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18 PRIVATIZATION WATER 04-03-00
NO. 18 04-03-00 d ___ - lnter-Com DATE: APRIL 3, 2000 TO: WILLIAM A. HUSTON, CITY MANAGER FROM: PUBLIC WORKS DEPARTMENT SUBJECT: FINAL REPORT ON THE "EVALUATION OF PRIVATIZATION OPPORTUNITIES FOR THE CITY OF TUSTIN MUNICIPAL WATER SYSTEM" SUMMARY . The final report on the "Evaluation of Privatization Opportunities for the City of Tustin Municipal Water System" evaluates the current operational functions of the 'City's water system and discusses the feasibility of pfivatizing the entire water system or various functions of the system. The types of pfivatizafion opportunities that were investigated involved complete sale, long-term leases, operation and maintenance agreements, and task-specific contracts. Additionally, the results of a benchmarking study comparing the operation of the Tustin Water System with four other similar municipal water systems, two water districts, and a private investor-owned utility are also included in the report. The analysis is unable to identify or project any potential cost savings from a sale to the private sector or a long-term lease agreement with the private sector. However, it does find that an annual operating agreement is conceptually feasible for the City to realize a potential economic savings. A copy of the report is on file at the office of City Clerk for review. RECOMMENDATION It is recommended that the City Council refer the final report on the "Evaluation of Privatization Opporttmities for the City of Tustin" prepared by Navigant Consulting, Inc. to the Audit Committee for review and comment. FISCAL IMPACT The evaluation study is the first phase of a three phase privatization study. The contract amount for Phase I is $74,756 with $70,129.20 having been paid to date. Phase II includes the preparation of a Request for Proposals from qualified contractors along with an evaluation of proposals received and Phase III involves assistance with drafting and negotiating a contract with the selected contractor. If the City Council decides to proceed with the next phases, the approximate cost will be $30,176 for Phase II and $6,856 for Phase IH. BACKGROUND During 1997, the City received several preliminary unsolicited proposals from various finns expounding the potential economic benefit to the City through privatization of the Municipal Water System. Generally, these proposals involved the City entering into an agreement with a private entity for the sale, lease or operation of the water system. Final Report on the "Evaluation of Privatization Opportunities for the City of Tustin Municipal Water System April 3, 2000 Page 2 Subsequently, the Public Works Department solicited proposals from nine firms experienced in the evaluation of the financial, engineering, and operation aspects of a municipal water system to analyze privatization opportunities for the City. Navigant Consulting, formerly Bookman-Edmonston Engineering, Inc., was selected to perform the tasks'specified in Phase I of the Request for Proposal for a not-to-exceed fee of $74,756. These tasks included analyzing the system's present condition, analyzing revenue and expenditures over a fifteen-year time frame, establishing a growth rate, and evaluating the rate structure. Additionally, Bookman-Edmonston was to identify and evaluate operations that may be operated in a more cost effective manner, review the status of other municipal privatization efforts and compare them to the Tustin system, and ultimately recommend a specific option based on their analysis. At the completion of Phase I, any opportunities for privatization were to be clearly understood and all current and future impacts to the City and the ratepayers were to be carefully analyzed and quantified. Upon completion of Phase I the City Council would then decide, based on the recommendations set forth in the Phase I Study, whether to proceed with Phase II and III. If a decision to proceed with Phase II ($30,176) and Phase HI ($6,856) was reached, contractual agreement with Navigant Consulting would be amended and returned to Council for approval. DISCUSSION In conducting the evaluation, Navigant Consulting reviewed the existing water system technical and financial reports, conducted field visits of existing water facilities, interviewed employees, conducted a benchmarking study, and analyzed the privatization activities of other water agencies. The study did not involve any water master planning or detailed system condition evaluation. The benchmarking study enabled the level of performance of the Tustin Water Division to be compared with other public agencies and the private sector. Agencies were selected based on their similarity to the Tustin Water system in areas such as total service connections, miles of pipeline, number of wells, source of water supply, and total revenues. The Orange County cities of Buena Park, Westminster and Fountain Valley along with the Northern California City of Palo Alto agreed to participate in the survey. Additionally, the Los Alisos and the Yorba Linda Water District along with an investor-owned utility agreed to participate. The goal of the benchmarking study was to determine if any of the internal workings of the Water Division were inefficient and identify potential privatization oppommities. Operations and management procedures were evaluated in the areas of administration, customer service, engineering/operations and maintenance. The evaluation enabled Navigant Consulting to reach the following conclusions: Significant potential cost savings from a sale of the water system could not be identified. . Significant economic savings could not be projected through a long-term lease agreement. Final Report on the "Evaluation of Privatization Opportunities for the City of Tustin Muni.cipal Water System April 3, 2000 Page 3 o Significant cost savings would not be realized by privatizing additional specific functions. . Economic savings through an annual operating agreement is conceptually feasible. o Outsourcing of valve and hydrant maintenance needs to be considered if an annual operating and maintenance agreement is not considered. Generally, the audit found that the Water Division was not performing to a level expected of a utility of this size in all areas of operation and maintenance. However, Navigant also concluded that retaining an experienced Utility Manager capable of implementing the management recommendations would greatly enhance the performance of the Division. It should be noted that during the course of the study, a computerized service-order tracking system was implemented, the cross-connection program was out-sourced, and an experienced Water Manager was hired on an interim basis. It is recommended that the City Council refer the Final Report on the "Evaluation of Privatization Oppommities for the City of Tustin Municipal Water System" to the Audit Committee for their review and comment. The Audit COmmittee will be able to consider the "conceptual feasibility" of an operational and maintenance agreement and compare it with potential "in-house" implementation of various performance recommendations contained in the report. The City's consultant will attend the City Council meeting to provide an overview on the ' study's findings and recommendations. Tim D. Serlet Director of Public Works/City Engineer S:\City Council Items\O0 City Council Items\Water Pdvitization Final Report. doc 1 I I 1 I I I I 1 1 r I 1 I r N Navigant CONSULTING INC January 28, 2000 Mr. Tim D Serlet Director of Public Works City of Tustin 300 Centennial Way Tustin, CA 92780 Subject: Evaluation of Privatization Opportunities for the City of Tustin s Municipal Water System Dear Mr. Serlet: We are pleased to submit the attached report on, 'Evaluation of Privatization Opportunities for the City of Tustin Municipal Water System. This completes Phase I of a potential three -phase process to investigate the feasibility of privatizing the City's Water Department. Based on the results of evaluating privatization opportunities, the following conclusions have been reached by NCI, followed by recommendations for the City to consider. • NCI is unable to identify significant potential cost savings which might result from a sale of the water system to the private sector • Based on the results of the water system financial performance evaluation, it is difficult to project significant economic savings from privatization through a long- term lease agreement. • It appears that an annual operating agreement is at least conceptually feasible for the City to realize an economic savings from privatization of its water system, as well as provide other benefits which the City may wish to take advantage of. • Based on benchmarking results, it is unlikely that privatizing additional individual specific functions would result in significant cost savings. • The City needs to consider privatizing valve and hydrant maintenance if it elects to not privatize the entire water system through an annual O &M contract to temporarily meet regulatory concerns and current maintenance practice deficiencies. Based on the audit review conducted by NCI, the Tustin Water Department is not performing in all aspects from an operations and management standpoint to the level Navigant Consulting, Inc. 225 West Broadway, Suite 400 Glendale, CA 91204 -1331 tel: 818-244-0117 fax: 818. 242.0480 1 I I I I I I I I I I Mr Tim D Serlet January 28, 2000 Page Two expected for a utility of this size. Privatization could present an alternative solution to these deficiencies, which could be accomplished through an annual operating agreement. NCI recommends the City consider implementing one of two approaches. The first is to retain an experienced Utility Manager capable of implementing the management recommendations contained in this report, plus privatize the specific functions of valve and hydrant maintenance until the City operating personnel are capable of assuming this responsibility The second potential approach is to request proposals from qualified operators to privatize the system through an annual operations and maintenance contract. It has been a pleasure to work with you and the Water Department staff, as well as other City management personnel. NCI looks forward to potentially assisting the City in implementing Phases II and III, if a decision is made to progress in the privatization process. Please call me if you have any questions regarding this study Yours very truly `/ /// Harold V Morgan Executive Principal Engineer r-Oest_ TUSTIN PRIVATIZATION STUDY TABLE OF CONTENTS Table of Definitions Table of Abbreviations 1 INTRODUCTION Scope of Study Phase I Product 1 -1 12 1 -8 2. EXECUTIVE SUMMARY 2 -1 Description and Operating Characteristics of Tustin Water System 2 2 Water Department Management. 2 5 3. DESCRIPTION AND OPERATING CHARACTERISTICS OF TUSTIN WATER SYSTEM 3 -1 Service Area Characteristics. 3 -2 System Demands and Source of Supply 3 -4 Distribution Mains and System Storage 3 -11 4. WATER DEPARTMENT MANAGEMENT 4 -1 Utility Service and Reliability 4 -2 Water Department Staffing, Training, and Organization 4 -16 Construction and Maintenance Management 4 -30 Metering Activity Billing Cycles and Cross - Connection Control 4 -43 5. WATER SYSTEM FINANCIAL PERFORMANCE 5 -1 Water Rates and Residential Water Cost 5 -2 Gross Revenue Operating Surplus, and General Fund Transfers 5 -8 Operation and Maintenance Expenses 5 -13 6. WATER RATE PROJECTIONS 6 -1 Estimated Revenue Requirements 6 -2 Income from Operations 6 -5 Adequacy of Existing Rate Structure 6 -5 7 CALIFORNIA WATER UTILITY PRIVATIZATION PROJECTS. Privatization through Asset Sale NAVIGANT CONSULTING, INC. I 7 -1 72 TABLE OF CONTENTS TUSTIN PRIVATIZATION STUDY Privatization through Long -Term Lease Agreements 7 -6 Annual Operation and Maintenance Agreements 7 11 Miscellaneous Privatization Contract Services 7 16 8. PRIVATIZATION OPPORTUNITIES 8 -1 Privatization through Asset Sale 8 -2 Privatization through Long -Term Lease Agreement 8 -13 Privatization through Annual O &M Contract 8 -16 Privatization through Contracting of Individual Functions 8 -20 Conclusions and Recommendations. 8 -22 Potential Privatization Operators 8 -23 APPENDICES Documents Reviewed or Referenced During Tustin Water System Management Investigation Tustin Water Department organization chart City of Fountain Valley Service Request Form (with Citizen Evaluation) and Service Request Water Survey Report — FY/1997 -98 Selected Service Goals for City of Fountain Valley and Southern California Water Company Department Operating Expenses, Debt Service and Income from Sales Longterm Privatization Lease Agreements for cities of Cupertino and Hawthorne City of Bakersfield Annual Operating Agreement Proposed Settlement of Issues on Commission Proceeding to Set Rules and Provide Guidelines for Acquisitions and Mergers of Water Companies NAVIGANT CONSULTING, INC. 2 Table of Definitions Privatization: The transfer of asset ownership or business operations from the public sector to the private sector Asset Sale: Long -term Lease Agreement: The sale of water system assets such as wells, pumps, tanks and distribution pipelines. Ownership and service responsibilities transfer to the private sector buyer A long -term lease (typically on the order of 15 to 25 years) of the water system given by a public agency to a private sector lessee to manage, operate, incur expenses and cost of capital improvements, and receive the revenues over the years of the lease term. Service responsibilities transfer to the private sector lessee, but ownership of the system does not transfer Annual Operation Contract given by public agency owner to pnvate sector contractor to And Maintenance operate and manage the water system for a fee. Terms of 0 & M Agreement: agreements may be multi -year Revenues and major capital improvement costs typically remain with public sector owner Selected expenses may be responsibility of either lessee or lessor I I 1 1 1 1 1 1 1 i 1 1 1 1 i i 1 1 1 I 1 Act AVIP AVRWC AWWA AWWARF Bakersfield C &M ccf cf CIP City CMMS Cupertino CWS Districts Dominguez ECO Folsom FTE gpcd Hawthorne IRS MG MGD Modesto MWDOC MWDSC NCI O &M OCWD OIR Park PUC RCNLD RFP Rio Rancho RRUC SCWC SDHS SJWW Suburban T &D Town Walnut West Covina TABLE OF ABBREVIATIONS Public Water System Investment and Consolidation Act of 1997 Apple Valley Industrial Park Apple Valley Ranchos Water Company American Water Works Association American Water Works Association Research Foundation City of Bakersfield Construction and Maintenance hundred cubic feet cubic feet Capital Improvements Program The City of Tustin (except where context refers to city other than Tustin) Computerized Maintenance Management System City of Cupertino California Water Service Company Los Angeles County Water Works Districts Nos. 1 10, 16, and 22. Dominguez Water Corporation ECO Resources, Inc. City of Folsom Full Time Employee gallons per capita per day City of Hawthorne Internal Revenue Service million gallons million gallons per day City of Modesto Municipal Water District of Orange County The Metropolitan Water District of Southern California Navigant Consulting, Inc. Operations and Maintenance Orange County Water District State Public Utilities Commission Order Instituting Rule Park Water Company State Public Utilities Commission Reproduction Cost New Less Depreciation Request for Proposals City of Rio Rancho, New Mexico Rio Rancho Utilities Corporation Southern California Water Company State Department of Health Services San Jose Water Works Suburban Water Systems Transmission and Distribution Town of Apple Valley City of Walnut City of West Covina I I I I I I 1 I TUSTIN PRIVATIZATION STUDY Section INTRODUCTION The City of Tustin (City) owns a water system serving customers in the City and adjacent unincorporated area (approximately 13,700 customers) This system was acquired by the City in 1980 from the privately owned water company Tustin Water Works. Since acquisition, the City has expended substantial capital investment in replacing undersized and fully depreciated water mains and other facilities. The City though, has a substantial capital investment program, the need for office space and maintenance storage facility for its Water Department personnel and equipment. The City wanted to benchmark its Water Department in comparison to other public and private water utilities and to determine if the Water Department can be maintained in the most economical and efficient manner Therefore, the decision was made to undertake a privatization study in order to evaluate potential cost savings which might occur from transfer of either Water Department assets or functions to the private sector Accordingly the City retained Bookman - Edmonston Engineering, Inc. the predecessor of Navigant Consulting, Inc. (NCI) to perform an evaluation of privatization opportunities for the Tustin water system. This report presents the analysis, conclusions, and recommendations resulting from conducting the study NAVIGANT CONSULTING, INC. 1 -1 I I 1 i I I I I 1 1 SECTION 1 INTRODUCTION SCOPE OF STUDY The City requested that the evaluation of privatization opportunities be conducted in three phases. In general, the first phase consists of the evaluation study Phase 2 includes the preparation of a request for proposals from qualified contractors if the City Council determines to consider services with the private sector plus evaluation of proposals received; and Phase 3 includes assistance with drafting and negotiating a privatization contract with the selected company This report only provides the scope of services associated with Phase 1 The following presents the requested scope of services by the City together with studies and preparation undertaken by NCI in connection with this evaluation. 1 Review and evaluate the City's water utility including but not limited to the system's present condition, service area, operating revenues and expenditures, administrative and operation functions (personnel, facilities, billing, meter reading), annual maintenance and repair needs, and anticipated capital improvements. • Following receipt of the Notice to Proceed, NCI prepared a detailed data request to the City outlining the initial information required for completion of the study Data requested and received included financial data, facility records, operating data, rate and capital improvement studies and projections, operating and maintenance expenses, records, organization charts, personnel job description, management audit reviews, and other records. • NCI participated with the City in a kickoff meeting to review the information requested, discuss the objectives of the study and clarify any questions that existed. • A field visit was made of the water system to review the current condition and operation of the facilities. This field visit was made with assistance from City operating personnel. In addition to viewing facilities and gaining an understanding of system operations from interviewing City staff the field visit also included review of existing and potential service areas for the purpose of assessing the location, types, and potential growth of system customers. • Water quality annual reports and regulatory reports for supplies produced and purchased by the Tustin system were collected and evaluated. In addition, contact was made with the California Department of Health Services (DOHS) to obtain input regarding the system's ability to comply with existing water quality standards and to determine if any health - related concerns existed among regulatory personnel. In addition to assessing current supplies and their conformance with existing standards, NCI also reviewed the need for potential capital improvements required to meet drinking water standards anticipated to be implemented in the near future. • NCI reviewed the availability of water supplies in order to fully serve the anticipated number of water customers within the service area at the end of 15 years. The anticipated relative dependence on imported water supplies and groundwater NAVIGANT CONSULTING, INC. 1 -2 I I I I SECTION 1 INTRODUCTION production for future annual deliveries was also reviewed. Finally NCI reviewed the current status and condition of groundwater pumping facilities, as well as the need for production facility improvements or additions. • NCI reviewed a preliminary draft of a recent water system master plan prepared by ASL Engineers. This review was made for the purpose of confirming the adequacy of supplying required system demands and fireflows as well as the ability of the existing facilities to meet future growth. This evaluation also included the ability of the water system to meet peak flows and provide adequate storage under a range of operating conditions. Particular attention was paid to customer complaints of pressure deficiencies or other concerns with water system service. This review also included identifying system design and existing operations in order to identify potential deficiencies. • See Sections 3 (Water System Description and Condition), 4 (Water Department Management) 5 (Water Rate Projections) and 6 (Water System Financial Performance) 2. Document and analyze the revenues and expenditures necessary to support the Municipal Water System for a fifteen -year time frame along with the impacts on the rate structure. This will involve establishing a growth rate along with estimating future water purchases, groundwater costs, and energy costs. • In order to project the impacts of the existing rate structure, NCI has reviewed financial data and rate policies obtained from the City Municipal Water District of Orange County (MWDOC) and Orange County Water District (OCWD). Reviewed were historic and current operating revenues and expenditures, debt service obligations, and capital improvement requirements. NCI met with the City to review the completeness, accuracy and interpretation of this data. • Based on the data received, NCI prepared projections of operating costs, income from sales, debt service obligations and capital improvement requirements through fiscal year 2014/15 • See Section 5 (Water Rate Projections) 3. Identify and evaluate alternative methods of operating any or all portions of the water system that will be more cost - effective than current operations and may provide other benefits to the City This shall include: a. An analysis of options for improving the effectiveness of current operations and methods to reduce costs. NAVIGANT CONSULTING, INC. 1 -3 1 i I I I 1 SECTION 1 INTRODUCTION b. An analysis of options specifically for contracting out any portion or all of the existing water services to the private sector or to an existing water utility c. All options evaluated in the preceding sub -tasks a and b shall be evaluated and quantified for their legal and organizational feasibility, set -up costs, effect on employees and benefit /cost ratio. Categories of costs may include contract expense, set -up expenses, operating costs, etc. Categories of benefits may include long -term rate stability and net revenues available to the City • In order to evaluate the potential cost savings from privatization, it was necessary first to evaluate the comparative level of performance of the City's Water Department with other public agencies and the private sector NCI's approach in conducting this study was structured to diagnose the City's water supply and distribution performance (based on analysis of performance measures, comparative benchmarking, examination of City records, and interviews with City personnel) identify areas where there were opportunities for improvement, and evaluate privatization opportunities that would reduce costs and improve service NCI performed a study of operations and management procedures which covered four subject areas. administration, customer service, engineering /operations, and maintenance. The goal of the Benchmarking study was to determine if any of the studied operating procedures or any other internal workings of the Water Department were inefficient, improvident, or imprudent. The findings from this study were used to identify privatization opportunities. The first criteria used in making the benchmarking panel selections was the relative number of connections compared to the Tustin system. The number of connections for Tustin is on the order of 14,000 and the comparable connection size for each panel system is on the order of 12,000 to 40,000 Larger municipal systems (over 70 000 connections) were rejected outright as being too large for comparison, as well as smaller systems which serve a significantly smaller population than Tustin. A second primary criteria was the question of location. It was attempted to identify primarily systems of comparable size located within the Orange County area. Accordingly as can be seen by reviewing the list below of panel members, all but one are located within Orange County The single exception was Palo Alto, a northern California city Palo Alto compares very well to the Tustin system, and provides a broader economic experience than for Orange County alone. Other considerations included miles of pipeline, number and capacity of wells, average single family monthly water use, total revenues, and source of supply (imported water vs. groundwater). While none of these parameters were controlling NA V IGANT CONSULTING, INC. 1-4 I I 1 SECTION 1 INTRODUCTION alone, the objective was to select systems with the greatest comparability to the Tustin system. Finally the goal was to benchmark the Tustin system, not only with other municipalities, but also with water districts and a private investor -owned utility As shown in Table 1 1 the Orange County cities of Buena Park, Fountain Valley and Westminster agreed to provide responses to a specially designed benchmarking questionnaire. As indicated above, the northern California city of Palo Alto was also included as a municipal public agency Two Orange County water districts participated including Los Alisos Water District and Yorba Linda Water District. Finally a private investor -owned utility provided benchmarking information for one of their comparable operating districts. The significant effort made by all of these panel members in providing the needed data to conduct this study is recognized and appreciated. The American Water Works Association Research Foundation (AWWARF) Water Industry Data Base for Utility Profiles, based on survey responses from over 100 utilities, was selectively included to gain a general perspective on operating performance for the parameter under study (for example, number of connections served per employee) The data utilized from this source was limited to those utilities responding from one or more of the following groups. A population of 50,000 to 100,000• systems under public ownership. a location in US EPA Region IX consisting of the states of Arizona, California, Hawaii, or Nevada, or water production based on groundwater only The AWWARF data was used as a reference base only to test the validity of the submitted data by the selected agencies. Data was collected by AWWARF during 1991 and 1992 (the latest data available at the time of this study) However financially sensitive parameters were adjusted by NCI to adjust for inflation. In order to make the AWWARF data comparable with the later data produced by the benchmarking partners. TABLE 1 -1 BENCHMARKING PARTNERS Purveyors Total Connections Miles of Pipe of 8' and Larger Wells Average Monthly Single Family 9 U se (ccf) Source of Supply (Percent) Total Revenues Number Capacity Capacity, gpm Metropolitan Groundwater Tustin 13,714 47 9 7,250 22 24 763 $ 10,753,375 Buena Park 18,372 225 9 15,173 26 42 58 6.800.000 Fountain Valle 16.575 136 6 24,000 23 20 75 5.954,000 Palo Alto 19,171 223 4 15 a 100 • 0 15,958,000 Westminster 20,000 153 13 14,008 NR 14 86 9,058,700 Water Districts Los Alisos 11,959 121 5 1,100 16 80 10 13,055,956 Yorba Linda 20,935 298 8 15.160 26 46 54 15,342,651 Private IOU 39,728 211 29 20,500 25 34 66 20,445.100 Average for all residential use Single family use would be higher Cit of San Francisco Hetch Hetch sus .I —wells are on standb . NAVIGANT CONSULTING, INC. 1 -5 1 1 I SECTION 1 INTRODUCTION Benchmarking data has been presented by numerical notation without indicating the specific purveyor in order to preserve the financial confidentiality of individual agencies. • A number of City employees were interviewed as part of the study process. An effort was made to interview as many key personnel as possible associated with the management and operation of the water system. Interviews, plus documents obtained from interviewed personnel, provided information to the NCI team in order to gain an understanding of the historic and current operations, staff goals for future operations, management practices and issues, and potential areas for improvement and privatization. The interviews also assisted NCI in identifying issues to include in the design of the benchmarking questionnaire. The following list provides identification of those individuals interviewed as part of the audit process. Name Title Bill Huston City Manager Tim Serlet Public Works Director Ron Nulte Finance Director Larry Schutz Assistant Finance Director Sofia Peterson Accounting Supervisor Gary Veeh Water Services Manager Art Valenzuela Production Supervisor Michael Martin Water Service Engineer Tim Martin Construction Inspector Tal Hazard Customer Service Supervisor Paul Gafne Plant Operator Brian McNamara Lead Worker Angel Aviles Maintenance Worker • Appendix A to this report lists documents obtained from the City in response to conducting the audit process. In addition to the documents referenced, substantial other miscellaneous data was supplied by the City for NCI's review • See Sections 4 (Water Department Management) 6 (Water System Financial Performance) and 8 (Privatization Opportunities) 4. Review the status of other municipal water system privatization efforts and compare them to the Tustin system. Document any issues /problems that have occurred. • NCI reviewed water system asset sales occurring in California over the last decade, based on PUC filed sales agreements and other documents, and information NCI obtained from its involvement with several of the sales. • Privatization projects through long -term lease agreements were identified based on research, previous NCI experience and contact with cities involved with such projects. NAVIGANT CONSULTING, INC. 1 -6 SECTION 1 INTRODUCTION • Two examples of annual operating agreements were reviewed and discussed in detail. NCI performed an on -site visit with the City of Bakersfield to obtain information and interview a City representative. • Miscellaneous privatization contract services throughout the state were identified and tabulated based on data provided by the AWWARF • See Section 7 (California Water Utility Privatization Projects) 5. Recommend specific options based on the preceding analysis. Identify financial and legal issues and procedures necessary to implement any recommendation. • Section 8 (Privatization Opportunities) identifies specific privatization options for the City to consider including financial issues and implementation procedures. • Legal issues are not included in the scope of work. If the City makes a decision to implement a major privatization project with the water system legal counsel must be obtained to assist in contract preparations, negotiations, and, in some cases, obtaining voter approval (e.g. totally selling the water system to a private buyer). It is anticipated legal assistance would be obtained in Phases II and III if the City proceeds further in privatization. 6. If privatization options are recommended, identify a list of qualified private companies and water purveyors that have the experience and available resources necessary to respond to a proposal based on the recommended options. • A list of qualified private companies and water purveyors has been prepared. See the last subsection of Section 8 (Privatization Opportunities). NAVIGANT CONSULTING, INC. 1 -7 SECTION 1 INTRODUCTION PHASE I PRODUCT A comprehensive technical report to be provided as follows. Five (5) screen copies for City review and comment, fifteen (15) final copies and one (1) reproducible. • Five draft copies were provided to the City for review and comment. NCI amended the draft report taking into careful consideration all comments made. • This final report (provided in the required number of copies) fulfills the requirement to prepare a comprehensive technical report NAVIGANT CONSULTING, INC. 1 -8 TUSTIN PRIVATIZATION STUDY Section EXECUTIVE SUMMARY This Executive Summary presents an overview of the Tustin Privatization Study including conclusions and recommendations. The following summary is divided according to the report sections, except for the summary tables of Water Department Management strengths and issues which are presented at the end of this section. INTRODUCTION The City of Tustin (City) owns and operates a municipal water system serving customers in the City and adjacent unincorporated area (approximately 13,700 customers) This system was acquired by the City in 1980 from the privately owned water company Tustin Water Works. Since acquisition, the City has expended substantial capital investment in replacing undersized and fully depreciated water mains and other facilities. However in view of a substantial ongoing capital investment program, and the need for new or replacement office space and maintenance storage facilities for its Water Department, the City desired to determine if the Water Department is being maintained in the most economical and efficient manner Therefore, the decision was made to undertake a privatization study in order to evaluate potential cost savings which might occur from transfer of either Water Department assets or functions to the private sector Accordingly the City retained Bookman - Edmonston Engineering, Inc. the predecessor of Navigant Consulting, Inc. (NCI) to perform a benchmarking study of its Water Department in comparison to other public and private water utilities and conduct an evaluation of privatization opportunities. This report presents the analysis, conclusions, and recommendations resulting from conducting the requested privatization study In order to evaluate the potential cost savings from privatization, it was necessary first to evaluate the comparative level of performance of the City's Water Department with other public agencies and the private sector NCI's approach in conducting this study was structured to diagnose the City's water supply and distribution performance, identify areas where there were opportunities for improvement, and evaluate privatization opportunities that would reduce costs and improve service. NCI performed a study of operations and management procedures which covered four subject areas. administration, customer services, engineering /operations, and maintenance. The goal of the Benchmarking study was to determine if any of the studied operating procedures or any other internal workings of the Water Department were inefficient, improvident, or imprudent. The findings from this study were used to identify privatization opportunities. The goal was to benchmark the Tustin system, not only with other municipalities, but also with water districts and a private investor -owned utility The Orange County cities of Buena Park, Fountain Valley and Westminster agreed to provide responses to a specially NA V IGANT CONSULTING, INC. 2 -1 I I I 1 I I r I I I I I I I SECTION 2 EXECUTIVE SUMMARY designed benchmarking questionnaire The northern California City of Palo Alto was also included as a municipal public agency Two Orange County water districts participated including Los Alisos Water District and Yorba Linda Water District. Finally a private investor -owned utility provided benchmarking information for one of its comparable operating districts. The significant effort made by all of these panel members in providing the needed data to conduct this study is recognized and appreciated. The American Water Works Association Research Foundation (AWWARF) Water Industry Data Base for Utility Profiles, based on survey responses from over 100 utilities, was selectively included to gain a general perspective on operating performance for the parameter under study (for example, number of connections served per employee) The AWWARF data was used as a reference base only to test the validity of the submitted data by the selected agencies. A number of City employees were interviewed as part of the study process. An effort was made to interview as many key personnel as possible associated with the management and operation of the water system. Interviews, plus documents obtained from interviewed personnel, provided information to the NCI team in order to gain an understanding of the historic and current operations, staff goals for future operations, management practices and issues, and potential areas for improvement and privatization. DESCRIPTION AND OPERATING CHARACTERISTICS OF TUSTIN WATER SYSTEM This section presents an overall system description and discussion of operating characteristics of the Tustin water system based on a review by NCI of Water Department engineering reports and supporting documents, interviews with Water Department operating staff, and a field visit to the system service area and facilities by NCI with assistance from Tustin operating personnel. Also contained in this section is a series of figures which provide benchmarking comparisons of the system description and operating characteristics based on data received from benchmarking partners and AWWARF utility surveys. It should be noted that this investigation performed by NCI focused on evaluating privatization opportunities and performing a management review of Water Department performance. The study did not include water system master planning or detailed system condition evaluation. Accordingly NCI prepared this section as a background reference for the Tustin system in comparison to other benchmarking participants to aid in understanding other sections of this report. The figures listed below support the discussion presented in this section. Also, reference is made to Appendix A which provides a list of the reports and documents obtained by NCI in performing this privatization study • Average Population per Residential Connection • Population Served per Mile of Pipe • Residential Customers as a Percent of Total Customers • Daily Total Retail Water Delivery NAVIGANT CONSULTING, INC. 2 -2 SECTION 2 EXECUTIVE SUMMARY • Ratio of Peak Day to Average Day Delivery • Average Retail Delivery per Capita • Average Retail Delivery per 1,000 Connections • Average Annual Residential Water Consumption per Capita • Average Annual Residential Water Consumption per Connection • Purchased Water as Percent of Total Water Delivered • Types of Distribution Mains Material • Estimated Average Age of Pipe Network • Annual Percent of Unaccounted for Water • Ratio of Storage to Peak Day Retail Delivery WATER DEPARTMENT MANAGEMENT This section presents the results of NCI's interviews with City staff document review and benchmarking analysis in order to assess the Tustin Water Department and its management practices. Benchmarking data was developed from a questionnaire supplied to each participating agency The discussion is divided into subsections of Utility Service and Reliability. Water Department Staffing, Training, and Organization Construction and Maintenance Management; and Metering Activity and Cross - Connection Control. For reference, a Water Department organization chart is contained in Appendix B Supporting the analysis are benchmarking graphs which are located within or immediately following the text which applies to the subject area. Conclusions for each area of review are presented at the end of each subsection. A summary of the management issues identified and corresponding recommendations for improvement are presented at the end of this Executive Summary Also summarized at the end of this Executive Summary are strengths of the current Water Department management. Utility Service and Reliability The trademarks of the water utility industry's best - managed systems are high service standards and reliability This section discusses the audit and benchmarking results of service performance, goals, and reliability Supporting this discussion are the following benchmarking graphs: • Average Emergency Response Time • Emergency Call Response Time NAVIGANT CONSULTING, INC. 2 -3 1 1 I I I 1 I 1 I I I 1 SECTION 2 EXECUTIVE SUMMARY • Average Non - Emergency Response Time • Non - Emergency Call Response Time • Service Call Tracking • Total Number of Customer Complaints • Customer Complaints by Category • Total Annual Breaks per 100 Miles of Pipe • Unplanned Service Interruptions per 1000 Customers • Customers Affected by Service Interruptions • Customer Time Without Water Service • Service Interruption Occurrences by Cause Conclusions Based on NCI's analysis of the Tustin water system service and reliability the following conclusions are reached. • Tustin performs well with emergency call response times. • Tustin needs improvement with regard to non - emergency call response times. • Tustin needs to establish a simplified computerized service call tracking system. • Indications are that complaints by the Tustin water system customers are not excessive. • Tustin needs to amend its monthly operations report to increase its clarity and usefulness, and consider instituting a Customer Evaluation Response Form. • Written service goals need to be developed by the Water Department for the benefit of employees and customers. • The Tustin system compares very favorably to other systems with regard to main break incidents. • The annual numbers of unplanned water service interruptions and customers affected for the Tustin system are considered to be at an acceptable comparable level. • Tustin is higher than all other benchmarking partners in response to customer hours without service occurring from unplanned interruptions. • The large percentage of service interruptions by mechanical failure of system facilities is not typical of other benchmarking participants and may be a consequence of deferred valve maintenance. NAVIGANT CONSULTING, INC. 2-4 i 1 I 1 1 1 1 1 1 I r 1 I 1 i SECTION 2 EXECUTIVE SUMMARY Water Department Staffing, Training, and Organization This subsection discusses the audit and benchmarking results of utility staffing and training. Addressed are the number of Water Department employees (including both the total number of employees, construction and maintenance personnel, field service personnel, and crew size) the training and organization of those personnel and a discussion of the potential near -term replacement of the Utility Manager on account of retirement. Supporting the discussion in this subsection are the following benchmarking graphs: • Population Served per Employee • Connections per Employee • Total Miles of Pipe per Employee • Annual Gallons Delivered per Employee • Annual Payroll per Customer • Construction and Maintenance Personnel per Customers • Field Service Personnel per Customers • Weighted Average Crew Size • Training Costs per Employee Conclusions • The Tustin Water Department is being staffed at a reasonable level. However it appears that administration staffing may be too low • Tustin is fairly representative in terms of average crew sizes. • One additional maintenance crew worker is needed to alleviate deferred maintenance on valve exercising and hydrant maintenance. • There is currently an absence of both a carefully prepared safety plan and designated safety coordinator for the Water Department. • Staff training is not being fully implemented nor is there a formal training program for cross - training. • Some Water Department staff do not have a clear understanding of the work, scope, role and product expected for assigned jobs. • A significantly lower amount per employee on job training is expended than benchmarking partners. NAVIGANT CONSULTING, INC. 2 -5 SECTION 2 EXECUTIVE SUMMARY • Potentially the City will have the need for a new Utility Manager in 2000 as a result of retirement of the current manager If the decision is made to not privatize the system, and retirement of the current manager occurs, no other task is as important for the City to complete successfully as replacement of the Utility Manager in order to improve its management and operations as recommended in this report. • Organization of Water Department employees appears to be reasonable for affected lines of authority • Current Water Department field offices are undersized, poorly organized and in substandard condition. As a result, there is a common lack of morale among field service personnel with regard to this issue. • Location of the Water Department Engineer and Utility Manager at the water operations offices is not typical for other water utilities. • There appears to be less than totally effective communications with the Water Department extending from the City Council level to field service personnel. • There is also a lack of effective communication between the Water Department field personnel, Water Department management and City management. • The Water Department does not prepare an annual business plan outlining the economic parameters under which it will operate. Construction and Maintenance Management Discussed in this subsection are the results of NCI's review of the Water Department's construction and maintenance management. Included in this discussion are construction scheduling and work order tracking, crew activity reporting, and construction material management. Also included are maintenance scheduling and procedures, work order estimating and tracking, crew activity reporting, material management, and the level of preventive versus corrective maintenance activity Supporting this discussion and located at the end of this subsection are the following benchmarking graphs: • Construction Computer Scheduling • Construction Work Order Computer Estimating • Construction Work Order Computer Tracking • Construction Crew Activity Computer Reporting • Construction Material Computer Management • Preventive versus Corrective Maintenance Activity • Number of Preventive Maintenance Schedules for System Facilities • Number of Preventive Maintenance Procedures for System Facilities NAVIGANT CONSULTING, INC. 2-6 SECTION 2 EXECUTIVE SUMMARY • Maintenance Computer Scheduling • Maintenance Work Order Computer Estimating • Maintenance Work Order Computer Tracking • Maintenance Crew Activity Computer Reporting • Maintenance Material Requisition Computer Management Conclusions The following presents the conclusions arrived at by NCI following the audit and benchmarking analysis of Tustin's construction and maintenance management. • The Water Department is not employing best management practices with regard to construction management. • The Water Department management systems for job scheduling, work order estimating and tracking, crew activity reporting and material requisitioning are completely manual. Also, with regard to the measurement of construction project progress and performance, monitoring is limited to periodic written reports to management, but only in limited detail. • For benchmarking partners, while no one purveyor indicated it had computer management processes in place for all tasks, at least one or more purveyors indicated a very high level of computer automation with work order estimating, work order tracking, and crew activity reporting. Only for the task of construction scheduling did no purveyor indicate a highly automated system. • The area of greatest need for improvement by the Water Department is maintenance management. Both the benchmarking results and audit interviews indicate that water system maintenance work is predominantly corrective in nature as opposed to preventive. Preventive maintenance is not conducted according to a written or computerized schedule. In addition to a lack of preventive maintenance plans, staff indicates that there are no written procedures for many of the water system operations. • There is currently no formal program for hydrant maintenance or system flushing. Also absent is a formal program for valve maintenance The lack of a carefully scheduled and monitored valve maintenance program is a serious current maintenance deficiency on the part of the Water Department, resulting in a directive by the SDHS to institute a written valve maintenance program (as well as a flushing program). • Tustin needs substantial improvement in the area of maintenance activities, particularly with regard to implementing a CMMS system. • Water Department records vary in their organization, completeness, and current status. Some records are reasonably good, but others are deficient. In addition to records deficiencies, it also appears that there is a problem with organization of Water Department records. NAVIGANT CONSULTING, INC. 2 -7 I I 1 1 I I I I I I I I I I i I I I I SECTION 2 EXECUTIVE SUMMARY • It is clear from NCI's interviews and facilities visit that warehousing for inventory as well as an inventory control system are both needed for efficient water system management. Metering Activity, Billing Cycles and Cross Connection Control This subsection presents the results of NCI's benchmarking analysis and audit of the Tustin water system metering activity billing cycles, and cross- connection control management. The following benchmarking graphs support this subsection analysis. • Meter Changeout Intervals • Annual Meter Reading Cost Per Customer Conclusions • Historically the City has experienced problems with meter reading. Since privatizing this function in 1998, the City has encountered no significant problems and judges that the contractor performance is very satisfactory • Tustin does not have a meter testing program for larger sized meters, compared to benchmarking partners which typically either have established programs or test meters by spot checks (selected by meter ages) • Tustin, with an average residential changeout interval of 20 years is less aggressive in meter replacements than three other benchmarking partners with 7 to 15 year changeout periods. • Industrial and commercial changeout intervals for Tustin, at 15 years each, are longer than most benchmarked purveyors at 7 to 10 years for both classes of user • Current annual meter reading costs under a privatization contract for Tustin at about $4 per customer are representative of those purveyors indicating the lowest meter reading costs. • The current City practice of bimonthly billing is typical for two- thirds of Orange County purveyors representing about 55 percent of ratepayers. Based on associated cost for meter reading and billing, it is estimated only large users with about 200 ccf or more would be economical to place on a monthly billing basis. • Cross - connection control has been a recent personnel problem for the City As this function in both a regulatory and liability issue, the City needs to quickly address the problem either by assigning it to appropriate personnel (engineering or water quality) or retain the services of a private contractor WATER SYSTEM FINANCIAL PERFORMANCE Presented in this section is a discussion on the benchmarking results for financial performance of the Tustin water system compared to benchmarking partners. In addition, where available, NAVIGANT CONSULTING, INC. 2 -8 SECTION 2 EXECUTIVE SUMMARY data has been included for AWWARF utility financial experience. This section is comprised of three subsections: Water Rates and Residential Water Cost; Gross Revenues, Operating Surplus, and General Fund Transfers; and Operation and Maintenance Expenses. Water Rates and Residential Water Cost Benchmarking figures which support the following subsection are listed following: • Monthly Residential Bills for Selected Usage • Residential Billings as a Percent of Total Billings • Average Annual Residential Water Cost per Customer • Average Residential Water Cost per Thousand Gallons Conclusions • Tustin has water rates which are very comparable to the benchmarking partners. • Providing water at comparable rates, considering the large infrastructure CIP requirements, is a significant economic strength of the Tustin Water Department. • Based on a 1999 water charge study for Southern California, Tustin rates are indicated to be about 20 percent lower than the region -wide average for the selected usage. • Based on a 1997 Orange County water rate study Tustin employs rates almost 15 percent lower than the average. • Overall, Tustin has competitive water rates when compared to other purveyors, including the private sector both in Orange County and Southern California. • The average annual residential water cost per customer for Tustin when adjusting for the large CIP revenue requirement is at about the middle of the benchmarking partners, and well below the private sector • The average residential water cost per 1,000 gallons for Tustin, after adjusting for the large CIP revenue requirement, is at a very competitive level with both the benchmarking partners, including the private sector and AWWARF utility data. Gross Revenue, Operating Surplus, and General Fund Transfers The following benchmarking figures support the discussion in this subsection. • Annual Gross Revenue per Customer • Gross Revenue per 1,000 Gallons Delivered • Annual Gross Revenue per Employee NAVIGANT CONSULTING, INC. 2 -9 SECTION 2 EXECUTIVE SUMMARY • Operating Surplus as a Percent of Revenues • General Fund Transfer per Customer Conclusions • Tustin is indicated to be competitive with several public agencies, as well as the private sector with regard to annual gross revenue per 1 000 gallons, in spite of the revenues produced for CIP • Tustin is among the most productive systems, including being generally on a par with the private sector in terms of gross revenue generated per employee. • Based on benchmarking results and other data, it is believed the City is at a reasonable level in its annual general fund transfer amount. Operation and Maintenance Expenses This subsection presents an analysis of the operation and maintenance expenses for the Tustin water system, compared against benchmarking participants, including evaluations of both total operation and maintenance expenses, payroll, purchased water and selected O &M functional costs (transmission and distribution, administrative and general, and customer accounting) The following benchmarking graphs support this subsection. • Total O &M Expense per Customer • Total O &M Expense per 1,000 Gallons Delivered • Total O &M Expense per Employee • Total O &M Expense as a Percent of Revenues • Purchased Water as a Percent of Total O &M Expense • Payroll as a Percent of O &M Expense • Payroll Cost per Employee • T &D O &M as a Percent of Revenues • A &G O &M as a Percent of Revenues • Customer Account O &M as a Percent of Revenues NAVIGANT CONSULTING, INC. 2 -10 SECTION 2 EXECUTIVE SUMMARY Conclusions • The Tustin system is being operated more efficiently than most of the benchmarked public agencies and private sector in terms of both total O &M expenses per customer and per 1,000 gallons delivered. • In terms of total O &M expenses per employee, Tustin is operating at a comparable level with the majority of benchmarked public agencies; and compared with the private sector Tustin operates only moderately higher (which could be anticipated based on a larger service area and resulting economy of scale for the private sector). Tustin and the other benchmarking participants all show a more efficient employee utilization than AWWARF data indicates for selected utility groups. • Tustin purchased water costs, measured as a percent of revenue, has one of the smallest percentages of benchmarked purveyors, reflective of an aggressive groundwater production program. However anticipated savings from lower cost groundwater are somewhat offset by extensive water treatment costs. • Payroll costs measured as a percent of total O &M expense are at a very reasonable level for Tustin compared to both the public and private sectors. Similarly Tustin payroll costs per employee are at a competitive, but reasonable, level. • Transmission and distribution expenses, measured as a percent of revenues, indicates Tustin to be very comparable to other public agencies, although higher than the private sector • Administrative and general expenses, measured as a percent of revenues, indicates Tustin to be at a reasonable level in comparison to the public sector and at a significantly lower level than the private sector • Customer accounting O &M measured as a percent of revenues indicates Tustin is performing well in comparison to both other public agencies and the private sector WATER RATE PROJECTIONS This section presents an analysis of the current revenues and expenditures for the Tustin Water Department. The water rate projections over a 15 -year time frame (2015) were developed assuming continuing City operation and management. The following subsections include Estimated Revenue Requirements, Income from Operations, and Adequacy of the Existing Rate Structure. Financial model tables including MWDSC rate projections are contained in Appendix E for reference. Adequacy of Existing Rate Structure The Water Enterprise Fund has substantial Current Assets. As of June 30 1998, the fund had Unrestricted Current Assets (Total Current Assets minus Restricted Assets) of $14 700 000. As utilities have a very reliable source of income from sales, Unrestricted Assets are generally considered adequate by financial managers when equal to one month's Operating Expenses NAVIGANT CONSULTING, INC. 2-11 SECTION 2 EXECUTIVE SUMMARY and Debt Service. Monthly Operating Expenses and Debt Service are projected to be under $700 000 through Fiscal Year 2008/07 (but peaking at $761 000 in Fiscal Year 2012/13) Thus, the fund has $14,000,000 ($14 700,000 minus $700,000) available to fund the Capital Improvements Program. If capital improvements to the water system are funded out of the Water Enterprise Fund at the rate planned in the 'Capital Improvement Program for Fiscal Year 1998 -1999' in each of the next four fiscal years (including FY 1998/99) expenditures will be $21,378,720. With Income from Operations transferred to the Water Enterprise Fund and with Cash and Investments in the fund earning 6 percent, the fund would have Unrestricted Assets of $358,243 at the end of FY 2001/02. Figure 5 -1 presents this projection graphically This balance is less than the desired $700,000. However Income from Operations over the following eight years, estimated at $5,016,287 is greater than the remaining capital improvements, estimated at $4,590,000 Accordingly the remaining improvements could either be phased over those eight years or funded with short term financing. TUSTIN WATER DEPARTMENT FINANCIAL INFORMATION Capital Improvement Program Funding for CIP for Fiscal Year 1998 -99 Using Current Rate Structure n wy m LL q c e c d c I, Q V gc -J L LL N d C $12,000,000 - $10,000,000 - $8,000,000 - $6,000,000 - $4,000,000 - $2,000,000 - $0 ($2,000,000)- ($4,000,000) FIGURE 2 -1 0 0 0 q0 0 0 N N 0 m O O 0 0 co n n m 0 O O O O O 10 CO 0 0 0 0 0 0 0 0 0 0 N p N Fiscal Year Today's Unrestricted Current Assets, equal to nearly two years Operating Expenses and Debt Service, are considered adequate to cover any plausible climate or drought induced fluctuations in sales in the near term. NAVIGANT CONSULTING, INC. 2 -12 SECTION 2 EXECUTIVE SUMMARY This analysis indicates three years of negative Income from Operations from FY 2010/11 to 2012/13. As these negative amounts average less than 2 percent of Income from Sales and are projected to occur more than a decade in the future, it is very uncertain whether there will be actual operating shortfalls. Conclusions Based on the rate impact projections performed by NCI, the following conclusions are reached. • In the fiscal year 2010/11 operating expenses are projected to exceed income from sales under the existing rate structure and will remain negative until the 1993 Certificates of Participation are paid off in FY 2012/13. • Current rates are projected to be sufficient through Fiscal Year 2014/15 assuming the rate of capital expenditures match the expenditures adopted in the FY 1998/99 Capital Improvements Program and short-term financing is obtained. CALIFORNIA WATER UTILITY PRIVATIZATION PROJECTS Discussed in this section are recent examples of privatization projects for California Water Utilities based on research performed through publications of the Reason Foundation, AWWARF data, annual reports of major water utilities involved in privatization projects, NCI's involvement with California privatization projects, and other sources. Also included is one privatization example of a New Mexico utility on account of its large size, NCI's recent involvement, and an illustration of a privatization project that has had problems. Included are examples of asset sales, long -term lease concessions, annual operating agreements, and miscellaneous smaller service contracts. Fuller descriptions are presented for those projects considered to be outstanding illustrations of the privatization approach being considered. The discussion in this section forms the basis for the analysis of privatization opportunities for the Tustin system as presented in Section 8 Privatization through Asset Sale There have been relatively few water system asset sales over the last decade from the public to the private sector Those that have occurred have been relatively small (the largest pending California sale is 7,000 connections) There have been many reasons for a lack of projects privatizing through an outright asset sale These include the requirement to gain voter approval of city ratepayers, the prohibition by the IRS of the assumption of tax -free bond financing by private taxpayers, and the view by decision makers that a sale will permanently mean a loss in utility control. Town of Apple Valley The Town of Apple Valley (Town) owns a water system which serves the Apple Valley Industrial Park (AVIP) The Town also provides the majority of area residents with sewer NAVIGANT CONSULTING, INC. 2 -13 SECTION 2 EXECUTIVE SUMMARY service. Apple Valley Ranchos Water Company (AVRWC) is a wholly owned subsidiary of Park Water Company (Park), which serves the majority of the residents of Apple Valley with water service. Park owns the stock of Jess Ranch Utilities Company which latter utility provides water and sewer collection services to the residents and businesses of the nearby Jess Ranch planned development. AVRWC and Park are currently considering a proposal to sell the Jess Ranch wastewater system to the Town. At the same time this transfer takes place, the Town's AVIP water system would be sold to Park or one of its subsidiaries. Following the system appraisals and negotiations, the Town and Company agreed to mutual sales of their respective systems. The AVIP system is being sold for an amount on the order of $2.5 million. This transaction is currently pending before the PUC for approval. The following lists the benefits of this privatization project. • Respective sales of these two utilities consolidate water service in the management of the company and sewer service in the management of the town. • Privatization results in economic utilization of stranded water facilities by merging the service areas and operations of the AVIP and AVRWC • Privatization enables landowners to be relieved of assessment obligations through bond defeasance with sale proceeds. • Potential economies of scale result from utility consolidations of both water and sewer service functions. City of West Covina The City of West Covina (West Covina) owns a water system serving customers in West Covina and adjacent City of Walnut. The West Covina system distributes water providing service to approximately 7,000 connections. The remainder of West Covina is served by other purveyors including an adjacent municipality and investor owned utility Among the primary reasons for potentially selling the system are the modest size of the utility (being only modestly economical to operate), the reliance on imported water for a majority of the source of supply and the prevalence of some of the highest rates when compared to other San Gabriel Valley purveyors. Recently the City Council unanimously voted to allow the West Covina ratepayers in the service area to vote on a proposed sale for the entire system to Suburban for a purchase price of $12.0 million together with a 10 percent decrease in current commodity rates. Rates for adjacent Walnut residents would remain unchanged. Rates for both city service areas are proposed to be held constant for four years. The West Covina acquisition would be added to the larger adjacent San Jose Hills District of Suburban. If successful, privatization of the West Covina system through Suburban will most likely result in the substitution of lower priced local surface water for imported supplies and the gain of a substantial economy of scale through the incorporation of the 7,000 connection West Covina system into the adjacent Suburban system totaling 66,000 connections. NAVIGANT CONSULTING, INC. 2 -14 SECTION 2 EXECUTIVE SUMMARY City of Modesto The northern California City of Modesto (Modesto) owns separate water systems in the nearby cities of Ceres, Turlock, and Waterford; and in the unincorporated areas of Hickman, Del Rio and Grayson which it acquired as part of the purchase of Del Este Water Company in the early 1990s (Del Este Water Company also served about one - quarter of the total area of the City of Modesto which was the motivating factor for the purchase). Modesto contains a total of almost 5,000 connections. In view of the location of these separate service areas outside of Modesto's sphere of influence, Modesto is considering selling the systems to the investor owned utility market. The combined value for these systems is several million dollars. As a first step, Modesto has been attempting to market the individual systems to the cities where they are located. If these efforts are not successful (and initial indications are that they will not be) Modesto may privatize these systems as a unit by selling them to one of the large investor owned utilities in the state. City of Folsom In 1992, Southern California Water Company (SCWC) purchased the Nimbus water system from the City of Folsom (Folsom) for an amount of $900 000 The Nimbus system service area is located southwest of the City of Folsom boundaries in the County of Sacramento, and adjacent to the Rancho Cordova service area of SCWC Apparently the motivation by Folsom to privatize this small water system through an asset sale was prompted by the opportunity to exchange water supplies with the regulated utility Los Angeles County Water Works Districts In 1991 the Los Angeles County Board of Supervisors, as governing body for Los Angeles County Water Works Districts Nos. 1 10, 16, and 22, agreed to privatize four water system service areas of the Districts by selling these systems to Southern California Water Company (SCWC), a private sector water utility company These public agency districts were providing service primarily within unincorporated area of Los Angeles County plus small portions within the cities of Hawthorne, Redondo Beach, and Compton. The purchase price for the asset sale involved with this privatization transaction amounted to $3.173 million cash. The County indicated that it had reached a decision to privatize these water systems by divestiture on account of SCWC's adjacent location, allowing the private utility the opportunity to serve the Districts customers at least as efficiently as the Districts could, and the probability that through economies of scale, the regulated utility would be able to serve all of the Districts customers at the lowest possible price. NAVIGANT CONSULTING, INC. 2 -15 SECTION 2 EXECUTIVE SUMMARY Privatization through Long -Term Lease Agreements There are currently two well known long -term lease agreements of municipal water systems by the private sector the City of Cupertino and the City of Hawthorne Both are described below Although there may be other long -term lease agreements in California, these two are considered to be representative of privatization through this approach. Copies of both of these agreements are contained in Appendix F NCI conducted research on existing long -term privatization projects in California from various sources as identified at the beginning of this section. City of Cupertino The City of Cupertino (Cupertino) owns a water system which serves approximately 4,225 connections, including both residential and commercial customers. The municipal system provides service to approximately one -third of the Cupertino population. The remaining population is served by California Water Service Company (CWS) and San Jose Water Works (SJWW) In 1996, Cupertino made the decision to explore the potential of privatizing the water system on account of its small size, personnel inefficiencies with regard to management and operations, the potential of system redundancies and backup supplies by adding it to a larger system, the difficulty in water quality monitoring and meeting new drinking water standards, and the Cupertino's belief that a greater economic return could be realized through privatization. On account of the low market price anticipated by selling the system, compared to the RCNLD other privatization alternatives were explored. Ultimately proposals were received from both CWS and SJWW to enter into a long -term lease of the system. The proposal from SJWW was eventually accepted which provided Cupertino with an upfront payment of $6.8 million for the exclusive right to operate and receive revenues for a period of 25 years. No other compensation is to be received by Cupertino for the lease (with the exception of a $1 per year lease payment). At the end of the lease period, the system reverts to Cupertino for future operations or alternative disposition. The $6.8 million cash payment is anticipated to be used to benefit the entire community such as a library expansion or park improvements. Rates, on the average, were allowed to increase by 20 percent over a three -year period to eventually equal the existing SJWW tariffs. Future rate increases will equal PUG increases to the SJWW regulated service area, but the City Council retains the right to not approve such increases if they are considered unreasonable. Disputes will be handled by binding arbitration. The only future downside risk that the Cupertino Public Works Director could envision was the potential future lack of annual oversight by Cupertino which could lead to deferred maintenance and substantial capital needs at the end of the lease period. The transfer of the system operations from the City of Cupertino to SJWW occurred in September 1997 Thus NAVIGANT CONSULTING, INC. 2 -16 1 SECTION 2 EXECUTIVE SUMMARY far Cupertino indicated it is fully satisfied with both the quality of service over the last year and its decision to privatize the system. City of Hawthorne In February 1996 the City of Hawthorne awarded a 15 -year lease of its water system to California Water Service Company (CWS) transferring responsibility for operations, maintenance and capital improvements from the municipal to the private sector In return for the lease, CWS will receive all system revenues during the lease period, estimated at approximately $4 million annually In exchange for the lease, CWS made an upfront cash payment of about $6.5 million plus annual lease payments of $100,000 The total present worth of the contract is estimated to be slightly over $7 4 million. Annual Operation and Maintenance Agreements Another alternative to privatize a publicly owned water system is to contract with a private operator to operate the entire system through an annual operation and maintenance agreement. Two outstanding examples of this privatization approach include the City of Bakersfield and the City of Rio Rancho, New Mexico. The former is an example of a very successful privatization project, the latter an example of problems that can arise with contractors. City of Bakersfield One of the largest privatization partnerships in the state is the operation and maintenance by California Water Service Company (CWS) of a major water system, known as the Ashe Fairhaven and Riverlakes service area, owned by the City of Bakersfield (Bakersfield) Although CWS was not the low bidder an intensive review of service qualifications and verification of references with other privatization projects led to the ultimate selection of CWS being retained as the service provider Bakersfield currently pays a monthly fee of just under $8 per connection per month (regardless of connection size) for the operations and maintenance contract. The current fee amounts to approximately $2 million annually for private contractor operation and maintenance services. Bakersfield believes it is accruing approximately $1 million per year in profits from the service area revenues. The Bakersfield representative indicated to NCI that the City has been very satisfied with the performance of the privatization contractor and the results of the operating agreement. Complaints over service and rates are believed to be low in comparison to other municipal systems, and necessary involvement by political leaders has been infrequent. Bakersfield indicated that it intends for the foreseeable future to maintain this privatization contract for operation and maintenance of its growing municipal water system. A copy of the Bakersfield agreement is contained in Appendix G. NAVIGANT CONSULTING, INC. 2 -17 SECTION 2 EXECUTIVE SUMMARY City of Rio Rancho The City of Rio Rancho, New Mexico (Rio Rancho) is an incorporated municipality located in Sandoval County northwest of the City of Albuquerque. In March 1995, an Operation's agreement was awarded to ECO Resources, Inc. of Texas. The agreement provided for operations and maintenance of the Rio Rancho water system, but not responsibilities for capital improvements. The management fee was 8 percent of the total Operation and Maintenance costs expended. A representative of Rio Rancho indicated to NCI that an adversarial relationship developed between the local management personnel representing ECO and the Rio Rancho City Council. The potential tension was aggravated by the City Utilities Commission and the absence of a strong leader and manager in the office of City Utilities Director Ultimately instead of renewing a two -year optional term following the first two years of operation, Rio Rancho gave a required 6 -month notice that it intended to replace ECO with a new private operator Subsequently a new operator (STE of Houston) took over the privatization contract with Rio Rancho to manage the water system. The Rio Rancho representative indicated to NCI that the O/M agreement awarded to ECO was flawed by providing no incentive for cost control (and, in fact, the contrary. the higher the cost to operate and maintain, the higher the fee). The new privatization contract provides for an incentive to the contractor for cost containment. Rio Rancho did indicate, however that much of the political problems that arose were more a result of local personalities, rather than a product of a flawed privatization project. Miscellaneous Privatization Contract Services In addition to the above major privatization projects, there are also many smaller outsourcing contracts to the private sector from public agencies. Various contract services include management for water sources or treatment, distribution main maintenance, meter reading, accounting and billing, collections, public information, and other contracts. A subsection tabulation presents an identification of these smaller specific private service contracts for California cities serving a population between 25,000 and 130,000 A total of 51 contracts were identified statewide. PRIVATIZATION OPPORTUNITIES This concluding section presents a discussion on potential water system privatization alternatives for the City of Tustin to consider The following subsections discuss privatization through asset sale (including an opinion of the order of magnitude fair market value), long -term lease agreement, annual operation and maintenance agreement, and selected contract services. Also presented are study recommendations and recommended potential service providers. NAVIGANT CONSULTING, INC. 2 -18 SECTION 2 EXECUTIVE SUMMARY Privatization through Asset Sale The strongest and most complete approach to privatization is through asset sale from the public to private sector On a global scale there are many examples of privatization utility asset sales including the transfer of the City of London, England water system to private investors after having been under public ownership for at least two centuries, as well as the sale privatization of all of Great Britain's wastewater systems. However in the United States, sales of significant public water utility systems have been rare. Examples of California water system sales are presented in the preceding section. The following discussion presents NCI's reconnaissance level valuation of the Tustin water system if privatized by outright sale; followed by a discussion of the merits of such an approach, plus NCI's conclusions and recommendations on the City undertaking total divestiture. Value as Indicated by Comparable Sales A comparable sale is a sale of property the price of which will shed light on the value of the property being appraised. Based on NCI's many decades of knowledge and experience gained in appraising water utility systems, it can be stated without reservation that market sales of water systems follow the same economic principles of supply and demand as other market transactions and provide a basis for making a prediction of the fair market value of a water system being appraised. Based on NCI's knowledge of other sales occurring in the country it is believed a large national utility would be willing to pay up to a 30 percent premium over the estimated rate base to be recognized as an acquisition adjustment (and not included in the rate base for rate making) Accordingly it is estimated that the Tustin system would sell for an amount of about $30 million without increasing the projected rate base using historic depreciated costs. This estimate is a gross cash selling price. The City would be responsible for any existing indebtedness. Advantages /Disadvantages of Asset Sale Generally it could be anticipated that there would be a number of advantages and disadvantages associated with privatizing the Tustin system through an outright sale. Among the expected advantages are the following. • A sale would eliminate the current responsibility of the City for daily operation and management of the water system and department including operation, maintenance, engineering, capital improvement, customer service, and financial activities. • A sale would eliminate the City's risk liability in operating a water system. • Privatizing the system would eliminate any obligations and problems associated with human resources. • A sale would result in conversion of a fixed asset to a liquid asset resulting in a substantial source of funds for other City uses. NAVIGANT CONSULTING, INC. 2 -19 I I 1 1 1 i 1 1 I I I I 1 SECTION 2 EXECUTIVE SUMMARY • Selling the system would result in elimination of the City's burden in completing a very extensive capital improvement program. • Sale of the system would increase modestly the City's property tax revenues due to the transfer of land and improvements to the public tax rolls. • A transfer of the system would provide a source of funds through franchise fee revenues. • Based on this study's water management review as presented in Section 4 transfer of the water system to a qualified regulated buyer /operator would facilitate implementation of corrective actions for all of the current management deficiencies identified. In contrast, there are also many potential disadvantages with privatizing the City water system through outright sale, including • Economic operation of the Tustin system would be primarily for the benefit of the shareholders of the private sector purchaser rather than for the benefit of the City and its residents. • Control over water rates, and service and management policies would shift from the City Council to the California Public Utilities Commission and the private utility which purchases it, giving the Tustin ratepayers and City Council less influence in rate setting, as well as addressing other regulatory and service issues. • Sale of the water system may cause a displacement of current Water Department employees, if not transferred to the private sector plus potential overstaffing of selected support departments such as Finance. • An outright sale would eliminate the annual General Fund transfer (with the associated reduction in time demands of City management and support staff). • Transferring ownership of the system to the private sector would be potentially a permanent action. Reestablishing ownership in the future, for whatever motivating reason, would be very costly (most likely through eminent domain) time consuming, and possibly legally infeasible. • A privatization of the water system through asset sale would require approval by City voters. Economic Potential through Sale Privatization Privatizing the Tustin system through a sale to the private sector will result in selected increased costs. These result from a rate of return on invested capital or rate base (profit) and taxes including both federal and state income tax. Based on a rate of return of 10 percent of rate base (which approximates the overall rate of return on rate base recently granted by the PUC in recent rate cases) the annual profit cost on a $30 million rate base would amount to $3 million. But this rate of return must be a net amount received by the utility after taxes which (based on an estimated 45 percent state and federal combined NAVIGANT CONSULTING, INC. 2 -20 1 I I 1 1 1 1 I I I 1 1 SECTION 2 EXECUTIVE SUMMARY income tax bracket) results in an estimated increased revenue requirement of about $5.5 million. Added to this would be an unknown amount of annual property taxes to be paid by the company (net of that portion of property taxes which flows to the City General Fund). These costs would need to be offset by reduced operating costs through increased economy of scale, greater worker productivity and other means. However reviewing the conclusions reached in Section 5 through financial benchmarking with the private sector and other public agencies indicate Tustin is performing well financially NCI is unable to identify significant potential cost savings which might result from a sale privatization. Privatization through Long -Term Lease Agreement A second major alternative to consider for potential privatization of the Tustin water system is through the use of a long -term lease agreement concession awarded to a qualified water utility operator This approach is less permanent than an outright sale of the system, but continues to represent a major commitment by the City for privatization. As discussed in Section 7 the cities of Cupertino and Hawthorne represent privatization projects developed through this approach. However in both of these referenced projects, the primary motivating causes to privatize through long -term lease concessions are significantly different than potentially exist for the Tustin system. This alternative has a very strong potential for being a favorable privatization approach. Benefits appear to include the following• • No vote by the system customers appears to be needed, but only a resolution by the City Council. • A substantial cash payment may be received up -front which may be close to (or in the case of Cupertino exceed) the fair market value without transferring title to the system. • The City eventually receives the system back. • The City continues to monitor the system management and operation, has some authority over rates, and can enforce changes in the case of bad management. • Maintaining system ownership negates having to regain ownership in the system in the future, for whatever unforeseen need avoiding uncertainty lengthy time requirements, and a very high cost. On the other hand, several disadvantages are believed to be potentially attached to this alternative They are as follows: • If an operator chosen by the City provides unacceptable service or system management, it would be very difficult to either make a change or reestablish municipal management until the end of the contract term. NAVIGANT CONSULTING, INC. 2-21 1 I I 1 I 1 1 1 1 SECTION 2 EXECUTIVE SUMMARY • Depending on which party has the cost responsibility for making capital improvements, the potential exists for the system to be returned in a state of condition requiring substantial infrastructure improvements. • Future water rate increase requests will not be under the jurisdiction or evaluation protocol of the California Public Utilities Commission. Therefore, the City will have the responsibility to approve or disapprove future rate increase requests. Other lease agreement models in the state provide for binding arbitration if agreement cannot be reached on rate proposals. If the Tustin system is leased under a long -term lease agreement, there would at least be a potential of future contentious rate proceedings with the result of binding arbitration. • If a qualified operator is not chosen for a long -term lease concession, substantial deferred maintenance at the end of the lease term may result. Without specific proposals from potential private operators, it is very speculative to estimate any potential savings from a long -term lease concession. The specific terms of any proposed lease concession agreement would depend on many factors such as the term of the lease, the current and anticipated future rate levels, the sources and responsibilities for capital improvements, the number and amount of operating expenses to be reimbursed by the City the mandatory retention of current municipal employees, and many other factors. Contractor lease payments (either annually or in lump sum) would be determined by the bidder based on the present value of anticipated future savings resulting from privatization. Theoretically if significant savings cannot be achieved by a private operator compared to municipal experience, the value of the least payments offered can be expected to be minimal. Based on the results of the water system financial performance evaluation as presented in Section 5, it is infeasible to project substantial economic savings from privatization through a long -term lease agreement. Substantial potential savings to be realized are particularly doubtful when viewing the total O &M expense per 1,000 gallons delivered (Figure 5 -11) and per customer (Figure -5 -10) payroll cost as a percent of O &M expense (Figure 5 -15) and per employee (Figure 5 -16) and transmission and distribution expenses plus administrative and general expenses as percents of revenues (Figures 5 -17 and 5 -18) Taken together these financial performance benchmarking parameters suggest the Tustin system is performing well against a peer group including the private sector However as presented in Section 4 the Tustin system is not performing from an operation and management standpoint to the level expected for a utility of this size. Privatization could present an alternative solution to these deficiencies which could be implemented through an annual operating agreement. Accordingly NCI does not recommend the City implement a lease concession at this time. Privatization through Annual O&M Contract A third major alternative to consider for potential privatization of the Tustin water system is through the use of an annual operation and maintenance (O &M) contract awarded to a qualified NAVIGANT CONSULTING, INC. 2 -22 SECTION 2 EXECUTIVE SUMMARY water utility operator This approach continues to represent a significant commitment by the City for privatization of its water utility operations, and provides significantly more flexibility in reversing a commitment to privatize than either an outright sale or long -term lease concession. As discussed in Section 7 the City of Bakersfield represents a privatization project through this approach which can be modeled for potential implementation of an annual contract for operation of the Tustin system by the private sector Advantages of privatizing through an annual operating agreement (which could contain a multi -year term) include the following • An annual O &M contract would eliminate most of the current responsibility of the City for daily management of the water system including operation, maintenance, and customer service. • An annual contract would share some of the City's risk liability in operating a water system. • Privatizing the system through this approach would eliminate any obligations and problems associated with human resources. • Based on this study's water management review as presented in Section 4 a transfer of the water system to a qualified regulated operator would solve most of the current management deficiencies identified. No vote by the system customers appears to be needed, but only a decision by the City Council. • The City would continue to monitor the system management and operation, with authority over rates, and could enforce changes in the case of bad management. Privatization through this approach, if it proves unsuccessful in the view of the City could be reversed to municipal operation and maintenance in only a few years, as opposed to more permanent approaches requiring a longer term, potentially over many years, to reverse. As with the other approaches, there are also several disadvantages believed to be potentially attached to this alternative. They include the following• • If a qualified operator is not chosen for an annual operating agreement which may last for several years, substantial deferred maintenance at the end of the lease term may result. • Privatizing the Tustin water system with the potential release of many current employees who are trained and experienced in operating the Tustin system could be a loss of valuable human resources if the City were to later municipalize the Water Department having the need to re -hire new employees without long -term experience and background with the City's system. Although it is difficult to project potential savings from an annual operation and maintenance contract from the private sector without having specific proposals to evaluate, it is possible to derive some feasibility insight by applying the terms of the Bakersfield contract to a potential Tustin project. As discussed in Section 7 Bakersfield currently pays a monthly fee of just under $8 per connection per month (regardless of connection size) for the operations and NAVIGANT CONSULTING, INC. 2 -23 SECTION 2 EXECUTIVE SUMMARY maintenance contract. With total connections of about 13,738, the Tustin system would represent a comparable annual fee for operations and maintenance of approximately $1.32 million. As referenced above in Section 7 the private contractor is responsible for all normal expenses it incurs in operating and maintaining the Bakersfield system with the exception that the City pays directly certain expenses including: • Electric and gas power charges • Water supply purchases • Pumping assessment taxes The total operation and maintenance expenses for Tustin during the year 1997 -98 was $4.58 million (not including administrative and general expenses compensated for through the General Fund transfer) Unlike the City of Bakersfield, Tustin incurs substantial source of supply costs to bring produced groundwater to potable standards. Excluding the consideration of these incremental costs, the total expended for distribution, non - electric expense for pumping, and customer service amounts to $1.63 million, or approximately $300,000 greater than the Bakersfield contract model amount. Additionally a significant amount of the annual General Fund transfer in the amount of about $738,000 reimbursing general administration costs could be credited to the elimination of this responsibility as a result of a privatization contract. It is estimated that a cost for administration of a similar privatization operating agreement would not exceed $250,000 per year However it is also recognized that the City may find it difficult to experience a cost saving of the reduced need for a General Fund transfer unless associated staff responsible for these activities could redirect their efforts into other activities capable of cost allocation. Based upon the above comparison, it appears that it is at least conceptually feasible for the City to realize an economic savings from privatization of its water system through an annual operating agreement. However there are several factors to consider which would potentially diminish the amount of potential savings including: • The Bakersfield system is 60 percent larger than the Tustin system potentially reflecting a lower cost per connection. • The private contractor for the Bakersfield system is the owner /operator of a substantial number of connections located within the remainder of the City making access to the City's portion of service area within close proximity to manpower resources. • Tustin has significant water quality treatment requirements requiring substantial operation, maintenance, and management which may result in a higher per- connection charge than the Bakersfield system indicates. • Tustin is located in a more urbanized area with a higher cost of living than Bakersfield. Nevertheless, it appears that a privatization alternative through an annual O &M contract may provide economic savings to the City as well as provide other benefits which the City may wish NAVIGANT CONSULTING, INC. 2 -24 SECTION 2 EXECUTIVE SUMMARY to take advantage of Implementing an annual O &M contract with a qualified contractor is estimated to cost on the order of $100,000 to initiate and complete. Requesting proposals to evaluate and consider would cost less depending on how far in the process the proposal were carried. Privatization through Contracting of Individual Functions The final level of privatization options to consider by the City is to privatize individual functions associated with operation or management of the water system. Unless a city or agency is very large, it is common to privatize selected functions necessary to operate a water utility Functions which are commonly privatized by most agencies include water quality laboratory testing, and the use of consultants for either total or specific planning and design projects. Table 7 1 in Section 7 presents an overview of individual privatization contracts by function for California cities with populations between 25,000 and 130,000 As indicated, privatization contracts for these miscellaneous services are listed in the broader categories of Water Sources, Water Treatment, Distribution Main Maintenance, Meter Reading, Accounting, Billing or Collections, Public Information, or other contracts. The City of Tustin currently has a significant level of privatization contracts for specific functions which total approximately $630,000 annually for the City in assisting with operation and management of its water system. Although it would be possible to request additional proposals for individual water system operation and management functions from the private sector it is highly questionable whether such an approach would result in significant cost savings. Large qualified water utility operators from the private sector have indicated to NCI that privatizing individual functions is not as attractive nor typically cost - efficient as privatizing the entire water system operation through an annual O &M contract. Further the results of the benchmarking analysis as presented above did not identify significant economic savings through privatization of individual functions. However if the City makes the decision to improve the performance of its Water Department operations and management through implementation of many of the recommendations made in this report (see Section 4), and not privatize the entire system through an annual O &M contract or other approach, then NCI recommends two specific functions be privatized until such time as the Water Department under municipal management is capable of undertaking these functions following implementation of many of the other recommendations. On account of distribution system maintenance deficiencies, including regulatory directives by the SDHS to correct such deficiencies, it is recommended by NCI that the City privatize the function of valve exercising and hydrant maintenance. It is envisioned that 50 percent of both total valves and hydrants could be maintained annually (i.e. total maintenance on a two -year schedule). Each of these functions are anticipated to require two -man crews to implement. Using the similar privatization contract for meter reading as an indication, it is projected that each function would require on the order of $55,000 to $60,000 annually to contract with the private sector It is possible that awarding both contracts to the same provider will result in a NAVIGANT CONSULTING, INC. 2 -25 SECTION 2 EXECUTIVE SUMMARY lower total cost. Hydrant flushing would still be a responsibility of the City to the extent it is needed or required. Conclusions and Recommendations Based on the results of evaluating privatization opportunities for the City of Tustin Water Department, the following conclusions have been reached by NCI, followed by recommendations for the City to consider • It is estimated that the Tustin system would sell to a large national utility for an amount of about $30 million without increasing the projected rate base using historic depreciated costs. • Privatizing the Tustin system through an asset sale is anticipated to increase rates if a rate base established for the purchaser significantly exceeds the rate base based on historic costs. Consequently the City would not sell the system if a rate increase to its customers would result. NCI is unable to identify significant potential cost savings which might result from a sale privatization. • Based on the results of the water system financial performance evaluation, it is difficult to project significant economic savings from privatization through a long -term lease agreement. • It appears that an annual operating agreement is at least conceptually feasible for the City to realize an economic savings from privatization of its water system as well as provide other benefits which the City may wish to take advantage of • The City currently incurs over $600,000 in privatization contracts. Based on benchmarking results, it is unlikely that privatizing additional individual specific functions would result in significant cost savings. • The City needs to consider privatizing valve and hydrant maintenance if it elects to not privatize the entire water system through an annual O &M contract to temporarily meet regulatory concerns and current maintenance practice deficiencies. Based on the audit review conducted by NCI, the Tustin Water Department is not performing in all aspects from an operation and management standpoint to the level expected for a utility of this size. Privatization could present an alternative solution to these deficiencies which could be accomplished through an annual operating agreement. NCI recommends the City consider implementing one of two approaches. The first is to retain an experienced Utility Manager capable of implementing the management recommendations contained in this report, plus privatize the specific functions of valve and hydrant maintenance until the City operating personnel are capable of assuming this responsibility The second potential approach is to request proposals from qualified operators to privatize the system through an annual operations and maintenance contract. If the City makes a decision to implement a major privatization project with the water system, legal counsel must be obtained to assist in contract preparations, negotiations, and, in some cases, obtaining voter approval (e.g. totally selling the water system to a private buyer). It is NAVIGANT CONSULTING, INC. 2 -26 SECTION 2 EXECUTIVE SUMMARY anticipated legal assistance would be obtained in Phases II and Ill if the City proceeds further in privatization. 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MolueAu! wn!paW pepaau spiooei Mau 6wle@Jo se Mann se 'spJooaJ luauno amp o1 do 6ul6upq pue 6wzlue6Jo w islsse of 4u515lsse anlleJlslulwpe welt pezlue6Jo /food pue aleldwooul 'elep to lno spiooei ewos snlels pue uollezlue6J0 luewe6euelj splooab wnlpalp -wei6wd aoueualulew anquanaid e ezlwRdo 01 (SWWO) wals/s luewa6euew aoueualulew pazualndwoo a to asn ow wawaldtw welsAs aoueualulew pazualndwoo to moel iuewa6euew Jaindwoo to 8Sn luewe6euelnl e0ueualweyN OH loeiluoo uopezpenud Jo Je) Jonn aoueualulew leuogippe to uoilue eJ 1.16nwyl Jayne 6ulysnll welsAs pue 'slueipAi 'sanlen col swei6wd aoueualulew luals!suoo alnlgsul 6wysnl; walsAs pus 'aoueualulew @Alen pue 1ueipAy Jot sweiboid mum' oN 6ulysn1l wals (s `aoueualulew eAIen pue weJp(H wawe6euelry aoueualulew Alp o!Jd suo!lepuewwooaa sanssl edoas cant snood SNOIIVON3WW0O3H ONY SNOISI1lONOO MNIMM MI= MN M M M OM MI a M Z NO1103S I I I r I I I I I I 1 I I I I TUSTIN PRIVATIZATION STUDY Section DESCRIPTION AND OPERATING CHARACTERISTICS OF TUSTIN WATER SYSTEM This section presents an overall system description and discussion of operating characteristics of the Tustin water system based on a review by NCI of Water Department engineering reports and supporting documents, interviews with Water Department operating staff and a field visit to the system service area and facilities by NCI with assistance from Tustin operating personnel. Also contained in this section is a series of figures which provide benchmarking comparisons of the system description and operating characteristics based on data received from benchmarking partners and AWWARF utility surveys. It should be noted that this investigation performed by NCI focused on evaluating privatization opportunities and performing a management review of Water Department performance. The study did not include water system master planning or detailed system condition evaluation. Accordingly NCI has prepared this section as a background reference for the Tustin system in comparison to other benchmarking participants to aid in understanding other sections of this report. The following figures support the discussion presented below Also, reference is made to Appendix A which provides a list of the reports and documents obtained by NCI in performing this privatization study • Average Population per Residential Connection • Population Served per Mile of Pipe • Residential Customers as a Percent of Total Customers • Daily Total Retail Water Delivery • Ratio of Peak Day to Average Day Delivery • Average Retail Delivery per Capita • Average Retail Delivery per 1,000 Connections • Average Annual Residential Water Consumption per Capita • Average Annual Residential Water Consumption per Connection • Purchased Water as Percent of Total Water Delivered • Types of Distribution Mains Material • Estimated Average Age of Pipe Network • Annual Percent of Unaccounted for Water • Ratio of Storage to Peak Day Retail Delivery NAVIGANT CONSULTING, INC. 3-1 1 1 1 I I i I 1 I I SECTION 3 DESCRIPTION, CONDITION AND OPERATING CHARACTERISTICS OF TUSTIN WATER SYSTEM Service Area Characteristics The Tustin water system service area covers most, but not all, of the incorporated area of the City Also, service is provided to unincorporated areas located adjacent to and north of the City boundaries. The current and projected system service area is estimated to total 8.4 square miles. Remaining domestic water service to the eastern portion of the City of Tustin is provided by the Irvine Ranch Water District. The water service area of the Tustin system is essentially completely developed, with associated water demands projected to remain relatively level over the next two decades. The growth projections in the service area are estimated by an ongoing master plan study to increase from a population of about 63,560 in 1997 to a peak population of 66,290 in the year 2005, and then slightly decreasing through 2020 to an estimated population of 65,003 Figure 3 -1 shows the Average Population Per Residential Connection served within the Tustin service area. As shown, Tustin is at the higher end of the range for average population per residential connection, in excess of 5.5, when compared to other benchmarking participants and AWWARF data. Only one other public agency (PUB 3) indicates an average population per residential connection in excess of 5. The lower end of the data is at about 3 persons per residential connection. NA VIGANT CONSULTING, INC. 3-2 TUSTIN WATER DEPARTMENT Population Served OPERATING INFORMATION P Average Population per Residential Connection 10- 9- $- $_ 5- 4- 2- 1- KEY 50K 100K. Utilities serving populations between 50.000 and 100,000 PRIV Privately Owned Utilities PUB Publicly Owned Utilities REGN IX USEPA Region IX (AZ, CA, HI, NV) GRDWTR Groundwater Water only USA National Composite l .. - C a — S C cv co C in to Y a n . a > a 0 ¢ iii a a a a a a a a I— Y o ,n FIGURE 3 -1 co C a X U cc 2 I- 3 Er Er CD Q rn NA VIGANT CONSULTING, INC. 3-2 1 1 I I I I 1 I I I I 1 SECTION 3 DESCRIPTION, CONDITION AND OPERATING CHARACTERISTICS OF TUSTIN WATER SYSTEM Figure 3 -2 presents an estimate of customer density through the parameter of Population Served Per Mile of Pipe. As might be anticipated in view of the results of the above figure (Figure 3 -1) Tustin has the greatest population served per mile of pipe at a level of about 450 This compares to the private sector data at about 375 people per mile of pipe, with the remaining statistical data indicating a wide individual variance between about 200 to 350 people per mile of pipe. NAVIGANT CONSULTING, INC. 3-3 TUSTIN WATER DEPARTMENT OPERATING INFORMATION Customer Density Population Served per Mile of Pipe 600 500- 400- 300- 200- 100 KEY 50K 100K. Utilities serving populations between 50,000 and 100,000 PRIV Privately Owned Utilities PUB Publicly Owned Uttlmes REGN IX USEPA Region IX (AZ, CA, HI, NV) GRDWTR Groundwater Water only USA National Composite - _ _ ® — — 'a ° r X a W CC < (I) D _._. ¢' ~ 3 CC Q NA p c co m — - ea - - f eo y > c0 E .0 a a n > n o 7 7 7 7 = a 7 a a a a a a` a ,- a a Y. to FIGURE 3 -2 NAVIGANT CONSULTING, INC. 3-3 SECTION 3 DESCRIPTION, CONDITION AND OPERATING CHARACTERISTICS OF TUSTIN WATER SYSTEM It is estimated the Tustin system serves about 12,450 connections with an additional service to almost 1,300 commercial, industrial, or other customers. Figure 3-3 shows the estimated Residential Customers as a Percent of Total Customers. Tustin, with about 90 percent of its total customers represented by residential consumers, is fairy typical of most of the other system responses at close to a 90 percent representation for residential users. TUSTIN WATER DEPARTMENT OPERATING INFORMATION Customer Demographics Residential Customers as a Percent of Total Customers 100/- 90 %- 80% 70% KEY 50K 100K Utilities serving populations between 50,000 and 100,000 PRIV Privately Owned Utilities PUB Publicly Owned Utilities REGN IX USEPA Region IX (AZ. CA, HI, NV) GRDWTR Groundwater Water only USA National Composite NA a c cv n a u) CO s > CO x ¢ Q a a a .0 n > 0 go E 0 F j F 0- a a' a' a a a a a z 3 W cc FIGURE 3 -3 ° a 0 cc System Demands and Source of Supply Over the last 12 years (1986 -87 through 1997 -98), the total groundwater production and imported water purchases have averaged approximately 13,000 acre -feet annually Total system demand for individual years has varied from about 11 400 up to 14,300 acre -feet. Projected increases in water demands are anticipated to be minimal, and based on peak historic usage, the total future estimated demand on the system is not anticipated to exceed 14,500 acre -feet in any given year NAVIGANT CONSULTING, INC. 3-4 i I I 1 II I a II II I I SECTION 3 DESCRIPTION, CONDITION AND OPERATING CHARACTERISTICS OF TUSTIN WATER SYSTEM Figure 3 -4 presents the retail water delivery by Tustin and the other benchmarking participants in terms of Million Gallons Per Day As indicated, Tustin delivers on average an amount of approximately 12 million gallons per day (MGD) which is fairly comparable with four of the other benchmarking partners ranging from about 10 to 15 MGD One of the three remaining purveyors indicated a delivery of about 7.5 MGD with the remaining two delivering 20 and 28 MGD TUSTIN WATER DEPARTMENT OPERATING INFORMATION Retail Water Delivery Millions of Gallons per Day Tustin Pub1 Pub2 Pub3 Pub4 PubS Pnv1 Pub6 FIGURE 3-4 NAVIGANT CONSULTING, INC. 3 -5 I I 1 1 I I I I I SECTION 3 DESCRIPTION, CONDITION AND OPERATING CHARACTERISTICS OF TUSTIN WATER SYSTEM Figure 3 -5 presents retail water delivery Ratios of Peak Day to Average Day Delivery Tustin at a ratio of about 1 4 is fairly typical of three other public agencies, but in contrast to one other purveyor at about 2.5. TUSTIN WATER DEPARTMENT OPERATING INFORMATION Retail Water Delivery Ratio of Peak Day to Average Day Delivery • a Tustin Pub1 Pub2 Pub3 Pub4 Pubs Prrv1 Pub6 FIGURE 3 -5 NAVIGANT CONSULTING, INC. 3 -6 SECTION 3 DESCRIPTION, CONDITION AND OPERATING CHARACTERISTICS OF TUSTIN WATER SYSTEM Figures 3 -6 and 3 -7 compare the Average Daily retail water delivery in terms of Gallons per Capita and per 1,000 Connections. For the benchmarking partners, retail water delivery varies from about 160 to 325 gallons per capita per day (gpcd) with all but one system delivering 225 gpcd or less. The Tustin system delivers slightly less than the majority at about 165 gpcd. In contrast, AWWARF data indicate a slightly lower retail water delivery ranging from about 150 to about 210 gpcd. On a per 1,000 connection basis, Figure 3 -7 indicates Tustin has a somewhat higher comparable daily delivery level. For 1,000 connections, average daily gallons delivered is about 850,000 gallons. Only one other purveyor is higher than this level with the majority of benchmarking partners ranging from 600 000 to 700,000 gallons delivered daily per 1,000 connections. Although AWWARF group data indicates typically lower levels for various groups in comparison to Tustin, the data for Region 9 (Arizona, California, Hawaii, and Nevada) indicates an average daily delivery almost equivalent to the Tustin performance TUSTIN WATER DEPARTMENT OPERATING INFORMATION Retail Water Delivery Average Daily Gallons Delivered per Capita 350- 325- 300- 275- 250- 225- 200- - o ® ?` 175 - 150 - - 125 100- — - - 75- - 50 - - — 25 0 KEY 50K 100K. Utilities serving populations between 50.000 and 100.000 PRIV Privately Owned Utilities PUB Publicly Owned Utilities REGN IX USEPA Region IX (AZ, CA, HI, NV) GRDWTR Groundwater Water only USA National Composite 4 E N CO V' N N Y i W X Q Q N 0 � 0 0 0 - j H cn O a a a a a a` a — a Z 0 w CC 0 CC LO a FIGURE 3 -6 NAVIGANT CONSULTING, INC. 3 -7 1 1 1 1 1 1 i 1 1 1 1 1 1 1 1 1 i 1 i SECTION 3 DESCRIPTION, CONDITION AND OPERATING CHARACTERISTICS OF TUSTIN WATER SYSTEM TUSTIN WATER DEPARTMENT OPERATING INFORMATION Retail Water Delivery Average Daily Gallons Delivered per 1,000 Connections 1 100,000 - 1,000.000 - 900,000 - 600,000- 700,000 600,000 500,000- 400,000 300,000 200,000 100, 000 0 KEY 50K 100K tithes serving poWlatons between 50,000 and 100,000 PRIV Privately Owned Utttes PUB Publicly Owned Utttes REGN IX USEPA Region IX (AZ CA, HI, NV) GRDWTR Groundwater Water only USA Natonal Composite FIGURE 3 7 0- 0_ 0- .0 0. CO 0. 0 0 O H ct ct Figures 3 -8 and 3 -9 present benchmarking data results for residential water consumption in terms of Average Annual Gallons per Capita and per Connection. The former figure indicates an average annual gallons per capital consumption of about 45,000 gallons which is fairly typical of four other public agency purveyors. Two other purveyors indicate a substantially greater amount of residential water consumption which appears to indicate questionable data (most likely with an inaccurate estimate of population within the service areas). Figure 3 -9 shows an average annual gallon consumption per residential connection for most of the benchmarking participants ranging between 200,000 and 250,000 gallons. The Tustin system indicates an amount of about 240 000 gallons for this parameter AWWARF results are significantly less than benchmarking partners ranging from about 100,000 to 175,000 annual gallons per residential connection. NAVIGANT CONSULTING, INC. 3 -8 SECTION 3 DESCRIPTION, CONDITION AND OPERATING CHARACTERISTICS OF TUSTIN WATER SYSTEM TUSTIN WATER DEPARTMENT OPERATING INFORMATION Residential Water Consumption Average Annual Gallons per Capita 100,000 -' 75,000- 50,000 25,000- 0 Tustin FIGURE 3 -8 a NA Pub1 Pub2 Pub3 Pub4 PubS Prlvi Pub6 TUSTIN WATER DEPARTMENT OPERATING INFORMATION Residential Water Consumption Average Annual Gallons per Residential Connection 300,000 250,000- 200,000- 150,000 100,000 50,000 KEY 50K 100K. Utilities serving populations between 50.000 and 100.000 PRIV Privately Owned Utilities PUB Publicly Owned Utilities REGN IX USEPA Region IX (AZ. CA. HI, NV) GRDWTR Groundwater Water only USA National Composite ti I- D 0- co V N G D 0- 0- 0- (a) Includes both residential and non - residential deliveries. FIGURE 3 -9 tro n X > CO X S Q 0 ¢ 0- H Co 0- _ a 3 CD cc W uo ¢ i0 cc NAVIGANT CONSULTING, INC. 3 -9 I I I I I I I 1 I I I I I i I I I I I SECTION 3 DESCRIPTION, CONDITION AND OPERATING CHARACTERISTICS OF TUSTIN WATER SYSTEM Figure 3 -10 presents graphically estimates of Purchased Water as a Percent of Total Water Delivered by each of the benchmarked purveyors. As shown, there is a substantial variance in the amount of purchased water relied on by the various purveyors ranging from about 12 percent to 100 percent of source of supply Tustin at the lower percentage of purchased water indicates the least dependence on purchased water with four other purveyors ranging from about 25 to 30 percent. The Tustin system currently has complete redundancy in its source of supply facilities to provide projected annual demands with either 100 percent groundwater or alternatively 100 percent purchased water (but not complete redundancy to supply peak demands from either source) It is a significant strength of the Tustin water system that the redundancy and flexibility exist to interchange these two sources of supply This operating flexibility will enable the city to minimize any contingency arising from severe drought conditions or emergency occurrences such as seismic events. TUSTIN WATER DEPARTMENT OPERATING INFORMATION Imported Water Supply Purchased Water as Percent of Total Water Delivered 100% - 90 %- 80 %- 70% 60 %- 50 %- 40 %- 30 %- 20 %- 1090 - 0%- Tustin FIGURE 3 -10 Pub1 Pub2 Pub3 Pub4 Pub5 Pnv1 Pub6 NAVIGANT CONSULTING, INC. 3 -10 1 NA Tustin FIGURE 3 -10 Pub1 Pub2 Pub3 Pub4 Pub5 Pnv1 Pub6 NAVIGANT CONSULTING, INC. 3 -10 1 1 1 I 1 r SECTION 3 DESCRIPTION, CONDITION AND OPERATING CHARACTERISTICS OF TUSTIN WATER SYSTEM DISTRIBUTION MAINS AND SYSTEM STORAGE The Tustin water system has on the order of 50 miles of distribution mains of 8- inches and larger Figure 3 -11 presents the Type of Materials making up the entire distribution network in comparison to the benchmarking partners. As shown, the Tustin system has over 80 percent of its mains comprised of asbestos cement pipe, which is typical of the private sector purveyor and two other public agencies. Tustin also has significant amounts of polyvinyl chloride, steel, and cast or ductile iron pipe. TUSTIN WATER DEPARTMENT SYSTEM DESCRIPTION Distribution Mains Type of Material 1— 100% - 90% 60 %— 70 %- 60 %- 50 %- 40 %- 30 %- 20%- 10 %- 0% Tustin FIGURE 3 -11 Pub1 (a) Pub2 Pub3 Pub4 Pubs Priv1 Pub6 • Cast Iron • Ductile Iron ❑ Other U Steel ❑ PVC ❑ AC (a) Maloof), of mains are AC. NAVIGANT CONSULTING, INC. 3 -11 1 1 1 1 I I I SECTION 3 DESCRIPTION, CONDITION AND OPERATING CHARACTERISTICS OF TUSTIN WATER SYSTEM Figure 3 -12 presents the Estimated Average Age (Years) of the Entire Pipe Network for Tustin and its benchmarking partners. Tustin is shown to have an average pipe network age of 25 years in a range of about 15 to 35 years for all purveyors. NAVIGANT CONSULTING, INC. 3 -12 TUSTIN WATER DEPARTMENT Age of Water Mains SYSTEM DESCRIPTION Estimated Average Age (Years) of Entire Pipe Network 50-' 45- 40- 35- 30 -- 20- 15- 10- - — — — NA 0- Tustin Pub1 Pub2 Pub3 Pub4 PubS Priv1 Pub6 FIGURE 3 -12 NAVIGANT CONSULTING, INC. 3 -12 1 I I 1 I 1 I SECTION 3 DESCRIPTION, CONDITION AND OPERATING CHARACTERISTICS OF TUSTIN WATER SYSTEM Figure 3 -13 shows estimated Annual Unaccounted for Water (Percent) for all benchmarking participants. Unaccounted for water represents unmeasured water lost through main breaks, meter inefficiencies, and other sources. Tustin at 7 percent is typical of two other purveyors at 7 to 8 percent, but slightly higher compared to other purveyors at the 3 to 4 percent level. It is anticipated that the City's unaccounted for water percent will decrease following completion of its proposed construction program and implementation of (selected) recommendations for management improvements contained in Sections 2 and 4 TUSTW WATER DEPARTMENT OPERATNG NFORMATKNJ Unaccounted for Water Annual Percent 10.0 % - 9.0 8.0% 7.0 %- 6.0 5.0% 4 0% 3.0% 2.0% 1.0 %- 0.0%- Tustin FIGURE 3 -13 PL61 Pub2 Pub3 Pub4 Pu15 Priv1 Pub6 NAVIGANT CONSULTING, INC. 3-13 1 I 1 SECTION 3 DESCRIPTION, CONDITION AND OPERATING CHARACTERISTICS OF TUSTIN WATER SYSTEM As a general guideline, system storage for municipal water systems should at least equal peak day delivery (with exceptions for systems with multiple sources of supply of adequate size) Figure 3 -14 shows system storage of benchmarking partners in terms of a Ratio of Storage to Peak Day Retail Delivery The Tustin system at about 0.6 indicates less storage in terms of a ratio than three purveyors, but greater than three others. The ongoing construction of the Main Street facilities includes a new 2.2 MG reservoir which will improve this ratio. Also Tustin with multiple sources of supply can be considered to be less vulnerable to short-term production shortages than many of the other purveyors. NAVIGANT CONSULTING, INC. 3 -14 TUSTIN WATER DEPARTMENT System Storage SYSTEM DESCRIPTION Ratio of Storage to Peak Day Retail Delivery 6 -� 5- 4- 3- 2- a - Pub4 Pub5 Tustin Pub1 (a) Los Alisos includes reclaimed storage FIGURE 3 -14 Pub2 Pub3 Priv1 Pub6 NAVIGANT CONSULTING, INC. 3 -14 1 TUSTIN PRIVATIZATION STUDY WATER DEPARTMENT MANAGEMENT This section presents the results of NCI's interviews with City staff document review and benchmarking analysis in order to assess the Tustin Water Department and its management practices. Benchmarking data was developed from a questionnaire supplied to each participating agency The discussion that follows is divided into subsections of Utility Service and Reliability. Water Department Staffing, Training, and Organization Construction and Maintenance Management; and Metering Activity and Cross - Connection Control. For reference, a Water Department organization chart is contained in Appendix B. Supporting the analysis are benchmarking graphs which are located within or immediately following the text which applies to the subject area. Conclusions for each area of review are presented at the end of each subsection. A summary of the management issues identified and corresponding recommendations for improvement are presented in Section 2. Also summarized in Section 2 are strengths of the current Water Department management. NAVIGANT CONSULTING, INC. 4-1 SECTION 4 WATER DEPARTMENT MANAGEMENT UTILITY SERVICE AND RELIABILITY The trademarks of the water utility industry's best - managed systems are high service standards and reliability This section discusses the audit and benchmarking results of service performance, goals, and reliability Supporting this discussion are the following benchmarking graphs. • Average Emergency Response Time • Emergency Call Response Time • Average Non - Emergency Response Time • Non - Emergency Call Response Time • Service Call Tracking • Total Number of Customer Complaints • Customer Complaints by Category • Total Annual Breaks per 100 Miles of Pipe • Unplanned Service Interruptions per 1000 Customers • Customers Affected by Service Interruptions • Customer Time Without Water Service • Service Interruption Occurrences by Cause It should be noted that many of the benchmarking results received from purveyor participants are based on estimates rather than actual time records. Accordingly comparative results are frequently subjective Nevertheless, overall, it is believed that benchmarking results do identify areas for improvement. The City of Tustin estimates that its average emergency response time is 30 minutes from customer call to site arrival by utility representatives to the customer's property It is believed that 95 percent of emergency calls are responded to within 30 minutes, with the remaining 5 percent of emergency calls being responded to within 30 to 60 minutes. Estimates are that no emergency calls were responded to in excess of 60 minutes. For non - emergency inquiries or requests for service by customers, the City estimates the average time from call to site arrival was 4 hours. This reflects estimates that 80 percent of its non - emergency service calls are responded to in excess of 60 minutes (with 30 percent of service calls estimated to be responded to by either a return phone call or customer site visit between 4 to 8 hours and at least 10 percent of total calls taking more than 8 hours) There are no written service goals for either customer call response or service restoration. Additionally the City does not currently track either of these service parameters by computer or other means. Requests for service made by customers to the Water Department are recorded on a service order card. Identification of the caller time and date of service request received, and remarks on the concern expressed are recorded on the service order Orders for appropriate service are then distributed to appropriate personnel for response. The service order card also provides for written notes, and the date and time when work was completed. Basic information for a large NA V IGANT CONSULTING, INC. 4-2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 4 WATER DEPARTMENT MANAGEMENT portion of 1998 service orders (date, employee responding, street address, category of service required, action taken, and old and replacement meter numbers and readings) have been entered into a computer spreadsheet. However it is not known how this information is to be summarized or analyzed to assist in Water Department management or operations. Also prepared by the Water Department is a monthly water operations activity report for maintenance and operations which provides, among other things, the total number of service orders for meter leaks, pressure, flow noise, etc. (as a total and without further breakdown) after -hours calls and responses. However the information provided in this activity report has neither a graphical presentation of trends, nor any comparison to service target goals. Service Call Response The City of Tustin compares very favorably with the benchmarking group with regard to both average emergency call response time and percentages of emergency service calls responded to within selected time periods. Emergency calls are related to responses needing immediate action, such as main breaks. Non - emergency calls are less compelling for service response such as fixing a leak in a meter box. Identifying a problem as either emergency or non - emergency is based on the judgment of the responsible agency As shown on the graph for Average Emergency Response Time in minutes from call to site arrival (Figure 4 -1) four of NAVIGANT CONSULTING, INC. 4-3 TUSTIN WATER DEPARTMENT SERVICE SERVIC E AND RELIABILITY Average Emergency Response Time Minutes from Call to Site Arrival 60 -• 45- Pub1 �--s- Pub2 Pub4 Priv1 Pub6 PubS Pub3 Tustin FIGURE 4 -1 NAVIGANT CONSULTING, INC. 4-3 I I I I I I I I I I I I I I I 1 I I SECTION 4 WATER DEPARTMENT MANAGEMENT the benchmarking partners, including the private sector have similar average response times of about 30 minutes. One agency has a slightly longer average at 45 minutes, with the two remaining participants indicating significantly better average response times, from about 15 to 20 minutes. Tustin also comparatively performed well in Emergency Call Response Time in percentages of calls responded to within selected time periods. Five of the eight benchmarking participants indicate that 90 percent or more of its emergency calls are responded to within 30 minutes including Tustin (Figure 4 -2) The response provided from the private sector indicated a somewhat lower percentage of response within 30 minutes at 50 percent, with an additional 40 percent of emergency calls responded to within 30 to 60 minutes. Only two benchmarking respondents indicated some emergency calls require a response time of greater than one hour including the response by the private sector However it should be noted that many of the benchmarking responses were indicated to be estimates rather than an analysis of actual response time records. Also, the private sector respondent serves a system service area which extends over a considerably larger geographical area than the other municipal providers. TUSTIN WATER DEPARTMENT SERVICE AND RELIABILITY Emergency Call Response Time 100 % ! 90% 80 %- 70 %- 60 %- 50% 40% 30 %- 20%— 10% 0% Tustin FIGURE 4 2 Pub1 Pub2 Pub3 Pub4 PubS Pub6 Priv1 For Average Non - Emergency Response Time (Figure 4 -3), the City of Tustin is estimated to require a substantially greater time than the other public agency benchmarking respondents, but NAVIGANT CONSULTING, INC. 4-4 I I I I y I I I r I 1 1 I I I SECTION 4 WATER DEPARTMENT MANAGEMENT TUSTIN WATER DEPARTMENT SERVICE AND RELIABILITY Average Non - Emergency Response Time Minutes from Call to Site Arrival Tustin FIGURE 4 3 Pub1 Pub2 Pub3 Pub4 Pub5 Priv1 Pub6 The associated graph (Figure 4 -4) for Non - Emergency Call Response Time indicates that percentages of calls responded to within selected time periods are considerably higher for lower time periods than estimated by Tustin. The City estimates that 80 percent of its non - emergency calls are responded to within a time period exceeding 60 minutes. This compares with the private sector only having 40 percent of its non - emergency calls requiring greater than 60 minutes and one municipal respondent indicating that 100 percent of its non - emergency calls require a time of no greater than 30 minutes within which to respond to. It is recommended that the Water Department review its procedures utilized to respond to non - emergency calls. Response procedures should be developed to identify typical non - emergency response tasks, and target associated response times. The majority of Tustin's non - emergency calls should be responded to within 60 minutes. NAVIGANT CONSULTING, INC. 4-5 I I I I I I I I I I r I i I SECTION 4 WATER DEPARTMENT MANAGEMENT TUSTIN WATER DEPARTMENT SERVICE AND RELIABILITY Non - Emergency Call Response Time 100% 90% 80% 70 %- 60% 50 %- 40 %- 30% 20% 10 %- 0% Tust n FIGURE 4 -4 Pub1 Pub2 Pub3 Pub4 Pub5 Pub6 Prry 1 Service Call Tracking Figure 4 -5 presents the benchmarking results of Computer Tracking of Service Calls by Type. As shown, five participants indicate the utilization of computer tracking of service calls by type. Two of the five, including the private sector Indicate at least six categories of service call tracking are maintained by computer records including responses to on /off service requests, billing responses, water quality inquiries and responses, leaks, pressure concerns, and other service call needs. NAVIGANT CONSULTING, INC. 4-6 2. ® <30 Minutes • 30 -60 Minutes 0 >60 Minutes J l 1 iiH;_H _AI NA 1 I , i 11 Iii Tust n FIGURE 4 -4 Pub1 Pub2 Pub3 Pub4 Pub5 Pub6 Prry 1 Service Call Tracking Figure 4 -5 presents the benchmarking results of Computer Tracking of Service Calls by Type. As shown, five participants indicate the utilization of computer tracking of service calls by type. Two of the five, including the private sector Indicate at least six categories of service call tracking are maintained by computer records including responses to on /off service requests, billing responses, water quality inquiries and responses, leaks, pressure concerns, and other service call needs. NAVIGANT CONSULTING, INC. 4-6 SECTION 4 WATER DEPARTMENT MANAGEMENT TUSTIN WATER DEPARTMENT SERVICE AND RELIABILITY Service Call Tracking Computer Tracking of Service Calls by Type ®on/off ■ billing ❑water quality ❑ leaks Tustin FIGURE 4 5 Pub1 Pub2 Pub3 Pub4 Pubs Pub6 Priv 1 Tustin does not track by computer the number and type of service calls and inquiry responses according to type. State -of- the -art service call tracking practiced by large utilities include total computerization of service call inquiries, work order tracking, and interconnection with a GIS database. Such a system computerizes all information from receipt of initial call to completion of the service response including customer plat map location and system map correction for meter changeout or other service upgrade. Although the City may not need to incorporate such a sophisticated system, it is recommended that the Water Department establish a simplified computerized service call tracking system to allow for monitoring of the occurrence trends of various consumer inquiries and needs, as well as provide a simplified system for tracking the ultimate resolution of service requests. Customer Complaints and Surveys Figures 4 -6 and 4 -7 present customer complaint benchmarking as reported by each purveyor within its annual report to the State Department of Health Services (SDHS) for 1997 Tustin indicates a moderate level of Total Complaints per 1 000 Connections (Figure 4 -6) compared to the other benchmarking participants. Although the total number of complaints at about 14 per 1 000 connections is significantly higher than those reported by at least two other public agencies and the private sector it is about two to three times or more lower than two other public agencies which report on the order of 30 to 50 complaints per 1 000 connections. NAVIGANT CONSULTING, INC. 4-7 I II I 1 I I I I I I I I I I I �I SECTION 4 WATER DEPARTMENT MANAGEMENT TUSTIN WATER DEPARTMENT SERVICE AND RELIABILITY Customer Complaints Total Number of Complaints per 1,000 Connections 0.050 -7 0.045- 0 040 - 0.035- 0.030 - 0.025 - 0.020 - 0.015 - 0.010 - 0.005- 0.000 Tustin Pub1 (a) Pubt does not track complaints for pressure FIGURE 4 -6 Pub2 Pub3 Pub4 PubS Pub6 Priv1 Reference to Figure 4 -7 Customer Complaints by Category, indicates that all three of the agencies reporting the highest complaint ratios are a result of leaks /outages. Leaks reported by customers include meter and on -site plumbing leaks as well as main system infrastructure leak or outage problems. Total and type of complaints reported by the private sector and several public agencies are extremely low NCI interviews with City management indicate the City Council has not been required to address customer service concerns for a number of years. This implies a customer base generally satisfied with water department management and service reliability regardless of the number of service complaints reported to the SDOHS. Tustin indicates its other major source of customer complaints is in the area of water quality However with at least three other respondents indicating about the same level or even a greater number of complaints regarding water quality it is not considered the water quality results for the City are excessive (i.e. Tustin is typical of many of the other comparable benchmarking purveyors with regard to water quality complaints). NAVIGANT CONSULTING, INC. 4-8 I I I I I I 1 I i I I t I I SECTION 4 WATER DEPARTMENT MANAGEMENT All benchmarking participants indicated that they monitor the level of customer complaints, except for one. Of these, four make periodic reports to management on a monthly basis, with one purveyor also indicating it prepares an annual report on the level of customer complaints. The City does provide a monthly activity report of maintenance /operations which contains customer complaints and requests for service orders. Included are monthly statistics on water main breaks repaired, service lateral leaks repaired, the combined number of requests for service orders (meter leaks, pressure, flow noise, etc.), and reported water quality concerns. It is believed that reported complaints in the SDHS annual reports are in fact 'complaints, rather than simply 'inquiries, in view of the fact that most require water department investigation and response. Care should be given to identifying customer inquiries (typically involving no response or remedial action by operating personnel, but only involving education of the consumer), and separating them from complaints. None of the purveyors indicated formal customer service surveys have been conducted, although the response from the private sector was the plan to conduct such a survey in the near future, and the response from the City of Fountain Valley was that it provides each customer requesting service a quality assurance evaluation form in order to allow customer evaluation of the service received. Management Reporting and Service Goals Appendix C contains a copy of the service request form used by the City of Fountain Valley In addition, the City of Fountain Valley also prepares an annual water service request survey report which provides a summary of service requests by classification, together with a report on NAVIGANT CONSULTING, INC. 4-9 TUSTIN WATER DEPARTMENT SERVICE AND RELIABILITY Customer Complaints Number of Complaints by Category per 1,000 Connections 0.040 -y 0.035 -' 0.030 -' 0.025 -' 0.020 -' 0.015 -' 0.010 -' 0.005 -' 0.000 (a) Pubt does FIGURE s in Water Quality ■ Pressure ❑ Leaks /Outages • Other i a a Tustin Pub1 Pub2 Pub3 Pub4 Pubs Pub6 Priv1 not track cwnpiairvs For pressve 4 -7 All benchmarking participants indicated that they monitor the level of customer complaints, except for one. Of these, four make periodic reports to management on a monthly basis, with one purveyor also indicating it prepares an annual report on the level of customer complaints. The City does provide a monthly activity report of maintenance /operations which contains customer complaints and requests for service orders. Included are monthly statistics on water main breaks repaired, service lateral leaks repaired, the combined number of requests for service orders (meter leaks, pressure, flow noise, etc.), and reported water quality concerns. It is believed that reported complaints in the SDHS annual reports are in fact 'complaints, rather than simply 'inquiries, in view of the fact that most require water department investigation and response. Care should be given to identifying customer inquiries (typically involving no response or remedial action by operating personnel, but only involving education of the consumer), and separating them from complaints. None of the purveyors indicated formal customer service surveys have been conducted, although the response from the private sector was the plan to conduct such a survey in the near future, and the response from the City of Fountain Valley was that it provides each customer requesting service a quality assurance evaluation form in order to allow customer evaluation of the service received. Management Reporting and Service Goals Appendix C contains a copy of the service request form used by the City of Fountain Valley In addition, the City of Fountain Valley also prepares an annual water service request survey report which provides a summary of service requests by classification, together with a report on NAVIGANT CONSULTING, INC. 4-9 I r I i I I I I I i I I I SECTION 4 WATER DEPARTMENT MANAGEMENT customer evaluations received as being either positive or negative A copy of this survey report for 1997 -98 is also contained in Appendix C The maintenance /operations monthly activity report prepared by the Tustin Water Department is a good effort to provide management with an overview of Department activities. It is also helpful for the statistics reported to contain the previous two years results for the year -to -date. However with the amount of statistical data presented, it is difficult to quickly comprehend either trends, or detect those parameters of most importance Also, with no reported service goals to compare the statistics against, it is difficult to monitor performance. It is recommended the City amend this operations report in order to provide a continuing report to management and the City Council by selecting those parameters of greatest importance, together with providing a graphical presentation of data which lends itself to such treatment. It is also recommended the City consider instituting a Customer Evaluation Response Form similar to that provided by the City of Fountain Valley to its customers. Currently the Tustin Water Department has no prepared written statement of service goals for providing service and reliability to customers. Even if operating parameters and service result statistics are not maintained by the City it is important to state service goal expectations for City employees, City Council, and customers. Clearly stated service goals are particularly helpful to employees operating the system in order to understand what level of service should be expected by customers. Such goals should form the basis for service resolution of potential objections or disputes, as well as providing a target for designing service improvements. Several of the benchmarking respondents indicated they have goals for service restoration and other levels of customer service. Appendix D contains examples of typical service requirements and goals prepared by two of the benchmarking partners. It is recommended that the Water Department prepare similar service goals and expectations for the benefit of its employees and customers. Main Breaks and Service Interruptions Figures 4 -8 through 4 -12 present the results of benchmarking data on main breaks and service interruptions. The first, Figure 4 -8, indicates the Total Annual Breaks per 100 Miles of Pipe. As shown, the Tustin system compares very well to other benchmarking respondents and data reported by the AWWARF Only two respondents indicated their main break experience was less than the City of Tustin. Significantly annual main breaks reported for all categories grouped by AWWARF (presented as the six bars on the far right of the graph) indicate that Tustin has fewer breaks per length of pipe by as much as four to six times. The favorable indication for the number of annual main breaks may reflect the substantial pipeline replacement undertaken by the City over the last two decades. NAVIGANT CONSULTING, INC. 4-10 SECTION 4 WATER DEPARTMENT MANAGEMENT TUSTIN WATER DEPARTMENT SERVICE AND RELIABILITY Main Breaks Total Annual Breaks per 100 Miles of Pipe 50- 40- 30 20 10- KEY 50K 100K Utilities serving populations between 50,000 and 100,000 PRIV Privately Owned Utilities PUB Publicly Owned Utilities REGN IX USEPA Region IX (AZ, CA, HI, NV) GROWTH Groundwater Water only USA National Composite NA C N t a a a' a' .0 V N .o .0 a a a o Y > co X ¢ Q .j G ¢ H V) a a a 0 W CC CC 0 FIGURE 4 -8 Annual Unplanned System Water Service Interruptions per 1,000 Customers (Figure 4 -9) also indicates the Tustin system operates at an acceptable comparable level. Customers Affected by Service Interruptions (Figure 4 -10) appears to be slightly high in comparison to other respondents, but similar to three other purveyors including the private sector Customer Time Without Water Service (Figure 4 -11) indicates that the City is higher than all other respondents (although several responses were not made) and many times higher than the private sector response It is realized that the response data by participants may be based more on estimates rather than actual recorded data. Nevertheless, the Water Department should review recent experiences with water outages to ensure that customers are not without service for any periods longer than absolutely necessary NAVIGANT CONSULTING, INC. 4-11 i I I 1 I I 1 r I I I SECTION 4 WATER DEPARTMENT MANAGEMENT NAVIGANT CONSULTING, INC. 4-12 TUSTIN WATER DEPARTMENT SERVICE AND RELIABILITY Annual Service Interruptions Unplanned System Water Service Interruptions per 1,000 Customers 10 B- 6- 4- 2 ' — - a. Pnv1 Pub6 -- S — NA Tustin Pub1 Pub2 FIGURE 4 -10 Pub3 Pub4 NA :_ar�zss- 0 Tustin Pub1 Pub2 Pub3 Pub4 FIGURE 4 -9 - Pubs Priv1 Pub6 NAVIGANT CONSULTING, INC. 4-12 TUSTIN WATER DEPARTMENT C SERVICE AND RELIABILITY ustomers Affected by Service Interruptions Total Residential Customers Affected Annually 700 -' 600- 500 - 400- 300- 200- 100- Pubs - a. Pnv1 Pub6 -- NA Tustin Pub1 Pub2 FIGURE 4 -10 Pub3 Pub4 NAVIGANT CONSULTING, INC. 4-12 I 1 I I r I I 1 1 1 I 1 I I 1 1 1 SECTION 4 WATER DEPARTMENT MANAGEMENT The last graph (Figure 4 -12) presents Service Interruption Occurrences by Cause. Significantly no other purveyor participating in the benchmarking indicated the source of service interruption to be mechanical failure of system facilities. With Tustin indicating 50 percent of its service interruptions being caused by this source, it is recommended a review of such recent interruptions be made to potentially reduce the number of mechanical failure service interruptions in the future. This finding may be a consequence of deferred valve maintenance which when performed results in valves either breaking or not shutting down completely causing a need to go to another valve which results in a wider area of shut down. NAVIGANT CONSULTING, INC. 4-13 TUSTIN WATER DEPARTMENT SERVICE AND RELIABILITY Customer Time Without Water Service Hours per 100 Residential Customers 10 -' 6- 6- 4- 2- NA NA NA Tustin Pub1 Pub2 Pub3 Pub4 Pub5 Priv1 Pub6 FIGURE 4 -11 The last graph (Figure 4 -12) presents Service Interruption Occurrences by Cause. Significantly no other purveyor participating in the benchmarking indicated the source of service interruption to be mechanical failure of system facilities. With Tustin indicating 50 percent of its service interruptions being caused by this source, it is recommended a review of such recent interruptions be made to potentially reduce the number of mechanical failure service interruptions in the future. This finding may be a consequence of deferred valve maintenance which when performed results in valves either breaking or not shutting down completely causing a need to go to another valve which results in a wider area of shut down. NAVIGANT CONSULTING, INC. 4-13 I I 1 1 I I I I I SECTION 4 WATER DEPARTMENT MANAGEMENT TUSTIN WATER DEPARTMENT SERVICE AND RELIABILITY Service Interruption Occurrences by Cause 60 %- 50 %- 40% 30% 20 %- 10 %- 0% 4 Tustin FIGURE 4 -12 Pub1 Pub2 Pub3 Pub4 Pub5 Pub6 Priv1 ©Water Quality •Water Supply ❑Mechanical Failure DOther •Customer Plumbing ❑Main Breaks Conclusions Based on NCI's analysis of the Tustin water system service and reliability the following conclusions are reached. • Tustin performs well with emergency call response times. • Tustin needs improvement with regard to non - emergency call response times. • Tustin needs to establish a simplified computerized service call tracking system. • Indications are that complaints by the Tustin water system customers are not excessive. • Tustin needs to amend its monthly operations report to increase its clarity and usefulness, and consider instituting a Customer Evaluation Response Form. • Written service goals need to be developed by the Water Department for the benefit of employees and customers. • The Tustin system compares very favorably to other systems with regard to main break incidents. • The annual numbers of unplanned water service interruptions and customers affected for the Tustin system are considered to be at an acceptable comparable level. • Tustin is higher than all other benchmarking partners in response to customer hours without service occurring from unplanned interruptions. NAVIGANT CONSULTING, INC. 4-14 I I I I I I I I I SECTION 4 WATER DEPARTMENT MANAGEMENT • The large percentage of service interruptions by mechanical failure of system facilities is not typical of other benchmarking participants and may be a consequence of deferred valve maintenance. NAVIGANT CONSULTING, INC. 4-15 1 1 I I I I I I I I I i SECTION 4 WATER DEPARTMENT MANAGEMENT WATER DEPARTMENT STAFFING, TRAINING, AND ORGANIZATION This subsection discusses the audit and benchmarking results of utility staffing and training. Addressed are the number of Water Department employees (including both the total number of employees, construction and maintenance personnel, field service personnel, and crew size) the training and organization of those personnel and a discussion of the potential near -term replacement of the Utility Manager on account of retirement. Supporting the discussion in this subsection are the following benchmarking graphs: • Population Served per Employee • Connections per Employee • Total Miles of Pipe per Employee • Annual Gallons Delivered per Employee • Annual Payroll per Customer • Construction and Maintenance Personnel per Customers • Field Service Personnel per Customers • Weighted Average Crew Size • Training Costs per Employee Department Staffing The Tustin Water Department employs 22 personnel to support its management and operations. This includes three individuals in the Finance Department of the City given the responsibility for marketing and customer service. Also included in the total are two individuals responsible for meter reading retained under a privatization contract with Southern California Water Company A series of four figures, 4 -13 through 4 -16, provides a benchmarking analysis of the number of Water Department employees compared both to the benchmarking partners and AWWARF benchmarking data collected nationally The parameters of population, connections, miles of pipe and annual retail delivery were all graphed in terms of quantities per employee All of the graphs show that Tustin Water Department staffing was within a reasonable range when compared to the benchmarking comparison group, and either equaled or significantly exceeded efficiencies when compared with AWWARF data. NAVIGANT CONSULTING, INC. 4-16 1 1 I 1 i i 1 1 1 1 1 1 1 1 1 r SECTION 4 WATER DEPARTMENT MANAGEMENT Population Served per Employee (Figure 4 -13) indicates approximately 3,000 people per each utility employee. Only one other public agency municipal purveyor exceeded this level of service in terms of population served. For Connections Served per Employee (Figure 4 -14), Tustin is approximately in the middle of the results for the benchmarking partners at about 625 connections per employee, but significantly more efficient than those systems reporting to AWWARF (ranging more on the level of 300 to 400 connections per employee). The private sector in this graph was considerably higher at about 800 connections per employee, but this utility has a certain number of headquarter employees performing work on behalf of the District which are not accounted for within the local system (which costs are eventually charged to the District operations). Also, it would be expected that this purveyor would be more efficient in view of its significantly greater size than the Tustin system (on the order of 2V2 times as large) NAVIGANT CONSULTING, INC. 4-17 TUSTIN WATER DEPARTMENT Population Served STAFFING Number of People Served by Each Utility Employee 5,000 - 4,000 - 2,000- 1,000- KEY 50K IOOK Utilities serving populations between 50.000 and 100,000 PRIV Privately Owned Utilities PUB Publicly Owned Uutitie REGN IX USEPA Ragan IX (AZ CA HI, NVI GROWTR Gr nbwater Water my omposne USA National Composite — — - — — - ® o o N E ? a ? a a = FIGURE 4 -13 n > co x ¢ ¢ 0 0 t¢ Population Served per Employee (Figure 4 -13) indicates approximately 3,000 people per each utility employee. Only one other public agency municipal purveyor exceeded this level of service in terms of population served. For Connections Served per Employee (Figure 4 -14), Tustin is approximately in the middle of the results for the benchmarking partners at about 625 connections per employee, but significantly more efficient than those systems reporting to AWWARF (ranging more on the level of 300 to 400 connections per employee). The private sector in this graph was considerably higher at about 800 connections per employee, but this utility has a certain number of headquarter employees performing work on behalf of the District which are not accounted for within the local system (which costs are eventually charged to the District operations). Also, it would be expected that this purveyor would be more efficient in view of its significantly greater size than the Tustin system (on the order of 2V2 times as large) NAVIGANT CONSULTING, INC. 4-17 i I I I I I I I r SECTION 4 WATER DEPARTMENT MANAGEMENT TUSTIN WATER DEPARTMENT STAFFING Connections Served Total Connections per Employee 1,500- 1,000- 500 KEY 50K 100K Utilities serving population between 50.000 and 100 000 PRIV Privately Denali Utilise PUB Publicly pursed U1 M1t,es REGN IX USEPA Region IX (AZ CA. HI, NV( GRDWTR Groundwater Water only USA National Composite all® FIGURE 4 -14 N e, v N no Y > m X Q .0 O D 1- to a a a' a 0 a a` 0 a a z 3 c w 0 0 Q Q Viewing Miles of Pipe Served per Employee (Figure 4 -15) and Annual Gallons Delivered per Employee (Figure 4 -16), indicates Tustin is operating its water utility at a very efficient staffing level. In both cases, the City is relatively on a par with the private sector staffing and equal to or exceeding the performance indicated by AWWARF data. NAVIGANT CONSULTING, INC. 4-18 I I I I I 1 I i SECTION 4 WATER DEPARTMENT MANAGEMENT TUSTIN WATER DEPARTMENT STAFFING Miles of Pipe Maintained Total Mt es of Pipe per Employee 20- 15- 10- 5- KEY 50h LOOK Utilities serving plpulatnrs between 50 000 and 100 000 PRIV Pr atety Owned Uelmes PUB Publicly Owned Utilities NEON IX USEPA Region IX )AZ. CA. HI NV) GRDWTR Groundwater Water only USA National Composite NA FIGURE 4 -15 D co 0 0 CO ; CO x Q Ct 0. 0. a' a' a' 0- 0- 0 a a. z o Y W c o a c7 NAVIGANT CONSULTING, INC. 4-19 TUSTIN WATER DEPARTMENT Retail Delivery STAFFING Annual Gallons (mg) Delivered per Employee 400 - 375- 350- 325- 300- 275 250- 225- 200- 175- 150- 125- 100- 50- 25- KEY 9 50K 100K 'Alleles serving populations between 50,000 and 100.000 PRIV Pn ately Owned Utilities PUB Publicly Owned UtilNe REGN IX USEPA Reglo IX (AZ. CA. HI. NV) GRDVVTR Nattioat Composer only USA ® S - -- ® o 0 g To cm n co n n a — Yo > m x ¢ a r m m a a a a a a a` 0 a a z Y W O it o cc in 0 FIGURE 4 -16 NAVIGANT CONSULTING, INC. 4-19 I 1 1 i 1 I I SECTION 4 WATER DEPARTMENT MANAGEMENT Figure 4 -17 presents an analysis of Total Annual Payroll per Customer for each utility included in the benchmarking group. As shown, Tustin is within the range of about $50 to $100 in annual payroll per customer at about $80. Again, the private sector at a significantly lower cost (approximately $55) is not totally comparable for the same reasons stated above with regard to the comments made in regard to Figure 4 -14 (allocation of certain management and operation - related costs from the Company headquarters which are not reflected in this graph) The results of these benchmarking comparisons indicate that the Tustin Water Department is being staffed at a reasonable level. It is also considered that the City requires about two additional employees compared to all other purveyors in the benchmarking group when consideration is given to the extra staffing required to operate the nitrate removal and desalting treatment facilities. Therefore, the results presented above should be fairly representative when compared to the other benchmarked purveyors. The following Table 4 -1 presents a comparison of staffing levels by major function for the Water Department compared against the range of personnel retained by four of the public agency benchmarking group. Not included in the range was the private sector benchmarking partner in view of its significantly larger customer base. As shown, except for the function of administration and management, Tustin staffing levels are typically around the lower of the range of comparable purveyor staffing. In the case of administration and management personnel, the NAVIGANT CONSULTING, INC. 4-20 TUSTIN WATER DEPARTMENT STAFFING Annual Payroll Total Annual Payroll per Customer $200 -' $175 - $150 - $125- $100- $75- $50- $25- $0 FIGURE AM Pub1 Pub6 — — Pub2 Pub4 Pnv1 Tustin 4 -17 NA Pub3 Pubs The results of these benchmarking comparisons indicate that the Tustin Water Department is being staffed at a reasonable level. It is also considered that the City requires about two additional employees compared to all other purveyors in the benchmarking group when consideration is given to the extra staffing required to operate the nitrate removal and desalting treatment facilities. Therefore, the results presented above should be fairly representative when compared to the other benchmarked purveyors. The following Table 4 -1 presents a comparison of staffing levels by major function for the Water Department compared against the range of personnel retained by four of the public agency benchmarking group. Not included in the range was the private sector benchmarking partner in view of its significantly larger customer base. As shown, except for the function of administration and management, Tustin staffing levels are typically around the lower of the range of comparable purveyor staffing. In the case of administration and management personnel, the NAVIGANT CONSULTING, INC. 4-20 i I I I i I I SECTION 4 WATER DEPARTMENT MANAGEMENT Tustin Water Department is at 0 65 (with the remaining 0.35 of the Water Services Manager's time being allocated to the primary function of resource management) compared to a range of 2.5 to 3.5. Again, these results imply that the Tustin Water Department is operating at an efficient staffing level. It appears that administration and management staffing may be too low Based on NCI's review of comparable water system departments organization charts, it appears that additional administration and management personnel are either division secretaries, assistant water superintendents, or administrative assistants to the Department Manager Also, it does not appear that in other water departments, the manager's time is significantly allocated to resource planning. TABLE 4 -1 Staffing Levels by Major Function (Number of Full Time Employees) Function Tustin Range of Public Agencies Resource Management 0.35 0 -3.25 Marketing and Customer Service 3 4 7 Meter Reading 2 2.25 4 Rates 0 0 — 0.5 Distribution System Planning and Design 1.5 0.5 3 Distribution System Operations and Maintenance 13 8 5 15 Construction- System Expansion or Improvements 1.5 0.5 — 8.5 Administration and Management 0.65 2.5 — 3.5 Figures 4 -18 and 4 -19 present benchmarking results for Construction and Maintenance Personnel and Field Service Personnel, each per 1,000 Customers. As shown, for both of these functional areas, Tustin compares reasonably with both the private sector and the other public agency benchmarking participants. NAVIGANT CONSULTING, INC. 4-21 SECTION 4 WATER DEPARTMENT MANAGEMENT TUSTIN WATER DEPARTMENT STAFFING C &M Personnel FTE 5, 4 3- 2- 0 FIGURE per 1,000 Customers 5' q _ 3- 2- 1 _ FTE. Full Time Equivalent. Defined as 2080 labor hours per year. (e g two 40 hrs Mk employees working 3 months= 960 labor hrs. approx 0 5 FTE) Pub3 Tustin Pub1 4 -18 Pub1 Pub4 NA Priv1 Tustin FIGURE 4 -19 Pub2 Pub2 Pub5 Pub3 Pub4 Pub5 Pub6 Priv1 NAVIGANT CONSULTING, INC. 4-22 TUSTIN WATER DEPARTMENT STAFFING Field Service Personnel FTE per 1,000 Customers 5' q _ 3- 2- 1 FTE. Full Time Equivalent Defined as 2080 labor hours per year. leg. two 40 hrs mk employees working 3 months= 960 labor hrs . approx 0.5 FTE) Pub3 Pub1 Pub4 NA Priv1 Tustin FIGURE 4 -19 Pub2 Pub5 Pub6 NAVIGANT CONSULTING, INC. 4-22 SECTION 4 WATER DEPARTMENT MANAGEMENT Based on the staffing analysis, it is recommended the City retain an administrative assistant to assist the Utility Manager and other supervising personnel in records maintenance and organization, resource planning, and other support functions. This individual should have some technical experience and be able to create simple computer schedules, maintenance programs and inventory controls. ' Crew Size 1 I 1 t i The Tustin Water Department maintenance staff is organized into two three - person maintenance crews, one two - person crew and one individual dedicated as a service representative. Benchmarking Figure 4 -20 presents Crew Size for participants in terms of Weighted Average Number of Workers. As indicated, Tustin is fairly representative of three other public agencies with average crew sizes in excess of two people. Three of the remaining public agencies have average crew sizes under two with the private sector responding it has an average crew size on the order of 1 4 This lower average number of people per crew for the private purveyor reflects utilization of eight employees to maintenance activities as single workers. Based on the benchmarking results, it does not appear that Tustin has crew sizes with an excessive number of employees. However there is a need for one additional maintenance NAVIGANT CONSULTING, INC. 4-23 TUSTIN WATER DEPARTMENT STAFFING Crew Size Weighted Average Number of Workers 5 -, 4- 3- FIGURE Pub2 Pub1 Pub6 Pub3 Pub4 Pub5 Prrvt Tustin 4 -20 Based on the benchmarking results, it does not appear that Tustin has crew sizes with an excessive number of employees. However there is a need for one additional maintenance NAVIGANT CONSULTING, INC. 4-23 SECTION 4 WATER DEPARTMENT MANAGEMENT worker in order to provide enough staff to make up two rather than three crews. The resulting impact from not being able to maintain a third maintenance crew has been the deferred maintenance on valve exercising and hydrant maintenance as discussed below The City should retain an additional maintenance worker as soon as practicable in order to alleviate the shortfall in full staffing of its organized crews. Safety and Emergency Response Planning There is currently an absence of both a carefully prepared safety plan and assigned staff person to act as the safety coordinator for the Water Department. A number of safety concerns were expressed during staff interviews. However occasional safety seminars have been held for Water Department personnel in the past to address selected safety issues. The lack of a safety plan containing proper operating procedures associated with issues of safety and the lack of a designated safety coordinator pose a potential liability to workers safety (as well as the safety of City residents who may be impacted by an accident), potential damage to City and private property and cause an adverse impact to workers morale who believe their best interests are not being taken into account. The City needs to address these deficiencies by continuing to hold frequent safety seminars on selected issues, prepare a Water Department safety plan, and designate one individual who would be responsible for addressing safety issues and coordinating training. Staff Training and Training Costs Interviews with City staff and management indicate that staff training is minimal in the Water Department. It was indicated that historic allocated budgets for management training have not been implemented. There appears to be a lack of professional training and efforts by staff to attend professional seminars. Personnel indicated that they are never afforded to go to seminars to gain additional training, but felt a need for more hands -on training. Supervisory personnel indicated that there is not enough release time to send staff to AWWA seminars and other training programs. Also absent was a formal training program for cross- training. It is believed that there is also currently no strong employee mentoring of more inexperienced personnel. According to staff, training is pretty much, 'learn as you go Staff also indicated that there was a need to learn a lot of the job requirements on their own. NCI was also told by some staff that they do not always have a clear understanding of the work, scope, role, and product expected for assigned jobs. However staff did believe that they are beginning to work together as a team in meeting daily demands of Water Department responsibilities. Benchmarking Figure 4 -21 presents Training costs in terms of Annual Dollars expended per Employee. As shown, dollars expended on staff training costs confirm the results of NCI staff interviews. Tustin is among three other public agencies which spend on the order of $50 or less per employee annually on training costs. This is contrasted with two other public agencies spending about $200 and $550 per year annually and the private sector which expends a reported $900 per year per employee for technical and management training. NAVIGANT CONSULTING, INC. 4-24 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 4 WATER DEPARTMENT MANAGEMENT TUSTIN WATER DEPARTMENT STAFFING Training Costs Annual Dollars per Employee $1,000 - $900- $800 - $700 - $600 - $500 - $400 - $300 - $200 - $100- $o- NA Tustin Pub1 Pub2 Pub3 Pub4 Pub5 Pub6 Pnv1 FIGURE 4 -21 In order to promote professionalism, provide for the most efficient methods for operations and management, retain staff morale and long -term employment by experienced employees, it is essential that a strong staff training program be implemented. This should include technical and management seminars, on -site (and preferably hands -on) training programs, and formal procedures to ensure cross - training of employees. As sufficient cross - training of job responsibilities occur it should be easier to free the required amount of time to send selected employees periodically to training seminars. Water Department management should strongly encourage (and, if absolutely necessary even require) that every employee attend at least one or two training seminars annually A variety of training seminars should be identified for employee selection and preference, taking into account those areas of expertise believed to be most beneficial to Water Department operations. Additionally Water Department supervisors should identify appropriate group seminars to be performed on -site at least semiannually Finally the Water Department should assess the level of employee skills to mentor inexperienced personnel in normal job responsibilities as well as establish a formal cross - training program in order to bring the entire Water Department staff into a higher skill level. Utility Manager The current water Utility Manager of the Tustin Water Department was a prior employee of the Tustin Water Works, an investor -owned utility and assisted the City in ownership transition beginning in 1980 when the City purchased the system from the Company Since that time, NAVIGANT CONSULTING, INC. 4-25 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 4 WATER DEPARTMENT MANAGEMENT many distribution mains have been replaced, significantly improving system performance. However the Utility Manager expressed to NCI his desire to retire in 1999 (although no official notice has been given to the City), potentially creating the need for the City to find a replacement if the decision is not made to privatize the system (see Section 8). In view of the many recommendations made by NCI to improve its management and operations of the water system (assuming continuing operation by City employees) no other task is as important for the City to complete successfully as selection of a replacement Utility Manager Of the need arises) Such an individual must have the leadership skills, management experience, and operating knowledge of a medium -size municipal water system to strongly impact employee morale, upgrade operational and maintenance procedures through computer automation and assistance, interact positively with the City Council and management, and expedite the substantial backlog of pending construction improvements. A selected Utility Manager also needs to be experienced with interacting with regulatory authorities and dealing with consultants and construction contracts, familiar with water quality issues, and possess a basic understanding of good preventive maintenance programs and procedures. A new Utility Manager for the Tustin Water Department should also have a basic understanding of imported water issues and pricing. The City should institute a manager replacement search as soon as practicable following a notice by the current manager to leave and a decision to continue under City operation and management. It would be beneficial if the City could retain a replacement prior to the retirement of the current manager by a couple of months in order to familiarize the new manager with the existing system Department employees; system records, and professional network contacts from regulatory authorities, adjacent water agencies, consultants, contractors, and suppliers; Orange County Water District, Metropolitan Water District, East Orange County Water District; and other relevant professional sources. The City also needs to assess the proper level of compensation in order to attract a well qualified individual for this position. Practical experience and success at operating a comparable water system at a high level is more important than educational credentials. Employee Organization and Location As part of the benchmarking data collection effort, NCI obtained organization charts for Tustin (see Appendix B) and most of the benchmarking partners to review the water department organization approaches by the various purveyors. Tustin's organization of its employees in the Water Department appears to be reasonable for affected lines of authority However employee location is a significant issue for the City to address. Based on employee interviews and NCI's field visits, the current field office of the Water Department is under sized, poorly organized and in a sub - standard condition. As indicated below warehousing space is not available for appropriate levels of inventory Appropriate space for employee change of clothes and field cleanup does not exist including the lack of hot water Finally the existing building is poorly organized for employee office space and records organization. There is a common lack of morale among employees with regard to the field services location. Initially the City studied the possibility of either constructing a new Water NAVIGANT CONSULTING, INC. 4-26 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 4 WATER DEPARTMENT MANAGEMENT Department building at the current office site or remodel the existing facilities. However in view of the ongoing construction of the Main Street Reservoir and associated facilities on the same property it is now planned to transfer the field offices location to an existing field- services building occupied by other City departments. Assuming the City does not implement privatization of its water system the City should assure that the new field services location of the Water Department employees is fully functional with adequate space and office division, plus adequate facilities for records organization and space. Two other observations made by NCI in its review were the locations of the Water Department engineer and Utility Manager both currently located at the field services office. Normally engineers assigned to utilities are located in central city hall offices and not at a remote field location. We suggest that when the transfer is made to the new field services location, the water system engineer be relocated into the Public Works Department together with other utility and public works engineering personnel. Also it is typical that the Utility Manager be located within city hall facilities to facilitate communications and planning with other city management staff As discussed below there is a communications problem within the Water Department. Much of this problem could be solved by relocating the Utility Manager to a city hall office for permanent location with field visits to the services center on an as- needed basis, rather than having the permanent office of the Utility Manager at the services center with City Hall visits as needed. NCI recommends that the new Utility Manager be located within City Hall offices. Water Department Communications Based on employee interviews, there appears to be less than totally effective communications within the Water Department extending from the City Council level to field service personnel. There appears to be a lack of information on imported water issues and other significant water utility issues both by City management and the City Council. Water issues are infrequently discussed by the City Council and very few reports are made to the Council on Water Department activities. There is also the lack of strong feedback communications from the Water Department to City management including the absence of clear information reports regarding the current status of Water Department activities and operating results. It is believed that communications will be enhanced by locating a new Utility Manager and engineer within City Hall offices. Also, implementation of the recommendation to make the Water Department activities reports clearer should assist in conveying useful information. NCI recommends that a quarterly report be prepared for the City Council providing a status of Water Department activities and performance with a presentation made by the new Utility Manager It is hoped that a new utilities manager with appropriate communicating skills will also facilitate communications between field services personnel and management. Today many larger well managed water utilities, both in the public and private sectors, prepare business plans outlining the sources of water together with associated costs, projected revenues and expenses, and other business planning issues. It is recommended that the Tustin Water Department prepare at least a business plan memorandum outlining the business and economic framework under which the utility plans to operate. Such a plan will be informative both for City management and Council, as well as City residents. NAVIGANT CONSULTING, INC. 4-27 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 4 WATER DEPARTMENT MANAGEMENT Conclusions • The Tustin Water Department is being staffed at a reasonable level. However it appears that administration staffing may be too low • Tustin is fairly representative in terms of average crew sizes. • One additional maintenance crew worker is needed to alleviate deferred maintenance on valve exercising and hydrant maintenance. • There is currently an absence of both a carefully prepared safety plan and designated safety coordinator for the Water Department. • Staff training is not being fully implemented nor is there a formal training program for cross - training. • Some Water Department staff do not have a clear understanding of the work, scope, role and product expected for assigned jobs. • A significantly lower amount per employee on job training is expended than benchmarking partners. • Potentially the City will have the need for a new Utility Manager in 2000 as a result of retirement of the current manager If the decision is made to not privatize the system, and retirement of the current manager occurs, no other task is as important for the City to complete successfully as replacement of the Utility Manager in order to improve its management and operations as recommended in this report. • Organization of Water Department employees appears to be reasonable for affected lines of authority • Current Water Department field offices are undersized, poorly organized and in substandard condition. As a result, there is a common lack of morale among field service personnel with regard to this issue. • Location of the Water Department Engineer and Utility Manager at the water operations offices is not typical for other water utilities. • There appears to be less than totally effective communications with the Water Department extending from the City Council level to field service personnel. • There is also a lack of effective communications between the Water Department field personnel, Water Department management and City management. • The Water Department does not prepare an annual business plan outlining the economic parameters under which it will operate. NAVIGANT CONSULTING, INC. 4-28 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 4 WATER DEPARTMENT MANAGEMENT CONSTRUCTION AND MAINTENANCE MANAGEMENT Discussed in this subsection are the results of NCI's review of the Water Department's construction and maintenance management. Included in this discussion are construction scheduling and work order tracking, crew activity reporting, and construction material management. Also included are maintenance scheduling and procedures, work order estimating and tracking, crew activity reporting, material management, and the level of preventive versus corrective maintenance activity Supporting this discussion and located at the end of this subsection are the following benchmarking graphs: • Construction Computer Scheduling • Construction Work Order Computer Estimating • Construction Work Order Computer Tracking • Construction Crew Activity Computer Reporting • Construction Material Computer Management • Preventive versus Corrective Maintenance Activity • Number of Preventive Maintenance Schedules for System Facilities • Number of Preventive Maintenance Procedures for System Facilities • Maintenance Computer Scheduling • Maintenance Work Order Computer Estimating • Maintenance Work Order Computer Tracking • Maintenance Crew Activity Computer Reporting • Maintenance Material Requisition Computer Management As discussed in Section 3, the City of Tustin has performed substantial replacement of undersized and fully depreciated distribution service lines since acquiring the water system in 1980. However in the past, proposed new well and reservoir construction projects under City construction management were not proceeding in a timely schedule. As a result, many proposed construction projects were backlogged for initiation and completion. In 1995, the City's response to the situation regarding capital improvement projects was to privatize construction management by retaining an engineering consulting firm to manage construction projects. The City indicates that 80 percent of its total construction budget is managed by an outside consultant. The Water Department also indicates its management systems for job scheduling, work order estimating and tracking, crew activity reporting and material requisitioning are completely manual. No measures are employed to evaluate construction crew performance. Finally with regard to the measurement of construction project progress and performance, monitoring is limited to periodic written reports to management, but only in limited detail. Construction Management Automation and Crew Performance Benchmarking partners all indicated that no more than 5 percent of their total construction budgets were managed by engineering consultants. However it is recognized that the level of pending CIP projects for the City is substantially greater than the benchmarked purveyors. NAVIGANT CONSULTING, INC. 4-29 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 4 WATER DEPARTMENT MANAGEMENT Although three of the benchmarking participants also indicated totally manual systems for construction management, at least three others indicated that most of construction management tasks were either primarily automated with some manual control, or highly automated with a minimum amount of manual data entry and manipulation. These results are graphically presented by benchmarking Figures 4 -22 through 4 -26, Computer Construction Scheduling, Computer Work Order Estimating, Computer Work Order Tracking, Computer Crew Activity Reporting, and Construction Material Computer Management. While no one purveyor indicated it had computer management processes in place for all tasks, at least one or more purveyors indicated a very high level of computer automation with work order estimating, work order tracking, and crew activity reporting. Only for the task of construction scheduling did no purveyor indicate a highly automated system. NAVIGANT CONSULTING, INC. 4-30 TUSTIN WATER DEPARTMENT CONSTRUCTION AND MAINTENANCE PROCEDURES Construction Automation Computer Construction Scheduling 6' 5 _ 4- 3- 2- — KEY 6- Minimum manual data entry and manipulation 3- Most tasks are automated but interlace requires human intervention. 0- Completely Manual NA .--- Tustin Pub1 Pub2 Pub3 Pub4 Pubs Pub6 Prlvl FIGURE 4 -22 NAVIGANT CONSULTING, INC. 4-30 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 4 WATER DEPARTMENT MANAGEMENT TUSTIN WATER DEPARTMENT CONSTRUCTION AND MAINTENANCE PROCEDURES Construction Automation Computer Work Order Estimating KEY 6= Minimum manual data entry and manipulation 3. Most tasks are automated but interface requires human intervention 0= Completely Manual i NA Tustin Pub1 Pub2 Pub3 Pub4 Pub5 Pub6 Prlv1 FIGURE 4 -23 TUSTIN WATER DEPARTMENT CONSTRUCTION AND MAINTENANCE PROCEDURES Construction Automation Computer Work Order Tracking 6 5- 4 3- 2- 0- . KEY - 6= Minimum manual data entry and manipulation. 3. Most tasks are automated but interface requires human intervention 0= Completely Manual --� NA Tustin Pub1 Pub2 Pub3 Pub4 Pub5 Pub6 Prlv1 FIGURE 4 -24 • NAVIGANT CONSULTING, INC. 4-31 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 4 WATER DEPARTMENT MANAGEMENT TUSTIN WATER DEPARTMENT CONSTRUCTION AND MAINTENANCE PROCEDURES Construction Automation Computer Crew Activity Reporting 6 5 4- 3 2 0 • KEY 6= Minimum manual data entry and manipulation 3= Most tasks are automated but interface requires human intervention 0= Completely Manual 6= Minimum manual data entry and manipulation. 3= Most tasks are automated but interface requires human intervention 0= Completely Manual - j i 1 -- ®.- ®.. NA .. ... _._..... :.._.-- ..>,.. _. .mom...,_ -. .. as r- ..- s.... -... ..,- .+.. -., .-..r=••.� NA Tustin Pub1 Pub2 Pub3 Pub4 PubS Pub6 Priv1 FIGURE 4 -25 TUSTIN WATER DEPARTMENT CONSTRUCTION AND MAINTENANCE PROCEDURES Construction Automation Construction Material Computer Management 6 5 4- 3- 2- 1 0 Tustin Pub1 Pub2 Pub3 Pub4 PubS Pub6 Priv1 FIGURE 4 -26 NAVIGANT CONSULTING, INC. 4-32 KEY 6= Minimum manual data entry and manipulation 3= Most tasks are automated but interface requires human intervention 0= Completely Manual ®.- ®.. NA .. ... _._..... :.._.-- ..>,.. _. .mom...,_ -. .. as r- ..- s.... -... ..,- .+.. -., .-..r=••.� Tustin Pub1 Pub2 Pub3 Pub4 PubS Pub6 Priv1 FIGURE 4 -26 NAVIGANT CONSULTING, INC. 4-32 1 1 1 t 1 1 1 1 1 r 1 1 SECTION 4 WATER DEPARTMENT MANAGEMENT In regard to construction crew performance measurements, while two purveyors indicated that they did not measure construction crew performance (as the case for Tustin), at least three others indicated that they used a variety of approaches to measure construction crew performance One purveyor indicated that it used four different approaches to monitor construction crew performance including: percent utilization, actual dollars versus estimated dollars, actual hours versus estimated hours, and crew size required versus crew size used. Finally in response to measuring construction project progress and performance, most agencies report that monthly written reports are prepared to management on progress status and performance for both current and recently completed construction projects. Additionally other progress measurements employed for construction project monitoring included actual hours versus estimated hours, actual dollars versus estimated dollars, and completion dates versus target dates. At least one agency indicated that it employs a computerized project management system to monitor construction project progress and performance. All of these results indicate that the Water Department is not employing best management practices with regard to construction management. In view of the large backlog of pending construction projects, NCI believes it is prudent at this time to leave construction project management as a responsibility for an outside consultant. At this time, NCI recommends that the Water Department focus its initial efforts in correcting deficiencies in maintenance management as discussed below Construction project management can revert to the Water Department responsibilities at such time as the maintenance function has been addressed and following completion of a substantial amount of the backlogged projects. However there is a strong need to carefully monitor the performance of the engineering consultant to properly manage the pending construction projects with a careful review of performance according to both actual versus target completion dates and actual versus estimated dollars. Finally periodic written reports to management on construction progress and performance should be prepared with enough detail and performance measures to enable both City management and Council to quickly comprehend the status and performance of ongoing projects. Maintenance Programs The area of greatest need for improvement by the Water Department is maintenance management. Both the benchmarking results and audit interviews with Department personnel indicate that water system maintenance work is predominantly corrective in nature as opposed to preventive. Interview estimates vary from only minimal preventive maintenance performed to a level of about 25 percent. Preventive maintenance is not conducted according to a written or computerized schedule. There is currently no hydrant maintenance being performed nor a systematic schedule for distribution system flushing. It is believed that the system contains a large number of low quality valves. In the absence of previous scheduled maintenance, many valves easily break when current exercising is attempted creating a need for a large number of valve cut -ins. The lack of a carefully scheduled and monitored valve maintenance program is a serious current maintenance deficiency on the part of the Water Department. Valve maintenance is currently being performed only as time and manpower permit, but it is estimated it will take on NAVIGANT CONSULTING, INC. 4-33 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 4 WATER DEPARTMENT MANAGEMENT the order of five years to exercise all valves. Additionally staff is not sure of how many valves in the system there actually are. Many system valves are normally open or closed, but their normal operational status is not typically indicated on system plans. Valve maintenance was started in 1993 -94 but only about 40 percent of the system has been covered in the last four years. The District Office of the State Department of Health Services (SDHS) responsible for regulating the operation of domestic water supply systems in the State, indicated the following in a 1998 Annual Inspection Report for the Tustin Water system. The City does not have a written valve maintenance program due to staffing. Flushing is performed based upon the customer complaints. The City does not have a written flushing program. The City needs to develop a written valve maintenance program and flushing program. (emphasis added by SDHS) (Page 16) NCI audit interviews of Water Department staff indicate a staffing problem with performing routine preventive maintenance such as valve exercising, hydrant maintenance and system flushing. In view of a maintenance worker deficiency there was not enough staff available to maintain a dedicated valve crew There is a dedicated truck which has been purchased by the City and equipped for valve maintenance, but no continuing crew staffing to implement an ongoing program. Unless an equipment operator is required, a valve maintenance crew would typically be made up of two maintenance workers. The staff indicates that it has not had time to implement and continue an organized valve maintenance program. The existing deficiency with an appropriate preventive maintenance program is further indicated by the Water Department's response to the benchmarking survey audit interviews regarding written maintenance schedules, and inspection and maintenance procedures for system facilities. Absent are written planning maintenance schedules for pumps, motors, treatment plant equipment, storage tanks, valves, pressure regulating stations, fire hydrants, and distribution system flushing. In addition to a lack of preventive maintenance plans, staff indicates that there are no written procedures for many of the water system operations. Benchmarking results further indicate the deficiency of the Water Department in the area of preventive versus corrective maintenance activity Figure 4 -27 Level of Preventive vs. Corrective Maintenance Activity indicates that six of the seven purveyor participants in the benchmarking study practice more than half of their maintenance activities in preventive maintenance. Two of the six indicated their maintenance activity was focused on mostly preventive tasks. Only one purveyor had more than half of its maintenance tasks classified as corrective, but still was at a higher preventive maintenance level than Tustin. NAVIGANT CONSULTING, INC. 4-34 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 11 1 1 SECTION 4 WATER DEPARTMENT MANAGEMENT TUSTIN WATER DEPARTMENT CONSTRUCTION AND MAINTENANCE PROCEDURES Maintenance Activity Level of Preventive vs. Corrective Maintenance Activity 4 3 2 0 Tustin Pub1 Pub2 Pub3 Pub4 PubS Pub6 Privl FIGURE 4 -27 Figures 4 -28 and 4 -29 Number of Preventive Maintenance Schedules and Procedures for System Facilities, respectively indicate the number of preventive maintenance schedules and procedures for system facilities according to purveyor At least five agencies have some number of either preventive maintenance schedules or procedures in place to coordinate careful ongoing preventive maintenance programs. In both cases (schedules and procedures) the private sector responses indicated the greatest numbers. Basically written maintenance schedules were prepared and in place for all system facilities (pumps, motors, storage tanks, valves, pressure - regulating stations, fire hydrants, and system flushing) for the private sector response. Written preventive maintenance procedural plans have also been prepared by the private purveyor for maintenance activities on system facilities. NAVIGANT CONSULTING, INC. 4-35 KEY 4= Mostly preventive 3= More than half preventive 2- More than half corrective 11= Mostly corrective '+ 7 , t �,r r i Hki Tustin Pub1 Pub2 Pub3 Pub4 PubS Pub6 Privl FIGURE 4 -27 Figures 4 -28 and 4 -29 Number of Preventive Maintenance Schedules and Procedures for System Facilities, respectively indicate the number of preventive maintenance schedules and procedures for system facilities according to purveyor At least five agencies have some number of either preventive maintenance schedules or procedures in place to coordinate careful ongoing preventive maintenance programs. In both cases (schedules and procedures) the private sector responses indicated the greatest numbers. Basically written maintenance schedules were prepared and in place for all system facilities (pumps, motors, storage tanks, valves, pressure - regulating stations, fire hydrants, and system flushing) for the private sector response. Written preventive maintenance procedural plans have also been prepared by the private purveyor for maintenance activities on system facilities. NAVIGANT CONSULTING, INC. 4-35 1 1 1 1 1 1 1 1 1 1 r 1 1 1 SECTION 4 WATER DEPARTMENT MANAGEMENT TUSTIN WATER DEPARTMENT CONSTRUCTION AND MAINTENANCE PROCEDURES Maintenance Schedules Number of Preventive Maintenance Schedules for System Facilities 10 -A 9 8 5 3 Tustin Publ Pub2 Pub3 Pub4 Pub5 Pub6 Privl FIGURE 4 -28 NAVIGANT CONSULTING, INC. 4-36 TUSTIN WATER DEPARTMENT CONSTRUCTION AND MAINTENANCE PROCEDURES Maintenance Procedures Number of Preventive Maintenance Procedures for System Facilities 10 -' 9- 8- 7- 6- q_ 1 AS ^ 1 _ {:a, t s — „ 1" Tustin Publ Pub2 Pub3 Pub4 Pub5 Pub6 Privl FIGURE 4 -29 NAVIGANT CONSULTING, INC. 4-36 1 1 1 1 1 1 1 1 1 1 r 1 1 SECTION 4 WATER DEPARTMENT MANAGEMENT Maintenance Management Automation Best management practices include the use of a computerized maintenance management system (CMMS) to optimize the effectiveness of a preventive maintenance program in order to reduce maintenance and operating costs, reduce emergency incidences, prevent regulatory intervention, and prolong the remaining lives of system facilities to the longest extent practicable. Figures 4 -30 through 4 -34 present benchmarking results for Maintenance Automation for various tasks (Scheduling, Work Order Estimating, Work Order Tracking, Crew Activity Reporting, and Material Requisition Management). As shown, at least four or five responding agencies indicated various levels of maintenance task automation. Although no one agency excelled in all aspects of maintenance automation, at least one agency indicated a very high level of maintenance automation for most of the individual maintenance tasks. NAVIGANT CONSULTING, INC. 4-37 TUSTIN WATER DEPARTMENT CONSTRUCTION AND MAINTENANCE PROCEDURES Maintenance Automation Maintenance 6 -' 5. 3- 2- I Computer Scheduling KEY 6- Minimum manual data entry and manipulation. 3= Most tasks are automated but interface requires human intervention. 0= Completely Manual � Tustin FIGURE 4 -30 Pub? Pub2 Pub3 — Pub4 Pub5 Pub6 Prlvt NAVIGANT CONSULTING, INC. 4-37 1 1 1 1 1 1 1 1 1 1 r 1 1 1 1 1 1 1 SECTION 4 WATER DEPARTMENT MANAGEMENT TUSTIN WATER DEPARTMENT CONSTRUCTION AND MAINTENANCE PROCEDURES Maintenance Automation Maintenance Work Order Computer Estimating 6J KEY 6= Minimum manual data entry and manipulation Most tasks are automated but interlace requires human intervention 0= Completely Manual 0 Tustin FIGURE 4 -31 Pub1 Pub2 Pub3 Pub4 Pub5 Pub6 Privl TUSTIN WATER DEPARTMENT CONSTRUCTION AND MAINTENANCE PROCEDURES Maintenance Automation Maintenance Work Order Computer Tracking 6 5 4- 3- 2- 0 Tustin FIGURE 4 -32 Pub1 Pub2 Pub3 Pub4 Pub5 Pub6 Privl NA V IGANT CONSULTING, INC. 4-38 KEY 1 6= Minimum manual data entry and manipulation 3= Most tasks are automated but interlace requires human intervention 0- Completely Manual t i f i Tustin FIGURE 4 -32 Pub1 Pub2 Pub3 Pub4 Pub5 Pub6 Privl NA V IGANT CONSULTING, INC. 4-38 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 4 WATER DEPARTMENT MANAGEMENT NA V IGANT CONSULTING, INC. 4-39 TUSTIN WATER DEPARTMENT CONSTRUCTION AND MAINTENANCE PROCEDURES Maintenance Automation Maintenance Crew Activity Computer Reporting 6 -' 5- 4. 2- FIGURE az KEY 6= Minimum manual data entry and manipulation 3= Most tasks are automated but interface requires human intervention. 0= Completely Manual - �. S.R. Pub6 !Er 1111131/ 1 . Pub3 Pub1 Pub4 Pub2 Privt Tustin 4 Tustin 4 33 Pub2 Pub3 Z�-'a. . . i Pub4 PubS Pub6 Privl -34 NA V IGANT CONSULTING, INC. 4-39 TUSTIN WATER DEPARTMENT CONSTRUCTION AND MAINTENANCE PROCEDURES Maintenance Automation Maintenance Material Requisition Computer Management 6' 5- 4- 3 2- 1. FIGURE — = ' KEY 6= Minimum manual data entry and manipulation 3= Most tasks are automated but interlace requres human Intervention. 0- Completely Manual S.R. Pub6 . Pub4 Privt Tustin 4 Pub1 Pub2 Pub3 PubS -34 NA V IGANT CONSULTING, INC. 4-39 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 4 WATER DEPARTMENT MANAGEMENT It is clear from the above audit and benchmarking results that the Water Department needs substantial improvement in the area of maintenance activities, particularly with regard to implementing a CMMS system. However such improvements will require potentially both training on behalf of the staff and leadership by Water Department management. Staff interviews indicated that there is a need to learn preventive maintenance as current personnel have never performed this important water system function. Records and Inventory Control Efficient management of a municipal water department requires good recordkeeping and materials inventory control. NCI's review of selected Water Department records, together with the results of staff interviews, indicate that Water Department records vary in their organization, completeness, and current status. Some records are reasonably good, but others are deficient. Many record deficiencies have already been identified in the Water Department management discussions presented above. In addition to records deficiencies, it also appears that there is a problem with organization of Water Department records. NCI believes that a technical administrative assistant, experienced in computer records management, retained by the City and dedicated to assisting the utilities manager and others in the Water Department, would be extremely helpful in organizing current records, bringing records up to current date, and creating additional operational and management records for implementing many of the other recommendations made in this section. A number of employee interviews indicated that the Water Department has a current problem with inventory space and control. Materials supply is a problem with no adequate warehouse storage available. Annual bids for supplies are received at the beginning of each year for major items such as meters which may or may not last through the year There is currently no inventory control system in place to monitor the level of supplies on hand. As a consequence, staff indicated there is a constant need to buy PVC pipe and other materials. Also, inventory space is not available for larger items such as hydrants. However it was noted by staff that the City is very responsive in providing adequate equipment needs as requests are made to management. In addition, there is also a need to perform an updated water system inventory of all system facilities including pipe ages, sizes, and materials, and lengths installed; as well as a proper accounting and inventory for such appurtenant facilities as valves and fire hydrants. It is anticipated that the current master planning being performed by an engineering consultant will provide an updated water system inventory of the Tustin water system. It is clear from NCI's interviews and facilities visit that warehousing for inventory as well as an inventory control system are both needed for efficient water system management. An inventory control system and adequate space to warehouse inventory should alleviate the wasted time expended by operating staff to purchase additional facilities. An inventory control system would also assist the preparation of annual inventory needs for supplier bidding. A well- managed water department should have a computerized inventory control system to assist in the management and provision of appropriate inventory to its repair crews. NAVIGANT CONSULTING, INC. 4-40 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 4 WATER DEPARTMENT MANAGEMENT Conclusions The following presents the conclusions arrived at by NCI following the audit and benchmarking analysis of Tustin's construction and maintenance management. • The Tustin Water Department is not employing best management practices with regard to construction management. • The Water Department management systems for job scheduling, work order estimating and tracking, crew activity reporting and material requisitioning are completely manual. Also, with regard to the measurement of construction project progress and performance, monitoring is limited to periodic written reports to management, but only in limited detail. • For benchmarking partners, while no one purveyor indicated it had computer management processes in place for all tasks, at least one or more purveyors indicated a very high level of computer automation with work order estimating, work order tracking, and crew activity reporting. Only for the task of construction scheduling did no purveyor indicate a highly automated system. • The area of greatest need for improvement by the Water Department is maintenance management. Both the benchmarking results and audit interviews indicate that water system maintenance work is predominantly corrective in nature as opposed to preventive. Preventive maintenance is not conducted according to a written or computerized schedule. In addition to a lack of preventive maintenance plans, staff indicates that there are no written procedures for many of the water system operations. • There is currently no formal program for hydrant maintenance or system flushing. Also absent is a formal program for valve maintenance. The lack of a carefully scheduled and monitored valve maintenance program is a serious current maintenance deficiency on the part of the Water Department, resulting in a directive by the SDHS to institute a written valve maintenance program (as well as a flushing program) • The Water Department needs substantial improvement in the area of maintenance activities, particularly with regard to implementing a CMMS system. • Water Department records vary in their organization, completeness, and current status. Some records are reasonably good, but others are deficient. In addition to records deficiencies, it also appears that there is a problem with organization of Water Department records. • It is clear from NCI's interviews and facilities visit that warehousing for inventory as well as an inventory control system are both needed for efficient water system management. NAVIGANT CONSULTING, INC. 4-41 SECTION 4 WATER DEPARTMENT MANAGEMENT METERING ACTIVITY, BILLING CYCLES AND CROSS- CONNECTION CONTROL This subsection presents the results of NCI's benchmarking analysis and audit of the Tustin water system metering activity billing cycles, and cross - connection control management. The following benchmarking graphs support this subsection analysis. • Meter Changeout Intervals • Annual Meter Reading Cost Per Customer All connections in the City of Tustin water system are metered. The total 1997 connection count of 13,738 included 12,448 residential connections (including both single - family residences, mobile homes, condominiums, and apartments), and 1,290 connections serving commercial, industrial and other customers. For the latter category it is estimated that there are approximately 950 commercial connections, 100 institutional, and about 50 industrial customers. The remainder are primarily landscape irrigation and fire protection services. Accordingly approximately 90 percent of the customer service base is residential connections. The City maintains no regular program for testing the accuracy of its system meters, which are typically replaced based on declining consumption. Based on replacement history of meter changeouts of approximately 700 to 750 per year residential meters are estimated to have an average changeout period of approximately 20 years. Commercial and industrial meters are each estimated to be changed on the average of once every 15 years. Meter installation dates, manufacturers, and model numbers are maintained on computerized customer records. Meters sized 3' and larger are sent to the vendor for repairs when necessary with meters of 2' or smaller not repaired. Meter reading is performed on a schedule to support bimonthly billing to all customers. Almost all meters are manually read with field hand -held computer data entry Each week, data is downloaded into a computer program for weekly billing. Less than 100 meters (larger sized with difficult access for reading) are touch -read with associated computer data entry It is estimated that the average number of days from day of meter reading to mailing (billing lag time) is approximately two to three days. A number of years ago, meter readers were assigned to the Operations Section of the Water Department. However as a result of supervision problems and excessive lag times occurring from meter re- reads, the meter reading function was transferred to the Finance Department. Subsequent performance from employees assigned to this City department also resulted in problems, with the eventual result that the meter reading function is currently performed under a privatization contract with Southern California Water Company This outsourced meter reading function is estimated to require 1.5 full time employee demand at an annual cost of about $54,000. Since privatizing this water utility function, the City has experienced essentially no significant problems with meter reading and judges that the contractor performance is very satisfactory All of the benchmarking partners are also 100 percent metered for their water system customers. Meter reading and billing technology for benchmarking partners is primarily manual NAVIGANT CONSULTING, INC. 4-42 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 4 WATER DEPARTMENT MANAGEMENT meter reading and hand -held computer data entry as the City of Tustin. However the City of Buena Park is changing from an entire manual meter reading and data entry technology to a complete touch -read metering technology In addition, one purveyor uses radio meter reading for large meters. Currently two benchmarking agencies also have no meter testing program. However one utilized a consultant service for a one -time testing event, and another tests the accuracy of meters by spot checks, with testing focused on age of meters. Three remaining benchmarking partners have established meter testing programs with all larger meters (typically compound meters 3' or larger) inspected either every year or every two years. Figure 4 -35 presents Meter Changeout Intervals for benchmarking partners by class of user Tustin's meter changeout interval for residential customers at 20 -years is representative of three other purveyors indicating average residential meter changeout ages of about 17 20 years. However at least three other benchmarking partners reported residential meters are only left in the system for average ages of 7 15 years before changeout. With respect to commercial and industrial meters, Tustin is clearly not as aggressive in meter changeouts. Tustin indicates an average age interval of 15 years for commercial meters, together with one other purveyor On the other hand, five other purveyors indicate a commercial meter changeout interval of 7 10 years (with 10 being typical) No other purveyor had an industrial meter changeout interval over 10 years (with 7 10 years being typical) whereas Tustin indicated an industrial meter interval of 15 years. NAVIGANT CONSULTING, INC. 4-43 TUSTIN WATER DEPARTMENT METERING ACTIVITY Meter Changeout Intervals Average Age of Replaced Meters in Years 20- i y 18- 16- 14- 12- 10 4- 2 Residential ■ Commercial • Industrial I ar i NA Tustin Pub1 Pub2 Pub3 Pub4 Pub5 Pub6 Priv1 FIGURE 4 35 NAVIGANT CONSULTING, INC. 4-43 SECTION 4 WATER DEPARTMENT MANAGEMENT A 20 -year residential meter interval may be appropriate for some systems. However various factors such as sand production can shorten the effective life of a meter Inaccurate meters almost always under register resulting in lost billing revenues and higher unaccounted for water percentages. NCI recommends the City conduct a one -time sampling survey of residential meters focusing on meters of 20 years or greater Also, records of replaced meter ages based on the current City practice of replacing meters with declining consumption should be computer maintained to verify the adequacy of the current 20 -year changeout period for residential meters. Finally the City needs to institute periodic testing of high use commercial and industrial meters, at least on a biannual basis. Figure 4 -36 presents Annual Meter Reading Cost Per Customer As shown, meter reading costs per customer vary from about $2.50 to $12.50 annually However results presented for Tustin represent experience prior to obtaining a privatization contract for meter reading. Anticipated annual costs under the new contract are estimated to be about $4 per customer which is more representative of the experience of those purveyors indicating efficient meter reading costs under $5 per customer annually Meter reading costs are also a function of the service area characteristics. For example, one of the purveyors reporting among the lowest meter reading costs per customer is known to have a flat concise service area with a comparably high density of residential users. On the other hand, Tustin is known to have a significant number of large homes in the hills slowing down meter reading efficiency It is recommended that the City review the experience of Buena Park following a year of operation under the complete touch read system to evaluate potential use in Tustin. Also, the City should continue its pilot evaluation of touch read meters for its industrial and large commercial users. TUSTIN WATER DEPARTMENT METERING ACTIVITY Meter Reading Cost Annual Cost per Customer $20 $15- $10- $5 $o NA Tustin Pub1 Pub2 Pub3 Pub4 Pub5 Pub6 Priv1 FIGURE 4 36 NAVIGANT CONSULTING, INC. 4-44 SECTION 4 WATER DEPARTMENT MANAGEMENT The City of Tustin currently meters all users on a bimonthly schedule. This results in large users accumulating substantial outstanding accounts (including high use residential customers) All benchmarking partners also bill customers on a bimonthly basis with the exception that one agency reads commercial and agricultural users on a monthly basis and one additional purveyor indicates that all large metered users are also billed monthly The Orange County Water Rate Survey reports that about one -third of the 34 Orange County purveyors surveyed bill on a monthly basis representing over 45 percent of the total County ratepayers. It is not known how many of these represent multiple utility billing practices. For a Tustin residential customer using 20 cubic feet per month, the average cost is about $28. By billing on a monthly basis, the City is losing the interest for 30 days on every other month charge, which amounts to about $0 12 per bimonthly cycle. However the estimated cost of meter reading and computer entering (exclusive of bill preparation and handling) is on the order of $0.67 per event. Therefore, it does not appear cost effective to meter read and bill on a monthly basis unless consumption is on the order of 125 ccf or more. Taking into account the related costs of billing, it is likely that only customers with a monthly consumption of 200 ccf or more should be considered for monthly billing. It is recommended the City review its high consumption customers (particularly those with continual late payment practices) together with relative locations, for potential monthly billing. Consultation with the private meter reading contractor together with an assessment of computer software billing accommodation should enable a decision as to monthly billing feasibility for a limited number of high usage customers. The testing and maintenance of cross connection control devices is a current responsibility of all potable water purveyors in order to ensure the absence of contamination potentially occurring from cross connections with either wastewater flows or non - potable supplies. The City of Tustin has been experiencing difficulty with assigning responsibility for cross connection control to staff located in either engineering or water production. Maintenance of staff certification has also been a recent problem. Benchmarking partners indicate cross connection control has been either a responsibility of engineering or water quality personnel with the majority indicating the latter As cross connection control is a regulatory and potential liability issue, the City needs to quickly address this responsibility issue by either assigning it to appropriate personnel (those involved in either engineering or water quality) or utilize the services of an outside contractor Conclusions • Historically the City has experienced problems with meter reading. Since privatizing this function in 1998, the City has encountered no significant problems and judges that the contractor performance is very satisfactory • Tustin does not have a meter testing program for larger sized meters, compared to benchmarking partners which testing typically either have established programs or test meters by spot checks (selected by meter ages). • Tustin, with an average residential changeout interval of 20 years is less aggressive in meter replacements than three other benchmarking partners with 7 to 15 year changeout periods. NAVIGANT CONSULTING, INC. 4-45 94-4 'DM 'ONILIRSNOJ INVDIAVN Jolo2Jlu00 alenud a 10 seo!AJas all u!elaj Jo (Aj!enb JaleM JO 6U!JGBU16U0) lauuosiad aleudoJdde of 1! 6u!ub!sse Aq alp walgoJd ay' ssaippe INo!nb of spaau Apo all 'anss! J(lp!ge!l pue AJoleln6ei e yloq u! uogoun; s!yl sy Apo ayl Jo; walgoid lauuosied lue0eJ a uaaq sew lonluoo uo!loauuoo -ssoJ3 • •s!seq 6u!II!q AIlluow e uo aoeld of leo!wouooa aq mom WOW JO 100 ON lnoge yl!M siasn a6Jel Apo palew!lsa s! p 'bu!p!q pue 6u!peeJ Jaiew Jo; lsoo pale!oosse uo pasee •sjeAedalei ;o lueoied gg lnoge 6u!luasaidai sJOAaAJnd Alunoo ebueio ;o spnyl -oMl Jo; leo!d (l s! 6u!ll!q AIwluow!q ;o eo!loeJd (1!o luanno ayl • .slsoo 6u!peaJ Jalaw 'saw! ayl 6wleo!pu! sio (a&Jnd asoyl ;o aA!leluasaJdeJ aJe Jawolsno Jed q$ lnoge le u!lsnl Jo; loeJluoo uoilez!lenud e Japun slsoo 6u!peej Jalaw lenuue luaiino • iasn sasselo yloq Jo; sieah o1 01 L le sJoAaAJnd paNJewyoueq lsow ueyi Jabuol we 'yoea sieaA Si. le 'u!lsnl Jo; sleAJalw 1noe6uelo le!oiawwoo pue leulsnpul • 1N3W3OVNVVI IN3WJFlvd30 831VM b NOILO3S TUSTIN PRIVATIZATION STUDY WATER SYSTEM FINANCIAL PERFORMANCE Presented in this section is a discussion on the benchmarking results for financial performance of the Tustin water system compared to benchmarking partners. In addition, where available, data has been included for AWWA Research Foundation (AWWARF) utility financial experience This section is comprised of three subsections. Water Rates and Residential Water Cost; Gross Revenues, Operating Surplus, and General Fund Transfers; and Operation and Maintenance Expenses. Conclusions reached from this financial performance evaluation are presented at the end of each subsection. NAVIGANT CONSULTING, INC. 5-1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 5 WATER SYSTEM FINANCIAL PERFORMANCE WATER RATES AND RESIDENTIAL WATER COST Benchmarking figures which support the following discussion are listed following: • Monthly Residential Bills for Selected Usage • Residential Billings as a Percent of Total Billings • Average Annual Residential Water Cost per Customer • Average Residential Water Cost per Thousand Gallons Figure 5 -1 presents Monthly Residential Bills For Selected Usage levels based on adopted water rates for each benchmarking partner Four monthly usage amounts are utilized in the figure including five, ten, fifteen, and twenty hundred cubic feet (ccf). As indicated, Tustin generally has water rates comparable to other benchmarking partners with three public agencies (PUB 2, 3, and 5) having lower water rates. Two public agencies (PUB 4 and 6) are clearly higher in water rates at all respective levels of usage except for the first tier with the remaining two respondents, one public agency (PUB 1) and the private sector (PRIV 1) having approximately the same level of water rates (with the private sector being slightly higher at every level of selected usage) These water rate comparisons are significant when considering TUSTIN WATER DEPARTMENT FINANCIAL INFORMATION Water Rates Monthly Residential Bills for Selected Usage $60.00 $50.00 $40 00 $30.00 $20.00 $10.00 $0.00 7 ■5ccf 10 ccf ■15ccf ❑ 20 ccf i I Tustin FIGURE 5 1 Pub1 Pub2 Pub3 Pub4 PubS Pub6 Priv1 NAVIGANT CONSULTING, INC. 5 -2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 5 WATER SYSTEM FINANCIAL PERFORMANCE that Tustin requires such a large revenue segment to be devoted to CIP As discussed below approximately 40 percent of the revenues collected for the Tustin system are targeted for infrastructure improvements. Providing water at comparable rates, considering the large infrastructure CIP requirements, is a significant economic strength of the Tustin Water Department. A recent survey on California water charges for 1999, published by Black & Veatch Corporation, indicates the Southern California region has a water charge range of $7.80 to $69.90 for a monthly water use of 15 ccf The average for this range is $27.82 per month (based on a survey of 218 Southern California service areas) This compares to Tustin charging $22.49 for similar usage or about 20 percent lower than the region -wide average. For Orange County a water rate survey performed in 1997 by the Orange County Water Association and Municipal Water District of Orange County indicated the range of cost for a monthly residential water bill using 20 ccf was $18.55 to $54.00 This data, representing an analysis of 31 Orange County water systems, indicated the average monthly bill was $32.33 and the median was right at $30 00 The City of Tustin is included in this data analysis for Orange County with a residential monthly water bill for a user at this level of $28.09, or almost 15 percent less than the average. These results, together with those presented above, strongly support the conclusion that the City of Tustin has competitive water rates when compared to other purveyors, including the private sector both in Orange County and Southern California. This conclusion is further strengthened by the fact that Tustin is implementing a significant CIP revenue production rate NAVIGANT CONSULTING, INC. 5-3 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 5 WATER SYSTEM FINANCIAL PERFORMANCE Figure 5 -2 presents Residential Billings as a Percent of Total Billings, both for benchmarking partners and AWWARF utility survey data. As shown, Tustin has slightly over 75 percent of its total billings represented by residential consumers. This compares with benchmarking partners who indicate residential billing percentages ranging from 60 percent to over 90 percent. AWWARF reports that residential billings comprise about 62 to 68 percent for utilities responding to this question depending on category of data collected. TUSTIN WATER DEPARTMENT FINANCIAL INFORMATION Residential Billings Residential Billings as a Percent of Total Billings 100 % - 90 6090 70 %- 60 %- 50 %- 40/ Sad KEY 50K 100K Uubues ser ng populauo berwe 50.000 and 100.000 PRIV Privately Owned 'Pubes PUB Publicly Owned UULUes REGN IX USEPA Region IX PAZ, CA HI NV) GRDWTR Groundwater Water only USA National Composite m SIB NA 0 FIGURE 5 -2 17:7 cc .0 .0 Mr .0 in .0 C55- et 0 Y w 0 4 ¢ C¢7 Figures 5 -3 and 5 -4 present benchmarking data for Average Annual Residential Water Costs per Customer and per 1,000 Gallons. As shown (Figure 5 -3), the range of average annual residential water cost per customer varies widely from about $250 to $525 for the benchmarking partners. AWWARF data, based on a very large data base, indicates average values from just under $200 to about $275 per customer annually The Tustin water system is indicated to have the highest average annual residential water cost per customer both for benchmarking partners and AWWARF data. However it is significant that the Tustin system transfers a significant portion of revenue produced to capital improvement reserve funds. In 1997 -98, the total revenue transfers to the CIP fund totaled almost $4 million, or approximately 40 percent of the revenue budget. This results in an amount of slightly over $200 per customer annually being collected for CIP which if deducted from the total annual residential water cost per customer would result in NAVIGANT CONSULTING, INC. 5-4 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 5 WATER SYSTEM FINANCIAL PERFORMANCE a very competitive level on the order of $325 per customer annually This latter result would fall right at about the middle of the residential cost performance of the other benchmarking partners and well under the private sector experience at about $475 per customer annually Residential annual water costs per customer for Tustin are also anticipated to be slightly higher than the other benchmarking systems when reviewing the average water use per connection by residential customers. Tustin reports an average water use of about 2,500 cubic feet (cf) monthly per connection compared to most of the other systems at a level of about 2,300 cf or less monthly Only one other public agency reports a slightly higher per- connection usage at about 2,700 cf per month. The benchmarking graph for Average Residential Water Cost per Thousand Gallons (Figure 5 -4) also indicates Tustin to be higher than all but one benchmarking respondent at about $2.20 The one public agency (PUB 6) indicating a significantly higher average residential water cost per thousand gallons in excess of $3.00 is also known to have an aggressive main replacement program requiring substantial CIP investment. Deducting an allowance for CIP revenue production for the Tustin system would again result in an estimated cost per thousand gallons ($1.35) which is very competitive with both the benchmarking results and the AWWARF NAVIGANT CONSULTING, INC. 5 -5 TUSTIN WATER DEPARTMENT Residential Cost FINANCIAL INFORMATION Average Annual Residential Water Cost per Customer II $700 - $sob- $500_ $400 _ $300- $200- $100- KEY ___ - 50K 100K Wale erving population between 50,000 and 100,000 PRIV Privately Owneo UtJnie PUB Publicly Owned Urines REGN IX USEPA Region IX (AZ CA HI, NV/ GRDWTR Grounawalel Water my USA NaI'oral Composite 0 O m - -. ® L - .._ .. r.....x ... -- a —Q C N f7 in (p Y > CO X Q Q Jo 0 a a a a a a a` a a W Q cc 0 FIGURE 5 3 The benchmarking graph for Average Residential Water Cost per Thousand Gallons (Figure 5 -4) also indicates Tustin to be higher than all but one benchmarking respondent at about $2.20 The one public agency (PUB 6) indicating a significantly higher average residential water cost per thousand gallons in excess of $3.00 is also known to have an aggressive main replacement program requiring substantial CIP investment. Deducting an allowance for CIP revenue production for the Tustin system would again result in an estimated cost per thousand gallons ($1.35) which is very competitive with both the benchmarking results and the AWWARF NAVIGANT CONSULTING, INC. 5 -5 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 5 WATER SYSTEM FINANCIAL PERFORMANCE data. The private sector benchmarking response (PRIV 1) indicated an average residential water cost per thousand gallons at about $1.90 Conclusions • Tustin has water rates which are very comparable to the benchmarking partners. • Providing water at comparable rates, considering the large infrastructure CIP requirements, is a significant economic strength of the Tustin Water Department. 1 • Based on a 1999 water charge study for Southern California, Tustin rates are indicated to be about 20 percent lower than the region -wide average for the selected usage. ' • Based on a 1997 Orange County water rate study Tustin employs rates almost 15 percent lower than the average NA V IGANT CONSULTING, INC. 5 -6 TUSTIN WATER DEPARTMENT Residential Cost FINANCIAL INFORMATION Average Residential Water Cost per 1,000 Gallons 56 $5 $4- 53- 52 51 KEY ` 50K 100K Utilities erving populations between 50.000 and 100.000 PRIV Pnvately Owned Utilities PUB Publicly Owned Utilities REGN IX USEPA Regi° IX (AZ. CA. HI. NV) GRDWTR Groundwater Wate my USA National Composite - - -- w m ® v Q o 50 _. —. -_. .--.. _. T-. - _...-. .--... _, _.. - -_-. -.—, — Tustin Pub1 Pub2 Pub3 Pub4 PubS Pub6 Pnv1 50K -100K PRIV PUB REGN IX GRDWTR USA FIGURE 4 5 Conclusions • Tustin has water rates which are very comparable to the benchmarking partners. • Providing water at comparable rates, considering the large infrastructure CIP requirements, is a significant economic strength of the Tustin Water Department. 1 • Based on a 1999 water charge study for Southern California, Tustin rates are indicated to be about 20 percent lower than the region -wide average for the selected usage. ' • Based on a 1997 Orange County water rate study Tustin employs rates almost 15 percent lower than the average NA V IGANT CONSULTING, INC. 5 -6 SECTION 5 WATER SYSTEM FINANCIAL PERFORMANCE • Overall, Tustin has competitive water rates when compared to other purveyors, including the private sector both in Orange County and Southern California. • The average annual residential water cost per customer for Tustin when adjusting for the large CIP revenue requirement is at about the middle of the benchmarking partners, and well below the private sector • The average residential water cost per 1 000 gallons for Tustin, after adjusting for the large CIP revenue requirement, is at a very competitive level with both the benchmarking partners, including the private sector and AWWARF utility data. NAVIGANT CONSULTING, INC. 5-7 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 5 WATER SYSTEM FINANCIAL PERFORMANCE GROSS REVENUE, OPERATING SURPLUS, AND GENERAL FUND TRANSFERS The following benchmarking figures support the discussion in this subsection • Annual Gross Revenue per Customer • Gross Revenue per 1 000 Gallons Delivered • Annual Gross Revenue per Employee • Operating Surplus as a Percent of Revenues • General Fund Transfer per Customer Annual Gross Revenue per Customer based on data supplied by the benchmarking participants, is presented in Figure 5 -5 This benchmarking graph is analogous to the average annual residential water cost per customer as discussed above The graph pattern for the various reporting agencies is similar to the aforementioned graph for residential water cost and, again, demonstrates the significant revenues collected per customer to support aggressive CIP projects for both Tustin and PUB 6. NAVIGANT CONSULTING, INC. 5 -8 TUSTIN WATER DEPARTMENT Gross Revenue FINANCIAL INFORMATION Annual Gross Revenue per Customer $800 $700- $600- $500- $400- $300 $200 $100- ® Pub6 Pub5 �• Priv1 Pub1 Pub4 - Pub2 Pub3 - - - — — $0 _ _- Tustin FIGURE - -. ._ _ - - ...._ 5 -5 NAVIGANT CONSULTING, INC. 5 -8 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 5 WATER SYSTEM FINANCIAL PERFORMANCE Figure 5 -6 presents the Gross Revenue per 1,000 Gallons Delivered, indicating all agencies, plus the AWWARF data at levels between $1 and $2 per 1,000 gallons delivered, with one exception for a public agency known to be replacing a majority of its system infrastructure (PUB 6) Tustin is indicated to be competitive with several public agencies (PUB 1 4 5, and 6) as well as the private sector (PRIV 1 and AWWARF PRIV) in spite of the revenues produced for CIP NAVIGANT CONSULTING, INC. 5 -9 TUSTIN WATER DEPARTMENT Gross Revenue FINANCIAL INFORMATION Gross Revenue per 1,000 Gallons Delivered $6- $6 $4 - $3- $2- $i— $0 KEY 50K 100K Utilities servrng popu atlo betwe n 50 000 and 1 00,000 PRIV Prvately Owned Mitres PUB PuNKly Owned UtrInes REGN IX USEPA Region IX (AZ. CA. HI. NVI GAONTR Gr undwaler Water my USA National Composite - - - - - -- - n O ® a Z n n a n n i Y > m x = o J 7 0 > = 0 F tq a a a a a a 0- ° d a Z 3 0 0 LLI CC CC 0 FIGURE 5 -6 NAVIGANT CONSULTING, INC. 5 -9 SECTION 5 WATER SYSTEM FINANCIAL PERFORMANCE Figure 5 -7 indicates Annual Gross Revenue per Employee. At a level of approximately $400,000 gross revenue per employee Tustin is among the most productive systems including being generally on a par with the private sector (PRIV 1) in terms of this benchmarking parameter The four leading benchmarking participants, including Tustin, are well above AWWARF reported data, being on the order of two times as effective in gross revenue production per employee. TUSTIN WATER DEPARTMENT FINANCIAL INFORMATION Gross Revenue Annual Gross Revenue per Employee $500,000- $400,000 $300,000- $200,000 - $100,000- $0 m ANEW m KEY 50K 100K PRIV PUB REGN IX GRDWTR USA Uulrlres serving populatio between 50 000 and 100 000 Pr watery Owned UWnies Paddy Owned U41nies USEPA Region IX (AZ, CA, HI. NV) Gr ndwate Water only National Composite eavir C N CO Q 00 10 Y > CO X Q Q o O N O ID D 1] D > Co F 0- a a a a a a ° a a z 3 z UJ O N a (} LC FIGURE 5 -7 NAVIGANT CONSULTING, INC. 5-10 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 5 WATER SYSTEM FINANCIAL PERFORMANCE Figure 5 -8 presents Operating Surplus as a Percent of Revenues. Operating surplus in this analysis is the available revenues left after paying for all operating expenses, but before any allowance for depreciation and CIP or in the case of investor -owned utilities, also taxes and profit. A reasonable margin of operating surplus for a public agency would generally be expected to be on the order of 5 percent or more as indicated by at least three participants (PUB 2, 3 and 5) The private sector response at about 23 percent reflects the surplus revenue requirement to provide for depreciation, taxes, and rate of return. The Tustin system at 40 percent is believed to indicate the CIP revenue requirement also estimated at about this level as a percent of revenues. NAVIGANT CONSULTING, INC. 5 -11 TUSTIN WATER DEPARTMENT FINANCIAL INFORMATION Operating Surplus Operating 45 % -' 40 %- 35 %- 30 %- 25 %- 20%- 15 %- 10 %- - 0% Surplus as a Percent of Revenues — - — — — _ ® V 5 hi FIGURE58 Tustin Pub1 Pub2 Pub3 Pub4 Pub5 Pub6 Priv1 NAVIGANT CONSULTING, INC. 5 -11 1 1 1 1 1 1 1 1 1 1 1 1 r 1 1 1 1 1 1 SECTION 5 WATER SYSTEM FINANCIAL PERFORMANCE General Fund Transfer per Customer are benchmarked in Figure 5 -9 NCI reviewed the City's financial memorandum to support its level of general fund transfer based on estimated allocated labor costs by senior management and staff Based on the support memorandum and the benchmarking results, it is believed the City is at a reasonable level in its general fund transfer allocation. At least one other public agency (PUB 2) is at about the same level, one is significantly greater (PUB 6) and a third (PUB 1) is about 20 percent lower TUSTIN WATER DEPARTMENT FINANCIAL INFORMATION General Fund General Fund Transfer per Customer $100.00- $90 00 -- $60 00 - $70.00 - $60.00 - $50.00 - $40.00- $30.00 $20.00 - $10.00- $0 00 Tustin FIGURE 5 -9 Pub1 Pub2 Pub3 Pub4 Pub5 Pub6 Privl Conclusions • Tustin is indicated to be competitive with several public agencies, as well as the private sector with regard to annual gross revenue per 1,000 gallons, in spite of the revenues produced for CIP • Tustin is among the most productive systems, including being generally on a par with the private sector in terms of gross revenue generated per employee. • Based on benchmarking results and other data, it is believed the City is at a reasonable level in its annual general fund transfer amount. NAVIGANT CONSULTING, INC. 5 -12 µ NA NA NA Tustin FIGURE 5 -9 Pub1 Pub2 Pub3 Pub4 Pub5 Pub6 Privl Conclusions • Tustin is indicated to be competitive with several public agencies, as well as the private sector with regard to annual gross revenue per 1,000 gallons, in spite of the revenues produced for CIP • Tustin is among the most productive systems, including being generally on a par with the private sector in terms of gross revenue generated per employee. • Based on benchmarking results and other data, it is believed the City is at a reasonable level in its annual general fund transfer amount. NAVIGANT CONSULTING, INC. 5 -12 SECTION 5 WATER SYSTEM FINANCIAL PERFORMANCE OPERATION AND MAINTENANCE EXPENSES This subsection presents an analysis of the operation and maintenance expenses for the Tustin water system, compared against benchmarking participants, including evaluations of both total operation and maintenance expenses, payroll, purchased water and selected O &M functional costs (transmission and distribution, administrative and general, and customer accounting) The following benchmarking graphs support this subsection • Total O &M Expense per Customer • Total O &M Expense per 1,000 Gallons Delivered • Total O &M Expense per Employee • Total O &M Expense as a Percent of Revenues • Purchased Water as a Percent of Total O &M Expense • Payroll as a Percent of O &M Expense • Payroll Cost per Employee • T &D O &M as a Percent of Revenues • A &G O &M as a Percent of Revenues • Customer Account O &M as a Percent of Revenues Figures 5 -10, 5 -11 5 -12 and 5 -13 present graphical benchmarking presentations of Total Operation and Maintenance Expenses per Customer per 1,000 Gallons Delivered, per Employee and as a Percent of Revenues. NAVIGANT CONSULTING, INC. 5 -13 SECTION 5 WATER SYSTEM FINANCIAL PERFORMANCE Figure 5 -10 shows Total O &M Expense per Customer ranging from about $300 to $500 Tustin operating experience indicates a total O &M expense of about $400 per customer which is lower than four other public agencies (PUB 1 4 5, and 6) and essentially equivalent with the private sector However the private sector purveyor is approximately three times as large in the number of customer connections, and therefore, would be expected to be operating at a slightly greater economy of scale. TUSTIN WATER DEPARTMENT FINANCIAL INFORMATION O &M Expense Total O &M Expense per Customer $700- $600 - $500- $400- $300 $200- $100- $0 Jeer a Tustin Pub1 Pub2 Pub3 Pub4 Pubs Pub6 Priv1 FIGURE 5 -10 NAVIGANT CONSULTING, INC. 5-14 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 5 WATER SYSTEM FINANCIAL PERFORMANCE Figure 5 -11 shows Total O &M Expense per 1,000 Gallons which indicates that Tustin is delivering water at about the $1.25 per 1 000 gallon level which, as shown, is more cost efficient than any of the other benchmarking participants except for one (PUB 3) including the private sector at the higher level of $1.50 This comparably lower cost probably reflects the greater proportion of lower cost groundwater Tustin is able to utilize compared to other agencies. Total O &M expense per 1,000 gallons delivered ranges up to about the level of $2.25 (PUB 4) TUSTIN WATER DEPARTMENT FINANCIAL INFORMATION O &M Expense Total O &M Expense per 1,000 Gallons Delivered $3 $2 $0 Tustin FIGURE 5 11 Pub1 Pub2 Pub3 Pub4 Pub5 Pub6 Pnv1 NAVIGANT CONSULTING, INC. 5-15 1 r 1 1 1 1 1 1 1 r 1 1 1 1 1 1 1 1 1 SECTION 5 WATER SYSTEM FINANCIAL PERFORMANCE Reviewing the Total O &M Expense per Employee (Figure 5 -12) indicates Tustin to be in the most frequent parameter range of about $250,000 to $300,000 together with three other purveyors (PUB 2, 3, and 4) Two purveyors (PUB 5 and 6) are significantly lower at under $200,000 per employee with the remaining public agency (PUB 1) being significantly higher at about $450,000. The private sector response is only moderately higher at slightly over $300 000 With the larger service area of the private sector and thus, greater economy of scale, the higher and more productive private sector result could be anticipated. Based on AWWARF data, all of the benchmarking participants show more efficient employee utilization than selected utility groups. TUSTIN WATER DEPARTMENT FINANCIAL INFORMATION O &M Expense Total O &M Expense per Employee $500,000 $400,000 - $300,000 - $200,000 - $100.000- $0 - FIGURE 5 -12 KEY 50K 100K UliLlies sums poavlalwns between 50.000 and 100.000 PRIV Pr vately Owned UUINes PUB Publjcy Owned Ut Hie REGN IX USEPA Region IX rAZ CA. HI. NV) GROWTR Gr ndwaler Water only USA National Composite n a a .0 a a > Y a a a. NAVIGANT CONSULTING, INC. 5-16 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 5 WATER SYSTEM FINANCIAL PERFORMANCE The final graph reviewing total O &M expense is Figure 5 -13 showing Total O &M as a Percent of Revenue. As could be predicted, Tustin has a significant margin between total O &M and revenues to account for CIP revenue production. At least two public agencies (Pub 4 and 5) report having exceeded revenues with total O &M expenses (which may only be a one -year operating anomaly as opposed to a continuing condition). TUSTIN WATER DEPARTMENT FINANCIAL INFORMATION O &M Expense Total O &M as a Percent of Revenues 140% ' 130% - 120%- 110% 100% - 90%- 80%- 70%- 60%- 50% 40 %- 30% - 20%- 10%- 0 %- Tustin FIGURE 5 -13 Pub1 Pub2 Pub3 Pub4 Pub5 Pub6 Priv1 NAVIGANT CONSULTING, INC. 5-17 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 5 WATER SYSTEM FINANCIAL PERFORMANCE Figure 5 -14 shows Purchased Water as a Percent of Total O &M Expense. Tustin, with an aggressive groundwater production program, has one of the two smallest purchased water percents of all respondents at about 20 percent of the total O &M cost. Generally it would be anticipated that with one of the lowest purchased water percentages, Tustin might be expected to be operating even more efficiently in terms of total O &M expenses, realizing the greatest savings from purchased water cost avoidance. However a substantial offsetting cost is expended by the City in treatment cost for the produced groundwater in order to bring it up to potable standards. The cost of treated groundwater can equal but not exceed the cost of imported water as a result of an exemption from OCWD pumping assessments applied to groundwater requiring extensive treatment and treatment cost rebates received through the MWDSC local water projects program. TUSTIN WATER DEPARTMENT FINANCIAL INFORMATION Purchased Water as a Percent of Total O &M Expense 700% 60.0% 50 0 %- 400% 300% 20 0 %- 10.0% 000 Purchased Water FIGURE 5 -14 NAVIGANT CONSULTING, INC. 5 -18 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 5 WATER SYSTEM FINANCIAL PERFORMANCE Figure 5 -15 indicates Payroll as a Percent of Total O &M Expense. As shown, payroll percentages vary from slightly over 10 to slightly in excess of 25 percent for the benchmarking participants. Tustin, at about 13 percent (or on the order of one -half of the highest percentage experienced by a public agency purveyor (PUB 5)) is at a very efficient level. It is not known why the AWWARF data at levels ranging from about 30 to 40 percent are significantly higher than the benchmarking responses. TUSTIN WATER DEPARTMENT FINANCIAL INFORMATION Payroll Payroll as a Percent of O &M Expense 50.0% 45 00/0 40 0° 35 0% 30.0 25 0% 20 0% 15.0 10 0% 5 0% 00%o KEY 50h toots PRIV PUB REGN IX GRDWTR USA Utilities serving populations between 50000 and 100.000 Privately Owned Utilities Publicly Owned Ut/lrlres USEPA Region IX (AZ, CA HI, NV) Grourawater water only National Composite FIGURE 5 -15 n a n CL a a. a 0- CD 0- 0 0 0 N CO CO a S 0 Q to NA V IGANT CONSULTING, INC. 5-19 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 5 WATER SYSTEM FINANCIAL PERFORMANCE Payroll Cost per Employee is graphed in Figure 5 -16. Generally benchmarking respondents indicated a payroll cost per employee ranging from about $35,000 to $50,000 Tustin at the $50,000 level is comparable with two other public agencies (PUB 4 and 5) and only about 10 percent higher than the private sector at about $45,000 AWWARF data indicates somewhat lower payroll costs per employee in the general range of $30,000 to $40,000 Some of this difference may potentially be explained by comparing costs in the highly urbanized Orange County area compared to overall survey data including many systems located in rural areas. Two of the purveyors (PUB 1 and 2) are substantially higher at $70 000 and $95,000 per employee It is suspected this data is inaccurate, but NCI was unable to confirm or identify why the data was incorrect. TUSTIN WATER DEPARTMENT FINANCIAL INFORMATION Payroll Payroll Cost per Employee $100,000- $90,000 - $80.000 - $70,000 $60,000 - $50,000- $40,000 - $30,000 $20,000 - $10,000- $o KEY 50K 100K Wales servng population between 50.000 and 100.000 PRIV Prwaleb Owned uttlnes PUB PLtlitly Owned UlNres REGN I% USEPA Regnn IX (AZ. CA. HI NVI GRDWTR Gr ur water Water only USA Nalonal Composite n w 0 c N m a LO (D > = j .0 .0 .0 > o Ix M a 0- a' a a a' a` - a H O in FIGURE 5 -16 NA V IGANT CONSULTING, INC. 5 -20 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 5 WATER SYSTEM FINANCIAL PERFORMANCE Figure 5 -17 presents benchmarking data for Transmission and Distribution (T &D) O &M as a Percent of Revenues. Tustin is comparable with two other public agencies (PUB 2 and 3) in the 12 to 15 percent range, but significantly higher than the private sector response at about 5 percent and one other public agency at only about 2 or 3 percent (PUB 6) The remaining respondent (PUB 4) indicated a 25 percent allocation of revenues to the T &D function. It is believed by NCI that a considerable amount of the wide variance in these results may be explained by the accounting cost allocation to the T &D function as opposed to actual experience for T &D expenses. For example, it is known that one of the respondents charged almost all of the general manager's time to the T &D function without an allocation to administrative and general expense While this benchmarking result initially implies an opportunity for cost savings through privatization, with Tustin experiencing greater T &D O &M expenses as a percent of revenues by about 8 percent compared to the private sector (Priv 1), this potential savings is more than offset by administrative and general expenses as discussed following. TUSTIN WATER DEPARTMENT FINANCIAL INFORMATION T &D O &M as a Percent of Revenues 30.0 O &M Expense Tustin FIGURE 5 -17 Pub1 Pub2 Pub3 Pub4 PubS Pub6 Privl NAVIGANT CONSULTING, INC. 5 -21 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 5 WATER SYSTEM FINANCIAL PERFORMANCE Figure 5 -18 presents the Administrative and General Expense as a Percent of Revenues. Tustin appears to be at a very reasonable level of about 10 percent compared to the private sector response at about 20 percent and one other public sector report (PUB 6) at over 35 percent. This latter result is again believed to be more a function of accounting allocation rather than actual experience for administrative and general expenses. A &G expenses for PUB 3 are about the same level as Tustin, while the remaining public purveyor (PUB 4) is somewhat lower at about 7 percent. TUSTIN WATER DEPARTMENT FINANCIAL INFORMATION O &M Expense A &G O &M as a Percent of Revenues 40.0 % - 35 0°% 30.0% 25.0% - 20.0 % - 15 0°% 10.0% 5.0 %- 0.0%- FIGURE 5 -18 n a a J a .0 3 a .0 J a NAVIGANT CONSULTING, INC. 5-22 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 5 WATER SYSTEM FINANCIAL PERFORMANCE The final Figure 5 -19 for this section is Customer Account O &M as a Percent of Revenues. These costs include meter reading, bill preparation, and financial accounting allocated to maintenance of water customer accounts. As shown, Tustin s performance in this cost function is significantly better than two public agency reports (PUB 3 and 4) at 10 percent or higher and reasonably comparable with the private sector (the latter slightly higher by 1 to 2 percent) and another public agency (PUB 2) at about 5 percent. The remaining data submission by a public purveyor (PUB 6) is lower than Tustin by about 2 percent, but is known to maintain its water department customer accounting with three other municipal - supplied utility services (electric, natural gas and wastewater) thereby gaining both an economy of scale and having the need to perform cost allocation of customer accounting. TUSTIN WATER DEPARTMENT FINANCIAL INFORMATION O &M Expense Customer Account O &M as a Percent of Revenues Tustin FIGURE 5 -19 Pub1 Pub2 Pub3 Pub4 Pubs Pub6 Pnvl NAVIGANT CONSULTING, INC. 5 -23 SECTION 5 WATER SYSTEM FINANCIAL PERFORMANCE Conclusions • The Tustin system is being operated more efficiently than most of the benchmarked public agencies and private sector in terms of both total O &M expenses per customer and per 1,000 gallons delivered. • In terms of total O &M expenses per employee Tustin is operating at a comparable level with the majority of benchmarked public agencies, and compared with the private sector Tustin operates only moderately higher (which could be anticipated based on a larger service area and resulting economy of scale for the private sector). Tustin and the other benchmarking participants all show a more efficient employee utilization than AWWARF data indicates for selected utility groups. • Tustin purchased water costs, measured as a percent of revenue has one of the smallest percentages of benchmarked purveyors, reflective of an aggressive groundwater production program. However anticipated savings from lower cost groundwater are somewhat offset by extensive water treatment costs. • Payroll costs measured as a percent of total O &M expense are at a very reasonable level for Tustin compared to both the public and private sectors. Similarly Tustin payroll costs per employee are at a competitive but reasonable, level. • Transmission and distribution expenses, measured as a percent of revenues, indicates Tustin to be very comparable to other public agencies, although higher than the private sector • Administrative and general expenses, measured as a percent of revenues, indicates Tustin to be at a reasonable level in comparison to the public sector and at a significantly lower level than the private sector • Customer accounting O &M measured as a percent of revenues indicates Tustin is performing well in comparison to both other public agencies and the private sector NAVIGANT CONSULTING, INC. 5-24 TUSTIN PRIVATIZATION STUDY Section WATER RATE PROJECTIONS This section presents an analysis of the current revenues and expenditures for the Tustin Water Department. The water rate projections over a 15 -year time frame (2015) were developed assuming continuing City operation and management. The following subsections include Estimated Revenue Requirements, Income from Operations, and Adequacy of the Existing Rate Structure. Conclusions from this projection and analysis are presented at the end of the section. In order to forecast the impacts of the existing rate structure, NCI has reviewed financial data obtained from the City Orange County Water District (OCWD), the Municipal Water District of Orange County (MWDOC), and The Metropolitan Water District of Southern California (MWDSC). Historic and current operating financial data were reviewed, including revenues and expenditures, debt service obligations, and capital improvement requirements. NCI met with the City to review the completeness, accuracy and interpretation of this data. Subsequently NCI prepared projections of operating costs, income from retail water sales, debt service obligations and capital improvement requirements through fiscal year 2014/15. Financial model tables including MWDSC rate projections are contained in Appendix E for reference. NAVIGANT CONSULTING, INC. 6 -1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 6 WATER RATE PROJECTIONS ESTIMATED REVENUE REQUIREMENTS Annual revenue requirements consist of the costs of owning, operating, and maintaining the water system plus depreciation. Under public ownership, these costs include operating expenses, other income (expenses) and annual debt service payments. Revenues recovered from the users of the system must be sufficient to cover these revenue requirements as well as any additional funding requirements associated with annual capital additions and improvements to the water system. Estimated revenue requirements were developed based on historic information contained in Tustin's Program and Financial Plans, Comprehensive Annual Financial Reports, Projected Capital Improvements Program for Fiscal Year 1998 -1999 various tables obtained from the Finance Department and Water Department, and projections of purchased water costs obtained from MWDOC (Letter dated February 3, 1999 Subject: Future Metropolitan Water Costs for Tustin) and estimates of groundwater replenishment costs from the 2020 Master Plan Report for the OCWD NCI met with the City to review these documents, followed up by phone calls to obtain clarifications as required. Presented below is a description of the development of estimated revenue requirements. Operating Expenses Operating expenses consist of (i) supply. (11) pumping; (iii) water treatment; (iv) transmission and distribution (v) customer service; and (vi) administrative and general expenses. Supply and pumping expenses are primarily influenced by the annual water requirements of customers. Annual water requirements were estimated based on projections developed by MWDOC which incorporated data developed in cooperation with the Tustin Water Department. As there is minimal potential for future growth within the service area, changes in use are more heavily influenced by local weather and conservation requirements than by growth. In order to respond to evolving water supply conditions and opportunities, Tustin has been developing groundwater treatment plants and is improving their pumping capacities. As the mix between groundwater production and imported water purchases changes, costs will also change. Table 6 -1 presents historic and projected water production, purchases and retail water sales. Specific projected sources of production are also included in Table 6 -1 Production goals of the City are driven by groundwater allocations determined by OCWD with imported water purchases making up the balance of the City's water needs. Water demand projections are those currently used by MWDOC based on input from the City NAVIGANT CONSULTING, INC. 6-2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 6 WATER RATE PROJECTIONS Table 6- 1 Historic and Projected Retail Water Sales acre -feet/ ear Untreated Ground- . water Main Street 17th Street Treated Treated Water Water Purchased (Imported) Production Water Production & Purchased Brine Production Lost Water Retail Water Sales 1 2 1 3 [41 1 +2+3 1 51 4+5 71 8 6`7J81 Historical FY 89/90 6105 670 0 6775 6652 13,427 31 1146 12,251 FY 90/91 1 5588 2586 0 8174 4460 12,634 122 1242 11,270 FY91/92 6285 2107 0 8,392 3,004 11,395 101 572 10,722 FY92/93 6513 1063 0 7,576 I 4,858 12,434 67 1177 11,190 FY 93/94 7187 694 0 7,881 1 4,361 ' 12,242 41 530 11,671 FY 94/95 6308 1661 0 7,969 4,578 12,547 90 811 11,646 FY 95/96 8442 1206 0 9,648 1 3,695 13,343 83 856 12,404 FY 96/97 7,864 883 2,187 10,934 3,357 14,291 301 705 13,285 FY97/98 7,242 818 I 3,022 1 11,082 2,078 1 13,160 1 356 1184 11.620 Projected FY 99/00 8.582 1.418 3,000 13,000 1,350 14.350 584 1,019 12,748 FY00 /01 8,582 1,418 3,000 13,000 1 1,350 1 14,350 584 I 1,019 12,748 FY 01/02 through FY14/15 9,269 1,818 3,000 14,087 350 14437 664 1,025 12,748 Development of production capacity has been supported by financial incentives from MWDSC through the Seasonal Storage Service Program and OCWD These incentives include loans, lease agreements and joint participation agreements. Projections of operating expenses are based on historic expenses and budgets reported in the City's Program and Financial Plans, except for those expenses directly tied to water use (energy groundwater replenishment assessments and purchased water costs) Energy costs are projected based on anticipated production and electrical rates. Taking into account electric industry deregulation, it is anticipated that when 'stranded costs' for investor -owned utility investment are recovered (by the end of 2001), electrical rates will drop by approximately 25 percent. Replenishment assessments are based on groundwater pumping and unit cost projections obtained from OCWD Cost projections for purchased water through Fiscal Year 2007/08 were obtained from MWDOC (and projected beyond that date based on an assumed inflation rate) Those expenses not directly correlating to water use were projected from the recent City budget adjustments based on discussions with the City and an assumed inflation of 2 percent (which rate was selected by NCI based on recent inflation experience for southern California). Fiscal Year 1999/2000 operating expenses are estimated at $6.5 million as compared to $6.8 million in the completed Fiscal Year 1998/99 The majority of that decrease is due to increased production of groundwater which is less expensive than purchased water While projected costs trend upward due to anticipated inflation, increases in purchased water costs and replenishment assessments, there is a variation in the annual cost pattern due to changes in water sources, completion of debt payments and the anticipated drop in electrical rates. NAVIGANT CONSULTING, INC. 6 -3 1 SECTION 6 WATER RATE PROJECTIONS 1 Other Income 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Other income consists of interest income on invested funds. As the Water Enterprise Fund has $14.6 million in cash and investments as of June 30 1998, interest income is substantial. During Fiscal Year 1997/98 this income was $853 000 As will be discussed below the City intends to use much of this cash and investments to fund their Capital Improvements Program (CIP) If this program proceeds as scheduled, this interest income will decrease as enterprise funds are expended. Debt Service Payments The City's debt service payments on existing debt will remain in the range of approximately $1.0 to $1.2 million until the end of Fiscal Year 2012/13 when the final payments on the 1993 Certificates of Participation are made. However as discussed below additional debt financing may need to be incurred by the City prior to 2010 in order to continue CIP funding. Capital Expenditures The City has an ambitious Water Capital Improvement Program for the next few years. Planned expenditures in the Proposed Capital Improvement Program for Fiscal Year 1998 -1999 are shown in Table 6 -2: Table 6 -2 Ca • ital Im • rovement Pro • ram Year Proposed Water Capital Improvement Pro tram for Fiscal Year 1998 -1999 FY 98/99 Projected $6,515,045 FY 99/00 Planned $4,898,675 FY 2000/01 Planned $4,915,000 FY 01/02 Planned $5,050,000 FY 02/03 Planned $4,550,000 FY 03/04 Planned $20,000 FY 04/05 Planned $20,000 Total $25,968,720 NAVIGANT CONSULTING, INC. 6-4 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 6 WATER RATE PROJECTIONS INCOME FROM OPERATIONS Operating revenues of the Tustin Water Department are derived from the sales of water to households, commercial users, industrial customers, and miscellaneous ratepayers. Projected revenues from retail water sales were derived from estimated water sales volumes shown in Table 6 -1 Income per acre -ft of water sold is projected based on the Fiscal Year 1997 -98 income per acre -ft. Table 6 -3 presents projected annual income from operations for Fiscal Year 1999/00 through 2014/15. Table 6 -3 Income from O•erations Fiscal Year Operating Revenues Operating Ex.enses Existing Debt Service Income from Operations FY 99/00 I $ 8,808,557 $ 6,541,1021 $ 1,009,471 $ 1,258,295 FY 00/01 8,808,557 6,736,822 999,621 1,072,425 FY 01/ 02 8,808,557 6,469,324 1,069,021 1,270,523 FY02 /03 8,808,557 6,542,588 1,055,271 1,211,009 FY 03/ 04 8,808,557 6,744,552 1,052,971 1,011,345 FY 04/05 8,808,557 6,947,555 1,074,371 786,942 FY 05/06 8,808,557 7,108,762 1,068,171 631,935 FY 06/07 8,808,557 7,191,239 1,085,671 531,958 FY 07/08 1 8,808,557 7,301,647 1,100,571 406,650 FY 08/09 1 8,808,557 7,477,773 1,112,871 218,224 FY 09/10 8,808,557 7,592,075 1,122,571 94,222 FY 10/11 I 8,808,557 7,708,101 1,129,671 28,904 FY 11/12 8,808,557 7,839,970 1,134,171 165,273 FY 12/13 8,808,557 7,973,632 1,161,071 325,835 FY 13/14 8,808,557 8,109,121 109,071 590,676 FY 14/15 8,808,557 8,196,664 109,071 503,133 As indicated, operating expenses and debt service are projected to exceed operating revenues under the existing rate structure in fiscal year 2010/11 ADEQUACY OF EXISTING RATE STRUCTURE As the Water Enterprise Fund has substantial Current Assets (Comparative Balance Sheets Water Enterprise Fund, June 30 1998), it is important to review the status of this fund. As of June 30 1998, the fund had Unrestricted Current Assets (Total Current Assets minus Restricted Assets) of $14 700,000 As utilities have a very reliable source of income from sales, Unrestricted Assets are generally considered adequate by financial managers when equal to one month's Operating Expenses and Debt Service. Monthly Operating Expenses and Debt Service are projected to be under $700,000 through Fiscal Year 2008/07 (but peaking at $761 000 in Fiscal Year 2012/13). Thus, the fund has $14,000,000 ($14 700,000 minus $700,000) available to fund the Capital Improvements Program. NAVIGANT CONSULTING, INC. 6-5 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 6 WATER RATE PROJECTIONS If capital improvements to the water system are funded out of the Water Enterprise Fund at the rate planned in the 'Capital Improvement Program for Fiscal Year 1998 -1999' in each of the next four fiscal years (including FY 1998/99) expenditures will be $21,378,720 With Income from Operations transferred to the Water Enterprise Fund and with Cash and Investments in the fund earning 6 percent, the fund would have Unrestricted Assets of $358,243 at the end of FY 2001/02. Figure 5 -1 presents this projection graphically This balance is less than the desired $700 000 However Income from Operations over the following eight years, estimated at $5,016,287 is greater than the remaining capital improvements, estimated at $4,590,000 Accordingly the remaining improvements could either be phased over those eight years or funded with short term financing. TUSTIN WATER DEPARTMENT FINANCIAL INFORMATION Capital Improvement Program Funding for CIP for Fiscal Year 1998 -99 Using Current Rate Structure $12,000.000 $10.000,000 $8,000,000 $6,000.000 $4,000,000 $2.000,000 - $0 -- ($2.000,000) ($4.000.000) FIGURE 6 -1 e OD T 0 0 °o O s O 0 O a O 0 O 0 O 0 O 6 Fiscal Year O 0 O N ,7 N Today's Unrestricted Current Assets, equal to nearly two years Operating Expenses and Debt Service, are considered adequate to cover any plausible climate or drought induced fluctuations in sales in the near term. This analysis indicates three years of negative Income from Operations from FY 2010/11 to 2012/13 As these negative amounts average less than 2 percent of Income from Sales and are projected to occur more than a decade in the future, it is very uncertain whether there will be actual operating shortfalls. NAVIGANT CONSULTING, INC. 6-6 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 6 WATER RATE PROJECTIONS Conclusions Based on the rate impact projections performed by NCI, the following conclusions are reached • In the fiscal year 2010/11 operating expenses are projected to exceed income from sales under the existing rate structure and will remain negative until the 1993 Certificates of Participation are paid off in FY 2012/13. • Current rates are projected to be sufficient through Fiscal Year 2014/15 assuming the rate of capital expenditures match the expenditures adopted in the FY 1998/99 Capital Improvements Program and short -term financing is obtained. NAVIGANT CONSULTING, INC. 6 -7 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 TUSTIN PRIVATIZATION STUDY Sect.On CALIFORNIA WATER UTILITY PRIVATIZATION PROJECTS Discussed in this section are recent examples of privatization projects for California Water Utilities based on research performed through publications of the Reason Foundation, AWWARF data, annual reports of major water utilities involved in privatization projects, NCI's involvement with California privatization projects, and other sources. Also included is one privatization example of a New Mexico utility on account of its large size NCI's recent involvement, and an illustration of a privatization project that has had problems. Included are examples of asset sales, long -term lease concessions, annual operating agreements, and miscellaneous smaller service contracts. Not included are descriptions of privatization projects under study by several California cities including Fresno San Jose, Chino and Chino Hills. None of these cities have, as of this time, reached an agreement for privatization and a number of alternatives, similar to those described below are being considered. Fuller descriptions are presented for those projects considered to be outstanding illustrations of the privatization approach being considered. The discussion in this section forms the basis for the analysis of privatization opportunities for the Tustin system as presented in following Section 8. NAVIGANT CONSULTING, INC. 71 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1. 1 1 SECTION 7 CALIFORNIA WATER UTILITY PRIVATIZATION PROJECTS PRIVATIZATION THROUGH ASSET SALE There have been relatively few water system asset sales over the last decade from the public to the private sector Those that have occurred have been relatively small (the largest pending California sale is 7,000 connections) There have been many reasons for a lack of projects privatizing through an outright asset sale. These include the requirement to gain voter approval of City ratepayers, the prohibition by the IRS of the assumption of tax -free bond financing by private taxpayers, and the view by decision makers that a sale will permanently mean a loss in utility control. Following are descriptions of California water utility privatization asset sales. Also presented in this subsection is a discussion of the potential value of the Tustin water system if privatized through an asset sale. Town of Apple Valley The Town of Apple Valley (Town) owns a water system which serves the Apple Valley Industrial Park (AVIP) The Town also provides the majority of area residents with sewer service Apple Valley Ranchos Water Company (AVRWC) is a wholly owned subsidiary of Park Water Company (Park) which serves the majority of the residents of Apple Valley with water service Park owns the stock of Jess Ranch Utilities Company which latter utility provides water and sewer collection services to the residents and businesses of the nearby Jess Ranch planned development. AVRWC and Park are currently considering a proposal to sell the Jess Ranch wastewater system to the Town. At the same time this transfer takes place, the Town's AVIP water system would be sold to Park or one of its subsidiaries. Accordingly AVRWC retained NCI to appraise the two systems for potential sale. The area known as AVIP consists of approximately 4,266 acres which were targeted in the 1980s for industrial development. The service area is located in Sidewinder Valley in the northern portion of the Town. The service area also includes existing commercial and residential development. The 1988 construction project provided for only backbone facilities designed at 50 percent buildout. No facilities have been added since the initial 1988 construction. The existing nine service connections are comprised of two commercial and seven residential service accounts. Industrial development of the AVIP service area, since its water system construction in 1988, has not occurred to any significant extent. Near term future development is also not promising for a variety of reasons. First, sewer service is provided by septic tank. Currently the Regional Water Quality Control Board would require a sewer collection system for full industrial development in order to prevent nitrate contamination in the groundwater basin. Other obstacles to further industrial development were presented in the Town's recently prepared Comprehensive Economic Development Plan. A prospective purchaser would recognize the near term economic infeasibility of this utility as a stand -alone system. NAVIGANT CONSULTING, INC. 7 -2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 7 CALIFORNIA WATER UTILITY PRIVATIZATION PROJECTS There is approximately 144,000 feet of pipelines in the AVIP system ranging in size from 8 to 16 inches in diameter Water is produced from one offsite 18 -inch production well having a capacity of 800 gallons per minute. Water produced from this well is transmitted through approximately 29,000 feet of transmission pipeline to the AVIP distribution system. There are two pressure zones created for service within the AVIP service area with each containing a 12 million - gallon steel reservoir Water is boosted between pressure zones through two 50 horsepower booster pumps. Following the system appraisals and negotiations, the Town and Company agreed to mutual sales of their respective systems. The AVIP system is being sold for an amount on the order of $2.5 million. This transaction is currently pending before the PUC for approval. The following lists the benefits of this privatization project. • Respective sales of these two utilities consolidate water service in the management of the company and sewer service in the management of the town. • Privatization results in economic utilization of stranded water facilities by merging the service areas and operations of the AVIP and AVRWC • Privatization enables landowners to be relieved of assessment obligations through bond defeasance with sale proceeds. • Potential economies of scale result from utility consolidations of both water and sewer service functions. City of West Covina The City of West Covina (West Covina) owns a water system serving customers in West Covina and adjacent City of Walnut. The West Covina system distributes over 6,000 acre -feet of water per year through an infrastructure that includes approximately 84 miles of transmission and distribution mains providing service to approximately 7,000 connections. The remainder of West Covina is served by other purveyors including an adjacent municipality and investor owned utility Among the primary reasons for potentially selling the system are the modest size of the utility (being only modestly economical to operate), the reliance on imported water for a majority of the source of supply and the prevalence of some of the highest rates when compared to other San Gabriel Valley purveyors. West Covina was examining the potential to divest itself of its municipally owned water system through a multiple -step process. The first step involved receiving Statements of Interest and Statements of Qualifications from qualified buyers capable of providing a high quality of utility water service to West Covina residents. Based on six responses received, West Covina evaluated each interested buyer's qualifications in order to select a limited number of potential buyers from which a request ultimately would have been made to submit Offers to Purchase, containing the offered price, terms, and other financial considerations. The request for offers from a few selected highly qualified purchasers, and evaluation of those offers would have involved the second step of the sale process. Finally following the City Council's selection of a NAVIGANT CONSULTING, INC. 7.3 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 7 CALIFORNIA WATER UTILITY PRIVATIZATION PROJECTS preferred buyer a vote would have been taken by the customers of the water system residing in the City of West Covina in order to approve the sale of the water system to the selected buyer As a part of the potential sale evaluation, West Covina retained NCI to initially perform an evaluation and appraisal study of the West Covina system. Based on NCI's analysis, the fair market value of the West Covina system, if sold to a regulated purchaser as of June 30 1996, was estimated to be approximately $11.0 million. Late last year the City Council made the decision, prior to distributing the Requests for Offers to Purchase to enter into an exclusive negotiating period with Suburban Water Systems, one of the initial six respondents to the Requests for Statements of Interest and Qualifications. Suburban currently serves the majority of residents in West Covina and is adjacent to West Covina's service area. It was anticipated that negotiations would lead either to a sale, lease concession, or operations and maintenance contract, or some combination thereof (possibly handling the service areas within West Covina and Walnut differently). Legal requirements for selling the service area within the City of West Covina differ from those requirements for selling the system lying within the adjacent City of Walnut. Recently the City Council unanimously voted to allow the West Covina ratepayers in the service area to vote on a proposed sale for the entire system to Suburban for a purchase price of $12.0 million together with a 10 percent decrease in current commodity rates. Rates for adjacent Walnut residents would remain unchanged. Rates for both city service areas are proposed to be held constant for four years. The West Covina acquisition would be added to the larger adjacent San Jose Hills District of Suburban. If successful, privatization of the West Covina system through Suburban will result in the substitution of lower priced local surface water for imported supplies and the gain of a substantial economy of scale through the incorporation of the 7,000 connection West Covina system into the adjacent Suburban system totaling 66,000 connections. City of Modesto The northern California City of Modesto (Modesto) owns separate water systems in the nearby cities of Ceres, Turlock, and Waterford and in the unincorporated areas of Hickman, Del Rio and Grayson which it acquired as part of the purchase of Del Este Water Company in the early 1990s (Del Este Water Company also served about one - quarter of the total area of the City of Modesto which was the motivating factor for the purchase) These service areas outside of Modesto contain a total of almost 5,000 connections and are supplied exclusively with ground water through 22 wells. In view of the location of these separate service areas outside of Modesto's sphere of influence, Modesto is considering selling the systems to the investor owned utility market. Accordingly Modesto retained NCI to appraise the systems for potential sale. In 1997 NCI completed appraisals on each separate water system contemplated for sale plus an overall appraisal report for a potential sale of all of the systems as a unit. The combined value for these systems is several million dollars. As a first step, Modesto has been attempting NAVIGANT CONSULTING, INC. 7-4 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 7 CALIFORNIA WATER UTILITY PRIVATIZATION PROJECTS to market the individual systems to the cities where they are located. If these efforts are not successful (and initial indications are that they will not be) Modesto may privatize these systems as a unit by selling them to one of the large investor owned utilities in the state. City of Folsom In 1992, Southern California Water Company (SCWC) purchased the Nimbus water system from the City of Folsom (Folsom) for an amount of $900,000 The Nimbus system service area is located southwest of the City of Folsom boundaries in the County of Sacramento, and adjacent to the Rancho Cordova service area of SCWC This system appears to consist only of distribution lines, service connections, meters and hydrants, and miscellaneous parcels of real property Production and reservoir facilities do not appear to be a part of this small service area Apparently the motivation by Folsom to privatize this small water system through an asset sale was prompted by the opportunity to exchange water supplies with the regulated utility As part of the sales agreement, the City agreed to commit to a future supply of up to 3,500 AF per year to SCWC for service to the Nimbus water system in order to meet demands of the transferred system. In return, SCWC agreed to provide an equal amount of water annually to Folsom in order to provide supplies for development of an area known as the East Facilities Plan Area (as described in Folsom's current General Plan) In effect, the City of Folsom was motivated to privatize this system in order to obtain a water supply for development in other areas of Folsom. Los Angeles County Water Works Districts In 1991 the Los Angeles County Board of Supervisors, as governing body for Los Angeles County Water Works Districts Nos. 1 10 16, and 22, agreed to privatize four water system service areas of the Districts by selling these systems to Southern California Water Company (SCWC), a private sector water utility company These public agency districts were providing service primarily within unincorporated area of Los Angeles County plus small portions within the cities of Hawthorne, Redondo Beach, and Compton. The purchase price for the asset sale involved with this privatization transaction amounted to $3.173 million cash. The system assets included several thousand service connections, pumping plants, storage reservoirs, and wells: plus distribution pipelines, valves, meters, hydrants, and appurtenances. The County indicated that it had reached a decision to privatize these water systems by divestiture on account of SCWC's adjacent location, allowing the private utility the opportunity to serve the Districts customers at least as efficiently as the Districts could, and the probability that through economies of scale, the regulated utility would be able to serve all of the Districts customers at the lowest possible price. NAVIGANT CONSULTING, INC. 7 -5 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 7 CALIFORNIA WATER UTILITY PRIVATIZATION PROJECTS PRIVATIZATION THROUGH LONG -TERM LEASE AGREEMENTS There are currently two well known long -term lease agreements of municipal water systems by the private sector the City of Cupertino and the City of Hawthorne. Both are described below Although there may be other long -term lease agreements in California, these two are considered to be representative of privatization through this approach. Copies of both of these agreements are contained in Appendix F NCI conducted research on existing long -term privatization projects in California from various sources as identified at the beginning of this section. City of Cupertino The City of Cupertino (Cupertino) owns a water system which serves approximately 4,225 connections, including both residential and commercial customers. Cupertino receives over 90 percent of its supplies from a connection with the Santa Clara Valley Water District, estimated at a capacity of 3,125 gpm, plus supplemental water from two groundwater wells. The municipal system provides service to approximately one -third of the Cupertino population. The remaining population is served by California Water Service Company (CWS) and San Jose Water Works (SJWW) In general, the water quality supplied to the system's consumers is excellent. The water distribution system, constructed with over 50 miles of water mains ranging in size from 4 to 20 inches in diameter consists of asbestos cement, protected steel and cast or ductile iron pipe material, the latter being the sole material used in pipeline construction since about 1980 Service connections consist primarily of copper although there is some galvanized iron services which have been a source of leaks for operating personnel in the past. There are no plastic services in the system nor any two -inch pipelines. Unaccounted -for water is estimated to range between 5 to 7 percent which is considered to be good for a system of this age. Pipeline leaks average on the order of 10 per year The distribution system is considered to be in good condition. In January 1996, the SDHS annual inspection report concluded that the Cupertino water system was in good operating order with conscientious management and personnel. According to the 1994 Annual Report, 30 complaints from consumers were made relating to leaks, pressure problems and water quality which is considered to be an acceptable level for a water system of this size and age. In 1996, Cupertino made the decision to explore the potential of privatizing the water system on account of its small size, personnel inefficiencies with regard to management and operations (on account of the lack of staff expertise in selected areas, such as water quality and its modest demand for operating staff), the potential of system redundancies and backup supplies by adding it to a larger system, the difficulty in water quality monitoring and meeting new drinking water standards, and Cupertino's belief that a greater economic return could be realized through privatization. As a first step in Cupertino's privatization assessment, NCI performed a reconnaissance level appraisal of the water system in order to evaluate the feasibility of privatizing the water system by selling it to the investor -owned utility market. Based on NCI's evaluation, the reproduction NAVIGANT CONSULTING, INC. 7 -6 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 7 CALIFORNIA WATER UTILITY PRIVATIZATION PROJECTS cost new less depreciation (RCNLD) of the system was estimated to be on the order of $7.5 million. However in view of the large amount of developer contributions, the estimated private sector market value at the time was only about $1 million (based on an anticipated rate base to be allowed by the PUC in accordance with net historic investment by Cupertino) This estimate of low market value compared to RCNLD resulted in Cupertino making the decision not to sell the system to the private sector Subsequently Cupertino explored other privatization alternatives. A comparison of residential water rates for the City of Cupertino in comparison with the adjacent large private sector purveyors, CWS and SJWW indicated Cupertino's rates were favorable when considering the typical residential water consumption. The annual median water bill for a residential customer was $227 This amount was about $50 per year lower than a SJWW customer paid and $79 lower compared to a CWS customer similar usage. Water usage cost differences for commercial users, if transferred to either regulated purveyor varied from a reduction of 6 percent to an increase of 27 percent. On account of the low market price anticipated by selling the system, compared to the RCNLD other privatization alternatives were explored. Ultimately proposals were received from both CWS and SJWW to enter into a long -term lease of the system. The proposal from SJWW was eventually accepted which provided Cupertino with an upfront payment of $6.8 million for the exclusive right to operate and receive revenues for a period of 25 years. No other compensation is to be received by Cupertino for the lease (with the exception of a $1 per year lease payment) At the end of the lease period, the system reverts to Cupertino for future operations or alternative disposition. The $6.8 million cash payment is anticipated to be used to benefit the entire community such as a library expansion or park improvements. Rates, on the average, were allowed to increase by 20 percent over a three -year period to eventually equal the existing SJWW tariffs. Future rate increases will equal PUC increases to the SJWW regulated service area, but the City Council retains the right to not approve such increases if they are considered unreasonable. Disputes will be handled by binding arbitration. Prior to approving the privatization contract, Cupertino notified every customer with the invitation to submit comments or objections by writing, phone, or e-mail. Out of the total customer base, only 36 responses were received with about 20 of these objecting to the rate increase. The only future downside risk that the Cupertino Public Works Director could envision was the potential future lack of annual oversight by Cupertino which could lead to deferred maintenance and substantial capital needs at the end of the lease period. The transfer of the system operations from the City of Cupertino to SJWW occurred in September 1997 Thus far Cupertino indicated it is fully satisfied with both the quality of service over the last year and its decision to privatize the system. Relevant terms (in addition to those described above) of the lease include the following: • Any property added to the system or capital improvements by the lessee shall immediately become the property of the City Lessee has no authority to sell, transfer or NAVIGANT CONSULTING, INC. 7 -7 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 7 CALIFORNIA WATER UTILITY PRIVATIZATION PROJECTS retire any system property or encumber (real property) without express permission of the City • Lessee shall pay for all expenses and costs related to managing, operating and maintaining the water system (including plant improvements, water supply charges, taxes, operation and maintenance expenses, and so forth) • Lessee shall be responsible for all customer service including billing, payment processing and responding to customer inquiries or complaints (bills, leaks, and other concerns). • Lessee is to maintain 24 hour on -call emergency response, including maintaining an emergency communication system and natural disaster operations plan. • Lessee is to provide total management of all water quality concerns including sampling, testing, reporting and regulatory compliance. • Lessee is to perform all acts and services required to manage and operate the water system similar to the manner in which the utility operates its own systems. • Annual reports are to be provided to the City on the system operations including a summary of extraordinary maintenance, capital improvements, customer complaints and their resolution, and water quality analysis. Other periodic reports are to be given on the system operations and maintenance if reasonably requested by the City • No water charges shall be made to the City for fire fighting activities. All other municipal use shall be billed at regular rates. • If the City determines that the system is not being maintained or operated in accordance with customary utility standards, following notice and follow -up actions, the City has the alternative of arbitration. • The City can require the Lessee to bill and collect any City- assessed utility user's tax. • Lessee shall provide commercial general liability insurance ($5 million on an occurrence basis) automobile liability insurance (single limit of not less than $1 million) and workers' compensation insurance. • Upon expiration or termination of the lease, the system is to be returned in good order and condition, and in a state of repair consistent with prudent use and maintenance in accordance with customary utility standards. City of Hawthorne In February 1996 the City of Hawthorne awarded a 15 -year lease of its water system to California Water Service Company (CWS) transferring responsibility for operations, maintenance and capital improvements from the municipal to the private sector In return for the lease, CWS will receive all system revenues during the lease period, estimated at approximately $4 million annually In exchange for the lease, CWS made an upfront cash payment of about NAVIGANT CONSULTING, INC. 7 -8 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 7 CALIFORNIA WATER UTILITY PRIVATIZATION PROJECTS $6.5 million plus annual lease payments of $100,000 The total present worth of the contract is estimated to be slightly over $7 4 million. The Hawthorne system serves approximately 6,000 customers over a four square mile service area (approximately 75 percent of Hawthorne's area). The pipeline distribution system totals over 50 miles and includes a rapid sand filter treatment plant for groundwater two MWDSC imported water connections, seven treated water reservoirs with a total capacity of 8.78 mg, seven booster pumps, and an elevated tank to provide hydraulic control. Significant lease terms (in addition to the above described terms) include the following • System is leased on an 'as -is' basis. • Lessee will produce from City's groundwater rights and pay all groundwater replenishment taxes. • Lessee, at its expense, shall perform all system repair and maintenance in accordance with customary utility practices. • Lessee shall pay for all costs of operation. • Lessee will prepare a quarterly report an water quality and customer complaints. • Response to major main breaks shall be within one hour and to all leaks within 24 hours. • Proposed rates and rate changes shall be approved by City which approval shall not be unreasonably withheld. • Increases in the cost of water or power or City- imposed fees may be passed on to customers without requiring approval. • Lessee shall bill and collect charges for water service, plus bill and collect on City's behalf any utility user's tax or sewer service fee. • Except in cases of emergency lessee shall obtain City's approval to make capital improvements. • Capital improvements shall be made in accordance with all requirements as if City carried out the work as a public improvement. • Lessee shall prepare an annual report describing capital improvements including associated costs. At the end of the lease, the City shall reimburse lessee for the undepreciated value of the capital improvements made. • Lessee agrees to offer to hire current City employees in comparable positions at or above current compensation levels, including benefits. • Appropriate insurance will be maintained by lessee including not less than $5 million single limit commercial general liability and not less than $1 million automobile liability per occurrence NAVIGANT CONSULTING, INC. 7 -9 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 7 CALIFORNIA WATER UTILITY PRIVATIZATION PROJECTS ANNUAL OPERATION AND MAINTENANCE AGREEMENTS Another alternative to privatize a publicly owned water system is to contract with a private operator to operate the entire system through an annual operation and maintenance agreement. Two outstanding examples of this privatization approach include the City of Bakersfield and the City of Rio Rancho, New Mexico The former is an example of a very successful privatization project, the latter an example of problems that can arise with contractors. City of Bakersfield One of the largest privatization partnerships in the state is the operation and maintenance by California Water Service Company (CWS) of a major water system, known as the Ashe Fairhaven and Riverlakes service area, owned by the City of Bakersfield (Bakersfield) NCI met with a representative of Bakersfield to obtain information on the historic relationship and current status of this partnership The City of Bakersfield acquired the initial water system, consisting of only several thousand connections, in the early 1970s as part of a Kern River water rights litigation settlement with Tenneco a local land developer At the time, Bakersfield was in the water business with only agricultural deliveries. However in view of Bakersfield having neither experience nor staff involved with production and delivery of domestic water supplies, it requested CWS to operate the system on its behalf for an interim period. CWS is, and has been for many decades, the domestic water purveyor for the majority of the City of Bakersfield. The system is located in the western portion of Bakersfield which has been undergoing significant developer growth since Bakersfield acquired the initial system. Today this system totals approximately 22,000 connections and is currently growing at about 800 connections per year Based on a field visit, the service area appears to be relatively new with 92 percent of the system consisting of residential connections of 1 inch or less. The remaining customers consist of commercial, light industrial, City -owned landscaping connections, and California State University Although the water supplies to the area have been entirely groundwater historically (from 38 wells with a total pumping capacity of about 47,000 gpm or 68 mgd) Bakersfield is participating in a feasibility study to construct a water treatment plant with CWS to serve treated surface water diversions from the Kern River into the City -owned service area as well as portions of CWS's franchise. Following several years of an interim contract, Bakersfield entered into a permanent sole- source operating and maintenance contract with CWS. Subsequently Bakersfield felt compelled to issue a Request for Proposals (RFP) in order to receive competitive bidding on the O &M contract. Several operating firms made bids on Bakersfield's contract including CWS. Although CWS was not the low bidder an intensive review of service qualifications and verification of references with other privatization projects led to the ultimate selection of CWS being retained as the service provider Bakersfield currently pays a monthly fee of just under $8 per connection per month (regardless of connection size) for the operations and maintenance contract. Monthly connection fees are subject to adjustment annually in accordance with similar percentage NAVIGANT CONSULTING, INC. 7 10 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 7 CALIFORNIA WATER UTILITY PRIVATIZATION PROJECTS changes in employee union contracts (however negotiations are initiated for increases exceeding 5 percent) The current fee amounts to approximately $2 million annually for private contractor operation and maintenance services. Bakersfield believes it is accruing approximately $1 million per year in profits from the service area revenues. Rates can be changed from time to time as Bakersfield in its sole discretion sees fit. Rates for water service in the City -owned area are believed to be approximately 20 percent less than the adjoining investor -owned utility area which encompasses most of Bakersfield. However a comparison is somewhat problematic in that all of the City -owned area is metered whereas the remainder of the Bakersfield area franchised by CWS is based on a flat rate structure Several years ago, Bakersfield made an internal economic study and believes the O &M privatization contract is more economical than Bakersfield operating the system itself For contract administration, approximately 25 percent of the time available for the Public Works Director is consumed plus approximately 50 percent of the time for one staff person (not including financial, legal, and other associated City departments) CWS is responsible for all normal expenses it incurs in operating and maintaining the system with the exception that Bakersfield pays directly expenses related to • Real property taxes • Electric and gas power charges • SDHS regulatory fees • Water supply purchases • Pumping assessment taxes, and • Main extension agreement refunds For extraordinary maintenance, defined to be amounts in excess of $2,000 Bakersfield will pay for the actual cost. However written pre- authorization is required (unless an emergency repair) before undertaking the work, and Bakersfield is not obligated to use the private contractor to perform the needed repair or capital improvement. If authorization for extraordinary maintenance is given, the Company can bill Bakersfield 8 percent for engineering, construction supervision and inspection, and overhead charges. For emergencies (threatening the public health or safety in the Company's judgment) CWS can undertake construction action immediately with Bakersfield having the right to order a cessation of work upon notification. If the latter occurs, Bakersfield will pay for work completed plus an 8 percent repair charge as described above. Capital improvements to the system are made or paid for by Bakersfield based on written estimates from the Company In such cases, Bakersfield pays for the cost of the actual work plus the 8 percent charge as described above. CWS also provides engineering services for operations, maintenance, additions and capital improvements. NA V IGANT CONSULTING, INC. 711 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 7 CALIFORNIA WATER UTILITY PRIVATIZATION PROJECTS The responsibilities and duties of the privatization contractor include the following: • Employ supervise, and train qualified employees necessary to operate and maintain the water system in compliance with all laws and regulations. • Provide vehicles, tools, equipment, fuels, and various supplies to operate and maintain the water system. • Operate and maintain Bakersfield's water supply system, water treatment or disinfection equipment, and water transmission and distribution system (including equipment inspections, cross connection control, valve maintenance, hydrant inspection and main flushing, repair of main breaks or leaks, and other duties) and deliver the highest and best service possible (operating and maintaining the system in a manner similar to that which it operates its PUC- regulated Bakersfield District) • Maintain an inventory of fixed assets, and equipment and supplies, for daily operations and repairs, and maintain an adequate supply of meters for new construction. • Implement a water conservation program. • Perform all water quality sampling, analysis, and reporting; submit monitoring plans and coordinate monitoring with regulators, prepare and distribute annual water quality reports to customers; and investigate taste and odor complaints. • Provide customer account service and meter maintenance account inquiry work; customer premises leak detection; customer assistance credit and collection services; cashiering; account cut -in and cut -out; monthly meter reading and billing. • Provide a 24 -hour on -call response to emergencies and customer inquiries, prepare an emergency disaster operations plan, maintain an emergency communications system; and employ reasonable efforts to provide a maximum of one -hour response to customer inquiries concerning water quality and two hours for other inquiries. • Operate and maintain a local business office, staffing it during normal office hours. • Provide to Bakersfield, and update periodically accurate and reproducible distribution system maps and plat maps. • Provide to Bakersfield the following financial and operating reports. Daily deposit slips for revenues collected. ► Weekly summaries of extraordinary maintenance, capital improvements, developer installations. ► Weekly service and complaint records with nature of complaint and resolution. ► Monthly sales reports including connections and revenues by classifications. ► Monthly water production by source groundwater levels and energy consumption for each well, booster pump energy use, and wells sampled and tested. ► Annual consumption by customer account and classification. NAVIGANT CONSULTING, INC. 7 -12 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 7 CALIFORNIA WATER UTILITY PRIVATIZATION PROJECTS Any other management report or information relevant to the operation or maintenance of the system. The current operations agreement, executed in 1992, contained an initial term of three years with successive three -year renewal periods and provided each party a cancellation option with a 180 -day notification. The Bakersfield representative indicated to NCI that the City has been very satisfied with the performance of the privatization contractor and the results of the operating agreement. Complaints over service and rates are believed to be low in comparison to other municipal systems, and necessary interaction by political leaders has been infrequent. Bakersfield indicated that it intends for the foreseeable future to maintain this privatization contract for operation and maintenance of its growing municipal water system. A copy of the Bakersfield agreement is contained in Appendix G. City of Rio Rancho The City of Rio Rancho New Mexico (Rio Rancho) is an incorporated municipality located in Sandoval County northwest of the City of Albuquerque. Historically water services within Rio Rancho s corporate limits have been supplied by a privately owned utility In 1994 Rio Rancho determined that its interests could best be served through municipal ownership and operation of the water system which was owned by Rio Ranch Utilities Corporation (RRUC) During 1994 Rio Rancho initiated eminent domain proceedings against RRUC In early 1995, Rio Rancho petitioned the Court to authorize an immediate taking of the water system, which resulted in Rio Rancho assuming responsibility for the system shortly thereafter Ultimately a negotiated settlement was reached ending the condemnation litigation. At the time of the ownership transfer to Rio Rancho, the water system was comprised of 16 wells ranging in depth from approximately 350 feet to 1,925 feet, approximately 36 miles of water transmission lines of 10 inches diameter or greater and approximately 200 miles of water distribution lines. The majority of the water transmission and distribution lines were PVC pipe. Most lines were installed since 1981 As of year -end 1993, 11 steel storage and surge tanks were in service, with a total storage capacity of approximately 17 million gallons. The water system was totally dependent on groundwater pumped from the Middle Rio Grande Basin. Annual water sales totaled approximately 3.3 billion gallons in 1993. At year -end 1993, approximately 14,000 customers were served by the water system. In March 1995, an Operation's agreement was awarded to ECO Resources, Inc. of Texas (a subsidiary of Southwest Water Company located in West Covina, California) The agreement provided for operations and maintenance of the water system, but not responsibilities for capital improvements. The management fee was 8 percent of the total Operation and Maintenance costs expended. A representative of Rio Rancho indicated to NCI that an adversarial relationship developed between the local management personnel representing ECO and the Rio Rancho City Council. The potential tension was aggravated by the City Utilities Commission and the absence of a strong leader and manager in the office of City Utilities Director Ultimately instead of renewing a two year optional term following the first two years of operation, Rio Rancho gave a required 6 -month notice that it intended to replace ECO with a NAVIGANT CONSULTING, INC. 7 13 SECTION 7 CALIFORNIA WATER UTILITY PRIVATIZATION PROJECTS new private operator Subsequently a new operator (STE of Houston) took over the privatization contract with Rio Rancho to manage the water system. The Rio Rancho representative indicated to NCI that the O/M agreement awarded to ECO was flawed by providing no incentive for cost control (and, in fact, the contrary• the higher the cost to operate and maintain, the higher the fee). The new privatization contract provides for an incentive to the contractor for cost containment. Rio Rancho did indicate, however that much of the political problems that arose were more a result of local personalities, rather than a product of a flawed privatization project. NAVIGANT CONSULTING, INC. 7 -14 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 7 CALIFORNIA WATER UTILITY PRIVATIZATION PROJECTS MISCELLANEOUS PRIVATIZATION CONTRACT SERVICES In addition to the above major privatization projects, there are also many smaller outsourcing contracts to the private sector from public agencies. Various contract services include management for water sources or treatment, distribution main maintenance, meter reading, accounting and billing, collections, public information, and other contracts. The following tabulation presents an identifiction of these smaller specific private service contracts for California cities serving a population between 25,000 and 130,000 As shown, 51 contracts were identified statewide. 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(13 E co N a = no = „H,, N Q O a g° iO d 5 * d -. -1 w 3 3 * d fC fn 5. m N V G C –. = 0 a. G O Auo ewe Auiufl 000`0E1. ONV OOO'Sd N33M138 NOLLV1fldOd V ONIAd3S SWBISAS EI31VM VINUOdIIVO 80A ONIOdflOS1l0 30NVN3INIVW ONV SNOIJV113d0 S1031101:1d NOIIVZI1VAIUd Alllllfl y31VM VINy04I1V0 L N01103S 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 TUSTIN PRIVATIZATION STUDY Section 1 PRIVATIZATION OPPORTUNITIES 1 1 1 1 1 1 1 1 1 1 1 1 1 1 NAVIGANT CONSULTING, INC. 1 This concluding section presents a discussion on potential water system privatization alternatives for the City of Tustin to consider The following subsections discuss privatization through asset sale (including an opinion of the order of magnitude fair market value) long -term lease agreement, annual operation and maintenance agreement, and selected contract services. Also presented are study recommendations and recommended potential service providers. 8 -1 SECTION 8 PRIVATIZATION OPPORTUNITIES PRIVATIZATION THROUGH ASSET SALE The strongest and most complete approach to privatization is through asset sale from the public to private sector On a global scale there are many examples of privatization utility asset sales including the transfer of the City of London, England water system to private investors after having been under public ownership for at least two centuries, as well as the sale privatization of all of Great Britain's wastewater systems. However in the United States, sales of significant public water utility systems have been rare Examples of California water system sales are presented in the preceding section. The following discussion presents NCI's reconnaissance level valuation of the Tustin water system if privatized by outright sale followed by a discussion of the merits of such an approach, plus NCI's conclusions and recommendations on the City undertaking total divestiture Value as Indicated by Capitalized Earnings The operations of an investor -owned water utility in California including earnings are required to be regulated by the California PUC if charges are applied to water deliveries. The Tustin system, currently not under PUC jurisdiction, would be regulated by the PUC if the system were sold to a private investor Under the policies of the PUC the earnings are designed to yield a fair rate of return on the capital invested by the owners of the utility This invested capital is referred to as rate base. Relationship between Rate Base and Capitalized Earnings Value The earnings allowed can be expected to be established at levels which will yield a rate of return on capital invested by the owners of the utility sufficient to attract capital considering other investment opportunities. Assuming that earnings are maintained by rate adjustments when necessary then capitalization of these earnings (at a capitalization rate equal to the fair rate of return allowed by the PUC) would by definition result in a number equal to the rate base. This is demonstrated by the following example (with the specific figures in the example being for illustrative purposes only and assuming 100 percent equity) Rate Base = $150,000 Rate of Return allowed by PUC = 10% Then the PUC will allow water rates sufficient to produce net revenues which will provide (after operating expenses, taxes and depreciation) an annual income of 0 10 x $150,000 = $15 000 per year The amount which a purchaser would be willing to pay for a system which would produce a net income of $15,000 per year if the purchaser were willing to accept a 10 percent return on his investment, would be $15,000 = $150,000 0 10 NAVIGANT CONSULTING, INC. 8 -2 SECTION 8 PRIVATIZATION OPPORTUNITIES This is equivalent to the rate base. It should be noted that although the rate base and the capitalized earnings value are the same numbers, conceptually they are different values. To the extent that the Commission allows a fair rate of return on the rate base higher than a rate of return demanded by an investor considering other potential investments, or to the extent that growth pressures or other factors enhance the expectation of future earnings, the purchase price paid could be expected to be at a premium over the rate base. The price paid in excess of the rate base is classified as a utility plant acquisition adjustment and does not contribute to the rate base. Accordingly an acquisition adjustment cannot earn a rate of return nor can depreciation be expensed against it for rate making purposes. Alternatively if expected earnings in the estimation of the buyer are lower than required considering other potential investments, then the price paid by the buyer could be expected to be no more than, or even a discount from, the rate base. Estimated Rate Base The rate base which may be expected to be allowed for an investor -owned utility by the PUC is normally made up of the following elements. (1) The historical capital costs of the facilities comprising the utility plant which remain in service (2) A deduction for the accumulated depreciation applicable to the foregoing facilities computed in accordance with the policies of the PUC (3) Deductions for that portion of the utility plant financed by means other than investment by the utility owner These deductions include contributions in aid of construction (on the basis of the depreciated value of the facilities represented by these contributions) and unreimbursed advances for construction remaining on the books at the time of computation of the rate base. (4) Deductions for any portions of the depreciated costs which represent an imprudent expenditure of funds, including money used for facilities not used or useful in supplying the water system demands or for overdesign of the system; (5) Allowances for working cash and for materials and supplies; (6) An allowance for the given rate making unit's pro rata share of common plant (such as a utility's general offices) in the case of larger water companies owning multiple water systems. NAVIGANT CONSULTING, INC. 8 -3 ' SECTION 8 PRIVATIZATION OPPORTUNITIES 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Several of the above items, including working cash and common plant, although they would typically make up a part of the rate base, do not relate to the property being considered for potential privatization through an asset sale in this discussion. Estimated Potential Rate Base of Tustin System In order to estimate a capitalization of earnings value for the Tustin system, potentially to be acquired by a purchaser coming under the regulation of the PUC it was necessary to first establish an estimated current rate base for the system at a selected date of value (June 30, 1998) Table 8 -1 presents our calculation of the potential utility plant component of rate base (representing that portion of the rate base being considered for sale) in the approximate amount of $23.75 million for the water system as of June 30, 1998, based on reported balances in accounting records supplied by the City Table 8 -1 Estimated Original Cost, Depreciation and Potential Utility Plant Component of Rate Base for the City of Tustin Water System June 30 1998 Asset Descri.tion Amount Original Cost, Total Utilit Plant Land $ 542,560 Wells 1,315,872 Pum•in. E.ui•ment 310,249 Reservoirs 1,741,006 Water Treatment E•ui•ment 26,332 Transmission and Distribution Mains 11,939,971 H drants 828,651 Meters 382,500 Services 1,232,361 Buildin•s 6,822,164 Comcuter and Office E.ui.ment 336,921 Communication E.ui.ment 529,182 Tools and E.ui•ment 231,406 Donated Assets 1,879,690 Subtotal, Utilit Plant in Service $ 28,119,366 Plus Construction Work in Pro.ress 3,036,477 Total, Utilit Plant $ 31,155,843 De.reciation Reserve 5,981,703 De.reciated Original Cost $ 25,174,140 Exclusion from Rate Base De.reciated Donated Assets 1,427,372 Potential Rate Base $ 23,746,768 However as discussed below recent passage of state legislation (SB 1268) makes it possible for a purchaser to pay a premium (subject to restrictions) over the existing potential rate base and have it approved for the subsequent rate base under the new owner NAVIGANT CONSULTING, INC. 8-4 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 8 PRIVATIZATION OPPORTUNITIES Original Cost New Less Depreciation The depreciated original cost of the Tustin system as of mid -year 1998 is estimated in Table 8 -1 to be approximately $25 million. Capitalized Earnings Value It is NCI's opinion that the anticipated rate of return which is expected to be allowed by the PUC on the potential rate base of the transferred Tustin water system facilities is a reasonable rate at which to capitalize earnings. At a 10 percent rate of return on the potential rate base (which would approximate the rate of return which might be expected by a purchaser as of the date of value) the earnings (based on a PUC rate case setting rates for a regulated purchaser) which would be generated by $23.75 million of rate base would be $2.375 million per year Capitalization of this amount at a capitalization rate of 10 percent would indicate a potential sales price of $23.75 million. Consequently the capitalization of earnings approach indicates a potential price for the Tustin system essentially equivalent to the estimated rate base component of the facilities being valued, or $23.75 million. Value as Indicated by Comparable Sales A comparable sale is a sale of property the price of which will shed light on the value of the property being appraised. Based on NCI's many decades of knowledge and experience gained in appraising water utility systems, it can be stated without reservation that market sales of water systems follow the same economic principles of supply and demand as other market transactions and provide a basis for making a prediction of the fair market value of a water system being appraised. In appraisal practice there are several characteristics of a transaction which are typically considered in evaluating whether a transaction is a 'comparable sale. Characteristics of Comparable Sales Among the characteristics considered for selecting comparable sales are • • The character and use of the property in relation to that being appraised; • The size of the property involved in the particular transaction in relation to the size of that being appraised; • The geographic proximity of the property to that being appraised; and • The date of the transaction in relation to the date of value for the property being appraised. For a privatization analysis, sales that we consider as being comparable are sales of water systems which at the time of sale came or remained under the regulatory jurisdiction of the PUC The utility properties sold deliver water for domestic and associated commercial use through distribution systems consisting of pipelines and appurtenant equipment. At the time of the sale, the systems would all be governed by the rules of the PUC Most importantly the rate setting procedures and the determination of return on invested capital would be similar NAVIGANT CONSULTING, INC. 8 -5 SECTION 8 PRIVATIZATION OPPORTUNITIES Consequently we conclude that for potential sales selected, the character and use of the property at the time of sale are sufficiently similar to that of the property being appraised that any such sales can be considered as comparable From the standpoint of size, only sales of utilities having rate bases of sufficient magnitude were considered. For this valuation, a sale range was considered for utilities having rate bases of approximately $1 million or more. This size of utility is sufficiently large to include sophisticated buyers with knowledge of the market and regulatory framework, and exclude smaller sales of water utilities which are frequently purchased by unsophisticated buyers paying unrealistic prices. Hence, it is considered that from the standpoint of size, the sales we have researched are comparable. All of the comparable sales considered are utilities within the State of California and at the time of sale were under the regulatory jurisdiction of the PUC The PUC utilizes the same procedures and criteria for setting rates and for determination of allowable rates of return throughout the state. Accordingly any sale taking place within the State of California can be considered as sufficiently close in location to the property being valued to be a comparable sale. The other characteristic to be considered is the time when a sale took place in relation to the date of value for this analysis. In order to sufficiently analyze the utility market for systems of comparable size, we have reviewed sales occurring from the early 1990s through the date of value. However the price paid for a system was not used directly in this approach to value but rather a review of the price paid as a percentage of the rate base and its impact on existing rates at the time of sale was utilized. Public Water System Investment and Consolidation Act of 1997 (SB 1268) In the latter half of 1997 in the closing days of the legislative session, the Governor signed SB 1268 which is known as the Public Water System Investment and Consolidation Act of 1997 (Act) There are three major elements to this legislation, only one of which concerns this study Two sections are addressed to municipal sales (either from a city county or city and county) of water systems either to another public agency or privatized through the sale to a regulated buyer The third section (which is of concern to this discussion) is addressed to sales of water utility property to regulated buyers of water systems and the associated recognition of rate base by the PUC Although not discussed below other sections of this Act would apply to a privatization sale including the requirement to conduct a vote of City ratepayers authorizing a privatization. The Act requires the Commission to use the standard of fair market value when establishing the rate base value (which ultimately will be used for rate setting). The fair market value is defined as that amount reached by a willing buyer and willing seller (as defined in state Code) This differs from historic practice by the Commission which would recognize in rate base either the depreciated historic cost, or the purchase price, whichever was less. This means in essence that the PUC was directed to potentially recognize any premium paid for a water system above NAVIGANT CONSULTING, INC. 8-6 SECTION 8 PRIVATIZATION OPPORTUNITIES its depreciated historic cost when such a sale occurs between a willing buyer and a willing seller The Act then states that if the fair market value exceeds reproduction cost, the PUC may still include the difference in the rate base if it finds that the additional amounts are fair and reasonable. There is a series of guidelines in the Act to determine if the additional amount above reproduction cost is fair and reasonable In order to obtain additional insight from the PUC staff contact was made with the Los Angeles Office of the Commission's Ratepayer Representation Branch of the Water Division. Currently the PUC has established a formal proceeding (Order Instituting Rule or OIR) in order to reach a decision establishing guidelines for implementing SB1268 One of the objectives stated by the Legislature in passing this Act, in order to encourage water system sales to larger operators thereby creating an economy of scale, is. 2719 The Legislature finds and declares (c) Providing water corporations with an incentive to achieve these scale economies will provide benefits to ratepayers. That is, allowing regulated utilities to acquire systems up to reproduction cost which investment will then be recognized in the rate base for setting rates (including a rate of return and depreciation on that rate base) will result in economies of scale, and benefits to ratepayers. However paying reproduction cost will not result in benefits to ratepayers if it means increased water rates. Also noteworthy are the comments by the PUC staff in its comments submitted in the current OIR on page 1 The Commission's primary objective should be to make certain that each merger or acquisition will result in improved efficiency of operation, higher quality of service, and a reduction in rates for customers. (emphasis added) In other words, the PUC staff believes the Commission's objective in approving sales to regulated buyers should be (among other things) a reduction in rates for customers. Briefs have been filed in the PUC regulatory proceeding to formulate guidelines to implement SB 1268. The current status of this proceeding is a pending decision on a written consensus by the parties representing both the regulated utilities and the consumer advocate groups which might form a policy framework for implementing SB 1268 whereby the PUC might approve future water system sales. This jointly prepared statement of principles for reviewing and approving sales by the PUC is anticipated to be adopted later this year or early next year Appendix H contains a copy of the proposed settlement between the PUC staff Ratepayers Representation Branch and the California Water Association which latter group represents a majority of the private water utilities in the state. Although this settlement is urged for adoption NAVIGANT CONSULTING, INC. 8 -7 SECTION 8 PRIVATIZATION OPPORTUNITIES by the parties (and thus not yet adopted) it is anticipated that this settlement will be adopted by the Commission in the near future These guidelines and rules to evaluate proposed mergers or acquisitions of water utilities by regulated utility buyers are of interest in order to assess the potential marketplace for the potential sale of the Tustin water system to a regulated purchaser Important in the proposed settlement is Section 2.02 which states as follows: 2.02 Notice of Intention. The parties agree that any request for authorization to acquire a Class A or B water utility should be preceded by a Notice of Intention. Such notice should include a showing as to how the merger or acquisition would affect reliability compliance with regulations relating to health and safety economies of scale, and customers. If acquired by the private sector the Tustin water system would be classified as a Class A water utility (based on level of revenues) by the PUC One of the requirements as set forth in the Notice of Intention to support a proposed acquisition or merger is a showing of how an economy of scale may result in approving the transaction. Clearly any proposed increase in the rate base from paying a purchase price in excess of the anticipated rate base as reflected by net book value exclusive of contributions would result in a potential rate increase (unless offset by substantial more efficient operations saving O &M expenses) which increase would hardly result in an economy of scale. NCI has also been told by the PUC staff that it remains steadfast in its objection to including amounts paid for contributions in aid of construction into the rate base by the acquiring utility In other words, the PUC staff believes that it would be appropriate to recognize a sale price for a regulated utility up to its reproduction cost new less depreciation (RCNLD) for facilities paid for by the utility but not for those facilities paid for by developers. Comparable Utility Sales The specific utility sale considered in this analysis meets the following criteria (in addition to the earlier criteria stated) • Sale of a complete water system (either a complete water company or a separate operating system of a company) • Sale representing an arm's length transaction, • Sale which was limited to utility property (i.e. the sale did not include significant other non - utility property) • Sale which did not involve any other special circumstances which would cast a doubt on its validity as an indication of what would happen in a normal market transaction. Utility Sales to Regulated Buyers Our research reveals that there has been only one large California water utility sale since the 1997 passage of SB 1268 with a rate base following transfer of ownership exceeding $1 million. NAVIGANT CONSULTING, INC. 8 -8 SECTION 8 PRIVATIZATION OPPORTUNITIES That is the current pending purchase of Dominguez Water Corporation by California Water Service Corporation. NCI has reviewed initial data in order to analyze the recent sale of Dominguez Services Corporation (Dominguez) to California Water Service Company (CWS). Data reviewed included a 1997 annual report of Dominguez, a news release from California Water Service Group announcing the merger acquisition, selected web site pages announcing both the merger transaction and also Dominguez third quarter 1998 earnings. NCI has also contacted individuals representing both Dominguez and CWS in order to verify certain details of the transaction. This is reportedly the largest historical water utility transaction occurring in California. The last large California sale comparable to this transaction, according to records maintained by NCI, was the acquisition of California Water and Telephone Company water utility properties by American Water Works in the 1960s. This historic sale was in the $40 million range Although the Dominguez -CWS transaction is technically a merger it can also be viewed and analyzed as a purchase of Dominguez by CWS with the purchasing power and medium of company stock having a liquid cash value However this sale is complicated somewhat by the current market values of both Dominguez and CWS. The former stock is traded on the NASDAQ and has a current market -to -book ratio of about 2.4 times. The latter stock is traded on the NYSE and has a current market price -to -book ratio of about 2.0 times. One might conclude based on the analysis performed that the acquisition of Dominguez was for an inflated price using stock with an inflated value. Nevertheless, this pending transaction indicates that CWS paid a derived value of about two times the anticipated rate base amount for the water utility property Dominguez Services Corporation is the parent of Dominguez Water Company Dominguez Services Corporation is the holding company for several water utilities including Dominguez Water Company which is the largest utility system and serves about 130,000 people in the South Bay of Los Angeles County primarily within the City of Carson. Smaller utility systems are also owned in northern Los Angeles County the Kern River Valley in Kern County and the Russian River Valley in Sonoma County However these other systems total only about 15 percent of the total customers served by Dominguez Services Corporation. Based on the third quarter 1998 operating results, the following tabulation presents the anticipated rate base component of utility assets owned by the corporation. NAVIGANT CONSULTING, INC. 8 -9 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 8 PRIVATIZATION OPPORTUNITIES ITEM AMOUNT ($1,000) Gross Utdit Plant $ 62.357 Less De•reciation 23 482 Net Utiht Plant 38,875 Plus Construction Work in Pro.ress 4 861 Subtotal 43,736 Less Advances for Construction 5,413 Less Contributions in Aid of Construction 6 268 Antici.ated Rate Base $ 32,055 As shown, the anticipated rate base amount from the third quarter financial data ending Sept. 30, 1998, for Dominguez Services Corporation amounts to slightly in excess of $32 million. According to a news release, CWS is acquiring Dominguez by offering 1 18 shares of its stock for every share of Dominguez stock. The estimated market value at the time of the news release is $47 6 million (today it is closer to $50 million) However in view of this being a stock purchase, the cash price of the CWS stock offered is only a portion of the purchase price. Added to this amount must be the long -term debt assumed plus the net balance of the difference between current assets and current liabilities. The following tabulation presents the net liabilities (excluding long -term debt) assumed by CWS when acquiring Dominguez stock. These amounts are also based on the 1998 third quarter financial information. ITEM AMOUNT $1,000 Current and Accrued Assets $ 7,106 Plus Deferred Debits 2 391 Subtotal $9 ,497 Less Current and Accrued Liabilities 7,149 Less Deferred Taxes and Credits 7 360 Net Current Liabilities $ 5,012 Accordingly as shown CWS is acquiring a net current liability balance of just over $5 million. Finally the last item of compensation is the assumption of long -term debt. According to the third quarter financial report, this balance is $11 155,318. Therefore, the total compensation paid for Dominguez by CWS is the sum of three items. the cash value of CWS stock of $47.6 million, an assumption of net current liabilities of approximately $5 million, and an assumption of long -term debt in the amount of $11 million. The sum of these items totals $63.6 million. This amount of compensation is essentially equal to twice the anticipated rate base of $32 million. However CWS is anticipated to request a stepped -up rate base for Dominguez as a result of the sale. This sale is pending approval by the Securities and Exchange Commission and the Public Utilities Commission. Also, both Company Boards of Directors have to approve the sale. It will take several months to secure regulatory approval. 1 The anticipated rate base for the Tustin system is almost $24 million. If the CWS- Dominguez transaction sales data analysis results are applied directly i.e. assuming the market will pay 1 1 NAVIGANT CONSULTING, INC. 8 -10 SECTION 8 PRIVATIZATION OPPORTUNITIES twice the anticipated rate base, the indicated market value purchase price for the Tustin water system is $48 million. However privatizing the Tustin system through an asset sale is anticipated to increase rates if a rate base established for the purchaser significantly exceeded the rate base estimated in Table 8 -1 based on historic costs. Consequently the City would unlikely sell the system if a rate increase to its customers would result. Based on NCI's knowledge of other sales occurring in the country it is believed a large national utility would be willing to pay up to a 30 percent premium over the estimated rate base to be recognized as an acquisition adjustment (and not included in the rate base for rate making) Accordingly it is estimated that the Tustin system would sell for an amount of about $30 million without increasing the projected rate base using historic depreciated costs. This estimate is a gross cash selling price The City would be responsible for any existing indebtedness. Advantages /Disadvantages of Asset Sale Generally it could be anticipated that there would be a number of advantages and disadvantages associated with privatizing the Tustin system through an outright sale Among the expected advantages are the following: • A sale would eliminate the current responsibility of the City for daily operation and management of the water system and department including operation, maintenance engineering, capital improvement, customer service, and financial activities. • A sale would eliminate the City's risk liability in operating a water system. • Privatizing the system would eliminate any obligations and problems associated with human resources. • A sale would result in conversion of a fixed asset to a liquid asset resulting in a substantial source of funds for other City uses. • Selling the system would result in elimination of the City's burden in completing a very extensive capital improvement program. • Sale of the system would increase modestly the City's property tax revenues due to the transfer of land and improvements to the public tax rolls. • A transfer of the system would provide a source of funds through franchise fee revenues. • Based on this study's water management review as presented in Section 4 transfer of the water system to a qualified regulated buyer /operator would facilitate implementation of corrective actions for all of the current management deficiencies identified. In contrast, there are also many potential disadvantages with privatizing the City water system through outright sale, including: NAVIGANT CONSULTING, INC. 8 -11 SECTION 8 PRIVATIZATION OPPORTUNITIES • Economic operation of the Tustin system would be primarily for the benefit of the shareholders of the private sector purchaser rather than for the benefit of the City and its residents. • Control over water rates, and service and management policies would shift from the City Council to the California Public Utilities Commission and the private utility which purchases it, giving the Tustin ratepayers and City Council less influence in rate setting, as well as addressing other regulatory and service issues. • Sale of the water system may cause a displacement of current Water Department employees, if not transferred to the private sector plus potential overstaffing of selected support departments such as Finance • An outright sale would eliminate the annual General Fund transfer (with the associated reduction in time demands of City management and support staff). • Transferring ownership of the system to the private sector would be potentially a permanent action. Reestablishing ownership in the future, for whatever motivating reason, would be very costly (most likely through eminent domain) time consuming, and possibly legally infeasible. • A privatization of the water system through asset sale would require approval by City voters. Economic Potential through Sale Privatization Privatizing the Tustin system through a sale to the private sector will result in selected increased costs. These result from a rate of return on invested capital or rate base (profit) and taxes including both federal and state income tax. Based on a rate of return of 10 percent of rate base (which approximates the overall rate of return on rate base recently granted by the PUC in recent rate cases) the annual profit cost on a $30 million rate base would amount to $3 million. But this rate of return must be a net amount received by the utility after taxes which (based on an estimated 45 percent state and federal combined income tax bracket) results in an estimated increased revenue requirement of about $5.5 million. Added to this would be an unknown amount of annual property taxes to be paid by the company (net of that portion of property taxes which flows to the City General Fund) These costs would need to be offset by reduced operating costs through increased economy of scale, greater worker productivity and other means. However reviewing the conclusions reached in Section 5 through financial benchmarking with the private sector and other public agencies indicate Tustin is performing well financially NCI is unable to identify significant potential cost savings which might result from a sale privatization. N AVIGANT CONSULTING, INC. 8 -12 SECTION 8 PRIVATIZATION OPPORTUNITIES PRIVATIZATION THROUGH LONG -TERM LEASE AGREEMENT A second major alternative to consider for potential privatization of the Tustin water system is through the use of a long -term lease agreement concession awarded to a qualified water utility operator This approach is less permanent than an outright sale of the system, but continues to represent a major commitment by the City for privatization. As discussed in Section 7 the cities of Cupertino and Hawthorne represent privatization projects developed through this approach. However in both of these referenced projects, the primary motivating causes to privatize through long -term lease concessions are significantly different than potentially exist for the Tustin system. In the case of Cupertino, the primary reasons for a long -term privatization contract were the system's small size (approximately one -third the size of the Tustin system in terms of the number of connections), lack of staff expertise and personnel, and the potential of adding the system to an adjacent larger system providing for system redundancy and backup supplies without incurring capital expenditures. Cupertino also believed that a greater economic return could be realized from the water system asset through a long -term privatization concession. As previously described, a proposal from San Jose Waterworks (SJWW) was eventually accepted which provided the City with an up -front payment of $6.8 million for the exclusive right to operate and receive revenues for a period of 25 years. However rates, on the average, were allowed to increase for existing city customers following the privatization by 20 percent over a three -year period to eventually equal the existing SJWW tariffs in the adjacent regulated service area. In a similar long -term lease concession of the City of Hawthorne system to California Water Service Company for a 15 -year period, the total present worth of the contract is estimated to be slightly over $7 4 million. It is believed that the primary motivating reason for the City to enter into this long -term lease agreement was the financial inability of the City to provide for the pending need of substantial infrastructure improvements. The execution of this lease concession agreement provided a mechanism to collateralize future revenues of the water system, thereby providing for needed CIP capital. This alternative has a very strong potential for being a favorable privatization approach. Benefits appear to include the following: • No vote by the system customers appears to be needed, but only a resolution by the City Council. • A substantial cash payment may be received up -front which may be close to (or in the case of Cupertino exceed) the fair market value without transferring title to the system. • The City eventually receives the system back. • The City continues to monitor the system management and operation, has some authority over rates, and can enforce changes in the case of bad management. N AVIGANT CONSULTING, INC. 8 -13 SECTION 8 PRIVATIZATION OPPORTUNITIES • Maintaining system ownership negates having to regain ownership in the system in the future, for whatever unforeseen need; avoiding uncertainty lengthy time requirements, and a very high cost. On the other hand, several disadvantages are believed to be potentially attached to this alternative They are as follows. • If an operator chosen by the City provides unacceptable service or system management, it would be very difficult to either make a change or reestablish municipal management until the end of the contract term. • Depending on which party has the cost responsibility for making capital improvements, the potential exists for the system to be returned in a state of condition requiring substantial infrastructure improvements. • Future water rate increase requests will not be under the jurisdiction or evaluation protocol of the California Public Utilities Commission. Therefore, the City will have the responsibility to approve or disapprove future rate increase requests. Other lease agreement models in the state provide for binding arbitration if agreement cannot be reached on rate proposals. If the Tustin system is leased under a long -term lease agreement, there would at least be a potential of future contentious rate proceedings with the result of binding arbitration. • If a qualified operator is not chosen for a long -term lease concession, substantial deferred maintenance at the end of the lease term may result. Without specific proposals from potential private operators, it is very speculative to estimate any potential savings from a long -term lease concession. The specific terms of any proposed lease concession agreement would depend on many factors such as the term of the lease, the current and anticipated future rate levels, the sources and responsibilities for capital improvements, the number and amount of operating expenses to be reimbursed by the City the mandatory retention of current municipal employees, and many other factors. Contractor lease payments (either annually or in lump sum) would be determined by the bidder based on the present value of anticipated future savings resulting from privatization. Theoretically if significant savings cannot be achieved by a private operator compared to municipal experience, the value of the least payments offered can be expected to be minimal. Based on the results of the water system financial performance evaluation as presented in Section 5, it is infeasible to project substantial economic savings from privatization through a long -term lease agreement. Substantial potential savings to be realized are particularly doubtful when viewing the total O &M expense per 1,000 gallons delivered (Figure 5 -11) and per customer (Figure- 5 -10), payroll cost as a percent of O &M expense (Figure 5 -15) and per employee (Figure 5 -16) and transmission and distribution expenses plus administrative and general expenses as percents of revenues (Figures 5 -17 and 5 -18). Taken together these financial performance benchmarking parameters suggest the Tustin system is performing well against a peer group including the private sector NAVIGANT CONSULTING, INC. 8 -14 SECTION 8 PRIVATIZATION OPPORTUNITIES However as presented in Section 4 the Tustin system is not performing from an operation and management standpoint to the level expected for a utility of this size. Privatization could present an alternative solution to these deficiencies which could be implemented through an annual operating agreement. Accordingly NCI does not recommend the City implement a lease concession at this time NAVIGANT CONSULTING, INC. 8 -15 SECTION 8 PRIVATIZATION OPPORTUNITIES PRIVATIZATION THROUGH ANNUAL O &M CONTRACT A third major alternative to consider for potential privatization of the Tustin water system is through the use of an annual operation and maintenance (O &M) contract awarded to a qualified water utility operator This approach continues to represent a significant commitment by the City for privatization of its water utility operations, and provides significantly more flexibility in reversing a commitment to privatize than either an outright sale or long -term lease concession. As discussed in Section 7 the City of Bakersfield represents a privatization project through this approach which can be modeled for potential implementation of an annual contract for operation of the Tustin system by the private sector Advantages of privatizing through an annual operating agreement (which could contain a multi -year term) include the following • An annual O &M contract would eliminate most of the current responsibility of the City for daily management of the water system including operation, maintenance, and customer service. • An annual contract would share some of the City's risk liability in operating a water system. • Privatizing the system through this approach would eliminate any obligations and problems associated with human resources. • Based on this study's water management review as presented in Section 4 a transfer of the water system to a qualified regulated operator would solve most of the current management deficiencies identified. No vote by the system customers appears to be needed, but only a decision by the City Council. • The City would continue to monitor the system management and operation, with authority over rates, and could enforce changes in the case of bad management. Privatization through this approach, if it proves unsuccessful in the view of the City could be reversed to municipal operation and maintenance in only a few years, as opposed to more permanent approaches requiring a longer term, potentially over many years, to reverse. As with the other approaches, there are also several disadvantages believed to be potentially attached to this alternative They include the following. • If a qualified operator is not chosen for an annual operating agreement which may last for several years, substantial deferred maintenance at the end of the lease term may result. • Privatizing the Tustin water system with the potential release of many current employees who are trained and experienced in operating the Tustin system could be a loss of valuable human resources if the City were to later municipalize the Water Department having the need to re -hire new employees without long -term experience and background with the City's system. NAVIGANT CONSULTING, INC. 8-16 1 SECTION 8 PRIVATIZATION OPPORTUNITIES 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Although it is difficult to project potential savings from an annual operation and maintenance contract from the private sector without having specific proposals to evaluate, it is possible to derive some feasibility insight by applying the terms of the Bakersfield contract to a potential Tustin project. As discussed in Section 7 Bakersfield currently pays a monthly fee of just under $8 per connection per month (regardless of connection size) for the operations and maintenance contract. With total connections of about 13,738, the Tustin system would represent a comparable annual fee for operations and maintenance of approximately $1.32 million. As referenced above in Section 7 the private contractor is responsible for all normal expenses it incurs in operating and maintaining the Bakersfield system with the exception that the City pays directly certain expenses including: • Electric and gas power charges • Water supply purchases • Pumping assessment taxes Table 8 -2 presents operation and maintenance costs for the Tustin Water Department during the year 1997 -98. As shown, the total operation and maintenance expenses for Tustin during the year referenced was $4.58 million (not including administrative and general expenses compensated for through the General Fund transfer) Unlike the City of Bakersfield, Tustin incurs substantial treatment costs to bring produced groundwater to potable standards. Excluding the consideration of these incremental costs, the total expended for distribution, non- electric expense for pumping, and customer service amounts to $1 63 million, or approximately $300,000 greater than the Bakersfield contract model amount. Additionally a significant amount of the annual General Fund transfer in the amount of about $738,000 reimbursing general administration costs could be credited to the elimination of this responsibility as a result of a privatization contract. It is estimated that a cost for administration of a similar privatization operating agreement would not exceed $250,000 per year However it is also recognized that the City may find it difficult to experience a cost saving of the reduced need for a General Fund transfer unless associated staff responsible for these activities could redirect their efforts into other activities capable of cost allocation. NAVIGANT CONSULTING, INC. 8-17 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 8 PRIVATIZATION OPPORTUNITIES Table 8 -2 O &M Costs for Tustin Water Department 1997 1998 DISTRIBUTION Salaries $609,695 Benefits 172.057 Maintenance 147,942 Fuel /Vehicle Lease / Re•air 79,915 Facilit Re•air 13,881 Contract Services 20,243 Other Su• •lies /Services 59.925 Subtotal, Distribution $1,103,658 PUMPING Purchased Water $771,385 Electric 465,452 Other Su. dies/Services 95,001 Basin Re.lenishment 705,218 Subtotal, Pum • in. $2,037,056 TREATMENT General Su. dies/Services $25,658 IONIZATION Salaries /Benefits $20,998 Electric 35,295 Basin Re.lenishment 36,906 Other Sus dies/Services 25,815 REVERSE OSMOSIS Salaries /Benefits $20,345 Electric 62,181 Basin Re•lenishment 37,513 Other Su••lies /Services 12,470 17 STREET DESALTER Salaries /Benefits $76,313 Electric 252,106 Basin Re•lenishment 274,984 Chemicals 101,713 Other Su..lies /Services 24,211 Subtotal, Treatment $1,006,508 CUSTOMER SERVICE -1 -ri- As min P - sole $120,823 Salaries Meter Readin• 2 E.uivalent 87,701 Benefits 27,896 Insurance 53,181 E•ui.ment Purchases 24,155 Posta•e 36,254 Com•uter O.erations 51,814 Other Su. •tiers /Services 29,914 Subtotal, Customer Service $431,738 TOTAL, OPERATION AND MAINTENANCE $4,578,960 NAVIGANT CONSULTING, INC. 8 -18 SECTION 8 PRIVATIZATION OPPORTUNITIES Based upon the above comparison, it appears that it is at least conceptually feasible for the City to realize an economic savings from privatization of its water system through an annual operating agreement. However there are several factors to consider which would potentially diminish the amount of potential savings including• • The Bakersfield system is 60 percent larger than the Tustin system potentially reflecting a lower cost per connection. • The private contractor for the Bakersfield system is the owner /operator of a substantial number of connections located within the remainder of the City making access to the City's portion of service area within close proximity to manpower resources. • Tustin has significant water quality treatment requirements requiring substantial operation, maintenance, and management which may result in a higher per- connection charge than the Bakersfield system indicates. • Tustin is located in a more urbanized area with a higher cost of living than Bakersfield. Nevertheless, it appears that a privatization alternative through an annual O &M contract may provide economic savings to the City as well as provide other benefits which the City may wish to take advantage of. Implementing an annual O &M contract with a qualified contractor is estimated to cost on the order of $100,000 to initiate and complete. Requesting proposals to evaluate and consider would cost less depending on how far in the process the proposal were carried. NAVIGANT CONSULTING, INC. 8 -19 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 SECTION 8 PRIVATIZATION OPPORTUNITIES PRIVATIZATION THROUGH CONTRACTING OF INDIVIDUAL FUNCTIONS The final level of privatization options to consider by the City is to privatize individual functions associated with operation or management of the water system. Unless a city or agency is very large, it is common to privatize selected functions necessary to operate a water utility Functions which are commonly privatized by most agencies include water quality laboratory testing, and the use of consultants for either total or specific planning and design projects. Table 7 1 in Section 7 presents an overview of individual privatization contracts by function for California cities with populations between 25,000 and 130,000 As indicated, privatization contracts for these miscellaneous services are listed in the broader categories of Water Sources, Water Treatment, Distribution Main Maintenance, Meter Reading, Accounting, Billing or Collections, Public Information, or other contracts. The City of Tustin currently has a significant level of privatization contracts for specific functions which are presented in following Table 8 -3. Table 8 -3 City of Tustin Privatization Contracts —1997 1998 Function Cost Heav truck/s•ecial machiner use $58,000 Meter readin. 54,000 Laborator water •ualit 20,200 Cross - connection •ro.ram 2,400 En•ineerin• desi•n 439,600 Ma••in• 13,700 Construction mana•ement 17,000 A•.raisal services 13,300 SCADA s stem maintenance 6,200 Landsca.e maintenance 3 400 Total $627,800 As shown, total privatization contracts for individual functions total approximately $630,000 annually for the City in assisting with operation and management of its water system. Although it would be possible to request additional proposals for individual water system operation and management functions from the private sector it is highly questionable whether such an approach would result in significant cost savings. Large qualified water utility operators from the private sector have indicated to NCI that privatizing individual functions is not as attractive nor typically cost - efficient as privatizing the entire water system operation through an annual O &M contract. Further the results of the benchmarking analysis as presented above did not identify significant economic savings through privatization of individual functions. However if the City makes the decision to improve the performance of its Water Department operations and management through implementation of many of the recommendations made in this report (see Section 4), and not privatize the entire system through an annual O &M contract or other approach, then NCI recommends two specific functions be privatized until such time as NAVIGANT CONSULTING, INC. 8 -20 SECTION 8 PRIVATIZATION OPPORTUNITIES the Water Department under municipal management is capable of undertaking these functions following implementation of many of the other recommendations. On account of distribution system maintenance deficiencies, including regulatory directives by the SDHS to correct such deficiencies, it is recommended by NCI that the City privatize the function of valve exercising and hydrant maintenance It is envisioned that 50 percent of both total valves and hydrants could be maintained annually (i.e. total maintenance on a two -year schedule) Each of these functions are anticipated to require two -man crews to implement. Using the similar privatization contract for meter reading as an indication, it is projected that each function would require on the order of $55,000 to $60 000 annually to contract with the private sector It is possible that awarding both contracts to the same provider will result in a lower total cost. Hydrant flushing would still be a responsibility of the City to the extent it is needed or required. NAVIGANT CONSULTING, INC. 8-21 1 1 1 1 1 1 1 r 1 1 1 r 1 1 1 1 SECTION 8 PRIVATIZATION OPPORTUNITIES CONCLUSIONS AND RECOMMENDATIONS Based on the results of evaluating privatization opportunities for the City of Tustin Water Department, the following conclusions have been reached by NCI, followed by recommendations for the City to consider • It is estimated that the Tustin system would sell to a large national utility for an amount of about $30 million without increasing the projected rate base using historic depreciated costs. • Privatizing the Tustin system through an asset sale is anticipated to increase rates if a rate base established for the purchaser significantly exceeds the rate base based on historic costs. Consequently the City would not sell the system if a rate increase to its customers would result. NCI is unable to identify significant potential cost savings which might result from a sale privatization. • Based on the results of the water system financial performance evaluation, it is difficult to project significant economic savings from privatization through a long -term lease agreement. • It appears that an annual operating agreement is at least conceptually feasible for the City to realize an economic savings from privatization of its water system, as well as provide other benefits which the City may wish to take advantage of • The City currently incurs over $600,000 in privatization contracts. Based on benchmarking results, it is unlikely that privatizing additional individual specific functions would result in significant cost savings. • The City needs to consider privatizing valve and hydrant maintenance if it elects to not privatize the entire water system through an annual O &M contract to temporarily meet regulatory concerns and current maintenance practice deficiencies. Based on the audit review conducted by NCI, the Tustin Water Department is not performing in all respects from an operation and management standpoint to the level expected for a utility of this size. Privatization could present an alternative solution to these deficiencies which could be accomplished through an annual operating agreement. NCI recommends the City consider implementing one of two approaches. The first is to retain an experienced Utility Manager capable of implementing the management recommendations contained in this report, plus privatize the specific functions of valve and hydrant maintenance until the City operating personnel are capable of assuming this responsibility The second potential approach is to request proposals from qualified operators to privatize the system through an annual operations and maintenance contract. If the City makes a decision to implement a major privatization project with the water system, legal counsel must be obtained to assist in contract preparations, negotiations, and, in some cases, obtaining voter approval (e.g. totally selling the water system to a private buyer) It is anticipated legal assistance would be obtained in Phases II and III if the City proceeds further in privatization. N AVIGANT CONSULTING, INC. 8 -22 1 1 1 1 1 1 1 I 1 1 1 1 1 1 1 1 1 1 SECTION 8 PRIVATIZATION OPPORTUNITIES POTENTIAL PRIVATIZATION OPERATORS If the City makes a decision to explore or implement an annual operating agreement of the entire water system, or specific O &M functions (such as valve maintenance) as discussed above, the following list identifies qualified private water utility operators which may be considered to request a specific proposal from. Most of the privatization projects identified in Section 7 involved these operators. California- American Water Co California Water Service Co. Dominguez Water Corp. JMM Operational Services, Inc. Operation Management International, Inc. Park Water Co Southern California Water Co Southwest Water Co. In addition, although not a private contractor the City should include Irvine Ranch Water District among qualified operators for an RFP distribution. NAVIGANT CONSULTING, INC. 8 -23 1 1 N 1 1 1 1 1 1 1 1 1 1 1 1 1 1 APPENDICES TO REPORT FOR CITY OF TUSTIN PRIVATIZATION STUDY Appendix Title A Documents Reviewed or Referenced During Tustin Water System Management Investigation B Tustin Water Department organization chart C City of Fountain Valley Service Request Form (with Citizen Evaluation) and Service Request Water Survey Report — FY/1997 -98 D Selected Service Goals for City of Fountain Valley and Southern California Water Company E Department Operating Expenses, Debt Service and Income from Sales F Long -term Privatization Lease Agreements for cities of Cupertino and Hawthorne G City of Bakersfield Annual Operating Agreement H Proposed Settlement of Issues on Commission Proceeding to Set Rules and Provide Guidelines for Acquisitions and Mergers of Water Companies 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1' 1 1 APPENDIX A DOCUMENTS REVIEWED OR REFERENCED DURING TUSTIN WATER SYSTEM MANAGEMENT INVESTIGATION 1 1 1 1 1 1 1 1 1 i 1 1 1 1 1 1 1 APPENDIX A DOCUMENTS REVIEWED OR REFERENCED DURING TUSTIN WATER SYSTEM MANAGEMENT INVESTIGATION The following sections contain Lists of numbered documents which were either reviewed or referenced by B -E during the Water Department management investigation. The purpose of dividing the documents into sections (Engineering, Management, Financial, or Other) is for convenience only Documents may contain information under more than one section, but are listed in the area which is considered to be most reflective of the information contained. Included in this appendix are primarily reports and memorandums. Potentially not included are certain individual data sets or tables supplied by the City as part of this study WATER SYSTEM FOR ENGINEERING 1. Upgrade of Water Wells, Phase I Report, McDonald - Stephans, Engineers, Inc. October 1997 2. Water System Dynamic Hydraulic Network Analysis Model, AKM Consulting Engineers, June 1993. 3. Tustin Water Service Management Program, Phase II, Engineering Analysis and Capital Improvement Program, Boyle Engineering Corporation, March 1984. 4. Water System Storage Evaluation Study Summary of Recommendations, Daniel Boyle Engineering, Inc. October 1990. 5. Seven Year Capital Improvement Program, City of Tustin Water Services Division, ASL Consulting Engineers, April 1996. 6. Water System Inspection Report, City of Tustin Water System, State Department of Health Services, April 1998. Last pnnted 06/01/99 3 39 PM IV 0.#304102 1 \ \gle tat \voll\ group \tusbn pnsittzaton\ list of documents doc 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 APPENDIX A DOCUMENTS REVIEWED OR REFERENCED DURING TUSTIN WATER SYSTEM MANAGEMENT INVESTIGATION (Continued) 7 Minimum Design Standards for Public Works Improvements Constructed Within Public Rights of Way or Improvements to be Maintained with Public Funds, Resolution No. 81 -4, Exhibit A City of Tustin, July 1992. 8. City of Tustin Main Street Nitrate Removal Demonstration Plant, Operation Summary Monthly Reports for June, 1990 Through 1998. 9 City of Tustin Seventeenth Street Desalter, Operation Summary June 1997 and June 1998. 10. City of Tustin Water Service Backflow Inventory -1997 11. Tabulation of Vehicles and General Plant Tools and Equipment, Tustin Water Department, September 29 1998. 12. 1997 Annual Water Quality Report to Consumers, City of Tustin Water Services. 13 Map of Nitrate Activity and Well Locations Within Tustin Water Service Area. 14. Printout of Water System SCADA Monitor 15. Map of Tustin Water Service Division Pipe Network, May 1997 16. Summary of 1998 Service Orders, Pages 1 through 33. 17 Monthly and Annual Summaries of Groundwater Production and Imported Water Purchases for years 1989 -90 through 1997 -98. 18. Brochure, City of Tustin Seventeenth Street Desalter, Orange County Water District, no date. 19 City of Tustin Water Master Plan, Draft, ASL Consulting Engineers, February 1999 Last punted 06/01/99 3 39 PN1 W 0.#304102 2 \ \gle fsl \ Noll \gr up \tushn pmWuhan\ list ofdacuments.dor 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 APPENDIX A DOCUMENTS REVIEWED OR REFERENCED DURING TUSTIN WATER SYSTEM MANAGEMENT INVESTIGATION (Continued) MANAGEMENT REPORTS AND DOCUMENTS 1. Urban Water Management Plans, 1990 and 1995, Tustin Water Service. 2. Tustin Water Service Management Program, Phase I Final Report, Boyle Engineering Corporation, December 1982. 3. City of Tustin Emergency Plan, The Basic Plan, no date. 4. Final Report, Public Works Department Management Review for the City of Tustin, October 1990. 5 Groundwater Recovery Program Agreement for the Tustin Desalter Project, Including an Agreement Between Orange County Water District and City of Tustin for the Construction, Operation, and Acquisition of a Groundwater Desalter Project, and Joint Participation Agreement for Recovery and Utilization of Contaminated Groundwater Between MWD, the City of Tustin, and Other Agencies, December 1992. 6. Domestic Water Supply Permit, State Department of Health Services, February 1989 (Permit No. 04 -89 -001); and Permit Amendments (Including Attached Engineering Reports), Dated April 6, 1993; September 4, 1996; September 9, 1993; June 24, 1998, and August 11, 1998. 7 Integration Study Field Services /Water Services, Public Works Department, City of Tustin, WLC Architects, Inc. March 1998. 8. Draft Program, Tustin Water District Office and Service Yard Planning, The Hill Partnership, Inc. August 1991. 9 Public Works Department Organization Chart, City of Tustin, October 1996. 10. City of Tustin Public Works Department, Water Services Division Fact Sheet, November 1990. Last punted 06/01/99339 P41 W 04304102 3 \ \gle fsl\ volt \gr up \tushn pnsihzahon \hst of documents doc 1 1 1 1 1 1 r 1 1 1 1 1 1 r 1 1 1 1 1 APPENDIX A DOCUMENTS REVIEWED OR REFERENCED DURING TUSTIN WATER SYSTEM MANAGEMENT INVESTIGATION (Continued) 11. Citation for Noncompliance, Water System No. 3010046 (City of Tustin), State Department of Health Services, October 1998. 12. City of Tustin Employment Opportunity Job Flyers, Water Treatment Plant Operator No. 97- 28,1997 13 Internal Memorandum, February 18, 1998, City of Tustin, on the subject: Fair Labor Standards Act Exempt Status of Water Quality/Production Supervisor 14. Internal Memorandum, City of Tustin, dated May 21, 1997 Subject: Request for Additional Position, Water Treatment Plant Operator 15. City of Tustin Water Capital Improvement Program, Phase III Schedule, ASL Consulting Engineers, September 18, 1998. 16. Water Operations Monthly Activity Report (Maintenance /Operations, Water Quality/Production, CIP Activity Summary Engineering Services Projects, Capital Improvement Projects), June 1988 and Fiscal Year 1997 -98, dated July 22, 1998. 17 City of Tustin Nitrate Sampling Schedule indicating sampling locations and days of the week. 18. Letter dated August 12, 1996, from Greenwood & Son, Real Estate Investments, to the City of Tustin, regarding on -site metering and service. 19 Letter dated March 14, 1997 from Fireman s Fund Insurance Company to City of Tustin Water Service Division regarding a deficient water supply problem at Ricoh Electronics. 20 Letter dated April 2, 1997 from Park Tustin Condominium Owners Association to the City of Tustin Mayor regarding water service repairs, attached with a copy of a letter dated April10, 1997 from the Office of the City Council to Park Tustin Condominium Owners Association responding to water service repairs. Last pr nted 06/01/99 3 39 PM W 0.#304102 4 \ \gle fs1 \voll \gr up \tustm pnvitivton \lot of documents doc 1 1 1 1 1 1 1 1 1 1 1 1 1 r 1 1 1 1 1 APPENDIX A DOCUMENTS REVIEWED OR REFERENCED DURING TUSTIN WATER SYSTEM MANAGEMENT INVESTIGATION (Continued) 21. Letter dated April 3, 1997 from Mary Bryant to Water Services Manager regarding leak repairs and high bill amounts, attached with a reply letter dated June 4, 1997 from the City of Tustin to Mrs. Mary Bryant responding to the aforementioned letter FINANCIAL 1. Proposed Capital Improvement Program, City of Tustin, Fiscal Year 1998 -99 2. Program and Financial Plans for Fiscal Years 1996 -97 through 1998 -99, City of Tustin. 3. Comprehensive Annual Financial Reports for the Years Ended June 30, 1997 through 1998. 4. 2020 Master Plan Report for the Orange County Water District, Final Draft, November 1998. 5. Letter from Pat Meszaros of Municipal Water District of Orange County to John Zoraster of B -E, dated February 3, 1999 on Future Metropolitan Water Costs for Tustin. 6. Orange County Water Rate Survey 1997 MWDOC /OCWA. Last printed 06/01/993.39 PN1 W0 M3041 02 5 \ \gle fit \soI1 \gr up \tusnn pr iGnton\ list of documents doc 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 APPENDIX B TUSTIN WATER DEPARTMENT ORGANIZATION CHART MN a s a e On .. — n 0 MN 11 In r.. r ON N 0 0. 4) O. v 0 3 a 4) 1- q. 0 T • •r U 0 O N CO 0 01 3 fPUBLIC WORKS DEPARTMENT WATER SERVICES MANAGER SUPERVISOR SUPERVISOR PRODUCTION AND MAINTENANCE AND QUALITY CONSTRUCTION ■ � Lead Worker Plant Operators (3) Maintenance Worker 1 Maintenance Workers (5) Equipment Operators (2) WATER ENGINEER { FINANCE DEPARTMENT 1 SENIOR ACCOUNT CLERK (Account Clerks (2) 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 APPENDIX C CITY OF FOUNTAIN VALLEY SERVICE REQUEST FORM (WITH CITIZEN EVALUATION) AND SERVICE REQUEST WATER SURVEY REPORT FY/1997 -98 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 y CITY OF FOUNTAIN VALLEY 17312 SERVICE REQUEST FORM NAME: DATE: ADDRESS. TELEPHONE NO: (HOME) (WORK) RECEIVED BV- DEPARTMENT DEPARTMENT RESPONSIBLE: TELEPHONE: CLASSIFICATION NO: 1! Animal Control 13- Sidewalk Repair 21- Waterline Break 2- Curb/Gutter Repair 14 -A Traffic Signs/Painting 22 -A Water Meter Leak 3-A Disease Control 14 -8 Traffic Signals 22 -B Water Meter Cover/Box 3.8 Insect Control 15- Sprinklers 23- Water Pressure 3-C Rodent Control 16-A Street Cleaning 24-A Water Quality/Taste -Odor 4-• Flood Control Channel 16 -B Sidewalk Cleaning 24 -8 Water Quality/Color 5- Fire Hydrant 17- Street Repair 24-C Water Quality/Turbidity 6- Graffiti 18- Storm Drains 24 -D Water Quality /Organisms 7 -' Contract Services 19- Street Lighting 24 -E Water Quality /Other -Air 8- Medians 20-A Tree/Removal 25 -A Other/Water Turn On-Off 9- Parks 20-8 Tree/Roots 25 -B Other/Water Usage -Leak Test 10- Parkways 20 -C Tree/Trimming 25 -C OtherNegetation Overhang 11! Refuse Disposal/Pickup 20 -D Tree/Diseased 25 -D Other /Street Spills 12- Sewers/Manholes 20-E Tree/Storm Damage 25 -E Other /Miscellaneous *City to notify responsible agency, e.g., County of Orange, Refuse or Other Contractors DESCRIPTION OF REQUEST ACTION TAKEN. EMPLOYEE: SUPERVISOR: DATE: TIME: -Ei M-{E -a i-a-i-a NM —. na a-i -n ♦• — a-a-a- CITIZEN EVALUATION DETACH HERE 17 312 1. Was the person who received your request courteous and helpful to you? (Circle One) VERY SOMEWHAT SOMEWHAT VERY COURTEOUS COURTEOUS DISCOURTEOUS DISCOURTEOUS & HELPFUL & HELPFUL SATISFACTORY LITTLE HELP NO HELP 1 2 3 4 5 2. Was the person who responded to your request courteous and helpful to you? (Circle One) VERY SOMEWHAT SOMEWHAT VERY PLEASED PLEASED SATISFIED DISPLEASED DISPLEASED 1 2 3 4 5 3. Was your request handled In a timely manner? (Circle One) VERY SOMEWHAT SOMEWHAT VERY TIMELY TIMELY SATISFACTORY UNTIMELY UNTIMELY 3 1 2 4 5 4. In general, how pleased have you been with City services over the past year? (Circle One) VERY SOMEWHAT SOMEWHAT VERY PLEASED PLEASED SATISFIED DISPLEASED DISPLEASED 1 2 3 4 5 OTHER COMMENTS• L. /1-a -' 1 .. 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 R��CE REQi/ ��� �?Q .4`:1' 9 CITY OF FOUNTAIN VALLEY CIVIC CENTER (714)593-4400 4rMn7 -` a it /i '∎ h� ill 10200 SLATER AVE, P.O. BOX 8030, FOUNTAIN VALLEY CA 92728 -8030 FY/1997-98 SERVICE REQUEST WATER SURVEY REPORT ACTION EVALUATIONS RCVD FOLLOW UP CLASSIFICATION DESCRIPTION RECEIVED TAKEN POSITIVE NEGATIVE RE • UIRED FIRE HYDRANTS 5 5 1 0 0 WATER LINE BREAK 36 36 7 1 3 WATER METER BOX/COVER 26 26 9 0 1 WATER METER LEAK 213 220 74 0 6 WATER MISCELLANEOUS 19 18 2 0 0 WATER PRESSURE 43 43 16 0 0 WATER QTY /COLOR 4 4 0 0 0 WATER QTY /ODOR 15 15 6 0 1 WATER QTY /OTHER- AIR/SAND 17 17 3 0 1 WATER QTY/TASTE 9 9 3 0 0 WATER TURN ON /OFF 70 70 13 0 0 WATER USAGE/LEAK TEST 102 102 20 0 1 SUMMARY FOR FY/1997 -98 559 565 154 1 13 ti ttr c 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 APPENDIX D SELECTED SERVICE GOALS FOR CITY OF FOUNTAIN VALLEY AND SOUTHERN CALIFORNIA WATER COMPANY 00S`Z 001 1 00L'b tiolaejsfles 1a8png 66-8661 00S `Z 001'1 001'6 tiolaelspes la2png 86-1661 00S`Z 005`Z S£Z'1 001'1 £ 099'p 00L`6 tiolaelslles tiolaeJslles 1 palewlls3 slenl3V L6-9661 96-S661 mama}, aauewaglaad sUwll alepdoidde u19Um 11eJ (3 d y) mop amid a!gdoiloJalay pus *Aesop uollaaJulslp iol sisal 901 0oS`Z suwil alepdoidde ui9um 1lei *Aesop apuong aol sisal gel 001 1 £ •sprepuels laaw suolleulwexa 61[lenb Salem 00L'yjo %66 Z 'saa!Mas typal{ allgndlo IUawPedaO awls „ICJolaeJsiles„ jo suoilejado walsis .ialem JOJ 8u11tJ lenuue ue U!spinj eualiO a3uewao.pad S566S '8I311111fftsl INV)IDOJld imathaunnans a3,LVM Zl'3OVNVW F'b`JOlid m;unaanO jo aa�� pus *mewled s� 'slueuiweluoa leg} 'sprepuels (Vda) £auaSy uoilaaloid IeIU*wuoJIAUH Amlaaw 'nalem Apienb -9Ai9 £lddns aaleM - fpaOM alignd .1.N31N.L21VdaO ,LN3W.LV311.L V Ain vas) 113.LVM '3'1111 I41VIIDOZId WVNlx>ad AHTIVA wv.wnod do £113 11111 111111 MN MI M I S _ 11_ MI MI 111111 r ISM OZZ OOZ 00Z 061 06I p 0SZ OSZ SPZ 0bZ £ 008'1 008'1 SZL'! 8ZL'I Z 009'91 009'91 099'1 005'91 1 ja8pn8 Iaapn8 palewlls3 slen)ay 66-8661 86-L661 L6-9661 96-S661 mawAaa aauewaopad smoy hZ upipm panlosat silea aoustsisse Jawo)snj p Asp Auh$Jom auo wytlm pawgpad Shea asnoH £ 'Cep Auppom auo ulytlm passaaoid stsanbaj jjo /uO z .a)ei Amnon "/ %S6 a gum Xly)uow- 1q peai sJataw 009'91 1 tp311pO aauswaoiaad 9S66S 'IME114111N1111V110011d ZN3CDOLLSIM IIS H3.LVM Tf3DVM+YV INV21DOad I 'ata 'Aural 'spiq.1a)em 4R!q 'AWL' 'ainssajd ,Qilenb Ja)em jo s)uieldwoa Rw)aaJJoa pue sawnbu! isiauaR Aupamsue 'sillq 'alum tuanbwlap jo uoi)aalloa ')sanba, uo saawas Auuo)sat pus 8upaauuoasip o) pa)elaJ se sJawotsna latent o) aapuas anlsuodsat pue snoaunoa apinoid .ia1e,N - SIIJoM allgnd .LN3JSLLNVdao 331A113S 1i3WO,LS(13 N3.LVM '31111 LW)IDO11d AVIIAwIAO WVVX)Nd AII'I'IVA W VLN(IC)� d0 A,1.13 Sin MI M — _ _ MI MI NI S MI 0 0 NM aza %SL %SL %SL %S' I. £ 1' 0 01 b Z %S6 %S6 %S8 %S6 1 laSpng Ia2png papetups3 gunny 66-8661 86-L661 L6-9661 96-S661 Ma1Aaa aauewaojaad /WM JO- nan -ul Suipnloul 's11am woJJ Salem AHD 3o (laulsip JaleM Aluno3 aSueio Aq las su Jo) %SL aanpoid 'Jalem (mpg pun pm uaamlaq lsoa SupleJad° mono! ayl welg0 )laam auo mil ia8uo1 9uilsel sawn.; Suwdwnd uo snedai Jofew palnpayasun (b) ino3 UB)ll WOW 20N 'WOW JO %05 aq of a8eiols JIOA)3Saa wnwitgpq £ Z 1 eua40 aauewaojJad .siasn 01 ales luaio ja Ism ism 28 Anon putt a.Inssaid Jo eualin paysggelsa uiyllm Aliluenb luaiawns u! uollnqulslp Jot.Ialem algelod Alddns LS66S 'i13gkNf1N INV110011d aa)eM - s1JoM 3119nd .LNHW.LNVd34 .LN3Q■3.I.N1113dflS113.1.VM 2I3DVNVW WVIIDObd SNOLLV213dO NOI.10110ONd ZI3LVM •31111. 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Provide service in the most cost - effective manner, utilizing productivity measurements and budget and cost controls. • 1 •. 2. Aesthetically Pleasing Water a. Receive fewer than one (1) complaint per month per 10,000 services regarding quality, taste or odor b. Evaluate any two (2) or more complaints in the same vicinity of a system through respective District Engineer 3. Availability of Company to Customer (Phone /Person) a. Answer 80% of all customer calls within 40 seconds. b. Answer 95% of all customer calls. c. Evaluate location of Customer Service offices and payment stations in relation to service area and accessibility to customers. d. Solicit input from local area customers in establishing extended office hours with a minimum hours of operation from 8:00 a.m. to 5:00 p.m. Monday through Friday e. Maintain 24 -hour per day phone availability of Company to customers through Company- staffed phone center f Complete /satisfy 85% of all customer calls on the initial call. 4. Response to Repairs and Leaks a. Investigate all leak calls personally by a Company employee immediately b. Repair immediately any leak where property damage is occurring, a hazardous condition exists or substantial water loss is being experienced. c. Repair any leak at the latest, the next regular business day 5. Response to Customer Complaints a. Finalize the Company's resolution of the complaint within five (5) working days. b. Achieve a reduction annually in total customer complaints. c. Investigate water quality complaints the same day they are received. d. Investigate all complaints within 24 hours. e. Keep all appointments within four (4) hour window of set appointment time. f. Receive zero CPUC Customer Informal Complaints. 6. Response to Customer Inquiries a. Have appropriate person return call by end of next business day if Customer Service Representative cannot answer inquiry at the time of the call. rev 101594 C1 LEVEL ¶7 PRIORITIES us omer 'equremen s, ee• a • C a ions 7 Turn -on— Turn -off Response a. Respond within 24 hours if possible, but no later than 48 hours per SCWC Tariff Rule 11, Section C. b. Keep all appointments within four (4) hour window of set appointment time. 8. Meter Reading and Billing Accuracy and Timeliness a. Read meters without prorating per SCWC Tariff Rule 9, Section 3. b. Reread all meters falling outside of high/low range. c. Send bill out within three (3) working days after meter is read. d. Estimate meter for no more than two (2) consecutive readings. e. Send explanation letter with bill or make telephone contact for all readings outside of high/low range. 9. Collections a. Maintain Percent Aging list (for accounts receivable older than 30 days) divided by Company Revenue percent, equal to or less than 1.0. b. Maintain overall Company average cost per customer on aging list (for accounts receivable older than 30 days) at less than 28 cents ($0.28). c. Maintain uncollectible accounts at less than 40% of total revenue. 10. Customer Conservation a. Promote cost - effective customer conservation programs. 11 Communication programs with customers a. Maintain a public information program in each service area. b. Obtain customer feedback on performance throughout the year 12. Professional Image of Employees, Offices, Facilities, Equipment and Vehicles a. Adhere to standards established in the employee dress /cleanliness code. b. Maintain a 'maintenance plan (including record of painting, cleaning, weeding, etc.) at each facility /office. Routinely inspect those items of particular importance to 'image' as seen by customers /residents. Maintain a checklist of such items in each district office. c. Keep all vehicles clean and maintained per manufacturer's specifications. rev.101594 C.2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 APPENDIX E DEPARTMENT OPERATING EXPENSES, DEBT SERVICE AND INCOME FROM SALES la)selOZ Wd 80'4 00/1/7 90 10009 V JO 1 9604 olgel 00109111 50500(19.1 'minis 100166 0!0)003)5 o1cj :olij u0gezlpnud 1113501\ r 94 /'Z 369'3 9E2'L 991'3 tle'L 769'3 6E9'Z BBL'[ 16E9'Z L29'Z 9C4'Z L992 OC9'Z O6C3 EPE'Z L6Z'Z 34Z'Z 903'3 Gig Z ZZL'Z LBO'Z O40'Z 000'3 000.Z 919'1 OL06 9906 691'1 I 1.91'L I61.1'1 L60'L 910'1 PSO•L 4E0'1. 410'1 966 916 996 91C 9L6 006 006 619 osuad93 096'096 1 900396 1929'C36 92L'CL 1690'CL 96[01 L6P'PL 1 3L2'91 , P961C1 L94'Z 9ES'Z I L29'2. BENZ 939'906 1 691'189 3991019 963'C99 19C6'31 1 399'31 9E9'3 t 061'31 1 099'CL I E6E1E1. 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/0003 00/66 66 /96 96-16 16-96 96-56 posy 00100 and (5120A leasld leouole1H uogduosaa eavuag lga0 •uµs(x3 I I I I Si I 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 APPENDIX F LONG -TERM PRIVATIZATION LEASE AGREEMENTS FOR CITIES OF CUPERTINO AND HAWTHORNE r 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 AGREEMENT FOR LEASE OF REAL PROPERTY (WATER SYSTEM) THIS AGREEMENT FOR LEASE OF REAL PROPERTY (WATER SYSTEM) ( "Lease ") is entered into as of October 1, 1997, between the CITY OF CUPERTINO, (hereinafter referred to as "City"), and SAN JOSE WATER COMPANY, a California corporation ( "Lessee "). WITNESSETH. WHEREAS, City provides water service to approximately 4200 metered customers in the service area described in Exhibit A attached hereto (as such service area may change from time to time in accordance with this Lease, the "Service Area"); and WHEREAS, City is the owner of certain real property, easements and rights of way and those certain pipes, mains, pumps and appurtenant facilities (including without limitation buildings, pump houses, sheds and other structures) constituting all of City's water system (the "Water System") within the Service Area and more specifically described in Exhibit B attached hereto; and WHEREAS, City desires to lease the Water System to Lessee, and Lessee desires to lease the Water System from City, for the period and upon the other terms and conditions set forth herein; AGREEMENT NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein and for good and valuable consideration, the receipt and adequacy of which the parties hereby acknowledge, City and Lessee hereby agree as follows: Section 1 Lease of Water System City hereby leases to Lessee, and Lessee hereby leases from City, the Water System as described on Exhibit B. The Water System is leased in an "as is" condition. Neither City nor any of its agents has made any representation or warranties with respect to the Water System except as specifically set forth in this Lease. City agrees, however, to provide Lessee with copies of maps, drawings, plans and specifications of the present system, along with customer service and account records in a form agreeable to both parties, all at least thirty (30) days prior to the Closing Date defined below Lessee agrees to use its best efforts keep all customer information confidential, whether received from City or developed during the Term of the Lease. Section 5. Concession Fee. As partial consideration for this Lease, Lessee agrees to pay the City a one time concession fee (the "Concession Fee ") of $ 6.8 million upon the execution of this Lease. The Concession fee is not a security deposit and is not refundable. Section 6. Base Rent. As additional consideration, Lessee agrees to pay to City as annual rental (hereinafter called the "Base Rental ") for the use of the Water System, the sum of $1.00 /year. The Base Rental shall be paid to City on the basis of City's fiscal year which commences July 1st and ends on June 30th. Section 7 Operation of Water System A. Repair. Maintenance and Operation. Lessee shall at its own expense throughout the Term of this Lease, undertake any utility plant addition, betterment, replacement, improvement, repair and perform routine and emergency maintenance of the Water System in accordance with customary utility practices and shall operate the Water System and pay all costs and expenses of operating the same (including the costs of all utilities, plant improvements, water and all public charges, taxes and assessments of any nature whatsoever), it being understood and agreed that City shall be under no obligation to pay any cost or expense of any kind or character in connection with or related to the management, operation, improvement, repair or maintenance of the Water System during the Term of this Lease. B. Customer Services Obligations: rendering monthly or bi- monthly bills to all customers receiving water service in the Service Area payment processing; responding to customer inquiries on water service, bills, leaks or other concerns; collecting bills; processing applications for new or transfer of service; collection of customer deposits for new service; collection of construction meter deposits; and investigation of customer complaints. C. Emergency Service Obligations: maintaining twenty-four (24) hour on-call response to emergency calls or customer inquiries; providing an emergency or natural disaster operations plan; maintaining an emergency communications system; providing or having access to equipment required to perform emergency repair work to vital system equipment and water mains; including evaluating and if necessary providing emergency diesel powered back up generator at critical pumping stations. D. Water Oualitv Testing Obligations: performing, or causing to be performed, by a State of California certified laboratory, any and all water sampling, analysis, testing and reporting as required for water sources, distribution mains or customer premises, testing and reporting as required for water sources, distribution mains or customer premises, by the U.S. Environmental Protection Agency, State of California Department 3 Utilities Commission approved rates in similar, nearby municipalities. Lessee may ask City to approve increases in rates from time to time. City shall act on all requests for rate increases within sixty (60) days of receipt of the request. In cases of natural disaster, other emergencies or acts of God, City recognizes that extraordinary rate relief on an expedited basis may be necessary and City agrees to expeditiously approve any such reasonably requested rate relief. In the event City does not act on any requested rate relief either within the 60 day period or on a expedited basis, as the case may be, and such rate relief is subsequently approved or ordered, the water rates and charges shall be adjusted to subsequently recover from customers over a reasonable period of time such amounts as are necessary to place Lessee in the same position it would have been had the rates been in effect from and after the end of such 60 day period. Not withstanding the foregoing, Lessee may upon written notice to the City, pass through to customers in the Service Area in a manner substantially similar to that permitted by the Califomia Public Utilities Commission any increase or decrease in the cost of water or power (to the extent not already reflected in rates), as well as any new City imposed fees, charges, taxes, License or permit fees, so long as Lessee promptly passes through in a manner substantially similar to that permitted by the California Public Utilities Commission any decreases in water or power costs. Lessee shall, at City's request, provide City with any information which may reasonably request documenting any changes up or down in the cost of water or power. Lessee may also impose conservation or rationing penalties on those customers exceeding their allocations, in the event of mandatory water rationing involving penalties imposed by the Santa Clara Valley Water District. In the event, that rates or surcharges are reduced by order of the P.U.0 or voluntarily by Lessee in areas of the City, other than in the Service Area of the Lease, the Lessee shall forthwith reduce its rates or surcharges within the Service Area of the Lease by the same percentage. A. Phase -in Rate and Structure Should Lessee's rates and charges be higher than that of City's at the time of Closing Date, Lessee will perform a conversion of rate structure and phase -in rates and charges over a three year period as follows. (1) Rate Structure Conversion. Beginning in January 1998 Lessee will convert the City's inverted rate structure to Lessee's rates by taking the revenue generated by the rates excluding charges and other revenue and computing an equivalent rate that would generate the same amount of revenue. (2) Phase -in Period. Beginning in January 1998 Lessee will have new rates and charges established by computing the differences between revenue generated using 5 rules of the American Arbitration Association or such other association as selected by the Presiding Judge of the Santa Clara County Superior Court, State of California. Section 10 Water Supply. Lessee will perform and honor all water supply contracts executed by City and presented to Lessee prior to the Closing Date. Any bills or invoices received by the City pursuant to such contracts for water delivered after the closing Date shall be promptly forwarded to Lessee for payment. Lessee has no right to terminate any such contract or to renew any such contract for more than 12 months without the express written permission of the City If assignment or transfer of any water right or contract is deemed necessary by either Lessee or City, City will cooperate with Lessee in completing such assignment or transfer for the duration of the Lease. Lessee shall not modify or take water supply wells out of permanent service without the express written permission of the City's Director of Public Works. Section 11. Customer Billing and Collections. A. Lessee shall bill and collect from customers receiving water through the Water System on the basis of the rates approved by City pursuant to Section 8, as adjusted for any pass - through adjustments permitted or required by the provisions of Section 8, and shall own, keep and retain all proceeds from such collections as the sole property of Lessee. Lessee shall propose payment and credit rules substantially similar to those imposed by Lessee in similar adjacent localities, and more particularly to customers served by Lessee in other parts of the City, with such modifications as City approves, and City shall approve such rates if they are reasonable and comply with all provisions of law applicable to municipality owned water systems. Any amendments thereto shall be submitted to City for approval. Lessee reserves the right to bill each customer on a monthly or bi- monthly basis, in the discretion of Lessee. B. To the extent required by law, Lessee shall bill ant collect on behalf of City from customers receiving water through the Water System any additional amounts which City may assess as a utility user's tax on such customers and shall promptly pay all such amounts to City C. City agrees to cooperate with Lessee in collection of unpaid/delinquent accounts. In doing so, City shall not be obligated to pursue collection on behalf of the Lessee of any such amounts unpaid by customers. D. Transition Periods: the meters of all customers in the Service Area shall be read (jointly unless City and Lessee agree otherwise) in accordance with the schedules set by both the City and Lessee. All monies received by either City or Lessee pertaining to 7 D. All insurance shall be effected under policies issued by insurers of recognized responsibility, licensed or permitted to do business in the State of California and reasonably acceptable to City E. Al! policies of insurance issued by the respective insurers shall provide that such policies shall not be canceled or materially changed without at least thirty (30) days' prior written notice to Lessee and to City Copies of such policies shall be deposited with City, together with appropriate evidence of payment of the premiums therefor, prior to the Closing Date. Copies of all renewed or new policies, together with evidence of payment, shall likewise be deposited with City prior to expiration dates of expiring or non - renewed policies. F The limits of insurance required by this Lease or as carried by Lessee shall not limit the liability of Lessee nor relieve Lessee of any obligation hereunder. G. Lessee shall cause each insurance policy obtained by it to provide that the insurance company waives all rights of recovery by way of subrogation against City in connection with any damage covered by any policy Section 13. Liens and encumbrances. City agrees to keep the Water System and Groundwater free and clear of all liens, security interests and encumbrances except for those consented to by Lessee. Lessee agrees to keep the Water System and Groundwater free and clear of all liens, security interests and encumbrances, except for those consented to by the City Section 14 Surrender Unon Expiration or Termination Upon expiration or termination of this Lease, Lessee agrees that it q all surrender to City the Water System in good order and condition and in a state of repair that is consistent with prudent use and maintenance in accordance with customary utility standards. Section 15. Default and Remedies. A. The occurrence of any of the following shall constitute a default by Lessee: (1) If Lessee fails to make any payment to City or to any third party required by this Lease as and when due, or to obtain and maintain any insurance required by this Lease, where such failure continues for ten days following receipt of written notice from City specifying the failure; (2) If Lessee fails to perform any of its other covenants or agreements herein contained, where such failure continues for thirty days following receipt of written notice from City specifying the failure; 9 this Lease. Lessee shall pay to City the rent due under this Lease on the dates the rent is due, less the rent City receives from any reletting. No act by City allowed by this section shall terminate this Lease unless City notifies Lessee that City elects to terminate this Lease. (2) Termination of Lessee's Right to Possession. In the event of a default by Lessee, during the continuance of the default and for so long thereafter as any damages or other sums payable by Lessee in connection with such default remain unpaid, City can terminate Lessee's right to possession of the Water System and the Groundwater at any time. No act by City other than giving formal written notice to Lessee shall terminate this Lease. Acts of maintenance, efforts to relet the Water System and the Groundwater or the appointment of a receiver on City's initiative to protect City's interest under this Lease (other than the appointment of a receiver to perform all of Lessee's obligations hereunder) shall not constitute a termination of Lessee's right to possession. On termination, City has the right to recover from Lessee any amount necessary to compensate City for all detriment proximately caused by Lessee's default. (3) Citv's Right to Cure Lessee's Default. City, at any time after Lessee commits a default, can cure the default at Lessee's cost.. If City, at any time, by reason of Lessee's default, pays any sum or does any act that requires the payment of any sum, the sum paid by City shall be due immediately from Lessee to City at the time the sum is paid, and if paid at a later date shall bear interest at the maximum rate an individual is permitted by law to charge from the date the sum is paid by City until City is reimbursed by Lessee. The sum, together with interest on it, shall be additional rent. E. Notwithstanding any provision of this Section 16 to the contrary, if a default or failure to perform by Lessee poses a threat to public health or safety, City shall so notify Lessee, and if Lessee fails to take corrective action within the time specified in such notice, City may enter the Water System and take all necessary action at Lessee's expense. Lessee shall promptly reimburse City for its costs. Section 16. Assignment. Lessee agrees not to assign this Lease or sublet the Water System or any portion thereof without the consent of City, which consent shall not be unreasonably withheld; provided, however, that City's consent shall not be required in connection with any assignment by Lessee of all of its rights and obligations hereunder to an affiliated company which is controlled by, controls, or under common control with Lessee. Section 17 Discharge of Liens Lessee agrees to pay and discharge all claims for materials, parts, labor, water, power and other consumables and supplies furnished at Lessee's instance or request upon or to the Water System and to keep the Water System free and clear of all liens resulting from such claims. City agrees to pay and discharge all claims and obligations for 11 Lessee: San Jose Water Company 374 West Santa Clara Street San Jose CA 95196 or at such other address as either party shall later designate for such purpose by written notice to the other party Mailed notice shall be deemed given on the date of delivery shown on the receipt card. Section 21. Waiver The waiver by City of any breach by Lessee of any term, covenant or condition hereof shall not operate as a waiver of any subsequent breach of the same or any other term, covenant or condition hereof. The waiver by Lessee of any breach by City of any tern, covenant or condition hereof shall not operate as a waiver of any subsequent breach of the same or any other term, covenant or condition hereof. Section 22. Representation City hereby represents and warrants to Lessee that the City owns the Water System free and clear of any and all liens, security interests and encumbrances. Section 23. Nondiscrimination. Lessee covenants by and for itself, its officers and assigns, and all persons claiming under or through it, and this Lease is made and accepted upon and subject to the following conditions: that there shall be no discrimination against or segregation of any person or group of persons, on account of sex, race, color, creed, national origin, ancestry, religion, citizenship status, age, marital status, medical condition, mental or physical disability, sexual orientation, veteran status or any other characteristic protected by federal or state law or local ordinance in the leasing, transferring, use, or enjoyment of the Water System nor shall Lessee itself, or any person claiming under or through it, establish or permit any such practice or practices of discrimination or segregation. Section 24. Counterparts This Lease may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, but all together shall constitute but one and the same Lease. 13 manner to the Water System or the Groundwater (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Water System or the Groundwater, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill or release of any Hazardous Substance or storage tank, now in effect or which may hereafter come into effect, and whether or not reflecting a change in policy from any previously existing policy Lessee shall notify City in writing (with copies of any documents involved) of any threatened or actual claim, notice, inquiry, citation, warning, complaint or report pertaining to or involving failure by Lessee, the Water System or the Groundwater to comply with any Applicable Law Section 31. Hazardous Substances. A. Lessee will not cause or permit to occur any release, generation, manufacture, storage, treatment, transportation, or disposal of Hazardous Substance (define below) on, in, under, or from the Water System or the Groundwater or any portion of it in violation of Applicable Laws. If Lessee does cause or permit any release or disposal of any Hazardous Substance on, in, or under the Water System or any portion of it, Lessee, at its own cost and expense, will immediately take such action as is necessary to detain the spread of and remove the Hazardous Substance to the complete satisfaction of City and other appropriate governmental authorities. Lessee shall promptly notify City of any release or disposal (of which Lessee has knowledge or becomes aware) of any Hazardous Substance on, in, under or from the Water System or the Groundwater. B. Lessee agrees to indemnify, defend (with counsel reasonably acceptable to City) and hold City and City's officers, agents and employees free and harmless from and against, all losses, liabilities, obligations, penalties, claims, litigation, demands, defenses, costs, judgments, suits, proceedings, damages (including consequential damages), disbursements or expenses of any kind (including attorneys' and experts' fees and expenses and fees and expenses incurred in investigating, defending, or prosecuting any litigation, claims, or proceeding) that may at any time be imposed upon, incurred by, asserted, or awarded against City in connection with or arising from or out of: (1) any Hazardous Substance, on, in, under, or affecting all or any portion of the Water System or the Groundwater, excluding any Hazardous Substance released, generated or disposed by City; (2) any breach of any covenant or agreement of Lessee contained or referred to in this section; (3) any violation or claim of violation by Lessee of any Applicable Law; or (4) the imposition of any lien for the recovery of any costs for environmental cleanup or other response costs relating to the release or threatened release 15 IN WITNESS WHEREOF the parties hereto have caused this Lease to be executed and attested by their proper officers thereunto duly authorized, and their official seals to be hereto affixed, as of the day and year first above written. ATTEST 41-n, r3xnc-k4 City Clerk CITY OF CUPERTINO LESSEE. SAN JOSE WATER COMPANY �cG - Arsi�c --T 17 Plosc AGREEMENT FOR LEASE, OPERATION MAINTENANCE OF REAL PROPERTY (WATER AND LEASE OF GROUNDWATER THIS AGREEMENT ( "Lease ") is made as of by and between the CITY OF HAWTHORNE ( "City"), a municipal corporation duly organized and existing under the laws of the State of California, and CAL!PORNIA WATER SERVICE COMPANY, a California corporation ( "Lessee "). WHEREAS, City provides water service to over 6,000 customers in the service area set forth on Exhibit A (the "Service Area"); and WHEREAS, City is the owner of a water system consisting of real property and facilities described on Exhibit B (the "Water System"); and WHEREAS, City has adjudicated rights to 1882 acre feet of groundwater annually under the amended judgment in California Water Service Company, et al, v City of Compton, et 4 Los Angeles County Superior Court Case No. 506,806 (the "Groundwater "); and WHEREAS, Lessee wishes to lease the Water System from City and to operate said system, and to pump the Groundwater for the purpose of furnishing water service to customers; NOW, THEREFORE, in consideration of the mutual promises and agreements herein contained, the parties hereto agree as follows: Section 1. Lease of_ at System_. City hereby leases to Lessee, and Lessee hereby leases from City, the Water System as described on Exhibit B. The Water System is leased in an "as is" condition. Neither City nor any of its agents has made any representation or warranties with respect to the Water System or the Groundwater except as specifically set forth lit this Lease. .. rt. • LJ JO 4.. - W .' ••.• emu. w ...- u. %AS an to 7o nc nrrrn rrma+ =e*.. • r '4 termination of the Lease meter readings shall be the property of the City All monies for services rendered and water sold after the Closing Date 'meter readings and through the expiration or termination of the Lease meter readings shall be the property of Lessee. Section 4. JJse, Subject to the provisions of this Lease, Lessee agrees to use the Water System and, to the extent permitted by applicable law, the Groundwater for the purpose of furnishing water service to customers. Lessee agrees to furnish water service to all customers in the Service Area in accordance with the applicable rules relating to service at all times during the Term of the Lease. Section 5. L .,ne S um Ferment. In consideration of this Lease, Lessee agrees to pay the City a lump sum (the "Lump Sum'') of six million five hundred fifteen thousand and two dollars ($6515,002.00) within 15 days of the Closing Date of this Lease. City agrees to promptly pay the West Basin Municipal Water District all amounts due and owing by City through the Closing Date out of the amounts received by City hereunder. The Lump Sum payment is not a security deposit. Section 6. Base Rent. Lessee agrees to pay to City as annual rental (hereinafter called the "Base Rental ") for the use of the Water System, the sum of one hundred thousand dollars ($100,00¢). The Base Rental shall be paid to City on the basis of City's fiscal year which commences July 1st and ends on June 30th. The Base Rental for any partial fiscal year shall be prorated on a daily basis. The first payment of Base Rental shall be paid within thirty (30) days from the Closing Date and shall be in an amount computed to the end of the then current month Thereafter, said payments of Base Rental shall be due and payable, for each fiscal year that this Lease is in effect, without demand, notice, deduction or offset, in equal monthly installments in advance on the first day of each month. Beginning on July 1, 1997, the Base Rental shall be increased or decreased each year on July 1 by the same percentage that Lessee's rates charged to customers served by the Water System 3 1% A a1 •w ✓•+. -- ..www.i. ,I•1a.i •■•■■ •.•wr •v • L. . reasons therefor. In determining reasonable rates and charges, City shall' consider all n relevant information, including the California Public Utilities Commission - approved rates for Lessee in similar, nearby municipalities. Lessee may ask City to approve increases in rates from time to time. City shall act on all requests for rate increases within 30 days of receipt of the request. In cases of natural disaster, other emergencies or acts of God, City recognizes that extraordinary rate relief on an expedited basis may be necessary and City agrees to expeditiously approve any such reasonably requested rate relief. In the event City does not act on any requested rate relief either within the 30 day period or on an expedited basis, as the case may be, and such rate relief is subsequently approved or ordered, the water rates and charges shall be adjusted to subsequently recover from customers over a reasonable period of time such amounts as are necessary to place Lessee in the same position it would have been in if the approved or ordered rates had been in effect from and after the end of such 30 day period or the date when such expedited approval should have been received. Notwithstanding the foregoing Lessee may .pass through to customers in the Service Area in a manner substantially similar to that permitted by the California Public Utilities Commission any increases in the cost of water or power (to the extent not already reflected in rates), as well as any new City - imposed fees, charges, taxes, license or permit fees, so long as Lessee promptly passes through in a manner substantially similar to that permitted by the California Public Utilities Commission any decreases in water or power costs. Lessee shall, at City's request, provide City with any information which it may reasonably request documenting any changes in the cost of water or power. Lessee may also impose conservation or rationing penalties on those customers exceeding their allocations, in the event of mandatory water rationing involving penalties imposed by the West Basin Municipal Water 5 an• 1J JO ♦1•cry • maintenance activities in accordance with customary utility practices, including, for example, repair of pipeline leaks, painting or coating of the interior or exterior of reservoirs, repair of defective meters, repair of pumps and controls, and similar items. B. Except in case of emergency, Lessee shall obtain prior approval of City before making Capital Improvements to the Water System. Lessee shall present a description of the proposed Capital Improvement(s), together with a statement of the purpose and need for it /them and the estimated costs thereof, to City for review City may approve the Capital Improvements) subject to such conditions, including costa, as Qty deems appropriate, and if in its sole judgment it /they are warranted for the continued operation of the Water System to serve customers in the Service Area in a safe manner or' to enable the Water System to be operated or the Groundwater to be used in compliance with all provisions of Applicable Law (defined in Section 31). Capital Improvements shall conform in all respects to City specifications and requirements for such work, and final plans and specifications shall be subject to approval by the Director of Public Works or his designee. Such Capital Improvements shall become part of the Water System and title shall vest in City immediately upon completion of construction. C. Lessee shall construct and install any Capital Improvements in accordance with all requirements, including, but not limited to, competitive bidding and prevailing wage rates, that would be applicable if City carried out the work'as a public improvement D. Lessee shall prepare and submit to City an annual report describing the Capital Improvement(s) constructed in each year, including the actual costs of each Capital Improvement and the total for the year. The report shall include such documentation of the costs as City may request. 7 r au payment (the `Periodic Payment'); and (iv) commencing on the first of the month next succeeding the date 90 days after expiration or termination of this Lease, and on the first of each month thereafter until the total amount of the Reimbursable Value, together with interest, has been paid, the City shall pay a sum equal to the Periodic Payment which shall be applied first to interest calculated as provided in Subsection (ii) above and then applied to reduction of pruicipai provided that the Qty shall have the option at any time, and front time to time, to accelerate said payments by making additional payments in reduction of principal or to prepay the entire remaining principal without penalty City pledges Water System revenues accruing. to City after the expiration or termination of this Lease as the source for repayment of this obligation and covenants to set the rates for water at a sufficient level to cover the reimbursements set forth in this Section; provided, however, that if at the expiration or termination of this Lease, City sells all or substantially all of the Water System and /or Groundwater or leases the Water System and /or Groundwater to a third party, Or shall apply the-net proceeds thereof toward prepayment of the Reimbursable Value due to Lessee Such reimbursements shall not be a debt of the City, nor a charge, lien or encumbrance, legal or equitable, upon any of its property or upon any of its income or receipts or revenues, other than the Water System revenues which have been pledged to the payment thereof as provided above. The provisions of this Section 10 F shall be specifically enforceable by Lessee, and shall survive the expiration or termination of this Lease. Section 11. Emp1oytes. Lessee agrees to offer to hire the current employees of City who work with the City Water System in comparable positions, at or above current total City compensation, including pay and benefits, as employees of Lessee and otherwise upon terns and conditions applicable to employees of Lessee in similar positions. Those employees who worked for Gty will be utilized to the maximum extent possible to provide service to the Hawthorne area and in any 9 JAN 18 96 14:08 97 ;444Ri:;a Prat- 701 ..rle• AD DO L1 W ••• .r• •■• r aft .— r• wasq...r ■••• —wa. V .IWJ L4.1W.JLMG1014∎44 iW L (3) Automobile (vehicle) liability insurance on an occurrence basis for bodily injury and /or property damage in a single limit amount of not less than one million dollars ($1,000,000). B. All policies of insurance shall contain an endorsement in favor of City and its officers, agents and employees listing them as additional insureds. C. The parties shall periodically review the insurance required hereby for the purpose of agreeing on increases in the minimum limits of such insurance, from time to time, to amounts which may be reasonable and customary for similar facilities of like size and operation. D. All insurance shall be effected under policies issued by insurers of recognized responsibility, licensed or permitted to do business in the State of California and reasonably acceptable to City. E. All policies of insurance issued by the respective insurers shall provide that such policies shall not be cancelled or materially changed without at least thirty (30) days' prior written notice to Lessee and to City Copies of such policies shall be deposited with City, together with appropriate evidence of payment of the premiums therefor, prior to the Closing Date. Copies of all renewed or new policies, together with evidence of payment, shall likewise be deposited with City prior to expiration dates of expiring or non - renewed policies. F The limits of insurance required by this Lease or as carried by Lessee shall not limit the liability of Lessee nor relieve Lessee of any obligation hereunder. G. Lessee shall cause each insurance policy obtained by it to provide that the insurance company waives all rights of recovery by way of subrogation against City in connection with any damage covered by any policy Section 13. liens and Encumbrances. City agrees to keep the Water System and Groundwater free and clear of all liens, security interests and encumbrances, 11 JOIN 7P 'R it no J 1-101 17 70 11` W •% .WV vl V • w VV Mtiwa A1../ 010 -NNI . V JfJJ.Jl...lf./{.1.J 1••W7..: . 1..M C 1 within 90 days); (c) if a trustee or receiver is appointed to take possession of substantially all of Lessee's assets or of Lessee's interest in this Lease and possession is not restored to Lessee within 60 days; or (d) if a writ of attachment or execution is levied on, or there is a judicial seizure of, substantially all of Lessee's assets or of Lessee's interest in this Lease and such seizure is not discharged within 60 days. B. If City shall default in the performance of any of its covenants or agreements contained herein and such default shall continue for a period of thirty days after receipt by City•from Lessee of written notice specifying the nature of the default, then Lessee may at its option, upon 30 days written notice, cancel and terminate this Lease. In the case of a default which cannot feasibly be cured within 30 days, if City fails to commence performance and diligently proceed toward full performance within 30 days after receipt of notice by Lessee of City's failure to perform or fails to complete performance within a reasonable time thereafter, Lessee may, upon 15 days notice, terminate this Lease C. In the event of a termination due to a default of City or invalidity of this Lease, City shall refund to lessee a pro-rata portion of the Lump Sum paid by Lessee pursuant to Section 5, calculated by multiplying the Lump Sum amount by a fraction the numerator of which is the number of months remaining in the Lease term and the denominator of which is 180. City may refund such sum, with interest from the date of termination of this Lease at the rate of one percent over the per annum rate of interest paid on investments in the Local Agency Investment Fund, over a period extending to the end of the original Term of this Lease, and may prepay all or a part thereof without penalty In the event of a termination due to a default of City, Lessee shall also be entitled to damages for any losses suffered as a direct result of the Lease termination. D. In the event of a termination due to a default of Lessee within the Lease Term, City shall retain $500,000 of the Lump Sum paid by Lessee pursuant 13 .111Y £r r0 ja• • rr 4 SWAP 14 t_l SAJ• — 4A '1 n£../ V•V 1{µ. y A ..a.r L...RRUJ.waU-u• shorter or longer than the remaining Term of this Lease. Lessee shall pay to City the rent due under this Lease on the dates the rent is due, less the rerit City receives from any reletting. No act by City allowed by this section shall terminate this Lease unless City notifies Lessee that City elects to terminate this Lease. (ii) Zenmination of Lessems Bight to ' ossession. In the event of a default by Lessee, during the continuance of the default and for so long thereafter as any damages or other sums payable by Lessee in connection with such default remain unpaid, City can terminate Lessee's right to possession of the Water System and the Groundwater at any time. No act by City other than giving notice to Lessee shall terminate this Lease. Acts of maintenance, efforts to relet the Water System and the Groundwater or the appointment of a receiver on City's initiative to protect City's interest under this Lease (other than the appointment of a receiver to perform all of Lessee's obligations hereunder) shall not constitute a termination of Lessee's right to possession. On termination, City has the right to recover from Lessee (a) The worth, at the time of the award, of the unpaid rent that had been earned at the time of termination of this Lease; (b) The worth, at. the time of the award, of the amount by which the unpaid rent that would have been earned after the date of termination of this Lease until the time of award exceeds the amount of the loss of rent that Lessee proves could have been reasonably avoided; (c) The worth, at the time of the award, of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of the loss of rent that Lessee proves could have been reasonably avoided; and (d) Any other amount necessary to compensate City for all detriment proximately caused by Lessee's default 15 JPYV 1 lY CO 4 r• 4 MAI 44"YJ• YMLJ]RCYU'1Y1J O'40 YL00 U a4.. ,j&.00.j r G. �, = I to pay and discharge all claims and obligations for materials, parts, labor, water, power and other consumables and supplies furnished at City's instance or request upon or to the Water System prior to the commencement of the Term of this Agreement. Section 18. IMem0it Lessee agrees to hold City, and its officers, agents and employees, free and harmless of and from, and to defend, indemnify, and protect City, and its officers, agents and employees, against all liability, loss, claims, demands, damage, expense, costs ( including, without limitation, reasonable attorneys' fees and all costs and fees of litigation and its threat) of any kind or nature arising out of or in any way connected with this Lease or Lessee's performance or obligations under this Lease to the maximum extent permitted by law The expiration or termination of this Lease and /pr the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or acaning during the Term hereof or by reason of Lessee's occupancy of the Water System. Without in any way limiting the foregoing, Lessee shall be solely responsible for, and agrees to defend and indemnify City and hold City harmless for any third party claim or action challenging the validity of this Lease. In the event this Lease is declared invalid, Lessee waives any claim it may have against City in connection therewith, other than any claim for reimbursement for Capital Improvements or refunds pursuant to Section 15 C. City agrees to hold Lessee, and its officers, agents and employees, free and harmless of and from, and to defend and indemnify Lessee, and its officers, agents and employees, against all liability, loss, claims, demands, damage, expense, costs (including, without limitation, all costs and fees of litigation and its threat) of any kind or nature arising from claims by third parties or governmental agencies and resulting from negligence, gross negligence, recklessness or willful misconduct by 17 J1n 17 _ 14.0 rr 1'IWUIIJLV yy1LC pca.wWL3 040 '4t100 IU 00J71.J010014VO4.J! r G1•Gr of the West Basin'Municipal Water District, which City agrees to satisfy out of the proceeds of the Lump Sum payment received by City pursuant to Section 5. Section 23. Nondiscrimination. Lessee covenants by and for itself, its officers and assigns, and all persons claiming under or through it, and this Lease is made and accepted upon and subject to the following conditions: that there shall be no discrimination against or segregation of arty person or group of persons, on account of sex, race, color, creed, national origin, or ancestry, in the leasing, transferring, use, or enjoyment of the Water System nor shall Lessee itself, or any person claiming under or through it, establish or permit any such practice or practices of disaimination or segregation. Section 24 Counterparts, This Lease may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, but all together shall constitutebut one and the same Lease. Section 25. its. This Lease may be amended or modified only in writing signed by the parties thereto. Section 26. Dispute Resolu.one Except as specified below, in the event that any dispute, controversy, or claim shall arise between the parties to this Lease with regard to any of the provisions of this Lease or the performance of the berms and conditions of this Lease by any party, such dispute shall be settled by binding arbitration under the rules of the American Arbitration Association and by an arbitrator selected from the Southern California Judicial Panel of Arbitrators, of the JA.M.S. /BNDISPUTE ADR Professionals. The cost of Arbitration shall be borne equally by the parties to the dispute. Judgment upon the award of the arbitrator may be entered in any court having jurisdiction thereof. Either party may demand that arbitration proceed on an expedited basis, in which case the arbitrator shall set an expedited schedule. Except as specified below, each party to this Lease hereby waives 19 JMN 17 70 14• OP rr'114.A.J 14.4-CJv WILL D.\M.1441a.J -010 .4000 IU 7r VJ.JCW 'are N K • a1. •-1 JO 14YAMJf r.G..'C. — property taxes levied on such interest. . Any such tax shall be the sole responsibility of Lessee. Section 28. Supplies. Tools and Equipment. Lessee agrees to buy from City the supplies, tools, and equipment listed in Exhrbit C for the lump sum of ten thousand dollars ($10,000). Section 29. Attorneys' Pees. 1f any party to this Lease commences legal proceedings or arbitration to interpret this Lease, to enforce any of its terms or for damages for its breach, the prevailing party shall be entitled to recover reasonable attorneys' fees. Section 30. Net Lease. This Lease shall be deemed and construed to be a "net lease" and Lessee hereby agrees that the rental provided for herein shall be an absolute net return to City free and dear of any expenses, charges or setoffs whatsoever except as provided in Section 10 P Section 31. Compliance with Law. Except as otherwise provided in this Lease, Lessee shall, at Lessee's sole cost and expense, diligei tly and in a timely manner, comply in all material respects with all "Applicable Laws," which term is used in this Lease to include all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, and requirements of any applicable fire insurance underwriter or rating bureau, relating in any manner to the Water System or the Groundwater (including but not limited to matters pertaining to (i) industrial hygiene, (11) environmental conditions on, in, under or about the Water System or the Groundwater, including soil and groundwater conditions, and ( iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill or release of any Hazardous Substance or storage tank), now in effect or which may hereafter come into effect, and whether or not reflecting a change in policy from any previously existing policy Lessee shall notify City in writing (with copies of any documents involved) of any 21 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 '.1 MI =1J PO� •.J' CM I11.14J1lrcy L_I1 LG DI%LNA Y,1J pea 1{MJ 14 :/GJJSJt,rJJM0O^IJ I r (2) any breach of any covenant or agreement of Lessee contained or referred to in this section; (3) any violation or claim of violation by Lessee of any Applicable Law; or (4) the imposition of any lien for the recovery of any costs for environmental cleanup or other response costs relating to the release or threatened release of Hazardous Substance, excluding any Hazardous Substance released, generated or disposed by City The expiration or termination of this Lease and /or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the Term hereof or by reason of Lessee's occupancy of the Water System and the Groundwater. C. For purposes of this Lease, "Hazardous Substance" means any substance, material or waste which is defined as a "hazardous waste," "hazardous material," "hazardous substance," "extremely hazardous waste," "restricted hazardous waste" or similar term under any provision of any federal, state or local law and includes, without limitation, hydrocarbons, petroleum, gasoline, crude oil or any products, by- products or fractions thereof. Section 33. City's Accevi, City and City's agents shall have the right to enter the Water System at any time in the case of an emergency, and otherwise at reasonable times and on reasonable prior notice for the following purposes (i) to determine whether the Water System is in good condition as required by this Lease and whether Lessee is complying with its obligations under this Lease; (ii) to serve, post or keep posted any notices required or allowed by law or under this Lease, and (iii) as City may otherwise reasonably deem necessary 23 APPENDIX G CITY OF BAKERSFIELD ANNUAL OPERATING AGREEMENT 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0.7/07/98 TUE 11 21 FAX 805 327 0173 BOOKMAN EDMONSTON 44-. GLENDAL.E 92 10 W.B. AGREEMENT NO. 9.2 -2 ,5 DOMESTIC WATER OPERATIONS AGREEMENT THIS AGREEMENT, dated 110V 41992 , 1992, by and between CITY OF BAKERSFIELD, a California municipal corporation ("City"), and CALIFORNIA WATER SERVICE COMPANY, a California public utility water corporation ( "Company"). RECITALS WHEREAS, City owns a domestic water enterprise whose facilities currently furnish water service to approximately 16,500 customers in an area in the City of Bakersfield and some areas in the unincorporated County of Kern; and WHEREAS, City initiated a Request for Qualifications (RFQ) and Request for Proposals (RFP) for the operation and maintenance of the City of Bakersfield Municipal Water System ("System"); and WHEREAS, Company submitted a response to City's RFQ and RFP and the City of Bakersfield Water Board, at its May 5, 1992 meeting, accepted the Company proposal and authorized the negotiation of a contract for City Council approval; and WHEREAS, This agreement and contract is the result of negotiations to operate and maintain the facilities within the Bakersfield Municipal Water System, including but not limited to the Ashe, Fairhaven, and Riverlakes Divisions; and WHEREAS, Company furnishes public utility water service throughout the State of California, including service to customers in the City of Bakersfield and surrounding unincorporated areas; and WHEREAS, Company is willing to provide the highest passible level of service to City, not as a public utility, but as contractor and agent to City. NOW, THEREFORE, incorporating the foregoing recitals herein, it is mutually agreed as follows: 1. OPERATION OF SYSTEM. Company is to provide, as contractor and agent for City and under the supervision of City, any and all acts and services nen scary to furnish the highest possible level of domestic water service to customers and in the day -to. day operation of the City System. Company will provide all qualified, trained and, if required, licensed and certified personnel, direct supervision, fully equipped vehicles, proper tools, equipment, fuels and various supplies to operate and maintain City System. The services to be provided shall include, but shall not be limited to: Post -Ir Fax Note 7671 IMPFSIFIAMMIWAMMI Con Pt °aw 7 9- MUM Co Root Phone Y Fax a Fax k 1� 001 07/07/98 TUE 11 22 FAX 805 327 0173 BOOKMAN EDMONSTON +-.+ GLENDALE ®002 (a) Daily operation of the System through operating pumps and pumping stations, by certified California water treatment operators of Grade Il or better, water treating or disinfection equipment operation; transmission and distribution system operations with records, equipment inspections, landscape maintenance, cross connection control coordination, valve exercising program, water main flushing, fire hydrant inspection, service connection replacement or repair, repair of main breaks or leaks, new tie -ins, testing and routine maintenance of meters, read and log supply meters, read and log electric consumption meters, customer premise leak detection, obtaining permits for normal or routine operations, and setting meters in new tracts; replacement or repair of customer meters with large meters serviced annually, meter reading monthly using the most efficient and error free method; (b) Customer services shall include but are not limited to: rendering monthly bills on behalf of City to all receiving City water service; payment processing in a practical and acceptable manner, responding to customer inquiries on water service, bills, leaks or other concerns; using reasonable efforts to collect all bills on behalf of City, processing applications for new or transfer of service; collection of customer deposits for new service; collection of construction metei deposits; investigation of taste and odor complaints; (c) Company will keep an inventory and warehouse adequate materials for daily operations; water main pipe of all sizes and specifications to the City System, valves, hydrants, service material, meter boxes, vaults and various other materials required for service connection, water main and general water system installation and repairs, and an adequate supply of meters to meet new construction demands (d) Company is to provide and maintain twenty four (24) hour on -call response to emergency calls or customer inquiries provide City an emergency or natural disaster operations plan; maintain an emergency communications system; in addition to routine equipment, provide or have access to any and all equipment required to perform emergency repair work to vital system equipment and water mains; shall use reasonable effort to provide a maximum of one (1) hour response to customer inquiries concerning water quality and two (2) hour for other inquiries (e) Other services Company will perform are to pay all operation and maintenance expenses except as noted in 4 #5 herein; to compute the amounts of refunds on behalf of City where City is obligated to make refund under extension agreements heretofore or hereafter entered into by City relating to the System; implement a Water Conservation or Waste of Water program; provide City with accurate and reproducible distribution system maps that are updated on a semi- annual basis and up- to-date plat maps on an annual basis; and 2 07/07/98 TUE 11 22 FAX 805 327 0173 BOOKMAN EDMONSTON .,i. GLENDALE (0 In general, to do all such acts and perform all such services as required to operate the System to deliver the highest and best service possible and in this connection, Company agrees to operate and maintain the System in a manner similar to that in which it operates its Bakersfield district, subject, however, to the provisions of the Bakersfield Municipal Code, Title 14, Chapters 14.04, 14.06 and 14.08, as presently constituted or amended, concerning domestic water matters, and in all respects to the provisions of this Agreement. 2. WATER OUALITY. Company will provide all trained and qualified personnel to oversee and ensure the City System is in compliance with all laws and regulations. Company shall perform, or cause to be performed, by a State of California certified laboratory, any and all water sampling, analysis, testing and reporting as required for water sources, distribution mains or customer premises, by the U. S. Environmental Protection Agency, State of California Department of Health Services and Office of Drinking Water and the Kern County Environmental Health Department or special acts of the U. S. Congress or California Legislature. Company will provide the water quality services as listed herein, which shall include but not be limited to; scheduling and collecting water samples to test for microbiological, inorganic and organic constituents, transportation to certified lab, preparation of monitoring plans, sample collection training, reporting to appropriate regulator, record keeping, analysis interpretation, special or emergency sample collection and analysis, emergency notification to affected customers, any and all published and distributed customer reports on water quality, new well or water source sampling and analysis, response to customer inquiries on water quality, coordination of cross - connection control and potential contamination issues, conduct annual system survey with California State Department of Health Services, obtain permits and compliance with appropriate Air Resources Control district and pay fines or assessments if due to Company neglect provide hazardous materials control program, and ensure all operator certification is in compliance with State and Federal requirements. 3. )3USINESS OFFICE. Company is to operate and maintain a local business office, located within the City limits, for the purpose of conducting business with customers of the system. Company will provide adequate staffing for at least the following services: walk -in bill paying service, new service accounts, closing accounts, service transfers, handle customer complaints and offer customer assistance regarding any aspect of City water utility operations and customer service. Office hours are to be Monday through Friday, 8.:00 am to 5:00 pm, excluding holidays, with a posted "emergency after hours" telephone number. 4. TRANSMITTING REVENUES. Company shall transmit on each business day to such depository as City or City Treasurer may designate, all monies collected by or otherwise paid to Company for service rendered and water delivered under and during the term of this Agreement. City shall promptly inform Company of the amounts and sources of all monies collected by or paid to City on account of service rendered to customers of the System during the term of this Agreement 3 Q003 07/07/98 TUE 11 23 FAX 805 327 0173 BOORMAN EDMONSTON -+4+ GLENDALE Rh004 S. PAYMENT OF EXPENSES. Company shall pay all normal expenses it incurs in operating and maintaining the System, under the terns of this agreement however, City shall pay directly all bills and costs for (i) real property taxes and assessments levied or assessed against the System or any part thereof, (ii) franchise and business taxes imposed upon or measured by revenues from the System, (iii) electric or gas power charges in operating the System, (iv) pump taxes levied upon extraction of water from wells serving the System, (v) State Department of Health Services fees and non - recurring sampling and testing which cannot be accomplished by Company certified laboratory, (vi) water purchased for delivery to the System and (vii) water mainline extension agreement refunds. Company shall promptly upon receipt forward to City any invoices or documentation related to items listed in this section. 6. EXTRAORDINARY MAINTENANCE. Company shall notify City, in writing, of repairs needed (such as main leaks) or non - scheduled maintenance ("Extraordinary Maintenance") that by Company's estimate will cost $2,000.00 or more. Company shall not accomplish such repairs or Extraordinary Maintenance unless it shall be directed to do so by City in writing or other appropriate written instrument Upon receipt of City's written approval, Company will cause such work to be performed and upon completion, will bill City for amount of the actual total installed cost of such work, if such work exceeds $2,000.00 in cost. Nothing herein contained shall, however, be deemed to limit City's right to cause such repair or Extraordinary Maintenance to be accomplished by a person other than Company, in which event Company shall bill City for Company's engineering, supervision, inspection and construction overhead charges at the rate of eight percent (8%) of the amount billed to City by said person other than Company as the total cost of such Extraordinary Maintenance item. City agrees to pay Company within thirty (30) days after receipt of such bit 7 EMERGENCY REPAIRS. In the event of an emergency involving any part of the System which in Company's judgment threatens the public health or safety, and if in the Company's judgment immediate action is required, Company shall have the right to perform, or cause to be performed, any work on the System (whether repairs, maintenance or capital additions) regardless of the estimated cast thereof, free from any provision of paragraph 6 or from any requirement that the work be let by competitive bid. Company shall notify City as soon as possible as to the work done and proposed to be done as a result of such emergency threatening the public health and safety and of Company's estimate of the cost thereof. Upon notification by Company of emergency work, City shall have the right to order cessation of such work, if other appropriate means are available to nullify public health and safety emergency. Company shall bill City for the actual total - installed cost of such work including Company's construction overhead charges computed at the rate of eight percent (8%) of the total cost of such work City agrees to pay Company the amount so billed within thirty (30) days after receipt of such bill. 4 07/07/98 TUE 11 23 FAX 805 327 0173 BOOKMAN EDMONSTON y.-, GLENDALE fi 005 8. MANAGEMENT REPORTS. Company shall provide City written reports, in a form suitable to both parties, related to the operations and maintenance of the City System, as described herein. The reports will include, but not be limited to: (a) Daily deposit slip for the deposit made by Company to City designated depository or bank account for payments received on behalf of City, (b) Weekly: summary of extraordinary maintenance, capital improvement, developer installations with job description, percentage of complete and pertinent comments relative to the project; service and complaint report with listing of customer complaints and inquiries, reason for customer contact and resolution of the matter, water quality analysis of microbiological testing; (c) Monthly: sales report showing number of accounts, water consumption and revenue by customer classification; month end accounts receivable showing billings and collections for City System; summary of customer deposits and construction meter deposits collected and remitted to City, water production by source; observed water levels in groundwater wells; electrical consumption summary by each well or booster station; list and analysis of water supply wells sampled and tested; (d) Annually consumption history by customer account and classification; listing and analysis results of all water supply sources (groundwater wells); and (e) Any other report or information that is pertinent and relevant to the operation and maintenance of the City System. 9. CONSIDERATION. Beginning January 1, 1993, in consideration of the services furnished by Company hereunder as City's contractor and agent, City shall pay Company a monthly fee of $6.33 for each active City service connection served the preceding month. Company shall review its costs hereunder to determine whether an adjustment of said monthly fee is required during the succeeding calendar year by reason of increase or decrease in the aggregate amount of expenses incurred by Company in performing its obligations hereunder. Adjustments to monthly fee shall not be in excess of the percentage wage and benefit adjustment of Company's employee agreement with the Utility Workers Union of America A.F.L. -C.LO. for the succeeding calendar year. If any increase in the monthly fee is determined by Company to exceed four percent (4%), then Company shall provide City substantial and supportive evidence for excess increase. Any amount in excess of five percent (5%) shall be negotiated by the parties acting in good faith. Company shall notify City of monthly fee adjustment not later than 30 days prior to the end of each year of the term hereof. In the event Company shall notify City of any fee adjustment, City's obligation for each month of the entire succeeding calendar year shall be at the adjusted amount. Company shall not be entitled to additional reimbursement from City, nor shall City be entitled to reimbursement from Company for current year monthly fee based on said review of costs incurred by Company. 5 07/07/98 TUE 11 24 FAX 805 327 0173 BOOKMAN EDMONSTON 44. GLENDALE 2h006 10. F.NGINEERING SERVICES. Company is to employ, retain or otherwise make available, qualified and licensed engineers, to City for consultation regarding operations, maintenance, additions and capital improvement of City system. The engineering areas of expertise should include, but not be limited to: distribution system design, in existing and new service areas, size and locations of water mains, services, fire hydrants and other special appurtenances; design of special facilities such as groundwater wells, pumps and water storage equipment with controls; operational engineering methods for the most efficient and cost effective means of operating the City System; electrical engineering; communications involving radio, cellular telephone and paging services; computer applications relating to water operations and reporting, general maintenance programs of City facilities with inspections, testing and review. 11. CAPffAL IMPROVEMENTS. City shall have the option of initiating and completion of capital improvement projects by authorizing, in writing, for Company to: (a) prepare a cost estimate for each System addition or improvement Following written approval of estimate by City, Company will proceed with the work of installation using in -house labor and equipment or contractor, whichever is most cost efficient Upon completion of installation, Company shall bill City for the actual total installed cost of work, plus eight percent (8%) of such cost, for engineering and inspection. City agrees to pay Company the amount so billed within thirty (30) days after receipt of invoice; or (b) provide engineering, plans, specications, supervision and inspection with construction completed by contractors selected by City pursuant to City's applicable competitive bidding procedures. Company shall bill City eight percent (8%) of the estimated cost of said addition or improvement. City agrees to pay Company the amount within thirty (30) days after receipt of Company invoke; or (c) supervise the preparation of engineering plans and specifications by an independent consulting engineer selected and paid by City, with construction completed by contractors selected by City pursuant to City's applicable competitive bidding procedures. Company will provide inspection of the work during construction. Company shall bill City four percent (4%) of the estimated total installed cost of each such capital improvement City agrees to pay the amount within thirty (30) days after receipt of Company invoice; and (d) in all cases, Company shall furnish qualified inspectors at the site of all construction work on capital items and shall ensure construction complies with City specifications. Such inspectors may be Company employees, consulting engineer employees or such other qualified inspectors as may be required. City is to be provided at the conclusion of the installation of capital improvements, any and all documents, maps, drawings, plans (including "as -built" plans), plans of record and certifications of acceptance of the construction of such improvements. 6 L •uopoe Ltouno0 4!0 Bans ;o s&ep p£ w!m state aowas to Atepunoq m sa2usga Aire ;o'Sappn u 'pagpou aq pegs AaedWO0 poano0 40 ow 3o uopniosat Aq OUR of amp mot; a2aego Amu State axuas pus sauepunoq "toot 'V ugtgr3 se pagans dent aq; ao smogs seats aowas pus sauspunoq aqi apple+ =PAS 140 aletado iiegs Auedtao0 'NSW amtras taaLVM 'n •wataq; pappua suostad aqi of spun;at lions waded to; aigtsuodsat aq iiegs 4!0 •stoettaw Ietimpw ;qt ;o asp AJesian!aas aqi no anp sputum 3o ianome agi nodal put Smictm m 40 Axon o; s; Ausdmo3 zaequoa aqi ;o swat Japan anp spun;at aq3 a;ndutoo pus ;arum aq; a! pom33e uosu;pgns m pan pnp!gpw gala to; uopeauo;ui anuaeat a;simmn° hags Sundtno0 •sputt;at auto of Auedtao0 sagsap 4u0 picot merino* asoq; to ;'matsds 40 of SWOP/ 40 dq Patnt»xa pettaoa ao!saatxa am!mem gala ;o £doa e Auedmo0 gspin; awls AttO •SIOVZLLNOO NIOISN133.3C3 3M'INIIvw •nopaauuoo aqi Smmtopad m sisoo pat!p to ;ma aq; 3o Aaedmo0 Aq 23!oe111 3° tdpoat sCep (p£) Stt!gt uppt Attedwo0 ,Std of saante 40 'masts Ap3 aqt o; 'gdefleted spit tapun paiie;sm sawitoe; 'popaanoo aq of SBSne3 to 'siaauuoo Aueduro0 '4o 3o ;sanbat uodn Si (o) pas 'aopem Auedmo0 30 ;dTaoat sAsp (p£) 4ttgt mgt a% uorsuapxa Bons to; atampsa ;sop aq; 30 (%p) ;uaotad sno; Anedmo0 And of saa12e 40 pataq; uopei!etsu aqi taadsw pas aswadns pas `uosuaixa went to; Ao;o 410011e1l pun;at mntaofem ant zanies% gags Auedmo0 •uo!sua;xa meta aq; 3o awtnpsa two aq; amtdde 'ateudotdde uaqm 'pan iaopeagpads slap o; sueid lions p aopetedatd aq; asutadns pas MONO! 'uopatas;p 40 ;e 'pegs Auedmo0 'uopuatxa Bans 3o satempsa 13oa pat sued nogonisaoo uoisuatxa mem =dodo; 40 Aq paewiis s; ;up tapwpgns to tadoianap 'tautotsno a tod (q) Jo '.tapwpgns to tadoiaeap 'tamotsno at Al :7 Aq Pamq 'wain/fed ;o tdpoat rage pap; os tummy aip Auedu o0 Aced at saat8e 4!0 •aosaatxa lions 3o two pagatsa; pm; palempsa aqi 30 (gyg) iaaotad ;g2ta Aaedmo0 And of scathe 4F3 Awns uopannsuoo aqt ;o uopeptooat pus uopaadsm aprnotd pas'oataip aopegetsm [slot aqi to; atemgSa isoo a gt!e+'4 0 at pus 'aq dent asea alp se 'tapwpgns to tadoiaeap'tamoisna leRpwpm acp atsuopeogpads pus sueid2uuaau;Sa3 (e) :apuotd o; st Aaedu o0 pus of pa;sanbaz aq dent Auedtao0 •tapwpgns pat Ao jo scuba' alp ie'Tataq pagpasap se saoutas apuotd Ana pig 'uo;suaixa qons Acre Hemp of pa;e2ggo aq ion pegs Anedmo0 •4!0 Aq pauttnia;ap aq gegs pettaoo gars ;o mto; ata lownwgns to tadoiaeap 'tataoisno ienpwpm ant pus 40 uaaegaq ;am= o; taenstnd apem aq hens suotswpgns to s!enpwpuI o1 aow:as gs!atn3 o; tams.% aq; ;o suopt a;xa atepdotdde taw Jo snopoaawn =was 'samiad;d tawt. inv StIOLLVT7V,ISNII uauiAivanS •zi LOO rIVON319 NO.LSNOWQB NV1131005 £LTO LZC SO8 %V8 St TT 3fLi, 86 /LO /L0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 07/07/98 TUE 11 25 FAX 805 327 0173 BOOKMAN EDMONSTON + +-. GLENDALE 15. WATER RATES. During the term hereof City shall establish and maintain water rate schedules applicable to the areas shown on Exhibit A. Rates may be changed from time to time as the City, in its sole discretion, sees fit City and Company agree all service connections, except for fire protection services, shall be metered and be subject to applicable rates. 16. RECORDS. City shall have access to Company's financial, operating, maintenance, complaint, or any other records and reports that apply to the Company operating the City System. City shall have access during normal business hours at the Company headquarters or appropriate Local Bakersfield offices, throughout the term of this Agreement and, in this connection, may require the re- production of Company's records of such statements, invoices and other documents as may be reasonably necessary to support any charge or bill submitted by Company pursuant to the provisions of this Agreement, records of system customer billing transactions and System collections remitted to City. 17. TERM. The initial term of this Agreement shall be for three years commencing January 1, 1993, provided, however, that such term shall be renewed for successive three year periods each, unless either party hereto shall notify the other at least one - hundred eighty (180) days prior to the expiration of the term of this agreement. 18. HOLD HARMLESS. Company shall save, bold harmless and indemnify City, its officers, agents, employees and volunteers from all claims, demands, damages, judgments, costs of expenses in law or equity that may at any time arise from or related to any work performed by the Company, its agents, employees or subcontractors under the terms of this agreement 19. INSURANCE. Company shall be responsible only for its own negligence, intentional acts, and/or omissions. Company shall procure and maintain and furnish the City Risk Manager and the Water and Sanitation Department with a certificate of insurance evidencing the insurance required for the term and duration of this agreement with the following minimum types and limits of insurance; (a) Automobile (vehicle) liability insurance shall provide coverage for owned, non-owned and hired autos, with coverage on an occurrence basis for bodily injury, including death, of one or more persons, property damage and personal injury, with limits of not less than one million dollars (31,000,000) per occurrence ; (b) Comprehensive general liability insurance, providing coverage on a per occurrence basis for bodily injury, including death, of one or more persons, property damage and personal injury, with limits of not less than one million dollars (5 � 000) per occurrence. Said policy may provide for self- insured retention by Company of 5250,000 per occurrence; 8 cos 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0.7/07/98 TUE 11 26 FAX 805 327 0173 BOOKMAN EDMONSTON 44. GLENDALE (c) State of California approved self- insurance program for Workers' Compensation. Program will comply with State required statutory limits for Workers' Compensation; (d) Additional insured endorsement in favor of City, its mayor, council, officers, agents employees and volunteers and (e) All policies required of the Company hereunder shall be primary insurance with regard to items for which Company is responsible as respects the City, its mayor, council, officers, agents, employees and volunteers and any insurance or self- insurance maintained by the City, its mayor, council, officers, agents, employees and volunteers shall be excess of the Company's insurance and shall not contribute with it If any part of the work under this agreement is sublet, similar insurance shall be provided by or on behalf of the subcontractors to cover their operations. All policies shall contain an endorsement providing the City with ten (10) days written notice of cancellation or material change in policy language or terms. 20. DISPUTED BILLS If City disputes or questions any portion of any bill, invoice or statement submitted to it by Company or any amount purportedly owing by it to Company, City shall promptly notify Company of the amount thereof so disputed or questioned, which amount City shall not be obligated to pay until such dispute or questions shall be finally resolved. However, City agrees in each such instance to pay Company, when due, the portion of such bill, statement or amount not so disputed or questioned 21. PAYMENT OF BILLS. City agrees to take all necessary steps procedurally so that payments due from it to Company pursuant to the provisions of this Agreement will be made on or before the applicable day specified herein. 22. AGREEMENT CONFORMS TO CHARTER. City represents and warrants to Company that this Agreement and the provisions hereof conform to City's Charter as currently in effect. If any subsequent amendment to or revision of said Charter shall in any way affect this Agreement or the validity of any provision hereof, City agrees to give prompt notice thereof to Company. In such event the parties hereto agree to make such amendments to or revisions of this Agreement as they may deem necessary or appropriate under the circumstances. 23. Company shall have no title to, or ownership interest in, the System or any part thereof whatsoever. 24. NOTICES. AB notices relative to this agreement shall be given in writing and shall be sent by registered or certified marl, postage prepaid, and addressed to the party to whom such notice is given at the following respective address 9 14009 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 O7/07/98 TUE 11 26 FAX 805 327 0173 BOOKMAN EDMONSTON To City . ++ GLENDALE CITY OF BAKERSFIELD City Hall 1501 Truxtun Avenue Bakersfield, CA 93301 To Company: CALIFORNIA WATER SERVICE CO. P O. Box 1150 San Jose, CA 95108 25. PARAGRAPH HEADINGS. Paragraph headings in this Agreement are for convenience only and are not a part of this Agreement and do not in any way limit or amplify the terms and provisions of this Agreement. 26. NATURE OF SERVICE. It is specifically recognized and intended by the parties hereto that in performing its obligations under this Agreement, Company shall not offer or perform any public utility service but shall act solely as contractor and agent for City. Company specifically does not dedicate itself to render a public utility water service to customers within the area shown on Exhibit A hereto, but rather agrees to furnish a non-utility service therein in accordance with the provisions of this Agreement. 27 CORPORATE AUTHORITY. Each individual executing this Agreement represents and warrants that they are duly authorized to execute and deliver this Agreement on behalf of the corporation or organization named herein and that this Agreement is binding upon said corporation or organization in accordance with its terms. 28. COMPLIANCE WITH ALL LAWS. Company shall, at Company's sole cost, comply with all of the requirements of Municipal, State and Federal authorities now in force, or which may hereafter be in force, pertaining to this Agreement, and shall faithfully observe in all activities relating to or growing out of this Agreement all Municipal ordinances and State and Federal statutes, rules or regulations now in force or which may hereafter be in force. 29. PREVAILING WAGES. Pursuant to Chapter 1 of Part 7 of Division 2 of Labor Code (commencing with Section 1720), Company agrees that in performing work as described herein, by itself or through any subcontractor, eight (8) hours labor shall be a day's work and forty (40) hours labor shall be a week's work, and that Company shall keep an accurate record showing the name and actual hours worked for all employed in said work, and that said record shall be kept open at all reasonable hours for inspection pursuant to Section 1812 of the Labor Code. Company and any subcontractors shall not pay less than the general prevalling rate of per diem wages and the general prevailing rate for holiday and overtime to all workers employed by Company in performing work as described herein. The prevailing rate for each craft, classification or type of work is determined by the Director of the California Department of Industrial Relations, and his schedule of prevailing rates is on file at Company offices located in San Jose and Bakersfield. The 10 f�o10 07/07/98 TUE 11 27 FAX 805 327 0173 BOOKMAN EDBONSTON -... GLENDALE schedule is incorporated herein by this reference. City shall have the right to inspect payroll records during normal business hours and shall have the right to question workers at any time concerning the wages being paid. Company shall not interfere in any way with the City's right to investigate conformance with the wage provisions of this Agreement. Company shall provide City two copies of employee claKi alions and rates of wages paid employees and any updates that may occur. 30. LABOR NONDISCRIMINATION . Company shall conform to the requirements of the California Fair Employment and Housing Act, to the regulations promulgated by the Fair Employment and Housing Commission to implement said Act, and to the nondiscrimination, affirmative action and equal employment opportunity requirements in the special provisions. 31. WAIVER OF DEFAULT. The failure of any party to enforce against another provisions of this Agreement, shall not constitute a waiver of that party's right to enforce any provisions at a later time, and shall not serve to vary the terms of this Agreement 32. FORUM. Any lawsuit pertaining to any matter arising under or growing out of this contract shall be instituted in Kern County, California. 33. TIME. Time is of the essence in this Agreement 34. ASSIGNMENT. This Agreement shall not be assigned by any party, or any party substituted, without prior written consent of City and Company. 35. BINDING EFFECT', The rights and obligations of this Agreement shall inure to the benefit of, and be binding upon, the parties to the contract and their heirs, administrators, executors, personal representatives, successors and assigns. 36. ATTORNEY FEES. In any action to enforce the terms of this Agreement, the prevailing party shall be entitled to recover its attorney's fees and court costs and other nonreimbursable litigation expenses, such as expert witness fees and investigation expenses. 37 MERGER AND MODIFICATION. This contract sets forth the entire agreement between the parties, and supersedes all other oral or written provisions. This contract may be modified or terminated only in a writing approved by City Council and signed by all the parties. 38. EXECUTION. This Agreement is effective upon hill execution. It is the product of negotiation and therefore shall not be construed against any party. 39. TAX NUMBERS. Company Federal Tax I.D. is No. 49 - 0362795. Company is a corporation? Yes No _ 11 o11 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 07/07/98 TUE 11 27 FAX 805 327 0173 BOOKMAN EDMONSTON ++-4 GLENDALE IN WITNESS WHEREOF, the parties thereto have executed this Domestic Water Operations Agreement on the day and year first -above written. APPROVED AS TO FORM: LAWRENCE LUNARDINI City Attorney COUNTERSIGNED; KLIMKO Director �� • 12 "CITY CITY OF BAKERSFIELD n retit.� ®012 CLARENCE E. MEDDERS Mayor "COMPANY" CALIFORNIA WATER SERVICE CO. By of hr-QeJ' of fic-" Lie% we President By 7� J Title Assistant Secretary N .-I O CIO w ur .4 IS M'.18.14V /• Anws Mod . 1111 '11 IWY 4414p.• 1.1. W 448.1441 .u.nl •.ou.. -441..1 1111 '01 1*M.I N (./ M 1^1..41 IIIY Ulf I/ • Y Iq'! • •104 .01011 •• 11 ••••n 49.141 M 14•1411 aff• T+AI •••• N11 '/ rM.Y 01-1Y •I nµY !JY SqJ 1. • N *V l ..•1 . 8.4 'I1 /11110441 ..Mn .'.'4 u11 w •H.n.IM w. uwy' ..n. TV 11 ••14 ns'ro 11 NI' — If-VI M 4811/4144/ 41 ..M ..n4 •47.4 •••• • —w.J •W4• w. .r.. ; 05 327 0173 If •414414111 —4- 14..441 .41 1 My MIN'! .94 II 1-01 041411144 Wr- 101...1 041411144 Mr.Y •11 .01 ..•••• UN0IJVIINNV nrr OIAUSS JO A'AIOYOVW W MI 41010wX' awu091 AIM1W110• OMU✓LLV Ora APfra ...4 -.: an van SWAZIS NOISAIB Z81YY O11SiN00 V131jQzr1Y8 40 A.1.10 07/07/98 TU NM MN 01 I= UM MN _ _ • 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 APPENDIX H PROPOSED SETTLEMENT OF ISSUES ON COMMISSION PROCEEDING TO SET RULES AND PROVIDE GUIDELINES FOR ACQUISITIONS AND MERGERS OF WATER COMPANIES 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA In the Matter of the Order Instituting Rulemaking ) on the Commission's Own Motion ) to Set Rules and Provide Guidelines for the ) Acquisition and Mergers of Water Companies. ) Rulemaking 97 -10 -048 MOTION OF THE RATEPAYER REPRESENTATION BRANCH OF THE WATER DIVISION AND THE CALIFORNIA WATER ASSOCIATION FOR ADOPTION OF SETTLEMENT The Ratepayer Representation Branch ( "RRB ") and the California Water Association ( "CWA ") have agreed on a resolution of each of the issues pending in this proceeding, as set forth in the attached Settlement, which they now submit for approval and adoption pursuant to Rule 51 et.seq. of the Rules of Practice and Procedure of the California Public Utilities Commission;( "Commission "). In particular, the RRB and CWA represent to the Commission as follows: a) That this Settlement commands the sponsorship of RRB and CWA, two of the four parties to the proceeding; b) That the RRB and CWA are fairly representative of the affected interests in this proceeding; c) That no term of the Settlement contravenes any statutory provision or any decision of the Commission; and d) That this Settlement, together with the record in this proceeding, conveys to the Commission sufficient information to permit the Commission to discharge its regulatory obligations with respect to the Parties and their interests. RRB and CWA believe that this Settlement is reasonable in light of the whole record, consistent with applicable law, and in the public interest. 1 In addition, RRB and CWA have entered into this Settlement on the basis that the Commission's adoption not be construed as an admission or concession by either of them, in any current of future proceeding. Finally, the Settlement attached to this motion details various requirements regarding acquisitions and mergers of public utilities which were addressed in this proceeding. WHEREFORE, RRB and CWS request that the Commission adopt the attached Settlement in its entirety as a complete resolution of all issues in the present proceeding. Respectfully Submitted, ' DATED- February 2, 1999 /s/ Francis S. Ferraro FRANCIS S. FERRARO Vice President California Water Association 12510 Fallcreek Lane ! Cerritos, CA 90703 (Tel) 408 - 367 -8200 (Fax) 408 - 367 -8430 DATED: February 2, 1999 /s/ Peter G. Fairchild PETER G. FAIRCHILD Principal Councel Ratepayer Representation Branch California Public Utilities Commission 505 Van Ness Avenue San Francisco, CA 94102 (Tel) 415- 703 -2049 (Fax) 415-703-2262 BEFORE THE PUBLIC UTIL111ES COMMISSION OF THE STATE OF CALIFORNIA Order Instituting Rulemaking on the Commission's ) own motion to set rules and provide guidelines for ) the Acquisition and Mergers of Water Companies ) SETTLEMENT 1.00 Introduction R.97 -10 -048 1.01 The parties to this Settlement ( "Parties ") relating to the Order Instituting Rtilemaking issued by the California Public Utilities Commission ( "Commission ") on October 22, 1997, are the Ratepayers Representation Branch ( "RRB ") of the Water Division and the California Water Association ( "CWA "). 1.02 The Parties agree that no signatory hereto nor any member of the staff of the Commission assumes any personal liability as a result of this Settlement. The Parties agree that no legal action may be brought in any state or federal court, or in any other forum, against any signatory representing the interests of RRB, any individual of RRB, its attorneys, or the RRB itself regarding this Settlement. All rights and remedies are limited to those available before the Commission. 2.00 General Requirements Regarding Acquisitions and Mergers of Public Utilities 2.01 Definition of Acquisition. An "acquisition" is a merger, a purchase of stock or assets, or an exchange of stock. 2.02 Notice Of Intention. The Parties agree that any request for authorization to acquire a Class A or B water utility should be preceded by a Notice of Intention. Such notice should include a showing as to how the merger or acquisition would affect reliability, compliance with regulations relating to health and safety, economies of scale, and customers. 2.03 Processing. The Parties agree that applications should be processed according to the schedules attached to this Settlement. 2.04 Results of Operations. The Parties agree that each application should include a forecast of the results of operation for (1) the acquiring utility, (2) the acquired utility, and (3) the combined operation for the first and fifth years following acquisition, together with all supporting documentation. 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2.05 Appraisal. The Parties agree that the filing of each application should include an appraisal, together with all supporting materials and workpapers. The appraisal should include all assets, including the value of the land and the cost of replacing the existing improvements, less accumulated depreciation. The complexity and detail required will necessarily vary based on the size and price of the acquired water system. 2.06 Facilities Funded by the Federal or State Government. The Parties agree that the cost of any plant or improvement of a privately -owned utility which is funded by a loan from the federal or state government and not included in rate base should not be included in the appraisal for the purpose of setting rates. The acquiring utility should be allowed to continue any surcharge established to repay any such loan until fully repaid. 2.07 Assets Funded by Contributions. The Parties agree that any asset funded by contribution should be valued in the appraisal in accordance with Section 820 of the Evidence Code. 3.00 Acquisition of Inadequately Operated and Maintained Small Water Utilities 3.01 Definition of Inadeguately Operated and Maintained Small Water Utilitv An "inadequately operated and maintained small water utility" is any operation serving under 2,000 customers that is subject to an outstanding order of the Department of Health Services to implement improvement. 3.02 Use of Advice Letter. To expedite improvements mandated by the Dgpartment of Health Services, the transfer of assets and related obligations of an inadequately operated and maintained small water utility may be approved by the Commission pursuant to an advice letter. 3.03 Incentives. The Parties agree that, for a period not to exceed seven years, a utility acquiring an inadequately operated and maintained utility should, pursuant to D.92 -03 -093, be permitted to exercise any one or combination of the following options: A. Establish a memorandum account for expenses associated with unanticipated repairs, B. Design rates to recover up to 100% of fixed costs in the service charge, C. File for an increase in rates based on the most recent increase in the Consumer Price Index for All Urban Consumers, and D Set rates on the basis of the applicable rate of retum on rate base permitted a Class C or a Class D water utility 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 3.04 Premium Above Purchase Price. The Parties agree that, if the purchase price is less than book value, the acquiring utility should be authorized to earn a return on the price paid plus 50 percent of the difference between book value and the pnce paid. The amount above the purchase price should be amortized over the average remaining life of the plant. In addition, the price paid shall include for purposes of ratemaking any cost incurred to complete the acquisition. 4.00 Acquisition of Mutual and Publicly -Owned Water Systems 4.01 Sections 852 and 854 of the Public Utilities Code. The Parties agree that neither Section 852 nor Section 854 of the Public Utilities Code requires a pnvately -owned utility to obtain authorization from the Commission before acquiring a publicly -owned utility 4.02 Filing of Rates. The Parties agree that the acquiring utility should be authorized to file an advice letter placing into effect the existing rates of its adjacent or nearby water system, the acquired system's rates, or rates lower than either. 4.03 Notice. Notice of a proposed acquisition should be given to all affected customers at the time when any advice letter or application is filed with the Commission. Additionally, the notice should contain a comparison of the rates before the acquisition and for the first year after the acquisition and identify any cost, including a reasonable return, not fully reflected in the first year's rates. With respect to the acquisition of a water system of a municipality, similar notice she uld be given to all affected customers prior to any election. 5.00 Financing Subject to Approval by the Commission. The Parties agree that each utility is required to file an application for approval of long -term financing involved in each acquisition. An example of long -term financing is a municipality that agrees to sell its water system in exchange for annual payments from the acquiring utility The Parties further agree that a utility may either file an application for the long -term financing of a particular acquisition or rely on authorization previously given by the Commission for long -term financing. 3