Palo Alto's utility officials have a pleasant conundrum on their hands these days -- a $50 million fund that the city can use to upgrade its transmission system, install smart meters or pursue other "special projects" relating to electricity.

The fund, known as "Calaveras Reserve," has been in place since 1983 and has undergone several transformations, the latest of which is now in the works.

The City Council launched the reserve to help pay off the city's debt for a new hydroelectric project. But when state legislators passed a law in 1996 deregulating the electric industry and allowing customers to choose their power supplier, Palo Alto officials decided to use the reserve to pay for electricity assets that the city purchased but would have a hard time supporting if it were to lose customers to a competing utility.

By 1999, the reserve balance reached $71 million, which was deemed enough to cover the asset costs, and the city stopped collecting funds, deciding it would draw upon the reserve until it ran out in 2033.

In 2009, to address changing market conditions, the council approved new guidelines for the management of the reserve.

Utility officials are still a long way from determining what to do with the $50 million, but early signs indicate that these funds will not be returned to the ratepayers who were asked to chip into the fund but for one or more long-term big-ticket items.

The city's Utilities Advisory Commission agreed last month that all of the Calaveras money should be placed into a new "Electric Special Project Reserve" and used to fund significant electricity projects. Senior Resource Planner Monica Padilla wrote in a report that top candidates include smart-meter infrastructure; investments in local power generation; and upgrades to the city's transmission-line connection (a subject of major interest since a plane crash caused a citywide power outage in February 2010). The city may also use these funds for energy-efficiency loans to businesses; exploration of "emerging technologies"; and a new Utilities Department building (in addition to its City Hall location, the department occupies a portion of the city's dilapidated Municipal Service Center).

Commissioners John Melton and William Berry both said they would favor spending the money on an upgrade of the city's transmission system. The city is currently connected to the electrical-transmission grid at the Colorado substation at 115 kiloVolts (kV), according to a staff report. Upgrading the system to 230 kV "has the potential of saving up to $5 million per year and improving the city's transmission service reliability." Such an upgrade, however, is estimated to cost more than $160 million, making it "economically infeasible," in staff's opinion.

A cheaper option would be connecting to the 230 kV transmission grid through SLAC National Accelerator Laboratory in the west side of the city. Staff estimated that the project would cost more than $40 million and could provide about half of the city's electric load. It would, however, depend on interest by Stanford and SLAC, according to the staff report.

"If a transmission project was available to us, it would be a worthwhile thing to do and it would reduce the future cost to ratepayers," Berry said at the July 20 meeting.

Not everyone agrees that the entire reserve should be dedicated to major electricity projects. In deciding to use all $50 million in the Calaveras Reserve for such projects, the commission rejected a Utility Department suggestion to use half of the reserve to support utility operations and help stabilize rates.

Utilities Director Valerie Fong said at the July meeting that the department made a "compact with customers" about what the money would be used for. Though the role of the reserve has changed, Fong said she feels "obliged to return it (the money) under the same intent under which it was collected."

The disagreement between staff and the commission means that the City Council will face two competing recommendations when considering the reserve's new role in the fall.

Commissioners John Melton and Steve Eglash both opposed the staff recommendation to split the Calaveras Reserve into two funds, with Eglash saying that the money should be spent on something major and significant and not "dribbled away" to cover operational costs.

"This is a substantial sum of money that we have here, and it's a valuable resource," Eglash said.

"Now is the time to take a real step forward to decide how to use it," he added.

Eglash proposed a set of guidelines for determining how the money should be spent. The funds he said, should be used for major projects (rather than operating costs) that benefit electric ratepayers, that are "worthwhile" (that is, they would be worth doing even if the city didn't have the reserve fund) and that are "impactful relative to the money we have in the reserve."

His colleagues on the commission agreed, with Berry saying he would like to see the funds used for "big significant projects that have a lasting value for the utility."

The council's Finance Committee is tentatively scheduled to consider guidelines for spending the Calaveras Reserve funds in September. The full council would then discuss the Finance Committee's recommendation in October.