• Despite revenues of $239 million per year, the Water Enterprise does not have a business plan. While the Water Enterprise does have important strategic plans in place or in development, each one focuses only on a portion of the Water Enterprise's functions. Collectively the existing plans do not constitute a business plan for the enterprise as a whole.
  
  
• The Water Enterprise does not have a business planning context for (a) renegotiating the 1984 Settlement Agreement and Master Water Sales Contract with the Bay Area Water Supply and Conservation Agency which expires in 2009, (b) making informed decisions about the merits of major policy, planning, and financing options, (c) determining future water rates, (d) measuring its performance, (e) determining its optimal personnel resources and organizational structure, (f) comprehensively planning for all of the Water Enterprise's capital needs, and (g) managing future business risks. The Department should develop a Water Enterprise business plan in FY 2005-2006 to address these business risks.
  
  
• For those Water Enterprise plans currently in place, the monitoring and reporting frameworks to track implementation of required management actions are inconsistent. Plans with insufficient monitoring and reporting frameworks do not ensure sufficient accountability for implementation of management actions approved by the Public Utilities Commission and funded by the Board of Supervisors. The Department should ensure that there are adequate performance measures and reporting mechanisms to allow the Public Utilities Commission to know that approved management actions have been achieved.

Water Enterprise Plans

In addition to operations plans such as the Regional Water System Operating Plan, the Water Quality Notification Plan, and emergency response plans, the Water Enterprise has certain key future-oriented strategic plans in place or in development, including:

• Water Supply Master Plan (April, 2000). This was developed in conjunction with the Bay Area Water Users Association (the predecessor of the Bay Area Water Supply and Conservation Agency). There has been progress on some of this plan's recommendations. For example, some of the physical facilities identified in the plan were incorporated into the Water System Capital Improvement Program, but none will be completed within the schedule envisaged by the plan. This plan is currently being updated.
  
  
• Alameda Watershed Management Plan (September, 2000) and the Peninsula Watershed Management Plan (June, 2001). These plans set policies and procedures for Alameda Watershed and Peninsula Watershed management and land use over 20 years. Collectively, these watersheds cover approximately 60,000 acres of land in three counties. Departmental staff members advise that these plans, although approved by the Public Utilities Commission, have never been fully resourced, in part because of the Proposition H water rates freeze. An Alameda Habitat Conservation Plan is due in the summer of 2006 and a Peninsula Habitat Conservation Plan is due in the summer of 2007. These habitat conservation plans, which focus on proactive environmental stewardship of the department's land holdings, are intended to secure 20 to 50 year permits for certain operations and maintenance activities within the Alameda and Peninsula Watersheds.
  
  
• Retail Water Shortage Allocation Plan (December, 2001). This identifies a process for allocating water amongst the City's retail customers during a system-wide water shortage of up to 20 percent caused by drought.
  
  
• Long-term Strategic Plan for Capital Improvements, Long-range Financial Plan, and Capital Improvement Program and Appendices (May, 2002; annually updated thereafter). These plans, which have guided the Water System Capital Improvement Program to date, are currently being updated again in light of the Public Utilities Commission's February, 2005 guidance on the policy parameters for the Water System Capital Improvement Program. While an important focus of the Water Enterprise, the Water System Capital Improvement Program covers only part of the Water Enterprise's entire infrastructure and operations.
  
  
• North Westside Basin Cooperative Groundwater Management Plan (draft May, 2004)
  
  
• Lake Merced Level Management Plan (October, 2004).
  
  
• Integrated Water Resources Plan (due by October, 2005). This plan will address the portfolio of water sources that can be developed for the City through 2030.
  
  
• Recycled Water Master Plan and Groundwater Master Plan (due in late 2006). The Department is revisiting recycled water and groundwater proposals originally contained in the 1996 Recycled Water and Groundwater Master Plan which was not supported by the Public Utilities Commission despite being requested by the Commission in response to the 1987-1993 drought and having gone through the environmental impact review process.

Ramifications of the Lack of a Water Enterprise Business Plan

While individually important, none of the above plans spans the functions and responsibilities of the entire Water Enterprise and there is no Water Enterprise business plan which does so. Business plans are a fundamental management tool for enterprises and are a utility industry best practice. A Water Enterprise business plan would set out the Water Enterprise's management, operational, marketing, and financial goals, objectives, and performance measures, and specific business initiatives. The lack of a business plan represents a significant risk for the Water Enterprise because:

• The Water Enterprise earns revenues of $239 million per year.
  
  
• The Department does not have a clear business vision for the future of the Water Enterprise as it begins the renegotiation of the 1984 Settlement Agreement and Master Water Sales Contract with the Bay Area Water Supply and Conservation Agency which represents the Public Utilities Commission's 29 suburban wholesale customers. This 25-year contract expires in 2009. A key business issue relates to the existing Settlement Agreement and Master Water Sales Contract's provision for the Public Utilities Commission to bill its wholesale customers on a `utility' payment method, so that they do not pay for a new asset until it is in operation. San Francisco residents bear the costs during construction, and are reimbursed for the wholesale customers' share of the costs through current revenues generated by the completed projects. This is going to be a significant burden on San Francisco residents during construction of the Water System Capital Improvement Program due to that program's cost and length. Negotiations about adopting a `cash' payment method, whereby wholesale customers bear their share of construction costs as those costs are incurred, rather than the existing `utility' payment method of determining the wholesale water rates, will require unanimous support from all the signatories to the renegotiated Settlement Agreement and Master Water Sales Contract and will also determine whether or not to use Regional Financing Authority financing for portions of the Water System Capital Improvement Program if that decision has not already been taken prior to 2009. Although the total payment amount under the `utility' and `cash' payment methods are the same because all users pay proportionally, there are significantly different cash flow implications at the beginning of a project, for repair and replacement later in the life span of the capital asset, and when projects are completed behind schedule. Another major policy question is the issue of who should pay for additional capacity in the water system given that only a portion of Bay Area Water Supply and Conservation Agency members need capacity increases. However, if the City builds new redundant facilities and derives a benefit (such as increased water system reliability and operational flexibility) from them, then it will liable for part of the cost.
  
  
• There has not been a regular forum in which to make informed decisions about the merits of major policy, planning, and financing options developed by the individual operating divisions, the Planning Bureau, and the Financial Services Section. For example, will the Hetch Hetchy water supply need to be filtered at some point in the future? How will the Water Enterprise respond to the increasing complexity of environmental regulations? What would be the water system impacts of removing O'Shaughnessy Dam? What new water sources should be developed (for example, groundwater, recycled water, and desalination) and how should that development be financed? How will water from such sources be produced, treated, delivered, and billed for in the future, and what are the operational and customer service components of utilizing such water sources? In terms of protecting the watersheds and mitigating for the environmental impacts of large construction projects, what Public Utilities Commission property holdings are surplus, and what processes and criteria are necessary to make that determination, and what new land purchases, easements, or other types of land rights should be pursued? How should the proceeds from one-time surplus property sales be spent? How can the Public Utilities Commission enhance its partnership relationships with neighboring utilities, particularly given the Federal and State governments' increasing emphasis on utilities integrating their water resources planning?¹ What should the Public Utilities Commission do proactively in relation to Federal and State water initiatives that could affect the City's future water supplies?
  
  
• There is no business planning context for determining future water rates. While the Water Enterprise is able to develop projections on the impact of the Water System Capital Improvement Program on water rates, it has yet to determine the optimal mix of ongoing repair and replacement investments and operating strategies required for the water system, and what impact the resulting mix of capital investment and operating strategies would have on water rates. Departmental staff members advise that an asset management approach, which aims to determine the optimal mix of capital investments and operating strategies to deliver a chosen level of service at the lowest possible cost, will assist in this process.
  
  
• There is no organizational performance measurement framework for the Water Enterprise to measure its performance in terms of financial, infrastructural, social, and environmental goals. Individual staff performance is not measured in the context of a business plan's goals, objectives, and performance measures.
  
  
• There is no business planning context for determining the optimal personnel resources required for, and organizational structure of, the Water Enterprise.
  
  
• The Water System Capital Improvement Program does not include the Water Enterprise's annual repair and replacement program, other priority capital improvement projects not included in the Water System Capital Improvement Program², the new facilities' ongoing operational costs, and future technological advances (for example, extending the use of SCADA, the Geographic Information System, the MAXIMO maintenance management system, electronic records management, the department's website, and automated meter reading to maximize the cost and security benefits of centralized information and increased automation). As noted in the Red Oak Consulting Performance Assessment Phase I (Draft Interim Report), the Public Utilities Commission lacks a comprehensive facilities master plan for the entire water transmission and treatment system.
  
  
• There is no business planning context for risk management. For example, how much water rationing would be acceptable during a multi-year drought?

Recommended Action

The Public Utilities Commission General Manager should (a) complete a Water Enterprise business plan in FY 2005-2006, and (b) develop an ongoing Water Enterprise business planning process to ensure that the Water Enterprise business plan is regularly updated from FY 2006-2007 onwards.

Monitoring and Reporting on Plan Implementation

At the beginning of this audit section, there is a list of the key plans the Water Enterprise has in place. These plans shape the Water Enterprise's work program. However, the frameworks for systematic monitoring of, and reporting on, implementation of these plans are highly variable. This section contrasts the monitoring and reporting frameworks of two sets of reports: (a) the Alameda Watershed Management Plan and the Peninsula Watershed Management Plan, and (b) the Lake Merced Level Management Plan. The following analysis is not intended to compare the value or scope of these two reports. The watershed management plans are important policy statements and management tools which cover much larger property assets and a much greater range of functions and environmental issues, and therefore pose much greater management challenges, than the Lake Merced Level Management Plan. Departmental staff members argue that the watershed management plans represent the completion of a complex planning effort and have resulted in substantial changes to the way the Department manages its watersheds. The Budget Analyst concurs that the development of these plans places the Department in a much better stewardship position than it would otherwise be in if the Department had not completed the watershed planning process. The following analysis is focused solely on the question of how to ensure accountability for implementation of the plans' recommendations.

Alameda Watershed Management Plan and Peninsula Watershed Management Plan

For example, both the Alameda Watershed Management Plan and the Peninsula Watershed Management Plan contain extensive lists of recommended "management actions." Table 6-1 in each report specifies that Phase 1(B) management actions, which are among the highest priority management actions, should be implemented between April of 2001 and April of 2006 for the Alameda Watershed Management Plan and between the Spring of 2002 and the Spring of 2007 for the Peninsula Watershed Management Plan. At the time the plans were published, the status of many of these management actions was described as "To Do," "Ongoing," or "Initiated." Lower priority Phase 2(B) management actions should be implemented within ten years of plan adoption, while Phase 3(B) management actions should be implemented within 20 years of plan adoption. Further, the two plans are due to be revised every five years.

There are also a number of subsidiary reports, including: Fire Management Plan Peninsula Watershed (August, 1996; updated March, 2002); Alameda Creed Watershed Grazing Resources Management Plan (July, 1997); Fifield/Cahill Ridge Trail Element (September, 1998); Sunol Valley Resources Management Element (November, 1998); and Preliminary Sunol Landscape and Recreation Plan (July, 1999). There has been no consolidation of the watershed management plans and their subsidiary reports into an overview policy statement of need, or inventory of resources and activities.

In response to the Budget Analyst's request for information about how the Department systematically monitors and reports on implementation of the plans' management actions, the Department responded that:

• "The phased actions contained in Chapter 6 were not designed to be fixed, but were meant to be periodically reviewed and revised and updated as determined by professional [Land and Resources Management Section]³ staff. This characteristic of the plan provides an important ability for managers and resource professionals by allowing for adaptive management of the various actions and guidelines dependent upon the changes in conditions, whether climatic, economic, organizational, or political." "Adaptive management" is the concept of institutional flexibility to respond to required or recommended policy changes. Once previously agreed deadlines are met and results have been evaluated, appropriate consideration can be given to policy redirections. The Budget Analyst considers that the Land and Resources Management Section's misinterpretation of "adaptive management" is undercutting the Department's ability to report accurately to the Public Utilities Commission and the Board of Supervisors on the management actions the Public Utilities Commission approved and the Board of Supervisors funded through subsequent budget appropriations. While management's ability to respond to changing conditions is important, management also needs to explain to the Public Utilities Commission why it has to deviate from an explicit set of management actions previously approved by the Public Utilities Commission.
  
  
• Land and Resources Management Section staff holds a monthly interdisciplinary watershed project review meeting which assesses proposed projects' compliance with the watershed management plans and the implementation of the watershed management plans' recommended management actions. The Budget Analyst notes that these meetings, while managerially valuable, produce no written document which explicitly links decisions taken to the required management actions of the watershed management plans.
  
  
• Land and Resources Management Section staff collect and analyze watershed management data using the Geographical Information System database, the MAXIMO maintenance work database (though this has limited utility), incident reports, and periodic updates of the Tables 6-1 described above. The watershed master plans are also reflected in the Land and Resources Management Section's annual budget requests. The Budget Analyst regards data collection and budget requests as necessary inputs to implementing the watershed management plans. These actions, however, do not constitute a sufficient feedback loop to ensure accountability to the Public Utilities Commission and the Board of Supervisors that required management actions approved by the Public Utilities Commission and funded by the Board of Supervisors are, indeed, being taken. Further, the Budget Analyst notes that updates of the Tables 6-1 provide only a broad sense of each management action's status, and no explanation for the reasons why, when the status is defined as "ongoing," "initiated," "to do," or "done/ongoing" (which is inherently contradictory).
  
  
• "The implementation of long-range management actions, for the most part, has not begun ... because of lack of funding or staffing or due to the relative priority of the actions when compared with Phase 1 actions, or because other departmental actions have taken a higher priority. For example, the implementation of the Fifield-Cahill Ridge Trail was prioritized higher than other management actions in the watershed plans by direction of the [Board of Supervisors] and [the Public Utilities Commission]." The statement about "lack of funding or staffing" suggests that there was either (a) insufficient departmental advocacy for adequate resourcing of the watershed management plans at the Public Utilities Commission and Board of Supervisors, (b) the Proposition H water rate freeze made adequate resourcing impossible, and/or (c) the Public Utilities Commission knowingly approved plans and required management actions which it could not resource.
  
  
• "Periodic revisions (approx[imately] every five years) may be made over the life of the Watershed Management Plans ... if necessary. Revisions are not expected to alter the essence of the plans, but will simply correct errors, present new data or clarify ambiguities. For example, mapping of the watershed has resulted in new and improved maps. These would be included in the updated plans. At present, there are no revised documents for review." The Budget Analyst questions the statement that revisions "will simply correct errors, present new data or clarify ambiguities" in light of the advice above that there has already been significant reprioritization of the management actions approved by the Public Utilities Commission in the original watershed management plans.

The Budget Analyst also notes that there is a diffuse spread of environmental and land management responsibilities throughout the Department which are insufficiently coordinated between the operational divisions and the Planning Bureau. At the January 13, 2005 Public Utilities Commission meeting, the Department undertook to consolidate its natural resources management functions into "a visible unit." As part of that initiative, it will be important for the Department to be able to account for the management actions taken to date in response to all relevant planning documents, most notably the watershed management plans, so that it can determine where the shortfalls are, and to focus the new unit's resources at those needs.

Lake Merced Level Management Plan

In contrast to the watershed management plans, the Lake Merced Level Management Plan provides a tighter monitoring and reporting structure. It sets out four goals, one of which is to "develop and implement a focused monitoring and reporting program based on lesson learned during the interim period," and sets out the data to be collected for an annual summary monitoring report to be distributed to stakeholders. Further, the Groundwater Program Manager position's FY 2004-2005 performance agreement contains a performance measure specifically about Lake Merced's water level. While this report has a much tighter focus than the watershed management plans noted above, and therefore lends itself more easily to tight monitoring and reporting, it provides a model which could usefully be applied to all other Water Enterprise plans.

Recommended Action

The Public Utilities Commission General Manager should direct the new Assistant General Manager, Water and Power (as recommended in Section 10) to review all existing Water Enterprise plans to ensure that there are adequate performance measures and reporting mechanisms to allow the Public Utilities Commission to know that approved management actions have been achieved. The reports to the Public Utilities Commission should include information on when implementation of recommendations or success in meeting recommended performance measures cannot be met because of funding limitations so that the Public Utilities Commission has the option to modify the affected recommendations or performance measures, or fully fund them.

The Public Utilities Commission General Manager should also report to the Public Utilities Commission during FY 2005-2006 on the status of all management actions in all existing Water Enterprise plans.

Conclusion

Despite revenues of $239 million per year, the Water Enterprise does not have a business plan. While the Water Enterprise does have important strategic plans in place or in development, each one focuses only on a portion of the Water Enterprise's functions. Collectively the existing plans do not constitute a business plan for the enterprise as a whole.

For those Water Enterprise plans currently in place, the monitoring and reporting frameworks to track implementation of required management actions are variable. Plans with insufficient monitoring and reporting frameworks do not ensure sufficient accountability for implementation of management actions approved by the Public Utilities Commission and funded by the Board of Supervisors.

Recommendations

The Public Utilities Commission General Manager should:

13.1 Complete a Water Enterprise business plan in FY 2005-2006.

13.2 Develop an ongoing Water Enterprise business planning process to ensure that the Water Enterprise business plan is regularly updated from FY 2006-2007 onwards.

13.3 Direct the new Assistant General Manager, Water and Power (as recommended in Section 10) to review all existing Water Enterprise plans to ensure that there are adequate performance measures and reporting mechanisms to allow the Public Utilities Commission to know that approved management actions have been achieved. The reports to the Public Utilities Commission should include information on when implementation of recommendations or success in meeting recommended performance measures cannot be met because of funding limitations so that the Public Utilities Commission has the option to modify the affected recommendations or performance measures, or fully fund them.

13.4 Report to the Public Utilities Commission during FY 2005-2006 on the status of all management actions in all existing Water Enterprise plans.

Costs and Benefits

While the Department may need consultant assistance to finalize its Water Enterprise business plan, the primary input should be from departmental staff members expert in water operations so that the Department commits to its own strategic planning processes and results.

A Water Enterprise business plan would allow the Department to address all of the deficiencies listed in the report above in the section "Ramifications of the Lack of a Water Enterprise Business Plan." In particular, undertaking a business planning process, and developing an ongoing Water Enterprise business planning process, would allow the Department to determine how best to:

• Renegotiate the 1984 Settlement Agreement and Master Water Sales Contract with the Bay Area Water Supply and Conservation Agency which expires in 2009.
• Make informed decisions about the merits of major policy, planning, and financing options developed by the individual operating divisions, the Planning Bureau, and the Financial Services Section.
• Determine future water rates.
• Measure its performance in terms of financial, infrastructural, social, and environmental goals.
• Determine the optimal personnel resources required for, and organizational structure of, the Water Enterprise.
• Comprehensively plan for all of the Water Enterprise's capital needs.
• Manage future business risks.

Reviewing all existing Water Enterprise plans to ensure that there are adequate performance measures and reporting mechanisms, and reporting to the Public Utilities Commission during FY 2005-2006 on the status of all management actions in all existing Water Enterprise plans, will ensure that the Department can account for its progress against all management actions approved by the Public Utilities Commission and funded by the Board of Supervisors.

¹ For example, the East Bay Municipal Utility District, with whom the Public Utilities Commission shares a water system intertie, is also an upstream water diverter with similar concerns as the Public Utilities Commission about potential threats to its water rights. The Public Utilities Commission also shares customers in eight cities and a water system intertie with the Santa Clara Valley Water District. The Public Utilities Commission is partnering on recycled water and groundwater projects with Daly City, the North Coast County Water District, and the City of South San Francisco.

² The Water Supply and Treatment Division recently compiled a summary document of estimates from a variety of reports that there are unfunded regional water system repair and replacement needs of at least $67,000,000 - $83,000,000 to maintain filtration avoidance and delivery reliability alone. This figure does not include the unfunded capital improvement needs of (a) the regional water system in relation to ensuring an adequate water supply and asset management, (b) the Hetch Hetchy Enterprise, or (c) the City Distribution Division.

³ The Land and Resources Management Section is part of the Department's Water Supply and Treatment Division.