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Why not sell Palo Alto Utilities? It makes financial sense.

Original post made by Otto, Crescent Park, on May 10, 2007

Sell PAU. Going price that property would be in the neighborhood of $800M-$1B, maybe more. Take the money from that sale and invest (in safe securities and bonds) an amount sufficient to contribute the current average amount contributed to the General Fund by the utility. Use the rest of the money (probably several hundred million) to help pay for infrastructure (about $100M), and the remainder to drive a _steep_ discount solar program sufficient to get most Palo Altons to a place where the grid is paying them back for generating surplus electricity.

The general argument that many raise against selling PAU is that our rate structure is currently cheaper than adjoining municipalities. We would be in danger of the same fate _if_ we didn't use a large portion of the sale money to solar-enable local residences.

In fact, money directed from a sale of PAU to solar, with other innovative deployments, could go a long way toward relieving most Palo Altans from high rates, for good.

Why isn't this idea even considered, or debated at the policy level. Maybe it's a bad idea; maybe it's a good idea; maybe it's an OK idea that can be iterated to a great idea.

I want to see some REAL innovation here, instead of just talk and the occasional meeting about innovation. Ms. Mayor, how about it?

Comments (77)

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Posted by Walter_E_Wallis
a resident of Midtown
on May 10, 2007 at 4:39 pm

That is an excellent idea, which means it will get no where. City Hall likes the revenue stream and the kumshaw. I would, however, vote for anyone who ran on that platform. Otto, are you doing anything the next few months? My check will be in the mail. Add restoring the yacht harbor and I'll lick envelopes for you.


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Posted by SkepticAl
a resident of Ventura
on May 10, 2007 at 7:13 pm

cool word of the week - thanks Walter. Although when I looked it up, I found it spelled "cumshaw."


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Posted by R Wray
a resident of Palo Verde
on May 10, 2007 at 7:38 pm

Yes, Otto, what a great idea. You make a lot of sense.


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Posted by 14k/yr
a resident of Jordan Middle School
on May 10, 2007 at 10:16 pm

1 billion dollars for the Palo Alto Utilities? Now that's funny. Is there any rational basis for that number? Let's see, any private purchaser would have a higher cost of capital than the city and would also have to pay corporate taxes that the city doesn't need to. Thus the value of the utilities to a private purchaser is necessarily less than the value to the city. Palo Alto Utilities contributes 14 million a year to the General Fund, so use 14 million a year in profits to value to the utilities. Using an 8% discount rate (10% is probably more accurate), the net present values of an indefinite stream of 14 million in profits is $175 million. Take away 40% for taxes and you get $105 million as the NPV. OK Otto, please explain how you are going to earn a steady return of 14 million a years based on 105 million.

[Portion removed by Palo Alto Online staff.]


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Posted by Anonymous
a resident of Another Palo Alto neighborhood
on May 10, 2007 at 10:18 pm

This could be a good idea and should be explored. With the great rate hikes that have happened and are going to continue to happen the price of electricity and other utilities in the city could easily exceed P G and E.. Unless the Utility Dept. can get their act together and control their costs and find cheaper electricty to buy selling things off may be the best thing to do. It useto be a well run department in the old days. Now they appear to contract everything out. I also wonder if the big corporations in the city are buying most of the cheap/low cost power the city is able to buy. A majority of the council are tied to the big corporations in one way or another. The rates should be tiered so that homeowners/residents can buy, use the lower cost electricity by having lower cost for say the first 800KWHr, then higher for the second 800KWH and on and on up.



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Posted by PA citizen
a resident of Another Palo Alto neighborhood
on May 10, 2007 at 10:33 pm

Having spent considerable time in PG&E areas and in Palo Alto, I can't even imagine why anyone would suggest this except out of ignorance or some rigid ideology.

But those of you who value the PA utilities, the better quality for less money that we've had for 75 years, you'd better watch out. That article touting what we have in the papers was a really bad idea. Conservatives get their knives out to ruin any public program that works well. Look at what Bush did to FEMA.

The PA utility is a gem. Please don't let ideologues screw it up like they are screwing up our country, just to prove that we should let big private oligarchs and monopolies with no accountability to anyone rule over us instead. They don't have to sell it to screw it up. Pay attention and defend what's good about our town!


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Posted by Otto
a resident of Crescent Park
on May 10, 2007 at 11:55 pm

[Portion removed by Palo Alto Online staff.]
Why not consider that valuation of a privately run utility that has a guaranteed and _growing_ consumer base going out as far as the eye can see (with increasing margins on energy products, not to mention various energy "efficiency businesses) can see? You're looking at the utility as if it were competing in a market where demand could fade.

You asked for a starting basis; there it is. The utility is unique, and quite unlike other enterprise rollup plays. You can apply all the standard valuation tools you want, but a municipal utility plays differently in capital markets, especially given the forward demand for the service - not to mention add-ons that are coming down the pike.

Why not sell the utility and supplement the sale with a bond that would 100% solarize the entire community? What are you afraid of? The present?

[Portion removed by Palo Alto Online staff.]

btw, the utility does not contribte $14M per year to the General Fund. Not in pure operational profit MINUS the clever rental add-ons that have been line-itemed by the city (and charged to citizens). So, what's the REAL contribution to the city? And what's the REAL prospect that this "asset" will continue to be a competitive asset, compared to the likes of PG&E, going forward? [many people discount the fantastic environmental contributions that PG&E has been developing - that aside, there's a potential here that shuold be explored - one that might just help Palo Altans out of the ghetto of constantly rising utility bills. Why not explore this with an unbiased mind, a mind that is free and clear of mundane valuation formulas that are mindlessly applied to business in a way that wreaks of MBA groupthink?

PA citizen, Methinks that _you_ might be the one with the rigid ideaology. Why is it that an idea like this should not be thorougly explored? We hire consultants for all kinds of things; many of them going nowhere. What are you afraid of - and, can you guarantee that Palo Altans will not be paying MORE for utilities than PG&E customers, 20 years hence? You can't, nor can you make a solid odds-on bet that that will be the case.

PAU is a great organization, but it simply doesn't have the resources to innovate energy costs down (with the exception of light bulb programs, etc. etc.).

So much to invent, so little imagination....


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Posted by Otto
a resident of Crescent Park
on May 11, 2007 at 12:00 am

14k, Why not see what the utility would bring in the open market? Bid it out; let's see what happens. If the idea wreaks, so be it. If not, buy me a cigar.

Valuation basis...ha! Any day now the sky will rain MBA's, just like frogs.


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Posted by Walter_E_Wallis
a resident of Midtown
on May 11, 2007 at 5:17 am

I just got a mailer from PG&E for their ENERNOC program, a voluntary load shedding system that reduces system peak load. I suggested this to our utility more than 5 years ago, and was brushed off with the excuse that Palo Alto was not subject to billing demand. We instead went for the glitz of hamster wheel power and pinwheel bird shredders. I had hoped an engineer in charge would change things, but alas.


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Posted by Fred
a resident of Barron Park
on May 11, 2007 at 7:41 am

An idea worth exploring, thanks for posting about it Otto. That said, I think the sarcasm and put-downs are not that helpful in exploring the issue and tend to put people off (and take up space).

Could someone inform me - does Palo Alto have generating assets (a power plant, running on coal, gas, or something else) or transmission and distribution assets (power lines, sub-stations, etc.)? Both have value, but the value is different in each case.

I think the valuation equation for assessing whether we should sell, putting service levels aside, is to compare the NPV of the discount stream (vs. PG&E rates) received by customers (at least I think we get a discount) plus any on-going profits the city gets from the utility, to the sale value of the assets. Both would have to be after tax, though consumers of course don't get a tax deduction on utility expense and I doubt that the City would pay a tax on the gain on the sale (though not sure).

I have also wondered why we own a utility. It is fairly unusual (though not unique), and certainly bears looking at the numbers to understand what we've got.

Fred


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Posted by aw
a resident of Old Palo Alto
on May 11, 2007 at 8:16 am

Otto,

Your observation that PAU is an underperforming asset for the City is absolutely correct. If we all agree we want a market return on the PAU asset, we can sell it, or we can raise rates to PG&E market and use the market income to fund needed capital projects. They're economically equivalent.

Side benefit: private solar PV investment payback in Palo Alto would move from today's never to PG&E's 7 to 10 years.


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Posted by Otto
a resident of Crescent Park
on May 11, 2007 at 1:38 pm

aw, good thinking! Fred, you riase some good points, but selling something like PAU does not fall into typical valuation or cash flow multipliers, as a general rule.

PG&E would love to gain long-term access to this niche, and there's no way that they wouldn't realize payback over time.

There are many opportunities here for both sides, but would our city consider doing this?

That's the key question; an exploratory look by someone _outside_ of city hall is the way to go (e.g. a creative, private diligence consultant that has the ability to synthesize creative deals).


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Posted by Fred
a resident of Barron Park
on May 11, 2007 at 1:47 pm

I agree Otto, the best way to find out what it is worth is talk to a couple investment bankers who works in California energy assets and see what they say. Bankers make that kind of pitch every day for free, just like the real estate agent who will tell you what your house is worth. You have to take it with a pinch of salt, but good bankers know the market and can give you a reasonable sense.

It is worth doing and then, with value range in hand, thinking about whether we should hold or sell.

An interesting test to apply, btw, knowing the value, is whether we would BUY the asset at that price. So if it is worth $1 billion, say; would the PA citizens support a bond issue/tax to buy the assets from PG&E? If the answer is no - we should probably sell.

Interesting discussion - does anyone at City Hall think about these issues?

Fred


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Posted by Dave
a resident of College Terrace
on May 14, 2007 at 7:05 pm

I'm trying to choose my words carefully, so my post isn't removed. This is the ______ I've read in a very long time. Once we sell PA Uitility, we are at the mercy of PG&E. Anyone knowing anything about PG&E would realize that it's the same as being at the mercy of Exxon/Mobil. Anyone enjoy being ExxonMobilled for the rest of their life? I didn't think so.


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Posted by Fred
a resident of Barron Park
on May 14, 2007 at 7:39 pm

Thanks Dave, that is a relevant point and I appreciate your choosing words carefully!

I think much of the rest of the state is served by PG&E, who of course is regulated by the state. I don't have a lot of experience with them. How do you perceive them?

When you say "Exxon/Mobilled" I'm not sure what you mean - are you saying the oil companies charge high prices or are somehow monopolists? I'm not sure I follow...

If we assume for a minute that PG&E prices are higher and service not as good (I have no data on either), there is still as question of "what would it be worth" to switch. $500M $1B? $5B? There is usually a price at which it makes sense to sell.

Fred


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Posted by Dave
a resident of College Terrace
on May 14, 2007 at 8:08 pm

Yes, Fred, Exxon/Mobil is gauging the public and robbing it blind. PG&E is notorious for terrible service and high prices. I was once on a bike trip in France. One member of our small group was a former very, very senior executive of PG&E and in he evenings, after many bottles of great wine which we all consumed, he would often get talkative. What I had discovered about their business practice and ethics still make me shudder. Luckily, he never remembered anything in the morning so it didn't keep him from telling us more the next evening. I liked him very much as a very witty travel companion but I remember wondering why he wasn't serving time in prison. Obviously, the attempt by the state to regulate PG&E has been a colossal failure. Think Enron, and you wouldn't be terribly off the mark. I have no idea how much our utilities are worth, but certainly not enough for us to ever consider becoming the willing victims of PG&E. To me it would be the same as selling the Deapartment of Defence to Halliburton,actually, it seems like we basically already did that and look at the results.


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Posted by Fred
a resident of Barron Park
on May 14, 2007 at 8:15 pm

Thanks Dave, that is disturbing. I would still like to understand what our utilities are worth.


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Posted by Resident
a resident of Midtown
on May 14, 2007 at 8:39 pm

I don't think Dave's vague, anecdotal drinking stories should be the basis of an informed policy debate. I'm sure someone else could write in with a story of a drinking session in which top Palo Alto Utilities officials confessed to drinking the blood of babies.

However, we don't need to make up any stories to know that Palo Alto Utilities has been screwing the citizens of Palo Alto. Just refer to the recent moonlighting scandal which led to the resignation of Director John Ulrich.


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Posted by sarlat
a resident of Crescent Park
on May 15, 2007 at 7:12 am

pg&e has been screwing californians for many years on a scale that makes the irregularities at PAU seem incredibly tame. The notion of giving even more power to a ruthless monopoly like pg&e, which would be the end result of selling our city owned utility is absurd. think for example of pg&e customers who must live without power for days after a powerful storm, because pg&e, in order to maximize profits, is chronically understuffed and doesn't have enough crews to fix those kind of problems quickly.think of pg&e using your money to pay the lucrative salaries salaries of sacramento lobbyists whose sole purpose is to weaken the state's regulations so they can screw their customers even more. making monopolies even more powerful is a form of self-abuse that needs extensive psychological study.


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Posted by Paulo
a resident of Community Center
on May 15, 2007 at 7:32 am

Selling PAU to a private oligarchy is a typical Reaganite idea of increasing corporate power in order to screw ordinary people that has resulted in rising costs and deteriorating service across the board. Instead of finding ways in which citizens may actually reducing the corporate monopolistic power, we have right wing ideologues trying to fool us into biting on this particular scheme.


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Posted by Fred
a resident of Barron Park
on May 15, 2007 at 8:12 am

Paulo and Sarlat, I can sense your frustration toward PG&E and as I have said, I don't have much experience with them. Are our neighboring towns (MV, MP, Sunnyvale, RWC, etc) served by PG&E? If so, we could quickly see how good/bad their experience is, which should be a proxy for ours.

Of course, it would only make sense is they bought our asset - and the question is how much value we would get. If the City of PA had $500M to spend (and I have no idea if that is right), what might we spend it on?

I think this is not so much an ideological or philosophical debate as one about costs and benefits to the community.

My two cents...


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Posted by Pam
a resident of Old Palo Alto
on May 15, 2007 at 8:22 am

All the "private oligarchy...ruthless monopoly" invective here are not contributing to the discussion.

The real question is what amount of money could we reap for the city's over burdened coffers by selling to PG&E, and what would we have to give up to get it?

Perhaps PG&E's rates would be higher than what we pay now...though that proposition looks increasingly tenuous as PAU's rates are rising faster than PG&Es in recent years. Perhaps we would give up something in terms of reliability ...though the problems at PAU give rise to doubts about whether the city is run efficiently enough to guarantee past standards of response in future emergencies.

In either case, it's possible to include rate guarantees and emergency response measures in any agreement for sale of the utilities.

Maybe it would turn out that we wouldn't find a buyer at a price that seems reasonable, and maybe the we couldn't find terms we'd feel comfortable with.

But shouldn't we at least investigate the matter...at least to the extent of letting some investment banker take a look? WHat are all you guys afraid of?


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Posted by Paulo
a resident of Community Center
on May 15, 2007 at 8:45 am

Getting rate and emergency response guarantees from a PG&E like monopoly has the same value as getting a guarantee from American Airlines that their flights will always be on time and your luggage will never get lost. Our rates are still substantially lower than PG&E, even if the are increasing at a higher rate, although I'm not sure even this is correct. Some residents are probably naive ebough to blieve that it would make financial sense if the 'price was right', but the floating of this ridiculous idea is nothing but a typical right wing, 'corporate is good, government is bad' mantra. It will never happen here, people are too smart to fall for this nonsense.


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Posted by Fred
a resident of Barron Park
on May 15, 2007 at 8:56 am

Paulo - I agree we should consider all the ramifications and the strength of any contract we might sign. You make a good point.

I do think belittling the idea and suggesting those who raise or support it have bad motives are tactics that should be avoided. I am sure your ideas and integrity are deserving of that same respect.

Fred


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Posted by R Wray
a resident of Palo Verde
on May 15, 2007 at 9:56 am

Paulo, Theory and history do not agree with you. Freedom beats controls every time. Capitalism beats Socialism every time. Look around, you will see that you are wrong.

CPAU estimates that the electrical utilities may be underground by about 50 years from now. Would it take that long under a more free system? I don't think so.

The reason the system is not going to change is that a large fraction of the city's employees work for the utilities. The city will never reduce their feed trough. We would have to have a revolution.


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Posted by Pam
a resident of Old Palo Alto
on May 15, 2007 at 10:36 am

Our rates are NOT substantially lower than PG&E. In fact, most Palo Alto users pay MORE for gas than PG&E customers in other communities. (Some pay slightly less because rate schedules vary with usage, but NONE pay substantially less.) Electric rates still are somewhat lower than PG&E, but the gap has narrowed markedly in the past several years, and as supply contracts that Palo Alto negotiated decades ago expire, the gap will likely disappear completely as Palo Alto does not have the negotiating power that a "monopoly" like PG&E does.

Whether Palo Alto should sell it's utilities is a multi-faceted problem, and the answer is unclear until we get some estimates of what a sale would bring...but either way, the prospect of substantially lower rates is not a reason to keep it.


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Posted by Fred
a resident of Barron Park
on May 15, 2007 at 10:42 am

Thank you Pam, that is very interesting data. Did you find a place on the web that shows the rates?

Fred


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Posted by Max
a resident of Leland Manor/Garland Drive
on May 15, 2007 at 1:26 pm

There are different forms of capitalism. The worst kind is monopolistic capitalism, favored by right wing ideologues, the supply side/trickle down types so loved by Reagan and his cronies. This kind of capitalist entities use their vast financial power to lobby government to allow them to excercise unfair business practices on the hapless public. By giving away our city owned utility, we would become victims of PG&E, which is one of those monopolistic corporations that cares about the public not at all. [Portion removed by Palo Alto Online staff.]


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Posted by Fred
a resident of Barron Park
on May 15, 2007 at 1:55 pm

Max, I can see you have strong feelings about PG&E. I am not sure what the major service and price difference are. It looks like Mountain View is served by PG&E - does anyone know how their rates and services differ from ours in Palo Alto?

And I agree, it would not make sense to "give away" our utility to PG&E (or anyone); the question is whether we might choose to sell it. It would be interesting to know what it is worth and to figure out if our money can be put to better use.

I don't think I'm a naive non-idealogue (or naive idealogue for that matter), as you put it. I'm just a guy who thinks a whole lot of capital might be tied up in an under-performing asset, and would be interested in knowing how much that asset might be worth. I don't think PG&E is better (or necessarily worse); I just think a pot of investment money might make our community stronger that it is today.

Fred


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Posted by Max
a resident of Leland Manor/Garland Drive
on May 15, 2007 at 2:25 pm

Fred, I don't know how much the sale of PAU would fetch, although I suspect that the 800m-billion# is extremely unrealistic. I'm more concerned with the principle. No matter who would sell it to, the next provider would have no incentive to supply us energy at the lowest possible price, quite the opposite. Monopolistic energy companies are notorious for price fixing, price gauging and for lousy service. One of the the most beautiful presents we received from Palo Alto past generations is a city owned utility company. We can fix whatever is wrong with the way PAU is run, we have no control over how PG&E or similar energy companies are run and how they treat their customers. Look at the airlines, where similar mindsets have been applied. Are you happy with the ever decreasing level of service, ever increasing fares and ever decreasing choices?


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Posted by Fred
a resident of Barron Park
on May 15, 2007 at 3:25 pm

Thanks Max, I agree of course that monopolies tend to have the wrong incentives and require regulation, which of course also has its problems. You are completely right on that.

I don't know how good/bad PAU is vs PG&E. But it shouldn't be hard to find out - we can just look at MV. Would that be a fair comparison do you think?

In terms of airlines - not sure if you meant that as an example of monopoly or not. They've got loads of problems, no doubt. But you don't have to convince me that monopoly is generally undesirable, I totally agree (as would most people I think).

So the first question to inform the debate, I think, is what's PAU worth? Does anyone know if the city has ever looked at this issue? Seems like something that would get kicked around every decade or so...

Fred


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Posted by Dave
a resident of College Terrace
on May 15, 2007 at 4:34 pm

Fred, an example of the difference in service between a provider like PG&E and PAU would be at looking at what happens when a major storm hits and a large area is left with no power. PG&E, in order to maximize profits is chronically understaffed. You hear of areas left with no power for days. A certain area in Marin was left with no power for 5 days the previous winter. This is not unusual after big storms. In PA, even if the power goes out, it's usually restored very quickly. This is one example out of many of the frills of having your own utility. To me it's immaterial what the valuation of PAU is, since it should never be sold.


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Posted by Fred
a resident of Barron Park
on May 15, 2007 at 4:57 pm

Thank you Dave for that example. It would be no fun to have no power for 5 days.

I would be interested in the price though.


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Posted by Judy
a resident of Crescent Park
on May 15, 2007 at 5:06 pm

I'm looking at copies of last month utility bill 3 different friends who are all PG&E customers. I have requested them specifically for this discussion. Although their utility bill doesn't include refuse, which is a different billing for them, and mine does, my bill is quite smaller. My house is the largest of the 3. I've been very surprised to read here that our utility bills are as large as PG&E. I think that there's some hidden agenda here by some. Not every supporter of the concept is the same,, but there are those who believe that every citizen owned company should be sold to private entities since to them it's a socialist concept and they just couldn't tolerate such a thing.


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Posted by Jeff
a resident of Leland Manor/Garland Drive
on May 15, 2007 at 6:22 pm

Why so much attacking of the motives of those you disagree with on here. The question of relative utility rates of PGE and PAU is an empirical one that can be easily answered. When we get the answer, we can make a decision about whether it makes sense even to consider selling the utilities.

Apparently there is an answer: Diana Diamond quotes a report by city staff as saying gas rates in PA are higher than PGE, while electric i lower. Web Link While Diamond has a point of view, the staff doesn't - or shouldn't (and in fact may be biased in the opposite direction if at all.)

There is no reason to think Diamond quoted the report inaccurately or it would likely have been caught by Weekly editors. It would thus seem to be a simple matter for some of the doubters to get the staff report and refute those who are saying things you disagree with about rates = if they're false. Much better than questioning whether those on the other side are motivated by ideology in my opinion.

Either rates are higher or they're not: it's factual, not opinion.


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Posted by Dave
a resident of College Terrace
on May 15, 2007 at 7:13 pm

Rates are lower in PA than they are in PG&E areas. All you have to do is look at bills from comparable households with similar energy consumption habits. I do it frequently and our rates are on average always lower. Of course, people who use their hot-tubs daily shouldn't complain that the gas portion of their utility bill being high, and many Palo Altans just love their hot-tubs. There's also the small detail of service that few here seem to put any $ value on, but when power is out, that small detail becomes very large. We have something very unique here, imperfect maybe, but many communities envy us our utility company. [Portion removed by Palo Alto Online staff.]


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Posted by Fred
a resident of Barron Park
on May 15, 2007 at 7:54 pm

Ok, here is some data on rates. This isn't quite apples to apples, but it gives a sense. I took published PG&E rates from here Web Link
Pacific Gas&Electric Company - Rate Information

I took PAU rates from my statement, received today. You can check the rates out on the web though here Web Link
City of Palo Alto Utilities - Utility Rate Schedule

The bottom line is that, as Jeff quotes the staff report above, gas rates are HIGHER in PA by 21% and electric rates are lower by 33%. So using my own actual quantities for gas & electronic (maybe a little gas heavier than others, but nothing too off), my total bill is 8% less with PA than with PG&E.

Note that this comparison isn't easy and may not be 100% right - both companies use tiered pricing, and it isn't easy to figure out where the tiers are for PG&E (at least it wasn't easy for me). I had a live PAU bill in front of me, so that was easier. Note that there is also summer and winter, different rate categories, and frequent pricing changes, so this is just one example.

I guess I would expect rates to be a little lower (I believe I read somewhere that PA locked in low cost hydro-power decades ago, does anyone know if that's true?), so it is roughly in line with my expectation.

Fred


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Posted by Fred
a resident of Barron Park
on May 15, 2007 at 8:04 pm

Dave, I can see how strongly you hold your position and I applaud your determination to not be PC. I will also try to be an independent thinker.

To be honest, though, the last statement in your post makes you sound a bit like an idealogue yourself, in the sense that you seem to imply that anyone who holds to other ideas must, by definition, be wrong.

I personally don't agree with your position (based on the information I have), but I don't think your position is silly or unreasonable. I hope you'll give me (and others with differing opinions) the same benefit of the doubt.

Fred


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Posted by aw
a resident of Old Palo Alto
on May 15, 2007 at 8:37 pm

Fred,

Municipal utilities are eligible for cheap federal hydro power (called "preference power") that's unavailable to for-profit utilities. A detailed P&L would show how much federal hydro PAU buys. Not surprised if gas is higher than PG&E if we're buying smaller quantities.

Couple of distinct discussions going on here. One is about role of government. Another is about rates. Third one is about economic return on a municipal asset.

My views: muni ownership is neutral; below market rates are inefficient(promote waste and discourage investment in renewable energy); and economic return on the asset should be close to market. We can use the return on assets to fund needed City capital improvements.

As far as quality of service anecdotes - couple years ago I tried to get service statistics out of PAU. They don't report.


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Posted by Fred
a resident of Barron Park
on May 15, 2007 at 8:57 pm

Thanks AW, that's very helpful. Are you saying that we can use the return on the assets (the free cash thrown off by the utility) for capital improvements? I believe that the utility pays a dividend into the General Fund, which funds city expenses. Please clarify.

Fred


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Posted by 14k/yr
a resident of Jordan Middle School
on May 15, 2007 at 9:42 pm

I still don't believe a 1 billion dollar valuation for the Palo Alto Utilities is remotely close to reality for the reasons I have previously stated. I can't even imagine who would purchase the entire combined utilities. Please, someone tell me, why the utilities should not be valued as the net present value of the projected post-tax stream of profits. I see no argument for tremendous local growth in power consumption. The city utilities have little in the way of hard assets that have any liquidation value. The utilities financials are a matter of public record. Please make your case for the billion dollar valuation; I can't see it.


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Posted by Pat
a resident of Palo Alto Hills
on May 15, 2007 at 11:15 pm

We'll never know the valuation unless we ask for it. What we posters here think, whether 1 billion or 100 million is irrelevant.

However, off the top of one's head, one thing that 14k isn't thinking about is whether PGE could, through economies of scale and more efficient operation than the obviously poorly managed municipal system we have, cut costs enough to justify a higher valuation.

Also, it's unclear whether the sweetheart power contracts we have would be transferable in a sale.

Wether this is enough to reach 1 billion, I don't know. Neither does 14k.

There's no logical reason not to get an estimate from a banker. THere are lots of political reasons however, so it won't be done.


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Posted by anon
a resident of Green Acres
on May 15, 2007 at 11:24 pm

Over the last 25 years, I've moved between PA and PG&E areas a few times. Most of the time, PA rates were significantly lower than PG&E and service in PA has been world's better. I wish the Weekly hadn't written that glowing article about PAU; I agree with above, right-wingers will have their knives out for it.

We had an intertie solar system in the '90's with PG&E. What a nightmare. They took power from us the first year or so without paying anything. (This was more than a megawatt of power at a time when prices were going through the roof). They required us to put in two meters so they could monitor generation and use separately and pay us a substantially lower rate than we paid, and when the law required net metering, they refused to pay the legally required rate until someone sued them. Didn't do us a lot of good, because then PG&E declared bankruptcy and paid us only a fraction of what they owed us. To top it off, last year -- LAST YEAR, more than SIX YEARS after we SOLD the house at issue and removed the solar system from the roof, shutting it down with all the correct paperwork and notifying them to take the generation meter -- they sent us a bill for that meter, our generation-only meter which never had any power use, only power generation sold to PG&E. They actually tried to bill us $500 on that! They claimed we had never closed the account (we had proof we did), that we hadn't given our forwarding address (they mailed the bill to the same billing address we had with them before, a PO box we've had forever and which we specifically wrote to them was our mailing address), made up lots of lies which most people would have gotten caught in but fortunately we're meticulous documentarians. They only stopped trying to collect when I called corporate with proof that they owed US that $500 -- they finally dropped the whole thing (didn't pay us, though). This is SIX YEARS after we not only sold the house, but moved out of a PG&E area back to Palo Alto.

I could make further comparisons, but I don't want to give right-wingers specific targets to mess up, I value PAU too much. You people have no idea what your are talking about. Any sector of the economy in which consumers can be held hostage, such as utilities, is typically more efficient with better results with government or non-profits. I'm a big believer in the free market, but I look at what's best from a consumer standpoint -- I understand that monopolies are anti-competitive, and for certain sectors of the economy, non-profits and government actually perform/compete better.


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Posted by Walter_E_Wallis
a resident of Midtown
on May 16, 2007 at 7:23 am

In a 1945 book on corporate history, PG&E admits that they welcomed the regulated monopoly, because at the time it was granted ther were parts of Frisco with multiple suppliers on some streets.
The key is regulated. When the regulation was for safety and economy, PG&E rates were among the lowest in the nation. When the PUC objectives were changed to social engineering and Luddite fatuity, and when the PG&E growth estimates were replaced with political projections, the original opposition to such foolishness was replaced with go along to get along. Half the engineering staff and twice the PR. I believe I suggested back then that were I a utility I would cease urging new facility construction and let the regulators explain the blackouts. They did.


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Posted by Pam
a resident of Old Palo Alto
on May 16, 2007 at 7:32 am

Why all this "right winger" name calling?

From what I can tell, most of the debate here is not even sell the system vs not sell the system.

Rather one side is saying let's find out what the sale of the system would bring and what it would cost in terms of rates and service terms to do so. The other side is saying...that even to consider such things makes one a right wing ideologue.

I don't get it. Jeff (Above) is right: whether the numbers make sense or not is an empirical question. Even if selling does make sense financially, we may still want to hold on to the system for other reasons. BUt shouldn't we find out?

[Portion removed by Palo Alto Online staff.]


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Posted by Otto
a resident of Crescent Park
on May 16, 2007 at 10:44 am

This is the discussion I had hoped for. Perhaps our policy makers will take the question up. If they choose not to do so, perhaps the upcoming election season will be a good place to vett the idea.

Again, it's _just_ an idea, but it's an idea that has been considered off-limits for discussion at the policy level in Palo Alto.

We have to begin asking ourselves hard questions. There's nothing to fear from that, unless the answers to those questions hint at solutions that many of us have created negative preconceptions about.

This municipality (Palo Alto), and most others in California, are approaching a time of challenge that is unprecedented in our history. We are going to be challeneged as never before. The only way to meet dramatic change, successfully, is to ADAPT. This is something Palo Altans - en masse - have almost never had to do, because things have gone so swimmingly well for almost the entire range of our history.

Adaptation is going to take leadership.

Back to PAU. We need to have this question brought to the policy level, with an honest appraisal of the following options, including additional options that others may suggest:

1) Should we continue to run PAU, as is?

2) Should we consider a sale of PAU - in part, or whole?

3) Should we consider yet unformulated partnerships between PAU and other entities that will create new economies?

This diligence _has_ to be undertaken by a disinterested party, and should _absolutely not_ be conducted by city staff.

As we have a wonderful group of staffers in our city, there is simply too great a danger of conflict of interest to entrust this partricular issue to anyone but an impartial third party.

A final note: that third party should not be a plain vanilla consultant. We need superb private diligence for this question. I would suggest a combination consultancy of persons (or organizations) that include someone from the private sector who has funded private utility infrastructure, as well as a typical utilies consultant with wide-ranging operational experience.


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Posted by Draw the Line
a resident of Stanford
on May 16, 2007 at 11:51 am

Fred, Pam, Otto,Pat..probably forgot a few, but the point is I want to thank you for being posters who keep the writings informational, civil, respectful, factual, questioning and open-minded.

I greatly admire your temperament and fortitude, and ability to not bite back. I hope we can keep you all involved on this and other threads.

If PA Town Talk can get a system going where we each pick a name, and stick to it, then rate the posters, I would give you all the highest ratings and read your postings.

Thanks for the lesson!


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Posted by Danny
a resident of Midtown
on May 16, 2007 at 12:05 pm

Otto makes very good points.

PAU is a tremendous asset Palo Alto has that other cities don't. It's important in these perilous financial times that we maximize the value of this asset. Whether that involves keeping things as they are currently or some other structure - including but not limited to a sale - is not obvious on the surface.

At least we should see what our options are - and Otto is right that the staff, as good as they may be, are not the proper persons to be doing the analysis.

Another poster in this thread suggested that an investment banker would likely do an analysis for free - in the hopes of getting some business if it ever came to that. That sounds like a good idea. There are likely many financial angles to any sale or joint operation agreement that experts could see that we can't.

I hope that this will become an issue in the debate about the future of PA.


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Posted by Paul Losch
a resident of Community Center
on May 16, 2007 at 12:51 pm

My opinion is that there are two key questions being asked here. One has to do with the future role of the PAU asset--this is a more quantitative question. The other question has to do with what are the key features that are important to Palo Alto's future as a community, and this is a more qualitative question, with various points of view.

On the first question, I will draw from my MBA 101 lessons, and say that the asset can be kept or sold. If it is kept, the profits it generates can either be dividended to the City to be used for other purposes, they can be returned to the rate payers, thereby providing a lower than market cost for utilities, or some blend of both. If it is sold, the funds received either can be reinvested in other assets that the City deems appropriate, or put into some funds that generate an income, which can then be used as our elected officials deem appropriate, including services, salaries, new or upgraded roads, etc. Under this sold scenario, of course, the rate payers would pay market rates to PG&E, no prospect of lower rates as exists now.

My little excel spreadsheet says that at a certain sale price, the City is better off selling the asset and putting the proceeds of the sale to other uses. Below such a price, the value to the community is greater if we keep the asset and use the profits in a fashion as they are today, with lower rates or funding for other projects. Investment banking types can do magic with numbers to make a case for something either way along these lines, just attend a finance class at Stanford Business School, and you can see how the discussions work. (I am being a bit sarcastic here, but there is more than a grain of truth to my suggestion. See the recent Business Week article about these sorts of things happening elsewhere in the country--Web Link )

In all fairness, it would be useful to see such a financial analysis--it could show that one or the other alternative is a "no brainer." I suspect that, like most things around here, the answer would not be so clear cut.

Which gets to the second question, the more qualitative one, about what the role of the utility is in Palo Alto's makeup going forward? I highly doubt that if we did not have the utility, it would be high on our list of "things Palo Alto needs." We would just accept PG&E as other communities do, and move on to other things. Since we do have it though, should we keep it, given the role it plays in our community's affairs?

My instincts tell me it is worth having and keeping. It is well run overall, we do get better service than PG&E customers do, if you accept some of the anecdotal evidence offered by others on this thread, that certainly has been my own experience. I like the flexibility we have with using the proceeds the asset generates to do things that are called for at the time. Right now, the money is largely being used as a way to fund other activities that our elected officials and community as a whole consider to be important. At other times, it has and can buffer us from the exigencies of the market place, although we put ourselves at some risk here as well, as the Enron debacle here locally a few years ago demonstrates. But, for it to serve such a purpose well, it has to be well run and well maintained, not neglected or taken for granted.

And having it serve this purpose is totally independent of how monies are used for other purposes. It is a funding mechanism, not a spending decision. If we as a community do not like how our current monies are being spent, we need to address that issue foresquare, whether we have a utility or not. My evil MBA twin reminds me that it is important to separate funding sources and funding options from spending decisions. It is a lack of leadership to spend money just because it is there--Homer Tunnel is a great example of that (largely federally funded.) It may be easier to make bone headed decisions about how and what to spend money on if it is available, but don't kill the funding source because of unwise spending priorities or choices.


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Posted by Chris
a resident of Palo Alto Hills
on May 16, 2007 at 1:45 pm

Paul's thinking on the utilities question is muddled by his propensity to view it as it just another "funding source", a term which he has used in this and other threads.

In fact, it is the very "flexibility" of utility payments as funding sources Paul describes that makes them most problematical. As a recent Diana Diamnond column points out, up to 25% of the Palo Alto general fund budget comes from both explicit and below-the-radar transfers from Utility ratepayers. The former explicit transfers as the so-called "dividend" of (currently) 14 million or so. The latter hidden transfers under various accounting schemes such as having the Utility (and ratepayers) pay "market" rates to lease property from the City's general fund which is paying much less for them - and the transfer of basic municipal functions like street lights to the Utility budget.

Of course, there's also the User's tax that was approved by the voters with the understanding that it would be put up for re authorization in 10 years - something that the Council conveniently ignored when the time came.

It's quite wrong to say that the accounting subterfuges are the result of some sort of community consensus as Paul does. For in fact most of the schemes are never discussed, explicitly considered, or voted on by the council, let alone by the public which likely is legally required by Prop 13 and follow-on measures.

The availability of this publicly invisible "funding source" is, in my opinion, a direct cause of the fiscal sloppiness that has come to characterize our city government. Paul says we need to address our spending issues foursquare. I agree with that. But the reason we have not done that as well as other cities is in large measure due to the fact that the too-convenient "alternative funding mechanism" (aka PAU ) has made it easy for successive councils to avoid making hard decisions.

If Council members and city staff didn't have the Utilities fallback funds, they'd have to make the case for spending and taxing to the public. The public discussion would be healthy in many ways. We'd have to actually make choices. And maybe the city would have to tighten its operations so that we didn't have events like the moonlighting utility employee scandals happening.

Monetizing the PAU asset by selling it might not make financial sense once Paul puts his spreadsheet genius to work. But whatever its financial merit, selling the utilities would put an end to the fundamentally dishonest shenanigans we've got sustaining our Rube Goldberg government finances now. For that good government reason alone, it's worth seriously considering getting rid of the PAU.


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Posted by Winnie the Pooh
a resident of Charleston Gardens
on May 16, 2007 at 2:04 pm

Chris and Paul represent two sides of the current Palo Alto coin. One is measured, and open with questions about 'what are appropriate service levels?' - the other is "my mind is made up, let's start cutting".

I don't see much merit in the latter, in that its underlying assumption has policy-makers attempting to impose a subterfuge on the public. How can one claim that as true, without being a bona fide mind-reader?

What _is_ worth looking into is whether we might get more for our money and time _if_ we could sell the PAU asset at a price that would help us maintain the General Fund padding that PAU has provided, pay for some other things that we need now (infrastriucture), and help to spark local solar and other green deployments that would save us more energy dollars (and carbon load) than PAU (or PG&E) could in the future.


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Posted by Chris
a resident of Professorville
on May 16, 2007 at 2:40 pm

When the city leases a piece of property to be used for utility purposes from Stanford for $1/yr and then turns around and Re-leases the property to the wholly-owned city Utilities department for $500,000/yr and charges the utility users (who are the same people as Palo Alto taxpayers) the $499,999 difference, it's hard to call it anything but "subterfuge".

When the city removes a municipal government function like street light maintenance from the general fund budget to the utilities department budget and pays with utility rates what was formerly paid with general funds -freeing up these funds for other purposes without raising taxes - again, it's hard to call it anything but "subterfuge".


If the city tried to raise the same $499,999 above-board, through taxes, they'd have to go through the usual legislative process and likely put it up to a public vote under Prop 13. You don't have to be a mind-reader to see that the "policy makers" are trying to avoid this through creative and dishonest accounting.

No one said anything about "cuts". But whether we cut or spend more, don't you think it's better to do it openly and above-board? I do. If we raise taxes, don't you think we should do that openly, rather than disguising them as utility payments? I do.

I don't know whether it makes financial sense to sell PAU, but it certainly does make good government sense to think about it.


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Posted by Pam
a resident of Professorville
on May 16, 2007 at 2:49 pm

Chris is right. Anyone who saw the recent PBS documentary on Enron knows that the kind of accounting the city is using with its utility department is exactly what got Enron into trouble. When one part of a public or private entity makes an internal "profit" by leasing, transferring or selling assets from one wholly owned subsidiary to another wholly owned subsidary, something is amiss. It was true with Enron, and it's true with the city.


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Posted by Paul Losch
a resident of Community Center
on May 16, 2007 at 6:32 pm

Chirs,

Far be it from me to suggest anyone has muddled thinking, but I am confused by some of your observations pertaining to my earlier posting.

I characterize the PAU asset as a funding source. You appear to take issue with such a characterization, and I am curious what you think better would define it. Your observations about how PAU is used do not as I read them make it clear why calling it a funding source is inaccurate. It is fine for you to have a dislike for how the asset is being used, that does not necessarily change what it is.

I am sure your suggestion that in order to achieve a "good government" vision we should consider selling this or any asset was merely a rhetorical comment. No need to get into honesty, legalities or fiduciary responsibility around that if it were sold for something less than full value for reasons of "good government."

I would like to know where I suggested there was commmunity consensus for accounting subterfuge. I am happy to discuss matters and my opinions, I am hard pressed to know what to say about this, since I don't believe I made such a statement, as you indicated.

On to some more specific substantive matters that I think have bit more fiber. I cannot tell from your comments if your concerns stem from the lack of transparency around this, or the decisions that have been made by various policy makers over the years. I actually think that there is a good deal of transparecny, or we would likely not have seen a column like Diana's. There is room for more, of course, but it appears to me that those pulling the levers are doing it in fairly plain view, and it becomes a matter of whether or not the way they are doing it is what the community wants. What am I missing?

Which leads me to something that may be even more worrisome for people who are concerned about tranparency and control over spending. If the PAU asset were sold, I think we run a very large risk that the proceeds generated from such a sale would be considerably more unfettered than what we have with the Utility. A huge pot of money would be very tempting for any official to see as a source for things that come along the pike. Approval by the voters for expenditures could easily be circumvented if people put their minds to it. I have stated before that spending must be addressed on its own merits, not hidden behind the veil of funds that are available. But human nature and political realities being what they are, if the PAU sale generated a hypothetical $1 billion, the types of concerns you express about city leadership needing to face genuine choices around our spending priorities could actually get worse, not better. Until that pot of money runs out in 30 years. Then where are we?


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Posted by Robert
a resident of Old Palo Alto
on May 16, 2007 at 6:46 pm

I see a lot of "grass is greener" thinking here. People are unhappy with their existing utility and assume that the situation will be better if we change. I doubt that sincerely. I would rather see the City keep PAU and decide in 10 years that it was a bad decision than to see them sell it and decide in 10 years that it was a bad decision. I think the downside is far greater if the City sells it than if they keep it. If the City-owned utility does poorly they will at least have some control over its management and strategy, whereas we will have no control at all over PG&E.
I am reminded of the school district selling off a bunch of school sites years ago. It seemed like a good idea at the time, and they got a bunch of money for it. Now our schools are overcrowded and there is no money or space for building new ones. Selling off an asset is a one-way street: you will never get it back. This is a monumental decision that should only be taken as a last resort. I don't think we are there yet.


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Posted by Chris
a resident of Palo Alto Hills
on May 16, 2007 at 7:36 pm

I would like to clear up my comments about the city's use of PAU as a "funding source". To be sure, in the purest technical sense of the word, PAU receipts are a source of funds for the city and its general fund. My comments, and my use of ironic quotes was meant to question the legitimacy of the way this "funding source" is handled by the city.

Paul gets close to the gist of my complaint when he mentions lack of transparency. It is a lack of transparency that I object to, but it's more: the entire process lacks integrity.

On transparency, I disagree that the average resident knows how much of the city's general revenue comes from the utility bills they pay. I follow goings-on at city hall very closely, and I had no idea that the level of transfers approached the 25 per cent figure apparently contained in the staff report mentioned by Diamond. As exemplified by many of the comments here, most people assume because our bills have until recently been lower than PG&E - and remain so for electricity - that there can't be this much crossover funding. Clearly this notion is mistaken.

Until it was dug out by Diamond, I didn't know of the way the city leases property to itself and charges us the difference via utility rates. Pam above is right: this is Enron style accounting. Does anyone seriously think that the average resident knows or understands this is going on?

There is much more: over the years I have seen employees "transferred" to PAU from the city budget who apparently continue to do the same jobs and sit at the same desks - just paid out of utility payments, not "taxes". The freed up funds then are used for other purposes. Other cities would have to raise taxes the old fashioned way to accomplish this. The easy availability of utility rate raises is a moral hazard for those who want to raise taxes but can't garner the necessary political support.

The city's budget is a maze of rents, leases, wage and money transfers from the PAU to the general fund. Who knows what else an independent audit would find? This clearly is NOT transparent, and anyone who says it is is fooling himself.

My bigger objection goes to the lack of integrity process involved in all of this. California has very specific laws - approved by the voters of the state - that govern the steps that a locality must take in raising revenue. It should be obvious that these rules are honored in the breach - if at all - by our city leaders because of the availability of the PAU.

When did our elected representatives discuss raising money for the general fund by the above-described self-dealing leasing scheme? The answer is NOT AT ALL. It was dreamed up by the staff and stuck in the general budget - my guess is in a way that made it hard to uncover. (It's been going on for years - with no notice until Diamond revealed it.)

Even if what the city is doing were not of questionable legality, I would object to it on principle. The city should raise revenue in an open and honest way. If it is true, as you seem to suggest in your first post that there is some sort of tacit approval for the way the city runs its financing scheme (You did say, "Right now, the money is largely being used as a way to fund other activities that our elected officials and community as a whole consider to be important."), then let's have an open discussion of it and vote on it like we do other 'funding sources'. If you're honest, you'll admit that one of the reasons this discussion does not occur is that city leaders are afraid of what the result might be.

To make it clear: the city and its utility constitute one entity. When the city chooses to raise revenues through utility rate increases, it's not functionally different than raising taxes: the same procedures should be followed. They're not. This is wrong.

As to your suggestion that if the PAU were sold, the resulting pot of money would be an irresistible target for spendthrift politicians and bureaucrats - I agree. But the pot of money would be much more politically visible than the artificially exaggerated "costs" that serve as cover for tax raises disguised as utility rate increases. Politicians would have to be much more open in taking cash from the city's bank account than they are now in covering their tracks with dubious accounting for utility "costs" that they determine themselves.

You're usually a pretty level-headed commentator, Paul, but on this one you're just wrong I think. I hope you will rethink your position.


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Posted by Donnie
a resident of Midtown
on May 16, 2007 at 8:06 pm

I agree that the accounting for these Stanford leases is pretty shady. But I have another question:

What did Stanford get in return for these $1/yr leases? Stanford is not in the habit of giving away assets. Does any one know what quid pro quo might have been given by the city to Stanford for these bargain leases? Must be more here somewhere.


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Posted by Common Sense
a resident of Midtown
on May 16, 2007 at 8:43 pm

I agree with Chris, and I think Paul is off base if he thinks that the residents approve of the way the utilities have been used to fund and balance the budget. Given the way past measures have gone on "tax increases", I doubt if given the choice, the voters would approve a tax increase equaling to what the utility department provides.

The Utility department's sole purpose should be to provide 'utilities', ie. gas, water, electricity, etc. to the residents of Palo Alto, not to be used as a funding source for other projects; if the Public Utilities Commission were regulating the utility department like they do for PG&E this would be the case, and the resident's utility bills would be much less. For many senior citizens, that would be a welcome relief.


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Posted by Fred
a resident of Barron Park
on May 16, 2007 at 9:51 pm

What a good discussion this is. Thank you to all the posters.

I do tend to agree that utility charges constitute a "hidden tax" that gives the city more money to play with, both in terms of rate setting and some of the other methods described in Ms. Diamond's column. That's not a great thing - we are taxed largely without knowing it and without any means to do anything about it.

That would be a factor in my thinking in whether to keep a utility or not. Though for a start, I would still like to just find out what it is worth.

Does anyone know if this issue is ever discussed at City Hall?

Fred


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Posted by aw
a resident of Old Palo Alto
on May 17, 2007 at 8:21 am

There isn't much precedent for pricing California municipal distribution utilities. Various comments that we should ask a banker are right.

We can come at this from the other direction: PAU reports a $14M per year "equity transfer" to the City. If that were the only payment, how much investment capital would it take to generate that payment stream?

Answer is $300M would safely generate that payment stream with some upside potential. Irony is that the "hidden" payments to the City make PAU more valuable, but hard to discern from the published P&L. Other irony is that below market electric rates mean we're not maximizing the return from our investment.

Bottom line is we can convert PAU's contribution to the City into an equivalent lump sum. As Paul commented earlier, if we could see the total contribution to the City budget, selling PAU might not make sense. But right now it's hard to tell; hence the discussion.


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Posted by Otto
a resident of Charleston Gardens
on May 17, 2007 at 8:21 am

Donnie's question is right on target. Surely, Stanford, no slouch when it comes to gaining favor in negotiation, received _something_ in return for those attractive lease rates. Further reporting on that part of the question would shed light on the entire issue.

For me, this is all beside the point; what's done is done.

The current question begs for further diligence on PAU as an asset that either is, or is not, optimally leveraged for future sustainability. If it isn't optimally leveraged at present, and the price can be made to be right (relative to what has been siuggested above), then we should dispose of the asset to realize a return that will create sustainability multipliers.

If the utility is optimally leveraged, then leave it alone, and do what we can to improve its forward efficiency.

And then there''s the gray area. What cooperative ventures within, or without, the region might the utility engage in? This latter question skirts the issue about how aggressive, and/or sophisticated, city development efforts can be.

The window for aggressive municipal business development of a new kind has opened within the last few years. Our cities are meeting new challenges, far greater than what we have had to face in prior years, because we have massive legacy infrastructure to deal with, and old habits about the way "cities do business" that die hard. Can we meet this challenge, or will Palo Alto ossify. The jury is out.


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Posted by aw
a resident of Old Palo Alto
on May 17, 2007 at 8:57 am

Otto,

Interesting question. Here's a thought experiment: suppose PAU offered to build and lease the City a shiny new Police HQ for $1/year. Good public policy?


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Posted by Otto
a resident of Charleston Gardens
on May 17, 2007 at 10:11 am

aw, How would PAU accomplish that?


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Posted by aw
a resident of Old Palo Alto
on May 17, 2007 at 10:29 am

Otto, I know more about corporate than municipal finance, so this is all purely speculative. It would also help to review the PAU charter documents.

Option A) PAU reports $8M per year interest income. I don't have their balance sheet, but assume that means PAU has +/- $100M cash reserve. Draw down cash reserve for a building.

Option B) Raise electric rates to market to finance a building bond. (PAU has bond financing ability. They are issuing a $22M bond based on recent Council approval to build water storage.)

I think we agree new approaches to City finance are needed! To be fair I don't think financing a City building this way would be a good idea...but more transparency would be helpful.


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Posted by Otto
a resident of Charleston Gardens
on May 17, 2007 at 11:02 am

aw,

To your option A:
As I understand the current situation, drawing down reserves to build infrastructure isn't an option.

To your option B:
You're going to make a lot of people angry :) Also, how would option B increase transparency? It seems that this option would go against the grain of many posters on this thread, who want taxes voted on, and not suddenly appearing unannounced in their monthly utility bill.

When I speak about aggressive business development, I mean a far more proactive and out-of-the-old-miunicipal-style-business-development-activity-games that municipalities have been playing for decades.

Our city requires someone(s) to literally go out and build public/private partnerships, with private industry, and with other regions. Minus an elected mayor with the power of the pulpit to do this (a very distant possibility), we require someone who knows how to shake a tree, look for opportunity, and sell. That's one big step to growth.

That aside, I'm not at all in favor of privatizing publicly provided services. This post re: PAU is an anomoly in my personal experience. It seems to me that PAU may not be able to deliver anywhere near the value that it once had, prior to deregulation in the power industry. We need to take note of that, and look into what kind of current and forward asset leveraging value can be derived from PAU, compared to what the asset can be realistically expected to bring in its current form. There's no harm in looking - in fact, there's more potential harm in not looking.


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Posted by Paul Losch
a resident of Community Center
on May 17, 2007 at 11:32 am

I have observed in other strings and obliquely above that there is a policy question, assuming the Utility is kept, around what its role is.

Much of what is being said around the accounting techniques, transparency and the like point out some valid questions around whether it is being managed in a fashion that reflects the community's expectations for it. To my way of thinking these serve to point out that, like many other things in the City and School District, we lack a clear policy around the Utility, and we consequently find ourselves in a confused state.

I can take my point of view that it is an asset than can be used to reduce rates or help contribute to the general fund. Others can suggest that it should not be a tool that is part of the overall finanical operation of the City, and in effect should be "siloed," leaving the rest of City operations to be funded or cut back as the case may be via other means. There is no right or wrong answer to that policy question, but getting a clear statement of policy would most definitely affect practices and behaviors around how the Utility and City go about their business.

There is another forward-looking issue that all communities face around how they will fund activities expected from local government. Propostion 13 had its place, and like much of our infrastructure, it also is 30 years old, and has implications for now built out communities that were not at issue when it was passed in another era. There are a number of legitimate revenue generating tools that can be brought to bear in supporting a community's infrastructure and service needs. Lost a bit in this discussion about utilities is how it fits into the larger scheme of a revenue strategy for Palo Alto, in a time where the twon no longer has dominant market share of regional sales tax, big box and auto dealerships have transformed as they have, we seem to be incapable of finding our way to attract new hotels, among other things. Talk about stuck in the past, we really don't understand fully how to "right size" ourselves in light of realistic revenue projections, with or without the utility, and certainly given the lack of a revenue strategy that can assure the community it is achieving its fair share in a region decidedly different than the days of orchards and greenfields when Palo Alto was a dominant enterprise and commercial center on the Peninsula between San Francsico and San Jose.

But that's another string, "Revnue Strategy." Utilities fits into it, but there is plenty more to say about PAU without digressing.


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Posted by aw
a resident of Old Palo Alto
on May 17, 2007 at 12:33 pm

Otto,

PAU is transferring $11.3M from reserves this year vs $14M transferred to General Fund. So I have to admit I'm confused about the public accounting principles that govern use of the reserves.

Paul you continue to raise great questions about vision for the 21st Century and revenue options going forward. We are at a bit of a revenue impasse. We have residents who don't want to pay more taxes. And we house industries, such as venture capital and private equity, that don't generate taxable sales. We have at least $1B of infrastructure backlog to catch up on if we want the pre-1989 amenities. So I'm reluctantly moving toward the view we have to cut City staff by about 500 heads and adopt the "Just like other cities" framework.

An off-topic anecdote: I was walking past one of our parks this week. Park gardener was cleaning up with an electric leafblower - powered by a gas generator he was pulling behind on a cart. Is that our vision?


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Posted by Chris
a resident of Palo Alto Hills
on May 17, 2007 at 12:51 pm

I think Paul Losch's recent post calls for some clarification.

While, as he says, there is a policy question as to whether the utilities revenue should be used for general fund revenues, the primary complaint for some of us concerns the nature process used to answer that question.

Right now, the general fund receives a significant portion of its revenue directly and indirectly through transfers from utility ratepayers. Paul is right that one can have differences of opinion as to whether those transfers should be taking place.

However I see NO argument for the proposition that any of the transfers should be made in a way that's hidden from residents, or that fails to follow the usual procedural processes for revenue raising. These matters should be publicly discussed and voted on where appropriate. Quite clearly, as the unrefuted facts in various posts here and in discussions stimulated by Diana Diamond's most recent piece show, this is going on now.

This sub rosa "revenue raising" though accounting manipulation is dishonest and highly corrosive to the rapidly diminishing trust between "normal" residents and the city establishment and government.

Paul has been excellent in pointing out the fiscal turmoil facing the city as its spending appetite and employee cost obligations exceed its revenue stream. It's important to bring these items into balance as he says.

However, it's a major oversight treat all potential "revenue sources" in a mechanical fashion, ignoring the ethical, governmental trust, and legal problems with some of the potential "revenue sources" - like the "source" represented by the flimsy utility accounting schemes under discussion.

My next door neighbor's bank account is technically a source of revenue for me if I can manage to get possession of his checkbook, that doesn't mean when I'm doing my budgeting, I should place it on the same plane as my paycheck in my considerations.


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Posted by Fred
a resident of Barron Park
on May 17, 2007 at 1:15 pm

aq, I enjoy you dry sense of humor (I think). It sounds like you are saying that we've had a good long run here (at least some people have - I just got here a couple years ago) and now we either have to find new revenue or cut expenses (or start selling assets, which might be ok too). Revenue's tough unless you can revitalize retail, which seems quite unlikely. So the answer is cut expenses. Is that correct?

Fred


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Posted by Otto
a resident of Crescent Park
on May 17, 2007 at 1:48 pm

Let's stay on track with the question that this post raised - selling the utility, or not.

The post was not about transparency of city fiscal operations; it was about whether we shuold begin diligence toward a discovery re: the viability of keeping, not keeping, or altering the business model of PAU.

If we get into a discussion about whether "sub rosa" transfers of tax are subterfuge, or not, we miss the larger point, and the insights that might be gained by discussing it.


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Posted by Otto
a resident of Crescent Park
on May 17, 2007 at 1:49 pm

Let's stay on track with the question that this post raised - selling the utility, or not.

The post was not about transparency of city fiscal operations; it was about whether we shuold begin diligence toward a discovery re: the viability of keeping, not keeping, or altering the business model of PAU.

If we get into a discussion about whether "sub rosa" transfers of tax are subterfuge, or not, we miss the larger point, and the insights that might be gained by discussing it.


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Posted by Chris
a resident of Palo Alto Hills
on May 17, 2007 at 2:20 pm

I'm in agreement that the main topic of discussion is whether PAU should be sold.

However, to me, a big argument in favor of getting rid of PAU is the inherent lack of transparency and resulting negative effects on government openness that its existence entails.

Absent this factor, it's purely a financial calculation to me: that is, if there weren't the negative externalities there are in having a city owned utility system, we'd only need to find out if the present value to the city and residents is higher with PAU sold, or kept.

As it is, I think the existence of PAU and its slush fund of easily accessible revenues has made or city worse in several respects - not the least of which is the sloppy management and lack of fiscal discipline that is glaringly evident.

Does anyone think we'd have overstaffed (compared to other cities) to the degree that we have, had we not had the only semi-visible and unaccountable-to-anyone utility revenues to feed the inefficiency and waste in our government?

While it's quite true that sale of PAU would result in a tempting pile of money to waste on ventures similar to what the city wastes PAU revenues on, I still maintain that because of it's a visible, tangible understandable asset compared to utility revenues, a bank account would be much more difficult to tap without public notice than utility revenues are.

At the very least, elimination of the moral hazard that permits policy makers to ignore public scrutiny that the existence of PAU makes possible should be a consideration in whether it should be sold or not.

To this degree, I respectfully dissent from the notion that we shouldn't be discussing lack of transparency in our discussion of PAU's sale.


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Posted by Otto
a resident of Community Center
on May 17, 2007 at 3:43 pm

Chris, Let's wait untiul they put it on the auction block; then we can demand conditions attacjed to the assets resulting from a sale. :)


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Posted by Fred
a resident of Barron Park
on May 17, 2007 at 4:02 pm

I tend to agree with Chris. Aside from the utility possibly being an under-performing asset (not sure till we see what it is worth), the fact that is an indirect source of taxation is problematic and important.

I had no idea how much of city revenues it produces, and tend to agree with Chris that this indirect-tax revenue makes it easier for the city to spend than taxes would.

I originally was curious as to value just because the asset might be under-performing; but with this reason on top, it seems an even more important issue.

Fred


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Posted by DeBagio
a resident of Embarcadero Oaks/Leland
on May 17, 2007 at 6:57 pm

This is a total exercise in wasting time. It's never going to happen. This is such an important part of our city heritage and the mentality that raises such an absurd proppect is the same one that has turned us into a nation governed by and for large corporations. Since it will never happe, why bother to even bring it up?


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Posted by Dan W
a resident of Southgate
on May 17, 2007 at 7:08 pm

As Paul Losch has pointed out many times in this and other threads, the city is heading for dire financial straits - different from anything we've ever had to face before. The current financial structure is unsustainable.

The city and its residents will have to make very difficult choices about revenues and expenses. Some of the alternatives will be so unpalatable to so many residents that some of what now seems unthinkable will start to seem like the best way out of our predicament.

As the back of the envelope calculations done by many in this thread indicate, it's quite possible that sale of PAU - something that currently seems off the table politically - will look like just what we need. (It's also possible that it won't look so good when we see the numbers....but that's what this thread is all about.)

As the lively responses to Otto's original post shows, there is a lot of interest already in examining the sale of PAU. It's seems safe to say that this interest will grow if such a sale can be shown to allow us to keep our current service levels without raising taxes to ridiculous levels.

For that reason alone this exercise is far from a waste of time. We owe Otto a vote of thanks for his efforts in starting the topic.

Additionally, reading this thread has taught me a lot about how the city's finances are handled...making me a better informed participant in the civic process. I would guess the same is true for lots of others.


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Posted by Fred
a resident of Barron Park
on May 17, 2007 at 7:37 pm

Dan, why are we headed toward dire financial straights? I just moved here - maybe I should reconsider!

Fred


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