Discussion on Elements for Inclusion in a Request for Proposal (RFP) for an Electric Valuation Study (Discussion and Action Item) (Continued from the March 19, 2004 Meeting).
Gloria L. Young, Executive Officer stated that the panel discussion that the LAFCo had at the March 19 meeting about the proposed elements for inclusion in a RFP was informative. If LAFCo chooses to move ahead with the RFP, she recommended that the Commission take those comments into account. Both Mr. Orchard and Mr. Smeloff agreed that experts would be needed to (1) scope out the RFP and the evaluation criteria and (2) examine the RFP’s that are received from consultants. It was recommended that a Subcommittee of the LAFCo be established to be involved in the process.
A presentation was made regarding the outline of elements for the RFP: Valuation of PG&E’s Facilities regarding Acquisition, Transmission and Distribution which is available at the Clerk of the Board’s Office, City Hall, Room 244 for public review and is discussed in the following paragraphs.
Ms. Young recommended that the respondents to the RFP receive background documents referenced in the RFP that would include the Energy Services Study, AB 117 Study, Electric Financial Pre-feasibility Study, and the City’s Electric Resources Plan. The LAFCo Commissioners have received copies of RFP’s for the Sacramento Municipal Utility District, North Carolina and Palm Springs in addition to The Economics of Electric System Municipalization prepared by the Association of Bay Area Governments (ABAG) that had specific information about San Francisco for their review. The elements of the proposed RFP take those reports into account.
Consultant services would be needed in the following areas: engineering and technical and financial and legal. The LAFCo could employ current legal counsel or consult or contract with other legal consultants if the Commission finds necessary. The scope of work was reviewed by Ed Smeloff, SFPUC, LAFCo’s legal counsel, Nancy Miller, and a member of the staff from American Public Power Association (APPA).
The phases of the project should include (1) facilities acquisition including severance cost; (2) forwarding ongoing operations and maintenance costs; (3) capital plan for transmission and distribution system upgrades (e.g. under-grounding); (4) energy supply acquisition; (5) evaluation of stranded costs/exit fees; (6) economic analysis by rate class and cost of service; and (7) legal strategy/cost. In a meeting held with Commissioner Schmeltzer this morning, she was adamant that the team of experts should definitely have engineering, technical and financial experience.
Alternate Commissioner Fellman asked if there would a separation between the transmission and distribution system or if it would be a total analysis.
Ms. Young stated that the Commission would need to make that determination. Mr. Smeloff submitted comments about this subject that Ms. Young will discuss later in the presentation. In reference to acquisition, as a follow-up to the pre-feasibility determination that R. W. Beck completed, this would add to it by completing the identification of all of the facilities to be appraised, included, but not limited to, the substations, poles and vaults. A detailed appraisal of the net book valuation, original cost minus depreciation including replacement costs new less depreciation and comparable sales of other similar systems. In addition, the capitalized net income would be studied.
If the scope of work included transmission, a consideration of the optimal configuration or reconfiguration of the facilities would be required. If the study looks at the value of the high voltage transmission system, it should include all of the assets north of the Martin substation. It should identify operational and maintenance costs; debt service costs; severance costs including what costs would be paid to PG&E for disrupting their system; exit fees and interconnection costs with regard to the Independent System Operators.
Alternate Commissioner Fellman asked if the study of the appraisal of the net book value (original cost minus depreciation) would provide a preliminary cost assessment or one that you could take to the bank that could be used for regulatory or legal purposes.
Ms. Young stated that would be a decision for the Commission, but she would hope it would be the cost that you would take to the bank.
Alternate Commissioner Fellman asked if the cost associated with the Independent System Operator would be the cost of the City and County of San Francisco establishing new interconnections.
Ms. Young stated that was correct.
Alternate Commissioner Fellman asked to explain the severance costs that would be paid to PG&E for disrupting their system.
Ms. Young stated those costs have not all been identified and would have to be defined. A number of stranded costs would have to be considered that have not been identified at this stage because this is just an overview of the scope of work. Experts would be solicited to write the RFP.
Commissioner Ammiano asked if the work would be pro bono.
Ms. Young stated that she always looks at pro bono work first.
Alternate Commissioner Fellman asked if the severance costs would be more than what is considered to be a stranded cost under the California Public Utilities Commission definition.
Ms. Young stated that was true.
Ms. Young stated that on transmission, elements such as valuation of the transmission assets, condemnation issues, potential compensation to PG&E and consideration of start up costs would be considered. On distribution, valuation of PG&E’s system regarding distribution, configuration, upgrades and compliance with operating standards would be considered.
A note from Mr. Smeloff was read asking the Commission to take into consideration the following:
To move into the business of providing electricity did not require acquiring the transmission system, and in addition, it would be useful to have the costs of acquisition of the distribution system separate from the cost of acquiring the combined transmission and distribution system.
Alternate Commissioner Fellman stated that when the Commission is looking at the implementation of Community Choice aggregation, the City and County can proceed without the acquisition. They are on separate tracks.
Ms. Young stated that is what she understood from Mr. Smeloff. Economic and financial analysis is to (1) analyze the customer-mixed profiles load profiles; (2) estimate load growth for a set period of years; and (3) to project revenues by rate class current and future rate customer services as well as rate schedules, including but not limited to, residential ratepayer class, small commercial, etc.
Alternate Commissioner Fellman stated that the CPUC voted out the PG&E rate case yesterday. LAFCo will have a better idea what the cost allocations will be moving forward.
Ms. Young stated that on the legal and stranded cost issues, the following elements would be needed (1) availability of records and data—disclaimer and confidentiality provisions; (that was in each of the example RFP’s distributed to the Commission); (2) condemnation, referendum, and municipal law implications (Ms. Miller had done part of the work previously); (3) ongoing steps during condemnation; and (4) options for financing.
R. W. Beck’s estimate of the cost was between $500,000 and $600,000. One of the elements that was mentioned at the March 19 meeting was to look at evaluating percentage wise what would be the required elements of an RFP. Mr. Orchard indicated that ten percent would be towards the equal opportunity, which is how they looked at their SMUD RFP. Ten percent was toward companies’ attributes and services; thirty percent was team approach; thirty percent was methodology and twenty percent was price and compliance with commercial terms. She suggested that the Commission consider these elements if they chose to move forward.
When this issue was first looked at a couple of months ago, Ms. Young indicated that this Commission would go out for an RFP. Mr. Bell mentioned that it would be necessary for him to subcontract with others at the time he was applying for the SMUD, and they did not have the resources to complete the assignment on their own. Since the LAFCo had one contract with R. W. Beck that had been amended several times, it was recommended that an RFP be issued if the Commission is interested in moving forward.
The LAFCo budget currently has $185,000 still remaining for this fiscal year. There are some outstanding invoices that would need to be paid. She would suspect that there would be $100,000 that could be carried over and encumbered in the next fiscal year for this endeavor if the Commission chose to move forward. A couple of months ago, a study timeline was considered for this project that it occur over the second half of the next fiscal year into the future fiscal year so that you would have it combined with those two years in order to pay for the entire study. LAFCo could move forward in encumbering those funds and she would need to work with the Controller’s and Mayor’s Offices to make that happen. In summary, you would have a $100,000 towards your next year’s budget and then funds from 2004-2005. If you started this project next year, you could carry it over into 2005-2006 without a gap. Ms. Young asked how the Commission would like her to proceed with the next steps.
Alternate Commissioner Fellman asked where the Commission is with reductions in our next fiscal year budget.
Ms. Young stated that the next fiscal year budget would be $370,000 and if we encumbered $100,000 that would be $470,000. One of the suggestions made was not to meet and not to have the use of the attorneys except when necessary. If in fact we don’t have meetings in the next couple of months, and we only meet periodically for studies and hearings that you would like to have happen, then we could save those resources. Staff could work on the RFP, pull together the necessary experts to start drafting and come back to you with something that you could look at later this year in adopting the RFP in the next calendar year.
Alternate Commissioner Fellman asked where the RFP experts would be coming from with respect to the RFP preparation and review.
Ms. Young stated that she would be working with PUC staff and members of the American Public Power Association. There are a number of cities that have staff and experts that the LAFCo could take advantage of. There are a number of experts that have been participated in our public hearings that either might be willing to participate in scoping the RFP, sitting as an expert, or providing you with names and resources. She would work with legal counsel and if the Commission saw fit, a Subcommittee.
Alternate Commissioner Fellman asked if this would be something we would not have to pay for or would there be a budget allocation for.
Ms. Young stated that she suspects that it would not have to be paid for and that the LAFCo did the same thing with the Energy Services Study. We were able to get experts to scope it out. We worked with our then legal counsel, Donald Maynor. Ms. Young recommended eliciting support from Mr. Maynor either to participate or to recommend experts on the subject.
Alternate Commissioner Fellman stated she would share her professional expertise.
Chairperson Commissioner Gonzalez stated that he does not think the LAFCo should proceed with the idea that this endeavor is something that has to wait until next year. LAFCo should continue to have meetings if there are reasons to have meetings. Informational hearings may allow us not to expend attorney dollars. The costs savings are not enough to shut down and wait for more money to come in. We could move forward and contract with someone who would understand that there may be payment over time or work out some arrangement taking into account monies coming in a later fiscal year. Anyone that has worked with a governmental agency would understand that.
Commissioner Ammiano agreed. It is never a good idea to interrupt momentum. We do have a transition with the General Manager of the PUC, and it is in our best interests to discuss the attitude towards public power with the new head of the SFPUC, Susan Leal. He recommended hearing from Ms. Leal and not only Mr. Smeloff who reports to Ms. Leal. In addition, there had been a discussion around LAFCo’s relationship with the Clerk of the Board’s Office in the Tuesday budget submittal and asked Ms. Young if she has heard anything surrounding the discussion of removing LAFCo from underneath the Clerk of the Board.
Ms. Young stated that the Clerk of the Board’s budget has been reviewed by the Budget Committee as of October of last year. The Board’s committee reviewed the Clerk of the Board’s budget, and approval from the Board’s Budget committee was received in February. That was at the same time that this LAFCo approved its budget with respect to LAFCo continuing its work. Whether it resides in the Clerk of the Board’s organization is one that she thinks is a policy decision and one that this Commission and the Board of Supervisors need to make. She stated that she did not ask for LAFCo to be under the Clerk of the Board’s organization. It was the direction of the then President of the Board, Supervisor Ammiano that she take on this responsibility. She has no ties if this organization was to move and it would operate wherever you put it, recognizing that the Commission has the ability to oversee it as a state agency. The City has no authority once you approve the budget unless you choose to make some other decision. That is strictly between you as LAFCo members and you as Board of Supervisors. At any time, the Commission can make the decision to shift, close, or continue with LAFCo’s activities.
Chairperson Commissioner Gonzalez asked for Ms. Young’s recommendations in terms of finalizing an RFP.
Ms. Young stated that it would take a couple of months to pull together experts to create an RFP that could be brought back to you in draft form. It would take time to get lists from you on experts that you may know that might be of value to this process as well as soliciting others that she knows such as contacts from the APPA. That process can be started and a draft could be brought back to the Commission by August.
Alternate Commissioner Fellman stated that we probably have the opposite case where we are concerned that we might be spending money too fast given that we won’t see a work plan until August. We may be in a situation where we don’t spend the money until the end of the year. She suggested putting on the agenda for consideration an item encumbering the funds from this fiscal year’s budget.
Ms. Young stated that as the Executive Officer she has the authority to work with the Chair on budgetary issues.
Alternate Commissioner Fellman stated that the LAFCo then definitely set aside those fiscal year funds in order to start this process.
Public Comment
Mr. Howard Ash stated that if we continue down the path of electric system valuation, he would like us to avoid a significant mistake that was made under the last contract with R. W. Beck and the Electric Financial Pre-Feasibility Study. Under that contract, we got the report with lots of words, but the critical piece of the analysis was the financial model that purported to quantify the benefits. Unfortunately, the only part of this financial model we got was a printout of the numbers in the Appendix. R. W. Beck retained possession and ownership of the model, the Excel spreadsheet with all the formulas and assumptions. Somehow in the process of contracting in that study, we did not get ownership of the model even though we paid for the labor that created it. Without the model, the consultants’ work cannot be checked or alternative valuation scenarios cannot be run using different assumptions or any new information that may come to us could not be incorporated. If we want to do anything more with that model and that study, we have to go back to the consultants presumably at an additional cost. Moreover, the calculations remain a black box for those of us who really want to understand them.
Learning from our mistakes in any future contracts such as for the valuation study we are discussing today, we should explicitly require that any work product of any kind specifically include electronic spreadsheets or any other quantitative models with all the formulas intact be property of the LAFCo and the City and County. In the presentation materials, there was an economic and financial analysis. He would hope that this would pertain to that. In summary, if we pay for the work, we are entitled to all the fruits of the work. Having the actual spreadsheets would allow us to further refine the work of the contractor and effectively leverage our investment. If the contractor is unwilling to abide by this, let’s find another contractor.
Chairperson Commissioner Gonzalez asked Ms. Young to take Mr. Ash’s comments into account and knows what Mr. Ash is referring to. That has been an ongoing struggle with many of the contracts that the City enters into. He shares Mr. Ash’s opinion on this. We have seen it even with contracts with the Assessor’s Office and some of the intellectual property that gets generated as a result of our contracting someone to do certain work for us, and yet there is always a question who retains the ownership. With R. W. Beck, if we wanted them to test those numbers with different assumptions, they would do that. We have built a good relationship with them and they have been willing and made many overtures to try to work with us on costs and other matters.