HomeMy WebLinkAboutStaff Report 233-08City of Palo Alto
City Manager’s Report
TO:HONORABLE CITY COUNCIL
ATTN:
FROM:
DATE:
SUBJECT:
FINANCE COMMITTEE
CITY MANAGER DEPARTMENT: UTILITIES
MAY 13, 2008 CMR: 233:08
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:
Adopt a resolution approving a policy establishing a Fiber Optics Emergency Plant
Replacement Reserve:
Approve a minimum funding level guideline for the Fiber Optics Emergency Plant
Replacement Reselwe 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
Approve the minimmn 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-a!one fund and be
separated from the Electric Fund. At separation, a Fiber Optics Emergency Plant Replacement
Reserve will be funded.
CMR: 233:08 Page 1 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-terna 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-recun’ing 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 yem’, and if
appropriate, revised guidelines will be recommended.
On Februm’y 20, 2007, Council approved changes to Electric, Water, Gas and Wastewater
Collection EPR Rese~we and RSR guidelines (CMR: !43:07). 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 Rese~we that would be
the stone 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 critica! failure in the Fiber Optics infi’astructure is the severance of a main trunk line,
which would cause a service inte~’uption. Repairing a severed main trunk line would cost
approximately $250,000 to repair. Therefore, the Fiber Optics Fund EPR Rese~we should be
funded to $250,000.
The RSR guidelines for the Water, Electric, Gas and \Vastewater 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 2 of 3
A decline in sales revenue of 15 percent for two years. The top tt~ree 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 maximma~ guideline is 50% of the sales revenue. This guideline is the same as the
existing guidelines for the Electric Distribution, Gas Distribution, Water, and \Vastewater
Collection Fm~ds. 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 reconmaended 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 reconmaended changes to the Utilities reserves do
not constitute a project that would require enviromnental review.
ATTACHMENT
A.Resolution
PREPARED BY:~ANE RATCHYE
"...Assistant Director of Utilities, Resource Management
DEPARTMENT HEAD:
CITY MANAGER APPROVAL:
VALERIE FO.~NG ~
Director of Utilities- /
STEVE EMSIdI~E/KELLY MORARIU
Deputy- City Managers
CMR: 233:08 Page 3 of 3
ATTACHMENT
NOT YET APPROVED
RESOLUTION NO.
RESOLUTION OF THE COUNCIL OF THE CITY OF PALO
ALTO ESTABLISHING A FIBER OPTICS EMERGENCY
PLANT REPLACEMENT RESERVE ANrD APPROVAL OF
FUNDING GUII)ELINES FOR BOTH THE FIBER OPTICS
RATE STABILIZATION RESERVE AN~D THE FIBER OPTICS
EMERGENCY PLANT REPLACEMENT RESERVE
WHEREAS, Section 2 of Article VII of the City Charter contemplates the
establishment of a reserve fund for contingencies for infrastructure replacements or emergency
repairs; and
WHEREAS, the City of Palo Alto ("City") has established separate Emergency
Plant Replacement Reserves for the Electric, Gas, Water, Refuse, Storm Drain, Wastewater
Treatment, and Wastewater Collection Funds; and
WHEREAS, on February 20, 2007, the Council approved changes to the funding
guidelines for the Emergency Plant Replacement Reserves for the Electric, Gas, Water, and
Wastewater Collection Funds, whereby the funding level for each of these reserves would be in
an amount equal to the lesser of the amount of the City’s liability insurance coverage deductible
or 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 that
utility; and
WHEREAS, pursuant to Resolution No. 7207, adopted June 21, 1993, the City
established separate Rate Stabilization Reserves for the Electric, Gas, Water, Refuse, Storm
Drain, Wastewater Treatment, and Wastewater Collection Funds, and conformed the levels of
the Rate Stabilization Reserves to the reserve level guidelines, as amended from time to time;
and
WHEREAS, Rate Stabilization Reserves are maintained to fund unanticipated
cost contingencies and help to maintain rate stability; and
WHEREAS, on February 20, 2007, the Council approved changes to the funding
guidelines for the Rate Stabilization Reserves for the Electric Supply, Electric Distribution, Gas
Supply, Gas Distribution, Water, and Wastewater Collection Funds;
NOW, THEREFORE, the Council of the City of Palo Alto does hereby
RESOLVE as follows:
SECTION 1. The Council determines that reliable dark fiber optics backbone
service is essential to the local economy and the dark fiber optics backbone licensees who use the
080418jb 0073011
backbone and that the integrity of the dark fiber optics backbone is vital to the health, safety and
welfare of the Palo Alto community.
SECTION 2. The Council hereby creates the Emergency Plant Replacement
Reserve for the Fiber Optics Fund and approves the funding guidelines applicable to the Fiber
Optics Fund’s separate Emergency Plant Replacement Reserve and the Rate Stabilization
Reserve.
SECTION 3. The Council finds that the adoption of this resolution does not
constitute a project under the California Environmental Quality Act and the CEQA Guidelines
and, therefore, no environment assessment is required.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
AB STENTIONS:
ATTEST:APPROVED:
City Clerk Mayor
APPROVED AS TO FORM:
City Manager
Senior Asst. City Attorney
Director of Utilities
Director of Administrative Services
080418jb 0073011