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February 22, 2002 Special Meeting

Meeting Information


Special Meeting

Friday, February 22, 2002, 9:30 a.m.
City Hall, Room 263

Chairperson: Commissioner Gonzalez
Vice Chairperson: Commissioner McGoldrick
Members: Commissioners Ammiano, Hall and Schmeltzer
Alternate: Commissioners Peskin and Fellman
Clerk: Monica Fish


(There will be public comment on each item)

1. Call to Order and Roll Call

The meeting was called to order by Chair Gonzalez at 9:30 a.m.

Members Present: Chairperson Gonzalez, Vice-Chairperson McGoldrick, Commissioners Ammiano (noted present at 11:54 a.m.), Schmeltzer, Fellman, and Hall (noted present at 1:15 p.m.)

Members Absent: None

2. San Francisco Local Agency Formation Commission (SFLAFCo) Public Hearing on Public Power.

Chairperson Gonzalez stated that the San Francisco Local Agency Formation Commission is sponsoring the first of several public information hearings that will investigate the options of providing electricity service to the City and County of San Francisco. The first information hearing will focus on various public power options, and that we look forward to hearing from a number of prominent public power managers in the morning session. There will also be an afternoon session beginning at 1:00 p.m. with additional speakers. In a few weeks, the San Francisco Local Agency Formation Commission will sponsor another public information hearing which will focus on options of continuing to receive electric service from PG&E, and we hope to have appropriate speakers from both Pacific Gas and Electric Company and the Public Utilities Commission to share with us information regarding this option. A date for that hearing will be scheduled in the near future, and there may be additional information hearings as the need arises to gather more information on any particular subject.

The SFLAFCo was established in August of 2000 as a result of an initiative petition to create a Municipal Utility District or MUD for the City and County of San Francisco and the City of Brisbane. California law necessitated that the City and County of San Francisco form a LAFCo to review the proposed formation of a district. In addition, the Cortese-Knox-Hertzberg Act authorized the LAFCo to perform studies and to obtain and furnish information that would contribute to the logical and reasonable development of local agencies for specific purposes. Most of you are aware that there was a recent election in San Francisco regarding the creation of a MUD. The result of the election revealed that there is public support in San Francisco for the consideration of public power.

Following the November election, the San Francisco LAFCo discussed whether there was a continuing need for this LAFCo Commission. After some discussion, the Commission unanimously concluded that there was indeed a public need and strong public support for the thoughtful investigation of public power options for San Francisco. LAFCo therefore decided to continue its work. The Commission felt it was the best vehicle for embarking upon a deliberate and open process of gathering information. By LAFCo establishing a broad information base on this complicated subject, San Francisco would be in a position to make a knowledgeable decision on whether to pursue the matter of public power either as a Municipal Utility District, a Municipal Utility, or in some other form or hybrid. These public discussions may very well lead to another ballot proposition in the future. The purpose of these workshops is to provide an opportunity to gather as much information as is reasonably possible to assist the members of the public and the Commission in our future thinking about how we move forward. The City and County of San Francisco and LAFCo will hopefully be able to assess the information we receive, explore the various options we have, and hopefully make the best decision for San Francisco.

Gloria L. Young, Executive Officer stated this is the first informational hearing to focus on public power options. I will take a few minutes to introduce each of the panelists. All have extensive bios, so I will briefly introduce them.

First, we are delighted to welcome Ms. Laura Doll. Ms. Doll is the first Chief Executive Officer (CEO) of the California Consumer Power and Conservation Financing Authority, a state agency established in response to the California 2001 energy crisis. Ms. Doll has had over twenty years of experience in formulating and administering corporate level strategic energy initiatives. She served as the Chief Administrative Officer of Austin, Texas, a municipally owned electric utility for over fourteen years. Ms. Doll has graciously stepped in to replace Mr. David Freeman who unfortunately could not be present.

Ms. Linda Davis is a member of the Board of Directors for the Sacramento Municipal Utility District. She was elected in 1992 and reelected in 1996 and 2000. She was the President of the Board of Directors in 1999 and also served as Vice-President for two years. She is currently the Chair of the Finance Committee.

Ms. Mary Tucker is a Supervising Environmental Services Specialist for the city of San Jose and has played a major role in planning and managing energy and environmental programs on local, state, and national levels for more than twenty years. She has been with the city since 1989. Ms. Tucker is the immediate past president of the American Solar Energy Society.

Mr. Tom Habashi is a director of Roseville Electric. Mr. Habashi has spent over the last twenty-one years working for community-owned utilities. His public service includes the cities of Burbank and Palo Alto.

Please join me in welcoming our panelists. I would now like to introduce Donald Maynor, Esquire our legal counsel for SF LAFCo, who will facilitate this session. Mr. Maynor has extensive experience in the area of municipal utilities.

Donald Maynor, Esquire stated, I would like to introduce my co-counsel, Nancy Miller, Esquire. If it pleases the Commission, I would like to suggest some informal rules for conducting a hearing this morning. I would suggest that the speakers keep their comments within the 15-20 minute range so that we would have an opportunity for the Commissioners, panelists, and members of the staff to ask questions. We also will provide an opportunity for the members of the public to ask questions. There’s a form that we put together in the kiosk, and if the public has any questions or comments, they could fill out the form and give it to Ms. Fish, the Clerk. If we have time at the end of all of the presentations, we will ask the questions of the panelists based on the written questionnaire. We do encourage you to ask questions and submit your comments. At the end of the afternoon session, there will be an opportunity for public comment as well.

Morning Panel 9:30 - 12:00 p.m.

Laura Doll, Chief Executive Officer, State of California Consumer Power and Conservation Financing Authority stated I do want to extend David Freeman’s apologies. This is an issue that’s absolutely near and dear to his heart, so he is very interested in what will happen here. I am sure he would be happy to come and talk to you at some point in the future. It’s an important issue that you are embarking on this morning, and I think you are doing exactly the right thing by starting to talk to people. I have as I come to you today a relatively narrow professional perspective right now on behalf of the California Power Authority, but I do have a lot of experience in the municipal utility side of things so would be happy to talk about that. Let me talk a little bit about this new kid on the energy block in Sacramento, the California Power Authority. Our official name is the California Consumer Power and Conservation Financing Authority. Each of those words are fairly important, but a key emphasis is on financing. This agency is about six months old and as mentioned was born out of last year’s energy crisis. The legislature had in mind that the state of California should have some control over energy reserves to avoid both blackouts and also to provide price stability in the market.

As our first assignment, we were directed by the legislature to produce an Energy Resource Investment Plan. I’ve left a copy of this plan, which was just delivered last Friday to the legislature and to the governor at each of your places, and there are a few extra copies. The plan is also available on our web site, which is The point of this plan is to help establish more clearly what the role of the Power Authority might be.

We were given authorization to issue up to five-billion dollars in revenue bonds to help with reserves, conservation, renewables, and so forth. That doesn’t mean that we have that money in hand right now, but we do have the opportunity to go to the market and get it for appropriate projects. What we’ve tried to outline in this plan is a vision of what we’re calling a clean energy future for California.

I think what is most significant to the work that you are undertaking is that should you elect to get into the electricity supply business, the Power Authority is a ready, willing, and able partner to help provide the resources that would enable you to do that. Those resources, in our view, can all be through clean energy options. We are in the clean energy and clean energy financing business. That distinguishes us from the other state agencies. We are not in the regulatory business, so we are not the PUC just across the street. We are not in the planning and siting business, so we are not the California Energy Commission. Our focus is really rather much more narrow than that. It is to fill some gaps in the marketplace working in concert with the private sector as well as the other state agencies to provide some measure of reliability and security in the state. We are non-profit. We are meant to be self-supporting. We are not there yet, only six months old. Anything we do will be priced on that basis, which is to say non-profit and cost-based pricing.

In the Plan, a couple of the things that we tried to outline more specifically include local examples as follows. There is, as you are well aware, a transmission reliability problem in San Francisco. We believe working with the California Independent System Operator (ISO) as well as the Energy Commission and the PUC, that this is a very serious need to be addressed as quickly as possible. One of the things that we have outlined and considering is financing a small peaker project in the area of the San Francisco Airport. Another specific local reliability program that we are considering would focus on businesses in the San Jose to San Francisco corridor and provide financing for special efficiency improvements and renewable energy projects in this area. Basically, we can help provide capacity. If you elect not to get into the electric utility business at a retail level, a key component of our Plan is something we’re calling, greening public buildings.

We are very excited about the opportunity to help levels of state and local government, and we have recently had an inquiry from the federal government as well. In other words, to reach out to public facilities throughout California and help provide financing for energy efficiency improvements and again for renewable energy projects like photovoltaics Now, San Francisco, of course, has clearly demonstrated an interest in renewables. We think that working with Sacramento Municipal Utility District, which has a very active program, Los Angeles Department of Water and Power, San Francisco, and the Power Authority, that we are going to have significant buying power to help influence the photovoltaic market in California and to move photovoltaics farther along than anyplace else in the country.

We think we’ve laid out in our plan something that you already believe and demonstrated that you believe is that clean energy works, that it is not only technically feasible, it can be cost effective as well. In our plan, we compare a clean energy future to a business as usual future, one in which for example 8,000 megawatts of capacity between now and 2006 is met by natural gas versus one that is met by clean energy conservation renewables and efficiency improvements.

One of the things that you may want to take a look at is the estimates of positive economic development impacts. Clean energy provides decent paying jobs and more jobs than conventional generation. These aren’t our numbers. These are our numbers that several respected institutions have worked on. I would think that is something that you would want to consider as you go forward.

Something else you’ll want to consider that again ties in with what San Francisco has already seen is the whole issue of public preference. While I don’t have copies of this for you, I wanted to make sure that you are aware of a new energy poll that came out this week that was conducted by the Hewlett Foundation. The results of it were publicized by the Energy Foundation. Their web site is downloads. This is the first California-specific energy related survey since last summer. A couple of things I will just highlight for you that was done throughout California. A very significant point is that nearly two-thirds of Californians think the energy crisis is far from over. Sixty-two percent said that they think that blackouts and shortages could still occur and that energy rates would continue to spike up and be unstable. Another thing I think is of particular interest is that nearly three quarters of Californians, 73 percent believe that energy conservation, efficiency, and new technology programs will help the economy. More than eight out of ten support doubling the state’s renewable energy supplies by 2010. Again, no surprise here in San Francisco. The public preference issue is an important one. I think I would just close with my California Power Authority hat.

If I could put on my veteran of the Municipal Utility industry hat for a moment. As you think through this, you will hear from a lot of experts today. Going forward, there will be a tendency to focus on important issues like financing, and engineering issues, and what happens if we take over this sort of thing. I would just encourage you to try to visualize what it would mean for San Francisco to be in this business. It’s a tuff business. Part of the visualization process needs to include as follows. What does it look like when there are difficult transmission facility siting decisions that have to be made? What happens when rates have to go up or when there are controversies about inter-class rate allocations, and you have multiple economists before you? Not to mention, really basic customer service issues. When do you cut off customers and how are you going to handle those public need issues? That’s the tuff side. At the same time, there is a very rewarding side. That is the opportunity to shape the energy future of a community and to shape energy policy according to local values and preferences.

San Franciscans have spoken to local preference issues loud and clear. When I was with the city of Austin, we had a management turning point. You are going to hear from one of those people this afternoon, Ed Aghjayan, who came to Austin from Palo Alto and really took the town by storm. The year was 1983. Austin was is in the midst of a major crisis because we were at that time participating in a nuclear power plant. Even though we had only a 16 percent share, we were sending to that nuclear power plant a million dollars a week. In 1983, that was a lot of money. We embarked on a conservation program at the urging of Mr. Aghjayan that was the equivalent of a power plant. It was over 550 megawatts at the time. That push, which reflected community values in Austin is still underway. It provided the underpinnings for everything that Austin is still doing today. It was a dramatic and radical shift. It mobilized the community.

I would just end by saying as you are listening to experts and technical experts, you may want to stay in touch with the question, whatever decision you make, is it ecological? How does it fit into the system of this community, the culture, the resources that you have available?

Chairperson Gonzalez stated you made reference to polls and public preferences. To play the devil’s advocate, what do you say to somebody who says, listen to the extent that you are going to rely on public opinion polls to pursue a public power agenda--in San Francisco, we actually took a measure to the ballot and it was defeated. My impression of what took place there is that while there was a lot of interest in the public power question, there appeared to be a lot of concern about whether or not the issue had been studied sufficiently. How relevant really are the polls? If the polls had been the other way that you were describing and there was a sense out there that a municipality can’t run energy, should we not move forward because of that?

The work as I understand at the California Power Authority would appear to be in direct response to the deregulation crisis that we had. It seems that to the extent that you are working on an energy resource investment plan or control over reserves, that that’s something that would benefit a municipality that was not engaged in a municipal utility concept, as well as one that perhaps was. What do you say to the argument that says, what is the need to start messing around with municipalized energy when the state is taking steps to try to make sure the crisis we just went through doesn’t happen again?

Ms. Doll stated let me start with the second question first. The issue of reserves is obviously critical to our core mission. The municipal utilities represented on this side of the table are going to talk to you about the fact that they were in quite good shape during the crisis so they weren’t hit in the same way that the rest of the state was in some cases. There may not be a specific role for the Power Authority in providing reserves to municipal utilities. However, the opportunity for the Power Authority because it has this bond financing capability, if we partner with other public institutions, those bonds can be tax-exempt. If those bonds are used for renewable resources, it can make a significant difference in lowering the cost of those resources to the consumers. A possible vision for the Power Authority is as a broker and developer of renewable resources throughout the state that could be available to public entities, cities, or municipally-owned utilities. Our vision is really to try to lower the cost of renewables in California.

To go to your first question about polls. I’m not a polling expert. This poll that was just done this week didn’t specifically ask the question about public power as such. I don’t know what polls on that issue would look like in San Francisco.

Chairperson Gonzalez stated my comments related to that are largely irrelevant. I think your comments related to that are irrelevant too. The reason I want them to be irrelevant is because if I take a different approach, then shouldn’t what the voters did at the polls dictate what it is that we do? Rather than a public poll, we should just go look at the ballot result.

Ms. Doll stated ultimately, you’re right. It’s what happens at the polls and then it is the issue to the extent of which you’ve been able to get the story out there and lay out the pros and cons of this issue. That is part of what you are doing here.

Chairperson Gonzalez stated I appreciate what the California Power Authority is doing. It sounds like there are going to be great opportunities for renewable energy, but they don’t seem to be tied to the question of whether a City has municipal power or not. I would be interested in hearing whether we as a City would have an advantage if we had some kind of municipalized electricity in terms of our ability to partner with the California Power Authority. I would be curious in hearing If the City of San Francisco goes into the area of public power, what should our local power authority look like? How do we need to change the Public Utilities Commission that we already have? What power does this local power authority need to have as it relates to bond financing, etc.?

Ms. Doll stated the advantage in partnering with the Power Authority is the ability of the Power Authority to provide resources from around the state that would be of interest coupled with tax exempt financing to lower the cost. It would be a public partnership.

Chairperson Gonzalez asked if we have a local power authority, how do we need to change our current PUC to accommodate or to best partner with the California Power Authority?

Ms. Doll stated I don’t know enough about your current PUC, but I would venture to say that the issue of governance will be a critical one, and that the issues are both complex and time consuming enough that governance would need to be done as pretty much a full-time job for whatever Board you put in place.

Commissioner Fellman asked Ms. Doll if the California Power Authority had started coordinating with the City on the peaker project at the Airport and projects in the San Francisco to San Jose corridor.

Ms. Doll stated we have, and I think Mr. Smeloff will be here this afternoon and his office has been involved in those. The San Jose to San Francisco projects are not very well developed at this point, but certainly on the Airport project.

Commissioner Fellman asked does that extend also to the public building greening project?

Ms. Doll stated yes, there are several local government groups that have been meeting on these issues, and the city of San Francisco has been involved as well.

Vice-Chairperson McGoldrick asked how big is that peaker plant at the Airport?

Ms. Doll stated about 50 megawatts.

Vice-Chairperson McGoldrick asked what do you think was the heart of our recent energy crisis, and how might that crisis have been averted had we been a municipalized power system in San Francisco?

Ms. Doll stated the experience of most of the municipal utilities in California was that they had control over their power supply, and they had procured their own reserves. In California, with the investor owned utilities, that historic relationship had been split apart so the power supply was no longer controlled by the retail electric provider, the investor-owned utilities. There were a number of other factors including low hydro and high gas prices and some transmission constraints. From a municipal prospective, the Muni’s did better because they never split the pieces apart. They kept them as a vertically integrated system.

Vice-Chairperson McGoldrick asked do you want to explain the splitting apart issue because there is a public that listens to this?

Ms. Doll stated the splitting apart was pulling generation out from the business and selling off most of those assets, putting transmission in a separate business and leaving distribution, which is what most customers experience in a third silo.

Donald Maynor, Esquire asked could you give specific examples of how the city of San Francisco could benefit from the Power Authority without being a municipal utility?

Ms. Doll stated generally, two things--the greening of public buildings. To the extent that we can in a more global sense provide low cost financing and have a pool of money that is set up to allow any level of government to participate. A key to this would be keeping the bureaucratic red tape down. I know we still have some battles ahead. Everything you can do to make your own facilities as efficient as possible is a clear benefit. The other side would be working jointly on solar or bulk procurement of other energy efficient technologies, fuel cells, and perhaps combined heat and power systems.

Mr. Maynor asked, so that would be for municipal use as an end user?

Ms. Doll stated, yes.

Vice-Chairperson McGoldrick stated that he had one other question as it relates to labor concerns that arose last year that in fact may have contributed significantly to some of the difficulties that we had at the ballot box on this issue. Some of the unions were concerned that there might be demeanition of their conditions of work and benefits and so on. Have you had experience in that area?

Ms. Doll stated it is an interesting question and something that as we put our investment plan together, we had not only a lot of public input and had meetings around the state, but we had specific stakeholder meetings with many of the unions involved. There are two issues. Certainly, they have a concern about private development of resources that might be outside organized labor. We speak to that in our plan by saying that anything that the Power Authority develops will adhere to the State Labor Guidelines. The more significant issue is what kinds of jobs really can be associated with clean energy, efficiency, and renewables. What sort of training can organized labor be involved with to help open up job opportunities and facilitate more jobs, not fewer jobs. Jobs that aren’t just with the original construction of a plant, but jobs which continue forward. Those are issues still to be worked out. We think there is a real potential for a win-win from the labor standpoint. So far, our plan has been received well by organized labor.

Commissioner Schmeltzer stated you talked about the questions we might have to think about here as far as how a public utility would be structured in the City. Could you talk a little bit about how it was structured in Austin?

Ms. Doll stated in Austin, the ultimate decision making was with the City Council. But, the City Council set up a Citizen’s Advisory Group, a nine-member Electric Utility Commission that met regularly and provided recommendations to the Counsel for the kinds of investment decisions, rate decisions, and bond decisions that remained in the Council’s purview.

Chairperson Gonzalez asked how many Council members are there? Is the Mayor elected at large? Could the Mayor veto what the Council did as it related to those issues?

Ms. Doll stated, seven Council members. The Mayor is elected at large and the Mayor could not veto. That was a majority vote of the Council.

Chairperson Gonzalez asked, did the Citizen’s Advisory Commission, let’s say on a bond question, would make a recommendation to the City Council, and by majority vote the City Council could issue what kind of bonds?

Ms. Doll stated actually, there were some dollar limitations, but in general in Austin, the Council insisted on votes of the general population to approve revenue bonds. For the electric utility, it was always revenue bond finance or Certificates of Obligation.

Chairperson Gonzalez asked by majority vote?

Ms. Doll stated of the citizens, yes.

Vice-Chairperson McGoldrick asked if you were sitting over here, what crucial information would you need and what steps would you need to take to be able to make an informed decision on this matter?

Ms. Doll stated I think you are definitely headed down the right path from what I hear about your process. Maybe the question of looking inward among the Board of Supervisors, how you think decisions could be made going forward. I don’t know that there are any specific facts that you ought to have that you aren’t already on a path to have. I would just emphasize this notion of you have a full plate already. So what does that look like if you add on a Municipal Utility, and how best do you structure it so that decisions can be made by people who have enough time to focus on it?

Vice-Chairperson McGoldrick stated I think that is a governance issue.

Ms. Doll stated, yes.

Commissioner Schmeltzer asked, you mentioned the decision that Austin made to get out of nuclear power?

Ms. Doll stated and they still haven’t been able to get out of it. There never was a buyer out there.

Commissioner Schmeltzer asked, how did they end up getting in?

Ms. Doll stated it was both national and state energy policy that prohibited more natural gas burning generation. It was the late 70’s so the world looked very different then. Austin partnered with the city of San Antonio and with what was called Houston Light and Power at the time (now it’s called Reliant) and with Central and Southwest which also has another name. There were four partners, two privately owned and two municipally-owned utilities that got into the project.

Commissioner Schmeltzer asked but Austin’s public utility was already a public utility then?

Ms. Doll stated Austin became a public utility in 1895 long before nuclear power.

Mr. Maynor thanked Ms. Doll for attending the public hearing. He stated as a point of order, if the public has any questions to ask, place them on the podium and we’ll pick them up. I did get a series of tuff questions from a member of the audience. Perhaps we could send you an e-mail and get some answers to these questions if we don’t have time to answer them this morning.

As most of you know, SMUD stands for Sacramento Municipal Utility District and we are pleased to have with us this morning Linda Davis, who is a District Board Member.

Linda Davis, Sacramento Municipal Utility District Board of Directors stated I appreciate the opportunity to speak to you today about public power. I have a list of public power pros and cons to talk about. But first, I wanted to tell you about myself and how I selected public power. I was a student and I had to make the big decision. I graduated from a university here in California and had to decide whether to go to work for PG&E or for my locally-owned utility. Just going through the job interview process led me to a commitment to public power. In my career as an engineer, I worked temporarily at SMUD as a student and returned a few years later to become President of the Board. When I speak to you, I’m not speaking to you as a member of the public who inadvertently became a Board member because of love of politics or my desire to become President. I’m here because I am committed to public power. The commitment goes far beyond commitment to an organization. The commitment to public power is a commitment to people. As I worked through the years in the industry, you realize there are two groups of people, the public power people and then those who work for investors. They really are a different group of people. Let me go onto the advantages of a public power system, having your very own Municipal Utility District, your ownership pride.

The first thing is in Sacramento and generally throughout the state, you have lower rates for municipal power companies. In Sacramento our rates are more than thirty percent lower than PG&E’s. We have had a lot of failures at SMUD. As you know, we had a nuclear power plant, a great investment, more investment than everything else in Sacramento. It was closed by the voters. It’s an exceptional expense. But, that was what the people wanted to do with their money. They wanted to pay to close their nuclear power plant and so they did. Even with that terrible mistake behind us, our rates are still thirty percent lower, and the reason is the commitment of our people and the pride of ownership, plus we have local control.

I heard Commissioner Matt Gonzalez ask the question--now that there is a California Power Authority, isn’t the state going to make sure there will be no power crisis? I will tell you, no. The state is not going to insure that the lights aren’t going to go out here in this City in a very devastating heat wave. But, nobody here is going to be accountable for that. When the trolley is not running and people were stuck in elevators, no one here in this room is going to be responsible for that because you’re not a public power agency and you’re not in control. If this is how your citizens voted then you still have no local control, that’s just your problem because you have no one to come down and complain to. The people who you pay your bills to, the people who you’ve trusted are out of town. Decisions made by electing representatives--the meetings are held in public. You can come and speak to your publicly elected representatives and complain to them. When you complain to your elected representatives, they can go themselves and get a key and look wherever you said there was a problem. Right now that can’t happen. You can’t ask somebody at PG&E to check their facility. They are not going to tell you what’s in there. Last week, I wanted to take a tour of the nuclear power plant to make sure with my own eyes that we were being protected from terrorists. If that plant belonged to PG&E, we have to be trusting somebody who is not our neighbor. I trust myself and my neighbors trust me. They voted to elect me and I go and I check on that plant. I wasn’t satisfied, but I never will be. AB 1890 which brought us the deregulation recognized the independence of public power and gave us more latitude in decision making. Because we own our own Municipal Utility District, we can own our own power plants.

I mentioned to you that as a student I worked for SMUD. I also spent a great number of years as a transmission engineer over at the Energy Commission. I have worked on most of the major power lines in the state. I also worked on siting a number of facilities. One of the projects I worked on gave me a great deal of insight into the public process, and that was your very own Hunter’s Point. That plant was never built and that was because of your public influence here. You have even greater control over what happens in your community and where your power facilities are sited. There is no doubt that these are obnoxious facilities, but we require them. Somebody is going to be somewhat harmed by the facilities. A Municipal Utility gives you the chance to go in further detail and speak in farther detail than an investor-owned utility will do.

I remember the rumors that investor-owned utilities actually paid people to come over and speak to the powers that be during that period. Municipal Utility Districts will never do that. They are not going to work against the public because your representative is the public. Furthermore, as I mentioned to you when we close 1000 megawatts of nuclear power plant down, because we were the municipal utility, we were not going to do the easy thing and go out and find a piece of property, move people off, such that happens with the Calpine projects in San Jose or other places. We looked at the overall public benefit to replacing the power. We didn’t go the easy way. We found places that needed to be cleaned up where there was an additional public benefit to the cleanup, and where there was an additional public benefit to making jobs in that specific locality. I’m not saying that the public welcomed us with open arms when we cleaned up the emissions from Campbell Soup and became partners with the Campbell Soup Company in our community to help them stay in our community. When we supported local business through our public power efforts to provide energy for our citizens, all of a sudden everything changes and the dollars that you are spending on your energy bill stay in your community and help to clean up all the messes that have happened in the past.

You can pursue your community values. It is true renewables are nice. Now you might be surprised to learn that in Sacramento because we were a municipal utility, we put out a lot of public surveys and we found that people were overwhelmingly in support of renewable energy. Even though it sometimes cost twenty percent or more.

The SMUD Directors decided though despite public power polls, often when it comes down to putting your money somewhere, the people really don’t want to pay. So instead of instilling a renewable energy program mixed in with our other bill, we said we will invite people to join the renewable energy program and they may pay a little more. You would be surprised how many people don’t put their money where their mouth is. We thought we would have 20,000 people, and a huge percentage of our customers want to pay for our renewable power. A lot of people don’t want to pay.

As a municipal, you can still make the appropriate decisions and let people have even more input into the process by this. You are not all grouped in with a huge group of ratepayers through this enormous state that you have, and trying to communicate to an investor-owned utility in the interest of making money what your values are. The disadvantage is you have to take the time to listen to the people. It is true the public process is slow and time consuming. However, once the decisions are made, the people buy on to it even more. Then they take civic pride in the action that was taken.

The most important issues for the next twenty years is going to be bridging from fossil fuels to renewable energy. Giving the people a choice now helps bolster the renewable energy field and make them more user friendly, bringing down the price. They make these products real for us. However, the public is never going to pay more for these products. So, your municipality once again has got to be there. I want to tell you the most important function of the municipal utility is to bridge this transition.

Now, you remember in school, many of you I know are administrators, college-educated. So are the managers and the decision-makers at PG&E. Now, how many of you really studied routinely every day and made a few steps towards getting your degree every day? How many of you waited until the last minute, and you were cramming to get all of that information in? Maybe you went out and spent some extra money on those study guides. Let me tell you it’s human behavior to wait until the last minute and scurry around. But when you are talking about your electricity at the last minute, people are going to be hurt because when that power goes out, people are hurt. Your economy will be shot. You will be unable to serve your people through the transit system, through your health care. Everything is going to depend on the price of electricity. The most sure thing that is going to happen to us is that we will lose to the transition if we wait for profiteers to do our planning for us. No, the state is not going to save you from an energy crisis. PG&E and some out-of-state investors are not going to save you from an energy crisis. The only thing that is going to save the city of San Francisco is for you to take charge, own your own resources, and serve your people. After September 11, a lot of nights I couldn’t sleep. It’s a big responsibility keeping the lights on for one million people, but we take that responsibility and we know who we are.

The money the customers save through lower rates, SMUD’s rates, are thirty percent lower. They’re not just good for the local community. They are a major injection. We use our local university to study the value of dollars spent, both the dollars saved and the dollars that we spend in our community, because we have hired local contractors and employ a lot of people in the community. In general, it’s a 1.1 money multiplier. That means for every dollar that the people pay in rates in Sacramento, they get $1.10. I want to make you think. What other services can you invest in that is going to pay you back ten percent like that? There is nothing.

Furthermore, if you look at the value of our energy efficiency programs, we spent money. We spent $130 million dollars on our community, and the people were happy about it. Their rugs were fixed. They had their windows fixed. We came to their homes and talked to them. We checked their ducts for them. We gave them new thermostat controls. For this amount of money, we figured this all translated into 185 million and increased local economic activity. Where will the city of San Francisco get an additional 60 million dollars of injection into your economy? It’s a stretch for you to find something.

So how do your rates compare to the IOU’s in your area? At SMUD, we kept our rates low and didn’t have a rate increase for ten years, but we sat back and watched and PG&E raised and raised their rates. Public power was about 12 to 14 cents cheaper than the IOU’s. Maybe this is one reason why deregulation came about. When you look at the national averages, public power brings the average way down, but you can keep being victimized if you like. We don’t have to pay a dividend to our shareholders either. We pay the dividends back to the public. In public power when revenues exceed our expenditures, we either put them back into the electric system or we find ways to reduce the cost. At SMUD, we put that money in the bank and we save it for a power crisis. We didn’t have to have a big bump of rates at SMUD because through the many years, we saved for this inevitability. We know that something bad is going to happen. We would think it would be a flood. We didn’t think it would be a market situation created by free market forces. But now, we are going to save money in the bank for that too. PG&E is not saving their money in the bank for the city of San Francisco, no more than they are locating services for you here which you can trust. If you don’t want to be unplugged, you have to stand up for yourself now and instill your own values and instill your own resources here in your own town.

It’s geographically impractical what is happening here. There is nowhere in the whole world except maybe Hawaii that’s stuck out here electrically like you are electrically. But, PG&E has never cared about this because they get more money to transport the power to you over these long power lines. Then you can play the victim and say that’s complex, we don’t know how it works, we might get electrocuted, we might not do this ourselves. I want to tell you what. Their IBW workers were very pleased to come to work for the city of San Francisco and tell you exactly what you have and exactly what’s going on here. Especially, after they have lost a lot of their retirement money, and they know they will be on public retirement systems. They will no longer be playing a cat and mouse game working for PG&E and supposedly serving the public. They will be serving the public and they will be earning a trustworthy retirement.

We’re the advantage to owning your own generation. You can control the costs. You don’t have to be totally dependent on this roller coaster market. Your system will be more reliable and you can make choices. But the important thing is when you flip that light switch, you won’t suspect there may be some really mean people at the other end who don’t identify with you or your lifestyles and who can very easily deny you the very means to your survival and put you into a power crisis, exorbitant cost, or maybe deny you power altogether. Your opponents will always raise the issue of costs. But, don’t let that stop you. You are paying the price now for not being able to make your own decisions. In fact, you are ignorant. You are absolutely ignorant of your power system. You owe it to yourselves to get out there and own it so you’ll know what’s going on. I can’t imagine being responsible for this number of people and not knowing my power system. The most expensive and vulnerable thing that you can do is to decide to not act as soon as practical to gain control of your power system.

Vice-Chairperson McGoldrick asked, in 2001, we had these so called market distortions, public language for very high market rates-did you have to raise your rates to accommodate increases in your supply during the campaign against public power here last year by anti-public power forces? There was campaign literature that went out that claimed that SMUD had to have record high percentage increases. I wonder if you caught wind of any of that, and whether or not you can explain why they thought that SMUD was a perfect example of public power that was somehow not fulfilling it’s public power mandate and then distributed this literature widely during the campaign?

Ms. Davis stated it is absolutely true. We did have to have a rate increase, and some people were a little more hurt than others. Maybe some people got up to a twenty-percent or higher rate. We’re far lower. What happened was due to the change in the market rate, we have always saved money for a drought at SMUD. We did save $100,000,000 dollars in the bank. We did over-recover. If we had saved $200,000,000, maybe we would have given everybody back some money. But here along came the "robber bearens" and stole our money. As far as I am concerned, it was stolen. After that, we had put an item on our bill, now more of an energy charge. We’re using that because we are afraid of a drought, and we lost our drought money. So we are trying to rebuild our stabilization fund and get our drought money back and additional money for the market force risk. Overall, no we did quite well, and we would never be hurt as bad as an investor-owned utility.

Vice-Chairperson McGoldrick asked did you have to raise your rates a higher percentage than others because your rates were already lower, and to what extent were you dependent upon for transmission-generated sources over which you didn’t have control? How much control do you have over your generated sources and your transmission?

Ms. Davis stated we have an immense amount of control over our transmission and generation. Like your Hetch-Hetchy, we own a hydro system that we are very proud of. We did leave ourselves open because although we owned a lot, we didn’t lock in a lot of resources. The fashion is of course if you form your own Municipal Utility District, you may own part of your system and you may lease some; however, your mix works out for you. The market prices is what knocked us into the rate increase situation. Otherwise, we shouldn’t have trusted the market. We will never do that again.

Now what my recommendation is and what we are working towards--we pulled out the hydro surcharge. Now in the future I am trying to talk my other directors into leaving that surcharge on there because it is obvious now we are going to have huge fluctuations in the spot market where you buy power so we have got to keep a bigger reserve. But also, we don’t want the public to think that we are doing a bad job. So, in the event you form a municipal utility district, the public will be able to see it. You can break it out in your bill where here’s our job, and here’s what is left of market forces so the public won’t be confused. They will be able to keep your scorecard straight. They will still be able to tell whether you are jacking up rates because you are doing a bad job as a municipal utility, or if it is just market forces.

Vice-Chairperson McGoldrick asked what percentage of your generated energy do you actually produce and control and what amount do you have to buy from the market?

Ms. Davis stated we generate around two-thirds and then say a third was left. But, this year I think we are only leaving a sixth open to market forces. We really didn’t appreciate shopping for electricity when the prices were spiking wildly, and so we’re already trying to do a little bit more long term shopping at a reasonable rate. But, we’ll never be that vulnerable again.

Commissioner Fellman asked with respect to the conservation investment or the energy efficient investment, and I think SMUD has a solar program?

Ms. Davis stated yes, we have the leading solar-program.

Commissioner Fellman asked is that investment made exclusively by SMUD or does the city of San Francisco participate at all or any of the other local governments that are within your utility district?

Ms. Davis stated the financing comes 100% through SMUD.

Commissioner Fellman asked that’s based on the rates that you collect from all of your customers? You said you had special renewable customers. Does that include your solar customers as well?

Ms. Davis stated we put our solar customers on special rates as well.

Commissioner Fellman asked and what about your energy efficiency customers?

Ms. Davis stated our energy efficiency customers are on a special rate. If they are investing in our products, they stay down in the cheapest pier.

Commissioner Fellman asked do the customers pay for the products?

Ms. Davis stated yes. When you have a municipal utility, you are able to loan people money to fix up their houses. For instance, if they have a bill right now for $150, the municipal utility may come over and visit their house and say, if you spent a few thousand dollars and fixed up your house, your bill would be reduced by $70, so you can loan the money, send them a bill, and they can fix up their homes. All of the money they saved on their bill they can pay their other bill to you for a few years, and then when they pay that off, they still have the energy savings. PG&E obviously now has some of these programs, but they are far more effective when they come from the local utility district.

Chairperson Gonzalez stated a lot of the remarks you are making relate to the Municipal Utility District as opposed to the consideration that we had locally of a power authority. Rather than having a more independent MUD, there’s been many here in San Francisco who are talking about a power authority that would really be our own PUC where we make some kind of City charter change to how a member of the local PUC is selected, perhaps elected or appointed and maybe change some of the authority that the PUC has. To what extent do you think the benefits your community has had are directly related to it being a Municipal Utility District as opposed to some other form of municipalized power?

Ms. Davis stated I feel our community has greatly benefited by being a separate Municipal Utility District versus an electric department such as Los Angeles or Roseville. The major thing is that your coffers are totally separate. It would be really a bad fall to me as the Electric Director to put that $100,000,000 in the bank and to see it tapped for some other civic purpose. Things are much more separate when you have your MUD. Honestly, I personally believe for a city this size you should have a separate MUD because it really is going to require a lot of attention. It shouldn’t be a subset of all of the responsibilities you already have in your City or your County.

Chairperson Gonzalez asked you are making an assumption that a PUC locally formed elected by the people would not be able to give the same degree of attention that your Board is able to?

Ms. Davis stated we are separately elected by the people.

Chairperson Gonzalez asked what is there about that distinction between a MUD and a Power Authority? Is it your belief that a MUD is elected and a Power Authority is or isn’t? Is it that the Power Authority has a closer relationship to City government? Is it that the City Council might be able to make the ultimate decision rather than the PUC?

Ms. Davis stated yes, I think the last thing you said was the greatest difference. It is really better to keep it separated. When you go through the process of repairing the system or siting new facilities, having a separate Municipal Utility governance body, that is where the responsibility belongs. So when you then make the decision and then give another track at the City Council level, it is really too divided. But, it works fine for some cities.

Chairperson Gonzalez stated it seems you are placing great weight on this whole idea of direct participation, direct democracy component of the public being able to elect people dealing with these issues. How negative is it if the public gets to elect folks working on this issue and their elected representatives, their legislature likewise participates in that decision making? Why wouldn’t that be seen as a positive as opposed to something that should be seen as a negative?

Ms. Davis stated I don’t see it as a positive or a negative. I believe that I did actually make the statement that the public process can be slow and time consuming. Decisions really have to be made in the power area. You have to make a decision and move on; otherwise, things aren’t going to work for you. That would be the only concern. I don’t favor a certain type of governance. I mostly favor getting the job done.

Chairperson Gonzalez stated let me ask you a different type of question. If we took the question of the difference in rates out of consideration that public ownership has a lower rate, and let’s say we concluded that the rates were equal to one other. Would the primary argument that’s left be greater public participation through public hearings? Would you still be as strong an advocate for public power?

Ms. Davis stated if I were coming here today to tell you that SMUD had higher rates, I would still tell you that the pride of ownership and the reflection of community values and the local control far outweigh any dollar amount. I fully believe that people should want to pay more to know that they can drive down the street, and they know that their local government are the people they are dealing with for their energy services rather than investors. I have always felt that commitment. I don’t want to give away that trust. In fact, I would much prefer to live in a public power town where I could as an electrical engineer go and talk to my public power agent, get the documents from them, and see how they’re planning because I have somewhere to complain to. If they’re doing a bad job, I can bring that up to an effective force.

Chairperson Gonzalez stated I am trying to ask questions from a devil’s advocate point of view. I appreciate you made the remarks early on about the terrible mistake behind us, this idea of the whole nuclear power thing. I assume you supported the will of the voters in eliminating the nuclear plant.

Ms. Davis stated yes, I have been working on the decommissioning.

Chairperson Gonzalez stated the reason I asked that is after you told us about the vote you said that the terrible mistake behind us related to having the power plant, not to the vote to eliminate it. What do you say to somebody that says take a look at Austin. The public speaks, the public for some reason continues to maintain a nuclear power plant. If the vote in your community had been different and the community had continued to support a power plant, what do you say about that? Obviously, that is opposed to your own ethics around public power or energy practices. Would you still be as enthusiastic about a Municipal Utility District if that were a decision?

Ms. Davis stated yes, I would because that reflected the values of the community. If the community had reflected the values to keep the nuclear power plant operating, I would certainly have worked in the best interests of the community to keep the reliability of that unit high and the maintenance costs as reasonable as practical. That would be the public’s choice and that would be what they had spoken to me and therefore, they had made that decision.

Chairperson Gonzales asked would it be better if in the creation of a Municipal Utility District that we consider if there are certain public policy or a constitutional bill of rights, certain matters that we wouldn’t want a Power Authority or a Municipal Utility District to be able to consider? Do you have an opinion about that? What if as a legislative body, at the time we presented to the voters, if we did so, a consideration of a Power Authority or a Municipal Utility District that we tried to include in that that there could not be certain considerations such as nuclear power or the expansion of reliance of natural gas, etc.?

Ms. Davis stated that is quite a statement because I definitely believe there is a huge element out there probably far more in Sacramento than you have here who go for cheap power, and they don’t care how messy it is or who it’s hurting. It would be a problem but as a Director I would have to implement the direction that the public voted. Obviously, if people wanted a nuclear power plant, wanted more pollution, they probably wouldn’t have voted for me. If I were going against the public, I would be out of office and somebody new would be there. You don’t have that opportunity with investor-owned utilities. If the public wants desires that are not matching the investor-owned utility-too bad, the investor-owned utility will proceed down its own path. The only way that you could feel effective as a citizen is through the public power system.

Chairperson Gonzalez asked what do you say to somebody that says the private corporation then becomes subject to regulatory rules, a whole set of rules related to the siting of new plants, etc.? Deregulation is not an example of the industry going bad as much as lawmakers failing to do their part in regulating the industry.

Ms. Davis stated I have wonderful news for you. If you form your own Municipal Utility District, you will be able to evade a lot of that regulation because you are not under PUC regulation. Furthermore, as a municipal utility, SMUD right now is pursuing its very own control area. We don’t even want to be part of the ISO game. We believe it’s our right as our own district under the MUD Act to not play a lot of these games. You will definitely find yourself in a whole different position. It takes a lot of work, but you can be far more successful in local control versus remote regulation. You could be much more effective.

Chairperson Gonzalez stated obviously in public ownership, the public is much closer to the decision making. In the regulatory scheme, they have to rely on legislators who often don’t have information or sufficient knowledge of the areas they are legislating in to protect them from these market catastrophes.

Ms. Davis stated it is such a long route for the investor-owned customers. They have got to elect a governor. The governor appoints the commissioners or they have got to elect their legislators. The legislators have got a Senate and Energy Committee. All of these people. You have to travel to Sacramento and stand in a long line. No, if you have your Municipal Utility District, you are the neighbor of the people you are serving. They will be knocking on your door, I guarantee it.

Mr. Maynor asked Ms. Davis if it would be possible for her to get some materials that would describe SMUD’s various programs on economic development, renewable resources, and conservation?

Ms. Davis stated yes, we would be happy to give you any information you would like, and our staff would be happy to come and provide you with more information. Please invite our Economic Development Director to directly meet with each of you individually so I can be sure that you are fully informed.

Mr. Maynor introduced Mr. Tom Habashi, Utility General Manager with the City of Roseville.

Tom Habashi, Director of the City of Roseville Electric stated it is a pleasure for me to be here today. Just for the media, we do have slides. This is an introduction about the city of Roseville. You usually travel by us on your way to Lake Tahoe, about fifteen miles east of Sacramento. The city owned its own electric utility since 1911. We are a department of the City. The city of Roseville is the largest in Placer County and for those of you who do not know where Placer County is, it’s split somewhere between the east of Sacramento all the way to Lake Tahoe Lake. The city has been growing at about six to seven percent for the past ten years. There are about 89,000 people in the City and 41,000 electric customers, 35,000 are residential customers and the rest are commercial and industrial. The largest two customers that we have are Hewlett Packard and NEC.

I know that you have got quite a few questions and you have listed them all. They are very good questions so I am going to try to address them one at a time. I will start with the question of what are the differences between Roseville and PG&E? I will actually start about talking about the differences between a community-owned utility and an investor-owned utility in general. Then I will start to specifically talk about the differences between Roseville and PG&E.

To begin with is the governance issue. On the surface, it looks like we have the same type of forum. However, in reality we are very different. The people that put our City Councils into their seats are the people who vote, the residents of Roseville, and generally the people that support the elections or the businesses of Roseville. The City Council governs us. They tell us what to do. They also look over our shoulders so they regulate us as well. Those are the same people that I do serve, the residents and the businesses of the city of Roseville. All I need to do is make them happy and I pretty much have my job done.

On the other hand, PG&E has the Board of Directors who has to look out over the interest of the shareholders. They have got FERC who is somewhere in Washington D.C. Every now and then they probably do something that is good for us. They have got the CPUC here in California who are busy doing the business of regulating the utility business up and down the state along with a number of other businesses. Sometimes they are appointed and sometimes they have Republican or Democratic tendencies depending on who is the governor at the time. Then of course, the California Energy Commission (CEC) that regulates and sites power plants. All of these different entities that regulate and tell PG&E what to do aren’t really for the most part the residents and the businesses of San Francisco. I don’t envy PG&E employees at all because they are pulled in so many different directions trying to make everybody happy. In the process, what they end up doing is making a lot of people miserable.

In terms of financing, investor-owned utilities have to issue taxable bonds, and they have to pay taxes on the assets they buy. They are also a for-profit organization. These are things that you are aware of. In our case, we issue tax-exempt bonds. We are not for profit, but we do make a transfer to the General Fund in the amount of four percent.

The next I believe is a very important difference which is who has the obligation to serve? In our case, we do have the obligation. We never let go of that. It stayed with us throughout the energy crisis and before and will stay with us after. We did offer our customers the right to choose their own supplier if they wish to do so. After two years of that experiment, we didn’t have a single customer signing with anybody else, so we closed shop and said there’s no sense of maintaining that program. In the case of PG&E quite frankly, I have no idea who has the obligation to serve the residents and businesses in San Francisco anymore.. PG&E made it clear quite often that they have the obligation and the right to deliver power, but not to generate that power or to go out and buy it. They will do so as the default provider if they must, but they will do that with complete indifferences as far as the monetary obligation or the risks that comes with building and acquiring supplies.

That takes us into the next slide. What kind of supply portfolio do we have versus what PG&E has? We generally have a portfolio of generating resources and short and long-term contracts that help us minimize and stabilize the cost of power. Right now, one third of our power is met with generating facilities that we have part ownership in, and two-thirds are met through contracts. PG&E used to do something similar to what we are doing in the past, but since deregulation, they have sold all of their power facilities except for the hydro and the nuclear. You are well aware that they are trying to transfer those facilities over to their other non-regulated subsidiary, and they are having a tuff time doing so. Their portfolio has a bunch of contracts that DWR entered into under duress and pressure blackouts.

Next slide please. Profits and transfers we discussed before. We have a four percent in-lieu franchise fee. We also take care of the operation and the maintenance of the traffic lights in the City and the streetlights in the city of Roseville. We also make direct transfers to the City to pay them for the services they provide for us, human resources, finance, and others. PG&E pays the taxes, the profits to the shareholders. In some cities, they have franchise fees. In some other cities, they have utility users tax. Going more specifically to the differences between the city of Roseville and PG&E, how do we deal with conservation? We put five percent of our revenue aside to help build renewable portfolio and to also spend on efficiency measures in town. That number went up quite a bit last year. But next year it will probably be brought down to normal. We also administer our own programs. We are the ones to spend the total amount of money that we budget for that program. In PG&E’s case, they are obligated to fund the public benefit program to the tune of about three percent of their revenue. To their credit, they have been doing a lot in that area for the past ten years or so. They are quite conscientious about their effort towards conservation. Nowadays, I believe CEC is the one that administers the programs for the most part.

Getting a little bit more specific to the question of differences. If I am a PG&E employee, I am going to get down to the last slide and say, so what are the differences between us? Really, the real difference comes down to what we believe we do for a living, which is do we provide reliable energy and do we provide it at a reasonable cost at a competitive price? This is pretty much what we breathe day in and day out. Are we more reliable? Are we more efficient? That gets us to how we measure reliability. There are three ways to measure reliability that are well known in the industry. The three indices that we use. One is the duration of outages. How long does an outage last per customer per year? The second would be frequency of outages. The third would be frequency of momentary outages. Those are the outages that you don’t feel, but are the cause of all the clocks in your household appliances to blink and drive you crazy in the process.

If you look at the first, this is how we compare with PG&E. We’ve been doing very well in the last four years. The last year as far as duration of outages, we were somewhere around twenty percent that of PG&E. Next is the frequency of outages. Still doing very well. It’s gone up a little last year. It is something we have taken notice of, and we have put a lot of money in the budget for next year to deal with a lot of aging equipment that we have to bring that number down quite a bit. Third, is the momentary outage and again, you could see the picture for yourself. Last, in terms of comparison. rates, as you can see we’re on the average. By the way, the number to the vertical axis is cents per kilowatt hour on the average. We looked at it for home, office, restaurant or industrial customers, and as you can see we’re somewhere around fifty percent. Maybe 55 percent of that is PG&E.

Now to deal with some of your other questions. One of the questions was, what do you think the trends that will take place in the industry in California in the next few years will be? I will just address three areas-trends in the supply area, trends in the transmission, and trends in the distribution area. These are the type of things you need to do in order to eventually bring power to your homes and businesses.

In terms of supply and availability, we’re going to go through the boom and bust. When there are shortages, there will be lots of power plants coming online. When prices get to be too cheap, some of those power plants will be kind of shoved aside or delayed until better times. That’s exactly what happened in the last couple of years by the way. Supply prices, I believe are going to be stable over the next few years. I know some of you may wonder why if you have boom and bust and availability, why the supply is going to be stable. Because the DWR entered into contracts that take it to seven, eight, and nine years into the future. Those who entered into those contracts on the other end need to make sure that those supplies will be there. They will make sure that either they build it or they contract for it. Somehow, they are going to bring the supplies in. Since DWR already paid premium for that power, most likely market price will be reasonable and stable over the next few years.

Transmission is going to be an issue almost guaranteed. Those who would like power like folks in the Bay Area, don’t have a lot of land to build generation in. Even if they do, it’s probably about a 5,000 square foot lot that you could build a house on, and that’s about the extent that you have available. You don’t have a lot of land to build power generation. The places where they have land, they don’t have customers. Some how you have to figure out a way to get the power from where you build it to where people will consume it and that requires transmission. Transmission is unsightly things that occupy quite a bit of land and cause quite a lot of headaches to a lot of people and take a long time to build. I think transmission is going to be our next headache. I know right now that all we can think of is the generation side. But, in the future, I think transmission is what we need to concentrate on.

Distribution-just an improvement in technology that will help us go from 12KV primary to 25KV primary, so it’s more of a way to reduce losses in the system. That would be the trend as I see it. If I’m starting a utility from scratch, how would it look like? I guarantee you that whatever we have on this slide is not going to be what will end up happening in California because we have already plenty of interests that are in place, and you can’t get there from here without a lot of pain. If I am starting this whole thing from scratch, I would privatize the supply industry and have it be market-driven. However, in order to make sure that we don’t face the situation that we faced last year, you need to have reserves, and those reserves I believe ought to be owned by the state or by an entity like the California Power Authority.

In terms of transmission, I would completely separate ownership of the transmission from operation of the transmission and planning for that. That has to happen otherwise the conflict of interest would be happening continuously for the utility you are trying to operate, own, maintain and run the system at the same time. I would have the transmission ownership be completely separated from the planning and operation. Transmission owner will only build and collect money for the investments that they are making absolutely without regard to what they are required to build. They are told what to build, and they are told by a regional transmission organization that looks at the entire region and makes sure they put the transmission at the right place at the right time.

Finally, if I would have it my way I would have every community own its own distribution system. Going on to the next question. The next question was would you consider municipalization? I think in any action that you take and any decision that you make has to be governed by three things. One, time. Is it the right time to do it? Place. Are we in the right place to do this? Do you have the appropriate set of circumstances in order to make that decision? That is pretty much what needs to govern any decision in my mind.

Looking at what’s going on in San Francisco. Four years ago you were told that four years from now specifically by April 1st of 2002 you will have a system that is twenty percent cheaper than what you had before, and you will be able to buy power from whoever you want to buy power from. Here we are now you are paying forty percent more than you what you paid four years ago. You don’t have any rights to go buy from anybody you want because of the DWR contracts. You have an organization that is providing you with electric utility that is bankrupt and torn by a lot of other circumstances that are happening around them. I do not know what would be a better time, a better place, and a better set of circumstances for you to at least if not jump right away into at least and investigate it seriously. My advice is yes, continue with what you are doing. This is definitely the right place and time and circumstances for it.

The question that Vice-Chairperson McGoldrick brought up earlier was well, if you were in my place, what information would I need in order to make this decision? The steps to investigate municipalization are well known. I have got them and would be glad to provide them to Gloria and Don. That’s nothing new. They have milestones where you have to come in and make certain decisions whether you want to go this way or that way and so on. Really, the decision that you need to make is whether you want to take on this fight. It is a fight and it will be. If you think it is going to be an easy one, think again. It took SMUD twenty years to go through the process before they managed to municipalize. That is how long of a fight they had to put up with PG&E in order to have self-control.

This is not something that you take on to advance your careers quite frankly. It will not be an easy ride. You will be fought every step of the way and you will be fought by an organization that knows how to fight these things very well. If you think that they fought it along in small communities all over California, all over Northern California, think of what they will do if the City and County of San Francisco will make an attempt to municipalize. You are the bread and butter without a doubt. This is the cash cow PG&E and they are not going to let go of it easily. My advice is get ready for the fight of your life and do not hesitate for a second to hit below the belt.

Mr. Maynor stated Mary Tucker is with the city of San Jose and specializes in conservation activities.

Mary Tucker, Supervising Environmental Services Specialist, City of San Jose stated I appreciate the opportunity to participate in this hearing and also to learn from what you are doing. Within the city of San Jose, I am responsible for coordinating a large number of the energy activities within the city within the Environmental Services Department. Our primary partner in this action is our General Services Department, who is responsible for instituting a large number of the energy efficiency and energy supply opportunities within the city. We also have a very active and enthusiastic inter-department energy team which brings together all of the departments, Library, Fire, Police, Recreation, the Parks to learn and to talk about what they are facing and what is going on.

We are not a Municipal Electric Utility. PG&E supplies the bulk of our energy needs, so I do bring a different perspective than the other members of the panel here. We have kept informed regarding the feasibility and the potential for establishing a Municipal Utility or other sort of entity, but at this time we are not undertaking any formal feasibility studies nor do we have any direction from our citizens or elected officials to start down that path. We do look with interest on your undertaking and those of other entities within the Bay Area such as East Bay Municipal Utility District as you explore these opportunities.

When the energy crisis hit California, San Jose was well prepared and able to respond on the end use side. We have had an active and progressive energy program for more than twenty years and also very strong energy policies that have guided our activities, and more recently, in the beginnings of last year, counsel adopted a Smart Energy Plan. The foundations for our policies are the city’s Sustainable City Policy. This is an expression of our desire to be an environmentally and economically viable city insuring that the actions that we take today in all areas would not jeopardize the resources or the ability of future generations to determine their own future. With sustainability as our foundation, we have three key goals as regarding energy to insure that we as a city use energy as efficiently as possible. In all aspects of our city government, our buildings, our vehicles, our transportation, and our land use planning to explore options for expanding our own supply with renewable energy sources and to develop strong partnerships within our community and our region.

On energy efficiency, we have had tremendous success lately with our own facilities reducing our energy expenditures since April of 2001 by more than two million dollars just through a strong partnership with our city departments and employees in identifying primarily low-cost and behavioral ways to save money and beginning to identify the most cost-effective areas for increased efficiency opportunities in our buildings and operations.

We have also adopted the U.S. Green Building Council’s lead or leadership and energy and environmental design rating system. For all of our new facilities starting in July of this year, all new city facilities and retrofits over 10,000 square feet shall meet a lead certified rating, which is the base level rating within that organization. The U.S. Green Building Council is a national organization of more than 1,000 members representing architects, builders, developers, manufacturers, state and local governments, and a wide range of folks. This will help to insure that all of our future city facilities will be as green and as energy efficient as possible.

We have also worked within the Bay Area here, other local governments, and the state government on these issues and have formed a virtual network of sorts, the California Green Building Collaborative, where we are able to come together and share what’s going on within each of our jurisdictions and how we are moving toward insuring that all of our own city facilities are as green as possible. In particular, working with the California Integrated Waste Management Board, who has taken on that leadership role for green building for the state facilities. I am also very honored that just recently, in January, I was elected to the Board of Directors for the U.S. Green Building Council representing state and local governments so we will be able to bring that voice to this organization as we work locally, state, and nationally on a lot of these issues.

Within the city, we have a proven track record of using co-generation systems, especially at our wastewater treatment plant and our convention center. We are currently actively exploring and analyzing the solar electric or the photovoltaic opportunities on numerous city facilities. Many of our existing city facilities and also making sure that we design it into the future city facilities incorporating even the potential for some of the newer solar technologies such as solar glass building integrated photovoltaics.

We are looking at our parking structures. We believe they offer a very unique opportunity for solar and looking at some of our lands and areas. One of the major concerns that we have as we started down this path is the ability to provide resources that would involve our Public Works Department and staff in this entire process. As I said, we are not an electric utility and any of the energy work that we do is primarily funded through general funds or through grants. We do not have a revenue source for these activities so we need to involve our Public Works Department in this activity. Because of the need to develop the bid documents, it’s been determined that solar installations are major public works process and therefore subject to our City Charter and Code Rules regarding bids and processes.

We believe we have identified a source of funds over two million dollars that we have now saved as a result of energy expenditures and to be able to initiate these activities and start down that path. We will also be working with the Department of Energy, the National Renewable Energy Lab through the Million Solar Roofs Partnership that we are part of to be able to obtain technical assistance from the National Renewable Energy Lab in helping us to design this. We too have the potential within financing these projects ourselves through tax-exempt bonds and other resources that would be available through the California Power Authority.

On a related issue to green power, it’s great to be able to have it on our own facilities. We were a little dismayed and concerned about our loss of direct access in being able to purchase green power. We had started down that path. We were going to release a request for proposals for green power when the energy crisis hit, and it was determined that direct access was no longer available. We are continuing to work with the League of California Cities to look at, is there a possibility to change that or to insure that there is the level of green power available for cities to purchase.

We have strong working relationships within our region to insure that our land use and neighborhoods are protected, and that energy generation facilities are built in the most appropriate places and meet all the regulations required of them and hopefully, in some cases go beyond that in order to protect the neighborhoods. We have worked diligently within our community to provide our businesses and residents with the information and the resources they need to make sound decisions regarding energy needs, energy education, energy fairs, such as you held in this very building. We held ours at our Sports Arena and a variety of workshops that had just been overwhelming through our green building program. Our solar workshops to provide information to the citizens are standing room only. We partnered with PG&E on a Cool Roofs Program similar to the statewide Cool Roofs Program, where we offered the rebates for the commercial sector to be able to install energy star cool roof technologies on their facilities and reducing their energy use especially during those summer months of peak demand. We are hopeful with the CPUC’s current program where they have opened up the public goods money, we too have applied to be able to provide a small business program of energy efficiency, audits, and also rebates to be able to run that program ourselves within the city of San Jose.

We have also set up a special program that use city funds to assist the low-income community within the San Jose area going beyond some of the state and federal programs that were available. We are providing utility bill assistance along with weatherization installations. One of the unique aspects of this weatherization program is the ability that we have given and written into the contract with our non-profit organization that is providing this service for us to install non-traditional energy efficiency techniques that are not currently included in some of the state and federal guidelines such as awnings, especially on the west side of many of the citizen’s homes and buildings. You would be amazed what a west-spacing awning would do during the summer as far as reducing the cooling needs that you would have within that. We are also excited about a pilot project that we will be doing with this organization to explore the installation of solar domestic hot water systems on many of the group homes for senior citizens within San Jose.

In the next few months, we will explore other energy policies and potential programs that we can undertake. We are initiating a community-wide stakeholder process to update our energy policies and look at a different energy action plan of sorts where we have a little bit of breathing room right now after the energy crisis, but really to solicit ideas and explore other opportunities within the city. We have actively engaged in discussions and networking with our counterparts in the Bay Area, here within the city of San Francisco, your Department of Environment and other groups within Oakland and other Bay Area communities where we shared ideas, strategies, resources, lessons learned, and looking at the potential for partnerships particularly in that area that you talked about bulk purchases. There are opportunities particularly right within the Bay Area that we could do that among our various city entities.

Energy will continue to be a key issue for San Jose. We will work locally, statewide, and nationally to insure that the goals for our city and citizens can be met and look forward to working with you and learning from you as you start down the path and research your public power options.

Ms. Tucker stated she just participated in an Advisory Panel for Alcatraz Island, which is in itself an entity onto its own, but they are looking for water. There is a new technology that captures fog, the water from the fog.

Ms. Fellman asked Ms. Tucker a question, but there were microphone problems.

Ms. Tucker stated I think the issue of local control would be the strongest benefit that we would look at with the city of San Jose and to start down that. We do understand that it is a long fight, and I need to read the report that came out for East Bay MUD. We do have a Municipal Water Utility. I know we will probably be looking to explore expanding that, but at this point it’s just some initial research in looking at that that will probably come up in this energy policy process and looking at the options and if we get the direction from our counsel to go down that path and learn from what you have been learning.

Chairperson Gonzalez stated, I wanted to ask Mr. Habashi a question. I was out of the Chamber when you finished your remarks. Can you tell me how large the City Council is in Roseville and whether the Mayor is elected at large?

Mr. Habashi stated it is a five-Council member. John Lee, the Mayor, is the person that received the highest vote in the election before. The Mayor serves for two years. After the two years, the person who received the highest vote in the previous election becomes the Mayor.

Chairperson Gonzalez asked if Roseville was a Municipal Utility District?

Mr. Habashi stated it is not a separate district from the city. It is a department of the city.

Chairperson Gonzalez stated the questions I was asking before related to the question of whether or not the benefits or disadvantages that perhaps your City has considered in terms of having a closer relationship.

Mr. Habashi stated I would assume a part of it had to do with the community expecting certain returns by investing in its own utility. I think that is a very reasonable expectation on behalf of the city and the people who live in the community to get some return. That relationship has to be very well established and perhaps put in place in the Charter so you don’t have misconceptions later on as to what the utility needs to provide in terms of return to the city. Right now, our return to the city is four percent of our total cost every year, and that percent is established in the Charter. Our funds are separate from all the other funds on the city. We’re not just a line item on the budget so to speak. We have separate funds as they do. Once you make that relationship clear and solid from the beginning, then it doesn’t matter to me whether it becomes a district or you have a department of the city.

Chairperson Gonzalez welcomed Commissioner Ammiano back to the meeting. He stated you mentioned it was an appointed Advisory Commission that gives advice to the Council in Roseville?

Mr. Habashi stated yes, on utility matters the City Council has appointed a five-member Advisory Commission. We meet with them once a month and talk to them about issues more of a technical nature that the Council more likely doesn’t want to hear back because they have other businesses to worry about. That Commission gives us guidance and advice to the Council. They are not the final decision-maker in the city. They are an advisory to the Council.

Chairperson Gonzalez asked what kind of bond capacity do the City Council members have? Do they put the bonds before the voters?

Mr. Habashi stated, no. Anything that has to do with the utilities is handled through revenue bonds.

Chairperson Gonzalez asked what kind of vote, four out of five, three out of five?

Mr. Habashi stated majority vote.

Commissioner Fellman asked, what is the percentage of electricity that you generate versus how much you purchase?

Mr. Habashi stated about one-third is generated by facilities that we have part ownership in. We have a hydro-facility, which is about 250 megawatts, a geothermal facility that is a little over 200-megawatts, and a number of combustion turbine facilities that are about a total of 175-megawatts. We are part owners in all of those facilities and two-thirds are purchased on contracts.

Half of the transactions that we have are with the Western Area Power Administration (WAPA). That is the entity that markets all of the federal hydropower up and down the Central Valley. Then, the other half of the contracts are with marketers.

Vice-Chairperson McGoldrick asked on the fiscal issues, has the City Council ever sought to use or borrow any of the funds that you have kept aside as your utility funds?

Mr. Habashi stated so far, we have borrowed about 27 million dollars to build a distribution system. Our total assets are somewhere around 175 million dollars. We have a debt to asset ratio of somewhere around fifteen percent.

Vice-Chairperson McGoldrick asked do you have a wall of separation between your funds and the general fund for the City?

Mr. Habashi stated yes.

Vice-Chairperson McGoldrick asked has the city ever sought to use your funds for general fund purposes?

Mr. Habashi asked to issue revenue bonds in order to do something that is city related?

Vice-Chairperson McGoldrick asked my question is a little bit along the lines of what the SMUD Board member pointed out that they kept a rainy-day fund, but actually it was a non-rainy day fund is what they originally thought for droughts. They had about a hundred million dollars there. When the market distortion hit last year, they had to deplete that fund. Do you keep a rainy day fund?

Mr. Habashi stated yes, we do. We have a rate-stabilization fund and today, the balance in that fund is somewhere around 120 percent of our total power purchase in this coming year. It’s a fat fund.

Vice-Chairperson McGoldrick asked were you subjected to the same sort of market problems that SMUD had, and did you have to deplete those funds down?

Mr. Habashi stated we did not. We did though last year ask for a rate increase to a total of 5 percent for residential customers and 7/12 percent for all other classes. That is the only rate increase we have had since 1993 or 1994.

Vice-Chairperson McGoldrick asked since 1993 or 1994, the only rate increases you have had are what you just stated?

Mr. Habashi stated yes. Actually, since 1993, we have had a number of rate decreases for both commercial and residential customers. We try to keep our eyes on the bottom line making sure the reliability is there and the cost is managed.

Mr. Maynor stated the city of Austin, Roseville and SMUD have been successful in attracting the computer industry. I wonder if you could briefly comment to what extent your electric utility was a factor?

Ms. Davis stated we work with our Chamber of Commerce and provide economic development rates to a lot of the computer industry that wanted to locate in our town. They were going to employ more people. We could develop a better rate for them because they are base load users. What they really liked about the SMUD area is our reliability. Because we are a municipal utility, we can understand that our city values these customers so we have actually provided them with a little extra reliability. However, I have to admit we weren’t all that friendly towards the last server farm that wanted to come to our city because they are very intensive on the load. They use as much as quite a number of homes, and after the energy crisis. Once again it is a county policy and we implemented it. So if they’re saying no, we need the jobs, we need the computer industry here, then we can be flexible and design a rate specifically for this type of function, and then when the plate is full, we can close the door on it too. There is a lot of benefit and control towards helping economic development in your community through the Municipal Utility District.

Ms. Doll stated rates were certainly a factor in Austin, but with the high tech industry one of the critical things was ties to reliability. In many cases, a dedicated substation made the difference.

Mr. Habashi stated I am going to repeat what SMUD and Austin pretty much are doing. What we do with economic development is we go and share with those prospective customers the reliability and rate figures that I have shared with you today. If that is the issue that they are looking for, then it is sufficiently enough. My experience with high-tech industry is that is not enough. They normally look for other things besides electricity, reliability, and rates. They look for proximity to Stanford University, for example, and places of that nature. Most of the industries that have high consumption tend to look at Municipal Utilities first.

Chairperson Gonzalez asked if we could accommodate public comment at this time?

Mr. Maynor stated we have one question and it’s a long series of questions having to do with peaking plants and your review authority. It may be the type of question that we could get answers to by e-mail. I have the address here of Jackie Williams. Mr. Maynor asked for Ms. Williams e-mail address in order to get her answers to her inquiry.

Ms. Williams stated she would not be here this afternoon.

Mr. Maynor stated that it was time for the lunchtime break.

Gloria Young, Executive Officer stated public comment would be after all of the presenters at the end of the meeting. We are taking all of the questions as Mr. Maynor indicated. In addition, before the close of this morning’s session, I would like to take this opportunity to really thank each and every one of you. I recognize and appreciate that you have had or have other commitments and took the time to be here. We are very pleased to have you here and have this information to help the Commission as they move forward in their decision-making processes. I cannot let this morning go without specifically pointing out Mr. Habashi and thanking him. I have worked with him for fourteen years and if I didn’t take this time to acknowledge that, I would be in trouble after this meeting.

Chairperson Gonzalez stated I would likewise join Ms. Young in thanking the speakers for coming forward. I am sure you will hear more from us, and we will in all likelihood take advantage of some of the overtures to get more information.

Vice-Chairperson McGoldrick stated I hope there are at least two-credit units for this in some graduate seminar. There is a great deal of educational-communication occurring here, and I really appreciate it.

The morning session adjourned at 12:05 p.m.

Afternoon Panel - 1:00 - 3:00 P.M.

The afternoon session reconvened at 1:15 p.m.

Members Present: Chairperson Gonzalez; Vice-Chairperson McGoldrick (was noted present at 1:49 p.m.); Commissioners Ammiano, Hall, and Fellman.

Members Absent: Commissioner Schmeltzer

Gloria L. Young, Executive Officer stated Don Dame is the Assistant General Manager of power management for the Northern California Power Agency (NCPA). Mr. Dame has over twenty-five years of electric experience including the California Department of Water Resources, Pacificor, Bonneville Power Administration and the Colorado Interstate Gas Company.

Ed Aghjayan recently retired from public service after more than ten years as the Public Utilities General Manager for the city of Anaheim. Mr. Aghjayan also served as the Deputy City Manager of the city of Pasadena and the Director of Utilities for the cities of Palo Alto and Austin, Texas. I would like to thank you again for coming and I need to also indicate that I have worked for several years with Mr. Aghjayan in the city of Palo Alto. Mr. Maynor will continue to facilitate this process.

Mr. Maynor asked the speakers to limit their comments to fifteen to twenty minutes to give ample time for questions.

Ed Smeloff, Assistant General Manager for Power Policy, Planning and Resource Development, San Francisco Public Utilities Commission stated for me this has been a little bit like old home week to be able to see a number of my colleagues and friends from the public power movement and particularly Linda Davis from the Sacramento Municipal Utility District, where I served for eleven years. You heard some impassioned arguments for the advantage of local control of the electric system and what has occurred in other cities and in California.

I wanted to speak to some of the specifics of our vulnerabilities in San Francisco and why it’s so important at this point in time to increase our local control over the electric system. San Francisco, given its geography is uniquely vulnerable to power disruptions. All of our imported electricity comes through one substation at the county boundary between San Mateo and San Francisco counties, the Martin Substation. There are five overhead transmission lines and one underground transmission line that bring power into that substation. The imported power capability for San Francisco is insufficient to meet the peak demands of the City. So, we have to have in San Francisco in-city generation to meet demand when we are using electricity during peak periods.

The infrastructure in the City I think you all know is quite old. The Hunter’s Point Power Plant is 44 years old. The plant at Unit 3 at Potrero is 38 years old. These plants are relatively inefficient. If you look at the key pollutants, the oxides of nitrogen and small particulates, the amount that they emit compared to a new power plant is eight to ten times the quantity on a per kilowatt hour basis. The plants are vulnerable to breakdown because of their age.

So San Francisco because of its peninsula nature, the age of its infrastructure has three particular vulnerabilities. One is for power disruptions. The second is for the environmental impact because we have to generate in the City and the plants in the City are relatively polluting. The third is very important and is the potential for market power by the owners of generation within the City. Right now, there are two owners of electric generation, PG&E and Merant, which owns the Potrero Plant. The goal of the Mayor and the Board of Supervisors in the City is to shut down the Hunter’s Point Plant as soon as we can do so without jeopardizing reliability. To do that, we would need in my judgement about 250 megawatts of new generating capacity or load reductions in the City by the year 2005. There is a proposal now that is before the California Energy Commission to build a new 540 megawatt facility at the existing Potrero site which would also be owned by Merant. If that facility were to be licensed and Merant were to construct that facility, they would own within the city limits of San Francisco 900 megawatts of generation, and they would have virtual monopoly power over generation during those hours when we cannot import all of the needs for San Francisco.

Now, historically or recently the way that market power has been addressed is through the independent system operation, which requires that the plant operate at times when it is needed for reliability and makes certain payments to the operator that allows them to recover some of their capital costs for having located in San Francisco and then limits them on to what they can receive for their variable cost. This is really the only control we have over what the prices are that are being charged for generation within the City.

Currently, PG&E takes the costs that occur in San Francisco and melds those in Northern California-wide. But there is a movement afoot at the ISO, and this is a system that has been put in place in the East Coast to move to what’s called zonal pricing where the cost of the system are applied to the areas in which those costs are created. So San Francisco because it is a load pocket, because it is an area which requires more generation in it that has to be operated for local reliability reasons could end up being impacted by that new system of zonal pricing.

The Merant plant’s current design is a two combustion turbine one steam turbine design, and the way it is put together is a single failure will trip off the entire plant, which means you lose all 540 megawatts of power-generating capacity. You have to have in San Francisco sufficient backup capacity so that you are still able to maintain reliability when the plant trips off. What that means because it is a single unit we are going to have to depend on the existing Unit 3 at Potrero as backup generation for years to come. That will continue to give Merant a significant market power in San Francisco.

There are alternatives to building this plant. There are a number of opportunities that exist right now in San Francisco to develop more efficient co-generation power. There is an opportunity to take the downtown heating loop and use the co-generation plant to provide both the steam and electricity for San Francisco. There is an opportunity out at Mission Bay and the new UCSF Campus to develop a power plant out there. The question right now is who is going to make the decision as to which plants get developed in San Francisco. Under the current regulatory regime, the decisions about which plants are built are those of the developers and the investors in those power plants. Right now, Merant has a head start in terms of the process that they are going through with the California Energy Commission. If that plant were built because its capacity is so large, it would crowd out opportunities to develop other resources in the City that could be more efficient.

I think this is a strong argument for local control. The argument is about who is going to take responsibility for planning for power and for procuring those resources. One of the problems that we have is that under the current regulatory structure, PG&E, which used to have responsibility for procurement no longer has that. They are in bankruptcy and they are not creditworthy so they cannot purchase power on behalf of the customers. The state has stepped in on an interim basis to perform that role of power procurement, but they only on a limited fashion as you heard through the California Power Authority are doing any new resource development. Decisions about what new resources are being developed are left to private developers. That was the thinking when we deregulated the industry that private investors and private capital would best determine and take the risks about new development.

What’s occurred since the collapse of Enron is we’ve seen a retreat from a willingness to invest in new power plants at the risk of the developers. We’re seeing very little interest in unbalanced sheet financing and more of a movement back towards a requirement that any new power plant be backed up by a long-term power purchase agreement. We’re at a point in San Francisco that if we decide we are going to rely on Merant to build the additional capacity for San Francisco, it still may not come to pass because of Merant’s potential difficulties in raising capital in the current markets to finance this without a power purchase agreement.

In San Francisco, we already have an agency that has some responsibilities for the delivery of electricity. The Public Utilities Commission through the Hetch Hetchy system provides electricity to all of the municipal facilities in San Francisco and operates 400 megawatts of capacity up on the Toulumne River and not only provides electricity to San Francisco but to the Modesto and Turlock Irrigation Districts. It seems to me that you have an opportunity if you are going to move towards a broader public power agency in San Francisco and exercise more local control over power development to build on the resources that are already available through the Public Utilities Commission. To go and start up a new utility district would require a formation of a brand new agency and raises the question about the initial funding for that agency.

In the case of Sacramento, when SMUD was originally formed, the city of Sacramento issued general obligation bonds to be able to fund the initial development work at SMUD before it took over the PG&E distribution system and before it had any source of revenue to do revenue bond financing. Under the current limitations of Proposition 13, the ability to issue general obligation bonds, it seems to me it would be difficult to find a funding source sufficient enough to allow for the startup of an independent agency like a Municipal Utility District.

On the other hand, you do have the existing San Francisco Public Utilities Commission, which has infrastructure, which has talented staff that you could begin the process of expanding the control over local sources of power. I would like to make the point that when we think about what we can do in San Francisco to think of it in terms of staging, how we gain some additional control. It’s not necessarily in my judgement to gain control over the wires and pulls and the transformers as a first stage to having more energy independence and having more local control. The City could take on the responsibility for portfolio management for planning and procuring electricity supplies without necessarily owning the wires. But it would require a change either in state law or in state regulation.

As you heard from previous speakers, direct access which allowed people to select their supplier of electricity has been closed down by the California Public Utilities Commission to protect the contracts that the state has entered into for the net open position in supply. There is a bill that Assemblywoman Migden is carrying this year and she carried it last year AB117, which was vetoed by Governor Davis last year I believe on technical grounds, but which is going to be carried again this year which would give municipalities the authority to aggregate load within their jurisdiction and to serve their customers by procuring supplies either by building their own generation or entering into contracts with other generators to sell power to their customers. This sort of community aggregation, direct access would allow the City to expand its role without having to initially condemn the distribution system. It is sort of a quicker path to local control. If the City were to do that would allow the City to exercise some decisions about where new generation is sited, what types of new generation is chosen, and allows the City to promote cleaner technologies as well such as solar and fuel cells.

If you do want to go the second step in condemning the distribution system and taking over ownership, there is a significant hurdle in state law, which is usually referred to as rebuttable presumption that is you as the three supervisors have the authority to exercise imminent domain and condemn PG&E’s property, but PG&E has a right under state law to rebut that finding and to take you to court and challenge you in court as to whether or not there was a public necessity in the condemnation. That can tie things up for years to go through that. Last year, Senator Burton and Senator Nelsoto introduced a bill to delete the rebuttable presumption clause in state law. It’s only been there since 1992. SMUD and others that exercised imminent domain did not have this barrier. It didn’t make it through the Assembly Committee last year, and this would be another hurdle over the long term. If you want to make it easier to move to a full municipal agency, eliminate the rebuttable presumption clause of state law.

Once you’re through that it is still going to be a formidable challenge to take over the system. I think one of the key issues and an issue that needs to be further investigated is what is the appropriate value for the distribution system and other assets that you would take over from PG&E if you were to operate a municipal utility. There have been a number of different methodologies that have been used in the past, but they usually boil down to one or two. One being replacement value of the distribution system minus the depreciation. The other being book value minus depreciation. Which methodology is eventually decided upon will have a major impact on whether or not in the short term electric rates will be any lower in San Francisco than they would be if service was continued to be provided by PG&E. Over the long term, rates will be lower because you will be able to use lower cost of capital to improve the infrastructure and over time that is significant enough that that will allow for lower rates in San Francisco. In the short term, what will determine whether rates are lower or not under a public power alternative is the price that will be paid for the PG&E distribution system.

Commissioner Hall asked, Mr. Smeloff six or seven months ago I sponsored a resolution that was unanimously approved by this Board to establish a Department of Public Power, and you alluded to that in your presentation. I think you said there is a law change required. If we were to establish a Department of Public Power within the existing PUC or a separate department, what is exactly required-a law change?

Mr. Smeloff stated you have the power as the Board of Supervisors to provide direction to the administration on the organization of City departments. It is my belief that the intent of the Mayor in appointing me as Assistant General Manager for Power Policy Planning and Resource Development, and the staff that we have now assembled really constitutes the beginnings of an Office of Public Power in the Public Utilities Commission. What I was referring to was the law change that the City would need to have in order to be able to sell power beyond just municipal agencies and sell power to retail customers. Right now, direct access, which was in place in the past had been ended. So the City could not under current state rules sell power to a business or retail customer. That is what would have to be changed either by the CPUC or the state legislature and that is what Assemblywoman Migden’s bill is about.

Commissioner Hall stated we could go ahead and set up a Department of Public Power within the existing PUC whose function it would be to buy, sell or aggregate power, not do the distribution at this point. Is that correct?

Mr. Smeloff stated you could set that up. You could buy power and we do buy power on the day to day market and contracts for the municipal load. What we can’t do under the current law is sell power beyond the current set of customers--to retail customers.

Commissioner Hall asked if we could sell to wholesale customers.

Mr. Smeloff stated we do sell wholesale power right now as the Hetchy Hetchy Water and Power System to SMUD, Modesto, and others. We can’t sell retail in San Francisco.

Commissioner Hall asked is that what you are defining as distribution? Are you defining as distribution as part of that the ability to sell to retail?

Mr. Smeloff stated no, it’s possible and it was done earlier. You can sell electricity over PG&E’s wires without having any responsibility for the distribution system. That is a possibility. That’s what would be allowed under AB 117. We have the ability to wheel over PG&E’s lines and sell to end users.

Commissioner Hall asked if we were to set up, what would you recommend as far as setting up a Department of Public Power? Would you set it up within the PUC? Would you make it a separate entity, a separate department? With you experience, how do you see it best being set up?

Mr. Smeloff stated the Hetch Hetchy water and power system is a multi-purpose system. But, it’s primary responsibility is to assure that there is a water supply for San Francisco and the Bay Area. To try to pull the power function out of the current PUC would be difficult to do because the Hetch Hetchy is so central to the power delivery infrastructure. Not only do we own seven power facilities in the Sierras, we also own about 110 miles of transmission lines to Newark within the Public Utilities Commission. It is my recommendation to build on what you have through the existing Public Utilities Commission structure.

Commissioner Hall asked but to set up a separate division, a separate Department as in my original resolution, a Department of Public Power that would do everything short of distribution.

Mr. Smeloff stated that is correct to set up an enterprise that would have responsibility for managing the power functions within the Public Utilities Commission which would set rates and bill customers. A key reform that needs to happen in my judgement is delegate to the PUC the authority to issue revenue bonds to be able to develop new resources, not only on the power side, but water and sewer services as well.

Commissioner Hall stated that could be set up everything short of distribution setting that aside right now to aggregate, to develop resources, to procure generation, etc. That can all be done within an existing Department of Public Power structured within the PUC.

Mr. Smeloff stated that is correct.

Chairperson Gonzalez asked the law change that you were discussing initially relates to the long-term arrangements that the state has made with certain power generators--is that true?

Mr. Smeloff stated the reason that the state has cut off direct access is because the state has entered into a number of contracts with power generators over a fairly long term at prices that are now above market rates. If they were to allow customers to opt out of being served by the state then those contracts could be in part stranded, and those costs would then be imposed on the remaining rate payers who are taking service through those contracts. That’s the reason for the prohibition. Any direct access would have to take that into account.

Chairperson Gonzalez stated the reason for that is if you allowed certain municipalities to engage in the sale to retailers, you would essentially be circumventing the contracts, and those contracts have guaranteed amounts of energy that are going to be purchased. True?

Mr. Smeloff stated that is correct. Many of those are taker pay contracts with fixed amounts that have to be delivered so the state would have an obligation to pay for power that it would not have fewer customers to deliver it to.

Chairperson Gonzalez stated I know these are long-term contracts. Any purpose in discussing whether or not there is a sunset provision on the direct access law?

Mr. Smeloff stated the CPUC has by order eliminated direct access and could re-institute it by a future order. There’s no date in which that could be done. If it is to be opened up, all of these issues related to stranded costs are going to have to be dealt with. There are several of them. PG&E has costs that were incurred during the time of price volatility when the markets went haywire that they still have not recurred. Those costs would be amortized over time. Those costs would probably be assigned to any group of rate payers if its through municipal aggregation or other direct access. Those costs would be assigned to them as well. The state has not fully recovered all of its costs when it was in the short term market buying power at very high prices. Those probably would also be assigned to any group of customers that got direct access. The third is the long-term power contracts that the state has an obligation. It is possible to put together a direct access program or community aggregation program, but it’s going to have to take into account these obligations that have been previously incurred.

Commissioner Hall asked Mr. Smeloff to define the difference between retail and wholesale customers.

Mr. Smeloff stated a retail customer is a end use customer who takes power from a retail utility usually at a lower voltage level, although the voltage levels can vary. The wholesale customer is a electric utility or an independent power producer who is not directly regulated by the state and which transactions between wholesale entities are regulated by the federal government.

Commissioner Hall asked then the law that Commissioner Gonzalez is referring to applies to both retail and wholesale or just retail?

Mr. Smeloff stated the direct access law applies just to the sale of power to retail customers.

Commissioner Hall asked then we could engage in sale or trading of power, aggregating and trading, to wholesale?

Mr. Smeloff stated and we do do that. That doesn’t allow us to sell electricity to any San Francisco business or retail customer. We could sell it to SMUD or we could sell it to Modesto if we have surplus power, and sometimes we do.

Commissioner Hall asked is that process formalized, or is that a process that can be much improved on at present in the City in your opinion?

Mr. Smeloff stated yes. In fact, we are beginning to institute some reforms in San Francisco on the way we look at anything more than short-term power purchases. I don’t want to get into this, but I am sure the Supervisors are well aware that the City got into a long-term with Calpine which now is significantly above market rates. In my view as we look back on this, the structure for making that decision at the PUC was not wholly adequate.

Commissioner Gonzalez stated to Commissioner Hall, I want to clarify two things. I think that the discussion versus wholesale versus retail when we are talking about the San Francisco market has to be placed within the context of what you referred to Ed, related to the Hetch Hetchy system really already providing energy to certain users. They just happen to be essentially City users. So in a way, we are wholesalers, but we are also retailers at the same time. Is that a fair characterization?

Mr. Smeloff stated that is a fair characterization. We have an agreement with PG&E called an interconnection agreement where they agree to provide distribution services for municipal load in San Francisco. This agreement goes through 2015, so we currently are able to use their lines since we don’t own any transmission lines this side of Newark to deliver that power to the municipal customers like the Airport, City Hall, and the Water Department.

Chairperson Gonzalez stated the whole question of whether or not the City can be a wholesaler and the likely advantages of that need, direct access law affects whether or not there is a demand for wholesale market and activity. Is that fair to say?

Mr. Smeloff stated certainly. There is a limited number of trading partners right now under the current structure because things have been frozen. Many customers who were buying power from alternative suppliers have defaulted back to their current utility. So there are a limited number of counter-parties to trade wholesale power with. Furthermore, the City is even more limited. Under the Raker Act, we can only sell power that is generated at Hetch Hetchy to other public power entities. We are prohibited under federal law from selling wholesale power to PG&E or any other investor-owned utility for resale.

Chairperson Gonzalez welcomed Commissioner McGoldrick to the hearing.

Commissioner Hall stated I wanted Mr. Smeloff to illustrate the advantages or the disadvantages of a takeover of the PG&E distribution system right now. What would be the advantages to the City assuming law was in order, everything was in order? What would be the disadvantages?

Mr. Smeloff stated in my judgement the principal advantage to owning the distribution system would be the ability to plan for small-scale generation like solar and fuel cells and to target the implementation of energy efficiency and load management to the parts of the system that are congested, to the parts of the system that would require new investments. If you look at the distribution system in an integrated fashion, you can in my judgement lower the cost if you are planning for new generation and upgrades in the distribution system in a comprehensive fashion. Where we are going in the utility business is for smaller-scale generation, cleaner generation, generation that is located closer to load so you end up losing less electricity in the transmission, and you are able to optimally use the distribution resources that are in place.

Commissioner Hall asked if this planning is the necessary ingredient, could this be worked out in place with PG&E operating as they are today?

Mr. Smeloff stated theoretically, you could have a cooperative relationship with PG&E where you jointly did planning for the addition of new resources. Theoretically, it could work if PG&E were willing to cooperate. There is an institutional barrier that PG&E has. PG&E is driven by its rate of return and making transfer payments to its parent corporation. To the extent that they may lose revenues on their distribution service through the implementation of solar or other distributed generation technologies on the customer’s side of the meter, they will put obstacles to having that happen. They make money by having more power flow over their wires, so the incentive is to put obstacles in the way of these systems that lessen the amount of electrons flowing over their wires.

Commissioner Hall asked what would be the cost of taking such a system over?

Mr. Smeloff stated that I think is the next step that the Board of Supervisors would need to look at. If you were seriously wanting to explore this, you need to do a very detailed inventory of PG&E’s assets within San Francisco. You need to know how many lines of wire, what the condition of it is, where the transformers are to come up with an evaluation of their value. Then, you need to look at the different ways the courts have treated compensation to companies like PG&E when you condemn and take over those. The big difference will be whether its replacement value minus depreciation or book value minus depreciation. If it’s book value minus depreciation, it’s going to be a lot less.

Commissioner Gonzalez stated Commissioner Hall just so you know, Mr. Maynor has prepared future public hearings on the financing question alone in this particular area that you are going.

Commissioner Hall stated it seems to me that if the City were to pick up the PG&E distribution system in the best sizable amount of money and from what I understand it’s quite dated, and if we were to invest in that system to bring it up to date, we’d be in the same position as PG&E not wanting to lessen the amount of electricity running through those wires. We would probably want to protect that system. It doesn’t matter what my position is. Your assumption that PG&E would be fighting any alternative to that system, I think the City would probably be in the same frame of mind after we’ve once invested in it. That’s why I was asking the question about working in conjunction with them regulating a planning process that results in new generation that we have control over the regulation, but not giving up the ability to control the situation.

Mr. Smeloff stated let me respond to two points. The first is that I think you are correct in characterizing the system as old and in need of improvements. The future cost to ratepayers would be the cost of making those improvements. A municipality can do it with tax-exempt financing. PG&E will have to do it with taxable financing. There is a difference there. It will be less costly for the City to make the improvements.

Commissioner Hall stated it would be less costly but probably more costly in the fact that we don’t have the expertise that they’ve had in doing this in the past. One offsets the other.

Mr. Smeloff stated the other point is that if the City makes those improvements, it will have a fixed cost of the system and it need to recover those fixed costs. The City will then have to balance policy goals of enabling clean distributed generation versus setting rates at a level sufficient to recover the fixed costs in the system. PG&E could do the same. As a result of diminished load through energy efficiency and distributed generation, go back to the PUC and apply for a rate increase. One reform at the state level is to create a state incentive structure so any lost revenues as a result of energy efficiency and distributed generation could be recovered by automatic increases in rates through PG&E. There are ways of doing it of incenting a system for PG&E that could produce the same results.

Commissioner Gonzalez stated Commissioner Hall I think you are raising some good questions. My thoughts in listening to Ed really the planning point that you raised seems very compelling to me, which is when you have the private corporation that has profit incentive the likelihood that they are going to work with a municipality towards things like energy efficiency and conservation and these alternatives that are going to bring down essentially the flow that they rely on, I think the logic is that it’s not going to be high on their priority list. The other point that you raised that I think is something we have to confront is I believe you said 1992 change as it related to our ability to condemn a distribution system and engage in that whole process of trying to acquire it which is what Supervisor Hall raises. It sounds to me that because of the law change the burden has changed, and it could be much harder for a Municipal Utility District or a Power Authority or a PUC to even get to that place.

Mr. Smeloff stated the burden of proof is the finding and the public necessity for public condemnation does not serve a higher public purpose. You have as Supervisors for other property that is non-utility your exercise of imminent domain is conclusive. It’s not final. There’s no additional review, but PG&E can tie things up in court for a number of years. That is why I tried to make the first point. I don’t want to lose the larger point which is one that I think that Supervisor Hall was also trying to make which is that we have this opportunity of making some real important decisions in the next three to five years about what major new sources of power are going to be located in San Francisco whether there’s going to be a large generator at Potrero, or whether we are going to do some smaller scale but still significant size generation in different parts of the City. The City has more ability to do that if it has more local control. It doesn’t need to own the distribution system to make the impact on those decisions. If you make it a precondition to own the distribution system, PG&E will tie this up, the attempt to condemn the distribution system for a very long time.

Commissioner Hall asked Mr. Smeloff, you say if we make an attempt to get involved in the distribution system, you think it will be tied up legally regardless of our efforts to increase generation or supply?

Mr. Smeloff stated I am saying that the critical issue facing San Francisco right now is developing newer cleaner sources of generation and that is where we should put our focus. By trying to get this community aggregation bill passed and getting the authority to sell to retail customers as the City of San Francisco you then become a creditworthy buyer of electricity, and you can finance new power plants or enter into power purchase contracts with others like the California Power Authority, who could finance these plants and then you could impact the type of technology and the location of technology. My point is that’s where we should focus our attention immediately, and then the issue of the distribution system is one that the Supervisors can look over the longer term.

Commissioner Hall asked or the PUC or the Power Authority or a MUD or whoever?

Mr. Smeloff concurred.

Commissioner Fellman asked with respect to your last point, Mr. Smeloff, right now without any further change in law, couldn’t the City and County of San Francisco encourage having green technologies or green buildings and energy efficiency go forward as a planning principle rather than an energy-purchasing principle?

Mr. Smeloff stated yes, we can. The Mayor appropriated in this year’s budget fifteen million dollars under the Mayor’s energy conservation account for energy efficiency in public buildings. The Department of Environment has obtained some of the public goods funds that are collected by PG&E under the current rate structure for doing energy efficiency in commercial buildings. The voters passed bond authority to do solar and other renewables in San Francisco so those things can go forward under the current structure. You heard from the city of San Jose. They are doing a number of other things that we should look closely at that we could do here in San Francisco given the current structure and situation.

Commissioner Fellman stated she had another question on barriers to retail sales by San Francisco. Suppose in the absence of creating a Public Utility District of some sort or a Municipal Water District or Power District, whatever we decide to do, we just said we are going to sell at retail. Is it the franchise that PG&E has within the geographic boundaries of San Francisco that would prohibit retail sales even if whatever entity the Supervisors decided to set up would be willing to be regulated as a public utility?

Mr. Smeloff stated no, it’s not. The franchise does not give PG&E the right to have a monopoly over the sale of commodity into San Francisco provides the franchise the wheel to distribute power into San Francisco. With direct access, there were other providers selling electricity into San Francisco prior to July of last year so if you could get over the hurdle of the prohibition on direct access, then the City could sell under the current franchise to retail customers. That’s not a barrier.

Commissioner Fellman stated even without direct access being open, is there a window of possibility where retail sales could occur, but they would have to be regulated by the California Public Utilities Commission?

Mr. Maynor stated I am not aware of it. I think your point on the aggregation bill was the one that would allow you to do that. There may be some understanding about aggregation. That’s a retail term so that would be the way to accomplish what Mr. Smeloff was talking about. That would be in the absence of condemning a system. The other thing to keep in mind is you don’t have to condemn a whole system. Cleveland, Ohio for example, part of the city is served by an investor-owned utility, part of it by a Municipal Utility. So there are options there.

Mr. Smeloff stated that’s a good point. Once you do this inventory, you may decide that there are some parts of the system that are so old you don’t want to buy that. That it would be better for the City, particularly if the policy of the City is to buy underground service, to go directly to providing new hookups or new service in that part of the City.

Commissioner Fellman asked how much of the City’s own load or its tenant’s loads are provided by City power today?

Mr. Smeloff stated let me give you the numbers that I know about. PG&E’s peak demand in 2000 was 950 megawatts. I will explain why this is not apples to apples. The City load that we sell through the Hetch Hetchy Water & Power System peak demands 120 megawatts, but that includes the Airport, which is our biggest customer, and it includes other load outside of San Francisco, a lot of pumping stations and pumping load of the water systems outside of San Francisco. I don’t have the precise figure, but I think we can drill down and get that, to know what portion of the load served by Hetch Hetchy is actually physically within the City of San Francisco.

Vice-Chairperson McGoldrick asked are there advantages and disadvantages that we would go into the public power business by a vote of the Board of Supervisors as opposed to the vote of an electorate?

Mr. Smeloff stated I think there is a couple of reforms in the City Charter that would be very valuable for a Public Power Agency. I think the most important one is delegating the authority to issue revenue bonds. Absent the authority to issue revenue bonds, it is very difficult in a timely way to develop the infrastructure that you need. There also needs to be reform of the rate structure. Currently, the Hetch Hetchy Water & Power System sells power to some customers at below cost and in the last couple of years made significant transfer payments to the City General Fund. In the future, if those were to continue long term, it would be difficult to get a credit rating for the public power agency and to issue debt. There is nothing wrong with subsidizing some customers, and most public power agencies do that, but there needs to be some quantification to make that an explicit policy on how those subsidies occur. There is nothing that would prohibit a regular transfer of funds, but it needs to be a predictable amount based on some formula so that when you project your future revenues, you will be able to show to the bond holders and to the credit rating agencies that you have a predictable supply of revenue.

Don Dame, Assistant General Manager of Power Management for the Northern California Power Agency (NCPA) stated that he has a brief slide show. Northern California Power Agency was formed in 1968. We’re currently headquartered in Roseville. The point of the slide is that we currently have twenty-one public agency members. We go as far north as the City of Redding and as far south as the City of Santa Barbara. We have some diverse members. Bay Area Rapid Transit is a member of NCPA, and we do the dispatching and scheduling of power for BART. We are essentially what I would like to characterize is a wholesale side supermarket. Most of our members that are in the power business are retail distribution entities. They actually do the final distribution of the power and send the bills to the end users. We do the building, operating, and financing of the power plants and the contracts necessary to deliver that power to the cities and also arrange for transmission and do the day to day scheduling and the buying and selling of electricity around those loads and resources.

Another point I would like to make here that picks up on one of the themes that I have heard. There is really no mystery to electricity. The physics are very well understood. One third of the power in this country is sold by public power agencies. The expertise that you need to run and operate a public power system from the business side and the operations side exists. There is no shortage of folks to give you the expertise and capabilities that you will need to do this should you choose to do so.

On the right hand side of this slide you will see the darker shaded area which is essentially very small. That is essentially PG&E’s service territory. Most of our members are clustered throughout that PG&E service territory. Santa Barbara is the only member that is in Southern California Edison service territory.

Vice-Chairperson McGoldrick asked if the color coding means anything, the green, the red, the black, the blue?

Mr. Dame stated that’s when I mentioned we were a supermarket. The red members that you see there are actually members of a ten-member power pool where they join their resources and loads together and we dispatch simultaneously. The green members tend to be associate members. A lot of them aren’t in the power business per se like the Placer County Water Agency, the Calaveras County Water District. Lassen Municipal Utility District is indeed in the power business, but they’re not in our power pool. The blue members are involved in power plants and Truckee Donner is a lower retail distribution company that is not involved in power plants or the associate member activities.

Next slide-I hope you can see this. They say a picture is worth a thousand words. Who would ever believe we had a bankrupt huge investor-owned utility? That is one of the new PG&E service vehicles. I don’t suppose you have seen those out in the streets out here, but I think that’s a dual-fuel vehicle.

Next slide-we happened to get a clip from Enron before the demise. I put this up here because this is the antithesis of public power. Enron came in. They don’t have roots in the community. Unlike both PG&E and public power entities, they came in with a big ego. They really didn’t have any magic formulas. It was buy low, sell high, maintain political connections, use creative accounting when necessary, sell your stock before it drops, shred records, and if that doesn’t work, leave town. I put this in here because that is just the opposite of what public power is. They maintain the responsibility and have to face the music if and when they do make mistakes.

Next slide--what was the driving force behind deregulation? Well in the mid-nineties everybody was lamenting that California power prices were half again the national average. Indeed, PG&E’s residential rates were thirty-four percent above the eight-odd cents national average for residential customers. After five years of deregulation, now PG&E’s rates are 77 percent above the national average, not a lot of prospect of going down. Again, sometimes we may do things for the right reasons, we get the wrong results.

Next slide-this is just a review of the general classes for PG&E. Right now, residential rates have gone from about 12 cents to 15 cents. Commercial from 11 cents to 14 cents, industrial from 4.9 to 9.8 cents, virtually 100 percent increase, in agricultural 11 cents to 15 ½ cents, a 30 odd-cent increase. A very difficult environment for businesses to deal in with power prices that go up to these amounts and with relative unpredictability.

Next slide-what is the real cost of deregulation experienced in California and throughout the west? It’s been estimated to be 50 to 100 billion dollars. It is very difficult to even conceive of that amount of money. You put it in terms of residential families in California, and that’s between five and ten thousand dollars per family. In retrospect, we could have not had deregulation and given residential customers electricity for ten years based on average California consumption and usage.

Vice-Chairperson McGoldrick asked what period of time is that for?

Mr. Dame stated that covers the period of the last three years and the projected increases out through 2010.

Vice-Chairperson McGoldrick asked so that is divided by eleven in terms of an annualized amount?

Mr. Dame stated that is not an annualized amount. That’s the total amount.

Vice-Chairperson McGoldrick asked that’s a total amount over an eleven-year span that you just described?

Mr. Dame stated that is correct.

Vice-Chairperson McGoldrick asked if I wanted to annualize, I would have to divide those numbers by eleven?

Next slide-what went wrong? Electricity is a very complex machine physically, but we had all those problems solved. We had the appropriate people in place to run this system on a day to day minute to minute basis. We added on to that a much more complex business system. The Independent System Operator, which I assume you have heard about many times before, when they send out an invoice to us and we are relatively little guys, the Northern California Power Agency and aggregate about ten percent of the size of PG&E, that invoice has about 50 megabytes of data in that invoice. They have to send it on multiple compact disks. Rules and rule changes-we are currently on Amendment 42 of the ISO in just the last three and a half years of this change in system operations. For any of you who have perused the ISO’s web sites, there are hundreds of thousands of pages of rules, regulations, and information on that. Literally, impossible to stay current and knowledgeable on what’s going on in real time. Sometimes we like to characterize this as the "Bill Gates problem," simply programmers gone wild. We can write codes, let’s write a lot of it. One of the losses we have seen here is really no obligation to serve load. This is one of the things that PG&E has lost unlike public power entities. It turns out it was based on high hopes, and it turned out to cost us high dollars and as we saw just a year ago-blackouts.

Next slide-put this in long historic context. The blue line on the bottom is what we call the nominal price of electricity. If you go back to 1920 all the way to the left, it was about eight cents a kilowatt hour. If you look all the way to the right, it’s about eight cents a kilowatt hour today, national average price. Those are what we call nominal or as spent dollars. If you were a worker in 1920, and you bought a kilowatt hour of electricity, you would pay ten cents for it. If you were a worker and you buy a kilowatt hour of electricity on average throughout the country today, you would pay ten cents for it. The redline adjusts for the changes and purchasing power over that period. Ten cents was worth a lot more money in 1920 than ten cents is worth in the year 2000. What you see is an inflation-adjusted price, over the year 2000 dollar price of electricity, going from about 60 or 70 cents a kilowatt hour back in the 20’s dropping to about eight or nine cents a kilowatt hour today. The point of this slide is electricity prices have been falling throughout the last century. This wasn’t a system that was broke and in need of repair.

Next slide-I will show you one little tick in here. If you just change the scale on this and you go from 1950 to 2000, you will see that during the latter 70’s and through the 80’s there was a rise in the price of electricity. This is if some of us can remember back to the energy crisis when prices were short and oil prices were escalating. There was an up-tick in prices, but then the latter part of that curve you will see from the mid 1980’s onward were falling again to as low as they had been in any time in the last 100 years.

Next slide-Now let’s see what California does against those national averages. The red and the blue lines are the national average residential prices. The green line and purple line are the California average prices. You can see in 1975, they were tracking national averages. They have tended to go above national averages over the last 20-25 years. You will see a hook at the end of the California numbers-those were the top lines. That is when deregulation took hold here in California, and it started to move us off the map.

Next slide-why are those prices in California higher than national averages after 1980? We had a lot of excess capacity. We brought some expensive plants online like Diablo Canyon. We had a very large reliance on natural gas and oil versus coal and some very strange environmental rules. We had PG&E and SCE primarily planning for deregulation and not what was good for their end users.

Next slide-are we out of the woods? What did bring prices down early last summer-mild summer weather, lots more power plant availability, gas prices plummeted, lots of conservation, lots of public awareness bringing about a significantly reduced demand and regulatory uncertainty as to whether some of these producers were really going to get their fingers wrapped for charging these very high prices. I think the most significant component there was luck.

Vice-Chairperson McGoldrick asked would you add to this the massive purchases that the state made?

Mr. Dame stated that may have had an impact. I don’t personally think that had a significant impact on bringing high prices down. I really think it was the lack of sustainability of $300 and $400, 30 and 40 cent a kilowatt electricity prices. Demand was really dramatically reduced and there was no way the public was going to sustain those prices. I don’t think the state entering long-term contracts had anything to do with it although everybody wants to take credit that they did, provided the relief that was necessary to bring prices down. I don’t think it had a demonstrable impact.

Vice-Chairperson McGoldrick asked would you say then conversely that if those contracts were able to be renegotiated downward that they would have no effect upon the market as well?

Mr. Dame stated I don’t think it would affect today’s market especially. What we’re seeing is just today is about 1.7 cent a kilowatt-hour-price off-peak and about 2.5, 2.6 cents per kilowatt-hour on-peak. Those are the day to day wholesale trading prices that we’re seeing.

Next slide--do we have a stable power state here? Over the last twelve or fourteen months, we’ve seen over 500 energy-related bills go through our state government. We’ve seen Southern California Edison bail out legislation. We’ve seen PG&E and Enron. I should have had quotation marks around the state all in very suspect financial condition. We’ve seen a lot of Munis bashed in my opinion for doing the right thing throughout this whole period. We’ve got a whole host of new state agencies alongside the existing ones. I’d hardly describe this as a very stable power environment.

Next slide--one of the things that we’ve seemingly lost in this is the efficiency of integration. When we talk about integration from a power perspective, we’re talking about the union of the loads, the ultimate place where electricity is consumed, transmission (our shorthand is XM), and generation (where power is produced). There is a very large efficiency in planning and designing around those loads the most efficient amounts of generation and transmission. Economic dispatch is not a new terminology. We’ve used it for years and years in this business. On a day to day basis, we always try to load the most efficient plants first. We always try to control the system in such a way so the lights do not go out. One large utility controlling loads, transmission, and generation has near instantaneous total information upon which to act, not only instantaneously but looking out over a 30-day, 6 months, 5 years or what have you. What you end up with is reasonable cost and high reliability.

Next slide--what is our prescription for public agencies? You’ll hear it over and over again. Really getting in the power business is not about whether it’s cheaper or more expensive. Within a hand-wave it’s going to be in the neighborhood of the same cost if it is done right. It’s about local control, building and owning your own power plants, undertaking that obligation to serve the members of your community, imposing and promoting conservation where it serves your purpose. This last black hole here is absolutely paramount. The customer always comes first. I know of no other power structure where the end use customer is the reason for all the day to day actions of all the staff involved in delivering those kilowatt-hours to load. Certainly something we would like to see is integration with local, state, and a national energy policy which we don’t really have just yet.

Next slide--stupidity got us into this mess, why can’t it get us out? Perhaps if it could, we would be out of this mess already. With that, I will answer any questions.

Vice-Chairperson McGoldrick asked do you know of any other public power companies that have had increases greater than the PG&E increases?

Mr. Dame stated that some of our folks were not immune and indeed were impacted by the system. The Truckee-Donner Public Utility District had rates that were in the neighborhood of 6.8 and 6.9 cents a kilowatt-hour. They’re not in the ISO operator’s or PG&E’s control area. They are in Sierra Pacific’s powers control area. They were short and had to go out on the market for new wholesale supplies, paid about 7 1/2 cents for their wholesale supply. They’ve consequently raised their retail rates to about 10 cents a kilowatt-hour, which is about a 40 odd percent increase in their retail rates. Also, the city of Palo Alto which had amongst the lower power rates in California raised their rates 43 percent approximately a year and a half to two years ago.

Vice-Chairperson McGoldrick asked do you know if this is because the amount of distributive energy that they got was of some disproportionate amount compared to other public power entities buying from non-public sources?

Mr. Dame stated most of them had a complete portfolio which virtually had every kilowatt-hour accounted for in terms of having the wholesale contracts and generation available to cover. Some of them did not have entire coverage of their supply requirements. Consequently, when the prices hit $300, $400 and $500 a megawatt hour a year, a year and a half ago, and these folks even though they were only covering maybe 10 to 25 percent of their requirements on spot market purchases, they went up radically and indeed, they had to raise their rates to cover that. We went out almost a year ago this month and locked up a long-term contract for 10 years with Calpine Corporation for 6 1/2 cents a kilowatt-hour. As we speak, that’s probably 2 1/2 cents out of the market rate now. So in order to serve your customers, diligence in managing your portfolio is required.

Mr. Smeloff stated I thought that was a superb presentation. I agree with all of it, particularly the point that he made about the cost effectiveness of integrated systems and the fact that historically utilities have dispatched based on the economies. We’ve dispatched the most efficient units first. So, the complexity of the new business system has added, in my judgement, costs to the overall delivery of electricity.

Ed Aghjayan, former Public Utilities General Manager, City of Anaheim and currently a strategic consultant on energy issues to several governmental agencies stated I think my introduction indicated among other things that in the last ten years I was General Manager of Anaheim Public Utilities. Since I retired in the past year, I have been working as a strategic consultant to a about a half dozen cities and agencies in Southern California that are concerned about their energy picture and are interested in municipalization. I thought it might be useful, since I have the history of having gone through the deregulation process with Anaheim (and having played a role in what the Munis negotiated as well as looking at what the options and problems are with the system) is to try to be as plain speaking as possible to give you some idea of what went wrong in the simplest fashion, and what you can do about it. I respect the fact that you are local government here, and to me local government is where you have to take responsibility for your decisions. This is something you deal with everyday. It is one thing to be at the federal and state level where you can sort of talk in some sort of generic global fashion about what’s going wrong and what you should do about it. But when you are in your position, you have to make decisions that affect people.

Let’s just talk a little bit about the history of AB 1890. It’s worth talking about the basic difference between where the municipal power systems ended up and where the investor-owned utilities ended up. The municipal systems argued during that entire process (it took a couple of years through the hearings), that we do not want to give up control of our power supply because that is what we can guarantee we can deliver to our customers. At one point in the past, Anaheim had no power generation. It took twenty years to get in the business and did not want to get out of the business because we knew what would happen if we did. So when the law was passed, the law contained provisions for municipal systems to maintain the term we use "vertical integration." All it really means is we continue to own our power plants, and we didn’t have to sell them. If you talk to investor-owned utilities now, and I’ve listened to many speeches and conversations at different cities I’m in, they will be very quick to point out to you that whatever went wrong with deregulation, it isn’t their fault because they are only in the energy delivery business. They just deliver the power. With that caveat I want to offer to you that something magical happened, not necessarily positive magical. On April 1, 1998 when deregulation took effect (actually I think they made it effective March 31st to avoid the April Fool’s Day comparison), the average ratepayer became divorced from their power supplier. They didn’t know it, but they went through a divorce. Up to that point, they had an equity ownership in the local power plant. After that, they were buying power from the grid. They became a renter on the market compared to a homeowner prior to when the power plant was regulated.

The investor-owned utilities were required to sell 50 percent of their thermal or generation. Most of them sold most of it, and it makes good business sense as to why they did because why would they hang on to investment when they were basically holding on to a risk. If power prices dropped down like everybody thought they might do, then they might be stuck with overpriced generation. They found they could sell it for more than book value, sometimes two to three times book value. In fact, they were protecting their shareholders by doing so. They were also aware of the fact that the other side of the coin was what happens if prices go up wasn’t their concern anymore because they were no longer in that business. They just distribute the power.

In the one respect you have entities that are protecting their interest and their rights by hedging their bets and getting rid of their generation so they don’t have investment in the market. On the other hand, you have ratepayers who do not even know they have been through a divorce who have no protection on the other side of that. This entire model depended upon quick entry into the market by a number of other players and prices dropping rapidly. As we know, the sale of these systems went to about a half dozen or less new players in the business.

About a year ago, I was being interviewed by a reporter who didn’t seem to understand this is why prices were going up so fast, and I asked her where do you live? She said, I live in Huntington Beach. I said okay, you know where the power plant is on Pacific Coast Highway. She said, you mean the Edison Plant? I said it’s not an Edison Plant. She said I know it’s an Edison Plant. I said go take a look at it. The plant looks the same, but the sign in front is different. That’s the problem. It is not owned anymore. You used to own that like you own a house, and you don’t own it anymore. That is why DWR had to go in the business to be able to guarantee power supply, and that is still where we are right now. Prices have dropped, but the problem and the situation remains. In terms of the city’s ideal with the agency’s ideal were a number of emerging issues that are facing them that effect the industry. One is who is going to invest in power generation and at what cost? Secondly, there has been a degredation in the reliability of distribution systems. A lack of funds, the negative side of performance-based rate making has all gone to result and distribution systems being neglected. In general, I am talking about the investor-owned systems. Those reliability needs need to be upgraded.

The transmission network is kind of a disaster right now. It’s headed for a show down. The federal government is attempting to establish regional transmission organizations in other parts of the country, and hopefully will create a model if they think they could move to California. But right now, for example in Ahaheim’s case, since 1996 the cost of transmission has gone up some 11 million dollars. That’s on top of 300 million revenues, so there’s about a 3 percent, 4 percent effect on the rates just in terms of increased transmission costs. They were high before. There is a question about the future of direct access. We don’t know whether we will be allowed to do that anymore. We hope that the community aggregation bill that Ed Smeloff was talking about that we will, but we don’t know. So that door might be shut.

We still have the issue of living with a volatile power supply market. Prices are low now, but they will go up again. How long and to what extent will the state be in the power business? I don’t think the state wants to be in power business. If they are not in the power supply business, who is responsible for that planning, who is responsible for that capital investment?

I want to get back to this cost of money and power generation issue. There’s been sort of an Enron effect in terms of the creditworthiness of those entities who have been doing construction of power plants. There have been a rash of power plant cancellations. The cost of money for these entities is now reaching in the 12 to 14 to 15 percent range. There was some discussion about the efficiency of the new power plants, and I agree with that. I want to give you some comparisons from a chart that I had come in contact with. I have been working with a couple of my clients, who are participants in the Magnolia Project, which is a publicly planned project. Southern California Public Power Authority is building a 240 megawatt plant spearheaded by the city of Burbank on the city of Burbank property within the city on an existing power plant site. This is going to be a combined cycle state of the art in terms of environmental quality and efficiency facility. There are seven public power participants in this project.

When we did a comparison of that project for the purpose of putting information on the official statement on the bonds that we hope will go out in the next several months, we came out with a total of a 2005 price of about 3.8 cents per kilowatt hour at the bus bar. That includes fuel costs, gas costs, and investment costs. When we compare that to other privately built plants by Calpine, Merant, Mission, Pacifcor, Sempra, Constellation of similar construction, combined cycle, similar efficiency levels, we find that they have entered into contracts with DWR for prices between 4.7 cents and 6 cents a kilowatt hour. When you break down the reason for those differences, we find that the fuel cost is about the same for all these plants, but the capacity prices in most cases double or more that of the Magnolia Project, which is a joint action agency and public power project. Why is that so? I will give you two reasons-high interest rates and profit margins. So if the future of the business and the industry is such that we’re talking a possible savings of 30 to 40 percent by engaging in public power projects where we’re expecting an interest rate of about 5 percent, that something has to be considered in your thinking and in the thinking of the policy makers in this business.

I want to get back to community involvement in public power. I deal at the local level with mostly elected and appointed local officials that have their fingers on the pulse of the community and for the most part where the community has their fingers on the throats of these officials. Most crises that deal with failures of business and economic systems do not stir local officials in the public to cries of action. Examples are savings and loans failures, even Enron failures-the distrust in accounting and auditing standards. Even rising interest rates don’t tend to end up at the local Council Chambers with demands for action. This is seen as problems for sure, but not generally affecting us directly or within the sphere of our influence. But every once in a while, an issue comes along that crosses the line and becomes a matter of public policy. I am making a case here as to why I think deregulation is a matter of public policy and solutions are demanded at the local level. Three times in my career I’ve seen it happen. Once was the oil embargo and fuel shortages in the late 60’s, early 70’s. The second is when nuclear power plant disasters and plants that weren’t built caused bankruptcies and skyrocketing prices. The third is the most recent one with California deregulation.

Everyone in the community understands that the outcome affects their lifestyle and results will be lasting. It is by definition of public policy is that we won’t leave it to the experts to decide. We as the public will participate in the debate. As mentioned earlier, I work with about a half dozen agencies and public entities and for them, they have about five issues that they need to address that they think is important for their communities. One is the quality of life. As prices rise, they find residential customers being seriously impacted. Second is business viability, and I want to differentiate between that and economic development. Business viability is a whole bunch of customers that are on the borderline of profitability when you suddenly raise prices 40 percent, they’re not profitable anymore, and they’re not going to stay in business. Third is economic development. I worked with one city that just purchased a 5,000 acre airforce base, and they are starving for jobs in their community. How are they going to get business to locate when prices are 20 cents a kilowatt hour. The fourth is the issue of safety and reliability, the integrity of the infrastructure. They don’t trust that. Lastly, they just don’t trust others making these decisions. These are all issues that I find that Mayors and Council members, Supervisors, and City Managers are grappling with right now. Their goal is to address the above issues and to control their own destiny.

Generally speaking in working with them, I am getting into the nitty-gritty of what options you have. There are four options that I have seen and worked with. One is serving customers through community aggregation as we have talked about. As you know, that’s on hold right now for electric customers unless we can get sufficient support for AB 117 and get that passed. However, I have customers that are doing it right now for natural gas. You can aggregate natural gas. I have one city that is buying it in bulk and selling it to its commercial industrial customers, and it’s a great attraction-also the governmental users. A second option is decentralized systems to serve site-specific areas, like industrial parks. Co-generation systems where there is some substantial capital outlay, but not necessarily connected with the grid. There is no reason why a system like that wouldn’t work, and because you are dealing with quite an efficient system when you are talking co-generation when you would be selling steam, chilled water, and electricity to potential retail customers. This is a legitimate approach. One of the cities I am working with is planning such an approach, and we think they will achieve significant financial savings and not connect to the grid. A third is going under FERC Order 888, filing for an interconnection agreement building the necessary substation infrastructure to serve new load only. In this instance, you are not condemning existing wires, but you are saying we’re going to take care of the new load and the new growth through an interconnection agreement which is under FERC order and FERC tariff. The last and the more significant approach is purchasing, condemning the IOU system, which I have at least one client considering that.

These are significant efforts. You can expect to have a good deal of opposition from the local investor-owned utility for any of these. I hear them say that they support aggregation, but I don’t necessarily see that in their actions. I know that in instances where we’ve proposed either site specific options or serving new load or negotiating for a sale or condemning a system there have been strong opposition by the local investor-owned utility. I think the reason is obvious. When deregulation occurred, I believe that these companies thought that the future of their company lay in the deregulated part of their business. I think their attitudes have changed. I think they now believe that the future of their companies lay in the regulated side. In fact, right now they are cash cows and generating money hand over fist. With rates set as high as they are and wholesale prices as low as they are, the NCPA had a nice chart about how prices had dropped down. None of my client’s retail customers have seen the decline in prices because prices are still at the high levels.

In terms of benefits and opportunities, when I get back to vertical integration controlling your supply and generation, stabilizing the prices, local control over environmental priorities, reliability, economic incentives, rates and rate setting as well as local control over your public purpose programs. In Anaheim, I had 7 million dollars of public benefit money that I did not have to send to Sacramento that we could make local decisions. We had more than 50 programs that were designed around the local community, everything from putting in off-peak lighting for security and economically disadvantaged areas to reduce crime. I’m not sure whether we reduced crime or chased it into other communities, but it seemed to work. To tree power programs, where we planted some 17,000 shade trees for energy efficiency to business incentive programs to make businesses more efficient. The ability to design programs around what your local community needs and wants is much better than letting somebody in Sacramento or across the street decide how it is going to be spent.

When I got a letter on what I was supposed to say, they said make sure you mention the risks and disadvantages. Power supply investment can be risky, obviously. It’s not the type of business cities are in. However, these risks can be mitigated through diversifying and working on joint power agencies. On the Magnolia project for example, there are seven entities that are sharing the risk on that project. Secondly, being publicly run doesn’t mean automatically that it will be run well. In fact, you must pay a lot of attention to the government structure. I was impressed by the discussion of setting up a Department of Power in the city. You must set that government structure up properly with public accountability, but with a professional staffing organization. Third, expect strong opposition to all of the suggested approaches. It can be a very time-consuming effort to go all the way through a condemnation process. You’ve heard talk about Sacramento taking twenty years to do it.

I will end up in my final note. I pulled a twenty-year old article from Public Power Magazine. I was going through some old papers, and I had written an article in the same magazine. This was a story about Macina in New York, which is a public power system. They took about eight or nine years to get through the legal process to take over the system to where they could realize the benefits. Prices were a lot lower than in surrounding areas. At the point this article was written, it was 1980. It was six years into the process. They didn’t get a final result yet, so they are still fighting it. I want to read you a very short section on what was at stake here in New York state. An unnamed official quoted by the New York Times the day after the 1974 vote expressed the possible utility concern.

"If Macina goes, can Niagra Falls be far behind? If that happens, will Buffalo, Rochester, and Syracuse be far off. Six years later, the sentiment still seems to be the same. So much rests on Macina. With everyone looking on, why does Macina feel so much alone? The town official says they are not getting much support from anyone because their town is so small and infanitismal in the political scene. No one seems willing to get their hands wet."

Macina went and as you can see, Niagra Falls, Buffalo, Rochester, and Syracuse didn’t go because it was so hard to get this established. When SMUD went, Sacramento went after twenty years effort, who would want to go through that again? It’s not an easy effort to go through and is something you have to give some careful thought weighing all of the options you have in terms of addressing this particular crisis. With that I will end my comments and open to any questions that you might have.

Mr. Smeloff stated Ms. Jackie Williams from South San Francisco asked a couple of questions. This relates to plans to build power plants at the San Francisco Airport. The question is:

"Does the 250 megawatt power plant for San Francisco Airport have the transmission lines to bring this power to San Francisco or will it go into the ISO grid for the highest bidder? It was my belief that any megawatts to San Francisco had to be connected north of the Martin substation. Is this true?"

There are two plants being proposed at the Airport. One would be owned by the San Francisco Public Utilities Commission. We’re developing that in conjunction with the California Power Authority. They would finance it. We would enter into a long-term power purchase agreement. That power plant will be interconnected at the Airport into the 12KV system. It will back-feed to the Airport and deliver electricity to the Airport. It is designed to operate in what we call an "islanded configuration" so if there is a power disruption, the Airport can still maintain power. That’s one power plant and it is specifically dedicated to serving Airport load. The other power plant is being developed by the California Power Authority with a private developer out near the United Airlines hangar. That is a peaking power plant that will only be there for grid reliability and will run only during hours of peak need to provide voltage support and grid reliability. It is not intended to be a plant that will deliver power into San Francisco.

The other question:

"SFO currently has a 50 megawatt co-generation plant at United Airlines for their needs, so why is there a 50 megawatt plant being financed by the Consumer Power Authority?"

There is a power plant that is owned by United. It’s not 50 megawatts; it’s 20 megawatts, and it’s for United’s own load. The plant that we’re developing would be specifically dedicated to the Airport load.

Commissioner Hall asked Mr. Smeloff, do you have any approximate costs relating to the construction of those plants?

Mr. Smeloff stated I can give you a rough cost for the full all-in cost of the plant. This will be built and financed by the Power Authority. We will not finance it, but we will buy it. The all-in costs are probably around 45 million dollars. We will know specifically once they complete a competitive bidding process among developers what the price is.

Commissioner Hall asked but you are guessing around 45 million dollars?

Mr. Smeloff stated around 45 million dollars for a 57-megawatt plant, and it will include the interconnections to the Airport grid.

Commissioner Hall asked would that be standard average costs for a plant that size?

Mr. Smeloff stated costs are coming down because of the surplus of equipment that is available recently. So these are much better prices than what you would have seen last summer. Because of just labor and specific San Francisco costs, the costs are higher than what you would see in Southern California or the Central Valley.

Chairperson Gonzalez asked Mr. Aghjayan, related to the extent to which the private utilities characterize their responsibilities as energy-deliverers, who in their opinion became responsible for generation?

Mr. Aghjayan stated they don’t know. Maybe they do know and maybe they would give you an answer to that, but I haven’t heard it. The assumption behind deregulation was that it was going to be such a rush into the market that it was going to be like selling ping pong balls. There is always a supplier along that If the price goes up, somebody is going to get into the business. The problem is it takes years to build a power plant. These are not ping pong balls, and in my own personal opinion I think their focus was on protecting their shareholder in these negotiations. I also don’t believe that they thought it was going to fall apart as quickly as it did.

Chairperson Gonzalez stated I would see how someone delivering energy would have an incentive in perhaps not bearing the responsibility for the generation component of it. But its curious to me that the laws that got us into this place also directed these deliverers to disinvest from generation. That seems to me significant because the legislators who did this bear a huge responsibility for not seeing the "crash" that that kind of public decision making was going to lead to. Am I missing something in the characterization?

Mr. Aghjayan stated without commenting on exactly what happened because I don’t think anybody knows, I would say there certainly is a loose end there. What happens if the power plants don’t get built, who is responsible? That question should have been asked a few more times during this process.

Chairperson Gonzalez asked what about the question of disinvesting of generation by those deliverers? What do you say to that?

Mr. Aghjayan stated they were required by law to sell half of their generation.

Chairperson Gonzalez asked why?

Mr. Aghjayan stated to get them out of a controlling, and I am not speaking from my personal viewpoint but from my perception of what was said at the time, was they wanted to get them away from a monopoly position on a power supply to allow more entrance into the market and hopefully, there would be fifty folks that wanted to generate power, not just the investor-owned utilities. One of the things that went wrong was that it ended up less than a half dozen companies being in that business that bought those plants. That was the negative. The other side of it is remember this, that some of these companies while at the very time were selling their generation in California were using their holding company funds to buy power plants in other parts of the country and take positions of that of a power supplier. All three major utilities in California are in that business right now.

Commissioner Hall stated if I recall, the intent of deregulation was to break up that monopoly as you just said and in reality it has resulted in something different.

Chairperson Gonzalez stated I think it is interesting that while the express motive may have been to increase competition in the generation of electricity. Of course it is easy with hindsight to see what was wrong, but it would seem to me that when you have a volatile market, and you are unsure of the availability of profits in the future, that that is not a huge incentive for people to go into these long term contracts or the process of creating generation in looking down the road. But the component that I think is interesting, and maybe this is what Supervisor Hall was thinking, the question of asking these deliverers to disinvest as a way to increase competition. I am wondering why isn’t simply opening it up and letting anybody compete in the market or wouldn’t have been sufficient to break down the monopoly?

Mr. Maynor stated one of the things that happened and we’re in that process at the PUC, is that there was a belief that there was tremendous co-generation potential in California. There was a great deal of emphasis by the independent generators to just open up the market--we’re ready to come in. As the speakers were saying, it takes a while for that to happen. It took a while for the program to get started. Frankly, there were many people who testified from other places in the world that went through the direct access program that experienced the exact same thing that California went through. It’s a complicated industry. That was one of the motivating forces was the sense that there was a lot of independent producers out there that were ready to come in if you could just get these folks out of the business so they would have a marketplace to sell.

Mr. Aghjayan stated it was also believed that in California there was a surplus of capacity back in the late 1990’s. In fact, everybody believed there was a five to ten-year surplus in capacity. It disappeared very fast. The rush at that point was to get rid of the generation to not get stuck with that over-priced inefficient generation so that you would have that financial responsibility. Can you imagine the surprise when they went out to bid and found they were getting two to three times book value? Somebody else was betting on the opposite thing happening. While at one point, the investor-owned utilities obviously thought they have to get rid of this expensive generation, don’t have it as a liability. Somebody in the market was saying it was going to go the other way and buying up generation.

Commissioner Hall stated exactly.

Commissioner Fellman stated there were a couple of other competing forces that occurred out of the AB 1890 legislation. One was that retail rates were frozen for all customers at a discount of 10 percent for everyone, so there wasn’t that competitive advantage to go to alternative suppliers for your load. Those of us who did were mostly green customers and were willing to either get the discount or pay more. So there was a fixed price on the retail price that caused a problem and also FERC’s (this is my personal opinion and I think others share this) market power analysis for monopoly power (and that’s what Ed spoke about) was looking at a statewide monopoly impact from purchasers of these divested power plants.

So, if you bought, like Merant bought a significant number of megawatts in the Bay Area from PG&E, it’s only maybe 6 percent of the statewide requirements, and yet in San Francisco, it’s 90 percent. So, we had that kind of tension going back and forth plus PG&E kept Hunter’s Point in the deal with the city to close it down as soon as reliable. So, there were a number of political factors and fixed policy factors that kept the prices at a particular level and didn’t really send the price signals to the developers. Finally, I think this is something that as a Commission member I am excited about working with, is that we don’t want to make decisions based on the short-term prices because those decisions were made in 1995 on short-term prices Similar kinds of decisions were made in 2000 on short term prices, and we’re living with the negative consequences of both those sets of decisions.

Mr. Aghjayan stated I agree with you. I also want to mention that 10 percent discount was financed through a 7 billion dollar bond issue of which we still have at least 6 more years to pay on. I don’t know where the 10 percent discount went to, but if you look at the back of your bill in the fine print, you will see something called a trust transfer account (at least it is in Edison’s territory), and that’s what you owe on that bond issue that finances that 10 percent decrease. We have 6 more years of that.

Commissioner Fellman stated and that 3 cents surcharge that was put in last March we’re still going to continue to pay as IOU customers, at least Edison will. I bet we’ll see that same thing ultimately for the PG&E bankruptcy solution.

3. Public Comment

Mr. Maynor stated we have one speaker card and now may be an appropriate time to hear from the audience.

Mr. Richard Knee stated I am a journalist. As such, I am extremely concerned about secrecy and the public’s right to know. Aside from all of the practical aspects you have been discussing, I think that should be a part of the equation that is given considerable weight in this entire discussion. You and I, unless we own shares in PG&E, cannot attend a PG&E annual meeting or shareholder’s meeting. You and I, unless we’re on the PG&E board, may not attend a PG&E board meeting unless by invitation. With the public power agency, the public will have some accountability. With the public power agency, the public will be able to see and hear the decision-making process. The public will be able to have input into the decision-making process. That process involves decisions that affect the very quality of life and in some cases life itself.

Mr. Laurence Schekman of Berkeley, stated I wanted to call your attention to the little town of Kutztown, Pennsylvania where they have had public power generation and distribution for a long time. As a result of that, they now have instituted a high-speed internet system for every resident and every business. They have installed fiber-optics so they can give broad band computer service to everyone. Very, very cheap, somewhere between $12 and $18 a month. They are only able to do that because they have public power distribution and can piggy back fiber optics on top of that, use the same service. The same thing is happening across the Bay in Alameda where (I just called them this morning) for $32 you can get broadband fiber-optics computer systems much faster than DSL. I added it up. If you wanted that with AOL, you would have to pay $24 for AOL service plus $31 for high-speed DSL, which in fact is not as fast.

The point is that if you opt for public power, you will also be able to provide the service of high-speed internet and cable television. In Pennsylvania, they have thrown in free long distance calls because when you have cable to every home, you can deliver free long distance in the same way that you can get long distance through the internet for no cost. It is an enormous advantage. I believe in San Francisco, that if you opt for providing cable as well as power generation, the advantages to the public will be so obvious that it will be able to overcome the amount of money that the companies will spend against it. I hope that you will provide us with that service. I have leaflets here that I will give to people which provide some information from Pennsylvania--the web address and the phone number to City Hall.

Mr. Robert Van Buskirk, Economic Analyst, Lawrence Berkeley National Lab, stated I do energy efficiency policy. I came here today to present some rough economic numbers. I appreciate the comments from the speakers, but I think putting some dollar figures on some of the savings and benefits would be useful to help motivate this discussion. First of all, we should note that San Francisco pays about $500 million dollars per year for electricity. The average residential rates in LAWP and SMUD compared to the investor-owned utilities are approximately 20 percent lower than the investor-owned utility rates. Commercial rates are about 10 percent lower. That means 50 to 100 million dollars per year for the City of San Francisco that succeeds in having a municipal utility.

Secondly, we talked about the cost of capital and the cost of borrowing. I looked up the cost of borrowing for PG&E which is in its filings. PG&E pays 6.8 percent interest compared to SMUD, which has a marginal cost of borrowing of 5.25 percent, which means that the interest rates for investments for a municipal utility would be approximately 30 percent less. They are very high amounts of debt and interest payments for utilities, so that would have a very large impact on the types of savings.

A very important issue which I think will help create the next financial crisis in the state sector is the huge stranded costs that PG&E still thinks its owed, which is many billions of dollars, and the huge stranded costs represented by the long-term contracts which are probably overpriced at least by a factor of 2. The contracts are valued at about 40 billion. That’s about 20 billion dollars. San Francisco’s share of that is about .6 billion dollars. The whole question of the degree to which San Francisco consumers can opt out of the exorbitant cost of the deregulation fiasco is a $600 billion dollar question for San Francisco.

PG&E still thinks its owed $7 billion dollars for the high electricity purchases. That means another half billion dollars for San Franciscans. So, the question of the degree to which San Francisco consumers will be liable for the cost of the deregulation fiasco is at least a $1 billion dollar question. That is I believe about $3,000 dollars for every San Francisco residential household. Currently, the only legal means of doing that is through conservation. So stranded costs are a charge on top of per kilowatt hour bills, then the less kilowatt hours you buy means the less stranded costs you wind up being liable for. A municipal utility may be able to emphasize conservation, local solar PB generation, and help individual San Francisco consumers opt out of that $1 billion dollars in stranded costs that you may be liable for.

In addition, there was talk about buying the distribution system. San Francisco is currently paying approximately $150 million dollars per year for the distribution system. You are renting it from PG&E. So, the question is, is it worth $150 a year to rent, or do you get a benefit from being the owner? The operating costs for that distribution system if you use SMUD, which has a larger system as an example is only 30 million dollars. So of that $150 million dollars per year that San Francisco is already paying for the distribution system, $120 million is rent for the capital investment of PG&E and since the City borrowing costs would be 30 percent lower, that 30 percent lower would essentially represent 30 to 40 million dollars per year benefit. There is a significant benefit to condemning and obtaining the distribution system. I want to put some of those cost numbers in to help motivate this whole process and to provide a bit of prospective of how much benefit for each of the San Francisco households we might be talking about.

Chairperson Gonzalez asked Mr. Van Buskirk, the figure of 30 million that you came up with for SMUD in terms of their cost?

Mr. Van Buskirk stated that comes from their Annual Report. In their Annual Report, they have their annual operating costs coming out of the transmission and distribution. It’s a line item. It’s available on the web.

Chairperson Gonzalez asked Mr. Buskirk, could you repeat those figures because Mr. Smeloff is very familiar with SMUD, and I would like to hear his thoughts.

Mr. Van Buskirk stated the figures, I tried a rough calculation to get the operating costs versus the capital recovery costs for the distribution system of what it would be for San Francisco, so I looked up SMUD’s Annual Report. It has a line item that says the annual operating costs for the distribution system is 30 million dollars per year. If you look at the rate structure, the rate structure in San Francisco says that approximately 30 percent of the rate goes to distribution. Thirty percent of the 500 million per year that San Francisco spends is approximately 150 million per year. The SMUD distribution system is bigger than the San Francisco distribution system, so San Francisco should be able to have operating costs of 30 million per year. That means the capital recovery costs for San Francisco distribution system that you are currently paying to PG&E is about 120 million per year. That is the rent that I propose that San Francisco is currently paying for its distribution system, and that could be decreased through lower cost on financing that you may have available through a MUD. Does that calculation seem more or less correct?

Mr. Smeloff stated what seems to be missing from that calculation is what the capital costs, the carrying costs are for SMUD’s distribution system. You extracted the O&M costs for the distribution system, but I’m not sure because I haven’t seen the numbers whether you actually included the capital costs.

Mr. Van Buskirk stated so what I was using the operating costs for SMUD for was to come up with a rough estimate of what the operating costs for the distribution system in San Francisco might be. The SMUD system delivers about twice as much electricity as San Francisco. So, San Francisco’s operating costs should be about 30 million. We know from the rates that San Francisco is paying PG&E about 150 million a year for the distribution. So, therefore, the effective capital carrying costs that PG&E is charging San Francisco would be at least 150 million minus 30 million, which would be 120 million.

Chairperson Gonzalez stated what I hear Mr. Smeloff saying is that 30 million dollar line item, he’d want to know more about whether or not it includes the capital costs.

Mr. Van Buskirk stated that 30 million line item does not include the capital costs from my reading of the Annual Report of SMUD.

Mr. Smeloff stated 120 million dollar carrying costs for the distribution system in San Francisco seems extraordinarily high to me.

Mr. Van Buskirk stated that is what is coming out of the rates. I think that is a measure of the types of benefits that San Francisco would obtain from condemning and acquiring the distribution system. By being able to lower those capital carrying costs, you would have the capability of lowering rates for San Francisco consumers. Because that money sent to the parent company had to come from somewhere, and it comes from things like overcharging on the carrying costs of the capital assets of PG&E.

Mr. Maynor stated I might add if this is an area of interest to the Commission, this might be one of the subjects we could come back with in a future informational hearing on with more detailed information.

Chairperson Gonzalez stated I think that would be a good idea.

Ms. Jackie Williams lives in South San Francisco, stated I am deeply concerned with the fact that there are two 50-megawatt plants going in at the South San Francisco Airport. I only found out about it today that there is now two. My understanding is that we were back to one. So I am wondering where the public information is, how I get hold of information when things change? The other thing I would like you to be aware of is that I’ve been going to hearings on AB 917, Judge Gottstein’s court with regard to transmission lines. The CPC end on the Jefferson Martin line is about to come out, which is a 230 KV line that goes from the Jefferson Substation in San Bruno to the San Martin. Is that correct?

Mr. Smeloff stated near Redwood City to Martin, the Martin Substation at the Cow Palace.

Ms. Jackie Williams stated it ends up at the San Martin station. ISO has informed the California for Better Environment that if there is two 230 KV transmission lines, we wouldn’t need power plants. Even Hunter’s Point could be closed down. I would like everybody to be aware of that because I don’t know about how information gets around. There is a letter on file that says if you have 230 KV lines, and I don’t know if that’s possible or what’s involved or how long it takes, my understanding is that at one time is that it takes eight to ten years to put in 230 KV lines and get all the approvals. But, now its on fast track because I just got some papers from Judge Gottstein’s court that says its coming up to be put on the agenda, and it has been considered a need because for transmission lines, you have to show a need. But when it comes to power plants, you can put as many as you want in. Like the Airport, they only need 50 megawatts right now to operate the Airport. My understanding is that they have that capacity there so when everybody is talking about putting in two 50-megawatt power plants, that’s purely for profit. Because none of those megawatts are going to come to San Francisco because you have to have a transmission line that goes north of the San Mateo station to bring most of the energy, which is my understanding into San Francisco.

My question to you is what is this megawatt at the Airport going to be used for? The Airport right now doesn’t need it. These are the two lots. Are we just going to put it into the General Fund? I’m really concerned because peaker plants are very dirty as we all know. They are the worst that can be put in. It was brought to my attention that at one meeting I went to on the Potrero Plant recently that they don’t want to just operate them for short term, they want to extend the time they use these peaker plants. Whereas, they used to have a certain number of hours they could run peaker plants, they want to extend the time on these peaker plants. I don’t know how I find out what’s going on because pollution is supposed to be a problem in South San Francisco. They’ve just paid out 150 thousand so the air quality could get passed. Along with a lot of other cities in the region, they’ve all put in some money to get the Clean Air Act passed. So if they’ve done that, why are we putting in peaker plants, which is the worst that we could possibly do?

Mr. Smeloff asked, first question you asked, how do you find out about this? One, the peaker plant will be owned by the State of California, by the California Power Authority. It’s not operating the plant for profit. It’s building the plant for reliability. You should go to the California Power Authority web site for information about that plant since it is going to be owned by the state. There are power needs in the mid-peninsula. There is not a power plant. There’s that little co-gen plant at United Airlines. There is not another power plant to get down to Moss Landing. So you have needs to serve the mid-Peninsula as well. It is the one area where you could have problems if there is a lot of demand. I think having a peaker plant in that location is not for San Francisco, it is for grid support in the mid-Peninsula.

Second question you asked was about the transmission line. Indeed, there is a proposal by PG&E to build a transmission line that is very much needed, and we are very strongly in support of that from Jefferson to Martin. They are only proposing to build one line that has been approved by the ISO, and they have to go to the CPUC to get their Certificate of Participation and Convenience. PG&E all of a sudden has been aggressive in promoting this line. They were in kind of a slow period for years, but now they seem to be moving pretty quickly to get that line licensed.

Mr. Williams stated she went to Judge Gottstein’s court and I asked for the Jefferson Martin. I also went to the CAL ISO and the stakeholder’s meeting and a lot of people seemed to have interest, especially PG&E at that meeting that they wanted to get on with it. It seems now they are getting on with it. But, you’re saying only one line?

Mr. Smeloff stated they are only planning to build one. It is very much needed. It will help us shut down Hunter’s Point and generate less electricity in San Francisco.

Public Comment Closed.

4. Adjournment

Donald L. Maynor, Esquire thanked the panelists for participating.

Chairperson Gonzalez stated on behalf of the Commission want to thank all of the panel. I speak for myself when I say this, having been a legislator a little bit more than a year, we are called upon to get into so many subject areas. Sometimes it’s very difficult obviously without the aid of experts in the field who are willing to come forward and speak to folks who are at so many different levels of competency on issues. Certainly, it’s been a very fruitful discussion this afternoon, and I really want to thank all of you.

Vice-Chairperson McGoldrick stated I want to second the comments of our Chairperson, Commissioner Gonzalez. You don’t know how appreciate we are. This really fills in a lot of blanks for us and helps us be able to be ready for decision making. It’s really based upon facts.

Commissioner Hall stated, thank you very much and echoing the comments of my colleagues. I think it’s so important that we know as much as we can before we embark upon any policy. We certainly do not want to repeat the mistakes of the past where we think deregulation is going to lead to a less monopoly, etc. etc. I think that’s what we are going to be faced with in the future. Just knowing which way to go is going to be critical upon having as much knowledge as we can get about what took place in the past, and how it relates to the goals that we want to set for the future. I think this is just the start of many informative sessions before we reach any direct path. Again, I want to thank Gloria for her work in setting this up.

Chairperson Gonzalez stated in the future hearings if possible, we should try to see if we could have Mr. Smeloff available. He brings with him quite a bit of understanding of what is happening on the local scene and is able to answer questions that I think the Commission wouldn’t be able to answer. I think what we found a little bit in the earlier part of the hearings this morning was by some of the speakers, perhaps not enough of a familiarity with what San Francisco is doing, and I understand that we invited them because they understand what they were doing in their own communities. I think Mr. Smeloff would be very useful for that if we could get his support.

Gloria L. Young, Executive Officer stated the next steps would be that we will be contacting your individual offices to poll you for future dates. We will also be contacting speakers that we intend to have at future sessions just to keep the public informed, and we will be posting the notices as we get those meetings scheduled.

(All presentations and information distributed at the Commission Hearing are available at the Clerk of the Board’s Office, Room 244, City Hall.)

The meeting of the San Francisco Local Agency Formation Commission adjourned at 3:31 p.m.

Last updated: 8/18/2009 1:54:50 PM