MEMORANDUM - City of Palo Alto

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







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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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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:









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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:





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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





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Attachment A – Quarterly Water Issues Update









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Attachment A – Quarterly Water Issues Update









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Attachment A – Quarterly Water Issues Update









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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-









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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-









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-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