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HomeMy WebLinkAbout2016-06-03 Utilities Advisory Commission Agenda PacketNOTICE IS POSTED IN ACCORDANCE WITH GOVERNMENT CODE SECTION 54954.2(a) OR 54956 I. ROLL CALL II. ORAL COMMUNICATIONS Members of the public are invited to address the Commission on any subject not on the agenda. A reasonable time restriction may be imposed at the discretion of the Chair. State law generally precludes the UAC from discussing or acting upon any topic initially presented during oral communication. III. APPROVAL OF THE MINUTES Approval of the Minutes of the Utilities Advisory Commission Special Meeting held on May 6, 2015 IV. AGENDA REVIEW AND REVISIONS V. REPORTS FROM COMMISSIONER MEETINGS/EVENTS VI. DIRECTOR OF UTILITIES REPORT VII. UNFINISHED BUSINESS None. VIII. NEW BUSINESS 1.Presentation on City’s Receipt of Tree Line USA Award - Courtney Schumm,Presentation Project Manager, Public Works, Urban Forestry Section, to Present Award 2.Election of Officers Action 3.Discussion on Approach to the Following Items for Commissioner Consideration Discussion as Suggested by Council: Fiber-to-the-Premise; Electric Underground; Fuel Switching/Electrification; Water Recycling; Second Transmission Interconnection with the City’s Electric Grid 4.Staff Recommendation that the Utilities Advisory Commission Recommend that Action the City Council Adopt a Resolution Approving Design Guidelines for the 2015 Electric Cost of Service Analysis 5.Selection of Potential Topic(s) for Discussion at Future UAC Meeting Action 6.Staff Recommendation that the Utilities Advisory Commission Recommend that the City Action Council Adopt two Resolutions Effective September 1, 2015: 1) Amending Rate Schedules W-1 (General Residential Water Service), W-2 (Water Service from Fire Hydrants), W-3 (Fire Service Connections), W-4 (Residential Master-Metered and General Non-Residential Water Service), and W-7 (Non-Residential Irrigation Water Service) to Increase Rates 4% and Add Drought Surcharges; and 2) Activating Drought Surcharges at the 20% Level in Response to Mandatory Potable Water Use Restrictions Imposed by the State Water Resources Control Board 7.Update and Discussion on Impacts of Statewide Drought on Water and Discussion Hydroelectric Supplies UTILITIES ADVISORY COMMISSION WEDNESDAY, JUNE 3, 2015 – 7:00 P.M. COUNCIL CHAMBERS Palo Alto City Hall – 250 Hamilton Avenue Chairman: Jonathan Foster  Vice Chair: N/A  Commissioners: James F. Cook, Michael Danaher, Steve Eglash, Garth Hall, Judith Schwartz, and Lisa Van Dusen  Council Liaison: Gregory Scharff IX. COMMISSIONER COMMENTS X. NEXT SCHEDULED MEETING: July 1, 2015 INFORMATIONAL REPORTS - A complete list of informational reports provided to the UAC can be viewed at http://www.cityofpaloalto.org/gov/boards/uac/reports.asp?code=CAPALO_8 and at City Hall, 3rd Floor, Utilities Administration office. Information reports cannot be discussed during UAC meetings, in compliance with Govt. Code Section 54954.2(a)(2 Utilities Advisory Commission Minutes Approved on: Page 1 of 9 UTILITIES ADVISORY COMMISSION MEETING – SPECIAL MEETING MINUTES OF MAY 6, 2015 CALL TO ORDER Chair Foster called to order at 12:06 p.m. the meeting of the Utilities Advisory Commission (UAC). Present: Commissioners Cook, Danaher, Eglash, Chair Foster, Schwartz, Van Dusen Absent: Commissioner Hall and Council Liaison Scharff ORAL COMMUNICATIONS Jeff Hoel noted that the Council indicated that the UAC should be involved in fiber issues and the Fiber to the Premises (FTTP) project. At the request of Chair Foster, Director Fong introduced staff present at the meeting for the benefit of the newly seated commissioners. APPROVAL OF THE MINUTES Chair Foster moved to approve the minutes from the April 1, 2015 UAC meeting as presented and Commissioner Eglash seconded the motion. The motion carried unanimously (6-0 with Commissioners Cook, Danaher, Eglash, Foster, Schwartz, and Van Dusen voting yes and Commissioner Hall absent). AGENDA REVIEW AND REVISIONS None. REPORTS FROM COMMISSION MEETING/EVENTS Commissioner Cook reported that he and former Commissioner John Melton, the appointed UAC subcommittee on the budget and rates, met with Senior Business Administrator Dave Yuan to review the budget in detail. UTILITIES DIRECTOR REPORT 1. Renewable Energy RFP: CPAU recently released the latest in its ongoing series of renewable energy requests for proposals. Under the latest version, the City intends to execute a long-term contract for between 30 and 80 Gigawatt hours per year of renewable energy. The start date for energy deliveries to the City is 2021, when one of the City’s two existing wind energy contracts will expire. The deadline for submission response to this RFP is May 21. DRAFT Utilities Advisory Commission Minutes Approved on: Page 2 of 9 2. PaloAltoGreen Gas Update: The Program has a goal of enrolling 20%, or roughly 5,000, of the City’s natural gas customers. This level of participation is expected to offset 16,000 metric tonnes of greenhouse gas emissions, representing about 10% of natural gas load, by 2020. As of April 29, 2015, 878 customers have signed up for the program.  Mitchell Park Library and International School of the Peninsula signed up to purchase carbon allowances to offset 100% of their natural gas load (as well as 100% of their load under the PaloAltoGreen electric program). Pete Moffat Co nstruction signed up for 100% PaloAltoGreen Gas for three different accounts at 947 Industrial Ave.  City facilities are planning to participate for 100% of their natural gas usage starting in July with the new fiscal year. 3. Home Energy and Home Water Reports: We have received inquiries on how the rankings for these reports are calculated. The vendors for the Home Energy Report (Opower) and the Home Water Report (WaterSmart) were able to validate that there is no bias in the reporting or any intention to skew the rankings in an attempt to encourage more conservation. Opower reviewed the Home Energy Reports since Palo Alto started the program and reported that about 10% of all customers fall into each decile, as expected. WaterSmart provided an explanation of the assignment of WaterScores to each household indicating that those in the lowest 20th percentile see a Green Water Drop for “great,” those between the 20th and 55th percentile see a Yellow Water Drop for “good” and those above the 55th percentile see a Red Water Drop, or “Take Action.” Scores are adjusted based on mitigating factors —for example, if a household is using less than 58 gallons per capita per day, they will not see a Red Drop, even if the rest of the similar households are using less water than they are. This occasionally happens in winter months when people do not irrigate, or in very large households, with 6 or more occupants. In addition, there may be “ties” for water efficiency, especially at the low usage end, so that more than 20% o f households see the Green Drop. 4. Community Outreach Events and Workshops  Saturday April 25, 2015 - Residential Solar PV Workshop attracted 92 attendees.  Staff participated in numerous outreach events in April for celebration of “Earth Month.”  May 5–Staff tabled at Avenidas Emergency Planning Fair.  May 7–Staff member Aimee Bailey will present an update on cost-effectiveness of residential electrification for Joint Venture Public Sector Climate Task Force. Staff will update the UAC on the same topic at th e July UAC meeting.  May 28-The City will be honored with the Acterra Sustainability Award at the annual awards ceremony.  May 30–Staff will participate in the Comprehensive Plan Summit at Mitchell Park Library and Community Center. Utilities Advisory Commission Minutes Approved on: Page 3 of 9 Commissioner Eglash added that he had requested more information on the Home Energy and Home Water reports and was happy that the vendors provided analysis to staff and that Director Fong requested Commissioner Schwartz congratulated staff on the receipt of the Acterra Sustain ability Award. She asked why the Home Energy Reports account for such a large fraction, 17%, of the City's electric energy efficiency savings as reported in the FY 2014 Annual DSM Report provided as an informational item in the UAC’s packet. Chair Foster replied that the 17% figure cited in the report is for the fraction of the total electric energy efficiency savings attributable to the Home Energy Reports, not the fraction of the City's total electric energy use that was saved due to the reports. UNFINISHED BUSINESS None. NEW BUSINESS ITEM 1: ACTION: Staff Recommendation that the Utilities Advisory Commission Recommend that the City Council Adopt the Proposed Utilities Operating and Capital Budgets for Fiscal Year 2016 Strategic Business Manager Dave Yuan provided a brief department overview, key accomplishments, and Fiscal Year (FY) 2016 initiatives. He summarized the significant FY 2016 budget proposals include a 12% water rate increase, a 9% wastewater collection rate increase, and an increase for fiber rates based on the Consumer Price Index (CPI) of 2.7%. Yuan noted that no rate changes were proposed for gas or electric and described the City's Office of Management and Budget (OMB) change to the budget reappropriation practices for the Capital Improvement Program (CIP) budget. Yuan stated that Utilities is not requesting any new positions, but is requesting reclassification of several positions to be more in line with their duties. Electric Fund Yuan stated that the key FY 2016 initiatives for the Electric Fund include the development of new programs under the Local Solar Plan, evaluation of electrification, analysis of options for a second transmission line and completion of a new Electric Cost of Service Analysis (COSA). Commissioner Schwartz asked if the City of Palo Alto Utilities (CPAU) has any storage on its system or if it has considered it. Commissioner Danaher asked if CPAU has done a system-wide, comprehensive review of the most cost-effective ways to reduce greenhouse gas (GHG) emissions. Director Fong answered that the City is in the process of doing this and that this effort is led by the City’s Chief Sustainability Officer. Commissioner Van Dusen asked if there was a plan to review storage technologies. Assistant Director Jane Ratchye replied that, as required by state law, CPAU completed its first study of Utilities Advisory Commission Minutes Approved on: Page 4 of 9 storage technology options and the Council determined that, since nothing was cost -effective at the time, it declined to set a target for storage. CPAU must redo its evaluation of storage every 3 years so that there is a chance that the conclusion will change depending on the cost of storage and the available of new technologies. Commissioner Eglash added that the City’s emerging technology program is an avenue for storage technologies that could be evaluated. Commissioner Eglash explained that the grid essentially acts as a large storage device—energy is allowed to be added to, or drawn from, the grid as needed. Yuan continued with a summary of the FY 2016 Electric Fund budget, noting that no rate change was proposed, the revenue was expected to decrease by 5% primarily due to realignment of budget with historical actuals and expenses increase by 11% due to commodity cost increases, CIP budget reappropriation, and a large increase in rent. He noted that the Electric Fund Reserves would fall by $25.7 million to $92 million. Commissioner Eglash asked why the O&M costs were projected to increase so much. Yuan explained that the budget request for FY 2016 appears higher when comparing the budget figures to the actuals for FY 2013 and FY 2014. He added that the majority of the increases in O&M costs were salaries and benefits. Historically, the Electric Fund has a high number of vacancies resulting in salary savings of $1-1.5 million which is why the budget is higher than actuals. Commissioner Eglash asked about the CIP costs and whether CPAU is doing more than one year’s worth of CIP project to get caught up. Yuan explained that the CIP budget includes funding for new projects and reappropriations of $7.5M to complete projects from prior years. Commissioner Van Dusen asked why rents and leases were so high. Yuan said that the City owns the land that the substations are on and that a new land appraisal increased the rent that must be paid by CPAU to the City. Commissioner Van Dusen asked if the 23 staff vacancies were affecting operations and noted that it appeared that not all the vacant positions were posted. Yuan said that 13 positions are in the process of being posted and another 7 positions are currently posted. Commissioner Cook said that it was important to note the high rent payments to the City and to point out that Utilities is understaffed and it continues to have problems with recruitment, yet continues to operate well and has won many awards for safety, reliability and environmental initiatives. Commissioner Cook added that he would appreciate an update on the second transmission line. He noted that the streetlight conversion to LED is a great project. He asked about the status of the conversion from 4 KV to 12 KV throughout the City. Assistant Director Tomm Marshall said that this is a long-term effort and an ongoing process, but that there are some engineering issues still to be resolved. Commissioner Cook said that some of the undergrounding districts were so old that they needed to b e rebuilt while other new areas are being undergrounded. He asked how much of the City is undergrounded at this time. Marshall confirmed that about 50% of the City is cu rrently undergrounded and that there are many issues with respect to coordination with telephone and cable providers. Commissioner Cook Utilities Advisory Commission Minutes Approved on: Page 5 of 9 added that security of the system is a priority and added that there have been attacks. Marshall stated that there are vulnerabilities that are being addressed to improve security. Commissioner Cook asked whether, with respect to maintenance issues with undergrounded facilities, is there anything we've learned over the years. Marshall said that they have learned from the many years of experience maintaining and operating the system and have installed equipment above ground (pad mounted) so that equipment is not sitting in water. Commissioner Cook commented that the budget book is very well done and the new format makes it easier to follow. Commissioner Schwartz asked about the original impetus for undergrounding the City. Marshall noted that this issue goes back to the 1950's and that the motivations included aesthetics and improved reliability, but that there are trade-offs including added expense and increased difficulty in locating and repairing faults. Commissioner Cook noted that undergrounding has a large positive benefit on the urban canopy since the trees don't have to compete with overhead lines. Fiber Fund Yuan stated that the major initiatives include completion of the FTTP master plan, completion of the wireless network plan and rebuilding of the fiber ring system, which was first constructed in the 1990s. He noted that fiber rates EDF-1 and EDF-2 will increase by 2.7%, based on the annual CPI. Yuan stated that the revenues are expected to increase by $0.5 million and expenses are expected to increase by $1.4 million due primarily to the fiber rebuild CIP. The proposed CIP budget is $1.8 million and the total reserves are expected to increase to $19.2 million. Public Comment Herb Borock said that Fiber CIP projects are determined by staff, rather than Council as with the Electric, Gas and Water CIP projects. He said that rather than approving a budget number for CIP projects to rebuild dark fiber, the UAC should request that there is more scrutiny on each project since Council has not approved contracts for the projects. Yuan noted that any contracts for construction for a CIP project over $250,000 would go to Council for approval following the same process as for the other funds. Commissioner Cook noted that Fiber reserves should be helpful for any future proj ect requiring capital resources such as the Fiber to the Premises (FTTP) project. Gas Fund Yuan noted the key initiatives for FY 2016 include the promotion of the PaloAlto Green Gas program, implementation of the CIP Master Plan, and continuation of the cross -bore safety program. He noted that there was no gas rate increase and that revenues are expected to decrease due to lower commodity costs and mild weather while expenses were expected to Utilities Advisory Commission Minutes Approved on: Page 6 of 9 increase by $7.5 million including higher transmission cost, gas main replacement CIP and cross bore program. Commissioner Schwartz asked why sales were down when there were so many new large building being constructed in town. Yuan said that the market price for the purchase of the gas commodity is passed on directly to consumers and that the commodity costs were lower than budgeted. He added that mild weather also contributed to lower sales volumes. Commissioner Cook said that the spending for the gas utility is focused on safety and that CPAU received a gas safety award for its efforts. Wastewater Collection Fund Yuan noted that the key initiatives in this fund are the construction of three CIP projects for main rehabilitation and augmentation project as well as an expansion of the sewer lateral replacement program. He said that the proposed wastewater rate increase is 9% for FY 2016 with revenue increased by $1.4 million while expenses would increase by $2.5 million. The Wastewater Collection CIP budget for FY 2016 is $6.0 million. The total impact is a net income decrease of $2.9 million resulting in total reserves of $12.8 million. Commissioner Danaher asked what the wastewater rate increase would mean for a residential customer. Yuan pointed the commissioner to page 103 of the draft operating budget, which showed that the increase was about $2.64 per month in the utility bill. For the benefit of the new Commissioners, Director Fong explained that the budget and rates approval process begins at the beginning of the year when staff provides the preliminary financial forecasts for all funds that shows the trajectory of costs, rate adjustments, and rese rve balances over the next 5-8 years. The preliminary financial forecasts are also presented to the Finance Committee before finalization of the Financial Plans. The Financial Plans are then presented to the UAC and the Finance Committee for recommendation to Council. Finally, the upcoming year's budget is presented at the May UAC meeting – this is where we are in the process. Water Fund Yuan said that the key FY 2016 water-related initiatives included implementation of the drought plan, completion of the Water System CIP Master Plan, and continuation of the seismic upgrade work on the water storage reservoirs. He said that the water rates were planned to increase by 12% and revenues would increase by 4% while expenses were projected to increase by 15%. He said the key CIP projects were system improvements, customer connections, and water main replacements. Overall, water fund reserves were projected to fall by $6 million. Commissioner Danaher asked how the financial reserve levels are established. Chair Foster noted that a UAC subcommittee reviewed the Financial Plans and budget proposal and went deeper into the financial reserves. Rates Manager Jon Abendschein added that establishing the reserve levels includes a review of the risks to each fund (i.e. load variability & future CIPs), the number of days of operating expenses, and the debt ratio coverage. Utilities Advisory Commission Minutes Approved on: Page 7 of 9 ACTION: Commissioner Cook made a motion that the UAC recommend that Council approve the FY 2016 Utilities Operating and Capital budgets as presented. Chair Foster seconded the motion. The motion carried unanimously (6-0 with Commissioners Cook, Danaher, Eglash, Foster, Schwartz, and Van Dusen voting yes and Commissioner Hall absent). ITEM 2: ACTION: Selection of Potential Topic(s) for Discussion at Future UAC Meeting Chair Foster noted that during the joint UAC/Council meeting, the Council highlighted several issues that it would like the UAC to provide advice on: 1) fiber to the premises (FTTP); 2) undergrounding of electric lines; 3) a second electric connection; 4) “fuel switching”, or electrification; and 5) recycled water. He would like to make sure that these topics are discussed by the UAC at some time in the next year and would like to see them on the UAC's 12-month rolling calendar. Director Fong explained that the proposed changes to the Palo Alto CLEAN program item— adding non-solar local renewable projects as eligible projects and maintaining the 16.5 cents/kWh CLEAN price for solar projects—was heard by the Finance Committee. However, its recommendation to Council was different from the UAC’s recommendation. She explained that the Finance Committee voted to reduce the CLEAN price for solar projects to the avoided cost. She explained that the item is scheduled to be considered by Council on May 18, 2015. Commissioner Schwartz asked if there was any update on the anaerobic digester project. Director Fong stated that the Chair Foster asked if the Public Works could provide an update to the UAC. Commissioner Eglash cautioned his fellow commissioners that adding topics takes staff time as well as time of Commissioners. He suggested that perhaps there were some items could be removed from the UAC's review to focus in more depth on some items. Commissioner Danaher asked if there was a time when the UAC agreed on a work plan for the year. Chair Foster said that this did not happen, but the joint meeting with Council provided a chance for guidance from the Council on the high priority issues. Director Fong reminded the UAC that it was advisory to the Council, not to staff. Staff is directed by the City Manager or Council. Commissioner Schwartz asked if there was some way for Commissioners to bring new items to the attention of the commission. Commissioner Eglash noted that the UAC has historically responded to staff's work agenda rather than be proactive with setting priorities. He added that the recent joint meeting with Council has raised this issue. Chair Foster said that it is a balancing act with staff resources. He noted that some of the five identified items have already been dealt with, some are being dealt Utilities Advisory Commission Minutes Approved on: Page 8 of 9 with and some are not being dealt with. He suggested that each of the key issues be brought forward to the UAC in some way by the end of the year. At this point in the meeting (2:07 p.m.), Commissioner Van Dusen left the meeting. Commissioner Danaher asked for some of the background materials for many of the policies that have been adopted. Director Fong stated that she would arrange to send links to the latest reports on each of the five items. Commissioner Danaher asked to put on the agenda how the UAC could approach some issues such as the FTTP and recycled water. This would allow a discussion, not necessarily on the issues themselves, but on how the UAC could add value on the issue. Commissioner Foster asked that that item be added to the UAC’s June agenda. He stated that the monthly drought update could be provided verbally in the Director of Utilities Report, rather than as a separate presentation. Director Fong agreed to that as often there is no huge changes in the drought situation month to month. Commissioner Eglash noted that he values the monthly drought updates, especially given the current severe drought. Director Fong stated that an update would be pro vided either as a presentation or in the Director of Utilities Report part of the agenda. ACTION: None. ITEM 3. DISCUSSION: Update and Discussion on Impacts of Statewide Drought on Water and Hydroelectric Supplies Senior Resource Planner Karla Dailey presented information on the condition of the water supply for the San Francisco Public Utilities’ system, the latest State Water Resources Control Board Emergency Drought Regulations and the proposed resolution scheduled to be considered at the May 11 City Council meeting. She also informed the UAC that the cost to keep the electric portfolio carbon neutral is still anticipated to be well below the 0.15 cent r ate impact approved by Council. Commissioner Schwartz asked how Utilities helps customers achieve water conservation. Dailey mentioned that the City is focused on actions and not on "water budgets" for water customers. Catherine Elvert, Utilities Communications Manager, responded that the City offers many different rebate programs, holds workshops on water use topics, and is available to speak to any group interested. Staff added that key account representatives routinely help large commercial customers with water and energy efficiency needs. COMMISSIONER COMMENTS Chair Foster noted that, aligned with Commissioner Danaher's suggestion, he would like to add an item on the June agenda to discuss how to move forward on the five key items raised by Utilities Advisory Commission Minutes Approved on: Page 9 of 9 Council at the joint UAC/Council meeting. He noted that he would like to appoint two to three Commissioners to act as subcommittees to work on each of these items. Commissioners Schwartz and Danaher agreed to be on a subcommittee to look into the Fiber to the Premises (FTTP) project. Commissioner Cook agreed to join Chair Foster on a subcommittee to look at a second transmission line and electric undergrounding. Regarding the electrification issue, Commissioner Eglash suggested that since the topic was coming forward soon anyway, a subcommittee may not be needed. For the recycled water topic, Chair Foster indicated that he would ask Commissioner Van Dusen to be on a subcommittee for that item. Meeting adjourned at 2:38 p.m. Respectfully submitted, Marites Ward City of Palo Alto Utilities Page 1 of 10 4 MEMORANDUM TO: UTILITIES ADVISORY COMMISSION FROM: UTILITIES DEPARTMENT DATE: June 3, 2015 SUBJECT: Staff Recommendation that the Utilities Advisory Commission Recommend that the City Council Adopt a Resolution Approving Design Guidelines for the 2015 Electric Cost of Service Analysis REQUEST Staff requests that the Utilities Advisory Commission (UAC) recommend that the Council adopt a resolution (Attachment A) approving the Design Guidelines for the 2015 Electric Cost of Service Analysis (Attachment B). EXECUTIVE SUMMARY Electric rates were last adjusted when a 10% rate increase went into effect on July 1, 2009. Staff intends to complete an electric rate cost of service analysis (COSA) in FY 2016 in advance of a rate adjustment that staff projects will be necessary on July 1, 2016. The primary goal of the COSA will be to review the allocation of costs to customer classes and the electric rate design to ensure customers are charged according to the cost to serve them. However, the COSA will also include a review of the rate design issues created by increasing numbers of local solar installations, higher electric vehicle penetration, and the potential for building electrification. This report discusses the existing rate design, gives an overview of the issues to be addressed in the COSA analysis, and sets forth short-term (Phase One) and long-term (Phase Two) work plans for addressing various types of rate design issues. The attached guidelines are only intended to address the Phase One work plan, which must be completed in time to support the July 1, 2016 rate change. Staff will return for further discussion of the Phase Two work plan and will recommend additional rate design guidelines at that time to guide Phase Two rate design activities. BACKGROUND Traditionally, utilities use a COSA to allocate costs among customer classes and to design rates. COSAs gained a more important role for California publicly-owned utilities after the passage of Proposition 26 (2010). Proposition 26 added provisions to the State Constitution essentially defining every local government fee or charge as a tax, requiring voter approval, unless one of seven exceptions applies. Municipal electric rates that do not exceed the reasonable costs to Page 2 of 10 the local government of providing electric service are one exception from the constitutional definition of a tax, and its voter approval requirements. Although Proposition 26 is not retroactive, it will apply to the City’s electric rates once they are increased next via Council adoption. The FY 2016 Electric Utility Financial Plan (Staff Report 5681) projected the need for a 6% rate increase on July 1, 2016. The current rates, which were last changed on July 1, 2009, are based on a COSA performed in 2007. The fundamental structure of the City’s current rates has remained the same since the early 1980s, though the commodity, distribution, and public benefits portions of the rates were “unbundled,” or separated out, during California’s deregulation of the electric market in the late 1990s. Like many utilities, Palo Alto had declining block rates (rates that decreased with increasing consumption) for all customers until the late 1970s, at which point the City switched to the current system. For residents, the current system includes inclining block rates (rates that increase with consumption, more commonly called tiered rates), and for the more diverse non-residential customer classes, flat seasonal rates with demand charges for larger customers. As Palo Alto transitioned to its current rate design, fixed charges for both types of customers were switched to minimum charges and eventually eliminated. The main driver for these changes was to encourage conservation. DISCUSSION The following sections provide a review of the current rate structure and a discussion of rate design issues affecting the utility in the short term and in the long term. They also include a work plan and a proposed set of rate design guidelines to guide the COSA. Summary of Existing Rate Structure Table 1, below, summarizes the number of customers on each electric rate schedule and the percentage of the City’s sales volume they represent . Currently the electric rate for separately- metered residential customers (Rate Schedule E-1) has three tiers, with rates that increase when customer use exceeds roughly 300 kilowatt-hours (kWh) per month and again when the customer exceeds roughly 600 kWh. Non-residential customers’ rates are flat (not tiered) and are higher during the summer. Larger non-residential customers are billed based on their peak demand (the highest fifteen minutes of consumption in the month, measured in kilowatts, or kW) in addition to their monthly energy use. These demand charges are higher in the summer than in the winter, just like the energy charges. None of the major rate schedules include fixed or minimum charges. Page 3 of 10 Table 1: Existing Electric Rate Schedules Rate Applicability Description Number of customers(1) Share of sales(1) E-1 Separately-metered residential customers Three tiered rate No fixed or minimum charge 25,341 16% E-2 Small non-residential customers and master metered multi-family customers Flat energy charge that varies seasonally No fixed or minimum charge 3,073 7% E-4 Demand-metered non- residential customers, peak demand <1000 kW Flat energy and demand charges that vary seasonally No fixed or minimum charge 736 32% E-7 Demand-metered non- residential customers , peak demand >1000 kW Flat energy and demand charges that vary seasonally No fixed or minimum charge 66 42% E-18 City-owned facilities Flat energy charge that varies seasonally No fixed or minimum charge 123 3% (1) FY 2014 The City also has a number of optional, pilot, and special use rate schedules. Both the E-4 and E-7 customer classes have optional time-of-use (TOU) rate schedules. There is a pilot residential (E-1) TOU rate schedule as well, though it is limited to the small group of customers participating in the pilot program. The E-14 rate establishes charges for street and highway lighting, and the E-16 rate deals with unmetered electrical equipment such as billboards, wireless antennas, and traffic cameras. There are also generation-related rates, such as the E-3 rate and E-NSE rate. The E-3 rate establishes wholesale energy purchase prices for certain types of customer-owned generating facilities. The City designed this schedule to comply with the Public Utility Regulatory Policies Act (PURPA). The E-NSE rate establishes the City’s purchase price for surplus generation from customer-owned net-metered solar systems. Lastly, the voluntary PaloAltoGreen rate is still available for certain commercial customers who want it for sustainability reporting purposes. Rate Design Issues, Short-Term and Long-Term Staff has identified a variety of rate design issues to address in coming years. Some of the issues are more relevant to the long-term operation of the utility (five to ten years from now), and others are relevant to its operation over the next three to five years. The short-term rate design issues include:  The need to update the City’s electric COSA. Since the current COSA was completed over 8 years ago, an updated COSA is needed before implementing any changes to existing rates.  Drought-related hydroelectric resource variability. This variability could potentially be managed using a hydro rate adjustment mechanism.  Customer interest in electric water heating and space heating. The City’s Carbon Neutral Portfolio has led some customers to consider electrifying the space and water Page 4 of 10 heating systems in their homes, or replacing gas-using appliances with electric ones. The electric rate structure has an impact on these decisions.  More electric vehicles and plug-in hybrids are on the market. Replacing gasoline or diesel fueled vehicles with electric vehicles is another form of electrification and, again, the electric rate structure can have an impact on these customer choices.  The City’s net energy metering (NEM) tariff for solar customers may reach capacity within the next one to three years. The City should have new rules and rates ready for customers who install solar systems after the NEM cap is reached, and should consider the impact of existing and proposed rate designs on the economics of solar. The long-term rate design issues include:  Advanced metering. This technology would enable wider applicability of TOU rate structures and charges based on customer peak demand. The utility will need to evaluate whether to apply these rate structures more widely.  Long-term potential for customer disconnection from the electric grid. As building technology advances and energy storage and distributed generation technologies become cheaper, it may become feasible for customers to disconnect from the distribution system. The utility should begin considering how to monitor these trends and how pricing strategies might need to be adapted.  Changing utility rate design. The largest utilities are considering a shift to residential TOU rate or even real-time varying rates. They are also considering the rate design issues raised by distributed solar, electric vehicles, building electrification, and other developing technologies. The City attempts to maintain some consistency with the rate designs in nearby communities, so the responses of larger utilities to these trends are worth monitoring.  New carbon reduction targets. More vehicle and building electrification will be required to achieve some of the targets being considered by the State and the City. This will have cost and rate implications for the electric utility. The utility should begin evaluating those long term impacts. To address the issues listed above, staff is proposing a two phase work plan. Phase One involves completing a COSA that addresses only the short-term rate design issues. Staff forecasts a need to increase rates 6% on July 1, 2016 to preserve the financial position of the electric utility, so that date will drive the work plan for Phase One. Longer-term rate design issues will be addressed in Phase Two since these issues are not critical to address prior to July 1, 2016, but preliminary analysis and some stakeholder discussions can begin in 2015 and 2016. Many of the Phase Two projects do not have specific deadlines for completion because they are driven by other planning efforts, such as the Sustainability and Climate Action Plan (S/CAP) and the City’s advanced metering planning efforts. Table 2, below, shows the issues to be addressed in each phase of the work plan. Note that the guidelines proposed for adoption only address the Phase One work plan. Staff will return to the UAC and Council with additional guidelines for any Phase Two rate design work. Page 5 of 10 Table 2: Electric Rate Design Work Plan Phase One Work Plan (to be completed by July 1, 2016)  Before the spring 2016 financial forecasting and budget adoption process, d evelop an electric COSA that addresses the rate design issues discussed in the Design Guidelines for the 2015 Electric Utility COSA (Attachment B).  As part of the spring 2016 financial forecasting and budget adoption process, bring completed COSA and new proposed rate schedules to the UAC and Council for review and adoption.  Develop rules and rates governing solar customers once the NEM program reaches capacity.  Examine projected impacts of the current residential tiered rate design on customers with electric heating and electric vehicles, and explore pilot programs, rebates, or other methods for addressing those impacts, as needed.  Complete a connection fee study to evaluate existing fees and address rules related to transformer upgrades. Phase Two Work Plan (to begin in 2015, completion dates to be determined)  As the City establishes new sustainability goals as part of the S/CAP and continues to analyze future trends in energy use, identify the impact of these on electric rate design and the electric utility’s financial position and develop appropriate responses.  As the CustomerConnect advanced metering pilot program progresses, and as a long-term plan is developed regarding advanced metering and other smart grid technologies, evaluate TOU rate structures and other rate designs those technologies could enable.  Monitor electric rate trends at the State level and among other publicly owned utilities.  Consider the use of fixed charges to recover certain types of costs.  Begin assessing the impact of distributed generation, storage, grid-interactive appliances, and electric vehicles on the distribution system and identify the rate designs that would send appropriate and cost-based price signals to customers using these technologies.  Develop a framework for monitoring the utility’s cost recovery and competitiveness in light of customer self-provision of power and disconnection from the electric grid.  Evaluate the long-term rate impact to the electric utility of new electric vehicle and building electrification loads, as well as new highly efficient building code standards that are currently in development. Rate Design Guidelines In the past, the UAC and Council have expressed concern about having limited ability to make changes to proposed rate structures once a COSA is completed. Staff agrees, and has committed to having policy discussions with the UAC and Council prior to embarking on a COSA. Staff is proposing a set of rate design guidelines for Phase One (Attachment B) to guide its work over the next year. Separate rate design guidelines will be developed for Phase Two. The guidelines for the Phase One COSA are summarized below and discussed in more detail in subsequent sections: Guideline 1. Rates must be based on the cost of service. Guideline 2. Energy charges should be structured similarly to the way they are currently structured, if feasible. Page 6 of 10 Guideline 3. All existing rates should be reviewed for inclusion in the COSA or for retirement. Guideline 4. The COSA should consider the impact of rate designs on electric vehicle and electric heating customers. Guideline 5. The COSA should consider the need for a minimum charge. Guideline 6. A hydroelectric rate adjustment mechanism should be evaluated. Guideline 7. The effect of rate design on current and future solar customers should be considered. Guideline 8. A study of connection fees should be completed. Guideline 9. The effect of proposed rate design changes on low income customers should be considered. Guideline 1: Rates to be based on the cost of service The goal of a COSA is to identify the costs associated with serving each customer class and the rates required to recover those costs. Historically, electric utilities have been able to make some adjustments to COSA-recommended rates to achieve environmental or social objectives. After Prop. 26, such rates cannot be structured solely to achieve policy objectives unless they are also cost-based, absent voter approval. The COSA has become an important tool for demonstrating that utility rates are based on the cost of service. As a result, this guideline must be the overriding one for the COSA. Guideline 2: Use existing rate design for energy charges For Phase One, staff recommends against considering major modifications to the structure of energy charges (such as shifting customers to flat rates, TOU rates, or real-time pricing) for this COSA. The City has not installed the necessary metering technology to implement advanced rate designs like TOU in the short term, and does not expect to do so for several years. The installation of advanced metering may take place within the next several years, and that would be the appropriate time to consider major changes to existing rate structu res. This is anticipated in Phase Two of the work plan. If feasible, the COSA should continue the current structure for energy charges, including:  A tiered energy rate for residential customers  A uniform energy rate (possibly with seasonal variation) for non-residential customers  A demand and energy rate for large non -residential users, possibly with seasonal variation Although staff anticipates retaining the existing structure for energy charges, minor adjustments, as discussed in subsequent guidelines, may be advisable (e.g. adding a minimum charge). Guideline 3: Evaluation of all existing rate schedules for continuation, consolidation, or retirement Staff recommends evaluating all existing rate schedules to determine whether they should be continued or retired. The main focus of this review will be the customer class definition s for non-residential customers. Staff will ask a consultant to evaluate whether the boundaries between small (E-2), medium (E-4), large (E-7), and City-owned (E-18) non-residential Page 7 of 10 customers should be redefined and whether some of the rate schedules should be consolidated. Guideline 4: Impact on electric vehicle and electric heating customers Residential customers represent a fairly uniform customer class when compared to non - residential customers. Electric vehicles are becoming more available, however, and some customers are considering greater use of electricity in their homes by replacing natural gas fueled water and space heaters with efficient heat pump water and space heaters. These customers are likely to have significantly different load profiles from the average residential customer. Staff recommends evaluating whether the cost to serve these customers differs from other residential customers substantially. If so, adjusting the pricing structure applicable to these customers may be appropriate. Guideline 5: Minimum Charge The electric utility incurs costs for billing, metering, and system maintenance for each customer connected to its distribution system, regardless of whether that customer uses energy. Many utilities use a fixed or minimum service charge to recover some or all of those costs. More California utilities are adopting these charges in recent years because the rapidly decreasing cost of rooftop solar and energy storage has enabled some customers to completely eliminate their electric bills through the use of NEM. These customers still use the distribution system when their solar system is not generating, and also incur costs for customer service, billing, meter reading, and maintenance of meters and service drops. A fixed or minimum charge recovers those costs. Fixed and minimum charges can be designed to recover similar costs, but differ in the way they operate:  A fixed service charge is applied each month in addition to the consumption charge. Revenue generated from a fixed charge allows the consumption rate to be reduced. Fixed charges are useful for reducing revenue variability for utilities with high load variability due to weather or other factors.  A minimum charge applies only if a customer’s consumption charge falls below a specified amount. For example, if the utility had a rate of $0.10/kWh, a customer using 30 kWh would pay $3 (30 kWh x $0.10/kWh) in the absence of a minimum charge. With a $5 minimum charge, a customer using 30 kWh would pay $5. If the customer used 100 kWh, the customer’s bill would be $10 (100 kWh x $0.10/kWh), and the minimum charge would not apply. A minimum charge generally does not generate as much revenue as a fixed charge, and may not generate much revenue at all unless there are substantial numbers of customers with little or no energy consumption. However, it can be useful for ensuring that very low users or solar customers contribute to the cost of operating the utility. For this COSA staff recommends considering a minimum charge as a way of ensuring that all customer groups contribute their share of the utility’s operating costs. This is consistent with Page 8 of 10 the approach currently being implemented by PG&E and other investor-owned utilities, as well as a number of publicly-owned utilities throughout California. Many of these utilities are considering eventually implementing fixed charges rather than minimum charges. Staff recommends considering a fixed charge in the Phase Two work plan, but only evaluating the addition of a minimum charge in the Phase One COSA work. Staff estimates that a minimum charge, if adopted, would be between $5 and $7 per month. Staff estimates that such a charge would affect less than 1% of all non-solar customers. It would affect slightly more customers on the rate assistance program, since these customers tend to use less energy on average. Even so, it would still only affect 1% to 3% of these customers, and they would still have lower bills than customers in the rest of the state. As part of the COSA, staff will evaluate how this charge (and other aspects of the rate design) would affect the economics of solar in Palo Alto. Guideline 6: Hydroelectric rate adjustment mechanism Hydroelectric resources make up roughly 50% of the City’s electric supply portfolio. The output of these resources varies with annual rainfall, but their costs are largely fixed. When rain and snow is plentiful and hydroelectric resources generate more tha n usual, the City does not need to buy as much electricity in the markets (or can sell surplus electricity) and its co sts decrease. During a dry year the opposite happens. Costs increase because the City must buy more energy in the markets to replace the hydroelectric generation. This variability can result in as much as $11 million to $13 million in additional costs in a dry year or cost savings in a wet year. The City maintains reserves to help manage these changes in cost in the short term, but the costs must be passed through in the rates eventually. Some agencies use a rate adjustment mechanism to make these rate impacts more transparent by passing on the costs and savings to customers as they occur. These rate adjusters provide a temporary rebate in a wet year or impose a temporary adder in a dry year. In addition to transparency, they have the added benefit of reducing the reserves needed to manage cost variability. Staff recommends evaluating a hydroelectric rate adjustment mechanism during development of the COSA. This would be done in parallel with the Phase One COSA and would involve additional discussions with the UAC and Council. If a hydro rate adjuster were recommended for adoption as part of this process, it would then be incorporated into the COSA. Guideline 7: Rate design and solar customers As a result of Senate Bill (SB) 1 (2006), investor-owned utilities and publicly-owned utilities like the City were required to offer NEM to customers who installed solar systems. Under NEM, solar customers who generate surplus energy in the summer receive a credit that can be used to offset their bill in the winter. SB 1 required utilities to offer this program until installed solar capacity reaches 5% of the utility’s peak load. The City, like many other utilities, will likely reach that point within the next one to three years. Investor-owned utilities are currently working with the California Public Utilities Commission (CPUC) to define rules for solar customers after the NEM cap is reached. Staff is monitoring this effort and also working on its own analysis specific to Palo Alto to develop a successor to the existing NEM rules. Page 9 of 10 For some customers, NEM can result in the elimination of the total electric bill on an annual basis, or even a small net surplus. One criticism leveled at NEM is that it is unsustainable and inequitable. Solar customers continue to use the distribution system during the night and winter, but customers with large systems do not contribute to the upkeep of the system because they pay no electric bill (or a very small bill). Solar advocates counter that existing rate structures may not properly account for the value that solar systems provide to the distribution system. Efforts are being made at the State level to balance these considerations in future rate design, and staff will do the same in this COSA. Discussions about post -NEM rules for solar customers will take place in parallel with the COSA and will involve additional discussions with the UAC and Council. The COSA will also evaluate the impact of any recommended rate design on the economics of solar systems. Guideline 8: Connection fee study The City currently charges customers a one-time fee to connect to the distribution system. The City charges a flat fee for a 200 ampere capacity connection, but requires a customized estimate for higher capacity connections. Fees for higher capacity connections can be substantially more expensive, especially if the new connection triggers the need for a residential transformer upgrade. These higher capacity connections, previously rare, are becoming more common as electric vehicle penetration increases and some customers begin to install electric space and water heaters. As part of the COSA, staff will re -evaluate its policies and fees for new and upgraded customer connections. Guideline 9: Impact on low income customers Changes in rate design can have different impacts on customers who use different amounts of electricity. Low-income customers have lower electricity usage than other customers, on average. Staff intends to evaluate the impact of any recommended rate design changes on low- income consumers and may recommend mitigation of those impacts if necessary. NEXT STEPS After receiving the UAC’s recommendation, staff will take the COSA design guidelines to the Finance Committee, followed by consideration by the City Council. The COSA is expected to be completed by the spring of 2016 so that updated rates can be adopted as part of the FY 2017 budget process to be effective on July 1, 2016. RESOURCE IMPACT The work associated with this project will be absorbed using existing staff and contract budgets. The new rates adopted as a result will be designed to generate adequate sales revenue to fund the electric utility’s operations in FY 2017. For FY 2017, the utility is projected to need roughly 6% more sales revenue ($8.8 million) than is generated by current rates, mainly due to increased costs associated with renewable projects. In addition, if the drought co ntinues through FY 2017, additional revenue (as much as $10 million to $15 million) may be needed to fund higher market purchase costs resulting from low output of hydroelectric resources. As part of the COSA, staff will evaluate a hydroelectric rate adjustment mechanism that could add a temporary charge to customer bills to generate additional revenue under a drought scenario. For more detail on these projections see the proposed FY 2016 Electric Utility Financial Plan (Staff Report 5681). POLICY IMPLICATIONS The process of adopting these design guidelines provides the UAC and Council an opportunity to provide policy guidance to staff before work begins on the COSA. Once a COSA is complete, it can be difficult to modify the resulting rate design without reviewing and possibly amending the analysis. The analysis performed as part of this COSA will support other policy initiatives, including the Local Solar Plan (Staff Report 4608) and the S/CAP. The analysis of the hydroelectric rate adjustment mechanism is part of the Long-term Electric Acquisition Plan (LEAP) Implementation Plan (Staff Report 1317). ENVIRONMENTAL REVIEW Adoption of the Design Guidelines for the 2015 Electric Cost of Service Analysis does not meet the definition of a project, pursuant to Section 21065 of the California Environmental Quality Act, thus no environmental review is required. ATTACHMENT A. Proposed Design Guidelines for the 2015 Electric Cost of Service Analysis PREPARED BY: REVIEWED BY: APPROVED BY: NATHAN ABENDSCHEIN, Senior Resource Planner ANE RATCHYE, Assistant Director, Resource Management J VALERIE t FO Director o Utilities Page 10 of 10 Attachment A Design Guidelines for the 2015 (Phase One) Electric Utility Cost of Service Analysis 1. Rates must be based on the cost to serve customers. This is the overriding principle for the cost of service analysis (COSA); all other rate design considerations are subsidiary to this basic premise. 2. For this cost of service study, and to the extent feasible, energy charges should be based on existing rate structures. This includes: a. A tiered rate design structure for residents b. A flat general service rate for small non-residential users c. A flat demand and energy rate for large non-residential users 3. The COSA should involve a review of all existing rate schedules for inclusion in the COSA or retirement. 4. The COSA should take into account the impact of rate designs on electric vehicles and electric heating customers, and should investigate: a. the extent to which these customers have different load profiles from other residential customers; and b. the extent to which existing rate designs should be adjusted for these differin g load profiles 5. The COSA should evaluate the need for a minimum charge. 6. A hydroelectric rate adjustment mechanism should be evaluated. 7. The COSA should evaluate the impact of rate designs on the economics of local solar for current and future customers and should be coordinated with an analysis of long-term solar policies to be put into effect after the existing net energy metering tariff reaches capacity. 8. A connection fee study should be performed and policies regarding residential transformer upgrades should be reviewed, either as part of the COSA or as part of a parallel analysis. The COSA methodology should be coordinated with any potential connection fee changes or policy changes. 9. The impact of any proposed changes on low income customers should be evaluated Page 1 of 11 6 MEMORANDUM TO: UTILITIES ADVISORY COMMISSION FROM: UTILITIES DEPARTMENT DATE: June 3, 2015 SUBJECT: Staff Recommendation that the Utilities Advisory Commission Recommend that the City Council Adopt two Resolutions Effective September 1, 2015: 1) Amending Rate Schedules W-1 (General Residential Water Service), W-2 (Water Service from Fire Hydrants), W-3 (Fire Service Connections), W-4 (Residential Master-Metered and General Non-Residential Water Service), and W-7 (Non-Residential Irrigation Water Service) to Increase Rates 4% and Add Drought Surcharges; and 2) Activating Drought Surcharges at the 20% Level in Response to Mandatory Potable Water Use Restrictions Imposed by the State Water Resources Control Board REQUEST Staff requests that the Utilities Advisory Commission (UAC) recommend that Council: 1) Adopt a resolution (Attachment A) amending rate schedules W-1 (General Residential Water Service), W-2 (Water Service from Fire Hydrants), W-3 (Fire Service Connections), W-4 (Residential Master-Metered and General Non-Residential Water Service), and W-7 (Non-Residential Irrigation Water Service) to add drought surcharges and increase rates 4% effective September 1, 2015; and 2) Adopt a resolution (Attachment C) activating the drought surcharges at the 20% reduction level effective September 1, 2015. EXECUTIVE SUMMARY The Fiscal Year (FY) 2016 Water Financial Plan recommended for Council approval by the Finance Committee on April 7, 2015 concluded that a 12% water rate increase was necessary in FY 2016. However, as a result of an update to the water cost of service analysis that was completed subsequent to the Financial Plan, Council is only able to adopt an 8% water rate increase effective July 1, 2015 (see Staff Report #5814 on the June 8, 2014 Council agenda). An additional 4% water rate increase, which is necessary to cover increasing costs in th e Water Fund, is proposed for implementation on September 1, 2015. Page 2 of 11 At the same time, staff proposes that the Council amend the rate schedules to add drought surcharges. These surcharges would not apply in a normal year, but could be imposed by action of the City Council in the event of a drought or other water shortage situation. The primary purpose of the surcharges is to recover some or all of the revenue lost due to water consumption reductions. They are not intended to be the primary tool for achieving conservation goals during a drought. Given the 24% water use reduction mandate established for Palo Alto by the State Water Resources Control Board, staff expects that customers will reduce their water use, requiring a rate increase to recover the largely fixed costs of providing water service. Staff recommends activating the new drought surcharges on September 1, 2015, the same day that the proposed 4% rate increase would be effective. In summary, the two attached resolutions are intended to accomplis h three objectives: 1. Complete the 12% rate increase recommended to Council by the Finance Committee on April 7, 2015. Staff has recommended to Council that this 12% increase be broken into two parts, with an 8% increase effective July 1, 2015 and the remaining 4% increase effective September 1, 2015. The 8% increase will be considered by the Council during the water rate hearings on June 8 and continuing if needed to June 15. The first resolution (Attachment A) implements the remaining 4% increase. 2. Add drought surcharges to the water rate schedules. These surcharges will not become active unless Council activates them by resolution. Three levels of surcharge are included, one for the 10/15% reduction level, one for a 20% reduction level, and one for a 25% reduction level. The first resolution (Attachment A) includes all three potential surcharges as part of the proposed rate schedule amendments, but does not seek Council authorization to apply them. 3. Activate the drought surcharges at the 20% reduction level, effective September 1, 2015. The second resolution (Attachment C) implements this action by activating the drought surcharges at the 20% reduction level. The increase to the underlying rate schedules (12% total, 8% on July 1, 2015 and 4% on September 1, 2015) is intended to generate additional revenue required to fund daily operations. The drought surcharges are only intended to be used temporarily under drought conditions or other water shortage situations, to recover revenue lost due to temporarily low sales volumes. The effect of the 4% rate increase is an increase of $2.89 per month for the median residential customer using 9 CCF/month. Note that the changes will take effect on September 1, after the summer irrigation season, when water usage is normally reduced. The impact of the imposition of the drought surcharges will depend on whether a customer reduces water use. Page 3 of 11 BACKGROUND Last year, in response to the ongoing drought, staff began the process of developing drought surcharges. The City’s current rate setting methodology is based on the 2012 Palo Alto Water Cost of Service and Rate Study by Raftelis Financial Consultants, Inc. (RFC) (Staff Report 2676). Prior to updating the 2012 Water Utility Cost of Service Analysis (COSA) to include additional rates or surcharges for use in an extended drought, staff sought policy direction in the form of guidelines for the COSA. The guidelines (Attachment D) were approved by Council on November 10, 2014 (Staff Report 5171) and state that:  Surcharges should be based on the cost to serve customers. This was the overriding principle for the analysis.  The demand targets and indoor and outdoor use reductions underlying the rate design should be consistent with the water shortage response plan evaluation criteria in Appendix G of the City’s 2010 Urban Water Management Plan (UWMP).  Staff should evaluate the feasibility of adding a third tier to the residential rate (W-1) and a second tier to the general non-residential rate (W-4).  Water purchase costs should be passed through directly on the bill as a separate rate component.  Variances should be evaluated for customers needing additional water for medical necessity, health and safety, and other critical needs. At the same time staff was completing the COSA for the drought surcharges, the annual budgeting and financial forecasting process was in progress. The FY 2016 Water Utilit y Financial Plan projected the need for a 12% rate increase on July 1, 2015. The primary driver for this increase is wholesale water rate increases. On March 4, 2015 the Utilities Advisory Commission recommended that the Council approve the 12% rate increase, and on April 7, 2015 the Finance Committee also unanimously recommended approval (Staff Report 5591). Staff mailed notices of the rate increase to all water utility customers, as required by Article XIIID of the State Constitution (added by Proposition 218 in 1996). Shortly after the City mailed the notices, the California Court of Appeal published a decision providing additional guidance on constitutionally compliant water rate de sign. Staff asked RFC to review the City’s water rate methodology and structure to ensure that they continued to equitably recover the City’s costs to provide water service. RFC examined and validated both the City’s methodology and rate structure as fundamentally sound, and recommended minor adjustments to ensure that peaking costs are equitably allocated to each customer class and residential rate tier. Since Council may not adopt rates higher than those in the Proposition 218 notice that was sent to customers, staff recommended that Council approve an 8% rate increase effective July 1, 2015, the maximum rate increase that both aligned with the updated COSA and was within the notice requirements. Council will consider the recommendation for the 8% rate increase at its budget hearings on June 8, 2015 and June 15, 2015 (S taff Report 5814). The remaining 4% rate increase needed can be adopted along with the drought surcharges. This increase is included in Page 4 of 11 the attached rate schedules, and a Prop 218 notice of the 4% increase and the range of potential drought surcharges Council may activate will be sent to customers in July. DISCUSSION Overview of 4% Rate Increase The attached rate schedules include a 4% rate increase, effective September 1, 2015. The rates are summarized in Tables 1 through 3, below. The tables show the existing rates, the rates proposed for July 1, 2015 (an 8% increase from existing rates), the rates proposed for September 1, 2015 (a 4% increase), and the change in rates. Note that the proposed rates for July 1, 2015 shown in Tables 1 through 3 are an 8% overall rate increase, not the 12% rate increase proposed at the March 3, 2015 UAC meeting. The 4% rate increase effective September 1, 2015, when combined with the 8% increase effective July 1, 2015, will result in an overall 12% rate increase, in line with the proposal in the FY 2016 Water Utility Financial Plan. All rate increases are based on the cost of service methodology established in the 2012 “Palo Alto Water Cost of Service and Rate Study” by Raftelis Financial Consultants as modified by the attached memo titled “Proposed Water Rates” by Raftelis Financial Consultants (Attachment F). Table 1: Water Commodity Charges (Current and Proposed) Current Rates (7/1/13) Proposed Rates (7/1/15)1 Proposed Rates (9/1/15) Change from July 2015 (Proposed) Rates $/CCF % W-1 (Residential) Volumetric Rates ($/CCF) Tier 1 Rates 4.99 5.70 5.93 0.23 4% Tier 2 Rates 7.58 8.08 8.38 0.30 4% W-2 (Construction) Volumetric Rates ($/CCF) Uniform Rate 6.15 6.66 6.92 0.26 4% W-4 (Commercial) Volumetric Rates ($/CCF) Uniform Rate 6.15 6.66 6.92 0.26 4% W-7 (Irrigation) Volumetric Rates ($/CCF) Uniform Rate 7.52 7.99 8.29 0.30 4% 1 The July 1, 2015 proposed rates shown in Tables 1 through 3 are for the 8% overall rate increase, that staff recommends be effective on July 1, 2015, instead of the 12% rate increase proposed earlier. Page 5 of 11 Table 2: Current and Proposed Monthly Water Service Charge Meter Size Monthly Service Charge ($/month based on meter size) Change from July 2015 (Proposed) Rates Current (7/1/13) Proposed (7/1/15) 2 Proposed (9/1/15) $/mo % 5/8” 14.67 15.54 16.03 0.49 3% 3/4” 19.51 20.88 21.50 0.62 3% 1” 29.18 31.58 32.45 0.87 3% 1 ½” 53.37 58.32 59.83 1.51 3% 2” 82.39 90.40 92.67 2.27 3% 3” 174.29 192.01 196.70 4.69 2% 4” 309.72 341.74 350.00 8.26 2% 6” 633.80 700.04 716.82 16.78 2% 8” 1,165.86 1,288.28 1,319.07 30.79 2% 10” 1,843.02 2,036.96 2,085.57 48.61 2% 12” 2,423.45 2,678.68 2,742.56 63.88 2% Table 3: Current and Proposed Monthly Fire Service Charges Meter Size Monthly Fire Service Charge ($/month based on meter size) Change from July 2015 (Proposed) Rates Current (7/1/13) Proposed (7/1/15)2 Proposed (9/1/15) $/mo % 2” 3.03 3.38 3.43 0.05 1% 4” 18.78 20.94 21.22 0.28 1% 6” 54.55 60.82 61.63 0.81 1% 8” 116.24 129.61 131.34 1.73 1% 10” 209.03 233.09 236.20 3.11 1% 12” 337.65 376.51 381.52 5.01 1% Table 4 shows the impact of the proposed September 1, 2015 rate changes (excluding any drought surcharges) on the median residential bill. This comparison assumes that customers do not reduce their consumption. Historically, however, customers have looked for ways to conserve after their bills have increased, so not all customers will experience the same bill increase. The average increase is roughly 4% compared to the July 1, 2015 proposed rates and roughly 12% compared to the current rates, but residential custo mers with lower usage will see higher percentage increases due to the adjustment to peaking factors in the proposed July 1, 2015 rate schedules. 2 The July 1, 2015 proposed rates shown in Tables 1 through 3 are for the 8% overall rate increase, instead of the 12% rate increase proposed earlier, that staff recommends be effective on July 1, 2015. Page 6 of 11 Table 4: Impact of Proposed Water Rate Changes on Residential Bills Usage (CCF/month) Bill under Existing Rates Bill under Proposed 7/1/15 Rates Bill under Proposed 9/1/15 Rates Change from July 2015 (Proposed) $/mo % 4 34.63 38.34 39.75 1.41 4% (Winter median) 7 52.19 57.82 59.99 2.17 4% (Annual median) 9 67.35 73.98 76.75 2.77 4% (Summer median) 14 105.25 114.38 118.65 4.27 4% 25 188.63 203.26 210.83 7.57 4% Table 5 shows the impact of the proposed September 1, 2015 rate changes (excluding any drought surcharges) on various representative commercial customer bills. As with residents, this comparison assumes that customers do not decrease consumption. Table 5: Impact of Proposed Water Rate Changes on Commercial Bills Usage (CCF/month) Bill under Existing Rates Bill under Proposed 7/1/15 Rates Bill under Proposed 9/1/15 Rates Change from July 2015 (Proposed) $/mo % Commercial (W-4) (5/8” meters) (Annual median) 12 88.47 95.46 99.07 3.61 4% (Annual average) 64 408.27 441.78 458.91 17.13 4% Irrigation (W-7) (1 ½” meters) (Winter median) 9 121 130 134 4 3% (Summer median) 37 332 354 367 13 4% (Winter average) 56 474 506 524 18 4% (Summer average) 199 1,550 1,648 1710 62 4% Overview of the Drought Surcharge Proposal The proposed drought surcharges for each rate schedule are shown in Table 6. The drought surcharges are based on the cost of service methodology established in the 2012 “Palo Alto Water Cost of Service and Rate Study” by Raftelis Financial Consultants as modified by the attached memo titled “Proposed Drought Surcharges” by Raftelis Financial Consultants (Attachment G). Table 6: Recommended Drought Surcharges ($/CCF) Rate Class 10%/15%3 Reduction 20% Reduction 25% Reduction W-1 Residential (Tier 1) 0.19 0.39 0.59 W-1 Residential (Tier 2) 0.55 1.14 1.76 W-4 (Non-residential and Master Metered Multi-Family, General Use) 0.24 0.49 0.72 W-7 (Non-residential and Master Metered Multi-Family, Irrigation) 0.51 1.18 1.93 3 Water use reduction targets for the 10% and 15% reduction targets are identical because of CPAU’s supply guarantee under its 2009 Water Supply Agreement with the SFPUC. The supply guarantee, which is higher than CPAU’s normal year demand, is a factor in the water use reduction targets. Page 7 of 11 As set forth in the attached rate schedules, these surcharges may be activated by Council ’s adoption of a resolution. The Council may opt to activate the surcharge at a lower level than necessary to fully recover all lost revenue. For example, if the City’s water supplier imposed a mandatory reduction of 20% on Palo Alto, the City Council could adopt surcharges at a 10/15% level or a 20% level. This gives the Council the freedom to adopt a lower surcharge to make up part of the lost revenue, and offset any remaining revenue shortfall by making temporary cost reductions or drawing down reserves. Once adopted, the surcharges wil l remain in effect until Council takes action to remove or amend them. Since the State has imposed a 24% mandatory reduction on Palo Alto effective June 1, 2015 staff recommends that Council adopt a resolution activating the drought surcharges. In the F Y 2016 Water Utility Financial Plan, staff projected a continuation of SFPUC’s request for a 10% voluntary water use reduction, but no mandatory reductions. The financial plan anticipated that the revenue loss associated with the 10% reduction in water sales would be offset by drawing down reserves, with no activation of drought surcharges. Now that Palo Alto is subject to a 24% mandatory water use reduction, staff recommends activating the drought surcharges at the 20% reduction level. Because they will take effect at the end of the summer irrigation season, the surcharges are only estimated to recover roughly 80% of the projected $2.8 million in lost revenue for FY 2016. The remaining lost revenue will be offset by drawing down reserves. Impact on Customer Bills Tables 7 and 8 show the impact the proposed surcharges, if activated at the 20% reduction level, would have on various sample customer bills. Customers who conserve4 would see a lower bill compared to a normal year, while customers who do not con serve would see an increased bill. High use customers see greater savings when they conserve and higher costs when they do not. This is because higher users are expected to reduce consumption more than lower users, an expectation that is factored into the consumption projections underpinning the rate design. Additional tables are included in Attachment E showing the bill impacts for other reduction scenarios. Customers who are already conserving may see increases to their bills as a result of the surcharges. Some customers may perceive this as “being punished for conserving,” even though they will still save money relative to a normal year. Staff intends to communicate the reason for the surcharges (that the utility’s cost to deliver water is mainly fixed), and that the impact of the surcharges will be felt more dearly by those customers who are not reducing consumption.5 4 Bills shown in Tables 7 and 8 assume that conserving customers use 10% less water under the drought surcharges. 5 These bill calculations assume the SFPUC does not raise rates to recover lost revenue. This assumption may hold in the short term, but in an extended drought the SFPUC will increase rates as needed. In this event, the City would adjust rates to pass the cost through to customers. Page 8 of 11 Table 7: Impact of Proposed Drought Surcharges (20% Reduction Level) on Residential Bills for both Conserving and Non-Conserving Customers Usage (CCF/month) Bill under Normal Year Rates* Bill with Surcharges, Conserving Customer Bill with Surcharges, Non-Conserving Customer Bill Change in Bill Bill Change in Bill % $/mo % $/mo 4 39.75 39.03 -2% -0.72 41.31 4% 1.56 (Winter median) 7 59.99 58.15 -3% -1.84 63.47 6% 3.48 (Annual median) 9 76.75 73.39 -4% -3.36 82.51 8% 5.76 (Summer median) 14 118.65 111.47 -6% -7.18 130.11 10% 11.46 25 210.83 186.20 -12% -24.63 234.83 11% 24.00 * Proposed rates effective September 1, 2015 Table 8: Impact of Proposed Drought Surcharges, Non-Residential Bills, 20% Reduction Level Usage (CCF/month) Bill under Normal Year Rates* Bill with Surcharges, Conserving Customer Bill with Surcharges, Non-Conserving Customer Bill Change in Bill Bill Change in Bill % $/mo % $/mo Commercial (W-4) (5/8” meters) (Annual median) 12 99.07 96.95 -2% -2.12 104.95 6% 5.88 (Annual average) 64 458.91 447.59 -2% -11.32 490.27 7% 31.36 Irrigation (W-7) (1 ½” meters) (Winter median) 9 134 124 -8% -11 145 8% 11 (Summer median) 37 367 323 -12% -44 410 12% 43 (Winter average) 56 524 458 -13% -66 590 13% 66 (Summer average) 199 1710 1473 -14% -236 1944 14% 234 * Proposed rates effective September 1, 2015 Drought Surcharge Rate Design, Alignment With Design Guidelines The design for the drought surcharges are mostly in line with the rate design guidelines adopted by Council, with deviations from Guidelines 5, 6, and 7 as discussed below. Guideline 1: Rates to be based on the cost of service The drought surcharges are based on the memo titled “Proposed Drought Surcharges” by Raftelis Financial Consultants (Attachment G). The surcharges use the same cost of service methodology as the City’s normal year rates, but assume reductions in sales commensurate with the water use reductions required. The model assumes that, during a drought, greater water use reductions occur in the rate classes more associated with irrigation (Tier 2 W -1, W-7), which results in higher increases in the rates. These surcharges are not “penalty rates” designed to punish overuse; instead, they are intended only to recover revenue lost due to water use reductions, although they may have the side effect of sending a price signal to encourage Page 9 of 11 conservation. While the surcharges may have some impact on customer conservation, they are not the primary tool for the City to achieve drought reduction targets, nor is that their intended purpose. Guidelines 2 through 4: Consistency of Overall Demand Targets and Indoor and Outdoor Use Reductions with Design Criteria in Appendix G of the UWMP The UWMP lists several criteria to use when evaluating the water allocations that form the basis for any rate design. These are included in Attachment H and are summarized below. They state that the allocations underlying any rate design should: a. Reduce overall City consumption to the reduction target required b. Provide sufficient water available for personal use c. Have a design that is acceptable to the community d. Be designed to minimize unemployment and business loss e. Minimize landscaping investment losses f. Be cost-effective, enforceable, and achievable in the given timeline g. Allow for flexibility h. Take into account for new water services i. Recover penalties applied by suppliers The proposed rate design accomplishes these goals. The demand targets and allocations used as the basis for the rate design are shown in Attachment D. By assuming greater cuts in outdoor use than indoor use, and designing rates on that basis, th e demand targets and indoor/outdoor allocations preserve sufficient water for personal use and minimize the impacts on business use. However, no individual allocations are established, which means people have the opportunity to choose whether they focus their savings goals on indoor or outdoor use. This provides flexibility to the consumer, allowing them the flexibility to allocate their water use as needed to minimize landscape investment losses, and makes it more likely the rate design will be acceptable to the community. Since individual allocations are not established, the rate design automatically takes into account new water services. Guidelines 5 and 6: Adding a Tier to the Residential (W-1) and General Non-residential (W-4) Rate Schedules As part of this study staff evaluated a three tier system for residential rates (W -1) and a two tier system for general non-residential consumption (W-4), but does not recommend adopting additional tiers at this time. Staff’s analysis of customer usage suggests tha t such an approach may be feasible and cost-justified, but it requires more legal and technical analysis than staff can currently accommodate, given the June 1 effective date of the state’s mandatory 24% use reduction. Guideline 7: Create a Separate Water Supply Rate Component Staff recommends against proceeding with this rate design feature at this time. Staff is currently projecting little change to the SFPUC’s water rates over the next three years given the large rate increase that will go into effect July 1, 2015. However, if the drought continues Page 10 of 11 beyond the upcoming winter, the SFPUC may increase its rates higher than anticipated, prompting staff to revisit this feature as part of a future rate change. Guideline 8: Evaluate the Need for Variance Processes The proposed cost-based surcharges do not include extraordinarily large increases or penalty rates for second tier users, so staff is recommending against creating a variance process at this time. However, if it becomes apparent that a variance process is necessary, staff will re-evaluate the feasibility of such a process. NEXT STEPS The Finance Committee will review this proposal on June 16, 2015. Assuming the Finance Committee supports staff’s recommendation, notification of the rate increases , including the range of potential drought surcharges Council may activate, will be sent to customers as required by Article XIIID of the State Constitution (added by Proposition 218, 1996). The rate schedules will then go to the City Council in August, at which time the public hearing required by Article XIIID of the State Constitution will be held. Assuming the Council adopts the rate changes, they will become effective September 1, 2015. RESOURCE IMPACT The attached rate schedules include a 4% increase over the rates that are proposed to be adopted July 1, 2015. The proposed July 1, 2015 rates are 8% higher than the existing rates and will generate roughly $3 million in additional revenue during a normal year. The additional 4% increase will generate an additional $1.5 million during a normal year, though it will generate less in FY 2016 due to the late adoption date. Actual revenue from both rate changes will be lower in the short term because sales volumes are lower due to drought restrictions. The enti re revenue increase will be offset by an increase in wholesale water supply costs, as discussed in the FY 2016 Water Utility Financial Plan. In addition to the 4% rate increase, the attached rate schedules include the addition of drought surcharges that could be imposed by Council as needed. Table 9 shows the estimated revenue that would be recovered by the attached drought surcharges under various drought scenarios, if they were kept in place for an entire fiscal year. Note that this revenue is not extra revenue above the utility’s cost of operation. It only replaces revenue lost due to decreased sales associated with the drought. Staff is recommending activation of the drought surcharges at the 20% level effective September 1, 2015. Table 9: Revenue Recovered by Drought Surcharges Reduction in Available Supply Estimated Lost Revenue Recovered by Drought Surcharges 10/15% $1.3 million 20% $2.7 million 25% $4.1 million The Fiscal Year 2016 Proposed Budget assumes a rate increase of 12%© consistent with the approved Water Utility Financial Plan. Due to the two-step process to achieve a 12% rate increase to cover the utilities costs and the uncertainty of water usage due to the drought and drought rates, staff anticipates returning to the City Council as part of the Fiscal Year 2016 Midyear Budget review report with a recommendation to adjust the water fund's revenues and align it with actual experience during the first six months of fiscal year 2016. POLICY IMPLICATIONS As discussed above, the proposed drought surcharges and underlying rates are consistent with the Design Guidelines for the 2014 Water Utility Drought Rate Cost of Service Study and Appendix G of the UWMP, except as noted above. In addition, they are consistent with Article XIIID of the State Constitution in that they reflect only the cost to serve customers under normal conditions and under various drought scenarios. ENVIRONMENTAL REVIEW Adoption of these rate changes is exempt from the California Environmental Quality Act, pursuant to California Public Resources Code Sec. 21080(b)(8), (adoption of rates to meet operating expenses, purchase supplies, meet reserve needs and obtain capital improvement funds), thus no environmental review is required. ATTACHMENTS A. Resolution of the Council of the City of Palo Alto Adopting a Water Rate Increase and Amending Rate Schedules W-1, W-2, W-3, W-4, and W-7 to include Drought Surcharges B. Amended Rate Schedules W-1, W-2, W-3, W-4, and W-7 C. Resolution Activating Drought Surcharges at the 20% Reduction Level Effective September 1, 2015 D. Adopted Design Guidelines for the 2014 Water Utility Drought Rate Cost of Service Study E. Bill Impacts of Drought Surcharges F. May 20, 2015 Memo from Raftelis Financial Consultants, "Proposed Water Rates" G. May 20, 2015 Memo from Raftelis Financial Consultants, "Proposed Drought Surcharges" H. Appendix G of the Urban Water Management Plan PREPARED BY: REVIEWED BY: APPROVED BY: JONATHAN ABENDSCHEIN, Senior Resource Planner ANE RATCHYE, Assistant Director, Resource Management ALERIE O. FON Director of Utilities v`9 Page llofll Attachment A * NOT YET APPROVED * 1 052615 sdl 6053336 Resolution No. _________ Resolution of the Council of the City of Palo Alto Amending Rate Schedules W-1 (General Residential Water Service), W-2 (Water Service from Fire Hydrants), W-3 (Fire Service Connections), W-4 (Residential Master-Metered and General Non-Residential Water Service), and W-7 (Non-Residential Irrigation Water Service) to Increase Water Rates 4% and Add Drought Surcharges R E C I T A L S A. On January 17, 2014 the Governor of the State of California proclaimed a State of Emergency due to severe drought conditions. On April 1, 2015 the Governor issued Executive Order proclaiming that severe drought conditions continue to exist, and ordering t he State Water Resources Control Board to adopt regulations imposing mandatory water use restrictions on water suppliers to achieve a 20% reduction in statewide potable water use through February 28, 2016. B. On May 5, 2015, the State Water Resources Control Board adopted regulations imposing upon Palo Alto a mandatory 24% reduction in potable water consumption from June 1, 2015 through February 28, 2016. C. The City's costs of distributing water and managing its operations are mostly fixed, and will not decrease despite decreases in water consumption during a drought. Customer response to this call for mandatory reductions will result in reductions in water sales revenue. The City intends to add drought surcharges to its rate schedules that may be used to recover these fixed costs during current and future droughts. D. The City, on June 15, adopted the FY 2016 Water Utility Financial Plan (Staff Report #5813), which determined an additional 12% increase in revenue was needed for FY 2016 due to increased water supply costs. On June 15 the City adopted an 8% increase to its water rates effective July 1, 2015. An additional 4% increase to normal year water rates is necessary to achieve adequate revenue to fund operations for FY 2016. E. Pursuant to Chapter 12.20.010 of the Palo Alto Municipal Code, the Council of the City of Palo Alto may by resolution adopt rules and regulations governing utility services, fees and charges. F. On July _____, 2015, the City mailed notice of the proposed water rate amendments and drought surcharges to all City of Palo Alto Utilities water customers. The notice contained a description of the 4% overall increase in water rates, as well as each of the three levels of drought surcharges that Council may activate in response to a drought or other water shortage situation. Attachment A * NOT YET APPROVED * 2 052615 sdl 6053336 G. Pursuant to Article XIIID Sec. 6 of the California Constitution, on August 17, 2015, the City of Palo Alto held a public hearing to consider all protests against the proposed water rate amendments, including the drought surcharges. H. The total number of written protests presented by the close of the public hearing was __________ fifty percent (50%) of the total number of customers and property owners subject to the proposed water rate amendments. The Council of the City of Palo Alto does hereby RESOLVE as follows: SECTION 1. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule W-1 (General Residential Water Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule W-1, as amended, shall become effective September 1, 2015. SECTION 2. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule W-2 (Water Service from Fire Hydrants) is hereby amended to read as attached and incorporated. Utility Rate Schedule W-2, as amended, shall become effective September 1, 2015. SECTION 3. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule W-3 (Fire Service Connections) is hereby amended to read as attached and incorporated. Utility Rate Schedule W-3, as amended, shall become effective September 1, 2015. SECTION 4. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule W-4 (Residential Master-Metered and General Non-Residential Water Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule W-4, as amended, shall become effective September 1, 2015. SECTION 5. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule W-7 (Non-Residential Irrigation Water Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule W-7, as amended, shall become effective September 1, 2015. SECTION 6. The Council finds that the revenue derived from the adoption of this resolution shall be used only for the purpose set forth in Article VII, Section 2, of the Charter of the City of Palo Alto. SECTION 7. The Council finds that the fees and charges adopted by this resolution are charges imposed for a specific government service or product provided directly to the payor that are not provided to those not charged, and do not exceed the reasonable costs to the City of providing the service or product. Attachment A * NOT YET APPROVED * 3 052615 sdl 6053336 SECTION 8. Council may later find it necessary to activate one of the drought surcharge levels described in the August 2015 public notice. Pursuant to Government Code 53750(h)(2)(B), Council’s later activation of any one of the properly noticed and Council - approved drought surcharge levels is not a rate increase for purposes of Article XIII C and Article XIII D of the California Constitution and Government Code 53750 . SECTION 9. The Council finds that the adoption of this resolution changing water rates to meet operating expenses, purchase supplies and materials, meet financial reserve needs and obtain funds for capital improvements necessary to maintain service is not subject to the California Environmental Quality Act (CEQA), pursuant to California Public Resources Code Sec. 21080(b)(8) and Title 14 of the California Code of Regulations Sec. 15273(a). After reviewing the staff report and all attachments presented to Council, the Council incorporates these documents herein and finds that sufficient evidence has been presented setting forth with specificity the basis for this claim of CEQA exemption. INTRODUCED AND PASSED: AYES: NOES: ABSENT: ABSTENTIONS: ATTEST: ___________________________ ___________________________ City Clerk Mayor APPROVED AS TO FORM: APPROVED: ___________________________ ___________________________ Senior Deputy City Attorney City Manager ___________________________ Director of Utilities ___________________________ Director of Administrative Services GENERAL RESIDENTIAL WATER SERVICE UTILITY RATE SCHEDULE W-1 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-1-1 Effective 7-1-20159-1-2015 dated 7-1-20137-1-2015 Sheet No W-1-1 A. APPLICABILITY: This schedule applies to all separately metered single family residential water services. B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides water services. C. RATES: Per Meter Monthly Service Charge: Per Month For 5/8-inch meter ..................................................................................................... $ 15.5416.03 For 3/4 inch meter ..................................................................................................... 20.8821.50 For 1 inch meter ........................................................................................................ 31.5832.45 For 1 1/2 inch meter .................................................................................................. 58.3259.83 For 2-inch meter ........................................................................................................ 90.4092.67 For 3-inch meter ........................................................................................................ 192.01196.70 For 4-inch meter ........................................................................................................ 341.74350.00 For 6-inch meter ........................................................................................................ 700.04716.82 For 8-inch meter ........................................................................................................1,288.281,319.07 For 10-inch meter ......................................................................................................2,036.962,085.57 For 12-inch meter .......................................................................................................2,678.682,742.56 Commodity Rate: (To be added to Service Charge and applicable to all pressure zones.) Per Hundred Cubic Feet (ccf) Per Month All Pressure Zones Tier 1 usage ........................................................................................................................$5.705.93 Tier 2 usage (All usage over 100% of Tier 1) ........................................................................8.088.38 ATTACHMENT B GENERAL RESIDENTIAL WATER SERVICE UTILITY RATE SCHEDULE W-1 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-1-2 Effective 7-1-20159-1-2015 dated 7-1-20137-1-2015 Sheet No W-1-2 Drought Surcharges: If adopted by City Council resolution as described in Section D.3, one of the three designated drought surcharge reduction levels will be added to the Customer’s applicable Commodity Rate for Tier 1 and Tier 2 water usage. The drought surcharges in the table below are measured in dollars per hundred cubic feet (ccf). System-wide Water Usage Reduction level 10/15% 20% 25% Tier 1 0.19 0.39 0.59 Tier 2 0.55 1.14 1.76 Temporary unmetered service to residential subdivision developers, per connection ........................................................................ $6.00 D. SPECIAL NOTES: 1. Calculation of Cost Components The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or taxes. On a customer’s bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. 2. Calculation of Usage Tiers Tier 1 water usage shall be calculated and billed based upon a level of 0.2 ccf per day rounded to the nearest whole ccf, based on meter reading days of service. As an example, for a 30 day bill, the Tier 1 level would be 0 through 6 ccf. For further discussion of bill calculation and proration, refer to Rule and Regulation 11. GENERAL RESIDENTIAL WATER SERVICE UTILITY RATE SCHEDULE W-1 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-1-3 Effective 7-1-20159-1-2015 dated 7-1-20137-1-2015 Sheet No W-1-3 3. Drought Surcharge During periods of water shortage or restrictions on local water use, the City Council may adopt a resolution activating a Drought Surcharge at the 10/15%, 20% or 25% level, as needed to recover the water utility’s costs of providing water service. The purpose of the Drought Surcharge is to recover revenues lost as a result of reduced consumption. {End} WATER SERVICE FROM FIRE HYDRANTS UTILITY RATE SCHEDULE W-2 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-2-1 Effective 7-1-20159-1-2015 dated 7-1-20137-1-2015 Sheet No W-2-1 A. APPLICABILITY: This schedule applies to all water taken from fire hydrants for construction, maintenance, and other uses in conformance with provisions of a Hydrant Meter Permit. B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides water services. C. RATES: 1. Monthly Service Charge. METER SIZE 5/8 inch ........................................................................................................................... 50.00 3 inch ........................................................................................................................... 125.00 2. Commodity Rate: (per hundred cubic feet) ................................................................ $6.666.92 3. Drought Surcharges: If adopted by City Council resolution as described in Section D.5, one of the three designated drought surcharge reduction levels will be added to the Customer’s Commodity Rate. System-wide Water Usage Reduction level 10/15% 20% 25% Surcharge (dollars per hundred cubic feed) 0.24 0.49 0.72 D. SPECIAL NOTES: 1. Monthly charges shall include the applicable monthly service charge in addition to usage billed at the commodity rate. 2. Any applicant using a hydrant without obtaining a Hydrant Meter Permit or any permittee using a hydrant without a Hydrant Meter Permit shall pay a fee of $50.00 for each day of such use in addition to all other costs and fees provided in this schedule. A hydrant permit may be denied or WATER SERVICE FROM FIRE HYDRANTS UTILITY RATE SCHEDULE W-2 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-2-2 Effective 7-1-20159-1-2015 dated 7-1-20137-1-2015 Sheet No W-2-2 revoked for failure to pay such fee. 3. A meter deposit of $750.00 may be charged any applicant for a Hydrant Meter Permit as a prerequisite to the issuance of a permit and meter(s). A charge of $50.00 per day will be added for delinquent return of hydrant meters. A fee will be charged for any meter returned with missing or damaged parts. 4. Any person or company using a fire hydrant improperly or without a permit, or who draws water from a hydrant without a meter installed and properly recording usage shall, in addition to all other applicable charges be subject to criminal prosecution pursuant to the Palo Alto Municipal Code. 5. During periods of water shortage or restrictions on local water use, the City Council may adopt a resolution activating a Drought Surcharge at the 10/15%, 20% or 25% level, as needed to recover the water utility’s costs of providing water service. The purpose of the Drought Surcharge is to recover revenues lost as a result of reduced consumption. {End} FIRE SERVICE CONNECTIONS UTILITY RATE SCHEDULE W-3 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-3-1 Effective 7-1-2015 dated 7-1-2013 Sheet No W-3-1 A. APPLICABILITY: This schedule applies to all public fire hydrants and private fire service connections. B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides water services. C. RATES: 1. Monthly Service Charges Public Fire Hydrant .................................................................................................... $5.00 Private Fire Service: 2-inch connection .......................................................................................................$3.383.43 4-inch connection .......................................................................................................20.9421.22 6-inch connection ....................................................................................................... 60.8261.63 8-inch connection .......................................................................................................129.61131.34 10-inch connection .....................................................................................................233.09236.20 12-inch connection .....................................................................................................376.51381.52 2. Commodity (To be added to Service Charge unless water is used for fire extinguishing or testing purposes.) Per Hundred Cubic Feet All water usage........................................................................................................... $10.00 D. SPECIAL NOTES: 1. Service under this schedule may be discontinued if water is used for any purpose other than fire extinguishing or testing and repairing the fire extinguishing facilities. Using hydrants and fire services for other purposes is illegal and will be subject to the commodity charge as noted above, fines, and criminal prosecution pursuant to the Palo Alto Municipal Code. 2. For a combination water and fire service, the general water service schedule shall apply. FIRE SERVICE CONNECTIONS UTILITY RATE SCHEDULE W-3 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-3-2 Effective 7-1-2015 dated 7-1-2013 Sheet No W-3-2 3. Utilities Rule and Regulation No. 21 provides additional information on Automatic Fire Services. 4. Repairs and testing of fire extinguishing facilities are not considered unauthorized use of water if records and documentation are supplied by the customer. {End} RESIDENTIAL MASTER-METERED AND GENERAL NON-RESIDENTIAL WATER SERVICE UTILITY RATE SCHEDULE W-4 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-4-1 Effective 7-1-20159-1-2015 dated 7-1-20137-1-2015 Sheet No W-4-1 A. APPLICABILITY: This schedule applies to non-residential water service in the City of Palo Alto and its distribution area. This schedule is also applicable to multi-family residential customers served through a master meter. B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides water services. C. RATES: Per Meter Monthly Service Charge Per Month For 5/8-inch meter .................................................................................... $ 15.5416.03 For 3/4-inch meter .................................................................................... 20.8821.50 For 1-inch meter .................................................................................... 31.5832.45 For 1 ½-inch meter .................................................................................... 58.3259.83 For 2-inch meter .................................................................................... 90.4092.67 For 3-inch meter .................................................................................... 192.01196.70 For 4-inch meter .................................................................................... 341.74350.00 For 6-inch meter .................................................................................... 700.04716.82 For 8-inch meter ....................................................................................1,288.281,319.07 For 10-inch meter ....................................................................................2,036.962,085.57 For 12-inch meter ....................................................................................2,678.682,742.56 Commodity Rates: (to be added to Service Charge) Per Hundred Cubic Feet (ccf) Per Month All Pressure Zones Per ccf ............................................................................................................ $ 6.666.92 RESIDENTIAL MASTER-METERED AND GENERAL NON-RESIDENTIAL WATER SERVICE UTILITY RATE SCHEDULE W-4 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-4-2 Effective 7-1-20159-1-2015 dated 7-1-20137-1-2015 Sheet No W-4-2 Drought Surcharges: If adopted by City Council resolution as described in Section D.2, one of the three designated drought surcharge reduction levels will be added to the Customer’s Commodity Rate. System-wide Water Usage Reduction level 10/15% 20% 25% Surcharge (dollars per hundred cubic feed) 0.24 0.49 0.72 D. SPECIAL NOTES: 1. Calculation of Cost Components The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or taxes. On a customer’s bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. 2. Drought Surcharge During periods of water shortage or restrictions on local water use, the City Council may adopt a resolution activating a Drought Surcharge at the 10/15%, 20% or 25% level, as needed to recover the water utility’s costs of providing water service. The purpose of the Drought Surcharge is to recover revenues lost as a result of reduced consumption. {End} NON-RESIDENTIAL IRRIGATION WATER SERVICE UTILITY RATE SCHEDULE W-7 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-7-1 Effective 7-1-2015 dated 7-1-2013 Sheet No W-7-1 A. APPLICABILITY: This schedule applies to non-residential water service supplying dedicated irrigation meters in the City of Palo Alto and its distribution area. B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides water services. C. RATES: Per Meter Monthly Service Charge Per Month For 5/8-inch meter .................................................................................... $ 15.5416.03 For 3/4-inch meter .................................................................................... 20.8821.50 For 1-inch meter .................................................................................... 31.5832.45 For 1 1/2 inch meter .................................................................................... 58.3259.83 For 2-inch meter .................................................................................... 90.4092.67 For 3-inch meter .................................................................................... 192.01196.70 For 4-inch meter .................................................................................... 341.74350.00 For 6-inch meter .................................................................................... 700.04716.82 For 8-inch meter ....................................................................................1,288.281,319.07 For 10-inch meter ....................................................................................2,036.962,085.57 For 12-inch meter ....................................................................................2,678.682,742.56 Commodity Rates: (to be added to Service Charge) Per Hundred Cubic Feet (ccf) Per Month All Pressure Zones Per ccf ............................................................................................................ $ 8.088.29 NON-RESIDENTIAL IRRIGATION WATER SERVICE UTILITY RATE SCHEDULE W-7 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-7-2 Effective 7-1-2015 dated 7-1-2013 Sheet No W-7-2 Drought Surcharges: If adopted by City Council resolution as described in Section D.2, one of the three designated drought surcharge reduction levels will be added to the Customer’s Commodity Rate. System-wide Water Usage Reduction level 10/15% 20% 25% Surcharge (dollars per hundred cubic feed) 0.51 1.18 1.93 D. SPECIAL NOTES: 1. Calculation of Cost Components The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or taxes. On a customer’s bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. 2. Drought Surcharge During periods of water shortage or restrictions on local water use, the City Council may adopt a resolution activating a Drought Surcharge at the 10/15%, 20% or 25% level, as needed to recover the water utility’s costs of providing water service. The purpose of the Drought Surcharge is to recover revenues lost as a result of reduced consumption. {End} ****NOT YET APPROVED***** Attachment C 1 150526 sdl 6053335 Resolution No. _________ Resolution of the Council of the City of Palo Alto Adopting Drought Surcharges at the 20% Reduction Level in Response to Mandatory Potable Water Use Restrictions Imposed by the State Water Resources Control Board R E C I T A L S A. The state of California is experiencing record dry conditions. On January 17, 2014 the Governor of the State of California proclaimed a State of Emergency due to severe drought conditions. On April 1, 2015 the Governor issued an Executive Order proclaiming that severe drought conditions continue to exist, and ordering the State Water Resources Control Board to adopt regulations imposing mandatory water use restrictions on wa ter suppliers to achieve a 20% reduction in statewide potable water use through February 28, 2016. B. On May 5, 2015, the State Water Resources Control Board adopted regulations imposing upon Palo Alto a mandatory 24% reduction in potable water consumption from June 1, 2015 through February 28, 2016. C. Customer response to this call for mandatory reductions will result in reductions in water sales revenue. The City’s costs of distributing water and managing its operations are mostly fixed, and will not decrease despite decreases in water consumption. The drought surcharges are necessary to recover these fixed costs. D. The City wishes to activate the drought surcharges for all of its water rate schedules at the 20% level. In light of the State’s mandate that Palo Alto reduce its overall potable water consumption by 24%, activation of local surcharges at the 20% level is projected to recover no more than the City’s fixed costs of operations, and is not projected to collect revenue above and beyond the cost to serve the City’s water customers under drought conditions. E. Pursuant to Chapter 12.20.010 of the Palo Alto Municipal Code, the Council of the City of Palo Alto may by resolution adopt rules and regulations governing utility services, fees and charges. F. On July _____, 2015, the City mailed notice of the proposed water rate amendments and drought surcharges to all City of Palo Alto Utilities water customers. The notice contained a description of the 4% overall increase in water rates, as well as each of the three levels of drought surcharges that Council may activate in response to a drought or other water shortage situation. The notice further informed customers that in August 2015, staff plans to recommend that Council activate the 20% drought surcharge level. ****NOT YET APPROVED***** Attachment C 2 150526 sdl 6053335 G. Pursuant to Article XIIID Sec. 6 of the California Constitution, on August 17, 2015, the City of Palo Alto held a public hearing to consider all protests against the proposed water rate amendments, including the drought surcharges. H. The total number of written protests presented by the close of the public hearing was _______ fifty percent (50%) of the total number of customers and property owners subject to the proposed water rate amendments. The Council of the City of Palo Alto does hereby RESOLVE as follows: SECTION 1. As authorized by Chapter 12.20.010 of the Palo Alto Municipal Code, the drought surcharges listed in Section C under the 20% reduction level for the W -1 (General Residential Water Service), W-2 (Water Service from Fire Hydrants), W-4 (Residential Master- Metered and General Non-Residential Service), W-7 (Non-residential Irrigation Water Service) will apply to all City of Palo Alto Utilities water customer bills as of September 1, 2015,. SECTION 2. In light of the State’s mandate that Palo Alto reduce its overall potable water consumption by 24%, activation of local drought surcharges at the 20% level is projected to recover no more than the City’s fixed costs of operations, and is not projected to colle ct revenue above and beyond the cost to serve the City’s water customers under drought conditions. SECTION 3. The drought surcharges will continue to apply until the City Council acts to remove or amend them. Council may later find it necessary to activate one of the other drought surcharge levels described in the August 2015 public notice. Pursuant to Government Code 53750(h)(2)(B), Council’s later activation of any one of the properly noticed and Council- approved drought surcharge levels is not a rate increase for purposes of Article XIII C and Article XIII D of the California Constitution and Government Code 53750 . SECTION 4. The Council finds that the adoption of this resolution changing water rates to meet operating expenses, purchase supplies and materials, meet financial reserve needs and obtain funds for capital improvements necessary to maintain service is not subject to the California Environmental Quality Act (CEQA), pursuant to California Public Res ources Code Sec. 21080(b)(8) and Title 14 of the California Code of Regulations Sec. 15273(a). After / / / / / / / / ****NOT YET APPROVED***** Attachment C 3 150526 sdl 6053335 reviewing the staff report and all attachments presented to Council, the Council incorporates these documents herein and finds that sufficient evidence has been presented setting forth with specificity the basis for this claim of CEQA exemption. INTRODUCED AND PASSED: AYES: NOES: ABSENT: ABSTENTIONS: ATTEST: ___________________________ ___________________________ City Clerk Mayor APPROVED AS TO FORM: APPROVED: ___________________________ ___________________________ Senior Deputy City Attorney City Manager ___________________________ Director of Utilities ___________________________ Director of Administrative Services Attachment D Adopted by Council on November 10, 2014 (Staff Report 5171) Design Guidelines for the 2014 Water Utility Drought Rate Cost of Service Study 1. Drought rates must be based on the cost to serve customers. This is the overriding principle for this study; all other rate design considerations must fall within this basic premise. 2. The drought rate design should be consistent with the water shortage response plan evaluation criteria in Appendix G of the City’s 2010 Urban Water Management Plan, summarized as follows: a. Reduce overall City consumption to reduction target required b. Provide sufficient water available for personal use c. Design should be acceptable to the community d. Unemployment and business loss should be minimized e. Landscaping investment losses should be minimized f. Plan should be cost-effective, enforceable, and achievable in the given timeline g. Plan should allow for flexibility h. Plan should take into account for new water services i. Plan should recover penalties applied by suppliers These criteria are discussed in more detail in the 2010 Urban Water Management Plan. 3. Rates will be designed for the following demand targets: San Francisco Public Utilities Commission System-wide Demand Reduction Target Palo Alto Demand (CCF) Projected Sales (CCF) 10/15% 4.976 million 4.571 million 20% 4.586 million 4.213 million 25% 4.261 million 3.914 million 4. Rates will be designed assuming the following allocation of water between indoor and outdoor (irrigation) use. SFPUC System- wide Reduction in Available Supply CPAU Sales (CCF) Indoor Use Outdoor Use (CCF) % reduction over normal year (CCF) % reduction over normal year None 4.946 million 3.134 million - 1.812 million - 10/15% 4.571 million 2.977 million 5% 1.589 million 12% 20% 4.213 million 2.852 million 9% 1.359 million 25% 25% 3.914 million 2.758 million 12% 1.160 million 36% 5. Rates for residential customers should provide an allowance for efficient landscaping through the use of three tiers, if feasible, and should otherwise be based on two tiers. Attachment D Adopted by Council on November 10, 2014 (Staff Report 5171) 6. Rates for commercial customers should provide an individual baseline allocation representing indoor use (based on winter use in a pre-drought year) and a second tier for outdoor use. 7. Water purchase costs should be passed through directly on the bill as a separate rate component. 8. Evaluate variance processes for customers needing additional water for medical necessity, health and safety, and other critical needs. Page 1 of 3 Estimated Impact of Proposed Drought Surcharges on Customer Bills The charts below show the impact of drought surcharges on customer bills. Note that the bill calculations below assume that the City’s wholesale supplier, the SFPUC, does not raise rates to recover lost revenue. This assumption may hold in the short term, but in an extended drought the SFPUC will increase rates as needed. In this event, the City would adjust rates to pass the cost through to customers. 10% / 15% REDUCTION LEVEL Residential Bills Usage (CCF/month) Bill under Normal Year Rates Bill with Surcharges, Conserving Customer Bill with Surcharges, Non-Conserving Customer Bill Change in Bill Bill Change in Bill % $/mo. % $/mo. 4 39.75 39.29 -1% -0.46 40.51 2% 0.76 (Winter median) 7 59.99 58.95 -2% -1.04 61.68 3% 1.69 (Annual median) 9 76.75 75.03 -2% -1.73 79.54 4% 2.79 (Summer median) 14 118.65 115.21 -3% -3.44 124.19 5% 5.54 25 210.83 200.22 -5% -10.61 222.42 5% 11.59 Commercial Bills Usage (CCF/month) Bill under Normal Year Rates Bill with Surcharges, Conserving Customer Bill with Surcharges, Non-Conserving Customer Bill Change in Bill Bill Change in Bill % $/mo. % $/mo. Commercial (W-4) (5/8” meters) (Annual median) 12 99.07 97.65 -1% -1.42 101.95 3% 2.88 (Annual average) 64 458.91 451.36 -2% -7.55 474.27 3% 15.36 Irrigation (W-7) (1 ½” meters) (Winter median) 9 134 130 -3% -4 139 4% 5 (Summer median) 37 367 346 -6% -21 385 5% 18 (Winter average) 56 524 493 -6% -31 553 6% 29 (Summer average) 199 1710 1601 -6% -109 1811 6% 101 ATTACHMENT E Page 2 of 3 20% REDUCTION LEVEL Residential Bills Usage (CCF/month) Bill under Normal Year Rates Bill with Surcharges, Conserving Customer Bill with Surcharges, Non-Conserving Customer Bill Change in Bill Bill Change in Bill % $/mo. % $/mo. 4 39.75 39.03 -2% -0.72 41.31 4% 1.56 (Winter median) 7 59.99 58.15 -3% -1.84 63.47 6% 3.48 (Annual median) 9 76.75 73.39 -4% -3.36 82.51 8% 5.76 (Summer median) 14 118.65 111.47 -6% -7.18 130.11 10% 11.46 25 210.83 186.20 -12% -24.63 234.83 11% 24.00 Commercial Bills Usage (CCF/month) Bill under Normal Year Rates Bill with Surcharges, Conserving Customer Bill with Surcharges, Non-Conserving Customer Bill Change in Bill Bill Change in Bill % $/mo. % $/mo. Commercial (W-4) (5/8” meters) (Annual median) 12 99.07 96.95 -2% -2.12 104.95 6% 5.88 (Annual average) 64 458.91 447.59 -2% -11.32 490.27 7% 31.36 Irrigation (W-7) (1 ½” meters) (Winter median) 9 134 124 -7% -10 145 8% 11 (Summer median) 37 367 323 -12% -44 410 12% 43 (Winter average) 56 524 458 -13% -66 590 13% 66 (Summer average) 199 1710 1473 -14% -237 1944 14% 234 Page 3 of 3 25% REDUCTION LEVEL Residential Bills Usage (CCF/month) Bill under Normal Year Rates Bill with Surcharges, Conserving Customer Bill with Surcharges, Non-Conserving Customer Bill Change in Bill Bill Change in Bill % $/mo. % $/mo. 4 39.75 38.98 -2% -0.77 42.11 6% 2.36 (Winter median) 7 59.99 57.55 -4% -2.44 65.29 9% 5.30 (Annual median) 9 76.75 71.75 -7% -5.00 85.57 11% 8.82 (Summer median) 14 118.65 107.24 -10% -11.41 136.27 15% 17.62 25 210.83 173.76 -18% -37.07 247.81 18% 36.98 Commercial Bills Usage (CCF/month) Bill under Normal Year Rates Bill with Surcharges, Conserving Customer Bill with Surcharges, Non-Conserving Customer Bill Change in Bill Bill Change in Bill % $/mo. % $/mo. Commercial (W-4) (5/8” meters) (Annual median) 12 99.07 96.71 -2% -2.36 107.71 9% 8.64 (Annual average) 64 458.91 446.31 -3% -12.60 504.99 10% 46.08 Irrigation (W-7) (1 ½” meters) (Winter median) 9 134 119 -11% -15 152 13% 18 (Summer median) 37 367 302 -18% -65 438 19% 71 (Winter average) 56 524 426 -19% -98 632 21% 108 (Summer average) 199 1710 1361 -20% -349 2094 22% 384 201 S. Lake Avenue Suite 301 Pasadena, CA 91101 Phone 626 . 583 . 1894 Fax 626 . 583 . 1411 www.raftelis.com Raftelis Financial Consultants Memorandum TO: Jon Abendschein, Senior Resource Planner FROM: Sudhir Pardiwala/Hannah Phan DATE: May 20, 2015 SUBJECT: Proposed Water Rates The City of Palo Alto (City) engaged Raftelis Financial Consultants, Inc. (RFC) to review the cost of service methodology and water rate structure described in our 2012 rate study1 to ensure its continued compliance with Proposition 218. This memo summarizes the methodology and development of the proposed water rate methodology and tiered rate structure. Proposed Water Rates The following subsections detail the methodology and calculation related to the proposed water rates for fiscal year (FY) 2016. Cost of Service Analysis Adjustments At the City’ request, RFC reviewed the cost of service analysis methodology used in its 2012 rate study, to ensure its continued compliance with Proposition 218’s substantive requirements for water rates. The methodology and rate structure described in the 2012 cost of service study remains fundamentally sound. Upon review, we have refined our analysis and recommend that the following adjustments be made to ensure that the rates proposed continue to equitably recover the City’s costs of providing water service: 1.RFC updated the customer class peaking factors using FY 2014 data. Peaking costs are one of the elements used to differentiate rates amongst different classes of customers. Different customers impose different demands on the system, and the portion of the costs related to peaking are applied proportionally to the peaking factors. As discussed below, peaking factors for the customer classes have shifted since the last study, and the new peaking factors should be reflected in the proposed rates. 2.RFC analyzed the usage characteristics for residential Tiers 1 and 2 usage in order to update the peaking-related costs to be allocated to each tier. The boundary between Tier 1 and Tier 2 use, 6 CCF, represents the median winter monthly usage for residential customers (winter is consider January through March). Analyzing winter usage is a common way to calculate indoor, year- 1 Palo Alto Water Cost of Service and Rate Study Report dated March 2012 ATTACHMENT F City of Palo Alto May 20, 2015 Page 2 round, base load use. Usage above this level typically is related to irrigation. As a result, the 2012 cost of service study did not allocate any peaking factors to Tier 1, because the customers with usage solely in that tier were presumed not to have a usage peak. Upon further study, RFC has determined that Tier 1 customers do have a small peaking factor that occurs as a result of their slightly higher summer use. As a result, RFC recommends refining the 2012 cost of service analysis to allocate a small share of peaking factor costs to Tier 1. This change will more equitably recover system design and operational costs associated with Tier 1 customers’ peak demands upon the system. 3. RFC adjusted the model to more clearly delineate the difference between base (delivery), peaking, and the cost of purchased water from San Francisco Public Utilities Commission (SFPUC). While this does not necessarily affect the cost allocation between customer classes, it does more clearly show the costs being allocated among customer classes and residential tiers. The adjustments were made to the model used to calculate the City’s existing rates, which has been updated to reflect FY 2016 budget requirements. Adjustment 1: Peaking Factors for Customer Classes Table 1 shows the peaking factors by customer class, based on the maximum month factors calculated from each customer class’ water usage in FY 2014, compared to the peaking factors used in the 2012 study. These were calculated using the same methodology as in the 2012 cost of service study. The primary differentiator of rates amongst different customer classes is based on the demand that they put on the system. This demand is expressed in terms of the maximum day and maximum hour facto rs. These are the demands expressed as a ratio of the maximum demand to the average demand for each customer class. For example, if the maximum demand for a customer class were 10,000 CCF per day, and the average annual demand were 5,000 CCF per day, the peaking ratio would be 2.0. Residential customers generally have higher peaking factors than commercial customers, and irrigation customers have the highest peaking factors. The max day factor for each customer class is based on the maximum month demands. The ratio of the max hour and max day for the whole system is used to estimate the max hour factor for each customer class. Since usage in the Construction – W2 class is intermittent and varies based on the construction activity in the City, customers in the Construction – W2 class are considered to be the same as the Commercial – W4 class for the purpose of calculating variable charges. These two classes are differentiated only in the fact that temporary hydrant meters are used for construction customers, while commercial customers have permanent services. City of Palo Alto May 20, 2015 Page 3 Table 1 Revised Peaking Factors by Customer Class The change to the peaking factors by customer class shifts the capacity or peaking-related costs among the customer classes, to equitably reflect their demands on the system and recover the City’s cost of providing service. The peaking factors for the W-4 customer class has remained the same (when normalized).2 The peaking factor for the W-1 customer class as a whole has also remained the same, though the peaking factors for the residential tiers have been adjusted as discussed below. The W-7 customer class peaking factor has changed. Adjustment 2: Peaking Factors for Residential Rate Tiers In order to equitably allocate the peaking related costs to residential Tiers 1 and 2, RFC analyzed the water usage per month per account for FY 2014. Since the maximum month usage for residential customers occurs in August, the August usage in each tier was compared with the average usage in each tier to determine the relative peaking factor for each tier. Table 2 shows the calculation of the peaking factor for each tier, representing the amount of extra capacity needed on the system to serve customers in that tier. The peaking factor for Tier 1 is 1.06 (i.e., the peak is 1.06 times the average or 6 percent above the average Tier 1 usage.) Similarly, the peak for Tier 2 is 69 percent above the average for Tier 2 usage. The delivery cost, or average cost of providing service, is recovered from the average component, and the peak cost recovered from the peak component. Based on the analysis, Tier 2 requires approximately 12 times (0.69/0.06) more peaking capacity than Tier 1. Conversely, in the 2012 study, no peaking cost was allocated to Tier 1, thus putting 100 percent of the peaking costs on Tier 2. 2 Normalization is done so that W-1 equals 2.0. This normalization is performed to make it easier to see differences between customer class peaking factors and how those peaking factors change over time. Using the normalized peaking factors results in the same cost allocation as would result if the non-normalized peaking factors were used. Customer Specific Peaking Factors 2012 Max Day (MD) 2012 Max Hour (MH) 2014 Max Day (MD) 2014 Max Hour (MH) Residential - W1 1.49 2.34 1.45 2.27 Master MFR/Commercial - W4 1.30 2.04 1.27 1.99 Irrigation - W7 2.25 3.53 1.81 2.84 Construction - W2 1.30 2.04 1.27 1.99 Customer Specific Peaking Factors 2012 MD Normalized 2012 MH Normalized 2014 MD Normalized 2014 MH Normalized Residential - W1 2.00 3.14 2.00 3.14 Master MFR/Commercial - W4 1.75 2.75 1.75 2.75 Irrigation - W7 3.00 4.71 2.50 3.92 Construction - W2 1.75 2.75 1.75 2.75 City of Palo Alto May 20, 2015 Page 4 Table 2 Peaking Factors for Tiers 1 and 2 Adjustment 3: Presentation of Underlying Rate Components These changes discussed above result in the calculated rates shown in Table 3 for FY 2016, assuming a 12 percent revenue increase. Each rate has three components: supply rate, delivery rate, and peaking rate. The supply rate represents the cost of purchased water from the SFPUC, which is applied to all customer classes and tiers equally since the City only has one source of water. Note that the supply rate component includes the fixed meter costs (about 2 percent of total costs) and losses (about 8 percent of purchased water). The delivery rate represents the City’s fixed costs of operating the water system to serve year-round base load consumption, excluding any peaking related costs. This component is also applied to all customer classes and tiers equally. The peaking rate represents the capacity related costs of the system necessary to serve peak load, and it differs per customer class and tier based on the calculated peaking factors for each customer class and tier, as shown in Tables 1 and 2. Table 4 shows the existing rates and how they underlying rate components were previously displayed. Table 3 Proposed FY 2016 Commodity Rate Peaking Factor Analysis for W1 Customers Max Month Usage Bills in Tier Usage per Bill Average Usage Peaking Factor Tier 1 - 0-6 CCF 73,173 13,124 5.58 5.27 1.06 Tier 2 - over 6 CCF 154,329 11,739 13.15 7.78 1.69 Customer Class Tier (ccf)Supply Rate ($/ccf) Delivery Rate ($/ccf) Peaking Rate ($/ccf)Rate ($/ccf) Residential - W1 Tier 1 6 $4.61 $1.10 $0.22 $5.93 Tier 2 over 6 $4.61 $1.10 $2.67 $8.38 Average Rate $3.87 $7.36 Master MFR/Commercial - W4 $4.61 $1.10 $1.21 $6.92 Irrigation - W7 $4.61 $1.10 $2.58 $8.29 Construction - W2 $4.61 $1.10 $1.21 $6.92 City of Palo Alto May 20, 2015 Page 5 Table 4 Existing Commodity Rate Components The proposed rates are shown in Table 5 for both an 8 percent and a 12 percent revenue increase. The monthly meter service charge includes customer service, metering, and billing charges as well as the costs associated with the service connection and a portion of the distribution system capacity. Fire service meter charges include costs associated with maintaining system capacity to serve firefighting flows for private fire meters. Customer Class Tier (ccf)Supply Rate ($/ccf) Delivery Rate ($/ccf) Peaking Rate ($/ccf)Rate ($/ccf) Residential - W1 Tier 1 6 $3.41 $1.58 $0.00 $4.99 Tier 2 over 6 $3.41 $1.58 $2.59 $7.58 Average Rate $6.41 Master MFR/Commercial - W4 $3.41 $1.58 $1.16 $6.15 Irrigation - W7 $3.41 $1.58 $2.53 $7.52 Construction - W2 $3.41 $1.58 $1.16 $6.15 City of Palo Alto May 20, 2015 Page 6 Table 5 Proposed FY 2016 Water Rates General Monthly Meter Service Charge Meter Size Existing Rates Updated COS Rates (8.2%) Updated COS Rates (12.1%) 5/8"$14.67 $15.54 $16.03 3/4"$19.51 $20.88 $21.50 1"$29.18 $31.58 $32.45 1 1/2"$53.37 $58.32 $59.83 2"$82.39 $90.40 $92.67 3"$174.29 $192.01 $196.70 4"$309.72 $341.74 $350.00 6"$633.80 $700.04 $716.82 8"$1,165.86 $1,288.28 $1,319.07 10"$1,843.02 $2,036.96 $2,085.57 12"$2,423.45 $2,678.68 $2,742.56 Monthly Fire Meter Service Charge Meter Size Existing Rates Updated COS Rates (8.2%) Updated COS Rates (12.1%) 2"$3.03 $3.38 $3.43 4"$18.78 $20.94 $21.22 6"$54.55 $60.82 $61.63 8"$116.24 $129.61 $131.34 10"$209.03 $233.09 $236.20 12"$337.65 $376.51 $381.52 Commodity Rate ($/ccf) Existing Rates Updated COS Rates (8.2%) Updated COS Rates (12.1%) Residential - W1 Tier 1 0 - 6 ccf $4.99 $5.70 $5.93 Tier 2 over 6 ccf $7.58 $8.08 $8.38 Master MFR/Commercial - W4 $6.15 $6.66 $6.92 Irrigation - W7 $7.52 $7.99 $8.29 Construction - W2 $6.15 $6.66 $6.92 201 S. Lake Avenue Suite 301 Pasadena, CA 91101 Phone 626 . 583 . 1894 Fax 626 . 583 . 1411 www.raftelis.com Raftelis Financial Consultants Memorandum TO: Jon Abendschein, Senior Resource Planner FROM: Sudhir Pardiwala/Hannah Phan DATE: May 20, 2015 SUBJECT: Proposed Drought Rates The City of Palo Alto (City) engaged Raftelis Financial Consultants, Inc. (RFC) to develop a drought rate structure that is Proposition 218-compliant, fair and equitable while encouraging conservation. This memo summarizes the methodology for the proposed drought rates. Proposed Water Drought Rates The following subsections detail the methodology and calculation related to the proposed drought rates for FY 2016. Demand Scenarios The City receives its potable water supply from SFPUC, which is currently asking its wholesale customers for a 10 percent voluntary reduction. If the drought worsens, SFPUC will ask for mandatory cutbacks. RFC modeled three supply reduction scenarios, which were provided by the City as supplied by SFPUC: a 10/15% reduction scenario, a 20% reduction scenario, and a 25% reduction scenario. Table 1 shows the projected purchases and sales in acre feet (AF) of water for each drought scenario for FY 2016, including a water loss factor of approximately 8.1 percent as well as projected reductions in usage. Table 1 Drought Scenarios Drought Scenarios – FY 2016 Purchases (AF) Sales (AF) Normal 11,404 10,477 10/15% reduction 10,535 9,679 20% reduction 9,710 8,920 25% reduction 9,022 8,288 Proposed Drought Surcharge Calculation The proposed drought rates are calculated to be revenue neutral, net of SFPUC costs, compared to the revenue generated from the FY 2016 rates shown in Table 2. ATTACHMENT G City of Palo Alto May 20, 2015 Page 2 Table 2 Proposed FY 2016 Water Commodity Rates Reduced sales result in reduced revenues as well as reduced purchased water costs. However, the net result is inadequate revenue to recover costs since a significant amount of the water system costs are fixed. As a result, rates need to be increased during drought and other shortage situations, to ensure financial stability and sufficient revenue recovery. In times of drought, it is important to ensure that basic health and sanitation needs are provided for first. This is considered to be essential usage. The City has set reduction targets for each type of consumption for each drought scenario, as shown in Table 3, in order to achieve the total target reduction set by SFPUC. Indoor usage is required to conserve less than outdoor usage. While it is not practical to set a target reduction for construction usage, for purposes of the analysis in order to calculate drought rates, construction usage is projected to have the same reduction as commercial customers. Table 3 Assumed Water Reduction in Each Scenario Table 4 shows the indoor and outdoor reductions (from a normal year) assumed under each reduction scenario and the usage reductions assumed for each customer group and billing tier based on the percentages shown in Table 3. Updated COS Rates (12.1%) Residential - W1 Tier 1 0 - 6 ccf $5.93 Tier 2 over 6 ccf $8.38 Master MFR/Commercial - W4 $6.92 Irrigation - W7 $8.29 Construction - W2 $6.92 Requested Reductions:10/15%20%25% Residential Indoor Reduction (0 - 6 CCF)5%9%12% Outdoor Reduction (7 - 30 CCF)10%18%26% Outdoor Reduction (30+ CCF)15%30%36% Reduction Goal 8%15%21% Non-Residential Indoor Reduction 5%9%12% Outdoor Reduction 12%25%36% City of Palo Alto May 20, 2015 Page 3 Table 4 Projected Water Usage in Each Scenario When usage is reduced in a drought, water purchase costs decrease as well. Therefore, water purchase costs were separated out before calculating the revenue requirement for the drought surcharges. Table 5 shows the estimated SFPUC supply costs for each drought scenario. Because of the fixed costs that SFPUC charges the City, the unit cost increases as the usage decreases. Table 5 SFPUC Supply Unit Cost in Each Drought Scenario - ($) The total water enterprise cost in FY 2016, excluding the cost of water purchased from SFPUC, is approximately $11.7 million, as shown in Table 6. To determine the cost to serve each customer class, net of water purchase costs, in FY 2016, RFC determined the total commodity revenue, based on the FY 2016 rates, less purchased water costs. Fixed meter charges are excluded from this analysis since those are unaffected by the drought. RFC used the same cost allocation methodology discussed in the previous section to determine the cost allocation to each customer class by cost component. Delivery costs are costs associated with providing service to customers during average conditions. Peaking costs are costs associated with providing service at peak conditions, which differ based on customer class since they peak at different levels. Table 6 Allocation of City’s Costs to Customer Class Customer Class Tier (ccf)Total Usage (ccf)Reduction %Total Usage (ccf)Reduction %Total Usage (ccf)Reduction %Total Usage (ccf) Residential - W1 Tier 1 6 894,536 -1.2%883,519 -2.2%874,706 -3.0%868,096 Tier 2 over 6 1,260,973 -13.5%1,090,204 -24.8%948,351 -34.2%829,401 Master MFR/Commercial - W4 1,798,207 -6.3%1,685,653 -11.9%1,584,610 -16.3%1,504,785 Irrigation - W7 428,161 -12.0%376,781 -25.0%321,120 -36.0%274,023 Construction - W2 6,694 -6.3%6,275 -11.9%5,899 -16.3%5,601 TOTAL 4,388,571 4,042,432 3,734,687 3,481,906 Normal 10/15% Reduction 20% Reduction 25% Reduction FY 2016 SFPUC Costs Usage (ccf)Unit cost ($/ccf) Normal $20,189,435 4,388,571 $4.61 10/15%$18,858,590 4,042,432 $4.67 20%$17,679,924 3,734,687 $4.74 25%$16,711,773 3,481,906 $4.80 COS Allocation Delivery Peaking Total Residential - W1 $2,360,813 $3,566,028 $5,926,841 Master MFR/Commercial - W4 $1,969,480 $2,182,259 $4,151,739 Irrigation - W7 $468,941 $1,104,723 $1,573,665 Construction - W2 $7,331 $8,123 $15,454 Total $4,806,566 $6,861,134 $11,667,699 City of Palo Alto May 20, 2015 Page 4 Table 7 shows the delivery unit cost in each drought scenario based on the projected water usage in Table 4 and the cost in Table 6. Since these costs are fixed, the unit cost increases as usage decreases. Table 7 Calculation of Delivery Unit Cost in Each Drought Scenario Table 8 shows the calculation of each rate component for each customer class in each drought scenario. The calculation is based on the data presented in Tables 5 through 7. Since the City only has one source of water, everyone pays the same unit cost for supply. That principle applies to the fixed delivery cost of the system. Since this cost is fixed, the unit rate increases as the usage decreases. The differentiation between the prices for the tiers comes from the peaking related costs. Since customer usage peaks at different levels, the peaking cost is used to differentiate between customer classes and tier prices. The difference in peaking costs between residential Tiers 1 and 2 is based on the same methodology and ratio shown in Table 2. In all scenarios, the revenue collected from the delivery and peaking components equals $11.7 million, meaning the drought surcharges only collect revenue equal to the normal year revenue requirement for delivery and peaking costs. Delivery Cost 10/15%20%25% Total Cost $4,806,566 $4,806,566 $4,806,566 Usage (CCF)4,042,432 3,734,687 3,481,906 Average Unit Cost ($/CCF)$1.19 $1.29 $1.38 City of Palo Alto May 20, 2015 Page 5 Table 8 Calculation of Rate Component in Each Drought Scenario1 Table 9 shows the proposed drought surcharges for each drought scenario from the FY 2016 normal rates, shown in Table 2. These are calculated as the difference between the normal rates and the rates shown in Table 8 for each customer class and rate category. 1 Totals may not add due to rounding. 10/15% Reduction Supply (SFPUC)Delivery Peaking Total Residential - W1 Tier 1 6 $4.67 $1.19 $0.26 $6.12 Tier 2 over 6 $4.67 $1.19 $3.06 $8.93 Master MFR/Commercial - W4 $4.67 $1.19 $1.29 $7.16 Irrigation - W7 $4.67 $1.19 $2.93 $8.80 Construction - W2 $4.67 $1.19 $1.29 $7.16 20% Reduction Supply (SFPUC)Delivery Peaking Total Residential - W1 Tier 1 6 $4.74 $1.29 $0.29 $6.32 Tier 2 over 6 $4.74 $1.29 $3.49 $9.52 Master MFR/Commercial - W4 $4.74 $1.29 $1.38 $7.41 Irrigation - W7 $4.74 $1.29 $3.44 $9.47 Construction - W2 $4.74 $1.29 $1.38 $7.41 25% Reduction Supply (SFPUC)Delivery Peaking Total Residential - W1 Tier 1 6 $4.80 $1.38 $0.33 $6.52 Tier 2 over 6 $4.80 $1.38 $3.95 $10.14 Master MFR/Commercial - W4 $4.80 $1.38 $1.45 $7.64 Irrigation - W7 $4.80 $1.38 $4.03 $10.22 Construction - W2 $4.80 $1.38 $1.45 $7.64 City of Palo Alto May 20, 2015 Page 6 Table 9 Proposed Drought Surcharges Commodity Rate ($/ccf)Normal 10/15%20%25% Residential - W1 Tier 1 6 $5.93 +$0.19 +$0.39 +$0.59 Tier 2 over 6 $8.38 +$0.55 +$1.14 +$1.76 Master MFR/Commercial - W4 $6.92 +$0.24 +$0.49 +$0.72 Irrigation - W7 $8.29 +$0.51 +$1.18 +$1.93 Construction - W2 $6.92 +$0.24 +$0.49 +$0.72 CRITERIA TO EVALUATE WATER SHORTAGE RESPONSE PLAN This appendix lists criteria expected to guide the selection of allocation/allotment strategies whenever water use reductions are needed. Not all of them may be applicable to every strategy but customer perception of equity is important in achieving the necessary reductions. 1. Reduce overall City consumption by reduction target required -this is the effective goal of any plan. To accomplish this goal the percentage reduction for the various customer classes will necessarily vary because their ratios of indoor/ outdoor use varies. 2. Sufficient water available for personal use -the most important use of water is for basic drinking, health, and sanitary uses, and therefore, this is given the highest priority of use. This prioritization will drive both rate schedules and water use restrictions. However, within allowed limits (i.e., water use restriction ordinances}, customers will be able to choose how they use their allotment between indoor and outdoor uses. 3. Acceptance by the community-many people tend to evaluate or accept a particular water- rationing plan in terms of how it would directly affect them. It is this aspect which makes it difficult to gain a popular consensus on any one plan. However, any plan must be generally accepted by the community to be successful. One important aspect of acceptance is the public's understanding of the program; thus, it is viewed as important to make the plan as uncomplicated as possible. 4. Minimize unemployment or business loss -water is extensively used in both commercial and industrial functions. If water is severely limited to these consumers, increased unemployment and business losses could result. Staff intends that, wherever possible, this should be avoided. Still, outside water use must be sacrificed greatly if only minimal indoor reductions are required. Cooling tower use for air conditioning must also be considered. 5. Landscaping investment losses -in cases of critical or severe shortage of water, it is expected that significant landscaping losses may arise . The use of recycled water should be encouraged for certain applications. In some cases, using the City's well system to augment the SFPUC supply will be an option to provide a minimum amount of water for landscaping. In this case, the goal should be to keep valuable and mature trees and plantings alive. Shrubs and lawns will be considered a lower priority. 6. Workable plan -the plan must be workable in order to accomplish its goal. It must take the following factors into account: a. Cost -the cost of any water plan to the public should be minimized. Page 1of2 ATTACHMENT H b. Enforcement -enforcement is viewed as a key component of any plan. Those plans requiring fewer resources for enforcement would be preferable. However, the success of a plan is contingent upon effective enforcement and the utility must be provided the resources to meet the enforcement objective. The current staff can only absorb a certain level of additional responsibilities without unreasonably impacting service to the customer. c . The plan must be practical and feasible from a data processing viewpoint and not subject to erroneous results due to incomplete or inaccurate databases. A realistic timeframe must be allowed to perform any necessary data entry or customer programming functions. 9 . Flexibility-the water shortage is a dynamic situation and may get better or worse . Thus, it is necessary that any plan be adaptable to changes in targets or adjustable if original expectations are not being met. 10. Allowance for new services-some provision must be made in any plan to serve new establishments or those under construction. 12. Recover penalties applied by suppliers -revenue should be collected to the extent necessary to recover any penalties that may be charged by suppliers . Page 2 of 2