Land Management

• The Public Utilities Commission lacks comprehensive management of City-owned land and real property under the jurisdiction of the Public Utilities Commission. This has resulted in inadequate property inventories and the failure to define properties that are either essential or surplus to the water, power, and clean water utilities' requirements. Currently, the Real Estate Services Bureau is unable to determine if all real properties are rented or in optimal use, resulting in the loss of potential rental revenue. The Real Estate Services Bureau should develop and maintain a comprehensive property inventory. A one percent increase in rental revenues annually would result in $100,000 in additional Public Utilities Commission rental revenues annually.
  
  
• Although the Real Estate Services Bureau has identified up to 29 properties that are potentially eligible to be declared surplus to the Public Utilities Commission's needs, with estimated sales values exceeding $120 million, only four of the 29 properties have been presented to and been declared surplus by the Public Utilities Commission for potential sale at public auction. If the Public Utilities Commission identified and offered for sale all properties that are surplus to the water utilities requirements, the Public Utilities Commission would receive at least an estimated $120 million in one-time revenues that, in accordance with Public Utilities Commission policy, would be allocated to capital repair and replacement or Capital Improvement Program projects. By using an estimated $120 million in land sales proceeds rather than revenue bond debt to finance a portion of the Water System Capital Improvement Program, the Public Utilities Commission could save an estimated $4.8 million annually in interest expenses.
  
  
• The Public Utilities Commission lacks a formal process of coordinating the sale of surplus properties among its Real Estate Services Bureau, and its enterprise departments, risking the sale or use of land that is inconsistent with the requirements of the water utility. For example, the Water Supply and Treatment Division and the Real Estate Services Bureau failed to communicate effectively regarding the option agreement for the sale to MasterDevo, a private developer, of Public Utilities Commission property in Mountain View, which includes a portion of the water system pipeline right-of-way. Organizations under the Water Supply and Treatment Division also failed to communicate and coordinate effectively, resulting in the failure to notify the Public Utilities Commission's Manager of Land and Resource Management, who is responsible for managing right-of-way properties, of the potential sale of right-of-way property.
  
  
• Further, the Public Utilities Commission risks significant legal and other costs from encroachment by adjacent property owners on the Public Utilities Commission's water system rights-of-way. The Public Utilities Commission is engaged in five legal disputes to remove right-of-way encroachments and, according to the City Attorney's Office, may face up to an additional 15 legal disputes regarding private property owners or tenants encroaching on the water system rights-of-way, resulting in unknown legal and settlement costs to the City.
  
  
• The Public Utilities Commission General Manager should ensure that the rights-of-way adopted management plan, presented to the Public Utilities Commission in June, 2004, is implemented effectively and should report to the Board of Supervisors on the existing and projected costs to the City to abate water system rights-of-way encroachments within the next six months.

The Public Utilities Commission owns 85,165 acres of land in and outside of San Francisco, of which approximately 62,441 acres or 73 percent is Water Enterprise Department land, including watershed and water system pipeline rights-of-way properties in San Mateo, Santa Clara and Alameda Counties, and other real property that is not categorized as watershed or pipeline property holdings, and may be surplus to the needs of the Water Enterprise.

The Public Utilities Commission owns land to maintain the water collection and transmission system, and to protect the watershed and access to the water transmission pipelines. This role requires comprehensive land management and planning, including a comprehensive evaluation of the Public Utilities Commission's property holdings to:

• Conclude which properties are surplus to the needs of the water, clean water and power utility systems,
• Identify properties that the Public Utilities Commission should acquire to support the Water System Capital Improvement Program and to protect the watershed as urban development occurs adjacent to the watersheds in San Mateo, Santa Clara, and Alameda counties,
• Protect the water pipeline right-of-way from encroachments and incompatible uses,
• Determine potential uses for watershed and pipeline right-of-way properties that are consistent with water policy priorities,
• Evaluate and monitor existing lease and permit agreements for ongoing compatibility with water policy priorities and compliance with lease and permit agreements, and
• Maximize revenues from Public Utilities Commission property within the constraints of departmental land management requirements.

Organizational Structure to Support Comprehensive Land Management

Responsibility for managing Public Utilities Commission land and real property is dispersed throughout the department. Consequently, the Public Utilities Commission lacks a comprehensive inventory and management plan for its land and real property. Specifically, no division within the Public Utilities Commission has determined:

• All of the property holdings which are surplus to the needs of the utilities,
• Which properties must be acquired for the Water System Capital Improvement Program and to otherwise protect the watershed, and the timing and cost of such acquisitions,
• Which encroachments on the pipeline right-of-way must be removed, and the timing and cost of such removal, and
• All potential uses for watershed and pipeline right-of-way properties.

This lack of overall land management and planning, including a comprehensive evaluation of the Public Utilities Commission's property holdings, creates several risks for the Department, including potentially:

• Not having the appropriate property holdings to protect the water system,
• Loss of revenue from not achieving the highest and best use in property leases and sales, and
• Delays and increased costs for the Water System Capital Improvement Program due to encroachments and property acquisition requirements.

Currently, responsibility for land and real property management is divided among the Real Estate Services Bureau, the Water Supply and Treatment Division and the Infrastructure Division's Project Management Bureau.

The Real Estate Services Bureau, which reports to the Assistant General Manager, Business Services is responsible for the management of Public Utilities Commission property which is leased or permitted¹, for property purchases and sales, and for the removal of right-of-way encroachments in coordination with the City Attorney's Office. The Real Estate Services Bureau primarily performs a leasing and permitting function, which is discussed in Section 12 of this report.

The Water Supply and Treatment Division is responsible for water pipeline right-of-way and watershed land management. This responsibility includes (1) patrolling and maintaining watershed and pipeline right-of-way properties, (2) reporting encroachments to the Real Estate Services Bureau, (3) determining compatible uses for watershed and pipeline right-of-way properties, and (4) issuing non-revenue engineering permits, and (5) identifying properties that should be acquired for the water system.

The Infrastructure Division's Project Management Bureau is responsible for land use planning for the Water System Capital Improvement Program. The Project Management Bureau is in the preliminary stages of planning land use, including land acquisition, for the Water System Capital Improvement Program. The Project Management Bureau will identify properties for acquisition and those properties with encroachments that must be removed for the construction of the Water System Capital Improvement Program. Once the Project Management Bureau identifies these properties, the Real Estate Services Bureau will be responsible for purchases and the removal of encroachments.

Responsibility for real estate and land management should be coordinated within the Public Utilities Commission. The February 2, 2005 draft organization chart transfers the Real Estate Services Bureau from the Business Services Division to the External Affairs Division. The proposed Water Division's Natural Resources Section will be responsible for watershed land management and the Infrastructure Division's Project Management Bureau will have responsibility for the Water System Capital Improvement Program's land use and acquisition management.

The Public Utilities Commission General Manager should establish a formal framework for coordinating the Public Utilities Commission's land use and real property management policies and protocols. Specifically, the General Manager should assign to the Assistant General Managers for External Affairs, Water and Power, and Infrastructure the joint responsibility for coordinating land use and property management, including protocols for establishing management oversight of (a) real property and land inventories, (b) surplus property identification, (c) property sales and acquisition procedures, (d) encroachment identification, management, and removal, and (e) other land and property management issues. The General Manager should require comprehensive written land and property management protocols, which should incorporate existing policies and procedures into a single document, prior to July 1, 2005, and quarterly joint reports from the Assistant General Managers for External Affairs, Water and Power, and Infrastructure on property and land management.

Property Inventories and Surplus Properties

The Public Utilities Commission lacks a comprehensive inventory of its property holdings. The Budget Analyst's 1994 Audit of Public Utilities Commission's Water Department found that the Real Estate Services Bureau² did not have a comprehensive property inventory of the Public Utilities Commission's property holdings, and recommended that the Division develop such an inventory. To date, the Real Estate Services Bureau has not created a comprehensive property inventory because, according to the Director of the Real Estate Services Bureau, the City's Department of Administrative Services Division of Real Estate has a property inventory list. The Division of Real Estate maintains a database of all City properties located in San Francisco. However, for all Public Utilities Commission properties outside of San Francisco, the Division of Real Estate only maintains high level summary data. This is inadequate for land management and planning purposes. A comprehensive property inventory should include information that would be the basis of a comprehensive evaluation of the Public Utilities Commission's property holdings, such as (a) data regarding potential uses, (b) if currently leased, lease uses and restrictions, (c) property rights of adjoining property owners, (d) characteristics of adjoining properties uses, (e) water pipeline locations, and (f) other information regarding the importance of the property to the utility.

Because the Public Utilities Commission does not have a comprehensive property inventory, the Public Utilities Commission (1) cannot identify all surplus properties, (2) could overlook vacant property with leasing potential, and (3) cannot evaluate Public Utilities Commission property holdings for overall land management and planning.

The Real Estate Services Bureau currently maintains an excel file with comprehensive information regarding active leases and permits but does not maintain information about property not under lease or permit to a third party. The Water and Supply and Treatment Division maintains a Geographical Information System for watershed and pipeline right-of-way properties only, which includes pipe locations, and identified right-of-way encroachments.

The General Manager should direct the Real Estate Services Bureau to develop and maintain a comprehensive property inventory of the Public Utilities Commission's property holdings, which incorporates the Real Estate Services Bureau database and the Water and Supply and Treatment Division Geographical Information System information. This comprehensive property inventory should serve as the basis for evaluating all of the Public Utilities Commission's property holdings and for coordinating land management among the divisions with various responsibilities for properties.

Surplus Property

According to departmental staff, the Department historically did not sell its property holdings to generate revenue. However, interest in using sale revenue to fund acquisitions for additional watershed properties, security improvements, and most recently, for the Water System Capital Improvement Program, has resulted in the identification and sale of four large surplus properties since 2001. These four land sales generated approximately $159,368,252 in revenue, the majority of which came from the $135,000,000 Bernal Property sale in Pleasanton. Departmental staff advises that in the next two years, ten properties will be recommended to the Public Utilities Commission for sale, and, if approved, would generate an estimated $49,115,000 in revenue. In the following five years, a further nine properties will be recommended for sale, and, if approved, would generate estimated revenues of $77,050,000, for an estimated $285,533,252 in sale revenues over a seven year period.

Table 11.1
Public Utilities Commission Large Property Sales
Completed, Pending and Proposed

Time Period	Number of Properties	Revenues Generated or Projected
FY 2000-2001 through FY 2003-2004	4	$159,368,252
FY 2004-2005 through FY 2005-2006	10	49,115,000
FY 2006-2007 through FY 2009-2010	9	77,050,000
Total	23	$285,533,252

Source: Real Estate Services Bureau

While the Department has not identified all properties that are surplus to the needs of the water, clean water and power utility systems, the Department has identified these above listed properties for sale following a query of surplus properties and an evaluation of development potential. According to the Director of the Real Estate Services Bureau, in 2001 and 2002 the Bureau reviewed all Public Utilities Commission-owned property and queried all departments, including the Hetch Hetchy, Water, and Clean Water Enterprise Departments, regarding property holdings surplus to their needs. Based on this review and query, the Real Estate Services Bureau, working with a consultant, evaluated the Public Utilities Commission's property holdings to identify development capability and potential revenues if sold. The Real Estate Services Bureau produced a report, entitled Surplus Under-Entitled Properties Preliminary List, which included the major properties identified as surplus and available for sale. Most of the properties on the Preliminary List have not been required for the Department for over 20 years. For example the Francisco Reservoir located at Bay and Hyde Street, has not been used since the 1940s and could generate estimated revenues exceeding $50 million, depending upon zoning requirements. Notably, of 29 properties on the Surplus Under-Entitled Properties Preliminary List, only four have been declared surplus by the Public Utilities Commission.

Surplus Property Policy

The Public Utilities Commission does not have a formal policy to identify and sell surplus property. Instead, whether to request that the Public Utilities Commission declare a property surplus is determined on a case-by-case basis at the staff level or in a closed session of the Public Utilities Commission. Without a formal Public Utilities Commission policy regarding the sale of surplus property, staff can make policy decisions regarding surplus land on a case-by-case basis, outside of the context of larger land management and planning issues. This practice may prevent the Public Utilities Commission, the Board of Supervisors and the Mayor from entering into policy discussions about the best uses for these surplus property holdings, some of which present significant land use questions and development opportunities.

The Public Utilities Commission should adopt a formal policy regarding the identification and sale of surplus property, including criteria for when properties may be declared surplus and the conditions, if any, under which the Public Utilities Commission would maintain ownership of property that is not required for the water, clean water and power utility systems.

Identification Process of Surplus Property and Lease Uses

The Department does not have a formal process of coordination between the Water Enterprise Department's Water Supply and Treatment Division, and the Clean Water and Hetch Hetchy Enterprise Departments and Business Services in the identification of surplus property and in determining potential uses for properties. According to the Director of the Real Estate Services Bureau, the Bureau notifies the Water Supply and Treatment Division Manager about the potential property sale and requests the Division Manager's evaluation and approval, prior to presenting the property to the Public Utilities Commission. However, Water Supply and Treatment Division staff indicate that in some cases they have not been aware of proposed sale of water system properties until after the sale had been negotiated, and in some cases approved by the Public Utilities Commission. A review of the coordination between the Water Supply and Treatment Division and the Real Estate Services Bureau regarding the option agreement for the sale of the Mountain View Whisman Tyrella property, that includes a portion of the right-of-way, to MasterDevo, a private developer, reveals that:

• The Real Estate Services Bureau issued a Request of Qualification and Proposals on February 13, 2004, before requesting that the Water Supply and Treatment Division evaluate a proposed sale for compatibility with Water System requirements.
• The Real Estate Services Bureau did not proactively initiate environmental review with the Bureau of Resource Management and the Planning Department in preparation of the option agreement, but was instead advised by the City Attorney's Office after the agreement was ready for submission to the Public Utilities Commission that the proposal would require California Environmental Quality Act (CEQA) review.
• The Real Estate Services Bureau coordinated with and received approval from the Maintenance Engineering and Operations and Maintenance Sections for the Water Supply and Treatment Division, but not from Land and Resource Management Section. Notably, the Maintenance Engineering and Operations and Maintenance Sections did not inform the Land and Resource Management Section or the Water Supply and Treatment Division Manager about the proposal.

The Real Estate Services Bureau and the Water Supply and Treatment Division failed to communicate and coordinate effectively regarding the sale of the Mountain View Whisman Tyrella property. Further, sections within the Water Supply and Treatment Division failed to communicate and coordinate effectively, resulting in the failure to notify the Land and Resource Management Section, which is responsible for managing watershed right-of-way properties.

According to the Director of the Real Estate Services Bureau, the Department has a formal policy that outlines required coordination between the Public Utilities Commission's divisions and sections responsible for land and property management before the Real Estate Service Bureau enters into a lease or issues a permit. However, this formal policy does not always result in leases and permits that best meet the needs of the utilities. For example, a review of the Sunol Valley Golf Course lease, which was entered on August 31, 2001, reveals that the Real Estate Services Bureau negotiated this lease agreement with the Sunol Valley Golf Course without including the following lease restrictions which were recommended in the April 2001 Alameda Watershed Plan:

• Stipulate maintenance/repair/replacement schedule for sanitation and waste treatment systems in the lease provisions.
• Reduce risk associated with the chemical toilets by requiring bolting to the foundation and the installation of berm or other secondary containment.
• Conduct ongoing monitoring to detect surface water degradation.

The lack of effective coordination and communication among the Public Utilities Commission's divisions and sections imposes unnecessary risks, especially the sale or use of land that is inconsistent with the requirements of the water utility. The General Manager should direct the Assistant General Managers for External Affairs, Water and Power, and Infrastructure to jointly develop written protocols regarding the decision-making process for the sale of Public Utilities Commission property, which are based on the utilities' land use needs, and are included in the formal property and land use management protocols. The General Manager should direct the Assistant General Managers for External Affairs, Water and Power, and Infrastructure to jointly review the existing policy for entering into new leases and permits to determine whether this policy is adequate and for inclusion, as revised, in the formal property and land use management protocols.

Evaluation and Planning

According to the Director of the Real Estate Services Bureau, all property not declared surplus by the Public Utilities Commission is considered essential to the water system. However, because property and land use management are currently dispersed, the Public Utilities Commission lacks a comprehensive evaluation of property holdings to determine which properties are essential and which are surplus to the needs of the water, power, and clean water utilities. The Public Utilities Commission risks holding properties indefinitely that are not necessary for the utilities operations, forgoing revenues from sales that could be applied to meet other needs. Although the Public Utilities Commission has adopted a policy to allocate property sales proceeds to future capital projects to mitigate water and clean water rate increases, the Public Utilities Commission lacks a policy to comprehensively identify surplus properties and approve such properties for sale. As noted above, the Public Utilities Commission has only declared four properties surplus of the 29 properties identified by the Real Estate Services Bureau as surplus to the utilities' needs.

Further, the Public Utilities Commission risks holding properties that present a liability to the Commission. For example, the Crystal Springs bypass area, which is landslide prone, creates ongoing liabilities, is not required for the water system, and is not currently being considered for sale.

The General Manager should direct the Assistant General Managers for External Affairs, Water and Power, and Infrastructure to jointly develop written protocols for identifying surplus property, which are based on the utilities' land use needs, and are included in the formal property and land use management protocols. Further, the General Manager should assess the 25 properties already identified by the Real Estate Services Bureau as surplus to the utilities' needs, that have not been previously declared surplus by the Public Utilities Commission, to determine which properties should be presented as surplus properties to the Public Utilities Commission. As part of this assessment, the General Manager should direct the Financial Services Section and the Real Estate Services Bureau to evaluate the potential revenue from the sale of the properties, allocation of such revenues to the Water System Capital Improvement Program projects, impact on the debt financing of such projects, and the impact on future water rate increases.

Managing Encroachments on the Water System Right-of-Way

The Public Utilities Commission has incurred significant liability and associated costs from the encroachment of adjacent property owners or tenants on the Public Utilities Commission's water system right-of-way. According to the City Attorney's Office, the Public Utilities Commission is engaged in five legal disputes to remove right-of-way encroachments and may face up to 15 legal disputes regarding private property owners or tenants encroaching on the water system right-of-way, resulting in unknown legal and settlement costs to the City.

The Public Utilities Commission has approximately 150 miles of water system right of way, measuring in width from 50 to 80 feet, in Alameda, Santa Clara, and San Mateo Counties. The Water Supply and Treatment Division is responsible for maintaining the right-of-way, including routine patrols of the water supply transmission system, controlling vegetation growth, and identifying right of way encroachment. The Real Estate Services Bureau is responsible for removing encroachments.

Until approximately 10 years ago, the Public Utilities Commission issued "garden permits", allowing adjacent property owners to maintain small garden plots on the water system right-of-way. Many of the formerly permitted gardens remain as encroachments on the right-of-way.

In 2001, the Public Utilities Commission adopted an encroachment policy, which includes:

• All right-of-way shall be free and clear of any and all unauthorized encroachments.
• Any and all necessary actions will be taken to prevent encroachments or cause removal of existing encroachments.
• Removal efforts will prioritize encroachments that are highest risk to the water supply infrastructure or that can be removed easily.

Currently, when an encroachment is identified, Public Utilities Commission staff send a letter to the property owner, directing the property owner to remove the encroachment. The Water Supply and Treatment Division's Land and Resources Management Section provided a report to the Public Utilities Commission in June, 2004, which outlined the water system right-of-way management plan, which includes (a) increased surveillance of the right-of-way, (b) automated right-of-way mapping using the Geographical Information Systems, (c) improved vegetation management, and (d) identifying and authorizing acceptable right-of-way land uses. The June, 2004 report to the Public Utilities Commission included the Real Estate Services Bureau's process for abating right-of-way encroachment.

The Public Utilities Commission General Manager should report to the Board of Supervisors about the existing and projected costs to the City to abate water system right-of-way encroachments during the FY 2005-2006 budget review. Further, because the presence and removal of water system right-of-way encroachment will be important in the planning and construction of Water System Capital Improvement Plan projects, the General Manager should include a status report on the right-of-way management plan in the Water System Capital Improvement Plan monthly status report.

Conclusion

The Public Utilities Commission lacks comprehensive management of the Public Utilities Commission's lands and real property. This has resulted in inadequate property inventories and the failure to define properties that are essential or surplus to the water, power, and clean water utilities' requirements. Currently, the Real Estate Services Bureau is unable to determine if all real properties are rented or in optimal use. Also, although the Real Estate Services Bureau has identified up to 29 properties that are surplus to the water, power, and clean water utilities' requirements, with estimated sale values exceeding $120 million, the Public Utilities Commission has only declared four of the 29 properties to be surplus. Further, the Public Utilities Commission risks significant legal and other costs from encroachment by adjacent property owners on the water system right-of-way.

The General Manager needs to ensure that responsibility for planning and managing the Public Utilities Commission real property and land is consolidated and coordinated among the Assistant General Managers for External Affairs, Water and Power, and Infrastructure, and that land use and property management procedures are defined in comprehensive written protocols, and that the respective Assistant General Managers report jointly to the General Manager on land use planning and property management.

Recommendations

The Public Utilities Commission should:

11.1 Adopt a formal policy regarding the identification and sale of surplus property including a criteria for when properties may be declared surplus and the conditions, if any, under which the Public Utilities Commission would maintain ownership of property that is not required for the utility.

The Public Utilities Commission General Manager should:

11.2 Establish a formal framework for coordinating the Public Utilities Commission's land use and real property management policies and protocols, including directing the Assistant General Managers for External Affairs, Water and Power, and Infrastructure to jointly coordinate real property and land planning and management, including:

(a) Writing joint protocols for establishing management oversight of

(i) real property and land inventories,

(ii) surplus property identification,

(iii) property sales and acquisition procedures,

(iv) new lease and permit agreements, and

(v) encroachment identification, management, and removal;

(b) Developing written procedures outlining the decision-making process for the sale of Public Utilities Commission property, which are based on the utilities' land use needs, and are included in the formal property and land use management protocols;

(c) Providing comprehensive written land and property management protocols, including incorporating existing policies and procedures into a single document, to the General Manager prior to July 1, 2005; and

(d) Providing quarterly joint reports to the General Manager on property and land management.

11.3 Formally present to the Public Utilities Commission real properties and land which are surplus to the water, power, and clean water utilities' requirements, including:

(a) Directing the Assistant General Managers for External Affairs, Water and Power, and Infrastructure to assess the 25 properties, which have been identified by the Real Estate Services Bureau as surplus to the utilities' needs but which have not been previously declared surplus by the Public Utilities Commission, to determine which properties should be presented as surplus properties to the Public Utilities Commission; and

(b) Directing the Financial Services Section and the Real Estate Services Bureau to evaluate the potential revenue from the sale of the properties, allocation of such revenues to the Water System Capital Improvement Program projects, impact on the debt financing of such projects, and the impact on future water rate increases.

11.4 Direct the Real Estate Services Bureau to develop and maintain a comprehensive property inventory of the Public Utilities Commission's property holdings, which incorporates the Real Estate Services Bureau database and the Water and Supply and Treatment Division's Geographic Information System information.

11.5 Report to the Board of Supervisors on the existing and projected costs to the City to abate water system right-of-way encroachments within the next six months.

11.6 Include a status report on the right-of-way management plan in the Water System Capital Improvement Plan monthly status report.

Costs and Benefits

The Real Estate Services Bureau should identify and determine all Public Utilities Commission property that is available for lease. A 1 percent increase in rental revenues annually would result in $100,000 in additional rental revenues.

Further, if the Public Utilities Commission identified and offered for sale all Public Utilities Commission properties that are surplus to the water, power, and clean water utilities requirements, the Public Utilities Commission would receive at least $120 million in one-time revenues that could be allocated to the Water System Capital Improvement Program. By using an estimated $120 million in land sales proceeds rather than revenue bond debt to finance a portion of the Water System Capital Improvement Program, the Public Utilities Commission could save an estimated $4.8 million annually in interest expenses, based on 4 percent annual interest.

¹ The Department of Recreation and Parks manages the leases on the Public Utilities Commission's Lake Merced tract, as discussed in Section 12 of this report.

² In 1994, the Real Estate Services Division was called the Commercial Land Management Bureau and was located in Operations under the Water and Supply Treatment Division.