent of O&M. Their payments for the debt service graduated
by 5 percent every year. It would be very difficult, off the top
of my head, to tell you precisely how much they paid versus how
much we paid in terms of dollars over the 15-year period.
Commissioner Eyer~Y: What percentage of our load did you say they
took?
Mr. Habashi: They took a little less than one-third of our
allocation of the Calaveras project. Their percent was 6.52. Our
EXCERPT UAC:03/06/96
6.a.(3)Page 7
total percent was 22.92, so I guess we were left with somewhere
around 16 or 16-1/2 percent.
Commissioner EHerly: The debt service is completed in 2024. Is
that the end of the first phase of the contract with the Calaveras
Water District?
Mr. Habashi: Our license will expire in 2032. It is 50 years from
the day we got it, which was back in 1982.
Commissioner EHerly: So the first part of the contract is a 32-
year life, and the second part of the contract that we have to work
out with them is for an equal amount? Is it for 60 years or 70
years, or what? Do they have a license to operate for the first
half of it?
Mr. Habashi: I believe our contract with the county allows us to
operate the project all the way to 2032.
CoE~issioner E~erly: How many years would that be? Did you go on
line when that contract started?
Mr. Habashi: From the time we went on line, it will be 42 years.
From the time we received the license from FERC, it will be 50
years.
Commissioner EHerlH: That indicates what you say in your report,
that our debt service is going to be up in 2024, and we will still
have some time after that that we will have the license.
Mr. Habashi: That is correct.
Commissioner EHerlH: And then we have the opportunity for another
30 years or so?
Mr. Habashi: We will have eight years after 2024. We will have
eight years of license under the contract, and we can perhaps
extend it beyond that a little more. For those eight years, we can
all relax, because we will not have any debt service to pay
anymore.
Commissioner Eyerly: My ~recollection is that the contract was
written in two equal segments. We are talking about the first one,
and the second one, we have to negotiate with them, but it is of
equal length to the first, according to my recollection of the
contract. So we have something like a 30- or 35-year extension
where we can work out pricing, etc., with them.
Mr. Habashi: I would assume that we would have the first rights to
negotiate a second license. Quite frankly, I do not know what will
happen in 2032. A lot of things can happen, given what is taking
place in the industry today. I would never want to guess beyond
that. I would not want to guess beyond five years from now.
Commissioner Eyerly:I wouldn’t want you to run any studies on it,
EXCERPT UAC:03/06/96
6.a.(3)Page 8
but I think that is a viable part of the Calaveras project.
Mr. Habashi: I agree with you, Fred. Those are going to be the
gravy years, and I am not saying I look forward to them, because I
expect to be retired by then. But certainly, those will be the
good years for the City.
Commissioner Eyerly: What Paul and Paul have brought out makes
sense to me, that maybe we need a little more input and studies as
to what we think the market value is going to be and the generation
at Calaveras, trying to substantiate that. But as long as we have
the ability to keep our rates very competitive, as we have now, it
seems to me to be good thinking to be putting more money into the
Calaveras reserve. That cuts down on the possibility that we might
come up short. I do not see that, as long as our rates are
competitive, there is any problem with that, other than the fact
that Randy does not like his rates to go up and down too fast. It
seems to me that we really need to think about continuing to put
money into the Calaveras reserve until we feel we are on top of the
stranded costs.
Mr. Mrizek: What we have been trying to do here, as we all
recognize, this year again our rate stabilization reserve is above
maximum. We have a good amount of money. I think we all agree
here that the best use of that surplus in the rate stabilization
reserve is not to return it or lower rates at this time, but to put
it into Calaveras. As Randy began his presentation, this is one
analysis that was made, and there will be more in the future. If
we see a need to increase Calaveras in the future based on
additiona! studies, We would make a recommendation in future years
for a possible rate increase prior to 2003 when we have to be at
market base rates. What we are trying to accomplish this year is
to not lower rates so that somebody might come along and say, you
have a lot of money there, so let’s lower the rates now. We do not
want to do that this year. We can always give the money back later
if it is not needed. That is what we are trying to sell. We want
to keep the money in reserve for Calaveras and the stranded
investment. If it goes down and we see that we do not need as much
in the stranded investment, we can always lower the rates later.
Chairman Johnston: As a part of the CPUC decision to allow
investor-owned utilities to recover stranded costs, are we going to
see submittals from PG&E and Southern California Edison, detailing
their stranded costs, which would not only involve their talking
about their indebtedness but would also require them to make the
same kinds of projections?
Mr. Bocciqnone: Yes, in fact, the investor-owned utilities have
already submitted their initial investments back in October or
November, although they al! tended to use the same market price
assumption. In fact, it was higher than the one we have been
using. They will have to resubmit, given the actual restructuring
decision that was submitted in December. I believe that will be
August of this year.
EXCERPT UAC:03/06/96
6.a.(3)Page 9
Chairman Johnston: So perhaps that might be something that would
be helpful to us to see when they do that, to make a chart of your
assumptions for energy and capacity. There are reasons why one
might make different assumptions, but there would be some other
data points that might be helpful.
Mr. Bocciqnone: They are going to have a true-up methodology, as
well, because they wil! have this moving target. Each year they
will be cranking it up, so we will follow that methodology and the
rationale for it. I suspect that they are going to assume a very,
very low market price, at least during the 2000 to 2003 time frame.
It is in their interest to build that number up as high as
possible.
The other mechanism that is out there is that the PUC is giving
incentives to the investor-owned utilities to divest up to half of
their thermal generation. So you will actually see some of that
generation spun off in value. That will probably be the best
indicator of the market value. I would surprised if we saw that
happen within the next year or two. I believe it will be down the
road.
Commissioner Grimsrud: One thing I mentioned the other day when.we
got together was a number that caught my eye in Exhibit B, the
Calaveras fixed cost for 1996-97. It comes out to about 16 mils
per kilowatt hour, which seems very high to me. I wondered what
are the primary costs incurred in that 16 mills per kilowatt hour?
Mr. Bocciqnone: After we got together, we looked at the 1995
current year budget. Off the top of my head, I think it was about
one-quarter of the cost. Actually, in 1995, the budgeted amount
was about 13 mils for an average water year. That included about
4 mils for administration and O&M, the maintenance of the
facilities. Another large item was the allocated share of the
control room operating costs. I believe that was a couple of mils.
Those were the big chunks. The others were somewhat spread out.
We could come back to you with a better answer.
Commissioner Grimsrud: That would be interesting. It seems to me
that with the market prices of whole units, the operating fixed and
variable O&M of that same category, I always thought that one of
the big advantages of hydro was that you just build it and let the
water do its job. So that seems like a pretty high cost. Is the
control room cost allocated over 50 years? How does that work? I
suppose you have to keep on rebuilding them.
Mr. Bocciqnone: It is also the staffing time.
Commissioner Grimsrud:
high.
Okay.I was just curious.It seemed very
Mr. Habashi: Probably, Paul, what you are really asking us to do
is to look not only at the Calaveras O&M, but to perhaps look at
all of the joint action agency expenses, whether it is NCPA or
TANC. Both of them will have their budgets submitted to the NCPA
EXCERPT UAC:03/06/96
6.a.(3)Page 10
and TANC Commissions in the next few months. When they are done,
perhaps we can come back with a tabulation of what kinds of
expenses we are looking at, whether it is for O&M for the projects
or for A&G or what have you.
Commissioner Grimsrud: To me, the net value of this project is
impacted by O&M cost. If we could bring that down, that adds to
its value.
EXCERPT UAC:03/06/96
6.a.(3)Page 11
City of Palo Alto
Utilities Advisory Commission
Wednesday, March 6, 1996
City Council Conference Room
THIS SUMMARY OF CONDENSED EXTRACTS FROM THE FULL MEETING MINUTES HAS THREE SECTIONS:
POLICY ISSUES - A BRIEF STATEMENT OF ANY ITEMS THAT ARE BELIEVED TO NEED A POLICY DECISION OR GUIDANCE FROM THE CITY
COUNCIL.
KEY ISSUES -A BRIEF STATEMENT OF SIGNIFICANT ITEMS DISCUSSED;
MINUTES HIGHLIGHTS - SHORT EXTRACTS FROM THE MEETING SHOWING THE GIST OF DISCUSSION, ALL MOTIONS AND VOTES, AND A
NUMBER IN PARENTHESIS INDICATING THE PAGE OF THE FULL MINUTES WHERE MORE DETAILED INFORMATION ON THE SUBJECT MAY BE
FOUND.
POLICY ISSUES
None.
KEY ISSUES
K-lo Consideration of a Proposed Calaveras Reserve Policy. Staff
presented the UAC with information on a proposed financial policy
that would establish a target for the Calaveras reserve and
extend the life of the reserve. The reserve will reduce the need
to raise the City’s retail electric rates in the future to offset
potential stranded costs. This is a budget issue item in the FY
96-98 Proposed Budget. The UAC agrees with staff’s proposal and
questioned if what was being proposed would provide enough funds
to cover those stranded costs. Further review is planned during
the UAC budget reviews. See 6.a.
250 Hamihon Avenue. Palo Aho. 94301 "a" 415.3292277 F.~C< 415.321.0651
Consent Calendar
Unfinished Business
Comparison of Electric Utility General Fund Transfers.
Randy Baldschun discussed the question that is coming up among a lot of
municipal utilities today: what is going to happen to General Fund
transfers when customers start leaving the system in terms of buying
power from other suppliers. For most cities, when a customer leaves the
system, since the revenue is currently based on a bundled rate, the
logical conclusion is that the transfer is going to go down for those
cities. In the case of Palo Alto, because we use the utility enterprise
methodology, the rate base is our net fixed assets in our distribution
system. As customers bypassed us, in a hypothetical situation, we would
continue to recover the transfer to the General Fund because it is based
on the assets. Theoretically, we do not perceive that the transfer to
the General Fund would necessarily be reduced if our customers bypassed
us, except perhaps in two circumstances. One is a total bypass, of
course, whether or not purchasing or we are not distributing power to
them. In that case, the transfer would not be collected unless we
implemented some special kind of rate or exit fee or whatever you want
to call it.
The second case is when enough customers leave the system and our power
costs go down significantly.
Chairman Johnston said it seems as though the rate payers ought to be in
a situation of looking at capital improvement projects very critically,
because not only do they have to pay to have it built out of their own
rate base money, but then having paid for it, they have to pay the City
an ongoing surcharge on that. So they get to pay for it twice.
Mr. Baldschun said they pay for it once in terms of whatever the CIP is,
and they pay an additional amount, based on the return of that. The
rate making principle on the rate of return on investment is a practice
that municipal utilities across the country use, and it is a practice
that for municipal utilities commissions that regulate municipal
utilities, it is the method that they use, too, the rate of return rate
based. I think that from my study of the arguments, the one that makes
the most sense to me is that this is a huge investment that is sitting
there, and there is a foregone opportunity that the City is foregoing by
not selling the system and the rate of return on taking that cash and
investing it otherwise.
Chairman Johnston said I would like to make a request that we get a
similar chart for the gas and water utilities, because it is my
understanding that, particularly with water utilities, there is a bigger
variation. Our water utility has, as a percentage of its revenues, the
highest transfer of all of our utilities. I think that if we are
engaging in capital programs that are going to continually drive that
higher, at some point, we ought to ask the question, "How high is it
reasonable for that to go?"
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Mr. Mrizek stated in the water utility, we have recognized that the
~ransfer to the General Fund has been increasing. We have had staff
discussions on this and we will be telling, the council that over the
next year, we will be analyzing the water fund and looking at all of the
costs of the water, so that we can get a handle on what percentage of
each expense is attributed to the operation of the water fund.
For the gas utility, there are not too many utilities to compare us
with.
We could probably contact the American Public Gas Association and ask
for some information.
Commissioner Eyerly stated in the matter of transfers to the General
Fund, I think we have to look at the fact that the City has made it
possible for the residents to enjoy the benefits of a municipal utility.
That utility, whether the electric, or whatever branch, is not trying to
make a profit. It is trying to operate to give utilities at low rates
to the residents. The City and the utility itself is certainly entitled
to a profit on their sales. We do not take a profit. We transfer it to
the General Fund, and that is the same way that a private corporation
would work. The profits go to the stockholders.
Chairman Johnston said, I absolutely agree. I think the City, as the
owner of the utility, is entitled to the return. I do not question that
at all, and I feel that is entirely proper. My concern is that the way
we compute it is a way that particularly penalizes certain utilities,
particularly the water utility, because they have a higher percentage of
capital programs.
I think the water utility is a good indication of why we ought to look
at it, because as we have this program for replacing the infrastructure
there, we already have a very high percentage transfer, and it is going
to get higher.
Mr. Mrizek said that one reason why staff wants to look at this over the
first year of the two-year budget so we can report back to the council.
Also, keep in mind that the transfer is a policy, a cap. In the water
utility, we have had transfers far lower than this cap, especially in
the drought when we had a zero transfer.
Review of Utilities Reserves
Mr. Baldschun presented an annual information report to let the
Commission know how we ended the prior fiscal year.
Consideration of a Proposed Calaveras Reserve Polic7
Mr. Baldschun said this is a proposal that is Palo Alto’s response to
stranded costs under open access. Staff has done an analysis of
potential stranded costs and has identified one that we need to take
care of right away. That is the Calaveras Hydroelectric Project.
Potentially, there could be others. We do not at this time want to set
aside funds or raise rates because of potential stranded costs with the
exception of the Calaveras project. The report states: "Yet, even if
EXECUTIVE SUMMARY
Final
UAC:03/06/96
Page 3
the forecast proves totally in error and the City never incurs stranded
costs, the Calaveras debt service is a real obligation that regardless,
requires funding through rates or reserves." Staff has come up with
some numbers and has come up with some realistic assumptions on market
prices all the way to 2020. There is tremendous volatility with the
model as you change those prices. The stranded costs will change
significantly, as well. We are basing this proposal to set aside funds
for the Calaveras project on what we call a base case. We feel we will
be in a position between where we are today with the Calaveras reserve
balance and where we are projected over the next couple of years to
attain the $35.7 million without raising rates for that purpose.
Chairman Johnston said I support the proposed transfer of money to the
Calaveras reserve. Randy, as you point out, regardless of what happens,
that is money that will be needed for that debt service anyway. I need
to know a little more about the forecasting of the price of energy over
the next 20 years. My biggest concern is that we have perhaps taken too
optimistic a view in assigning a value to what we will get out of
Calaveras in the future. My concern is that while I assume you will
update this from year to year, you are potentially painting a rosier
picture than might really exist in choosing this as a market value.
Maybe we need to make the transfer we are proposing now, which I
support, and maybe we ought to plan on making a transfer again in the
following year.
Mr. Habashi said any way that you look at it, due to the volatility of
the market today, it is almost impossible to predict with any degree of
certainty what the market price is likely to be. We think that what we
have here is good as far as we are concerned today. It provides a
reasonable basis for the conclusion that Randy came up with.
Commissioner Grimsrud said the way the market is now, there is a
tremendous amount of surplus capacity. Hydro energy cost is low,
capacity cost is almost zero. But as people start retiring units in
this market and as loads grow, I think that surplus will eventually go
away. I can foresee at some point in the future that there will be
escalation in market prices, but it is very uncertain. Maybe we ought
to do some kind of uncertainty analysis. This is your best estimate,
but maybe there ought to be a high and low kind of thing.
A couple of years ago, I was complaining that the reserves were so high,
but now, the competition is only going to increase over time, thus if we
err, maybe we should err on the high side. Do we want to take extra
money out now and save it so that we minimize our risk five or ten years
from now? I think that would be worthwhile.
Chairman Johnston I would like to underscore what Paul says. I don’t
think we are in a situation here with setting up Calaveras or just in
general, the stranded cost reserves, of taking the best estimate, or the
50th percentile number.
Mr. Ba!dschun said taking the base case I feel makes the most sense and
is the most defensible. If we took the worst case scenario, or even
half way between the worst case and the base case, we would be going to
the council to raise electric rates. You are talking about taking money
EXECUTIVE SUMMARY
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UAC:03/06/96
Page 4
out of people’s pockets, so you really need to have a strong foundation
and a strong forecast. In years past, we used to forecast our purchases
on a conservative approach, and we found that that was producing the
large surpluses. Now we do not forecast on a conservative approach. We
use a base case.
Chairman Johnston said in the old days, when we had a monopoly which was
not threatened at all, if we guessed too low, we could raise it the next
year. If we guessed too high, we could lower it the next year. We are
not moving into an era where there is a particular time window. If we
do not collect enough money from stranded costs and we are not
competitive going out the back end of this process, you basically run
the risk of losing your electric utility.
Mr. Baldschun said it gets to how comfortable you are with the forecast.
I will-give you an example. The base case was $50 million in nominal
dollars stranded costs from 2000 to 2016. The worst case was
$176 million and climbing. It depends upon your assumptions. I feel
that you have to use the most reasonable estimates that your staff has.
Chairman Johnston said it is not like you have a tried and true proven
model that has worked over the years, and you are going to apply that
model, and yes, you may be off a little here and there. We are really
in uncharted waters beyond five years, and that is exactly the
projection that is important here.
Mr. Boccignone said we have already looked at a wide range of possible
outcomes. Our low case scenario essentially looked at holding market
prices relatively flat over the next 20 years and assumed that capacity
values do not go up. The base case assumed that over the next i0 years,
there becomes a load resource balance and there is a significant
increase in the value of capacity. The difference between those two
scenarios was essentially doubling, so that our stranded costs, instead
of needing $35 million, we would need $70 million in 1998. Onthe other
hand, in our high market scenario, we might have $4 million in stranded
costs associated with Calaveras. We did not go out and poll a bunch of
experts. I don’t think any such person exists at this point in time°
Commissioner Eyerly said what Paul and Paul have brought out makes sense
to me, that maybe we need a little more input and studies as to what we
think the market value is going to be and the generation at Calaveras,
trying to substantiate that. But as long as we have the ability to keep
our rates very competitive, as we have now, it seams to me to be good
thinking to be putting more money into the Calaveras reserve.
Mr. Mrizek said I think we all agree here that the best use of the
surplus in the rate stabilization reserve is not to return it or lower
rates at this time, but to put it into Calaveras. As Randy began his
presentation, this is one analysis that was made, and there will be more
in the future. If we see a need to increase Calaveras in the future
based on additional studies, we would make a recommendation in future
years for a possible rate increase prior to 2003 when we have to be at
market base rates.
EXECUTIVE SUMMARY
Final
UAC:03/06/96
Page 5
New Business
Information Report: Temporar~ Western CRD Reduction
Mr. Boccignone presented a summary of the issue and said in January we
noted that we might need to make some decisions more quickly than we
could getting it on the meeting agendas. At that time you designated
Commissioners Eyerly and Grimsrud to meet with us.
Commissioner Grimsrud said I would like to say that I support this. You
have covered all the bases on it. It looks like a win/win situation for
us and for some other folks. So I endorse it.
Commissioner Eyerly said I second that, Paul.
Chairman Johnston said I appreciate staff’s working with Paul and Fred
in gettingthis done in a timely manner. I know that as time goes on
and we must respond faster and faster, we will have to get more creative
about how we work together. I was glad to see that this worked very
well. All the bases seem to be covered, and it looks like a good
agreement. It tends to set the stage in terms of relying more on the
spot market in starting to work that process regarding what procedures
we have in place for buying and trading.
Information Report: Utilities Lease of General Fund Properties
Commissioner Eyerly said staff has done a good job on getting the rent
lowered on the properties they use and in being realistic about what the
utilities are charged for the use of those properties.
Chairman Johnston said we agreed with some of what was done, but not
with everything that was done. I would certainly agree that when the
City owns property, it is entitled to a return on their investment
through the rent, but what this report reaffirms to me is that the
arrangement is a better arrangement for the City than it is for the
utility. I feel it would be better for the utility to own the property.
Mr. Mrizek said what we are saying is that it would have an adverse
effect on the General Fund. Being a department of the City, we
recognize that adverse effect. I don’t know if the General Fund would
be interested in selling existing properties, but for properties in the
future that we may need, we would certainly want to take that action.
Commissioner Grimsrud said going along wi~h Fred, we are at least taking
a step in the right direction. It is probably very hard, just like in
a lot of these areas, to make it appear as a business type decision. We
are a part of the City, and what we need to do is to be fair and
equitable. To me, 10% return on equity is not an outrageous rate, as
long as this asset is appropriate. I think the rent is going in the
right direction, and we ought to review it periodically to ensure that
it is a fair price.
Mr. Mrizek said we have that policy and will continue to assess the
properties on a timely basis.
ADJOURNMENT: The meeting was adjourned at ii p.m.
EXECUTIVE SUMMARY
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UAC:03/06/96
Page 6