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PAU Should Be Measured and Leveraged as a Business

Original post made by Mike, College Terrace, on Mar 16, 2008

Diana Diamond recently wrote a column about Palo Alto Utilities.

As usual, Diana chose to critique a Palo Alto institution in a way that makes it look as if that city institution is running in a way that is less than optimal, or somehow gouging Palo Altans by burying rental costs (which are scheduled for annual increases) into our utility rates.

In all this Diana Diamond fails to take note that PAU is a *business*, and line-itemed as a business. The charges that our city incurs from PAU operation are legitimate.

The fact that utility rates are climbing as a result of demand/supply variables AND operational cost DO bear scrutiny, however. Thus, this separate thread on PAU - not from the usual Diana Diamond perspective that implies incompetence, but from a reframed perspective that views PAU as it should be viewed, as a business.

My take is that we are all very well served by PAU employees; they're an outstanding bunch, but there ARE some legitimate questions about whether PAU's continued operation should continue unquestioned, and considered only as a cash cow for the General Fund, given the potential value of PAU as an asset that can be leveraged - up to and including a sale.

Normally, municipal services are not audited as profit-making enterprises. More on that in a minute.

PAU is structured differently than most municipal services. City-owned utilities are more the exception, than the rule. Given the latter, it's appropriate to bill the Utility for uses that alternately could generate income. That's appropriate, because it operates as a quasi-private business.

That said, municipal services *could* be audited for derived SROI metrics (social returns on investment). This would be a powerful way to measure baseline performance, year-over-year, and provide citizens and city workers both an opportunity to *enhance* both city services and taxpayer payback in a far more transparent way than is currently the case.

Back to PAU. IT's entirely legal for PA to do what it's doing with PAU, but given its capital status, PAU needs to be looked at as more than a "tradition" in Palo Alto. It needs to be treated as more of a business asset than a municipal institution.

Business assets are downgraded, upgraded, bought, sold, leveraged, etc. etc. We need to be thinking and acting on the PAU enterprise with more these things in mind - and start thinking about the full range of leveraged benefits that might be had from the PAU asset.

There has been a paucity of thinking in this regard, with both policy makers and citizens confused about the ultimate benefits and status of PAU. Until we change the frame within which we look at PAU, there will continue to be confusion around this issue.

We need to be asking ourselves if the PAU asset can be leveraged through a sale. Maybe that's a bad idea, maybe not. We do ourselves no fiscal justice to avoid asking and doing diligence on that question. There's nothing to be afraid of. We need to have that conversation.

I've brought this up before. Why not at least look into selling PAU? Maybe it's a bad idea; maybe not.
I've heard numbers in the $800M-$B range. I don't know how accurate that is, because it seems like a pretty big multiple to pay for a small utility...but what do I know?

Let's assume that we got $800M, just for the sake of conversation. We could take $200M right off the top and pay for some needed infrastructure (libraries, police building, storm drains, roads, etc.)

We could take $400M and put it into an investment trust that would pretty much guarantee a return equal to what PAU pays into the general fund.

We could take the remaining $200M and put it into a "solar conversion fund" that would enable local residents to go solar at a steep, steep discount. Maybe we could build the cost into an equity debt that would transfer with the property. There are probably lots of cool ways to finance something like this.

Voila! We pay for infrastructure; we get a bump every year in the general fund; and, we get to pump electricity back into PG&E's infrastructure.

Now, if the going price for PAU is smaller than $800M, we'd have to think hard, and maybe pass on the idea. Maybe not. Maybe we could sell it at a lower price in return for a cap on utility charges for some number of years, until Palo Altans could have a chance to use a smaller amount of money to go solar, or other energy saving technology.

There may be other variables that I'm not considering, that would make it more expensive than its worth, so sell off PAU.

If so, I would like to hear what those constraints are.

Why not look into having a potential buyer do a valuation of PAU, or have PAU do this itself.

We should at least know what PAU would be worth on the auction block - even if we don't want to sell it. Knowing what PAU is worth today could be used as a performance baseline for PAU management, one of whose jobs it would be to increase the value of PAU.

PAU is very unlike the rest of Palo Alto's public infrastructure; it's essentially a private business, run for the public good. Let's treat it that way, and leverage what it is, or could become, to the optimal advantage of its owners (us).

Comments (7)

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Posted by Resident
a resident of Another Palo Alto neighborhood
on Mar 16, 2008 at 1:41 pm

PALO ALTO FINANCE COMMITTEE ... The committee plans to discuss infrastructure and utilities rate increases. The meeting will begin at 7 p.m. Tuesday, March 18, in the Council Conference Room at City Hall (250 Hamilton Ave.).


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Posted by a
a resident of Adobe-Meadows
on Mar 17, 2008 at 4:48 pm

you wrote: "We could take $400M and put it into an investment trust that would pretty much guarantee a return equal to what PAU pays into the general fund."

Not in this market


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Posted by libraries
a resident of Crescent Park
on Mar 17, 2008 at 5:10 pm

Just sell PAU already and give the money to the libraries.


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Posted by Greg
a resident of Southgate
on Mar 17, 2008 at 5:38 pm

If PAU is to be measured as a business, then it should be able to purchase nuclear power. In fact, it should be able to negotiate with the major nuclear companies to build a nucler plant in Palo Alto. Imagine the benefits of our own nuke. We could could have a tax-free city, with almost none of the current arguemnts about who gets what. Our streets would be smooth. Our services would be A+. Our schools could be rebuilt. We could provide for the homeless. We could have a truly significant impact on the carbon footprint (global warming). Blue collar workers could actually afford to live in this city, or at least nearby. We could have expanded police and fire protection. I could go on and on...

Let's not listen to the hysterical anti-nuclear voices anymore! This is our city, and we should grab it back!


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Posted by Mike
a resident of College Terrace
on Mar 17, 2008 at 6:24 pm

a, Who said the investment would be made in US currency? :)


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Posted by Does it matter,who
a resident of another community
on Mar 18, 2008 at 9:08 am

Private Businesses do not/can not FLOAT BONDS to bail themseleves out of bad investments..


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Posted by Jim
a resident of Crescent Park
on Mar 19, 2008 at 9:53 am

"As usual, Diana chose to critique a Palo Alto institution in a way that makes it look as if that city institution is running in a way that is less than optimal..."

Diana Diamond has a knack for getting directly to the nugget. Or the lump of coal, as the case may be. If I had only the facts to work with I'd come to the same conclusions.


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