• The Water Quality Bureau Laboratories, which provide chemistry and microbiology analyses of the Public Utilities Commission's waste water and drinking water systems, neither track nor allocate the costs of laboratory services provided to the laboratories' clients, and therefore, cannot ensure that the charges for laboratory services are recovering all costs. For example, although revenues from external clients, which include the San Francisco International Airport, various cities, and other public entities, make up 4 percent of the Water Quality Bureau Laboratories revenues, external client workload makes up 8 percent of the workload, resulting in an estimated $281,512 annually in lost revenues to the Public Utilities Commission from external clients.
  
  
• Because the Water Quality Bureau Laboratories external clients pay for laboratory services based upon negotiated prices rather than cost-based prices, the costs of services differ among different clients. For example, for one type of analysis, known as "present/absence analysis of coliform", the city of Burlingame in San Mateo County pays $25 per analysis and the city of Hayward in Alameda County pays $15 per analysis.
  
  
• The Water Quality Bureau Laboratories are funded by a direct transfer of Water and Clean Water Enterprise funds in the budget each year. The Water Quality Bureau Laboratories have no internal cost-based price list and do not charge the Enterprises for specific laboratory analyses. More than 25 percent of the laboratory analyses performed by the Water Quality Bureau Laboratories for the Water and Clean Water Enterprises are discretionary to some extent, and are determined by operational considerations rather than regulatory requirements, such as monitoring a special process. Because the Water and Clean Water Enterprises are not charged for specific laboratory analyses, the Enterprises have no cost incentive to request the level of service that most cost-efficiently achieves the analytical goal.
  
  
• The Public Utilities Commission should require the General Manager of the Public Utilities Commission to direct the Water Quality Bureau Laboratories to negotiate cost-based fees with internal and external clients. Although the Public Utilities Commission can choose to negotiate fees with specific clients as a policy option, negotiated fees should be an exception rather than a standard practice.
  
  
• The Water Quality Bureau Manager should enhance the client services job description to serve as (a) the project manager for developing cost-based fees and (b) the gatekeeper for internal and external clients to ensure that the appropriate level of laboratory services are provided to achieve clients' analytical goals.

Tracking Costs of Water Quality Bureau Laboratories

The Water Quality Bureau Laboratories do not track the costs of services provided to the laboratories' clients, and therefore do not know if the charges for services recover the laboratories' costs. The Water Quality Bureau Laboratories provide chemistry and microbiology analysis of the Public Utilities Commission's waste water and drinking water systems for the Water and Clean Water Enterprises. The Public Utilities Commission, including the Water and Clean Water Enterprises, must comply with State and Federal regulations governing the quality of drinking water and the contents of waste water discharged into the San Francisco Bay. The Water Quality Bureau Laboratories analyze drinking water and waste water samples to comply with State and Federal regulatory and reporting requirements as well as samples submitted by Water and Clean Water Enterprise staff on a discretionary basis.

The Water Quality Bureau Laboratories also provide services to 17 external clients, including the Airport and several cities or agencies in San Mateo, Santa Clara, and Alameda Counties. The external clients pay negotiated fees for Water Quality Bureau Laboratories services that are based loosely on market prices. The fees vary among the external clients, depending on the length of time that the Water Quality Bureau Laboratories have provided services for the client, the volume of services provided, and whether the client is a Water Enterprise Department wholesale water customer. For example, for one type of analysis, known as "present/absence analysis of coliform", the city of Burlingame in San Mateo County pays $25 per analysis and the City of Hayward in Alameda County pays $15 per analysis.

The Water Quality Bureau Laboratories Annual Budget

Water and Clean Water Enterprise revenues pay for the Water Quality Bureau Laboratories expenditures. The Water Quality Bureau Laboratories annual expenditures are approximately $7.2 million, of which $2.9 million are funded by the Clean Water Enterprise and $4.3 million are funded by the Water Enterprise. Monies are transferred from the Clean Water and Water Enterprises directly to the Water Quality Bureau Laboratories each year as part of the budget process.

Approximately 4 percent of the Water Quality Bureau Laboratories expenditures are funded by external client revenues each year, which offset funding from the Clean Water and Water Enterprises. The Water Quality Bureau Laboratories received $323,550 in external client revenues in FY 2002-2003 and $294,669 in FY 2003-2004.

The Water Quality Bureau Laboratories do not track if revenues received from external clients cover the costs of providing services. In FY 2003-2004, although external client revenues of $294,669 made up only 4 percent of total revenues of $7,222,694, external client workload made up 8 percent of total Water Quality Bureau Laboratories workload. If external client revenues had made of 8 percent of total revenues of $7,222,694 in FY 2003-2004, the external clients would have paid $576,181 for laboratory services, an increase of $281,512 compared to $294,669 in actual external client revenues.

Identifying the Cost Efficiency of Laboratory Services

The Water Quality Bureau Laboratories could meet multiple objectives by establishing a cost accounting system to allocate the cost of services to the specific services provided, including:

• Controlling costs by segregating the components of costs, such as staff, reagent and other materials, equipment, and administrative overhead expenditures, to identify areas of expenditure growth and the reasons for the growth;
• Planning for future services and expenditures and establishing performance measures to assess the quality and cost of the services provided; and
• Setting prices for external and internal clients.

Monitoring Costs and Performance

The Water Quality Bureau Laboratories expenditures have increased by 28 percent from FY 2000-2001 through FY 2004-2005. Laboratory expenditures increased by 18 percent in FY 2003-2004 compared to FY 2002-2003, due largely to the implementation of the Water Contamination Emergency Response program and addition of two new positions, one senior level molecular biologist position and one senior level organic chemist position.

Table 5.1
Water Quality Bureau Laboratories Expenditures
FY 2000-2001 through FY 2004-2005

Source: Water Quality Bureau Laboratories

The Water Quality Bureau Laboratories lack sufficient cost data to determine if laboratory services are delivered cost-efficiently, including efficient utilization of staff resources. For example, in January, 2003, an outside consultant, Malcolm Pirnie Consulting, which is the parent company of Red Oak Consulting, issued a report regarding the laboratories' quality assurance program. As part of the analysis, the consultants reviewed laboratory staffing and found that the Millbrae laboratory facility had the capacity to take on additional workload while the Southeast Water Pollution Control Treatment Plant laboratory had deficiencies in managing high workload. In a follow-up to the initial report in June, 2004, Red Oak Consulting found that, although the Water Quality Bureau Laboratories had taken on additional workload, including conducting additional disinfection by-product monitoring of the water supply and performing additional services for external clients, interviews with Water Quality Bureau Laboratories staff indicated that staff at particular laboratory facilities were periodically and sometimes routinely underutilized.

June, 2004 Performance Assessment

The Water Quality Bureau Laboratories June, 2004, performance assessment, conducted by Red Oak Consulting, identified several areas of the laboratories functions requiring improvement, including:

• Developing professional training to broaden the scope of laboratories' employees' functions to provide redundancy and peak workload management, resulting in better utilization of staff resources;
• Establishing performance measures to more closely track and quantify laboratory performance and costs; and
• Developing a laboratory's facility maintenance plan, including maintenance and replacement schedules for laboratory equipment.
• Specifically, the Red Oak Consulting performance assessment recommended that Water Quality Bureau Laboratories management develop:
• A staff training program to train the laboratories' employees in a wider range of laboratory analyses and functions to increase their level of service and performance;
• Performance measures to track laboratory performance, including measures of time, cost, quality, efficiency, and productivity; and
• A laboratory asset management plan, including maintenance, replacement, and financial considerations.

FY 2004-2005 Performance Evaluation

The Water Quality Bureau Laboratories FY 2004-2005 budget and work plan includes implementation of the Red Oak performance assessment recommendations. Currently, Red Oak Consulting is working with the Water Quality Bureau Laboratories management to develop a laboratory staffing plan. The FY 2004-2005 work plan also includes implementing (a) laboratory performance measures, cost tracking, and business planning, and (b) a laboratory asset management plan. According to the Director of Laboratories, the laboratories have not begun implementation of these recommendations.

Laboratory Prices for Internal and External Client Services

Currently, the Water Quality Bureau Laboratories has a price list for external clients, based upon negotiated prices with each client, but no price list for internal clients. Water Quality Bureau Laboratories services are funded each year by a direct transfer of funds from the Water and Clean Water Enterprises in the annual budget. The level of Water and Clean Water Enterprise funding of the Water Quality Bureau Laboratories is not directly linked to the specific level of services provided by the Water Quality Bureau Laboratories.

More than 25 percent of the laboratory analyses performed by the Water Quality Bureau Laboratories for the Water and Clean Water Enterprises are discretionary to some degree. These analyses are not defined by regulatory requirements but by operational considerations, such as monitoring a special process or testing when unusual conditions occur. Specific types of analyses may contain several components, requiring different amounts of laboratory staff time, equipment, and materials, resulting in different costs. Because the Water and Clean Water Enterprises are not charged for specific laboratory analyses, the Enterprises have no cost incentive to request the level of analysis that most cost-efficiently achieves the analytical goal.

Components of Cost Allocation

The Water Quality Bureau Laboratories have not assessed if the laboratories provide cost efficient services, whether compared to private laboratories, other public agencies' laboratories, or to internal costs that are tracked over time. Analyzing the costs of laboratories' services, allocating the costs to types of analyses and procedures, and setting prices for internal and external clients would allow the Water Quality Bureau Laboratories to better assess the cost efficiency of its processes and to better manage its costs.

The Public Utilities Commission Financial Services Section staff, in conjunction with Water Quality Bureau Laboratories management, should develop a cost allocation system that analyzes and assigns the costs of laboratory functions in order to develop a cost-recovery price system for laboratory services. The Financial Services Section staff and Water Quality Bureau Laboratories managers will need to determine the type of cost allocation system to be implemented, whether based on specific types of "jobs" or laboratory analyses, on laboratory processes, or a combination of both.

Because the Water Quality Bureau Laboratories have standard processes for many of their analyses, the Water Quality Bureau Laboratories managers should be able to assign standard labor hours and wage costs, materials costs, and equipment costs to routine analyses. In evaluating and assigning direct costs, Water Quality Bureau Laboratories managers and Financial Services Section staff need to consider non-productive labor and fringe benefit costs, total material costs, such as shipping or other costs. Water Quality Bureau Laboratories managers and Financial Services Section staff will have to determine which Water Quality Bureau Laboratories costs are indirect costs that can not be assigned directly to specific processes, and how to assign hidden costs, such as the space and utility costs for the Southeast Water Pollution Treatment Plant, for which the laboratory incurs no direct charges. Financial Services Section staff will also have to determine how to allocate administrative overhead to specific processes.

The Laboratory Information Management System

Labor, materials, and overhead costs can be entered into the Water Quality Bureau's Laboratory Information Management System for each type of laboratory analyses. Although the Laboratory Information Management System is designed for tracking and monitoring laboratory procedures, fields to incorporate cost data for laboratory analyses can be created and cost reports generated. The system already has the capacity to generate invoices for external clients, detailing the unit price for specific types of analyses and the number of units.

Client Services Functions

The Water Quality Bureau Laboratories are currently recruiting for the vacant client services position. This position is responsible for developing and marketing laboratory services for external clients, maintaining the laboratory analytical capability table, and updating the laboratory business plan. The Water Quality Bureau Manager should enhance the client services job description to serve as (a) the project manager for developing and maintaining the laboratory cost allocation and pricing program and (b) the gatekeeper for internal and external clients to ensure that the appropriate level of laboratory services are provided to achieve clients' analytical goals.

Conclusion

The Water Quality Bureau Laboratories have not assessed if the laboratories can provide cost-efficient services, whether compared to private laboratories, other public agencies' laboratories, or to internal costs that are tracked over time. The Water Quality Bureau Laboratories should analyze and allocate its costs for providing laboratory services and develop cost-based prices for internal and external clients. Under a cost-based price system, the Public Utilities Commission can choose to negotiate fees with specific clients as a policy option, but negotiated fees should be an exception rather than a standard practice.

Recommendations

The Public Utilities Commission General Manager should:

5.1 Assign Financial Services Section staff to work with the Water Quality Bureau Laboratories managers to develop a system of allocating laboratory costs and establishing a price list.

5.2 Direct the Water Quality Bureau Manager to establish cost-based fees for internal and external clients.

5.3 Report to the Public Utilities Commission and the Board of Supervisors on the cost allocation system, including a proposed price list for internal and external clients, prior to September 30, 2005.

The Water Quality Bureau Manager should:

5.4 Expand the client services job description to include (a) project management to develop and maintain the laboratory cost allocation and pricing program and (b) gatekeeper functions for internal and external clients to ensure that the appropriate level of laboratory services are provided to achieve clients' analytical goals.

Costs and Benefits

The Water Quality Bureau Laboratories should develop a cost-based system for charging internal and external clients for laboratory services to ensure that resources are utilized efficiently and that costs are distributed fairly among clients. For example, if the Water Quality Bureau Laboratories implemented cost-based fees for external clients, who made up 8 percent of the workload and approximately 4 percent of revenues in FY 2003-2004, external client revenues would increase by an estimated $281,512 annually.