HomeMy WebLinkAbout2002-06-24 City Council (10)City of Palo Alto
City Manager’s Report
TO:HONORABLE CITY COUNCIL
FROM:CITY MANAGER DEPARTMENT: UTILITIES
DATE:
SUBJECT:
JUNE 24, 2002 CMR:285:02
APPROVAL OF AMENDMENT NUMBER TWO TO THE
DELOITTE AND TOUCHE CONTRACT C9115650 FOR RISK
MANAGEMENT SERVICES TO INCREASE THE FUNDING IN
THE AMOUNT OF $300,000 FOR A TOTAL MAXIMUM
COMPENSATION OF $740,000 TO CONTINUE ASSISTANCE IN
IMPLEMENTING AN ENERGY RISK MANAGEMENT PROGRAM
RECOMMENDATION
Staff recommends that Council approve the Amendment No. 2 (Attachment A) to the
Deloitte and Touche Contract C9115650 for risk management services to increase the
funding in the amount of $300,000 for a total not-to-exceed amount of $740,000.
BACKGROUND
On April 5, 1999, Council authorized the City Manager to enter into an agreement with
Deloitte and Touche for risk management services (CMR:186:99). Funds for services
were budgeted during FY 1998-99 and FY 1999-00 for a total not to exceed $225,000.
Council further delegated the City Manager the authority to extend the contract term as
needed. Funds for the contract were carried over through FY 2000-01.
Deloitte and Touche was selected through the City’s Request for Proposal process to
assist the Utilities Department (CPAU) in the development and implementation of a
comprehensive energy risk management program. Deloitte and Touche was selected
from eight other firms because of its professional approach, talent pool and in-depth
knowledge of the relationship between CPAU and the Northern California Power Agency
(NCPA). The scope of services under the Deloitte and Touche agreement were to be
carried out in three phases, as follows:
CMR:285:02 Page 1 of 5
Phase 1:
Phase 2:
Phase 3:
Review of existing risk management materials and program.
Develop suggested risk management plan and senior management
training.
Assistance with risk management implementation.
Deloitte and Touche completed Phase 1 and Phase 2 in the fall of 1999. In Spring 2000,
D&T began assisting CPAU under Phase 3 of the contract. Tasks under Phase 3 were
broadly defined in the original contract, and included review of risk management controls
and infrastructure and assistance with development .of risk management policies and
procedures. In calendar year 2001, Deloitte and Touche provided the following Phase 3
services:
¯Review of NCPA’s risk management systems;
¯Review of CPAU’s commodity pricing policY;
¯Review of CPAU’s interim risk management policies and procedures;
¯Development of draft credit risk management guidelines and procedures;
¯High level assessment of CPAU’s risk .management control infrastructure;
¯Review and feedback on various gas and electric supplier contracts;and
¯Staff training for Financial Accounting Standard Board Statement 133
applicability.
In August 2001, Deloitte and Touche completed the Risk Management Control
Infrastructure Assessment, in which it made several recommendations to improve and
formalize CPAU’s risk management program. The recommendations from that rePort
included:
¯Reorganize and update the control documents (policies, guidelines, and
procedures) including the establishment of formal policies and procedures for
credit approval and credit risk management;
¯Establish validation and risk measurement methodology and procedures for all
transactions;
¯Define the roles and responsibilities of all parties responsible for risk management
and develop and train staff as appropriate for those roles;
¯Ensure that systems support CPAU activities;
¯Perform annual audits of the policies and procedures to ensure alignment with
objectives; and
¯Create senior management reports for improved oversight.
On November 19, 2001 (CMR:409:01), Council approved Amendment #1 to the contract
and increased the contract funding by $215,000 ($105,000 for FY 2001-2002 and
CMR:285:02 Page 2 of 5
$110,000 for FY 2002-03) for a total maximum not to exceed amount of $440,000 for the
amended contract. Amendment #1 to the contract provided additional funds for
completing additional Phase 3 tasks. Those tasks included performing annual and mid-
year review of energy risk management controls, processes, and performance, and other
general risk management tasks. Some of this work has been completed and the funds
budgeted for-FY 02-03 ($110,000) are expected to be utilized to complete the annual
review and mid-year review of the risk management program.
DISCUSSION
In early 2002, Deloitte and Touche provided assistance in implementing its
recommendations to improve the energy risk management program. Work has focused
on establishing proper roles and responsibilities of the Council and staff, including the
staff Risk Oversight Committee (ROC). Deloitte and Touche assisted in a ROC retreat in
May 2002 and in redrafting the risk management policies and guidelines. Additional
Phase 3 tasks have been identified resulting from improvements suggested by the ROC,
Utilities and ASD staff, and the City Auditor’s office to continue implementation of the
risk management recommendations and additional funds are needed to perform these
tasks. These tasks include, but are not limited, to the following:
¯ Continued support of ROC activities (finalizing the policy and guidelines,
developing an organizational structure and functional review to align with roles
and responsibilities of designated staff);
¯Education (training and/or tutorials for City Councill City Manager, and City
Auditor and operational training for ROC and other City staff);
¯Response to audit report(analysis and context for the materiality and consistency
with industry practices of the City Auditor’s recommendations);
¯Control documentation (development of detailed risk management and transacting
procedures); and
¯Middle Office implementation (assist in the development of the middle office -
risk management - function as this function is recommended to be under the
supervision of the Director of ASD).
As a result of working with the City for over three years, Deloitte and Touche has gained
a thorough understanding of CPAU’s gas and electric procurement and hedging
operations and the relationship and dynamics between Utilities and other City
departments. This makes Deloitte and Touche uniquely qualified in assisting the City in
carrying out its risk management objectives. Deloitte and Touche has demonstrated its
CMR:285:02 Page 3 of 5
ability to provide valuable and objective advice and services and to work cooperatively
and productively with many departments and divisions within the City.
RESOURCE IMPACT
As of June 10, approximately $18,000 remains in budgeted FY 01-02 funds for this
contract. The estimated cost to complete the additional identified Phase 3 tasks is shown
in the table below.
Activity
ROC support
Education
Audit Response
Control Documentation
Middle Office Implementation
TOTAL (not including expenses)
Estimated
Professional
Costs
$56,OOO
$42,O00
$14,000
$33,600
$175,600
$321,200
An additional $300,000 is requested for these additional activities from the F¥ 01-02
budget. There are sufficient funds in the gas and electric fund budgets for FY 01-02 and
no budget increase is required. "
City staff is currently developing a formal "middle office" function (risk oversight and
control) as per consultant and City Auditor’s recommendations. A comprehensive
proposal is being developed to address all those recommendations. Preliminarily, the
proposal will include a recommendation to create a newly defined ,’Risk Manager"
position. The estimated additional costs above might be substantially reduced (by as
much as 50%) depending on the speed with which the City can establish and fill this
position. The envisioned Risk Manager would assume many of the interim functions
which City staff has requested assistance from Deloitte and Touche. Staff’s
c.omPrehensive proposal will address any decreased funding for Deloitte and Touche that
can be accommodated.
CMR:285:02 Page 4 of 5
POLICY IMPLICATIONS
This recommendation is consistent with the Council approved Utilities Strategic Plan
Strategy 2: preserve a supply cost advantage compared to the market price.
ENVIRONMENTAL REVIEW
These services do not constitute a project for the purposes of the California
Environmental Quality Act
ATTACHMENT
A. Amendment No. 2 To.Agreement No. C9115650 Between the City of Palo Alto
and Deloitte & Touche LLP
B.Fee Schedule for Phase 3 Extension (Amendment 2 to Agreement No. C9115650
between City of Palo Alto and Deloitte and Touche LLP)
PREPARED BY:
DEPARTMENT HEAD:
CITy MANAGER APPROVAL:
/- ~-L3 ¯ -
JANE RATCHYE
Se3aior Resource Planner
EMIL~
Assistant City Manager
CMR:285:02 Page 5 of 5
AMENDMENT NO. TWO TO AGREEMENT NO. C9115650
BETWEEN THE CITY OF PALO ALTO AND
DELOITTE & TOUCHE LLP
This Amendment No. Two to Agreement No. C9115650
~("Agreement") is entered into , 2002, by and
betweenthe CITY OF PALO ALTO ("CITY"), and DELOITTE & TOUCHE LLP,
("CONTRACTOR") a Delaware limited liability partnership located at
1000 Wilshire Blvd., Suite 1500, Los Angeles, CA 90017.
RECITALS:
WHEREAS," the Agreement was entered into between the
parties for the provision of risk management consulting services;
and
WHEREAS, the parties wish to amend the Agreement;
NOW, THEREFORE, in consideration of the covenants, terms,
conditions, and provisions of this Amendment, .the parties agree:
SECTION i. Section 4 entitled "COMPENSATION" is hereby
amended to read as follows:
"4.1 In consideration of the full
performance of the Services by CONTRACTOR,
CITY will pay CONTRACTOR a total sum not to
exceed Seven Hundred Forty Thousand Dollars
($740,000) ~aya~le within thirty (30) days of
submission by CONTRACTOR of its itemized
billings, in triplicate, in accordance with
o~the following fee and expense schedule set
forth in Exhibit "B".
SECTION 2. The following exhibit-to the Agreement is
hereby amended to read as set forth in the attachment to this
Amendment, which is incorporated in full by this reference:
a. Exhibit "B" entitled "Rate Schedule"
SECTION 3. Except as herein modified, all other
provisions of the Agreement, including any exhibits and subsequent
amendments thereto, shall remain in full force and effect.
020613 Ih 0072179
1
ZN WITNESS WHEREOF, the parties have by their duly
authorized representativeH executed .this Amendment on the date
first above written.
ATTEST:CITY OF PALO ALTO
City Clerk
APPROVEDAS TO FORM:
Senior Asst. City Attorney
APPROVED:
Assistant Ci~yMamager
Mayor
DRLOITTE h TOUCHE <LLP
Name: ’ ~.
Title:
Director 0f Administ~ativ~
Services
TaxpayerI.D. No. 12-3891517
Director of Utilities
Insurance Revie~
At t~ch~ent :
EXHIBIT "B" :RATE SCHEDULE
2
STATE OF
COUNTY OF
CERTIFICATE OF ACKNOWLEDGMENT
(Civil Code § 1189)
)
)
)
On , 2002 before me, the undersigned,
a notary public in and for said County, personally appeared
personally known to me (or proved to me on the basis of
satisfactory evidence) to be-the person(s) whose name(s) is/are
subscribed to the within instrument, and acknowledged to me that
he/she/they executed the same in his/her/their authorized
capacity(ies), and that by his/her/their signature(s) on the
instrument the person(s), or the entity upon behalf of which ’the
person~(s) acted, executed the instrument.
WITNESS my hand and official seal.
Signature of Notary Public
020613 lh 0072179
Attachment B
Exhibit B: Fee Schedule for Phase 3 Extension (Amendment 2 to Agreement No.
C9115650 between City of Palo Alto and Deloitte and Touche LLP)
The following fees are for work to be performed in Phase 3 under the extension of the contract between
CPAU and Deloitte and Touche dated March 16, 1999. The fees for Phase 3 tasks are estimated
between $200,000 - $425,000, plus out-of-pocket expenses, subject to the overall engagement fee and
expense limitations per the contract. The following are the hourly rates for Phase 3 tasks:
Partner
Senior Manager
Manager
Staff
Hourly R~e
$430
$350
$310
$200
The hourly rates reflect a discount of approximately 30% from CONSULTANT’s standard hourly rate
schedule, and are subject to change as CONSULTANT,s standard rate schedule changes. Professional
fees for the tasks to be completed in Phase 3 are estimated as follows:
Task 1A
Energy Risk Management Program Assessment - Annual Review
Professional
Fee Estimate
$70,000
Task 1B
Energy Risk Management Program Assessment - Mid Year Review $35,000
Task 2
$56,000
General Energy Risk Management Project Tasks ’
Continued support of ROC activities (Finalizing Risk Management Policies and
Guidelines, developing an organizational structure, refining transaction
authorization matrix, moderating, developing agenda, and preparing summary
report for ROC retreat)
Education (high level, strategic, and operational training for Finance
Committee, City Council, City Manager, Auditor’s Office, ASD, and the ROC)
Audit Response (provide support in ensun.’ng the CPAU response to the City
Auditor’s report is consistent with industry practices)
Control Documentation (assist in the front, middle, and back office procedures)
Middle Office Implementation (develop skills matrix for front and middle.
office staff, data input, security and verification guidelines, prototype risk
management reports, and strategy and schedule for assumption of Risk Manager
position)
$42,000
$14,000
Total $426,200
$33,600
$175,600
Attachment B
CONSULTANT will endeavor to keep out-of-pocket expenses to a reasonable level by scheduling
travel for on-site visits in a prudent manner and performing work off-site to the extent possible. Out-
of-pocket expenses are additional to the amounts above and are expected to be approximately 12-15%
of total professional fees. This contract maximum not-to-exceed amount is $740,000. No work will be
done in Phase 3 until a detailed scope of work is completed and CONSULTANT receives CPAU’s
written authorization.
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