Proposition 218 – The courts are speaking – listen!
Finally, a way to fight utility cost increases, also known as local government taxes. As the courts take a greater interest in 1996 Proposition 218, changes for utility services (local government taxes) are forecast. Ascending tier pricing, where each additional block of water (utilities) usage costs more, and the Rate Fairness Board (RFB), could be scrapped and the right to issue revenue bonds ceded back to the voters. Such changes will depend on how assertive citizens are in demanding their constitutional rights to vote on local government tax increases, which include utility services.
The Rate Fairness Board is a contradiction in terms. It was never needed...There is no mention of “fairness” in the constitution, just reasonable costs for current services.”
Time to implement Proposition 218
The 1996 Proposition 218 (Jarvis-Gann) is also known as the initiative for the right of citizens to vote on local government tax increases. Proposition 218 created a California Constitutional Amendment. The California Supreme Court in 2006 clarified the definition of local taxes, under Proposition 218, to include water service charges (and, by implication, sewer and refuse collection fees) and related fees that cannot be increased without a vote.
In April 2015 the 4th District Court of Appeals found that the city of San Juan Capistrano’s multiple tier water rates were inconsistent with Proposition 218. Ascending tier rates have long been a staple pricing system used by municipal water systems to ration limited supplies of water. Ascending tier pricing is also an important part of Governor Jerry Brown’s drought-conservation efforts.
The Court ruling did not rule out the use of ascending tier rates. It stated that all water supplies must be based on current production costs. The Court acknowledged that estimating “marginal costs” for rate setting, as prescribed by Proposition 218, would be a daunting task, noting, however, that Proposition 218 is the law and it must be followed.
Proposition 218 does not allow rates to be less or more than actual service costs for current water deliveries. This rules out ascending tiers where part of the water supply is provided at rates below cost, and another part at rates higher than cost to balance revenues and costs. This type of subsidy is not permitted.
Rates must mirror actual costs used to produce current supplies. Exact mirroring may be an impossible task for rate makers tasked with designing and implementing an ascending tier system. The near impossibility of mirroring an ascending tier rate system with actual costs may force utilities to use a one-rate system.
When tier pricing was introduced in San Francisco, much opposition came from lower to middle income folks with large families. These people believed they would quickly use up their tier 1 allocation and be forced to buy a disproportionate amount of water at the higher tier 2 charge, as a function of household size. For these people it is a regressive tax. It is an exacerbated regressive tax on these residents if the “tier-makers” have overestimated tier 2.(3, 4, …)
The Court in the April decision narrowed the allowed costs that may be used in rate making to those service costs directly used to provide current supplies. This also eliminates any crosssubsidization in the rate structure between time periods. This is sometimes called intergenerational transference, a process clearly not allowed under Proposition 218.
Marginal cost pricing – a better way to go
The insistence by the Court on using a marginal cost approach to setting rates is good news for rate payers and overall macro-economic wellbeing. Economists working in the United States and other drought areas, particularly Australia, have concluded that using marginal cost pricing leads to a more efficient use of water resources, and more optimally complements the economy than is found under ascending tier pricing regimes. This, of course, is based on valuing water supplies at a true opportunity (alternatives forsaken) cost.
Prior to 2002 all revenue bonds issued by the SFPUC had to be approved of by the voters. This is clearly in alignment with Proposition 218. San Francisco 2002 Proposition E passed and it stripped these voting rights on the issuance of revenue bonds from the citizens and handed them to the Board of Supervisors.
Revenue bond debt service must be repaid through the rate structure. In 2011 I estimated that the $4.6 billion repayment cost for the Water Supply Improvement Program (WSIP) would increase the cost of each unit (748 gallons) by an additional $2.69. There are plans by the SFPUC to issue up to $15 billion in revenue bonds to fund their overall capital improvement programs (water, wastewater, and power). Proposition P created the Revenue Bond Oversight Committee (RBOC). The RBOC was created to ensure independent oversight over bond issuances and bond expenditures.
The RBOC has been nullified by the SFPUC and other elements of the city administration and is nothing more than a rubber stamp for the SFPUC. Proposition E also stated that only the SFPUC and not the City and County of San Francisco would be responsible for the bond indebtedness of the SFPUC. The illusion of oversight is worse than having no oversight. Fortunately the courts have decided that the state constitution gives us that oversight and financial protection by making it law that all rate (tax) increases must be voted on.
Fortunately for the voters, in 2006, in the Big Horn Decision, the California Supreme Court defined utility services as local taxes and as such subject to the provisions of the California Constitution as added by passage of 1996 Proposition 218. SFPUC bond expenditures do increase utility costs (debt service) and hence local taxes. All revenue bonds issued by the SFPUC are repaid through local-tax increases and therefore, to be consistent with Proposition 218, must be put before the voters to approve or disapprove. San Francisco 2002 Proposition E cannot overcome the mandates of the California Constitution.
The Rate Fairness Board is a contradiction in terms. It was never needed. It must be excised from the body politic. Proposition 218 spoke exactly to what must be considered in making rates. There is no mention of “fairness” in the constitution, just reasonable costs for current services.
Brian Browne was coauthor of 2002 Prop P and former member of the Revenue Bond Oversight Committee it created.
No Bonds Without Real and Independent Oversight
The underprivileged of San Francisco are getting big-time relief, according to Mayor Ed Lee, in the form of $750 million in proposed affordable housing developments. Work is already commenced and well ahead of schedule, as you can see from the workers shown in the picture. It is s most reassuring to see politicians and bureaucrats working hard on “good works” and not the least concerned about their reelection, or subsidizing the financial, consulting, and construction sectors.
The proposed funding will come from $250 million in general obligation bonds and $500 million to be issued by the San Francisco Office of Community Investment and Infrastructure.
An objective system, untarnished by political favoritism, for allocating these proposed housing units must be in place.”
Ever cognizant of Adam Smith’s concern that when people speak of the public good, individuals must concern themselves with their private wellbeing, I believe a thorough monitoring and investigation by a truly independent entity of the financing, development, and allocation of this project must be in place.
To protect the truly needy in our midst, there must be a strict definition of what constitutes an affordable-housing candidate, and what exactly do they mean by affordable housing. An objective system, untarnished by political favoritism, for allocating these proposed housing units must be in place. Criteria such as “need” must be rigorously defined. Applicants from all walks of life, not just politically connected, must have an equal and unbiased chance of owning or renting one of these units. The criteria for distributing units must be in stone well before any voting on this large public expenditure takes place.
Without a firm and legally challengeable definition of an affordable client, what is meant by affordable housing, and an objective and transparent system for awarding these units, a NO vote seems the only option. The politicians, with their history of cronyism, make legally enforceable safeguards a must. They only have their own actions to thank for people not granting them this huge amount of money with the usual near blank check.
The failed history of oversight commissions and committees to independently check on the financing and expenditure of bonds in San Francisco mandates that these bond monies must not be approved until there is a truly independent bond oversight committee that reports only to the people, and is not controlled by the bureaucrats, financial intermediaries, lobbyists, and politicians.
Without cast-in-stone legal steps that objectively allocate these affordable units, and a real and truly independent oversight entity, a NO vote must be recommended.
Brian Browne was coauthor of 2002 Prop P and former member of the Revenue Bond Oversight Committee it created. Feedback: email@example.com
I read with amazement that PG&E had legally prevailed in a March 26, 2012, appeal (A127554), stating that PG&E and not the SFPUC had the right to supply the Ferry Building with electric power. SFPUC as a power provider to the Ferry Building was legally terminated and PG&E became the power provider to the Ferry Building. The court decision turned on the argument that the Ferry Building, with its many private businesses, was not agreed on “Municipal Load.”
Is it the purpose of this bill to have San Francisco supply electric power and water to its own people?” Mr. Raker responded “Yes.”
The dichotomy between municipal load and selling directly to the citizens of San Francisco was never enshrined in the 1913 Raker Act or affirmed by the U.S. Supreme Court (U.S. Supreme Court, U.S. v. San Francisco 310 U.S. 16(1940)). The Raker Act, which gave San Francisco certain rights in the Hetch Hetchy Valley for the purposes of the City and other public bodies of supplying water for domestic purposes and the sale and distribution of cheap electric power in competition with private power companies merely prohibited the sale of Hetch Hetchy water and power for resale to private entities. The concept of municipal load, in the Hetch Hetchy lexicon, is a new one with no nexus to the enabling legislation of the U.S grantee law (Raker) to allow San Francisco to develop water and power resources from High Sierra water for direct citizen and governmental use.
In a 1913 exchange between Representative Raker (Raker Act) and Representative Sumners in the debate prior to passage of the 1913 Raker Act, Mr. Sumners asked Mr. Raker “Is it the purpose of this bill to have San Francisco supply electric power and water to its own people?” Mr. Raker responded “Yes.”
In looking at the legal machinations of the PG&E v. SFPUC decision, I did not find any reference to the Raker Act hearings or the 1940 U.S. Supreme Court decision, both of which made it abundantly clear that San Francisco could not sell water or power from the Hetch Hetchy (High Sierra) system to an investor owned utility for resale. But the Raker Actv encouraged the sale of these commodities by San Francisco (SFPUC) to its “people.”
As a member of the Revenue Bond Oversight Committee (RBOC) I was continually amazed to hear fellow-members and attendant lawyers comment on the intent of the authors of the enabling legislation; 2002 Proposition P. This amazement came because I was an author of 2002 Proposition P. Proposition P was high jacked by self-serving interpretations of the real legislative intent, secret meetings, and the overt and continual interference by staff and members of the Administration who saw real independent oversight as a serious challenge to their objectives.
If laws are reinvented and reinterpreted for implementation, the question must be asked: why pass these laws? It is amazing that a private company can usurp the federally endowed right of a governmental entity, CCSF.
Brian Browne was coauthor of 2002 Prop P and former member of the Revenue Bond Oversight Committee it created.
Drought Pricing and Water Allocations
The current drought shows no signs of breaking. Water reserves are falling and there are few signs indicating any immediate or near term relief for the state’s watersheds. Water is becoming relatively more valuable with each passing day. Economists have long preached that free trade and exchange between people can enhance the wellbeing of the participants and benefit the entire community (economy). Restrictions on trade and commerce imposed by politicized commissars (commissioners and committee members) will have the opposite effect.
The diamond water paradox comes to mind as an illustration of shifting valuations. Two people find themselves lost in the middle of a dry and barren desert far from any known water source. One has diamonds. The other has water. Assuming neither can overpower the other, trade and exchange will take place. The exchange ratio of water to diamonds will change drastically as a function of supply and circumstances. Both will benefits from this voluntary exchange which is often dubbed a Coasian exchange after Nobel Prize winner Ronald Coase. His writings and those of Harold Demsetz and Armen Alchian, especially on exchange and the theory of the firm should be mandated for all our high paid bureaucrats. Then they would have to do the heroic thing and fire themselves.
Today’s drought disruptions are not dissimilar to the earlier oil disruptions. The myriad of federal, state, and local rules and regulations are inhibiting the market adjustment processes required to optimally weather the drought. A good example is the SFPUC’s inertia in disbanding its complex and non-operational make-work (for the usual suspects) approach to rate making.”
Higher water costs in an environment of supply uncertainty will have significant impacts on major macroeconomic factors. These impacts will be quantified in lower economic growth, albeit, employment, higher food prices and reversal for other major economic variables. These macroeconomic adjustments will not be dissimilar to what happened during the oil crises (supply interruptions) of the last century. Overlapping and poorly thought through regulations and laws stymied U.S. economic recovery by gluing up the automatic adjustment mechanisms of the market. The Invisible Hand was handcuffed by the regulators and lawmakers. When un-cuffed the economy roared back to life.
Today’s drought disruptions are not dissimilar to the earlier oil disruptions. The myriad of federal, state, and local rules and regulations are inhibiting the market adjustment processes required to optimally weather the drought. A good example is the SFPUC’s inertia in disbanding its complex and non-operational make-work (for the usual suspects) approach to rate making. 1996 Proposition 218 is clear and unequivocal; municipal rates must mirror the cost function for producing water. This is a simple directive that is rooted in orthodox economics. Such anachronisms and political lackeys as the Rate Fairness Board and Revenue Bond Oversight Committee must go.
There can be no other criteria for setting retail rates. Rates must be set that reflect both present and future costs in an equitable manner. This will mean eliminating the current ongoing financial games of holding off on rate amortization and only paying interest on unused capital. This may dampen current rates and hence immediately mitigate political angst, but unfair intergenerational debt transfers will negatively impact future growth.
In writing the Economic Section for the 2000-2002 Mayor’s Infrastructure Taskforce I stressed the need to get the SFPUC out of the banking business. This was based on the lack of clarity surrounding its husbanding of 1997 A&B bonds for $304 million. Now it may even pass $15 billion in issuing revenue bonds and the fog of finance is even deeper. An election issue must be the continuation of this role for the SFPUC. At the Norman Yee meeting on coaching the Galileo HS soccer team, and other filibustered issues, I received a non-operational answer when I pressed him on SFPUC issues. But apparently he did a good job coaching soccer. This unfortunately is the mindset for most of our supervisors. It may take another Proposition H that limits their ratemaking ability.
Market exchanges that benefit traders, and enhance the public wellbeing, can take place in the absence of City-appointed Commissars, whose objectives seem to be to please political ends without concern for ratepayer and aggregate community wellbeing. Trade without fiat-direction does occur in those water sectors that are free to trade and exchange without the oppressive hands of our USSR throwbacks interfering for their own narrow goals.
An example of this was reported in The Los Angeles Times on March 16, 2015 when it described Los Angeles offering San Joaquin rice farmers $700 per acre ft. for their irrigation water rights. This market exchange would be more profitable to the farmers than selling rice and would help quench Los Angeles’ thirst. It may not achieve the pre-drought level of economic wellbeing, but it will be better than a group of resume misfits taking hit and miss shots in an area in which they have no expertise.
The article goes on to say that San Joaquin rice farmers, by selling water to Los Angeles and leaving an acre fallow, would net the farmer a profit of $2,100, versus a profit of $1,000 to $1,500 from irrigating the acre and growing rice. Economists refer to these type transactions as Coasian exchanges, and postulate under most conditions both traders benefit with a net welfare gain to society as a whole.
This Coasian exchange approach was never tried between the peninsula customers and San Francisco in producing the 2009 Master Water Sales Agreement (MWSA). San Francisco’s pure Hetch Hetchy water was signed away by the secret negotiators, and San Francisco was contractually mandated to add qualitatively less (Brinegate) and significantly more expensive well water to its drinking water to make up the difference. Unlike a voluntary exchange, wherein both parties benefit, the 2009 Master Water Sales Agreement made San Franciscans worse off and peninsula customers better off at the expense of San Franciscan residents and businesses.
The current severe drought will require something other than a business as usual approach to water allocations. Conservation measures will help. Conservation and voluntary water use reductions are not a free good. Reductions in water use will not greatly reduce overall delivery costs. A 10 percent voluntary drop in water use will still demand that all system costs are paid. The total cost for the 90 percent use will not be much different from the former 100 percent use. The paradox is that after voluntary conservation the cost per unit of water may (probably) rise.
Total revenues must equal total costs. An increase in rate prices will cut demand. This is not a sure fire way to maintain revenues equal to costs (revenue requirements). It depends on demand responses (elasticity of demand) to an increase in rates. If a 1 percent increase in rates is met with a more than 1 percent decrease in quantity demanded, total (SFPUC) enterprise revenues will fall. This could be calamitous for an enterprise that must cover all expenses, especially providing debt service on the billions borrowed.
Economics is a dismal science. It is more dismal for bureaucrats who try and out think the invisible hand.
Brian Browne was coauthor of 2002 Prop P and former member of the Revenue Bond Oversight Committee it created.
In the February issue of the Westside Observer, Mr. Steve Ritchie, Assistant General Manager SFPUC, authored a rebuttal to my December-January article: “SFPUC Don’t Experiment with Our Drinking Water.” It was a general rebuttal, short on facts, and full of misrepresentations as to my research and knowledge. I did not write the caption. The caption is one-hundred percent accurate. Blending aquifer water with pristine Hetch Hetchy supplies is statistically not a zero sum game as to expected outcomes. I challenge the SFPUC to prove otherwise. There are no solid reasons why San Francisco should have its pristine supplies expropriated as planned by the SFPUC at the whim of peninsula wholesale customers.
Blending aquifer water with pristine Hetch Hetchy supplies is statistically not a zero sum game ... There are no solid reasons why San Francisco should have its pristine supplies expropriated as planned by the SFPUC at the whim of peninsula wholesale customers.”
Mr. Ritchie’s states I have not followed the development of Brinegate and he discounts my knowledge of diversified systems. He is absolutely wrong on both counts. Had the SFPUC revealed its real water-supply goals for San Francisco in 2002, as it does in Mr. Richie’s rebuttal, when it requested funding for the current Water Supply Improvement Project (then Capital Improvement Project [CIP]), 2002 Propositions A and E would have failed miserably. The SFPUC would have still needed to seek voter approval to issue revenue bonds; these issuances would be contingent on real progress, not multiple PR illusionary pronouncements; the Hetch Hetchy system would remain owned and operated by the SFPUC; and our local water would not be subject to arbitrary expropriation by decision makers who apparently believe more in Marx than Friedman.
When SFPUC presented one of its first efforts of Brinegate to the Revenue Bond Oversight Committee (RBOC) I asked staff if the 4 MGD of recycled bore water it was then proposing would count as part of San Francisco’s 81 MGD assurance under the 2009 MWS. If so, would we still be required to pay the wholesale charge as a function of the ratio of 81/265 or would it now be 77/265. No answer. I did mention that recycled well water cost multiples of Hetch Hetchy water. No answer.
I have worked on many recycled projects in the U.S. and abroad. My last project was on evaluating blending (the SFPUC’s three dollar word) water from an ancient and non-refillable aquifer with existing potable water supplies from ground-water sources. There were many components to this project, especially health.
In August 2004, I authored an article for Reason Foundation, Western Water Wars – Efforts to take over San Francisco’s Hetch Hetchy system. Mr. Ritchie’s article proves the accuracy of my 2004 prophecies. The SFPUC used to say they “owned and operated” the Hetch Hetchy system. They now just “operate” the regional system. The admitted appropriation (theft by fiat) of possibly more than twenty-percent of our historic water deliveries, as confirmed by Mr. Ritchie, is depressing.
Mr. Ritchie states that because San Mateo, Daly City, and eighty-percent of Californians drink blended aquifer and other-source potable water, he infers so should San Francisco. Mr. Ritchie’s logic: from each according to his ability, to each according to his need, as stated by Karl Marx, is not the logic that drives our capitalistic economy. San Francisco built the Hetch Hetchy system without any governmental subsidies and has been generous in sharing water and power provided by the system, as the federal appointed grantee.
People who live in San Francisco capitalized the value of having one of the country’s best water systems. It is reflected in our asset valuations. People who want to benefit from this phenomenon are not restrained from moving to San Francisco. Following Mr. Ritchie’s logic, this traditional American market mechanism can be replaced by politicized decisions via the mechanism of forced wealth reallocations. No one would suspect that the then Mayor, Gavin Newsom, had political ambitions well beyond the boundaries of the City on whose behalf he pledged to work in its best interests, and not his own statewide or national ambitions.
San Francisco has entered into two water agreements with its wholesale customers. The first one was in 1984 and the second one in 2009. For the intra-agreement twenty-five year period, San Francisco received from the Hetch Hetchy system on average 86 MGD (35.5%) and the peninsula customers 163 MGD (65.5%). These totals amounted to a system average of 249 MGD. The peninsula customers (BAWUA) and SFPUC, in a joint research project in 2000, estimated the long-term sustainable average of the Hetch Hetchy system, based on historic hydrology and expected system reliability, is 239 MGD.
Mr. Ritchie makes two statements: one of 4 MGD of recycled brine, and then alludes to a diversity for the San Francisco service-area of fifteen percent recycled brine for San Francisco. Fifteen percent of San Francisco’s historic takes of 86 MGD equals approximately 13 MGD. Fifteen percent of San Francisco’s assured volumes of 81 MGD equal 12.15 MGD. It appears the end-game for brine required to meet full expropriation levels is well in excess of 4 MGD.
Let me re-ask the question I asked as a member of the RBOC – will San Francisco still pay its apportionment of total system costs as a function of 81/265 or 78/265, or approximately 69/265 of Hetch Hetchy total costs? Many activists, and rightly so, I believe, want Bay Area Water Supply and Conservation Agency (BAWSCA) to subsidize part of the additional costs associated with integrating well water into our system, in that our assurances of Hetch Hetchy supplies, under the 2009 Agreement, were decreased by approximately 6 MGD from our historic takes and BAWSCA’s ad infinitum assurances increased by approximately 21 MGD over their historic takes. Our historic supplies of Hetch Hetchy water under this Agreement are being diverted to the BAWSCA wholesalers.
The 2009 Agreement used two methods for setting wholesale rates: utility and cost. The utility approach sets an allowable rate on what rate makers call the “rate base.” The rate base is differently defined, but usually includes historic capital costs less accumulated depreciation plus a small allowance for working capital. This amount is then multiplied by a weighted return on capital (debt and equity) to assess a capital charge.
It appears BAWSCA paid off the rate base and thus avoided future charges. The rate base is an accounting number. The capital charges were largely in 1920, 1930, etc. nominal (not inflated) dollars. The depreciation schedule is artificially contrived in that water systems last for centuries. Witness the ancient systems around the world still supplying modern cities. If this is indeed the final link in the regionalization process, which I forecast in 2004, we should have charged them replacement costs. This would be multiple billions, not the paltry millions they paid.
The hit piece against me was less than honorable, not unexpected from the caliber of folks (overpaid) I have met at the SFPUC. I am, however, truly disappointed that Mr. Harlan Kelly, SFPUC GM, allowed such a spurious piece of GIGO (garbage in – garbage out) to see the light of day. He has always had my respect and I have long-supported his elevation in the SFPUC hierarchy. It appears SFPUC is no longer the owner operator of the Hetch Hetchy system, but only the operator and serving at the pleasure of their regional masters BAWSCA.
Brian Browne was coauthor of 2002 Prop P and former member of the Revenue Bond Oversight Committee it created.
Why Prop 218 Must Not Be Ignored
It is time for the San Francisco Public Utilities Commission (SFPUC), and other California utilities, to price water services according to 1996 Proposition 218, a constitutional amendment. Water may only be priced at reasonable cost of service without any non-regulatory add-ons. A quote from Howard-Jarvis Taxpayers Association is a powerful statement as to purpose sought by the framers of Proposition 219:
“It is the clear position, supported by the language of Proposition 218, the liberal construct provision, and the intent of the voters that fees and charges for water service are governed by Proposition 218. To the extent that tier rates are imposed in a manner that deviates from ‘cost of service’ requirements, those rates are in violation of Proposition 218. Local governments or special districts which do not abide by the requirements of the new constitutional language do so at the risk of litigation.”
... fees and charges for water service are governed by Proposition 218. To the extent that tier rates are imposed in a manner that deviates from ‘cost of service’ requirements, those rates are in violation of Proposition 218. ”
Tier rates are specifically mentioned above. Unless tier rates perfectly mirror the cost function of producing water, they are illegal under Proposition 218. The way the two step tier rate program is portrayed by the SFPUC, this seems mathematical impossible. The lower rate is based on the earlier lifeline rate and the higher second tier rate is clearly a subsidy to permit a lower priced tier one. This type rate making is prohibited by Proposition 218 effective back to 1996. Not only are tiered rates illegal in California but a solid body of economic work indicates they are inefficient and exacerbate the goals of drought pricing. A new consideration raised in this article is that complex and opaque financial gamesmanship of shifting the debt forward to future ratepayers, in high probability, offends Proposition 218. It is time to view Proposition 218 constraints in the future as well as the present.
Utilities develop a rate structure to cover their production costs. This is called the revenue requirements approach to ratemaking. The two main components of most utility cost functions are operation and maintenance and external capital costs such as revenue bonds.
Finance costs are all costs related to the issuance and repayment of debt, mainly revenue bonds in the case of the SFPUC. The SFPUC has issued $4,039,972,895 for their Water System Improvement Program in 10 different sets of bond sales. The 76.39 percent actually flowing to projects seems low. This requires additional analysis.
Costs of Issuance
Debt Service Reserve
Commercial Paper Refunding
Direct O&M costs are probably easier to monitor than capital costs. Even this monitoring or oversight has become a near impossibility in San Francisco in that all attempts at independent oversight have been hijacked. People who think monitoring SFPUC-O&M costs is difficult will find trying to monitor and understand what the financial types are really doing with billions of revenue bond money is exponentially more trying to decipher. Bailing out the “too big to fail” financial intermediaries sent the wrong message to these gamers. Financial games were encouraged rather than discouraged. As a member of the Revenue Bond Oversight Committee (RBOC), I always felt the invisible hand that was blocking real regulatory reforms, dictated by an understanding of orthodox economics and the real mandates of the RBOC’s enabling legislation, was coming directly from the financial types.
To repay, in level annual amortized payments, the $4,039,972,895 currently issued in SFPUC-bonds, for a term repayment term of 30 years and a coupon rate of 4.5 percent, the SFPUC would need to blend into its rate structure an annual cost of capital amount of approximately $250,946,083. Over 30 years these payments would amount to $7,528,382,495, comprised of interest payments of $3,488,409,600 and principal of $4,039,972,895, all in nominal or dated dollars.
Traditionally, utilities capitalize interest on work-in-progress and then amortize, as plant goes on line, the total amount into level annual payments that are repaid in equal amounts in the rate structure. This is both transparent and an accepted way of sharing costs between present and future generations for large, long-lived capital items. The diagram below shows how the $4.04 billion dollars would have been passed through to the ratepayers with a well planned and normative WSIP production schedule. Remember the run up to the 2002 votes on funding? The SFPUC stated: we have a plan. Fund us and we will deliver on time (2015) and on budget ($3.6B).
The impact on wholesale rates of annually passing through the $250,946,083, at a system reliable delivery of 239 MGD, equals approximately $939 per acre ft, and for their non-sustainable delivery of 265 MGD the cost per acre ft is $847 per acre ft. This is only for wholesale cost increases as a function of their WSIP fix-up (currently issued bonds) program. It does not include any other costs. The SFPUC has large amounts of capital in accounts earning less than 1 percent (0.75%) that must at some point be fully capitalized and amortized into the rate structure.
The SFPUC is paying approximately 4.5 percent for these funds while earning an estimated 7/10th of one percent in these “liquid” funds, a swing of 3.75 percent that must be picked up as the real cost for this liquidity. In a WSO article with Tony Hall in 2014, we identified the SFPUC as having well over one billion in liquid assets, costing the ratepayers net about 3.75 percent. A check in 2015 indicates a like amount remains liquid with no date certain as to when this liquidity will be amortized into the rate structure.
The current confusion and additional costs incurred as a function of actual bond revenues collected for the WSIP program and the failure to keep 2002 promised completion dates (50% by 2010 and 100 percent by 2015) seems clearly in the reach of Proposition 218. These items also concern me as to the efficacy of their rate forecasts. I am concerned that dampening down rate increases may be a function of current political expediency? We really do need to know what is happening with future as well as current water-rates.
Brian Browne was coauthor of 2002 Prop P and former member of the Revenue Bond Oversight Committee it created.
Westside Drinking Water: SFPUC Responds
Brian Browne’s December 2014 article, “SFPUC Don’t Experiment with Our Drinking Water,” is inaccurate and misleading to all San Franciscans.
San Francisco’s Regional Water System is a critical regional asset for the San Francisco Bay Area. We serve 2.6 million Bay Area residents. We take that responsibility seriously every minute of every day.
Our Groundwater Project will create a diversified blend of up to 15% groundwater from the Westside Groundwater Basin in San Francisco mixed with Regional Water System water – adding to San Francisco’s current blend of surface water from Hetch Hetchy reservoir and our reservoirs in Alameda and San Mateo counties.”
Groundwater Mr. Browne has failed to follow the more than ten years of planning, environmental review, community involvement and water quality investigations that are the foundation of the San Francisco Groundwater Supply Project. This project will add up to 4 million gallons per day of reliable local drinking water into our San Francisco system at a reasonable cost. With wells in operation every day, we will be diversifying our supply to serve our drinking water needs and have reliable, tested facilities in place to serve us should an earthquake or other disaster sever deliveries from the Regional Water System. Many of our neighbors to the south – Daly City and San Bruno to name two – and over 80% of Californians rely on groundwater for part of their drinking water supplies.
Our Groundwater Project will create a diversified blend of up to 15% groundwater from the Westside Groundwater Basin in San Francisco mixed with Regional Water System water – adding to San Francisco’s current blend of surface water from Hetch Hetchy reservoir and our reservoirs in Alameda and San Mateo counties.
Every day we test and monitor all of our water sources and throughout the distribution system to ensure we meet and exceed all state and federal water quality requirements. We have spent more than 10 years studying the Westside Groundwater Basin, its historical use, current capacities, water quality, and potential for salt water intrusion. All of our work supports the quality of this water source and its viability to address our continued need to deliver safe, high quality water in San Francisco. It is not “recycled brine” as Mr. Browne suggests. And if you don’t trust our word, I encourage any interested party to learn more about the project and review the more than 10 years of detailed work and studies related to this groundwater project at sfwater.org/groundwater.
Obligations to our Wholesale Customers Mr. Browne also inaccurately represents our obligations as a regional water provider. As a wholesale water agency serving the San Francisco Bay Area we have binding legal agreements which provide the assurance of water delivery in perpetuity to our wholesale customers, including provision for reductions during times of drought. Just as the SFPUC serves the residents, businesses, and visitors of San Francisco, these agencies serve their individual communities. They equitably pay for their use of the system, which includes two-thirds of infrastructure upgrade costs for regional water facilities. And just as San Francisco has a phenomenal track record of conservation and wise water use, so do many of our wholesale customers. Some are now using even less water per capita than San Francisco!
Safe Water Every Day Now and in The Future Despite Mr. Browne’s allusion to the failures of other water systems, there has never been a case of waterborne illness in the history of the San Francisco Regional Water System. Nor has there been a case where we have completely run out of water thanks to our responsible planning, investments and management of our finite water supplies. We’re proud of our history and track record. We have delivered safe water to our customers for almost 100 years, and with the San Francisco Groundwater Project and other efforts to improve the reliability of our water supply, we plan to continue delivering safe, high quality water well into the future.
SFPUC Don’t Experiment With Our Drinking Water
The San Francisco Public Utilities Commission (SFPUC) plan to blend aquifer, aka well water, into San Francisco’s Hetch Hetchy water supply must be stopped until there is a proper and independent investigation into all aspects of this dubious project, including but not limited to health-risks, unfair costs to San Francisco, and the political capitulation of our existing water-rights to the peninsula during the secretly negotiated 2009 Master Water Sales Agreement (MWSA) by the SFPUC.
…secret negotiations amazingly reset the allocations for San Francisco back to 81 MGD and advanced the peninsula’s ad infinitum assurances to 185 MGD. That was the first betrayal. The second betrayal was that not all the 81 MGD allocated to San Francisco would come from pristine Hetch Hetchy sources.”
Mixing different source waters together is complex. Commingling pristine Hetch Hetchy supplies with well water requires a thorough and independent analysis of the well water and its impact on the purity of the entire system. What we all know is that water systems are integral to our health. There must also be an investigation as to why San Francisco came off so unfairly in these secret negotiations.
San Francisco averaged 86 MGD (Millions of Gallons per Day) between the 1984 sales Agreement and the beginning of the renegotiations in 2009 for the Agreement renewal. The peninsula averaged 163 MGD during the same period. These secret negotiations amazingly reset the allocations for San Francisco back to 81 MGD and advanced the peninsula’s ad infinitum assurances to 185 MGD. That was the first betrayal. The second betrayal was that not all the 81 MGD allocated to San Francisco would come from pristine Hetch Hetchy sources.
Currently the SFPUC has plans to acquire 77-78 MGD of Hetch Hetchy water for San Francisco and the rest of San Francisco’s assurance from well water. This Hetch Hetchy number seems to be a movable amount based on what is left over after peninsula customers are quenched. Their thirst increases and our allocation of pure Hetch Hetchy water decreases. Thus less Hetch Hetchy water and more recycled brine for San Francisco. These secret negotiators did not seem to factor in that San Francisco built the wondrous Hetch Hetchy system.
San Francisco availability of high quality water has been a driving incentive for major health facilities locating and expanding in San Francisco; witness the ongoing development of the UCSF health complex in Mission Bay, plus many more health-care centers. The question must be asked and answered: Will this be imperiled by the blending of well water?
A quick Google search for “Outbreaks of diseases due to contaminated water supply” will reveal that urban water systems are vulnerable. A recent outbreak of a large failed water purification system occurred in 1983 in Milwaukee, Wisconsin in which at least 104 deaths occurred and 880,000 out of 1.6 million suffered cramps, fever, diarrhea, and dehydration. The most affected were the elderly, and immune-compromised. The blending of treated well water with pristine water does not appear to be a zero sum game and requires the most vigilant and independent analysis.
Well water extraction and treatment costs are much greater than our Hetch Hetchy water costs. By ceding large amounts of Hetch Hetchy water to BAWSCA-wholesalers, San Francisco must substitute more expen sive water of an unclear composition. Passing these costs and risks on to San Francisco must not just slide through as a function of an over-bloated SFPUC PR machine.
The time has come for a full-blown City investigation — not just from the usual choir of bureaucrats and high jacked committees.
Beginning in September, 2014, California mandates that well-water extractions in California must be approved at the state level. Hopefully this hurdle will give San Franciscans time to realize and object to the many negative impacts of blending pure Hetch Hetchy water with well-water and why we ceded so much of our historic pristine Hetch Hetchy supplies to our wholesale customers.
>Brian Browne was coauthor of 2002 Prop P and former member of the Revenue Bond Oversight Committee it created.
Illegal Water Rates
The San Francisco Public Utilities Commission (SFPUC) must redesign its water and wastewater pricing rates.
Its current ascending tier system is illegal for municipalities, does not promote conservation, and is an inefficient use of resources. Recent studies in Texas and Australia show that the increasing block tariff (IBT) rate system used by the SFPUC and many other municipalities in California do not or encourage conservation.
A two-tier system implies that some ratepayers will subsidize other ratepayers. This is illegal under Prop 218. Rates must equal utility costs for all customers. Subsidies between different classes of customers are illegal.”
1996’s Proposition 218 (taxpayer revolt) clearly states that municipal rates in California cannot be changed without a vote of the people and rates must not exceed the cost of producing utility services. The 2006 California Supreme Court in Bighorn Desert Agency vs Vewril ruled that water-rate increases or decreases are property related fees and subject to Prop. 218.
A two-tier system implies that some ratepayers will subsidize other ratepayers. This is illegal under Prop 218. Rates must equal utility costs for all customers. Subsidies between different classes of customers are illegal. Plus the tier system imposes a hardship on dwellings with high occupant-density that have a low threshold to cross over into use of the higher-tier block tariff.
Instead of illegally diverting funds to subsidize conservation appliances the SFPUC should be looking into putting individual-meters into every dwelling and have a cost-based rate system without gimmicky and unverified rate systems, such as IBTs. Let the customer decide, based on market signals transmitted via actual use and cost, how to budget for conservation measures as a function of their own budget hierarchies.
Brian Browne was coauthor of 2002 Prop P and former member of the Revenue Bond Oversight Committee it created.
Let the market decide – Utility services
The gasoline shortages of the 70s and 80s were exacerbated by well-meaning policies to control prices. Anyone with a reasonably long-recall will remember lining up for hours in gasoline queues. These shortages and associated lines could have been avoided by doing away with price controls and that is exactly what happened when retail price controls were eliminated. The lines disappeared, and the price of gasoline generally rose and fell as a function of supply and demand. Shortages were by definition eliminated.
Many drought prone countries, such as Australia, are edging toward market reliance in allocating scarce water resources. As the population swells and weather uncertainty increases, this is probably where the U.S. and California in particular must move.”
Economists in the late 70s and early 80s argued that these shortages were informational. These economists believed that the major oil producing nations had undervalued the demand for their oil products. The disruptions to supply and following market chaos in the major oil consuming countries made the oil producing countries realize the real market-value for their products. It was a demand pull phenomenon.
These higher oil prices catalyzed greater investments in marginal supply areas and also caused an efficient realignment in oil-using industries and consumer goods (compact automobiles, etc). These changes, catalyzed by a more realistic revelation of consumer preferences, and transmitted through the market mechanism, led to greater and more efficient use of the planet’s oil reserves for a longer period.
The current shortages of California water are symptomatic of the fiat price being below the real market-valuation. A market solution, by definition, would eliminate “shortages.” Shortages only exist when one or both of the two-blades of the supply and demand scissors are fiat-constrained.
Some economists have argued that if Los Angeles (LA) water was not subsidized that the current LA urban sprawl would be considerably smaller. They also make the same argument about many irrigation districts (and crops grown) such as the San Joaquin and Imperial valleys. Farming and urbanization patterns would be changed and the invisible hand would redirect resources to their highest value in use.
The savings in drought-policing costs would be immense, and investments in water extraction, storage and transmission systems would be significant. A system of pipelines transmitting water throughout the U.S., similar to the oil pipeline systems, is a real possibility when demand is identified and transmitted through the market mechanism. This system could be funded by the private sector or with private-public partnerships.
There is no federal agency for water comparable to the Federal Energy Regulatory Authority (FERC) for overseeing water. Water resources (rivers, aquifers, rain, snow, etc.) in the U.S. often cross interstate lines. A federal agency might seem counter-intuitive to a market solution, but for planning and licensing purposes, as the U.S. water systems become more integrated to move supplies to where the demand is the highest, would appear a complementary and necessary adjunct.
A market solution is considerably more efficient than the current and costly pricing systems which encourages policing, neighborhood spying, and forming well meaning committees (e.g. Revenue Bond Oversight Committee) that are immediately high jacked by bureaucrats and special interest groups, whose agenda is self-aggrandizement (bowing to their masters) and not societal wellbeing.
Many drought prone countries, such as Australia, are edging toward market reliance in allocating scarce water resources. As the population swells and weather uncertainty increases this is probably where the U.S. and California in particular must move.
Brian Browne was coauthor of 2002 Prop P and former member of the Revenue Bond Oversight Committee it created.
Revisiting Power Deregulation
A review of U.S electricity prices shows that California ranks 43rd in high U.S. electricity costs at 13.05 cents per kilowatt hour, well above the national average of 9.9 cents per kilowatt hour. These data were provided from the Electric Power Annual Energy Information Administration as of June 26, 2013. This high price for California persuaded me that we must again revisit power deregulation.
The goals of AB1890 were to bring electric supply and demand into competitive price equilibrium and to achieve significant market efficiencies and price reductions. ... These changes were self-defeating and doomed this deregulatory effort from the start.”
A major battle is looming in our service area for automatic electric market share. PG&E has held a virtual closed monopoly. After the failure of California’s most chaotic deregulation (aka Western U.S. Energy Crisis) attempt 2000-2001, and the return to business as (nearly) normal, Carol Migden had AB117 passed in 2002 (signed 9/24/2002) to enthuse competition into the state’s power markets. Her idea of competition was to allow municipalities to establish community choice aggregation (CCA) districts. Municipalities electing to implement a CCA program under AB117 would automatically take over the customers currently enrolled in the current, resident-investor owned utility system. Customers wishing to stay with an investor owned utility, e.g. PG&E, would under AB 117 have to take administrative steps to “opt out” of the CCA.
In 1996 the California legislature unanimously passed AB1890 to deregulate California’s power markets. The goals of AB1890 were to bring electric supply and demand into competitive price equilibrium and to achieve significant market efficiencies and price reductions. The California Public Utilities (CPUC) lifted caps on wholesale pricing and kept caps on retail prices while investor-owned utilities were encouraged to sell off their own power plants. These changes were often incompatible with the basic cornerstones of a true market. These changes were self-defeating and doomed this deregulatory effort from the start.
This legislative contradiction led to opportunistic gaming, market manipulation, and market chaos. At the time the San Francisco Mayor’s Infrastructure Taskforce (TF) offered a viable solution: use the Hetch Hetchy hydro power to sell high and buy low while using city legal resources to investigate and pursue gamers. Ignored!
Hydro-power is like a tap. It can be turned on and off with a very small marginal cost. Large fossil fuel generators have a significantly higher start-up cost and turning them on and off is very costly. The TF engineers-economists recommended that the San Francisco Public Utilities Commission (SFPUC) investigate and implement pump-storage to enhance the power output of the Hetch Hetchy system, whereby water used for hydro-power at peak times is collected in storage dams, and during off-peak periods when power prices from other sources (that cannot easily be turned off) recede, is used to pump the water back up for reuse at peak-pricing times. This approach fell on deaf ears at the SFPUC. I am convinced the SFPUC staff spent more time trying to quash my efforts on the Revenue Bond Oversight Committee (2003-2012) than considering viable market and efficiency alternatives.
The California Department of Water Resources (DWR) under David Freeman, California’s Energy Czar, was ultimately given the task of buying up power contracts. To an outsider, its budget seemed near unlimited (later many contracts were renegotiated downwards). A little known debate between this author (at the request of TF Honorable Chair, Mr. Rich Bodisco) and Mr. Freeman, in the presence of Messrs Burton, Brown, and other notable decision makers at City Hall, saw a clash between a continuation of enhancing the free market solution (buy low, sell high – perfect with a major hydro resource) envisioned in AB1890, versus a return to a very costly bureaucratic solution. No contest. Trust the bureaucrats more than the Invisible Hand.
Now is the time to rewind this poor decision. As Federico Pena and Eric Hogger state in their article “Time to try electricity deregulation again” (SFGate, May 30, 2012):
“ Yet as California retrenched and limited customer flexibility, more than a dozen states across the country persisted with reforms in competitive markets for electricity, including Illinois, Maryland, Pennsylvania, New Jersey, New York and Texas. Competition in these states and elsewhere is flourishing, providing cost savings and innovative products and services, including clean energy supplies and programs that allow customers to actively manage their energy use in response to marketprices.“
The current big debate in California, unfortunately, is not deregulation, but whether CCA should allow for customers to opt out of a CGA or an investor-owned utility. I have no problem with San Francisco establishing a CGA and competing with PG&E as long as there are other providers. I would like more choices. Other states and other countries have embraced power deregulation with good results.
The supply/demand balancing system for power coming into the Western United States is considerably more sophisticated and fine tuned in 2014 than in 1996-2001. The pivotal buyer/distributer for 80% of California’s power is the California Independent System Operator (CISO) that provides open and non-discriminatory access to the bulk of California wholesale power grid. This system is analogous to the Air Traffic Controller who cannot discriminate between air-carriers and must balance the supply and demand for air and landing rights in near real time.
The CISO does its balancing in real time (power cannot be stored). The2014 CISO system can handle a competitive market-driven power market. It is time to give Californians (especially San Franciscans) real choice in their power markets. In this area, the home of high-tech, it is easy to imagine the proliferation of apps and other devices that would move in and ensure greater choices and greater efficiencies. The CPUC and ISO could work with the state, municipalities, and districts to ensure the mandated or consumer preferred mix of green power.
Footnote – Nebraska Energy Office, Lincoln, NE Brian Browne was coauthor of 2002 Prop P and former member of the Revenue Bond Oversight Committee it created.
The Ride Share: It's Wild in the West
Lyft, SideCar, Uber and Tickengo
Without a real socio-economic impact analysis, the California Public Utilities Commission (CPUC), allowed Transportation Network Carriers (TNC), so called ride-share vehicles, access to California intraurban markets.
Many Californian cities and local governments have existing systems for regulating taxis. These changes came at the apex of handheld computer applications (apps) that could be used to fetch a cab, bill the passenger by credit card, and pay the driver. Computer software developers were quick to jump into this market, and in many instances provide services that well regulated local companies were willing to provide, but more often than not were restrained by inept and politicized regulators.
While not praising the SFMTA, San Francisco’s current taxi regulator, it has in place stringent rules that guarantee public safety and convenience, including but not limited to complete vehicle coverage for all expected incidents, driver-checks, vehicle-checks, drug-testing, driver-training opportunities …”
Anyone browsing the newspapers of the world will see that there has been acceptance and rejection of these software-cum-ride-sharers. From New York, Paris, London, Sydney, San Francisco, and LA, the barricades are being manned as traditional livelihoods are being threatened by these app makers. The rejecters (mainly traditional cab companies and their drivers) are pushing back through street demonstrations, lobbying, and finally forcing legislators to write legislation that protects the traditional cab systems as to market share and comparative costs.
For example, Uber recently capitalized at $17 billion (Epoch Times, June 17) and is being pushed to be fully risk-responsible for all vehicles for which it contracts to assign ridership. This will require Uber have an umbrella insurance over all its contracted vehicles and must cover the operation of this vehicle at all times. This insurance must be comparable to the insurance required by traditional taxi-cabs in the district(s) in which they operate.
Probabilities are not additive or deductive. Each time a passenger uses a ride share vehicle (TNC) with fragile or zero insurance, the risk of an accident and failure to be fully compensated remains the same for each incident. This is the same, especially for San Francisco taxi cabs, except that the risk of an accident (certified, trained drivers, and fully maintained and inspected vehicles) and failure to be fully compensated is significantly less per incident, in that coverage for traditional cabs is established by law. Public safety demands that the CPUC and other over-arching regulators address this insurance issue immediately. Insurance and safety requirements must be required for TNC vehicles at the same level that most local municipalities require for their historic taxi systems.
While not praising the SFMTA, San Francisco’s current taxi regulator, it has in place stringent rules that guarantee public safety and convenience, including but not limited to complete vehicle coverage for all expected incidents, driver-checks, vehicle-checks, drug-testing, driver-training opportunities, knowledge of the market area, and so forth. The complete list is readily available from most urban regulators. These safety stops seem hit and miss with the proliferation of app TNCs.
The legal morass surrounding who should pay for insurance and other normal fleet-operating expenses should fall directly on the app developer, who has full responsibility for the ride transaction. Avoidance or possibly evasion of this responsibility must be regulated by the CPUC. To do anything else would be to endanger/harm (probabilistically) riders and put local cab systems at a comparative cost disadvantage.
Comprehensive insurance is only one aspect of the required regulations that the CPUC must impose on these ride-share vehicles. TNC vehicles must have the background and safety checks that local municipalities require of cab systems operating in California jurisdictions.
Uber and other app operators instigate and facilitate rides, and as such they must ensure their app-contracted vehicles are fully insured by their coverage. This marginal insurance cost must be directly incident (where the levy falls) on the app provider. The impact (who pays) could be decided between the app-facilitator and its TNC affiliates. The ultimate responsibility for deep insurance must be placed on the app vendor, especially if the app vendor has $17 billion in his war chest. This way any temptation by the app provider to distance themselves from accidents resulting from their business endeavors will be avoided and the full cost of the app operation internalized.
The supply of cabs is the sum of their marginal costs tempered by local and often illogical barriers to entry and by a system of fiat pricing that does muddy up market signals. Nevertheless these market hiccups have been in place for a long time and the industry has subsumed their existence. The sudden deregulation by the CPUC of intercity and intracity transport changed the economic environment of the existing cab systems in California. These changes negatively impacted most cab systems with attendant wealth loss for those involved.
This app insurance must not negate any current insurance requirements by a private owner in the state of California who may choose to become app-contracted.
The CPUC was at the forefront of airline deregulation. The more market permissive scheduling and rate making by the CPUC for intrastate airlines led to the 1978 Kennedy-Kelly Act, which deregulated U.S. Interstate carriers, and the demise of the Civil Aeronautics Board (CAB). The demise of the CAB did not happen in a vacuum. The Federal Aviation Administration (FAA), National Transportation Safety Board, ET AL remained as watchdogs to ensure safety in the over arch of public convenience and necessity (PC&N).
The CPUC actions in making ordinary (household) vehicles “cabs” happened in a near vacuum as a function of immediate acceptance of this new app technology. The CPUC just opened the entry gates to any and all comers who had a relatively new vehicle and appeared to initiate an Oklahoma Land Rush - type situation. It ignored the many community cab systems that have for years established safe and sound taxi systems reflecting local conditions. There were no backup systems put in place, such as the FAA or NTSB, to protect the impacted communities and guarantee a continuation of expected high-quality taxi-type services.
One main service that community members expect from their taxi, albeit ride-share, sector is safety and security. The security being that in the event of an accident the vehicle is well insured to adequately protect passengers, drivers, and bystanders. Recent history shows reluctance by the TNC-apps to accept this responsibility. This failure means drivers and riders must share all down-side risks while the app vendor skims off the profits. This type financial arms-length distancing by the app operators is unfair and unacceptable, and gives these opportunistic operators an unfair advantage over the well-regulated cab systems.
The open entry phenomenon has also negatively affected the value of existing medallions. Many medallions have been transferred at values based on industry economic conditions existing prior to the CPUC decision to deregulate, albeit destabilize, the taxi industry in California. These medallion values have dropped as capitalized net incomes in the face of TNC competition. This has created unexpected losses to members of the cab industry who currently hold purchased medallions. This and many other socio-economic effects should have been thoroughly analyzed before the CPUC took this precipitous action in handing over a large part of the California transit system to app operators.
Brian Browne was coauthor of 2002 Prop P and former member of the Revenue Bond Oversight Committee it created.
… it has … complete vehicle coverage for all expected incidents, driver-checks, vehicle-checks, drug-testing, driver-training opportunities …”
The Ratemaking Season - SFPUC rates
The season of utility ratemaking is upon us. New water and sewerage rates will be set by the San Francisco Public Utilities Commission (SFPUC), with oversight and guidance from the Rate Fairness Board (RFB). This season is extremely important to our pocket books in that the denominator of the rate quotient, volumes, is drying up in what some are forecasting as the worst drought in California history, and the numerator, production costs, is increasing both as a function of normal operation & maintenance costs pushed by the largest infrastructure expenditures in San Francisco’s history. This infrastructure program is being funded by revenue bond debt. Rate shock may be expected for many years.
Ratemaking, in the absence of a market solution, is price setting. Price setters are more notable for their failures than successes. The Interstate Commission Act of 1887 introduced a vague, non-operational concept of “just and reasonable” ratemaking to avoid “ruinous competition,” concepts never fully defined. It is estimated that the regulatory morass of the ICC costs the U.S. economy many GDP points. The regulatory epidemic catalyzed by the ICC quickly spreads throughout the U.S. with like economic disruption.
San Francisco does need an individual ratepayer advocate who cannot and will not succumb to the siren call of the politicians, special interests, etc”
Municipal utilities (SFPUC) in California are self-regulating. Investor owned utilities in California are regulated by the California Public Utilities Commission (CPUC). The CPUC supposedly has a formalized process. The enigma of the SFPUC process is of great concern. The Revenue Bond Oversight Committee (RBOC) is concerned with supply-side costs as to reasonableness, and the RFB is supposedly the ratepayer advocate as to fairness. Not exactly the good hands people.
Regulated utilities have a two-step (somewhat an artificial dichotomy) approach to ratemaking. First the regulated entity must establish its reasonable and allowable costs. This step quantifies the revenues required to run the entity. Second the utility must design a rate structure (fixed, variable, customer class, etc.) to collect these revenues.
1996 Proposition 218 (no taxation without a vote) must be factored into the City’s ratemaking process. New utility fees must not be implemented without a 2/3rd majority vote of the electorate. Rates must not exceed the reasonable and allowable cost of production. It has many other clearly defined limits on local government pick pocketing of citizens through user-fees.
Any fiat price can cut off demand, but is this price the most effective way to allocate resources? The current SFPUC ascending step rate structure comes to mind. It may be effective in achieving a cutback, but what cutback? How do they know if it optimizes available resources even under drought conditions? The planning math beguiles by its absence. Slamming on the brake may stop you, but where? Especially if you are driving at night without lights.
The ascending step rate structure has other problems in the context of offending Proposition 218. It appears that higher tier customers are subsidizing lower tier customers. Without a vote this appears to be a new and un-voted approved user fee. To balance required revenues the second tier would possibly be above the cost of production. This is not allowed under Proposition 218.
Rate relief for less fortunate citizens is a worthy cause. It should come from non-SFPUC rate sources. If the SFPUC wants to embed rate relief in its rate structure this program must be put to a vote.
During the 1987 – 1992 drought, California utilities significantly raised rates and customers responded by large decreases in demand. These changed demand patterns remained after the drought ended. This does not surprise: The first law of demand is that higher prices will reduce demand, and the second law is that the longer a higher price remains in effect, the more elastic the demand (substitutes) will become. An inelastic demand is where a one percent (part thereof) increase in price will induce a less than one percent cut back in use, meaning total revenues after the price increase will be greater than before. If the demand becomes elastic, then a one percent increase in price will lead to a greater than one percent decrease in volumes demanded. This will mean that after the price increase, total revenues will have decreased.
A sustained rate spike for water, sewer, and power services that could shift aggregate consumer preferences from inelastic to elastic would mean the revenues of the SFPUC would fall below the cost of providing services. The SFPUC would be forced to cut production costs, and if these costs efforts were not sufficient then it would have to look at reneging/deferring on part of its immense debt service.
The most effective and fair way to transmit rate changes is by individual metering. The consumer uses, the consumer pays. In addition to individual meters, San Francisco has many master-meter connections. A master-meter connection is where there is one meter with multiple users attached. These type arrangements are beggar-thy-neighbor systems, contrary to conservation goals.
SF has a large number of people under rent control, many with utilities embedded in their original leases. The rents and SFPUC utility-costs have had differential escalation rates. This problem can only be handled fairly with individual meters with an escalated credit for the original utility component of the rent. Master meter owners who re-price SFPUC charges (using averaging based on other criteria) to their tenants may offend Proposition 218, and be setting themselves up as an investor owned utility that should be regulated by the CPUC.
The SFPUC should encourage conservation, both through pricing and moral suasion. Subsidies for user-relief or other programs should not be funded out of rate revenues. San Francisco does need an individual ratepayer advocate who cannot and will not succumb to the siren call of the politicians, special interests, etc., and just get on about the job.
Brian Browne was coauthor of 2002 Prop P and former member of the Revenue Bond Oversight Committee.
Drought — the truth about the water works
e have a major drought. This is not the first, nor will it be the last drought. Our water overlords are failing to deliver on their multiple promises of an enhanced system for gathering, storing, delivering, and transporting water and sewerage. W
The 2009 Master Water Sales Agreement (2009-MWSA) of the SF Public Utilities Commission (SFPUC) made very sure the City would be left high and dry relative to its peninsula customers. This Agreement ensured that San Francisco's control over its Hetch Hetchy system would be gobbled up by the Bay Area Water Supply and Conservation Agency (BAWSCA), a state empowered water district, with a minority vacant seat (30%) just waiting for San Francisco to occupy.
The UCB contract was made to disappear by the RBOC Chair and her accomplices. No apology or explanation was offered to UCB and UCLA. This proposed RFP was a real chance to let the public know if the WSIP and other massive utility expenditures are actual or mainly just smoke and mirrors.”
I owe the good citizens of San Francisco a major Mei Culpa. As a member of the Mayor's Infrastructure Task Force (2000-2002) in drafting 2002 Proposition P—I, along with other members—pushed to include a BAWSCA member on the Revenue Bond Oversight Committee (RBOC). Adding a district representative was a first for San Francisco and a major blunder, hopefully never to be repeated. The one solace that can be gleaned is that they may have, by their behavior on the RBOC, provided the very reasons for not allowing them to take over the system.
BAWSCA in 2002 and again in 2009 telegraphed, by state law (AB1823) and contract (2009 MWSA), that it wanted to run the Hetch Hetchy system. It is content to wait and give the money changers and political bunglers sufficient time to hang themselves. Both AB1823 and the 2009 MWSA have the same time limit to fix Hetch Hetchy - 12/31/2015.
The objectives of the SFPUC's money lenders to play games with your bond-finances (February Westside Observer) and BAWSCA's dream of running the Hetch Hetchy system merged in an unholy alliance, to the detriment of San Francisco and its ratepayers.
BAWSCA, through its representatives, from the very first meeting of the RBOC, did everything in its power to thwart the real intent of the RBOC for independent review and for the RBOC to act as a true ratepayer advocate on your behalf. BAWSCA's gamesmanship would not have been productive without the clear and unswerving support of the majority members on this failed and nullified committee.
Beginning in 2007 the Contracts Working Group (CWG) of the RBOC pushed for an independent review of the SFPUC's vast multi-billion dollar infrastructure program by academia. After many starts and stops, due mainly lack of enthusiasm by staff and strategically placed Committee members, UCB and UCLA came up with a well thought out program to do a full body overhaul of the SFPUC's water improvement program ($4.6- billion-WSIP).
One question of overwhelming importance that had to be answered by this contract was, what is the system's real (v imagined PR) capacity to deliver water supplies? In 2000 BAWSCA (then BAWUA) and the SFPUC had agreed, based on historic-hydrologic conditions and system integrity, that the system could reliably deliver 239 million gallons per day (MGD) on a long-term basis. By 2002 this number had morphed upwards to 265 MGD and by 2009, just prior to signing the 2009 MWSA, 265 MGD had become contractual dogma with even the hint that going to 300 MGD would not be a stretch by these imaginative contract negotiators.
These brilliant professors were asked, among many other things, to evaluate the reality of 265 MGD in the context of their overall review of the entire WSIP project. The 2009 MWSA (SF's largest contract ever), between San Francisco and BAWSCA, is a house of cards without independent verification that 265 MGD as a reliable long-term system delivery number. If 265 MGD is invalid, then it would seem prudent to call for renewed negotiations of the MWSA.
These senior UCB professors, with degrees in economics and engineering, and their doctoral candidates agreed that flows and system capacity must be investigated. The professors and their students went through a careful and well thought out review of their RFP. The then-Chair of the CWG and well known water industry expert, Kyle Rhorer, publicly praised these professors and stated the high-value of their contributions to the SFPUC obtained during the RFP process.
Attending the meeting as supposedly interested but independent parties were two RBOC members, but non-subcommittee members, Mayoral appointee Kevin Cheng and BAWSCA appointee John Ummel. Kevin Cheng is currently the Chair of both the RBOC and the SFPUC's Rate Fairness Committee. John Ummel was then the Senior Administrative Analyst at BAWSCA. Concern has been raised about a possible conflict for Cheng being on an independent-RBOC committee overseeing the SFPUC while on the SFPUC's Rate Fairness Committee.
Ummel in an email (obtained under Sunshine – 2/14/2011), to then-Chair Aimee Brown and current member, Treasury Oversight Committee, addressing the UCB-RFPs investigation of flows on the Tuolumne River (85% of the HH supply) and the impact of Global Warming etc. stated the professors were "off base and disorganized." Ummel added in this report to Brown that, "Kevin [Cheng] was at the November (2010) meeting, will attest to how wishy washy the UC report was." The qualifications of these two individuals to evaluate this RFP remain a mystery. Neither man is an engineer, hydrologist, or economist, exactly the disciplines sought when this RFP was designed. This is a classic case of the San Francisco epidemic of resume misfits.
The UCB contract was made to disappear by the RBOC Chair and her accomplices. No apology or explanation was offered to UCB and UCLA. This proposed RFP was a real chance to let the public know if the WSIP and other massive utility expenditures are actual or mainly just smoke and mirrors. One inescapable fact is that BAWSCA does not stand on firm ground should they actually try and absorb the Hetch Hetchy system. They have been integral to the negation process and hence the dysfunctional outcomes.
Brian Browne was a former member of the Revenue Bond Oversight Committeev
OVERSIGHT OR MISUSE?
San Franciscans may be pleasantly surprised to learn that they currently have $5,691,278,327 sitting in the Treasurer’s pool of “Surplus Funds.” Surplus funds as defined by the Treasurer are monies resultant from bond issuances etc. that are not currently being used. The contributors to this Treasurer’s pool of funds are the revenues from the departments and agencies listed below. San Francisco ranks fourth in California for the average size of its pooled portfolio of funds at $6.2 billion.
The Contributors to San Francisco Surplus Funds Pool are as follows:
San Franciscans may not be pleased to learn that the return on these pooled funds is less than one-percent. The largest contributor to this pool of funds is the San Francisco Public Utilities Commission (SFPUC), which contributes approximately 30 percent or $1.7 billion. You may be surprised to find out that the SFPUC pays approximately 4.5 percent to revenue bond coupon holders for its $1.7 billion invested in this pool. The high cost for this excessive liquidity is unexplainable except to conclude that the people responsible for the handling of these funds are incompetent, inexperienced, or politically motivated because proper independent oversight of the SFPUC would not allow for such disastrous results.
There does exist at the current time the Treasury Oversight Committee, which is supposed to ensure that proper investment strategies are optimized, and this is where the devilment begins. One only has to take a look at the track record of the past and present members of this Treasury Oversight Committee and recall how these same individuals worked to destroy the Revenue Bond Oversight Committee as established by you the voters in 2002.
To refresh your memory, as a Supervisor in 2002, I placed on the ballot Proposition P, which created a truly independent Revenue Bond Oversight Committee (RBOC) for the San Francisco Public Utilities Commission, specifically tasked with reviewing the SFPUC’s revenue bond expenditures. This RBOC also has the unique power to stop additional unnecessary bonds from being issued. You the public wisely passed this Proposition, which put a definite crimp into the politicians and money managers’ self-serving practices at that time.
The current Treasury Oversight Committee is comprised of Joe Grazioli, Ben Rosenfeld, Charles Perl and Aimee Brown. There is one vacant seat to be filled by the Chancellor of the Community College District or his/her designee.
Three of the present members of this committee Messrs Perl (SFPUC), Rosenfeld (SF Controller) and Brown (Mayor’s appointee and 5 term chair of the RBOC, and a former employee of a firm that deals with municipal bonds and securities), along with two past members, Todd Rydstrom (SFPUC Chief financial officer and Asst. General Manager), and Ed Harrington, (former SF Controller and SFPUC general manager) all conspired to nullify the very intent of your Proposition P and negate any of the independent controls mandated by the RBOC. Why did they do this? Because without any controls or outside independent review they can do with your money what they decide is best for you, while at the same satisfying the political agendas of the politicians who appointed them and their “friends” with the aforementioned 4.5%. Creating more public debt via well publicized but unnecessary bond issuances is par for the course today for politicians who know nothing about true leadership or genuine public welfare. But this is so egregious, $6B earning less than 1%, while costing us 4.5% is just too obscene to be ignored. The foxes that usurped the RBOC under guise of independent oversight are now the very caretakers of this great amount of money. Do you see how the game works? If you can eliminate any independent outside scrutiny, you can really manipulate public intent.
There are far too many instances of back room dealing involved with these individuals to list here. The failure of these past and present members of the Treasurer’s Oversight Committee to implement 2002 Proposition P alone should have been cause for permanent dismissal from public service, or at least from any positio n involving fiscal oversight. The most amazing phenomenon is that these retreads keep appearing and that the body politic, especially the Mayor and the Board of Supervisors, keep reappointing them to positions of oversight. It is better to have no oversight than the illusion of oversight from people like this.
Brian Browne was coauthor of 2002 Prop P and former member of the Revenue Bond Oversight Committee it created. Tony Hall served twice as Supervisor for District 7
NO OVERSIGHT OF WATER PLAN
The most worrisome aspect of the SF Public Utility Commission’s immense spending programs is that there is no real oversight and no viable Long Term Strategic Plan (LTSP). The Commission is fully politicized and the Revenue Bond Oversight Committee(RBOC) has been willingly high-jacked.
Prior to Tom Ammiano’s 2002 Proposition E, the voters had to approve all major SFPUC revenue bond issuances. After its passage this oversight was removed and entrusted to the Commission, RBOC, and the Board of Supervisors. This gave the illusion of oversight.
Three Propositions (A, E, and P) in 2002 called for the SFPUC to have a long term strategic plan (LTSP). A LTSP asks: Where have you been? Where are you now? Where do you plan to go and how? This article takes a look at the progress of the SFPUC in planning and implementing its $4.6 billion Water Supply Improvement Program (WSIP).
Had the 81 Million Gallons per Day (MGD) assurance…been in place during this period, rationing would have been imposed on the City 80 percent of the time.”
Strategic Moves By Our Peninsula Customers
In 2002 the wholesale customers had California AB1823 passed to ensure eventual control over the Hetch Hetchy system. AB1823 stated: “Schedule [WSIP] shall require that projects representing 50 percent of the total program cost be completed on or before 2010 and that projects Representing 100 percent of the total program cost be completed on or before 2015.” The Bay Area Water Supply and Conservation Agency (BAWSCA), representing the wholesale customers, reinforced 2002 AB123 by putting the 2015 WSIP deadline in the 2009 Master Water Sales Agreement (MWSA) between SFPUC and BAWUA.
A review of June 2013 SFPUC data produced the following summary of WSIP financial progress:
Total bonds Issued
Total bond money spent
Required by AB1823
Bond Issuance Cost/Issued
Total Months 2003-2015
Total Months 2003-2013.6
Percent AB1823 Time expired
Percent spent of $4.6B/WSIP
Some numbers jump out from this table, especially the amount of appropriated but not spent funds amounting to $1,653,414,715. These funds earn less than 1 percent while the average weighted coupon rate for funding bonds is approximately 4.5 percent. This disparity is known as negative arbitrage. Negative arbitrage is when municipalities issue more bonds than are required for actual ongoing work. They do this by rationalizing that available liquidity and financial efficacy will offset the cost of interest-rate differentials. The actual cost-benefit calculations supporting this assumption have not been forthcoming. The near 15 percent of bond revenues going to issuance costs means that without discounting bureaucratic inefficiency, only eight-five cents on the dollar of bond revenues is available for actual projects.
Learning to Count
The 2009 Master Water Sales Agreement is a follow up on the 1984 MWSA. The 1984 MWSA had a major and admitted flaw. It assumed that the Hetch Hetchy system could deliver 285 MGD (million gallons per day). This was changed to another overestimation of 265 MGD for the 2009 MWSA. BAWSCA received an ad infinitum assurance of 184 MGD and San Francisco assurance was cut to 81 MGD. Approximately 4 MGD of San Francisco’s assurance is to be acquired from non-traditional Hetch Hetchy augmented sources (aquifers).
For the years prior to the secret 2009 MWSA negotiations, San Francisco used water in excess of 81 million gallons on 17 occasions. Only on 4 occasions did San Francisco use 81 MGD or less. Had the 81 MGD assurance, as negotiated in the 2009 MWSA, been in place during this period, rationing would have been imposed on the City 80 percent of the time.
During this 1985-2008 period BAWSCA customers only exceeded 184 MGD on three occasions, or 14 percent of the time. These deliveries are summarized above. Under the 2009 MWSA, if the total water demand for all BAWSCA entities is less than 184 MGD, BAWSCA members do not have to share this excess with the City, but can reallocate among peninsula water districts, whose individual demands were in excess of their individual contractual allocations. Excess Hetch Hetchy water available in the suburbs is not reallocated to San Francisco under this 2009 arrangement.
The concept of standard deviation is introduced in the above table, to show that between plus one and minus one standard deviation is where 68 percent of all water demands are expected. Looking at ranges and expected flow probabilities appear to have been ignored by the secret negotiators. This has resulted in a very unfair and unjustifiable allocation for San Francisco. The system has never produced 265 MGD over a statistically significant period. The 265 number is a figment of someone’s imagination, probably to increase BAWSCA’s share of Hetch Hetchy flows from their average of 163 MGD to 184 MGD, while cutting San Francisco back from its average of 86 MGD of Hetch Hetchy water to 78 MGD from Hetch Hetchy and 3 MGD from aquifer water.
These secret negotiators clearly failed to review a thorough 2000 joint study by SFPUC and BAWUA (Bay Area Water Users Association), the BAWSCA predecessor, which estimated Hetch Hetchy system long-term reliability, based on overall system integrity and historic hydrology, to be 239 MGD. This failure was compounded when the secret negotiators failed to use probabilistic techniques to look at expected turn-aways (demand exceeding contractual constraints) in making these illogical and unfair water assurances.
There are plans afoot to use part of San Francisco’s Hetch Hetchy water allocation to recharge the South Westside Groundwater Basin (Daly City, San Bruno, and California Water Services) during wet and normal use. Extracted water from these wells will require disinfection and additional treatment facilities.
A major overlook by these planners is that state law will disallow major developments if the water supply availability forecast is not reliable. The CEQA (California Environmental Quality Act) forecast used to justify the 2009 MWSA appears very challengeable
Utilities set rates to recover all reasonable and allowable costs. What is reasonable and what is allowable in a bureaucratic setting defies definition. Investor owned utilities in California are regulated by the California Public Utilities Commission (CPUC). Municipal entities are self-regulating. If utility costs equal $X then revenues must equal $X. This is the numerator in the rate quotient where volumes (V) are the denominator. This gives a generalized/average rate (R) quotient of R = $X/V.
Wholesale rates are now set using the cash method versus the utility method for capital components. The two systems are similar but significantly different especially as to identifying ownership. The utility method allows for a weighted return on debt and equity capital for rate base. Rate base was defined as being the historical investments less accumulated depreciation plus an allowance for working capital. This approach meant that clearly defined SFPUC assets were receiving a return based on an agreed weighted average cost of debt and equity capital. The cash approach seems to have opened the field for opportunistic financial transactions, clouded the concept of ownership, and disconnected water from its real valuation.
The following table shows how BAWSCA wholesale rates have been developed by the SFPUC for FY 2012-13 and FY 2013. Under the utility approach SFPUC would have charged BAWSCA a weighted average cost of capital on rate base. Following the 2009 MWSA the peninsula customers were to pay a depreciation component of $25.1 million per year for 25 years at 5.3 percent for capital charges (formerly a return on rate base). BAWSCA, recently issued its own bonds, and paid $365 million as full payment on the Hetch Hetchy depreciated asset use, and as shown these pre-2009 capital charges no longer enter into their rate calculation. This is represented by the zero in their FY-13-14 revenue requirements estimate for the item “Capital Pre 2009 Asset.”
SFPUC – Post 2009 MWSA – Wholesale Rate Calculation
The question - Does a depreciated account represent the true value of the asset? Should the secret negotiators have used a replacement (opportunity) cost versus a subjective accounting approach to more closely quantify the real value of water? To check a replacement (opportunity cost) approach, shown in the above table, instead of zero for capital costs a very modest $5 billion dollar replacement for the Hetch Hetchy Water System was used and a weighted average cost of capital (WACC) of 4.5 percent was charged. BAWSCA was allocated 66% of these capital costs amounting to an annual capital charge of $149 million.
It appears in the 2009 MWSA that SFPUC-BAWSCA valued the entire Hetch Hetchy water system at approximately $606 million. There should have been greater consideration for replacement costs in addition to WSIP work.
Using the modest replacement cost approach and charging a 4.5% weighted average cost of capital (WACC), the unit of water (748 gallons) increased from $2.51/CCF to $4.64/CCF. This is shown in the far right column above. This higher price, while unwelcome to many, would probably bring about a more optimal use of our scarce water resources. It is important that society accurately value these public assets. Using public resources in their highest use value must be followed where possible. Many question if Los Angeles would be the current Los Angeles if it had to full cost its water.
Many ancient water systems are still operational and productive. They survive because of their functionality and immense cost for replacing. The longevity of these type capital items is food for thought as to how to value them, and thus the value of their end product, and question the applicability of a depreciation account on truly ad infinitum type assets.
Voters must again have the right to approve all significant issuances of revenue bonds (repeal 2002 Proposition E) and the 2009 Master Sales Agreement (2009 MWSA) must be renegotiated.
Brian Browne was coauthor of 2002 Prop P and former member of the Revenue Bond Oversight Committee it created.
|A GPS-generated snap shot of San Francisco taxis shows a typical Friday night peak-time concentration of taxi-cabs in the north-east quadrant.
The San Francisco Municipal Transportation Agency (SFMTA) is failing to properly regulate the taxi cab industry. This must change immediately, otherwise the current cab model, with its many positive externalities for San Francisco, will disappear.
A recent agreement by the California Public Utilities Commission (CPUC) with an e-hail (Lyft) provider of ride-sharing (taxi surrogate) has potentially made every private car in California a taxi. The CPUC states that it has transportation jurisdiction over public highways and streets connecting points in California that do not cross interstate borders. The SFMTA assumed regulatory control over San Francisco taxis on March 1, 2009 when it took over the functions of the former Taxicab Commission.
A recent agreement by the California Public Utilities Commission (CPUC) with an e-hail (Lyft) provider of ride-sharing (taxi surrogate) has potentially made every private car in California a taxi … San Francisco taxicabs face incredible competition from these transit-alternatives … Taxis are already required to have many public safeguards such as high-levels of insurance, workers-compensation, redundant systems, qualified and police-vetted drivers etc, attributes not yet quantified with its ad hoc competitors.”
San Francisco taxicabs face incredible competition from these transit-alternatives. Some are legal under the permissive CPUC umbrella and many are illegal, mainly because there is insufficient enforcement. The SFMTA has no discernible regulatory process. SFMTA reaction to this competitive tsunami is usually counter-productive for the cab industry. Taxis are already required to have many public safeguards such as high-levels of insurance, workers-compensation, redundant systems, qualified and police-vetted drivers etc, attributes not yet quantified with its ad hoc competitors.
Every time the SFMTA forces the cab industry to accept an additional mandate it is taxing the industry by adding to the cost of doing business. Economists tell us that at each price, these additive marginal costs decrease supply, just like any tax on doing business. These taxes seem to be aimed more at transferring revenues from the taxis to the SFMTA for debt relief than enhancing the efficiency of the cabs.
On Tuesday March 19, 2013 the SFMTA legislated that all taxis must provide instantaneous (six seconds) data to the SFMTA. The SFMTA will develop and run a centralized database and cab-application (app). This app and data base will be 100 percent under the control of the SFMTA. The SFMTA state they will seek competitive bids from vendors to build the app. Data for this application will be provided free to the SFMTA by the cab companies. This is yet another tax on doing business and will allow the SFMTA to expand its already bloated and overpaid bureaucracy and get involved in an entrepreneurial enterprise with which they have no experience. This is a sector that does not need to be socialized at taxpayer expense.
The SFMTA claims this will make cabs more available to San Francisco and in degree be a substitute for adding new cabs. The cab companies argued that they can and are developing better (while maintaining brand recognition) apps, and if the SFMTA allowed them to require credit card prepayment (as required by their competitors) both riders and drivers would benefit. There is also privacy (corporate and individual) and fairness concerns in centralizing these data in the hands of a government agency.
The intent of the Board of Supervisors in passing the ordinance “Transferring the powers and duties of the Taxi Commission to the Municipal Transportation Agency” was not to have the SFMTA develop opportunistic ways to use the taxicab industry to pay down the non-taxi debt incurred by the SFMTA, or make taxis a test tube for failed USSR-type regulations, but to implement, as stated, policies to achieve “excellence” and “accountability.”
A GPS-generated snap shot of San Francisco taxis shows a typical Friday night peak-time concentration of taxi-cabs in the north-east quadrant. The average productivity (total time carrying passengers to total available time) of the San Francisco taxi fleet during the peak Friday and Saturday nights is nearly 40 percent higher than the average, non-peak, Monday to Sunday. The City Controller, under the Taxicab Commission, issued biannual Taxi Industry Reports. In these reports the Controller stated that SF taxis averaged 30 paying passenger rides per day. Statistical evidence obtained through GPS meter-clicks shows that the largest cab company averages 44 rides per day. Taxis have become very efficient. There are just not enough of them.
One interpretation of Say’s Law is that supply creates its own demand. Actually the demand is there, it just has not yet been met. The famous Ford Edsel – the demand was there, but the market did not evaluate it at the cost of producing. This idea seems to have great legitimacy and relevance in San Francisco. There is clearly an unmet demand for taxis in San Francisco. The issuance of more regular taxi medallions, with a decrease in costly and irrelevant encumbrances by the SFMTA, would disperse this cluster phenomenon (as shown in the GPS diagram) into the other areas of San Francisco. San Francisco does not need more anti-competitive activities (centralized dispatch), it needs more regular cabs and less misplaced economic regulation.
A major first move in regulating taxis by the SFMTA was to set up a “short-term” pilot project to allow the buying and selling (medallion holder - age based) of medallions at a fixed price of $250,000. The transfer fee was set at twenty-percent, fifteen-percent going to the SFMTA, and five-percent to a Driver Fund. This program also allowed the SFMTA to sell up to sixty-medallions, revoked or unissued and to use these funds in their debt reduction program. According to the SFMTA, this would “generate emergency funding” required by the SFMTA. Known by its real purpose, it is paying down a deficit unrelated to the vibrant and non-subsidized, self-sustaining taxi-industry. No rigorous asset valuation was made to set the $250,000 (maybe even an auction process?). At best it was a guess. These transfer fees and direct sales are in large an involuntary transfer from taxis to the other parts of the financially ailing SFMTA.
In late 2012 SFMTA allowed medallion holders, 60 and over, to sell their medallion to eligible drivers for $300,000. The SFMTA advised that these funds would be used for transportation initiatives and for the taxi industry. The SFMTA will collect thirty-percent of all sales. Approximately 300 medallions have been transferred in these so called sales programs. The SFMTA micromanages the entire exchange process and even qualifies participating lending institutes.
Fares have been increased once by the SFMTA. The allowable gate (lease to driver) charged by companies has not changed since 2007. There has been no proper public convenience and necessity (PC&N) hearing on these matters. The last gate increase in 2007 was tied to the cab companies committing to huge investments to green (fuel efficient and environmentally friendly vehicles) the fleet. Regulatory gate lag since 1999 has cost the two largest taxi companies (Yellow and Luxor) approximately $70 million.
Taxi drivers often bemoan the disparity between what Muni drivers earn (plus benefits) and what a cabbie makes. It seems that sustaining these inflated Muni remuneration packages has now fallen significantly on the cab industry to subsidize. This forced cross-subsidization from cabs to Muni might well fall under the banner of “no new local taxation without a vote” and thus violate the mandates of 1996 Proposition A, which is a California constitutional amendment.
Brian Browne was coauthor of 2002 Prop P and former member of the Revenue Bond Oversight Committee it created.
That Never Was
Tony Hall, in the November issue of the WSO, is correct in stating the Revenue Bond Oversight Committee (RBOC) is acting illegally. He should know; he placed Proposition P, the enabling legislation, on the ballot in November 2002.
There is a complete disconnect between what this Committee does and what the voters approved it to do in passing 2002 Proposition P. The correlation between implementation and the legislative mandate is negative. The RBOC has become a smoke screen for the many failures and dalliances of the SFPUC. In the expenditure of revenue bonds, there is no real ratepayer advocate acting in good faith on your behalf to oversee this bureaucratic Titanic as it indebts you to the tune of approximately $15 billion.
During World War 2 the British conceived the idea (“Operation Mincemeat” aka “The Person who never was”) of reinventing the identity of a human cadaver to convince the Germans that the next invasion by allied forces would be against Sardinia and Greece rather than the intended target of Sicily. The cadaver (now a fictitious Major William Martin) was dropped off the coast of Spain with false papers and plans. The ruse worked so well that even after Sicily was invaded the Germans still believed Sardinia and Greece were the intended targets. The RBOC is San Francisco’s financial Major William Martin. It is a mean-spirited disguise to fool the public into complacency that their revenue bond dollars are being well spent.
The Board of Supervisors could have allowed this fictitious committee, as mandated by 2002 Proposition P, to ignobly pass into the sunset on January 1, 2013. Instead the BoS, led by Supervisors Farrell, Kim, and Campos, is resuscitating it for another three years to ensure there is no real ratepayer advocate overseeing the gigantic expenditures being made from bond revenues to supposedly ensure our water, power, and wastewater infrastructure is fully rehabilitated and able to complement the economic and social growth of San Francisco and its peninsula customers. The financial and implementation smokescreen remains in place.
I disagree with Tony Hall that the current legislation is sufficient to ensure full oversight. It may well be sufficient in a world of idealists with hearts as pure as High Sierra snow, but not in the real world of high-finance, political intrigue, and backdoor dealings.”
I disagree with Tony Hall that the current legislation is sufficient to ensure full oversight. It may well be sufficient in a world of idealists with hearts as pure as High Sierra snow, but not in the real world of high-finance, political intrigue, and backdoor dealings. Some immediate remedies come to mind.
Step 1 - A Charter Amendment must be passed to give voters the right to issue all revenue bonds by approval at the ballot box. This goes a lot further than just rescinding Tom Ammiano’s 2002 Proposition E, which stripped voters of the right to issue SFPUC revenue bonds, but would require voter approval for all City and County of San Francisco revenue bonds.
Step 2- All loopholes must be eliminated. San Francisco voters, who in 2002 believed they were actually approving the water fix-up (Proposition A for $1.6B) and making financing easier (Proposition E) were hoodwinked by our representatives. The state (driven by politicians with ambitions exceeding the narrow confines of the City) had passed 2002-SB1870 creating a Regional Financing Authority (RFA) to lend money to the Hetch Hetchy water system regardless of the November 2002 election outcome. It was really a very cruel hoax on those folks who thought they really had a say in how the Hetch Hetchy fix-up would proceed.
Had both A and E failed, the massive expenditures by the SFPUC would still have taken place through the financial mechanisms of the RFA, and ratepayers would have to repay RFA loans in rate increases. This type of sneaky end-around-end smokescreen must be effectively blocked. Bottom line, in 2002 there was a con game pulled on the voters. Failure of both Props A (1.6 billion Hetch Hetchy fix-up) and Prop E (stripping the right of voters to approve revenue bonds) would have had the RFA as an insurance policy.
Step - 3 RBOC meeting minutes must be outsourced to a reliable and bonded transcription entity. The omissions and edited minutes of the RBOC official meetings are legend. These scant and uninformative minutes provide an extremely biased and self-serving history. A goal must be to have all RBOC meeting audio tapes transcribed and compared to the actual minutes.
Step – 4 The RBOC meetings must be held at user friendly times, at City Hall, and televised. There must be a complete break between the SFPUC and the RBOC. The actual language of 2002 Proposition P is clear that it must be independent. If the Founding Father of the Republic had interpreted independence as done with the RBOC, King George III would have retained veto powers and Congress would have met in London.
There are many more steps. A ballot measure to restore financing authority to San Francisco voters should include a call for ending this current charade and possibly creating a real oversight committee with the ratepayers as its clients. Not the SFPUC, which is the current setup.
The theory of the firm acknowledges that shirking requires oversight. Managers and oversight groups provide this function. That is they act as anti-shirkers. We need real anti-shirkers, not members of the group most likely to benefit from shirking.
It is time to put an end to illusionary “Operation Mincemeats” like the RBOC, and end committee hijacking and committee nullification.
The economic and social costs of these oversight failures are immense. These costs must be internalized by the ratepayers. Meanwhile the responsible resume misfits will be retired on your benevolence. Just look, for example, at the negative externalities flowing from the secretly negotiated 2009 Master Water Sales Agreement (MWSA), the largest contract ever entered into by San Francisco.
The change from the utility method to the cash method for allocating costs has clearly enhanced the playground for the financial types and clouded the issue of system ownership. A major catch phrase to cover many situations is encumbered. Its real meaning is as clear as mud.
Giving the peninsula customers an ad infinitum assurance exceeding 10 percent of their historical volumetric takes of Hetch Hetchy water was achieved by the secret negotiators, by cutting SF’s historical takes to an assurance that is approximately 15 percent less than historical takes. Both assurances sum to a number that is a statistical outlier, an event that occurs approximately 16 times every 100 years.
Brian Browne is a former member of the RBOC, firstname.lastname@example.org
Let the Revenue Bond Oversight Committee Sunset
The Westside Observer (WSO) has been out front with articles, by multiple authors, criticizing the effectiveness of the Revenue Bond Oversight Committee (RBOC). The San Francisco Public Utilities Commission (SFPUC) has shown its serious sensitivity to these criticisms of both the RBOC and the SFPUC by direct or indirect rebuttals in the WSO. These rebuttals have not dented the stinging criticisms of the SFPUC/RBOC. There was always light: 2002 Prop P mandated the RBOC sunset on 1/1/13.
District 2 Supervisor, Mark Farrell, however, has proposed an ordinance to amend the SF Administrative Code Sec. 5A.36 to extend the sunset date of the RBOC to 1/1/2018 from its current and eagerly-sought demise date of 1/1/2013.
We do need real, transparent, and most of all, independent revenue-bond expenditure oversight. Let this committee benevolently “pass” on 1/1/2013, but let its deeds be reviewed in light of the charter it was assigned in 2002, versus what it actually did 2003-2012. This is also known as public accountability”
The RBOC was supposed to act as the independent ratepayers’ advocate in the matter of revenue bond expenditures. It was placed on the ballot in 2002 by then-Supervisor Tony Hall. It passed with a significant majority. Tony has since disowned the RBOC as having no correlation with what he intended. During the mayoral debates he questioned its legality. Two authors of the enabling legislation describe it as a compliant lap dog of the SFPUC.
Nullification of a major city financial and supposedly independent oversight committee merits immediate, independent, and transparent investigation. It is hoped that the Civil Grand Jury will undertake this task. The Board of Supervisors should support such an investigation. The Board should also withhold revenue bond-funding power from the SFPUC until a proper investigation of the nexus (and impact) between the RBOC, SFPUC, Controller (CSA) and other government and private entities is conducted.
All who proclaim that this committee has been unswervingly true to 2002 Prop P should welcome this intense and open investigation. The Supervisors, by staying the revenue bond funding powers of the SFPUC during this period, will greatly relieve the increasing anxiety among ratepayers, who are becoming overwhelmed by utility rate hikes, spikes which appear to be the tip of the iceberg when all these billions, generated from the sale of revenue bonds, (some sitting in negative interest-bearing accounts), are properly amortized (versus innovative trading of income streams) into the rate structure.
The increasing issuance of revenue bonds by all entities in San Francisco is a growing concern. Seems San Francisco is creating a TARP-type relief system, to be repaid by future user fees, to cover up past and current inattention to infrastructure problems, and also to act as a “Keynesian” employment multiplier for public-servant positions that have become redundant in the dynamics of recession and technological change.
The Ethics Commission has taken stage center in the very public Ross Mirkarimi hearing. But off camera, the Controller’s City Services Auditor (CSA) has high jacked the contracting functions for the RBOC. The vehicle allowing this high jacking was a memorandum of understanding (MOU) between the RBOC and the Controller’s CSA in which the SFPUC agreed to pay the CSA for time and effort spent doing so. An inquiry to the Ethics Commission asked: How can the SFPUC justify these expenditures as part of their rate structure? Rates should only include reasonable and allowable costs, not expenditures that make “independent oversight” a joke. The Ethics Commission referred athe inquiry to the Whistle Blowers (CSA), the very organization who was benefitting from the funding. The Whistle Blowers referred the inquiry back to the SFPUC. An even darker cloud looms on the regulatory horizon when it is realized the CSA budget is a percent of all city departments, including the SFPUC.
We do need real, transparent, and most of all, independent revenue-bond expenditure oversight. Let this committee benevolently “pass” on 1/1/2013, but let its deeds be reviewed in light of the charter it was assigned in 2002, versus what it actually did 2003-2012. This is also known as public accountability.
Brian Browne is a former member of the RBOC, email@example.com
All in the Family II
Let the games begin (cautiously)
Turning on the City TV channel I was surprised to hear a former City Attorney complain to members of Budget and Finance Committee, 2/15/12, about the attachment of the 8 Washington Street project to Item 9 “Resolution to Intention to Form Waterfront Infrastructure Financing District.” This poison pill was excised at the request of David Chiu and members of the public.
Anyone living in the Financial District is aware that the 8 Washington Project (Sea Wall Lot 351), diminishing existing open access tennis courts, swim pools, and recreational areas with a high-priced and a very tall condominium complex is roundly opposed by many as both a bayside eyesore and a further depletion of city sporting and recreational facilities.
Disney learned this when he built Disneyland in Anaheim. He did not buy the surrounding area. Hotels rushed in and internalized the revenues associated with Disney’s concept."
The huge public-development expenditures to refurbish the Embarcadero were intended to create wonderful externalities to be internalized by the greatest number of citizens. These public funds were not intended to create an environment for an exclusive few who can afford these well-situated condos. To allow the waterfront to be obstructed by this complex will be to rob a great number of folks of their current heritage – the very beautiful Embarcadero. It represents a significant wealth transfer which is being perpetrated as a function of political muscle. This one project is the beginning of a slippery slope of high rise clutter.
Disney learned this when he built Disneyland in Anaheim. He did not buy the surrounding area. Hotels rushed in and internalized the revenues associated with Disney’s concept. When he developed Disney World in Orlando he wisely purchased vast acres of surrounding land to ensure opportunistic types could not internalize the external effects of being near Disney World.
When city planners received public funding to develop the Embarcadero, it was understood that opportunistic developers would not be able to profit by crowding out the promised beauty. If the city allows 8 Washington to be developed, it should make the developers pay the full opportunity cost of explicit development funds and implicit loss of public-good access to the existing ambience. In other words – 8 Washington approval will mean a massive wealth transfer from all citizens to a very few, possibly buying these condos for speculative purposes.
This unexpected insertion of 8 Washington raised the questions of what is this special district and why do we need it? A more bottom line question: Who will benefit from the planning, financing and implementations of the expanded America’s Cup project? Who will pay?
This special district, submitted by the mayor to the BoS, is authorized by California AB 664 (2.17.12); entitled, “Ammiano. Infrastructure and financing districts. America’s Cup venues.” This Act declares, among other things: “… portions of the San Francisco waterfront, are characterized by deteriorating conditions that cannot be remedied by private investments alone, and require the use of public financing mechanisms to finance the rectification the deteriorating conditions….”
The financing mechanisms allowed under the Act are similar to the menu of municipal financing approaches currently employed by San Francisco for developing projects. Revenues identified in AB 664 are “--- taxes, fees, charges, and other revenues….” Implementation of this financing district may fall under 1996 Proposition 218 and must be voted on.
One innovative approach being offered by the America’s Cup proponents is philanthropy to offset City expenses. The organizers have promised $32 million in three payments $12MM, 10MM, and $10MM spread over approximately three years. What, if anything, will these generous folks want in return for their donations? The city proceeding with the promise of $32 million in revenue funding from possible charity should be analyzed as a viable funding approach.
One public speaker made a reasoned comment that the race could proceed with minimal public involvement. Adding the Bay, basically—asis—was ready to stage the race. Based on his experience in sailboat racing, he delineated reasonable and affordable logistics that minimized much of the planned expenditures. Voices like this would gain greater access to the public awareness should the “final plan” be brought before the voters.
Of great concern is the naming spree by politicians of publicly-financed facilities. Residents are voicing increasing concern that they have no say in the naming of facilities, which they helped birth and for which they are paying. All proposed public facility (parks, buildings, walkways, etc.) names or name changes should be submitted to the public for voter approval. We all own these facilities, not just inside politicians with political clout.
A historical review of public financing and its efficacy might provide some clues as to expected outcomes from this new financing authority. In 2001 Senate Bill 1870 became law. SB1870 established a Regional Financing Authority (RFA),basically telling San Francisco voters that even if they disapproved or wanted mitigated the proposed billion ($) in the proposed fix-up debt for the Hetch Hetchy system, their will would be ignored via SB1870 financing. SB1870 was sponsored by peninsula water wholesale customers with much support from San Francisco regionalists.
To ensure voters no longer participated in issuing these type revenue bonds, Tom Ammiano’s 2002 Proposition E explicitly gave this power to the Board. Oversight will never return to the City until voter rights to issue debt are returned as prior to 2002 Proposition E.
What was originally intended as a sailing race has become an expensive and difficult to decipher development project. The secretive insertion of 8 Washington into approval of the financing district may be the tip of the iceberg. Yes, the America’s Cup is a brilliant spectacle – but at what price? The real cost is what we have to give up. To paraphrase Adam Smith, when folks speak of the public good I fear for my own personal well being.
Brian Browne is a former member of the Revenue Bond Oversight Committee, feedback: firstname.lastname@example.org
All in the Family
The San Francisco Public Utilities (SFPUC) requested the six-term chair, Ms. Aimee Brown, of the supposedly independent Revenue Bond Oversight Committee (RBOC), write a rebuttal to my “misconceptions” as printed in the Westside Observer (WSO). A sunshine request revealed this article was a collaborative effort between the SFPUC and Ms. Brown.
In early 2011, the RBOC decision-makers, without notice, and off-camera, stopped ongoing negotiations with the University of California Berkeley (UCB) and University of California Los Angeles (UCLA) to do a reality check on SFPUC’s plans and operations. The RBOC, instead, hired the Controller’s City Services Auditor (CSA), also known as the Whistle Blowers.
The universities gave freely of their valuable time and effort to understand the complexities of the SFPUC’s plans, its business model, and developed a complete draft-proposal. They did not get a thank you, nor apology, nor even an official notification from the RBOC.
The CSA was awarded a lucrative memorandum of understanding (MOU) with the RBOC. This MOU basically made the CSA the sole vendor for RBOC contracts. The RBOC majority refused to pay the CSA for pre-MOU costs. Staff of the SFPUC, at the RBOC meeting, agreed to pick up these pre-MOU costs of the CSA.
The CSA was created in 2003 by Proposition C, aka the Whistle Blower legislation. The CSA has a budget of 0.002 percent of the entire city budget (including the SFPUC). This means the CSA budget is approximately $13 million dollars. The CSA legislative charge is to investigate any and all city departments.
Immediate questions which come to mind are: Is using the CSA compliant with the RBOC’s legislative directive to seek outside independent consultants? Why does the CSA require RBOC funds to do what it is already funded and mandated to do? Is the CSA comparable to the opportunity cost of displacing the universities? Hiring an academic and working as a private consultant with prior commercial ties to the SFPUC does not overcome this latter concern.
A major issue is who pays the bill when the SFPUC expends funds for these types of questionable activities. The SFPUC is an enterprise organization. Its revenues are derived from rates. It claims to use a cost of service approach wherein only reasonable and allowable costs may be paid from rates. It is difficult to rationalize how costs generated in rebutting my articles and pre-MOU costs (to hire consultants for its independent oversight committee) may be classified as reasonable and allowable and then blended into your water and wastewater rates.
I called the Ethics Commission and was told to check with the city Whistle Blowers, aka CSA. I did, and was told to check with the Commission (SFPUC). This clearly creates an ever imploding spiral. This does however, highlight the need for real regulatory oversight.
The RBOC will sunset on 1/1/2013. Its life can be extended by the Board of Supervisors (BoS). The BoS should let this Committee, mercifully for the ratepayers, sunset on 1/1/2013. Committee nullification is not good public policy. A new and effective regulatory body should be developed that fulfills the intended charter of being a ratepayer advocate in the expenditure of revenue bonds.
Brian Browne is the Board of Supervisor’s appointed Member of the Revenue Bond Oversight Committee
An Alternative View
Readers may remember the September WSO article "Dracula Guards the Blood Bank" catalyzed a meeting (9/20/11) with the City Controller, Benjamin Rosenfield, and a group of activists (Joan Girardot, Nancy Wuerfel, Philip Ward, Esq. and the author). The main topic was to question the legality of the Memorandum of Understanding (MOU) between the Revenue Bond Oversight Committee (RBOC) and the Controller. This MOU makes the Controller the sole source vendor for RBOC contracts. This inside-dependent relationship is in direct contradiction to what was intended in creating an independent RBOC (2002 Proposition P) with a mandate to use outside-independent consultants and, if necessary (under certain mandated conditions), halt the issuance of revenue bonds.
The Controller said he agreed to this MOU as a result of the RBOC chair approaching him and requesting such services. In my September article I mention how this approach was done off-camera and at the cost of using the University of California as an independent, qualified, and outside consultant. In the face of legal arguments by the participants that this type MOU was not intended in 2002 Proposition P, the Controller agreed to seek another legal opinion from the City Attorney. This legal opinion, when presented, will be reviewed by independent attorneys and interested ratepayers/citizens.
Meanwhile, the failure to implement Proposition P as intended has surfaced in the mayoral debates. Tony Hall, who regards Proposition P as his jewel in the crown of his many legislative endeavors as a supervisor, has expressed publicly that the RBOC has been hijacked by both the Controller and SFPUC. He believes that this takeover has robbed the voters and markets of real oversight. He has expressed the opinion that this matter is so serious as to be considered corruption, and if elected he will take immediate corrective measures.
Meanwhile the City Attorney and other members of this committee push on with proposed legislation and lobby efforts to extend this debacle past its sunset of 1/1/13. We do need oversight, but not from a group that have habitually ignored the mandates of the enabling legislation.
The RBOC and the SFPUC are reacting superficially to criticism of their codependency. The RBOC did hire (negotiating initially off-camera and in secret) a UC faculty member, with past ties to the SFPUC, and working for his own consulting company (not the independent, multi-disciplinary UC group as originally proposed). The SFPUC (Commission) selected a group of folks labeled the Independent Review Committee (SFPUC-IRC). The RBOC virtually accepts this SFPUC constituted group (SFPUC-IRC) as their own independent review committee. These thinly veiled, non-structural actions to give a PR perception of the RBOC being independent do nothing to calm market and ratepayer concerns. Au contraire.
Brian Browne is the Supervisor's appointee to the Revenue Bond Oversight Committee.
The Chair of RBOC Responds to Brian Browne
Independent, Transparent Oversight
The Revenue Bond Oversight Committee
In 2002, San Francisco voters approved Proposition P and established the SFPUC Revenue Bond Oversight Committee (RBOC). Our job is to ensure that the SFPUC spends bond proceeds appropriately and complies with prudent financial management. The Committee meets on the third Monday of the month at 9:30 AM on the 4th floor of the SFPUC building at 1155 Market Street. The Committee abides by all sunshine requirements in accordance with San Francisco law and we pride ourselves on being open, accessible and above all else, transparent to the City and its ratepayers. In advance of each meeting, agendas are posted on the SFPUC website, the Board of Supervisors' bulletin board in City Hall and in the Main Public Library government document's section.
Proposition P authorizes the RBOC to review and audit revenue-bond fund expenditures. Our current principal focus is related to the $4.6B Water System Improvement Program (WSIP), the seismic and reliability upgrade to the Hetch Hetchy Water System. Our current audits are also starting to review the Wastewater Program (SSIP) as it gears up. The Committee conducts its oversight of SFPUC revenue bond expenditures through detailed audits and reports that are funded by a 1/20th of 1% fee on all bond issuances.
I have been a member of the RBOC since the Committee was formed in 2003 and I have served as Committee Chair since 2007.
The RBOC is an independent committee whose members are appointed by the Mayor, Board of Supervisors, Budget Analyst and Controller's Offices and BAWSCA. The Committee is composed of diverse professionals all with varying backgrounds and expertise that we leverage to produce thorough, effective and timely financial audits and analyses of the SFPUC's bond-funded projects. As mandated by Proposition P, the Committee members have expertise relevant to the work of the Committee that includes experience in economics, the environment, construction, project management, auditing, accounting and project finance. The RBOC is a democratically-run committee and all agenda items are subject to majority vote. The diversity in backgrounds and the constituencies that the members represent, foster productive and often vigorous debate. However, despite this diversity of viewpoints, the Committee has always come together to move forward and find consensus on projects and the scopes of our audits and financial analyses.
In the past, most Committee members have publically commended the work of our independent consulting team. Their audits have found the SFPUC in compliance with the City law, policies and procedures as well as industry best practices. The Committee has had detailed discussions with the General Manager's office about any issues or areas for further improvement that our audits reveal. In fact, we make recommendations to senior staff so they can monitor and remedy any findings and make it easier for the public to understand what is happening with each project. Significantly, most of our recommendations have been incorporated into the SFPUC's practices in order to improve its management of bond-funded construction projects, which ultimately benefits ratepayers. The work our Committee has generated is also presented annually and in public to the SFPUC Commission.
The RBOC is currently engaged in multiple oversight projects. We have contracted with the City Services Auditor, in their role as independent auditors, to review project expenditures and appropriations and project management costs related to several bond-funded WSIP and SSIP projects. Concurrent with these audits, the RBOC is conducting an intensive review of the SFPUC's construction management processes with the assistance of an Independent Review Panel of industry leaders. Included in this team are faculty from UC Berkeley and Stanford University. The review will examine three areas critical to the successful completion of large-scale construction projects: change management, risk management and project cost, schedule and contingencies; this report is expected to be finished in November.
All of this critical oversight work is ongoing while construction for the Water System Improvement Program is reaching its zenith. We're also beginning to plan for our oversight responsibilities for SSIP. Now, more than ever, we need the input of concern-minded San Francisco residents who wish to lend a hand to help ensure that the WSIP program is completed on-time and on-budget. The vital financial auditing and analyses work of our Committee has never been more valuable to ratepayers and the City than now. Please consider joining us on the third Monday morning of each month. Our Committee is often frequented by members of the public; any and all San Francisco residents are welcome to sit at the table with our Committee members and participate in our monthly meetings or in our working group conferences. Thank you for your attention.
Aimee Brown is the Chair of the RBOC, she has served on the Municipal Securities Rulemaking Board, VP at Goldman Sachs, Principal at Artemis Capital Group and Managing Director at RBC Dain Rauscher. and the National Association of Securities Dealer's Fixed Income Committee.
Dracula Guards the Blood Bank
The City needs real versus politicized regulatory oversight. No oversight is better than the illusion of oversight.
The imperfections of the California Public Utilities Commission (CPUC) regulatory oversight are often noted. These regulatory failings often pale in comparison with those of San Francisco's self-regulating system.
A case in point is the Public Utilities Revenue Bond Oversight Committee (RBOC). It was created by 2002 Prop P (sponsored by then supervisor Tony Hall) to provide independent, outside, and full public view of how revenue bonds issued by the SFPUC are spent.
This committee meets in the bowels of the SFPUC at 9:30am on Monday mornings. The RBOC has never held a public outreach meeting nor has it ever used outside-independent consultants. Both of which are mandated by its enabling legislation. Staff members attend in abundance (on the ratepayers' purse) and are treated like members. Their level of interference significantly counters what the voters assumed they were voting on.
The first three RBOC contracts were awarded to the same consultant. This consultant was chosen at a non-agendized meeting. Two RBOC members from the SFPUC and the Controller voted.
Without critiquing the products produced by the consultant, all three RBOC processes were flawed. The third contract, for the supposedly independent RBOC, was signed by the SFPUC in April 2009. After numerous entreaties to the City Attorney, this contract came before the full committee and public at an agendized meeting.
Following this 2009 procedural debacle, the RBOC Chair e agreed to improve the contractual process. The Contracts Working Group (CWG) of the RBOC contacted all major California universities with a request to help the RBOC determine if revenue bonds were being properly spent and if the SFPUC could meet its legal mandates: complete the Water Supply Improvement Program (WSIP) on time 12/31/15 and on budget ($4.6B).
Enter Major Universities In the 2010 RBOC-CWG Report, what really happened with the universities was ignored: This subcommittee during 2010 openly engaged in many significant exchanges with UCLA and UCB for independent, multidisciplinary, and outside consulting services.
Serious consideration for hiring UCLA and UCB did happen. the agenda item for the meeting of the RBOC-CWG reads: "Discussion and Possible Action concerning UC Berkeley and UCLA Joint proposal to development a Request for Proposal (RFP) concerning the Revenue Bond Oversight Committee (RBOC) and water System Improvement Program (WSIP)."
The minutes for this meeting state: "Chair Rhorer stated that the RBOC would draft a general scope of work based on the current discussion and bring before the Revenue Bond Oversight Committee to determine how to enter into a contract with UC Berkeley."
On August 17, 2010, the Coalition for San Francisco Neighborhoods (CSFN) passed the following resolution unanimously:
"Resolved, that the Coalition for San Francisco Neighborhoods strongly urges the Revenue Bond Oversight Committee to enter into a contract with designated experts at UC Berkeley and UCLA to conduct a thorough organizational review and status report of the WSIP (Water System Improvement Program) to determine if the projects can be completed on budget and by December 31, 2015, as mandated by State Law. Passed August 17 2010, Unanimous."
This resolution was delivered to RBOC Chair, Aimee Brown, of the RBOC, at the September 2010 meeting by Joan Girardot, Chair, CSFN, Water Task Force.
These neighborhood organizations wanted real oversight. These ratepayers were just ignored without discussion.
Exit University Assistance The UCB-UCLA effort just disappeared somewhere in the winter of 2011. It died without comment. No agenda item. No discussion. No apologies to UCB and UCLA for their great interest and hard work. Also, the CWG vanished.
Would the multi-disciplinary professors and their brilliant PhD (independent) students have opened an embarrassing can of worms? We will probably never know.
Enter City Services Auditor Based on Brown Act sunshine requests it appears that a decision was made, off camera (via meetings, phone calls, and emails, etc.), to dump UCB/UCLA and cede control of RBOC contracting work and procedures to the SF Controller's City Services Auditor (CSA). The first appearance of the Controller's CSA staff was on a vague, non-decipherable agenda item, but at the meeting, it became clear this RBOC-Controller union was already well underway.
The CSA, created by 2003 Prop C (Whistleblowers Prop) is funded by 1/5 of 1% of every City budget including the SFPUC. It is inside, not outside, it is dependent, not independent: city bureaucrats monitor themselves. This memorandum of understanding (MOU) between the RBOC and the CSA is arguably illegal. The legal language in the two propositions does not appear to support this MOU.
The SFPUC stated that they have issued $3,327,500,000 in WSIP revenues bonds. It has spent a total of $1,549,000,000 on WSIP. The SFPUC has deposited $1,778,500,000 of bond funds in a Treasures Account earning 1.25% interest. The SFPUC pays an estimated average of 4.5% to bondholders for these funds. This means the ratepayer must pick up $57,801,250 per annum in negative interest costs.
Why does the SFPUC require such a large amount of liquidity at such a high cost to ratepayers? This question requires considerably more analysis. It must be framed in the context that the SFPUC has a commercial paper (CP) draw of $500,000,000. The Federal Reserve estimates CP costs at less than 1% per annum.
When this interest differential versus commercial paper situation was brought to the attention (email) of the City Controller on 8/16/2011, he replied, "I obviously understand the issue you are raising related to the use of the CP program in lieu of bonds, and will take a look at the issue myself." Why did it take this reminder, in that he oversees the RBOC's new one-stop-shopping consultant per the recent MOU between the RBOC and the Controller?
Master Water Sales Agreement The failure of this committee to hold a true, un-orchestrated, public outreach meeting on the 2009 Master Water Sales Agreement (MWSA) between San Francisco and its suburban water customers is an oversight that must be readdressed.
San Francisco (the state's most conservation-conscious city) was treated unfairly in the MWSA. SF's actual supplies of Hetch Hetchy water deliveries were cut by over 10% and ceded to the peninsula at Hetch Hetchy system costs. Their historical use of water was increased by 10% as a result of this "transfer." SF must replace these supplies at costs up to 10 times Hetch Hetchy water costs.
This committee also refused to demand that the SFPUC include its 1/20 of 1% in the issuance cost for Build America Bonds (BABs) as allowed under the America Reinvestment and Recovery Act (ARRA). No document in law (2009 ARRA) or IRS code justified this exclusion.
To avoid a sustained floor fight the SFPUC, with compliance from the RBOC, agreed to accept a transfer from the SFPUC from other bond issues. 2002 Proposition P is unequivocal 1/20 of 1% of all revenue bonds issued by the SFPUC. This is not what 2002 Proposition P mandated.
The RBOC sunsets in 2013, however, the RBOC has asked the Board of Supervisors (allowed under 2002 P) to extend their sunset. To extend this particular committee past its sunset 2013 date would be a disservice to San Francisco.
We do need real oversight. A first step must be to rescind 2002 Proposition E (the blank check), which stripped San Francisco residents of the right to vote on the issuance of revenue bonds and handed this authority to the Commission and Board.
Brian Browne is the Board of Supervisor's appointee to the oversight board. Feedback: email@example.com
The Medallion Muddle
For years, San Franciscans have been complaining about their taxi service. Those complaints used to be made in the form of letters to the editor. Now, they go to numerous electronic websites. These complaints signal out every taxi company able to afford a Yellow Page advertisement and a phone number. It is often very difficult to get a cab on Friday night, in the rain, rush-hours, in many of the outlying suburbs, other strategic times such as medical visits, worship, etc. Who is to blame for these unmet demands? Should we be yelling at the taxicabs or the city bureaucrats who regulate the San Francisco taxi industry? Both?
San Francisco regulators have authorized the issuance of 1,500 taxi medallions. This means there are only 1,500 taxi cabs to service San Francisco residents, tourists, businesses, medical, entertainment, airports, and all other emergency and non-emergency short trip requirements. The taxi companies, in general, have embraced hi-tech communication, computerized traffic monitoring algorithms, and web-based applications to increase efficiency and to bridge the numerous periods when demand exceed the finite supply of cabs. There seems to be decreasing returns on efficiency, even with these costly and efficient electronic and computerized enhancements.
The evidence is clear that by metering public discontent (advice to the cabbie and various complaint outlets) and the empirical data produced by these sophisticated computer systems, there are not enough cabs and these frequent shortfalls (many riders not picked up) can only be addressed by adding a substantial number of new cabs (medallions). Peak time medallions, an alternative being suggested by the regulators, is unworkable and extremely costly to administer. Industry managers and owners, monitoring their inability to service customer demand, believe that 1,000 additional medallions are required now. Without these additional cabs the customer-stranded rate is expected to worsen.
An increase of 1,000 in medallions will potentially increase driver employment by 4,000. One understated value of the taxi fleet is its contribution to homeland and city security. During WW1 the taxis of Paris rushed troops to the battle front to save the French capital. Many times in the history of San Francisco, while less spectacularly, our cabs have performed magnificently to meet emergency needs.
SFMTA now regulate all economic and non-economic aspects of the San Francisco taxi industry. It is in their power to increase the fleet size to satisfy most customer demand. SFMTA must also recognize that as a regulator, it must abolish regulatory lag which imposes an income loss on both drivers and owners. Fares and gate fees, which sustain drivers and companies, have remained stagnant. In real terms, factoring in the erosion of purchasing power by inflation, the revenues from fares and gates have decreased significantly. The SFMTA must establish a regular, non-discretionary, systematic, open, and well advertised public convenience and necessity (PC&N) hearing, on an annual or biannual basis. These taxi-specific PC&N hearings should consider in a formalized manner all economic and non-economic attributes which the City wishes to regulate. For periods between PC&N hearings there should be automatic changes in fares and gates based on appropriate economic indicators (CPI, PPI, etc.).
A PC&N hearing must be held immediately by the SFMTA to address, in an omnibus and systematic series of hearings, all the problems that regulatory transfer and neglect has caused this vital and entrepreneurial industry. The most pressing problems are regulatory reform, creating a regulatory system that is deterministic, not opportunistic, and adding a significant number of new medallions immediately.
Feedback: Brian Browne
From the Chicken Coop
The Revenue Bond Oversight Committee was created by 2002 Proposition P in a thrust led by Rich Bodisco, the Mayor's Infrastructure Task Force, Tony Hall (put the legislation on the ballot), Phil Ward, Sean Elsbernd, and the voters. It was the best chance to ensure fiscal oversight for huge expenditures of citizen wealth.
The Revenue Bond Oversight Committee (RBOC) is finally getting attention. All for the good. After eight years the Board of Supervisors is considering its parental responsibility regarding who supports this committee, where it should live, and what it's supposed to be really doing.
For the first 8 plus years of its life, the RBOC has been a willing ward of the octopus-like SF Public Utilities Commission (SFPUC). The RBOC was intended to oversee and monitor the SFPUC's expenditure of revenue bonds on behalf of ratepayers. It meets monthly in the bowels of the SFPUC. Its voting system, notwithstanding the enabling legislation, has allowed this committee to remain inept as to its mandated mission and ensures that any opposition is muted.
Independent or co-opted? The RBOC has the power to pull the financial plug on the issuance of revenue bonds as a result of its independent audits. This is a contradiction in terms for this committee. Three contracts have been issued by this committee to the same consultant. None of those contractual processes were independent of SFPUC influence. The last independent contract was signed by the General Manager (April 2009) of the SFPUC without a full vote by the full committee. The City Attorney compelled the RBOC to bring this contract to the full committee for approval (September 2009).
Final Straw The SFPUC can pick the ratepayers' pockets almost at will. $4.6B for the Water Improvement Project, $4-$5B for the sewer overhaul plus power funding (unknown at this point) means $10B plus is not an overestimation of SFPUC spending plans. How much on power depends on the political will to implement Community Choice Aggregation (Migden AB117)? Water and wastewater estimates are at the $10B threshold — all to be funded by revenue bonds which are repaid through rate hikes.
The marginal increase per unit (748 gallons) of wholesale (city gate) water under a fixed coupon and term scenario (4.6% and 25 year) is shown below. The amount of water delivered (denominator in the $/unit) also affects cost. 239MGD (million gallons per day) is what SFPUC and the Peninsula forecast as the long-term Hetch Hetchy system reliabile delivery average based on hydrologic history and system integrity. 251 MGD is the average delivery of the Hetch Hetchy system for the 25 year period between the two water agreements (1984/2009) between San Francisco and its Peninsula customers. 265 MGD is the number used to set water assurances between the City and its suburban customers.
These amounts only include those increases required to service the $4.6 billion debt. Other embedded and escalated costs that increase rates are not included.
SFPUC has promised to fix San Francisco's aging Hetch Hetchy system by 12/31/2015. Without questioning the quality of the three prior RBOC studies, it was clear another study, by an independent team of dedicated researchers, was required immediately – a study that should ask and answer:
"Can the SFPUC complete the current Water Supply Improvement program on time (12/31/2015) and on budget ($4.6 Billion)?"
The Contracts Working Group (CWG -subcommittee) of the RBOC agreed that academia would be a productive place to look for such independent and overarching multidisciplinary input. Over a three-year process of requesting letters of interest and engaging in dialog with great universities. UCLA (Luskin Institute) and UC Berkeley (UCB) emerged as contenders. They agreed to co-submit. UCLA dropped out, due to work load, after the first rounds and a spirited, productive and intense negotiation continued with UCB. UCB requested, and the RBOC provided, a detailed history of all aspects of the WSIP. UCB then submitted an excellent draft scope of work. This entire process was the most transparent and competitive contractual process to date by the RBOC. It was abruptly terminated in mid-process, without real prior notification. It must be reinstated to gain back voter confidence in so-called independent oversight.
To bring this process to a final milestone, for contractual negotiations, and move forward toward a contract, a motion to hire UCB was made at the RBOC meeting of 1/24/11. It was defeated with only one affirmative vote (author). The usual naysayers appeared like well organized parrots. This occurrence at RBOC meetings is a regular menu item. Cost to ratepayers is yet to be quantified. Their statements clearly lacked detailed knowledge of the exhaustive search and negotiation process undertaken to date.
One contrarian rationalized away the idea of a systemic approach by saying the RBOC could only look at capital costs. This would mean the SFPUC could build a major dam in a dry river bed with revenue bonds and the RBOC could not ask why. Proposition P is about the efficacy of revenue bond expenditures. The question of debt service remaining inelastic over such a large price hike has never been properly addressed.
A previous study (2 years ago) by the SFPUC failed to adequately answer this question. It was based on very relatively rate changes, and the model innards were never revealed to this writer. If demand becomes elastic, even a 1 percent price increase would cause a greater than 1 percent decrease in demand and total system revenues after the rate (price) increase would decrease. Such a situation would be devastating for paying debt service. The professors were willing to do a thorough analysis of this frightening prospect.
The 44 member strong Coalition for San Francisco Neighborhoods, after considering this academic thrust, unanimously endorsed using UCB and urged the RBOC to move forward immediately. An activist suggested that because of the time constraints and importance of the subject that the Board be asked ASAP to provide a legal exception (if required under law) because of the incredible importance of the subject, time constraints (RBOC sunsets on 12/31/2012 and WSIP must be legally completed by 12/31/15) and the unique and extensive set of skills found at UCB (together with other academic institutions).
This academia contract, which had taken three years, was DOA at the RBOC. Then a new and long-winded RFP appeared in the proposed agenda for the RBOC monthly meeting. Suspecting such a move, an email requesting proposed agenda items was sent to the Chair. No answer. Standard operating procedure for this "transparent" committee.
The RFP process is supposed to go through the subcommittee and not be usurped by the Chair. The RFP was a lengthy litany of unfocussed and eclectic items. It was out of context with the dynamics of required oversight. It appeared to give individual "officials" of the RBOC the right to issue work and purchase orders. Such powers, in a democracy, without a real constitution, render some stakeholders impotent. It also seemed to be camouflage for the abrupt cancelling of the effort with academia.
Do we have an oversight problem? I believe so. In quick order of magnitude, the SFPUC must finish the WSIP by 12/31/2015. The SFPUC has completed approximately 20 to 22 percent of the work. The rest must be completed in about 1/3rd the legally allowed remaining time. The SFPUC has issued approximately $3B in bonds and has spent (WSIP) about $1B, with the difference in an account earning approximately 1.3%. The weighted average cost of the debt incurred by the SFPUC is of the order 4.5%. This is a negative arbitrage of -3.2%; a huge amount of money payable by the ratepayers.
Firms operate because they can produce at costs less than market costs. Owners hire anti-shirkers (managers) to protect their interest and ensure productive teamwork takes place. Managers have a lower propensity to perform if they become members of their own team. Oversight committees have the same role. Ratepayers are the masters and this must not be forgotten. On the other side of the coin, unions which are cooped by management are derisively called "company unions" and have been outlawed. The RBOC cannot become a "company" committee.
Brian Browne is co-author of 2002's Proposition P and Board of Supervisor
appointed No. 1 Chair on RBOC
Foxes and Henhouses at SF’s PUC
In 2002 the SF Public Utilities Commission (SFPUC) estimated its Hetch Hetchy fix-up at $3.6B. Today it is estimated at $4.6B. A revision to $5B by 2015 is likely. The ratepayers will pick up the check in significant rate spikes.
Proposition E of 2002 gave the SFPUC a virtual blank check. Its main target was the voter’s historical right to veto revenue bonds. It also allows a transfer of funds from the SFPUC to the general fund.
Utilities use a revenue requirements approach to ratemaking: rates, multiplied by units sold, (theoretically) equal allowable utility operating and capital costs. Revenues may not be set in excess of legitimate costs to produce funds for non-utility use.
Excess rate-revenues must be reinvested into the system or returned to the ratepayers as a rebate under California’s Prop 218 and the affirmative Big Horn decision
The Revenue Bond Oversight Committee (RBOC) resulted from the passage in 2002 of Proposition P. It was proposed as an independent counter-balance to Props A and E that gave the SFPUC, without voter approval—and real oversight—access to vast sums of public funds.
The RBOC was to be funded by setting aside 1/20th of 1 percent of all revenue bonds issued, These funds were to be set aside in a special account (RBOC NOT SFPUC) at the Controller’s Office.
The SFPUC decided to issue billions in Build America Bonds (BABs) created by the 2009 America Recovery and Reinvestment Act (ARRA). BABs’ interest payments are currently subsidized by the federal government (taxpayers) at 35 percent of all interest payments. BABs are not tax exempt to most US citizens.
Prior to using BABs the SFPUC issued tax-exempt municipal bonds and included the RBOC funding fee in the issuance costs. The SFPUC in issuing BABs decided that this fee was contrary to the 2009 Act and/or IRS codes.
There are no such prohibitions either in law (ARRA) or codes (IRS).
The net result of this was that there was no longer an automatic set-aside automatically deposited in a special RBOC account at the Controller’s Office. A special account, compliant with 2002 P, has not been set up at the Controller’s Office to take such automatic deductions after eight years since the passage of P.
For the period 2006 to end of year 2010, SFPUC will have issued $2,997,930,000 in revenue bonds. A lot of this money came as a result of recent BABs bond sales. RBOC’s accrued funding ($0.50/$1000) for this amount is $1,498,965 (less the $223,310, paid to the same consultant for three contracts), gives the RBOC a net draw by December 31 of $1,275,655.
It might be appropriate to review the applicable voter mandated text of Prop P:
San Francisco Administrative Code Chapter 5
§5.31(d) … “from and after the effective date of this Ordinance one-twentieth of one percent of the gross proceeds from each issuance or sale of public utility revenue bonds shall be deposited in a fund established by the Controller’s Office and appropriated by the Board at the direction of the Committee to cover the costs of said Committee.”
Yet now the SFPUC claims that over half of the mandated money, is optional. The RBOC must request its funding—putting the oversight committee in a very dependent relationship—and does not automatically accrue to the not yet created special and independent RBOC account.
Incredibly, the RBOC agreed to this dependent relationship, by a vote of 6 to 1, accepting this unprecedented decision to request the SFPUC grant them their money at a future budget time. This is a bad precedent.
Without a murmur the will of the people has been overturned.
If BABs forbade the SFPUC (which it does not) from including the RBOC fee, the SFPUC, on reaching such a financing fork in the road, should have issued very attractive tax-exempt municipal bonds and complied with the mandates of 2002 Proposition P:
§ 5.35. Application.
“(a) All public utilities revenue bond authorizations approved either concurrent with or after the effective date of this Ordinance shall be subject to the provisions set forth herein.
(b) All bond authorizations introduced at the Board after the effective date of this
Ordinance shall contain a statement incorporating the provisions of this Ordinance
in such bond resolution.”
The 1/20th of 1 percent accrued to the RBOC belongs to the RBOC. It is difficult to comprehend how the SFPUC in its official bond statements can claim that after 36 months unspent RBOC funds must be returned to the SFPUC.
The SFPUC, in a rebuttal to my previous guest editorial (Sept ‘10), praises both the SFPUC and the RBOC. The RBOC has not lived up to the expectations of the authors of 2002 Prop P.
The last independent contract of the RBOC was signed by the General Manager
in April 2009. Only after a painstaking plea to the City Attorney
was this contract reviewed and approved by a vote of the full
Committee of the RBOC in September 2009. Had this vote not
taken place that contract would not be a legally binding RBOC
Tragically, it must be concluded, based on actual results, that the RBOC oversight has been short-circuited by classic San Francisco bureaucratic, role-reversal, fox guarding the hen house maneuvers. Shame on everyone concerned.
Brian coauthor of 2002 P and Board’s No. 1 Chair on RBOC
SF PUC Takes Exception to Charges of Malfeasance
Building for the Future – Transparency and Ratepayer Savings
The last Westside Observer issue contained an inaccurate depiction of the San Francisco Public Utilities Commission’s (SFPUC) well-regulated, transparent financial bond-issuance process. The article lacked mention of the hundreds of millions of dollars of savings that the SFPUC has locked in place for the benefit of ratepayers. It also lacked explanation of the numerous independent reviews and audits undertaken each year that are required by the San Francisco Charter, state municipal code and the voters. So let’s take this opportunity to explain the substantial and multi-pronged oversight processes governing the SFPUC.
Firstly, some facts on project costs. The total cost for the Water System Improvement Program is $4.6 billion, not $5 billion. Next, the article incorrectly states that the City will be issuing up to $5 billion for bonds to implement its community choice aggregation program. That is false; at present, the City has no plans to issue any debt for the community choice aggregation program.
The article postulates that the long-term borrowing rate would be 5.5% over 25 years for the SFPUC’s debt. This statistic is inflated in today’s environment; with rates at historical lows, the SFPUC’s highly-rated water and sewer departments have garnered actual rates of between 2.5% to 4.8% for bonds issued over the past year. In fact, along with the refunding of older bonds to lower interest rates, the SFPUC has already locked in place for its ratepayers over $400 million in savings over the next 30 years. Additionally, the article references Proposition E – 2002, which actually made it much more difficult for the Board of Supervisors to transfer surplus revenue to the General Fund, not easier, which is what the article erroneously implies.
Issuing Bonds and Debt – Saving Money for our Ratepayers
In the public sector, governments issue bonds to pay for long-term capital improvements that will benefit customers for years to come. A portion of the repair and replacement of existing infrastructure is funded through current year rates (pay-as-you-go), but without the disciplined and prudent use of revenue bonds, rates would need to dramatically increase in a given year to pay upfront for massive infrastructure projects. For example, the WSIP Program is $4.6 billion, but our current water ratepayer revenues are just slightly greater than $300 million per year, hence the need for government issued revenue bonds.
In 2002, voters approved Propositions A and E, which granted the SFPUC the limited authority to issue short-term debt (like commercial paper or notes) and long-term debt (like bonds) for capital improvements. Commercial paper is short-term borrowing of less than 270 days and is typically used to finance project design and early construction. Utilizing commercial paper, which is issued at lower interest rates than long-term debt, saves ratepayers money. Since the inception of the SFPUC’s Water Commercial Paper Program, the SFPUC has saved ratepayers over $24 million. Additionally, the SFPUC has no plans to double the size of its Commercial Paper Program, as was erroneously reported in last month’s article.
Oversight of Bond Spending
As mandated by San Francisco’s Charter and Administrative Code, a complete and fully transparent process governs every aspect of the SFPUC’s bond issuance process. It begins with independent monitoring by the seven-member Revenue Bond Oversight Committee (RBOC). The RBOC meets monthly to review pending bond issuance, examine recent bond transactions and discuss financing. Aimee Brown, the Chair of RBOC and a seasoned expert in municipal finance, along with the members of the RBOC, regularly question all aspects of the SFPUC’s borrowing program. The RBOC conducts oversight of SFPUC project spending through detailed audits that are funded by a 1/20th of 1% fee on all bond issuances; in fact, the RBOC recently concluded an independent audit of a WSIP reservoir project, which found that the SFPUC complied with prudent financial management. The RBOC has reviewed the SFPUC’s Commercial Paper program and found solid performance.
The San Francisco Public Utilities Commission also provides overarching regulatory oversight and approves all debt issuances. The Board of Supervisors then has the final say and must authorize the SFPUC’s debt programs. Finally, projects and all financial transactions are subject to audits by the Controller, the City Services Auditor, independent financial auditors (currently KPMG) and RBOC auditors.
The SFPUC’s transparency and financial reporting is recognized nationally. Recent awards include the Distinguished Budget Presentation Award (Fiscal year 2009-10); and the Certificate of Achievement for Excellence in Financial Reporting (FY 2008-09).
San Francisco is fortunate to own, operate and maintain one of the best water, power and sewer systems in the country. The SFPUC is an enterprise department; our annual budget of $762 million is funded almost entirely through ratepayer customer charges like water rates, sewer rates and power rates. As a consequence, San Francisco taxpayers pay no taxes (ZERO DOLLARS) for SFPUC operations. Together, we will continue building for the future - strengthening our water, power and sewer systems.
Todd Rydstrom – Todd serves as the Assistant General Manager of
Business Services and the Chief Financial Officer of the San Francisco
Public Utilities Commission.
Noted in the above article, Aimee Brown is the current Chair of the RBOC. She is a municipal finance professional with over 30 years of experience, including positions as VP at Goldman Sachs, Principal at Artemis Capital Group and Managing Director at RBC Dain Rauscher. Aimee has played a lead role in some of the most complex infrastructure financing programs in the nation.
The Regulatory Morass of the SFPUC Financing System
The San Francisco Public Utilities Commission (SFPUC) is going deeper and deeper into debt, and voters no longer have the right to approve of how SFPUC incurs this revenue based debt. Ratepayers still have to pay for this debt through their utility bills. The structure of this debt has become considerably complex, and it appears that the SFPUC has become a financial intermediary, wheeling and dealing in complex debt instruments.
In the absence of voter oversight there does not appear to be any real regulatory constraints and oversight. This is exacerbated by the legal and financial complexities surrounding these programs in the overall context of a fragmented and unsystematic regulatory process. The unraveling of the thread between authorization of a project and the application of commercial paper is daunting.
The business model charges the SFPUC with planning and implementing possibly $10 to $15 billion in capital improvements and operating one of the largest multi-utilities in the US so this must be scrutinized. However, time and space are not available in this essay. Actual progress to date on water system improvements v promised deliverables weighs against a positive evaluation at this point.
The SFPUC (Commission) the politically appointed board of directors (commissioners) for San Francisco’s municipal water, sewer, and power systems, has potential plans to issue between $5 billion and $15 billion in revenue debt instruments. Rounding out/up:
• $5 Billion for the Hetch Hetchy system fix-up,
• $5 Billion for implementing community choice aggregation (AB117), and
• $5 Billion for a city-wide sewer fix-up.
Total and annual repayment schedules for projected capital improvements are summarized below. Annual payments were estimated at a long-term coupon rate of 5.5% over a 25 year term.
Prior to the passage of Proposition E in November 2002, voter approval was required for the SFPUC to issue revenue debt (bonds) tied to future rate increases. This system was straightforward and a relatively transparent process. The SFPUC would put forward a capital improvement plan to the voters. The back and forth during the run-up to the election would generate considerable information about the value of the proposal and the voters would pass or reject the plan. San Francisco has a long-history of voting for capital programs.
In the 1997, the measure to sell $304 million A&B bonds for seismic and water quality, the accepted financing approach to disbursement of project funding was incremental issuance of revenue bonds.
In 1998 Ordinance 203-98 permitted the Board to “issue or incur short-term indebtedness in anticipation of the issuance of revenue bonds which have been authorized in accordance with the Charter.” The phrase “in anticipation” is pivotal. Commercial paper (CP)programs were based on the already authorized issuance of revenue bond.
The SFPUC initially established a $250 million commercial paper draw to implement 1997 A&B work. This CP draw was repaid by selling authorized 1997 A&B revenue bonds. Members of the Mayor’s SF Infrastructure Taskforce (2000-2002) were concerned about the implementation of this CP program for the following reasons:
1) This step made the SFPUC a financial intermediary, for which it did not appear qualified, and
2) CP is significantly more difficult to monitor. Lots of time, varied churning and multiple rates are involved.
In November, 2002 Proposition E, a Charter Amendment, passed. It transferred from the voters to the Board of Supervisors the sole right to issue future revenue bonds. Proposition E specifically mentioned short term debt, commercial paper, and used the umbrella expression “revenue debt” to ensure the SFPUC was not constrained by debt instrument type.
Good public policy in general requires a KIS (keep it simple) approach. This requires a systematic, transparent and easy to understand system. The system for issuing short-term and long-term debt after the passage of 2002 Prop. E is significantly more complex. As one sage mother once said it is “as clear as mud.” SFPUC went from a relative KIS system to a regulatory morass while burdening its customers with an avalanche of debt.
To fill this uncertain regulatory gap between commercial paper and authorized long-term revenue bond debt, the Board passed Ordinance 266-06. This ordinance attempted to tie together the 1998 Ordinance 203-98 and 2002 Proposition E. It did not simplify the process. The main reason for 266-06 was to initialize a $150,000,000 commercial paper for SFPUC’s new sewer program. This ordinance did acknowledge the requirement that commercial paper (and derivatives thereto) programs could be used only after the Board had approved and identified the issuance of a dedicated revenue bonds program.
Proposition E also spoke to giving the SFPUC the right to enter into joint power sharing agreements, set rates, speak to rate fairness and interestingly allowed a conduit for Hetch Hetchy enterprise “surplus” revenues to be transferred to the general fund.
Surplus revenues belong to the ratepayers in the form of a rebate and/or must be plowed back into the system to reduce future charges since surpluses come from rates. Any transfer to the general fund would be contrary to 1996 California Proposition 218 (a revival of the old idea of no taxation without representation), a constitutional amendment, especially in light of the 2006 Big Horn Case1.
All revenue bonds must be repaid through rate increases. A genuine concern is that a rate increase of one percent will see a decrease in actual demand of greater than one percent, i.e., total revenues will fall, and less rather than more will be available for debt service after a rate increase.
Bottom line — there is no real regulatory oversight in SF. It has gone from a relatively simple and transparent system, with ratepayers and citizens involved, to a regulatory morass that is unmanageable. The SFPUC has authority to issue $650 million in commercial paper. They have indicated they wish to double this amount to $1.3 billion. Trying to keep track of actual authorizations and complementary commercial paper will be impossible. One disadvantage San Francisco has under state law is that it is a self-regulating municipality.
The current system does not work. A good start would be to rescind Proposition E.
Brian Browne is a member of the Public Utilities Revenue Bond Oversight Committee, a specialist in economic and regulatory analysis of water, wastewater, natural gas, power, and transportation sectors. Author of numerous studies on these subjects.
City's PUC Falling Behind on Water Fix-up?
The San Francisco Public Utilities Commission (SFPUC) creeps along with the Hetch Hetchy (HH) system fix-up. HH is a complex gravity system including dams, hydro-power plants, siphons, pumps, tunnels and pipelines that stretches from the High Sierras to the Bay. It provides water for approximately 2.4 million local and regional water customers with undoubtedly some of the most pristine water available in the USA. HH is also probably the only federally mandated municipal power provider in the US.
The 1913 Raker Act granted San Francisco the right to build dams and extract
water from the Tuolumne River and provide water and power to municipalities
and municipal customers. The system receives approximately 80 to 85 percent
of its water from the Tuolumne River. Under Raker the SFPUC has junior
riparian water rights. The senior rights are vested in the Turlock and
Modesto irrigation districts. The SFPUC may only extract water after the
flows of the Tuolumne River meet certain criteria at different times of
the year. Approximately sixty percent of all Tuolumne River water goes
to the irrigation districts and SFPUC. The Hetch Hetchy system receives
the residual amount of its deliverable water from sources west of the Oakdale
intakes for the San Joaquin pipelines.
The system is over 7 decades old and for years it has been known that this marvel of engineering must be repaired and improved. Over the years, many plans were advanced but never became operational. In 2002 the SFPUC boldly announced that they had a 76 project local and regional fix-up plan, known as the Capital Improvement Plan (CIP), and all that was needed was the funding authority and the SFPUC would implement and complete this plan by 2015.
Blank Check In 2002 San Francisco voters passed Proposition A granting the SFPUC the right to issue $1.6 billion in revenue bonds. This was trumped by 2002 Proposition E (Ammiano) that removed the voters’ the right to issue water and wastewater bonds and ceded it to the Board of Supervisors. SFPUC now had a blank check to implement their plan. The voters also passed Proposition P, which created the Revenue Bond Oversight Committee (RBOC) as a ratepayer advocate to monitor the expenditure of revenue bond funds.
Who Controls the Water? The 29 wholesale customers making up the Bay Area Water Users Association were clearly dubious. Their politicians passed three pieces of legislation AB2058 which morphed their entity into the Bay Area Water Supply and Conservation Agency with powers analogous to the Metropolitan Water District of Southern California. SFPUC was welcome to join and cede approximately 70 percent of its now 100 percent governance of the Hetch Hetchy system.
BAWUA successfully lobbied to pass AB1823 which called for 50 percent of the Hetch Hetchy fix-up work to be done by 2010 and 100 percent by 2015. SB 1870 collaborative efforts by local and regional folks created a regional financing authority to ensure the fix up would be funded in the event Props. A and E failed.
In 2002 both Props A and E passed and the SFPUC was given the green light to implement its multibillion dollar CIP.
In 2005 a new plan, Water Supply Improvement Project (WSIP) was unveiled under a new manager. It proposed major changes to the CIP including a system wide project environmental impact review (PEIR) and established a new concept called level of service. The large and expensive PEIR basically caused a major re-work of the original plan (CIP) and cost large amounts of time and resources. The levels of service are stated goals as to how quickly and at what levels the system may be restored after a major system break. It is unclear what, if any, mathematical model derived these so called ‘levels of service.”
Score card. The local percent complete is shown as 48.1% complete. The larger regional fix up is 13.3% and the total bill has reached approximately $4.5 billion. Why? It appears, based on extrapolation of current SFPUC costs and the blending in of the debt service for these billions in expenditures that conservatively rates will increase by a factor of 5 (6) before this system is finally completed.
In 2008 a “variant” to the WSIP was implemented under yet another new general manager. This plan extends the fix-up until 2018 and claims that the SFPUC will be able to deliver 265 million gallons of water per day (MGD) for regional and local customers from current pristine sources i.e. Tuolumne river and local reservoirs.
265. This 265MGD number is important. The current “variant” plan calls for the peninsula customers to receive 184 MGD and for SF to receive 81 MGD a total of 265 MGD. The city is currently negotiating a new Master Water Sales Agreement (MWSA), 1984-2009, and if this amount is enshrined in contract then the city customers could face water shortages, labeled by the SFPUC as “conservation.”
Historically, using SFPUC data, since 1984 (when the MWSA was signed), on average the Hetch Hetchy system has delivered 251 MGD with BAWSCA (nee BAWUA) receiving on average 163 MGD and SF 89 MGD. Using a longer historical period shows the annual average deliveries from the SFPUC decreasing more.
Over forecasting has some major negative impacts. State law demands that forecasts must be reliable and in the absence of available water residential and commercial projects may be stopped. The over forecasting phenomenon leads to underestimating the cost per unit of water. Over forecasting leads to over expectations in writing contracts such as was done in 1984 and appears to being replicated in 2009.
Competition. Yes, SFPUC is a municipal supplier of public power to both public and private customers if it so elects. It actually has private customers at the Ferry Building and SFO. It could win market share by providing a better widget, rather than socializing an existing private company, that is well scrutinized by the California Public Utilities Commission. The 1940 Supreme Court in affirming SFPUC as a municipal power provider stipulated that Hetch Hetch power could not be sold to PG&E for resale, but exhorted the SFPUC to compete against PG&E for both public and private customers
Looking Forward. San Francisco can look forward to the strong possibility of ceding governance of the Hetch Hetchy system, rate spikes of a magnitude that are not being discussed, intergenerational transfers of great debt to future San Franciscans, and the real possibility the system won’t really get fixed and all these well advertised calamities will befall an unprepared service area.
The Mayor, Board of Supervisors, Commission, and RBOC must exert real oversight and not externalize their implosive political aspirations onto our water and municipal power system. These folks need to confront the real issue: Can the current business model at the SFPUC actually plan and implement such a vast infrastructure project?