HomeMy WebLinkAboutStaff Report 143-07City of Palo Alto
City Manager,s Report
TO:
FROM:
DATE:
SUBJECT:
HONORABLE CITY COUNCIL
CITY MANAGER DEPARTMENT: UTILITIES
FEBRUARY 20, 2007 CMR:143:07
FINANCE COMMITTEE RECOMMENDATION ON CHANGES TO THE
GUIDELINE LEVELS FOR THE UTILITIES RATE STABILIZATION
RESERVES AND UTILITIES EMERGENCY PLANT REPLACEMENT
RESERVES
RECOMMENDATION
The Finance Committee recommends that Council approve changes to certain Utilities reserve
fund guidelines, detailed below. In addition, it recommends that the development of an
assessment of the risks facing each fund be undertaken as part Of the annual budget and retail
rate development and approval process.
BACKGROUND
The table below summarizes the proposed changes to the Emergency Plant Replacement (EPR)
and Rate Stabilization Reserve (RSR) guidelines.
CMR: 143:07 Page 1 of 3
Reserve Existing. Guidelines Proposed New Guidelines
Electric,’ Gas,
Water and
Wastewater
Collection EPRs
Electric Supply
RSR
Gas Supply RSR
No minimum (maximum, as stated
in the City Charter, is = 5% of the
book value of the fund’s capital in
service)
Maximum = 103% of purchase cost
Minimum = half of maxilnum
Maximum = 75% of purchase cost
Minilnum = half of maximum
Maxilnuln = 38% of sales revenue
Minimum = half of maximum
Electric
Distribution RSR
Gas Distribution Maximum = 40% of sales revenue-
RSR Minimum = half of maximum
Water RSR
Wastewater
Collection RSR
Maximum = twice the minimmn
Minimum= sunl of: 1) 15% of
sales revenue; plus 2) sales revenue
decline due to abnormal weather
Maximum = twice the minimum
Minimum = sum of: 1) 15% of
sales revenue; plus 2) sales revenue
decline due to abnormal weather
Target = midpoint between
minimum and maximum
All RSRs
Minimuln = greater of: 1) the City’s
liability insurance coverage
deductible or 2) an amount covering
the lnost expensive critical item
Maximum = 100% of purchase cost
Minimum = 50% of purchase cost
Maximum = 75% of purchase cost
Minimum- 35% of purchase cost
Maximuln = 50% of sales revenue
Minimum £ 20% of sales revenue
MaximulI1 = 50% of sales revenue
Minimum = 20% of sales revenue
Maximum = 50% of sales revenue
Minimum = 20% of sales revenue
Maximum = 50% of sales revenue
Minimum = 20% of sales revenue
Target to be established following all
annual evaluation of risks to each
fund as part of budget preparation
COMMITTEE REVIEW AND RECOMMENDATIONS
At its January 17, 2007 meeting, the Finance Committee unanimously approved staff’s
recommendations on changes to the Utilities Reserves Policies and Guidelines. In its discussion,
the Finance Committee clarified that the almual risk assessment would not go back to the
Committee separately, but as part of the budget and Utilities rates proposal.
POLICY IMPLICATIONS
Appro.val of the recommended changes is consistent
establish new Utilities practices and guidelines.
with existing City policy, but would
CMR:143:07 Page 2 of 3
ATTACHMENTS
1.CMR:107:07: Utilities Advisory Conunission Recommendation on Changes to Certain
Utilities Reserve Guidelines
PREPARED BY:
[JAN~ RATCHYE
"~Se~or Resource Planner
DEPARTMENT HEAD:
CITY MANAGER APPROVAL:
EMIL~AR~I~’~0N
Assistant City Manager
CMR:143:07 Page 3 of 3
ATTACHMENT 1
City of Palo Alto
City Manager’s Report
TO:HONORABLE CITY COUNCIL
ATTN:
FROM:
DATE:
SUBJECT:
FINANCE COMMITTEE
.CITY MANAGER
JANUARY 17, 2007
UTILITIES ADVISORY COMMISSION
DEPARTMENT: UTILITIES
CMR:107:07
RECOMMENDATION ON
CHANGES TO CERTAIN UTILITIES RESERVE GUIDELINES
RECOMMENDATION
Staff and the Utilities Advisory Commission (UAC) recommend that Council approve changes to
certain Utilities reserve fund guidelines. SpecificallY, staff and the UAC recommend that the
development of an assessment of the risks facing each fund be undertaken as part of the annual
budget and retail rate development and approval process. This annual assessment will be
compared to the established guideline levels to assist in the determination of the Rate
Stabilization Reserve level target for each fiscal year.
Additionally, minor changes to the guidelines of the following Utilities Fund Reserves are
recommended are noted below:
For the Electric, Gas, Water and Wastewater Collection Emergency Plant Replacement
Reserves, establish a minimum guideline level equal to the greater of: 1) the City’s
liability insurance coverage deductible or 2) the amount that covers the most expensive
item of equipment which, if lost, would cause interruption in the normal activity of that
utility;
2.For the Electric Supply Rate Stabilization Reserve, change the minimum and maximum
guideline levels equal to 50% and 100% of the annual supply purchase cost, respectively;
3.For the Gas Supply Rate Stabilization Reserve, change the minimum and maximum
guideline levels equal to 35% and 75% of the annual supply purchase cost, respectively;
and
CMR:107:07 Page 1 of 3
For the Electric Distribution, Gas Distribution, Water and Wastewater Collection Rate
Stabilization Reserves, change the minimum and maximum guideline levels equal to 20%
and 50% of the annual sales revenue, respectively;
The table below summarizes the proposed changes to the Emergency Plant Replacement (EPR)
and Rate Stabilization Reserve (RSR) guidelines.
Electric, Gas,
Water and
Wastewater
Collection EPRs
No minimum (maximum, as stated
in the City Charter, is = 5% of the
book value of the fund’s capitalin
service)
Electric Supply Maximum = 103% of purchase cost
RSR Minimum = half of maximum
Gas Supply RSR
Electric
Distribution RSR
Gas Distribution
RSR
Water RSR
Wastewater
Collection RSR
All RSRs
Maximum -- 75% of purchase cost
Minimum = half of maximum
Maximum = 38% of sales revenue
Minimum = half of maximum
Maximum = 40% of sales revenue
Minimum = half of maximum
Maximum = twice the minimum
Minimum = sum of: 1) 15% of
sales revenue; plus 2) sales revenue
decline due tO abnormal weather
Maximum = twice the minimum
Minimum = sum of: 1) 15% of
sales revenue; plus 2) sales revenue
decline due to abnormal weather
Target = midpoint between
minimum and maximum
Minimum = greater of: 1) the City’s
liability insurance coverage
deductible or 2) an amount covering
the most expensive critical item
Maximum = 100% of purchase cost
Minimum = 50% of purchase cost
Maximum = 75% of purchase cost
Minimum = 35% of purchase cost
Maximum = 50% of sales revenue
Minimum = 20% of sales revenue
Maximum = 50% of sales revenue
Minimum = 20% of sales revenue
Maximum = 50% Of sales revenue
Minimum -- 20% of sales revenue
Maximum = 50% of sales revenue
Minimum = 20% of sales revenue
Target to be established following an
annual evaluation of risks to each
fund as part of budget preparation
BACKGROUND
On September 19, 2006, the Council Finance Committee directed staff to work with the Utilities
Advisory Commission (UAC) to develop recommendations for changes to the policies,
guidelines, or purposes of the following Utilities Fund Reserves [CMR:358:06]:
1. Emergency Plant Replacement Reserve for the Water, Electric, Gas, and Wastewater
CMR: 107:07 Page 2 of 3
Collection Funds;
2. Supply Rate Stabilization Reserve for the Electric and Gas Funds;
3. Distribution Rate Stabilization Reserve for the Electric and Gas Funds; and
4. Rate Stabilization Reserve for the Water and Wastewater Collection Funds.
The attached memorandum to the UAC contains staff’s recommendations for the selected
reserves and the rationale for the development of the recommendations, which were presented to
the UAC at its December 6, 2006 meeting.
COMMITTEE REVIEW AND RECOMMENDATIONS
At its December 6, 2006 meeting, the UAC considered staff’s recommendations on changes to
the Utilities Reserves Policies and Guidelines. After discussion, Commissioner Dawes made a
motion to accept staff’s recommendation with the proviso that, for the rate stabilization reserves,
if the target balance resulting from the risk assessment is below the minimum guideline level,
that appropriately conservative risk assumptions should-be used. This motion died for the lack of
a second. After further discussion, the UAC unanimously approved staff’s recommendations.
ENVIRONMENTAL REVIEW
Approval of the recommended changes to the Utilities reserves does not constitute a project that
would require environmental review.
NEXT STEPS
If the recommendations are approved, staff will provide the annual risk assessment for each fund
and make .recommendations regarding the reserve levels for each reserve fund during the budget
and retail rate development process as described in the report to the UAC.
ATTACHMENTS.
1. Report to the UAC for its December 6, 2006 meeting: Changes to Certain Utilities
Reserve Guidelines
2.Excerpt of December 6, 2006 Utilities Advisory Commission notes
PREPARED BY:
DEPARTMENT HEAD:
CITY MANAGER APPROVAL:~ARRISON
City Manager
CMR: 107:07 Page 3 of 3