HomeMy WebLinkAbout2001-11-13 City Council (10)City of Palo Alto
City Manager’s Report
14
TO:
FROM:
HONORABLE CITY COUNCIL
CITY MANAGER DEPARTMENT: UTILITIES
DATE:
SUBJECT:
NOVEMBER 13, 2001 CMR:425:01
REQUEST FOR APPROVAL OF AN ORDINANCE AUTHORIZING THE
CITY MANAGER TO PURCHASE A PORTION OF THE CITY’S
ENERGY REQUIREMENTS DURING THE 2005 - 2010 PERIOD UNDER
SPECIFIED TERMS AND CONDITIONS AND CLARIFICATION OF
CMR:389:01 (REQUEST FOR APPROVAL OF 1) THE PRIMARY
OBJECTIVES FOR LONG-TERM ELECTRIC PORTFOLIO
DEVELOPMENT AND 2) THE PURCHASE OF A 25 MW POWER
SUPPLY CONTRACT FOR UP TO FIVE YEARS STARTING IN YEAR
2005)
RECOMMENDATION
Staff recommends that the City Council approve an ordinance of the Council of the City
of Palo Alto authorizing the City Manager to purchase a portion of the City’s energy
requirements during the 2005-2010 period under specified terms and conditions. In
addition, as requested in CMR:389:01, staff and Utility Advisory Commission
recommend that the City Council approve: 1) the primary objectives which will guide the
long term electric portfolio development, and 2) the purchase of a 25 MW power supply
contract for up to five years in the period 2005-2010.
DISCUSSION
The project description is outlined in detail in CMR:389:01 (attached) that was
unanimously approved by the Finance Committee of the Council on October 16, 2001.
When approving the staff recommendation to purchase 25 MW power supply, the
Finance Committee was made aware that the process by which Council could approve
this recommendation will have to be in the form of a Council Resolution or Ordinance.
Since the approval on October 16, 2001, staff and the City Attorney have developed an
Ordinance that will facilitate the Council approval of the 25 MW purchase. The
CMR:425:01 Page 1 of 2
Ordinance was developed to codify the terms and conditions of the 25 MW purchase and
authorizes the City Manager or his designated representative, to enter into and execute
contracts for blocks of energy with qualified power suppliers under the approved terms
and conditions. The terms and conditions included in the Ordinance are identical to the
ones approved by the Finance Committee and the Utility Advisory Committee.
ATTACHMENTS
A. CMR:389:01 approved by the Finance Committee on October 16, 2001: Request for
approval of 1) the primary objectives for long-term electric portfolio development
and 2) the purchase of a 25 MW power supply contract for up to five years starting in
year 2005
B. Minutes of the Finance Committee meeting on October 16, 2001
C. Ordinance of the Council of the City of Palo Alto Authorizing the City Manager to
Purchase a portion of the City’s Energy Requirements during the 2005-2010 Period
under Specified Terms and Conditions
PREPARED BY:Shiva Swaminathan, Senior Resource Planner
Girish Balachandran, Interim Assistant Director
DEPARTMENT HEAD:
~f Utilities
CITY MANAGER APPROVAL:
SON
Assistant City Manager
CMR:425:01 Page 2 of 2
14
TO:HONORABLE CITY COUNCIL
FROM:
DATE
SUBJECT:
CITY MANAGER DEPARTMENT: UTILITIES
OCTOBER 16, 2001 CMR:389:01
REQUEST FOR APPROVAL OF 1) THE PRIMARY
OBJECTIVES FOR LONG-TERM ELECTRIC PORTFOLIO
DEVELOPMENT AND 2) THE PURCHASE OF A 25 MW
POWER SUPPLY CONTRACT FOR UP TO FIVE YEARS
STARTING IN YEAR 2005
RECOMMENDATION:
Staff and the Utilities Advisory Commission recommend that the City Council
approve 1) the primary objectives which will guide the long-term electric portfolio
development and 2) the purchase of a 25 MW power supply contract for up to five
years in the period 2005-2010.
DISCUSSION:
The term of the City’s current contract with the Western Area Power Administration
(Western) ends on December 31, 2004. In October 2000 Council approved the 20-
year Western Base Resource Contract (CMR:378:00) which will replace the existing
Western contract. The new contract is expected to provide considerably less energy
to the City than the existing contract and hence will result in a large electric supply
deficit starting in 2005. The projected energy shortfall in the year 2005 and beyond
is expected to be approximately 500 million kilowatt-hours per year or 45% of the
City’s electricity energy needs during an average hydrologic year.
Primary Obiectives in Developing Electric Supply Portfolio Plan
Before proceeding with the development of a long-term electric supply portfolio
plan to fill this energy deficit, it is important to define the objectives that will guide
CMR: 389:01 1 of 4
staff in the development and management of electric supply portfolio. Staff and the
Utilities Advisory Commission (UAC) propose the following set of primary
objectives.
¯Ensure low and stable electric supply rates for customers.
¯Provide superior financial performance to customers and the City by
maintaining a supply portfolio cost advantage compared to market cost and a .
retail supply rate advantage compared to PG&E.
¯Enhance supply reliability to meet City and customer needs by pursuing
opportunities including transmission system upgrades and local generation.
¯Balance environmental, local reliability, rates and cost impacts when
considering renewable resource and energy efficiency investments.
Purchase of a 25 MW Fixed Price Power Supply Contract
Market prices in recent months have declined substantially. The prevailing market
prices are thought to be unsustainably low by most market participants and have
prompted some generators to announce the postponement of their plans to build
generation in California.
Though the energy shortfall is not expected to materialize until January 2005,
energy portfolio risk management principles emphasize that the timing of actual
energy procurement transactions be made in a staggered fashion, with different
terms and duration, with different counterparties, and with fuel and source
.diversification.
Based on the energy portfolio risk management principles outlined, and due to the
dramatic decline of electric prices in recent months, staff recommends the purchase
of energy with the following characteristics:
Characteristics of Potential Forward Electricity Purchase Contract
25 MW for up to six months between September and April
A term of up to five years starting in year 2005
Energy to be delivered at NP-15, round-the-clock
The purchase to be a fixed price contract with an average price not to exceed
$45/MWh
ca The energy is expected to satisfy i0-20% of the projected annual energy short-
fall during an average hydro year
ca The purchase may be made in two blocks with counterparties approved by the
Utilities Department’s Risk Oversight Committee
CMR: 389:01 2 of 4
UTILITIES ADVISORY COMMISSION REVIEW AND RECOMMENDATION
Since February 2001, the UAC has reviewed analysis pertaining to the option
available to the City to fill the energy deficit in year 2005 and beyond.
At the September 25, 2001 meeting, the UAC unanimously approved staff’s
recommendation to purchase energy to fill part of this energy deficit. The UAC
went beyond the staff’s recommended purchase quantifies of three months of
purchases of up to three years (nine consumption months) and recommended staff
be provided additional authority to make purchases for six months (September
through February) and for up to five years (thirty consumption months). The UAC
motion to provide staff with this increased authority passed with a unanimous vote.
In recommending this increased purchase authority, UAC members stated that they
too believe that electricity prices are low and reasonable at present and staff should
not be "gun shy" to commit now to purchase a larger percentage of our future
energy requirements. The UAC’s recommendation for increased authority is
accepted and endorsed by staff. Based on market conditions and further analysis to
fine-tune the term of purchase, the final decision regarding the purchase term will be
determined by staff in the coming weeks.
In discussing the primary objectives in developing the electric supply portfolio plan,
the UAC proposed modifications to the initial set of objectives proposed by staff.
These comments were fully incorporated by staff, and the final version of the
proposed objectives was unanimously approved by the UAC at the October 3, 2001
meeting. In approving the objectives, the UAC felt that "low and stable rates for
customers" should be the overarching objective in planning the portfolio.
RESOURCE IMPACTS
The total cost of the contracts could be up to $25 million over 5 years (25 MW *
$45/MWh * 720 MWh/MW-month* 6 months/year * 5 years). This cost of
approximately $5 million!annum is estimated to be approximately 7% of the
forecasted total electric supply cost during this same period.
POLICY IMPLICATIONS
These recommendations meet the objectives outlined in the Utilities Strategic Plan.
Specifically, the recommendations meet the goal of Strategy No. 2, "Preserve a
supply cost advantage compared to the market price."
ENVIRONMENTAL REVIEW
The approval of the primary objectives and the purchase of the electricity contracts
do not constitute a project under the California Environmental Quality Act;
therefore, no environmental assessment is required.
CMR: 389:01 3 of 4
ATTACHMENTS
A. UAC Reports dated September 25, 2001
B. UAC Minutes dated September 25, 2001
C. UAC Report: Request for Approval of Primary Objectives
Electric Portfolio Development dated October 3,2001
D. UAC Minutes dated October 3,2001
For Long-Term
PREPARED BY:Shiva Swaminathan, Senior Resource Planner
Girish Balachandran, Interim Assistant Director
DEPARTMENT HEAD
CITY MANAGER
D~rector of" L~tilities
City Manager
CMR: 389:01 4 of 4
TO:
FROM:
UTILIT!ES ADVISORY COMMISSION
UTIITIES DEPARTMENT
DATE:SEPTEMBER 25, 2001
SUBJECT:REQUEST FOR APPROVAL OF PRIMARY OBJECTIVES FOR
LONG-TERM ELECTRIC PORTFOLIO DEVELOPMENT AND A 3-
MONTH, 25 MW POWER SUPPLY CONTRACT FOR THE
PERIOD 2005-2007
REOUEST
This report rexIueststhe Utilities Advisory Commission (UAC) recommends that the City
Council approves: 1) the 5 Primary.Objectives which will guide the electric portfolio.
development, and 2) a 3 month, 25 MW electricity purchase contract forthe period 2005-
2007.
~£~KGROUND
The term of the City’s current contract with the Western Area Power Administration
(Western) ends on December 31, 2004. In October 2000 Council approved the 20-year
Western Base Resource Contract (CMR:378:00) which will replace the existing Western
contract. The new contract is expected to provide considerably less energy to the City.
than the existing contract and hence will result in a large electric supply deficit starting in
2005. Based on the analysis provided by staff; UAC approved a set of guidelines to fill
this energy deficit in February 2001. A presentation of electric portfolio development and
implementation process was made to the UAC on September 5, 2001. Both the February
2001 report ..and the September 5 presentation are attached to this report.
DISCUSSION
Due to the changed Western contract, the projected energy shortfall in the year 2005 and
beyond is.expected to be ~ 500 million kilowatt-hours per year (MWh/yr) or 43% of the
City’selectricity energy needs during an average hydrologic year. This deficit is highly
variable depending on hydro conditions with the energy deficit as high as 68% in a very
dry hydro year and as low as 17% in a very wet year. This annual production variability is
illustrated in Figure 1.
Page 1 of 5
~ig li Variability of Existing Generation Portfolio After December 2004
140,000"
120,000
0
E too,ooo.
~ 80,000
u.I 60,0o0
20,000
o
Before proceeding with the development 9f long-term electric s, upply portfolio
recommendations, it is important to defin~ the objectives that will guide the electric
supply portfolio development. StaffpropOses the following set of 5 primary objectives.
Primary_ Objectives in Developing Electric Supply Portfolio Plan .
1. Maintain Palo Alto’s supply portfolio cost advantage compared to market cost
2. Ensure stable elec~c supply rates for. customers
3. Maintain Palo Alto’s retail supply rate advantage compared to PG&E
4. Develop a renewable resource portfolio & implement energy efficiency and
conservation programs to improve the quality ofthe environment in accordance, with
the Utilities Strategic Plan
5. Enhance supply reliability by developing local generation to meet customer needs
Though these Objectives are broad in scope and may be in conflict, a set ofpre-defmed
and City-wide accepted Electric Portfolio Objectives will provide staff with a degree of
focus and establishes an overarching set of boundary conditions to develop a portfolio
plan.
Page 2 of 5
Tigure 2 illustrates the rapid decline of market prices in recent months: with year 2005
prices declining from a high of over $50/MWh in May 2001 to a low. of $38/MWh in
mid-September 2001. The prevailing market prices are thought to be unsustainably low
by market participants, and have-prompted some generators .to announce the.
postponement of their plans to build generation in California. It is thought that electric
13rices must increase or natural gas prices must decrease to justify building new
generation.
Fig 2: Illustration of the Decline of Annual Forward On-Peak Market Prices in N.Califomia
150 ’
140 ¯
130 ¯
120 -
110
I00
80 1
70 I
9/1110 10/1R0
Year 2003
Year 2004 .. -- ~
Year 2005
11/1/00 1211110 1/~/01 2/1111 3/1111 411111 5/1/0~ 611111 711/01 8/1/01 9/1/01
Date of Forward Market Price
Though the energy shortfall is not expected to materialize until January 2005, portfolio
risk management principles emphas~e that the timing of actual energy procurement
transactions be made in a staggered fashion; with different terms and duration, with
different counterparties, and with fuel and source diversification.
Based on the risk management principles outlined, and due to the dramatic decline of
electric prices in recent months, staff recommends the purchase of a small increment of
electric supply, by the end of the year. Figure 1 illustrates that in all hydro conditions, the
greatest deficit exists during the three fall months..For this reason, staff recommends
.making a relatively small purchase to fill part of that deficit at this time.
Characteristics of Recommended Forward E1ectrici _ty Purchase Contract
c~ 25 MW for the months of October, November, and December. This is a standard
"quarter four" product. Depending on market conditions and risk premiums
associated withtransacting a ’non-standard’ product, thepurchase months may be
modified to September, October and November instead, at staff discretion.
Page 3 of 5
Preliminary Analysis of ElectricSupply Porffolio’s post-2004 Deficit
£ E~ecutive Summary ~
"lhe res~ctufing of Palo Alto’s contract with the .Western Area Power Administration (Western)
results in a significant resource deficit beginning in 2005. These shortagesare significant:- from
about 25% of forecasted load in spring ,months. to over 75% in the fall. In addition,.Palo Alt0’s
long-term Supply portfolio is heavily weighted with hydroelectric sources in the post-2005
V~estem Base Resource product and Palo Alto’s existing long-term resource, the Calaveras
hydroelectric project.
To fill the supply.resource deficit, it is recommended to tiiversify the supply.portfolio by adding ¯ .
exposure to gas-fiiv~ generationand by sfl~in, g contracts for fixed-price power for terms-of .
va-ying lengths. Staffshould pursue opportunitiesin the market place and act as appropri~’te to
hedge price risk and to "~
A~ a first cut fo~ filling the post-2005 energy d~ficit, the following supply 0prior.are.
1.. Purchase gas-fired generation for 25-50 MW. This could be done independently or
jointly with other entifies,’s~ch as other NCPA members. " " " "
2. Hedge the fuel costs of the gas-fired unit by fixing or capping the price df gas...
¯ 3. ¯ Purchase electricity forward for ten years for half of the deficit remains.." g afterthegas
plant Output (approximately 30 MW average).
4: Purchase electricity forward for five years for half of the d~ficit remaining ~ffter. the gas
. plant, output and the ten-year forward electric purchases (approximately.15 MW average).
5.Rely onsho~t-term purchases or the spot market for the remainder of thedeficit
(approximately 15 MW average).
Staff should pi.irsue Counci! appm.val of these concepts andattain the ability to act on
oplmrtum.’ties as. they arise within the approved range of potential transactions. The~Director of
Utilities should be responsible to implement the supply acquisition program Within approved
guidelines from Council.
2 Preliminary Analysis of Electric Stipply Portfolio’s posf-2004Deficit
Pre "hminary Analysis of Electric Supply Porffolio’s post-2004 Deficit
L EXECUTIVE SUMMARY ....................~., .........i .....................................................~ ...........2
HI. DESCRIPTION OF WESTERN BASE RESOURCE.. ..........: ........................
BASB R.F.~OURCB DF_.SCR!FIION...~ ................................................... ............, ....................~ ........." ....3
PALO ALTO’S BASE R2SOURC~ ALIX~ATION.AND. COST .....................:..: ...............~ ....................3
IN. LOkD AND RF~OURCE B~LL~CE .............................................., ..............~ ..................4
I~m,a’n~ OBmCTf~ PUNCT:ON ...................¯ .............: ......................
UNCEETAINYT~"-"
MODEL 0F THE PROBLEM .................~ ..........L..: ...........:..~ ............’ ........~ ........................................7
VL ANALYSIS RESULTS ...., .....; .........~., .......: .................: ...................,.~..~ ............................1.8
BEST ALTER.NATIV’S ..........., ......~ .........’ ..............., ......................................: ................................,.8
COST .TO SERVE LOAD ...............................LL ......................., ............:..,: .......:.. ....., ....................L 8.
MARK-TO-~.Ass~r~.cBmrrY ......." ..............................: ......................................, ..........i0
VII. PRELIMINARY RECOMMENDATIONS ........... ......., .........~ ....., .......;.., ...................11
" VIII.ADDYrIONAL ANALYSIS TO BE DONE ..........................................~ ................ ......12
o
1 .Pm~a:ry Analysis~ of Electric.Supply Portfolio’s post-2004 Deficit
I~Introduction .~
Palo Alto’s supply portfolio w.’dl undergo a major ehag. ge on Yanuary 1, 2005 when the current.
c0atra~t with Western is replaced with a substantially ..different product. The major change that
ocettrs is that .the produ.et becomes nonfirm, is subject to hydroelectric conditions, and the annual
energy expected in .an average hydro year is only about 40% of. the current contract entitlement:
Thus, SRG undertook to evaluat~ alternatives to meetprojec~ed loads given the emergence of a
significant supply deficit starting in 2005. This paper is the result of a preliminary analysis of
r.hat deficit.
1~ Description of Western Base Resource
Basc Resource Description
Wcstcm!s Base Resource is a very diffcre.n.t product ~au the current Western commercial Finn
product. Currently, Western provides a capacity and energy allocation with minimum and-
maximum hourly, monthly, and ye~.ly entitlements, Beginning in 2005, Palo Alto must commit
to pay a 11.624 percentage of We, stem’s costs in. exchange for the same percentage of the output
from the Base Resource. Therefore, the Base Resource is essentially a slice of the available
hydroelectric resource, As such, it is a nonfirm product and is subject to uncertain water supply
conditions.
The Base Resource is the resource "avai!ab!e after meeting the requirementsof Project Use
[wat=’pumps for me Central Vall~y Proj~t] and l:rlrst Preference customers [customers from the
"counties of origin", where the CVP Trinityand New Melones dams ar~. located] and any
adjustments for maintenance, reserves, transformation losses and certain ancillary services". The
gcreration designated.asthe Base R~ource consists of: !) CV’P gencmti0n, which provides the.
majof~y of the energy produced; 2) a purchase power contract for 50 mcgawatts (MW) of peak
load hour, market-priced energy that terminates in 2014; and 3).generation from the Washoe -
project, which is a small project located in n0rthea~t California producing an average annual
generation of 10 gigawatt-hours
The estimated average annual generation of the CVP is 2,900 G~Vh after Project Use obligations
are met. CVP generation is highly dependent on water supply conditions. During a dry year,
CVP.genemtion is expected, to protluee 1,570 GWh/year. A wet ye~ar is expected, to produce
5,200 .G-W’h/year. CVP generation is also dependent on environmental constraints and water
delivery obligations to CVP water customers.
Palo Alto’s Base Resource Ailoeation and Cost
Since Palo Alto’s Base Resource alloeationis abotit 11.6percent, the energy available should be
approximately 362 .GWh/year in an average year. Annual energyavailable to Palo Alto in a dry
and wet year is expecte~_i, tO be 211 GVCh and 635 GWh, respectively. This compares to Palo
Alto’s energy entitlement of 1100 GVCh/year in the existing contract, and Palo Alto’s-fiscal year
¯ 1999-00. load of approximately 1200 GVCh.
Western’s Base Resourcewill be a cost-based resource and is expected.to cost about $50
million/year. This means that Palo Alto’s ll.6percent obligation will l~e about $6 million/year
regardless of how much of the Base Resource is available and .~tilized by Palo..Alto. Thus~ in an
¯ Pre~ar~ Analysis ofElectric Suppl~ Portfolio’s post-2004 Deficit
aeerage hydrologic year, the cost of Base Resource energy is expected ~o be about $17 per ¯
rnega~,att-hour (2vlWh). In adry year, the cost of Ba~e Resource energy could be $28/MWB.
Extremely dry.years could increase costs even more. A wet year would yield-more energy, at an.
estimatzd cost of only $10/MWh, These costs compare to the estimated market value of energy
for the period 2004-24 of apprordmat.eIy $50/MWh. -Thus, the Base Resource energy is expected
to cost only one-third of the cost of energy from the open market. (For comparisorl ~urposes, the
cost of firm energy under Palo Alt0’s existing contract with Western is $18/MWh in fiscal year
:1999-00 and $30/M’Wh in fiscal year 2000-01.)
1V. Load and resource balance .
~alo AltQ’s resource deficit (differen~,e ha contracted supply resources, and fore~.asted load) after
2004 is significant. Contracted mso~,’ee consist of the Western Base Resource contract, Palo
Alto’s sh~ in the Calaveras hydroelectric project, and the seasonat:.exdhange contract with
Seattle City Light. Since the majority of the contracted resources ale hydro-based, the portfolio
i~ extremely sensitive to hydrological conditions.. The table and chart below shows, the monthly
load and resource balance for 2005 for.axi average hyd~’o year. :
_Load.-...10~,a44 94,515 !51,546 101,507 t 105,312
Weatern 17,0/.3. 17,i99 -9A,994 33,079’ 56,615
Cala~era~~I~391 ~0~51~ 16j70 21r06I; 22r338
S~L 3t909 3~530 3~09t 782]~ 26,35~
!_Delieit 71,331~62~79~1 ~9,473 46,~8.~I
Load and Resource Balance (MWhimonth)
.~u~, Sep oct ~noy ....
I05,699 110,295 ll0rl~ iI~ 11~372 l~t4~ iI~rl42
54,632[ ~0,710] 43a19 21~1~ 10,830i 9r8~6 ..12r176
43;~] ~ ~35 83,495 94,515 ~,394 80,~61
E~tergy .LOad and Re~om-ce Balance
(av~xagc hydro y¢~)
100,000
l.. 0,000
40,000
20,000
Feb Mar Apr May Iun Jul"" Aug Sep Oct Nov Dec
Preliminary A~alysis of Electric Supply P6rtfolJo’s pos[-2004Deficit "
~th~ ~n~rgy is. broken into on- and Off-peak p~rio .ds, the energy d~ficit is as shown inthe chart
bdow: "
Post-2004 Energy Deficit¯(average hydro year)
80,000
50,000
20,!300
liOn-peak
DOff-peak
Jan Feb .Mar Apr"" May. :~lun Jui Aug 8ep Oct Nov Dec
This chart Shows thatthe need’in an average year ranges from about 20~000 to 35;000" .
MWn/month for bff-pe, ak and from 7,500 to57,500 MWh/month on-peak in an average year.
Ths Variability bf th~ sizeof.th~ deficit in. dry and wsi years is shown in the following chart:
120,000
100,000’
M so,ooo
W
h/40,000
on
th
0
¯ 20,000 ’
Post-2oo4 Energy Deficit
Dry Year
wet Year
Jan Feb May Jun Jul Aug 8ep Oct Nov Dec
5..Preliminary Analysis. of F.2ectric Supply P0rtfolio’s post-2004 Deficit
Consistent with the extent of the hydroelectric sources in the portfoho, the deficits are much less
in wet years, especially in the spring months. In the fall months, when the hydro resources have
less available, the deficits are large in all hydro year types. .
¥. Analysis approach
SRG conducted an analysis of the~post-2004 electric portfolio. The De~ision Analysis approach
used to evaluate the problem consisted of three steps:
1.Set up the problem
a. Develop candidate objective function(s)
b. Identify uncertainties or construct a range of future scenarios to test altemative.s
c. Develop a range of suPLal, y altematives
2.Mod~l the problem --
a. D.evelop a model to calculate the objective function(s) "~’.
b. Model must allow characterization of each supply alteniative
c.- M~lclmust sllow.ch.aracterization of each scenario Or uncertainty
3.Condu~t the malysis
a. Show objective function t~sults for.e~ch alternative for ea~.h scenario, oruncertainty
b. D~play results so Mat dec.ision-makers are aware of any’balanci.n, g of objectives
study Goals - ¯ "
The first step was to set up the proble~ and deft.us the goals of.the analysis. The foll6wing g6als
were identified: "1) keep Pale A.lto’s costs below.market (assuming Western is Cost-based); 2)
rate stability; B) cost stability; 4). diVers, ity of sources (e.g. gas fueled; contracts for supply with
terms of 20 years: 15 years, 10 years, 5 years; spot purc. hases; own; lease); 5)increased
reliability in Pale Alto.and/or in Bay Area; and 6) that a significant fraction of.supply ne.e~ am
determined prior to 2005.
!dentif~ Objective.Yunction
_The analysis must identify.an "objective function", or bottom line.to compare alternatives. Many
candidate objective functions were considered including: 1) items directly rel~itext, to cost (!ow
expected cost, the distribution of costs, stability of costs, etc.); and 2) items directly related to
difference between cost and market value (e,g. likelihood that rotes are below.market). -The two
selected objective functions were the cost to serve load and the mark-to-market value of the
portfolio.
Supply Options
A range of supply options was developed and included options directly related to: ii purchasing
method (e.g. purchase supplies forward, purchase electrcity at prices based on a fixed heat rate
and gas price index, purchase supplies at indexed (gas or electric) prices, and put Off hydro risk
to others via an "integration" contract); 2) generation source (e.g. do nothing - relyon mar~t for
all additional new requirements, purchase output from a thermal plant, build !6cal generation -
generation, cogeneration, distribut~dgeneration, and bufld remot~ generation,build gre¢n
generation- wind,, geothermal, PV, landfi!1 gas); 3) retail strategies (e.g. sign customers to 10ng-
term contracts and sell customers shares of supply purchasss); and 4) ownership (e.g. self own,
joint action, or lease). ’ ’.-
Prelimin~ Analysis of Electric supplj~-Poztf0lio,s posf:2004D~fiCit " .....
,.3.
4.
5.
6.
8.
T~e .supply options evaluatazt included: ¯ .
1, Short-term contracts that rely on market for all additional newrequirements or
commitments of one year or less -
¯Long-term contract with supplier forfixed price.
Long-term contract With supplier for capped price (call opti.on)
Pater into a long-term "integration" contract with fixed price block
Pater intoa long-term "integration" contract with floating price block .
Own remotelong-term.thermal generation and buy gas at fixed price
Own remote long-term thenmal generation and buy gas at floating price .
Own local generation connected to PA’s system
Uncertainties ..
In order to test options, a range Of future s~enerios must be identified, l~.mre scenarios consist
ofpo.ssible futures identified by features that are uncontrollable. (e.g. mar~. t prices). The major
uncermiuties identified included gas and electric market prices, Western.future costs, and
hydrologic production (from CVP and Calaveras). Given these uncertainties, future scenarios to
use in the analysis included the following: ..-
1. Base (nominal case)
2. Low (gas and electricity) market costs
3. High (gas and elec~city) market costs
4. Low CVP production, high market prices .
-5. High CVPproduction, low market prices
6. High Western .costs
Model of the Problem
A spreadsheet model was built which calcUle .t.edthe objecti’~’e functions ~or ~ach supp.ly Option.
The objective fimction also d~. pended Upon the values of the unceztain’vafiables. Decision
analysis soft-ware, DPL (Decision Programming Language developed by Applied Decision "
Analysis, a wholly owned subsidiary of Pricewate~houseCoopers LLP), was useg to evaluate the
options under unce~ty, . ..
Supply altematives, or combinations of supply options., were evalua~d as well as each option
separatt~ly. For this analysis, 25 MW chunks of each option were used to cma~ supply
akema~ives~ Any needs.above those satisfied by the.options Would be met with market priced
elec~city on the spot market.
7 "Pre~ar~ Analysisof Electric Suppl~ P0rtfolio’sp0st-2004 Deficit
l’he supply altgmative~ that were testgd ~e shown in the table below:
Forward electric
contract (fixed
price)
Spot
market
(floating
Balance:
Balance "
Balance
Balance
~ options (flOating
price with a cap = $1
above forward price)pumhased at
Gas unif with.
gas-
pumhaseA at
VL Anmy~ r~mlts
B~st alternative .
The best supply alternative (from expected value perspective) includes the following options:
¯buy electricity forward (i.e~ at fixed prices);
¯buy call options; and ,
¯own gas generation for which gas is purchased forward.
.Cost t6 Serve .Load
The cost of this alternative (expressed as.20-year net present value of the commodity cost to .
serve forecast~ load) is $1;47 billion. Pot calendar year 2005, the cost is about $56 mflhon..
The cumulative probability distribution of the 201year Cost is shown ~n the fo].lowing chart. It
shows the effects of the~ uncertainties: 1) spot electric prices; 2) spot gas prices; and 3)
We, stem costs.
Preliminary Analysis of Electric SupplyPortfoh0’ s post.-2004 Deficit".
0.9"
0.8
0.1
Cost to Serve Load CEV = $1469~on)
for p=riod 2005 through 2024
-2375 -2250 -2125 ~2000 -1875 -1750 -1625 -1500 -1375 -1250 -1111 -1000 -8"75 -750
20-year NlaV of .~Cost to Sen, e Forecastr.d Load
As shown in the chart, the cost to serve load can range.from an extreme low of $800 ~bn to-
an extreme high of $2.4 billion. The 10-50-90 (cumulative probabilities) are $823 m~]lion., $1.35
billion, and $2.3 billion, respectively..
Uncertain Variables
Of the uncertain variables- teste& the onewith the greatest impact on both the outcome and the
optimal alternative is spot electric price. If elec~c spot prices are high, the optimal alternative
. still r~mains (and the value of the calls and forward purchases iS "increased), but the costfor any
unfixed load increases. If electric spot prices are low, then the o.ptimal alternative is to buy on
t.he sho..rt-termmarket as any purchases fixed forward are out of the money and calls will be
unexercised. I.fi tlds case, the N-PV cost could go to $645 million.
Changes in the cost. of Westem will change the cost to serve, but not the decision about
alternative. Changes in the cost of the spot gas price could change the alternative slightly and
change the cost slightly. If gas spot prices turn out to be low, the optimal alternative would have
¯ been to purchase the gas on a floating basis, .rather than fixed, and the cost ch~Luge to the supply
portfolio would be minimal (less than 5% for a 25 MW gas-fired plant).
Lu this analysis, hydrologic uncertainty was not introduced since it was a long-term analysis.
The additi0n.of hydro uncertainty to the analysis does not change the optimal alternative, but
does widen the distribution of possible.costs. In f~ct, including hydro uncertainty does not even
6hauge the 10-50-90 (cumulative probabihties) of the optimal, alternative. However, the extreme
cases range from a low of $650 million to a high of $3.2 billion.
9 " "" lhielimii~ary Analysis of Electric SUpply Portfolio’s post:2004 Deficit
M~rkLto-Market Asset/Liability. ~The mark-to:market valuation of the alternatives leads (as expected) to the same o~timal
alternative. As shown in thechart bdow, the shape of the cumulative probability distribution is
exactly upside down from ~hat for the cost to serve load. This chart, however, shows the
Likelihood of the sUpply portfolio being above market costs (when the MTM is negative), -The
chart.shows that this outcome occurs about 25% Of the time.
1
Mark to Market Asset (EV=.$831 million.)
I I I 1 t -I
1000 1260 1~0 " .17~0 2000
l:~elinS~--Y Analysis Of Electric SupplyPo~’ff0lio’ s post-2004DefiCR ¯
~.~.~rnatives
Both the cost to serve load.and the mark-to-market asset for.each supply alternatives studied was
calculated. Thechart below shows the low, expected value, and high values for the cost to serve
load for each Supply alternative.
Cost to Serve Load for each alternative
3500
~3000
500
10% chance cost greater than this
\
.’/
10%.ehane~ cost less
i I ~1 I 1 I
flx~2~float ~s.calls
alternat~ve
The chart shows that the Optimal alternative is.both the. one with tlie lowest exFfexl.eost andthe
lowest "fisk’~,. or range aro .uud the;expected value. However, it.is.not the lowest cost in all
futures. The 100% spot alternative will do .thebestin future charac .terized lJ~ low, spot market .
prices, but would cost.the most if.mark~tprice.s..are high; As expected, k display of mark-to-
market)viii.show the exact opposite with the optimal alternative having the highest expected
value and the highest ran. ge fo~ mark:to-mai’. ketasset. Relying !00% on the spot market will
.result in a lower expected value for MTM, but a smaller range and will never be negative.
The fact that cost to serve load:andmark-to-r~arket asset are complimentary requires decisibn-
makers tO balance those two objectives. .-
VII.Preliminary Recommendations.
Post 2004, Palo Alto is short about 75.MW in the Q1 (first quarter of tfe calendar year -
~anuEy, F.ebmary, and March), 50 MW inQ2 and Q3 ¯and 100 MW in Q.4. As a fraction of 10ad,
this ranges from a tow of 25% in the spring to Over 75% in thefall. This exposure to spot market
prices could result in dramatically indreased costs. For this reason, itis recommended that Palo
Alto fix the price for some part of its future needs prior to 2005: A reasonabld amount might be
11 ..Preliminary Analysis of FAectric Supply Portfolio’ s post-2004 Deficit
¯of a g~ generation unit is a good option,
Asa firit cut for filling the pc.st-2005 energy deficit, the following supply options.are
6. Pumhase gas-fired generation for 2.5-~0 MW. This could be done ind~pondenfly,or
jointly with other entiti~, such as other NCPA members.
7.-Hedge the fuel costs of the gas-fired unit by fixing or capping t~e price of gas.
K Purchase electricity forward forten years for half of the deficit remaining after the gas
plaut.output 0ipproximately 30 MW a,~erage).
9.. Purchase electricity l~orward for five years for. half of the. deficit remaining after the gasplaut outputand the ten-year ~rward electric purchases (approximately 15 MW.average).
10.Rely on short.-term-purchases or the sPOt market fpr~the rexnain.’ der of the d~ficit
(approximately 15 MW.average). "
This strategywill result in amore balanced portfolio, than the current on,e, .which is heavily
weighted with hydroelectric.resources. ¯
Load and-Resource Balance
(average hydro year).
160
140
120
oE ~oo
~ 6o
0
J~n Feb Mar Apr May Jun Jul .Aug Sep Oct Noy Dec
VHI. Additional analysis to be done . -
This report is preliminary and provides a broad overview of the post-2004 energy ’~01~" and
potential supply options to fill it. Before going ahead with any recommendation, additional
analyses need to beperformed. The following are some aualyses that are recommended:
¯.pi~hmii~a~Atialysis of FAe~tric SupplyPorffoho’ s .posl:.2004D~fici~ "
Value Of locating generation in Palo Alto - Any additional value in increased local
reliability if a generation plant is located physically in or near Palo Alto should be
Gas g~neration plant Cost - The cost estimates used in the study to analyze .the gas:fired
unit were from NCPA. However, a more thorough investigation into the costs for~ueh, a
venture is wLrranted, including a financi~ analysis of alternatives to fund the capi.tal
costs. " "
,Pre-2005 mark-to-market analysis - Palo Alto’s current rates are well below market
costs, however.that relationship, may change beginning in 2005. The difference between
Palo Alto’s costs and market value prior to.2005 will show the-potential ,room" available.
for rate increases prior to 2005..This information can be used to de~,elop a financial and
rate plan for preparing for the post:2005 period.
Pre-2005 plans to builh reserves - Although Palo Alto faces risks in its electric supply
costs now, those risk could increase dramatically after 2004. The appropriate level for
the rote stabilization reserve nee~ to be determined bas~l-on those risks. The pro-2005
period can be used to build up reserves to the proper levels since CPAU’s curmntrates
¯ are well below market prices.
DSM ~alue - Although this study only evaluated supply options, demand-side measures
could well figure into a post-2004 energy hole solution. Information needs to be gathered
regarding the availability, reli~b~ty, cost and other features of DSM programs.
Financial .ai~ysis - Anyset of alternatives.should be evaluated from the utility’s
fi_uaneial perspective. A financial analysis would show how alternatives would be
funded,the effect on rates, and th8 risks inherent in the position of the utility.
13 Preli~nary.’Analysis of E1 .ec.tric Supply Porffolio’s post-2004Deficit
Discussion of Year 2005-2010 Electric
.. Portfolio Development Plan
& Implementation Process
Update to Preliminm’y Recommendations approved by UAC in
-~ebruary 2001
UAC Informational Presentation on S~ ~t~mber 5, 2001
Outline
Objective of Pi:esentation
Outline of Prel~m~nar~ Analysis Recommendations approved.
by UAC in Feb 2001
Discussion of Principles for Developing the Electric Portfolio
Discussion of Porffoli0 Types and Recommended Electric ¯
Porffoho
UAC Discussion/Input
Next Steps
Objectives of Presentation
Provide an update of the electd~ portfolio development plan
Obtain feedback from~UAC r.~garding different polic~: questions
- Tolling Contracts vs..Inve, stment in Power Plants
- Attractiveness of Pre-Paid Contracts to Leverage Low Cost ~f Capital
- Timing & Duration of Purchase Commitments
- Palo Afro’s ’Go Alone’ Strategy with West .era
- Genera~on Options within the C~ty
- Ob]~ctive~ in D~ve!oping a I~n~wable C.m~-ation Porffoi~0 Stm~.dm~
- Portfolio D~velopment Plan & ImpI~n~ntation Proce~
Obtain feedbackfrom UAC ~garding staffproposal to m~k~ a ~
purchas~ commitment to fi~1 the ’energy hole’ at prevailing fo~,ard
prices (25 M’W, Q4 n~n~h pu~hases for 3 ye, a~ b~gindng O~t 2005 @ ~3.5 c~nts/kV/h)
Prelim. Recommendations Approved by UAC in Feb 2001
Purchase gas-fired generation for 25-50 MW. This could be dome
independently or jointly with other entities, such as other NCPA members
Hedge the fuel costs of the gas-fired unit by fixing or eaFping the price of
gas
Purchase electricity forward for ten years for half of the deficit remaining
after the gas plant output (approximately 30 !VlW average) -
Purchase electricity forward for five years for half of the deficit remaining
after the gas plant output and the ten-year forward eleelzic purchases
(approximately 15 MW average)
Rely on Short-term purchases or the spot market for the remainder of the
deficit (approximately 15 M-W average)
2
Primary Objectives for Developing Electric Portfolio
The Electric Portfolio was Developed based on 5 Primary Objectives
1. Ensure Low and Stable Retail Rates for Customers
2. Maintain Pale Alto Supply Portfolio Cost Advantage Compared to Market Cost
3. Maintain Pale Alto Suppt~ Portfolio Cost Advantage Compared to PG&E
4. Develop a Kenewable Resource Portfolio in Accordance with CounCil Guidelines
5. Develop Local Generation to Meet Customer/City Reliability Goals "
Strategies to Achieve Portfolio Development Objectives
1. Reduce portfolio cost fluctuations eansed by hydro production variability
by divm~36ng to fossil fired/renewable generation technologies, and by
maintaining adequate supply rote stabilization reserves
2.Maintain a flexible resource portfolio to provide Commodity product
needs of customers and achieve the 5 primary objectives outlined
3. Make energy ddieit purchased/investment using a ladder-approach with
different commitment dates, commitment terms/duration, start dates, etc.
4. Obtain input from residents/rate payers, UAC/Couneil.when-developing
renewable resource!energy-efficiency anda local generation portfolios
5. Preserve Western Conlract and CVP Base P~esource value, while
maintaining relative independence from Westem’s custom products
Inventory of CPAU’s Existing Generation & Transmission Portfolio, Year 2005
~ --2032 54 130 5010235 118
CPAU Refai Load
:
Discussion of Potential Portfolio Profiles
Short Term Commitments, Large Cost Volatility, .......
Maintain Calavcras/Westem Base l~¢souxc¢, and any additional resouxce
commitment to.be < 5 year tem~ ¯
Medium Term Commitment~ Moderate Cosi Volatilit~
Mainta~ Calaw-ras/Westem Base l~esouxce, and make new contract
purchase commitments with vary’inglterms, but no greater than 10 years.
Long Term Commitment, Low Cost Volatili~.
Maintain Calaveras/Westem Base l~¢source, and make considerable fixed
price p~rchase commitments for 20-30 yeax terms at fixed/variable prices.
Renewable Port~lio Commitmen.~
Kcnewable resource portfolio target of meeting 5%(moderate)/10%
(aggressive) of energy ne~ds of the City by 2010-2015 period. This could be
applied to any of the above generic portfolio profiles
4
Potential Tools/Deal Types to Develop Portfolios
itTC
201.5
Portfolio 1: Short Term Commitments, Large Cost VolaUlity
1~00
Short t~m~ mrk~t purchases, 0-5 yam
Year Purchase, 25 MW QtlQ4 Period ~ml
y~riComm~znent Term
10
Portfolio 2: Medium Term Commitment, Moderate Cost Volatility
11
Portfolio 3: Long Term Commitment, Low Cost Volatility
10 Year PurcMsa, 25 MW Q1/Q4 Pedod (Deal’ryl~ 4)
5 Year Purchase, 25 MW (24 Period (Oe~l l~e !)
12
Recommended Portfolio, Lo~.d - Kesource Balance
l~eomm~d~d Por~fol~o (Por~ollo 2) - Av~a8~ Hydro
Soumes of Energy: Electric Portfolio Characterlstlc~ Year 2005-2010
A~rage Hydro Y~r. ~0 perc~nlJ]e
Recommended Portfolio, Load - Resource Balance
~ecomm~nded Po~o~o (Port~o~o 2) - Dr~ Hydro Y~r
Sources of Energy: F.Jectdc Portfolio Charact~. dstics Year 2005-20t0
D~y I~ YW - 10th petunias low
Recommended Portfolio~ Load - Kesource Balance
Reconm~ Portfolio (Portfolio 2) - Wet Hydro Year
Sources of Energ~:~ioctdc Portfolio Charactede~lcs Year 2005-2010 ¯
Wet hydro y~. 0~h p~cent~e h~tI
Hydro Risk Mitigation Strateg
.Hydro production highly variable by month and annual hydro condition
¯Average hydro production (Westem/Calaveras resource) is -680
OWh/ye~r compared to a City load of~1,200 OWh
¯The average production can vary from -380 GWh in very dry year to
1,000 GWh in a very wet year
¯The average commodity purchase, cost can vary from-S35 million in an
average hydro year to -# $48 million in a dry year
¯ 4 $26 million in a wet year
¯ . The annual cost variability will be managed with the use of supply rate
stabilization reserves without having to pass it on to customers
immediately
¯Weather derivatives were found to an expensive way to manage hydro
pro ducfion risk
¯Staff exploring the option oflaying-offpart oftbe 54 MW Calaveras
ownership
16
Retail Rate Projections 2005-2010
(~$5 milllonh!e~r Investment in renewable technologies, Portfolio Type 2)
Comparison of projected Electric Commodity & Retail Rates:
Palo Alto v~r~,s ~G&E & Market, Year 2005-20t0
PG~E ¢ommod~y R~t~s
17
Discussion Topics
Futm~ Poli~y Direction
- Tolling Contracts v~. Investment in Power Plants
_ At~aactiven~ss of Pro-Paid Contracts to Levezage Low Cost of Capital
-. Timing & Duration of Purchas¢ Commitments
- Palo Alto’s ’Go Alone’ Stra~gy with West~=m
- Generation Options within the City
- Market PLtrchases: Act Now vs. Later, case for a forward purchase now
- Objectives in Developing a Renewable Generation Portfolio Standards
- Portfolio Developmeat Plan & Implementation Process
Next Steps
- Incorporate Feedback, undertake additional analysis
- Interim UAC Recommendations on Sept 25, 2001
- Council Fimmce Committee, October 2001
. Council, end of October 2001
18
Tolling Contracts vs. Investment in Power Plants
A tolling contrac,t attempt~ to mimic the cost of generation f~om an actual
powcr-plaut and provides the mechanism/formula for pricing the energy.
Contract 2948A is a tol]~ing contract, with a pricing formula attempting to
-mimic PG&l~’s generation portfolio cost
Advantages of Tolling Contracts
¯Tolling con~..ct~ could have a shorter tcnn commitment compared to
investment in power plmts& h~nce offers flexibility in terrn commi~n~nts
¯Tolling contract pricing structure is defined in the contract ~n.d is not subject to
construction cost over-runs, delays in operation, power pl~nt~operational risks
¯Contract could b.e prepaid to leverage City’s low cost of capital
Disadvantages.of Tolling Contracts
¯performance and aedit risks arv higher in a tolling contract
¯Does n~t provid~ additional optionahties inherent in owning physical assets like
scheduling efficiency upgrades, etc.
19
Relative Merits of Pre-Paid Contracts
A pre-~aid contract for electricity is similar to a large investment in a
power plant. Howevgr, instead of investing in tangibt~.generation
assets, the City hau&-over a cash amount equivalent to the initial
investment in a power plant for the promise of energy being delivered
at a cost lower thau that the City would have otherwise paid in the
open market
Prepaid con~’acts provide the mechanism to leverage the benefit of
City’s low cost of capital compared to a merchant power plant.
developer
There are a number of benefits and risks assOc~ted with thistype of
contract. The primary risk is related to ’performance of the contract’.
The counter-party may default on the contract, afar receiving a large
initial payment.
2O
10
Relative Merit of Pre-Paid Contracts
The City has the burden of satisfying Internal l~venue Sen, ice
(I~) rules to demonstrate that such transactions have economic
merits over and beyond an arbitrage of the City’s ability to issue tax
exempt municipal bonds
-Once this burden of proof is satisfied, the City is ~ to issue tax-
ex~pt municipal b .on~ds to consummat~ inch a deal and enjoy all
the benefits related to them
-The City is in the initial proems of evaluating the merits bl~such a
transaction and would provide detai!ed mcomm=ndations to execute
such a contract if the merits out-weigh the risks of such a contract,.
UAC/Council guidance sought (e.g. 10% saving required before.
staff should pursue such opportunities)
21
Term Commitmsn~ when Making Purchase Decisions
¯With deregulation and the ~evelopmsnt of the electricity commodity
markets, City’s electricity ne~ds can be purchased at any time, unlike
20 years ago under a monopolistic m~rket structure.
¯Purctmse commitments, duration, and timing is import~t for the sole
purpose of securing low and stable .prices
. The 5 portfolio planning objectives are not congruent at all times
¯These obj~,’~tives requires the maintenance of a flera~ole portfolio with
different generation technologies and fucl price exposures, different
~ term/pricing commitments, start dates, etc.
. Investment. in a new power plants requires a technology and term
commitment of ~B0 years.
¯Prelimina~ staff recommendation is that any new purchase
commitment (other than those for renewable or local generation) to be
~10 years and no longer than 20 years
UAC/Councfl input sought in this area
11
Palo Alto’s ’Go Alone’ Strategy with Western
ARm" the end of the PG&E integration contract 2948A in Deeembm" 2004, the
nmv We, sm’n contract that b~gins in January 2005 will provide access to the
bare hydro gsnm.at~on output of the CVP projects only
This output, in the absence of an integration agm~n~nt similar to the one
provided by PG&B dining the pr~-2004 pm.iod, is highly v .m~able by season
and annual hydro conditions
¯Although WesmTi could provideits customers, including Palo Alto, insulation
from the hydro unc~tain’ty in the hydro-only product, staffrrcommend
managing the hydro uncertainty independently from We.stem b.ecause:
- Palo Alto would not have con~:o.l over what ’firming res~urce’....Western
could purehasr and all pricr risk associated with it
- "Pat political risk of the posm’bility of Western may be 9onstrain~d by
fedea~l funding authorization
-Weste~ is likdy to be a less attractive ’credit counter-party’ for suppliers
of’firming resources’ compared to Palo Alto -+ more expensive sin.vices
¯Staff srck UAC/Council guidance on sta~s ’go alone’ strategy
Generation Options within the City
Local grneration has the potential to increase supply reliability for the City,
avoid congestion and transmission charges, and provides local conizol
However, Palo Alto does not have any ideal sitos f~ri large bass-load plant,
but a site close to the City’s waste-water treatment plant has the potential for a
50-100 MW size unit
A pre "lmainary ’fatal flaw study’ has been commissioned to evaluate the
feas~ility of siting such a plant, and if found feas~le and acceptable to
residents, City may take a I0~20 M’W ownership with additional contractual
rights to all of the power during emergencies
Additional 1-2 MW DG sites at customer facilities being evaluated
Cost of energy generated by Such a peaking-intermediate local generation
plant is expected to be high, and does not provide a match for the City’s
commodity need for base-load type generation resource
24
12
Market Purchases - Purchase Now or Wait?
Market prices have declined considerably since the high in April 2001, but still
-50% above the lowpriees seen in 1997/1998
5 year round-the- clock electricity contracts starting year 2005 could be
purchased @ -4 cents/kWh
¯Electricity contracts for the Qi/Q4 months when the ’~nergy hole’ is the largest
could be purchased for ~3.5.¢-L*’nts/kWh
¯At prevailing forward priers, some of the generators have postponed their new
generation buildup plans due to the low deetrieity for~vard prices
Market Purchases - Purchase Now or Wait?
¯The higher cest to build at prevailing natural gas prices (compared to the
contract price for electricity) has been confirmed by generators.approachingthe City and NCPA’s own evaluations.
¯General thought in the market is that the electricity price pendul .um has now
swung too far in the direction of unsustainable ’low prices’
¯Staff contemplating an immediate purchase of a 25 MW fixed prices contz~et
for a 3 year term starting in year 2005 to fall ~10% ofthepost 2004 energy
hole "
This sizategy to make a small.purchase now is consistent with a staggered
eommitment/laddering approach to filling the energy hole
13
Renewable Portfolio Standard & Implementation Process
¯Customer surveys indicate support for the development of renewable
energy sources and Utilities Strategic Plan calls for programs to improve
quality of the environment
¯Renewable resources continue to be more expensive compared to
conventional fossil fueled based generation technologies
¯CPAU is in the lrrocess of formulating several scenarios for UAC/Councfl
consideration for developing a renewable electricity generation-portfolio
¯Scenarios include m~eting 3-10% of City’s total energy needs via
renewable resources by 2010-2015 time period with total expenditure
commitment of $30-$100 million over a 10-15 year period
¯Technologies considered are wind, distributed solar phot0-voltaics (Pv),
central solar PV, solar thermal, geothermal, small hydro, land1511 gas
, After UAC/Cotmcil input, a fi.ual recommendation portfolio standard and
streamlined implementation process within approved guidelines will be
developed
27
Renewable/Alternative Energy Investment Opportunities
Roadnurp for Decision Makers
A tradeoff arises from the competing objectives of maintaining cost advanta,qe
relative to market and pursuing environmentally sustainable resources
1.How much cost advantage (headroom) should the city trade for
increased environmental sustainability?
5 % of Energy? ½C/kWh? 8% rate increase? $10 millionperyear? HowLong?
2. How should that pool of money be allocated?
Effi~/cy~ ~Green Supplyl.*la
}"-...,,~
Solar
Motoz~
Renewable/Alternative Energy Investment Tradeoffs
Commitment to sustainable technologies impact rates.
..,-~--Subscrip~on Solar PV 67 ~
Oistri~d
..... .-~-Utzrty Owmd DSM 25MW
0%2%4% 6% 8% 10%
Percent of Energy ~e Mw
29
$3,~2
S301
$185
$128
$102
S~
~2
Renewable/Alternative Energy Investment Opportunities
A few significantly different portfolios achieve different objectives.
Portfolio A:Portfolio B:Portfolio C:
Low Cmt DSM, Large Solar & Clean G~Sun & Wind
En~,gy C~t
Rzt~ Impact at
10% of Energy
Capital for t0%
of Energy
Fraction of Load
for $100 million
CapfUl
2
Kenewable/Alternative Energy Policy Questions?
Several Policy Decisions are required specific to sustainable resources.
¯ What is Palo Alto’s willingness to pay for how much "green"?
Higher Cost vs. sustainability preferences as a policy
1. > 5% of energy with <10% increase in rotes?
2. 50 GWNyear @ < $80/MWh?
¯ Why do we need a renewable portfoho policy?
Underlying motivation sets the foundation for resource plan~g
1.Interest in meeting Kyoto target: Electricity consumption related CO2
~mission reduced by 7% from 1990 levels by 20107
2.Keduce CO2/NOx emissions related to electricity consumption by
10% from 2000 levels by 20107
31
Portfolio Development Plan & Implementation Process
Initial analysis provided in February 2001
Implementation plan being developed - today’s update
Staff sees opportunity to purchase some of the energy needs for
the post 2004 period no.._.~w due to relatively 10w prices (25 MW Q4
Purchase for a 3 Year Term, Deal Type 1)
UAC approval of fiual portfolio plan, implementation and
reporting process at the next UAC meeting on Sept 25th, 2001
After UAC approval, Finance/Council approval, staff will
implement plan within approved guidelines
Progress of implementation will be reported on a quarterly basis
32
Next Steps
Staff seeks UAC guidance on staff approach outlined above
Staff will incorporate UAC input and seek UAC approval on
September 25, 2001
-Approval of 5 objectives and strategies to achieve objectives
-Approval of the immediate purchase of a 25 MW, 3 year, Q4 purchase
¯Obtain council approval of the above in October
¯Return to UAC, as appropriate prior to implementing f-tn~er
transactions
Further development of renewable portfolio standards with
UAC/Couneil input
33
Electric Portfolio Development and Implementation Questions
¯How much commitment?
- Long vs. Short Term Commitment
-Fixed price, variable prices
- Renewable/energy efficiency investment
¯What are the Risks?
- Large irreversible commitment to above market cost resources: renewable,
local, generation, long term fixed price contract
- Administrative burden, over diversification
¯What additional strategic and tactical details ?
- Procurement strategy (e.g. Own plants vs. partnerships vs. contracts)
-Fossil fuel plant (natural gas and/or coal)
- Timing of commitment (laddering, start 2001 vs. 2005)
-Financial details (borrow, pre-pay, capitalize/expense expenditure)
- Plan revision fi:equeney (e.g. Review annually?. Every three years?)
34
4
TO:
FROM:
UTILITIES ADVISORY COMMISSION
UTIITIES DEPARTMENT
DATE:OCTOBER 3, 2001
SUBJECT:REQUEST FOR APPROVAL OF PRIMARY OBJECTIVES FOR
LONG-TERM ELECTRIC PORTFOLIO DEVELOPMENT
REQUEST
This report requests the Utilities Advisory Commission (UAC) recommends that the City
Council approves the four Primary Objectives which will guide the electric portfolio
development and management.
BACKGROUND & DISCUSSION
This is a follow up to the items discussed at the September 25, 2001 UAC meeting. The
revised portfolio planning objectives outlined below in an attempt by staff to reflect the
input provided by the commissioners at the last meeting.
Primary_ Objectives in Developing Electric Supply Portfolio Plan
¯Ensure low and stable electric supply rates for customers.
Provide superior financial performance to customers and the City by maintaining
Palo Alto’s supply portfolio cost advantage compared to market cost and retail
supply rate advantage compared to PG&E.
Enhance supply reliability to meet City and customer needs by pursuing
opportunities including transmission system upgrades and local generation.
Balance environmental, local reliability, rates and cost impacts when considering
renewable resource and energy efficiency investments
Though these objectives are broad in scope and may be in conflict, a set ofpre-defined
and City-wide accepted Electric Portfolio Objectives will provide staff with a degree of
focus and establishes an overarching set of boundary conditions to develop a portfolio
plan.
Page 1 of 2
POLICY EVIPLICATIONS AND UTILITIES STRATEGIC PLAN
This recommendation does not represent any change to existing City policies. The
Primary Objectives support Strategies 2, 4, and 7 of the Utilities Strategic Plan (USP).
The recommended purchase oft he electric contract supports the Primary Objectives and
is an important component of USP Strategy 3: "Preserve supply cost advantage compared
to the market price."
RESOURCE IMPACT
There is no resource impact.
ENVIRONMENTAL REVIEW ~
Executing the recommended purchase contract does not constitute a project under the
California Environmental Quality Act (CEQA).
NEXT STEPS
Upon UAC approval, staff will seek Finance Committee/Council approval of the Primary
Objectives.
PREPARED BY:
REVIEWED BY:
DEPARTMENT HEAD:
Shiva Swaminathan, Senior Resource Planner
Jane Ratchye, Senior Resource Planner
Karl Knapp, Management Specialist
Girish Balachandran
Acting Assistant Director of Utilities
Page 2 of 2
ROLL CALL
Called to order at 6:30 by Chairman George Bechtel. Also present: Dexter Dawes, Dick
Rosenbaum, Richard Carlson and Rick Ferguson (arriving 6:40).
Bechtel: For the purposes of minutes, Mr. Ferguson is absent and I believe our Council
Liaison Mr. Beecham probably will not be present tonight, but possibly Mr. Ferguson
will be. Tonight there are 3 items on the agenda. The first is approval is requested for 5
primary objectives for electric portfolio development and that is an action item. It
requires Commission action. The second agenda item is a request to approve a 3 month
25 megawatt electricity contract for 2005, 2007 and action is asked of us tonight on that
item. The 3rd is discussion, perhaps further discussion, following up on our September 5th
meeting on power supply presentation and that’s a discussion item. That among one of
the items there was that we did not cover and I asked to be deferred on the presentation
by Karl Knapp on a presentation on alternatives for renewables.
I’d also like to mention that Commissioner Ferguson is now present also.
APPROVE 5 PRIMARY OBJECTIVES FOR ELECTRIC
PORTFOLIO DEVELOPMENT
Bechtel: Moving to the first item on our agenda. Approval of 5 Primary objectives for
electric portfolio development. John, you have a presentation on that for us.
Ulrich: Yes I do. I have a brief one and put this in perspective and then sorry I was not
here for the last meeting, but I want to commend the staff for putting together a great
presentation last time on this issue and the benefit of having tonight as a special meeting
so we can follow up and be able to take advantage of what we believe is the appropriate
time for going ahead and purchasing a power contract, so we will spend the time and put
together this new order which will have us talk about the 5 primary objectives and then to
move on to discussion and request for approval on the purchase contract and then to have
a discussion on the future power supply needs. And along with that, have the
presentation of the alternatives for the future and the benefit of saying what I’m saying
now is the reason why I was gone last time was I was able to go to our daughter’s
wedding in Colorado, so if you’ll forgive me for not being here, I’ve had a higher, more
important event to attend to.
Bechtel: We offer congratulations to you on the marriage of your daughter.
Ulrich: Thank you.
Ulrich: I do need to point out that we have a transcriptionist that most of you had a
chance to meet, Debbie Rosario, and for benefit of the transcription and work, if people
that come up and talk at least the first time, mention who they are so that it can be
recorded on tape. Thanks.
Bechtel: John, Commissioner Dawes reminded me. Although this is a special meeting, I
know what protocol is, but should we ask for public comments at the beginning of the
meeting or not sure if it was noticed on the agenda.
Ulrich: Well, to be very clear, that would probably be appropriate for you to do that now
if you’d like or have us report on any other activities that you think is appropriate.
Bechtel: The purpose of this meeting is addressed in the agenda, 5o I’d like to just stick to
that as far as commissioners, but I would be interested if anyone from the public would
like to speak at this point. None. Go ahead. Sorry John.
Ulrich: That’s quite all right. In some ways, this is probably a more informal meeting
than we normally have because we’re on one topic so if there’s any area you’d like me to
stop and talk about, I will. I’m back over here because the portable mike isn’t working
and I want to make sure it gets on the record. I’ll go over and try to take this other mike
and get started. Trying to see if this works.
The meeting objectives will be to further discuss presentations, if you find them
appropriate, that were discussed on Sept. 5th and in your package is a reminder of what
was discussed on this topic back in February 14th and subsequent comments by
commissioners. Also included in your package is a draft of the minutes of the last
minutes that you had if you’d like to refer to that. Also, we’ll have discussion and
approval of the primary objectives in developing the electric portfolio plan. Discussion
and approval of the 25 megawatt 3 month purchase for the years 2005-2007 and
presentation and discussion of the renewable portfolio standards and then discussion of
the next steps. And feel free if there’s some area that you believe should be covered, let
me know.
Bechtel: John, Dick Rosenbaum just pointed out that in his packet, he did not get a copy
of the last minutes of the last meeting. So let me ask the other commissioners, did you
receive a copy?
Ulrich: Let me be a little more clear. I’m Sorry. When it was first sent out, it did not
have the minutes, because we had not had them ready, but based on the questions that we
got, when I sent out a subsequent new agenda which was posted at the same time I sent a
copy of the minutes. So the only way that you’d have them is from the email that was
sent to you yesterday.
Bechtel: Okay. Thanks. I have a copy of those minutes, so if anyone cares to refer to
them, they’ll be here.
Ulrich: The next area will be in next steps. After UAC approval of objectives and the
25-megawatt purchase, we will then ask, the staff will seek the finance committee and
council approval. First at the finance committee, with is scheduled for Oct. 16th and then
City Council which will be on Nov. 13th. Staff will execute the 25-megawatt purchase
immediately after the council’s approval and staff plans public meetings and several more
UAC council special meetings in the next 3 to 6 months to discuss the electric portfolio
plan and implementation process. Staff expects to have the final electric portfolio plan
approved by the council by March 2002. All of these steps are listed not to prejudge
whether you’re going to approve the objectives and the purchase. We believe there is a
strong reason to do that and that’s ~vhy we’re here, but I want to lay out the next steps so
you can see there will be a thorough investigation and time set aside to make sure we
look at our portfolio needs in considerable depth.
Today it’s important though that we go through all the primary objectives and make sure
we’re clear on that and we’ll spend time doing that. This for purposes of making sure
everybody sees what those primary objectives are. They’re listed not particular order and
as you can see some of them have the potential for not being coincident with each other
and there be a need to prioritize these actions. But we believe, in reference back to the
strategic plan, that maintaining Palo Alto supply portfolio cost advantage as compared to
market cost is an important objective. Ensuring stable electric supply rates for customers,
maintaining Palo Alto’s retail supply rate advantage compared to PG&E, develop a
renewable resource portfolio and implement energy efficiency and conservation
progams to improve the quality of the environment in accordance with the utilities
strategic plan and enhance the supply reliability by developing local generation to meet
customer needs. In a moment we’ll come back to this and ask for participation in
definition and understanding of each of these objectives so that we have clear guidance
on how to go ahead and procure the long-term energy supply portfolio.
: (Inaudible comment)
Ulrich: The action item #2. The recommended purchase we’re talking about this
evening is consistent with all the different strategies developed by staff in the preliminary
electric portfolio development and implement stages plan. In other words, the actions
that we’re going to be asking for on the 25 megawatt contract this evening would be
consistent with virtually everything that we’ve looked at for the future so we can make
the decision this evening without jeopardizing our long term plan options. #2 the 25
megawatts that we’re asking for this evening is only for the months of October,
November and December and the term of 3 years with the delivery starting in
September/October of 2005 and ending in November/December of 2007. And we’ll get
to the points of why these are important dates and periods of the year. Energy is to be
delivered at NP15 around the clock. The energy is expected to satisfy about 10% of the
projected annual energy shortfall during an average hydro-year. And the purchase may
be made in 1 or 2 blocks and will be with counter-parties that are approved by the
Utilities Department’s Risk Oversight Committee. Now all the details of our request for
this are covered in the memo to the UAC that is in your package so this is just some of
the highlights. I’ll have this available but this is a copy of the strategic plan that notes
that reasons for having the objectives for development of our electric supply. We’re
trying to be very consistent with already approved strategic plan and our recommendation
for this evening fits very well within the strategic plan, but you may want to reference
that as we discuss these actions and our recommendations and you should all have a copy
of it. So that is the brief summary of what we’d like to do this evening and at your
discretion, we can start with Item #1 and go through the questions or comments that you
have about each of those objectives and see if we’re on target with your thinking.
Bechtel: Thank you John. I’m of the notion that we first look at the larger the picture
which is to look at the 5 primary objectives. And then to move to the specifics and of
course the first specific we have before is a specific contract. Do my commissioners have
other feelings about how to address it and then maybe one by one, we can go over the
primary objectives and see whether they are consistent with the strategic plan or however
you wish to consider them? Mr. Dawes.
Dawes: I would propose that we first offer up a motion to adopt these and then during
the discussion we can offer amendments to any of the 5 that are appropriate. Is that the
way you’d like to handle it?
Bechtel: I believe that that is a good way to handle it. It puts a specific action on the
table and then we can be fairly efficient in disposing of it or so. So do I hear a motion?
Ferguson: So moved.
Bechtel: We have a motion by Mr. Dawes (?) to approve the primary objectives in
developing the electric supply portfolio plan and do I hear a second?
Dawes: I’ll second. The motion was Rick’s though.
Bechtel: And we have a motion, a second. So shall we start discussion, Mr. Ferguson?
Fer~uson: The staff has done an excellent job here, lining up objectives that interleave
with the strategic plan. I’m happy to take it as it is.
Bechtel: Mr. Dawes.
Dawes: A couple of comments and suggested revisions. According to my recollection,
was according to our customer surveys that reliability was the #1 objective of our
customer base and actually cost was secondary. The only reference to reliability was we
are going to enhance it by developing local generation to meet customer .needs. My
proposition will be to ensure customer, strike enhance and insert "ensure", supply
reliability by specific actions included but not limited to developing local generation to
meet customer needs. There are other ways to enhance or to ensure supply reliability but
my beliefs is that’s the most pressing. The second comment that I would make is that we
actually, on the face of it, are along with ensuring supply reliability is to have a stable
electric supply as well as a stable electric supply rate. So I would insert in the second
bullet point after electric supply, "and supply rates for customers". So in other words, the
primary thrust is to ensure reliability and to ensure a stable electric supply. Then we also
have the rate issues that are so well addressed. So those are my 2 suggestions.
Bechtel: Comments by staff on Mr. Dawes’ suggestions for changing the wording?
Girish?
Balachandran: Commissioner Dawes, when you talk about stable electric supply and
stable electric rates, could you clarify what stable electric supply means?
Dawes: Ensuring that we have contracts lined up for supply. In other words we will be
discussing supply contracts tonight and our one of the utilities’ primary responsibilities is
to have a portfolio that is complete and ensures our supply. As an example, 6 months
ago, we added an insurance policy to our supply portfolio. We had a 100% under
contract, but we had a very good reason to believe that one of those contracts might be
breached so we bought an additional supply in order to ensure a stable supply so that is
what I mean by that statement. Have a full portfolio. The charge is to have a full
portfolio at all times.
Balachandran: What you’re saying is we should have contracts for all the supply at all
times?
Dawes: I don’t really mean that because we should be in the spot market from time to
time. We don’t want to overbook our supply, but ....
Balachandran: I guess that is what I’m trying to get at. Where you’re headed, if I
understand right, is actually implied by the objectives especially 1, 2 and 3. And so
we’re trying to get each of those bullets, look at a specific constraint and I so...
Dawes: It may be unnecessary to say have a separate bullet point, which says ensure a
stable electric supply portfolio. I mean that’s what this discussion is all about and the
further underlying assumption is that a spot market.will exist and will always exist both
to sell our excess contracted supply and to buy what we need that we don’t have due to
extraordinary demands or what have you, weather conditions. So it may redundant so I
guess would back off and then simply suggest a modification of the last bullet point to
have it read "ensure supply reliability".
Carlson: This is a point that I support Dexter, that we should be fairly at risk adverse in
contract forward for the great majority of our needs. None of us mind some reliance on.
the spot market but the great majority of our needs should be contracted forward for a
significant number of years.
Balachandran: To respond to that. You can achieve that by directing us on different
contracts by telling us to go long on different contracts and I see that as part of the
implementation as we go through this process if what we get from you and the city
council is sign up lots of long term contracts, we will essentially, it does meet this
objective. And you end up prioritizing these objectives so if you’d say stable electric
rates is more important to me than another priority, it will lead to a certain portfolio mix
so I see it as an opportunity in the implementation phase.
Bechtel: Follow up, Mr. Carlson?
Carlson: I’m waiting for Mr. Rosenbaum who had some suggestions in this area and I
would like to hear what his suggestions are at this point in more detail.
Bechtel: Mr. Rosenbaum.
Rosenbaum: Thank you. Worrying about the wording of strategic plans and list of
objectives is not my forte and it’s not something I was going to do until I noticed that,
and I don’t know whether everybody did, in the September 5th presentation~ the what is
objective #2 here said "ensure low and stable electric supply rates for customers" and I
assume staff for some reason decided to leave out "low" and one reason for doing that is
they’re worried about consistency since some of the recommendations are obviously, if
implemented, will increase our costs. It occurred to me, and I hope you’ll forgive me for
going off on somewhat of a monologue here, that maybe we can clarify exactly what it is
we intend to do here. Low and stable rates has always been the objective of this utility.
The fact that our rates are less than PG&E is surely important but that’s never been the
criterion by which we evaluate how we acquired our supply.
Let me make clear that my assumption has been that the objectives that we’re talking
about relate to the portfolio that we’re going to acquire to fill our deficit. That is, we
have 50% of our needs are coming from Western and Calaveras, we already have that. It
seems to me logical that the objectives are to apply to the new stuff. And when you take
that into account, then I believe that 2 of the primary objectives #1 and #3 really don’t
provide any guidance. By that I mean that given PG&E’s problems, they’re going to be
stuck with the state contracts for 20 years and we have Western. It’s inconceivable that
any strategy that we would adopt to fill our deficit would cause us to have rates ~eater
than PG&E. Now if that’s the case, then you have an objective which provides no useful
information to you and just doesn’t seem to me that that’s an objective to have with
respect to filling our deficit. And the same statement is true with Item #1- maintain Palo
Alto’s supply portfolio cost advantage compared to market cost. Given that we have
Western at such a favorable rate, there’s no way that our market cost is going to, that our
cost is going to exceed market cost. There’s no portfolio strategies that is reasonable that
is going to cause that to happen. So I don’t see that 1 or 3 really give us any direction
with respect to filling the deficit so there are 2 ideas that I suggested.
Objective #2 we want to put in "stable and low"- we want to add low and then because of
my views that 1 and 3 really don’t provide any direction with respect to acquiring the
portfolio, I would leave those out.
The other theme here is I don’t believe we’re prepared to set as an objective the
acquisition of renewable resources or siting local generation and what I’m suggesting is
that those might well be good ideas but we ought to have a caveat on the side, that we
haven’t discussed either one of them. There are good reasons to question that, there are
many questions about the cost effectiveness of renewable resources and while we
certainly want to have utility policies that coincide with the general environmental
awareness of the community, we’ve got to do this in a reasonable manner and I don’t feel
we’ve established that.
With respect to local generation, I would just point to a couple of items. One in the
February memo, this is the one that Jane Ratchye wrote. Her first recommendation for
further analysis is value of locating generation in Palo Alto. Any additional value in
increased local reliability if a generation plant is located physically in or near Palo Alto
should be determined. I don’t know if we’ve made that determination yet. Then, in the
view foils that we got in September, view foil #24, there are 5 bullets and they certainly
suggest that there are some issues with local generation. One of them is the suggestion
that if we did have significant local generation, it would have to be peak or intermediate.
I don’t know why that is. And the final bullet makes the point that the cost of energy
generated by such a peak and intermediate local generation plant is expected to be high
and does not provide a match for the city’s commodity need for base load type generation
resource. So once again, it’s certainly something we want to look at, but I wouldn’t feel
comfortable making that a firm objective right now, perhaps a preliminary objective. So
for that reason, I suggested what some might think of as caveats or weasel words and I
know we don’t like those. We like to be firm, but I personally don’t feel that we’re ready
to do that. So my suggestions there were to fill a portion of our requirements with
renewable resources if economically feasible and consider local generation to meet
customer needs and increase reliability as alternatives to what the staff has recommended.
I told you the staff has 3 items in one of the objectives and it’s always good to be concise,
but I separated them out. My final point, it’s a minor one, the way in which I would
account for our ongoing conservation and energy efficiency program is to say that we’re
going to size the portfolio that we purchase to take that into account. We’re not just
willy-nilly going out and buying energy. We’re going to take into account that which we
planned to purchase. I don’t know if any of this appeals to my colleagues. But if there is
some interest, I’m prepared to make a motion but I’m not prepared to support the
objectives that are here unless there are some modifications made to them.
Bechtel: Thank you Dick. What I’d like to do is to hear from all of us and then come
back to those issues. Personally I agree, I have some concern over the wording. Myself,
I don’t want to spend a lot of time but you’ve stated exactly some of the points that had
me concerned. So maybe perhaps, Mr. Ferguson, would you like to make comments on
the objectives at this point?
Fer~uson: Sure. Again, I thought the staff did a good job on their first crack at it here. I
agree with the comments made by other commissioners. Any one proposal to fill a piece
of the portfolio could very well have no impact on one or more of these objectives -- it’s
completely possible. But we’re talking about a portfolio development here. We’re trying
to get a universe, a superset of objectives that will cover all the reasonably foreseeable
portfolio options going forward. So sure, there’s going to be a case where there’s no
market cost consideration. Sure, there’s going to be a case where there’s no cost
advantage relative to PG&E. But there might well be cases where there, are those things,
and then they deserve their 5% or 10% weight in the consideration. If the staff believes
there’s a reasonable chance that a portfolio option coming before us is going to strike
more than a glancing blow on one of these dimensions, then let’s use these as the bullets.
I’m happy to re-architect the words to some extent, but these all make sense.
Let’s take them one by one. Enhancing or ensuring supply reliability is a great objective
all by itself-- but we have that elsewhere in the policy. Staff’s point here is that in
particular, we want to make sure that local generation doesn’t fall off the list. Local
generation proved enormously helpful to us in the last year. It was nice to have it there in
our Batman utility belt. So I’m glad to see it specifically brought in here. We might as
well bring it in while we’re defining objectives for the portfolio. Developing a renewable
resource portfolio -- even though we took a little public relations hit a couple of months
ago -- (I think we’re getting sound piped in. This is great. Not only have we interleaved
strategic objectives, but we’ve interleaved 2 different commission meetings tonight on
the same soundtrack) --
Disembodied Voice over Loudspeaker: "...even think we’re on a trail maintenance plan
Ferguson: ... And speaking of renewable resources, what might we find as we maintain
the trails and dispose of the debris? Renewable resources are going to become more
important. If it turns out that’s not economically feasible, it will fall out of the portfolio
considerations. But the point is, the staff has proposed that we put it specifically in, as
one of the considerations to make every time we look at a portfolio option. I support that.
Again, we can re-architect the way it’s phrased, but I’d like to see it there. The supply
rate advantage to PG&E? It’s a wonderful story to tell. We’re consistently looking to
stay competitive with the nearby competitor. We should be proud of that -- even if it
means that from one portfolio option to the next, it happens to have no particular
relevance. Stable supply? That’s the whole point of the portfolio, so I’m happy to put
the words in there. It kind of bordered on redundant. Supply portfolio cost advantage
compared to market cost? Well, notice that 1 and 3 are talking about particular analytical
dimensions, one saying: let’s focus on the world of cost, the cost side of the portfolio.
Item 3 is talking about rates, the price to the customers. Each of those leads us into a
different analytical frame, so as an analytical tool to guide staff, this seems to be a
perfectly good starting place. I’m interested in commissioner Carlson’s suggestion that
we also state a particular bias about relying on forward purchases. That’s a new
dimension, that’s a new wrinkle. I’d be happy to add a bullet 6 to get us there. I’ve said
my peace, thanks.
Bechtel: Thanks Rick. Dick Carlson.
Carlson: Let me suggest some words here. I’m trying to just integrate what’s been said.
This dost advantage issue is important enough that I want to keep it in there, but I would
propose that we just simplify it by saying "maintain Palo Alto’s supply portfolio cost
advantage compared to market cost and PG&E". Maintaining our cost advantage to
market cost is going to be more difficult in the out years than we concurrently conceive
them. There are some new technologies coming out that we really better keep our eye on.
We will have to be careful on. It’s not next year and it’s not the year after but in 5, 6, 7
years, there’s some real potential out there. So I would like to keep that in. It would
simplify it saying we want to be below both the market and PG&E in our planning.
On #2, if we say "ensure stable and low electric supply rates" that implies stable rates,
implies stable supply situations so that handles that. I would just drop #3. We don’t need
it separate any more. #5, we could just simply say to "ensure supply reliability". I’m
pretty sure that local generation will be an important part of that, but I don’t see any
reason to call it out at this point.
The really troubling one is the renewable resource and energy efficiency programs as
objectives, because at a minimum, we can say use them to the degree they help meet
other objectives. There’s no question that energy efficiency and energy conservation is
especially targeted towards peak use. If probably more efficient than generation in the
long run and it’s an important part of any supply portfolio. That’s a sure thing. The
policy issue is, as an objective, do we want to go farther than that. Do we want to just
have more renewable resources and energy efficiency just for its own sake? I’m a lot less
certain about how much we want to invest in that, which is what was implied by Dick
Rosenbaum’s statement. So can we just simply say "develop a renewable resource
portfolio and implement energy efficiency and conservation programs to the degree they
meet other objectives?" That one is the only real policy issue that’s implied that we
ought to think about.
Ulrich: Can I just interject with a little staff communication for a minute?
Bechtel: Feel free. Go ahead.
Ulrich: Well just to explain a little more of what we were trying to do is, I said earlier
that there is a natural push between some of these objectives. That they won’t all fit
together and that when we, we may want to prioritize them, but there’s not been any
thought that bullet #4 which has renewable resource portfolio and implement energy
efficiency conservation programs would stand on their own. The idea there is that we
believe there are lots of people, good percentage of them in Palo Alto, that would like us
to not just look at the lowest cost way of providing energy but to look at the environment.
And look at ways of implementing energy efficiency which would preclude us from
having to buy more supply or as much supply as we currently do now. Meet that supply
from conservation. It’s quite possible, if we meet other criteria, that they’re willing to
pay a higher than what would be the lowest possible cost energy if we only looked at the
lowest cost. So that’s one reason we left "low" out - we may find that the best mix is not
the lowest cost but we side more with reliability, which may be in the form of fuel cells
that are located in various parts of Palo Alto. Besides getting supply reliability, we
would get distribution reliability and also be able to implement, for example, additional
photovoltaics which in the long run is going to be a very good supply for us, but will cost
us more in the short run to implement it.
Where is that balance point going to be? Our reluctance to put in "low" and "cost
effective" words like that, implies too much that we’re going to focus too much on the
lowest cost or the most cost effective. That may not be what we want to do. So those are
the reasons we left some of those out. Philosophically and pragmatically, we would like
to have the lowest rate. There couldn’t be any better way of competing than having low
cost and most cost effective that may not be the entire objective that we want to have.
We purposely have these push-and-pull relationships between each of these objectives, so
that-we can balance all of that and come up with the best portfolio mix. I wanted to
interject that, so we didn’t just focus on one and say well that doesn’t fit with the other
ones. They all kind of mesh together.
Bechtel: Thank you John. Rick?
Fer~uson: Just a quick clarification. I would have quickly accepted commissioner
Carlson’s proposal to fold 1 and 3 together, but (staff correct me if I’m wrong) you are
talking about different ends of the spectrum. #1 is talking about cost, the cost to get
supply, and on #3, you’re talking about our retail rates.
Ulrich: Yes and it’s advantageous. We debated this because you can argue as Mr.
Carlson said that 1 and 3 maybe should drop out or be together. There’s always an
advantage in looking at your competitor that’s around you. That doesn’t mean that’s
your only criteria, but it’s valuable to know what your competition is charging and to
have an objective that you’re going to maintain a rate advantage compared to that
competitor. We may decide that that’s not the most important one, but I like the idea of
having it there so it keeps us focused on the competitor also.
Bechtel: Mr. Rosenbaum.
Rosenbaum: Let me respond and perhaps, suggest a way. I recognize that staff has this
conflict if you put in "low and stable" then you go and propose renewable resources,
you’ve got a conflict. It seems to me what we really want to say and I don’t know why
we can’t come right out and say it and perhaps not call it a set of objectives, but just a
plan. Most of the portfolio we plan to acquire is going to be from conventional
generation sources. Clearly, we want that portion to be acquired so as to provide low and
stable supply costs and the reason you put in low is because obviously you can go out
today and purchase a 20 year contract. That would be stable but that might not provide
the lowest cost. You seek a balance in your implementation plan that’s exactly what
you’ll do, you purchase different contracts, different lengths of time. Then I would think
you ought to say is, the cost element notwithstanding, we want to consider several items
that may well increase the cost, one of them being renewable resources, the other being
consideration of local generation. Then you’d have something that’s consistent, and
everybody understands what you’re talking about. And that’s really what we’re about.
Now if that isn’t of interest to my colleagues, I’m not prepared to craft a motion to that
tonight. But the staff, if that’s of interest, can certainly work out something that simply
states that. Once again, there ought to be a caveat with respect to whether to call that a
preliminary recommendation, but with respect to renewable resources and local
generation, I don’t see how we can tonight based on what we know, set those as firm
objectives.
Ulrich: I would agree that there’s not a, we don’t want to get in a position or make a
recommendation for you to believe that we’re looking at local generation or renewable as
our salvation where that is going to be a primary supply. But we’re in agreement here
that these are aspects of our supply mix that we need to look at. We are looking at the
entire portfolio. We have the Western contract hydro after 2005. It’s going to be a
significant part of our portfolio. So we’re talking about the additions to that, to make it a
robust, as low cost, as environmentally friendly and as reliable as we possibly can have.
So we’re pretty much all in agreement with all those. We’re just trying to be sure that
we’re capturing the kind of things that we’re discussing tonight and we’re not forgetting
something.
And if it’s your wish to not finalize this tonight, that would be fine. Or to come up with
more general objectives that don’t hinge on one word or adjective over another that might
be another way to reach a conclusion this evening. This is one of those subjects where
I’m very confident that we’re not very far apart on where it is we’re trying to do. But it’s
going to be what we’re going to go out and work on a portfolio plan, that we have studies
going on now. We’re participating with NCPA that will be looking at local generation
here in Palo Alto and elsewhere. So we’re going to look at that and we’re going to look
very strongly at renewables and we’ll discuss some of that in a few minutes. So it’s
probably at the same point that commissioner Rosenbaum is, that in the sense that we’re
talking about a relatively small amount of our portfolio in either local or renewables, but
it’s important to emphasize that they may not be the lowest cost or/and their reliabilities
are as important or higher than the cost.
Bechtel: Thank you John. I have not had a chance to comment on the 5 points and I’m
in agreement with all the comments that have been made. Let me just see if I can capture
at least some of the thoughts in terms of where we are. I see some of the major
differences are that we have 5 bullets. John mentioned earlier about prioritization and
perhaps the last 2 bullets really go to, really alternatives. One of the things we had talked
about was that conventional and Mr. Rosenbaum talked about and Mr. Carlson both
about conventional sources. The first 3 items really perhaps relate to conventional
sources. It seems to me though what’s not been said, and we said it in other ways, is
we’d certainly like to buy low and sell as low as possible. I would like to see the word
"low" back in there as we had before and #2 at least to tell people in the city that we are
trying to maintain our electric supply rates as low as possible. Low doesn’t mean the
lowest. It just says "low". I’m not sure we need a comparison to PG&E, but certainly
that benchmark is needed. So let’s come back to maybe somewhat of the issue is that
how do we tell people with these objectives that we’re using that we’re going to do the
best job we can to fill our needs with providing the lowest cost and buying as cheaply as
possible? That’s what we’re trying to say in the first 3. Maybe they can all be said in 1
bullet. So first of all, is it possible we can move ahead and have at least an objective that
talks about our use of conventional sources and say that that’s going to make up the bulk
of our portfolio? And so we’re at least stating that, at least that’s what the objective and
with that being the bulk of our portfolio, what is it we’re trying to accomplish in giving
you guidance with respect to contracts, a long, short term and so on? So that’s really my
concern with what I see here is what I share with others is that we’re not, this maybe does
not give us a clear way to view any of the alternatives we have. I would at this point
entertain a specific proposal or motion to amend any of these points as long as we at least
address some how, the issue of conventional sources vs. renewables in some way. Mr.
Rosenbaum.
Rosenbaum: Let me first make it clear. I’m happy to go along with this 25 megawatt,
the 2na item that you have because and I’m happy to do that without having firmed up the
objectives. What Chairman Bechtel has suggested makes sense. We ought to state clearly
that most of the portfolio we plan to acquire is going to be conventional sources and do
we expect that strategy to be implemented the way to produce low and stable costs and
then what I’m not sure of and I’d really like to leave it to staff is to introduce that cost
notwithstanding we want to explore a number of alternatives. And that will be done
depending on the results of the study of those alternatives; we are prepared to add
additional costs to include those in our portfolio.
Bechtel: Comments? Mr. Carlson.
Carlson: Well I’m just wondering if we should just ask the staff, having heard everything
they’ve heard, to go back and revise these so we don’t spend the whole night on it.
Because we should get on to the specifics of the supply portfolio and I agree with Dick
Rosenbaum. I definitely want them to-go ahead and buy the first 25 megawatts now.
This looks like a buyers market and let’s start buying some of our clearest needs right
now and come back to this. I’m not sure, either we cut it off now or I’m afraid it may be
another hour on the objectives.
Bechtel: Mr. Ferguson.
Ferguson: I agree with Mr. Carlson that we have one major item tonight. This has taken
too long. Mostly we’re wordsmithing. And. there may be some policy differences
emerging here. Rather than beat up on that, let’s do the thing that’s doable tonight, and
be better time-managers. So I’m happy to withdraw my motion if the staff agrees to take
a second crack at this, perhaps in time for our October 5th meeting. And then we can take
care of the big item tonight.
Bechtel: With the consent of the seconder, Mr. Carlson, we will withdraw the motion.
There’s no motion on the table. Do I hear another motion to taking another action? Mr.
Rosenbaum.
Rosenbaum: I would move that the subject of objectives be referred back to the staff and
that we request a revision attempting to take into account the comments that have been
made at the meeting tonight.
Fer~mason: I second.
Bechtel: Motion by Mr. Rosenbaum.
Dawes? Comments from staff?. Girish.
Second by Mr. Ferguson.Comments? Mr.
Balachandran: Commissioner Rosenbaum and commissioner Bechtel, if you could
clarify what you mean by conventional resources? When I heard what you said, okay,
we’re saying the majority of the resource deficit will be filled at market prices essentially.
So we can go out and buy gas tolling agreement or coal fired plant or whatever. But all
those get sold at market prices. So is what you’re saying, buy that at market prices and
distinguishing the other aspects of cost notwithstanding, there are other resources which
come up at higher than market.
Bechtel: Mr. Rosenbaum.
Rosenbaum: I mean my thought when referring to conventional is thermal resources. We
know what we mean by conventional generation sources. I’m not sure what you were
getting at by speaking of the market, that is what we may build, we may contract for or
tolling contracts.
Balachandran: Right. When I say we may buy contracts that don’t have any relationship
to the fuel source, the fuel supply and we don’t really care about it. We care about the
l~rice. That’s what I was trying to clarify. What we’re thinking about is okay we’re
going to buy at market price and we can talk about the term, etc. and distinguishing that
from other resources, which are greater than market price.
Bechtel: You know how to frame, it in such a way that we can understand it. I guess
when we said conventional, I meant thermal also, but you phrased it, you’ve added
another option in there, which is totally independent of the fuel. What we’re asking is you
understand what we are saying so come back with some sort of a proposal that says that
and then I believe we’ll all understand that. Any other discussion on the motion? All in
favor of the motion to refer the objectives to staff?. Another go around, say "aye".
All commissioners: Aye.
Bechtel: All are supporting that. We probably should’ve done this, had this same
discussion earlier in the month. You might have had a chance to come back perhaps that
we had been doing our homework during the month, we might have said to you maybe a
little bit better. I apologize personally for not giving you the feedback a little bit earlier.
On the other hand, we’re in complex times here. So given the fact is we’re talking about
a dialogue not only with us but a dialogue with the community over the next several
months. This won’t be too onerous of a burden to come back again. So with that, we’ll
move to the next item if that’s ageeable with staff, which is, take up the contract.
Ulrich: Sure. Our objective tonight was to go through this and I appreciate your
feedback and we will come back. We’ll look at the entire portfolio including what we
currently have and foresee with Western and add our other needs to it. Thank you for the
feedback. Our objective is to make this as simple and as gives us enough number of
options so we can look at whether it’s tolling or whether we care less about where the
energy is generated, it’s what’s the term and condition of the contract we’d be signing.
So we will do that.
APPROVE 3-MONTH 25-MW ELECTRICITY PURCHASE
CONTRACT FOR 2005-2007
Ulrich: If you’re ready to move to item #2 -- call it crystal clear -- it’s what we’re asking
to do. Ask if you have any questions that may not be as clear to you as we think the
benefits are of going ahead with this contract. We’d appreciate your support on this.
Bechtel: Questions from commissioners on the characteristics (I’m referring to the
overhead printout in front of me) characteristics recommended for the purchase contract?
Mr. Ferguson’s light is on.
Ferguson: I just have one question, and it’s a repeat of the question I posed in our last
meeting. I didn’t see the answer in the write-up here. If we think there’s a market price
bpportunity now, why limit ourselves to 25 megawatts? What’s the shape of the
probability curve here?
Balachandran: Maybe commissioner Carlson can help us with that, but I’ll just take a
stab at an answer here. It’s consistent with the approach of laddering. We have to start
somewhere, and we are going to be buying blocks of power over the next 2 to 3 years.
Prices could go down even more, so we’re going to have an opportunity to buy a spot in
the market. If you change your recommendation after your discussion, say buy 25
megawatts for 6 months, I’m not sure if I’d come back to you and say we really think we
shouldn’t be doing that. You’ll know it’s within the range of the laddering, the first step
of the laddering.
Ulrich: The easy answer is that what we’re recommending tonight, we’re very
comfortable with. Particularly if you look at this trough or window of opportunity or part
of the laddering -- this is very clear to do. Going beyond that makes the decision less
than optimal at this particular point.
Ferauson: This is a perfect instance of governance. We have an expert staff. The staff is
giving us their best, objective, analytic product, and telling us that that, plus their gut
feeling, says this is the right buy to make today -- and they’d be uncomfortable moving
off any of these criteria. So the question for us commissioners is: does any one of us
have a substantially different gut feel, or a different number to throw into the mix? .
Bechtel: Anyone on the commission wish to address that? And Mr. Dawes’ phone just
happened to ring.
Dawes: Actually, my question is much more fundamental -- a policy issue. The City
Manager currently has authority to buy 3 year contracts. According to my approach, we
don’t really need to discuss this and probably shouldn’t. This is "a drop in the bucket" in
the supply reservoir for the out years. We’re talking about probably a couple of percent
of the supply needs of this particular 3-year period. We’re entering hazardous waters
here to debate the market timing of this investment. My personal background has been in
investments, and one of the worst errors you can make is trying to be a market timer. If
we entertained this degree of deliberation for all of the forward purchases~ we’d probably
be meeting once a week and spending many hours in so doing.
The second aspect is that this is a fast moving market. The chart that shows out-year
prices by month is phenomenal to say the very least. Prices are collapsing in the period
of 3 months. Prices have dropped by a factor of 60 or 70%. So if we’re saying that we’re
going to go to the finance committee in 2 weeks and the city council in a month, then we
are frustrating the whole notion of a nimble, well-oiled supply process, procurement
process. In recent years, we’ve discussed the issue of how the utility should be managed.
This is an absolute example #1 to me of how not to manage this utility -- to bring up an
element of the supply contract that is going to take 6 weeks to put it in place. You know
the economics may have changed dramatically by then, possibly for the better, but
equally possibly for the worse. So I sort of question the whole notion of reviewing this.
Ulrich: Just a point of clarification. Really the reason for coming here is the timing
issue, both as an opportunity we see available -- because we don’t have direction from the
UAC or the city council to go ahead and fill this hole. This is strictly the staff seeing an
opportunity and it’s even pictorially obvious that there’s a benefit of going out to do it.
Dawes: So just do it.
Ulrich: Normally you would not hear us say anything more. We’d pick up and head out
of here. But a couple of points. It’s quite possible the city manager has authority to do it
and if so we’ll pursue that part of it. But this fits into a portfolio that is longer term than
just going out and buying something that we need the next few days. One, it’s a forward
purchase and it’s for a 3 year period of time. We want to have full disclosure of that,
regardless whether the city manager can sign it. That’s maybe a short cut. We also think
the opportunity is going to be here for a while so there is not a need to come and ask for
this to be done overnight as we’ve done on other things we think were very critical to be
done. So this is not a bureaucracy attempting to have more bureaucracy. We can shortcut
that if it’s an appropriate thing to do. We will investigate this regardless. It’s important
that you see this. Once the long-term portfolio plan is approved, after we get agreement
on the objectives and we get agreement on where our long-term portfolio plan is, we
won’t be back. We’ll go out and implement it as strategic plan calls for. So we will not
be back here for each and every purchase. That would be our objective.
Bechtel: Other comments? Mr. Carlson.
Carlson: You’re being a little gun-shy. You should buy more for a longer time period. I
would recommend this is just an ideal hole-filling contract, this 3-month concept, and
you should do it for at least 5 years. You can’t completely time this kind of market, but
¯ these prices are very advantageous. At these prices, we clearly can maintain current retail
rates. We are probably a little bit better if we can buy a whole portfolio at this price, it
would be great. So you should seriously consider buying more in terms of the longer-
term contract. The only thing that’s holding me back from saying why don’t you buy 50
megawatts is the issue that would fit in with buying base load generation, which also fills
the hole at all times. Boy, I would say the more the better right now.
Swaminathan: Part of the reason is those conflicting objectives. Part of the objective is
to be competitive with the market. This is a contract we’re going to start in 4 years and
it’s going to run for another 3 years beyond. I agree these are good prices. I’m not sure
as we had just talked about, new technology is coming online 5-10 years down the road.
These are commitments we are making for an extended period of time. So again, 5 years
we are comfortable, too, but it’s the conflicting objectives that are holding us back. We
don’t know what the price is, where the market price will be in 10 years time.
Carlson: None of us do, but this one looks like a good bet and it looks like such a good
bet that you ought to consider doing more, quickly.
Ulrich: I always like coming here, because we’re able to get good recommendations.
We have no problem in giving more options to ourselves by going and requesting
authority to purchase more and as we get closer to the time of doing it, then being able to
make a more informed decision. And you’re right, what we’re doing is limiting the
purchase, the other side of it. This is in a sense a "no-brainer" request, and it’s one we’re
comfortable in moving along. It doesn’t say we’re not comfortable with doing something
more aggressive, but this option is easier to move along and not get bogged down in
analysis that is going to be harder to justify to some people. So we’d be pleased if you’d
like to make a recommendation that gives us that kind of latitude. We’d be pleased to
move it along.
Bechtel: Thank you John. Mr. Dawes.
Dawes: Just to follow up, having said what I said, I would support Mr. Carlson’s
observations about the additional authorization, I would instead of the 3-month hole, to
me the 6-month hole is equally obvious, starting September 1st and ending February 28th
and taking up to 5 years. Now that is an authorization that would be out of the current (as
I read it) City Manager’s ability. When we get around to making a motion on this
particular situation I’d propose to the finance committee and the council that the City
Manager be given authorization to go out to the 5 years and 6 months per. I’d also like to
observe that this is very contrary to the position I took when we started talking about 50
megawatts over 10 years. In my huge caution eventually we backed off very
considerably on that as my feeling at that time that these prices could collapse very
rapidly and they appear to be doing that. I also think that the timing here is propitious
and that you should have the flexibility to in fact buy more.
Bechtel: Mr. Dawes, would you like to be so kind as to make a motion and then we can
have further discussion. Since you raised the issue some months ago, you might be so
magnanimous and to move ahead with this one?
Dawes: Certainly. I would like to propose that the staff’s proposal for purchase contract
authority be expanded to enable them to buy up to a 6-month period of power over a 5
year period between the first of September and the end of February, assuming
continuation of the favorable price situation that currently exists.
Bechtel: Before we have a second on it, could I ask you to maybe rephrase the motion?
Say you recommend approval of this specific proposal but in addition, you recommend
consideration for additional contracts along the lines so that at least we can cover this
specific one?
Dawes: I would be happy to do so. I will propose to approve the staff’s recommendation
and also provide additional authority to expand it up to the 6 months and 5 years.
Bechtel: Do I hear a second?
Carlson: Second.
Bechtel: Second by Mr. Carlson. Discussion on this motion? Mr. Ferguson.
Fer~uson: Thanks, just one technical clarification from the staff, if you would. Is the
supply hole September-February or is it more like July-December? I know we had seen
it before in high, low, and medium-flow charts. Now we only have one chart in this
package tonight.
Ulrich: The chart seems to show it more toward the winter.
Ferguson: So if we’re going to go 6 months, those are the optimals.
Ulrich: You might -- Mr. Dawes’ motion didn’t say anything about quantity, it was
length of time. Is that your intent?
Dawes: The motion was to approve staff’s recommendation and then supplement it in so
the staff’s recommendation stands in terms of this quantity. Seemed about right to me.
Bechtel:John were you asking did the additional, any additional purchases be more
specific?Is that what you’re asking?
Ulrich: No, I was listening to Mr. Carlson and I thought his point was additional amount
beyond 25 megawatt. I was asking Mr. Dawes if his motion included additional quantity
besides length of time. As I understand it, he said 25 megawatts but, instead of the 3
months that is in our recommendation, would be to go out 6 months.
Bechtel: Yeah, I guess specifically that’s what he said, but I’ve given that, we can
certainly consider perhaps some quantity of limit at this point let’s go for a discussion
and we can always amend the motion.
Dawes: The reason I maintain that was looking at relying on the loaded resource balance
chart and seeing that 25 megawatts would then to balance out our deficit so that a single
base load, not a single but base load additions would be fairly equal throughout the year
so the 25 seemed very appropriate for a hole-filling contract.
Bechtel: Mr. Ferguson.
Fer.m~son: I just want to get closure on this. Does Mr. Dawes motion pin it down to a
specific 6 months period or does the staff have discretion to slide the 6-month period?
Bechtel: I believe he said through February or March.
Dawes: September through February. But I would be agreeable if staff suggests to have
it 6, 2 quarters of purchases at the staff’s discretion. That would be a better idea.
Bechtel: I just feel, I didn’t write down, did someone second this motion?
Carlson: Yes, I seconded. And I agree with Dexter, for the time being, we should keep it
at 25 because I want to come back to the issue of a base-load contract. I don’t want to
preclude a base-load contract by buying so much of this.
Bechtel: Other comments on this specific motion by Mr. Dawes. Mr. Rosenbaum.
Rosenbaum: Staff had good reason for limiting this to the 4th quarter and I’m waiting for
staff here.
Ulrich: I’m sorry my graphics are I was, we were trying to fill in the space
there to see what the difference would be on a 25 3-months or a 25 6-months or a 50.
Just so I can understand Mr. Carlson’s point, so excuse me Mr. Rosenbaum, would you
mind asking me again?
Rosenbaum: Well I was just starting. If you look at the chart that’s on the wall, it’s clear
that there’s a bigger hole in the 4th quarter than there is in the 1st quarter, looking at the
yellow line which is the, that’s the average year, and that’s why staff came to us with the
proposal for the 4th quarter. I have nothing against them considering 6 months. As long
as that’s the spirit of what we’re doing, I don’t think we’re in a position to direct you to
buy for 6 months rather than 3 months, but we’re just saying that in your best judgment,
you think that ought to be done, then that’s good.
Ulrich: The additional flexibility of 6 months out to 5 years is very good. It Nves us a
lot more flexibility and we will, if you pass that motion, we will look at it and proceed if
it’s the best way to go.
Dawes: Yes, keep in mind that the motion was additional authorization to purchase at
staff discretion, so this is not a mandate; it is a acceptance for staff to be able to do
something if conditions are it.
Ulrich: I understand.
Bechtel: Yes, basically, the message that the UAC would like the finance committee and
the council to take away is that we certainly believe that this is the right, this specific
contract is the right thing and that it appears that at this time that additional purchases
should be considered and that we endorse that presuming that we pass this motion. So
there being no further discussion, shall we vote on this motion by Mr. Dawes? All in
favor, please say "I".
All commissioners: I
Bechtel: None opposed.Motion passes. These are the 2 items that are the most
important on the agenda.
DISCUSSION OF SEPTEMBER 5TM UAC POWER SUPPLY
PRESENTATION
Bechtel: The 3~d one there’s some suggestion Mr. Carlson talked about base load and so
on. I would like for us to in an attempt to get some more information, particularly I
would like to hear a little about the renewables, which we did not hear about last time.
It’s one of the objectives we did not. We all felt that we didn’t quite have enough
information on that so my recommendation, my plan as chairman had been to have that
item specifically from last month’s meeting and then at thus point, we can look at the
time, when that is completed and decide how best we proceed. Does that seem like a
reasonable way to go? Mr. Dawes.
Dawes: In the presentation of September 5th, which is the 3rd item here preceding the
renewable discussion there was various pieces of the presentation that talked about the go
alone strategy from Western, term commitments, prepaid contracts, tolling contracts
versus investment in power plants. I don’t want to lose that and hope that either we
should do it before discussing renewables or after what is the pleasure of the chair? In
other words, it’ll be starting on page 19 of the presentation.
Bechtel: Is the staff prepared to revisit? We’re looking at overheads
something. We did cover those as I recall. I have notes on there.
Ulrich: Chairman Bechtel?
19 through 20
Bechtel: Yes
Ulrich: Just as a point, yes, we are prepared to discuss any of the foils 19 through 30
something, but I would suggest that so we’ll have time, that we do the renewables first.
That way it can be open-ended and you can have as long as you want to discuss the other
options on all the different pages. That way if we don’t get through that, we can continue
the discussion at a later date.
Bechtel: That will be my preference. There are a number of items like local generation
and all of that. All seem like they can almost take up a full meeting just to discuss each
of these alternatives. We are talking about the next several months going over that, so
let’s proceed with discussion by, presentation by Karl on the renewables and then at that
point, we can look and see what the time says.
Ulrich: I would like to invite Dr. Knapp and please note the uniform that he has tonight.
Bechtel: I’m just wondering where his Stanford tie is.
[another meeting soundtrack interferes with this transcription]
Kna.p_12: Okay. I’m on. The red light’s on. Hello Debbie. Some of the customer surveys
in the past show a lot of support for renewables and DSM or Demand Side Management
in general. And also the utility’s strategic plan calls for programs that improve the
environment. As we know, renewable resources appear to be more expensive than
conventional resources. Most of the fossil fuel based generation...?? They also require a
longer-term commitment. Now the City of Palo Alto Utilities is formulating a several
different scenarios for UAC and Council consideration for developing this portfolio
approach for renewable resource. They include considering filling 5-10% energy with of
the total renewable resources by the year 2010. With .an expenditure somewhere around
$30-100 million over that 10-15 year period:..Several different technologies in slides I’m
going to show you in the preliminary analysis including wind, solar photovoltaics, central
solar power plants from photovoltaics, also solar thermal, electric geothermal and small
hydro as supply resources. There’s also some energy efficiency on there for
comparison. Now after final UAC and Council input, that’s not tonight, we will of
course have a recommendation for portfolio standards and streamlined implementation
process. So the reason this spits in to the whole post-2004 discussion at all, is that there is
an opportunity to meet some of the deficit with clean energy resources. And as you know
as I said a minute ago, clean power usually comes at a higher price and requires a longer
term of commitment. We have these conflicting strategic directives that we’re talking
about which are maintain low and stable costs but improve the environment. So this is
where this discussion is leading off from. And what we have is essentially, shown in this
diagram, a conceptual 2-step question or decision that needs to be made. First of which is
one way to view is it, how much of a headroom below this market price premium we’re
trying to maintain, are we ready to give up to go to more environmental sustainable
technologies and energy resources. There are a lot of diff. Ways to look at that. What
much of a percentage of the energy into the traditional renewable portfolio "??"
approach? Or how much of a premium per kilowatt hour- the green pricing approach?
Or what’s the impact on average rates- which is what a lot of us think the customers don’t
care about? Or how much are we ready to spend as a premium, kind of like the whole,
how many million dollars per year are we talking about- how does it fit into the budget
approach? And also how long are we willing to commit because as we said earlier, the
City Manager can commit to a 3 year contracts, but for some of these types of
technologies, you have to have a 10 or longer year commitment to get someone to
actually have affordable financing to. actually build some of these plants, so given that
you have this kind of budget or target you decided in Step 1 is how should we invest in
this money that we’re setting aside here? There’s 2 pieces to it. There’s kind of the
megawatts on the green supply side and the megawatts on the efficiency side. A lot of
people don’t think of efficiency investments as a supply resource, but it really is. It’s not
as obvious. It’s not as visible or glitzy and it’s really tough to measure exactly how many
kilowatt-hours you’re buying. Up until now, most of our efficiency investments except
last spring have all been through public benefits types of funding. Now we’re talking
about looking at it as a resource and investing in it as part of the resource portfolio, which
is a different perspective, at least in this discussion. Now green power supplier ranges in
cost and value to the city. Some technologies have a pretty small premium now. Others
show a lot of promise for improved economics and performance in the near, or not so
distant, future. I want to look at what these trade offs are between different types of
technologies on the next slide here. Now let’s see if I can get the right slide there.
There’s a lot of information on this slide. What this chart illustrates is the percentage
increase in average electrical rate, which is on the vertical axis as a function of the
percentage of the total energy supplied in Palo Alto for a number of different types of
technologies ranging from geothermal to solar photovoltaics on the top end. It includes a
couple of examples of both customer owned energy efficiency investments and utility
owned energy efficiencies. The utility owned energy efficiencies is kind of the best you
can do because it assumes that there’s no revenue in that. For example if 2% of our
energy needs was supplied by a central solar photovoltaics power the average electric rate
would increase by about 8% for the life of the plan for about 25 years, so that’s how you
read this chart.
Dawes: I’m sorry. I didn’t follow that. Could you point it out in pencil on the?
Knap_.t2: Okay. I’ll try. So if you read over from the horizontal axis to 2% of the total
energy supply in 2010 and you go straight up to either the 2nd or the top line, which is two
different types of photovoltaic plants. You see that that’s about 8% rate impact, so the
average electric rate or the revenue requirement goes up by 8% having 2% of energy
from photovoltaics.
Dawes: And what do the 67 megawatts and the 332 and the 301, how do they relate to
this, because you have different megawatt numbers down on the 10% of energy I didn’t
quite get that.
~: What a perfect straight Council member you are. That’s my next little bullet. So
let’s see the "??" plant capacity required to meet the 10% of our projected energy
consumption so the reason why the capacities are different has to do with the different
capacity factors of the different types of power plants. So a Solar PV plant has the
capacity of about 20-25% whereas say a small hydro geothermal is closer to 80%-85%.
Dawes: Are you talking about efficiencies?
Knap_!2: No. Because solar panels only generate electricity when the sun’s out, you need
more capacity to generate the same.
Dawes: So you’re talking about load versus capacity rating?
Knap_12: Most technologies along these lines are talking about in $ per megawatt so it’s
peak capacity rating required to generate the same amount of energy for all the diff
technologies.
Dawes: So geothermal, for instance, operates 24/7 so it has fairly low capacity but
supplies the same percentage as something that has a 67 megawatt capacity but supply it
on a part time basis.
KnaRl~: To the side of that is the actual energy cost in $ per megawatt hour for each of
the difftechnologies. I should point out that Action item #2, energy cost is between $38-
42/megawatt hour, plus it is down here near the bottom, thus the premium.
Dawes: And this assumes the depreciation of the capital assets over its useful life, which
varies amongst these different technologies?
Knap_12: Right.
Dawes: The PV might be 20 years and the solar dish may be 10.
Knap_12: Right, and further more, these lines show very narrow, straight lines. In reality
it’s very site specific. Some are more certain than others. Actually energy efficiency
lines tend to curve up because you get the, as you try to, it’s tough to get say 50
megawatts worth of energy efficiency so it gets very expensive so it curves up. Some of
the more expensive supply resources actually curve down because you get economies of
scale and it’s not quite as expensive to buy 50 megawatts of PV as 5 on a per megawatt
basis. What we really need to solicit from this group and from the city as a whole really
is "Where on this chart are you willing to be?" We all want to be down at 0 or lower on
the vertical axis and as far to the right as we can on the horizontal axis. And all the lines
go in the wrong direction for that, so maybe you want to stay to right of 8% of the energy
but stay below 10% rate impact. Stay in that quadrant and you’re happy. This is a
citywide pdlicy decision that has to be made and not something that can just fall out of
pure analysis. So we’re not expecting actions and answers on that particular question.
We’re really trying to start the discussion on how to get to there.
Dawes: Another query. It seems to me just looking at these alternatives that some are
very feasible, known technologies applicable to Palo Alto. Some are frankly not.
Looking at this, I’d say lets build a geothermal plant and you’d say it’s wonderfully cost
effective and so forth and so on, but the fact is we can’t do it because we have to put up
with the geysers and we’d have to have access to the underlying magma and so forth so it
to me its kind of a strong "??" to put geothermal here because it’s great but you can’t
have it.
KnaRl2: Well these plants don’t have to be in the Palo Alto city limits. You see we could
fulfill our energy supply as renewable from a remote source such as small hydro or
geothermal. There are not that many promising geothermal plants as I’ve been learning.
The point remains, you may not be able to 16 megawatts.
Dawes: You can build a wind farm in Mojave and it will have to get some benefit here in
Palo Alto.
Ulrich: If I might interject, when you look at the energy mix for the city of Santa Clara
for example, 21% of their energy comes from geothermal so it’s possible to develop it.
Dawes: Palo Alto used to own geothermal resources and then sold it because of the
situation that prevailed at the time so we’re no strangers to it here either.
Ulrich: It’s important to know. These kind of alternatives, we can look at regardless
whether they’re in Palo Alto or not.
Knap_p: And it may well be owning a fraction of somebody’s bigger plant or buying the
output from the plant and not necessarily building our own geothermal plant. We’ll take
a look at this next slide, because.
Bechtel: Karl, will you be taking questions. Mr. Ferguson has a question.
KnaRt2: yes.
Ferguson: I just Scanned quickly ahead here. Maybe you’ll be answering this in the next
couple of slides. This slide here, it’s a nice array. Thanks for explaining it. I’d almost
like to see one more column on it which is explains energy in numbers we’re familiar
with and cost in numbers we’re familiar with, but one of the benefits of these renewables
is they have better environmental performance. I think of it as entropy. We’re going to
pay an entropy penalty somewhere in the system by generating high temperature energy
in a short period of time. One way we pay the entropy penalty is environmentally. Is
there some kind of figure of merit you can develop for each of these alternative
renewable resources that indicates what is an inherently more reliable supply and is this
substantially more environmentally beneficial than others, so that when we pay $300
instead of $48 we see the environmental benefit along some dimension?
KnaE12: Yes, in fact there is kind of an array of report card for each technology. For
example, wind is not as firm as geothermal or small hydro. Photovoltaic is actually has a
very high availability and is easy to predict when the sun is going to be up but there are
no allowances for either diversification in our portfolio in this chart. This is just pure
commodity cost that has some "??" there’s no add or credit, no carbon emissions offset,
nor is there a deficit for the fact that some of these are non-dispatchable. They’re take or
pay, or take and pay actually, but that will be part of the follow up. Kind of figure out
how much more analysis to do after we find out if we’re going to be on this chart at all.
That’s kind of the next step.
Bechtel: Other questions? Mr. Carlson.
Carlson: Yeah, I’ve got a couple comments here because there’s the cost issue as Rick
just recommended, but there’s also how it fits into our portfolio, for example, small hydro
does not supply power just when we need the power, so it’s just doesn’t fit in that
expansive hole we have. Other things and this is what we’ve looked at for years, some of
the environmental problems with some of these technologies are certainly non-zero
especially those wind power plants on the ridges which is, I mean, the number of eagles
and raptors they kill are serious and we have to stop that. The birds just love exactly the
best spot where you want to put a wind machine up. So and also these costs are changing
all the time. We have some older ones like geo wind has come down nicely. We always
.h_ope photovoltaic will but geothermal’s there already and I’m not sure I’d call it a
renewable resource but it’s a fairly long term resource and it certainly doesn’t emit CO2
or much of anything else and expansion of those buying in there or financing part of the
proposed expansion is a doable thing as I understand it. So there’s some real
possibilities in there but it’s not an easy choice. Of course, landfill gas just looks
wonderful because we sure have a landfill gas resource in town.
Bechtel: Go ahead Karl.
Knap__p: Okay. Well actually to illustrate the range and magnitude of requirements of our
clean energy portfolio as opposed to any of individual technologies, we’ve selected 3
significantly different combinations of some of the technologies just to kind of illustrate.
The first is just an equal mix of the lowest cost resources. It has energy cost of about $60
per megawatt hour. We’d have 2% increase in rates if we supply 10% of energy with that
mix. We’d require about $80 million of capital if we were to actually build the plants.
The fraction of the load we can meet if you spend $100 million is another figure of merit
is about 12%. So these are just the...go ahead.
Bechtel: I was just going to ask Karl. What was the rate the commodity cost did you use
for the base rate non-renewable? $40 or so per megawatt hour?
KnaRl2: Well the $45 per megawatt hour in 2010.
Bechtel: $45 per megawatt hour in 2010. Thank you.
Knap_.12: So the 3rd on the far right, is the all sun and wind portfolio at $100 per megawatt
hour and then we picked something in between just to be to fall somewhere in the middle.
The point of this is not to give detail cost estimates of the different kinds of portfolios but
to point out some points which is the amount of money to build this or to commit to
power purchase contracts over a 10 year period is on the order of $50 to $100 million. It
is possible to meet a reasonable amount of power load depending on what mix you have.
And you can actually have some of the most expensive technologies in a portfolio that
still meets our goal, for example, in our 3rd portfolio, that 10% of solar PV accounts for
50% of the money so even though it’s the most expensive you can still come up with
something that works with all the technologies.
Dawes: Do your assumptions under the solar PV distributed parallel what we’re paying
now for PAU customers to put in PV panels?
KnaR!2: Yes. Now there doesn’t have to be any single technologies. There are of course
endless number of possible portfolio options once you start mixing things together and I
do want to move on to some of the main points. Which is what we really have to figure
out as a group is what is Palo Alto’s basic willingness to pay for environmentally friendly
energy and how much renewable energy should fit in to the whole portfolio? We need to
address this cost versus sustainability conflict and some of the language which were
discussed earlier on the strategies may actually make this a little bit easier. It’s really a
matter of city preferences and it’s important to question whether we want to have an
expensive contributor to our power supply. And the second big question is the
motivation here. Why do we need a renewable portfolio policy? There’s been lot of
expression of interest from the public at a lot of City Council meetings. I haven’t seen it
here at any UAC meeting yet. I periodically receive personal emails asking why we
don’t do all of our power with photovoltaic on people’s roofs. There’s a lot of interest. I
don’t know how much interest yet from the commercial sector but there’s actually a lot of
dollar values that haven’t been included in this analysis yet which would help make a
better case and fill up the report card because there are no environmentally benign
technologies. There are only pros and cons of each one. So the underlying motivation
kind of sets the foundation is how we read in this report card. Is the goal to meet the
Kyoto protocol? He had a 7% reduction in carbon emissions from Palo Alto energy use
by 2010. That would actually change how you would do your portfolio. Or is it
reducing air emissions related? That’s a whole different motivation also. Do we want to
be the leading municipality in renewable energy or do we just want to be better than the
state average of 12%? These are just throwing out possible motivations. The steps, I
believe are, for one, getting discussion going here, but also finding out what does the
public, both commercial and residential, have to say about what we ought to be doing
with this and how does it fit into the #4 strategy bullet that was on action item #1? So it
really kind of leads into the discussion that I hope it would stimulate from doing this.
Bechtel: Thank you very much, Karl. You did cover the next slide, I noticed, which at
least I’m looking at the presentation from the 5th basically which says staff will
th Wincorporate UAC input and seek UAC approval on September 25 . Well e dealt with
that item on the first issue.
Knap.12: That’s because I was, this part was supposed the last part then lead back into the
next steps for the overall portfolio and so now it’s been extracted so I can either hand it
back to Shiva but it would actually be better to have this renewables discussion if you all
would like to.
Bechtel: Well I’m getting looks from my other commissioners because I have a slide that
they don’t have and I apologize. Okay. I would entertain questions from the commission
on Karl’s presentation on renewables. But perhaps they’re looking for feedback and
personally I’m also looking for feedback and I’m interested also in how we wrestle with
this issue as we’ve seen our rates will go up for whatever % we have. It’s part of our
"??" to advise the Council but I believe at the same time, it’s part of our responsibility to
gather input from the public and the staff on this issue so I’m personally very interested
in the renewables issue so I’ll open it up. Mr. Rosenbaum.
Rosenbaum: Yeah.
and because we’d
participation?
Just a question. We introduced green pricing probably a year ago
heard a lot of people are interested in it. What’s been the
Ulrich: If you’re looking at a percentage? It’s quite low. It’s in...do you have the #?
Dawes: It’s quite low? What do you think that means? That’s sort of a volunteer green
effort. Does it mean people aren’t interested? We haven’t sold it enough? It’s not
dramatic enough? Nobody knows what the sources are?
~: The actual number is 171 residents have signed up with is about .7% and I don’t
think enough analysis has been done to actually say exactly why people have signed up
or haven’t signed up. It actually continues to grow. I have a little chart of sign ups
versus time.
Rosenbaum: What’s the premium for signing onto green energy?
Knal2p: It’s about $14/month for future 100. This is estimated right off our website.
$8.00/month for future fifty and about $4.00/month on average residential bill.
Rosenbaum: I mean for kilowatt hour.
Knap_~: I don’t.
Rosenbaum: To make it consistent with this, what percentage increase in rates is it 10%
increase in rates, is it 5% increase or what?
Balachandran: Kabat just told us it’s 1, 2, 3 cents higher than normal bundle rates
depending on the kind of product that you pick.
Dawes: And our bundled rates are about 7.5?
Balachandran: Today yes.
Bechtel: So it’s 1, 2, 3 cents on a 7.5 cent base rate. Is that?
Balachandran: This is based on a 6-cent rate. and all the rates increased even for the
future green customers.
Rosenbaum: Does staff have any concern over this? That is we have a voluntary
program. This is in a community where a lot of people would express interest in the
environment and the turn out has been very low. What we’re suggesting here is a
compulsory program. Is there concern about this?
Baldschun: We haven’t market it since our big push.
Bechtel: Mr. Baldschun is telling us.
Baldschun: Okay, I’ll try this. We are going to push it again. Obviously during the last
6 months, we’ve had other things on our plate but we are going to push green power
again and I expect to see the participation levels increase. They are low relative to our
projections. We did see some jumps when we did market it heavily in April and July but
we really haven’t pushed it much because we’ve been pushing this and the AEEP
program and a lot of things so this has been on the back burner.
Balachandran: And we are also going to look at the product itself. All the products we
offer are 100% green as opposed to some of the others offered in the general market in
California which has a bunch of brown mixed in and those had a very good response
from the customers so we’re going to look at the product to in addition to what...
Ulrich: I’ll give a view that we’re comparing apples with oranges so that if we move
ahead with this, there’s a strong benefit. We should look at mixing it so that it’s included
in everybody’s bill. It’s part of our portfolio strategy rather than the way we’ve done it is
we will buy it for you if you want it and we’ll charge a premium above what everybody
else pays. That is a far different kind of product than one where we get either consensus
or going through and asking the public and businesses how much they want to participate
overall in their utility in green power and that becomes part of our entire mix. Then it
will be a far different product than the kind that we’d go out and buy. The premium right
now is quite significant. And some of the things Karl talked about raising the rate 2%
might not be felt in the same way, so I’d rather not compare the success rate of what
we’ve already done because we’re going to learn how to market it better and provide a
product that we think people will want to have or we won’t do it.
Rosenbaum: Thank you.
Bechtel: Other comments or questions of Karl on renewables? Mr. Dawes.
Dawes: I just wanted to emphasize my concurrence with Mr. Rosenbaum’s question.
This issue of compulsory versus voluntary is major issue in my mind and I would much
prefer to see something that continues to be voluntary where we can market a green
program in effect pay for itself. When I see what I’ll generally term theology, written
down on the paper as the reason for doing something, it makes me a little nervous. The
Kyoto convention is a highly, I’m not sure if it’s inflammatory but it certainly is an area
that excites a great deal of heat and light and very little policy unanimity that I can
discern while the current administration has disowned it, the prior administration never
submitted it to the Senate for ratification because they knew it would fail and fail
miserably. So for Palo Alto to shoulder the Kyoto convention is far reaching and way
over-reaching for our situation and I reject the idea that we should justify a program of
this nature on something as controversial as that. I’d much prefer to see it as a hard
headed analysis of reason for expanding our resource supply mix at rate increments that
are tolerable, reasonable and justified.
Bechtel: Other comments? Mr. Ferguson.
Ferguson: I’d like to see the score card address measures of reliability, diversification,
efficiency, nominal improvements in avoiding conventional pollution, so we could pick a
portfolio that doesn’t externalize either costs or benefits on any of these dimensions. [end
of tape 1 and begin tape 2...missed a couple of sentences]
Dawes: Again, thinking from an investment perspective, I would also introduce
alternatives, for example, fiber-to-the-home expansion entire city-wide is probably about
a $40-45 million investment with some significant revenue implications for us. I would
certainly say if we’re contemplating really big numbers such as $50 or $100 million
tripped off the tongue on these presentations that it is very reasonable to stack up,
unrelated to green power, but related to PAU investment alternatives, these kinds of
things.
Bechtel: Mr. Carlson.
Carlson: This is an excellent presentation. I love this table. You just put a lot of
information that was complex into a pretty easy-to-understand table. The questions I
have are, the conservation area there’s so many little things you can do that are probably
more cost effective than this. And so you’re underestimating the cost of the range of cost
effective conservation especially in the lighting area. You’ve got this utility owned
demand side management at $67 per megawatt hour. That may true for large industrial
applications, but a lot more can be done cheaply on a residential side. And so you’re
underestimating the conservation potential. It’s hard to estimate but there are a lot of
megawatts out there, more than this, more and more cheaply than this implies. Maybe
I’m wrong but the last time I checked the numbers, they were better than this. But I share
with Mr. Rosenbaum and Mr. Dawes, the skepticism of putting many tens of millions of
dollars in this wind-something is dramatic for the whole community. Fiber-to-the-home
for every home in the community would A) everybody would love and B) would
probably if not break even, possible make a little at it. Some kind of capital investment
and effort is pretty interesting. The final area that we should put up here and it brings me
back to Kyoto, the efficiency improvements that you can get from a really good new
power plant compared to the old power plants that we used to buy probably are
environmentally one of the better things we can do. I know the new power plants are just
quite significantly more efficient in terms of meeting the Kyoto protocol and reducing air
emissions and doing good things for the environment. That’s a set of, that’s an
alternative in the utility area that needs to be thrown into this mix. And it’s probably very
cost effective, I mean these technologies are fun and they’re exciting, but for what you
get, you sure spend a lot of money.
Bechtel: Mr. Ferguson, you’re light’s on? No. Mr. Rosenbaum.
Rosenbaum: I just can’t let the comments relative to fiber-to-the-home pass. I don’t
think we want to, instead of wasting $50 million on alternate energy, why don’t we do it
on something that people would like? Fiber to the home has got to stand on its own as an
investment and I’m sure staff shares that view. What I wanted to indicate was an
alternate view here on the commission.
Ulrich: We were just waiting to see how long.
Bechtel: Mr. Knapp.
Knap_2: On the DSM numbers, I should have a point of clarification in there; a big
component is the loss of revenue associated with DSM investments because that has a
rate impact. It’s not just dollars of megawatt hour avoided. It’s plus the revenue you
didn’t get for not selling those megawatt hours, so somebody else has to pay for that
distribution charge in part anyways.
Carlson: Ok. So that’s interesting. I’d like to see some detail on that because you get
into a whole fixed versus average cost, cut set there that’s worth looking at more
carefully.
Knap_t2: It’s in that rate impact measure, is all it is. With the 10%, say if it was all done
with DSM, a 10% reduction and total megawatt hours sold still has to recoup the same
total and revenue requirement for all the distribution and transmission and the investment
and energy efficiency itself, that’s why it’s probably higher than you’re used to.
Bechtel: No other comments? Thank you very much Karl for a very enlightening, and I
a~ee with Dick Carlson, that one curve sort of tells us the picture that we have to set up
curves as we look at it. We’ve covered the agenda tonight that I wanted to cover it. On
the first item under primary objectives, we sent that back to staff for rework and it would
occur to me that that was probably the right thing to do judging by the fact on this last
presentation on renewables, we had certainly a discussion about the pros and cons of that.
We approved the contract. We’ve covered renewables. Short of any other urgent
business or news, I would propose we adjourn this meeting to another time. I guess the
primary objectives, we’ll look at again sometime in the next some months and we can
talk about that as we look at that again. John, any thoughts about coming back to that
one?
Ulrich: Well we’d have to come back to it rather soon, not too many months. We may
have to decide whether you’d like to have another special meeting to continue in this
dialogue: One, for the objectives and two, to have more understanding and
communication about the future portfolio options. Similar to the foils we didn’t cover in
as much detail as you might want to have or would you like to have that as part of a
regular meeting in addition to the other agenda items?
Bechtel: I did not bring the projected agenda for us and you have it there, maybe we can
spend a few minutes there and give us a heads up on the next couple of meetings.
Ulrich: Well actually at the next meeting, one of the agenda items is talking about the
long-term Utility Advisory Commission agenda. The feedback that we got from the
small subcommittee headed by Mr. Ferguson came back future meeting agenda items. It
would be valuable to go through some of those items and interpretation and definition of
what is expected on each of those items so that 1) we can prepare for them and you’ll be
aware of what kind of information reports you’ll get at those particular times so you may
want to at that time go through this topic and find out where you want to have this fit?
Bechtel: That’s going to be October 3rd, is that right?
Ulrich: Next meeting is scheduled to start at the normal time at 7:30 on October 3rd. So
that’s only, that’s next Wednesday and you’re packet will be sent to you on Friday.
Briefly, the items are the NCPA Interconnection Agreement Update, Voluntary
Commercial Time of Use Electric Rates. The first one is information and the second one
Time of Use rates is an action item. The 2001-2003 Demand Side Management and
Public Benefits Plan and so when you ask for what we’re doing with the money. That’s
an action item. We’re also going to be bringing the Strategic Plan Performance Report;
the one that we promised for some time is how to measure our strategic plan. That’s in
the form of information so that you have a chance to modify and ask questions and we
can bring back in final form. Alternative Emergency Water Supply Options Study will
be here and then we have our NCPA and TANC report and then the Long-Term UAC
Agenda, so it’s quite a bit of material.
Bechtel: Yes, it does look like a very full agenda. Do you anticipate, and it doesn;t
sound like it, bringing any further contracts specific contract proposals to us? It does not
sound like that’s going to be there. So really the issues we need to grapple is really
coming back to a set of objectives whether they are 5, 4, 3,or 2, or 1 on the portfolio.
Ulrich: That’s the benefit of the discussion we had tonight. We have a clear view of
your ideas and concerns about renewables and whether there’s a price premium we
should be considering or not, so that’s a valuable area. We would want to come back and
push back on some of the items that you brought up so that when we have a good
understanding and dialogue of the kind of portfolio that you would like us to look at and
we would like all of you of course to be together on that and ~ve us guidance so that
when we put together the portfolio, it will not be a surprise to you and we’ll be able to
move ahead and get it approved early so you may want to have one more of these
meetings on a special basis to finish up on these objectives and have whatever debates
you’d like to have on pushing forward on cost versus reliability and reliability and cost
versus a sustainability and how to mix that portfolio together.
Bechtel: I was wondering if we were to meet one month from today, October the 20
something. Commissioners? How do you feel about meeting in October? Mr. Dawes.
Dawes: We’re leaving on the 22nd of October for a month, so I won’t be at the
November meeting and late October wouldn’t be very good for us.
Bechtel: You won’t be returning really until late...
Dawes: Thanksgiving.
Bechtel: Thanksgiving. So there’s one input on schedule. Any other inputs on schedule
in October?
Ulrich: Just to point out another carrot we have to consider. All of this portfolio
planning has to go to the City Council in relationship to our strategic plan and I don’t
think this is going to be a subject that we’re going to be able to come at one time and
present to them and get their concurrence that this is the final portfolio plan, so I’d like to
have the education and the communication both of the community and with yourselves
and with the City Council and there is not a lot of time when you build all of that in, for
us to delay having more meetings and getting agreement on these options. If I can push
back to October or early November would that or we can have if you’d like to consider it,
a more extended meeting and have it as part of...
Bechtel: On next week’s meeting?
Ulrich: It’s probably a bit early for that, but maybe the subsequent meeting. Start it
earlier. Just offering suggestions. Whatever is quicker.
Bechtel: Mr. Rosenbaum.
Rosenbaum: Why don’t we think about this and make a decision on the October 3rd
meeting as to whether we want to have a second meeting in October?
Bechtel: Let’s do that. Let’s we’ll bring calendars available at the October 3rd.
Ulrich: We’ll bring the calendars and some recommendations and if it’s agreeable, we’ll
have that discussion under the Long-Term UAC Agenda item. Are you okay with that?
Ferguson: Just a scheduling precaution: the proposal that you called a no-brainer tonight
still took us 30 minutes to deal with, so...
Ulrich: Well, it turned out to be even more than that. The UAC gave us far more brains
than that tonight, thank you very much.
Bechtel: We gave you three more months, I believe.
Ulrich: More months, that’s it. We’ll put it in years. Months and years.
Bechtel: Thanks very much. I’ll entertain a motion to adjourn.
Carlson: So moved.
Ferguson: Second.
Bechtel: Second. All in favor?
All Commissioners: Aye.
Bechtel: Approved. Adjourned.
Bechtel: Other comments? Mr. Rosenbaum.
Rosenbaum: George, I think one of the other things we wanted to discuss was the
possibility of a special meeting later this month before Dexter left to continue our
discussion of renewables and local generation and whether or not we ought to own a
public, whether we ought to own a power plant and I don’t know if staff is ready to
continue those discussions, but I think that was our intent.
Bechtel: Thank you for reminding me.
Ulrich: Sure. I think we were going to talk about that on the next item on the long-term
portfolio. I think that’s an excellent point. We ought to discuss.
Bechtel: Okay. Any other comments on the Long Term Agenda? Good. Thank you.
Thanks very much. We’ll, John and then with myself, hopefully we can work through
this.
APPROVE PRIMARY OBJECTIVES FOR ELECTRIC PORTFOLIO
DEVELOPMENT
Bechtel: Next item 9 is Approve the Primary Objectives for Electric Portfolio
Development. An action item. A carry over from our September 25th meeting and I have
a proposal in front of us. This item is a change from the previous recommendation.
There were 5 primary objectives. I see in their recommendations that this time we have 4
objectives and so proceed to.
Ulrich: Well one thing we didn’t do is we didn’t show you the ones that’s not here that
listed what we had last time so if you have a copy of them, you can very easily see what
the changes are. I think we’ve, since we’ve had a chance to talk to just about each one of
you, and show you some of the additional drafts that most of your comments are in here.
So it would be better to answer questions. My objective tonight would be to get your
concurrence to it and if you wanted to add things like your definitions of what these
objectives are or prioritize them, that would be very helpful too so when we come back,
we’re speaking the same language and the same interpretation of what each of these
objectives mean.
Bechtel: Commissioners? Comments on the objectives? Mr. Ferguson.
Ferguson: I think they did a pretty good job of bobbing and weaving through all the
comments last time, so I can’t pick any fights with this. I just want to go back to the
fundamentals of why we’re doing it. We have some pretty generic statements of strategy
and mission in the objectives. I assume that what we have here is a thinking framework
that the staff is going to use to make tradeoffs and brainstorm about portfolio options, and
this is just a way of organizing our work together. You’re going to use this framework
UAC MINUTES 10/03/01
ahead of time when we see the portfolio options delivered to us, you’re going to present it
to us, basically, under these 4 bullets, and I think that’s just an efficient way for us to
communicate. If any one of us discovers a bright idea for a major fifth objective, I’m
sure we’ll bring it up. But for starters, this seems just fine.
Bechtel: Mr. Rosenbaum.
Rosenbaum: Yeah, I would commend the staff and I would move approval as presented
in the memo.
Bechtel: We have a motion by Mr. Rosenbaum to approve the primary objectives as
presented. Do I hear a second?
Carlson: I’ll second.
Bechtel: Second by Mr. Carlson. More discussion on this? I see no discussion. I’m
assuming that we will all vote on this according to your deepest feelings. The staff has
done a good job in reflecting what we wanted, so all those in favor, please say "Aye".
All Commissioners: Aye
Bechtel: Opposed? None? Motion passes unanimously.
Ulrich: Thank you. I would ask maybe to set a clarification and that would be that these
objectives in a sense are in order of priority or if one is in conflict, we look to the above
or would you like us to just get them all out?
Bechtel: That’s a good question. In terms of priority, I would say that I believe that they
are in order of my own personal priorities of how you should operate, but other
comments? Is there a sense of prioritization by which the order in which they’re
presented or by any other statements in there? I don’t see that other than just the listing
here, but it’s, you raise an issue that there ought to be, that perhaps there should be some
discussion on that.
Ulrich: We don’t need limitations in a sense. We can bring it back, but I, my expectation
in saying this is that the top one ensure low and stable electric supply rates for customers
is pretty important and I would look at that as one that is probably superior to some of the
other ones in some sense.
Bechtel: Mr. Carlson.
Carlson: The only one I’d push up on the list is reliability and there are situations
especially given the interest of our large customers and I would say even our residential
customers that you’re going to have to spend some money at times to ensure higher
reliability which is exactly what we did with the generation project.
UAC MINUTES 10/03/01
Bechtel: Other comments on priorities? I think. So with that we’ll conclude that these
notes should be your guiding principles and filling the hole.
Ulrich: Thank you.
Bechtel: Thank you very much for everyone’s patience in sitting through this. Do I hear
a motion? Yes.
Ulrich: I’m sorry. There was a question Dick, pardon me, Commissioner Rosenbaum
suggested having another meeting. Did you want to discuss that, Dick?
Rosenbaum: Yes, I think that was our intention at the end of our last special meeting.
You know, if staff is prepared and there’s some useful information you think you can get
from us in the next couple of weeks, I think we should certainly consider it.
Was there an extra meeting or moving the meeting up so Dexter can come?
Rosenbaum: No, it was an extra meeting.
Balachandran: I think it would help us, the staff, if our intention was to have as many
meetings as you wanted to get on the same page, so what would you like to discuss at that
meeting? You did mention renewables.
Rosenbaum: Yes, yes, I think we left renewables up in the air and perhaps Carl is trying
to prepare something for us and won’t be ready in the next 2 weeks.
Balachandran: He is, I will check with him, but from the last time I talked to him, he was
ready to go. In fact, he felt he wanted to get into more detail and disappointed he could
not at the last meeting, so he’s ready to go. I do know he’s taking a week off, I think next
week, so I need to check on the schedule to make sure he’s set.
Ulrich: Excuse me. Maybe at this point, just briefly reviewing everybody’s calendar.
we put one together in 2 weeks, is that good or?
Commissioners: That works. That works. The 17th.
If
Ulrich: Do you leave on the 17th?
Dawes: No, the 17th is 2 weeks from today which we could. No I leave on the 22nd
Monday.
Bechtel: The 17th works for me, but it turns out there’s a high probability that I will be
absent for the November meeting so.
Balachandran: That’s the week he’s not here.
UAC MINUTES 10/03/01
Bechtel: I’m sorry.
Balachandran: That’s the week he’s not here.
Ulrich: The week of the 17th.
Balachandran: Week of the 15th.
Rosenbaum: Then a week from tonight, is that too soon? The l0th.
Balachandran: I will talk to him and maybe send the UAC.
Commissioners: I’m not available on the 10th. 9th? I can’t do it on the 10th either.
Bechtel: Let me also add one other thought. One of the other issues was basically
around the idea of reliability which was local generation and correct me if I’m wrong,
that was also an issue we’re quite interested in so to pull that together we may not want to
brush too far ahead with that, so that would be say next week is too early, the 17th is not
possible, then the following week, the 24th.
Ulrich: One suggestion might be is that you can just send me an email telling me the
dates that we can all share and what we may do instead of say like local generation would
be to talk about what is local generation and what would be some of the advantages of
putting a coal plant in Palo Alto or something like that and get at least those kind of
things out. Because the studies we’re working on with NCPA on the value of local
generation may turn out that cost or the benefits of getting someplace else may be a lot
clearer in a few months. I think for ease of things, all you can really talk about is in
generalities so that we get clarity or get public understanding of what we’re talking about.
Bechtel: Well perhaps we ought to just. Why don’t we do this then? We address
renewables and then if we have another special meeting or with using as the agenda is
available, we can discuss the other one. I’m not sure that there’s a great sense of urgency
that we deal with this in a month so.
Ulrich: Yeah, I’m sorry for mucking around it. We’re being a little hesitant. We ought
to look at the agenda for next month and see if we can just put the renewables on that.
You’ll be gone though, Commissioner Dawes?
Dawes: And Mr. Bechtel.
Bechtel: And I’m likely to be gone too the way it looks like right now.
Ulrich: Well maybe we can just adjust the regular meeting to another time?
: When are you back?
UAC MINUTES 10/03/01
Ulrich: Do we move that forward Commissioner Dawes or back?
Dawes: I’m out of pocket October 22- November 21.
Ulrich: Well.
Bechtel: It sounds to me like email exchange of being in town is the first order of
business.
Ulrich: Just send it to me and I’ll get back to you Mr. Bechtel.
Bechtel: Okay. Thank you. Do I hear a motion to adjourn?
Ferguson: So moved.
Bechtel: Moved by Mr. Ferguson. Seconded by Mr. Carlson. And all in favor, please
say "aye".
Ferguson: We’re voting with our feet.
All Commissioners: Aye.
[The meeting was adjourned.]
UAC MINUTES 10/03/01
ORDINANCE NO.
ORDINANCE OF THE COUNCIL OF THE CITY OF PALO ALTO
AUTHORIZING THE CITY MANAGER TO PURCHASE A PORTION
OF THE CITY’S ENERGY REQUIREMENTS DURING THE 2005
2010 PERIOD UNDER SPECIFIED TERMS AND CONDITIONS
The Council of the City of Palo Alto does ORDAIN as
follows:
SECTION i. The City Council finds that:
io
m o
C o
D°
In 1967, the United States entered into a Contract No.
14-06-200-2948A with Pacific Gas and Electric Company
("Integration Contract"). Under this contract, the
Western Area Power Administration (~WAPA") provides
electric capacity and energy to the City of Palo Alto
("City") over PG&E’s transmission system. It will
expire in December 2004.
In 2000, the City entered into a Contract No. 00-SNR-
0033 with WAPA (~Base Resource Contract"). Under this
contract, the City will receive less electric capacity
and energy than is currently made available under the
existing power purchase agreement. It wil! begin in
January 2005 and will expire in December 2024.
The wholesale price of energy in recent months has
declined, but some market participants, including the
City, believe that the current relatively low market
price will not continue indefinitely.
The City Manager seeks the authority to purchase 25 MW
b!ocks of energy and capacity at current relatively
low wholesale prices and under certain other terms and
conditions to fill an anticipated shortfall in the
City’s energy needs that wil! arise after 2004.
m 0 If energy is not provided pursuant to contracts at
specific prices, then purchases would be made at
variable and relatively higher spot market prices. The
public health, safety and welfare requires the City to
now implement price risk management principles in
order that the City may purchase energy in a timely
and cost-effective manner to meet the anticipated
energy supply deficit that wil! occur after 2004.
SECTION 2. The City Council hereby authorizes the City
Manager or his designated representative, the Director of
O11105 s.vn 0072117
Utilities, by appropriate written delegation, to enter into and
execute contracts for blocks of energy with qualified power
suppliers under the following general terms and conditions:
io Quantity. Total purchases for all contracts negotiated
and executed by the City under this authorization
shall not exceed 25 megawatts of energy for any hour.
m o Term. Each contract shall not exceed a term of five
(5) years and shall not extend beyond 2010.
C 0 Delivery Period. The delivery of energy shall occur
during an eight-consecutive-month period, commencing
September 1 and ending April 30, inclusive, during the
term of any contract.
Do Delivery Point. Each contract shall specify NP-15 or
equivalent location as the delivery point.
Price. Each contract shall establish fixed prices for
energy and capacity, and the average price of all
contracts entered into and executed by the City shall
not exceed $45 per kilowatt-hour.
SECTION 3. No contract entered into and executed by the
City Manager and approved as to form by the City Attorney under
this authority may extend beyond December 31, 2010.
SECTION 4. The City Council hereby finds that this
ordinance is exempt from the provisions of the California
Environmental Quality Act pursuant to Section 15061(b) (3) of the
California Environmental Quality Act Guidelines, because it can be
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seen with certainty that there is no possibility of significant
environmental effects occurring as a result of the adoption of this
ordinance.
011105 svn 0079117
INTRODUCED AND PASSED:
AYES:
NOES:
ABSTENTIONS:
ABSENT:
ATTEST:
City Clerk
APPROVED AS TO FORM:
Senior Asst. City Attorney
APPROVED:
City Manager
Director of Utilities
Director of Administrative
Services
APPROVED:
Mayor
011105 syn 0072117
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