• The Public Utilities Commission faces significant financial and regulatory risks for operating the Treasure Island and Yerba Buena Island utilities since 1997, including electricity, natural gas, water, and sewer, but has not planned adequately for the Public Utilities Commission's financial and regulatory risks once the Navy conveys full ownership of Treasure Island and Yerba Buena Island to the Treasure Island Development Authority, anticipated to occur in 2005 or 2006. Consequently, the Public Utilities Commission could incur significant costs with inadequate revenues to cover the expenditures.
  
  
• For example, the Public Utilities Commission could incur up to $5.7 million in capital improvement and preventive maintenance costs for existing utilities during the approximately four year interim period, after the U.S. Navy conveys ownership of Treasure Island and Yerba Buena Island to the Treasure Island Development Authority, and before construction of new utility infrastructure is completed, but has not yet identified a funding source for these costs.
  
  
• The Public Utilities Commission will incur new operating and maintenance costs for the existing Treasure Island and Yerba Buena Island utilities during the four year interim period to meet State and Federal regulatory requirements but has not developed cost projections for Treasure Island and Yerba Buena Island operating and maintenance costs during the interim period.
  
  
• A March 2004 report, Utility Vulnerability and Risk Assessment for Treasure Island and Yerba Buena Island - Final Report, recommended that during the interim period (a) the Public Utilities Commission should not take ownership of the existing utilities; (b) the Treasure Island Development Authority should contract out operating of the existing utilities; and (c) if the Public Utilities Commission does operate the existing utilities, the Public Utilities Commission should negotiate a private industry standard agreement with the Treasure Island Development Authority to mitigate its risks and liabilities. However, neither the Public Utilities Commission nor the Treasure Island Development Authority have planned to contract out operation of the existing utilities during the interim period, and as of the writing of this report, the Public Utilities Commission will most likely operate the utilities during the interim period.
  
  
• As of June 30, 2004 the Public Utilities Commission had $1.6 million in outstanding unpaid bills for operating the utilities, of which $1.3 million was owed by the Treasure Island Development Authority and $300,000 was owed by other tenants. The outstanding unpaid balance will increase in FY 2004-2005 because the Treasure Island Development Authority does not include monies in its budget to pay utility costs. The Mayor should include funds in the FY 2005-2006 Treasure Island Development Authority recommended budget to pay utility costs and develop a schedule for payment of the past due balance.
  
  
• Currently, the Public Utilities Commission has no written agreement with the Treasure Island Development Authority to operate the Treasure Island and Yerba Buena Island utilities. The Public Utilities Commission should enter into a written agreement with the Treasure Island Development Authority.
  
  
• The Public Utilities Commission should enter into a written agreement with the Treasure Island Development Authority for the operation of the Treasure Island and Yerba Buena Island utilities. Further, the Public Utilities Commission and the Treasure Island Development Authority should present a joint financial analysis to the Board of Supervisors in December, 2006, evaluating how the proposed development of the Treasure Island and Yerba Buena Island utilities system will best meet the financial interests of the City and the City's utility ratepayers.

The U.S. Navy is expected to convey the ownership of Treasure Island and Yerba Buena Island to the Treasure Island Development Authority in 2005 or 2006. The Treasure Island Development Authority, a redevelopment agency, and the Treasure Island Community Development Limited Liability Company ("Treasure Island Community Development"), the prospective master developer selected through a competitive selection process initiated in 2000, will redevelop Treasure Island and Yerba Buena Island. The City, through the Mayor's Office of Base Reuse and Development and the Treasure Island Development Authority, and Treasure Island Community Development are currently negotiating a redevelopment agreement pertaining to this effort and expect to have a signed contract by early 2007.

Following the expected conveyance in 2005 or 2006, Treasure Island and Yerba Buena Island property, except for the Federal users' property, and utility system ownership will be transferred to the City. Whether the Treasure Island Development Authority or the Public Utilities Commission will own, operate, and maintain the utilities has not yet been determined, although the Mayor's Office of Base Reuse and Development expects that the Public Utilities Commission will continue to be responsible for operating and maintaining the utilities. The City, through the Mayor's Office of Base Reuse and Development, has been negotiating on behalf of the Treasure Island Development Authority with the U.S. Navy on the terms and conditions of the conveyance of Treasure Island and Yerba Buena Island, and although the Public Utilities Commission has been advisory to the negotiations, the Public Utilities Commission has not been included in the negotiations.

The Public Utilities Commission's Financial Exposure

The Public Utilities Commission has not planned adequately for the significant financial and regulatory risks presented by the Treasure Island and Yerba Buena Island utilities. The City entered into a Cooperative Agreement with the U.S. Navy in 1997 when the U.S. Navy transferred responsibility for Treasure Island and Yerba Buena Island to the City. The Public Utilities Commission has maintained and operated the Treasure Island and Yerba Buena Island utilities since 1997, but has no written agreement with the Treasure Island Development Authority covering the terms and conditions of maintaining and operating the utilities.

The Public Utilities Commission's Operating and Maintenance Expenses

Treasure Island and Yerba Buena Island utilities consist of drinking water, wastewater, storm water, electricity, and natural gas systems. The Public Utilities Commission Water Enterprise provides drinking water through the Water Enterprise's water system. The Clean Water Enterprise operates and maintains Treasure Island's wastewater and storm water collection systems, constructed by the U.S. Navy. The Public Utilities Commission purchases electricity through an agreement with the Western Area Power Administration, which provides power from Federal sources, and natural gas from the Pacific Gas and Electric Company.

The Public Utilities Commission bills the Treasure Island Development Authority and other Treasure Island tenants for the direct costs of providing utility services. Treasure Island tenants include the John Stewart Company, which manages approximately 650 units of former military housing; the Treasure Island Homeless Development Initiative, which manages approximately 200 housing units occupied by formerly homeless individuals and families; the U.S. Department of Labor; the U.S. Coast Guard; and other tenants.

As of June 30, 2004, the Public Utilities Commission had an outstanding balance of $1.6 million, of which $1.3 million was the Treasure Island Development Authority's outstanding balance. The Treasure Island Development Authority's outstanding balance is expected to increase in FY 2004-2005 because funds to pay the Public Utilities Commission were not included in the Treasure Island Development Authority's FY 2004-2005 budget.

Table 8.1
The Public Utilities Commission's Total Billings and Total Payments for Treasure Island and Yerba Buena Island Utility Services
FY 1998-1999 through FY 2003-2004

Source: Public Utilities Commission Financial Services Section

The Public Utilities Commission's Projected Future Costs

Proposed Development Agreement

The City is negotiating a development agreement with the prospective master developer, Treasure Island Community Development, to develop Treasure Island and Yerba Buena Island. The Mayor's Office currently expects to present a development agreement term sheet to the Board of Supervisors in the late summer of 2005 and to conclude negotiations and enter into a development agreement in early 2007. Under the proposed development agreement, the overall development project would provide funding for constructing the new utilities system.

As noted above, the Public Utilities Commission is not directly included in the development agreement negotiations, although the Mayor's Office of Base Reuse and Development advises that the Public Utilities Commission will be consulted with respect to the transfer of utilities and utility related permits and agreements. The Mayor's Office of Base Reuse and Development has recently formed a work group that includes the Public Utilities Commission, the Treasure Island Development Authority, the Mayor's Office, and the master developer to address a variety of issues related to the operation of the Treasure Island and Yerba Buena Island utilities during the approximately four year interim period between 2005, when the U.S. Navy is expected to convey ownership of Treasure Island and Yerba Buena Island to the Treasure Island Development Authority, and 2009, when Treasure Island Community Development is expected to complete construction of the backbone phase of the new utility system. According to the Mayor's Office of Base Reuse and Development, the work group is intended, among other tasks, to ensure the effective collaboration on resolving long term utility capital planning issues.

The Public Utilities Commission faces significant future financial, regulatory, and operational risks if the Public Utilities Commission assumes responsibility for the new utilities system. Specifically, the Public Utilities Commission needs to ensure that the future new utilities system will be (a) of high quality and compatible with the City's existing systems; (b) designed and constructed to meet future regulatory requirements; and (b) cost efficient and financially viable.

When the Mayor's Office presents the proposed development agreement term sheet to the Board of Supervisors, expected to occur in the late summer of 2005, the Public Utilities Commission, through the General Manager, should present a report to the Board of Supervisors on the Public Utilities Commission's assessment of the risks to the Public Utilities Commission and how these risks will be addressed in the development agreement.

The Public Utilities Commission, through the General Manager, and the Treasure Island Development Authority should present a joint financial analysis to the Board of Supervisor in December, 2006, prior to the expected conclusion of negotiations of the final development agreement in early 2007, evaluating how the proposed development of the Treasure Island and Yerba Buena Island utilities system will best meet the financial interests of the City and the City's utility ratepayers.

Interim Capital and Operating Expenditures

The Public Utilities Commission will most likely be responsible for operating and maintaining the existing utilities system for the approximately four-year interim period between 2005 and 2009, prior to the expected completion of the backbone utility system by the prospective master developer. During this period, many of the existing tenants, including the John Stewart Company residential tenants, will remain and require utility services.

According to the March, 2004, Utility Vulnerability and Risk Assessment for Treasure Island and Yerba Buena Island - Final Report, conducted by Raines, Melton, and Carella, Incorporated, the Public Utilities Commission will incur an estimated $2.8 million in capital repair costs for priority capital projects within the first five years after the U.S. Navy conveys ownership of Treasure Island and Yerba Buena Island to the Treasure Island Development Authority. Additionally, the report estimated that the Public Utilities Commission will incur an estimated $720,000 per year for preventive maintenance costs, or $2.9 million over a four-year interim period between 2005 and 2009. Therefore, the Public Utilities Commission's will incur up to an estimated $5.7 million for capital repair and preventive maintenance costs during the four-year interim period between 2005 and 2009, after the expected conveyance of Treasure Island and Yerba Buena Island and prior to completion of construction of new utility systems. The Public Utilities Commission has not yet identified a funding source to pay these costs.

Table 8.2
The Public Utilities Commission's Estimated Total Capital Repair Costs and Annual Preventive Maintenance Costs within the First Five Years after Conveyance of Ownership of Treasure Island and Yerba Buena Island to the City

Source: Raines, Melton & Carella, Inc., Utility Vulnerability and Risk Assessment for Treasure Island and Yerba Buena Island - Final Report, March, 2004

Planning for Operating and Maintenance Expenditures

The Public Utilities Commission has not yet developed a cost plan for the Public Utilities Commission's projected costs and revenues for operating and maintaining the Treasure Island and Yerba Buena Island utilities during the interim period. For example, although the Clean Water Enterprise expects the baseline costs to operate the wastewater treatment system at Treasure Island to increase during the interim period compared to current operating costs, the Clean Water Enterprise does not yet have operating and maintenance cost projections.

In the Utility Vulnerability and Risk Assessment for Treasure Island and Yerba Buena Island - Final Report, the consultants, Raines, Melton, and Carella, found that the Public Utilities Commission faced significant financial and regulatory risks for operating the existing Treasure Island and Yerba Buena Island utilities during the interim period and recommended that:

• The Public Utilities Commission should not take ownership of the existing utilities during the interim period.
• The Treasure Island Development Authority should contract out operating of the existing Treasure Island and Yerba Buena Island utilities during the interim period.
• If the Public Utilities Commission does operate the existing Treasure Island and Yerba Buena Island utilities during the interim period, the Public Utilities Commission should negotiate a private industry standard agreement with the Treasure Island Development Authority to mitigate its risks and liability.

As noted above, the Public Utilities Commission has recently begun to participate in a work group with the Mayor's Office of Base Reuse and Development, the Treasure Island Development Authority, and the prospective master developer to address issues that will arise during the interim period after the U.S. Navy conveys ownership of Treasure Island and Yerba Buena Island to the Treasure Island Development Authority. However, two of the four Public Utilities Commission work group members, the Assistant General Manager, Business Services, and the Director of Financial Services have recently resigned from the Public Utilities Commission.

The Public Utilities Commission has lacked both a written agreement with the Treasure Island Development Authority to operate the Treasure Island and Yerba Buena Island utilities, and continuity of management oversight due to turnover of executive management staff since 1997, when the Public Utilities Commission initially assumed responsibility for operating the utilities system. The Public Utilities Commission should direct the General Manager to negotiate and enter into a written agreement with the Treasure Island Development Authority to operate, maintain, and conduct capital repairs of the existing Treasure Island and Yerba Buena Island utilities system.

Also, the General Manager should present a report to the Public Utilities Commission prior to December 31, 2005, which includes:

• An annual cost plan for operating and maintaining the Treasure Island and Yerba Buena Island utilities during the interim period after the U.S. Navy conveys Treasure Island and Yerba Buena Island to the City and prior to construction of the backbone of a new utilities system; and
• Proposed alternative funding sources to pay for anticipated capital repair costs to the existing utilities of an estimated $5.7 million, including approximately $2.8 million for high priority capital repairs and $2.9 million for preventive maintenance for a four-year period (equal to $720,000 per year);

The proposed report should present essential information to the Public Utilities Commission members, who have authority to approve or disapprove the Public Utilities Commission annual budget.

The Public Utilities Commission Regulatory Risks

Under the 1997 Cooperative Agreement between the City and the U.S. Navy, the U.S. Navy continues to own the National Pollutant Discharge Elimination System permit to operate the waste water system and the State Department of Health Services permit to operate the drinking water system. Between 1997 and 2003, the U.S. Navy has received 21 National Pollutant Discharge Elimination System permit violations and 18 incident reports for overflow of the storm water system and other incidents, but has not been fined to date. The Public Utilities Commission is not currently liable for permit and other regulatory violations.

The Public Utilities Commission's Future Regulatory Risk

Once the U.S. Navy conveys Treasure Island and Yerba Buena Island to the Treasure Island Development Authority, the owner of the Treasure Island and Yerba Buena Island utilities will own the permits. Therefore, if the Treasure Island Development Authority owns the utilities, the Treasure Island Development Authority will assume much of the regulatory risk. However, if Public Utilities Commission operates the Treasure Island and Yerba Buena Island utilities on behalf of the Treasure Island Development Authority, the Public Utilities Commission will share the regulatory risk.

The new owner of the Treasure Island and Yerba Buena Island water utility will need to obtain a new State Department of Health permit. The Public Utilities Commission Water Enterprise will need to plan for several regulatory requirements and the associated costs for operating the water system, including (a) capital improvements to reduce stagnation and associated problems, such as coliform growth, in the water system; (b) potential mandatory system upgrades imposed by the State Department of Health as part of the permit; and (c) broader notification requirements, through water bill inserts or newspaper advertisements, for Treasure Island and Yerba Buena Island utilities violations if the Treasure Island and Yerba Buena Island utilities are combined with City utilities.

The Clean Water Enterprise, which operates the Treasure Island wastewater system, expects new and increased operating and maintenance costs to comply with anticipated clean water regulatory requirements. The Regional Water Quality Control Board issued a wastewater discharge permit to the Navy in 1995, which outlines specific numeric limits for the discharge of treated wastewater at Treasure Island. In 2004, the Public Utilities Commission negotiated a new National Pollutant Discharge Elimination System permit with the Regional Water Quality Control Board in anticipation of the conveyance.

Due to new and more stringent regulations, the new wastewater permit contains effluent limits that, according to Clean Water Enterprise staff, may be difficult for the existing wastewater treatment plant to meet. The Clean Water Enterprise staff anticipate that the Public Utilities Commission will need to conduct feasibility studies to support interim effluent limits. The new permit may also require additional monitoring, which would increase operation and maintenance costs. Failure to comply with the limits or provisions outlined in the permit could lead to mandatory minimum penalties or legal action from the Regional Water Quality Control Board.

Conclusion

The Public Utilities Commission faces significant financial and regulatory risks for operating and maintaining the Treasure Island and Yerba Buena Island utilities during the approximately four year interim period after the U.S. Navy conveys ownership of Treasure Island and Yerba Buena Island to the Treasure Island Development Authority, expected to occur in 2005 or 2006, until the construction of the backbone of a new utility system by the proposed master developer in approximately 2009. The City has not yet determined if ownership of the Treasure Island and Yerba Buena Island utilities will pass to the Public Utilities Commission or be held by the Treasure Island Development Authority. However, the Mayor's Office of Base Reuse and Development anticipates that the Public Utilities Commission will continue to operate and maintain the Treasure Island and Yerba Buena Island utilities after conveyance.

To Public Utilities Commission has not planned sufficiently for the future financial and regulatory risks of operating and maintaining Treasure Island and Yerba Buena Island utilities during the interim period. Specifically, the Public Utilities Commission should enter into a Memorandum of Understanding with the Treasure Island Development Authority to operate, maintain, and conduct capital repairs of the existing Treasure Island and Yerba Buena Island utilities system. Further, the General Manager should present a report to the Public Utilities Commission, including Treasure Island and Yerba Buena Island utilities capital and operating cost projections and alternative funding sources. The proposed report should present essential information to the Public Utilities Commission members, who have authority to approve or disapprove the Public Utilities Commission annual budget.

Further, although the Public Utilities Commission assumes significant financial, regulatory and operational risk if the Public Utilities Commission assumes responsibility for a future new utilities system constructed by the proposed developer on Treasure Island and Yerba Buena Island, the Public Utilities Commission has played an advisory but not a direct role in the proposed development agreement negotiations between the Treasure Island Development Authority and the prospective master developer. The Public Utilities Commission, through the General Manager, should present a report to the Board of Supervisors on the Public Utilities Commission's assessment of the risks to the Public Utilities Commission and how these risks will be addressed in the development agreement. Further, the Public Utilities Commission, through the General Manager, and the Treasure Island Development Authority should present a joint financial analysis to the Board of Supervisor, evaluating how the proposed development of the Treasure Island and Yerba Buena Island utilities system will best meet the financial interests of the City and the City's utility ratepayers.

Recommendations:

The Mayor's Budget Office should:

8.1 Include funds in the Mayor's Recommended FY 2005-2006 Treasure Island Development Authority budget to pay utility costs, including a schedule to pay the past due balance.

The Board of Supervisors should:

8.2 Request the Public Utilities Commission, through the General Manager, to present a report concurrently with the Mayor's Office presentation of the proposed Treasure Island and Yerba Buena Island development agreement term sheet, expected in the summer of 2005, on the Public Utilities Commission's assessment of the financial, regulatory, design and operating risks to the Public Utilities Commission and how these risks will be addressed in the development agreement.

8.3 Request a joint financial analysis from the Treasure Island Development Authority and the Public Utilities Commission, through the General Manager, in December, 2006, evaluating how the proposed development of the Treasure Island and Yerba Buena Island utilities system will best meet the financial interests of the City and the City's utility ratepayers.

The Public Utilities Commission should:

8.4 Direct the General Manager to present a report to the Public Utilities Commission prior to December 31, 2005, which includes:

(a) an annual cost plan for operating and maintaining the Treasure Island and Yerba Buena Island utilities during the interim period after the U.S. Navy conveys Treasure Island and Yerba Buena Island to the City and prior to construction of the backbone of a new utilities system; and

(b) proposed alternative funding sources to pay for anticipated capital repair costs to the existing utilities of an estimated $5.7 million, including approximately $2.8 million for high priority capital repairs and $2.9 million for preventive maintenance for a four-year period (equal to $720,000 per year).

8.5 Direct the General Manager to negotiate and enter into a Memorandum of Understanding between the Public Utilities Commission and the Treasure Island Development Authority for the operation of the Treasure Island and Yerba Buena Island utilities if the Public Utilities Commission operates the utilities during the interim period.

Costs and Benefits

The Public Utilities Commission will incur some new costs for conducting a financial analysis of owning and operating the Treasure Island and Buena Vista Island utilities. Additionally, the Public Utilities Commission may incur some new City Attorney costs for negotiating an agreement between the Public Utilities Commission and the Treasure Island Development Authority. By entering into a written agreement with the Treasure Island Development Authority, and planning and conducting a financial analysis, including the financial impact of developing and operating the Treasure Island and Yerba Buena Island utilities on the City and the City's ratepayers, the Public Utilities Commission reduces its future financial and regulatory risks and could reduce future costs and liabilities.