HomeMy WebLinkAbout2001-02-20 City CouncilCity of Palo Alto
City Manager’s Report
TO:HONORABLE CITY COUNCIL 3
FROM:CITY MANAGER FROM: UTILITIES
ATTENTION: FINANCE COMMITTEE
DATE:FEBRUARY 20, 2001 CMR:103:01
TITLE:RISK MANAGEMENT STRATEGIES: APPROVAL OF
ENERGY RISK MANAGEMENT POLICIES
RECOMMENDATION
The Utilities Advisory Commission and staff recommend that the Council approves the
proposed energy riskmanagement policies.
BACKGROUND
Deregulation in the gas and electric industries has resulted in an increase in risk for the City
of Palo Alto Utilities Department (CPAU). At its January 11, 1999 meeting, Council
directed staff to respond to issues regarding Council oversight of Electric and Gas Utilities’
activities in the new competitive environment.
Prior to adoption of the Utilities Strategic Plan on November 13, 2000 (CMR:418:00), staff
proceeded to prudently monitor and mitigate, risks. On November 19, 1999, the City
Manager approved the recommendation of the staff Risk Oversight Committee, comprised
of the Director of Utilities, the Director of Administrative Services, and the Assistant City
Manager, to approve the Interim Risk Management Policies and Procedures (IRMP&P).
Since then, staff has been operating under the IRMP&P. Besides the energy risk
management policies, the IRMP&P includes other elements related to the management of the
wholesale supply portfolios of the gas and electric utilities such as: 1.) designation of
personnel with transaction authority; 2.) supply portfolio management strategies and
CMR:103:01 Page 1 of 4
procedures; 3.) personnel authorized to make transactions; 4.) functional responsibilities
of all personnel involved in managing the supply portfolios; and 5.) forms used to track
transactions.
DISCUSSION
The IRMP&P provides a backbone of organizational structure, management policies, general
strategies and limits for transactions of energy .commodities. It clarifies the definitions,
objectives, and .procedures of the energy risk management program so that each party
involved in any risk management activity understands his or her responsibilities. As such,
the IRMP&P sets out transaction limits, internal controls, allowable and not allowable
~ransacti0ns, transaction procedures, performance measurement, and record keeping.
The IRMP&P formed the basis for the proposed energy risk management policies and
include the broad, overarching policies that guide the development of a comprehensive
energy risk management program. These policies and procedures formalize existing practice
and take a very conservative approach to managing risks. The implementation of the
program is the responsibility of the Director of Utilities.
The proposed energy risk management policies are summarized below:
o
Business Obi6ctive - states that the goal of the energy risk management program is
to manage the supply portfolios for the benefit of Palo Alto’s retail customers. This
will be achieved by reducing exposure to volatile market energy prices, optimizing
contracts and other assets, and offering commodity products desired by customers.
Anti-Speculation - states that speculation (defined as putting CPAU in a more risky
position in an effort to make money) is prohibited.
Authority and Responsibility - states that the City Manager has the responsibility to
assure that the Utilities Department is acting prudently in mitigating risks that are
inherent in operating in a competitive environment.
Separation of Duties to Preserve the Integrity of the Market Transaction Process -
requires that another individual monitor the individuals who enter into transactions.
OperationalPolicy- states who has responsibility for transactions to purchase or sell
energy within a month or a day for terms of less than a month versus transactions to
purchase or sell energy ahead of each month for terms of at least a month.
Counterparty Credit Policy - ensures that CPAU seeks credit-worthy counterparties
for its transactions and manages credit risk for its supply portfolios.
Performance Reporting - requires CPAU to report to the City Council and the UAC
on the performance of risk management activities.
CMR:103:01 Page 2 of 4
CPAU already operates under the proposed energy risk management policies 1 - 6. Policy
#7 (Performance Reporting) will be implemented beginning in July 2001.
Although no use of financial instruments is allowed in the proposed energy risk management
policies, staff intends to propose their use at the discretion of the Director of Utilities in order
to enhance the efficiency with which CPAU purchases commodities in the wholesale
markets. Staff will return to the UAC in February 2001 and to the Council in March or April
2001 with a recommendation on the use of financial instruments for hedging energy price
risk.
BOARD/COMMISSION REVIEW AND RECOMMENDATION
On December 6, 2000, the Utilities Advisory Commission considered staff’s proposed risk
management policies. The UAC supported the proposed policies and moved to add one more
requiring CPAU to report the performance of risk management activities to the City Council
and the UAC. Staff has included that additional policy in the proposed policies. After a
discussion about the recent volatility in gas and electric market prices, the UAC
recommended that Council approve the proposed risk management policies as amended.
The UAC also questioned why CPAU could not at this time use financial instruments to
hedge against market price increases. Staff advised that it will return to the UAC and
Council with a proposal to use financial instruments to hedge risk.
RESOURCE IMPACT
Approval of the proposed energy risk management policies will enable Utilities to continue
to manage the risks inherent in conducting business, thus mitigating potential negative fiscal
impacts.
POLICY IMPLICATIONS
The proposed energy risk management policies are consistent with the Utilities Strategic Plan
and with current CPAU supply purchasing practice.
ENVIRONMENTAL REVIEW
Approval of the proposed energy risk management policies does not constitute a project
under the California Environmental Quality Act and, therefore, is exempt from the
environmental assessment requirement.
CMR:103:01 Page 3 of 4
ATTACHMENT
A:
B:
C:
Risk Management Policies and Procedures
December 6, 200 report to the UAC: Risk Management Strategies
Minutes from the December 6, 2000 UAC meeting
PREPARED BY:
DEPARTMENT HEAD APPROVAL:
~ffectorUoLfl~tiCl~es
CITY MANAGER APPROVAL:~SON
Assistant City Manager
CMR: 103:01 Page 4 of 4
ATTACHMENT A
Risk Management Policies and Procedures
Risk Management Policies and Procedures
General Attitude Towards Risk
The City of Palo Alto Utilities (CPAU) recognizes that certain risks are inherent in the
deregulated energy business. CPAU will manage risk by limiting its activities to those in which
CPAU has a particular expertise and that arerelated to its normal business operations. Because
of the volatility inherent to the markets CPAU participates in, particular attention will be paid to
volatility. CPAU will conduct all business activities within approved policies and procedures.
The attitude that individual CPAU employees have toward risk will be consistent with CPAU’s
risk philosophy.
The CPAU management is expected to manage business risks at acceptable levels. Employees
may not engage in activities that expose the City to risk beyond acceptable levels. Employees
are expected to fully understand the extent to which their decisions and actions may expose the
City to risk. Activities that are not related to the normal business activities of CPAU and have.
the effect or potential of increasing risk shall be avoided.
The basic premise underlying CPAU’s risk management attitude is that no activities related to
energy purchase and sales should unnecessarily expose the City to ~xcessive risks or the
possibility of large financial losses in relation to the size of the electricity and gas reserve funds.
Reserve balances maintained by the gas and electric utilities also provide financial liquidity and
¯ flexibility in entering into other shorter term contracts and purchases of energy in the spot and
forward market as needed to meet the projected load. Maintaining the safety of these reserve
funds is a matter of high priority for the CPAU and the City.
Energy Risk Management Program Policies
CPAU’s basic Energy Risk Management Program policies are described below..
1.Business Objective
The primary business objective in developing and implementing an Energy, Risk Management
Program is to benefitPalo Alto’s retail customers. Wholesale transactions are effected to
maximize the value of assets for the benefit of Palo Alto’s retail customers. CPAU will take
actions to: (a) reduce exposure to potential adverse energy price movements; (b) enhance
revenue by taking advantage of flexibility inherent in CPAU contracts and resources; and (c)
enhance revenues by offering competitively priced commodity products that address customer
needs.
2. Anti-Speculation
Speculative buying and selling of energy products is prohibited. Speculation is defined as
buying energy not needed for meeting load or selling energy that is not owned. In no event
Risk Management Policies and Procedures
should transactions be entered into to speculate on market conditions.
3.Authority and Responsibility
After the City Council has approved these risk management policies, the City Manager will
assure that the Utilities Department is acting prudently in mitigating risks that are inherent in
operating in a competitive environment. The Director of Utilities is responsible to develop and
implement procedures consistent with the risk management policies
4. Separation of Duties to Preserve the Integrity of the Market Transaction Process
The person who makes an approved transaction must not be the same person who confirms the
transaction or the same person who monitors and reports on performance of that transaction.
5. Operational Policy
CPAU will be responsible for all electric and gas transactions for a month before the month
begins. After the beginning of the month, the Northern California Power Agency (NCPA) will
have responsibility for electric transactions and CPAU’s gas supplier/operator (currently, Texas
Utilities) will have responsibility for gas transactions that are completed on CPAU’s behalf.
6. Counterparty Credit Policy
As a policy, CPAU will attempt to minimize counterparty credit risk by: 1) engaging only with
counterparties deemed to be creditworthy; 2) diversifying counterparty risk through the use of
multiple counterparties, when appropriate; 3) limiting the size and type of transactions allowed
per counterparty; and 4) not knowingly participating in sleeve transactions (i.e. acting as a
middleman to facilitate a trade between two parties who do not have credit with each other).
7. Performance Reporting
CPAU will develop parameters to measure the performance of risk management activities and
will report results periodically to the City Council and the Utilities Advisory Commission.
2
ATTACHMENT B
TO:Utilities Advisory Commission
FROM:Utilities Department
DATE:December 6, 2000
SUBJECT: Risk Management Policies
REQUEST
This report requests the UAC recommend the City Council approve the risk management
policies described in and attached to thismemoranduml
BACKGROUND
Deregulation in the gas and electric industries has resulted in an increase in risk for the
City of Palo Alto Utilities Department (CPAU). At its January 11, 1999 meeting, the
Council raised concerns regarding potential risk management activities and directed staff
and the City Attorney to respond to issues regarding Council oversight of Electric and
Gas Utilities activities in the new competitive environment.
In Spring 1999, staff retained the services of Deloitte and Touche, a businessconsulting
firm, to further assist in the development and implementation of an energy risk
management program. Based on its evaluation, Deloitte and Touche recommended that
CPAU take a comprehensive approach to respond to the competitive environment. To do
this, the consultant recommended that CPAU define its strategic direction and develop an
energy risk management program to support that direction. Now that the Utilities
Strategic Plan has been adopted (CMR:418:00), it is now time to return to the Council
with the overarching risk management policies.
DISCUSSION
As discussed in the Utilities Strategic Plan, risk management is key to the financial
management of Utilities. The underlying philosophy of the Utilities Strategic Plan is to
provide superior service to the City and Utilities customers. This goal is the driver
behind each proposed risk management policy.
Prior to adoption of the Utilities Strategic Plan, staff proceeded to prudently monitor and
mitigate risks. On November 19, 1999, City Manager approved the recommendation of
the Risk Oversight Committee to approve the Interim Risk Management Policies and
Procedures (!RMP&P). Since then, staff has been operating under the IRMP&P. The
IRMP&P related to the management of the wholesale supply portfolios of the gas and
electric utilities. The following elements are included in the IRMP&P:
¯General attitude towards risk
¯Energy risk management program policies
¯Counterparty credit policy
¯ _ Transaction authority
¯Supply portfolio management strategy
¯Supply risk management procedures
¯Authorized gas and electric traders
¯Functional responsibilities
¯Transaction tracking forms
The IRMP&P formed the basis for the attached proposed risk management policies that
are recommended for adoption by the City Council. The attached risk management
policies include the broad, overarching policies that guide the development of a
comprehensive energy risk management program.. These policies and procedures
formalize existing practice and take a very coriservative approach to managing risks. The
implementation of the program is the responsibility of the Director of Utilities.
Although no use of financial instruments is allowed in the interim policies and
procedures, staff intends to proposes their use at the discretion of the Utilities Director in
order to enhance the efficiency with which CPAU purchases commodities in the
wholesale markets. Staff will return to the UAC in January 2001 with a recommendation.
on the use of financial instruments
ATTACIIMENT
Proposed Risk Management Policies ¯
PREPARED BY: Jane Ratchye, Senior Resource Planner
REVIEWED BY:Girish Balachandran, Supply Resource Group Manager
DEPARTMENT I~AD APPROVAL:
[CH
of Utilities
ATTACHMENT C
City of Palo Alto
Utilities Advisory
AGENDA
Commission
Wednesday, December 6, 2000
City Council Chambers
MINUTES
CALL TO ORDER
ROLL CALL
ASSISTANT DIRECTOR OF UTILITIES REPORT
UNFINISHED BUSINESS
WATER QUARTERLY REPORT
2
2
2
2
2
APPROVAL OF 2000 URBAN WATER MANAGEMENT PLAN AND WATER SHORTAGE
CONTINGENCY PLAN
RISK MANAGEMENT UPDATE
ALTERNATIVE EMERGENCY WATER SUPPLY SOLUTIONS STUDY
NORTHERN CALIFORNIA POWER AGENCY REPORT
BAY AREA WATER USERS ASSOCIATION REPORT
TRANSMISSION AGENCY OF NORTHERN CALIFORNIA REPORT
ADJOURNMENT
11
18
22
23
25
25
Utilities Advisory Commission Minutes 12/06/00 Page 1 of 26
CALL TO ORDER
Chairman Ferguson called to order the meeting of the Utilities
Wednesday, December 6, 2000 at 7:30 p.m. in the City Council
Avenue, Palo Alto, California.
Advisory Commission on
Chambers, 250 Hamilton
ROLL CALL
PRESENT: Commissioners Richard Ferguson, George Bechtel, Dexter Dawes, Dick
Rosenbaum and Richard Carlson
Ferguson: If there is there a motion - any comments or Conversation, all those in favor - Aye -
passes 4 to 0 - Agenda ’ review and revisions. Randy would you like to change the order of
anything here or are we pretty much set up to go as planned.
Baldschun: I think we can go as planned.
Ferguson: Commissioners - Okay
ASSISTANT DIRECTOR OF UTILITIES REPORT
Ferguson: We have a short Director of Utilities Report since we’ve had a flurry of Stage 2 alerts
here. Randy, would you like to give us a quick news recap?
Baldschun: Well it’s been an interesting week. As you are all aware headlines are in all the
papers. California has been experiencing some supply shortages, for a variety of reasons, not the
least of which is a number of generations, and facilities are down for a scheduled maintenance at
the time when the demand is increasing in the evening hours so we’ve asked our customers to
delay their holiday lighting until 7:00 p.m., and that messages have gone out to the media, and it
will be going out in the Utilities Community Announcement Page. As far as today and yesterday
goes we are on Stage 2 status. We have avoided a Stage 3. We do not have any rotating outages
in Palo Alto, and we hope that the outlook for the rest of the week, due to the forecast a cooler
weather is still up, it’s a tight situation.
UNFINISHED BUSINESS
Ferguson: Thank you very much. Our next item of business is actually of no unfinished business
so we will proceed to the new items on tonight’s agenda, the Water Quarterly Report, and let me
just announce for the record that Commissioner Carlson has joined us. Is there any presentation
on the quarterly Report?
WATER QUARTERLY REPORT
Baldschun: We don’t have a presentation. Jane Ratchye is here; she is the lead on this report.
We have other staff in the audience that can answer questions, but I would like to introduce
Jeanny Rozzi, who is going to be taking minutes tonight. This is her first evening here, and she
is the Staff Secretary in the Information Technology Department. So welcome Jeanny and thank
you. Welcome. Jane is here to answer questions
Utilities Advisory Commission 11-01-00 Page 2
Bechtel: Mr. Chairman I have a couple of questions. On page two, the demand side’-
management was interested in the collaboration with Oakridge National Laboratory and use
something called the Hot Water Demand System and it is probably m9re my intellectual
curiosity, but I’ve wondered about this cold water flowing down kitchen sinks being slightly
contaminated then being recirculated. So I was wondering is there something I am missing here
in this concept.
Auzenne: No sir you are not necessarily, missing something, but if I may be allowed to
elaborate. When you typically, let me back up, in California home construction the water heater
is typically placed in garage or closet farthest away from the kitchen, which makes little or no
sense but leave that as it may. What this device does is it sits there when you turn on your water
tap typically to get hot water .you let the cold water run until you get hot water, what this advice
does is it establishes a pump between the cold water line and the hot water line. So that you are
not taking and recycling water that’s gone down the drain. What you are doing, is your sitting
there extracting the cold water from the cold water line or from the cold water, from the hot
water line, until you reach hot water at which point a thermal couple turns it off. But what you
should have done is essentially ship the water back up stream to the water heater. It’s a very
elegant solution.
Bechtel: Okay sounds like, are there any cost projections for this at this point?
Auzenne: That’s one of the things that we are going to be determining projections and that’s why
Oakridge is so interested and Santa Clara Valley Water and number of other water agencies
including the California Urban Water Conservation Coalition Of which we are signature for the
best management practices. They are very interested in t.his. It is possible to possibly reclaim up
to 25 gallons a day per household.
Ferguson: Does it have a pump in it?
Auzenne: Yes sir, you would be required to have an outlet beneath the sink to plug it in. It’s
activated by a button so the button is manually turned on; the thermal couple turns it off.
Typically runs three to five seconds. It is moving a lot of water.
Bechte~l: It sounds very interesting. Thanks very much for the explanation. The second question
I had was on the SFPUC Capital Improvement Plan Program and maybe it will come up before,
but it had to do with seeing later on in the packet. Talk about how much money is projected for
refurbishing or to be spent on Hetch Hetchy.. And it said the SFPUC your saying SFPUC is
looking at Budget items now and into the spring. I’m wondering what are we doing to look at
Budgeting for long term expense. I know we have gone over the Capital Improvement Plan, and
I know it was coming up, but I’m not sure I recall any specific way that we had looked at which
is a number being hundred and some odd million dollars projected. So I was wondering, are you
starting to think anything at all about how we might cover those costs in the future? How we
will deal with them, I should say?
Baldschun: Well we would certainly run the ten-year factor forecast based on the updated cost
projection from San Francisco. We have seen some projected rate increases in the water as a
result of the CIP project. But the piece that’s not in there, and actually I’m glad you asked that
question, because I think you all have questions about the gas situation and the Electric, and I
Utilities Advisory Commission 11-01-00 Page 3
think our strategy financial, strategy for all Utilities including sewer and all four Utilities is
probably next year to do out to do some bond financing and what that’ will do is, that will elevate.
some of the pressure on the rates, because it will be financing the CIP from the bond proceeds
rather than having it to use the rate component to fund the CIP and so that will help all Utilities
including the Water to some extent. It will finance our own CIP. But regardless, we are going to
have some hefty rate increases in Water and Electric and Gas in the next few years.
Bechtel: Is there any idea what sort of a spending profile that San Francisco is thinking about for
up grading the Hetch Hetchy system. I know the dollars we talked about over a ten (10) year
plan, and I assume that there was some plan. expenditure per year and so on or so - is there any
communication with them, shall I say or to BAWUA on this.
Ratchye: Right, well we do have projections, but they’re very old, we don’t have anything new
from San Francisco. San Francisco has not adopted a financial plan or a CIP plan, and that’s
what we where hoping that they would do in December. That’s probably going to be delayed
until probably May. So at that point they will; hopefully, finally laid out their plan for building
all the needed projects that they have in their CIP with identified financing and BAWUA will be
closely watching this, because we do believe that most if not all these projects are needed and
part of our worry is that they won’t build them, because they’ll make their financing plans
something that’s finance-able rather than driven by need to install some of these projects so we
are hoping that its going, to be driven by needand figure out some financing to support that need,
but we haven’t seen anything yet on that. It’s been delayed because the mayor has now asked
the PUC to come up with a long term vision and Strategic Plan. So they are going to do that
before they complete the coordinated CIP financial plan, but when they are set to adopt that we’ll
probably ask if some UAC members might want to come to that meeting. So we don’t know.
The only projections, and they are incorporated into our budget, are just what we had before and
there updated you know with short term information that we get about next year San Francisco
budget but we just don’t have any updated picture of how they are going to fund these on what
timeline.
Bechtel: But it seems as if they come through in something like the spring as they meet and they
make some decision which maybe asking to much it sounds like it might tie in with our own .
budgeting process all though its the connection that’s probably going to be loose and missed.
Ratchye: Well they will make a budgeting decision for the following fiscal year, and that will
result in what the suburban rates will be, but we still need them, we still want them to actually
adopt a longer term plan that shows what their intentions are what their goals are to get these
some of them pretty long term projects going and when they would be designed and actually
constructed and when the money is going to be spent over probably a 15 year time line. So we
will know some...at least for the next fiscal year when they do their budget and hopefully in May
if they do as they say they were going to do we will get a financial plan and a CIP Plan and that
will be very welcome information they have never had one before.
Ferguson: Good. Thanks Jane. Any of the commissioners with questions on the Water Quarterly
Report.
Carlson: I just got one follow up question on that HotWater System. I don’t know how easy it
would be to install but I’ve got a gravity based system with no pumping required in my Tahoe
Utilities Advisory Commission 11-01-00 Page 4
cabin that works like a charm. Its basically a giant circulating system where the hot water rises
and cools down ...is that something we could require by code because it certainly saves water as
you pointed out.
Auzenne: Is your question...should we require by code the device that I described earlier?
Carlson: No I’m talking about requiring plumbing instead of energy I guess is the trade off.
Auzenne: I suppose we could probably do almost anything with building code the question is
with your existing housing stock and the fact that Palo Alto is already built out its probably the
horse has left the barn for that type of system.
AI~I: Okay, Okay
Dawes: I might add it takes a return line which is expensive to put.in, in addition rather than just
dumping it into the cold water line. Question to Jane. The Bay Area Blending Project I didn’t
know what that was and also the higher usage in the tail block was lingo that I didn’t get.
Ratchye: Where do you see the higher usage in tail block?
Dawes: The last one on the Financial Report.
Ratchye: We have tear grates one base line amount and then for any amount over that it’s a .
higher price.
Dawes: And the tail block is the highest or the lowest?
Ratch~/e: The highest
Dawes: And the blending project under CAL Fed?
Ratchye: The Blending Project is an idea that is very conceptual phase I guess, it’s an idea that
all I believe 7 agencies which actually BAW maybe one so actually maybe 6 regional water
supply agencies in the Bay Area. So that’s San Francisco, Santa Clara Valley Water District,
East Bay Mud, Zone 7, Alameda County Water DistriCt and I don’t know if I’m missing.
somebody, and BAW they all meeting and trying to figure out a way to maintain high water
quality within the Bay Area with some possible idea of mixing trying to get maybe some lower
quality water like Delta water to lower quality uses. I think Contra Costa County Water District
is also in there which gets basically Delta water at a percent. They are trying to figure out some
way that jointly they can solve some of the water quality and quantity and reliability problems as
the Bay Area and present _that as a CAL Fed funded project. It, s very conceptual I don’t think
anything ......
Dawes: So this is basically mixing Delta Water with drinking water?
Ratchye: I don’t think it would be that. I don~t think that San Francisco for example wouldn’t
be taking Delta water into its Hetch Hetchy lines, because that’s got filtration avoidance status
and that’s a different kind of water it would be treatment beyond what Hetch Hetchy water does.
Utilities Advisory Commission 11-01-00 Page 5
And so the piping arrangements and things like that are not very clear at this point, but it~ a
concept this group of 7 agencies is meeting to discuss ideas trying to get those 7 agencies
together to talk about the Delta and the Bay and the users .and try to develop what ever projects
they can think of and present them to CAL Fed for funding. So as we find out more ,detail
around that we will return with that right now its very conceptual.
Dawes: One last question on the Shut downs Chart C looks like October was a big problem is
that indicative of anything or just a random occurrence?
Ratchye: I don’t know the answer whether its indicative but I just got in my e-mail todaY one
more month.
Dawes: It looks like a blip.
Bradshaw: That’s exactly what it was it was a blip in our system with the colder weather coming
on and number of other factors the older pipes tend to cause problems.
APPROVAL OF 2000 URBAN WATER MANAGEMENT PLAN AND WATER
SHORTAGE CONTINGENCY PLAN
Ferguson: Great if there are no other questions lets proceed to our next item which is an action
item. Staff request UAC approval of the year 2000 Urban Water Management Plan including the
Water Shortage Contingency Plan. This is a fascinating comprehensive document one of the
best-integrated pictures and snap shots of the system here I’ve come across so I appreciate the
work that you put in generating the document. Lets collect questions from commissioners first
then we will ask for motion any questions or comments Mr. Dawes.
Dawes: I’d sort of be interested in having the staff discuss what changes where from the prior
one I gathered this is a 5 year update and to me really the important thing is what changes are
here and focus on that. I just might point out that there seems to be a little more proof reading’
necessary, the appendices and attachments in the table of contents don’t really relate to what’s in
our package I assume this is a late stage draft, but before it goes. to the City Council you should
check into that.
Miller: Yes, there are a couple minor formatting things with the appendixes.
Dawes: And titles and things like that.
Miller: Right, that we will clear up. As far as the changes, as you mentioned here in one of the
management plan is updated every five years in this plan we used as a template a template that
department resources provided so the format is completely different from the previous plans and
we did that in order to one make it fit with what DWR was doing but also to take a fresh look at
it so we didn’t nearly just replace the or update the existing numbers. What we did try and do
was incorporate as much as possible the information from the previous planning studies that we
have done many of which or all of which have come in front, of the UAC so we even tried to
incorporate that into the document as muchas possible and that’s the main change as we
incorporated that document and follow the format that the DWR was asking for. The Urban
Utilities Advisory Commission 11-01-00 Page 6
Water Management Plan is required of all agencies serving more than 3,000 people in Californ’ia,
and is a minimum planning level that there asking for. Fortunately, in Palo Alto we have done a
lot more planning than :.s required in this and this plan is primarily a summary of many of the
planning efforts that we have done so we have gone int0a lot more detail in a lot of the areas
than DWR is asking for in this study. So much of it is a summarizing document. The onepiece
that is different than any of the other documents we brought to you is the Water Shortage
Contingency Plan, and that is something that is only provided in the last Urban Water
Management Plan we had a shortage contingency plan and this one is an update to that. The
format is similar the actions are similar in what we are proposing in this one and what we
propose in the previous one there has been some minor changes to it but the overall actions and
stages of actions that we would u.ndertake during a drought are quiet similar.
Ferguson: That leads to me to a question on the provisions of the shortage plan. Does this cast
this in concrete for five years? Or is the Council have the opportunity to change the excess usage
fees for example?
Miller: My understanding is does not cast it in stone, that is a general structure and that if we got
into a drought we would look to this general structure as a starting document but our actions
would depend very much on where we were at that time what severity of the drought was, a
bunch of other factors, and that’s taking into account that what it does is give us a general idea of
the types of actions that we would take so that we would have a blue print from which to work.
Ferguson: Any comments Mr. Dawes?
Dawes: On the table on page 24 where is talks about SFPUC System Supply and Demand
Comparisons shows our projections going out from 261 acre feet to 294 and the same covered by
the supply. I had thought that the system in a normal year that we where drawing about what our
allotment was is my recollection not right there, in other words I didn’t think that the amount of
water available at SFPUC would sustain a 294 acre foot thousand acre foot requirement. It’s on
Page 24 Jane. Its says they have plenty of supply for our increasing demand.
.Ratchye: That would be nice.
¯ Dawes: It seemed great you know why are we so excited.
Ratchye: I don’t know if ...this is taken straight from San Francisco we did not make these
numbers up. They probably took those numbers from the water supply master plan that did
indicate that they are planning to increase the suigplies. So you know that looks like their plan.
The problem with a lot of these numbers is the safe yield of the system depends a lot on how you
operate the system. I don’t know if you recall I had made some presentation before about
. currently they can operate the system at a certain amount and almost never have to cut back
below that. The only problem is we would have to cut back every year ten percent if they went
down to that level, which is about ten percent lower than our current demands in the system.
Dawes: This relays to Tulomne having first dibs on their amount and then San Francisco having
the amount above.
Utilities Advisory Commission 11~01-00 Page 7
Ratch~/e: Right. Its under the .... If you assume that next year is going to be the start of h I
think a (7) seven year drought, that looks like the last drought plus (2) two more years tacked on
the end, then you Could only deliver 239 is my memory every year because you have to keep
back a whole bunch in storage so that you always have the ability to ride through that whole (7)
seven years with hardly having to decrease below that, but the problem is 239 is below what we
are currently using or you could operate the system to meet current demands and then your safe
yield is down below. And so what is behind these numbers I’m not aware but I do believe that
these numbers do include what is probably in the Water Supply Master Plan as far as when new
supplies plan to come on line.
Dawes: We aren’t misleading the state by putting these numbers down, I mean as far as we
know they are accurate.
Ratchye: Right we have it footnoted.
Dawes: We are not on the hook here, okay.
Ratchye: That’s what we are supposed to do in this plan, we are supposed consult our supplier
and get the information from them and we are just reflecting that back as they told us.
Baldschun: Yes and the tables on the next page go into more detail on the dry year scenario page
24 is the normal year scenario.’
Dawes: Why did Shoreline stop taking our recycle water? This is on page 30.
Ratchye: A lot of it is because the pipeline that delivered that down there is in horrible shape. It
is an old, old pipeline that was Roger can maybe answer that better than I can, but that’s my
knowledge of it. It’s an old pipeline its right along the bay, its holy, a lot of water infiltrates into.
Dawes: It was not having to do with recycle water was inappropriate for this particular use in the
Golf Course there and that sort of stuff.
Ratchye: Well I think it also relates a bit to the incentive structure for the people who operate
that Golf Course. Their incentive is to have the greenest lawn not to have the cheapest lawn and
they don’t pay the ...the party that is paid to maintain that doesn’t pay the water bill. I think
that’s really a big part of it.
Dawes.: And recycle water isn’t cheaper than Hetch Hetchy water?
Ratchye: It is cheaper but that’s like a split incentive thing, they
Dawes: But Hetch Hetchy makes greener green I guess.
Ratchye: Well Hetch Hetchy doesn’t have the salts.
Dawes: I see
Utilities Advisory Commission 11-01-00 Page 8
Ratchye: I think there is a salt problem and they want to completely avoid ever having to have
that. So yes it is definitely poorer quality water there are things you could do but ......
Dawes: Thank you. Any other questions or comments on the Water Plan. Mr. Rosenbaum
Rosenbaum: Yes I did speak, leave a message with Kirk about one minor concern there as a
sentence at the end of the last paragraph on page 20 about explaining the increase in our water
use from 1995 - 2000. It’s of the increase in population and jobs accounts for much of the
increased water usage and I didn’t think it was necessary to put in a sentence to try to explain it,
bu.t in any event the increase is almost certainly due to the rebound affect from the drought.
There’s been almost no single family housing built in Palo Alto inthe last five years, and now if
you look at table 4 on page 21 it is quite interesting almost the entire increase is due to single
family and multiple family residential. Most of the other categories actually did go down. So
yes I would recommend you leaving that out or changing that sentence.
Baldschun: I thinl~ your point is well taken and I think you are right that I would speculate that
most of that increase is due to the fact that your going from a situation during the drought where
we had lawns that were either dying or brown, to a point today where everybody has green lawn
so that is accounted for a lot of the usage so we’ll edit that.
Ferguson: In this shortage plan one of the topics is Water Mutual Aid Agreements. Do you we
have Mutual Aid agreements in place .today? Or is that something we redevelop as
circumstances develop?
Miller: I would ask Roger Cwiak to answer, he is much more knowledgeable about that than I
am.
Cwiak: Roger Cwiak, Engineering Manager for Water Gas Waste Water. We have mutual aid
agreements forhelp but not for water supply although we do have entities with Stanford’s Water
System and the City of Mountain View. There is no written agreements as of today for those
entities in the past historically water systems have just helped other" water systems in a time of
need.
Ferguson: One of things this leads to is that, due to our.format that we are using for the first time
here. One of the nice outcomes is that it provides a common language for the various suburban
systems to talk with each other, negotiate with each other or plan with each other. In this is one
of those topics where we all kind of see our situation arrayed in the same order. I’m wondering
if your suspicion helps us start such negotiations for a short-term water resistance. Particularly
in the case of the local breakage herein Palo Alto. Or do you think it’s perfectly good on the ad
’ hoc basis that it is today?
Cwiak: I have been trying for two (2) years to negotiate now with and to get other water Utilities
to sign something and its not going well. I think the way the status pull people can live with that,
but actually give up their water supply to supply another water purveyor its hard to get that in
writing. Most of the cities around here depend on the same supplier so when they’re out of water
we are out of water from a supplier. The only thing that they are going to be able to help us with
is there storage or their wells.
Utilities Advisory Commission 11-01-00 Page 9
Ferguson: Good. Thank you, that’s a useful fact for one of our next items on the agenda. Ahy
other comments here on the Urban Water Management Plan, Mr. Carlson.
Carlson: Yes I’ve got one question and maybe I just didn’t see it here, but I didn’t see much
about long run conservation plans are there things that we could do now to make ourselves less
vulnerable?
Auzenne: Well we have a number of programs, operating across multiple market sectors,
whether is be residential, industrial, commercial, our attempt is always to reverse the upward
trend of consumption that’s what we are trying to do. I don’t really know of any particular
activity that we could do that would make a substantial drop immediately. One thing that we
have embarked upon is a new program this year to promote the use of dedicated irrigation water
meters for those large commercial and industrial sites that have typically always had there
irrigation systems tied into their domestic water. The reason that we are pursuing this activity is
because in time of drought then we would be more able from both the pricing and a policy point
to be able to differentiate indoor versus outdoor usage.
Carlson: Well what I’m thinking of is something, or do we have, what kind of program do we
have to encourage drought resistance plantings, so everything doesn’t, it’s a choice between
death or cheating.
Auzenne: One Of the items that wasn’t included, as an appendix was B the report for the best
management practices. In 1991 the City of Palo Alto signed the Best Management Practices
Memorandum of Understanding with the California Urban Water Conservation Council. What
that means is there are 14 activities ranging from education to hardware installation to plumbing
retrofits and modifications that we have embarked upon. And we are obligated, or we have
obligated ourselves to try and meet in a good faith effort those standards as part of the Cal Fed
process those standards may become mandatory. We find ourselves well positioned should that
happen. We are working constantly with the CUWCC to identifywhat our conservation goals
would be under that memorandum of understanding. So as to if not identify or if not participate
in a particular activity on of the 14, there is a qualitative volumetric goal associated with that,
that we could make up in another activity such as this hot water demand recovery system. We
are looking at that as a way to meet significant amounts of our goal for the best management
practices.
Carlson: Okay. Let me switch to the supply side again in terms of drought planning and I know
this is primarily a San Francisco issue, but by far the easiest to obtain supply. In the water area is
the water that goes right through, our dams to the Modesto Irrigation District and there is one
other ...Modesto and Turlock, which actually gets the great maturity of the flow on those
streams. What is the status of drought sharing discussions with them?
Ratchye - Well I don’t have new information on that, that is an element of the Water Supply
Master Plan, that was the source identified as the easiest, quickest, cheapest, best, just the
obvious candidate for dry year water, and so we are hoping that San Francisco is still proceeding
on the plan to get some sort of dry year agreements with the districts I don’t have any new
update where they stand on that, just I think they, I don’t think they dropped it I think they are
proceeding, but I can’t tell you. There is no agreement yet. We do have a lot of water stored in
new Don Pedro Dam that we can’t get physically. And all that water gets...we can use that
Utilities Advisory Commission 11-01-00 Page 10
water on paper during droughts and one idea is to go into a negative bank and drought. There is
a lot of different ways to structure an agreement and ultimately we will get some agreement. We
haven’t seen any agreement or the form of one yet.
Carlson: Maybe we should end crop subsidies and drought years.
Miller: I have some update on that commissioner Carlson in that my understanding is that MID
and possibly TID are waiting to discuss that until San Francisco has a permanent General
Manager.
That topic isn’t on the table until there is a permanent General Manager.
Ratchye: That should be in January
Miller: And that would be a topic that could be discussed.
Ferguson: There are no other comments can I have a motion to approve.
Carlson: I would move that the UAC recommend to the City Council approval of the 2000
Urban Water Management Plan.
Ferguson: Is there a second.
All together: Second
Bechtel: Any other discussion?
Ferguson: All those in favor say aye.
All together: - Aye.
Ferguson: Any one oppose?
Ferguson: None its unanimous 5 - 0 vote. Thank you very much. We are on to item 3, the Risk
Management Update, is there a presentation on this?
RISK MANAGEMENT UPDATE
Baldschun: This is an action item as well. The agenda is .... there is a typo there was a request
for us to recommend the council approve these policies~ Don’t have a planned presentation but
Girish and Jane are here to answer your questions.
Bechtel: Mr. Chairman I have a question, how different are the strategies or policies in this
document compared to actual practice over the last five years?
Girish: They pretty much reflect what we have been doing. We are pretty conservative
organization. I think what it is, it formalizes a number of our practices and actually through our
Interim Risk Management policies and procedures we have actually put it in to writing and
assigned responsibilities and basically cleaned up a lot of what we used to do and if you look at
Utilities Advisory Commission 11-01-00 Page 11
the past five years the thing that was different five years back and what we progress is the
number of deals we do. This market has been deregulating progressively more so we have the
Opportunity to do more deals. So five years back we weren’t doing as many deals as we are’
doing today. So five years back it wasn’t as much of a need to have a number of procedures in
place. Written procedures have authority limits etc. etc. in place. So as the need for that has
progressed through this last five years we have started to formalize the process.
Ferguson: Thank you. Any other comments Mr. Dawes?
Dawes: Girish you indicated in this last paragraph that no financial instruments are allowed,
staff intends to propose their use of the discretion the Director to enhance the efficiency and so
forth and I guess we will get plugged in, in January 01. I don’t know if its worth sort of
speculating on what you might have in mind at this point or a little hint in that direction or is it
just premature?
.Girish: Sure we can I think tell you about what we plan to do like we talk to when we went to
the finance committee for the gas rate increase. We also, we mentioned it to them that time. The
idea here is to give us another tool in our toolbox to manage our risk. When you look at all the
different, example the gas market has gone completely wild. I mean we have never seen
anything like this ever.
Dawes: It’s over $7.00 now.
Girish: Oh no, the daily price yesterday was $26.00
Dawes: Really
Girish: The price for January was $17.00. For all of January the bid week price for all of January
was $17.00, December closed at $14.00 in California. The price you may be looking at is the
Henry Hub price, but by the time it’s transported to California, so it is something just nuts
basically.
Dawes: Is this, I mean this is a little bit of aside, but I can see some of these gas for electrical
class shut down.
Girish: What kind of plants?
Dawes: Gas-fired Electrical.
¯ Dawes: That was the morning headline.
Girish: Oh no the gas-fired plans they are making .money big time right, because they are selling
into COB at $800 now. The cost of running that plant is about $250.
Dawes: At $250 for gas they can still..
Girish: Oh yes. $26.00 is the daily price for gas say at 10,000 MMBTu rate that’s $260 is the
cost of producing it. Per megarwatthour and you sell it for yesterday’s price at COB was $800.
Utilities Advisory Commission 11-01-00 Page 12
Dawes: But that’s a peak price or?
Girish: Peak price.
Dawes: But you have to average that out over the period that they are operating, which ....
Girish: Is a day. Some of them are buying
Dawes: It was $800 average for 24 hours of the whole day?
Girish: Yes heavy load hours, all 16 hours. Excuse me, it was actually all of January. All of
January was costing $800 yesterday, that was the price.
Dawes: Well at this rate I could see PG& E and Edison being financ.ially strangled.
Girish: Faster
Dawe~s: I mean in January perhaps. I mean this is very serious stuff.
Girish: Yes this is a crisis, and what we are seeing on the gas side has not hit the papers yet. All
that we have been seeing is electric. This is a major deal, because November monthly price at
City gate was $6.00 range. Now if PG&E passes through to its customers, customers will just
getting their bills for the $6.00 price. Well December closed at $14.00 so they are going to see
those prices at the end of December beginning of January, and its going to be incredible.
Dawes: At our last meeting we had a brief discussion about our reserve position on gas and
connection with the gas rate increase and you said you would get back to us. When we’ll be
tapped out on our RSR for the gas side. I was apprehensive that the January and June scenario
that we had worked out would be insufficient and it sounds like it’s a lot worse now than it was
then. We’ll be pumping dollar bills out to our customers here through our pipes. Not out of
reserves but out of the City coffers and I don’t know if you guys have plans to return with an
emergency rate increase, maybe the end of March of something like that. I’m very concerned
about our RSR levels and when they’re gone.
Baldschun: It’s hard to give a short answer to that question.. The objective for this fiscal year is
to in enact gas rate increases so that the end of the fiscal year we will end up with a minor
positive balance in both the supply reserve and the distribution reserve. And that was, those
projections indicated that we need 25% in January and another 25 or 34% in June. And we have
locked in pretty much of our supplies for the current fiscal year but not for the next fiscal year.
So even if we do meet the current fiscal year goal we are faced with a possibility of a very huge
rate increase in July. So the UAC’s recommendation last month was to consider bring forth the
July rate increase to perhaps April. That suggestion is gaining more and more merit each day
particularly as this market continues to rise beyond anybody’s reasonable projections. So it’s
very possible we will be coming back with an earlier rate increase sometime in April but the
exact timing exact numbers tonight I can’t tell you.
Dawes: You mentioned we were hedged. Are we 100% hedged or only partially.
Utilities Advisory Commission 11-01-00 Page 13
Girish: Pretty much 100% hedged through June. And zero for post June.
Baldschun: Right.
Girish: Actually in Frank’s weekly memo that came out Friday. There was an estimate of the
savings that our customers are getting. That time, it was estimated too be about 8.8 million
dollars for the remaining part of this year. It’s actually closer to the 12 million dollars or so.
Dawes: I really think we need to get the word out to our customers and to our citizens, staff and
the Utility Department has done an ’incredibly good job and that they are not withstanding at 25%
increase in January, are having a, enjoying a very good period.
Baldschun: Well we have prepared the bill insert in anticipation of Council approving this rate
increase on the 18 and it does mention the transition that we are trying to achieve to full cost
recovery. I do want to make one point regarding the perception that we are losing money right
now. If Council approves a rate increase on January 1st we will recover our commodity cost and
then some on each rate schedule on each rate block. Since Girish is locked in 100% as of now
we know what the commodity cost is in. All of our bundled rates are now going to be above that
rate so we will not lose on any sales. In fact, sales will be good for the Gas Utility after January.
Dawes: Actually thatthe hedged part I either forgot about or was unaware of that we where that
well hedged and I might have great complements to the staff for getting that worked our ahead of
time, that’s terrific.
Ferguson:. Any other comments on the Risk.Management update in front of us, Mr. Rosenbaum?
Rosenbaum: Yes, speaking of your success in what I would call a risk management activity,
Dexter mentioned it ought to be reported in some sense and when the Council discussed this in
January of 1999 reporting an oversight was one of the concerns, and I noticed that is missing
from the policies that you have here. Do you have some comment on that?
Girish_: Yes we plan.to report various measures of Utilities performance to the Strategic Plan.
So we have the Strategic Plan we have four objectives, and we have a number of strategies. A lot
of the implementation planned is to come back to you after the Council with the final number of
strategies so that you can see that we are doing our jobs as asked. So risk management is one
aspect of the strategic plan and so it’s part of that, that will be presented and so yes there will be
reporting in some form both to the UAC and to the Council on varibus aspects of how we run the
Utilities and Risk Management will be one of them.
Rosenbaum: Yes, I wonder if I don’t know if my colleagues would be interested in this but
suppose we were to add a policy 7 tonight, recommend that it be added, and I have written one
which is CPAU will develop parameters to measure the performance of risk management
activities, and will report results periodically to the City Council and UAC. Is that sort of thing
you had in mind?
Girish: Yes that wouldbe fine.
Utilities Advisory Commission 11-01-00 Page 14
Ferguson: Let me just add when we considered this as part of a package of risk management
related items. I think the UAC past a very similar motion, and it didn’t turn up at this particular
piece.
Girish: Yes I think what you are referring to is probably the long term contract guidelines Which
came to you back in July and that going to the Council on December 18, and it has sections in
there about reporting to the UAC and the Council in certain frequency.
Baldschun: Excuse me that particular report requires us to come to you twice a yea~ with
performance evaluation of any fixed term commodity rate or any custom commodity rate
contracts.
Ferguson: And to the extent that was another component of risk. The decision to buy into the
long-term contracts it would be nice to dovetail that with what commissioner Rosenbaum was
proposing here.
Girish_: Yes I thing the general policy you are talking about that’s I don’t have a problem putting
it in here, it fits in with what we are thinking about. I think the details of what the parameters
actually are the frequency of reporting those are the things that we will develop at part of
implementing the strategic plan p~esented to you along with other things.
Rosenbaum: Fine there is a precedent for doing this as I often mention in our investment policy,
you know we invest several hundred million dollars in reserves, and every month the council
receives a report giving the interest rate in comparing that to. some treasury parameter. And
that’s the sort of thing I don’t know what the right period is, so should I make that as a motion
Ferguson: I think that would be great.
Rosenbaum: Alright I would move the addition of another policy to read as follows: CPAU will
develop parameters to measure the performance of risk management activities and will report
results periodically to the City Council and UAC.
Ferguson: Is that a motion to recommend this as so modified?
Ferguson: Yes. Well a motion to recommend the policies as presented in the report with the
addition of one more policy.
Ferguson: Excellent - second
A1.__[1: Second
Ferguson: Mr. Dawes any other discussion on this?
Ferguson: All those in favor say aye.
A1._~I: Aye
Utilities Advisory Commission 11-01-00 Page 15
Ferguson: Any one opposed?
Ferguson: I think that was unanimous.
much. Mr. Carlson.
5m0.It is recommend up to Council. Thank you very
Carlson: I just had one question its not critiquing the thing, but its part of those inserts I think
would be very important to warn the customers about our status for next year that under current
rates this is likely to be very substantial. People need a lot of time to plan for this sort of thing.
This is the year to put in double pane windows and this is the year to put in new furnaces and lets
just get that word out.
Dawes: Yes, I absolutely agree
Carlson: Renew your weather stripping too. All of the above.
Dawes: Mr. Rosenbaum
Rosenbaum: Just along these lines, maybe Girish has the answer to this. If you look in the
commodity section of the newspaper and you look at future prices starting in June and July they
seem quite reasonable. But for some reason we have decided not to hedge that far into the future
or am I missing some point here?
Girish: You talking about the gas contracts?
Rosenbaum: Yes well the gas
Girish: Well we are in the process of extending our gas supply contract at present we don’t have
a contract with the supplier to extend it that is one of the reasons why we also want financability
to do financial products, where you can basically deal with a number of suppliers and you are not
limited as we are today to dealing with one physical supplier..So we are in the process of
actually extending it, extension could happen as early as maybe a couple of weeks from now or
as late as March. It depends on how some of the negotiations go with the supplies so, but that is
what we want to do but right now we don’t have a contract.
Rosenbaum: So that is why we haven’t hedged for the next fiscal year.
Girish: Right
Rosenbaum: It’s not that you have made a decision not to try to hedge at this point.
Girish: That’s right.
Rosenbaum: Thank you
Bechtel: Have you tried Girish, going to Enron’s Web site as described at the last NCPA meeting
and negotiating there.
Utilities Advisory Commission 11-01-00 Page 16
Girish: Yes that still takes a contract. We have looked at it, in fact Jane looks at it several times
a day, and we get some fabulous information from that Web site. But right now our privileges.
on that web site are limited to viewing and not to trading. "Before we trade we have to go
through a bunch of legal work and just getting that done is going to take some time.
Dawes:. Ah...Girish I’m a little confused as to why we are unable to start hedging operations
absent a supply contract, I mean I can understand perhaps that this wouldhave the appearance of
a naked purchase of a financial instrument but on the other hand we know we are going to be
buying a lot of gas starting in June from somebody we maybe changing suppliers and you know
other kinds of things, but I don’t understand the connection between inability to hedge and not
having a contract.
Girish: Well it what you are saying we can do a financial deal without actually having a
contract?
Dawes: Well one can hedge, I mean I can go and buy and sell contracts as an individual as a
speculator. CPAU has the ability to being a major customer knows that it will have be required
to buy so the having somebody ship the product to us shouldn’t be at issue. So I don’t
understand the connection between having to have a written out sign contract and then being able
to start hedging that particular contract rather than starting to hedge any old contract because we
know we are going to have one starting in June. We just don’t know when or with whom.
Girish: We are looking at all ttie different alternatives Commissioner, and right now I don’t
believe we could actually...I can’t pick up the phone right now and do a deal with Enron without
having some paper work in place, and that’s going to require some of other type.
Dawes: I would like to understand that. But I don’t, could somebody explain it to me sometime.
Girish: I can do it off line, if you want? At your pleasure.
Dawes: Are any other commissioners interested in this anomaly or?
Bechtel: Yes it is a little mysterious so if there issome simple explanation we could have tonight
Girish: A supplier before they sell to us they need to have a contract basically, it’s a pretty
simple explanation. Where I ...say for example with on the electric side I don’t have the same
problem because we have several enabling agreements through NCPA, to do deals with different
suppliers so that electric side I can goahead and buy power from any number of different
suppliers. On the gas side we have a contract with one supplier right now and we are in the
process of extending and so I can’t go out and buy from someone else other than my existing
supplier unless I have an enabling agreement, or unless I have a blanket authority to do financial
deals and so certain contract you have to sign to do a financial deal, its called a ISDA contract.
Which is a form of enabling agreement which if you do a deal with any supplier on a financial
basis they will require you to have that in place.
Bechtel: Are these sort of like pre-approval of credit?
Girish: Yes credit has a lot to do with it.
Utilities Advisory Commission 11-01-00 Page 17
Dawes: Yes, I mean, I can see if our normal supplier was Enron and we entered into. a contract
with Northern States Gas Compan3i for ten thousand therms over a certain number of months and
at the end of the day we ended up with Enron again but not for many months and we would have
this contract with a company we are not going to do business with. I assume we can then sell
that in the open market and replace it with a contract with Enron, trading of at the same price but
if we think that the prices today are more favorable than they will be later on we would come out
ahead.
Girish: Right and that’s, due to some of the alternatives that we are considering that’s why I told
you it would take me probably between the next two weeks to up to March, depending on what
works out. We have to work with our legal department to figure out what we can and can’t do
also in this case. Because if we go afiead and do what y6u just described, that could be viewed
as a financial transaction basically, and right now the opinion that we got is we can’t do financial
transactions unless we have explicate, authority from the City Council. So there are variations to
doing what you just suggested where we can do physical contract with the supplier to basically
do what you suggested, and so that’s what we also want to see if we can do that. But we don’t
have it in place now.
Dawes: I would commend your continued diligence in working towards that because I think we
do need that sort of flexibility to delay can sometimes be a great detriment to the company.
Ferguson: The spectra of the Orange County Bond fiasco, figures large in the minds of City
Government officials when you talk about financial instruments. Thank you Girish very much.
ALTERNATIVE EMERGENCY WATER SUPPLYSOLUTIONS STUDY
Ferguson: The next item is 4t~, the Alternative emergency water supply solution study. A
wonderful jam-packed set of charts and valuation elements...I.really enjoyed the fact that
we are stepping right along here. Getting to some useful conclusions on emergency and
long-term supply. Item 4. Is there a presentation on this?
Bradshaw: Just a couple of quick comments on it. This draft is the result of our response to
request that was .made after August 3 meeting, which Commissioners Dawes and Rosenbaum
made some suggestions and we have examined those options and we have come up with this
document, and the conclusions are basically are that alternatives one and five should be
continued to be looked at. And also that we do start our outreach program with our customers as
soon as possible so that we can keep our customers informed with what is going on and get their
input into where we go next.
Dawes: I’m just disappointed that the pipeline from the hilltop there in the Industrial Park costs
so dam much because otherwise I mean its competitive now but otherwise it would be great.
When do you start approaching the idea of the inter-tie behind the hospital there, is that
something that’s scheduled or is that yet to be done?
Bradshaw: That’s yet to be done, we again ....Ask Roger to answer when proposed to start
talking about that.
Utilities Advisory Commission 11-01-00 Page 18
Cwiak: We haven’t officially talked to Stanford about trying to use the inter-ties in the way that
the alternative number 5 suggests. I’ve had some talks with their staff, there could be problems
with there general use permit, that they are trying to secure from the county and the development
that they plan to use the water that they have in their system to supply their own needs and then
to try to negotiate or guarantee that supply to somebody else would cause problems for their
future plans.
Dawes: So even as a back-up, I mean this is receptacle-as well I am sure that you’ve gone into
this .... ah...where we could back them up the same way they would back usup or doesn’t the
system work that way.
Cwiak: We both have the same supplier and we would both be in the same situation at the same
time, relying on our own wells and stored water. It’s hard to get water utility to guarantee supply
to some one most of those agreements have wording in them that go along the lines, if its
available and we can help we will, But its very hard to get an agreement that says if we need it
you’ll deliver.
D__awes." Mr. Rosenbaum
Rosenbaum: As I recall vaguely when we had this conversation back in August we talked about a
quick pro quotes as Dexter says...some reciprocity. Stanford built a very large reservoir, which I
assume they sized at taking into account their expected growth over the next 10 or 20 years. So
if we were to want to draw on that for this one-day emergency they could well have a problem.
But didn’t we talk about the possibility of us building a larger that anticipated reservoir and then
being able to hook that in to Stanford Systems so as to provide the essentially the same amount
of assistance to them that they would be providing to us.
Rosenbaum: We did discuss that. There are problems with the location possible problems, with
the location that we have chosen that would be of benefit to the City without pumping over in the
industrial part I’m not sure how this recent developments with Stanford regarding the foothills
and trying to put anything out in the foothills in the next 25 years. If that would affect us trying
to get a reservoir somewhere west of Foothill Expressway on their property.
Cwiak: But I mean even if we put the reservoir in the Stanford Industrial Park which is the
recommendation here, with this 7,000 foot pipeline, isn’t there someway of hooking into their
system?
Rosenbaum: We could...I’m sure we could build pipe to some location in their system. We have
not discussed this with Stanford.
Cwiak: I think we are going to have to offer Stanford something, we talked about money at the
meeting...I was very generous Dexter I think was talking about $50,000. You are going to have
to do something with Stanford they are very difficult, to negotiate with and I’m sure you’ve had
experience with them, but this is clearly in the combined interest of both parties. I trust you will
be exploring all these possibilities with them.
Rosenbaum: We will but by initial contact with there staff has not been promising.
Utilities Advisory Commission 11-01-00 Page 19
Cwiak: And we have a non-Stanford alternative on the list here correct?
Dawes: We have basically the study alternative, that’s the other recommended alternative.
Ferguson: And so we will develop those in parallel.
Ferguson: Well negotiate as best we can with Stanford, but we’ll develop and analyze those two
in parallel.
Cwiak: Yes, That is correct.
Ferguson: Mr. Rosenbaum
Rosenbaum: Yes I’m in jest to follow along I think the other thing we mentioned is that
sometimes these issues have tO be precede ata higher level. Has anyone on the council of
Stanford Committee been talked to about this potential issue?
Cwiak: No they have not. Well that might be another approach to pursue.
Cwiak: Okay
Ferguson: Mr. Carson
Carlson: Yes I’m...there are a couple of details here. Where exactly in this Stanford research
park are you talking about the reservoir?
Dawes: It sounds like a good idea, but its in the big book that we had that we had before you
came on Dick but its on a hilltop on the old Syntex property which is now Roache, and its kind
of... what’s the little hilltop there?
Carlson: There is a large open space hill behind...it’s actually behind...is that what we are
talking about?
Cwiak: It’s the higher hill that’s on the left side when you are going out towards 280 on Page
Mill the higher hill that you see from the road there of to the left.
Carlson: Okay, so that’s what we are talking about.
Carlson: Yes that the hill behind Apree, now we are talking about a steel tank somewhere there
or how does it work.
Cwiak: It would probably if it was allowed to be constructively be constructed in the hill and
hidden. Earth would be. removed...you would construct the tank and then you would try to hide
it from all the people. Produce the visual impact of it. You wouldn’.t see a tank when it was
done. You would try to do something that would shield it.
Utilities Advisory Commission 11-01-00 Page 20
Carlson: One concern that you are going to hit is that, that’s probably the prettiest and healthiest
growth of oaks left in anywhere close to that.area. I mean there probably is some space but you
have to be awfully careful those are some of our biggest and best left.
Cwiak: I’m sure ther~ will be a lot of environmental problems to address trying to build in any
location out in that area.
Ferguson: Any other comments? On the report on alternatives?
.Ferguson: Okay, Thank you for a nice summary.
Dawes: One question is terms of timing on this. We talked about a bond issue here earlier I can
certainly see the water situation which is still hanging around a 12 or 13 million dollar amount
being folded into the bond issue will be ready to be very specific with our water emergency
supply long term thing so that we could put it in the bond issue, which sounds like its maybe
coming down the pipe this next summer or something?
Baldschun: Roger may want to fill the details, but the plan I’ve seen for the CIP which includes
the E1 Camino Park and other pieces that go spread out over a number of years. I think the big
hit is about 2 years or 3 years from now. And so what we will want to do is we will want time,
the bond issueso that it covers the expenses within a window of 3 years.
Dawes: But we will have decided what we want to do, these are thealternatives one versus six.
By the time that bond issue has to be conceptualized and put to the voters.
Cwiak: We hope to start working at trying to identify the sites when we have a budget approval
during the next fiscal year. Staff has talked about the year.
Dawes: So we should have....
Cwiak: 2,003, 2,004 bond issues
Dawes: I am just trying to figure out alternative one or six would be decided upon that’s first
quarter next year. I mean we will have the data and the discussions basically it turns on
Stanford’ s.
Cwiak: What the consultant is elected, has recommended we try to get the public outreach on
this so that we don’t predetermine a location that turns out the public won’t except. So we want
to try to involve them in now with while we have some alternatives, we can try to let them know
the benefits of each site and maybe they can bring other things to the table that we have not
thought of yet and help influence where the final location would be.
Dawes: But you have ruled out say alternative 6 by next spring? Is it 5 or 6? There are two
under consideration. When does this staff have .enough information of the discussions with
Stanford to say this is the way we are going to go?
Cwiak: I would think thai probably by the end of the summer, we could get to that point. The
end of summer of next year.
Utilities Advisory Commission 11-01-00 Page 21
Ferguson: Mr. Rosenbaum
Rosenbaum: Just for the record I mean Dexter you spoke about voter approval is my
understanding these are revenue bonds and there would be no voter approval, is that correct?
Baldschun: That’s correct, and there may be more than one bond issue in this. We may have
one, certainly in the gas side we .should max out the CIP as early as possible. Which would be
next year, and there may be a water piece in there and electric as well. They may come back two
years later when most of the water CIP is going to have another one. So we will have to look at
all these projects, I think were you are trying to go with this is if we don’t know for sure what
Stanford is going to do, what we are going to do with this project, does that mean that it’s going
to influence our decision to do some bonds and probably won’t because there are so many other
things that are going to require some .financing and in the worst, case we would fund this
particular project out of the rates andits not the, overall its not going to be a big impact.
NORTHERN CALIFORNIA POWER AGENCY REPORT
Ferguson: Okay, next item is Reports of Official’s and Liaisons 5 and CPA Commission Reports.
It says oral report. Right here...not much to read.
Girish: In NCPA .... couple of things that the commission got briefed on was the FERC auto
which we talked to you about last time, That was discussed...there is a move to from what is
called a Public Coe. To CMUA which is basically having Public Agency take over the
transmission system. That’.s something that has been proposed. Some fancy PA staff met with
the governor’s office and they were impressed with the idea. They are going to come out with
something; Governor Davis I believe is going to have some implementation details available on
December 13th. And so those are things that are being talked about. The NCPA strategic
planning meeting is the end of January. So there is a little bit of talk about that, and another big
item that was talked about after the commission meeting was the legislative rally and beginning
of February APP let us go to rally, and what our goals are for that. That was overall what’s
happening in NCPA.
Ferguson: Public is what we have been calling Transco.
Girish: Yes. It is a form of Transco that is not for profit and yes.
Carlson: Let me ask about a related subject in that is I have beenheating rumors that the
governors is going to propose some state agency to buy the hydro system from PG& E?
Girish: Yes well I have heard that but I have no further information other that rumors that I have
heard before. The PUC recently denied PG&E application to auction it off. So there is also what
Commissioner Carlson has been talking about giving the Utilities the power to build plants again
so basically own plants. So its almost not just stop the vesture but reverse it back. I think we are
going to hear much more on December 13. So far the governor has made some very broad
statements, there-have been finger pointing going on as to whose fault it is, to the situation in
California right now and trying to figure out whose jurisdiction different action, different people
should take and been asking for ...their authority to all the refunds and price gaps etc: and so he
Utilities Advisory Commission 11-01-00 Page 22
hasn’t come up with something very definite he is just dropped a bunch of principles and h6w
good Sound he is.
Ferguson: Mr. Bechtel
Bechtel: Ah Girish - how much power does Falk have in doing two things one of which should
came up ...I guess you mentioned lasts months meeting, it also hit the press that they were going
to say that the structure should be changed. And now you are saying with pricing powers and so
on, price regulation powers. Do they really have those powers?
Girish: Yes they do, I believe they have the power to change that thought and that’s going
forward right now. The boat is going to be reconstituted. The power to refund what’s being
asked for right now, I don’t think the Faulk is basically said that they don’t have the power to do
that. They have found the rates to be unjust and unreasonable but I think what the Gox~ernor is
asking is going back to June of last year and refunding a whole bunch back to customers and
Faulk is said they don’t have the authority to do that, but the Governor believes that they do.
Bechtel: That will be interesting to see, I would also like to commend everyone the San Jose
Mercury said diligent and very strong pursuit of this whole issue too. I mean there were articles
almost every day this morning. They are doing a lot of digging into this issue, so I encourage all
of us to encourage them to keep digging.
Rosenbaum: Okay, any other NCPA questions or comments? Next Item is the ....I’m sorry Mr.
Dawes.
Dawes: I have one question which is not directly related but Girish perhaps you could clear it up.
My assumption was that the IOU’s had to-sell their thermal power plants under the
deregulation’s scenario and many of the articles I read now seem to say that~ it was a voluntary
thing, which was it?
Girish: What is said what they had to dives 50%. That all they were ordered to do, 50% of the
thermal resources to dispose of the other 50% I believe there was the rate of return for keeping it
was not going to be as high as the revenue they could of got for selling it. So, but as far as
ordering them to do anything it was just 50%.
Dawes: Thanks
BAY AREA WATER USERS ASSOCIATION REPORT
Ferguson: Okay, the BAWAU reports Jane.
Ratchye: I don’t have any report except to say that I wanted to present these information for the
whole San Francisco CIP, lots of numbers get bandied about 41/2 billion, 31/2 billion, 21/2
billion take your pick depending on how you look at it and what piece of that you are looking at.
So I just wanted to.convey that and also noting that the regional water systemis 2 IA billion that
we as the suburban BAWAU agencies are responsible for 1 ½ billion, but we have to recognize
that’s all in the context of San Francisco’s real huge just themselves 3 billion for the City
including all the sewer and Hetch Hetchy and in City water and their part of the regional water
Utilities Advisory Commission 11-01-00 Page 23
system. And so that, the comprehensive CIP and financial plan that we are hoping to see in May
now, will include all those components. So they are doing their financial planning and there
thinking of there ability of their own voters to approve bonds for the whole package and one of
there probably worse financial, there Utility in the worst financial shape is what they call clean
water which is the sewer and so that just sort of interesting to know that they have very large CIP
and not just the system to serve the BAWAU agencies, and I don’t know if anyone has any
questions on this report.
Ferguson: Mr. Rosenbaum
Rosenbaum: You mentioned here voter .approval wouldn’t these also be revenue bonds, is
there...do revenue bonds require voter approval in San Francisco.
Ratchye: I think there some category of.bonds that they can do without getting voter approval
I’m not sure they have done that. The way they have to do things normally, and the way they
have always done things is San Francisco has to pay for everything up front and so there voters
have to approve the bonds for everything including the part that we alternatively repay for two
thirds of, and they have to pay for all the design and everything while its in construction and we
don’t pay until its on line, used and useful, and that’s when we begin to pay back there cost. So I
don’t know, you know they have a rate freeze in San Francisco and its for water and sewer rates,
and a big part of that initiative that was passed was driven by there sewer part of the San
Francisco PUC and that is a rate freeze on their rates except for any voter approved bonds. They
can rise up and they have already got 350 million dollars of voter approved bonds, and so they
could rise up to.cover those and rise up anymore for voter approved bonds. That’s the only way
they can raise their rates and so they are essentially operating costs are stuck for 7 years. That’s
why you see them going out and trying to get more money on there right of way up and down the
peninsula and other ways to try to maximizing value from their different assets they have a lot of
land in the east bay and a lot of land in the Peninsula. ’
Rosenbaum: All right so they may have the special prevision requiring voter approval of new
bonds. ~
Ratchve: Well I don’t know the exact answer to that question I know that they have always done
that I think there is some way and I don’t if its an emergency the declaration or something that
they can even if the voters don’t approve a bond if they can show need or we have to build this
thing even though the voters didn’t approve a bond they can do that, but they have never had to
do that yet, and I don’t think that would be in their plan. But I have heard talk like that. I don’t
know a whole lot of detail about that I can find that out if you are interested in but I know their
plan is that the significant thing about this CIP and the magnitude of it for us is that it is very
unlikely that San Francisco is going to be able to get their voters to approve 1 ½ billion that
would be paid for by us. And so we are expecting them to come to us to help them finance these
projects and that will be the first opportunity we really have to gain somewhere in the whole
govemments of their system. Right now we have very little power and its only at the time where
we actually will be asked or will want to put up money that I believe in exchange for that would
have to gain some sort of control. Some decision making table in exchange for that. What that’s
what we expect we just don’t think they will be able to just bond finance 4 V2 billion as a City of
San Francisco.
Utilities Advisory Commission 11-01-00 Page 24
Rosenbaum: Thank you, any additional information on the governance trial balloons that w~re
floated out in Sacramento or is that sort of died away after the reports came out?
Ratchye: Well I don’t see any action recently on anyone following up on Lou Papans proposal
for example but there is a study that the California Policy Research Council is doing on
Governance and that under way and we don’t have any result from that yet or recommendation.
And I’m not sure who is going to listen to that organization or whether they have any standing or
do people just look at it and throw it away. It will probable have to be brought up again by the
political level.
TRANSMISSION AGENCY OF NORTHERN CALIFORNIA REPORT
Ferguson: Great. Thank you Jane. Next Item is Item 7 the Transmission Agency of Northern
California
Ferguson: No news - okay. We are at the end of the agenda anything else commissioners?
Bechtel: I have just a question for future insight. The next meeting in January the only Item is
the Long Term Water Study is this schedule still ...I mean this long term plan is this the last one
I found and I don’t see a date on it, but it maybe valid so is that what the agenda item is likely to
be? Randy did you have any feel for that?
Baldschun: I can’t add anything to that but I can imagine that John will be talking with Dexter on
the proposed agenda for January and make a decision on conducting the meeting or adding to the
agenda.
Ferguson: Okay, do we have any commissioners that are going to be absent January 3. But we
have a fighting chance for quorum.
ADJOURNMENT
Ferguson: Okay, move to adjourn. Happy Holidays
Utilities Advisory Commission 11-01-00 Page 25