HomeMy WebLinkAbout2001-05-24 City CouncilCity of Palo Alto
City Manager’s Report
TO:HONORABLE CITY COUNCIL
FROM:CITY MANAGER
ATTENTION: FINANCE COMMITTEE
DEPARTMENT: UTILITIES
DATE:
TITLE:
MAY 24, 2001 CMR:248:01
RECOMMENDED REVISIONS TO ELECTRIC FUND AND GAS
FUND SUPPLY RATE STABILIZATION RESERVE GUIDELINES
RECOMMENDATION
Staff and the Utilities Advisory Commission recommend that the Council approve the
proposed revisions to the Electric Fund and Gas Fund Supply Rate Stabilization Reserves.
DISCUSSION
Summary_ of Issues
Reserves are maintained to absorb any unexpected cost associated with electric and gas
supply cost, without having the need to pass on the cost immediately to customers through
adjustments to retail rates. In May 1999, the City Council approved guidelines for the
Electric and Gas Funds Supply Rate Stabilization Reserves (SRSR) based on a percentage
of supply sales revenues (CMR:194:98). Recent events related to the energy crisis have
prompted staff to propose changes to the Gas and Electric Reserve guidelines so that the
reserves are based as a percentage of supply purchase costs rather than as a percentage of
supply sales revenue. The percentages associated with these reserve levels have also been
increased for the Electric Fund.
¯ CMR:248:01 Page 1 of 3
The table below summarizes the current and proposed guidelines. The rationale for changing
the methodology is discussed in greater detail in the staff report transmitting the
recommendations to the Utilities Advisory Commission (UAC)I attached. The proposed
reserve guideline for the Electric SRSR is an increase in the minimum reserve guideline
from 30% of commodity sales revenue to 40% of budgeted commodity purchase cost. This
will result in the minimum guideline increasing from $13.2 million to $17.4 million. The
proposal also increases the maximum guideline for the Electric SRSR. These changes result
in a target and maximum reserve guideline of $26.1 million and $34.8 million respectively.
The proposed change in methodology for the Gas SRSR is to base the guideline formula
upon commodity purchase gas costs rather than sales revenue. Despite this revision, the Gas
SRSR dollar guideline levels did not change.
Current and Proposed Supply Rate Stabilization Reserve Guidelines
Target
Guideline
Current Electric S RSR Guidelines and
Guideline Levels
Proposed Electric SRSR Guidelines and
Guideline Levels
Current Gas SRSR Guidelines and
Guideline Levels
Proposed Gas SRSR Guidelines and
Guideline Levels
Minimum
Guideline
30% of Budgeted
Commodity Sales
Revenue =
$13.2 million
40% of Budgeted
Purchase Cost =
$17.4 million
20% of Budgeted
Commodity Sales
Revenue =
$6.6 million
20% of Budgeted
Purchase Cost =
$6.6 million
45% of Budgeted
Commodity Sales
Revenue =
$19.8 million
60% of Budgeted
Purchase Cost =
$26.1 million
30% of Budgeted
Commodity Sales
Revenue =
$9.9 million
30% of Budgeted
Purchase Cost =
$9.9 million
Maximum
Guideline
60% of Budgeted
Commodity Sales
Revenue =
$26.4 million
80% of Budgeted
Purchase Cost =
$34.8 million
40% of Budgeted
Commodity Sales
Revenue =
$13.2 million
40% of Budgeted
Purchase Cost =
$13.2 million
BOARD/COMMISSION REVIEW AND RECOMMENDATIONS
On April 4, 2001, the Utilities Advisory Commission approved staff’s proposed reserve
policy guidelines by a 4-1 vote. Commission discussion focussed on the need to maintain
adequate reserves to address volatile market prices. Additionally, the UAC noted increased
vulnerability to price swings associated with hydro energy production due to changes
anticipated in City’s contract with Western Area Power Administration (Western). Beginning
CMR:248:01 Page 2 of 3
in 2005, in a dry hydro year the City will have to purchase additional thermal energy at
market based rates to compensate for the lower hydro based energy made available to the
City through the Western contract.
While the UAC agreed to changing the reserve guideline formula from one based on sales
revenues to one based on purchase cost, there was discussion of the timing of increasing
reserve targets along with the anticipated bond issue for capital improvement projects (CIP).
Questions were raised as to whether a lowering of the reserve target from the proposed levels
could result in lowering the amount of the proposed bond issue. It was concluded that staff
would require flexibility in identifying revenue sources and not to combine the reserve policy
guidelines to the decision on CIP bond issue.
ATTACHMENTS
A: April 4, 2001 Report to the UAC: Proposed Revision to Reserve Guideline
B: Minutes from the April 4, 2001 UAC meeting
PREPARED BY:.
DEPARTMENT HEAD APPROVAL:
Shiva Swaminathan, Resource Planner
/
of Utilities
CITY MANAGER APPROVAL:
Assistant City Manager
CMR:248:01 Page 3 of 3
TO:
MEMORANDUM
Utilities Advisory Commission
FROM:
AGENDA DATE:
Utilities Department
April 4, 2001
SUBJECT:Proposed Revisions To Reserve Guidelines
REQUEST
This report requests the Utilities Advisory Commission recommend Council approve the
proposed revised guidelines for the Electric Fund arid Gas Fund Supply Rate Stabilization.
Reserves (SRSR).
RECOMMENDATION
For the electric SRSR in FY01-02, it is recommended that minimum, target, and maximum
reserve levels be set at $20 million, $30 million and $40 million respectively. This corresponds
to 40%, 60% and 80% of the estimated electric supply purchase cost budget for the proposed
fiscal year.
For the gas SRSR, it is recommended that the minimum, target, and maximum reserve guidelines
levels be set at $6.6 million, $10 million, and $13.2 million respectively. This corresponds to
20%, 30% and 40% of the estimated gas supply purchase cost budget for FY01-02. As energy
prices stabilize, the proposed electric and gas SRSR guidelines will be revisited.
Comparison of Current and Proposed Electric and Gas
Supply Rate Stabilization Reserve Guidelines Applied to FY2001-02
Current Electric S RSR Guidelines and
Guideline Levels
Proposed Electric SRSR Guidelines and
Guideline Levels
Current Gas SRSR Guidelines and
Guideline Levels
Proposed Gas SRSR Guidelines and
Guideline Levels
Minimum
Guideline
30% of Budgeted
Commodity Sales
Revenue =
$14 million
40% of Budgeted
Purchase Cost =
$20 million
20% of Budgeted
Commodity Sales
Revenue =
$6.6 million
20% of Budgeted
Purchase Cost =
$6.6 million
Target
Guideline
45% of Budgeted
Commodity Sales
Revenue =
$21 million
60% of Budgeted
Purchase Cost =
$30 million
30°£ of Budgeted
Commodity Sales
Revenue =
$10 million
300£ of Budgeted
Purchase Cost =
$10 million
Maximum
Guideline
60% of Budgeted
Commodity Sales
Revenue =
$28 million
80% of Budgeted
Purchase Cost =
$40 million
40% of Budgeted
Commodity Sales
Revenue =
$13.2 million
40% of Budgeted
Purchase Cost =
$13.2 million
Page 1 of 5
BACKGROUND
In May 1999 the City Council approved Supply Rate Stabilization Reserve (SRSR) guidelines
for the Electricity and Gas Funds based on a percentage of supply sales revenue (CMR: 194:98).
Recent events related to the energy crisis have prompted staff to revisit these reserve guidelines
to assess their adequacy in this changing environment. Some of these events incl~ade: 1) volatile
and sky-rocketing energy prices, 2) Western Area Power Administration (Western) contract cost
uncertainty, and 3) greater cost impacts associated with hydro uncertainties, particularly upon
expiration of the Western integration contract in 2005.
DISCUSSION
The gas supply purchase budget for FY 01-02 is approximately $33 million, considerably above.
the $11.5 million adopted budget for FY 00-01. Though the actual gas procurement cost of the
City in FY 00-01 is expected to be below PG&E customer’s gas supply cost, the cost to the City
for F¥00-01 was considerably above budget. While retail gas rates were raised (15% in August
2000, 25% in January 2001, 25°,/o in April 2001) to respond to the higher wholesale cost, the
increased cost has depleted the gas supply RSR.
On the other hand, actual electricity supply purchase costs for FY 00-01 are expected to be
considerably below the budget. This is due to the City’s ownership of surplus electric resources
and the ability of the City to sell surpluses at higher than estimated market prices. Howe;cer,
looking forward, the looming uncertainty regarding Western contract rates and increased cost
uncertainty due to hydro weather conditions have made the electric supply budget estimates
subject to wide variation. The expectation of these cost uncertainties negatively impacting the
City’s financial position prompted an analysis of the existing SRSR guidelines.
Uncertainties with Electricity Supply Cost
The major uncertainty associated with the electric supply cost at present is the Western contract
rate due to uncertainty surrounding the PG&E thermal rate. In a worst case scenario, Western’s
melded rates could increase to about $80/MWh. This would result in a cost increase of about
$4.5 million/month or about $55 million a year. Staffs position is that any such abrupt cost
increase that is not of a one-time nature will trigger a retail rate increase to raise offsetting
revenues. Thus, reserves are not expected to remedy such a worst case scenario.
Budgeted electric supply cost is expected to be about $50 million in FY 01-02 and is expected to
increase to about $60 million in F¥ 05-06. Budgeted purchase cost for electricity includes
energy commodity purchases, transmission, NCPA, and debt service net of layoff revenues.
Budgeted purchase cost excludes transfers to and from rate stabilization reserves, Calaveras
reserves, staff overhead, and transfers to the general fund. The uncertainties associated with
these costs are as follows:
Page 2 of 5
central Valley Project (CVP) Hydro Production Uncertainty (Dry Hydro Conditions):
Cost could increase by $7 million in FY 01-02 and by up to $13 million in FY 05-06, the post
2004 period. ~
Calaveras Production (Dry Year): Cost could increase by $9 million in FY 01-02 and by.
$4 million in FY 05-06 under dry hydro conditions. 2
Calaveras Plant Outage: Cost could increase by about $4 million in FY 01-02 and about $2
million in FY 05-06.3
Market Price Uncertainty: Assuming.that 10% of the electric supply needs are purchased
after annual budgets are set in the post 2004 era, higher market prices could result in a cost
increase of about $2 million above budgeted amounts. 4
Description of Uncertainty Impact of Uncertainty ($M)
FY 01-02 to FY 05-06 and
December beyond
CVP Hydro Production- Dry Year (10%)
Calaveras Production - Dry Year (10%)
Calaveras Plant Outage - (5%)
Market Price Risk - (5%)
TOTAL
2004
1.7
2.9
3.4
4.
$20million
13
4
2
2
$21million
The total cost of the uncertainties identified above is $20 million in FY 01-02 and $21 million in
FY 05-06. If reserves are to be maintained to ride through two consecutive years of such
cumulative sets of adverse events, the reserve target should be in the $40 million range. The $20-
$40 million range corresponds to approximately 40-80% Of budgeted purchase cost. These
estimates do not include the possibility of Western costs rising dramatically due to changes in the
PG&E integration contract. Such a change in Western rates will be dealt with through a rate
increase.
IPalo Alt0 has access to - 400 GWh of CVP production in an average hydro year. This could reduce tO -240 GWh
in a dry year (90% excellence factor). In FY 01-02 if the 160 GWh shortfall can be purchased at PG&E thermal rate
of $35/MWh, this would result in a cost increase of-$6 million. The corresponding cost increase in the post-2004
period is estimated to be -$13. million. "This assumes that the electricity prices will be -30% higher in a dry year
compared to the forecasted prices.
2 Calaveras energy production fails from an average of 93 GWh to 34 GWhin a dry year. The 59 GWh resource
deficit will have to be purchased at $150iMWh in FY 01-02 and $60/MWh in FY 05-06.3 Value of expected energy production March through May. If a complete plant outage occurs water may have to be
spilled. Insurance coverage does not begin until the 3rd month after outage.
410% of energy in 2005 is -125 GWh. If this is purchased at prices 30% above average market prices of $55/MWh,
the resulting cost increase would be -$2 million (125 GWh * $55/MWh * 30%).
Page 3 of 5
Uncertainties with Gas Supply Cost
The proposed gas purchase budget for FY 01-02 is approximately $33 million. Budgeted
purchase cost for gas includes projected commodity purchase cost and transportation based on a
normal weather year. The gas purchase budget excludes staff overhead, transfers to and from
rate stabilization reserves, and transfers to the general fund. Cost uncertainties associated with
gas supply cost are volumetric uncertainty due to weather, market price risk related to unhedged
positions, and credit risk. These uncertainties may be quantified as follows:
Volumetric Uncertainty: Volumetric risk is greatest during the winter months when both
volumes and price may be significantly different than projected. The corresponding cost
increase is estimated to be about $3 million a year.5
o Market Price Uncertainty: The gas portfolio management strategy is to maintain 25% of
gas purchase requirement unhedged at the beginning of a budget year and to manage
purchases within the year. Though this strategy is planned to maximize overall portfolio
value, it is a source of potential cost increase if market prices rise within the year compared
to budgetary estimates. The cost associated with this uncertainty is estimated to be about $1.6
million.6
Credit Risk: Although the city will reduce counterparty credit risk by purchasing from
reputed counterparties and hedge purchase requirements through multiple counterparties,
credit risk is part of the uncertainty associated with gas procurement. It is recommended that
the gas SRSR maintain about $1 million in reserve to soften the impact of counterparty
default. 7
Impact of UncertaintyDescription of Uncertainty ($M/year)
1.Volumetric Uncertainty- Cold Winter 3.0
2.Market Price Uncertainty 1..6
3.Credit Risk 0.8
TOTAL $5.4 million
The total cost associated with the three uncertainties in any given year is -$5.4 million.
This amount represents the minimum guideline level. However, based upon the current reserve
guidelines, the minimum level for FY1-02 is approximately $6.6 million, or $1.2 million higher.
5 Assuming a cold winter (November through March) when the actual load is the "high" forecast load, an average
increase of 1,700 MMBtu per day for the 4 winter months. It is likely that cold weather and higher loads will be .
accompanied by higher wholesale gas prices. If the price for the winter months increase from $10 to $15/MMBtu,
the total cost impact will be -$3 Million (1,700 MMBtu/day * 120 days * $15/MMBtu).6 This assumes that -20% of the 3.8 million MMBtu annual.demand (~0.8 million MMBtu) will be purchased within
the year after budgets have been set. Assuming a potential price increase associated with this strategy to be
$2/MMBtu, the total cost increase, above budget would be $1.6 million7 With a gas procurement budget of-$33 million, the City anticipates to hedge purchase requirements with at least
two parties. Assuming the City purchases $16 million worth of gas from one counterparty and the value of gas
increases 50% resulting in a net value of $8 million (mark-to-market). At a 10% probability of default by one of the
counterparties, the reserve requirements will be -$0.8 million.
Page 4 of 5
Staff does not propose to lower the reserve guidelines at this time. Instead, staff recommends that
the current guideline for the gas SRSR (20% of supply sales revenue) be modified to 20% of gas
purchase cost. This change is intended to align the calculation of reserve guidelines for supply
with the cost of that supply. The proposed change in formula for the gas SRSR has little impact
on the actual guideline level calculated compared to the current formula..This is evident in the
table comparing the current and proposed guidelines.
PREPARED BY:Monica Padilla, Resource Planner
Shiva Swaminathan, Resource Planner
REVIEWED BY~Girish Balachandran, Supply Resource Group Manager
Randy Baldschun, Assistant Director of Utilities, Administrative Services
DEPARTMENT HEAD APPROVAL:
John Ulrich
Director of Utilities
Page 5 of 5
UTILITIES ADVISORY COMMISSION
Meeting Minutes - April 4, 2001
Call to Order
Chairman Rick Ferguson called the meeting to order at 7:30 PM. Commissioners present:
Dick Rosenbaum, Dexter Dawes, George Bechtel, Richard Carlson, and Rick Ferguson.
Fer.quson: .Good evening. We have a couple of requests here from the public to address the
Commission - from one of our former Commissioners, Paul Grimsrud. We are holding not
only the regular meeting, but also the Special Utilities Advisory Commission meeting with the
extra agenda item, whose notice went out on the tails of the first agenda.
Public Comments
Grimsrud: Hi, nice to be back. I went to another Council meeting a few weeks ago and
brought out a few points I thought I would come here. My wife has Bible Study tonight so I
get to do this while she is out doing that. I made a statement to the City Council about a
UAC member-being a part of the Oversight Committee. I understand that through state law
the City Attorney thinks that that’s not something that can be done and in my opinion that is
an unfortunate thing. Having diversity in government in these matters is worthwhile. And
working for Public Utilities for the last 25-30 years, sometimes, it is a dangerous mix to have
elected officials and public employees making all the decisions. You know there have been
some weird decisions at. various places around the country. 1 am not saying that that would
happen here. Certainly the staff is top.notch staff but I guess I would challenge the fact that
having a UAC member a part of that committee is something that is not within the context of
the law.
I would like to talk in general about rate design and cost. Certainly Girish and the staff have
capability here to study all the things and I am sure they have studied them, but it is my
strong opinion that now m much more than say 7 or 8 years ago when we were doing the
integrated resource planning -- that incremental costs or marginal costs are much, much
higher than average costs. And therefore, both in our rate design and in our programs for
Demand Side Management and things like Solar Programs, we should be doing rates and
incentives that reflect that. In the past, when we talked about conservation measures, the
staff would say well that’s not very attractive here because our costs are so low. Well, our
average cost may be fairly low but certainly our incremental costs are not low. In terms of
rate making, we should have a very aggressive, tiered rate like we had with water during the
drought years. I would suggest something in the order (and I am talking about residential)
something in the order of 400 kWh hours per month. Anything up to that, or maybe it is less
than that, should be a very small rate increase and then maybe a middle tier in anything over
say 700 KW hours a month, you know a 40 or 50% increase in rate. We have to give people
a rate signal which will really encourage them to conserve. You know, I talked about having
to minimize the exportation of environmental impacts. I think, even in the rate structures and
incentive structures we should add a 10 % or 20% additional incentive for basically not
having environmental impacts or not exporting environmental impacts. A proper policy for a
UAC Minutes 4/4/01 Page 1 of 57
City like Palo Alto is to have a large chunk of our incremental resource be within the
boundaries of Palo Alto. I would like ’to see maybe even looking at a plant at the solid waste
site or something right here next door to us where there is some shared resources with the
wastewater facilities. For now, that’s about it. I might talk again in a few minutes so Iwill
leave it at that.
Fer.quson: Thank you, Mr. Grimsrud.
Fer.quson: There is one other slip here. Mr. Herzing - you asked to speak to the rate
increase question. It might be another 45 minutes or so before we get to that agenda item.
Would you like to speak now?
Herzin.q: 317 Monroe Drive, 94306. I have a question for the Commission. If the Utilities m
gas, water and light m are in such dire straits for money, why was it possible for the City
Council to transfer $14.1 million from profit of the Utilities into the General Fund? Do I get an
answer?
Fer.quson: We would be happy to address that question when we get to that agenda item,
and we have our Council liaison here tonight.
Herzin.q: Then I have before me, if that transfer is permissible, etc. I have Proposition 218
and Section 6:
"property related fees and charges: requirement for existing new or increased
fees and charges if herein charged shall not be extended in both or increased by
any agency unless it meets the following requirements. Revenues derived from
the fee or charge shall not exceed the fund required to provide the properly
related, service. Revenues derived from the fee or charge shall not be used for
any other purpose other than that for which the fee or charge was imposed. The
amount of fee or charge imposed upon any parcel or person has the increment of
the property ownership shall not exceed the proportional cost of the Services
attributed to the parcel"
and this is directly, I’m reading from Prop 218. The Howard Jarvis Organization, etc. have
the drafter’s intent. Requirements for exceeding new or increased fees are
"charges or fee charge shall not be extended in full or increased by the agency
unless it meets all the following requirements. (1) Revenues derived from the fee
or charge shall not exceed the funds required to provide the related service.
Revenues derived from the fee or charge shall not be used for any purpose any
other than that forwhich the fee or charge is imposed"
and then they put a comment here:
"number 1 and 2 will prohibit the current practice of siphoning off fee revenue
and supplementing a city’s general fund. The practice sometimes known as
UAC Minutes 4/4/01 Page 2 of 57
"charging an in-lieu.fee - franchise fee" currently occurs in both Los Angeles and
Sacramento
and certainly in the City of Palo Alto owning and operating all of its own utilities, except
telephone, it is illegal.. Yet as I just stated, I look at the revenue here, it says the amount of
money transferred to the General Fund was $14.1 million or 13% of the budget. Now
something is wrong somewhere.
Approval of Minutes
Fer.quson: Thank you for your comments and your questions Mr. Herzing. We will have an
opportunity to address the questions in short order so please stick with us as long as you
can. Are there any other members of the public that wanted to speak to the topics tonight?
We will close the public speaking portion and then proceed on to the approval of the minutes.
Is there is a motion to approve the minutes of last month’s March. 7th meeting?
Rosenbaum: So moved.
Ferquson: Moved by Rosenbaum; seconded byBechtel. All those in favor. Passes
unanimously 5-0. . .
Ferquson: I notice the package includes the one-page Utility Policy Advisory summary, and
thank you again Commissioner Bechtel for that.
Agenda Review and Revisions
Once again, with the Commissioners’ consent and permission, I would like to propose a
couple of changes to speed up the flow tonight. One, if we might move the Gas Quarterly
Report down in front of item 8 when we are talking about gas rate increase. Itkind of sets
the stage for the gas rate discussion.. We don’t hop from topic to topic. Secondly, if we move
the update of Strategic Implementation Plan, which includes some examples of budget, move
that to precede Item 5. We’ll talk about the fiscal year budget overview, and then move the
BAWUA report by Kirk Miller up to the to of the agenda so Kirk can proceed directly from that
into the Electric Generation Reliability topic. John, where do you want to see the accelerated
energy efficiency item on the special agenda?
Ulrich: I tentatively put it after the Strategic Implementation Plan because it is technically
unfinished business. We had that on our agenda before and this is an update and I would
suggest that it be at that location.
Fer.quson: Then, let’s do this. Let’s start with Accelerated Energy Efficiency on the
unfinished business agenda for the special meeting, then proceed to BAWUA, then to
Electric Generation Installation, that lets Kirk get in and out. Any objections? No. Let’s start
then with the Director of Utilities report.
UACMinutes 4/4/01 Page 3 of 57
Director of Utilities Report
Ulrich: Thank you. Just a couple of quick items. I would like to take this opportunity to tell
you where I was last week. I was at a California Municipal Utilities Association.(CMUA)
meeting where we had considerable discussion on all kinds of issues, both water and
electricity. But, I want to point out here that one of our speakers was a member of our
Utilities Advisory Commission, Mr. Carlson, and I would say that his discussion -- which was
around the economist’s view of the energy situation in California -- was quite provocative in
that he led a jaded group of utility folks who have an excellent idea of why the energy
situation is as it is. Mr. Carlson gave a view that was very interesting and very thought-
provoking for the group. He solicited a lot of questions, and I also want to say that he
represented the UAC very well. We had a long discussion that was designed for public
officials, both elected and appointed, and he was there through the entire time participating in
the discussion. I would like to thank him for that, and he may have some comments later on.
The other areas that I want to bring to your attention is that PG&E, as we suspected and we
discussed at several earlier meetings, went ahead and made a filing with the Federal Energy
Regulatory Commission on March 27. It is asking to change Contract 2948A which is, as you
know, the Integration Agreement between PG&E and Western and Western is our supplier of
a good portion of our energy. While Western has its own resources and hydro generation,
primarily at Trinity and Shasta Dam, this contract has been integrated for many, many years
with this contract 2948A so it has a thermal equivalent of the hydro-generation for the times
when hydro is not available, so PG&E, under contract, provides the integration so that we as
purchasers of energy from Western get a fixed product that is reliable throughout the year.
Now as you know that is going to change at the end of 2004 and we become basically a
hydro resource from Western. We had not contemplated that PG&E would try to change the
terms and conditions of the Agreement that they have with Western, but as we have believed
for the last three months that they were on the verge of doing so. Well, they have made that
filing and in essence, they are saying that they can no longer provide and no longer feel it is
appropriate for them to provide this integration at what is called a "thermal rate" - it is spelled
out on the contract which is equivalent to the thermal production of electricity m as if there
was a power plant owned by Western. That contract calculates the cost that we pay as if the
power plant was there owned by Western. So goes the theory or the idea in the contract.
Their point in the filing is that they no longer have to use the thermal rate that has been in the
contract and that in recalculating that, the price should go up to what they determine as
market rather than what would be a different interpretation of how thermal is calculated. We
don’t know the impact of that except for speculation and of course we will work with Western
and we will also become a vigorous intervenor inthe filing along with Western to try as best
¯ we can to make sure that what PG&E is asking for does not get implemented.
The impact on rates if it does get implemented would be very dramatic. Our estimation is
that the cost to Palo Alto would increase to the tuneof approximately 125 million dollars a
year. That would be our share of about 1.15 billion dollar cost increase to the Western
because of the dramatic difference between the thermal rate that is in the contract and the
calculation methodology and what is currently market, somewhere between 120 and 400
dollars a megawatt hour. There are a few other sections in their filing. Another one that is
UAC Minutes 4/4/01 Page 4 of 57
prominent is a transmission rate change that would affect our cost by approximately 1.8
million dollars per year. We have an opportunity to intervene and we plan to do that, I
believe it is April 18t~, prepare a protest and intervenor filing that would be heard by FERC.
So that is what we’ve just learned, and we are putting together our plans at the present time,
working with the Western and other members that would be impacted.
Fer.quson: Mr. Carlson.
Carlson: John, the timing of this is very important. How quickly could this-actually go into
effect? Is this something that takes weeks, months? What are we talking about?
Balachandran: That is still unclear as to when it would take effect but it could be as early as
May 18, given that interventions are due April 18 and 30 to 60. days after that, FERC can
either reject it or accept it. And so the earliest could be May 18th.. It is very unlikely it will be
May 18th, probably give us the time to protest.and take depositions, etc.
Carlson: What do they normally do? Doesn’t this usually last a lot longer?
Balachandran: I believe there is about a 5 month time frame from the time they file so there
is about 5 months before this whole thing will get resolved.
Ulrich: There are several scenarios, all the way from rejection of the filing to being able to go
to various courts to be heard, and the key thing is to put our plans together and to have
basically a joint filing with some specifics that may relate only to City of Palo Alto that would
add to our protest.
Dawes: I would be interested in the nature of our contractual arrangement with Western.
This appears to be PG&E’s burden with the day ahead, purchase ahead requirement. These
are the sky-high daily rates they have to pay under the so-called deregulation. We recently
authorized staff and City Manager to enter into long term contracts assuming that, if we had
not already, we are about to, or will. Can we, in effect, buy.our own energy rather than
continuing in effect, the total Western sourcing via this integration contract?
Ulrich: Well, we have had some discussion about that at SOC meetings and at UAC earlier.
I am not sure how much detail you would like to get into at this point. Probably the simple
answer is that we doubt that going alone would be a strategy that would be more beneficial
than working and staying a customer with Western because of the integration and the
benefits that a good portion of the contract gives us.
Dawes: Even if the integration provides for this supplemental power coming in at the daily
rates bid in by PG&E.
Kabat: Yes. Western has been looking at this issue and we have been helping them look
through it. The problem with abandoning Western is that you would be forfeiting the. hydro
portion which is 3/8 of all of the energy. This is about 5/8 of the energy this year.
UAC Minutes 4/4/01 Page 5 of 57
Dawes: We can’t take the hydro and not the integration~
Kabat: We can’t separate the products out, so our best strategy is to try to enforce the
contract. Our contractual case at FERC is very strong and the contract is clear about the
intent so what we need to do, I believe, is to work with Western to pursue vigorously the case-
at FERC.
Dawes: Does Western have the ability to substitute long-term power purchases in lieu of that
offered by PG&E which might be at outrageous prices?
Kabat: Western has been preparing to do that. And based on a suggestion by another
member of our staff, Shiva Swaminathan, we have been working with Western on an
alternative strategy which would be to set up a fixed-for-floating swap with a third-party
counterpart that would pay a fluctuatingamount of money equal to the amount needed to pay
PG&E during the FERC fight. Once we win, there is a large refund from PG&E that is all the
money that they have over collected from us during the fight as we prevail and reset the rate.
Dawes: Which we or may not be able to collect.
Ulrich: Of course you know my point always at this juncture is to try to say we have given
you a bit of a summary of the specific strategy and that we need to work on it some more.
The area I want to give you reassurance on, is that we do not take this lightly and we will look
at all types of alternatives and share those with you at the appropriate time.
Ferquson: Let me ask one question here to clarify, and then we will move on to the next
topic. The 125 million you thought would be coming Palo Alto’s way if the FERC ruling
sticks - how much of that expenditure is for prospective services, and how much of that
applies to catch-up?
Kabat: That is all forward.
Fer.quson: Thank you. Our next item under the revised agenda is energy efficiency.
Accelerated Energy Efficiency Program.
Ulrich: As yourec~ll, we had a discussion earlier and this is our next step. While Tom is
setting this up, a little bit of additional background. With the energy crisis in California and
the deep concern that we have for supply not going to equal the demand this summer, and
for these higher costs .of energy we will be talking about later on this evening, we believe it is
important to have a very aggressive and effective load management, and a better description
of energy conservation or as it is sometimes called, demand-side management plans. That
is what we will describe this evening and ask that you, after your review, concur with this, and
support our efforts to add this additional money to our budget atthe Council meeting which is
on the 23rd of this month.
UAC Minutes 4/4/01 Page 6 of 57
Fer.quson: So just to be clear, the action item is for the UAC to recommend to Council the
spending of additional money for the accelerated program.
Ulrich: Yes, and on the other side of this, an expected result for that expenditure.
Fer.quson: Understood.
Kabat: Luckily things have been so calm in the electricity market that Tom Auzenne and I
had some free time to work on this kind of thing. We have been trying to put some flesh and
bones on an idea that we rolled out for you on February 14th and now it is being called the
Accelerated Energy Efficiency Program and it is basically to use some of the reserves to
promote faster supply of "negawatts" to the system. The thought was to usethe supply
reserves because the supply reserve can benefit from these electric efficiency programs.
The goals of this program - accelerating energy efficiency projects into the summer of 2000
for extra savings. This program should have a rate reduction goal, never has had one, and
that has not been part of the Public Benefits Program and it was part of AB 1890 so this is a
different twist on using energy efficiency. Now is a great time to accelerate these projects
and next year has half the value (I will show you a plot on that) and we also would like to
favorably impact the California power situation, doing Palo Alto’s part.
This Accelerated Energy Efficiency Program isan effort to incent and assist customers
accelerating their efficiency improvements that otherwise would probably occur anyway over
the next 5 to 10 years. There is a lot of equipment out there that turns over from time to time.
What we are trying to do is accelerate the turnover and improvement of it. The program uses
a variety of methods to incent and assist customers and it is intended to cost effectively
achieve efficiency improvements that reduce our utility revenue requirements. [Slide]
Electric wholesale prices, the blue lines coming down over the next couple of years; electric
retail prices, lower red lines headed up so now there are some unprofitable sales being made
out on the margin. We think these kind of programs can improve that and put more sales
into the wonderful profitable category. Taking a look now at what would happen if we got
things done - this plot shows the project lives from one year to 10 years of life of project.
And it shows the impact on reserves, improving reserves in kwhours of project achieved.
The interesting thing here on the first line is for projects installed this year they have these
effects; next year they have about ½ of the rate reduction effects for reserve improvement
effects. So, because of those tall blue lines I showed you a minute ago, we really want to get
things done this year that are better than next. And the next year is worse than that so we
are in a unique opportunity right now to reduce rates of psm.
The other question that has come up has been, are there diminishing returns? HOW much of
this can we do? And so these are plots of the value, here is 5 million dollars, the value of
swaths of 5 megawatts. So the first 5 megawatts looks like it can save about 5 million
dollars; the second 5 nearly 5 million; the third 5 down around 4 million. After that, it does not
look as pretty. An interesting thing happens in the year 2005, that is another swath coming
in, waiting to start till then does have a slight upward slope. So, what we see is, yes, there
are diminishing returns. We probably want to keep checking our situation: where are we with
loads and resource, that kind of thing, as we progress over the next couple of years. So, we
UAC Minutes 4/4/01 Page 7 of 57
don’t want to overshoot immediately. We have identified a few factors affecting this
accelerated energy efficiency program economics. They are changing wholesale prices. As
prices rise, this looks better. As they fall.this looks worse. Change in retail rates - as our
retail rates go up, money poured into energy efficiency produces more lost revenue, so it has
an effect there also. Changing retail rate structures can effect this.. For example, going to
time-of-use rates is another thing we have to watch. And then diminishing returns beyond
that 10 to 15 megawatts of accomplishment. We have a few things out there to keep an eye
on.
To manage those uncertainties, we propose that we keep offers to customers under this
program relatively short time frame. Don’t make the offer open-ended. You can get it at any
time in the next 5 years. It gets short with end dates, so maybe 6 months or less.
Periodically, re-evaluate all the programs on a forward looking basis and this has been a
forward look and so just repeat this kind of forward analysis of the programs and then
continuously look for new measures, being a new application like Tom was mentioning to me
today. They have done some testing on a special refrigerant, a swirling device that looks like
it improves heat transfer and saves energy. So evaluate new measures to put into the stack
and look for new ways to incent and assist customers, i.e. consider low interest loans, where
we take them out of the budget cycle by paying their contractor and then they repay us,
maybe half of what we paid the contractor and that is the same as them having a 50% rebate
- so those kinds:of things are things we need to look at.
I’ve got a few policy issues that need to be considered. We recommend sharing 50% of the
projected electric supply reserve improvement of each measure with the participating
customers as an incentive payment or rebate. So if we are identifying that there is something
out there that if they screwed in this device it would save us $60 and we would lose $40 in
revenue, we would be $20 ahead on our reserves. We try to incent them to do it by giving
them ten of the dollars. So we estimate the value of getting people to act on these things
and offerincentives that we would be happy if they took. The second point is to consider the
use of additional benefit funds to sweeten the rebates if needed. Maybe some projects
where we give them half of the reserve improvements andthat is not enough to get people to
act; maybe it is only producing us a 4 or 5 year payback and they think, "oh, a 20% pretax
rate of return, that’s not good enough." They want more. Could be that there is a use for
public benefit funds in the role of sweetening the pie.
The thing we are asking for today - UAC action we request m is to spend up to 5 million
dollars from the Electric Supply Reserve to provide electric efficiency rebates for residential,
commercial and industrial and city facility type customers. So for all types of customers
these rebates would be for measures providing electric reserves at at least a 2 to 1 return on
its efficiency investment. This return will be calculated using the difference between our
wholesale cost exposure and our retail rates. That’s the action we are looking for.
May I show you a few more details about the.project? The technologies we are considering:
commercial, residential, lighting improvements; commercial motor lighting and systems
controls improvements; commercial motor and drive replacements so we can replacing old
motors with more efficient motors and then other projects that meet the return on Reserves
UAC Minutes 4/4/01 Page 8 of 57
Criteria - as I mentioned Tom’s unearthing new projects from time to time. This is a large
effort. There are City staff involved, equipment involved, contractors support and outside
services, lots of marketing to do. There are supply.reserves on the line and possibly Public
Benefit funds put to use. So, it is definitely a multifaceted venture. Since I showed you the
rapidly declining wholesale cost m that. is what the market thinks is about to happen m we
think that we need to look at procedures that help us be nimble and quick, because if we
aren’t fast on this it looks like a lot of the opportunity will go by. So the schedule is to take
this project to the UAC tonight. This project then goes to the Finance Committee as requests
for approval of BAO on April 17th and it would be helpful, perhaps, if the UAC would be able
to field a person or two at that Finance Committee on April 1.7th and it would be helpful
perhaps if the UAC was able to field a person or two at that Finance Committee Meeting.
Then we take the BAO to Council on the 23rd and implement as soon as possible. That’s all I
have.
Fer.quson: Thank you, Tom. Commissioners, any comments or questions?
Carlson: Yes. That 2 for 1 sounds really interesting. Does that mean that if we spend 5
millionwe can actually net out 10 million dollars over a time period?
Kabat: Yes. Let me make sure I am getting this right. You spend 5, you will get 5 back and
you will be 5 ahead. That’s what you meant by net out.
Carlson: Right.
Ferquson: Don’t you split it with the customer, though? You come out 7 ½ ahead. I’m not
sure I follow when you said you split it with the customer.
Kabat: Well, what that means is that if we are looking at things that we think will reduce our
wholesale cost 15 million dollars ~ and lose 5 million .in revenue because these things lose
revenue ~ that would put us 10 million ahead in reserves: 15 savings minus 5 million lost
income. I look at that 10 million and think maybe I ought to free up half of that to pay them to
do the thing that would put me 10 million ahead had they done it for free. So I am still 5
million ahead after my 5 million dollar expense.
Carlson: So, Tom, this 5 million is the 50 % sharing and basically we are paying them up
front?
Kabat: Yes.
Dawes: I am a little confused by the computations Tom. You ran by that so rapidly.
Kabat: And I used all the 5’s.
Dawes: Because you know in my feeble mind, when you talk about, in effect using reserves
to buy into these things, the cost and savings side are directly related to what our rates would
be at that time. And it sort of sounds as though this is from a baseline rate at which we are
UAC Minutes 4/4/01 Page 9 of 57
today, rather than what the rate might be at the time these things go into effect. I mean, one
of the agenda items here is a rate increase for electricity, so the numbers it seems would
change. Or something is escaping me.
Kabat: I did use a 7 cent system average rate which is the size of the. system average rate
after the large increase to be discussed. So I am using a baseline but it is the .baseline which
will be in effect within the next few months.
Dawes: And on the resource side, you assume that we would have implemented this item
which we just talked about earlier where we are now taking in resources which blend up to be
the much higher figure based on the new integration number? ¯
Kabat: I looked out at the margin and on the margin we are already a purchaser of high cost
power, and occasionally a seller of high value Calaveras power when we are able to
conserve. So out on the margin we are already exposed to those tall blue lines that I
showed.
Dawes: I didn’t think today that we were exposed to those high costs through the integration
contract m which is admittedly very low m that buying all our supplies essentially through
Western ~
Kabat: This page has graph paper axes, so this calls for a graph. The energy we get from 0
out to maybe 80. % or 90% we are getting at a nice low rate from Western on the order of 2
cents. But out beyond that, we are out there on the market.
Dawes: So we do have some
Kabat: Right. We have exposure, so our average costs are down here~ but our marginal
costs we can save against are up here ~ at the market.
Dawes: I am not aware of what proportion we actually are paying market for on a day to day
basis. So you are saying it is from zero to ten percent on the average.
Kabat: Zero to 10 megawatts and I showed those plots of diminishing returns. What those
had to do -- as we ate through that and conserved our way through that top part and fell
down into the bottom part ~ we saw the loss of savings from additional DSM. That is what
that analysis had shown: looking out at the margin, we really enjoy saving that first 5
megawatts swath shown in blue. That second one, the red one we also enjoy saving that.
The third one, we are starting to eat into a little bit of the underlying cheap stuff and by the
fourth one we are down into -
Dawes: So the underlying assumption is that we will average between 10 and 15
megawatts of the high cost supply.
UAC Minutes 4/4/01 Page 10 of 57
Kabat: I guess my underlying assumption, and I haven’t focused on volumes on how much
accomplishment this program will achieve, was that we not initially overshoot 1,0 megawatts
by much. Gosh, if we went and saved 20, I would kind of regret the last 5 or 10 of that.
Dawes: Got it.
Kabat: So our advice in here is, or our promise is, to keep re.evaluating this thing on a
forward looking basis and integrating all the information we have into the latest forecasts of
retail prices and wholesale prices and loads, controlling the amount of exposure into these
markets.
Fer.quson: Mr. Rosenbaum, did you have a question earlier?
Beecham: I have a couple questions. One is on our marginal cost being above the base
Western rate. I don’t recall in any of the charts seen before that show us buying hard unless
perhaps this is a result of the banking we have with PG&E. I just don’t recall in previous
chart that we buy power on the market.
Kabat: There are some times when we have bought power in the markets and that are many
hours when we are able to sell into the markets. This kind of thing is symmetric, whether you
are buying, or selling. If you are able to sell and the price is up where those blue lines were,
you would really like to get your customers to quit buying it from you at 7 cents so that you
could sell it at 22 cents to someone else wholesale.
Beecham: So we should also look at this not necessarily as cost, but as opportunity cost as
well.
Kabat: Right. This is a big opportunity we’ve got.
Beecham: O.K. That helps me quite a bit. In fact that may take care of most of my other
questions. That’s it, now that l understand.
Bechtel: Tom, my experience with rolling out a new project is that it never goes very quickly.
So here we are in summer; we are now in April and so you are trying to convince people to
sign up for something. If it is that pump for example in the back room, they have to discover
it first, they have to understand what is going on. I don’t believe that we can market things
that quickly. I don’t believe that we can get up to speed. Can you convince me that we can?
Ulrich: We have a team effort here. Those are excellent questions and that is getting into
how we are going to accomplish it. Tom Auzenne will give you a little bit of an uptake on it.
You have to recall that a majority of our customer load is from our industrial and large
commercial and that’s where there is more of the low hanging fruit. I would agree-that if you
try to communicate this to every single customer and had them do some action, it probably
would not be cost effective. So the program for the ones we are talking about is short term
-- go out and do it. It is based on a lot of action items with our larger customers.
UAC Minutes 4/4/01 Page 11 of 57
Auzenne: That was a very nice prologue. Do I believe that we can do it? Yes, I believe that
we can do it because of what John alluded to. We are in contact with our largest commercial
customers on a daily basis. I met with representatives from Hewlett Packard today; I met
with representatives from Agilent yesterday. We have an ongoing relationship. We are
working with them now and through our consultants. There was originally a contract that
came before Council from Energymasters International which is our Energy Services
Company (ESC). Theyhave since changed their name to Planergy International and they
have brought more resources to the table. They are working with a number of our largest
customers. I won’t go through the litany who they are working with now. Let’.s just say the
roster is more than impressive. They have signed some contracts they have identified
through their auditing functions a variety of ability and opportunities for those customers.
Those customers are sitting there now, frothing at the mouth at the possibility of enhanced
rebates. They have projects ranging, as Tom has mentioned, from low hanging fruit m
lighting projects, motor replacement projects that they feel that they can purchase from their
suppliers and use either contractors or their own in-house staff- toreplacement by the time
lines that we are talking about. We have some customers that were looking at chiller
replacements years from now where they’ve found appropriately sized chillers available on
the market place now (which is actually getting a little tough). They have indicated a
willingness to work with their suppliers to get those installed by the deadline, which is a very
hard thing, to do without their resources, obviously that could not happen. How large an
impact we can make? I don’t know, but the marketing, at least in the commercial and
industrial sector, is there. It is ready.
Ulrich: Tom, you might mention the impact that it has on City facilities’because City facilities
are customers of the Utility and the amount of audits that have already been accomplished.
Auzenne: Working through the Sustainability Committee that is sponsored by the City
Manager’s office, we had already done a major audit of this building in November of 2000.
We are trying to track down additional .funding from the state to try to do some of the
implementation measures of that. We are also accelerating that so we are, we have already
gone through, over the last 10 working days, audited 60 facilities on lighting for city facilities.
We should be seeing the results of that by April 17 and then we will see again what
resources we can sit there and throw at that, ranging from not only this building but again 59
other facilities. That was a yeoman’s effort.
Fer.quson: You mentioned that one of the sources of funds might be the State. Today, the
legislature passed what is now the 400 million dollar energy efficiency bill. Anybody have the
latest information on how that might be used in this program? Clearly the program works
even if there isno state money, but if there is, how might that play out?
Auzenne: Well, one of the things We have taken advantage of from the State so far is the
cost sharing for our LED traffic signal replacement effort. We should be taking delivery of
product next week and we have a drop dead date for installation of June 1st, at which point,
we will have changed out incandescent traffic signals at 90 intersections throughout the City
for a peak production of 166 kw. That is one effort.
UAC Minutes 4/4/01 Page 12 of 57
I do know that they passed new legislation. I haven’t found an up-to-date copy of that yet.
Ulrich: It is our understanding that in the bill whichis sponsored by Senator Sher had 84
million dollars total for sharing among Municipal Utilities throughout the State. I am not sure
whether it was blue lined or whether there were any changes in that. The article I read today
did .not articulate specific amount. Whatever is in there that is designated for Municipal
Utilities because everyone in Palo Alto is a taxpayer, a share of that would come back and
we would integrate those funds into this program.
Dawes: Tom. Are these planned to be audited on an individual basis so that we are highly
confident before we start writing checks out of our supply RSR that these projects have been
completed, that the savings which they propose to undertake are in fact real?
Auzenne: Yes, we will be using the services of Planergy International for our measurement
and verification protocols. As Tom said we will continually be looking forward because as
you can see the price changes fairly dynamically over time and so we will be sitting there
making sure that we are capturing what we think we are capturing.
Dawes: If the figures in this 10 year plan are correct, it appears that our supply RSR at the
end of this FY will be about 31.6 million by contrast that is in effect significantly above the
guidelines established by the Council. As far as you know, these are the approximate
magnitude of thefigures -- and we could afford to designate 5 million dollars of that reserve
for this program?
Auzenne: The projected ending balance for the current fiscal year includes in the projections
of 5 million reduction in the supply rate stabilization reserve so this program so it ends with a
balance projected of 31.6 million and the new guidelines are shown on the -
Dawes: That is after this contemplated 5 million
Auzenne: Right, they have taken 5 million out. That’s the projected balance and the new
guidelines are shown on the 10 year financial forecast-
Dawes: Is that incidentally why the Admin Operations and Management jumps upso much
this year?
Auzenne: That is right - exactly why. That’s where we put it
Dawes: I was just-
Ulrich: We should point out that one of the items for discussion, Item No. 6 is revision to the
reserve guidelines. Those have been factored into the 10 year forecast.
Fer.quson: Great.
UAC Minutes 4/4/01 Page 13 of 57
Bechtel: I have a follow-up question. Tom you talked about Planergy International, and they
are going to administer this program. Could you give me some feel as to how much that is
going to cost us or can we give them an incentive or something. Can they come up to speed
quicklyon this program? How is this going to work?
Auzenne: Planergy International is also a design-build firm, so they have a very high
motivational level. Because whatever projects they will be recommending they will also
probably be one of the bidders, and our customers are comfortable with that. Some have
taken advantage of their services and have signed contracts with them, some have elected to
do projects in-house and are comfortable with that too. We have an ongoing contract with
Planergy to do auditing services and Measurement and Verification Services.. So they are
properly incented.
Bechtel: I was a Doubting Thomas a few minutes ago. You have done a good job of
explaining it. I might encourage you though to show the curves you showed about the
marginal costs, coming to us cold as it was. Maybe the Finance Committee is on top of
curves like this a lot more than we are, but we are going to need to sell this two more times.
So I encourage you to put all you can in the way of visuals to help us to understand what is
going on, particularly not only to us, but also to people out here in the audience and the
others coming at this for the first time.
Auzenne: Agreed.
Rosenbaum: Was there a deadline for companies to decide to go ahead and do this?
Auzenne: Yes. We have taken our commercial advantage program, which you have seen -
it is a standard rebate program for a variety of different measures, and for a short term we
have doubled the rebate for those until May 29th. This is an adjunct to that. Right now we
are looking for a drop-dead date for this program of June 29th. Tom and I will continue to sit
there and crunch numbers and work it out because there may be advantage beyond the
summer peak, so we might want to sit there and push it out maybe a month or two.
Rosenbaum: This is for a company to commit, or for when the project will be completed?
Auzenne: installed.
Rosenbaum: Installed? Alright, well it certainly on paper this sounds like a very sensible
project. How it works out in practice is difficult. The economy isn’t good; companies are
going to be a little reluctant to make capital expenditures, I would think.
Auzenne: That is probably true, but the promise of free money is always good and the
possibility of lowering their operating costs overcomes a lot 0f reservation. One of the things
that Tom Kabat mentioned also is that we are looking at other products as well, including low
interest loans. I agree with you. Once you get out of the normal budget cycle, a lot of these
larger customers are hamstrung by their capital budgets, so their operating budgets have a
lot more flexibility. If we can sit there and find a way to provide them with financing that could
UAC Minutes 4/4/01 Page 14 of 57
be re-bid out of their operating budget, then they don’t have to go fight the capital battles.
That Will go a long wayto insure in our success as well.
Rosenbaum: I certainly commend you for your effort. As Tom Kabat mentioned, you kind of
did this in the spare time that you have available, and I wish us all well.
Auzenne: Thank you.
Beecham: You talked about this having a 2% return, if I understand.
One year or going out over 10 years?
Over what time is it?
Kabat: Right.: The analysis was of a 5-year period and so that" I will make a new example
where all the numbers won’t be 5’s. Say, over 5 years, if something got installed it would
reduce our wholesale cost by $60. But it would reduce our revenues by $20. So it would net
us $40 ahead. Over those 5 years, a lot of that saving occurs over that first year. We are
$40 ahead if it happened for free, but then this program is to spend up to $20 as required to
try to incent that thing to happen that initially saved us $60. So if we spend the $20 we will
save $60 gross, lose $20 in revenue and will finish $20 ahead.
Ulrich: You can appreciate - we had considerable amount debate about some of these
areas but the innovative part looks like it will work. Our plan is to try to make this, obviously
as simple as possible, for all of us to understand. But there is a lot of math behind this and
you have had a chance to see it. It is significantly cost-effective for both customer and for the
utility, and sharing it is a perfect way to balance benefits for everybody.
The other part that we haven’t got into is, when we talk about the rate increase, there is an
incentive built in, obviously because the price of energy is going up. People who otherwise
might not have taken action, will now be able to see results in their bill by doing these kinds
of things. So, even customers that are pressured in the economy not to spend very much will
be able to see the benefit of getting involved in this before the 29th -- actually doing
something. And they will save money on their bottom line and will get results.
Fer.quson: Before we act on this Mr. Dawes, I misinterpreted the label on one of our
speaker’s slips. So we have another member of the public that I would like to bring in before
we take action. Mr. Dawes passes. Mr. Grimsrud, would you like to speak to this issue?
Sorry I misinterpreted.
Grimsrud: I would like to wholeheartedly support this program.. Actually, to accelerate it. I
will be a critical public and say that I thought it should be at this point 4 or 5 years ago. I was
frustrated because the Public Benefits budget was not being used in a very aggressive way.
Now it is clear that it should be used and that is why it has accelerated. As far as
presentation of economics, my feeling is that there should be a presentation for each
program probably. The participant’s economics; the nonparticipants’ economics, and then
how does it affect the transfers to the General Fund. Those things get complicated but it is
worth while. People like the City Council are concerned about how all these things might
affect transfers to the General Fund. I get kind of muddled in all the numbers. You know I
UAC Minutes 4/4/01 Page 15 of 57
support those transfersl but it has to be somewhat clearer what those causes and effects of
those things are. As far as the diminishing returns issue, my intuition is that after 2004 that
this 15 megawatts or whatever, may turn into 50 or 100 megawatts. If the Western resource
turns out to be a limited Shasta or Trinity resource, the marginal costs could be 100
megawatts of high marginal cost power. So in my opinion, yes in the short term there could
be some limit but in the long-term the benefits could be very significant. It should be an
aggressively run program. ¯
Fer.quson: Great. Thank you. If there are no other questions or comments - John would
you liketo add something before we --
Ulrich: Just briefly, the comment about the impact on the General Fund. We will probably
get to it in a little bit but the 10 year forecast and all that is, the assumption there is that as
these rates go up, the present formula for calculating the transfer takes into account
additional revenues. It is worth repeating that all of our budget forecasts assume that we are
not increasing the transfer to the General Fund based on revenue. Our expectation is they
would stay at their present level with the 3% of escalation in it per year. We are not passing
those additional costs for the higher rates that our customers are paying back in the form of
higher transfers to the General Fund.
Beecham: And John, could you quickly respond to the question of whether or not these
programs would have been economical in previous year?
Ulrich: Clearly, they would not be near as economical and that is part of the benefit of being
in Palo Alto: the rates are so low as compared with elsewhere and also with the cost of
installing conservation. The sale of conservation was not nearly as easy to do as it is now,
as prices go up. The answer would have been "No".
Beecham: And you mention our retail prices but also our wholesale costs, in the past, have
not been high enough to warrant this kind of action, I understand.
Ulrich: That’s correct. People with memory far back a number of years will know that there
were much more aggressive conservation programs at that time because costs were higher
as compared with costs of other things, and then they have gone down so the incentive has
not been there.
Auzenne: Our Public Benefits were designed while we had 6 cent or 5 cent retail rates and a
2-cent wholesale market so even our marginal purchases at 2 cents and sometimes only our
marginal purchases were the one making the big contribution .to reserves. So there was not
the incentive for reducing rates by using conservation. Conservation did not work to reduce
rates in that environment. In this environment it works well.
Fer.quson: Mr. Dawes- final comment.
Dawes: Yes. Two items. Will time-of-day metering which I understand we are phasing in,
now impact this program in any way?
UAC Minutes 4/4/01 Page 16 of 57
Ulrich’: Presently, it will not because the rate schedules are not based on that. They will in
the future.as we -
Dawes: But it won’t diminish the savings, I guess it depends on when the power is saved.
And your retail offset would not be as large.
Baldschun: The rate that Tom is using as model is the proposed rate with this 43% rate
increase and it’s 6.8 cents per kWh. The time of this rate would still equate to 6.8 cents per
kw hour. It would have, obviously a differential between peak and off-peak. Our feeling is to
introduce this rate structure which we are hoping to do this summer for our large industrial
customers. We don’t want to adversely impact their bills by having a huge differential
initially, so we will transition to a differential much like we have done to the residential
customers over the years when we went to declining block rates, to inverted rates and when
we go from the current rate structure for large industrials to time of use rates to major change
in their bill because of their individual load factors. So we have to be very careful about that.
So I don’t think this program will have an adverse impact materially in the initial years
because we are not in a major change in billingthese customers initially from time-of-use
rates.
Dawes: The second item is the Public Benefits funds that we are currently expending. My
recollection of the Public Benefit Funds that we are currently expending - my recollection of
the list that we went over. it has some applications and projects in Redding, CAand you know.
things that really are not related right here in Palo Alto. Why can’t we use some of the
existing Public Benefit Funds or re-direct those projects to those closer to home?
Ulrich: Those could be looked at. As you recall, those you are talking about relate to our
Green Power Program and they are committed for in that ~area. Obviously, things can be
corrected but this program we are talking about tonight is very specific in addition to what we
are already doing.
Fer.quso.n: Tom, did you want to add something?
Auzenne: The program you are talking about was remote renewables, and we have already
committed to that program and we are ending that program this year. The dollars allocated
for that program will not
Dawes: And to the extent funds are available, we will use our existing Public Benefit
Program in this accelerated energy efficiency program?
Auzenne: Yes, that is one of the things we are doing with this particular program in addition
to-
Dawes: So, we will first use up all the funds available in that program before we dip into the
supply RSR?
UAC Minutes 4/4/01 Page 17 of 57
Auzenne: Not necessarily. We plan on using them in conjunction with each other so you can
stack one rebate on the other. The economics will still work out the same.
Baldschun: We have seen such a response from Palo Alto residences and businesses
during this energy crisis. We are going to go through our Public Benefit Dollars this year and
the Reserve, so this is needed to accelerate the other programs.
Auzenne: As regards your comment about the remote renewables, yes we are looking
specifically at another program or modification of an existing program to take and spend
those dollars here in town. As soon as we finish the design, we will be coming to you with it.
Bechtel: Thank you very much. This is a wonderful program. It shows, I know the staff has
been working on this for some time because we have had off line discussions with various
staff members about the potential,, plus a presentation by Tom back in February. In the
interest of moving ahead, I will recommend that the UAC recommend to the Council that we
implement the accelerated energy efficiency program as outlined by the staff.
Fer.quson: I take that as a motion.
Dawes: Second.
Fer.quson: Any more discussion. Mr. Beecham has a comment.
Beecham: I have one more question for John. The Governor has a target for conservation
of 7 to 10 %.
Ulrich: Yes, he also has his 20-20 program.
Beecham: Relative to his target for conservation, how much for us would this One program
achieve?
Ulrich: Well, ideally we would get a 5% reduction in our load. That is our goal for this
program. In addition to that, we have other programs, working with the same customers, the
large ones on the voluntary management to be used during Stage 2 and Stage 3 in lieu of
rolling blackouts. Then the third item would be the generator that we are talking about
adding, so that we have layers of opportunities to keep from rolling blackouts. This program,
of course, is more focused besides hopefully eliminating the opportunity for rollin~.,blackouts.
It also gives load management, demand side management, which will be a financial incentive
to customers and to reduce our marginal cost of our energy.
Beecham: So by this one clever program, using the money we get paid back, we achieve
about 2/3 of the Governor’s goal for conservation.
Ulrich: Yes.
UAC Minutes 4/4/01 Page 18 of 57
Fer.quson: Sounds like this is a slam-dunkfor at least a couple of years. All those in favor?.
None Opposed. By 5-0 the action is recommended to Council. Thank you very much.
Ulrich: I would point out, as you could tell, the presentation by Tom you have not seen in the
package. We are having copies made this evening so before you leave this evening, there
will be copies for you.
Fer.quson: And againl I would just like to add that this item did appear on the special meeting
notice that followed on the heels of the first agenda.
BAWUA Report
Fer.quson: BAWUA is the next item here, and I am sorry we could not make it in perfect
sequence. We will dip into water briefly and then get back to energy.
Miller: Good evening. Jane Ratchye prepared this report and I have looked at it and talked
with her about it and am prepared to answer any questions that you might have.
Fer.quson: This is item No. 10 in your package~ It consists primarily of the SF press release
that we were told about last month when Art Jensen visited us, followed by the extensive
comments by the BAWUA staff on SF’s proposed draft CIP. Any questions or comments
from the Commissioners?
Dawes: Obviously a work in progress. Still lots of questions to be answered by SF. To me
the largest area yet to be heard from is how they expect to finance it - the wing and a prayer
that the voters are simply going approve it may be difficult; not a whole lot mentioned on JPA.
It does not look like they are asking for input from the suburban or BAWUA to any great
extent. Is BAWUA coordinating sort of a uniform response on what the suburban customers
would most prefer in terms of how they become involved in this, either through Joint Powers
or any other ways?
Miller: I don’t know all the details of the BAWUA response. But the pieces are that BAWUA
has reviewed the documents very carefully and is actually quite pleased by the quality of the
document and the honesty that is in there, and the realization of the problems that they face
and thedifficult decisions that lie ahead. The BAWUA Board and the .Committees are
looking at how to respond to this. It would involve BAWUA. staff as well as possible
participation by UAC and/or elected officials at certain meetings to press home the points and
move them in the direction they seem to be going.
Dawes: So their plan is that there will be a uniform response, that BAWUA agency will, in
effect, have a unified response to San Francisco. Is thattheir intent?
Miller: I believe that that is their intent. That is part of the whole communication process that
they have been working on for many months.
UAC Minutes 4/4/01 Page 19 of 57
Dawes: Does Palo Alto have a position for BAWUA? I mean, what is our position? Is it just
that a JPA be considered or are we lobbying aggressively for that ?
Miller: I don’t know that we are specifically focusing on a JPA as much as focusing on the
issues that are brought up by the BAWUA staff in the review of the report. Those are of
concern to us. But also, more importantly is to have the SFPUC formally adopt the CIP and
the Long Term Financial Plan so that it is part of their mandate or agenda that they are going
forward with. Then within that context, we will look at the question of a JPA, or what type of
funding mechanism. But the main focus now is to get BAWUA’s input into the SFPUC and
encourage them to formally adopt both those documents.
Fer.quson: Along those lines, one of {he things that a JP would bring’us is a forrrrat role in the
process. One way to push for that is in their strategic objective.bullets, where they just say
that the SF PUC "will involve the stakeholders and customers". I would like to see the
adjectives "systematically and regularly" !nvolved. "Involvement" could be a only a one time-
a-year schmooze, and that is not the effect we want.
Miller: To the extent that we are looking at financing mechanisms that would involve us and
commitments to the CIP plan that would involve all the BAWUA agencies, we would be
looking at commensurate representation.
Fer.quson: Any comments, Commissioners? Thank you Kirk, for the BAWUA report.
Balachandran: There is one more item over here. Bill Berry who is Finance Director for the
SFPUC, is planning on being here for the next UAC meeting so he will make a presentation
on the Strategic Plan. You will have a chance to ask him several of these questions.
Ulrich: Let me interject - I put at your places, copies of our new hand-out material for small
business, residential customers and a third one for a little bit larger cogernment and
institution in Palo Alto. These have just been completed and I wanted you to have a chance
to see it and they would be used in conjunction with our other conservation programs.
Members of the public who would liketo have copies, they are available here at our office. I
have a few early editions if someone wants them.
Baldschun: I might add they will be mailed out to all the residents April 16th and the small
commerc.ial customers already have them and the large industrials will have them in their
hands in April:
Fer.quson: Yes, I received the blue one at the office.
Electric Generation Installation for Summer Energy Reliability
Fer.quson: The next topic on our revised agenda is to proceed to what was Item 3 on the
printed version. Mr. Grimsrud, did you want to speak again on this one?
UAC Minutes 4/4/01 Page 20 of 57
Grimsrud: One of the things I talked about at the City Council the other day was my support
for distributed generation. I watched one of the UAC meetings a number of months where
Bern said that customer-owned distributed generation might be a threat to us. You know, it
could be if there were a large number m if 80% of our load our energy goes to doing their
own generation we might lose a lot of sales. My opinion is that we should be looking into and
talking to these customers m and you probably are ~ on going into the business of providing
distributed generation. And being the best provider of that service and then making money
on that service. To me that is an option that everyone wants to look at and we can, maybe
through the mix of that with the other resource we. provide, we can offer the best product.
Just one little blurb on past years: the opportunity costs may have been very high but the
average costs were not. The point that that leads to in distributed generation is that part of a
lot of the marginal cost issues are in it toward load management. Really what you have, you
have very difficult incremental costs, say between 4 and 6 in the afternoon almost every day
and thus those technologies that can reduce load during those days ought to be very
valuable. What that suggests is that a solar array by itself is not nearly as valuable as a solar
array with battery storage or any other kind of load management strategy. So, as one values
these things and gives incentives to these things, one needs to be aware of the load-shaping
aspect of these technologies, and make sure that the incentive is given accordingly. But
anyway, the bottom line is on distributed generation, I am very supportive. We need more
and more emphasis in that area. Thank you.
Dawes: You may have seen in the strategic plan that going into the business of distributed
generation was high on the list of strategies so we definitely are pursuing that.
Electric Reliability Summer Generation
Fer.quson: Let’s move on to the summer reliability topic.
Ulrich: Well .as you recall, we had a joint meeting that many of you were able to come and
appreciated at the SOC where we introduced this idea as a tool to help mitigate, in the form
of an insurance policy a way of reducing,.minimizing and hopefully eliminating the need for,
rolling blackouts this summer. We came tonight to give you an update. This is moving very
quickly. A little better idea of the economics and the time schedule we have and if you are in
agreement with our idea, we ask that you support it with whatever thoughts that you have
and then go with us to the Finance Committee on the 17th of this month for approval and
moving ahead.
Fer.quson: Again, on the Special Meeting Agenda, this item was changed to an action item.
Ulrich: Yes, I felt that this was more than just information and I gave you an opportunity to
provide some action steps along with us to make this come to fruition. And Kirk will run
through this with you.
Miller: I have copies of the handouts over here. I am not sure if I have enough for everybody
but please feel free.
UAC Minutes 4/4/01 Page 21 of 57
Ulrich: This material is difficult to prepare early because it has information, some arriving as
late as about 7:00 this evening.
Miller: John mentioned we made a presentation in the UAC/SOC joint meeting and we
appreciate your input at that meeting. Since then, we have taken the advice given to us and
moved as quickly as possible on this project which is called "Cooperatively Owned Back-Up
Generation" or COBUG. What we are talking about is siting about 5 megawatts of generation
within Palo Alto. I want to go through these fundamental reasons of why we are doing it. It is
important that we take a moment and look at these and see if we are all in agreement on
these 3 points. The first is that Palo Alto customers place a high value on reliable service
and the Utility Department is focusing on providing that reliability. The second is that over
the next 2 years, we are expecting rolling blackouts. For this year, we think we have a
probability of 1.0 that a significant number of rolling blackouts are going to occur in California,
given the situation of the Northwest with limited hydro resources and in California with not
enough snowpack and in order to provide higher reliability and reduce the impacts of rolling
blackouts, there is a need for siting for local generation -- for use only during the Stage 3
rolling blackouts -- and that is a point that I will. stress again as I go through.
The program that we are talking about, this COBUG, is in addition to 2 other significant
pieces that we are working on and the one is the aggressive energy efficiency program that
Tom talked about. The second is the load management program that we have described to
you before and ongoing with our largest customers whereby we are asking them to curtail
load up to 20% every time we have a rolling blackout regardless of what block they would
have been in. That would provide as much as 15 megawatts of shock absorber for Palo Alto.
This 5 megawatt COBUG would provide another 5 megawatts so we would have essentially
a 20 megawatt shock absorber.
What we are proposing is a 5 megawatt natural gas-fired back-up generator to be installed
August 1,2001. Unfortunately, natural gas units are not available prior to that. They have all
been snatched up and we are lookingat 5 megawatts of diesel back-up generator from June
1 to August 1. Our first choice is not diesel but we see it as a necessary step to providing the
blackout protection and moving towards natural gas-fired generation which is much cleaner.
The 5 megawatt back-up generator would serve roughly 2% of our 200 megawatt load. The
recent blackouts that we had m this back-up generator would have eliminated all of those
blackouts within in Palo Alto, having just those 5 megawatts available. So, it is a significant
resource that would help Palo Alto. And the use of the back up generator will reduce the
need for customers to turn on their diesel back-up generators. And that has 2 advantages.
One is that use of this diesel generator at a higher output and loading would be more
efficient than a whole bunch of diesel generators partially loaded throughout the City. And if
we are looking at a natural gas-fired generator, it will be a significant improvement over the
emissions from a whole bunch of customer owned diesel generators.
To look at the contracting: how do we get a generator installed in Palo Alto in an extremely
short period of time, we have gone ahead and obtained sole source authorization up through
the City Manager to contract with Planergy. We obtained it on the 26th of this month, based
on the meeting that we had with the UAC and the SOC to proceed. Planergy would provide
UAC Minutes 4/4/01 Page 22 of 57
the engineering procurement construction on a turn-key basis. The cost for the program
depends on a number of factors. One is whether we buy, rent or lease the equipment and
what we are planning to do is for the diesels is to rent them for those 2 months and then for
the gas unit, either have a long term lease or purchase the unit and I have some indicative
prices up here. If we were looking at just summer 2001 for the diesel and a 2 month rental of
a gas unit, we would be looking at roughly 650 thousand dollars. If we are looking at a 5 year
lease of a gas unit, then we are looking at roughly 60,000 a month for that 5 year period to
lease the gas-fired unit and the purchase is approximately 3.5 million dollars for a 5
megawatt turbine or reciprocating engine fired with natural gas.
Are there questions on these costs? I have another spreadsheet that will break that cost out
per customer class, but any questions at this point?
Carlson: Yes, on the gas turbine. In terms of what you .can get, what kind of heat rate can
you get? I mean how efficient a unit can we get with this kind of timing?
Miller: Good question. We have looked at a number of units and we have quotes through
Planergy International for 4 of them. - a Solar unit with Kawasaki internal combustion engine,
E.M. Bocker which is made by Power Systems, a forth a Deutz unit which is made by
Steward and Stevens. The Solar has a heat rate of approximately 11,200 and the
reciprocating units have them at a better heat rate on the order of 8500 to 9000.
Carlson: " So the reciprocating have significantly better heat rates. Is it a maintenance
problem with them?
Miller: The main disadvantage with the reciprocating engine is that if you are going to use
them for long periods of time - they have different operating characteristic, I mean turbines
will work better if you are running them for long period s of time. The reciprocating engines
will perform better if you are turning them on and off which is how we would use them. Also,
.there is significant space - for instance the reciprocating engines take approximately twice
the amount of space footprint as the turbines.
Ulrich: The other part, as we have learned is that the efficiency of the turbine drops off
significantly as the temperature of the day increases and you have to put in evaporative
coolers to bring the efficiency back up, which is not something that the reciprocating engine
has a problem with.
Dawes: It sounds like we are heading for a reciprocating engine then, John.
Ulrich: The numbers seem to be looking that way.
Dawes! And are the costs pretty similar either on a lease or purchase basis between the
two?
Ulrich: I believe they are less on the reciprocating.
UAC Minutes 4/4/01 Page 23 of 57
Miller: Actually, the capital costs on the reciprocating engine is a little bit higher. The two
things that.lean heavily in favor a reciprocating engine.are, one is availability. Because of the
energy crisis there is a very limited amount of equipment out there and we have identified
reciprocating engines that we can get and have installed by August 1. The quickest we can
find for the gas turbines is availability in September which really means an installation in
November which means more time with the diesel generators running in Palo Alto which is
something we would like to avoid. So that is the big advantage.
Ulrich: You might mention the cost per megawatt is less on the operating cost, when you
include that is it less on the reciprocating
Miller: Yes, on the cost per for this particular Deuitsch unit we are looking at is sized slightly
larger, it is like 5.4 megawatts of that overall capital costs are slightly higher but the cost per
kilowatt is lower and also the operating costs are lower and the operation maintenance costs
are significantly lower with a reciprocating engine as opposed to a turbine just because the
operation of it is not nearly as tricky.
Fer.quson: Any difference on noise? I know you are going to get to environmental siting
questions later.
Miller: Indeed we are.
Fer.quson: But between turbine and reciprocal, is there a big noise difference?
Miller: There does not appear to be a big noise difference between the two, Both of them.
are loud in the order of 70 decibels at 7 meters. You would not want one in a neighborhood
which will get to the siting issue and that is a key criteria for the selection of the site.
Fer.quson: Thanks.
Miller: We have Stu Russel with ESA consultants, a subcontractor to Planergy who is here
this evening and who can answer some of the permitting questions that I can’t. Permitting --
Bay Area Air QualitY Management District will require a permit to operate both the diesel
units and the gas-fired units and we are looking at diesel units which are CARB-certified
which apparently make the permitting process easier. Planergy is investigating the
permitting issues. Permitting will take 4 to 6 weeks and we are working on how to speed that
up.. The initial discussions with that is to say that a permit to operate can be obtained - the
diesel one is a little bit trickier but the gas one looks quite easy, particularly for the way we
would be operating it. The emissions would be quite low. We would also be looking at the
CEQA process with Planergy, to go through the CEQA process, examine what is required
with .this facility.
Carlson: Do we have to buy emission credits to run these things? In LA we would have to.
Miller: No, we don’t.
UAC Minutes 4/4/01 Page 24 of 57
The operation of the equipment. We would have all the maintenance provided by the
equipment supplier. The COBUG would have direct control by the SCADA through our load
control center. We would be located directly behind the load control center and it would run
only when the ISO calls for curtailments. It would not be run for economic reasons, so just
because the prices are high, we are not planning to turn this on. We would essentially keep
it in reserve, so that when the ISO asks for a percent reduction, when they say to Palo Alto,
drop your load by 10% or roughly 20 megawatts, on a given day, we can call the load
management participants in our load management program to curtail. We hope to get as
much as 15 megawatts out of that. And then this 5 megawatts generator would kick on as
well. That is where we are hoping that we can get through a 10% reduction within Palo Alto
without any rolling blackouts. That is our intention and that is what we are working very hard
to get to.
Dawes: I want to be sure I understand how screwy these rules are. Basically, we can’t use it
to prevent a blackout because if we did then we couldn’t use it to survive the blackout locally.
Miller: Right. If we are selling it into the ISO and dispatching it for economic reasons, it
essentially becomes a system resource that we then have to run. So that if there is then a
statewide request for rolling-blackouts, then we have to reduce 10%, despite this generator
already running.
That disincentive also applies to the load management program whereby it would be in the
interest of a customer to keep all their incandescent lights on and wait for a rotating outage
call and then just turn off the inefficient incandescence. What we are doing with our load
management program is giving a 5% credit for hard-wired conservation, so that we remove at
least some of that disincentive for our large customers. Conservation and load management
are working against each under the screwy system we have.
Ferquson: We don’t have to put a black cloth over the unit when the ISO reconnaissance
satellite flies over the site?
Ulrich: That’s not a reason for camouflaging it.
Miller: Which gets us to siting issues. We looked at several sites and we looked out at the
landfill, we looked out at some of the customer sites, some of the large customers and we
looked at city property. We have chosen the site of the MSC for several reasons and as we
have gone through this process we are extremely pleased with the site that we have chosen
for a number of reasons. One is gas supply. It is next to the PG&E high pressure line and if
we are looking at a turbine, they require roughly 275 psi gas and the only place to get that is
from a high pressure PG&E line and we can tap into that with relative ease. It is a bit of a
hassle but it is much easier if you are close to it. The second advantage that I mentioned of
the reciprocating engine is that only requires low pressure gas, roughly 20 psi and our
distribution system runs at roughly 24 psi so we can run a low pressure line to that and save
significant amounts of time and money, not having to deal with high pressure line and dealing
with PG&E and an application process and a number of things. It looks like we can use our
UAC Minutes 4/4/01 Page 25 of 57
existing house line within the MSC to provide the gas for the units, and that is a significant
advantage.
Electrical capacity was another item. We needed a site where the 12 KV system was strong
enough that we could feed 5 to 6 ~megawatts back into it without having to do a lot of
reconductoring. Noise is a significant issue. We wanted a place where there was lack of
residential neighbors. The MSC being on the other side of 101 appears to be an excellent
site from a noise standpoint. Space availability- having enough space there and also having
a site that is City property so that we don’t have to get into contracting issues with lease or
use of someone else’s property which would cause delay. And the last one is security and
liability because we are talking about a potentially a dangerous piece of equipment if it were
available to the public and .also its 3 ½ million dollars worth of equipment and we don’t want
to put it in a place where there is no security. On the liability issues at the MSC are
significantly reduced. It is behind a locked and guarded gate and the security issues are also
less there.
Carlson: Another issue on that siting issue - because you only need low pressure gas, that
means for reciprocating engine putting another plant at the waste water treatment facility. It
suddenly becomes more interesting.
Miller: It does with the exception that the gas line that goes out there does not have sufficient
.capacity, low pressure to do that and we would end up tearing up streets to do that. We
looked at that site very closely, but because we have to tear up streets, it delays the project
considerably.
Ulrich: The idea of the waste treatment plant may be a better idea for a more base-load or a
longer-operated unit, which might bode better for a turbine installation. That would be all
wide open to look at, but one thing about being a gas utility is that we have the opportunity to
build gas lines.
Miller: On siting - this was taken by the aircraft just before it went to China and you can see
this is a picture of the MSC, a part of the MSC and I’ll point out some things. This is the
Utility Control Center. Along the bottom here is highway 101. This building right here is the
Animal Control Facility and this is the edge of the Municipal Service Center so what we are
looking at is siting the initial gas generator in this area and siting the three diesel generators
in this area and we have selected 2 areas because we don’t want to be tripping over
ourselves while we are installing the gas turbines if we have to have them in the same site
and then we can easily get the gas turbine in and the diesel generators out. Another nice
thing about this site is that there are three existing power poles, here, here and here and that
is an existing practice line that the linemen use and what we would do is add 2 more poles
here and here and some line to bring it out to the street and then tie it into the existing 12 KV
system, we would add 4 other pieces; there are 3 transformers here because the diesel
generators produce at 480 volts and we need to step it up to 12KV and we can use the
transformers that we have at the MSC ’so we don’t have to rent transformers. Nice to have
your own little toy box there, and also there is switching equipment required for switching
between the generator and the system. So, after the diesel generators are gone, the 3
UAC Minutes 4/4/01 Page 26 of 57
transformers would leave and the 3 generators would leave and you would be left with the
gas turbine, the switch, and poles. Any questions on the site?
Fer.quson: Prevailing.wind is what, from left to upper right?
Miller: I believe that the prevailing wind in the summer time is going this direction - away
from 101.
Fer.quson: And away from the animal facility.
Miller: And away from the animal facility.
Ferquson: And most of the residents of Palo Alto.
Miller: Yes.
Bechtel: Kirk, how far to the nearest commercial building? I would assume that would be the
closest non-city facility nearby. How far is that away approximately?
Miller: I believe the closest is directly across 101 and the distance from the generator to the
street is in excess of 300 feet and then you have probably got several hundred feet of
highway, you know 500 to 600 feet. It is more than that but quite a distance and that is one
of the reasons that we liked the site a lot.
Carlson: The 3-½ million dollar question. Who pays?
Miller: All customer classes would benefit from the increased reliability. The simplest and
fairest way is that all customer classes would pay the cost of the unit, proportional to their
use. The level of payment is such that larger customers, who demand the highest reliability
because of their higher outage costs, would end up paying more ofthe overall cost. The per-
customer cost appears reasonable. I have a spreadsheet to show that. COBUG is
essentially an insurance contract. We can install this thing and if the State got their act
together this summer and we never used it, our cost would seem significant since we never
needed to use it. But that would be a great result. We don’t think that is going to happen.
We imagine we are going to end up using it a number of hours this summer.
What we have done is taken the first cost that we included of $650,000 for the rental of the
diesel, the set-up, the engineering and 2 months rental of the gas unit. Just take that price
and what does that equate to for various customers? And we broke out in this first column
the customer usage by customer class and what the percentage of usage is .and then how
that $650,000 be allocated among them and how many customers there are and what the
cost per customer comes out to be and the cost per month over 4 month summer period. So
what it comes out to be for residential is that this COBUG would cost an average residential
customer $4.00 for the entire summer or $1.00 per month, and for the largest customer it
would cost $6,000 a summer or $1,500 a month. In our initial discussions with the large
customers, we have only talked with a couple of them, but they have been extremely
UAC Minutes 4/4/01 Page 27 of 57
supportive of this project and are very interested in higher reliability. This cost is not a
deterrent to them at all. For the residential customers, the costs appear very small for this
level of reliability.
Ulrich: As you recall from our last meeting, this is in the sense of an illustration, to show that
while the investment appears quite high, when you break it down per customer, it makes it
quite small. We are not expecting to add this as a surcharge or a direct payment by each
customer, this is just an illustration of what the cost for each customer is.
Fer.quson: A good way to view it is as an insurance policy. That is the way to communicate
to all classes of customers that this is the premium we’re paying.
Ulrich: Well, just to be Clear, they will not get a premium bill from the City of Palo Alto.
Miller: Then looking at the approval process to get this project completed, we have obtained
the sole source authorization before coming to you this evening. We have arranged a
public meeting for next Monday and would invite any and all of you to attend. We. have the
Planergy contract being reviewed by the Finance Committee on the 17th and would also ask
that the UAC send a representative to that and then a Budget Amendment Ordinance would
go to the Finance Committee at the same time. On the 23rd, we are hoping that the City
Council approves both the contract and.the Budget Amendment Ordinance for this project. It
is a very fast time frame and a lot of people are working on it.
Ulrich: I might just point out the public meeting has been noticed so there is advertisement in
the paper and that will be, I believe, at 4 o’clock right here in this room, prior to the City
Council meeting. In addition to discussing this generator we will also go over the load
management and conservation programs, the accelerated efficiency material that we gave to
you earlier this evening, so it will be a dual purpose public meeting.
Miller: The decision and next steps. One of the steps~that we need to make immediately and
John Ulrich and I are working on it is arranging a deposit to hold the diesel rentals. As you
are aware, everyone is clamoring for them and a CARB-certified diesel is in high demand so
we want to be sure we get one for the June 1st availability. The decision on the gas turbine
or the reciprocating engine. We have made that decision and John Ulrich and myself and the
director of engineering are going to be finalizing that decision very quickly and beginning
work on the electric and gas service connections engineering. Both gas and electric say they
are ready to begin on that and.we have Scott Bradshaw in the audience and he can answer
any questions relating to the engineering aspects of that. The permitting process we have
begun working on that. We have discussed this with The Bay Area Air Quality Management
District and are working on the required documentation for both the CEQA process and the
permitting. And the schedule again is June 1st to have the COBUG operational. If we can
move that forward we will do that just to have that insurance available sooner, perhaps in mid
May. August 1st we’ll have the gas COBUG operational and we believe that both of these
dates are possible. Not easy, but possible.
UAC Minutes 4/4/01 Page 28 of 57
What do we request from the UAC? One is to recommend approval of the COBUG bY the
City Council. Second is attendance and support at public information meeting on Monday
and the third is attendance and communicate approval to the Finance Committee on the 17t~i
I am available for any questions you may have.
Miller: Before we do that I realize we have had a letter from Herb Borok asking a number of
questions and I wanted to go through that first and I believe it is in your packet. The
question of whether a 5 megawatt generator would provide enough capacity to prevent rolling
blackouts this summer..-The answer is definitely "NO" but it will be an important piece in
preventing the severity and frequency of the outages. The question of do we expect the
summer blackout to be on a percentage basis that we get the request from the ISO. And the
last one I don’t think I mentioned is the cost of fuel in the spreadsheet and the cost for
operating the units is between 9 and 13 cents, depending on the unit, per kw.
Fer,quson: Let me start again. How modular is this site work? In particular if we ended up
purchasing, for example a 5 megawatt gas unit and elected to keep 1.75 of diesel for a
couple extra months on a lease, have we done all the site work necessary to keep that diesel
hanging around for a couple of months?
Ulrich: Well, we discussed that a little bit. One would be the permit, whether we could do
that and the other problem that we have to address is that the pole line or the distribution line
where the generator would be connected to has the capacity existing for 5 or 6 megawatts
but is not capable for 10 if you wanted to run both of them if that was your question.
Ferquson: The diesel is 1.75 so I wonder if ~
Ulrich: We would get all 3 of them
Fer,quson: The diesel is 3 times 1.75 but when you complete the site work, can you turn on
one of three diesels and supply 1.75 megawatts -
Ulrich: Oh, I see what you mean. That may be. We would have to discuss it. I don’t think
you want to do something on the ragged edge. The other,consideration we would give would
be once we started operating the diesel, start to consider what it would be like if probable and
what the blackout situation is to go and accelerate reconstruction of the pole line to be able
to take care of this additional load, if that is possible. There would be a number of things to
look at.
Fer.quson: The reason I ask, as we have discussed before, it just seems that if this is the
year to buckle down and do this, maybe this is the year to take the ragged edge away so that
we don’t have to do it again if we get extremely bad news about rolling blackouts and
discover that our insurance policy is basically insufficient to get us through September and
October, Why not just do the rewiring or the reconductoring from day one?
Ulrich: Sure Are you recommending that we do that?
UAC Minutes 4/4/01 Page 29 of 57
Fer.quson: I like the idea of stepping up to it. If the reconductoring is an expense that
Ulrich: We like to go and build things but we are also trying to walk before we run. I gave
you a scenario where we could have both in place and try to mingle them together so that we
could get some combination of 5 or 6 plus 1.75 plus another ! .75, etc. if that would work.
Fer,quson: I am just thinking in terms of setting the stage correctly so that you can add
capacity on relatively short notice up to the maximum possible limit.
Ulrich: Well, the other approach would be the numbers, the analysis that is done and the
amount of money that we would be going to the Council for approval in this BAO process.
The plan. that Kirk talks about which would be using ¯ the diesel for 2 months and then the
natural gas generator beyond that. So you would have to modify your request for money so
that you could continue to have 2 leases and a rental going simultaniously, so if that is your
judgment, we can consider that or we can come back and ask permission .afterwards or
something like that.
Fer,quson: Well again, I was just trying to eliminate the number of times that we have to ask
permission. If we can consider adding to the site and decide it today, great.
Rosenbaum: A couple of things you might be thinking about as you go forward to the public
and the Finance Committee and one is perhaps a firmer response to Herb Borock’s question
- 5 megawatts is two and a half percent but it is my understanding -- and we want to be in a
position to explain m that when a third-stage alert is called, several large customers are
going to immediately drop load by a certain amount, and we can indeed take credit-for that.
Miller: Oh, definitely. A very big part of our response would be the load management
program, and then we piggy back with this.
Rosenbaum: Alright. So then you will want to have a protocol if there is a request for a 5%
reduction, are you are going to turn on the generator or depend on the large customers
dropping their load. That is an issue that people might be curious about. The other one is,
why are we even bothering with rolling blackouts? It is not a position I would take, but.we
have read about Roseville and Lodi. I am always impressed when people I know are quoted
in the Wall Street Journal. Tom Habashi made, I thought, tortured comments on why they
didn’t think they should necessarily participate. It is not a position I agree.with, but that
question might well come up from a resident or businesses and we should bewell prepared
to respond to that also.
Miller: I will let John respond to that.
Ulrich: Well, we will be prepared. There is hardly a day when we don’t discuss that so I
would be more than glad to bring that up. Excellent question.
Bechtel: The Governor has talked about a shortfall really earlier than the end of the summer.
We normally would see it. This is going to miss that window and I guess basically I am just
UAC Minutes 4/4/01 Page 30 of 57
respopding to the question of how much permanent facilities we put into the MSC in terms of
upgrading without seeing what happens. If we do miss the June window, let’s say, and we
do have it there and then we don’t need it for the rest of the summer, I hate to see us
spending all that money.- Switching, I know is expensive too. Switch gear - And you are
talking about 2 different sites, and so on. I just want to say that I don’t really support doing
more than what you are doing right now which makes a lot of sense.
Ulrich: Do you want any discussion on that?
Fer.quson: Any other comments, Commissioners?
Carlson: I just want to add in response that anybody who bases any energy p~cfi’es-on what
the Governor is saying these days is probably making a mistake.
Ulrich: Do you want me to repeat what you said in San Diego?
Fer.quson: You came for advice and we delivered. Any other comments? The staff has
asked for action on this item. Do you recommend it? Is there a motion?
Dawes: I propose a motion that the UAC endorse the Staff’s recommendation on BUGS and
COBUGS.
Bechtel: Seconded.
Fer.quson: Motion by Dawes seconded by Mr. Bechtel. Any more discussion? All those in
favor? Motion carries 5 to 0.
We are a little past the 2 hour point. We have many items left on the agenda.
Rosenbaum: It is not obvious to me that we can get through this agenda at an reasonable
hour tonight so perhaps during the break there can be some discussion as to how we might
deal with all this.
Fer.quson: Good idea. Let’s take 7 minutes and reconvene at a quarter till. [Break]
Let’s come back into session here and focus on the agenda and the time.
These are all interesting and important topics with big dollars attached. And we are going to
be running on fumes in about an hour. So, I would like to propose using our time tonight to
collect the facts on the gas quarterly report and then deal with the proposed gas rate
increase action item. Then move to the proposed electric rate increase item, and defer to the
next meeting or a special meeting a discussion about the Reserve Guidelines, at least to the
extent there is something left to discuss after the implicit approval of those in the rate
increase. Then on to the strategic and 10 year plan discussions. Commissioners, is there a
better way to architect that? Then let’s do it that way m and the same thing with the TANC
and NCPA reports. We will catch up with them next time.
UAC Minutes 4/4/01 Page 31 of 57
From the staff’s standpoint do we need a special meeting to reinsert those items or can we
just move that all to May the 2nd?
Ulrich: If we can cover 7 and 8, those are the issues which go to the Finance Committee.
That’s the timely area and also the guidelines, or your approach to tacit approval. Those
other items are really up to you in your knowledge area for the budget and for the forecast of
where we are going for 10 years. That would be your call. My recommendation at this point
would be to do itat the next meeting.
Fer.quson: ,Let me say again that on the rates, the staff has built in the assumptions that they
are also asking be approved as revisions to the Reserve Guidelines. So when we say "yes
or no" to the electric rate increases or gas rate increases we are essentially implicitly
approving the assumptions on the Reserve Guidelines.
Baldschun: Well, you could accept the rate proposals but could not accept the Reserve
Guidelines and it would not change the rate proposals. The guidelines are not part of the
budget process.
Fer.quson: Then let’s defer the guideline discussion in your picture for next meeting.
Ulrich: Excuse me, I just wanted to point out we are going to Finance Committee though with
the Reserve Policy.
Fer.quson: We will extract promises from some Commissioners to show up at those
meetings before we break tonight. Let’s start with the Quarterly Gas Report again, to havea
fresh set of figures in front of us before we talk about rates.
Quarterly Gas Report
Ulrich: While Monica is coming Up I would like to open it up to questions as opposed to
having a presentation on the material.
Fer.quson: Commissioners, any questions on Gas Quarterly?
Bechtel: I have a question on the terminology. I know about hunting in Canada but I am not
sure Iunderstand what "open season for .capacity" is. Could someone explain the
terminology and the paragraph there about open season?
Padilla: That’s basically a time when owners of capacity put their capacity on the market for
you to bid for. So there was an open season for some capacity and PGT capacity and they
basically said "we have this amount of capacity, make your bid before the deadline". That’s
what they basically said.
UAC Minutes 4/4/01 Page 32 of 57
Bechtel: Now I guess the question is, who contracts for that capacity or do we assume that
PG&E contracts; who delivers to our City gate? Can you - what is the ramification to Palo
Alto about this?
Padilla: Well, we don’t own any Interstate capacity with PG&E but we were actually
considering buying some capacity outside of the state up to Canada. And so if we want to
actually buy that we have to submit a bid during "open season". We had started the initial
process of determining of whether or not we wanted to bring some into our portfolio when we
learned of this "open season". We were kind of late into that and did not submit a bid for
transportation. But we would be basically buying it directly from the owner of the asset.
Bechtel: I see. Now is this something that as you go forward you would consider, are you
always considering it so now you gave "open season" on your calendar to look at this in the
future?
Padilla: Well we learned from the last "open season", when we had gone into it we were
looking at maybe - we had a consultant and he was suggesting perhaps submitting a bid for
maybe a 10 to 15 year commitment. The results from this last "open season" with PGT, the
lowest bidder submitted a 50 year term and they agreed to buy the capacity for 50 years so
we probably would not do that but we are continuing to evaluate our options, including talking
with NCPA about doing some kind of a shared capacity deal, they are in the market for some
capacity too, and we are actually starting the Integrated Resource Plan on the gas side. We
will be looking at transportation, storage and portfolio.
Balachandran: Let me just add to that - there is a second market for transportation also
where you can go in and buy transportation for less than for any period of time. So you
basically go to winners of this bid and find out if they are willing to sell me gas transportation
for 5 years, 10 years, whatever we want~ The second part of that we can also use.
Bechtel: If we - so if rates continued to rise as they are now, it makes sounder and sounder
sense to look at having - owning some transmission capabilities. Is that right?
Balachandran: Yes, basically it to diversify our portfolio and actually owning some assets so
looking at some transportation both into Canada and to the Southwest. Also going to look at
storage options and also depend to a certain extent on the market.
Bechtel: Thank you.
Carlson: I know in Southern California, but I am less sure about up here, that the
transportation costs are just incredible in producing just an astonishing differential between
Louisiana gas cost and the Southern California gas costs. That happened for awhile here
but it mostly disappeared. What is the status of that?
Padilla: Well, the basis between Louisiana and where we buy our gas PG&E city gate is
still pretty high. The base is about $3.00 for next month.
UAC Minutes 4/4/01 Page 33 of 57
Carlson: That’s the differential?
Padilla: Differential.
Carlson: Ouch.
Padilla: It used tO be negative. We operated the market that was negative just a couple of
years ago. So the basis forecast is to increase as well. The basis of our cost component
that has become very volatile and hard to basically hedge
Carlson: Short of capacity, what is the fundamental, problem here, or is that a game going
on?
Padilla: It is supply and demand at the border, not necessarily a lack of capacity although
capacity may have something to do with it. At times, when there is capacity we still have
basis problems. It is more supply and demand at the border.
Carlson: So that means like a third or more of our gas cost is just the transportation
differential- basis differential.
Padilla: Right.
Fer.quson: Any more questions or comments on.the Gas Quarterly Report?
Dawes: Is it appropriate to ask about the nature of our hedging strategy in the ensuing year
now or when we talked about the rate change.
Fer.quson: Let’s just move into the next topic if we are finished here.
Dawes: Could we get an update on our July 30 or June 30 hedging for our next fiscal year?
Padilla: For next fiscal year thus far, we have hedged about 40 % of projected lead, our total
projected load and our goal is to have 75 % of our total projected load hedged by June 30,
2001. It is 75% rather than 100% because our gas procurement plan, we had purposefully
decided not to hedge the portion of our portfolio that is eligible for direct access. We were
going to hedge those through term commitments rather than make them as part of our
portfolio.
Dawes: Are the prices that you have for your hedging consistent with the rate proposal that
we have in front of us and what is your assessment on the amount that you intend to hedge
but haven’t yet hedged in terms of pricing verses this price action we are looking at tonight.
Padilla: The proposedbudget that is in the staff report is estimated at 33 million or 34 million
for the whole fiscal year and as of market prices today, we project our costs to be closer to
38 million this fiscal year. Of that 38 million we have hedged 14 million which is about
roughly 50% of our portfolio so ,we on the market for the rest which is about 24 million. Of
UAC Minutes 4/4/01 Page 34 of 57
what we have hedged, our average unit cost is about $7.75. The market cost per unit for the
stuff we have not bought yet but will have to buy as of today is about $12.20 so our total
average cost for next year, we expect to be $10.00 for commodity alone for every BTU.
Dawes: And, if we factor that expected average cost into our rate increase proposal, how
does that compare to the assumption that is in this proposal?
Balachandran: Well, it is about 4 to 5 million dollars more in commodity than what we put in
our budget so if you look in our bundle, basis it is going to be about 10% more than the rate
increase.
Dawes: Given the fact that we blitzed our supply reserve totally at this juncture, is this rate
proposal sufficient given the fact that it is not .going to cover our commodity?
Balachandran: Our strategy is to buy gas at different times, so we think through a very
structured and disciplined process of buying gas. So gas is at $12 today and if we plan to
buy by June 30, prices could be $8 or could even be $14. But we are going through a
disciplined process of doing that so it will be what it is. The budget proposal, at the time it
was put together, incorporated funding the reserve.. So whatever rate proposal that we bring
you may be in the next fiscal year we will look at funding reserves also.
Dawes: You also had a bond issue shown in the 10 year plan. Is it appropriate to bring that
part of the discussion and is that a real proposal, is it going to be at the table this next year
as part of this rate and reserve structure issue or where do we stand?
Ulrich: Well, it depends on how much depth you want to get into. The plan is to debt finance
a portion of our CIP related to electric, gas and water and because of its impact on being
able to keep distribution rates lower by debt financing over a 30 year period -- rather than
our current practice of paying for ClP with the revenues from our existing customers and
rates. So, this is a change in finance strategy for the CIP that’s factored in, and that is par for
the discussion item in either the 10 year forecast or the discussion during the budget period.
Dawes: Yes, I don’t want to get into an unrelated discussion tonight. I feel that it is a very
important topic and I guess it would be best to reserve that for the 10 year forecast because
it is not something that - the rate decision does not turn on the bond issue question~ I just
want to establish that first so that we can go ahead on a rate proposal which has an
underlying assumption that the bond issue is wrapped into it as well.
Baldschun: The rate proposal, does in fact, assume that we are going to do some bond
financing for the ClP - about 13 million dollars and so to the extent we didn’t do .that bond
financing we would have to have a larger rate increase.
Dawes: Yes, I was afraid you were going to say that, so when I read the interlocking
schedules m
UAC Minutes 4/4/01 Page 35 of 57
Ulrich." I am sorry. I was trying to make clear that that is exactly what is built into it, is to fund
the ClP amount over a 30 year period, rather than continue to pay for all CIP work from
current revenues.
Dawes: See, I frankly look at it a little differently. It seems to me that you are doing a bond
issue to fund immediately building reserves. If you look at the figures, the net results is the
.bond issue money flows into the reserves, and they are pumped up to where they should be.
But in effect we are paying interest money for the privilege of building our reserves in one
year instead of 4 or 5 years. ,Maybe it is a different way of looking at the same set of figures
- I’ll grant you that. I am highly reluctant to entertain bond issues for and paying interest on
bond issues in effect for purposes of building the reserves quickly. I would much prefer to go
at it in a more gradual sense. I am uneasy to hear that obviously we don’t know at this point,
but certainly it looks as though the rate increase that we have baked in on the gas side isn’t
even sufficient to recover our increase cost of commodity this year. We don’t have any
reserves to cover that. We have basically been. behind the curve for the last year on that:
We have accelerated more than we thought we were going to do, but we are still behind the
curve. We should probably seriously look at a higher increase than what we are looking at.
In terms of balancing, doing a bond issue to cover this at a slightly higher rate than doing a
bond issue and not paying the interest on it- I guess I would go more towards the higher
increase.
Ulrich: It may be helpful to get through the whole analysis of the bond area. Your
assumption is not correct, and from our planning standpoint maybe we should go through
that. The other part I want to make sure we are clear on, we reduced the reserves on
purpose in order to mitigate the impact of the gas rate increase. It was a strategic objective
that we all participated in and now our plan is, as you all know, is to rebuild those and at the
same time we are passing along the additional cost of gas. So there is the impact of "we did
not pay for it before and now we have to pay for it" in the additional rate increases.
Fer,quson: Let me try a shorter way around the block. I understand that talking about the
reserve guidelines deserves an hour all by itself. But in the gas rate increase that you have
in front of us tonight, how much would that number change if by magic it was legally
impossible to pull off the bond financing in the next year?
Baldschun: We are planning on financing 12 million or 13 million dollars for fiscal year 01
and 02. Now those are the bond pr(~ceeds you see on line 20. So if you took away m
Fer.quson: Is this for Gas?
Baldschun: This is what our current plan - it may go up somewhat but a lot of these
numbers are preliminary; they have not been formally even approved for the budget. But
basically I am talking in Gas, we are still on Gas, right?
Fer.quson: Yes.
UAC Minutes 4/4/01 Page 36 of 57
Baldschun: So if you take the 13 million and you say you are not going to have that financial
resource, you are going to have to put that in the rates and over about 49 million which is the
current projected revenue in a percentage calculated...
Dawes: See, I don’t follow that because m the 13 million dollars is to cover CIP for 3 years.
Baldschun: That is right.
Dawes: It is only 4 million dollars that you would be missing.
Baldschun: You’re right. I stand corrected. The rest of it goes into reserves, so the amount
that is being financed in the year that is being questioned is the difference between the line
20 and m
Fer.quson: If we had to make up that 4 million, how would this 67% retail gas rate increase
change?
Baldschun: You would add - it would be less than 10%. It would be 4 million over the 49
million.
Beecham: Let me ask a question. The ClP - those funds will be used to do what project?
And what is the life of the project?
Ulrich: Well these are multiple projects. ClP is mainly system improvements system
reliability. For example, in the gas area, it would be replacement of old and brittle gas
distribution pipe that is leaking more than it is practicable to repair or it has reached its life. It
would be the same analyses for the electric and the water.
Beecham: What would be a rough lifetime of the value of what we are purchasing under
those programs - 5 year, 10 year, 15 year?
Ulrich: Well, typically they would last 30 years and in some cases water pipes last a lot
longer than that.
Baldschun: We are talking 60 years for water pipe.
Maybe it would help if we shared with you our strategy here for using this approach. As you
know, our rates are going up or are proposed to go up higher than they have ever been
before. This is a way to get some short term rate relief which we feel is a prudent measure to
take. It also is very common with utilities to do debt financing on capital improvements. We
are one of the rare cities or municipal utilities which don’t actually finance their ClP. Most do.
There are a lot of good reasons to do it and some good reasons not to. In the long run, you
end up paying a little bit more because of the interest expense. But in the short term, which
is what we are in right now, we need to provide whatever rate relief we can to our customers
because these rates are going to go up perhaps 67% if Council approves this and then
perhaps some more. Based on discussion you just heard from Monica during the year if our
UAC Minutes 4/4/01 Page 37 of 57
contracts that we enter into are higher than our budget we are going to be coming back, to
you with another rate increase so that our reserve targets are met. So we may have another
gas rate increase coming around August or September when we get more information but
right now it is too premature to really assume what gas prices are going to be for the next 12
months until we have a better handle on the prices. They may go higher or they may .go
lower.
Fer.quson: So the short answer m to address Commissioner Dawes’ proper question and
concern about the Reserve guidelines m is that the proposal that we have in front of us for
action tonight on Gas rate increases might be 8 or 9% higher if everything else remained the
same and we couldn’t conduct the bond financing in the next year.
Baldschun: Yes.
Fer.quson: Even if all that turns out to be true, we are likely to be revisiting the Gas rate
increase in the next 12 months anyway for the other reasons we stated.
Baldschun: Strong likelihood.
Fer.quson: So we take some risk by not addressing Commissioner Dawes’ question tonight,
but it lingers no more than 30 days before we get another crack at it?
Dawes: Could I return briefly to the bond issue. I would prefer to hear the answer that this
subject would be revisited at a later date and that it is not absolutely critical to make that
assessment now, because again I have some more questioning in this area.
Ulrich: I am sorry to have all of this at the same time. I wish we had time to go through each
area. Bond financing is an integral part of not only the gas rate increase but the electric rate
increase and also the water. There is no rate increase but that is part of the financing of the
water and that results in part for not having a water rate increase: So this is the thought of
looking at the entire utility infrastructure as one integrated system and looking at the best way
to pay for a much more significant infrastructure program that is, as you recall, we undertook
the last couple of years and it is going to accelerate as our system gets older.
The area to be real clear is that we did not initiate the bond discussion because of the supply
cost rates going up. We were looking at this and have for some time as our financing
mechanism for our infrastructure work which, of course, is in the~.distribution side of. the
business. So the money that is up from the proceeds of the bonds would cover, and it would
be sold as a bondto cover, all of those various enterprise of funds and we would sell the
bonds for miscellaneous infrastructure work in those three utilities and sell it that way. The
money that is collected from the sale we are proposing has to be utilized on projects over a
three year period. So that is how we came up with the total amount for the bond.
And then there is some, as you know Mr. Dawes, considerable expense related to the bonds. "
There is a level where there is a certain amount of money that is valuable to go out and get,
and when you ask for too little, your costs exceed your value going out for a bond. So we
UAC Minutes 4/4/01 Page 38 of 57
would put that money that is not used for the second and third year to the distribution reserve
fund,~ for CIP work and the interest collected, which we are told we cannot arbitrage this,
since this is a Municipal financing and for non-tax related work. I hope I am saying this right.
So we cannot take that money and go and invest it and make more money than it is costing
us for the bonds. So we have had bond counsel, and they are currently going through all that
with Finance Department of the City. We would expect to go out in the next few months with
the bond. So my point in just saying all this, and I know you didn’t want to get into the 10
year forecast; this is an integral part of our request for the gas rate and also for the electric
rate increase, even though it is on the distribution side.
Dawes: I still come back to the fact that the ten year schedule shows that we are going from
essentially zero reserves, up to over 6 million dollars in reserves at the end of 01-02,
exclusive of the debt service reserve. So that is 6 million dollars added to the reserves and
in my way of thinking, we have borrowed that money to put into reserves. Now if you look at
it differently, you borrowed money to put into CIP. I am saying we are spending ratepayers
¯ money for CIP and borrowed it to put into reserves. Let’s say we don’t do that; we just don’t
do a bond issue. We do what we have always done which is to fund things. (And I’ll say
Water is different than the Gas side). We would, instead of increasing our distribution and
supply RSR’s by 6 million dollars, we would increase it by 2 million dollars. They would be
below the minimum target but to me the choice of borrowing money.to fund the reserves or
having reserves less than target, I would go for the second scheme.
Rosenbaum: I would second Dexter’s concerns. I am a little surprised that as a policy issue
the idea of bonding the capital improvements had not come to us earlier. If you look at the
Gas utility CIP, it’s 4 million something year after year after year. This is not a one time
expenditure and somewhere in here I saw in the electric utility it said .the bond proceeds
would be used for one time expenditures but to my way of thinking, it makes no sense at all
to bond on-going expenditures. You are not saving anything and very quickly you are going
to have bond costs every year that are greater than the CIP costs currently when you take
them out of rates.
Ulrich: I guess in one sense, I apologize that a lot of this maybe is not as sequential, when
you have this kind of discussion. But it was not our intent to necessarily have a rate increase
right now. You can see the reasons why we need to do it, and maybe if we had more orderly
time, to talk to you about the bond. We have been discussing that and I thought we have
had some discussion, not specifically about this, we have been working on this for some
time. I am concerned that you are taking this to an area 1) we have never thought of or 2)
where you have a different approach in how you think we are going to use the money than
we have ever contemplated. So I’d need to think about that. The money m to my thinking
and knowledge and listening to Bond Counsel and our Finance people m I can’t use that
money for anything other than what I just described. We are selling the bonds for exactly
what I said, not for reserve purposes.
Dawes: No, but the impact is the reserves are spiking up very suddenly from zero to 6
million dollars.
UAC Minutes 4/4/01 Page 39 of 57
Rosenbaum: John, I am just questioning the whole idea of using bonds for ongoing constant
CIP projects. If you have a one time expenditure where you want to share the costs over 30
years so everyone gets a chance to pay, if you are building a new City.Hall or if you are
doing a San Francisco water project where the amount of money is far in excess of your
annual revenues, you use bonds. But here it does not seem to make any sense.
Ulrich: Well, it probably is new from a standpoint of we have never done it before. It clearly
is done all over the United States on all kinds of things. I actually think this is a better use for
a bonds, because it is tied to the overall infrastructure betterment. One case or argument is
why should our ratepayers pay right now for something that has a 30-year life?. To me, a
very logical use of bonding is that it shares the cost of new pipe that is going in, just as when
it was originally installed it was shared by customers into the future over the life of the asset.
Now, if you believe that there is another way to do it, we are giving you our recommendation
on a way to adequately fund the major CIP work. Remember, this is work that is going to be
done overthe next 3 years. It is not necessarily considered something that we are going to
come back again three years from now and do again. But in light of the increased costs in
the supply side, this is another tool, not only to spread the cost of the ClP out over the next 3
years, but it is a way to have rate relief for less money than we would have to collect from our
customers right now, in an otherwise very,tough supply market.
Rosenbaum: Yes, well I would respond that if you thought of this as a short term expedient
over the next three years, I would agree with you that it just might make sense to do. But as
a change in policy, that is to say, instead of taking 4 million dollars each and every year out
of rates, I am going to start selling bonds, that does not make any sense.
Baldschun: That is not the plan. The 10 year financial forecast just shows 3 years and then
stops. That is because we have no intention to change the policy on an ongoing basis. If we
did that it would really result in some high rates, because you would eventually have to pay
all that interest. This is a short term solution to provide some immediate rate relief to Palo
Alto residents and commercial customers who are going to experience some unprecedented
high energy bills this summer. This is a prudent measure that we can take to provide rate
relief to the customers that we serve. Like I said, we are unique in that we don’t do it. Most
utilities have quite a bit of outstanding debt on their capital improvements, so we are
planning to bond 100 percent of the near-term Gas Fund CIP. Dramatically less on the
Electric and the Water CIP. We looked at the Wastewater Collection ClP and the reason we
are not doing that is because the revenue requirements for that are quite a bit different than
the commodity based utilities and when you come off that bond financing and have to bring
that back into the rates,, it is quite a shock. But it is not a shock here. If you look at the Rate
Stabilization Reserves they are building up to 6 million the first year, 16 million the next year.
That is not from ongoing bound proceeds. That is because the rates themselves have been
raised.
Rosenbaum: Well, as a short term measure I can agree with you. I was just concerned
about a policy change.
UAC Minutes 4/4/01 Page 40 of 57
Carlson: I want to echo what Mr. Rosenbaum just said. 1 agree that I don’t think it is a good
long °run policy, but the additional rate increase we are talking about is more like an
additional 14% and that’s because it’s.on the smaller base where we are; it is 10% more than
we are going to get but what you are going to get is 1.67 and it multiplies out m and the
expert is shaking her head "yes". So, we really are shaving a rate peak. If it looked like gas
was going to be 10 or 12 dollars forever, I would be much more skeptical. I can’t imagine
that happening. You can make methane out of lawn mower clippings for as much money, if
you knew you were going to do it forever. But shaving that peak really is not a bad idea, and
I don’t object to this as a really temporary expedient. Once the gas rate starts dropping then
you can start funding your CIP out of your rates, and just drop your rates more slowly.
Ferquson: Any other comments? Well, our foray into the proposed Gas rate increase gave
us this opportunity to clarify the bond financing implications.
Ulrich: I just want to make sure we are clear why we are doing what we are doing. It is
important as a way to mitigate our rate increase. I just want to make sure you are clear and
understand why we are trying to do this and not have a different way of building up our
reserves. Did we do a good job of explaining that?
Fer.quson: Mr. Dawes, what remains to be explained?
Dawes: Well, I agree completely with Dick Rosenbaum.that in the Gas side, and in my
preliminary comments, I said Water is different.because we face this real bump in "Cap Ex"
and that is definitely a bonding situation. But in the Gas side, you look at the cap ex for it
starting at 99-01 is about 4 million, then it was 6 million and actually coming down this year
01-02 where you are proposing to do a bond issue. Cap Ex is actually down from what it was
through 03 and then it drops to 5 and it stays at 5.1 - in other words it is basically business
as usual. And to suddenly put an 8.3 million dollar bond issue m excuse me 12.7 million
dollar bond issue ~ into this, I guess Dick Carlson’s rationale, well, this may be the top of the
Matterhorn and we are kind of just clipping the top of it, and we will bond that to smooth it out
for our customers. I do have some sympathy for that, but I don’t think these figures, again,
looking at the Gas side and I have the same issue with the Electric too because the Electric
you are justifying this on the basis of changing the Reserve strategy -- which I also have an
issue with - I don’t think we need to change the reserve strategy on the Electric. We are
adequately reserved at this point in time in Electric. To boost them would take a lot of
persuading from me. So I come back to the point that I would prefer to see the reserves in
01-02 funded instead of to the extent of 6 million dollars, at 2 million dollars, if you did this
¯ arithmetic and took out your 12.7 and took out you 8.3 down in the debt service reserve and
forced everything into the change in supply and distribution RSR, then you chop it from 6
plus to about 2. I would prefer to have it higher, but that is a better strategy than abandoning
our long term policy of funding our routine Cap Ex out of rates, and all of a sudden starting in
on this business of stealing from the future, which is what bonding to smooth out rates does.
Ulrich: I guess you would have to tell us how you want to proceed. I understand what you
are saying. But that is not what we are attempting to do and -
UAC Minutes 4/4/01 Page 41 of 57
Dawes: I would endorse the rate increase as it stands. It is terrific. It may not be enough.
Ulrich: I will keep my- you know, that’s fine but
Dawes: But I would say, please come back to the UAC before you float out 12 million dollars
worth of bonds.
Fer.quson: Mr. Dawes, is that a motion to endorse the gas rate increase?
Dawes: Yes, it is a motion to endorse the gas rate increase.
Bechtel: Yes, I’ll second it.
Fer.quson: Is there any other discussion on the gas rate increase as it looks?
Bechtel: I have a question on -- again, looking at it, I am looking at a three year rate
increase and then a drop to I guess 1 dollar and 8 cents three years out. We had our last
rate increase at which we allowed, we dropped our rates in ’99 and so the question is, this 10
year plan is very lumpy to me. That is all I can say. As I look at it, it is awfully lumpy. We
are going to have to have a lot of discussion about these lumps and I don’t think tonight is the
night. So, I basically say that I do endorse the rate increase as you propose but let’s come
back to the 10 year projection, at least the next 3 year projection.
Fer.quson: Just to clarify the rate increase. We know you are going to bring us new news
maybe in a matter of months.Do you need our decision on the rate increase in the
intervening 30 days?
Ulrich: Yes. We need it tonight.
Fer.quson: You need our decision tonight because you are going to use it in the 30 days
remaining and before the next UAC meeting.
Ulrich: Correct.
Fer.quson: Thank you. That’s the answer.
Rosenbaum: Why are you going to use it in the next 30 days.
Baldschun: We go to the UAC tonight. We go to the Finance Committee April 17th and then
to Council in May 21st
Rosenbaum: Alright but that does bring up the point about having the increase start in June
rather than July and this was to raise a half million dollars in this fiscal year, what is the
reason for that?
UAC Minutes 4/4/01 Page 42 of 57
Baldschun: The reserves - we need to build up the reserves. If we did not have this rate
increase in June, we would forego a half million dollars in sales revenue which means that
the reserves would end up ½-million dollars in the hole.
Ferquson: And that is consistent with the UAC’s decision earlier, to look again.
Ulrich: This is following the strategy I discussed doing it sooner rather than later because of
the concern on the precipitious drop of the reserve.
Baldschun: What has changed is the gas cost. They have gone up quite a bit since the last
time we talked. You saw the variance in the quarterly report - it was. about 2 million dollars
that has hit this fiscal year. That has had a direct impact on our rate stabilization, so we are
bringing forth this rate increase to try to offset to some extent.
Ferquson: Any other discussion on the Gas Rate increase? We understand the implications
of the debt financing and the fact that there is more to come in less than a year. Other staff
comment?
While we are waiting for the staff comment on the topic of rate increases, one of the
questions posed by our speaker Mr. Herzing was whether Prop 218 forbids this, and I just.
want to point out that Prop 218 categorically excludes from its application gas and electric
utility charges.
Ulrich: I apologize for the hesitation, I just wanted to make sure .I understand why your
comment or concern about the debt financing. Our proposal is’ for 67% increase on June 1st.
I understand your concern or reluctance on the debt financing but without the debt financing
as part of our revenue requirements, the rate increase is going to be about 80% that we will
ask the Finance Committee to approve rather than 67% so I just want to make sure that you
understand why my hesitation is - I want you to be fully aware of what the difference in rate
would be based on your concern with the debt financing portion of it.
Dawes: I don’t see how these numbers justify that John. So you have a schedule which
showed why the rate increase has to be higher. Certainly, these figures -- to me, they don’t
justify it.
Ulrich." Well, as Randy pointed out earlier, the difference is about 7 or 8% so I am giving you
just an estimate of it. If you don’t debt finance, then you have to collect more revenue from
the customers to pay for your CIP work. That is exactly what it is.
Baldschun: We are going to do the numbers before the next meeting so we will have, at the
Finance Committee Meeting, we will certainly have the difference but Richard Carlson was
correct about the base. We have to look at the base and I can’t do these numbers in my
head right now. It will be a largerrate increase, trust me.
Dawes: It may be that it being an annual schedule obscures quarter by quarter for issues
that don’t show up here, but this schedule -- I can’t track your logic.
UAC Minutes 4/4/01 Page 43 of 57
Ulrich: Well, we would be glad to sit down and go through that. I am sorry that we aremyou
say something and I say something back. It is not our intent to try to push a bunch of
numbers through. This is very important. It has a significant impact.
Dawes: It is a policy change.
Ulrich: Well, that has to be a difference of opinion. I don’t believe that what we are trying to
do is a significant departure from what we have been doing in the past. If you are construing
that the debt financing is a change in policy then that is a whole area we can discuss. I
guess I need some guidance from you on how you want to proceed. It is imperative that we
go through the rate proposal with the Finance Committee and the City Council for all the
reasons we have mentioned, including restoration of the reserve fund. I want to be able to
explain to them what we are doing and why we are doing it.
Fer.quson: Let me propose this, procedurally. We have. a motion on the floor, there may or
may not be some more discussion on it. But let’s dispatch that motion one way or another,
and then proceed to the electric rate increase discussion. We have already had some of the
discussion about debt financing, and we can introduce some kind of a clean-up motion to add
these caveats so that you have formal action or advice to carry forward to the Finance and
Council meetings, and then we will call it a night. Any other discussion on the Gas Rate
increase? All those in favor say aye.
That motion carries 5-0 for the 67 % gas rate increase and we will clarify the discussion in a
later motion. Thank you very much, Commissioners.
Proposed Electric Rate Increase
Fer.quson: Is there a presentation on the Electric Rate increase proposal?
Ulrich: Not specifically. We don’t have a presentation except to answer some questions and
while this is one of the most significant requests for rate increase probably in a very long
time, I do want to point out while the numbers sound, percentages sound high, the impact on
our customers, while I don’t want to minimize the cost, the percentages don’t bode as well as
looking at the dollar amount. During the previous discussions, I have pointed out that our
average customer uses a relatively small amount of electricity because on an annual basis
there is very little use of air conditioning and homes are typically not huge an~ there is a lot
of concentration of dwellings particularly, small apartments. So small customers which would
be typical of a condo/apartment is in the order of around 300 kws and the impact of this rate
is about 35 % increase or a $4.75. A more typical single family home would be up in the
range of 650 kws and the impact here is about $14.38 a month and then ~here are a group
that uses more than that and of course, the dollar amount would be more. With the
exception of the very small customers with the 35% increase, the residential average
increase is 43%; the large residential customer would be 48% and the commercial of small,
medium and large would be on the order of 43%. To give you a bit more demographic
approximately 1/3 of our residential customers, about 7500 are in the category of small
UAC Minutes 4/4/01 Page 44 of 57
apartment homes and the average, there is another 34% about 8200 and then the large
customers which would be over 650 and that would be a wide. range in that category - that’s
about another 8300 so that it is about evenly divided 1/3 between those different classes of
residential customers.
The reasons for the increase is as you all know that the City of Palo Alto has had a very
unique and favorable contract for almost a very large percentage of its electricload - anyway
fro.m 70 to 90 and sometimes over 100% of the load and energy has come from Western.
So we have put a very large amount of our eggs in one basket, and that has been very
favorable to the residents and businesses for many years. Now with the advent of the
problems of your potential PG&E bankruptcy or the FERC filing with PG&E, the Integration
Agreement and Interconnection Agreement has become an additional cost, potentially a
significant, additional cost. We have done an evaluation on what we believe is the
appropriate.amount of additional cost that we are going to get in the short run from Western.
Those have been factored into the rate.
So that’s kind of the long and short of it. I am pleased that we have been able to talk about
our Load Management and Energy Conservation programs to show that this is a way of just
adding costs and just passing them on. This is a group of Utility professionals that have
thought very long and hard about how to do this and how to make the pain as little as
possible. The other side of it if you are going to make some comparisons, which sometimes
it is difficult to do because if you have experienced the low rate for a long time, making a
comparison with someone in Menlo Park or Mt. View or San Jose does not always strike at
home. But if it was compared with those customers that are using the same amount of
electricity, the bills m even with this 40+ % increase-’ are anywhere between 43 and 57%
less than people in PG&E’s area. That is the summary of what we are asking. The increase
will be effective July 1
Fer.quson: Let me ask the same analog to the question I did on the gas rate. If you pulled
out the debt financing component of this, how much would you have to increase this rate to
cover the same spending? Randy shows 5% higher?
Ulrich: Just to count the fingers - 5%.
Fer.quson: So 5% on top of 40. some percent would be the average increase.
Dawes: I assume that the answer you just gave John.is due in part or totally to change in the
guideline reserve requirements that we have not yet discussed. I mean that is implicit in the
assumption.
Ulrich: Yes, that is correct.
Dawes: Yes, well as I said earlier I believe that that also needs a lot of discussion. The
reserves that we currently have on the books 31.5 million dollars in the Supply RSR and 3
Million dollars in Distribution and 2.2 in Plant Replacement in addition to Calaveras, which as
we all know with the current rate structure we have, even with a incredible collapse in rates
UAC Minutes 4/4/01 Page 45 of 57
still like it is probably unlikely that we will need that Calaveras Reserve. I am frankly a
skeptic on why we need to raise these reserves, simply because there is more beta in terms
of the rates, in other words they are more volatile than they have been and it looks to me
that’s your justification for increasing these reserve proposals. But I frankly don’t think it is
necessary. Over 30 million dollars in our Supply RSR basically on the gas side, we used our
reserves over the last year in the face of a rising rate environment and now we are justifying
a bond issue on the basis that our reserves are zero and we have to build them back up. On
the Electric side, the reserves are very robust and we are justifying an electric increase on
the basis we should increase the reserves, even though we have not used any at this .point.
Baldschun: No, we are not increasing the supply reserve. This rate increase is going to put
zero money into the Supply Reserve.
Dawes: I see that the 31.6 to 29.7 - that is true but overall the reserves go up by 102 to 108,
6 million in the face of a 9 Million dollar bond issue and a currently 31.6 million dollar supply
RSR. I would recommend the 3 million dollar difference there that we take out of that supply
reserve, there is plenty of room there to cushion our situation without floating a bond issue.
Here again, to subsidize our rates by doing a bond issue to the ClP m I just don’t think it.is
necessary.
Ulrich: Well, you have raised a number of things and if you would want to have that
discussion now, that would be fine.
Dawes: Well, if it is implicit in this whole rate increase, I will vote against this rate increase
on the basis that it is turns on having a 9 million dollar bond issue for the Electric CIP. I just
don,t think it is necessary.
Baldschun: Let me just correct something about the Reserves. The balances are going up
but that is because on line 57 is the debt service reserve and that’s the bond proceeds of 6
million.
Dawes: Yes, I said that if you didn’t do the bond issue the reserves would go down 3 million
and the Supply RSR is sufficient for that.
Baldschun: Distribution is going to go up though. We do need to build up the Distribution
Reserve and that is part of this proposal.
Dawes: No, I understand that.
Baldschun: I know that is not your issue, though.
Dawes: It is. I said earlier I didn’t agree with the need to change the guidelines on supply -
I’m sorry, Randy m you said it was-
Baldschun: We didn’t change the guidelines on Distribution.
UAC Minutes 4/4/01 Page 46 of 57
Dawes: You didn’t change the guidelines on Distribution. I frankly kind of put those 2 reports
¯ togetl’ier in my head.
Baldschun: It is OK. It is confusing. We have lots of things going on but we are proposing a
change in the Supply Reserves. That is not triggering any money going into the Supply
Reserves so by virtue of the fact that we are proposing a guideline change, that is not
triggering this rate increase. What is triggering the rate increase is two things - the
Commodity Cost and the need to fund the Distribution Costs and build up the Distribution
Reserve.
Dawes: Right. Again, I would say my druthers would be do the rate increase as proposed,
bag the bond issue and take the difference out of the Supply RSR which I compute is about
3 million, 10% of the reserve.
Fer.quson: Before we go to Commissioner comments, I am sorry, I do have a .slip here from
the public for this agenda Item 7 from Mr. Borock. and then we will finish Commissioner
conversation. And another slip as well.
Borock: I want to use the overheads and figure out how to use that again. Alright, well let
me start. The first thing is that one of the key things, the Commodity costs - the Council has
made the decision to have advice on buying power go through Standing Oversight
Committee so really you have decisions going on in a way that normally are expected from
the UAC to be more involved in. One of those issues has to do with the question of whether
buying peak power for just 3 1/2 years or over a 10 year period. Those are the 2 options
which are being looked at. Just 6 months ago when we signed the WAPA contract we talked
about getting a custom, negotiating over the next 2 years a custom contract with WAPA for
that period after 2004. So for what it is worth, whenever that decision is made it seems to
me that extra peak power - 10 megawatts - should be just on that 3 ½ years.
Normally when the Finance Committee makes recommendations about rates, it sees a rates
schedule and you don’t have a rate schedule in front of you. We just heard and perhaps it is
in this material that you read, and I have not read your entire packet that this rate increase is
not just for the commodity increase which is being talked about a lot and also the Distribution
System and I would like to hear more information on that and I believe that the rate payers
might also due to the sense about what is needed on the increase in distribution costs. And I
recall on either reading or hearing during early discussions that we were the Standing
Oversight Committee a statement or distribution or transmission costs were about 4 cents
per kw and that they would be increasing and so maybe now all those pieces are coming
together.
I believe that I have the correct rates now and essentially, as I understand, the rates are in 3
pieces, commodity, distribution costs and the public benefits cost and it is only when you get
to the piece for residential customers of over 600 kw hrs where the pieces, the non-
commodity piece is up to 4 cents now and I would like to see some discussion on how these
different pieces are increasing. In other words, what would be the optional rate schedule.
The Finance Committee is going to be seeing a rate schedule when it makes its
UAC Minutes 4/4/01 Page 47 of 57
recommendation. In the Staff Report it mentioned increased transmission costs and high
reliability and grid management charges. My question then is are those things bundled into
the commodity cost or do they appear under distribution costs?
Another thing you will notice is that we only have 3 rate tiers, up to 300, the next 300 and
over and 600, however in the staff report we talk about large customers that have as much
as 3000 per month and it would seem tome if we are talking about conservation, we would
want to have additional tiers. Maybe if those customers had a price increase for every 300
kw hours they might be able to cut back, especially when we are talking about a third or more
of the customers at 650 kw hours per month which is above the highest tier. I would like to
take those things into consideration because otherwise what you have, even though there is
a lesser increase in the lower and small users, that in terms of something that is being
described to us in crisis terms as Mr. Grimsrud mentioned earlier, you are faced with the
same thing with water that we did impose some drastic rate changes for those bigger users
in order to encourage conservation. As long as we continue with the same policy that we
have now, the 600 kw hours is the last break, I don’t think that is going to happen. Thank
you.
Ferquson: Thank you Mr. Borock. We have another slip from Richard Cassell. Mr. Cassell,
welcome.
Cassell: Yes, I just want to reiterate again what I said before, we think we are in an energy
crisis. We have been told that by everybody and everybody believes it. I am trying to cut
back on the use of energy and for everyone to do that, what we need to do is to increase
dramatically the cost for excess use of power. Instead of just making a very slight increase,
making everybody pay more. Again, it seems to me that a surcharge, you get half the power
you were existing, that you are using right now for the same price you got it now and the
other half you would have to pay twice as much or whatever the numbers come out to be to
make up the difference to try to encourage people to conserve power rather - this does not
encourage them to save power. Just a very slight increase as he says for the residential
customer on what he is already doing doesn’t do the job of cutting back on the power use.
Fer.quson: Thank you, Mr. Cassell.
Rosenbaum: I had raised-the question as to where this 23 million dollars in increased
commodity cost come from, since it does not come from the proposed Western increase. Let
me sort of amplify on that a little, John. You also mentioned in addition to the proposed
increase the concern about the FERC decision, it had been my impression that there was not
going to be any part of this rate increase associated with the potential FERC decision., that is,
when that decision is made.
Ulrich: That is correct.
Rosenbaum: Alright. So we are not talking about any FERC action here. So my question is
where do we get the 23 million dollar increase in commodity costs?
UAC Minutes 4/4/01 Page 48 of 57
Baldschun: I’ll address this and maybe Girish will have something to add. The 23 million is
broken up, if you will look at the 10 year forecast, you will see that it is broken up on lines 8
and 9 as the commodity 16,790 thousand and the distribution 7,210 thousand. On the
Distribution side, we have some increased costs for the CIP for the street lights and the traffic
signal; we have increased O&M; we have an increase of about 460 thousand in Telecom.
There is a rent increase in the figures that we are seeing from the budget; there is the debt
service decrease in the Calaveras debt - excuse me that is in the supply side. I have 2
columns I am looking at here. There are about, I would say, 10 different changes, some plus
and some minus that net out to about 6.9 million. Now if you look at the Distribution Reserve
which is. below its minimum about 939 thousand is proposed to go and fund the Distribution
Reserves. So of the 6.9 million, you have roughly 9 that is designated for building up the
Distribution Reserve and the rest is to cover increased cost on the supply side. You are really
looking at a net increase of 16 million 790 thousand and that is on a 12 month basis. On a
fiscal year basis, it comes out to about 16 million, one hundred thousand because when you
have a rate increase, you prorate the first month, so you don’t collect that full amount of
revenue. Girish can talk about the supply side.
Balachandran: O.K. the supply increase is about 18 million dollars if you look at line number
31 of the 10 year financial forecast from about 25 ought to about 43 million bucks. So 18
million, of which there is a transmission cost increase from PG&E of 2 million ISO charges,
GMC and reliability fees another 2 million, NCPA cost increase of 2 million, so that is 6. The
remaining 12 million is the Western cost increase. So off the 18 million of supply, 12 is
attributed to Western.
Rosenbaum: Is the NCPA and administrative cost increase of 2 million or is there a
commodity component of that?
Balachandran: There is no commodity component to that.
Rosebaum: So that is just staff increase, I mean.
Balachandran: It is actually been on the books for l more than a year but we funded it
through reserves. There are a bunch of things including staff increase, dealing with the ISO,
so this has actually been in NCPA’s budget for I more than a year.. Just dealing with the ISO
settlements, billing, RMR, it is an incredible amount. They have added new staff, legal
counsel, legislative and regulatory work on Western and with restructuring, risk management
work
Dawes: Do they repay Palo Alto for some of the staff we have donated to them or
Balachandran: Do they repay us for this - yes in some ways depending sometimes if we do
a deal in the pool, we would--
Dawes: I mean Tom Kabat spends a lot of time up there
Balachandran: Right.
UAC Minutes 4/4/01 Page 49 of 57
Dawes: I figure maybe if we are coughing up 2 million, maybe we get some of it back.
Balachandran: No. In the pool we are about 33 to 35 percent share of pool expenses so we
are the largest pool member. So, we get any risk management costs, soft ware costs,
software that needs to be updated - we get a pretty hefty chunk of that.
Rosenbaum: This is part of that 2 million one time or is it going to be with us every year?.
Balachandran: It is going to be on-going for the most part.
Ferquson: Any other questions about the electric rate increase?
Rosenbaum: Yes. I used to be with NCPA and it is almost inconceivable that Palo Alto is
getting a 2 million dollar increase. That would suggest the total agency budget increase of 6
to 8 million dollars considering the share that we give. Is that what is really going on at
NCPA?
Balachandran: Yes, this has been in the budget for more than a year. NCPA’s budget
increased dramatically last fiscal year so you know, we have been paying these increased
costs through this year through our reserves basically and so since it was approved last year
you are looking at maybe 18 to 20 months back that all this was brought up to the NCPA
Commission. We looked at it before it came to Commission, staff looked at it and had
negotiations and lots of questions, etc. Remember, the whole the industry is changing so all
these costs just keep up with all the changes that are happening. They had to add staff and
power supply business unit, they added 3 or 4 staff at least. IT had to change tremendously
including scheduling coordinator services, entirely new computer systems, risk management,
getting tracking systems over there, consultants to help us with Risk Management, legal
counsel, R&R Wolf, just to get contracts in place, hiring legal counsel for that so that there
was a tremendous amount of work that needed to be done.
Rosenbaum: Well, a lot of that does sound like one time costs. Once again I have a lot of
trouble believing that the NCPA budget went up by 6 to 8 million dollars on an annual on-
going operating basis. Alright, but that is 2 million there. 2 million for PG&E increase for
transmission, is that something that just happened this year?
Balachandran: No, we have seen it coming down the pike. PG&E has been filing different
tariffs called Transmission Owner m TO1 through TO5 which is the present tariff -- and it is
a pass through from Western to us and this is something that we had a rate lock, PG&E
could not pass through the rate through Western until April of this year. So that is something
that is going to come through as a completely cost-based rate. We don’t really have much of
a foot to stand on, unlike 2948A in the energy rate where we can fight that. This is
something that we have been expecting for more than a year or so.
Rosenbaum: But this comes to us through Western independent of the Western rate. It is
not part of the Western rate.
UAC Minutes 4/4/01 Page 50 of 57
Balac~handran: That’s right. It is a straight pass-through.
Rosenbaum: And not included in the rates.
Balachandran: No. So Western’s rate when they file it in the Federal Register does not
include this rate. So this is an additional cost to us,
Rosenbaum: Alright. Then you spoke of 2 million for the ISO.
Balachandran: There are the ISO charges off the GRID management charge. Initially, we
were protected from Grid Management Charge through the Interconnection Agreement.
Then we had a 50 50 settlement in a. sense that only 50% of GMC would be charged to us,
but that is going to be phased out. Reliability cost - there is an RMR cost which is basically
local generation that is run in the Bay Area and other places to maintain reliability that is
charged to us through the ISO also. So those are the costs that come through.
Rosenbaum: And then the big one is the 12 million dollars. What is the basis for that - is
that1.2 cents times a billion units?
Baldachandran: Pretty much. It is a 3 cent rate for Western and that is what this increase is
based on.
Rosenbaum: I thought Western was going to fix its rate by now. When are we going to get
the Western rate?
Balachandran: It depends upon what how the FERC rules. Western is on the books around
2 cents or so and depending on how this FERC filing turns out, the ~’ate will be determined at
that time.
Rosenbaum: That might take 6 months. Why are we thinking about raising rates now?
Were you saying the Western rate will stay at 1.8 or 2 cents where it is now until FERC
makes a decision?
Balachandran: That’s right.
Rosenbaum: Why are we raising rates now?
Balachandran: FERC could make their decision as early as a month May 18th or 20th.
Rosenbaum: We could surely meet then and base our rates on the actual cost. We are a
cost-based utility. I do not understand why n I m, ean, we know that we do not have to raise
rates until July 1. We have always done it that way. We have seen in gas that it is possible
to change them at other times. Why not wait until we know what our costs are?
UAC Minutes 4/4/01 Page 51 of 57
Balachandran: One of the reasons is, if there is an adverse ruling by FERC and the rates go
up to what PG&E is asking for, then the Western rate could be 10 to 12 cents. Now 10 to 12
cents could translate into tens of millions of dollars for us in a month so it is probably about
10 to12 million in a month for us. There is a reserve issue over here too as to that rate
shock. So, what has been factored into this assumption is pretty low compared to where it
could go, but this what we expect. We don’t expect to pay more than this. If it does happen,
we need to be able to respond rapidly and pay our bills.
Rosenbaum: Well, we have reserves to take care of the one month you are worried about. I
guess I don’t see the need for the rate increase at this time. I really think it would be better to
put it off until we know what our costs are. So unless there is something I am missing, I
would not be supportive of this 40 percent rate increase at this time. That is going to be a big
shock to a lot of people. You know, we are not PG&E, the fact that PG&E is raising rates
40% -- everyone thinks we are a municipal utility and we have made a big point ab(~ut being
independent of PG&E. To some degree this proposed rate increase is based on why not, the
competition is going up, so why shouldn’t we go up. So I just can’t see it at this time.
Fer.quson: Any other Commissioner comments?
Carlson: Yes. The one argument that is most interesting here in the case of gas, we are
certainly shaving a peak. You know we are increasing a little less than necessary, we are
doing some bonding, some peak rate mitigation. I don’t think you can make that argument
here in electric. In this situation future rate increases will almost certainly be higher, almost
certainly once we hit the 2004 range, no more legal argument. PG&E or whoever is going to
sell Western at market rate and the rate increase is going to be even higher. So what makes
sense to me here, is doing this rate increases now, getting the customers used to it, at least
in the beginning of it, and building the reserves because the situation is so unusual. But you
have much less of an argument for bonding in this area because you are not shaving a peak,
you may as well.get used to it. I don’t see any point of bonding on top of this. So that is
where things are on this one.
Fer.quson: Any other comments?
Bechtel: I agree with Mr. Carlson. It makes sense to look at a rate increase. I don’t think I
like 40% - I don’t think I like it on gas either. But there seems to be general consensus that
the new generation is going to come on line and prices will probably stabilize, but at a higher
rate than we have seen. And the 2004 issue needs to be dealt with now, so I am going to
support the rate increase proposed by staff.
Fer.quson: Let me ask a procedural question, then I will turn to Mr. Dawes. Is there any
great procedural difficulty in handling the gas rate increase at the next Finance Committee
meeting and deferring the Electrical Rate issue. What happens ifthat slips a month and
FERC pops up on May 18~h?
Ulrich: Well, it is the timing. There is value in going to the City Council with the entire
package so they see the impact of overall rates. I mean our customers are all the same
UAC Minutes 4/4/01 Page 52 of 57
Whether they are electric or gas. There is value in being able to show our customers that we
thought through and looked at the rates for both our costs related to both electric and gas,
and have considered them both together. And, historically, and some of you are far more
familiar with them than I am, we have looked at trying to put all our rates, as many as
possible, every other year or every year at July Ist and using that as a because it also helps
in the budget process to know how much revenue is coming in from the utility rates. So, the
timing is appropriate to take both the electric and gas at the same time to the Finance
Committee and then go through it. It is obvious from discussions that you are still not
satisfied with our idea about the debt financing. We can sure give that some more thought
but I would still ask that you approve the increases that we have asked for in electric and gas
so that we can move forward with it.
Dawes: Well, 2 items. One, the commodity change is cloudy at this point m that is the way I
would summarize Girish’s discussion. At this moment we don’t have a specific commodity
cost increase we are looking at and we are pretty sure it is going to come through, either
through the FERC mandated thing or some other change but Dick’s point is it is not on the
table. There are other cost increases that we talked about - the NCPA, the Western, the
gatekeeper, ISO certainly requires an increase. I frankly think that an increase of something
very close to the 43% is very justified so long as it is separate from the bond issue. I’ve
beaten that horse to death, and I don’t know how we are going to draft our motion here but I
would like to see it separated later on.
Fer.quson: Let me try to simplify it. Can I have a motion to defer to the next UAC meeting
the consideration of items 2, the Update on Strategic Plan, Item 4, the Ten Year Forecast,
~ltem 5, the Fiscal Year. 01 overview, Item 6, the Proposed Revisions to the Reserve
Guidelines and Item 7, the Proposed Electric Increase.
Dawes: Sounds like it should be a special meeting.
Ferquson: Just "the next meeting." We will talk about schedulingafter. I just want to get it
deferred for now. Is there a second to deferring to the next meeting?
Carlson: Yes, I will second that.
Ferquson: Any discussion on scheduling that motion?
Ulrich: Excuse me. Could you
Fer.quson: The motion was to defer those items to our next meeting.
Ulrich: Which items were those? I’m sorry.
Fer.quson: Referring to the web agenda: it is item 2, Strategic Plan Update, Item 4, the Ten
Year Forecast, 5 the 102 Budget Overview, Item 6 the Revisions to Reserve Guidelines and
Item 7 the Proposed Electric Rate Increase. And I should - well we will pick up our Reports
of Officials as well - TANC and NCPA.
UAC Minutes 4/4/01 Page 53 of 57
Ul.~rich: Well, with the exception of the Proposed Electric Rate Increase, I am not sure why
you want to defer that. -
Ferquson: You will get a better sense since there is no screaming need to approve that in
the next month. We will get a better decision either through a special meeting or the next
regular May meeting. That’s why I asked the question about procedure, and I am betting
that the sense of the Commissioners is we would all feel a little more comfortable, by at least
3 out of 5, in considering that later.
Dawes: I would also like to put in a plug for Herb Borock’s suggestion and other citizens
suggestions about steepening the electric increase rate schedule in terms of rate changes for
larger residential users. I don’t think these are big issues about small commercial or
industrial customers versus large, but on the household side this probably could deal. of
support for steepening that curve and the call for conservation. I remember vividly the
changes in behavior when either 10 or 15 highest residential water users were published in
the newspaper back about 6 or 7 years ago, my next door neighbor being on the list. How it
changed behavior. A steeper rate schedule for high residential users would be highly
beneficial.
Baldschun: Commissioner Dawes, just for clarification, the proposal is to apply a larger
increase on the tail-block so your suggestion is to go even further than the proposal rate
increase -
Dawes: Even steeper.
Baldschun: O.K.
Rosenbaum: I would just like to respond to that. It is sufficiently inverted as it is and it is
really not necessary to go beyond that so perhaps Dexter and I would differ on that. It is
quite extreme right now.
Fer.quson: Anybody want.to break the tie vote here? We clearly need some more baking
here. Mr. Dawes do you want to take credit for that motion to defer?.
Dawes: I’ll make the motion to defer?
Fer.quson: Just to clarify, Mr. Carlson seconded it. If there is no more discussion, let’s have
a vote to defer and then treat the question of scheduling next.
Bechtel: Let me clarify - we are tabling every thing on this agenda at this point, is that what
you are saying? All remaining items on the agenda, we are tabling, including the current
issue under discussion. Is that correct?
Fer,quson: The issue under discussion is the proposal for electric rate increase and the
motion is to defer the completion of discussion on that as well as the other items which
UAC Minutes 4/4/01 Page 54 of 57
spilled off the agenda, and to do that at our next meeting. So the principle in front of us now
is deferring these items and it is now 11:20. If there is no more discussion, all in favor.
Anyone opposed? No one opposed. We have elected 5-0 to defer those. Now let’s briefly
treat the question of whether we need a special meeting or do we want to gear up for May
2nd which is our ordinarily, regularly scheduled meeting. Any thoughts?
Dawes: Special meeting.
Carlson: Special meeting.
Fer.quson: Staff- any immediate suggestions or limitations on time frames. Do it the
Tuesday before Finance Committee. You want to try that?
Ulrich: What is your pleasure. Obviously, we would like to do this to - the difficult part on
doing an item like the electric - the ones that are being deferred that have to go to the
Finance Committee are the Proposed Electric Rate Increase and the Revisions to the
Reserve Guidelines and to some degree we have a timing issue on the budget. So the
sooner we could have a meeting that would meet your needs we could get on to the Finance
Committee agenda, we have to ask Council member Beecham whether there is anything
regarding the Finance Committee as Mr. Beecham is the Chair of the Finance Committee
whether we can do something in the latter part of April or early May on those subjects. We
have the Finance Committee on that we would cover the Gas Rate Increase and the
Conservation and the COBUG which would be on the 17th of April.
Beecham: I thought I would add in here our schedule for the Finance Committee on the
Budget but I don’t see that as I go through this. Whenis the budget -
Ulrich: The Utility budget is May 24th.
Beecham: But I mean for the Finance Committee overall, we have about a half dozen
meetings in a row on the budget and I don’t think we would want this as we do those.
Ulrich: You would want us beforehand.
Beecham: Yes.
Ulrich: If it is alright, I’ll work with Council member Beecham and with Carl Yeats to come up
with a date.
Dawes: How about a week from today or something like that? In other words, something to
keep the 17th - keep it coming into the meeting on the 17th but have it next Wednesday or
something like that.
Ferquson: Next Wednesday is the 11t~. It is a good idea.
Ulrich: Subject to scheduling a room and all that.
UAC Minutes 4/4/01 Page 55 of 57
Fer.quson! Plus or minus a day would help. Mr. Bechtel?
Bechtel: Tuesday.
Fer.quson: Tuesday, the 10th.Is there enough time to notice a meeting for Tuesday?
Rosenbaum: I would prefer Wednesday.
Fer.quson: Mr. Bechtel’s Wednesday is impossible. We have eliminated him if we do it on
Wednesday. Do we have enough calendar days to notice a meeting for Tuesday? If it goes
out tomorrow?
Ulrich: Well, it is 72 hours and so that would mean getting the agenda out on Friday this
week. It would be rather close. The real question is what additional materials would you like
beyond what we have already provided. If you want nothing additional other than additional
analysis that we would provide and come prepared to discuss at the meeting that would be
different than just taking these items as they are and moving them to next week. Then there
would really not be a packet with information other than the public notice of the meeting.
Fer.quson: Myguess is that is correct. The only preparation needed here is just a good
night’s sleep for at least 5 or 6 of us.
Dawes: Is the 10 year budget on an Excel spreadsheet by any chance? Is it possible to E-
mail that out to those of us who want to make points by proposing our own agenda could do
SO.
Baldschun: You won’t be the first UAC Commissioner who has done rate analysis, right
Dick?
Fer.quson: Lucy, did you need to make a comment?
Hirmina: I’m sorry. Maybe we can just put this sheet separate because it is attached to 6
different spreadsheets here. Each one of those is like --
Fer.quson: Well, we are not going to do spreadsheet design tonight. So we have a tentative
date of Tuesday, failing that we have Wednesday next week and we are as prepared as we
need to be, John.
Ulrich: So your preference is April 10th ? We will still ask you to approve the. increases that
we have asked for, both in electric and gas, so we can move forward with it.
Fer.quson: Our preference is Tuesday if that is possible because all Commissioners can
make it and I think all Commissioners are ready, willing and able to do this a little earlier in
the evening.
UAC Minutes 4/4/01 Page 56 of 57
Ulrich: Such as 7:00 o’clock.
Rosenbaum: 7:30.
Fer.quson: Mr. Rosenbaum wants 7:30 - that’s fine.
Rosenbaum: No, no. I am happy to go at 7:00 but it is going to confuse us. We always meet
at 7:30.
Ulrich.: Well, we have had a few exceptions to that. So is it 7:00 then?
Ferquson: 7:00 on Tuesday. That takes care of that meeting and, of Course, the regularly
scheduled UAC meeting is May 2. If there is no other business Commissioners, we are
adjourned.
Meeting adjourned at 11:30 p.m.
UAC Minutes 4/4/0i Page 57 of 57