Proposition E - Water and Sewer Rates, Surplus FundsNovember 1, 2002
What it does
This Charter Amendment is intended to reform the Public Utilities Commission so that it can operate as a more efficient enterprise.
Why it is on the ballot
The PUC has deferred maintenance on its water system for decades. A combination of mismanagement, political resistance to raising rates, a voter-approved rate freeze, and the practice of raiding surpluses from the Hetch Hetchy hydropower system to make up shortfalls in the General Fund have all contributed to the decline of the system. This fall, the voters will be asked to approve a $1.6 billion revenue bond (Prop A) to catch up on deferred maintenance of the water system, upgrade it, and improve its ability to withstand catastrophes. Prop E is a companion measure that is intended to fix the underlying problems that got the PUC into trouble in the first place. It would make structural changes designed to give the PUC the ability to operate more like a normal utility, capable of making long-term investment decisions and operating in a financially responsible manner.
Those who support Proposition E state:
- This measure is absolutely necessary to avoid default on the sewer bonds.
- The Rate Fairness Board, Citizens Advisory Committee, public review of the Long Range Plans, and required standards will provide the criteria and controls to give the public necessary assurances as to rate increases.
Those who oppose Proposition E state:
- The City cannot be trusted to manage the system and to issue revenue bonds without voter approval of every measure.
Revenue Bonding Authority
Prop E would allow the City to issue revenue bonds to repair and upgrade the water system without going to the ballot. Revenue bonds are repaid by a specific revenue stream other than general taxes--in this case future water bills.
In most of the country and most of the state, revenue bonds can be issued without a vote of the people. San Francisco, however, requires a vote of the people when revenue bonds are issued. Many voters do not know the difference between revenue bonds (repaid by future fees) and general obligation bonds (repaid by taxes). Therefore, it is difficult to obtain approval for revenue bonds. Moreover, bond rating agencies consider the practice of requiring votes for revenue bonds to be highly risky and unusual; therefore, San Francisco's bond ratings are hurt by this practice.
Prop E would give the Board of Supervisors the ability to issue revenue bonds for PUC capital improvements when authorized by a two-thirds vote of the Board of Supervisors, for the purpose of "reconstructing, replacing, expanding, repairing, or improving water facilities or clean water facilities or combinations of water and clean water facilities under the jurisdiction of the Public Utilities Commission."
Historically the rate setting process outlined in the San Francisco Charter is this: the PUC forwards rate proposals to the mayor, who forwards them to the Board, who either accepts or rejects. This process was always a little vague, with no clear guidelines for how rates should be developed.
However, in 1999 Proposition H was passed which put in place a rate cap, unless the voters over-ride it. The rate cap provided an exception for "emergencies," but the City Attorney has ruled that the deferred maintenance and seismic risk of the water system does not constitute an emergency.
The rate cap is sending the PUC sewer program into insolvency. If we do not lift it, the PUC will go into default on its bonds in 2006. Rating agencies have lowered the water supply system's bond rating from AA- to A, raising interest rates by 0.2% when the PUC borrows money, which would cost $32 million over the first ten years of the proposed capital improvement plan. Because the department is repaid over 30 years, lifetime costs are even greater.
Rating agencies have lowered the sewer system's bond rating from A+ to A- raising interest rates by 0.4%, which would cost an extra $40 million over the first ten years of the capital improvement plan. However, absent fiscal intervention, it is expected that the credit rating will be lowered farther. A BBB+ rating would result in another 0.4% increase in interest rates.
Prop E would give the PUC the authority to set rates through a rigorous rate-setting process including independent review and a rate study. The PUC would be required to set rates according to "cost of service," a term of art which means that rates can only cover the cost of providing the service, but cannot raise revenue generally for the city.
Prop E would also establish a Rate Fairness Board, consisting of representatives from the City Administrator, the Controller, the Mayor's Office of Public Finance, two residential customers, and two business customers. The Rate Fairness Board would be advisory only, but it would be empowered to hold hearings, make reports, and issue rate recommendations to the PUC. It is likely that the Rate Fairness Board would have a high level of trust and be the real source of rate setting. This is the same procedure as that contemplated by Prop D, the energy-related PUC reform.
The energy division of the PUC historically generates surplus funds. The City owns the Hetch Hetchy dam and sells hydropower to the Modesto and Turlock Irrigation districts and City departments such as Muni, the airport and San Francisco General Hospital. These "profits" have been approximately $20 million a year over the last decade.
Logically, these surpluses would have been used to pay for other capital needs within the PUC. Our water supply and hydropower systems are part of the same Hetch Hetchy system, and they are managed together. However, the Charter has not allowed transfers between the electricity operations and water or sewer. Thus over the years, as the water supply and sewer systems have faced enormous unmet capital needs, the surpluses from the energy division have been transferred to the City's General Fund.
Prop E would change that. If any one division (water, sewer, or hydropower) has a surplus in any year, that surplus goes to meet the needs of other PUC divisions. Only if there are no needs for funding in any of the three divisions as certified by the City Controller could the PUC vote to transfer, by unanimous vote, surplus funds into the General Fund of the City.
Priorities for Use of Funds
The City Charter spells out the order of priority for the use of PUC revenues. First comes operating expenses; second comes repairs and maintenance; third comes reconstruction and replacement. In "fourth position" is payment on bonds for "acquisition, construction, or extension."
Standard industry practice is to put repayment of all bonds in third position. Prop E recognizes the payment priorities of outstanding bonds. Under Prop E, the Charter and the bonds would be made consistent with each other.
Joint Powers Agreements
Two thirds of the water from Hetch Hetchy is consumed outside of San Francisco--in San Mateo, Santa Clara, and Alameda counties. State Senator Jackie Speier. has proposed a bill, which San Francisco supports, to set up a regional financing authority to help fund the water system upgrade. As proposed, the bill would have the regional customers pay for two thirds of the "regional system"--meaning the common water system that brings water from Yosemite to the Bay Area. Prop E would allow the PUC to join the Financing Authority proposed by Senator Speier
Long Range Plans
Prop E would require the PUC to develop and annually update long-term capital plans, financial plans, and strategic plans. These planning requirements are necessary for the rest of the Charter amendment to work. They would provide the most significant opportunity for the rate-paying public to monitor and influence the actions of the PUC. This would allow the democratic process to determine the strategic direction of the PUC. (Should wastewater treatment be centralized in one neighborhood or decentralized? Should we try to increase water supply or rely on conservation? How much are we willing to pay to promote environmental and social goals? Etc.) Then, once the objectives are defined, public employees would be directed to carry out the objectives as efficiently as possible. If the planning process is structured the right way, San Francisco will come closer to this system: democratic input to the goals, then empower the professionals to carry out the goals.
It is an essential companion measure to Prop A, the Water Revenue Bond. The PUC has not done a good job managing its assets. Unless we restructure the agency so that it is capable to do the planning, setting rates, and investing in the maintenance of the system, we are skeptical of its ability to make good use of an additional $1.6 billion. Therefore, we urge a yes vote on both measures.
SPUR recommends a "Yes" vote on Proposition E.