HomeMy WebLinkAbout2001-05-21 City Council (3)City of Palo Alto
City Manager’s Report
2
TO:HONORABLE CITY COUNCIL
FROM:CITY MANAGER DEPARTMENT: UTILITIES
DATE:
SUBJECT:
MAY 21, 2001
APPROVAL OF THE
IMPLEMENTATION PLAN AND
THE 2001-02 PROPOSED BUDGET
UTILITIES
ASSOCIATED
CMR:223:01
STRATEGIC
CHANGES TO
RECOMMENDATION
Staff recommends that the Council:
1) Approve the City of Palo Alto Utilities.(CPAU) Strategic Implementation Plan.
2) Affirm inclusion of the resources required to implement the strategic initiatives
introduced in this document in the Proposed 2001-02 Budget, Exhibit B.
3) Direct the City Manager to make annual progress reports on the performance of
CPAU in meeting the objectives of the strategic plan.
PROJECT DESCRIPTION
Strategic planning was initiated in late 1999, with the goal of ensuring CPAU could be
flexible and responsive in the face. of market forces which had been unleashed in
California through deregulation. On November 13, 2000, Council approved the Utilities
Strategic Plan (CMR418:00), but asked staff to return with an implementation plan to
carry out the objectives and strategies of the Plan.
In January, design teams were formed to develop key strategic initiatives which will
support the Strategic Plan objectives and strategies. At the same time, an Implementation
Advisory Team was formed to oversee and direct the activity of the design teams. The
advisory group is composed of representatives having a stake in the success of the
implementation plan.
¯ CMR:223:01 Page 1 of 3
The:strategic initiatives : brougl~t, to the Advisory Team by. the design teams span the
functional areas within Utilities. The Advisory Team has selected a limited number of
those which it believes have the highest priority and with which significant progress can
be achieved over the next year.
Two key outsti~nding issues, not fully addressed in the attached report, are continuing to
be pursued by the Advisory Team and Utilities staff. These are:
1)Both the Council and staff have identified the need to review the current governalace
structure of the Utilities to ensure it is well-suited to the new competitive
environment. While the proposed implementation plan can be accomplished with the
current governance structure, implementation may conceivably be enhanced by
alternative structures that are continuing to be reviewed.
¯ 2) One key function of the strategic plan is to p~ovide those in the governance role with a
method, to measure the proposals and activities of CPAU in terms of market
performance. While proposed measures are introduced in the attached report, staff
continues to work to refine appropriate performance measures and will return to the
Council with these prior to the first annual review.
BOARD/COMMISSION REVIEW AND RECOMMENDATIONS:
At its May 2, 2001 meeting the Utilities Advisory Commission unanimously voted to
support the staff recommendations to Council for approval of the Strategic
Implementation Plan, as well as inclusion of identified resources related to the plan in the
Proposed 2001-02 Budget; and to require annual reports to Council on the performance
of CPAU in meeting the objectives of the strategic plan. In addition, it voted to have
staff report to the UAC semi-annually on the progress of’CPAU in meeting the strategic
objectives.
RESOURCE IMPACT
Staffing requirements for implementing this plan include the addition of a Senior
Resource Planner and the reclassification of a Market Analyst to a Senior Market
Analyst. The Senior Resource Planner is needed to focus on increasing Palo Alto’s
influence in the legislative, regulatory and outside agency arenas to meet reliability,
pricing and industry governance objectives in electricity, gas and water. The Senior
Market Analyst reclassification is necessary to retain qualified staff to engage in
customer analysis and conduct surveys, statistical analysis, measure performance of
utility effort in conformance with Strategic Plan and technical research on new product
designs.
CMR:223:01 Page 2 of 3
The additional Senior Resource Planner and the reclassification of the Senior Market
Analyst have an annual cost of approximately $147,546. Funding for this expense will be
included via Exhibit B of the Proposed 2001-03 Budget, and reviewed along with the
entire Utilities Department budget by the Finance Committee on May 24, 2001.
The Utilities Strategic Plan must be flexible and responsive to the changing utility
environment, consequently it is not possible to know, at this time, all of the resource
requirements of implementing the plan. Other items will be brought before Council
through BAO actions as they are identified at future dates.
ATTACHMENTS
A: May 2, 2001 Report to Utilities Advisory Commission
B: Utilities Strategic Implementation Plan
C:. Excerpt of Minutes from UAC Meeting 5/02/01
PREPARED BY: Blake Heitzman and John Ulrich
DEPARTMENT HEAD:
ctor of Utilities
EMIL~ HARRISON
Assistant City Manager
CMR:223:01 Page 3 of 3
MEMORANDUM
TO:UTILITIES ADVISORY COMMISSION
2
FROM:UTILITIES DEPARTMENT
DATE:
SUBJECT:
MAY 2, 2001
RECOMMEND. APPROVAL OF THE UTILITIES STRATEGIC
IMPLEMENTATION PLAN AND ASSOCIATED CHANGES TO
THE 2001-02 PROPOSED BUDGET
REQUEST:
Staff requests that the UAC recommend that Council:
1. Approve the City of Palo Alto Utilities (CPAU) Strategic Implementation Plan
2. Affirm inclusion of strategic initiatives introduced in this document in the Proposed
2001-02 Budget.
3. Direct the City Manager to make annual progress reports on the performance of
CPAU !n meeting the objectives of the strategic plan
BACKGROUND:
The strategic planning was initiated in late 1999, with the goal of ensuring CPAU could
be flexible and responsive in the face of market forces which had been unleashed in
California through deregulation. On November 13, 2000, Council approved the Utilities
Strategic. Plan (CMR418:00), but asked staff to return with an implementation plan to
carry out the objectives and strategies of the Plan.
The objectives of Utilities Strategic Plan are:
1." Enhance customer satisfaction by delivering valued products and services.
2. Invest in utility infrastructure to deliver reliable service.
3. Provide superior financial performance to the City and competitive rates to
customers.
4. To identify and maintain the unique advantages of municipal ownership.
Page 1 of 4
The strategies are:
1. Operate distribution systems in a cost effective manner.
2. Preserve a supply cost advantage compared to the market price.
3. Streamline and manage business processes to allow CPAU to work efficiently and
cost-effectively.
4. Deliver products and services for competitive markets.
5. Attract and retain employees with critical skills and knowledge.
6. Maximize the General Fund transfers and maintain financial strength.
7. Implement programs that improve the quality of the environment.
DISCUSSION:
In January, design teams were formed around the major functional areas of endeavor
within Utilities. The purpose of these design teams has been to develop key strategic
initiatives which will support the Strategic Plan objectives and strategies. At the same
time, an Implementation Advisory Team was formed to oversee and direct the activity of
the design teams. The advisory group is composed of members from key bodies having a
stake in the success of the implementation plan. Specifically the membership of the
Implementation Advisory Team includes: One Council member, two UAC members, the
Assistant City Manager, and the Director of Utilities and his three Assistant Directors.
The schedule for completion has been demanding given the current utility crisis in
California, however the Implementation Advisory Team has remained dedicated to meet
the Council’s time line, and has produced the attached report for approve.
The report addresses two areas of strategic endeavor:
Strategic initiatives which are currently in progress and are well known to the
UAC and Council,
Strategic initiatives which are now being defined.
The strategic initiatives brought to the Advisory Team by the design teams span the
functional areas within Utilities. The Advisory Team has selected a limited number of
those which it believes have the highest priority and with which significant progress can
be achieved over the next year.
There are two key outstanding issues that the Advisory Team and Utilities staff are
continuing to pursue. First, both the Council and staff have identified the need to review
the current governance structure of the Utilities to ensure it is well-suited to the new
competitive environment. Each of the strategic initiatives in the proposed
implementation plan can be accomplished with the current governance structure, but
implementation may conceivably be enhanced by alternative structures that are
continuing to be reviewed. Second, one key function of the strategic plan is to provide
Page 2 of 4
those in the governance role with a method to measure the proposals and activities of
CPAU in terms of market performance. Staff continues to work to refine appropriate
"performance measures for the defined objectives and will return to the Council with these
when all the work has been completed..
RESOURCE IMPACTS:
Most of the strategic initiatives presented in the implementation plan were already, in the
budget process prior to the development of this phase of the plan. Other items have been
initiated recently, and approved by Council in a strategic response to the current energy
.crisis. Yet other items have been added in the Context of this implementation plan. As is
demonstrated by some initiatives that were recently fast tracked; it is unlikely that all
required resources are now known or will be anticipated at this time.
The strategic initiatives are listed below in the context of their impact on the Proposed
FY 2001-02 budget:
¯Distribution system management: Augmentations to the CIP Budget:
¯Distributed generation pilots: Estimated $210,000. from existing public benefit
funds and an estimated cumulative diversion of 2.25 FTE from across all Utilities
divisions.
¯Commodity supply planning: No additional impact.
¯Commodity risk management: One new senior resource planner.
¯Expanded energy efficiency: Funding already in the public benefit reserve, with
additional funds potentially available from the state.
¯Load management: COBUG funding $3 million recently approved by BAO. The
separately proposed curtailment program is self supporting through California
Independent System Operator (CAISO) funds to be received for participating in
the program. A staff upgrade from Market Analyst to Senior Market Analyst will
be in the 2001-02 budget.
¯24 x 7 customer support: 3 FTE
¯Telecom services: 4 new FTE, already approved in November.
¯Fiber to the Home: $300,000 already approved in November to build the pilot in
the test neighborhood. $400,000 to develop the business case, and business plan,
financial plan and marketing plan if the business case is positive.
POLICY IMPLICATIONS:
This plan is consistent with the Utilities Strategic Plan, approved by Council on
November 13th, 2000.
Page 3 of 4
ATTACHMENTS
A: Utilities Strategic Implementation Plan,
PREPARED BY: Blake Heitzman, Interim Telecommunications Manager
DEPARTMENT HEAD:
JOHN ULRICH
Director of Utilities
Page 4 of 4
E X C E R P T
UAC
May 2, 2001
The Utilities Advisory Commission meeting was held on May 2, 2001 at 7:30 p.m. in the
Palo Alto City Council Chambers. Those in attendance were as follows: Rick Ferguson,
George Bechtel, Dick Carlson, Bern Beecham. ’
Item 2: Strategic Implementation Plan
Blake’snot here right now. I can probably walk through this presentation. Can you hear
me? Good. We passed out copies of the presentation in addition to the CMR. There will
be packets for the public. The request this evening is action for approval for the
implementation plan. Two of you, Mr. Bechtel and Mr. Beecham have been on the
committee and we’ve had others working on this also so there is a good group of people
who have been involved.
The .goals of the Strategic plan are to prepare for the competitive forces unleashed by
deregulation, develop strategies that are responsive and flexible, involve key stakeholders
across the organization to create broad ownership, create a plan that can be broadly
understood by both professional and the public, and create a plan that can be
meaningfully referenced. It doesn’t do much good to have a. program that is not
understood and bought into by everyone.The objectives are to enhance customer
satisfaction by delivering valued products and services, invest in utility infrastructure to
deliver reliable service, provide superior financial performance to the City and
competitive rates to customers, and to identify and maintain the unique advantages of
municipal ownership.
Our strategies are to operate distribution systems in a cost effective manner, to preserve a
supply cost advantage compared to the market price, and streamline and manage business
processes to allow CPAU to work efficiently and cost-effectively. Deliver products and
services for competitive markets, attract and retain employees with critical skills and
knowledge, maximize the General Fund transfers and maintain financial strength and
implement programs that improve the quality of the environment. As you all know we’re
doing many of these activities now. The idea is to have it clearly tmderstood that is our
responsibility now. Everything we do should fit into those strategies. So we’re not
diverting our attention into other things.On November 13, 2000; Council members
approved the Utilities Strategic Plan, and asked staff to return in the spring with an
Implementation Plan. Today we’re presenting an outline of that and what we plan to do.
The advisory team consists of one Council member, two U.A.C. members, the Director
of Utilities, two Assistant Directors, and the Assistant City Manager.
The functions of the Advisory Team are to review design team submittals, direct
additiOnal effort where necessary, prioritize strategic initiatives, prepare the plan report,
and advocate the application of the strategic plan to the governance process
I’m moving rather quickly on this as many of you have already seen this but I want to
make sure to cover all the highlights.
The design team will identify strategic activity which is or should be performed in their.
functional area, develop detailed information about the strategic activities (including
costs and benefits, schedule, strategies and objectives supported.
On-going activities Will include distribution system improvements, financial planning,
energy efficiency programs, dark fiber leasing, customer product planning, and
commodity supply planning. Key new initiatives of local distributed generation,
expanded customer service, load management, fiber to the home, and financial risk
management will be concluded in a couple of years. We will be putting this together
over the next few months and testing it.
The highlights of our efforts so far has been Council’s approval of the Strategic Plan,
strategic objectives being integrated into the governance process (budget), and eleven
strategic initiatives identified for immediate efforts.
Implementation activity has begun for identified key initiatives, including: design
activity for approved programs, construction activity for approved programs, research
activity, including pilot projects to develop business cases for potential programs. And,
two issues need further work, continue to finalize performance measures and to look
prospectively on governance.
Conclusion: Top one is almost a no-brainer, nothing is certain in the California utility
industry. As we have learned, a new crisis can occur at any time. My pager just went
off as I was talking. [Looks at phone message] The California ISO is extending the
system.waming through 5/3 for 24 hours. This is the latest update on the energy situation
in California. With a well crafted plan CPAU can react to change in a flexible and
responsive marmer to take appropriate actions to meet new challenges.
.In conclusion the staff requests the UAC to recommend that Council approve the CPAU
Strategic Implementation Plan, affirm inclusion of identified strategic objectives in the
proposed 2001-02 budget and direct the City Manager and the Utility Director to make
annual progress reports.
While it’s a little difficult to see, this is an example of, these are our key plan strategies
listed on the left and I’ve mentioned most of them. On-going would be the distribution
system, the financial planning, energy efficiency programs and so forth. And then going
to the right, would be where it fits into our individual strategies. So we’ve got real clarity
on everything that we plan to do. And the last page adds the additional information.
Now that was very quick and Blake Heitzman and I will be pleased to answer your
questions.
Ferguson: Great, thank you John. Commissioners again, we have a long agenda tonight.
Let’s see if we can do our Q&A here in ten minutes or so. Mr. Dawes, you had a
question along the way?
Dawes: First I want to congratulate the staff and the committee on an outstanding
implementation plan. I think it really adds hugely to the whole planning effort, he
questions I have going through this were, I didn’t notice any prioritization of the
initiatives to implement the strategic plan. And I didn’t know whether there was a need to
do this, a request that the U.A.C. and the Council get involved setting these priorities for
optimization? Is there interest in polling these bodies for items to. add or delete to this
implementation plan? And I’ll just go through these items quickly.
Thirdly, I had talked about benchmarking some time ago and while there is a little in here
about comparisons and trying to get set standards, benchmarking with other Munis’ or
IOUs, I think would be and exceedingly useful aspect to the implementation of the
strategic plan. And lastly, not quite last, it was mentioned in many of these of additional
staff requirements and I didn’t set down add them all up but it seemed like quite a bunch
of folks required and I would be interested in seeing what sort of additional folks we
would need to implement this all. And lastly, I was very curious about the fact that we’re
starting distributed generation experiments and as far as I know, we hadn’t put any
money into that. I think that is a wonderful business area to be in but it can be
exceedingly capital extensive, depending on how we embark upon that. I would be very
interested in what we’re trying and what the approaches are and whether you intend to
come in with a big capital Come in with a big capital request for funding generators for
our customers, leasing them to them or something.
Heitzman: I’ll try follow the order you presented questions. The prioritization process,
the initiatives that you see in the report as being key initiatives are actually the ones we
picked as being high priority. I think if you look down below them youql see several
lower priority ones that were put as back bumer ones, so to speak. So the initiatives are
distributed as such that different work areas are working on each one so I don’t think
there’s much need for further prioritization as far as that goes. Certainly your comments
would be useful and helpful. The key one for each work area is the one that is presented
as a new initiative and report.
Benchmarking was something that was talked about in our last meeting and it’s a very
complex issue and is something that is part of the performance measure process that we
are still trying to define. There’s two levels of concern,, one is to be able to come up with
a limited number of performance measures that the general public and people that are not
well versed or extremely knowledgeable about the process can use as a measure. What
we’re talking about in the report, are four samples that could be used as a aggregate
measure that measure general conditions such as what is customer satisfaction,
aggregated: across the whole organization. What is financial performance aggregated
across the whole organization, We hadn’t settled on those. And then there’s an issue of
having performance measures that are very detailed and people who are very
knowledgeable can understand it and see and understand. AS you know, there are 100’s
of possible benchmarks. So the problem is sorting out which of those 100’s we want to
work with. Even an knowledgeable person has to limit the set of measures that they are
going to work with. That’s an issue that has to be done over the next year before we
come back with an annual report and so on. So that is still being worked on.
The staffing issues that you brought up, many of those are already in the budget. I guess
I should start out saying we don’t know that all the strategic initiatives that we want to
initiate this year are already identified. Things can change, and certainly they have
changed over the last few months. So it’s obvious things are always changing so we
don’t actually know what resources we will need over the year as something else
happens. The staffing you see in that report, many of those are already approved and
some of those are to be approved. For instance there is the issue of the dark fiber
business. Some of those positions are mentioned in the report and have already been
approved. And then certainly for the 24/7 staffing which is upcoming there will have to
be additional positions in order to be able to do that kind of service. So I think what
you’re seeing is some of those numbers reflect things that have already happened and a
fairly labor intensive issue of having a 24/7 service. I think that’s a major stepl There is
also staffing in there that you see that is just people being redirected by the Strategic Plan
to do something that they hadn’t been doing before, leaving other things undone. So that
some of that is redirection to work on some of these projects.
Last thing you mentioned was the distributed generation, and the projects they are
looking at now are fairly small capital projects, they are very small and a lot of that
money has been identified to come from existing sources, some can possibly be done
through the public benefit money. So whether or not we will come forward with a
request for large expenditure in the future will depend on how the experiments come out.
The pilot projects and the business planning coming out of those pilot projects would
determine whether or not we would come forward and ask for more.
I think that’s true with some of the other projects, such as the Fiber To The Home project.
If it works well it looks like it can be done, and financially feasible to get done in a way
that benefits the citizens and also doesn’t cause us to loose money, then there may be a
request in the future to expand that project across the City. That’s kind of what we are
looking forward to seeing but it. will also depend on what the experiment says and the
results of that.
Ulrich: I’d like to add a couple of points. That is precisely why this implement plan and
having the strategic plan completed because our efforts will be as we bring ideas forward
will fit them in and show how they apply to the SP I think it will make these ides much
easier to see what we are trying to accomplish. And that we’re not moving off into some
unknown territory that are not related to the strategies of the Utility. That’s the whole
point of this, you’ll be able to see where we’re going and why we’re doing it. I think the
first question you asked was about changes, how you could impact changes if you wanted
to change strategies or others. I would see that we would do that frequently. The
objectives, I don’t see changing at all. We should agree on why we’re here. Strategies
and how we achieve those objectives, those can change beyond the seven that we have. I
don’t want to go and move off into new areas without it being grounded on what our
focus should be in the utility ofPA. I think everything is going to fit together and we can
agendize this as fi:equently as you’d like to revisit it.
Some of the measurement systems you point out in the benchmarking are available now
and we do use them. We just finished one and will incorporate it. Some of the other
areas, there hasn’t been much benchmarking within the industry, we’re kind of breaking
new ground in some things. In other areas related to these positions and focus, we can
get to some of this during the budget discussion.
Ferguson: Any comments, Mr. Bechtel
Bechtel: John and Blake, I think also ought to say, let me just mention that being part of
the advisory team, I saw a lot more proposals on the table that we considered and so in
essence the team and I think with our guidance only, the actual participants, Dexter, went
through a Culling process of their own. There were an awful lot of proposals for action
and so what you see is already a distillation of a lot of good ideas that surfaced through
the various work teams already. The other is I was very pleased to see incorporated in
the budget document lots of references to the materials in the Strategic Plan, so almost by
~default we have approved the implementation plan because you’ve already incorporated
it into your thinking. My only question on a new topic is the one on governance. I know
we’ve not really addressed that. Can you give us a feel for when the governance issue
might be addressed during the coming months or perhaps certainly in this. next fiscal
year.
Ulrich: As you know, that was one of the key areas we wanted to look at and as-we move
th(ough the implementation area thought this would slow us down and was quite a large
topic. When we went out and looked there were not a lot of other utilities that have taken
the initiative from the part of the utility to look at the governance. Those directions
came from City councils or from the governing body. And we thought we needed to look
at how that would work and how it could apply here but we didn’t want. to slow down
what we got started on the implementation plan so thought it would be better to role out
what we have and then continue to look at the governance. It became clear to me that
many things as you see in the implementation plan can be done without going through a
lengthily process on governance.
Ferguson: Any other comments? Mr. Carlson?
Carlson: Yes, I just want to comment on that distributed generation area which I think is
a very important thing for us to get into. But I think you need to add the perspective of
looking at distributed generation is one of the bigger longer run risks we face if it
becomes as cost effective as some forecasters believe in the three or four year time frame
that means 7cents a kilo watt hour so, then if we’re stuck at much higher rates not,
because of current problems it’s a long run competitive issue and it’s a great way of
getting into see how much a problem it might be is to get into it ourselves and start
supplying it.
Ulrich: I think that is important as it can have a significant impact as to on where our
future power comes from and this is an area that we need to take the initiative on. Mater
of fact, coincidently I had a call from one of our major trade allies about using PA and
several of it’s customers in a beta test on a test of that system so there’s a lot of interest in
doing it and the cost effectiveness would be important and as a gas utilities this would be
important opportunity for us if it’s a good business. The other part is if it’s really key,
not necessarily the cost, it is the reliability that can be added to our customers for adding
to distributed generation. We think in the short run that is a critical area being able to
manage your business and having reliability of service than a current commercial
distribution system can provide.
Ferguson: Mr. Dawes?
Dawes: I was intrigued by Mr. Bechtel’s remarks. Is the commit going to ,be on-going.
and continue in a prioritization mode on implementation on strategizing in the future or is
this a one shot deal, and if it is one shot deal, how do we get that prioritization in the
future?
Ulrich: You could do it a number of ways, . I don’t think that having the committee
constituted as it is now is necessarily the best use of time later on. What you could do, I
guess my vision would be more is to revisit this frequently and as a group or have some
instructions to the staff as to review the priorities and review our strategy in what we are
to do and have that continued dialogue and as new things come up whether it is
distributed generation or a new type of product come back and talk about how it fits
within our Strategic Plan. We expect this to be a living document, not well we have now
done it now let’s move to something else.
As one of the participants on the committee, I appreciated a chance to go through the
process, to go through this first rehearsal of applying these strategic objectives and
strategies to the actual product line items and one of the things I want to stress to the
Commissioners here are the dimensions on this chart. That’s our handy work. That’s our
stuff. And the staff has played it back to us and organized it in projects left on this chart
and one of the things they did well on this round is to identify to good strategically
correct things that they have been doing all along as well as the half dozen high visibility
things, some are big dollars, some are not .big dollar items that indicate a change in
direction. This seemed to be a nice short summary and because it is short and because it
is easy to refer to I hope that when we craft a motion here in the next minute or so that we
schedule this at least twice a year, maybe the September-October time frame and March-
April. One .month ahead of our year December mid-term budget and our annual budget
exercise so that when we focus on the budget ’and we are doing it tonight for the first time
in a rough way we are focusing on the budget with a kind of a strategic stance, a firm
platform a sense of direction so with that said I am pleased with the result and glad to
have had a chance to participate.
Beecham: I have just a few comments to make. The proof of a good strategic plan is that
you get to where you think you want to go. And that you manage the process of g~tting
there. The other element of it is that when the world changes you can change
immediately for it and we certainly have the opportunity in this year 0r next year to find
out if, in fact we have the right plan for that. I certainly think what we see so far in the
organization that in fact that with this plan and with management they are very light on
their feet in terms of being able to change direction as missions change and that, if you do
a plan that creases where you are going, you can’t get there, basically and I think this is a
very flexible plan and staff knows they have to able to dance.
Dawes: I would like to propose a motion that the UAC recommend approval to ,the City
Co9uncil of the Utilities Strategic Implementation Plan and associated changes to the ol-
02 proposed budget and add to that that we would urge staff to return twice a year to the
UAC and the Council with updated list of projects within the Strategic Implementation
Plan to facilitate planning and mid-year budget planning.
Bechtel: Second
Ferguson: Any other comments.
The only comment that I have is that Dexter’s motion asked for progress reports twice a
year; the staff recommendation was annual progress reports. I am wondering whether
staff has any - but he did mention budget updates. What is the feeling on updating,
annual, twice a year any feeling.
I think if you want to make any major changes that are not affected by some crisis that we
are not aware of, I think you would want to do that once a year so that we can budget and
move towards completion of those areas. If, on the other hand, you want to measure
results and fine tune it or tweak it then I think twice a year would be great for that.
Depends on what your expectations are at each of those review points.
Bechtel: Perhaps then I might move an amendment to say twice a year with the UAC and
an annual progress review with the Council.
Dawes: Accept.
Ferguson: The motion is amended to twice annual review with the UAC and once annual
review with Council. With the amendment motion in front of us. Any other discussion?
All those in favor say Aye. [All say aye] Anyone opposes? [None] Motion passes 4-0.
Ulrich: Just a couple of a closing comments, I just wanted to thank staff and all of you
who have participated in this. It is a much better document and is really going to stand
the test of time for all the work you have put into it. In particularly, Blake for managing
the project and keeping us all on track to get it done,
Also, the City Council tl~ere will be a public hearing -it is on the agenda 14th of May so if
you would like to join us and participate in that, I would appreciate that also.
Thank you.
¯ Table of Contents
Utilities Strategic Implementation Plan
Executive Summary
Table I
Table 2
How This Report Is Organized
How This Report Was Developed 5
Descriptions of the Strategic Initiatives
Distribution System Management
Financial Planning
Commodity Supply Planning
Expanded Energy Efficiency Programs
Telecom Services
Example Performance Measures
5
6
9
12
15
17
19
Conclusion 22
Page 1 of 23
PALO ALTO UTILITIES DEPARTMENT
STRATEGIC IMPLEMENTATION PLAN
Executive Summary
On November 13th,. 2000 the Palo Alto City Council (Council) approved the Utilities
Strategic Plan and directed the City Manager to return to Council with an implementation
plan at a future date. This report is in response to that Council directive. The purpose of
this report is to provide Council with a clear description of the nature and direction of
the strategic implementation effort which the City of Palo Alto Utilities (CPAU) is taking
to achieve the four objectives and seven strategies of the strategic plan.
The Strategic Plan does not proscribe a list of actions to be taken, but rather sets a
constant guide and reference upon which to focus the long range and continuing CPAU
activities. While maintaining that long-range vision the plan allows CPAU to be flexible
and responsive in a rapidly changing environment. No one could have foreseen the
bankruptcy of PG&E when the strategic plan was approved on November 13th, 2000. Yet
the strategic plan has provided a guide for staff to take successful initiatives in vastly
different circumstances than existed when the plan was approved, six short months ago.
Examples of new initiatives that have recently been taken to achieve the strategies and
objectives in this new environment are:
¯The recent development of the load management program and the COBUG
emergency generation projects to support the strategic objectives of customer
satisfaction and system reliability in the face of the rolling blackouts conducted by
the ISO.
¯Involvement in the PG&E bankruptcy process to protect the financial value of the
electric utility for Palo Alto and its citizens from default by PG&E on its
contractual obligations in association with the Western contract.
Both of these efforts are described in more detail within the body of this report.
The new paradigm faced by CPAU has moved staff to develop the new activities
described above, however, there are ongoing programs which are also aimed at achieving
CPAU’s strategic objectives. Though information, methods, and activities within these
programs may vary, the enduring goal is to achieve the strategies and objectives of the
strategic plan. Council is familiar with most of these programs through previous reports.
Important examples are:
¯The on-going refurbishment of the distribution system to reduce maintenance
costs, comply with regulations, and improve service reliability.
.¯Financial planning to maintain competitive rates while making a reliable and
significant return to the General Fund.
Page 2 of 23
¯Customer product planning through.research of customer needs for product and
service alternatives.
¯Commodity supply cost and volatility management through approved risk
management and contracting activities, and the representation of Palo Alto’s
interest before regulatory and legislative bodies.
¯Expanding energy efficiency programs to reduce resource consumption and costs
to customers, and to reduce the impact on the environment.
¯Operate. a dark fiber system for current and expanding high-speed data needs of
commercial and industrial customers of all sizes.
Other key new initiatives which are of a strategic nature but do not promise immediate
mitigation of the current energy crisis are being pursued by CPAU to meet .customer
needs over the long haul. These include:
¯Research and developmental projects in distributed generation to provide a long
range partial solution to reliability and supply cost control.
¯Establishing 24 x 7 customer service to provide around the clock rapid response
to customer emergencies and to allow more convenient scheduling of field
services visits. Also establishing a web presence to allow on-line bill payment,
review of billing and usage information, and the scheduling of services.
¯Research the expansion of high-speed data services to residential customers
through the fiber to the home (FTTH) project.
A quick overview of all the strategic initiatives versus the key strategies and objectives is
presented here in Table 1 and Table 2.
Table 1
Strategies and Initiatives
Key Plan Strategies
Implementation Initiatives
On-going, in-pro~lressi or cornplet~
Distribution system improvements
Financial Planning
Energy Efficiency Programs
Customer Product Planning
Commodity Supply Planning
Dark Fiber Leasing
Key new initiatives
Local Distributed Generation
Expanded Customer Services
Load Management
Fiber to the Home
Energy Risk Management
X X X
X
X X X X
x x
X X x
X X X
X X X X X X
X X X
X X X X
X X X X
X X X
Page 3 of 23
Table 2
Objectives and Initiatives
Implementation Initiatives :~ i ,~i ~/ ¯:
O~;going; improgress, or complete i:I~ ~
Distribution s~,stem improvements X
Financial Planning X
Energy Efficiency Programs X X
3ustomer ProduCt Planning X X
3ommodity Supply Planning X X
Dark Fiber Leasing X X
Local Distributed Generation X
Expanded Customer Services X X
Load Management X
FTTH X X
Financial Risk Management X
Measures are necessary to track CPAU’s success in implementing the strategic plan.
Staff believes that performance measures should be few, simple and easily understood by
the Council and the public alike. The-Advisory Team and staff believe it is efficient to
adopt four understandable measures, one for each objective of the strategic plan.
However it is difficult to pour the many aspects of the CPAU business into so few
measures. While no measures have been selected for presentation at this time examples
of the types of measures that could be used are:
¯Gap analysis for customer satisfaction. The gap is the difference between the
service received by a customer and that which they had expected to receive.
¯Value creation for financial performance. Value is created when CPUA provides
a return (for the customers and the city) which is greater than could be achieved
by investing in a risk free instrument.
¯There are industry standard reliability indices that are used to describe the
reliability of an electric utility. In general, these indices measure the number of
minutes of customer service interruptions, per customer, per year. These indices
are used by the CPUC to evaluate performance based measurements for the three
regulated utilities.
Page 4 of 23
The advantages of municipal ownership. APPA has identified a list of
characteristics which accompany municipal ownership of a utility. CPAU could
be compared to this yardstick.
Finally the implementation of the strategic plan involves various efforts, some which
have been quick responses to the volatile energy situation, and some which offer long
term solutions to the current problems. Other initiatives address customer needs for high
level and convenient service, or expanded communication capabilities in their
neighborhoods and to distant points on the globe. In all,cases, the activities represent a
flexible and responsive effort to achieve the strategies and objectives of the Utilities
Strategic Plan.
How This Report Is Organized
This report is organized around projects and programs that will produce tangible results
in one or more strategic area. Each project’s contribution to the objectives and strategies
is summarized in Tables 1 and 2 in the executive Summary.
To provide perspective regarding the direction of this .strategic plan, the discussion of the
new projects is preceded by a summary of recent and on-going strategic effort. Many of
the new efforts are an evolution of curren( and past efforts. The presentation of the
proposed initiatives and past and on-going efforts provide Council with a comprehensive
picture of Utilities strategic positioning.
How This Report Was Developed
In order to prepare a report that addresses the interests of key stakeholders, an
Implementation Advisory Team was formed with membership from: the City Manager’s
Office, Council, the UAC, and the Director of Utilities and his executive staff. This
advisory body reviewed detailed planning material from Utilities staff and then provided
direction regarding the content of this report. The projects selected for inclusion in this
report are key strategic efforts which are sufficiently focused in scope to make significant
progress over the next year.
Descriptions of the Strategic Initiatives
In the past, strategic planning was done in the Utilities Department on an independent
division by division basis. The pieces were then consolidated to form the Utilities
Strategic Plan. The current plan is the product of representatives from all Utilities
divisions collaborating to set the strategic plan in place. Each of the following sections
addresses a major functional area within Utilities. Within each functional area we first
describe completed, on going or in-progress strategic activity which is being managed by
staff in that functional area. Next, in each section, we describe one or more key new
strategic initiatives proposed for development. We also describe other strategic
Page 5 of 23
initiatives, which were considered but have been placed at a lower priority than the key
initiatives. These may be developed at a later date.
Distribution System Management
Rebuilding and maintaining the distribution systems is the second largest Utilities
expense, ranging from $5 to $10 million dollars per year (commodity purchase is the
largest). In .the past, the rebuilding activity could only be called strategic in that it
followed a planned schedule of completion.
Parallel to the development of the strategic plan, new management has refocused
distribution system improvement.s on the priorities of: reducing maintenance costs,
improving service quality, addressing regulatory compliance issues, and providing
service at the lowest reasonable cost.
This is being done by focusing on distribution sub-systems where the materials and
methods of construction have statistically reached the high maintenance-high cost phase
of their life. By focusing on these sub-systems staff is achieving the dual strategic
obj ectives of:
1."Improve financial performance" by replacing equipment which has a high
maintenance cost and greatest safety risk; and,
2."Invest in utility infrastructure to improve reliability" because the replaced equipment
is also the most failure prone equipment.
Electric distribution system replacement also targets removal of problem, subsystems
before 2004 to help offset rising supply costs with reduced maintenance costs. This will
also help meet the strategic objective of maintaining "competitive rates for customers"
over the long run.
Key New Initiative - Local Distributed Generation:
Project Purpose: To provide safe, reliable and competitive energy supply in an
environmentally responsible manner.
The shortage of power supply in California, the regulatory difficulties in siting new
power and the political realities of California bode for continuing shortages for some time
into the future. With many of Palo Alto’s major customers requiring high power
reliability, local generation offers a solution that can keep Palo Alto businesses operating.
This proposal is to construct pilot distributed generation stations on or near promising
customer sites. If the project meets power reliability and financial goals the program
could be extended to other interested customers. An additional benefit of CPAU’s
approach to distributed generation is that most design alternatives are environmentally
Page 6 of 23
friendly, and provide greater efficiency because the energy losses caused by transmitting
power over the state transmission grid are avoided, and the heat by-product of generation
(co-generation) is available to reduce the cost and pollution of burning additional fuel for
heating. This will be important as CPAU evaluates projects in their overall impact and
benefit to our customers.
Customer need:Providing appropriate reliability is one of the strategic plan objectives.
Customer surveys indicate that 90% of Palo Alto’s major customers view service
reliability as their number one utility concern. Two-thirds of these have expressed
willingness to purchase firm power supply from CPAU, even at a higher price.
If the pilot phase of this initiative is successful then CPAU would offer distributed
generation to key customers who express willingness to contract for premium reliability.
If that phase of the program proves successful, Utilities would consider installing
distributed generation for customers with less critical needs.
Time Frame: Currently a core team with key expertise from across the Utilities
organization has been assembled. Their first task is to identify distributed generation
alternatives and consultant expertise to complete the following prior to October 2001:
¯a business plan
¯resolve technical issues
¯design and install pilot project
¯identify 5-10 additional potential sites for distributed generation
On a parallel track Utilities staff will conduct customer research to determine if the
targeted customer classes are willing to pay the necessary rates to justify the costs of
higher levels of reliability.
If the first phase demonstrates potential for this technology to meet Utilities objectives
then in the winter and spring of 2002 the second phase would be implemented by testing
two technologies at up to four sites in Palo Alto.
A final report and business plan for offering the service to major customers would be
completed by the end of 2002. The business plan will recommend offering a distributed
generation product if the following questions can be answered affirmatively:
1.Customer satisfaction- Does the program create sufficient customer satisfaction that it
retains reliability sensitive customers?
2.Financial performance- Is the program capable of generating sufficient revenue to be
financially viable?
Estimated resources:
This project requires the assembly of a conceptual design team composed of
representatives from work groups with different sets of expertise. This conceptualization
phase will last from several weeks to several months depending on the complexity of the
project and the time staff has available (or is told to make available) to complete it. This
Page 7 of 23
particular conceptual team includes staff fi-om: Supply Resources Group (supply issues),
Engineering (physical design), Competitive Assessment (customer technology research),
Rates (rate design), and Marketing (customer interaction). It is-estimated that the
cumulative effort of this group will be .5 full time equivalent (FTE) employee.
Other staffing related to the project includes:
¯Design and project management- 1.5 engineering FTE
¯Support staff, including marketing, legal, financing- .25 FTE
¯On-going maintenance - .1 FTE per year
Total staff commitment during the two year pilot = 2.25 FTE
Financial resources include the following:
¯Consultant expenses during the pilot phases = $70;000-$90,000.
¯Construction costs during the pilot phases :
¯$600-800/kw without co-generation, or
¯$1000-1200/kw with cogeneration
¯totaling to $20,000 to $40,000 for a single demonstration in the first year
¯totaling to $40,000 to $80,000 for two demonstrations in the second year
Maximum estimated financial commitment for a two year pilot = $210,000
Project Status: Previous distributed generation studies have provided a useful starting
point for the core team and consultant. The core team has been formed and has identified
funding for the first phase through the public benefit program.The team is now
researching qualified consultants, and ~¢arious equipment providers.
Strategies and objectives affected:
1. Strategies 11 2, 3 and 4 are supported by this activity.
2. Objectives 1, 2 and 3 are supported by this activity.
(See the appendices for more thorough descriptions of the objectives and strategies)
Other new initiatives which were considered:
The following initiatives were also considered for development in support of long range
strategic goals related to the distribution systems. However, in order to remain
sufficiently focused, only the above "Local Distributed Generation" was selected for
immediate action. This project was selected because it is believed to provide the greatest
potential for meeting the strategic objectives. Some customer research will be conducted
related to the other projects in the near future.
Premium Service for Medium and Large Customers: In order to understand where
premium reliability can be cost effectively constructed it is necessary to survey
customers to determine which ones are willing to pay additional fees to maintain this
high level of reliability. This survey will be conducted within the next year.
Page 8 of 23
2.Power Quality Services: To determine the feasibility and market for power quality
services. A study of customer power quality needs will be completed this year.
Financial Planning
Strategic financial planning is an integral part of the operation of Utilities, Financial
considerations and activities include:. Develop and monitor the budget,, develop
¯ competitive rates based on cost of service principles that meet revenue requirements,
develop and implement sound reserve policies and general fund transfer policies, prudent
management of utility finances, maintain a high bond rating, computer modeling of
financial contingencies based on a ten-year financial forecast, and staggering multiple
utility rate increases to minimize customer bill impacts.
Several years ago, as Palo Alto broke into the competitive era, the major financial issue
of reco+ering stranded costs was brought before Council and the Calaveras Reserve was
established. During the last ten years, Council has approved the establishment of Utility
Rate Stabilization Reserves and policy guidelines and the Utilities equity transfer policy.
Such policies need .to be revisited periodically on an on-going basis. In this era of volatile
and rising wholesale energy costs, maintaining the fiscal integrity of the utility funds
depends on timely retail rate adjustments. Also, the importance of forecasting energy
consumption and wholesale prices will continue to rise as the benefits of the Western
contract erode and also as long-term wholesale gas Contracts are executed with suppliers.
Key New Initiatives - Financial Planning:
The following are new or in-progress financial planning initiatives. All support strategic
objective #3: "Provide superior financial performance and competitive rates". Objective
#1, customer satisfaction, is supported indirectly by offering competitive rates.
1.Deploy a work order system in FY2001-02 to track system operations costs
accurately and to enable the targeting of high expense distribution sub-systems for
modification, upgrade or replacement.
2.Use bond financing for three years beginning in FY01-02 for CIP projects to levelize
rate impacts over the life of the projects.
3. Develop and implement financial strategies in F¥0i-02 to address and transition
towards higher electric energy costs in the post 2004 period.
4. For the FY01-02 budget, the gas and electric supply reserve guidelines were reviewed
in the context of new uncertainties in the wholesale energy markets and revised
guidelines are recommended for FY01-02:
5.To soften the impact of skyrocketing wholesale gas costs over 12 months, the utility
has followed a financial strategy to implement a series of major retail rate increases in
Page 9 of 23
FY00-01 while drawing down on the Rate Stabilization Reserves and then building
up the reserves in FY01-03.
Customer Product Planning
Palo Alto Utilities has always prided itself in being responsive to its customer-owner
needs. Strategically the goal has been to provide our customers with offerings of
services, which are similar to those provided by. larger utilities, and to deliver these
services in a prompt and courteous fashion. Over the last several years, we have honed
our effort to understand customer interests and needs through expanded customer
surveying techniques regarding existing and proposed products that we could offer. This
information is necessary to strategically position ourselves to meet the most critical needs
of our customers.
Utilities’ dedication to customer satisfaction is characterized by a continuing dedication
to energy efficiency and environmentally sound programs, responsiveness to customer
calls, and early adoption of customer choice programs. We have been rewarded for these
efforts by very positive feedback in all our customer surveys.
Key New Initiative - Expansion of Customer Services:
Project Purpose:
There are two significant initiatives planned to improve customer service and meet
customer expectations. They are operation of a 24x7 field service unit and introducing
Customer Self Service (CSS) through web access.
1.In order to achieve an "in-town presence" to respond quickly to gas leak emergencies
and to introduce a more convenient level of customer service, the Utilities Field
Services .operation is proposing to move to a 24 by 7 (any time) service level. This
will improve the response time to dangerous conditions during off-hours (between
9pm and 7am) and on weekends. Expanding the hours of field service will enable
customers to schedule field service visits at their own convenience and supports the
strategic objective to "enhance customer satis~’action by delivering valued products
and services."
2.Through web access, enable customers to view their billing information, execute
automatic payment options, and sign up for services. This will also help reduce the
call activity and load on the customer service call center, making it possible to
improve the focus on customer inquiries, which cannot be addressed through the web
access.
Customer need: Several surveys conducted by Utilities staff have shown that citizens
place great value on the convenience of 24 by 7 access which is offered through an
Page 10 of 23
intemet presence, and around the clock staffing. In Palo Alto, many citizens expect this
level of service.
Time Frame:
¯ By the end of the spring, select a CSS software vendor and work out the design and
cost details.
¯In summer initiate a pilot internet presence to test the program and go-live system
wide with CSS in the fall.
¯After the budget approval, post, fill, and train 3.0 field service employees to begin to
expand to 24 x 7 Customer Service Center staffing by January 1, 2002.
Measures of success:
Customer Self Service- The program will be expanded and offered if the following
questions can be answered affirmatively:
1.Customer satisfaction - Do customers indicate satisfaction with the availability and ’
usefulness of the on-line service?
2.Does the Intemet traffic volume indicate an appropriate level of customer usage and
acceptance of the service?
3. Are there indications of reduced traffic to the Customer Service Center?
24x7 Field Service Operation-
1. Customer satisfaction - Do customers indicate satisfaction with the 24 x 7 availability
and convenience offield service appointments?
2. What is the improved response time on gas leaks by having an in-town response
capability?
Estimated resources:
Included in the FY 01-03 budget is a recommendation to add 3.0 full-time field service
employees to provide a 24 x 7 Customer Service Center presence.
The Customer Self Service software application was included in the Council approved
Capital Improvement Project for the Utilities Customer Information System.
Project Status: An RFP for the CSS has been issued and the responses are being
reviewed at this time. The 24x7 field service operation is included in the Utilities F¥01-
02 budget proposal. ¯
Strategies and objectives affected:
¯Objective 1 is supported by this activity
¯Strategy 4 delivers products and services in a competitive market.
(See the appendices for more thorough descriptions of the objectives and strategies)
Page 11 of 23
Other initiatives which were considered:
1. Expand the understanding of our performance. To be certain that the services we
perform are done promptly and courteously we are expanding our satisfaction
surveying to include all points of contact between the Utilities and the customers.
2. Expand our understanding of customer needs. We are segmenting our customers
according to their activities, size and needs. We then research the services that we
could offer and we survey customers to see if these services would be valued. In
accordance with the strategic plan, services with high customer value are pursued for
development.
Both of the above activities are scheduled. The cost to do so requires an increase from
Market Analyst to Sr. Market Analyst to acquire staffing with the skill to collect and
analyze statistical information related to customer satisfaction. The increase to the senior
position will also address the key strategy of acquiring and retaining skilled staff.
Commodity Supply Planning
Purchase of supply commodities for gas, electric, and water is the largest budget item for
City of Palo Alto Utilities. The normal combined commodity budget for FY 99-00 was
about $47 million. However, in the last nine months an energy supply crisis has
developed in California and the estimated FY 00-01 cost for commodities is expected to
be $65 million. The budget for FY 01-02 is estimated at $92 million, this is a 96%
increase over the budget a mere two years ago.
The PG&E bankruptcy, the PG&E filing at the Federal Energy Regulatory Commission
(FERC) that could raise Western rates by more than 300%, the hyper-volatile gas and
electricity markets, the volume of power that needs to be purchased to replace the
Western contract in the post-2004 period and the large water cost increases expected to
come with the SFWD replacement of aging infrastructure will require careful
management to ensure that costs do not increase more than necessary.
Commodity costs are passed directly through to the customers, however CPAU takes
pride in a long history of maintaining one of the lowest electric utility rates in the state.
In addition, it is a primary mission of the City of Palo Alto and the Utilities Department
to maintain an environment where the businesses and citizens can prosper economically.
As a consequence, the Supply Resources Group (SRG) continually strives to reduce the
cost as well as the volatility of prices. Currently SRG manages costs and volatility as per
the guidelines of a risk management program that has been approved by Council and is
overseen by a high-level management committee called the Risk Oversight Committee.
Due to the increased volatility of the commodity markets additional tools - financial
instruments - are needed to increase the efficiency and lower the costs of purchasing
supply. Additionally, the risk management program needs to be improved; and adequate
controls, training and resources need to be dedicated to this task. The risk management
tools that are not currently authorized for use would prove beneficial to the customers.
Page 12 of 23
The current Western contract will expire in 2004. The present PG&E bankruptcy could
accelerate the need to purchase replacement power since PG&E’s actions could result in
the loss of a substantial amount of Western power prior to 2004. In the next few years
SRG will actively negotiate replacement power contracts and also investigate the siting of
power plants in Palo Alto and the Bay Area. These efforts will be undertaken within the
risk management guidelines.
The current supply shortfall in California is not just a technical problem but also a
regulatory and legislative problem. As a result SRG has found it necessary to maintain a
presence in the legislative and regulatory arenas where we often ally with other municipal
agencies, but also occasionally find our needs to be unique and requiring our own
representation. Staff believes that it is necessary to exercise a diligent presence
throughout the current crisis, as the policies developed by the political bodies will
probably be in place for a long time.
In addition, San Francisco Water Department (SFWD) is developing a long needed and
expensive refurbishment of its facilities to provide safe and reliable water supply. To
further complicate matters, the contract with SFWD expires in 2009.
Key New Initiative - Commodity Risk Management:
Program Purpose: The goal of the risk management program is to hedge volatile
wholesale energy market prices and to control costs so that rates to our retail customers
will be reliable and stable as possible.
The shortage of gas and electric supply and the associated volatility have negatively
affected businesses across the state. In order to minimize the impact on Palo Alto
customers, CPAU staff has recommended, and Council has approved, a set of policies
that govern how commodities are purchased by Utilities. Activities that will be
undertaken in the risk management program include:
Cost averaging by entering into supply commitments across time and across suppliers
to diversify market price and credit risk.
Develop credit risk management policies, limits and implementation procedures.
Commit to continuously monitoring and improving the risk management program to
reflect market conditions.
Purchase sufficient amounts of power to replace the existing Western contract.
Use risk measure-based methods to manage the exposed portion of the load.
Provide hedging services for customers who sign special contracts.
Establish buy/sell arrangements with approved counter-party suppliers to ensure
competitive offerings.
Evaluate gas storage and trans 3ortation options to manage volumetric risk and hedge
costs.
Page 13 of 23
¯Seek authorization to use financial instruments to hedge costs and provide price
stability.
¯Manage regulatory and legislative risk by intervening and advocating in appropriate
¯forums (e.g. PG&E bankruptcy and FERC proceedings).
Customer need: Reliability in delivery and price are needed by customers of all classes.
As stated before in this document, research shows that customers view reliability as their
highest priority in their utility services. In addition, commercial customers need price
stability to stay within their budgets for the production of products and services they
provide to their customers. Many residential customers need price stability to stay within
their personal budgets.
Time Frame: The risk management program and associated initiatives described above
will be brought to the Council as appropriate over the next 18 months. Some initiatives,
like the approval to use financial instruments, will be brought¯ to the Council in May
2001. Other initiatives like entering into long-term contracts to replace the Western
contract will be brought to the Council in phases over the next 18 months. Staff will
present a plan to expand risk management policies to include financial instruments to
Council in April 2001. Procedures to implement this plan will be completed by October
2001.
Estimated resources: The current staff has the necessary skill set to implement the
current program. However due to the unprecedented complexity, volume of work and
high costs across all three commodities, there is a need for additional staff and funding
for expert assistance. Staff will need to be trained or consultants hired to manage the
financial instrument based hedging and to communicate the hedging, methods and
strategies to customers and decision-makers. Additionally, the budgets for legal and
regulatory efforts will be significantly increased.
Project Status: Risk management, except for financial hedging, is currently being
practiced. Legal and regulatory efforts to protect the Western contract are underway.
Strategies and objectives supported:
Strategy 2 and 4 are supported by this project.
Objectives 1 and 3 are supported.
(See the appendices for more thorough descriptions of the objectives and strategies)
Page 14 of 23
Expanded Energy Efficiency Programs
The interest and need for conservation has risen dramatically with the current energy
crisis. CPAU is experiencing rising customer interest in a number of its programs such as
appliance rebates, photovoltaic system rebates, window and heating system rebates, and
commercial energy efficiency rebates. At the same time, it is apparent that the marginal
cost of power to CPAU is rising significantly and will continue to rise as the availability
of low-cost Western power diminishes. To the extent CPAU customers participate in
programs to lower their energy usage, they will benefit from lower bills and the Utility
will benefit by avoiding the high cost of supplemental power. In this regard, retail rates to
all customers are favorably impacted by conservation. CPAU currently offers a wide
range of programs and is continuously adding new programs. CPAU has designed
programs for all classes of retail customers (residential, small commercial, medium
commercial and large industrial).
Project Purpose: To promote the efficient use of resources and to help hold down costs
to the utilities and the customer, introduce new energy efficiency programs and build on
the success of current programs. ’ ’
Customer Need: The development and expansion of demand side management programs
is based on the identified high level of environmental concern in Palo Alto and the need
to favorably impact power supply costs.
Time Frame: The deployment of existing and new energy efficiency programs is an on-
going activity. Special programs such as the Advanced Energy Efficiency Program
(AEEP) are planned to achieve aggressive results over a very short timeframe. Other
programs such as Green Power or Photovoltaics are on-going activities.
Estimated Resources: Public Benefit Funds are available to fund extensive programs. If
necessary, additional funding needs can be brought before. Council when the need arises.
State and federal grant funding will also be considered and obtained where appropriate.
Additional staffing can usually be acquired on a temporary basis to manage clerical and
other support work for our existing professional staff. A comprehensive marketing plan
has been completed to effectively coordinate and promote the programs. The plan links
existing staff resources to specific energy efficiency programs and goals.
The Public Benefit Program budget is annually funded directly from rates and, if
. necessary, supplemented from reserves.
Strategies and Objectives Affected:
This program meets three of the four objectives. It enhances customer satisfaction by
delivering valued products and services. It helps provide superior financial performance
by having afavorable impact on high power costs. It maintains the unique advantages of
municipal ownership by providing more generous energy efficiency rebates than are
offered by investor-owned utilities and by tailoring programs to our customers needs.
Page 15 of 23
Key New Initiative - Load Management:
Program purpose: To reduce the frequency of rolling blackouts, and to provide
participating customers with greater power reliability.
Due to the recent energy crisis in California, Palo Alto has been subject to frequent
threats of power curtailment by the ISO. In response, Palo Alto has joined with other
utilities to provide controlled curtailment to forestall the necessity of rolling blackouts.
Customer and system needs: Staff has met with key customers and found that they are
willing to control load when requested to avoid rolling blackouts. The ISO is looking for
better ways to manage the system than simply "pulling. the plug" when reserves drop too
low. The load management program is designed to meet both of these needs. In
exchange for the sacrifice made by customers who reduce a significant load
instantaneously and frequently on request by CPAU,, they are largely exempted from a
rolling blackout that would cut power to their entire facility.
Time Frame: The program is under development. A pilot phase began this spring. Full
operation is planned for tl~is summer. A contractor, working in Conjunction with
Northern California Power Authority (NCPA), is managing the program. Four customers
are participating in the spring pilot, partly to test the required dispatch and monitoring
systems. Telemetry and advanced metering are being inventoried and scheduled for
installation, where required, for a full summer program. In the fall, after the high load
season is over, the effort will be reviewed and evaluated based on the following:
¯ Reliability: Does the program improve reliability and help reduce the frequency of
rolling blackouts called by the ISO?
¯Financial performance: Was the program cost effective?
Estimated resources:
The start up of the program has been labor intensive, requiring the inventorying of
telemetry and .metering, recruitment of program participants, negotiating of the contract
with the contractor, and’ testing of systems. It is estimated that the combination of all
staff effort will be about 1.0 FTE involved in the start up. Within this is a .5 FTE
upgrade to Senior Market Analyst to manage and analyze this and other customer load
related databases.
The contractor will receive a flat fee of $200,000 for operating the program through the
summer season. Up to 40 advanced meters with associated telemetry may be installed at
up to $1000 cost per installation. These meters will benefit other Utilities programs, such
as time of use pricing, as well.
Strategies and objectives affected:
¯Strategies 1 and 4 are supported by this activity.
¯Objectives 1 and 2 are supported by this activi[y.
(See the appendices for more thorough descriptions of the objectives and strategies)
Page 16 of 23
Telecom Services
In recent years Utilities took the strategic initiative to build a fiber optic loop within the
city in order to serve an observed customer need for broad band services. Since its
inception the system has been expanded to meet new customer needs. Usage of the
system has steadily grown, and additional staffing has been hired to recruit customers and
manage the additional accounts. These new positions provide the city the opportunity to
increase the revenue from the dark fiber system while providing staff with career paths in
an exciting new utility service, thereby contributing to staff retention. Several staff
members have applied for these openings and view them as a desirable opportunity for
career development.
Key New Initiative - Fiber to the Home (FTTH):
Project purpose: To determine if a optical fiber "distribution" system can be self.
supporting in residential neighborhoods by meeting the needs of residential customers.
The FTTH project was proposed several years ago and has been taken through several
attempts at genesis. Currently funding has been allocated through the city budgeting
process to establish a fiber "distribution" system to approximately 70 residents in a test
neighborhood. The project will allow staff to determine installation costs using different
techniques and methods, user interest in various services available over the network, and
develop information about acceptability of rates for services, etc. In the end, a business
case will be developed to see if a build out of the distribution system for the whole city
meets sufficient customer need to be financially reasonable.
Customer Need: Preliminary customer research indicates that there is sufficient demand
for services which could be delivered over a fiber optic network, however alternative
delivery methods may offer pricing that will be difficult to overcome. The deployment of
optical fiber to residents will depend on attracting sufficient customers to its higher
quality and speed to support the system costs.
Time Frame: The project is to be rolled out over the next year. Selection of service
provider partners is still in progress, but is expected to close soon. The test period will
be at least one year. The follow-up analysis and report may take up to 6 months.
Estimated resources:
Approximately $600,000 has been allocated for the construction of the FTTH test. An
additional $400,000 had been set aside to develop the business case, business plan,
finance plan, and marketing plan for a full residential system build out. The analysis will
be done sequentially; if the business case is not positive then there is no need to expend
the funds for the business plan, finance plan, and marketing plan.
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Project Status: Staff is current involved in discussions with partners and citizens about
the design of the project.
Strategies and objectives affected:
1. Objectives 1, 3 and 4 are supported by this activity.
2. Strategy 4 is supported by this activity.
(See the appendices for more thorough descriptions of the objectives and strategies)
Other initiatives which are in progress:
The idea of city operation of an energy efficient, open access co-location facility is
being studied and considered for a pilot project. Muni operation of such a facility
would offer the advantages of:
¯Siting at a less disruptive location
¯Coupling sufficient power facilities to support the facility and local load
¯Integrating energy efficient design into the facility
¯Providing access for small businesses which might otherwise not be able to
establish a presence in the community
Currently pricing structures for Dark Fiber leasing are extremely complicated and
make it difficult for a potential customer to easily get an estimate of an annual lease
fee. In an effort to simplify the whole process, the idea of zone pricing is being
researched.
The Telecom Group continues to discuss strategic partnerships with municipalities,
utilities, and private businesses to enable long haul connectivity between neighboring
jurisdictions, increasing revenues for all involved partners.
Other initiatives to be considered when resources allow:
A potential service offering that could generate ongoing revenue for the Utilities
Department is a centrally monitored fire/intrusion alarm system that can be integrated
into a fiber-based network. Such services could prove to be of great value to both
business and residential customers.
2.Staff will conduct research to determine if there is a suitable market for video, voice
and data services to be offered by the Utilities.
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Example Performance Measures
Staff proposed four measures to track the implementation of the strategic plan; one
measure for each of the four objectives. These measures have been reviewed by the
Implementation Advisory Team, and have been found to be generally acceptable.
However it is difficult to combine many aspects of the CPAU business into so few
measures. While no measures have been selected for presentation at this time examples
of the types of measures that could be used are presented below.
Measure 1: Gap Analysis -Customer Satisfaction
The gap is the difference between the level of service expected by the customer and the
level of service received by the customer. In particular, for all services, the following
industry standard dimensions of customer satisfaction should be measured on an ongoing
basis:
¯Reliability: The ability of the business to perform the promised service dependably
and accurately.
¯Responsiveness: The willingness of the business to help customers and ability to
provide prompt service.
¯Assurance: The knowledge and courtesy of employees and their capability to convey
trust and confidence.
Currently we measure the gap in customer satisfaction by randomly polling customers who
have contacted Utilities in various .ways. The information the customers provide is
compiled and analyzed statistically to determine whether our service level is improving or
degrading. The results are provided to Utilities management; specifically, the managers in
the service area where the services were performed. Anonymous information is also
passed to the service manager allowing the correction of shortfalls as well as allowing
service staff the opportunity to see commendations. The Competitive Assessment Group is
currently extending its customer satisfaction monitoring to include all points of contact
between Utilities and customers.
In addition, surveys of customer classes are conducted, to assess whether sufficient services
are being offered to meet our customer’s utility needs. These surveys inform us about the
customer satisfaction gap in the types and arrays of services which we offer, compared to
the services they might get from other providers.
The results of the satisfaction surveys will be compiled into one number to give the overall
gap for the entire Utilities. This single number gives management and Council members an
overview of the performance of the entire Utilities. The underlying data will still be used
to identify strengths and weaknesses in the functional work areas of the Utilities.
Pag~ 19 of 23
Measure 2." Reliability
The reliability of the distribution system is reported in terms of the number and duration
of service interruptions or "outages" per year. The Institute of Electrical and Electronic
Engineering (IEEE) issues standards that contain several reliability indices that reflect the
frequency of these types of outages at the electric distribution system level. This index is
used by the CPUC to evaluate performance of the three regulated utilities (PG&E, SCE,
SDG&E).
No national standard has been identified for gas and water systems; however, engineering
and operations staff have been tracking customer service disruptions as part of the utility
impact measures for these business units. This data can be used to measure current
against past performance.
It is proposed that these standards be adopted and reported annually.-These may be
compared to the reliability of other providers and to our historical levels to measure
whether the service level is acceptable and whether it is improving or degrading.
Measure 3: Value Creation
For the management of a business unit, the contribution to value creation of an entire
product line can be measured unit by unit, thereby determining the productivity of each
unit. As a result, management may choose to reallocate resources to increase the
production of productive units and to set policies for operating the least productive units.
The amount of value created or destroyed is calculated as follows:
Value Created = Equity * (Return on Equity - Cost of Capital)
The value is created for the owner of the utilities (i.e., the City of Palo Alto) only when
CPAU can earn a return on equity (ROE) that exceeds its cost of capital (the interest
which can be made by investing elsewhere). When ROE consistently falls short of the
cost of capital, value is destroyed. As a municipal utility, CPAU, should also measure
the amount of value it creates for its customers.
The value created by the sum .of all business units will be reported to Council and the
UAC annually to provide an overview of the financial health of the Utilities. The value
created by each individual business unit would be used by Utilities management to
determine where changes in activities need to be explored.
Measure 4: Uniqueness of Municipal Utilities
During the strategic planning process, the UAC requested that staff add a fourth objective
to the plan. That is: "To maintain the unique advantages of municipal ownership."
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The American Public Power Association (APPA) is the national advocate for public
electric utilities. They list the attributes of public power as:
¯Controlled by locally elected body of citizens in a public forum
¯Purpose to serve, as opposed to IOU purpose to profit.
¯Reinvests excess revenue in other community services and facilities
¯Generally lower rates
¯Responsiveness to customer concerns
¯Recognized commitment to the environment
¯Efficient use of other city services, in support of the utility
¯Benefits of tax exempt financing
¯Headquarters and support services located within the city, providing a financial
benefit to local businesses
A possible solution is to establish a fraction using the sum (9) of the attributes listed by
APPA as the denominator and the sum of the attributes found in Palo Alto as the
numerator. This could be multiplied by 100 to create a percent.
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Conclusion
Strategic decisions have always been made at City of Palo Alto Utilities, but they have
generally been independent decisions, not part of a comprehensive collaborated plan.
Many of these decisions, such as the decision in the 1960’s to contract with Western for
power and San Francisco for water, have had enormously positive impacts on the success
of Utilities and its value to the city. In recent years, CPAU has responded to the
introduction of competition into the Utilities business by establishing a stranded cost
reserve fund and by choosing to phase in direct access rather than accept the CPUC
format of fully opening the market. Other important decisions: conversion to a new
customer information system, the establishment of a Risk Oversight Committee (ROC),
pursuit of the renewal of the Western contract, collaborations with BAWUA and SFWD
regarding the rebuilding of the SFWD delivery system, and the establishment of a dark
fiber system are examples of strategic activity which will reap rewards in the long term
future of CPAU.
While the strategic plan was in the process of formulation, strategic decisions have
continued to be made. However, the decision-makers have also been participants in the
strategic planning process and have been able to couch their decisions in the context of
the strategic plan. As the energy crisis and competitive market conditions develop in
California, it is becoming more necessary to have a comprehensive coordinated approach
to making strategic decisions. Continued development of the risk management program,
long term purchasing of commodities to hedge against market volatility, expanding the
energy efficiency program, expanded research into customer satisfaction and needs,
strategic refurbishment of the distribution systems, and improving customer service are
all on-going strategic efforts which Council has knowledge of from sources other than
this report. However, new strategic efforts have been introduced recently, some for the
first time in this report. These programs are:
1.Development of distributed generation pilot projects to improve system reliability and
to add local power resources to our supply portfolio.
2.Development of a load management program, to help reduce the frequency of
blackouts on a state level and to benefit key customers who participate in the program
by removing them from the black out "cue".
3. Reduction of the Service Center call load through 24x7 (any time) service including
on-line (Internet) customer usage information, bill payment, and service scheduling.
4.Construction of the fiber to the home project to test whether a fiber optic
"distribution" system for residential customers can be cost effectively constructed and
operated.
5. Implementation of commodity risk management to limit price volatility and limit
price increases. This broad initiative spans the gamut from the use of risk
management tools like financial instruments to actively participating in regulatory
and legislative forums to provide stable rates (e.g. maintain the value of the Western
contract).
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Table 1 in the Executive Summary displays the implementation initiatives against the key
strategies of the Utilities Strategic Plan. Each of the key strategies has been addressed at
least twice within the context of the key on-going and new strategic efforts. The most
frequent strategies impacted are Strategies 4 and 6, the strategies of delivering products, to
meet customer needs and of maintaining financial strength, respectively. Table 2
demonstrates how the strategic initiatives support the four objectives. As with the
strategies, all are addressed, however Objectives 1 and 3, which relate to customer
satisfaction and superior financial performance, respectively, are strongly supported.
Based this information and the detailed descriptions of these projects listed in the sections
above, staff requests approval to proceed in the strategic direction indicated by these
projects. In the future, during the budget process or through other specific reports, the
noted staffing and resource needs will be formally requested.
Appendix:
Pages 2 and 3 from the Utilities Strategic Plan
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Appendix:
Excerpts from
~ Utilities Strategic Plan
MISSION STATEMENT
"To build value for our citizen owners, to provide dependable returns to the City and citizens
of Palo Alto, and to be the preferred full service utility provider while sustaining the
environment."
SUPPORTING OBJECTIVES
1.Enhance customer satisfaction by delivering valued products and services.
2.Invest in utility infrastructure to deliver reliable service.
3.Provide superior financial performance to the City and competitive rates to customers.
4.To identify and maintain the unique advantages of municipal ownership.
KEY STRATEGIES
FOR THE NEXT 5 YEARS
STRATEGY I:
STRATEGY2:
STRATEGY3:
STRATEGY 4:
STRATEGY 5:
STRATEGY 6:
STRATEGY 7:
Operate distribution systems in a cost effective ma.nner.
Preserve a supply cost advantage compared to the market price.
Streamline and manage business processes to allow CPA U to work
efficiently and cost-effectively.
Deliver products and services for competitive markets.
Attract and retain employees with critical skills and knowledge.
Maximize the General Fund transfers and maintain financial strength.
Implement programs that improve the quality of the environment.