2026-10-20 - Finance Committee Regular Meeting

01:59Mhm.

03:38>> Passing.

03:40>> Hi, I'm here. I can hear you. Can you

03:41hear me?

03:42>> Yes, I can hear you. Thank you. We'll

03:44come down right now for um passing.

05:49>> Mhm.

07:44>> Mhm.

09:39>> Mhm.

11:34>> Mhm.

12:16>> Good afternoon. I'd like to welcome you

12:18all to the Finance Committee meeting of

12:22uh the 20th of October of 2026.

12:25Uh the clerk will please call the roll.

12:28>> Council member Bert.

12:29>> Here.

12:30>> Council member Lu.

12:31>> Here.

12:32>> Council member Lowing.

12:34>> Here.

12:34>> All present.

12:35>> Okay.

12:38First off, we'll see if there's any

12:39public comment of items not on the

12:41agenda.

12:42>> We do not have any requests to speak for

12:44in-person general public comment.

12:48>> Okay, and we'll do oral or offline at

12:51the end of the meeting.

12:52Okay.

12:54So, we have a couple of

12:55media items today.

12:57Um

12:59something to do with $100 million in

13:01bonds, so we'll turn this over to

13:03Director Light.

13:05>> Uh good afternoon, Chair, committee

13:07members. My name is Lauren Light, the

13:09Chief Financial Officer for the city.

13:10This is a really important and exciting

13:12item before you. Um through our budget

13:15and also our planning for capital, we've

13:17talked about the critical infrastructure

13:19improvement for a grid modernization,

13:21right? Updating the aging infrastructure

13:24and also expanding for the increasing

13:26demand. So,

13:28the time is here and now. We actually

13:30are going to talk about financing. We've

13:32talked about it for a bit. Um,

13:34and I think importantly as you know, but

13:36for the sake of the committee members

13:39and also for the sake of the community,

13:42we are being very strategic and smart.

13:44You may recall we're doing three

13:45tranches. What that means is that we're

13:48only going to borrow what we need when

13:50we need it. It also helps us deal with

13:53um, rates because they vary. And so,

13:56that helps us also address the

13:57volatility and the concerns around

13:59rates. So, wanted to set the table there

14:01with that. Appreciate the utilities

14:03advisory committee 2 weeks ago. They had

14:05a really robust conversation on this

14:08topic.

14:09Um, really diving into financing, but

14:12importantly also is the impacts on rates

14:14and ratepayers, right? There's a lot of

14:16concerns around that. Really appreciated

14:18that conversation and also they uh, they

14:20helped us put guardrails around what

14:23we're doing.

14:25Uh, we sharpened our pencils some more

14:26and staff has submitted a supplemental

14:28report to incorporate some of that

14:31feedback.

14:32Staff continues to talk internally to

14:35look at what is realistic um, and what

14:38is imperative. Um, what is imperative

14:40from the utilities team perspective is

14:42that we need cash flow in early 2027.

14:46Um, that's really important.

14:48Um, with that said, we also want to

14:49acknowledge, you know, the impacts on

14:52rates. The UAC has put a 1% guardrail on

14:56that.

14:57We've done the math. We've recalibrated

15:00the um,

15:02TIC, right? Basically, that's the cap on

15:05cost of financing, the interest rates

15:07including all expenses.

15:09We recalibrated that to 6%.

15:13It was previously 6 and 1/2.

15:15Um, we're hoping that's going to be

15:17feasible.

15:18Um, time will tell.

15:20Uh, we will continue to monitor the

15:22market conditions um, and also look at

15:25different levers. Christine will go

15:27through that this afternoon for Finance

15:29Committee to understand the foundation

15:31of our work and some opportunities that

15:34we will have. As you know, with all of

15:37our financing, it's an iterative

15:38process. So, this afternoon Finance

15:41Committee will look at it. Hopefully,

15:43will support and recommend advancing

15:45this to Council um, which is scheduled

15:47for December 6th. The reason why I bring

15:50that up is between now and December 6th,

15:52we'll continue to monitor the market.

15:55Um, if interest rates change

15:59and departs from the 6% TIC, I just want

16:01us to be realistic that we do want to

16:04continue to advance the recommendation

16:06to finance, but we may need to continue

16:09to update Council on where the market

16:11stands.

16:13So, this afternoon, uh, Christine will

16:15unpack again the foundation of our work

16:17um, and we hope that you will support

16:20the recommendation. And importantly, I

16:22represent to you that we have a great

16:24team working on this, not only city

16:26staff, but the consultants that are

16:28involved in such a complex financing

16:31transaction, and we're all here to work

16:33in the best interest of the city. So,

16:35with that, I'll turn it over to

16:36Christine.

16:38>> Thank you, Director Lay. Um, we have

16:40with us online Darren Hodge of PFM and

16:43Fred Dilly. Uh, you may recognize them

16:45from the water bond transaction. So,

16:47next slide, please.

16:50Today's presentation covers a variety of

16:52topics. And like Lauren said, this is a

16:54very heavy, complex matter.

16:57Um, we're going to discuss the UAC's uh,

16:59feedback and how we incorporated the

17:02additional analysis in our supplemental

17:04report.

17:05Uh, we're going to cover the background

17:07and funding needs of the grid

17:08modernization project. Um, the proposed

17:12debt structure and the estimated costs.

17:14And we were able to update our um,

17:16interest rates for interest rates as of

17:19yesterday.

17:20Um, so you have the latest information.

17:23Uh, we did a comparison of what was in

17:25the 2027

17:27utility forecast and a sensitivity

17:31analysis.

17:32Uh, we ran a total of reimbursements of

17:36cost that incurred to date.

17:39Um, we also wanted to present and have a

17:42discussion of financing mechanics and

17:45some structure considerations to think

17:48about.

17:49And then also just finally the next

17:51steps for council authorization.

17:53So, next slide, please.

18:00Okay.

18:01At the October 7th meet meeting, the UAC

18:04expressed concerns about rising interest

18:07rates, the timing of the issuance, and

18:09ensuring rate impacts remain contained.

18:12Overall, the commission supported moving

18:14forward with the issuance, but

18:15recommended policy guardrails to

18:17minimize customer rate impacts.

18:21In response, this we provided analysis

18:24in the supplemental report including the

18:26sensitivity analysis for the bonds, a

18:29comparison of debt service costs um, to

18:33what's in the financial plan, and a

18:35discussion of the reimbursement of cost

18:37to date.

18:39Next slide.

18:43Thanks, Kristy. Um, real quick, an

18:46overview and background of the project.

18:48So, grid monetization is a long-term

18:50investment to prepare the electric

18:52system for future demand including EV

18:55adoption, electric vacation, and

18:57increases in customer-owned

18:59generation.

19:01The total investment ranges between $0.3

19:04and $0.4 billion over the next 8 to 10

19:06years.

19:07And current revenues and reserves cannot

19:10support this scale, which is why

19:12long-term bond financing is necessary.

19:15Um the council adopted a reimbursement

19:17resolution in December 2024, enabling

19:20reimbursement of approximately 28.7

19:24million in project costs to date.

19:26Next slide.

19:29This slide shows projected capital

19:31funding and and spending and funding

19:33sources. Costs increased significantly

19:36and the planned bond issuance fills the

19:38funding gap not covered by rate revenue.

19:41Projected spend um through 2029 is 94.8

19:46million, including the 28.7

19:49already spent in fiscal year 25 and 26,

19:53the total reaches 123.5

19:57million by fiscal 2029.

20:00Cash and cash and reserves will cover a

20:02portion, however, the the remainder

20:04requires bond find financing and staff

20:07is seeking authorization up to 100

20:09million for the first tranche of bond

20:11financing.

20:12Next slide.

20:15I acknowledge this is a very heavy

20:17slide. There's a lot of information. So,

20:19if you have any questions, let's let's

20:21talk through, but this is basic this

20:23slide basically s- outlines the

20:26structure of the issuance and its

20:29administration.

20:31Um

20:32First, I just want to note um the 2027

20:35bonds are the electric utilities

20:37first-ever issuance and will be sold via

20:40a negotiated sale

20:41method where we've um solicited for an

20:45underwriter that assists with bond

20:47structuring, investor outreach,

20:50materials that and other materials that

20:52are all important for a utility without

20:55market history.

20:57Uh we selected JP Morgan as the

20:59underwriter out of 10 proposals that we

21:02received.

21:04Um and you'll also note that in the

21:07latest um 2009 water bond refinancing,

21:11um we didn't use a underwriter because

21:15the water utility already had

21:16established market history. So, um a

21:19little bit different situation here.

21:22Regarding the city's debt policy, um the

21:25debt service cost must not exceed 15% of

21:28the annual expenditure budget, and our

21:31proposed financing strategy is in

21:33alignment with that policy.

21:36Interest rates will be set in January

21:392027, and the table on this slide

21:41reflects the estimates as of yesterday,

21:44including the true interest costs and

21:46all-in

21:48TIC.

21:49The TIC includes all borrowing costs,

21:52including the coupon rate and any

21:54premium and discounts in today's

21:56dollars, while the all-in TIC includes

21:59that plus administrative and issuance

22:02costs.

22:04The administrative the issuance costs

22:06are approximately um 0.6 million.

22:10Um please also note that um these

22:14interest rates as of yesterday decreased

22:16by 12 basis points compared to what's

22:18reflected in the supplemental memo. So,

22:22as Lauren mentioned, this is very

22:23dynamic market, and you know,

22:25fortunately for us there was an interest

22:27rate decrease within a week.

22:31Um

22:32going back to the left-hand side of the

22:34slide hand sla- side of the slide,

22:37um the financing strategy is planned in

22:40three tranches issued every 3 years with

22:42timing dependent on project needs and

22:44pace.

22:46Um staff and PFM will present to rating

22:51uh present to two rating committees in

22:53early December with ratings expected to

22:55be received mid-December.

22:59As we noted in the supplemental report,

23:01the debt service assumptions and the

23:02sensitivity analysis we presented assume

23:05a trip double A category rating

23:08and a 10-year call option on the bonds.

23:12Um I just want to note, too, also just

23:15uh managing expectations that receiving

23:18receiving a triple A rating for an

23:21electric utility is uncommon due to

23:23inherent operational regulatory

23:26regulatory and commodity market risk in

23:28the sector.

23:30The estimated basis point spread between

23:32a double A and triple A rating for

23:34comparable issues is approximately 5 to

23:3710 basis points.

23:38And if we were to receive a rating below

23:41double A, it could be a more significant

23:43spread.

23:45Next slide.

23:48This is staff's um sent

23:52uh sensitivity and uh now comparison to

23:54the 2027 forecast that was adopted by

23:57council in June.

23:59Um first off, the 2027 forecast had

24:02different assumptions for bond sizing.

24:05The forecast assumed a total of 348

24:07million of project financing

24:10while our revised strategy assumes 330

24:13million.

24:14This results in an estimated debt

24:16service

24:18an estimated annual debt service cost of

24:206.5, 7.1, and 7.1 for tranches 1, 2, and

24:243,

24:25reaching maximum annual debt service to

24:27of 20.7 million in 2033.

24:33Based on staff's rate model, for every

24:35approximately for every 2 million in a

24:38debt additional debt service above the

24:412027 forecast

24:43will result in a 1% rate increase.

24:47So therefore, remaining maintaining a

24:49rate increase below at one 1% or below

24:53requires that the annual debt service

24:55stay at or below 7.2 million.

24:59Which is that 2 million increase between

25:02that 5.2 that's highlighted on the

25:04slide.

25:08The revised strategy assumes a 20 basis

25:12point interest rate increase

25:14between

25:16the 2027 forecast and a 15 million

25:21increase in bond principal.

25:23So, you'll see here

25:25on the 2027 line we have 85 compared to

25:28the 100

25:30and then 4.6 compared to

25:334.8 today's rates.

25:36And so, that all equates to a increase

25:40of debt service of 1.3

25:42and an approximate

25:440.7 rate increase.

25:49Okay, next slide.

25:52This is our sensitivity analysis.

25:54Um, the team has also prepared using

25:57both an 85 million and a 100 million

26:00dollar bond size.

26:02This calculates what would happen if to

26:05debt service costs

26:07TIC and all-in TIC if the market were to

26:10increase by 50 basis points

26:12and 100 basis points.

26:15So, you'll see here based on sizing of

26:18based on sizing the debt and a 100 basis

26:21point market increase, debt service can

26:24range between 5.5 million and 7 million.

26:28And as noted earlier, just keep in mind

26:31a 7.2 million debt service would be a 1%

26:36electric rate increase.

26:38And that's based on a 100 million.

26:43Um,

26:45I think now I'll turn the next slide

26:47I'll turn over to Mr. Hodge at PFM to

26:51go through some historical

26:53um, interest rates going back to 1981,

26:56which might be helpful context as we

26:59think about issuance costs around this

27:03debt issuance. So, I'll turn it over to

27:05you, Darren.

27:06>> Perfect. Thank you, Christine. Can you

27:08hear me just fine?

27:09>> Yes.

27:10>> Excellent. So,

27:12appreciate the opportunity to speak

27:13tonight. And

27:15as Lauren mentioned at the outset, an

27:17important factor that we take into

27:18account when developing our finance

27:20plans is interest rate levels. And

27:22before I talk about where we currently

27:24are, let me take a step back and talk

27:26about where we've been over the last

27:28several months. So, in June, we hit we

27:31were at levels that were for the year

27:33the low levels. And then in July,

27:36unfortunately, what occurred is the

27:38situation with Iran

27:40reignited. And when the conflict with

27:43Iran amplified, what occurred was that

27:46the investors became concerned about oil

27:48prices.

27:50Along with oil prices increasing, that

27:52drove concerns with regards to higher

27:54inflation. And anytime we have concerns

27:57about higher inflation, what that does

27:58to interest rates, it puts upward

28:00pressure on interest rates. Investors

28:02demand a greater return because

28:05inflation is reducing the overall value

28:07of their holdings. And so, what we've

28:09seen over the last 2 and 1/2 months is

28:12an overall increase in interest rates.

28:15And when we're looking at our

28:16transaction, our transaction has an

28:18average life of about 20 years. And in

28:21that maturity range, we've seen interest

28:23rates increase by about 60 basis points

28:25between today and where we were in late

28:28July. Now, as Christine mentioned, we

28:30have been fortunate over the last week,

28:32we've seen an improvement in interest

28:34rates anywhere to the tune of about 20

28:36basis points. And so, that's been very

28:39helpful for us, and we'd like to see

28:40that continue.

28:42Now, anytime that we talk about interest

28:45rates, it's important that we put

28:47interest rates in perspective of where

28:49are we right now and comparing it to

28:51historically where we've been. And the

28:54best way that we like to look at

28:56historical averages is going back as far

28:58as we can. And so what you're looking at

29:00on this slide is a representation of

29:04interest rates along the interest along

29:06the yield curve going back to June of

29:081981. So about 45 years of information.

29:12And what this shows is this is the

29:15index, the tax-exempt index that we use

29:18to price our bonds. And there's various

29:20spots along the yield curve. So 1 2 3 4

29:235 7 10 all the way out to 30. And what

29:26you'll see is these gray bars for each

29:28spot along the yield curve. That

29:30represents the range at which that spot

29:33yield has moved over the last 45 years.

29:37And then you'll see two color lines

29:39right there. The green line represents

29:41where we currently at and then the

29:43orange line represents over the last 45

29:46years, what has been the average rate

29:48for each of these spot spot rates along

29:50the yield curve.

29:51And what you can see is that for a

29:53majority of the yield curve, basically

29:55from about three years on out, currently

29:58we're below 45-year averages. So even

30:02though we've seen an increase in

30:04interest rates which we're very

30:05cognizant of, when you look at it from a

30:07historical perspective, we're still

30:09below that 45-year average. And so

30:12that's why we talk about

30:14even though we have tools in our tool

30:15belt to help address the interest rate

30:18movements and volatility, we always like

30:20to take a step back and look at where we

30:22are versus a historical context to put

30:24it all

30:26in relativity.

30:28Christine, with that I'll turn it back

30:29to you.

30:33>> Thank you, Darren. That was very

30:35helpful.

30:37Um

30:38let's transition to the next slide,

30:40please.

30:42And this slide is a summary of

30:46total

30:47capital costs to date

30:49that are eligible for

30:52reimbursement from bond proceeds. We

30:54just wanted to give you a quick update

30:56and summary there.

30:57So, next slide.

31:01Um

31:03to issue these bonds, Council will need

31:04to adopt a formal resolution for

31:07authorization and approve several legal

31:09documents that are listed here.

31:12Um these documents will be reviewed by

31:14the Council on December 7th.

31:17Um UAC's recommendation included

31:20specific guardrails around minimizing a

31:23rate increase to 1% and due to

31:25complexities of a rate analysis

31:28including a 1% rate uh increase limit in

31:32Council's resolution would introduce

31:35ambiguity during the pricing of the

31:36bonds. So, rather than including a rate

31:39cap in the resolution

31:41um staff recommends based on our

31:44analysis a 6% TIC cap um in Council's

31:50resolution.

31:52And that would provide a finite and

31:54objective parameter

31:56um that ensures Council's policy

31:58direction is implemented

32:01consistently at the time of sale.

32:04Once the city may proceed to market once

32:06all these documents are approved by

32:08Council.

32:10Um and then here for the next slide,

32:12I'll turn it back to Darren.

32:15Um we we

32:18we staff and PFM met to

32:22um figure out what a toolbox would be

32:25that can be considered relevant in a

32:27rising rate environment. Um and Darren,

32:30I'd appreciate if you'd review these

32:32with the committee.

32:33>> Yeah, absolutely. So, as I mentioned

32:36earlier, anytime we proceed with a

32:38transaction, one of the things we look

32:39at is what are the tools in the tool

32:41belt, as Christine mentioned, that are

32:43available to us. And so, as we're

32:45discussing this and analyzing what may

32:47or may not transpire over the next

32:48several months, we came up with a number

32:50of tools that we wanted to discuss. And

32:53so, the first is right now we're

32:55anticipating a not to exceed par size of

32:57a hundred million dollars, but one of

33:00the tools available to us is to

33:02potentially reduce the size of the

33:04issuance.

33:05The advantage of reducing the size of

33:07the issuance is that we're borrowing

33:09less in today's market, and so if

33:11there's an expectation that rates will

33:12decrease, then we're borrowing less in a

33:16higher interest rate environment. So,

33:17that would not only um potentially defer

33:21uh some of our bonding needs, but just

33:23by the fact that we're issuing less

33:25debt, it would lower our debt service.

33:27Now, the risk of this is that if we

33:30reduce the amount of bonds that we sell

33:32today, again, essentially what we're

33:35making a call on is that interest rates

33:36will be lower in the future. If interest

33:38rates are not lower, then it could be

33:39more expensive for us to borrow. In

33:42addition, we would then need to, with

33:45the follow-up bond transaction, proceed

33:46with another sale of bonds. We'd have to

33:48go get ratings, um update legal

33:50documents. There might be efficiencies

33:52that we could try to realize by um

33:56essentially selling the second tranche

33:58together with the next sale of bonds

34:00we're looking to sell, but there's

34:02considerations.

34:03The other aspect is the final maturity.

34:05We can always shorten the final

34:07maturity.

34:08The downside of shortening the final

34:10maturity is that it compresses the the

34:13debt service that we have to pay. So, it

34:15could increase our average annual debt

34:18service because we have a

34:20shorter amount of time with which to

34:22repay the bonds that we're borrowing.

34:24Um the advantage of it is that if

34:26obviously if we shorten our final

34:28maturity, we're going to be borrowing

34:30shorter on the yield curve, which means

34:32we're going to be borrowing at a

34:33uh lower overall uh interest rate.

34:36The second tool that we looked at was

34:38delaying the sale if it's warranted by

34:40market conditions.

34:42Um the advantage of delaying the sale is

34:44that if the market is inhospitable when

34:47we're looking to sell bonds, that we

34:49could wait for the market to stabilize.

34:52And and obviously kind of the implied

34:56forecast there is that we're guessing

34:58that interest rates in the overall

34:59market environment would be better when

35:01we came back to market. But we would we

35:03would do is we'd call we'd go

35:04day-to-day. So, we would schedule a

35:07pricing date and then say if we're not

35:09going to price the bonds on that day,

35:11then we will monitor the market on an

35:13ongoing basis and wait for market

35:15conditions to improve and they'll and

35:17then sell bonds. The downside there is

35:19obviously if market conditions don't

35:21improve, at some point we will need bond

35:23proceeds for the project and so then

35:25we'd be subject to borrowing in the same

35:27high interest rate environment.

35:30Another option that we have available to

35:32us is looking at the call option. As

35:34Christine mentioned, it's standard in

35:37our market to sell bonds with a 10-year

35:38call. What that means is that 10 years

35:41after we sell the bonds, we have the

35:43option, it's at our discretion, where we

35:46can refinance the bonds if interest

35:47rates are lower. One of the things that

35:49we're looking at is potentially

35:51shortening that period. Instead of

35:53having it 10 years, maybe selling and

35:55structuring our bonds so that we have

35:57the option to refinance our bonds in 7

35:58years, 8 years, or 9 years. The

36:01advantage of that is that we'd have, if

36:03interest rates are lower in the future,

36:05the ability to refinance the bonds we

36:07sell today

36:08earlier. The downside is that if

36:10interest rates aren't lower, that call

36:12option, that shorter call option, costs

36:15us money over time. And so it's a math

36:17equation that we analyze to figure out

36:19is the risk worth the reward at the time

36:22of pricing.

36:24And the last option that we looked at

36:26and that's available in the tool tool

36:27chest is a loan from the electric

36:29special project reserve. Now, the

36:32advantage of this is it's quick

36:33short-term liquidity for the project to

36:35keep construction on schedule. The

36:37downside to this is that there's a

36:39potential impact to our credit rating

36:41due to the fact that we're reducing our

36:43cash position. Cash is one of the

36:45important considerations that the rating

36:47agencies take into account when they

36:48analyze our credit and so we want to be

36:50very careful to make sure that we have

36:52very strong liquidity to try and get

36:54that um credit rating as high as

36:56possible.

36:58And with that, I'll turn it back to

36:59Christine.

37:01>> Thank you, Darren.

37:03Next slide, please. Um and this

37:06basically concludes our presentation and

37:09summarizes our

37:10recommended action by the committee,

37:12which is to um

37:14forward to council the resolution

37:17authorizing staff to

37:19sell the electric revenue bonds for a

37:22principal amount of not to exceed a

37:24hundred million with a TIC of 6%.

37:28Approve the electric revenue bond

37:31indenture for

37:33Basically, what's listed at

37:35item number two in my your packet so

37:37heavy this week.

37:39Um and direct staff to structure the

37:422027 bonds such that the resulting

37:45revenue requirement is consistent with

37:47and does not exceed the equivalent of a

37:50one-time

37:511% rate increase. So, that captures the

37:55UAC's uh recommendation.

37:58And that concludes our presentation.

38:06>> Okay.

38:09Good news is it matched the packet very

38:10well.

38:12So, I think we're

38:15I think we're ready to uh

38:18I mean the packet with the supplement. I

38:19think we're ready to have some uh

38:21questions or should we just do a a round

38:23of top line questions and then dig down

38:25through?

38:29Who's that?

38:30Pat, you want to go?

38:32>> Sure.

38:33Um so starting at the end for so

38:37the

38:38the recommendation in the presentation

38:43is slightly different than from the

38:44recommendation in the packet.

38:47>> That's correct and we revised the

38:49recommendation via the supplemental

38:51report.

38:51>> Yeah.

38:52>> Yeah. And um

38:54so that

38:55third aspect you you basically think

38:58that

38:59indirectly

39:01um

39:04well we would either

39:06achieve that

39:08uh not exceeding the 1% rate increase

39:11or we might issue

39:13less bond amount. Is that how we'd stay

39:15under? Is that

39:16the other way that

39:19we assure that we

39:21um do not exceed the 1% increase?

39:25>> There's kind of a couple Did you want to

39:27Sorry.

39:29There's a couple levers. There There's

39:31either

39:32Well,

39:33the interest rate's the interest rate.

39:35It's whatever the market is reading at

39:36the time and to stay within a 1%

39:41um

39:43rate increase

39:45we wouldn't we our limit would be 7.2

39:49million in debt service. So

39:53if we wanted to achieve that, then we

39:56would have a 6% cap and also

39:59structure the debt such that, you know,

40:02it could be up to 100 million or or we

40:05can lower it to stay within that 1% cap.

40:08>> That's what

40:09>> Yeah.

40:09>> Yeah, that's what I was asking. So um

40:12if

40:13if we get the interest rate we're

40:15hoping, then we can do the full 100. If

40:18not, we need to reduce that a little bit

40:21to stay within the 1% cap.

40:23>> Yes.

40:23>> Okay. So, our

40:26I couldn't find where we we've been

40:28using reserves for the

40:31expenditures to date. I guess the 27

40:33million it is. Is that right? And

40:36and we'll have some additional

40:38capital expenditures before

40:41we would receive the bond funding. And

40:45did I read somewhere that might take us

40:47up to 34 million or something?

40:49Maybe I'm trying to recall that, but

40:52something like that, huh?

40:56>> I think it's on slide five.

41:00Where through 2029

41:03and including what we've already spent

41:06in 25 and 26

41:09total spend is 123.5

41:12million.

41:14>> Yeah, but

41:16when do we expect we'll we'll receive

41:19the bond funds?

41:21>> We would close late January. So, we'd

41:24have it for sure by beginning of

41:26February.

41:26>> the 27 million, how much do we think

41:30we'd spend on the capital? Maybe not so

41:32much between now and

41:34less than six months.

41:36>> Are you referring to slide 10, which is

41:38the schedule of costs incurred?

41:41I think he's asking how much in

41:43additional would we spend between now

41:46and when we find get the bond proceeds.

41:48I think that's what he's asking.

41:49>> taking from reserve.

41:50>> Yeah, Alan, I don't know if

41:52>> By the time we get the bonds.

41:53>> staff is available to respond to that.

41:58>> So, when I look at table on table five

42:00on page five, so, you know, that that is

42:02our expenditure amount. Um so,

42:07the

42:08it really depends on the lag. And now I

42:10hate I hate to make it more complex than

42:12necessary, but when we look at the

42:13projects here, this is our baseline in

42:16terms of

42:17what we actually think we're going to be

42:18spending over those years.

42:20And a lot of these projects are really

42:22buying transformers.

42:24And the transformers is going to be

42:26really highly dependent on what we have

42:27to put down to purchase these

42:29transformers.

42:30So, I can try to give you an answer to

42:31that, but it could change.

42:33>> I

42:33You know, I'm I'm assuming if we know

42:35that we've got the 27 million or so to

42:38date uh and that was over how many

42:41years?

42:43>> The last few years doing that is $28

42:45million and the cash financing and the

42:47sources is we spent about 33 million.

42:49>> Yeah, okay. That That's ballpark. That's

42:51all we're trying to get. Okay.

42:53Um

42:55and I couldn't find our

42:58in here where we are on our current

43:02reserve level from having drawn off that

43:0528

43:06uh soon to be maybe 33 million

43:10versus

43:11>> on the operators

43:11>> our reserve target and

43:15um and our current amount.

43:20>> So, I might turn to Lisa Belyea to give

43:22us an update on the current status.

43:24>> Yeah, and I think that of the amounts

43:25for the council that's an

43:26>> That will be helpful to understand

43:28because we are um at our higher levels

43:30in our operating reserves and at least I

43:32can go through the the capital reserves

43:34as well.

43:35>> So, this is Lisa Belyea, Assistant

43:37Director Utilities Resource Management.

43:40And we are currently evaluating the

43:42year-end reserve levels in all of all of

43:45the utilities. So, um right now the

43:48reserve levels I don't we're going to be

43:51bringing that forward to the UAC and

43:53Finance Committee over the next couple

43:54of months, so I'm uncertain whether now

43:57is

43:57I don't think I have the the complete

43:59information to give you.

44:01Um

44:01but uh

44:03I can tell you that the operations

44:04reserve at the end of 2026 is at a high

44:07level

44:09um

44:09and so I don't think there's a concern.

44:12>> So first off

44:14what are what are our goals?

44:16And then where are we approximately?

44:18>> Okay, the dollar amount

44:19>> And then third is what's the

44:21relationship you're talking about

44:22operation reserve this is capital

44:25and what's the relationship between

44:27those two for this purpose?

44:28>> Sure, why don't we pull up give us a

44:30moment to pull up the report that we

44:32just did on the reserves so that we make

44:33sure we're consistent with that. Give us

44:35a second.

44:36>> Okay, so while you do that

44:39um

44:45Sorry.

44:52Just looking at my various notes

44:54um

44:58the

44:59I'll just say that I'm

45:01I I think it's really valuable if we

45:05have a a section in greater detail

45:08on the use why we're doing this grid mod

45:11and we've talked about this several

45:13times. My understanding is that we have

45:16three purposes and a number of the

45:20capital investments may hit two or even

45:23three of those purposes at once.

45:25So we have our reliability that we want

45:29to improve. We have aging equipment that

45:31we would have to replace anyway.

45:34And then we have

45:36uh

45:37uh expansion of capacity for

45:39electrification.

45:41And

45:42we even within the reliability we've

45:44talked about you know

45:46needing to have clearer goal setting if

45:49we're moving toward electrification not

45:51just the historic reliability but even

45:54better yet reliability.

45:56Um

45:57so when when we have these tables on the

46:01capital spending sources of funding.

46:05I'd find it very valuable, and I think

46:08the public and my colleagues on the

46:10council would as well, to be able to see

46:14the each of these line expenditures.

46:17This one hits

46:19uh is for capacity, or this one's for

46:21capacity and reliability.

46:23Um because we're just not telling a

46:25story as to why we're doing this.

46:28Uh and it This is a lot of money

46:31skipping over the why. We we at a high

46:34level, we say, "Well, it's cuz of grid

46:35mod." But what does that mean to our

46:38rate payers who are saying, "Well, I'm

46:39having to pay for this. What do we get

46:41for?" This is sounds like a massive

46:44dollar amount. Of course, it's spread

46:45over 30 years on the payments, so it's

46:47not so bad when we spread it, but it is

46:50a big expenditure, and we're really not

46:53explaining the why very well.

46:55So, that's

46:57a request more than a question, but

46:58Alan, go ahead.

46:59>> Yeah, now I you've actually taken my

47:01notes here. I had the age of the

47:03infrastructure, the goals of increasing

47:04reliability, and the council goals of

47:06resiliency, and that

47:08modifying and adjusting for the

47:09increased electrification.

47:11Um we have told that story, but we need

47:13to tell it again. We need to tell it

47:14again about looking at the grid

47:17modernization, extending the time frame,

47:19building it as people develop, as we see

47:22electrification happening in in our

47:24utility.

47:25Done a real deeper dive in looking at

47:27that grid modernization, breaking up the

47:2912 district projects, but bringing that

47:31all back and and taking it home to

47:33saying, "This is the

47:34investment that the community is making

47:36and why, and what it does for you." And

47:38it's replacing transformers that were

47:40from the 1950s and '60s. It's, you know,

47:43making it more resilient. So, when we do

47:44have outages, we have ability to switch

47:46you from one sub substation to another.

47:48So, telling them what the value and

47:49benefit is is absolutely has part of

47:51that story. So, we can bring back and

47:53call back from some of those previous

47:55reports that we've provided, and then

47:57and then

47:58update it with the latest information.

48:00>> reports were hit those subjects, but in

48:03my mind they were too cursory in

48:05explaining it. So, they didn't go deep

48:07enough and in this one we we we really

48:09don't as of yet touch on it. I think

48:12when it gets to council and we'll have

48:15greater public scrutiny, it'll be that

48:16much more important. But I I I don't

48:19want to just reiterate the previous

48:21reports because I don't think they

48:22explained it well enough. They did more

48:24than we do here.

48:26Okay. For for right now, that's good for

48:28me.

48:32>> I just want to ask one one question

48:34before

48:36George.

48:37You did a lot of work as a result of the

48:40UAC recommendations and it sounds like

48:42you're in agreement with them. I just

48:45wanted to make sure if you had any

48:46separate reports or except for this

48:48point we agree or anything like that

48:50just so I know where everybody stands.

48:54>> Um yes, overall we appreciate the

48:56conversation, the concerns, and the

48:58guardrails. We just want to be cognizant

49:00that we are working with the dynamics of

49:04the market.

49:06>> Yeah.

49:06>> And so, should rates evolve to the point

49:09where we cannot stay within the 6% TIC,

49:12we will bring that back to council,

49:14especially if we forecast that before

49:16June before December 6th. We will

49:19continue to calibrate, structure, do

49:22what we can to meet that expectation,

49:26but that is an area that we are more

49:29concerned about than less.

49:33>> Yeah, and you already noted that, so I'm

49:34glad you put put an underline on it.

49:38At some point in time, if we need the

49:40money and it's going a little bit

49:41higher, I would think that council's

49:42going to have to have some discretion

49:45a year from now to make some

49:46adjustments. I pick a year out of the

49:48out of the sky, but

49:50>> Correct. And we could reduce the

49:51principal if we needed to

49:54to stay within that 1%

49:58rate payer impact guardrail. If that's

50:01the predominant concern, there are other

50:03ways of adjusting it.

50:04>> Yeah. Okay. Good.

50:07George, do you have questions? And then

50:09we'll go to public comment after that.

50:11>> All right. Thank you. Uh

50:13good to see updates here, and I also

50:15really appreciate the nimbleness with

50:18uh updating the 2027 forecast, having

50:20bond market updates, responding to the

50:22UAC recommendations.

50:23Um

50:25uh

50:26yeah, keep keeping this fresh is really

50:28appreciated. Um I guess the big picture

50:32question is how do you

50:35how are you going to evaluate the

50:37financing structure considerations in

50:3912? I think

50:43uh you know, clearly we're going to

50:45optimize around the 1% rate limit

50:47increase. We're going to try to optimize

50:49around the 6% TIC.

50:51Um

50:54but

50:55uh

50:56I mean, all of these options sort of

50:58seem reasonable. Like, how do we

51:01like, do we need any council oversight

51:04or uh

51:06uh input on how you actually use these

51:09tools and prioritize between them?

51:15>> I think if um council's sitting at the

51:17policy level of, "Okay, 100 million,

51:21do not exceed in 6% TIC." But I think

51:23perhaps maybe it would be helpful,

51:25Darrin, if you described kind of

51:27how the structuring

51:30process works when we're closer to

51:32pricing and how we work with the

51:34underwriter on that. That might help

51:35shed some light on this.

51:38>> Absolutely. Thank you, Christine. And

51:40thank you for the question. So, just to

51:42make sure I'm understanding the

51:43question, your question was within the

51:45tools in the tool belt we were talking

51:47about, as we get closer to pricing, how

51:50do we decide which one of those tools to

51:52use at the time? Did

51:55I send the question correctly?

51:56>> Yeah.

51:57>> Yeah, so I think the first item is that

52:00we we have the uh not to exceed TIC. So,

52:03that's kind of the parameter that if

52:05we're fitting within that, then we have

52:06the option to sell the bonds as they're

52:08currently structured. As we get closer

52:10to pricing, the way that the transaction

52:12process works is we will set a sale

52:15date. And right now we are scheduling

52:18that sale date to be mid-January. And in

52:21the the months leading up to pricing, we

52:23will have regular updates as we have

52:25been doing with the city and staff, just

52:28talking about here's what we're seeing

52:29in the markets, here's what the TIC's

52:32looking like. And if we start to see the

52:34TIC trend up to that 6% interest rate,

52:38then at that point we will have

52:41conversations about, all right, which

52:44one of these tools do we want to use?

52:45Because each one of them will have their

52:48own set of considerations. In other

52:49words, let's just take the 6%. If we see

52:52the TIC increasing above 6%, really the

52:56options that we have are to either delay

52:58the sale or to potentially look at

53:01reducing the size of the final maturity.

53:04And what we'll do is we'll take stock of

53:07what is occurring in the market at that

53:09time.

53:10Is the situation that caused rates to

53:11increase above 6% something that we feel

53:14is a temporary market reaction to an

53:17exogenous event, or is it something more

53:20systematic that we think is going to

53:21drive rates higher for a longer period

53:24of time? If that's the situation, then

53:26we would probably choose to reduce the

53:28size in the final maturity to get us

53:31under that 6% not to exceed to allow us

53:34to sell the bonds.

53:36If we feel that the reason that we're

53:38above 6% is because it's a kind of a

53:40short-term market reaction to an event

53:42that we think will subside,

53:44then it probably makes more sense to

53:46delay the sale by a few weeks or a month

53:50to see if market conditions improve. So,

53:52it's tough to prioritize exactly because

53:55they're tools that are used in very

53:56specific situations, but hopefully that

53:59helps you give or hopefully that helps

54:00give a little insight into how we think

54:02about that.

54:03>> Yeah. I guess one tool that was

54:05mentioned in the supplemental report as

54:07on the table and likely happening was

54:09reducing the

54:11uh principal amount to around 85

54:13million. And so,

54:16uh

54:17that

54:19um

54:22uh is that the sort of default plan? I

54:24guess I wasn't totally clear between

54:26this presentation and staff report how

54:29those pieces like how we're sort of

54:31determining that amount.

54:35>> It's one of one of the options we have

54:38to stay within the

54:41um 1% rate increase. Um when speaking

54:46with utility staff, we were talking

54:48about, "Okay, what's the ultimate

54:49minimum we can have?" And 85 million,

54:53you know, that aligns with the forecast

54:56was was the

54:57range.

54:58>> Okay.

54:59>> Yeah.

55:00>> So,

55:01related to that, how confident are we in

55:03the project costs? Because, of course, I

55:05noticed that almost all of them are

55:07rounded to the nearest $500,000.

55:10Does our contingency baked in? Like

55:12like, you know, uh

55:15can you elaborate?

55:16>> Absolutely, great question. I appreciate

55:18that as well. So, yes, we actually took

55:20a look That's why we took the projects

55:22and broke them up into 12 separate

55:24discrete projects.

55:25I can also bring up Tara Corley here,

55:27but we also looked at some of the costs

55:30of like projects in PG&E service

55:32territory and what they were seeing in

55:34terms of what the what we should be

55:37expecting in terms of those

55:39investments

55:40and then put those projects over time.

55:42So,

55:43as you look at the projects on that

55:45previous slide is these conversions of

55:48our substations happen over several

55:50years. You have to purchase the

55:51materials. You have to purchase the long

55:53material items. So, you'll you'll be

55:55able to see, you know, frankly, what the

55:58market is and and how it is changing.

56:00But yes, we put those costs in there.

56:01They do include some contingencies and

56:05estimates.

56:06Um it's just the the nature of the work

56:08that we do.

56:09>> Okay, so if we actually go out for 85

56:11million, we're not

56:14putting a bunch of risk on our reserves

56:15cuz we're taking the minimum amount.

56:17Like we're taking 85 million based on

56:19these projects and these projects have

56:20some contingency and we would actually

56:23feel good about landing closer to that

56:25number.

56:25>> Correct. And then there's levers we can

56:27we can pull in terms of the pace of

56:30electrification. So, if you look at some

56:31of these projects, the critical ones are

56:34updating our aging uh substations that

56:37are, you know, with transformers from

56:39the 1960s.

56:41Um some of the projects that we would

56:43able to to look at modifying is our

56:45distribution improvements cuz that's

56:47based on the pace of electrification. We

56:48have a lot of good AMI data that be

56:50coming in. We have some uh

56:53subtransmission projects are in here.

56:56Those are looking at some of the the

56:58higher voltage lines. Um so, we would

57:01we would shift those out and focus

57:03really on the high priority items, which

57:05are are the substations. So, if we need

57:08to make adjustments in the the nature of

57:11the projects, we have that ability to

57:13prioritize the ones that are are

57:15critical for increasing reliability,

57:18um

57:19affordability, frankly, and resiliency

57:21of the system. So,

57:22>> Okay.

57:22>> those projects we have defined and we've

57:24actually looked at those if we have to

57:26have some reduced.

57:27>> Okay, so

57:29I can wrap up this round and come up

57:31back soon. but one taking ways that 85

57:33million-ish is enough that the projects

57:37have some contingencies already

57:40and if we if things get unexpectedly

57:42more expensive, we can delay some of the

57:45distribution projects, which seems to be

57:49half or more of the of the cost in this

57:52initial set of projects

57:55uh

57:55so that we can make the 85 million

57:57dollars work even if there are

57:59unexpected

58:00>> elements. Yeah, so so to be clear, we

58:01started at I think 85 million, we went

58:04to 100. If you look at the table that

58:05was presented in the report, it is still

58:07100 million dollars with the projects.

58:10>> Okay.

58:10>> Um and when you take off, you know,

58:12potentially

58:14um

58:14our levers of looking at distribution

58:17improvements and and phasing those out

58:19over time, um those are about a third of

58:22all the projects on here. So, if we

58:24needed to to, you know, make

58:26adjustments, those are probably where we

58:28would make those adjustments.

58:30>> So, the recommendation of or or

58:33sorry, recommendation is too strong for

58:35it, but where the staff report says

58:36we'll probably we'll likely end up

58:38closer to 85 million than 100 million,

58:40that's actually sort of changing the

58:43plan a little bit on slide five.

58:45Uh the that's sort of already assumed to

58:48be a

58:50>> Yeah, the bond financing here is is up

58:51to 100 million dollars. Again, there's

58:54going to be some some play in terms of

58:56what we use for cash and what we use for

58:57bond financing.

58:58>> Sure. Okay. Um

59:01Uh yeah, I can uh

59:04pick up some of my questions later.

59:06Thank you.

59:08>> I had a couple more before we go to

59:10public comment. Um

59:12I was reading in the as I read the

59:14document, it seemed like you were

59:15suggesting that a double A rating might

59:18be a stretch. Did I read that right? You

59:20didn't quite use those words here in the

59:22presentation, but I just wanted to

59:24check. And and and then what is the

59:25downside?

59:27>> Um, that's correct. Um, a AAA rating for

59:31electric utility is quite a stretch. I

59:34know that I hate to kick it over to

59:36Daryn constantly, but Daryn, you had

59:38some really good um,

59:40color on this

59:42um, the why because staff had asked you

59:45um,

59:48>> Yeah, absolutely. Happy to address that.

59:50I actually invite one of my colleagues

59:51um, Mike Berwanger on who uh, can also

59:54add some additional color, but

59:56just given the operational and the risk

59:58profile of electric utilities in

1:00:01California, particularly with the

1:00:02relation to wildfire, etc. We don't see

1:00:05a lot of AAA utilities. And so, it's a

1:00:08little bit different than the water side

1:00:10where water is uh, different in its risk

1:00:13profile. And so, when we look at what

1:00:17might be possible with the electric

1:00:19side, we think something in the double A

1:00:21category is probably more likely. But

1:00:23Mike, if you're available, maybe you can

1:00:25share us some additional insight into

1:00:27um,

1:00:28uh, the rating agencies view of the

1:00:30power utilities.

1:00:31>> Yeah, they just view it more risky than

1:00:33water. Um, yeah, I think I agree with

1:00:36what you just said, Daryn. I would just

1:00:37add that uh, we're not aware of a AAA

1:00:40rated public power electric utility in

1:00:43the country. So,

1:00:45uh, but we do feel that the somewhere in

1:00:48the double A category, it's always tough

1:00:49to nail down uh, the rating analysts.

1:00:52We're about to start on that process and

1:00:54we'll have better information as we get

1:00:56along and get further into that, but by

1:00:58all accounts, the somewhere in the

1:01:00double A category is definitely

1:01:02achievable.

1:01:04>> And if we dropped to A,

1:01:07what does that mean

1:01:09in terms of the whole sales process?

1:01:12>> So, if we dropped to a single A rating,

1:01:15what that really means is that the

1:01:17interest rates that we're going to pay

1:01:18are going to be higher. So, right now

1:01:20what we estimate is if you're in the

1:01:22double A category, the cost of dropping

1:01:25from let's say double A to double A

1:01:27minus is approximately five basis

1:01:29points. If you drop to a single A, then

1:01:33the increase might be more than five. It

1:01:36might be between five and 15 just

1:01:37because there is a

1:01:39differentiation between investors who

1:01:41want double A minus versus A plus rated

1:01:43paper, but that would all be encompassed

1:01:46within our not to exceed interest rate

1:01:48of 6% within the resolution. So, we

1:01:51would still have to fit within that.

1:01:53We would just have less cushion.

1:01:56>> Okay.

1:01:58And then just for the public, can

1:02:00somebody recap what's in the 600K of

1:02:04expense to issue?

1:02:09That money That money doesn't come to us

1:02:11and it's cost of doing business, but I

1:02:13think we should articulate that to the

1:02:14public.

1:02:15If you need more time on that, we can.

1:02:18>> Thank you, uh chair.

1:02:21That would include fees for bond

1:02:24counsel, so Jones Hall,

1:02:26disclosure counsel, which is Stradling,

1:02:29our municipal advisor PFM, the

1:02:32underwriter JP Morgan,

1:02:35and credit ratings from two agencies.

1:02:40>> Yeah, I I knew that was in the report,

1:02:41but I wanted it to be spoken out to the

1:02:43public, so

1:02:44if you want to add any other detail, you

1:02:46can, otherwise that's good for now.

1:02:48Okay.

1:02:50Let's go to public comment, please.

1:02:55>> We currently have one request to speak.

1:02:57Our first speaker is Hamilton H.

1:03:02>> Can you hear me?

1:03:03>> Yes, we can.

1:03:05>> Thank you. I have a couple of comments.

1:03:07Palo Alto needs to modernize its aging

1:03:10electrical infrastructure, improve

1:03:12reliability, and accommodate growing

1:03:14electricity demand.

1:03:16The benefits do need to be much more

1:03:18clearly articulated by utility staff to

1:03:22the city council for this bond raise and

1:03:25going forward to the UAC.

1:03:27I support authorizing the full 100

1:03:30million, not the 85 million in grid

1:03:33modernization bonds with appropriate

1:03:36financial safeguards since each bond

1:03:38raise takes considerable time and effort

1:03:42Darren presented tools, but we need a

1:03:45strategy.

1:03:46Using these to protect rate payers

1:03:49against significant increases or

1:03:52decreases since we cannot predict which

1:03:55way they will go. And of course they

1:03:57will fluctuate over time.

1:03:59I believe the strategy is

1:04:02raising the full amount of 100 million

1:04:04to protect against rates increasing

1:04:08and absolutely require a 10-year or

1:04:12shorter call provision so we can finance

1:04:16if rates drop. I do not support waiting

1:04:19till pricing or offering to decide if we

1:04:22should extend the call provision beyond

1:04:2410 years. We will have two more rounds

1:04:27of bond financing at 150 million each

1:04:31which also essentially acts as cost

1:04:33averaging the interest rates which is

1:04:36another reason I do not support raising

1:04:3985 million because if we raise 85

1:04:42million now and the rates go up we did

1:04:45ourselves a lot of damage. Things like

1:04:48delaying the offering because rates is

1:04:50high is just a pure gamble.

1:04:53So let's have a comprehensive

1:04:55well-thought-out financing strategy that

1:04:58will protect us since we cannot predict

1:05:01the future about both increasing rates

1:05:04and decreasing because they could

1:05:05increase a lot, they could decrease a

1:05:07lot.

1:05:08Thank you and thank you for for me share

1:05:10my comments.

1:05:13>> That concludes public comment on action

1:05:15item one.

1:05:19>> Okay.

1:05:21Back to the committee. Second round of

1:05:23folks.

1:05:24Beth, did you want to go?

1:05:25>> Thank you. Um

1:05:27so first uh could you address the

1:05:30question that uh Hamilton Hitchings

1:05:33raised about whether we should have a

1:05:35shorter uh call period?

1:05:38>> Um I'll attempt to and then Darren,

1:05:41chime in if you can. Um as we look at

1:05:43trying to manage and minimize costs of

1:05:45issuance, each strategy will prompt an

1:05:48anticipated market response. Reducing

1:05:51the call period, i.e. being able to

1:05:54refund and call over all our debt

1:05:56earlier is a benefit to us as a

1:05:58borrower. It's a disadvantage to the

1:06:01lender and for that reason, those

1:06:03features will cost us more.

1:06:06Typically, um it is a 10-year standard.

1:06:09Anything below that will cause a

1:06:11reaction and therefore our cost of

1:06:13borrowing will go up for that benefit.

1:06:15Darren, did you want to add to that?

1:06:18>> Yeah, absolutely. Thank you, Lauren and

1:06:19I think I agree with everything you just

1:06:21said and the reason that we make this

1:06:23decision closer to pricing is because

1:06:26when the market's volatile like it is

1:06:28right now, the

1:06:30benefit or the cost that investors will

1:06:32charge us for a shorter call can vary.

1:06:34For instance, right now when we're

1:06:35looking at an 8 and 1/2 year call versus

1:06:38a 10 10-year call,

1:06:40investors are charging us about four

1:06:41basis points on the TIC.

1:06:44However, if the situation changes and

1:06:47investors are instead demanding 10 basis

1:06:49points, well then the cost benefit may

1:06:52not work in our favor and so that's why

1:06:55our plan our current plan is a 10-year

1:06:57call, but we're going to have these

1:06:59tools that we have available to us that

1:07:00we've analyzed and figured out what is

1:07:02the break even that we're willing to

1:07:04accept in terms of the cost for a

1:07:06shorter call so that we're prepared to

1:07:09make that decision at pricing based off

1:07:11what we're hearing from investors.

1:07:13>> Okay, so

1:07:15by approving

1:07:16the staff

1:07:18proposal

1:07:20we would be allowing a shorter call

1:07:22period if it was warranted.

1:07:27>> That's correct.

1:07:28>> Okay. All right.

1:07:30Um

1:07:31and then

1:07:33were folks able to

1:07:35pull up any information on

1:07:37where we are on our reserves?

1:07:40>> Yes. So,

1:07:41the two reserves that we talked about

1:07:43with the committee and I think that

1:07:45you're referring to are both our

1:07:46operating and capital reserves. Our

1:07:49capital reserve is at about five These

1:07:51are projected for year the end of this

1:07:54year FY 2027.

1:07:56Um so, we're estimating about 5.9

1:07:59million in the CapEx reserve.

1:08:02Uh the target is over 7 million.

1:08:05Uh the OpEx reserve is currently

1:08:06estimated at 54 million.

1:08:09And the target for that is between 38

1:08:11and 76 million.

1:08:14>> And in this context, why does the

1:08:16operating reserve have any relevance? Do

1:08:19we

1:08:19>> It doesn't. I just wanted to make sure

1:08:21that we gave it to you given how large

1:08:23it is that someone could perhaps

1:08:25criticize that we hid them all.

1:08:26>> So, as we've been paying this 28 million

1:08:30in projects last couple years, we were

1:08:32feeding that capital fund and so, we

1:08:35weren't really draining the reserve very

1:08:37much. Just

1:08:38a couple million.

1:08:40Is that right?

1:08:40>> I would say it's pretty low.

1:08:42Um

1:08:43the

1:08:45CIP reserve, we're at the minimum. The

1:08:48CI current CIP reserve maximum, if I

1:08:51were to look at the target, is 28

1:08:53million.

1:08:54>> Oh, I

1:08:55maybe I misheard what you had said. I

1:08:57thought you said we were 5.something and

1:08:59our target is 7.

1:09:01>> Um so, the council at the last meeting

1:09:05gave a current minimum guideline to stay

1:09:08with that, which would be 7 million.

1:09:11Um, and so the annual depreciation,

1:09:14which staff recommended in our last

1:09:16meeting, was a 13.6 million dollar

1:09:18reserve. So if

1:09:20Sorry, there's a lot of numbers floating

1:09:21around as we're actively changing our

1:09:23reserve target.

1:09:24>> you know, what do we really

1:09:26>> Yeah.

1:09:27>> think we should be at long-term, and it

1:09:30sounds like what we authorized was a

1:09:33near-term agreed down

1:09:36until we got this bond issue.

1:09:38>> That's correct.

1:09:38>> Okay. So, that's part of the story. I

1:09:41think we we need to explain that as we

1:09:42go back to the council.

1:09:44Um,

1:09:45and it's it's it's reasonable. Uh, there

1:09:48were decisions made, but

1:09:50we're we're kind of diving back in

1:09:52without the context.

1:09:54And it

1:09:55I I just want to revisit um, a little

1:09:57bit one more time on

1:10:00the values that we'll get from this grid

1:10:02mod, um,

1:10:04because uh, the

1:10:07from the limited amount of research I

1:10:10was able to the

1:10:11see, the

1:10:13um,

1:10:14>> Uh-huh.

1:10:15>> Okay.

1:10:18Um,

1:10:19what is that

1:10:21uh, just the age of the transformers

1:10:24really degrades their uh, reliability a

1:10:26lot.

1:10:28And then we have

1:10:30contemporary transformers versus 50

1:10:33years ago are different materials. They

1:10:36have

1:10:37um,

1:10:38uh, they're smarter systems.

1:10:40They have surge protections.

1:10:43Uh, all of those leading to advantages

1:10:46primarily in reliability.

1:10:49Is that correct?

1:10:50>> Yeah, that's absolutely correct. I mean,

1:10:52if you look at our our system, we have

1:10:54two substations that are 4 kV islands.

1:10:56So we're not able to if those if those

1:10:59substations fail that's the second

1:11:01>> that's the the reliability. But, yes,

1:11:02the modernization of the equipment so we

1:11:05can have advanced PLCs, we can have

1:11:07controls, we can monitor the system,

1:11:09we'll have the ability to do advanced

1:11:11switching where we have to do manual

1:11:13now. It really opens up a lot of doors

1:11:15for us in terms of modernizing system

1:11:17and then restoring customers sooner.

1:11:20So, we're really looking forward to

1:11:21those investments.

1:11:23Um but, yes, we can do better explaining

1:11:26that to the city council on what the

1:11:28value is of these investments that the

1:11:31the city is making.

1:11:32>> And you jumped to that second major

1:11:34category. So, in addition to the both

1:11:36the pole mounted and the ground mounted

1:11:38transformers being

1:11:41newer and not having lost every year

1:11:44losing significant reliability for every

1:11:46year they're in service. And I I was

1:11:49surprised how much they lose based on

1:11:51just the age.

1:11:53Then, they're better designed today

1:11:56in several significant ways than 50

1:11:58years ago.

1:11:59And um

1:12:00and then lastly, what you were leading

1:12:02to is switching from the four to the 12

1:12:04KV and really reminding everybody

1:12:07because I know you had explained that

1:12:09before, but why that is, what are the

1:12:12multiple values from that. So, good.

1:12:15>> And we have about 2,900 customers on

1:12:17those two substations. So, really

1:12:18getting them to be able to have

1:12:20resiliency and be able to for us to

1:12:22switch in case of any failures um is

1:12:25really

1:12:26critical important to us.

1:12:27>> Great. And I I recall

1:12:30uh and we we haven't revisited this in a

1:12:32while, but when we had

1:12:34significant outages in was it

1:12:372021 or 2021-22

1:12:41um

1:12:41uh a good portion of those were

1:12:44substation equipment based. And um I

1:12:48think we did some

1:12:50some replacement on a more urgent basis

1:12:53if I recall but not this systematic

1:12:55approach. Is that

1:12:57generally correct?

1:12:58>> So, you know, we did take a look back at

1:13:00a lot of the the outages in terms of the

1:13:02the types of outages and the cause and I

1:13:04believe and uh Terry will correct me if

1:13:06I'm wrong is about 38% of the outages

1:13:09were caused by equipment failures. So,

1:13:11that's a real telltale sign that uh we

1:13:13do need to reinvest in those

1:13:15replacements

1:13:16um and as they reach end of life.

1:13:18>> Yeah, and implicitly

1:13:20we'll take that 38% down a lot, not to

1:13:23zero

1:13:24uh but uh this will take it down a lot

1:13:27and that that's there there goes to this

1:13:30estimate of how much improvement in

1:13:32reliability we'll get just from that.

1:13:34Okay, thanks.

1:13:39>> George.

1:13:40>> Okay, a few uh

1:13:43extended questions on reserves. Um

1:13:48can you refresh me a little bit on the

1:13:50point for uh reimbursing the capital

1:13:53reserves? So, we are at 5.9, target is 7

1:13:58to 28 I believe I heard. Um

1:14:01when we uh

1:14:04how much of the uh bond financing would

1:14:07we potentially actually use for the

1:14:08reimbursement?

1:14:12>> I think Christine has the um

1:14:15reimbursement number somewhere in the 20

1:14:18to 30 million figure.

1:14:20>> I I right, the the total amount of work

1:14:22that could be reimbursed is 28.7

1:14:25million.

1:14:26>> Mhm.

1:14:26>> And our capital

1:14:29reserve max range is or I mean target

1:14:34max range obviously we

1:14:35could have more is around 28 million, is

1:14:38that what I heard?

1:14:39>> At present, but you're obviously

1:14:40currently reviewing that.

1:14:42>> Yes. Right. So, if we

1:14:47reimburse

1:14:48and we have

1:14:50uh

1:14:51not quite six in right now, then we are

1:14:55reimbursing

1:14:56or then we are potentially having going

1:14:59straight to the very high range in a way

1:15:01that

1:15:03we are paying interest on it potentially

1:15:05in an avoidable way. And so, I didn't

1:15:07see that as a strategy and I'm just not

1:15:10sure whether

1:15:11uh it's something

1:15:13we'd want to consider as a strategy uh

1:15:15in the financing structure

1:15:16considerations. Um

1:15:18In some ways, that feels preferable than

1:15:20delaying distribution upgrades, for

1:15:22example,

1:15:23uh

1:15:24as far as the trade-offs we could make.

1:15:26>> Absolutely. And I think that's one of

1:15:27the tools that would enable staff to go

1:15:30down to that 85 issuance 85 million

1:15:32issuance level with minimal impacts to

1:15:35the project versus if they were to go

1:15:37further,

1:15:38um

1:15:39there would be more significant project

1:15:40impacts. So, to your point, depending on

1:15:44uh tools that we used to strategically

1:15:47make this investment, um we could choose

1:15:50lower reimbursement target

1:15:53um for the reserves and then make that

1:15:55up through our general rate making on an

1:15:58annual basis.

1:15:59>> Yeah, I would definitely be interested

1:16:01in certainly having that option sort of

1:16:03more explicitly on the table.

1:16:06Um can you also fill me in on the

1:16:09ex- electric special project reserves,

1:16:12which are 30 million

1:16:14and uh

1:16:16contemplated as sort of filling in some

1:16:18potential short-term cash flow needs,

1:16:21uh

1:16:21which I understand has some trade-offs.

1:16:25Can you talk one about some of the

1:16:26flexibility in the

1:16:28and flexibility in that reserve and its

1:16:32target levels? And can you also talk

1:16:34about um

1:16:36let's say we did go for a lower amount

1:16:39uh and then

1:16:42costs unexpectedly change at the back

1:16:44end, could we also just use that to

1:16:48provide some buffer

1:16:52>> Sure.

1:16:54The special projects reserve and I may

1:16:56need Lisa and Alan's help is

1:16:58um

1:16:59a

1:17:00specific use reserve. There's actually a

1:17:02council resolution

1:17:05that guides guides and governs how those

1:17:07funds can be used. So, short-term

1:17:09borrowing from it is obviously something

1:17:11that we'll do to help manage the

1:17:13nimbleness within it, but in terms of

1:17:16full on dedicating monies from those

1:17:19reserves, we staff wouldn't do that

1:17:21unless it's in alignment with the

1:17:23original resolution intention. And

1:17:25ultimately it was intended to do a major

1:17:29investment in in

1:17:31our transmission, frankly. I think

1:17:34um

1:17:35because we needed more redundancy

1:17:38for our transmission since we have a

1:17:40single point of failure or we have a

1:17:42single point of failure

1:17:43and transmission projects are extremely

1:17:45costly.

1:17:48>> Um

1:17:51>> I would also like to add that um we

1:17:54would want to analyze reducing some of

1:17:56our reserve balances as you may recall

1:17:58in the our water rate

1:18:01um

1:18:01setting and the

1:18:04the rating report from S&P, they did

1:18:06note that one of the things they look at

1:18:08is our liquidity, which means a

1:18:10measurement of our reserve levels. So,

1:18:12there would be some correlation between

1:18:15reserve levels and bond rating and going

1:18:18back to, you know, AAA, AA, single A and

1:18:21what that could do ultimately to our

1:18:23borrowing costs. So, it could become a

1:18:25circular

1:18:26problem. I'm not saying there's a direct

1:18:29line, but these are the different things

1:18:31we'd want to analyze as we

1:18:33move things around to

1:18:36cobble together a sound strategy.

1:18:38>> Yeah.

1:18:41Uh

1:18:42and transmission improvements are not

1:18:44included in this first set of projects.

1:18:48Uh

1:18:49are they? And so would not naturally be

1:18:52a fit for the ESP reserves.

1:18:55>> Yeah. So um

1:18:57sorry to be the the

1:18:58jerky engineer, but so these are sub

1:19:00what they call subtransmission projects,

1:19:02so 60 kV or below. I don't want to

1:19:04confuse that with the transmission

1:19:06project that uh the CAISO authorized to

1:19:09bring a second transmission uh to to

1:19:11Palo Alto and we're you know working

1:19:13through that process as well.

1:19:15>> Okay.

1:19:16>> But that is separately funded and not

1:19:18part of this funding here.

1:19:19>> Yes, and the ESP is for that and so uh

1:19:22okay. Uh

1:19:24good to understand.

1:19:27And um

1:19:29and it's also good that it's listed as

1:19:31an option, but I now way better

1:19:33understand some of the limitations and

1:19:34issues there.

1:19:36Um

1:19:37uh

1:19:40just because my comments are somewhat

1:19:43brief, uh maybe I'll just sort of do a

1:19:46quick

1:19:47round of that now. Um

1:19:51uh

1:19:52yeah, I think uh

1:19:55looking at reimbursement

1:19:57uh as a lever is something we should

1:19:59certainly at least explicitly

1:20:00contemplate.

1:20:02Um I agree with the public commentary

1:20:06that

1:20:07we should not necessarily delay issuance

1:20:10or overpay for or or pay for nonstandard

1:20:13options

1:20:15uh in the sense that

1:20:16we would pay a premium to

1:20:19uh and or be trying to time the market

1:20:22in a way that may not be necessary if we

1:20:25already have two more tranches of debt

1:20:27that

1:20:28phased over years sort of naturally

1:20:30diversifies us to interest rate risk. Um

1:20:35uh

1:20:37and

1:20:39uh

1:20:41I guess the last point is that uh and

1:20:44maybe this is just like a quick question

1:20:45for Nods. Like we would like how much

1:20:48more specific would we actually get when

1:20:50we get a staff report in

1:20:53mid-December for the actual sign-off on

1:20:56this? Would we have more specifics about

1:20:58what financial structures we're actually

1:21:00leaning towards at that point?

1:21:04>> I think Darren, I'll defer to you

1:21:06because there is still a spread between

1:21:08December, I think it's December 7th, and

1:21:11potential sales at the end of January.

1:21:14So, please comment to the extent you're

1:21:16comfortable and confident.

1:21:18>> Perfect. Thanks, Lauren. Yeah, you hit

1:21:20the nail on the head. We'd still have a

1:21:21month before we're looking to price, but

1:21:23I we we would have an update on kind of

1:21:26where we stand from a TIC basis.

1:21:28And some of the impacts of some of the

1:21:31things that have happened that will

1:21:33happen between now and then such as the

1:21:34election. So, we'll have a better

1:21:37comfort with regards to where the TIC

1:21:39might be, but in terms of the final

1:21:41structure, to Lauren's point, we'd still

1:21:43have a month until we sell, so we'd want

1:21:45to make sure that we retain that

1:21:46flexibility, but we could come back with

1:21:49a little bit more refined information.

1:21:52>> I think having some more elaboration and

1:21:55loose prioritiz- or loose prioritization

1:21:58or at least discussion of how these

1:21:59tools will be used and also including um

1:22:03uh reimbursement levels on previous

1:22:05projects as a tool uh

1:22:09would be important for me in uh

1:22:12in the next phase. Like uh

1:22:15softly right now with incomplete

1:22:17information, I'd lean toward

1:22:18slightly smaller amounts, not trying to

1:22:20time the market, not trying to pay

1:22:23uh too much more for non-standard

1:22:24options, uh

1:22:26potentially looking at reimbursement

1:22:27rates. Like these things are all in my

1:22:28mind, but uh um

1:22:31uh

1:22:32it's hard to see how they fit cohesively

1:22:34as a whole until

1:22:36uh

1:22:37maybe we get them in a staff report in

1:22:39December. And so that's what I'd like to

1:22:41see then.

1:22:42Um

1:22:44uh but and yeah, those are my comments.

1:22:46Uh I

1:22:48uh

1:22:49otherwise think that

1:22:51this generally make or that this makes

1:22:53sense.

1:22:58>> Okay, I had a couple questions back way

1:23:00back on the slides.

1:23:01Uh

1:23:02I wasn't quite sure about the sort of

1:23:04the materiality of slide number nine.

1:23:06We're talking about the interest rates

1:23:07and where they were historically. Is

1:23:08that just to keep us relatively

1:23:10comfortable that they're not going to go

1:23:12to 10%? Is that really

1:23:15>> I mean, I'll talk to that. We it's one

1:23:18of the requests from the utilities

1:23:20advisory commission.

1:23:21Um and the discussion with them is uh

1:23:24they wanted a better understanding of,

1:23:26you know, where are we in the market? Um

1:23:28and not trying to

1:23:30>> Okay.

1:23:30>> Well, play the market. Maybe someone to

1:23:32play it. I'm not sure, but just really

1:23:34have that better understanding since

1:23:36uh you know, where we are today versus

1:23:38in 3 months from now versus the last 30

1:23:41years.

1:23:41>> Okay.

1:23:42Uh and then on nine, your slides your

1:23:45slide was slightly different than the

1:23:46packet. Is that cuz you updated 2 hours

1:23:48ago? So

1:23:50>> Yes.

1:23:50>> Okay. Just

1:23:51>> This is one of them.

1:23:52>> Confirm that.

1:23:54Okay.

1:23:55Um

1:23:57Yeah, I I I would like to second uh

1:24:00Commissioner Burt's Burt's motion on the

1:24:03level of storytelling that we need to

1:24:05do. Um

1:24:06because it's just so valuable for folks

1:24:09to know it

1:24:10I don't want to use the word in detail,

1:24:12but in in in in a substantial

1:24:14presentation on all the good stuff this

1:24:15is going to do. There's still a lot of

1:24:17folks out there that think that we don't

1:24:18need most of this financing because it's

1:24:20going to be used for more EV chargers

1:24:23and

1:24:24um taking away my gas stove

1:24:26for you know retrofit of homes and some

1:24:30of it we hope is going to be used for

1:24:31both of those things because of the

1:24:33reliability and the whole structure and

1:24:34all all that but

1:24:37the point about how much of this we

1:24:38would have to do anyway

1:24:40and get the reliability factor in there

1:24:43is really important and then just all

1:24:45the other good stuff that we can feel

1:24:46more comfortable about in the whole

1:24:48utility

1:24:50is a good story and we should we should

1:24:52we should tell it in in detail.

1:24:57Let's see.

1:25:00Also back on that

1:25:03in the packet that where you you're

1:25:05you're

1:25:06showing the evaluation stuff and the

1:25:08financing structures where you reduce

1:25:09the size or delay the sale. As I went

1:25:12through that a couple of time each time

1:25:13I did on on number two when I got the

1:25:15number two delay the sale I always wrote

1:25:16no.

1:25:17I just think that should be sort of as

1:25:20last a last resort as we would probably

1:25:22get. Now I understand from some of the

1:25:24comments from our consultants that that

1:25:26means delaying the sale two weeks

1:25:28potentially or

1:25:29but you know substantially we shouldn't

1:25:31even have that in our mind because we

1:25:33need to finance this thing. I also think

1:25:35that

1:25:37we're all in the business of trying to

1:25:38guess at market rates and interest rates

1:25:41and so on and some of us are better than

1:25:43others but you never you never really

1:25:44know until it happens so I think Mr.

1:25:46Hedges point is well taken there too

1:25:48trying to kind of guess on that versus

1:25:50let's get this done so we can build what

1:25:53we really need here for the next 20

1:25:55years or so

1:25:56is is really the core point so that's

1:25:59sort of a

1:26:00key comment that that I wanted to make.

1:26:03And you also pointed out in that same

1:26:05section

1:26:06that you have a short-term backup plan

1:26:08with the

1:26:09electric special projects reserves so

1:26:11that gives us a little bit there if if

1:26:13we need to but not nearly what what we

1:26:15want.

1:26:18So I think it was a very

1:26:20thorough

1:26:21presentation with a lot of authorities

1:26:24here being able to to present it to us.

1:26:26I appreciate the UAC input

1:26:29as well and uh

1:26:30glad that you guys were able to

1:26:32incorporate that in time for this

1:26:33meeting.

1:26:37Any other comments from the committee?

1:26:42Okay, then we'll entertain a motion.

1:26:47>> I will move the staff recommendation.

1:26:51>> The three points?

1:26:53>> Yes, the uh

1:26:55updated one in this

1:26:57in the slides.

1:26:59>> In the supplemental memo?

1:27:00>> Yeah.

1:27:01>> Yeah, also in the slide though.

1:27:03>> Yeah, yeah.

1:27:03>> Second.

1:27:05>> Okay, if there's no other conversation,

1:27:07we take a vote, please.

1:27:12>> Council member Lawie?

1:27:13>> Yes.

1:27:14>> Council member Lu?

1:27:15>> Yes.

1:27:16>> Council member Burt?

1:27:17>> Yes.

1:27:17>> Motion carries unanimously.

1:27:20>> Uh thanks a lot to staff and outside

1:27:22consultants as well and

1:27:24let's keep hopeful on interest rates.

1:27:26>> Well, I guess a question given that this

1:27:28was unanimous, uh are we recommending

1:27:31that it go forward as a consent item?

1:27:35>> Rather than

1:27:36>> Oh, unfortunately, um

1:27:39it can't. It has to be on action per

1:27:41state law.

1:27:42>> Oh, good.

1:27:43>> over 100,000

1:27:44>> Because

1:27:44>> it has to be on action.

1:27:45>> All right. I I was going to question

1:27:48whether it shouldn't be on action, so by

1:27:51default it is. Thank you.

1:27:52>> Yeah, and including telling the story.

1:27:55>> That's right.

1:27:55>> Yeah.

1:27:57Okay, thanks.

1:28:12>> Thank you.

1:30:06>> Okay, we're going to move to our second

1:30:08agenda item for this afternoon,

1:30:11uh which is uh a couple recommendations

1:30:13on the

1:30:15regional water quality control plant.

1:30:19So, we'll turn that over to

1:30:20>> Yes, and good evening Chair Vaelen and

1:30:23committee members. Uh I'm Brad

1:30:25Eggleston, director of public works.

1:30:28Uh so, the topic before us tonight, uh

1:30:30wastewater treatment fund reserves, are

1:30:33a very important topic for the financial

1:30:35health of the regional water quality

1:30:37control plant, uh and also for rate

1:30:40planning by Palo Alto and our other

1:30:42partners.

1:30:43And our team has really been doing a lot

1:30:46of work on this topic over the past

1:30:48year,

1:30:49including multiple discussions about the

1:30:52recommendations with the partners,

1:30:54and we're very glad to re- have reached

1:30:57this milestone of having this discussion

1:30:59with the committee on those

1:31:00recommendations.

1:31:02Uh so, with that brief introduction, I'm

1:31:04going to turn it over to Tina Pham, uh

1:31:06senior engineer at the plant, who's

1:31:08played a key role in developing these

1:31:10recommendations. Uh she'll also be in-

1:31:13introducing some of the other staff and

1:31:14consultants who are here who have been

1:31:16participating.

1:31:19>> All right, thank you, Brad.

1:31:21Um

1:31:22as he mentioned, I'm a senior engineer

1:31:23with the RWQCP, and over the last year,

1:31:26we've been working very closely with our

1:31:28program manager, Wedren Klaren, and

1:31:30Raptelis, uh who is a consultant

1:31:32specializing in financial planning for

1:31:34local governments to update our reserve

1:31:36policy. I'm happy to present, and

1:31:38sitting next to me is Greg Sands from

1:31:40Wedren Klaren, and on Zoom is Sudhir

1:31:43Partiwala. Um both of them were critical

1:31:45in developing uh these recommendations,

1:31:47and will be available to help me answer

1:31:49uh questions you guys may have.

1:31:51Um so, the work is particularly

1:31:53important because our existing reserve

1:31:55policy is more than three decades old

1:31:57and does not include a framework for

1:31:59direct contributions from our partner

1:32:01agencies to fund our reserves.

1:32:05Um next slide.

1:32:06So this slide um is our

1:32:09staff uh one slide back. This slide is

1:32:12our staff recommendations as presented

1:32:13in the staff report and we would like

1:32:15Finance Committee to review them and

1:32:16provide direction.

1:32:18Next slide.

1:32:19Um this slide is a more detailed version

1:32:23um

1:32:24of our staff recommendations

1:32:25specifically showing the calculation for

1:32:27each reserve type and I'll go through

1:32:28that fairly quickly. For the O&M

1:32:30reserve, the calculation is made of two

1:32:33parts. First part is 20% of the annual

1:32:36operating cost. Second part is 100% of

1:32:39the minor CIP annual authorization. For

1:32:42capital reserves, also two part um to

1:32:45this target, it would be 100% of the

1:32:47average annualized five-year capital

1:32:50plan excluding minor CIP. And the second

1:32:53part is 10% up to 20% of one year

1:32:57average of the annualized five-year CIP

1:33:00um for debt-funded projects.

1:33:02For our debt reserve, we are simply

1:33:05recommending to match our debt covenants

1:33:07requirements. And for rate stabilization

1:33:09reserve, because the plant has partners

1:33:11who are individually responsible for

1:33:13setting their rates, um we uh

1:33:17which are informed by our plant

1:33:18forecast, um we are recommending to

1:33:20eliminate them uh eliminate the rate

1:33:23stabilization reserve.

1:33:25Next, to implement these reserves, um

1:33:27our staff is proposing a five-year

1:33:29phasing schedule um where reserve

1:33:32contributions are increased by a fixed

1:33:34percentage with collection starting in

1:33:37fiscal year 2029.

1:33:39Next slide.

1:33:42So here shows our reserve amounts. The

1:33:44idea is that the reserves would result

1:33:46in amounts recalculated each year as

1:33:48they evolve through time. As you can

1:33:50imagine, our O&M costs change, our CIP

1:33:52program evolves, and loans are initiated

1:33:54and executed and paid off. And so the

1:33:57amounts here are based from information

1:33:59from our fiscal year 2027 forecast and

1:34:03assumes contributions as I mentioned

1:34:05starting in fiscal year 2029. So here in

1:34:07this slide you'll see two charts. The

1:34:09top chart is a blue chart showing the

1:34:12initial RWQCP reserve targets for each

1:34:15reserve part and each reserve type.

1:34:18The first row represents plant-wide

1:34:20reserve target

1:34:22by fiscal year 2033.

1:34:25Made up of debt reserve and capital

1:34:27reserve and these two are based on fixed

1:34:30capacity shares. The O&M reserve will be

1:34:33based on each partner's flow and load

1:34:35share which is updated annually based on

1:34:37data collected from flow meters and

1:34:39samples from the collection system. This

1:34:41split aligns with how costs are actually

1:34:43distributed between the agencies.

1:34:45Second row is Palo Alto specific reserve

1:34:49target amount in fiscal year 2033. The

1:34:52bottom chart shows the five-year phase

1:34:54in timeline to reach the target amount

1:34:56using a fixed rate of increase. You will

1:34:59see the RWQCP reserve targets and the

1:35:02Palo Alto specific amounts as well. Next

1:35:04slide.

1:35:06So working back to

1:35:08how we are making these recommendations,

1:35:10the reserve

1:35:11the current reserve policies are not

1:35:13specific to RWQCP

1:35:15and its partnership model and the

1:35:17associated partner agreements. And

1:35:19that's one of the main reasons why we

1:35:21wanted to do this reserve study. Looking

1:35:23forward though, we sought to develop an

1:35:25updated reserve policy that would meet

1:35:27the current need but also our future

1:35:28needs. Keep in mind that our future

1:35:30capital program is being looked at as

1:35:32part of our long-range facility plan

1:35:34update currently underway and we're

1:35:36anticipating to finish that work up next

1:35:38year in 2027.

1:35:40In addition, we know that Baker Tilly's

1:35:42has extended considerable efforts and

1:35:45our utilities department has as well on

1:35:48citywide reserve policies.

1:35:50And we have reviewed their work and we

1:35:52are working to align the reserve policy

1:35:54recommendations where applicable. Next

1:35:56slide.

1:35:57So, for consistency and clarity, we want

1:36:00to provide some working definitions so

1:36:01we're all using the same vocabulary.

1:36:03These are in the staff report and I'm

1:36:05happy to refer back to them if needed.

1:36:07Next slide.

1:36:09So, over the past year, we've worked

1:36:11hard to analyze several different

1:36:13reserve types

1:36:15um and several different alternatives,

1:36:16several different phasing timelines, and

1:36:19the means of how to increase those

1:36:20amounts um

1:36:22and how they're funded toward the

1:36:23initial reserve targets. We looked at a

1:36:25lot. And so, the check marks summarize

1:36:27the results of the alternatives analysis

1:36:29and reflect the alternative staff have

1:36:31decided to carry forward within our

1:36:33recommendation.

1:36:34So, again, O&M capital debt rate

1:36:37stabilization reserves were assessed

1:36:39over 5, 10, and 15 years um and

1:36:44uh we also looked at the increase types

1:36:46over time.

1:36:48It's very quickly um evidence says that

1:36:5015-year phasing timeline would not work

1:36:53um especially to achieve some of our

1:36:55targets and our increasing capital

1:36:57program that we're expecting. And so,

1:36:59that uh phasing timeline was eliminated

1:37:02early on.

1:37:03Next slide.

1:37:05So, this slide gives the reasoning for

1:37:07our reserves. The conclusion um of the

1:37:10reserve types analyzed identified the

1:37:12need for an O&M reserve in order to

1:37:14mitigate risk and expense of the current

1:37:17billing practice practices and make sure

1:37:19that the plant had sufficient working

1:37:21capital required. Capital reserve is

1:37:23needed in order to respond to unforeseen

1:37:26issues and emergencies. And also, a debt

1:37:28reserve is needed to meet our loan

1:37:30commitments. Again, we found that rate

1:37:32stabilization was not applicable uh to

1:37:34us as a regional entity as we're not

1:37:37responsible for setting rates. Next

1:37:39slide.

1:37:40So, phasing schedule was very important

1:37:42to us and we worked very carefully with

1:37:44our partners to land on our

1:37:46recommendations here.

1:37:47Staff assessed both 5- and 10-year

1:37:49timelines for meeting the initial

1:37:51reserve targets and we found that 5-year

1:37:52timeline best positioned our plant to

1:37:55meet the potential 10-year forecast

1:37:57based on what we knew at the time last

1:37:59year.

1:38:00So, five the 5-year timeline also

1:38:02increases the overall reserve amount

1:38:04quicker, which is anticipated to help

1:38:06provide better financial ratings and

1:38:09therefore could provide better borrowing

1:38:10terms for future debt issuances.

1:38:14Fixed rate or percent increase was

1:38:16determined to be more favorable than

1:38:18fixed amount increase. The fixed rate of

1:38:20increase keeps the year-over-year

1:38:24impacts predictable and this is

1:38:25important to our partners and it

1:38:27simplifies the incorporation of the

1:38:28policy into a multi-year rate setting

1:38:31process and it helps ensure proportional

1:38:33growth in contributions as operating and

1:38:36capital budgets evolve.

1:38:38Next slide.

1:38:42So, this slide shows how the 5-year

1:38:43phase-in timeline

1:38:46compares in blue to the 10-year

1:38:48alternative in red. Both for both the

1:38:51fixed amount increase to the initial

1:38:54target and the fixed percentage increase

1:38:56to the initial target. As a reminder,

1:38:58the initial total reserve target is 34.4

1:39:02million represented by the solid gray

1:39:04line. So, as you'd expect, we we're

1:39:06reaching the target amount quicker with

1:39:08the 5-year alternative, accelerating the

1:39:10timeline that the policy provides the

1:39:13plant with access to capital in order to

1:39:16respond to emergencies and access to

1:39:18working capital to best align with the

1:39:20plant's billing practices.

1:39:22Next slide.

1:39:23So, this slide compares the dotted line

1:39:26to the solid line

1:39:28and it's meant to

1:39:30show how we analyze the fixed amount

1:39:33type of increase versus the fixed

1:39:35percentage. So, staff is recommending

1:39:37the fixed rate increase. This approach

1:39:40allows for more gradual initial

1:39:43increase, giving partners time to plan

1:39:45for the reserves into the rate

1:39:46projections. This is particularly

1:39:48important to some of our partners who

1:39:49set rates for 5 years, and the rate

1:39:52increase will also favorably position

1:39:54the plan to respond to higher reserve

1:39:56target values if and when capital

1:39:58projects are being added to the capital

1:40:00program, as I mentioned as part of our

1:40:02long-range facility plan update.

1:40:04Next slide.

1:40:06So, this chart shows how the reserve

1:40:08balance will grow toward the target

1:40:11during the phase-in timeline. For each

1:40:13year, there are three different shades

1:40:15of gray representing the three reserve

1:40:17types that would get funded in that

1:40:19year. Starting in fiscal year 2030,

1:40:21you'll have, um, you know, the second

1:40:24year of the phase-in timeline.

1:40:25Also shown are the gray amounts,

1:40:28um, which reflect the reserve balances

1:40:30carried over from prior years. And

1:40:32ultimately, in fiscal year 2033,

1:40:35the, um,

1:40:37RWQCP treatment fund reaches 34.4

1:40:40million in reserves.

1:40:43Next slide.

1:40:45So, there's a lot to this slide, I'm not

1:40:46expecting to go through it, but the

1:40:48purpose of this slide is to show our

1:40:49work, um, as we reviewed Baker Tilly's

1:40:52recommendations as well. Um,

1:40:54and in general, both approaches are

1:40:56pretty similar.

1:40:58Um, we have a similar total reserve

1:41:00target, but there are a couple key

1:41:01differences that I want to highlight.

1:41:03So, staff recommendation for O&M reserve

1:41:05is tailored to how the plant actually

1:41:07does its billing cycles to the partners,

1:41:09and also pro- and and provides the

1:41:12associated working capital we need. Um,

1:41:14the capital reserve is also tailored to

1:41:16the plant. The majority of the plant's

1:41:19capital projects are debt funded. So,

1:41:21basing capital reserves solely on

1:41:23cash-funded projects would not, um,

1:41:26provide significant enough reserves.

1:41:28Instead, staff are proposing to keep

1:41:30Baker Tilly's recommendation for

1:41:31cash-funded projects in this policy, and

1:41:33then add 10 to 20% of the annualized 5

1:41:37year CIP to the reserve.

1:41:40Our debt funded our our our debt funded

1:41:42reserve essentially is the same between

1:41:44us and Baker Tilly, basically meeting

1:41:45our debt covenants requirements.

1:41:47And as mentioned previously, we're

1:41:49eliminating the rate stabilization

1:41:50reserve.

1:41:52Next slide.

1:41:54So a key component to our reserve

1:41:56management will be governance and

1:41:58tracking that will be needed to include

1:42:00it in our partner amendments. We

1:42:02currently meet with partners at least on

1:42:04a quarterly basis and they've been very

1:42:06involved in the development of these

1:42:07recommendations. Working with our

1:42:09partner agencies, we will need to

1:42:11memorialize the means by which the

1:42:13reserve balances will be tracked, how

1:42:15the targets will be updated, and the

1:42:17basis for each partner's contributions,

1:42:19and the means to replenish these funds.

1:42:22So we haven't figured all this out yet.

1:42:24We're working on these items over the

1:42:26winter and developing

1:42:28recommendations for the committee as

1:42:30part of our next steps. Next slide.

1:42:33So here's a simplified version of the

1:42:35timeline for our next steps for our

1:42:38RWQCP wastewater treatment fund

1:42:40policies, but also the Palo Alto

1:42:42wastewater collection fund reserve

1:42:44policies as well. This chart was in the

1:42:46staff report. We know both groups are

1:42:48working in collaboration and will

1:42:49continue to do so. And we also know our

1:42:51recommendations today will impact Palo

1:42:53Alto collection system's reserve policy

1:42:55and rate setting process.

1:42:59Next slide.

1:43:00So this again is the recommended action

1:43:02side.

1:43:03Again, we're hoping to have your review

1:43:06and direction

1:43:08on our reserve

1:43:10categories and targets.

1:43:12Any questions?

1:43:20>> I'm sure we have a bunch.

1:43:23Uh

1:43:24not as many as the last item.

1:43:26Um

1:43:27so

1:43:30our our current reserves, can you

1:43:32refresh that uh us what we have there

1:43:35including the one that we're going to

1:43:37eliminate on the rate stabilization?

1:43:40>> Yes. So,

1:43:422026 unaudited financials reflect 7.8

1:43:46million dollars in total reserves. And

1:43:49we looked in the past, our reserves in

1:43:52the last 3 years have been around that

1:43:54amount between 5 to 7 million roughly.

1:43:58>> And how much of that is the rate

1:44:00stabilization versus us?

1:44:02>> Rate stabilization, I believe is about

1:44:05currently

1:44:072.6 million of the 7.8.

1:44:10>> Okay.

1:44:11So, then on

1:44:13slide 11 where we see a 2029

1:44:17starting point on the increases

1:44:22um

1:44:23I'm assuming that that's approximately

1:44:26reflecting

1:44:28what we have in the other reserves or

1:44:30what we're going to bleed down from the

1:44:31whole 7.8.

1:44:33>> Yes, we expected that you would ask this

1:44:35question.

1:44:37We know of our current 7.8 million

1:44:40dollars in reserve amount. This analysis

1:44:43does not include

1:44:46that amount because when we ask for

1:44:48contributions will be more than 3 years

1:44:50from now

1:44:51and we're trying to message to our

1:44:52partners ahead of time. When it comes

1:44:54down to it, when we actually initiate

1:44:56these reserves, we'll of course roll

1:44:58over whatever is left into the reserve

1:45:00amounts.

1:45:01>> I'm just trying to understand

1:45:04how rolling that over will impact the

1:45:08contributions we need to make each year

1:45:10to the reserve and leading into my next

1:45:13question is what that's going to mean on

1:45:16rate increases.

1:45:17>> So, we're currently trying to have the

1:45:20committee develop or approve a

1:45:22methodology of how we calculate our

1:45:24reserves. We're going to have to

1:45:24calculate every year, but because we're

1:45:28a regional facility and we're trying to

1:45:30give our partners a head and we do

1:45:32forecasting out for 10 years for them

1:45:34and we provide that forecast for them in

1:45:36November. We're trying to build that

1:45:38into

1:45:39into their rate their they can build

1:45:41into their rate models going forward. So

1:45:43what we anticipate is is that will going

1:45:46in 2029 will look at what we have

1:45:49and then

1:45:50anticipating what we we also think that

1:45:54potentially rates will

1:45:56go our our operating costs may go up

1:45:58over time by 2029 our capital may go up

1:46:01over 29 and so we're going to have to

1:46:03recalculate it every year and so then

1:46:05we'll be lumping that 7 million plus

1:46:08whatever our our target will be and

1:46:11we're going to have to recalculate it

1:46:12for our partners, but we needed the 34

1:46:14million target right now in fiscal year

1:46:1623 is what was based off of the current

1:46:19the current forecast we had.

1:46:22So it's this is where it's a

1:46:24I mean it it's moving, right? It's it's

1:46:26it's can't be static because none of our

1:46:29capital projects are static. Pro-

1:46:31projects change

1:46:33some are delayed

1:46:35some costs increase, so that's what

1:46:37we're also trying to do.

1:46:39But

1:46:40if that makes sense annually we'll be

1:46:42updating the the rate the reserve

1:46:44targets for our partners.

1:46:45>> more

1:46:46more more of a methodology

1:46:48than actually a forecast.

1:46:50>> Correct.

1:46:50>> And if I can add one more point though

1:46:52Councilmember Burke to your question

1:46:55Karen described these factors that will

1:46:57be changing every year.

1:46:59If all things were equal and when we

1:47:02started collecting this we were still

1:47:05looking at a 34.4 million dollar number

1:47:08that would mean that we were we would be

1:47:10collecting less from the partners than

1:47:13is shown in this report. Because we

1:47:15would we would start with already having

1:47:18those funds in the reserves and not need

1:47:20to collect as much.

1:47:21>> Yeah. And I

1:47:22>> But we don't have confidence that will

1:47:23be the case and so this really it is

1:47:26more of a methodology.

1:47:27>> We have this fun slide four we have the

1:47:30under the five-year timeline

1:47:33um

1:47:34uh

1:47:35Palo Alto specific contributions right

1:47:38under that green

1:47:40down to the dollar uh on something that

1:47:43we're really just saying is a formula.

1:47:45Um and what I was trying to understand

1:47:48is

1:47:49do those contributions assume a transfer

1:47:52of existing reserves or not?

1:47:54>> No, it does not.

1:47:56>> Okay.

1:47:58Okay. And

1:48:01appreciating that uh these are estimates

1:48:04and we're really looking at today at uh

1:48:07endorsing

1:48:08an approach um

1:48:11nevertheless do we have because this

1:48:13could inform our feedback on five or 10

1:48:16years um

1:48:18is what do we think are the rate

1:48:19impacts?

1:48:22>> So we worked with our utilities

1:48:24counterparts for collection system and

1:48:26they they assume about a 1.9% increase

1:48:29based on the numbers we provided. Um and

1:48:32so that's per year but it's additive. So

1:48:35it's 1.9

1:48:37and then

1:48:38per um

1:48:40So the way that it's it's

1:48:43they're going to be building it in

1:48:46the way that when we were talking to

1:48:48utilities the first year it's a 1.9%

1:48:51increase and then they're going to have

1:48:54to build it into their over overall

1:48:55model

1:48:56for the based on our fixed rate

1:48:58percentage.

1:49:00And so it may be more than 1.9% the

1:49:03second year.

1:49:04Depending on

1:49:06the target and the other um factors that

1:49:10we have.

1:49:12>> And have you also modeled if it's 10

1:49:14year what the rate increases would be?

1:49:17>> not meet our debt covenant requirement

1:49:18if we do a 10-year. That is why we we

1:49:21are recommending a 5-year.

1:49:23Once our secondary treatment project is

1:49:25completed in 2029, we and plus a few

1:49:27other projects, we need to have money in

1:49:29the bank, which we currently don't have

1:49:31enough of.

1:49:32>> Oh.

1:49:32>> By 2029.

1:49:33>> Is the the slides

1:49:36when we had

1:49:38I'm not sure that was clear when slide

1:49:40seven was explained.

1:49:42That we basically

1:49:45it

1:49:46sounds to me like slide seven should be

1:49:48gray from what you just said. That is

1:49:51it's a non-starter.

1:49:54>> Correct. Correct.

1:49:54>> Okay. So, maybe we should modify that.

1:49:56>> Correct.

1:49:57>> Okay.

1:49:58>> I just also wanted to add to the

1:49:59question about rate impacts. The 1.9%

1:50:02as modeled this afternoon by staff, um,

1:50:05based on a typical residential monthly

1:50:07bill is about a $1.67

1:50:10a month.

1:50:12>> That's better to hear.

1:50:21>> Thank you.

1:50:22Um,

1:50:25I I I think it's still a little bit hard

1:50:27for me to

1:50:28reason about the point about a forecast

1:50:31versus the methodology sort of going out

1:50:33into the future.

1:50:34And so, the

1:50:37uh

1:50:38that the capital assumptions and debt

1:50:41covenants assumptions, how likely do you

1:50:44think those are to change between

1:50:47uh for 2029 to 2033? Like, are we

1:50:51already baking in our assumptions about

1:50:53that we might raise or and

1:50:56sort of larger capital projects that we

1:50:58might add between now and uh when we are

1:51:02next slated to review capital projects

1:51:04in fall 2027?

1:51:06>> Yeah, I can take a stab and then maybe

1:51:08you can add. Um,

1:51:10so, how we calculated 16.9 million for a

1:51:14debt reserve it includes a few projects

1:51:16that we know are already in construction

1:51:19and that the debt covenants requirements

1:51:21will come into place as soon as we start

1:51:23paying debt service. One example for

1:51:25that is STU project. Um so, in 2 years

1:51:29we expect that we will need to have

1:51:31roughly 8 million dollars. Um you know,

1:51:34to cover that debt covenants, but then

1:51:36we also in our modeling include projects

1:51:38that are under design or anticipated as

1:51:40well

1:51:41um that would um

1:51:44you know, potentially need

1:51:46uh

1:51:47money to meet those requirements within

1:51:49the time frame. However, if those

1:51:51projects um extend out or are delayed

1:51:54for whatever reason, we may not need the

1:51:56full amount by 2033, but this is again

1:51:58is our best guess based on our forecast

1:52:01um developed last year.

1:52:03>> Okay.

1:52:04>> So, those are projects that have already

1:52:06been approved in the 5-year capital

1:52:08program that council's already

1:52:10authorized. So, we're not adding any new

1:52:12projects at this point in time.

1:52:14So, so when we look to budget for the

1:52:175-year capital, those are the projects

1:52:19that were included in this current

1:52:20reserve.

1:52:21>> Got it.

1:52:22>> analysis

1:52:23>> Got it. Just

1:52:24>> why we did a 5-year

1:52:25>> Yeah.

1:52:26>> lookout, but we also do forecasting for

1:52:2810. So, there may be projects in there

1:52:30that council has not authorized in the

1:52:32in cuz we only authorize 5 year that we

1:52:34are planning out cuz large-scale capital

1:52:36projects we're now working on a

1:52:38long-range facility plan update for the

1:52:40next 50 years that we'll be bringing to

1:52:42council sometime next year.

1:52:44>> Okay.

1:52:46I

1:52:48I think that is helpful uh and just to

1:52:50be more explicit the word in the back of

1:52:51my mind is that in 2028 we or 2027 we

1:52:56uh add an extra

1:52:58100 million dollars in capital projects

1:53:00and then actually the rate increases

1:53:02um

1:53:03might be

1:53:05twice as high if they start in 2029 uh

1:53:08and uh

1:53:09we still need to reach the target by

1:53:102033

1:53:12realizing that

1:53:13uh

1:53:14that a lot of those planned future

1:53:17projects are already baked in but not

1:53:19potentially all of them.

1:53:23I think

1:53:25that is helpful to understand

1:53:28but still a little bit confusing in

1:53:29terms of where we'll actually

1:53:32be in

1:53:34uh in terms of rate increases from 2029

1:53:36onwards.

1:53:39Even acknowledging that the total amount

1:53:40is relatively low per bill.

1:53:45I'm not sure. Is there anything we can

1:53:46actually say or

1:53:49do about that now or is this

1:53:51do we just is the recommendation just to

1:53:53move forward with the methodology you

1:53:54know that some projects might change but

1:53:56we don't expect

1:53:58the total change to be really massive

1:54:00now.

1:54:04>> So we're we're trying So I think some of

1:54:06your questions are going to be answered

1:54:08when we bring our long-range facility

1:54:10plan update which we're anticipating

1:54:12probably mid to late 2027. As you can

1:54:15anticipate doing the last time we did a

1:54:17lot our long-range facility plan was in

1:54:192012 and some of the projects that were

1:54:21that are built into this 5-year

1:54:23methodology are projects from the 2012

1:54:27master plan. So that's how long it takes

1:54:30to give you perspective for large-scale

1:54:32capital projects at this huge treatment

1:54:34plant take to plan design fund and then

1:54:39start construction on. So

1:54:42the anticipation that we're going to get

1:54:44a a project done quickly in 5 years is

1:54:48not going to happen. I wish I wish they

1:54:51would because our plant is 50 years old

1:54:53and falling apart but you can't get

1:54:55capital done that quickly.

1:54:57>> Okay.

1:54:58>> just to calm people down.

1:55:00>> Okay. Right. That's helpful. Um

1:55:03uh

1:55:05I maybe a more detailed and technical

1:55:07question. Can you just sort of help me

1:55:09unpack the

1:55:11capital reserve in the capital portion

1:55:13of the operating and maintenance reserve

1:55:16in particular having 100% of minor CIP

1:55:20and reserves feels like a lot like

1:55:23If we're doing a million-dollar minor

1:55:25project, we would actually

1:55:27have an extra million in reserves like

1:55:29sort of two x

1:55:30>> So so the

1:55:32portion that we have in our operating is

1:55:34actually for cash flow. So we have

1:55:37agreements with all of our partner

1:55:39agencies for minor capital authorization

1:55:42that was from a 1994

1:55:47where it's not a lot of money. It's

1:55:48around I think we're up to 4.4 million

1:55:50dollars. So it's really not a ton of

1:55:52money to do small-scale capital projects

1:55:55without having to go and do a partner

1:55:57amendment for every single project we

1:55:59want to do, but it's to give our cash up

1:56:01front. So we have that money sitting in

1:56:03the bank. So we're not waiting for it.

1:56:06So and that because right now the way

1:56:08that our billing is and that's the whole

1:56:10operating reserve for billing. We build

1:56:13we look at a forecast. We forecast out

1:56:15what we anticipate we'll spend. We bill

1:56:17quarterly on anticipating spends and

1:56:20then at the at the end of the fiscal

1:56:22year our the second quarter we true up.

1:56:27So we might be carrying bills on our

1:56:29books

1:56:31for a little bit and that's why we want

1:56:32that reserve. So we have the money in

1:56:35the bank. Okay. That was the whole point

1:56:37of that. Okay. Does that make sense?

1:56:39>> Yeah, that makes sense

1:56:42and

1:56:44I could imagine some alternate world

1:56:46where we had sort of more agile billing

1:56:48of our partners, but

1:56:51realize that that's probably a minor

1:56:52optimization also not the world we live

1:56:54in and so that makes sense and that

1:56:56clarification is appreciated. Thank you.

1:57:00>> Okay, I have a number of questions. You

1:57:02know,

1:57:04we touched already on this 1.9%

1:57:07and then you say it could be per year

1:57:09for for 5 years a couple of places here

1:57:11in in the packet.

1:57:13So

1:57:14the cumulative number over time could go

1:57:16up like 6 8%.

1:57:21>> And

1:57:21>> So according to utility staff, yes, it

1:57:24could go up over time. So it's a

1:57:26cumulative increase.

1:57:28>> And this is for our actual

1:57:30>> For our actual reserves.

1:57:31>> Not our not our partners in this but for

1:57:33our customers.

1:57:34>> Our customers.

1:57:36>> Uh-huh.

1:57:37Okay, so that's the wrong number.

1:57:38>> So just to be very clear, I think what

1:57:41utility staff is telling us is they're

1:57:44modeling that if you're kind of

1:57:46averaging this out, it's a 1.9% increase

1:57:50every year of the 5 years.

1:57:52So, you know, 5 * 1.9 plus whatever the

1:57:58exponential piece of that is, right?

1:58:02>> Yeah, that's not a trivial number. No.

1:58:04>> It is not.

1:58:06>> Um

1:58:08Okay, and then another thing back on

1:58:11in in the packet where you were going

1:58:13over on

1:58:14Let's see, this is packet page 218 where

1:58:17you're going over the

1:58:18What's this thing headed?

1:58:20It's the beginning of the analysis

1:58:22you're talking about the partners

1:58:23and then how you bill the partners and

1:58:25so on and you have It was one of my

1:58:27questions that you you just touched on

1:58:28right now.

1:58:29Um

1:58:30where you bill on a quarterly basis and

1:58:32then you fill in with um

1:58:35number four which is the emergency

1:58:37response capacity.

1:58:39And that's where you can do some

1:58:40borrowing. But why wouldn't it be easier

1:58:43and then we're building up all these

1:58:44reserves, why wouldn't it be easier to

1:58:46say move to 60-day billing as opposed to

1:58:4990-day billing and get our cash sooner

1:58:52so we don't have to go through quite as

1:58:54many hoops.

1:58:56>> So, that is what our current um historic

1:58:59long I think that the great questions.

1:59:02Um it would just require a partner

1:59:04amendment. So,

1:59:05>> To the contract?

1:59:06>> Yes. So, this is all in our existing

1:59:10long-standing agreements with our

1:59:12partners.

1:59:13>> Yeah, back to 1950 I read, right?

1:59:15>> Many of them are very old.

1:59:17So,

1:59:18>> Uh but it just seems that that was

1:59:20pretty liberal to begin with and maybe

1:59:22just trim

1:59:23pulling that in a little reeling that in

1:59:24a little bit would give us cash earlier

1:59:26and that might change some of these

1:59:28numbers to our advantage.

1:59:30Um I mean I don't know how hard it is to

1:59:32arm wrestle to get those. And and the

1:59:35related question is did you have would

1:59:36you have to get that from all of them?

1:59:39In order to make it

1:59:42>> So, for example, the line of credit,

1:59:44I'll be going to East Palo Alto meeting

1:59:47after this meeting to get that one

1:59:49approved. So, any amendment we do I have

1:59:51to go to all the partners.

1:59:52>> Mhm.

1:59:53>> So, and that's just for the line of

1:59:55credit. So, then we can start pulling on

1:59:56the line of credit that we approved in

1:59:57August.

2:00:00>> Yeah. Yeah, but yeah, your sentence

2:00:02>> Sorry, I think it's great. We definitely

2:00:03can make changes and amendments. It's

2:00:05just it takes time

2:00:07to to do to bring all the partners along

2:00:10cuz we have um

2:00:11five partners.

2:00:13>> Yeah. Well, obviously I've never read

2:00:14that contract, but

2:00:16it seems like we got the water, so

2:00:18that's a good start.

2:00:20I mean the waste water billing.

2:00:22Um

2:00:23but you're you're absolutely correct

2:00:24there that that gives you limited

2:00:25flexibility to respond to emergencies

2:00:27and we have to have those. I mean that's

2:00:28that's that's an easy

2:00:30uh analysis there or an easy easy to

2:00:33agree with that analysis.

2:00:36And then just jumping to in a number of

2:00:38cases here I I was asking about what are

2:00:40the impacts on the partners and you said

2:00:42that it was very positive. So, sort of

2:00:45what what's it going to cost them and

2:00:47they had positive response. How's that

2:00:49going to be incorporated also with

2:00:50contract amendments?

2:00:52>> Yes. Everything needs to So, that's why

2:00:54we factored into 2029.

2:00:57So, when November when we give we

2:00:59provide our forecast for 10 years to our

2:01:01partners for 28 in November and we'll

2:01:04put this in the in their portion of the

2:01:0629 so they can plan out for their rates.

2:01:09And then we'll need to work with Kyle to

2:01:11help do the amendment and they'll need

2:01:13to go to all of our partners to get

2:01:15their amendments to get the approval to

2:01:17them build it in.

2:01:18>> Okay, that's the mechanics and why why

2:01:20are they feeling good about this? What

2:01:22are they What are they

2:01:23>> bringing them along. Um they understand

2:01:25the urgency, they understand the age of

2:01:27our infrastructure.

2:01:29Um we've had to do a lot of new partner

2:01:31amendments. Um if you if you remember we

2:01:33will came back to council on the GB01

2:01:36fix.

2:01:37Um the joint interceptor sewer fix where

2:01:39all the waste water comes in. We started

2:01:41the No one understands GB01 but we do

2:01:44cuz we spent the summer trying to fix

2:01:45it. But it's where all the waste water

2:01:47comes in and um we had to do a massive

2:01:51emergency fix on that. And so we've been

2:01:52bringing the partners along. That was

2:01:54millions of dollars. And so the partners

2:01:56understand the urge and the and the

2:01:58urgency of it and they come to our

2:01:59facility and they know it's critical

2:02:01infrastructure. And so we're at kind of

2:02:03a juncture where we're rebuilding the

2:02:04site.

2:02:05>> It It's been interesting at a couple

2:02:07points along the way where at partners

2:02:09meetings we were describing these fixes

2:02:12and the need to

2:02:14we were having to have them go back and

2:02:16authorize more funding on kind of an

2:02:19emergency basis

2:02:21and they're saying to us, "Why don't you

2:02:22have a capital reserve that you can pull

2:02:25from to take care of these items?"

2:02:29>> Right. And I'll also add that they fully

2:02:31understand the debt covenants

2:02:33requirements. Like Palo Alto takes on

2:02:35the debt for

2:02:36um our our WQCP and so they fully

2:02:39understand the need for us to meet those

2:02:41covenants requirements.

2:02:43>> So, if as a policy we came back and said

2:02:46we we just don't think we can

2:02:48I know this is still early stages, but

2:02:50that we can't tolerate 1.9 a year for 5

2:02:53years, then what what do we what would

2:02:55we do to help

2:02:57uh get that lower?

2:03:00>> I I I think the the only option would be

2:03:03changing either reserve targets or the

2:03:06uh ramp-up period.

2:03:10You know, um

2:03:12obviously 5, 10, and 15 are not the only

2:03:16numbers between 1 and 15.

2:03:20So, if if there was more uh work the

2:03:22committee was interested in seeing,

2:03:25we could still look at other options.

2:03:30>> Okay.

2:03:31Uh that's my questions for now, so do we

2:03:33see if there's any public comment,

2:03:34please?

2:03:35>> There are no requests to speak for item

2:03:37two.

2:03:38>> Okay.

2:03:42All right, then just comments from

2:03:44council members. You want to start, Pat?

2:03:45>> Well,

2:03:46just following up on that last uh issue

2:03:48of

2:03:49um

2:03:50Karn had said before that 10 years

2:03:52wouldn't achieve our objectives. Uh I

2:03:55would be interested in uh whether there

2:03:58is somewhere between 5 and 10 that would

2:04:00meet the objectives and would spread out

2:04:03the uh

2:04:04uh the rate increases a little bit. I'm

2:04:06not saying that is what we would choose

2:04:08to do, but uh that would be useful to

2:04:12have modeled that.

2:04:12>> Yeah, options, sensitivity analysis,

2:04:15something like that.

2:04:21>> And just uh plus one to that, but uh

2:04:24also that um

2:04:28I like the uh

2:04:30fixed rate approach in that we can make

2:04:34a game-time decision in 2030 or 2031 if

2:04:38we want to contribute

2:04:40like or can we make a game time decision

2:04:42if we want to contribute slightly less

2:04:44to capital reserves

2:04:47uh

2:04:48in

2:04:49sort of before the exponential

2:04:53uh

2:04:54uh increase of like the fourth and fifth

2:04:57year of the phase in hits or would we

2:04:59not be able to make any of those

2:05:02decisions because it all be already

2:05:04contractually up with all of our

2:05:05partners?

2:05:07>> I think it would depend on how we um

2:05:10structure it if there are some

2:05:12flexibilities.

2:05:13Um I I think we know I I do we'll try

2:05:16and model different scenarios. I do also

2:05:18want us to um think about how this will

2:05:21increase our or decrease our ability to

2:05:24get bonds in the future if we don't have

2:05:26money in the bank cuz we also know that

2:05:28our ability to get SRF is is dwindling

2:05:31for future projects. So we're most

2:05:33likely going to need to bond finance

2:05:34future our capital projects which is

2:05:36another reason why we need a reserve.

2:05:38>> Yes. I understand.

2:05:39>> us to to think about all the different

2:05:41scenarios as to why we did this and

2:05:43we've actually been very fiscally

2:05:44conservative in terms of why the the the

2:05:4734 million's actually um the we were

2:05:49trying to be the smallest amount of rate

2:05:52increase for our partners

2:05:54even though

2:05:55um other places were recommending a 20%

2:05:58for capital and we went to 10. So I'm

2:06:00just I I want the um I want the

2:06:03committee to understand that we actually

2:06:04were really trying to be as lean as we

2:06:06could knowing the potential implications

2:06:09for rate increases cuz we've heard you

2:06:11over the years

2:06:12um but we're also trying to make sure

2:06:13our facility is robust and can um be

2:06:16adaptable especially with the current um

2:06:19El Nino coming down the pipeline and we

2:06:21don't actually have money sitting in the

2:06:22bank for that one.

2:06:23>> Okay.

2:06:23>> Thankfully we have a line of credit but

2:06:25>> I do think I

2:06:27should bring up with the committee. I

2:06:31in the interest of simplicity and having

2:06:33this be something that we can work with

2:06:36more easily administratively, we've

2:06:38shown you scenarios with wrap-ups on a

2:06:41specific timeline.

2:06:43That does raise the issue that Karen

2:06:46described of the debt service reserve

2:06:48and our our needs to meet debt covenants

2:06:51and build that up to a certain level at

2:06:53a certain time.

2:06:54So, we have had some discussion about

2:06:56the potential of funding

2:06:58fully funding the reserves on different

2:07:00timelines.

2:07:02So,

2:07:03we're not thrilled about that, but I'll

2:07:05put it out there that the one thing we

2:07:07could look at is

2:07:09funding the debt service reserve on on

2:07:12the timeline that that allows us to meet

2:07:15that while having a somewhat longer

2:07:17timeline on fully funding the others.

2:07:19>> Mhm.

2:07:21Yeah, I'm very respectful of the fact

2:07:23that our partners have

2:07:25rate payers,

2:07:27um but we have rate payers and partners.

2:07:30So, we have two things to worry about.

2:07:32Um

2:07:33and

2:07:34it's just been a hit it's just been a we

2:07:36as we know our utilities just been a hit

2:07:39year after year after year after year

2:07:40since the pandemic's been over, so

2:07:43um

2:07:46it it's an issue.

2:07:48>> And so, how would there be flexibility

2:07:52or would there not be flexibility if in

2:07:542031 we actually say, "Actually, our

2:07:58capital projects are going really well

2:07:59and uh

2:08:02the uh

2:08:05reserves potentially could be lower than

2:08:07the budget amount or

2:08:09uh maybe we don't need to or maybe

2:08:11something changes about our debt. Um

2:08:13would we be able to say at that point,

2:08:15"Let's stretch it out over another

2:08:17couple of years." or would we

2:08:20uh be pretty boxed in with all the

2:08:22>> So,

2:08:22>> partners?

2:08:23>> I think what we can do is we can

2:08:24probably give um it's based on what your

2:08:27recommendations is we'll go back to the

2:08:29drawing board and see what flexibility

2:08:30we can build in to give some options for

2:08:32you based on what you're requesting. We

2:08:35did try and build in options with the

2:08:38the debt. Um, if you look at the

2:08:39capital,

2:08:40uh, it was a 10 to 20% and we're only

2:08:43recommending 10 right now and we're not

2:08:45recommending 20 until later and that

2:08:47would have give us flexibility. So maybe

2:08:48we look at doing a five to

2:08:5120% right?

2:08:53>> I see.

2:08:53>> So we could give ourselves some other

2:08:55kind of flexibility in there so we don't

2:08:57have to come back and revisit the whole

2:08:59reserve policy but it would give us that

2:09:02flexibility for the committee um, to

2:09:04make some changes or adjustments as

2:09:06needed. So we can we'll we'll do some

2:09:08work on our end and see what we can do

2:09:10cuz I'm listening I'm hearing you and

2:09:12seeing what we can and maybe there's a

2:09:14schedule will make it more work for us

2:09:15but schedule that we need to make our

2:09:17debt covenant. Let's make that but then

2:09:19maybe the other reserves can be on

2:09:21different time horizons and we'll look

2:09:22at those and see what we can come back

2:09:24for you which is great. This is why we

2:09:25wanted this discussion now.

2:09:27>> Yeah, I think having some flexibility

2:09:29that uh, I'm not saying that we will

2:09:31necessarily use because we do want to

2:09:34properly fund this. Uh, would be nice

2:09:37uh,

2:09:38just so we have the optionality and

2:09:39don't need to go back to partners. Um,

2:09:42yeah.

2:09:43>> And then Kyle's going to help us

2:09:45figure out how to put that in our

2:09:46amendments.

2:09:48>> Yes.

2:09:50>> Just not slowly. Go.

2:09:53So, you know, I I think

2:09:55um,

2:09:56you know, we we talked a lot about just

2:09:59how much work goes into uh, any changes

2:10:02to the way the financing of the or

2:10:05finances for the wastewater treatment

2:10:07enterprise work. Um, you know,

2:10:10Corrine talked about how the plant was

2:10:11built 50 years ago and it's kind of held

2:10:14together by

2:10:15you know,

2:10:16band-aids and duct tape and

2:10:18um,

2:10:19>> Oh, not duct tape.

2:10:21>> Uh,

2:10:22I I I think you could you say the same

2:10:23thing about the partner agreements.

2:10:25Um they're they're just very antiquated

2:10:27in the way they contemplate uh how the

2:10:30enterprise is uh run on both uh you

2:10:33know, operations day-to-day basis, but

2:10:35also capital funding. You know, it's

2:10:36it's very much a a hand-to-mouth organi-

2:10:39um operation.

2:10:41And so,

2:10:42um I I think that uh the reserves are

2:10:46are actually going to be

2:10:48uh welcomed by our partners because they

2:10:52add a lot more predictability to, you

2:10:56know, their planning. You know, so we

2:10:58talked about our partners and their

2:11:005-year rate setting. That Mou- Mountain

2:11:01View is the only one with a 5-year rate

2:11:03setting schedule, but but the rest um

2:11:06set their rates annually, but they also

2:11:08have

2:11:09significant capital improvement programs

2:11:12that they are planning. So, all of, you

2:11:14know, the the farther out in advance

2:11:17that we can help them forecast what we

2:11:20are expecting as the treatment component

2:11:23of their sewer rates, the more they

2:11:25appreciate it. And so, um I I think we

2:11:28can

2:11:29These These are all things that we're

2:11:31keenly aware of as we work through our

2:11:33partners and and the partner agreements

2:11:36um and it is it is on the list of things

2:11:38for for my office to do.

2:11:44>> Okay. So, the the motion is to approve

2:11:47the framework of this approach.

2:11:51So, I'm happy to move that on uh

2:11:53page back of page 214,

2:11:56one and two.

2:11:59>> Second.

2:12:06>> Unless there are any other questions, we

2:12:07can put that to a vote.

2:12:10>> All right.

2:12:13We did.

2:12:15>> Rolls.

2:12:16And so, this motion does

2:12:19have that 5-year

2:12:21sort of hardcoded in.

2:12:24But we still want information about in

2:12:27between 5 and 10, and this motion is

2:12:30fine for that. Just to be very explicit.

2:12:32Okay.

2:12:33>> Yes, we under- we understand the ask.

2:12:35>> Yeah. Fair question, George.

2:12:36>> Yeah. And some optionality around uh

2:12:38uh

2:12:39flexibility in ways that we don't have

2:12:41to. Yeah, got it. Okay.

2:12:44>> If I might ask for clarification,

2:12:46um

2:12:47Commissioner Relyea, did you want to

2:12:48include number three

2:12:50of the staff recommendation? I'm only

2:12:52showing numbers one and two cuz I

2:12:53thought that was what I heard.

2:12:59>> Well,

2:12:59>> Number three is the one that has the

2:13:02>> 5-year timeline.

2:13:02>> 5-year.

2:13:05>> Yeah, let's start. Yeah.

2:13:08We'll go back to staff on that question.

2:13:10Do we need three at this point?

2:13:14>> Three is the tentative but direction, so

2:13:17I think we would uh with staff having

2:13:21agreed to look at modeling something

2:13:23between

2:13:25uh five and 10, but uh

2:13:28>> I do think as well that from the the

2:13:30discussion we're having, uh I think we

2:13:33would want to come back to the Finance

2:13:34Committee and show some of uh these

2:13:36materials. So, this motion as written is

2:13:40for a recommendation to the City

2:13:41Council.

2:13:43>> So, we should drop three.

2:13:44>> I I don't think we're we're ready we're

2:13:45there yet.

2:13:47>> So, we're not including three.

2:13:49>> It would be helpful if you included

2:13:51three. Just um

2:13:54the only reason why I'm asking for three

2:13:56is cuz we're going to our to provide our

2:13:58forecast for our partners, but knowing

2:14:00that that's a tentative partner forecast

2:14:03for 2029. Just because And it can

2:14:06change. Cuz we're trying to be as as

2:14:08transparent for our partners, and I

2:14:10don't want to not include a potential

2:14:13reserve target

2:14:15in the November

2:14:17forecast for them.

2:14:19And this is the challenge that we have,

2:14:21but then knowing that it and it will be

2:14:22forthcoming with them knowing that it

2:14:24may change.

2:14:25>> Well, I think we should put in the word

2:14:26tentative then.

2:14:27>> That's fine. And I'm okay with that. I

2:14:29just want something that I can show my

2:14:30partners cuz we've already given them

2:14:32all these numbers.

2:14:33>> Okay. Put in tentative before 5-year.

2:14:36That also addresses your question,

2:14:37George.

2:14:38>> Yeah.

2:14:38>> That'd be great. Thank you. We

2:14:39appreciate that. Thank you.

2:14:43>> So, you're adding three.

2:14:45Oh, you you already did.

2:14:46>> Yeah.

2:14:47>> Faster than we can talk. You had it on

2:14:48the screen. Thank you.

2:14:50Okay. Vote, please.

2:14:53>> Council member Lou?

2:14:54>> Yes.

2:14:55>> Council member Burt?

2:14:56>> Yes.

2:14:56>> Council member Lowing?

2:14:58>> Yes.

2:14:58>> Motion carries unanimously.

2:15:00>> Okay. Thanks.

2:15:02Good iterative discussion and more to

2:15:03come.

2:15:05Thanks to staff for all that.

2:15:08And I think we already have Do we need

2:15:10need to do any look forward on this

2:15:12committee today?

2:15:14I don't think so, right?

2:15:16Okay. All right. Then we stand

2:15:18adjourned.

2:15:19I already asked. Oh, oh, sorry.

2:15:21The open public comment.

2:15:23>> Yes.

2:15:24>> Go ahead.

2:15:24>> There are no requests There are no

2:15:26virtual requests for general public

2:15:27comment.

2:15:28>> Yeah.

2:15:29Okay. Thanks.