HomeMy WebLinkAbout2000-11-13 City Council (29)City of Palo Alto
City Manager’s Report
TO:HONORABLE CITY COUNCIL
19
FROM:CITY MANAGER DEPARTMENT: UTILITIES
DATE:
SUBJECT:
NOVEMBER 13, 2000
APPROVE THE UTILITIES
THE CITY MANAGER TO
IMPLEMENTATION PLAN
CMR:418:00
STRATEGIC PLAN, AND DIRECT
HAVE STAFF RETURN WITH AN
RECOMMENDATION:
Staff recommends that the Council:
1. Conceptually approve the City of Palo Alto Utilities (CPAU) mission statement, kerr\objectives and strategies, and;
2. Direct the City Manager to return with an implementation plan that includes proposed
governance, policy and organizational changes; financial projections and impacts;
resource requirements and other related proposals to enable CPAU to continue to
function effectively as a customer-driven and competitive business operation.
PROJECT DESCRIPTION:
Deregulation has increased competition for retaining customers and presents
unprecedented challenges to tl~e City of Palo Alto Utilities (CPAU). Technological needs
have heightened customer expectations for near perfect reliability, innovative products
and superior customer service. Competitors allocate significant financial, technical and
legal resources towards meeting these customer needs.
CPAU has examined its strategic direction in light of these industry changes and has
concluded that changes are necessary to meet customer needs quickly and cost effectively
in order to retain these customers and sustain an appropriate level of General Fund
transfers.
CMR:418:00 Page 1 of 3
-BOARD/COMMISSION REVIEW AND RECOMMENDATIONS:
Staff presented a first draft of the Strategic Plan (Plan) to the Utilities Advisory
Commission (UAC) in May 2000, and to the City Council at a special study session in
June 2000. Suggestions arising from these presentations have been integrated into the
Plan, which was presented to the UAC onNovember 1, 2000 (Attachment A).
Additional changes have been made to incorporate the comments from the UAC at its
November 1st meeting.
The UAC motion regarding the Plan was: " Motion to approve the staff report here with
the understanding that the staff will, to the greatest extent possible, reflect in the written
document to Council the comments and additions made by the commissioners tonight,
and to the extent they can’t be incorporated into the bullets points per se, that you do a
good job excerpting the minutes for the benefit of Council."
Staff has received written comments and verbal comments both from the UAC and
Councilman Beecham. These have been integrated into the UAC report on the strategic
plan and the Utilities Strategic Plan, both of which are attached.
In summary the nature of the changes are as follows:
1.Make changes to the staff report so as to not overstate the dangers of distributed
generation and other competitive threats. Councilman Beecham felt these statements
would be misleading.
2.The Strategic Plan does not address implementation issues, such as in what manner
support services will be provided.
o Change the mission statement to include "Build value for our citizen owners. To
provide dependable returns to the City..."
Strengthen language under Strategy 6 items A & B to state "Maintain stable transfers
to the General Fund", and "Maintain reserves within established guidelines"
respectively.
5.Add the following items under Strategy 7:
"F. Provide sustainability life cycle cost analysis to Palo Alto customers."
"G. Enhance conservation."
6. Add the following items under Strategy 2:
"E. Work through partner agencies such as BAUWA, TANC, and NCPA to
become a more effective voice for our mutual benefit."
"F. Pursue investment in cost effective local and regional generation systems."
7. Change Strategy 6 to read: "Maximize the General Fund transfer and maintain
CMR:418:00 Page 2 of 3
financial strength".
Minor language changes within the UAC report.
RESOURCE IMPACTS:
The resource impacts will be addressed in detail when staff returns with the
implementation plan to Council at a future date.
POLICY IMPLICATIONS:
The policy impacts have not been identified at this time, however Council may direct
staff to investigate these and report back to Council at a future date.
ATTACHMENTS
A:Revised report to Utilities Advisory Commission
B"Revised Utilities Strategic PlanC:Excerpt of Minutes from UAC Meeting 11/01/00
PREPARED BY: Blake Heitzman and John Ulrich
DEPARTMENT HEAD:
of Utilities
CITY MANAGER APPROVAL:
BENEST
City Manager
CMR:418:00 Page 3 of 3
REVISED
TO:
FROM:
Utility Advisory Commission
Director of Utilities
DATE:
SUBJECT:
NOVEMBER 1, 2000
APPROVE THE UTILITIES STRATEGIC PLAN AND DIRECT THE
CITY MANAGER TO HAVE STAFF RETURN WITH AN
IMPLEMENTATION PLAN
REPORT IN BRIEF
Locally owning and operating a municipal utility has provided substantial benefit to the City
and community for over 100 years through lower rates, quality service, financial support to
the General Fund, programs that reflect community values, customer convenience, efficiency,
access to tax exempt financing, local control and staff expertise. However, the rapidly
deregulating electric and gas utility industries have led. to increased competition for
customers and make the City of Palo Alto Utilities (CPAU) commitment to provide
maximum benefit to this community and be the preferred full service utility provider much
more difficult to achieve. Competition has heightened customer expectations for world class
reliability, innovative products and superior customer service. Competitors allocate
significant financial, technical and legal resources towards acquiring customers from existing
utilities. Deregulation has also led to extremely volatile energy prices and many new entrants
into this competitive market.
In response to external competitive changes, CPAU has developed a strategic plan that
proactively charts a course to enhance its ability to meet customer expectations by
functioning effectively and efficiently in a competitive business environment. The Strategic
Plan consists of a mission, key objectives and strategies that are the subject of this report.
CPAU has examined its strategic direction in light of these industry changes and has
concluded that governance, resource, and policy changes are necessary to sustain an
appropriate level of General Fund transfers and retain existing CPAU utility customers.
At its November 1st meeting the UAC received and approved the strategic plan contingent’
upon specified changes. Staff has made the recommended changes.
Page 1 of 6
-RECOMMENDATION:
Staff recommends that the Council:
1. Approve the CPAU mission statement, key objectives and strategies, and;
2. Direct the City Manager to return with an implementation plan, that includes proposed
governance, policy and organizational changes, financial projections and impacts,
resource requirements and other related proposals to enable CPAU to continue to function
effectively as a customer-driven and competitive business operation.
BACKGROUND
Approximately one year ago, staff began interviewing all CPAU managers and other key
managers from support departments regarding the future outlook for the utilities industry. In
early 2000, a core team of managers from all divisions of CPAU reviewed this information
and began to develop a strategic plan. After extensive analysis and discussion staff presented
a first draft of the Strategic Plan (Plan) to the Utilities Advisory Commission (UAC) in May
2000, and to the City Council at a special study session in June 2000. Suggestions arising
from these presentations have been integrated into the Plan, which was presented to the UAC
on November 1, 2000 (Attachment A).
DISCUSSION
With over 100 years of success in providing responsive and reliable utility service at
reasonable prices, CPAU has developed and retained many of the skills and processes needed
to operate-a successful utility operation. Changes in the energy industry, however, are driving
the need for CPAU to refine its business strategy, adapt to competition and leave the security
of its service monopoly. Although CPAU has many competitive advantages such as solid
customer relationships, a talented and skilled staff, and the ability to package multiple utility
services, the speed, flexibility, and resources with which CPAU can proactively deploy and
respond to customer expectations does not currently match its competitors.
Customer Expectations Are Increasing
Palo Alto citizens and businesses expect near perfect electric reliability, innovative energy
products and services, and exceptional customer service. Such expectations are all driven
by technological advances and a global economy. Numerous businesses in Palo Alto,
including corporate headquarters, have laboratory, research and development, and production
processes requiring exceptional new levels of service reliability. Loss of data and production
caused by even momentary failure of ~lectric service result in a significant financial loss to
these customers. The infrastructure of CPAU, and most other incumbent utilities, was not
designed or built to serve customers requiring such high levels of reliability. These
customers’ expectations for reliability and other energy related products can be met by
competitors whose product line focuses on customer needs. CPAU competitors have already
begun to introduce innovations such as web access for usage and billing data, superior levels
of electricity reliability and quality, and a full spectrum of energy services that includes
financing, installing, and maintaining service reliability related equipment on customer sites.
Page 2 of 6
Utility customers in Palo Alto will expect CPAU to quickly and cost-effectively adopt these
same solutions to meet their needs. If CPAU fails to respond, customers will begin to
explore other options for meeting their critical energy and telecommunications needs.
Marketplace Changes Erode City of Palo Alto Utilities Advantages
Significant market-shaping events must be addressed effectively by CPAU so as not to erode
the strategic competitive advantages that CPAU currently has. These events have the
potential of significantly lowering the General Fund transfer. Some of the market-
transforming events are:
Changes in the federal government contract will result in a significant reduction in Palo
Alto’s electricity commodity price advantage beginning in 2005.
Wholesale electricity prices in California have increased by more than 300% in the past
12 months.
Volatility in the natural gas market, demonstrated by the sudden 100% rise in gas prices,
has affected customers across the nation.
Customers can purchase energy from suppliers other than CPAU due to customer choice
options. Up to 50% of Palo Alto’s electric load (annual revenues of $23,654,000, based
on adjusted budget figures for 00-01) and 26 % of its natural gas load (annual revenues
of $ 4,310,000, based on adjusted budget figures for 00-01) are at risk.
Customer retention for CPAU will be more challenging with the emergence and activity
of competitors in the energy market place such as global corporations that market power
and gas, financial, technical and energy services on the Internet.
Customers require increasingly higher levels of reliability and quality in utility services,
and will buy it at high market prices, rather than lose their business operations even for
a few minutes. In this search for reliability, some customers have already installed their
own emergency, generation. It is only one step further to begin to assume full
responsibility for their own power requirements.
Distributed generation units have become so small that 90.percent of Palo Alto’s electric
load could theoretically be served by them. The cost effectiveness and the headaches of
managing one’s own generation equipment makes distributed generation undesirable to
most customers. However the vendors of these devices continue to tune their packaging
to meet the needs of diverse customer groups, and eventually, as CPAU rates increase,
reliability needs rise, and the price of distributed generation units drop, installing them
will become more attractive to customers.
Competitive Advantages of the City of Palo Alto Utilities
While there are many market forces that challenge the success of City of Palo Alto Utilities
in the future, CPAU has major strength to draw upon in meeting competitive threats:
100% market share as incumbent utility
A skilled and experienced workforce
An allocation of federal power which presently helps keep supply costs below market
A strong financial position with low debt and strong reserves
Page 3 of 6
Fully collected stranded costs
Ar~ :~xceptionally high S&P bond rating
High customer satisfaction levels
Electric reliability in the upper quartile nationally
Consolidation of billing and services that is convenient to customers and often reduces
the cost of doing business
Comprehensive resource efficiency programs and benefits targeted to residents and
businesses
Ability to add new products and services focused only on Palo Alto customer needs
Disadvantages for City of Palo Alto Utilities under Competition
There are many challenges that CPAU will need to manage effectively in order to function
as a viable business operation. Many of the following disadvantages, unless resolved, will
soon erode CPAU’s ability to provide value to the community, retain customers and maintain
transfer levels to the General Fund. CPAU’s major disadvantages are:
Loss of supply marl~et share is inevitable as competitors enter Palo Alto marketplace.
Employee compensation options are not as flexible, competitive and performance-based
as leading businesses in industry.
Contracting and procurement procedures are not designed for streamlined business
operations and are significantly slower than CPAU competitors’ "just in time" business
approach.
Existing utility distribution infrastructure cannot currently meet super reliability demands
of customers.
City processes and support functions are designed under governmental support service
models not as competitive business models (Attachments B and C).
Competing priorities and overburdened staff in support service departments lead to
delays in meeting utility customers’ identified needs and slow adoption of 19usiness
process and technology advancements.
City authority levels and approval processes are significantly slower than those of
CPAU’ s competitors.
Protracted process for many business planning and operational functions such as strategic
planning and contract negotiation with customers provides a distinct competitive
disadvantage to CPAU.
Strategic Plan Charts New Business Direction
The City of Palo Alto Utilities has examined its strategic direction in light of the marketplace
changes and has concluded that governance, resources and policy changes are needed to
sustain an appropriate level of General Fund transfers and retain existing CPAU utility
customers.
The purpose of the Strategic Plan is to expand upon CPAU’s strengths and diminish its
weaknesses, in order to excel at customer responsiveness in a market where customer
Page 4 of 6
demands are increasing. By leveraging strengths and minimizing weaknesses, the Strategic
Plan increases the value of CPAU to its customers. The Strategic Plan addresses the need to
take measures now to abate the existing competitive disadvantages prior to the emergence
of a fully competitive market place in Palo Alto.
The CPAU Strategic Plan has the following components:
MISSION
"To build value for our citizen owners, to provide dependable returns to the City and citizens
of Palo Alto, and to be the preferred full service utility provider while sustaining the
environment."
KEY OBJECTIVES
1. Enhance customer satisfaction by delivering valued products and services
2. Invest in utility infrastructure to deliver reliable service.
3. Provide superior financial performance to the City and competitive prices to customers.
4. Identify and maintain the unique advantages of municipal ownership.
STRATEGIES TO ACCOMPLISH KEY OBJECTIVES
1. Enhance distribution rdiability at competitive costs: Maintain high levels of system
reliability through an aggressive, yet efficient, program of refurbishment. Furnish
customer specific levels of superior reliability where customers are willing to pay.
Accomplishing this strategy will help preserve and increase revenues, thereby adding
value to CPAU.
2. Preserve a supply cost advantage compared to the market price: Seek ways to
manage commodity costs in the face of reductions in the federal power allocation. By
keeping rates below the market and offering risk management products, customer
defection can be minimized, thereby adding value to the CPAU.
3. Streamline and manage business processes to allow CPAU to work efficiently and
cost-effeetivdy: Streamline and manage business processes to reduce costs and respond
quickly to customer needs, thereby maintaining customer satisfaction. Establish cost
effective service functions where the sole mission is the success of the CPAU and service
performance evaluation is based on the success of CPAU. This will add value to CPAU.
4. Deliver products and services for competitive markets: Maintain and enhance
customer satisfaction by delivering value added products and services. Consider adding
additional dark and light fiber services to current Dark Fiber program. Provide these
value added services and products through alliances or internal development. This action
will protect or increase revenue opportunities thereby adding value to CPAU.
5. Attract and retain employees with critical skills and knowledge: Allow the Director
to develop programs to attract and retain employees with critical skills and knowledge.
Benchmark critical positions with competitive utilities and industries requiring similar
employee skills.
6. Maximize the General Fund transfers and maintain financial strength: Maximize the
Page 5 of 6
0
value of CPAU to the City and the citizens of Palo Alto by successfully managing
reserves, financing options, risk management practices and the use of capital to reduce
operational costs and to focus business efforts in areas which increase revenues.
Implement programs that improve the quality of the environment: Invest in
appropriate environmental and public benefit programs.
CPAU must focus on customer needs and move forward quickly and effectively to meet these
needs in order to continue providing maximum benefit to this community over the long term.
According to the Harvard Business Review, the cost of acquiring a new customer is 6 to 10
times greater than retaining an existing one. To succeed in the future, CPAU will need the
flexibility, procedural streamlining, authority levels and resources to meet or beat competitor
offers to CPAU. customers in order to retain customers and be a viable business entity that
provides significant value to the community.
RESOURCE IMPACT:
The resource impacts have not been identified at this time, however Council may direct staff
to investigate these and report back to Council at a future date.
POLICY IMPLICATIONS
The policy implications have not been identified at this time, however Council may direct
staff to investigate these and report back to Council at a future date.
TIMELINE (OPTIONAL)
Council may direct staff to develop a timeline and report back to Council at a future date.
ENVIRONMENTAL ASSESSMENT
This project is categorically exempt from the provisions of California Environmental Quality
Act and no further environmental review is necessary.
Prepared By: Blake Heitzman, Manager of Competitive Assessment
Approved By:
of Utilities
Attachments: Utilities Strategic Plan
Page 6 of 6
REVISED
11/01/00 Page 1 of 7
PALO ALTO UTILITIES DEPARTMENT
STRATEGIC PLAN
MISSION STATEMENT
"To build value for our citizen owners, to provide dependable returns to the City and
citizens of Palo Alto, and to,, ~,e the preferred full service utility provider while
sustaining the environment."
SUPPORTING OBJECTIVES
1.Enhance customer satisfaction by delivering valued products and
services.
2. Invest in utility infrastructure to deliver reliable service.
3. Provide superior financial performance to the City and competitive
rates to customers.
4.To identify and maintain the unique advantages of municipal
ownership.
11/01/00 Page 2 of 7
KEY STRATEGIES
FOR THE NEXT 5 YEARS
STRATEGY 1: Operate distribution systems in a cost effective manner.
STRATEGY 2: Preserve a supply cost advantage compared to the market price.
STRATEGY 3: Streamline and manage business processes to allow CPA U to
work efficiently and cost-effectively.
STRATEGY 4: Deliver products and services for competitive markets.
STRATEGY 5: Attract and retain employees with critical skills and knowledge.
STRATEGY 6: Maximize the General Fund transfers and maintain financial
strength.
STRATEGY 7: Implement programs that improve the quality of the
environment.
11/01/00 Page 3 of 7
Strategy 1: Operate distribution systems in a cost
effective manner
A.Accelerate the capital improvement program to reduce maintenance costs
in later years when competition will become more intense.
B.Offer distributed generation products where they meet customer and
reliability needs in an economically justifiable fashion.
C. Develop multi-year service contracts with local contractors for
outsourcing the installation of all new water, gas, and sewer services.
D. Provide customized reliability solutions to meet customer needs.
Strategy 2: Preserve a supply cost advantage compared to
the market price
A.Explore alternative supply methods and projects to control costs of
electric, gas, and water commodities to meet existing and future customer
needs.
B.Investigate partnerships, alternative sources, and projects to secure low
cost, reliable transmission for commodity supplies.
C.Manage exposure to energy commodity price risk.
D.Enhance wholesale revenues through optimization of contractual rights
for transmission and generation.
E.Work through partner agencies such as BAWUA, TANC and NCPA to
become a more effective voice for our mutual benefit.
11/01/00 Page 4 of 7
Strategy 3: Streamline and manage business processes to
allow cPAU to work efficiently and cost-effectively
A.Develop, execute, and monitor service level agreements with other City
Departments.
B.Outsource certain support functions.
C.Review the City Charter for governance and organization changes which
could improve Utilities success under deregulation.
D. Eliminate or streamline low value work.
E. Support City effort to streamline budget, administrative, and regulatory
processes.
F. Investigate a regulatory process where customer confidentiality is
protected to the extent possible.
G. Track and evaluate other departments’ charges to Utilities accounts.
11/01/00 Page 5 of 7
Strategy 4: Deliver products and services for competitive
markets
Establish a brand presence while providing customer valued products in the
following areas:
A. Reliability services
B. Convenient customer bill payment options
C. Power quality services
D. Energy and water efficiency services
E. Financial assistance using CPAU’s low capital cost to assist customers to
obtain valued energy products and systems (e.g. backup generation)
F. Installation and maintenance services
G. Commodity products
H. Telecom products
Io Energy and water information and control services
J. Special Facilities and metering options
K. Special customer contracts
L. Distributed generation devices
M. Pursue profitable retail sales outside the City
N. Develop a competitive e-commerce position
Strategy 5: Attract and retain employees with critical
skills and knowledge
A.Offer compensation and benefit packages that are competitive with
private industry and consistent with the local markets.
B.Evaluate hiring practices to allow the Utility to respond to a competitive
environment.
C. Promote a safe and drug free work place.
D. Evaluate establishing apprenticeship and recruiting programs.
11/01/00 Page 6 of 7
Strategy 6: Maximize the General Fund transfers and
maintain financial strength
A.Maintain stable transfers to the General Fund.
B.Maintain reserves within established guidelines.
C.Balance transfers between enterprise funds to provide flexibility.
D.Maintain bond financing ratings and consider it to fund major projects.
E.Assess the value of individual business units.
F.Optimize the economics of buying rather than leasing property.
G.Complete the work order cost system.
H.Design standby and/or exit charges to recover fixed or stranded costs.
I.Create performance measures and establish budgetary and cost
monitoring tools.
Strategy 7: Implement programs that improve the quality
of the environment
A.Support implementation of the environmental components of the City’s
Comprehensive Plan.
B.Improve existing green pricing program.
C.Support implementation of the City’s Shstainability Program.
D.Support investment in future green resource projects.
E.Implement Public l~enefits and demand side management programs.
F.Provide sustainability life cycle cost analysis to Palo Alto customers,
G.Enhance conservation.
11/01/00 Page 7 of 7
EXCERPT
Utilities Advisory Committee
November 1, 2000
Excerpt Minutes - Item 2 Utilities Strategic Plan
Ferguson: Let’s move on to Item 2 the Strategic Plan followed by the Fiber Business Plan.
There is a logic to this. The Strategic Plan really should serve as the umbrella under which
things like the Fiber Business Plan align themselves. So to the extent we can hammer out some
of the larger principles in the Strategic Plan I think our discussion on the Fiber Plan will be a
little easier. John is there a presenter?
By the way, our minutes are being taken by Zariah Betten tonight so I’d like to be sure we get a
good recording for her sake.
Ulrich: Thank you. Mr. Chairman, in an effort to move this along I will sit here and Dee will
move the mouse as we go along. You have our proposal and that is to approve the Utilities
Strategic Plan and direct the City Manager to have Staff return with an implementation plan. So
this evening we will not be discussing an implementation plan. This is a significant
recommendation that we are asking for your approval. We would like to review this. I have a
presentation that will summarize much of what it is the report. We would like to take this to the
City Council for the full City Council’s review and hopefully approval on November 13th. So it
is a very short turnaround time and included in that will be our recommendation for the Fiber
Plan. Both of those have a lot to do with each other. I think the order we are taking helps it to fit
together.
We have worked on this for a number of months. We went to you in May of this year with our
initial proposal. You gave, us some recommendations and we then followed that up with a study
session with the City Council in June. The crux of what we would like to do is a strategic plan,
in our belief, is nothing more than a way to streamline, organize and look at the way we are
currently governed to be able to compete in a competitive environment that gets closer to Palo
Alto every day. We see that competitive challenge coming. The strategic plan is attempting to
work on that and be competitive over at least the next five years. We’ve developed a mission.
We have, I believe, clear objectives and strategies so that we will be successful. The
recommended actions that would be carried out in the plan and we would develop a
communication and public outreach plan so that all of our customers, those that own the utility,
Utilities Advisory Commission 1
would have clarity about what we’re doing and whywe believe it is in the overall best interest of
all of us to have a strategic plan in place.
We’ve had discussion here. Randy Baldschun gave all of you a very clear and a very good
history of our utility. We were founded on principles that are listed here. We do have low rates.
We have reliable contribution to the general fund. We clearly have local control as exemplified
by this evening and our relationship with the City Council. The programs that we’ve developed
and continue to do are built around community values. We are clearly focused on our customer
convenience and the type of operation they would like us to have. The roll of the strategic plan
is basically as our blue print over the next five years. The challenges will be the future market
environment, the threats and opportunities to the utilities, the strength and weaknesses of the
utility organization and plans to meet customer needs and respond to competitive threats. The
actions needed to secure a success. As you see every day and based on many of the items that
we bring to you, you’ve helped us a lot in being able to focus on the competition that is here and
continuing to increase. Customer demands are rising. Every customer is looking for the value
proposition and as time moves on that value proposition increases. There are competitors that
are large and diverse. We’ve had discussions about the price volatility and the risks that are
inherent with that. Competitor penetration will rise as our surrounding investor owned utility
rate freeze is in and that will come. Emerging technologies, the fascination .of distributed
generation, e-business, have the clear potential to transform our industry.
Here are some examples of the demand and the opportunities we have in energy services. We
are looking at and plan to implement a 24/7 service in Palo Alto where you can have your pilot
lights lit at 2:00 in the morning if you like. Aggressive energy management programs, green
energy, many options in paying the bill, and power quality and lots of price options. All of those
just expand our opportunities to be able to provide competing alternatives that are out there.
Examples of some of the key players, we-see them every day, Enron, Duke, Dynergy, Reliant,
Southern, Williams. We see Williams; they are right out in front of City Hall. We had an
example of them just a few weeks ago when they were installing a fiber optic system through the
City. Commodity prices are highly volatile. We had some discussion about that. Other than that
spike in 1-1-99 when everybody thought there was going to be a significant shortage of energy
here is what has happened with gas prices. They have stayed relatively stable. As you can see
from the first quarter, about the beginning quarter of this year, they have had a steady and
precipitous increase. They will come down sometime but we are not sure when. Here are the
same in the electric. Much more volatility as you can see on the right-hand side.
We have our own local issues that have come home very clearly particularly on June 14t~ when
PG&E and Palo Alto Utilities were forced to cut some of our customers through a rolling
blackout because energy demands have increased significantly. They are growing at 6% 200-
300 megawatts per year. That’s probably conservative depending on where you are at. Keep in
mind that the entire load of the City of Palo Alto peak demand is only slightly above 200
megawatts. We have to cope with this situation is a part of the reason why we have the strategic
plan.
Utilities Advisory Commission 2
Onsite generation, we hear about this all of the time and it is getting closer. After 2004 we
expect a significant increase interest in distributed generation. The reasons for that I’ll go
through in a few minutes. We find that reliability, not cost is the concern of many of our
¯ customers. The price, they are very happy with it but they would much rather trade that lower
price for higher service reliability. Technological advances have reduced the size of onsite
generation all the way down to 100KW. 150KW units are currently being installed in all
regional stores of a very large electronics supplier who is not very far away from here. Their
entire reason is to ensure reliability and in some areas to reduce costs because the supply costs
have been passed on directly to the customers, not as we’re doing but that’s becoming very
common, and they want to have full control over their power supply.
We are blessed with having major strengths to meet that competitive threats. We do have highly
skilled and experienced workforce. We have our federal power allocation keeps and we foresee
certain supply costs will be below market. We have a very solid financial position, currently
with low debt and strong reserves. Stranded costs are fully paid off. We believe and hear
everyday that we have high customer satisfaction. Gas and electric reliability is above average.
Status as a full-service community-owned utility provides convenience to customers and low
customer rates.
Now, our weaknesses are common in other utilities similar to ours: We are all experiencing
aging distribution systems. Much of our distribution was installed in the 1950’s and 1960’s.
Much of it is reaching its useful life. We have a very aggressive infrastructure plan to replace it.
We have declining supply cost advantages. We have organizational and process inefficiencies
and based on many of the competitors we are being limited in some of the product and service
portfolios. We are all facing the difficulty of retaining key personnel because of costs and in this
job market alternatives to working in the City of Palo Alto Utilities.
Here is where the beginning of our strategic plan is trying to overcome. We need to have
additional capital investments. We are working on and for our new supply arrangements,
particularly after 2004, and gas opportunities. We are looking at and will expand our product
and service offerings. We are engaged in new and expanded fiber services. These will be
opportunities to help us replace some of the lost opportunities in the electric and gas business.
We are looking at and initiating internal streamlining governance changes. And of course, the
best of all, lots of hard work.
We believe that we should have a full-service utility model. We believe that having full-service
is what our customers are interested in and believe that’s the way a utility in Palo Alto should
operate. This model that we have, we. believe, will meet and beat some of our competitive
threats. We will be able to retain high levels of customer satisfaction and loyalty and continue to
provide superior financial returns to the City.
We have summarized our mission here. I think it is quite clear and would not leave very much
ambiguity. To provide the maximum benefit to the customers of the City of Palo Alto Utilities
and to be the preferred full-service utility provider. We are one of the few, if not the only,
municipal utility in the State of California that provides electric, gas, water, waste water and
Utilities Advisory Commission 3
~urrently dark fiber. All of those are opportunities for the future and that’s were we see our
being a full-service utility provider.
We’ve gone through and looked at all of the key objectives that we should be focusing on.
While some of these sound and look very familiar, I think it is important to reaffirm what we are
here to do. Enhance customer satisfaction by delivering valued products and services. Invest in
our utility infrastructure to deliver reliable service. Provide superior financial performance to the
City and competitive prices to our customers. To identify and maintain the unique advantages of
municipal ownership and there are many. I will not attempt to read every one of these but the
key seven strategies are very important in how to achieve these objectives. We have to enhance
our distribution reliability and we have to do it so there are competitive costs. Preserving a
supply cost advantage. Streamline and manage the business process. Deliver products and
services for the competitive market. Attract and retain employees with critical skills and
knowledge. Maximize the owners’ value and maintain financial strength. Implement programs
that improve the quality of the environment.
We’re not going to be able to do this without having a clear and supportive communication and
outreach to all of our customers explaining what we are doing, soliciting their help and support,
and understanding of why we are doing this.
Here are our recommendations: approve the City of Palo Alto Utilities Department Mission
Statement, Key Objectives and Strategies. Forward to Council for review and approval.
Recommend that the City Manager direct the completion of an implementation plan including
proposed governance, policy and organization changes, financial projects and impacts, it is
important that you see what these benefits both in the financial and the operational side, and if
there is any resource requirements that those be articulated and included in the recommendations.
I’ve summarized those. There is far more detail in your package. I solicit your questions.
Ferguson: Just at the top here let me make sure we understand what action you want us to take
and the relationship with what I see is now four different documents under this heading. First
let’s just enumerate the documents. We have tonight’s November 1 slide presentation called the
Strategic Plan. In our packet we have under Item 2, the report asking us to approve the Utilities
Strategic Plan which runs about seven pages. That is followed by a more detailed earlier version
of something called the Utilities Strategic Plan, that’s bullet points one through seven. Then a
fourth and final document called the Context and Purpose of the Strategic Plan. So if we were to
approve the Staff recommendation tonight, are we approving the contents of all four of these
documents or does one amend another?
Dawes: I couldn’t find the fourth one, Rick.
Ferguson: In the packet following the bullet points that we’ve seen a couple of times before.
Strategy four, five six, seven pages.
Dawes: Okay, I viewed that as part of the ....
Utilities Advisory Commission 4
Ferguson: There is a third part after that called Context and Purpose that we’ve never seen
before. So is the request to approve the November 1 summary and carry that to Council with the
rest of this as interesting background.
Ulrich: Yes. Specifically the recommendations that are found on page two of the report dated
November 1 where the subject is Approve the Utilities Strategic Plan and direct the City
Manager to have Staff return with an Implementation Plan. Everything else that you mentioned
is clarification, information and some detail on it. Specifically we are asking that the Staff is
recommending that the Council approve the City of Palo Alto’s Utility Department Mission
Statement, Key Objectives and strategies. And two, direct the City Manager to return with an
implementation plan that includes proposed governance, policy and organization changes,
financial changes and impacts, resource requirements and other related proposals to enable the
City of Palo Alto Utilities Department to continue to function effectively as a customer driven
and competitive business operation.
Ferguson: And you’d like Council to get that proposal from you on the November 13th?
Ulrich: That’s correct.
Ferguson: Okay. Let me divide our discussion into two parts then. If there are Commissioners
that would like to comment on the high-level implications here of request one and two, let’s have
that short high-level conversation first before we jump into some of the details of the individual
paragraphs or bullets. Any comments on the high-level requests on page two?
Dawes: The only question I have is with this very short time schedule it basically I have a lot of
comments about it. I don’t know if anything is going to get incorporated in here or you are going
to ask for an up or down recommendation of UAC endorsement, or is it endorsement with
changes. How do we come to grips with this?
Ulrich: Well my belief is that we’ve had discussion in May on this subject and some of you
participated in the discussion with the City Council, and we’ve attempted to incorporate all of
those questions and concerns in the documents that you have. What I think the strength is at this
point which I think would allow you to approve this, hopefully unanimously, is that we would
like your support to move ahead and develop the implementation plans. So the devil is always in
the details and you would have opportunity to critique and to modify or do whatever you wish in
the implementation plan. I think the key thing here is, do you believe that it is appropriate for us
to go off and do this because of the external marketplace and the potential benefits that would be
gained to the City by having a organization that is moreakin to the way the competition works
rather than to have it as it currently is function more as a department in the government structure
of the City of Palo Alto. All of those things can be debated and worked on in the implementation
stage. I don’t think it is appropriate for us to go off and work on those if we don’t have your
support and conversely the City Council’s, belief that this is the appropriate thing for us to
venture off and do.
Ferguson: Any other high-level comments on the direct request or the process? Mr.
Rosenbaum.
Utilities Advisory Commission 5
Rosenbaum: I’ll make an overall comment. I sat through the development of a Comprehensive
Plan for the City, as did Council Member Beecham. I tend to see this as the same sort of
document. John spoke of the devil being in the details and until you get to the implementation,
in my view, there is really nothing to dig into. I think sufficient time has been spent on
developing the current recommendation and we should be ready to move on and get to work on
the real meat of it.
Ferguson: Any comments? Okay. I have no other comments on the high-level so let’s proceed
to any particular bullet points in the proposal that anyone feels strongly about correcting or
adding since our last two visits here. Mr. Dawes.
Dawes: This may be a little on the late side but frankly in the Mission Statement I’m concerned
that some stakeholders are conspicuously omitted. I think that, at least from my standpoint, the
employees of the enterprise and the City as owners are important elements of the Mission
Statement. In other words, I see one of the major reasons for this continuing on is to provide the
benefits which it has provided the City over these years and it doesn’t exist simply to please our
customers and to do a good job, provide service levels and low costs for our customers. It also is
there to provide a return for the owners, the City, and indirectly the citizens. I think also it is not
uncommon in Mission Statements to include a nod to the employee, management, operational
employees of the’ enterprise and providing a stable workplace with opportunities for growth and
advancement. So I would simply say that, to me, it is too limiting and I would like to see a
broader one.
Moving on to some other specifics. As I mentioned, John, in an e-mail and I’ll pass this on to
you. I recently participated in a lengthy process which resulted in a blue ribbon commissioned
report for the National Association of Corporate Directors called the Roll of the Board in
Corporate Strategy, which I find exceedingly...it’s brief, it’s got big print, it is very direct and
has war stories. I’ll pass it on to you as an aid here.
Looking at some of these other issues, in the strategies to accomplish key objectives" you talk
about maximizing the value of CAPU. To me, that’s like saying we’re going to get the stock
price as high as we can and that’s not really applicable here. What we are talking about, or what
I think about, is maximizing the transfers. In other words, it’s a cash flow look rather than a
market value approach. We should be talking about maximizing cash flow from operations
rather than market value.
I also think that we are ignoring, this whole thing ignores, the fact we are actually in the
generation business today. It talks about distribution objectives but I think we should be talking
about generation objectives not only with respect to what we have, the Calaveras Project, but that
we should be keeping a major open mind. This is under strategy 1; I’d put an objective IB,
which says, to investigate expansion of generation resources to add to our Calaveras resource.
Given the situation we have in the state I see no reason why our strategic objectives should
foreclose being in the generation business either by ourselves with a box out in our parking lot
out on the other side of Bayshore or in tandem with some of the other large munis having a
bigger box someplace. Or maybe even joint venturing with some of the Enrons or whatever of
Utilities Advisory Commission 6
the worm to bolster our ability to have resources available to ourselves. So I wouldn’t be so
narrow as you have shown in Strategy 1.
I’d al: ,dd under Strategy 2 that we should be working effectively with ~,~ur muni agencies and
CPA axe_~ BAWUA. They are very important to us in terms of our strategic survival, long term
growth and so forth.
Under Strategy 3, Streamline and manage business processes, I guess I would be more sort of
global in that look. Rather than talking about service level agreements with the City departments
I’d talk about optimize the organization of support functions for cost and efficiency. That covers
the bailiwick of working with City agencies or bagging it and going back to the old way and
having our own or even sub-contracting them so that we’re not in the business at all. But be
more genera,1 in that regard.
I’d talk about our abilities to .... under C I’d reword it rather than reviewing the City Charter for
changes I’d say, propose and obtain approval for City Charter changes which could improve
utilities success under deregulation. More proactive in that regard. I’d make part of C, F, which
¯ is investigation of the regulatory process where confidentiality is possible.
Under Strategy 4, Delivering products and services, as you went into this I get very excited about
changing lemons into lemonade with respect to distributed generation and envisioning us using
our financial power in terms of our investment grade paper, our tax exemptability to issue paper,
to actually go in the business of owning and operating distributed generation facilities for some
of our large customers. In other words, instead of competing with us we are helping them_
compete and up their reliability all on a basis where we are making margins on the use of our
capital and the use of our people. I don’t get that flavor in that strategy. I would certainly urge
that in there.
Strategy 6, Maximizing the owners’ value and maintenance of financial strength, you talk about
monitor, monitor, monitor. I’d talk about maintain stable and growing transfers. You are not
just looking at it; you are going to do it. And similarly with B, maintain reserves within
established guidelines, goes back to our discussion earlier about the gas situation. Rather than
just monitoring them and say, oop we’re off the chart, we ran out of money, we’re negative, you
say we’re going to maintain them. And B, we are going to balance transfers between enterprise
funds to provide flexibility. I think that’s certainly a long term goal of mine is to get out of our
little box of having people, the Johnson’s of the world, complaining that the water fund is getting
raided and so forth when we could be looking at this thing as our financial .... our balance sheet as
an integrated entity and the fir~ancial strength of the whole company, and being able to afford a
dividend flow commensurate with our entire operation rather than cherry-picking each little guy.
F, instead we are evaluating economics, we’re optimizing the economics of buying rather than
leasing property. And that goes to this maybe setting up a leasing company to facilitate our
customers getting into distributed generation issues.
Anyway, I’ve rattled on here quite at length and actually I have a heck of a lot more here but
time is wasting. Perhaps I’ve done enough of it and I think you get the idea of how I would
propose strengthening this as a document. I think it is still a little flabby and wishy-washy.
Utilities Advisory Commission 7
Ferguson: I’d like to ask Councilman Beecham for a little guidance. What, other than a straight
up approval, what could we do tonight that would be of incremental benefit to Council when it
hears this on the 13th?
Beecham: Curiously, that was running through my mind as well. When the Council reviews
this, the Council I expect will recommend to the Utilities Department any changes that Council
thinks are appropriate. The Council, I think, will appreciate the advice of the Commission. It is
best if the advice is clear. One thing certainly we can do is just read the minutes and pick up
everything. If there are certain points the Commission as a whole wants to emphasize it helps to
have that pointed out to us. I think the types of comments being made so far will be useful to us.
At a minimum I would urge you to continue that kind of comment and discussion. If it is
possible for you to key in on certain improvements or changes or issues that need to be identified
and resolved, picking those out clearly would help.
Fer~uson: Thank you for that guidance. With that, our former Councilman Rosenbaum, now
Commissioner Rosenbaum, do you have some comments?
Rosenbaum: As I mentioned earlier I went through the Comprehensive Plan process and my
forte is not in changing the wording. I respect what Dexter has done and I’m trying to see way in
which we can make direct use of that. I think Dexter has great experience in just this area and
formulating Mission Statements and Strategic Plans. But given the schedule that the Staff has
I’m trying to think of a way to incorporate those. Would it be possible for you to type up a list of
suggested changes and present it to the Staff and have that go forward with the Staff report?
Dawes: Sort of minority report?
Rosenbaum: I wouldn’t say it’s a minority report. I have no objection to anything you said and I
think it does strengthen it. I respect that the Staff has spent a great deal of time. Different people
will come to the different wordings and different emphasis. I think it would be helpful to Staff
that is Staff might well want to incorporate some of your specific recommendations. It’s a little
difficult for them to pick it up in this manner.
Dawes: Be happy to.
Rosenbaum: If we could get something from you to Staff on a timely basis I think it would be
very helpful. Rather than us going through one by one your recommended changes.
Ferguson: Thank you. Mr. Carlson, any comments on the bullet point presentation?
Carlson: The only comment I have, and I’m not sure where it is, I just want to be very sure that
in the end we in the Council have a good pic.ture of what this utility will look like post 2004
when the major change in the [Wappa] contract and in the water capital improvement plan is
fully implemented. I think it is a dramatic change and we need to look at exactly what it means
both financially and then also what the secondary implications are.
Utilities Advisory Commission 8
Ferguson: I’ve got one strongly held preference although it could be implemented in many
different ways here. That is, as I looked at tonight’s slide presentation I don’t think I saw the
word "telecom" or "data" at all. I think it really does need to be raised up on the short form for
several different reasons. One, let’s just start with the Mission Statement. We talk about
becoming the preferred provider for full-services utilities. That implies a kind of bundling which
we’ve talked about before and there are lots of advantages to that. I think we have a wonderful
opportunity here in the sense that AT&T is now dividing itself up into four companies and one of
the reasons for that giant strategic change at AT&T is that .they discovered that bundling all the
telecom related services didn’t turn out to be a strategic advantage at all for the company over
the last year. Crazily enough the interesting bundling success was bundling long distance service
with coupons at Jiffy Lube. That is to say there is creative remarkable surprising kinds of
bundling that are going to pay off better than the ones we kind of rationally expected. I think
telecom related bundling, data communication related bundling, is one of our best prospects for
growth. I don’t think it is a slam-dunk. I don’t think the business case is made yet. But I think it
deserves a place here at the high-level summary bullets. Another good place to consider it is
when we talk about, I guess it’s your slide 7 where you talk about the large financially powerful
firms that dominate the energy industry. We look at Enron and Williams and we got two
companies here who have made enormously powerful strategic decisions to build data
businesses. That should tell us something about the linkages between companies in the energy
business and the way they think of their future and the way we should think about our future. I
agree completely that energy belongs at the top of all of our priority lists but we just completely
lost the data and telecom component here.
A final comment on the recommendations. Something in me wants to see a slide for each of the
three recommendations with the final recommendation summary wrapping it up. For example,
under the proposed governance policy and organizational changes I think at this high level you
might include a slide that talks about such things as keeping inside the City the distribution
business and spinning off to some kind of hybrid organization the supply business or the network
administration business. Give a picture or snap shot of what we mean by governance changes.
Another option is to include bullets like Grant’s memo here.
Financial projections and impacts, I think even at the high-level presentation a couple of "for
example slides" that talk about financial projections .if gas prices keep marching up, financial
projections if we have to buy our own local generation or pay a particularly high charge to solve
the transmission problem. Or again, just one snap shot summarizing the fiber business plan
talking about the dark fiber prospects as well as the best case and worst case lines on a residential
build-out. I’d like to see most of those things addressing the prospects for telecom woven into
the top-level presentation.
Past that, at the last meeting I asked for a set of clear bullets about what really are the
competitive advantages of a municipal ownership whether it is energy or fiber. I was pleased
that on page four of the Staff report there is a pretty good set of bullets there, competitive
advantages of the City of Palo Alto Utilities. I think that list of eight or nine bullets is worth
putting in the high-level presentation. Some sub-set Of those are advantages that are unique to
Munis. Whether we are talking about growing a variation of the electric business or growing a
variation of the fiber business, we are going to need to keep coming back to those unique
Utilities Advisory Commission 9
advantages because those are the things that are going to push oui: business plans into the
believable zone. They will be there because just as a favorable energy prices have helped us mn
the electric utility, those are the kinds of advantages that will make business plans more
believable and more saleable to Council. So with those suggestions for additions and emphasis
and content to the high-level plan, I’d be prepared to support the recommendations.
Any other comments?
Rosenbaum: In the text, I assume will be the report that goes to Council. On page three, the first
bullet, under the heading Marketplace Changes Erode CPAU Advantages we have, "Changes in
the federal government contract will result in a significant’reduction in Palo Alto’s electricity
commodity price advantage beginning in 2005." In reading the minutes from last month I think
this is the one that led to some discussion about Bern taking some hot milk to relieve anxiety. I
think with good reason. I don’t think that’s a correct statement. I believe the Utility Advisory
Commission has had some discussion about this before.. That with some minor reduction the
energy we are going to get is the same. Western has been finning up this energy. They are not
going to do that; we’re going to have to do it. You know all the arguments. Western has been
going to the market. We’re going to go to the market. So price volatility may well be an issue
but it seems to me that to the Council and other lay people who read this it is precisely the wrong
information. Is there any comment from Staff on that? I know you are trying to make a case but
I don’t think that’s an appropriate bullet to use.
Ulrich: I think you are seeing it differently than we intended. I believe that what we said is very
true and we articulated that in our report to the Finance Committee and the City Council on its
approval for our base contract with Western that they approved just’ last week. What we meant
by "significant reduction" is that we cannot take the firming at a favorable price because of the
contract that Western had with Pacific Gas & Electric in the interconnection agreement which
had accounts in it where they were able to store energy in a bank account. That has been
depleted or will be very soon. That part of the firming is not there. I do not think that it is being
over dramatic by saying that significant reduction in the commodity price advantage is not true.
We’re not trying to scare anybody but you’ve got to remember that the City of Palo Alto’s major
commitment in its contract with the federal government assured us virtually or close to 70%-90%
of all our energy needs because of the great decision that was made 40 years ago. So for Palo
Alto that change in the Western contract will probably be more significant that other municipals
because of our high percentage of Western. So again, it was not an attempt to scare anybody but
I think there is a case for being concerned. That’s why we developed and will pursue a plan to
find alternatives that are very good for the future and not rely on somebody else firming for us or
just waiting around for that to come to pass in 2004.
Rosenbaum: Well, maybe it’s the definition of significant. What’s going on in the industry and
what happened to the customers of San Diego Gas & Electric, that’s significant. We’re not
anticipating difficulties with the interconnection agreement or that going away. I think that’s
might expect.
Ulrich: I think my role and attempt here is to emphasize the need for a strategic plan and to get
on with organizing so we can be as effective as our competitors. This particular point is
Utilities Advisory Commission 10
extremely important. We’re finding every day letters and correspondence putting the preference
issue up at a very high level of consciousness throughout the United States. That is’ something
we don’t hav~ a whole lot of control over and may not. So I think it is important to bring these
potential risks up not to foretell that they definitely will happen but I think it is something we
have to be very aware of and work to mitigate.
Rosenbaum: All fight, I won’t pursue that point any longer. The second one is one that has
always been of interest and UAC has discussed it before. Improving distribution reliability. We
always say we are going to do this. Why is this going to keep an energy customer who can buy
the energy for less from someone else?
Ulrich: As you know energy is divided into two parts here. We have the supply side that we
have open access in Palo Alto. One of the few municipalities that do that for very large
customers. So if our price of our commodity is higher than somebody can deliver it well a
customer will quickly go to that..The other key component that has come up very clear to us
fairly recently is the reliability of the supply which is basically controlled by how reliable our
distribution and delivery system is. Whether it is PG&E’s transmission or the ISO allowing the
energy to come here or our distribution, that’s where I believe the competitive advantage is going
to be for those of us that invest prudently in a reliable distribution system so we can deliver it.
That doesn’t mean that we’re not reliable now but our customers frankly are willing to pay for a
higher amount of reliability to their business. The loss of business is significant when they lose
power for whatever reason from the City of Palo Alto. I believe that is a strategic advantage we
can have by making our service reliability meet what the customer wants and will pay for. That
was the reference to the reliability side.
Rosenbaum: I guess I’m looking for quid pro quo here. We can contract with the customer to
provide facilities within their buildings to improve their reliability. We can make improvements
in our distribution system and the customer can pay for that and then go off and buy the energy
somewhere else. On the other hand, if we say we will make these improvements if you sign a
contract for a certain length that might make sense. I’m not getting that from your comments.
Ulrich: Part of that is I don’t deal out all of our hands in this environment. I think there is a
strategic advantage in doing some of the things that you are talking about and some of the things
that Mr. Dawes talks about. I have to assure you that we think about these things very, very
clearly and all of those things that you mentioned are things that we would be prepared to do.
Rosenbaum: All right, that ....
Ulrich: Plus several others.
Rosenbaum: Fine. All right, I know you are always thinking one step ahead of us, John.
Ulrich: I work in an environment where you keep a lot of your trade secrets and not spread them
around. But I’d be glad to discuss some of those. You are fight on point with your observation.
Thanks.
Utilities Advisory Commission 11
Ferguson: Okay, that said, Mr. Beecham.
Beecham: If you don’t mind I’d like to go through probably a laborious process perhaps. I’ve
got comments, not so much on the slide type description of the plan but more on the text in the
Staff report: With your tolerance I’d just go through and make either comments or questions in
the text.
For example on page three in the. top paragraph .it does say in the last line of that paragraph,
"customers will leave or take services from other providers if those expectations are not met."
How readily do you think customers will make a decision to leave and go to another provider?
Presuming that their decisions are based on reliability, on cost, on convenience, and I presume on
other factors as you mentioned 24/7 on service and things of that nature.
Ulrich: Would you like comments back?
Beecham: If you can, yes.
Marshall: Currently we know of customers that are not leaving our system but are providing
themselves with full back up generation simply because they don’t want to skip a minute or even
a cycle of power. So the leaving currently isn’t going to be to go to somebody else but to start
providing for themselves and there are some customers that have set this kind of generation
facility at their facility in order to provide themselves assurance that they would not lose even a
minute of power. Such customers as Alta Vista. So that’s the current threat. I assume as our
Western advantage becomes maybe less than it is now prices may go more towards market then_
you have other reasons why they might choose to leave. I don’t those are things we have to dea!_
with immediately. I think it is more provide the 100% reliability in the power quality so they can
do their process that are so delicate and require such good service.
Beecham: So as you talk about leaving, one part is they will spend additional resources on their
own for backup which is not necessarily leaving our system but is an added cost for a customer
that if we can help them avoid that would be nice.
Marshall: You are correct. If we could do that for them we could probably do it cheaper and
probably better. The other aspect is once they got a gen. set sitting there they would start
thinking about using it more. So by doing it ourselves that is something that we can avoid.
Ulrich: Part of this is being able to sit down with a customer and listen to what they need and
then be able to react and provide support and service whether that’s an engineering detail to do
the analysi.s to see what’s the benefit of the customer and to the utility and then make a decision
to go ahead and do it. Some of those may be a financial instrument help them with a long term
contract that they pay it back. All of those things currently take a very long time under our
current policies to be able to do that. So that would be an example of how we could go in solve
this and have a customer for a long period of time. They’d be happy.
Beecham: I do know, John, that as part of your objective that we become as light bn our toes as
a’ ballet dancer so we can react quickly to whatever our customers request. But as you talk about
Utilities Advisory Commission 12
customers leaving I’m not sure that I didn’t hear customers either a) physically leaving and going
someplace else or b) they take power from an alternative supplier.
Ulrich: B ,th of those are.possible. Part of the thing of leaving is that one; they may never come
here in the first place. We’ve had examples of, which are not necessarily related to the utility,
where somebody comes here and wants a particular type of service and if they can come and be
assured of it then they’ll make their financial decision to move and put that load into Palo Alto.
So in this case we’re probably not as explanatory as you’ve led our discussion to be. We
probably should write some of the words in there a little bit more clearly because leave means
not be connected at all or leaving and doing it themselves or in some cases getting up and take
their business and go somewhere else. I think the last one you alluded to was some other way for
a competitor to directly connect to that customer.
Beecham: As you mentioned, I would like to get some idea on the probability of each of those
happening. More realistic risks or more highly probable risks we need to respond to more
clearly than those that are less likely.
Ulrich: You’ll notice through this that there is not a clear timeline when some of those things
will happen. Some of these can happen now, some will happen more as our prices increase or
other factors come in. What we’re again trying to show here is that it is not just the same old
business any longer not to get into the details of when those things might happen. Our point is to
let’s change and to put all the processes in place so when they come next week we can do it, or if
they come two years from now we can do it.
Beecham: Also, Rich mentioned that some customers may never come. One thing that came up
recently at a NCPA meeting, I think, was that Santa Clara Power or Silicon Valley Power of
Santa Clara their energy requirements this past summer was significantly higher than their
projections because of new demand coming in. I’m happy to see that Palo Alto’s forecast was
pretty exact. We didn’t have any surprising new demand coming in. So for Santa Clara they had
new users coming in and I don’t know if they were server farms or of what nature. Philosophical
question is, how much do we want new customers especially when part of our issue now is in
fact procuring sufficient supply and a part of the future may be the additional marginal power
that we get is at a higher cost than our average power?
Ulrich: All those things are important. You could theorize that there are some classes of
customers that you’d very much like to have because they help us in our load shape and we’re
able to buy energy at a much cost because their load demand is at a particular time of day or
particular month. That’s many of the reasons why we should be looking at our self as an energy
company as opposed to electric and gas and water uniquely. You look for those synergies that
will help someplace else. So part of that would be a business development plan where you are
looking for particular types of load and you work with the community and zoning and planning
ordinances to be able to facilitate those type of changes.
Beecham: Moving down, and hope this isn’t too nit-picky, as you get into the bullet points the
second bullet point talks about electricity prices increasing in California. I would think you
Utilities Advisory Commission 13
primarily mean wholesale energy prices. Since for example and other constrained providers they
are not yet passing those prices on to their customers. At least not clearly.
Ulrich: That’s the way I read it when we put it in there and Gary has just confirmed that.
Beecham: Coming down to the second to the last bullet you talk about customers, and I would
say some customers require higher levels of reliability and will buy it any price. You might find
some other way of putting that since that’s
Ulrich: We studied that and if you listen to some of our customers the kind of number they
throw out as the alternative to paying for service reliability is so astronomical that it virtually
reaches at so-called any price. We’re talking half a million dollars to five million dollars an hour
for a loss of power even if it’s for a few milliseconds because of whatever their process is. That
was not intended to be too dramatic but it is awful close.
Beecham: You might want to clarify that as you just described it. That rather than lose it for
four milliseconds or for a few minutes they are willing to pay substantial additional price for that
value. That’s part of the reliability that you’re talking about.
In the last point you talk about advances in distributed generation. You quote up to 90% of our
load entirely at risk.
Marshall: When we say entirely at risk we mean both supply and distribution. The numbers are
just simply run from the size of the generator that is now available. This is more theoretical than
actual at the moment. We say as small as 100KW, they are down to 30KW at this point. So if
you look at our load 90% of our customers at 30KW or larger load. So those would all be able to
set a gen set at their facility if they so chose. You could set three or four and you don’t need a
system backup. So the potential is there. I’m not saying it is going to happen or that they are all
going to want to do that but the potential is there.
Beecham: Just because there is a technological possibility would still not lead me ever to
conclude that 90% of our load is entirely at risk. There are so many other factors in there in
terms of the Bay Area Air Quality Management District allowing it, practicalities, do they have
places to put the equipment. As I go through this I’d like to be sure that whatever I read I
entirely believe and at this point I can’t entirely believe that. If you still believe it is entirely true
then please convince me of it but at this pdint I’m not convinced.
Marshall: As I said it is a technological possibility and that’s what is intended to be said here.
Not that it would happen or that it’s a high probability that it would happen.
Beecham: In that case I find that not to be a very high value statement in the document. I want
to know what is realistic. I do appreciate that DG is getting much better than it used to be and
that in fact we should look at it as options in serving our customers. But still to say that that’s
putting our load entirely at risk kind of costs a little bit of credibility in at least my mind in how
to interpret some of these things.
Utilities Advisory Commission 14
On the next page the first set of bullet points, the third to the last, electrical reliability is in the
upper quartile nationally. Do you have any estimate of what it is locally?
Marshall: The only document that we have that tells us about this is the TBA study that was
done in 1996. It was a national survey and that’s all we have.
Ferguson: Councilman Beecham, let me interrupt here just for a second. I’d like to make best
use of time particularly since ,we have a bunch of people in the audience that want to address the
Fiber Business Plan. Can we interrupt this and finish this after Fiber Business Plan? I agree we
should make a record here of .....
Beecham: For myself, I’m happy just to sit down with Staff and go over these comments as
well. There is no need for me to do it here publicly.
MOTION
Ferguson: Would you be willing to put together the same memo as Commissioner Dawes? If
you are willing to do that then let me propose that we just have a motion to approve the Staff
report here with the understanding that the Staff will to the greatest extend possible reflect in the
written document to Council the comments and additions made by the Commissioners tonight,
and to the extent they can’t be incorporated into the bullet points per se, that you just do a good
job of excerpting the minutes for the benefit of Council. I’ll make that motion.
SECOND
Rosenbaum: Second.
Ferguson: Any other comments? All those infavor? I’m sorry, Commissioner Dawes had a
comment.
Dawes: Could you restate what the status of these appendages are, Council Member Beecham’s
and myself?
Ferguson: Yes. The understanding here is you are going to prepare a memo reflecting your
comments as well as the comments that we didn’t get to tonight. And it will be appended to our
recommendation to proceed to Council with this. We are inviting Staff to incorporate them
directly into their materials and to the extent they can’t
Dawes: I will vote aye to the motion.
Ferguson: Any other comments?
Public Speaker: Are you accepting public comment?
Ferguson: Public comment on the Strategic Plan?
Utilities Advisory Commission 15
Public Speaker: Yes.
Ferguson: Fine.
Arthur Keller, 3881 Corina Way, Palo Alto: I’ll be brief. A couple of comments. First of all I
didn’t hear anything about conservation the whole discussion tonight. I think that should be
conservation - reducing usage - saving energy. That should be an important part of what you
are talking about.
Second thing is about distributed generation, I didn’t hear anything about the impact on the
environment of distributed generation.
The third thing is the City Utility is very good about having a process of electric generation
through solar power. I actually did some research on that. I found out I could put 8KW on my
house. It would cost me net of the four dollars a watt that the City will give me as a rebate,
$50,000 to do so. I don’t know how many decades but at least it was more than the life of the
house is expected to be till I receive that money back in reduced energy cost not withstanding the
expected increase in electric charges. I think things like that might be considered since the
process of solar power has a great benefit toward shaping the load as was mentioned earlier
tonight. Thank you.
MOTION PASSES
Ferguson: Thank you very much for your comment Mr. Keller. Okay let’s see if we can wrap
this. All those in favor of the motion? (ayes) It passes 4-0.
Rosenbaum: For Mr. Keller’s benefit I don’t know whether you had an opportunity to look at
the report but strategy seven does address exactly what you say, implement programs that
improve the quality of the environment. How this gets worked out will be part of the
implementation but it is certainly included here.
Mr. Keller: Thank you Mr. Rosenbaum.
Ulrich: May I just make a process statement? It is important that your participation and support
be heard at the City Council meeting. I will commit to giving you a copy of the recommended
changes from Mr. Dawes and Mr. Beecham and others that you might have and put those all
tbgether before this is all finalized and send it to you so you can have a good idea of what is in
the report. You would even have an opportunity to give me comments back before we finalize it
and put it in the CMR so that you see what is reflected in your comments. It is important that
you feel comfortable with it and that we are representing the views that you have.
Ferguson: I’d like to propose that we take a strictly limited five minute break here. We are at
the two hour point. But before we do, for the members of the public that v~ish to speak, I have
one note here from Arthur Keller on the Fiber project. We are going to have a slide presentation
of the revised Fiber Business Plan. Would you like to comment before that or would you like
public comments after you see the slide show? After the slide show? Okay. Let’s take a strict
Utilities Advisory Commission 16
-five minute break here and we’ll start with the slide show on the Fiber Business Plan.
you.
BREAK
Thank
Utilities Advisory Commission 17