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1998-05-19 Town of Truckee TOWN COUNCIL SPECIAL MEETING MINUTES May 19, 1998, 5:30 P.M. Truckee Donner Public Utility District Board Room 11570 Donner Pass Road, Truckee, CA CALL TO ORDER - Mayor Florian called the meeting to order at 5:34 p.m. ROLL CALL PRESENT: Councilmembers McCormack, Susman, and Mayor Florian ABSENT: Councilmembers Drake and Schneider (excused absences) ALSO PRESENT: Stephen L. Wright, Town Manager; J. Dennis Cmbb, Town Attomey; and Vicki Soderquist, Deputy Town Clerk PLEDGE OF ALLEGIANCE was led by George Robertson. PUBLIC COMMENT - None COUNCIL IMMEDIATE PRIORITIES 5.1 Southwest Gas Status Report. Recommendation: Council provide direction to staff and the CA Public Utilities Commission (CPUC) as desired. Mayor Florian stated that each party would have 10 minutes to make their presentation (if there were two people he would allow 20 minutes), Council would then allow 3 minutes each for public comment, hear summation/rebuttals, and then there would be Council deliberation. Mr. Wright stated that at the May 7th CPUC meeting action was tabled because Commissioner Neeper wanted to submit an alternate decision which would be agendized for the CPUC's May 21st meeting. The Town had not seen the alternate decision, and had been advised that if it was drafted it would contain terms oftbe settlement agreement between the Office of Ratepayer Advocates and Southwest Gas which included a reduction in areas to be served. Southwest Gas would be required to absorb part of the increase in costs for the entire project and part of the costs would be passed through to ratepayers via a surcharge for construction costs. The principal issue was whether the Council wanted to take a position or submit a recommendation to the CPUC. Options available were: I) do nothing, 2) support Judge Wright's decision, 3) support the Office of Ratepayers Advocates settlement agreement, or 4) request a delay/deferral of CPUC action until the full Council could address the community's concerns. The Town had received a large number of letters from concerned citizens. Councilmember Susman referred to a copy of a letter that had not been signed. Mr. Wright replied that it was a form letter that was being circulated in support of the ORA settlement agreement. Councilmember McCormack stated that there was a serious aspect as to what would happen if Judge Wright's proposal were executed by the CPUC. He questioned if it could lead to significant delay by Southwest Gas which was a legal issue. Mr. Crabb stated that it was a legal issue and he wanted to hear all public testimony and presentations prior to making any comments. Jim Simon, attorney representing a coalition of Truckee citizens, explained the critical importance of the issue - it was a matter of monumental concern to the ratepayers due to the magnitude of costs involved. He requested that Council: 1) adopt a motion directing the Mayor to write a letter urging adoption of Judge Wright's decision; and 2) have the Mayor address and advocate that position before CPUC at their May 21st meeting. It appeared that the CPUC was lacking a unified voice from Truckee. If the Council did not give specific direction it would amount to more delay because at the present time Southwest Gas had an obligation to follow through with the commitments made to the Town in a timely fashion, which was what Judge Wright was saying. If Southwest Gas chose to take the issue through procedural processes other than the CPUC, it could involve a direct appeal to the CA Supreme Court, which was rare in administrative law proceedings. The message procedurally was if Southwest Gas were to do that, they would have the burden of unwinding the transaction they had already and, the decision the CPUC hopefillly would make, which was a very unlikely event. The impact of going ahead with the transaction they had agreed to was that everyone would receive service earlier and consistent with the cost projections. The reason for the special meeting was that the Town was out of the loop at the time when Southwest Gas made their application. The Office of Ratepayers Advocates had not heard from the Town or community and, because they did not hear from the Town or community they felt there was no opposition to the application. The Town was not on the Service List when some of the administrative proceedings were held and the CPUC needed to be told by the Council that the community wanted Southwest Gas to uphold their promises. Mr. Simon stated that he had talked with a few of the CPUC Commissioners and he wanted to emphasize that it was his impression that the CPUC wanted to hear from the Council and, when they did, he felt there would be the right result and Southwest Gas would live up to their promises. Kathleen Eagan, Former Mayor, asked that the Council consider three constituencies (those receiving service, those waiting, and those that were cut out) defined by what Southwest Gas had proposed in their settlement agreement with the Office of Ratepayer Advocates and the implications. She then presented overheads (on file) which outlined the three phases, number of customers, original cost cap, actual costs, and cost overruns. Phase 3 originally included 4,200 customers; the Office of Ratepayers Advocates settlement would include only 2,900 customers - 1,500 customers would be cut out or receive service under a different rate structure. The current surcharge on an average of 100 therms/month would be $1,490.40 over the original 10 years (cost to current ratepayers) under the Office of Ratepayer Advocates settlement agreement it would raise the surcharge to 18 cents or $3,970.08 over the extended period of 19 years. That was a huge issue. The position for Council should be for the "whole" Town. Ms. Eagan stated that Southwest Gas estimated the net loss of the entire project at $26.7 million over their cost cap. There were over 27 million shares of common stock outstanding for Southwest Gas and the net affect on those common shares of stock would be 50 cents. It was a big hit but it was a bigger hit to the citizens of Truckee. Ms. Eagan stated that when Southwest Gas filed their application for release of the rate cap in July 1997, the Office of Ratepayer Advocates filed a protest and asked the Commission to deny the request. The Commission was clear at that time that they would uphold the request from the Office of Ratepayer Advocates to deny the application. She felt the ORA had received the perception from local officials that there was really support for the settlement, i.e. a letter drafted from the Council. She felt the intent of the Council was not to give blanket approval, but the letter could be read that there was approval of the original application. Therefore, she felt the ORA indicated that they wanted to go ahead. She did not believe that was the Council's intent, if it was, she requested that they reconsider that position. Town of Truckee May 19, 1998 Special Page 2 Mr. Simon hoped Council had mad the decision. The decision was by a Judge that heard comments in a public meeting, studied the matter and came out strongly in suggesting that the application be dismissed and that Southwest Gas be ordered to proceed with all deliberate speed to fulfill the obligations set forth in the original decision. By adoption of a position the Council would not be upsetting the apple cart or creating new or problematic issue, but urging that Judge Wright's reasoning was sound. Two former Mayors and a Vice Mayor that had been involved in the process at the time the applications were made all had the same point of view which carried a significant amount of creditability. He urged the Council to listen carefully to the community input. Robert M. Johnson, Assistant General Counsel/Legal, Southwest Gas Corporation, stated it was his third opportunity to speak before Council on the project. The last time was in February when they presented the settlement agreement Southwest Gas had entered into with the Office of Ratepayer Advocates for public presentation to the Administrative Law Judge and the citizens of Truckee. The settlement agreement entered into with ORA had been reached in January and filed with the CPUC at that time. He would reiterate their position regarding the current application, review the settlement agreement, review their proposal to deal with the remaining potential customers, and CPUC action with respect to the draft alternate decision. Their application was filed in July 1997 after they determined the costs of continuing to provide service in Phase 2 and Phase 3 in Truckee had far exceeded their initial estimates, i.e. $56 million. When the application was drafted the initial estimate was $26 million. They received and negotiated a cost cap with ORA with a 10% contingency. The first phase was projected at $7 million and it came in at $7 million, the second phase was projected at approximately $11 million and came in over $26 million. When they determined that they would experience costs over their initial projections they investigated to find out why and what they would be experiencing in Phase 3 to complete the original project which was projected at $11 million. It was currently estimated at $20 million to complete Phase 3 as initially proposed. The overall cost of the project, at~er completing the first part of Phase 2 in 1996 was projected out to $56 million. In July 1997, they filed an application with the CPUC asking that the cost cap be increased to $46 million and that their obligation to serve through Phase 3 construction be reduced from 4,200 customers down to 2,900 customers and that the remaining customers would be served under the current Main and Service Rules. In the fall of 1997, they initiated in depth settlement discussions with ORA, after the ORA filed their petition to dismiss the application, but before it was acted upon. They negotiated a settlement with ORA that increased the cost cap to $38 million; Southwest Gas would be responsible for $8 million of the rest of their original proposed $46 million. The company would serve 2,900 customers in Phase 3 over a two year construction period, delay its general rate case filing for two years (which would have a cost impact on the company of approximately $4.5 million), and increase the surcharge to 18 cents to cover the additional $9 million which the customers would be responsible for in the expansion areas. The remaining customers would be subject to the Main and Service Rules (last 1,500 customers). That was submitted to the CPUC in January, they presented it to the Administrative Law Judge in Truckee in February. Mr. Wright's primary concern in February was the remaining 1,500 customers and how service would be provided. They had indicated in their response in March that because of weather conditions they were not prepared to move forward on how they would provide service. At the request of one of the CPUC Commissioners they developed parameters for providing service to the remaining 1,500 customers (handout on file). They proposed to do an in-depth marketing analysis during the summer to make sure that there was sufficient interest. They were primarily concerned with the Donner Lake area with respect to the number of customers that were seasonal customers (summer only) and whether there was sufficient interest. In the last several weeks they had fleshed out the proposal and would be looking at three things for consideration in putting together their subsequent application: 1) customer commitment, 75% which was below what they had experienced. 2) Rate basing construction costs associated with moving into the remaining areas. That would not increase the surcharge as all customers throughout Northern California would see the increase in the rate base and there could Town of Truckee May 19, 1998 Special Page 3 possibly be an increase in rates (that was being proposed due to the costs associated with construction and provided them an opportunity to phase the construction over an extended period of time). The actual rate impact would not be serious with respect to the remaining customers in Northern California and would not create any undue cross subsidization. 3) They were looking at $4,000/customer in Truckee and $8,000/customer in Donner Lake. There was an additional cost but they felt the customer commitment level, rate base and construction and a rate design that insured that the customers in the Donner Lake area were paying the appropriate amounts associated with the cost of service would be sufficient to justify moving in and completing the project. That was what they had indicated to the Commissioners and put into the record of proceedings regarding the remaining 1,500 customers. That was where they were at the present time. They had the settlement agreement, made a commitment as to what they would do regarding the remaining 1,500 customers and, as they indicated in their letter of March 1998 to Administrative Law Judge Wright, they anticipated completing the engineering work and studies during the summer and make their filing on or before October 1st. They wanted to get it resolved during the next winter season. Phase 3 would be a two-year construction cycle adding 1,200 customers during the summer and 1,800 customers next summer during the construction season. They had encountered, in completing Phase 2 and experiencing the $16 million cost overruns, the construction season was so short for what they had to do for a retrofit construction plan that it drove the costs up and they had to split it. That was why they were proposing to do Phase 3 over two year period. They envisioned having the CPUC deal with the remaining 1,500 over the next winter season so they would be in a position by 2000 to start construction, assuming the parameters were satisfied for the remaining 1,500 customers. Mr. Johnson stated that the draft decision submitted by Commissioner Duque, drafted by Administrative Law Judge Wright, rejected the settlement and required the company to proceed under the initial proposal. Southwest Gas had been seeking the development of an alternate decision that would adopt the settlement agreement because they felt it was appropriate recognizing the cost overruns they had experienced and the economics of the completed project. The CPUC agenda showed both, but they had not seen the alternate decision and were not sure they would see it before the Commission acted upon it. If the alternate decision was adopted and the settlement agreement approved, they would start construction of Phase 3 in 2-3 weeks, which would add 1,200 customers during the summer and accommodate the Town with respect to their paving activities in the Tahoe Donner area. They would finish Phase 3 next summer. If Judge Wright's decision were adopted, there would not be any construction during the summer because they would proceed with any legal remedies to overturn the CPUC decision. They would not start construction until those legal remedies were exhausted. They were doing that not from the perspective ora negative reaction to the draft decision. If they stopped construction the costs to existing customers would not change, they would avoid any additional costs. Southwest Gas would also avoid spending another $20 million which they would never receive a return on their investment. That was an amount of money the Company was not willing to spend. Councilmember McCormack stated the costs would go on for a longer period for existing customers. Mr. Johnson replied that the surcharge would go on until the rates were adjusted by the CPUC. The existing customers paid a base rate plus 12 cents. In all likelihood, if the Commission decision was to go forward and they challenged it in court and lost, he could almost guarantee that the customers would not pay any more than initially projected. When that decision would be made he was unsure, it would probably be addressed in the general rate case filing which could be at any time. Mr. Johnson stated that looking at the remaining 4,200 customers in Phase 3 as originally proposed, he did not feel they would get gas. From a practical point of view, if there was some alternative to providing service to those customers, whether another provider or other vehicle to provide gas to those customers, that would be reviewed and investigated at the time they challenged the Commission Town of Truckee May 19, 1998 Special Page 4 decision. Everyone had to realize that to provide service to that group of customers it would cost $20 million. It was not a situation where they were asking for anything over and above what their costs were. If customers wanted natural gas it would cost $20 million. They were proposing to absorb one half of the added costs and customers in the expansion area would absorb the other half. They were not trying to burden customers in Truckee unfairly. What they had done and what they had absorbed to date and committed to absorb was approximately $16 million associated in cost overruns, which was in effect the total amount of cost overruns incurred to date. They were not willing to absorb the additional $20 million for the project as originally proposed. They proposed to expand the project, add additional 3,000 customers, and increase the costs to customers by an $9 million. Mayor Florian questioned the procedure of how the project was approved, i.e. who did the initial analysis and who approved the project. Mr. Johnson replied that the project would be initiated through the Marketing Department, reviewed through the Engineering Department and based on everyone's assessment a decision would be made whether to do the project. The Company approved the project for Truckee in 1991/92 and they filed their application with CPUC in November 1993 to move into Truckee. Mayor Florian questioned if the initial numbers were revisited. Mr. Johnson replied that an escalator was built into the estimates. When they estimated the project the Town of Truckee did not exist, they dealt with the County. Circumstances changed and those circumstances cost the Company money. Mayor Florian questioned when the project was approved internally and when they were ready to proceed, who was in charge. Mr. Johnson replied that they were. Mayor Florian questioned if they had a project manager and what his responsibilities were as to looking at the costs of the project. Mr. Johnson stated that he assumed the project manager would look at the project in sufficient time to make appropriate decisions. Mayor Florian questioned the guidelines of the company for the project manager to identify costs. Mr. Johnson responded that he did not know. What happened in the summer of 1996 was that they found themselves experiencing the full scope of the cost overruns in late September/early October 1996 when they received the bills from the contractors for work done in June. From their perspective, if looking at cost control, there was none, in the sense that there were no milestones or any internal procedures designed to track those costs. He stated he could guarantee that if those costs had been tracked properly the project would have been stopped in the summer of 1996. Mayor Florian questioned whose responsibility that would be. Mr. Johnson replied that it would be the Company's responsibility and they were well aware of that and that was why they had proceeded the way they had. Councilmember McCormack felt the Council had been late in understanding all of the implications, but after reading Judge Wright's proposal, it was clear that Southwest Gas had made guarantees, assumed the risk consciously and deliberately in exchange for alternative rate making and oversight. Southwest Gas made a deal and received credits and benefits that were far outside of Truckee and now they did not like the results. It appeared Southwest Gas wanted to renege on their guarantee. Mr. Johnson responded that the commitments made were based on the assumption that the total costs of the project would not to exceed $30-32 million. The presumption in the proposed decision by Judge Wright that it was traded for something else in the General Rate Case was totally incorrect. The General Rate Case dealt with alternate rate making with respects to other aspects. With respect to the cost cap there was no benefit to company for entering into cost cap agreement. That issue was incremental to underlying decision. There was no benefit to the Company or to ratepayers outside of Truckee. It was an incorrect assumption and there was no basis for that in the underlying order. What Southwest Gas was facing was a changed cimumstance. They went into the agreement anticipating a cost between $26-32 million and had a project that would cost in excess of $55 million, it was not the same project and the Company would not have made that commitment had they known the total costs. Town of Tmckee May 19, 1998 Special Page 5 Councilmember McCormack stated it was the same project, it just cost more. Mr. Johnson stated that if the conditions existed when they originally engineered the project he would agree, but the conditions changed. Mayor Florian questioned what conditions changed. Mr. Johnson stated he was not at the meeting to rehash that, it had been done already. They had outlined their position in the application with respect to the additional cost overruns. They did that one year ago when they came to Truckee, they were not blaming anyone. They were faced with a situation ora total project of $56 million and when originally engineered it was less than $35, the project was different. Conditions changed and they felt they should have the opportunity to recover some of their additional investment. Councilmember McCormack questioned if Southwest Gas contended that statements in Judge Wright's draft order were incorrect. Mr. Johnson replied that on the one point they were. Councilmember McCormack stated that Southwest Gas agreed absorb all costs over $29 million and questioned if that was incorrect. Mr. Johnson stated that was exactly what they had said because they envisioned a project that would not go over $32 million. Councilmember Susman stated that Mr. Johnson had made a comment that Southwest Gas' position was that if people wanted gas in Truckee it would cost $20 million. Mr. Johnson stated that in the application Southwest Gas would provide service under the settlement agreement to an additional 2,900-3,000 and the additional cost associated with that would move the cost cap up from $29 million to $38 million, i.e. $9 million more. Councilmember Susman stated Mr. Johnson had said that if Truckee wanted gas it would cost $20 million. Southwest Gas came to the community in 1993 and said if the community wanted gas it would cost $29 million and now they were discussing cost overruns and also excluded 1,500 homes. Southwest Gas claimed they had problems with contractors, and he questioned if he was correct in assuming that Southwest Gas had dealt with those contractors before. Mr. Johnson stated that it was one of their own subsidiaries. It was not so much trouble with the contractor, but trouble in getting contractors to the area in the construction season. Councilmember Susman questioned why Truckee was not on the Service List. Mr. Johnson replied that they had sent the Town a copy of the application in 1997. He thought it had been sent to Steve Wright and assumed that Southwest Gas had met with the Council before they filed the application, i.e. April 1997. Councilmember Susman stated that part of the negotiated settlement addressed the freezing of gas rates to 2001. Mr. Johnson stated that was correct. Councilmember Susman questioned if Mr. Johnson could address his comment regarding "a possibility of rate increase when they go back to the CPUC". Mr. Johnson stated that if Southwest Gas filed their rate case to go into effect 1999, based on the parameters that were established in previous rate cases, they would have a projected revenue shortfall $4.5 million and, assuming that there were no other changes, they would be entitled to a rate increase of $4.5 million. They were originally scheduled to file during the current year for rates effective 1/1/99 and they had agreed to delay that for two years which they projected would create a revenue shortfall of $4.5 million. Councilmember Susman questioned if Southwest Gas received the 75% saturation of the Donner Lake area what it would do to the base rate that Southwest Gas was asking for on the entire northern California area, i.e. subsidizing the Donner Lake and Prosser Heights areas. Roger Montgomery, Southwest Gas, replied that the costs would be spread over Northern California with a substantial portion of the costs going back to Donner Lake. It would depend on the volumes available at the time of the next rate case. Councilmember Susman stated that the number he heard was 11 cents for the subsidy throughout Northern California along with the 4.5%, and an increase in surcharge from 12 cents/therm to 18 Town of Truckee May 19, 1998 Special Page 6 centfftherm. Mr. Johnson felt that was an awful lot, what they would be looking at were additional costs of $4,000 for the 1,500 customers maximum. Current rates would pick up $4,000. Cotmcilmember Susman stated that Northern Pipeline was initially on a contracted basis and then turned into a time and materials operation which led to some of the cost overruns. Mr. Johnson replied that the contract was initially a unit basis, but when the initial bids for Phase 2 were received they knew it would be at or exceed the initial estimate of$11 million so it was shifted to time and materials (per day rate) because the Company had done that in other instances when they ran into what they felt was an excessive unit cost basis. They had been able to shift to a per day rate and save money. They felt they could come in at budget for Phase 2 and that was the reason for the shift. Councilmember Susman questioned if Southwest Gas knew that in 1996. Mr. Johnson stated that was correct, they knew that in the winter of 1996. Mayor Florian questioned if that move saved them money. Mr. Johnson stated that it had not, it cost them $5 million. Mayor Florian questioned if that was a decision that was made internally. Mr. Johnson stated that was correct. Councilmember Susman questioned why Truckee residents paid a higher therm rate than Incline Village. Mr. Montgomery stated they were two different jurisdictions and that large commemial and industrial users in Nevada resulted in lower average costs. It was also less expensive to lay pipe in Nevada. All customers in Northern Nevada paid the same rate, it was an average of the area with commercial customers picking up a lot of the costs. Councilmember Susan questioned what would happen to the price of natural gas if deregulated. Mr. Johnson replied that it would provide an opportunity for customers to provide their own gas supply which Southwest Gas would transport. Councilmember Susman stated that the cost overruns might result in a net cost per share of 50 cents per shareholder. Mr. Johnson stated that he was not sure, it could be. Councilmember Susman stated that Southwest Gas had a 63% increase per share the first quarter, and if50 cents represented the per share cost it was less than a 40% decrease in dividends to shareholders. Steve Carpenter, former Councilmember/Vice Mayor, stated he was aware that the Council did not call special meetings without having a very special purpose and this was an important issue. He had heard about the advantages of natural gas, but was glad he still had propane so he did not have to personally deal with the issues. He had sat through Council meetings but did not recall the Council discussing rates. The Town's involvement was the franchise agreement, road construction/reconstruction issues, and the whole concept of providing service to the community, but it was not a Town Department. It was not their role at that time and it was not the Council's role at the present time. They kept hearing confusing things about rates, etc. and the date the Town incorporated and that there were other factors that changed things. That had nothing to do with what was before the Council The Council needed to decide if they were going to the CPUC (if the Town could go it would be great). That was the kind of decision the Council was discussing. Related to that, the idea of sticking to the original deal, he had to operate his business that way and he expected other businesses to deal that way. The deal last year was to evaluate Donner Lake in a 30-day period and everyone would know the results/costs and Southwest Gas would start construction this year. The short construction season was not a surprise for Southwest Gas as they already served Incline Village, but they were saying now. it was a surprise, now there were cost overruns and they wanted to charge people for the costs. He did not feel Southwest Gas should charge people for their cost overruns. Karen Sessler, small business owner on West River Street (being served by natural gas) and homeowner in Prosser Lakeview Estates (next phase to be served), urged Council take a clear stand Town of Truckee May 19, 1998 Special Page 7 to encourage the CPUC to deny Southwest Gas' request to modify the terms and conditions of their original agreement. She requested that the Council also encourage the CPUC to adopt Administrative Law Judge's opinion. The Town could and must force Southwest Gas to honor their original agreement. The issue was bringing natural gas to all of Truckee. There could be some that would argue that it was more important to bring gas to a few more people even if they had to sacrifice some of the neighborhoods, but in the proposal submitted by Southwest Gas there was a theory that they may be able to bring gas to Donner Lake if a lot of specific conditions were met and if they paid a lot more money. That was not the original agreement. The agreement was to bring gas to all of Truckee. Southwest Gas was trying to divide and conquer; to pit neighborhood against neighborhood and that was not what the community was about. There was an argument being made that some of the neighborhoods not being served, i.e. Tahoe Donner and Prosser Lakeview Estates wanted gas even if it meant sacrificing other neighborhoods or higher rates. She said no, at their business on West River Street their natural gas was costing them approximately 20% more than propane did. If the sumharge went into effect, she felt it would not make natural gas economic for her in Prosser Lakeview Estates. Those already being served would also get a big economic hit. The increase of 6 cents/them would be approximately $75/year. To the businesses and community it was money that should stay in the community. That money should not be given away to Southwest Gas, they made an agreement to accept the overruns and they should be held to that agreement. She distributed copies of the Southwest Gas' press releases for February and April which stated that the Company had recognized the $8 million cost overrun on the project. By the time their accountants had dealt with it, it was whittled down to $4.3 million. Even after taking that $8 million loss from the project their net income was still $32.3 million compared to only $18.3 million the year before. The April press release announced that Southwest Gas had record 4th quarter earnings. It was not a company in need of bailing out, their shares were trading near their all time high. They were laughing all the way to the bank while they were picking the pockets of those in Truckee. The Council needed to take a clear stand and protect the citizens of Truckee. Jim Mass, Prosser Heights, stated if the Administrative Law Judge's decision was not upheld there would be a tremendous groundswell of disdain and disgust among the community. Prices would rise for those that already had natural gas, those without natural gas would be happy that they still had propane because it was considerably cheaper. He was the one that initially put the discussion of natural gas on the Truckee Donner PUD Board agenda in the early 1990's. It was his purpose to look at and examine natural gas to serve all of the community (with a main line as close as Northstar) due to the safety issues of propane. Chris Hershberger was at that meeting and a good discussion was held at that time. The project was to be done in three phases. The project was no where near complete and some would never receive natural gas. It was troubling to hear Southwest Gas' explanation ora "different project". He did not understand how the ground had changed, no earthquakes, volcanic eruptions, etc. It was still the same project. He could not understand how they did not know how much it would cost to put pipes in the ground. Other agencies put pipes in the ground, all of the time, serving all of the people. There was no excuse in saying that it was going to cost too much, therefore, someone had to go without water, electricity, and sewer. The Town should expect Southwest Gas to do the same. The payback was much longer, not the 8-10- years projected in the original agreement. Southwest Gas claimed that they had not seen the alternate proposal that would be submitted by Commissioner Neeper, he proposed that they had not only seen it but that they helped write it. He had the opportunity to hear Commissioner Neeper at a conference several years ago and it was his opinion that the Commissioner was not interested in the consumer, but companies and their stockholders. Southwest Gas had threatened the community that if the Administrative Law Judge's opinion was upheld Southwest Gas would go to court and delay the project. He said go to court and delay the project because Truckee was an entire community and Southwest Gas should be told to finish the entire project. He did not believe that Southwest Gas was playing square with the Council or the community. At a meeting at TSD, Southwest Gas made a presentation on how they would serve the Prosser area. They stated that they Town of Truckee May 19, 1998 Special Page 8 could not service the Prosser Heights area because Caltrans would not give them right-of-way. He then spoke with Bob Quinn, TDPUD, and he stated that the PUD had discussed with Southwest Gas the use of the feeder line behind Coachland and into the Prosser Heights area. That option was never brought up during the TSD meeting. He had since met with Southwest Gas officials and utility district officials regarding the need to cooperate in terms of easements because he felt so strongly that the entire community needed to be served and, that if utility district easements could help and keep a good deal of the gas lines out of the roads, it would benefit the entire community. He urged the Council to adopt a motion to direct the Mayor to write a letter and appear before CPUC to support Judge Wright's decision and let the chips fall where they may. Fred Zubell, stated the Council had the opportunity to do the right thing, make a motion, and take action to tell Southwest Gas to live up to their agreements and signed contracts. They had agreed to be responsible for overruns, it was as simple as that. Southwest Gas was not a company that was hurting, they could better afford it than the ratepayers of Truckee could. To respond to their threat and look at it in the short term would be very short sighted. The Council prided itself at looking toward the future of the entire community and what would happen in two or three weeks was of little consequence in looking at what the ratepayers would be paying for twenty years. The CPUC needed to hear from the Council. Breeze Cross, former Councilmember/Mayor, stated he was currently being served with natural gas and was undecided as to whether it was cost effective. As a Councilmcmber on the original Town Council they were dealing with a lot of issues in 1993, i.e. snow plowing, road maintenance, and forming thc Planning/Building departments. One oftbe issues was the Southwest Gas application for gas service for the Town of Truckee. He recalled that it was a big issue, the Council had studied it as best they could and it was very complex. Where the numbers came from, how good the numbers were, were questions asked over and over again and the Council had been provided assurances that the numbers were well worked out, they were viable numbers, and that Southwest Gas would standby those numbers because any cost overruns would be absorbed by Southwest Gas. The mn out period to pay the surcharge would be a factor not of cost overruns, but of how many people signed up for gas. During that period of time in the community there was a great dca] of interest and it looked like it made sense as a community to support the application. Now Southwest Gas was saying they made a mistake, that they could not do it, for reasons that were none of their responsibility, it was the contractor or the Town not allowing them to destroy the roads and wanting them back in fair condition and, for whatever reasons, not many of them sound like Southwest Gas' fault, i.e. out of their control. How could the community have done better diligence in looking at the project, he did not think they cnnld as they did not understand the business and it was not the Town's responsibility because they had a guarantee. That took the onus offthe Council If the community turned their back on that guarantee, they would be saying that thc Town would subsidize Southwest Gas' mistake. They could extract the additional $9 million by attaching it to the cap and when get Southwest Gas got around to serving Donner Lake, that entire cost would be placed on the back of community, i.e. an additional $ I0 million for serving Donner Lake on top of the $9 million. That would be $19 million extracted from the community. The Town was guaranteed that Southwest Gas would not have to be paid. The Council was dealing with big issues, i.e. a deferred road bill that was not the Town's fault. Southwest Gas and all the other forces that were trying to extract money from the community would prevent the Council from doing the things that they had a responsibility to do. It was the cumulative costs that were making the community not affordable and making people say they were tired of paying. He urged the Council to support Judge Wright's position and to be forceful in their actions. Jim Abbott, Tahoe Donner/Donner Lake, stated it was his understanding that it would take $20 million to finish the project and that $35 million had been spent so far. The initial budget was $11 Town of Truckee May 19, 1998 Special Page 9 million which became $28 million. Mr. Johnson stated that through Phase 2 the costs were in excess of $35 million and the original budget was $18 million. Original estimates were $29 million for the entire project. Mr. Abbott felt that engineering should have been done before starting on the contract. He was concerned regarding the identification of potential customers and the terms and conditions set for Donner Lake to get service. A survey had been done at Donner Lake last summer and he was uncertain of the results. It appeared to him that it should not have to be redone, maybe refined, but there was some reason to do the study and he did not know what it was. Generous easements had been granted to Southwest Gas with the assumption that the whole project would be finished. He hoped Southwest Gas would take a new look at it. Hopefully, the Council would communicate with the CPUC and obtain a favorable decision on Judge Wfight's opinion and they could move on with Southwest Gas taking another look rather than hang it up in court. Charlie White, Donner Lake, stated that Southwest Gas was making Donner Lake out to be the heavies. The doubling of costs per house in Donner Lake seemed ridiculous. He questioned if the 75% level of commitment was immediate, i.e. a promise to hookup within the first year. The requirements were nebulous and hard to grasp. There were a lot of buildings, especially condominiums that were electric only and could not convert, it was not fair. Southwest Gas should stick to the original deal and service the community. He assumed that the Town would also speak for the Placer County portion of Donner Lake. Ed Sundgren, Prosser Heights, requested that the Town Council forcefully carry the community's comments to CPUC. He then read his comments to the Council (a copy on file). Mr. Simon thanked the Council for their insightful questions, which he felt elicited more information in the deliberative process. He felt the Council was at a crossroads, i.e. dealing with a company of such size and having to make a yes or no decision. It was his prediction that it would not go to court. Despite Counsel's comments, he suggested that what would happen if the Council did the right thing, was that the Board of Directors of Southwest Gas would take a close look and decide to panner with the community and not fight, peace would come out of it as the Council would have stood up for themselves and the community. By doing that it would invite Southwest Gas into the process. The threat of litigation was distasteful. The idea that the cost overruns were unprecedented or unpredictable did not make sense. There was a possibility that there was a corporate strategy at play which might be to come in and bid the project at a certain amount to "get your foot in the door" and then things change and rates go up, that was not unheard of. What occurred, as he understood it, was that part of the quid pro quo with cost cap was that there would be no oversight or technical regulation of some of the installation procedures along the way. What was received in exchange for a promise from a good corporate citizen like Southwest Gas was do the job and there would be no oversight for the guarantee on the cap. The deal stated Southwest Gas shareholders would be responsible for any costs in excess of the cost cap. All of the good lawyers at Southwest Gas that negotiated the deal intended to be bound by that statement. It was not a situation that had changed, it was standard procedure. Council needed to make a motion, let the message get out across the country, because the reputation of the Town could be hun by future Council actions. He believed Council wanted Truckee to mean what it said and that the people the Town did business with had to honor their agreements. He urged Council to make a motion directing the Mayor to send a letter urging denial of the application of Southwest Gas and adoption of Judge Wfight's decision and have the Mayor make the presentation to the CPUC. It would be the Town's first interface with the CPUC which he felt had been responding with sincerity and integrity to the citizens of the community. Former Mayor Eagan had laid the groundwork. He believed the Town would be successful and that Southwest Gas would take high road and not the litigation road. Town of Truckee May 19, 1998 Special Page 10 Ms. Eagan encouraged the Council to be very decisive. She expressed her concern when new deals were presented at the 11th hour, as it played upon the Town's interest to work reasonably and consider all options, but at some point the Council needed to look back at the history of how the issue progressed and say "no" we stop here. She encouraged the Council to stop it at the present point. She referred to the Town's past negotiations with the Railroad and the straightforward discussions and negotiations. Because of that difference she felt the Council needed the courage to behave a little differently than they would normally be inclined to do under other circumstances. Mr. Johnson thanked the Council for the opportunity to respond, it was not a pleasant experience being the target and they had been there before. He wanted to make sure that everyone understood that what they were looking at was a situation that should not be viewed as a threat from the Company in the sense that the Company was not taking a vindictive action. They were looking at ifil'om a point of view that they had spent $35 million, rates were in place to recover not the $35 million, only the percentage that had already been authorized by the CPUC and he would guarantee not a dime more. If they stopped today, the current customers would incur no additional costs. The Company was faced with costs to finish the project which would cost $20 million more. They proposed a situation where the costs were shared. That was the way they put their application together and negotiated the settlement with ORA. They filed the application in July, settlement discussions started after the first pre-heating conference. The only one that participated in the pre-hearing conference was the Office of Ratepayer Advocates. The Town of Truckee had the application, Southwest Gas had made presentations to the Town regarding the cost overruns and they had moved forward in good faith and were dealing with the party that was interested in resolving the issue. They developed the settlement, filed it, and presented it to the Town in February. What they heard the last five days was a lot more than they heard before that time. Looking at it realistically, Southwest Gas was faced with a situation on a going forward basis. They had 4,200 customers to serve and a cost of $20 million, that was reality. It had nothing to do with anything else, it was not trying to cover any overrun costs they had experienced to date, those costs were already history. The Company was committed to eat every dime associated with the other cost overruns. All the settlement addressed was the costs on a go forward basis. The Company was not committed to go forward with that today if there was no opportunity to make a return on the $20 million investment. That was the Company's decision. Recognizing that, they were not trying to sandbag anyone, they had not been doing that from the start. They were looking at the cost to finish the project. If they stopped today, current ratepayers would not pay another dime more than they currently were. In looking at it realistically from the Company's decisions and other ratepayers, the best thing they could do would be to stop because the cost to them would not go up. If everyone wanted to look at it as a sharing arrangement, they had made the commitment, absorbed $16 million, he recognized that there were advantages and disadvantages with tax benefits and such, but it was not a situation where they were asking the ratepayers to pay every dime. They recognized that they were not in a position to do that and could not expect anyone to agree to that. What they were faced with was a situation they felt they could go forward with, i.e. capture 3,000 of the 4,200 customers for $9 million more and that was what they were proposing to do. That was what the settlement said. They had also committed to serving the remaining 1,500 customers. They hoped that they could do that. What they were really looking at was that they were in a position where everyone wanted them to react but they would react as stated. Things changed, their abilities to do things differently would change, but it was a situation that everyone was looking for an up and down commitment today, they could not make it other than what he had stated. If the CPUC adopted the draft decision they would exercise whatever legal remedies were available. The practical implications of that was that the construction season started four days ago and they envisioned that they could finish Phase 3A during the summer even if they received a favorable decision by the CPUC on June 4th. They were committed to doing that recognizing what they had agreed to in the settlement. They felt that was a reasonable approach and put them in the position to complete the bulk of the project and deal with the rest of it. If everyone wanted a decision today that Town of Truckee May 19, 1998 Special Page 11 Southwest Gas would absorb the $27 million the project would not go forward, that was reality, not a threat. To expect everyone to react quickly enough to start construction, assuming the CPUC came out with a decision on Thursday directing them to do it, it would not happen as there was not enough time. When Southwest Gas was faced with a situation that could jeopardize their ability to pay dividends to their shareholders, there would be a reaction to make sure that they took advantage of whatever legal remedies were available before acting. That put them in a very difficult position of dealing with shareholders and their ability to raise capital. Those were costs that would be passed on to all ratepayers, that was reality from their perspective. He did not want everyone to view that as a threat, it was reality, that was what they were faced with and that was what their reaction would be if they were forced to deal with the subject today. They were asking for the partnership everyone was asking for. If Southwest Gas had done their engineering correctly and knew everything from day one, they still may have gone forward with a $56 million project. Would everyone be complaining today if that were the decision. It was a small project under CPUC guidelines. They came in at $30 million and there was a CA Statute that stated if the project was in excess of $$0 million there was always an opportunity to go back and ask for an increase in the cost cap. In the project it was a situation that circumstances had changed from when they originally engineered the project and they were not blaming anyone. They probably did not do it correctly, except they did have some experience at the lake and budgeted $7 million to finish the expansion within the basin and came in at $7 million. That was based on their construction experience in 1995, it worked for them. They did something right, they did something wrong in the next phase. Was it appropriate to blame them for all of that and impose the full costs on them. He did not believe so. Southwest Gas had absorbed $16 million and was ready to go forward and deal with Phase 3 and ready to turn dirt as soon as they received the approvals. Mr. Wright stated the Council needed to discuss the issues. The options available were still the same. Mr. Crabb stated there were no guarantees when going to court. Assuming the CPUC put on a full contested hearing and ultimately upheld Judge Wright's decision, he felt it would be difficult to get that reversed, particularly in light ora single appeal to the CA Supreme Court. It was his view that the threat that ultimately the entire project would be stopped was not a particularly compelling argument. Council needed to realize that there were two very practical consequences, i.e. litigation which took time, and there would be no construction during the present season and which was virtually a guarantee and, secondly, if there was any interest on the part of the Town to get construction next year, it would require the Town to become more involved than it had been in the litigation and rate case. Those should be factored into the Council's decision. The two most impressive things he had heard was that it was a 20 year decision ultimately, and that it should not be based on a couple of months of consequences. He advised the Council to think about what was ultimately best for 20 years in Truckee which was the dominating factor in making a decision. There was a need for a partnership. Southwest Gas and the ratepayers had talked to each other and the Town and citizens were left out of the conversations. Discussions should be held on how to bring all three parties together for a partnership once Southwest Gas delivered on their original promise. Mayor Florian questioned if another company could supply natural gas if Southwest Gas withdrew. Mr. Crabb replied that it would be subject to CPUC approval and the Town issuing a franchise assuming Southwest Gas walked away from the project. Mayor Florian questioned if the TDPUD was subject to the same guidelines. Mr. Crabb replied that they would be subject to a franchise agreement and was uncertain at to whether they would be subject to the CPUC. Mr. Maas stated that the TDPUD was not subject to the CPUC but LAFCo would have to grant authority regarding the PUD's ability to serve gas. Town of Truckee May 19, 1998 Special Page 12 Councilmember McCormack referred to Mr. Crabb's remarks and clarified that after the completion of the project discussions should be held regarding a partnership for any subsequent negotiations. Mr. Crabb replied that assuming Judge Wright's decision was upheld, Southwest Gas would have a $20 million issue that would not go away, it was an issue with the community and everyone needed to talk through that once the project was completed. Councilmember Susman stated he was intrigued with the May 15th letter that had not been signed which was in support of the ORA settlement. He noted that the Council had not heard from them at the meeting. He was looking at the overall benefit of community and realized that there was a constituency that supported the ORA settlement, but if they were not going to come forward, they should be aware that the Council considered the ramifications on everyone. He had a problem with some of the explanations regarding Southwest Gas' knowledge of cost overruns, that circumstances changed, and that the project changed. He was also concerned that Mr. Johnson seemed confident that whatever came out of the negotiated settlement would meet Southwest Gas' needs and no one had seen the new negotiated settlement. Regarding the overruns due to conditions of soils in Truckee, the Council heard it from the PUD and TTSA that they could lay pipe in the ground. He believed the community responded to a commitment to provide service and they had not seen that service. Councilmember McCormack stated that in other discussions he was satisfied in his mind that any changes made by the Town did not result in significant cost overruns. There may have been a lot of factors that Southwest Gas failed to recognize, California had a lot of tough laws, but if they did not recognize that it was not the Town's or Nevada or Placer Counties' responsibility, it was poor management. Councilmember Susman agreed. Mayor Florian stated that he ran a grocery store and every six months he ran an inventory, when he bought goods he had to sell them for a profit, at the end of the inventory if he came up short he did not simply raise the prices knowing that in one year he would recoup the loss. He had to look for his shortcomings, address them, and move on with business. He did not pass that shortage on to the public. Councilmember McCormack stated that there had been excellent comments made and the Council appreciated the trouble everyone had gone to, including Southwest Gas. He was particularly interested in Breeze Cross' and Steve Carpenter's comments. The Council had considered issues such as rate base, how to resurface the roads behind the cuts, and the franchise fee, but the Council was not a part of the CPUC decision at the beginning. Maybe they could have been but at the time it did not seem like something they could do. There was a fundamental difference with the negotiations held with the Union Pacific Railroad, Truckee was the only one negotiating with the railroad, there was full disclosure and it worked very well. The Town did not have that opportunity with Southwest Gas, partly the Town's own doing. They were facing a different situation. He felt the Town was late in getting up to the table, but excusing himself, he did not understand everything until he read Judge Wright's proposed ruling which included things that he had never heard before. The exclusion of part of the community had always been a problem for him, making a decision to permanently or for the foreseeable future exclude a part of the community was a problem, but the potential of killing the project was another feature he was unable to deal with until he was better informed. Maybe Judge Wright was wrong, but if that proposal and statement of the facts and considerations was real he had an entirely different view of the implications of recommending Judge Wright's proposal. He appreciated Mr. Crabb's comments; it was a 20-year decision. If Tahoe Donner and Prosser Lakeview had to wait 1-2 years, if that was what it would take to work out the process to its conclusion, it was not a high price to pay to get the right answer. He felt the Council needed to take a position with the CPUC both by letter and attendance. Mayor Florian stated he was a shareholder of the company he worked for and when they came to the community they had an idea of what the cost of facility would be. When they started the project they Town of Truckee May 19, 1998 Special Page 13 went over costs because the design standards were not generic. Even though the dollar amount went over, it was just one project within the corporation and they did not make the community suffer. The next project they took a little tighter look. They learned from the experience in Truckee. They did not punish the community for being over budget. Councilmember McCormack stated there was danger in dismissing the impact of an overrun, $20 million was a big hit. Councilmember Susman stated he always had a problem with the promise of Southwest Gas coming in to provide service to the entire community. Councilmember Drake had stated that the negotiated settlement to serve 3,500 more people was better than not getting gas to anyone and that had started to sway him, but after reading the opinions he was committed at the present time that Southwest Gas needed to be accountable to the community for their commitment and contract. Mayor Florian felt it was a moral issue. Southwest Gas came to the Town; therefore, they should be a part of the community. Motion by Councilmember Susman, to send a strong letter to the CPUC to deny Southwest Gas' application and the ORA settlement agreement, uphold Judge Wright's draft decision and, if possible, send Town representation to the CPUC hearing, Seconded by Councilmember McCormack, approved 3-0-2. Mr. Wright stated that staffwould draft a letter and fax it to the Commission Wednesday morning. Staff would also work with the Mayor regarding representation at the CPUC meeting on Thursday. Mayor Florian stated that he had a corporate commitment that he could not get out of. He would entertain having the Vice Mayor and/or Steve Wright attend. Councilmember McCormack felt the details could be worked out. He thanked everyone in attendance for their work which he felt brought him into focus. It had been a very helpful process. Mr. Maas thanked Ms. Eagan for her efforts. He felt the governmental process was working as Administrative Law Judge Wright had heard the community which was reflected in his recommendation. Any action taken regarding Southwest Gas' application would be a 20-year decision. COUNCILMEMBER REPORTS: None ADJOURNMENT. Mayor Florian adjourned the meeting at 7:48 p.m. by: Respectfully submitted, STEPHEN L. WRIGHT, Town Manager Vicki C. Soderquist, CMC~uty Town Clerk Town of Truckee May 19, 1998 Special Page 14