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HomeMy WebLinkAboutStaff Report 343-10TO: HONORABLE CITY COUNCIL FROM: CITY MANAGER DEPARTMENT: UTILITIES DATE: SEPTEMBER 13, 2010 CMR: 343:10 REPORT TYPE: CONSENT SUBJECT: Approval of Utilities Advisory Commission Recommendation to Defer any Action on Trading the City's Unused Individual Water Supply Guarantee Until at Le~st January 2011 and Approval of the City's Position that San Francisco should use the Individual Water Supply Guarantee to establish the Interim Water Supply Allocation EXECUTIVE SUMMARY In May 2010, the City received an offer from the Purissima Hills Water District to purchase some of the City's unused water supply guarantee for $1 million. There are many unresolved issues such as how much water the City would get in a drought and for the long-term. Given the uncertainty regarding the value of retaining its full water supply guarantee and the potential amount it could receive for selling it, the City responded that it is not ready to pursue a sale at this time. This report recommends deferring action on any further offers from Purissima Hills Water District or other water agencies to buy the City'S unused water supply guarantee until at least January 2011, when some of the issues regarding the water supply guarantee are expected to be resolved. The report also recommends the City's position in its discussions with San Francisco regarding how it decides to split up the water available to be delivered from the regional water system until 2018. REQUEST Staff and the Utilities Advisory Commission (UAC) recommend that the Council defer any action on trading the City's unused Individual Water Supply Guarantee until at least January 2011. Additionally, staff recommends that the Council direct staff to advocate that the San Francisco Public Utilities Commission recognize the Individual Water Supply Guarantee as a major criterion in its decision on how, to divide the Interim Water Supply Limitation of 184 million gallons per day between the members of the Bay Area Water Supply and Conservation Agency. BACKGROUND Palo Alto's potable water supplies are provided by the City and County of San Francisco through . the regional water system operated by the San Francisco Public Utilities Commission (SFPUC). Agencies that buy water from the SFPUC are members of the Bay Area Water Supply and CMR: 343:10 . Page 1 of5 Conservation Agency (BAW-SCA l ). On June 30, 2009, the 25-year contract between San Francisco and the BAWSCA member agencies expired. On June 1, 2009, Council approved a new Water Supply Agreement (the 2009 Contract) between San Francisco and the BAWSCA agencies (CMR: 269:09), effective July 1, 2009 through June 30, 2034. Individual Supply Guarantee Under the old contract, San Francisco committed to providing a total of 184 million gallons per day (MGD) of water, in perpetuity, to 24 BAWSCA agencies2 • Palo Alto's share of the 184 MGD, its Individual Supply Guarantee (ISG), is 17.075 MGD. The 2009 Contract reconfirms 'the 24 wholesale agencies' collective supply assurance of 184 MGD as well as the agencies' Individl;1al Supply Guarantees. In addition, under the 2009 Contract, the ISGs are permanently transferrable between BA WSCA agencies. Since Palo Alto's current and projected water usage is around 13 MGD, Palo Alto has a significant unused ISG that it could transfer to another BAWSCA agency. Money from the sale of unused ISG could be used to help fund water-related projects such as a recycled water project. Interim Supply Allocation As part of the process to gain approval for its capital program to repair and seismically upgrade the regional water system, theSFPUC opted to adopt a water supply element that included the Interim Supply Limitation (ISL), which restricts water deliveries from the regional system's watersheds to 265 MGD until 2018. The primary reason the SFPUC did this is to encourage water conservation and minimize environmental damage from diverting more water from the river systems that supply the regional water system. The 2009 Contract describes how the SFPUC will implement the ISL it imposed. San Francisco's share of the ISL is 81 MGD, and the BAWSCA agencies' share, including the two interruptible customers, the Cities of Santa Clara and San Jose, is 184 MGD. Specifically, the 2009 Contract states that by December 31, 2010, San Francisco will unilaterally decide how to divide the total BAWSCA agencies' share of the ISL, or 184 MGD, among the 26 BAWSCA agencies, by allocating each agency an Interim Supply Allocation (ISA). The sum of all 26 agencies' ISAs will collectively total 184 MGD. The 2009 Contract also explicitly states that the Wholesale Customers (the BAWSCA agencies) do not concede the legality of the SFPUC's establishment of ISAs or imposition of the Environmental Enhancement Surcharge (described below) and reserve the right to challenge in court these issues individually or collectively. The table below shows the key attributes of the ISG and the ISA. 1 The 26 BA WSCA agencies include Alameda County Water District, California Water Service Company, . Coastside County Water District, Estero Municipal Improvement District, Guadalupe Valley Municipal Improvement District, Mid-Peninsula Water District, North Coast County Water District, Purissima Hills Water District, Skyline County Water District, Stanford University, Westborough Water District, and the Cities of Brisbane, Burlingame, Daly City, East Palo Alto, Hayward, Hillsborough, Menlo Park, Milpitas, Mountain View, Palo Alto, Redwood City, San Bruno, San Jose, Santa Clara, and Sunnyvale. 2 Two agencies do not have an Individual Supply Guarantee. The Cities of San Jose and Santa Clara are interruptible customers of the SFPUC and, therefore, have no ISG. The City of Hayward does not have an ISG, but it is part of the 184 MGD supply assurance. CMR: 343:10 Page 2 of5 Water Supply Origin of Water Who is Total Palo Alto's Share Element Supply Element Included? Amount Individual Perpetual contractual 240f26 184 17.075 MGD Supply obligation in 2009 and BAWSCA MGD Guarantee (lSG) 1984 Contracts with agencIes San Francisco Interim Supply 2009 Contract All 26 265 81 MGD for San Limitation (lSL) describes San BAWSCA MGD Francisco Francisco's unilateral agencIes 184 MGD for the decision to limit water and San BA WSCA agencies (see deliveries until 2018 Francisco below for ISAl Interim Supply 2009 Contract states All 26 184 Unknown -San Francisco Allocation (lSA) San Francisco can BAWSCA MGD will determine by end of unilaterally impose agencIes December 2010 The main purpose of the Interim Supply Limitation is to encourage water conservation and to allow time to study the environmental conditions of the watersheds that supply the regional water system. As such, additional diversions from the Tuolumne River and Bay Area watersheds are restricted until additional environmental studies are complete (before 2018). If water usage from the regional water system exceeds the 265 MGD ISL, then an Environmental Enhancement Surcharge will be levied on those agencies (including San Francisco) that exceed their ISAs. Receipts from the surcharge will be used for environmental restoration or enhancement projects on San Francisco watersheds. Water Shortage Allocation For water shortages (droughts), the 2009 Contract contains a formula for how to divide available water between San Francisco and the BA WSCA agencies similar to the method agreed to in the old contract. However, because the method used to divide the water among the BA WSCA agencies expired with the old contract and there is no replacement methodology in the 2009 Contract, the BA WSCA agencies are in the process of developing one. DISCUSSION The BA WSCA agencies have been discussing these water supply issues since the 2009 Contract was approved. The water shortage allocation formula discussions have progressed to narrow down the choices, but unanimous agreement has not been achieved. Further, there is little time left for the agencies to agree on how they would propose that San Francisco establish the ISAs for each agency, since San Francisco must decide by December 31, 2010. In addition, even if the BA WSCA agencies agree on a proposed ISA formula, San Francisco is not obligated to accept any proposal from the BA WSCA agencies. Palo Alto staff is closely engaged in these ongoing discussions and feels strongly that its perpetual ISG of 17.075 MGD must be properly recognized in any formula. Whether either or both the water shortage allocation formula decided upon by BA WSCA or the ISA set by San Francisco will be based in some way on the ISG is unclear at this time. Meanwhile, several BA WSCA agencies have contacted Palo Alto to express interest in purchasing Palo Alto's unused ISG. One BAWSCA member, the Purissima Hills Water District (PHWD), recently sent a letter to Palo Alto's mayor with an offer to buy 0.5 MGD'ofPalo Alto's CMR: 343:10 Page 3 of5 ISG for $1 million (Attachment A). The Mayor's response declining the offer is attached (Attachment B). The value of Palo Alto's unused ISG is difficult to assess while the water shortage allocation formula and the ISA remain unknown. The value of the ISG will depend in part on whether, and to what extent, the ISG is a component of a water shortage allocation, as Palo Alto advocates. In addition, whether the ISA will be somehow based on the ISG will not be clear before December 31,2010. Thus, the offer from PHWD was refused and staff recommends that any other offers received from PHWD or other parties be refused at this time and that no work be done to solicit any other offers to purchase any unused ISG until January 2011 at the earliest. Although San Francisco will unilaterally make a decision on the ISA before December 31, 2010, the SFPUC has stated that it welcomes input on the process from BA WSCA members. Staff believes that in the meantime, it can best represent Palo Alto's perspective by providing as much relevant information to San Francisco as possible. Fundamentally, staff believes that the perpetual nature of the ISG makes it an obvious choice for the ISA as it defines the contractual relationship between San Francisco and the Wholesale Customers. In fact, the ISG was granted to the Wholesale Customers in perpetuity in both the 1984 and 2009 contracts with San Francisco. Staff recommends that the City adopt. a position that the San Francisco Public Utilities Commission heavily weight the ISG in its determination of ISAs for each of the Wholesale Customers. Staffs proposal aligns the ISA with the City'S existing, perpetual, ISG entitlement. This position may not be entirely consistent with other BAWSCA member's position, but is in the best interest of preserving the City'S rights. COMMISSION REVIEW AND RECOMMENDATIONS The UAC considered the staff recommendation to defer any action on trading the City'S unused Individual Water Supply Guarantee until after the end of 2010 at its meeting on July 20, 2010. The UAC discussed the several issues with the ISG and the ISA and determined it would be prudent to wait until the issues were resolved prior to consider selling any unused ISG. Commissioners did acknowledge that PHWD's offer could perhaps be worthwhile and deferring action may result in negative consequences. The City however, could be in a stronger position in future negotiations with San Francisco if it did not sell any of the ISG at this point. Commissioners also agreed that Palo Alto should protect its interests in these important negotiations by contacting San Francisco and discussing its interests. The UAC voted unanimously (6-0) to recommend that the Council defer any action on trading the City's unused Individual Water Supply Guarantee until after the end of 2011. The excerpted draft notes from the UAC meeting are provided as Attachment C. RESOURCE IMPACT Passing up the offer from PHWD of $1 million means that the water utility could lose the opportunity for that revenue. However, it is likely that the City's unused ISG will continue to have value after January 2011 since several agencies have expressed an interest in buying it. POLICY IMPLICATIONS The requested action creates no new Council or City policy, but does establish the City's position to be used in its discussions with the SFPUC when it establishes Interim Supply Allocations for Palo Alto and the other BA WSCA members. CMR: 343:10 Page 4 of5 ENVIRONMENTAL REVIEW The decision to defer action on selling the City's unused water ISG does not constitute a project pursuant to Section 21065 of the California Public Resources Code, thus no environmental review under CEQA is required. ATTACHMENTS A: May 18, 2010 letter to Mayor Burt from Purissima Hills Water District re: Principles of Agreement for Purchase of Portion of City of Palo Alto Unused SFPUC Supply Guarantee B: June 9, 2010 letter to Purissima Hills Water District from Mayor Burt C: Excerpted Draft Minutes from the July 20,2010 UAC meeting PREPARED BY: ~NEO.RATCHYE \-\jl U;ilities Assistant Director, Resource Management DEPARTMENT APPROVAL: Director of Utilities CITY MANAGER APPROVAL: City Manager CMR: 343:10 Page 5 of5 .~. 's T AT'1'ACHJVII~NT A F· . , Purissima Hills Water District Mayor Patrick Burt City of Palo Alto 1249 Harriet Street Palo Alto, California 94301 ,. r, '. '. " .~ May 18, 2010 Subject: Princlpl~$ of Agreement for Purchase of Portion of City of Palo Alto :if:. :(3'* J:~ces~SFPUCSupply Guarantee . ..-,C_ ~ ... -) . ;::;) r··· ... ~ Dear Mr. Burt: . ~1 c.;::~~ Over the last year, the Purissima Hills Water District ("PHWD") and the City of Palo Alto :~\'C.:i ("City"), both among staff and among several elected officials, have discussed the City's inte!est ?:,.~: in selling, and PHWD's interest in purchasing, a portion of the City's San Francisco Public CD y' Utilities Commission excess water supply guarantee ("Supply Guarantee"). , PHWD desires to take these discussions to the next level by proposing Principles of Agreement that would establish the key business terms for the sale of a small portion of the City's stlpj>ry Guarantee to PHVyD. These Principles of Agreement would serve as the foundation for a more detailed agreement that can be prepared by the attorneys for our agencies. PHWD's proposed Principles of Agreement are attached to this letter. In short, PHWD desires to purchase 500 acre feet of the City's Supply Guarantee for a one-time purchase price of $2,000 per acre foot, for a total purchase price of $1,000,000. PHWD understands that 500 acre feet is approximately 12.5% of the City's excess Supply Guarantee. , We welcome the opportunity to meet with you and other representatives of the City to discuss and reach fihal accord on the Principles of Agreement. Please let me know when you are available to meet. ' , , Sincerely, -4'p~ . Gary Waldeck President,. Board of Directors cc: P~trick:Walter, General Manager ' ' ,',.' ji,m ~ee~e" GitY Mamig~r " : . . . ';. . ;~. : ~', . . '". .:: .. " .. ::: Attachment', ' Service To The Hills Since 1955 PRINCIPLES OF AGREEMENT FOR PURCHASE OF PORTION OF CITY OF PALO ALTO EXCESS SFPUC SUPPLY GUARANTEE Amount to be Purchased: PHWD will purchase 500 acre feet of the City's excess SFPUC Individual Supply Guarantee. . Purchase Price: PHWD will pay a one-time price of $2,000 per acre foot for the permanent transfer of 500 acre feet of the City's Individual Suppiy Guarantee, for a total purchase price of $1,000,000. Manner of Payment: PHWD will pay 100% of the purchase price within 90 days from the date of execution of agreement between PHWD and City for the permanent transfer of a portion of the Individual Supply Gu~rantee, or the date that the City and County of San Francisco . approves the permanenttransfer of this portion of the Individual Supply Guarantee, whichever occurs later. Time of'Transfer:· City will transfer the portion of its Individual Supply Guarantee concurrent with PHWD payment of purchase price to City. Recycled Water: PHWD will investigate in good faith the alternatives and feasibility of becoming a recycled. water customer of the City of Palo Alto. CEQA: PHWD, at its sale cost, will complete the environmental review required for the permanent transfer of a portion of the City's Individual Supply Guarantee. June 9, 2010 Gary Waldeck President, Board of Dh'ector's Purissima Hills Water District 26375 Fremont Road Los Altos Hills, CA 94022 Ci~of Palo ATTACHMENT B Office of the Mayor and City Cou1J.cil Subject: City of Palo Alto response to Purissima Hills Water District letter of May 18th 2010, titled "Principles of Agreement for Purchase of Portion of City of Palo Alto Excess SFPUC Supply Guarantee" Dear President Waldeck:· I received your letter dated May 18th regarding your interest in proposing Principles of Agreement applicable to a potential transfer of a portion of the·City of Palo Alto's Individual Supply Guarantee (ISG) to the .. Purissima Hills Water District. Your letter outlines the broad principles and foundation of such a transaction, including pricing, volume and timeline~ The City, like Purissima Hills, receives 100% of its water supply fronithe San Francisco Public Utilities Commission~s Hetch Hetchy system. ·Both of our agencies have an ISG, a contractual entitlement to water from the system that exists.in perpetuity. For Palo Alto, this perpetual ISG is 17.07 million gallons of water per day. The City did historically use an amount of water equivalent to Its ISG, but aggressive conservation, incentive pricing and ~ustomer awareness have resulted in dramatic water use reductiOllS to the point that, the City now consistently uses signific~llltly less than its ISG, and is not projected to exceed its ISG in the foreseeable 'future. > At this time there is uncertainty .surrounding the development of all allocation formula for water deliveries from· San Francisco during droughts, and uncertainty in how San Francisco will establish the Interim Water ~upply Limitation, which is discussed in Article Four of the 'Water Supply Agreement with the City and County of San Francisco, executed by both of our agencies in June 2009. The City anticipates this uncertainty will be settled within a, year. At that time, the City will re-evaluate the best way to encourage an ISG trading mechanism in a manner that will create a· durable market for aU theBA. WSCA agencies, reward agencies that have invested in conservation and water recycling, and provide a mechanism for agencies to meet their neelis in a cost-effective manner. In. the interim, while I appreciate your inquiry, the City is not entertaining offers to purchase any portion of its ISG: Please feel free to contact Nicolas Procos at (650) 329~2214 if you have further questions. /;liJ4~ P.!.rick Burt { Mayor of Palo Alto. cc: City Council Members Utilities Advisory Commissioners City Manager James Keene CityAttomey Gary Baum P.O. Box 10250 ' Palo Alto, CA 94303 650.329.2477 650.328.3631 fax EXCERPTED DRAFT MINUTES OF UTILITIES ADVISORY COMMISSION Meeting of July 20,2010 ATTACHMENT C ITEM 3: ACTION: Recommendation to Defer Any Action on Trading the City's Excess Individual Water Supply Guarantee Until at Least January 2011 Assistant Director Jane Ratchye stated that there have been several entities that have expressed an interest in purchasing Palo Alto's excess water supply allocation and the offer from Purissima Hills Water District was the first actual offer received. However, as explained in the memorandum, there are too many issues that have not been resolved and staff recommends that the City not act on any such offer prior to the end of 2011. Commissioner Foster summarized the report by saying that Palo Alto's Individual Supply Guarantee (ISG) is about 17 million gallons per day (MGD) , yet it uses only 13 MGD and, therefore, has excess ISG to sell, but that he supported staffs recommendation to wait until the issues were resolved to consider selling the excess ISG. Commissioner Melton stated that he was worried that when the Interim Supply Allocation (ISA) was established, the ISG would be meaningless and have no value. Commissioner Eglash agreed that the ISG could be worthless and we could get some money now, but going forward, we would be in a stronger position in future negotiations with San Francisco if we did not sell any of the ISG. Eglash stated that we need to understand that we are choosing not to sell despite a real offer of $1 million, but that he concurs with staff s recommendation. Commissioner Keller asked if the sale of the City's excess ISG could be structured differently so it would get ongoing revenues rather that a one-time payment. Ratchye replied that a future sale could be structured in many different ways, including the one suggested by the commissioner. Commissioner Berry stated that he supported staffs recommendation. He added that Palo Alto should protect its own interests with San Francisco and not necessarily go along with what BA WSCA is doing. Commissioner Eglash agreed that Palo Alto should go directly to San Francisco to protect our interests. ACTION: Commissioner Foster made a motion to recommend that Council defer any action on trading the City's excess Individual Water Supply Guarantee until after the end of 2011. The motion was seconded by Commissioner Berry. The motion carried unanimously (6-0).