HomeMy WebLinkAbout2002-10-21 City Council (18)City of Palo Alto
Manager’s Repor
TO:HONORABLE CITY COUNCIL
FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICES
DATE:"
SUBJECT:
OCTOBER 21, 2002 CMR: 413:02
IMPLEMENT UTILITY RISK MANAGEMENT SUPPORT
RECOMMENDATION
To implement a Utility Risk Management Program, staff recommends that:
Council adopt the attached Budget Amendment Ordinance and Resolution creating
a Manager, Energy Risk position in the City’s Table of Organization and
Employee Classification System.
2.Council direct staff to simultaneously pursue recruitment of a staff Manager,
Energy Risk and contractual risk management services.
BACKGROUND .,
With deregulation of California’s energy markets in 1996, the City of Palo Alto began to
develop an energy risk management program. Energy risk management can be defined as
reducing the possibility of higher energy costs and higher rates to customers by assessing
and addressing such issues as:
Price Risk - energy prices will dramatically rise or fall resulting in higher costs
and rates
Credit Risk - energy suppliers that experience financial problemg may not be able
to fulfill their supply commitments, exposing the City to market forces and
potentially higher costs
Administrative risk - a staff member completes an energy transaction outside
established procedures that impacts the value of the Cit~?s energy portfolio
The goals of energy risk management activities are to balance the business objectives of
(1) providing stable gas and electric rates to end users, (2) preserving a supply cost
advantage through obtaining the best available price, and (3) managing business
processes to allow CPAU to work efficiently and cost effectively. To achieve these
CMR:413:02 Page 1 of 6
processes to allow CPAU to work efficiently and cost effectively. To achieve these
objectives, the City’s risk management program has undekg0ne considerable evolution
since it began in 1997.
A Risk Oversight Committee (ROC) was formed in 1998 by the City Manager. The
Committee consists of the Assistant City Manager, the Directors of Utilities and
Administrative Services, and the City Attorney’s and Auditor’s Offices acting as
advisors. The ROC, which meets twice per month, is responsible for developing,
approving and recommending the policies and guidelines driving the risk management
function.
To assist, with this effort, the firm of Deloitte and Touche (D&T) was hired in 1999 to
provide the expertise and experience necessary to establish an effective risk management
program. While the City had interim risk management policies and staff performing risk
functions in 1999, D&T was charged to review and to recommend industry best practices
for the City’s risk control infrastructure, policies and procedures, and credit evaluation
techniques. One of D&T’s chief~recommendations was to separate or segregate risk
management duties into three independent functions: a front, middle and back office.
The primary goal of this recommendationis to create a system of checks and balances
whereby staff who are executing transactions with supp!~ers (front office) are being
monitored (middle office) for conformance with City pol~icies, procedures, and credit
guidelines so as to prevent the City from being exposed to undue trading risks. The back
office would track and process transactions, account for :and track bills, and issue
payments among other duties. This recommendation .was~reinforced by the City
Auditor’s recent "Assessment of Utility Risk Management Procedures" (Assessment),
which was presented to the Utilities Advisory Commission (UAC) on July 10, 2002 and
the Finance Committee (FC) on July 16, 2002.
In this Assessment, recommendation 13 stated "the ROC...should segregate and clearly
detail the roles, responsibilities and .authorities for the front, middle, and back office
personnel. Recommendation 14 affirmed that "the Cityl should go forward with
establishing a formal middle office function. The middle office,, once established, should
report to the Director of Administrative Services." The Auditor further stated, "City of
Palo Alto Utilities (CPAU) and Administrative Services Department (ASD)
representatives plan to propose creation of a utilities risk management position in ASD to
coordinate oversight and reporting functions. We support this recommendation." The
City had additional recommendations (18 and 19) that outlined the responsibilities of the
middle office. The FC unanimously approved all of the city Auditor’s recommendations
and staff has developed a strategy to respond to those on the Middle Office.
CMR:413:02 Page 2 of 6
DISCUSSION
A linchpin to the success of a Risk Management Program is.to have a risk manager who
will perform the middle office function. This person’s duties~include, for example:
Evaluating financial impact and risk exposure of new transactions
Monitoring trading activities to ensure compliance with policies and
procedures
Evaluating and managing credit risk exposure: with current and potential
counter parties
Monitoring and reporting on market conditions.relative to risk management
and risks for energy portfolios and individuai’t?ansactions
Ensuring appropriate data management, validation and testing within risk
management system.
The knowledge, skills and experience required of this position are substantial. The
person must have energy trading ~ind/or financial risk management expertise and. have
excellent financial, analytical, and economic skills. The risk manager must be proficient
in statistical analysis, modeling and forecasting and be able to assimilate and
conceptualize data quickly. In addition, solid interpersonal and communication skills are
required. The risk manager must exercise good judgment, be’g:l(ader, and be able to deal
with uncertainty and potential disagreements. The risk manager will act as staff to the
ROC and will be expected to make presentations to the UAC and Council.
Because of the considerable skills and expertise required of this position, staff
recommends moving along two alternative paths simultane0usly. These consist of: 1)
explore hiring, a permanent, full-time staff person, and 2):explore hiring a contract risk
manager or contracting with a firm that offers a risk management program and on-site
staffing. The rationale for pursuing two paths is that finding~ and hiring a regular staff
risk manager may be unusually challenging. Since the g0al~is to have this expertise as
soon as possible, staff wants an option in place to hire contractual risk management
services, should the City be unable to hire a staff person.
Staff’s preference is to have an in-house risk manager who is directly responsible to
senior management and becomes an integral part of the City’s culture and environment.
For this strategic position, an employee whose performance is. tied to salary and benefit
incentives is, in staff’s opinion, optimal. Because of upheaval in the energy industry and
the collapse and near collapse of energy companies, there i may be a window of
opportunity to hire a staff risk manager. In a sample of thr(e California cities, public
sector risk manager annual salaries range from $85,000 t0 $125,000. Those in the
private, financial sector can range up to $400,000. ~
CMR:413:02 Page 3 of 6
Staff is realistic, however, about the potential difficulties in recruiting a risk manager. In
addition to a limited pool of individuals who have the required expertise, staff anticipates
obstacles such as: a reluctance of private sector employees .to move to the public sector;
relocation to an area with high housing and other costs; limited opportunities for
advancement; a relatively small and straightforward energy portfolio to manage; and
remuneration based on public sector pay scales. It may be necessary, therefore, to enter
into a contractual relationship with an individual risk manager or with a firm providing
these services. Estimated costs for contractual support range from $235,000 to $260,000
annually.
In order to pursue these paths simultaneously, staff recommends reclassifying a 1.0 FTE
Utilities position to a 1.0 FTE Risk Manager position and transferring the position from
the Electric, Gas and Electric Funds to the Administrative Services Department in the
General Fund. This transfer follows the recommendation of the City Auditor to clearly
segregate the functions of the front and middle offices and t0 have an effective system of
checks and balances. The Utilities department, however, will continue to fund the risk
manager position. The attached.Budget Amendment Ordinance (BAO) changes the
2002-03 Adopted Budget and the City’s Table of Organizati~n’to reflect this change. In
addition, Council must adopt the attached resolution that ~adds the new position to the
City’s employee classification system. With Council’s:,.adoption of the BAO and
resolution, staff can begin the recruitment process.
At the same time staff is recruiting a staff risk manager, it will send out a Request For
Proposal for contractual risk management services. A D&T’~staff.member currently is
assisting staff and Human Resources in identifying individuals and firms that may offer
the desired services. Should the search for a staff risk manager: be unsuccessful, staff will
return to Council with a report on its efforts to obtain contractual services.
RESOURCE IMPACT
The resource, impact of implementing the risk management program depends on the
outcome of the search. Estimates for each option are as follows:
Option 1: Hiring a staff Risk Manager
Salary and benefits for this position are estimated at around $127,000 and $46,000,
respectively. Since an existing position will be reclassified to the new position and is
incorporated in the budget, the incremental cost to the City is approximately $41,000.
Option 2: Contracting with a Risk Mana.~er or a Risk Management Company
Estimated costs range from $235,000 to $260,000. ,~
POLICY IMPLICATIONS
As stated, the City Auditor, the ROC, and Deloitte and Touche recommend procuring risk
management services as a means to strengthening the City’s current program. Hiring a
CMR:413:02 Page 4 of 6
Risk Manager is consistent with the final Risk Management Policies recommended by the
UAC and the FC and to be reviewed by the Council on October 21, 2002.
The energy risk program also is consistent with the Council approved Utilities Strategic
Plan and Key Strategies:
Strategy 2: "Preserve a supply cost advantage compared to the market price" and a
tactic supporting that strategy is "Manage exposure to en,ergy commodity price risk."
Strategy 3" "Streamline and manage business processes to allow CPAU to work
’ efficiently and cost-effectively."
NEXT STEPS
Once Council approves the Energy Risk Management Policies, the ROC will finalize and
approve Energy Risk Management Guidelines that support and implement the Policies.
The next step is for the front, middle and back office to develop detailed procedures,
which will guide the day-to-day activities of each office in conformance with approved
City risk management policies and guidelines. The risk manager (staff person or by
contract) will be a key resource in developing final procedures for the middle office.
TIMELINE
October Council approves Risk Management Policies and directs staff
to pursue risk management services
November/December Staff conducts search for a risk manager
January/February Risk manager services are procured
ENVIRONMENTAL ASSESSMENT
Approval of this position change does not constitute a project under the California
Environmental Quality Act and, therefore, is exempt from the environmental assessment
requirement.
ATTACHMENTS
Attachment 1:Ordinance of the Council of the City of Palo Alto Amending the
Budget for the Fiscal Year 2002-03 Adding 1.0 Full-Time
Equivalent Manager, Engergy Risk Position in the Administrative
Services Department for the Utilities Risk Management Program and
Dropping 1.0 Full-Time Equivalent Manager, Competitive
Assessment in the Utilities Department :. ~ "
CMR:413:02 Page 5 of 6
Attachment 2:Resolution of the Council of the City Of Palo Alto Amending the
Compensation Plan for Management and Confidential Personnel and
Council Appointed Officers Adopted by Resolution No. to
Delete the Classification of Manager, Competitive Assessment, and
Add the Classification of Manager, Energy Risk
PREPARED BY:
~i~ut~y~D~ ~Administrative Services
DEPARTMENT HEAD APPROVAL: Q___~~~, . _
CARL YEATS//
Director, Adr~nistrative Services
DEPARTMENT HEAD APPROVAL:
CITY MANAGER APPROVAL:
FRANK BENEST
City Manager
CMR:413:02 Page 6 of 6
ATTACHMENT 1
ORDINANCE NO..
ORDINANCE OF THE COUNCIL OF THE CITY OF PALO ALTO
AMENDING THE BUDGET FOR THE FISCAL YEAR 2002-03 ADDING
1.0 FULL-TIME EQUIVALENT MANAGER, ENERGY RISK POSITION IN
THE ADMINISTRATIVE SERVICES DEPARTMENT FOR THE UTILITIES
RISK MANAGEMENT PROGRAM AND DROPPING 1.0 FULL-TIME
EQUIVALENT MANAGER,COMPETITIVE ASSESSMENT IN THE
UTILITIES DEPARTMENT
WHEREAS, pursuant to the provisions of Section 12 of Article
III of the Charter of the City of Palo Alto, the Council on June 17,
2002 did adopt a budget for fiscal year 2002-03; and
WHEREAS, the Utilities Department has developed a risk
management program for its energy supply portfolio operations; and
WHEREAS, the Risk Management Program requires the creation of a
Middle Office function and the Consultant (Delloitte & Touche) and
the City Auditor (City Auditor Report 02-R-13, July 2002) recommend
that the function be under the direction of the Administrative
Services Department Director instead of the Utilities Department
Director; and
WHEREAS, to ensure the success of the Risk Management Program,
there is a need to add a full-time Manager, Energy Risk to oversee
the Middle Office function in the Administrative Services
Department; and
WHEREAS, partial funding for this position will be provided
from the 2002-03 Adopted Utilities Department’s operating budget by
dropping a full-time Manager, Competitive Assessment and effecting
an operating transfer to the General Fund to fund this position; and
WHEREAS, an additional appropriation of funds from the Gas
Supply and Electric Supply Rate Stabilization Reserve will be
partially offset by savings in the Gas Distribution, Electric
DistributiOn and Water Rate Stabilization Reserve resulting in
additional future year ongoing expense of approximately $40,889; and
WHEREAS, six months of funding for this additional position
must be included as a part of the 2002-03 Adjusted. Budget and will
be incorporated as an additional component to the General Fund cost
plan reimbursement from the Utilities DePartment;,and
WHEREAS, City Council authorization is needed to amend the
Table of Organization in the 2002-03 budget as hereinafter set
forth.
NOW, THEREFORE, the Counci! of the City of Palo Alto does
ORDAIN as follows:
SECTION 1. The Table of Organization as amended to reflect
changes shown in the attached Exhibit A is hereby approved.
SECTION 2. The sum of Eighty Six Thousand Three Hundred
($86,300) is hereby appropriated to the Administrative Services
Department to hire and provide benefits for one full-time Manager,
Energy Risk, and is offset by reimbursement revenue from the
Utilities Department.
SECTION 3. This transaction has no impact on the General Fund
Budget Stabilization Reserve.
SECTION 4. As specified in Section 2.28.080(b) of the Palo Alto
Municipal Code, a majority vote of the City Council is required to
adopt this ordinance.
SECTION 5. The Council of the City of Palo Alto hereby finds
that this is not a.project under the California Environmental
Quality Act and, therefore, no environmental impact assessment is
necessary.
SECTION 6. As provided in Section 2.04.350 of the Palo Alto
Municipal Code, this ordinance shall become effective upon adoption.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSTENTIONS:
ABSENT:
ATTEST:APPROVED:
City Clerk Mayor
APPROVED AS TO FORM:
Senior Asst. City Attorney City Manager
Director of
Services
Administrative
Director of Utilities
Exhibit A
2002-03 TABLE OF ORGANIZAT ON AS AMENDED
CONTINUED
Manager, Information Technology
Manager, Accounting
Manager, Budget
Manager, Purchasin~ & Contract
Administration
Manager, Real Property
Manager, Investments, Debts & Projects
2000-01 2001-02 2002-03
Actual Adjusted Adopted
Budget Budget Budget
3.00 3.00 3.00
1.00 1.00 1.00
1.00 1.00 1.00
0.95 0.95 0.95
1.00 1.00 1.00
1.00 1.00 1.00
2002-03
BAO
Changes
2002-03
Adjusted
Budget
3.00
1.00
1.00
0.95
1.00
1.00
Office Specialist (25)
Payroll Analyst
Program Assistant (24)
Senior Technologist
Senior Accountant
Senior Buyer
Senior Financial Analyst (24)
Staff Accountant (13)
Staff Secretary
Storekeeper (23)
Storekeeper-Lead (23)
Supervisor Revenue Collections (24)
Technologist
Warehouse Supervisor
0.00 0.00 1.00
2.00 2.00 2.00
1.00 1.00 0.00
17.00 21.00 21.00
4.00 4.00 4.00
1.00 1.00 1.00
9.00 9.00 10.00
3.00 3.00 4.00
2.00 2.00 2.00
4.00 3.00 4.00
0.00 1.00 0.00
1.00 1.00 0.00
1.00 2.00 2.00
1.00 1.00 1.00
2.00
0.00
21.00
4.00
1.00
10.00
3.00
2.00
3.00
1.00
.0.00
2.00
1.00
Community Services Department
Administrative Assistant
Administrator, Human Services
Administrator Special Events
Building Serviceperson
Building Serviceperson-Lead
Coordinator, Child Care
Coordinator, Library Circulation
1.00 1.00 1.00
1.00 0.00 0.00
1.00 ’ 1.00 1.00
4.00 4.00 4.00
2.00 2.00 2.00
1.00 1.00 1.00
1.00 1.00 1.00
1.00
0.00
1.00
4.00
2.00
1.00
1.00
2002-03 Budget Cit3, of Palo Alto 287
Exhibit A
2002-03 TABLE OF ORGANiZATiON AS AMENDED
CONTINUED
2000-01
Actual
Budget
Business Analyst 1.00
Cathodic Technician 1.00 1.00
Cement Finisher 1.00 1.00
Chief Electric Underground Inspector (6)1.00 0.00
Chief Inspector, WGW (6)1.00 0.00
Coordinator, Utility Projects (1)4.00 4.00
Customer Service Representative 4.00 5.00
Customer Service Specialist 3.00 3.00
Desktop Technician 1.00 0.00
Director, Utilities 1.00 1.00
Electrical Assistant I 5.00 5.00
Electric Project Engineer 0.00 3.00
Electric Underground Inspector 2.00 2.00
Electric Utility Compliance Technician 3.00 2.00
Electric Utility Compliance Technician -
Lead 0.00 1.00
Electrician 14.00 14.00
Electrician-Lead 6.00 7.00
Engineer 6.00 4.00
Engineering Technician III 6.00 2.00
Engineering Manager, Electric 1.00 1.00
Engineering Manager, WGW 1.00 1.00
Equipment Operator 2.00 2.00
Executive Secretary (4)2.00 2.00
Gas System Technician 3.00 3.00
Heavy Equipment Operator 9.00 9.00
Inspector, Field Services 3.00 4.00
Instrumentation Electrician 0.00 0.00
Lineperson/Cable Splicer 11.00 10.00
Lineperson/Cable Splicer-Lead 4.00 5.00
Maintenance Mechanic 2.00 2.00
Manager Utilities Telecommunication 1.00 1.00
2001-02 2002-03 2002-03
Adjusted Adopted BAO
Budget Budget Changes
1.00 1.00
1.00
1.00
0.00
0.00
4.00
5.00
3.00
0.00
1.00
5.00
3.00
2.00
2.00
1.00
14.00
7.00
4.00
2.00
1.00
1.00
2.00
1.00
3.00
9.00
4.00
0.00
10.00
5.00
2.00
1.00
2002-03
Adjusted
Budget
1.00-
1.00
1.00
0.00
0.00
3.00
5.00
3.00
0~00
1.00
5100
3.00
2.00
2.00
14.00
7.00
4.00
2.00
1.00
1.00
2.00
1.00
3.00
9.00
4.00
0.00
10.00
5.00
2.00
1.00
Manager, Public Relation 1.00 1.00 1.00 1.00
2002-03 Budget ~City of Palo Alto 299
Exhibit A
2002-03 TABLE OF ORGANIZATION AS AMENDED
CONTINUED
2000-01 2002-03
Actual Adopted
Budget Budget
Utilities Installer/Repairer 15.00 14.00 14.00
Utilities Installerl/Repairer Assistant (2)2.00 2.00 2.00
Utilities InstalleWRepairer-Lead 5.00 6.00 6.00
Utilities Rate Analyst 1.00 1.00 1.00
Utilities System Operator 5.00 5.00 5.00
Utilities Accounting Technician 1.00 1.00 1.00
Utilities Key Account Representative 3.00 3.00 3.00
Utilities Locator 2.00 3.00 3.00
Utilities Market Analyst 2.00 0.00 0.00
Water Transmission Specialist-Lead ........1.00 1.00 1.00
Water Transmission Specialist 2.00 2.00 2.00
Water Transmission Supervisor (1)0.00 0.00 0.00
Water Meter/Cross Connection 2.00 2.00 2.00Technician
2001-02 2002=03
Adjusted BAO
. Budget Changes.
2002-03
Adjusted
Budget
14.00
1.00
6.00
1.00
5.00
1.00
3.00
3.00
O.00
1.00
2.00
1.00
2.00
CPA External Services
Manager, Information Technology *0.00 1.00 1.00
Technologist * (3)0.00 3.00 3.00
Human Resources Assistant- Confidential 0.00 0.00 1.00¯ (5) .... "
1.00
5.00
Footnotes:
These positions are tied to contracts with outside agencies or external revenues. They wil be
eliminated by attrition if funding source is lost. ~
1 Reclassification of 1 FFE Coordinator, Utilities Projects to Water Transmission Supervisor.
2 Add 1.5 Program Assistant, Drop 0.5 Staff Secretary and 1.0 Utility Installer/Repairer Assistant.
3 Addition of 2.0 Technologist to support external service contracts (cost recovery).
4 Adopted-in-concept Removal of 1.0 Executive Secretary due to retirement.
2002-03 Budget City of Palo Alto 301
ATTACHMENT 2
RESOLUTION NO.
RESOLUTION OF THE COUNCIL OF THE CITY OF PALO
ALTO AMENDING THE COMPENSATION PLAN FOR
MANAGEMENT AND CONFIDENTIAL PERSONNEL AND
COUNCIL APPOINTED OFFICERS ADOPTED BY RESOLUTION
NO.TO DELETE THE CLASSIFICATION OF
MANAGER,COMPETITIVE ASSESSMENT,AND ADD THE
CLASSIFICATION OF MANAGER, ENERGY RISK
The Council of zhe City of Palo Alto does RESOLVE as
follows:
SECTION i. Pursuant zo the provisions of Section 12 of
Article III of the Charter of the City of Palo Alto, the
Management Compensation Plan, adopted by Resolution No. , is
hereby amended by deleting the classification of Manager,
Competitive Assessment, and adding the classification of
Manager, Energy Risk, as shown in Exhibit "A", attached hereto
and incorporated herein by reference.
SECTION 2. The Director of Administrative Services is
authorized to implement the amended classifications and salary
as sez forth in Section i.
SECTION 3. The Council finds that this is not a project
under the California Environmental Quality Act and, therefore,
no environmental impact assessment is necessary.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
City Clerk
APPROVED AS TO FORM:
Mayor
APPROVED:
Senior Asst. City Attorney City Manager
Director of Administrative
Services
Director of Human Resources
021016 cl 8120285