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HomeMy WebLinkAboutResolution - 2003-R0115 - Professional Services Contract For Rate Review - Ernst & Young, LLP - 03_05_2003Resolution No. 2003-RO115 March 5, 2003 Item No. 30 RESOLUTION BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF LUBBOCK: THAT the Mayor of the City of Lubbock BE and is hereby authorized and directed to execute on behalf of the City of Lubbock a professional services contract by and between the Cities of Lubbock, Brownfield, Floydada, Tulia and Ernst & Young. LLP, contract for a rate review with respect to cost sharing methods used by the City and West Texas Municipal Power Agency, and any associated documents, which professional services agreement is attached hereto and which shall be a part of this Resolution as if fully copied herein in detail. Passed by the City Council this 5th ATTEST: " 5"�� Y-N-� eb cca Garza, City Secretary VED day of March _ , 2003. 1,e,A,,-e C cD AL, MAYOR Beverly Hodggg, Mghaging Director of Finance APPROVED AS TO Linda Chamales, Supervising Attorney Ddres/Ernst&YoungRes February 28, 2003 Resolution No. 2003—RO115 March 5, 2003 Item No. 30 -�ERNST&YOVNG L L P March 5, 2003 Ms. Beverly Hodges Managing Director of Finance City Of Lubbock Lubbock, TX 79457 Dear Beverly: This letter agreement ("Agreement") will confirm the understanding between the City of Lubbock, City of Brownfield, City of Floydada and the City of Tulia ("Cities") and Ernst & Young LLP ("Ernst & Young"), with regard to the engagement of Ernst & Young to assist the Cities by conducting a rate review with respect to the cost sharing methods used by the West Texas Municipal Power Agency ("Agency"). We understand that considerable human and capital resources have been dedicated over the past decade in the planning, construction, repair and operation of JRM8 in addition to the litigation surrounding the project. Further, we understand that given the significant financial scale of this project and the resulting problems associated with its failed start- up, the Cities seek to understand how the charges associated with the project and other costs of the Agency were allocated and charged to theMember Cities. Our approach will utilize Ernst & Young's expertise in cost reviews, operational governance and utility cost sharing to efficiently and confidently provide a review with the following tasks: • Review of the governance processes that are in place with respect to the relationships between the Cities, Lubbock Power & Light ("LP&L") and the Agency to define improvements that can improve future control over cost sharing allocations • Review of the cost accounting and accumulation processes for costs attributable to the the parties and the billing of those costs to the parties • Review of the cost sharing processes, allocations made to various member cities, the rate design for cost recovery and the extent of recovery of costs through rates, and methods and suggest improvements A draft work plan is included as Attachment A for your review. The tasks and deliverables outlined in the work plan will provide a more detailed understanding of the anticipated work required to meet the Cities' objectives for this review. Upon selection, we would meet with the Cities' designated project management committee to revise the work plan to final form including additional details. For this project, Ernst & Young will require access to all relevant documentation concerning the management and costs of the Agency and Lubbock Power & Light including those associated with the construction of JRM8. In addition we will need access for interviews of certain Agency and LP&L personnel in a timely manner. Our findings will be presented in a final report and presentation to the Cities . We anticipate the work plan will require approximately 5-6 weeks to complete after notification to proceed. This timing is contingent upon timely access to the required documentation and personnel for interviews and analysis. The determination of whom to interview and the scope of the interview will be made by Ernst & Young. We will inform you of any expected delays or scope modifications required, if any, as soon as we are aware of them. Professional Fees and Expenses Upon your acceptance of this Agreement, we are prepared to begin this engagement. The Cities agree to pay Ernst & Young based on time and materials applied to this engagement. Our professional fees are estimated to be $90,500 plus out-of-pocket expenses and standard administrative surcharge for the work described herein. Our professional fees will be based on the rates shown in the table below. Out-of-pocket expenses will include costs directly associated with this engagement including travel, accommodations and out-of-town meals, overnight deliver (estimated at $8,000), as well as Ernst & Young's standard administrative fees of 11.5% of standard rates (estimated at $10,000) covering administrative support, telephone, facsimile, postage, printing and duplication, document materials, computer services and similar items. The proposed hourly rates and estimated hours that make up our professional fee estimate are as follows: Level Rate Estimated Hours Partner $400 25 Senior Manager $335 145 Senior Staff $200 160 If any changes to the original work program are proposed, a representative of the City of Lubbock and a representative from the other member cities and Ernst & Young will mutually decide on whether the changes are necessary. Based on this discussion, we will discuss any amendments to our fee estimate. Our fees are due and payable upon receipt of our invoice. Upon signing of this letter of retention we will submit invoices for 40% of our estimated fees and expenses. Subsequent invoices will be submitted based on actual time and materials charged bi- weekly. Invoices will be submitted to the designated project manager. Payments will be made based on each member city's proportionate membership in WTMPA. Terms and Conditions This agreement will be governed by the Terms and Conditions contained in Attachment B, which are incorporated herein by reference. Ernst & Young also agrees to follow the Confidential Information guidelines in Attachment D. Our work is advisory and action on all conclusions and recommendations arising from our work will remain the responsibility of the Cities, LP&L and the Agency. The terms and conditions for Ernst & Young's engagement as described herein are valid for acceptance by the Cities for 30 days from the date hereof, and are subject to change thereafter. This Agreement is executed in five (5) duplicate originals, each of which shall be deemed an original and shall together constitute one and the same Agreement, with one counterpart being delivered to each party. This engagement is important to us and we appreciate the opportunity to be of service to you. If you are in agreement with the terms set forth herein, please indicate by signing and returning the enclosed copy of this letter to Kenneth Novak. If you have any questions about this letter or wish to discuss these matters further, please contact Alan Bell at 214-969-9617 or John Devlin at 202/327-6386. Very truly yours, Agreed to and Accepted by: Title: MAYOR `` Date: March 5, 2003 ATTEST: Rebeca Garza, City Secretary VED Beverly Hodges, Managing Director of Finance APPROVED AS TO FORM: Linda Charnales, Supervising Attorney Office Practice Section Agreed to and Accepted by: City of Brownfield, Texas 01 Title: MAYOR 6 Date: March .s , 2003 ATTEST: City Secretary Agreed to and Accepted by: Title: MAYOR Date: 3 - V 3 ATTEST: aren E. Lawson , City Secretary Agreed to and Accepted by: City of Tulia Texas By: &�- &• Title: MAYOR Date: / 0 3 ATTEST: City Secretary cc: Mr. Alan Bell, Ernst & Young Mr. John Devlin, Ernst & Young ATTACHMENT A Proposed Work Program — WTMPA Rate and Cost Sharing Review Phases and tasks described below will be conducted concurrently. Over the course of the project we would expect to hold formal progress and findings reviews with the Cities designated project manager on a bi-weekly basis. PHASE 1: Governance Assessment We will assess the governance processes that exist between the Cities, LP&L and the Agency. The objective of this assessment will be to document contract compliance with the current reporting and oversight responsibilities for each party in connection with the contracts between and among the Cities, LPL and the Agency.. We will examine potential failures in contract compliance and determine who is bearing the cost of these failures, potential project management and cost misunderstandings, and any potential lack of a priori control opportunities. The key tasks include: • Review the contractual framework between and among the Cities, LPL and WTMPA • Review prior reviews, including all available workpapers • Investigate any issues previously identified to us by the Cities • Determine any failures to comply with contract obligations • Determine the cost of any failures to comply with contract obligations, who is bearing the cost and to whom the cost is being billed • Determine the processes by which costs are established, costs are charged, costs are allocated among the Cities, and rates for cost recovery are determined and implemented • Review and determine, as definitely as possible, all amounts owed or due amongst each of the entities, (the Cities, LP&L, and the Agency), under all of their respective agreements and according to generally accepted industry valuation methods. Based on the current state assessment results and leading practices for governance and risk management in similar situations, we will recommend changes for consideration by the Member Cities, LP&L and the Agency. Our deliverable from this Phase will document our analysis, conclusions and recommendations. PHASE 2: Cost Accumulation and Billing We will assess the process by which costs attributable to the parties are accounted for and accumulated, and subsequently billed. The objectives of this assessment will be to document the accuracy of costs accumulated, the comprehensiveness of the costs accumulated and the extent to which the costs accumulated are billed.. The key tasks are: • Review costs by period by whatever detail available • Perform analytics on these costs to assess the extent to which costs vary over time and the causes of the variations • Review existing audit workpapers for extent of vouching of accounts to source documents • Vouch individual accounts to source documents based on analytics and extent of prior testing • Compare costs accumulated to costs billed to WTMPA and/or the member cities. The cost accumulation and billing will be performed in two stages: costs during the period of the JRM8 construction and subsequently, and costs during the years of existence of the WTMPA prior to the construction of JRM8. Our deliverable from this Phase will document our analyses, conclusions and recommendations. PHASE 3: Cost Sharing and Rate Setting Process Review A process exists for cost sharing by the members of the Agency. We will review the process and cost -sharing formulae used against common practice for allocating shared utility operating and capital related charges to identify whether the basis for allocation to the Cities is consistent with intent and good practice. We will also assess whether different techniques might be used to provide more current information or notice with respect to unexpected changes in costs. We will also review the rate design process, the rate structure and the extent to which the rates recover the costs. The key tasks are: 0 o Document the cost sharing processes o Assess whether the cost sharing process is consistent with the contractual framework o Document the rate setting process and rate design used o Determine whether the intended processes were implemented in the period o Assess whether the processes implemented worked in terms of timely, accurate cost recovery o Assess the processes overall against current conditions and commonly accepted utility cost sharing practice o Review previous charges and payments between the Cities, LP&L and WTMPA; and determine the amounts which should have been made had the terms of the contracts been followed. The cost allocation and rate design review will be performed in two stages: for the period of the JRM8 construction and subsequently, and for the period covering the years of existence of the WTMPA prior to the construction of JRM8. Our deliverable will document our analysis, conclusions and any recommended improvements in the process. The Cities have requested a breakdown of the cost estimate by phase. The following cost estimate breakdown is necessarily somewhat general as some tasks are necessary to complete multiple phases. Phase Est. Hours Direct Cost Est. Admin&Other Est. Governance Assessment 105 $28,800 $5,800 Cost Accumulation and Billing Later period 90 $24,700 $5,000 Earlier period 35 $ 9,600 $1,900 Cost Sharing and Rate Setting Later period 70 $19,200 $3,800 Earlier period 30 $ 8,200 $1,600 Total 330 $90,500 $18,100 Resolution No. 2003-RO115 ATTACHMENT B Terms and Conditions Conflicts of Interest As you know, Ernst & Young provides professional services to entities similar to THE CITIES. Although it has not come to our attention that services are being provided by Ernst & Young to any other entity in connection with this engagement, you consent to the provision of services should they occur, so long as no individual serving THE CITIES in this engagement is part of a team serving such other entity and so long as no confidential information acquired by Ernst & Young in serving THE CITIES is shared, without THE CITIES' consent, with such other engagement team. Indemnification, Dispute Resolution and Limitation of Liability Ernst & Young's Analysis is designed to provide you with certain recommendations for your further consideration and evaluation in light of all other available information. It should not be used as the sole source upon which you rely in making important financial or other decisions and should not be taken to replace other inquiries and procedures that you should undertake for the purpose of satisfying itself regarding such decisions. Ernst & Young can assume no responsibility for any use you may make of the Analysis and you remain solely responsible therefor. In no event will Ernst & Young be liable for any loss, liability, or damage of any kind resulting from your use of the Analysis, whether direct, consequential or indirect, even if we are expressly advised of the possibility of such loss, liability or damage. In consideration of our agreement to act on THE CITIES' behalf in connection with this engagement, to the extent permitted by law, Ernst & Young shall be indemnified and held harmless by THE CITIES against any losses, claims, damages or liabilities ("Claims") to which it may become subject in connection with this engagement. THE CITIES will also reimburse Ernst & Young, to the extent permitted by law, for its expenses (including fees and expenses of legal counsel) as such expenses are incurred in connection with investigating or defending such Claims. However, THE CITIES will not be obligated under this indemnity to the extent that such Claims arose out of the negligence, gross negligence or willful misconduct of Ernst & Young. The reimbursement and indemnity obligations under this paragraph shall be in addition to any liability you may otherwise have, shall extend upon the same terms and conditions to the officers, directors, shareholders and employees of Ernst & Young, and shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. In the event we are requested or authorized by THE CITIES or are required by government regulation, subpoena, or other legal process to produce our documents or our personnel as witnesses with respect to our services for THE CITIES, THE CITIES will, so long as we are not a party to the proceeding in which information is sought, reimburse us for our professional time and expenses, as well as the fees and expenses of our counsel, incurred in responding to such requests. Any controversy or claim arising out of or relating to services covered by this Agreement or hereafter provided by us for THE CITIES or at its request (including any such matter involving any parent, subsidiary, affiliate, successor in interest, or agent of THE CITIES or of Ernst & Young, or involving any person or entity for whose benefit the services in question are or were provided), shall be submitted to voluntary mediation. In no event, regardless of the legal theory advanced, shall Ernst & Young be liable or responsible to any person or entity including, but not limited to, THE CITIES other than for its negligence, gross negligence or willful misconduct. Neither party shall be liable to the other for consequential, incidental, indirect, punitive or special damages (including loss of profits, data, business or goodwill), regardless of the legal theory advanced or of any notice given as to of the likelihood of such damages. THE CITIES' recourse with respect to any liability or obligation of Ernst & Young hereunder shall be limited to the assets of Ernst & Young, and THE CITIES shall have no recourse against, and shall bring no claim against, any partner of Ernst & Young or any of the assets thereof. Confidentiality Ernst & Young agrees to keep any and all confidential information related to or received from THE CITIES in connection with this engagement confidential, and will disclose such confidential information to potential third parties only at your direction. Confidential information shall not include information to the extent that: (i) it is or becomes publicly available through a source other than Ernst & Young; (ii) it was known to Ernst & Young as of the time of its disclosure; (iii) it is independently developed by Ernst & Young without reference to the confidential information; (iv) it is subsequently learned from a third party that does not impose an obligation of confidentiality upon Ernst & Young; (v) it is required to be disclosed pursuant to law or regulation, government authority, duly authorized subpoena or court order; or (vi) is approved for disclosure by prior written consent of THE CITIES. Our role as advisor and/or any advice (written or oral) rendered by Ernst & Young pursuant to this engagement may not be disclosed without our prior written consent unless required to be disclosed pursuant to law or regulation, government authority, duly authorized subpoena or court order. Unless otherwise directed, at the conclusion of this engagement, we may publicly disclose our role as THE CITIES' financial advisors. Other Provisions THE CITIES jointly will be the issuer of descriptive, financial and cost information and management will provide us with a joint letter of representation regarding the facts, assumptions and information contained in the descriptive memorandum. You agree that (i) all information and (ii) the necessary access to potential management team members, customers, partners and investors required by Ernst & Young will be provided within a mutually agreeable period of time. In the event that access to the necessary information and/or personnel is not provided within a mutually agreed upon period of time, Ernst & Young retains the right to adjust the fees and timing of services accordingly. THE CITIES recognize and acknowledge that in rendering services hereunder, Ernst & Young has been and will be using, relying upon and assuming the accuracy of, without independent verification, data, material and other information (including, without limitation, financial or expense forecasts and projections), with respect to THE CITIES, furnished to Ernst & Young by or on behalf of THE CITIES and its agents, counsel, employees and representatives (the "Information"). Ernst & Young does not assume responsibility for the accuracy and completeness of the Information and Ernst & Young shall not be obligated to conduct any independent study or investigation as to the accuracy or completeness of the Information. THE CITIES represent that the Information will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements there, in light of the circumstances in which they were made, not false or misleading, and that the Information will be true, complete and correct in all material respects. Furthermore, recognizing the importance of management's representations to the effective performance and value to THE CITIES of this engagement, THE CITIES release and indemnify Ernst & Young and its personnel from any liability or expense that arises out of a knowing misrepresentation by management. Resolution No. 2003-RO115 ATTACHMENT C Dispute Resolution Procedures The following procedures shall be used to resolve any controversy or claim ("dispute") as provided in our engagement letter of February 27, 2003. If any of these provisions are determined to be invalid or unenforceable, the remaining provisions shall remain in effect and binding on the parties to the fullest extent permitted by law. Mediation A dispute shall be submitted to mediation by written notice to the other party or parties. The mediator shall be selected by agreement of the parties. If the parties cannot agree on a mediator, a mediator shall be designated by the CPR Institute for Dispute Resolution at the request of a party. Any mediator so designated must be acceptable to all parties. The mediation shall be conducted as specified by the mediator and agreed upon by the parties. The parties agree to discuss their differences in good faith and to attempt, with facilitation by the mediator, to reach an amicable resolution of the dispute. The mediation shall be treated as a settlement discussion and therefore shall be confidential. The mediator may not testify for either party in any later proceeding relating to the dispute. No recording or transcript shall be made of the mediation proceedings. Each party shall bear its own costs in the mediation. The fees and expenses of the mediator shall be shared equally by the parties. Resolution No. 2003-R 0115 ATTACHMENT D Confidential Information 1. Ernst & Young LLP acknowledges that in performing services hereunder, Ernst & Young LLP may have access to, or THE CITIES may provide to Ernst & Young LLP information and/or documentation of a Confidential and/or Proprietary nature. 1.1 Definition of Confidential Information. THE CITIES' "Confidential Information," includes both information of a commercial nature and information related to THE CITIES' customers or consumers. THE CITIES' Confidential Information includes, but is not limited to, the following, whether now in existence or hereafter created: 1.1.1 All information marked as "confidential" or with similar designation; 1.1.2 All information protected by rights embodied in copyrights, whether registered or unregistered (including all derivative works), patents or pending patent applications, "know how," trade secrets, and any other intellectual property rights of THE CITIES; 1.1.3 All business, financial or technical information of THE CITIES and any of THE CITIES' vendors (including, but not limited to, software licensed from third parties or owned by THE CITIES or its affiliates); and 1.1.4 THE CITIES' service philosophy and objectives, promotions, markets, materials, financial results, technological developments and other similar proprietary information and materials. 1.1.5 Any and all information of or about customer(s) of THE CITIES, of any nature whatsoever, and specifically including but not limited to customer lists, customer financial information, and the fact of the existence of a relationship between THE CITIES and its customer(s), which, in all events, Ernst & Young LLP should, in the exercise of reasonable judgment, recognize to be confidential. 1.2 Ernst & Young LLP agrees that all such Confidential Information shall be held in strict confidence and disclosed only to those employees whose duties reasonably require access to such Confidential Information. Ernst & Young LLP may use such Confidential Information only as necessary for performance under this Agreement. Ernst & Young LLP shall protect such Confidential Information using the same degree of care, but no less than a reasonable degree of care, to prevent the unauthorized use, disclosure or duplication (except as required for backup systems) of such Confidential Information as Ernst & Young LLP uses to protect its own confidential information. Confidential Information shall be returned to THE CITIES or destroyed upon THE CITIES' request (with such destruction certified in writing to THE CITIES) once the services contemplated by this Agreement have been completed or upon termination of this Agreement. 1.3 Ernst & Young LLP agrees that any violation of the obligations of confidentiality, as set forth in this section, may be a material breach of this Agreement and may entitle THE CITIES to terminate this Agreement without penalty upon notice to Ernst & Young LLP consistent with the terms and conditions of this Agreement. 1.4 If Ernst & Young LLP is required by a court or governmental agency having proper jurisdiction to disclose any Confidential Information, Ernst & Young LLP shall promptly provide to THE CITIES notice of such request so that THE CITIES may seek an appropriate protection order. 2. Limited Use of Confidential Information and Survival of Obligations. 2.1 Ernst & Young LLP may use the Confidential Information only as necessary for Ernst & Young LLP's performance hereunder and for no other use. Ernst & Young LLP's limited right to use the Confidential Information shall expire when THE CITIES no longer require Ernst & Young LLP's performance hereunder. 2.2 Ernst & Young LLP's obligations of Confidentiality and non -disclosure shall survive beyond Ernst & Young LLP's duty to perform and shall survive termination or expiration of any agreement between THE CITIES and Ernst & Young LLP. 2.3 Upon expiration of Ernst & Young LLP's limited right to use the Confidential Information, Ernst & Young LLP shall return all physical embodiments thereof to THE CITIES or, with THE CITIES' permission, Ernst & Young LLP may destroy the Confidential Information. Ernst & Young LLP shall provide written certification to THE CITIES that Ernst & Young LLP has returned, or destroyed, all such Confidential Information in Ernst & Young LLP's possession. Notwithstanding anything to the contrary herein, Ernst & Young LLP may retain its work papers. Any Confidential Information contained within such work papers remains subject to these confidentiality provisions. 3. Disclosure to Third Parties. If Ernst & Young LLP's performance requires or allows disclosure of the Confidential Information to any third parties, then Ernst & Young LLP shall ensure that such third parties will have express obligations of confidentiality and non- disclosure, with regard to the Confidential Information, similar to Vendor's obligations hereunder. Liability for damages due to disclosure of the Confidential Information by any such third parties shall be with Ernst & Young LLP. 4. Exceptions. Notwithstanding the foregoing, the term "Confidential Information" shall not include any portion of such information that the receiving party can establish to have: a. been publicly known without breach of this Agreement; or b. been known by the receiving party without any obligation of confidentiality, prior to disclosure of such Confidential Information; or c. been received in good faith by the receiving party from a third -party source having, to the best of the receiving party's knowledge, the right to disclose such information; d. been independently developed by the receiving party without use of Confidential Information. e. been determined to be public information pursuant to law or regulation, or such information that is required to be disclosed by law or regulation, government authority, duly authorized subpoena or court order.