UTILITY ADVISORY COMMISSION MINUTESBechtel: We have 4 Commissioners present. Mr. Carlson is absent. ORAL COMMUNICATIONS Bechtel: Next item on the agenda is oral communications and

UTILITY ADVISORY COMMISSION MINUTES JANUARY 9, 2002

ROLL CALL _____________________________________________________________________ 2

ORAL COMMUNICATIONS _______________________________________________________ 2

APPROVAL OF MINUTES_________________________________________________________ 2

AGENDA REVIEW AND REVISIONS _______________________________________________ 2

DIRECTOR OF UTILITIES REPORT _______________________________________________ 3

UNFINISHED BUSINESS __________________________________________________________ 6

NEW BUSINESS __________________________________________________________________ 6 RECOMMENDATIONS ON ELECTRIC TRANSMISSION ALTERNATIVES _______________________6 RENEWABLE PORTFOLIO REPORT_______________________________________________________12 ALTERNATIVE EMERGENCY WATER SUPPLY STUDY 5A __________________________________28

NEXT REGULARLY SCHEDULED MEETING ______________________________________ 30

ADJOURNMENT ________________________________________________________________ 30

ROLL CALL

Chairman George Bechtel called the meeting to order at 7pm. Present are Commissioners Dexter Dawes, Dick Rosenbaum and Rick Ferguson. (Dick Carlson arrived later).

Bechtel: We have 4 Commissioners present. Mr. Carlson is absent.

ORAL COMMUNICATIONS

Bechtel: Next item on the agenda is oral communications and I don’t have any indication of anyone wanting to speak.

APPROVAL OF MINUTES

Bechtel: So the next item is the Approval of Minutes of the Utilities Advisory Commission held on December the 5th, 2001. Any comments or corrections to the minutes?

Dawes: Move acceptance.

Rosenbaum: Second.

Bechtel: Motioned by Mr. Dawes. Second by Mr. Rosenbaum. All those in favor of approving these minutes say “aye.”

Commissioners: Aye.

Bechtel: All approve.

AGENDA REVIEW AND REVISIONS

Bechtel: Item #4, Agenda Review and Revisions. Mr. Ulrich?

Ulrich: Just a slight change, I recommend under new business that we switch items 1 and 2 and put #2 first. Don Dame from the NCPA in Roseville is here as part of that presentation and I’d like to have that earlier so he can depart for Roseville tonight.

Bechtel: That’s great. Any comments? That’s a pretty good idea. Before we start, we’d like to thank the staff for putting together, even though we had a pretty tight crunch, putting together this program on such short notice. John any comments from someone before Don?

Ulrich: I can give you just a brief record report under item # 6 if you’d like to move to that? Unless you have some Commissioner comments.

Bechtel: Yes, I think other than the review by Mr. Dawes of your newly-released CD, we will pass on that.

S:\UTL\OldH\U A C\UAC 2002\2002 January 09\Minutes\Final Minutes 010902.doc

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DIRECTOR OF UTILITIES REPORT

Ulrich: I’ll look forward to that report. Thank you. Just briefly, as you know, we’re in thisroom because of the other 2 rooms were occupied and this meeting is not being televised to thefar reaches of Palo Alto. We expect to go back to that when we go back to our normal room. The meeting is being videotaped. Dee Zichowic is here to make sure the recorder records everything. So keep in mind some of the limitations we have this evening and speak up. We’ll be able to record it.

Bechtel: Is the audio going okay so far? Let the minutes show that Mr. Carlson is here.

Carlson: Finally found his way here.

Ulrich: Very briefly, a couple things that from the last meeting. One, we’ve had gas rate increases, and many of our customers have seen the impact of those increases this month. We’vehad good communication with those who’ve had questions. We have a number of people applying for assistance and also for the lower rate that is available for people that have lower income based on the income guidelines -- which earlier last year were raised to a higher incomelevel so more people qualify. So that’s been help. The good news that is coming along is that we’ve finished, I think today, the purchases of gas for ’02 and ‘03 and will be able to look at our forecasted prices versus the price we’re actually paying, and be able to come back, we believe in March, with a recommendation at the UAC meeting for changing the gas rate down. Taking into account the amount of money going into reserves, we’ll be able to look at our reserve minimumsand use some reserves to be able to help the gas rate decrease. We’ve also had communicationwith the media with the articles in the newspaper explaining to folks about our programs and things they could do. And we’re also re-emphasizing that over the last year, if you look at theprice of gas in Palo Alto versus PG&E in utilities bills, there’s about a $500 in savings per resident for the twelve months combined. So if you look backwards, there is significant benefit. The difficulty right now is the price of gas on the spot market basis that PG&E passes on is lower than our average. Customers that I’ve talked to and others have been understanding of the issues, and actually have been supportive of the things we’ve been doing.

Bechtel: John, have you said anything to the media about the review of the rates in March?

Ulrich: Not specifically in March. We’ve talked about the annual budget and rate review and when we talked to the media a couple days ago, we had not finalized our gas purchases. It’s important that when we say March, we’ll be coming here to UAC. We’ll be able to makerecommendations to the Council after that meeting, probably by April.

Dawes: I have a question John, basically related to something raised at the last meeting about a possible contractual liability from the termination of the Enron gas contracts. You’ll be able todiscuss that and any retained risk you see, when we address this rate decreasing issue.

Ulrich: Yes we can talk about the risk side of that supplier contract, but there’s always a risk associated with terminations and we have to factor that into the reserve calculation.

Dawes: Yes.


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Ulrich: We’ve had meetings with the Santa Clara Valley Water District regarding some of the operations plan and emergency CIP work and those were quite favorable. They understood what we were doing. Carollo Engineers are also the engineering firm for the Santa Clara Valley Water District, so they’ve already started communications with them about our groundwater pumping plan, with additional wells we’re going to put in and also the storage that we’re talkingabout. There’s more to come, but I wanted to emphasize that we’re going to have thosediscussions so there’s no surprise. As time goes on, we should be able to assume that others continue to know about our plans. We can discuss more of that when we get to item #3 on the agenda.

We’re going to have the strategic planning meeting with NCPA. We’ve had preliminarydiscussions of the agenda with the Utility Directors and with the staff at NCPA. So we’ll be prepared for that meeting on the 23rd and 24th in Sacramento. We’re going to focus on what’s been completed in the strategic plan for the NCPA plan for last year. We’ll do a report on completion. We’ll look at what our present critical important issues are, prioritize those and complete the areas that should be worked on this coming year. This should give a good direction to the staff and to all the members of NCPA on what we’re going to do. That should be a really good 2 days.

The PG&E bankruptcy: the U.S. trustee has denied -- the cities and counties, including San Francisco and several rural counties in California and the city of Berkeley -- denied their request to form an official “governmental bodies” committee in the bankruptcy case. Palo Alto will to continue to try to represent their interests as well as others in the official committee of unsecuredcreditors.

Dawes: Any information on the PUC requests on PG&E’s Reorganization plan?

Ulrich: I just read today that Chairman Lynch does not like that plan. It takes away a lot of control from the state. We’ll have to see where that goes. Palo Alto is preparing to file, we’re preparing today as we speak, our further objections to the disclosure statement from PG&E and objections to the plan of reorganization based on PG&E’s apparent downplaying with less-than-candor about concerns that we continue to voice about the plan. So the opportunity is to provide those objections to the disclosure statement and that will be done by tomorrow.

Dawes: Are these muni-specific or are they more generalized, that all creditors share?

Ulrich: I would say that they are very much focused on Munis. Most of the areas are of interest to creditors in the sense that they have money owed and we’re looking at longer-term contractual relationships including the interconnection agreement. We’ll talk about that. I mentioned a littleabout the lack of anything else on Enron. The COBUG has been completed. Karl just indicated to me a few minutes ago that he just received the letter from the Bay Area Air QualityManagement District. We have a permit to operate, so it’s no longer just a back-up.

Knapp: Technically, it’s the invoice.

Ulrich: We pay the money. So is there more on what we’re going to be authorized to permittedto do with the 2600 operating hours per generator per year.

Dawes: What percentage is that? 30%?


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Carlson: Yeah, that’s a big number.

Ulrich: That’s quite good and that’s the advantage of having the generators. It’s not the greatest time to be generating.

Carlson: The pendulum swings.

Ulrich: The generator is managed by Scott and his organization and they’re all ready to go. Karl is looking at a time where we can put together a trip out there so we all have a chance to see it.

Dawes: At a later meeting, we’ll have some guidelines on what the plan is in terms of operations. With the wonderful equations of crossovers, heat rates, price per kilowatt-hours, and so forth.

[laughter]

Ulrich: Sure, Dexter. We’ll do that. I’m not going to bring that subject up anymore. I’m sureyou all read the paper. There was a really good article in today’s Weekly about the water mainbreak we had last week, and the initiatives we took to try to make the best out of a bad situation. I’m very pleased with the staff who made arrangements to/from facilities and water and offers to put people up in hotels. Currently, as we speak, we have another water break by a contractor over at Embarcadero and St. Francis. It’s a very large gas and water line break. They’ll beworking on that for many hours. It’s a continuation of contractors putting holes through our water lines.

Bechtel: Can we bill them back for that?

Ulrich: Of course, but it’s not enough, though.

Bechtel: Do we bill them back on formula?

Ulrich: Basically on cost

Bradshaw: We bill on actual cost of the repairs. There’s no kind of penalty involved, although we have discussed other ways to penalize them in a different formula based on actual cost ofrepairs and damages to existing operations.

Dawes: You’re going to put an overhead rate on it?

Ulrich: Well we have the normal overheads.

Dawes: But it just costs nothing but about $400?

Bradshaw: It’s a man hour rate which includes time and materials.

Ulrich: That’s my summary report.

Bechtel: Thank you. More questions for John for the 6th item?


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UNFINISHED BUSINESS

Bechtel: Let’s move to unfinished business. I guess we don’t have any unfinished business so moving on to item #8, New Business.

NEW BUSINESS

RECOMMENDATIONS ON ELECTRIC TRANSMISSION ALTERNATIVES

Bechtel: We’ve got 3 items here and all of them involve money in one sort or another, as I look at this. All require some fine and careful judgment on our part but two of them are InformationItems. I’m not sure how the alternative study gets to be an action item, but maybe when wecome to that, you can describe it. Let’s move to Recommendations on Electric TransmissionAlternatives. That’s a very complex issue. I read through the report and I must say that I’m not sure that I understand all that is in there. I think that we should be grateful that Don has comedown tonight. He gave us a fairly good overview and actually a lot of details at, let’s see, it was the November, or October meeting.

Ulrich: You’re right it is a very complex issue and it’s not one where we have all the answers tonight. This is why it’s listed as an information item. But you’re correct that Don was here back in October. For many of you when we were at our annual meeting, he had an opportunity over breakfast to give us a sketch of what complications he felt we were doing. So he’s back this evening along with other members of Palo Alto staff to talk about this because we’re going to be faced with, in a very relatively short period of time, probably over the next 30-90 days, to have your contract agreement or ratification of some document that would determine what we’re going to do with our interconnection of transmission. This evening is in preparation for taking this document to City Council on Jan. 28th as an information item, so there is some morecommunication with the rest of the public in Palo Alto on what the electric transmission serviceoptions are. Many of these are very complicated.

What we’re trying to convey through this evening and through to the Council is that regardless of what happens to the Interconnection Agreement, although it will expire on March 31st, we will not have service interruptions or a change in reliability.

There is not extreme pressure to make a decision or to select one of the options in the next few days. But the intent is, and I’ll get more into this, is that we’re following the path of severaloptions simultaneously so that we can recommend and follow one that is in our overall best interest. You recall, we had discussions during our budget and rate analysis for the increase last year, what it included, and it did include anticipation of transmission cost increases. In thescenario options laid out here, we do not anticipate that there will be a need for a rate increase in the foreseeable future to pay for the additional cost of transmission service.

Dawes: Actually, John, getting back to the gas rate decrease. We had raised electric rates fairly substantially a few months ago to deal with the Enron numbers that were starting to come in. With the extinguishment of that obligation and the continuation of the Western situation, would we be looking at a rate decrease for electric as well as for gas?

Ulrich: Well I’d feel more comfortable in waiting until I understand more of the issues here andalso of Enron and our future electric portfolio commitments. Where are we going on electric?


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That will come at an appropriate time -- I want to get that part across. You’re welcome to ask questions throughout this and I would suggest that we have Girish and Don go through the high points. But I wanted to give you some of the bottom line here so you wouldn’t feel compelled to make a rushed judgment on one of these options.

Dawes: Come budget time on April 1st, we’ll be looking at a different set of numbers. We don’t really know what.

Ulrich: I think we should probably go through these options and talk about the end game in the State, if it’s going to go up for some [inaudible].

Dawes: I don’t see it resolved for months or years.

Baladchandran: I think you’re right. Some of the costs will be determined after the fact. I think we were trying to look at different perspectives. This is an agreement we’ve had for years. We’ve never been in a situation like this where a long-term transmission agreement has noresolution 3 months before we have to move into another frame of operation. Now the positive news -- and Don will get into this some more -- is as far as service continuity is concerned, thatis being taken care of. There’s not going to be any kind of break in the physical sense.

Dawes: When you say, “being taken care of”, who’s taking care of it and how?

Baladchandran: Well, electrically, no switch gets pulled because the contract expired. Althoughthere is no contract, power continues to flow, and as you go to the [inaudible] to operations to a contract with associated costs, there are operational protocols that have to be followed. Don and NCPA have been very active on working with the ISO. They had a meeting with ISO and they continue to meet with the ISO to develop options on the operational protocol. So things will work out.

Dawes: How about maintenance and the manpower? I mean is PG&E not threatening to pull people from the substations?

Baladchandran: No. This is purely a cost allocation issue between PG&E and ourselves. There are some operational issues on reliability, depending on what kind of agreements we sign with the ISO. It could be protocols related to blackouts, whether they’re economic blackouts or reliability blackouts. Those would be details we’d have to deal with in any kind of agreement.We don’t know who we’re going to be entering into an agreement with. We have 4 options welaid out in the report. All 4 will be pursued at this point. They have different timelinesassociated with completion but this, we believe, gives our options the greatest flexibility. On the cost side, we have budgeted for an increase in ISO cost; we don’t expect any rate impactright away. There will be a cost impact but not a rate impact to us. At this point, I’d like to turn to Don to talk a little about the details of what is being worked out with the ISO right now. Afterhe’s done, we’ll come back to handle questions and talk about what we can do for the Council session.

Dame: Good evening, Mr. Bechtel, Commissioners. Again, it’s a pleasure to be in Palo Alto. To pick up a little bit where Girish left off, also following through a little bit on the presentation review of last October, kind of an update of what’s the status. Operationally, it will be continuity of service as Girish said. Nobody will come here with full breakers. This is a contractual issue,


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a dollar issue and not a physical service issue. So I’m a customer here in Palo Alto and whatUAC concern is someone is going to call me and ask me why the lights aren’t on. That will not happen, at least not for any reason related to what we’re doing. Recall that PG&E filed toterminate the Interconnection Agreement. That was filed at the Federal Energy Regulatory Commission and the FERC has not yet acted even though the termination is proposed to beeffective on April 1st of this year. FERC has until March 31st to act. That doesn’t give us a lot oftime. One possible action that FERC can take is to reject PG&E’s filing outright. Those are thecomments that we made in the intervention that we filed in this case. We said that PG&E wasn’t being responsive to its Stanislaus commitments, which required firm service provisions to Palo Alto and other neighboring entities through 2050. That has not yet been formally litigated in any action by FERC. So we’re stuck in a situation where we don’t want to take steps that we can’t retract if indeed FERC were to act and reject PG&E’s filing. Some of the steps that we will need to take require actions that we can’t withdraw from. So we’re trying to kind of walk both sides of the line at the same time. To finish on FERC, one of the things we’re contemplating doing probably in the next 4-6 weeks is having a workshop in Washington DC where PG&E, the NCPA pool, Silicon Valley Power -- which is in exactly the same position contractually that the NCPA pool is -- the ISO and the FERC staff themselves. Get down and have a workshop. It attempts to convey to the FERC staff, and ultimately to their Commission, the need for swiftaction, which almost sounds oxymoronic at this time because in the electric utility industry less than 90 days is virtually no time at all. Normally, we would have had something like this all tidied up, signed, sealed and delivered 6 to 8 months ago. We’d know almost a year ahead of time what we’re going to do. So that takes care of the FERC action.

As a backstop, we have been dealing directly with the ISO. These negotiations have been movedforward lately by SMUD’s activities, setting up a separate control area. This tends to be a threatto the ISO because it removes a lot of load from Northern California, from their purview, where they would otherwise be able to tack on some of their overhead cost, and weakens their argumentto be the control area operator for all of Northern California. So SMUD has given us, has given the ISO, a little bit of a push in pursuing that and it gave one of the options that we in Palo Altois pursuing is potentially joining that separate control area. This is an issue because we are a mesh in PG&E’s grid. We’re pursuing it, but it’s not a near term solution. That’s not a viableoption for April 1. It’s a much longer-term objective, which would put us back in control regarding control area operations using the grid in a way that meets our purpose under the known circumstance. With the ISO, which is the only game in town, there is no other control area operator in California so we’re all captive customers in that regard right now.

We’re working out an arrangement whereby we can do in their parlance kind of an aggregated metered subsystem, very similar to what we do now. We basically scoop up all the pool members together, add up their total loads, commit to the appropriate amount of resources tomeet those loads and then we settle what we call the imbalance when we’re not exactly meetingthose loads. We settle that imbalance on an aggregated basis, not individually for Palo Alto, Roseville, Lodi, Healdsburg, etc. We do it on an aggregated basis as a fairly significant benefit to pooling.

Now the ISO -- as we speak, and we’re going to meet with them Friday -- intends to have eithersome form of contract available for approval by the ISO Board at the February 7th ISO Board meeting. That’s quite a fast pace for the ISO. The meetings that we’ve been going to over therehave on the order of 20 ISO staff members. So we’ve got their attention over there, that there are a couple of significant issues we’re working on. I think we’ll have a workable solution. In the


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event that we do not have a workable solution, we will have a bridging arrangement with the ISO. All of our power plants to date have ISO-compatible meters and they see the output ofthose plants in real time. All of our loads are separately metered, but they’re not all ISO-compliant meters right now. The bulk of them are Western meters, but they are revenue-quality meters. And we have communications established with the ISO as we speak where they can see the output of our power plants and the loads placed on those power plants simultaneously. AsGirish said, one of the steps that we did take years ago was to set up our own schedule coordination capability. We performed that with ABAG, we’ll do it with Silicon Valley Powerauthority and a couple of other entities. And we can use that ability as a schedule coordinator to submit schedules for resources to the ISO.

There may be ultimately some litigation down the road if we don’t have an established bridging agreement or an interconnection agreement by April 1st should that be an avenue that we take.The ISO may send us invoices. We may protest those invoices. There will be an argument. It’ll be a legal argument, not a physical power flow argument. This is kind of unsettling to me. I like to feel like I have more control over what’s going on. Unfortunately, the options here are quite limited, and as Girish said, I think we’re pursuing every feasible option there is out there with theidea of trying to find an arrangement that gives us the most control and the most protection from charges that the ISO tends to like to spread out. (They call them “peanut butter” charges: spreadthem out to all the participants in the control area). And what we suggested to them is we don’t mind paying cost that we caused you to incur (it’s called “cost causality”), but we don’t want to pay costs that other folks are causing you to incur. So the structure that we’re proposing with them -- and they seem quite receptive to this -- is one that compensates them for all the real workthat they do for us, and insulates us from the work and the cost that they perform for others. So with that, I’ll hand it back to Girish who will be glad to respond to any questions.

Baladchandran: I think the only thing I have to add is the NCPA pool has sent a letter to the ISO placing us with a contingent application to actually turn over our COTP transmission to ISO. If you want to join the ISO as a participating transmission owner you have to turn in your application by December 31 or June 30 for joining 6 months later. So NCPA sent a letter with alot of caveats in it saying there are a number of negotiations going on, that this letter did not permit any of the individual pool members to join in, that those decisions will have to be madeindividually by the cities themselves. That is part of one of the options, Option B, that’s another action that was taken.

Bechtel: Mr. Dawes.

Dawes: Is NCPA now acting for Santa Clara and SMUD in this regard? Are we all on parallel paths on this? How does this work?

Dame: SMUD is a little different. It’s establishing itself as a control area. They hope to havethat function up and running by May 1st of this year.

Dawes: So they have their own lines but they also use some of PG&E’s?

Dame: Yes. And SMUD is electrically an island; it can very much insulate itself with theexception of some lines that go into the Santa Clara system. We’re kind of like a scatter diagraminside PG&E’s service territory. Silicon Valley is on an identical path than we are. PG&E, they have a separate Interconnection Agreement with the NCPA pool. Almost identical and it, too,


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now ends in FERC action and will terminate on April 1. Discussions with Santa Clara and theyare involved in the negotiations for the last couple of weeks with the ISO with us. They will useNCPA schedule coordination function along with the pool. We will do that, in fact, what will end up happening is we will pool with Santa Clara.

Dawes: They schedule their own now?

Dame: They schedule their own now. They will use NCPA to schedule. We won’t prepare their schedules for them. They will prepare their own schedules. We will add them up with theschedules we prepare for the NCPA pool and submit them all at once. The ISO sees from us as a schedule coordinator, just supply and demand. They don’t see any of the entities that are behind us aggregated together.

Dawes: It’s not likely or it’s not possible, I guess maybe it is possible, that we will go ourseparate ways and end up by, in effect, negotiating against each other?

Dame: I’d say there’s a nonzero probability of that happening.

Dawes: In the best of both possible worlds?

Dame: I don’t anticipate it. We’ve been working very closely with Santa Clara. Their difficulties and dilemmas and options are virtually identical to ours. At this juncture, we’reanticipating that possibly 1 to 3 Santa Clara staff members might actually locate in NCPA forsome period of time to make sure they can make sure they can take care of their schedules through our schedule coordinator. [inaudible] and it remains to be seen, coming out of this I think probably a very positive thing is a much closer relationship between Silicon Valley andNCPA.

Bechtel: Dick?

Rosenbaum: Historically the Munis have been struggling and opposed to joining the ISO presumably because the overhead costs in the ISO are too high. Is this still the current situation?Has the ISO responded by reducing costs?

Dame: Well, there are two answers to that question. The first answer is yes and the second answer is no. Yes, we still think that the ISO costs are too high and if we had a better alternative,we would be pursuing it demonically so to speak. The ISO is really not doing a great deal to control costs. In fact, in their newest round of budgets, they’ve asked, I believe, for another 50 employees over there. So they will have approximately 700 employees to do a job of what wethink should be somewhere in the order of 200 and 225 employees. I recall that when, maybe I didn’t cover this the last time, we had a consultant on behalf of all the Northern California Munisdo a control area feasibility study and they concluded that the cost of performing control area functions -- not all the generation plant that is necessary to do minute to minute load following -- but just the overhead, the communications protocols, the dispatch center and all the staffing that goes along with that should cost on the order of .30-.40 cents a megawatt hour. To take care of those control area operating functions, the ISO as we speak, is somewhere in the $1.80-2.00 range, so off by a factor of 4 or 4.5 or more to what we think those costs should be. Unfortunately, we’re not in the driver’s seat in being able to compel the ISO to change its ways.


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Bechtel: Mr. Carlson.

Carlson: I’m curious about who’s going to end up owning the PG&E transmission assets, as I’m sure you are too. As I recall it, there was a proposal for the State to buy it and that died in thebankruptcy. What’s likely to happen here? Are they going to spin that off? What are they goingto do with it?

Dame: As we speak, if their plan of reorganization goes through, it will go to the main PG&E corporation in an outfit they’re calling right now as “Etrans” and so PG&E proper will stillcontinue to own that transmission system and ostensibly will charge cost-based rates to the usersthroughout that grid. One of our primary objectives is to buy a load ratio share, buy or get ownership type rights for our load ratio share of the PG&E transmission system. One of the things we’ve been talking about internally (if we would have done this 10 years ago, we didn’tthink it was necessary, we wouldn’t be in the situation we are right now. We would’ve had our transmission. It would have been shielded from ISO controls) -- we could jump in with SMUD’s control area based on that ownership of that load ratio share and be quite insulated fromthese other world happenings so to speak. So in trying to be forward looking, I think that’sprobably our best long-term objective is to somehow secure ownership type rights. We do nothave those now.

Dawes: How does that fit into an RTO set up? I mean, if the RTO thing does come to pass in a year or two or four, would that obsolete the need of this regional SMUD controlled subgroup of Northern California doing all the transmission?

Dame: It may, but not necessarily. A regional transmission organization basically sets up therules and protocols for all the sub control areas to conform to within a defined region. So a regional transmission organization would be the entity that controls the transmission grid,defines how it’s expanded, etc. But wouldn’t necessarily limit that region to one control area only so a SMUD control area or a SMUD NCPA, Modesto control area could well fit into an RTO.

Bechtel: Does the PUC and the Plan of Reorganization of PG&E, the bankruptcy or any ofthose, do they have any say on whether we can buy a load share or the RIA other than FERC? Does anybody have to pass judgment on the RIA other than FERC?

Dame: The IA is FERC’s jurisdiction. Now there have been some discussions recently about perhaps some type of eminent domain, some type of condemnation proceeding, which wouldtake place in California to compel PG&E to sell us a load ratio share. This almost sounds, it’s an area where we will have control. We would initiate the action. Public agencies do have a preference for control over facilities they use to perform a public service in California. If we dothis in the context of a friendly condemnation, any monies that PG&E received over and abovebook value as long as they invest them in similar facilities over a 3-year period would not be subject to tax. So in some measure, it would help PG&E liquidate their obligations to theircreditors. Now PG&E has continuously through today been obstreperous in its proposition to sell municipals a load ratio share of transmission.

Bechtel: Any other questions? Good. I think this is going to be a complex issue to take to the City Council and so.


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Ulrich: We were hoping this presentation would prepare you, not to convey full knowledge of every idiosyncrasy in this, but to show that we’re thinking about this and on top of this. We’relooking at all the alternatives and this stuff isn’t escaping us, and not that we’re not aware of it. The other part of it is to give some assurance that we’ve considered these costs in our rates and that in the short run this is not some impact to our customers- that they’re going to see it in theirutility bill.

Bechtel: Well I think when you introduced the subject, John; you did a good job at distilling the nuggets of what the issues are. Good, thank you. Yes Girish?

Baladchandran: Since this is an information report going to the Council, you won’t even be presenting those nuggets. It’ll just be a report.

Ulrich: We can just mail it to them. You know the process that goes in the package, but wewould obviously be pleased if we had more information. If you have any recommendations, have additional information or things that we haven’t covered, I’d like to hear that from you also.

Dawes: Just one additional question. I agree with the $1.80 mentioned as a number. I’m looking at these tiers here. I don’t know if we’re talking about gigawatts, years, hours.

Baladchandran: It’s a unit.

Dawes: It’s a unit. So it’s consistent with these units.

Baladchandran: Before we close up on this issue, I’d like to introduce Shishir Mukherjee, who is the Resource Planner who contributed quite a bit to this report. Thank you.

Ulrich: Thank you very much. And Don, thank you for coming down.

Dame: Thank you. Thanks, folks.

Ulrich: Your public speaking is very clear to everybody.

Bechtel: We’ll see you at the NCPA meeting later this month.

Ulrich: We’ll be talking before that.

RENEWABLE PORTFOLIO REPORT

Bechtel: The next item on the agenda is Renewable Portfolio Report, an information item and I guess you have a lengthy report with backup material and so on. We had been talking about thisfor some time. Again this is one in which it seems to me to be where the staff could use our guidance and comments on the range of possibilities to build a commitment that the City should make to adding renewables to our portfolio, so with that, Karl are you ready to lead the discussion or Girish?

Ulrich: I think we’re kicking it off in just a minute just to make sure we have a clear objective on what we’re trying to do this evening. As you pointed out, this is a follow up to a report and


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materials that were given earlier and also approval of guidelines that were given in February2001 to fill and anticipate post-2004 electric supply deficits.

As a part of that, we believe we should clearly explore utilization of renewables as part of that portfolio.

At the earlier meeting there was a lot of discussion about how much renewables and what they would be and their cost to provide electric energy to our current type of power supply. So there’s an attempt here to put all of that in perspective, but I think the value of this report will beto point out alternatives and to start the dialogue with the community and the City Council about what level of renewables we should have in our short and long-term portfolios. And obviously it’s a report at this point because coming in March, we want to come back to talking about ourlong term portfolio for supply so there doesn’t need to be a decision tonight, but we want you to thoroughly understand all the alternatives. Karl’s report is right on top of that.

But we want feedback at the end of this. What’s missing? What is it that we’re not thinking about or areas we should focus on? Because we would like from this meeting so we can go out and talk to our customers and have meetings and discussions on what is here, so when we comeback to the City Council with our portfolio plan, we have this considered. Even though we maynot have all of our renewable portfolio in place because March is very far away, we should have a very good understanding of the concerns and issues. So feel free to ask those kind of questions and also give us feedback on what is missing. We started to think about what this kind of balance point to strike.

[inaudible comments by several people talking at once]

Baladchandran: Well, Commissioners. Those are the kind of comments we want to hear.

Ulrich: Yes…

Dawes: Well, I have a little speech for later on.

Baladchandran: In the interest of saving time, I won’t comment. Karl probably can go through the presentation and will resolve the differences; there are a couple of differences between the presentation and report.

Ulrich: Well Dr. Knapp, it’s all yours.

Knapp: Well actually I thought I’d start with the end in mind and put the last leg first. Like John said, I’m going to review some of the analysis, I’m talking about slide #2.

Dawes: It’s the same as the last one?

Knapp: Right.

Ulrich: Does everyone here have a copy of this?

Knapp: There’s a pile of extras back here if not. As I’m going to review some of the analysis, you can just follow on our last meeting where we went over most of the cost and some of the


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trade off issues. As John said, it’s an information discussion. There’s no specific action required here. While I did save these questions to the end and these are questions that I personally, as well as the rest of us on the staff, have in mind, we’d like to solicit your input aimed at basically identifying the right strategic questions and have a way to identify pertinent analytical andcommunity questions to help answer those questions.

The report lists proposed strategies and guidelines that have specific numbers in them. Those are meant to stimulate discussion -- they’re not the recommendation at this point. They are examples of basically existing options you’ve seen in other portfolio presentations. It comesalong in the process of recommendation and is really primarily to get a discussion launched, to be examples. We really don’t have data or support and specify what is the “right” level we want to target both for supply content or spending levels. For slide 3, we’ve prepared this fairly detailed analysis of renewable resource options, which are presented in the attached longer staff report. It describes the motivation, status, technical and economical evaluation, a review of outside activities beyond Palo Alto and some proposed strategy and action plans for actual investing in energy efficiency and renewable supply options for the Utilities Supply Portfolio.

Throughout this whole discussion, the term renewable resources is used a little loosely. It refers to both renewable energy supply from sources like wind or solar and also demand side management, including energy efficiency and load management. So what I’d like to highlight is mostly the motivation and our proposed plan leading into discussion. Also, I do want to touch on our current status and some of the key points from the energy resources scorecard, which was a term coined in the last meeting, kind of a report card for different technologies, which I think should make for some excellent discussion at the end.

Motivation. Staff (all of us) recommend that renewable resource investment strategy should provide energy supply alternatives consistent with the comprehensive plan, also involving City Council directives embodied in the City Sustainability Policy statement and in the Utility Strategic Plan and Primary Objectives in Developing Electric Supply Portfolios. And finally customer preferences which are part of the Future Green Rate program. And as I mentionedbefore, both Demand Side Management and Clean Energy Supply apply, so “negawatts” and megawatts can all be cost effective if both are in place in this resource portfolio mix.Sustainability is a major theme in quite a few City goals, policies and programs. This is theCity’s adopted formal Sustainability Policy statement which was adopted April 2, 2001. It says:

It is the intent of the City of Palo Alto to be a sustainable community – one which meets its current needs without compromising the ability of future generations to meet their own needs. In adopting this policy, Palo Alto accepts its responsibility to:

Ensure the continued economic, social and environmental vitality of the City of Palo Alto;Protect the quality of the air, water, land and other natural resources;Promote and support the conservation of native vegetation, fish, wildlife habitat and other ecosystems;Minimize human impacts on local and worldwide ecosystems.

So renewable resources offer opportunities to meet both near-term and long-term supply electricity needs for Palo Alto and it represents a mechanism, which can economically advance Palo Alto’s Sustainability Policy and its related goals. On slide 6, it talks about sustainability asembodied in the Comprehensive Plan. Recognizing that conventional energy supplies and their


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consumption continue to have global, regional and local environmental impacts. TheComprehensive Plan has this Goal N-9, which reads “A clean, efficient, competitively-pricedenergy supply that makes use of cost-effective renewable resources.” And I’ve also listed theseother 3 policies that are pertinent to energy and sustainability. For reference, I actually have theentire energy section of the Comprehensive Plan as Appendix A in an attachment to the report so you can see everything that is said about energy in that section. That’s the main point of that slide.

Bechtel: Karl, can I ask you a question about the Comprehensive Plan? Do you have access or is there a supporting discussion summary and so on of the Comprehensive Plan committee that put this together? Is there background information? The plan is so evolved and it’s had variousversions of it. I’d be just curious myself as to whether there are background discussions on someof these topics or did somebody just decide to throw it all in and have no discussion at all?

Knapp: John?

Bechtel: Dick, you would be familiar.

Rosenbaum: City Council has spent over a year working on this and the fact that it says “cost-effective” -- I might have introduced those words. There was a lot of discussion. There surely was very little thought on what it might mean, depending on who interpreted it. That’s thesituation that we’re in right now. Comprehensive Plans tend to have a little for everybody.

Baldschun: UAC was involved too.

Bechtel: Thank you.

Knapp: In support of the City sustainability goals and policies, the Utilities’ Strategic Plan specifically identified Key Strategy 7 which is “implement programs that improve the quality ofthe environment”, but I also stress that “besides improving the environment, investments inenergy efficiency and renewable resources also have the potential to meet basic resource needs,reduce risk, and meet customer preferences”, which means they also meet Key Strategy 2 “Preserve a supply cost advantage compared to the market price” and Key Strategy 4 “Deliver products and services for competitive markets”. Of the four Primary Objectives in Developing Electric Supply Portfolio Plan that was approved recently, the fourth specifically states, “Balance environmental, local reliability, rates and cost impacts when considering renewable resource and energy efficiency investments.”

This objective is a critical first step toward defining “cost-effective” for renewable resources, stipulating that reliability and environmental implications should be included too, not just direct financial cost. This balance is important because most renewable resource alternatives, as you saw before, continue to be more expensive than conventional alternatives with conventionalgeneration technologies. So the point of that series of slides is that sustainability and energy efficiency pretty much pervade a lot of different policies in the City. It’s a City Council directive which energy efficiency and renewable resources can actually do something about. That’s why we’re actually pursuing this in the trade off that we were talking about in the last meeting.

Status. Now the next chart, what this illustrates is this is the Power Content Label for Palo Alto and California system mix in bar chart form - the percentage by each generation technology that


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generates electricity that is provided to our customers. Palo Alto uses the California EnergyCommission definition of renewable energy for it’s purposes which includes biomass, waste energy, winds, solar, geothermal and small hydroelectric. Small hydroelectric meaning less than 30 megawatts. In 2001, as you can see eligible renewable energy resources constitutes about 6% of the electricity supply for Palo Alto. Out of the 6%, 1% comes from the small hydroelectric purchases that are part of Western purchases and the other 5% come from the bulk mix that is credited with the California Mix percentage. The California Mix is 12% or the share of renewables is 12%. Palo Alto only has, well last year, half of the eligible renewables content also has half a share of fossil fuels and half a share of nuclear compared to the state average mix.The large hydroelectric generation, which is over 30 megawatts, is Palo Alto’s largest powersource and it is not considered a renewable resource by the CEC. Of the 62% of the large hydro, 54% of that 62% is from direct purchases from Western and the rest is from the California Mix.So that’s a picture of today on where we are.

Bechtel: Karl, do you have numbers relative to other locations outside of California for example?

Knapp: I have some numbers for other Munis around here. For example, Silicon Valley Power is 27% eligible renewable, LADWP is I think only 2%, SMUD is 7% so it ranges quite a bit.

Bechtel: So it’s all over the map.

Dawes: By virtue of what [inaudible] it’s a very bad deal. Huge investments.

[inaudible about geothermal qualifying as renewable]

Baladchandran: We could have kept that.

Knapp: So that’s a snapshot of where we are and the changes [for the next year?]. Now on the next slide, there are no really uniform metrics to determine how sustainable any given resource is. I think everyone here is aware of that. The tradeoffs and intricacies are pretty complicated.Lots of volumes have been dedicated to this topic, but what’s presented here is my version of a “consumer reports” summary of the quantitative analysis that is actually in the longer report. Foreach energy electrical generation technology, plus some of the non-generation technologies, we provided our cost ranges, information about risks and variability, information about the environmental impact. One of the main initial observations (you can kind of squint at from a distance) is there’s a lot of black stuff in the upper rows and there’s a whole lot of dark dots over here on the left under eligible renewables -- meaning there’s quite a significant environmentalimpact for conventional technologies. Among eligible renewables, they also actually have someimpact. There’s no pure, clean solution. They also have some problems; a lot of them are not dispatchable. Some of them have availability problems and they cost more. It’s kind of an at-a-glance presentation of the energy tradeoffs, again without it being reduced to some single number. Efficiency has very little in the way of environmental impact, not negligible, but very small.

The attached report deals with all of these in each of these columns quantitatively as much as possible. But each technology whether it’s renewable or conventional has its own environmentalcaveats but we really concluded as a group and staff that there is no real available single metricthat we’re going to be able to reduce this to identify what premium per kilowatt hour the


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different technologies really reflects City Council preferences and the City, from the top down, analytical approach. The only way to identify is, there’s 2000 lbs of CO2 per megawatt hour or so many tons of NOx per megawatt hour for different technologies.

Dawes: Karl, under “Other”, is that eligible or ineligible or could it go either way depending on what it is?

Knapp: Well they’re not recognized by the CEC as an eligible renewable. So that’s it, a CEC definition.

Dawes: So, fuel cells: if we built one out by the COBUG, that’s not an eligible renewable at thisjuncture?

Knapp: No it’s not an eligible renewable unless it runs off of biomass. So if it runs off ofhydrogen or biomass fuel then it will be considered renewable even though it is clean so it does meet clean power, but it doesn’t meet CEC’s definition. And we don’t have to subscribe to CEC’s definition except for our power plant. [inaudible] That’s up for discussion.

Dawes: That’s an area I want to get into big time.

Carlson: You just said something that was even stranger -- hydrogen counts as a renewable? You made it seem that hydrogen came out of the air somehow.

Knapp: No, I misspoke. It depends on where it came from.

[inaudible comments and laughter]

Knapp: Part of the action plan, working from the other direction, is deriving more of a willingness to pay or a premium, from a survey of the public and the City Council. But providing this information so that it’s made based on thorough knowledge rather than just aguess. The primary risk faced by our current portfolio is hydro risk. That’s primarily a year-to-year issue. Most of these technologies are uncorrelated with that particular kind of risk so thatthe value associated with risk reduction is primarily from diversification, so it still has value. A [inaudible] lot of technologies that increase a lot of energy when it’s a dry year and that’s what you really want. So there’s still added value from diversification. But then of course fuel-based generation is simple, but has is susceptible to price risk, so nothing’s without risk, but it also provides diversification and that talks to where are the big dark lines of the risks and variability columns for different technologies.

Another important distinction between depletable resources and renewable resources is this lastcolumn on the right, which is the life cycle net energy balance. This is the ratio of how muchenergy is produced over in the lifetime of the equipment. How much energy it took to make it in the first place, including the energy that went into the concrete and the aluminum and everything else. Large hydro is actually very high in that respect. It can generate 50x as much energy as it takes to build the plant. And most renewable technologies range anywhere from a ratio 6 up to 100. No fuel-based technology can be over 1. You have to include the energy in the fuel and you’re limited by efficiency, so one big difference between depletable resources, or fuel based resources and renewables is this life cycle energy balance. It basically leaves behind more


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resources had you not built it which is a huge positive for most technologies. That’s all I reallywanted to say about the technologies scorecard at tonight’s meeting. We can revisit this.

Dawes: I’m surprised that nuclear is only 0.3. I would have thought that given the basically lowcost of fuel to the amount actually produced that it would be higher than that. Is there a capitalcost?

Knapp: No, it’s a pure energy ratio. So that the efficiency of converting uranium into electricity is really what the mix is. It’s not the cost of the uranium. It’s independent of the cost.

Dawes: But you get a lot of thermal power out of one kilogram of uranium.

[inaudible]

Knapp: Actually, a lot of these do. So what I’m leading to next are strategic questions. Key issues we’d like to answer to actually come back with a recommendation for what we should do is: First- should we be purchasing energy or continue to buy attributes the way we buy green power now as you buy green tickets that are just trading in the greenness of energy? Marketing is finding out that it’s very difficult to explain to people and they hesitate to sign on, buy in. I have energy as the answer. [inaudible] That’s actually a significant contributor [inaudible]. It actually has to have some energy, not attributes. The second question is if I’m going to buy energy, then how much? The example that’s in here is increasing from our current level of 1% with specific purchases of up to 5% over the next 5 years all the way up to 10%. That was one of the examples in one of the portfolios. For example, at the 5% level, we pay 2 cents per kilowatt hour more which would be an average rate increase of .1 cent per kilowatt hour so that’s the order of magnitude of cost and rate impacts.

Dawes: I was perplexed because I thought that this percentage was driven by people signing upfor green power and paying for it. Yet the text and your comment just now seem to indicate that we’re paying more and we’re just piling it onto the rates that everybody pays. Is this a programwhere the purchasers pay as they go and pay a higher rate so it’s cost neutral to the people who don’t sign up for green power? Or is the expectation that we’ll pile that some of that extra cost back into the basic rate, but spread it to everybody?

Knapp: The suggestions is that green power subscribers are buying one product and this is actually outside and beyond green power Future Green Program.

Dawes: At one point, you said try to do 1% per year for our resource mix. Try to increase 1% per year. Then you say we’ll do more if people ask for it and I would suspect that we’d do less if people don’t ask for it. Is that not what you’re saying?

Knapp: [inaudible]

Dawes: It is backed by no matter what, that we’ll just pile the extra cost back into the rate basebut if people request for more and are willing to pay for it, then we’ll get more? Is that correct?

Knapp: The suggestion is to in addition to those who wish to be 100% renewable is to have afraction of the overall mix for everyone else, that also have some renewables.


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Rosenbaum: A compulsory program.

Dawes: A compulsory program.

Knapp: But the cost effectiveness is measured not to exceed the Council-stipulated rate structure. The next question is. We’re going to get to that. You can come up with an analyticalnumber that ranges between .2 and 5 cents per kilowatt-hour, but I didn’t think that was quite firm enough of an answer to move forward with it with completely reasonable assumptions.

Dawes: Try 7 cents. 5 sounds like too round a number.

Knapp: Of course, the next question, we don’t have a recommendation yet for what that level ought to be. We know where we are. We’re at 1%. And the second is how much can supply funds be spent to cost effectively deploy efficiencies as well as renewables to help supply meetdemand? One suggestion is to invest up to, similar to the AEEP program, investing up to say a million dollars a year, reducing load (this is outside of public benefits) but it would be held to a tighter cost effectiveness test than public benefits spending.

Dawes: Is there any implicit assumption that public benefits moneys will go into investing in this program and if not, why not?

Knapp: I think it will be beyond that.

Baldschun: I think the program that we’re talking about here tonight is above and beyond what we’re already doing for the public programs in our budgets.

Dawes: Is it appropriate to put on the table that 2.85% and using those moneys to invest in thesesupply alternatives instead of just kicking in new CIP dollars for it?

Knapp: It can be used for demonstration programs, but not for buying commodities.

Dawes: Well how about investing in a renewable power plant?

Rosenbaum: R&D related?

[Inaudible] ??: It is a qualifying activity.

Dawes: So if we build a solar array on top of City Hall, that could be charged to this programand the output of that can go in this renewable pot?

Baldschun: We could shift ours from a DSM program to a program like this to produce renewable resource.

Knapp: So the programs tend to look more cost effective when we did it in the spring, where itwas pretty much large commercial and industrial programs.

Dawes: That’s the DSM.


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Knapp: Yes. In the current gas pricing and electric price rates, we reviewed what efficiencymeasures would actually best meet the cost effectiveness test. If you’re set to do it when prices go up at some point, you’re ready to go. And I don’t think there’s actually enough money in the 2.85% to reach some target of say of reducing load by a megawatt each year.

Dawes: We don’t have to put it in DSM, do we? I mean, we can deploy that into building a power plant and save a million dollars a year or something like that. Get a bond issue of $5million. Build a renewable power plant of some sort or use DSM or use the 2.85% to fund it. I mean that as an example.

Knapp: Yes, this would be to augment. That wouldn’t be enough to get to the goals that we have in mind for overall renewables and sustainability in the DSM.

Dawes: It is a pot that we can play with to further these goals.

Baldschun: Legally, yes. Auzenne is more familiar with this but there are 4 categories in AB 1890 spelled out and I believe one of those is renewables. So yes, we could spend more moneyand have less money in DSM or all of it on renewables and nothing in DSM. All of this ispossible. It’s legal.

Dawes: We just spent basically everything on DSM, and now we’re saying that DSM doesn’t pay off -- so maybe it’s time to consider doing something different?

Baladchandran: This is just the kind of discussion we want to be having to put out the different options and alternatives.

Knapp: The last bullet is kind of a leading strategy question. Renewable strategy is planning to be incorporated into the overall energy resource plan. It’s not going to be its own little plan. It’s an integrated resource plan. So the answer is yes and I’m going to read it as a question. And our proposed plan of action, this leads into a discussion.

The first step is to balance out; establish criteria for balancing the environmental, localreliability, rates and cost impact when considering renewable resource and energy efficiencyinvestments. So basically it’s figure out how to do this balancing act for objective #4. If we’re not successful in doing this with the top down technique, set public hearings through forms and surveys and soliciting input both from UAC and from Council and we can actually narrow that down to what we can actually recommend. Some of the other ideas that were proposed are to actually talk to Council about considering that the City actually becomes a Future Green power customer, which would be a huge boost for the Future Green program. And of course we will continue to actively monitor what’s going on with technology and costs and continue to support public benefit programs and scheduled rate programs or other Utility Marketing Services. Thatis not part of using supply funds for going towards renewable and energy efficiency.

Bullet 12, slide 12 is a list of analysis that we still have ongoing, just to let you know what we still have in the hopper which is basically bring information together on what can we go out and get right now. There are actually quite a few people who bid for the CEC. They have an auction for incentives and there are quite a few people who got incentives, but there are quite a few people who didn’t, where if they can actually get people to buy their power, you can probably buy renewable energy at a reasonable cost depending on what you consider reasonable. There is


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actually, I’ll bring a list of what those are. Also potential leveraging assistance such as grants,low interest financing. If you build a power plant, for example, Munis do qualify for 1.5 cent production credit and that kind of gets into the whole buy versus build question on renewables power plant risk, whether it’s ourselves or through NCPA or jointly with 2 other Munis or what have you, but identify what we can really do, both with grants and buy and own decisions for real power plant.

The rest is identifying and reporting and investigating whether some of the assets we have would qualify to be considered green, not really reducing our renewable content, but reporting it accurately. And also we have to actually take a look at gas efficiency conservation measures andwhat business they have with [inaudible] if you take a look at gas and electric as a whole, to maybe see what we can there as well. So going back to the start at the end. These are the strategic questions and we’re hoping to answer those questions. I’ll just open the floor for speeches and discussions.

Bechtel: Thank you Karl. I think you did a good job of summarizing it in 13 slides. A little bitbetter than 35 pages or so. This is great. Commissioners? Mr. Dawes, if I may say so, I know you have questions to ask. Can we move on to some of the other people’s questions?

Dawes: Absolutely. I was going to wait.

Carlson: I can’t wait to hear Mr. Dawes’ speech.

Bechtel: Well, you’re going to hear the speech regardless.

[laughter]

Bechtel: Mr. Ferguson.

Ferguson: I don’t want to steal Dexter’s thunder at all, but I want to go for a simple policy proposition to put before Council. I do appreciate the analysis here. It’s a wonderful set of data, a wonderful set of technical answers for those people who are looking for technical answers and comparisons. That’s a good work product and I’m pleased to see it.

But let’s focus on the question that we’re going to bring to Council. The simpler we can makethat, the better. And you’re almost there. You’ve got that by asking “what’s the premium you’re willing to pay.”

In many respects, the public benefit program mandates us to spend 1.5% or whatever it is -- it’s kind of a political freebie here. The State’s basically giving us political cover, an excuse to allocate X dollars for things including renewables. Whether that money goes away or not, the City has a separate Sustainability Policy and we have a built-in environmental goal in our strategic objectives list. So it’s a fair question to present before Council: “You say we want to do this. We’re covered by the Public Benefit Program. Many of those things have turned out to be useful, to crank out greener energy and avoid blackouts, so it wasn’t a wasted effort. Many other reliability benefits are built into these things, too. But Council members- we can give youa zillion technical examples, all of which just boil down to a single question: How much money,what percentage of our supply budget do you think we should spend -- what ceiling, what


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percentage -- if we have an opportunity to get a particular environmental result, a sustainability score?”

Then use some of these examples to strike up a conversation with Council members. Get the Council members to a number that reflects a political decision, invites a debate to develop them. That’s really what it boils down to. The Council might ask “do you think we ought to kick in a half a million dollars a year for all purposes over and above Public Benefit, and leave it to youstaff to decide year to year what’s the best way to allocate it?" Or “do you think it’s worth cutting in half our renewable power cost or do we think the 1% is the correct target?” Just get a relatively simple, straightforward global decision from Council: “Give us a dollar number to manage toward. Give us a percentage number to shoot for.” [inaudible]

It makes it almost more difficult for Council if you present and discuss 35 pages of technical detail, and if that happens, you kind of lose the debate. The goal here is to provide them someuseful results, for guidance. And there’s little point to pursue it at all unless the City wants to make good on the environmental values that we claim to have. I support the goal toward renewables, and just suggest that you frame the policy decision for Council as choosing one or two simple numbers that reflect community consensus. Preferably one.

Bechtel: Mr. Rosenbaum.

Rosenbaum: [inaudible- question about the packet] In our discussion, we asked how we identify the right strategic question. I do appreciate what you’re saying. Even though the report is written as though there are some specific recommendations, that it’s more of a discussion paper rather than the usual recommendations, that we get [inaudible], but I think one strategic question is whether it ought to be a compulsory or a voluntary program. [The City of Austin article was interesting, but theirs is a voluntary program] given that they probably have 10x the load that we do. Their numbers are quite large and the interesting thing is they say they have 125 smallbusinesses and 25 large companies participating and willing to pay voluntarily. And it just mightbe that we have some large companies that’s willing to do that also.

Dawes: I didn’t think this sounded voluntary to me, because everybody’s going to be replacing afuel charge for the green power charge.

Ferguson: Only subscribers to the green program.

Dawes: So people who have fuel charges are the only subscribers to the fuel charge? So others’fuel charge goes to zero? Others will volunteer for green power charge?

Rosenbaum: I assumed as I read it.

Dawes: I thought subscribers meant everybody who wants power from the City.

Knapp: Not the program subscribers.

Baladchandran: There’s a brown fuel charge and there’s a green fuel charge.

Dawes: So you get one or the other?


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Baladchandran: One or the other. The default when you get fuel charges is brown and then you can choose to get green fuel charge.

Ulrich: You have to sign up for the green fuel charge.

Knapp: Also the fuel charge varies and the green power charge is fixed for 10 years. The attraction is “oh it’s a little more, but it’s not going to change for 10 years”. Actually the premium has gone up since November. It’s now 1.1 cents. [inaudible]

Rosenbaum: It’s a voluntary program, which has been promoted. And Rick, you mentionedframing this as a political decision. As you know, over the last few years, we’ve thought ofourselves as a customer-driven utility and I don’t know if our key accounts people are talking to the large customers to see what they’re interested in or if they’d like to have their mix raised by some amount that the City Council might think politically acceptable.

Ulrich: As I mentioned earlier, our customers like communication, we would do that of course before we’d bring it up to the City Council.

Rosenbaum: Normally, communication is you put some ads in the paper about a public meetingand based on past experience, people do come out. 85% of our energy is non- residential.

Baldschun: We need to survey our large customers. [inaudible] We did this survey a few years ago. We did all residential. The industrial and large commercial customers were essentially not interested in green power and I think it’s just because of the economics. We do have one on the green power right now; we have one non-residential customer on it. All the others are all residential.

Rosenbaum: That’s what you’d expect. And the problem is that all Munis have the sameproblem. The way it is, the elected officials are elected by the people who use 15% of the energy, not by the corporations and businesses that use the other 85%. [inaudible] But anyway, my basic point is, one of the strategic questions is, should this be voluntary or compulsory? The assumption in what you’ve written is that I have a voluntary program in addition to thecompulsory program. The second strategic question is the one that Dexter brought up. Use the public benefit money, you don’t have to use all the public benefit money, but it’s hard to see why you wouldn’t want to use some portion of our public benefit money to secure [inaudible]. And then as just a general comment, like Rick said, there’s an awful lot of information in here, but from what I see, the only practical source that we have on here is wind. Geothermal is being talked as being low-cost. I don’t know where this geothermal would come from. Thegeothermal from the geysers has turned out not to be renewable resource. The finite resource[inaudible] What else is there besides wind and geothermal?

Knapp: Landfill gas.

Rosenbaum: Well that’s not going to make a major contribution. If you are going to talk aboutwind, wind really costs, a number to compare with 6.2 cents. Is that still an accurate number?

Knapp: It might. It’s very site specific, but people are buying/selling wind now for 5 cents with a 1.5-cent production credit. So cost is 6.5 cents, but you can buy it at a little over 5.


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Rosenbaum: Are there still good sites available?

Knapp: There are hundreds of megawatts of wind going in Washington/Oregon. [Don’t know if you want to buy it] from Wisconsin, but in California.

Carlson: In California, there are. Near Palm Springs, there’s a great big site.

Knapp: In the next 2 years, there will be 10,000 megawatts of natural gas being installed and 200 megawatts of wind.

Rosenbaum: Is that practical, because of the low availability ratio we require in order to get 10% of our energy from wind? Is it 46 megawatts?

Knapp: Yes.

Rosenbaum: 46 megawatts is almost a quarter of our total capacity now. And you speak of 200 megawatts coming online? [inaudible] What I’m trying to get at- the report is fine in theabstract, but when it comes to making a concrete recommendation, aside from wind, I don’t know what I would choose. Wind as indicated is a little problematic, so it’s hard for me to see where we’re going.

Ulrich: That’s the point of bringing that up so you can discuss who’s going to pay for it and where it’s going to come from. An area we need to also consider on here is demand side management and conservation and internal onsite renewables, such as photovoltaics on houses, businesses. And some other areas to look at more stringent are building standards. There are a lot of models in California where they just use [Title 14] as the construction standard to have a higher standards so that you are able to save considerable energy both in new buildings and retrofit buildings. So you can mix all of those things together.

Rosenbaum: But I mean, the supply ones are the part of this whole program that make up the bulk of this report. [inaudible] a renewable and try to get concrete [inaudible] It’s not very generous at 35 cents per kilowatt-hour.

Ulrich: Again, it’s a mix. We’re not talking about an incredible percentage of our total needs, so it’s diversity and reliability of the portfolio resource as a whole that we should be leaning towards. Granted, some of the technology is expensive right now, but if we set ourselves someobjective goals to buy in long term, we can consider maybe buying short term with the intent of replacing it with renewables as time goes on. We’re trying to get an understanding of what the community is willing to pay for whether it’s the businesses, schools and our own government, so set an objective where we can follow forth for the longer term. That’s a benefit of this debate. After we agree that there are limited opportunities to put in some renewables that are cost effective, it doesn’t mean we shouldn’t have those somewhere in our portfolio, short or long term. We can also look very hard at the incentives we give to people building or remodeling in Palo Alto. Those are renewables that last the life of the --

Bechtel: Let me just interject. I think the purpose of this discussion tonight is to give someguidance to the staff as to what to consider or not to consider perhaps. With that in mind, Dick, do you have any other? I thought your suggestion here was good. I think discouraging Solar I think was real clear. Any other specifics that you had in mind?


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Rosenbaum: No.

Bechtel: Mr. Carlson.

Carlson: Yeah. This is a very interesting discussion and this sums it up. I’ve studied and written on this stuff for years. I think Rick is right. You really need to frame this as a clearquestion. And I think we’re talking about spending $2 million or so a year. Is that the kind ofballpark we’re talking about if we move to 5%?

Knapp: Yes- a million for 5%. If you go up to $2 million, it’s 10%.

Dawes: Is that the extra cost or the total cost?

Knapp: The extra cost.

Bechtel: The commodity cost.

Knapp: Yes. So at 5%, you get 2 cents more per kilowatt-hour and it’s $1.2 million.

Carlson: And basically, I think it should be thought of as expenditure. If you’re spending this extra $1 million or $2 million a year, maybe it’s only $500 thousand, but I think that that’s a way to frame it. But the other part of framing it, I was just looking at the rest of the City. There are 2 ways of looking at it. One is to help the environment by reducing fossil fuel use, which I think iswhat most people think when they think about renewables. Other people just want to buy renewables. Those are very two different ways of looking at it. And from the City perspective, I was just saying, where else can I save a lot of fossil fuel for $2 million? Well, I can pay the extra cost which is maximum $10,000 per vehicle to buy 100 vehicles that are hybrid electrics, and hybrid electrics use about ½ the fuel for the same production, the same performance as a regular vehicle. The City’s got a lot of vehicles -- and that is a way of thinking of it. If the main thing is to try to help the environment and reduce fossil fuel use, what’s the most efficient way to use $1 million or $2 million? And is it renewable? Is it producing more energy with renewablesinstead of fossil fuels? Or are there other things the City does where you can save more energy, more fossil fuel, for the same amount of money? Just doing my back of the envelope, I think shifting your vehicle fleet $2 million a year, you can shift your whole vehicle fleet to hybridelectrics. They’re wonderfully efficient. Performance is great and probably save a great deal more fossil fuel. I think that’s the kind of comparison that’s worth thinking about if you’re really thinking about the broader goal. If you just think renewables is an end in itself and you think the public likes spending $1 million or $2 million a year on it, then fine. That’s really a Council decision and I think this sort of thing we should get involved in by saying, “if you want to spend$1 million or $2 million or $500 thousand a year on renewables, what are the best renewables to look at?” And again, I think from a cost-effectiveness viewpoint, wind is looking pretty interesting, but it’s not free from the environmental perspective because those avian impacts arepretty severe.

Dawes: It’s over $200 for a hawk.

Carlson: Well the impact on the raptor population on the Golden Eagles up in the Diablo Rangeis pretty real. And until you’ve seen a couple crippled Golden Eagles, you don’t really


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appreciate that they are really endangered. But it really isn’t a purely political decision. I think you need to frame it and tell them there’s no magic here. There are a bunch of interesting new technologies and over a period of time, over a long period of time, some of them can really drop in price and truly become cost effective such as the [inaudible]. It’s going to be a long term and maybe just because they’ve got such long term potential, Council will want us to invest in thosemost exotic even though they’re the most costly. But if you’re trying to save fossil fuel, if that’s your goal, there are certainly more efficient ways to do it.

Rosenbaum: A quick question. Did you notice the wildlife section in this report? I think Karl attempted to respond.

Carlson: I didn’t get to that section, but I knew it was on the chart and I know it’s become areasonable well-known issue. It’s very real.

Rosenbaum: I mean, there’s an argument made here that is not as significant as people had originally estimated, and I was just curious to your reaction.

Carlson: Haven’t read the paragraph. I’ve just been reading the results and talking to people.

Knapp: I tried not to draw a conclusion whether it was significant or not. Simply reporting theactual numbers that are measured in the literature.

Carlson: There are just more and more dead. The problem with this stuff is, if you do the serious research, what happens is that a lot of the victims disappear because the local predatorsfigure out this is a really easy place to find something to eat and so the skunks and the raccoons all of sudden they’re roaming around, picking up the stuff. I mean we can’t have it to measure…

Bechtel: Gentlemen, you’re drifting off the specific recommendation or discussion. Mr. Dawes.

Dawes: I wanted to follow up on one of the things Dick Carlson talked about and it disturbed meas I went through this and that is the mixing of the accepted definition of green power withreduction of emissions broadly. You seem to be stressing the politically correct definition ofgreen power, which is very narrow. My feeling is deep down inside me, we’re 80% green power, but we can’t count that because that’s not the “right” definition -- and I’d like to stressthat. But I agree with the Council’s policy which is laid out in your slide here Karl. If you look at it, it really says what I think it should say: reduce fossil fuel use without necessarily having to buy a specific slice of energy which might be more expensive than another expenditure and investment which has larger reduction in fossil fuel. An example that I can think of -- it’s a badone because it would increase our dependence on hydro -- but hydro enhancements are really a huge payoff. The Shasta re-wind project is a tremendous project and it gets more bang for the buck. When you look at the rotors that we have at Calaveras, maybe a computer could changethat flow just a little bit to get 3% more power from it. [inaudible]

It’s the kind investment that I think we would just leap at, but we are precluded from it if we have our eyes drilled on this very specific definition, which I think is way too confining. So myrecommendation to Council is “yes, think in terms of a dollar amount that you’re going to have to pay. Then think more broadly of what is the very best investment we can make to reducefossil fuel use without having to subscribe to this.” If people are starting to pay big bucks, the


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percentage goes up and we can then afford to spend more than we would have spent on these non-definitional types of things. Fine, we can do that, but I wouldn’t lay a general charge on therate base just to be politically correct in going into these specific eligibles, and not looking atineligibles.

Ulrich: Couldn’t you achieve the same thing without saving fossil fuel by way of improving the construction standards for buildings and provide more incentives to reduce the use of energy?

Dawes: That’s a much more difficult number, because at some point, that curve is going to flatten and the costs are going to be dramatically higher for the next increment of progress. You can seal your houses up, but people are going to get claustrophobic and they’re going to start opening their windows because they like fresh air so.

Ulrich: As Dick pointed out, the major energy users are businesses in large buildings.

Dawes: Yes, I absolutely subscribe to that thought, but add to it that we should look at the very[inaudible].

Bechtel: I’d like to wrap this up real soon. Mr. Ferguson.

Ferguson: If I had to give a briefing on this tomorrow night, I’d make a lot of use of the “power mix status” picture. To communicate the lesson, simply make the statement that shifting theshape of that curve to the left means more environmental protection and sustainability in general. Look at where Palo Alto is today compared to the State average. We’re already doing real well. The decision we’re asking you Council for is: we’ve got to fill a hole after 2004, and the shapeof this power-mix curve is bound to change, because we’ve got to fill this hole with somewhat a different mix. So, please Council, tell us how to keep the bias on the curve to the left. Give us anumber. Give us a percentage cap, a guide to err on the side of bending to the left, rather thanbuilding a whole new set of program prescriptions.

Dawes: I think your first suggestion was better if I may say that. The first one you had cast as a dollar amount. This one you cast in terms of a percentage amount. I’d say, let’s bend to the left,but put your dollars on the table and we’ll see how much the percentage has changed.

Ferguson: I’m looking for a single number, whether it’s a dollar figure or a percentage figure. I want a single number.

Bechtel: Any other comments not of a new nature in terms of guidance to the staff? Let me justwrap up then with my feeling. I agree. There have been some really good suggestions here. Dick suggested about City of Austin energy. One thing about it is spending money on buying something that is not really truly tangible that you can see everyday like windmills [inaudible] orso. It’s hard to get people excited about it but I think this project has a little meat to it - specificcapital investment, purchasing – and so people signed up and subscribed to it because it was real and not just buying some traders’ version of green power which we’ve done. The idea of setting up a specific number or range of dollars is a real good one, a million or plus or minus or whatever it is.

We should go back to the Comprehensive Plan. Dick had been involved in looking at those before when he was on the Council. The City, at least the people involved in putting it together,


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really did say “make a statement” and they told all of us in the City we really do want to look at this from a renewable point of view, from an environmental point of view. I have the feeling that we’re sitting here, controlling the purse strings and saying, “we’re not going to let you have whatyou say you want.” That’s absolutely wrong. We should test the citizens here and say, “are you really willing to step up to this? Are you really willing to spend an additional $1 million a year to be more environmentally sound to look at wind and so on with all of these others?” Whetherwe do this in a survey as the City Manager’s done, put it as capital improvements or it just comesup to City Council in discussion and maybe we take a year or so to get involved in it.

We have some holes in our power sources to fill and I think Rick was absolutely right. We’vegot to look at this as a portfolio change and not necessarily next year or so, but we do have a hole to fill. We can take a look at both what we said in our Comprehensive Plan and what we say thatwe want to do to make sure that we do have a reliable source, look at this seriously and not be too parsimonious in looking at it strictly as a rate increase or so on. Out of all of this discussion, that Karl and the rest of you can at least frame or put something together that makes sense and allows us to move on with, I believe firmly that we need, increased amounts of renewables in our portfolio. Now how we get there and when we get there, I think, is going to take a lot of work and a lot of respect. So I’m not sure that we can add much more to staff’s plate in terms oftrying to frame a specific proposal, but if someone wants to take a stab at it one more time? But I think I’d like to move on to the next item if we can. Dick?

Rosenbaum: One further question. I thought that the idea of getting the City to participate in theFuture Green Program was interesting, but I’m trying to estimate what the cost would be. Randy, what percentage of our total is used by the city?

Baldschun: We’re in the top 10 power users in the City.

Dawes: It says it’s 3%.

Baldschun: Could be.

Dawes: What’s the cheapest Future Green increment? Per year?

Baldschun: [inaudible] $300,000

Rosenbaum: That would be an interesting one for the City Manager to bring up to the City Council. Spend this on whatever recommendations staff and UAC make. You can spend $300,000 more for electricity. I think that sort of addition would bring some real costs home tothe City Council. They’d be real interested in hearing that today.

ALTERNATIVE EMERGENCY WATER SUPPLY STUDY 5A

Bechtel: Okay. Any more discussion? Then it’s 9 o’clock. We can take a brief break and take the last issue or maybe we can get some sense of how much discussion we want on Alternative5A and what action you’re anticipating John.

Ulrich: Well all of our water facilities, or most of them, are under way or awaiting decision right now. If it’s all right with you, I’d just like to move ahead on this.


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Bechtel: Let’s do it.

Ulrich: With as much interest as there is on this side of the table, I don’t think it will take too long. Most of you have a copy of the interoffice memo that was sent out that’s called “emergency supply for improvement of Alternative 5A”. Just briefly, there were a number of alternatives for providing emergency water supply that were incorporated into the Carollo Engineer study that was done back in 1999. And subsequently, we’ve had considerable amountof discussion. I’m looking at other alternatives and trying to get clarity on what each of those alternatives would do and we had discussions several months ago about looking at anotheralternative, which is Alternative 5A. And we’ve had a number of meetings with most of you on this subject so I won’t go through those details. What I would like to have a discussion about and the reason why it was put on as an action item, is that a couple months ago, you asked and wrote a letter to City Council requesting that they approve the Stanford Advisory Committee.Bring up the idea of an alternative where there will be a sharing of storage at the existingreservoir in the hill as a means of 1) reducing the cost and providing as good or as better …

[Video tape changed, discussion ensued about the alternative. Details lost in tape change]

MOTION: Motion made by Rosenbaum based on new information presented for the projected cost of Alternative Energy Water Supply Study 5A, the U.A.C. approve the original staffrecommendation and recommend that the City Council not proceed with discussions withStanford on this Alternative.

SECOND: [inaudible]

Motion Passed unanimously.

Ulrich: … [inaudible] of full disclosure. I thought I’d discuss with members of the group that because of the theater that’s over there, we have provided Stanford with a drawing that’sdifferent than this. It shows it going underneath the soccer field.

Dawes: Not underneath the ballpark.

Ulrich: Yes, I thought we had that discussion. Maybe I’m being too sensitive to all of this but Ithought I’d had other discussions to show you specifically the locations where that would and would not work.

Dawes: It’s different than here.

Carlson: I thought that would have been a real problem for you because you need a larger pipeline to get to the pump station.

Ulrich: It would actually be a lower cost if you do it where this is. Moving it out onto the soccer field would require more pipes.

Rosenbaum: Are you willing to that because of the proposed location of the Performing Artscenter?


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Ulrich: We are working diligently to find a location that is acceptable to Stanford and if work is needed in this emergency water supply [inaudible]. And as you recall that all of these prints and all of this work is for [inaudible]. What we’re trying to move along is getting approval to use the area so that the detailed engineering can be done to very specifically locate the reservoir where it should be. You should also know that dimensions of the reservoir aren’t fixed. It can be square or in a different shape or rectangular. [inaudible]

Bechtel: Okay, so we have now dealt with the water issue. My guess is hopefully we’ll have, I’m sure we’ll have more discussion on the water issue when it comes time so we can revisitsome of these things.

NEXT REGULARLY SCHEDULED MEETING

Bechtel: Next agenda item is next regularly scheduled meeting. Next month’s meeting will beWednesday, February 13th and I guess looking at the Legislative Rally report – the APPA, the Utilities Second Quarter Report and so on. And you have the table with the proposed calendar for the remainder of the year. Thanks very much for that.

Ulrich: In fact, Dee is putting this together and we’re updating it quite frequently. We also havea multi-colored rainbow sheet that has the process on our topics and items and the flow that will take place in approval so we’ll be able to see where in the UAC it’s in the overall approvalprocess so you get an idea of what comes next afterwards. So those items that need to go to the Finance Committee meeting or to Council is indicated here and that reflects back into the independence. If you could review those, specifically the future agenda items, give us somefeedback on any items that are missing or you’d like us to look at. [inaudible comments]

Ulrich: Some people deal with numbers and some others deal better with colors.

Rosenbaum: I notice that the March meeting was moved back to the 13th. Did anybody notice that?

Bechtel: Yes, I noticed that.

Ulrich: That’s my next item. We’ll be moving the meeting that would normally be on the 6th, Ibelieve, to the following week, the 13th, because of a conflict with the CMUA meeting that some of you may attend. I thought I’d bring it up now that way we can come to an agreement.

Ulrich: No. February 13th is the appropriate time. [inaudible] We’ll probably have longer lead-time to schedule these. This is going to be a cozy room.

Bechtel: So everybody put these dates into your Palm Pilot or Handspring Visor or Pocket Calendar.

ADJOURNMENT

Bechtel: Do I hear any other issues? Do I hear a motion to adjourn?

Rosenbaum: So moved.


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Dawes: Second.

Bechtel: All in favor? Motion passes. We’re adjourned.

Documents

UTILITY ADVISORY COMMISSION MINUTESBechtel: We have 4 Commissioners present. Mr. Carlson is absent. ORAL COMMUNICATIONS Bechtel: Next item on the agenda is oral communications and