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HomeMy WebLinkAboutStaff Report 256-06City of Palo Alto City Manager’s Report TO: FROM: DATE: SUBJECT: HONORABLE CITY COUNCIL CITY 5~_NAGER JUNE 12, 2006 DEPARTMENT:UTILITIES CMR:256:06 CITY 5IA_NAGER ACTION FOR THE CITY AS A SUBURBAN REPRESENTATIVE IN ITS WATER CONTRACT WITH SAN FRANCISCO This report is for the Council’s information only. No action is required. DISCUSSION On December 12, 2005, the Council delegated to the City Manager the authority to execute certain documents for the City of Palo Alto under the settlement agreement and master water sales contract (contract) with San Francisco when the City acts as a suburban representative [CMR:434:05]. The City Manager exercised that authority when he signed a letter on April 18, 2006 advising the San Francisco Public Utilities Commission (SFPUC) that the suburban representatives intend to review the calculations made to determine the costs allocated to the suburban customers for FY 2003-04. The suburban revenue requirement is the amount the contract allows San Francisco to collect from the suburban purchasers, the group of agencies that purchase water wholesale from the San Francisco reNonal water system. These same agencies comprise the membership of the Bay Area Water Supply and Conservation Agency (BAWSCA). The contract requires that a "compliance audit" be performed on San Francisco’s calculation of the suburban revenue requirement each fiscal year. Each year, the suburban representatives may choose to conduct a "suburban review" of the compliance audit. BAWSCA staff reviewed the FY 2003-04 compliance audit and recommended that the suburban representatives initiate a suburban review of the audit for the FY 2003-04 suburban revenue requirement. BAWSCA staff identified ten issues, but expects that they can be dealt with without resorting to arbitration. CMR:256:06 Page I of 2 POLICY IMPLICATIONS Signing the attached letter was consistent with Council authority delegated to the City Manager. If the issues raised cannot be resolved without going to arbitration, the Council will be asked to approve that action. ATTACHMENT April 20, 2006 letter to Ms. Susan Lea1, SFPUC General Manager, from Arthur R. Jensen, BAWSCA General Manager re: Section 6.06 Suburban Review - FY 2003-04 PREPARED BY:Jane Ratch)~, Senior Resource Planner DEPARTMENT HEAD: ATf ~,Director ofAfftministrati~ e Ser~ ices CITY MANAGER APPROVAL: EMILY HARRISON Assistant City Manager CMR:256:06 ..Page 2 of 2 April 20, 2006 Bay Area Water Supply & Conservation Agency Ms. Susan Leal, General Manager San Francisc Public Utilities Commission 1155 Market Street, 11th Floor San Francisco, CA 94103 Subject: Section 6.06 Suburban Review - FY 2003-04 Dear Susan: Pursuant to Section 6.06 of the 1984 Settlement Agreement and Master Water Sales Contract, the Suburban Representatives have the prerogative to conduct a "suburban revieW’ provided the SFPUC is notified of this intent within three months of having received the auditor’s compliance audit report. The FY 2003- 04 report was rece.Jved on January 23, 2006, hence, the deadline for initiating a suburban review is April 24, 2006. The Suburban Representatives have designated the staff of the Bay Area Water Supply and Conservation Agency to conduct ~ review of the portions of the compliance audit designated on the attached page. As provided in the Agreement, the scope of the suburban review may be expanded to include other portions of the compliance audit beyond those initially designated. In order that the review proceeds in a constructive and timely fashion, BAWSCA is authorized to act on behalf of the Suburban Representatives during the suburban review. John Ummel, Senior Administrative Analyst for BAWSCA, will oversee the review and will serve as liaison to the Suburban Representatives. In the past, Bill Laws, Rate Administrator for the SFPUC, has worked with John Ummel in providing information to our inquiries. Unless you instruct otherwise, John will continue to work with Bill on an informal basis on items pertaining to this suburban review and other matters not expressly designated. If the SFPUC or compliance auditor wishes to contact us during the course of the suburban review, all such communications should be ch~anneled through Mr. Ummel. Very truly yours, General Manager, BAWSCA 155 Bovet Road, Suite 302 ¯San Mateo, CA 94402 ¯ph 650 349 3000 ¯fx 650 349 8395 o wvvw.bawsca.org SUBURBAN REPRESENTATIVES Alameda County Water District Date City of Redwood City Date City of Hayward Date a Water ~rvice Date City of Palo Alto Date Attachment CC:Scott MacDonald, AGM Business Services, SFPUC Bill Laws, Rate Administrator, SFPUC Ray Mc Devitt, Attorney, Hanson-Bridgett Eugene Yano, Auditor, Yano and Associates Karen Cordeiro, Auditor, KPMG John Ummel, Senior Administrative Analyst, BAWSCA \\DELL1600\Users\jummel\My Documents\Main Files\SRR~sec606f’y03-04.doc SUBURBAN REPRESENTATIVES Alame,County Water District 4 Date City of Redwood City Date City of Hayward Date California Water Service Date City of PaiD Alto Attachment Date CC:Scott MacDonald; AGM BuSiness Services, SFPUC Bill Laws, Rate Administrator, SFPUC Ray MC Devitt, Attorney, Hans0~ZBridgett ’ Eugene Yano, Auditor, Yano and Associates Karen Cordeiro, Auditor, KPMG ’~ John Ummel, SeniorAdministrative Analyst, BAWSCA \\DELL1600\Users\jummel\My Documents\Main Files\SRR~sec606fy03-04.doc SUBURBAN REPRESENTATIVES Alameda County Water District Date " City of Redwood City City of Hayward Date Date California Water Service Date City of Palo Alto Date Attachment CC:Scott MacDonald~ AGM Business Services, SFPUC Bill Laws, Rate Administrator, SFPUC Ray Mc Devitt, Attorney, Hanson-Bridgett Eugene Yano, Auditor, Yano and Associates Karen Cordeiro, Auditor, KPMG John Ummel, Senior Administrative Analyst, BAWSCA \\DELL1600\Users\jummel\My Documents\Main Files\SRRksec606fy03-04.doc SUBURBAN REPRESENTATIVES Alameda County Water District City of Red~ Date Date City of Hayward Date California Water Service Date City of Palo Alto Date Attachment CC:Scott MacDonald, AGM Business Services, SFPUC Bill Laws, Rate Administrator, SFPUC Ray Mc Devitt, Attorney, Hanson-Bridgett Eugene Yano, Auditor, Yano and Associates Karen Cordeiro, Auditor, KPMG John Ummel, Senior Administrative Analyst, BAWSCA \\DELL1600\Users\jummel\My Documents\Main Files\SRR\sec606fy03-04.doc SUBURBAN REPRESENTATIVES Alameda County Water District Date City of Redwdod City Date City of Hayward Date California Water Service Date Date Attachment CC:Scott MacDonald, AGM Business Services, SFPUC Bill Laws, Rate Administrator, SF.PUC Ray Mc Devitt, Attorney, Hanson-Bridgett Eugene Yano, Auditor, Yano and Associates Karen Cordeiro, Auditor, KPMG John Ummel, Senior Administrative Analyst, BAWSCA \\DELL1600\ljsers\jummel\My Documents\Main Files\SRR~sec606f-y03-04.doc Attachment Portions of the FY 2003-04 Compliance Audit Designated for Suburban Review- Section 6.06 1. Clarification: Inclusion of Administrative and General (A&G) Costs for 425 Mason St, 1990 Newcomb St, Millbrae HQ, and Sunol HQ The Master Contract allows the SFPUC to allocate portions of the cost to the suburban purchasers for building maintenance at 425-Mason, 1990 Newcomb, and the Millbrae and Sunol headquarters. For FY 03-04, BAWSCA staff requested additional information regarding A&G expenditures. This information revealed that costs to maintain the above facilities in FY 03-04 were $778,872, $4,451,897, $2,252,587, and $732,129 respectively. It is requested that for each of these facilities, the SFPUC provide a detailed description and itemization of the aforementioned costs to maintain these facilities for FY 03-04. In addition, please provide the totals for the previous two fiscal years (FY 01-02 and FY 02- 03) to maintain these facilities. With respect to 1990 Newcomb St, please provide an updated description as to what functions (services) are currently performed and for which departments. Importance to Suburban Purchasers: The SFPUC may have allocated certain costs to the suburban purchasers not allowed by the Master Contract. 2. Clarification: Inclusion of vehicle maintenance costs under A&G. The Master Contract allows the SFPUC to allocate portions of the cost to the suburban purchasers for the maintenance of vehicles for the suburban division. For FY 03-04, BAWSCA staff requested additional information regarding A&G expenditures. This information revealed that vehicle maintenance costs for FY 2003-04 totaled $2,092,958. Of this total, expenses of $229k and $192k were charged to account codes 471133 and 471134. These account codes refer to the Crystal Springs Pipelines. The suburban representatives request clarification as to how vehicle maintenance costs SFPUC-wide are accounted for and separated for purposes of allocating costs between the City and the suburban purchasers. Finally, please identify what is included under vehicle maintenance (for example, does it include fuel, leased vehicles, and outsourced service repairs?) and what the total was for maintaining all SFPUC vehicles in FY 2003- 04. Importance to Suburban Purchasers: The SFPUC may have allocated certain costs to the suburban purchasers not allowed by the Master Contract. 3. Clarification: Costs Related to HH Roads Rebuilding In FY03-04, the SFPUC included costs of $1,370,871 for "HH Roads Rebuilding" under Project 804. The SFPUC allocated the costs as "joint water and power". The information provided by the SFPUC suggests that this work was done at the Moccasin complex; however, the project description states that this project is associated with Cherry Oil Road (804-01) and Early Intake Road (804-02). Past road work on Cherry Oil Road has been classified as "power° and Early Intake Road serves as access to Kirkwood Powerhouse. The suburban representatives request clarification as to the location and extent of the repairs. Importance to Suburban Purchasers: The SFPUC may have incorrectly identified the work performed and, consequently, misallocated costs to the suburban purchasers. 4. Clarification: Workers Compensation Up until FY 2002-03, the SFPUC accounted for Water Supply and Treatment (WS&T) workers compensation costs under the Administrative and General -(A&G) category. Beginning in FY 2002-03, the SFPUC transferred WS&T workers compensation costs from Administrative & General to Transmission and Distribution (T&D) in order to provide comparable treatment with how workers compensation costs were being recorded for in-City workers. Generally speaking, an A&G classification assigns 1/3 of the cost to the suburban purchasers while a T&D classification assigns 2/3. This may or may not be allowed under the Master Contract which calls for workers compensation insurance costs to be allocated as A&G, not T&D. In FY 2003-04, $878,339 in workers compensation costs were reclassified from A&G to T&D. The suburban representatives request clarification as to how the SFPUC is treating the claims and administration aspects of workers compensation costs as it pertains to the suburban revenue requirement. Importance to Suburban Purchasers: The SFPUC may have allocated certain costs to the suburban purchasers not allowed by the Master Contract. 5. Allocation of Costs: Habitat Conservation Plan (HCP) In FY03-04, the SFPUC included initial expenses of $405,469 for the Alameda Habitat Conservation Plan. The SFPUC maintains that water source protection is the primary beneficiary of a HCP. As such, the SFPUC has chosen to classify the cost under "Source of Supply" which allocates 2/3 of the cost to the suburban purchasers. Last year, the SFPUC agreed to classify costs for the Vulnerability Study as an A&G expense because it was not project-specific, dealt with several enterprises, and was broad in scope. The suburban representatives believe that HCP expenses are more appropriately classified as an A&G expense too; the HCP is broad in scope (e.g., flora and fauna identification, vegetation (fire) management, recreational activities, species sensitivity zones, etc. ), does not have a direct relationship to water supply, and finally, covers a multitude of projects. Importance to Suburban Purchasers: The SFPUC may have incorrectly identified the work performed and, consequently, misallocated costs to the suburban purchasers. 6. Allocation of Costs: Millbrae Annex Needs Assessment In FY03-04, the SFPUC included costs of $1,465,343 for Project 122 (Millbrae Annex Needs Assessment) under Purification, a classification which allocates 2/3 of the cost to the suburban purchasers. According to the project description, this study was to "address the needs.., of a new building.., combined drinking water, waste water laboratory, office functions of WS& T and WQ, and a new Emergency Ops Center." The SFPUC maintains that the study was done for purposes of examining whether new water quality lab facilities should be cd6struc:ted at the Millbrae site. However, the project description states - otherwise, the assessment never served a practical purpose (i.e., nothing was ever built), the project was put on hold several times, and excess project funds totaling $1.9M were eventually de-obligated. Furthermore, expenses related to the repair and maintenance of various facilities at the Millbrae site for $341k were classified as A&G. Given the broad scope of the project, the questionable value of the benefit derived, and the fact that other facility-related expenses at the Millbrae site have been classified under A&G, suggests that classifying this study under Purification is incorrect. The suburban representatives request that the classification for the expense be changed to A&G, which would allocate approximately 1/3 of the cost to the suburban purchasers. Importance to Suburban Purchasers: The SFPUC may have incorrectly identified the work performed and, consequently, misallocated costs to the suburban purchasers. 7. Allocation of Costs: Sunol Master Plan in FY 2003-04, the SFPUC expensed $105,074 for the Sunol Master Plan (Project 169) and classified the expense under Purification, a classification which allocates 2/3 of the cost to the suburban purchasers. According to the project scope, this study was to assess the current and future needs of the Sunol Maintenance Yard and develop a plan for future improvements and repairs. To our knowledge, no significant improvements or repairs were made as a result of this study. Had repairs or improvements been made to the Sunol facility as a result of this assessment, such repairs would likely have been classified as A&G, the current designation prescribed by the Master Contract. As such, the suburban representatives request that the cost of the Sunol Master Plan be classified as A&G, a classification which would allocate 1/3 of the cost to the suburban purchasers. Importance to Suburban Purchasers: The SFPUC may have misallocated costs to the suburban purchasers. 8. Clarification: Services of Other (GF) Departments (081 Account) In FY 03-04 Accounting costs went up $500k, in part due to charges by the Controller for "on-line systems" and Department of Telephone and Information Systems. These are both GF entities. Many services provided by other city departments through the 08! accounts are necessary; the cost of which is shared between city and suburban ratepayers. On the other hand, some services appear to provide little or no benefit to the wholesale water system customer. Specifically, are expenses related to the Mayor’s job program for in- city youth (081WE), Mayor’s legislative services (081MY), urban forest council (081EV), Business and Economic Development (081ED), Commission on Aging (081RE), and the City’s Surety Bond (081SB) partially allocated to the wholesale water customers? Where is the benefit to the suburban ratepayer? What safeguards certain 081 expenses from being inflated to help cover budgetary shortfalls in the City’s general fund operating departments or special programs? Importance to Suburban Purchasers: When the City’s GF produces large deficits, the SFPUC is expected to pick-up more general fund costs which may be getting passed on to suburban ratepayers. 9. Clarification: MUNI Costs for Mainframe Services The work papers for the FY 03-04 audit show that the SFPUC’s bureau for Information Technology (ITS) has not increased the charge to MUNI for computer services over the last three years despite huge increases in ITS expenditures. (MUNI negotiates a work order with ITS each year to reimburse ITS for mainframe computer use.) in the mid-90s, MUNI was consistently charged in excess of $1M annually for ITS services. For example, in FY I997-98, ITS expenditures were $4.1M and ITS recovered $1.2M or 29% from MUNI. In FY 2003-04, ITS expenditures were $11.1M and ITS recovered $572k or 5% from MUNI. Some of the recent increases in the ITS budget have undoubtedly gone towards providing services to the SFPUC’s three enterprises, i.e., costs to operate and maintain the mainframe for MUN! would be relatively less. Nevertheless, the amount work ordered ($572k) has remained identical for the last three years. The suburban representatives request clarification as to how the SFPUC budgets and accounts for work actually performed by ITS on behalf of MUNI. Importance to Suburban Purchasers: MUNI, which is a general fund entity, may be getting discounted services at the expense of the SFPUC’s three enterprises and the suburban purchasers. 10. Clarification: Inclusion of Debt Service as part of total Expenditures in Calculation of SFPUC (Class B) Charges in FY 2003-04, Clean Water was allocated a reduced percentage of total SFPUC "Class B" overhead because Clean Water was able to reduce its debt service. (Explanation: Class B overhead charges are allocated to each of the enterprises on the basis of enterprise total expenditures. In FY 2003-04, Class B charges cor~.isted of the General Manager’s Office, Systems Planning, and the Environment and Regulatory Management bureaus. The suburban representatives question whether including debt service in an enterprise’s total expenditures is a fair way to allocate SFPUC bureau costs. In other words, how and why does a reduction in debt service by Clean Water (as a result of refinancing) actually translate into a reduction in benefit received by Clean Water from the aforementioned three bureaus and, conversely, increase the benefit for Water and Hetchy? Note: This issue could impact some SFPUC overhead "Class A" charges as well. Some Class A costs are allocated based on budgeted rather than actual expenditures. Presumably, debt service would be both budgeted and expended. Importance to Suburban Purchasers: The reduction in Clean Water expenses means that more SFPUC overhead is allocated to the Water Enterprise and the suburban purchasers. The large debt service that will be incurred by the SFPUC for the regional WSIP in the future could result in more SFPUC overhead costs allocated to the Water Enterprise and the suburban purchasers. 11. Clarification: Improvements at University Mound Reservoir In FY 2003-04, the SFPUC capitalized $2,877,237 and also expensed $3,479,280 for improvements related University Mound Reservoir. Both were charged to Project 624-07 (University Mound South Basin Improvements). The Suburban Representatives request clarification as to the treatment of these separate charges and whether they are in accord with Generally Accepted Accounting Principles (GAAP) and/or are consistent with the SFPUC’s past practices. For example, the expensing of the seismic upgrades at University Mound for $3.4M appears to be inconsistent similar seismic improvements at College Hill Reservoir that were capitalized. Importance to Suburban Purchasers The suburban revenue requirement can go up significantly when projects are expensed rather than capitalized. (Note: on a present value basis, it makes little difference.) We seek assurances that the SFPUC is following past practices and/or GAAP. \~DELL1600\Users\jtnnmel’dvly DocumentskMain Files\SRR\Sec606IssuesF¥0304.doc