HomeMy WebLinkAbout1996-12-09 City Council (14)City of Palo Alto
City Manager’s Report
TO:HONORABLE CITY COUNCIL
6
FROM:CITY MANAGER DEPARTMENT:UTILITIES
AGENDA DATE: DECEMBER 9, 1996 CMR:480:96
SUBJECT:Final Report from Theodore BarD’ and Associates on the
Organizational Review of the Utilities Department
REQUEST
This report transmits from the Utilities Advisor’ Commission (UAC) to the CiD’ Council the final
report from Theodore Barry and Associates for the organizational review of the CiD, of Palo Alto
Utilities Department and requests that Council approve the UAC recommendation that the report
be referred to the Ci~, Manager for staff: ’ s response to the consultant’ s recommendations, and,
return with an implementation plan.
RECOMMENDATIONS
Staff recommends that the City Council accept and review the final report from Theodore Ban’?..
and Associates (TBA) on the Utilities Organizational Review. The UAC reviewed and accepted
the report at their November 6, 1996 meeting. Members of the UAC and the project team from
TBA will be present at the Council meeting to answer questions. The UAC recommends that the
City Council refer the items discussed in the implementation plan (Appendix I) of the report to the
City Manager for staff analysis and response. Staff recommends that Council accept the
Organizational Review report by TBA and the UAC recommendations. Staff further recommends
that both be forwarded to the City Manager with the direction to return to Council with a response
including an implementation plan;
POLICY IMPLICATIONS
This report does not represent any change to existing policies.
CMR:480:96 Page 1 of 3
EXECUTIVE SUMMARY
Changing priorities in the Utilities Department prompted by the .deregulation of the utilities
indust~ have made competition for Palo Alto’s utility customers an issue of the future. Exceeding
customer expectations and maintaining customer loyalty remain paramount in keeping the
Utilities’customer base. This new climate of change provides an excellent opportunity to perform
an organizational review of the Utilities Department. In December 1994, the City Council
approved the City Manager’s recommendation to conduct this review and to assign the
administration of the study to the UAC. The goal was to ensure that the Utilities Department is
efficiently organized for future competition in the industry and meets the service expectations of
customers competitively. In May 1995, the UAC created a "Blue Ribbon" Task Force to review
and comment on the Request for Proposals (RFP) and aid in the selection of the consultant to
perform the study. The revie~v process continued over the next several months, and the RFP was
issued in November 1995. With the recommendation from the UAC, Council approved the
contract with TBA in March 1996.
Once the UAC approved the work plan from TBA at the April 3, 1996 meeting, the project began.
Immediately, representatives from TBA and the subcontractor, Resource Management
International (RMI), met with managers from the Utilities Department to conduct a benchmarking
workshop and introduction to the work plan. Over the next several months TBA worked with staff
conducting interviews, reviewing documents, manuals, reports, and studies. Staff completed
operational surveys and questionnaires for the benchmarking studies. As each phase was
completed, TBA discussed the results with staff at various levels to review and clarify the
conclusions. Staff appreciated the opportunity to clarify issues and, at times, correct inaccuracies.
Discussions with the consultants from TBA and RMI were open, productive and informative.
Feedback sessions were held with representatives from other departments impacted by the
findings. TBA shmved considerable sensitivity to the workload of Utilities staff in scheduling.
meetings, interviews and requests for information. The process was smooth with little disruption
After the feedback sessions, TBA presented the findings as part of the monthly progress reports
to the UAC. UAC commissioners provided feedback, direction and guidance at these meetings.
TBA incorporated suggestions from the UAC in the final report, which is presented at this meeting
along with the minutes from the UAC meetings from May through November 1996. The UAC
discussed the TBA report at the November 6, 1996 meeting and passed a motion to accept the
consultant’s report. The motion also recommended that after the City Council reviews the report,
they refer the report to staff for their response to the recommendations and to prepare an
implementation plan. The motion passed by a vote of 4 to 1.
FISCAL IMPACT
There is no fisc!l impact.
CMR:480:96 Page 2 of 3
ENVIRONMENTAL ASSESSMENT
This report does not constitute a project for California Environmental Quality Act (CEQA)
purposes, therefore, no environmental assessment is required.
ATTACHMENTS
Executive Summary,
Final Report
ADpendi x I
Minutes from UAC meetings April thru November 1996
PREPARED BY:Rosemary, Ralston, Utilities Administrator
DEPARTMENT HEAD APPROVAL:
Dir~,fUtilities
CITY MANAGER APPROVAL:
FLEMING
.ger
CMR:480:96 Page 3 of 3
City of Palo Alto
Utilities Advisory Commission
Item
I.
2.
3.
4.
5.
6.
Wednesday, April 3, 1996
City_ Council Conference Room
MINUTES
Roll Call ..........................2
Oral Communications .....................2
Approval of Minutes: March 6, 1996 ..............2
Agenda Review and Revisions .................2
Consent Calendar .......................2
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
City Council Referrals ....................66
Reports of Officials/Liaisons ................66
a. NCPA ..........................66
b. BAWUA ..........................66
Next Meeting: May I, 1996 ..................66
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.
Council Chambers, 250 Hamilton Avenue, Palo Alto, California.
Item i. Roll Call.
in the
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 ~lenn 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
Final Page 2
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 tea~ of TB&A and RMI to do
the study. We look for-ward 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 u~ 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 wil!
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
gaveher some feedback information on that.
Commissioner Grimsrud: There was some discussion that might have been
of interest to you in preparation for thi~ meeting.I was just
wondering if any feedback 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 pretty 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 take questions 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 leve! 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 bench_marking 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 crpportun-iti~s 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 ~ctually 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 t~at 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.
MINUTES UAC:04/03/96
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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 headingVCM 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 in 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 det~il? 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 al! 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 hhe four years of t’ies to the City of
MINUTES UAC:04/03/96
Final Page 5
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
~hat the overall work plan is designed to give you some input into the
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 bench_marking 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 additiona! analyses in all of the
key areas and come back with descriptions of findings in each of those
areas. Step Ill 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 comparin~ a p~rrel of ~ti~ities ~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 work on the benchmarking side of
MINUTES UAC:04/03/96
Final Page 6
water, aswell. 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 have
planned these milestones around our understanding of your scheduled
meeting dates over the next severa! 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 wil! 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 incorpora~ted into the final report
w:[th a fina! 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 more4
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 thatyou 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 wil! 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 individua! interviews with the UAC members, with
City Council members, which we have found pa[ticularly informative in
the past to get some objective feedback from the City Counci! 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 s~udy. 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, customer expectations, and water and gas
issues are the areas where RMI wil! 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 specif&cally called out in the Request for
MINUTES UAC:04/03/96
Final Page 8
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.
.~cmmissioner 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 bench-marking. 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. Basic~lly, 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 years the various kinds oftrends 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 example 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 amount
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.
MINUTES UAC:04/03/96
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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.
Commissioner 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 wil! put the Palo Alto information into our
database of information and produce customize~ 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 ~m 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 ho 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 w~uld 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 traditiona! 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 wcrk, 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.
Conunissioner Grimsrud: One other question I have in terms of the
bench_marking 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 i~dustrywide 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 pane!. 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 al!ows 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 prqbably 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 al! been
open to doing it, and that may be a way of supplementing some of the
information.
MINUTES UAC:04/03/96
Final Page 13
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
bench.marking 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 bench, marking 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 Tim and 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 envirornnent. I am
MINUTES UAC:04/03/96
Final Page 14
thinking in terms of someone like Sun Microsystems, who might be a
potentia! 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.
Chairman Johnston: Thank you, Mr. Gruen. Next is Mr. Debs.~
~. 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 commen~s 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 counci! 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
Final Page 15
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
action 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 think 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 Rosenba~un, among others, wanted more of a
straight, mundane type of benchmarking. There wgre others, like myself,
that were interested in the competitive aspects 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 f~om 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
Final Page 16
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 bench_marking 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 deregulation, 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 wil! 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
Final Page 17
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: Thank 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 regar~ 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 ~ith 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 meeting with 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
City of Palo Alto
Utilities Advisory Commission
Wednesday, May 1, 1996
City Council Chambers,
I tern
o
°
Roll Call ..........................2
Oral Communications .....................2
Approval of Minutes and Executive Summary, April 3, 1996 2
Agenda Review and Revisions ................2
Consent Calendar ......................5
Unfinished Business .....................5
a. Monthly Report by Organizational Review Consultant, TB&A . 5
New Business ......................ii
a. Utilities FY 1996-98 Proposed Budgeb and CIP ......ii
b. FY 1996-98 Utilities Rate and Reserve Proposals ....ii
City Counci! Referrals ...................29
Reports of Officials/Liaisons ................29
a. NCPA ..........................29
b. BAWUA
i0.Next Meeting
Ii.Adjournment.
250 Hamilton Avenue. Palo Alto. 94301 ~ 415.329.2277 F.~X 415.321.0651
Item 5. Consent Calendar
Item 6. Unfinished Business
a. Monthly Report by the Organizational Review Consultant, TB&A
Chairman Eyerly: The next item is our monthly report by TB&_A, our
organizational review consultant.
Mr. Szybalski: We are pleased to have this chance to present a monthly
status report. It is still pretty early in the project, but it will
afford you the opportunity to see the direction in which we are going
and to give us early guidance. We were fortunate to have a large part
of our consulting team here tonight to make different parts of the
presentation. I will introduce each member of the team as he gets up to
conduct a portion of the presentation. I am Tim Szybalski, Project
Manager for t~e TB&A/RMI team. We would like to give you a work plan
update and remind you of the overall project tasks, a report on tasks
that we said we said we would work on last month, and proposed tasks
this month. Also, give you a status on the organizational analysis and
some various work plans, particularly around ¯ water/wastewater
benchmarking and the gas benchmarking. We think those are probably
areas you want to take a look at, at least in some detail, followed by
some questions and answers. ~
The first slide summarizes the three slides you have seen earlier that
basically show three major steps in the project from High-Level
Diagnosis to Detailed Analysis and some detailed tasks, following two
parallel tracks. One is Organizational Review and one is Competitive
Assessment. Then a Final Report and Implementation. We are still early
in Step I. By the next meeting we hope to come in with some specific
focus areas for consideration.
The next slide has changed only slightly. (Milestones by UAC Meeting
Dates, Revised) There should be no substantive changes from the one you
have seen earlier. We have tried to tie our work progress and our work
plans and deliverables to the meeting schedule of the UAC. You can see
that today is a progress report on how the various tasks are coming
along. Next month will be the Areas for Detailed Analysis,a
preliminary analysis of expectations and areas for detailed review.
Next is a Report on Tasks from Last Month. We said we would submit data
requests to the Utility Department. They exceeded our expectations. We
received four large boxes of budgets and work plans and job
descriptions, a lot of things we have been working our way through. We
MINUTES UAC:05101196
Final Page 3
also presented to them the electric survey, actually three different
surveys. One was on electric operations, one on energy marketing and
another on customer service. We do have the electric survey back as of
today, and will begin entering it into our database. So one has already
been completed. We had a kickoff meeting that lasted throughout the
morning with the top 16 managers of the utilities. It was
informational. From our point of view, it helped to present our
understanding of bench_marking and get a common ground with the Utility
Department. We did that about three weeks ago. Then we have conducted
followup interviews with all senior members of the utility staff.
For the planned tasks for this month, I will go through five separate
presentations for a quick overview of what is being planned on the
organizational review. We will do value-centered management, then
electric bench_marking, followed by the gas/water/wastewater plan, and
then the competitive assessment plan.
The steps in the organizational review review, so far, is that we have
reviewed current job descriptions. We have interviewed the top 16 staff
members on what they do. We have interviewed assistant directors and
managers, plus a few senior engineers in key positions. Our plan, after
tonight, is to interview selected supervisors, maybe half the
supervisory force, as well as senior engineers, planners, and we also
plan to begin to observe/interview selected field office persorrnel.
That will mean spending time with selected people such as a part of a
meter-reading route, observing a customer rep handling phone calls,
watching a construction crew in various areas, methods tools, how they
approach the job, what materials they have. These are intended as
random samples for how the organization operates. We really do mean
observe/interview. We want to talk to the people in all positions in
the organization and get a view of their knowledge, skills, information
and the authority that they have to do their job properly. So we will
have selected interviews with field personnel. This is probably a
critical point to get up front, because this is where the consultants
are not just some memo that comes through. We.are rea! flesh and blood
showing up on the job site, asking questions. So we will become much
more visible after tonight. Most of what I described about interviews
and benchmarking has to do with the some of the more production-oriented
organizations. We also propose something called Value-Centered
Management (VCM), and I will let Duncan Ross take that up.
Duncan Ross: I am with Theodore Barry and Associates, and my primary
focus on the project will be the value-centered management portion of
the work. This is a brief outline of the work plan we are going to work
through with the VCM. We have already begun the preliminary interviews.
From the interviews and the initial review of the documents we have
MINUTES UAC:05101/96
Final Page 4
received, we have already made an initial analysis or sununary of the
products and services within the organization. The next step is to take
that a little bit deeper. We will be speaking further with people
within Resource Management. I should explain that where we have
"Citywide Services," we are really are referring to two separate groups.
One is administrative services within the utilities organization, and
then, some of the additional services provided by the City. What we
will try and get a handle on there are the key products and services
that are provided to the organization that are necessary in the
conducting of their work and meeting the needs of the ultimate
customers. Once we have conducted the preliminary review of the
products and services internally, we then turn around and ask the people
who have received those products and services how they value them.
Again, we want to make sure we are doing the right things, doing them
the right way. So we will be going back and interviewing people again
in Administrative Services, in this instance, also Engineering and
Operations, and in Resource Management. I would also point out is that
the reason we have not included Engineering and Operations at this point
in the products and services is that that is primarily being captured
within the benchmarking, primarily the electric benchmarking, and Tim is
going to talk further about that now.
Mr. Szybalski: Very soon, we should have available some of the first
benchmarking graphs. We just got the data from the City today. We can
compare them with our database of investor-owned utilities within the
next few weeks. I do want to make the point that from our perspective,
benchmarking is not only measure. It is also practices. So we will be
doing some cost measures, some cost comparisons, and we will also be
doing practice measures. What practices are employed by this City that
might be different from other organizations? We have something called
benchmarking interviews. We feel this is an important piece, because it
is not the ability to make apples and oranges comparisons. This is not
always that easy. We want to make sure that We completely understand
the source of the data, what the data say and how they might be
different here from our panel. So there wil! be some initial interviews
on areas to look for. Finally, when we get the data, then actually
talking to individual managers on the status you are in, the fourth
quartile, and less talk about what that means and why that might be, or
if it says you are in the first quartile, let’s talk about that.
The surveys that were distributed for the electric T&D were returned
today. For energy marketing, which is one that covers gas and electric
marketing programs, that is out and should be back shortly. The
customer service survey, which we usually give to our electric and gas
clients, is out, but we have to modify it slightly.to ask some basic
water statistics. Again, the purpose of this whole benchmarking
MINUTES UAC:05/01/96
Final Page 5
interview and survey process is to identify focus areas for improvement.
So the purpose of all of this is, first of all, to leave you with a
useful work product, but also to help us identify where there are
potential areas for improvement. That is the reason why we do our
benchmarking. Are there any questions?
Commissioner Saha~ian: I have a question on your electric bench_marking.
You have energy marketing down. What about energy commodity
procurement, such as gas sourcing, spot energy purchases, etc. That is
a very substantive piece of the activity, certainly.
Mr. Szybalski: Correct. That is not something we will be handling
through bench~.arking. We will be handling it more through value-
centered management. Basically, we will be looking at what the activity
is, how well it is being done, how other people value it. We
potentially ~ay get into looking at how other organizations do it based
upon some other case studies we have done. Right now, the bench_marking
is really focused upon the operationa! areas, as the value-centered is
more on services that are a little hard to measure. In other words, you
do not go out to a panel of 50 and compare their cost per transaction,
because what is really important is the effectiveness of the purchasing,
not the transaction costs.
Ron Oechsler: !f I could add one point. One area that we will be
looking into throuqh the survey will be the practices of the other panel
members. These are hedging their risks on the procurement of natura!
gas. We will be wanting to ask those other members of the entire panel
whether they use various types of risk management tools to shelter
themselves from the risk of~rising~and~falli~g~prices. That is one area
where we will attempt to get an idea of what the population in general
is doing on the gas side.
Commissioner Grimsrud: One thing that comes to mind in this whole
benchmarking area (and this has come up before) is whether we should be
benchmarking among other utilities’ past operations and most recent
operations. Should we benchmarking against something like IPPs or more
a competitive type organization? It seems to me that in order to really
do it right, we ought to take two slices. One is benchmarking like you
said, conventionally, how do we compare which quartile are we in, but
recognize that the first quartile today might be the fourth quartile
tomorrow. So the question is whether there is a way we can compare
against organizations’ processes like individual processes in other
industries, like telephone, etc. Is that something that is a
possibility?
Mr. Szybalski: That is an excellent observation. With our clients, we
MINUTES UAC:05/01/96
Final Page 6
basically suggest they do it in stages. The first stage is to look at
your immediate competitors. The next stage is, when you are in the
first quartile, go out and see what other people are doing. There are
some obvious examples in customer service. In Purchasing, we have taken
people out to maintenance areas. There are a lot of excellent
refineries, other kinds of organizations that run excellent maintenance
programs. So there is a lot to learn from maintenance outside. The
classic T&D operations are a little bit different. We would still say,
look for the similarities. So yes, I would agree, but we would suggest
doing that in the next phase as an ongoing next phase of bench_marking.
Next, we would like to walk you through the water and wastewater. We
have Harold Morgan here representing RMI.
Mr. Morgan: Good evening. I actually work for’ a water resources
consulting firm, Bookman Edmundston Engineering. We are a subsidiary of
RMI that is a part of this project team. This slide looks very much
like the electric bench_marking work plan that you just saw and had very
well explained by Tim. I have been participating in the benchmarking
interviews in order to try and focus some of the issues in areas where
we want to take a look at the water and wastewater systems. Again, we
are looking at Engineering and Operations, Administrativ~ Services, and
Resource Planning. Some of those interviews have taken place, and
tomorrow, we are going to continue with additional interviews. The
Water Marketing ~nd Customer Service Surveys are a couple of areas we
are also going to put into the questionnaires to try and get some
response from water marketing, focusing more on.drought management as
opposed to attempts to sell more of your product. With the Customer
Service Survey, as Duncan already explained, we are also going to try
and incorporate the water and wastewater areas within that survey. The
original scope of the water distribution system that we had prepared in
the proposal is basically outlined to compare your utility systems with
AWWA Research Foundation data. As we have gotten some of the feedback
from members of this UAC, as well as some~ of the City staff, we
understand that water and wastewater is something that you do want us to
take up and take a more refined and complete look at, so we changed the
panel to make it a little more extensive, instead of just AWWA research
data. Based upon a review of utility systems in the bay area primarily,
but in other areas as well, this is the potential panel that I am now
looking at. There are eight plus the City of Palo Alto and AWWA that I
think would make good potential panel comparisons. Out of that eight,
we hope to get perhaps five or six that will agree to participate in
this study. We attempted to not only identify systems close to you here
on the peninsula, such as Milpitas, Mountain View, Sunnyvale and Redwood
City, but also I wanted to pick up an IOU, California Water Service,
probably the Los Altos system. The City of Burbank has an electric
utility as well as water and wastewater, so we thought they would be
MINUTES UAC:05/01/96
Final Page 7
informative to include. The reason the City of Alexandria, Louisiana is
shown is that they, like you, have all of their utilities under City
operation, water, gas, electric, etc., so we think we might get some
useful information from making that analysis. We contacted AWWA
Research Foundation, and they tell us that they are just re~dy to put
out their new questionnaire to participating cities across the country.
They have agreed to send us the survey questionnaire so that we can pick
up some of the questions they are asking so that participating cities in
perhaps both of those surveys will not be confused by the questions. So
we want to take a look and compare what we are getting from AWWA on
that. Their survey will actually occur after ours, so we will not have
the benefit of the most recent data from them, unfortunately.
Likewise with the wastewater, in the proposal, we had four cities
potentially identified, but at that time, I thought we were going to be
looking at the treatment plant too, but since we started this project,
I learned that we are not going to be doing that, so I have refined that
scope of panel and also expanded it. Those are the cities, many of
which are also the water systems that you just saw, with the exception
of the Napa Sanitation District. I fee! it would be interesting to pick
up a sanitation district that does nothing but manage wastewater
collection and see how that compares. That completes my comments.
Mr. Oechsler: [ am Ron Oechsler, and I am project leader from RMI,
Resource Management International. I will be responsible for the
bench_marking of the natural gas utility, as well as a competitive
assessment of the electric utility. The basic steps are similar. We
have interviewed and will be interviewing senior staff managers, as well
as supervisors, from the th~ee, major_.segments of the utility. We will
be utilizing results from the energy marketing and customer service
surveys which are beginning to come back, and we will assemble and
utilize a survey approach, administering a survey to a panel of
representative gas utilities.
In the natural gas industry on the municipal end, unlike the situation
that exists in electriCity and water and wastewater, there is virtually
no reporting of cost information by municipally owned gas utilities. As
a result, we will need to focus our questionnaire on the cost
information that is obtainable from these entities. In order to be
comparable with information from investor-owned or local distribution
companies, which we have included in our sample, it would follow the
breakdowns that are collected by the Federal Energy Regulatory
Commission in what they call their FERC Form 2 Report. We will also
need to work with the City to ensure that Palo Alto records and has cost
information available in the same format. It would bepointless to
collect it for panel members if Palo Alto’s information is more
MINUTES UAC:05/01/96
Final Page 8
aggregated. So we will need to verify that with staff before going out
with our questionnaire. We have assembled a potential panel that will
provide a very good standard of comparison wi~h Palo Alto. The criteria
we are using are that these would be well managed entities that also
provide, in the municipal end, services besides natura! gas. There are
ten other municipal gas utilities. Of those, four of them operate the
same four utilities that Palo Alto does, and the others provide
generally three, leaving out the wastewater utility. So we will be able
to compare the City’s gas distribution performance against utilities
that have the same problem of cost allocation and needing to divide up
common costs among these different systems. We will be finalizing the
questionnaire by the middle of May. We will distribute that
questionnaire, receive results back in approximately two weeks after
that, and we will request results back and do the analysis in June, with
the results to be incorporated in the further analysis.
Mr. Szybalski: The last piece we would to present to you has to do with
competitive assessment. It looks at what customers think about your
performance, somewhat more perception-based data. David Ulm from RMI
wil! discuss that.
Mr. Ulm: As Tim mentioned, I am Dave Ulm with RMI. My responsibility
will be in this competitive assessment area. One of the things we
wanted to do up front, before actually defining the type of focus groups
and who we were going to include in those foc~/s groups, was to go ahead
and review a lot of the information that is already available. In
reviewing that information, we looked back and found surveys, both water
and electric, that were done in 1994 for the commercial and residential
customers. We also found tha~ .ther_e were some focus groups and a
telephone survey done back in 1990. What we are doing is to utilize
some.of the key questions that were used in those surveys so that we can
not only get an up-to-date, current picture of what those customers are
thinking and use that, but we can also take ~ look at the trend since
1990 and 1994. In reviewing the surveys, one of the significant results
of those surveys has been that the customers really have a strong
satisfaction with the utility service, and also a feeling that the price
of the service is fair for the value they receive. It will be
interesting to determine whether that is still the case in our next
survey.
We also looked at the key customer management program. That is a
program that has just gotten started toward the end of last year. The
use has been mainly in the area of customer representatives to get into
one-on-one meetings with the largest of the commercia! and industrial
type customers. These largest customers are defined as those that have
over a million dollars in total revenues for all of the services that
MINUTES UAC:05/01/96
Final Page 9
they receive. Suggestions we have gotten from our interviews, in terms
of whom we should talk to on this round of focus groups, it was
mentioned that the best information for the staff would be if we could
go down a tier. That would be not the key customers, but would be the
major customers, which are about 50 customers that have between $I00,000
and $i million in total revenues. So what we are proposing in terms of
the plan is to have four focus groups, and actually have one with the
key or top tier so that we can see how the trend is going on that.
Also, have three focus groups that would get the second tier group. It
would give us an opportunity to talk to customers from about 16
different companies. We would take these all from a group that is kind
of a corporate group and it has a total of 26 in it. We would get a
very good sample of customers. What we would be doing is getting both
quantitative and qualitative data by giving them a survey to fill out as
part of the focus group so that we can compare that against questions
that have been asked in the past. Are there any questions?
Commissioner Sahagian: I have two questions. First, on the competitive
assessment, your analysis, as you have described, is really !ooking
toward the larger users of the service as a source of information to
evaluate the competitiveness of the utility today. As a part of that
analysis, are you also going to be looking at the changing regulatory
climate, making an analysis of what that is going to do to the
competitive position in the future?
Mr. Ulm: What I was discussing actually is after that first item on the
chart, the rest of the way down.
Mr. Oechsler: Yes, we will be looking at the major developments that
have occurred since the middle of last year. The Phase I report that
staff prepared that was circulated to the UAC encompassed most of the
major threats and opportunities that exist as a result of the trend
towards competition, particularly the ability’of customers to purchase
their own energy from suppliers other than the City. That ground has
been well covered and does not need to be updated. What we will be
doing is to look at developments that have occurred since then. Those
developments include the issuance of a final policy decision by the
California PUC on the res.tructuring of the operations of the utilities
they regulate in California. Just this past week, the Federal Energy
Regulatory Commission issued a final rule in their massive Notice of
Proposed Rulemaking on the wholesale end of the electric business.
Also, on Monday, the proposed tariffs were issued by the three
California investor-owned utilities for the independent system operator
and for the power exchange, which will be functioning in California on
January i, 1998 if the implementation schedule goes forward. We will be
looking at those major developments and the implications that they could
MINUTES UAC:05/01/96
Final Page 10
have for the City vis-a-vis its generation costs and distribution costs.
So we will be able to identify those issues that have the potential to
take away some of the advantages that the City has enjoyed in the past,
possibly putting the City in a position that would represent a
competitive disadvantage vis-a-vis the surrounding utilities.
Commissioner Sahagian: I wanted to make sure that there was going to be
a quantitative piece of this that would look at the future and provide
some strategic suggestions. Secondly, in the bench_marking that you are
doing, most of it seems to be focused on the post-purchase service
component. I am assuming that the bench_marking is going to be very
qualitative, comparing costs of service in this area for the different
components to cost of service in other areas, as opposed to a
qualitative one.
Commissioner Grimsrud: I am comfortable with the breadth of what has
occurred so far. If one of you would like to remain, you may be
interested in some of our discussion on rates and the budget.
Mr. Szybalski: We appreciate the opportunity to do the update. As the
question said, there are three keys. One is to produce each of these
work products in a way that builds on some of the good work you have
already done, taking them a step further, so that the next time, you can
build even further on them. Secondly, as mentioned, to make sure that
the competitive piece is taken into account~ Third, that we come up
with some very helpfu! organizational suggestions which we will be
presenting to you one month from today. Thank you very much.
Chairman Eyerly: We appreciate your presentation. I have heard from
staff that you are asking a lot of questions and obtaining a lot of
information, andI understand that they are being very helpful.So
thank you, and that is all that we need from you tonight.
Item 7. New Business
a.Utilities FY 1996-98 Proposed Budqet and CIP
b.Utilities Rates and Reserves
Commissioner Eyerly: We are ready for a presentation.
Mr. Mrizek: We do not have a presentation except that Lucie Hirmina has
some rate comparisons. I will just make a brief introduction of the
overall budget and rates. I will then ask Lucie to show comparisons,
followed by your questions and comments.
Members of the UAC, tonight the staff brings to you a two-year proposed
MINUTES UAC:05f01/96
Final Page 11
City of Palo Aho
Utilities Advisory Commission
Wednesday, June 5, 1996
Citv Council Chambers
Item
i.
2.
3.
4.
5.
6.
o
MINUTES
Roll Call .........................1
Oral Communications ...................1
Approval of Minutes: May I, 1996 .............1
Agenda Review and Revisions ................1
Consent Calendar .....................1
Unfinished Business ....................1
a.Monthly Report by the Organizational
Review Consultant, TB&A ................1
b.Water Issues Update .................26
c.Gas Issues Update ...................28
d.Overview of existing City storm drain system
and development of recommended category C storm
drain infrastructure improvements ...........29
New Business ......................42
City Council Referrals ................42
Reports of Officials/Liaisons ...............42
a.NCPA ........................42
b.BAWUA ........................42
c.TANC .........................42
Next Meeting .......................43
Adjournment ........................43
250 Hamilton Avenu~ . Palo Alto. 94301 "s’ 4t5.329.2277 FAX 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.
STAFF PRESENT:June Flemi’~g./ ity Manager
Tom Habashi~ssistant Direct_~, Utilities
Rosemary Rals~,on/Administr~tive Assistant,
Kirk Miller/Ut~!ities Re~urce Planning
Joe Teresi/Publlc Works/
Boccignone/~til~ies Resource PlanningDoug
Glenbrook Drive R~rts/Director Public Works
Item 2.Oral Communications/- None
Item 3.Approval of Min~e~i ~n~ ~ec~tive Summary
Roll Call
PRESENT:~Commissioners Chandler, Eyerly, Gr~:~iSrud,
Johnston.~\ .
ABSENT: CommlmSloner Sahagian
COUNCIL MEMBER P~ESENT: Rosenbaum (8:40 p
Utilities
and
Chairma~n John_____~sto___~n: Thinext item is val of the May I, 1996
minutes.However, sinc~ we only have two Co~nissioners present tonight
that were present at ~e May 1 meeting, we wi~l have to delay approval
of these minutes u~l the next meeting. ~
Item 4.A~end~ Review and Revisions - None/
Item 5.Co~sent Calendar - None
Item 6.Unfinished Business
a.Monthly Report by the Organizational Review Consultant,
TB&A.
Chairman Johnston: We will have Tom Resh start us off on this.
Mr. Resh: Thank you, Commissioner. This is a brief agenda of what
we plan to cover this evening. I will run through it quickly. First,
I will reintroduce our team, then give you a quick update on the work
plan. We will spend most of the presentation, about a half~hour, on
some of our preliminary findings, and take whatever time is required
for your questions. Then we will review the tasks we will be
concentrating on over the next month. If there are any followup
M i n u t es UAC: 06/05/96
Final Page 2
questions or answers after that whole discussion, we will entertain
those, as well.
Let me point out where we are in our work plan. Step I was Project
Initiation and High-Leve! Diagnostics. That part of the project we
feel we have completed. What we are really looking towards now are
the areas we will be looking at for more detailed analyses. If you
recall, we divided our work plan into two separate areas -- the
Organizational Review and the Competitive Assessment. This evening,
we are prepared to concentrate our discussion and presentation more
on the organizational review aspect. At the next meeting, we want to
talk more about the competitive assessment. Also, on the
organizational review side, the first task you see in the slide is the
Competitive Benchmarking. We will give you an updated status on where
we are with that, but we are going to be talking more about the
results of the benchmarking at the next meeting. So as a preliminary
thought on that, if we could get some more time set aside on the
agenda for the next meeting, we will probably need more time, as we
will have quite a bit more information at that point in time to go
over. We will have both the bench_marking data from the electric
survey, possibly also from the gas, water and wastewater surveys, plus
a number of observations and results from the competitive assessment.
So there will be a fair amount of data that we will be presenting and
discussion.
Chairman Johnston: I assLune you will coordinate with Rosemary in
terms of how much time you feel you will need.
Mr. Resh: Yes, we will do that. Rosemary has been taking care of
that. For this one we thought we would need more time tonight, and
sent a message that we might need two hours. That is probably more
the case of what we will need the next time as opposed to tonight.
Here is one other change from our original work plan that we are
calling our "Revised Milestone Chart." In the original plan for
tonight, we were going to present the results of the electric
bench_marking data. We actually have that completed and we have
received all of the information. We have run it through our system
and we have all of the results. However, we have not had a chance to
analyze the results nor do any normalization that we might need to ~o
with the Utilities staff. So we are going to be concentrating on that
over the next few weeks and we have shifted that to the progress
report on June 26. We also thought we would be in a position to talk
a little more about the competitive assessment tonight, but again, we
have shifted all of that to the next meeting.
Minutes UAC:06/05/96
Final Page 3
That leads us to what we do want to talk to you about. I do not want
to diminish it in importance, as it is an important step in our
process. We are going to run through what we are calling "Preliminary
Findings" and have broken them into two categories. One is Strengths
and the other is Issues. Issues, quite frankly, is kind of a catchal!
word for what you will be looking at. I would like you to be thinking
of this tonight as the Strengths are we not going to be spending much
more time on. We are satisfied that in these areas, things look good,
and performance is what it should be. With few exceptions, we are
setting those areas aside and considering them as being done.
The Issues areas, at this point in time, are areas that we need to
delve into more deeply. Some of them are more complicated areas and
we need to spend more time on them. In some of the areas, we have
already raised some concerns or we have seen some opportunities, so
again, this Issues area is a bit of a mixture. Think of it for this
evening as being areas where we plan on spending a considerable a~ount
of time over the next month or two as we get into much more detail in
those areas. After Tim has finished doing that, he will also show you
how the top-down part of this study, the organizational review, fits
together with the benchmarking. I will give him the opportunity to
explain that chart
Next I would like to go over who is here tonight. Tim Szybalski, Ron
Oechsler and Duncan Ross are here from our t~a!n tonight. As we get
into the questions that you all have, this group can probably address
most of your concerns. I will now turn this over to Tim who will run
through the strengths and issues.
Mr. Szybalski: I would like to begin by saying a little about where
we are in this process and how we arrived at this series of slides
about preliminary findings. Basically, we have conducted a lot of
interviews in the organization. We started with the director, went
on down to the assistant directors, almost all of the managers, most
of the senior engineers, most of the supervisors in the operations
organization, and many of your lead foremen in your various crews.
In some cases, I have actually had interviews with individual crew
members. So we have had a broad exposure to thoughts within the
organization about what is working well, what needs to be changed,
their access to information, and the tools they have to do their job.
We also have some preliminary benchmarking data that we believe give
some initial confirmation, but to be fair, we want to make sure they
are apples to oranges comparisons and really understand what the
bench_marking data is about. [Shouldn’t that be to make sure they are
NOT apples to oranges comparisons??]
Minu tes UAC:06/05/96
Final Page 4
The first set of slides has to do with overall organization strengths.
As consultants, too often we are called in to say what is wrong with
the organization, and how can we improve. That is the purpose of most
these efforts. We find it is also very important to acknowledge what
is going well, and we feel that our overall assessment is that this
is a wel! run utility. There are many good things happening here, and
we want to take a couple of slides to acknowledge that. The various
findings have been reviewed with the director and assistant director
to make sure that we at least have an understanding of the issues.
Some good exchange occurred as to what the various issues are.
The focus areas on the left are key areas. The first one is Rates.
The overall level of rates is the scope of that issue, and its
strength is that you have low electric and gas rates. Even though we
acknowledge that as a strength, we do talk a little later about the
issues of where lower electric rates come from. Is it on the T&D
side? Does it extend to the transmission distribution side as well?
There are some other absences in that area of strengths.
The second focus area is certainly Competitiveness. We 10ok at how
the utility has organized itself, where it spends its attention, and
how it sets pricing policies to change behavior. We have certainly
seen a proactive response to the electric industry restructuring, and
to name many things that you have under way, there is your marketing
rep program, a competitive analysis group, and~various pricing studies
u~der way. Certainly, your mission-driving budget is excellent in
providing a high level of program management and, in fact, overall
costs have been reduced for the utility over the last couple of years.
We see lots of activity, lots of operationa! changes under way, such
as reorganization studies, work teams, committees, a lot of systems
under development, and to name some things, reengineering, customer
±nformation systems, GIS. We see basically strong liaisons with other
agencies. There are some areas for improvement which we will talk
about at a later time, but generally, it is a very effective liaison.
We see an aggressive infrastructure replacement program for gas, water
and wastewater, and we certainly see that as a strength of the
organization.
This is pending benchmarking comparisons, but initial studi~s show
that the service levels are very good. Response times, reliability,
convenience, lot of stories about working jobs on weekends at customer
convenience, adhering to regulations about noise abatement, those
kinds of things. There are lots of good things happening at the
service level area. Generally, regarding the staff selection,
training, knowledge, skills and ability, overall, we saw very strong
staff capabilities in many areas.
Minutes UAC:06/05/96
Final Page 5
In the use of contractors, this is where in many places, there are not
good contract policies. Everything is done in-house. You have been
very effectively supplementing house resources, particularly in the
infrastructure replacement program, with contract resources. You are
to be commended for that.
Commissioner Eyerly: You have mentioned a lot of good things that are
happening in the Palo Alto Utility. I think the commission has been
aware of that during the last couple of years, but have you made any
comparisons with other organizations our size such as a municipality
like Santa Clara or Redding or some of those cities? You mentioned
proactive response to the electric industry restructuring. How are
we doing, compared to the others? I know we are doing well, but how
about some of the other cities? On budget costs, are we as lean and
mean as some of the others, or not?
Mr. Szybalski: Budget will be a different question. But as far as
the things you are doing, we have done some comparisons and we are
doing some reviews with some of your sister utilities. We are
interviewing s~z~e of the joint agencies, and I know that Tom wants to
speak to that. Cu~t from what I have seen in the municipal world, you
have been vet}" aggressive in using what I call the M word, a word
which most utilities will not use, and that is Marketing. You have
been very aggr~cive in setting up that group. We will talk a little
later about the role and direction of that g~oup, as we feel that is
an issue, but as far as making that comparison, there are very good
things.XXX
Mr. Resh: Just a couple of things to add to that. In the course of
several studies we have done either prior to or during the course of
doing this one, we have had a chance to get feedback and at least
qualitative comparisons of what Palo Alto has been doing compared to
others. I would characterize al! of the feedback as being very
positive. Palo Alto seems to be doing things on a very proactive
basis. As Tim has mentioned, the marketing departments, setting up
customer service representatives for major accounts, those are things
we have seen a lot of on the investor-owned side over the last two or
three years, but had not seen much of on the municipal side. The fact
that you have already done a lot of that is a real plus.
Mr. Szybalski: As we do these feedback sessions with managers, this
is the time where we pause, and usually there are some smiles on faces
that there are some strengths, and now we get to the part where we
talk about the things that are not strengths, and therefore, they must
be weaknesses. We do not necessarily see it that way at this point.
Basically, as Tom described, there are a series of issues that have
Minutcs UAC:06/05/96
Final Page 6
to do with something that does not look quite right, and we need to
know more about. So some of them are based on concerns, and some of
them are based in areas where you do well but maybe you can do better.
Some are just areas that we want to talk more about in the
organization. This list includes overall organization. Starting with
that, the way you describe integration of functions among different
utilities, that can mean many different things. You have many
different commodities, and you have some choices to organize your
utilities around commodities, like electric, gas, and water. You have
your choice to organize them around functions. One way is that you
focus attention on how to run an electric business. You look at
priorities, and the other way is to focus on economies of scale. How
can we answer phones, rather than having six phone answering centers,
which does not make much sense. What we see here is, again, that the
word has to be fairly carefully characterized. There are very
different levei~ of integration. In other words, all utilities show
up on the sa~e bil!. Most utilities cal! the same customer service
center. There ~ some integration among resource planning. There are
not really se; arate groups around gas, electric and water. But in
fact, the e~ectr~c operation, electric engineering, is very separate.
It is a very ~,-~.arate world. Gas, water and wastewater are, in fact,
very integrateZ t~jether. So it basically leads to the question that
we have to think about over the next month or so, which is, what is
the desirable devree of integration between those. A strong case can
be made for market segmentation. Each has vegy different challenges
and are fronted from different levels. In fact, we try not to invent
issues. We try, to come across them from very real problems. A very
real problem here is that we are trying to see who is in charge of the
utility. Who worries at night about what is happening to our water
program? Who worries at night about wastewater? Where is the
business plan for each of these commodities? The answer we get is one
that may be a very good one and we just need more time to talk to
people about it. That is, it is everybody and nobody. Or it is Ed
who really manages each of those, or the director of the utility who
really is manager of each of those functions? We just want to go a
little further and ask, what is the desirable degree of integration?
How do you get the advantage of economies of scale while focusing
attention on each of those different commodities?
The second overall organization issue is Resource Management. Again,
we have noted some very strong things happening in that organization.
We certainly see a bunch of functions added to it in terms of
marketing, and what you end up with is a very large group. So the
question for us is that you have a large group, maybe more than 10%
of your organization, who is studying, planning and meeting with
customers, and not turning bolts and wrenches, etc. Probably, a
Minutes UAC:06/05/96
Final Page 7
couple of issues there are, are they doing the right things? Are they
called the right things? Do they have the right functions? Are they
in the right place? Again, a very competent group, but are they of
the right size? Are they going in the right direction? Maybe more
importantly, how can you keep a planning group from being too separate
from the organization? The things we hear in the organization are,
I don’t really know exactly what they do. Competitiveness is not
necessarily my job. My job is just to build the line or dig the
ditch, etc., so how do you get a sense of competitiveness, not just
in a small group, but throughout the organization? We do not know the
right answer. At this point, we are not making recommendations. Tom
Habashi has agreed to talk with us more about that and try to find out
what the right size role is. And indeed, how can you build consensus
among the organization, because I think they are talking about the
right issues. We would just like to see more of it in the rest of the
organization.
On Job Costing, we identified the mission-driven budget as a very
good, progrant~atic budget that gives high visibility to what you are
doing and why you are doing it, along with some impact measures around
service levels. But one of the essences of a utility, particularly
in the operations area, is to manage little pieces. How much did this
job cost? How much did that job cost? How much do big jobs cost?
How are we doing so far and what are the impacts? We generally saw
inadequate support. We see time sheets going ~n bi-weekly, not daily.
We see a lot of work-arounds because the budget does not keep
estimates or the cost system does not keep what the estimated cost is,
so there are a lot of work-arounds to keep track on spreadsheets of
what the costs are, moving information from one to the other.
Finally, there is just some information such as contract costs that
are in there. So we want to know more about that and how you can
improve that cost management part of the utility.
Tom has challenged me on a couple of these issues. Are these generic
statements or are they specifically for the City of Palo Alto? The
answer yes to both. Information technologies are costly and subject
to cost and schedule runs everywhere. They are also here. How can
the timeliness and quality of information technologies be improved?
We certainly want to talk about that. There is an organizational
component simply because most of the service is being provided by the
City. Again, look for the role of a strong project manager role. In
some cases, that is fulfilled; in some cases, it is not. Good project
management technique is sometimes there, sometimes not. So we simply
want to find out more about how, from the utility’s side, that
particular function needs to be organized more effectively, perhaps
around stronger project management, which is the usual answer, and
Minutes UAC:06/05/96
Final Page 8
possibly more resources. You look at projects of these magnitudes,
and for the large, investor-owned, you might see a task force of 50
or 60 people working on the project. Here it is being done as a part-
time, resource-constrained activity, so resources are not always the
answer, but that certainly is one of the concerns.
The next item is new technologies. Basically, we do believe that new
technologies are going to be the key to competitiveness. My only
concern with a small utility is that I do not think there is anything
that I have seen that says a small utility cannot compete. I think
that most can run a distribution system as well as a large company,
with the caveat that there are some important systems you need to run
these utilities. Trying to implement all of these at the same time
is a difficult task. To give one example, the AM/FM/GIS is a
fundamental change in the way you run your business. You have spent
a lot of money on AM/FM/GIS, and I applaud that. The time is now, but
when I go to a construction lead person on a crew and they are doing
drafting from a blank piece of paper, and even have templates out
there as they do it a lot, when you go into the records and find 50
years of work orders that people rely upon everyday to get their work
done that are not yet on GIS, admittedly, you are early in the
program, but I have a concern that the organization around the new
technology needs to be thought out, and the key ones really need to
be supported and worked through.Certainly, the CIS is a fundamental
system to a utility company.~
With water rates, essentially here we are mainly interested in the
operating maintenance and CIP portion of rates. At first blush, it
looks high, based on some of the numbers that have been presented in
this forum and others. Basically, we want to see the contribution of
the operating maintenance and CIP in that, just so that we understand
what is there. The bench marking will help us do that.
Regarding new service installation, again, another generic statement
at every utility company, and probably no utility company is spending
more time on any process than on the new business process. It is
cu!nbersome everywhere. People are taking some dramatic steps to
improve it. You have some steps under way. Electric has made some
changes; gas has made some changes; water and wastewater also, but
essentially, they run slightly different systems, and there is a
citywide effort under way to simplify permitting. It looks a little
piecemea! at this point. We really want to understand how can the
process be simplified from start to finish. The caveat there is that
you do not have a lot of new customers, so it is not a real expensive
process, but preliminary indications are that at a per-unit cost, it
is very high. You do not have a lot of units, but per unit, it is
Minutes UAC:06/05/96
Final Page 9
very high. So we need to know more about that and what you can do
about that.
The last two overall issues are dispatch and operations, and demand
side management. The dispatch and operations portion of the utility
is one of the parts of the utility that is not as integrated as I
would have expected it to be. You have an integrated electric
dispatch center, a very nice dispatch center, but only the customer
electric calls go there, and only electric dispatch goes there.
Admittedly, the other is done through the City agencies, and the
question is, whose overhead do you support? Do you support the City’s
overhead by using those existing dispatch systems? That economy of
scale, or do you try to bring it under a utility that might be a more
unified chain of command, with a uniform face to the customer and a
more uniform response? Those are questions we want to ask.
With demand side management, again, another generic statement because
the industry has seen many of the same issues played out in many
different ways. Yesterday, you were conserving, telling people to use
less. Today, you are telling people to use more, or you are telling
people you are worried about sales or margins, or retaining customers.
There are several theoretical ways to bridge that dilemma. The first
is if you can show that demand side management is economic. I
congratulate this group for acknowledging the dilemma and saying that
you are going to set aside a certain a!nount oE demand side management
as a customer service. I think it is hard to justify it on economic
grounds, so you have bridged the dilemma that way. Even now that you
have bridged the dilemma, there is still a lot of concern about who
are the people that are doing it, how can you transfer the skills, and
how can you make both of those worthwhile activities exist in
parallel? So we want to know more about that policy of DSM, and we
also have some bench marking results that suggest it is more of a
customer service issue than perhaps a marketing function, a DSM
function. So we certainly want to talk about that. Those are the
issues that we had at a high leve!.
Commissioner Eyer.~y: Before you go on to the next level, I have a
couple of questions. On resource management, it seems to me that it
is almost a budgetary matter to be decided upon by the City Counci!
and advice of staff, etc. Is it your intent in the resource
management that it would tell us where we either are or are not
spending enough money or getting in deep enough? What is the
objective?
Mr. Szybalski: Yes, the intent would be to look at the products and
services that are being provided to try and evaluate in which ones you
Minutes UAC:06/05/96
Final Page 10
should invest more, and in which ones you should invest less. Again,
all of these are policy decisions. We say that our job is simply to
point out in many of these areas a policy that has been made to have
DSM, and you are spending a certain amount, and we can point out from
bench marking results that that is a very different dec±sion than is
being made at other utilities. That is a policy decision, just as
maintenance cost is a policy decision. You may decide that you want
maintenance costs at a certain level and maintain a certain
reliability. Our bench marking is partly to point out where you are
a little different from other people and to clearly focus your
attention on whether, if that is the policy, then make it a very
specific decision, not a default decision.
Chairman Eyerly: My other question falls in the same vein as
information technology. We sit here, as a UAC, and we like lots of
information, and I am sure we can run up a lot or resource costs,
staff time, etc. That seems to me to be a budget matter also, as to
where you draw the line. How do you advise us on that?
Mr. Szybalski: Most of these projects we are talking about are very
hard to cost-justify. It’s a matter of what do you get if you have
it, and what do you have if you don’t have it. We at least want to
give you a sense of those systems that we feel really are important
and need to be promoted and supported, and perhaps be supported even
more than they are, and those that may be les~ important. There are
even technologies that are not being used at all, for example,
computers in trucks. A lot of people are experimenting with that.
We had a crew lead say, "The police cars have computers in their
trucks. How come we don’t. Then we wouldn’t have to draw these
maps." Again, that is a budget issue, and a very expensive budget
issue. That is an example of one where we would say, that is a good
technology, but it does not look like the payoff is there yet for the
City.
Chairman Johnston:
point.
Let us cover quite a few questions we have at this
Mr. Resh: This is the last slide. It is intended to show the fact
that we have a top-down and a bottom-up look and how it all converges
to lead us to these observations.
Mr.Szybalski: I would just mention that this is a busy slide which
was intended to do two things.
Chairman Johnston:
you have covered.
Let’s wait on this slide and just cover the issues
Minutcs UAC:06/05/96
Final Page 11
Commissioner Grimsrud: I was going to talk about strengths and
issues. On strengths, a couple of comments are in regard to things
such as liaisons. You say, "effective liaisons with other agencies."
All of these things are kind of a balance and you talk about this
balance in the issues. It is that we can be effective, but we can
overkill it also. There is a lot coordination that needs to go into
that, and it requires a lot of staff. A lot of resource management’s
time probably goes into liaison types of functions. So to a certain
extent, one ought to look at whether we are putting the right level
of effort into that, given the kind of importance that the liaison
plays, both with NCPA and with other agencies. So there is a tradeoff
there. That interested me.
With service levels, it is the same thing. I think you said it
indirectly in that there is a strength, which is marketing and high
customer expectations. I feel that we realize that there are
expectations, but I am not sure. So in essence, maybe we need to do
more marketing to figure out what level of expectation there is. Then
direct our efforts toward meeting those expectations as cost-
effectively as possible. One of the concerns I have always had is,
what is the right level of reliability. Is it one in a million years,
or one in ten years, or what? I think that depends upon your
different customers, so marketing is where it’s at on that issue.
As far as the issues, I wholeheartedly agree with you about the
information technology issues. In particular, it seems to me that in
dispatch, in database development, customer information systems, there
ought to be more coordination between the utilities. It may go beyond
just the utilities we dea! with to include water, wastewater and maybe
even solid waste. It seems to me that in order to make a good
reconunendation, one almost must have a good capability of
understanding architecture. In other words, information technology
architectures. I was wondering if you have that capability. Is that
something that RMI brings or that you have? Inherent with an
organizational structure is probably the question, how is your
architecture going to be with your databases and computer systems?
So that is a question.
Mr. Szybalski: In general, we do not claim any information
background. We have not gotten far enough. I know there are things
like enterprise models, data models, how you think about your
organization in terms of data. We have not looked at that, so we
would probably focus more on-the functionality of what are the systems
you get, what are you getting for them, how are people like crew
leaders using them. Also, what don’t they have that they do not know
about that they need. That is probably the level.
M i n u t es UAC: 06/05/96
Final Page 12
Commissioner Grimsrud: So you are looking at it from a functional
point of view without regard to what types of systems realistically
are out there in the real world right now. This is what functionally
would be ideal for a place like Palo Alto.Is that what you are
saying?
Mr.Szybalski: Not quite as far as that.We have a sense, from
recent projects, of the available state of technology. In other
words, we know what GIS systems are out there,in general. We may not
know them as well as some of the people here who have done extensive
research on them. We know what GIS systems are there, and who the
leading vendors are. We know some of those basic technologies, but
we are not systems integrators or information technology people.
Commissioner Grimsrud: So you know enough to at least make the level
of reconunendations that you do but not to write a specification for
a technology.
Mr. Szybalski: My wife is a systems analyst, and she might not agree
with that, but yes.
Mr. Resh: I have one point to add. There is one other dimension that
we will of course be looking at. That is, from an organizational
standpoint, where is the responsibility for the development, where is
the responsibility for the development and s%pport of those systems
on an ongoing basis. That has been part of my discussions with the
City departments, as well as the utility, to start looking at what
kind of issues are present there. There are some issues present there,
and we are going to see if we can’t come up with a way to solve that,
either overlap or gap.
Commissioner Grimsrud: That is a very important aspect of it, and I
appreciate that. Another thing in a similar vein is resource
management. The capabilities that the resource management group have
I sometimes thing would be useful in some of the issues we have dealt
with in wastewater and perhaps even in storm runoff. My question is,
should there be more flexibility in the organization to allow for
those capabilities to be usefu! for more than just the three commodity
utilities? That is something that interests me.
In demand side management, I feel that we are handling it well. We
have things covered pretty well, and you could go ahead and look at
it, but I feel the key is the marketing area. We are doing a good job
on that. I personally have a lot of background in DSM. I know where
we are at, and I know why we are here. I think staff recognizes that
where it is at is the understanding of customer needs to the extent
Minutes UAC:06/05/96
Final Page 13
that DSM solves some other problems as well. I am backing that up
myseif very much, but there has to be a balance. So I don’t know if
you want to put a whole lot of emphasis on delving into that a lot.
Mr. Szybalski: Again, our issue might more be just to point out where
you are compared to others and it is your policy, and there are some
organizational issues again around how they are combined.
Mr. Oechsler: If I could add something here, the analysis of customer
satisfaction that Mr. Ulm is doing, including the focus group that he
is going to conduct tomorrow, and the telephone and mai!
questionnaires that he has been administering, they are picking up
responses to your board’s determinations about DSM programs, including
the change in delivery mechanism from a rebate type program. That is
an area where there may truly be tension between what the customer
wants. This is a point you made earlier. The customer may love rebate
programs, but from a utility management position, rebate programs may
not be the way to go. We will be picking up some of the reactions to
the policies --
Conunissioner Grimsrud: And that is excellent. We could use more
input from customers in these areas, and I appreciate that.
Chairman Johnston: We talked earlier on’about the interviews.
Originally, when you came in here and talked about your scope, my
recollection of the interviews is that it included some groups that
were not mentioned today. I wanted to run through those to understand
where we are at on them. The first two were the City Council and the
UAC where you indicated you were planning on conducing interviews.
I am not sure whether that is in the form of feedback from these
meetings, which may be fine, but I wanted to clarify that issue.
know you have met with the City Council as well. The third group is
the City Manager’s office, because you have talked about essentially
almost every level within the Utilities Department itself. I wanted
to make sure the other organizations within the City are covered.
Could you con~nent on that?
Mr. Resh: Since that is my focus, Chairman Johnston, let me focus on
that question. We had asked for individual interviews with the City
Council, and the City attorney determined that that was in violation
of the Brown Act. So instead, at last week’s City Council meeting,
I met in block with the City Council and we had a list of questions
that we put up on the board that were fairly general questions. We
did get the feedback we were looking for in terms of the number of
complaints that they heard from customers, and in general, their view
~,1inutes UAC:06105/96
Final Page 14
of the utility, whether or not they were comfortable and felt they had
been well advised as to changes occurring in the industry. So we
covered all of those topics, but we did it in a general session with
the counci!. I have also been meeting regularly with June Fleming in
advance of these meetings. She has given me suggestions, direction
and feedback, and that has been working very well. I have been very
pleased with the candor of those meetings. In addition, I have been
in the process of interviewing several people on the City staff. In
fact, I met today with Emily Harrison, who is in charge of the all of
the IT functions and purchasing. I will be interviewing more of her
staff in the upcoming weeks. I have also been on point with the NCPA,
Western and TANC.I have had a preliminary round of interviews with
the people there.
Chairman Johnston: June, would you care to comment?
Ms. Flemin~: Yes, I would like to be in support of what you just
heard from Tom. Let me deal with the council first. The City
attorney and I had some extensive conversations with how the
consultants would interface with the council, particularly since we
had just completed the organizational review for the general fund
which was stil! fresh in our minds. The consultation with the council
was handled differently than this one is being handled. I am
convinced, after talking with the City attorney, that whereas that
process was not illegal, it was not the clean~est way to go about it.
I did acquiesce to his recommendation that we not do that on an
individual basis. This is a very public process and it is a public
agency, so he had grave concerns about the Brown Act. He really tries
to keep us clean and orderly as to how we function in light of that.
As a result, we decided that we would have a discussion with the
entire council. I further decided that it would be best to do that
within the setting of a regular council meeting so that it would be
before the entire public, and they could participate. That was done,
and I got feedback from the council that they were very pleased with
the way that it went. I believe the consultants got the information
they needed from the council, as well. Having said that, it does not
prohibit any single council member from contacting any member of the
team.
That leads me to my second point. I have found the consultants to be
very open and available and willing to discuss issues not only wi~h
the staff but with my office. We have had lively meetings and
discussions, and they have been beneficial to both of us. I had made
a little check list of things that I was concerned about, and I was
extremely pleased to find that in these issues, all of them had been
covered. So while I am here, I wish to state that I have gone over
51inutcs UAC:06/05/96
Final Page 15
those issues with Tom and I feel they are ones that we do need to
pursue. I do not see them as weaknesses, but certainly as areas where
I had some concerns, and we need to answer the questions as I have had
them outlined to me in the presentation here tonight. I am extremely
supportive of the consultants. I feel they have done an excellent job
of narrowing it down to what they need to focus on from which we can
benefit. I feel it is extremely important that you continue to give
them the feedback that I have already heard you giving them tonight.
The dialogue is open; it is honest. So far, I have really enjoyed the
discussions that Tom and I have had. We do not always agree on
everything, but that is okay. That is why they are here. They have
a different perspective than I do. I feel that they have done an
excellent job so far, and I look forward to its continuing.
Chairman Johnston: Thank you, June. I have a couple of other issues.
My first one has already been brought up by Commissioner Grimsrud.
It is the issue of liaisons, and can you potentially do too much of
a good thing. From my perspective, there are times when I am not
quite clear whether some of our staff is actually working for NCPA.
I don’t mean it is against the interests of Palo Alto at all. It is
for the interests of Palo Alto, but because we have some staff that
is very strong in certain areas, I sometimes wonder whether other
agencies rely too much upon them, so that is a similar point to what
Commissioner Grimsrud was talking about, and I would like to have that
amplified a bit. ~
I have a question about marketing. You talked about the marketing
organization, and you raised the issue about marketing and DSM. It
has been my impression that marketing is not what we normally think
of as being marketing in the utility industry in our marketing
department. I would like to hear what your perspective is, but my
perspective of marketing in the marketing industry, and the City of
Palo Alto utilities is a new group, is not one that actually goes out
to sell more resources. It is purely a client satisfaction operation.
Therefore, since DSM is also a largely client satisfaction operation,
the two actually fit together pretty well. Is there any more
traditional marketing for selling resources? Do you have a comment
on that?
Mr. Resh: One of the other dimensions that I would add to marketing
is long-range planning, in terms of programs to serve customers, and
looking at ways in which you might unbundle services or change the
kinds of services that you provide. So it has that long-range aspect
of it. Where we are going to spend a little more time in that program
is not so much looking at a conflict between DSM and marketing, but
rather looking at the Skills and talent level of the people who have
Minutes UAC:06/05/96
Final Page 16
been moved from a conservation role into a marketing role. I have not
done that yet. We have not gotten into that level of detail, but to
me, that is a tough transition. That is not to say that it cannot be
done, but if you have people who have been thinking conservation,
conservation, and now you are telling them to be long-range planners
and think about marketing programs and new ideas and new ways to
produce revenue, maybe not through sales of electricity but through
other services, you have a different mind set. That is the area we
want to look at in more detail to see how that organization is staffed
to fil! that role. In every utility, there certainly will be a place
for DSM.
Mr. Szybalski: You have raised a good question, and if you look at
the priorities in your organization, which is essentially around
customer atte:.t:on, customer service, I would just add one note.
Marketing g,=n~-raily is oriented toward retention of your
commercial/inl " trial customers which have the most economic impact.
So I guess I ;.~r:ca!!y agree with you that we probably misstated the
set of prior:’.{~s that your organization is going after, as opposed
to what a tra: ".onal organization goes after. There probably is at
least a ~:~.~iict between whether you retain large
contmercial/~--¯ ..._~:trial customers.
Chairman Jo~hr.c<~.::: My last question has to do with integration across
the different utilities. Certainly, if you ~re looking at an issue
such as repair crews, and whether a repair crew that repairs water
lines can als: repair wastewater collection lines, those kinds of
things. In that area, there are lots of municipalities that do both.
You can look at models where there are separate crews, and you can
look at models where the crews cross over, and you can make some
judgments as to which is more efficient, do some bench marking, etc.
But in the areas where I think you have identified the biggest
"barrier," if I can call it that for the moment, seem to be more
between the electric and the water/wastewater or perhaps electric and
gas, water/wastewater. In that area, we have few peers, because most
electric utilities do not sell water. So how do you go about
providing some assessment there? I am not clear as to what the
process is to decide whether we should be doing more integration or
less integration in those areas.
Mr. Szybalski: I can probably say it is not going to be scientific,
and probably, the bench marking is not going to be definitive in any
way. The process we will be looking at is trying to balance the need
for competitively meeting different markets, maybe even for gas and
electric, maybe it is large customer/small customer. People are
organizing around process; they are organizing around new customer
Minutes UAC:06/05/96
Final Page 17
needs. They are organizing in a lot of different ways. So I do not
have the answer yet. The process will be looking at bench marking
results. Are there areas that are higher and some that are lower?
Basically, we wil! be looking at barriers to things that are not.being
addressed in a commodity. Are there issues not being addressed, and
how can you either strengthen the process so that there is more focus
on a commodity like wastewater? Maybe you can do the same with things
like planning processes as opposed to actual work structural changes.
I know that is not a very complete answer.
Mr. Oechsler: We may be able to obtain some useful information in the
gas bench marking exercise. We are one step away from finalizing the
questionnaire. We had a very productive meeting today with the
engineering and operations staff. Rosemary went over in detail all
of the questions. Because of the timing of it, we were in a position
to be able to focus in on some areas that have been picked up in the
organizationa! review. In light of your question, I think it would
be quite appropriate to pose the question of the panel, which on the
municipal end, at least, consists entirely of companies that have
multiple utilities. In fact, of the eleven municipals that we
presently have on there, I believe four or five of them provide the
same four utilities that we are looking at here. The other six
provide three of them. So there is an opportunity to ask one or two
questions, something in the nature of, ~Do you conduct maintenance of
your gas system with other utilities?" That ~s an area where we can
get some partial information.
Commissioner Chandler: Thanks very much for the presentation. I want
to step back for a moment and look at these strengths and issues that
have been identified. It seems to me that there are perhaps three
different categories that I would place them in. I have a differing
level of interest as a member of the UAC in each of these. I want to
express that to you, and see how my colleagues feel, as well. The
first level of things I would call pure policy decisions. The first
one in the strengths area fits into that category, which is Level of
Rates. I felt that that type of issue is very much policy-determined
by our City Council making a decision. Part of it is cost-driven by
what our cost of service is, and part of it is policy, but at the end
of the day, what the number is which comes in on the bill every month
is going to be the result of the policy decision that has things
behind it such as degrees of transfer to the general fund, etc. I
have generally viewed that type of a pure policy issue as something
that is of less interest for an organizational review. That is why
we elect a City Council and have elections for it.
The second category is areas such as resource management comments.
Minutes UAC:06/05/96
Final Page 18
We have made a policy decision to make an investment in a certain
area, and there is a policy issue as to whether it should be more or
less, but there is useful bench marking to be done against other
utilities, just to provide input for that future decision-making. I
find that to be more interesting than the first category I mentioned,
but again, not to be of prime focus, but I think it would be very,
very useful to get the benchmarking data and feed them into the
process, going forward.
I find the nuts and bolts comments (and this is the third area), such
as level of integration between the utilities, and level of
information technology, and how we are finding more productive ways
to operate, and are we taking advantage of what is out there in the
marketplace as being the key area where we can get some very specific
recommendations for things we ought to be looking at again, not at the
systems integrated level of, "Gee you ought to go by such and such a
system," but from the standpoint of saying, "This is how other
utilities found ways to cut their costs of providing service and
organize themselves more efficiently." That is the key thing that we
can get out of this that will be tremendously valuable. I wanted to
emphasize that focus from my point of view.
I am also really pleased at the feedback we just heard from the City
manager on your process and the way you discussed these things with
staff before presenting them here tonight. In-any organization, there
is a tendency to want to think we are doing things right and are doing
the best we can and people are making investment decisions for us and
do not necessarily want to be receptive to change, and they see change
as being a criticism of what went before rather than an identification
of opportunities. Everything I have heard suggessts that people are
hearing this as identification of opportunities, not criticisms. I
think that is going to be really, really important to long-term
effectiveness, coming out of what you are doing. I want to
congratulate you for that piece of it so far.I hope that that
continues to be the hallmark of the effort.
Commissioner Grimsrud: I have a quck question.You were talking
about integrated functions among the utilities.I wondered what is
the scope of looking at this? Is it throughout the entire City
government? Does it include things that might be happening in Public
Works or in Emily Harrison’s group? Or are we just keeping within the
bounds of the utility organization?
Mr. Resh: Where I have been keeping the limitation is that I have
only been talking with groups (and only plan to talk with groups) that
have an interaction or either provide a direct service or receive a
Minutes UAC:06/05/96
Final Page 19
service from the utility, where there is a direct interchange of
information and support. The scope of our work does not take us
beyond that.
Commissioner Grimsrud: For instance, I made a couple of comments
about wastewater and storm drainage, which are under Public Works.
Is that out of bounds as far as this organizational review?
Mr. Resh: Well, wastewater is a part of this. It covers electric,
gas, water and wastewater. What is out of the bounds of this is, for
instance, refuse collection.
Ms. Flemin~: If I could comment, I believe you will find that this
City has one similarity with the last study that we did when we did
the study of the General Fund. It is virtually impossible to look at
it and close your eyes to utilities. They simply could not do that.
They had to ask some questions within the utility area to ensure they
were giving the right response when it came to the General Fund. I
am sure they will find that to be the case when they do the utility,
also. We have not put a barrier around them, saying, "Do not cross
this line." I do know that, for example, the discussions that Tom
just mentioned have gone on. I have talked with Emily today, and that
integration is going on very smoothly.
I would like to add while here that in addition to the number of
utilities, which is a challenge, I have really been insistent with Tom
that they remember this is a complete organization that we work with
here. The utilities are not set apart. They have to function
smoothly in coordination with the rest of the staff. We may have
enterprise funds and general funds, but as far as I am concerned, it
is all one organization, and we all have to make sure that all of the
pieces are taken care of. I have been very comforted by the responses
that I have received in that regard.
Another point that I want to acknowledge publicly, which I have
acknowledged to a few of you here, is that a study like this
inevitably uncovers other issues, issues that we may need to pay
attention to but which are out of the scope of this study. I
encourage you to give me that list if there are such things that we
need to do, some next steps that we need to take that fall out of the
scope of what they are doing. They really have a narrowly defined
organizational scope that they are following. There may be some other
items we need to do as a follow~p.
Contmissioner Chandler: As a followup on what you just said, it is
good that the issue came up. You said that something was outside of
Minutes UAC:06/05/96
Final Page 20
your scope, and I heard June say something that made it sound like it
was inside your scope. From the standpoint of a productive
organization, looking at the City as a whole, if there are ways we can
be using the IT investment we are making in the City more efficiently
by bringing the utility into sharing some of the IT resource that is
being done elsewhere in the City, or vice versa, it is useful to have
that pointed out as part of an organizational review. I thought I
heard you say that if it is outside the utilities, that is not really
what you are looking at, yet I thought I heard June say that we really
want to view this as one organization where there is an ability to
function smoothly and share things. So I would be interested in a
little more discussion on that.
Ms. Fleming: I do not feel we are saying different things at all.
Let me tell you why I believe we are not saying different things. The
primary focus of this organizational review is on utilities, which I
think we all agree upon. That is clear to all of us, but the
utilities cannot function alone, and in some cases, there are areas
(and maybe the technology piece is a good example of that) where that
has to be integrated into what we are doing citywide. There are some
particular utility pieces that are unique, and I think Tom and others
have recognized that, and they will go as far with that under the
utility organizational review as they can. I feel that is what they
are doing. He can correct me if I am wrong.
Mr. Resh: I agree with that. I did not mean to sound like we were
putting any strict limitations on this, but we are going to be
sensitive to the fact.that, for instance, if Emily Harrison asks us
to look at how effective the IT support is for the fire department,
we are not going to do that. But we are definitely going to look at
whether there is an opportunity for the GIS AM/FM system to be better
utilized citywide, and we are already looking at that as part of the
utility, and we will certainly make those observations.
Commissioner Chandler: In a way, I meant it vice versa. I asstune
that when I call someone in the utilities department and get
Voicemail, that it is actually the same Voicemail system when I call
the manager’s office and that utilities did not go out and buy a
separate Voicemail system from a separate vendor, if there are ways
to be thinking about sharing resources that are just plain smart from
an organizational management standpoint, and that we do not have
blinders on and say, utilities are separate so we are not even going
to look at the way the City, as a whole, can do that.I hope that the
other way around is also part of it.
Ms.Fleming: It is.
Minutes UAC:06/05/96
Final Page 21
Chairman Johnston:
now.
I would like you to finish up your last two slides
Mr. Szybalski: We have put this up for two reasons. The first was
to give you some kind of idea about the process for identifying
issues. In some ways, we start at the left and look at the big
picture. How do you respond to your outside environment? How do you
respond to customers? The next series of slides actually looks at the
major organizational boxes that you have, as exemplified by assistant
directors. That is really how the organization runs. We need to find
those issues. Then again, we have tried to look at it on a commodity
basis, which is how we are doing the benchmarking. We are doing
electric benchmarking. Issues are coming out. Water benchmarking.
Wastewater bench_marking. Some of them are at slightly different
levels. So that is the first level, to show how issues come out,
which really resulted from a comment by the director who saw many
areas of similarity. We are trying to show in which organization they
occur and in which contmodity they occur just one time, rather than
duplicating it. The second thing this is trying to show is to just
give you a map of where the issues are. In a sense, more of the nuts
and bolts things might show up on this graph than in the overall
organizational review. These are the kinds of things that are coming
out in the various meetings. We have something like 30 or 40 issues
we are working out. There may be that many recommendations coming out
of the study. The purpose of this session tonight was to show you
what we have on the table to make sure there is not anything we are
missing, strengths we are overlooking, areas where you have concerns
that wehave not addressed, or things that are out of bounds, or
things that may be more important or more interesting to you. So that
is really the end of this presentation, and I will return it to Tom
to pursue it further.
Mr. Resh: At this point, Paul, all we are looking for from you is
basically any other feedback on where we are headed. We have noted
your comments, and will certainly incorporate those as we go forward.
As I said, our plan for the next meeting would probably be a longer
presentation and perhaps even more of a discussion, as we are planning
on coming with a fair nmount of data the next time. A lot of what you
have heard tonight is the result of that higher level of interview
process. We will return with a lot of data and a !ot of information
on both benchxnarking and the customer analysis.
Chairman Johnston: That sounds good, and I assLune we will get a
packet of those data so that we will not be seeing them for the first
time at the next meeting. Just like tonight, we have had this, and
that works very well. We are used to going through data, and we would
Minutes UAC:06/05/96
Final Page 22
be happy to have them. Are there any other questions?
Commissioner Eyerly: On Page 12, you have another group there under
Completion of Organization Review Tasks and Completion of Competitive
Assessment Tasks. Maybe a little discussion from you on that second
one, Completion of Competitive Assessment Tasks. What are you doing
there?
Mr. Oechsler: In previous meetings, there has been a good deal of
discussion on where the focus should be and how much emphasis should
be placed on that area. What we will be doing in the area of
competitive assessments will be to look very briefly at the changes
that have occurred since the Phase I report was conducted, dated
around July, 1995. Since then, there have been some very significant
changes in the regulatory end, and also in the market end. Those
changes, just to give you a preview, have touched on some of the major
advantages that the City has traditionally
(sounds like dissessed??) Particularly in the area of
generation costs. The City has enjoyed a tremendous and very
significant cost advantage vis-a-vis the surrounding IOU in the area
of generation. There are developments under way in California and at
the national level which could call into question your retention of
that significant benefit. In a very broad sense, those are the
competitive challenges that are more refined and more defined than
they were a year ago. I see the ultimate meaning of this is not that
w~ are going to recommend that you do things that you are not doing
right now, but what it does, in my view, is to underscore the
importance of the efficiency of your distribution system. You may not
be able to affect what does on at the national level vis-a-vis the
sale of Western area power administration. You may have some effect
on state policies, or you may have no impact on the PUC, and
certainly, the FERC is influenced by a variety of factors. Those
development could affect the City in a way by taking away some of the
advantages that have given you some head room in terms of competition
in the past. What all of that means is that you need to focus more
on your own house and the efficiency whereby you distribute the
electricity that comes in at your substations. That is really the
overall thrust of the compehitive analysis -- to focus on those types
of issues.
Commissioner Eyerly: That sounded good, but it leaves one item open
that I am going to ask you about. On the deregulation of the electric
utility, we have had some discussion at the commission level as far
as whether we should be investigating the sale of power outside the
City limits, and whether we should allow outsiders to come into our
area, in view that we contro! the transmission lines. Are you going
Minutes UAC:06/05/96
Final Page 23
to have any comments on that or comparisons to other cities? Or on
things that are happening with deregulation that I read about all the
time now?
Mr. Oechsler: The scope of our recommendations and analysis I would
not want to comment upon right now. I do not have a definitive answer
to that. But once again, we are clearly observing the dividing line
between areas that are true policy calls, pointing out the fact that
in a competitive environment, the opportunities will be there to sel!
services that the City may have by virtue of the systems that it owns.
Certainly, the sale of those services, whether it be in the form of
marketing power, marketing ancillary services, you name it, those
activities could result in additional revenue streams. Those revenue
streams certainly improve your bottom line and act as an offset to
costs that you z~!ght have inside the City. That is probably the level
at which we are gcing to stop, unless we come to some conclusions that
your brethren ~unicipals in California are wel! beyond that, although
I do not think we will find that. I would like to leave it at that
for the moment.
Commissioner =~ .....[~’: That is fine. June has something to say.
Ms. Fieminq: C~c.issioner Eyerly, I think that is one of those areas
that I reference/ earlier where I am confident they will go as far as
they can within the scope of their study. They may get to the point
of saying, here are some options, and here is how you should be
organized if 3"ou want to address those options. They may even get as
far as to say, this would be our direction, based upon what we see
from bench~arking. They may also get to the point where it is very
conceivable that they will say to us, this is where you may want to
do more study, and that may go on that list of areas where we really
will need to devote some more time and attention in a more in-depth
way. I am confident that they will lead us to the point of saying,
here are the options, and here is how you should be organizing it if
you want to meet those options, or you may need to do some more work
in this area. I think you chose a good one to fall into that
category.
Commissioner Grimsrud: I think you have described a distribution
system as a clearly identifiable place that we have control over and
where we can optimize it. But it seems to me that the transmission
and generation is where a lot of action is going to be in terms of
maintaining competitiveness. Things such as our contract with
Western, and just contracts in genera!. How will we manage contracts
in the future in order to maintain that competitive edge? How can we
better manage the TANC resource? Is there something we can get better
Minutcs UAC:06/05/96
Final Page 24
at TANC? I guess you do not have a crystal ball, like everyone else,
but you can always project worst case scenarios or various scenarios
and then say, okay, are you organized to go down those scenarios. I
wondered if these are the kinds of things you are thinking about, or
are you going to just direct yourself primarily at the distribution
system?
Mr. Oechsler: The kinds of issues that you touched on are precisely
the ones that wil! be rolled into this competitive assessment. Those
are the factors that, in my view, are evolving since last year that
have implications for the ultimate competitiveness of your product to
your customers. Without going into a tremendous level of detail, we
will go into the appropriate level of detail to explain our assessment
of what those factors are, where they stand at the present time, and
essentially, what are the risks to the City if things go in a
direction that is not to your interest. So yes, we intend to look
into those issues.
Chairman Johnston: I have one final question on the schedule.
you on schedule, or is it slipping a little?
Are
Mr. Resh: We are basically on schedule. The only area where I feel
we fell short on for this meeting was that we had hoped to present the
actua! results of the electric benchmarking, and we have just not
gotten through the analysis yet. That is the ~nly place where we are
a little behind, but in general, we are right on track.
Commissioner Sahaqian: Thank you very much. I have been hearing good
reports. Keep up the good work, and we look forward to seeing you
later in the month.
Item 7.b. Wah~r Issues Update
Mr. Habashi: Kir~,Miller from the Resource Management staff is here
to answer any quest~ns. ~
Mr: Miller: If you have,questions about° the report or any topicstherein, please discuss tho~_
Commissioner ~rimsrud: I was won.~i_ng if there is an itemized list
of the $40 million or whatever is~ increase in capital projects
budget for San Francis~D~ Do we have a~ist like that, just to give
us a feel for what is going on? ~
Mr. Miller: J~here are some preliminary- " lists~ut together by San
~/~/Right now, they h~ve a new ~inance ~a~er on board, as
Minutes UAC:06/05/96
Final Page 25
City of" Palo Alto
Utilities Advisory Commission
DRAFT
Tuesday, June 25, 1996
Ci~ Council Chambers
MINUTES
10.
Roll Call .........................2
OralCommunications ....................2
Approval of Minutes: May I, 1996 . . 4 ............3
Agenda Review and Revisions .............3
Consent Calendar ......................3
Unfinished Business: ....................4
a.SFWD Water Quality Information Report ..........3
b.PG&E Gas Accord Information Report ...........4
c.Monthly Report by the Organizational Review
Consultant, TB&A .....................6
d. Telecommunications Phase 4 Report ............43
e.Quarterly Electric Issues Update ............4
New Business ........................60
City Council Referrals ...................60
Reports of Officials/Liaisons
Next Meeting: August 7, 1996
250 Ham~hon Avenue . Pat,, .ajt{, . ’M301 ~ 415.329.2277 FAX 4!5.321.065!
Commissioner Ey@..rly: I am glad we have a watchful staff.
Commissioner Sahagian: I am not an expert on natural gas transmission,
although I d6~uy a fair amount. My understanding was that when the
early unbundling~took place, some of the "owners" of the transmission
lines bore some of t~..~ost of that unbundling, something like a 25-75%
split. I believe that~o be correct, although I do not know the
specific details of it. Is~T~here any indication that PG&E is going to
bear some of the cost of the infrastructure, or their shareholders bear
some of it? Or is it all going to ~-transitioned through in transition
charge as part of the transport cost? ~
Ms. Dailey: I think PG&E is planning on bearing some of those costs.
That part of the accord is still confidential.
Chairm@n Johnston: Thank you.
Item 6.c. Monthly Review by the Organizational Review Consultant, TB&A
Mr, ..$zybal~ki: It is a pleasure to be here tonight. The agenda ~for
today is to put on the table some specific work products, the results of
the analysis we have done so far. Most of those are now on the table
and we can start thinking about recommendations. This is a good time to
take pause and see the data we have out there from which we are going to
start making recommendations. I want to tal~ about a work plan update,
have an update on competitive assessment, and Ron Oechsler will give us
an update on what has happened since the Phase 1 report. Again, it is
our way to make sure we do not lose sight of the strategic issues
driving the organizational review, particularly on the electric side.
We then will talk about some supplemental studies we have done, focus
groups of your major industrial customers, and some of the findings from
those studies. We will then talk about organizational analysis, going
a little deeper into organizational issues by group and percent electric
bench_marking this month. That is the basic agenda. We hope to take
about an hour in the presentation, followed bY any questions you have.
Chairman Johnston: What I would like to do is a little bit different
than that. That is a pretty long presentation, and I would like to
break it up into segments, particularly when you are done with the
competitive assessment portion. If we could take a break then and have
the questions while still fresh in people’s minds at that point, then go
on to the organizational review portion and have questions then, too.
I a~n going to encourage people to jump in if they want clarifying
questions a!ong the way, but rather than leaving everything to the end,
I think it will make the discussion go a little better this way. I know
we expected this to be a fairly lengthy presentation, but I would
MINUTES UAC:06/25/96
DRAFT Page 6
encourage you to try to get through things fairly quickly. We have read
the packet, so what I prefer to do is to focus on more of the issues or
the important points, rather than necessarily having to go through
everything that is on every chart.
~r. Szybalski: That was our intent, so that is good. Again, just a
reminder on the parallel paths of the organizational review and the
competitive assessment. One is more internally focused, and one is more
externally focused. As a reminder on the work plan, we are continuing
to work towards having some preliminary recommendations at the meeting
on August 7th. With that, I would like to turn this over to Ron
Oechsler to talk about the competitive assessment update.
Chairman JQhn~.Q~:
schedule plans.
I take it then, Tim, that we have no change in the
Mr.Szybalski:Simply put, we are still on schedule.
~Mr. Oechs~e~: As Tim indicated, the purpose of the competitive
assessment is to set the framework within which the organization study,
particularly of the electric utility, is being conducted. Basically,
the City is facing a series of challenges, particularly in the area of
electric sere’ice as a result of market and regulatory changes.
Recognizing the work that had been completed in the Phase 1 study of
competitive threats, opportunities and chal~enges facing the City as a
result of electric market restructuring, we have focused our competitive
update on the developments that have occurred since the Phase 1 report
was issued last June or July. .An assessment of what, if anything, those
recent developments say about the way the City’s competitive position
was characterized in that study, and then look at some of the major
implications for these trends, and thirdly, to look at what specific
actions the City has under way or adopted or recommended in that Phase
1 report, and their significance in light of She competitive situation.
You have been receiving quarterly reports and other materials relating
to the developments that have occurred, so I will not go into detail.
it has been an extremely active period since last June or July. The
major developments that have occurred include the CPUC’s issuance of a
final policy decision on electric restructuring, the highlights of which
are the creation of a power exchange and an independent organization to
operate the transmission grid, and then the endorsement of what is
essentially called retail wheeling or direct bilateral contracts between
power suppliers and retail customers with a schedule phased in. There
also was the culmination of the FERC’s rulemaking on transmission open
access, which endorsed many of the proposals in the original NOPR, as it
is called, which has the effect of posing potential changes in the
MINUTES UAC:06/25/96
DRAFT Page 7
City’s transmission charges that are paid to PG&E and potential changes
in the way transmission access is provided.
Another significant development was that in April, the California IOUs
filed proposed tariffs for the independent system operator and power
exchange. The PUC, as was discussed, approved an interim competition
transition charge for PG&E. PG&E has proposed to freeze rates at 1996
levels and to use the next five years to write off its stranded
generating costs. Finally, Western Area Power Administration has moved
forward with the development of its post-2004 marketing plan, which will
essentially set the City’s allocation of power from the central valley
project.
In my assessment, these developments underscore and, to some extent,
intensify the threats to the City’s resource position, the City’s
electric resource costs that were identified in the Phase 1 report. I
would like to highlight a couple of key deve!opments in particular.
First, the independent system operator is proposing a system of
transmission pricing that will vary the transmission charge, depending
upon whether a region is constrained or not constrained. This may have
been reported to you by staff. Since Palo Alto is located in a region
that is expected to be characterized by constrained transmission
congestion, i.e., the inability to import during peak periods sufficient
amounts of low-cost power to satisfy demand, it is likely that this
locational pricing mechanism for transmission will affect Palo Alto.
What that will do is that it will result in payment of a usage charge or
a per unit charge to bring power into the City’s substation from Tracy
where the CVP power is delivered and where the terminus of the
California-0regon transmission project is. PG&E will not be necessarily
adversely affected by these charges, because it is going to average the
transmission charges paid by all of its customers. It will also average
the prices paid to the power exchange, so what that will mean is that a
customer in this neck of the woods served by PG&E will face the same
generation costs and delivery costs as might be faced by a customer in
the area of the foothills of Sacramento where I live.
Palo Alto, however, is a single utility anddoes not have anyone else to
average in high costs with, thereby levelizing them. That creates the
possibility that Palo Alto could be at a transmission disadvantage in
terms of bringing power to its substation.
A second development that I would underscore is two trends, actually.
First, in the last year, the power market conditions have-underscored a
differential between the cost of bulk power in the open market,
particularly from the Pacific northwest~ where there is an ample amount
of hydroelectric generation thisyear, and the cost of power from the
MINUTES UAC:06/25/96
DRAFT Page 8
Federal Central Valley Project. In many months the CVP power, as
economical as it is in the long term, has been higher priced than the
market. Western is working to try and correct this situation and put
themselves on a firmer footing in the long term. Resource management
and the City staff is working with Western to try and correct that
situation, but it reminds us that the CVP generation may, at times, not
provide a cost advantage to the City. Furthermore, developments over
the last year have just underscored the risk that political developments
will result in a transfer of the Central Valley Project out of the hands
of the federa! goverrnnent, which could result in its sale to a third
party. That could be a private utility. Obviously, that is another
high priority area where staff and the utilities department is working
to prevent that outcome, but quite frankly, in this instance, it might
be despite your best efforts and the best efforts of your colleague
utilities and your strategic allies, and it may not be possible to
prevent that. I do not want to overstate this threat, but the prospect
nonetheless remains that the major factor that has given the City a
competitive advantage vis-a-vis its surrounding competitors’ low cost
generation may be jeopardized in the long term, coupled with the
possibility of higher transmission charges. The net effect is that the
City may be at a disadvantage vis-a-vis its competitors or may wind up
no better off than its competitors in the area of bringing electrical
energy to the substation.
I have highlighted in a graph attached at the back of your packet what
the significance of this development would be. On the left we compare
two bar charts representing the costs of PG&E on an average basis and
those of the City. The PG&E numbers were basically 1995. The Palo Alto
numbers were from the Phase 1 report which is for the 1994-95 fiscal
year budget. The intent was not to go back and do a lot of numerical
analysis but just to highlight the general trend here. You can see that
historically, the City has enjoyed a significant cost advantage in
generation, which is the shaded area, during the periods we have
compared here. It is roughly 2-1/2¢. The white area represents all
other costs - transmission, distribution, including customer service,
account billing, etc., which is a different definition that will be used
later in the electric bench_marking, so please bear that in mind. On the
right, I have illustrated without any further changes just the effect if
the City were to acquire generation at the same average price as PG&E,
delivered into its system. What this illustrates is that the percentage
difference or the amount of the difference between the City’s system
average rate and the average rate of it competitor, PG&E, is declining
both in absolute and in percentage terms. Essentially, it declines to
roughly on the order of 25% versus something over 40%, if I remember
correctly, in the historical period.
MINUTES UAC:06/25/96
DRAFT Page 9
To me, this is a very significant development that has a number of major
implications for the City’s. electric utility. Number one, if the
advantage in generation is lost, it will focus increased attention and
importance on the distribution end of your business. It means that if,
for example, your cost of power matches that of PG&E, the focus of your
competitive advantage will come in the distribution of the power from
the City’s substation to the customers’ meters. In essence, that
underscores the importance of the benchmarking and the analysis of O&M
costs that is being done by Theodore Barry in this project. A second
implication, to my mind, is that it again underscores the importance of
the City’s ability to provide value-added services to its customers, or
what we would call marketing. Customer service, customer satisfaction
and marketing are certainly an important avenue for retaining satisfied
customers, countering the impact of the potential loss in the cost
advantage on the generation side. So my second implication is that the
issue of marketing, marketing policy, setting clear goals as to what the
City is providing to its customers, is the City’s business objective to
deliver energy from whatever supplier to the customers and to be an
efficient delivery system, or is it to provide value-added services to
customers so that they will want to remain a full service customer of
Palo Alto? All of those issues that were highlighted in the Phase 1
report have, if anything, become even more important in the environment
that the City finds itself. There is another chart I have provided
which illustrates a major trend that we see developing in the area that
might be ca!led customer service. The title ~of this chart is ~Expected
Movement of National Electric Competitors." Up unti! now, the thought
was that the major competitors to a utility such as Palo Alto would be
power marketers, people selling generation services. That has been the
focus of retail wheeling, and the customer’s desire to access power
markets has been to buy generation. However, as the market continues to
open, as FERC’s policies are clarified, as more and more companies enter
this field, the margins on the generation business are being squeezed.
The competitors are adopting different respQnses to this situation.
Many of them are linking up with what might be called energy service
companies, other utilities, and in some cases, subsidiaries of utilities
and private firms that are in the business of providing energy
management services, including efficiency,-technological improvements,
and focusing on providing a package of bundled offerings to the large
and attractive customers. I am not sure that that trend is going to end
with the largest customers. What this indicates to me is that over
time, your customers will be faced with an increasing array of energy
management and energy service options which will not necessarily be
limited to energy. It might include industrial gases, process
management, envirornnental disposal, you name it. Whatever a customer
would find of value they probably are going to be offered by these other
competitors and alliances of competitors. So in seeking to buttress the
M!hq!TES UAC:06/25/96
DRAFT Page i0
satisfaction of your customers, my sense is that the bar is going to be
progressively raised as time goes by. This does not in any way, in my
view, diminish the positive results that Mr. Ulm has found in his survey
of your customers. It just reminds you that as you look into the
future, a satisfied customer today is a starting point. It is something
where you will probably have to run harder to achieve and maintain that
same level of satisfaction in the future.
To summarize, this is a table which, in essence, pulls together various
criteria for evaluating the competitive position of the City’s electric
utility, using a number of common and fundamental criteria. In the area
of low-cost generating resources, as I have noted, the City faces a
possible erosion of its traditional advantage in this area. The City
does have a limited exposure to stranded generating Costs and is
proactively pursuing measures to mitigate and basically set aside
reserves to cover those costs. That is something that needs to be
continued and followed through in the eventual development of a CTC. I
understand that there is some work that will be presented later this
year on that. A third key factor which adds to the competitive strength
of a utility is a favorable transmission access. I have noted before
that the City could face some adverse trends in this area, as well.
You certainly want to see a utility proactively trying to influence its
regulatory envirorunent, and you certainly want to see a utility aligning
itself with strategic partners. Palo Alto is, in our judgment,
effectively moving forward in those areas. ~
The final three indicators I have shown here are customer satisfaction,
an ability to offer a wide variety of products and services, and a well
defined marketing strategy. The area of. customer satisfaction right now
looks very positive. David Ulm will highlight some areas that customers
are concerned about. As I have indicated, as the number of competitors
and the range of products that they are offering increases, it is
important that Palo Alto be able to match thos.e products and services so
as to basically retain its customers as full service customers. In that
area, more will need to be done at a more intensive pace in the coming
months to be able to be in a position to match what the competition will
be offering, and hence meet the rising expectations of your customers.
In some areas, it is going to be necessary to address some
organizational issues that affect the City’s ability to leverage natural
gas services, for example, and electric services to provide’customers a
competitive mix of both. At present, if a competitor can come in and
can provide a piece of equipment that will increase gas usage and will
reduce electricity usage to the overall benefit of the customer, that
could obviously affect the throughput on gas and certainly deliveries on
electricity. Palo Alto may wish to have a similar capability which
would require some way to evaluate those types of programs, using some
MINUTES UAC:06/25/96
DRAFT Page Ii
common currency in the form of overall revenues or transfers to the
general fund, for example. There needs to be a way to evaluate the
feasibility of those types of projects.
Finally, I would underscore the area of marketing policy as one that
deserves attention on the priority basis. It is important that the
policymakers set the goals for the utility and the objectives that the
staff designs programs and implements programs to achieve. In that
regard, there are a number of questions that, based upon my preliminary
interviews and conversations, still have not quite been brought to
fruition, such as, is the City’s objective to be a deliverer of
generation services, or a marketer of generation services? Should the
City market power outside of Palo Alto as a means of offsetting some
revenue losses within the City or perhaps even strengthening the ability
to retain its current customers? Those are among the kinds of issues
that will be important to address and clarify as the deadline for
competition comes nearer. That ends my presentation.
Johnston: I would like to cover some questions next, but
first,before we do that, I have a card here from Mr. Gruen on this
topic,so I would like to cover that now.
Richard Gruen, Box 2351, Palo Alto: I have one comment which is similar
to one I made earlier on the same subject. That is that I think of the
electric utility in this example as really bering three utilities rather
than the two which you show here. There is the generation one, which
you correctly called out. Then there is transmission and distribution.
I think of transmission and distribution as being separate things. The
reason is that we buy transmission, and we do distribution. So in terms
of looking at what we have control over, as opposed to what we go out
and buy in the market, if you could show each of these as three boxes
rather than two boxes, you would be able to convey that idea. If-you
could even attach numbers to them, people would have some idea of the
relative cost and relative opportunity in each area. PG&E probably
looks the same, as they are providing . both transmission and
distribution. That is true for most utilities, and that is why they
think of it in this way, but we will be faced (and PG&E will be faced)
with cases where the transmission is separate. Certainly the COTP gives
you an opportunity to look at it as a separate sort of thing. I can see
our looking at options for higher reliability where we have transmission
from two different operations as one of our features. I know that when
PG&E was talking about gas, one of their points was that they had
multiple connections to the gas network available, whereas someone else
might have only one connection. In electricity, it might be the other
way around. PG&E really only has one corunection to us. They have three
sets of wires but they all go through the same route and they all go
MINUTES UAC:06/25/96
DRAFT Page 12
through the same substation. If we had customers who were interested in
a higher reliability service, we might have some different choice. At
any rate, calling these things out as separate entities is what I would
like to see you do. Thank you.~
Chairman Johnston: At future meetings, you may have more of an
opportunity to respond to Mr. Gruen as he has been appointed to this
commission. At the August meeting, he will be sitting up here. I
referred to that before you arrived this evening, Mr. Gruen.
Congratulations on your appointment.
I would like to modify things a bit. I believe you were about to go in
and talk about the customer satisfaction portion now and I stopped you
perhaps a bit early. Would you like to proceed with that now?
Mr, Ulm: First, I would like to give you a little background on where
the highlights of mail surveys came from. We used three different
techniques. One was mai! surveys that went out on May 24th. We had 16
corporate representatives from 14 major companies respond. The mail.
survey included 22 questions for each utility -- electric, gas, water
and wastewater. There were two types of questions. One was for service
rating, and the responses back were either Excellent, Good, Fair, Poor
or Don’t Know. The second type of question was for service importance.
The response back was either Very Important, Somewhat Important or Not
Important. For a few of the respondents~ we followed up on their
surveys, calling them back to get some background information on some of
their responses. We also had telephone interviews, and those were
conducted between May 22nd and May 30th.We had eight corporate
representatives from six major companies.Again, it was the same
questions that were used in the mail survey.What we did was to send
out the survey to the people prior to their scheduled interview. Then
we called them up and went through each of the questions, one by one.
The third data collection technique was the fogus group that was held on
June 5th from 11:30 to 1:30 here in Palo Alto. It included seven
corporate representatives from five major customers, including Hewlett-
Packard, Xerox and several others. Again, ~he purpose was to get an
accurate picture of the major customers’ service expectations. On the
agenda, there were two questions for each of the four utilities. One
was, what do you think the services offered by the specific utility?
(??) And what changes would you like to see? Specifically, we were
focusing on power quality, reliability, price, and value. One thing to
note is that the people who participated in the focus group also filled
out the same survey that was answered by those who were interviewed on
the telephone and those who provided the mail surveys. From the full
group of corporate customers, we obtained the same quantitative
information. We just got some additional qualitative information from
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the focus group, as well as from the telephone interviews.
In summary, in terms of who participated, there was a total of 31
corporate representatives from 22 major companies. The population we
were dealing with were those companies who have at least $I00,000 in
annua! utility bills. The sample included a group from well over a
$130,000 annual utility bill to $6.7 million. The total of the 22
companies’ annual bills is $33.5 million, representing 60% of the total
population of 73 corporate customers that we started with. It also
represents about 30% of total revenues for all of the utilities.
As you saw from the materials that were provided in the packet, the
responses for the electric utility are very impressive. 96% of those
who were asked to rate the electric rates said that they were Good or
Excellent. 74% actually said Excellent. 100% of those customers rated
technical support and response to outage as Good or Excellent. In terms
of the Importance ratings, we looked at various things such as power
quality, reliability, customer service, and had them rank those items as
to whether they wanted to have better power quality versus lower rates.
The responses back were that 83% of the customers rated lower rates as
very important. Fast response to outages was very. important to all
major customers. The overall rating for the electric utility was 91%
rating it Good or Excellent, with 74% rating it Excellent.
Chairman Johnston: David, rather than gqing through all
individually, if you have a summary point you want to make,
be fine. Otherwise, what I would like to go to questions.
of these
that would
Mr. Ulm: I do have a couple of summary sheets, and then we can go to
questions. I have two summary graphs. The first one gives the
responses to the question on rating the current rates for electric, gas,
water, wastewater, and overall. What this shows is that the first four
bars under Excellent is the percentage of those who rated electric rates
as Excellent. Then gas rates, water and wastewater. The important
thing here is, when you look at both Good and Excellent, the bars on the
right, you still see that electric is rated higher than the others.
When you break it out between Excellent and Good, you can see even
greater differentiation from the customers.
Here is the same type of a chart, but it is the overall value of the
utility. If you look on the right, it is the percentage that rates the
utility Good to Excellent. You can see that all of them are up there
close tc 80% and above, with the electric being overall at 91%. When
you break that down into Excellent and Good, you can see that there is
even more differentiation. 74% of those rated the electric service as
excellent. It drops down quite a bit for the other services.
MINUTES UAC:06/25/96
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I have put together a surmmary, using some of the quotes from people who
participated in the focus group and from interviews. First, looking at
the electric utility, the overall thing is that we have excellent rates
in service, and keep doing what you are doing. 75 to 80% of most of the
major customers’ bills are the electric portion, so they do want to keep
those rates down. Power quality is becoming more and more important,
and there are some concerns about the ability of the utility to have the
proper monitoring equipment to be able to measure power quality. On the
gas side, the overall opinion is that there are not many problems.
Rates could be better. Some problems with gas are technical and
engineering support, but very good overall value to the customer. For
the water utility, it is a good value, with some problems with metering
and billing and customer service. Many customers have experienced meter
reading and billing problems. Some examples of poor customer service
skills and attitudes were given. An important point I would like to
make here is that the negative comments and areas where there could be
improvement have been put up here so that we can pass them along and
some attention can be paid, but the improvement areas are very small
compared to the number of positive comments. I have not shown all of
the positive comments. If I did, these negative comments would only
represent about 12% of the comments. 88% were to keep on doing things
the way you are doing them. Wastewater is a pretty good value. There
were some complaints similar to the above -- customer service skills and
attitude as with the water utility. They question the clarity and
interpretation of some of the recommendations.
.Chairman Johnston: I have a question about the survey on the wastewater
utility. Were you making a distinction in the questiorunaire between the
wastewater collection that is a part of the utilities department and the
wastewater treatment plant?
Mr. Ulm: In the questionnaire, we called it wastewater collection.
Chairman Johnston: For example, the comments about the regulations.
think that has more to do with what you can put--
Mr. Ulm: What we found is that there is some lack of clarification
between wastewater treatment, wastewater collection and water. Some of
the comments that were improvement opportunities made for the water area
also really related to the wastewater treatment. So there is a lack of
differentiation. When they hear that they cannot put something down the
sewer drain, they automatically are thinking of wastewater collection.
Here are some overall utility department conclusions. Most major
customers perceive the utility department as an e~cellent value. The
MINUTES UAC:06/25/96DRAFTPage 15
electric utility is the most important to the major customers, and it is
also the highest rated service, which is good. In a lot of cases, what
you find is that something that is important to the customer turns out
not to be as important to the supplier, therefore, it may have a lower
rating. Here, what we are seeing is that electric is important and it
is also rated highest. You do put your resources where the greatest
need is. The customers noted some opportunities for improvement, such
as the need for some consolidation or summary on the bill. They see the
rebate programs going away. They have participated in them, they
appreciated them, and they feel it is going to be much more difficult
now to be able to get some energy improvement opportunities approved.
What they did was to use the utility as an objective third party who
could provide an analysis of the benefits. Then, along with that
recommendation, they could get it approved. Now they will be standing
on their own. The non-utility services such as refuse and permitting
are perceived as being part of the utility department, especially
refuse, since it shows up on the bill. Yet the customers note that
there is a significant difference in customer attitude and customer
focus in these non-utility areas. So it does have an impact on their
perception of the utility department. Finally, major customers are very
pleased with the customer representative program and account
representatives. They like the idea of being able to go to one person
who can be an interface for them with the other utilities. In fact, one
of the recommendations that came out is that they would like to see that
same type of thing for the whole City, tha~ is, one person to go to
whether it was for refuse or permitting or electric or gas. They could
go to that person, who could then interface for them. That is a summary
of the results.
Chairman Johnston: Let us now have questions on the presentation.
Commissioner Eyerly: In the comments from major users, you did not have
a very large group, as we do not have a very. large group, but you had
some particular comments that there were problems from this company or
that company. Have you listed those for staff?
Mr. Ulm: We have the specific comments as they have been distributed.
At this point, it would be without names.
Commissioner Ey~r!y: But you do have that available if they want it?
(Yes) On those, were there more than one or two people who made those
same comments?
Mr. Ulm: In al! of those that I put up here, there usually were at
least two different companies that made them, such as the gas technician
problem. There were two different companies that felt that on the
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electric side, people cooperated in terms of new installations and they
took customer input. On the gas side, it was, ~Do it my way."
Commissioner Ey@.r!y: I have a question on the bar graphs. You showed
that they rated as Excellent, Good, etc. Did you give them a criterion
as to how to arrive at their rating percentages? How did they do that?
Mr, Ulm: It was the scale that I showed you up front, a four-part
answer scale, either Excellent, Good, Fair or Poor.
CQmm~ssioner Eyerly: How did they arrive at their decision? Do they
have experience with some other utility somewhere, or do you give them
a rating as to how to arrive at that percentage?
Mr, U~m: There was not a definition for it. In some cases, I am sure
that the percentage of Excellent by one rater was different than someone
else’s perception. In response to your question, practically everyone
in the large customer group does have experience with other utilities.
Most of them have plants in the PG&E area as well as the Palo Alto area.
Several of them had plants in Pacific Corp, either their Utah or their
Oregon service territory. So in those cases, they were rating on a
comparison with other utilities.
CQ~s.sioner Eyerly: That prompts me to ask the question, was the
person who is experienced with the operation~ of the other utilities the
same person who answered this request for a rating? Companies are
large, and I cannot believe that they have one person at this plant who
is familiar with other utilities.
Mr. Ulm: The people that responded to this and were our contacts were
the directors of the facilities, the people who are responsible for all
of the facilities and are, in fact, responsible for those in other
service territories.
Commissioner Grimsrud: You have given a scenario here where our
generation costs are essentially the same as everyone else’s. I was
wondering if you and your company have realistically looked at what is
likely to happen, say, ten years from now, given a scenario that either
Palo Alto still buys from Western or the government, or we all own,
people that buy own those facilities (??) versus the PG&~s and the
Pacific Corps of the world that have some fossi!, have some hydro, have
a bunch of IPPs that are going on the market. It seems to me that in
the long run, we still may have a cost advantage, but perhaps that is a
wrong impression.
Mr.Oechsler: Our assessment is that the Western resource is a
MINUTES UAC:06/25/96
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potentially competitive resource in the long term, particularly if the
operations can be streamlined and costs reduced. It is a 2,000 megawatt
system, and if you take some general estimates of what would be a
reasonable amount of O&M costs and you assume typical water conditions,
you come out with different estimates anywhere from 15 mils to-20 mils.
Interestingly, there has been some analysis done in the context ~of the
market power filings of Edison and San Diego Gas & Electric, which have
been filed with the Federal Energy Regulatory Commission to support
their request to sell power at market rates into the power exchange.
The analysis that Edison did, or more properly, their consultant did,
was to rank the generation units basically in the west as a whole, based
on their operating costs. What they showed was that there was a huge
chunk of resources that Edison estimates can produce power in the range
of 18 to 24 mils. Those are likely to be the one on the margin in the
power exchange.
Commissioner ~r~msrud: Is that based on variable cost only, or does
that include any carrying charges, fixed costs or capital costs?
Mr, 0@chsl@r: That particular analysis was basically the variable fuel
costs and may have had a little bit of O&M in there, the assumption
being that we have a lot of extra capaCity now, California in
particular. It is going to drive prices down, particularly as everyone
competes to supply that increment of power until the capacity is either
shut down or worked off by growth. Again, there are a lot of different
variables that drive this forecast -- water conditions, gas prices,
etc., but nonetheless, as a general proposition, you would be prudent to
look at at least one case that showed fairly low prices for a reasonable
period of time. In that envirornnent, if the Western resource is
preserved and can be made more efficient, that could certainly be an
asset to the City. You initially asked if we had done any analysis
about this. Our firm has not done intensive modeling. A lot of other
people are trying to do it. It is a highly c~mplex endeavor.
Commissioner Grimsrud: Right, it is, and maybe it is more up to Palo
Alto staff to look at that. It is hard to figure out what our
competition is going to look like in, say,~ten years from now. Maybe
what we ought to do is to have five different alternative competitors
and see how they are constructed and what are their financial
responsibilities. It is hard for me to believe that we are going to
compete just on spot energy, because someone is going to have to be
responsible for capacity and for reliability, all of those things, too.
It is hard to get a clear picture, but it seems to me that if one did
that analysis, in al! likelihood we will still have some cost advantage
as long as the Western resource is managed well and the outcome is
reasonable, in other words, is not just sold to the highest bidder.
MINUTES UAC:06/25/96
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Mr, O@chsl~r: I would say it is certainly an outcome to work towards.
One of the conclusions in my analysis is that that is not a foregone
conclusion. I think that right up there with that scenario, there needs
to be a scenario in which you have no cost advantage in generation. As
I indicated, there are some developments that for periods of time could
result in a disadvantage. So that needs to be a very important planning
scenario that should receive attention.
¢0mmissioner Grimsr~: The other line of questioning has to do with
customer satisfaction. An area that interests me and takes your survey
one step further, and again, it may be more the task of the marketing
department, but it is an important one, which is, what premium will
people pay for higher reliability? What premitun will they pay for
higher power quality? How much money should we spend in those areas,
and how much can we expect to spend and still retain these customers?
It seems to me that this is a balance to be maintained. Is that
something you are going to get into?
Mr. Szyb~l.~k.~: We will not be getting into it in this study. What we
have done is to take a look, comparisonwise, in terms of the customer’s
viewpoint. Where do lower prices match up against better power quality,
etc. The interesting thing that came back on this was that from the
survey responses, of those who, as they went through and ranked the
importance of power quality, reliability, customer service and lower
rates, probably about 50 to 60% in each of the services, electric, gas,
water and wastewater, the last question was, of those that you rated as
being Very Important, which one or two would you rate as Most Important.
Price caune up there in each case. With the focus group, what I did at
the end of that session was to have them do a paired comparison where
they compared price against each of the other factors, such as quality,
reliability, etc. against the other factors. In the gas, water and
wastewater, price still came up as the first factor, but reliability or
availability was very close behind. In the electric, power quality
actually came up to be first, and slightly below that was rates, and
slightly below that was availability and reli.ability. What I have seen
done in a lot of surveys such as for new cars and the different options
you can put on cars is to actually go into that in a lot more detail and
get the people who are rating it to narrow it down to how much are they
willing to pay for the additional air bag on the passenger side or a
safety feature, etc. So that would be a separate thing here, but that
is something along the lines that utilities are going to need to know
and have a better handle on what the customer is willing to pay for
these different things so that you can come up with the best mix.
Commissioner Chandler: I have a question about the focus groups and the
way that relates to some of the rest of the materials that we are going
MINUTES UAC:06/25/96
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to be looking at this evening with respect to the strengths and issues
in various parts of the organization. As I looked at the strengths and
issues, there were three areas that I thought might affect customers’
views. One was the issue of billing systems. I think that was
highlighted in the responses that you brought forth. A second was
dispatch and whether the dispatch system was organized well enough. It
seemed that our City’s dispatch was slower than other cities’ dispatch.
Did that come up at all in any of the focus groups as a customer
concern?
Mr. Ulm: Of the factors that we evaluated, dispatch I would assume
would be the closest to response to outages. Response to outages was
rated very important and very high in each of the four utilities. In
the first one, the billing area, there were a lot of conunents, in fact,
one point I wanted to bring up earlier is that when you think about all
of the cost that you put out to make customers remain as your customers
(and here we are talking about major customers that are from $I00,000 to
$i,000,000 a year), there were only two Fair ratings of all of the 26
respondents to the survey. One of those two Fair ratings was a person
who was also at the focus group. He was very positive in terms of the
rates. They had a plant in PG&E’s territory and had mentioned that if
they had had their data center in that other territory, they would be
dead now. They went on about how good the rates were and the
reliability, so I got him aside and asked him why, in his survey, he
rated the electric utility and the overall u~ility only Fair. ~You have
rated these various individua! items as very high." His whole issue was
a billing problem that he had. He had always had other utilities that
would always waive any late fees that they had. They had a special
billing circumstance that did not allow them to get their bill paid on
time, and they kept getting late fees assessed. Nobody here would waive
the fees. I must believe that that is a very small amount of money when
you add up the penalties that were put on there. His whole issue was
that these other utilities do not do this. ~We have a reason why we
cannot possibly make this. It is black and white. They won’t listen to
me." They have gone ahead and switched their ~illing system in order to
be able to pay the bill five days ahead of time. What he mentioned was
that theycould only afford to do that with one utility. So when you
look at a little thing like billing, somebody in your accounting area
can have an impact on a major customer, in this case, one that has a
$500,000 annual utility bill, and by rating it Fair, they are going to
be more susceptible to someone coming along and picking them off than
the others who rated you Excellent.
Conunissioner Chandler: I was pleased that one of the strengths is that
we have so few deadbeats on the payment side. Maybe that is because we
assess late charges. There is only so far you can go to accommodate
MINUTES UAC:D6/25/96
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other people’s cash management. What I am trying to get is to synergize
this a little bit between the pieces of the presentation. I saw a lot
of the stuff that we are going to be seeing later in the materials that
you gave us about strengths and issues as being internal organizational
issues, and where we may be able to do things more efficiently
internally and build on some of the strengths we have identified. I a/n
trying to get a sense of how much of the concerns that are in that area
have leaked out into the customer service side of things. I ~m hearing
that, other than the billing system, not very much is leaking.
Mr. Szybalski: Part of our process is that we are presenting the
preliminary customer survey information to you tonight, but part of our
work plan is to take this information, both the specific examples as
well as the ratings, and go back and look at that in terms of how the
benchmarking information comes through and some of the other steps, so
it does all get interwoven into the study and into the final
recommendations.
~Onunissioner .Sahagian: I have questions both in the customer survey
area and in the competitiveness area. In the customer survey area, you
have put percentages in terms of satisfaction with various aspects of
the various utilities. Have you done this type of survey for munis or
IOUs? If so, are we going to be getting any kind of comparative data,
as we have received on the transmission and distribution portion of our
utility? ~
Mr. Ulm: The survey was not developed to be comparable to other surveys
going in. It was developed for two purposes. One was to get the
current input in terms of where the customer is at. Also, it was to be
able to compare it to prior Palo Alto results. In fact, the last survey
was done in 1990. We have done some preliminary comparisons with that.
We have the same questions that were asked back then, the same rating
scales, and in fact, the overall rating in 1990 was 90% Good or
Excellent. It is 90% Good or Excellent now also, but the big difference
is that there was actually a turnaround between Excellent and Good. Now
we have 58% of the 90% rated as Excellent, whereas only 32% of the 1990
survey rated it Excellent. So there has been some movement going from
Good to Excellent. Each area, as you will see in the benchmarking
comparisons, has some unique things that would make just pulling some of
the same questions for another survey to compare to here. In Palo Alto,
a lot of the corporate customers have PG&E also as a supplier. Almost
everyone of them knows that the Palo Alto rates are 6¢ or 7¢ versus I0
for PG&~. They also know that the reliability here is so much better
than their plants in PG&E territory. To try and compare that to the
Salt. River Project or a few of the other utilities that have done
similar surveys, although you could put them side by side, would be very
MINUTES UAC:06/25/96
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difficult to compare. We had not planned on doing that.
Commissioner Sahagian: On the competitiveness, I felt like Paul was
reading my mind as he was asking his questions here this evening. I
tend to feel that the analysis of the potential outcome, assuming that
the WAPA structure stays intact, is probably a little overly
pessimistic, as far as the low cost power that is at the border. I do
not think it is realistically going to satisfy the entire power need of
the State of California. There are quite a few less efficient power
resources that are going to be ~fatter" targets than the City of Palo
Alto. Nevertheless, I think the-suggestion of doing some modeling,
assuming that deregulation happened tomorrow and compartmentalizing
transmission, distribution and generation, looking at different
scenarios of power generation sourcing is a very worthwhile exercise.
I think it is something that either as part of this study or possibly a
separate exercise by staff would be well worth pursing, looking at bulk
power purchases, one scenario may be PG&E as another, and do a buildup,
realizing that a pool is going to have a clearing price based most
probably on the highest bid price in. That is really what is going to
determine the rate.
Councilman RQ~@nbaum: I wonder if I might ask a question. I do not
usually do so, but eventually, all of this material will come to us on
the council.I have a simplistic question which some of my colleagues
might share.I hear all of this talk about marketing and customer
satisfaction.I assume that the City will always maintain a monopoly on
the distribution system, because we are going to run the wires to the
plants. We might be providing lousy reliability and power quality, but
I do not see that it would be to the economic interest of one of our
customers to then go out and seek power if that power was going to cost
more than from us. Conversely, and the more likely situation, is that
we could be providing exemplary service in terms of power quality and
reliability. What would a customer have to lose, if lower price power
was available than we could provide, from simply taking that lower
priced power? Why is any of this more important than the price of the
external power?
Mr. Ulm: It is a good question. Trying to put a value on customer
service and reliability is something we have talked about as something
you are going to need to get a better handle on and get more
sophisticated in being able to measure that in the future. To answer
your question, as presented here earlier, right now, the major advantage
that Palo Alto has is the generation cost, at least compared to
neighboring utilities. If that generation cost advantage goes away,
then the big competitive field is going to be items such as power
quality and reliability and customer service and other things that are
MINUTES UAC:06/25/96
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offered. Your second point was whether those things would keep your big
customers from going away if they could get a cheaper deal. You cannot
actually quantify it, but the input that I got back from focus groups
and the interviews was that right now, some of these customers cannot
understand how Palo Alto’s reliability is so good compared to PG&E or
other utilities in areas where they either live or have plants in.
There was at least one person who said, we would be willing to pay more
if we had to in order to keepPalo Alto. At the same time, one of the
things that came up in the focus group was a concern by the major
customers as to what deregulation is going to mean to them. The point
that they made was, Palo Alto has good reliability and it also has good
lower cost. What is to keep them from going out and selling power to
customers who are willing to pay more than what their current customers
are paying? What impact would that have on us? So there are a lot of
questions that are being asked in this whole area. Definitely, price is
one factor, and some of these other factors which are becoming more and
more important, such as power quality, and one that has been important
for a long time, reliability and availability, are going to be there.
There is going to be a certain amount more that you could charge for
those items than you could if you had lower quality.
Councilman Rosenbaum: I am still having trouble with this. I assume
that we are always going to be responsible for the distribution. We
could be providing the very highest reliability. Why would someone go
and buy their power somewhere else? Thgy cannot buy reliability
somewhere else. If you stuck with our reliability, why does anything
except the cost of power make any difference?
Mr. Ulm: There will be utilities who are going to be willing, if they
have the right to come into Palo Alto’s territory and sell power and put
it over your lines, to take a loss to get some of your bigger customers
that have a real good, solid base load. As they take customers away,
you will have to spread your costs over .your smaller residential
customers. That is going to raise the price to them. So at some point
in time, if that is the direction in which it goes, you are faced with
having an investor-owned or some other utility come in and buy your
distribution at a much lower price than itsactual value.
Chairman Johnston: I understand the question that you have in mind, and
I believe you still did not get your question answered. Maybe we can
follow up on that. Your question will ultimately be a good one for the
City Council.
Commissioner Grimsrud: I have a question that is perhaps a legal
question for Dick or the City attorney. Do we absolutely have a
monopoly on distribution? Do we control every piece of property in Palo
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Alto to the point where no one can bring a distribution line into the
City? I am not sure about that. That is one question I have. If that
is not the case, then we do not necessarily have a monopoly on-
distribution.
Mr. Oech~ler: That issue was addressed in broad terms in the Phase 1
Report. There is also the question of on-site generation, distributed
generation, so that technological developments could result in a reduced
flow of electrons through that customer’s meter. That is a concern that
you would need to have. To address the other question, which was, what
is the importance of perception of value and value added by Palo Alto?
I think of the context that we are in is the margins that are available
for providing services are being under pressure as customers seek every
way possible to reduce their costs of doing business. The one way to
offset that basic trend is to provide better value, however you can do
that. Certainly, some of the things we have touched upon here are ways
to do that, ways for customers to feel they are getting a wide range of
services, better convenience, etc. from dealing with the City than they
could by purchasing their services on an individual basis from other
suppliers.Those are assets to explore and utilize to strengthen your
position.
Commissioner Grimsrud: Since this is my last meeting, this is a
question that is burning in my mind, and I would like to ask your advice
at this point. You have raised the questio~ that one option for Palo
Alto might be to market outside the City. My question is that
inevitably, since there will be some marketing of our customers from the
outside, should we be starting to take any steps at this point in
investigating whether or not we can do it, and how should we do
marketing outside the City? Is that something you would recommend?
Mr. Oechsler: Yes, I would recommend that you evaluate that. It is
certainly one option that you have to earn ~evenue that could offset
revenue losses elsewhere. There also may be some synergies between
marketing outside the City and retaining your own customers. For
example, if you were to market generation services or some other type of
services, perhaps in conjunction with a strategic partner, maybe a
marketing company, you might utilize your transmission assets more
heavily and get value out of that. You might also be able to market
excess power that you might have available and get some value out of
that. Ultimately, if you were to market to the affiliates of a Palo
Alto-based company, you might strengthen your ability to provide
services to that company. So there are some basic advantages, and the
issue certainly should be evaluated.
Commissioner Grimsrud: Is that something that you might include in this
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study in terms of recommendations?
M~, 0echslgr: Yes, what I plan to do is to discuss this issue further
with staff to find out what the status of the reconunendations are that
were in that Phase 1 report. What is the status of looking into this
issue and certainly, if it needs further emphasis, we will suggest that
it be followed up.
Mr. Szybals~i: Let me add one more comment to what I think is the
fundamental issue, and which we will be talking about a little more.
That is, why do you want industrial customers? What do they do for you?
How do they help share your cost? I think that is the thrust of the
question. Those are issues we will be grappling with. What is the
value of these industrial customers? How much attention should you pay
to them?
Chairman J0hns~QD: I have one question with regard to the chart showing
the potential impact of losing the cost advantage in generation. It
seems as though there have been many references to our big advantage in
generation. In looking at these numbers, I note that PG&E’s cost of
generation is 71% greater than ours. I also note that PG&E’s T&D costs
are 70% greater than ours. So I am not sure, from that, why we
necessariiy make such a fuss about generation, per se, since basically,
both sets of costs are equally more expensive. Is there any comment on
that?
Mr. Ulm: One point is that you do not want to use PG&E as your
benchmark against whom to compete against. As competition comes in,
there are many other utilities out there that are much more efficient on
the T&D side. So if they can get down to the same generation costs,
they will have the same or less total cost than what Palo Alto has.
Mr. iSzyb~.iski: That is a good response. Alsq, we have some sorting out
to do between that graph and some of the T&D results you are going to be
seeing pretty soon.
Chairman Johnston: I also think PG&E’s T&D costs have been changing
pretty rapidly recently, so I will be concerned about those figures. It
just seems as though we have been taking this as a given that that is
where our advantage is. In fact, our advantage right now is across the
board.
We are only partly through your presentation. I would like to move a
substantial portion of your further presentation from you to us, in that
we have your viewgraphs and we can ask questions on them. What I would
like to do, Tim, hopefully for a few minutes, is not to try to race
MINUTES UAC:06/25/96
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through the presentation, because I don’t think that will be productive
here, but if you want to steer in some direction or you have some issues
on which you would like to have some response back to us, then give you
perhaps five minutes to say a few words and over a couple of viewgraphs,
if you would like, then put the burden back on us to pull out things on
which we have concerns.
Mr. Szyb~Iski: That is an excellent suggestion. Let me put up two
viewgraphs that will direct the conversation. I don’t think we need to
go much further in discussion of the overall organizationa! analysis
which we talked about the last time. What we are trying to do here is
to take different views of the organization. We are at a point where it
is a little confusing for all of us. We get customer information that
says, you are very good. We have competitive information that says yes,
but you have to get better. We have internal information that says that
just in talking to people, there are things we can do better here.
There are areas in which we can improve. We have some benchmarking that
I do want to focus on in a minute. Basically, what we are looking for
is convergence. We are looking for how all of the issues fit together
and what recommendations are going to make sense. We can skip all of
those issues in the middle blocks, which was a large part of the
presentation, and respond to questions you have.
The other slide I would put up is just to introduce the subject of
benchmarking. This is a presentation we are~naking today. I would just
underscore that the electric panel is the one we agreed to. It is a
panel of IOUs. It is a very competitive panel. It is not a panel you
are used to looking to. It is not one where you are necessarily always
going to come out on the top. But the purpose of showing this slide is
to remind you that we think the standard with which to compare
yourselves to is the panel of national utilities who may want to come in
and take customers away. We also want to underscore that we view this
benchmarking activity as really a learning process, and we have enjoyed
good, productive discussions with your staff. But certainly, there is
a little push back in any benchmarking. Is this a report card? What
does it mean? So we want to underscore that we want to make sure you
understand what the panel is, and how it is~a little different from what
you have compared yourselves against before. We see value in that, and
just make sure that it is quite clear. With those two points, I will be
glad to respond to questions.
Commissioner. Grimsrud: what I will do is to march through the
viewgraphs that look interesting to me. I would like to start with the
last one I have tabbed, which is the Customers Served. It is fun to
!ook at the outlier ones, as they are the ones that always show that
Palo Alto is in the extreme. I don’t know if that is good or bad.
MINlVfES UAC:06/25/96
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Under Customers Served, it looks like we are the smallest in terms of
customers served of all these in the survey. I was wondering how that
would affect the results, in genera!. Do you have any general comments
on that? It seems to me that if you design a comparative survey, it
would be desirable if we are somewhat in the middle rather than at the
tail. Maybe you could comment on that as to the effect of it.
Mr. S~yb~l~ki: It is certainly a very reasonable question that staff is
raising. Again, it was a predesigned panel. It is the major players in
the national electric market. We think it is a strength of preexisting,
very deep questions that get into a !ot of areas. That is why the panel
was created and yes, you are way over on the left side. We also
identified three graphs on a page in there that have distinguishing
characteristics, so that you really do have to take the survey results
with a grain of salt, meaning really understand what they mean. Yes,
you are the smallest. In essence, those numbering systems have some
rationality, because they roughly follow size; let me see if that is
absolutely true. There is a cross break between different kinds of
commodities, so let me take that point back.
As we have used this panel against big and small,.we have not seen any
particular advantage, one way or another. We have not seen that big
companies particularly do better than small companies. So that is the
first response. Yes, you are on the tail end, and yes, that is probably
an accurate assessment of your.role as a p~ayer in the energy market,
and we have not necessarily seen unit costs tracked by how big you are,
in other words, no evidence of economies of scale on the distribution
side.
Commissioner Grimsrud: Going back to the first outlier slide that I
see, it is the customer minutes of interruption due to distribution
equipment failure where, of those that were measured, we came out second
to the worst. It seemed like there were other graphs that indicated we
were doing relatively well. I wondered why, in this particular graph,
we look so bad.
Mr. Szybalski: Let me underscore that a lot of the cost information
shows you on the high cost side. What you are getting for that is
extremely high service. So this page underscores very high service
levels measured by customer minutes. The distribution of your customer
minutes lost is curious. That is one of the things we want to
investigate. There is a table there that shows how your outage minutes
are distributed. You virtually have no tree trimming outages, which is
the major source of outages in most organizations. So the distribution
is curious, and we want to find out a little bit more about that.
MINUTES UAC:06/25/96
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Commissioner Grimsrud:
stand for?
So there are no tree outages.What does CAIDI
Mr, .... ~zybalski: The three particular reliability numbers are CAiDI,
which is the number of minutes the customer would experience. There is
frequency, which is the number of outages a customer would experience,
and there is CAIDI which is kind of a conditiona! probability. If I am
out, how long would I be out? So it assumes that if you have had an
outage, how long would it be? Roughly multiply the two numbers,
frequency times how long you are going to be in an outage, and it should
roughly come up to CAIDI.
Commissioner Srimsrud: So is this saying that on the expected value, a
customer would be out a little over an hour per distribution equipment
failure event?
Mr. Szybalski: That is the overall CAIDI number, which would mean that
customers on average (your company number is 60), would see about 45
minutes when they were out. Most of that outage is related to
distribution equipment failure. Again, that is curious and we need to
learn a little more about that outage distribution.
Commissioner Grimsrud So I guess what you are saying is that Page ii is
more of an overall assessment and Page 30 is for a specific type of
outage. ~
Mr.Szybalski: That is correct.
Commissioner Grimsrud: So what this is telling us is that maybe we
should direct fewer resources to tree trimming and more resources to
transformers or something like that. Is that what this is telling me?
Mr..Szybalski: Those are the kinds of quesDions we are going to be
asking. Who is getting this reliability? How much do they value it?
Are these the right places to spend your dollars? Are you giving
reliability to customers who value it?
Commissioner Grimsrud: This is all very interesting and fun to see.
takes awhile to soak it all in.
It
Mr. Szybalski: We hope that is the spirit. So far, it has been the
spirit of staff. We also have an obligation to point out a few things
that are, in particular, curious. One is that we have, on the first few
pages, some overall cost levels. When we divide by customers, you end
up in the fourth quartile. When we divide by kilowatt hours or
commodity usage, you end up at a different place. We have not had any
MINUTES UAC:06/25/96DRAFTPage 28
companies move as dramatically when you change the denominator.
Clearly, what that says is that you have a few very large customers. I
think this is all a piece that helps us to understand the utility. You,
in fact, are the lowest in getting revenue from residential customers of
anyone in our panel. This includes some big metropolitan utilities. So
clearly, we have to understand what is different about you. This is
helping us. You are very dense. You are among the densest. You are
among the highest usage per customer and among the highest focus on
commercial and industrial of any of these panels we are looking at. You
also have the highest service. So when everything is divided by
kilowatt hours, you look much more favorable. I think that favorable
cuts both ways. As we have made these presentations to investor-owned
utilities, favorable used to be lowest cost T&D. That is assuming you
have good reliability. So the question is, what is good? What policies
do you want? As we discussed with some of the staff, by our
calculation, there was about a penny spent on the transmission and
distribution, the wires part of the business. Given some of the recent
storms, maybe that is the best penny you spent.~ Those are the kinds of
things we are going to be looking at.
Commissioner Grimsrud: Going on to Pages 35 and 36, you have the
Average Cost per New Overhead Service and the Average Cost per New
Underground Service. It looks like in the overhead service, we are very
competitive, whereas in the underground service, we are the most
expensive of all. Is there any underlying re~son for that? I guess you
are just providing the data at this point.
Mr. Szybalski: We are really trying to understand it. Again, that is
the focus. We are looking for the conversions. We see an underground
process that is complex and convoluted. On the other hand, you do not
have many of them. The ones you do have are not subdivisions of 200
tract homes coming in, with each one being a service that is a very
short run. You have major reconstructions, remodellings in congested
areas, and you have large industrial customers coming in. So again, it
is trying to get all of the parts of the puzzle together and say, yes,
it is convoluted, but may be that $3,000 is not unrealistic, given what
that sample consists of. Those are the questions we are grappling with
and trying to make sense of them. Again, the staffing chart is probably
one that makes people the most uncomfortable. We are not recommending
any particular action on that. You have made some service level
choices, dividing by customers the most unfavorable way to evaluate the
utility. What it really underscores is the focus of the utility on the
commercial/industrial sector. It gets at the question of yes, you are
spending a lot of your dollars on reliability. Are those going to the
customers at risk? Are you spending those on projects to increase
reliability for commercial, or are you doing it for residential, which
MINUTES UAC:06/25/96
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already enjoys an extremely high reliability?
CommissiQner Grimsrud: Getting back to the underground~question, I am
very interested in that we are going on a 40-year program of
undergrounding, which is a large amount of money. Anything you find
that might make that more efficient might be very helpful to us.
Going on to Pages 52 and 53, those have to do with tree trimming. I
have already made the point that we do not have any tree trimming
outages, yet we are spending a lot of time and money on tree trimming,
relative to other utilities. Is that because we are Palo Alto and have
a !ot more trees than everyone else?
Mr ..... $zybalski: On the face of it, if you look at the first chart, and
again this is to make sure that all of these things are subject to
potential misinterpretation, it indicates that Palo Alto has a high cost
amount of money spent per overhead mile of lines. This simply says that
if you take how much you spend on tree trimming and the number of miles
of line that you could potentially trim, that would be the cost. It is
high, compared to the panel. There are several factors there. Number
one, our shows you trim a lot more often, maybe even twice as
often as other organizations. You have a trained staff of arborists.
You have more trees in more complex areas, being a dense City, so again,
it is just a red flag that says, here is the policy. You are getting a
lot for that money. If your outages were al~o poor, I would say there
is real cause for concern. At this point, we say it is a service level
question. The second companion graph says, given that you trim the same
number of miles, what is your expense? Again, we see the same quartile
performance. Are there more trees per mile? Are they more difficult?
Do you do a better job? Those are all service level questions. It is
enough for us to raise the. question.
Commissioner Grimsrud: So here, I guess, it is the question of whether
we are doing an optimal level of tree trimming. It may be that we are
overdoing it somewhat. It becomes a question of how many tree-related
outages we want to be able to accept. That is a balance.
Regarding the substation operations and maintenance expense, per MVA, it
may be that the units are such that it makes our cost high, compared to
everything else. Is that what is going on here?
Mr. Szybalski: Again, we will be looking for some convergence. You
could always question the denominator, the number of MVA, the number of
substations. We also look at intervals, which are not recorded here.
The way you maintain substations would be the envy of the industry. So
you do have high levels of maintenance, and you d6 have virtually no
MINI~2ES UAC:06/25/96
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substation outages. Part of that is a policy decision. We are looking
at a convergence that says, gee, you have intervals that seem higher
than necessary. I visited one substation that served Stanford Shopping
Center and the Stanford Medical Center. Clearly, there is high value in
maintaining that substation at peak performance. There may be others
that are less critical to your system. Those are the questions we are
going to be asking. You do have very high levels of service. You are
getting, in return, very high levels of cost. Are those the right ones?
For the most part, the policy questions have not really identified
anything that we could call major productivity issues at this point.
Mostly, they are questions of why do you do as much as you do.
Commissioner. Grimsrud: So in these areas, at the end of this project,
are you going to make any recommendations or are you going to say, these
are the tradeoffs and the various service~levels. You pick a service
leve!, and we will make a recommendation as to how many people you ought
to have involved or how much money you ought to cut, etc.
Mr. Szybalski: That is probably an area where you could give us some
advice. My tendency would be to highlight these as service level
issues, and we would probably have the responsibility of making a
recommendation in light of the competitive issues that Ron has outlined
and in light of some of the customer concerns that David has outlined.
We probably have a responsibility to say, you have chosen a service
level, but we do not feel it is the right sgrvice level, but certainly
to highlight it, recognize it as a policy issue and say, you ought to
consider cutting back on the intervals at which you conduct periodic
inspections, for example.
Chairman.Johnston: I have some overall questions. They have to do with
the presentation of the material that we have. You indicated earlier
that this list of peers, competitors, whatever you want to call them,
the approved list, maybe I missed it, but I do not remember any
discussion in your proposal when we talked about how you were going to
do the benchmarking, etc., that led me.to believe that we were not going
to understand who the people were that you were comparing us to, and
that this would be done in a coded fashion so that we really do not know
who is who. Could you comment on that, because I feel it really does
rather severely affect our ability to analyze the data.
Mr. Szybalski: One of the things that is not in this package but should
be, that I do have, is a list of participants. That certainly should be
in this package. So we will provide that. We proposed a preexisting
panel. This is national survey data. We promised our participants
confidentiality, and that is why it is double coded. What you see is
really a matter of your knowing who the participants are, but you do not
MINUTES UAC:06/25/96
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necessarily know who is best or who is worst. If we did not make that
clear, it was certainly our intention, and in fact, I gave you examples
of the particular report that this is derived from. Basically, we have
taken your numbers and have plugged them into an existing report and an
existing database.
Chairman JohnstQn: I will not speak for everyone and say that you did
not make it clear, but I did not get that out of what you presented.
Others can use their own memories and make their own judgments. I would
just reflect that I certainly did not get that, and it is a very
important point. I certainly did not ask the question and get the wrong
answer. I am not implying that for a minute. But-because I feel it is
very important, I would suggest that you have an obligation in future
marketing to really address this point. It really affects how one views
this. It is one thing to say yes, we would like to get the data and be
compared to the most competitive people across the country. But it is
another thing to understand that in the process, you are going to lose
the ability to understand how you compare to your closest and most
likely competitors. That is an enormous sacrifice that we are paying
here, and I am very concerned about that. It may very well be that
based on the list you provide, since there are quite a number of pieces
of information, and this valley is renowned for its abilities in reverse
engineering, that we may, in fact, be able to identify such competitors
as PG&E and SMITD. There is nowhere better in the country to do that
than here. I am interested in the best competitors across the country.
I am also interested in really knowing how we compare to the more local
areas. I am frankly not that concerned about the issue of not having
many peers our size. The competitive world is a competitive world, and
nobody gives you any slack if you are small. That is just the way it
is. So for example, I do not mind too much if it turns out that our
comparative municipal utility in this package is SMUD versus Santa Clara
or whatever. That does not bother me so much. What bothers me is that
I really cannot tell what I am looking at here. Rather than having it
done this way, I would prefer that the individual utilities were not
identified at all and that we were given a bar chart for Palo Alto, a
bar chart for California municipals, a bar chart for California IOUs,
and a bar chart for national IOUs, for example. I happen to think that
would be a lot more useful. You would still be able to maintain the
confidentiality, but I think we would be able to see a lot more. It may
not be true for every measure, but from my perspective, I fe~l I would
learn a lot more from that. So that is something I a~ rather concerned
about, and I do not know if there is an opportunity to think about it,
but I would encourage you, within the scope of your contract, to talk
with Rosemary to see what might be done. I feel there are areas where
I am not quite sure how we are going to sort out what it means. The one
thing I do not want is to have this become an unproductive document by
MINUTES UAC:06/25/96
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essentially having you generate some benchmarks that might force some of
the City staff to try and explain why they think they are different, but
they are not really sure because they do not know whose benchmark it is,
and you get documents going back and forth. I would like to avoid that
and make sure that where we are poor, we recognize that we are poor, but
there are not kind of excuses, and where we are not poor but the
benchmarking is simply misleading, that that is also clear~ So one
suggestion I have is the reverse engineering. Another suggestion is the
categorization of types of utilities in the maruner I just indicated, for
example.
Another issue is something I think might be fairly easily done. That is
that for each of the charts~ to put in something I might call an
importance factor. Some of these may, of course, be subjective when
they have to do with quality issues, but many of them have specifically
to do with dollar cost numbers. It is one thing to~ see that you are
ranked real low. A good example of this might be "New Undergrottnd
Connections." We are ranked quite low there, but if we look at the
percentage of our whole budget that we spend on that, it might be 0.1%.
That would get a very low importance rating, while something where we
might be ranked in the third quartile rather than the fourth but which
represents a significant amount of dollars to the City would then be
ranked in high importance. It seems to me that that is a very easy
thing to do. On each of these items you are looking at, you know how
many dollars Palo Alto spends on them, therefore, you could give it some
kind of relative importance rating. Some of them are qualitative, and
maybe you could not for those, but for those that are quantitative, I
think that would be extremely helpful.
Ultimately, my biggest concern is how do we come to closure on this.
This is something that Paul talked about a little at the end. What I
would like to have coming out of this study is a set of agreed-upon
clear areas where we can provide improvement ~ather than a list of areas
that you feel are concerns but which staff questions whether they really
are concerns because they question the validitY or the appropriateness
of the bench_marking. That, to me, is going to be unproductive. So
again, I would really encourage you to work closely with Rosemary and
staff and try to sort out which of the fourth quartile rankings, for
example, are really serious issues and which ones are not, and not leave
that as something that the policymakers can decide in the future. There
are so much data here that I fear we will lose something if we do not
get good closure on this. Do you wish to comment?
Szybalski: I will take that as strong feedback, and we certainly
got some from staff, as well. We will come back to you next time after
having worked with staff and make some suggestions. I would reiterate
MINUTES UAC:06/25/96
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a couple of things. One is that we have used the learning exercise.
The reason we go through this is to highlight in a quick screen of 200
measures of saying where are you out of bounds against a real
competitive panel that we should look at. Secondly, it is learning,
because we have seen staff presentations and comparisons of your
municipal brethren. We have a recent one that shows you to be in a very
strong relative position. You are not going to learn more from that.
You are going to learn more from this. Another comment would be that a
lot of this is not very proprietary because it is straight off of FERC
information. So there is really no reason why you cannot get cost
rankings. The proprietary information is more the practice data.
Again, to your other point (and we do not mean to be argumentative, as
we take it as strong feedback), we will think about it. I just want to
clearly say that our purpose in going into it was to highlight areas
where we should look through other means, other convergence means, and
see if there are common stories coming together. Yes, we do feel an
obligation to come back and highlight what is important. That would
come out as a series of-recommendations.
Chairman Johnston: With regard to what you meant about other
municipals, etc., I would agree with you that I am not particularly
interested in seeing a benchmark that just shows us against other NCPA
members. We know pretty well how we stand with them and do not really
see them as our competitors. So I fully accept that aspect of what you
said. I have a question, however. With rega;d to these comments, where
do you think we are going to stand when we get to the water and gas?
Are we going to be in the same boat, or is there a chance that some of
the points I raised might be addressed?
Mr .... Szybalski: That is one reason why I did not protest too much.
Basically the gas, water and wastewater will be more custom designed
surveys against a panel of municipals, for the most part, although Ron
may want to speak to the gas IOUs. We have added a panel of gas IOUs
under the same conditions. There are clearly things to be learned from
each. Our thought on electric was that there is so much existing rich
information to allow a very thorough screen of the electric that we
chose that approach for the electric. We did not choose it for the
others.
Mr. Oechsler: With regard to the confidentiality, we are constructing
a de novo for the gas, water and wastewater utilities. In that area, we
are finding that the pane! members appreciate the pledge of
confidentiality, because when they fill out a questionnaire, they do not
expect that their name is going to be attached to a fourth quartile
performance in some other area of the country where they have no contro!
over how that information is going to be used. So I appreciate the
MINUTES UAC:06/25/96
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issue of the proprietary nature which you have identified in the context
of the preexisting panel. We are creating a brand new panel, and we
felt it was important to pledge that to our participants. But what we
can do is certainly to consider grouping the IOUs in one portion of the
table. Those are going to be the ones with the larger customer base.
We have deliberately selected municipals that have customer bases quite
close to Palo Alto in a range. That is really the core of our panel.
We hope to get a 20,000 to 100,000 customer range. There are couple of
200,000-customer utilities that could present different problems. The
panel will be a little bit closer, and I do not think we will have the
kind of complete uncertainty that I hear reflected in your comments as
to who are these bars. It will be a smaller number; they will be closer
to the City, and I think we will try to experiment with perhaps drawing
a dividing line with the IOUs.
Commissioner Grimsrud: I would like to make a quick comment on that.
I work, like you people, in the generation side of utilities. We
totally have to maintain confidentiality. There are always utilities
asking about the generation cost of their neighbors that we have been
studying. There is just no way we can do that. So I appreciate that.
There is something that you can do, which is that given some of the
questions we have, some of the outliers, some of the information, maybe
you yourselves can look at the characteristics of a very similar utility
in, say, tree trimming, and make some more intensive evaluations. In
other words, do a more micro analysis of t~at to see if we are out of
bounds or not. Is that the kind of thing you are perhaps planning to
do?
M.~........Szybalski:I would also underscore the comment that we certainly
want to work.We have had a very cooperative relationship with the
staff so far.Again, the purpose of this was just to put forward a
whole bunch of conflicting data on the table, try to work out what it
means and where the areas are. We are planning a schedule of meetings
to work out those recommendations and at least get staff input to it.
Part of that very naturally might be to create some of these panels.
Some of these are easy enough to limit, "without making too many
promises. Let’s just look at the data for this part of the country or
for California or for a certain temperate zone of certain sizes. They
are all very easy limits to put on the data and create other panels. A
suggestion is just California utilities. That is something we have done
for people before. Those are all possible things we can do in the
analysis phase with the staff to try to figure out what is the issue,
and is it a major one and is it a concern.
Commissioner Eyerly: Following along on what Paul said, my
understanding from what you said at the start of your presentation is
MIN~3TES UAC:06/25/96
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that the panel that you picked was to put us in perspective with a very
competitive group of people. Of course, that is to our advantage to
understand that. But did you say they were all IOUs.
Mr. Szybalski: No, the list probably had a half dozen very large
municipals, mostly LPPA members, large public power.
C~m~issioner Eyerly: I think we have merit coming from what you have
done, but it probably needs to be broken down into groups somehow or
other. The California municipal utilities are not that broad a group,
so I do not feel comfortable in tying it down to that narrow a field.
Would it be feasible for you to break it down into segments without
violating the confidentiality that Paul Grimsrud has .feared and
mentioned and which is a viable comment? Maybe you could group it into
California municipalities, California IOUs, eastern and other areas,
something like that, so that we could have a handle on it.
Mr. Szybal~ki: That is a good suggestion, case by case. We can take
the more significant graphs and try to understand them by creating those
other panels.
Commissioner Eyerly: Okay, that is one idea. From these charts and all
the study material and data that you have here, you have come into your
benchmarking issues which I read with interest and have made some notes,
which I will not go into. I think that when~vou get comments with what
you have developed here so far that say high relative to panel IOUs,
that there is overall staffing, number of employees, very high service
levels achieved, it becomes a bit scary for us, as we sit here as a
commission and for the staff. We would like to tie that down as to what
the competition is and maybe have a chance to look at several different
plans so that we have some idea of where we are.
Mr, .Szybalski: I think those are all reasonable requests, but I would
remind you that during the last session, we put up some of the very same
material published in the San Jose Mercury News. It said, aren’t you
great because as a municipal, you spend more dollars on reliability than
those bad guys across the border with whom you compete. So again, a lot
of the bench_marking data is in the eye of the beholder. The high cost
is good. The fact that you have a staffing level that serves your
customers, and again, we are coming to the conclusion that dividing you
by customers is a faulty indicator, because you have some very big
customers that demand a lot of service and a lot of employees. So you
have a lot of employees to serve some very big customers. Yes, I can
see the desire to split the panel, but after you have done it, I feel
you will be left with some of the same conclusions. You have made some
decisions to provide very high levels of service. You have some very
MINUTES UAC:06/25/96
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high, needy customers. The only real issue I have is whether you are
taking this relatively large number of customers per large number of
employees and applying them to those customers who use the kilowatt
hours. That would be my point of analysis. So yes, you can cut the
panel; you can make comparisons, but I think you are going to be left
with the same fundamental issue.
Commissioner Eyerly: We probably will be, but we will have more
confidence in what we might recommend if it is done that way is my
belief. One other comment that Paul Grimsrud made, and that is market
power. We have all been wondering on this commission as to how long it
is going to last. I thought that was what you are going to tell us, but
you are not doing that. You are telling us that we may lose the
advantage of what we have in generation, and we should be prepared for
it, yet it sounds like it will have to be up to our staff to study and
recommend and make those decisions at the appropriate time. Where ygu
are putting your emphasis is on becoming more efficient in operations
and maintenance, distribution, etc., those types of things. That is
what your benchmarking is more related to as a viable use to us, I
believe. Those are my comments.
Commissioner Chandler: I have three principal comments on this
discussion we have been having and on the benchmarking data. First, I
think that I hear some of my colleagues’ discomfort, and apparently some
comments from staff as well, about whether ~t is apples and apples. I
really appreciated that chart that showed the different competitive
envirornnents so that you can compare out to world class producers of
goods and services like L.L. Bean, FedEx, Sony or ABB, and then down to
people who are closer to the industry you are in, particularly. For the
same reason that I heard Paul Johnston say that he is not uncomfortable
with the size comparison, even though we are the smallest in the group,
I also am not uncomfortable that the panel is composed of other
utilities from around the country, many of whom may be IOUs. I think
that fundamentally, the same business functions are performed as our
utility has to perform. It gives us an ability to get a sense of
benchmarking and then come up with reasons why it is different. Maybe
tree trimming is different because of the number of trees that we have,
or other factors, but it gives you a basis for comparison. We are a
little bit victims here of the fact that we are seeing work in progress.
We asked for it because we want a report every month on where things are
at, so we are getting a ton of raw data thrown at us.
I really appreciated the comment about convergence. I was trying to get
at that with my question to you earlier about whether the things that
were coming out of the customer focus groups were similar.to the things
that were coming out of the internal organizational review, bottom up
MIhqFfES UAC:06/25/96
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versus top down. I think the benchmarking is just another data point on
that which will either confirm or prove anomalous relative to the other
measures we are looking at. So it is very helpful to have this
information and to be able to analyze and decide what is relative and
what is not.
Second, I strongly agree with the idea of doing some kind of importance
measure, and then going in there where we are different on something
that is important, and do a credo analysis. Here are the top five
reasons that Palo Alto is different. Some of them may just be the
nature of the beast -- we have more trees. But some of them may be
things that are operational issues that hopefully will tie back to other
areas of the study. So that is how I would like to see the benchmarking
used, with some identification as to where are the A items for us, given
where we spend our money, and what are the factors that are producing
those results. Maybe you can comment on whether that is what you plan
to do.
Mr. Szybalski: Yes, basically that is what we are planning to do in the
analysis phase, to look for that convergence, find issues that we feel
are important, try to work with staff to analyze why they are important,
why they make a difference, and give some recommendations.
Commissioner Chandler: Great, because i feel that that is going to be
how those data, if they are going to be use[ul, are going to get used.
The third comment I would make, listening to some of the other
discussion, is that ! think it is sometimes easy to confuse the two
parts of our organizational review, the competitive analysis on the one
hand and the internal organizational aspects on the other. I think that
the way benchmarking information is interesting to me is that other
utilities can do these functions either most of them are much more
expensive than we are and we have some magic elixir that we found and
let’s make sure we hold onto it, or that we. are not as efficient in
figuring out why. I am not as concerned about being able to figure out
who it is that is behind there so we can fi.gure out whether they are
going to be day to day competitors or not. I would rather use that to
get into the fact of our internal organizational things that we can do
to let us function more efficiently and get more for our money. In
reading the slides on the strengths and issues, for instance, one theme
that I saw coming through from various departments (and I am not sure
that it ties to the benchmarking) was whether we are making a large
enough or an efficacious enough investment in information technology.
I see this coming through in many different areas there. There is
automated meter reading where the analysis was that we are behind. That
also is an issue that leads to staffing levels, is it not, to the use of
AM FM GIS for job tracking, to the billing systems, work management
MINUTES UAC:06/25/96
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systems like backlog analysis which was one that I saw. If we can tie
some of that into the bench_marking and relate it to some of the places
where we may be out of line, it would be particularly valuable. I
appreciate all the raw data, but I understand that it can cause
~heartburn for people until it has been analyzed and digested.
Mr. Szvbal~ki: We also appreciate your recognizing that this is work in
progress. I would point out one other thing. We have been working very
hard to take your accounting system, which does not look too much like
FERC, and translate it into a utility accounting system that separates
transmission from distribution, operations from maintenance, and that is
why we have actually suppressed a lot of the graphs until we understand
it better and understand how to take your costs apart.
Commissioner Sahagian: I also appreciate all of the information you
have presented. One thing that has really gotten my attention is the
fact of the anomaly that was pointed out that Palo Alto has such a
disproportionately large industrial/commercial consumer base, relative
to the residential. I think that has the potential of skewing the
analysis in any comparison, be it on the basis that you present it, or
aggregated in another form. I am particularly concerned also because
this has been a subject of a lot of discussion in the deregulation arena
right now in the area of cost shifting. For instance, if you lose your
biggest customers, the denominator is then moved over to a much smaller
base. That frankly makes Palo Alto a much~more vulnerable target to
cost shifting if we start to lose our large industrial and commercial
customers. Along these lines, might it be possible, because when you
talk about cost per customer, that you are rating a customer that uses
1-1/2 kilowatts of power along with someone who uses half a megawatt of
power. They are all customers, yet when you look at it, they are apples
and the Titanic, two completely different things that are being compared
here. I feel that it would be very helpful if some analysis were made
of what the levels of cost and service were. in the various sizes of
categories, comparing how we perform with our large customers versus
other utilities with their large customers, and are those large
customers who are so important maintained in our user base, in our
aggregated consumer base, being given, at ~a minimum, a proportional
service and cost being a~plied to them, as opposed to residential? I
suspect not, because I don’t think they have as many trees as our
residential customers do, but they do have a lot more 0_nderground
service, which is getting a lot less attention. That is an observation
from looking at the data presented.
Mr. Szybalski: The couplet that we learned from these bench_marking
studies too, and one thing we learned is dividing by customers that the
City probably does not make a good idea. (???) Your point is very
MINUTES UAC:06/25/96
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perceptive that what we really want to do is to try and find a cost
allocation among customer classes to make sure it is accurate. In fact,
that would be a very good final presentation that says, of your capital
budget, these are the kinds of things going towards residential
customers. They only make up 15% of your revenue, but what percent of
the capital investment? I think the third thing you just caused me to
think about is, dividing by customers almost gets at a worst case
scenario. Yes, you look pretty good when you divide by all of those
kilowatt hours you push through those lines, but when you start dividing
by 30,000 customers minus five or six big ones, you have a very
different look to the City. That is really what Ron’s effort was
underscoring. That is the worst case. What if al! of the customers
were residential and you had that distribution system sitting out there.
Chairman Johnston: Let me make one clarification as to why I suggested
you might group the various utilities together not only by whether they
are IOUs or municipal utilties, and also why I think geography matters.
Geography matters because in this country, there is an enormous
disparity in the cost of labor across the country. When we are talking
about most of what is done and what we are looking at in the T&D study
here are distribution-related things in the City which involve manpower.
If we have competitors (and I don’t know how they would necessarily do
a distribution here), but basically, it would involve manpower in this
geographical area. So comparing to Carolina Power & Light or Florida
Power & Light, there may be appropriate thing~ to make those comparisons
to, and I am not saying those data are irrelevant, but I think it is
important to segregate them, because it is simply unrealistic to assume
that our utility here can hire engineers, can hire linespeople, can hire
those kinds of people at anything close to the kinds of costs of people
with equivalent qualifications can be hired in other parts of the
country. So there is a reason why we say that geography matters from a
competition standpoint, and part of that is that costs differ,
particularly in this area. Generation cost~ largely have to do with
fuel that may not have such a big effect, depending upon whether you are
looking at hydroelectric or what, and I understand the need to keep the
confidentiality issue of customers. I am also in the consulting
business, so ! understand that, and I am no~ suggesting that you should
waive that. If you are not free to do that, you should not do that, but
there are other ways to present the data, and it really does matter. If
you are not going to do that, you might just as well be taking labor
costs from other parts of the globe. Why stop with the United States?
Mr. Szybalski: I know the hour is getting late and we have heard the
feedback. We will act. We will try to put together panels that meet
some of your concerns. I will just say that when we run these surveys,
we get 30 to 40 of these utility companies together in a room, and they
MINUTES UAC:06/25/96
DP~AFT Page 40
all come in saying we want to be in the first quartile. We then find
ways to identify how you get into the first quartile. You divide by
pole miles, you divide by customers, you divide by the number of ice
storms, you divide by the number of major Pacl0 universities, there are
a bunch of things you can divide by to get in the first quartile. You
are perfectly right, and I do not want to underestimate the importance
of people having confidence in these data. When we do detailed
benchmarking studies, probably the most important thing is that people
have confidence in the data. But after having done a lot of these,
making the regional comparisons, wage rate being one we look at a lot,
it does not cause a wiggle in the graph, and your fourth quartile wage
rates do not move you to the first quartile. How you measure it does
not move you to the first quartile. It is usually a fundamental thing,
maybe a policy decision, maybe a characteristic of your service
territory. Those are definitely things we want to get at and we do want
staff to feel confident. So we have heard and we will respond and we
will work to segment the panels in a way that gives people a greater
comfort level. We certainly will highlight the ones that are different.
Having done a number of them, there are as many reasons why people in
the northeast feel that their costs are higher than the people in the
southwest.
Mr. Oechs!er: Chairman Johnston, if I could comment without in any way
undercutting the point you are making about real differences in utility
cost structures, I do recall that a number of years ago as California
was entering the whole issue of evaluating its electric utility
industry, the initial analyses that the energy commission and the
utilities commission came up with were pointing out a lot of the reasons
why our rates are so high. What we have seen then is a basic acceptance
by the policymakers that it is the national averages that we are really
competing with as far as attracting industry to California. So ! have
noticed a falling away of those qualifiers. We have expensive nuclear
plants, we do not burn coal, we do not like coal, we have air quality
problems. California is a high cost state. What I do notice in the
broad debate about restructuring is almost a forgetting of some of those
major differences and a focusing on wha~ the policymakers are
increasingly seeing as an inevitable need, which is to just bring those
costs down. Again, that should not obscure the real differences that
there are, but I do see that trend of comparing yourself with the nation
as a whole and that basically becoming of paramount importance.
Chairman Johnston: I have no disagreement with that. If you present
the results the way I am suggesting, you will get your point and you
will get my point, and confidentiality will be retained. So I do not
understand who loses. That is all I a~ really suggesting.
MINUTES UAC:06/25/96
D~AFT Page 41
¢QmmissiQner Grimsr~d: Going along on this plane, it seems that if one
region of the country has a cost of living index that is 20% lower than
Palo Alto, maybe it would be of interest to have analyses that normalize
for that so that for the kinds of analyses that were comparing number of
employees per, say, miles of trimmed trees or something, that we could
get a normalization to the cost of living index. I was just wondering
if you had done that or had considered doing it for your other
customers.
Mr. Szybalski: All of the things you are suggesting we have done for
clients, and they are all very valid questions. They are all trying to
make apples to apples when we know they are not apples to apples. But
those are things we can bring to the party and show you some of the
comparisons and satisfy you.
Commissioner Grimsrud: There are some areas that are not quite like
what you are saying where we are saying, $25 for us is the same as $20
for North Carolina, something like that because of the cost of living
index. It is the same number.of employees, so it seems like something
like that might be worthwhile.
Commissioner Chandler: I still think there is a danger, when you get
too deeply into making apples to apples comparisons, that you then lose
any variability in your data. If you normalize and say, oh well, if you
take the cost of living into account and the qost of labor, then you see
that we are really not more expensive in doing a particular functioD.
Maybe one of the lessons is, if you have a higher cost of labor, you
ought to be investing more than the rest of the country in automated
meter reading~ So you can do something about the fact that you have a
disadvantage in the cost of labor, which is that there are other
resources you can invest in in managing your organization so that you
will be more efficient. If you wash out that analytical point by
normalizing everything, then you lose the ability to have that policy
choice as to how to adapt to the cost structure that you are in. Not
everything is static. It is a dynamic world, and we can change the
nature of our investment to respond to our competitive advantages and
disadvantages, not because we are competingwith Carolina Power & Light
but just so that we are a more efficient organization that provides our
customers with the most for their money.
Commissioner Grimsrud: My response is (and I think you answered it) is
that you can slice it and dice it a lot of different ways, and in fact,
that is probably what we are going to do. So you can do the analyses
either way, basically.
Chairman Johnston: I would like to bring this to a close. Perhaps the
MINUTES UAC:06/25/96
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most important point I have heard here is probably Mark’s comment that
this is work in process. The purpose of this meeting was to get
feedback. You have gotten plenty of feedback. We have consistently cut
you short in presentations and we have been giving you feedback. So we
should look at this as a mission accomplished and bring this topic to a
close. I thank you for your time, and look forward to seeing you here
again. I think you will be back on the first Wednesday in August.
CommissiQn~r Chandler:
have a conflict of
participating.
I have been advised by the City attorney that I
interest on this item, so I will not be
Chairman Johnston: I will now turn over this item to Bernie Strojny.
Mr, Strojny: Thank you; Chairman Johnston and members of the Utilities
Advisory Commission. The last time we were here was January of this
year. We were talking about the conclusion of Phase 3 of the
telecommunications strategy study. At that time, we came to the UAC
with a recommendation to focus on two main strategies. Those strategies
were the possibility of leasing the existing infrastructure that the
City has in place, making good use of that, and the second strategy was
to look at developing a network and leasing ~ccess to it. Those were the
recommendations which came to the UAC and which you approved last
January. Those recommendations were taken to the City Council in
February and the council approved those recommendations of Phase 3. The
staff then marched ~nto Phase 4. We are here tonight to present the
Phase 4 report to you and to share with you the findings we have
gathered from the Phase 4 report. Joining me tonight are Van Hiemke,
the resource planner in the utilities department, and Dave Rozzelle, a
principal with the Media Corunections Group. Van, of course, has done
the lion’s share of the work on this report. Dave has assisted him as
a consultant. That has been instrumental in helping us to move this
issue a!ong. Without further ado, I would like to present an overview
of the Phase 4 evaluation process. In Phase 4, what we were doing was
assessing the City’s strengths and weaknesses relative to the
competition that we would face in the area of telecommunications. As a
part of that process, we met with the telecommunications managers of
four of the largest Palo Alto corporations, as well as representatives
from PAUSD and PA Conunet, the City’s electronic community group, and one
with which we keep in close contact. In addition, we also issued a
request for information and had some discussions with potential
telecommunications service providers. Thus far, we ha+e indicated in
the report that we have received Some positive resp6nse from those that
MINUTES UAC:06/25/96
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City o£ Palo Alto
Utilities Advisory Commission
Wednesday, August 7, 1996
City Council Conference Room
MINUTES
Item
I.
2.
3.
4.
5.
6.
7.
II.
Roll Call
Election of Officers
Oral Communications
Approval of Minutes: June 5, 1996 ..........52
June 25, 1996 ...........2
Agenda Review and Revisions ..............3
Consent Calendar ....................3
Unfinished Business: ..................3
a.Gas Issues Update ..................3
b. Monthly Report by the Organizational
Review Consultant, TB&A ...............4
New Business: ....................28
a.Information Report, Plan for the Water Fund
Financial Review .................28
City Council Referrals ................44
Reports of Officials/Liaisons: ............44
a.NCPA Commission Report ..............44
b.TANC Report ....................51
c:BAWUA .......................52
Next Meeting: September 4, 1996 ..........52
250 Hamilton Avenue. Palo Alto. 94301 "i~ 415.329.2277 F.~X 415.321.0651
Mr.
are delaying
before they
settlement is more of
reviewed it and we will
supposed to be in the
the City Attorne,
:Asstuning they get the report out.The reas
is that they want to have on board
have the settl ~nce. The
terms of process, we have
to our understanding of what is
docl Then we will take that to
Chai ton: Thank you.
Item 7.b Monthly Report by the Organizational Review Consultant
Chairman ~ohnston: Would the representatives please come forward
and give their report.
Mr. Resh: Thank you, Chairman Johnston. What we planned on doing
this evening, which we would like to confirm with you before
getting too far into it, is that we did not plan on making you sit
through a presentation of all of these slides. We hope you have
had a chance to review the report, and essentially, what we would
like to do is to get your reaction and feedback to it. There are
a couple of slides at the beginning that ~ want to touch on, the
status report, and give you a feel for where we are in the process.
Then if it satisfactory with you, we will turn this back to you for
feedback questions and any other issues that you want to bring up.
Chairman Johnston: That is fine.
Mr. Resh: If you would turn to Page 4, the Milestones Chart that
we have presented every time we have made a presentation to you, I
would like to highlight the last step in this milestone chart,
Results of City Counci! Review. I understand from Ed Mrizek today
that it is more likely that instead of the City Council review
occurring on November 6th, apparently, there will be a joint
meeting between the UAC and the City Council on Tuesday, November
12th. Based on that, it probably would work well to do that at
that joint session.
Mr. Mrizek: It would be after the joint session. All of the
commissioners would be present for the joint session. We will
hopefully schedule this item for the Council that evening.
Chairman Johnston: That would be fine.
Minutes
Final
UAC:08/07/96
Page 4
Mr. Mrizek: The session will start at 5:30 p.m. There will be a
dinner, and then a one-hour session between the commission and the
City Council. That will be your annual discussion..
Chairman Johnston: That will be fine.
Mr. Resh: The other point that I want to make is that as far as
our overall schedule, we still plan on adhering to these dates of
submitting the Draft Final Report on September 3rd and Final Report
on October 3rd. In the interim between this evening and September
3rd, there are a few items that are behind schedule on where we had
hoped to be tonight, primarily involving the additional
bench_marking studies that you have not seen yet. They are still
not ready. They will be ready, at least for some preliminary
review, for staff next week.We will have those to you prior to
this September 3rd meeting.
On page 5, we have the overall issues map that you have seen
before. I want to point out in the issues and recommendation pages
that follow that there are a number of places where we say
~Pending," as you have no doubt noticed. Those are areas where we
still have not completed some of our detailed analyses. Some of
that applies to the overall organizational analysis issues. We are
still in the process of completing the recommendations on
relationships with external agencies and ~he relationship of city
departments, although that is moving along. A good portion of our
time last month has been spent with staff reviewing issues, getting
more detail, getting more detail on benchmarking. There are a few
of those pending areas that fall under the Administrative Services
Section. Again, primarily, an information report on this area.
And as I have already mentioned, the wastewater benchmarking, water
benchmarking and gas benchmarking is still to be completed. We
have spent considerable time working through all of those issues,
recommendations and details with staff. That is not to say we have
agreement. I do not want to put those words out, but I feel that
we do have understanding. That is what we hope for. Beyond that,
we start getting into the specific issues. It is probably more
effective to turn that back to you, Paul, and we wil! address any
questions or concerns that you have.
Chairman Johnston: Very good. Why don’t we start on that.
Commissioner Eyerly: I went through what they presented this time,
and I am impressed with everything that they have done. The issues
and recommendations, scope, etc., all seem to be pretty well done,
to me. I see that they have picked up a few areas where there
Minutes UAC:08/07/96
Final Page 5
might be some problems. Evidently, we will get their
recommendations on them later as far as any depth of changes or
corrections. So generally speaking, I feel it is well done, and
that we are moving right along.
Commissioner Gruen: I would make two kinds of comments. One is
that the questions and issues statement overview has a lot of
questions in it. I ~m anxiously ~nticipating some answers to the
questions. I think we agree on the questions, but I would like to
see something on the answers before the City Council meeting. I’d
like to ask the staff what is reasonable. You should leave
yourselves some time to allow staff to do research on that. So
that is my.comment, that there are lots of issues and questions,
and I am interested in getting at the answers.
A second comment is that I note that the benchmarking section is
not here. I assume you are still planning on having a benchmarking
section. We had a lot of comments about it the last time around,
and I do not see anything that would show that anything has
happened there. Will we know anything about bench marking? For
example, have some of the bars you have there say, this is the
median for California Municipal, or this is the median for
investor-owned utilities, or whatever it might be. That need not
take a lot of extra effort on your part to identify any of them,
but it would still give us something to measure things by.
The other half of that is what I have been talking about earlier.
The matter of transmission and distribution are still shown here as
a single entity. That is not useful in Palo Alto. We do
distribution in Palo Alto, and we want to know what our
bench_marking is with respect to distribution. We do not~ do
transmission.We buy it on the market. The market will adjust for
that all by itself. So let me turn that into a question, if I may
(ahb_h, the static has disappeared!), and say, is that something you
can tell us about? Can you show us the difference between
transmission and distribution? How do we compare in distribution?
Mr. Resh: We are working on those. One thing that is not very
well marked in the electric section is that there are still a lot
of dashes there. Those were numbers we got, and we are ~oing to
staff. They have been very cooperative in making estimates on how
to distribute the transmission. You do have a small transmission
component. We are working with staff to figure out what those
numbers are. We have gotten the first reports out, but again, we
want to make sure that they are right. So yes, we are working on
that. We are also trying to provide more detail in a couple of the
Minutes UAC:08/07/96
Final Page 6
areas you mentioned.
As far as comparisons, we did include a few public power
benchmarks. For American Public Power Association, again, their
benchmarking effort is only about 14 indicators that they looked
at. We found two or three that were relevant that we did include.
As far as California Panel, we are ~looking at what that is going to
take to produce. We are doing it for a current survey. Whether we
go back and do it for this survey is a decision we are going to
have to make, but I think it is a reasonable request, and we think
we can comply. What we expect is that by the next meeting, you
will have the completed electric benchmarking report and the
completed customer service report, which, again, staff has been
looking at. It includes benchmarks like telephone center, meter
reading costs, field service, and some of those results are
portrayed in here. You also have energy marketing, as well. You
wil! have three reports, as well as the gas, water and wastewater,
so we did not deliver any bench_marking results, per se, although
you have some of the summarized results in the back. The detailed
reports should all be available by the next meeting.
Chairman Johnston: I would like to follow up on Richard’s comments
in that I am not clear whether you answered a question that I
believe was at least implied in Richard’s comments. It had to do
with our comments at the last meeting. Regarding bench_marking and
a concern about what the data would do. When we get the final
benchmarking as part of the draft report at the next meeting, are
we going to see anything different from what we have seen? We have
offered a number of suggestions as to how the data might be
organized. There could be any number of ways in which it might be
organized, but we offered a number of suggestions and raised a
number of concerns about the way it was organized. Is there a
backup plan to provide something different, or are you planning on
providing the same graphs, albeit it will be finalized and cleaned
up?
Mr. Szybalski: We have not made that decision, but I think we can
produce California Panel, for example, pending some looking at what
it is going to take to do that, but we believe we can do that.
Chairman Johnston: Obviously, we are not going to have the luxury
of seeing the benchmarking in the water and wastewater ahead of the
draft report. When we have the draft report, that wil! be the
first time we see it, recognizing that it is not a month before the
final report comes. Can you make some comments particularly about
where you are now and how the data are going be organized and how
Minutes UAC:08/07/96
Final Page 7
that design is going to address or not address some of the issues
that we raised the last time?
Mr. Oechsler: I cannot speak in detail about the water~ and
wastewater, as Harold Morgan is dealing with that, but he is
organizing the data analyses and the indicators along the lines of
the information which is available from the American Waterworks
Association, where there are aggregated, and in some cases,
disaggregated numbers for water utilities. In the wastewater area,
I believe he will be relying upon the panel he has assembled. That
does not address your question in specifics, but he will be
presenting the data with an eye toward making sure that the
differences and similarities are pointed out and that his
conclusions are based upon his best judgments about the
comparability of Palo Alto vis-a-vis the pane! members.
Chairman Johnston: One of the differences in terms of the water
and wastewater is that I believe that from the panel you have
chosen to make comparisons with, not all but a considerable
majority are public entities, unlike the electric where there are
some municipals, but most of them are IOUs. In that environment,
is the issue of disclosure of data, which has been a big issue with
regard to electric utilities, does that issue go away when dealing
with water utilities?
Mr. Oechsler: I think the answer to that is yes and no and maybe
yes. In the questionnaires that we distributed, (and I can speak
to the gas questionnaires, as well), this aspect of all three
utilities, we have pledged to the respondents that we will treat
their data with confidentiality, and we would not identify the
members of the panel, other than by a number, and we will take
pains to ensure that a reader cannot trace who those numbers might
be. They are not able to speak for themselves, so you can have
City X showing up as a very high cost city. I think Palo Alto would
have concerns if it filled out a questionnaire that would be used
by some other entity, and it would show Palo Alto in a light that
you might not agree with. So what we have done, both in
anticipation of that concern, and also to speed the acceptance
process to make it easier for the panel members to say yes, we will
fill this out because our data are going to be treated with
confidentiality. Without going back to the panel, you would not be
able to identify those panel members by name. My sense is that
having gone out and pledged that we would maintain the
confidentiality of the data, I am not sure I would feel comfortable
going back and saying, ~Would you mind if we simply identified all
of these bars by name, and you will get to see who the othe~ panel
Minutes UAC:08/07/96
Final Page 8
members are, as well."
In the case of the water bench_marking, the issue there is not so
much competition, but is more or less benchmarking comparisons, so
the selection there is whether the City of Palo Alto would regard
as an appropriate comparison, some of the same companies or cities
that Randy uses in his analyses: There is one investor-owned
California water company which serves a portion of a neighboring
city that gets to your point about using the panel. On the gas
panel, at this moment, one investor-owned company has submitted the
data. We have commitments from five, but with thepress of events,
etc., despite the high level commitments to do this, they did not
carry through on it. On the public side, I expect to get virtually
al! of the publicly owned utilities that have agreed to participate
in the gas survey. The reports are in, and we have entered the
data today in our database, and we will start looking at the
ratios. ~There I believe it will be a much more homogeneous panel.
There are about five or six utilities that are in the 20,000 to
50,000 customer range, and there is another somewhat larger group,
and there are a few larger public utilities, so there, we are not
going to have some of the concerns that were expressed about the
electric benchmarking results.
Chairman Johnston: I agree with that. I know you have spent quite
a bit of time in identifying water aRd wastewater and what
and which particular utilities you feel .It
sounds like we are still going to get numbers, not names.
Mr. Oechsler: That is correct.
Chairman Johnston:That is going to be true of all survey
measures, not just . Many of the survey measures
that you have are pretty publicly known.
Mr. Oechsler: Right. The number of customers.
Chairman Johnston: Yes, the number of customers. Even
very much a public number. On the other hand, if you were to talk
about the size of the crews, the number of people in different
departments, etc., people might get sensitive to
available. But there isn’t going to be any distinction
It is going to be coded by numbers.
Mr. Oechsler: Right. It would be possible for one of the Palo
Alto staff to easily assemble the numbers of customers. I got the
data from the same public sources that your staff has. The more
Minutes UAC:08/07/96
Final Page 9
sensitive information is where we will focus our attention, things
like operating and maintenance costs, number of employees, and pull
the ratios by dividing those by customer, by thousands of cubic
feet of gas deliveries, etc. For those numbers, I believe you
would not be able to provide any identification of those numbers,
because I don’t think there is any public source for that.
Commissioner Gruen: Maybe I am missing something here, but it
seems to me that if there are some publicly available numbers, like
the number of customers, and we could look those up, then you could
look those up and identify Utility #24 as being the City of
Redding. Then we would know that the City of Redding is #24 for
all of the confidential data.
Mr. Oechsler: No, we have taken pains to prevent that. We will
double code the numbers. In fact, in our materials, we have
presented to you a table showing who are the potential panel
members. These were before we had gotten commitments, and what
were their numbers of customers, and how many miles of main they
had on the gas side. I have no problem with doing that for the
results of the survey, but when it gets down to the actual
responses that are dollars, empty E’s, etc.
Commissioner Gruen: So you are maintaining some confidentiality.
Mr. Oechsler: That is correct.
Commissioner Gruen: I also want to try to talk about the rationale
for this thing, the transmission and distribution. I can envision
some competitive environment in which someone goes to Hewlett-
Packard and says, we will give you some cheaper electricity. Then
Palo Alto says okay, we will charge you 4¢ for distribution. We
will get a penny for generation and a penny for transmission.
Hewlett-Packard quite reasonably says, you cannot possibly be
spending that much. It costs you twice what other people are
spending, things like that. I cannot imagine that we are not going
to have that discussion with at least one potentially large
customer. We are going to need data so that we can say, ~This is
what it really costs." That is Emily’s department. And then, your
department, which is, ~What are other people paying for this sort
of thing, and are we reasonable with respect to them?" I think we
are going to see that in any case when we get into the competitive
environment. Certainly electricity and gas come to mind. I can
see others as well. That is what is behind my saying, please split
them out. It is not a matter of, we .need a little more paper here.
This report is not heavy enough. There is a very specific use that
Minutes UAC:08/07/96
Final Page 10
those numbers are going to be put to. I think we have to be ready
to respond. That is why I keep asking the question, and keep
hoping someone will not say, well, that is a decision we have to
make, but rather, we have made the decision, and we are going to go
and work on this, and we are going to give you numbers.
Mr. Szybalski: Yes, for transmission and distribution, we are
going to do that, and we are going to try and make a comparison to
recent PG&E distribution numbers, for example. We will make
national comparisons on transmission versus distribution, so we
will have that breakdown.
Commissioner Gruen: Good. Thank you.
Commissioner Chandler: Just to understand the bench.marking so that
when I look back at those numbers, does the double coding mean that
a utility is #24 on one chart is not necessarily #24 on another?
Mr. Szybalski: Basically, yes. We have identified some clearly as
alternate ID codes. So some are more publicly available from FERC
data that in some sense, can be reengineered with a little effort.
Again, part of it is confidentiality, and part of it is not
necessarily wanting to be the source of making those FERC
comparisons to companies that perhaps do not want to be number
last, and do not particularly want to see our name associated with
them doing the analysis that anybody could do. So that is one
reason why we double code. You can reverse engineer that very
easily. The second is more their practice data -- their staff
levels, their crew sizes, whether they have computer systems, how
long they have been installed, and again, with some diligence, and
if you knew what I know about computer systems, when they are
installed, you could say, yes, #23 has a 20-year-old CIS system,
and maybe I could figure out who they are, so it is possible, but
again, what is important is that there is not the attribution to
this particular study.
Commissioner Chandler: I am not questioning why you are doing that
at all. I understand that completely, and I understand why, even
if the information is publicly available, you do not want to
assemble it in such a way so that someone could say, TB&A is
dinging their client. You have no reason to do that. I just want
to make sure that when I am looking at this report, and I say, how
does this guy stack up on this chart, and I do my little very
informal correlation, I had better be carefu! that I am not
necessarily looking at the same person, because the numbers change.
Minutes UAC:08/07/96
Final Page 11
I have three questions. First, a very general question about
information systems investment. I think a number of the areas
where I see recommendations coming out this have to do with
information systems. That is an area where the city already has a
large information systems department doing it ~that the utility
draws off of to some extent in some areas, and in other areas, has
its own independent systems. I am just wondering how closely your
work is going to be tied to whatis going on in the rest of the
city on this, so that as an information systems investment plan
comes out of this, it is integrated with what the city is doing as
a whole so that we are not reinventing the wheel in utilities, and
we are leveraging off of the genera! investment that the city is
making.
Mr. Szybalski: I can address a small piece of the question. Tom
can address the larger portion. The particular small piece we are
going to look at ~is investment in CIS. We do have a survey
question that looks at how much utilities have spent in their
customer information system, which is one of the key systems.
Mr. Resh: For the larger portion of the question, we have met with
Emily and her staff. I personally met with Rob Pound to try and
ensure there are the right connects and that we understand what the
city issues are versus the needs of the utility. It is going to be
an area where we will be focusing even fu~rther. We still have a
little more work to do in that area, but we are going to try to
bring a correct balance there. I will point out that we have
already seen significant changes that have happened in Emily’s
department and the new people that are in there and the new
staffing. So we are aware that there are lots of efforts under way
to correct past problems. We appreciate that. What we are looking
at now is saying, is there still a need on the utility side for
some additional resources, some additional expenditures, to make
sure that ’the CIS system, as Tim has already mentioned, moves
forward in a timely manner to meet the needs of the competitive
threats on the utility side. We are also looking at the same thing
on the GIS system.
Commissioner Chandler: I guess what I am asking is, when we get
the final report, will there be a path to making decisions on how
to address some of these recommendations that will allow for using
integration with what is going on in the rest of the city? Is that
something for which we should hire an information systems
consultant to figure out how to make it all fit together?
Mr.Resh:Certainly,directi0nally, we are going to make our
Minutes UAC:08/07/96
Final Page 12
recommendations about how we think it could come together in terms
of the level of details and specifics of this system versus that
one and how the exact details of the implementation are going to
unfold. That is more of an implementation step. We are certainly
trying to look at it from the perspective of what the challenges
are to the city, implementing the needs of the utility. I am not
sure if I have answered your question.
Commissioner Chandler: You have, to a point, and there is probably
no better way to answer it right now. From my standpoint, in terms
of getting a useful document, that is going to be an important part
of figuring out how to implement the information systems, making it
easy to do so in the context of how the city approaches its overall
IS needs. I feel that to be important, and if that is kept in
mind, that would be good. I am just trying to sense how much you
are doing that. It sounds like you are sensitive to the issue.
Mr. Resh: We are sensitive to the issue. In fact, I was requested
today by the city manager that I make one more !oop through that
department and talk specifically about some of our reconunendations
that right now tend to be more utility focused, but make sure that
those recommendations are at least understood on the city
department side. I intend to do that.
Commissioner Chandler: I have two other questions on the material
that we had in our packets this week. The first is on the general
observations that were made about planning for capital projects,
basically, and the electric utility. It refers to substation
maintenance intervals on Page 36. It struck me as being just in
terms of how you do a business plan on a project and figure out
when you need to spend money on it. I did not know whether to draw
some general conclusion from that about the level of analysis going
into project planning in terms of looking at ROI for projects, or
whether it is very specific to these two that happen to be next to
each other.
Mr. Szybalski: I think they are tied, as you point out. There is
a capital budgeting process in the city; there is a planning
process in the utility. We think there is an opportunity to
strengthen it by starting a business planning process that clearly
lays out where your revenues are, what the risks are, how much
reliability you need and where you need to spend the money to get
those target reliability levels for various classes of customers.
So that is really the thrust of that particular recommendation.
Out of that follows not only a capital plan but a maintenance plan,
as you point out. As we did the bench_marking again, we think the
Minutes UAC:08/07/96
Final Page 13
benchmarking worked whether the relative levels are exactly right.
These are appropriate questions you are asking in different panels,
but we feel that benchmarking worked in highlighting two areas that
in particular are well above industry norms. Then built on a
business plan, you would look at what you are spending on
substations. Are you spending it in a way to improve the
reliability of those customers that you are concerned about? Let’s
say, your industrial customers have a different target than other
customers, and make sure you are spending money in the right place.
So yes, they go together, but one is a little more capital, one is
a little more operating.
Commissioner Chandler: Today, are we using pure engineering
criteria that are not enough weighted by business analysis? Is
that the thrust?
Mr, Szybalski: Generally, that is what utilities across the
country are experiencing. Engineering analysis is certainly
fundamental to all of it, but how many safety factors do you build
in? What kind of equipment loading do you build in? Are all
judgments business decisions? There have been some recent articles
about pole loading. In a nearby utility, it shows that if you kept
those too close, on a business decision, you can also get hurt. So
we are very sensitive to that, but more and more companies across
the country are revisiting their standard~ and are saying, "We can
load transformers at 120% with no ill effects. We can increase our
line loading. We do not have to put in so much excess capacity.
We can cut back on substations." Part of the detail to which we
are trying to respond in terms of benchmarking is intervals of
inspection. We have some pretty good industry norm~ that say, this
is what utilities experience. Many of them are moving away from
IEEE standards to their own practical experience about how long the
intervals can vary from manufacturer recommendations. We have some
of those data, and we think it can be useful for setting your own
policies. Again, with any tradeoffs, you do have an extremely high
level of reliability. You do have an extremely high number of
industrial customers, and you have some very sensitive loads. So
we have avoided saying, you should get to the mean, and if you got
to the average utility, therefore, you would save X number of
dollars, because you are not average. In many ways, we find you
are dense. You have the highest percentage of industrial load of
any of the companies in our panel. Therefore, you have to proceed
cautiously, nevertheless, we feel there are two areas of
opportunity.
Commissioner Chandler:I think there are going to be policies
Minutes UAC:08/07/96
Final Page 14
(inaudible) I work for a company (Really
bad static) a genuine belief what the customer requires
(lengthy remarks inaudible)
Mr. Szybalski: We have two models. One we have prepared for
another city in a business planning process which we can bring to
the table. We have another which is a kind of model APPA planning
process. They do not specifically direct it, but it gets to those
issues. They are not easy questions. What we can tell you is that
there is a lot of experimentation with that. There is a lot of
trying to get to that margin, and there have been some mistakes.
Some people have cut too far, so our approach is, here is where the
average is, and you need to start moving in that direction, asking
those questions. As any business gets deregulated, you are going
to be looking at your sources of revenues, keeping your industrial
customers, what the margins are, and hopefully, with value-added
services for this reliability, you pay more, for example. You are
by trial and hopefully not too much error, you will find the right
mix for you. We can give you a range of industry experience, which
is where we will provide the bench_marking.
Commissioner Chandler: A third question (inaudible)
Mr. Szybalski: Basically, the source of the observation was that
when you ask an engineer or an operations person what .is the
standard to build a certain piece of equipment, .it is often up to
a PG&E standard or a San Diego Gas & Electric standard because your
standards are very limited. We feel that there ought to be a City
of Palo Alto standard that really makes those tradeoffs and
decisions right for you. The more we talk with staff, the more we
realize that they know that, and they are actively working on it.
They have a consultant putting together those standards and
suggesting where you should get more standardized, and where you
should make the investment. So in a sense, we are saying yes, you
are moving in the right direction, and continue doing it.
Commissioner Chandler:
we are doing today?
There wasn’t anything specific about what
Mr. Szybalski: No, in fact, I was impressed with the expertise,
not only in engineering but with the operations people in the
standards and the new materials they are bringing in and how they
are thinking about new materials. So in general, I felt that in
their participation, a lot of committees were recognizing.equipment
to avoid. I felt they were doing a good job.
Minutes UAC:08/07/96
Final Page 15
Commissioner Sahaqian: I think that from our review of the scope
of the study, it is just right. In any study, the comparative
information is most useful. But the net result of the study needs
to give a very clear and quantifiable set of recommendations that
do not leave us with a lot of questions on where to go next, but if
implemented, will hopefully improve the performance. So I want to
urge you, since to me, all of this is kind of a build-up, that it
is really your implementation plan and your set of recommendations
where the rubber meets the road in all of this work. For instance,
on Page 13, I thought it gave a very good, graphic exhibit of
recommended modifications or changes in the way we.do business, and
then having some quantification of what you think from that
outfall, this type of a change, would be. I would like to see this
in almost every area where you identify an area where we deviate
our performance from the norm or a need that can be pulled back or
improved. I urge you to make very clear, precise recommendations,
implementation recommendations and try to quantify what your
projection and the results would be. I also feel it is most
important that in your overall scheduling of activities, that we
get a reasonably set of recommendations and an
implementation plan at least 60 days upstream of our meeting with
the City Council. I feel it is going to take at least one
iteration through it to wring it out. Those are my comments.
Chairman Johnston: I would like to pick up on a couple of things
that Mark was talking about. First of all, on the issue of
reliability and level of service, the distinct impression I get
from the benchmarking and where you are on the issues and
recommendations is that the City of Palo Alto comes across in many
areas as having very good service, both in terms of reliability and
also in terms of response to customers, etc. At the same time, it
comes across as having relatively high cost in many areas. It can
be some capita! programs or it can be things as small as the amount
of tree trimming. There are just a lot of individual items. I
agree very much with Mark. I fee! there is an overall policy
decision that ultimately has to be made as to how much reliability
and service that a city like Palo Alto wants to provide. It is
good for us to know that your bench_marking is confirming where we
stand. That is fine. I do not however necessarily accept that we
should move toward the average. Maybe we should; maybe we
shouldn’t. So what I would like to see is something that helps the
city decide where they should be. To some extent, one can do this
in a numerica! way, and to some extent, it is difficult.
Certainly, you can do things like showing the reliability and how
it is impacted by the variety of maintenance and capital projects,
etc. that allows one to see truly what is the increment that we are
Minutes UAC:08/07/96
Final Page 16
paying. It may be that we are willing to pay 20, 30, 40, 50% more
in individual categories that represent only a small increment in
the overall price and achieve a substantial increment in
reliability. So I feel it is going to be important to quantify
that in some way. That may not be easy, but I feel that without
that, we are going to come away from this saying, we could save
money by moving toward average, and it would have some impact on
reliability, but we will still hotnecessarily have the best basis
for making a decision as to whether that is a good tradeoff or not.
In the absence of that, there is going to be a tendency to say, the
customers are happy, and the rates are not too high, so maybe we
should leave the status quo. In a sense, that is a shame. I agree
with Jim that we wound like to.have some recommendations which, if
implemented, would lead to a stronger utility. So I feel it would
be helpful if you could give it some thought. Perhaps you have
some comments on that.
Commissioner Sahaqian: If you do make recommendations in that
area, I think everyone is probably the most sensitive right now
about the electric utility for obvious reasons. Because of the
unbundling that is coming down the pike, it is probably going to be
helpfu! if you address the T&D part separately from the generation
part. It is not entirely clear to me that transmission and
distribution are going to be faced with the same competitive
challenges as generation. What is the competition going to be in
T&D when tariffs are published and accesses are opened? That
really sets the backdrop for how we develop our policy with respect
to T&D, as that is really where the cost issues are the most
Chairman Johnston: Basically, all the cost issues we are talking
about are about how frequently you inspect things, how~frequently
you replace equipment, how often you trim trees, all of those
things that are associated with the distribution network. We may
not have the competition there, so it is appropriate for the City
of Palo Alto not to just ignore the competition, so therefore, we
can have high prices. No, but it is appropriate for the City of
Palo Alto to make a judgment on what the correct level of
Mr. Oechsler: One of the issues I highlighted in my competitive
assessment was the fact that you are moving from a bundled
envirorunent in which there was not a differentiation between
generation, transmission and distribution, and an environment in
which Palo Alto traditionally had a very significant advantage in
generation, which underlay and enabled you to provide the low rates
Minutes UAC:08/07/96
Final Page 17
with which the customers are so satisfied. Now you are moving into
a competitive envirornnent with the changes that are underway. With
regard to federal power and other things, you can say with
certainty that you are not going to have the same kind of advantage
in the generation side unless your competition is incredibly inept
or unless you are incredibly lucky. So you need to plan for an
envirornnent in which the delivered cost of power to the customer
will be a market price for generation, plus your transmission and
distribution charge, with the key element being determined largely
by FERC and your own investments. Again, I agree fully with the
focus. The key variable that you need to know to plan things like
reliability is where do you stand with regard to distribution. Up
until now, despite the reams of data that come out of the PUC, it
has been very difficult to figure out where PG&E is in the
distribution end of the business. In the middle of July, they
filed a report called an unbundling report, in which they have gone
through their cost structure and have done an exercise where they
attempt to classify their cost in terms of production, generation,
transmission and distribution, public programs and common costs
that they need to do an effort study to figure out what they are
related to. I saw some numbers this afternoon, and the results of
that study show that out of PG&E’s roughly I0¢ rate, (9.9¢ per
kilowatt hour), their generation end, as they quantify it, is
around 6.6¢. If my math is right, that leaves about 3.3¢ for
everything else. Of that, your transmission is about ~, which
means that their distribution rate is around 3¢. The numbers that
were available in the Phase 1 report indicated that Palo Alto’s
distribution charge was, on average, around 2.7¢. I do not have
the chart in front of me, but in the comparison I looked at this
afternoon, in everything but generation, the city had a 1/2¢
advantage, or a 15% advantage, vis-a-vis PG&E, which I feel
provides an important parameter there in telling you that in
looking at reliability, let’s keep in mind that on average, the
advantage is 15%. A trend that is also going on is that PG&E~has
the ability to move a lot of costs from distribution to
transmission, and God knows where else they could put them. Palo
Alto is more limited in that respect. So you are in a situation
where probably the competitive bar on PG&E’s side may be going
down, but that is a very important thing to consider. The
preliminary results, and I underscore that these are preliminary
because there is a lot more effort that needs to be done on the PUC
side to unbundle costs, I would expect that the consultant who is
working with your rates department may have a sharper point as to
what is the city’s non-generation cost. The comparison I see is
showing that the advantage that you have in a competitive
environment is there, but it is not one that necessarily puts you
Minutes UAC:08/07/96
Final Page 18
in a position that is without challenge. I hope this provides a
benchmark in terms of helping to evaluate all of these other
specific issues.
Chairman Johnston: With regard to what the final recommendation is
going to look like, there are a number of flags you have raised,
and you are not at the end of it yet, as you have some pending
meetings, but in the information iechnology end of it, there were
a number of flags you have raised. Are we going to see
recommendations that I might call technology-specific? Let’s say,
for example, with regard to CIS and JS, will you. have a specific
recommendation for each as to where we are? Are we behind? Are we
spending enough money? How do you see that? Or is it going to be
more like a bundled recommendation related to technology?
Mr. Szybalski: There are probably three specific technologies that
we are going to look at. I would say that our role is going to be
organizationa!, it is going to be resource, and it is going to be
level of importance to the future. It is not going to be
technology driven. We are not going to say, you should develop
your CIS with a package instead of internally. That is a tough
decision that you have been struggling with for a long time. We
will, however, raise up at least three projects that we feel are
extremely important, and we will try to do it here. The CIS
project is probably as important a project as you have in the
utility company. It fundamentally deals with what you know about
your customers, how you bill them, what information you keep, how
you might market them in the future, how you route recorders, how
work is done. That needs to be raised up, and our basic
recommendation is that the level of resources you are applying
compared to other organizations that we look at in 60-person, 100-
person departments doing this, does it fit the task? So the other
is automatic meter reading and graphic information, and AM, FM, GIS
(automated mapping, facilities management, graphic information
systems). So those are three technologies we are going to say are
really important. As for the level of resources, they are, in some
ways, troubled projects. The level of resources applied is
probably not right. You need to do something. We are also
implicitly saying, those are important projects. Generally, the
direction in which staff is going techno!ogically, as near as we
can tell, is correct, otherwise we would at least point out that we
felt it was not correct. Just the level of resources and the level
of attention is not right. Whether that is enough specific
recommendations in here, we are stil! concerned about, because
again, these are massive undertakings for any utility, and you are
doing it, in many instances, with part-time staff. So the level of
Minutes UAC:08/07/96
Final Page 19
support from the city information department, the !T department, is
probably something Tom can speak to to see, whether in fact, they
have the horsepower to deliver these projects from their end.
Mr. Resh: The only thing I can add to that is that "in my
observation and discussions from the city side, they are making
moves to correct the past problems. The proof is going to be in
the results. Our concern in all of these systems is the time that
has already been spent and the time that still remains to get to an.
operational, completely satisfactory solution to these systems. We
put out there that at least one of those stakes in.the ground ought
to be January, 1998. If that system is not fully operational by
then, we would say you are absolutely behind the power curtain and
that you are vulnerable for not having that kind of a system in
place. It is a tall challenge now, and I don’t think it can be
done unless you dedicate more resources to it. That is how strong
our recommendation is. As Tim said, we are not going to recommend
the platform you will use; we are not going to recommend the
software system you select, but we are going to put that kind of
emphasis on it.
Chairman Johnston: That is fine.Let me ask you about the
resource management development You made some
comments about that. Clearly, from your recommendations here, it
sounds like you are stil! working on the~final wording for your
recommendations. I would like you to elaborate a little on the
comments you make here, because one might get a feeling from this
that the Resource Management Department is wandering in the desert.
I want to give you an opportunity to clarify a little what you see
going on here.
Mr. Szybalski: Thank you for the chance to do that. We met with
staff today, and they had some of the same comments. In fact, this
is one in particular where we do owe some very specific detail on
the role. Just to go from the issues, as somebody mentioned here,
we asked staff a lot of good questions. Here we think we have the
right answer, and now, we do not think they are wandering in the
desert. As we looked at the organization, we finally were able to
break it into its component parts to look at what the different
pieces do.
There is a resource planning group where perhaps the issue was to
what degree did they work on external responsibilities with NCPA
and others. As Tom might discuss, by the time we looked at their
role and the value added, it is money well spent. It is an
important department that is dealing with very important issues
Minutes UAC:08/07/96
Final Page 20
that are only going to get more important. We looked at the
competitive assessment group, and the more we understood their
mission, which is really a market research mission to find out what
your customers want, it is a relatively small group, and
unfortunately, it probably does not size according to utilities.
You have five people doing market research; PG&E might have 45.
Can you scale it down, since they are I00 times bigger? We think
it is probably about reasonable.
The last one where we think there is more work to do is the
marketing group. It is of a pretty good size.~ It is not to
diminish the importance of marketing. We feel it is important, and
we think you have made a good shift from marketing to residential
customers, which almost everyone needs to get out of, and market
instead to the industrial customers. We need to look at it
position by position, looking at that transition and make sure we
understand what each position is contributing, not so much perhaps
from the overall staffing level, on which again, we have some
benchmark results which you have not seen yet that say, your
overall marketing costs are not excessive, compared to most
utilities. I think it is a matter of, have you positioned the
people in the right way? Are you getting the most for those
marketing positions? In fact, do you have the right¯ skill mix
doing the right tasks? As we ask about the right size and role, I
guess the answer is that roughly, we think it is the right size.
If we decomposed it, resource management might not be the most
descriptive of what they do as an organization. They really are a
marketing organization, at least in large part, and we think they
are moving in the right direction. We need to delve a little
deeper into some of the positions to ensure that they are targeted
in the right way. There have been some massive changes in the last
year. That is where we are right now.
Chairman Johnston: It is a part of the organization that we see a
fair amount of here, because of the fact that there is so much
change going on. So it is a part of the organization that we are
more in tune with. I think they have taken on a lot of additional
responsibilities in the advent of competition, etc. So it is a
very important issue, but it is not clear to me from the way you
have written this that --
Mr. Szybalski: We have one piece we are still trying to decompose.
The other thing I would add is that we also see them as having a
significant role in the strategic planning process. We feel they
have done very good work. We do think there is room for
improvement to broaden the base of the planning process, and we
Minutes UAC:08/07/96
Final Page 21
want to recommend one that is a little more engaging of other
people in the organization. We have had some good meetings with
that group, and we hope to continue to lay out a planning process
that they can support.
Commissioner Gruen: I have a simple question. You obviously are
going to have some data with which you are doing all this
benchmarking in generating these graphs. You are doing this with
a computer. Would it be difficult to give us a computer disc with
the same information so that we could generate a different kind of
graph for something like that, putting in the same. confidentiality
which you are now maintaining?
Mr. Szybalski: We just charged a client a lot of money to do that
recently, so I am hesitating.
Mr. Resh: The problem we have with doing that, quite frankly, is
that we have invested well over $i00,000 in the development of the
system. We do not treat it lightly. We do not like to give it
away. That is not to say that we cannot work with you to perhaps
give you some components that are important to you and make it work
for you. But our investment in that system, with over seven years
of development, makes us very hesitant to say we are just going to
turn it over.
Commissioner Gruen: I don’t know that I was looking for the
system, but would you provide us with some number of graphs?
Obviously, I can sit down and type in all of the numbers from those
graphs. Do I have to type them in, or are you willing to make it
easier for me? I am not looking for some different kind of
analysis that you do, or any "database system," as there are a
zillion of those in the world, but rather, in lieu of typing.
Mr. Resh:
does.
I don’t know that there is a middle ground.Perhaps Tim
Mr... Szybalski: One suggestion is that there are some readily
available FERC databases, which I am sure your staff is aware of.
For not a large fee, you get some very nice data, so for half of
the data, that is the underlying source. Staff could invest in
that, which I do not believe they have. It is an interesting
question that we should probably discuss with them as you do more
benchmarking, to make sure you have the UDI or OPI databases, which
are very easy to manipulate and ask for searches and make queries.
It is all available. The practice stuff, again, is more
proprietary and more confidential, and we would get into more of
Minutes UAC:08/07/96
Final Page 22
the issues that Tom is talking about.
June Fleming: (Inaudible, speaks from audience) I understand why
you want that information, but it is outside of the scope of the
project that we entered into. I would be very reluctant to
If, after the project is done, we want to
enter into a separate agreement with them to do something like
that, they may be willing to do so, but it is outside of the scope
of this project.
Commissioner Gruen: I wasn’t looking for a $100,.000 report.
Ms. Fleming: (Inaudible comments) With all due respect,
Chairman Johnston: I have a comment about the next meeting in
September. That is the one where you are planning on having your
draft report ready. It will also be a time when we will see a lot
of information for the first time. I do not see any way to do
anything other than take a very long time at that next meeting, and
it quite possibly will be the most important meeting that we have.
I wanted to see if that is consistent with your thinking. If it
was, I wondered if we could have some type of agreement about the
scope of the next meeting. I anticipate that not only will we need
to review the benchmarking that we have not seen, but we will
probably need to take the recommendations literally one by one.
There may be some we can cover very quickly, but after all, these
recommendations, as I see them, will hopefully be pretty specific,
and ultimately, the city is going to have to be faced with the
decision as to whether to implement each and every one of these
recommendations. So I think we are going~ to have to literally go
through them, one by one, and that will take a fair amount of time,
but I feel that is what we will need to do. If you feel
differently about it, I Would be interested in hearing from you.
I also would be interested in hearing from any of the commissioners
who want to speak to this, and whether they think I am going too
far on that or if they think that is correct.
Commissioner Gruen: Not only do I think you are not going too far,
but I would ask the related question of when do we get to see the
report? How much time do we have to read it and study it before
September 4 when we have to talk about it?
Chairman Johnston: The normal process is that we get it in our
packet the Friday previous to the meeting. I do not know what
delivery date TB&A has for delivery to the city.Do you know that,
Tom?
Minutes UAC:08/07/96
Final Page 23
Mr, Resh: We are still looking at that same schedule. Perhaps
what we can do, recognizing that that could be a bit overwhelming,
is to get pieces to you in advance of that Friday, as we have them
available, rather than waiting for the entire package. We can try
and do something like that, particularly the benchmarking.
Chairman Johnston: It would be appropriate to get the benchmarking
out earlier, and have the report follow.
Mr. Resh: The other thing i would add is that one of the things we
are going to do, and I would say that this will be the area where
we want to spend perhaps the most time, is that we are going to
prepare an Executive Summary. Granted, we are stil! going to
maintain all of these detailed recommendations, but we are going to
pull to the Executive Sttmmary what we feel are the ten most
critical issues and recommendations. We need to spend a lot of
time on those. We can probably spend less time on the ones we have
al! seen and talked about a bit already, although we wil! certainly
be more clear and try to quantify where we can and point out~
benefits. So there will be some new information. We will all
benefit going through them one by one, and we will spend more time
on the major ones.
Chairman Johnston:
tonight.
That will be fine. I believe we are done
Mr. Mrizek: I want to comment that staff has been reviewing these
reports with the consultant on a timely basis, and when the draft
report comes to the commission next month, as you have stated,
there will be a short time for us to review it also. Our plan is
that we will be reviewing it during the month of Septemtber, and at
your October meeting, when the final report comes to the
commission, we hope to have a parallel report from staff with our
comments. That is basically what we are planning at this time so
that you will see some of our comments. We will be bringing it to
the commission at the same time in October. The question is, will
the commission have an opportunity at that October meeting to
review everything and make a recommendation to carry this forward
to the City Council in November? Commissioner Sahagian has said
he wants 60 days for review. So is the November date too soon?
Chairman Johnston: We will have 60 days from the time that we
receive the draft report. What concerns me right now is the idea
that we, the commission, will be receiving a report from staff at
the same time that we are receiving a fina! report from the
consultant. That concerns me, because I had hoped we would have an
Minutes UAC:08/07/96
Final Page 24
opportunity to review staff’s comments based on the draft report
before the final report.
Ms. Fleming: I don’t want to make the waters any murkier, but I do
want to add one word. The comments that you will get from staff
will be just that, comments. This document, when completed by you,
will be invaluable, and it will go to the City Council, and the
City Council will be asked by me to receive it and send it back to
me for recommendations regarding implementation. So the kinds of
comments that you are going to get from staff are just comments,
rather than any indication as to where we will be going as an
organization with the final report. Tonight, as I have listened to
your discussion, I have been extremely encouraged that you are
doing a very thorough job. That will be extremely helpful to me,
because it is my intent that this report, when you send it to
Council, is only going to be received by the Council and then
referred back to me. So I em trying to do two things to put into
context the kind of comments you are going to get from staff and
know that your review is absolutely essential. That is why I have
been coming to these meetings so that I can thoroughly understand
where you are coming from. The final report will come back to me,
and I will then subsequently go back to Council with the
recommendation.
Chairman Johnston: That is very helpful
Commissioner Chandler: I heard something different in what Paul
was expressing, and I have the same concern, i believe. I do not
want us to be in a position of getting the final report from TB&A
and then getting a report from staff with the comments on the final
report from TB&A and have the consultants more or less done. I
would rather see that integrated, so I think Paul was on the right
track in suggesting that you provide staff’s comments at the time
we receive the draft report so that when the final report comes in,
some of those comments can be addressed and we have an integrated
document, rather than two separate documents. That, to me, would
be very valuable, having that kind of interactive approach between
staff and the consultant in developing the final report, rather
than getting a final report and staff comments at the same time.
Commissioner Sahagian: I very much agree, because there very well
could be issues and insights brought out in the staff comments that
we would want to have an opportunity to review and have addressed
in the final report. That is why I felt it was very important that
we received everything in initial draft form and have an
opportunity to review and comment on it, and then have a final
Minutes UAC:08/07/96
Final Page 25
document generated that we are comfortable with prior to the
Council meeting. I would agree that even if the comments were in
very rough form, they could be bullet point issues brought up on an
overhead at the September meeting.
Mr. Mrizek: They definitely would have to be very brief because we
will only have a short opportunity to review them before the next
meeting.
Chairman Johnston: There are two things going on here. On the one
hand, June is reassuring us that the city’s ultimate action plan
and the city’s ultimate decision is not the same as the final
report, as it should be. It should be separate. I understand
that, and that is appropriate and takes the pressure off a little
bit. But at the same time, I feel that I do not mind if there is
not agreement between everybody on the report. That is fine,
because the consultants’ report has to be just that. It has to be
the consultants" report, and staff may disagree with some of the
recommendations, and that is fine, too. That does not mean that
the consultant has to change its mind, and the consultant should
not, but I think what is important here is that we do not have
ships passing in the night. We must not have a situation where the
reasons for differences are because there is a misunderstanding.
That is what I want to make sure about, and that is why I really
want staff’s comments before we get to finalizing the report. If
we do not do that, I feel there is a real danger in their simply
being a misunderstanding in the recommendations when it is just two
ships passing in the night. So the question is, how do we best do
that? Are there ways of extending the schedule? I don’t believe
any of us is particularly interested in that. On the other hand,
what are the alternatives? Depending upon when you get your report
out, is there or is there not not going to be time? Had you
originally planned on taking the month of September in reviewing
this? Are there any other options?
Mr. Mrizek: It all depends upon when we get the draft report. If
Tom can start feeding it to us piecemeal, as you say, you need
information ahead of time, like the benchmarking. If we can start
getting it in pieces, we can begin making our comments. We are
going to do as much as we can in September.
Commissioner Eyerly: What is the problem of extending the whole
schedule one month? Why not receive the draft report in September
and let staff come back with their comments in October, with the
final report in November? Putting it a month later would send it
to the Council in December.
Minutes UAC:08/07/96
Final Page 26
Mr. Mrizek: That is a possibility, but I know that Emily would
have some concern with that if there are recommendations to
implement any recommendations in next year’s budget process.
Ms, Harris:(Inaudible) I have been counseled
Mr. Mrizek:If that is not an issue, then it is not a problem.
Ms. Fleminq: I want this to be done well, and done right. I want
you to have the time you need. If there is an issue here about the
contract, about extending it, etc. (although I do not know about
that), I am willing to deal with that. I would not have embarked
upon this venture if it were not important. It is extremely
important, and Paul, perhaps we need to talk about what needs to be
done, along with Ed Mrizek and Tom Resh, to meet everyone’s needs.
I am not willing to make this kind of financial investment in this
kind of project and ask you to make this kind of decision. I am
committed to .
Chairman Johnston: If that is okay, and if the commission agrees,
I think we have agreement on the commission that our intent here is
to be able to have time to review comments from staff before we
finalize our comments on the draft report so that the final report
can be done after that. What we need to do is to work out a
mechanism for that. Can we leave it at that tonight?
Commissioner Eyerly: Let me ask one question. What is the
contract deadline? Is it supposed to be finished by a certain
date?
Mr. Resh: These are the datesout of our proposal, and we were
driving for this because the longer this takes, the more time we
have to spend.
Commissioner Eyerly: Are you going to charge us more money if we
extend this another month?
Mr. Resh: If it means that we have to spend more time in more
meetings, then there is that potential. If all we are doing is
saying, instead of doing a meeting on September 4th, we are going
to do the meeting on some other date, and there is no additional
time involved --
Commissioner Eyerly: You would not be doing any more work.
would have just delayed it a month.
You
Minutes
Final
UAC:08/07/96
Page 27
Mr. Resh:
work.
But I do hear in this discussion the potential for more
Chairman Johnston: That is not my intent. My intent is that you
were planning on coming to us with a draft report on which we would
give some comments, such as, we do not understand this
recommendation, and could you clarify that, whatever the comments
might be. What I am saying is that I want to be able to ask those
questions, having in hand comments from staff. We may or may not
agree with what comes from staff, and that is another issue, but I
do not want to have you go through two cycles, one with the
conunission, and then have another one with staff. I want it all to
be at one meeting and get done once. For example, one possible way
of doing that is for you to submit the draft report as planned, but
simply not come to any meeting in September, and come to a meeting
in October when we will review the draft report. That is one of a
number of potential solutions. The intent here is not to generate
more work. The intent is that for the commission, we Would be
better armed to provide feedback on the draft report. So I believe
I am hearing agreement, and what we will do is that June and Ed and
Rosemary and Tom and myself make sure that there is a mechanism to
accommodate that. If one scenario is for an additional meeting,
there are a number of possibilities. Let’s work out what needs to
be done. With that, I thank you very much.
Item 8.New Business
: Plan for the Water Fund Financial
.Chairman Randy Baldschun will make the
Mr..Baldschun: We do
memorandtun has been provided
to do our own in-house study as
to 15% higher than surrounding are~
cities which will be identified
the kinds of information
a lot of
UAC to
our
going to
comments. This
you of our plans
rates are about i0
have picked a number of
,. We have indicated
ther. This is an
opportunity for you to ioo the shopping list information and
give us your feedback ch we can take under nt when we
talk to the various . If there is any ~we have
not asked for rou feel we should ask for,this the
appropriate to hear about that from you in order to pos ly
include it i survey results.
We a schedule here that indicates that in approximately
¯ we will be coming back to you with the results of the
Minutes UAC:08/07/96
Final Page 28
Item
i.
2.
3.
4.
5.
6.
o
City of Pa!o Alto
Utilities Advisory Commission
Wednesday, September 4, 1996
City Council Chambers
Roll Call
MINUTES
Paae
Oral Communications ....................
Approval of Minutes: August 7, 1996 ............
Agenda Review and Revisions ................
Consent Calendar ......................
Unfinished Business: ....................
i
i
i
2
2
2
a.Monthly Report by the Organizational Review
Consultant, TB&A ....................2
b.Program Referral from Finance Commfttee .........17
c.Quarterly Water Issue Update ..............23
d.PG&E Gas Accord .....................29
New Business: ...................... . 31
a. Staff Report to UAC on PG&E Service
Reliability .......................31
b. WAPA Mandatory IRP ...................44
City Council Referrals ...................47
Reports of Officials/Liaisons: ...............47
a.NCPA ..........................47
b.BAWUA ..........................54
c.Response to UAC Request to Review Transfer
Methodology ........................54
Next Meeting:
Adjournment
250 Ham;lton Avenue. Palo A!to. 94301 "a" 415.329.2277 F.a.x 415.321.0651
City of" Palo A!to
Utilities Advisory Commission
Wednesday, September 4, 1996
City Council Chambers
MINUTES
Chairman Johnston called the meeting to order at 7:30 p.m. in the
Council Chambers, 250 Hamilton Avenue, Palo-Alto, California.
PRESENT:
ABSENT:
Commissioners Eyerly, Gruen, Johnston and Sahagian.
Commissioner Chandler
COUNCIL MEMBER PRESENT: None
Item 2. Oral Communications - None.
Item 3. Approval of Minutes and Executive S~ummary.
Chairman Johnston:
7, 1996.
The next item is approval of the minutes of August
MOTION: Commissioner Eyerly: I move approval of the executive summary
and the complete minutes of the August 7th meeting.
SECOND: By Commissioner Gruen. I do have a question. There are a lot
of blanks in the minutes. What is supposed to happen with those at this
point?
Commissioner Eyerly: We have suffered through this before. If they do
not get picked up during our corrections, we generally let staff fill
those in for us.
Chairman Johnston: The idea of the minutes is to not n~cessarily
.capture every word, but to make sure we have the essence, particularly
when we meet in the Conference Room. The microphones are not as good
in that room. If there are items to be changed that you fee! are really
important, and there are just a few of those, we could cover those right
now. If we are generally happy, we go ahead and approve them.
Commissioner Gruen: I am generally happy with my comments.
250HamHtonAvenue.Palo~to.94301 ~ 415.329~277F.~ 415321.065t
MOTION PASSES: Chairperson Johnston: All those in favor, say aye. All
opposed? That passes unanimously on a vote of 4-0 with Commissioner
Chandler absent.
Item 4. Agenda Review and Revisions:
Commissioner Gruen: I was anxiously awaiting our future meetings,
because I did not see anything about the transfer mechanisms for the
various utilities as an agenda item for tonight. What I am wondering
is, when will that be an agenda item?
Commissioner Eyerly: I had the same feeling. We had talked about the
response to a request for a review of the transfer methodology, and
staff had indicated that they would be able to give us a fill-in on that
within a month. They have put the memorandum in the packet, but it is
not agendized. I would like to have the opportunity to talk about it
a little bit, but not take any action on it, because it is not on the
agenda. I feel we need to ask some of the questions you are starting
to ask. So I would like to address that in the agenda tonight as Item
9.c. under Reports of Officials/Liaisons.
Chairman Johnston: Does anyone have a problem with that?
Commissioner Gruen: I have no problem with talking about it, but by the
end of the evening, I would like to have found a date and added it to
our future list when we can have a real discussion on it. I am willing
to accept pretty much anything that staff wants to do about how and when
and who is involved and whether it is Price Waterhouse or someone else.
Commissioner Sahagian: I have one item that might not be appropriate
for tonight, but I would certainly like to suggest that it be put on the
agenda for the next meeting. That is the impact of the pending passage
of A.B. 1890, the electric utility restructuring. There were some
provisions in that restructuring that will have an impact on our
municipal utility. It would be helpful to get a staff report on that
as early as possible.
Mr. Mrizek: We will be providing updates on that. We just received the
legislation, and in fact, we do not as yet have a complete copy of the
legislation in our hands.
Item 5.Consent Calendar - None.
Item 6.Unfinished Business
a.Monthly Report by the Organizational Review Consultant.
MINUTES UAC:09/04/96
Final Page 2
Chairman Johnston: I will start by making sure that everyone
understands where the schedule is. My understanding is that tonight,
the plan is for us to review the final details of the bench_marking
studies and that as a result of revisions since our last meeting, your
draft final report will be available for us prior to the next meeting.
The next meeting will be the one that we have long awaited in terms of
our going step by step through all of the recommendations. Is that
still the status?
Mr. Szybalski: Yes, that is our understanding, and we are also
presenting a draft report tonight in anticipation of the meeting on
Monday to actually begin discussing the recommendations, and hopefully,
starting to think about an implementation plan, which actions are agreed
to, and which ones may have some areas for additional study. Our intent
tonight is really to describe process, but we will be glad to respond
to any questions you have about the benchmarking.
Chairman Johnston: So you would like to start this off by making a
presentation on the process?
Mr. Szybalski: A rough description that we delivered six bench_marking
studies in six different areas. It is a lot of information. We regard
it as studies that will be useful to the utilities department for a
bunch of reasons into the future. Our process was really to identify
those issues that we regarded as significant to identify our
recommendations dealing with them. Then we have just completed an
executive summary that was delivered today that wil! identify what we
regard as the ten most important. We have begun a process of
prioritization and action. That is the process we intend to follow.
Chairman Johnston: Shall we go directly to questions? Or are there
some highlights you would like to share? Are there particular things
you have identified in the benchmarking that you want to point out to
us?
Mr. Szybalski: At this point, we have certainly talked about electric.
The customer service benchmarking is new to you, although we have
discussed it with staff. In general, there are some very favorable
findings in that particular study. Perhaps the one area that staff is
aware of is the CIS features which are a little less than what you would
find in many of our panels. So that was an outstanding issue. With the
marketing study, perhaps the major observation we have is how most
utilities have gone towards targeting industrial/commercial accounts as
opposed to residential. That is certainly something that has been
started here, and we are going to suggest further steps along that line.
MINUTES UAC:09/04/96
Final Page 3
Mr. Oechsler can respond to that, and any questions you have on water
and wastewater we will record and get some written responses back to
you. Harold Morgan is not here tonight. That is our high level
summary, most of which was incorporated in the status report we gave the
last time. There were not any big surprises that caused us t~ rethink
too many of the observations, perhaps with the exception of water, where
we were able to target differences and rates a little more. That,
however, is not something we are prepared to talk about tonight.
Chairman Johnston: So in terms of the water, we will cover that at the
final review, and you will be prepared for our specific questions posed
tonight. Let us proceed with questions.
Commissioner Gruen: I have some fairly general questions. Maybe these
are questions that were asked before I became a member of this
commission. I am looking at one which is the customer service issue.
I do not see where Palo Alto was mentioned in this. I cannot figure out
which utility number is Palo Alto, therefore, I cannot ask, ~How do we
compare?" Am I missing something, or are we excluded from this?
Mr. Szybalski:
Alto is #30.
I apologize if you did not get good instructions. Palo
Mr. Mrizek: In the cover memorandum from Rosemary, it did indicate that
Palo Alto is #30. In the gas benchmarking, Palo Alto is #22. In the
electric, Palo Alto is #60.
Commissioner Gruen: I had suggested as a member of the public some
months ago that you identify us somehow on the graph with something like
a star or an arrow that said, this is Palo Alto. Everyone is going to
want that, especially if the number bounces around one way or another,
and especially if you look at the back of the report where it says how
are the utilities, and the City of Palo Alto is not there. I think the
reports ought to stand by themselves without a cover letter from
Rosemary so that it is easy to deal with. That is a general comment,
and I will continue to suggest that. It is a matter of ease of
understanding.
The second type of thing like that is how you organize the random
numbers. I understand that they ought to be random in the sense that
we do not know the names of the utilities. But I could use some sort
of ordering of the numbers so that I do get something out of it. I
wanted to suggest possible ways in which you might order them. The most
straightforward is by size of utility. It seems to me that size of
utility affects the efficiency of the utility and the way it can produce
things much more than whether it is a combined gas and electric or just
MINUTES UAC:09/04/96
Final Page 4
gas alone, and whether it is a municipal or not. Especially in the case
of gas and electric, I think we will find ourselves competing with
general utilities, not with municipa! utilities. Therefore, that comfy
little corner we have which says, we only have to compare ourselves to
the municipals, is going to disappear. We are going to be comparing
ourselves, in the real world, to everyone. So size would be one way in
which you might sort these~numbers, again not mentioning names, but just
putting the biggest one as #I and the smallest as #60 or whatever.
Another way you might sort them which would provide information would
be geographically. You look here and see AEP (American Electric Power
in Ohio and Michigan) and you know that they dea! with lots of ice and
snow. You see someone in Hawaii, and they do not deal with a !ot of ice
and snow. So the parameters they have as an operational function and
what they have to deal with for distribution will be very different.
If you listened t6 the weather report tonight, the folks on the eastern
seaboard are talking about which hurricane is going to happen where.
If you go to Hawaii, they are talking about whatever hurricane dealt
with them. We don’t have a lot of hurricanes out here. We have a
different environment, so you want to have some way of saying, we are
not comparing ourselves in efficiency with the guys who have a different
set of problems. So geographically is another way, and maybe #i are the
folks in Maine and #60 are the folks in Hawaii. That is another way in
which you can put some information in there. That information is more
important than whether or not it is a municipal.
Now let’s look at Page 223 of the service, Appendix B. There is a whole
pile of folks who are not available. Then there is something which is
94 mean and 95 mean. I could use another couple of lines that said
something like ~Mean of utilities which are within 50% of the size of
Palo Alto," i.e., 50% smaller or twice as big, some range like that so
that we have another data point while still maintaining confidentiality.
I think the confidentiality is good. It means you might get some
answers, but I feel it is worthwhile to give us comparison points. Just
saying the top quartile of everyone gives us as much as information as
a couple of well chosen means. You can be the experts and tell us
whether we want to hear about the mean or the median.You understand
that issue very well.
I have a question on the electric.
are looking at?
Is this accurate 1994 data that we
Mr. Szybalski: For most of the group, it is, in fact, 1994 data. For
the City of Palo Alto, it is fiscal year 1994/95. For many of the
public agencies, it is also 1994/95. So the City of Palo Alto is
shifted by a half year.
MINUTES UAC:09/04/96
Final Page 5
Commissioner Gruen :
out?
How long does it take before the 1995 data comes
Mr. Szybalski: It will be available in about a month. It just became
available from some of the services from FERC. We have been processing
it and are about to release the 1996 results within a month.
.~.ommissioner Gruen: Should we expect to see that?
Mr. Szybalski: We would love to have you participate in that survey.
You do not have any new data yet. You could compare your existing
1994/95 data with the 1995 database that we have available. That would
show you whether there was movement, and that is certainly something
that could be done. We would urge an ongoing benchmarking effort.
Commissioner Gruen: Do we have somewhere the questions which you are
going to ask to produce these answers?
Mr. Szybalski: We could make that available.
questionnaire itself.
Staff certainly has the
Commissioner Gruen: Let me give you an example. I am looking at
Appendix A, Graph i0. I have a few questions about it. There is a line
which seems to say ~Adjusted Mean." The first question which comes to
my mind when someone says "adjusted" is, wha~ were the adjustments?
Mr. Szybalski: That is a very good question, and having just put
together this book for this year’s data, we have gotten better at
responding to some of the things you have mentioned. We do have means
for different panels. With this data set, we have not done that, and
there are some areas where it is not as well documented. This is a good
example. I assume that the adjusted mean, although I cannot tel! from
this report either, but you can see there is an outlier or two that
probably were thrown out.
Commissioner Gruen: I understand outliers.
similar project are here.
My calculations for a
Mr. Szybalski: And your point is well taken.
documented, and it is not on the graph.
That certainly should be
Commissioner Gruen: I am willing to hear pretty much any rational
explanation, but I like to know what I am looking at. The reason I
chose this particular graph is that it talks about outages. I see that
with the third item in, there is 0.7 of an outage. .I don’t know what
0.7 of an outage means. I know whether my lights are on or off, but I
MINUTES UAC:09/04/96
Final Page 6
do not know what 70% of an outage is.
Mr.Szybalski: The
have an outage during the year.
outages.
is how often a customer might expect to
So the average customer would have 0.7
Commissioner Gruen:
particular case?
Outages greater than five minutes, in this
Mr. Szybalski: Yes. If you look at #31, the way that particular
company defines outages is that you are not out unless you are out more
than five minutes. We do not agree with that, but that is the way they
define it.
Commissioner Gruen: As you say, I may not agree with that, but I do
like to know what I a/n looking at. Everyone agrees that unless you are
out for a minute, you are not out. Is that what you said is the meaning
of this graph?
Mr. Szybalski: Yes, most people define a sustained outage as more than
one minute. In practice, if you look at the graph, there is really not
any noticeable difference in performance based on how you define what
is a sustained outage. So the people who say it is more than five
minutes do not seem to be any better performers even if they hay@
lowered the level. -They do not seem to be performing any better than
anyone else.
Commissioner Gruen: My computer certainly notices outages of much
shorter duration, less than a second. It sometimes notices them for
weeks thereafter, as a result. That is not a piece of information I
will get from this graph.
Let me choose another example which is perhaps less controversial. This
is an issue of how you show information. I am now !ooking at Appendix
F, Page D-3. There is a graph showing four utilities with what I think
is zero showing, and one utility with an N/A showing. They look the
same to me. Zero and N/A are visually identical. My suggestion there
is that they should be distinguishable in some form. Maybe you could
leave the boxes black if they are zero, for instance. They ought to
look different.
Mr. Szybalski: The only convention we have used is to just move all of
the N/A to the right, but I can see that that is not very appealing.
Commissioner Gruen: I would comment in general that these three-
dimensional bars leave me cold because I cannot find out what the number
MINUTES UAC:09/04/96
Final Page 7
is. Let me refer you to Page F-13 where there are a few bars. Am I
supposed to refer the height of the bar to the background? In other
words, for the Palo Alto utility, are we at 4%? Is that what the
information shows? I do not understand the intent of having the three
dimensions there except to confuse where the base line is.
Mr.Oechsler: This was part of Harold Morgan’s work. He followed the
same convention that we did for the gas benchmarking.We used the
three-dimensional bars primarily for visual interest.It was not
intended to smush over the data. What you would want to do is to read
the back line there.
Commissioner Gruen: The back of the bar against those thin lines?
Mr. Oechsler: Right. So for example, Palo Alto I would say is at 3%.
Commissioner Gruen: I would rather be able to read those someplace
where your little hatch marks are. I really did read it differently
against the background as 4% rather than 3%. Visual interest, to me,
does not override accurate data. You can have all the visual interest
you want, as long as you do not lose information. I think you are
losing information here. My favorite graph in this series is on Page
F-II. There is no information whatsoever, but a distinction between
Palo Alto’s no information and other people’s no information. I sure
don’t understand that. Anyway, if you could look through for things
like this. You will find them as well as anyone can. If we are going
to have something, I ought to be able to understand it.
There was also one of these where I could not tell what the difference
was between gray and black. There is one on Page B-5. I picked this
one since we are not arguing about the data in any form. It is new data
to us. This Page has many different bars supposedly telling us many
different things, but I cannot tell which they are. Maybe this one
started out in color, and that is the problem. If we are going to
present it in black and white (which I think is a good idea), then we
need cross hatching of some sort or some other mechanism for identifying
which bar is which.
Mr. Oechsler: I appreciate your comments and will certainly.pass them
a!ong to Harold.
Commissioner Gruen: Let me ask you a general question. I have been
making comments about these things. Are you going to do anything about
any of this? Do you have time?
Mr.Szybalski:That is a key question.We probably will have to
MINUTES UAC:09/04/96
Final Page 8
reissue some of these, certainly indicating Palo Alto more clearly and
putting on a graph where you are very clearly with arrows. That is
certainly something that we ought to do. Normally, we do. So as we
reissue these, we will try to do a better job of that. The issue of
various means is something we have started with our new data set. It
is actually a fairly expensive process to do. We made an estimate of
what it would take and passed it on to the City manager. We would be
pleased to do it, but it would take a significant effort to go through
and do it on this data.
A couple of other things, in terms of an errata sheet, of describing,
as you mentioned, the adjusted mean. That is just sloppy, and we should
be able to respond to any questions you have there, and we will be glad
to do that. We have an errata sheet that we have going. In terms of
coding, each of these has a slightly different secret which we could
share, but we didn’t. For example, with the customer service, the
numbering system is basically coded. The first third are all electric
utilities. The middle third are gas only, and the last third are a
combination. That would help your understanding. In the customer
service, that is probably more significant than anything because you
handle so many commodities in customer service that there are economies
of scale. You have one telephone center to answer multiple commodities,
so we feel that is an important point maybe more than size. In
electric, we do actually have a coding scheme. Thelnumbers are actually
in relation to size, with the smaller numbers being the bigger
companies, I believe, and the higher numbers are the smaller companies.
We could share some of that with you, and we did not. We certainly will
do that so you can get a little more out of this information.
I would just make one comment about size. Based upon one of the
observations at a previous meeting, we did go back to an APPA panel.
APPA is very good in their surveys about doing a lot of discriminating
between east and west and north and south, big and small. They have a
very limited data set, which why we think you got value out of the
hundreds of measures we used. They look at a lot of financial ratios,
but their operating ratios are very limited. An interesting finding
which was buried in the report last time was that every place we looked,
efficiency was inversely proportiona! to size. That is counter-
intuitive. To us, we have never found a relationship between size and
efficiency. In fact, in the APPA numbers, we saw that universally, the
most efficient utility was your size utility, 30,000 to 50,000
customers. I have worked with utilities of more than one million
customers, and they do not seem especially efficient to me. So whether
it is a.small data set or whatever, trying to find size relationships
are going to be a little difficult from this data. We found no
consistent pattern that says you cannot be as efficient as anyone else.
MINUTES UAC:09/04/96
Final Page 9
~Qn~nissioner Gruen: I would agree that there is no particular reason
to believe we would be more or less efficient. Looking at the one you
mentioned, electrical utilities, you have municipals called out as one
of your categories. I wanted to make sure we understood that we have
to compare ourselves to everyone, not just to municipals. We have to
be as efficient as anyone else who comes in with a carpetbag to sell to
our customers, regardless of whether ~hey can say they are a municipal
and rate two gold stars.
Commissioner Sahagian: From my perspective, the main reason for this
study was to try and give us information about how we are doing in a
broad sense in our various utilities versus other comparable utilities
and potential competitive utilities, looking at a top of the line type
result, and then looking at what we can do in individual areas within
our utilities to improve our efficiency and make ourselves more
competitively positioned for what is inevitably happening. There is a
tremendous amount of benchmarking information here, but in my
experience, you always start with the top line and work your way down,
a top down approach as opposed to bottom up.
I did that, and it appears to me that in the area of our electric
utility, when you look at T&D expenditures per megawatt hour sold, which
is probably the only way to !ook at it, because looking at it per
customer skews it, given the disparity in customer size that we have
within our service territory, it looks like ~e are just a little bit
above the median line that you show here, not having the benefit of
knowing how those utilities stack up and which ones are potentially
threatening geographically, or might have excess power to sel! in our
territory if the access opened up. It is hard to really evaluate how
we are doing in terms of kilowatt delivered, but in terms of our T&D,
it looks pretty good. When you consider the reliability that goes along
with it, I think it is quite good. We have very high reliability, which
is clear from the other graphs. So that eases some of my concerns on
the electric side. However, in the other three utility areas that I
focused on, water, gas, and wastewater, based on your revenues per
thousand gallons delivered, and in your gas benchmarking, revenues per
MCF, it looked to me as if we were on the high end of the spectrum.
That gave me a lot of concern. I would like you to address that again.
I certainly would hope that it is going to be addressed in your study
as to why you think that is. There are obviously going to be reasons.
The reasons certainly could have a very strong impact on our position
in some of the utility areas. Also, give us a clear understanding of
what you think the underlying causes and adjustments might be. I want
to pass that comment along as an overall observation in the bench_marking
and get your thoughts on that.
MINUTES UAC:09/04/96
Final Page i0
Mr. Szybalski: I will reply initially, and maybe Ron will follow up.
Basically we agree with your analysis that on the distribution side,
your overall costs are well within the range, and your reliability is
excellent. On the water and wastewater, we are still trying to address
the very question you asked. On initial blush, it appears to be
primarily related to your infrastructure replacement program and how you
fund it. It is very aggressive. The. data supports, at least at first
look, that some of your service level measures are not good there. You
have a lot of leaks, so those are the things we are trying to sort out.
I think your assessment is probably the right one that on those, it is
a high level due primarily to infrastructure replacement. There seems
to be bench_marking support for that particular program and why you have
it under way.
Mr. Oechsler: I can comment on the results of the gas benchmarking.
To me, the most important indicators are distribution O&_M expenses. We
have looked at how those expenses are per customer, per mile of main,
and MCF of sales. What we found was, and we have reflected in the
tables where we report our results, we have noted that the cost per
customer and cost per mile of main appear high. However, the cost per
MCF is below the average. What we have concluded is that the
differences appear consistent with the City’s location and density,
i.e., it is in a high cost area. The City has a relatively dense
service area, and the level of reliability provided in the scope of the
capita! improvement program. So what we bed noted there was that
probably the most relevant indicator is the per MCF. In that area, your
costs appear relatively low. If you look at revenues, what you are
looking at there is probably more a reflection of what is the relative
weighting of the different customer classes in your total sales, and to
what extent are there differences between the distribution charge for
your residential customers and your commercial/industrial customers.
For a typica! large utility with a very large service customer base, you
would expect your commercia! and industrial revenues to be relatively
low, since there is a high load factor. With customers who use a lot
of gas on a constant basis, cost allocation would tend to al!ocate a
smaller proportion of cost to them. In Palo Alto’s case, that is a bit
different. That is why we are suggesting that it is the cost per MCF
that you want to look at. That appeared to be relatively good.
Commissioner Sahagian: (Microphone turned off -inaudible)
Mr. Oechsler: Right. The procurement cost is going to differ between
these utilities. We have not broken that out separately, so what you
are looking at here is the total charge, the bundled rate. Making
allowances for that, the transmission and distribution charge for Palo
Alto’s commercial and industrial customers is relatively high. It is
MINUTES UAC:09/04/96
Final Page ii
basically on a par with the charge for the residential customers. One
of the reasons for that, and I feel you have touched on an important
issue, is that Palo Alto’s commercial and industrial base is relatively
smal!. Also there is no smokestack industry here, no heavily energy-
intensive industries that use a large amount of energy at a constant
rate. In fact, the load profile for your commercial and industrial
customers is very similar to the load profile for the residentials in
that it is peaky. There is a fair amount of heating usage, and when you
allocate costs, using a cost allocation factor which has to do with peak
usage, you are going to be allocating proportionally the same amount of
costs to the commercials and the industrials that you do to your
residentials, which translates to a higher rate. It is perfectly
justifiable, by cost allocation principles, and this was considered by
the rates group when we did our study a number of years ago. You have
touched on an important point in that a customer of Palo Alto could look
at its distribution rate on the gas side and say, it is 50% higher than
for a similar customer in the PG&E area. You could explain the reason
to them, but they might not be satisfied with the explanation~
Commissioner Sahagian: You are saying, an industrial customer. That
is where my concern is mainly centered -- the sanctity of the industrial
base with respect to both gas and electric. If there is an area where
we probably risk departure of customer base, it is in that area.
Admittedly, if we maintain control over the distribution and they have
no choice, no economically viable alternative,~ it becomes a moot issue.
That is something that has to be looked at, especially in light of what
is going to become an increasingly competitive envirorunent.
Mr. Oechsler: Right. It is a valid concern. If a supplier went to one
of your customers and said, by the way, I have looked at your tariff,
17 per therm compared with i0 per therm for a PG&E customer of similar
type, similar pressure, you could explain that you have allocated costs
fairly, based on load factors. The customer stil! might say, it is
still a high rate. If the customer were to apply pressure to the City
Council, saying we are not happy with this, it would be an issue you
would have to address. So it is a valid point.
Commissioner Eyerly: I found a world of information in everything you
have given us, but there were a few things that stuck out, which I will
comment upon. I hope that in the final reports, there might be some
recommendations for some of these problems that I see. Taking the
wastewater report, I notice that you have researched in your
benchmarking that the interruptions are high, power without service is
high, response time is slow, infiltration is high, all of which indicate
to me that the infrastructure has been allowed to go much too long and
these problems revolve around that. Some recommendations after a study
MINUTES UAC:09/04/96
Final Page 12
of this might point that out.
In the gas benchmarking and the water bench_marking, that infrastructure
is still a problem, but we seem to be moving on it. I notice in the
gas, we have a very high leak rate in the infrastructure at this time.
Something else that is interesting to me is that the average wages in
the gas utility are high. It indicates the same in the water
benchmarking also. Payroll expenses are high. I am presuming that it
is due to the cost of living in this area, but it does not say anything
about it in your graphs, etc. That is something that I think needs to
be pointed out with your reasoning and recommendations, to have the
reasons for that.
One other thing is that I noticed in your customer surveys on your major
service customers, in some of the replies that came back indicating what
is important to those major customers, I think we have all been aware
that the cost of the product is very important to those people, and the
service is very important to those people. Those two ingredients are
where we really need to maintain high levels of service at low cost.
There is so much information that I am just blown away trying to digest
it. So I am waiting for your final report to see what it really says.
Commissioner Sahaqian: I would like to add one thing to some of the
excellent points that Fred has raised. It is something I noticed we use
for a lot of our outside contractors. I notice that some of the other
utilities use their own corp-based crews. This is something I learned
in spades from running a power plant myself. I would be interested in
having you address that issue, as well, and what you feel the tradeoffs
might be there, especially given the fact that a fair amount is being
invested in infrastructure upgrade, and whether there is an economic
tradeoff there that might be considered.
Chairman Johnston: I wanted to ask about how specific your final
recommendations are going to be in some areas. There are a number of
the utilities that seem to have similar symptoms, particularly gas,
water and wastewater associated with the infrastructure programs. In
the issues sections in the studies we have gotten, my copy does not have
an issue section for water. I guess that is coming later, but with the
other two, the issues section talks about some of these, and there are
clearly some recommendations. I am hoping that in the final report, we
will get something that is a little more specific. Let me pose a couple
of examples and get your feedback on it.
One has been discussed somewhat already, that is, the cost of installing
the infrastructure here, which you seem to uniformly point to across the
different utilities as being high. By the final report, are you going
MINUTES UAC:09/04/96
Final Page 13
to reach a point where you satisfied that that is because of the density
and cost structure in this area? Or are you likely to come back and
say, this is something that concerns you and needs to be looked at? How
specific are you going to be in your ultimate recommendations on that?
Mr. Oechsler: With regard to gas, we did note in the issues section
that the construction costs in this area, based on available indicators,
appear to be something on the order of 20 to 25% above the national
average. A number of the other utilities were in lower cost areas in
the midwest and the southeast. We also noted and discussed with the
engineering and operations staff about what might be the causes for
this, since what we have to work with is this comparison. One of the
thoughts was that the strict regulations that the City requires of
contractors is very likely to be a factor -- the fact that you do not
have people working at night, the fact that you take pains not to
disrupt traffic around the business districts, and that you have strict
requirements for planking, etc. All of those things are really outside
the scope of our review, but we believe that these factors would
certainly have to be taken into account in looking at the cost
comparisons. Staff basically agreed with us. So our feeling was that
in general, the costs are appropriate, given the special factors that
affect of Palo Alto, also with knowledge of the pains taken by the
operations and engineering staff to contract for the gas line
installation work. It is a very competitive process, and staff believes
that they have really gotten the costs about ~s low as they possibly can
for contractors to make any profit at all. So based on a consideration
of all of these factors, we do not have recommendations to make, and our
conclusion is that the costs are not out of line.
Chairman Johnston: You have said you could take some questions back.
I would like to make sure that that response for the gas utility is
equally applicable for the water and wastewater. The reason I suspect
that it might not be with the water has to do with a part of the answer
we just got, having to do with some special considerations for the City
of Palo Alto in terms of operating at night and in terms of planking,
etc. The group of utilities chosen for the gas study was much more
widespread than the comparison for the water study, which includes many
of our neighbors, like Mountain View, Sunnyvale and Milpitas. I assume
also that it is the City of Hayward, not Haywood. To my knowledge from
the kind of work that I do in this area, I am not aware that the City
of Palo Alto’s regulations with regard to sensitivity to residential
neighborhoods, noise, etc. are really out of line with other cities in
the bay area. I could easily accept that it may be out of line with
other places in the country, but not with other cities in the bay area.
Since most of the water benchmarking comparison is with cities in the
bay area, I would want to make sure that we do not automatically assume
MINUTES UAC:09/04/96
Final Page 14
that what is true for gas is also true for water. So perhaps that could
be looked at. I know that was only a part of the response, and there
are other parts associated with cost of living, etc., but again, the
cost of living, in terms of contractors, should not be that more
expensive to get a contract done in Palo Alto than it would be in
Mountain View, for example.
Mr. Oechsler: I will certainly make sure that we have an answer to
that. I would also note that at the end of the discussion of
construction costs, we brought out the fact that a number of the other
utilities are in much less dense areas, so a lot of the trenching may
be open trenching, whereas, trenching in Palo Alto would be much more
expensive. That is another difference where we need to find out if it
affects the other members of the water and wastewater panels.
Chairman Johnston: Right, and I suspect that my other comments would
apply almost equally. Palo Alto is a little bit more dense than some
of the other cities in the bay area that we are talking about, but not
very significantly.
As a result of Commissioner Sahagian’s comments, you mentioned that a
lot of the concern with regard to the top-down performance, as it has
been described in looking at cost to deliver a thousand gallons, for
example, those kinds of issues, a lot of that is associated with the
more aggressive capital improvement program. In your analysis and final
recommendations, are you going to be a little more quantitative about
that in the sense of saying, that represents 90% of the reason why the
cost might be a little higher? I am not looking for an exact
percentage, per se, but I am looking for a. feeling about whether it is
your belief that that really is the focal point of the issue, or does
it just account for about half the issue and we need to look elsewhere
for the other half?So I would hope you could address that. Does that
sound reasonable?
Mr. Szybalski: That is a very fair request, and as we have started to
put together an implementation plan, we have tried to !ook at the report
in terms of what are the actionable items and the background bekind
them. For that one, in particular, I think what you want to separate
out is maintenance cost versus capital costs. The initial look is that
your ongoing O&_M is within the ballpark, which leaves the capital as the
main reason. That is a fair observation that we need to quantify and
make that argument, showing that it is true. The other balance is
whether your spending is in the ballpark and whether your reliability
is in the ballpark. If it is not, that is where we would look at a
capital improvement program to justify the capital improvement to bring
your numbers back up to where they should be.Yes, we hope to be-able
to talk to those points.
MINUTES UAC:09/04/96
Final Page 15
Chairman Johnston: With regard to the quantity of capital improvement
programs that we have, the number of miles of gas line that we replace
annually, etc., it does appear from the bench_marking studies that while
they are not quantitative, they support the proposition that we have
more leaks than average and we should be replacing more than average.
That is the trend one gets from looking at it. Do you feel comfortable
that we really do have more leaks than other people? I think you
recognize that leaks in gas lines and water leaks are mostly minor
leaks. You get more leaks if you look harder, so we need to be careful
to separate out how hard we are looking for leaks and how many leaks we
are getting. You can see this very clearly if you go back and look at
the leak rate per year. You will see it jumping al! over the place, and
if you then go and correlate that with the effort put into finding
leaks, you will find that when you spend more money looking for leaks,
you find more leaks. I know we have old infrastructure here, but I am
a little concerned that we too easily accept that we need the
infrastructure program we have because we have more leaks. If it really
is that old and that decaying, yes, we do need it, but if part of our
extra service is that we look harder than others, I would like to see
that we get that.
Mr. Oechsler: I could respond to that for gas as regards leaks per mile
of main and as reported in the gas benchmarking. In discussions with
staff, staff pointed out that the level of leaks, which for a number of
utilities is in the range of 0.i to 0.2 per mile of main, that is quite
a bit lower than it has been historically. The industry, as a whole,
is bringing leaks down to a relatively low level. So you need to take
that into consideration in looking at the differences. Also, for Palo
Alto, the leak rate has been coming down. A third point is that the
capital improvement program was, in our judgment/ properly focused on
replacing infrastructure that needed replacement. So insofar as the
leaks, we need to be a little more clear in order to put this into the
proper perspective. From my interviews with staff, I am comfortable
that the program is properly designed and implemented. It is something
that does make your system more reliable and safer, important priorities
for your customers. The policy of financing those improvements out of
current rates will result in a ~higher rate than if it were financed
through other means. That is a policy decision the City has made and
was not really a part of our review.
Chairman Johnston: I have another question that is probably beyond your
scope, so I am giving you an easy out if you tell me that it is. In
terms of the approach for infrastructure replacement, this City is
betting essentially all of its marbles on high-density polyethylene
pipe. Is that true of other utilities, as well?
MINUTES UAC:09/04/96
Final Page 16
Mr. Oechsler: Our survey showed that polyethylene is the material of
choice for the utilities in the panel. So we have no basis to question
that.
Chairman Johnston: So you feel that Palo Alto is consistent with
current thinking on that topic?
Mr.Oechsler: Yes, that is our judgment.
Mr. Szybalski: One further observation is that one of the things we do
try to look for is whether the staff is participating in industry
associations. Does staff know what the trends are? Our judgment is
that they are not only sitting on panels, but they are being asked to
participate on panels, so I think they are very wel! aware of trends.
Chairman Johnston: That is all we have for you tonight. We look
forward to going through the specific recommendations the next time.
Thank you.
B.Progra~ referral from the Finance Committee.
Tom Habashi: ~
questions.
We have no report tonight.We are here to answer
Chairman Johnston: I will begin. I want to make sure that I understand
this program correctly. Refresh my recollection of the percentage of
revenues that we have al!ocated to DSM.
Mr Habashi: That was one percent. By the way, this program was
already approved by the UAC in March or April. The reason it went to
the Finance Committee was that we intended to use a consultant to the
tune of more than $25,000. Unfortunately, on the day that the Finance
Committee met, we did not have anybody from utilities present, and they
had one or two questions. Since they could not get an answer, they
referred it back to the UAC.
Chairman Johnston: will the funds for this program come out of that one
percent of revenues?
Mr. Habashi: That is correct.
Chairman Johnston: So does this represent something close to 30% of the
available funds from that progra/n?
Mr. Habashi: The available funds, excluding staff expenses, are a
little over $400,000. So this probably represents about 20% of that.
MINUTES UAC:09/04/96
Final Page 17
City of Palo Alto
Utilities Advisory Commission
Wednesday, October 2, 1996
City Council Chambers
Item
1
2
3
4
5
6
7.
9.
I0.
ii.
12.
M]NUTES
THIS SUMMARY OF CONDENSED EXTRACTS FROM THE FULL MEETING MINUTES HAS THREE SECTIONS:
POLICY ISSUES - A BRIEF STATEMENT OF ANY ITEMS THAT ARE BEL.]EVED TO NEED A POLICY DECISION OR GUIDANCE FROM THE CITY Council.
KEY ISSUES - A BRIEF STATEMENT OF SIGNIFICANT ITEMS DISCUSSED;
MINUTES HIGHLIGHTS - SHORT ~CTS FROM THE MEETING SHOW1NG THE GIST OF DISCUSSION. ALL MOTIONS AND VOTES, AND A NUMBER
IN PARENTHESIS INDICATING THE PAGE OF THE FULL MINUTES WHERE MORE DETAILED {NFORMATION ON THE SUBJECT MAY BE FOUND.
Roll Call .........................2
Welcome NCPA Legislative Tour ...............2
Oral Communications ....................2
Approval of Minutes: September 4, 1996 ...........2
Agenda Review and Revisions ~ ............3
Consent Calendar ......................3
Unfinished Business: ....................3
a. Draft Report by the Organizational Review
Consultant, TB&A ....................3
b. Electric Issues Update ................46
New Business: .......................49
a. UAC planning for joint meeting with Council .......49
City Council Referrals ...................58
~Reports of Officials/Liaisons: ...............58
a.NCPA Commission Report ................58
b.TANC Report .......................59
c.BAWUA Report ......................59
Next Meeting: November 6, 1996 ...............59
13. Adjournment ........................59
250 Hamilton Avenue. Pa]o Alto. 94301 "s" 415.329.2277 FA.X 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, Gruen, Johnston and Sahagian.
ABSENT: None.
Council MEMBER PRESENT: Roserabaum.
Item 2. Welcome NCPA Legislative Tour
Chairman Johnston: The NCPA legislative committee is here tonight.
They have been visiting in town. We welcome you tonight.
Kent Palmerton: I am with NCPA and we would like to thank you for the
opportunity to come and visit. We have two guests who have been taking
to many of our facilities, Mr. Philip Medalle and Mr. Roger Canfield.
Both of them are with the state legislature, and both have participated
in drafting and working with the language of AB 1890, the restructuring
legislation that has recently been passed. Both of them have been
instrumental in working with issues with electric restructuring through
the relationships with Assemblypersons Martinez and Conroy of the state
legislature. ~
Chairman Johnston: We thank you very much for your efforts and
appreciate your keeping the municipals in mind as we go through all of
these changes.
Item 3. Oral Communications
Ed Mrizek: I am speaking as a resident of the City of Palo Alto, and I
am also a utilities employee. I want to announce that next week is
Public Power Week and Public Natural Gas Week. The utilities have been
public utilities. The water utility is i00 years old this year. Our
electric utility will be I00 years old in 2000, and we have been in the
public gas business since 1917. So we have a long history of public
utilities. Next week, we will be recognizing that here i~ the City.
You will find a brochure on public power at your places tonight, also
the arunual apples which we hand out to customers at our customer service
areas. Thank you.
Item 4.Approval of Minutes and Executive Summary
Chairman Johnston:The next item is approval of the minutes of
Mintues UAC:10/02/96
Final Page 2
September 4, 1996.
MOTION: Commissioner Gruen: I move acceptance.
SECOND: By Commissioner Sahagian.
MOTION PASSES: Chairman Johnston: All those in favor, say aye.
opposed? That passes unanimously on a vote of 5-0.
All
Item 5. Agenda Review and Revisions
Chairman Johnston: In talking with the City attorney today, Item 8.a.,
Utilities Records Requests and Privacy Protection for Personal Customer
Information Proposed Policy and Procedure, is being continued. We will
not be discussing it tonight. Are there any other issues associated
with the agenda?
Commissioner Eyerly: On Item 7.b., the Electric Issues Update, I want
to speak to that on the tentative Utilities Advisory Commission agenda
in our packets.
Item 6. Consent Calendar - none.
Item 7. a. Draft Report by Organizational Review Consultant.
Chairman Johnston: It is my understanding that you are not planning on
making a presentation and that you are here for questions on the draft
final report.
Mr.Resh: That is correct.
Chairman Johnston: I understand, based on the scheduling of your team,
that you have requested that we deal with the water issue first. We
have had the water benchmarking results previously, but we have not had
any hint, in a sense of the issues, prior to this meeting. This is
really the first time to look at the benchmarking results in conjunction
with the issues you have raised, along with the strengths and
recommendations. So what I would propose that we do is to start with
that area, moving forward to questions associated with that. Is that
alright, Tom?
Mr. Resh: Yes, in fact, we appreciate your accommodating our schedule
on that. Let me assure you we are prepared to stay as long as need be
to answer questions.
Chairman Johnston:I will start off with an overall comment. It
Mintues UAC:10/02/96’
Final Page 3
appeared to me, from the benchmarking results that are in Appendix E,
that the water utility was a utility in which the cost of providing a
unit of water was, according to your benchmark, about 20% higher than
the next highest, and considerably higher than many others. You
indicated that there were a number of reasons why that might be so,
including the aggressive capital improvement program.You also pointed
out that the number of employees per unit of water,for example, was
again high, compared to elsewhere. But when I look at the
recommendations that you have, I do not find anything in the
recommendations that really addresses those issues very directly. I do
not find things in there that are pointing very specifically to the
issue of the cost. I do not find things in there pointing specifically
or recommending any reductions in employees. I am not saying that that
should be in there, but I feel it deserves an explanation.
Harold Morgan: Good evening. I was responsible for the water and
wastewater. Let me first say that I appreciate your accommodating our
schedule and problem. When you look at the American Water Works
Association (AWWA) results which also accommodated the data, along with
the panel that we selected to look at the employees, we find that the
City is fairly comparable with what we would expect with industry
standards. It is really some of the panel members that vary from Palo
Alto. Based on that result, I did not really feel confident to propose
a recommendation of a reduction in staffing.
You rightfully recognized, as I did, that the average water costs for
the user in the City were higher than many of the panel members by a
factor of perhaps 20%. I think that although we did not do a cost-of-
service study to identify the exact factors in this,. I suspect that
there are number of reasons why this might be the case. One would be
the somewhat high in comparison rate of return which the City generates
through its revenues and then transfers to the General Fund. That was
significantly higher than the other cities. Then of course, as you have
already alluded to, the very extensive capita! improvement project which
is being funded out of current revenues. Again, when you look at the
panel members, a number of them are financing improvements through bond
issues. Finally, the water conservation that is experienced in this
City has been very strong. Again, in comparison to other cities, the
populace of Palo Alto, when asked, responded very strongly in conserving
30 to 35% of historic usage. There again, as you know, when you have
water usage go down, you still have the bills to pay and the revenues
still have to be there. That is going to force those per-unit cost.
Those are probably the areas I would investigate through a rae study if
I were trying to explain specifically why those costs are higher.
Chairman Johnston:I would like to go back over those issues again.
Mintues UAC:10/02/96
Final Page 4
One,you say there is an issue of some other cities are funding out of
bond issuance and we are funding from current revenues.
Mr. Morgan: Yes.
Chairman Johnston:
factor.
Two, you said that conservation was a significant
Mr. Morqan: I believe it to be. I have not done an independent study
to confirm what I aln saying, but this is what appears to me to be some
of the reasons that I would propose as needing further study. As I
understand it, your City staff responsible for rate making is looking
into those issues.
Chairman Johnston: And a third issue was transfers, which you indicated
were high.
Mr. Morgan: Yes.
Chairman Johnston: Did I miss one?
Mr. Morgan: Those were the primary three:
conservation, capital improvements.
rate of return,
Chairman Johnston: The data on conservation seems to suggest that
indeed, Palo Alto did respond very well, but if you look at the data
that show the water use per customer in Palo Alto compared to water use
per customer in other communities surrounding us, we do not stand out as
being especially low. I can understand why our rates might be high if
people in this town were using very little water compared-to people in
surrounding towns. I don’t feel that the data that you obtained
suggests that that is true. You did get some data that suggested that
we cut back a lot during the drought, but in terms of the actual usage
per customer, I do not recall that as being especially low.
Mr. Morgan: I think the average water use in the City is about 14 ccf
per month. The statewide average is closer to 20 ccf. Again, I did not
make an independent study of that. It was my impression that the
average water use in the~City was somewhat lower, particularly in regard
to the state.
Chairman Johnston: It is clearly way lower than the state. That is
because you have people out in the central valley with unmetered water,
all kinds of things, who use much more than we do. But in terms of the
comparative pool that you used, which included many of our neighbors,
and included other areas around the bay, that was not the case. That is
the comparison I am really talking about. So I am still not sure that
Mintues UAC: 10/02/96
Final Page 5
I really fully understand why conservation is that big a player here.
If our usage was substantially below Menlo Park and Mountain View and
Sunnyvale, the kinds of cities you had in the bench_marking, I would have
had an easier time understanding that, but it does not appear to be so.
Mr. Morgan: I will take another look at that.
Commissioner Chandler: The question was about the staffing levels, if
I heard the question correctly. If I may follow up on that particular
aspect, it seems to me that the metrics we were looking at in a lot of
the benchmarking was full-time equivalent per thousand customers, that
kind of thing. I could see the conservation playing in if we were
looking at the per acre-foot or per-measure-of-water. But when you are
looking at per-mile of pipe or per-thousand-customers, I do not
understand why the factors you were referring to would necessarily
apply. The one factor that was pointed out in the final report was the
idea that on the O&M and administration side, there might be an
allocation issue where costs were being allocated more heavily than the
water utility. That, to me, might be a fruitful area to look at and get
some staff response on, as well. Help me understand why the
conservation would even play into a metric that is per thousand
customers. It may be my lack of understanding.
Mr. Morgan: I think we started the discussion with a little confusion.
We actually were talking about two issues here. What I was trying to
address was the average water cost per corunection. I was not really
talking about employees.
Commissioner Chandler: Paul, I thought your question was about
employees. Do you want to talk about employees?
Chairman Johnston: My question was actually more general than that, but
it included that among a number of other items. In my overall look at
this (and other Commissioners please comment if you agree or disagree),
it seemed as though the recommendations for the electric utility were
more specific than the recommendations for the water utility. The water
utility seemed to have about the biggest problem in comparison with
neighbors, yet the recommendations seemed to come back that there are a
series of different things we could look at. Maybe my expectations are
out of line with what this study is about, but it seemed like we did not
get to the point of making more specific recommendations. At the last
meeting (which I recognize you were not present for), I posed a question
about how specific the recommendations were going to be. Based on the
answer, I was certainly led to believe that they were going to be more
specific than where we are now with regard to the water utility. That
Mintues UAC: 10/02/96
Final Page 6
concerns me, because there have been a number of issues raised, but the
recommendations are mostly "go study this" or "go study that."
in the electric, utility, I do see some areas where it is ~go study this"
but there are also quite a lot of very specific recommendations. Maybe
I was being too optimistic in hoping that you would find what we are
missing here.
Mr. Morgan: Again, I suppose that if I had seen it, and going back to
the exa!nple that the other commission brought up, what I did see in the
benchmarking with the administrative and general O&M, for exa!nple, as a
percent of all O&M, clearly it shows up as a question mark. There is a
recommendation to look at the allocation for that particular item, but
I did not see staffing levels that raised a concern for me, particularly
when looking at the AWWA data. This City compares very favorably with
the western region and the size of Palo Alto in comparison to the AWWA
panels, and even on a nationwide basis. Even though the panel members
specifically may have had data that were a little different than that,
I was persuaded by the AWWA data that you do not really have a staffing
problem.
Chairman Johnston: Could you point us to the charts you had in mind
with regard to that?
Mr. Oechsler: If I could comment while he l~oks for those charts. One
of the areas where I had provided Harold with information that I had
developed with Rosemary Ralston was the number of positions outside of
the utility department that are funded by the different utilities.
After working through the rather .specific and. detailed~information, we
came up with a way of estimating that by using average dollars per
employee. We converted the dollars that were allocated for these
externally funded positions and converted those to numbers of units.
What I observed in the gas benchmarking study was that none of the other
panel members indicated that they had any positions funded outside of
their utility. That indicated to me either that the City is doing
something that no other City does, or that these other folks did not
take the pains that the City took and that we took in working with them
to identify these numbers of positions. My conclusion was that you are
not unique among all the utilities. The conclusion that I drew was that
you are probably reflecting measuring a higher staff level, given your
methodology, than these other companies were. So that was one factor
which we did reflect in our conclusions here. It gives us pause in
~ moving forward and further underscores Harold’S conclusion that if the
indicator shows up to be reasonable, using this national standard, plus
the fact that Palo Alto probably over allocates in terms of methodology,
than the other companies, that factor was definitely taken into account.
Mintues UAC:10/02/96
Final Page 7
Chairman Johnston: That is very helpful.
Mr. Morgan: I see four benchmarking tables that you might refer to.
One is "Population Served Per Employee." Another is "Connection per
Employee." Also C2, "Number of People Served by Each Utility Employee"
and "Miles of Pipe per Employee" and ~Average Retail Delivery per
Employee." All of those I think show that Palo Alto is very comparable
with the AWWA data.
Chairman Johnston: Do you have any explanation why Utilities 3,1,2,4,5
and 7, all Of which are more similar to us than AWWA, have a very
different result?
Mr. Morgan: No, I do not.
Mr. Szybalski: If I could make a couple of comments relating to the
electric survey data, the particular survey was much more detailed on
the water side than it was on the electric. In electric, because we
have been working on it for a number of years, it got down to lots and
lots of detailed practice questions. We did, in conjunction with the
benchmarking, also do a basic organizational walk-through of all the
different crews to see how they were staffed, how they were manned,
whether they were the appropriate crew ~ sizes, whether they had
appropriate cost reporting, etc. In general, that coupled with the
benchmarking, gave us a good sense that the crews were pretty productive
crews. The only other third thing I would mention besides, there was
some operational analysis, as wel! as just benchmarking and the detailed
surveys, I would also mention that there was also that on the electric
side, we found that dividing by customer can be a very difficult
measure. You have very, very large customers, and I am not sure that
the demographics are exactly the same on the water side, but a per-
volume measure is usually a much better indicator for you than a per-
customer measure.
Chairman Johnston: I would agree, and that is why, in looking at Chart
C-4, I have some question. We do not know exactly who 2,4,5 and 7 are,
but if we go back to the lists that are in the pool, at least two of
those have no reason to be doing any better than we are, from what I can
tell. On the very first page, if you look at #7, we have Gainesville
Regiona! Utilities and the City of Glendale. Those are the only two
that are outside the bay area, assuming that the City of Haywood is
Hayward. So it seems as though there might be a reason, when I go back
to C-4, to explain two of the peaks that are very different than ours,
but I have a difficult time with the others. That is the problem I
Mintues UAC:10/02/96
Final Page 8
have. The only explanation I believe I have is the the AWWA data.
Mr.Morgan: I can take another look at C-4 specifically and see if I
can get further explanation on that.
Chairman Johnston: What I am concerned about is that of the utilities
that you and staff agreed upon as being an appropriate panel to look at,
six of the remaining seven are doing better in that measure than we are.
At least four of those six are very much our neighbors. In some cases,
they are doing substantially better than we are by that measure. I
don’t want to beat this to death, but I just want to make sure you
understand the nature of my concern here.
Mr. Szybalski: Just to balance out the picture, I think that Page A-8
is probably one that was an influence on us in looking at your
infrastructure replacement program, and also potentially why you have
people who respond to emergencies. You are a City that needs an
infrastructure replacement program. That is why, in general, we say
yes, we see the numbers, but given the productivity of the crews, given
some of the service problems you have, we feel you are on a wise course.
I know you would like a little more decision on how wise, on exactly how
many people, and Mr. Morgan couldn’t deliver those numbers exactly.
Chairman Johnston: We have been struggling here with the capital
improvement program, and we recognize that it needs to be above average,
given the age, given the number of breaks, etc. I don’t think there is
any disagreement about that. Do you have a comment about whether it is
too far above average, or not far enough above average?
Mr. Morgan: Which is that, the rate of -
Chairman Johnston: The level of funding of our capital improvement
program. You have agreed, and I think all of the commission members
have agreed, that it needs to be above the norm, based on the City’s
situation. The question is how much above the norm is it. Are we about
right? Does it look to you to be a little high? Too low?
Mr. Morgan: I think it is probably about right. You are making
progress. There has been a decrease in the number of leaks, according
to the data that the staff keeps. I would continue to monitor the
unaccounted for water loss as you continue to improve. It is hard to
say without looking continually at the data, but I think you are
probably about where you ought to be.
Commissioner Sahaqian: I have two comments to make. First of all, I
agree with Chairman Johnston in his comment about the recommendations.
Mintues UAC:10/02/96
Final Page 9
I found that on the utility side, there were a lot of really
constructive recommendations. To the extent that those can be filtered
on through to the water side, giving us a little clearer course of
action if any is required, that would be helpful.
The other thing I was wondering about is whether there is anywhere in
the data sets information on age of these other comparable utilities
that you have used?
Mr. MorGan: Yes, it is in the B section.
Commissioner Gruen: Yes, that seems to talk about age, and if you
ignore the one outlier, we and everyone else were in the range of 29 to
39 years. That is not a really large difference, as shown by these
data. Let me make one specific comment and two more general ones.
The specific comment is on Page F-9 and F-10. F-10 talks about water
conservation. It shows Palo Alto as having a higher percentage of water
conservation. It also shows that five out of seven of the other
utilities report no data whatever. So I don’t think I would like to
draw a lot of conclusions about our being lots higher than the rest of
the world with so many non-reported precincts. That is tke sense I have
before I jtunp in. I want to collect some data or have some other nice
measure.
Mr. Morgan: Your point is well taken. I suppose I have the fault of
collecting data in my mind as I work in other areas. We did an
unaccounted-for water loss study for Sunnyvale a couple of years ago, so
I seem to have other data rolling around in my mind, so I guess maybe I
am persuaded more than I should be about the lack of full knowledge of
the panel.
Commissioner Gruen: I do not say that you are wrong in being persuaded.
Mr. Morgan: But I agree with you that you are right.
Conunissioner Gruen: I would be happy to have you put the data down so
that the rest of us could be persuaded, and we could point to something
and say, see, this is it. If you look at the previous page, F-9, and
you say, this is residential water consumption so that it eliminates the
issue of large commercial, small commercial, etc., and it is consumption
per capita so that it has some normalizing factor in there, then Palo
Alto’s consumption is not particularly low. There are four guys below
us and one guy above us, so from the consumption data, one would not say
that it is residentia! conservation. So that is another factor which
says,, maybe it is not just conservation.If there are some more data
Mintues UAC: 10/02/96
Final Page 10
somewhere, I would like to see them.
I have two general comments. One is that for me, at least, it would be
helpful if you would tell us where the data that support that
recommendation is next to each of your recommendations, e.g., a column
that says, this is on Page F-9 and F-10, making it easier for people to
flip to it. I and the other Commissioners have spent a lot of time
looking at this, and we are still doing a lot of flipping pages up here.
You could solve that, and it would also give you the opportunity to make
another review of your recommendations and say, is this recommendation
supported by data, or should I write another paragraph saying "The data
are not shown here, but here is why I think so." We welcome your
expertise as consultants, and if there is a reason why we should believe
something other than what we have gotten, please tell us.
My other general comment is that your reading of the recommendations
again yourself would probably help. If you look at Page 60 of the
report itself, the "final draft report," under water bench_marking (which
is why I raise it at this time), the third recommendation tells us,
"Course may include water conservation."
Mr. Morqan: I picked that up on the plane, too. You are right
Commissioner Gruen: If you read through them again and put in where the
supporting data are, that would give you the-opportunity to review these
.things and make sure that you are saying what is supported by the data
and what you want to say and add whatever comments about other things
you know which caused you to make that recommendation anyway.
Mr. Morgan: Okay. Thank you.
Commissioner Eyerly: I want to take you to Pages 60 and 64 in the final
report. While we have been talking to you experts, we have had a lot of
discussion at the commission level on transfers of money, the amount to
the General Fund, and methods of financing our infrastructure. Your
comments on Page 60 qualify everything you have said by saying that it
is outside your scope of study. Yet you make remarks about the highest
months among panel members, highest by a factor of two, highest among
panel, higher than next panel member by 20%, and upon tur~ing to Page
64, Infrastructure Financing, Method compared against other panel member
systems, Evaluate infrastructure financing approach, etc. All that says
to me is that you have not done all of your work. You say it is outside
of your scope, so why do you even bring it up if it is. You have looked
at these other panels, and you certainly have something to compare with
as to how they finance their infrastructure, whether by bonds or by
cash, etc. I am disappointed with what you have put in these
Mintues UAC:10/02/96
Final Page 11
recommendations here in this final report on the water utility. I don’t
know if you can correct it, but I don’t think you have done all of your
work.
Mr. Resh: As far as analysis of those issues, it was certainly outside
the scope of our assignment. We were specifically told that it was not
an area that we were supposed to be studying. The fact that we observed
these things and pointed them out was an attempt to provide you with
some value from observations. Doing an analysis of those areas was
something that was not within our scope. They are just things we have
observed.
Commissioner Eyerly: Then I would question why you would include them
in if they were outside the scope of work.
Mr. Resh: We thought it would be helpful if we made the observations
that that was what we saw.
Commissioner Eyerly: When you do that, from our standpoint and from the
standpoint of the City Council, they look at it and then wonder, just as
I have, why you included it if you do not have anything to back up what
you have said. I think it would have been better to have left it out.
Commissioner Gruen: Let me follow up on that. Is there a section here
where you have some data on how other cities do it? Is there backup to
that?
Mr. Morqan: Not specifically for that. We did ask about that in the
questioranaires and got some response. We do not. have a graph of that,
but there were a couple of other issues that he brought up. One was the
rate of return. There is a graph on that. It shows that Palo Alto is
the highest of General Fund transfers.
Chairman Johnston: While you are on that topic, with most of these
parameters, you tend to show multiple different ways. When you have a
parameter like -employees, for example, you do it per customer, per
revenue, per unit of water, per a whole lot of other things. The
General Fund transfer is different from that. Unless I am incorrect,
the only chart on that in the packet is G-20, the very last page of the
document. It is shown per customer, so we do not have one that, for
example, is shown as a portion of revenue or as a portion of the ~mount
of water or anything else. There is a reason why you tend to show these
parameters in different ways, because depending upon the utility, you
can look at it in different ways. I feel like we are a little overly
constrained here. We only got it one way.
Mintues UAC:10/02/96
Final Page 12
Mr Morqan: I was going both ways as to how much to get into this,
since we were asked not to. On the other hand, it was my feeling, which
~I can express now, that Palo Alto has a rather high rate of return for
a municipality when compared to other municipalities, according to both
my experience and also the panel members. That is why, as Tom has
pointed out, it is simply presented as an indication to you. I
presented this in a way that I thought would be informative, that is,
per customer.But you are quite correct, we could have put it in
another form.
Chairman Johnston:
around.
Obviously, you have the data, ~so you could flip it
Mr. Morgan: Yes, we could put it into another parameter form.
Chairman Johnston: I feel this is a perfectly good one, but it just
that it is only in the one form.
While we are on that chart, it puzzled me a little because there was
Palo Alto and eight other utilities. At the very beginning of the book,
there was only Palo Alto and seven other utilities. I was curious as to
what was the new utility that sneaked in here.
Mr. Morgan: What happened there was that we originally started with
eight. One of the utilities here in the bay area promised us all along
that they would participate in the study, and at the last minute, they
simply indicated to us that they could not. I will get it out of there.
Chairman Johnston: So that is one of. the N/A’s, I assume.
Mr. MorGan: Actually, it would not be in there. The N/A is a situation
where we have data, but the utility chose not to answer the question.
On the left, where you have Nos. 5 and 8, particularly with this General
Fund transfer per customer, the utility indicated that they did not have
General Fund transfers, so that is a zero. On the right, we have N/A’s
where the utility did not provide that information.
Chairman Johnston: That I understand, but I thought you just said that
one of the utilities that is in here was one from which you did not
receive data, so you had to remove it.
Mr. Morgan: Right. That is why that must be looked at. I don’t know
the answer to why #8 shows zero. There should not be eight.There
should only be seven.
Chairman Johnston:So #8 does not belong.
Mintues UAC:10/02/96
Final Page 13
Mr. Morgan: That is correct.
Chairman Johnston: That was the clarification I needed.
Commissioner Gruen: Now I am confused, because as I flip through the
pages, it seems that Utility #7 is the one that is not answering your
questions, yet #7 is shown as an N/A here. In just flipping through the
pages, that seems to be the one where you do not have information.
Mr. Morqan: What I think happened is that #7 was the place marker, and
#7 gave us data. Then when #7 did not come through, we took that out.
I will correct that. You are looking at the right bar graphs, but #7
and #8 may be interchanged in a wrong way.
Chairman Johnston: Okay. It sounds as though there are a couple of
things here, and in the final-fina!, obviously you are going to clean
those up.
Mr. Morgan: Absolutely.
Chairman Johnston: So it may not be unreasonable to request that when
you are cleaning up these things (since I assume you have the data), you
might give us the General Fund in a couple of other different ways.
Mr. Morgan: Okay.
Chairman Johnston:
revenue.
I would suggest by unit of water and by unit of
Commissioner Chandler: I would like to add a couple of comments on the
water. In reviewing this report over the last few days and in reviewing
the minutes of last month’s meeting which I could not attend, I tried to
think about what is the value-add that I can provide and that we can we
provide. In following up on this, I feel that the value-add would be to
make sure that we have a program that everyone buys into as being steps
that we can use to improve the organizational efficiency of our
utilities. That is why I think we separated our meeting in order to
have the opportunity for staff comments in the meantime. If staff had
some disagreements in some areas, those could be reconciled and we would
not just be left with an argument at the end of the day. What I would
like to see out of this is a program to track how we are doing on
implementing improvements that are going to provide the biggest return
the soonest. I think that is where the energy should obviously be put.
I want to reemphasize what I think Rich and Pau! were saying, which is
Mintues UAC:10/02/96
Final Page 14
that when I read these recommendations, there are almost none of them
that I could not have written myself without knowing anything about the
City’s water utility. They are al! sort of good advice for anybody that
is running anyorganization at all. I would disagree a little with
Fred, referring to its being outside of the scope of study on the gross
revenues. It says, "Both measures highest among panel may be a function
of high rate of return and General Fund transfers. Also may be due to
extensive capital improvements." The comment was, ~Although outside the
scope of study, evaluate method and level ~of assessing rate of return."
It seems to me that we know we should assess the rate of return and
General Fund transfers. That is something thatwas not part of the
study, as you correctly note. But what should be a part of the study is
to determine whether it is or is not a result of the extensive capital
improvements. If the answer is that it is, then the whole issue of
reviewing the transfers, etc., become~ a little less pressing. I just
don’t see anything coming in the recommendations that I could follow up
upon and say, Ed, I want you to go ahead and do that.
Mr. Resh: To fully answer that question, we would have to do a detailed
study of General Fund transfers, because there are components of it.
Commissioner Chandler: No, I am saying that there could have been a
study of the effect of how extensive the capital improvements are to
determine the degree to which that was the implicating factor in the
level of revenues per thousand gallons of delivered being highest in the
panel. That is the type of hands-on metric that you guys should be able
to get your arms around.
Mr. Morgan: But it still seems to me that you need to do a cost-of-
service study and an entire rate study. I think your staff is now
performing that function. They have been getting some of the panel data
from us that we shared from these cities to actually do some of the
work.
Commissioner Chandler: Maybe they want to do that and maybe they do
not. What I would be interested in knowing is, are the extensive
capital improvements, is the source of this relative to the other
members of the pane!? You have that information because you know who
the other panel members are. You can make that kind of an assessment.
This whole issue of the Genera! Fund transfers and rates is outside of
the scope of the study, and I do not really expect information on that.
Commissioner Gruen: Let me try another way of saying the same thing.
You talk about the average age of the system. You could tell us how our
maintenance expenses compare to average age. In .other words, try to
normalize it by age, telling us whether higher age generates some amount
Mintues UAC:10/02/96
Final Page 15
of additional expenses. That could be a graph you could give us with
existing data, and that would be a way of trying to answer the question,
are our maintenance expenses abnormally higher, given our older pipe, if
you will. Obviously, you are not the ones to say, this is the right or
the wrong financial way of accounting for this, but I think you could do
something with the data that you have.
Mr. Oechsler: If I could comment, I encountered the same issue with the
natural gas utility. One of the problems we had in trying to be more
specific as to what extent the CIP program does contribute to a rate
issue is that as a general proposition, if you had none or fewer
investments and you were covering fewer capital expenditures in your
revenue requirement, it would be lower. There is no doubt about that.
But how does one assess what is its contribution to the rate disparity?
You could zero it out and see what the rates would be, but then again,
you have a cost allocation question in that matter, so what we are
saying here is that to become specific about the relationship between a
particular program and a measurable observation of rate and cost levels
is not that easy. There are many factors that are a part of the revenue
requirement.
Commissioner Gruen: That’s right.
Mr. Oechsler: Yes, one would like to look at this in a variety of
different ways, but then understand that every time you look at
something like that, the chart shows up relationships that are not
clear. !n many instances, you do a correlation of maintenance expenses
with age, as you noted earlier, but age differentials are not that
great, so you may not see a trend there. It continues to.go down that,
and I know from observations of a priDr~st~dy with the study that the
CIP program is a significant part of the revenue requirement for the
non-core transportation rate, but I know of that from a previous piece
of research, having worked with the City previously. I understand,
having gone through that study, that that was a complicated exercise.
So what I am trying to do is to make a general observation here that to
go into much further detail in any of these specific factors is an issue
that involves a lot of work.
Commissioner Chandler: I know there is a lot of work involved, but I
tended to feel that at the end of the water section, I was trying to
hold water in mY hand with my fingers spread apart. I just didn’t feel
that I was left with anything that was useful by way of a set of
recommendations for staff to do something that can address perceived
shortcomings relative to other utilities that we were looking at. I
concur that in the electric area, there were a lot of good
recommendations, although there was one thing that came up in the water
Mintues UAC:I 0/02/96
Final Page 16
recommendations that was also in the electric that was a tease, in a
way. It said, "Review requirements on contractors that could raise
costs unnecessarily." That is the type of area where some specifiCity
that said, "Most utilities do not require their contractors to do X, Y
and Z and you do," that is the kind of specific thing to go and look at.
Otherwise, there is no benchmark for us to ask, "Do we have extra
requirements that others do not need to have? Are we goldplating
things?" That is an example of an area where more specificity would
have been very helpful, and would have been helpful in the electric,
although I do not want to criticize that. We are not talking about
that, plus the reconunendations there on the w~ole were much more
specific.
Chairman Johnston: Part of the reason we may be having such difficulty
on this is that we did discuss this at the last meeting, wherein I made
a specific request, and it was geared toward the capital improvement
program, asking whether or not you anticipated that the recommendations
you ca~e back with in the final report would be more specific, or would
be specific with regard to the fact that we know that our capital
improvement program is aggressive here. We know our rates are high
here. We had specifically asked if you could give us some feel for
whether that is the reason why, or is it 80% why, giving us some feel
for why that is. Your response to that was, and I quote, ~That is a
fair request." That is on Page 15 of the minutes. So there is a bit of
a disparity between the level we were anticipating in this area and what
has come back. But rather than beating on that any further, what I
would like to do, just quickly before we get off water and wastewater
(and we really have spoken only about water), I would like everyone to
focus on Page 59, on the issues~ tahule .... and just.quickly tick off down
through each of the recommendations to see if there is anything that
anybody wants to know. There are only a few pages, and I want to make
sure about it. I would like to go through this methodically, taking
that Page 59, and see if anyone wants any clarification with regard to
the recommendations that appear there.
Commissioner Chandler: On Water System Maintenance, are we all clear as
to what are the best industry practices that need to be compared
against? Or is that something we were hoping was one of the things that
was being done in this study?
Commissioner Gruen: Maybe here is the case where I say, which of the
graphs should we be looking at to go with this recommendation?
Mr. Morgan: Well, there is a series of them.
E-8, those primarily.
In Section E, E-6, E-7,
Mintues UAC:10/02/96
Final Page ! 7
Chairman Johnston: As I understand
specific observation that you have,
corrective, not preventive.
it, it is mostly geared to a
which is that maintenance is
Mr. Morgan: That is correct. Without question.
Chairman Johnston: So by and large, that is where we are, and that is
a concern we ought to focus upon..
Mr. Morgan: That is correct.
Commissioner Gruen: I could look at the next page, E-9, and say, we are
using too much automation.
Mr. Morgan: I would say that you were completely state of the art with
automation. I was impressed with the level of automation.
Chairman Johnston: Moving on to Page 60, we have talked about some of
the issues here already, but is there anything further? (None) Page
61? Here it is that last recommendation that I~talked about before. It
seemed as though you had an issue and the recommendation did not quite
match it. You have given us a lot of explanation as to why that might
be. Page 63, "Issues Associated with Wastewater." Any comments?
Commissioner Eyerly: I would ask about the %ast item on Page 63, sewer
stoppages, which is the highest in the panel. It says, "Continue
priority on replacing older sewers and laterals." Within what you have
studied and the data you have collected, should we be doing more of
that, spending more money per~ year_~than.~ we are? ¯ It says to just
continue. What does that mean, since we are the highest in the panel?
Mr. Morgan: Again, staff keeps data on stoppages, and it indicates that
it is going down. You are starting to make progress on that issue.
Commissioner Eyerly: Do you think you ought to include that someplace,
along.with your issues, so that someone who does not hear you say that
would understand?
Mr. Morgan: I can do that.
Chairman Johnston: Anything on page 64? (None) On Page 65, the first
item is one that Mark talked about earlier: "Reconsider City
requirements imposed on contractors that tend to increase costs." I
very much agree. If there are some that you have identified, it would
be really helpfu! to get them on the table, if there are any.
Mintues UAC:10/02/96
Final Page 18
Mr. Morgan: There was nothing in the questionnaires that indicated
that. This partly is a response to your staff’s knowledge of City
requirements and also of the surrounding area. They felt that this was
the case. I can ask them to be more specific and try to get more
information on this.
Commissioner Chandler: What level of staff was it that provided this
information? Why have they not told management sO that we could get it
fixed directly? What is going on there?
Mr. Morgan: Do you want me to identify who it was?
Commissioner Chandler: No, you do not need to do that.
Mr. Morgan: It was at the management level of both the wastewater and
the water departments. Specifically, it was Roger Jensen and Roger
Cwiak who indicated that to be the case. Larry Starr also was a part of
that meeting, and he-indicated that to me, as wel!. All of these
results were discussed with staff. That was their consensus of some of
this reasoning.
Mr. Szybalski: But I feel that your observation is a fair one.
probably could have listed those and have been more specific.
We
Commissioner Chandler: I would like to sea if there is some consensus
on this, but what I would like to be able to do with this is to have a
system. You did that in some of the other areas where you specifically
said how much it is going to cost to implement this recommendation, and
how much it is going to save, and what the break-even period is, etc.
That is great. It helps us to prioritize. It tells us exactly what to
do. I just did not see anything in this section that would let us do
that. As a commission, I feel that is one of the things we can do best
is to provide that sort of forest level oversight of the utilities
department, keeping a focus on some issues that can get lost in the day
to day rush and hustle and bustle. Longer-term goals can be pursued in
a disciplined way, which I think our utility generally does, but this
study is a great opportunity to take a look at some new issues and
identify them. Do we want to ask that, as a part of the final report,
we get a much more specific set of recommendations,or are we
comfortable with this overall approach that we have here?
Mr. Szybalski: Some of the questions you ask are very intellectually
challenging in terms of being able to ask ~What if we took out
infrastructure replacement costs from all of these numbers, what would
you look like?" The problem is that once you take that out, you have to
say, yes, but the reason you have an infrastructure replacement program
Mintues UAC: 10/02/96
Final Page 19
is because you have these high maintenance costs with a lot of leaks.
So then you would have to go back and put the staffing level back up to
take that into account. Actually, I think both of those things would be
worthwhile to look at and worthwhile to do.
The other concern I would have is that it is a fairly well marbled
organization. That is one of the places where you will see some other
recommendations later on, where we talk about trying to take apart your
utility in certain ways. It is the water that is the most well marbled
with the gas curves. You are doing gas, and then you go to water, and
you go to gas. You may even go to wastewater but not return. There are
some sanitary concerns in between. I will wait for your deliberation.
I will not commit our team to that at this point, but just to say, once
you start down that path, it becomes pretty hard to tear those things
apart in a way that tells you exactly what is happening.
Chairman Johnston: My comment on that is, in some cases that is
probably true, but in the specific example that we were most recently
using, that almost seems to be clearly not the case. It puts us one
step closer if we have a way of essentially figuring out what these
issues are. There are reasons, for example, where our City might impose
on contractors that they cannot work before 8 a.m. or cannot work after
6 p.m because the residents do not want to be disturbed. It might be
something that even though it might cost us more, the City might choose
to do it. But there are all kinds of others, and without knowing what
the issues are, we are left with saying, where do we begin, except by
going back and saying, let’s review all of these things. I think we
were hoping that when you sat down with staff and they listed some of
the things they thought were examples~._of.~why, it.was, higher here, that
you, with your knowledge of other municipalities, would be able to say
to us, staff has given us five reasons why they think it is high, but in
point of fact, three of them are just fine because everyone has to do it
that way, or whatever, and these other two you really ought to address.
We do not feel that we got that. Our City manager wishes to say
something.
Ms. Fleming: I don’t know if I am going to confuse this or help you.
I certainly do not want to interfere with the line you are on, but I
thought it may help if I put into a little perspective what will happen
with this report when you finish with it. When we started down this
path, I certainly had in mind the fact that we had just gone through an
entire organizational study for the rest of the City. I felt that it
was an appropriate thing to also have happen for the utilities. I have
come to appreciate and understand the fact that it is a more in-depth,
different kind of study that you get into when you are involved in the
utilities operation than when you are involved in the General Fund
Mintues UAC:I 0/02/96
Final Page 20
operation. But in a way, you are really getting a dual benefit here.
The basic intent that I had set out to achieve was to find Out if the
utilities were organized properly, and that was it. We expanded that
scope a bit, but we did not get into many of the areas that you are
mentioning here. What I have seen so far of the report causes me to
want to try and put it in perspective for you. There are areas raised
here where there is just not enough information to go anywhere with it,
except to say, there is a red flag and you need to do more work. At
least in one of those areas, I have told you that I a~n committed to
including it in the next budget cycle, the area we got into in a
discussion with you here as a result of the information in this study.
I do not find myself too discouraged by some lack of depth of detail
because it is basically an organizational review. It will go to the
City Council, and it is my intent to recommend that we handle it the way
in which we have handled all other such studies. You will comment on it
as you see fit, and I am sure that it will be extensive and in detail,
and we will appreciate it. It will then be returned to me for staff,
and at that point, it will take time, a great deal of time. We will go
through the study, through each piece of it, and come back with our own
staff recommendation to Council as to what they will do. So the
document, as you see it and as you forward it to Council, will be the
document that is this consultant’s report, which will be returned to me,
which will be my recommendation, and then~ we will take that and go
through it piece by piece, item by item. We will then come back with a
recommendation to Council as we did with the organizational review. The
more information we have here, the better we are going to be able to
respond to the pieces that. ar~there... As:I see it now,. I envision that
we will not only get into organizational issues, but also some
operational issues. So the fact that you do not see some of the depth
you want here may well mean that when we get it back at staff, we will
have to go and delve for those answers to be able to know (a) how to
organize and (b) how to respond to the deficiencies or suggestions that
are there. I wanted to put in perspective the path that we wil! go
down.
While I have the microphone, I want to thank you for the energy and
effort that you are putting into this. You will certainly make our task
easier when the document does come to us.
Chairman Johnston: I appreciate your comments.
Commissioner Gruen: I have two questions on the wastewater
benchmarking. On Graph F-II, I did not get a lot of information out of
that graph. There were not a lot of people who responded. As far as I
Mintues UAC: 10/02/96
Final Page 21
am concerned, you do not have to show that if you have nothing to say.
Mr. Morqan: I have different graphs. I believe that graph had no data
at all? (Yes) We took care of that. I apologize for that.
Commissioner Gruen: On Page F-14, you talk about General Fund transfers
per customer. Do I misunderstand? Are we al!owed to have a General
Fund transfer on wastewater?
Mr. Morgan:
illegal.
I got responses from at least one City that told me it was
Commissioner Gruen: Yet I see two cities that tell us how much.
Mr. Morqan: I know, and I cannot respond to that.
Chairman Johnston: We have been told that it is not legal, so that is
our understanding, as well.
Mr. Morgan: I guess nobody told the other cities!
Chairman Johnston: Unless there are other comments, we can let you go
and move on to the other sections. Thank you for coming.
We have quite a bit of ground to cover here$ One way to proceed is to
go directly to the issues section and go through the specific
recommendations. Does that seem appropriate?
Commissioner Eyerly: That_is probably° a. good idea, but before you do
that, I would like to inquire about Appendix G, Updated Competitive
Assessments, and get into the electric utility with a statement.
Perhaps they can answer, and then we can go on with your procedure.
You have not addressed AB 1890 which has been signed by the governor and
which is a very integral part of planning for our electric utility. It
hardly seems to me that this report can go forward for people to read
with a date on it which is after that has occurred without you people
addressing that. The staff has worked up in the material we have
tonight a very detailed restune of what has happened and what we need to
do. I would think that if you did nothing more, you would take that and
add it to your report so that you would have something that when it goes
out, it addresses AB 1890. I would like your comments.
Mr. Oechsler: This reminds me of something, if I could make a personal
reference. When I was getting my Ph.D., my advisor said you should
always include a cutoff date so that if you are writing your
Mintues UAC: 10/02/96
Final Page 22
dissertation and the political system collapses the next day, when you
are defending your dissertation, you do not want to have to respond to
that. That is essentially what has transpired here. We had submitted
this material, and the legislature did what some people did not expect
it to do -- actually produced a bill.
My competitive assessment was focused on the broad positioning of Palo
Alto’s electric utility. My understanding was basically what the
Utilities Advisory Commission wanted, rather than a detailed going
through of the Phase 1 report, or even an updating of specific sections
of that. In my judgment, the overall most important facts to consider
really have not changed in light of AB 1890. There is no question that
we are going to enter a competitive electric market. AB 1890 does not
mandate, but it creates a situation in which customers of many other
utilities in California, and certainly the investor-owned utilities, are
going to have their choice of their generation supplier. There will be
an issue of stranded costs related to that. So what I focused on was as
a business competing for your customers, among a number of factors, two
are very important. One is the generation cost and the distribution
cost. In the past, you have had an advantage, a very significant one,
in the generation cost area. For reasons noted in the report, there is
a potential that that traditional advantage will certainly narrow, and
may disappear. That will focus competition on your distribution cost
and your ability to deliver the product to the customer at its meter in
the most competitive manner and at a dompetitive price. Those
conclusions really have not been changed by AB 1890. It talks about
governance of the independent system operator, etc., and also some
issues relating to transmission access charges, but at this broad level,
what are the ingredients for competition?.. It does not change that. So
my response respectfully would be that as I construed the competitive
assessment, AB 1890 has a lot of implementation type details, has a lot
of decision-making type of details, has a lot of other impacts, but it
does not really affect the ingredients for success.
Commissioner Eyerly:
do not agree.
I will not debate it any further with you, but I
Commissioner Gruen: I would comment, as you probably heard earlier, on
the one piece of data that is in this Appendix G. The one piece of
data, the one graph, is a comparison of non-generation costs between
PG&E and us. The non-generation costs are transmission and
distribution. Transmission is not something we do. We do distribution
within the City; we buy transmission. Somehow,we have to know how our
distribution compares to other people’s distribution. That is the area
which we can control and the area on which we have to work. This graph
doesn’t cut it. This graph specifically hides that information from us.
Mintues UAC: 10/02/96
Final Page 23
Is there someplace that does tell me about distribution rather than
distribution-transmission?
Mr. Szybalski: Yes, in the electric bench_marking results, which I
believe is in Appendix A. There is almost everything you want to know
about distribution. I will point out, and we have had a !ot of
discussion, that the distribution is only about one penny. So what you
see is a representative graph that says there is a !ot of A&G, there is
a lot of customer service, there is a lot of other things in there
besides transmission. So I think that graph really does include a lot
of the kinds of things that are important, not just transmission. If
you just look at the distribution penny, the graph does look a little
different, as you point out. You do not have an advantage in
distribution.
Commissioner Gruen: I guess what I aza asking is, how about Palo Alto’s
expenses versus the non-Palo Alto expenses. I know we buy some stuff
outside, like transmission. PG&E provides transmission and distribution
themselves and I agree that A&G is something which ought to be there.
I would like to see A&G. I would like to see distribution. I would
like to see all of the costs that we are going to have to pass on to a
potential competitive customer, and see how that compares to what PG&E
would have to pass on to a potentia! competitive customer.In other
words, are we in line there?
Mr. Szybalski: Again, that is an excellent question..
linked from our piece studies to this overall graph.
We have not
Mr. Oechsler: My response would bed-that the complexity of unbundling a
bundled product, which is what we are talking about here, are very
sizeable. Even in the determination of the leve! of what is being
represented here for Palo Alto, you have a choice of whether you are
talking about the revenues or whether you are talking about what is the
role of the fund transfers in that so that you can make a decision as to
whether you are going to include the fund transfers or not. I spoke
with the manager of rates, and we worked our way to this being a
reasonable representation of Palo Alto, the 2.7¢. Your City is
undergoing an electric cost-of-service study which would be needed to
unbundle those components. It is just not that easy to do. This is a
slippery slope, and that is why people are unbundling their rates. It
is because they are entwined. You cannot separate them that easily, so
again, I stand behind this basic point I am trying to make in this
graph. If you take a point in time and say, this is our rate now, this
is what it has been, compared with the investor-owned utilities, you
will see Palo Alto at a substantial advantage. What I have done here is
to say, if you take out the generation part of it, this is the advantage
Mintues UAC: 10/02/96
Final Page 24
in the non-generation end of the business, which we certainly can talk
about with more certainty than if we started unbundling it. This was
the second step of the argument, which is, if historically a generation
cost advantage has been greatly in your favor, in the future, if that
goes away and nothing else changes (which I know is a very great
simplification), this is what it would look like. I thought that it
would be valuable to have that general image in mind that Palo Alto does
not have another 50% advantage in the non-generation end to count on.
That is the broad message that I felt was important to make in this
competitive assessment as it was conducted.
Con~nissioner Gruen: I certainly do not want to disagree with you about
its being difficult. I think we recognized that it was difficult. I
think we recognized that it included all of these factors. What we had
hoped was that you could provide some comparison for the individual
pieces rather than just saying, "anything other than generation."
Mr. Resh: But again, I think what Ron is saying, and what I will
underscore, is that you are really talking about an unbundling rate
study, which is way beyond the scope of what we were asked to do. It is
a very complex issue, whether it is with this utility or with
comparative data with other utilities. There are a lot of other
utilities that are faced with the same problem. They are starting to do
unbundling studies. There is not a lot who have actually done them.
Ron provided some information here that we feel is the right
perspective. It is to say that you have enjoyed a very strong
competitive advantage because of your low purchase power cost. That has
been excellent. In the future, that part of the playing field is going
to be leveled. All that this underscores is that for the rest of the
equation, you do not enjoy a significant advantage.
Chairman Johnston: Before getting back to the final report, since we
have asked a couple of things on this competitive assessment, there is
one area where, unlike some other areas that you say are beyond the
scope, you make some very definitive statements, and I want to make sure
you have done the work to justify those definitive statements. You say,
~limited exposure to stranded costs." Then you say, "The City Council
has approved a reserve fund policy to cover the largest portion of
stranded costs." Does that mean that you have determined what our
stranded costs are, and you have reached the determination that we have,
in fact, funded the largest portion of that? Or is it rather that you
have been told by staff that we have an active progra!n to deal with
that? Or whatever?
Mr. Oechsler: Based on my own reading of the staff report on the
reserve policy, particularly in light of the action that was taken last
Mintues UAC:10/02/96
Final Page 25
year, this is what is meant in this statement. SpecificallY, the
statement is that the City Council is aware of the issue and is taking
steps to address it. It does not quantitatively measure whether the
reserve measure is appropriate, whether it was based on the right
scenario of market conditions. The statement that I wanted to make was
that the City was aware of it at its highest policy level, and is taking
steps to deal with it. That is a very positive statement, because many
people are only .beginning to grapple with the question. That is how
that statement should be interpreted. It is not an assessment of
relative effort or whether the foundation for it is appropriate or
whether you do not need to go any further. I do understand that that is
another subject that is being studied at this point.
Chairman Johnston: I would then suggest that you rewrite this
paragraph. What you just explained to me I would absolutely agree with.
The City Council is aware of it and that we have taken some steps to
deal with this already, that it is still under review, etc. But this
paragraph can be used to interpret that you have, in fact, determined
that we have dealt with the largest portion of that. We may have. We
may not have. It sounds like you have not really done a study of it,
and I would agree that it is beyond your scope to determine that. I
don’t think, from your explanation of what you have written here, that is
actually what you really mean.
Mr. Oechsler: That is correct. As written, it does imply a level of
analysis, judgment, and a conclusion that is not supported by the work
that I did.
Chairman Johnston: So if .yQu~would~ ~ust~ take a look at that, I am
completely comfortable with your explanation, but if you would just get
that worded, I think that would be helpful.Can we now return to the
final report and start dealing with issues?
Commissioner Chandler: I think that is a great way to proceed. I
missed the September meeting, but in the August meeting, I recall that
one of the things we wanted to do (which I alluded to) was to get staff
comments in the meantime. Was that dropped from the program?
Mr. Mrizek: The staff comments, as City Manager June Fleming has
indicated, is that this is a report from a consultant to the UAC and on
to the Council. Once it has been received by the Council, the Council
will return the report to the City manager. At that time, during our
analysis, that is when we will comment on the recommendations and return
those recommendations to the Council.
Commissioner Chandler:Did the manager instruct you not to make the
Mint ues UAC: 10/02/96
Final Page 26
comments?
Mr. Mrizek: What we have indicated to the Chair, Paul Johnston, is that
our comments will be that we have previewed the report with the
consultant. We understand what they are saying. We appreciate all the
time they have put forth in spending time with us so that we are able to
understand what they are saying. That is basically what we want to say
at this point.
Commissioner Chandler: I thought we had asked quite specifically in
August to get staff comments so that while the consultant is here, we
could understand whether there were areas where staff disagreed with the
recommendations so that we could understand where the consultants were
coming from. If a decision has been made not to do that, I would just
as soon have that out and know that we are not going to do that.
Chairman Johnston: What Ed has indicated is correct. He did talk with
me about the procedure. As the City manager has explained, this is by
no means near the end of the process. There is going to be a fair
amount of work done in some cases to try and address these more
specifically. For that reason, the complete review was not going to be
done by staff at this time. As I see it, where we sit now, the best job
we can do is to make sure that independently, we really do understand
the recommendations that have been made by the consultant, the basis for
them and their scope so that after staff ~as had a chance to finally
evaluate this and comes forward with recommendations that would come
through us and ultimately go to the City Council, we would be in the
position of having the background and the knowledge from the consultants
to be able to critique, evaluate, agree, disagree, whatever, with those
recommendations. As I understand it, from staff’s standpoint, the
process is that we want to get through this report, and then staff is
going to take some time to review that. Let me ask the City manager to
comment on that.
Commissioner Chandler: I have no problem with her comments a few
minutes ago about the process that would be taken afterwards. I was
just surprised that this was different from the direction that we had
discussed in August.
Mr. Mrizek: Perhaps I misspoke at the August meeting and may have
misled you in some of my comments. I wanted to clarify that, and that
is why I had conversations with Chairman Johnston to clarify when our
comments will be forthcoming.
Chairman Johnston: I think the game plan did get changed a little after
that meeting. I was made aware of that change, and I probably should
Mintues UAC: 10/02/96
Final Page 27
have communicated that to the members of this panel. I personally a!n
quite comfortable with the process being this way. I agree with you,
Mark, that it is different from what we talked about, but I personally
think it is a very workable way to go.
Commissioner Chandler: That is fine. I just wanted to get some
clarification.
Ms. Fleming: I feel that Chairman Johnston has done a suburb job. I
could not make it any clearer than you have. The role that staff plays
when these tasks are being done is that we stay out of it. That is the
advantage of having this con%mission. You are an independent body; you
are looking at it with a clean, clear eye. The consultants have to come
to us to get information. If we see gross errors, misstatements, things
of that sort, then we certainly tell them, but we do not pursue them to
make sure that they correct it, but we will bring those kinds of errors
to their attention. We do not get involved in it except to be there and
give information. Then you give the kind of scrutiny that Chairman
Johnston has just articulated very well. We are clean. Staff’s hands
are out of it. We get the consultants’ work and we get the great
benefit of what you have been able to do. Then it comes back to us.
Now you have it, Chairman Johnston, and perhaps we were not clear in the
beginning. If not, I apologize for that.
Commissioner Chandler: Based on the consultants’ statements over the
months, it does sound like you, at least, have been very directly
involved in terms of direction, but the larger point I would like to
draw from what you have said, then, is that we can assume that this does
reflect any correction o£ any-grosserroTs oT-cunissions or mistakes that
staff found so that this document, at least from staff’s standpoint, is
clean of gross errors and omissions.
Ms. Fleming: That is true. I want to be clear about what my
involvement has been. I have met with Tom Resh just as a kind of status
update, where are you, or where are you going, what do you see. I have
had absolutely zero impact on anything that they have put into this
report. Out of my duty and responsibility as manager, I have talked to
him about being on target, are they doing what we are finally going to
pay them for, what is the time schedule, etc. That is really it. If I
had gone any further, I am sure Chairman Johnston would have called it
to my attention.
Chairman Johnston: Then let us go to the final report.
Mr. Resh: Could we make a suggestion as to how we might facilitate
going through this? We know there is a tremendous amount of information
Mintues UAC: 10/02/96
Final Page 28
here.
Chairman Johnston: Please do.
Mr. Resh: The suggestion I would make is that instead of going to the
final report, that you go to the Executive Summary and begin on Page i0
where we have brought forward what we felt were the eleven most
important recommendations. After we have had a chance to go through
those, that we then go to ~Appendix I where we have all 39
recommendations that follow on.We would already be through the first
eleven, and pick up from there.
Commissioner Sahagian: I would like to make a general comment before
launching into this. I thought that the recommendations and the focus
in the T&D area, which is clearly going to be the area that is going to
be relegated to the highest degree of competition, was very pointed and
focused, and the recommendations were very clear. I felt that the
recommendations, in general, in terms of how our marketing focus should
be oriented within customer groups, was also reasonably good,
recognizing that the bigger targets are clearly going to be the ones
that are going to be in play the earliest. I do not entirely agree with
Fred’s comment about the deregulation legislation needing to be fully
embraced in here. I will take your comment that this was developed
before the ink was dry on that. However, the potential outcome of that
deregulation legislation was pretty clearly defined probably as early as
two or three meetings ago in terms of choice with respect to munis
keeping their captive customer base or not. I felt that, given the
importance of this aspect of restructuring, it really was pretty lightly
addressed in your competitive assessment’~sect~on,¯ I thought you could
have gone into a little more depth about the pros and the cons of our
opening up our markets here, letting our customers come into play versus
trying to keep the markets closed. I think that potential issue had
been tabled far enough in advance so that I would like to have seen it
addressed a little more in here. That is a very important decision
point that the City is going to have to deal with pretty early on.
Admittedly, it is a big piece of an unbundling study in making an
overall assessment of the market, but I would like to have seen a little
more focus on that in here. I wanted to throw that out on the table.
I would like to follow your recommendation, Tom, in terms of going
through these recommendations. In that way, there are probably fewer
pages to flip through. Let’s start with the Executive Summary. Let’s
start on Page I0 with the text.Does anyone have questions on any of
the first four recommendations?
Commissioner Sahagian :
Mintues
Final
On Items 1 and 2,you give us some global
UAC: ] 0/02/96
Page 29
objectives in terms of what needs to be done in these particular areas.
Can you put them in somewhat more specific terms, relative to what is
currently being done and where the shortfalls are? There obviously are
some planning tools taking place and customer interface to evaluate
reliability needs. Have you looked at what is being done currently, and
can you give us some perspective as to where the programs are perhaps
nonexistent? Do they need to be bolstered up?
Mr. Szybalski: Yes, specifically on the business planning process, Tom
can get into some of the details of the planning process that we
propose. The couple of gaps that we see are (I) ciear business plans by
commodity. There is not a water business plan that would address some
of the issues you are talking about. How much can we spend? How much
should we spend? There certainly is a good budgeting process in place
in Palo Alto. I congratulate you on your budgeting process, but in
terms of planning the contingencies, where to spend money and sources of
revenue by commodity, we think that is a weakness. The second place is
probably the degree of participation. I attended a planning meeting of
a utility up north recently, and there were i00 people in the room,
sitting on various committees, to become much broader. They have a lot
of representation, a lot of study committees to bring planning up on a
regular basis in a much more open process. Here I think it is a little
bit of a dry exercise. It is a good plan, but it is a little dry. It
does not involve a lot of staff in it. Those would be my two particular
comments on the business planning process ~tself.
In terms of reliability needs, again, that is a fallout. In particular,
it probably should say, certainly the word "electric" in there is
noticeably missing. It really~is~_looking at projects from a business
point of view. The particular example I chose was a voltage conversion
project that particularly looks at residential customers who are less at
risk, who have pretty good reliability now, the business economic
justification of those projects compared to other projects you could
have on your plate. Those would be examples of the kinds of gaps we see
right now.
Mr. Resh: I would like to add to the reliability issue. This is an
issue that again is certainly a significant part of what utilities are
starting to look at in terms of how do I remain competitive, how do I
deal with different customer classes, what are the specific needs of
individual customers. What this really requires is doing some very
detailed customer research with looking at issues such as, are customers
willing to pay more for reliability. That is one of the fundamental
issues. You hear a lot of concerns when there is an outage, and we have
all suffered in California from the major outage a couple of months ago.
Mintues UAC:10/02/96
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The question comes down to, when I have a big high tech firm in my
customer base, are they willing to pay more for it? If so, how much?
How do I structure that? How do I ensure that reliability? What we
really are suggesting here is that that is the direction in which
information needs to be gathered. Historically, even when that type of
information has been gathered, it has tended to be done by, give me
information on industrials, give me information on commercials, give me
information on residentials, by customer class. Nowadays, we are
saying, particularly with your big customers, you have to get to the
individual customer and ask, what is an individual customer willing to
do? That is the direction we are recommending here.
Chairman Johnston: On that topic, this appeared elsewhere in more
detail, since this is a summary. There seemed to be two things that you
were saying, as I read this. One is that we need to understand more
about the issues of reliability, just as you have described. It also
seemed as though there was a suggestion in there that too much of our
resources may be going to the residential community in terms of
reliability and perhaps not focused enough on the commercial and
industrial. Am I reading that correctly?
Mr.Resh: Yes, you are.
Chairman Johnston: In terms of Recommendation #i, to clarify it a bit
more, I am not quite clear as to whethe~ you are saying that the
planning process you are looking for is something different from the
budget process, or that the budget process needs to be expanded more, or
is more inclusive? I am not sure whether you are looking for a separate
process.
Mr. Resh: It is different from the budget process, but it should be
tightly linked to the budget process so that the budget itself reflects
the strategic goals and business plans. There is one very excellent
document that was put together by the resource group within the utility.
We have touted it as an excellent example of what a particular
departmental business plan might look like. It captures strategic
direction, but it also gets into the specific goals and objectives for
that department. We would like to see that across the utility, and we
would also like to see it by commodity. It provides the guidance and
the goals and the directionby which you take action. What we saw
missing there was that type of document across the utility. Also what
we think this wil! do, and the reason why we are recommending the kind
of structure that we did in the appendix and what we refer to here is
that it puts it in place as a continuous process. It is .not something
that you do once every two years or once every three years, because in
Mintues UAC:I 0/02/96
Final Page 31
this changing enviror~ment, we now think that strategic~ planning,
particularly the pressures on the electric side of the business,
requires an ongoing process. Actually, the process we recommend has
eight specific meeting agendas that need to take place during the course
of the year where you address such things as external factors in one
meeting, where you look at financial scenarios, different initiatives in
other meetings. There is a whole set program that we are recommending
that you put in place.
Commissioner Gruen: I am going to talk about Recommendation #2. In
fact, I like your oral response to it a 10t better than your
recommendation in the report. Let me therefore talk about the
differences. You talk about customer classes in the recommendation,
whereas in talking to us now, you say we have to know about our big
customers, not just dividing it into industrial, commercial and
residential. I think you are absolutely right. We do have to know what
our big customers do and do not want. In your response tonight, you
said, we have to know what order of magnitude they are willing to pay to
get some of the things they want, but you do not mention that in your
report. I agree with you that it is absolutely crucial. When I was the
second biggest customer of another utility in the bay area, I was unable
to get their attention on the issue of reliability. We were certainly
willing to pay more, and did eventually pay more in setting up our own
mini-utility, because we could not buy the service we wanted. So asking
people what it is worth to them is a very g~ood sort of a question, and
I would like to see that~in your recommendation, as well. It was in
your discussion tonight, but it is not in the Executive Summary.
Next, I would like to see people-in the. utility think in terms of what
projects they might invent to achieve those goals, rather than just
looking at the projects we now have. I think our staff is very
creative, and presented with a marketing opportunity - someone wants
this sort of thing - our staff could say something like yes, we could
provide that but it would cost $3 million or whatever. So I would like
to see you identify explicitly that we look for projects that would
solve our customers problems, meeting, their needs, and that we include
those, if you will, in the IRP of possible projects for us to work on,
just as you are suggesting here that we ought to be evaluating the
projects in terms of their return, in terms of what our customers really
want. So would you reread this and then include your response, which is
excellent, into the report?
Commissioner Sahagian: I would like to return for a moment on
Recommendation #I and the issue, what is needed for success. I think
all of the other recommendations pale by comparison.I see them as a
Mintues UAC:10/02/96
Final Page 32
subset feeding up into this one. This sounds a lot like contemporarY
business management philosophy being applied to a municipal utility,
with strategic business unit managers that have cost center
responsibilities and responsibilities for setting the objectives and
goals and implementation plans. In a situation where you have a mix of
a number of utilities under one roof, have you seen the system work like
this? Is anyone organized in this way right now, effectively running?
How do you keep things nice and neat, because once you get below the top
level, it becomes a little like a matrix management scheme, I would
think, since a lot of the skill sets are going to be shared.
Mr. Resh: In terms of taking it to that level, I would agree that there
are some complexities when you have a fully integrated operation. But
in terms of looking at the business plans and objectives and goals by
commodity, we are trying to deal with that in essence almost !ooking at
it as though they were separate business ttnits. Frankly, some utilities
are moving to exactly that. They are moving to very distinct business
unit organizations where they have a generation business unit, a
transmission business unit, a distribution business unit, a customer
service business unit and beyond the meter services. That is a trend,
particularly with some of the investor-owned utilities where they are
basically single commodity focused. It is a little cleaner to do in
that environment.
This whole issue of ongoing strategic plar~n~ing is really just emerging
.in the industry. Even with the investor-owned, they have not done a lot
of this in the past. They have not done a lot of business unit
planning. We are doing a lot of work in this area right now. For a lot
of our clients, it is a first-time.-effort~~ ~ They-~have not thought this
way before, so it was easy for us to bring this in as a recommendation
because we are doing it all over the place. The actual implementation
of it in an integrated utility is going to add some complexity, but we
still think it needs to be done. This is fundamental business thinking,
starting to think more like a competitive business than a franchise
monopoly.
Commissioner Sahagian: Are there any other municipals right now that
you are aware of that are starting to move in this direction? Who is
leading the pack out there? I would be interested in finding out if
there is someone who has already embraced this approach. It is
undoubtedly a departure from the traditional, especially in the utility
business.
Mr. Resh: I defer to Tim on this with the City of Edmonton, but I
believe they are an example.
Mintues UAC:I 0/02/96
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Mr. Szybalski: You have some closer examples, but I have quite been
taken by a Canadian utility that recently created a utility out of their
electric department. The City of Edmonton created it as a standalone
company with one shareholder and did some significant business planning,
investing something like $20 million to $30 million in new business
systems. They did not use any of the City’s business systems, any of
the City’s planning .approaches, any of the City’s budgeting, and
developed their own from scratch. It is a good sized City, 750,000
population, and there is something a little different about the Canadian
environment that al!ows them to do things a little more radically. I
would not recommend it for a City this size, but that is a particular
example of the extreme that could be taken. They have actually taken
over the water utility now as a separate operating entity under a
separate business plan from the City and put it under the overall
structure. That is an example of the kind of thing that is happening.
Mr. Oechsler: Our firm is working with a number of municipal utilities
and joint action agencies across the United States. The approach that
is the most common is to do a strategic plan, which is in general terms,
just to look at what is your basic response to exogenous changes,
restructuring, things like that. A lot of it has to do with awareness
of those factors, looking into things that are potential threats and
opportunities. The concept of a business plan is a fairly new one, as
I have observed it. The words are sometimes mixed, but I think of a
business plan as having more to do with the ~evenue generating potential
of a business, making decisions based upon whether the revenues that
could be generated within a competitive context are sufficient to
support all of the activities that the enterprise is engaged in. That
has to do with things like~ tel±ability for a particular class of
customers. So I don’t think that the concept of business planning, as
I have described it, is as commonplace as I believe it will be in a
couple of years. But once you decide that you want to.be positioned
strategically correctly, the next question is, where is the money coming
from?
Commissioner Sahagian: Mr. Chairman, I would like to request that when
the utilities department comes up with their review and comments on the
.recommendations of the consultant, that this issue be given some real
focus. I feel that the strategic business unit focus is really going to
be very key to our maintaining our competitive position and some
compartmentalization and unbundling of our own businesses within the
utility structure so that we can look at them individually. I feel that
you have hit the nail right on the head with Recommendation #i as
regards what is going to be required in a global sense to be able to
stand up and move forward from here.
Mintues UAC:10/02/96
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Chairman Johnston: I would like to jump ahead to Recommendation #7,
which in some ways, I see related to this. Your recommendation is for
us to transition to essentially an energy utility and a water utility,
with the energy utility having electric and gas and the water utility
having water and wastewater. We have traditionally had it all in one,
but to the extent that there is a breakup currently, it is wires versus
pipes, and gas is pipes, so there tends to be more of a relationship
between gas, water and wastewater. In terms of an organizational
review, this is a very specific, direct, strong recommendation of
something that is different from what we are doing now. Can you
elaborate a little more on what would it really mean? I bring that out
in part because to some extent, with our major customers, we have been
moving toward sort of integrating everything, having key customer
contacts that take care of all of the problems for all of the utilities.
So could you comment a bit on what this would really mean to the utility
and why it is so important?
Mr. Resh: There are several different dimensions to this statement, as
you have correctly identified. One of the reasons why we have not
recon~nended that this be something that we undertake now, that needs to
happen as part of this study as a specific recommendation and let’s go
forward and break this up, is that the utility is functioning quite
efficiently right now in the integrated form. We feel that overall,
your customers are benefiting from that. They are benefiting from the
sy~%ergy, and obviously in providing thos~ services, there are some
synergies, hence a lower cost to the customers. So for the time being,
we have said that things are okay the way they are. If I was drawing a
Greenfield organization and setting up businesses and reflecting a
future, more competitive business world~ " I would be moving in this
direction to separate business units along energy lines and water lines.
The issues that come to play there are several. One is the different
intensity of the business lines. In one case, you are going to have
what could potentially be avery competitive, very fast moving, very
intense business segment in energy with, on the other hand, a much less
competitive, perhaps much slower moving environment on the water side.
We think that is a potential to create different demands on the level of
staff, on the skills and qualifications of the employees. We think
there is also an issue relative to if you are the service provider of
all of those entities, you do not want to be done at the expense of
another. What I mean by that is, let’s say that your customers are not
as happy with wastewater as they are with the electric service. Does
that mean that in order to satisfy that customer in order for you to
present the best picture in the electric utility, you need to make the
investment to bring them all up to the same level? We would offer at
Mintues UAC:10/02/96
Final Page 35
this point that that is not the right gauge. If you have a separate
business unit that your customers look at and say, this is my electric
and gas utility and it is first rate and the service is excellent, you
are spending the money in the right place, because that i~ where the
competition is and that is where the threats are for loss of revenue.
The rest of the business perhaps does not have to be at that same level
of excellence. We understood that there was one example of that here
when the utility was trying to find an off-the-shelf customer
information system, something that we believe is desperately needed and
is a critical component of future competitive success on the electric
and gas side of the business. They could not find a system that also
covered water and wastewater, and for that matter, other utilities, a
multiple system, so the decision was not to proceed with that. It was
decided to proceed in a different direction to deve!op a system in
house. As a result, that system is not done yet. Our understanding of
what happened was that that is why that decision was made.
One of the other concerns (and there is no evidence of this at this
point) that we would have in this makeup of business segments is that
because the electric fund is obviously the largest by a factor of almost
i0, that if one part of the business is subsidizing another part of the
business, it is probably the larger fund that subsidizes the smaller
fund. Again, we did not get into those specifics in this study, but we
would be concerned about that when one fund is the one that is going to
be competitive. So separating into business units where that is a
cleaner line precludes that from happening.
Commissioner Eyerly: I hear what you are saying, but I do not hear that
you have seen any real. evidence. You say that it could happen that
their largest utility might be subsidizing in the way of field personnel
or accounting, etc., but I don’t think that happens here. I think our
cost accounting, etc. pretty well separates the utilities. So I take a
little issue in trying to get the energy utilities to stand on their
own, because I think you are going to run up overall costs. This is a
small town, and the utilities overall are not large.
Mr. Resh: As I commented, we had not seen evidence of that, and that is
why I have actually put it at the end of my list. It is not the driving
factor here. We put it up as a red flag.
Commissioner Chandler: I see this as being related to the first
recommendation, so I would be interested in your comment on this. It
seems to me that even in another one of the recommendations (and may be
that it is incorporated in this) but even in Recommendation #7, ~Take
advantage of synergies between utilities," which suggests that even in
Mintues UAC: 10/02/96
Final Page 36
the scenario you are painting of a separate energy utility, there would
be some major services where it made sense to apply all the way across
the board, just as we do that with the rest of the City at this point
between the utilities and information systems and purchasing, even as
you are proposing, focusing some of those a little more on utility
needs. So I guess what I am hearing here is a nuance on the whole
business planning focus that the separate energy utility is really an
ability to do business planning and profit and loss cases that are
pretty sharply defined for someone who has responsibility for that, not
a total separation and total duplication of every single service that is
used by each utility.
Mr. Resh: You are correct on that. That is not where we are headed
with this, in fact, we are working with another utility right now where
we are actually going further with this recommendation simply because
they have not attempted to integrate field services and operations. We
are saying, since you do not have that synergy now and have not
developed that, let’s set it up with a power delivery business unit and
a water delivery business unit, but in the middle of that, you have a
customer service business unit that services both.
Commissioner Chandler:
dispatch.
You made a similar recommendation here on the
Mr. Resh: Right. The issues that that crea~es, you have to have better
transfer mechanisms for transfer pricing between business units, and
there are some complexities that you are faced with. That is why we are
not recommending a move to that at this point. " There are costs in terms
of doing that. We-are saying, ~start thinking of these as separate
lines, do business planning around that, and as this industry evolves,
consider moving to the separation here where it makes sense.
Commissioner Chandler: Is there anything about Recommendation #7 that
does not happen automatically as a logical progression from doing
Recommendation #i appropriately?
Mr. Resh: Recommendation #I could be done without as much separation
and without as much distinction between the business units from an
operating sense. Recommendation #7 is really talking more about
separating it from an operating standpoint to the extent that it makes
sense to do that.
Mr.Szybalski: But we would agree that Recommendation #I starts moving
you in the direction of #7 because you have now separated your costs.
Mintues UAC:I 0/02/96
Final Page 37
Commissioner Chandler: I work for a business right now that has a
number of business units but not divisionalization in a forma! sense.
There are certainly pluses and minuses, so I hear what you are saying.
It is a little more nuance than the way I feel Fred was presenting it.
That is what I was trying to get at, and thanks.
Commissioner Gruen: On Page 12, you make a comment about refuse
collection as being something that is perceived as being less well done
than some other utilities services. Are you suggesting that we ought to
have refuse collection done by utilities rather than by public works?
In either case, it is a contractor who does the real work. The question
is, which department signs the contract with that contractor and which
monitors it, etc. Is there a recommendation in here about that?
Mr. Oechsler: Let me respond to that. In going through the top ten
recommendations, one of the factors that was brought out was that in the
customer satisfaction surveys, there were very high ratings for the
electric service. Some of the customer key accounts indicated that they
were unhappy with the level of refuse collection. Some of them said
they were unhappy with some aspects of wastewater collection, actually
the permitting end of it that was really a function of the wastewater
treatment plant. So we asked ourselves, all right, this seems to be a
blemish as far as customer satisfaction is concerned. Should we
recommend that the utilities department (a) focus more of its attention
on dealing with these outside entities so that the customers are happy?
.That is certainly a reasnable recommendation, to do better those things
that are shown to have areas for improvement. That is going to come out
of cost, a cost for management time and attention, possibly money. It
is a complex thing in the City-because-~the utilities department, to my
understanding, does not get involved in negotiating the service contract
with the trash collector. So if the trash trucks leak on the customer’s
premise, the utilities department currently does not have a whole lot to
do with that. So what we are recommending is that Ed Mrizek and staff,
who have enough to do, go outside of the business and get involved in
the trash end of it, or should they focus on the key competitive
sectors. In a way, that is the spirit in which we offer this
recommendation. When you look at customer satisfaction and other
similar issues, keep asking yourself, "Am I trying to improve ~something
which is either neutral as far as the customer’s willingness’to buy what
is really at stake here, which is energy, or is it a contributing
thing?" If it is a contributor, I would certainly go ahead and try to
do it. If it is a neutral, if in a competitive energy world, you really
are not going to face a lot of competitors who are offering better trash
along with electricity and gas, then do not be concerned about trash.
That is the broad spirit of it.
Mintues UAC:I 0/02/96
Final Page 38
Chairman Johnston: I would like to move on to Recommendations 8, 9 and
i0. They are very specific recommendations in the IT area. An overall
view we would get from the recommendations is that if there is an area
where the utility is not where it should be, it is in the area of
information technology. It seems as though there are just a lot of
specific recommendations here. We need someone to coordinate and get
our act together in customer information systems and geographic
information systems and utility information systems and even in job
costing systems, which is not here, but was an earlier recommendation.
Would you give us an overall sense as to where you feel a utility such
as ours, given its size, etc., is and where it should be?
Mr. Szybalski: We spent a lot of time pondering that. First of all, we
feel that technology is extremely important for your survival. We think
there are at least two major programs, the customer information, I am
working for somebody right now who is calling it a billing system. I am
telling them it is not a billing system. It is a customer information
system. In fact, it is not even a customer information system, it is
their marketing system of the future. That is the No. 1 project you
must have going on to be successfu!. Also, AMFMGIS is all of the
operational aspects. It is how you store information about yourselves,
your assets, your facilities. It is all geographical, and the
breakthroughs in AMFMGIS have been phenomenal in just the last three or
four years, although they have been working on them for 20 years, and
the City is actually very far along. It is looked at as a leader in
AMFMGIS, but it has not quite pulled all of its resources together. We
are a little concerned that we certainly recognize that you are of a
size you need to You probably could not go it alone. We
recognize that there is definitely someinteraction between the role of
IT in the utility versus IT in the City. There are some boLLndary
conflicts and concerns. We are also concerned that this scope of your
effort, in other words, in your CIS project, you might have half a dozen
people working on it, whereas a large utility up north that is producing
a system that does most of the same things yours does has a 200-person
project, including consultants and all sorts of people. There is
something wrong with the scope. I am not sure that these positions are
going to solve your problem, but I think they will certainly highlight
it and be able to get the right resources. I am a little concerned
about municipals. I am doing some work for statewide cooperatives over
the last couple of years, and they have a national network that is a
little more robust than the municipal network. I am a little concerned
about where you get some of those resources and how you deal with some
of those. I hope these are not band-aids, but at least are a start on
the process to identify how important systems are, how the utility needs
to focus on them for survival, at least these two systems, and at least
Mintues UAC:I 0/02/96
Final Page 39
start focusing on some improvement in those areas. Both of these are
very difficult. There is a whole history of failed systems in both CIS
and AMFMGIS.
Chairman Johnston: Just so that I understand the scope and specificity
of these recommendations, from reading them, I get the picture that we
have staff in these areas and they are doing things, and maybe we just
need to have some defined leadership. I em also a little nervous when
I see the need to hire managers in three areas, because when you hire
managers, you need to hire a whole lot of staff in these areas. Have
you specifically identified that we are missing some of the leaders in
each of these areas, or that these are areas that we need to beef up?
Mr. Szybalski: We have identified these specific positions that we feel
would really help the utility. No. 1 is to provide the technological
advisor to the utility to worry about their problems and their issues.
City staff certainly does that, and they have a staff, but we think you
need someone very directed towards the needs and concerns and can
participate in the planning for the utility of their future needs.
Given the severity of the impact of the energy market, we fee! it is
going to be more critical than worrying about all of the issues. There
needs to be a person concentrating on that, plus other people who worry
about the citywide services. So that is one position, somebody who
could plan the technology future for the utility and think about the
utility’s needs, and represent them to the City, maybe even acting as a
contract manager to ensure that information services are delivered on
time when promised, when scheduled by the City, or whoever the other
vendor is.
The two project management positions very specifically focus attention
on the needs of the utility for those particular applications, less of
a technical position as opposed to understanding, for example, AMFMGIS,
what it really means to the utility and identifying the applications for
the future, from circuit mapping to automated records to preventive
maintenance, all of those kinds of things similar to CIS to understand
the marketing system of the future. It is not a way to collect revenue
for the City necessarily.
Chairman Johnston: Again to clarify, you have talked about this overall
guy who would give the City direction in information systems as the
information systems manager, Recommendation #8. The two project
managers that you refer to, would they report to him?
Mr.Szybalski: Probably. That would be our recommendation.
Mintues UAC:10/02/96
Final Page 40
Chairman Johnston: From your evaluation of staffing levels, do you feel
we have enough staff and it is just the leadership in that area that is
needed?
Mr. Szybalski: No, these are identified as net positions.
information staff is extremely lean.
The utility
Chairman Johnston: I did not mean to indicate that these would be
replacements in any way. I am just asking that if we added this
leadership to what we already have, would we then have what we need?
Mr. Szybalski: With the caveat that these are great big projects.
Chairman Johnston: That is my concern! How big are they?
Mr. Szybalski: Given the scope of your CIS, this is a good start. I
not saying this will solve an effort you have had under way for the last
several years.
Mr. Resh: Let me add that I believe part of that answer will come from
what type of solutions you choose to pursue to meet particularly the CIS
need. If you were to have to program from scratch an entire CIS system
entirely developed in house, I don’t know that the combination of this
new individual and the City resources are capable of doing that within
the time frame that is probably needed. O~ the other hand, if you use
this position to help scope out and identify and specify the possible
acquisition of a system, and then use this individual to implement~that
system across the utility, that is a different level of intensity and
involvement. Those decisions are bering analyzed, right now as we speak.
We have met with the City staff in this area; we have worked with the
utility staff in this area. We think they are getting the program back
on track, but there has been a history of problems here too, not unlike
many utilities, as Tim mentioned.
Chairman Johnston:
recommendations?
Any other comments on the first eleven
Mr. Resh: Paul, one of the things I would like to mention is that we
noted a mistake here, when you go to the next two tables that stummarize
these recommendations. We dropped Recommendation #i0, and
Recommendation #ii became #i0.
CQmmissioner Gruen: I wanted to say that I thought your IT
recommendations were absolutely correct in terms of providing IT people
who were oriented towards utility needs. One of my hot buttons is that
Mintues UAC: 10/02/96
Final Page 41
this year’s utility bills were worse than the ones we had last year.
Last year, our residents could read about gallons of usage per day.
This year they read about ccf’s per variable billing period. That means
that you carunot compare from one billing period to another. I think the
person who is directing the project has a lot of other things to do, and
he did not even realize he was making a change. So I think that having
people who are specifically focused on utility needs would be a positive
thing, would mean that that person would say, I am making a change here.
Why am I doing it? Is it a change that I want to make? You would have
someone who had that as his job rather than a whole pile of other things
so that it slipped past him. So I feel you are on the right track.
Mr. Szybalski: One observation on the list. The reason why we called
this the implementation plan was because it was our effort to go through
our voluminous report and say, what would we do as consultants? What
would we advise you to come back and ask the utility for the 39
actionable recommendations? Not everything we wrote in the report is
actionable. We tried to list the 39 that we thought warranted followup
and attention.
Chairman Johnston: Let’s continue with these recommendations.
there any questions up through #20?
Are
Commissioner Sahaqian: I have a question on Recommendation #2. The
first part of the recommendation is very cl~ar, but in the second part,
you have "Rank projects by contribution to reliability; and link to
overall business planning process." I do not understand what is meant
by "contribution to reliability; and link to overall business planning
process."
Mr.Szybalski: There is certainly a comma missing.
Commissioner Gruen: The semicolon should be a comma. I see that
Recommendation #2 appearing in three different forms, depending upon
where it is, and appearing in yet a fourth form in your oral summary.
Mr. Szybalski: I apologize for that. We did try to go through and make
it consistent in every place. I will check on that again.
Chairman Johnston: I have a question about Recommendation #19 which has
to do with the extent that you follow what might be considered as
commercia! business practices in checking out your customers, etc. Am
I correct in viewing this that what you have noticed is that the process
we follow is perhaps not consistent with current business practice, yet
it is not necessarily clear whether, if we spent more time and energy
Mintues UAC: 10/02/96
Final Page 42
screening customers, given our low writeoffs, that it would really
result in any net benefits?
Mr.Szybalski: That is a good statement.
Chairman Johnston: So perhaps this recommendation is somewhat along the
lines of saying, this is something to watch. If our collections go
down, then should we start implementing some more traditional practices?
Mr. Szybalski: Correct, and potentially there are still people who are
abusing the system, although the overall writeoff~ is low. I actually
heard a staff member say there is no energy theft in Palo Alto, or not
much. I feel that is not necessarily true.
Commissioner Gruen: On this recommendation, I feel it is a fine example
of a case where a reference next to a recommendation to the chart which
has some data on it would be helpful. You point out in the data section
that we are in the bottom quartile on some of the size of collection
items even though the total number is small. If you had the reference
here, we could turn to that and see where it was coming from, and it
probably would have answered Paul’s question right off the top.
Commissioner Eyerly: On Page 9, Recommendation #21, the recommendation
of legislative efforts and working with the City attorney’s office on.
confidentiality policy, don’t you think we should include the NCPA
office in that? It is in ~the last item on Page 9 where the bottom
bullet says, ~Continue legislative efforts and work with the City
attorney’s office." I think that should include NCPA for the electric
utility, because there is quit~.a_bi~oof_confidentiality that goes on
these days.
Commissioner Chandler: I think it was the concern that in the course of
our meetings, we could prejudice the City’s marketing efforts in a
competitive environment. I believe that is what this one was focused
on, if I recall the context in the larger report.
Mr. Szybalski: It actually did combine two thoughts, so you are right.
The first thought was to continue legislative action. Again, this page
ties back to a table in the final report that has a lot of things in
that table. What we wanted to do was to get the real clear
recommendations out of that table. Here, it mixes two ideas. We did
not call it a recommendation, however.
Chairman Johnston:
recommendations?
Any comments on any of the remaining
Mintues UAC:10/02/96
Final Page 43
Commissioner Eyerly: On Page 15, Recommendation #31, you state in
there, "Review allocation procedures and method of A&G expense bet.ween
the utility department and the water fund." Do you have any reason for
making that suggestion? Do you feel that we are not doing that now?
Mr. Oechsler: This stemmed from one of the recommendations of Mr.
Morgan in the water benchmarking area. It reflects the finding that A&G
expenses appear to be high. He did not carry it to the conclusion of
saying that this was definitely a cause. He said this could be a
possible cause, and to take another look at it.
Chairman Johnston: Any other comments on any of the materials related
to the organizational review?
Commissioner Gruen: I want to make sure that I state somewhere the four
general recommendations that I have. The first is that you go through
the report and look for the places where you have used initials which
you understand but which the rest of the world might not understand. If
you talk about AM-FM-GIS systems, some people will think you are talking
about radio broadcasting, and they will not understand why it is in
here. I know you know it, and you can talk about it to us, but if you
are going to talk to the public or even the City Council, you have to
prune those. If you talk about CTCs, that makes sense in this room, but
it is not going to make sense to all of the audience that is going to
look at that. So I suggest you read through it and put in words
instead. It will take a few more words, but it will measurably increase
understanding.
Secondly, I have talked about, references between your recommendations
and data so that people can understand where you are coming from, what
you had that made you think that, and see which did not have that,
therefore, we would know that you had not done a survey or that this was
out of the scope or whatever the reason might be. People would
understand how you got there, not just that this is where you are. If
you just put inthere, "This is what I want," then ultimately, the City
manager comes back and says, ~We don’t want to implement that one." I
would like you to include the basis so that it makes sense, just as it
makes sense when you talk to us here.
Third, I continue to be concerned about the dates of the data you are
showing us. We are sitting here in the fourth quarter of 1996. The
most recent data here is two years old. Some of it is two-and-a-half
years old because someone is on a fiscal year that ended sometime in
1994. I would like to see more current data. I don’t know what our
contracting is on this, and I am sorry if we did nob contract for data,
Mintues UAC:10/02/96
Final Page 44
say, within a year of when the report is presented. I think we should
have done so, and I would like you to take a look at seeing what it
would take to give us the more recent data, rather than data which ended
in 1994, two years ago.
Finally, there are pages in here which are, at best, difficult to read.
I am looking at the final report, Page 6 and those areas in black on the
right side where something must have been in color, but you certainly
cannot read that without trying a lot harder. I don’t know what you
need there, but readability would certainly be a plus. That completes
my general comments.
Con%missioner Sahagian: We have all been giving you constructive
criticism here and there throughout this document. I do want to make
one comment on an up-note. I thought the recommendations were quite
good. When we came to you two months ago, that was one of the things
that I and others on the commission stressed that we wanted to see a
pretty clear set of implementation recommendations. With the exception
of the water area, which we have already discussed, I thought that
overall, they were pretty good.
Commissioner Eyerly: I have not quite finished with the final report.
If you would turn to Page 43 and also Page 46 regarding trees, you have
made some pretty critical analyses there and you compared us to .IOUs.
Our costs were high, etc., but I do not imagine that you have taken into
consideration the kind of City you are dealing with when it comes to
trees. So I think you need to qualify what you are saying, because it
really gives us a black eye. I don’t think you will find any City that
you ran a comparison with that has.~the number of trees that we have.
Chairman Johnston: I was wondering if we could get through one whole
night without talking about tree trinuning! I know that inevitably,
there will be discussion, and I know there might not be agreement
between your comments and staff’s comments in this area. I think you
should recognize that "tree" is a part of our name, but if you feel that
that is the way it is, that is fine. It is interesting because you
always look at the tree trimming expenses per mile of overhead line, but
what we do not see are tree trimming measures per tree. It may very
well be that we are different or not that different, but I had really
hoped we could just get by without talking about trees, but I guess it
cannot be avoided. I know we have made a !ot of recommendations here
tonight, and it is clear that some of those are within our contract and
are reasonable for you to adjust in completing it, and some are not.
Obviously, you will continue to work with staff and with Rosemary in
finalizing the report. I think there were some very straightforward
Mintues UAC:10/02/96
¯ Final Page 45
comments as simple as wording that I assume you agree with.
making notes as we talked about it.
I saw you
I really would like you to step back and.try to take an objective look
at where you are (and I know you are defending your teach, Tom), but I
think this commission is fairly united in its feeling that there is a
disparity of the specifiCity of recommendations. I certainly would
second Commissioner Sahagian’s comments with regard to many of
recommendations. On an overall basis, I felt that you did hit the mark.
There were a lot of very specific recommendations. Whether staff will
end up agreeing with them or not, they were very specific, and I
appreciate those. There were some that were not specific~ but there
were a lot ofgood specific ones here, as well. I just think that if
you looked at it objectively, overall, you would indeed conclude that
there is something still a little missing in the water portion. What
you can do about that, I do not know, but I would hope that you would
make us happy for what you have done in all the utilities, not just most
of them.I thank you very much for your time.It has been a long
session.
Item 7.b. Electric Issues Update.
Mr. Mrizek: Staff has no presentation, but are present to answer any
questions you may have.
Chairman Johnston: I do not have any questions on this report, but the
report you have prepared for the City Council is extremely good. I
liked the table format at the back. It is a very nice format for
quickly going and getting a grasp..of, looking at the issues.I commend
you on it.
Mr. Habashi: Thank you.
Commissioner Eyerly: I would second what Paul has said. I want to ask
about our tentative agenda for the UAC. We have stranded costs
scheduled for November 6, December 4, January 8 and February 5. I would
like to tie that into where we start to worry about the budget. Our
meeting on November 6th indicates a discussion of issues and an
approach. It seems like we pretty well have things spelled out with all
we have been doing and hearing about what the legislature has done on AB
1890. Can you fill me in a little on how we are going to handle al! the
meetings on stranded costs?
Mr. Habashi: I had a chance to have a quick discussion with Randy
Baldschun this afternoon about what would be included in the
Mintues UAC: 10/02/96
Final Page 46
City o£ Pzlo Alto
Utilities Advisory Commission
Wednesday, November 6, 1996
City Council Chambers
Item
i.
2.
3.
4.
5.
6.
I0.
ii:
MINUTES
Roll Call .........................2
Oral Communications ....................2
Approval of Minutes ....................2
Agenda Review and Revisions ................2
Consent Calendar ......................2
Unfinished Business: ....................2
a. Final Report by the Organizational Review
Consultant, TB&A ....................2
b. Gas Issues Update ....................17
c.UAC Planning for Joint Meeting With Council .......42
New Business:
a.
b.
....................... 17
Compressed Natural Gas Rate ...............17
Information Report, Street Light Conversion
Program .........................23
Utilities Project PLEDGE Proposal ............24
Electric Utility Stranded Cost Update ..........29
City Council Referrals ...................37
Reports of Officials/Liaisons: ...............37
a. NCPA Commission Report .................54
b.BAWUA Report ......................37
Next Meeting ........................54
Adjournment ........................54
250 Hamilton Avenue. Palo A!to. 94301 "~’ 415.329.2277 FAX 415.321.0651
Chairman Johnston called the meeting to order at 7:30 p.m. in the
Counci! Chambers, 250 Hamilton Avenue, Palo Alto, California.
Item i. Roll Call
PRESENT:Commissioners Chandler, Eyerly, Gruen, Johnston and
Sahagian.
ABSENT: None.
COUNCIL MEMBER PRESENT: Rosenbaum.
Item 2. Oral Communications - None.
Item 3. Approval of Minutes and Executive Summary
Chairman Johnston: The next item is approval of the minutes of October
2, 1996 and the Executive Summary.
MOTION:Commissioner Eyerly:
Executive Summary.
I move approval of the minutes and
SECOND: By Commissioner Sahagian.
MOTION PASSES: 5-0.
Item 4. Agenda Review and Revisions.
Chairman Johnston: I would like to propose that we move Item 6c, UAC
Planning for Joint Meeting with City Council, to follow 7d, Electric
Utility Stranded Cost Update. One reason for my request is that it is
a Commission matter preparing for our meeting with the City Council next
week, and we do not need to have everyone present in the audience for
that item. Also, I would like it to occur after we have the update on
the stranded costs. Does that meet with everyone’s approval?(It was
so agreed.)
Item 5. Consent Calendar - Nothing.
Item 6.Unfinished Business
Item 6 a.Final Report by the Organizational Review Consultant,
TB&A
MINUTES UAD:I 1/06/96
Final Page 2
Chairman Johnston: Welcome!
Tim Szybalski: I would like to say I am pleased to be here to present
this rather large stack of final report documents, including an
Executive Summary of the final report and a lot of appendices. We found
this to be a very challenging project, but we would like to congratulate
you on a process that gave us time to understand the issues to
appropriately involve the staff in the process and to respond to
questions to get your input and guide the process as we went along.We
think the result will be a good one for the City.
Because of that process, we do not feel the need for a final
presentation. You have watched the project as it evolved. We would
like to do two things tonight, if we might. One, we would like to
respond to a couple of the issues raised last time, pointing out some of
the changes we made in the final report from the draft. Second, Tom
Resh could not be here today, but we would like to get some advice that
you have on the level of presentation that you think would be
appropriate, along with any guidance that you have in terms of how we
might present the material to the City Council. We would now like to
proceed with some comments in response to some issues that you raised at
the last meeting, if that meets with your approval.
Chairman Johnston: Please do. Why don’t you summarize the issues that
were raised and how you have responded to them.
Mr. Szybalski: I would like to start with one observation. Probably
one of the areas where there was a lot of additional material presented
that you are really seeing for the first time has been in the final
report, Appendix A, where we have added additional benchmarking
sections, particularly on tree trimming and substation maintenance
practices. These were particular issues brought up as a part of the
study. We feel this is additional background that will help support the
recommendations and be useful as you go ahead in the process. I do also
have to say that as we made some other changes in the report,
unfortunately, we did not change the Table of Contents, so we have
produced an errata sheet. The Table of Contents is misleading. It does
not show these additional areas. In trying to put arrows on all of the
reports, in this particular document we also failed to show that you are
Number 60. So people picking up Appendix A are going to be a little
confused. Hopefully, we got all of that right in Appendices B and C,
but we did not here, so we clearly want everyone to know that you are
Number 60, and we apologize for not getting the arrows appropriately in
this particular appendix. That is probably the main change in the
appendix. Most of the other changes will be described by Mr. Oechsier.
He went to some considerable detail to look again at some of the water
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issues that were raised. This additional analysis did not necessarily
change our findings and conclusions, but hopefully, they are better
supported now, and they will be more helpful to you in understanding how
we arrived at our conclusions. With that, Ron will make some comments
on the water issues.
Mr. Oechsler: At the last meeting, there were a range of issues that
were discussed by the Commission with specific requests made with regard
to the materials that RMI prepared -- the competitive assessment update,
the benchmarking reports, and in particular, the water benchmarking
report. The general recommendations included better documentation of
materials that were referred to in the analysis, particularly the issues
pages of the bench_marking reports, so that it was easier to find out
what graphs were referred to in particular sections as regards
benchmarking to identify the City on the bars and to improve the
readability of the bars so that it was easier to infer numbers from
them. Those are by way of general comments or requests.
On the competitive update, Commissioner Gruen asked whether we could
unbundle the non-generation costs into transmission versus distribution.
Commissioner Eyerly asked for comments on the implications of Assembly
Bill 1890 for the City. In the specific area of gas and water
benchmarking, we referred to a number of City requirements that staff
had indicated may increase costs for construction work that is
contracted out, particularly in the area of CIP-related work. We have
provided in the final report an Exhibit 19A which documents those City
requirements that may increase construction costs. There were a series
of questions raised about water which I will get to in a moment. We
have disaggregated to the best of our ability in the Executive Summary,
Page 9, Exhibit 4, a comparison of the electric utility cost, PG&E
versus Palo Alto. There, what has been done is that instead of focusing
only on the non-generation component, we have provided the entire rate
component again. Generation and transmission are shown as the item in
white. The transmission for PG&E is only a half a cent, so it is very
small. Most of that is generation. The gray shaded area is essentially
non-generation and transmission. At the present moment, one can only
break down PG&E’s cost, which is something under three cents, into
distribution and either public purpose expense or things which they do
not how to disaggregate. There is a filing scheduled to be made on the
15th of November, wherein PG&E will further unbundle its costs. That
will provide some additional detail, but at the moment, this is about as
good as we can do.
For the City, it may be possible to further disaggregate distribution
into distribution O&M and things related to customers and billing, etc.,
but that information would be required from the unbundling study that is
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under way. We have provided the information that was available in
speaking with the manager of rates. We were able to differentiate that
into distribution and then, transfers and rents.
The basic conclusion remains. Palo Alto has an enormous competitive
advantage presently, when you consider the total bundled rate. But as
stranded costs are written off and the City’s generation costs may
approach that of the market, as with PG&E, the competitive focus will
then shift to the distribution or non-generation part of the rate, where
the City still has an advantage, although not as great in absolute
terms. That is on the issue of unbundling of electric costs.
I have noted in the final report on the gas benchmarking study that we
have provided a graph which shows that the City has a gas transportation
rate for its industria! and commercial customers that is substantially
higher than PG&E. The graph shows a difference of 17 per therm for
Palo Alto and 15 for PG&E. The PG&E rate has subsequently come down to
around 12 per therm, so there is a very substantial differential there
to the City’s disfavor when one compares the gas transportation and
distribution rate vis-a-vis those for similarly situated PG&E customers.
As I noted, we included several pages in the competitive update that
relate to the provisions of AB 1890 as they affect municipal utilities.
The general impact on municipal utilities and the specific impact on the
City are in our assessment, and we have also added a few additional
recommendations along those lines.
In the water area, there were a number of very specific questions that
were posed relating to the analysis that we had done of the City’s cost
levels, the City’s staffing levels, and the capital improvement program.
Specifically, we were asked to review the data on consumption and
determine whether the City’s water consumption is lower,
proportionately, than that of other panel members, which might explain
the cost ratios measured in terms of units of consumption that were
higher. On that score, if you like, I can spend just a few minutes on
providing those details which may be of benefit to you in further
analysis.
As regards the City’s consumption levels of water, as you correctly
noted, Chairman Johnston, on Graph F4, the average daily retail delivery
per capita for Palo Alto is not lower than that of the other panel
members. In fact, the City’s retai! delivery per capita, average daily,
is around 200, which is basically among the two highest members of the
panel. However, when we look at the preceding graph in F3, average
daily retail delivery per connection, the City’s consumption per
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connection, in essence, per meter, is quite a bit lower than a number of
the other panel members. Panel member #2, which is at the higher end,
is about 28% higher than Palo Alto. Panel member #5 is about 15%
higher. I looked at the residential consumption area, and in that area,
with Panel member #2, average daily residential consumption was some 75%
higher than Palo Alto. What that means is that to the extent that costs
are generated by metering and connections (which is ultimately the
hardware and infrastructure that the utility operates), it means that
the City’s deliveries per connection are lower than that of the other
panel members. That means that the ratios where we divide costs by
thousands of gallons delivered wil! tend to be somewhat overstated. In
applying that conclusion to the analysis of staffing levels,
particularly in revenues per thousand gallons, the City’s ratio of total
water revenues per thousands of gallons delivered is on the higher end.
What one needs to take into account is the fact that we are overstating
the City’s relative position due to the proportionately lower amount of
deliveries.
In that critical indicator of revenues, we were also asked to take a
look at the contribution of General Fund transfers and the capital
improvement program costs on the City’s cost performance. We have added
in the water benchmarking report two new exhibits, Exhibits 20 and 21,
which address that issue. Separating out those two items brings the
City’s performance in revenue per customer from the highest in the panel
to the position of second highest. It brings the City’s indicator in
line pretty much with the top four members of the panel, Palo Alto and
the three next ranking utilities, Utilities #2, 6 and 4. I would regard
all of those utilities more or less in the same position in terms of
revenues per customer. Indeed, if you compare the City’s revenues,
excluding these two items, which contribute much more heavily to the
City’s total revenue per customer level than for the other companies,
the City is about 15% above the average of the other three. So in that
area, we did not see that the City was extremely out of line on the
revenue side. You are more or less on a par with the other three
members of the panel on the top end of that chart.
Regarding the revenues per thousand gallons delivered, Exhibit 21, if
you take out the General Fund transfers and the capital improvements,
the City is a little bit higher, but not greatly so, in my judgment. In
light of that, we have determined that for the finding that is reflected
in our report, there is no need to change that. There was not enough
information on the City’s cost structure to allow us to say, this item
appears to be particularly out of line. It is certainly an item that
you would want to take a look at, but in the data that are available
today, there was not enough information to go to the next step and say,
you ought to really look into this category. In that regard, as we
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noted earlier, the City does not separate operations from maintenance
expenses, which is the first step you would take in taking a look at the
revenue structure. So that is an area where we have recommended that
you pay better attention to separating costs so that you can perform a
better analysis.
The last major issue that was posed to us had to do with the CIP program
expenditures. While not reflected in a graph, the City spends about 8%
of its total revenues on the capital improvement program in the water
utility. That is about $1.2 million per year. In our judgment, that is
not particularly excessive. There are a number of panel members that do
not have any capital improvements indicated, at least, not in the year
of the survey. There is one with 17.6%, which is double the City’s, and
one at 2.4%. So clearly, capital improvement is a major priority for
the water utility, greater than for some of the panel members, but
within the data available for the benchmarking, I would not call that
particularly excessive.
Chairman Johnston: Could you run over those figures again?
Mr. Oechsler: As reflected in the questionnaire, the City’s annual
expenditures on its capital improvement program for water is $1.2
million.
Chairman Johnston: Do we know what the discrepancy is between the
$1.2 million you have been told and the $2.9 million in the current
budget? Perhaps we are looking at a different time frame. If you look
at the budget for fiscal year 1996-97, I believe the budget for the
water capital improvement program is $2.9 million.
Mr. Oechsler: In the fiscal year 1994-95 budget, which is the data
reflected in the questionnaire that was filled out, the number in that
report is $1.2 million.
Mr. Mrizek: That was when we were still ramping up the infrastructure
program, so we were not at the full level of the water main
replacements. We began ramping up the gas first, and then the water and
the wastewater. Perhaps that is the reason why it is so much lower. We
did not have a full infrastructure budget for water.
Chairman Johnston: Then given the discrepancy between $1.2 million for
the rampup and the $2.9 million budgeted for this year, you better be a
little bit careful in your comments about the proportion of the water
fund that is spent on capital improvement programs. It is almost two-
and-a-half times the number you just indicated.
MINUTES UAD:ll/06/96
Final Page 7
Mr. Oechsler: Yes, your point is well taken, and all of the data we
have reflected in our benchmarking reports are for a specific year.
Even comparing capital investment levels of these utilities, there is
nothing to say that any one of the members may have had double the
amount the next year. You are correct. I was making a general
observation that, given our knowledge of the condition of the utility,
the leak rates, etc., based on our review of the data we reviewed, we
did not consider that to be excessive for that year.
Chairman Johnston: What now concerns me is that you have reviewed the
capital improvement program, and you have concluded that we are probably
about right, although I know this was not the focus of your study. What
worries me now is that "probably about right" seems to be based upon a
$1.2 million annual revenue expenditure. In the budget for this year,
we have $2.9 million, and in the budget for next year, I believe it is
about $2.5 million. It goes down a little bit, and it is projected to
be in the $2.5 million range for the foreseeable future. Your estimate
of ~about right" is half of what the utility is planning on doing. With
this knowledge, would that change your recommendation of "about right"?
Or is it that broad?
Mr. Oechsler: The observation I made pertains to the year in question.
Clearly, if even the graphs that we provided, if we were to do some
entirely new benchmarking results, we would clearly want to -- first of
all, you have to see where the City came out in that comparison, and
then breaking out $2.9 million out of the total revenues would show a
higher contribution. So the point remains that the City has a higher
contribution of CIP costs as a percent of revenue than the other panel
members. That would probably be even more so in any revised or updated
data. That is about as far as I could really go.
Mr. Szybalski: If I might add one other way to look at it, part of our
reason for looking at this capital improvement and General Fund was to
see whether the operation, that white part of the bar, was in the
ballpark. Again, that was supported by going out and observing crews,
watching how things were done. We could find no practices in particular
that showed us that you were operating an inefficient utility. Your
comments about how big that capital improvement area and the general
transfers are definitely of concern. Yes, those are bigger numbers than
we used in this analysis.
Chairman Johnston: Just to put it in perspective, it is 20 or 21% for
the current 1996-97 year. The percentage of all expenditures by the
water utility on capital improvement programs is about 20 or 21%. So I
want to keep that in mind.
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Mr. Oechsler: The final issue that was raised related to the graphics
on staffing levels. In particular, Graph C4 indicated that the City had
a significantly lower gallons-per-employee ratio than the other panel
members. In fact, the City’s ratio of gallons-per-employee, correcting
for units, is around 86.8, 87 million gallons per employee, whereas you
can see that the other utilities are significantly higher. In this
area, I noted that approximately 20% of the City’s FTE count reflects
positions funded outside the water department. These are General Fund
positions. 20% of the employment costs would also reflect those
positions, based on the methodology we used to estimate those. The
other panel members, by and large, do not indicate employees funded
outside the department, which could indicate that they do not know what
that number is, but that there probably is a number. Or it could mean
that all of the work of the water department is done within the water
department, which I would think is probably not true, given that most
municipalities rely on General Fund positions and councils and
attorneys, etc., and billing staffs outside the actual department. So
in that regard, let’s assume that these other panel members really are
funding some level of employees outside the General Fund. In order to
do an apples to apples comparison, we should separate out the City’s
General Fund employees, at least for a first cut. When I did that, the
City’s ratio would go from something like 87 million gallons per
employee to something like 107 to Ii0, which would bump it up a notch.
When one adjusts that, in light of the fact that these other utilities
have significantly higher deliveries per connection, you would make
another adjustment. The differential between Palo Alto and the other
panel members, the "best performers" if you will, narrows quite a bit
compared with what we see on this graph. Given that the City is
pursuing a capital improvement program that is more ambitious than the
other members, the information was just not available for us to say that
the staffing levels were excessive. That basically supports the
position that Mr. Morgan took, which was that in looking at a variety of
indicators, we do not see evidence that the department is over staffed.
That is not to say it is not worth examining in further detail, but
based upon the material that we reviewed, our conclusion I think is
still accurate. We did not find a basis for recommending a specific
staff reduction.
Those are the primary areas that we investigated, upon your request. I
hope that that material is useful to the Commission and also to the
staff as they look at these issues further.
Chairman Johnston: Thank you very much. I appreciate your further work
on this. What I would like to do now is to turn to our objective for
this evening, which is to get to a point where we have some
recommendations that we can make to council with regard to implementing
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Final Page 9
these recommendations as outlined in Appendix I. So I would like to
take comments from the Commission on that topic, specifically related to
what comments we might provide to the City Council regarding the
proposed implementation plan and to make use of the consultant here to
perhaps clarify points that are needed for that purpose. We have been
through this material before, and I would prefer that we not plough back
through it, but to the extent that we need clarification in order to
provide guidance to council on how to interpret the recommendations and
implement the plan, that would be entirely appropriate. Does someone
wish to begin?
Commissioner Sahagian: I have two things to say about the plan and
perhaps a few comments on the implementation side. First of all, I want
to compliment you. You have done a pretty thorough and responsive job
of putting together a plan. You have, in my opinion, addressed the
development of an implementation plan to go along with it, which is one
of the things we set out at the beginning and requested you to do.
I am particularly interested in the electric utility area, as many of us
are, since there is obviously an interim term concern about how that is
going to fare through the process. One thing that would have been
helpful (and maybe there is still a way to do this as part of the
finalization process), in Exhibit i, you indicate there, as a result of
Fred’s request which you felt the breakout was for TNDM and the
different pieces of the power structure for PG&E whom we might view as
being a typica! competitor of ours, but there really is not anything
that addresses what those costs might be during the transition period
while recovering stranded costs and after transition. I think there is
quite a bit of projective information out there on that. For planning
purposes, that would have been very helpful. I think that is something
we are going to have to do anyway in our planning process.
As far as the implementation plan, it seems to me that there are two or
three areas that really come home when looking at broad-based
recommendations to the City Council. One is the unbundling, the way we
handle our utilities. It is very clear in your overall recommendations
that you feel there is a need to set up separate business centers and
separate strategic planning and cost control centers for each of the
various utilities in the group. I happen to agree with that. I think
that is going to be especially important with the deregulation of the
electric utility and also as a means of perhaps getting further focus
placed in areas such as the water utility where there are issues that
probably need, if you will, segmented management focus. That, I think,
is one of the strongest recommendations we should bring to the council.
MINUTES UAD:I 1/06/96
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Along with that is the need to have very focused strategic plans in each
of the utility areas, both strategic and implementation plans, really
trying to organize ourselves, perhaps along more traditional, private
industry lines, as electric utility transitions away from
being regulated to unregulated. It is almost like going from public to
private. I think that is the other recommendation that I see in here
that, in terms of broad-based recommendations, I fee! we should be
bringing to the City Council.
Commissioner Gruen: I’ll take a shot at one of them. I began at the
beginning, and looked at Recommendations 1 and 2. I asked, how are they
related to each other and how are they implemented? I am comparing
Recommendations 1 and 2 as shown in Appendix I. #I is basically,
"Establish a business planning process." #2 is "Determine reliability
needs of each customer class, rank projects by contribution reliability,
and link with the business planning process." That seems to be
something where you take into account what your customer wants rather
than just what you want. Then I looked at the final report itself on
Page 40, where you talked about the electric business plarnling process.
There is a chart there of who would do what, and there is a planning
council which is staff getting together and establishing some goals.
For example, a customer retention goal is the first thing that staff
would name. How many of our customers do we want? It goes on, but
there is no mention made anywhere in the planning process of the
electric utility taking into account what the customers want. There is
no mention anywhere in the planning process of surveying customers.
Should we have a key accounts program? The idea is to ask your top two
dozen customers what they want. You could conceive of picking some
sample customers in the mid-range and asking them what they want, and
not just what they want, but what they are willing to pay for it. By
and large, we are dealing with businesses, and they are capable of
giving that sort of an answer. "Yes, it is worth this much to me." I
don’t see any way in which that sort of questioning, that sort of
information collection, makes it into the planning process. So if you
will, I would say that Recommendations 1 and 2 ought to somehow say,
listen to your customers. Your customers now have choices. Your
customers now will act on these choices. If your customers don’t
believe you are listening to them, they will find someone who will, and
those are new sorts of things to a public utility. I feel it is worth
emphasizing that that is one of the changes we have to make. Since it
comes out so clearly in your first few recommendations, but not in your
planning process, I feel it is worthy of attention.
Mr. Szybalski: I certainly agree with everything you just said, and if
the diagram does not show it, I will have to look at it a little more
carefully. Certainly, that is where it starts - at good market
MINUTES UAD:I 1/06/96
Final Page 11
research. That unfortunately appears to be somewhat implicit in this
particular process. I think that if you look at Appendix K, which is
the planning process, it ought to be a little more robust in putting
forth that kind of information. This one was a little more focused on
the electric business planning process. I would agree with your
observation that the word "customer" ought to be there, and I do not see
it.
Commissioner Eyerly: I feel that you consultants have given us a good
report, a good organizational review. You have brought us a lot of
material here and we have had a lot of meetings and a lot of discussions
with you. I find that what you have presented as far as recommendations
and comments, etc., are backed up by your benchmarking. It gives a lot
of material for the staff to consider and look over, going through it
somewhat with their own judgment calls as to how it relates to Palo
Alto. I appreciate that you have included in your report items which
the UAC has been trying to address. The City Council and staff are
geared toward our continuing that, and staff is working on it. When I
speak of that, I am thinking about evaluating the manner of transfers to
the General Fund from the utilities, and also the financing of our
infrastructure which is heavily impacted with the work we are doing in
the water, gas and wastewater areas.
So what I come down to as regards my comments for the council is that I
really think the general report that we have here is way beyond the
scope of we, as individuals of the UAC, are making very many comments as
to how it ought to be handled. I think it needs to be referred to the
council with comments that the UAC is pleased with the report as it has
come forward, and it should be referred to the staff for study, and back
to the council, or to the UAC, if staff felt there should be more
comments from the UAC after having looked over some of your
recommendations, etc.
As regards the other items which I mentioned, including AB 1890, I
believe staff is already geared up on that. Their work is going to
include the UAC, so we do not need any more comments on that. Those are
my comments, and I would like to make a couple of remarks for the record
as far as the final reports.
I feel that on your bench_marking information on the tree trimming on
Page 43 of the final report, you mentioned that on tree trimming, we
have different service levels from some of the benchmarking pane!
members. That is not a very strong remark. I am sure we have many more
trees than most of the people you surveyed, and it is very easy to skip
over that remark. I appreciate your putting something in there on it,
but my remark is that I really feel we are heavily impacted by the
MINUTES UAD:ll/06/96
Final Page 12
number of trees that we have.
Regarding your distribution costs in the Executive Summary on Page 8,
you mention they are marginally lower, compared to PG&E. I am not sure
what you mean by "marginally," but that says to me that it is not by
very much. When I look at your chart, it shows that we are at 1.2 per
kilowatt hour, and PG&E is at 2.1, roughly speaking. That is not a
lot of money,but it seems like quite a bit of difference,
percentagewise.
The other item in your report that you go into is water benchmarking and
wastewater benchmarking and that we ought to be studying the financing
of the infrastructure and the transfers, but you do not say much about
the gas benchmarking. Maybe I have overlooked it, but I think the gas
utility is just as important as those other two. That concludes my
remarks and my simple recommendation as to what we ought to do with the
report.
Commissioner Chandler: I have two basic areas of comment. First, I
concur with what Commissioner Eyerly has just been saying about process.
It had been my preference that we have comments from staff before the
final report came along so that we could do some reconciliation of
different viewpoints with the consultants present, but a decision was
made not to do that, with the implication that I feel it is going to be
very hard for the City Council to act on this until the staff has
studied it and has come back with what they think is an appropriate
implementation. To that end, however, one of the most valuable aspects
of the report is the ranking of activities not just by these priorities
but by what can be done pretty easily without additional extensive
additional resources, and what is going to cost money, and what kind of
payback comes from that expenditure. So I would suggest that in
presenting these priorities, that you bring that type of analysis into
the presentation directly so that one does not have to look in two
different places to find that. The summary of the recommendation and
implementation plan could benefit from that being brought together as a
whole. I feel that ultimately, when staff does evaluate these
recommendations, one of the issues is going to be the resources that it
takes to implement them. To the extent that the council has a sense of
the consultant’s judgment as to resources that it would take, that would
be useful in allowing for prioritization by the council of what they
want to see implemented and when. So those would be my two comments,
that I think we are limited in what we can do because of not having
comments from staff initially, and that one way to begin to overcome
that is to ensure that the council has a clear sense that some of these
things have good payback but may cost a lot of money to do, and some
which may have some good payback but not cost a lot of money.
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Chairman Johnston: I support most of the comments made in terms of
where we are. I feel we have a pretty good understanding of the
recommendations that have been made here. There is not, for example, a
whole group of observations that I would want to disregard or throw out
before recommending this on to the City Council. So from my standpoint,
I would simply like to see us refer this as being the work of the
consultant which has a lot of input from many of us along the way, and
provide that as the recommendations, and recommend that council seek a
response from staff either as to how to implement these recommendations
in terms of cost and timing, etc., or why they think it is not
appropriate and would not want to pursue that particular recommendation,
possibly putting it into a second tier priority list. So my feeling is
that we should pass this along to the City Council just that way. I
would like to see if anyone has a different view of how to pass it on,
or if anyone wants to attach other suggestions to those recommendations,
and then see if we can vote on this matter.
Commissioner Chandler: I have a relatively trivial question. In
looking at the errata sheet that was FAXed up today, I do have some
concerns because those were matters that were expressly discussed by the
Commission at the last meeting. So while on the one hand, I wish they
had been implemented into the report, as it would have made it a lot
more readable, on the other hand, if the bottom line is that the council
is going to focus on the final report and summary of recommendations,
then I do not want to see a lot of money being spent to put a bunch of
stickers on things that no one is ever going to look at. I am concerned
about that, and wonder whether we should at least have, particularly the
items regarding appendix A, addressed by having something stapled into
each copy that addresses that, even if on each page, it does not
indicate that we are #60. Maybe it ought to indicate it pretty directly
on the cover. I don’t mind asking the consultant to do that, since we
had certainly asked for it several weeks ago. I don’t want to assume
that the council is not going to look through it, but I don’t want to
load up on costs if the reality is that it is not going to make a
difference. I would be interested in the thoughts of my colleagues on
that.
Mr. Szybalski: It was unfortunately a staff oversight. It was done
properly in Appendices B and C. We would be.glad to produce a limited
number of copies for the City Council in whatever way you direct us to
do that. We would be glad to do that.
Chairman Johnston: Good. That will take care of that.
Commissioner Gruen: I have two questions to make sure that I understand
this correctly. First, in the so-called final report, the report
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Final Page 14
itself, there is something called Benchmarking Preliminary Findings. Is
there an implication that there will be some later version of this?It
is after Page 31.
Mr. Szybalski: That will be in the new errata sheet.
Commissioner Gruen: The other item I believe I understand, but want to
make sure i have the numbers right. These are 1994 data. If I were a
fiscal year utility like Palo Alto, running from July through June,
would that be July, 1993 to June of 19947 Or is it 1994 through 19957
Mr. Szybalski: It was one of the early issues we had to deal with for
the benchmarking report. Most of the benchmarking data are for the year
1995, since most of these are investor-owned utilities. There is a
percentage of people in this benchmarking report who are on a fiscal
year, and in fact, most of them were in fiscal year 1994-95. You
actually are leading the cycle. You have newer information in there by
six months than most of the people in the survey, and newer information
by a year than a few people in the survey.
Commissioner Gruen: That is not what your report says, and that is why
I am questioning it. The report says they are 1994 data. If you are
telling me these are 1995 data, I will be a lot happier.
Mr. Szybalski: Yes, you are correct. I am sorry. Our current report
went out with 1995 data, and you are right, that is 1994 data. Yours is
1994-95.
Commissioner Gruen: So we are leading, and other utilities on our cycle
would be fiscal year 1993-94?
Mr.Szybalski: Right.
Mr. Oechsler: In the water, wastewater, and natural gas, the data are
either calendar year 1995 or in Palo Alto’s case, fiscal year 1994-95.
So there is not that issue there.
MOTION: Chairman Johnston: I move that the City accept the
consultant’s report and that council review the recommendations and ask
staff to prepare an implementation plan, including whether they will do
it or will not, and if so, why, and that that task be given to staff.
Council can decide whether they would like, following that, to have that
report return to council or return to the UAC.
SECOND: By Commissioner Sahagian.
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Final Page 15
Commissioner Gruen: I would like to explain why I am going to vote
against this. It is because I want to underscore two issues. First,
the newest data in this report is 22 months old, and the oldest data is
40 months old. That is why I made sure I had that information right.
I feel that that is too old. If we are sitting here with something
Commissioned in March of 1996 and delivered in November of 1996, that it
ought to be a year newer, just the way you were thinking but not the way
your report shows. That is one issue.
The second issue I want to underscore is that customer input is not
included in the planning process. You suggested that we look at
Appendix K, and I did a scan on that. The word "customer" is nowhere
mentioned in it, so it is not part of what you are advocating for the
planning process. I think it ought to be, and I want to make sure that
we highlight that for the council. Thank you.
MOTION PASSES: Chairman Johnston: Is there any further discussion on
this motion? All those in favor, say aye. All opposed? That passes on
a vote of 4-1, with Commissioner Gruen voting nay. Thank you very much.
I know you have had to trave! here a lot and endure a lot of examination
by us. You have been patient, and I appreciate your efforts.
Mr. Szybalski: I will take some of the comments you have made as guides
in approaching the City Council, with the points to stress. So I
appreciate that.
Ms. Fleming: Since this is the last evening that you will be dealing
with this task that has been assigned to you, I would like to take this
opportunity to express my appreciation to you for the time and effort
and the energy that you have spent on this process. I know that it has
really eaten into your schedule and has caused you to adjust the
assignments that you really want to pay attention to. When we, as
staff, realized that we needed to undertake such a project, I want you
to to know that it was with great confidence that I asked the council to
let you sit as that review body for this report. There were several
options available to us as to how we would have processed that, but you
have served us so well that we felt you were absolutely the best body to
do this and provide this service to us. So I want to take this
opportunity to say, thank you. I know you have put in a lot of time.
As staff, that is part of our job to do that, but you sit in a voluntary
capacity, and I sincerely appreciate it. We will forward on to the City
Council your recommendation, along with my recommendation to the council
as to how they will deal with it. I certainly want to thank you for
what you have done.
Chairman Johnston: Thank you very much. I appreciate your comments.
MINUTES UAD:ll/06/96
Final Page 16
Item 6. b.Gas Issues Update.
Karla Dailey: I do not have a formal presentation prepared for the gas
issues update this evening. I am available for your questions.
Commissioner Gruen: There was mention made of a change in the PG&E
tariffs so that they were now significantly lower than ours. Do you
have any comment on that?
Ms. Dailey: Are you referring to the transmission? (Yes) Off the top
of my head, I cannot recall exactly what caused that to change. It
actually went up from i0 to 12¢, I believe. We used to compare i0 to
our 17¢, and now we are comparing our 17¢ to 12. So I think it went in
the other direction, but I can get back to you on that.
Chairman Johnston: That completes that item.
Item 7.New Business
a.Compressed Natural Gas Rate
Lucie Hirmina: Mr. Chair, Commissioners, I do not have any formal
presentation for this matter, but I am available for any questions.
Commissioner Gruen: I have a question that comes to mind whenever I
hear about therms, and I know all of the factors and adjustments which
go into a therm. Now I have something which smells like the same kind
of thing. It is per gasoline gallon equivalent. Could you give me some
idea of what one of those is? Is that the amount of natural gas you
need to go as many miles as a gallon would take you?
Ms. Hirmina: I am not an engineer.
engineer. That is my understanding.
I got the therms from our gas
Commissioner Gruen:
what it is.
So you and I are in the same boat.We do not know
Ms. Hirmina: Yes. They have changed the therms to gallons.
Mr. Mrizek: Basically, what you said is correct. It is a calculation
that has been used in the compressed natural gas (CNG) industry to
basically equivalent gallons to therms(?). How many therms would it
take for an equivalent gallon of gasoline? How many miles would you go?
We do not have the formula with us tonight, as Lucie said, but I am sure
our engineering staff could provide that information.
Ms. Hirmina: It is a factor of 1.6.
MINUTES UAD:I 1/06/96
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Commissioner Sahagian: I think it might just be a million btu
equivalency, comparing the heating value of gasoline to compressed
natural gas. I doubt if it would take into account the mileage
efficiency of the vehicle.
Mr. Mrizek: No, you are correct, it is the heating value.
Commissioner Sahaqian: It is about ii0,000 per gallon.
I have a comment. Richard zeroed in on the same general area as I was
looking at. I found it rather surprising, as I had never paid much
attention to compressed natural gas, that it was 71 per gallon for CNG,
which is probably on the order of half of what gasoline is per gallon.
My comment is that if this is a program that we are interested in
promoting, from an air quality perspective, we ought to get out and crow
about it. It is a pretty compelling rate for people to consider vehicle
conversion, and it seems like one of those very well kept secrets, as it
is not real obvious to people in the energy business.
Commissioner Chandler: I thought the same thing, but my reaction was
exactly right on your initia! comment. I am not sure it is 71¢ compared
to $1.42, because I don’t know what the efficiency is with which the
fuel is turned into turning wheels. That is really going to determine
whether the 71 is or is not a bargain. There would also be the capital
costs of conversion and issues of maintenance and reliability. So I am
not sure how you would ultimately measure the total cost of ownership.
I was wondering whether this is going to be limited to the school
district or whether other people convert, or are you going to be running
a fueling station for anyone who happens to show up with a vehicle? How
is that going to work?
Mr. Mrizek: When we began the compressed natural gas program
approximately three years ago, we initially started with the City fleet
only, converting approximately one-third of the City fleet to CNG. We
did this because it is a cleaner burning fuel. It is cost effective,
and our first plan was to put a CNG filling station at the municipal
service center (MSC). This we have done. Our plan, through demand side
management (DSM), is to work with some of our major customers in the
City, hopefully establishing a second station somewhere in the City in
the future. We are looking at a number of sites, and we will be talking
with some of our major customers. PG&E has worked with the postal
service people and other major companies to convert parts of their
fleet. We want to do the same thing. The use of the fueling station at
the municipal service center will be limited to fueling only of City
vehicles and the buses we mentioned in this report. We do not plan to
open up our MSC to other customers. We would have some difficulties
MINUTES UAD:I 1/06/96
Final Page 18
there because of traffic flow, etc. So we would not want to look at
another site in the future to open this up to future customers.
Commissioner Eyerly: Lucie, your report covers all the bases as I read
it. I note in the development of the rate schedule that you figure Palo
Alto’s rate would 71, and PG&E’s rate would be 84¢, putting us a little
bit under PG&E. Things like this are good for the City to move forward
on and see how it works out, perhaps expanding it depending upon what
happens. This is a small amount of money, and it seems to be priced
right. The environmentally concerned people will be pleased with it,
and I think we certainly should go ahead on it.
MOTION: Commissioner Eyerly: I move that we recommend to the council
that they approve the G-10 schedule that has been prepared.
SECOND: By Commissioner Chandler.
Chairman Johnston: I have a number of questions about this. One is
whether the intent here is that the pricing is done to recover the cost
of the program, or is this pricing deliberately being what one might
call subsidized as a part of the DSM program?
Ms. Hirmina:
program.
Actually, no, this is just to recover the cost of the
Chairman Johnston: Also, you have indicated construction capital costs,
and you have provided for a 7% interest rate.How is this being
financed? Are we borrowing the money for this?
Ms. Hirmina: It was included in the capital improvement program.
Chairman Johnston: Then my question is, why are we only charging 7% to
this program? Is this part of the gas utility?
Mr. Mrizek: That is correct.
Chairman Johnston: So if it is a part of the gas utility, the capital
costs are included in the CIP program which, based on the way I
understand it, returns roughly 9-1/2% to the City, yet we are doing our
calculation for the rate based on a 7% return. Why not the full return?
It sounds like the rest of the gas utility has to subsidize the
difference.
Ms. Hirmina: What I am using the 7% for, this is the interest on our
portfolio, so it is just like discounted cash.So I have recovered from
the cash that was spent. It is like a cost for the life of the
project.
MINLTES UAD:I 1/06/96
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Chairman Johnston: But at the same time, having incurred the capital
cost, it will increase the transfer to the General Fund.
Mr. Mrizek: The CNG program I do not believe is part of the gas fund
for transfer. We have kept that’separate. That is not part of the
assets that we use in calculating the transfer.
Chairman Johnston: That is what I was trying to understand. So what
exactly is our policy, then, in terms of what capital programs add to
the rate base for transfer, and what do not? I do not quite understand
~that.
Mr. Mrizek: The gas distribution system, which would be all of the gas
mains, the laterals, the meters, all of those to serve our customers,
but not the gas fueling station for the CNG.
Chairman Johnston: What I am trying to understand is, where is the
origin of that decision that the capital cost for a CNG system would not
provide a return to the General Fund. Why not? I do not quite
understand that.
Mr. Mrizek: Because the CNG system is on the other side of the meter,
the customer’s side. When we serve a customer, industrial or
residential, all of the distribution system up to the meter we include
as an asset. We look at a CNG program basically as another customer.
We have a meter, and we are metering gas. On the other side is the CNG
pumping station at the MSC. That is the rationale that we use.
Chairman Johnston: In the case of the customer, if it is on the other
side of the meter, doesn’t the customer pay for it?
Mr. Mrizek: That is correct. And here we are collecting that asset
based on the price per gallon or price per therm that we sell our CNG to
our customers.
Chairman Johnston: It seems like a very arbitrary decision as to where
you decide the break is between what provides a return and what does
not. I do not quite see what the distinction is. I don’t see why the
City would consider this any less of an investment upon which it should
be entitled to a return.
Mr. Baldschun: You might look at this as the gas utility seeing an
opportunity to encourage natural gas use in an efficient manner that
helps the envirornnent and saves cost to the City and other agencies, and
perhaps eventually to private users. As Ed said, it is not on the gas
utility side of the meter. It is on the customer side, so it is unique
.,s, IINUTES UAD: 11/06/96
Final Page 20
in that regard that we are making an investment to encourage this
activity and are recovering it through the CNG rate over 15 years using
the opportunity cost, you might say, of the portfolio of our cash which
is 7%.
Chairman Johnston: One could argue that the meter is on the way into
the pumping station, or one could argue that the meter is on the way out
of the pumping station. When I come in to fill up, you have a meter
there that records how much I get out, and the whole pumping station is
on the other side of the meter. It just seems very arbitray to me.
Randy, I can completely accept the logic you give, but that logic to me
then suggests that we are subsidizing this as a DSM program. And that
may be just fine, but I feel we ought to be clear as to whether this is
something we are treating differently becaue we think it is good and
deserves merit for environmental reasons as a part of the DSM program.
Why are we doing this? It seems to me that I have heard two rationales.
One is based upon which side of the meter that it is, which seems to be,
at best, arbitrary, and the other is that it is a good thing to be
doing, which falls into the category of DSM.
Mr. Baldschun: If there are some costs we are not recovering, which, to
me, signifies a subsidy, then I am not aware of them. I think the costs
for operating and the capital costs, the only component that is not in
there really is the profit in terms of transfer to the General Fund on
this activity, but there is a good reason for that. We do not own the
asset, essentially, and it is a quasi -- who owns it? The point is that
this breaks with tradition in the sense that we putting some money into
an activity that is not on the utility side of the meter, but we are
recovering our costs, so I cannot see it as being a subsidy.
Chairman Johnston: You raise a good question. Who does own this? It
sounded like you were going to reach the point in saying the utility
does not own it. Then I was going to ask, who does own it? Then you
probably would have to come back and say, the utility sort of owns it.
So it sounds like there isn’t much of an argument there. From the
utility standpoint, I would accept it. If the General Fund is not going
to charge the utility a transfer on it, then you are correct. The
utility is not subsidizing it. Then I guess my question is, why is the
General Fund choosing this particular program to be so generous? Maybe
that is not a question for you.
Mr. Mrizek: You are correct there. You asked another question -- why
are we doing it? We are doing it because of the Clean Air Act. .This is
entirely a program that we see as a benefit to the community and the bay
area.
MINUTES UAD:I 1/06/96
Final Page 21
Chairman Johnston: I am very supportive of our doing it. Don’t get me
wrong. The question is merely a matter of whether we are doing it on
the basis that it is a DSM basis, or are we doing it on the basis of the
way we would do any other utility activity involving equity transfers.
I think, Ed, you have answered the question with regard to maintenance.
The only vehicles we are going to be fueling are fleet vehicles.Are
there particular fleet vehicles that have been identified so far?
Mr. Mrizek: This is just City vehicles. City fleet plus two buses from
the Palo Alto School District and two from the East Palo Alto School
District.
Chairman Johnston: Do you see that changing?
Mr. Mrizek: The only change we would foresee is if we would increase
the number of City fleet vehicles being converted to CNG. We do not
plan to utilize this station for other customers.
Chairman Johnston: My next question, following on what we have heard,
is why not? Maybe we should be in the business of encouraging taxi
fleets and other fleet vehicles.
Mr. Mrizek: Yes, we want to encourage our customers to convert to CNG,
however, to do so, the MSC, as you know, is funneled through a two-lane
roadway. We would have to redo the master plan of the area, causing
considerable traffic. We would have to go through a number of things.
The decision we reached at this time is that the fueling station at the
MSC, the security at the MSC we took into consideration, and a lot of
things to make a determination that that fueling station will be
utilized just for the City vehicles. But yes, we are looking at other
sites in the City if we get additional customers such as Hewlett-Packard
or Varian who may want to convert some of their vehicles or the post
office. We would then look at another site for another CNG fueling
station. We need a location where there is a high pressure gas line, a
PG&E line that we can tap into. That is another criterion.
Chairman Johnston: What I would like to do is to propose an amendment
to the motion that is on the floor and see if there is support for a
second. I would like to propose that we do indeed recommend that the
City Council adopt this, but that we ask them to consider whether they
want to have an equity transfer on this. If so, the increase in cost
would be relatively modest and would still allow us to provide a cost
below that of PG&E. So I would propose that amendment.
Commissioner Eyerly: I accept your amendment as maker of the motion.
MINUTES UAD:I 1/06/96
Final Page 22
Commissioner Chandler: And I accept as the seconder.
MOTION PASSES: Chairman Johnston: Is there any further discussion on
the motion as amended? All those in favor, say aye. All opposed? That
passes unanimously on a vote of 5-0.
Item 7. b.Information Report, Street Liqht Conversion
Program.
Mr. Mrizek: The members of the Commission requested this report, and we
are providing this for the Commission information.
Commissioner Gruen: I want to make sure I understand the numbers, if I
may. First, the number which caught my attention is that by the end of
calendar year 1996, you will be completely finished with this program.
Is that accurate?
Mr. Mrizek: That is correct.
Commissioner Gruen: Grossly, the arithmetic on what your electricity
costs are that you get twice as much light in exchange for 40% of the
cost of electricity. Can you say anything about how often you have to
change the lamps or what it costs to change a lamp, things like that?
Mr. Starr: The cost to change the lamp is the same whether it is
mercury vapor or high pressure sodium. We find that the high pressure
sodium lights last for around four years, so they have a good life time.
The incandescents lasted for less than one year. So you get more light,
less electricity, and longer life.
Commissioner Gruen: So it costs us four times as much to change
incandescents because you have to change them more often. What does it
cost to send someone out to change one?
Mr. Starr: If it is for just one at a time, it probably takes from 20
minutes ot a half hour, depending upon how far you have to drive to
reach the site, then set up the truck, go up and open up the fixture,
change the bulb, put the fixture back together and come back down. It
works better if we do a number of them at one time. We are also laying
out a plan to do group replacements instead of waiting for them to
actually fail. We would just establish a lifetime on them, and then
every four years, we would replace a whole group of them.
Commissioner Gruen: I believe I see the makings of a success story here
rather than a mere report. Certainly more light for less money is a
success story. Replacing them on a longer-term basis sounds like a
MINUTES UAD:I 1/06/96
Final Page 23
success story. What I am suggesting here is that when you get it all
done, in a couple of months, you put in the success story parts, calling
them out explicitly, and send it on to the counci!. You have something
you are doing right, so let’s go crow about it.
Mr. Starr: We will be glad to point out when this is done.
a !ong-term project.
It has been
Commissioner Chandler: Larry, is there any other technology coming down
the pipeline on this, while we are looking at it, that is going to make
us say in five years time that we are not going to want to do it again?
Not that this is a criticism.
Mr. Starr: Not that we have seen. Remember when you are going around
the country, you will see the pink lights almost everywhere now when you
fly someplace. There is nothing else that we have seen on the market.
Commissioner Chandler: Also, as a point of interest, because I happen
to live near there (and this borders on the trivial), the last section
of the report talks about the conversion of the final 500. I notice
that 36 of them are going to be part of undergounding project #37.Is
that a project that will be undertaken in the current fiscal year?
Mr. Starr: Yes, we are looking at the design for that right now.
is really going to happen in our lifetime.
So it
Chairman Johnston: I would certainly second this program. It is
obviously one of those very successful programs. In a sense, it is a
good example of the utility leading by example in terms of the cost
effectiveness of a variety of energy-saving measures. I know that the
utility has been trying to persuade many customers to change their light
bulbs, and here, you are doing it on a grander scale. So I feel it is
a excellent program. Thank you very much.
Item 7. c.Utilities Project PLEDGE Proposal
Mr. Baldschun: Project PLEDGE is a proposal. You have read the
memorandum. It is a utilities program that is supported particularly by
Administrative Services. Emily is here to answer questions that could
potentially impact her group. Also Rob Pound from Information
Technology Services is here to answer questions that affect his area
regarding software programming. Melissa Cavallo will answer questions
on the accounting end of it.
There are really four areas, and the fourth one is utilities. The
Project PLEDGE proposal is staff’s recommendation to provide a mechanism
MINUTES UAD:I1/06/96
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for rate payers to contribute or donate funds to help other rate payers
who are having trouble paying their utility bills. You have seen a lot
of literature on it, so I will not spend a lot of time on the details of
the program. To summarize, we think that the kind of program we are
recommending is cost- effective, however, we want to try it for a one-
year period and evaluate the results and come back to the City Council
with the number of participants and the impacts on staff.
The program that was referred to us by the council was one that involved
the checkoff box. We evaluated that proposal, and based on the impacts
on staff, we do not feel it is cost-effective, so we are not
recommending to the council that we pursue that option. The third
option we mention in the report is male solicitation, which has very
little impact on the staff. It doesn’t appear to provide very many
contributions, based upon the experience of other utilities. With those
opening comments, I will open it up for questions.
Commissioner Gruen: I have a question on your Page 3 where you talk
about the number of residents who meet your four categories. One of
your ~# of Residents" is n/a. Somehow, the theory is that if someone
who owes us money gives us a forwarding address, we do not know how many
people we have in that category, whereas if they give us a forwarding
address which doesn’t work, we know how many there are.
Mr. Baldschun: We have not bothered to look up the records for that
activity. It is not something we normally collect on a regular basis.
We had to do some special digging for this assignment just to come up
with these numbers. It was not worth the effort to pursue every last
customer in this report for that purpose.
Chairman Johnston: I have several questions. This obviously seems to
be one of those things where you try to make the logical compromise
between the program that gives the most money and the program that is
most cost-effective. This seems to me to be a very reasonable
compromise from that standpoint.
You are talking about this being a pilot program. As I understand it,
it is going to be done for all residents for a period of one year, so
the piloting is a time period. It is not going to be some subset. Is
that correct?
Mr. Baldschun: We are proposing to implement the program beginning near
the end of the current fiscal year, running it for 12 months, and then
report back to council on the results.
Chairman Johnston: The question I have when I see a report like this
MINUTES UAD:I 1/06/96
Final Page 25
and when you are building the software, although it is apparently
relatively easy for this purpose to do so, is about other potentia!
programs that might want to use this. Obviously, there are all kinds of
people who lobby for various checkoff boxes. One that has perhaps been
knocking around here a little louder than some of the others is the
issue of green pricing. That is one of those areas that, at least in
theory, could be handled in exactly the same way. You could have a
pledge with regard to some fixed dollar increment or a percent of markup
on your bill, and you could proceed that way. In working on this
program, how do you see it relating to that? Do you see it as being an
opportunity to build software that could be applied that way? Or do you
see it as being totally separate? Is there any connection here at all?
Mr. Baldschun: The software program for green pricing, and I assume
what you are referring to is customers just contributing to a fund that
would go toward non-renewable resources, would not involve any
programming other than putting a line on the bill statement. That would
be fairly easy. What we are talking about with Project PLEDGE is much
more complicated than that. We would have to get into the billing
software programs which are a kluge of many, many programs with no
documentation. The problem with a lot of these things is that they
sound simple, but you have to plan for the unexpected. A customer
pledges that he is going to send two dollars a month, but only sends a
dollar. How do you handle that dollar difference? Those are the
exceptions that create the problems for a lot of folks. So the software
program has to be designed to anticipate and allow for all of those
exceptions. With green pricing, that would be an easy one-line item on
the bill, and there is room for it on the bill.
Chairman Johnston: The way I understand how that might work, it would
be quite similar to a pledge. People could pledge to sign up for so
many dollars per bill, for example, to be added to their bill for
purposes of green pricing. Then you would have the exact same situation
when they pay the bill if they do not pay the full amount. How do you
allocate that? I guess I do not really understand the difference
between this pledge program and a pledge program for money for green
pricing.
Mr. Baldschun: Maybe I do not understand what you are referring to on
green pricing. Is it a situation where the utility is simply collecting
a sum of money and distributing those sums toward the purchase of non-
renewable resources as part of its portfolio, not specifically
identifying on a customer’s bill how much of their kilowatt hours went
to that? If you are talking about the latter, it is more complicated.
Chairman Johnston: What I was talking about is what you might call
MINUTES UAD:ll/06/96
Final Page 26
"voluntary green pricing" where essentially, some individuals or
companies could choose to pay a surcharge on their utility bill, a fixed
amount per month or a percentage markup, some such thing, and that money
would go to a fund. I believe we have had a number of letters,
proposals, etc., over the years that talked about that program. It
seems to me that there was a direct analogy with the Program PLEDGE.
Mr. Baldschun: If it is a voluntary program, then it would be a problem
because we would run into the same problems we have. If they did not
pay what they had pledged, it would become an accounts receivable --
Commissioner Sahagian: First of all, in concept, I think this is a
really good program. At the same time, given that we are in an election
year and a year of welfare reform, I looked at it in that light trying
to understand it. Two things often come to mind with these kinds of
programs. One is ensuring that the money gets channeled to where it
really needs to be channeled. Secondly, what are the real
administration costs, relative to what you get back. In terms of the
channeling, it looks like you have indicated that you would use the
Salvation Army and would work in some kind of tandem or joint basis to
have them prequalify recipients. In terms of the cost of the program,
you indicate that there is a relatively nominal cost because you would
be piggybacking all of the work on the mailings that we are already
doing, so the postage and handling cost would be small. My only
question is in your analysis of administration costs. You really do not
talk much about the joint evaluation aspect of it with the Salvation
Army and how you determine who qualifies and who does not. Has that
been looked into? Those costs could run up pretty quick, offsetting the
value of the total program.
Mr. Baldschun: I debated whether or not to lengthen the report, and I
decided not include that part. Basically, the Salvation Army is very
amenable to working with agencies. There are a number of utilities, and
that part I mentioned. They have criteria they use for REACH. It is
Palo Alto’s choice. We could decide to liberalize those requirements or
not. We will meet with them and decide what makes the most sense. My
guess is that we will probably collect more money than the rate payers
are going to apply for if we simply stuck with the PG&E REACH
guidelines, which is once a year. I am aware of customers who really
could use rate relief four or five months of the year, but they do not
qualify under the current system. I would hope that we could liberalize
what is currently provided by the Salvation Army. They seem to be open
to that.
Commissioner Sahagian: I tend to agree with you. That was my reaction
-- that the collections would probably exceed the distributions. Would
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the administration costs be included as part of that?
Mr. Baldschun: The Salvation Army would take 10% of the contributions
to cover their expenses. That is a verbal agreement with them. We have
not signed on the dotted line yet, but that is an estimate.
Commissioner Sahaqian: And for the utility administration costs,
extraordinary costs, would there be any recovery there?
Mr. Baldschun: In our administration costs we are not talking about
incremental costs. It is just time of the existing staff to do the
work. It cuts across four areas, the four sitting here. The
incremental costs are only about $1,500 a year. We have not calculated
the actual costs of everybody doing their particular activity.
Ms. Harrison: The staff that would be working on this program are
already working on utilities programs in Administrative Services. So
there would be no increased cost to the utilities. It would be a
tradeoff as to which utility’s work they were doing at any point in
time, just additional work.
Chairman Johnston: I have a card from Mr. Lewis to speak.
James Lewis, 1498 Edgewood Drive, Palo Alto: Chairman Johnston and
members of the Commission, I wish to thank the UAC and staff for your
consideration of the Project PLEDGE program. This community has long
been known as a caring, compassionate place, and I believe this program
potentially .will be a fine example. This concept was originally
introduced to the City three years ago in 1993. At that time, there was
some interest, but for a variety of reasons, it was not pursued. A year
ago today, November 6, 1995, the City Council once again considered this
program, which I called "Utility assistance for families in crisis." It
followed a City Council priority known as "People in Crisis." At that
time, the City Council voted unanimously 9-0 to refer it to the UAC and
staff for further consideration. One might ask, who would donate into
such a program? The answer may be found by looking at a number of other
places that already offer this program such as the following. First,
PG&E’s highly successful REACH program has been offered for many years.
Over 70,000 customers per year contributed $4.5 million in 1995. In the
State of Texas, their program brought in $2.15 million, and in the State
of Arizona, last year $775,000 was contributed into their program. At
the City or municipal level, we find that in the City of Mesa in
Arizona, over $30,000 was contributed by their citizens. In the City of
Garland, Texas, over $I0,000 was voluntarily contributed. You might ask
whether, once collected, are the rate payers in need of the funds? In
checking with several groups, I learned that Palo Alto has such a need,
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as outlined in your staff report. With PG&E, over 350,000 customers
statewide have been helped over the years by this program. In Texas,
the Lone Star Gas Company reports that they have helped 29,000
customers. Incidentally, the Salvation Army already helps a number of
Palo Alto residents, but the source of their funds is outside of Palo
Alto. The REACH program that is collected by PG&E customers has been
allocated to the local Palo Alto Salvation Army people, and
unfortunately, they run out of those funds during the year. Presently,
there is an insufficient amount, so if this program does get approved by
the City, we can either replace those funds with our own citizens
helping our own citizens, or we can supplement those funds that they are
allocated by their own office. I am delighted and pleased that this
program is being considered by the UAC and by the Palo Alto Utilities
Department. I can share with you that I fully support the staff
recommendation. Thank you very much.
Chairman Johnston: Thank you, Mr. Lewis.
MOTION: Commissioner Eyerly:
recommendation.
I move approval of the staff
SECOND: By Commissioner Sahagian.
MOTION PASSES: Chairman Johnston:
vote of 5-0.
That motion passes unanimously on a
Item 7. d.Electric Utility Stranded Cost Update
Mr. Baldschun: Earlier this spring, as you know, we spent some time on
the subject recommendations that council approved, one of which was that
we review this matter again this year with the UAC. That is why we are
here tonight to begin the first of three meetings on stranded costs.
Tonight we have a report that outlines our approach to the subject and
how we plan to approach it over the next three meetings. We also have
Attachment 1 that was performed by Jane Ratchye and Doug Boccignone with
Tom Habashi’s review on the updated stranded cost estimates. They can
answer specific questions in that area, and I will try to answer
questions on the agenda items and how we plan on addressing these items.
Next month, I will primarily be addressing the mitigation measures that
we want to bring to your attention to engage in a dialogue,
specifically, what happens if the staff is wrong in our forecast and we
underestimate or overestimate stranded costs, what options are available
to the City? This is something that we danced around in the spring. We
did not spend much time on it, and I don’t know if any of us sitting
here tonight have definitive answers tonight or next month, but we want
to attempt to look at these things and try to get a comfort zone for
MINUTES UAD:ll/06/96
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them. In order to recommend a stranded cost plan, you need to have some
sense of the risk involved if you are wrong.
One other comment I wish to make is that the current council policy is
that we will establish a balance in the Calaveras Reserve by the end of
2003 of $31.6 million. As you know, since the spring, AB 1890 has come
out, and now they have moved it up a year, essentially for the investor-
owned utilities for fall, open competition in 12/31/01. So we have
updated the stranded costs numbers to include what the target balance in
the Calaveras Reserve would be in 2002 rather than in 2003.
There are some other changes that Tom’s group is going to talk about.
Mainly, the COTP is in there this time. Also, the there are some
refinancing assumptions regarding Calaveras that have an impact on the
numbers. There are also some policy decisions that we plan to bring
before the council that really have to be made before any final action
can be taken on the stranded cost policy. The plan is to get those to
the council and to you prior to the final decision on stranded cost.
Chairman Johnston: Tom, are you going to make a presentation?
Mr. Habashi: We do not have one but we are ready to respond to your
questions. I have one thing to add to what Randy said. I want to
emphasize that next month, in addition to the stranded cost investment,
the stranded cost report that you will be getting from Randy addressing
mitigation measures and recovery measures, we will also be bringing in
recommendations for certain policy issues that need to be addressed by
the council in regard to customer choice and asset investment recovery,
as well as sales. We are working on that right now, and we
hope to be able to bring it to you in December.
Chairman Johnston: Could I begin by trying to get a gut level feel of
where we think we are now? I understand that a lot more work needs to
be done, but when I look at Exhibit A, I wonder if I em reading it right
or wrong. The way I look at it, it appears that maybe my worst fears
have been realized. When we had this issue here before, we had talked
about a projection of how fast the energy prices would rise and that if
we were going to have relatively low stranded costs, it would depend
upon our having a fairly steep climb in energy prices. You show the
four different levels that we had talked about before for the City of
Palo Alto, and then there are these two other lines which, at least to
a first order, mirror the City of Palo Alto low-estimate cost for low
energy prices therefore being the stranded cost high estimate. If I
understand this correctly, that seems to be telling us that the
projection is as bad as we thought it could have been. To make matters
even worse, we knew we had a limited time period. We missed a year in
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terms of not increasing electric rates last year. We potentially are
losing another year, because instead of trying to get this done by 2003,
it is now 2002, so we have basically lost a year there. Am I missing
the boat or is it pretty bad?
Mr. Baldschun: What you have this time that you did not have before is
a forecast of energy prices that is a proxy for market prices from a
marketer. That is one estimate. That is not an estimate which we have
tried to turn into a high, low, medium. It is simply their estimate,
and we have added 30%, which turns out to be a relatively low market
price which is close to the market price that staff forecast back in the
spring. The other one that you have, The Merrill Lynch estimate, is
similarly low, although a little bit higher than the marketers. I think
it is premature to conclude tonight whether it is worse or better. I
think you will get a sense of that after having gone through this
exercise over three months. You can look at the high end of the range
and you might say, what are we worrying about in terms of the market
prices? Again, it gets down to where you feel you are given
information, given the mitigation measures we are going to come to you
with next month. You are correct in that the window has shortened and
when we can enact rate increases. We decided that we did not want an
increase in rates last year. Of course, with AB 1890, they have
shortened it one year, so that window is shorter. The question is, is
that a nightmare? Well, we will find out next month when we show you
the rate projections.
Chairman Johnston: I understand that you are not done with your
analysis, but we do not have a final number yet. Obviously, we have
more work to do here, but it at least looks like we are going to go back
to the City Council with a significantly higher target over a shorter
time period. It seems to me that we would be saying that we are going
to be recommending that we need to increase rates.
Mr. Mrizek: That is a possibility. As Randy indicated, we are doing an
analysis now at staff of looking at our current rate, the expenditure we
require at this time to purchase our energy, and our supplies over the
next three to five years. Tom and Doug and their staff will be doing an
analysis of that. We know that the market is soft. We want to look at
whether that market will remain soft over the next several years.
Possibly there will be some dollars available there to put into reserves
rather than to apply to purchases. As I said, staff is looking at that
now, and we are looking at some other options for generating revenues if
we have to increase Calaveras Reserve well above the $31 million figure
we recommended last year. We will be bringing to you some alternate
options on how to increase the reserve, if absolutely necessary to reach
the target by 2001 or 2002. We still do not have all of that
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information. We want to bring that to you over the next two months.
Mr. Habashi: Chairman Johnston, I would like to make one point to put
your fears at ease a little bit. The reduction of the Western
allocation that we did a couple of months from 175 to about 130 allowed
us to go to the market quite often on the spot and buy cheap energy to
replace that of Western. So over the next four years, we may be looking
at some good amount of dollars coming in via that reduction of the
Western allocation. Even if the market is high, we should expect that
the stranded costs would be low, therefore, there is a balance here due
to the fact that we have gone on the spot market quite often. If the
market is very low, then the stranded cost is high, but if we go on the
market, that reduces our production cost and increases our savings. I
think you will see when we come to you next month that the rate impact
is likely to be minimal.
Chairman Johnston: I look forward to that.
Commissioner Sahaqian: I thought this was a pretty well prepared brief.
However, I do not completely understand what we are saying in Exhibits
A and B. When I read this analysis, the first thing that came to mind,
if you were to amortize the stranded investment over some period of time
and divided by the tota! number of kilowatt hours that we would expect
to generate at current consumption levels, what does it mean in terms of
cents per kilowatt hour? The numbers that have been bandied about in
the deregulation hearings have been in the range of four to four-and-a-
half cents for California investor-owned utilities. That is what the
competitive transition charge (CTC) has been projected to be. When I
looked at these graphs, I thought I might be looking at something that
put it into those terms. I do not completely understand what we are
saying in Exhibits A and B. Could someone clarify what these exhibits
are saying? When you say, "Energy Price in Dollars per Kilowatt Hour"
what is that?
Ms. Ratchye: First of all, the label is wrong. It should say, ~Dollars
per Megawatt Hour." I realize that could cause confusion. The CTC
material you will see next month. This has nothing to do with that.
This only shows various market price projections to show the uncertainty
in forecast.
Commissioner Gruen: I just read it all as mils, therefore, it all made
sense. I have some more basic questions. On the first page, you talk
about 2003 dollars rather than 2002 dollars. Are these different units,
like 1998 dollars? Or is that just a change in target date that you are
talking about?
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Mr. Baldschun: It is a change in target date. 2003 was relevant in the
spring when we adopted the policy. It is no longer relevant for
purposes of this new analysis.
Commissioner Gruen: Is there a discount rate you use in calculating
these? If so, what is it?
Ms. Ratchye: Six percent.
Commissioner Gruen: How do you get six percent?
Ms. Ratchye: I got that from Lucie who said it is the rate of return on
our portfolio.
Commissioner Gruen:
earlier.
Well, it was 7% when we were talking about that
Ms. Ratchye: I heard that, too.
Commissioner Gruen: And it is 5% when we talk about how much the
expenses increase each year. I do not have a crystal ball, but I think
it would be easier if we picked some number that everyone could agree
upon, and start with that.
As I understand stranded cost, there are really two calculations going
on here. One up here is what we actually have to pay, and then there
are these various market estimates of what we think we can take in in
revenue or revenue net of costs to produce that revenue. The stranded
cost is the difference between them -- how much we don’t think we will
be able to pay in mils per kilowatt hour or whatever unit you want for
it. I asked several months ago what the Calaveras bonds would cost.
What is the top number of all of this? How much are we on the hook for?
Mr. Habashi: We are at a little over $120 million.
today.
That is outstanding
Commissioner Gruen: Is that through 2024?
Mr. Habashi: That is correct. And if we keep paying it in nominal
dollars, it probably grows to about $240 million or $250 million.
Commissioner Gruen:
those numbers be?
If that gets refinanced, as you expect, what will
Mr. Habashi: In this staff report, we are including the assumption that
we would be able to refinance those bonds that we actually can
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refinance. There are some that we cannot refinance at this point. The
assumption we are making is that we would be able to refinance them from
the current 7-1/4% down to 6%. That brings down the stranded cost by
about $9 million, I believe. Jane tell me it is $8 million.
Commissioner Gruen: You said that is stranded cost. What is this total
number we are going to have to pay over time?
Ms. Ratchye: The principle would be the same. With the stranded costs,
savings would be the same as the savings from the refinancing.
Commissioner Gruen: That makes sense. There is an IRP in here, after
a fashion. On Page 4, you talk about various contracts and you like
this one but don’t like that one. Presumably, there is a cost for
energy associated with each of these contracts. Can you give me a quick
run-down on how much we are talking about? These guys want 40 mils.
Those guys want 120 mills, or whatever it might be.
Mr. Habashi: Are you talking about the list of projects on Page 4?
Commissioner Gruen: Yes, the various projects. You say you do not want
Washington Water Power, presumably because it costs too much.
Mr. Habashi: That is correct.
Commissioner Gruen: That is the sort of thing I am asking.
the prices that go with these companies?
What are
Mr. Habashi: Are you looking at rates for dollar per kilowatt hour?
(Yes) Roughly, the WWP is probably a melded rate of about 4-1/2 to 5¢.
The Calaveras Project in an average year is about 8¢. Bonneville Power
ranges anywhere from 9 mils per kilowatt hour in May to 25 mils in
August, September and October. The California Oregon Transmission
Project is about $3.00 or $3.50 per kilowatt month. Western is ranging
today 25 mils per kilowatt hour, if you add the CVPIA cost, or 2-1/2.
Mr. Baldschun: I would like to caution the Commission on one item,
CTCs. I don’t want us to get started off on the wrong foot. We are not
planning on coming to you next month with a CTC cents-per-kilowatt hour
figure. That will come when we unbundle the rates later in the spring
with the rate proposals. The PG&E CTC formula is rather complex. Other
utilities that have formulae for CTCs will probably be uniquely designed
for their situation. Conceptually, the way I see our CTC is that there
are two components. One is the stranded costs that occur in the year in
which you have the rate effective. So in 1997, we have some stranded
costs calculated. Those can be translated into a rate per kilowatt
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Final Page 34
hour. Beyond that, you have the transition window that goes from 1998
through 2001. That is also a stranded cost that our customers are going
to be paying so that we can build up the Calaveras reserve. So there
are really two parts to the CTC for Palo Alto. It is not just a one-
year number where we are going to collect what they have, because there
are obligations that go beyond that. In fact, they go until 2024. We
are just bringing them all forward to 2002.
CQmmissioner Eyerly: I do not have much to say on the report. I
appreciate the amount of work you are putting into the work and on
stranded costs and bringing the UAC along with you. I know that some of
us were concerned last year that we should have transferred more money
to the Calaveras Reserve, realizing that stranded costs were an issue
that we have to take care of. But I know it is not that easy to
convince the council, outside of Dick, that it can just be done that
easily. I think the reports you have started on, and with what you have
told us tonight of the other meetings, we should have something
substantial and supportive when you get through. So I appreciate that
you are on the right track. We don’t like the window closing down, but
I know you are going to come back with recommendations to solve all of
this for us!
Commissioner Sahagian: Now that I understand the tables a little bit
better, I have some more comments. One of the things that became very
apparent to me, in working with Tom in trying to prepare for the City
Council meeting, was that the bad news is that we have the stranded
investment, but the good news is that once we pay the debt down, it is
going to be a very competitively priced asset. I appreciate what you
just said, Randy, about the complexity of calculating CTC. However,
when looking at trying to develop a methodology for collecting the funds
to pay down the debt, in addition to a hard dollar amount that you are
collecting over a period of time, it would be most helpful if we could
have it somehow couched in terms of -- if you were to look at that as
being something you collect as part of your rate, what does it mean in
terms of cents per kilowatt hour that you would have to generate over
that period. That puts it into a much more tangible and understandable
context when looking at it and trying to get a feel for it, speaking for
myself, at least. What does it really mean if we go out between now and
2002 and try to recover these costs? Otherwise, we are going to have to
sit here with calculators and multiply megawatts times hours per year to
try and get a feel for that.
Mr. Baldschun: We are planning to give you the two worst case
scenarios, the low market price and the medium-low market price, given
the Commission’s comments this spring that you felt we were too
conservative. So you will get a sense of the rate impacts. The rates,
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like all rates, will include all of the revenue requirements. There are
a number of changes to our expenses and revenues, so you will see the
net impact. That is really what the customer is going to see. When we
break out the CTC, that will be identified on the customer’s bill. They
will be able to see that and will know what it is. We will tell them
that we are going to take it off at the end of 2001, that it will be
eliminated. I am not ready tonight to say we can calculate the CTC in
time for next month, except maybe a ballpark figure. You could do a
back-of-the-envelope figure simply by taking the 1997 stranded cost
estimate and dividing it by the total kilowatt hours, which are around
one billion. That will only give you a CTC for that year. Beyond that,
you have to take the net present value of the stream of stranded costs
from 1998 to 2002. Tom just showed me a figure of one cent per kilowatt
hour, so I guess that is it.
Mr. Boccignone: Regarding Tom’s number, we did a back-of-the-envelope
last spring, and it was less than one cent per kilowatt hour for us. It
would be comparable to the 3-1/2¢ or 4-1/2¢ you have probably seen for
PG&E. In terms of a forward looking basis to make that comparison, it
is going to be difficult. AB 1890 changed the thinking about CTC by
establishing this rate cap. The IOUs are going to calculate how much
money they are putting into the CTC account each month, but it is not
going to be a fixed amount. It will just be the difference between
their current rates and their cost. So they are actually going to kind
of back into it. By the end of the collection period, they are going to
check and see if they collected enough. If they over collected, they
will refund; if they under collected, they get a few more years to catch
up.
Commissioner Sahagian: Was that one cent figure on the basis that we
would recover the entire capital but would need to be repaid for
Calaveras and the transmission by the year 2002?
Mr. Habashi: I will tell you very roughly how I calculated that in my
head. I figured that even in the worst case, if we have a stranded cost
of about $80 million and we have $40 million already, then you need to
collect another $40 million over a four-year period. So you need to
collect $I0 million every year for four years. If our consumption is
about one thousand gigawatt hours, then if you divide the $i0 million by
a thousand gigawatt hours, you get about a penny per kilowatt hour.
Chairman Johnston: It seems like a good analysis. I like it. If I
could take it one step further, that is, roughly speaking, a 15%
increase, all things being equal. I understand that you might have
savings, because energy prices might be low during that time, and
because of that, you could offset some of that, but all things being
MINUTES UAD:ll/06/96
Final Page 36
equal, it is of that order of magnitude.
Mr. Habashi: Correct.
Chairman Johnston: Thank you very much for the report. It is a very
good start on this process, and as we have identified before, it is one
of th__e most important processes. We appreciate it.
Item 8.City Council Referrals - None.
Item 9.Reports of Officials/Liaisons
a.NCPA Conunission Report - See Page 54
b.BAWUA Report
Chairman Johnston: I would like to make a further revision to the
agenda, taking this item next. So let us have the monthly report.
Ms. Ratchye: I await your questions.
Commissioner Chandler: Is this one of the items we are going to be
discussing? I thought I had suggested taking this to the council at
next week’s session, but then, did we decide not to?
Chairman Johnston: Right. We had decided not to on the basis that we
felt we really did not have very complete information. I do not mean
from you, Jane, as you have been doing a very diligent job in keeping us
up to date, but the San Francisco PUC has not completed their studies.
As I understand it, all we are hearing is that they anticipate
substantial changes in the price of water. We really do not know
exactly when nor exactly how much. Commissioner Chandler indicated that
this is an important issue to which we might want to alert the council,
but I am wondering where it stands, if you would give a broader update.
Ms. Ratchye: It is early, but I don’t think it is too early to advise
council that there is likely to be very large water rate increases. You
won’t be able to give them a figure yet, but it is clear to me that the
rates are going to go up substantially. The plan that I have that the
San Francisco PUC has seen, but unfortunately did not provide any
comments upon to their staff, does show water ~rates more than doubling,
estimating that our rates which are now $301 per acre foot would go up
to $650 at the end of ten years. That is only when some of these big
projects are capitalized. You recall that the suburbs don’t pay until
they are on line and useful, so this is only a portion of their
$2 billion dollar program that results in more than doubling of rates.
San Francisco people have told me that they are willing to come and
provide a workshop to show what these projects are that they are talking
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about. I thought that might be appropriate for you. BAWUA is busy
trying to figure out whether we really do need them to feel comfortable
with these figures.
I have some information about it. San Francisco has made a presentation
to their rating agencies, for example. They are concerned about the
issuances of large amounts of bonds, so they have been presented with
the need for this, and San Francisco keeps telling me that they have a
high debt coverage, historically. They have low outstanding debt now,
and they think they can do this. They claim that this $2 billion plan
is financially feasible for them to do. It is not a wish list of
projects. It is what they think is likely to be needed.
Commissioner Chandler: I am not going to revisit the issue of whether
we should do it next week, but I really feel that this is the type of
issue where we can provide a pretty good early warning system for focus.
The last time we discussed this either 30 or 60 days ago, we were
considering also asking for the council to look at potentially having us
evaluate the cost of alternative sources of water that might be
available, as well. That strikes me as a pretty major policy decision
for us to make. As I look at the flyer about i00 years of community
service proudly proclaiming that since 1938, we have been almost
completely using Hetch Hetchy water, we are now looking at being in a
position where something we have been doing for 60 years may not be the
right thing to do, going forward. I really think we should agendize
that workshop for a meeting during the next two to three months, and be
prepared, then, send on to the City Council some kind of report or
recommendation that the council look at either considering some
alternatives or be ready for it. This is the type of thing that the
public, and I include myself as a subscriber, gets excited about when
they see the bills rising and no one has told them it was happening and
nobody planned for looking at the alternatives.
Ms. Ratchye:
increasing.
Remember that these are the wholesale rates that are
Chairman Johnston: Right. I was going to make that point. What we are
talking about is a 100% increase in the wholesale rate. The wholesale
rate represents about 35% of our water rates. If that were to double
over a 10-year period, we would have about a 3-1/2% rate increase per
year for ten years. That is still significant, but perhaps not quite as
scary when one puts it in those terms. I know there was a time, further
back, when there was essentially an IRP process done to look at the
issue of wells and connections to the Santa Clara Valley Water District
and the San Francisco Water Department. I would agree, Mark, that I
think engaging in starting a process to reevaluate that issue in the
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context of this would be very appropriate.
Commissioner Chandler: And we have a water distribution system that ±s
expensive to support, as well, and is the bulk of our cost, but that
does not change the fact that this is a huge amount of money you would
be taking out of the homes of everyone in Palo Alto to pay for this
project. We would be remiss not to be looking at the alternatives
pretty aggressively. I am sure that the elected officials are focused
on the fact that that is something they may be able to do something
about, one way or another, if we plan it. Every time I see one of these
reports, it makes me start thinking about it again. That’s why we get
these monthly reports!
Commissioner Johnston: Absolutely, that is why. I would like to ask if
you think it would be appropriate for you to get back to us on what you
think might be an appropriate timetable in terms of engaging in this
review, along with some staff recommendations. There are two things
that are required here. I would agree with Commissioner Chandler that
this is something we need to warn the City Council about. The other
issue is starting a potentially involved process in doing the kind of
review that may be necessary to look at our alternatives. So it might
be appropriate at this time, Ed, to get back to us with some feedback as
to whether you think we need to go and ask council for that, or whether
you see that kind of a review in your horizon coming just in the normal
course of business here within some reasonable period of time, based
upon an anticipated schedule for these rate impacts that will come from
San Francisco Water. Then we will be in a better position to decide
whether this is something we have planned for and are going to review,
or whether it is something that is a major, off-budget item for which we
need to go to council. Perhaps you could get back to us on this.
Mr. Mrizek: Yes, first of all, I don’t think this is an off-budget
item. This is something we have been following. As Jane indicated to
you a month or two ago when she reported, we did not have enough
information yet. Now we have a little more, and she has indicated that
we can set up a workshop. Staff will be looking at those costs, working
with bay area water users, and will bring that information to you.
Perhaps Tom’s staff will dust off the water IRP, looking at alternate
water resources, the recommendations that came out of that IRP a few
years back, and bring that information back to the Commission.
As you know, we are also doing a study on our wells this year for
upgrading the wells for emergencies. We wil! try to roll all of that
back into some type of report for the Commission. As you indicated, we
will give you some time frame. It should not be more than two or three
months from now that we ought to be able to place something on the
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agenda.
Chairman Johnston: Good. We would like to accept your offer of
arranging a presentation from the San Francisco Public Utilities
Commission. Is that something that could be arranged during one of our
regular meetings, or would it need to occur during daytime hours?
Ms. Ratchye: I would think it could happen during a regular meeting.
Or you may want to have a special meeting specifically for the workshop.
They need to sell the BAWUA members on this whole thing, and they need
support in order to do any of this.
Chairman Johnston: How much time do you think the workshop would take?
Ms. Ratchye: It might depend on how many questions you have. I can
find out how long their presentation is that they make to their
Commission or to the ratings agency. The rating agency asked lots of
questions. That probably was more than one hour. The CoE~ission
apparently had very little comment. So that would be up to you.
Chairman Johnston: If it can be done in an hour, we can certainly
schedule it for a regular meeting. If it were to require three hours
for a meaningful meeting, we would need to schedule an extra meeting.
Commissioner Gruen: I would like to comment that, based on my having
spent the balance of the day in Sunol, chasing around to the various
installations that the San Francisco Water Department has there, they
had a tour which they were running today. Depending upon which person
we listened to, which person was talking about his area of future
grandeur, we either had a $30 million project to improve the filtration
plant, or a $500 million project to hollow out all of Sunol down to a
depth of 200 feet and make another reservoir out of it. These are
people who are seriously talking about these things. Which of those
projects, or any of the dozen others they talked about, such as, build
another ten-and-a-half foot diameter tunnel through the mountains to
Irvington was another they were hoping to get. That was a high priority
project. I don’t think there is yet consensus yet even as to what the
projects are, or which ones will happen first, or even the number of
digits in the cost of each of the projects. We could well hear what
someone’s thinking is on the subject, but the Delphi experience of
hearing a dozen different people on the subject today certainly
convinced me that they do not yet know what it is they are actually
going to do. Then we have this thing which says, we could probably get
away with $2 billion worth of bonds, so what is it we would like to do
with all that money? Also, the sort of thing I keep hearing from Jane
is, well, they have some projects in mind, but we are not clear on what
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the projects are. That certainly is the message I got today.
Presumably, we will get a similar message when we see the west bay
tomorrow.
Commissioner Eyerly: We have been listening to Jane for a year or two
about this San Francisco Water, and I am glad that Mark brought this up
tonight to talk about it. It seems like San Francisco is nearing the
point where they are going to try to sell some bonds, $300 million to
$500 million long-term bonds. What kind of bonds are those going to be
-- revenue bonds? Have they told you yet? Are they going to try and
wrap in their customers to help guarantee those bonds?
Ms. Ratchye: I don’t think so.
Commissioner Eyerly: Will it be strictly on San Francisco?
Ms. Ratchye: Yes, I think so.
Commissioner Eyerly: Okay, that makes me feel a little better. Paul
has brought it up about bringing down the San Francisco Water Department
to talk to us about this, but it is like Richard is saying. They are
not sure where they are going, so I don’t know if we need to listen to
them. They can tell us about different things, but we all know a little
about San Francisco water, and their approach, as far my belief is, is
that they are going to try and sel! us on being happy with rate
increases to pay for these improvements. I think that what we need to
be heading for, and I wanted to ask Ed about his willingness to come
back in a workshop and give us more information as to whether staff has
been talking about other resources. We have talked a little about our
water resources, but do we have any feasibility studies as to what is
practical? We don’t want to go along with San Francisco on these water
increases. That is what I am interested in hearing about at a workshop.
Where do we go from here, instead of just objecting to what San
Francisco wants to do.Is there another alternative that is
economically feasible?
Mr. Boccignone: Fred, one of the things San Francisco is undertaking
right now is a master water supply plan. As part of that process, they
are going to be investigating a wide variety of alternatives. We are
participating in the selection of the consultant and the scoping of the
project. What we are hoping to get out of that is a wealth of
information about alternatives. So I believe one of our key plans for
next year is our own water supply plan. We are not calling it an IRP,
but our hope is to leverage off of the efforts we are paying for as a
customer of San Francisco at a low cost. They are going to be
identifying the same kind of alternatives we would look at, and on top
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of that, rolling in the things Ed talked about, such as looking at our
own wells. So that is part of our plan.
With regard to having San Francisco come down to talk to us, I think it
would be very valuable for them to hear what you have to say. As Jane
said, they presented it to the San Francisco PUC and did not get any
questions. When we are at these meetings, it seems like we are often
the lone voice of the customers, questioning at the staff level as to
what is going on. Some of our customers are very, very supportive, and
I feel it would be very good for them to hear from a governing board
about some of the concerns you have expressed, particularly at the early
stage before they formulate their plans further.
Commissioner Gruen: I think they are hearing some of those.
knew Jane’s name.People said, ~Oh, you are from Palo Alto."
a reputation.
Everyone
You have
Mr. Bocciqnone:
by our board.
It would be nice for them to see that it is backed up
Mr. Habashi: I am sensing the level of interest in the topic. Probably
one of the things we can do is to come back to you next month with two
things. One is the potential presentation by the San Francisco folks,
if we can narrow that down to the number of minutes that it can fit into
our schedule next month. Two, is an outline of a plan that staff will
put together to say, from month to month, this is what we intend to do,
as we work with San Francisco and as we put our plans together. I will
see how we can make it fit next year to address what San Francisco is
doing, as well as putting together a resource plan for Palo Alto on the
water side. So what you are going to get is an outline, nothing more,
just an outline of a series of presentations that we can bring to the
UAC.
Chairman Johnston: That sounds good. Thank you very much.
Item 6. c.UAC Planninq for Joint Meeting with City Council
Chairman Johnston: The next item is our planning for the joint meeting
with the City Council that occurs next week.. I have passed out three
items to you. One is in regard to a call I received indicating that I
needed to provide an agenda for our meeting next week. I did that based
upon the discussion we had at our last meeting, but I may not have
completely described the topics. What I thought I would do is to open
with some opening remarks to introduce the Commission and the objectives
for the meeting. Then I would talk about the three topics we had
identified last time. The first topic was one that Mark had indicated
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that he wanted to talk about -- how we, as a body, would work in the
competitive environment. He indicated it is a short item, so that is
the first topic. The second topic had to do with capital improvement
program funding alternatives and General Fund transfer effects. The
third one was the restructuring of the electric industry. I put three
subheads beneath there to expand on them. That is what Fred and Jim
were going to talk about.
What I would like to do is just run through these quickly in this order,
just having us do a shortened version of what we might do next week to
ensure that if there are points of substantial disagreement among the
Commission members, whoever is presenting the topic can present it with
that in mind, saying there are differing views, and this is the issue.
Or if there is agreement, we would know that there is agreement. Mark,
can I ask you to address the first topic?
Commissioner Chandler: Sure. All I plan to do is to try and sensitize
the council to the fact that we discuss quite openly in our meetings
what our strategy is for dealing with our potentially at-risk customers,
and that our competitors in the future envirornnent are not necessarily
going to be doing that in a public forum. What I hope to do in the
meantime is to talk to Ariel Calonne about the Brown Act and the way in
which it plays in any potential exemptions that are available at this
point, and see whether the council does not want to undertake something
through NCPA perhaps, if some legislative relief is required to try and
seek that. I want to point out that one implication of having a UAC
exist to undertake these discussions is a potential disadvantage, so I
am glad there is a UAC and I think we do useful work, but I don’t want
us to end up potentially doing destructive things in the course of
fulfilling our mandate.
Chairman Johnston: I think that is fine. It is a very important issue,
and will be glad to see it addressed. Are there any other comments on
that? (None) You have a draft of some overheads I was planning on
using at the meeting. I do want to get some feedback from the
Commission on these, if there are changes you would like to see made.
I have gotten considerable help from staff over the past severa! weeks
on this issue in terms of running some financial numbers. The numbers
I am using, therefore, have come about with staff assistance. So I want
to run through these very quickly. Because this topic affects all of
the utilities, but particularly the water utility, I want to introduce
it by some of the organizational review findings for the water utility
in terms of the rates being higher than neighbors, the CIP expenditures
being higher, the CIP expenditures essentially being needed due to our
leak rates, etc., and that the general transfers are also high.
MINUTES UAD:11/06/96
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The third slide shows the amount of money we spent on capital
improvement program programs and General Fund transfers by utility as a
percentage of that utility’s expenditures. It shows that the water
utility is by far the most heavily impacted by both the capital
improvement program and the General Fund transfer. I think we knew
this, but it is a way of showing it numerically. All of the numbers
shown here are from the 1996-97 budget that we have.
The next point I wanted to make is to make some statements on what I
think we, as a Commission, understand to be our City’s current policy
with regard to CIP financing. It is basically pay as you go. We are
not going out and borrowing money for these projects. That has the
advantage of avoiding the cost of debt. It has a disadvantage of
creating an immediate rate impact and would get to pay out of the
current revenues, so rates tend to be high. It also creates an increase
in the General Fund transfer, because our General Fund transfer is
specifically related to the capital improvement projects.
I want to say something about the General Fund transfer policy using the
utility enterprise method, which has the advantage of being an accepted
method, therefore, it passes everyone’s rules. It has the disadvantage
of not really tracking where the money comes from to fund the source,
i.e., whether the General Fund pays for the capital improvement or
whether the rate payers, through their rates, pay for the capital
improvement program. It has the exact same effect. The General Fund
gets an increase in the transfer.
Then I wanted to look at the scenarios of pay-as-you-go financing versus
debt financing. If you look at pay-as-you-go financing, which is what
we do now, what happens is that in the current year, the CIP is financed
from current year revenue. The result of that is that that project cost
is added to the rate base and is depreciated over the life of an asset,
which varies from asset to asset. For a pipeline project, it might be
about 40 years.
The General Fund fund transfer is calculated on the order of 9-1/2% of
the rate base, although that varies. So if you look at the actual cost
of a $2.5 million program by taking a net present cost, using a discount
rate here of 5%, if you do that and look at the current cost of the
$2.5 million project plus the discounted costs of all of those 40-year
payments into the future, it actually costs the rate payers about
$5.2 million to build a $2.5 million project. That is why it has a very
severe
impact, and that is a point I wanted to make.
If you look at debt financing, I have Option A and Option B. The two
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options have to do with how you interpret the General Fund transfer
rules. As I understand it, there was some discussion among staff as to
whether or not Option A or Option B is the correct way to follow the
rules. It is not clear which is the right way to do it. What happens
there is that the current year CIP is financed from bonds. In point of
fact, it probably grouped a series of years together in order to reduce
the initial financing cost. What happens, then, is that the project
cost is added to the rate base and depreciated over the life of the
asset, as it was before. The General Fund transfer is calculated just
as it was before, except that it is, in fact, reduced by the interest
cost on the debt. So the effect is that the rate payers are still
paying the equivalent same amount, but the General Fund gets a much
reduced transfer. Because of the fact that you do not have to come up
with the money initially, what happens is that the net present cost to
the rate payers of this $2.5 million project drops from $5.2 million to
a little over $4 million.
Then looking at Option B, it is basically the same, except that this is
where there is still some discussion among staff as to the correct
interpretation of the rules. It is not clear whether the General Fund
transfer is reduced by the interest on the debt or by the entire debt
service. Depending upon which of those two it is, if it is the entire
debt service, then Option B is what happens. In that case, there
obviously is an even bigger reduction in what the rate payers pay. They
then end up paying only $2.8 million to build a $2.5 million project.
The next chart is one that simply shows that all three scenarios are
designed to build the same $2.5 million project, and they all look at
the present value cost to the rate payer in terms of implementing that
particular policy. The first one, pay as you go, the one we are doing
now, is a little over $5 million, with the other two being the bond
financing. The conclusion I draw from this (and I want to the
Commission to comment on any of this) is that the current pay-as-you-go
policy is really a very difficult policy to justify to the rate payer.
This is a choice that the utility has, whether it finances or is the
pay-as-you-go plan. Because of the way that the General Fund transfer
policy is set up, this suggest to me that if we are offering the utility
in the interest of the rate payers, we ought not to be doing pay as you
go.
The second conclusion is obviously that a change to that financing would
significantly affect General Fund transfers. The General Fund transfers
are reduced either by the entire debt service or by the interest cost.
The third conclusion I get is that if you are operating in the interest
of your rate payers, you have to change the program here. If you change
the program, it is not clear to me that the right change is to move to
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debt financing. All that does is to send money out of Palo Alto to the
holders of those bonds. It seems to me that what might be more
appropriate is to reevaluate the General Fund transfer policy so that it
is not so strictly tied to the infrastructure program. What I have
suggested, as a basic review of this, and staff has indicated that they
are going to do a review of this topic, since the City manager has
suggested that it is within our purview to look at the issue of
financing of capital improvement programs, I don’t want us to be in the
position of making a recommendation to council now, but what the likely
outcome is is that you get at least one of the three suggested changes
here. One is that you do not use bond financing. Two is if you change
the transfer policy, or three, if you just arbitrarily change the
transfer amount. It seems to me that you have to do some of those, and
I would like to open it up for comments.
Commissioner Eyerly: I think what you have here, Paul, is good, and is
pretty clearly presented. My only comment is that in the possible UAC
recommendations, those ought to give a little description of what we
have been talking to staff about and the agreement that we could talk
about financing, but the transfers are something I need longer study
for. This points out the need for it, and eventually, we might be
involved in that, but we are not trying to move on it now, just some
clarification so that they understand that staff is working on it and
that we are not trying to push it out of shape. The rest of it looks
good to me.
~.Qmmissioner Chandler: I am little uncomfortable with our getting too
deeply into the substance of the issue tonight, given what our agenda
said we were going to be discussing. I do have a couple of comments
about this presentation. I feel that it is getting pretty far over into
the issue of what the appropriate transfer to the General Fund is. If
I were designing the presentation myself, I might seek a little more
balance in the presentation in two different ways. First, to say we
recognize that there is a transfer to the General Fund to support other
activities and to recognize the fact that this is a business that is
being run and there needs to be a return, but sometimes the
methodologies can get a little out of whack. We think there might be a
situation here where there is some double dipping going on. We just
want to lay that out for you to consider and appreciate the impact of
different kinds of rate making. The phrase ~double dipping" may help
clarify to people what it is we are saying, laying it out that way,
rather than trying to drive toward particular conclusions. It is not a
priori apparent to me that, taking into account all of the City’s needs,
what we are doing is inappropriate. It may be that we want to change
the methodology. It may be that we don’t. I feel this is a little bit
strong in the conclusions. I understand the theoretical point that is
MINUTES UAD:I 1/06/96
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being made, but the real world point to me is that we have some legal
concerns that we have to operate inside of, and we also have parks we
need to pay for and all kinds of other things. Things do not always
come out perfectly when you are trying to balance different
considerations. It certainly does lay out the issue pretty clearly, and
I congratulate you for that.
Chairman Johnston: I would be very happy by trying to make it clear
that I agree with you. The City absolutely is entitled to a reasonable
return, and in point of fact, as I see it, a change in the rules would
not necessarily mean a reduction in the return at all. It likely might
mean a different balance between what is paid out of the different
utilities. As you can see from this chart, you have a much harder hit
to the water utility which, compared to all of its neighbors, is in the
worst shape. I certainly would want to be careful to indicate that I do
not see this as an issue of whether across-the-board transfers are too
high or too low. That is not the issue here. The issue for me, at
least, is that the particular way that we have it set up hits the water
utility very hard. On top of that, it seems to me that the water
utility does have an obligation, like any other utility, to run its
operations in the best interest of its customers. Given this transfer
policy, it is not operating in the best interests of its rate payers.
That is just because of the way in which the transfer policy is set up.
If it were going to be in the best interests of its rate payers, it
would fund its capital improvement programs in a different way. That is
self-evident.
Commissioner Chandler: I hear you, and what I am saying is that there
is a variety of factors to be considered. Running it in the best
interests of its rate payers is not the only one. There is a variety of
stakeholders in our municipal utilities system, which are the interests
of the citizens as users of services that are partly funded by return on
investment, as well as people’s role as customers of particular
services. I am not sensing a balance there. This is provocative, and
it is going to be useful next week. Those are my comments, as you
requested.
Chairman Johnston: I appreciate those comments. I think the reason I
think it is important is that I actually do believe that a municipal
does have a requirement to operate in the best interest of its rate
payers. That is precisely the reason why there has been so much
interest in not having arbitrary General Fund transfers. When the
General Fund transfers are arbitrary, one is arguably not operating in
the best interests of the rate payers. You are arbitrarily charging
.rate payers whatever you want to charge, then moving the other money
over to the Genera! Fund, which is exactly not what we are doing. We
MINUTES UAD[11/06/96
Final Page 47
have done everything we can to try and make sure we do have a formal
policy, therefore, we meet those standards of operating in the interests
of rate payers. I just think we have a strange rule here in terms of
how it affects capital improvement programs.
Commissioner Chandler: It is not an unusual rule, however. There is a
section in the Internal Revenue Code relating to investment tax credit
as it existed in the late 1970s and early 1980s that I happened to have
been involved in and am thus familiar with it. It was particularly
relevant to telephone companies where the federal government wanted to
ensure that the federal tax benefits were maintaining their incentive
effect and did not just flow through as a reduction in prices to rate
payers. So it required that there be no flow-through of investment tax
credit benefits to rate payers. A similar scheme existed for
accelerated depreciation benefits, as well. There was an Internal
Revenue Code provision that denied the utility the eligibility for those
benefits if the regulator flowed through the benefits to the rate
payers. The investment tax credit went one step further. Not only did
it refuse to allow flow-through, but it required that the credit be
added to the rate base for future use. It was exactly the same kind of
double dipping. Some people thought it was unfair; others thought it
was having the correct incentive effects. Some people thought it was a
driving of the United States Congress by the utility industry. So there
is a variety of ways to look at it. I know you feel strongly about
this. I just think there are a number of ways of looking at it. We are
not going to sort it out tonight.
Chairman Johnston: You are right, we are not going to sort it out. If
there was a government regulation requiring us to do this, we would
comply. I am suggesting that we are the government, and we should not
advocate such policies. I think it would be very appropriate, Mark, for
you to make some additional comments after I make the presentation. Are
there other conuuents?
Commissioner Sahagian: In many ways, I agree with what Mark is saying,
even though I personally feel that the methodology for the transfer is
not necessarily consistent with policies that we might feel are better
applied here. It should be presented in a way that lays it out in a
somewhat less provocative manner. To put it in simple terms, at the end
of the day, it is dollars being moved from the utility over into the
General Fund for use by the City. I think of our utility as serving the
rate payers and also, collaterally through transfers, as serving the
citizenry of our town. So we have a double-breasted purpose, and maybe
restructuring this or softening it a little bit, laying it out as more
of an indication of how it might be done otherwise and what the impacts
would be, would be good. So I suggest a little softening of it.
MINUTES UAD:I 1/06/96
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Chairman Johnston: I would like to see that. I guess that is what I am
asking staff to do, to come back with the impacts. I don’t know whether
the change I am talking about here would reduce or increase the General
Fund transfers, because I am not purposefully laying out what the
alternative policies for a General Fund transfer should be. I have been
told that is a major study, and there are a lot of alternatives there,
so I am deliberately not doing that. I believe that what I am hearing
(which may be an oversimplification) is that I need to make a very clear
statement that the issue here is not the total return to the General
Fund, but rather, how it is done. Because of how it is done, it really
affects different utilities in different ways. I absolutely agree with
that. If that tone is what you are looking for, I would be more than
happy to provide that.
Commissioner Sahagian: That seems to be about right. The focus is more
on methodology rather than on absolute transfer. You are questioning
the absolute transfer quantity, and you are trying to point out some
inconsistencies or areas in the current methodology that need further
study and evaluation. I feel that is the right tenor in which to put
it. That is my suggestion.
Commissioner Gruen: Without trying to change the content, let me talk
about how you might present it. There are really three different
proposals which we are trying to compare and contrast. One of them is
the one we are using now, the pay by utility. Another is debt
financing, interest only, and the third is debt financing all debt
service. If you were to label those as A, B and C, you would see that
there are three of them, and then work on names for them. I have just
given you my suggestions for them. I feel that ~pay by utility" rather
than ~pay as you go" conveys the idea of what we are doing now. Debt
financing in the other two cases is a good contrast to that. So that
might be a way in which you could present the same kind of thing and be
clear that there are alternatives, and we have one of them, but the
other two are plausible alternatives also. Then you can get to the
second point of how those affect the various utilities, which really is
a matter of how much capital they have to generate for CIP. That is
what is different from one utility to another. The electric utility is
pretty much buying electricity and using stuff which is already there,
etc.
Councilman Rosenbaum: I am concerned that, based on the discussion that
the City Council had at budget time concerning water rates, that some
council members had the idea that we ought to do bond financing
independent of transfer to the General Fund in the same sense that you
do bond financing if you want to build a new City hall. Future
generations get to pay rather than the current taxpayers. I don’t think
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that is the point here. It is a much more subtle point, saying we ought
to do bond financing if we want to stick with this arbitrary formula.
Obviously, we can change the formula. So I think you ought to make it
very clear what you are getting at here.
Another more general thought I have is that I recognize the amount of
work that has gone into this. You have a whole bunch of topics, and
this one is pretty involved. I think it may be a little too much for
us. We are pretty hard pressed to get there by 5:30 p.m., and we are
almost sure to start late. Folks have worked all day, and there is a
long meeting coming after this, so you might want to consider whether
there might be a little too much detail here for this particular dinner
meeting. We are probably going to be eating dinner while doing this.
Dinner is served at 5:00, so the council is not going to get to the
meeting until 5:30 p.m.
Commissioner Eyerly: You have made some good comments. One thing I
feel makes this a little hard for the council to accept is the last box
on Page 2. You have the title, "Possible UAC Recommendations." I think
that ought to come out of there and say, instead, "Possible Solutions"
or "Possible Courses of Action," and get the UAC out of there. That is
somewhat out of our bailiwick. We don’t want them to feel that we are
going to take over advising them on how to transfer to the General Fund.
If they want to ask for recommendations, they wil!, but I strongly
suggest we get the UAC out of the title.
Chairman Johnston: Let’s move on to the next topic,
Restructuring of the Electric Industry.
which is
Commissioner Eyerly: Commissioner Sahagian got Tom Habashi to a
meeting, and invited me to come. The three of us talked at the meeting,
and then Tom put in some work on it. Jim Sahagian has led the way with
his expertise as to what we ought to be bringing out. He really needs
to present this. It has more of his ideas than mine. I just asked some
questions. When he gets through, then I may bring up some points that
may have been overlooked, but Commissioner Sahagian ought to handle this
topic.
Commissioner Sahagian: . I tried to keep the presentation relatively
simple. The first slide just outlines what the current status is for
the three areas -- the generation, transmission and distribution parts
of our business under the status quo, then comparing it to what it means
to the City after deregulation, now that the deregulation legislation
has been passed. I think the most interesting or controversial ones in
here are the electric generation and transmission, since both of those
are really where the competition will be taking place. With
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distribution, we are still relatively unaffected. It is a regulated
monopoly both currently and in the future. I put in an overall category
regarding what happens to retail electric sales rates if we open access.
That is a policy decision by the City of Palo Alto. Our sales rates
wil! only be regulated with those customers that we retain. Certainly,
depending upon how competitive we are and whether we retain all our
customer base or go outside the service territory that we control with
our distribution, that could have an effect on the net back to the
General Fund.
The next slide deals with probably the first major policy issue that the
council faces, open access to the customer base, or else remain a closed
access service territory. It compares some of the issues, the pros and
cons with respect to competition if we do open the access, and what are
some of the things that we will have to address if we open access. I am
not making any recommendations here. I am just laying out the pros and
cons of open access.
The next slide deals with the case if we open access. Legislation
allows us to recover our stranded costs through a competitive transition
charge that we have learned more about this evening. We will probably
put some ranges in here. We have hard dollar figures for the Calaveras
and hydro project and the California Oregon transmission line. Maybe we
would keep those in, and we might put in a note as to which case those
represent. Also possibly put in a note of what type of CTC range in
terms of cents per kilowatt that might represent if we try to recover
that between now and 2002.
Mr.Habashi: The way we have it now, it is June of 2002.
Commissioner Sahagian: Another policy decision that the City would face
if it opens up its service territory is whether to seek a customer base
outside of its historic barrier of control, and what the issues there
are, again contrasting the pros and cons if we go along with that
activity.
The last slide is really the bottom chart, and I would not be at all
opposed to jettisoning the middle slide. In fact, we can probably
simplify it, taking the top slide and simply say, this is typically what
the generation makeup is of the power we are buying today. The middle
slide shows the cost of purchased power to get an idea of what
percentage of the total is from each of the different sources. The
bottom slide I feel is the most interesting one. We can talk a little
about what some of the rate projections are by the IOUs quickly,
pointing out that we have one clearly out-of-market resource, Calaveras,
with the current debt service of about 6¢. The WWP is relatively small.
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That is just a capacity slice. The other one that is a little above
market, although not too bad for combined capacity and energy, is
Western. The good news in this slide, which we really want to drive
home to the City Council, is that when we shed the capital component in
Calaveras, it becomes an extremely competitive piece of this puzzle and
would clearly stand well against any competition in the future. So the
name of the game is, buy down the debt and get into the market. Get
ourselves a competitive position in the market if we are going to open
access. That is my presentation.
Commissioner Chandler: I think this is great. The only piece in the
middle that I wish were there is that the concept of stranded cost
recovery and CTCs are not intuitively obvious to people who do not
follow these things very closely. That is really the point of the slide
at the end -- why you want to recover the stranded costs as quickly as
possible and move on to being competitive. I notice that in the
stranded cost slide, you do not have pros and cons. I think maybe the
time to bring that last slide into the discussion would be as part of
your stranded cost presentation with a few pros and cons, so people can
see exactly what the impact is that you are talking about.
Commissioner Sahaqian: That is a good comment.
Commissioner Eyerly: On that bottom diagram about the average rates,
NCPA, and we have already canceled Washington Water Power, have we not?
Mr. Habashi: The reason is that this is 6¢ is that the numbers here are
from 1994-95. It was a wet year.
Commissioner Eyerly: Bonneville also. We are in the process of doing
away with those two. What I am wondering, Jim, is whether we should
show those.
Commissioner Sahagian: That is a good point.
Mr. Habashi: You are correct. We will remove those two from the chart
that shows the stranded assets.
Chairman Johnston: I have a couple of comments. One has to do with the
1994-95 Calaveras numbers. My recollection was that in looking at the
Calaveras dollars per megawatt hour, even if you take away the
investment cost, my understanding is that it was pretty sensitive to the
rainfall in that year. If you have a lot of water, the cost is
relatively low. If you do not have a lot of water, the cost is quite
high.
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Mr. Habashi: That is correct. What you are seeing here is the result
of a wet year.
Chairman Johnston: So I am a little concerned about representing
Calaveras as having this extremely low rate, which is true for wet
years, but is not really true in terms of providing a fair picture of
what one might expect it to do over the long haul. It is still going to
be a good asset, but I think it is quite exaggerated here, according to
my recollection, which is that there is a big swing between wet years
and dry years. It might be appropriate for Tom to look at that number,
perhaps showing this column as a range or an average. I am a little
nervous about showing a number that could be that sensitive, since it
was a wet year.
Mr. Habashi: That is a good point. We can show another bar that will
show wet years and dry years and the range between 6¢ and 16¢.
Chairman Johnston: A second comment I have is, following up on
Commissioner Sahagian’s comments on transferring these $82 million and
$16 million amounts. You indicated that you would include a range, and
you also indicated that you might put a cents per kilowatt hour figure.
I would really like to see that worked out into a rough equivalent rate
increase. For the council, it seems to me that you come even closer to
home when you talk about not necessarily a rate increase, but just what
percentage of the rates it represents, just dividing the dollars there
on an annual basis by the revenues to give a sense of what kind of an
effect it is. That would bring it home.
The other thing I would like to see on this chart is to show what our
current policy is, the current policy associated with the $31.6 million
by 2003, putting that in context there so that there is an understanding
that we may, in fact, be quite far from there. Or depending upon how
all the numbers come out, we may be there. That is a study that is
ongoing, and staff is going to complete that study. We are going to
review that, and it will° be the result of all of the studies that wil!
go back to council. There are some big numbers that are being tossed
around here, and I am sure the council understands that the reserves
have big numbers in them. What I would like to see communicated is that
even though we have a big reserve, we may very well need to enhance it.
Commissioner Sahaqian: Those are all good comments and we can add them
in. One thing that is clear to me is that whatever recapture we seek,
we ought to be very sure that when we get to the end of the transition
period, we have fully funded out the debt. I would rather be left with
a situation of having a surplus that we have to figure out how to deal
with than being short when hitting a competitive situation.
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Chairman Johnston :
(None)
Any other comments on this agenda item?
Item 9.a. NCPA Commission Report
Chairman Johnston: May we have the report.
Councilman Rosenbaum: Our NCPA meeting was held in Lompoc, and a
representative from Lompoc loudly announced that they are taking
seriously the admonition to prepare for competition. They evidently
went to their City Council and got approval for a 16% electric rate
increase. They are also reducing their transfer from the electric fund
to the General Fund by $400,000, which is quite a bit for a City the
size of Lompoc. I should say that they are going to mitigate that
reduction in transfer from the electric fund by increasing the transfer
from the water fund by the equivalent amount. Upon being questioned,
they indicated that they have no formula at all. They do what they
want, and that that makes sense. They said there was no opposition.
They did indeed try to publicize the electric rate increase, and no one
cared. On the other hand, they are almost entirely retail and small
commercial. They are well under PG&E, having no large industry. So
they were able to do that and still remain well below PG&E.
Chairman Johnston: It is encouraging that we have some other utilities
out there that are willing to bite the bullet and increase their rates
to accomplish this, putting themselves in a good position going forth.
Unfortunately, in our City’s case, we have a General Fund transfer and
a water utility that is high at the very top end, compared to our
competitors. Presumably, while Lompoc was not one of the cities we
compared ourselves to, if they were more typical, then they probably
deserved to have an increase of that transfer in their water utility.
Commissioner Eyerly: On Washington Water Power, I see that it says that
one option, in paying it off, is to use cash from the NCPA general
operating reserve or from individual members; reserves. That really
ought to come from individual reserves, should it not, rather than from
the NCPA operating fund?
Councilman Rosenbaum: It would come out of that part of the funds
related to each individual City.
Chairman Johnston: The meeting is adjourned.
Next Meeting: December 4, 1996
ADJOURNMENT was at II p.m.
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