HomeMy WebLinkAbout2004-03-15 City Council (12)City of Palo Alto
City Manager’s Report
TO:HONORABLE CITY COUNCIL
7
FROM:CITY MANAGER DEPARTMENT: UTILITIES
DATE:
SUBJECT:
MARCH 15, 2004 CMR:186:04
RECOMMENDATION TO EXECUTE FINAL SETTLEMENT
AGREEMENT BETWEEN THE CITY AND COUNTY OF SAN
FRANCISCO AND THE SUBURBAN PURCHASERS
RECOMMENDATION
Staff recommends that Council authorize the Mayor to execute the final settlement
agreement between the City and County of San Francisco and the member agencies of the
Bay Area Water Supply and Conservation Agency.
BACKGROUND
In 1984, Palo Alto and the other agencies and water districts who purchase water from the
City and County of San Francisco (San Francisco) entered into a Settlement Agreement
and Master Water Sales Contract (Master Contract) with San Francisco. The agencies
and water districts that purchase water from San Francisco are the same as the member
agencies of the Bay Area Water Supply and Conservation Agency (BAWSCA) and are
collectively referred to in the Master Contract as the Suburban Purchasers.
Disputes in implementation of the terms and conditions of the Master Contract may be
resolved by arbitration. In June 2002, an arbitration was requested by the five agencies
(referred to in the Master Contact as the Suburban Representatives) who represent the
BAWSCA member agencies in certain cases in the Master Contract: the Cities of Palo
Alto, Redwood City, and Hayward, the Alameda County Water District, and the
California Water Service Company, Inc. The Suburban Representatives disagreed with
San Francisco regarding the calculation of the amount charged to the BAWSCA member
agencies (the Suburban Revenue Requirement) for Fiscal Year 1999-2000.
DISCUSSION
The two issues in dispute related to: 1) double-counting of fixed assets; and 2) the proper
allocation of design costs for a septic system at the Kirkwood powerhouse. San
CMR:186:04 Page 1 of 3
Francisco and the BAWSCA member agencies approved a Partial Settlement Agreement
in December 2002, which resulted in a credit to the BAWSCA agencies of $1.6 million.
The Partial Settlement Agreement resolved the double-charging issue for assets going
forward and for another issue identified in the investigation conducted after the
arbitration filing: credit to the BAWSCA agencies for reimbursement San Francisco
received from the Federal Emergency Management Agency for repairing facilities
damaged in disasters. However, two issues remained unresolved: 1) double-counting of
fixed assets in the period prior to FY 99-00, specifically FY 97-98 and FY 98-99; and 2)
septic system design write-offs.
In January 2004, San Francisco agreed with BAWSCA’s position on the double-counting
of assets and agreed to credit the Suburban Purchasers over $2 million to correct that
problem. The issue of the $2.5 million written off by San Francisco as septic system
design was investigated further and a variety of problems was discovered, primarily very
bad record-keeping and inadequate accounting systems. It was discovered that the $2.5
million was not spent on septic system designs at Early Intake, a San Francisco power
facility, that were subsequently abandoned, as represented by San Francisco, but included
a long list of expenditures on projects such as waste treatment projects at O’Shaughnessy
Dam, septic system design at Holm powerhouse, sewer system improvements at a
campground at Tuolumne Meadows, as well as septic system plans and designs for Early
Intake that actually were used. Only $957,000 could actually be attributed to faulty
designs at Early Intake. All these corrections were added to the Final Settlement
Agreement resulting in a total credit in the balancing account to the Suburban Purchasers
of $2,094,621 for both issues.
Perhaps the most valuable element of the Final Settlement Agreement is concurrence to
certain terms to improve the clarity and accuracy of San Francisco cost accounting in the
remaining years of the Master Contract. Overall, the arbitration demand filed by the
Suburban Purchasers in June 2002 resulted in a total savings of $3.6 million. The savings
will result in lower wholesale water costs by approximately $300,000 in for FY 04-05 for
Palo Alto.
ATTACHMENT
Final Settlement Agreement
PREPARED BY:_
JANE RATCHYE, Senio(R/esource Planner
CMR:186:04 Page 2 of 3
DEPARTMENT HEAD:
CITY MANAGER APPROVAL:
of Utilities
Assistant City Manager
CMR:186:04 Page 3 of 3
CHR:186:04 ATTACHMENT A
FINAL SETTLEMENT AGREEMENT
I.RECITALS
1.In 1984, the City and County of San Francisco ("San Francisco" or the "City")
and the various communities and water districts in Alameda, San Mateo and Santa Clara
Counties that purchase water from the City (the "Suburban Purchasers") entered into a
Settlement A~eement and Master Water Sales Contract (the "Contract"). The Contract, anaong
other things, provides how costs of water system operation will be allocated and how water rates
will be set and provides an arbitration procedure in the event of dispute.
2.On June 21, 2002, Alameda County Water District, California Water Service
Company, Inc., the City of Ha~vward, the City of Palo Alto, and the City of Redwood City (acting
as the Suburban Representatives as provided in the Contract) served a Demand for Arbitration
against San Francisco pursuant to Section 8.02 of the Contract, contesting the San Francisco
Public Utilities Commission’s ("SFPUC’s") calculation of the Suburban Revenue Requirement
for Fiscal Year ("FY") 1999-00.
3.In December 2002, the parties entered into a Partial Settlement Agreement which
resolved some, but not all, of the matters at issue with respect to the Suburban Revenue
Requirement for FY 1999-00.
4.In January 2003, the City filed its response to the Demand for Arbitration.
5.In May 2003, the parties agreed to submit the dispute to the Hon. Charles Legge,
United States District Judge (Ret.) for resolution through arbitration, as provided by the Contract.
6.In accordance with scheduling orders issued by Judge Legge, the parties
conducted both formal and informal discovery, pursuant to which the SFPUC thrnished copies of
documents requested by the Suburban Representatives and made available employees of the
SFPUC for depositions.
7.The parties have met to discuss the issues remaining in dispute. As a result of
their discussions, the parties have reached agreement on all such matters and desire to conclude
the dispute on the terms set out below.
1077525.5
Cf, IR:186:04 AnACHMENT A
II.CAPITALIZATION/EXPENSE OF EQUIPMENT ASSETS
8.Background. In FY 1997-98, the SFPUC converted its existing fixed asset
records and began using a Fixed Asset Accounting and Control System, implemented by the City
Controller, to record and maintain fixed asset records. As part of the implementation of this
system, certain accounting procedures were modified. One such modification was to use a single
index code to reverse the expensing of equipment purchases that were also capitalized. As a
consequence of this modification, a portion of the cost of these equipment assets was both
charged to the Suburban Purchasers as an expense in the year of acquisition and added to the
wholesale rate base on which the Suburban Purchasers are charged depreciation mad return on
capital over the assets’ useful lives.
9.The Partial Settlement Agreement corrected this overstatement insofar as assets
capitalized in FY 1999-00 and charged as an expense in calculating the Suburban Revenue
Requirement for that year are concerned. The correction was effected by means of a credit in
favor of the Suburban Purchasers of $1,1 t 5,360 for that year, reflected in an adjustment to the
balancing account as of June 30, 2002 in that anaount plus interest. The Partial Settlement
Agreement did not, however, address equipment assets both expensed and capitalized during FY
1997-98 or FY 1998-99.
10. The parties now agree to address this overstatement with respect to equipment
assets that were both expensed and capitalized during FY 1997-98 and FY 1998-99. The
overstatement will be offset by means of a credit in favor of the Suburban Purchasers in the
amount of $2,067,402, to be reflected in an adjustment to the balancing account as of June 30,
2002 in that amount. The credit represents the present value of return and depreciation charged
or to be charged on the Suburban Purchasers’ share of the equipment assets purchased in FY
1997-98 and FY 1998-99. The method by which this credit is calculated is shown on
Attaclmaent One.
III.DESIGN EXPENSE WRITE-OFF
l 1. Background. In FY 1999-00, the SFPUC expensed $2,541,749 in charges that
had been accumulated in a Work in Progress (WIP) account since FY 1987-88 (the "Write-Off").
At the time that the SFPUC transferred this amount to expense, it believed (a) that all the charges
had been incurred in developing designs of a septic system in the Hetch Hetchy Water and Power
Final Settlement Agreement
1077525.5
Cf, lR:186:04 A’n’ACHf, tENT A
Department, (b) that the project as so designed had been abandoned and that it was therefore
appropriate to write off the design costs as an expense, and (c) that the facility to be served by
the septic system serves both water and power functions and is therefore classified as "joint."
Based on these assumptions, the SFPUC treated the entire Write-Off as a joint expense, a portion
of which was included in the Suburban Revenue Requirement.
12. Investigations and discovery conducted as a result of the filing of the Demand for
Arbitration have disclosed that the majority of the Write-Off expensed in FY 1999-00 was not
associated with preparation of subsequently abandoned designs of a septic system for a joint
facility. For example, some charges were associated with projects that were actually constructed
and should have been capitalized. Other charges were associated with preparation of designs for
a facility that is properly classified as power, rather than joint. Other charges were associated
with preparation of designs which were actually used in construction of facilities that are now
substantially complete and which should be included in the cost of those facilities when they are
capitalized. Still other charges were incurred in construction of a facility that is properly
classified as water, rather than joint.
13. The parties agree that the Write-Off will be reclassified, for purposes of the
Contract and Suburban Revenue Requirement, as follows:
A.$552,544 of the amount recorded as an expense in FY 1999-00 will be
treated as plant-in-service as of June 30, 2000. This amount represents the cost of design and
construction of improvements to the septic system at O’Shaughnessy Dam completed in two
phases pursuant to Contact No. HH-817R and Contract No. HH-829. The improvements will be
assigned a useful life of 10 years and will be classified as joint. The amount to be included in the
Suburban Revenue Requirement as the Suburban Purchasers’ share of return and depreciation for
years commencing with FY 2002-03 is $21,006 per year.
B.$50,000 of the amount transferred to expense in FY 1999-00 will be
reclassified from joint to power. This amount represents the estimated cost of preparing plans
for septic system improvements at Holm Powerhouse that were not used.
C.$587,658 of the amount transferred to expense in FY 1999r00 will be
reclassified from joint to water. This represents the cost of design and construction of the initial
Final Settlement Agreement
1077525.5
Cf,IR:186:04 ATrACHf,IEN[ A
phase of improvements to the septic system at the National Park Service ("NPS") camp~ound at
Tuolumne Meadows which was completed in FY 1995-96 pursuant to Contract No. WP-04, and
an associated payment to the NPS.
D.$393,616 of the amount recorded as an expense in FY 1999-00 as design
costs will be treated as Construction-Work-in-Progress ("WIP"). This represents the estimated
cost of preparing designs that were in fact used in construction of sanitary and industrial waste
treatment facilities recently constructed under SFPUC Contract WP-! 5R. This aanount wil! be
treated as plant-in-service for the purposes of calculating the Suburban Revenue Requirement
when the facilities built under Contract WP-15R are capitalized.
The facilities constructed under Contract WP-15R are distributed among four
locations, which are classified as follows:
¯Early Intake Septic System:Joint
¯Kirkwood Powerhouse (including its
connection to Early Intake Septic System)Power
¯Holm Powerhouse Power
¯Moccasin Powerhouse Power
The $393,616 in design costs will be allocated to these four facilities in the same
proportion as the other costs to be capitalized (including construction and construction
management) are allocated among these four facilities. For purposes of this Agreement, the
portion of the Early Intake Septic System to be classified as power extends from the Kirkwood
Powerhouse to Station 64+20.76, as shown on Sheet No. C-3 for Contract WP-15R.
E.The balance of the amount transferred to expense in FY 1999-00
($957,931) will remain as a joint expense in FY 1999-00.
The result of the foregoing reclassifications is a credit in favor of the Suburban
Purchasers in FY 1999-00 of $75,711.
The method by which this credit is calculated is shown on Attachment Two.
Final Settlement Agreement
1077525.5
CMR:186:04 AI-~ACH~IENT A
IV.ADJUSTMENTS TO SUBURBAN REVENUE REQUIREMENT FOR FY 1999-00
AND TO BALANCING ACCOUNT
14. The total amount of the adjustments to the FY 1999-00 Suburban Revenue
Requirement called for in Sections 10 and 13 and the resulting credit to the balancing account as
of June 30, 2002 shall be as shown on Attachment Three.
V.EVALUATION OF SFPUC COST ACCOUNTING P~NCIPLES
15. The SFPUC has initiated changes in its cost accounting systems and procedures
which it believes will improve its ability to track and allocate costs accurately and in accordance
with the Contract. Other improvements are scheduled to be implemented within the next 24 to
36 months. These improvements are described in Attacbanent Four. The SFPUC agrees to
implement these improved systems and procedures and to regularly inforrn the Suburban
Representatives, through the Bay Area Water Supply and Conservation Agency, of their status
and operation as provided in Attachment Four.
VI.OTHER PROVISIONS
16. Compromise of Disputed Claims. This Agreement is a compromise of disputed
claims, and no party intends it to be construed as an admission by any party as to any legal or
factual position.
17. Retention of Jurisdiction. Judge Charles Legge will retain jurisdiction of the
Demand for Arbitration for purposes of enforcement of this Settlement Agreement.
18. Relationship to Contract. To the extent there is any inconsistency between any
term of this Agreement and the Contract, this Agreement will control and prevail.
19. Complete Agreement. Except as otherwise specified, this Agreement constitutes
the complete agreement between the parties concerning the subject matter of this Agreement.
There are no representations, promises, warranties, covenants, or undertakings other than those
expressly set forth or referred to in this Agreement.
20. Modifications. This Agreement may be modified only in writing by the parties to
this Agreement.
Final Settlement Agreement
1077525.5
CMR:186:0~ ATTACHMENT A
21. Waivers. Any tenn or provision of this Agreement may be waived at any time by
the party or parties entitled to the benefit thereof by a written instrument duly executed by such
party or parties. Any waiver for any particular matter shall not, unless otherwise noted, be
construed to constitute a waiver for any other matter.
22. Notice. Any notices permitted or required to be given tinder this Agreement may
be given by persona! delivery, or by U.S. mail, first class postage prepaid, to the representative
of the parties as provided below:
If to the City:Patricia E. Martel, General Mmaager
San Francisco Public Utilities Commission
1155 Market Street, 4th Floor
San Francisco, CA 94103
With a copy to:
Joshua D. Milstein, Deputy City Attorney
1390 Market Street, 6th Floor
San Francisco, CA 94102
If to the Suburban Representatives:Art Jensen, General Manager
Bay Area Water Supply & Conservation Agency
155 Bovet Road, Suite 302
San Mateo, CA 94402
With a copy to:
Ray McDevitt
Hanson, Bridgett, Marcus, Vlahos & Rudy, LLP
333 Market Street, Suite 2300
San Francisco, CA 94105-2173
23.
California.
Governin~ Law. This Agreement is governed by the laws of the State of
24.
Agreement.
Recitals and Exhibits. The recitals and exhibits to this Agreement are part of this
25. Section Headings. Section headings are for ease of reference only. They are not
part of the Agreement, and they are not intended to modify or alter the meaning of the text of the
Agreement.
Final Settlement Agreement
1077525.5
CMR:I:86:04 ATTACHMENT A
26. Counterparts. This Agreement may be executed in any number of counterparts,
each of which when executed and delivered shall be deemed to be an original and al! of which
counterparts taken together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, this Agreement is entered into by the parties by their
respective duly authorized officers, the Suburban Representatives acting on their own behalf and
on behalf of the Suburban Purchasers.
THE CITY AND COUNTY OF SAN FRANCISCO
Acting by and through its Public Utilities Commission
By:
PATRICIA E. MARTEL, General Manager
Date:,2004
Secretary to the Commission
APPROVED AS TO FORM:
Deimis J. Herrera, City Attorney
By:
Deputy City Attorney
Suburban Representatives
ALAMEDA COUNTY WATER DISTRICT
By:Date:.2004
CALIFORNIA WATER SERVICE COMPANY
By:Date:,2004
Final Settlement Agreement
1077525.5
Cf, tR:186:04 ATTACHF1ENT A
CITY OF HAYWARD
By:Date:,2004
CITY OF PAL0 ALTO
By:.Date:,2004
CITY OF REDWOOD CITY
By:Date:.2004
APPROVED AS TO FORM:
HANSON, BRIDGETT, MARCUS, VLAHOS & RUDY
By:
Attorney for Bay Area Water Supply &
Conservation Agency and the Suburbm~ Representatives
Final Settlement Agreement
1077525.5
CMR:186:04 ATTACHMENT A
CMR: 186:04 AI-I’ACHMENT A
Cf4R:186:04 ATTACHf4ENT A
Cf4R:186:04 ATTACHMENT A
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Cf, IR:186:04 AT[ACHf, IENT A
~o°~
CMR:186:04 AI-rACHMENT A
Summary of Costs Charged to Project No. CUH793
Included in FY 1999-00 Suburban Revenue Requirement Calculation
Cost Summary
Project-to-date Charges through 6/30/00 2,541,749
Less:
O’Shaughnessy Phase I
O’Shaughnessy Phase II
Toulumne Meadows Sewer Rehabilitation
Holm Powerhouse Design Allowance
Subtotal
238,599 Capitalize as Joint
313,945 Capitalize as Joint
587,658 Expense as Water Specific
50,000 Expense as Power Specific
1,190,202
Charges FY 96-97 to FY99-00 393,616 Exclude (Capitalize with WP-15R)
Net Charges to be Transferred to Expense1 957,931 Expense as Joint
Credit Calculation
Costs to be Transferred to Expense
Toulumne Meadows Sewer Rehabilitation
Holm Powerhouse Design Allowance
FY 86-87 through FY 95-96 Joint Costs
Total to Expense
Allocation Factor
Allocated Cost
Suburban Allocation Factor
Suburban Share
Power
50,000
Wate~ Joint
587,658
957,931
50,000 587,658 957,931
0%100%45%
0 587,658 431,069
65.9615%65.9615%65.9615%
0 387,628 284,340
Total .
671,968
Costs to be Capitalized
O’Shaughnessy Phase 1
O’Shaughnessy Phase II
Total
Allocation Factor
Addition to Water Related Rate Base
Average Rate Base
Suburban Allocation Factor
Suburban Share
Rate of Return
Return
238,599
313,945
552,544
0%100%45%
0 0 248,645
0 0 124,323
64.2595%64.2595%64.2595%
0 0 79,889
8.4858%8.4858%8.4858%
0 0 6,779 6,779
Total to be included in SRR 678,747
Amount originally included in SRR
Credit to Suburban Purchasers
2,541,746 45% 65.9615%754,458
75,711
~Charges net of transfers to expense and plant-in-service
A~achement2
Page I of 1
Summary of Settlement Credits
Issues 1 and 2
CMR:186:04 ATTACHMENT A
Attachment 3
Page I of I
Credits due the Suburban Purchasers
Issue 1 CreditI
Issue 2 Credit
FY 2000-01 Interest at 6.045%
FY 2001-02 Interest at 4.232%
Total Credits due the Suburban Purchasers
Credit due San Francisco
Issue 2 Credit~
Net Credits due the Suburban Purchasers
$2,067,402
$75,711
$4,577
$3,204
$2,150,894
$56,273
$2,094,621
Reference Attachment 1
Reference Attachment 2
~Net present value of return and depreciation over expected service lives of assets also includes as expense
2Return and Depreciation on O’Shaughnessy Phase I and Phase I! improvements including interest
CMR:186:04 ATTACHMENT A
Page 1 of 2
ATTACHMENT FOUR
The SFPUC is implementing measures to improve its management of capital projects.
These include
o
o
No Electronic Timecard System: Recently implemented by the SFPUC, the system
allo~vs labor costs to be updated on a daily basis and maintained to accurately
assess the status of schedules and budgets throughout a project’s stages.
Proiect Control System: Is intended to be the primary scheduling and budgeting
tool for managing capital projects, including those in the regional Capital
Improvement Program, allowing costs to be tracked and controlled at the task or
activity level within a project.
Enterprise Asset Management: Represents a systematic approach to management
of fixed assets from the initial planning stage through design, construction,
operation and maintenance, rehabilitation to ultimate disposal.
Implementation of these programs provides an opportunity to improve SFPUC’s ability
not only to accurately track costs, but to accurately assign them to appropriate categories
established by the Master Contract. (For example, ’°water," "power" or "joint" for
HHWPD assets and ’~base," "maximum day" or" maximum hour" for SFWD assets.)
SFPUC will keep the Suburban Purchasers informed, through periodic reports to
BAWSCA, of its progress implementing these and related efforts to improve its control
of project costs. Specifically:
Project Control System: Within 60 days from the date of this Agreement, SFPUC
will provide BAWSCA the specifications for its enhanced project control system,
together with a schedule identifying the key milestones for implementing the
project control system. Thereafter, the SFPUC will provide quarterly updates on
the status of implementation until such time as the system is fully implemented,
and will include BAWSCA representatives in a demonstration of the system prior
to full implementation.. The SFPUC will give thoughtful consideration to any
comments BAWSCA may provide regarding the specifications for the project
control system and/or the status of its implementation.
No Enterprise Asset Management System: Within 90 days from the date of this
Agreement, the SFPUC will provide BAWSCA a draft Request for Proposals
soliciting consultant services as the initial step in developing an enterprise asset
management system. The SFPUC will give thoughtful consideration to any
comments BAWSCA may provide regarding the scope of work, schedule and
other elements of this RFP, as well as on the final contract with the selected
consultant. Thereafter, SFPUC will provide quarterly reports to BAWSCA on the
status of implementation, which is expected to require between two to three years
to complete, and will include BAWSCA representatives in a demonstration of the
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system prior to full implementation...
Within 90 days from the date of this Agreement, the SFPUC will request the external
auditor which conducted the most recent audit of the Suburban Revenue Requirement
(KPMG) to offer suggestions on how the project control system and enterprise asset
management system can assist the SFPUC in preparing the Suburban Revenue
Requirement in compliance with the Master Contract and assist the external auditor in
conducting its audit of the Suburban Revenue Requirement.
Commencing with projects advertised for bid more than 180 days after this Agreement,
the SFPUC will use its best efforts to structure the bid form used to solicit bids to
construct projects in the wholesale water system, the costs of which should be assigned to
more than one cost category in the Master Contract, so as to facilitate the allocation of
those costs between or among those categories.
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