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HomeMy WebLinkAbout1998-09-15 City CouncilC ty City of Palo Alto Manager’s Report TO:HONORABLE CITY COUNCIL ATTENTION: FROM: FINANCE COMMITTEE UTILITIES ADVISORY COMMISSION CITY MANAGER DEPARTMENT:ADMINISTRATIVE SERVICES DATE:SEPTEMBER 15, 1998 CMR: 352:98 SUBJECT:DRAFT SCOPE OF SERVICES FOR REQUEST FOR PROPOSAL TO SOLICIT A CONSULTANT TO EVALUATE METHODOLOGIES FOR UTILITY FUND TRANSFERS TO THE CITY’S GENERAL FUND RECOMMENDATION Staff recommends that the Utilities Advisory Comm!~on and the Finance Committee review the proposed scope of services for the selection of a consultant to evaluate methodologies for Utility Fund transfers to the City’s General Fund. BACKGROUND Policy and Procedure 1-10 directs that staff provide the two Council committees with a list of budgeted projects for which consultant services costs will be greater than $25,000. In accordance with this policy, the identified consultant contracts for 1998-99, as described in CMR:291:98, were forwarded to the Finance Committee for review on July 7, 1998. The Finance Committee requested to review the proposed scope of services for the selection of a consultant to assist in evaluating methodologies for-the Utility Fund transfer~ to the City’s General Fund. In addition, the Utilities Advisory Commission has requested an opportunity to review the scope of services for this project. This study was proposed by the City Manager in light of financial challenges associated with deregulation of the electric and gas industries and has been endorsed by both the Finance Committee and the Utilities Advisory Commission (UAC)., .The Finance Committee and the CMR:352:98 Page 1 of 4 UAC have both expressed concerns about the competitiveness of the utilities and the ability of the utilities to maintain rates’as low as possible. Both bodies have emphasized that a review of the transfer methodology is important for long-term financial planning and the fiscal stability of the City’s utilities and the General Fund. Historically, transfer and rate making policies have been established by the City Council to protect and to serve the interests of both the ratepayers and taxpayers in Palo Alto. The current methodology for transfers to the General Fund is the utility enterprise method, which is based on a rate of return on asset base methodology. This methodology was adopted following a study of appropriate policy guidelines for utility rate making and cash transfers by Price Waterhouse in December 1982.. Using this methodology, during fiscal year 1997-98, the City’s Electric, Gas, and Water Utilities transferred $11.9 million to the General Fund, an amount equal to 13 percent of total General Fund revenues. The utility transfers to the General Fund have contributed to the City’s ability to deliver a high and unique level of services. The City considers the Refuse, Storm Drain and Wastewater Utilities general governmental functions, and as such, does not transfer net revenues from these Utilities to the General~Fund. DISCUSSION The attached Request for Proposals (RFP) (Attachment A) requests the services of a professional consultant with a background in the utility industry to review the City’s current transfer methodology to identify transfer methodology options, and to make a recommendation regarding the most appropriate methodology for transfers from the City’s Electric, Gas, and Water Funds to the General Fund. In 1997-98, due to pending changes in the Utility industry, the City Manager recommended the Council freeze the transfers from the Utility Funds to the General Fund at the 1996-97 levels. This practice was continued with the 1998-99 budget. There have been several important impacts to the utilities since the current methodology was established. These include: The potential impact of Proposition 218 on the Water Utility’s ability to increase revenues. Deregulation of electric and gas utilities in California, and potentially nationwide, which requires the City’s rates to be competitive, and as a result of which staff is recommending that supply and distribution activities be separated. The Utility Infrastructure Improvement Program, begun with the 1990-91 Budget, which funded an increased level of capital improvements to restore utility plant and CMR:352:98 Page 2 of 4 equipment. Since the current utility transfer methodology is based on the level of utility plant and equipment, this program triggered an increase in the level of transfers to the General Fund. Recommendations of a 1996 Utility Department Organizational Review called for a review of the transfer methodology, especially in the Water Fund. The principal objective of this study is to review the City’s current transfer policy, and to recommend revisions, as appropriate, irl light of current and anticipated future circumstances. The transfer policy must allow for the Utilities to maintain rates which are competitive, to provide a transfer methodology which is acceptable to the bond market and the City’s external auditors, as well as to allow the City government a reasonable measure of stability and predictability with regard to these transfers. The scope of services for this project will focus on three different tasks. These will include: a review of existing policies; the identification of transfers and rate-making policy options; and a recommendation for a transfer policy or policies the City should consider for adoption. In the first task, the consultant will identify and. evaluate the accounting and rate-making policies which currently govern the disposition of revenues for the City’s Electric, Gas, and Water Funds. The second task will include the identification of transfers and ratemaking policy options which are consistent with current regulatory and legal requirements. The consultant will also evaluate each category of utility service and make a recommendation regarding whether the category should be partial or full cost recovery and subject to the transfer policy. Finally, .the consultant will make a recommendation regardinghow sales to customers outside the current service area, which has come with deregulation, should be evaluated with regards to the transfer policy. The third task will be to recommend a transfer policy or policies for the utilities. If the recommended transfer policy differs from the existing policy, the consultant will recommend actions that should be taken to implement the new policy (Municipal Code changes, accounting modifications, etc.). The consultant may recommend different transfer policies for each utility. RESOURCE IMPACT Funds for this project in the amount Administration budget. of $85,000 are included in the 1998-99 Utilities CMR:352:98 Page 3 of 4 TIMELINE After Finance Committee and UAC review of the attached scope of services, the RFP will be revised and issued (by late September). Staff anticipates a consultant will be selected and will begin work by November 1998, with a final report due in March 1999. Upon Council approval of the policy, any change in the transfers will be implemented as part of the 1999- 2001 Proposed Budget. ENVIRONMENTAL ASSESSMENT This is not a project under the California Environmental Quality Act (CEQA). ATTACHMENT Attachment A Draft Scope of Services for Selection of Consultant to Review the Methodology for Utility Fund Transfers to the City’s General Fund PREPARED BY:Gigi Harrington, Budget Manager Linda Craig, Senior Financial Analyst DEPARTMENT HEAD APPROVAL: CARL YEATS Services CITY MANAGER APPROVAL: Manager CC: n/a CMR:352:98 Page 4 of 4 ATTACHMENT A REQUEST FOR PROPOSALS Draft Scope of Services for Selection of a Consultant to Review the Methodology for Utility Fund Transfers to the City’s General Fund GENERAL INFORMATION The City of Palo Alto is the only city West of Colorado with a full range of municipal utilities, which include Electric, Gas, Water, Refuse, Storm Drain, Wastewater Collection and Wastewater Treatment. As a result of the foresighted vision of its founders, Palo Alto’s 60,000 residents and associated businesses benefit from favorable utility rates and utility services provided by the City’s municipal utilities. In addition, as owners of the utility system, the citizens of Palo Alto continue to receive a return on their investment from the utilities. Over the years, these Utilities Transfers to the General Fund have allowed the City to deliver a high and unique level of services. During fiscal year 1997-98, the City’s Electric, Gas, and Water Utilities made direct cash transfers of $11.9 million to the General Fund representing 13 percent of total General Fund revenues. In addition, the City’s seven Utilities paid $12.7 million for their share of City services supporting the utilities. Although the City does not charge a franchise fee to its utilities, as it would with a privately owned utility service, it does charge $7.3 million in rent for the sites owned by the City’s General Fund and occupied by the Utilities. In addition, the City charges a utilities users tax to water, gas and electric customers. Only the Electric, Gas and Water utilities are part of this study. Attached in Appendix I are the audited 1996-97 financial statements for the Utility Funds. Utility transfers to the General Fund are made in accordance with Article VII, Section 2 of the City Charter as last amended in 1950 (Appendi ~x II). The City considers the Refuse, Storm Drain and Wastewater Utilities general governmental functions, and as such does not transfer net revenues from these utilities to.the General Fund. Historically, transfer and ratemaking policies, and other guidelines.have been established by the City Council to protect and to serve the interests of both the ratePayers and taxpayers in Palo Alto. The current methodology for transfers tO the General Fund is the utility enterprise method, which is based on a rate of return on asset base methodology. This methodology was adopted following a study of appropriate policy guidelines for utility ratemaking and cash transfers by Price Waterhouse in December 1982. Since that time, there have been significant changes in the financial, economic, and political environment that will continue to have a major impact on the City’s General Fund revenues and on Utility ratepayers. In 1997-98, due to pending changes in the Utility industry, the City Manager recommended the Council freeze the transfers from the Utility Funds to the General Fund at the 1996-97 levels. This practice was continued with the 1998-99. budget. There have been several important impacts to the utilities since the current methodology was established. These include: The potential impact of Proposition 218 on the Water Utility’s ability to increase revenues. Deregulation of electric and gas utilities in California, and potentially nationwide, which requires.the City’s rates to be competitive, and as a result of which staff is recommending that supply and distribution activities be separated. The Utility Infrastructure Improvement Program, begun with the 1990-91 Budget, which funded an increased level of capital improvements to restore utility plant and equipment. Since the current utility transfer methodology is based on the level of utility plant and equipment, this program triggered an increase in the level of transfers to the General Fund. Recommendations of a 1996 Utility Department Organizational Review called for a review of the transfer methodology, especially in the Water Fund. The principal objective of this study is to review the City’s current transfer policy, and to recommend revisions, as appropriate, in light of current and anticipated future circumstances. The transfer policy must allow for the Utilities to maintain rates which are competitive, to provide a transfer methodology which is acceptable to the bond market and the City’s auditors, as well as to allow the City Government a reasonable measure of stability and predictability with regard to these transfers. SCOPE OF SERVICES 1.Review of Existing Policies The consultant will identify, review, and evaluate the significant legal, accounting and rate-making policies which currently govern the disposition of revenues for the City’s Electric, Gas, and Water Funds. Policies will include, but not be limited to, the following: -Current Transfer Policy -Current Ratemaking Policy --Utilities Reserve Policy -City Practices Related to Interfund Charges 2.Identification of Transfers and Rate-Making Policy Options The purpose of this task is to identify and evaluate transfer and rate-making policy options which are consistent with current regulatory and legal requirements. This task includes the impact of deregulation on transfer levels of municipal utilities in California. Working in conjunction with staff, the consultant will identify viable transfer policy options detailing the benefits and constraints of each option and the associated financial impact on the City and Utility. The consultant is not expected to make any predictions of future revenues and expenditures, nor to develop a sophisticated financial model for the Utilities Department. The City has this information available and will supply it to the consultant. Rather, the consultant will reference the important legal decisions, California legislative statutes, and precedents set by other municipal utilities as factors in presenting transfer policy options. With the advent of deregulation, the electric and gas utilities will each operate a supply and distribution business unit. Given any legal and competitive constraints identified for each unit, the consultant will assess the appropriateness and feasibility of applying a transfer methodology for each business unit. In addition, the consultant will make a recommendation regarding the appropriate transfer policy applicable to sales of electricity or gas outside City limits. Finally, the consultant will conduct an assessment of each category of utility service and make a recommendation regarding whether the appropriate ratemaking policy should be partial or full cost recovery and subject to the transfer policy. This will include an assessment of telecommunication, traffic signal, street light, and other services provided by the Electric Utility. Recommended Transfer Policy or Policies Based upon findings in the first two tasks, the consultant, in conjunction with staff, will develop alternative transfer policies to compare with the existing policy. Although the current policy applies equally to the Electric, Gas and Water Utilities, there may be different policies for each utility as a result of this study. The consultant will make a recommendation as to which policy should be pursued and (if not the existing policy) what actions should be taken to implement the policy (Municipal Code changes, accounting modifications, etc.) on a fund by fund basis. Deliverables Ten copies of a draft report that encompasses the three tasks described above according to the time line indicated below. Ten copies of a final report plus one camera ready copy. Attendance at meetings as discussed below including two night meetings - one with Utilities Advisory Committee and another with the Finance Committee. PROJECT MEETINGS The consultant will prepare for and participate in the following meetings: Staff Meetings: Five to ten, at approximately two hours each. Steering Committee Meetings: Three total at approximately two hours each. Utilities Advisory Committee and Council Finance Committee Meetings: Two at approximately two hours each. Each meeting may include a formal presentation in the evening. TENTATIVE PROJECT SCHEDULE City issues Request for Proposals Proposals due to City Consultant interviews Contract awarded by City Council Study in Progress Draft Report due to City Presentation of Final Report to Utilities Advisory Committee and Council Finance Committee Council Approval of Policy October 13, 1998 November 6, 1998 November 16 - 27, 1998 December 14, 1998 December 1998 - January 1999 Early February 1999 March 3, 1999 March 16, 1999 April 12, 1999 ~ ~PPENDIX I ENTERPRISE FUNDS Enterprise Funds are used to account for operations (a) that are financed and operated in a manner similar to private business enterprises - where the intent of the governing body is that the costs (i.e., expenses, including depreciation) of providing goods or services to the general public on a continuing basis are financed or recovered primarily through user charges; and (b) where the governing body has decided that periodic determination of revenues earned, expenses incurred, and/or net income is appropriate for capital maintenance, public policy, management control, accountability, or other purposes. A separate fund is maintained for each of the City-owned utilities, each of which is a self-supporting activity that renders services on a user charge basis to residents and businesses located in Palo Alto. The City maintains the following Enterprise Funds: ¯Water Fund ¯Electric Fund o Gas Fund °Wastewater Collection Fund °Wastewater Treatment Fund °Refuse Fund o Storm Drainage Fund " - 67- CITY OF PALO ALTO, CALIFORNIA ENTERPRISE FUNDS COMBINING BALANCE SHEET JUNE 30, 1997 WITH COMPARATIVE TOTALS FOR JUNE 30, 1996~ (in thousands of dollars) ASSETS CURRENT ASSETS: Cash, cash equivalents and investments Restricted: Cash and cash equivalents Investments Accounts receivable, net Interest receivable Prepaid items ~" Total current assets Property, plant and equipment, net TOTAL ASSETS LIABILITIES AND FUND EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities Accrued salaries and benefits Current portion of revenue bonds, net Accrued landfill closure liability Total current liabilities LONG-TERM LIABILITIES:, Revenue bonds, net of current portion TOTAL LIABILITIES FUND EQUITY: Contributed capital Retained earnings Total fund equity TOTAL LIABILITIES AND FUND EQUITY Water $10,172 1,551 150 11,873 27,911 $ 39,784 $ 769 35 804 804 7,751 31,22_____~9 38,980 $ 39,784 Electric $ 70,470 6,831 1,041 78,342 92,436 $170,778 $ 1,364 126 1,490 169,288 $170,778 Gas $18,619 1,021 275 19,915 29,185 $49,100 $ 586 48 634 634 48,466 $49,100 o 68 - Wastewater Collection Wastewater Treatment Refuse Storm Drainage Totals June 30 1997 1996 $13,681 1,195 200 15,076 24,938 $40,014 $ 7,254 512 109 7,875 27,117 $34,992 $12,867 $1,273 $134,336 $121,227 4,240 4,240 6,989 1,812 192 -13,114 13,339 190 19 1,984 1,906 187 187 164 15,056 5,724 153,861 143,625 4,955 10,441 216,983 200,583 $20.011 $16,165 $370,844 $344,208 526 28 175 729 1,851 2.580 $ 297 62 380 739 4.027 4,766 21,382 8,844 30,226 $34,992 859 27 6,932 7,818 308 $4,709 $5,296 9 335 269 285 840 801 6,932 6,685 602 12,006 12,608 3,557 3,557 $16,165 12,816 17,884 30,700 58,593 281,551 340,144 $370,844 13,051 18,695 31,746 58,593 253,869 312,462 $344,208 9,030 28,404 37,434 $40.014 7,818 12,193 12,193 $20,011 - 69 - CITY OF PALO ALTO, CALIFORNIA ENTERPRISE FUNDS COMBINING STATEMENT OF REVENUES, EXPENSES AND CHANGES IN RETAINED EARNINGS FOR THE FISCAL YEAR ENDED JUNE 30, 1997 WITH COMPARATIVE TOTALS FOR THE FISCAL YEAR ENDED JUNE 30, 1996 (In thousands of dollars) OPERATING REVENUES: Sales of utilities: Customers City departments Wastewater treatment Service connection charges and miscellaneous Other revenues Total operating revenues OPERATING EXPENSES: Purchase of utilities Administrationand general Engineering (operating) Resource management Operations and maintenance Rent Depreciation and amortization Total operating expenses OPERATING INCOME NONOPERATING REVENUES (EXPENSES): Interest income Interest expense Joint venture debt service Loss on disposal of fixed assets Total nonoperating revenues (expenses). INCOME BEFORE OPERATING TRANSFERS OPERATING TRANSFERS: Operating transfers in Operating transfers out Net operating transfers NET INCOME (LOSS) RETAINED EARNINGS, BEGINNING OF YEAR RESIDUAL EQUITY TRANSFER OUT RETAINED EARNINGS, END OF YEAR Water Electric Gas $ 12,629 $60,541 $ 15,833 651 1,623 396 180 253 391 482 7,754 630 13,942 70,171 17,250 4,815 25,843 9,728 1,282 2,216 1,245 47 311 55 379 2,241 479 1,512 5,088 1,408 605 1,815 198 652 4,022 891 9,292 41,536 14,004 4,650 28,635 3,246 585 3,986 1,115 (8,637)(42) 571 (4,716)1,073 5,221 23,919 4,319 148 ~(7,557)~ ~2,148)(7,409)~) 3,073 16,510 1,679 28,156 135,640 43,495 $31,229 $152,150 $45,174 - 70 - Wastewater Wastewater Collection Treatment Storm Refuse Drainage Totals June30 1997 1996 $ 8,600 83 92 680 9455 $3,824 6,735 141 10,_700 $ 18,120 $ 1,954 386 109. 2 161 4 20 667 2 067 $ 117,677 $ 114,343 7,072 6,794 6,735 .6,341 916 736 11,852 5,433 144,252 133,647 3,824 308 35 950 8O 772 5 969 3 486 6,338 854 891 406 1,158 352 227 6,997 6,850 496 4,289 1 570 186 164 10 579 .18 906 1 293 121 1 761 774 50,548 45,580 7,202 6,437 2,185 2,151. 3,099 2,832 23,301 22,612 6,987 6,998 8,257 7,635 101,579 94,245 42,673 39,402 809 (147) (439) 223 3 709 (51) 3,658 24,746 445 672 51 (320)(287) (397) 125 275 (236) 246 2 036 538 213 8,631 65 2,045 504 10,148 3,053 7,663 6,859 (754)(796) (9,034)(8,972) (560)(183) (2,685)(3,092) 39,988.36,310 213 253 (12,519) (11,330) (12,306)(11,077) 27,682 25,233 253,869 228,636 -71 - CITY OF PALO ALTO, CALIFORNIA ENTERPRISE FUNDS . COMBINING STATEMENT OF CASH FLOWS FOR THE FISCAL YI=AR ENDED JUNE 30, 1997 WITH COMPARATIVE TOTALS FOR THE FISCAL YEAR ENDED JUNE 30, 1996 (In thousands of dollars) CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:Operating income Adjustments to reconcile operating income to net cash provided (used) by operating activities: Depreciation and amortization Changes in assets and liabilities: (Increase) decrease in accounts receivable (Increase) decrease in interest receivable(Increase) decrease in prepaid items Increase (decrease) in accounts payable, accrued liabilities and accrued salaries and benefits Increase (decrease) in accrued compensated absences Increase (decrease) in accrued self insurance Increase in accrued landfill closure liability Net cash provided by operating activities CASH FLOWS PROVIDED BY (USED IN) NONCAPITAL FINANCING ACTIVITIES: Operating transfers in Operating transfers out Net cash provided by (used in) noncapital financing activities CASH FLOWS USED IN CAPITAL AND RELATED FINANCING ACTIVITIES: Acquisition and construction of capital assetsPrincipal paid on revenue bonds Interest paid on revenue bonds Net cash used in capital and related financing activities CASH FLOWS PROVIDED BY INVESTING ACTIVITIES - Interest and dividends on pooled investments NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND EQUIVALENTS, BEGINNING OF YEAR CASH AND EQUIVALENTS, END OF YEAR Water Electric $ 4,650 $28,635 Gas $ 3,246 652 4,022 891 74 (14)189 (2)(91)29 (216)11 (222) 5,158 32,563 (2,148) 148 (7,557.) (10,457)(2,771) 4,133 (3,269) (2,771) (19094) 585 3,986 1,115 824 10,046 (661) 9,348 60,424 19,28_.~0 $10,172 $70,470 $18,619 - 72 - Wastewater Collection $ 3,486 772 136(2) 440 4 832 Wastewater Treatment $ 121 1,570 (53) 8 (380) Refuse $ 1,761 186 (118)(20)(23) (82) 247 1 951 Totals Storm June 30 . Drainage 1997 1996 $774 $ 42,673 $ .~9,40- 164 11 (72) 877 8,257 7,635 225 (482) (78)(125) (23)(104) (521)(2,922) (538) (1,462) 247 247 50,780 41651 213 253 (12,519) (11,330) (12.306)(11.077) (4,511) (166) 809 766 12915 (1,026)(139)(3,015)(25,188)(18,598) (360)(275)(801)(755) ~~~(9,788)(9.7393 (35.777)(29,092) 445 67~51 7,663.6,859. (28)2,096 (2,683)10,360 8,341 ~10771 ~128,21~119875 - 73 - VII-1 -VII-6 CITY OF PALO ALTO CHARTER APPENDIX Article VII. bliscellaneous Sec. 2. Public utilities revenue. The revenue of each public utility shall be kept in a separate fund from all other receipts and shall be used for the purposes and in the order as follows: a. For the payment of the operating and maintenance expenses of such utility, including the necessary contribution to retirement of its employees. b.. For the payment of interest on the bonded debt incurred for the construction or acquisition of such utility. c. For the payment of the principal of said debt, as it may become due. d. For capital expenditures of such utility. e. For the annual payment into a reserve fund for contingencies, of an amount not to exceed ten percent of the expenditure for capital outlay for the year, exclusive of bond fund expenditures. The total accumulated in, this reserve for contingencies shall at no time exceed five percent of the book value of the utility’s capital in service. This reserve fund shal! be available for use by the utility, only for replacements or emergency repairs and after special approp’riation by the council. f. The remainder shall be paid into the general fund by quarterly allotments.