SUBJECT:  Request for Proposals for the Municipal Water System

 

RECOMMENDATION

It is recommended that the City Council:

1.         Approve the framework and principles presented in this report and direct the City Manager to release the RFP to solicit proposals to:

a)   Lease the Municipal Water System, or:

b)   Operate the System under a management contract, or both, and

2.         Direct the Administration to prepare a Management Plan for continued operation of the System by employees of the Environmental Services Department.

 

BACKGROUND

 

At the Council meeting of December 19, 2000 the City Council approved recommendations by Mayor Gonzales and Vice Mayor Fiscalini, and by the Administration, regarding preparation of an RFP for lease or operation of the Municipal Water System, including that the City Manager’s Office proceed with the RFP team to prepare the RFP document.

 

As part of this process, the Environmental Services Department is expected to evaluate its current operation of the System and prepare a Management Plan that the Council would also consider.  In February of this year the City Council approved a contract with Psomas, Inc. to assist the Department in this anticipated effort.

 

The economic and other benefits presented in the most advantageous lease proposal, the most advantageous operating proposal and in the Management Plan will allow the Council to decide how the System should be managed and operated in the future.

 

ANALYSIS

 

Working closely with the City Manager’s Office, the City Attorney’s Office and selected staff of the Environmental Services Department (selected to ensure they are not also involved with developing the Management Plan), the City’s consultants, HDR Engineering, Inc. and Hawkins Delafield and Wood have completed about 95% of the RFP document.  The document is a comprehensive statement of duties and responsibilities of a lessee or operator of the System and of the general terms and conditions under which the City will enter into either a lease or management contract with the most advantageous proposer.  The draft document is shown at Attachment A.

 

The draft RFP has attributes that satisfy the City Council policies and priorities established for this RFP:

 

  1. Lease or management contract options:  The RFP allows each proposer one of three options: a) respond only to the Management Contract option; b) respond only to the Lease option; or c) respond to both the Lease and Management Contract options.  The RFP provides for the separate evaluations of the Lease and Management Contract proposals.

 

  1. Financial benefit:  The Lease option is designed to maximize the accelerated financial benefit to the City without having any adverse impact on current water rates.  The Management Contract option is designed to minimize the costs of operating and maintaining the municipal water system.  In both cases, through the competitive process, proposers will offer market driven financial benefits to the City.

 

  1. Managed competition:  The Administration will have the opportunity to submit a Management Plan that is consistent with the scope of services defined in the RFP.  We expect the Management Plan will be based upon increased efficiencies, lower costs, and improved productivity.  The Management Plan will provide a baseline for comparing the financial benefit, if any, of the Lease or Management Contract proposals.

 

  1. City employees:  The RFP reflects the City’s current Competition Policy, which requires that there will be no layoffs of any City employees if a contract is awarded to a private firm.  Furthermore, the RFP encourages proposers to hire existing System employees.

 

  1. Water rates:  For both the Lease and Management Contracts, the City will establish water rates and can thus maintain the inclining rate structure to meet the City’s continued priority to promote water conservation.  The Service Fee paid to the company will be set each year by formula as defined in Lease or Management Contract.   As indicated during HDR Engineering and Hawkins, Delafield & Wood’s (the City’s procurement consultants) presentation on December 19, 2000, setting water rates to ensure that they remain at or below the median prices in the South Bay area can result in some unintended consequences.   To address this issue, the RFP is structured to avoid the need to increase current water rates as a result of the privatizating the System.   Future water rates will depend on the Service Fee paid the Company; the general rate of inflation; increases (or decreases) in wholesale water and electricity costs; and the amount of water consumed and the number of customers served.

 

  1. Go/No Go decision:  The RFP is structured to allow the City Council to assess the merits of continuing or stopping the RFP process at various stages, including: a) authorization to issue the RFP; b) authorization to enter into negotiations with a preferred proposer or acceptance of the Management Plan; and c) authorization to enter into a contact with a private firm or acceptance of the Management Plan.

 

Lease

 

Responsibilities of the Parties

 

In the proposed lease relationship the City would carry out the following responsibilities:

 

·        Ensure that the City’s Competition Policy is followed regarding the impact of a lease of the System on City employees.  No employees would be laid off.  The company would be encouraged to offer employment to affected City employees.

 

·        Set water rates at levels City Council deemed appropriate to cover all System costs and in accordance with its policies regarding water conservation.

 

·        Receive all System revenues

 

·        Fund, from System revenues, the Service Fee paid to the company, wholesale water costs, ROR and In-Lieu payments to General Fund if applicable, contract administration costs, and repayment of outstanding loans

 

·        Obtain necessary permits for improvements and regulatory approvals

 

·        Fund capital improvements required for System expansion

 

The lessee would be responsible to:

 

·        Operate, maintain, repair and replace the System in accordance with City requirements and applicable law

 

·        Provide meter reading and customer billing services with payments made directly to City

 

·        Repair and replace all water meters in accordance with City requirements

 

Structure of Proposals

 

The RFP invites companies to propose to lease the System for 20 years with five, one-year extensions at the City’s option.  The basic structure of the proposals will be as follows:

 

·        For a Service Fee that is based upon the quantity of water delivered to customers that is defined in the RFP, the companies will propose a lump sum Accelerated Financial Benefit (AFB) they would pay to the City.  The Service Fee will be based on the current cost of operating and maintaining the System and will cover the company’s cost of O&M for the System, some or all of its cost of financing the AFB it proposes, and profit.  The Service Fee payment schedule will be adjusted annually based on a common inflation index such as the CPI.  All other things being equal, a company proposing a higher AFB than other companies would be more advantageous to the City.

 

The RFP invites companies to propose four financial scenarios for the lease:

 

Scenario #1:     The AFB at the outset of the lease is based on possible operating efficiencies and the growth potential within most of the current service area of the System (as described in the RFP), assuming the City continues to transfer the annual Rate of Return (ROR) (currently $2.1 million) and In- Lieu amounts (currently $270,000)) from the System enterprise fund to support General Fund services.  Additional AFB amounts will be proposed to be paid to the City in future years based upon the actual growth in Edenvale and North Coyote Valley service areas, the two areas of the City in which the System is most likely to expand during the term of the lease.

 

Scenario #2:     The same as scenario #1, except that the City would not transfer the ROR and In-Lieu amounts to the General Fund.  These System revenues would remain in the enterprise fund and may be used by the company to finance a larger AFB to the City.

 

Scenario #3:     This scenario is similar to #1, except that the AFB proposed would be in a single payment at the outset of the lease.  No further payments will be made as System growth in Edenvale and North Coyote Valley actually occurs.  The companies will be asked to forecast the growth they believe is likely to occur in those areas during the term of the lease and to include its impact in the single AFB payment.  To the extent that a company believes more customers and greater income will be derived during the term of the lease from these areas, a larger AFB proposal will likely be made.

 

Scenario #4:     The same scenario as #3, however, the City would not receive the ROR or the In-Lieu transfers from the System enterprise fund, but instead allow the company to rely on those revenues to fund a larger AFB payment to the City.  Since growth of the System in Edenvale and North Coyote Valley areas can be expected to result in increases in ROR and In-Lieu amounts, a company’s forecast of this growth may lead directly to its ability to propose a larger AFB to the City.

 

Management Contract

 

A second option would be a proposal to operate the System rather than lease it.  In that case, a company would propose to operate the System for the same term as the lease.  The annual Service Fee payment by the City to the Company would be the only financial consideration.  The annual Service Fee will be a competitively derived fixed amount proposed by the company, subject to an annual adjustment based on a common inflation index such as the CPI. No AFB would be proposed.  Covered costs of the company would be essentially the same as in the Lease, minus the return of the AFB.

 

Under the Management Contract approach, the City’s Competition Policy would also protect City employees from layoff and the company would also be encouraged to hire City employees

 

Management Plan

 

ESD will submit a Management Plan that will detail the current and projected operating costs for the System based on assumptions about operating efficiencies, wage and other controllable cost increases and system growth.  The Plan will reflect the work now being done with Psomas to identify opportunities to reduce costs and increase productivity and efficiency.  The benefits of these opportunities will be incorporated into a projected annual System operating cost, which the City would incur to continue municipal operation of the System.

 

Next Steps

 

If the City Council approves issuance of the RFP essentially as described in this report, the RFP team can complete the document and prepare it for distribution on the schedule shown below.

 

Muni Water Proposed RFP Timetable

Milestone

Dates

Issue RFP

 

7/16/01

Mandatory Pre-Proposal Meeting and Common Site Visit

 

8/15/01

Scheduled Individual Site Visits by Proposers

7/30/01

8/31/01

Deadline for Receipt of Questions Concerning this RFP

 

9/14/01

Proposal Due Date

 

10/12/01

Proposer Interviews and Proposal Clarifications

10/29/01

11/9/01

Most Advantageous Proposal(s) Recommended to City Council With Management Plan

 

 11/27/01

City Council Authorization to Proceed with Negotiations

 

TBD

Contract Negotiations

TBD

TBD

City Council Authorization to Enter into Agreement with a Private Firm

 

TBD

Service Agreement Execution

TBD

TBD

            TBD = To be determined

 

CONCLUSION

 

The proposed RFP is structured to solicit competitive proposals from private companies that will demonstrate the economic value to the City of leasing the System and of operating it under a management contract.  It will accomplish that without jeopardizing the jobs of City employees who might otherwise be affected by those arrangements.  Through preparation of a Management Plan by ESD, the Council will also be able to evaluate the costs of continuing to operate the System with City employees, and to compare those costs to annual Service Fee costs it could expect under a lease and a management contract.

 

COORDINATION 

 

The structure and primary features of this RFP have been reviewed with the Mayor’s office and the City Auditor to ensure that, in their view, they are likely to achieve the Council’s objectives in this process.  Observations and suggestions from both Offices were very helpful in finalizing the draft document. 

 

This report has been coordinated with the City Attorney’s Office and selected staff of ESD.

 

 

Darrell Dearborn

Senior Deputy City Manager