HomeMy WebLinkAbout1996-05-28 City Council (17)TO:
City of Palo Alto
HONORABLE CITY COUNCIL
FROM:CITY MANAGER DEPARTMENT:UTILITIES
AGENDA DATE: MAY 28, 1996 CMR:281:96
SUBJECT:Review of Work Plan of Theodore Barry and Associates (TBA) for
an organizational review of the Utilities Department
REOUEST
This report transmits to the Council the work plan approved by the Utilities Advisory
Commission (UAC) for an organizational review of the Utilities Department by Theodore Barry
and Associates, and requests Council input directly to the consultant on any additional utilities
operations issues to ensure they are being addressed.
RECOMMENDATIONS
Staff recommends that Council review the attached work plan from Theodore Barry and
Associates (TBA) along with the comments made by the Utilities Advisory Commission (UAC)
regarding the work plan and provide the consultant with any additional comments which should
be included in the Work Plan.
POLICY IMPLICATIONS
This Work Plan does not represent any change to existing policies.
EXECUTIVE SUMMARY
Council approved the contract with Theodore Barry and Associates for the Utilities
Organizational Review at the March 11, 1996 meeting. The contract required that TBA develop
a proposed work plan, present it to the UAC and give the City Council an opporttmity to discuss
with the consultant their concerns with the Utilities’ operations to insure that those issues are
being addressed in the review.
The Work Plan was.reviewed, discussed and approved at the UAC meeting of April 3, 1996.
Sections from that meeting pertaining to the discussion are attached to this CMR. The next step
in the process is for the consultant to meet with the Council.
CMR:281:96 Page 1 of 2
FISCAL IMPACT
There is no fiscal impact.
ENVIRONMENTAL ASSESSMENT
The Council finds that this project will have no significant environmental impact.
ATTACHMENTS
Exhibit "A" Work Plan from TBA
Exhibit "B" Minutes from the UAC meeting of April 3, 1996
PREPARED BY: Rosemary Ralston, Utilities Administrator
DEPARTMENT HEAD APPROVAL:
CITY MANAGER APPROVAL:
Manager
CMR:281:96 Page 2 of 2
City of Palo A!to
Utilities Advisory Commission
Item
I.
2.
Wednesday, April 3, 1996
City. Council Conference Room
MINUTES
Roll Call ~2
Oral Communications .....................2
o Approval of Minutes: March 6, 1996 ..............2
Agenda Review and Revisions .................2
Consent Calendar .......................2
o Unfinished Business
a.
b.
do
..................... 34
Information Report, Copper Piping Corrosion .......34
Information Report, Update on Discharge
Standards for the Regional Water
Quality Control Plant ..................18
l.Ten-Year Financial Forecast Update ..........36
2.Information on Rate Increase to
Augment the Calaveras Reserves .............47
3.Information on Calaveras County
Agreement with NCPA ...................55
FY 1996-97 DSM Program Recommendations .........56
Quarterly Electric Issues’Update ............64
New Business .........................2
a.Meeting with Organizational Review
Consultant, TB&A .....................2
8.City Council Referrals ....................66
o Reports of Officials/Liaisons ................66
a. NCPA ...........’ .......66
b. BAWUA ...........................66
i0.Next Meeting: May i, 1996 ..................66
iio Adjournment .........................66
250Ham~tonAvenue.Palo~to.94301 ~415.329.2277F~415.321.0651
Chairman Johnston called the .meeting to order at 7:30 p.m. in the
Council Chambers, 250 Hamilton Avenue, Palo Alto, California.
Item i. Roll Call.
PRESENT: Commissioners Chandler, Eyerly, Grimsrud, Johnston
ABSENT: Commissioner Sahagian
COUNCIL MEMBER PRESENT: None
Item 2. Oral Communications - None.
Item 3. Approval of Minutes of March 6, 1996 Meeting
Chairman Johnston: I have one correction I would like to make on Page
24, Item 6.b. The first large paragraph, which was attributed to me,
was actually made by Jane Ratchye, so I would like the minutes to
reflect that Ms. Ratchye delivered that paragraph.
MOTION:Commissioner Grimsrud: I move approval of the minutes.
SECOND:By Commissioner Eyerly.
MOTION PASSES: Chairman Johnston: All those in favor~ say aye. All
opposed? That passes unanimously on a vote-of 3-0 with Commissioners
Chandler (temporarily) and Sahagian absent.
Item 4. Agenda Review and Revisions
Chairman Johnston: I want to propose a couple of changes in the agenda.
For Item 7.a. involving the organizational review, I would like to bring
that forward after Item 5. I would like to interchange Items 6.a. and
6.b. The second change is at the request of Glenn Roberts, who felt
that the order would be more appropriate that way, in that they are both
related topics.
Item 5. Consent Calendar - Nothing
Item 7.a. Meeting with Organizational Review Consultant, TB&A
Chairman Johnston: I would like to welcome the consultants here tonight
for the organizational review. We will turn it over to the TB&A people
who have some materials prepared.
MINUTES UAC: 04/03/96
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Tom Resh: I will be the engagement director for the project I am with
Theodore Barry and Associates (TB&A) With me this evening from Resource
Management International (RMI), the firm with which we are teaming on
this study, is Ron Oechsler, Harold Morgan, and from TB&A, we have
Duncan Ross and Tim Szybalski. These gentlemen and myself will be some
of the key people involved in the study. There are others from both of
our firms who will also .be involved. A little into the presentation
this evening, we can go over the roles of the various individuals. With
that as an introduction, let me begin by saying thank you to the UAC and
to the Blue Ribbon Panel for selecting the team of TB&A and RMI to do
the study. We look forward to performing it, and we are prepared to get
started immediately. What we have put together for ..........
.................................. this
evening is a brief presentation of our work plan. One of the reasons I
asked all of us to come to.this meeting tonight was to actually hear
from all of you regarding any specific policy issues or directions that
you might wish to share with us as we launch into the study. So I
certainly want to make that part of the agenda and are looking for your
input. We recognize that the study is being done for the UAC, and we
want to make sure we maintain open lines of communication. As you will
see, we have planned a lot of our work around the milestones of these
meetings.
Commissioner Grimsrud: I’have a quick question for you. Did you get a
chance to see any of the minutes or discussions about people’s comments
on the proposal and presentation?
Mr. Resh: No, I have not seen any of the comments or minutes. We did
get via Rosemary Ralston some of the questions that were raised, and I
gave her some feedback information on that.
Commissioner Grimsrud: There was some discussion that might have been
of interest to you in preparation for this meeting.I was just
wondering if any fee,dback had gotten back to you.
Mr. Resh: Yes, I did from Rosemary.
First, I would like to go over the work plan briefly. There are several
different levels of the work plan’ that are included in this handout.
-One gets into quite a bit of detail on the specific tasks. We do not
plan on discussing that this evening. We want to review with you the
work plan p~etty much as outlined in our proposal, and now it has been
fine tuned to match the schedule for the project. I want to
MINUTES UAC:04/03/96
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specifically go over the first four initial tasks to make sure you are
comfortable with the direction we are going to take with those. Then we
will takequestions that you may have. I would ask the team members to
bring to our attention anything I may have missed or that needs further
elaboration.
To briefly review the scope’and objective of the study, the objective is
to review how the department is organized, determine if the utility is
performing at a high level of efficiency and effectiveness in providing
responsive.and reliable service as expected by the customers, covering
the electric, gas, water and wastewater parts of the operation.
The scope includes the utilities organization, the general
administration, administrative services, customer operations, the
distribution parts of the business -- water, gas and electric -- and the
collection side -- wastewater. Resource management is the supply and
demand side of the business, also to review the interface with services
that are provided from other city departments and the Joint Action
Agencies, and to review the EIA forms, which will be an important part
of some of our benchmarking work. That briefly covers the objective and
scope. It is pretty much as you had outlined in the Request for
Proposal and as we included in our proposal to you.
As for our overall approach to this study, on a study of this nature, we
typically break it down into different phases. The phase that you
really contracted with us to perform is Phase I, a management study,
which includes reviewing the opportunities for improvement, the
performance of the utility, and to develop a detailed improvement plan.
The actual implementation phase springs from that and will be the work
undertaken by the utility department to actually implement our
recommendations. One of the things that both of our firms are very
cognizant of are that anything that comes out of our operational review
certainly has to be implementable. We bring that kind of operational
focus, so as we are developing recommendations for the utility, we will
.be keeping in mind that they must be practical and implementable.
The next slide shows our overall organization and represents most of the
people that are here this evening. I do want to point out two changes
in this chart which we submit for your approval relative to a couple of
changes we have had in personnel since our original proposal. On the
RMI side, under Customer Expectations, we have inserted the name of
David Ulm of RMI. Ron will address the nature of that change.
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Ron Oechsler: In our proposal, we had earmarked Dr. Betsy Ailen to lead
the Customer Expectations portion of the project. As we indicated in
our proposal, it could be done through the conduct of focus group
interviews or individual interviews with the city’s customers. It could
include the largest customers or a cross-section of perhaps of some of
the large commercial users, as well. In our proposal, we are
substituting Mr. David Ulm for Dr. Ailen, who is no longer with RMI.
David comes with long experience in working with publicly owned
utilities. He was manager of corporate performance for the Salt River
Project and also at Salt River, he was the project manager for a
strategic review of all of their operations. In that context, he led a
strategic planning team and conducted extensive focus group interviews
and other tools to evaluate the performance of the SRP, which is one of
the largest publicly owned utilities in the southwest. David comes well
qualified, and we are very confident that his addition will mean a
strengthening of the team.
Mr. Resh: The other change I want to bring to your attention for your
approval is on the organization side of the chart. You will see that
under the heading VCM Analysis the name of Duncan Ross for TB&A. Duncan
is here this evening. It is our recommendation that we replace Richard
Lamb, who was i~ our original proposal. There are a couple of reasons
for that. First of all, Duncan just moved to the bay area from our New
York office, so he will provide a local person for the team. Also,
Duncan is a manager with our firm. Richard Lamb was an associate. We
are prepared, however, to honor all of the rates as included in the
proposal and substitute a more experienced individual, but still bill at
the associate rate for Duncan’s involvement. Duncan also brings more
experience in organizational reviews and our VCM process, so we think he
is an excellent addition to the team and will provide a lot of value to
the city for the study.
Mr. Morgan: May I point out one other detail? My name is Harold
Morgan, and it shows Gas/Water/Waste Water by my name. I am only going
to be involved with water and waste water, and Ron. Oechsler will be
doing the analysis on the gas system. It is a minor detail that I
wanted to point out.
Mr. Resh: We would be happy to provide the detailed resumes on these
changes. I have not provided those, as yet, to Rosemary who has been
coordinating all of this information. Another thing I might mention is
that Duncan is an undergrad from Stanford University. I don’t know if
that is a plus or not! So he has the four years of ties to the City of
MINUTES UAC:04/03/96
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Palo Alto, and probably influenced him a little in getting him to move
back to the bay area. With those changes, what I would like to do now
is turn this over to Tim Szybalski to briefly run through our work plan,
and then I will wrap it up with a few additional comments about our
schedule.
Mr. Szybalski: Thank you, Tom. The first slide is intended to show
that the overall work plan is designed t0 give you some input into ~he
process so that you can effectively manage the scope of the study. Our
Step I is really to kick off the project, to make various data requests
and do a high level diagnostic, basically the first look at the
organization relying upon some benchmarking data to identify potential
areas for improvement. At the end of that stage, we would come back to
this forum and say, these are the focus areas we recommend looking at.
The second stage is a more detailed analysis, once we agree upon the
scope of the effort. We will be doing additional analyses in all of the
key areas and come back with descriptions of findings in each of those
areas. Step III is the final report and implementation plan which again
gives you a chance to look at and question it and influence the final
report and implementation.
As the organization chart suggested, there really are two parallel
efforts. The first is the organizational review itself, and it has
three tasks. These will all be going through the same kind of steps in
the overall plan. One of the tasks will be competitive benchmarking,
and basically, we will be comparing a panel of utilities against the
performance of this organization, both on gas, water and electric. We
have found that to be a very quick and efficient way to screen areas to
focus attention. So we will be doing competitive benchmarking. Tom
will be talking a little more about that.
Value-centered management is a way to get at some of the less measurable
things, particularly what staff groups do, and look at some of the
products and services and value-creating in some of those staff
departments. Then finally, there will be the organizational analysis.
We will be looking at responsibilities, staffing levels, work flows and
reporting relationships, as well as just how the knowledge, information,
responsibility and rewards flow through the organization, plus any
recommended organizational changes.
The parallel chart is what the RMI team is going to concentrate upon,
with the exception that Harold will w~rk on the benchmarking side of
MINUTES UAC:04/03/96
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water, as’well. Basically, it will be a review of the strategies for
meeting competitive threats, analysis through focus groups of customer
service expectations, and looking at customer retention programs. So
those are the key phases or steps that the project will be going through
and the key tasks that will be performed. Tom will talk a little more
about the schedule and how we propose to work with you to accomplish
those tasks.
Mr. Resh: This is an overall bar chart schedule of how we see the
project unfolding. There is the kickoff meeting tonight, and we
envision completing the final presentation no later than the October 2
meeting. The next slide indicates some specific milestones. We h~ve
planned these milestones around our understanding of your scheduled
meeting dates over the next several months. So tonight we are looking
for approvals of our basic approach to ’the project. On May i, we plan
on furnishing a progress report. On June 5, we plan on having
recommendations on areas for detailed analysis, and at the meeting
changed from July to June 26, there will be a progress report on our
activities in competitive action plans and competitive alternatives. At
the meeting on August 7, there will be a presentation of the results of
our detailed analysis, and on September 4, we will have presented to you
a draft of our final report. At the meeting of October 3, we anticipate
having all of the comments back and incorporated into the final report
with a final wrap-up presentation at that meeting. So we have scheduled
our deliverables and milestones around these key meetings. We
anticipate that at every one of these meetings,~ there will be at least
one of us here to do the presentations, and at times, there may more.
We will focus the people here as dictated by the agenda items.
As to the first four tasks, we are looking at the next month where we
will be concentrating most of our activity, the first item, specifically
the electric survey. It is not to ignore the other surveys, but this is
a very extensive survey. It is something that you may recall from our
proposal that we have been doing in the industry now for about seven
years. It just takes some time for the utility to be able to assemble
all of the information that will go into this benchmarking survey, so we
will get that started right away.
We have already started some plans for a kickoff meeting with the
utility director and his staff. It will be next Thursday, April Ii. We
will have the utility director, the’assistant directors and their direct
reports at that meeting. What we are going to be doing in the course of
that meeting is several things. We are going to go over the scope of
MINUTES UAC:04/03/96
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the project and how we plan on conducting it and the kind of input and
information we will be requesting from the various departments in the
utility. We are also going to be doing a two-hour seminar on
benchmarking. We have found this to be very beneficial in kicking off
this kind of a study to get people really aware of why you do
benchmarking, what the end results can look like, and what kind of
participation we will require in getting this done. We think this
emphasis is important, because the bench_marking is really one of those
tools we have that constantly keeps the objectivity of this study in
mind. It is very hard data that we use in comparing the performance of
utilities all over the country.
We have also begun, through the support of Rosemary Ralston, to develop
some of the data requests. This slide shows a list of starting points
of information that we need to gather and review as part of the study.
Again, we hope to have that pretty well completed within the first month
or so of the study.
The other element we want to accomplish early on are the initial, high-
level interviews. It is our anticipation, unless you direct us
otherwise, to plan on individual interviews with the UAC members, with
City Council members, which we .have found particularly informative in
the past to get some objective feedback from the City Council members
and their constituents, also with the other city departments that
provide services and support tO the utility, and with the senior members
of the utility staff. So we hope to get all of those done during the
first month of the study.
The next slide, Tangible Project Benefits, reiterates some of the
benefits that we think will accrue from this study. The bench_marking,
the objective assessment, the organizational review which, as Tim has
already outlined, will be the lead responsibility of TB&A to conduct
that study. That was a concern that was raised during the process
regarding the involvement of RMI because of their continuing work for
the utility. We are going to take the lead on that study. The VCM
analysis we feel will provide some very informative information about
high value services that are provided, and it will also help. us identify
lower value services that perhaps can be reduced or eliminated. The
issues of competitiveness, custome~ expectations, and water and gas
issues are the areas where RMI will be focusing their attention. One of
the things we need to resolve early on is to just how best incorporate
the customer input into the study. It was an important part of our
proposal, although it was not specifically called out in the Request for
MINUTES UAC:04/03/96
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Proposal, that we sort out within the next week or two how best to
accomplish that, whether it would be through surveys or interviews or
focus groups, working with the utility to’see what kind of information
they may already have on their customers. We know this is always a
sensitive area, and we want to do it in the best forum possible to
provide the best possible input from the customers. That concludes our
prepared material. We will be happy to address any questions or
concerns.
Commissioner Grimsrud: I was wondering when we are going to discuss
what to benchmark. I guess it is part of your new work where you say
the first task is to decide what to benchmark. I was wondering if that
will happen in this workshop next week, or is that what will happen
tonight?
Mr. Szybalski: If I could answer, we are really prepared to go ahead
with the electric survey immediately. It is a well prepared series of
50 or so questions that culminates in a survey that compares a panel of
utilities across the country. So I guess we are really asking for
approval to go ahead with that particular survey, which is a broad
survey of utility practices and utility performance measures. I did not
bring a book with us today that would show it, but I think the selection
committee had a copy of that book.
.Commissioner Grimsrud: I guess what I would have liked to see is
perhaps just a general sense, given that survey, on the kinds of
parameters that you see to be important for benchmarking. Maybe a list
or a table with some of the major factors that are used for
benchmarking, and for us to respond to that. Otherwise, we will get the
results, and we would not have had any input in the process.
Mr. Szybalski: I could take a few minutes to walk you through that, but
it would not be a formal presentation. Basically, we go through the
major processes that occur in a utility company. We go through basic
reliability statistics, the overall T&D organization, customer service
kinds of responses, maintenance practices, store management response
outage kinds of processes, and most of these are supported by the
various measures you .have around customer outage minutes. We ask a lot
about construction practices and construction crew sizes. We have been
monitoring over seven yea.rs the various kinds of trends in each of those
areas, meaning size of construction crews are generally getting smaller,
the kinds of work practices using rubber gloves or how people approach
energized lines, some of the safety rules, so it is about 50 or 60
MINUTES UAC:04/03/96
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detailed questions about practice and all the basic processes in an
electric utility.
Commissioner Grimsrud: Maybe it would be in the workshop, but it would
be good to show an exa!~ple of the output of that for the major benchmark
parameters that you use, for us to get a feel for whether that makes
sense for Palo Alto or not, or should we do something a little bit
different.
Mr. Resh: Paul, we would be happy to do a couple of things. First of
all, I can have copies of our most recent surveys for transmission
distribution, customer service and marketing sent up here right away so
that you can look through all of those. We certainly invite your
participation in the seminar. We will plan on going over a fair ~mount
of that information at the seminar, although it is not the sole purpose
of doing it. The primary purpose is perhaps more to educate the staff
on what we are trying to accomplish with that information. We would be
happy to get your input on it. One of the things we have experienced in
the past with the survey is that it tends to be, if anything, overly
ambitious in terms of the fact that there is quite a bit of information
that does not necessarily apply to every different utility. We have
developed it over a number of years. There are actually 555 different
data points or pieces of information in the survey. We find that in
some cases, what actually makes sense is to pare some of that back
rather than necessarily doing it all. It can be a bit of a task getting
all of that information down.
Chairman Johnston: I would like to see us take you up on your offer in
terms of distributing that material. I then suggest as a mechanism that
any commissioners who have comments on the applicability to Palo Alto,
or whatever concerns they might have, there would be a mechanism for
them to get in touch with Ed Mrizek’s staff in time for the April Ii
meeting. Then we can get feedback through that meeting.
Commissioner Grimsrud: That sounds good. My thought also is that it is
not necessarily just what is in the survey, but maybe examples of how
you analyze the survey results and how that might be presented. That
might be a part of the benchmarking .thing also. As you mentioned, the
survey may have 500 data items, but for Palo Alto, .there are certain
ones that are important, and how you interpret them are important. That
is where I see us being interactive, making sure that we are really
going after meaningful information before it has all .happened.
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Mr. Resh: Great. We welcome that input and will get that to you
tomorrow for the April II meeting. We will send two different sets of
documents. One will be the actual raw survey forms which are not
necessarily quite as meaningful as the end reports. The end reports
will be readily apparent and you can see the performance comparisons in
them. The forms have been developed over years of use in terms of how
best to get people to provide the raw data, and then we take those data
and put them through a whole process that we have developed where we
actually produce the end study. You will probably want to focus your
attention on the final reports and not so much on the questionnaires
themselves.
CQmmissioner Chandler: I have a question about the survey which I am
not certain I understood from the presentation. Is the survey, in
general something that you undertake generally? Or is it something
that is being undertaken as a specific part of this project?
Mr. Resh: The survey that we are referring to is a survey we have been
doing of the utility industry for the last seven years. It is in three
parts, transmission/distribution, customer service and marketing. What
we are going to do is to ask the utility to fill out the survey
questionnaires, and we will put the Palo Alto information into our
database of information and produce customized reports for Palo Alto for~
the purposes of the study.
Commissioner Chandler: I wanted to make a couple of general comments
about the selection process, and everything I am going to say is
reflected in our minutes, which I really would commend to you to take a
look at. There were a couple of principle reasons why I, for one, felt
pretty strongly that you folks were the right team to be working with us
on this, plus one thing that cut the other way, actually. There is an
ironic element to one of the reasons. That is, one of the people who
was on one of the competing teams happens to have been a utility
commissioner in a city where you did a study previously, and we knew you
had done the study because you had referred to this city. The
commissioner talked at length about how effective that study had been,
how useful it had been, how specific it had been in the scope of its
recommendations, and the way you had then worked to develop an
implementation plan. I think it was inadvertent on .this person’s part,
but it certainly made an impact on me.
The second factor that, to me, was very favorable was the sense of
independence I got from you in terms of the way you would work with the
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various constituent bodies in the city from the City Council to the UAC
to the utilities staff itself. I feel that that independence is very
important. The factor that cut in the other direction was that your
proposal was more focused than some of the others on the competitive
assessment. We understood that Dr. Exler had been involved in doing
work for the city before, and that the work had been well received.
That was a favorable element, but I felt that I wanted to have a lot of
focus on day to day operations , really working to implement specific
task-oriented suggestions in the traditional organizational study mode,
rather than spending a lot of time on broader policy issues. At the
time of the selection, I felt that this was an opportunity where I could
provide some of that feedback to you, and perhaps others who felt the
same way could also. There might be a possibility of adjusting at the
margin here where the emphasis is given, with all due respect. We
respect your work, but this is not a repeat of that previous assignment
nor an update of it to deal with the changing landscape that we have
today. So I wanted to provide that feedback, because those are very
important elements to me, and I think to others, as you look back at the
record that we created in terms of what we want .to get out of this
process.
I spent a good part of this afternoon giving a review to a pretty darn
good employee who, none the less, has some areas for improvement. It
was a very tricky process to impress the need for improvement on someone
who was doing a good job and also wanted to be rewarded and wanted to
feel they were doing the right things. I think some of that same task
is before you, so if you keep that balance in mind, it will be
successful.
Commissioner Grimsrud: One other question I have in terms of the
benchmarking is making sure that we get apples to apples comparisons
with other utilities. I guess the process is that you are going to
collect data from Palo Alto and then use an industrywide database to
make some comparisons. I was just wondering where, in your schedule
here, we would get feedback as to what is the appropriate way of
ensuring that we have an apples to apples comparison. We cannot compare
Palo Alto with the City of Los Angeles/LADWP and/or if there are
somewhat different kinds of municipalities, what kind of an analysis
might you to unbias those kinds of comparisons. I wondered when that
would happen.
Mr. Szybalski: Clearly an apples to apples comparison is virtually
impossible in this benchmarking. The utility companies are very
MINUTES UAC:04/03/96
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different; the operations are very different, and the service
territories are different. Most of our adjustment comes with doing the
first cut at comparisons, and then trying to actually understand the
background of the utility, what is different about it, and how it
compares to the panel. There are some areas where it may be in a fourth
quartile and there may be some very distinctive reasons, given the
service territory, why that is true. Nevertheless, it gives us a place
to start looking if a performance level is very different from some
other utility. As we have approached the municipal market or even the
cooperative markets, smaller kinds of organizations, yes, the comparison
to these larger companies does become an issue. We have generally been
able to show people it is a good standard to hold them to. Maybe
municipals may, in general, be lower in some of the areas, and our
experience is that in some areas, they generally are lower, but that is
not always the case. It allows us to really identify superior
performance and compare the utility to that performance level. So we
think that for what we are trying to do, it is a fair standard to help
us identify where potential areas of improvement are. Many of the
practices are not really related to size. They are really related to
planning, scheduling, crew performance, those kinds of things. So it is
a first start now. We are prepared to supplement, to some extent, with
a municipal panel of your choice. That is probably something Tom would
be glad to talk to. We do have municipal utilities in the panel.. They
tend to be the larger ones. We do have a database of some smaller ones
that we have worked with. They can be supplemented in that way.
Commissioner Grimsrud: So in other words, you could compare us with
somewhat like in kind, a dozen or so municipal utilities or small
investor-owned utilities, for that matter?
Mr.. Resh: One of the things I have done over the last several weeks is
that there are a number of these studies going on right now or are about
to be started. The City of Santa Clara is going to be doing a study.
The City of Redding is going to be doing a study. We proposed on those
studies, and although we were not selected, I have discussed with the
key people in those municipalities the possibility of working with some
of their data and with their consultants to do some comparisons between
the results of their study and the results of ours. To the extent that
that is a prudent thing to do (and we probably need to talk about that
before we do it), that is certainly a possibility. They have all been
open to doing it, and that may be a way of supplementing some of the
information.
MINUTES UAC:04/03/96
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Tim made an important point that I want to emphasize. In terms of
looking at the future and looking at the competition for this utility
and this service territory, we really think it is important to focus on
what the investor-owned utilities are doing. They are much more likely
to be the competitors than another municipal that simply does not have
the resources to reach out and do the things that a PG&E might do up
here or that a Southern California Edison might be able to do .in
Southern California. So we do not want to lose that perspective. As
you may recall, one of our credentials that we used in presenting our
capability for doing this study was the study we did for Riverside. We
relied very heavily on investor-owned performance in doing the
benchmarking study for them. I actually believe that if you were to
call the director down there today, he would say that was the right
thing to do. Comparing them to Burbank and Pasadena and Glendale would
not have been nearly as meaningful as comparing them to San Diego and
Southern California Edison. I think that same situation will be found
here. We are prepared to supplement it, and one of the ways might be to
coordinate with some of these other ongoing studies.
Mr. Oechsler: As we outlined in our proposal, one of the steps along
the way in the interpreting of the benchmarking results is to take into
account those factors of the environment in which Palo Alto is operating
that can explain differences. That was an area where RMI will be
Working closely with Timand his colleagues, because we do have a very
substantial knowledge of the environment in which your city functions
and in which other municipal utilities in Northern California operate.
To the extent that that environment introduces special circumstances
that need to be taken into account, we will be working to ensure that
those factors are considered.
Chairman Johnston: We will now take public testimony.
from Richard Gruen who wishes to speak on this issue.
I have a card
Richard Gruen, P.O. Box 2351, Palo Alto: I turned in this card to speak
before you gentlemen had the opportunity to reassure me that you are
thinking along the right directions. The two directions I had in mind
were that I view the utility environment changing such that we will
really have a generation utility in electricity, for example, and a
distribution utility and a transmission utility.. I envision the
competition being someone like PG&E who says, we do generation, we do
transmission, and how much do you charge for distribution. Looking at
how efficient we are in each of these sub-utilities, if you will, is
probably equally important for the competitive environment. I am
MINUTES UAC:04/03/96
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thinking in terms of someone like Sun Microsystems, who might be a
potential customer for us, where PG&E would be the competitor. Either
of us could provide distribution to them relatively easily, certainly
for the Palo Alto and also for the Mountain View areas. What you would
like to know is, could we compete with them? Could we make a proposal?
People tend to say, well, our electricity comes out at 6¢ or 7¢ a
kilowatt hour, and they will ignore the differences underneath. Those
differences will become increasingly important in the future. A second
point is really similar in that investor-owned utilities are going to be
a part of the competition, so they better be a part of the benchmark.
They better be what you are comparing it to, rather than saying, Santa
Clara, because they are a municipal, is somehow more significant. I
think you are absolutely right in looking at the IOU’s. Thank you.
~hairman Johnston: Thank you, Mr. Gruen. Next is Mr. Debs.
R. J. Debs, 3145 ~Flowers Lane, Palo Alto: Thank you, Mr. Chairman.
This is not my idea, but it is a good one. The traffic situation in
this town has gotten very bad. People are speeding and running red
lights, and since there has been put into the utility bill a matter of
graffiti, it seems to this gentleman who cooked it up that perhaps
something could be put in that the police have five motorcycles and
traded in two patrol cars. They are actively starting to work on this.
Two of them have qualified, and three are in ~training. Also, there is
a team going out about red-light running. There are automatic agents
that do this, and I am trying to pursue it with the council to take them
up. I have talked to one of you on this, and other cities, including
China, has them. The police are sitting on this, and if we could-give
it to everyone in town that way that it would be good to slow down and
to watch out going past red lights and also trucks are really violating
it. Thank you.
Chairman Johnston: That completes the comments from the public.
Mr Mrizek: I have some comments on the process as it regards staff and
what I have seen presented here. My first comment has to do with the
presentation under the initial interviews page where the City Council
members are listed. I believe that the presentation indicated that the
consultant would probably be interviewing council members one on one.
In the proposal that we sent out, we did indicate to give the council an
opportunity to discuss the concerns of the utilities operation for
making their input. I have not had an opportunity to find out from the
City Manger whether the council wants to have this performed at a
MINUTES UAC:04/03/96
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council meeting with the entire council listening to the consultant, or
on a one-on-one basis. I would like to have that clarified before we
proceed with that step.
Also, on that page, I would propose that we include the City Manager, as
far as interviews, and also that we add a Joint Action Agency
representative, Mr. Mike MacDonald of NCPA. I have already alerted him
that the study is under way, since one of the assignments is to look at
our involvement with joint action agencies. In the schedule, as far as
meetings, it shows that the final report would come to the commission in
October. I would add a step, because once the commission reviews the
report and carries it to the council, that would probably take place in
November, and the commission would probably want the consultant to be
present at that time. Those are my only comments at this time.
MOTION: Chairman Johnston: I move that we approve the work plan and
actiod items, along with the comments that have been provided by Mr.
Mrizek and Commissioner Grimsrud in response to his request here.
SECOND: By Commissioner Chandler. I made a comment about the degree of
focus on competitive assessment versus other issues that I had thought
reflected some discussion we had at the time. I do not want to leave it
out there as a confusing matter. If the rest of you folks do not have
that recollection and you thin~ that that suggestion is out of order, we
ought to make that very clear and to just proceed. If you thought that
was the right suggestion, we ought to clarify that, as well.
Commissioner Grimsrud: Not everyone was in favor, one way or the other,
as I recall. I think Dick Rosenbaum, among Others, wanted more of°a
straight, mundane type of benchmarking. There were others, like myself,
that were interested in the competitive a~pects of it. There needs to
be some balance, and it is a question of what balance we have. There
were a whole lot of presentation points made from all of the proposers
on the competitive issues, and not very much on just straight
benchmarking. Perhaps what we should say is that we are very
interested, and that was one reason why I was very strongly supportive
of your organization. I felt that you had the tools to do a good
benchmark procedure, as well as a competitive assessment. So there
needs to be a balance, and as we proceed more, we may get a sense of
whether we need more of one thing or another. At this point, I am
comfortable with what you have presented.
Chairman Johnston: I agree with Mark’s comments, and it is probably a
MINUTES UAC:04/03/96
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good idea ’that we do that, because there clearly was a range of opinion
on this commission in terms of how much of it should be toward
competitiveness, looking ahead at a competitive environment, and how
much ought to be aimed at just having the most efficient, streamlined
operation that we can have on more of a nuts-and-bolts type of a study.
I was struck in the presentation that you gave that you had clearly the
best tools. I agree with Paul on that. The benchmarking you spoke of
was much more specific, much more detailed than any of the other people
who came here to propose, many of whom gave very good presentations but
did not seem to have the same tool kit.
On the other hand, I, too, was not entirely happy, Tom, with an answer
that you gave to one of the questions at the meeting. It did make me
believe that you were going too far into the competitiveness issue,
almost to the point that areas like water and wastewater collection,
which are not planned for d~regulation, would get left a little by the
wayside. I certainly do not want to see that happen. I want to see a
balance here. I am interested in both sides. As you plan to do a lot
of interviews, you may hear some range of opinions through those
interviews, but it is important that this be designed to be a
comprehensive study, designed to be able to address a variety of issues
related to competitiveness, which means just doing the best job you can,
as well as competing with somebody else who is trying to get the same
business. So I would add that comment. The bottom line is that
everyone on this panel voted for having you here. Our main hope is that
we still feel that way when you are done! Are there any other comments?
Commissioner Eyerly: I am sure you realize that you are dealing with
political bodies. The UAC is not so political, but the council
certainly will be, and you will have input in interviews from a variety
of sources. With your background and from what we have seen, whether we
trust that you can balance that in your benchmarking and on your return
and as you move ahead, if you do not, you will probably get your
critiquing from here, for sure.
MOTION PASSES: Chairman Johnston: Is there any further discussion on
this motion? All those in favor, say aye. All opposed? That passes
unanimously on a vote of 4-0 with Commissioners Chandler, Eyerly,
Grimsrud and Johnston voting aye and Commissioner Sahagian absent.
Thank you very much. I appreciate your time. It looks like we will be
seeing a fair amount of you, essentially at every meeting from here on
for awhile. I wish you luck in the study. I am sure you will get the
cooperation you need from the utility department. It should be
MINUTES UAC:04/03/96
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interesting, and hopefully, rewarding for all of us.
Item 6.b. Information Report: Update on Discharge Standards for the
Regional Water Quality Control Plant.
Chairman Johnston: Glenn Roberts will make the presentation.
Mr. Roberts: Than~ you, Mr. Chair. I appreciate the commission’s
indulgence in rearranging the order of these items. It makes a little
more sense to talk about the standards first. Corrosion is really a
subset of a bench control measure for compliance with those standards.
I will make a couple of brief introductory comments and then turn the
bulk of the presentation over to Phil Bobel, Manager of Environmental
Compliance. Also present tonight are Bill Miks, Plant Manager, and
Kelly Moran, Manager of Environmental Control Programs, who will be
participating in the presentation, as well.
With regard to the update on the permit renewal and compliance with
standards, I want to enter one piece of information about the process
that has happened since last this was before you in October of 1995. As
the commission knows, we have been working on a joint effort with the
other cities in the south bay, Sunnyvale and San Jose in particular, to
develop a coordinated approach in dealing with the Regional Water
Quality Control Board on the relaxing of standards and reissuance of the
permit. There has been one significant event that has resulted in
somewhat of a step sideways temporarily that I want to bring to the
commission’s attention. The previous executive director of the Regional
Water Quality Control Board, Steve Richie, left that post and has now
taken the position as executive director of the San Francisco PUC. He
is dealing with issues like Metro and Hetch Hetchy, those kinds
of things in the San Francisco water system. All of the discussions
that we have had previously regarding this joint effort and the strategy
and the process involved were developed with him and had his
concurrence. We now have a new executive director, a lady named Loretta
Orsinian, who comes to this with some background experience but not that
specific involvement and commitment to the joint effort. As a result,
we have had to regroup somewhat. We are meetingwith her on April 5 to
review this approach with her. I do not necessarily foresee any major
problems or setback, but it has resulted in some items going on hold
temporarily. I do not know if that will be a problem for the overall
schedule, but we will know more once we meet with her and once we are
able to discuss the specifics that Phil Bobel will be telling you about.
Hopefully, we will obtain her concurrence as the new executive director
MINUTES UAC: 04/03/96
Final Page 18
of the San Francisco By Area Water Quality Control Board. I simply
wanted to highlight that for your attention. The good news is that we
are even more committed to the joint effort with our cities, working
towards a consensus, but we have had to take more time to do it than we
originally thought.
Commissioner Grimsrud: I assume the troops are pretty much the saxae,
that is, the people on the board that work with you on a day to day
basis. It is just the executive director who has changed. Or does the
executive director represent all of the intelligence of the agency?
Mr. Roberts: Clearly, the day to day staff, whom Phil knows by name and
bY sight far better than I do, could talk about it in a little more
detail. But yes, the people there, the technical staff and the policy
staff are still, by and large, the same, but of course, they take their
direction from the executive director, and her approach to this is
really key. Also, there have been some changes on the board, as well.
Some new members have been appointed to the board, and she needs to
develop her approach consistent with the board’s direction and policy as
well. It is just taking a little time to sort through that, but the
technical staff, by and large, is the same.
Commissioner Chandler: I have a general question. One thing I noted in
this report was that the City of San Jose is developing some data to
support a site-specific concentration standard of eight to ten parts per
billion. I am wondering what is the process to collect those data, and
what can we do to be supportive of that effort. It certainly was one of
the bright spots in this report.
Mr. Roberts: That is a part of the joint effort that we are working on.
San Jose has undertaken some of these technical activities
independently, as have we and Sunnyvale also. We are still discussing
how to bring them together into focus, but clearly, all three cities are
supportive of that effort.
Commissioner Chandler: Has there been an effort made to actually hire
some consultant for this? It sounds like a pretty detailed study of the
specific makeup of the bay bottom. "Silt, clay, organic matter and
complexing ions in the receiving water trap toxic chemicals and prevent
them from being as toxic to marine life." If there is’an opportunity
there to put some resources into developing a pretty strong,
scientifically based report, rather than just throwing information at
the agency, I would love to see that happen.
MINUTES UAC:04/03/96
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Mr. Roberts: Absolutely. Phil can tell you some of the specifics about
what both is doing and what we are doing in that regard.
~ommissioner Chandler: I have one other question. What was our cyanide
event in November?
Mr. Roberts: I will let Phil speak to both of those shortly.
Commissioner Eyerly: I have a few questions for Glenn. As I looked
through the report and looked back over what we have been through, to
me, the big thing that happened when we were discussing this before was
that there was litigation that came forth precluding ~the enforcement of
the regulations. Now we are trying to meet them. Have you had any
input as far as the litigation is concerned? Is there any discussion in
that vein? We have a letter from the city attorney of October 17th that
indicates he was going to keep us and the City Council updated on that
and provide reports in connection with his twice a year litigation
status reports. Have you had any input from him as far as what he said
in that letter, status reports twice a year on the litigation?
Mr. Roberts: I am not aware of any specific recent up,ate that has been
prepared by the city attorney in that regard, but I think that is due to
the fact that there is really very little new information to report.
The permits have all been remanded back to the regional board as a
result of the settlement of that prior litigation. While, on the one
hand, the permits are technically legally invalid and the standards are
not enforceable, on the other hand, all three cities have jointly taken
the position that we intend to continue to comply to the best of our
ability with those prior permits and standards, pending development of
new ones. That has been more of a policy issue in practice than it has
been a legal situation.
Commissioner Eyerly: That leads me to my second question. You are
working with the other south bay dischargers, and the conditions with
each are a little different, but I am presuming that the regulations
that are going to come down are going to be as stringent as they think
you people can meet individually or collectively. The litigation is not
doing anything, and just what you said is my belief. Although we have
not had any report on that from the city attorney, it seems that what is
happening in the timeframe that you have, they are going to write the
regulations after ample discussions with you people as to what they feel
you can meet. Do you think that is the way it is going to happen?
MINUTES UAC:04/03/96
Final Page 20
r R bet : I think that philosophically, regulators in all areas,
whether air quality, water quality, etc~, tend to approach the process
trying to drive the maximum feasible attainment. That certainly will.be
a key consideration here from federal, state and local governments.
What we are attempting to do in this process with our city is to show
what is feasible on the one hand, but also what is necessary on the
other hand, revisiting some of the science to look at the receiving
waters, to look at the bionics and try to establish what is necessary to
preserve the healthy of the bay, rather than what is technically
feasible. We believe that there are reasonable parameters that can be
established to show what is necessary as well as what is feasible.
Commissioner Eyerl~: Then in your report where you have five key
regulatory documents that you expect to be revised between now and July,
1998 and the discharge permit expires in July of 1998, if those
requirements are not written to what you can meet, where are we going to
be when July of 1998 comes around?
Mr. Roberts: I think that will be a key part of Phil’s presentation
that he will cover.
Commissioner Eyerly:That is what is worrying me, so I will be glad to
hear some answers.
Phil Bobel: I was going to give a little more background than is now
necessary, as I thought there would be a new board member present.
Since you are all so well versed, I will just quickly remind anyone who
has forgotten that we do have these three sewage treatment plants south
of the Dumbarton Bridge. One is San Jose, and as you indicated, Mark,
San Jose has been doing some special testing to try and facilitate
getting a so-called site-specific limit that would take into account the
special features of the south bay, namely, that we have a lot of
sediment and "stuff" in the water that ties up these organic
constituents. We have volunteered to help San Jose either financially
or in any way that we can with testing. They have just completed an
amazing new laboratory in the last year that some of you may want to
visit. They have the best capability to do that kind of analysis of
anyone now in Northern California, including the private sector. We do
not have the same capabilities at our much smaller laboratory, so it is
appropriate that they do that testing. We will continue to volunteer to
help them financially. I am actually amazed that they have not yet
taken us up on that offer.
MINUTES UAC:04/03/96
Final Page 21
The fact that we are below the Dumbarton Bridge has lent itself to some
other types of projects. (Slides are shown) You rejected this one at
the last UAC meeting, which was, moving the bridge. (Laughter) The
pollutants of concern are changing. This is a slide showing that copper
is still at the top of the list and still the one we have the biggest
problem with. It is the best example to work through with you, so I
will be focusing on it again tonight. We do have some updates for you
in terms of some of the other pollutants. Mark was asking about
cyanide. With the cyanide situation, we did have a very special, and
hopefully unique, problem in November. Throughout the month of
November, we had elevated values coming into the treatment plant and
going out of the treatment plant. We traced it back to Ramek, a company
in East Palo Alto that takes waste from others and treats it. It is
essentially a solvent recycler for the most part. They were taking
cyanide waste and discharging it to us, and should not have been doing
so. We are in the process of enforcement action relative to that, an
enforcement action that actually the East Palo Alto Sanitary District
would do, but we are supporting them in their effort. We have modified
the Ramek permit very substantially to include major new monitoring and
management controls at their facility to prevent something like that
from happening again. Those permit provisions are now in place, and
Ramek has a very different and augmented system for catching anything
like this in the future. Cyanide, UP until that point, was actually a
major success story for us. In past years, we have had cyanide hits,
but in the early part of 1995, it had been reduced. It was really this
one incident that was so crisp and so clear that we could trace it right
back to the Ramek facility, and there was no question about where it was
coming from. Cyanide is actually a success story for us. Thinking
back to that list of pollutants I showed, it was one that, had it not
been for this incident, I would have said it was no longer a pollutant
of concern for us. In terms of the standard, it really is not.
To give you an update on a few other pollutants, arsenic is another
problem we had in the past which we think we have licked, as well. It
is no longer a pollutant for us to worry about. It turns out that
arsenic was coming to us from the groundwater in the East Palo Alto area
from a superfund site there where arsenic was used 20, 30, 40 years ago
in wood treating. It was used in a very haphazard manner that became
laced in the ground. ~ It continues to move into the groundwater, so we
have to be very careful that the sewer pipes do not allow that
groundwater to enter it and move on down. That is what was happening.
So the responsible parties in that area have repaired several sewer
lines and actually found one again this winter which was eliminated that
MINUTES UAC:04/03/96
Final Page 22
was bringing arsenic into our system, but not in great enough
concentrations to cause a problem. So this winter, the January/February
values are still well below the limit, which was not the case in past
winters, so we feel like we have found the arsenic problem at that East
Palo Alto superfund site, and we feel we have solved it.
Another good news pollutant story is nickel. This slide goes back to
October of 1992, to give you a little perspective. Actually, this trend
continued all through 1995. We did not have any violations of nickel in
1995. Those very large spikes at the end of 1994 we traced back to a
particular facility, and an enforcement action was taken, and we do not
expect that problem to reoccur. The name of the facility was Hammond
Plating in Palo Alto. It is a fairly small facility near San Antonio
Road. So nickel looks like something that is under control for us, and
this actually distinguishes us a little bit from problems that still
occur in San Jose. In San Jose, both copper and nickel continue to be
major issues for them. As we move through the planned development
process, we will be focusing mostly on copper. San Jose will be
focusing both on copper and nickel. We feel we have nickel pretty much
licked now.
One other success story reminder is that silver, for a long time, was on
our list. Not only are we well below the silver limits for discharge
today, but we have been able to show that the buildup in clams that had
occurred is dramatically less. You have seen charts like this before.
We now have a 1995 datapoint, so we just show it this way over
essentially a decade and a half. It is one of our big good news story.
Chairman Johnston: Phil, what is the standard on that?
Mr. Bobel: There is no standard for the amount of silver in clams, at
least, no enforceable standard. The standard that we have to meet is
2.2 parts per billion in our effluent, which is now down around 0.2. So
we are down one order of magnitude below the standard almost always. It
has had a positive effect on the clams.
Commissioner Grimsrud: These anecdotes you have shown us about these
events we have had in the past brings to my mind the level of
surveillance we will need in the future to be able to identify these
things very quickly, or be able to identify them, period. I guess we
were lucky in the past. I am not sure what process you needed to
pinpoint the source, but I was wondering if we have a surveillance
system that will be adequate to quickly and efficiently find problems
MINUTES UAC:04/03/96
Final Page 23
when they arise.
Mr Bobel: We do have a system, and I would not say it is pure luck,
but I would have to admit that there is an element of that. It is a
needle in a haystack kind of phenomenon. We have a large service area,
and some of these discharges are very small. There are hundreds of
medium sized dischargers, but thousands of small dischargers. It is
difficult to pinpointoa source. We do have systems for doing it; we do
have monitoring in place, and we have to balance the cost of that
monitoring, which is large, against the potential for need. As we
continue to control these major dischargers, we hope that that means the
need for monitoring at least will not be any greater than it is now. I
must say that this incident with cyanide in the fall did bring me back
to the reality that an individual discharger can impact our effluent
even though it is over 20 million gallons per day. To be honest, it
rocked my confidence to notice that one discharger could impact. 20
million gallons a day to the extent that they did. So you are right.
We will have to continue with the aggressive monitoring. I hope we do
not have to increase it.
Here is one other graph on current events, pollutant-specific. The
largest remaining problem is copper. This shows calendar year 1995
updated, but not dramatically changed from data I have shown you in the
past. The standard is 4.9. We~are, generally speaking, over the limit.
However, due to the remanded basis plan and the remanded permit, this
standard is not currently enforceable for Palo Alto, so it is not
technically a violation, but this is how we compare to the standard that
they had imposed earlier.
To recap, what has happened to us is that the litigation actually at
both the federal and state level has resulted in these standards not
being enforceable and yet not replaced by a specific standard. I showed
you this chart the last time which has no important updates. It shows
that we have a schedule to get the copper standard. In our case, that
is the critical one. San Jose is also interested in revising the nickel
standard° We have these activities under way at the national, state and
local levels to get a new standard ready for our permit which needs to
be issued by the regulatory agencies in July, 1998. One could argue
that they need to do it right now, because the permit has been remanded
and is not valid, not enforceable. We view it as being more their
problem than ours. If they do not do it any quicker, I do not see a big
negative for Palo Alto. San Jose and Sunnyvale see as it a larger
negative, because they are in jeopardy of violating a mass limit much
MINUTES UAC:04/03/96
Final Page 24
more quickly than we are, due to their growth. So San Jose and
Sunnyvale are pushing to get this standard in place for copper as early
as possible and before 1998. I am not sure that is realistic, and I
think the regulatory agencies will be able to do it in this timeframe,
frankly.
There is no major update to these schedules. If you have any questions
about these activities, the only one I am going to focus on is the one
Glenn mentioned, and that is what we are doing most locally with respect
to the South Bay Plan. Next I would like to show you another slide as
an example of some of the actions that we have under way. Mark alluded
to some of the testing that San Jose is doing to prepare for another
standard. We also have consultants at work doing various things. One
of the activities is to go back over existing data to prepare for the
new permit. This is not going to be only with respect to copper, but
also all of the important pollutants to.us. Zinc is one where we
violate our effluent limit about once a year or so, it seems like. So
it is an important one for us to revisit. What we want to do between
now and 1998 is to assemble data that demonstrate that zinc is not one
for which they need to give us this kind of a limit. You can see on
this chart that the standard in the receiving water (the bay itself) is
that line at the top. The bay values for zinc, the concentration of
zinc actually in the bay at these four stations, is all well below the
limit that is to be achieved in the receiving water. In other words,
the bay itself is okay. When the bay is okay, they are not supposed to
impose these kinds of standards upon us. Yet they did in past permits.
So we are going to assemble these kinds of data and make the argument
that zinc should not be one of the constituents regulated through this
same kind of process. We are currently going through a detailed
analysis of each pollutant now (and we have consultants helping with
that) to put the best foot forward that we can to limit the exposure
that the city has to standards which may not be completely necessary,
given the way federal and state statutes work. So I wanted to make you
aware that this is the kind of stuff we are assembling, and at future
meetings, you may want to have us present some of the detail on other
pollutants. I wanted you to know that we are expending a fair amount of
energy on efforts like this for different pollutants. We have different
kinds of angles and approaches on different pollutants. This is one of
them.
Commissioner Grimsrud: Station #3 looks like it is just outside the
outfall discharge° (Yes) So if that looks good, it ought to be pretty
convincing. What would be.interesting would be to see a time history of
MINUTES UAC:04/03/96
Final Page 25
that.If that showed that you did not have a problem over a time
period,that ought to be very convincing.
Mr, Bobel: Yes, and we have done those kinds of plots and statistics,
too. Unfortunately, the number of datapoints out in the bay is not
large° You do not get a really convincing statistical picture as far as
the timeframe goes. We are looking at it from that angle as well where
we can find these trends. Another convincing trend that we are looking
for is that most of these pollutants, our trend in our pipe, has looked
like this - down. This is copper, the one where we say we have a
problem, but actually, if you look at it in terms of the mass of copper
and you look over a fairly extended time horizon, it looks like we are
really doing well, and we are from this angle. So if you had bay values
over this same period of time, and they were relatively flat, which we
believe they were, relative to this, then that suggests that the amount
of copper coming from other sources is so great that it swamps the
effect of our discharge and reduces the importance of controlling our
particular discharge, since it is not having that great an impact on the
bay. We are trying to develop data that would allow us to make those
kinds of arguments, as well.
Chairman Johnston: Phil, regarding the chart you just showed for zinc
in terms of the receiving water requirement, I do not recall a similar
chart for copper.
Mr. Bobel: We have one, but I do not have it here. It does not paint
as rosy a picture, and that is why I didn’t show it to you.
Chairman Johnston: How bad is it?
Mr, Bobel: Copper is not that far over the bay limit, but it does go
over a little. So if I had this up for copper, it would look about the
same. Station #3 is higher than the others, but the black line would
intersect all of the bars, in other words, all of the stations are
approximately 20% above the standard.
Chairman Johnston: And you see the study that San Jose is currently
conducting as potentially being one way to raise the receiving water at
that black line you showed.
Commissioner Grimsrud: Has any effort been made to try and estimate the
relative magnitude of the point and nonpoint sources?
Mr. Bobel: Yes. A good question. I do not have a chart for you, but
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we have taken a cut on that, and for copper, the estimate is that the
point source dischargers, the three sewage treatment plants, are roughly
15% of the total. There is a lot of debate about that number, because
the storm water values are extremely variable. If you have a wet year,
you have a huge sediment load coming down the creeks and the values
change greatly. Some people feel that you should compare it only with
relatively dry years or summer months. There are all kinds of different
ways. of doing that, but the regional board did it in a particular way
that they have used. Taking these data,, it would say that the point
source discharges are 15% of the total for copper.
Commissioner Grimsrud: So given that, it sounds as if even though you
had zero discharge, there are lots of times when you would not be
satisfying water quality standards in the south bay.
Mr. Bobel: We believe that that is probably true, and that is some of
the data that we are trying to put together. Like I said, if we could
show that even with our decreasing copper values, the bay values are
either constant or meandering around, it would support the concept that
our POTW discharge is not crucial or even influential in the bay values.
We are certainly trying to put together all of the data we can to make
that case.
Commissioner Grimsrud:~ What local agency is looking into the overall
copper problem from the nonpoint source?
Mr. Bobel: It is the same water board, the Regional Water Quality
Control Board.
Commissioner Grimsrud: So you are looking into that as well, and
looking at measures to d~crease nonpoint sources.
Mr. Bobel: Right. That is a big part of it, and if you would like to
hear about that at one of your future meetings, we could paint the
picture on that for you. One chart I wanted to show you about copper
that will set the stage for the next agenda item oncorrosion shows just
where the copper is coming from. This pie shows the sources of copper
coming through the sewage treatment plant. Remembering that we feel
that only roughly 15% of the copper is coming through the sewage
treatment plant, of that 15%, here are the sources of that 15%. This is
the most recent estimate that Kelly did. For the first time since we
have been doing this over the last four or five years, we have finally
gotten very good closure, thanks to Kelly’s work on a mass balance here.
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It was mostly due to the fact that we had just completed these four
studies on corrosion and we now have an increased estimate of copper
coming from corrosion. In other words, more copper is coming from
corrosion than we used to think was the case. It has allowed us to
close our mass balance pretty Successfully. To the extent that we have
to get any future major reductions, we would have to start looking at
that corrosion piece to do much good° That is the obvious takeaway
message here.
Commissioner Grimsrud: I assume there is a corrosion element to each of
those other sectors.
Mr Bobel: We have taken that out of the other sectors.
Commissioner Grimsrud: My question is whether most of the corrosion is
from the residential sector because there are more pipes? Or is it from
the industrial sector?
Mr, Bobel: Kelly Moran can respond to that.
Ms. Moran: The corrosion contribution is flow based, so it is based on
the number of gallons per day coming from the various sectors. In the
Clean Bay Plan, we actually have a breakout of the corrosion
contribution, although I.do not have it broken out quite in a direct way
to answer your question. Of the flow that comes from industry, about
40% of the copper is from corrosion. Of the flow that comes from the
commercial sector, such as small businesses, office buildings, etc., 54%
comes from corrosion. Of the flow coming from residences, which is
about 60% of our flow, 72% of the copper comes from corrosion, so it is
directly related to the flow. There are also corrosion-related sources
that are not corrosion, of copper drinking, water piping. For example,
corrosion of cooling towers, excess corrosion due to the circulation of
hot water systems, etc. are not included in this pink corrosion piece of
the pie but it is included in the individual sectors.
~=~: Just multiplying those numbers roughly in my head, you would
have about 70% of the corrosion coming from the residential, splitting
the other 30% between commercial and industrial. We are going to talk
about corrosion a bit more in a minute. Let me just talk about the
South Bay Plan developments a, bit. That is one of the regulatory
activities that is ongoing between now and 1998 to get us to a new
standard. In our case, the one we are the most concerned about, of
course, is copper. The three south bay dischargers are making the case
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to the regional board that we have to do this South Bay Plan, and we
must do it quickly. As Glenn was alluding to, we had an agreement with
the old executive officer that this needed to be done and that they
ought to start it going. With the change in leadership on the regional
board, there has been some lost time, even though the staff people are
the same. The agreement really had not gotten all the way down in their
organizational structure, and they had neither embraced it nor begun it.
So we-have to make sure that we have this commitment at the top again
and ensure that it gets pushed down the line. I met with the new
regional board director, and I met with her two weeks ago to try and get
this thing back on track. The key features of the South Bay Plan for us
are, of course, that it be cooperative with our three cities which is
already under way with the technical activities we have been talking
about. We need to get these toxic pollutant standards finalized, and
most importantly to us, we need some long-term stability and certainty
on what these standards are going to be. We cannot have these things
continue to bounce around. You know what we have been facing in the
last few years is a standard that has changed and has gone from 300 in
1989 to 4.9 in 1993. We hope that it heads in a different direction.
That is one issue. Another issue is stability and certainty. If we are
going to be spending large amounts of money or any money at all, we need
some better figures and some certainty as to what the values are going
to be. So that is a major issue for us.
Involvement of all the interest groups is an issue. We have had a
situation in the past where groups that were not happy appealed, filed
suit, etc., so it is important for us to have a process that is
scientifically based so that the dischargers do not feel the need to
file suit nor the environmental groups. That is our goal. If there are
q~estions about that, we can take them, or we can move to the corrosion
part.
Commissioner Eyerly: On the metals that we are discharging (and it
seems like you have been very successful in the efforts you have made,
outside of copper), it makes me ask the question that I guess strictly
source control is the way you have brought that down. If, in source
control, do you control it through permits to discharge certain metals?
How is that handled?
Mr. Bobel: It is not just source control. I want to give Mr. Miks due
credit here. The plant has increased the removal efficiency through it.
In the last five or six years, we have gone from about 80% of copper
removal to about 90% copper removal. Of course, that means that what is
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coming out of the end of the pipe was basically cut in half from 20% to
10%. So we have had a major decrease in copper and in some of the other
metals because of efforts we have made to increase- the removal
efficiency through the plant. So we have done that, but you are correct
in.that we have made major source control efforts. Some of those were
driven through permits. The largest industries, approximately i00 of
them, get individual permits, and we spend a lot of time with those big
guys. We have had a series of waste minimization reviews that they have
been doing. We have had consultants helping them to do these waste
minimization reviews, suggesting specific measures in their plants. In
addition to those i00 major facilities, we have also had a series of
source control programs for smaller facilities such as automobile repair
facilities, machine shops, laboratories, and those do not all get
handled through a permit process. There are just too many of them.
They get handled through development of best management practices,
dissemination of those, relatively less frequent inspections where we
discuss it with the facility owners, so we have a three-tiered approach,
and then there is our residential work as Well, so we have programs
going on for industry, for smaller commercial businesses that are not
permit driven, and homeowner public education which, of course, is not
permit driven.
Commissioner Eyerl~: The upgrading of the plant that Bill was involved
with was several years ago.
Mr. Bobel: It really continues. I am not talking about physical
upgrades. The last major physical upgrade was in ’98 (!!) That helped.
But I am talking about operational changes we have made. There are
three or four of those that Bill could elaborate upon.
Commissioner Grimsrud: I would like to say that I am really glad we are
doing this collaborative work with the south bay dischargers and also
your involvement in the state task group. I feel that is a good move.
Hopefully, through this analysis, we will come up with something as that
is the kind of thing we were discussing a year or so ago, coming up with
a standard. My point of view is that we should support the
envirorunental groups in terms of coming up with fish and wildlife
standards that make sense, but we should also support the work like San
Jose is doing in terms of what the impact of discharge standards are in
terms of the toxicological impacts on fish and wildlife and what happens
in the bay that might mitigate that. Also, I get the impression that
everyone sees point sources as being the only thing we can get our hands
on, so let’s do that first because it is the least costly° I am not
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convinced that that is true. As time goes on, we ought to put a little
more emphasis on figuring out what measures we can take to reduce
nonpoint sources, thus allowing ourselves more leeway on the point
sources. That is where I am coming from.
Mr. Bobel: Here is a summary of our Clean Bay Plan which does address
both point and nonpoint dischargers. Commissioner Eyerly was asking
what are we doing with industry and how do we do it. This is a summary
of it. Our Clean Bay Plan is actually an inch-thick document that
summarizes all of the control programs, both on point and nonpoint
dischargers. One thing to note about this is that we have a contingency
plan in there on Pages 16 and 17 which we call the Preliminary Copper
Contingency Plan. It does not do exactly what Commissioner Grimsrud was
alluding to. This particular page is just talking about the point
source or the stuff that comes through the sewage treatment plant. But
if the sewage treatment plant had to get greater copper reduction, this
is a list of things we could further evaluate and execute. You will
note that the very first one there relates to corrosion. Of course,
that relates back to the diagram I showed you where 51% was coming from
corrosion. You can see on this list other things that we have talked
about from time to time. Let me assure you that in addition to looking
into this stuff, we are also looking into the nonpoint source stuff and
are very active in it. An example that I believe we talked about last
time is the break pad item. Our best estimate is that of all of the
copper going into the south bay, somewhere around 35% of it is coming
from brake pad wear. Only 15% is coming from all three sewage treatment
plants, yet as much as 35% may be coming from this one source, over
which the City of Palo Alto really does not have much control. So we
try to balance activities over which we do have control and are within
our purview, makingsure that we are working on the most cost-effective
things. The way we have done that with brake pads is to form a
partnership. This is Kelly’s baby. We helped form what we call the
Brake Pad Partnership. Because Palo Alto is not the right agency to try
and do something about brake pads, yet because it appears to be one of
the most cost-effective things that could be done, we have helped
spearhead an effort to investigate further and bring the right parties
to the table to discuss this situation. We call this group the
partnership, and we keep trying to convince everyone else to participate
in it who are more appropriate than we are to end up doing something
about it. So we are focused on that while trying to balance that
against the fact that some of these are not really within our purview.
Mr. Roberts: Mr. Chair, I would like to elaborate just a little further
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on the nonpoint source issue. You may wish to have us come back at a
separate session with some more detail. Let me reassure you that Phil
is being very modest in what he says. It is just the tip of the iceberg
of the efforts being undertaken. There is a coalition of all the cities
in Santa Clara County working on those issues through the Santa Clara
County Water District. Phil, Kelly and others are active in that. We
pursue these areas very aggressively, and we are headed toward trying to
impact that element of the sources to the bay much more aggressively
than has historically been the case. The Break Pad Partnership is a
prime example of that, and both Phil and Kelly have been pursuing that
issue, not just locally or regionally, but nationally, as well.
Ultimately, that is something that hopefully USCP and USDOT would want
to get involved with, much as they did with leaded gasoline 25 years
ago. If we can pursue that, I feel we could make a major impact there.
They have both been to national conferences on that very topic°
Mr. Bobel: One thing that relates to that which I wanted to mention
because Commissioner Grimsrud was a champion of it at past meetings is
that these things on the contingency plan that we have listed are items
that we hope to stick into the model we are developing for cost
comparisons. When and if we have to make tough decisions at the sewage
treatment plan about doing some of these things, we would be able to
come back to you with cost comparisons, cost per pound of pollutant
removed, and be able to have that information for you° We have a
consultant working on a simple model that will make sure we are looking
at apples and apples. When we are looking at very different types of
control strategies where some of them are capital, some of them
operating, we have to make sure we make the right assumptions. We
thought it was worth.doing a little model and getting it all worked out,
so we are working on that. The nonpoint source stuff could be plugged
in there, too.
Item 6.ao Information Report.. Co~er Piping Corrosion.
Mr, Bobel: Next is corrosion. In the interests of time, I will just
note that what Kelly has given you is three of four studies that we have
recently completed, and the fourth is just about done. We have known
for some time that corrosion was a major part of the copper problem, so
we initiated these studies and are just wrapping them up. The fact
sheet that is on top of them is all I am going to attempt to summarize
for you. At the back of the report, the last page contains the
Corrosion Action Plan. It says, ~RWQCP COPPER CORROSION ACTION PLAN°"
As a result of these studies, we have developed this plan, and you will
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see that it is in two parts° One is "Actions in Progress" which are the
things we are doing now, and ~Possible Actions." Those things we would
only do if conditions changed. The two major conditions that might
change are that we might get a final copper standard, which would mean
we have to do something beyond what we are currently doing at the sewage
treatment plant. That is one trigger. The other main possible trigger
is that the drinking water regulatory framework will dictate corrosion
control for purposes of reducing pollutants in drinking water. Either
of those things could conceivably happen, but we are suggesting that the
things in the right-hand column would be done if one of those two things
happens.
Let’s go over one of them by way of example. The one from which we
could get the most copper reduction is listed first: Addition of
Corrosion Inhibitor to the Water Supply. Palo Alto could add a chemical
to the drinking water which would reduce corrosion. San Francisco could
also, as our water supplier. We studied this, but are not recommending
that it be done at this time. The action in progress that would show is
to monitor the situation and continue to work on it. We say here, "Work
with Palo Alto Utilities Department to test identified corrosion
inhibitor strategy." Pilot work is the next logical step here, and we
would intend to come back at a future meeting to discuss the piloting of
this. We are not looking for the go-ahead on it at this time, but we
would come back to you with a joint Utilities and Public Works
Department proposal for piloting. We are working on that, but we do not
have a proposal at this time. A possible action would be, of course to
actually add the corrosion inhibitor. Our studies show that the best
one to use would be orthophospate in a concentration of approximately
one part per million.
The next one relates to the use of non-copper piping materials. You are
probably aware there that currently, it does not meet code to use
plastic pipe indoors for residential use. So we do not show doing that
now, but we do show, as a current activity, increasing public awareness
and encouraging facility managers to use non-copper piping where it is
legal. It is legal for exterior pipe and it is legal for industrial
internal piping. So those are areas where we can now recommend its use
but not require it. That is the proposed area. In the future, yQu see
possible actions if it became legal to use it. Then we could behave in
a different fashion, as outlined in the report. That would take one of
the triggers to become true, and then it would take a change in code.
Chairman Johnston: What I suggest is that since this was in our packet,
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I am happy to spend more time on it if people have questions, but I
would suggest that you not go through it all. I am wide open to people
asking questions.
Commissioner Grimsrud: This looks very interesting, and what I would
have liked to see possibly is a rough quantification of possible cost
impacts. Cost is important, but of the 50% that is due to corrosion,
how much of a bite would that take?
Mr. Bobel: We have definitely done an estimate on that.
Ms. Moran: You are actually looking for the contents of the fourth
report which is just about to be published. The consultants estimate
that about one-third, or 30% of that 50% would be eliminated through the
addition of the corrosion inhibitor, the phosphate, at the concentration
that is recommended. The data to support that estimate are actually in
one of the three reports before you -- the linear polarization report.
That is a pretty technical report, but it includes all of the laboratory
chemical analysis that leads to the increased estimate of corrosion that
we included in the Clean Bay Plan and that 30% reduction estimate that
I am telling you now.
Commissioner Grimsrud: So just as a comment, if you do something like
this in real summary format, it would be good to put it right in there
so we could get a feel for it.
Ms. Moran: We did not have that estimate at the time we needed to
prepare the sheet. We will have a dollars-per-pound estimate when we
finish the fourth report. I do not know what that number will be
because the consultant is still getting the last financial information,
which is why the report was delayed. What I can tell you now is that
that estimate is probably going to be on the order of several thousands
per pound per pound of copper not discharged to the sewer. That will
probably compare highly favorably to other methods that are currently
being pursued or potentially could be pursued in the future for
reduction of copper, which could add up to the tens and hundreds of
thousands of dollars per pound, depending upon who is taking the action.
Chairman Johnston: I believe that completes that item° I appreciate
very much the update. I do have one question perhaps a little out of
the bounds of this report, but within the general scope of what you
discussed. As we move forward in the planning, one hears rumblings
about their eventually being discharge requirements on storm water. Has
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there been any discussion of possible change in that picture?
~X_~: Do you mean numerical limits for storm water? (Yes) We
continue to resist efforts to do that. At the national level, we
believe that the correct interpretation of the statute is that they do
not belong in permits. At this time, the regulatory agencies are
supporting that position. I do not see any change there. If anything,
there is kind of a hardening of that position even at the regulatory
agenc level, so I think there would have to be a change in
administration or a fundamental shift before we need to worry about
quantitative limits on storm water.
Chairman Johnston: Thank you very much, Phil.
Item 6.c.i. Ten-Year Financial Forecast Update
Chairman Johnston: Randy Baldschun will make the presentation.
Mr. Baldschun: Good evening. Item 6.c. is the ten-year financial
forecast for the four utilities -- water, gas, electric and wastewater
collection. It is something that we provide for you every year, and the
relevance of it is that it gives you a sneak preview of what kind of
proposals will be coming to you in April. There is an error on the
first page where it talks about a water rate increase of 9% for fiscal
year 1997-98. It is actually a 7% increase. I might mention something
else about that particular rate increase of 7%. In the water fund, we
looked at the impact of a number of factors in an increased transfer to
the general fund and the capital improvement program going up and some
sluggish water sales. It looked like a double-digit rate increase, so
we split it up into two years. We are starting to see some hope in
water sales more recently, so although we were planning to have a
subsequent rate increase in the water in 1997-98, if water sales in fact
do better than we projected, we will forego that rate increase. As far
as 1996-97, you see we have a 12% gas rate decrease, a 9% wastewater
rate decrease, and a 6% water rate increase. No changes in the electric
are proposed. Are there any questions?
Chairman Johnston: I have a number of questions. First of all,
understand that when you are doing these long-range forecasts, you tie
in with the city planners, to some extent, in terms of a variety of
issues. I am not quite clear where the large number of new customers is
coming from, and whether they are actually new customers or whether it
is essentially taking one meter in an apartment building and dividing it
MINUTES UAC:04/03/96
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up. For example, if you look at the water utility, it goes from 23,000
customers to 31,000 customers in a ten-year period. That is 8,000 new
customers. That seemed like a very large number, and I did not know if
that was just because of subdividing meters or is there some explanation
for that? I do not see the city having that much room to grow, frankly.
Mr. Baldschun: To be honest with you, I am not sure how that number is
calculated. My assumption is that it would be multiple-family, but I
will have to check and see what formula was used to project the number
of customers.
Commissioner Grimsrud: I was also going to ask about these numbers. It
looks as though for the first five years, the growth shows 30 additional
customers per year. Then all of a sudden, between 1999 and 2000, it
starts growing by a 1,000 or 1,300 or 1,500 customers per year, which
does not seem possible. That is true not only for water but also for
the electric, as well. It is the same kind of discontinuity. All of a
sudden the growth rate goes crazy. I don’t think that is impacting your
other numbers that much, because your peak demand has not gone up very
much. I do not know what those numbers mean.
Chairman Johnston: That is why I asked whether it was due to
subdividing meters or something.
Lucie Hermina: Actually, I adjusted for the first few years. The
numbers for the end years are just an old projection of the number of
customers. I did not adjust all of them. I just adjusted for the first
few years to be able to have a good handle on how many customers do we
think we have. I apologize for that. The number of customers does not
affect the revenue, the demand° We do the demand separately°
Chairman Johnston: Okay. I have another question that harps on a theme
that you have heard me comment upon the last time. I feel it is clearly
borne out here. The issue I raised about the way we finance our capital
improvement program is such that we pay for it out of current revenues,
and then it adds to the base that is used for calculating the transfers
to the city. It has a a kind of compounding effect. If you look at
that issue here, you will see that by the year 2056, the proposed
transfer to the general fund becomes 20% of revenues for water. Last
time, Randy, you did mention that you had been looking at this,
recognizing that there was some problem. I would encourage you to see
if we cannot find a way to solve that problem rather than just solving
it by each year, looking at the budget and saying, well, that is a
MINUTES UAC:04/03/96
Final Page 36
ceiling and we do not have enough money to pay for it and we will see if
we can get the City Council to make some kind of a change. I think
these numbers demonstrate that there really is a problem with this
mechanism, and it really needs some fundamental solution. There is no
particular reason why the return to the general fund should be a greater
percentage ten years from now than it is now, simply because we paid
more rates and replaced more pipelines. There is nothing in here that
indicates that any measure of satisfaction or performance or anything
like that is going to change in any way. That is just the way the
method works.
Mr. Mrizek: During the preparation of this year’s proposed budget, the
utility staff did recognize this potential problem in the future. The
numbers you see here are based on the current transfer policy, but the
utility staff has held preliminary meetings with the Administrative
Services Department and also with the City Manager, pointing out the
potential of going up, as you say, Paul, to transfers reaching a 20% cut
of the pie within the next ten years. This is a problem that staff will
be looking at over the next budget year, and it will come back to the
council probably prior to the second year of the two-year budget with
some proposals and recommendations. Possibly a cap on the transfer
could be one way. We really do not know what is going to happen, but we
do .recognize this as a problem, especially in the water utility where
the revenues are so low, compared to the transfer.
Chairman Johnston: Again on the water utility, I am looking at the
proposed rate changes and I am also looking at the average purchase
rate. I am surprised to see that the average purchase rate rises as
slowly as it does, given all of the updates we have been hearing from
Jane Ratchye. I very much had the impression from the direction in
which the San Francisco Water Department was going in terms of their
various capital improvement programs and the various things that they
were undertaking (and I believe they have announced a rate increase for
their customers which I assume will come back and hit the other bay area
users), so it just seems as though the price going from 70¢ per ccf only
to 75¢ per ccf over the next four cycles seems very optimistic. At
least, it does not seem to jibe with what we have been hearing from
Jane, but maybe I have been misinterpreting that. Do you care to
comment on that?
Mr. Bocci~none: The proposals that we have been alluding to from the
San Francisco PUC are preliminary, and they have not been adopted, so we
have not reflected those in these forecasts. They are talking about big
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numbers that they may be proposing to spend, but they are not
incorporated in any of their long-range plans, so they are not formed
well enough for us to incorporate them. Within the next two years, they
should not impact us.
Chairman Johnston: I guess that is part of the art of longmrange
forecasting, which is how you make assumptions about the future. You
cannot just make assumptions about what has already been absolutely
agreed to, or you would never project correctly. But I guess what you
are saying is that there is enough speculation in those kinds of plans
that they are reasonably not included in the current forecast.
Mr. Habashi: A lot of the plans that San Francisco has in mind are
likely to be built over the next few years, and they are not going to
start collecting for it in the bonds until probably four or five years
from now. That is probably why the next four cycles do not have a large
rate increase. Even if they do a lot of these CIP projects that they
have in mind, they are not likely to start collecting for them for a few
years yet.
Commissioner Grimsrud: I need to have a little bit better understanding
of what the rate base is on Line I0.
Mr. Baldschun: Primarily on net fixed assets.in the distribution
system. There is also a working capital allowance, and that consists of
one month’s water purchases cost plus two months of other O&M expenses.
That formula is standard in the industry. It is unique to rate making.
It is not something the CPAs would be aware of it, and it is similar to
what the investor-owned utilitiesl use to calculate a rate base. I
would say that 80 to 90% of it is not fixed assets.
Commissioner Grimsrud: Okay, so the return on rate base then is what
you use to get the transfer to the general fund°
Mr. Baldschun: That is correct.
C.~mmissioner Grimsrud: Going along with Paul, my feeling is that in
looking at the relative health of the utilities, looking at the
transfers, looking at the rate changes, if I were to mold this next
year, I would probably say, let’s reduce the return on rate base for
water and increase it for gas. With gas, we have a 12% rate decrease
that we are talking about, whereas with water, we have a 6% increase.
We are pretty much saying we are going to have about the same return on
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rate base. My feeling is, why don’t we have a return on rate base based
on the health of the utility and also based on minimizing rate shock
within~the individual utilities.
Mr. Baldschun: I will try to give an easy answer to a complicated
question. Getting back to the original ~Price Waterhouse study, what
they said was, you calculate your rate base and you choose a rate of
return within a certain range of reasonableness, with the lower end
being long-term, risk-free investments which is around 6% right now.
The high end of the range is what a corresponding investor-owned utility
would earn from the California Public Utilities Commission. So it is
California Water Service for the water, which is 9.86%, and PG&E’s
recent rate of return is 9 something percent, too. The gas is at its
high rate of return. It is at the ceiling. Water is at the ceiling.
Your comments about suggesting a lower rate of return in the water fund
has merit because of the fact that the water fund is not as strong as
the other funds, and the competitiveness of the water rates do not enjoy
the same advantages as do our gas and electric rates. All of these
factors are going to be looked at this year. We are going to try and do
a review of our water utility and compare it to other water utilities,
looking at their policies and practices as far as financing and
infrastructure. Do they have accelerated infrastructure programs or
not? What kind of transfers to the general fund do they make? What
kind of a formula? Are there any subsidies between the city and the
water utility to make the rates lower? There is a whole range of
revenue requirement items that go into a water rate. We are not just
going to focus on one component. Hopefully, what will come out of the
study, is that we will get a better sense of our water rates. We may
find that they are little bit higher, but we will understand the reason
why. It is because of this reason or that reason, or we will make
recommendations to change some policies. I feel we have to do the study
first and cover all of the bases, looking at what kind of
recommendations we may want to make.
Commissioner Grimsru~: I guess where I am coming from is, to some
extent, given the discussion that Paul said, the whole calculation is,
in a sense, bogus. Someone has invested X number of dollars and made an
investment, bought some capital, and now, we are getting a return on
capital. The city has not invested X number of dollars into the
utility, and now, they are getting a payback. To me, it seems a little
different. It also seems to me in this more competitive world that we
ought to have a little more flexibility than in the past as to what kind
of return on rates are reasonable. What is a reasonable ceiling? The
MINUTES UAC:04/03/96
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electric utility has been very successful. Part of the reason why is
that there were probably some council members back in the sixties that
made excellent decisions. Why can’t we have a higher rate of return for
the electric utility while we are in this situation? What I am trying
to say is, the City Council wants to’have a transfer in this order of
magnitude . How do we balance the transfers that make the most sense
between the utilities? What I am thinking of, just to throw out
numbers, is that I would think that for the water utility, a 6 to 8%
rate of return would be reasonable, whereas in the gas in electric, I0
to 12% could be reasonable. Why not?
Mr. Mrizek: I think what we have to look at, which Commissioner Eyerly
would remember, having been a member of the council, that it really was
not an adopted policy as far as transfers. They fluctuated all over the
place back in the seventies before we had the Price Waterhouse study and
a proposal to follow. This particular policy has worked well since it
has been adopted. It is defendable. The various bonding agencies such
as Standard & Poor’s or Moody’s has commended Palo Alto for such a
proposal and policy, whereas other municipal utilities do not have such
a proposal° I think Randy indicated last time what the transfer in Long
Beach Gas was this year, where they had revenues of $82 million roughly,
and their transfer was $32 million. They have no policy. We recognize
that this is maybe not the best arrangement, but it is an excellent
policy right now to follow, and as Randy and I have indicated, we want
to look at maybe a chap, especially in the water utility, since that is
your concern. We want to look at all costs in the water utility, not
just transfers. Our capital program is very costly, but we think it is
necessary. We want to look at that. .With the well study we are.
proposing for next year, that may even increase the capital program even
higher unless we possibly recommend some sort of a cap on the CIP in
future years. Until the study is done, as Randy has indicated, I feel
that we want to continue with the current policy that is in place, and
continue the transfer during the next budget year as we were
recommending.
Chairman John ton: I have used the water utility, because I think it is
the most exaggerated, both in terms of the percentages being proposed to
be transferred, but also for the reasons that Paul indicated, that it is
perhaps the most out of whack in terms of looking at some return based
on performance. But in point of fact, if we are going to have a systam,
the system has to be reasonably stable and look llke it is going to work
in the long term. The system does not look like it is going to work in
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the long term for any of the utilities. Each one of the utilities is
working in a situation where as you project forward, the percentage of
the pie ~hat is being transferred is going up. It is going up faster in
some than it is in others, but the percentage is going up. That is
something that is fundamentally nonsustainableo It is perfectly
reasonable that the dollar amount would go up because of inflation,
etc., and you might have greater sales and all of that. I have no
difficulty with that going up, but the idea that you can take a bigger
and bigger slice out of a bigger and bigger pie fundamentally does not
work. Not too long ago, there was a time period where there was kind of
a capital improvement planning deficit that was recognized a few years
ago, and they needed to spend more money on that. A program was put in
place which is now being followed, and I am happy to see that it is
being followed, but i’t may be that the current transfer plan works well
when you have a deficit in your capital improvement programs because you
can keep those percentages relatively stable over time. But given where
we are today, you cannot keep them stable, and there is no business from
which you can continually take a bigger and bigger slice of the pie and
expect it to work.So I think all we are saying is, there is a real
problem with this.Maybe Price Waterhouse blessed it and said it was
okay some time ago,but it does not look okay when you look into the
future. If you take the position that we always have the option of
reducing it, then I think arguably, you are getting back into the exact
same situation you were before where it is really arbitrary. The
ceiling is always looked at as an arbitrary ceiling, and each year, you
are going to try and figure out what to do. So I do not quite know what
is the best way of taking this issue forward, but I just think something
needs to happen, and not just with one utility. The electric utility is
also affected by this.
Mr. Baldschun: One of the problems is that it is the council policy, so
I think the direction would have to come from the council.
Chairman Johnston: Let me respond to that. I agree that it comes from
the council, but I see our job as being the provider of recommendations
to the council. Part of our job is that if we see a policy that is
being put in place which may have been very appropriate at the time but
is looking like it is not going to work in the future, I see it as part
of our job to go back to the council and say, look, we don’t think this
is working, and we would llke you to reconsider the policy. I think the
only issue, then, is what is the best mechanism for that. I agree that
it is their policy.
MINUTES UAC:04/03/96
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Mr Bid chun: There are two other observations I would like to make.
One is that most water utilities probably use a percent of gross
revenue° That percentage tends to be arbitrary. If we were ’to use that
formula here in our utilities, you would see the transfers going up, as
well, because our revenues climb over a ten-year period. So it is the
same problem you are raising with the utility enterprise methodology.
You want to base it on performance, but yet, if you increase water rates
because the San Francisco Water Department increased wholesale water
costs, why should the city get another chunk of that transfer. Those
kinds of formulas, whatever formula or index you use, is going to
increase the transfer. I do not have an answer for you right now, but
I feel that it bears consideration. The other point is that before we
adopted the utility enterprise methodology, the electric utility
transferred 33% of its revenue to the general fund.
Mr. Mrizek: On your question, Paul, on the best mechanism, in the month
of May we will bring to you the utilities budget rates and reserves and
ask the UAC for a recommendation to approve that proposed budget
document. Your recommendation, with any changes or proposals, will then
be carried forward to the Finance Committee which meets later in May,
and then on to the council for budge adoption in late June. So as far
as mechanism, that would be the appropriate time during your review of
the budget next month.
Chairman Johnston: Thank you.
Commissioner Chandler: I would like to add a comment to this discussion
I have listened to the two of you engaged in with Ed and Randy. I think
that the whole issue of transfers to the general fund and the
methodology for it is a very, very complex legal and regulatory set of
issues. I understand very well Ed’s conservatism in not wanting to mess
with it, so to speak. A consistent methodology was provided to the city
that would withstand the types of assault that some might make on that
and which has provided a measuring rod that we could follow over time.
I hear what you are saying, and I see the issue that is coming out of
this, but I feel that it needs to be approached from a very, very
systematic standpoint so that if we are going to review, usi.ng that
methodology, I don’t think it can be from a casual, brainstorming
approach of saying that there are problems with the numbers going
forward, given the size of the rate base. I think that we would want to
pursue that in a very, very careful way, bringing-the issue to the City
Council and engaging someone, such as we did in the past with Price
Waterhouse, to examine alternative methodologies and determine whether,
MINUTES UAC:04/03/96
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given the numbers in front of us, there is a basis for improvement. If
there is not a basis for improvement, then so not move. But I am very
concerned about a discussion that, to me, seamed a little bit
intellectually honest but cavalier relative to the complexities of the
legal and regulatory issues that are associated with this problem.
Chairman Johnston: I am tempted to agree that the legal and regulatory
issues here are complex, but I am also struck by the fact that anything
goes. We had a presentation last week in which there was a discussion
of the different rules and different percentages that we use in a
variety of other utilities. What becomes clear from that in spite of
the complex legal and regulatory issues is that the data and the
methodology are absolutely all over the map. I would absolutely agree
with you, Mark, that if we were going to propose something different, I
think we ought to get specialized help in terms of doing that. That
direction would have to come from council. I would agree with that.
What I am interested in doing is getting this issue before council so
that they can at least hear the arguments that I and some others would
make that the current methodology is not a good one. Maybe it was
appropriate at the time, but it bears review, and council could choose
to ignore that, or they could choose to agree with that and suggest, as
a mechanism, possibly retaining again Price Waterhouse or possibly doing
something else. I would agree with Mark that I don’t think we would
just sit here and propose a policy. I would not want to propose a
policy of what sh~ould replace it. I simply would point out some of the
problems associated with it, and also point out that it does not appear
as though we should be locked into this approach, given the great
variability of approaches used by other entities. Perhaps given that
the picture does not look good for using this methodology in the future,
it is time to have it professionally reviewed. So I would agree with
Mark’s comments.
Commissioner Eyerly: I think the residents in Palo Alto are probably
smarter than some of the residents in some of these other cities that we
looked at where the rate return is all over the map. The reason that
Price Waterhouse was brought into this city for a study years ago was
because of threats of whether the rates had become a tax instead of a
rates. That is a very vlable threat when you have some very large users
of your utilities. If you cannot support what you transfer to the
general fund by a methodology that is reasonable and comparable to, say,
the corporate utilities, there is that threat. That is why we tried to
get away from it, and it has worked quite well over these periods of
years. There have been a couple of things that have come up that have
MINUTES UAC:04/03/96
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come to my mind. It was mentioned at our last meeting that the rate
payers pay twice when they fund the improvements and when they transfer
to the general fund. That is true, but if the general fund had to put
up the money for the improvements in the utilities to come out of the
general fund, they would only be able to do it by bonding. The interest
payments on the bonding would probably be double the expense for the
general fund. So I think it is proper to do it under the rates, and
think we can support that. One thing that has come to mind that might
be an improvement on the Price Waterhouse structure, which Paul has been
talking about because he is very familiar with pipe and costs, is if we
replace the piping in the city infrastructure, that is a large increase
in our capital improvements. I have learned that we depreciate that
infrastructure, and I am not sure that is the right thing to do. You
always have to have the infrastructure. You always have to have your
pipe, your poles, your wire, etc. I am not sure that it should be
depreciated so that it goes up and down. When you have to replace it,
then you have a larger amount of inventory to figure your transfer.
think it ought to be considered that maybe it ought to be a constant
price unless you increase the amount of wiring that you have or the
amount of pipe° You would have to have a factor in there for the
increase of inflation in it, but that might stabilize it instead of its
going sky high as we go into a capital improvement, and everything is
depreciated down to zero and up we go to a large amount. There may be
other things like that that staff is thinking about in their studies
that might make some improvements in the way we handle things.
Commissioner Grimsrud: I support Paul’s position in that. I think we
should look at this over a longer term, not just between now and next
month. Maybe what Fred says is right. Maybe what is needed are
adjustments to this methodology, but I think we do need to sit back and
look at it over a long period of time and perhaps get some outside help.
The trend, particularly for the water utility, does not look good.
Rather than just sit back and say okay, we are going to do the Price
Waterhouse proposal, I think we need to look at the fundamentals of that
and see if there can be an adjustment that can be made, so I support
Paul"in that.
Mr. Baldschun: We agree that the trend does not look good for the water
fund, but it is also our assumption that when council looks at the trend
and when council sees the impact on water rates, they will agree with a
reduced~rate of return on rate base. They have done that historically.
You saw the graphs last month where they took no return on rate base for
one year during the drought, and they took a reduced rate of return on
MINUTES UAC:04/03/96
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rate base’for a couple of years during the drought. The formula has
flexibility there. It is a matter of the council getting the facts,
getting the information, and then making a decision. If you read the
Price Waterhouse report, which is fairly thick, there is an executive
summary that we handed out to you in the rate workshop in January. You
get a sense of what criteria the council should consider. In my mind,
it does not matter what method you use. The most important criterion is
comparative rates. There is no formula that is going to satisfy
everyone, because if there was, we would all be using it. The key is,
what is the impact? Is the formula that we have for the water fund
right now going to push our rates to an uncompetitive level? If that is
the case, my assumption is that the council would probably take a
reduced rate of return.
Chairman Johnston:
item.
If there are no other comments. That completes this
(Commissioner Chandler leaves the meeting.)
Item 6.c.2.Information on Rate Increase to Augment the Calaveras
Reserve.
Chairman Johnston: Randy Baldschun will make this presentation also.
Mr. Baldschun: This is in response to last mont’s meeting. I am not
going to go into it at. any great length, but I hope this provides you
with the kind of information you were looking for in terms of what kind
of rate impacts might we see in the electric fund if we decided that we
wanted to fund the Calaveras Reserve at a level that is higher than that
which is based on the base case. So we have charts attached to the
report showing six scenarios. I will end it there and open it up for
questions.
Chairman Johnston: I am looking at the first of the two charts at the
back of the report, which I found to be extremely helpful and
insightful, as I did the report in general. I appreciate your doing
this, and it did very much respond to the issues that we raised.
I will start out by asking a side question about PG&E. Do I understand
their recent announcement correctly to indicate that they are
essentially fixing their electric rates for a period of the next five
years?
Mr. Baldschun: My understanding is that they have announced that they
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are going to freeze electric rates through the end of 2001 and that they
will go to market pricing for all of their customers beginning in 2002.
That is a one-year earlier timeframe than we had previously understood.
Chairman Johnston: Looking at the next to last chart in the report,
"Rate Impact Comparison of Alternative Calaveras Stranded Cost
Scenarios," I notice ~with all three strategies, the medium, medium-high
and high strategies, even if we do a 3% increase this year, as we had
requested that you take a look at, we are still projecting that there
will be further increases required over that same time period where PG&E
is going to remain constant. The way I look at it is, I am not really
sure what the argument is for delaying the increases. If you bring the
increases forward, you clearly give us greater flexibility with regard
to responding to different stranded cost scenarios. If we started with
the medium one today and in a couple of years time, we decided no, it is
closer to medium-high as things changed over time, the more we bring
things forward, it seems to me the better position we will be in, and we
would not be in a situation where, over the Same time period, we are
looking at PG&E’s rates and saying, as long as we stay below them, they
are moving up and we can move up along with them a little bit. So to
me, this study reinforces my feeling that we ought to be recommending a
rate increase. That is partly because of the fact that we are going to
be projecting increases over this time period anyway, and it is also for
the reasons we discussed at great length the last time having to do with
my feeling, shared by some of the other commissioners (possibly all,
do not recall) that looking at the medium scenario is perhaps not the
appropriate thing to do. So what I get out of this is that I think we
should be proposing a rate increase this year, and the only question in
my mind is whether 3% is the appropriate one, or whether something like
5% would bemore appropriate.
Mr. Mrizek: As Randy indicated in his presentation last month when you
asked that these alternate studies be brought to you, this is the first
year, and this is just based on one study year and one set of numbers.
Based on that and on our staff recommendations, the medium stranded cost
is the level we feel we should be at at this time. As we progress in
the future, we will be upgrading these studies and will have additional
information. Staff believes we still have time to have a rate increase
next year or in subsequent years beyond that. However, with the new
policy we are taking to the council on Calaveras, we are adding to this
year $15.9 million to the Calaveras Reserve, and we are very healthy in
our rate stabilization reserve. We believe that this is an excellent
starting year, and staff does not feel that a rate increase is necessary
MINUTES UAC:04/03/96
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to go beyond what we are recommending in this first year.
Commissioner Grimsrud: I agree with staff. It seems like for the last
couple of years, the utilities have almost been making more money than
they know what to do with. I don’t know why that it is, but maybe it is
because the forecasts are on the negative side and --
Mr. Baldschun:were good!
Commissioner Grimsrud: My sense is that if the rainfall continues to
look good and the hydrology looks good and the Pacific Northwest looks
good, we will probably beat our forecast again this year. Therefore,
the information I have right now supports your position. I am not ready
to pour a huge amount of money into this reserve until I have better
information. So waiting a year for a rate increase makes sense to me.
Commissioner Everly: I feel that the amount of money that is
recommended for transfer to the Calaveras Reserve is probably about as
much as we ought to go for. Right now, if I were on the council, I
think I would have a problem with that much money starting out to go
into the Calaveras Fund and the rate increase to put some more in until
certain things have been done. Randy, in his report, has brought up a
number of questions and assumptions that needs to be addressed, and
probably rightfully so so that we have a little bit better handle on
what we really need to do, and target this for the council for 1997-98,
with discussion going forward on our level this fall. That is what I
take it your report is saying.
There is one thing I have noticed that I am wondering about. In the
last report we had on the ten-year financial forecast, Randy mentioned
that there was a decrease in electric rates at 3% for fiscal year 1997-
98 which has been dropped. Are you thinking about the Calaveras and the
3% we got in this other report, or how did you do that?
Mr Baldschun: It gets back to what Paul said. We projected the 3%
decrease because our rate stabilization reserve (RSR) was overflowing.
So we are recommending that about $15.9 million be transferred from the
RSR to Calaveras. That forecast was done a month or two ago. Since
then, there have been revised projections of expenses in the electric
fund which are whittling down what we thought we were going to have in
the RSR, and we would have fallen below the minimum. So we dropped the
rate decrease. We would have dropped it regardless of the Calaveras
MINUTES UAC:04/03/96
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proposal, because we would not want to be below the minimum in the RSR.
Commissioner Eyerly: I take it from what you say in your report that
you are going to bring this back to the UAC in the first half of 1996-97
with some more assumptions covered and thoughts put into it. In the
discussions we have had, I think we all feel that we really must look at
the stranded costs and intelligently move more money over into the
Calaveras Reserve. Staff is going to do that, I take it from your
report, without having any doubt.
Mr. Baldschun: Absolutely. Right now, we really do not have a lot of
confidence in the numbers. When we met last month, since then, I have
seen two legitimate changes to the model. One was a change based on the
~assumption of the output of the Calaveras, which was a little bit more
pessimistic, and it made our stranded costs go up. In the report last
month, we indicated that we needed to fund the Calaveras Reserve to
2016. Now with this change, it goes to 2020. We have a report going
into the council packet this week on the Calaveras proposal, and the
numbers are different from what you saw last month. There is another
change that is not even in the report going to council regarding our O&M
expenses associated with Calaveras, which is changing the numbers again.
The numbers are constantly changing, so I think we all need to do a lot
more analysis on the stranded costs and figure out what the
ramifications are, because none of us know. We have more questions than
we have answers. We know we have to protect the electric fund’s
financial stability, but we see ample time and a window of opportunity
to do it. When you look at the alternate scenarios, whether you go with
the 3% now or you go with the 8% next year, what tells me is that under
the worst scenario, we can accommodate these rate increases and that 15
or 20% over a five-year period is not a killer deal. We increased water
rates 56% one year, so when I look at these numbers, I do not see it as
a situation that is alarming. In fact, I was pleased to see that we
could accommodate these kinds of rate increases and fund the Calaveras
under the worst case scenario. But we have a lot of questions we still
should bring to you and that you should bring to us between now and
December. ~
Chairman Johnston: Ed, as I recall a couple of months ago, you
mentioned we were going to get a report on the overall stranded cost
situation, not just the Calaveras, but including the transmission
project, just an overall evaluation of stranded costs°
Mr. Mrizek: I believe that is coming in June. That is what Tom Habashi
MINUTES UAC:04/03/96
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and his staff are shooting for°
MOTION: Chairman Johnston: I am going to propose a motion here that is
not addressed to the issue specifically whether there should or should
not be a rate increase this year. It addresses the issue that we
discussed at great length the last time, that is, whether it is
appropriate to use a medium stranded cost scenario for purposes of
planning for stranded costs. I move that use of the medium stranded
cost approach is not appropriate ~nd that I would like staff to consider
what higher level, other than the 50th percentile being the medium
stranded cost, might be reasonable, given the downside risks of what
happens if you bet wrong, moving into the competitive environment. So
I move_ that the medium stranded cost is not the appropriate planning
strategy for stranded costs and that, in fact, something shooting higher
than that (although I Will not say whether it is medium-high or high) is
appropriate.
Commissioner Grimsrud: I am a proponent of looking at distributions or
financial risk profiles using more than one scenario. So I would not
back that motion, because it implies that you are going to select one
scenario and say, okay, we are going to base our decision on that. I am
interested in looking at a number of scenarios and looking at the
financial risk over the long term, given a certain probability that this
will occur, this will occur, and this will occur. I think the point is
right and we do not want to get just the medium scenario and that’s it,
and that is an appropriate comment, but I do not feel we should say,
okay, we are going to base our decision on a medium-high scenario.
feel what we should do is to look at a number of scenarios that band
certain levels of probability, and then assess what our risk profile is,
based on that.
Chairman Johnston: Let me clarify my motion. It is that the medium
stranded cost scenario is not an appropriate mechanism for planning for
stranded costs. That is the motion I am proposing, and that staff
comeback with another suggestion which could be a probabilistic
approach, or it could be an approach of picking some other percentile,
but some approach other than medium stranded costs.
Commissioner EyerlT: That motions sounds all right, but why no simplify
it by saying that staff will bring back a variety of scenarios, as
Commissioner Grimsrud is talking about. You have brought several to us
this time, and I would like some more. I would think that is what they
are planning, and I don’t think should plan on the medium alone. We
MINUTES UAC:04/03/96
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ought to have higher, and maybe lower, whatever they feel as they go
into it.
Chairman Johnston: Let me explain the reason why I a~ proposing a
motion here. Last month, staff told us that they believe that the
medium stranded cost approach is the appropriate approach. We asked
them to come back and show us some other data, and in fact, they showed
us some other data last month in terms of high and low issues, la am
sure that staff will come and show us a variety of issues that we can
look at, but fundamentally, staff, no matter what they are showing us,
have a belief that the medium stranded cost is the right approach. I do
not agree with that, and I believe from the comments that have been made
by this commission that other members of the commission do not believe
that either. I want to make it very clear that there is a distinction
between simply asking that other data be prepared and essentially a
policy statement from the standpoint of the commission saying that we do
not endorse a medium stranded cost approach. I am looking to not
endorse a medium stranded cost approach. I would like that to be on the
record. If I do not have support that, I can change the motion, but
that is the essence of what I am trying to make clear.
Commissioner EyerlT: How have you arrived at the opinion that the
medium stranded cost approach is not the proper one to follow when the
questions here that they want to study have not yet been answered? How
do you pick out medium as being improper?
Chairman Johnston: The reason I believe the medium approach does not
work is if we go back to the discussion we had last month in which Randy
indicated that over the years, the staff has used a medium approach
generally for budgeting purposes, for rate setting, etc., and I agree
with that for that application, because in the past, if you set rates a
little too low one year or a little too high one year, you could fairly
easily adjust in the following year. I feel that with the stranded cost
scenario, we are in a situation where we have more control over our
rates over the period between now and 2003 or thereabouts than we are
likely to have after that time period. After that, we will certainly
have control of our rates, but we not have control over the people who
pay those rates if we do not set them to their liking. So the
environment is such that if we make the bet the wrong way, the long-term
viability of the utility is at risk. I think that that needs to be
taken into account, and in taking that into account, you do not end up
saying that the medium stranded cost approach is the correct approach.
I would endorse what Paul says which is that if you could look at some
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risk-based approach, that would probably be the best way to come up with
how you ought to do your long-range planning. I certainly would endorse
that. We would have to see how the reports came back and what tools we
would use, etc., but I simply think that in a situation where we have
control over our rates in the immediate time period and beyond, once the
competition kicks in and we open up our city, do not have that
flexibility in the back end, so as a planning tool, it seems t be
inappropriate. I think that as you get more information, the.
differences between what you might call a medium approach or a medium-
~high and a high will tends to narrow. As you get more information, the
range of possibilities becomes less. That obviously will be accounted
for as we move forward here. I a just looking at the fundamental issue,
is it appropriate to use best estimate? In an environment beyond 2003
or thereabouts, we have some serious limitations on our rate control.
I would like to see us say that the medium stranded cost approach is not
the appropriate approach.
Mr. Baldschun: If I could just make the staff position clear on this,
in the report we talk about using the base case scenario for 1996-97.
That is the proposal to transfer the $15.9 million, but we are not
locked into ’that, and no decision has been made that that is the best
scenario to use. What we are saying in the report is that we are going
to come back to the UAC and evaluate what the appropriate target should
be. It even says, "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." So what we are saying is, we are open to
changing the target level, but right now, we do not have the information
that can justify that. We want to spend some time evaluating it. If it
is appropriate, we would recommend a higher balance. If it is not, then
we will not.
Chairman Johnston: Right, and I understand that. The way I interpret
that, from the comments you made last month and also from those you just
made, is that your approach is that right now, you are using a medium
stranded cost approach and these are what the numbers look like. In a
year’s time, we will still look at the medium stranded cost approach.
The numbers will be different because you will have better data, and the
numbers will change over time so that your best estimate of what the
stranded cost will be will also change over time.
Mr. Baldschun: No, in six months we will come to you and we will make_
a decision on which case is the best case. Is it the medium-high? Is
it the medium? Is it the high? Is it somewhere in between? In six
MINUTES UAC:04/03]96
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months, the plans are to have that decision made. So we are not
planning on adopting this base case in finitum. It is something we are
adopting on an interim basis until we complete the study. Once that is
done, then the results of the study will justify the appropriate level.
We need to study all of the ramifications that I list in the report.
There are fundamental assumptions that we are all making here that no
one has really sat down and talked about. We want to get those out on
the table so that we can understand exactly what are the ramifications
of stranded cost. What are our options in dealing with them? Before we
can develop a strategy to deal with them, we have to get a good handle
on stranded cost, and I don’t think we have that right now°
Commissioner Grimsrud: It sounds like we are all in general agreement.
I might propose to change the motion that you will not limit the
analysis or presentation to just the medium stranded cost approach. I
think you are saying that you will not do that. It may be that in
certain kinds of analyses, the medium case works, so I do not want to
propose a policy that we never use the medium case, but in this
analysis, I agree with Chairman Johnston that that is probably not the
most desirable case. But as long as you present us with all of the
different types of cases and not just limit it to that, I am comfortable
with it. At this point, Paul, the information has been transferred and
we are in general agreement. I am not sure that a motion is needed.
Commissioner Eyerly: Why don’t you put your motion on the floor for the
record.
MOTION: Chairman Johnston: I would make an alternate motion to not
limit the analysis and presentation of the stranded cost issue to just
the medium stranded cost case but to look at a whole distribution of
cases so that we can assess the financial risks of the various cases,
and select the right ones.
SECOND: By Commissioner Eyerly.
MOTION PASSES: Chairman Johnston: I can support that. I think that is
what we are already doing. All in favor? (Passes 3-0, with
Commissioners Eyerly, Grimsrud and Johnston voting aye and Commissioners
Chandler and Sahagian absent). I will not try another motion, but I
want to be very careful that we are not dealing here with issues of
semantics. When I talk about the medium stranded cost approach, I do
not mean that we are talking about trying to achieve a target of
$31,597,000 in 2003. That is a current projection ofa medium stranded
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cost approach. If you look at these six months from now, we will have
a different number for each of these, but we could still have what would
be called a medium stranded cost approach and a medium-high and a high.
There would just be different numbers on those, because our assumptions
would be better. Hopefully, the numbers would converge. What I am
after is not just looking at a variety of issues, but trying to move
toward a getting a more conservative policy.
Commissioner Grimsrud: To put a little closure to this, it reminds me
of when we first got started about five years ago. In those days, in
very early meetings we were being presented with benefit-to-cost ratios
for, say, a stig unit. It was expected value. We didn’t like that, and
we went through a big process and developed an IRP process where you
actually did very nice probabilistic analyses and did financial risk
profiles of various scenarios. I think the staff is very capable of
doing that sort of thing, and I feel that that sort of an analysis is
worthwhile in this case, as well.
Item 6.c.3. Information on Calaveras County Aqreement with NCPA
Chairman Johnston: This item will be covered by Tom Habashi.
Mr. Habashi: This report was made in response to some questions that
Commissioner Eyerly asked last month. We do not have a presentation
prepared, but we are here to answer any questions.
Commissioner Eyerly: I am happy to see the report and to have had you
look over the contract so that we really know what it says. It points
out that we have a very valuable, long-term resource, so the efforts we
are putting into stranded costs for Calaveras are very appropo at this
time. We certainly do need to surmount those to protect this valuable
resource, which I expect will get more valuable with time.Thank you
for the report.
Mr Habashi: My pleasure.
C~_airman Johnston: It seems as though we get this nice window from 2024
to 2032. Once we get rid of the debt (hopefully before then), we will
have a pretty good focus on the O&M costs of operating the facility,
which I understand are also somewhat high.
Mr. ~abashi: We will try to do that in the couple of years.
not wait that long.
We will
MINUTES UAC:04/03/96
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Chairman Johnston: I understand that. We would like to be reaping some
very big rewards by the time we get out there, and not start addressing
that issue only then. Thanks for the report. It clarified some issues
that I certainly was not aware Ofo
Item 6.d. FY 1996-97 Demand Side Management Prouram Recommendations.
Mr. Habashi:
item.
Blake Heitzman will make a short presentation on this
Blake Heitzman, Manager of Competitive Assessment Group: In an effort
to get information to the UAC prior to the budget process, staff brought
forward a proposal for DSM funding last October. This presentation is
a follow-up to that with more specific information about proposed DSM
programs. The programs will be rolled into the budget report in May for
final consideration at that time. We are considering that tonight, UAC
approval would, of course, be contingent upon that final budget approval
in May. In October, the proposal that went to the UAC set a budget
~between 3/4 of a percent and one-and-a-quarter percent for DSM funding
so that the DSM programs would not go into an IRP process as in the past
and be competing with supply resources. It would be competing against
itself for the DSM funding. Six criteria were set in that October
report that we used to. sort through the programs and give them various
values. Also in that report, it was recommended that three kinds of
programs be developed -- those that are at belt load, those that are at
load neutral, and those that are at decreased load. Initially, staff
developed a list of potential programs, and the list came from programs
that were introduced in the 1995 electric IRP, programs that we knew
other utilities were using, just a general brainstorming between staff
members and also customer input that came to us through our field reps.
To these approximately 40 different ideas that we came up with, we
applied the six criteria. Those that are rejected are in an appendix at
the back of the report. We used two criteria as filters. They were a
go or a no go, and we culled out the programs that did not pass the
filters° One filter was marketability, which to us meant, are we able
to get this program on the street by July? Another marketability issue
would be,. is this a new technology that we are uncomfortable with trying
to put on the street right now? A second filter was customer
acceptance. It was an opinion of customer acceptance that came from the
previous end use survey that we had a couple of years ago, and also from
a recent survey that we made of randomly selected customers. If we felt
that a program would not be acceptable to customers, we culled it out.
MINUTES UAC:04/03/96
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We used the final four criteria to place value on the various programs
that were left after the culling process. Environmental benefit was one
of the four criteria. We measured environmental benefit and tons of
pollutant that would be reduced. We used a gas turbine as a marginal
resource for offsetting electrical generation. We used DOE values on
pollutants that come from the gas turbine, and used CUC values for
relating pollutant values. In other words, a pound of nox is equal to
200 pounds of CO2. There was a CUC report that related the different
weights of pollutants. For gas combustion, we just took the reduction
and combustion products from gasol, pipeline quality gas, and there was
also some CFC reduction where we used estimates of leakage of CFCs from
existing compressors. That basically is how we got the environmental
benefit number.
The Customer Satisfaction Value number came from our customer survey of
nine major customers and approximately 30 non-key customers. We asked
them how they valued various elements of DSM and on what they placed the
most value. The Competitive Value was based on a combination of
customer satisfaction value and the customer segment that the program
addressed. In other words, if it addressed key customers who were at
risk, we considered it to have more competitive value than if it
addressed residential customers who are less likely to leave the system.
Costs were staff costs, and city funds were applicable and program
operating cost lost revenue was issued as a different number in a table.
In Table i, a summary table, it gives you the programs that we came up
and the different values associated with those programs based on those
criteria values that I just discussed. These are the programs that we
are recommending for implementation, starting in July of this year, the
next fiscal year. That gives you a brief overview and I can take
questions.
Commissioner Grimsrud: I would like to go through the report and make
some points. On the Analysis, it looks like you have made some
estimates of load impact in order to get the environmental impacts.Is
that right?
Mr. He~zman: Yes, that is correct.
Commissioner Grimsrud: To me, there is information not found here that
I feel would be worthwhile. One is the estimated megawatt load impact
during peak loads and megawatt hour load over the year by program, the
potential range of bill impacts for the customer. In other words, what
is the beneficial impact? Also, for each program or for the whole suite
MINUTES UAC:04/03/96
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of programs, what the rate impact is to the nonparticipants, i.e., the
general rate payer.
Mr. Heitzman: We did run the numbers for the rate impact for the
general rate payer. It was 0.3% per year, so we considered it to be
insignificant compared to the other rate impacts that would be occurring
due to other -o
Commissioner Grimsrud: That would be useful information to include in
the report. In the program for industrial comprehensive efficiency, one
thing that interests me is whether there is a way that we can enter into
contracts with these people, besides just improving customer
satisfaction? If we said, okay, we are going to invest so much money in
helping you, but we want to have some assurance that you are going to
stay in our system.
Mr. Heitzman: As you will notice, most of these programs deal with
gathering information from the customers about their facilities and also
about our system in general. If you look at the whole list, there is a
lot of study going on. One of the proposed programs is a financing
study program. In that program, we would address the possibilities of
forming contracts, etc., with customers on that basis. We did not feel
comfortable with trying to launch a program this July that had those
kinds of bells and whistles, so to speak. We did not feel that we could
gear up quickly enough to have a good program that had all of those
things appropriately without doing a more detailed study.
Commissioner Grimsrud: It looks like you have a budget here of $707,000
for that first program. Is that per year, so that for nine customers,
you are spending $707,000?
Mr, Heitzman: That is a two-year figure.
Commissioner Grimsrud: That is a fairly significant amount, although
these nine customers, I am sure, have very large revenues. I guess as
time goes on, what I would like to feel is some comfort that our DSM
investments in these large customers will reap some return.
Mr, Heitzman: We hope so too!
~_~mmissioner Grimsrud: I guess that is the whole, idea. Customer
satisfaction may be the best way to do it, but I am wondering if there
are other ways to do it, as well, that makes it more secure.
MINUTES UAC:04/03/96
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Mr. H_~bashi: If the competition were to heat up in 1998 or thereabouts,
we would seriously start to look at contracts with
customers to keep them in the Palo Alto system for a little while. We
will look at it from a comprehensive standpoint, taking into account
DSM, as well as a few other things we can do for them at that time.
Commissioner Grimsrud: My last set of questions relate to Appendix B,
"Study opportunities to defer investments in capital improvements on the
transmission and distribution system." Is part of that to get better
load research data on your transmission and distribution, or do you have
load research?
Mr~ Heitzman: We do not have a lot of load research on your system, per
se. We had it on a per-customer basis, but not on substations, etc. I
think we have one recorder at a substation. Generally, this is a
follow-up on a study that was conducted a few years ago, and we are
essentially looking at working in cooperation with the engineering staff
to follow up on that study and see if there are some things that can be
done with DSM to help defer capital improvement costs. So as you can
see, there is not much money involved here.
Commissioner Grimsrud: Are you talking direct load control or load
management or something to minimize spiky peaks?
Mr. Heitzman: Those are all possibilities. There are other
possibilities if there are locations in our system (and this is all
hypothetical since the study has not yet been done), if there are
segments of the system that may need capital improvement that could be
deferred if the load could be reduced, the spikes, either through load
control or just something at the customer facility that brings down
their peak, then that is something we want to look at in cooperation
with our engineering staff and see if that could be achieved.
Commissioner Grimsrud: Do you have recorders that you can just plug out
there and do some load research?
Mr. Heitzman: They are hard wired. Most of our recorders, the ones
that we are working with now, are wired in with phone wire. We remotely
have telemetry to examine them. They are fairly easy to get in, but
they are hard wired, so you can’t just pick them up and’move them.
Commissioner Grimsrud: On ~Study feasibility of municipal-o~ned
distributed generation," I am wondering if there is going to be any work
MINUTES UAC:04/03/96
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done on reliability demands, i.e., through your customer surveys or
whatever, and try to determine what level of reliability the various
customers need, thereby using distributed generation to improve’ that or
assure them of this level of reliability. I guess the first step is,
are we getting information on that?
Mr, Heitzman: On the reliability level needed by customers? (Yes) I
am trying to think of whether this is covered in a pervious study or
not.
Mr. Habashi: Actually, we were planning on putting something together
to survey the customers and see what kind of reliability and other
issues they would like to see addressed. However, we have put things on
hold somewhat since earlier this evening, you heard from the
organizational review consultant that they will be doing something
similar to this. We want to make sure we are not duplicating their
efforts. If they are going to do the work, we will take the information
that will be coming from them and use that to establish the on-site
generation program.
Commissioner Grimsrud: My last question has to do with the budge~ of
$238,600 for alternative fuel vehicles. Is that for the cost of the
study?
Mr. Heitzman: It is about one-half for study and one-half for
demonstration, approximately. It indicates that $150,000 is
demonstration dollars, so the study is a little less than half. That is
supposed to be a comprehensive study of both electric and natural gas
vehicles projecting ten years into the future, as well as infrastructure
changes that might be needed. It is supposed to be a very thorough
study of what might become of those two eventual load builders there.
Also, environmental benefits.
Chairman Johnston: I have a question about that particular item also.
On these alternative fuel vehicles, is there any reason to rethink this,
in light of the new decision on zero-emisslons for electric vehicles in
California? On the one hand, we want to be ahead of the curve a little,
but on the other hand, part of what we are looking at is having
infrastructure to respond to needs when those vehicles come along.
Given what has happened, I am wondering if it is appropriate to rethink
whether this is, in fact, the right time to be doing this study.
Mr.Heitzman: My feeling on proposing this study was that at some
MINUTES UAC:04/03/96
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point, we need to take a really comprehensive view of the political
environment and the technical environment, etc. I suppose this study
could be deferred for a year or two, but it seemed like at some point,
we needed to step up and look at what our best projection of the future
is going to be and be able to develop some kind of plan. The study may
indicate that we do not need to do anything for two or three years
because of this happening with the relief of the mandate. But it seemed
like it is something that we just want to understand better, so although
it could be deferred, there is some value in getting a handle on it now
so that we can plan for it. There is also this fluctuating situation
where, at one point, the mandate has been backed off, but then they are
also saying that they want the automobile manufacturers to work
cooperatively, etc., and proceed on their own. So there is some value
in knowing where we might be in that picture now, even though the
mandate has been pushed off. It seemed to me to be worth the dollars to
go ahead and propose it. now rather than waiting to see what happens in
the next cycle.
Chairman Johnston: I do not recall whether, as a part of pushing that
mandate back, if there were some agreements. I thought there were some
agreements in terms of spending some research dollars. In other words,
they did not have to produce the vehicles but there were some other
requirements. I am wondering whether, in fact, there is an opportunity
for Palo Alto to participate in that in a way that we do not put our
dollars up, but we agree to look at it. I am not prepared to vote
against this, because we have allocated a block of dollars and you are
trying to find the best way of spending those dollars, but it seems as
though the timing is premature. If it is not premature, it seems as
though, in effect, there may be other dollars to do this study.
Mr, Heitzman: I think you can look at these budgets as the maximum
number of dollars that we expect to spend. In the process of developing
the RFP for this study, we would be looking at support from wherever we
could get it. In fact, if it is the automobile manufacturers who have
to do the research and spend some money on it and we could latch onto
some of their money, we would do that. So you can look at this as the
maximum we would spend, and certainly, we would use every avenue
possible, such as state funding, etc., to supplement our-dollars and
lower our cost°
Chairman Johnston: Let me go back through some of the other programs.
Regarding Program#5, the Residential Coupon Program. I understand here
that we have not specifically decided on which items you might provide
MINUTES UAC:04/03/96
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coupons and that those programs will be evaluated as we go along. My
feeling is that I would like to see that budget treated in the same
manner as discussed previously, looking upon that as a maximum, but
possibly considering not funding any of them. We went through this with
the refrigerator rebate program, and I know there are other rebate
programs that may prove to be better, but one of the questions I think
we never had adequately answered was, when people are in the marketplace
buying products and they have a choice of a more efficient product or a
less efficient one, in a city like Palo Alto, do coupons make any
difference in the choices that people make? Don’t people, in fact, make
their choices for a variety of reasons not having to do with the coupon?
Therefore, the coupon is handing out money and it just happened that it
was in the same year that they wanted to buy the new product. We raised
those issues before when we addressed the refrigerator rebate program,
clearly with some softness conceptually in the program there, and it may
be different for different products, but it seemed as though, when you
did the analysis before, that effect was not really accounted for, and
probably would not be fully accounted for in pursuing these. For that
reason, in this town at least, I am generally opposed to these programs.
As you mentioned here, they are going to have to pass your criteria, so
I would suggest that you use the criteria pretty stringently. It is nQt
clear to me that those things would pass if you really evaluated it
properly.
The last comment I want to make is on the photovoltaic program. The
budget is very small for that, and we are just participating, as
understand it, in SMUD’s program. Could you give me a little more
detail as to why this is not something that we might pursue more
aggressively in this town, as opposed to simply supporting research
elsewhere?
Mr. Heitzman: You have a good point. We could pursue it in Palo Alto.
This project originally started with a larger dollar amount and
potential for establishing some collectors, as an example, an
experimental project here in Palo Alto. It was scaled back to fewer
dollars and not any collectors in Palo Alto. The major reason was that
we were uncertain as to where we would establish them, where we would
set them up, who would maintain them, etc. We just felt that for the
first phase, we would rather have somebody else do it, get some
information on it, and then decide whether we want to do it here or not.
MOTION: Chairman Johnston: That sounds fine. Therefore I move that we
endorse this program.
MINUTES UAC:04/03/96
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E~_~0_~: By Commissioner Grimsrud. In general, I support DSM, and I
think we should be in that business to some extent, even though we do
not make a lot of money in it. I, too, have some reservations about
this $238,600 for the gas and electric alternative fuel vehicles study.
If there is one area that the utility can be supportive of in the
Comprehensive Plan aspects, it is Transportation. I am interested in
looking at city-owned facilities to help transportation. To direct some
of these funds into supporting the city overall in that area would be
very worthwhile. The way you have presented this gives some
flexibility, in general~ and I agree with that. I will support the
motion.
Commissioner ETerly: I, too, will support the motion.
for both 1996-97 and 1997-98.
This program is
MOTION PASSES: Chairman Johnston: All those in favor, say aye. All
opposed? That passes unanimously on a vote of 3-0 with Commissioners
Eyerly, Grimsrud and Johnston voting aye and Commissioners Chandler and
Sahagian absent.
Item 6.e. Ouarterlv Electric Issues Update.
Mr, Habashi: Doug Boccignone will give you this update.
Mr. Boccignone: I will not discuss anything in particular in the
report. I will just highlight something Chairman Johnston mentioned
earlier about PG&E’s announcement last Friday that they were going to
accelerate the deprecation of the Diablo Canyon Plant while
simultaneously holding rates constant to enable them to be at market
pricing at the end of 2001, as opposed to the prior plan to do it at the
end of 2005. So it does point out that as we suggested in earlier
presentations, once industries go down the path of restructuring, things
tend to accelerate. We are trying to keep on our toes.
Chairman Johnston: That is well noted, while we wait another year to
see whether we should move faster or not°
Commissioner Eyerly: I am worried about all of the things that are
happening. With PG&E’s actions with the Modesto situation and open
access tariffs, etc., I am wondering if we are adequately prepared. I
guess you are going to seek some outside legal help on some of these
matters. Perhaps Tom Habashl could comment on that, as we were talking
about it during the break. My belief is that transmission costs are
MINUTES UAC:04/03/96
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going to be the~thing we will have to fight over the next period of
years with PG&E. We need to get geared up for it, and not loiter
behind. I asked Tom if NCPA was in a position with their legal staff to
lead the charge for us.
Mr. Habashi: You are quite correct that transmission will be an issue
in the future. We are looking at it not only from a Palo Alto
perspective, but we are also working with NCPA to look at it from an
NCPA perspective as a user of the PG&E system. Also, we are looking at
it with TANC as an owner of our transmission lines. So we are working
in different arenas to try and resist having all of the costs that PG&E
has right now as on the transmission side, that we have to pay for. So
we are still on top of it, Fred. I cannot assure you that the outcome
will be pleasant. I think we are all certain of seeing more expensive
transmission in the future. The question is, how much more? Is it
going to double or will it go up only about 20%, 25%? We do not know.
Commissioner EyerlT: The other thing I asked Tom about was in regard to
the Modesto PG&E situation where Modesto is seeking to sell energy
outside of their immediate service area. We have talked about this in
the past and whether it is possible for us to sell excess power, etc.,
in the future outside of the city limits. I do not know just where
staff stands on that, now that you hve gotten some input from Ariel
Calonne, the city attorney. As I understand it, you are still going to
pursue this to get a little more background as to whether we would be
free to sell power in the future outside of the city.
Mr. Habashi: We are looking at that very cautiously. The Modesto
Irrigation District (MID) went out and decided to endorse open access,
and they are very aggressively seeking a lot of customers outside of
their service territory. In return, they have engendered a lot of anger
from the investor-owned utilities, who are seeing their customers
fleeing their system and avoiding having to pay the stranded costs of
what they need to pay in order for the IOU’s to recover their stranded
assets. I am glad they are first. If we have to do it later on, we
will do that, but again, we are lookin~ at it very cautiouslyand want
to make sure that it does not invite the IOU’s, as well as others, into
our service territory.
Commissioner Everl~: When you say that you are looking at it
cautiously, I can understand that, but what I am really asking is
whether with deregulation, we could legally do this or not.
MINUTES UAC:04/03/96
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Mr. Habashi: I cannot really tell. I think we will need a legal
opinion on this matter before we go forward. I know that MID could
because they have a special status as an irrigation district and because
of the agreements they have signed with the district who also signed an
agreement with PG&E to allow them to use transmission. I do not believe
we have the same status as the irrigation district. I do not want to
say I am sure about it, one way or the other. We need some legal
support on this.
Mr. Boccignone: Under current law, we have some opportunitie~ we could
pursue. We certainly need to explore them with the legal counsel that
we are currently in the process of retaining. One thing we have noted
in the report is that as a result of the MID activities, there has been
legislation proposed that would severely restrict our ability to serve
anyone outside of our territory, including traditional annexations.
That is of great concern to us and to all municipal utilities.We are
taking steps to oppose that.
Chairman Johnston: Thank you.
Item 8. City Council Referrals - none.
Item 9. Reports of Officials/Liaisons
Item 9.a. NCPA.
Mr. Habashi: I would just quickly point out the attachments to the
NCPA report on telecommunications. They are well worth reading.
Item 9.b. BAWUA - none.
Next Meeting: May I, 1996
ADJOURNMENT: The ~eeting was adjourned at 11:30 p.m.
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March 26, 1996
Ms. Rosemary Ralston, Administrator
City of Palo Alto Utilities Department
250 Hamilton Avenue - Second Floor
Palo Alto, California 94301
Dear Ms. Ralston:
Enclosed ig our presentat!on for the April 3 UAC meeting.
We will need approximately 45 minutes to review the work plan, plus whatever time the UAC
may need for instructions and direction to TB&A/RMI. We plan on having four or five members
from our team present, including myself, Tim Szybalski, Ron Oechsler, and Harold Morgan.
I look forward to seeing you.
~S~
Thomas J. Resh
Managing Director. ’
THEODORE BARR~ & "ASSOCIATES
515 South Figueroa Street, Suite 1500 ¯ Los Angeles, California 90071 ¯ 213.689.0770 ¯ FAX 213,629,7580
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