Discussion on Elements for Inclusion in a Request for Proposal (RFP) for an Electric Valuation Study (Discussion and Action Item).
Ms. Young stated that the LAFCO received the potential elements for inclusion in an RFP for an Electric Valuation Study. In preparing the RFP, several RFP’s were reviewed, conferred with legal counsel, members of the Commission, and the American Power Association.
Ms. Nancy Miller, Legal Counsel introduced Arlen Orchard, General Counsel from the Sacramento Municipal Utility District (SMUD) to talk about elements and issues they were confronted with. SMUD is in the process of expanding their jurisdiction to include a portion of another county that is currently served by PG&E. They recently published an RFP proposal.
Transcription of Mr. Orchard’s presentation:
Arlen Orchard, General Counsel, SMUD stated that he would discuss background information on SMUD. We are a publicly owned agency, a political subdivision of the State of California. We are governed by a seven-member elected Board of Directors. Currently our service territory encompasses all of Sacramento County and a small part of Placer County. Approximately a little more than a year ago we were approached by several jurisdictions in Yolo County including the cities of Davis, West Sacramento, and Woodland to consider annexing all or a portion of Yolo County into our service territory, an area currently served by PG&E. There were a number of public hearings held by our Board as well as the Boards of the other jurisdictions, and we did an internal pre-feasibility study to determine, as LAFCo has, whether it was worth considering taking the next steps and doing an entire feasibility study.
In that pre-feasibility study, we looked at a high level as to whether there were any technical concerns with regard to serving the territory in terms of supplying energy to that area. We also looked at whether there were any high-level concerns that would have an impact to our existing customers and to our type facilities such as our call center, etc. We determined after that first look that it appeared that it was technically feasible and it appeared at first economically feasible to consider and proceed. We spent about a three- to four-month period developing a request for proposal. Our situation may be a little different that the City and County of San Francisco in that we are an existing utility and have a fair amount of internal expertise in a number of areas. Our RFP was not all encompassing and we specifically did the study believing it was more appropriate. But, the bulk of it included the RFP. The RFP went out in October. We did some site visits etc. with the potential proposers. We got proposals back at the end of January and conducted about a six-week evaluation and presented the results of that evaluation to the Board yesterday indicating we awarded the contract to R. W. Beck.
Within the RFP itself, there were a number of cost categories that were looked at. We wanted to consider initial acquisition costs, ongoing O&M costs, debt service costs, severance costs which are costs that we would pay PG&E for disrupting their system essentially. So, if certain transmission facilities were acquired and certain things had to be rerouted, then we would be responsible for those costs. Interconnection costs with regard to the Independent System Operator System. Additionally, our system is configured and designed differently than PG&E’s so there were upgrade costs in order to meet our operating criteria, which is essentially a more reliable system since we have a loop-flow system. In addition exit fees were looked at. Those are the broad cost categories that were included in the RFP for consideration. We also asked in the RFP to consider three scenarios which are not applicable to LAFCo’s situation. We asked them to look at annexation of West Sacramento alone, annexation of West Sacramento and the city of Davis alone, and then the annexation of all three jurisdictions together.
In addition, we broke the RFP up into three broad categories. The first was to consider transmission issues. Those types of things were to consider the identification of those facilities, what the optimal configuration or reconfiguration of those facilities would be, what the system separation or severance costs would be and then the valuation of the transmission assets. When you are undertaking a condemnation proceeding as you are aware, there is the obligation of the public agency to compensate the party.
There are a number of ways that you can value those assets. There are four ways that are typically used. We are having our consultant evaluate all four scenarios because that is the band width for performing the economic analysis. The first is the net book value which is looking at the full depreciated cost that is the one anyone who is condemning any property looks for because that is the cheapest. There is replacement cost new less depreciation which is what it would cost to build the system now less the depreciation of the existing system. That is the one typically that investor-owned utilities will argue for because that yields the highest return for them. There is a capitalized net income approach which is a revenue-based approach which puts it somewhere in between the two. There is another one called a comparable sales approach where you look at the acquisition of other similar systems.
Commissioner Ammiano asked if labor costs are involved because PG&E has their own union.
Mr. Orchard stated that no, because we are not annexing a really large area there will probably be minimal impact to either PG&E’s workforce or our workforce. In fact the same unions that represent PG&E’s field forces represent ours, that’s the IBEW. To the extent there are additional openings, we would absorb those workers into our workforce.
Commissioner Ammiano asked if SMUD was going to purchase the transmission lines that PG&E uses currently.
Mr. Orchard stated we would be considering whether it makes sense to purchase those as a part of that analysis. I am unfamiliar with the San Francisco area’s configuration of your system, so I am not sure whether transmission facilities would be impacted.
Commissioner Ammiano asked if eminent domain plays a part.
Mr. Orchard stated yes, that is in the acquisition. Once annexation is approved, that is the next step to exercise eminent domain powers.
Commissioner Ammiano asked if SMUD just deals with utilities, not cable or garbage.
Mr. Orchard stated we are solely an electricity provider in the area.
Continuation of Mr. Orchard’s presentation: In addition to the transmission system, we also needed to look at start up costs in case the configuration resulted in us needing to construct new transmission. New transmission tends to be relatively expensive and difficult from a siding standpoint and normally does pose some environmental challenges. In addition to the transmission system, we needed to perform a similar type of analysis with the distribution systems that we would be acquiring and probably the largest single impact there is any configuration or upgrades that would need to be done to PG&E’s aging facility to bring it into compliance with our operating standards. I understand from having read through the pre-feasibility study, that is an issue that you will also be facing.
Beyond the physical assets themselves, a key part of the economic analysis that would be done is to look at load and revenue projections. We are asking R. W. Beck to develop customer-mixed profiles, load profiles, estimate load growth over the next twenty years, and project revenues by rate classes over the next twenty years to determine whether economically this is a feasible venture for current ratepayers and our potential new ratepayers to undertake. In addition, part of that would be to develop rate schedules that take our existing rate schedules and compare them directly to PG&E’s rate schedules folding in all of those costs to determine the ultimate impact on each rate class. We will be looking at the residential ratepayer class, the small commercial, agricultural etc. to determine whether there are any potential negative impacts on any specific rate class. That is the broad general scope of the RFP. We have provided your staff with a copy of the RFP that went out and hopefully that will be helpful in developing your own RFP.
Internally, there were additional things for staff to consider as part of an adjunct to that feasibility study. Those areas were energy supply issues. How are we going to get the electrons, where are we going to get them from and what will that mix look like? Are there any challenges given that there are green volatility in the natural gas market which is expected to continue for a number of years? Impacts to our call center? Impacts if any to our administrative services and how the increased burden on staff would be and how it would be absorbed into our current services? Impacts to our field forces--whether we need to augment those in order to maintain reliability not only for our current customers, but for our potential new customers. Overall reliability of the system--whether there would be any potential impacts there. Also the final thing that we reserved to staff was the consideration of the legal process related to annexation and acquisition of the system and moving through the Sacramento County LAFCo and the elections that would be required. That is the overview of the RFP.
I was asked to talk a little bit about the evaluation criteria that we employed if that would be helpful. We did not look strictly at price. We have a program which is our equal opportunity business program and local compliance amounted to 10 percent of the evaluation criteria. The next evaluation criteria were company attributes and services. That is specifically to look at the experience and results that the company, the proposer, has achieved in these areas. Before we were actually looking for companies that have worked for both investor-owned utilities and public organizations in the past doing annexation studies or a broad breadth of experience in doing some very large annexation studies in the past. That accounted for another ten percent of the evaluation criteria. Thirty percent of the evaluation criteria was to look specifically at the team that was being brought to the table and the team in each category looking at things like valuation and transmission planning, economists, etc. That accounted for thirty percent of the evaluation criteria. Another thirty percent was the methodology that would be employed by the team, valuation and analysis type areas and finally, price and compliance with our commercial terms was 20 percent of the criteria.
As you can see, we really weighed the evaluation much more heavily on technical expertise and past experience rather than price. The reason we did that was we felt it was very important that whoever was chosen and the study ultimately developed would have a high degree of credibility both to give our elected officials and the elected officials in the other jurisdictions confidence and good information so they could make a decision, but ultimately it was most important to have a high degree of credibility for the electorate who would be asked to vote for this issue. That is why we weighted those areas much more heavily.
The one thing I would add in selecting an ultimate contractor is that obviously putting together a very tight well defined RFP with the expectations and the requirements is essential. Equally and even more important is the team that will evaluate those proposals. I would urge you to consider the need for subject matter expertise in a number of areas because the valuations are very specialized. Transmission planning is very specialized and folks who generally might be evaluating the normal and typical RFP probably do not have the expertise necessary to evaluate. Consider people who have expertise in transmission and distribution planning, operations, with rates and pricing, customer service, and economic analysis. Include load forecast as well as energy supply to be part of the evaluation team in determining the best contractor for the job if in fact you decide to move forward.
Commissioner Schmeltzer asked what the price was of the winning RFP.
Mr. Orchard stated that the final contract number was approximately $499,000 which was the award for the study. The work will begin around April 1st. The study is expected to run probably through the first part of November. We are planning at this time tentatively a presentation to our Board and the Boards of the other jurisdictions probably late November or early December. The price range is in those evaluations which were deemed a responsive range from the high $300,000 to just about $500,000. That is consistent with our initial assessment of what we expected it to come in at.
Commissioner Schmeltzer asked for the size of the service area that is being annexed. Customer wise?
Mr. Orchard stated it is nowhere near the size of San Francisco from a customer account, but bigger from a geographic standpoint. The total population for the three cities is approximately 150,000 people. Woodland is the furthest away from Sacramento County and that is about 18 miles away.
Commissioner Fellman asked what the Board’s goal for the study results is. How will you be using the results of the study?
Mr. Orchard stated the Board’s goal is to have the best available information in order for them to continue to consider whether annexation makes sense, not only from our existing ratepayer owners, but also from our other jurisdictions. These are things that our Board will be looking at beyond just the hard economics. There are some qualitative measures that come into play. There are things like is reliability enhanced? Is customer service impacts to our customers and potential other customers—are there improvements? Local control will obviously be an issue and expressed as a benefit that the other jurisdictions see. From that standpoint, the thing they are most concerned about is if there is a reflection of community values. SMUD places a high degree of importance upon renewable resources. Those are some of the qualitative considerations our Board and the other jurisdictions will look at. The purpose of the study is to have the best available information.
Commissioner Fellman asked going into the study, your pre-feasibility study said it looked like it would be a good idea, but it is not a foregone conclusion at this point?
Mr. Orchard stated that was correct. Our pre-feasibility study indicated that it was potentially a good idea, but that further study was needed so it was worthwhile taking that next step knowing there were a lot of uncertainties that would be uncovered and addressed in the full feasibility study.
Commissioner Fellman asked if the City of Sacramento has any impact on the SMUD Board? You mentioned that you would be going through the Sacramento LAFCo. Do you also have to go down to those local jurisdictions?
Mr. Orchard stated that SMUD is an independent agency with independent authority that derives from legislation called the Municipal Utility District Act and that is where the Board’s powers derive from. While we work cooperatively with the City and County and other jurisdictions in our area, we are not subject to any governance by any other agency in that area. But we are subject to the LAFCo process with regard to the determination whether annexation is in the best interests of all the parties. We will be working through that LAFCo process should our Board and the other elected Boards choose to proceed with annexation after the feasibility study.
Commissioner Fellman asked with respect to the elected Boards, is it the Board of Supervisors or are there are separate Public Utility Boards that have been formed in each of these jurisdictions?
Mr. Orchard stated that the city of Davis actually looked at one point in forming a Municipal Utility District or doing a City utility and decided because of their small size it was not economically feasible to do so. That is the genesis of their approaching us. If they were to be annexed into our territory, our Board would be redistricted in order to provide representation for those jurisdictions also.
Transcription of Mr. Smeloff’s presentation:
Ed Smeloff, Assistant General Manager, San Francisco Public Utilities Commission stated that your staff has sent over to me an outline of the Elements for Request for Proposal to review. I would like to provide you with general comments. In comparison with the SMUD organization, there is considerably more internal technical expertise in Sacramento at SMUD than we currently have at the SFPUC. This draft outline includes a variety of functional analyses that is being suggested to be done. Some of that falls into what I would call an appraisal, which is what R. W. Beck recommended as the next sequential step for moving forward on the acquisition of the PG&E system.
So there are several elements here that relate to an appraisal and I will just note what those are. The first is really fundamentally identifying all of the properties and coming up with a valuation of each of those properties. As Mr. Orchard mentioned, there are several methodologies for determining what the acquisition cost is for them. I think you will need as part of the appraisal process to think through which of those approaches you want to take, whether you want to ask the consultant to do multiple approaches such as the original book value minus depreciation versus new minus depreciation or capitalized income approach. I think all of those approaches would be valuable for the Commission and the Board of Supervisors to understand as you go forward to see what the relative range of acquisition costs could be under those different approaches.
It is important at this point in time if you want to go forward to determine what if any severance costs there is going to be associated with acquisition of the system. A key decision that will need to be made is whether the City and County of San Francisco want to acquire the transmission assets and the distribution assets in San Francisco or to acquire just the distribution system. There is a substantial transmission system at 115Kv and 230Kv in San Francisco, 13 underground transmission lines, and 5 major substations. That will be a substantial component of any acquisition. To move into the business of providing electricity it is not necessary to acquire the transmission system. You could acquire the distribution system at lower voltages. You need to make a key decision when you go out with the RFP what properties you are going to conduct an appraisal on.
Your fourth point, which is evaluation of the cost and benefits of the acquisition of the system, is what has already been done by R. W. Beck in their preliminary analysis? Obviously, once you have gotten a more detailed cost estimate of the system, you will want to do a follow-up and a more detailed cost benefit economic analysis. The question you might want to consider is do you want to roll that analysis into an RFP for an appraisal, or do you want to then follow up afterwards and do a economic analysis once you have gotten the numbers in on the cost of the system. You have a whole variety of other activities in this outline, which fall outside of what I would call the appraisal process. You have a number of issues related to legal and regulatory issues such as identify any FERC issues, identify stranded costs. In those areas rather than having an appraiser or a firm that does engineering analysis, you probably want to bring in resources that have the appropriate legal expertise.
Vice-Chairperson Commissioner McGoldrick asked Mr. Smeloff to repeat what those other legal and regulatory issues are.
Mr. Smeloff stated you have identified stranded costs, which is an issue related to regulatory authority. Are there going to be exit fees? Are there going to be stranded costs? You would need to bring in expertise that can look at those issues both at FERC and at the California Public Utilities Commission (CPUC). You have a broad general category. You might want to ask the City Attorney to comment on this. Identify any FERC issues. As an aside, maybe Mr. Orchard can comment on this. There may be some legal analysis that you want to keep protected and maintain attorney-client privilege on and other issues that relate to an RFP that you might be comfortable having that information out in the public domain or ask your own City Attorney counsel on that issue.
You have addressed potential legal consequences requiring PG&E transmission and distribution system. It is obviously a very different question than the question of a cost estimate of that system. You have other issues that really relate to organizational structure. What is the appropriate organizational structure for a utility in San Francisco? That is a question that goes beyond the scope of an appraisal. You need to think through and I can assist you on this—the sequence of these activities. If you want to go forward, what are the crucial steps in the evaluation process that you need to take? Obviously the next step as recommended by Beck is to move forward with an appraisal of PG&E’s properties.
Commissioner Hall stated that you are talking about four or five steps that need to be taken where the costs are unidentified at this time. In order to get a complete true bonified package that would allow this group or some other body to make a decision. That is what I was saying last time. I think what you are laying out for us today is proof of that. I would love to have a study that would analyze what you are saying. I hate putting studies on top of studies, but I can that this type of thing, the four or five elements that you mentioned require a separate look with money identified to each phase, legal, stranded benefits and then we could make a decision to say "at that time, let’s move ahead or let’s not go in that direction, let’s perfect what we had already done."
Mr. Smeloff stated, I concur with your observation. You need to do an appraisal of acquiring the system. You need to do an estimate of what the severance costs are, any additional improvements to the PG&E transmission and distribution system to have it function as an integrated system in San Francisco. A whole separate issue that you are considering as a part of community choice aggregation is what is the cost and the portfolio of electricity supplies that you are going to use to provide that service. You are looking at that separately. What is the cost of the start-up of assembling the appropriate personnel?
Commissioner Hall stated that it is not just the thought can we acquire the transmission and distribution. It’s not that simple. There are about five different things that we have to look at. If we leave that uncovered, we are leaving ourselves vulnerable along the path of public power. That is the original goal here.
Mr. Smeloff stated that you should take it sequentially. You may find there is a fatal flaw in just the oath containing the distribution system. It will be an interesting endeavor identifying what the value of the downtown network system is going to be. If you are interested as a matter of policy in proceeding forward, that would be the next logical step to do the appraisal of the distribution and transmission system as was recommended by R. W. Beck. The critical policy question is if the City were to go into business, do you want to be in the transmission business or just the distribution business.
Chairperson Commissioner Gonzalez asked Ms. Young to give the Commission a sense of how to proceed. It seems that the RFP can be put together and presented to the Commissioners at a future meeting and we can make a decision as to what should be included and what should not be included and take steps from there.
Ms. Young stated the process for developing the elements including sending a copy to Mr. Smeloff was to also get input from the American Public Power Association (APPA) as well as to review several of the RFP’s that were brought to my attention from other consultants. I agree with Mr. Orchard’s comments as to when this process came to bear, it would be important for us to have a team of experts sit on a panel as we did with the Energy Feasibility Study. There was a team of three consultants taking part in the RFP to do an Energy Services Study. I agree to bring back more information after taking into consideration comments made at today’s meeting. Mr. Smeloff mentioned from the legal issues involved in this process and also from talking to our legal counsel, Ms. Miller, we would also involve the attorneys that work with PUC in terms of looking at the process. In talking to Commissioner Schmeltzer, it was reiterated that the first steps would be the appraisal. We could also phase this process and bring you back that information at the next Commission meeting.
Chairperson Commissioner Gonzalez agreed and then at that time the Commissioners could take a position as to what should be included or not included.
It was agreed to tentatively schedule the next meeting on April 16th.
Public Comment
Mr. Francisco DaCosta stated that he had listened to Mr. Smeloff’s comments carefully and they have had several meetings with the community-based organizations, but what has been left out besides some of the critical elements like the appraisal, the distribution, is how are we going to deal with the old power plants? The two power plants do play a role and are linked with the distribution and the transmission. The Jefferson Martin transmission line and its impact have not been addressed. The environmental issues especially linked to the Southeast Sector. The idea that the SFPUC and the City are pushing for the peakers. That has not been addressed. The real issues as to who is going to operate it and manage it when it comes to the Unions. Most importantly, the money. Suppose PG&E demands a billion dollars. Do we have the money? Right now we have a deficit of $350,000,000 plus. How are we going to address that? Initially, he suggested that some monies have been set aside for LAFCo. We need every dollar so that some studies can be done. He had pleaded with LAFCo to have a panel discussion to hear about it and his request has been neglected. CEO’s need to play an important role on the various flowcharts and the distribution. Mr. Smeloff has brought CAL ISO and PG&E to us. He recommended that Mr. Smeloff tell this body if those CEO discussions were truthful.
Mr. Smeloff stated that if you are going to do an appraisal, you do want to make a decision of whether you want to acquire the generation in the City. My assumption was that you did not. That (1) Hunter’s Point is going to be shut down in the near future so that it is not going to be an operating power plant and (2) the power plant in Potrero is already 38 years old, the main one and the other three peaking plants are 27 years old. If it is in the City’s interest to acquire the existing generation, then that would certainly impact the design of your RFP. You do need to make a policy decision about the acquisition of generation.
On the other issues I will acknowledge we have had somewhere in the neighborhood of 15 meetings with a variety of community-based organizations such as the ISO, PG&E, CPUC staff, Energy Commission staff to better understand as a community what the long-term needs are for both transmission, generation and demand-site programs for San Francisco and the greater Bay Area. It’s been fruitful. It’s been a good education process. After this meeting, I am going to try to produce a consensus statement for the work we have done over the last year or so.
On the Jefferson Martin, that is outside of the scope of your study here. Jefferson Martin is a proposed transmission line that PG&E intends to build in San Mateo County. It will improve the flow of electricity if other things occur as well in terms of improvement of the transmission system in San Francisco. But, it’s not something that has been built so it is not something you would be thinking of acquiring. It is also something outside of San Francisco County.
Chairperson Commissioner Gonzalez stated that it seems that the rights to take over construction of that line would be relevant.
Mr. Smeloff stated what would be more relevant—San Francisco actually owns a high voltage transmission system that comes down from Moccasin up in the foothills and terminates at the large Newark substation. To be able to deliver our hydro-electric power into the City having transmission lines to go from Newark across the Bay up the peninsula to the large Martin substation in Daly City would be a valuable resource and something people have discussed building many years ago. Building high voltage overhead transmission lines in a dense urban area, which the Bay Area is, is very controversial and would be very expensive. The Jefferson Martin transmission line is estimated to cost about $200,000,000. It’s a 26-mile line largely on SFPUC watershed property.
This item has been continued tentatively for April 16th.