Gloria L. Young, Executive Officer stated that at the November 14th meeting, there was discussion about the possibility of having a panel discussion. Ms. Young asked for the Commission’s clarification as to when the panel discussion would occur and what the forum would be.
Mr. Ken Mellor, R. W. Beck stated that since the last meeting, they had been working with the data provided by PG&E. In some regards the data was helpful and in some regards there was data missing. They have requested other data that would fill in the gap and have received a packet of data yesterday that helps in one sense. He did not feel that any other data was necessary to complete the report. They have reviewed the comments received from PG&E, Mr. Ash, and Legal Counsel and would be incorporating a number of the comments into the report. Several of the comments are at a level of detail that was never anticipated for this high-level of a study. They would still like better data, but are not confident of the results. Municipal load data was received from PG&E yesterday. They have not had a chance to go through the data received to see if it is consistent with the rest of the data. Hopefully, the data received will be sufficient to move ahead.
One of the areas they are having major difficulty in is the area of the rate levels. Inconsistent data is coming out of the Energy Commission and inconsistent expectations are coming from PG&E. There is an expectation of lower rates in 2004, but what they can’t tell is what would happen from 2004 on. PG&E is unable to provide them with any expectation of what is going to happen beyond 2004. That is going to be an area where there continues to be questions. They are going to have to do a sensitivity analysis to get the best kind of answer that the Commission needs for further action.
All comments received to date have been reviewed. They are here today to listen to additional comments and PG&E’s presentation.
Mr. David Rubin, Director, Service Analysis, PG&E made a presentation in response to R. W. Beck’s comments provided at the November 14, 2003 public hearing in response to PG&E’s critique of the R. W. Beck Draft Report. The following topics/slides were discussed: 1) Explanation of Study’s overstatement of revenues; 2) Overstated revenues are not "likely offset by equally higher costs"; 3) R. W. Beck’s rebuttal claims…Public filings identify a rate increase in 2004; 4) Fact: R. W. Beck misunderstands PG&E’s public filings; and 5) Results of Sensitivities. The presentation is on file and available at the Clerk of the Board’s Office, Room 244, City Hall.
Vice-Chairperson Commissioner McGoldrick asked Mr. Rubin to explain what performing sensitivities analysis means in laymen’s terms.
Mr. Rubin stated that performing sensitivities analysis means that you take a look at the financial model that you have set up in order to try to see whether in fact takeover produces financially attractive results. Once you have established a financial model for purposes of determining whether a particular course of action is desirable, it behooves you to change some of your input assumptions, things that you can take a guess at, but don’t know for certainty to see what would happen if your guess is wrong. You can do that in a variety of different ways. But generally speaking it involves what is called a sensitivity run. That means how sensitive is the output to a change in the input. The input in this case might be the operations and maintenance expense in running a distribution system or the rates that would be charged to customers on the system or the cost of power prices. In each one of these cases, you can make a different assumption to test if this would really be a robust analysis, or if events don’t play out in the way I assume, am I going to regret having made this particular decision.
Vice-Chairperson Commissioner McGoldrick asked if in other words, the variability of the input creates a predictability factor which one considers causality will create a result in differentiation from one model to the next. Is that correct?
Mr. Rubin stated that was correct.
Public Comment
Sean Randolph, President of the Bay Area Economic Forum, public private partnership of local governments, corporations, university leaders and laborers sponsored by Bay Area Council and ABAG. They are pleased to have a chance to be able to comment on the R. W. Beck report today. Since the beginning of the Energy Crisis in California about two and a half years ago, they’ve done a lot of analysis on electricity in the state as well as locally including the issue of what are the economics of creating new municipal utilities for electrical power. The most recent report that they did on the subject approximately a year ago was called The Economics of Electric System Municipalization Infrastructure Acquisition and Consumer Rates, October 2002. This report had some findings that applied to the immediate case being discussed today.
One was that when there is a public takeover of an electrical system, the valuation of the assets such as the distribution system will change from book value to the market price that has to be paid to acquire the asset. This is invariably going to be higher than the book value. It will correspondingly increase the financial cost.
The second factor that would apply to the study is that they found the key cost components that would determine whether a new municipal utilities’ rates would be higher than lower than that of the investor-owned utility are basically: 1) the income tax exemption and the debt only capital structure that is available to cities; 2) the premium that is paid over book to acquire the distribution assets which will increase rates paid by the municipal utilities customers relative to those of the IOU; and 3) the municipal utilities cost of generating or purchasing power. They found that all the other cost components that go into the price mix are relatively minor in their impact after those three determinants.
If you look at how these particular factors play out in any City, the Economic Forum developed a cost of service comparative model. The model found that if a municipal utility in San Francisco or any other city could match the investor-owned utilities power acquisition cost on the market, it could then meet or improve on the IOU’s consumer rates only if the acquisition cost to acquire the lines was less than or equal to 176 percent of book value. Higher or lower power acquisition costs would either move that figure up or down.
Commissioner Schmeltzer asked Mr. Mellor if he was familiar with the study that the last speaker discussed.
Mr. Mellor stated that he was not and would be interested in looking at the study.
Commissioner Schmeltzer responded to Mr. Mellor’s comment earlier about the level of detail and the back and forth and data requests. There has been a lot of good points raised about the study and there has been a lot of good data that has come out of it. PG&E’s comments on the report is helpful information and things that should be taken into account as we move towards a final report. She agrees that she does not see a point in the back and forth continuing.
Mr. Mellor agreed with Commissioner Schmeltzer’s comments. They understand that revenues were overestimated. They will go back and make the corrections that they need to make. The trouble is that they used data that was presented to the San Francisco Public Utilities Commission (SFPUC) for a different purpose. They either misinterpreted the data or the presentation of that data has changed. In any event, the new data that they have received says that they estimated too high revenues, and that will be fixed. They still have problems in that the numbers that they have that are presented from two or three databases in PG&E are inconsistent. They think they can sit down and address that and come up with the best number they can and take responsibility for dealing with those inconsistencies. He does not think they can go back and get all of the figures to match.
Commissioner Schmeltzer stated what has been asked for is an analysis and the more data, information and comments that you have to build into that is helpful in clarifying where the points of contention are. I don’t expect that everybody will be in agreement on every point.
Mr. Mellor stated that he thinks what PG&E has presented is helpful in coming up with a greater level of accuracy in their projections.
Alternate Commissioner Fellman asked Mr. Mellor if he had any comments on PG&E’s presentation today.
Mr. Mellor stated that PG&E presented information as to why the revenue projections that R. W. Beck had were wrong. R. W. Beck has their data and will take that into account. They may not always agree with it, but it will markedly reduce the revenue projections that they use. They have presented some graphical information showing where that falls. They need to go back now and look at that. The second issue they presented was the statement that there were offsets, that their revenues were too high, then the costs were also too high. If you reduce sales, then you also reduce the costs of generation to serve those sales. They will run the model again and that will determine what the new level of costs is. He is guessing that they are right. It is not a full offset. If it is as small of an offset as they have said, they don’t know. They have not rerun the model because they have not had the data and part of the data that was missing was the data that was received yesterday. Once all that is put into place, he thinks there will be a pretty good sense of the revenue stream. They still have some confusion over their direct access sales and will be making some estimates there because the data that was presented isn’t consistent always, and is presented in a way that is very difficult to comprehend. With that, they need to stop going back and forth. They need to take what they have. It will result in substantially reduced sales and would also result in substantially reduced costs. It will not be a full offset; he agrees with PG&E. On those matters, they are in agreement.
On the third matter that Mr. Rubin talked about that had to do with sensitivity analysis, R. W. Beck will do those. There is a more information in the packet that they presented that they did not present here. He has significant disagreements that he needs to review and respond to. As far as PG&E’s presentation, he does not think they are in disagreement.
Alternate Commissioner Fellman stated that PG&E had requested that R. W. Beck enter into a nondisclosure agreement with respect to the data.
R. W. Beck stated they would not sign PG&E’s agreement because they are at a point now that if they are not going to keep going after more data, they don’t need to sign their agreement.
Alternate Commissioner Fellman asked how much time it would take to do a further analysis.
R. W. Beck stated they needed about four weeks.
Vice-Chairperson Commissioner McGoldrick asked Mr. Mellor about the timeframe required to implement a community aggregation plan. The report indicated it would take four to six months. He asked if Mr. Mellor thought the numbers would change their recommendation on the Draft Electric Financial Feasibility Study.
Mr. Mellor stated that one of the commentaries, Mr. Ash asked that they present in this report a comparison of the economic benefits of full municipalization versus community aggregation. They will include in their final report a brief comparison that will bring the two in perspective. It gives you the opportunity to look at the costs and risks associated with going one way or the other.
As far as community aggregation, they still don’t have information from the California Public Utilities Commission (CPUC) regarding the exit fees that will be paid by those customers involved in community aggregation. Nor have they put out the rules. Those are going to be important to your decision as to whether it makes sense to go ahead. There are a lot of things going on that are dependent on other bodies and other jurisdictions to help you make your decisions. At the same time, you can be the leader and go out and push on community aggregation to put pressure on the CPUC to move forward with the job of setting the rules for community aggregation, particularly the exit fees. He thinks that if he were sitting in the Commission’s chair, he would like to see this report and compare the economic benefits of this alternative versus the community aggregation alternatives.
Vice-Chairperson Commissioner McGoldrick asked if the exit fees are shorthand for those PG&E costs that are reasonably attributable.
Mr. Mellor stated the exit fees are the responsibilities of existing customers to pay for State Department of Water Resources power purchases, for debts that were incurred by the state during a time that we had an energy crisis. They don’t want new customers to leave PG&E or another investor-owned utility and escape their responsibility to make those repayments.
Ms. Young discussed dates for the next possible SFLAFCo meetings given the fact that R. W. Beck had indicated that they would need approximately four weeks. She suggested January 16 or 23rd for the next meeting. Unless she hears differently, January 16th will be the date for the next meeting. At the January 16th meeting, if we are insured that R. W. Beck would be able to come back with the analysis, that would be the meeting that would include a panel. She requested clarification on the Commission’s intent around a panel. Was it strictly to have PG&E and R. W. Beck representatives, or whether there were other thoughts related to a panel?
Chairperson Commissioner Gonzalez stated that the Commission should hold off on the panel until a presentation is made on January 16th.
Alternate Commissioner Fellman asked if the purpose of the next meeting was to have R. W. Beck present the final report and then there would be another meeting to vote on whether we accept the final report. Is that correct?
Ms. Young and Chairperson Commissioner Gonzalez stated that was correct.
Commissioner Schmeltzer stated with that in mind, maybe we could set the meeting for a week later than the report is presented so there is time to review it and ask questions before voting on a final.
Ms. Young stated that would take it to January 23rd.