HomeMy WebLinkAboutStaff Report 2160
City of Palo Alto (ID # 2160)
City Council Staff Report
Report Type: Action Items Meeting Date: 11/1/2011
City of Palo Alto Page 1
Summary Title: Changes to the Calaveras Reserve
Title: Finance Committee Recommendation to Adopt a Resolution Approving
Renaming the Calaveras Reserve the Electric Special Project Reserve and
Adopting Electric Special Project Reserve Guidelines
From: City Manager
Lead Department: Utilities
Recommendation
Staff, the Utilities Advisory Commission (UAC), and the Finance Committee recommend that the
City Council approve a resolution to:
1. Change the purpose of the Calaveras Reserve from partially funding above market
electric costs and partially funding projects that benefit electric ratepayers to entirely
funding projects that benefit electric ratepayers;
2. Rename the Calaveras Reserve as the Electric Special Project (ESP) Reserve; and
3. Adopt the following ESP Reserve guidelines:
a. The purpose of the ESP Reserve is to fund projects that benefit electric ratepayers;
b. ESP Reserve funds are to be used for projects of significant impact;
c. Projects proposed for funding must demonstrate a need and/or value to electric
ratepayers. The projects must have verifiable value and not be speculative, or risky
in nature;
d. Projects proposed for funding must be substantial in size, requiring funding of at
least $1 million;
e. A goal is to commit all funds in the ESP Reserve by end of fiscal year (FY) 2015; and
f. Any uncommitted funds remaining at the end of FY 2020 will be transferred to the
Electric Supply Rate Stabilization Reserve and the ESP Reserve will be closed.
In addition, the Finance Committee recommends that the Council direct staff to identify a
process for selecting eligible projects.
Executive Summary
Since the Calaveras Reserve was first established in 1983, Council has changed its purpose
several times. While the purpose and deployment of funds has changed, the Calaveras Reserve
City of Palo Alto Page 2
has always been maintained for benefit of the Palo Alto’s electric ratepayers. Most recently,
the reserve was used to cover the “stranded costs” of the Calaveras Hydroelectric Project,
which costs more than the market value of its energy output. These above-market costs were
deemed “stranded” when customers could choose alternate electric suppliers under electricity
de-regulation rules in the late 1980’s in the regime known as Direct Access.
The threat of Palo Alto having stranded costs as a result of Direct Access doesn’t exist in the
short term and is relatively low in the long term. Holding funds in the Calaveras Reserve,
therefore, to cover a low risk event is not necessary. However, Palo Alto’s electric ratepayers
are facing the prospect of several large expenses over the next few years related to several
initiatives. Specifically, transmission upgrades, redundant electric supply, and the deployment
of smart grid technologies are being evaluated, and plans to invest in such areas to increase
value to Palo Alto’s electric customers will be developed in the coming years.
The Calaveras Reserve’s estimated Fiscal Year (FY) 2012 ending balance is approximately $50
million. Changing the purpose the Calaveras Reserve to fund special projects and adopting the
proposed ESP Reserve Guidelines will ensure prudent and fair use of the funds on behalf of Palo
Alto’s electric ratepayers.
Committee Review and Recommendations
Staff proposed modifications to the Calaveras Reserve to the UAC at its July 20, 2011 meeting.
Staff’s recommendation to the UAC was to designate approximately half of the Calaveras
Reserve funds to be used to offset the above market cost of the Calaveras hydroelectric project
with the remaining funds held in a newly created ESP Reserve to be used for special projects to
the benefit of the electric ratepayers. The UAC did not agree with staff’s recommendation and
instead proposed that all of the Calaveras Reserve funds be held in a newly created ESP Reserve
to be used for special projects to the benefit of electric ratepayers with specific guidelines for
the use of ESP Reserves.
Subsequent to the UAC meeting, staff changed its recommendation to be consistent with the
UAC’s recommendations. At the September 20, 2011 Finance Committee meeting, staff
proposed changes to the Calaveras Reserve (Attachments B and C) as follows:
1. Change the purpose of the Calaveras Reserve from partially funding above market
electric costs and partially funding projects that benefit electric ratepayers to entirely
funding projects that benefit electric ratepayers;
2. Rename the Calaveras Reserve as the Electric Special Project (ESP) Reserve; and
3. Adopt the following ESP Reserve guidelines:
g. The purpose of the ESP Reserve is fund projects that benefit electric ratepayers;
h. ESP Reserve funds are to be used for projects of significant impact and not to offset
operating costs and/or reduce rates in the short-term;
City of Palo Alto Page 3
i. Projects proposed for funding must demonstrate a need and/or value to electric
ratepayers. The projects must have verifiable value and not be speculative, or risky
in nature;
j. Projects proposed for funding must be substantial in size, requiring funding of at
least $1 million;
k. Commitment of funds shall be determined by end of FY 2015; and
l. Any uncommitted funds remaining at the end of FY 2020 will be transferred to the
Electric Supply Rate Stabilization Reserve and the ESP Reserve will be closed.
Following a brief presentation by staff of the history of the Calaveras Reserve, key issues and
proposal, UAC Commissioner Steve Eglash provided a summary as to why the UAC proposed
that all of the Calaveras Reserve funds be used for special projects to the benefit of electric
ratepayers. Commissioner Eglash stated that the UAC advised that the remaining funds be
spent on significant projects rather than have smaller amounts transferred annually to the
Electric Fund to support general operating expenses.
The Finance Committee had an extensive discussion about the proposed changes to the
Calaveras Reserve and guidelines for the new ESP Reserve. Vice Mayor Yeh expressed concerns
over staff’s lack of process to identify and review projects and communicate progress on
potential projects, including the development of a redundant transmission line to meet
reliability concerns. Several Committee members questioned the somewhat arbitrary nature of
the recommendation to identify funding commitments by 2015, however they also recognized
that the funds should not be held in perpetuity. Council Member Schmid stated that any
project to be funded should be cost-effective to electric ratepayers and meet certain economic
criteria. Lastly, Council Member Scharff requested that the City Attorney’s Office provide
Council an opinion regarding whether Calaveras Reserve funds must be used to the benefit of
Electric ratepayers only, or if those funds can be used for other purposes, including the City’s
General Fund.
The Finance Committee voted unanimously to accept the UAC’s and staff’s recommendation
with the following modifications:
Modify 3b to read: ESP Reserve funds are to be used for projects of significant impact;
Modify 3e to read: A goal is to commit all funds in the ESP Reserve by end of fiscal year
(FY) 2015; and
Add a new recommendation 4 to read: Staff is to identify a process for selecting eligible
projects.
The minutes of the Finance Committee meeting of September 20, 2011 are provided as
Attachment D.
City of Palo Alto Page 4
Resource Impact
Changing the purpose of the Calaveras Reserve and adopting the proposed guidelines will
impact electric rates in the short term by ceasing the annual transfers from the Calaveras
Reserve to the Electric Fund. The impact on rates for those transfers is equal to a one-time rate
increase of about 2.5% sustained over a ten year period. However, the funds will remain in the
Electric Fund to be used to benefit electric ratepayers and will eventually be used to fund
worthwhile projects, which would have been funded from either the sale of bonds or a rate
increase. Therefore, over the long term, there is no impact on electric rates from the
recommended action. Requests for future expenditures for projects from the proposed new
ESP Reserve require Council approval and their resource impact will be identified at that time.
Policy Implications
The proposed resolution is consistent with the intended use of the Calaveras Reserve, to
benefit Palo Alto’s electric ratepayers. The City’s electric ratepayers have been the source of
the funds since Council established the Reserve in 1983. In 1996, California’s electric industry
deregulation law, AB 1890, authorized both investor-owned and municipal utilities to collect a
Competition Transition Charge (CTC), on electric customer bills. The City opted to collect the
CTC from electric ratepayers and further funded the Calaveras Reserve. The City Attorney’s
Office has advised that Calaveras funds continue to be spent to benefit those who contributed
– the City’s electric ratepayers.
Evaluating the need for and purpose of the Calaveras Reserve is a strategic initiative in the 2011
Utilities Strategic Plan. The proposed new ESP Reserve and guidelines would replace the
current Council-approved Calaveras Reserve guidelines.
Environmental Review
Approval of the ESP Reserve and Guidelines does not meet the definition of a project pursuant
to Public Resources Code Section 21065, thus no California Environmental Quality Act review is
required.
Attachments:
Attachment A: Resolution Approving Changes to Calaveras Reserve (PDF)
Attachment B: Staff Report to Finance Committee Recommending Changes to the
Calaveras Reserve (PDF)
Attachment C: Finance Committee At Place Memo with Modification to Proposed ESP
Reserve Guidelines (PDF)
Attachment D: Draft Excerpt Finance Committee Minutes of 9-20-11 (PDF)
*Not Yet Approved*
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Resolution No. ______
Resolution of the Council of the City of Palo Alto Approving
Renaming the Calaveras Reserve the Electric Special Project
Reserve and Adoption of Electric Special Project Reserve
Guidelines
WHEREAS, the Calaveras Reserve was first established in 1983 to help
defray cost associated with the Calaveras Hydroelectric Project;
WHEREAS, in 1996, in anticipation of deregulation of the California
electricity market, Council changed the purpose of the Calaveras Reserve to cover
potential stranded costs associated with the Calaveras Hydroelectric Project, Seattle City
Light Exchange contract, California Oregon Transmission Project and Washington Water
Power contract;
WHEREAS, in 1997 Council authorized the collection of a competitive
transition surcharge from the City of Palo Alto’s Utilities Department (CPAU) electric
customers to cover stranded costs in the event CPAU customers elected to receive
electric supply services from other providers;
WHEREAS, in 1999 Council stopped the collection of the competitive
transition surcharge because the Calaveras Reserve was fully funded at $71 million, and
established the Calaveras Reserve Target and Guidelines with a 34 year drawdown
schedule;
WHEREAS, in 2009 Council approved new Calaveras Reserve guidelines,
which required the annual calculation of short-term stranded costs to determine the
minimum transfer to the operating budget, the annual calculation of long-term stranded
costs, and the identification of funds available for special projects to benefit electric
ratepayers;
WHEREAS, at the July 20, 2011 Utilities Advisory Commission (UAC)
meeting, staff presented a proposal to clarify the amount of Calaveras Reserve funds that
would be available to transfer to the operating budget to cover short-term operating cots
and how much would be available to fund future electric special projects. The UAC
unanimously voted (with Commissioner James Cook absent) to transfer all of the
Calaveras Reserve to a new Electric Special Project Reserve to fund projects to benefit
electric ratepayers;
WHEREAS, consistent with the UAC’s direction, staff presented at the
September 20, 2011 Finance Committee meeting a proposal to rename the Calaveras
Reserve the Electric Special Project Reserve, and proposed new guidelines to manage the
*Not Yet Approved*
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reserve. The Finance Committee voted 4 to 0 in support of staff’s recommendation with
some minor modifications; and
NOW, THEREFORE, the Council of the City of Palo Alto does hereby
RESOLVE as follows:
1. SECTION 1. The Calaveras Reserve is renamed the Electric Special Project (ESP)
Reserve.
SECTION 2. The following ESP Reserve guidelines are adopted:
a. The purpose of the ESP Reserve is to fund projects that benefit electric
ratepayers;
b. ESP Reserve funds are to be used for projects of significant impact;
c. Projects proposed for ESP Reserve funding must demonstrate a need and/or
value to electric ratepayers. The projects must have verifiable value and not be
speculative, or risky in nature;
d. Projects proposed for ESP Reserve funding must be substantial in size,
requiring funding of at least $1 million;
e. The ESP Reserve funding goal is to commit all Reserve funds by end of fiscal
year (FY) 2015; and
f. Any uncommitted funds remaining at the end of FY 2020 will be transferred to
the Electric Supply Rate Stabilization Reserve and the ESP Reserve will be
closed.
SECTION 3. Staff is to identify a process for selecting eligible projects.
SECTION 4. The Council finds that any revenue derived from the authorized
adoption enumerated herein shall be used only for the purpose set forth in Article VII,
Section 2, of the Charter of the City of Palo Alto.
/ /
/ /
/ /
/ /
/ /
/ /
/ /
*Not Yet Approved*
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SECTION 5. The Council finds that the adoption of this resolution does not
constitute a project under Section 21065 of the California Environmental Quality Act
(CEQA) and the CEQA Guidelines, and therefore, no environmental assessment is
required.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
___________________________ ___________________________
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
___________________________ ___________________________
Senior Deputy City Attorney City Manager
___________________________
Director of Utilities
___________________________
Director of Administrative
Services
City of Palo Alto (ID # 1977)
Finance Committee Staff Report
Report Type:Meeting Date: 9/20/2011
September 20, 2011 Page 1 of 5
(ID # 1977)
Summary Title: Change Purpose of the Calaveras Reserve
Title: Utilities Advisory Commission Recommendation to Change the Purpose of
and Rename the Calaveras Reserve to the Electric Special Project Reserve and
Adopt New Reserve Guidelines
From:City Manager
Lead Department: Utilities
Recommendation
Staff and the Utilities Advisory Commission (UAC) recommend that the Finance Committee
recommend that Council:
1.Change the purpose of the Calaveras Reserve from partially funding above market
electric costs and partially funding projects that benefit electric ratepayers to entirely
funding projects that benefit electric ratepayers;
2.Specify that the $2 million from the Calaveras Reserve that was made available to
provide loans for energy efficiency projects for business customers will be repaid to the
Electric Supply Rate Stabilization Reserve;
3.Rename the Calaveras Reserve as the Electric Special Project (ESP) Reserve; and
4.Adopt the following ESP Reserve guidelines:
a.The purpose of the ESP Reserve is to fund projects that benefit electric ratepayers;
b.ESP Reserve funds are to be used for projects of significant impact and not to offset
operating costs and/or reduce rates in the short-term;
c.Projects proposed for funding must demonstrate a need and/or value to electric
ratepayers. The projects must be cost-effective and not be speculative, or risky, in
nature;
d.Projects proposed for funding must be substantial in size, requiring funding of at
least $1 million;
e.Commitment of all funds in the ESP Reserve shall be determined by end of fiscal year
(FY) 2015; and
f.Any uncommitted funds remaining at the end of FY 2020 will be transferred to the
Electric Supply Rate Stabilization Reserve and the ESP Reserve will be closed.
Executive Summary
Since the Calaveras Reserve was first established 28 years ago, Council has changed its purpose
and use several times as a result of changing market conditions, risk of stranded costs and
September 20, 2011 Page 2 of 5
(ID # 1977)
future cost uncertainties. While the purpose and deployment of funds has changed, the
Calaveras Reserve has always been maintained for benefit of the Palo Alto’s electric ratepayers.
Palo Alto electric ratepayers are facing the prospect of several large expenses over the next few
years related to several initiatives. Specifically, transmission upgrades, redundant electric
supply, and the deployment of smart grid technologies are being evaluated and plans to invest
in such areas to improve value to Palo Alto electric customers will be developed in the coming
years.
The Calaveras Reserve’s estimated FY 2012 ending balance is approximately $50 million.
Changing the purpose the Calaveras Reserve to be used exclusively to fund special projects and
adopting the proposed ESP Reserve Guidelines will help ensure prudent and fair use of the
funds and will provide a greater certainty in planning for long-term investments on behalf of
Palo Alto’s electric ratepayers.
Background
The Calaveras Reserve was first established in 1983 to help defray costs associated with the
Calaveras Hydroelectric Project. Council changed the purpose of the Calaveras Reserve in 1996
(CMR: 214:96) and authorized collections from electric ratepayers to cover the amount that
certain electric assets’ costs were projected to be above their value, or “stranded”, in
anticipation of electric deregulation in 1998 and the threat of customers choosing electricity
suppliers other than the City. In addition, Council approved a new Calaveras Reserve policy
linking the reserve balance to an amount sufficient to cover potential stranded costs.
In 2009, Council approved a new set of guidelines to manage the Calaveras Reserve which
included setting the minimum transfer to the operating budget based on an annual calculation
of short-term stranded costs; the annual calculation of long-term stranded cost; and the
identification of funds available for special projects to the benefit of electric ratepayers.
Discussion
The existing Calaveras Reserve Guidelines do not provide certainty and/or clear direction with
regards to the amount of funds available in the future for special projects versus the amount to
be used to cover short-term stranded costs. On July 20, 2011 staff recommended that the UAC
recommend to Council a slight modification to the existing Calaveras Reserve guidelines to
clarify the amount of the funds to be used to cover stranded costs and the amount of funds to
be reserved for projects. The staff report to the UAC describing the proposal and providing
additional details is provided as Attachment A. Staff’s proposal included splitting the existing
Calaveras Reserve into two reserves with approximately half of the funds to be used to offset
above market costs associated with the Calaveras Hydroelectric Project and the other half to
create the ESP Reserve to be used to fund projects to benefit electric ratepayers.
The UAC argued that the funds were better spent for special projects, rather than being used to
cover the above market costs of the Calaveras Hydroelectric Project. Staff subsequently
decided to change its proposal and supports the UAC’s recommendation to reserve all funds in
September 20, 2011 Page 3 of 5
(ID # 1977)
the Calaveras Reserve for special projects. Staff’s reasons for changing its original
recommendation to the UAC include:
1.There are large, impactful, and expensive projects that are looming for the Electric
Fund such as a second transmission interconnection and smart grid components,
which together could cost more than the amount in the Calaveras Reserve. The
availability of these funds to pay for the improvements would obviate to the need to
raise rates or issue bonds to finance them.
2.The proposal still requires that the projects benefit electric ratepayers. Thus,
electric ratepayers who funded the reserve will receive the benefits of the collected
funds.
3.Palo Alto’s electric rates are already some of the lowest in the state.
4.Transfers from the Calaveras Reserve are not needed to avoid rate increases and/or
to stay within Council approved rate objectives, as the Electric Rate Stabilization
Reserve is substantial and can be used to offset the need for rate increases over the
next 3-5 years.
Commission Review and Recommendation
Staff presented its recommendation to the UAC at its July 20, 2011 meeting. The UAC indicated
its support to improve clarity in planning and the use of Calaveras Reserve funds. However the
UAC did not support staff’s recommendation to retain some funds to offset above market costs
and, instead, proposed that all funds be used for special projects to the benefit of electric
ratepayers along with a set of guidelines to manage the ESP Reserve. Specifically, the UAC
offered the following set of guidelines for the management of the ESP Reserve:
1.Funds should be used for projects that benefit electric ratepayers.
2.Funds should be used for projects, not to offset operating costs and reduce rates.
3.Projects should be worthwhile; that is, funds should be used for projects that would
have been worth doing even if the City had to pay for them.
4.The cost of a project should be relevant and impactful. Funds should not be spent
on projects that are too small and can easily be funded some other way.
5.If projects can be found that meet the above guidelines, then speed and certainty
are preferred. It is better to spend the funds sooner rather than later. Staff should
examine means by which the entire funds can be spent now, and the consequences
of doing so.
Additionally, the UAC proposed that: a) all the money in the Calaveras Reserve be transferred
to the ESP Reserve; b) the ESP Reserve have a 2020 sunset (i.e., all money not spent by 2020
would be transferred to the Electric Rate Stabilization Reserve); and c) projects proposed for
funding from the ESP Reserve be determined by the end of FY 2015.
The motion to recommend that Council move all the money in the Calaveras Reserve to the ESP
Reserve, sunset the reserve by 2020 and adopt the guidelines suggested by Commissioner
Eglash was unanimously approved by the UAC (6-0, with Commissioner Cook absent).
September 20, 2011 Page 4 of 5
(ID # 1977)
Staff’s current proposal for the management of Calaveras Reserve and the ESP Reserve is
consistent with the UAC’s recommendation to use the funds exclusively for special projects to
the benefit of electric ratepayers and expands on the ESP Reserves Guidelines as proposed by
the UAC.
The draft minutes of the UAC’s July 20, 2011 meeting are provided as Attachment B.
Next Steps
Staff is evaluating potential projects which may receive ESP Reserve funding including
investments in transmission upgrades and advanced metering infrastructure (AMI).
Staff is assessing the merits and feasibility of an electric transmission interconnection between
the City and the SLAC National Accelerator Laboratory (SLAC). The project would extend two
new 60 kilovolt (kV) underground lines from SLAC’s substation to the City’s Quarry substation.
These underground cables would follow different paths and would be sized to carry Palo Alto’s
entire load during an emergency. This project would increase reliability for SLAC and the City
by providing redundant transmission and reduce the City’s cost of transmission service.
Preliminary project cost estimates are around $40 million. Staff is working with interested
parties, but has to coordinate with SLAC, Stanford, the Department of Energy, and the
California Independent System Operator. An update on the status of the project should be
available by early 2012.
As an alternative, Palo Alto and PG&E have developed a backup plan to provide a fourth 115 kV
transmission line to the City. This plan would extend a 115 kV line from Ames Substation to
Adobe Creek Substation on existing PG&E towers at an estimated cost of $10 million. The
alternative plan would not provide any transmission service cost relief to the City.
AMI is one of the building blocks for a “smart grid”. It provides the interface between the
customer and the utility and could lead to improved demand-side load management, outage
response, customer satisfaction, efficiency of operations, and reduced system losses. Recently,
staff retained a consultant to provide a smart grid road map, with recommendations on how to
move forward. The consultant’s assessment found that there was no compelling reason to
make major investments to implement smart grid in the City in the near future. The consultant
recommended that the City undertake a number of intermediate steps in the next 2-3 years to
better position the City to implement the smart grid road map. Undertaking the intermediate
projects in the next 2-3 years is preliminarily estimated to cost up to $500,000. The assessment
also found the total cost of implementing smart grid applications will require an investment of
$16 million for electric, natural gas, and water services.
Resource Impact
Changing the purpose of the Calaveras Reserve and adopting the proposed guidelines will
impact electric rates in the short term by ceasing the annual transfers from the Calaveras
Reserve. The impact on rates for those transfers is equal to a one-time rate increase of about
September 20, 2011 Page 5 of 5
(ID # 1977)
2.5%. However, the funds will remain in the Electric Fund to be used to benefit electric
ratepayers and will eventually be used to fund worthwhile projects, which would have been
funded from either the sale of bonds, or a rate increase. Therefore, over the long term, there is
no impact on electric rates from the recommended action. Requests for future expenditures for
projects from the proposed new ESP Reserve require Council approval.
Policy Implications
Evaluating the need for and purpose of the Calaveras Reserve is an initiative in the 2011
Utilities Strategic Plan. The proposed new ESP Reserve and guidelines would replace the
current Council-approved Calaveras Reserve guidelines.
Environmental review
Approval of the ESP Reserve and Guidelines does not meet the definition of a project pursuant
to Public Resources Code Section 21065, thus no California Environmental Quality Act review is
required.
Attachments:
·Attachment A: July 20, 2011 Memo to UAC on Proposed Modifications to the Calaveras
Reserve (PDF)
·Attachment B: DRAFT Excerpted UAC Minutes of July 20, 2011 (PDF)
Prepared By:Monica Padilla, Sr. Resource Planner
Department Head:Valerie Fong, Director
City Manager Approval: James Keene, City Manager
MEMORANDUM
3
TO: UTILITIES ADVISORY COMMISSION
FROM: UTILITIES DEPARTMENT
DATE: JULY 20, 2011
SUBJECT: Recommend Proposed Modifications to the Calaveras Reserve Guidelines
and Establishment of the Electric Special Projects Reserve
_____________________________________________________________________________
REQUEST
Staff recommends that the Utilities Advisory Commission (UAC) recommend that Council
approve a change to the Calaveras Reserve guideline and the establishment of a new reserve with
funds from the existing Calaveras Reserve. Specifically, staff recommends:
1. Transfer $25.114 million from the Calaveras Reserve to establish a new Electric Special
Project (ESP) Reserve to be used to help fund future projects to the benefit of electric
ratepayers and/or to offset future electric rate increases.
2. Change the Calaveras Reserve Guidelines to:
a. The purpose of the Calaveras Reserve is to offset above market costs related to the
Calaveras Hydroelectric Project; and
b. Each year as part of the budget process, transfer a fixed amount from the Calaveras
Reserve to the Electric operating budget as provided for in Schedule of Calaveras
Reserve Transfers (Attachment A) until the reserve is exhausted in Fiscal Year (FY)
2024.
3. Approve the ESP Reserve Guidelines as follows:
a. ESP Reserve funds may be used to fund projects to the benefit of electric ratepayers
and/or to offset Electric Utility operating costs and potential rate increases;
b. Staff will work with the UAC to identify and recommend projects for funding from the
ESP Reserve for Council consideration and approval;
c. Staff will report annually to the UAC and Council the identification of new projects to be
funded and/or the status of existing projects funded through the ESP Reserve; and
d. Any funds remaining in the ESP Reserve at the end of FY 2020 will be transferred to the
Electric Supply Rate Stabilization Reserve and the ESP Reserve will be closed.
BACKGROUND
In 1983, the City Council established the Calaveras Reserve in the electric fund to help defray a
portion of the annual debt service costs associated with the Calaveras Hydroelectric Project
“Calaveras Project”, which was put in service at that time. As originally established, the
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Calaveras Reserve policy did not provide for a target balance and depletion of the reserve was
anticipated by 2032.
California Assembly Bill 1890 was adopted in 1996, which provided for the deregulation of
California’s electric industry effective January 1, 1998. A key element of deregulation was the
provision for “Direct Access,” which would allow electric customers to choose their electric
commodity supplier. The City of Palo Alto Utilities (CPAU), along with other California
utilities, was faced with the prospect of losing customers and load to Direct Access and being left
with expensive generation assets already purchased or built to serve these customers. In
response to such risk, Pacific Gas and Electric Company and other investor- and municipally-
owned utilities established stranded cost surcharges to collect funds from ratepayers to cover the
amount that these uneconomic assets were projected to cost above their market value in the
future (i.e., “stranded cost”).
Consistent with the threat of Direct Access, Council changed the purpose of the Calaveras
Reserve in 1996 (CMR: 214:96) and authorized collections from electric ratepayers to cover the
amount that certain electric assets’ costs were projected to be stranded. In addition, Council
approved a new Calaveras Reserve policy linking the reserve balance to an amount sufficient to
cover potential stranded costs. The assets identified as stranded included the Washington Water
Power contract, the Seattle City Light Exchange contract, the Calaveras Project, and the
California-Oregon Transmission Project (COTP). When the Calaveras Reserve balance reached
$71 million in 1999, stranded costs were deemed fully collected. At that time, Council ceased
collecting funds for these stranded costs and established the Calaveras Reserve Target and
Guidelines (CMR 222:99) with a schedule to draw down the funds through the end of FY 2033.
The schedule was designed to transfer an amount sufficient to cover stranded costs each year into
the electric fund’s operating budget.
To address changing market conditions including the reduced risk of Direct Access, the
expiration of the Washington Water Power contract, the long-term assignment of COTP and
permanent assignment of the Seattle City Light Exchange contract, in 2009 staff provided an
updated assessment of stranded cost and presented and discussed several alternatives for how to
manage the Calaveras Reserve with the UAC, Finance Committee and Council.
The Finance Committee and Council recognized that the amount in the Calaveras Reserve was
more than adequate to offset above market costs and that deployment of the excess reserves to
fund projects which benefit electric ratepayers was both prudent and fair use of the funds.
Therefore, on June 15, 2009 Council approved new guidelines for the management of the
Calaveras Reserve (CMR:275:09) as follows:
1. Require the calculation of the “stranded costs” for the electric supply portfolio during the
annual budget process for the upcoming budget year(s) and set the minimum transfer
from the Calaveras Reserve to the Electric Supply Operating Budget equal to this
amount;
2. Require the calculation of the “stranded costs” for the long-term (until 2032 when
Calaveras debt is paid off) of the electric supply portfolio during the annual budget
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process and ensure that the Calaveras Reserve balance will be sufficient to cover this
amount;
3. Calculate “stranded cost” based on the above market cost of the Calaveras Hydroelectric
Project and the California Oregon Transmission Project; and
4. To the extent that there are funds available in excess of long-term “stranded cost” needs,
staff will work with the UAC to identify and recommend projects for Council
consideration and approval. Such projects shall be to the benefit of electric ratepayers.
Adhering to the Council-approved guidelines for FYs 2011 and 2012, staff assessed the short-
and long-term stranded costs and recommended the minimum transfer amount from the
Calaveras Reserve to the operating budget based on the short-term stranded cost calculation.
During the budget process for FY 2012, the UAC recommended against staff’s recommendation
to transfer the minimum amount of $5.238 million to the operating budget. Subsequently, the
Finance Committee approved staff’s recommended transfer, but directed the UAC to work with
staff to develop a list of potential projects to be funded from the Calaveras Reserve. Attachment
B contains the excerpted notes from April 19, 2011 Finance Committee meeting.
Since approval of the Calaveras Reserve guidelines, Council has approved $2.319 million in
projects to be funded through the Calaveras Reserve, including $2 million for energy efficiency
loans to be repaid to the Electric Fund. Projects identified and recommended for funding via the
Calaveras Reserve thus far are projects which further the City’s goals and are not considered to
be operational in nature and/or are already part of long-term capital improvement, distribution
and/or resource acquisition plans.
Additionally, in 2010, staff embarked on the process of updating the Utilities Strategic Plan. A
thorough review of the need for and purpose of the Calaveras Reserve, including an assessment
of the Direct Access threat, is an initiative under the proposed Utilities Strategic Plan.
DISCUSSION
Purpose and Need for Calaveras Reserve
Currently, the Calaveras Reserve is used to offset the cost of assets whose cost is above market
value. Although the threat of Direct Access is relatively low for Palo Alto, it may increase in the
future. Statewide, the threat of Direct Access is increasing as consumers demand choice. Senate
Bill 695 (SB 695) which was signed into law in October 2009 lifts some of the emergency
measures the legislature imposed during the 2000-01 energy crisis, including suspension of the
ability for customers to choose a Direct Access electricity provider. SB 695 allows an expansion
of Direct Access service for individual retail non-residential end-use customers and requires the
California Public Utilities Commission to phase this in over a three to five year period. Limits
were set on the maximum amount of load eligible for Direct Access for each of the three
California investor owned utilities. Such limits have been fully subscribed with interest
surpassing the limits indicating a strong desire by consumers for supplier choice. Further,
communities across the state are looking to establish community choice aggregations (e.g.,
Marin Energy Authority and City of San Francisco) as a means to develop electric supply
portfolios consistent with their local community’s environmental, price and/or social objectives.
Page 3 of 8
Page 4 of 8
The City does not currently offer Direct Access to its electric customers, nor is staff exploring
the idea of offering Direct Access in the near future. Further, staff is not aware of any proposed
legislation to mandate that municipally-owned utilities offer Direct Access to its customers.
Since the threat of Direct Access is low for Palo Alto, the need to hold reserves to cover potential
stranded cost is also low.
Calaveras Reserve
As part of the FY 2012 budget development process, staff calculated the stranded cost for FY
2012 of $5.238 million and the long-term stranded cost of $30.8 million. The long-term stranded
cost calculation was derived by estimating the Calaveras Project’s long-term above market cost
of $27.3 million1 and added $3.5 million in contingencies related to the 15-year assignment of
COTP.
Staff recommends no longer including COTP contingencies in the calculation of above market
costs. The probability of such contingencies materializing is minimal and may be covered using
funds in the Electric Supply Rate Stabilization Reserve. Staff currently estimates the Calaveras
Project’s above market cost to be $25.206 million2, which is the amount staff recommends
maintaining in the Calaveras Reserve to cover the above market costs associated with the
Calaveras Project. Table 1 provides a summary of the cost, value and above market cost (cost
minus value) related to the Calaveras Project through FY 2032.
1 Assumed fixed long-term debt through FY 2032; Northern California Power Agency’s forecast of fixed and
variable operation and maintenance cost; Calaveras generation output at 90% of long-term average; energy and
capacity value based on expected wholesale market prices in November 2010; and included a carbon free resource
value adder. 2 Assumed fixed long-term debt through FY 2032; Northern California Power Agency’s forecast of fixed and
variable operation and maintenance cost; Calaveras generation output at 100% of long-term average; energy and
capacity value based on expected wholesale market prices in May 2011; the forward market price as of May 2011 is
assumed to include the cost of carbon, therefore no carbon-free resource value adder; and assumes increased
ancillary service market value going forward.
Table 1: Calaveras Hydroelectric Project Net Value ($000’s)
Fiscal Year Ending Project Cost Project Value Net Value (Negative numbers
indicate above market cost)
2013 12,218 7,895 (4,322)
2014 12,023 9,140 (2,883)
2015 12,101 9,449 (2,653)
2016 12,189 9,851 (2,338)
2017 12,081 10,171 (1,910)
2018 12,163 10,400 (1,763)
2019 12,099 10,575 (1,524)
2020 12,193 10,759 (1,434)
2021 12,245 10,931 (1,313)
2022 12,343 11,115 (1,228)
2023 13,366 11,296 (2,069)
2024 13,259 11,490 (1,769)
2025 7,132 9,971 2,839
2026 7,171 10,270 3,099
2027 7,212 10,578 3,366
2028 7,255 10,895 3,640
2029 7,299 11,222 3,924
2030 7,341 11,559 4,218
2031 7,381 11,906 4,524
2032 7,424 12,263 4,839
Total for FY 2013
through FY 2024
(25, 206)
Attachment A, the proposed schedule for the Calaveras Reserve Balance, is a fixed schedule of
transfers from the Calaveras Reserve to the Electric Fund’s operating budget, based on the
Calaveras Project’s annual above market cost, as shown in Table 1. The schedule in Attachment
A shows transfers for FY 2013 through FY 2024, the years when the Calaveras Project’s costs
are above market value. If the proposed schedule is followed, after FY 2024, the Calaveras
Reserve will be exhausted and will be closed.
The estimated FY 2011 ending balance for the existing Calaveras Reserve Fund is $55.558
million. Given the $5.238 million transfer to the Electric Supply Operating budget in FY 2012,
the projected Calaveras Reserve ending balance for FY 2012 is $50.320 million. Provided the
recommended $25.206 million is held in the Calaveras Reserve, then $25.114 million is available
to establish the new ESP Reserve.
Staff recommends that the above market costs be frozen at the amounts shown in Table 1 and
not be revisited or readjusted annually as provided for in the current Calaveras Reserve
guidelines. This fixed schedule will provide certainty about the disposition of the funds and
clearly shows how and when the funds previously collected from ratepayers are returned to them
in the form of reduced Electric Fund costs going forward.
Page 5 of 8
Electric Special Project (ESP) Reserve
Staff recommends $25.114 million be set aside in the ESP Reserve to fund projects to the benefit
of electric ratepayers. Staff also proposes within the recommended ESP Reserve guidelines, the
flexibility to utilize ESP Reserves to offset any large increases in electric operating costs, which
may necessitate a rate increase outside of certain electric rate objectives. Any such
recommendation will be identified during the annual budget process and subject to UAC
recommendation and Council approval.
Last, the recommended ESP Reserve includes a sunset date of June 30, 2020 to ensure that the
funds are not maintained indefinitely without returning the funds to the ratepayers who provided
them. Any remaining funds after that date are to be transferred to the Electric Supply Rate
Stabilization Reserve, or replacement fund, for the benefit of electric ratepayers. As part of the
recommended guidelines, staff will report annually to the UAC and Council on progress in
identifying and funding projects to ensure deployment of funds.
Projects Considered for Funding from the Calaveras or ESP Reserve
Staff first reviewed potential projects for funding from the Calaveras Reserve with the UAC in
November 2008 when it held a study session on potential uses of the Calaveras Reserve as staff
was evaluating changes to the reserve guidelines. On January 12, 2009, Council directed staff to
work with the UAC to review possible projects that would benefit electric ratepayers for
consideration of funding from the calculated “excess” Calaveras Reserve Fund (CMR: 110:09).
That direction was also incorporated into the Calaveras Reserve guidelines, which were adopted
in June 2009.
At the UAC’s May 2009 meeting, staff evaluated a number of potential projects as candidates for
funding from Calaveras Reserve funds. Typical capital projects such as system improvement
projects, undergrounding, distribution system upgrades, and control system upgrades were not
considered. Based on the May 2009 assessment, staff determined that three projects were the
best projects for funding at that time:
1. Investment to implement advanced metering infrastructure (AMI);
2. Investment and incentives for local generation and cogeneration projects within the
City; and
3. Investment to upgrade the City’s transmission line connection.
Staff recognizes the potential for additional expenditures related to major projects which may
materialize as a result of several studies, strategic initiatives and/or City endeavors including:
The Smart Grid Strategic Plan;
Utilities Strategic Information Technology Plan;
Electric transmission interconnection improvements;
Emerging Technology Program Innovation Fund; and
New service center for Utilities (and other related) services if the Municipal Service
Center is no longer available
Page 6 of 8
The exact magnitude, feasibility and/or need for expenditures related to the above mentioned
initiatives is not yet known, but several of these projects could cost in the tens of millions of
dollars. For example, staff’s initial estimate related to Smart Grid includes $10 to $15 million
for installation of 29,000 smart meters alone and costs related to electric transmission
interconnection improvements could be over $40 million. A summary of potential projects that
could be considered for funding from the reserve are described in more detail in Attachment C.
Since the current Calaveras Reserve guidelines were approved in June 2009, Council has
approved $2.545 million in funding from the Calaveras Reserve for four projects. Table 2 is
summary of these projects.
Table 2: Projects Approved for Funding from the Calaveras Reserve ($000)
Fiscal
Year
Local
generation
PLUG-IN
Program
Smart Grid
Feasibility
Study
Energy/
Compost
Feasibility
Study
Energy
Efficiency
Financing
Program Total
2010 $200 $70 $2,000 $2,270
2011 $200 $75 $275
2012 $0
Total
Approved $400 $70 $75 $2,000 $2,545
Total
Expended $0 $70 $49 $2,000 $2,119
Alternatives Considered
Staff considered several alternative strategies for managing the existing Calaveras Reserve
including maintaining the current set of guidelines. Staff’s main concern for continuing with the
current set of guidelines is lack of clarity of whether the reserve is intended to offset short-term
above market cost, should be maintained to cover future stranded cost, or held to fund future
projects. Such lack of clarity makes it difficult for staff to determine how much funding will
come from the Calaveras Reserve to offset operating costs and therefore may cause delays in
recommending electric rates, operating budgets and financial plans.
In addition, since the guidelines require recalculation of the long-term costs annually, there is
uncertainty about how much funds are available for special projects, which makes it difficult to
plan for such projects.
Staff also considered alternatives for calculating the above market cost of the Calaveras Project.
One alternative is to continue the annual calculation with the budget process, as in the current
guidelines. Another alternative is to implement an end-of-year true-up of the Calaveras Reserve
transfer based on actual above market cost for the Calaveras Project. Staff’s recommendation
ceases the annual calculations, fixes the annual transfer amounts, and sets a date for the when the
reserve closes, all of which provide financial certainty for the Electric Fund and clarity for
ratepayers.
Page 7 of 8
NEXT STEPS
Staff plans to take the proposed guidelines to the Finance Committee for consideration in
September 201l and, depending upon the recommendation from the Finance Committee, seek
Council approval in Octo ber 20 II.
RESOURCE IMPACT
Creating a new reserve fi'om funds in the current Calaveras Reserve and adoption of the
proposed guidelines will not result in a direct impact on existing resources. Resources will be
impacted as specific projects are funded using Calaveras and/or ESP Reserves. Approval of
requests for expenditures from either the existing Calaveras Reserve or the proposed new ESP
Reserve requires Council approval at the time of the request.
POLICY IMPLICATIONS
Evaluating the need for, and purpose of, the Calaveras Reserve is an initiative in the Utilities
Strategic Plan. If staffs recommendation is adopted by the Council, the proposed new
guidelines would replace the current Council-approved Calaveras Reserve Guidelines.
ATTACHMENTS
A. Schedule for Calaveras Reserve Balance
'B. Excerpted notes from the Finance Committee's meeting of April 19, 2011
C. Summary of approved and potential projects that could be funded fTom the ESP Reserve
PREPARED BY:
REVIEWED BY:
DEPARTMENT HEAD:
MONICA PADILLA ([2..-
Senior Resource Planner
()
\'0ANE RATCHYE D Assistant Director, Utilities Resource Management
VALE~G
Director of Utili' es
Page 8 of8
Attachment A
Schedule for Transfer and Ending Balance for the Calaveras Reserve
FY 2013 through FY 2024
Starting Balance Transfer Ending Balance
Fiscal Year $000 $000 $000________
2013 50,320 29,436 20,884
2014 20,884 2,883 18,001
2015 18,001 2,653 15,349
2016 15,349 2,338 13,011
2017 13,011 1,910 11,101
2018 11,101 1,763 9,338
2019 9,338 1,524 7,814
2020 7,814 1,434 6,380
2021 6,380 1,313 5,067
2022 5,067 1,228 3,839
2023 3,839 2,069 1,769
2024 1,769 1,769 0
Attachment B
Excerpted notes from the Finance Committee’s meeting of April 19, 2011
3. Recommendation of Approval of Transfer of $5.238 Million from the Calaveras
Reserve into the Electric Utility Operating Budget for Fiscal Year 2012 and Electric
Utility Long Term Financial Projections and Revenue Requirements.
Ipek Connolly, Senior Resource Planner, spoke on the Revenue Cost Projections and Reserves.
She also introduced the Calaveras Reserve and the reasons behind the proposed transfer. She
discussed the Risk Assessment and the Rate Comparisons. Staff made no request for revenue or
rate increases for the Electric Utility for 2012. Staff requested a transfer of $5.238 million from
the Calaveras Reserve into the Electric Utility Operating Budget for 2012 as a minimal transfer
following the Calaveras Reserve Guidelines. Projected costs and revenue streams were provided
for information and were subject to change. Electric Rate Stabilization Reserve balances were
projected within the minimum and maximum guidelines for the next five years with the projected
5 percent per year rate adjustments for 2014-16. Electric Utility average customer bills were
currently 39 percent lower than PG&E and one of the lowest in California. The Electric Fund
Revenue and Cost Projections were also discussed. She discussed forward market views versus
actual market costs for electric prices. Supply costs were lower than expected. The electric price
market cost was similar to the gas chart. She reviewed lower than expected renewable costs and
transmission costs. The only known variation was supply costs. The budget year and beyond
overall minimum cost increases were about 3.5 percent per year over the next five years. There
was a built in 5 percent rate adjustment for the next five years.
Future changes were discussed. Most were business as usual with regard to the future forecast,
with the exception of a built-in $2-3 million CIP expenditure in 2013 for SmartGrid technology.
There were expected reimbursements and grants at 65% built back in. She also noted an
additional energy efficiency-planning amount of $1.7 million. A built-in 5 percent rate
adjustment was discussed. She reviewed and summarized the Calaveras Reserve. She noted Staff
will start a thorough review of the need and purpose of the Calaveras Reserve with the Utilities
Advisory Commission (UAC) in June 2011. She discussed the stranded costs calculations.
Council Member Schmid asked for clarification on the stranded costs.
Ms. Connolly stated the cost was greater than the market value. There was a cost to having the
asset. The value was established by the market price. The amount, which was above the revenue
generated by the market price, was the stranded cost.
Council Member Schmid asked if they were getting hydro from Calaveras, and if the market
price was low, then how could the cost be greater.
Debra Lloyd, Senior Resource Planner, stated the value of the electricity was low but the costs
are fixed. She noted there were debt service costs and O&M costs. Council Member Schmid
asked how can there be a surplus in a good hydro year. Ms. Connolly stated if the market price
was very high, then the production from this asset was very high, and this covered and exceeded
the fixed cost.
Attachment B
Tomm Marshall, Assistant Director Engineering, stated the general cost to develop the energy
was higher than the energy output.
Council Member Schmid asked if this were true even in a good hydro year.
Monica Padilla, Senior Resource Planner, stated this was a good hydro year and that it cost $10
million to run the Calaveras Project. The energy and ancillary service were valued at $6.2
million, so that was a loss.
Ms. Lloyd stated when there is a good hydro year, the availability of that water can actually drive
the market price lower.
Council Member Scharff asked about the market price of the energy. Would the price still be the
same if this was considered green energy.
Ms. Padilla could not quantify that value. Based on market price for long-term renewables at $4-
5 per megawatt hours, if they sold Calaveras to someone else, that was the price they thought
they might get.
Ms. Connolly continued with discussion of the Stranded Cost Calculations with an estimated $55
million in the reserves. The budget year minimum short-term stranded costs were estimated at
$5.24 million, the long-term stranded costs were estimated at a total of $30.8 million, which left
$35 million to benefit Electric Ratepayers. Staff was not proposing any funding for special
projects. This was for implementation of existing policies. She discussed the Electric Fund
Supply Rate Stabilization Reserve (SRSR) Levels with transfers from the Calaveras Reserve,
which were within the minimum and maximums. These were expected to stay this way within
the budget year with the 5 percent rate increase built in, and in keeping with these projections.
She continued her discussion with the Electric Fund Distribution Rate Stabilization Reserve
(DRSR) Levels. Again, they were at a healthy point and expected to remain there. The 2011
Expected Average System Revenue per KWh ($/KWh) as of January 14, 2011 were discussed
and the relative standings within Palo Alto which included all customers by all power supplies. It
was a self-reported survey and all customers reported significant savings. She summarized staff
recommendations, which included making only the minimum transfer of $5.2 million from the
Calaveras Reserve into the Utility Operating Budget. Implementation of Council’s 2009
approved guidelines to return Calaveras funds to the ratepayers was discussed as well as the
guidelines in place, which allow staff to efficiently manage financial forecasting and rate setting
activities. She discussed the UAC’s recommendations at the April 6th 2011 meeting in which
they delayed the decision on the Calaveras Reserve transfer for six months to allow the UAC to
understand and review the police and purpose of the Reserve. A chart of the Electric Fund
Supply Rate Stabilization Reserve (SRSR) Levels with transfers from Calaveras Reserve was
reviewed showing the impact of not implementing the current policy.
Ms. Lloyd noted they were unable to show a number of different scenarios so showed what
would happen without the transfers.
Attachment B
Asher Waldfogel, Utilities Advisory Commission (UAC) Chair, provided background on some
of the long-term discussions that had been going on with at the UAC. It was not that they were
against using the funds in transfer to help lower rates, but they were also interested in
researching other areas where these funds may be of use, such as some of the other pending and
planned projects, SmartGrid, for example. They wanted to make an educated decision and do
what was best for the reserves and for the ratepayers.
Council Member Yeh asked for clarification and a better understanding of the transfer and the
stranded costs through 2032. He asked what the timeframe was for the potential projects
regarding Calaveras when it came to the transfer of funds from the Reserve.
Mr. Marshall stated they were having ongoing discussions on specific projects.
Ms. Lloyd noted a specific project was funded based on its value to the community and not just
because there was a pool of money to be spent on a project.
Council Member Yeh asked, given UAC’s recommendation for the six-month hold on the
transfer of the Calaveras Reserve, he asked why Staff had recommended that the transfer move
forward. He asked what potential loss there was in having the six month delay in funding.
Ms. Connolly stated the money was not going anywhere, so having it now rather than later
allowed them to move forward with the budget process to more efficiently manage things.
Council Member Shepherd asked if the 5 percent increase on the Electric Fund Supply Rate
Stabilization Reserve (SRSR) Levels included the transfers.
Ms. Lloyd stated this was the case.
Council Member Schmid spoke to the Electric Fund Revenue and Cost Projections and the
Adopted Budget over-estimating the cost of purchases. He discussed good hydro years, versus
bad hydro years, and questioned whether a good hydro year was starting currently.
Ms. Padilla stated two things happened in 2011; really good market prices and hydro started
materializing in March. The projections were done in November and December. Council
Member Schmid noted a good hydro year should be nine months, so that presumably would
carry into 2012. He noted he continued to struggle with the projected numbers.
Ms. Connolly explained some of these numbers further. The projected 2012 estimates were
based on numbers from December prior to knowing the hydro situations. Projected 2011 was
based on February. The budgeting process required them to submit their numbers in December.
They have the benefit in February of knowing a better estimate. They update their projections
every week. She can tell the latest estimates for 2012 are very close.
Council Member Schmid stated it was hydro with gas backup, so hydro in total along with
Calaveras was high. He cited other reasons why it was difficult to agree with these number
estimations. He also spoke to the extremely conservative reserve and purchase guidelines. He
Attachment B
stated they were asking the ratepayer to buy them insurance in their risk forecast with an
everlasting notion that there is a need for more reserves. He stated the conclusion was to go to
the UAC to use the Reserves more efficiently or to ask for the 5 percent increase.
Ms. Connolly clarified they were not requesting to take the money out of Calaveras and put it
into rate stabilization. The money would effectively work in the way he suggested, which was to
put it in the operating budget, to relieve the budget in revenue collection. Council Member
Schmid stated he felt they had over-estimated the cost of purchases for the hydro year.
Ms. Connolly stated this was the risk assessment they were currently undertaking.
Council Member Schmid noted they had undergone this discussion before, and the agreement
was to return with these guidelines.
Ms. Lloyd asked if he was referring to the Rate Stabilization Guidelines.
Ms. Connolly stated they had reviewed these guidelines with the Council in 2009.
Council Member Schmid stated his perception was the way they had treated the risk and the
reserve guidelines, and the purchase costs in this hydro year, were overestimated.
He stated there were three alternatives: 1) let the money sit for six months, 2) if it comes to the
Electric Fund that they consider the 5 percent rate increase, or 3) consider it as a constant fund of
$2 million forever to the Electric Fund so there were no rate bumps.
Council Member Scharff stated it was helpful to have the fund for special projects. He also
wanted to see the utilities underground. He recognized the fund could be used to match other
funds. He felt waiting six months had no impact, since they could always decide to do it later. He
also had questions on what kind of investment rate of return and debt service were on these
funds.
Lalo Perez, Director Administrative Services, said it was laddered. There was a 3.4 percent
average rate of return. Ms. Padilla stated, as far as debt service on the Calaveras project, they had
23 percent ownership with other members on the project. The value on the debt was $160
million.
Mr. Perez added going into the market it would be a 10 year, three percent rate of return locking
up funds for a long time. Shorter term was one percent in a year or two.
Mr. Marshall stated money they could be spent on increasing efficiency to the system.
Mr. Waldfogel asked if they remembered what the dollar value for undergrounding the overhead
utilities was.
Mr. Marshall said Staff would have to return to the Committee with that information.
Attachment B
Council Member Yeh stated they were also potentially competing with elecommunication
companies.
Mr. Marshall stated there was a reserve in the Fiber Fund. The money could be used for a
transmission line. There were other things the money could be used for such as generation.
MOTION: Council Member Shepherd moved, seconded by Chair Scharff, that the Finance
Committee recommends to the City Council approve the total transfer of $5.238 million from the
Calaveras Reserve into the Electric Utility Operating Budget for Fiscal Year 2012.
Council Member Shepherd looked toward a return to ratepayers. She recognized that this issue
will come back in ensuing years. She also had an ethical issue with coming up with a way to
spend the money without going back to the ratepayers for input on their willingness to pay for
the projects.
SUBSTITUTE MOTION: Council Member Schmid moved seconded by Council Member Yeh
to suspend the transfer of the $5 million of the Calaveras reserve to allow staff to return with a
proposal about how to spend it in six months after discussion with the UAC.
Council Member Yeh stated he hoped for clear criteria on how to identify a project that will truly
benefit the ratepayers, a rank and order of projects for UAC consideration. Council Member
Scharff stated he did not want to see this being an issue of spending money simply because it
was available. He would rather there be a no project alternative than the money being transferred
for the sake of being transferred because they have the money to spend. Worded correctly, the
funds should be used wisely.
Council Member Yeh stated the interconnection for him was dialogue they had previously
regarding emergency preparedness and other issues where this money would help them
accommodate their priorities. He said the additional six months gives them time to put some
criteria on how they spend the funds on what truly is best for the City and its ratepayers.
Council Member Scharff stated they could Motion to do the transfer and have the UAC look at
the remaining $50 million and whether future transfers can be made, ranking and prioritizing
projects or choosing a No Project Alternative.
Council Member Shepherd stated this was implied in the original Motion.
Council Member Yeh stated he did not hear that in the original Motion.
Council Member Shepherd stated they were going to bring this back to the UAC.
Council Member Schmid stated the distinction between the Motion and the Substitute
Motion was the $5 million dollars remaining in the fund until the $50 million takes place.
Attachment B
Council Member Shepherd stated if they wait long enough they will have better information.
However, they also have to move forward, so she did not support the Substitute Motion.
Council Member Schmid worried that the transfers to the Electric Fund would stabilize the
already substantial reserves.
Council Member Shepherd asked if she understood correctly that this stabilized the reserves right
now.
Ms. Connolly stated with current projections, the costs were above revenues, which meant they
were under-collecting and could use what was in reserves without showing a rate increase. If
they take the $5 million out, they would have a rate increase in 2013.
Council Member Schmid said the purchase cost increased by 16% in a great hydro year.
Ms. Connolly stated those costs were $1.8 million this year, and the forecast was holding.
Council Member Schmid stated the only cost that was changing was the purchase costs.
Ms. Lloyd stated this included the renewables and transmission costs.
SUBSTITUTE MOTION TO THE SUBSTITUTE: Council Member Scharff moved, seconded
by Council Member Yeh to transfer $5 million of the Calaveras Reserve and request the Utilities
Advisory Commission review the remaining $50 million and suggest a future prioritized project
list, future transfer policies, and a “no project” alternative by September 2011 to the Finance
Committee.
Mr. Waldfogel asked why the review had to be completed by September and why not just by the
end of the year.
Council Member Scharff because this has been out there for quite some time, at least since 2008.
Council Member Yeh noted the transfer policy had been revisited many times, and predated
many Members of Council.
Mr. Waldfogel asked for more time to consider projects thoughtfully.
Council Member Yeh offered they could have until prior to next budget cycle in November.
Council Member Schmid stated he was voting against this because they had an obligation to the
ratepayers. He stated spending $5 million upfront, without the knowledge and input of
ratepayers, was not best practice.
Council Member Shepherd stated the way she understood the process, these monies were
extracted from the ratepayers via their electrical billing processes. This was then some type of
matriculation to get it back after 22 years.
Attachment B
Ms. Lloyd stated the more the process was delayed, the more people float in and out of town and
the process.
Council Member Shepherd noted this was one of the reasons she was in support of the transfer
until there was a more deliberative reason not to do it. She was in support of the Substitute
Motion.
SUBSTITUTE MOTION: Passed 3-1, Schmid no
Mr. Perez noted this was not on Consent, that it would be an Action item for Council.
Council Member Scharff asked if that was true. He thought it became a part of the overall
Budget and then came back to the Finance Committee.
Council Member Shepherd stated she objected to that, and wanted it to go to Council.
Council Member Schmid stated the recommendation said it was recommended to Council to
approve it on Consent.
Mr. Perez stated they could make it part of the budget process. It could be an Item listed as an
approval piece.
Council Member Shepherd asked for understanding of the protocol.
Mr. Perez stated if it was part of the budget it would be listed as an item to be approved as part of
the whole.
Council Member Shepherd stated she understood it but objected to it.
Council Member Scharff stated there were a bunch of items that get spelled out.
Council Member Shepherd stated this was not cuts, this was policy discussion.
Mr. Perez stated it happens with Utility Rate Increases.
Council Member Shepherd stated it will have to get pulled out during a long night of budget
discussion.
Council Member Scharff stated it does not go under Consent because it was voted 3-1.
Mr. Perez noted the problem was that a Council Members may not have the whole budget in
context.
SUBSTITUTE MOTION: Council Member Shepherd moved, seconded by XXXX for the item,
“Recommendation of Approval of Transfer of $5.238 Million from the Calaveras Reserve into
the Electric Utility Operating Budget for Fiscal Year 2012 and Electric Utility Long Term
Attachment B
Financial Projections and Revenue Requirements.” to be placed on the City Council Agenda as
an Action Item.
SUBSTITUTE MOTION FAILED FOR LACK OF A SECOND
Mr. Perez stated it would be presented in Council’s package on June 13th 2011. Council
Member Shepherd asked if it was reversed if it would impact the rest of the Budget.
Council Member Scharff stated it would only affect the Electrical portion of the Budget.
Council Member Shepherd noted she still was unclear on this part of the process once it moved
to Council.
Mr. Perez stated she could ask the City Attorney about this, and that it was not uncommon to
have different positions on this in the Budget Adoption.
Council Member Shepherd stated she was trying to get this item separated out as an Action Item
so that it would not get rehashed or slashed in the Budget discussions.
Attachment C
Summary of Potential Projects
for Funding from the Calaveras/Electric Special Project (ESP) Reserve
Many projects have been identified for possible funding from the Calaveras Reserve after
Council revised the Calaveras Reserve Guidelines in 2009. These ideas include:
1. Investment to implement advanced metering infrastructure (AMI)
2. Investment and incentives for local generation and cogeneration projects within the City
3. Investment to upgrade the City’s transmission line connection
4. Energy Efficiency
5. Emerging Technology Demonstration Program
6. New Utilities Department Building
7. Other ideas
1. Investment to implement advanced metering infrastructure (AMI)
The City’s Automated Meter Reading (AMR) Pilot Project was completed in September 2007.
The pilot included enabling approximately 4,400 electric, gas, and water meters, which are
covered by six meter reading routes, to be read remotely. Currently the usage recorded by these
meters is being read remotely by either the fixed radio network or by a drive-by reader. The
pilot project has demonstrated that an AMR system is able to meet many of staff’s expectations
with regards to reading electric, gas, and water meters for billing purposes.
AMI is one of the building blocks for a “smart grid”. It provides the interface between the
customer and the utility and could lead to improved demand-side load management, outage
response, customer satisfaction, efficiency of operations, and reduced system losses.
For FY 2010, Council approved $70,000 to fund the Electric utilities’ one-third share of the
development of the smart grid road map. The consultant assessment of smart grid applications in
the City was presented to the UAC in April 2011. The assessment found that there was no
compelling reason to make major investments to implement smart grid in the city in the near
future. The consultant recommended, and UAC and staff concurred, to undertake a number of
intermediate steps in the next 2-3 years to better position the City to implement a smart grid road
map. Undertaking the intermediate projects in the next 2-3 years is preliminarily estimated to
cost up to $500,000. The assessment also found the total cost of implementing smart grid
applications will require an investment of $16 million for the electric, natural gas, and water
utility.
2. Investment and incentives for local generation and cogeneration projects within the City
Locally sited, natural gas-fired cogeneration applications have the benefits of higher efficiency,
higher reliability and sustainability, and elimination of line losses associated with transmitting
electricity over long distances. Cogeneration applications (also known as combined heat and
power) simultaneously generate electricity and useful heat for utilization in buildings or
processes. In March 2011, Council approved the Long-term Electric Acquisition Plan (LEAP)
along with several initiatives to promote local generation to meet the City’s Renewable Portfolio
Standard (RPS) through the possible deployment of Feed-in-Tariffs (FIT) and certain reliability
needs.
Page 1 of 4
Attachment C
PLUG-In Program
In 2007 the City launched a distributed generation incentive program for customers, the Power
from Local Ultra-clean Incentive Program (PLUG-In) (CMR:391:07) to provide incentives for
customers to invest in cogeneration. For FY’s 2010 and 2011, Council approved funding from
the Calaveras Reserve of $200,000 for each year for Plug-In program rebates. No rebates have
been issued to date.
LEAP Strategy #4 Local Generation, promote and facilitate the deployment of cost effective local
resources, calls for an evaluation and possible modification of the City’s PLUG-In program.
This assessment is expected to be completed by December 2011 and may call for increased
funding from the Calaveras Reserve.
Anaerobic Digester
Council approved spending $75,000 from the Calaveras Reserve in FY 2011 to pay for a share of
the Energy/Compost Feasibility Study of dry anaerobic digestion near the wastewater treatment
plant. The electric utility’s share of the approved consultant contract is $49,439, and the study is
not anticipated to go over budget. Staff presented near-final results of the study to the City
Council on June 27, 2011. The study showed waste management alternatives involving
anaerobic digestion to be comparable in cost to alternatives involving export of waste out of the
City, with no alternative standing out significantly compared to others. The City Council
directed staff to finalize the study, but did not give any further direction on how to proceed. The
decision to proceed with further study of dry anaerobic digestion is unlikely to be made until
after the November 2011 election. There is a citizen initiative to undedicate a portion of Byxbee
Park to use as the site of a waste to energy project, and whether further study is undertaken will
depend in part on whether that initiative is passed. If the initiative passes there may be further
requests for Calaveras funding for this project.
Local Gas-Fired Generation
LEAP Strategy #4 Local Generation calls for staff to evaluate the feasibility of developing a 25
to 50 MW generating facility to connect to the City’s distribution system in order to meet certain
energy and reliability needs. Staff is in the process of assessing such feasibility including the
economics and availability of potential sites.
Staff intends to update the UAC in fall of 2011 with an assessment. Early indications support
previous findings that aside from the low value relative to cost of building gas-fired generation,
no potential site exists within Palo Alto to build a generator of such scale. Staff therefore does
not anticipate requesting use of ESP Reserves to help cover the cost of building gas-fired
generation within Palo Alto.
3. Investment to upgrade the City’s transmission line connection
The City is connected to the electrical transmission grid at the Colorado substation at 115 kilo-
Volts (kV). Upgrading the connection voltage to 230 kV and receiving all the electricity needed
to serve the City at this higher voltage has the potential of saving up to $5 million per year and
improving the City’s transmission service reliability. The City has conducted several studies
independently and in conjunction with the Pacific Gas and Electric Company (PG&E) to upgrade
Page 2 of 4
Attachment C
the voltage at the Colorado substation, but the cost of the upgrade was estimated to be over $160
million, making the project economically infeasible.
The City is currently exploring a connection to the 230 kV transmission grid through the SLAC
substation in the west side of the city. The cost of this project is preliminarily estimated to be
over $40 million with the potential of serving approximately half of the City’s electrical load.
The feasibility of this project is highly dependent on interest by Stanford and SLAC.
4. Energy Efficiency
Council approved using $2,000,000 from the Calaveras Reserve to fund electric efficiency loans
to business customers. These zero-interest loans would help customers invest in energy
efficiency by providing financing for up to 5 years for a loan of between $5,000 and $50,000 per
customer for those customers who install electric efficiency equipment through one of the
utility’s rebate programs.
The program and all related documentation and applications were developed by a team including
staff members and representatives of a third party administrator, QuEST. The program has been
available to and promoted with commercial customers through the Commercial Advantage
Program, Right Lights+ and the Commercial and Industrial Energy Assistance Program since
May 2011 (www.cityofpaloalto.org/commercialfinancing). As of July 1, 2011, staff is in
discussion with four customers on completing loans. These loans are expected to be completed
by the end of the third quarter in 2011.
5. Emerging Technology Demonstration Program
Led by the City Manager’s Office, an internal, multi-departmental team has been formed to
explore emerging technologies and opportunities for the City to help facilitate innovation within
Palo Alto. The Utilities Department is assisting with identifying potential technologies and/or
services to be piloted by Utilities customers.
In the fall of this year, staff plans to request funding for the establishment of this program.
Currently, the amount that is considered appropriate for such a program is about $300,000 per
year with about $200,000 for electric projects. Further, the program could identify additional
projects for funding from the proposed ESP Reserve to help defray costs and/or provide
incentives for technologies related to the use of electricity.
6. New Utilities Department Building
The City’s Infrastructure Blue Ribbon Commission (IBRC) formed in 2010 is a City Council
appointed citizen commission charged with advising the City Council on how Palo Alto’s
infrastructure backlog might be reduced.
The primary focus of the IBRC is General Fund infrastructure including the City’s Municipal
Service Center (MSC), of which the Utilities Department occupies a portion. Possible
recommendations may include the upgrades and/or expansion of the MSC to accommodate
growing use or even the consolidation of Utilities Department functions in one building outside
of the MSC. ESP Reserves could be used to fund the Electric Fund’s share of such a building.
The IBRC is slated to bring its findings and recommendations to Council in December 2011.
Page 3 of 4
Attachment C
Page 4 of 4
Table 1 below lists the Calaveras Reserve funds that have already been approved for specific
projects. Table 2 lists potential funds that may be requested in the future.
7. Other Ideas
Since 2009, staff and the UAC have identified many ideas for potential funding from the
Calaveras Reserve. Besides the ones described above, ideas have included funding of rebates for
photovoltaic projects within the City, replacing street lights with more efficient technologies,
purchasing land from the City and loaning funds to other City funds to save on financing costs.
The ideas remain for future consideration, but are not recommended at this time.
Table 1 below lists the Calaveras Reserve funds that have already been approved for specific
projects.
Table 1: Projects Approved for Funding from the Calaveras Reserve ($000)
Fiscal
Year
Local
Generation
PLUG-In
Program
Smart Grid
Feasibility
Study
Energy/
Compost
Feasibility
Study
Energy
Efficiency
Financing
Program Total
2010 $200 $70 $2,000 $2,270
2011 $200 $75 $275
Total
Approved $400 $70 $75 $2,000 $2,545
Total
Expended $0 $70 $49 $2,000 $2,119
Table 2 lists potential funds for the smaller projects that may be requested in the future. Larger
projects such as a new transmission line, a new Utilities building, and installation of smart
meters is not included in Table 2 as the costs are uncertain at this time.
Table 2: Potential Projects for Funding from the ESP Reserve ($000)
Fiscal
Year
Local
Generation
PLUG-In
Program
Smart Grid
Pilot Studies
Emerging
Technology
Demonstration
Program Total
2012 $200 $200 $650
2013 $200 $250 $200 $650
2014 $250 $200 $450
2015 $200 $200
2016 $200 $200
2017 $200 $200
Total $400 $500 $1,200 $2,350
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_______________________________________ City of Palo Alto
EXCERPTED DRAFT MINUTES OF UTILITIES ADVISORY COMMISSION
Special Meeting of July 20, 2011
ITEM 3: ACTION: Recommend Proposed Modifications to the Calaveras Reserve Guidelines and
Establishment of the Electric Special Projects Reserve
Senior Resource Planner Monica Padilla provided a brief presentation of staff’s recommendation to split the
existing Calaveras Reserve into two reserves to provide clarity and certainty regarding the use of funds
going forward. Padilla explained that the Calaveras Reserve (CR) estimated ending balance for FY 2012 is
approximately $50 million. Staff’s proposal would leave approximately $25 million in the Calaveras
Reserve to be used to offset above market cost associated with the Calaveras Hydroelectric Project based
on a Council-approved schedule of transfers through FY 2024. Staff would no longer calculate stranded
cost on an annual basis and the transfer would be included as part of the annual operating budget. Padilla
further explained that the remaining approximately $25 million would be used to establish a new reserve,
the Electric Special Project (ESP) Reserve to fund electric projects to the benefit of electric ratepayers.
The process of selecting projects to be funded through the ESP would be the same as in the existing
Calaveras Guidelines and that all projects would be subject to UAC review and Council approval.
Commissioner Melton expressed his general support of staff’s objective to solve the issue of what to do
with the Calaveras Reserve and staff’s attempt at simplifying multiple objectives, however does not support
staff’s recommendation. Commissioner Melton suggested that instead of annually transferring funds from
the Calaveras Reserve to the Electric Rate Stabilization Reserve (i.e., operating budget) that the funds be
transferred to the newly created ESP Reserve and suggested a sunset date for the ESP Reserve of 2024
to make it consistent with staff’s proposed sunset date of the Calaveras Reserve.
Public comment:
Jeff Hoel expressed his support for Commissioner Melton’s suggestion of not transferring Calaveras
Reserve to offset operating costs, but rather holding all of the funds for special projects. Mr. Hoel further
added that he did not believe a sunset date was needed for the ESP Reserve.
Commissioner Eglash also expressed his support of Commissioner Melton’s suggestion that the CR funds
be used to fund special projects and not to stabilize rates adding that the City presents itself with a great
opportunity having collected $50 million. He indicated that now was the time to move forward in deciding
how to use it. He suggested that the UAC develop guidelines so that a process could be used to evaluate
projects and decide which to pursue. Commissioner Eglash made a motion to adopt the following
guidelines to be used when evaluating how to expend funds, including:
• Funds should be used for projects that benefit electric customers.
• Funds should be used for projects rather than offset operating costs.
• Projects should be worthwhile, not spent frivolously.
• Cost of project should be relevant and impactful relative to amount in reserve. Not to pay for small
projects that can easily be paid for another way.
• Funds should be spent with speed and certainty—sooner rather than later.
Commissioner Eglash mentioned specific projects which could receive funding such as redundant electric
supply, energy efficiency, AMI/smart grid and removing barriers to deployment of renewable energy
projects. He also expressed that funds should not be used for undergrounding of electric utility services.
Commissioner Eglash provided written copies of his proposed guidelines to other UAC members and staff.
Chair Foster also supported the idea of transferring all funds to the ESP Reserve to be used for special
projects. Commissioner Foster asked staff if it made sense to transfer funds annually as suggested by
Commissioner Melton versus all at one time. Utilities Assistant Director, Jane Ratchye indicated that there
was no point in transferring annually if the desire was to spend it all on projects.
Commissioner Waldfogel asked staff if the Calaveras Reserve was needed to cover other potential
exposures other than Direct Access, which is not presumed to be an exposure. Ratchye confirmed that
there are no truly “stranded costs” at this time as the City does not allow Direct Access. She stated that
there is legislation which orders the phase-in of Direct Access for investor owned utilities and Direct Access
could become a requirement for publicly owned utilities, but that at this time, the City does not offer, and is
not required to offer, Direct Access to its customers.
Commissioner Berry asked what rate impact would result from not transferring the $25 million proposed by
staff to be transferred to the electric operating budget. Staff indicated that the impact of not transferring the
$25 million is a one time rate increase of about 2.5% would cover the impact associated with transferring
the full CR to the ESP Reserve. Commissioner Berry also expressed that he also does not agree with
transferring funds annually to stabilize rates and would prefer to spend the funds on a significant projects
with tangible, long lasting benefits to customers.
Chair Foster also expressed his support of using all of the Calaveras Reserve funds for special projects,
however is concerned about acting prematurely to spend the money and/or pushing staff to act too quickly
and would prefer to have a date to spend the funds by 2020 or 2024.
Commissioner Berry asked staff to comment on whether it sees any problems with the motion since it is
different from what staff recommended. Director Fong stated that she is uncomfortable not using the money
for the reason it was collected originally. In a sense, Fong stated that there was a “compact” with the
customers about the use of those funds.
ACTION: Commissioner Eglash moved to recommend Council adopt the following guidelines to expend
the funds in the Calaveras Reserve:
1. Funds should be used for projects that benefit electric ratepayers.
2. Funds should be used for projects, not to offset operating costs and reduce rates.
3. Projects should be worthwhile; that is, funds should be used for projects that would have been
worth doing even if the City had to pay for them.
4. The cost of a project should be relevant and impactful. Funds should not be spent on projects
that are too small and can easily be funded some other way.
5. If projects can be found that meet the above guidelines, then speed and certainty are
preferred. It is better to spend the funds sooner rather than later. Staff should examine means
by which the entire funds can be spent now, and the consequences of doing so.
Chair Foster seconded the motion and offered a friendly amendment to the motion to move all the money in
the Calaveras Reserve to the ESP Reserve and sunset the reserve by 2020 (all money not spent by 2020
would be transferred to the electric operating fund). Commissioner Eglash accepted the amendment, but
wanted the end date to be earlier than 2020. He suggested that projects be determined by 2015.
The amended motion passed unanimously (6-0).
September 20, 2011
(ID #1977)Page 1 of 1
Finance Committee At Places Report
DATE:SEPTEMBER 20, 2010 REPORT ID: 1977
FROM:CITY MANAGER DEPARTMENT: UTILITIES
TITLE:Utilities Advisory Commission Recommendation to Change the Purpose of and
Rename the Calaveras Reserve to the Electric Special Project Reserve and Adopt
New Reserve Guidelines
Staff submits this change to its recommendation as a result of further review of prior Council
action. Staff’s modification is to remove its recommendation that the $2 million from the
Calaveras Reserve that was made available to provide loans for energy efficiency projects for
business customers be repaid to the Electric Supply Rate Stabilization Reserve. Council approved
funding the $2 million seed money for a four-year business loan pilot program in December 2009.
The report requesting approval of using Calaveras Reserve funds for the program (CMR: 430:09)
stated that:“At the end of the pilot project period, staff will report back to City Council with a
recommendation on whether the program should be continued, modified in some way, or
eliminated. At that time, a comparison of this program against other efficiency measures will be
presented.” Since the issue of how any remaining funds for the loan program will be addressed
at the conclusion of the pilot program, the recommendation for Finance Committee
consideration and action has been revised as follows:
RECOMMENDATION
Staff and the Utilities Advisory Commission (UAC) recommend that the Finance Committee
recommend that Council:
1.Change the purpose of the Calaveras Reserve from partially funding above market electric
costs and partially funding projects that benefit electric ratepayers to entirely funding
projects that benefit electric ratepayers;
2.Rename the Calaveras Reserve as the Electric Special Project (ESP) Reserve; and
3.Adopt the following ESP Reserve guidelines:
a.The purpose of the ESP Reserve is to fund projects that benefit electric ratepayers;
b.ESP Reserve funds are to be used for projects of significant impact and not to offset
operating costs and/or reduce rates in the short-term;
c.Projects proposed for funding must demonstrate a need and/or value to electric
ratepayers. The projects must be cost-effective and not be speculative, or risky, in nature;
d.Projects proposed for funding must be substantial in size, requiring funding of at least $1
million;
e.Commitment of all funds in the ESP Reserve shall be determined by end of fiscal year (FY)
2015; and
f.Any uncommitted funds remaining at the end of FY 2020 will be transferred to the Electric
Supply Rate Stabilization Reserve and the ESP Reserve will be closed.
__________________________________ __________________________________
VALERIE O. FONG JAMES KEENE
Director of Utilities City Manager
FINANCE COMMITTEE
DRAFT EXCERPT
Regular Meeting
September 20, 2011
Utilities Advisory Commission Recommendation to Change the Purpose
of and Rename the Calaveras Reserve to the Electric Special Project
Reserve and Adopt New Reserve Guidelines.
Jeff Hoel felt the proposal was a good idea but had concerns; 1) if the
funds could not be spent by 2020 the monies went into reducing
current rates rather than going towards special projects, 2) there were
risks in every project so to not take the risk was to not accomplish the
possibility.
Senior Resource Planner, Monica Padilla gave a brief history of the
Calaveras Reserve and how it had changed over the years. The key
reasons why the Calaveras Reserve was chosen to be changed were;
1) the Reserve had an expected balance of $50 million by the end of
Fiscal Year 2012, 2) the Hydro Electric Project was estimated to cost
$25 million above market value over the life of the project, 3) the
electric utility was facing several large expenses related to several
initiatives, and 4) the current set of guidelines provided little certainty
to Staff in determining the amount that would be available to offset
versus the amount available to fund future projects. Staff provided
recommendations to the Utilities Advisory Commission (UAC) for the
uses of the funds, they did not agree. Staff had revised their
recommendations to be more inline with the UAC recommendation
which was to put all of the monies aside for use with special projects
with no money covering short term operating expenses. Staff’s goal
was to have the recommendations approved by the Finance Committee
and forwarded to Council for their approval.
Utilities Advisory Commissioner, Steve Eglash clarified the UAC was
impressed with the original purpose the Reserve was established for.
The UAC agreed now was an appropriate time to recommend an
appropriate use of the funds. Because the monies were collected over
ten years ago it was not practical to return it to the rate payers who
had made the initial contributions. The guidelines suggested the
monies had to be used in a manner that would benefit the electric rate
payers as a group. The UAC felt it would be beneficial to spend the $50
million on a small number of significant projects that would be difficult
to fund otherwise. There were no recommendations on which projects
should or should not be funded; the UAC could provide direction to
which projects would be appropriate to fund if it were requested.
Vice Mayor Yeh noted the proposal formalized the direction the City
had been going with respect to the Calaveras Reserve in the sense of
future repair projects with the Electric Fund. He asked if the At-Place
memo regarding the guidelines had significant changes to the present
guidelines.
Ms. Fong declared the changes were considered to be minor. There
was a recommendation in the earlier draft that had been deleted. The
recommendation was looking at the $2 million that was used to fund
the Zero Interest Loan Programs for energy efficiency which was
approved by the Council in 2009 as a pilot program. Staff had been
directed to return at the end of the pilot for determination on what to
do with the monies that had been returned from the loans. The
recommendation had been removed since the Council had already
directed Staff to return for further analysis.
Vice Mayor Yeh asked for Staff’s vision of the process for moving
forward with the potential projects as proposed under the guidelines.
He asked to understand the potential involvement and significant
investment of other government entities.
Ms. Padilla explained there was not a process in place. Each project
needed to be evaluated and determined on its own merits including
the potential manner for funding. If a project did materialize it would
be brought before the UAC, Finance Committee and Council for
discussion.
Ms. Fong asked if the question was regarding current projects and how
Staff prioritized them. If that was the case, Staff could return with the
projects listed in a prioritized manner. She clarified any one of the
capital projects could be Bond funded, it just so happened that
currently there was a significant amount of monies available. There
was not a single project proposed that would consume the entire
amount of funds unless Council chose to move forward with under
grounding which could consume the entire amount and would not be
sufficient.
Mr. Eglash clarified the drive of the UAC for the use of the monies was
projects opposed to dribbling it out over a number of years to reduce
rates by a few percent. If the direction was to give the fund a
significant project rather than reduce rates, Staff was capable of
evaluating a set of projects and providing a financial calculation on
how to best use the money. The UAC did not support funding Smart
Grid since it was not yet a stable entity.
Vice Mayor Yeh acknowledged the aspect of moving some of the larger
projects forward were out of the control of Staff or the Council. He
asked if that was why the timeframe for the use of the funds was
suggested for 2015.
Ms. Fong clarified larger projects took time to construct and evaluate.
Mr. Eglash clarified his understanding of the question was if the date
ended too early. He stated if the Finance Committee decided the dates
should be pushed out beyond 2015 the UAC could accommodate that
request. The recommendation included a date to avoid the possibility
of projects not being selected.
Vice Mayor Yeh agreed the value of setting dates was a tool that drove
the projects forward. He noted the decision to move forward with a
system such as Smart Grid for a small utility such as Palo Alto would
be contingent upon technology and how it proved itself within other
contexts. To that extent, 2015 was a premature date.
Ms. Padilla agreed with Commissioner Eglash that the recommendation
of a date was to avoid the funds being held in perpetuity.
Ms. Fong explained the funds were available and if Council chose to
deny a project the funds would continue to be available; they did not
disappear if a project was not approved.
Council Member Schmid asked how a benefit was measured. For
example; there was $50 million available and 20 million rate payers, if
they each received a check in the amount of $2,500 that was a benefit
to them. His thought was the recommendation needed to be a greater
benefit to the rate payer than a check for $2,500. He recommended
not removing the recommendation of reducing rates. He did not agree
with solidifying a date without a list of tangible benefits.
Ms. Fong clarified the date certain of 2015 was to identify the projects
but the date for completion was not until 2020. She noted the concept
of benefits to the rate payer was to ensure the monies being spent
were in benefit of the electric rate payers.
Council Member Schmid understood the rate payers were the electric
rates payers and expressed his opinion was the benefits received in
return needed to be equivalent in scale to the amount they had paid
into the Fund.
Mr. Eglash declared when discussing the Electric Utility, the largest
electric users in Palo Alto were businesses not residents.
Council Member Shepherd asked whether bringing fiber to the
substations as a benefit to the community could be considered as a
project for the use of the funds.
Ms. Fong clarified in accordance with the guidelines the benefits
needed to be a benefit to electric rate payers.
Council Member Shepherd stated the strategy would be to bring the
fiber lines to the electric substations thereby benefiting the electric
rate payers and the community as a whole.
Ms. Fong clarified the electric substation was not a direct benefit to the
electric rate payer.
Council Member Shepherd asked if the UAC would participate in a
discussion on utilizing the monies to bring fiber to the substations.
Ms. Fong verified the UAC was reviewing the Fiber Fund which had its
own reserve for such projects.
Council Member Scharff asked for clarity on the recommendation to
commit to the use of the funds by 2015 although not complete the
projects for an additional five years.
Ms. Fong acknowledged the wording may need to be adjusted. Staff
envisioned an excess amount of monies of $50 million presuming there
were projects identified for the use of $40 million by 2015, those
projects would be moved forward. Therefore there was an additional
$10 million in uncommitted funds.
Council Member Scharff asked why, if there were excess funds there
would not be additional projects funded rather than returning the
monies back to the rate payers.
Ms. Fong stated Staff would follow the direction of Council with respect
to any remaining funds at the end of the 2020 time period.
Council Member Scharff understood the guidelines being in benefit of
the electric rate payers, since the original funds were contributed by
that entity. He disagreed and felt the funds should be used to benefit
the community as a whole, encompassing the electric rate payers. He
asked when the funds were initially collected.
Ms. Fong verified the funds were initially collected in the 1990’s.
Council Member Scharff acknowledged the monies were collected by
the businesses at that time and the majority of them were in all
probability no longer in the City. He asked if there was a legal
requirement to return the funds as a benefit to the electric rate
payers.
Ms. Fong was uncertain of the legal requirement and suggested
referring the question to the City Attorney to verify the legal risk of not
spending the monies as was intended.
Council Member Scharff the question was whether the monies could be
used for a more pressing need to benefit the entire community.
Ms. Fong would verify the requirement with the City Attorney’s office.
Council Member Shepherd agreed to verify the requirement with the
City Attorney although she felt there would not be much leeway. She
recommended the Motion include Council setting a policy to maintain
the guidelines as they were.
Mr. Eglash acknowledged the role of the UAC was an advisory capacity
to the Finance Committee and the Council although, it might be helpful
to understand the direction the UAC was heading in. As for the date
certain, there was no issue with that changing to a target date; the
idea behind the date was to drive behavior. He offered in general, the
UAC was sensitive to the different classes of users and the distribution
of uses between residential and commercial as with small users to
larger users with each type of utility.
Council Member Scharff agreed with the overall concept of division
although in this situation there was no clear manner in which to return
distribution to those specific contributors.
Council Member Schmid addressed the list of potential projects by the
UAC and asked if they indicated the types of projects being
considered.
Mr. Eglash clarified the list was brought forward by the Staff for UAC
consideration and was not a list of recommendations by the UAC.
Council Member Schmid asked if there would be a process set in place
to prioritize the greater benefit of each possible project.
Mr. Eglash stated yes, there would be. On the second to last page of
the minutes from the UAC meeting of July 20, 2011, there was a
secondary list which overlapped the list presented by Staff. The UAC
list included redundant electric supply, electric efficiency, AMI Smart
Grid, and the mention of removing barriers to deployment of
renewable energy projects.
Council Member Schmid asked if there was a timeline in place as to
what was to be accomplished within the next six months and so forth.
Ms. Fong stated Staff was in the process of identifying what projects
might be determined. The Smart Grid Study had been completed; the
second transmission line to Palo Alto was being looked at, some of the
items on the proposed list were in play although Staff was uncertain as
to their validity.
Council Member Schmid asked how the review of the proposed
projects might change now that there was a budget in play.
Assistant Director of Utilities, Jane Ratchye stated the process the
Utilities Department would go through, which was mentioned in the
Guidelines, remained the same whether there were excess funds or
not. All projects recommended to be funded through the Calaveras
Reserve were necessary and would have a net benefit.
Council Member Schmid stated the projects being recommended were
a part of the general Capital Projects list and the funds being used
from the Calaveras Reserve were being used because they were
available but if more was needed other funds would be brought in to
complete the list.
Ms. Ratchye clarified the list was not the on going Capital
Improvement Projects (CIP) such as line replacements but they were
items considered Capital Projects because of their nature.
Mr. Eglash noted the UAC had given consideration to the annual CIP.
The City’s Utilities Department had been very conscientious over the
past several years in making up for prior lapses in investments. Two
years ago there was a special committee involved in reviewing the
infrastructure investments and the Utilities Department was found to
have been on top of the necessary work.
Council Member Schmid saw the excess funds as an opportunity to
allow the City to accomplish things that may not have been possible
otherwise. He felt because of the special circumstances the selection
hurdles should be higher than that of the standard needs of the City.
Council Member Shepherd understood Council Member Schmid’s
comments but was uncertain whether there was a way to qualify or
quantify a higher need from a standard need.
Ms. Fong noted the process for bringing projects forward was the same
for Staff, the difference for the Finance Committee or the Council was
what fund would be used to fund them.
Vice Mayor Yeh had been a proponent of the redundant electricity line,
especially after the plane crash a couple of years ago that disrupted
the business community for a full day. He said there had been several
processes on the selection of projects. He recommended a clearly
defined process be implemented. He was unsure about soliciting legal
opinions regarding reaching outside of the electric realm.
Council Member Shepherd asked if Vice Mayor Yeh was recommending
identifying a project now.
Vice Mayor Yeh sated if he were it would be the redundant electric line.
Because the Calaveras Reserve had been discussed numerous times as
a potential funding mechanism for significant projects, he saw the
renaming of the Fund and setting guidelines as an intention to
formalize the program with no clear process to move forward with the
next steps. Once the project was selected, the role of the Council had
to be clarified to determine if they had the ability to write letters to the
President of Stanford University or the Department of Energy for
promoting the projects.
Ms. Fong noted when the time was right, Staff would ask for Council
support and involvement in that capacity. For the redundancy electric
line Staff was uncertain of the true cost.
Vice Mayor Yeh asked how the City could get a true cost estimate.
Ms. Fong stated Staff had a meeting set up with the entities involved
and were hoping for their participation.
Vice Mayor Yeh hoped Staff would effectively use Council to assist in
the process. Without a clearly defined process there were possible
opportunities being missed because the structure to move forward was
lacking key elements.
Ms. Fong understood the concerns and explained that some projects
such as the secondary redundancy electric line required a number of
outside entities and each of them may have separate stakeholder
interests that needed to be dealt with.
Vice Mayor Yeh understood the process but had heard the same
scenario for a number of years with no forward momentum.
Ms. Fong clarified the role of each entity had changed over the years
and there were agencies creating utility rules that defined each
subsequent entities liability. Palo Alto was at the mercy of the Energy
Departments’ regulations.
Council Member Scharff shared similar concerns but was not in a
position to commit to any one project without more data.
Vice Mayor Yeh was saying it would be beneficial to have a technical
review for each specific project that provided Council the timeline
information and articulated consequences if those timelines were not
met.
Mr. Eglash stated the question was whether Council wanted the
process to drive the money or the money to drive the process. The
UAC imagined Staff was already pursuing potential projects and simply
having the knowledge that the money was available was an additional
tool for them to move forward.
MOTION: Council Member Schmid moved, seconded by Vice Mayor
Yeh, that the Finance Committee accept Staff and the Utilities Advisory
Commission (UAC) recommendation that Council: 1) Change the
purpose of the Calaveras Reserve from partially funding above market
electric costs and partially funding projects that benefit electric rate
payers to entirely funding projects that benefit electric rate payers, 2)
Rename the Calaveras Reserve as the Electric Special Project (ESP)
Reserve, and 3) Adopt the following ESP Reserve guidelines: a. The
purpose of the ESP Reserve is to fund projects that benefit electric rate
payers; b. ESP Reserve funds are to be used for projects of significant
impact and not to offset operating costs and/or reduce rates in the
short-term; c. Projects proposed for funding must demonstrate a need
and/or value to electric rate payers. The projects must be cost-
effective and not be speculative, or risky, in nature; d. Projects
proposed for funding must be substantial in size, requiring funding of
at least $1 million; e. Commitment of all funds in the ESP Reserve
shall be determined by end of Fiscal Year (FY) 2015; and f. Any
uncommitted funds remaining at the end of FY 2020 will be transferred
to the Electric Supply Rate Stabilization Reserve and the ESP Reserve
will be closed, and 4) Staff will identify the process and criteria for
example (economics) for selecting eligible projects.
Council Member Shepherd asked for clarification on the wording of
number 3c of the Motion regarding whether it was equivalent or
greater than a rate reduction.
Council Member Schmid was attempting to raise the bar on the use of
the funds to something greater than a large project on the CIP. He felt
it should be justified as being more significant to the rate payer than a
rate reduction.
Council Member Shepherd stated there was no process in place to
quantify a greater than a rate reduction structure.
Council Member Schmid explained Staff would need to provide a
manner in which to measure of benefit.
Ms. Fong asked if the goal was the project needed to return a benefit
greater than the $50 million or greater than the individual rate payer
receiving $2,500.
Council Member Shepherd expressed she would not support the Motion
with the wording as it was in number 3c. Each rate payer could
quantify the benefit differently and it was not for the Council to
determine what they saw as a benefit.
Council Member Schmid clarified when selecting the project, Staff
needed to be able to say there would be payback of considerable value
to the rate payer in lieu of the rate reduction.
Vice Mayor Yeh suggested Staff identify a process and criteria for
selecting eligible projects.
Council Member Shepherd asked when Staff returned with their
process if the Finance Committee would be able to view how they
quantified the value.
Council Member Schmid was asking for a specific economic justification
to offset the fact that the $50 million belonged to the rate payers.
Vice Mayor Yeh asserted Staff needed to be aware that a part of the
criteria would have to be economic based.
Ms. Fong stated between the new language in number 4 and the
original language in number 3c it was sufficiently covered.
Council Member Schmid clarified the language in item 3c had been
removed.
Ms. Fong recommended leaving the language since number 4 added
the process and criteria, the information in item 3c was necessary.
Ms. Ratchye noted the guidelines themselves were the criteria that had
been identified by Staff and the UAC so she was concerned that adding
process and criteria within the criteria would become confusing.
Council Member Schmid had concerns with the language in item 3c;
the original proposed language stated the need to demonstrate a value
or be cost effective. That was not clear that the value needed to be
equivalent to $50 million. His Motion was to include the totality of the
projects be equivalent to $50 million or more.
Ms. Fong asked Council Member Schmid what the term cost effective
meant to him. She noted the cost for a full City outage calculated
would be more than equivalent.
Council Member Shepherd asked if there were calculations done on the
loss during the day of the plane crash.
Ms. Fong stated the cost had not been compiled.
Council Member Schmid said the cost for under grounding one of the
three lines electric lines or the proposal to run another line would be
up words of $15 million which was an option to the $40 million slack
connection. It may not be as adequate or attractive as the secondary
redundancy line but the trade-off was the rate payer was receiving the
best value.
Council Member Shepherd stated her understanding was Council
critiqued the proposed projects during the selection process and if they
determined there was not an adequate balance it would not pass.
Council Member Schmid was responding from the experience of each
time there had been a rate hearing there was a small contingent of
citizens that came to the meeting to protest their dissatisfaction of
rate return. His goal was to be able to explicitly address their concerns
that the money was being used for a project that did not benefit them.
Vice Mayor Yeh was satisfied that the guidelines themselves were a list
of criteria with the added piece for economics. He asked if there could
be a qualifier to denote that was a concern and was not being over
looked.
Council Member Schmid suggested adding parentheses around the
words, for example (economics), would satisfy his desired outcome.
Vice Mayor Yeh noted that would provide flexibility for Staff to define
the economic benefit. The economic benefit could be addressed in a
number of ways such as return on investment calculations. He
affirmed by changing the economic verbiage it eliminated the proposed
language from number 3c; the equivalent or greater than rate
reduction.
Council Member Schmid accepted the changes in verbiage.
Council Member Scharff asked for clarification on the phrase electric
rate payers. He asked if the use of the funds were being limited to the
use of the Electric Fund rather than a broader use.
Ms. Fong clarified Staff would commit to retrieving a response from the
City Attorney’s office on the use of the funds.
MOTION PASSED: 4-0