To ensure that it can demonstrate sufficient analysis and provide justification for its decisions on significant energy-related transactions, the city should create a formal process and guidelines that include the following: identifying the benefits and risks of proposed transactions, quantifying the benefits and risks of proposed transactions, evaluating and comparing proposed transactions against alternative proposals, quantifying the impact of proposed transactions on short-term and long-term rates paid by the city's energy customers, seeking an independent validation of the fair market value of proposed transactions, and documenting and communicating the findings of the evaluation process to the city council.
In order to ensure that energy-related transactions are properly vetted and analyzed, the City has established a formal process that details guidelines against which the overall value of transactions should be measured. Risks and benefits of proposed transactions shall be evaluated and the procedures that have been implemented dictate the steps required and the methods to be used to determine if a given transaction is a viable option for the City in the short-term and/or long-term.
Policies, procedures, and energy management plans for the Resource Management division within the City's Gas & Electric Department are in place to ensure that necessary investments are made in a responsible, timely manner to maintain a reliable, efficient power system.
The City will provide additional framework of the various actions that are taken into consideration when analyzing energy financial transactions in the Budget Policies and Procedures manual. This will include recognition of the use of financial analysis, scenarios, and cost impact of decisions being made. This will be incorporated in the annual update of the Budget Policies and Procedures manual and will be presented to the City Council for approval.
On February 4, 2014, the City Council adopted the Budget Policies and Procedures Manual, which establishes guidelines regarding planning, revenue development, investments, capital improvements, debt management, fixed assets, use of reserves, and inter-fund transfers. In some cases, consultants are used to assist with the various elements of the guidelines because they have specific, task-related expertise and resources. For example, in the case of a recent electric rate adjustment on July 1, 2014, the consulting services of Crossborder Energy and Michael Bell Management Consulting were utilized to provide specific expertise in addressing business risks and to ensure that appropriate electric rates were developed. As part of this analysis, scenarios were examined against alternative proposals which quantified proposed transactions on rates for a three year period. This provided an independent assessment and validation that was documented and communicated to City Council as part of the related public hearing held on June 17, 2014. A copy of the presentation made to City Council is included.
Although the city's Budget Polices and Procedures Manual establishes a framework, it lacks guidance for how the city will analyze financial transactions. To address our recommendation, the city will need to ensure that its policies and procedures specifically include the aspects of appropriate financial decision making that we listed.
In early 2014, the Finance Director and Director of Light & Power expect to present a proposed integrated energy strategy to City Council for adoption. This will be part of the long term financial modeling for the Light & Power Department. The Finance Director, Director of Light & Power, and Electric Rates Committee will continue to work together to develop the proposal based on an updated rate study to be completed by Michael Bell Management Consulting later in the year. Among other specialized services for local governments, Michael Bell Management Consulting specializes in municipal electric utility management and planning.
The city indicates that by the end of June 2013 the finance director and the director of light & power will develop and present for city council adoption, a formal process and guidelines regarding significant energy-related transactions, but does not specify whether those guidelines will include all elements that we recommended.
The city did not address this recommendation in its August 2012 response. (See 2013-406, p. 197)
Agency responses received after June 2013 are posted verbatim.