MEMORANDUM - City of Palo Alto

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					                            MEMORANDUM
                                                                                    1
TO:          UTILITIES ADVISORY COMMISSION

FROM:        UTILITIES DEPARTMENT

DATE:        FEBRUARY 9, 2005

SUBJECT: UTILITIES QUARTERLY REPORT : WATER, ELECTRIC, GAS,
         AND FINANCIAL ISSUE UPDATES


REQUEST:
These quarterly updates on water, gas, electric, fiber and financial issues are for the
Commission's information only.

EXECUTIVE SUMMARY:
This quarterly update is meant to keep the Commission apprised of the major issues that
are facing the water, gas, and electric utilities.

ATTACHMENTS:
A. Quarterly Water Issues Update
B. Quarterly Gas Issues Update
C. Quarterly Electric and Fiber Issues Update
D. Quarterly Financial Information Update

PREPARED BY:           Romel Antonio            Blake Heitzman     Raveen Maan
                       Ceyda Can                Lucie Hirmina      Jane Ratchye
                       Roger Cwiak              Tom Kabat          John Reinert
                       Karla Dailey             Eric Keniston      Shiva Swaminathan
                       Anthony Enerio           Karl Knapp         Monica Padilla
                       Bill Gray                Debbie Lloyd

REVIEWED BY: Tom Auzenne, Assistant Director, Customer Services
             Girish Balachandran, Assistant Director, Resource Management
             Scott Bradshaw, Assistant Director, Engineering and Operations


APPROVED BY:              ___________________________
                          JOHN ULRICH
                          Director of Utilities
                                                       Attachment A – Quarterly Water Issues Update

                              QUARTERLY WATER ISSUES UPDATE
                                       February 2005


Issues related to Palo Alto’s water supplier, the San Francisco Public Utilities Commission
(SFPUC), and the agency representing the wholesale customers of SFPUC, the Bay Area Water
Supply and Conservation Agency (BAWSCA), are discussed below.

I.      Water Supply Issues

Water Availability
The SFPUC’s December 2004 Hydrological Conditions Report (attached) contains information
about the regional system’s water supply reliability. As shown in that report, the Hetch Hetchy
precipitation index (computed using six Sierra precipitation stations indicating wetness of the
basin) for the 2005 water year to date (October 1, 2004 through December 31, 2004) was 17.1
inches, or 152 % of the average season-to-date precipitation. The December precipitation was
7.11 inches, or 127% of the average.

The water received in the SFPUC’s Tuolumne Basin reservoirs (Hetch Hetchy, Eleanor and
Cherry Lakes and the New Don Pedro Water Bank) from inflows and precipitation for the 2005
water year to date was about 14,000 acre-feet, or only 25% of San Francisco’s normal inflow for
the period. San Francisco’s total entitlement for the 2004 water year (October 1, 2003 through
September 30, 2004) was 331,555 acre-feet.

San Francisco’s water bank in New Don Pedro Reservoir was about 461,000 acre-feet (out of a
capacity of 570,000 acre-feet) as of December 31, 2004. The total water in storage in both the
mountain system and the local systems was about 1,110,000 acre-feet as of January 1, 2005,
leaving about 321,000 acre-feet of available storage capacity in the system.


II.     Water Quality

Chloramine Conversion
SFPUC continues to take the lead in responding to citizen complaints about chloramines
throughout the area served by the regional system. Andrew DeGraca, SFPUC’s Acting Assistant
General Manager of Operations, sent a letter on January 10, 2005 to Art Jensen, BAWSCA’s
General Manager, updating him on the SFPUC’s activities on chloramine health issues since his
last letter of November 18, 2004. His letter outlined activities that SFPUC has undertaken to
address the issues, specifically:
    • The San Francisco Department of Public Health (SFDPH) in coordination with the
         county health offices from Alameda, San Mateo, and Santa Clara counties finalized a
         standardized dermatitis questionnaire for use by the health officers in the four counties.
         The SFDPH collaborated with county health officers in the suburban counties regarding
         citizen inquiries. The SFDPH responded to three individual health-related calls (all
         peninsula residents) inquiring about the dermatitis questionnaire; currently, the SFDPH



Item 1: Utilities Quarterly Report Update Attachment A: Water                          Page 1 of 19
                                                       Attachment A – Quarterly Water Issues Update

           has two completed questionnaires. The Menlo Park Almanac published an article on
           December 15, 2004 on the dermatitis issues, after speaking with SFDPH’s Dr. Judy
           Weintraub: http://www.almanacnews.com/morgue/2004/2004_12_15.chloramine.shtml.;
       •   SFDPH worked with the chair of the Health Committee of the California Conference of
           Local Health Officers (CCLHO) to ensure that chloramine would be included on the
           agenda for its meeting in January. The health officers from Alameda, San Mateo, and
           Santa Clara counties indicated they would take an official position on chloramination
           after the CCLO has taken a position. The SFPUC is hopeful that CCHLO will take a
           position in February. If it doesn’t, SFPUC will seek position letters from individual
           County Health Officers in the service area; and
       •   N-nitrosodimethylamine (NDMA) sampling was conducted on November 15, 2004 in the
           SFPUC system. This was the second NDMA sampling after the conversion to
           chloramines. Eight samples were below the detection level (2 nanograms/L or ng/L).
           One sample was just above the detection level (2.1 ng/L), but well below the California
           Department of Health Services Action Level (10 ng/L).

On December 7, 2004, the San Mateo County Board of Supervisors formally requested that the
CCLHO to study whether chloramine is safe and to take a position on its safety. On December
16, 2004, the BAWSCA Board of Directors made the same request to the CCHLO.


III.       SFPUC Issues

Implementation of AB 1823
Assembly Bill Number 1823, the Wholesale Regional Water System Security and Reliability
Act, requires San Francisco to take certain actions on an established timeline. The SFPUC has
met all timelines to date. The next deadline is for the SFPUC to issue an annual report on
progress in securing supplemental sources of dry year water during 2004 by February 1, 2005.

SFPUC is required to issue a report by September 1 of every year to the California Department
of Health Services, the Joint Legislative Audit Committee, and the California Seismic Safety
Commission on the progress made on the CIP during the previous fiscal year. A separate section
of AB 1823 requires the SFPUC to notify the State promptly if it adopts revised project
schedules. The SFPUC must explain revisions to project schedules that show a delay in
completion from that originally adopted. The SFPUC submitted a CIP Program Status Report
and Update to the State that attempted to serve both functions in time to meet the September 1,
2004 deadline. However, the SFPUC did not adopt the revisions and, instead, embarked on a
series of policy workshops, which will likely result in another change in the CIP schedule.

Policy Workshops on CIP
As a result of the rejection by the commission of SFPUC staff’s revised CIP schedule on
September 28, the SFPUC is holding a series of workshops to develop overall policy objectives,
including environmental objectives, for the CIP, and the level of future water supply to be
provided to customers outside San Francisco.




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                                                       Attachment A – Quarterly Water Issues Update

December 14 Workshop
At the December 14 workshop on customer demands, conservation potential and future purchase
estimates, the results of the long-term demand study were discussed. Highlights presented
included:
• Between 2001 and 2030, wholesale agency demands are projected to increase 19%, while SF
    demands are virtually flat. Wholesale agencies expect a 19% increase in population and 36%
    increase in jobs. SF expects more jobs, but very little population increase – it expects that
    the residential use will decline while non-residential use increases.
• Wholesalers and SF have almost the same in split between residential and non-residential
    load.
• About 2/3 of total supplies for wholesalers are from the regional system, while 99% of SF’s
    supplies are from the regional system.
• Much more current use of recycled water in wholesalers service areas than in SF, but not
    much more planned by 2030.
• Recycled water and water conservation estimates do not state whether it’s SFPUC water that
    is saved, or one of the wholesaler’s other supplies.

The key questions posed for the Commission’s consideration were:
1.     Will the SFPUC meet the purchase requests of its customers?
2.     What drought shortages will the SFPUC accept?
3.     What will be the SFPUC’s preferred supply mix?

Water demand was described as consisting of 3 components: 1) wholesale agency demands; 2)
SF retail demands; and 3) natural resources (fish, recreation). Currently the regional system has
a supply deficit in a drought year (defined as 1986-92 hydrology followed by 1976-77
hydrology) of 36 million gallons per day (mgd). This will grow to 46-61 mgd in 2030.

Water supply options include conservation and efficiencies, recycled water, conjunctive use and
groundwater, transfers, increased surface water storage, and desalination. Another option is
acceptance of periodic shortages.

A representative of the Bay Area Water Stewards (BAWS), a loose umbrella group of
environmental advocates, presented its comments on the demand studies and purchase
projections. These groups want:
• More DSM – they believe that there is much more conservation potential than reported and
    that the estimates should be compared to the “Waste Not, Want Not” report that stated that
    about a third of all water use is wasted. BAWS wants to ensure that any benefit/cost analyses
    of DSM include savings of wastewater treatment and energy.
• Want more water than currently used (only what is required by law) to be dedicated to
    natural resource uses. Stated that 59% of the Tuolumne is diverted now and that’s too much.
    The ecosystem needs to be restored and more water is needed.
• SF should condition contracts with wholesale agencies on customer DSM program
    implementation and contracts should include sustainability measures.
• In answer to the first key question, “should the SFPUC meet the purchase requests of its
    customers?”, BAWS says “NO” because:


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                                                       Attachment A – Quarterly Water Issues Update

    o Use of recycled water in the future is too low.
    o They don’t like results that show that jobs growth is higher than area population growth –
      means that unsustainable developments are happening elsewhere (e.g. Tracy).
    o Demand studies rely too much on land use agency General Plans as these may change.
    o Some agencies are using too much water and show too much growth in water use.

An SFPUC Commissioner said that as a consequence of these policy workshops, the SFPUC
might want to add or remove projects from the CIP. SFPUC staff, BAWSCA and BAWS were
urged to get together to agree on some inviolate objectives and constraints.

January 13 Workshop
The SFPUC had an all-day workshop on January 13 to re-examine the policy objectives that
support the CIP and to define the objectives for the projects to be evaluated in the Program
Environmental Impact Report (PEIR). In advance of the workshop, BAWSCA submitted five
objectives for the regional water system:

    1. IMPROVE PHYSICAL RELIABILITY – Rehabilitate and/or replace system facilities to
       provide necessary day-to-day operational reliability and to be capable of supplying
       average winter-level demand after a maximum credible earthquake.

    2. IMPROVE DROUGHT RELIABILITY – Increase the reliable yield so that the system
       can consistently supply at least 90% of normal water use during extensive droughts.

    3. MEET EXISTING WHOLESALE CUSTOMERS’ NEEDS – Construct system facilities
       so that it can meet gradual increases in existing wholesale customers needs to a level of
       209 MGD (annual average demand) in 2030, to accommodate planned growth and
       support the regional economy.

    4. CONTINUE TO DELIVER HIGH QUALITY DRINKING WATER – The system
       should continue to provide drinking water from the highest quality water supplies
       available.

    5. STEWARDSHIP: PRESERVE AND EXPAND WATERSHED LANDS – Preserve
       public ownership of SFPUC watershed lands in Bay Area for open space, wildlife and
       water quality. Acquire (or support public acquisition of) riparian corridor lands in Lower
       Tuolumne Basin and provide financial support for habitat restoration and public
       access/recreation in Lower Tuolumne.

At the workshop, the commission discussed alternative levels of reliability and service that might
be provided by San Francisco and considered the following critical questions:
• To what degree the water should be treated and with what reliability;
• How much water the system should be capable of providing during a drought;
• How much, if any, additional water the regional system should provide to meet the needs of
    existing and future residents and businesses outside San Francisco; and




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                                                       Attachment A – Quarterly Water Issues Update

•   How soon water should be available from the regional water system following a major
    natural or man-made disaster.

The commission discussed alternative scenarios for each of these questions. Of the two
alternatives presented for “seismic reliability”, the commission chose the lower service level, or
“basic service”, defined as winter demands. These would supposedly include all water needed
for domestic and industrial needs in the winter and do not include irrigation demands. However,
irrigation does not constitute the only difference between summer and winter demands; water use
in cooling towers is also higher in the summer. The cost for the set of projects needed for the
“basic service” option was $2.158 billion, while the cost for the “basic service + 20%” option
was $2.248 billion, an increase of $90 million, or 4%.

The alternatives for “delivery reliability” were to: A) ensure delivery of summer demands; or B)
ensure delivery of annual average demands given one unplanned outage concurrent with one
planned outage of major facilities. The commission again chose the lesser standard. The
estimated costs for the A and B options are $968 million and $803 million, respectively.

Both of the “water quality” options presented met current and anticipated local, state, and
federal requirements, but one included watershed protection projects such as purchasing key
parcels of land to ensure that they wouldn’t be developed and fencing to keep cows out of creeks.
The commission chose the option that included the watershed protection projects. The basic
option cost was $270 million, while the option with watershed projects cost $345 million.

Three “water supply” options were presented that differed by the amount of water the regional
system could be expected to deliver in a design drought (8 ½ years of drought – the 1987-1992
hydrology followed by the 1976-1977 hydrology). The options included: A) 100% delivery of
demands during the drought (i.e. no cutbacks); B) 90% delivery of demands during the drought
(i.e. 10% cutbacks); and C) 80% delivery of demands during the drought (i.e. 20% cutbacks).
The commission voted for option C, but wanted to see additional information about the impacts.
The options were expected to cost $1,222 million for option A, $603 million for B, and $422
million for C. Option A included an expansion of Calaveras Reservoir from its current 97,000
acre-feet (AF) to 420,000 AF and a 14 million gallons per day desalination plant.

The commission is expected to make decisions on the PEIR objectives at its February 8 meeting.

Updated Wholesale Water Cost Projections
In December BAWSCA provided updated wholesale water rate projections. Since the SFPUC
still doesn’t have a financing plan for its CIP (and are even now reviewing the CIP’s objectives),
the numbers for the out years are still speculative. The nearer years’ estimates are better and
show that the rates are expected to be significantly lower than predicted just six months ago as
shown in the chart below:




Item 1: Utilities Quarterly Report Update Attachment A: Water                          Page 5 of 19
                                                                     Attachment A – Quarterly Water Issues Update


                                        SFPUC/SCVWD Wholesale Water Rates
                        $1,200



                                               SFPUC Rate Projection - 6/11/04
                        $1,000
                                               SFPUC Rate Projection - 12/14/04
                                               SCVWD Pump Tax (Groundwater)
Commodity Cost ($/AF)




                                               SCVWD Treated Water Rates
                         $800



                         $600



                         $400



                         $200



                           $0
                                 1971



                                        1976



                                                    1981



                                                              1986



                                                                       1991



                                                                                  1996



                                                                                         2001



                                                                                                2006



  IV.                       Bay Area Water Supply and Conservation Agency Activities                    2011

  Drain Hetch Hetchy
  Media coverage of the proposal to drain the Hetch Hetchy reservoir has continued and the idea
  has captured the imaginations of legislators. In mid-September, two legislators (Canciamilla, D-
  Pittsburg and Wolk, D- Davis) wrote the governor urging him to endorse a study to drain the
  reservoir. They requested that the Department of Water Resources (DWR) review the studies
  done by UC Davis and Environmental Defense and to “outline the necessary actions the state
  must take to achieve this restoration.”

  In November, the governor directed DWR to study the proposal. DWR’s Director indicated that
  his agency would neither conduct an exhaustive analysis nor take a position on removing the
  dam. Rather, it will collect data from studies already performed and prepare an assessment
  within a year.

  At a legislative staff policy briefing on November 26, BAWSCA’s General Manager Art Jensen
  made the following key points:


  Item 1: Utilities Quarterly Report Update Attachment A: Water                                        Page 6 of 19
                                                       Attachment A – Quarterly Water Issues Update

•     Government officials should insist that, until alternative facilities are physically in place with
      iron-clad institutional arrangements for their funding a operation, the Hetch Hetchy reservoir
      will remain as it is today.
•     Full costs and environmental impacts of eliminating the Hetch Hetchy reservoir must be
      calculated, including finding an alternate reservoir, treating the water, connecting to the
      present piping, operating the new system, and removing the dam.
•     Nothing should delay rebuilding the present Hetch Hetchy regional water system.
•     If legislators decide to consider this proposal, we believe hearings should be conducted by
      water, environmental, utility, and local-government committees.

BAWSCA Board Calendar
The calendar of future BAWSCA board action and report items includes:

Each Meeting
   • Report:       SF progress implementing AB 1823 – status
   • Report:       New master contract – status report
   • Report:       Questions on health impact of chloramine
January 2005
   • Report:       Status of water supply conditions (pre-snow season)
   • Report:       State audit of SFPUC maintenance practices
   • Action:       Election of officers (RFA and BAWSCA)
March 2005
   • Report:       Status of water supply conditions (mid-snow season)
   • Report:       Preliminary BAWSCA FY 05-06 Budget
May 2005
   • Action:       Adopt BAWSCA FY 05-06 Budget


V.       Regional Financing Authority Issues

The RFA Board met on January 20 and elected new officers, but has no meetings scheduled for
the future as the financing schedule for SFPUC’s CIP remains in flux due to the policy
discussions.


VI.      City of Palo Alto Utilities Issues

Capital Improvement Program Status Update
The Phase I Improvements Project entails preliminary design, final design, related studies (e.g.
environmental CEQA compliance, geotechnical evaluations) and construction-phase services for
various capital improvement projects related to improving distribution system water quality and
the reliability of the water supply system.

A contract with Carollo Engineers for this work was originally executed in June 2002. The
contract was amended in March 2004 (CMR:164:04) to include the following additional work:


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                                                       Attachment A – Quarterly Water Issues Update


•   Preparing an environmental impact report (EIR) for the well rehabilitation project, the new
    well sitting and construction projects, the new reservoir and pump station project, and the
    Mayfield reservoir pump station project which comprise the 8-hour emergency water supply
    project.

•   Expanding the scope of the basic improvements project (currently under design) to include
    two other projects not considered in the original scope: replacing the pumps (including
    related mechanical, electrical and instrumentation equipment) at the Boronda and Park pump
    stations.

The status of each of the projects as of January 12, 2005 is presented below:

1.     Reservoir Booster Station Improvements
This project consists of upgrading and replacing the mechanical, electrical, and instrumentation
equipment at the following pump stations: Quarry, Corte Madera, Boronda, Park, and Dahl. In
addition, this project will provide a secondary connection/supply to Pressure Area 4 (the area
generally bounded by Foothill Expressway, Page Mill Road, Arastradero Road, and Deer Creek
Road).
   • Carollo has completed the construction bid documents (plans and specifications) for this
       project. These construction documents also include the improvements under design in
       two other City projects: Distribution System Water Quality Enhancement and Existing
       Booster Station Improvements.
   • One issue that remained to be resolved is that portions of the pipeline connecting all of
       the Foothills Area pump stations and reservoirs has been operating at or above its design
       pressure. Carollo has provided the City with a letter outlining possible mitigation
       measures to address this issue. Carollo and the City met in July to discuss the options
       and found that the pipeline has been and will continue to operate within the original
       pipeline design safety factor.
   • The City has processed the CEQA documents (Categorical Exemption) for this work as a
       part of the Planning Department's December 2003 assessment and formal filing with the
       county.
   • Council awarded the contract to Anderson Pacific Engineering Construction,
       Incorporated on November 8, 2004 (CMR:465:04). Construction groundbreaking is
       expected to begin in February 2005, and to be complete within 10 months thereafter.

2.     Distribution System Water Quality Enhancement
This project consists of constructing reservoir mixing systems at Monte Bello, Dahl, Park, and
Mayfield reservoirs, and ammonia feed at the Hale, Rinconada, and Peers Park well sites. In
addition, Carollo provided the City with a water quality monitoring program and
recommendations for mobile dechlorination equipment that is used during the City’s annual
water system flushing operation.
    • This project is part of the larger package including the two projects described in 1. above
       and 2. below. As in those projects:



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                                                       Attachment A – Quarterly Water Issues Update

        o Carollo has completed the construction documents submittal as part of the larger
            submittal noted above;
        o The City has processed the CEQA documents (Categorical Exemption); and
        o Council awarded a contract for construction. Staff is working with the contractor to
            finalize construction schedules.
    •   The final nitrification action plan was delivered to the City to support operating the now
        chloraminated distribution system.
    •   Carollo also prepared the water-quality monitoring program to support distribution
        system management efforts for regulatory compliance. This monitoring program works
        in concert with the nitrification action plan to prevent nitrification episodes in the now
        chloraminated system.

3.      Existing Booster Station Improvements
This project consists of designing pressure regulator upgrades at the Quarry, Corte Madera,
Boronda, Park, and Dahl booster stations. These improvements are necessary to improve the
City’s ability to manage water quality in the Foothills Area, as well as supply emergency water
demands during a shutdown of SFPUC’s Hetch-Hetchy aqueduct system.
    • This project is part of the larger package including the two projects above. As in those
        projects:
        o Carollo has completed the construction documents submittal as part of the larger
            submittal noted above;
        o The City has processed the CEQA documents (Categorical Exemption); and
        o Council awarded a contract for construction. Staff is working with the contractor to
            finalize construction schedules.

4.     8-hour Emergency Water Supply Project
These projects consist of these major components:
   A. Reservoir, Pump Station, and Phase 1 Well – the new reservoir, pump station and well,
       which were recommended in the report entitled “Water Wells, Regional Storage, and
       Distribution System Study” (1999 Study), will help bring the City's system in compliance
       with the DHS recommended supply criteria of meeting at least 8-hours of maximum day
       demand while maintaining fire suppression reserves; and
   B. Existing and New Wells and Mayfield Pump Station – rehabilitating the City’s existing
       wells to enhance the supply reliability for on-going demands during a shutdown of the
       SFPUC Hetch-Hetchy aqueduct system. This project also includes expanding the
       Mayfield pump station to deliver water to the Foothills area in the event of such a
       shutdown.
The current status of the 8-hour emergency water supply project follows.
   • The initial phase of the Reservoir and Pump Station portion of the project is to evaluate
       environmental constraints at each of the potential reservoir sites. As part of this analysis,
       Carollo considered in the September 2004 draft Environmental Constraints Analysis
       (ECA) additional project alternatives including desalination, SCVWD connection, and
       the existing system interties for comparison to the recommendations made in the 1999
       Study.




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                                                       Attachment A – Quarterly Water Issues Update

    •   In November 2004, Carollo completed the final documentation of the ECA, including
        evaluation of the project alternatives.
    •   The test hole programs for the Phase I well, and for a possible well at the Roth site
        (Heritage Park), were completed in November 2003. Carollo has prepared the report for
        this work. The draft report was submitted to the City in June 2004. This information was
        made part of the November 2004 ECA.
    •   Carollo will assist the City with the public involvement (PI) program for this project.
        The PI program is scheduled to begin this month or next depending on individual
        schedules with the purpose of gauging and accounting for public interest in the
        improvement projects, and to help refine the list of possible project sites to help focus the
        EIR.
    •   Design work for the improvements will not start until after the EIR is complete. The
        projected date for EIR certification is November 2005.


VII.         Santa Clara Valley Water District Activities

SCVWD Partnership for DSM activities
CPAU will continue the successful partnership with Santa Clara Valley Water District
(SCVWD) by participating in the next iteration of the water conservation programs. Partnering
with SCVWD, CPAU will take advantage of grant money obtained by SCVWD and the
SCVWD’s technical expertise, minimize the need for start-up costs, and reduce demands on
CPAU staffing resources for putting together water conservation programs. Moreover,
participating in SCVWD water conservation efforts will assist CPAU in accomplishing key
components of the California Urban Water Conservation Council’s Best Management Practices.
Additionally, with the expected increase in CPAU water rates in the near future, water
conservation efforts are more critical than ever to assist CPAU customers in keeping their utility
cost down. Over $200,000 will be offered in water conservation programs through this
partnership, with CPAU contributing $96,000 towards these programs, and will save CPAU
$10,000 in expenditures from last year’s cost-sharing agreement.

As a result of the previous SCVWD and CPAU cost-sharing agreement MOU, CPAU customers
participated in many varied water conservation programs. Participation rates for Palo Alto
residents and businesses are among the highest in the SCVWD’s countywide water conservation
efforts. Examples of these successful programs include:
• The “Water Wise House Call Program” served 710 Palo Alto residents;
• 23 residents and businesses have participated in the ET Controller program; and
• Over 100 commercial clothes washers have been replaced during this partnership.


VIII.        Operating Measures

The four attached charts describe water utility operating measures for FY 04-05 through
December 2004. Note that the data shown in these charts for the November 2004 quarterly
report to the UAC (for FY 04-05 through September 2004) contained errors. The data shown on


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                                                       Attachment A – Quarterly Water Issues Update

these charts corrects those errors and provides the correct data for FY 04-05 through December
2004:
       Water System O&M - Mainline Leak Repairs
       Water Main Leaks by Type of Pipe
       Water Main Shutdowns and Customers Affected
       Unplanned Water Service Disruption


IX.     Attachments
SFPUC Hydrological Conditions Report for December 2004




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                                                            Attachment A – Quarterly Water Issues Update



                                                  Water System O&M Mainline Leak Repairs
                  Number of Hours to Repair
                                                         FY 04-05 (as of Dec. 2004)

                                              5
                                                                                                   Target 4 Hours or Less
                                              4
                                              3

                                              2
                                              1
                                              0
                                                   1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
                                                                 Break Number
     100% services restored in 4 hours or less
                                                                                                   Total No. of breaks: 9
                                                                                                   Avg. Hrs. to Repair: 2



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                                                       Attachment A – Quarterly Water Issues Update


                                          Water Main Leaks by Type of Pipe
                                        Material Failure Only (FY 04-05 as of Dec. 2004)

                      35


                      30                                        PVC

                      25
    Number of Leaks




                      20                                        AC

                      15
                                                                                                                      Other
                      10


                       5                                                Cast Iron

                       0
                       1994   1995    1996         1997          1998    1999     2000        2001       2002     2003     2004

             Miles of CI: 59.1 (31% )                 Miles of AC: 124.3 (56% )                 Total Miles of Main: 226
             Miles of PVC: 22.1 (5% )                 Miles of CCP: 17.3 (8% )



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                                                                                   Attachment A – Quarterly Water Issues Update



                                                       Water Main Shutdowns & Customers Affected
       Number of Shutdowns & Customers Affected

                                                             Planned and Unplanned FY 04-05

                                                  90
                                                                                                                        Customers Affected
                                                  80
                                                                                                                        Number of Shutdowns
                                                  70
                                                  60
                                                  50
                                                  40
                                                  30
                                                  20
                                                  10       1        2        4         2        1     00
                                                   0
                                                                 Aug-04




                                                                                                                                            Apr-05




                                                                                                                                                              Jun-05
                                                        Jul-04




                                                                          Sep-04




                                                                                             Nov-04




                                                                                                                         Feb-05

                                                                                                                                   Mar-05
                                                                                                               Jan-05
                                                                                    Oct-04




                                                                                                                                                     May-05
                                                                                                      Dec-04




    Total Customers Affected: 193
    Total Shutdowns: (Planned -1, Unplanned - 9 )


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                                                           Attachment A – Quarterly Water Issues Update



                                               Unplanned Water Disruptions
                                                By Cause/Main Lines Only

                         3                     Material Failure             3rd Party           City Crews
     Number of Outages




                         2


                         1

                             0 0          0          0 0 0 0 0 000
                         0
                                                          Oct-04




                                                                                                           Mar-05




                                                                                                                             May-05
                                                                                       Jan-05

                                                                                                 Feb-05




                                                                                                                    Apr-05




                                                                                                                                      Jun-05
                             Jul-04

                                      Aug-04

                                                 Sep-04




                                                                   Nov-04

                                                                              Dec-04




    Total Material Defect: 3                                                                      Total City Crews: 0
    Total 3rd Party: 6                                                                            Total Disruptions: 9


Item 1: Utilities Quarterly Report Update Attachment A: Water                                     Page 15 of 19
                                                       Attachment A – Quarterly Water Issues Update




Item 1: Utilities Quarterly Report Update Attachment A: Water                         Page 16 of 19
                                                       Attachment A – Quarterly Water Issues Update




Item 1: Utilities Quarterly Report Update Attachment A: Water                         Page 17 of 19
                                                       Attachment A – Quarterly Water Issues Update




Item 1: Utilities Quarterly Report Update Attachment A: Water                         Page 18 of 19
                                                       Attachment A – Quarterly Water Issues Update




Item 1: Utilities Quarterly Report Update Attachment A: Water                         Page 19 of 19
                                                                        Attachment B – Quarterly Gas Issues Update


                                           QUARTERLY GAS ISSUES UPDATE
                                                  February 2005


I.              Supply Issues

Wholesale Natural Gas Prices
Gas prices have reacted to a variety of fundamental market forces in the past three months. While
gas prices have more or less followed crude oil prices, a lack of cold weather caused a price decrease
last month while a recent forecast for colder temperatures in the Northeast has resulted in an increase
in forward prices. The average projected price at PG&E Citygate over the next twelve months was
$6.33 per MMBtu as of January 10, 2005. Figure 1 below provides historical monthly bidweek
index prices and projected future natural gas prices at PG&E Citygate.

                             Natural Gas Wholesale Prices at PG&E Citygate
                                                             as of January 10, 2005
      $12                 - Implied volatility from at-
                          the-money option prices
                          used to generate ranges
                          - 1 standard deviation
      $10                 - Approx a 30% chance that
                          the actual price will be
                          outside the high and low
           $8             range

                                                                               High
 $/MMBtu




           $6
                                                                               Projected

           $4                                                            Low
                      Actual

           $2


           $0
                               Ju




                                                          Ju




                                                                                  Ju




                                                                                                     Ju
                 Ja




                                           Ja




                                                                      Ja




                                                                                            Ja




                                                                                                              Ja
                                 l-0




                                                            l-0




                                                                                    l-0




                                                                                                      l-0
                   n-




                                             n-




                                                                        n-




                                                                                              n-




                                                                                                                n-
                                                                                                06
                     03




                                               04




                                                                          05




                                                                                                                  07
                                     3




                                                                4




                                                                                        5




                                                                                                          6




                                                                    Figure 1

Supply Acquisition
In June 2000, staff began to implement the “laddered” gas procurement strategy to lock in gas costs
for pool customers (customers not eligible for direct access). The laddering strategy was revised in
January 2004 and presented to the City Council in March 2004 [CMR:167:04].
Approximately 90% of the expected pool load is hedged for the remainder of FY 2004/05 with an
expected cost of $18 million for the City’s total load (pool customers plus large customers either on


____________________________________________________________________________________________
Item 1: Utilities Quarterly Report Update Attachment B: Gas                      Page 1 of 10
                                                                                    Attachment B – Quarterly Gas Issues Update

the G-3 rate or a contract rate). Approximately 82% of the expected pool load is hedged for FY
2005/06 with an expected cost of $19.4 million for the City’s total load. Figure 2 shows the
expected pool load for the next 36 months and the status of the laddering strategy.

                                             Gas Supply Procurement Program for Pool Customers
                                           Monthly Fixed-price Purchase Volumes Compared to Target
                                                             as of January 10, 2005

                               * Shaded area represents
         500,000               minimum and maximum
                               purchases under laddering                         Expected Pool Customer Load
         450,000               strategy
                               ** Forecast revised       Actual Fixed-Price Purchases
         400,000               December 2004

         350,000
                                                                                  Fixed-price
 MMBtu/Month




                                                                                  Purchase Target
         300,000

         250,000

         200,000

         150,000
                                                         89% Target                                         50% Target                   30% Target
         100,000                                       81% Actual                                        42% Actual                   12% Actual
                                                     60% min - 100% max *                           40% min - 75% max *             20% min - 50% max*
               50,000

                    0
                     05


                              5




                                                05


                                                         5




                                                                                       6




                                                                                                    6
                                                                       5

                                                                      06




                                                                                      06




                                                                                                                 6

                                                                                                                07


                                                                                                                               7




                                                                                                                                        07


                                                                                                                                                 7

                                                                                                                                                          7
                                      05




                                                                                     06




                                                                                                                              07
                           r-0




                                                       -0




                                                                                                 -0


                                                                                                               -0
                                                                 -0




                                                                            r-0




                                                                                                                       r -0




                                                                                                                                               -0

                                                                                                                                                         -0
                   b-




                                            g-




                                                                    b-




                                                                                   g-




                                                                                                              b-




                                                                                                                                    g-
                                    n-




                                                                                  n-




                                                                                                                            n-
                                                     ct




                                                                                               ct




                                                                                                                                             ct
                                                             ec




                                                                                                        ec




                                                                                                                                                     ec
                          Ap




                                                                                                                     Ap
                                                                           Ap
                 Fe




                                                                  Fe




                                                                                                            Fe
                                           Au




                                                                                Au




                                                                                                                                   Au
                                                                                Ju
                                  Ju




                                                                                                                          Ju
                                                     O




                                                                                              O




                                                                                                                                             O
                                                             D




                                                                                                        D




                                                                                                                                                     D
                                                                                Figure 2

Because of the fixed-price purchases, the City’s weighted average cost of gas (WACOG) differs
from the monthly market price. The City’s estimated WACOG for the pool is $5.22 for FY 2004/05,
significantly below the current weighted average forward market price of approximately $6.14 per
MMBtu. The City’s estimated WACOG for the pool is $5.71 for FY 2005/06, compared to the
current weighted average forward market price of approximately $6.47 per MMBtu. In the months
close to the end of the laddering time horizon, the City’s WACOG is closer to the forward market
price since purchases were done more recently and because a smaller fraction of the total gas needs
have been purchased for this period (as shown in Figure 2).

Figure 3 below illustrates the difference between market prices and the City’s estimated WACOG.




____________________________________________________________________________________________
Item 1: Utilities Quarterly Report Update Attachment B: Gas                      Page 2 of 10
                                                                                          Attachment B – Quarterly Gas Issues Update


                                                    Gas Market Prices vs Pool Purchases
                                                                                  (as of 1/10/05)


                                    7.5
                                                                                Forward Market Price
      Natural Gas Price ($/MMBtu)




                                    7.0

                                    6.5

                                    6.0

                                    5.5

                                    5.0

                                    4.5
                                      Expected Pool WACOG                       Fixed-Price Pool Purchases
                                    4.0
                                          Fe




                                                             Au


                                                                    N


                                                                            Fe




                                                                                               Au


                                                                                                      N


                                                                                                              Fe




                                                                                                                                 Au


                                                                                                                                        N
                                                    M




                                                                                      M




                                                                                                                        M
                                                                     ov




                                                                                                       ov




                                                                                                                                         ov
                                                    ay




                                                                                       ay




                                                                                                                        ay
                                             b-




                                                                               b-




                                                                                                                 b-
                                                               g-




                                                                                                 g-




                                                                                                                                   g-
                                                                      -0




                                                                                                        -0




                                                                                                                                          -0
                                                       -




                                                                                          -




                                                                                                                           -
                                               05




                                                                                 06




                                                                                                                   07
                                                               05




                                                                                                 06




                                                                                                                                   07
                                                        05




                                                                                          06




                                                                                                                            07
                                                                        5




                                                                                                          6




                                                                                                                                            7
                                                                                      Figure 3


II.                                   Regulatory Issues

PG&E Biennial Cost Allocation Proceeding (BCAP) Application
In the BCAP, PG&E proposes a total revenue requirement of $3.66 billion consisting of four
components: procurement (63%), distribution and transportation (30%), public purpose programs
(4%), and transportation balancing accounts (3%). Most of the costs are allocated to PG&E’s retail
customers, with only natural gas vehicle (NGV) program costs, the rate discount for PG&E
employees, and various balancing accounts being allocated to wholesale customers.

PG&E proposes to allocate $102,000 per year in costs to the wholesale class, 0.003% of the total
BCAP revenue requirement. Reflecting its 87% share of forecasted wholesale gas usage, Palo Alto
is allocated 87% of the total or $87,000 per year compared to today’s cost of about $74,500. If the
CPUC approves PG&E’s proposed revenue requirement, throughput forecast, and cost allocation,
Palo Alto’s Customer Class Charge would be $0.0257 per MMBtu, up slightly from the current
charge of $0.022 per MMBtu. The Customer Class charge will account for about 9% of Palo Alto’s
total transportation revenue payment of $990,000 to PG&E in 2005. Staff and Palo Alto’s
consultants have checked PG&E’s cost allocations and it appears that PG&E has properly applied
existing CPUC policies to compute Palo Alto’s rate. The new rates are proposed to be effective July
1, 2005 for a two-year period.



____________________________________________________________________________________________
Item 1: Utilities Quarterly Report Update Attachment B: Gas                      Page 3 of 10
                                                 Attachment B – Quarterly Gas Issues Update

Although evidentiary hearings are scheduled to begin February 10, PG&E plans to initiate settlement
discussions among interested parties. PG&E believes there are a limited number of issues in the
proceeding and that a settlement is obtainable. Staff plans to attend the settlement meetings
primarily to make sure that any proposed settlement does not adversely affect Palo Alto.


III.  Key and Major Accounts
Nothing to report.


V.      Operational Measures
The attached graphs provide information on operational measures for FY 04-05 through December
2004. Note that the data shown in these charts for the November 2004 quarterly report to the UAC
(for FY 04-05 through September 2004) contained errors. The data shown on these charts corrects
those errors and provides the correct data for FY 04-05 through December 2004:
    Gas System O&M – Mainline Leak Repairs
    Gas System O&M – Service Installations
    Gas Main Leaks By Type of Pipe
    Gas Meter Exchange Productivity Measurement
    Gas Main Shutdowns & Customers Affected
    Unplanned Gas Service Disruptions




____________________________________________________________________________________________
Item 1: Utilities Quarterly Report Update Attachment B: Gas                      Page 4 of 10
                                             Gas System O&M Mainline Leak Repairs
                                               FY 04-05 (through December 2004)


                             6
  Restoration Time (Hours)




                             5
                                                                   Target: 95% Restoration in 4 Hours or Less
                             4

                             3

                             2

                             1

                             0
                                 1   4   7        10        13          16          19          22          25          28
                                                           Break Number
     94% of repairs completed
                                                                         Total Number of Leaks = 15
     within 4 hours
                                                                         Avg. hours to repair = 2.3


____________________________________________________________________________________________ Item 1: Utilities Quarterly Report Update
Attachment B: Gas                                                                Page 5 of 10
                           Gas System O&M Service Installations Number of
                             Days From Payment to Installation FY 04-05
                                                                                            Target 38 Days or Less
                      40
                      35
     Number of Days




                      30                                                                                         Installed
                      25
                      20
                      15
                      10                                                                                       to MSC
                      5
                      0
                            1




                                     6




                                                         11




                                                                             16




                                                                                                 21




                                                                                                                    26
               Number of Service Installations through December 2004
                                                 Total No. of Installations = 23
   100% of services installed within 38 days     Avg. Days to Complete = 18.7


____________________________________________________________________________________________ Item 1: Utilities Quarterly Report Update
Attachment B: Gas                                                                Page 6 of 10
                                 Gas Main Leaks by Type of Pipe
                             Material Failure Only (FY 04-05 as of Dec. 2004)

                       120
                                                                                           ABS
                       100
    Number of Breaks




                                                                                        Steel
                       80
                                                                                         PE
                       60

                       40

                       20                                                                       Other

                        0
                        1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
    Miles of PE: 35.6 (17.7%)
    Miles of ABS: 43.5 (21.8%)                                                         Miles of BWP: 73.1 (36.4%)
    Miles of PVC: 45.5 (24.2%)                                                         Total miles of Main: 207



____________________________________________________________________________________________ Item 1: Utilities Quarterly Report Update
Attachment B: Gas                                                                Page 7 of 10
                               Gas Meter Exchange Productivity Measurement
                                        Target vs. Actual Exchange

                         250
   Number of Exchanges




                         200
                                                                                                               Target:
                         150                                                                             120 Exchanges/month

                         100

                          50

                           0
                                          Aug-04
                                 Jul-04




                                                                                                                                      Jun-05
                                                   Sep-04




                                                                                                                    Apr-05
                                                                                                Feb-05




                                                                                                                             May-05
                                                                                       Jan-05
                                                                     Nov-04
                                                            Oct-04




                                                                                                           Mar-05
                                                                              Dec-04




 As of December 2004                                                                                      Total Exchanges: 938
 20,708 Residential Gas meters in system                                                                   Avg. per month: 156


____________________________________________________________________________________________ Item 1: Utilities Quarterly Report Update
Attachment B: Gas                                                                Page 8 of 10
                                                  Gas Main Shutdowns & Customers Affected
                                                                 FY 04-05
                                                                                                                 Number of Shutdowns
                                                                                                                 Planned
                                     6                                                                                                                  150
                                                                                                                 Unplanned
                                                                                                                 Customers Affected
   Number of Shutdowns, Planned or




                                     5                                                                                                                  125




                                                                                                                                                              Customers Affected
                                     4                                                                                                                  100
              Unplanned




                                     3                                                                                                                  75


                                     2                                                                                                                  50


                                     1                                                                                                                  25

                                           0        0        0        0        0        0
                                     0                                                                                                                  0
                                         Jul-04   Aug-04   Sep-04   Oct-04   Nov-04   Dec-04   Jan-05   Feb-05    Mar-05     Apr-05   May-05   Jun-05


                                     Total Customers Affected: 383
                                     Total Shutdowns: (Planned - 0, Unplanned - 17)




____________________________________________________________________________________________ Item 1: Utilities Quarterly Report Update
Attachment B: Gas                                                                Page 9 of 10
                              Unplanned Gas Service Disruptions by Cause
                                          Main Lines Only

                      6
                                                              Mat. Failure         3rd Party          City Crews
   Number of Breaks




                      5
                      4
                      3
                      2
                      1
                          0 0 0                 0 0            000       00
                      0
                          Jul-04

                                   Aug-04

                                            Sep-04

                                                     Oct-04

                                                                Nov-04

                                                                         Dec-04

                                                                                  Jan-05

                                                                                            Feb-05

                                                                                                     Mar-05

                                                                                                              Apr-05

                                                                                                                       May-05

                                                                                                                                Jun-05
      Total Material Defect: 3                                                             Total 3rd Party: 13
      Total City Crews: 2                                                                  Total Disruptions: 18


____________________________________________________________________________________________ Item 1: Utilities Quarterly Report Update
Attachment B: Gas                                                               Page 10 of 10
                                         Attachment C – Quarterly Electric and Fiber Issues Update

                    QUARTERLY ELECTRIC AND FIBER ISSUES UPDATE
                                  February 2005


I.       Update on FERC, CAISO, CPUC, Transmission, and Other Related Activities

Electric Industry Market Design in California
The California Independent System Operator (CAISO) continues to work on the design of the
Market Redesign & Technology Update (MRTU)1 project. The CAISO’s current priority for MRTU
is the resolution of a number of policy issues. Staffs from Palo Alto and other Bay Area cities in
addition to consultants are participating in CAISO stakeholder groups with the goal of preserving the
value of the City’s current contracts and Metered Subsystem (MSS) status. Current issues of interest
to the City include:
1. The Transitional Alternative Pricing and Settlement (TAPAS) is being developed as a
   contingency market settlement design in the event that concerns the CAISO has about the
   economic impact of the Sellers’ Choice contracts2 and market power issues under a Locational
   Marginal Pricing (LMP) settlement regime are not resolved by February 2007 (the current date
   for full implementation of MRTU). The CAISO will determine how to proceed with TAPAS
   once they know the outcome of the Federal Energy Commission (FERC) proceedings on Market
   Power Mitigation (ruling expected January 2005) and Seller’s Choice contracts (ruling expected
   June 2005). The City is not party to any Seller’s Choice contracts. However, in an attempt to
   solve the Seller’s Choice problems, the CAISO is proposing inter-scheduling coordinator (SC)
   trade settlement rules that will impact the cost, value, and contract language of energy trades.
   Therefore staff and consultants are participating in the stakeholder group and will
   propose/support designs that allow for market liquidity and effective hedging of congestion cost
   risk.

2. The CAISO filed their proposal for treatment of Existing Transmission Contracts (ETC) with
   FERC in December 2004. The proposed approach would reserve ETC capacity, which is
   unscheduled in the Day Ahead Market, on interties only. ETC capacity that is unscheduled in
   the Day Ahead Market would not be reserved, but the CAISO would allow for schedule changes
   through real time (consistent with the ETC) and provide a hedge against any resulting congestion
   costs to the ETC holder. The City does not hold any ETCs but remains involved in this
   proceeding. The City’s interests are to: 1) ensure that transmission ownership rights [as we have
   through our participation in The California-Oregon Transmission Project (COTP)] remain
   outside of the ETC proceeding and continue to be fully reserved; 2) support the protection of
   existing contracts; and 3) monitor the cost impact of ETC treatment.

3. A key element of LMP market design is the use of Congestion Revenue Rights (CRRs) as a
   hedge against the risk of congestion costs. The CAISO is conducting its CRR Study 2, which
   the City is participating in via the Northern California Power Agency (NCPA). The goal of the

1 Formerly known as Market Design 2002 (MD02)
2 The Seller’s Choice contacts refer to a set of contracts negotiated by the state during the energy crisis, which
provided for the sellers option to pick delivery points and under some contracts both delivery and receipt points.

Item 1: Utilities Quarterly Report Update Attachment C: Electric & Fiber                              Page 1 of 14
                                         Attachment C – Quarterly Electric and Fiber Issues Update
    study is to determine the effectiveness of CRRs as a hedge against annual congestion costs.
    Results from the study are expected during the 2nd quarter of 2005, and the CAISO is planning to
    file its final rules for allocating CRRs by the 3rd quarter of 2005.
4. The CAISO released a white paper in November 2004 with its proposal for integration of MSS
   in MRTU. The CAISO’s anticipated timeline is to get a FERC ruling by the 4th quarter of 2005.
   Staff and consultants continue to participate in the stakeholder group because the final treatment
   of MSS will impact NCPA’s scheduling and load following capabilities, and will affect the
   City’s CRR allocations and energy settlements with the CAISO.

Resource Adequacy
Another major component of California’s market redesign is the resource adequacy requirement
whereby utilities are expected to demonstrate ahead of time that they have adequate generation
capacity to meet their load requirements. The lead ageancy for this issue has been the California
Public Utilities Commission (CPUC).

The CPUC issued its Phase 1 decision for CPUC jurisdictional load-serving entities (LSEs) in
October 2004: Full implementation of the 15-17% planning reserve margin (PRM) should be
reached by June 1, 2006. By Sept. 30th each year, CPUC jurisdictional LSEs must submit
compliance filings with the CPUC to show that they have lined up 90% of their forward
commitments for the subsequent year’s May through September period. A 100% month-ahead
forward commitment obligation is required for all months of the year. While this decision does not
apply to munis, it is probable that we will have to adopt similar practices and would impact
resource-purchasing decisions for the electric portfolio. The CAISO has until February 7, 2005 to
file any changes to its market redesign to reflect this CPUC order on resource adequacy. Both
NCPA and the California Municipal Utilities Association (CMUA) are initiating discussions and
comparisons of our own planning practices to the CPUC’s decision.

The CPUC decision also dealt with resource counting conventions, which are the means by which
resources are determined to be eligible as qualifying capacity that satisfies the forward commitment
obligations. Of particular interest to the City are the resource counting conventions for liquidated
damages contracts and intermittent resources. The CPUC concluded that:
1. Existing liquidated damages contracts should be counted at some undefined level, subject to
   deliverability and other screens, just like other resources. In Phase 2 of the resource adequacy
   proceeding the CPUC directs the parties to consider alternative contract language that will create
   substitute products available on the market that will be easier to track and verify than current
   liquidated damages contracts.

2. A method using historical performance is appropriate for counting intermittent resources.
   However, the CPUC requires that it be determined in a way that will reveal monthly differences.
   Further, the CPUC will evaluate segregating wind resources based on geographic locations.

The CPUC is now conducting Phase 2 of the resource adequacy proceeding and aims to reach a final
decision by mid 2005. Phase 2 will result in a final decision on load forecasting protocols and
resource counting conventions, and will design deliverability screens to permit implementation by
all jurisdictional LSEs. The deliverability screens are likely to include:

Item 1: Utilities Quarterly Report Update Attachment C: Electric & Fiber              Page 2 of 14
                                         Attachment C – Quarterly Electric and Fiber Issues Update
1. Deliverability to aggregate of California load. This means that for resources in generation
   pockets (South of Miguel, Contra Costa County), not all resources would fully count for an LSE
   that has contracted for them because they cannot all “get out” of the generation pocket to serve
   system load.

2. Deliverability of imports. LSEs would not be able to contract for an unlimited amount of
   resources since import capability may be constrained.

3. Local deliverability. While the CPUC recognized arguments that imposing local deliverability
   requirements on LSEs may increase costs, and raise issues of market power since, by definition,
   fewer resources would qualify to meet local requirements, the CPUC concluded that benefits to
   reliable system operation outweigh those concerns. The CPUC further concluded that it would
   like to replace the current Regulatory Must-Run (RMR) construct with contracting by LSEs,
   while recognizing that RMR will continue in the near term, and may be a needed backstop in the
   long term.

Transmission and Other Related Activities
Staff has submitted a request to PG&E for PG&E to draft a Study Plan for the City to convert to 230
kilo-volt (kV) service. This would consist of a system impact study and cost estimate for conversion
of two of the existing three 115 kV lines to 230 kV operation.


II.   Western Area Power Administration (Western) Issues & LEAP Update

Western Issues
Western transitioned to the Post-2004 operation situation smoothly but with a number of
improvement opportunities beginning to show. There were no electrical glitches even as Western
joined the newly created Sacramento Municipal Utility District (SMUD) control area. There are a
number of resource communication glitches, and sub-optimal control strategies that are to be
corrected in the coming months. For example, the transfer of information between the two Federal
Agencies (Reclamation and Western) needs to be smoothed out and better resource utilization
strategies need to be developed and implemented.

Western Post-2004 Base Resource Contract
Western approved and implemented the assignment of Palo Alto’s Western Base Resource
Percentage to NCPA to achieve the pooling benefits. A companion bilateral agreement, the
Assignment Administration Agreement (AAA), has also been implemented to specify the rights and
responsibilities of parties and methodology to share pooling benefits.

Western currently has more Project Use pumping load than it has generation while refilling its
reservoirs. Therefore Western is not expecting to provide noticeable amounts of energy to Base
Resource customers until March.

Western Post-2004 Custom Product Contract
Palo Alto executed the Custom Product Contract to act as a six-year enabling agreement for buying
power for shorter durations. Staff may, at a later date, seek authority from Council to manage

Item 1: Utilities Quarterly Report Update Attachment C: Electric & Fiber             Page 3 of 14
                                         Attachment C – Quarterly Electric and Fiber Issues Update
purchases of less than 20 MW for less than 12-month strips. Staff will continue to keep the UAC
informed on the status of these contracts in the coming months.

Western Post-2004 Rates
Western completed its formal rate development process and published its rates. Palo Alto will soon
be paying about $300,000 each month for Base Resource in winter season and about $450,000 each
month in the April-October period.

Long Term Electric Acquisition Plan (LEAP) Implementation Update
Staff is working on a number of aspects related to the LEAP implementation plan approved by the
Council on August 7, 2003. An informational report on the topic was provided to the Council in
August 2004 [CMR:370:04] and presented to the UAC in September. The upcoming electric energy
picture and progress in implementing LEAP was presented to Council and the public in a study
session conducted during the Council meeting on October 12, 2004.

The local generation feasibility study was delayed slightly in order to get the first tier of renewable
energy contracts in place. In order to improve coordination with other City-wide priorities,
recognizing important constraints on resource availability from other departments that are needed to
participate in the study, and noting the critical interdependence of all in-town resources including
energy efficiency, demand response, and local generation, staff is first placing more initial analysis
emphasis on revisiting the achievable potential for both demand-side efforts and customer-sited
distributed generation and cogeneration. Staff has identified these key areas where improved
information is needed in more detail to adequately engage the public in understanding the broad
range of alternatives and helping to shape CPAU’s long-term energy plans. Public engagement
efforts are still in the works to start in the spring, which require some additional and coordination
with other important City-wise public outreach efforts.

Wholesale power prices remain relatively high and volatile, as the prices tend to follow natural gas
prices. For example, the Northern California on-peak strip price for calendar year 2006, which
began trading in October 2001, is currently trading at $63 per megawatt hour (MWh). The current
price is significantly higher than the all-time low price of $33 per MWh in January 2002, however
lower than the high of $70 per MWh in October 2004. Figure 1 below shows forward prices for
Northern California.




Item 1: Utilities Quarterly Report Update Attachment C: Electric & Fiber                Page 4 of 14
                                         Attachment C – Quarterly Electric and Fiber Issues Update




                                             Figure 1
Staff continues to purchase diversified “laddered” blocks of electric power to fill short to mid-term
supply needs. Figure 2 below shows the monthly load-resource balance for the next three years.
Projections for hydro resources from Calaveras and Western for the next 12 months are based on
current reservoir levels and average precipitation and inflow conditions. Beyond 12 months, the
long-term average forecast of generation is used. A fiscal year summary of the City’s load-resource
balance is shown in Figure 3.




                                                      Figure 2


Item 1: Utilities Quarterly Report Update Attachment C: Electric & Fiber              Page 5 of 14
                                               Attachment C – Quarterly Electric and Fiber Issues Update



                        Electric Supply Resources as of January 13, 2005
                                  Assuming Average Hydro Year
                1,200

                         2% surplus
                                      8% deficit     26% deficit    26% deficit   29% deficit
                1,000



                 800
   Annual GWh




                                                                                                Deficit
                                                                                                Market Transactions
                 600                                                                            Renewables
                                                                                                Calaveras
                                                                                                Western
                 400



                 200



                   0
                         FY 04-05     FY 05-06      FY 06-07       FY 07-08       FY 08-09

                                                         Figure 3

A detailed transactions report showing the date of forward market purchase commitments made,
price, quantity, supplier, total cost, prevailing market value, etc, are provided in the Quarterly
Energy Risk Manager’s reports.

Council approved long term power purchase agreements from wind and landfill gas on November 8,
2004 and January 18, 2005. Wind deliveries started in December 2004 and are expected to meet
approximately 6% of the City’s annual load. Once the two landfill-generating facilities are on-line,
expected in 2006 to 2007, these will provide another 6%. To date, CPAU has secured specific non-
large-hydro renewable energy purchases for 2007 and beyond equivalent to 13% of the City’s total
electric supply. Under normal hydro conditions, large hydro from Western and Calaveras comprise
49%, and the remaining 38% are either laddered market purchases or not yet acquired.

The landfill generator that has operated at the Palo Alto landfill since 1989 was decommissioned in
January 2005. The plant was owned and operated by WPI, selling power to PG&E. CPAU
evaluated the potential to use the Palo Alto landfill gas to generate electricity, but found that the
resource was not economic. In addition, using the landfill gas as a direct energy source in the
Regional Water Quality Control Plant (RWQCP) sludge incineration process is more efficient and
provides more net environmental benefits.


Item 1: Utilities Quarterly Report Update Attachment C: Electric & Fiber                           Page 6 of 14
                                         Attachment C – Quarterly Electric and Fiber Issues Update

III. Miscellaneous Legislative/Regulatory Issues Update

Back Charges Related to Scheduling Coordinator Service (SCS) Tariff
As outlined in prior reports, Palo Alto’s share of this alleged claim for PG&E services is
approximately $6.9 million, with an additional claim of $1.6 million for accrued interest for a total
of approximately $8.5 million. Via NCPA, the City has been depositing 1/12 of this amount
(approx. $730,000/month) into an escrow account each month starting in June 2004. The entire $8.5
million has been recognized in the FY 03-04 financial statement and year-end electric supply reserve
balance of $53.4 million. Settlement talks with PG&E are presently underway within the auspices of
FERC. If a settlement is not reached, an initial FERC ruling on this issue is expected on July 21,
2005. If parties decide to appeal the ruling, the matter will be taken up at the Appeals Court in
Washington, D.C. The procedural schedule has slipped by a month due to a medical emergency
associated with FERC’s primary witness.

Western-PG&E Transmission Contracts – Post-2004
In April 2004, PG&E filed with the FERC for the termination of the following contracts that expire,
by their own terms, by January 1, 2005:
        The “Transmission Exchange Contract” or “Contract 2947A” with Western;
        The Contract With PG&E for the Sale, Interchange And Transmission Of Electric Capacity
        And Energy between Western and PG&E (Contract 2948A), including several related
        contracts with the same expiration date.
        The Coordinated Operations Agreement (COA) Between PG&E, Southern California Edison
        Company, San Diego Gas & Electric Company And the Participants In the California-
        Oregon Transmission Project (COTP) Governing the Coordinated Operation Of the Pacific
        AC Intertie And the California-Oregon Transmission Project. This filing also included a
        successor COA.

FERC accepted the package of replacement agreements, which, coinciding with the Western move
to the SMUD Sub-Control area, went into place on January 1, 2005. NCPA reports that the
transition went relatively smoothly apart from some minor software problems.

State Legislative Bills
The 2005/2006 Legislative session is starting up, with February 18th being the last day for bills to be
introduced. Senator Murray has introduced SB 1 that addresses funding for a Solar Homes Peak
Energy Procurement project. Additional electric-related bills are expected that will address
renewable portfolio standards and resource adequacy. We are also expecting to see a
telecommunications bill related to franchising laws.

Federal Bills
A new pass at a Federal energy bill is expected this session.

Upcoming Contracts for Council Approval
On February 21, 2005 staff is seeking Council approval to join the Central Valley Project
Corporation as recommended by UAC and by the Finance Committee in 2003. The Corporation is
up and running and producing value for its members, sometimes at the expense of its non-members.

Item 1: Utilities Quarterly Report Update Attachment C: Electric & Fiber                Page 7 of 14
                                         Attachment C – Quarterly Electric and Fiber Issues Update


IV.      Telecommunications Update

Dark Fiber*
Staff continues to focus on general and construction cost controls, and recently acquired a network
management system (FiberBase) towards this effort. Staff also took the next step towards the
outside auditor’s recommendations for rate structure modifications, and recently hired a consultant,
Utility Financial Solutions, for a new rate structure design and a cost-of-service study, which is
anticipated to be complete by mid-2005.

As seen in the table below the last 6 months has shown a steady but slow rebound in customer
revenues when compared with the same period in the previous year. In addition to the increased
revenues mentioned, there are six new projects currently under construction, which will increase
revenue nearly an additional $43,000.

      Change in…                                   Sales                   Losses        Net
      Quarterly Comparison
      Oct 2003 – Jan 2004                              $54,074               $108,676    ($54,602)
      Oct 2004 – Jan 2005                              $83,226                 $1,817      $81,409
      To-Date Comparison
      July 2003 – Jan 2004                            $59,429                $181,487   ($122,058)
      July 2004 – Jan 2005                           $142,226                  $3,791     $138,435

In line with our audit recommendations and in an effort to conform legal issues of fiber optic
services to other utilities, staff is in the process of integrating fiber optic services into the Utilities
Rules and Regulations.

Fiber To The Home (FTTH)
Staff continues to maintain the FTTH Trial, and monitors the developments related to other FTTH
projects. Latest contacts informed us that Lompoc and Truckee are moving forward. Aside from the
FTTH technology, staff is researching a new emerging technology, called Broadband-over-
Powerline (BPL), and preparing a report on its technical and financial feasibility in Palo Alto in
conjunction to FTTH efforts.
*
    See end of Attachment C for Dark Fiber Operations Statement of Income prepared by Administrative Services
    Department




Item 1: Utilities Quarterly Report Update Attachment C: Electric & Fiber                     Page 8 of 14
                                         Attachment C – Quarterly Electric and Fiber Issues Update
V.     Electric Public Benefits Program Update
Residential Measures Report (for the period 10/13/04 to 12/31/04)

                                                Rebate           Energy           Therms           Customer
         Measure                    Count       Amount          Svgs./Yr.        Svgs./Yr.         Svgs/Yr.
Ceiling Insulation                      3          $768                  0             1,053             $100
Central Air Conditioner                 2           $600             3,150                 0              $284
Clothes Washer                        112        $26,450           75,264                  0            $6,774
Dishwasher                            100         $7,425             7,500                 0             $675
Floor Insulation                        1            $13                 0                 7                $7
Gas Furnace                             2           $600                 0               238              $226
Gas Water Heater                        3          $300                  0               255             $242
Great Eichler Window                    1           $108                86                 0                $9
Programmable Thermostat                 3          $207                  0               144             $137
Refrigerator                          102        $12,125           52,326                  0            $4,709
Wall Insulation                         3          $598                  0               352             $340
Water Heater Blanket                    1            $10               475                 0               $43

Totals                                  333       $49,204           138,801           2,049            $13,546

PV Partners

Period                                     Number of Systems           Peak kW        Rebates
FY 04-05 To Date                           9                           19.3           $68,235
Pending Applications                       8                           29             $87,721
Installed to date (since 10/1/99)          95                          290            $1,005,394

Palo Alto Green
As of January 11, 2005, 2004, Palo Alto Green (PAG) has approximately 3015 active participants or
10.96% of all electric accounts. PAG continues to be the second highest participated program in the
nation based on the percentage of utility customer enrollment. PAG customers consumed 1,991,735
kWh in September 2004, or 1.6% of total citywide sales for that month. PAG has also set a new
goal of 15% community participation rate.

Consultant Assistance for Resource Efficiency (CARE)
To date, two studies were completed in FY 04-05 at a cost of $20,875

Commercial Advantage Program

Period                          No. Applications MWh/yr. Peak kW Therms/yr.   Rebates
FY 04-05 To Date                16               372     70      1,000        $130,000
Installed to date (since 10/99) 174              10,919  1,275   2.47 Million $3.7 million




Item 1: Utilities Quarterly Report Update Attachment C: Electric & Fiber                       Page 9 of 14
                                         Attachment C – Quarterly Electric and Fiber Issues Update
VI.     Key and Major Accounts
On October 21, 2004 the Utilities Department hosted a recognition luncheon for the Key and Major
Accounts that have signed up for the Palo Alto Green Program. Guests at the luncheon included
Utilities Director John Ulrich, Vice Mayor Jim Burch and Santa Clara County Supervisor Liz Kniss.

With vacancy rates a concern in Palo Alto, there is some positive news about Palo Alto companies
who are expanding within our city limits. CPI announced that its San Carlos facility was going to
consolidate into its existing Palo Alto site. Stanford Hospital has expanded into 4 new locations in
the Research Park. Varian Medical Systems opened a new facility on Hillview Avenue. Connetics
and CV Therapeutics have also increased their square footage within Palo Alto.


VII. Operations Update
See the three attached graphs showing operational performance measures for FY 04-05 through
December 2004:
1.   Electric Service Interruptions – FY 04-05 (number and types of outages)
2.   Electric Service Interruptions – FY 04-05 (average minutes per customer affected)
3.   Electric Service Interruptions – FY 04-05 (minutes per customer per year)




Item 1: Utilities Quarterly Report Update Attachment C: Electric & Fiber            Page 10 of 14
                                                                                          Attachment C – Quarterly Electric and Fiber Issues Update

                          Electric Service Interruptions FY 04/05
                       System Non-Storm                      System            Overhead        Underground        Other

              6


              5


              4
    Outages




              3


              2


              1

                         0         00          00        0    0            0         0
              0
                  July        Aug         Sep          Oct         Nov         Dec       Jan     Feb       Mar     Apr      May      Jun




Item 1: Utilities Quarterly Report Update Attachment C: Electric & Fiber                       Page 11 of 14
                                                                                         Attachment C – Quarterly Electric and Fiber Issues Update


                                                       Electric Service Interruptions FY 04/05
    Averae Minutes per Customer Affected


                                           180
                                           160                               165
                                                                                                      Goal - 120 minutes
                                                      149 150                                         per customer
                                           140
                                           120                    125
                                                           All outage data


                                           100                                     104
                                                 91
                                           80
                                           60
                                           40
                                           20
                                            0
                                                  July Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun




Item 1: Utilities Quarterly Report Update Attachment C: Electric & Fiber                     Page 12 of 14
                                                                                     Attachment C – Quarterly Electric and Fiber Issues Update


                                       Electric Service Interruptions FY 04/05

                            70
                                                                                                    Goal- 60 minutes per
                            60                                                                      customer per year


                                                                                55
     Minutes per Customer




                            50                                             53
                                       All outage data

                            40

                            30
                                                              25
                                           22        23
                            20

                            10     9

                             0
                                 July Aug Sep             Oct       Nov Dec          Jan     Feb Mar             Apr       May Jun



Item 1: Utilities Quarterly Report Update Attachment C: Electric & Fiber                   Page 13 of 14
                                                                                       Attachment C – Quarterly Electric and Fiber Issues Update
 City of Palo Alto
 Utilities Department
 Dark Fiber Operations
 Statement of Income
 Cost Center: 20020501, 20020502, 20020503, 20020601


                                                          Budget for Twelve            Actuals for Six Months
                                                        Months Ended 6/30/2005           Ended 12/31/2004        % of Budget Remaining

 Revenues:

 Fiber Optic Adv Engineering Fee                                             30,000                     5,380                    82.1%
 Fiber Optic Interconnection Fee                                             370,000                   38,699                    89.5%
 Fiber Optic License Fee                                                   1,120,000                  534,585                    52.3%
 Drop Cable Mgmt Fee                                                         120,000                       -                    100.0%
 Fiber Optic Misc Rev                                                            -                      1,116
 Fiber Optical Rev                                                               -                      9,418
 Fiber Optic Fee to City Depts                                                    -                    39,036
 Drop Cable Fee to City Depts                                                    -                    78,467
 Sales Adjustments                                                               -                    39,779
  Total                                                                    1,640,000                  746,480                    54.5%


 Expenses
 Salaries and Benefits                                                       662,304                  262,155                    60.4%
 Contract Services                                                           130,318                   17,145                    86.8%
 Supplies & Materials                                                        23,859                   23,328                      2.2%
 General Expense1                                                            420,443                      370                    99.9%
 Rent and Leases                                                              56,000                   11,851                    78.8%
 Allocated Charges                                                           241,000                  116,621                    51.6%
  Total                                                                    1,533,924                  431,470                    71.9%


 Excess of Revenues over Expenses                                           106,076                   315,010

 1
  Budget amount includes $401,443 for CIP




Item 1: Utilities Quarterly Report Update Attachment C: Electric & Fiber                    Page 14 of 14
                                         Attachment D: Quarterly Financial Inforation Update



                          Quarterly Financial Information Update

Based on the UAC recommendations, the reports for all three utilities now cover the
same reporting period. Therefore, financial data related to Electric purchases are based
on three months actual and three months estimated costs for the period of October 1,
2004 - December 31, 2004, as bills have not been received. Transitioning to the ISO
billing/ settlement regimen is the main cause of the delay in receiving the final electric
bills from NCPA. Gas and Water figures are based on six months of actual data.


                                                FY 04-05            FY 04-05   Difference
       Electric                 FY 03-04        Adopted              Actual    Of Adopted         %
                                                 Budget                        Budget and     Difference
                                                                                 Actual
                                 Actual        Jul04-Dec 04     Jul04-Dec 04
 Retail Sales Units (kWh)      958,025,890       478,737,513     486,354,996      7,617,483        1.6%
 System Average Retail Rate        $0.0729           $0.0759         $0.0767        $0.0008        1.1%
      ($/kWh)

 Retail Sales Revenue          $69,823,869     $ 36,329,222     $ 37,287,637     $ 958,416          2.6%
 Purchase Cost                  22,826,094       15,911,412       17,747,809    (1,836,397)        11.5%
      Operating Margin         $46,997,775     $ 20,417,810     $ 19,539,828    $ (877,981)       (4.3%)



Explanation:
FY 03-04: Annual sales level of 958 million kWh was 4.2 percent below the adjusted
budget forecast.

FY 04-05: Sales units and revenues through December have been higher than the adopted
budget projections by 1.6 and 2.6 percent, respectively. Purchase costs for the same
period are estimated to be higher than the budget figure by 11.5 percent. This higher cost
is mainly due to a $0.5 million Western charge related to retroactive increase in PG&E
transmission wheeling rate going back to September 2003, lower than projected RAC
refund disbursement from Western during the first six months of the year, and higher
Western restoration charges. The projected net impact on the operating margin is a
decrease of 4.3 percent, or $878 thousand.




Item 1: Utilities Quarterly Report Update Attachment D: Financial               Page 1 of 7
                                         Attachment D: Quarterly Financial Inforation Update



                  Proposed Electric Supply Rate Stabilization Reserve
                                    All figures in thousands (000’s)
FY 04-05 Adopted Budget Ending Balance                                              $ 52,462

Projected Adjustments:
   Changes to FY 04-05 Adopted Budget Beginning Balance                 $ 967
   Estimated Change in Operating Margin through December                 (1,287)
   Budget Amendment Ordinance Expense                                          -
   Other Revenue changes to Budget                                             -
   Other projected expense changes to Budget                                 775
   Purchase Cost related to outside sales                                      -
   Wholesale Revenue changes to Budget                                       657

                                             Net Sum of Projected Adjustments        $ 1,113
                                         Estimated FY 04-05 Ending Balance          $ 53,575
                                Adopted Budget SRSR Maximum Guideline is            $ 37,886

               Proposed Electric Distribution Rate Stabilization Reserve
                                    All figures in thousands (000’s)
FY 04-05 Adopted Budget Ending Balance                                              $ 6,876

Projected Adjustments:
   Changes to FY 04-05 Adopted Budget Beginning Balance                $ (1,633)
   Estimated Change in Operating Margin through December                     409
   Budget Amendment Ordinances Expense                                         -
   Other Revenue changes to Budget                                             -
   Other Expense changes to Budget                                             -

                                             Net Sum of Projected Adjustments       $ (1,224)
                                          Projected FY 04-05 Ending Balance          $ 5,652
                                 Adopted Budget DRSR Minimum Guideline is           $ 5,378

Electric Supply Rate Stabilization Reserve: As explained in the previous UAC
quarterly report, the $967 thousand FY 04-05 SRSR beginning balance favorable
adjustment was mainly due to RAC refunds from WAPA, lower ISO costs, and NCPA
pool revenues.

The projected $1.3 million decrease in operating margin through December reflects the
net impact of higher than projected sales revenues offset by the $1.836 million higher
purchase costs. Higher transmission related costs and Western costs/refund adjustments
are the main drivers of this increase in cost. Savings related to NCPA regulatory costs
were also realized during the first six months of the year. In addition, during the first six
months approximately $657 thousand in increased wholesale revenues were realized due
to higher wholesale volumes and higher market prices.

For the last two quarters of FY 04-05, costs are projected to be approximately $775
thousand lower than budget. The lower costs are mainly due to lower Western Base


Item 1: Utilities Quarterly Report Update Attachment D: Financial            Page 2 of 7
                                         Attachment D: Quarterly Financial Inforation Update



Resource fixed costs for the months of January to June 2005, lower NCPA regulatory
costs, and higher RAC credits disbursement expected during this period.

The net result of all the above factors is expected to result in fiscal year ending balance of
the SRSR to be $53.57 million, $1.1 million higher than the adopted budget. The ending
balance projection has reduced by approximately $100 thousand since the last UAC
quarterly update in October 2004.

Electric Distribution Rate Stabilization Reserve: As reported in the last quarterly
update, the $1.6 million decrease to the adopted beginning balance is the net impact of
lower than projected sales and unrealized investment income. The $409 thousand
increase in the operating margin through December is the result of higher than projected
sales. The net result is a projected decrease of $1.2 million to the ending balance of the
DRSR.


                                            FY 04-05          FY 04-05        Difference         %
        Gas                FY 03-04         Adopted            Actual         Of Adopted     Difference
                                             Budget                           Budget and
                                                                                Actual
                             Actual       Jul 04–Dec 04     Jul 04 –Dec 04
 Sales Units (Therms)       31,506,997        13,212,366         13,110,112      (102,254)       (0.8%)
 System Average Rate            $0.785             $0.83              $0.87         $ 0.04        4.4%
      ($/Therm)

 Retail Sales Revenue     $ 24,734,399      $ 11,001,462      $ 11,392,178      $ 390,716          3.6%
 Purchase Cost              15,965,423         7,317,364         8,500,921       1,183,557        16.2%
      Operating Margin     $ 8,768,976       $ 3,684,098       $ 2,891,257     ($ 792,841)      (21.5%)



Explanation:
FY 03-04: Sales units were 9.2 percent below budget projections.

FY 04-05: Sales units through December are lower than projected by 0.8%, however,
revenues for the same period are slightly higher than projected 3.6 percent. Due to market
prices being higher, purchase costs are greater than the adopted budget by 16.2 percent.
Projections for gas supply costs for the reminder of the fiscal year indicate significantly
higher costs than budgeted. A 20 percent supply side mid-year rate increase took effect
January 2005. Preliminary figures show the net impact for the first six months of the
fiscal year, is a decrease of $793 thousand, or 21.5 percent of the Operating Margin.




Item 1: Utilities Quarterly Report Update Attachment D: Financial                Page 3 of 7
                                         Attachment D: Quarterly Financial Inforation Update



                     Proposed Gas Supply Rate Stabilization Reserve
                                    All figures in thousands (000’s)
FY 04-05 Adopted Budget Ending Balance                                             $ 6,556

Projected Adjustments:
   Changes to FY 04-05 Adopted Budget Beginning Balance                  $ (139)
   Change in Operating Margin through December                             (943)
   Budget Amendment Ordinances (BAO)                                         348
   Other Revenue changes to Budget                                         (785)
   Other Expense changes to Budget                                         1,464

                                                Net Sum of Projected Adjustments   $   (54)
                                             Projected FY 04-05 Ending Balance     $ 6,502
                                    Adopted Budget SRSR Minimum Guideline is       $ 6,275

                  Proposed Gas Distribution Rate Stabilization Reserve
                                    All figures in thousands (000’s)
FY 04-05 Adopted Budget Ending Balance                                             $ 3,862

Projected Adjustments:
   Changes to FY 04-05 Adopted Budget Beginning Balance                  $ (251)
   Change in Operating Margin through December                               150
   Budget Amendment Ordinances (BAO)                                           -
   Other Revenue changes to Budget                                             -
   Other Expense changes to Budget                                             -

                                               Net Sum of Projected Adjustments    $ (101)
                                            Projected FY 04-05 Ending Balance      $ 3,761
                                   Adopted Budget DRSR Maximum Guideline is        $ 4,236

Gas Supply Rate Stabilization Reserve: The $139 thousand decrease to the FY 04-05
beginning balance is primarily the net result of lower than budgeted purchase costs offset
by decreased sales and interest income. For FY 04-05, the operating margin through
December has decreased by $943 thousand, which reflects the impact of slightly higher
sales revenues offset by much higher purchase costs than projected. The $348 thousand
BAO is net of three changes at midyear: a $2 million supply rate increase, a $1.7 million
projected revenue increase from sales to non-pool customers, and a $3.36 million
purchase cost increase. As of this report, projected forward market prices have
decreased, resulting in a reduction in purchase cost expense of $1.5 million. Revenues
will be reduced as well. The $785 thousand is the net of a $1.5 million reduction in non-
pool revenues offset by an expected PG&E refund of $798 thousand. The projected net
impact of the above for the fiscal year is a decrease in the SRSR ending balance of $54
thousand.

Gas Distribution Rate Stabilization Reserve: As reported in the last quarterly report,
the $251 thousand decrease in the beginning balance reflects both lower than expected
Administrative and Operating Expenses, and lower sales levels and unrealized investment


Item 1: Utilities Quarterly Report Update Attachment D: Financial          Page 4 of 7
                                         Attachment D: Quarterly Financial Inforation Update



income. For FY 04-05, the operating margin through December has been higher than the
budgeted figure by $150 thousand. Based on the above, the net impact is a projected
decrease of $101 thousand in the DRSR ending balance.

                                          FY 04-05          FY 04-05        Difference           %
    Water                FY 03-04         Adopted            Actual         Of Adopted       Difference
                                           Budget                           Budget and
                                                                              Actual
                           Actual       Jul 04–Dec 04     Jul 04– Dec 04
 Sales Units (Ccf)         5,962,767         3,402,000          3,219,600       (182,400)        (5.4%)
 System Average Rate           $3.54             $3.88              $3.90         $0.02           0.7%
 $/Ccf)

 Sales Revenue         $ 21,131,850     $ 13,186,000       $ 12,564,529     $   (621,471)        (4.7%)
 Purchase Cost            7,441,523        4,272,856          4,154,302         (118,554)        (2.8%)
 Operating Margin      $ 13,690,324      $ 8,913,144        $ 8,410,227     $   (502,917)        (5.6%)



Explanation:
FY 03-04: Sales Units of 5.9 million CCF were 0.1 percent below projections.

FY 04-05: Water sales units were 5.4 percent lower than the projected budget figures
through December. Consequently, sales revenues are 4.7 percent lower than the budget
projections for the same months. Purchase costs were 2.8 percent lower than projections.
The net impact of the above is a decrease in the Operating Margin of 5.6 percent.

                        Proposed Water Rate Stabilization Reserve
                                    All figures in thousands (000’s)
FY 04-05 Adopted Budget Ending Balance                                                      $ 6,728

Projected Adjustments:
   Changes to FY 04-05 Adopted Budget Beginning Balance                     $ (863)
   Change in Operating Margin through December                                (503)
   Budget Amendment Ordinances (BAO)                                              -
   Other Revenue changes to Budget                                                -
   Other Expense changes to Budget                                                -

                                              Net Sum of Projected Adjustments           $ (1,366)
                                           Projected FY 04-05 Ending Balance             $ 5,362
                                   Adopted Budget RSR Minimum Guideline is               $ 7,105

The $863 thousand change to the FY 04-05 Beginning Balance is primarily due to
unrealized investment income, lower than budgeted connection fee revenue, and higher
operating expenses. For the period from July to December, the net impact of lower than
projected sales and decreased costs is a decrease in the operating margin of $503
thousand through December. The net impact of the above is a projected decrease of $1.4
million in the RSR ending balance.



Item 1: Utilities Quarterly Report Update Attachment D: Financial               Page 5 of 7
                                                                       Attachment D: Quarterly Financial Inforation Update




                                             Residential Electric Bill Comparison
                                                                       Based on 650 Kwh/Mo


                $90
                $80
                $70
 Monthly Bill




                $60
                $50
                $40
                $30
                $20
                $10
                 $0                                                                                 Jun-04




                                                                                                                                                                                              Nov-04
                                                                                                                      Jul-04
                                                                                May-04




                                                                                                                                                                            Oct-04
                         Jan-04




                                                 Mar-04




                                                                                                                                        Aug-04
                                                              Apr-04
                                    Feb-04




                                                                                                                                                          Sep-04




                                                                                                                                                                                                                Dec-04
                                                                                          Billing Month

                                                                                         PG&E                         Palo Alto




                                              Residential Gas Bill Comparison
                                                  Based on 100 therms Winter & 30 Therms Summer


                $140


                $120


                $100
Monthly Bill




                $80


                $60


                $40


                $20


                  $-
                                                                                                                                                                                     Nov-04
                        Jan-04




                                                                                           Jun-04




                                                                                                             Jul-04
                                              Mar-04
                                  Feb-04




                                                          Apr-04




                                                                                                                               Aug-04



                                                                                                                                                 Sep-04




                                                                                                                                                                                                       Dec-04
                                                                       May-04




                                                                                                                                                                   Oct-04




                                                                                         Billing Month
                                                                                          PG&E               Palo Alto



                Item 1: Utilities Quarterly Report Update Attachment D: Financial                                                                                  Page 6 of 7
                                                            Attachment D: Quarterly Financial Inforation Update




                                       Residential Water Rate Comparison
                                                              Based on 14 Ccf/Mo




               $60
               $55
Monthly Bill




               $50
               $45
               $40
               $35
               $30
               $25
               $20




                                                                                                                                      Nov-04
                     Jan-04




                                                                           Jun-04



                                                                                         Jul-04
                              Feb-04



                                        Mar-04



                                                   Apr-04




                                                                                                     Aug-04



                                                                                                              Sep-04




                                                                                                                                               Dec-04
                                                              May-04




                                                                                                                             Oct-04
                                                                       Billing Month
                                Palo Alto        Menlo Park            Los Altos Hills            Los Altos            Redwood City




Item 1: Utilities Quarterly Report Update Attachment D: Financial                                                       Page 7 of 7

				
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