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HomeMy WebLinkAbout2003-08-04 City Council (25)City of Palo Alto City Manager’s TO: FROM: DATE: SUBJECT: HONORABLE CITY COUNCIL CITY MANAGER AUGUST 4, 2003 DEPARTMENT: UTILITIES CMR:355:03 FINANCE COMMITTEE RECOMMENDATION FOR APPROVAL OF NATURAL GAS SUPPLY PORTFOLIO PLANNING AND MANAGEMENT OBJECTIVES AND GUIDELINES FOR THE GAS UTILITY LONG-TERM PLAN (GULP) RECOMMENDATION The Utilities Advisory Commission (UAC) and staff recommend that the City Council approve three objectives and four guidelines for the Gas Utility Long-Term Plan (GULP). Approval of the objectives and guidelines will guide staff in developing and managing the City’s Gas Utility Long-term Plan. COMMITTEE REVIEW AND RECOMMENDATIONS The Committee voted unanimously to accept staff’ s recolnmendation. ATTACHMENTS A: CMR:345:03 B: Finance Committee minutes excerpt from 7/15/03 PREPARED BY: DEPARTMENT APPROVAL.: KARLA DAILEY Resource Planner CITY MANAGER APPROVAL: EMILY HARRISON Assistant City Manager Page 1 of 1 TO:HONORABLE CITY COUNCIL FROM:CITY MANAGER DEPARTMENT: UTILITIES ATTENTION: FINANCE COMMITTEE DATE:JULY 15, 2003 CMR:345:03 SUBJECT:REQUEST FOR THE APPROVAL OF NATURAL GAS SUPPLY PORTFOLIO PLANNING AND MANAGEMENT OBJECTIVES AND GUIDELINES FOR THE GAS UTILITY LONG-TERM PLAN (GULP) RECOMMENDATION The Utilities Advisory Colrnnission (UAC) and staff recolrmaend that the City Council approve three objectives m~d four guidelines for the Gas Utility Long-Term Plan (GULP). Approval of the objectives and guidelines will guide staff in developing and managing the City’s Gas Utility Long-term Plan. DISCUSSION Staff proposes the tkree following GULP objectives to govern gas supply resource asset acquisition and energy efficiency strategies for the gas utility: Objective 1: Objective 2: Ensure low and stable gas supply rates for pool customers. ("Pool" customers are natural gas customers who do not have access to a supplier other than the City. "Non-pool" customers are customers who either choose to take natural gas service on rates based on monthly varying market based prices, based on a fixed price for a fixed term or elect to take service from another supplier. Cun’ently, approximately 75% of the City’s natural gas demand is comprised of pool customers. No customer is taking service from a supplier other than the City.) Provide superior financial performance to customers and to the City by managing the supply portfolio cost in a competitive manner compared to market cost and a retail supply rate advantage compared to PG&E. CMR:345:03 Page 1 of 4 Objective 3:Balance enviromnental, rate, and cost impacts when considering energy efficiency investments. These objectives are consistent with the portfolio objectives approved for the electric utility (CMR:425:01). To facilitate the development of specific recommendations, staff has developed four GULP guidelines based on the three objectives. Key themes found in these GULP guidelines address diversification to minimize risk and stabilize rates, operational flexibility, and opportunities for energy efficiency. Guideline 1: Market Risk Management - Manage market risk by adopting a portfolio strategy for gas supply procurement by: A. Diversifying energy purchases for the pool across commitment date, delivery date, duration, suppliers, pricing terms and delivery points; B. Maintaining a prudent exposure to changing market prices by leaving some fraction of the forecasted gas pool needs exposed to near-term market prices; C. Avoiding long-term (> 10 years) fixed-price commodity contracts. Guideline 2: Asset Acquisition and Management- Explore supply, pipeline, and storage acquisition options available to the City which may be assembled to yield reliable supply at fair and reasonable cost, taking into consideration: A.Long-term supply cost for gas deliveries at. PG&E Citygate; ("PG&E Citygate" is any point at which the PG&E natural gas backbone transmission system com~ects to the local transmission and distribution system. The Citygate is not one specific, physical location. It is a virtual trading poh~t on PG&E’s natural gas system.) B.Operational needs including the need for daily balancing during Operational and Emergency Flow Orders; C.Existing and potential regulatory mandates; D.Potential operational streamlining opportunities with other agencies; and E.City’s low cost of capital for asset acquisition. Guideline 3: Management of Regulatory and Legislative Matters - Se~we as an effective voice to protect and enhance the City’s position in regulatory and legisIative arenas by: A. Intervening in the regulatory and legislative arenas to ensure that the City’s gas utility interests are protected and enhanced; and B. Exploring potential joint action with other public agencies. Guideline 4: Gas Energy Efficiency Investments -Pursue cost-effective energy efficiency investments by: CMR:345:03 Page 2 of 4 A.Providing expertise, education and incentives to support cost-effective customer efficiency improvements; B.Demonstrating new efficiency and load management alternatives; and C.Providing rate assistance and efficiency programs to low-income customers. Guidelines 1, 2 and 3 apply to objectives 1 and 2 while guideline 4 applies to objective 3. For example, successful management of market price risk will result in stable rates for customers. Asset management will result in good financial performance for the City. BOARD/COMMISSION REVIEW AND RECOMMENDATIONS The Utilities Advisory Co~mnission (UAC) reviewed this reco~mnendation and approved it unanimously at its June 4, 2003 meeting. There were no comments from the public. The UAC urged staff to investigate opportunities to invest in long-term assets like pipeline capacity, gas storage and gas producing wells. Since these co~mnents were within the purvie~v of the proposed Objectives and Guidelines no action was taken on these comments. POLICY IMPLICATIONS These three proposed existing City policies. Management Policies. GULP objectives and guidelines do not represent any change to The objectives and guidelines conform to City’s Energy Risk The guidelines support thd Utilities Strategic Plan: 1.Strategy price; 2.Strategy continue 3.Strategy strength; 4. Strategy 2 - Preserve a supply cost advantage compared to the market 4 - Deliver products and services valued by our customers, and to build CPAU brand presence; 6 - Maintain stable General Fund transfers, and maintain financial and 7 - hnplement proN’ams that improve the quality of the enviromnent. The proposed GULP Guidelines further the City’s commitment to the Green Govermnent Pledge by supporting the conservation of energy. ATTACHMENTS A: Minutes from UAC June 4, 2003 meeting CMR:345:03 Page 3 0f4 B:UAC Report dated June 4, 2003 titled, ’°Request for the Approval of Natural Gas Supply Portfolio Planning and Management Objectives and guidelines for the Gas Utility Long-Term Plan (GULP)" C:GULP Attachment A PREPARED BY: DEPARTMENT HEAD: CITY MANAGER APPROVAL: Karla Dailey {/ Resource Planner JOH~I~LRICH Diy~t~r of Utilities Assist~t Ci~ Manager CMR:345:03 Page 4 of 4 UTILITIES ADVISORY COMMISSION MEETING MINUTES JUNE 4, 2003 DRAFT EXCEI~T Gas Utility Long-Term Plan (GULP) Ulrich: Thank you Mr. Chairman. The request that you have before you is an action item for the approval of the natural gas supply portfolio plamaing and management objectives, and the guideline for the gas utility !ong-tema plan kaaown by the acronym GULP. Karla Dailey will have a brief presentation that you see up on the screen. Then we will ask for your questions mad your approval of this item. Dailev: Thanks John. This is a very quick presentation and nothing that is not in the report in your packet. Objectives and guidelines, I just noticed an error on the cover sheet here, there is more than one guideline. Let me go ahead mad get into it. What are the reasons that we are doing this? The first one is just a need to review our commodity purchasing strategy. It has been in place over two years and although we think of it often we haven’t really sat dowaa and done some analysis on whether our strategy is the right one given all of the objectives that utilities has. The second reason has to do with some negotiations that are going on associated with PG&E bankruptcy case. One outcome in a list of many of that proceedings is that Palo Alto may be asked to commit to some pipeline and storage assets with PG&E. So we want to be proactive and kmow wlaich of those assets we might be interested in committing tobefore we are asked to make such a decision. The third reason is a regulatory one. At this point in time Palo Alto is not required to hold may assets. But there is a movement among some interested parties that would require may customers who have the status of core, which means non-core customers could have their gas diverted in an emergency situation to us. That might require us to hold some those kinds of assets. Proactively, we would like to know what we may want to hold if we were required to take some action by a regulatory mandate. The fourth reason is just the desire to have a platform for evaluating opportunities as they arise - having some systematic way to evaluate an asset or make a decision when it comes up. There are three proposed objectives. The first one is to insure low and stable rates for the pool customers. The non-pool customers are the large customers who have opted not to be part of our pool; we set their rates based on whatever rate option they choose. It’s a straight pass through. They have control over whether they want to have stable costs or costs that vary with the market. So this GULP objective just applies to the pool. The second objective is to manage our supply costs in a competitive manner with the market. And to maintain a retail advantage compared to PG&E. The third objective has to do with energy and efficiency. What we have said here is to strike a balance between the environment, rate impacts mad cost impacts when we are considering such investments. Draft 6/4/03 UAC Minutes Page I of 7 There are four guidelines. The first has to do with market risk management. I divided these up into three bullets. Diversity is a guideline. We want to maintain diversity. We want to maintain some appropriate level of market exposure mad we will avoid long term fixed price commodity contracts, That mainly b, as to do with an issue - liquidity. - at this point. Once you go out a certain nmnber of years there aren’t enough players in the market to have a liquid ma’ket for those types of products. This is just a reminder of ourcurrent strategy, this slide was done a couple of months ago but the idea is still the same. Our current strategy is that in the near 12 months we will have locked in 75% of our expected needs through fixed price contracts. Fifty percent for the next 12 months, and then 25 percent for the third 12 months. There was a maaagement decision to fix the price of a hundred percent of our 2002 - 2003 needs. That is reflected in that graph. If I were to update that graph today, the first month would be July and we’re at a 75 percent goal for the fiscal year of 03-04, today looking at that graph. This is the strategy we will be reviewing: Do these percentages make sense? Does the timing make sense? Does a tln’ee-year tema make sense? All these components of the strategy will be under review. The second guideline has to do with asset acquisition. We will just explore assets such as storage and pipeline capacity to see if it makes sense in our whole supply portfolio. We will take into consideration the long-term supply costs for our gas that is delivered - operational needs, regulatory mandates and we wil! look imo potentially teaning up with another agency. Also keep in mind the City’s low cost of capital for assets acquisitions, which may make a difference in some cases. The third guideline has to do with regulatory and legislative matters, and this isn’t really any different than what we do now. We inte~wene where we need to, to protect the City’ s interests. And we are always on the lookout for someone to temn up with. So we will keep tt~at high on our radar screen as well. Unfortunately on the gas side there aren’t usually as ma~y opportunities as electric, because there aren’t very many gas utilities in California. Often our interests are different than other parties that are intervening in a proceeding. The fourth guideline addresses energy efficiency investments. We wil! provide expertise and incentives to support efficiency improvements. We’ll demonstrate efficiency and load management alternatives and provide low-income rate assistance. The scMdule. Obviously we are coming to you today in June with the objectives and guidelines. These objectives and guidelines are scheduled to go to finance con~"nittee in July and the Council in August. That schedule slipped a little bit from our original goal because of other co~ffiicts and overloaded agendas. We are proceedh~g with the analysis nonetheless, and are still hoping to get a draft of the analysis to you this sunnner, although it will probably be late stormier at this point. Aaad then a final sometime in the fall. That’s all I have. Carlson: Any questions? Go ahead Dexter. Dawes: I am fascinated by the asset-acquisition connnents coming out of the PG&E reorganization. I camaot remember hearing about these opportunities. I view them as opportunities to cement our infi’astructure, if you will. I an aware of, for instance, the huge discrepancies between the Henry Hub gas and the California border and the Palo Alto Citygate Draft 6/4/03 UAC Minutes Page 2 of 7 prices that are not so much now as they were a year or two or three ago. But they were very substmatial - on the order of 50 to 100% was my recollection. If there is any information you can give about the opportunities that are available here, I would be very interested in hearing about them. I view tl~is again as an oppollunity to lock in low-cost public transportation and storage facilities, which are vitally important to the City. That is one comment. The second COlrmaent has to do with the long term colmnitmems to supply. I had mentioned in the past and will do so now - I hope we would not foreclose oppol~u~ities to actually buy producing wells if they become available at attractive prices. Again, I think that on a tong supply basis, to owa~ the assets -- obviously at prices that are attractive to us -- is something we should do. On the basis that our strong suit is low cost-of-capital, which you have mentioned, and it is a very powerful one in the utility business. And lack of having to pay any taxes is a very big item in comparison to IOUs that would be or other regulated companies or mtregulated companies supplying usl So the oppormltity to avail ourselves of long term asset acquisition even in the supply end, I thi1~¢, could be extremely attractive. Just so our antelmas are open and our minds are open to these. But I would like some input on the first issue. Dailev: Let me respond to your second issue first. Definitely on the list of things we are looldng at is an interest in production or some sort of reserves. As you probably know, SMUD just made an acquisition. Oh, you didn’tl~aow that? Yes, SMUD just took an interest in some reserves, so we have made contact with some of the analysts at SMUD who pushed that deal through mad are trying to see how it applies to Palo Alto. The guideline in here really refers-to long term fixed price contracts, not long term assets. I think those two tl~ngs are fairly different so we won’t be shutting out opportultities as you discussed. What may result from the PG&E bankruptcy would be the possibility to reserve California or PG&E system assets before some sort of open-season. We are talking about pipeline capacity fi’om the California border to the Citygate. PG&E storage that is in-state will not address may sort of basis differential between Henry Hub and the California border. I don’t foresee buying capacity to the Henry Hub. We would possibly look at buying capacity up to Canada or in the Southwest, the San Juan Basin or something of that nature. I am sort of putting the cart before the horse, because the analysis hasn’t been done. The most obvious assets are in state and just moving the delivery point a little farther -- for at least part of our supply -- a little further away from the city gate, closer to the wellhead. Dawes: Henry Hub was just as an example of the price differemials. I also mentioned from state border to our City Gate was a pretty big number at one point, too. I don’t know where they sit now, but to freeze those long-term is a long-term objective that we should have in mind. Dailev: Right, right. We did sign a memorandum of understanding with PG&E. That has to do with -- if their plan gets approved tl~rough this whole bmtkruptcy proceeding, they will have this other entity that manages all their pipeline and storage assets, and we may be able to make a reservation ahead the open season on those assets. There are a lot of"if’s" in that scenario, but it is one possible outcome. Dawes: So PG&E will be forced to do a lot of asset sales to successfully reorganize? It sounds like that is what is coming out of this whole arrangement. Draft 6/4/03 UAC Minutes Page 3 of 7 Daile.y_: They are not talking about selling their assets, they are talking about allowing us to mal~e reservations of their assets ahead of the open season. They are not divesting assets, they are just filling them up. They are filling the bus, more or less. Dawes: Are these at fixed prices in the future? Or is it just the fact that we will be able to get storage, but we’ll set the price at market at some future date that we need it? Daileyg: As far as I ca~ see, we would know the price at the time we cormnitted so, yes, it would be, it would be a fixed price for some anount Of pipeline capacity for some term. Dawes: Long term? Dailev: Probably five to ten years, at least. Dawes: Hopefully, ten or longer. Thank you. Carlson: Conm~issioner Ferguson. Fer,~uson [placing a second and larger "Big Gulp" cup on the dais]: Thaak you. I understand the talk about buying capacity, but my next question goes to the number of different gas pipelines. Is there an opportunity here to diversify the number of different physical ways to get gas to the Bay Area? Daile_2: To the Bay Area or to Palo Alto? Ferguson: To Palo Alto or to the Bay Area. I tmderstand there may be a limitation to Palo Alto. But just as we have had an opportunity to strengthen the Hetch Hetchy pipelines and perhaps build a fourth pipeline, does this asset purchase increase the number of ways physically to get gas closer to us? Dailev: I will make a~ attempt at this. I don’t think we are talking about additional pipelines being built into the Bay Area. We might be able to diversify our supply cost b.y being subjected to different base in prices mad different delivery point prices. But we are not talking about physically adding more pipeline capacity in California. Ferguson: So this plan doesn’t eliminate may physical chokeholds on us? Dailev: No, and I don’t thilak... Fer~uson: We are stil! exposed to the same earthquake risks and physical risks? Daile2: No, it doesn’t eliminate that. I am not sure that is a big concern right now. There is a lot of capacity in California, it’s not a major issue for gas. Draft 6/4/03 UAC Minutes Page 4 of 7 Bechtel: Karla, what would be the impact, probably in our contmodity cost, of doing nothing of purchasing assets. I area sure there are number of people wl~o really don’t have the City’s resources to purchase anything, as we do. What if we did nothing? What would be the impact? Daile2: In a sense, doing nothing is what we have done for the last few years. We used to have some storage that was part of a brindled rate with PG&E. When that was unbundled we ilmnediately declined to take it, it was just not Cost-effective. We didn’t take any of it. Also, we have not traditionally held pipeline capacity, with the exception of the piece of Redwood that we own. which we got at a very cheap rate. It was a no-brainer to take that. At least historically spealdng, those were good outcomes. We had lower supply costs than we would have, mad in most cases, than if we would have held those assets. Just because that’s true today doesn’t mean that a decision for the future is to continue to do nothing. We certainly recognize that. When we do this analysis, I’na not actually doing the analysis. Another person in our group is, which is good because they don’t have all the biases and the history that I do. He is looking at a very blmlk page, mad very open-mindedly at all the possible futures mad what the best portfolio of assets to hold, given all those potential futures, would be, Bechtel: I guess you are really saying that you don’t know what the outcome would be? Perhaps we are plmming ahead. I am hoping this is what we are doing, we are anticipating various scenarios that would happen to us, one of which would be nothing, to consider the range of options of acquiring something in the future. I am assuming that the study includes all those features and then we will get a chance to look at it. But that brings up the point.., how fast would we have to react? Let’s say the PG&E bankruptcy is resolved, the PUC or someone has a plan of reorganization. Are we looking at fast decisions here? Or is this open season on acquiring going to be a year long, six months, two years? Can you give me some feel what sort of time pressure we might be under? Dailesi: John might be able to respond better to how quickly the bankruptcy might be resolved. Ulrich: You are asking questions about filling in all the spaces around the guidelines that we’re asking you to approve. You me moving into how to make these guidelines work to our advantage, and we are not that far along hi this process, as Karla is trying to point out. Frmakly I would very much ask [that we be] moving on from bankruptcy and talking about sometlting else, because of the implications this has with our electric business. Feel free to ask what you like, but I an malting a suggestion that we focus on these guidelines for approval things that you think that we missed, or are not covered here, so we have thoroughly good long range plan when it’s put together. Rosenbaum: Just to follow-up, I assume the timing on GULP .going to the finance cormnittee and to the Council is some momhs away? Ulrich: Yes. Draft 6/4/03 UAC Minutes Page 5 of 7 Rosenbaum: Apparently that’s free fl’om a timing standpoint, you don’t sense anything happening that would require may other action? Uh’ich: Going beyond whether we sense something or not, one of the real strengths we have here in.Palo Alto is I have your phone nmaabers. We can set a meeting mad get people together rather quicldy and also go to the City Comacil if those are the kinds of things that need to be done. That will be our contingency plan. Move this as fast as we have to if we get something that tells us there’s an opportunity that we need to take advantage of. Rosenbaum: Thank you. [Commissioner Ferguson adds a third mad still larger cup labeled "Super Big Gulp" on the dais]. Carlson: Any more questions? Go ahead Dexter. Dawes: On Attaclm~ent A, ~vhich is the thing we would be recommending to City Council, and reader guideline one, section B, it says, "maintaining a prudent exposure to changing market prices by leaving some fraction of the forecasted gas pool needs exposed to near term market prices." Then, under balancing objectives, under A, it says "maintain large spot power and short term market exposure." Are we prudent or are we large? Dailev: That’s not recommended objective, this is a comparison. All these tables in attachment A show the recommended objective in bold and for comparison proposes, the objectives that are different. We are just trying to show here .... Dawes: I got it. These were comparative purposes only. Daile2~: Great. Carlson: Any other questions? In that case, lets have a motion to approve. Bechtel: Mr. Chairman, I move that the UAC recommends that the City Council approve the three objectives and four guidelines for the gas utility long term plan. I guess that’s the end, we don’t need the second sentence. Carlson: Do we have a second? Fer~uson: I’ll second. Carlson: Any discussion? All in favor say aye. Ferguson [placing on the dais a fourth giant-size cup labeled "Double Big Gulp"]: Yes, this has gotten better as we’ve talked. Mr. Chairman, can I vote twice on this? Ulrich: I would sliggest that the video camera take a close up of Mr. Ferguson, so that it can record his nonverbal comments accurately. Draft 6/4/03 UAC Minutes Page 6 of 7 Carlson: So we have a program already designed for us! Dailev: Did you have to buy all those? Ferguson: No, it was a gift. Ulrich: I hope you enjoyed gulph~g the drills. Ferguson: Good Hetch Hetchy water. I vote aye. All: Aye. Carlson: Any opposed? Unanimously approved. Verygood job, thal~k you very much. Ulrich: Thank you. You can see fi’om the staff report the thoroughness that the group has spent putting this all together. And particular thanl<s to Karta. Carlson: Dexter, you had one more question. Dawes: One more thing I had written down and forgot to say but it is illustrative only, it goes with the "no long term contracts." What I had opined or suggested before my note says "Maintaha an opportunistic approach. If a good deal comes by, take it." Remember the WAPA contract of 1964, which was sort of average at the thlae, but we learned to love it at the end. I was unaware that SMUD had bought reserves but I thhak gas is going to get very scary here over the next ten or fifteen years. If we can buy into a gas field, I think we should look at very seriously. Beecham: To answer that, we are going to have to look at our policies in the city for purchasing commodities and length of time and quantity, to make sure we are fitting in with the rules that we have with the city. Or go and attempt to have those changed. Rosenbaum: Just one comment. I am disappointed that we chose the acronym .GULP for gas, when it seems to me more appropriate for water. But it does seem to work very well. I have to compliment the staff on coming up with something that we’ll always remember. I an~ waiting for the next project that we have. And Ma. Dawes is still asking for a name for our Fiber to the Home Project. So maybe in the next month the staff can come up with some ~ice names for that project. Ulrich: We will put tremendous effort and intellectual thought, and try to meet your expectations. Dawes: As you may have heard, I have a suggestion. Ulrich: Yes, we do recall and it is in the record. Since you have not copyrighted it, we may be willing to steal it very quickly. (END OF EXCERPT) Draft 6/4/03 UAC Minutes Page 7 of 7 ATTACHMENT B Draft 6/4/03 UAC Minutes Page I of 7 MEMORANDUM 1 TO:UTILITIES ADVISORY COMMISSION FROM:UTILITIES DEPARTMENT DATE: SUBJECT: JUNE 4, 2003 REQUEST FOR THE APPROVAL OF NATURAL GAS SUPPLY PORTFOLIO PLANNING AND MANAGEMENT OBJECTIVES AND GUIDELINES FOR THE GAS UTILITY LONG-TERM PLAN (GULP) REQUEST This report requests the Utilities Advisory Con~nission (UAC) recon~nends that the City Council approve tlnee Objectives and four Guidelines for the Gas Utility Long-Term Plan. Approval of the Objectives and Guidelines will guide staff in developing and managing the City’s Gas Utility Long-tema Plan (GULP). BACKGROUND In 2001 staff began the process of developing a Long-Term Electric Acquisition Plan (LEAP) as a response to the electric energy deficit that will occur when the Western contract expires in December 2004. Council approved LEAP objectives in November 2001 (CMR:425:01) and LEAP guidelines in October 2002 (CMR:398:02). In April, 2001 staff outlined for Council a gas commodity purchasing strategy (CMR: ! 96:01). Staff has now begun the process of updating that strategy and developing a plan similar to the LEAP for the gas utility. Like the LEAP, the Gas Utility Long-Term Plan (GULP) will be the vehicle by which the gas co~r~nodity portfolio will be managed consistently, transparently, and with input from the public and the Council. Several key differences exist between the electric and gas utilities and the process fo~ these plans. Unlike the electric plan, the need for a gas utility long-term plan is not signaled by a change in a current contract situation such as the Western contract changes. Nor is the gas utility impacted by the hydro availability uncertainty or the need to manage hydro dependent assets. However, due to the lack of long-term gas assets, the gas supply deficit is more ira_mediate than that for electric. Three main factors are driving the need for GULP: (1) a need to review and update the current commodity purchasing strategy with public input, (2) the possible need to commit to PG&E assets as part ofa PG&E banlonaptcy negotiation, and (3) the need to be prepared for possible new regulations imposing minimum asset holdings for core customers. In addition, development of a GULP addresses recormnendation #20 in the Assessment of Utility Risk Management Procedures by the City Auditor which reads, "CPAU should continue to regularly and actively (a) review the performance of the energy procurement strategy, (b) quantify the risk and cost consequences of alternatives, and (c) communicate the risks and costs of reconmaended revisions to the City Council." Commodity Purchasing Strategy The gas utility does not have any long-term supply assets and hence is inherently in deficit. The commodity purchasing plan for the pool load (pool load consists of residential, small commercial, and large conn:nercial customers who chose to give up direct access eligibility) is cun-ently driven by a <<laddering structure". The goal calls for 75% of the forecasted natural gas requirements for the pool be purchased for 0-12 months out, 50% for 12-24 months out, and 25% for 24-36 months out. This laddering strategy diversifies purchasing timeframes over a 36 month period at different forward-pricing points thereby avoiding the need to buy all supply requirements within a short-window of time and market prices. The following graph illustrates the cun’ent !addering strategy and the deficit the inherent deficit in the gas utility. This 3-year laddering strategy will be reexamined as part of the GULR Gas Supply Procurement Program for Pool Customers as of March 20, 2003 500,600 450,000 400,000 350,000 ~300,000 ~250,000 ~200,000 150,000 100,000 50,000 0 100% 02/03 PG&E Bankruptcy IfPG&E’s plan for reorganization is approved, many of PG&E’s assets will be regulated by the federal govermnent instead of the State of California. In such a reorganization, Palo Alto has colranitted, in a memorandum of understanding (MOU) with PG&E, to negotiate a Transportation and Storage Services Agreement (TSSA). The TSSA will outline pipeline capacity and storage reservations that will be available to Palo Alto outside of the normal process for auctioning those assets. GULP will outline which and how much or those assets Palo Alto will be willing to con~ait to acquire for the long tenn. Regulatory Pressure Palo Alto, a wholesale customer of PG&E with a core natural gas load, currently enjoys benefits of that status without any lninimum regulator7 requirements regarding pipeline capacity or storage holdings. There is a relatively strong movement among interested parties on the PG&E system to require customers such as Palo Alto to take on the responsibility of paying for some of those assets that are required to maintain a reliable PG&E system-wide natural gas supply. If such a future scenario arises, GULP will lay the foundation for making these commitments. In addition, the GULP will provide a platform for evaluating potential asset investment opportunities as they arise. The schedule of pieces of the plan that have been acted on or are planned for action by the UAC and/or City Council is displayed below. Approval of energy Risk Management Policies Draft GULP Final GULP Implementation ICouncil approval of risk management policies 2/20/2001 (CMR:130.01) Revised 10/01/02 (CMR:398.02) }To UAC - May 2603; To Council June 2093 ~To UAC - Summer 2003 iTo UAC/Council - Fall 2003 IWint&r2003 DISCUSSION Staff proposes the three following GULP Objectives to govern gas supply resource asset acquisition and energy efficiency strategies for the gas utility: Objective 1: Ensm:e low and stable gas supply rates for pool customers. Obj ective 2: Obj ective 3: Provide superior financial performance to customers and the City by managing the supply portfolio cost in a competitive manner compared to market cost and a retail supply rate advantage compared to PG&E. Balance environmental, rate, and cost impacts when considering energy efficiency investments. These objectives are consistent with the portfolio objectives approved for the electxic utility (CMR:425:01). To facilitate the development of specific reconamendations, staff has developed four GULP Guidelines based on the tl~’ee Objectives. Key themes found in these GULP Guidelines address diversification to minimize risk and stabilize rates, operational flexibility, and opportunities for energy efficiency. Guideline 1: Market Risk Management -Manage market risk by adopting a portfolio strategy for gas supply procurement by. A. Diversifying energy purchases for the pool ac~vss commitment date, delivery date, duration, suppliers, pricing terms & delivery points; B. Maintaining a prudent exposure to changing marketprices by leaving some f’action of the forecasted gas pool needs exposed to near-term market prices; C. Avoiding long term (> ] 0 years) j3xed-price commodity contracts. Guideline 2: Asset Acquisition and Management- Explore supply, pipeline, and storage acquisition options available to the City ~,¢hich may be assembled to yield reliable supply at fair and reasonable cost, talcing into consideration: A. Long-term supply cost for gas deliveries at PG&E Citygate; B. Operational needs including the need for daily balancing during Operational and Emergency Flow Orders; C. Existing and potential regulato~y mandates; D. Potential operational streamlining opportunities with other agencies; and E. City’s low cost of capital for asset acquisition. Guideline 3: Mana,gement of Regulatory and Legislative Matters -Serve as an effective voice to protect and enhance the City "s position in regulatory and legislative arenas by: A. ~rntervening in the regulato~v and legislative arenas to ensure that the City’s gas utility interests are p~vtected and enhanced, and B. Exploring potentiaIjoint action with other public agencies. Guideline 4: Gas Energy Efficiency Investments -Pursue cost-effective energy efficiency investments by: A. Providing expertise, education and incentives to support c ost-effective customer effciency improvements; B. Demonstrating new efficiency and load management alternatives; and 4 C. P~vviding rate assistance and efyqciency p~vgrams to low-income customers. Guidelines 1, 2 and 3 apply to Objectives 1 and 2 while Guideline 4 applies to Objective 3. For example, successful management of market price risk will result in stable rates for customers. Asset management will result in good financial perforrnance for the City. These objectives and guidelines are different from those employed by Pacific gas and Electa-ic Company (PG&E) and the City of Long Beach, the only other municipal gas utility in California. B oth purchase g as o n a m ore s hort-term basis. Their asset holdings are somewhat different from each other. In contrast to Palo Alto, PG&E adopts a more short-terna purchasing strategy and has regulatory approval to pass on actual purchase cost via retail rates that change on a monthly basis. Rate stabilization is not a PG&E objective. PG&E does hold interstate and intrastate pipeline capacity and storage capacity for its core customers. Long Beach also purchases gas based on a short-tema index. Long Beach has an objective of matching the price paid for gas by its nearest IOU, Southern California Gas Company (SOCalGas). Therefore, gas is purchased based on an index that mimics the SoCalGas purchases. Long Beach does use some risk management tools such as gas priced with a ceiling and floor price, but buys mostly on a monthly index. Long Beach does not hold any interstate pipeline capacity but does own storage capacity. POLICY IMPLICATIONS AND UTILITIES STRATEGIC PLAN These three proposed GULP Objectives and Guidelines do not represent any change to existing City policies. The Objectives and Guidelines conform to City’s Energy Risk Management Policies. The Guidelines support the Utilities Strategic Plan: 1. Strategy 2 - Preserve a supply cost advantage COlnpared to the market price; 2. Strategy 4 - Deliver products and services valued by our customers, and continue to build CPAU brand presence; 3. Strategy 6 - Maintain stable General Fund transfers, and maintain financial strength; and 4. Strategy 7 - Implement programs that improve the quality of the environment. The proposed GULP Guidelines further the City’s commitment to the Green Government Pledge by supporting the conservation of energy. RESOURCE IMPACT Implementation of the GULP Guidelines by itself does not have resource impacts. However, implementing the GULP may require re-allocation of current staffing resources since staff may need to manage more assets than it does at the present time. Specific recommendations resulting from application of the GULP Objectives and Guidelines will be brought to the UAC and Council as appropriate. ENVIRONMENTAL REVIEW Adopting the proposed guidelines Environmenta! Quality Act (CEQA). does not constitute a project under the California NEXT STEPS Upon UAC approval of the GULP objectives and guidelines, staff will seek Council approval of the Same in June or July 2003. An initial review of staff’s analysis will be presented to the UAC late summer with a final report and recommendation in the fall. ATTACHMENTS A:Sunnnary of Analysis and Options Considered in Developing the Gas Utility Long- term Plan (GULP) Guidelines PREPARED BY: REVIEWED BY: Kafla Dailey, Resource Planner ~.. ~.IRISH BALACttANDRAN . ~Assistant D~ector of Utilities, Resource 1V~¢agement KARL VAN ORSDOL Energy Risk Manager Administrative Services Department DEPARTMENT HEAD: JOH of Utilities 6 At~achment A Summ a_ry of Analysis and Opti0ns COnsidered in Developing the Gas Utility Long-term Plan (GULp) Guidelinesl .. Guideline 1: Market .Risk Management Manage market risk. by..adopting a por~fol{o strategy for gas supply procuremgnt by: . A." Div~.rsifying energy purchases for the pool across commiOnent date, de(ivery date, duration, suppliers, pricing terms & deliverypoints; B. Maintaining aprudent exposure to changing marketpr.ices by le~rving some fraction ¯ of the forecasted gas poo!.needg exposed to near-term marketprices; C. Avoiding long term (>10 years) j-~ed-price commodity contracts. Balancing: Objectives A. Maintai~i large spot (short-term) market exposure 13. Purchase all gas ,da long-term fixed-price ¯ resources (>10 y~ars) C. M.maage market risk by adopting porffo~~h’ategy for gas supply pr~(g’k~ment " Low & Stable Pool Rat~s +, stable, but may not be low Competiti*e-Rates ++ -, the !ong~rthe term, the great~ the chance ofdiverging from market rates Energy Efficiency ++ 5-(-) means the alternative helps achieve (hinders) the objectiye; quantity of+ (-).indicates to wh~it, extent ObjectiTe.is helped (hindered)-. ¯ bold i~dica~es the recommended guidelifie .. Unlikethe .electric utility, the gas utility has no long-term committed resources (Western Base Resource and the Calaveras hydroelectricplant have 20-30.year term commitments) Di~.6r~ifyin~: e~iergy purchases a~ recommended reduces market price risk and facilitates the ~aJk~enai~6d0f s~ible and competitive ~:ates. . On~ alternative is. to purchase-all needs on the short-term ("spot") energy markets. This wouId-achiev( the objectiv( of maintaining competitive rates, but wo.uld likely lead to volatile costs and, therefore, v.o!atile retail rates. Another aiternativeis to lock in- all ga~ needs a.t very long-term fJ_x.ed.-pric, es. Rates would be stable but. would not follow market pric.es. This could lead to low rates (if thelocked-in prices turned out to be lower than market prices) or uncompetitive high rates (if.the locked-in prices we{e higher than market prices). In addition, gas prices become less liquid past three Attachment ~ to five years..resulfing in a l~ge bid-ask spread. Mainta~g adequate market 9n.’ce-based resources to meet load is importaiat So Mat the..City. can maintai~ a. flexible portfolio wi. "th sufficient short-term resources so costs are ~ot very cliff&era from market cos~!~ at any timg. In a..ecordance win tSe commodity pricing policy, ~e GULP commoditypurchasing plan wil! apply to po01 c~.stomer needs,only. Gas for c~istomers with marke~ based rates (G3), fixed- term rate’customers (Gll), and custom contract cus.tomers (Gi2) will be purchase.d in acco{dance with pre-apprf~ed purchasing plans for those customers. Guideline 2: Asset Acquisition and Management-Exp]ore supply, pipeline, and storage acquisition options available to the City which may be. assembled to yield reliability of supply at fair and reasonable, cost, talcing into consideration: A, Long-term.supply cost for gas deliveries at.PGd~. Citygate; B. Operational needs including ~he need for daily balancing during Operational and Emergqncy Fl~W Orders;. C. Existing and potential.regulatory.mandates; -D. Potential. operational streamlining opportunitieg.with other, agencies; and " E.’ City’s tow cost of capital for asset "acquisition.. . ~ " " Balaneimg Objectives A. Hold no pipeline or storage asset fights B. Purchase all gas at the wellhead mad transpoff 100% of gas ~aeeds with City-owned pipelin.e assets.¯ Hold storage to m.eet all winter pealdn~ loads. - Low &-Stable Pool Rates¯ +, stable, but may not be low Competitive Rates ++ -, the io.nger th~ term of commitment, the greater ¯ e chance,of divergSag from markdt rates; ~redit risk is .higher Energy ¯ Efficiency C. Assemble a mix of pipeline and storage + ++ + ". options, taking into consideratiim Virthal pipeline eap:~Ity:,~itifl:~t~rage + (-) me~s the alternative helps achieve (l~ders.) the objective; quantity of+ (-) indicates to ¯what ektent Objective is helped (kindered) bold indicates the recommended gui~deline ..- . Currently the City holds pipeline capaci.ty equivalent to the year-round base load requirement- and has a contradt for winter swing gag needs in the form of’qcirtudl storage." That is, the City I~ays areservation fee for the right to buy or sell gas a~ daily market prices. : aitemative is to hold no assets, real or virtual,and rely on the PG~E Citygate index for 2 Attachment A !00%.ofga~- needs~ The C~ty’s Current allocation ofRedw.ood pipelia..~ capacity is at below mazket rates, so rejecting that capacity would not b6 in the be~t interest " of the Cit~. Ac.quiring the n’ghts io other assets may prove to further.the o’bj ective~ ofiow.and stable-rates and, c0"mpetitiveness. In addition, regulatory mandates may require the City to tmld pipeline and storage assets -as. a customer with core load. Ano.~e~ ~.t~rna,.tive?,w..oMd..be: tR..buy all gas. at me-wellhead: mad hol.dI enough pipeline and ¯ st0iage:c~paci.ty to.meet 100% of the City gas iequirement onevery-@ of the year. With an average slimmerusage of 6,000 MMBtu per day and a peak winter day usage of-30,000 ~tn, such a commitifi.e~i[ would leave-large.amounts 0. fpip~line c~pacity nnderuti.lize-d for much of the y~. .Ih ~d~ti6n, Costs fo~ tha[:caPaCi.tSr Would.be)0cked in for ldng terms -(proba)ly.l.0 years 0i m0~e) this may teadto total costs above or 5elow the markei. The. GULP .process will..i~.clude evaluating pipeline capacity alternatives and storage aRernatives that may be incorporated into a total gas portfoliomanagement package. - Virtual .pipeline and storage Capacity will also be evaluated for cost effectiveness and op.eratignal fiexibiii~y.. " Pd~iat0iy mailda[es m.ay b~-impgsed that wo~ld require P.alo .Alto to hold some amount of thefie assets. Severalr~uiat0ry~denarios will be developed with a defermined response to each possibility. , . .. When managin~sl~ch "a~sets~ S’ome:sharin~ with- otheragei~cies may prove viaJsl.e..These relationships will be expi6r~d: aspart.of the GULP. G.uideline 3: Maiiag~m~~"~f Rdguiatory M-atte~s - Serve as an ~ffective :~oice toproCect a"nd knhdnce.the C@’~-pbSitz’oi~ in iegulat.o~y and legisl.at!ve ari)~as by: A.Intervening in the. regu~ator~ and legisla, tive arenas-to ensure that the City’s gas utility interestsare prStecieda~d enh.anced;" and B.Exp loring potestia’¢ j~ii~t"action with orbed’public agenciesi Balancing ObjectiVes Low & Stable P0ol Rates. Competitive A..Stop spending funds on regulatorY advocacy -- B. Protect rights via r.eguilatory areni~++ p ai~cicip afion- . . + (-) means the alternative hel.ps achieve (hinders) the objective; quantityof+ (-) indicates to what extent Objeciive is helped. Cnindered) bold in .dicates the recomlnended guideline. " It is reco.mmended to Sctivelyparticipate in the regulatory arena, relying, on consultant heip,~ to advance the City’s interests. Th~se activities may incllldejoin.t action w!th other similarly positioned agencies. Guiddin~ ii: G~is Ener:~., E~3_cienc ,V In_n2v~ti+__i ~n_tS - Pz)rsz~.ec.ost-effec~;een~?&~Tcie,n@ ¯ inv.estments by:. X. providing ex,pe’rffse, education and incentives to support cost-effective customer effi. ciency im,provements; B. D~in:ongtrciting riew efficiency and load mahagement alternatives; aizd ’ C. PrOviding rate assistance and efficiency_programs to low-income customers. :Balancing Objectives Lo~ & stable Competitive ¯ Po6I iLa-tes Rates ++ A. Spend n’d supp~ementaI funds on energy effieiency " B. Fup.d. 0st-effective energy efficiency programs Ene.rgy Effiei~ney + (-) m~~:al~’~ative helps achieve (hinders) the objective; quantity of+ (-) indi.’cates to wh’af ~tenf Objective is helped (hindered)" bold indic,ate~s. ~he recommended guideline " Unlike the eleciric Utility, there is no State requi2rement for Public Benefits programs. In: 1996, Cofin.cil approved-- a. gas fund revenue alloc~ation of 1%.. for effici.ency prograflaS (CM~:209:§@..This funding level has b~en adequa.te, and a vm-iety of residential and ¯ co~rc}al-igas efficiency p.rograms have been offered. Currently~ several, commercial progr-~-are in effect incIuding boiler and water heater replacement rebates. A was..hing machine"rebate forreSidential .cus.tomers is also underway, -- SulSPteme~talfu~ding will berecommended .when.high value opportunities present themselves to offset higfiacost gas supply with less expensive conservation or peak shaving stra.t.e s. seen during the 2000-0 energy crisis: " 4 ATTACHMENT B Finance Committee Meeting July15, 2003 Approval of Natural Gas Supply Portfolio Planning and Management Objectives and Guidelines for the Gas Utility Long-term Plan (GULP) Morton: The next item on the agenda is the request for approval of the Natural Gas Supply Portfolio Planning and Management Objectives and Guidelines for the Gas Utility Long-term Plan (GULP). Ulrich: We’ll have a staff presentation. Karla’s passing that out. This has similarity to the Electric Plan in that this is our long-term plan for gas and the guiding principles on how we go about doing it. And we have some recommendations here and this also has had review by the Utilities Advisory Commission and we’re requesting that you approve our recommendations. Karla Dailey is a Resource Planner, the smartest person we have on gas. Dailey: Thanks, nay presentation is not nearly as long as the one you just waded through so just as an introduction, we’re going through a similar process for the gas side of our business as we have been with the electric, but we’re at the beginning steps of that. So what I’m bringing to you tonight are the objectives and guidelines for the Gas Long-term Plan which you looked at a long time ago for the LEAP Plan. I’d like to start out with just a little bit of background information for you. This is a graph of natural gas wholesale prices at a certain delivery point. This happens to be at the PG&E citygate which is just a point on PG&E’s system where gas is bought and sold and it’s the point where Palo Alto happens to buy and sell most of the gas for our customers. These are monthly prices. If you looked at a graph of daily prices, it would be much more extreme than this, but this.just Nves you an idea of where prices have been over the past several years the big spike being the energy crisis, obviously, and where we are today. Looking forward, the pink line in the middle is where we think prices will be based on the forward curve or what gas is selling for for those months. The red line and blue line represent a 90 percentile range of where prices could be. So, still a lot of uncertainty in gas prices looking forward. This is the message that this is trying to convey. Beecham: Can you tell us then why prices are so variable looking into the future? Dailey: The main problem for gas right now is that existing production has declined more rapidly than projections for that production were saying several years ago. In the meantime, new wells are not producing as much as wells that were drilled several years ago were producing. Demand has come off quite a bit since the energy crisis, high gas prices drove companies out of the country out of business so there’s been a lot of shaving of demand that’s happened already. So if you assume that demand doesn’t have much farther to go down and that these supplies are tight, there’s not a lot of wiggle room when something goes wrong. So if it’s a very cold winter or if there’s a big hurricane or something of that nature, that will have a much more dramatic impact on the price of gas than if there’s lot of supplies sitting out there in a bubble that can kind of buffer that a bit. Kishimoto: So there’s not huge storage through that (inaudible)? Dailey: Well, there is storage and we’ve been at an all-time low nationwide as far as how that storage is filled. There have been actually huge injections over the past six weeks that have kind of brought us out of the scariest looking of those pictures that we were seeing in the springtime. But we’re still quite low and that storage will probably for the most part get filled up by the time winter comes along. Utilities are mandated to fill their storage in most states so... Kishimoto: Storage represents like one month (inaudible)? Dailey: That’s probably close. I don’t have the exact number off the top of my head, but the main problem is just production is just not keeping up. There are lots of rigs out drilling, but we’re just not getting ahead of demand. We’re barely able to keep up, and when things are that close and folks are drilling as much as they can, if there’s a big problem, it will take a long time to recover from that. It will cause a lot of volatility in the market in the meantime. One of the things that Girish talked about long term is the idea of liquefied natural gas and if prices stay high and if prices stay volatile, that’s an incentive to suppliers to build liquefied natural gas facilities and figure out ways to get that supply here. But that’s probably eight years away. That’s a long time away. A lot of experts will say it’ll never happen in California, that you will never see an LNG terminal in California. Beecham: Because of?. Dailey:: Environmental reasons. The most likely places are Baja which may have an impact on the California market, Louisiana, east coast. There are already some in Louisiana and on the east coast. Those are likely places for more. Nevertheless, even if they are in Louisiana or Baja, that will alleviate some of the nation’s problems. But, short term .... Kishimoto: What are the environmental (inaudible)? Dailey: There wilt be big ships coming in. There’s a worry of explosion although... Ulrich: These things are stored very much like a big thermos bottle because they’re stored at a very low temperature in the liquid form. Kishimoto: So basic (inaudible) Ulrich: So you can put a lot more gas, about 600 times... 2 Beecham: I think it’s primarily concern for explosion, that kind of a risk factor. Some of these (inaudible) in terms of impact on the environment (inaudible) but anyone who might want to live around it would be concerned about explosion potential, not that there’s much record of it happening but the potential is still there. Dailey: A leak which translates to explos.ion. Freeman: But it’s liquid. Ulrich: It converts... Dailey: It has to be very, very cold. Freeman: Okay, got it. Dailey: This is just a quick look at commodity costs for the past few years, and, again, it’s really just to give you a sense of the magnitude. They have been more or less steadily climbing from 1998 up to the $22 million during the energy crisis. Last year we spent about $14.7 million on gas and our expected (inaudible) 03-04 $17 million, recognizing that they had exposure so it could be as low as $14 million and as high as $21 million. This is just an overview of how our customers are split up, and in the report I talked a little bit about pool vs. non-pool. I’ll try to explain this a little better. The non-pool are large customers who have chosen to take their gas purchasing strategy into their own hands. They can basically be divided into two categories, those who want to be exposed to the market and we just buy gas for them each month and have that cost (inaudible) and those who want to lock in a price. They choose the time and whatever the price is at that moment is what we look in the rate at. We buy the gas simultaneously and they have that gas at that price for whichever term they choose (inaudible). So, that is the non-pool. The pool is everybody that we in Resource Management are making gas purchasing decisions on their behalf. At this point, that class of customers is a pool completely made up residential and small commercial customers. A large customer can choose to become a part of the pool but we don’t have any customers who are doing that right now. They are all on a (inaudible) market rate or fixed term rate, but they do have the option to become part of the pool. Most customers seem to like controlling their (inaudible). The pool, while it may be stable, that rate is subject to change. (Inaudible) It does not normally change often but we calmot tell a customer between now and the next budget cycle that the rate will change. We can’t do that. (Inaudible) For the pool we have a laddering strategy and that is that we buy approximately - it’s a 3-year time period, looking forward, it rolls forward all the time, and we buy approximately 75% of their expected needs (inaudible) price for the nearest 12 months, 50% for the second 12 months out, 25% for the third 12 months out, then 25% (inaudible). But we will buy blocks to keep it in that basic pattern. Just a (inaudible) as of March 20. The blue line shows you what our forecast is for the of the pool and the pink line is how much we purchased for the pool that month. Why are we doing the Gas Long-term Plan? Few reasons. One is that I need to review that purchasing strategy and make sure that it makes sense (inaudible) for our pool customers. That strategy was developed sort of two-thirds into the energy crisis and it did come to you as an information item (inaudible). The second reason has to do with PG&E bankruptcy negotiation (inaudible). There is a scenario whereby a reorganized PG&E would make a deal with Palo Alto to let us buy some capacity of some of their assets prior to (inaudible). This is a deal that we made with them a long time ago througsh a Memorandum of Agreement but they promised they would work with us to let us get first crack (inaudible) storage asset. Under a certain scenario (inaudible). So if that were to come to fruition, we would have a strong platform for (inaudible) deciding which of those commitments we would want to make with them (inaudible). The third reason is right now as a wholesale customer of PG&E, we have a lot of core privileges or privileges that as a customer with residential customers behind our meter, we will never have gas taken away from those customers. An industrial customer, a food processor, electric generator do not have the same privileges. (Inaudible) yet we are not required to (inaudible). There is a small but strong movement among PG&E interested parties that would be interested in having (inaudible) requirements for customers like Palo Alto. So if there were new regulations (inaudible), we want to know ahead of time what those assets would be that would be (inaudible) and not have to react as they come (inaudible) more proactive. The fourth is as opportunities arise, have a good, strong platform for evaluating those (inaudible). Kishimoto: (Inaudible) storage assets (inaudible) what kind of storage assets? Dailey: Underground storage, PG&E has some storage, and there are a few privately- owned storage companies in California. We have three objectives we are bringing to you tonight. These are not unlike the objectives that you saw for the electric side. The first one is to ensure low and stable supply rates for the pool customers. The second is to provide superior financial performance to customers in the City. And the third is to balance the environmental rate and cost impact when we are when we are looking at emergency efficiency investments. Freeman: I have a question on No. 2. Why are we only comparing it to PG&E? I know there are only (inaudible). Could we just (inaudible)? Ulrich: Well, it’s a good benchmark because everybody around here is (inaudible). Freeman: Okay. Dailey: We have four guidelines. The first is to manage market risk and we want to do that is by diversifying our purchases for the pool across commitment date, duration, suppliers, delivery points. We do want to maintain a prudent exposure to the market and we want to avoid long-term commodity contract. This doesn’t mean we wouldn’t necessarily get into a long-term storage agreement, but the main (inaudible) out too far in the commodity market. There are just not enough people buying and selling (inaudible). (Inaudible) in the 10-year range. The second guideline addresses asset acquisition and management. We are looking at supply, physical gas reserves in the ground, pipeline (inaudible) and will take into account the cost for delivering the gas where we need to deliver it, operational needs, regulatory mandates and look at potentially (inaudible) oppommities with other agencies and taking into account our low cost of (inaudible). The third guideline has to do with regulatory and legislative matters and it’s really no different from what we do right now. (Inaudible) to serve as an effective voice to protect the City’s position by intervening when it makes sense and also exploring potential joint action with other agencies. This has been fairly difficult on the gas side because we are (inaudible). There are lots of other munis on the electric side, but we don’t always have the same conditions or interests that they do. So we are always on the lookout for that. It has been pretty hard to achieve. The fourth guideline addresses energy efficiency. We will explore cost-effective programs by providing expertise, education, demonstrations, and (inaudible). The schedule - the energy risk management policies (inaudible) objectives and guidelines were approved back in October of 2002. The UAC approved unanimously the objectives and guidelines at the June meeting, and we are taking to Council on August 4. We would like to have sort of draft analysis back to the UAC in the summer and then reconlmendations would come back to you in the fall. In summary, our recommendation is that City Council approve the three objectives and four guidelines for the Gas Utility Long-term Plan. Morton: (inaudible). We entertain a motion (inaudible) and then discuss it. Kishimoto: (Makes a motion). Morton: I have a motion from Council Member Kishimoto to approve recommendation. Is there a second? Beecham: I second it. Morton: Vice Mayor Beecham (inaudible). Council Member Kishimoto, would you like to be~n the discussion? Kishimoto: (Inaudible) nothing to compare .... Ulrich: Are you asking what our philosophy is? Kishimoto: What are the major tradeoffs? Ulrich: (Inaudible) basically following the market and doing the same thing with PG&E. As a PG&E customer, you can’t tell from month to month what your actual costs will be. We believe our philosophy is much different than everyone, stable rates for our customers, and we followed that when we used our reserves to reduce the impact of rate shock when the gas prices went up. That is our philosophy here. That is why we purchase the gas in the laddering (inaudible). Not the best price, but... Yeats: The key point I want to make is that it doesn’t mean we’ll always be, as Girish said before, in the money. We may actually be paying more than the market price because our goal is to stabilize. Beecham: Statistically, our average price, long-term average, will be slightly higher than if’it floated all the time, but the benefit of the slightly higher price is you know what it’s going to be (inaudible) basis. Kishimoto: I guess the other question, why is (inaudible)? Ulrich: You have to go back to the history of time. I can tell you with respect to PG&E, they bought up all the gas utilities throughout California (inaudible). When they got to Palo Alto, they found that (inaudible) Kishimoto: Okay. (Inaudible). It’s not because of liability? Dailey: No, there are lots and lots of little municipal utilities all over the country. The Southeast is hugely small municipal utilities. California (inaudible). Ulrich: There was not much gas in California until the early 20’s because prior to that, they were making gas in California by burning coal (inaudible) and then there was gas found in California. Then the expansion took place going to the southwest and up to Canada. It is very difficult for a municipal utility to get into that kind ofbusiness. We would not be able to do that easily without the investments that were made 10 years ago. Morton: that means we are dependent on PG&E for transmission. They own the pipelines (inaudible). Ulrich: That’s why it is very important (inaudible) in negotiating (inaudible) continue a relationship(inaudible). Kishimoto: (Inaudible) we are agreeing to go out and acquire, explore it and go to Council (inaudible). Freeman: I was reading the minutes and Dexter Dawes - and I came to the same opinion - (inaudible) and you made a very blanket statement, "We don’t want any long- term contract, certainly not after 10 years." He said, "Why don’t we change it to maintain an opportunistic approach?" Suppose we had the lowest gas prices since dirt happened and we can buy it for 10 years? Would these guidelines that we have now prevent us from doing that? 6 Ulrich: I’ll give you the Director’s answer on this. Every week I ask Girish if these are the absolute lowest prices that we’re going to have and he always smiles and says "I can’t guarantee that." Nobody can. We used to think that if we get down to about $2, maybe $3, we thought it was really a good deal. We would love to have all that cash (inaudible). It’s impossible to know what that is going to be. Freeman: Well, you have a historical perspective. So, if all of a sudden gas became $2 now, would you feel constrained by the 10-year limitation? Ulrich: Okay. We will be back (inaudible). Freeman: I thought his comments were good, "maintain an opportunistic approach," but but there was no answer to that. Ulrich: The reality of it is that we are (inaudible) rest of the market. There are going to be risks associated with it (inaudible). Morton: (Takes vote - all ayes) Thank you for your presentation. Thank you, John.