From: Leiber, Phil Sent: Tuesday, September 30, 2003 11:48 AM To: Yakin, Dale Cc: Arikawa, Ben Subject: FW: Proposed 2004 ISO Budget Dale, Please see responses to your questions below. Philip Leiber Treasurer & Director of Financial Planning California ISO 916-351-2168 916-351-2259 (fax) The foregoing e-mail communication (together with any attachments) is intended for the designated recipient(s) only. If you feel you received the communication in error please note: it may be confidential, therefore unauthorized use, dissemination, or reproduction of the message is prohibited. Please advise the sender and delete this message from your system. Nothing in this communication is intended to operate as an electronic signature under applicable law unless expressly specified as such. -----Original Message----- From: Yakin, Dale Sent: Monday, September 29, 2003 3:39 PM To: Arikawa, Ben Subject: Proposed 2004 ISO Budget Ben, I have a few questions about the budget proposal: 1) What is the "Revenue Credit from Operating Reserve"? Is this an amount collected for contingency which was not utilized? Response: We'll be providing the details of this calculation this week. Please see page 12 of the following presentation (see page numbers of slide) for a description of the Operating Reserve. http://www.caiso.com/docs/2003/09/24/200309241425573593.pdf 2) What is the "Vacancy Factor" and how does it effect salary and benefit expense? Is this a budgeted amount that was not utilized because budgeted new hires did not occur? Response: We recognize that not all positions will be occupied next year. To recognize the savings that may result from this, we reduce salaries & benefits by a total of $2 million. These savings are reflected in the "Salary & Benefits" costs reflected in the budget. 3) There is an explanation that lease expense is reduced because the leased items were purchased. Lease expenses reduced by ~$8 Million, but capex aside from MD02 only increased by ~$8 Million. Does this imply that the leased equipment had depreciated to the point that this year's lease payment = buyout price ? Response: The $8M decrease in lease expenses is a result of: 1) The purchase of leased equipment at the end of the lease term, which ends the monthly lease expense over the course of the year (approx $5M). 2) Lease dollars were budgeted for 2003 projects and new equipment, prior to a change in Financing practice/philosophy, moving from leasing equipment to buying equipment, resulting in unused budget dollars (approx $3M). The philosophy of purchasing leased equipment, as opposed to refreshing equipment and continuing on a lease schedule, allows the assets (IT hardware) to be managed according to the useful life, which may be 5 or more years, versus managing the hardware based on a contract life, which in the case of leasing, is typically three years. Buying out the lease schedules utilizes the full life of the equipment and reduces the ongoing O&M expense. The capital cost of a lease buyout is fair market value, which is significantly less than the original purchase price, typically the equivalent of 3-5 months of lease payments. The CapEx budget increases from $22 million in 2003 to $32 million in 2004, or $10 million in total. Of the $10 million increase, MD02 increases from $15 million to $22 million, or $7 million. Non MD02 expenditures increase from $7 million to $10 million. So, the increase in "capex", entails other projects not related to leased equipment or centralized IT equipment expenditures. The $10 million for all non-MD02 capital acquisitions includes equipment and other programs. While the equipment acquisition could readily consume $6-8 million of that remaining $10 million, we will attempt to defer, and economize as much as possible, to keep the equipment procurement costs from consuming the major of those funds and permit other important capital projects to be undertaken also within that $10 million. The capital budget for leased equipment buyout is $2.5M, and the capital budget to refresh end of life equipment (equipment at the end of its useable/supportable life of 5 years) is $2M, approximately 15% of all owned equipment. These are estimated costs based on a continuation of service at the level currently provided. There is an effort to consolidate servers, now possible with the availability and deployment of monitoring software that facilitates the placement of more than one application on a server. So, there is an effort to reduce the level of equipment--i.e. some won't be replaced.