HomeMy WebLinkAboutStaff Report 1321City of Palo Alto (ID # 1321)
City Council Staff Report
Report Type: Informational Report Meeting Date: 2/7/2011
February 07, 2011 Page 1 of 5
(ID # 1321)
Title: Interim Supply Allocation
Subject: Final Interim Supply Allocation
From: City Manager
Lead Department: Utilities
Recommendation
This report is informational only. No City Council action is required.
Executive Summary
As part of its October 2008 approval of the capital program to repair and replace the regional
water delivery system, the San Francisco Public Utilities Commission (SFPUC) established a
limitation on water deliveries until 2018. The restriction on water deliveries from the regional
water system applies both to San Francisco and to the group of 26 wholesale customers who
purchase water from the SFPUC. The 2009 Water Supply Agreement between San Francisco
and the wholesale customers required the SFPUC to decide how to divide the water allocated
to the wholesale customers among them by December 31, 2010. Palo Alto provided written
and oral comments throughout the SFPUC’s process to develop a methodology for this decision.
This report describes the process, Palo Alto’s position, and the SFPUC’s final decision on how
much water each wholesale agency is allocated.
Background
The Hetch Hetchy water system delivers approximately 260 million gallons per day (MGD) of
high quality potable water over a 280-mile pipeline network to water users located in San
Francisco and in twenty-four cities and water districts and two private water utilities in the Bay
Area. Together the 26 agencies outside of San Francisco comprise the membership of the Bay
Area Water Supply and Conservation Agency (BAWSCA) and provide water to 1.7 million
people, businesses and community organizations in Alameda, Santa Clara and San Mateo
counties. BAWSCA and its member agencies advocate for continued delivery of safe, reliable
drinking water in a cost-effective manner.
In order to enhance the ability of the SFPUC to meet goals for water quality, seismic reliability,
delivery reliability, and water supply, the SFPUC is implementing its Water System
Improvement Program (WSIP). The WSIP is a $4.6 billion, multi-year capital program to
upgrade the SFPUC’s regional and San Francisco’s local water delivery systems. The WSIP
improvements are designed to allow the SFPUC system to continue to provide high quality
February 07, 2011 Page 2 of 5
(ID # 1321)
water in the event of a major earthquake. The cost of the WSIP will result in steadily increasing
water costs for the BAWSCA agencies.
In 2004, the SFPUC and the BAWSCA member agencies completed three planning studies to
estimate the future water demand and conservation potential for each BAWSCA member
agency, and provided the studies as input to the Program Environmental Impact Report (PEIR)
for the WSIP. The results of these studies concluded that projected SFPUC water use for the
BAWSCA member agencies would be 209 MGD in 2030, after accounting for the following:
25 MGD of water savings that would naturally occur within the BAWSCA service area as
a result of appliance efficiency standards in plumbing codes; and
23 MGD of water savings and recycled water use that the BAWSCA member agencies
committed to, including 10.43 MGD of recycled water and 12.77 MGD of water
conservation.
In October 2007, BAWSCA committed to saving an additional 10 MGD of water purchased from
the SFPUC by 2030 as part of its comments on the Draft PEIR for the WSIP, reducing the
BAWSCA member agencies’ projected demand for SFPUC water to 199 MGD in 2030. As part of
the development of the WSIP, the SFPUC developed level of service goals for the project. The
level of service goal adopted for water quantity was to meet the region’s water supply needs
until 2030 during non-drought years.
When it adopted the WSIP and certified the PEIR on October 30, 2008, the SFPUC made a
unilateral decision to limit water deliveries from the SFPUC system to 265 MGD until 2018. This
265 MGD Interim Water Supply Limitation (IWSL) for the system allocates 184 MGD to the
BAWSCA agencies and 81 MGD to San Francisco until 2018. This decision was made by the
SFPUC despite the projections in San Francisco’s own environmental documents which
projected the BAWSCA member demands would exceed the proposed 184 MGD limitation in
2018.
The section of the SFPUC’s report requesting adoption of the WSIP and the PEIR included these
paragraphs explaining that the goal to meet future water supply needs would not be met:
“Staff recommends that the San Francisco Public Utilities Commission (SFPUC)
adopt the Phased Water System Improvement Program (WSIP) Variant based on
the determinations and findings of the Final Programmatic Environmental
Impact Report (FPEIR) for the WSIP and other policy considerations.
“In March 2008, SFPUC staff requested the San Francisco Planning Department
to consider a variation of the WSIP called the Phased WSIP Variant. The SFPUC
identified this Variant in order to consider a program scenario that involves full
implementation of all proposed WSIP facility improvement projects to insure that
the public health, seismic safety and delivery reliability goals are achieved as
soon as possible but phased implementation of a water supply program to meet
February 07, 2011 Page 3 of 5
(ID # 1321)
projected water purchases through 2030. Deferring the 2030 water supply
element of the WSIP until 2018 would allow the SFPUC and its wholesale
customers to focus first on implementing additional local recycled water,
groundwater and demand management actions while minimizing additional
diversions from the Tuolumne River. Under the Phased WSIP Variant, the SFPUC
would establish an interim midterm planning horizon – 2018. If the SFPUC
adopts this Variant, it would make a decision about future water supply to its
customers through 2018 only, and would defer a decision regarding long-term
water supply until after 2018 in light of then current information and updated
analysis. All non-water supply related WSIP goals and level of service objectives
would be achieved under this Variant and all individual WSIP facility
improvement projects proposed in the original WSIP would be constructed.”
(Emphasis in the original.)
In June 2009, the BAWSCA agencies, including Palo Alto, signed a new 25-year Water Supply
Agreement (WSA) with the City and County of San Francisco (CMR 269:09). The WSA
incorporated implementation of the IWSL that was imposed on the BAWSCA agencies by the
SFPUC (Article 4; Section 4.01). The WSA required the SFPUC to determine how to split up the
184 MGD allocated to the BAWSCA agencies by establishing an Interim Supply Allocation (ISA)
for each agency by December 31, 2010.
According to the WSA, if the 265 MGD IWSL is exceeded at any time through 2018, the SFPUC
will impose an environmental enhancement surcharge on any BAWSCA agency which was using
more water than its ISA, or on San Francisco if its usage was above 81 MGD. The framework for
the environmental enhancement surcharge is captured in the WSA (Article 4; Section 4.04).
The SFPUC is required to establish the environmental enhancement surcharge during the rate
setting process for the FY 2011-2012 wholesale rates.
Discussion
The WSA captures the terms and conditions for implementation of the ISA. Of note, the
BAWSCA agencies did not agree with the legality of San Francisco’s unilateral imposition of the
ISA, and continue to reserve their individual rights to challenge the ISA. In the summer of 2010,
BAWSCA and its member agencies attempted to collaborate on the development of an ISA
allocation methodology which could be provided to the SFPUC for its consideration. However,
the BAWSCA agencies were unable to reach agreement on an appropriate ISA methodology to
propose to the SFPUC.
Starting in August 2010, the SFPUC met with the BAWSCA agencies and solicited input on
potential ISA methodologies. One possibility put forward was each agency’s future projected
demand for 2018, as presented in the BAWSCA Long Term Water Supply Reliability Phase I
report of May 2010. The sum of the projected demands was equal to 182.84 MGD. Another
option discussed was for the ISA for each agency to be equal to its contractual allocation from
the SFPUC system, or Individual Supply Guarantee (ISG). Coincidentally, the sum of the ISGs
equals 184 MGD.
February 07, 2011 Page 4 of 5
(ID # 1321)
Between August and December 2010, the SFPUC presented several proposed allocation
methodologies to the BAWSCA membership for feedback and comment (Attachment C). During
the process, Palo Alto provided three comment letters on the various proposals and the
Director of Utilities attended one SFPUC meeting to deliver oral comments into the record. In
addition, Palo Alto staff closely coordinated activities with the City Manager, the City Attorney’s
Office and Palo Alto’s BAWSCA Director, Larry Klein. Palo Alto’s primary argument was that the
ISAs should be based on the ISGs for each agency, since the ISG is the long-term contractual
entitlement that defines the contractual relationship with San Francisco.
On December 8, 2010, SFPUC staff issued a proposed allocation methodology to be considered
at the SFPUC meeting on December 14, 2010. After review of the proposed methodology, it
was determined that the approach was not consistent with the WSA and did not properly
recognize Palo Alto’s existing contractual entitlements. Staff and the City Attorney’s Office
engaged outside counsel to prepare the City’s written comments on SFPUC’s December 8th
draft (Attachment B) and coordinated with Council Member Klein to attend the meeting and
deliver a prepared statement.
During the December 14 SFPUC meeting, SFPUC staff informed the BAWSCA agencies in
attendance that the SFPUC was considering a fifth and new alternative. After reviewing the
new alternative during the meeting, it was determined the new formula is more closely aligned
with each agency’s ISG. Palo Alto supported the new formula as the preferred alternative to
the previous allocation methodology. The SFPUC unanimously approved the new version
(Attachment A).
Under the approved allocation methodology, the City of Palo Alto has an ISA of 14.70 MGD.
This compares to a contractual entitlement (ISG) of 17.075 MGD and actual usage in FY 2010 of
10.99 MGD. It is unlikely that Palo Alto’s water supply needs will exceed 14.70 MGD by 2018.
As a result, staff does not anticipate Palo Alto will incur any penalties for usage above Palo
Alto’s ISA.
Utilities Advisory Commission
Staff provided an informational report on the IWSL to the Utilities Advisory Commission at its
January 12, 2011 meeting. There was no discussion.
Resource Impact
If the water supplies provided by the SFPUC to San Francisco and the BAWSCA agencies exceed
the IWSL of 265 MGD at any time through 2018, any agency over its ISA will be subject to
paying the Environmental Enhancement Surcharge (EES) for any amount of water used over its
ISA. Thus, if the IWSL is exceeded, and Palo Alto uses more than 14.70 MGD, it will be subject
to the EES. The SFPUC will establish the EES before July 2011. Staff considers it very unlikely
that Palo Alto would exceed its ISA.
Policy Implications
February 07, 2011 Page 5 of 5
(ID # 1321)
The IWSL was unilaterally imposed upon the BAWSCA agencies by the SFPUC and the City of
Palo Alto reserves its right to challenge the legality of the imposition in the future, if necessary.
Staff does not anticipate the outcome of the IWSL process will impact current policies.
Environmental Review
This informational report does not meet the definition of a “project” pursuant to CEQA
Guidelines Section 21065, thus, no environmental review is required.
ATTACHMENTS:
Attachment A: Final ISA Method (PDF)
Attachment B: Palo Alto ISA Letter-12-8-2010 (PDF)
Attachment C: Draft and final ISA methods (DOC)
Prepared By:Nicolas Procos, Resource Planner
Department Head:Valerie Fong, Director
City Manager Approval: James Keene, City Manager
GAVIN NEWSOM
.... AYOH
FRANCESCA VI~TOR
PHESIOENT
ANSON B. MORAN
VICE PRESIOENT
ANN MOLLER CAEN
CQt.I.MiSSIONER
ART TORRES
CDMMIBSIONER
ED HARRINGTON
GENERAL MA""-GER
SAN FRANCISCO PUBLIC UTILITIES COMMISSION
~155 MarketSt, f11h Floor, San Frar,c'sco, CA 94103' TeL (415) 554<)155' Fax (415) 554-3161' ITY (415) 554,3488
December 16, 20 I 0
TO: Wholesale Customers
"i" ~ /'/A/:::"" //(jr;:;:~i,~"_, "
FROM: Steven R. Ritchie, Assistant General Manager, Water Enterprise
SUBJECT: Final Interim Supply Allocations
Attached please lind the Final Interim Supply Allocation adopted by our Commission
on December 14, 2010, Thank you for providing feedback <t~ we worked through the
challenging process of developing the Allocations, As the Commission noted, this
was not an easy decision. The Allocations were based on:
• The lesser 01'2017-18 purchase projections or Individual Supply Guarantees.
• Hayward receiving its 2017-18 purchase projection.
• San Jose and Santa Clara receiving no less than as provided in Section 4.03 of
the Water Supply Agre"ment.
• The residual amount heing allocated proportionally to those customers whose
pllfchase projections were less than their Individual Supply Guarantees,
Also attached is a detailed description of the methodology used to calculate the
Allocations. We provide this to make sure there is clarity on how the Allocations
comport with Section 4.03 of the Water Supply Agreement.
If you have any questions, please contact me at (415) 934-5736 or via e-mail at
Attachment:
1. Interim Supply Allocation Adopted December 14,2010
2. Final Interim Supply Allocation Methodology
cc (w/attachments): Art Jensen, BAWSCA
Wholesale Customer
Individual Supply
Guarantee (ISG)
(MGD)
Projected FY
2017-18
Purchases (3)
(MGD)
Interim Supply
Allocation
(MGD)
Alameda CWD 13.76 13.76 13.76
Brisbane/Guadalupe 0.98 0.95 0.96
Burlingame 5.23 4.82 4.97
California Water Service Company 35.68 36.06 35.68
Coastside 2.18 2.18 2.18
Daly City 4.29 4.66 4.29
East Palo Alto 1.96 3.40 1.96
Estero 5.90 5.82 5.85
Hayward2 22.09 22.92 22.92
Hillsborough 4.09 3.51 3.72
Menlo Park 4.46 3.90 4.10
Mid-Peninsula 3.89 3.61 3.71
Millbrae 3.15 3.13 3.13
Milpitas 9.23 8.80 8.96
Mountain View 13.46 10.26 11.43
North Coast 3.84 3.58 3.67
Palo Alto 17.08 13.33 14.70
Purissima Hills 1.63 2.77 1.63
Redwood City 10.93 10.85 10.88
San Bruno 3.25 2.30 2.65
San Jose 0.00 4.50 4.13
Santa Clara 0.00 4.50 4.13
Stanford 3.03 2.84 2.91
Sunnyvale 12.58 9.44 10.59
Westborough 1.32 0.94 1.08
Total 184.00 182.83 184.00
1 "Option 5" as identified in Resolution 10-0213.
2 Hayward value calculated as 184 mgd less the total of permanent customer ISG's (161.91 mgd).
3 Long-Term Reliable Water Supply Strategy Phase I Report, May 25, 2010 (Appendix A, Table A-3).
Interim Supply Allocation Adopted December 14, 20101
ISA Methodology Page 1 of 1 December 14, 2010
Final Interim Supply Allocation Methodology:
1. Assign initial ISA – All customers with a defined ISG were given their ISG or
FY2017-18 Projected Purchases, whichever is less. Hayward was given their
FY2017-18 Projected Purchases. San Jose and Santa Clara were given 4.5 mgd
each less a reduction based on the aggregate average ISG reduction of customers
with ISGs. The aggregate average ISG reduction is calculated by taking the total
defined ISG of 161.91 less the allocated ISG to arrive at the unallocated ISG. The
unallocated ISG is then divided by the number of customers with defined ISGs
(23 customers).
2. Allocate the reserve to customers with defined ISGs that received less than their
ISG for their initial ISA – This is completed in two steps as follows:
a. Determine the percent share of the unallocated ISG for each customer. To
calculate this number take each customer’s ISG less their ISA divided by
the total unallocated ISG.
b. Determine amount of reserve to be allocated to each customer. To
calculate this number take each customer’s percent share of unallocated
ISG and multiply it by the reserve.
3. Revise ISAs- Add the allocated reserve to each applicable customer’s initial ISA.
4. Check that San Jose and Santa Clara are not reduced by more than the aggregate
average reduction in ISGs for those wholesale customers with defined ISGs. The
average aggregate reduction is calculated by taking the total defined ISG of
161.91 less the allocated ISG to arrive at the unallocated ISG. The unallocated
ISG is then divided by the number of customers with defined ISGs (23
customers). San Jose and Santa Clara’s reduction is determined by subtracting
their ISA from 4.5 mgd. If their reduction and the aggregate average reduction in
ISGs are not in balance, go to Step 5.
5. Allocate additional water to San Jose and Santa Clara by taking the difference
between the aggregate average reduction in ISGs and the reduction of San Jose
and Santa Clara. Add that difference to San Jose and Santa Clara. This will revise
the reserve allocation available for the customers with defined ISGs.
6. Revise allocation of reserve for those customers whose ISA was less than their
ISG – This is calculated by taking the percentage calculated in Step 2a and
multiplying it by the new reserve amount.
7. Finalize ISAs – Add the new reserve value to each applicable customer’s initial
ISA. Check San Jose and Santa Clara again to ensure they are not reduced by
more than the aggregate average reduction in ISGs for those wholesale customers
with defined ISGs.
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December 8, 20 I 0
Commissioner Francesca Vietor, President
San Francisco Public Utilities Commission
1155 Market Street, 11 th Floor
San Francisco, CA 94103
Re: Establishment of Interim Supply Allocations under the 2009 Water Supply
Agreement
Dear President Vietor:
On behalf of the City of Palo Alto ("Palo Alto"), we submit the following final comment
letter and proposal in connection with the scheduled December 14,20 I 0 meeting of the San
Francisco Public Utilities Commission ("SFPUC"). At this meeting, SFPUC staff will present a
proposal to establish Interim Supply Allocations ("IS A") for wholesale customers served by
SFPUC ("Wholesale Customers") under the 2009 Water Supply Agreement ("WSA"), I including
Palo Alto. SFPUC's decision on this matter has potentially serious ramiflcations for Palo Alto
and other Wholesale Customers, as evidenced by Palo Alto's active participation in SFPUC's
process to this point2 However, the issues Palo Alto raised in its letters and at the ISA
discussion meetings have not been adequately addressed. As time grows short until the
December 14th meeting, Palo Alto is compelled to make a strong statement about the importance
of preserving the rights established by the WSA.
First, the ISA is a pricing mechanism only. It does not affect the supply of water
available to a particular Wholesale Customer. It is neither a water right nor a contractual right to
I "Water Supply Agreement between the City and County of San Francisco and Wholesale Customers in
Alameda County, San Mateo County and Santa Clara County," July 2009.
2 Palo Alto has submitted two letters to SFPUC outlining in detail its concerns about early drafts ofthe
ISA. See comment letters to SFPUC Assistant General Manager Steve Ritchie from Palo Alto Mayor
Patrick Burt dated September 23,2010 and October 14, 2010, Attach ments 1 and 2 to this letter.
MCCORMICK, KIDMAN & BEHRENS, LLP
LAWYERS
Commissioner Francesca Vietor, President
San Francisco Public Utilities Commission
December 8, 2010
Page 2
water. Rather, it establishes a line between two different water rates. That line is crossed when
the total amount of water provided to SFPUC's wholesale and retail customers exceeds a certain
amount and the amount of water provided to a particular Wholesale Customer exceeds that
customer's ISA. No one will be deprived of water based on their ISA; this is a financial issue.
Second, SFPUC's legal right to impose any allocation that could interfere with the right
of Wholesale Customers to purchase their fulllSG at regular price has never been established
and is subject to legal challenge by the Wholesale Customers. Palo Alto expressly reserved the
right to challenge such a practice in the WSA (see ~ 8.07(D)(3)) and reasserts that right here.
Thanks to its aggressive conservation policies, Palo Alto does not believe it ",~ll be at risk for
penalty rates under any proposed ISA methodology, but if penalty rates are assessed to it for
deliveries below its ISG, an immediate challenge will result.
Finally, due to its limited risk of exposure to penalty rates, and in a good faith effort to
find a solution that balances fundamental principles and rights with parties' concerns, Palo Alto
is amenable to a compromise that stays largely within the status quo. This means that the City of
Hayward's supposedly limitless right to water from SFPUC will be respected,) and the practice
of providing water to San Jose and Santa Clara based on goodwill rather than contract rights may
be considered in assigning them an ISA. But other important elements of the status quo must
also be respected for this peace to last, and any adverse impact from these proceedings on Palo
Alto's ISG rights will result in a swift change of heart.
Without abandoning these important points, the follo~ng letter summarizes Palo Alto's
concerns and proposes a compromise methodology for assigning ISAs.
1. Background
Palo Alto is one of 27 Wholesale Customers under the 2009 WSA. The WSA succeeds
the 1984 "Settlement Agreement and Master Water Sales Contract" ("1984 Agreement"), which
was created to settle a lawsuit filed by Palo Alto and other Wholesale Customers over the
manner in which wholesale rates were established. The 25-year term of the 1984 Agreement
expired on June 30, 2009. The WSA's 25-year term began immediately thereafter.
The 1984 Agreement established a "Supply Assurance" committing SFPUC to deliver a
certain amount of water to the Wholesale Customers. It further allocated the Supply Assurance
l While it has often been stated during this process that Hayward's 1962 agreement with SFPUC assures
it of all the water it needs on a pennanent basis, this may be an oversimplification. Even Hayward
concedes it enjoys special status only as long as SFPUC is able to deliver the water and water supply
conditions are normal. (See City of Hayward, 2005 Urban Water Management Plan, page 3-1.)
MCCORMICK, KIDMAN & BEHRENS, LLP
LAWYERS
Commissioner Francesca Vietor, President
San Francisco Public Utilities Commission
December 8, 20 10
Page 3
among 24 of the 27 Wholesale Customers as an ISO expressed in tenns of daily deliveries. (See
WSA, ~ 3.02(A).) Three Wholesale Customers -the Cities of Hayward, San Jose and Santa
Clara -were not allocated ISOs4 Both the Supply Assurance and the ISO were continued in the
WSA, which establishes a Supply Assurance of 184 mgd (including Hayward) and an ISO for
Palo Alto of 17.08 mgd. Both agreements provided that the Supply Assurance and the IS Os are
perpetual.
In a separate section, the WSA establishes an "Interim Supply Limitation" ("ISL") that
provides a collective allocation for the Wholesale Customers, plus San Jose and Santa Clara, of
184 mgd. Further, the WSA provides for the establislunent of an "Interim Supply Allocation," or
[SA, by SFPUC at a public hearing prior to December 31,2010. In general, if the total amount
of water provided by SFPUC exceeds the ISL under the conditions stated in the WSA, the
agencies that exceeded their indi vidual IS As can be assessed an "Environmental Enhancement
Surcharge" ("EES") in an amount still to be detennined. EES will thus constitute monetary
penalties similar to a tiered rate structure. A final point central to this discussion is the fact that
some Wholesale Customers have kept their water purchases below their ISOs, while others have
not. Palo Alto's own longstanding commitment to water conservation and recycled water has
reduced its water purchases well below its ISO.
The detennination ofISAs by SFPUC must be completed by the end of this year and has
been the subject of impassioned meetings and correspondence in recent months. Palo Alto's
position, as explained below, is that the ISA must be based on the ISO, which is "perpetual" and
established by contract, rather than on selt~reported "projected purchase" amounts that were
never intended by the parties that prepared them to be used for that purpose.
2. SFPTJC May Not Adopt ISAs that Infringe on Palo Alto's ISG
The ISO is the sole contractual means of allocating the SA among the Wholesale
Customers. It is also the predicate for wholesale payments because water rates are assessed
based on proportional annual use. (See WSA, ~ 5.02(E).) The only limit the WSA places on
annual use is the ISO. (See WSA, '13.02(D).) SFPUC has no legal authority to impose an ISA
that adversely impacts the negotiated allocation entitlements or the Wholesale Customers' agreed
upon payment calculation method. An ISA determination based on any factor other than a
particular entity's ISO would not be consistent with the central role of the ISO in the WSA.
4 Hayward does not have an ISG because of its 1962 agreement with SFPUC. San Jose and Santa Clara
do not have ISGs because under both the 1984 Agreement and the WSA they are provided water on a
temporary. interruptible basis.
MCCORMICK, KIDMAN & BEHRENS, LLP
LAWYE.RS
Commissioner Francesca Vietor, President
San Francisco Public Utilities Commission
December 8, 20 I 0
Page 4
lSOs are the perpetual and exclusive means of water allocation under the WSA. They are
contract rights dating back to 1984 and are the sole basis for setting entitlements. The ISO is no
historical accident; the SA and individuallSOs were negotiated and agreed to among all the
parties based on all available information and extensive input from many sources. ISOs were
granted by the 1984 Agreement, survived its termination, and were incorporated and reaffirmed
in the WSA. Palo Alto has long relied on its perpetual ISO right in water resources and land use
planning, including in evaluating the need for additional supplies, increasing water efficiency,
investing in recycled water, and planning economic development.
3. The Water Use Projections Were Never Intended to Be Relied Upon by SFPUC
Palo Alto objects to SFPUC's reliance on the "Projected FY 2017-18 Purchases" in
determining ISAs for the Wholesale Customers. These numbers are taken from BA WSCA's
"Long-Term Reliable Water Supply Strategy Phase I Scoping Report, May 25, 2010." This was
a planning document prepared for BA WSCA. It was the first phase of a three-phase water
supply strategy. The numbers used were not approved by Palo Alto for application in the
calculation of ISAs under the WSA. Any review of the document would not have been
undertaken with knowledge the numbers would be used for an altogether different purpose and
would potentially lock Palo Alto and others in to W1favorable ISAs and expose them to
substantial EES penalties.
4. As Proposed, the ISAs Would be Contrary to SFPUC's Stated Policy Goals by
Rewarding Waste and Penalizing Past Success in Conservation
SFPUC's stated policy in imposing the ISL and ISA is to encourage conservation and
local supply development. Palo Alto has a long track record of success in this regard. In the
mid-I970s, its demand exceeded its cunent ISO. Today Palo Alto buys much less than its ISO,
despite a slight increase in population. (See Attachment 1.) But the draft ISAs penalize Palo
Alto's success. They improperly base the ISA primarily on future demand projections, with no
regard for an agency's past conservation efforts. In effect, this would reward excessive water
use where conservation efforts have been less aggressive by reflecting those excessive levels in
ISAs. The ISAs essentially grant preferential treatment to those with little or no record of water
conservation success. This is a perverse incentive not to conserve and is directly at odds with the
ISA's purported policy goals.
MCCORMICK, KIDMAN & BEHRENS, LLP
LAWYERS
Commissioner Francesca Vietor, President
San Francisco Public Utilities Commission
December 8, 2010
Page 5
5. Anv Action but "Zeroing Out" the ISAs for Temporary Customers Would Elevate
Their Status Above That of Permanent Customers
No entities stand to benefit more from ignoring ISGs and basing ISAs on projected
purchases than SFPUC's temporary, interruptible customers San Jose and Santa Clara. They
have no ISGs. Unlike every other Wholesale Customer, they have no permanent right to water
under the WSA. The WSA bluntly classifies them as "temporary" and "interruptible" customers
who are not assured of the right to continue in the system after 2018. (See WSA, '19.06.)
Palo Alto objects to the fact that these two cities, with purportedly inferior rights, appear
to be receiving preferential treatment by SFPUC. Even though San Jose and Santa Clara have no
ISG, the 4th Draft continues the practice of the previous drafts by proposing an ISA allowing
them to receive their full projection -4.50 mgd each -without the threat of surcharge or other
limitation. This would virtually guarantee that San Jose and Santa Clara would never be subject
to EES penalties, when in fairness temporary and interruptible customers should be the first to be
assessed EES. If the 265 mgd ISL is ever exceeded, every drop of water purchased by San Jose
and Santa Clara under the WSA should be subject to EES penalties. While reserving all rights to
assert this position, Palo Alto acknowledges that political expediency requires some compromise
at this time, as reflected below in its proposal for establishing ISAs.
6. Palo Alto's Proposal
Palo Alto is a co-grantee under the Raker Act. (City o/Palo ALto v. City and County 0/
San Francisco (1977) 548 F.2d 1374,1376-1377.) As expressly stated in the WSA, Palo Alto
reserves all rights related to the question of what rights, benefits and privileges that status
affords. (See WSA, ~ 8.07.) In particular, Palo Alto does not concede that SFPUC may lawfully
impose a water supply limitation of any kind, particularly one that disregards Palo Alto's ISG
rights. However, for the limited purposes of avoiding immediate legal action and facilitating
establishment of timely and equitable ISA levels, Palo Alto proposes adoption of the following
methodology based on SFPUC's 4th Draft (see Attachment 3 to this letter):
a. Basis for Establishing ISAs: Each agency's initial ISA would equal the
lesser of (1) its ISG or (2) its projected FY 2017-18 purchases, except for
San Jose and Santa Clara, which would each be assigned an ISA of 2.25
mgd. This method would yield the same ISAs shown in the 4th Draft with
the exception of San Jose and Santa Clara. This acknowledges San Jose
and Santa Clara's existing relationships with SFPUC and the Wholesale
Contractors, while reflecting their status as "temporary" and
"interruptible" customers.
MCCORMICK, KIDMAN & BEHRENS. LLP
LAWYERS
Commissioner Francesca Vietor, President
San Francisco Public Utilities Commission
December 8, 201 0
Page 6
b. ISA Reserves: The remaining ISL would be placed in reserve and would
equal 9.0 mgd.
c. Distributing the Reserves: If the 265 mgd threshold is exceeded, the
reserve would be distributed in the following order of priority. First,
Hayward would receive the balance of its demand. Second, aU parties
with ISOs would receive up to their ISOs; if reserves prove insufficient,
those parties would share the remaining reserve in proportion to their
ISOs. Third, all parties with ISOs would receive the balance of their
demand without regard to ISOs; if reserves prove insufficient, those
parties would share the remaining reserve in proportion to their ISOs.
Finally, parties without ISOs other than Hayward (i.e., San Jose and Santa
Clara) would share the remaining reserve, if any5
This method of distributing the reserve is optimal because it is fully consistent with
existing agreements. First, it would prioritize Hayward in accordance with its 1962 agreement
with SFPUC. Next, it would make the second distribution according to each party's ISO and
thereby minimize the risk that any party will be surcharged for purchases falling within its ISO,
which would be an unacceptable outcome in light of each Wholesale Customer's perpetual right
to purchase up to its ISO at the price agreed upon in the WSA. With respect to the third and
fourth priorities, it would be appropriate to favor permanent customers' remaining needs over
any allocation to San Jose and Santa Clara because if and when an EES is appropriate, it should
be imposed on temporary, interruptible parties before permanent customers are affected.
Finally, in addition to the changes Palo Alto proposes for the 4th Draft, it also requests
that any adoption of ISA levels be accompanied by a policy statement from SFPUC on the
following issues:
• A commitment by SFPUC to end the ISA in 2018.
• A reaffirmation of the principle that the ISO is a perpetual right that shall be the
foundation for any water allocation under the WSA.
5 SFPUC informed Palo Alto this week that staff would ask the Commission (1) to postpone any
decision on implementation of the reserve to a date uncertain and (2) to delegate the authority for
making this important decision to the SFPUC Oeneral Manager. Palo Alto believes a decision
on implementation should be made now, in conjunction with adoption of the ISAs, but above all
it must be made by the Commission and not delegated to SFPUC staff.
MCCORMICK, KIDMAN & BEHRENS, LLP
LAWYERS
Commissioner Francesca Vietor, President
San Francisco Public Utilities Commission
December 8, 2010
Page 7
• A commitment to set future EES amounts at a reasonable level.
• A commitment to maintain the ability of Wholesale Customers to permanently
transfer portions of their ISG, irrespective of any ISA determination by SFPUC.
Thank you for your consideration of this important matter. The City of Palo Alto and the
undersigned welcome your questions and comments.
DJP:var
Cc:
City of Palo Alto City Council
Very truly yours,
McCORMICK, K DMAN & BEHRENS, LLP
DANIEL 1 PAYNE
City of Palo Alto Utilities Advisory Commission
James Keene, City Manager
Valerie Fong, Director of Utilities
Donald Larkin, Interim City Attorney
Art Jensen, General Manager of the Bay Area Water Supply and Conservation Agency
Attachments:
l. Letter to SFPUC Assistant General Manager Steve Ritchie from Palo Alto Mayor Patrick
Burt, September 23, 2010.
2. Letter to SFPUC Assistant General Manager Steve Ritchie from Palo Alto Mayor Patrick
Burt, October 14,2010.
3. Palo Alto Proposal for Changes to SFPUC 4th Draft Interim Supply Allocations.
ATTACHMENT 1
'.
September 23, 2010
Mr. Steve Ritchie
Assistant General Manager.
)
San Francisco Public Utilities Commission
1155 Market Street, 11 th Floor
San Francisco, CA .
City:of Palo Alto
office of the Mayor and City Council
Subject: City of Palo Alto Comments on Draft Interim Supply Allocation Methodology
Dear Mr. Ritchie:
The City of Palo Alto has reviewed the Draft Interim Supply Allocations (ISA) included with
your"August 20,2010 letter.
We h~lVe several concerns with the proposed draft ISA, which is based on future forecasts from
the Bay Area Water Supply and Conservation Agency's (BAWSCA) Long Term Reliable Water
Supply Strategy Phase I Report (phase I Report). As an alternative, Palo Alto supports an
approach based on the existing, perpetual contractual entitlements of all of San Francisco's
wholesale customers (Wholesale Customers); an approach based on each customer's Individual
Supply Guarantee (ISG). Although Palo Alto does not concede the legality of San Francisco's
unilateral imposition of any water supply limitations, the City is pleased to "submit these
comments, and we appreciate the opportunity to express our concerns. "
1. The IndJvidual SuOPly Guarantee is a Perpetual Contractual Right and Defines the City's
Water Supply Relationshf.p with San Francisco
"Each Wholesale Customer's ISG is an established, perpetual contractual right that is guaranteed
by and survives the expiration of both"the 1984 Settlement Agreement and Master Water Sales
Contract, and the 2009 Water Supply Agreemet:lt (2009 Agreement) between San Francisco and
the Wholesale Customers. It is expected that each Wholesale Customer will endeavor to restrict
its use of water from the regional water system to its ISG. San Francisco's draft ISA, which has
no relationship at all to the ISG, renders the ISG meaningless.
However, the ISG's meaning to the City of Palo Alto, a co·grantee under the Raker Act, cannot
be overstated. San Francisco cannot impose a limit on the ISG, nor can Palo Alto accept such a
limit. The 2009 Agreement specifies that both San Francisco and its Wholesale Customers
"share a commitment to the Regional Water System providing a reliable supply of high quality
water at a fair price, and achieving these goals in an environmentally sustainable manner"! but
the draft ISA only. serve~ to erode San Francisco's commitment to reliability.
I 2009 Agreement. Introductory Statement.
P.O. Box 10250
Palo Alto,CA 94303
650.329.2477
650.328.3631 fax Page 1 of4
Printed with lo"ba.ed Inks on IOO'lli ....,'ct.d. paper pro.,.. •• d without chlorine.
) ')
2. Using the Individual SUt!'ply Guarantee to Establish Interim Supply Allocations Promotes
Good Water Planning .
Since the creation of the 1SG in 1984, the presence of the perpetual right to its 1SG has
influenced many of Palo Alto's decisions, including evaluating the need for additional supplies,
increased water efficiency commitments, recycled water investments and economic
development. Clarity of supply is an essential prerequisite for good water resource planning.
Thus, Palo Alto has long relied on its perpetual right to its 1SG in all of its water use planning .
. Palo Alto strongly supports the mechanism in the 2009 Agreement which allows the transfer of
1SGs between BA WSCA agencies, and believes that such transfers will result in additional
investment in the most cost-effective conservation or alternative supply resources for the region.
However, if the ISA has no relationship to the ISG, these transfers will not occur and
investments in water efficiency and new sustainable water supplies will be discoura~ed or
delayed. Therefore, the proposed ISA methodology fails to achieve the stated purpose ofthe
ISA, which is to enforce the interim water supply limitation of 265 million gaUonsper day
(MOD).
3. Basing the ISA on Long-term Water Use Forecasts is Not Appropriate
Palo Alto does not support using future demand projections to establish the ISA. Demand
projections are mere estimates, require the use of many assumptions and are highly uncertain.
The following concerns highlight the problems with using the forecasts that were developed for
the Phase I Report and BA WSCA's Water Conservation Implementation Plan (WCIP):
• Agencies are not on a level playingfield: Different agencies chose varying degrees·of
conservation commitments in the forecasts used as the basis for the Phase I Report. Rather
than encourage conservation, San Francisco's proposed ISA allocation method perversely
rewards those agencies that made a lesser commitment with an increased ISA.
• The forecast was not formally approved and is based on incomplete data: The WCIP report
and the projections in the Phase I Report were not approved by the Palo Alto City Council or
the BA WSCA Board of Directors. Palo Alto is in the process of evaluating future demand
projections and Senate Bill 7x water use reduction requiremerits, and Palo Alto's water use
projections will likely change during preparation ofthe·City's 2010 Urban Water
Management Plan. .' .
• Theforecastfails to account for prior conservation investments: The aggressive goals in the
WCIP report do not account for SUbstantial water reductions achieved as a result of previous
efficiency efforts. Thus, using the WCIP as a basis for San Francisco's proposed ISA is
especially punitive for those agencies that have aggressively pursued, and achieved,
conservation for many years.
• Using forecasts to establish potential penalties will impactfutureforecast methodologies:
Forecasts are a valuable tool to infonn future decisions regarding water supply, conservation
and growth. But, if San Francisco adopts an ISA mechanism based on future forecasts, Palo
Alto will be forced to re-assess future forecast methodologies to ensure that Palo Alto is not
unfairly exposed to risks for use within its contractual 1SG entitlement.
Page 2 of4
.. . ." )
4. The Draft Allocation Methodology Does Not Account for Historical Water Reduction Efforts
Palo Alto is unique among BA WSCA agencies in providing gas, electric, water and wastewater
services to residents and businesses. Over the past 30 years, Palo Alto has leveraged this unique
pos~tion to optimize efficiency gains across all services. In the mid-seventies, Palo Alto's water
use exceeded its ISG of 17.07 MGD, but conservation, incentive pricing, increased recycled
water use and customer awareness have resulted in dramatic water use reductions. These
reductions have been so successful that they penni t Palo Alto to use significantly less water than
its ISG.
Starting with the 1976 drought, the City im:ested in substantial capital improvements for more
water efficient technology for all customer groups. During this time, Palo Alto implemented an
institutional commitment to efficiency for all customers at a time when few utilities were doing
the same2• This consistent outreach and interaction with customers has resulted in long-lasting
water use behavioral changes throughout Palo'AIto and accounts for much of the permanent
water reductions Palo Alto has achieved.
In 1991, Palo Alto signed the Memorandum o/Understanding Regarding Urban Water
Conservation developed by the California Urban Water Conservation Council (CUWCC), and
committed to meeting targets for conservation best management practices. Since becoming a
signatory with CUWCC, Palo Alto has saved over 16,000 acrefeet of water through
conservation programs and the use of recycled water, and remains committed to aggressively
pursuing all cost effective conservation measures and recycled water options.
Palo Alto's historical investments in recycled water and conservation have resulted in an.
approximate 3 MGD water use reduction from Palo Alto's peak usage. As a result, Palo Alto's
historical savings have benefitted the entire region by reducing overall water demands. Absent
this commitment, and similar commitments pursued by some of the other Wholesale Customers,
" it is likely that the Wholesale Customers in aggregate would exceed their collective supply
liniitation of 184 MGD. San Francisco's draft ISA fails to recognize Palo Alto's historic,
contribution to conservation, since the methodology is based purely on forward-looking
projections.
5. The Proposed ISA Could Cause Financial Harm to Responsible Agencies that Limit Their
Water Use to Below Their Individual Supply Guarantees ' ,
The perpetual right to its ISG p1,'ovides certainty for Palo Alto and other Wholesale Customers.
Palo Alto expects that usage within an individual agency's ISG will be charged a fair and
reasonable price that is consistently and unifonnly applied to all Wholesale Customers. Yet the
proposed ISA methodology provides a contradictory and inequitable framework. For example,
under San Francisco's proposed ISA, Palo Alto could pay one price for water up to 13.38 MGD,
and a higher price for water beyond that, despite the fact Palo Alto's ISG is 17.07 MGD. At the
same time, several Wholesale Customers would pay the same price for water up to and beyond
their contractual ISG entitlement. In theory, Palo Alto could offset any financial risk by
2 City of Palo Aito Urban Water Management Plan Update and Amendment, 1990.
Page 3 of4
) )
acquiring credits from another Wholesale Customer that is below its ISA. But this situation,in
which Palo Alto would be forced to acquire credits from a Wholesale Customer that is above its
ISG, is simply unacceptable, particularly because Palo Alto has done so much to remain below
its ISG.
Palo Alto strongly advocates that the ISG should be the basis for any interim limitation imposed
by San Francisco, to ensure the proper recognition of the ISG as. an integral component of the
contractual relationship between all parties involved. We look forward to the opportunity to
continue to collaborate with San Francisco on this issue. .
Please feel free to contact Valerie Fong, the City's Director pfUtilities, at (650) 329-2277 or via
email at Valerie.Fong@cityofpaloalto.org to discuss this matter further.
Sincerely,
~(/iu~f
Patrick Burt
Mayor of Palo Alto
CC: City of Palo Alto City Council
City of Palo Alto Utilities Advisory Commission
James Keene, City Manager
Valerie Fong, Director of Utilities
Gary M. Baum, City Attorney
Art Jensen, General Manager of the Bay Area Water Supply and Conservation Agency
Page 4 of4
ATTACHMENT 2
October 14,2010
Mr. Steve Ritchie
, Assistant General Manager
San Francisco Public Utilities Commission
1155 Market Street, 11 th Floor
San Francisco, CA
'"--,------
)
Ci!yof ,Palo,Alto
Office of the Mayor and City Council
Subject: City of Palo Alto's Comments on Interim Supply Allocations Process
Dear Mr. Ritchie:
The City of Palo Alto ,has received the 2nd Draft Interim Supply Allocation (ISA),proposal ,
included with your October 1, 2010 letter. As always, the City remains committed to exploring
all of its legal options in response to unilateral action taken by any party to the 2009 Water
Supply Agreement. But 'the City is pleased to note that the 2nd Draft ISA methodology at least
partially incorporates the Individual Supply Guarantee (ISG). The City 0(Pa10 Alto believes this
is a st~p in the right direction and supports the San Francisco Public Utilities Commission's
(SFPUC) movement to a methodology based on the ISG.
As stated in the City's comment letter on the 1Bt Draft ISA, Palo Alto cannot emphasize enough
the critical role the ISG plays in the contractual relationship between the BA WSCA agencies and
the SFPUC. This beneficial relationship provides certainty not only for Palo Alto, but also for
San Francisco. If San Francisco acts to weaken or, ignore the ISG in any future allocation
formula, the contractual relationship between our two entities is weakened as well. As co-
grantees under the Raker Act, Palo Alto and San Francisco must work together to preserve our
existing contractual relationship and ensure that nO action will result in tl;1e diminution of our
mutual entitlements.
As you know, in December 2010, the SF-puc will consider your isA recommendation. At that
time,the SFPUC has an obligation to clearly reaffirm its perpetual commitment to the ISG as the
single most important contractual delivery standard in the 2009 Water Supply Agreement, and
acknowledge that the ISA is indeed interim in nature and will cease to exist after 2018. In the
meantime, we look forward to the opportunity to continue to collaborate with San Francis~ on
this issue. .
Printed with ,oy-baBed Inks Olll00~ I'tIC)'clIlcl paper proce ... d wllbo.t chlorine.
P.O. Box 10250
Palo Alto, CA 94303
650.329.2477
650;328.3631 fax
i) )
Please feel free to contact Valerie Pong, the City's Director of Utilities, at (650) 329-2277 or via
email at Valerie.Fong@CityofPaloAlto.org to discuss this matter further.
Sincerely, _ ~/ ~
Mayor of Palo Alto
CC: City of Palo Alto City Council
City of Palo Alto Utilities Advisory Commission
James Keene, City Manager
Valerie O. Fang, Director of Utilities'
Gary M. Baum, City Attorney
Art Jensen, General Manager of the Bay Area Water Supply and Conservation Agency
'. ,
ATTACHMENT 3
PALO ALTO'S PROPOSED INTERIM SUPPLY ALLOCATIONS
Agency
Individual
Supply
Guarantee
(MGD)
Projected FY
2017-18
Purchases
(MGD)
Palo Alto
Proposal
(MGD)
Alameda CWD 13.76 13.76 13.76
Brisbane/Guadalupe 0.98 0.95 0.95
Burlingame 5.23 4.82 4.82
California Water Service Co. 35.68 36.06 35.68
Coastside 2.18 2.18 2.18
Cordilleras Mutual Water Assn. 0.01 0.01 -
Daly City 4.29 4.66 4.29
East Palo Alto 1.96 3.40 1.96
Estero 5.90 5.82 5.82
Hayward 22.08 22.92 22.92
Hillsborough 4.09 3.51 3.51
Menlo Park 4.46 3.90 3.90
Mid-Peninsula 3.89 3.61 3.61
Millbrae 3.15 3.13 3.13
Milpitas 9.23 8.80 8.80
Mountain View 13.46 10.26 10.26
North Coast 3.84 3.58 3.58
Palo Alto 17.08 13.33 13.33
Purissima Hills 1.63 2.77 1.63
Redwood City 10.93 10.85 10.85
San Bruno 3.25 2.30 2.30
San Jose 0.00 4.50 2.25
Santa Clara 0.00 4.50 2.25
Stanford 3.03 2.84 2.84
Sunnyvale 12.58 9.44 9.44
Westborough 1.32 0.94 0.94
Total ISAs 184.00 182.84 175.00
Reserve 9.00
Draft and Final ISA Methodologies ATTACHMENT C
/\Ceney Individual supply Projecled FY 2017·18
Guarantee (ISGI purchases
1St Draft IlIferim 11Id Ota{t Interim lId Ota{t IIIterim 4th Ota{t Interim
SUpply Allocation supply Allocation supply Allocation SUpply Allocation
rina/lnterim
supply Allocation
Alameda CWO 13.76 13.76 13.76 13.76 13.76 13.76 13.76
Brisbane/Guadalupe 0.98 0.95 0.95 0.98 0.95 0.95 0.96
BUII~ .. me 5.23 4.82 4.82 5.23 4.82 4.82 4.97
callfornia Wat .. se",ice Company 35.68 36.06 36.06 35.68 36.06 35.68 35.68
Coastside 2.18 2.18 2.18 2.18 2.18 2.18 218
Oalv Cit)' 4.29 4.66 4.66 4.29 4.66 4.29 4.29
East Palo Alto 1.96 3.40 3.4 1.96 2.66 1.96 1.96
Estero 5.90 5.82 5.82 5.90 5.82 5.82 5.85
HajIVrard 22.08 ' 22.92 2292 22.92 22.92 22.92 22.92
HiDsborou~h 4.09 3.51 3.51 3.86 3.51 3..51 3.72
Menlo Par~ 4.46 3.90 3.9 4.29 3.90 3.90 410
Mid·Penmsul. 3.89 3.61 3.61 3.89 3.61 3.61 3.71
M[IIbrae 3.15 3.13 3.13 3.15 3.13 3.13 313
MUpit., 9.23 8.80 8.8 9.23 8.80 8.80 8.96
Mountain -yjew 13.46 10.26 10.26 1129 10.26 10.26 1143
North Coasl 3.84 3.58 3.58 3.84 3.58 3..58 3.67
Palo Alto 17.08 13.33 13.33 14.66 13.33 13.33 14.70
Purissima Hi~ls 1.63 2.77 2.77 1.63 2.77 163 163
Red'llood Cil), 10.93 10.85 10.85 10.93 10.85 10.85 10.88
san Bruno 3.25 2.30 2.3 2.53 2.30 2.30 2.65
San lose 0.00 4.50 4.5 3.67 4.50 4.50 4.13
Santa clara 0.00 4.50 4.5 3.67 4.50 4.50 413
stanford 3.03 2.84 2.84 3.03 2.84 2.84 2.91
SUnn'(l'ale 12 .. 58 9.44 9:44 10.38 9.44 9.44 10.59
Westborough 1.32 0.94 0.94 103 0.94 0.94 108
~otIl 184.00 182.84 18284 184.00 182.10 179.50 184.0
.. AII .aluesil Mir n allons er da' MGO g p II
RESERVE 1.90 4.50 0.0