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HomeMy WebLinkAbout2003-10-09 (2)MINUTES ADJOURNED JOINT MEETING OF THE PALM DESERT CITY COUNCIL AND PALM DESERT REDEVELOPMENT AGENCY THURSDAY, OCTOBER 9, 2003 — 2:00 P.M. ADMINISTRATIVE CONFERENCE ROOM I. CALL TO ORDER Mayor/Chairman Benson convened the meeting at 2:01 p.m. II. ROLL CALL Present: Councilman/Member Buford A. Crites Councilman/Member Jim Ferguson Councilman/Member Richard S. Kelly Mayor Pro TemNice Chairman Robert A. Spiegel Mayor/Chairman Jean M. Benson Also Present: Carlos L. Ortega, City Manager/RDA Executive Director David J. Erwin, City Attorney Sheila R. Gilligan, ACM for Community Services Homer Croy, ACM for Development Services Justin McCarthy, ACM for Redevelopment Rachelle D. Klassen, City Clerk Paul S. Gibson, Director of Finance/City Treasurer Robert P. Kohn, Director of Special Programs Steve Smith, Planning Manager III. ORAL COMMUNICATIONS None IV. NEW BUSINESS A. CONSIDERATION OF FEASIBILITY STUDY FOR PALM DESERT "SPOT" MUNICIPAL UTILITY. Mr. Kohn noted the staff report and Feasibility Study provided to Council/Agency Members prior to this meeting. He stated that previously, the City Council had adopted an ordinance forming the Palm Desert Municipal Utility; and later, an ordinance was adopted that called for the dedication of utility construction items in new development. Staff then secured an Interconnection Agreement with Southern California Edison in order to preserve the City's/Agency's ability to MINUTES ADJOURNED JOINT MEETING PALM DESERT CITY COUNCIL AND PALM DESERT REDEVELOPMENT AGENCY OCTOBER 9, 2003 provide power in a "greenfield" area, the North Sphere, if the City Council/Agency decided to do so. He said then the services of EES Consulting were secured in order to perform a feasibility study, which was now complete. He introduced representatives from EES Consulting to review the study in detail. MS. GAIL TABONE, Vice President of EES Consulting, Kirkland, Washington, provided background on the company. She said theirs was a 25-member economic and management consulting firm with engineers on staff. In addition to those listed on the report, she said their clients also included the Cities of Anaheim and Burbank. She said their company did not work with large, investor -owned utilities nor energy providers; they worked with smaller utility districts and cooperatives. She went on to discuss the presentation provided at today's meeting (now on file and of record in the City Clerk's Office). MR. JON PILIARIS, EES Consulting Project Manager, went on to explain the way the analysis was performed in the Feasibility Study, noting that revenues and the load forecast were key components. He said a projection of Edison rates was applied, primarily based upon the California Energy Commission's forecast, with some slight modifications made to account for different usage patters in the desert. For the results presented here, it was assumed that there were really no savings from power supply — whatever it would be for Edison, it would be for the City. He compared the way estimating projections was accomplished by using bench - marking when it was uncertain exactly what the costs would be. However, in this instance, a bona fide from offer from ENCO was available, which was used because it was a real offer, and it was a bit higher than the benchmark results, meaning it would provide an even more conservative assumption. He said Edison rates could be broken into two pieces, the commodity/wholesale component and the local delivery. After the local delivery component of rates is applied to loads, it results in a wires revenue; and after subtracting certain wires -related costs, there is a leftover margin, which under the currently envisioned arrangement, would be split between ENCO and the City Municipal Utility. He went on to say the next cost item was taxes, of which franchise fees could be a thorny issue on some levels. He said they assumed that the City would not want to be in any worse position than if Edison continued to serve the new development; therefore, they went forward on the premise that in -lieu -of franchise fees would be paid at a commensurate level. However, property taxes were not assumed to be paid on the new facilities, as there was an issue with regard to gift of public funds and the political sensitivity involved. MR. PILIARIS said that another big piece of the cost structure was capital costs. The way things worked currently was that the developer essentially builds most everything and gets a refund or rebate from the utility, which he pointed out that this would be a policy decision as to how to proceed from there. He said within the cost structure, the developers have to pay not only the cost of the facilities (i.e., 2 MINUTES ADJOURNED JOINT MEETING PALM DESERT CITY COUNCIL AND PALM DESERT REDEVELOPMENT AGENCY OCTOBER 9, 2003 concrete and steel) but also a tax component, which would be eliminated under a City -owned structure. For this study, it was assumed that the resulting leftover funds were split in half between the City and the developer; although, there would be a small amount of tax that would be need to be paid by the City (probably pennies on the dollar) and could be considered a capital expenditure. He said as it looked right now for residential new hook-ups, the net effect of that rebate would be approximately $700/customer per new residential hook-up. When the two were multiplied, it resulted in a capital component for local distribution. He said added to that was the transmission component, which would require some interconnections with Edison's system, some studies, and some new equipment. Further down the line, one or two substations would be required. For this study, more conservatively, it was assumed two substations would be needed. To the extent growth exceeds expectations, the second may be needed sooner. He said adding the two components together would provide a projection of capital needs going into the future. Next, Mr. Piliaris discussed how the capital expenditures would be financed. He explained for this study, the City's substantial reserves were considered as a way to fund the utility's capital expenditures for the first 10 years to be repaid at the rate of 4%, interest only, over a 10-year period. After 10 years, presumably loads would have caught up so that there would be a collective mass of customers to pay the capital component of rates that the utility or the City would go out and issue a revenue bond and repay the City for the previous 10 years' worth of borrowing. He said they projected the estimated tax-exempt interest rate is 51/2% with a 30-year term. He said in addition to capital costs, there would be some internal City costs assumed — there would be the need for at least a one-half full- time employee, primarily for administration, contract negotiation, and keeping abreast of current developments, as well as some vehicle and miscellaneous inventory costs. The net effect (shown on page 7 of the presentation), would be about $15 million of excess revenues over the first 10 years, or a savings of about 15% on the Edison rate; and the trend went up incrementally. He pointed out that this did not include any assumed power supply savings, nor did it consider the other half of the tax credit as far as developer fees. Presumably, if the developer kept the other half of the tax savings, it would flow through somehow to the cost of the structures that they're building and selling into the market. MS. TABONE stated that there were some uncertainties in some of the numbers relative to growth and different assumptions, which would vary the results somewhat. However, in most cases, it presented a significant percent savings or dollar revenues to the City. Other considerations were local control of operations and rates, which was a key benefit in forming a municipal utility. On the other hand, she said it was the City officials setting the rates, and there were political aspects to consider there as well. She pointed out that there were probably about 50 municipal utilities in the State of California that are successfully managing their 3 MINUTES ADJOURNED JOINT MEETING PALM DESERT CITY COUNCIL AND PALM DESERT REDEVELOPMENT AGENCY OCTOBER 9, 2003 operations, suggesting that perhaps a trip to one or more of these could be arranged to find out what types of challenges they face and/or benefits they realize. She said for this study, they assumed the City would still want to collect the Public Purpose Fund, approximately 3¢ per kilowatt hour tacked onto every single electric bill. As a municipal utility, the City would be able to collect those funds and keep them for applying to conservation and renewable energy locally instead of being averaged out over the whole system. Regarding potential savings and risks in power supply, Ms. Tabone said to be conservative, this study assumed that the municipal utility would pay the exact same amount for power supply that Edison would. Right now, the market for power supply is lower than some of the contracts Edison is locked into; but as a condition of not taking service from them, the City would be required to pay an exit fee, which would make up the difference between the market price and the contracts. The exit fee would drop off after 8 -10 years, and there are benefits on a municipal side that can give lower power supply costs because the City would have the ability to acquire tax-exempt financing, which is quite a bit lower than the financing available to a utility. Conversely, the utility would be smaller, and the economies of scale wouldn't be there as they would be for the larger Edison organization. She felt there was a trade-off between the two, combining the tax-exempt savings along with opportunities to either buy from independent power producers or go together with other utilities to build the resource, and to contract in a way that fit the new utility's needs. She said EES had a lot of background in power supply, and the next couple of years was a good time to be in the market with prices likely to remain stable; in three to five years, there could again be some volatility. MS. TABONE said every utility is facing changes in technology, meaning it's always a concern that the potential exists for someone to come out with a "black box" or "widget" that creates power supply — like a home -based fuel cell that does away with the need for a utility that has wires connecting homes to power plants. She said although one of their customers in Washington has been nervous about this potential for the past 10 years, nothing has resulted yet; and it was probably a long ways off. However, as an Edison customer where there's an infrastructure being paid for, and then everyone switches to fuel cells, you will probably still have to help pay for that infrastructure. It is a risk for a municipal utility that maybe 20- 30 years from now customers won't buy power from off the grid but will be generating their own — or it may never be cost effective to do so either. If the municipal utility was setting its own rates, controlled its own public purpose funds and how developers were reimbursed for line extension policies, Ms. Tabone said there was the ability to shape some other policies through operation of the utility. She said although it wouldn't be recommended to run massive public policy programs by operating a utility, there would be some 4 MINUTES ADJOURNED JOINT MEETING PALM DESERT CITY COUNCIL AND PALM DESERT REDEVELOPMENT AGENCY OCTOBER 9, 2003 flexibility afforded to promote some other goals within the City. She advised that on balance, there are risks of owning and running a utility, but their study found that they were manageable — the level of savings were there where it should be taken seriously. She said it boiled down to a policy decision, considering those entities that had been in place 20 - 30 years, many of which weathered the 2001 electric problems very well because they had their own generation or contracts and had been in business a long time. She countered that it wouldn't mean the endeavor would be struggle -free in the first few years. The City's idea for a small greenfield municipalization, and providing it contracted appropriately, would be less risky in the first few years, but there also wouldn't be any money to be made or saved in that time frame either. She said 10- and 20-year benefits were those to be considered, with an estimated level of benefits in the range of 16% - 18% savings, depending upon power supply, and she felt it was worth exploring further. With regard to excess revenue, Ms. Tabone said rates could be set based on cost, with all savings passed on to customers, or they could be used to repay the debt faster, reserving the ability to provide lower rates in the future. She said reserve accounts could be set up to fund future capital expenditures of the utility. Or, she said oftentimes municipal utilities transferred some excess revenues back to their cities to cover costs — one way cities get money from utilities is a franchise fee built into the cost, which would be received either from Edison or from its own utility. She said another source of revenue would be to offset some of the City's overhead for administering the utility (e.g. employees, office space). Finally, she said there was usually a payment for equity, as debt was paid off and the City has equity in the utility, it would only be fair to have some type of return on that equity. MS. TABONE said as far as operational and construction management, they were done by municipal utilities every day; there wasn't much risk there as long as it was managed properly. From an engineering perspective, her firm felt this was an entirely feasible project, pointing out that they were not talking about a large-scale sudden takeover of facilities, but starting out small and having an outsourcing contract to build and operate those facilities, possibly eventually building up in-house staff to take over the responsibilities. She said from a regulatory standpoint, the municipal utility would have operational control and be out from underneath the California Public Utilities Commission (CPUC) regulation, which also has pros and cons — the CPUC can mandate Edison to produce a certain percentage of renewable projects, sign contracts, or sell off their resources. From a financial standpoint, she said they felt the savings were significant enough to pursue a municipal utility further, noting that there were still things to consider seriously before any contracts were signed. She added that in comparison to a lot of other cities they'd looked at, the savings here are significant; Palm Desert had sufficient growth that many other cities did not. 5 MINUTES ADJOURNED JOINT MEETING PALM DESERT CITY COUNCIL AND PALM DESERT REDEVELOPMENT AGENCY OCTOBER 9, 2003 MS. TABONE went on to state that the next step in this process would be to solicit public comment. She said the Feasibility Study needs to be finalized; they wanted to be sure that everyone was comfortable with the assumptions made. She was aware that City staff had been talking with ENCO, a potential operator of the system, and while they felt the rates were a little bit high, there was probably room to negotiate, and it would be worthwhile for the City to try to work out an arrangement. Regarding power supply, she said there are many people who sell power supply, and it wouldn't have to be managed by the City on a day-to-day basis; even utilities with their own staffs used contracted services for power supply. She said it was very manageable, but it was important to manage both the short - and long-term risk. Once all of that was done, it would be time to come back to the City Council for approval of any next steps. Responding to Mayor Pro-TemporeNice Chairman Spiegel, Mr. Piliaris explained from page 6 of the presentation — Capital Expenditures — that the New Customers column was based on the projected hook-ups, both residential and commercial, an average number based on advice provided by the City's Planning Department. Developer Refund related to how Edison's current rate structure was set up, the developer puts in the facilities, they paid a tax component on top of that, and then there was a rebate back to the developer once new hook-ups are placed on the grid. He affirmed that in the first year, the City would pay the developers $710 per new hook-up, which was multiplied by 276 new customers, resulting in $197,000 from the City. He further affirmed that $200,000 would also be paid by the City, for a first year's total capital investment of $397,000 Mayor Pro-TemporeNice Chairman Spiegel commented that Palm Desert consisted of around 45,000 residents, and none of them would have the advantage of the subject utility. He was hesitant to risk that much of the City's funds when existing constituents wouldn't realize the benefit. MR. PILIARIS answered that the revenues would come from only those who were taking service from the utility. MS. TABONE added that it was a matter of deciding whether the Council was representing the existing constituents or all the constituents who will eventually be in the City. Secondly, she said the capital invested would be a loan, and it would be paid back with interest. It was assumed that it was being borrowed from the City because there are funds within the City to pay for it. Another way to go would be to issue revenue bonds; when utilities are formed, there can be bonds issued on the basis of the utility, not the City as a whole. Mayor Pro-TemporeNice Chairman Spiegel remarked that one of cities' largest concerns today was what Sacramento would do next — they were taking away the City's sales tax, possibly its hotel occupancy tax, etc. — so if this proposal looked 6 MINUTES ADJOURNED JOINT MEETING PALM DESERT CITY COUNCIL AND PALM DESERT REDEVELOPMENT AGENCY OCTOBER 9, 2003 like a good revenue stream for the City to continue to grow as it was now, that would be one thing. But he didn't see it. MS. TABONE responded that over the long term, there was the potential for revenues coming from the utility. Over the short term, it would be tight. In answer to Councilman/Member Crites, Ms. Tabone affirmed that if the City didn't want to put in any of its own money, it could use 100% financing, but it would be more expensive; the interest revenue would go to someone other than the City, and that was a policy decision. Further, she affirmed that a combination of both City funds and financing could be used, adding that it was common for cities to issue tax-exempt bonds — revenues from the utility were the pledge against the bonds instead of going back to the City. It was harder to get financing for a brand new utility than it was to get it for one that had been in place for 10 or more years. Councilman/Member Kelly remarked that if all City funds were used, the income stream would be larger in the future. In further response to Councilman/Member Crites, Ms. Tabone affirmed that if the City loaned all the money to the project, it could be at the same rate of interest that revenue bonds would charge (7%), with reduced savings to the customer, but the option was available. Upon Mayor Pro-TemporeNice Chairman Spiegel's inquiry regarding Desert Gateway's intent to break ground in March 2004, Ms. Tabone said the power supply component for the Desert Gateway project could be arranged with a month's notice, providing the authority was in place and the right people negotiated the contract. She added that there was also the Wholesale Distribution Access Tariff from Edison, and they legally have to provide service if there is available capacity on their system on a wholesale basis. However, securing that wholesale service falls under Edison's time line, and in order to get that in place, it would be hopeful to do so in a few months — she felt that would be the biggest bottleneck. Mr. Kohn commented that it was one of the reasons the City filed for the Interconnection Agreement, with an estimated time line for power to be available by the time that development was ready. He said negotiations on that agreement were still in progress. Further, he pointed out that the O&M Agreement, which was not yet finalized, would have a major impact on the economics — the term of the agreement, the share of revenue could be 60/40 instead of 50/50, but that was something that would be done next if the City Council/Agency Board directs. Councilman/Member Crites observed that the City was currently in the midst of a General Plan discussion. He then wondered first, whether the lowest potential 7 MINUTES ADJOURNED JOINT MEETING PALM DESERT CITY COUNCIL AND PALM DESERT REDEVELOPMENT AGENCY OCTOBER 9, 2003 General Plan demand use designations were considered for these projections. Second, he asked whether the projections considered the current active housing market or if they considered the last time the housing/development market had a pause, in approximately 1992. Third, he asked for an explanation of the Feasibility Study Table 2's "% Difference." MS. TABONE explained that as shown on Table 1, there was growth of about 500 residential customers for the year. Planning Manager Steve Smith added that the General Plan Advisory Committee (GPAC) considered three alternatives, and the total residential units at 4,086 would be in line with the lowest intensity. He said the recommended intensity is higher, and then there was a higher alternative above that —the most conservative was shown here. Responding to the second question, he said interest rates would have the most impact on the housing/development market. Further, with regard to the last economic pause experienced in the '90s, he didn't think Palm Desert was affected as much as other areas; probably 500 units/year would be reasonable. Councilman/Member Kelly suggested obtaining those numbers from the City's Building & Safety Department. Councilman/Member Crites agreed that it would be important information to have on an adjusted -acreage basis. Mr. Smith said there were about 1,000 acres of residential there. In answer to the question regarding Table 2 and the "Bottom -Up Approach," Mr. Piliaris said it was based on the more current square footages. Councilman/Member Crites stated that according to Title 24, the amount of electricity used per square foot was supposed to shrink, further pointing out that Title 24 had also just been upgraded in the Coachella Valley. He asked that the most current Title 24 data be incorporated into the study. Mr. Ortega remarked that when the study was first reviewed, staff had the same concern. Mr. Croy went on to explain that the energy efficiency of the utilities installed in homes was rated every year. However, he said even the market will dictate how it goes, illustrating that if a house was made bigger, the only way to increase the efficiency was by reducing things like the air conditioner, heater, those types of products. He said the volume of the house will be predicated on the volume interior, not on the size square footage — if the home had a solid 8-foot-high ceiling in a house of 5,000 square feet, it will actually use less electricity than the 8 MINUTES ADJOURNED JOINT MEETING PALM DESERT CITY COUNCIL AND PALM DESERT REDEVELOPMENT AGENCY OCTOBER 9, 2003 same size house that had a larger volume with cathedral ceiling -type design. He stated that it was difficult to make an exact projection. Mayor Pro TemNice Chairman Spiegel suggested that the category of Large Commercial, rated at 58% higher, should also be re -analyzed. He believed that Westfield Shoppingtown would use the same amount of utilities as WalMart will use and wondered why it would be higher there than it is on existing facilities. Councilman/Member Kelly remarked that he felt the report was a good one, easy for him to read and understand, and better than the one prepared for CVAG. He felt the one prepared for the City contained a good deal more facts than the one presented to CVAG, which contained many more opinions. Councilman/Member Ferguson felt he and his colleagues wanted to know at what point the Municipal Utility was not feasible and how much flexibility there was — if a real estate recession was experienced, or if Edison received a 2¢ rebate from the Federal Government and dropped their kilowatt hour. MS. TABONE answered that in preparing the study, they had not factored in sensitivity to those issues, but it was set up to very easily do so. Councilman/Member Ferguson also had a question about Table 3 - Residential 2004 at 3,276 and the formula used to calculate megawatts for the Toad: houses x kilowatts (average use per house) = megawatts. He said in his utilization of that formula for all 13 years, he was 14-16% lower in all his calculations than the study. MR. PILIARIS responded that they would re-evaluate those figures. Councilman/Member Ferguson further questioned why Palm Desert's own historical data wasn't utilized for this study instead of a "similar Southwest Desert city." MR. PILIARIS said the End -Use Report would make that representation; it was from Edison for existing structures within the City. Further responding, he said the community studied was a new development south of Phoenix. MS. TABONE added that if they could get the most current data from Edison, the study could be updated accordingly. An Edison representative on hand at this meeting affirmed that they would be happy to supply the requested information. He said it was provided February 2002, and it could be updated. 9 MINUTES ADJOURNED JOINT MEETING PALM DESERT CITY COUNCIL AND PALM DESERT REDEVELOPMENT AGENCY OCTOBER 9, 2003 Councilman/Member Ferguson was concerned that only 12 small businesses were projected to go into 1,000 acres in the next 13 years. MR. PILIARIS answered that they were provided data on general types of new customers that would be coming into the new development — some would be bigger, some would be smaller, and they would vary in energy intensity. To begin the study, they were all considered to be identical. He said they looked at the total square footage going in, estimates of energy intensity, multiplied the two together, and came up with a total usage for the commercial class, divided by the new customers coming in, resulting in an average per customer. What turned out was that the average customer would fall into the GS-2 class. In reality, there will probably be more that will fall into the GS-1 class, and fewer in GS-2, but they didn't feel the usages would be any different. MS. TABONE added that the GS-1 customer pays a higher rate; if there were more from the small commercial class, there would be additional revenues, based upon Edison rates. Further responding to Councilman/Member Ferguson, Mr. Piliaris answered that Edison tiered rates were used for the calculations. Additionally, he said the D-, GS-1, and GS-2 schedules were used and all the associated sub- schedules/programs to the extent that they had the information for them and thought it would affect the results. He said they didn't get too detailed with discounts for low income, as there was additional data needed for qualifying customers. Ms. Tabone went on to say also that the area studied was new development, and even if existing data was available for how many people qualified for low income programs, it may not be applicable to a new development area. Lastly, Councilman/Member Ferguson called attention to page 5, Table 2 and the 24%, 44%, and 58% increases cited there, wondering what the reference to "unique characteristics of the planned development" meant. Mr. Smith answered that he did not provide the original information, but he could find out. Councilman/Member Crites moved to, by Minute Motion, receive and file the Palm Desert "Spot" Municipal Electric Utility Feasibility Study completed by EES Consulting. Motion was seconded by Councilman/Member Crites and carried by 5-0 vote. Councilman/Member Ferguson moved to, by Minute Motion, direct staff to continue the study with EES and return with answers to issues raised, including a sensitivity study to analyze the relationship of rates and growth, and the potential revenue stream to the City. 10 MINUTES ADJOURNED JOINT MEETING PALM DESERT CITY COUNCIL AND E PALM DESERT REDEVELOPMENT AGENCY OCTOBER 9, 2003 Councilman/Member Crites pointed out that this should not stop staff from being able to potentially bring the City Council/Agency Board some draft operating agreements to see how they look, and he seconded the motion, which carried by a 5-0 vote. With City Council/Agency Board concurrence, Mayor/Chairman Benson adjourned the meeting at 3:05 p.m. ATTEST: RACHELLE D. KLASSEN CITY CLERK/AGENCY SECRETARY — CITY OF PALM DESERT, CALIFORNIA/ PALM DESERT REDEVELOPMENT AGENCY iii N1BENSON, MAYOR/CHAIRMAN 11