March 22, 2002 Special Meeting

Meeting Information

MINUTES

Special Meeting

Friday, March 22, 2002, 9:30 a.m.
City Hall, Board of Supervisors Chambers, Room 250

Chair: Commissioner Gonzalez; Vice-Chair: Commissioner McGoldrick
Members: Commissioners Ammiano, Hall, and Schmeltzer
Alternates: Commissioners Peskin and Fellman
Clerk: Monica Fish

SPECIAL AGENDA

(There will be public comment on each item)

1. Call to Order and Roll Call

The meeting was called to order by Chairperson Gonzalez at 9:37 a.m.

Members Present: Chairperson Gonzalez, Vice-Chairperson McGoldrick, Commissioner Ammiano, Commissioner Hall and Commissioner Fellman

Member Absent: Commissioner Schmeltzer

Legal Counsel Present: Donald Maynor, Esquire and Nancy Miller, Esquire

2. San Francisco Local Agency Formation Commission (SFLAFCo) Public Hearing on Distributed Generation, Renewable Resources, and Conservation/Energy Efficiency.

Donald Maynor, Esquire stated this morning we’re happy to have some speakers on the subject of distributed generation, energy efficiency, and renewable resources. Some of the panelists are coming from Sacramento, and I understand there is a lot of traffic coming over the bridge, so we will rearrange the speakers. One of the reasons we wanted to focus on this particular area is because as we’ve learned, San Francisco has difficulty importing in electricity because of transmission constraints. It would make sense to closely investigate reducing energy usage through energy efficiency and conservation and at the same time looking at having generation within the City and including the idea of distributed generation, which the idea is that the end user actually has the generation on site. In that sense, it’s not necessary to use transmission systems and perhaps even distribution systems. It is a topic of great interest around the state. In fact, the California Public Utilities Commission (CPUC) has an ongoing proceeding on how to further certain elements of distributed generation. This morning we are going to hear from a number of speakers on the subject. One will be from the industry that provides energy efficiency and distributed generation. Another person, Don Schultz, from the PUC will talk about the regulatory aspect of it.

This morning we have Rich Ferguson who is with the Center for Energy Efficiency and Renewable Technologies, most commonly known as CEERT. He has a great deal of background in renewable resources and energy efficiency. Dr. Ferguson received his degree in Solid State Physics from Washington University in St. Louis, Missouri in 1967 and has long been involved in energy policy issues. He has taught Physics at UCLA and Cal Poly in San Luis Obispo. Currently, he is the Research Director at CEERT at its headquarters in Sacramento. He is a volunteer leader in the Sierra Club, and he now serves as Chairman of the club’s California Energy Committee. In addition, he is a member of the California Power Exchange Board of Governors representing public interest groups. At CEERT, Dr. Ferguson administered the California Regulatory Research Project to analyze potential impacts of electric industry restructuring proposals on public policy goals related to energy efficiency and renewable technologies. He has served on both the energy efficiency and renewables working groups as part of the California Public Utilities Commission’s restructuring process, and he was involved in negotiations leading to California’s restructuring legislation passed in September of 1996. You don’t want to blame Dr. Ferguson for the results of those activities. Dr. Ferguson frequently testifies before legislative committees and state agencies on a wide range of energy policy issues.

Before Dr. Ferguson begins, I have asked that two articles be handed out that might be of interest. One entitled "Small and Clean is Beautiful: Exploring the Emissions of Distributed Generation and Pollution Prevention Policies" involves a good discussion of distributed generation. It has good definitions and gives you examples of what they’re talking about. The other one entitled "Breaking the Consumption Habit: Ratemaking for Efficient Resource Decisions" by Sheryl Carter of the National Resources Defense Council involves rate making considerations. She was invited to participate as well and couldn’t attend, but she thought you would be interested in reading these articles.

Panel 9:30 - 1:00 p.m.

Dr. Richard Ferguson, Director of Research, Center for Energy Efficiency and Renewable Technologies (CEERT); Energy Chair, Sierra Club, California stated I am affiliated with a number of organizations. What I want to say this morning should not be attributed to any of them. It’s a basis of my own analysis.

We’ll start with the second slide-What problems are we trying to solve? I think it’s important before you begin, to clearly understand what problem it is you are trying to solve. There are three general ones. One is reliability of service. You don’t want the lights to go out. You are also worried about cost and price stability and environment is also an issues that needs to be addressed. Unfortunately, in this debate, people jump around from one issue to the other issue. In fact, that was a large part of the problem last year was that one week we were worried about the lights going out. The next week we were worried about what it was going to cost to keep them on. Unfortunately, we lost focus.

Next slide-Problem=Reliability. The reliability problem is three-fold. One is you have growing electric loads, and there is not enough generation to meet those loads and or not enough transmission.

Next slide-Problem=the cost and price stability issue. One is the issue of market power that can be wielded by generators. When the system gets tight and supply is on the margin, whoever controls that supply is obviously in a very strong position. The other thing that you should think about is the fact that our state and certainly this city is heavily dependent on natural gas, and we’re very concerned what is going to happen about natural gas prices in the future. I am not going to talk too much about that today, but I submit that is worthy of your consideration. The fact is that the total supply in North America including Canada, Mexico, and the United States is only marginally sufficient for existing demand. BOA projects that demand for natural gas is going to increase 50 percent in the next two decades, and in fact we’re going to have to start importing liquified natural gas. In the meantime the price is liable to go crazy. That is something I submit should be on your agenda, but I am not going to talk more about it today.

Next slide-Problem=Environment. Environmental issues, primarily to focus on air pollution first, both local and regional. I see my neighbors in Sacramento and San Joaquin Valleys are already nipping at your heels about all the nasty pollution that you generate and blows over in their turf. That certainly is an issue. Climate change from burning fossil fuels is a growing concern and will continue to be. Water cool power plants is always an issue. It is an issue at Potrero. Then there is always neighborhood impacts-generally people don’t like these things in their back yard.

Next slide-Solutions-Reliability. What are the solutions to these problems? If what you are worried about is reliability, the very best thing you can do is reduce demand. Especially at times at peak use, because that is when we’re fighting for it. You can also increase local generation capacity because that means you are not going to be as dependent on transmission and transmission problems. That can be either Central Station large power plants or distributed power plants, which is part of our discussion today. The other thing I am not going to talk much about but really should think about additional transmission into the City. Back east they are proposing to run a 330 megawatt power line under the Long Island Sound from Connecticut to Long Island. If they can do that, I’m not exactly sure why we can’t build additional transmission under the Bay from Oakland to wherever. That’s another one that should be keyed up for your discussion, but we’re not going to talk more about it today.

Next slide-Solutions-Cost and Price Stability. If what you’re worried about is cost and price stability, again, the best thing you can do is try to reduce demand. As we like to say, the problem is not rates--its bills. You could have high cost per kilowatt hour, but if you’re not doing very much then it doesn’t matter so much. You could also own your own generation, which at least if the price of power goes up and you are getting paid for the generation, you are getting the money instead of some nasty other generator, as the governor would say. You could also contract for your own supply perhaps. I think Don Schultz is going to talk more about the details of the City getting more involved in making its own electric resource decisions. That is a big gulp. I think generally politicians are more comfortable having somebody else make the decisions and then complain if they turn out wrong, rather than take responsibility and make them yourselves. Generally, the municipal utilities have a pretty good process and it involves the public, but it is a huge responsibility. It’s one that I recommend to you. There are other ways that the City could hedge against increased prices. For example, you could hedge in the gas markets against rise in price of gas so that if gas does go up, you are making some money to counteract or offset the cost of electricity. The other thing we are going to talk about is renewable generation. The reason this is a reasonable thing to do if you are worried about cost and price stability, it is basically a very capital intensive form of generation. But once, you’ve made that commitment there’s fuel costs and if prices become (unclear)) you could get long term contracts at fixed prices so you know what you’re looking at down the road.

Next slide-Solutions-Environment. The best thing you can do is reduce electric loads, and you can also do things to reduce the fuel use, especially locally is probably most important, but also regionally by looking at high efficiency generation. Distributed generation may or may not play into that. Likewise, you can be more dependent on renewable generation and less on thermal generation. Reducing neighborhood impacts is a hard one. Combined distributed generation may play into that; maybe not. Those are the kinds of things that you can do. It’s not rocket science. We know what the problems and potential solutions are in general. It’s finding ways to do it.

Vice-Chair McGoldrick asked in terms of reducing electric load especially in times of peak demand, what does that require, a timer on the meter?

Dr. Ferguson stated there are a whole variety of programs to do that. We could supply you with a list that is generally done throughout the country. Depends what you are talking about, residential, commercial or industrial. We could come up with a list like that. There are several. SMUD, for example, has a program where they could remotely turn off air conditioning units from headquarters. People sign up and get a discount on their bill in order to participate. SMUD can basically throw a switch and reduce the load. Let’s come back to that.

Next slide-Strategy=reduce electric demand. Dr. Ferguson stated as you saw in all three of these problems, the very best thing you can do is to minimize the use of electricity. I don’t care whether you call it conservation, efficiency, or anything else. The goal is to reduce the load on the electric grid. When people start thinking about doing that, you can either think about new technologies, for example like the one that I was talking about. But, basically it means that the old stuff has to get retired. You can’t just grow your way out of this problem unless you get rid of the old stuff on the system. The program I am most familiar with is the refrigerator problem. The refrigerators that are out there in use now use about 1500 kilowatt hours a year on average. The new ones-we got a new standard last year, use 500. There is 1000 kilowatts a year difference. If I have a new refrigerator and I plug it into the wall, I’m not saving energy, I am using another 1500 kilowatts. It’s unplugging the old one and making sure it never runs again that saves the energy. We need both. We need good new equipment, but you also have to think about retiring the old equipment, no matter what it is, whether it is traffic lights that you are going to replace, LED’s or whatever. Then, educating consumers about what their impact is is also important. It was something we didn’t really understand too much about until last year when the governor cranked up his "Flex your Power" program with amazing results. It was because it was before the consumers on a daily basis in the media and everywhere else that that succeeded. Again, we could talk about particular measures, and there are other experts better than I that could do that. That certainly has to be on top of your list.

Next slide-recommendations to reduce electric loads. What can the City do to do this? In my opinion, the first thing that needs to happen is you really need a good understanding of what is using electricity out there now. Rather than just say, "well I like this program, let’s try it". You need to really understand how electricity is being used, not only in your City loads, but everywhere, if you are thinking about getting involved with other customers. In the process, you will be able to identify opportunities. Then, you just have to find a way that everything that is cost effective to do, you do, but it does cost money. It saves money in the long term, but there is an up-front cost. How you raise that money is always an issue. You could look at bonds, utility taxes, and presumably these revenue streams are all going to be repaid in one way or the other from the savings on your bill. As long as what you are doing is cost effective, then it is positive cash flow into the system. We had talked some years ago about what we called an energy efficiency bank, where a customer could go borrow some money from the City or whomever to put in some new equipment, get rid of the old equipment, and basically repay on their electricity bill in such a way so it is cost effective. Their bill still goes down, and nobody is out of pocket any money. It is difficult to do that unless you have control of the bills, and we’ll talk about that. The other thing, just a simple one, is to make sure you are participating at the PUC and their programs. The state has a program of about 230 million dollars a year to promote these kinds of measures. Unfortunately, what happens to that money is often left up to the utility. If nothing else, making your people more aware of the opportunities that are already out there to make sure they get their share of these programs is very important. It’s a no-brainer. The money is there, but unfortunately, not enough public agencies are there talking about what’s needed, how to deliver these programs, helping deliver these programs, and so on. That would be my very first recommendation is rather than reinvent the wheel is try to make the best use of the wheel we’ve got.

Next slide-Next strategy is what I call deployment of combined heat and power. Often this is referred to as distributed generation. Unfortunately, and I know there will be some disagreements from others on this panel. The technologies that we have for small-scale onsite generation are not very efficient. They are relatively new technologies. They tend to be expensive and in some cases, they are not as clean technologies as the good central station facility.

Vice-Chairperson McGoldrick asked what does CHP mean on the slide?

Dr. Ferguson stated combined heat and power. I think there is general agreement now in the industry that these technologies make sense to do if you use the heat that comes out the back end for some useful purpose. The simplest one for example is just turbine. Take a jet engine off an airplane. Instead of running the airplane, you could spin a generator and generate power with it, but the exhaust that comes out of it has a lot of heat in it. In fact, the small turbines that are on the market now use less than 30 percent of the energy for the electricity. The other 70 percent, if you are just throwing it away, don’t bother. But if you could find a technology where somebody is using heat anyway, and they can put a turbine in the front end of that system and use the heat that comes out the back to run a cannery or whatever their heating mode is--then you’re ahead of the game. That’s why we refer to this as combined heat and power rather than just distributed generation. Stand alone distributed generation does not make much sense because of the reasons I said, primarily efficiency problems and cost. But, I’m sure there are opportunities, and in fact I think the speaker from Onsite can identify those. Their company is probably the biggest one in California and maybe in the West doing these systems. There again, if you have an audit and you know who is using energy, you can identify opportunities where you could get 10 to 50 megawatts, perhaps local generation and not increase air pollution and get some electricity out of it.

Commissioner Hall asked what are some of the uses for the combined heat and power? What are some of the uses for the heat that is extracted from these plants in your knowledge?

Dr. Ferguson stated there is a lot that is proposed and kind of depends and is a better question to ask the lady from Onsite. For example, a lot of the chillers that are used in hotels and buildings are fired by gas. It’s technology basically that the energy comes in the form of the heat from natural gas, and then there is a process that generates chilled water. So, if you can put your electric generator in front of that and use the heat to run your chiller, that’s a good thing. In the valley, a lot of the systems that use this are food processing plants that you need low-temperature steam for running this system. In Europe, they are very often the heat from the back end is used for district heating system. I don’t know enough about the details about what goes on in San Francisco to know whether that’s an option or not. Just about any system that is gas-fired now that is using low-temperature heat potentially is a candidate for these technologies. But, to get down to the details of where these things have done successfully, you need to talk to people in the industry to find out.

To go back to the slide, there is a problem with what you do with the electricity that comes out of these things. If for example, you had a big hotel to put in a fuel cell set and was using the heat out of the fuel cell to run their air conditioners or whatever. If the electricity that is generated is used inside the building for their own load, there’s no problem. If however, the idea is well they’re going to generate extra energy and sell it to the City, now there is a problem. We think those are solvable problems. We think it’s going to probably take legislation or at the very least action from the Public Utilities Commission to facilitate those kinds of transactions. Right now, they are very complicated. Perhaps, some of the other speakers can give you a clue. It is an issue that is being looked at heavily by the legislature and everybody else because it’s a fascinating possibility that we generate power at a lot of little locations and send it around the grid. But, interacting with the grid is not simple. Anybody who thinks that the California Independent System Operator is a simple system operator has it wrong. As long as these things are small enough so the power can be used internally, then there should be no problem, and that’s what Onsite is doing.

Next slide-Recommendations for deploying CHP. Certainly one of the things you need to do before you decide whether you are going to do it or not is identify what the opportunities are. That’s why I think the idea of an audit inside the City is a good thing. In principle, you can set up a system whereby the capital is raised by the City through some mechanism or another, then it is repaid through the electricity that is produced in the process. But if what you are doing is selling to other entities, then there are additional problems, and we don’t right now have the solution to those problems. Another thing that has been proposed by several people who want to do things like this is a thing called net metering. I am not encouraging it to go there, but it probably is something that your consultants need to consider. Net metering is the idea, for example, its used in photovoltaic applications where sometimes you are taking power off the grid and it goes through the meter one way, and sometimes you are putting power back into the grid and running the meter the other way. Basically, what you pay at the end of the month or the year is the sum of the net of those two. We got that system in place for solar, and other people have suggested that it be used for all kinds of other technologies. There are problems with that, basically having to do with bypassing the costs of maintaining the wires. Suppose that you could net things out to zero. On a daily basis, you are putting as much back in during the day as you are taking out at night so at the end of the month you have zero change in your meter. But, the wires had to be there so that you could take that power out during the night. But if you have a zero bill, then you are not paying your share of maintaining those wires. So, that whole issue is touchy, but it might be used for combined heat and power if you could solve some of those problems. That is why I have the question marks in front there.

Next slide-Strategy-Deploy Renewable Resources. The renewable resources I’m sorry to say is a very difficult one. I know you sold to solar bonds and supported that, but it is a very expensive technology. Compared to the possibilities that exist on the demand site reductions and on combined heat and power, photovoltaics are a very expensive technology. I applaud people who want to put them on a house. It’s a good thing. I am considering it for the house I’m building, but it’s an expensive technology.

Commissioner Ammiano stated we’ve been working on this, and the key here is bulk. The more bulk, then that addresses this issue. That’s what we’re aiming for anyway. The City has their own grid, and we have the up-front cost for the homeowners.

Dr. Ferguson stated I don’t mean to discourage that. Every time I run the numbers and I hope that prices come down. SMUD even went to the idea of getting a panel manufacturer to move into the City in terms of a deal.

Commissioner Ammiano stated we also have the advantage of getting state subsidies because it’s renewable, because of different categories.

Dr. Ferguson stated and we work very hard to make those subsidies possible. Nevertheless from a matter of public policy, you have to think about where we’re going to put public dollars into the system. I wish you all the success in the world, but it is an expensive technology any way you cut it. Unfortunately, the City does not have the best solar site in the world either. It doesn’t have good wind sites, good geothermal sites, good bio-mass facilities or fuels. It is a different kind of thing. If what you are talking about renewables is building renewable power plants in the City, I think you have a hard road ahead. If you are going to use renewable resources, you have to go get them where mother-nature puts them. We just don’t have a choice. The geothermal facilities exist in certain places and that’s it. The wind is only strong enough to be economically viable in certain places. It’s just a fact that you have to deal with. But, it is possible to solve some of your problems like the cost problem and the environmental problem by investing in renewable projects outside the City. If you are in a position where you are buying electricity for your own load, then there is absolutely no problem at all. If you’re not doing that, then you are going to have to get clever about how these facilities work. After all, Hetchy Hetchy is a long ways away too and somehow we made that work more or less. There are opportunities, and I certainly encourage you to look at those, but they are going to be off-site facilities, over at Altamont. There’s more wind available over there that would be a good investment for anybody to make. We are working on bills in the legislature to make that possible. It is difficult. Because there is so much turmoil, it is our understanding that PG&E is not really very interested in going back into the power buying business and passing those costs through to consumers. There is no money in it for them. It’s nothing but a hassle. They are never going to be sure that they are going to get all of their costs recovered, etc. etc. To the extent that there might be a deal here with PG&E where you guys take the responsibility for acquiring your own resources, but it is a difficult one. I really don’t know what else to tell you. That is the last slide.

I would be happy to answer any questions. I know I am not as enthusiastic about some of these technologies as other people, and I don’t mean to put a damper on it. The closer you get to actually making these decisions, the more you have to be realistic about where the technologies are, what the costs are, and what the opportunities for recovering those costs are and so on. The very first thing that you should do is to have a good understanding of how electricity and energy are used in the City. Unless you are a whole lot different from other cities, my guess is you don’t have a very good idea, and even PG&E doesn’t have a very good idea, truth be known.

Vice-Chairperson McGoldrick stated just a question from Page 10, your third bullet says participate at CPUC, recommend, promote and administer programs. Could you flush that out a little bit? Is there participation at the level of which the CPUC would give us assistance that is subsidized?

Dr. Ferguson stated the way these programs work now is that everybody in PG&E’s territory pays money into the pot. On an annual basis, the PUC decides what to do with that money. Historically, basically the utilities have said, we are going to do this on a more or less take it or leave it basis. Over the last years, there has been more and more opportunity for people or entities like your own to go into that process and say, I don’t need this stuff. Our problem here, we need these kinds of programs. The first thing you can do is to make sure that the Public Utilities Commission understands the needs of the City and what the best programs from your point of view would be. The second thing is that the marketing of these programs is also generally left to the utility. Generally, they are spread throughout the service territory and often to be frank do not do a good job. There are some of us who think that they are not really interested in reducing the sales of electricity. So, there is an opportunity for an agency like yours to put the word out through tax bills or garbage bills, or any other ways you have of communicating with the people what opportunities exist to make use of these funds. So that you are self-directing these funds. There is also an opportunity, and I think it’s going to grow, to recommend your own programs and conceivably even administer those own programs. The whole question about who is going to control this money, which for PG&E’s service territory is $70 or $80 million dollars a year. It is a large amount of money. It is not inconceivable in the future if you were going to go with your package to the PUC and say, here’s what we want to do, that they would let you administer those programs. There was sort of a pilot that was done last year that was approved yesterday that is sort of a step in that direction. Unfortunately, I wasn’t really impressed with what the local entities came up with. Mostly, they just wanted additional marketing money to push the utility program. I think it’s worth spending some of your own money on because it will be returned to the citizens many fold if they can increase their participation in these projects. Lots of people in the room are well aware of how these processes work and can help you out with it. That is sort of my vision for these programs in general is that they become less and less utility programs often for PR purposes and much more use that money targeted at solving problems that the local entities have. I encourage you to join in that process and push things in that direction. One caution that I have to make is that you really don’t want to fragment those programs into a bizillion little pieces. It isn’t rocket science. Generally, the kinds of things that you need to do are the same kinds of things that Oakland needs to do and everybody else in California. Rather than have twenty different programs all trying to do the same thing with twenty different RFP’s, twenty different contracts, and twenty different sets of rules, you need to get together with the other entities and set up a common system so that it works for everybody. The vendors just go nuts if they have to sign different contracts with every city in the world. I know ABAG was trying to do that. Diane might know better than I how that turned out. There are some efforts in this direction to set up regional entities to coordinate these efforts, and I strongly recommend that you get involved with that.

Vice-Chair McGoldrick asked, did you say about $70 or $80 million dollars is available annually?

Dr. Ferguson stated we could get that number for you. The total in this particular pot is I think $230 million dollars for the three investor-owned utilities. PG&E shares about 40 percent of the total. I could get you that number.

Vice-Chair McGoldrick stated that is close enough just to have some idea that that’s out there, and we could be going for it.

Dr. Ferguson stated you need better targeting of that money. Its process is out there and lots of people can help with that. I strongly encourage you to step up and get involved.

Mr. Maynor stated I would remind the public if they have any questions they could go to the kiosk and write out your question, put it on the podium, and we’ll ask the question.

Commissioner Ammiano asked how familiar are you with European models because almost every country there has some kind of municipalization, wind power, solar power. Are you familiar with their programs?

Dr. Ferguson stated not as much as I would like. There is a current flap in Denmark with the new conservative governor. They decided they had too much wind power. The one thing they have done on renewables on a system-wide basis is basically to say, I think wind power is worth, pick a number six or seven cents a kilowatt hour. They passed the law called the Electricity Feed Law that exists in Germany, and I think Spain has one and some other countries too. Basically, if a developer can generate power and get it into the grid, they get paid seven cents. The rest of the system works around that. It’s been very effective. It’s surprised every utility manager in the United States that they didn’t have more problems than they did. But that’s one model. If you’re in a position that you’re actually buying power for your own use, I would certainly recommend something like that. If you can sell me solar power for 20 cents, you got a market. That’s one of the things that they’re doing in Europe. I don’t know how the combined heat and power is set up except a lot of those cities were designed for central facilities whether it is air conditioning or heating. So that you have a citywide use for steam. Toronto is using Lake Ontario water instead of air conditioning. They decided they would just pump water out of the lake and circulate it around the city for cooling rather than to run electricity air conditioning. There are a lot of different models, but I am not as familiar as I would like to be.

Commissioner Fellman stated Dr. Ferguson, we do have a central steam plant here. We have the last heat corporation regulated by the California Public Utilities Commission in San Francisco, so there isn’t an opportunity for that. The City is looking at that from the City PUC side as a possible generation. I think even City Hall may be on steam, but they are looking at the new commercial building development in the City because that is one of our main industries here. I was going to ask you to give us your observations of how these innovative programs have worked at the investor-owned utilities versus your experience at SMUD, because one of our admissions is looking at the possibility of a Municipal Utility in San Francisco. Have you have seen any differences or benefits to one model or the other?

Dr Ferguson stated the main virtue of a municipal utility, aside from the fact that you have low cost money available, is the process. You’ve got your hands on the throttle your own self. You are taking responsibility for the outcome and it’s a much easier venue for the public to get involved with. I don’t think the results are always necessarily better. We’re certainly not happy about Los Angeles Department of Water and Power and what they do. They’re thinking about buying more coal-fired power from Utah. I think municipal governments in general don’t have a particularly sterling record that sets them apart from utilities. They are all over the place. There are good and bad ones like anything else. The main virtue is that you are taking control of your own destiny, and I think that’s a good thing to do. I would strongly recommend it. I would say I don’t think ownership of the wires is so important. I was surprised at the Muni proposal down here that you wanted to own the wires. It’s what we call Muni light systems where the utility continues to maintain the wires at the distribution level just as they do the high voltage wires running around the state. The question of the energy that is bought and put onto the grid on behalf of the city and the people of San Francisco is in the hands of the city. It’s called Muni Light, unlike Sacramento that does own the wires. It’s an option that I think would engender a whole lot less opposition from PG&E. They make money owning the wires. They don’t make money buying power and selling it to you guys. That’s a pass through cost. I think the resource issues-where are you going to buy your power, how are you going to contract, do you have contract law, do you go to the spot market, are you going to build your own stuff? All those questions, more renewables, more energy efficiency, all those kinds of things are in your own hands. Personally, I would recommend you look at the Muni Light option. It would probably take some legislation or at least PUC action, but I wouldn’t go in it with the attitude that somehow you are going to sneak out of all the cost that the governor ran up last year at DWR buying power. You are not going to be able to do that first of all, and it’s not the right motivation. You need to be in this for the long haul because you want to control the energy that is used in this City. I strongly recommend that you look at it, but I sure would add that option of not owning the wires, just being the one that controls the energy into the system.

Commissioner Fellman stated do you have an observation of a separate Board run Muni versus a City department type Muni?

Dr. Ferguson stated I think the SMUD elected Board is a good model. The DWP Los Angeles model where basically it’s a City Council does not work very well. I think the closer the elected officials are to the decisions, the better off you are. I would say that if you are thinking about that, an elected Board directly in charge of these decisions is the better way to go. The more remote it gets, the more bogged down it gets in other political issues. That is certainly what happens in Los Angeles, for example. The option of having an elected Board that is directly responsible for these decisions is a better way to go.

Chairperson Gonzalez stated Dr. Ferguson, you made some remarks earlier and I think I agree with it in a general sense whether or not there is a need to buy distribution lines and things like that. I think the remarks that municipalized power is better because there is some general destiny in your hands, you get to make decisions--I agree with that. I think it’s all good, but the question of owning lines also impacts what the cost is. Depending on the feasibility of that, that can be in some cases the precondition of putting together municipalized utility that is successful. While I agree with you, not every model in the state or in the country has been successful at the level that we can categorically say municipalized power is absolutely better than private utility or vice versa. You can’t divorce that from the equation. I know that your remarks were not meant to say that you would divorce it from consideration.

Dr. Ferguson stated I don’t disagree. I am building a new house in PG&E service territory, and I am dealing with the problem of getting service. I have to admit that I wish there was a local Municipal Utility that I could deal with rather than PG&E. It’s a nightmare dealing with that bureaucracy. What you say is certainly true. It depends on what problem you are trying to solve. If it’s a cost issue, the opportunities for reducing the cost of the distribution grid, I think are pretty minimal. You could certainly improve customer service and make people a lot happier than you can now. There are a lot of opportunities there. I don’t mean to deny that. Certainly from the cost point of view, there is not as much sort of upside potential for local ownership as there is from on the resource side. I am not against it. If you can do it, fine. I just think you should consider other options.

Chairperson Gonzalez stated you concede the fact that somebody else owns those lines. You yourself say that they stand to benefit from that. They are making a profit by virtue of the fact that we have to rent them in some fashion. So, while it may not be the deal breaker in terms of whether or not a municipalized control can be successful or what the level of profit is, it is clearly a component of it.

Dr. Ferguson stated if you want to go that way, I am not trying to talk you out of it. I am just saying it’s useful to look at the other model where you are controlling energy only. You may do that first and then do the other later, do it in a two-step fashion. It’s just an option. I think rather than butting heads with PG&E and go onto the mat, you may be can sort of go down this road in a step-wise fashion. I am not trying to talk you out of it.

Chairperson Gonzalez stated I am okay with the idea that somebody may disagree or want to talk me out of it. It just seems that when I hear your remarks in that particular area, your remarks seem to be influenced by the fact that there would be a battle with PG&E, be it a legal battle or whatever, it is that you are essentially saying there is a benefit in avoiding that. That seems to be at the foundation of your remarks.

Dr. Ferguson stated partly. I am an environmentalist. The environmental impacts and benefits come from where your energy comes from what you you put into these wires. I have to admit I am not as much focused on wires as other people. That probably accounts for my emphasis. That is your call on how you want to approach this. All I am suggesting is I think the option of going the Muni Light route at least as a first step is one that should be considered. I don’t mean to talk you out of a full blown Muni. I am a fan of public power.

Chairperson Gonzalez stated the final thing I want to say is you made some remarks earlier about solar. I thought it was interesting because while you emphasize the cost of solar as an environmentalist, you didn’t make the point that the public here in San Francisco may have elected to want to use solar energy even if it costs more. Of course, we are trying to make it so that is not the case. But clearly in terms of what the goal is, it may be the will of the citizenry here that we explore a type of energy that is environmentally friendly.

Dr. Ferguson stated I do not want to denegrate the environmental benefits of solar power. I really don’t want to do that. The Sierra Club supported that bond issue. I understand that It’s sexy politically, and it actually tends to run on peak so there is some value from peak. It is a distributed generation so that it doesn’t rely as much on transmission distribution. I hope that you get the cost down so that it’s too cheap to meet her, like Diablo Canyon. In effect, there are other options. You could also put solar power out in the desert, where you get a whole lot more energy for the same kind of price. That is all I am saying that there are other options. I understand the decision that was made and I supported it. I am sorry if I gave the impression that I thought it was a stupid thing for the people of San Francisco to do. If you are interested in getting the "biggest bang for your buck" I think there are other options.

Commissioner Ammiano stated I don’t agree with that analysis. However, I appreciate that you put that forth. If we had listened to that, we wouldn’t have gone to the voters.

Mr. Maynor stated I think we are ready for our next speaker, and I want to thank Dr. Ferguson for stopping by this morning.

Dr. Ferguson stated thank you for inviting me, and I will keep an eye on what you do and wish you all the luck in the world. If I can be of any help, do not hesitate to call on us.

Mr. Maynor stated Donald Schultz is with the Office of Ratepayer Advocates, which is part of the PUC. I think at one point that was a division that was under the authority of the PUC, and now it is appointed by the governor. He is in Sacramento and is focused there at the PUC on energy efficiency, renewable based self generation program evaluation regulation, energy consumption patterns, energy efficiency opportunities, integrated resource planning, consumer education and protection. Mr. Schultz has worked for the Santa Barbara County, prepared their energy element to the General Plan. He has also worked six years at the Energy Commission in the Conservation Division in Demand Forecasting Office. He is currently on loan to the Governor’s Office of Planning and Research. We’re interested in hearing Mr. Schultz’s comments on some of the same areas that Dr. Ferguson has spoken on, in particular on distributed generation.

Mr. Donald Schultz, Division of Ratepayer Advocates, California Public Utilities Commission stated I work for the Office of Ratepayer Advocates as my main job for the about the last six months. I have been working on loan half time for the Governor’s Office of Planning and Research on various aspects of the energy crisis that have come our way in California. The package that you have--what I did as you can see is take the questions that Don had prepared for this and tried to prepare some response to some of them. I focused mostly on the issues and questions identified here associated with what is being called distributed generation. I don’t want to go through and read all of this. My guess is you haven’t had a chance to read it yourself, but maybe we can just go through and I could hit on some of the highlights.

First issue-What you have here is the definitions of distributed generation at least in recent PUC rulings. This term is something that is used widely in the press and elsewhere in other states and in other agencies, and not necessarily the same way. I am not necessarily saying that these definitions are absolutely clear and definitive and don’t need some further work, but nevertheless and as a long time fan of definitional purity and consistency, I am hoping that the State of California can use common definitions as we move forward and try to define what these products are and how they best fit into California’s energy system, and also known in context of San Francisco. You’ll notice on the last bullet of this first slide is the definition of self-generation which you can see on the graph. On this graph, self-generation is defined in regulatory terms and also in practice more importantly as sort of a subset of distributed generation. It is the kind of situation that in some cases Rich was talking about where basically the electricity is produced on site, and it is stays on site. If there is some excess electricity that is not needed for the load of the building in which it is located, then it may or may not be sold into the grid. As an element of distributed generation and because it is pretty much tied to buildings itself, that’s why self-generation doesn’t have much potential here or around the state for other distributed generation technologies such as wind or some of the other renewables.

Issue 2 - what are the advantages of distributed generation in San Francisco? Again, I don’t think there is anything new here. I am quite sure that you know that the San Francisco City and County and the area around it and the Bay Area in general along with San Diego Gas and Electric have been identified in California by system planners as being the most highly congested. That means that all the vulnerabilities that we experienced in the energy crisis when they come back as well as new vulnerabilities that are on the horizon perhaps, makes citizens and businesses in the city government in the San Diego region as well as in the Bay Area region perhaps more vulnerable than other parts of the state. That means in some way the value of distributed generation technologies is more important here and in San Diego than elsewhere. It doesn’t mean that the standard methods of accounting for those benefits will capture those, but they nevertheless are there.

Issue 3 - Is ownership of the distribution facilities necessary for distributed generation? Again I know everybody wants simple answers. The simple answer is no. But a more meaningful answer is highlighted here. Again we go back to some of the basics. just the engineering part of it. The answer of ownership is inexplicably tied to the question of whether this is on the customer side of the meter or on the utility/grid side. If these products are installed on the system side of it, then presumably the ones who finance and sponsor those projects which could be the utilities or could be other power merchants, are probably going to want to own those things and they are going to want to be paid to sell that electricity into the grid. When you get to the customer side of the meter on the building on site type generation, logically to maximize control of that, one would want to retain that ownership of that system. It becomes part of the asset or the infrastructure of that building. It would increase the value of that building for resale or for whatever else you might want to do with that building. It is integrated into the building and electricity if it is done at least the way it could be done is used onsite. Ownership in all of these issues, as I am sure you know are so interrelated that’s what makes it so entertaining to try to find out what’s going on.

Issue 4 - Is electricity generated by distributed generation cost-competitive with large power plant generation? At the about the time I came in, I heard Rich talk about his observations on the relative cost effectiveness, and the information I am giving you here is radically different than Rich. This is part of the ongoing argument that he and I have been having for at least a few months, probably a few years. Hopefully, we will continue in the future. Basically what I am trying to suggest is the number that I am looking at recently, is that first off that the relative cost of these technologies is changing and is changing favorably. When I am talking about these technologies, I am talking about primarily onsite photovoltaics and the two leading applications of combined heat and power, meaning fuel cells and micro-turbines. Economics is changing radically in its favor for the variety of reasons I have mentioned here. When you get into questions of relative cost effectiveness, and I know you are talking about PV and peakers and whatever. I think the key point here is if you want to say whether PV is cost effective, the right reference point is peakers because that is the competing research choice. You wouldn’t want to compare the costs on a cents per kilowatt hour or a dollars perr megawatt of a PV with a combined cycle central power plant station or from imported power from hydro or something else. You would want to compare it to a peaker plant because solar is basically going to provide power or take power off the grid or reduce the load off the grid at the time the peaker would be kicked on. I think you understand that. In terms of the economics, I think that is a fair statement. Even with current prices of PV, and they haven’t come down as fast as some would like, they hopefully will be coming down soon or continue to go down. The cost of PV systems should continue in a declining manner. No one can predict how far or how fast they will go down. Even at the current state, I believe it is cost competitive.

Commissioner Ammiano asked didn’t the State Energy Commission go out to bid for solar down to 18 cents? That’s what I heard anyway.

Mr. Schultz stated we have to be careful about what it is that different agencies pay in the form of subsidies versus what the total cost is. What I’m talking about is if you take the total cost of a PV system, regardless of how much is subsidized or financed by different financing mechanisms, and you compare it to a peaker regardless of who owns and operates and finances that project. That is what I am talking about. That, I believe is the right way to look at these comparisons and the right way to render a judgement on cost competitiveness. Again, there is not going to be a simple answer. If you look for something that says is this cost effective, there is a thousand other questions that you need to be asking. From whose perspective is it cost effective? From the participants perspective if it’s an onsite type of thing? From the system or from society? There are a lot of questions that come up. Which type of resources? Is it a peaker? Is it a load following type generation or is it a base load? Those all matter a lot. All of this used to be before deregulation assessed rather methodically in what was called integrated resource planning process in California. That all went away. It is now coming back and hopefully the questions of how do you compare and how do you establish cost effectiveness in the context of a long-term integrated resource plan. Hopefully, the terminology and standard methods that used to be used will be restored. To the extent that the City and County of San Francisco participate in those discussions, I would hope that you become familiar with those types of methods and methodologies.

Mr. Maynor asked do you share the view with the DOE that natural gas prices are going to increase 50 percent in the next ten years?

Mr. Schultz stated those weren’t prices, those were quantities--the demand for natural gas.

Mr. Maynor asked to what extent? Obviously, when there are gas shortages, the prices go up. To what extent does that play in the analysis?

Mr. Schultz stated it plays in a lot. I think if we learned one thing, it has become more risky to try to predict what the future of the underlying... That is the key element that affects cost-effective statements is the future cost of natural gas at the wholesale and retail level, particularly in California, because as we all know virtually any new central power plant that is going to be built is going to be naturally gas fueled. If you do planning on a marginal cost basis or marginal plant kind of thing, which is what most economists argue, and that is sort of the identified deferrable resource--a natural gas fired peaker or a natural gas fired combined cycle central power plant in the 500 to 1000 megawatt. I don’t think there is any point in trying to compare them for California and San Francisco purposes, the cost of any of these things relative to a new nuclear plant, for example. I don’t think that’s worth much pencil time, but I could be wrong.

Commissioner Fellman asked do you see the Energy Commission subsidies continuing? I know there are some issue in the legislature about whether or not the about a $135 million a year will be allocated for the next ten years?

Mr. Schultz stated we will get back to the question of funding because it is a critical issue. Both the programs that are funded at the PUC and the CEC and elsewhere and how this should be coming together and is real and not real, we’ll come back to later.

Issues 5 and 6--what are the air quality considerations for selecting distributed generation in San Francisco. Air quality sooner or later, as Rich correctly pointed out, the main focus from an environmentalist perspective, is what is the source of the generation and of the production of the energy? Not so much a wires-type issue. This is of course the air quality issue. I am sure you are all familiar with re-surging issues of air quality and air quality disputes between Bay Area and the Central Valley. The type of energy resources that are used currently and in the future are inextricably going to be linked with that. The other one that is more recent and has been around for the next few years is the MTBE/Ethanol dispute that is now getting attention at the federal level and has major implications for both the Central Valley and the Bay Area. Of course, we then immediately as suggested here get into transportation policy issues. The main message here is that transportation issues and transportation energy issues almost have to be dealt with at a regional level. To try to deal with them at a small geographic area is basically fruitless and counter to the larger public interest. I know the various dimensions to this dispute. All I am saying is that these issues are going to affect what you do in terms of stationary energy type applications.

Next slide. Going back to Diane’s question. As I think Rich alluded to, but I want to put it in more specific form here. The PUC has been the public agency that has administered $300 million dollar a year energy efficiency public purpose program for a long time. Rich’s notation of 230 refers to the electric portion. There is another 70 million from PG&E on the gas side and also if you include SoCal gas. That money is intended by statute to provide financial assistance and information to customers statewide in the utility and industrial service areas to help finance traditional energy efficiency products and measures in homes and businesses. Everybody who pays into that which is every customer of investor owned utilities, and again I am talking about the four, including SoCal gas, but it is all PG&E in your case. The total statewide is 300. I don’t know exactly the PG&E share. But the more relevant question moving ahead would be depending on which way you want to go, what share of the PG&E pot is being collected from San Francisco city businesses and residents. That can be determined or the share of it can be determined without too much trouble. That’s one pot of money. That has been there for a long time. That program is one of four public purpose programs that were established by statute with the deregulation legislation, AB1890, which was passed in 1890. Its program life was extended up to ten years I believe in the 2000 legislative session. That money is fixed in statute. It could go up or down in the amount, but there is expected to be a per statute. Of course that could be changed. It is expected that the PUC is going to continue to be the public agency that will be overseeing that pot of money.

The second program that I don’t think there was any mention of was created at the PUC under statutory direction with another bill, AB 970, which became law in October 2000. That law which had a lot of features to it directed the PUC to establish a new distribution charge and therefore new program that would promote what would then became self-generation. That is a $125 million statewide collected by again the four industrial owned utilities. Again, I don’t know the PG&E portion, but it would be somewhere in the neighborhood of probably $50 or $60 million of that for self generation. This money and the PUC finally got that program up and rolling and running in July of last year. That program is still in effect. That has by PUC direction a four-year program life. These are how long it is supposed to last, in other words charged, collected monthly alongside of the energy efficiency monies. Those two pots of money and the San Francisco share provide the foundation for basis for some stable funding that could be used to enable the City and County of San Francisco to become a program administrator of your share. Those are the two programs I think most of you are familiar with. The Migden bill deals with the share from San Francisco. That only addresses the energy efficiency program. The same concept could be extended to the self generation program. That same concept going back to some of other Richard’s comments and those that are more consistent with what my own are and of my agency, that is that could be done at a regional basis, not necessarily at a city basis. In other words if as suggested in here and getting into some suggested options to consider and I know you are considering, we can go on to the next slide to get to what I am talking about.

Issue 13 - What practical short term and long term recommendations do you have for San Francisco? To look at the two bulleted answers. The short term or moving toward the long term role for local governments are embedded in these two bullets. One is to take advantage of the upcoming opportunity. It is sort of there now, but it’s not as definitive as it might be at the PUC. That is to become an alternative program administrator for both the energy efficiency and the self-generation program. Again, what we would recommend in the past when this issue has come up because it has come up a number of times at the PUC is that it be done through regional energy offices, not for each of the 435 cities and 58 counties. That would get back to something that Rich was talking about--some concerns about vulcanization and just serious problems. In any case, establishing that network of regional energy offices. What would be the geographic boundaries of them? All that is not clear. But if ABAG, for example. started to step up to do that. Let me back up. In the case when the PUC established its self generation program about a year ago or recommended that the Commission designate, not put out to bid, but simply designate the San Diego Regional Energy Office as the program administrator for that program--that’s a model that the Commission bought. What they did was they just directed San Diego Gas and Electric to take the money that they collect monthly and turn it over to this non-profit regional energy office that existed and had some experience in energy matters. The San Diego Energy Regional Office is the program administrator, not San Diego Gas and Electric for the self-generation. That same model, that sort of flow of transactions, that sort of arrangement, could be extended to other regional offices, and it could be extended to both the energy efficiency and the self generation program. That issue generically about what is going to be the future role of the utilities including PG&E is again expected to come up at the PUC more formally sometime this summer. I don’t think any dates have been set. We are going back to what is admitted here and what Rich was talking about. That will be your opportunity to get more formally involved. If you would do it on the context of working with say a regional entity like ABAG, it would probably be received better or be more effective rather than having hundreds of cities showing up independently or all fifty counties. The other thing that I don’t think was fully flushed out and I am not sure it was alluded to. There is currently right now the beginning of a statewide bulk procurement effort that has been and is being sponsored by the newly formed California Power Authority that is actually being executed by the State’s Department of General Services. The State Department of General Services for years, one of their jobs is to buy on a bulk basis everything from pencils to cars to whatever. Last year, for example, they bought a mass bulk purchase for traffic signal lights, LED’s. That brought the cost down. I don’t know the details, but that was a short-term success that happened very quickly. It is easy to do when you have a totally standardized product. In any case, that same concept is being extended now for photovoltaic systems, for fuel-cell products and for micro-turbines. The results of what is called an RFB are just now coming back in, in which the industry has basically said back to the Power Authority--this is how much we will charge on a cents per KWH or a dollar per KW of capacity if you buy to put into public buildings x number of quantity. The theory is the larger the quantity the lower the price. The results of that RFB once they finalize would be to sort of to put a cap on. Anybody who is getting to the project level and actually trying to put together a financial package to get approval to put on one of these systems in a public building--and a public building by definition means city and county buildings, not just state buildings. City and county entities have used this process, this bulk procurement process, for a lot of products in the past. They could do it for this one is the point. How successful it will be in the short term of bringing down the cost is unclear, and the results of the micro-turbine one and the PV one are not yet posted. The idea again is that should put in an upper limit. When you get to a specific project and want to get approval for it, let’s say on a city building, then that you would know the names of the companies that would offer at that price. There is no reason why you couldn’t negotiate a lower cost. That is how the pressure downward is supposed to work. It is expected in the future that yet another RFB will be released. Hopefully, there will be more manufacturers and want to be installers of these products that will come in with lower costs. The theory is over a period of a few years, this would continue to keep pressure on the downward pressure. The companies will want to know that there is a buyer of these products and the buyers are public agencies. Cities and counties and state government agencies have been selling these products in the 4000 megawatts of load in public buildings in the state of California. That is the framework within this will hopefully happen over the next few years and hopefully again that will start to bring down the prices. Again, I know we haven’t done anything quite like this in this kind of scale in California so it’s too soon to be completely optimistic. I understand Rich’s curmudgeon and skepticism, but nevertheless, Rich, I think it is going to work this time.

Mr. Maynor asked, you were talking about the public benefits funding. Is that like a surcharge that shows up on the bill?

Mr. Schultz stated right.

Mr. Maynor asked if the City was a Municipal Utility, would a Municipal Utility also be subject to the same surcharge?

Mr. Schultz stated yes.

Mr. Maynor asked would they get to control the program itself? Is that how it works?

Mr. Schultz stated basically there are two differences in a Municipal Utility. One is in statute in an investor owned -- the exact amount, the dollar amount annually that is supposed to be collected is identified by statute. The statute for municipals basically says municipal utilities are encouraged to have a comparably-funded collection of programs. Remember, for investor-owned and by statute, there are four public-purpose programs that have been established. One is the low-income energy efficiency program. Another is the non-low income energy efficiency program which is the $300 million a year. Then there is the RND program that is administered at the CEC, and then there is a CEC renewable program. Those are the four public-purpose programs that were established by statute for the investor owned. The municipals as I understand it, were encouraged by that same statute to have a similar set of programs. They would get to control it and the amount of money that they could use for one versus the other. They could use all of it for RND and no one would know presumably. because there’s no state agency oversight of the Municipal Utility’s use of that money, or if they are in fact collecting the amount that they were expected to by statute.

Dr. Ferguson stated I think as I recall, the number was supposed to be 2 1/2 percent of revenues, but performance has been very spotty.

Mr. Maynor stated I have another question for both of you. Do you use any computer modeling to analyze these different types of generation models in forecasting in changes and gas prices and at what point do certain renewable resources become-cost effective? Does the Energy Commission, your Department, or CERT use those types of computer modeling?

Dr. Ferguson stated we are involved in an advisory process with all the western states to the Western Governor’s Association called the Western Regional Air Partnership Rap. They are using a model like that. It’s the same model that DOE uses by ICF Consulting and in fact, we’re running that model right now in that process to sort of see what prices and what point to say when to become cost effective. I am not a fan of computer models generally speaking. Basically, what you put into the models, your assumptions influence what comes out so strongly that I am never quite sure what you’ve gotten. The ICF model is sort of the standard one used by IPA and DOE and it is being run, but what’s going to happen to gas prices? As what Don says, that is major input, and you can get just about anything you want out by what you put in. There are models around that are so complex because they have to model interactions between states, interactions between fuels, interactions between technologies, transmission access, pipeline access. They are very complex and certainly beyond what our organization could do and probably beyond what the Energy Commission can do. There are people who can do that.

Mr. Maynor asked would it be safe to say that the difference between you two gentlemen is that Mr. Schultz is more interested in immediately beginning to see more investment in distributed generation, where you would perhaps prefer or recommend more investment in the energy efficiency side, conservation side? I’m not sure I understood what the differences are between you two.

Dr. Ferguson stated the discussions Don and I have been having--it is an unusual position because I hope he’s right. But I don’t think he is. He makes the point in his comments too that the distributed generation--how you use the thermal, the so-called waste heat is very important. We’ve been looking at the efficiencies of turbines and their using natural gas. The fuel for the fuel cells comes out of natural gas. The efficiencies are very important here, and they are not as good as a combined cycle gas plant. Unless you have the stuff in a situation where you are making good use of the exhaust from an efficiency standpoint-how we’re using natural gas in the United States is just hard to justify. I think we’re in agreement on that that it is very important that where you put these things in, you have to look and make sure that you make maximum use of all of the energy.

Mr. Schultz stated we have always argued in a different way but with the same effect that these products should not be eligible for subsidies or public finance support unless they are used in a combined heating mode power for that very reason. There is not a disagreement there in terms of once you do, we believe they are, from what I’ve seen, of comparable efficiency to a total efficiency to a central power plant. They don’t have some of the other adverse environmental impacts that a central power plant has. There is one difference that I was reminded of that Rich and I have not had a chance to argue about recently. That is, I do believe that the energy efficiency choice as opposed to the on-site power generation choice is a declining market, so to speak. Both because it’s been done already or a lot more. There is a physical limit to saturation of these things. The further we get up there, there are diminishing returns and they are becoming less cost-effective. They are going in different directions. If you take the traditional energy efficiency as one clump of stuff, and it’s always hard to generalize but you have to at some point, and if you take the other group of onsite self generation, that’s a huge potential with the expected declining costs if we stay on focus and do what things are in the works for. Whereas, the traditional energy efficiency stuff-now we are talking about high efficiency lighting systems, high efficiency HVAC and even high efficiency refrigerators. There is a limit here. We have reached a limit. That’s probably a declining thing. When you get into that kind of situation, the cost-effectiveness becomes worse, not better. So, I think these things are crossing. That doesn’t mean we should stop from running energy efficiency. It just means that longer term that if you had a ten year investment plan, if you expected current year quantities of savings from energy efficiency to be the same for each of the next ten years, personally, I think that would be unjustifiable. Whereas, you could have an expanding amount of load taken off the grid from these other things--that would be reasonable.

Dr. Ferguson stated I don’t disagree with Don except perhaps where these lines are going to cross in the future. I would like to report that we had a meeting at SMUD, including the General Manager Jan Schore, on this issue of distributed generation. We asked SMUD what their discussions had been with their large customers who are maybe targets of opportunity for this technology. She reported that they just had very little interest in becoming electric generators. They say, just give us the electricity for cheap and we’re happy. How these technologies move into the market is a question right now. It’s an issue that in fact the City could play a role in. For example in some cases, suppose you have a facility that you need steam and you decide that you are going to put a micro-turbine in there and generate the steam with the exhaust. The question, if the operator has to now have an employee who understands electricity, who understands how to connect up to the grid and all the rest of this stuff. That is asking a lot of a company who has never been into this business at all. It was basically what SMUD found is that there was a reluctance to do this. It might make sort of marginal economic sense maybe, but, this is not the business we’re in. There has been some discussion about ways to help people get around that. For example, maybe somebody else owns the equipment and leases it to them and provides all of the management that you need to keep the system running and get hooked to the grid and all the rest of that stuff. So, there are a lot of management models. I think how fast this stuff moves into the market depends on how that works out. People need help. Just because it may make economic sense, doesn’t mean that it is going to happen automatically. That’s why I say if you could in your audit process identify some good looking targets where this makes sense to do and then find out what is the entity need. If it is a public or private entity, what kind of assistance do they need to make this stuff happen? I think maybe more important than the financial role you might play is this kind of management assistance to make this happen. Maybe you aggregate these systems together--I don’t know the answer. Maybe on site and new testimony will give some examples of how they have done it. We’re just hearing that from utilities all over the country when they go to their customers and say, would you be interested in doing this--the immediate reaction would be no. So people are going to need help making this happen. That is an ideal role for a city entity to play.

Nancy Miller, Esquire stated I do work for SMUD, and it is true that the initial reaction of many of these businesses are, what me, that’s not really the business that I’m in. But, there’s growing interest and I think if you talked with Jan Schore, the Director at SMUD, she would say this. Particularly, in what I would call our new high-energy demand industries hi-tech, which is a marvelous opportunity for this City, and they just need a little push and a little guidance and that market is there in my opinion.

Commissioner Fellman stated at the City we have the old PG&E steam system still in place. It’s not like Sacramento where you have to build a new steam system or have individual ones. We could use that. If we’re trying to attract server farms or some of the other bio-tech, I think a lot of those industries given what’s happened over the last couple of years are looking at their own sources of electricity. They want to incorporate that into their building costs up front rather than trying to retrofit. That gets a cost savings when you build it in.

Mr. Maynor asked Don, is there any state money to do some of these auditing functions that Rich was recommending for San Francisco?

Mr. Schultz stated there is a difference between auditing the city-owned facilities-that money is available. Through the energy efficiency program that PG&E currently administers, they have offered forever and are still offering the opportunity for each individual building to be audited in terms of what its energy use is. To do an inventory to distinguish it of the whole consumption pattern-how much exactly is used for lighting, how much is used among all residences and government buildings in this geographic boundary? That’s the kind of information that has not been done, but could be done. That would be sort of the basis for a planning type function and opportunity. But for actually implementing projects, that auditing service is available. In terms of this specific thing that Rich is talking about, providing the service of actually outsourcing the ongoing maintenance of these onsite products and whether they could be leased or owned. The mechanics of how to put those things together are there. There are some that have been worked out-the city of Vallejo I think is the most prominent example where they have put in a fairly large PV system. It was sort of financed and I am not quite sure who owns it. I am not sure of the details. Those kinds of transactions involving the emerging EESP industry, for example, or the Esco industry, companies like On-Site, which there are perhaps far too many for their case. In any case, there are a number of those that are working in California mostly on energy efficiency stuff, but they have the skills, the information and the wherewithal to put together that package of services for onsite self-generation.

Mr. Maynor stated we have a written question from Charles Kalish. It’s regarding the intersection of cost/benefits on energy efficiency and conservation versus solar. Where does Amory Lovins’ data weigh in on the amount of efficiencies yet to be gained from conservation and energy efficiency.

Mr. Charles Kalish stated that Amory Lovins had a lot of studies on efficiency in conservation. You are saying that it’s kind of reached its peak and from his talks up in Sacramento last year during the power crisis, it seemed like he’s talking about an enormous number of benefits still to be gained from both efficiency in conservation.

Mr. Schultz stated he knows that Amory has been saying that forever and he’ll never stop saying that. At some point, the laws of physics and economics will come in. You can take one of his favorite things, that is refrigerators that Rich knows a lot about. You are not going to get much lower than 600 KWH a year without another huge investment in some kind of product materials and whatever else that doesn’t really exist yet. If you do, ten years ago the average usage for a refrigerator was 2000. Now it’s down to 600. A lot of those higher efficiency refrigerators just by a normal turnover in stock are happening. There have been some accelerated replacement for those refrigerators, and all that is fine. All I am saying is that there is a limit. Amory or nobody can know in California definitively right now what the saturation level is of these high-efficiency products because the state of California stopped collecting that data as a part of deregulation. There are efforts underway to start to collect that, revisit the question which needs to be revisited in my mind every few years and should be done on a regional level that is--what is the saturation level of high efficiency refrigerators? What is the saturation of high-efficiency lighting systems in commercial buildings? There isn’t good data on that now. So, no one can say definitively. All I am saying is at some point there’s got to be a limit. But because these things have been installed and promoted for so many years, we have to be somewhere on this. At some point, there’s a limit and we have to be somewhere down that curb. Whereas with the onsite self-generation type product it’s a zero basically now. These are starting to go in and the potential is huge.

Mr. Maynor stated Ms. Lowe is here, that she is from the private sector and will help resolve this dispute between these gentlemen.

The San Francisco Local Agency Formation Commission hearing recessed at 11:20 a.m.

Chairperson Gonzalez called the hearing to order at 11:48 a.m.

Mr. Maynor stated that Elizabeth Lowe is the Vice-President with the On-Site Energy Corporation, which is in the business of both energy efficiency and distributed generation. She is responsible for the firm’s operations and regulatory representation in Northern California and Texas, and she has a particular expertise with industrial and food-processing customers. She also has capabilities in the areas of natural gas and electric purchases and overall customer strategies to reduce energy costs. Prior to joining Onsite, Ms. Lowe was the Vice-President with Duke Solutions, which is part of the Duke Energy subsidiary. That involved working with retail and wholesale customers to develop and implement overall energy purchasing strategies. She has assisted in the past large energy consumers and the development of the energy cost -education strategies through procurement and management of fuels, tariff and contract negotiations, aggregation strategies and demand-site management planning.

Elizabeth T. Lowe, Vice-President, Northern California, Onsite Energy stated I am also here representing the interests of National Association of Energy Services Company, which is why I believe our company was contacted originally. So, I can speak to issues beyond just some of the industrial work that I am responsible for, but also the NAESCO market and the kind of market we see in California with projects both in energy efficiency and distributed generation. I did leave some handouts on your desk.

Starting off with the pie chart I have here, it’s our belief, and I am going to give you a little bit of insight from the trenches, what we’ve seen with energy efficiency opportunities and distributed generation opportunities in California. First with this pie chart, we see still very large opportunities for energy efficiency savings for customers. If you look at their overall bill, there’s an opportunity we’re seeing saved between 15 and 30 percent on energy efficiency with usually between a two and five year pay back in most cases. Those paybacks have been improved given recent rate increases for customers and obviously having a downward trend on those paybacks. So, I put this here just to indicate there are various strategies to pursue. Co-generation and distributed generation are actually not on this chart. It’s actually more of a focus on energy efficiency.

Turning to the next page on current trends. Pricing trends aren’t looking good for energy consumers, which is maybe one reason why we’re here. However, natural gas prices are lower. What we’re seeing is a disconnect between low wholesale prices for electricity and high retail rates in California, whereas, the retail prices for natural gas reflect better the wholesale market for natural gas. We have seen a huge price increase for customers in California. Many have seen between a 50 percent and 100 percent rate increase depending on how they are using energy throughout the year and if they are summer-peak or winter-peak loaded. However, we have also seen incentives for customers interested in pursuing energy efficiency, peak load reduction projects, and generation. So, the strategies we believe a customer should pursue include purchasing from third parties, particularly natural gas and at this time, pursuing peak load reduction strategies including thermal storage, distributed generation. Thermal storage has not been a very viable kind of strategy in the past because there hasn’t been a large differential between on- and off-peak rates. Thermal storage basically involves using ice or water that you are chilling at night during off-peak rates and you are running it through a system to run air conditioning or HVAC systems during the day. So now, that is more of a viable strategy just given on- and off-peak rate differentials. We also believe that customers should become as efficient as possible because the best way to reduce cost is to use less and then look at onsite generation options. I think pursuing a lot of these in parallel is a good way to go.

I have got a list of projects here in industry. I know there has been some discussion before I got here regarding lighting and HVAC. Some of the things I have included here go way beyond that including a lot of industrial process kinds of projects. Looking at frequency drives and control systems that are going to take existing equipment and make it run more efficiently as well as putting in more efficient equipment taking all inefficient equipment out and putting more efficient equipment in. Boiler retrofits and condensate return systems are basically using waste heat from a boiler system and putting it back into the system so you are using the heat more efficiently. Several examples here. I also had onsite generation.

I am going to talk a little bit about energy efficiency and then talk some about distributed generation and then address questions. In energy efficiency, as I mentioned, we believe the most effective way to lower cost is to reduce how much you are using. Our company and other energy service companies have also been referred to as EESP’s or Energy Efficiency Service Providers in the deregulated market. Energy service companies are probably just a more frequently used acronym. Our companies will identify, will look at a facility, will audit facilities--I know there were some questions before about auditing, and look at what the opportunities are on commercial and industrial facilities. Primarily, there are some companies that also work through contractors to look at residential facilities. We’ll do audits, preliminary engineering. We’ll bring regulatory incentives and then implementation can include financing, project management, guaranteeing of savings of those projects and measuring of the savings. There are many state incentives. I’ve listed some in California and in other states as well.

You can flip through the next few pages. They simply have pictures of some of the types of projects that energy service companies implement. Controls and energy management systems have been particularly effective over the past number of years. We’ve seen not only controls working well for lighting systems-obviously, you have probably experienced this where you have got motion sensors where the light goes on when you are there. If you take that to a larger level with large industrial customers who are running say three big pieces of equipment and the controls rely sense when the production is going down, normally those pieces of equipment will continue to run or are manually controlled. Now with an automatic control system that has various points of connection into that facility, it will automatically shut down pieces of equipment. So we’re seeing dramatic savings from controls.

The next page shows some case studies. I know Don has been very involved in the Public Utilities Commission’s dealings with the incentive programs, and he was on the committee that helped develop these programs in recent years. I have the energy savings shown here where you have energy efficiency savings, which are the bottom line dollar amount. The customer is saving T&D savings if there is a voltage or transmission-related project done putting in the substation for that customer. These are all state-funded incentives that have been implemented for large industrial customers and then you have capital. You see the annual bill where there has been a savings impact of 16 to 32 percent. The simple payback (the state incentives have been paid for several years) is actually closer to two years, but I just put in all of these numbers as if they have been paid in year one. These are again for industrial customers who have literally done no energy efficiency projects in the past. The way that a lot of manufacturers work is that no money goes towards energy efficiency. It all goes towards new production. In fact, we dealt with a large defense contractor at one point ,who is virtually going to the scrap yard to find pieces of equipment to hold things together where they are getting millions of dollar for building very large complex pieces of equipment and putting a lot of money into that. So, these incentives have certainly gotten attention in that the paybacks now are more reasonable. They get the attention that they are two years and less payback. Companies are more likely to do these kinds of projects.

The next chart just shows some of the projects that Onsite Energy has been involved in with incentives and saving customers significant amount of money and brining in a lot of incentives.

The next several pages are some case studies. I think for the purposes of this meeting, we can flip through the case studies 1, 2, and 3 and put them aside because these are more food-processing related. But, the reality again is that none of these projects were done before the incentives were available. Case study 4 and 5 are probably more relevant for this meeting in that one is a multiple facility bank and the other is municipal buildings. So, chillers were installed in this bank, cooling tower, a control system, lighting retrofit. There were incentives of $270,000, capital of 1.1 million dollars, and an annual savings that were significant. So, you can see how these incentives continue to provide value and benefit to the customer.

Municipal buildings-this was some work done in the city of San Diego. Chiller and cooling systems or handling systems again controls, and lighting retrofits and variable speed drives, significant incentives in capital. This project was then financed with a guaranteed savings over a number of years. The city of San Diego is pursuing more and more projects at each of their city-owned facilities.

I know there was some discussion about incentive programs in California and I have provided a bit of a summary here. We do not know the final incentive numbers on these. We in essence have payments between six and twenty cents per kilowatt hour depending on whether you are doing a lighting system or a refrigeration system. Natural gas has some incentives as well. There is up to $300,000 available per site and $1.5 million per corporate entity that is being proposed. There has also been California Energy Commission money as you probably know. We actually got some money for an agricultural program, but there has been other money going out from the Energy Commission focused on kilowatt demand reduction, so not just the KWH, but getting peak demands down in the state. Distributed generation incentive-again I think that was discussed earlier--It pays 30 percent for cogeneration projects. It pays up to 50 percent for photovoltaic projects, 40 percent of fuel cells. So it is promoting again distributed generation and smaller facilities with some innovation in fuel cells and photovoltaics also being an incentive. PG&E has $60 million dollars this year and will continue to have about that amount through 2004. There is about ten million dollars, actually maybe fifteen I think is the net amount going out to commercial and industrial customers in the PG&E energy efficiency program this year.

With that, I’ll turn to distributed generation. In the past, there has been more use of onsite generation for transmission and distribution reinforcement or we’ve needed new power in the system. Certainly two years ago there was a big push towards increasing the amount of generation we had. Not really as much as on a distributed generation level, but for putting in some big generators as you probably know. Merant is in the city of San Francisco and Calpine and others are in other parts of the state developing projects. With distributed generation, at least the energy service company focus has been more on the incentive-based type of projects. So 1.5 megawatts and below usually on projects that are going to provide some additional reliability for a customer or are going to maybe give that customer the ability to be self-sufficient. I know there is some discussion before also on the importance on steam usage. Co-generation is very efficient on a small level and that it is using instead of using gas to run a boiler for heating, you are actually using the waste heat from the generator for heating. So you are creating steam from that. So there are some great efficiencies there. I think that certainly that is the only thing that is incented in the state program is when it is combined heat and power where there is a use for that (unclear) steam. The larger generators are just building large generators and not necessarily have any use for the (unclear) steam.

The conclusion on distributed generation from our standpoint is there is high electric prices, there is low gas prices, there is some value of distributed generation particularly in some transmission constrained areas. Customers are screaming about reliability. They are screaming about high costs. They see distributed generation as providing a solution for both. Most generation is distributed generation technology is proven. We are also seeing a lot more vendors in the marketplace coming to California, seeing things like air permitting requirements and then coming up with solutions so there is no Nox emissions from their gen sets. So there is a lot of innovation going on in this area.

The next few slides are really here for your information just indicating that there is a very large market. There has not been much penetration of co-generation, particularly in the food sector that’s been much more at steam than Petrochem. If you take that down to the commercial level where you are looking at smaller facilities or rooftop units, it’s even lower or more limited penetration in those market places.

In distributed generation, the current opportunities we see to lower cost for customers are fuel-switching going from electricity to natural gas since gas prices are low and electric is high. Looking at generation, engineering solutions or more efficient equipment and shifting operations off peak, load profile adjustments, and we also see some savings on voltage upgrades where customers may get power at a higher level of transmission and reduce their distribution costs from a utility.

What are some of the challenges? We think it is very important with a lot of vendors running around saying that their type of equipment is the best whether this is energy efficiency frankly or distributed generation to appropriately evaluate the type of equipment so it is correctly sized for a customer given their load. At this point, we are not recommending that a customer sell back at this level to the utility because they may be paying 12 cents for electricity, but the marketplace is going to pay them too. It doesn’t make a lot of sense to do that so generally being a self-generator is important. Permitting could be a problem certainly in California, but as I said before we are finding some very innovative technologies that have reduced emissions and some no Nox emissions types of technologies. There is also a limited opportunity to pursue distributed generation because these incentives we believe have been so critical. If they are paying 30 percent of the total installed cost, we only have a few years to install distributed generation. There could be even more limitations on that if the state comes back and says we are going to take some of that money back, which is always a concern for many of those programs. We are seeing that right now in fact with the California Energy Commission where there is a lot of money put in place and contracted for peak demand reduction for a project installed this summer and last summer and a lot of that money is being taken back. We are looking at a limited window. Although most large developers are going to see value in size, so bigger is better, right now I think there is a very good market and more vendors out there who are focusing on smaller distributed generation units.

In conclusion, I hesitate on this first point because we are looking at the alternative to going completely off the grid, and the potential that there could be exit fees. So, what can you do as you are evaluating that? What can you do if that is not a feasible strategy? There are other approaches to reducing costs. You can pursue these parallel and I think it makes a lot of sense in any case in this environment. There are incentives out there for energy efficiency and distributed generation. I believe you should be as efficient as possible and then put in distributed generation so you size it appropriately. I also think that there is a lot of discussion of course about where rates are going to be over the next five years. But I think the economics are there right now for small co-generation. I think the environmental benefits of co-generation are significant and of course as we see these new technologies with low emissions, they’re even better and permitting costs should not be significant. There is also a growing number of developers. Although we have seen a decrease, not only in the ESP’s who provide a commodity only in a deregulated market, we’re also seeing a decrease in the number of energy service companies who are in our business. But, there is a growing number of I would say vendors, the companies who actually have the equipment for distributed generation or who have the more efficient appliances or more efficient control systems. That marketplace is really growing, so there’s more and more options there, some lower cost options and again, these environmentally conscious options as well.

I think the last page just has very fine type with your introduction.

Vice-Chairperson McGoldrick asked Mr. Maynor would you referee a running dispute this morning or a discussion of course regarding the maximization of energy efficiency and whether or not there is a kind of cap there where eventually you just can’t reduce it anymore and that there is a natural recurrence of replacement factors with things like refrigerators and so on. How far do you think we still could go in terms of energy efficiency?

Ms. Lowe stated my opinion is a little bit different from my colleague on my left. I think there is a huge opportunity. Part of this is from personal experience where our company has gotten into the industrial marketplace that has literally been untapped for energy efficiency when there’s all the pieces of equipment and production has taken priority for projects. We are also dealing with large commercial buildings. Again when the focus has not been energy efficiency, the focus has been making this chip or this wigit and doing it no matter what the cost. I think Mr. Schultz is right that when you look at appliances, there may not be more room to go in terms of efficiency. In the market there is very efficient equipment. Then the next question is how much of that has gotten into the market to be used by customers. I’m speaking much more to the commercial and industrial types of buildings where there are huge opportunities. In a lot of cases people have installed lighting. Maybe they have installed lighting five years ago. Now there are new lighting technologies that could be put in. Maybe they don’t have lighting controls, so those lights are very efficient, but they are never turned off. I mean again I think those are opportunities on the HVAC side adding controls, putting in more efficient equipment there is still a lot of opportunities these, and technologies are improving all of the time.

Vice-Chairperson McGoldrick asked what are those initials that you used?

Ms. Lowe stated HVAC for Heating, Ventilation, Air Conditioning. So HVAC systems, there is a lot of opportunity for improvement there at each facility level. Then, when you get into industrial process which gets very sticky in dealing with those types of customers. They don’t want you coming in and messing with their process even if you are just dealing with an engine room and it’s not going to do anything to affect how they are producing some widget. We found significant savings. That’s where we’re getting to the 30 to 40 percent cost savings on those types of projects with two to four year paybacks. So, it’s not saturated from my standpoint.

Vice-Chairperson McGoldrick stated, but I understand the short of it too is the industrial and commercial as opposed to the residential. The residential may be already more saturated.

Ms. Lowe stated, and I don’t know that. I think that Don was also commenting that we don’t have the kind of data. We know what’s there for sale, but we don’t necessarily know how many people have bought it. So, on residential, I really don’t have an idea. I think it’s certainly given the increased interest in energy that we’ve seen in California that’s been a front page issue over the past few years. I bet people are a lot more interested in seeing little appliance efficiencies now than they were three years ago.

Vice-Chairperson McGoldrick stated let me give you an example. For example, you list as one of the many items electronic ballasts and I think what they call T21 tubes that they replace the old fluorescent tubes, the old neon tubes, the skinnier ones about an inch in diameter.

Ms. Lowe stated there are T12’s and T8’s. Now there is T5’s.

Vice-Chairperson McGoldrick stated and I remember seeing people starting to install those in recent years. I know we have an energy efficiency system going on right now with our small businesses. We have about an 8 million dollar grant that some folks in the small business community were able to get and going around the small businesses around the city right now. My question is, what percentage of the commercial or industrial opportunities would you say have converted to something like electronic ballasts with T12’s or T5’s and so on? Would you venture a guess that there is less than five percent or 40/50 percent or any idea?

Ms. Lowe stated I don’t have an idea on electronic ballasts and what kind of saturation we have. I will let Don comment on this. One thing I would say one of the big struggles we have with commercial buildings installing these types of units is if they have tenants, then they are passing on the costs to their tenants. There is not necessarily an incentive in all of these high rises to put in electronic ballasts. I have always found it amusing when I would go into the PG&E building that was leased from somebody else, and you go to the floor that was the energy efficiency floor and you look everywhere and its magnetic ballasts and the T12, the more inefficient lighting. But, the tenant had no incentive to install this because it was all passed through on their lease.

Mr. Schultz stated, this goes back to the point I was making earlier. There has not been a convincing study done of where we are. That should have been done on a time-series basis so we could see the effects over time just to get some sense not only of the saturation level, but the saturation rate. That kind of data was collected on a bi-annual basis through the 80’s and into the mid 90’s and then that was stopped. There is an effort underway now to sort of redo those studies to try to get a better sense of where we are on that penetration curve for different end uses. I think the best way to approach this is through different major end uses meaning different within ratepayer classes. The large customers are a whole different thing. I don’t know. This may be right that there’s a lot more there. All I know is that the utilities have reported major savings from that industrial class, the large customers, for many, many years. I never personally believed what they said, but there have been reported savings. To say that it has been untapped, would be unfair. Also, what nobody knows is what appears to be reported by the only authority who has access to the data that there was a huge, huge reduction in consumption last year. The argument is over why and which customer classes. We don’t know the answer to that because the data to provide that which will shed light on these questions.

Commissioner Ammiano asked if somebody is doing an analysis of that? Is it available?

Mr. Schultz stated there have been comments in the media on these various aspects, and there is a study underway. There is data being collected to do some kind of studies to shed some light about what exactly did happen last year. There is widespread agreement that a huge unprecedented level of reduction of consumption statewide happened. There is not reliable data happened whether that happened more or less here versus there, large customers versus medium, whether that was a result of changes in behavior which was a one time effect, whether that was a result of investments in energy efficiency that have a long lasting effect. That is the information that is not available.

Commissioner Ammiano stated I have always contended that when PG&E was reacting to everything and saying we must conserve and that’s the answer--I always thought that was kind of patronizing because I thought California did have that awareness and actually were very conservation minded and maybe that coupled with made everyone feel more conscious about it.

Mr. Schultz stated and the core question is whether that is going to be repeated. As opposed to whether that change was a result of a recession or whether that reduction was a result of investments in significant long lasting energy efficiency products. Those are the unknowns right now.

Commissioner Ammiano stated as an FYI, my office is taking the lead on a refrigerator-replacement program for the public housing developments here in San Francisco. We are going to replace them. The current ones, which really eat a lot of energy up with energy efficient ones and the cost savings will go back. It will be 2,000 or 3,000 refrigerators. It is working out well. Except of course all the vendors are calling us now, Maytag and they want to try to pitch it to us.

Mr. Schultz asked, do you have a sense of when once you do that with the money that you are pushing out, what percentage of public housing refrigerator use will you have effected?

Commissioner Ammiano stated in San Francisco it would be 100 percent. There’s also an issue of what do we do with the old refrigerators. That’s another issue. I guess they have freon-I’m not sure. But, they just can’t be disposed of.

Dr. Ferguson stated I have a question of Commissioner McGoldrick. How would the City go about trying to assess what potential there is on a citywide basis. Is there some kind of statistical sampling you can do of the various kinds of businesses to find out. I was asking this question myself and I just don’t know the answer.

Mr. Schultz stated utilities do report to the Energy Commission, sales by both an SIC code and rate class and so on. If we had that on a geographical basis, consumption by business type, by foreign designated region, then you could whip from other information make an estimate what the load profiles are within this.

Dr. Ferguson asked, but what opportunities exist for companies like Onsite to fix it?

Mr. Schultz stated I know. But to me, starting with basic actual consumption data by those different categories provides the outer boundary.

Vice-Chairperson McGoldrick stated, I think you are just talking about scoping and sequencing a survey in terms of certain parameters that you would establish that would have trip switches in them that would revolve around the technologies available at the time at say when the buildings were constructed for one, let alone the uses for that building. You could take pre-impost 1930, pre-impost 1950, pre-impost and so on. You just go on and do some samplings and request permission to go in and visit a few places. Would that make sense to you all? Then that would give you something as opposed to a more morphis survey that is looking at a total load without accounting for the particularities and specificity regarding those actual buildings and their uses and their time of completion and occupation and so on.

Mr. Schultz stated that the kind of survey you are talking about is the right kind of survey. Those surveys were done in the past. They are in the process in the CEC as a protracted negotiation. The data, to do that survey, you have to have the total population of customers and you have to know who they are and where they are. You have to figure out who the representative is to know who to contact, That information is controlled by the utilities and always will be because they have the actual sales data. The qualifier in this, In the past those surveys have not been stratified as they say by region within the utility area. They could be, which would be a more costly survey. If you did that, you would have a sub-utility area survey information that would lead information into what the current consumption is, what the major end uses are and what already has been done based upon customer responses to the survey.

Vice-Chairperson McGoldrick stated an inventory of certificates of completion of buildings of certain types would be available with our Planning Department. That is all part of our inventory of real estate that we have public and private.

Mr. Schultz stated that would give vintage oriented. Because the state of California having Title 24 standards and that kind of thing, that would give at least another reference point to get a handle on consumption by vintage.

Ms. Lowe stated I think you can do a survey. I think it’s possible to start if you are looking at San Francisco in particular. You’ve got groups and I have talked to San Francisco BOMA for instance. When you go through BOMA and provide through them a questionnaire, and we have a standard one page questionnaire that says what do you have in your building and a checklist of type of equipment, and then you can see what the opportunity is. With BOMA, you could get a great sampling of the large commercial buildings here. Then if you wanted to get more industrial data, you could send that to a sampling of industrial customers. If you wanted to get retailers, you could send it to a sampling there. I think it’s possible and basically it’s a one page questionnaire that you need to get back. Isn’t that always the struggle? You send it out, it’s great. It will give you great information, but you have to get it back.

Mr. Maynor asked what if you were to do a survey of industrial customer or hospital for example and you concluded they would be a good candidate for a co-generation facility. It looked like some of the pay-ack periods were very short with these incentives. I understand the incentives may not always be around. If the end user did not want to pursue the project for whatever reason-let’s assume the City would want to become a Municipal Utility-would that be a project that they could finance and recoup within a short period of time? Are the savings that identifiable where you could actually work out an arrangement with the end-user that will reduce your energy bill by ten percent or will keep the benefits of having invested in this facility? Is that something that can be done?

Ms. Lowe stated absolutely, we are actually dealing with some folks on the distributed generation front where you were actually working with them on setting up another legal entity that would in essence sell power and steam to itself. So what you are doing there is acting as the operator and companies can come in, operate, and maintain that facility. It is important to realize that you are providing electricity and steam to that customer because that is really what makes the economics work, and is significant savings because instead of buying gas for heating, they are buying gas for this turbine that is also creating electricity. It is a real benefit there with the steam.

Mr. Maynor stated in effect there may be a short time period or opportunity for a City to do this if the incentives are going to go away in three or five years. That would be an ideal opportunity to invest in some of those specific opportunities that an audit may reveal in the City.

Ms. Lowe stated I would think so just because of the window of opportunity.

Dr. Ferguson stated these incentives are being paid for by the customer. It’s not free money. So, if you were to go about setting up your own utility, you have the same ability to raise this money from your customers as utilities do. Again, that is another argument of taking charge of your own destiny that you get to make the decision whether you want to still raise money from all of your customers to provide these incentives.

Ms. Lowe stated however, isn’t that more the case with energy efficiency incentives and less the case with distributed generation? I thought distributed generation was coming from more of a state pot as opposed to a direct line item on the bill.

Mr. Schultz stated it is not a line item on the bill, but it is a monthly fee that is being collected. Whether it starts to appear on the bill is up to the PUC.

Ms. Lowe stated that for distributed generation, that money is available for Municipal Utilities.

Mr. Schultz stated the Municipal Utilities were not by AB 970 ordered to create a comparable self-generation program that the legislation did order the PUC to set up.

Ms. Lowe stated I thought there was some funds available.

Mr. Schultz stated no, the municipal utilities have been left with considerable flexibility. They could use the public goods charges right now that they are collecting for anything including subsidizing self- generation or whatever else or energy efficiency or whatever else. They are given much more flexibility by statute.

Ms. Lowe stated you could certainly argue that this concept of getting the incentives that are out there now for energy efficiency and for distributed generation (as much of those funds in that are kind of paid for by San Francisco customers now). Use as much as those as possible while you are evaluating the feasibility.

Mr. Schultz stated I would urge you to focus on your own buildings, the buildings you control. In some way or another, you are going to approve or not approve projects for energy-efficiency upgrades or self-generation. Those are the ones you are going to see that are going to get approved. That money is available to help finance those. As a customer, you pay into those charges, into those funds. How long those charges will be assessed will depend on future legislation and future action of the PUC. But at least for the next four years, you are going to have access to that money to help pay for investments in energy-efficiency products and onsite self-generation products in public buildings on your own--beyond what you might want to try to do to encourage other businesses and residents to participate. That’s what you have control over right now is the electricity usage and the electricity bills of your City and County buildings.

Ms. Lowe stated and that’s what is happening down in San Diego in fact. One of the projects that I mentioned earlier. Next is the Police Department, then it is the Pool, then it is the Library. It’s all of those city-owned buildings that are being done right now in San Diego.

Mr. Maynor asked are you involved in that project?

Ms. Lowe stated, yes.

Mr. Maynor asked do you have any descriptive material that you could share with us at some point?

Ms. Lowe stated sure, I would be happy to share that. Onsite got a contract with San Diego a couple of years ago.

Vice-Chairperson McGoldrick stated you may already know. This building got renovated in recent years and was basically retrofitted in terms of high-efficiency factor. Of course, we have another building on the 500 block of Golden Gate Avenue that’s just beginning. That’s a very so-called green building and very similar to what the new Federal Building in San Francisco is going to be. I was going to ask you, and I appreciate your reminding us of all that--in terms of the public goods charge that you just referred to, you say there is a lot more flexibility in terms of the municipally-owned or publicly-owned facilities. Is that number one question, is that partly because there is an assumption that there is already probably a public goods objective and mission at work with a publicly-owned utility. Secondly, is there any kind of cap in terms of a public-goods charge? Is there any ability of the localities to actually tap into the public-goods charge? Is it only at the CPUC level that that can be done?

Ms. Lowe stated there are with the public goods charges related to energy efficiency, those are only available to customers in investor-owned utility areas.

Mr. Schultz stated no, by the same statute did expect...

Ms. Lowe stated, okay, thanks. There are programs available with municipal utilities. They typically have not been as lucrative as the ones run by PG&E, Edison and San Diego Gas and Electric in particular. There are state- imposed limits. I think I mentioned that there is $300,000 per facility and 1.5 million per corporate entity whether you look at the City of San Francisco as a corporate entity.

Mr. Schultz stated those are program design details that change every year

per order from the PUC in the case. Or, if you are talking about a municipal utility, a municipal utility itself could change those kind of program design details. Municipal utilities can also change the amount of the surcharge for any particular purpose that they want to. Those are not restricted by legislation. But to come back to your first question of why was that. My own observation is pretty simple is that it is pure politics. Municipal utilities are local government. The legislature does not thread lightly in terms of dictating things like that to local governments. That’s why they gave them a lot of flexibility because the municipal utilities and their associations at the time this was discussed came forward and said look, we’ll do these things, but don’t tell us exactly how to do it.

Vice-Chairperson McGoldrick asked is there an inventory that you know of of the institutions in San Francisco who are actually doing self generation, or is there any idea about what level of self-generation might actually be generated in San Francisco? Is there anything comparitive to other cities that are comparable to San Francisco. I know there aren’t that many. Fresno, we’ll say, San Jose, San Diego, Los Angeles, where self generation is known. Do you know what the levels are?

Mr. Schultz stated I am sure that San Jose city facilities have installed for example some PB’s. I’m quite sure I heard about that. My guess is that was partially financed by the self-generation program. If it wasn’t, it was a mistake. Lots of cities and counties are starting to do this. There have been so far media reports about these kinds of things that they are in the works or have been approved in the last six months, and we are just recently starting to see final evidence that they have happened.

Vice-Chairperson McGoldrick asked how about large public institutions like universities, colleges, and school districts? I know those are more spread out in terms of the aerial factor. But, is there any indication that there are a lot of people hopping on board with that? Is there anything in San Francisco that you know about in terms of public institutions, not just City and County of San Francisco, and then any large private users. What is the level at which self- generation is occurring with large private users?

Ms. Lowe stated there has been a few waves of looking at co-generation. In fact, Onsite started twenty years ago in the generation market. That was when there was interest in working with third parties where we had qualifying facilities that had a steam load and could produce electricity and this interest in diversification in the state of California. So, there were a lot of universities who installed co-generation. So they used the waste heat. We are talking bigger scale, say 10-50 megawatts in size, generally. What I’ve been talking about with distributed generation is a much smaller unit that is eligible for these incentives. So, for a period of time in the 80’s, you had a lot of co-generation being installed. If you look at the more recent years, until a couple of years ago, you had low electricity prices or anticipated lower electricity prices and in fact higher gas prices so it didn’t make sense to pursue generation. People were looking at feasibility studies but no one was doing it because the economics didn’t make sense. Now, high electric, low gas, and incentives--I think a lot of people are looking into this. How much is installed so far I don’t know. How much is installed in the city of San Francisco that might have been done ten to fifteen years ago, I don’t know the answer to that either. But I think interest, certainly given the marketplace and the incentives, there is considerably more interests now than there would have been two or three years ago.

Vice-Chairperson McGoldrick asked is it traditional to have to strongly motivate and incentivize these things as opposed to letting the market sort of cause the fluctuations in interest?

Ms. Lowe stated we have certainly seen a big difference when you take the payback from seven years to four or something like that. There is a dramatic impact, and it goes from a project that is absolutely not going to go to something that gets some interest. Of course, now you have this coupled with a lot of corporations who are saying they want increased reliability. They don’t want to go through what they went through two summers ago. Everyone considers that last summer was mild. The other thing that people consider, and I know I am kind of going back to an earlier discussion, but last summer was mild and there wasn’t as much demand. A lot of companies simply shut off during peak hours and they sent people home or they had them work over the weekends, and it was a disaster for some of these businesses and their relationship with their employees. They vowed, we are not going to do that again so what do we need to do now to avoid that? We are going to put in distributed generation so we can run off peak and not worry about what the prices are, have reliability and things like that. So, going through last summer with high prices, people shutting off again. A lot of people now are more interested in distributed generation I think than were before.

Dr. Ferguson stated historically, most what would be called distributed generation was used for backup generation and usually diesels. There is an enormous amount of that stuff around. It’s not the kind of technology that we’ve been talking about here today because it made no use of waste heat at all. That was a big concern last summer that people would start using that as if it were additional power for the grid. The California Resources Board because it tends to be dirty diesel stuff did develop a list of all that, but I don’t think they got down to the level of detail of small combined heat and power facilities. But, these would have to be permitted. So your Planning Department might have an idea.

Mr. Schultz stated I don’t think these small ones would need to be permitted by the City. They would need to be registered with the utility.

Dr. Ferguson asked you would need a building permit, don’t you?

Mr. Schultz stated no, I am talking about a retrofit case. I don’t think the City is involved. I could be wrong. Let’s say a small commercial building put in the rooftop PV. It would reduce their annual load by 25 percent from what you would get from traditional energy efficiency by the way. I don’t think that would require a city.

Vice-Chairperson McGoldrick stated it wouldn’t be a Planning Department issue. It would be a Department of Building Inspection issue with electrical, gas and utilities.

Mr. Schultz stated that they as well as the utility would have to sign off. What information they get would be different. Like the utility collects information on the size of it and that it has met safety standards and whatever else. I am not sure what the City would actually get. Does the City keep records on the exact location of it and what kind of business it is?

Commissioner Fellman asked, don’t we have to have that kind of review? I think under Title 24, which was developed twenty years ago, do commercial buildings also have to comply with Title 24? Any home improvement or residential construction in the City has to show what their energy use is going to be under Title 24.

Mr. Schultz stated the relationship between these kinds of products or these kinds of systems and Title 24 is a little bit murky at the moment in terms of reporting and keeping track of that kind of data.

Commissioner Fellman stated that was a question we talked about during the break. I just wanted to get a quick comment from the panelists for us on this, which is that the big upsurge in California in the late 70’s and early 80’s was because California took a proactive role in regulating requirements for new refrigerators for example.

Mr. Schultz stated for appliances in buildings.

Commissioner Fellman stated and as Elizabeth was referring to and co-generation and other kinds of renewables. We’re at a point now where over the past ten years, culminating with the AB 1890 legislation, there was a move to have the market to provide those services. We were retreating from the market model now back to a regulatory model, but the genie is out of the bottle on competition. I was going to ask the panel if they could comment on whether there is a space now for local government to do something that using the incentives, but also requiring that those incentives be used. Not just leaving it to an individual developer, but saying new buildings need to have certain kinds of energy efficiencies built into them.

Mr. Schultz stated. remember in that same era in the early 80’s there was a push to encourage local governments and some state assistance was provided by the Energy Commission and others to help local cities and counties develop local ordinances that would go beyond Title 24, which is a state standard. That applied mostly to new construction and quite exclusively new construction. But how do you define new construction has evolved. A lot of those ordinances were passed. There were even some retrofit ordinances. I’m not sure whether the city of San Francisco actually had one of those. I know Berkeley did of course.

Commissioner Fellman stated we did have one when I bought my house in 1983, and it has expired.

Mr. Schultz stated those ordinances were either repealed later or just not enforced. The opportunity is still there now. The point is the city of San Francisco and any city without being a municipal utility or anything else can adopt standards that would basically have the effect of all new homes or small commercial buildings, for example, would have to have a PV system on it or would have to have zero electric load. The technology is there. With a combination of a PV system and a fuel cell, for example, there shouldn’t need any new load on the grid with this. That in conjunction with meeting Title 24 efficiency standards shouldn’t be that hard. It shouldn’t add that much to the cost of the building and the technologies there. That is something that the city can do that goes beyond what state standards would be and you could do that. In other words it wouldn’t add to the load grid of this whole area and further aggravate and it would help to contribute to the reduction in the vulnerabilities that this region would face. All of those buildings that have those kinds of products are isolated from those effects.

Vice-Chairperson McGoldrick asked are there jurisdictions where that’s a requirement in some very low density including single-family home levels or two-three unit places?

Mr. Schultz stated those are all possibilities. Those can be done at the state level.

Vice-Chairperson McGoldrick asked, is there any place where it has actually been implemented that you know of?

Mr. Schultz stated not that I am aware of. I think it’s under discussion or at least under consideration.

Vice-Chairperson McGoldrick asked, is that under discussion at the CPUC or with building standards?

Mr. Schultz stated there are three ways in which that could occur legally. One is the CEC which governs Title 24 standards that applies to all new... But Title 24 does not apply to new industrial. It applies to basically commercial and residential, including multi-family. The CEC could upgrade the standards that would have the effect of requiring either PV or more on all new residential single-family homes or on all new multi-family homes. They would do it by commercial building type. For each commercial building type, they have different Title 24 standards, but a wide range of them. These new technologies could be there at a statewide level. The state could do that. Or each city or county has the authority to go beyond the state standards, which is a minimum and adopt basically an ordinance that would have that same effect. The other way that that could happen is it could happen through the PUC--the PUC because of its oversight of the investor-owned utilities basically through line extension regulations. Whenever there is a new building built, they have to put a new line in there. There is a cost assessed. The cost for that line extension could reflect or could be changed in such a way that it could become an economic imperative to put in PV systems as opposed to putting in or paying for that kind of... Or they could give a subsidized line extension so the building could have the grid as standby if they put in those things.

Vice-Chairperson McGoldrick asked what would be the likelihood of the last, the CPUC?

Mr. Schultz stated I think both the CEC and the PUC have their hands full for awhile. So if you want to see it happen locally, you might just want to do it.

Vice-Chairperson McGoldrick stated there are a lot of other variable factors and constraints on that that would have to do with everything from housing to at least initial affordability, not duration affordability.

Mr. Schultz stated that these are considerations that should be looked at locally or regionally, not necessarily statewide.

Ms. Lowe stated I just want to comment on the idea of being n essence a distribution channel for incentives that would promote these kinds of technologies or projects. I think there is definitely a role for cities to be that avenue to their areas of influence. We as a Committee have talked to the city of San Jose before about that helping them get incentives out to their customers. They now are trying to get incentives directly from the state that they can allocate to customers. So, there is definitely a role where you all are closer. We have been in the same situation as a company where we are working with the Energy Commission because we are close to food and agricultural customers so we have money that we directly allocate to those customers. I believe you are very well positioned to do that.

Mr. Maynor stated we have no other questions from the public.

Commissioner Ammiano stated I would like to thank the members of the panel for their time and expertise.

Chairperson Gonzalez stated I would like to join Commissioner Ammiano in thanking the invited speakers for coming out today. Mr. Maynor, my thought would be that we would take general public comment and close the meeting. If you could confer with the individual members regarding the next meeting dates informally rather than publicly on the record. We are all interested in continuing to have these hearings, and they have been very productive.

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

3. Public Comment

No Public comment.

Public Comment closed.

4. Adjournment

The public hearing of the San Francisco Local Agency Formation Commission adjourned at 12:48 p.m.

p>