• Despite an annual Public Utilities Commission operating budget of approximately $585 million, management responsibility for the operation of critical public utilities used by up to 2.4 million San Francisco and suburban customers, and ownership responsibility for billions of dollars worth of capital assets and land holdings, the Public Utilities Commission does not have a broad strategic plan.
  
  
• The Water, Hetch Hetchy, and Clean Water Enterprises each have significant planning needs because (a) strategic policy and planning is not regarded as a core function in the way that system operations has traditionally been, and (b) the Public Utilities Commission lacks a strategic plan which encompasses its water, power, and clean water responsibilities and how those functions will be coherently and consistently managed.
  
  
• Absent a regularly updated departmental strategic plan developed through a consultative process with internal and external stakeholders, the Public Utilities Commission lacks on a department-wide basis: (a) a unified vision, mission, and policy goals which shows the linkages between the water, power, and clean water enterprises; (b) a regular forum, format, and process for the managers and the Public Utilities Commission to raise and discuss major policy issues with each other; (c) a strategic policy and planning orientation for the department as a whole; (d) planning consistency across the enterprises; (e) discussion about how business processes can optimally support the organization as a whole; and (f) a framework for consistent organizational policies and procedures.
  
  
• updated strategic plan which is supported by a comprehensive policy, planning, implementation, and reporting system.

The Department's Planning Needs

With an annual operating budget of approximately $585 million, management responsibility for the operation of critical public utilities, and ownership responsibility for valuable capital assets, the Public Utilities Commission needs to ensure that strategic policy and planning is a core function in the way that system operations has traditionally been. Our management audit of the Public Utilities Commission's three enterprise funds has found significant strategic policy and planning needs in all three enterprise funds. To recap:

Phase I Management Audit of the Public Utilities Commission - Clean Water Enterprise Fund (September 17, 2004)

• There are a number of urgently required clean water capital improvement projects which are either on hold or proceeding incrementally through the insufficiently funded annual clean water repair and replacement program.
  
  
• Since the 1990s, there has been extensive clean water capital planning, but the overall planning process has not been particularly coherent, especially given the elimination of clean water projects from the Department's long-term capital improvement program in 2002. The Department has now chosen to undertake a separate Clean Water master planning process due for completion in 2007. Despite delays in moving the Clean Water master planning process forward, the process has now begun.
  
  
• The Public Utilities Commission General Manager should hold departmental staff members and third party contractors accountable for meeting critical path milestones in the Clean Water master planning process. Clean Water Master Planning should be a core responsibility of the recommended Assistant General Manager, Clean Water position, and clean water staff with operational expertise should be an integral part of the Clean Water master planning process.

Phase II Management Audit of the Public Utilities Commission - Hetch Hetchy Enterprise Fund (December 21, 2004)

· By not developing a Hetch Hetchy Enterprise business plan, the Department has failed to meet requests from the Board of Supervisors and directives from the Public Utilities Commission, and to implement recommendations from its own consultants.

• Failure to develop a Hetch Hetchy Enterprise business plan is a result of (a) the Department's lack of an overarching strategic plan, (b) the dearth of executive management guidance, (c) the non-functioning of the Department's Risk Management Committee and the Risk Oversight Committee, (d) no one manager below the over-extended Assistant General Manager, Operations position being responsible for managing the Hetch Hetchy Enterprise or its budget, and (e) the unresolved conflicts between the Water Operations, Power Operations, and Power Policy Divisions.
  
  
• Business plans are a fundamental management tool for enterprises and are a utility industry best practice. There are serious negative ramifications arising from the lack of a Hetch Hetchy business plan. The Hetch Hetchy Enterprise, which generates approximately $126 million annual in revenues, lacks a clearly defined operating policy, a clear business vision for the future, and a forum for deciding on major strategic policy and planning options. Roles, responsibilities, and accountabilities are unclear. There is no organizational performance measurement framework. There is no business planning context for funding capital programs, funding energy efficiency and alternative energy initiatives, or determining the optimal personnel resources and organizational structure. There are delays in making business-critical decisions. Since the Hetch Hetchy Enterprise does not control the application of its rates and which City organizations receive subsidized power, and since it lacks a business plan, the Hetch Hetchy Enterprise cannot responsibly seek a credit rating from the credit agencies.
  
  
• The Public Utilities Commission General Manager should make finalization of a Hetch Hetchy Enterprise business plan an early priority of her administration, and develop an ongoing Hetch Hetchy Enterprise business planning process which incorporates cost-of-service rate review and performance measurement processes.
  
  
• The Board of Supervisors should reserve 75 percent of FY 2005-2006 capital project appropriations for the Hetch Hetchy Enterprise until the Department transmits a Hetch Hetchy Enterprise business plan to the Board of Supervisors.

Phase III Management Audit of the Public Utilities Commission - Water Enterprise (March 23, 2005)

• Despite revenues of between $170 million and $180 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, (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.
  
  
• 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.

It is the professional judgement of the Budget Analyst that each enterprise has significant strategic policy and planning needs because (a) strategic policy and planning is not regarded as a core function in the way that system operations has traditionally been, and (b) the Department lacks a strategic plan which encompasses its water, power, and clean water responsibilities and how those functions will be coherently and consistently managed. The Clean Water Master Plan (due 2007), the Hetch Hetchy Business Plan (due FY 2005-2006), the Water System Capital Improvement Program Environmental Impact Report (due 2007), and the Integrated Water Resources Plan (due 2005) are all important documents for the individual enterprises in terms of both strategic policy intent and operational implementation. However, cumulatively, they do not amount to a strategic plan for the Department as a whole. Further, they are being developed in a vacuum due to the lack of an overarching strategic plan for the Department as a whole.

Ramifications of the Lack of a Departmental Strategic Plan

The Red Oak Consulting Performance Assessment Phase I (Draft Interim Report) stated that a utility best practice is that:

The organization is clear about its purpose, mission, and priorities, and has clear, compelling mission and vision statements. Strategic plans are used and updated regularly. Clear policies and procedures are established, updated, and are well-communicated, and are in excellent alignment with organizational mission and goals.

To this end, the Red Oak Consulting Team identified a need for greater attention to department-wide planning, strategic and policy functions, and inter-departmental coordination.

Absent a regularly updated departmental strategic plan developed through a consultative process with internal and external stakeholders (for example, the Bay Area Water Supply and Conservation Agency, the Bay Area Water Stewards, and the Public Utilities Commission's Citizens Advisory Committee), the Public Utilities Commission lacks:

• A unified vision, mission, and policy goals for the department as a whole which shows the linkages between the water, power, and clean water enterprises. As the Public Utilities Commission's overarching policy document, a departmental strategic plan could set out department-wide goals related to sustainability, environmental stewardship, regulatory compliance, and other overarching policy issues. Within that context, the Water System Capital Improvement Program Environmental Impact Report, the Integrated Water Resources Plan, the Hetch Hetchy Business Plan, the Clean Water Master Plan, and any other business and operations plans to be developed by the enterprises in the future would be implementation plans containing the action steps necessary for each enterprise to achieve the Department's overarching policy goals.
  
  
• The organizational structure is not fully aligned with the Department's strategic goals. For example, the Department's natural resources management functions are currently spread across a number of divisions.
  
  
• A regular forum, format, and process for the Commission and the Department to raise and discuss major policy issues with each other. Regular updating of the Department's strategic plan would reinforce the Public Utilities Commission's policymaking role, building on the November of 2004 through February of 2005 planning process undertaken by the Public Utilities Commission in relation to the Water System Capital Improvement Program.
  
  
• A venue for discussion and resolution of key policy and business questions between the Department, the Commission, the Board of Supervisors, and the Mayor's Office. For example, what is the relationship between water and power? What impact will the increased use of recycled water and conservation have on the Clean Water Enterprise? Should the Department pay a franchise fee to the City in lieu of the current water and power subsidies to City departments? What are the economic and policy considerations which must be taken into account when investing in alternative sources of water (for example, desalination, recycling, and water sources and storage options requiring filtration) and power (for example, renewable energy)? Is entering the retail power market under the community choice aggregation model an appropriate role for a civil service department operating under an appointed commission? What would be the impacts of removing O'Shaughnessy Dam?
  
  
• Policy continuity during changes in the Public Utilities Commission's membership or the Department's senior administration, and a public forum and format for discussing policy changes new commissioners and/or administrators wish to make.
  
  
• A strategic policy and planning orientation for the department as a whole.
  
  
• Planning consistency across the enterprises. For example, should all enterprises aim to meet or exceed minimum regulatory requirements? What are the key operational plans for each enterprise and who is responsible for systematically monitoring their implementation and regularly updating them?
  
  
• Incentives for staff to work across the enterprise boundaries on issues that affect the Department as a whole, to clarify roles internally, and to clarify relationships with other City departments. Who is responsible for what?
  
  
• Business processes which optimally support the organization as a whole. For example, how can the administrative bureaus best support the enterprises? How can the Financial Services Section streamline the budget process and provide optimal financial management reports? How can Human Resource Services facilitate personnel hiring, disciplinary procedures, and succession planning? How can Information Technology Services ensure coherent information technology purchases and a systematic equipment replacement program? How can Real Estate Services optimize revenues from the Department's land holdings within necessary operational constraints? How can Contracts Administration streamline the contracting process? How can security, emergency planning, fleet management, and communications system services best protect and manage the Department's facilities and services?
  
  
• A framework for consistent organizational policies and procedures.

Sustainability Plan

At the January 13, 2005 Public Utilities Commission meeting, departmental staff members advised the Commission that the Department would develop a department-wide "sustainability plan" to comply with the Proposition E requirement that the Public Utilities Commission manage natural resources in an environmentally friendly, sustainable manner. According to departmental staff members, a sustainability plan would aim to:

• Achieve department-wide balance of ecological, economic, and social goals and practices.
• Design, assess, and integrate organizational and system management.
• Use a business case, multi-criteria assessment, or other utility industry standard methodology.

Sustainability plan components could include the following: inventories of natural resources and lands, facilities, assets, and operations; facility and materials lifecycle assessments; priority initiatives and the required implementation steps; technical and financial feasibility studies; benefit and cost studies which evaluate the return on investment; sensitivity analysis; risk assessment; performance measurement against sustainability indicators; and audit trails. After developing sustainability goals, the Department could identify practical strategies for achieving them with clear performance metrics. Such a plan could lead to policies and procedures which guide decisions in areas ranging from large, once-in-a-lifetime investments (such as a large capital improvement project) to routine daily activities (such as the purchase of office supplies).

Such a sustainability plan could usefully form the core of a departmental strategic policy and planning process. However, the Budget Analyst notes that a departmental strategic plan is intended to address more than environmental stewardship concerns, however far-reaching, as indicated by the list of strategic policy and planning benefits above. A sustainability plan could only do this if it also encompasses organizational sustainability (for example, succession planning; organizational flexibility), economic sustainability (for example, financial viability; business planning capacity), and infrastructure sustainability (for example, asset management).

The Public Utilities Commission has an estimated budget of $500,000 for consultant input over a two year period to develop a sustainability plan. The Budget Analyst recommends that the Public Utilities Commission General Manager use this funding to develop an expanded Public Utilities Commission strategic plan, using input from both internal and external stakeholders and maintaining a focus on environmental, organizational, economic, and infrastructure sustainability. Given that sustainability planning is a multi-year process, such a plan is expected to take three years to complete. Therefore, if three years are necessary for a comprehensive planning process, the Budget Analyst recommends that an interim strategic plan be issued no later than FY 2006-2007 to keep the planning process progressing forward, with a final plan issued no later than FY 2007-2008. Further, the Public Utilities Commission General Manager should regularly update the strategic plan so that it remains a "living document."

Conclusion

Despite an annual Public Utilities Commission operating budget of approximately $585 million, management responsibility for the operation of critical public utilities used by up to 2.4 million people, and ownership responsibility for billions of dollars worth of capital assets, the Public Utilities Commission does not have an overarching strategic plan.

The Water, Hetch Hetchy, and Clean Water Enterprises each have significant policy and planning needs because (a) strategic policy and planning is not regarded as a core function in the way that system operations has traditionally been, and (b) the Department lacks a strategic plan which encompasses its water, power, and clean water responsibilities and how those functions will be coherently and consistently managed.

Absent a regularly updated departmental strategic plan developed through a consultative process with internal and external stakeholders, the Department lacks: (a) a unified vision, mission, and policy goals for the department as a whole which shows the linkages between the water, power, and clean water enterprises; (b) a regular forum, format, and process for the Commission and the Department to raise and discuss major policy issues with each other; (c) a strategic policy and planning orientation for the department as a whole; (d) planning consistency across the enterprises; (e) discussion about how business processes can optimally support the organization as a whole; and (f) a framework for consistent organizational policies and procedures.

Recommendations

The Public Utilities Commission General Manager should:

15.1 Expand the Department's current sustainability plan project to develop an interim Public Utilities Commission strategic plan no later than FY 2006-2007 and a final strategic plan no later than FY 2007-2008 using input from both internal and external stakeholders and maintaining a focus on environmental, organizational, economic, and infrastructure sustainability.

15.2 Regularly update the Public Utilities Commission strategic plan so that it remains a "living document."

15.3 Ensure that the departmental strategic plan is supported by a comprehensive policy, planning, and reporting system.

Costs and Benefits

The Public Utilities Commission has an estimated budget of $500,000 for consultant input over a two year period to develop a sustainability plan. This funding should be the core funding for an expanded departmental strategic plan. While the Department may need consultant assistance to finalize its departmental strategic plan, the primary input should be from departmental staff members expert in operations and expert in planning so that the Department commits to its own strategic planning processes and results.

The benefits of a departmental strategic plan include: (a) a unified vision, mission, and policy goals for the department as a whole which shows the linkages between the water, power, and clean water enterprises; (b) a regular forum, format, and process for the Commission and the Department to raise and discuss major policy issues with each other; (c) a strategic policy and planning orientation for the department as a whole; (d) planning consistency across the enterprises; (e) discussion about how business processes can optimally support the organization as a whole; and (f) a framework for consistent organizational policies and procedures.

The benefits of supporting the departmental strategic plan with a comprehensive policy, planning, implementation, and reporting system are ensuring (a) accountability for the implementation of management actions approved by the Public Utilities Commission and funded by the Board of Supervisors, (b) the necessary feedback loop to keep the departmental strategic plan a "living document," and (c) all staff members' contributions are linked to the vision, mission, and policy goals of the organization as a whole.