HomeMy WebLinkAboutStaff Report 233-08CMR: 233:08 Page 1 of 3
TO: HONORABLE CITY COUNCIL
ATTN: FINANCE COMMITTEE
FROM: CITY MANAGER DEPARTMENT: UTILITIES
DATE: MAY 13, 2008 CMR: 233:08
SUBJECT: ADOPTION OF A RESOLUTION APPROVING A POLICY
ESTABLISHING A FIBER OPTICS EMERGENCY PLANT
REPLACEMENT RESERVE AND APPROVAL OF FUNDING
GUIDELINES FOR BOTH THE FIBER OPTICS RATE STABILIZATION
RESERVE AND THE FIBER OPTICS EMERGENCY PLANT
REPLACEMENT RESERVE
RECOMMENDATION
Staff recommends that the Council take the following action:
1. Adopt a resolution approving a policy establishing a Fiber Optics Emergency Plant
Replacement Reserve;
2. Approve a minimum funding level guideline for the Fiber Optics Emergency Plant
Replacement Reserve which will be equal to the lesser of: A) an amount equal to the
amount of the City’s liability insurance coverage deductible; or B) an amount equal to the
replacement cost of the most essential fiber optics infrastructure which, if damaged or
destroyed, would cause a significant interruption in the normal operation of the City’s
fiber optics infrastructure; and
3. Approve the minimum and maximum funding level guideline for the Fiber Optics Rate
Stabilization Reserve which will be equal to 20% and 50% of the annual sales revenue of
the Fiber Optics Fund operations, respectively.
BACKGROUND
In 1996, the City began operating its fiber optics business. Currently, the Fiber Optics operation
is a sub-fund of the Electric Fund and the Fiber Optics Rate Stabilization Reserve was created.
For the FY 2008-09 proposed budget, the Fiber Optics Fund will be a stand-alone fund and be
separated from the Electric Fund. At separation, a Fiber Optics Emergency Plant Replacement
Reserve will be funded.
CMR: 233:08 Page 2 of 3
Article VII, Section 2(e) (Public Utilities Revenue) of the City Charter requires a reserve to be
established for each utility “for use by the utility, only for replacements or emergency repairs.”
Emergency Plant Replacement (EPR) Reserves have been funded for the following Utilities
funds: Electric, Water, Gas, and Wastewater Collection Funds. Staff recommends that an EPR
Reserve be created for the Fiber Optics Fund as well.
The Council established by policy the Rate Stabilization Reserves (RSRs) in May 1993
[CMR:263:93] for the Water, Electric, Gas and Wastewater Collection Funds, to ensure funds are
available to cover short-term situations when expenditures exceed revenues; to provide a
depository of excess funds when expenditures are less than revenues; to plan for certain known
future occurrences of a non-recurring nature; or to “ramp up” if the expenditure is of an ongoing
nature. The key points of the Council policy are:
• Reserves should be used to finance extraordinary one-time contingencies and to cover
increased operating costs in the short-run, while allowing rates to gradually increase over a
reasonable period.
• Reserves should not be used to solve long-term financial problems or to cover potential
major catastrophic disasters.
• RSR level guidelines should be set to allow reserves to float up or down. The decision to
hold more money or less money than the guidelines should be based on an assessment of the
uncertainties and financial risk facing the utilities.
• The adequacy and prudence of the guidelines will be reviewed internally each year, and if
appropriate, revised guidelines will be recommended.
On February 20, 2007, Council approved changes to Electric, Water, Gas and Wastewater
Collection EPR Reserve and RSR guidelines (CMR: 143:07). The guideline for the EPR
reserves for each fund requires the lower of the City’s liability insurance coverage deductible
amount or an amount that would cover the replacement cost of the most expensive critical item.
DISCUSSION
Staff proposes the approval of a guideline for the Fiber Optics Fund EPR Reserve that would be
the same as the EPR Reserve established for the Electric, Water, Gas and Wastewater Collection
Funds. The current deductible for the City’s liability insurance is $1 million. The most
expensive critical failure in the Fiber Optics infrastructure is the severance of a main trunk line,
which would cause a service interruption. Repairing a severed main trunk line would cost
approximately $250,000 to repair. Therefore, the Fiber Optics Fund EPR Reserve should be
funded to $250,000.
The RSR guidelines for the Water, Electric, Gas and Wastewater Collection Funds were
developed after an evaluation of risks, or cost contingencies, to which the relevant funds are
exposed, were made. For the Fiber Optics Fund, the cost contingencies include:
CMR: 233:08 Page 3 of 3
• A decline in sales revenue of 15 percent for two years. The top three Fiber Optics customers
provide about 15 percent of the total revenue for the fund;
• A rise in ongoing operating expenses for two years; and
• Unusual one-time cost contingencies (e.g. expansion of the CIP). Fiber optics system
expansion and improvements to the system are being evaluated at this time.
The Fiber Optics Fund minimum RSR guideline is proposed to be 20% of the sales revenue. The
proposed maximum guideline is 50% of the sales revenue. This guideline is the same as the
existing guidelines for the Electric Distribution, Gas Distribution, Water, and Wastewater
Collection Funds. Based on current sales revenues, the proposed RSR minimum and maximum
guideline levels are $540,000 and $1.35 million, respectively.
RESOURCE IMPACT
Current reserves in the Fiber Optics Fund RSR are about $4 million. Therefore, even after
funding the $250,000 for the proposed Fiber Optics Fund EPR Reserve, the Fiber Optics Fund
RSR will be above the proposed maximum guideline level. Staff will re-examine rate levels
depending on the development of CIP plans.
POLICY IMPLICATIONS
The recommended establishment of a Fiber Optics EPR Reserve and the establishment of the
reserve guidelines for the Fiber Optics EPR Reserve and RSR require Council approval.
ENVIRONMENTAL REVIEW
Adoption of the resolution and approval of the recommended changes to the Utilities reserves do
not constitute a project that would require environmental review.
ATTACHMENT
A. Resolution
PREPARED BY: JANE RATCHYE
Assistant Director of Utilities, Resource Management
DEPARTMENT HEAD: _________________________________
VALERIE FONG
Director of Utilities
CITY MANAGER APPROVAL: _________________________________
STEVE EMSLIE/KELLY MORARIU
Deputy City Managers