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Home My WebLink About2018-03-07 Utilities Advisory Commission Agenda PacketAMERICANS WITH DISABILITY ACT (ADA) Persons with disabilities who require auxiliary aids or services in using City facilities, services or programs or who would like information on the City’s compliance with the Americans with Disabilities Act (ADA) of 1990, may contact (650) 329-2550 (Voice) 24 hours in advance. NOTICE 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 Meeting held on February 7, 2018 IV. AGENDA REVIEW AND REVISIONS V. REPORTS FROM COMMISSIONER MEETINGS/EVENTS VI. GENERAL MANAGER OF UTILITIES REPORT VII. COMMISSIONER COMMENTS VIII. UNFINISHED BUSINESS - None IX. NEW BUSINESS 1. Staff Recommendation that the Utilities Advisory Commission Recommend that the Action City Council Adopt: (1) a Resolution Approving the Fiscal Year 2019 Wastewater Collection Financial Plan; and (2) a Resolution Increasing Wastewater Rates by 10% by Amending Rate Schedules S-1 (Residential Wastewater Collection and Disposal), S-2 (Commercial Wastewater Collection and Disposal), S-6 (Restaurant Wastewater Collection And Disposal) and S-7 (Commercial Wastewater Collection and Disposal – Industrial Discharger) 2. Staff Recommendation that the Utilities Advisory Commission Recommend that Action City Council Adopt: (1) a Resolution Approving the Fiscal Year 2019 Water Utility Financial Plan; and (2) a Resolution Increasing Water Rates by 4% by 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) 3. Selection of Potential Topic(s) for Discussion at Future UAC Meeting Action NEXT SCHEDULED MEETING: April 4, 2018 ADDITIONAL INFORMATION - The materials below are provided for informational purposes, not for action or discussion during UAC Meetings (Govt. Code Section 54954.2(a)(2)). Informational Report 12-Month Rolling Calendar Public Letter(s) to the UAC UTILITIES ADVISORY COMMISSION WEDNESDAY, MARCH 7, 2018 – 7:00 P.M. COUNCIL CHAMBERS Palo Alto City Hall – 250 Hamilton Avenue REVISED Chairman: Michael Danaher  Vice Chair: Arne Ballantine  Commissioners: Lisa Forssell, A. C. Johnston, Judith Schwartz, Lauren Segal and Terry Trumbull  Council Liaison: Eric Filseth Utilities Advisory Commission Minutes Approved on: Page 1 of 9 UTILITIES ADVISORY COMMISSION MEETING MINUTES OF FEBRUARY 7, 2018 REGULAR MEETING CALL TO ORDER Commissioner Schwartz called the meeting of the Utilities Advisory Commission (UAC) to order at 7:00 p.m. Present: Commissioners Forssell, Johnston, Schwartz, Segal, Trumbull Absent: Chair Danaher, Vice Chair Ballantine ORAL COMMUNICATIONS David Carnahan, Deputy City Clerk, advised that the City is recruiting for one position on the Historic Resources Board, three positions on the Human Relations Commission, two positions on the Public Art Commission, and two positions on the Utilities Advisory Commission. Applications can be found on the City Clerk's webpage, and the deadline to apply is March 20 at 4:30 p.m. APPROVAL OF THE MINUTES Commissioner Segal moved to approve the minutes from the January 18, 2018 special meeting. Commissioner Johnston seconded the motion. The motion carried 5-0 with Commissioners Forssell, Johnston, Schwartz, Segal, and Trumbull voting yes and Chair Danaher and Vice Chair Ballantine absent. AGENDA REVIEW AND REVISIONS None REPORTS FROM COMMISSIONER MEETINGS/EVENTS Commissioner Schwartz attended the Smart Energy Consumer Collaborative symposium, where Felecia Etheridge gave the keynote address. The strategic planning group should review the address because it is a good model for engaging consumers. At the DistribuTECH trade show, Commissioner Schwartz viewed a demonstration from Smart Energy Water (SEW). Perhaps SEW could give a demonstration during a Commission meeting. Commissioner Schwartz encouraged staff to attend the Voices of Experience workshop the following week to learn about other utilities' experiences with advanced metering infrastructure (AMI). UTILITIES GENERAL MANAGER REPORT Ed Shikada, Utilities General Manager, delivered the General Manager’s Report. FERC Rejects DOE Grid Resiliency Initiative: In September, Department of Energy Secretary Rick Perry requested that the Federal Energy Regulatory Commission (FERC) initiate a rulemaking proceeding to impose certain rules and regulations on regional transmission organizations (RTOs) and independent system operators (ISOs), such as the California Independent System Operator, “to ensure that certain reliability and resilience attributes of electric generation resources are fully valued.” This move was considered to be in direct support of baseload fossil fuel, most notably coal, nuclear energy and anti- renewable resources such as wind and solar. Many industry stakeholders, including Palo Alto through the DRAFT Utilities Advisory Commission Minutes Approved on: Page 2 of 9 Northern California Power Agency (NCPA), opposed the directive and called on FERC to reject the rulemaking. These stakeholders contended that the proceeding was unnecessary and could potentially lead to new payments in support of coal and nuclear plants. Additionally, the move was seen as a political attempt to discredit the renewable industry. Stakeholders urged FERC to remain objective on this issue. Updated Utilities Logo: I am pleased to announce that our Utilities Department has decided to adopt a new logo which offers a brand refresh, or makeover, to our former look. The new design utilizes elements of the City's logo, including the symbol of our City's namesake, the El Palo Alto redwood tree. This visual connection to the City as a whole presents a unified brand for our organization while also maintaining a recognized identity for Utilities. While not directly propelled by our update to the Strategic Plan, the timing of this logo refresh is well aligned with our updates to the strategic destination and vision for our Utility, hopefully complementing our efforts to establish ourselves as a vibrant, forward-thinking, yet trusted brand for the community. City Rebate for HP Energy Efficiency Pays Back with New Sustainable Garden: Last week, HP unveiled a new sustainable garden at its global headquarters in Palo Alto, partly funded by a rebate from Utilities for an energy efficiency project at the campus. By participating in the City’s Empower Palo Alto Program for energy efficiency, the company received a rebate for the energy savings and used the funds for a number of employee sustainability engagement projects, including the garden which employees will be able to tend. The City worked with HP on a site wide retro-commissioning project to optimize the efficiency of existing heating, ventilation and air conditioning (HVAC) systems, upgrade building energy management software, and install LED lighting. HP is already seeing energy savings results including a year-over-year site-wide electricity reduction of 1,430,149 kilowatt hours (kWh) and close to 105,000 therms. This is equivalent to the amount of energy needed to power roughly 250 homes in Palo Alto for a year. CMUA Capitol Day: In late January, staff attended the annual legislative lobby day in Sacramento, hosted by the Northern California Power Agency (NCPA) and California Municipal Utilities Association (CMUA). Lobby day enables NCPA and CMUA members to share information with politicians and legislative and regulatory staff about utilities issues. The highlight of the day this year was meeting directly with Palo Alto’s legislators, Senator Jerry Hill and Assemblyman Marc Berman. At the meetings with our legislators, staff highlight specific CPAU achievements as well as information about how we operate our utility. These meetings are particularly important because we are able to discuss future laws and regulations that impact CPAU, and we can offer information regarding how a particular bill might affect us and other publicly owned utilities. Newly Designed Program Webpages: Our marketing and communications teams have been updating Utilities webpages for a fresh design and presentation. More recently, we created video and graphics for an engaging and dynamic display of information about the Home Efficiency Genie and Heat Pump Water Heater programs. Commissioners may be especially interested in viewing video testimonials for the Home Efficiency Genie program, as one of the featured participants is Catherine Crystal Foster, wife of former UAC Chair Jon Foster. Visit cityofpaloalto.org/efficiencygenie to watch. Water Supply: The San Francisco Public Utilities Commission (SFPUC) reported the February 1 snow surveys in the Hetch Hetchy watershed revealed snow pack above 8200 feet at about half of normal. The entire snow pack is approximately one-third the average amount to date. Systems storage remains high, and demand continues to be less than pre-drought levels. SFPUC does not anticipate requiring water use reductions even if precipitation conditions for the remainder of the year are exceptionally dry. Because 2017 was a wet year, reservoir levels remain above average; therefore, total hydro generation forecasts for the next 12 months remain equal to long-term average levels. This represents a sharp decline from the forecast of a few months ago when projections were above average generation levels for 2018. For the upcoming 12-month period, hydro resources are expected to provide approximately 52% of electric supply needs, which is down from a projected supply level of 64% at the end of calendar year 2017. Utilities Advisory Commission Minutes Approved on: Page 3 of 9 COMMISSIONER COMMENTS None UNFINISHED BUSINESS None NEW BUSINESS ITEM 1: ACTION: Staff Recommendation that the Utilities Advisory Commission Recommend Council Approve the 2018 Strategic Plan Ed Shikada, Utilities General Manager, noted Attachment B to Item 1 is an itemization of Commissioners' comments from the January meeting and staff's responses. The tentative date for presentation of the Strategic Plan to the City Council is February 26. Commissioner Johnston advised that staff did a nice job of reflecting the UAC's comments in the Strategic Plan. ACTION: Commissioner Trumbull moved to recommend Council approval of the 2018 Strategic Plan. Commissioner Johnston seconded the motion. The motion carried 5-0 with Commissioners Forssell, Johnston, Schwartz, Segal, and Trumbull voting yes and Chair Danaher and Vice Chair Ballantine absent. ITEM 2. DISCUSSION: Preliminary Financial Plans for the City of Palo Alto's Electric, Water, Gas and Wastewater Collection Utilities Erik Keniston, Senior Resource Planner, presented the preliminary financial forecasts and rate changes for electric, gas, wastewater collection, and water funds. The monthly residential bill in Palo Alto is currently 14% below bills from other regional utilities. Staff is recommending an overall rate increase of 5% or a bill increase of $13 per month. The rate increase is comprised of 8% for electric, 4% each for gas and water, and 10% for wastewater. Because of current reserve positions and increasing capital costs, the projections for rate increases in future years have increased as well. For the Electric Utility, the Hydro Stabilization Reserve Fund contains $11.4 million; the Supply Rate Stabilization Reserve Fund contains $9 million; and the Special Projects Reserve Fund contains $10 million, which has to be repaid in FY 2021 and FY 2022. In response to Commissioner Forssell's question regarding the main drivers of the cost increases for operations reserves, Keniston advised that market variability due to the drought and the lack of rate increases in recent years are the main drivers. Keniston continued stating that the electric commodity is growing because of large increases in transmission costs. The forecast contains the cost of additional renewables. Capital Improvement Program (CIP) costs are increasing slightly, partially due to the need for work on some underground districts in the future. In reply to Commissioner Schwartz's inquiry regarding the increase in operations, Keniston indicated the increase is caused by a return to full staffing. Keniston reported that the Supply and Distribution Operations Reserve Fund ended FY 2017 below the minimum levels. Some previously approved transfers from reserve funds will occur in FY 2018 to raise fund balances above the minimum level. Staff's goal is to increase fund balances to target levels by the end of the forecast period. Overall the balances of reserve funds are sufficient to meet the risk assessment levels. Staff is projecting a withdrawal from the Electric Special Projects Reserve Fund in FY 2018 with the majority of funds transferred to the Distribution Reserve Fund, a small withdrawal from the Hydro Stabilization Reserve Fund, and draining the Supply Rate Stabilization Reserve Fund. The Distribution Operations Reserve Fund ended FY 2017 below the minimum target level, and staff will transfer funds and increase rates to stabilize it. There are no Distribution Rate Stabilization Reserves remaining. Reserve funds for Utilities Advisory Commission Minutes Approved on: Page 4 of 9 commitments and reappropriations are committed for prior projects or items already budgeted. In 2017, staff estimated a 7% rate increase in FY 2019, but that has changed to an 8% rate increase. Future rate increases will likely be 2-4% to meet expenses. Uncertainties in the Electric Utility are the cost of Smart Grid implementation and CIP costs. In response to Commissioner Schwartz's query regarding the impact of the Santa Rosa fires on construction costs, Ed Shikada, Utilities General Manager, advised that there may be an impact in the future, but staff has not identified any near-term effects. Commissioner Forssell requested a chart listing all reserve funds and the intended purpose of each fund. In response to Commissioner Segal's inquiry about staff anticipation of lower sales, Keniston indicated staff is seeing slightly lower sales; however, electric sales are leveling out and close to projections for FY 2018. In reply to Commissioner Schwartz's query regarding inclusion of the adoption of electric vehicles (EV) in the forecast, Keniston stated future load projections include EV growth. Keniston reported staff is projecting a 4% non-commodity rate increase for the Gas Utility. The increase is the result of strictly distribution-related charges. PG&E's pending rate case could result in a rate impact of perhaps more than 10%; however, the rate case could remain pending for several years. Staff is projecting slightly lower costs in FY 2019. Projections for FY 2020-2021 include updated costs for existing main replacement projects and additional costs related to converting all meters to advanced metering infrastructure (AMI). At the end of FY 2017, the Operations Reserve Fund balance was healthy; therefore, the rate increase is not as high. Because of higher costs, slightly higher rate increases are projected in the future. Uncertainties are a decrease in consumption due to fuel switching and the number of allowances under the Cap-and-Trade Program. In answer to Commissioner Schwartz's question regarding the impact of advocating for fuel switching and the loss of Diablo Canyon on achieving carbon reduction goals, Keniston indicated he would provide information at a later time. Shikada added that the City is not advocating fuel switching but providing consumers with options and facilitating their decision-making. Commissioner Schwartz felt the consumer needs to understand the tradeoffs of fuel switching. In reply to Commissioner Segal's query about resolution of the lack of qualified staff for the gas main replacement project and how it is reflected in the budget, Shikada reported that additional staff has been hired to support the Gas Utility. Keniston continued with the Wastewater Collection Utility. Staff will likely recommend a 10% rate increase, for an increase of $3.48 on the average residential bill. The average water bill in surrounding cities is approximately $52 per month in comparison to $38 for Palo Alto after the rate increase. Rates in Palo Alto and surrounding cities will increase due to upgrades of treatment plants and lower availability of bond funding. In response to Commissioner Forssell's question regarding the Wastewater Collection Utility paying for upgrades to the water treatment plant, Keniston explained that the Wastewater Collection Utility bears a portion of the cost to upgrade treatment plants because of the water mains used to transport water. In answer to Commissioner Johnston's question regarding the treatment plant being revenue neutral, Keniston stated that the treatment plant does break even every year. Costs are divided among all partners based upon the relative usage of the plant. Keniston advised that the Operations Reserve Fund is low. Staff is projecting it will drop below the minimum level even with 10% rate increases. The fund needs cash to meet the expense profile. Utilities Advisory Commission Minutes Approved on: Page 5 of 9 In reply to Commissioner Johnston's query regarding the definition of the risk assessment line, Keniston indicated that the risk assessment line is an internal metric used to cover a one-time 10% increase in CIP costs. The risk assessment line also reflects the largest historic downturn in revenues. Keniston continued with staff's projection of a series of 10% rate increases for the next few years. Uncertainties include increasing costs for ongoing capital projects. In reply to Commissioner Schwartz's inquiry regarding the public's questioning of the need for rate increases, Keniston reported he did not receive many questions. The Utility has been using reserves rather than increasing rates. Commissioner Schwartz believed residents should understand that the combination of deferred maintenance and the use of reserves kept rates artificially low. Shikada stated the focus is typically to explain today's expenses rather than reasons for not increasing rates in the past. A historical perspective could be useful. Commissioner Schwartz felt the concept of maintaining low rates at the expense of maintenance and reserve funds was not appropriate. In answer to Commissioner Trumbull's question regarding options for main replacement and rate increases, Keniston explained that the plan is one main replacement project every year. Staff could plan smaller projects or delay some projects in order to reduce rate increases for a while. In reply to Commissioner Schwartz's query regarding explanations of rate increases for the City Council, Councilmember Filseth believed Utilities has done a good job of providing advance notice of rate movements. In response to Councilmember Filseth's inquiry about the reasons for projections and budgeting being higher for wastewater than other utilities, Keniston clarified that some projects need to occur sooner than originally projected, and costs are higher than projected. In the last year, staff has reevaluated projects and their costs. Shikada added that staff is investigating ways to smooth capital expenses. In addition, Utilities has not had the staff to deliver projects in a predictable manner. In answer to Commissioner Trumbull's question of whether deferred maintenance can be performed faster given the increasing costs, Keniston indicated staff is reviewing whether the rate and amount of work is optimal. Commissioner Trumbull felt deferred maintenance should be performed faster. Shikada advised that staff will return to the Commission and Council with information about the pace of main replacements and the ability to maintain infrastructure. Commissioner Johnston recalled budget discussions in 2017 raised concerns that the amounts allocated for capital improvements would not keep pace with the expiration of the useful life of projects. Shikada clarified that Utilities has not had sufficient staff expertise to perform projects or to supervise contracts. Commissioner Segal suggested staff identify the causes of deferrals in future reports. The solutions for deferrals caused by staffing and economics are different. Commissioner Forssell encouraged staff to ensure cost effectiveness was not prioritized over safety and reliability of service. Councilmember Filseth added that the community should know the costs for delivering safe and reliable service. Keniston continued with the Water Utility. Staff is recommending a 4% rate increase overall due to increased costs for capital improvements and the need for more storage. San Francisco Public Utility Commission (SFPUC) does not anticipate increasing the rate in the coming year. In response to Commissioner Schwartz's question regarding anticipation of drought conditions due to the lack of rain, Keniston stated the lack of rainfall does not bode well for FY 2019. Utilities Advisory Commission Minutes Approved on: Page 6 of 9 Keniston reported that the fund has healthy reserves. Estimating water usage and the length of recovery following a drought is difficult. Water usage has been higher than estimated but has not reached pre- drought levels. For future years, staff is recommending higher rate increases than previously projected because of storage and AMI projects. The uncertainty is water usage rebound. Commissioner Segal preferred not to defer storage projects. Keniston clarified that storage projects are included in the budget over the next three years. Staff is not planning to defer them. Keniston advised that Water and Wastewater Financial Plans will be presented to the Commission in March and the Electric and Gas Financial Plans in April. Monica Padilla, Senior Resource Planner, noted staff has spent a great deal of time reviewing planning for CIP replacement projects. Priority 4 of the Strategic Plan contains three strategies and key performance indexes (KPI) related to planning projects. ACTION: No action ITEM 3. DISCUSSION: CPAU's Role in Community Resiliency—Defining Framework and Principles Debra Lloyd, Acting Assistant Director of Utilities Engineering, reported that the staff report outlines next steps to engage the Commission in workshops to lay the framework for resiliency and the Utilities' role in resiliency. This is an initiative contained in the Strategic Plan. Resiliency and reliability are often used interchangeably, but they are different. Reliability is measured by the number of service outages and the duration of outages. Reliability is delivering a service at the quality that is needed. Resiliency is more about how abruptly or dramatically a utility is impacted by an event and how quickly it can recover. Staff is proposing to work with a consultant to hold workshops. The first step is to outline a workshop and gather information. Perhaps one or two Commissioners could form a subcommittee to assist staff. Ed Shikada, Utilities General Manager, had heard interest in having subject matter experts advise the Commission, which staff could accommodate. The Director of the Office of Emergency Services, Ken Dueker, will participate in the first workshop. In response to Commissioner Johnston's question about participants in the workshop, Lloyd indicated the workshop would be open to the public. Shikada suggested the workshop could be a study session or a regular meeting. The format could be a briefing from a subject matter expert and then a discussion facilitated by the consultant. Commissioner Schwartz emphasized the need for a well-facilitated conversation with experts so that Commissioners and the public can ask questions and discuss tradeoffs. Reliability is the routine performance of work, while resiliency is preparation for anticipated events. Commissioner Schwartz offered to help with planning the workshop. ACTION: No action ITEM 4. DISCUSSION: Update on Outage Management System Operational Issues Tomm Marshall, Assistant Director of Utilities Operations, reported that the recent issue with the Outage Management System was caused by a component being omitted from a software update. The software has been updated to install the needed component. Staff will attempt to continue improvements to the Outage Management System, but the process is slow. Over the long term, staff will look at replacing it in conjunction with implementation of a new customer information system (CIS), smart meters, and GIS upgrade. Utilities Advisory Commission Minutes Approved on: Page 7 of 9 In response to Commissioner Johnston's inquiry regarding communication of outage information to the public, Marshall advised that oftentimes staff does not know when a resolution will occur. Staff relays information to customers through social media and the City website. The lack of staff constrains communication of information. Commissioner Schwartz stated Utilities learns the scope of the outage through customers' reports. Marshall clarified that the customer does need to notify Utilities of some types of outages. Commissioner Schwartz suggested the outage system does not have to be integrated with CIS. Other services can be utilized until AMI is implemented. Marshall explained that another vendor would still have to obtain the data, determine outages, and rebuild the interfaces to make the system work. In reply to Commissioner Schwartz's comment that other services utilize text messages for communications, Marshall advised that the current Outage Management System has the capability to utilize text messages and the internet; however, those features have not been implemented. Commissioner Schwartz suggested the communications system does not have to be integrated directly with the SCADA system. Marshall advised that the issue is having the resources to make changes to the system. Commissioner Johnston felt the economies of scale work against Utilities because of its size. Systems utilized by larger utilities would not work for Utilities. Marshall indicated Utilities could run a better system, but it will take resources and dedication to make changes. Staff could look into moving it forward more quickly. In reply to Commissioner Schwartz's question of whether staff has talked to Smart Energy Water (SEW) about leveraging the new system, Marshall responded that he had not spoken with SEW. Ed Shikada, Utilities General Manager, reported staff needs to ensure Utilities has a functional system and will look for opportunities to upgrade or implement some other system. ACTION: No action ITEM 5: DISCUSSION: Fiber Utility Update Jeff Hoel, speaking as an individual, remarked that the Commission's role is to advise Council rather than staff. The overall objective as stated in the staff report is too narrow in scope. The system should provide a number of speeds and offer good prices, reliability, and customer service. Public-private partnerships have not always been beneficial. The City should build the system itself. Staff should present large construction projects to the Commission for review prior to release of the Request for Proposals (RFP). Andy Poggio, speaking as an individual, urged the City to proceed with Fiber to the Premises (FTTP). AT&T and Comcast are not good choices. Wireless is not a replacement for fiber and doesn't work well for streaming data. FTTP will benefit startup and existing companies and residents. Herb Borock stated public comment is not related to the staff report because staff has decided it will determine the content of an RFP. A fiber project should provide a service to the community. Without support from the Council, City Manager, and the Utilities Director, a Utilities project will not occur. Dave Yuan, Strategic Business Manager, reviewed the development of the fiber network in Palo Alto. The purpose of the fiber rebuild capital improvement program (CIP) project is to relieve congestion points in the downtown area and Stanford Research Park and to add more fiber strands. The network currently has approximately 100 customers, 221 connections, annual revenue of $4.5 million, annual expenses of $2 million, and a reserve fund balance of $27 million. The fiber optic backbone is comprised of approximately 54% aerial fiber and 46% underground fiber. A high concentration of fiber is located in downtown and Stanford Research Park. Utilities Advisory Commission Minutes Approved on: Page 8 of 9 Jim Fleming, Senior Management Analyst, reviewed milestones for FTTP and wireless beginning in 1999. In August 2017, the Council directed staff to develop a business case and funding plans for a Fiber to the Node (FTTN) network; to engage a management consultant; to identify potential partners and/or service providers; to prepare a high-level network design; and to draft ordinances to lower construction costs. Comcast has confirmed the availability of gigabit-speed broadband to most premises in Palo Alto. AT&T Fiber will initiate a network upgrade in Palo Alto in 2018. The City and County of San Francisco issued a Request for Qualifications for companies to design, build, finance, operate, and maintain a ubiquitous broadband FTTP network. The estimated cost to build a citywide dark fiber network in San Francisco is $1.5 billion, and the estimated cost for a lit network is $1.9 billion. AT&T and Verizon Wireless are conducting 5G wireless trials in several cities. Small cell deployments are vital to extending wireless service coverage and/or increasing network capacity. In December 2017, the Federal Communications Commission (FCC) repealed the Net Neutrality Rules. A lawsuit has been filed against the FCC's action. Two bills in the California State Senate would force internet service providers (ISP) to adhere to Net Neutrality protections; however, state laws may be preempted by Federal policy. The Chairman of the FCC announced formation of a Broadband Deployment Advisory Committee to provide the FCC with advice and recommendations regarding deployment of high speed internet access. Yuan advised that staff is working with the Citizens Advisory Committee (CAC) regarding a Statement of Work for the RFP, and the City Attorney is reviewing the statement. The goal is to identify potential applications for gigabit services including costs, benefits, and potential revenues; identify public-private partnership models; and develop a high-level network design with cost estimates. Staff plans to issue the RFP in March with a contract award as early as June or July. Commissioner Schwartz requested staff provide the official position of the CAC and a chart showing applications of the different technologies. She expressed concern about staffing a new utility should fiber become a reality. Commissioner Schwartz suggested staff conduct a survey of consumer appetite for and concerns about services. Commissioner Segal requested an economic analysis. Yuan advised that the last cost estimate was $78 million for an FTTP network. Fleming added that the cost for a fiber network in Palo Alto is less than in San Francisco because of the fewer number of dwellings in Palo Alto. While San Francisco is not comparable to Palo Alto, it can provide a model for a public-private partnership. In response to Commissioner Forssell's query regarding the cost of FTTP in comparison to FTTN, Yuan explained that the RFP for FTTN includes an expansion option for FTTP for the full City. Staff estimates the cost for FTTN to be $15 million. In reply to Commissioner Segal's query regarding a cost savings between FTTP and FTTN with a future expansion to the premises, Yuan indicated there could be a cost savings. Ideally, staff hopes to find a partner for the last mile. Commissioner Schwartz felt a case could be made to fund FTTP to ensure the vitality of businesses. Commissioner Forssell requested staff attempt to quantify the positive impacts of people working from home rather than commuting. In answer to Commissioner Segal's question regarding a date when 5G will be commercially available, Fleming reported the first commercial launch of fixed 5G technology will occur in Sacramento in the coming year. There is debate about 5G replacing FTTP. Commissioner Schwartz stated that development of 5G may not be in the best interest of consumers. The City should consider the effects of the repeal of Net Neutrality Rules with respect to fiber. Utilities Advisory Commission Minutes Approved on: Page 9 of 9 Commissioner Forssell noted privacy should also be a concern. In reply to Commissioner Forssell's query regarding development of fiber occurring in parallel with finding a partner, Yuan indicated the two are on a parallel path. Yuan noted Utilities is attempting to add staff to the fiber team to advance Council's directions to staff. Fleming reported that wireless cannot perform without fiber for the backhaul. Fiber is very important to the development of existing networks and future 5G technology. Commissioner Johnston felt it is important to highlight what cannot be done now but what can be done with fiber. In reply to Commissioner Forssell's question regarding equating FTTN with backhaul, Fleming explained that FTTN would create opportunities to license more fiber. As networks are built out, there will be more demand for dark fiber. The FTTN concept is to create opportunities to build the last mile to the individual premise or to use that point of presence within the network for other communication opportunities, whether licensing fiber to third parties or for the City's use. One focus of the business plan is to determine if FTTN will have value and whether infrastructure will attract a third party to build the last mile to the premise. Bob Hinden advised that information about applications and technology is available on Google and Comcast websites. The cost estimate for FTTP appears to be cheap when considered with the cost of traffic calming projects. Trials of 5G do not mean it will be universally deployed. Marketing hype for 5G should not confuse the discussion of fiber. Palo Alto is suited to FTTP because of the existing fiber ring and the Palo Alto Internet Exchange. In answer to Councilmember Filseth's inquiry about resellers of fiber, Fleming explained that resellers are called competitive local exchange carriers. They do not own facilities but use dark fiber to resell telecommunication services. Resellers serve primarily the business sector. ACTION: No action ITEM 6: ACTION: Selection of Potential Topic(s) for Discussion at Future UAC Meeting and Potential Designation of UAC Ad Hoc Subcommittee(s) Ed Shikada, Utilities General Manager, reported that the Commission could designate subcommittees for the budget and resiliency workshops In response to Commissioner Segal's inquiry regarding the existing subcommittees, Shikada indicated that the budget subcommittee is appointed and meets annually. Commissioners Johnston, Forssell, and Segal volunteered for the budget subcommittee. Commissioner Schwartz volunteered herself and Vice Chair Ballantine for the resiliency subcommittee. ACTION: No action. The next meeting is scheduled for March 7, 2018. Meeting adjourned at 9:20 p.m. Respectfully Submitted, Marites Ward City of Palo Alto Utilities 6054071 Page 1 of 8 2 MEMORANDUM TO: UTILITIES ADVISORY COMMISSION FROM: UTILITIES DEPARTMENT DATE: March 7, 2018 SUBJECT: Staff Recommendation that the Utilities Advisory Commission Recommend that the City Council Adopt: (1) a Resolution Approving the Fiscal Year 2019 Water Utility Financial Plan; and (2) a Resolution Increasing Water Rates by 4% by 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) RECOMMENDATION Staff requests that the Utilities Advisory Commission (UAC) recommend that the Council: 1. Adopt a resolution (Attachment A) approving the fiscal year (FY) 2019 Water Utility Financial Plan (Attachment B); and 2. Adopt a resolution (Attachment C) increasing water rates by 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). EXECUTIVE SUMMARY The FY 2019 Water Utility Financial Plan includes projections of the utility’s costs and revenues for FY 2018 through FY 2028. Costs are projected to rise by about 4% per year over the next several years, primarily due to increasing water supply and capital project costs. As a result, staff projects the need for a 4% water rate increase on July 1, 2018 and 7% rate increases in FY 2020 and FY 2021. The 4% increase in 2018 is needed to raise revenue for rising capital and operations expenses. Over the longer term, increases are primarily associated with increasing water supply costs, with some of the increase related to rising capital costs. BACKGROUND Every year staff presents the UAC with Financial Plans for its Electric, Gas, Water, and Wastewater Collection Utilities and recommends any rate adjustments required to maintain their financial health. These Financial Plans include a comprehensive overview of the utility’s operations, both retrospective and prospective, and are intended to be a reference for UAC and Council members as they review the budget and staff’s rate recommendations. Each Financial 6054071 Page 2 of 8 Plan also contains a set of Reserves Management Practices describing the reserves for each utility and the management practices for those reserves. The UAC reviewed preliminary financial forecasts at its February 7, 2018 meeting. DISCUSSION Staff’s annual assessment of the financial position of the City’s water utility is completed to ensure adequate revenue to fund operations, in compliance with the cost of service requirements set forth in the California Constitution (Proposition 218). This includes making long-term projections of market conditions, the physical condition of the system, and other factors that could affect utility costs, and setting rates adequate to recover these costs. The current rate proposals are also based on the cost of service methodology described in the 2012 Palo Alto Water Cost of Service & Rate Study, the 2015 Study update, and the 2015 Drought Rate memorandum completed by Raftelis Financial Consultants. Staff proposes to adjust water rates to the levels shown in Tables 1 and 2, below, effective July 1, 2018, to recover costs related to growing capital improvement, operations and maintenance, and general administrative costs, as discussed below. These changes are projected to increase the system average water rate by roughly 4%. This includes a smaller increase in water consumption charges and a larger increase in fixed charges, for an overall increase in residential customer bills of roughly 3% to 4%. Concurrently, staff is also evaluating whether it would be appropriate to apply a single fixed charge to smaller meter sizes, which was an issue raised in the 2017 metering audit. If implemented, this change would require an update to the utility’s cost of service analysis. The evaluation will be completed for possible implementation on or before July 1, 2019. The rate changes proposed for July 1, 2018 are included in the proposed amended rate schedules in Attachment D, and outlined here in Tables 1 through 3. Table 1: Water Consumption Charges in $/CCF (Current and Proposed) Current (7/1/16) Proposed (7/1/17) Change $/CCF % W-1 (Residential) Volumetric Rates ($/CCF) Tier 1 Rates 6.66 6.66 - - Tier 2 Rates 9.18 9.48 0.30 3% W-2 (Construction) Volumetric Rates ($/CCF) Uniform Rate 7.68 7.80 0.12 2% W-4 (Commercial) Volumetric Rates ($/CCF) Uniform Rate 7.68 7.80 0.12 2% W-7 (Irrigation) Volumetric Rates ($/CCF) Uniform Rate 9.08 9.37 0.29 3% 6054071 Page 3 of 8 Table 2: Current and Proposed Monthly Service Charges for W-1, W-4, and W-7 Meter Size Monthly Service Charge ($/month based on meter size) Change Current (7/1/17) Residential (W-1) Commercial (W- 4) Irrigation (W-7) Proposed (7/1/18) Residential (W-1) Commercial (W- 4) Irrigation (W-7) $ % 5/8” $16.77 $18.71 $1.94 11.6% 3/4” $22.60 $25.21 $2.61 11.6% 1” $34.26 $38.22 $3.96 11.6% 1 ½” $63.40 $70.73 $7.33 11.6% 2” $98.37 $109.75 $11.38 11.6% 3” $209.11 $233.29 $24.18 11.6% 4” $372.31 $415.36 $43.05 11.6% 6” $762.81 $851.02 $88.21 11.6% 8” $1,403.94 $1,566.29 $162.35 11.6% 10” $2,219.92 $2,476.63 $256.71 11.6% 12” $2,919.34 $3,256.93 $337.59 11.6% Table 3: Current and Proposed Monthly Service Charges for Fire Services (W-3) Meter Size Monthly Service Charge ($/month based on meter size) Change Current (7/1/17) Proposed (7/1/18) $ % 2” $3.79 $4.23 $0.44 11.6% 4” $23.42 $26.13 $2.71 11.6% 6” $68.03 $75.90 $7.87 11.6% 8” $144.97 $161.73 $16.76 11.6% 10” $260.70 $290.85 $30.15 11.6% 12” $421.11 $469.81 $48.70 11.6% Bill Impact of Proposed Rate Changes Table 5 shows the impact of the proposed July 1, 2018 rate changes on residential bills. The average increase in revenue is projected to be about four percent, but some customers may see slightly higher or lower increases in their bill due to slight changes in the composition of the utility’s costs. The change represents about a 12% increase to the distribution portion of the water rates to recover projected increases in capital projects, such as reservoir and tank rehabilitations, main replacement projects and meter upgrades, as well as inflationary increases to operations costs. This is offset by lower water supply costs than were projected by staff during last year’s forecasting process. Because water consumption increased as the Bay Area exited the drought last year, the current estimate of the FY 2019 SFPUC W-25 rate (Wholesale Use with Long-Term Contract) is $4.10/ccf, compared to last year’s projection, which was 6054071 Page 4 of 8 $4.37/ccf. The SFPUC will not determine its final wholesale rate until May or June. However, in order to have the City’s water rates in place for July 1, staff must provide notice to CPAU customers by the end of April. Should the SFPUC increase rates beyond $4.10/ccf after the City’s July 1 water rates are adopted, current Operations Reserves should provide sufficient funds until an adjustment to Palo Alto’s rates can be made next year. Table 5 shows the impact of the proposed changes. Table 5: Impact of Proposed Rate Changes on Residential Bills Usage (CCF/month) Bill under Existing Rates (7/1/17) Bill under Proposed Rates (7/1/18) Change $/mo. % 4 $43.41 $45.35 $1.94 4.5% (Winter median) 7 $65.91 $68.15 $2.24 3.4% (Annual median) 9 $84.27 $87.11 $2.84 3.4% (Summer median) 14 $130.17 $134.51 $4.34 3.3% 25 $231.15 $238.79 $7.64 3.3% Table 6 shows the impact of the proposed July 1, 2018 rate changes on various representative commercial customer bills. Table 6: Impact of Proposed Rate Changes on Commercial Bills Usage (CCF/month) Bill under Current Rates (7/1/17) Bill under Proposed Rates (7/1/18) Change $/mo. % Commercial (W-4) (5/8” meters) (Annual median) 12 $108.93 $112.31 $3.38 3.1% (Annual average) 64 $508.29 $517.91 $9.62 1.9% Irrigation (W-7) (1 ½” meters) (Winter median) 9 $ 145.12 $ 155.06 $ 9.94 6.9% (Summer median) 37 $ 399.36 $ 417.42 $ 18.06 4.5% (Winter average) 56 $ 571.88 $ 595.45 $ 23.57 4.1% (Summer average) 199 $ 1,870.32 $ 1,935.36 $ 65.04 3.5% FY 2019 Financial Plan’s Projected Rate Adjustments for the Next Five Fiscal Years Table 7 shows the projected rate adjustments over the next five years and their impact on the annual median residential water bill. Table 7: Projected Rate Adjustments, FY 2019 to FY 2023 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 Water Utility 4% 7% 7% 6% 4% Estimated Bill Impact ($/mo)* $2.84 $6.10 $6.52 $5.98 $4.23 * estimated impact on median residential water bill, which is currently $84.27. 6054071 Page 5 of 8 The largest projected increases in water rates occur between now and FY 2024, with lower increases afterward. Figures 1 and 2 below illustrate the projected increases in the Water Utility’s costs between FY 2018 and FY 2024: Figure 1: FY 2018 and FY 2024 costs Figure 2: Percentage of Total Cost Increase From FY 2018 to FY 2024 Attributed to Supply, Capital, and Operations Costs A major driver for the increase in the water utility’s costs (and therefore rates) over the next several years is the cost of water. Wholesale water costs are adopted by the SFPUC, and generally change on an annual basis, but are projected to increase by 3.8% from FY 2018 to FY 2024. The SFPUC is currently engaged in a $4.8 billion Water System Improvement Project (WSIP), funding of which is 60% complete but not forecast for final completion until late 2021. Current major projects underway are replacement of Calaveras dam, restoration work to the Alameda Creek Watershed, and work on regional groundwater storage and recovery. The 6054071 Page 6 of 8 SFPUC is forecasting the need for additional Transmission, Supply & Storage and Treatment system upgrade projects, starting after the WSIP is complete. All future and in-progress construction work will require bond funding, and the SFPUC’s financial plans show debt service cost growing by 77% between FY 2018 and FY 2024, and nearly doubling by FY 2028. Initial wholesale rate increase projections range from 5% to 7% per year through FY 2024 to cover increases in debt service cost. In later years (FY 2024 through FY 2028), water supply costs are projected to rise by about 1.0% percent per year on average, though the later year forecast is highly uncertain. Changes in usage due to drought, or recovery from drought, can also make the magnitude of future increases difficult to predict. The SFPUC’s costs to operate the Regional Water System are primarily fixed costs, so the water rate charged to wholesale customers like the City of Palo Alto is highly dependent on usage by all users of the Regional Water System. The City’s FY 2019 Water Utility Financial Plan assumes that, while the drought has ended and usage has started to increase, based on CPAU’s experience, consumption is not anticipated to return to pre-drought levels. The SFPUC is currently working on its budget for FY 2019, and the long-range changes to wholesales costs are subject to change. Staff will reflect those increases in future financial forecasts, as they become available. There remains some uncertainty in the forecasts of capital costs for the water utility in coming years. Water main replacement costs have risen substantially in recent years. The regional and even national focus on infrastructure improvement has created labor shortages, leading to higher bids than were seen in the past. Capital cost projections increased by 5.4% from FY 2018 through FY 2024. In part this is because the FY 2018 capital budget, like previous years, was lower due to main replacement project delays, so the increase in capital costs is more pronounced. However, the increased costs also are due to the higher construction costs CPAU has seen in recent capital project bids, as well as large one-time capital costs in FY 2019, FY 2020, and FY 2021 related to reservoir rehabilitation and additional costs required to switch water meters to be read automatically (AMI). Over the entire forecast period (through FY 2028), capital costs are projected to rise on average by 4.4%. Operations costs are projected to increase by 2.1% over the forecast period due to materials and services cost inflation as well as benefit costs that are increasing faster than inflation. Higher bid costs and delays in project schedules resulted in a deferment of main replacement projects in FY 2017, temporarily lowering costs, and greater than anticipated sales post-drought resulted in higher revenues. These have resulted in the Operations Reserve being filled to the maximum guideline level, and with surplus reserves available to phase in rate increases more slowly over the forecast period by drawing down reserves. Water Bill Comparison with Surrounding Cities Table 8 compares water bills for residential customers to those in surrounding communities as of February 1, 2018 (under current the City’s current water rates). Palo Alto customers have the highest monthly bills of the group, although bills for smaller water users are lower than in some 6054071 Page 7 of 8 surrounding communities. It is unclear at this time what water rate changes may be implemented in these communities for FY 2019. Table 8: Residential Monthly Water Bill Comparison Usage (CCF/month) Residential monthly bill comparison ($/month)* As of February 2018 Palo Alto Menlo Park Mountain View Hayward Redwood City Santa Clara 4 43.41 50.51 37.10 33.20 50.10 22.76 (Winter median) 7 65.91 73.36 57.50 54.62 70.56 39.83 (Annual median) 9 84.27 88.60 71.10 68.90 84.20 51.21 (Summer median) 14 130.17 126.70 105.10 106.51 128.86 79.66 25 231.15 210.50 220.70 199.02 247.97 142.25 *Based on the FY 2013 BAWSCA survey, the fraction of SFPUC as the source of potable water supply was 100% for Palo Alto, 95% for Menlo Park, 100% for Redwood City, 87% for Mountain View, 10% for Santa Clara and 100% for Hayward. Changes from Last Year’s Financial Forecast Table 9 compares current rate projections to those projected in the last two year’s Financial Plans. As shown, the FY 2019 rate projections are somewhat lower than projected last year. The cumulative projected increase in rates through FY 2028 is similar to last year’s projections. Table 9: Projected Water Rate Trajectory for FY 2018 to FY 2027 Projection FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Current (FY 2019 Financial Plan) 4% 7% 7% 6% 4% 4% 1% 3% 1% 2% Last year (FY 2018 Financial Plan) 6% 6% 6% 6% 6% 2% 2% 2% 1% N/A Two years ago (FY 2017 Financial Plan) 9% 6% 2% 2% 2% 3% 5% 3% N/A N/A NEXT STEPS The Finance Committee is scheduled to review the FY 2019 Water Financial Plan in April 2018. Assuming the Finance Committee supports staff’s recommendation, notification of the rate increases will be sent to customers as required by Article XIIID of the State Constitution (added by Proposition 218). The Financial Plans and rate schedules will then go to the City Council with the FY 2019 budget for adoption, at which time the public hearing required by Article XIIID of the State Constitution will be held. Assuming the rate changes are approved, they will become effective July 1, 2018. RESOURCE IMPACT Normal year sales revenues for the Water Utility are projected to increase by roughly 4% ($2. 7 million) as a result of these rate increases. See the attached FY 2019 Water Financial Plan for a more comprehensive overview of projected cost and revenue changes for the next ten years. POLICY IMPLICATIONS The proposed water rate adjustments are consistent with Council-adopted Reserve Management Practices that are part of the Financial Plans, and were developed using a cost of service study and methodology consistent with the cost of service requirements of Proposition 218. ENVIRONMENTAL REVIEW The UAC's review and recommendation to Council on the FY 2019 Water Financial Plans and rate adjustments does not meet the definition of a project requiring California Environmental Quality Act (CEQA) review under Public Resources Code Section 21065 thus no environmental review is required . ATTACHMENTS A. Resolution of the Council of the City of Palo Alto Approving the FY 2019 Water Utility Financial Plan B. Proposed FY 2019 Water Utility Financial Plan C. 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 D. Amended Rate Schedules W-1, W-2, W-3, W-4, and W-7 PREPARED BY: REVIEWED BY: ERIC KENISTON, Senior Resource Planner C &-~ JONATHAN ABENDSCHEIN, Assistant Director, Resource Mgmtf':<- L? -4 ' ---.......... APPROVED BY: EDSHIKADA General Manager of Utilities 6054071 Page 8of8 Attachment A * NOT YET APPROVED * 6054073 Resolution No. _________ Resolution of the Council of the City of Palo Alto Approving the FY 2019 Water Utility Financial Plan R E C I T A L S A. Each year the City of Palo Alto (“City”) regularly assesses the financial position of its utilities with the goal of ensuring adequate revenue to fund operations. This includes making long-term projections of market conditions, the physical condition of the system, and other factors that could affect utility costs, and setting rates adequate to recover these costs. It does this with the goal of providing safe, reliable, and sustainable utility services at competitive rates. The City adopts Financial Plans to summarize these projections. B. The City uses reserves to protect against contingencies and to manage other aspects of its operations, and regularly assesses the adequacy of these reserves and the management practices governing their operation. The status of utility reserves and their management practices are included in Reserves Management Practices attached to and made part of the Financial Plans. The Council of the City of Palo Alto does hereby RESOLVE as follows: SECTION 1. The Council hereby adopts the FY 2019 Water Utility Financial Plan. SECTION 2. The Council finds that the adoption of this resolution does not meet the California Environmental Quality Act’s (CEQA) definition of a project under Public Resources Code Section 21065 and CEQA Guidelines Section 15378(b)(5), because it is an administrative governmental activity which will not cause a direct or indirect physical change in the environment,, and therefore, no environmental review is required. INTRODUCED AND PASSED: AYES: NOES: ABSENT: ABSTENTIONS: ATTEST: ___________________________ ___________________________ City Clerk Mayor Attachment A * NOT YET APPROVED * 6054073 APPROVED AS TO FORM: APPROVED: ___________________________ ___________________________ Assistant City Attorney City Manager ___________________________ Director of Utilities ___________________________ Director of Administrative Services FY 2019 WATER UTILITY FINANCIAL PLAN FY 2019 TO FY 2028 ATTACHMENT B WATER UTILITY FINANCIAL PLAN February 2018 2 | Page FY 2019 WATER UTILITY FINANCIAL PLAN FY 2019 TO FY 202 8 TABLE OF CONTENTS Section 1: Definitions and Abbreviations................................................................................ 4 Section 2: Executive Summary and Recommendations ........................................................... 4 Section 2A: Overview of Financial Position .................................................................................. 4 Section 2B: Summary of Proposed Actions .................................................................................. 5 Section 3: Detail of FY 2019 Rate and Reserves Proposals ....................................................... 6 Section 3A: Rate Design ............................................................................................................... 6 Section 3B: Current and Proposed Rates ..................................................................................... 6 Section 3C: Bill Impact of Proposed Rate Changes ...................................................................... 8 Section 3D: Proposed Reserve Transfers ..................................................................................... 9 Section 4: Utility Overview .................................................................................................... 9 Section 4A: Water Utility History ............................................................................................... 10 Section 4B: Customer Base ........................................................................................................ 10 Section 4C: Distribution System ................................................................................................. 11 Section 4D: Cost Structure and Revenue Sources ...................................................................... 11 Section 4E: Reserves Structure ................................................................................................... 12 Section 4F: Competitiveness ...................................................................................................... 12 Section 5: Utility Financial Projections ................................................................................. 13 Section 5A: Load Forecast .......................................................................................................... 13 Section 5B: FY 2012 to FY 2016 Cost and Revenue Trends ........................................................ 14 Section 5C: FY 2017 Results ....................................................................................................... 15 Section 5D: FY 2018 Projections ................................................................................................ 16 Section 5E: FY 2019 – FY 2028 Projections ................................................................................ 16 Section 5F: Risk Assessment and Reserves Adequacy ............................................................... 18 Section 5G: Alternate Scenarios................................................................................................. 19 WATER UTILITY FINANCIAL PLAN February 2018 3 | Page Section 5H: Long-Term Outlook ................................................................................................. 19 Section 6: Details and Assumptions ..................................................................................... 19 Section 6A: Water Purchase Costs ............................................................................................. 20 Section 6B: Operations .............................................................................................................. 21 Section 6C: Capital Improvement Program (CIP) ....................................................................... 22 Section 6D: Debt Service ............................................................................................................ 25 Section 6E: Other Revenues ....................................................................................................... 26 Section 6F: Sales Revenues ........................................................................................................ 26 Section 7: Communications Plan .......................................................................................... 27 Appendices ......................................................................................................................... 28 Appendix A: Water Utility Financial Forecast Detail ................................................................. 29 Appendix B: Water Utility Capital Improvement Program (CIP) Detail ..................................... 31 Appendix C: Water Utility Reserves Management Practices ..................................................... 32 Appendix D: Description of Water Utility Operational Activities ............................................... 35 Appendix E: Sample of Water Utility Outreach Communications ............................................. 36 WATER UTILITY FINANCIAL PLAN February 2018 4 | Page SECTION 1 : DEFINITIONS AND ABBREVIATIONS BAWSCA Bay Area Water Supply and Conservation Agency CCF The standard unit of measurement for water delivered to water customers, equal to one hundred cubic feet, or roughly 748 gallons. CIP Capital Improvement Program CPAU City of Palo Alto Utilities Department O&M Operations and Maintenance RFC Raftelis Financial Consultants, Inc. SFPUC San Francisco Public Utilities Commission SFWD San Francisco Water Department UAC Utilities Advisory Commission WSIP The SFPUC’s Water System Improvement Program to seismically strengthen the transmission lines of the Hetch Hetchy regional water system. SECTION 2 : EXECUTIVE SUMMARY AND RECOMMENDATIONS This document presents a Financial Plan for the City’s Water Utility for the next ten years. This Financial Plan provides revenues to cover the costs of operating the utility safely over that time while adequately investing for the future. It also addresses the financial risks facing the utility over the short term and long term, and includes measures to mitigate and manage those risks. SECTION 2 A : OVERVIEW OF FINANCIAL POSITION Staff expect overall costs in the Water Utility to rise by about 2.8% per year from fiscal year (FY) 2018 to 2028. Excluding FY 2017 (which, unlike normal years, did not include a water main replacement project), most costs are projected to rise by 2-4% annually through the projection period. Water supply costs, the largest component of the utility’s costs, are projected to rise nearly 3.7% per year through FY 2024, and at a lower rate in subsequent years, due to a series of major capital projects on the Hetch Hetchy water system. See Section 6A: Water Purchase Costs for more information. Capital projects, with several reservoir and tank rehabilitation projects scheduled for FY 2019 through FY 2021, as well as increases to main replacement project costs to reflect rising construction costs. More detail on CIP costs is discussed in Section 6C: Capital Improvement Program (CIP) below. Table 1 below shows the costs for the Water Utility from FY 2017 through FY 2028. Table 1: Expenses for FY 2017 to FY 2028 (Thousand $’s) Expenses ($000) FY 2017 (act.) FY 2018 (est.) FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Water Purchases 20,075 22,062 22,611 23,356 24,190 25,318 26,207 27,534 27,680 28,458 28,558 28,659 Operations 15,965 18,627 19,142 19,615 20,088 20,529 20,973 21,364 21,743 22,154 22,430 22,826 Capital Projects 4,110 8,267 13,695 13,210 16,765 10,709 11,023 11,344 11,675 12,024 12,373 12,737 TOTAL 40,151 48,956 55,449 56,181 61,042 56,556 58,203 60,242 61,098 62,636 63,361 64,222 WATER UTILITY FINANCIAL PLAN February 2018 5 | Page This proposed financial plan projects that the Water Utility needs the rate increases shown in Table 2 to ensure that revenues cover rising costs and reserves remain healthy. While costs are increasing roughly 3.5% per year through FY 2024, staff projects a need for sales revenue increases averaging roughly 4.7% per year over that period. This is due to the fact that revenue is currently slightly below costs and also because little or no increase is expected in non-sales revenue (e.g. interest, connection fees). The table also shows rate projections from last year’s Financial Plan. Last year’s plan projected earlier, generally higher rate increases. However, the delay of FY 2017 water main replacement projects as well as post-drought sales revenues resulted in an increase in reserves, which enabled the more gradual increases projected in the current plan. This also means that the Rate Stabilization Reserve will be drawn down over a longer time frame than projected in last year’s financial plan. Table 2: Proposed and Projected Water Rate Changes for FY 2019 to FY 2028 Projection FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Current 4% 7% 7% 6% 4% 4% 1% 3% 1% 2% Last year 6% 6% 6% 6% 6% 2% 2% 2% 1% N/A 2 years 9% 6% 2% 2% 2% 3% 5% 3% N/A N/A The Water Utility has a Rate Stabilization Reserve that can be used to smooth rate increases over several years. This Financial Plan projects that these reserves will be exhausted by the end of FY 2021. The Water Utility also has a Capital Improvement Program (CIP) Reserve that can be used to offset one-time unanticipated capital costs. This Financial Plan assumes that the CIP Reserve will be used for unanticipated capital expenses or returned to the Operations Reserve by the end of FY 2020. The Water Utility Operations Reserve was above the maximum guideline level at the end of FY 2017, mainly due to larger than anticipated drought surcharge revenue. However, these funds will be needed to fund the Water Utility in FY 2018 and FY 2019, bringing the Operations Reserve within guidelines by FY 2020. Table 3 shows the projected reserve transfers over the forecast period. Table 3: Transfers To/(From) Reserves for FY 2018 to FY 2028 ($000) Reserve FY 2018 FY 2019 FY 2020 to FY 2028 Capital Improvement - - (2,726) Rate Stabilization - - (4,069) Operations - - 6,785 SECTION 2 B : SUMMARY OF PROPOSED ACTIONS Staff proposes the following actions for the Water Utility in FY 2019: 1. Increase rates to raise an additional 4% in revenue to fund increases to capital expenditures and increased operations costs. Section 3B: Current and Proposed Rates describes this increase in more detail. WATER UTILITY FINANCIAL PLAN February 2018 6 | Page SECTION 3 : DETAIL OF FY 2019 RATE AND RESERVES PROPOSALS SECTION 3 A : RATE DESIGN The Water Utility’s rates are evaluated and implemented in compliance with the cost of service requirements and procedural rules set forth in the California Constitution under Article 13 (per Proposition 218). The City structured current rates based on staff’s assessment of the financial position of the Water Utility, and updated current rates using the methodology from the March 2012 Palo Alto Water Cost of Service & Rate Study by Raftelis Financial Consultants, Inc. (RFC) (Staff Report 2676), as well as RFC’s 2015 Memorandum: Proposed Water Rates updating the 2012 Study and analyzing drought rates (Staff Report 5951). Staff plans to review and update this cost of service study in 1 to 2 years, unless any major changes occur to the utility’s operations or customer base that would necessitate an earlier study. Before conducting any new cost of service study, staff will review current rates and the scope of the study with the Utilities Advisory Commission (UAC) and Council to determine the City’s policy priorities. In 2015 Council adopted a drought surcharge to assist the water utility in recovering its costs due to decreased revenue resulting from lower water consumption as customers conserved. With the State declaring the drought over in FY 2017, the drought surcharge was discontinued as of July 1, 2017. SECTION 3 B : CURRENT AND PROPOSED RATES The current rates and surcharges were effective on July 1, 2017. Current rates reflect adjustments in accordance with the results of an updated cost of service study performed by RFC in 2015. The 2015 study developed the drought surcharges and evaluated the City’s water rate methodology and structure in light of court decisions interpreting provisions of the State Constitution applicable to water rates. RFC validated the City’s rate structure, recommending only minor adjustments to ensure that peaking costs were equitably allocated to each customer class and residential rate tier. CPAU has five rate schedules: separately metered residential customers (W-1), commercial and master-metered multi-family residential customers (W-4), irrigation-only services (W-7), services to fire sprinkler systems in buildings and private hydrants (W-3), and service to fire hydrant rental meters used for construction (W-2). All customers pay a monthly service charge based on the size of their inlet meter. This charge represents meter reading, billing, and other customer service costs, but also the cost of maintaining the capability to deliver a peak flow for that customer corresponding to their meter size. All customers are also charged for each CCF (one hundred cubic feet) of water used. Separately metered residential customers are charged on a tiered basis, with the first 0.2 CCF per day (6 CCF for a 30 day billing period) charged at the first tier price per CCF, and all additional units charged a higher tier price per CCF. Commercial customers pay a uniform price for each CCF used, and a higher price for separately metered irrigation service. For July 1, 2018 staff is proposing an increase in rates of approximately four percent. Water rates are composed of two general types of costs: commodity and distribution. Commodity WATER UTILITY FINANCIAL PLAN February 2018 7 | Page costs are mainly volumetric in nature and charged by the San Francisco Public Utilities Commission (SFPUC). In late December 2017, the SFPUC provided a preliminary estimate that their FY 2019 W-25 wholesale rate for agencies with long-term contracts would remain at $4.10/CCF in FY 2019. The SFPUC will not determine its final rate until May or June. However, in order to have the City’s water rates in place for July 1, staff must notify customers by the end of April. Staff is using the SFPUC’s December 2017 estimate in this forecast. For FY 2018, early indications were that the SFPUC would raise their rates to $4.37/CCF, and this was what was used in CPAU staff’s rate setting analysis. Since the SFPUC’s actual rate increase was lower, and FY 2019 indications forecast no change, staff will reduce the commodity portion of CPAU’s rates accordingly. Distribution rates cover all the costs to deliver water within the City, such as operations, maintenance, metering and billing, and capital improvement. Capital improvement costs have been increasing by about 3.5% annually, are projected to continue rising in the future, and staff is reflecting these changes in distribution costs. Operations costs are discussed in Section 6B: Operations, below. The decrease in commodity rates partially offsets the distribution increases, thus the percentage change differs between volumetric rates and monthly service charges. Table 4 shows the current and proposed consumption charges. Table 4: Current and Proposed Water Consumption Charges Current (7/1/17) Proposed (7/1/18) Change $/CCF % W-1 (Residential) Volumetric Rates ($/CCF) Tier 1 Rates 6.66 6.66 - - Tier 2 Rates 9.18 9.48 0.30 3% W-2 (Construction) Volumetric Rates ($/CCF) Uniform Rate 7.68 7.80 0.12 2% W-4 (Commercial) Volumetric Rates ($/CCF) Uniform Rate 7.68 7.80 0.12 2% W-7 (Irrigation) Volumetric Rates ($/CCF) Uniform Rate 9.08 9.37 0.29 3% Table 5 shows the current and proposed monthly service charges for rate schedules W-1, W-4, and W-7. WATER UTILITY FINANCIAL PLAN February 2018 8 | Page Table 5: Current and Proposed Monthly Service Charges for W-1, W-4, and W-7 Meter Size Monthly Service Charge ($/month based on meter size) Change Current (7/1/17) Residential (W-1) Commercial (W-4) Irrigation (W-7) Proposed (7/1/18) Residential (W-1) Commercial (W-4) Irrigation (W-7) $ % 5/8” $16.77 $18.71 $1.94 11.6% 3/4” $22.60 $25.21 $2.61 11.6% 1” $34.26 $38.22 $3.96 11.6% 1 ½” $63.40 $70.73 $7.33 11.6% 2” $98.37 $109.75 $11.38 11.6% 3” $209.11 $233.29 $24.18 11.6% 4” $372.31 $415.36 $43.05 11.6% 6” $762.81 $851.02 $88.21 11.6% 8” $1,403.94 $1,566.29 $162.35 11.6% 10” $2,219.92 $2,476.63 $256.71 11.6% 12” $2,919.34 $3,256.93 $337.59 11.6% Table 6 shows the current and proposed monthly service charges for rate schedule W-3 Table 6: Current and Proposed Monthly Service Charges for Fire Services (W-3) Meter Size Monthly Service Charge ($/month based on meter size) Change Current (7/1/17) Proposed (7/1/18) $ % 2” $3.79 $4.23 $0.44 11.6% 4” $23.42 $26.13 $2.71 11.6% 6” $68.03 $75.90 $7.87 11.6% 8” $144.97 $161.73 $16.76 11.6% 10” $260.70 $290.85 $30.15 11.6% 12” $421.11 $469.81 $48.70 11.6% SECTION 3 C : BILL IMPACT OF PROPOSED RATE CHANGES Table 7 shows the impact of the proposed July 1, 2018 rate changes on the median residential bill. The average increase is projected to be about four percent, but some customers may see slightly higher or lower increases due to slight changes in the composition of the utility’s costs. WATER UTILITY FINANCIAL PLAN February 2018 9 | Page Table 7: Impact of Proposed Water Rate Changes on Residential Bills Usage (CCF/month) Bill under Current Rates (7/1/17) Bill under Proposed Rates (7/1/18) Change $/mo. % 4 $43.41 $45.35 $1.94 4.5% (Winter median) 7 $65.91 $68.15 $2.24 3.4% (Annual median) 9 $84.27 $87.11 $2.84 3.4% (Summer median) 14 $130.17 $134.51 $4.34 3.3% 25 $231.15 $238.79 $7.64 3.3% Table 8 shows the impact of the proposed July 1, 2018 rate changes on various representative commercial customer bills. Table 8: Impact of Proposed Water Rate Changes on Commercial Bills Usage (CCF/month) Bill under Current Rates (7/1/17) Bill under Proposed Rates (7/1/18) Change $/mo. % Commercial (W-4) (5/8” meters) (Annual median) 12 $108.93 $112.31 $3.38 3.1% (Annual average) 64 $508.29 $517.91 $9.62 1.9% Irrigation (W-7) (1 ½” meters) (Winter median) 9 $ 145.12 $ 155.06 $ 9.94 6.9% (Summer median) 37 $ 399.36 $ 417.42 $ 18.06 4.5% (Winter average) 56 $ 571.88 $ 595.45 $ 23.57 4.1% (Summer average) 199 $ 1,870.32 $ 1,935.36 $ 65.04 3.5% SECTION 3 D : PROPOSED RESERVE TRANSFERS In the FY 2018 Financial Plan, staff proposed transferring $1.87 million from the Rate Stabilization Reserve to the Operations Reserve in FY 2018. This transfer was not necessary as increased sales during FY 2017 resulted in larger than expected revenues, largely from the drought surcharge. The drought surcharge was discontinued at the start of FY 2018. Customer sales recovery after the drought continues to be more robust than staff’s initial projections. Section 4E: Reserves Structure and Appendix A: Water Utility Financial Forecast Detail shows details of reserves levels. SECTION 4 : UTILITY OVERVIEW This section provides an overview of the utility and its operations. It provides general background information and helps readers better understand the forecasts in Section 5: Utility Financial Projections and Section 6: Details and Assumptions. WATER UTILITY FINANCIAL PLAN February 2018 10 | Page SECTION 4 A : WATER UTILITY HISTORY The Water Utility was established on May 9, 1896, two years after the city was incorporated. Voters of the 750 person community approved a $40,000 bond to buy local, private water companies who operated one or more shallow wells to serve the nearby residents. The city grew and the well system expanded until nine wells were in operation in 1932. Palo Alto began receiving water from the San Francisco Water Department (SFWD) in 1937 to supplement these sources. A 1950 engineering report noted, “the capricious alternation of well waters and the San Francisco Water Department water…has made satisfactory service to the average customer practically impossible”. By 1950, only eight wells were still in operation. Despite this, groundwater production increased in the 1950’s leading to lower groundwater tables and water quality concerns. In 1962, a survey of water softening costs to CPAU customers determined that CPAU should purchase 100% of its water supply needs from the SFWD. CPAU signed a 20-year contract with SFWD, and CPAU’s wells were placed in standby condition. The SFWD later became known as the SFPUC. Since 1962 (except for some very short periods) CPAU’s entire supply of potable water has come from the SFPUC. As the city grew, so did the number of mains in the water system. The system of mains expanded along with the city, while existing sections of the system continued to age. In the mid-1980s, the number of breaks in cast iron mains installed during the 1940s and earlier started to accelerate. In FY 1994, to combat deterioration of older sections of the system, CPAU performed an analysis of cost effective system improvements and increased the rate of main replacement from one mile per year to three. CPAU began a plan to replace 75 miles of deficient mains within 25 years. In 1999, a study of system reliability concluded that major upgrades were needed to the distribution system to provide adequate water supply during a natural disaster. This ultimately resulted in the $40 million Emergency Water Supply and Storage Project, completed in 2013, which involved a new underground reservoir in El Camino Park, the siting and construction of several emergency supply wells, and the upgrade of several existing wells and the Mayfield pump station. Upon completion, the city began to focus reliability efforts on its system of water storage reservoirs and transmission lines in the Foothills. At the same time that CPAU was evaluating the reliability of its own system, the SFPUC, in consultation with BAWSCA members, was evaluating the reliability of the Hetch Hetchy water system, which crosses two major fault lines between the Sierras and the Bay Area. That evaluation concluded that major upgrades to the system were required. This planning process culminated in the SFPUC’s $4.8 billion Water System Improvement Project (WSIP), which is ongoing. The SFPUC continues to evaluate its aging system for other needed infrastructure improvements. SECTION 4 B : CUSTOMER BASE CPAU’s Water Utility provides water service to the residents and businesses of Palo Alto, plus a handful of residential customers not in Palo Alto (Los Altos Hills, primarily). Nearly 20,300 WATER UTILITY FINANCIAL PLAN February 2018 11 | Page Figure 1: Cost Structure (FY 2017) 50% 40% 10% Water Purchases Operations Capital Figure 2: Revenue Structure (FY 2017) 99% 1% Sales of Water Other Revenue customers are connected to the water system, approximately 16,500 (81%) of which are separately metered residential customers and 3,800 (19%) of which are commercial, master- metered residential, irrigation and fire service customers. Judging from seasonal consumption patterns, between 35% and 50% of Palo Alto’s water is used for irrigation, and that consumption is heavily weather dependent. It also varies significantly by season. As a result of these two factors, there is significant variability in the amount of water that is demanded from the system month to month and year to year. SECTION 4 C : DISTRIBUTION SYSTEM To deliver water to its customers, CPAU owns roughly 233 miles of mains (which transport the water from the SFPUC meters at the city’s borders to the customer’s service laterals and meters), eight wells (to be used in emergencies), five water storage reservoirs (also for emergency purposes) and several tanks used to moderate pressure and deal with peaks in flow and demand (due to fire suppression, heavy usage times, etc.). These represent the vast majority of the infrastructure used to distribute water in Palo Alto. SECTION 4 D : COST STRUCTURE AND REVENUE SOURCES As shown in Figure 1, water purchase costs accounted for roughly 50% of the Water Utility’s costs in FY 2017. Operational costs represented roughly 40%, and capital investment was responsible for the remaining 10%. These percentage distributions are projected to remain similar over the forecast period with the capital investment increasing to approximately 20% of the Water Utility’s costs and operations declining to approximately 35%. The Water Utility receives nearly all of its revenue from sales of water and the remainder from capacity and connection fees, interest on reserves, and other sources. Appendix A: Water Utility Financial Forecast Detail shows more detail on the utility’s cost and revenue structures. Roughly 15% of the utility’s revenues come from fixed service charges, though most of its costs are fixed. WATER UTILITY FINANCIAL PLAN February 2018 12 | Page SECTION 4 E : RESERVES STRUCTURE CPAU maintains six reserves for its Water Utility to manage various types of contingencies. The descriptions below summarize these reserves; see Appendix C: Water Utility Reserves Management Practices for more detailed definitions and guidelines for reserve management: • Reserve for Commitments: A reserve equal to the utility’s outstanding contract liabilities for the current fiscal year. Most City funds, including the General Fund, have a Commitments Reserve. • Reserve for Reappropriations: A reserve for funds dedicated to projects reappropriated by the City Council, nearly all of which are capital projects. Most City funds, including the General Fund, have a Reappropriations Reserve. • Capital Improvement Program (CIP) Reserve: The CIP reserve can be used to accumulate funds for future expenditure on CIP projects and is anticipated to be empty unless a major one-time CIP expenditure is expected in future years. This CIP can also act as a contingency reserve for the CIP. This type of reserve is used in other utility funds (Electric, Gas, and Wastewater Collection) as well. • Rate Stabilization Reserve: This reserve is intended to be empty unless the city anticipates one or more large rate increases in the forecast period. In that case, funds can be accumulated to spread the impact of those future rate increases across multiple years. This type of reserve is used in other utility funds (Electric, Gas, and Wastewater Collection) as well. • Operations Reserve: This is the primary contingency reserve for the Water Utility, and is used to manage yearly variances from the budget for operational water supply costs. This type of reserve is used in other utility funds (Electric, Gas, and Wastewater Collection) as well. • Unassigned Reserve: This reserve is for any funds not assigned to the other reserves and is normally empty. SECTION 4 F : COMPETITIVENESS Table 9 shows the current water bills for residential customers compared to what they would be under surrounding communities’ rate schedules. CPAU has the highest monthly bills of the group, although bills for smaller water users are less than in some surrounding communities. WATER UTILITY FINANCIAL PLAN February 2018 13 | Page Table 9: Residential Monthly Water Bill Comparison Usage (CCF/month) Residential monthly bill comparison ($/month)* As of January 2018 Palo Alto Menlo Park Mountain View Hayward Redwood City Santa Clara 4 43.41 50.51 37.10 33.20 50.10 22.76 (Winter median) 7 65.91 73.36 57.50 54.62 70.56 39.83 (Annual median) 9 84.27 88.60 71.10 68.90 84.20 51.21 (Summer median) 14 130.17 126.70 105.10 106.51 128.86 79.66 25 231.15 210.50 220.70 199.02 247.97 142.25 * All comparisons use the 5/8” meter size. SECTION 5 : UTILITY FINANCIAL PROJECTIONS SECTION 5 A : LOAD FORECAST Figure 3 shows 40 years of water consumption history. Average water use has trended downward over time even as Palo Alto’s population has grown. Significant water use reductions over the 40-year history were in response to requests to reduce water use in the 1976-77 and 1988-92 drought periods. During these periods, customers invested in efficient equipment and modified behavior to achieve water reduction goals. Reductions in usage achieved during these drought periods endured even after those periods. More recently, water sales decreased substantially during the 2007-2009 recession and during the 2014 - 2017 drought. Usage has started to recover after the drought, though the level at which usage will finally plateau is unknown. Figure 3: Historical Water Consumption WATER UTILITY FINANCIAL PLAN February 2018 14 | Page Figure 4 shows the forecast of water consumption through FY 2028, as denoted by the dotted line. Figure 4: Forecast Water Consumption California has until recently been experiencing drought conditions, and the State had mandated a 24% water use restriction for Palo Alto up until May 2016. Customers continue to conserve, but water usage has been increasing. Based on patterns experienced in previous droughts and in recognition of continued state-level calls for conservation, this forecast assumes consumption will only rebound by 50% of the difference between pre-drought and drought levels, then resume with the previous trend of decreasing usage over time. SECTION 5 B : FY 201 2 TO FY 2016 COST AND REVENUE TRENDS Figure 5 and the tables in Appendix A: Water Utility Financial Forecast Detail show how costs have changed during the last five years as well as how staff projects they will change over the next decade. The annual expenses for the water utility rose substantially between 2013 and 2017. The increases were primarily related to water purchase costs, which increased 21% from $16.6 million in FY 2013 to $20.1 million in FY 2017. Section 6A: Water Purchase Costs contains a more in-depth discussion of water purchase costs. Operations costs have remained fairly steady since FY 2014, while CIP costs have generally increased but fluctuated down in certain years. For example, in FY 2013 a new water main replacement project was delayed to permit completion of a backlog of projects budgeted in prior years. In FY 2017, delays were in part due WATER UTILITY FINANCIAL PLAN February 2018 15 | Page to the rising CIP costs; during that year a water main replacement project that was put out for bid resulted in very few contractors competing, and project bids that were higher than budgeted. Figure 5: Water Utility Expenses, Revenues, and Rate Changes: Actual Costs through FY 2017 and Projections through FY 2028 SECTION 5 C : FY 2017 RESULTS Actual revenues for FY 2017 were higher than projected ($47.5 million vs. $41.8 million). The drought was declared over by the Governor during FY 2017, and customers started consuming more water. Higher sales, along with the drought surcharge in place until the beginning of FY 2018, resulted in higher revenue. The trend of higher connection and capacity fee income continued during FY 2017. Costs were also lower during FY 2017, mainly due to savings in operations, administrative fees and some CIP savings, although increased purchase costs from higher sales offset some of this. Table 10 summarizes the variances from forecast. Actual Projected WATER UTILITY FINANCIAL PLAN February 2018 16 | Page Table 10: FY 2017, Actual Results vs. Financial Plan Forecast Net Cost/ (Benefit) (000) Type of change Higher sales revenues $(3,185) Revenue increase Increased connection and capacity fees, other income (2,453) Revenue increase Operations and maintenance, general admin costs lower than expected (1,634) cost savings Purchase costs higher than expected 833 cost increase Net Cost / (Benefit) of Variances $(6,439) SECTION 5 D : FY 2018 PROJECTIONS Sales levels for FY 2018 were increased based on recent usage trends, and estimated sales revenues are also estimated to increase by about $4.2 million. Other revenues are also expected to increase, partially due to the trend of higher connection and capacity fee income, but also from higher interest income resulting from larger reserve balances. On the expense side, the most notable change from the FY 2018 budget identified at this time are increases for CIP expenditures. The effort to rehabilitate mains along University Avenue is anticipated to have much higher costs than initially projected, and some additional projects were included after last year’s financial plan was created. Additional expense increases are anticipated from higher water supply costs associated with higher water sales, as well as some increases to operations and administrative costs. Table 11 summarizes the changes from last year’s forecast. Table 11: FY 2018 Change in Projected Results, 2018 Forecast vs 2019 Forecast Net Cost/ (Benefit) Type of Change Higher sales revenues $(4,232) revenue increase Higher misc. revenues (1,269) revenue increase Increase in capital projects 4,185 cost increase Higher operations and purchase budgets 1,233 cost increase Net Cost / (Benefit) of Variances $(83) SECTION 5 E : FY 2019 – FY 2028 PROJECTIONS Figure 5 above shows that costs for the Water Utility are increasing through the rest of the forecast period. Water supply costs are the largest component, and are generally projected to grow steadily by two to three percent over the coming years. Operations and capital investment costs are also expected to increase at the same rate of inflation used in the City’s long-term financial plans (2.5% to 3.0% per year). While future CIP costs have been revised upwards to reflect the higher construction costs seen in recent projects, there is still uncertainty with regard to the utility’s future costs for main replacement. See Section 6: Details and Assumptions for more detail on the costs that make up these projections, as well as the various assumptions underlying the projections. As shown in Figure 5, above, staff currently projects revenues to be below expenses for FY 2018 and for the three subsequent years. Revenues exceeded expenses in FY 2017 due to delays in water main replacement projects, leading to lower annual CIP spending in that year, as well as drought surcharge revenue that made up for reduced distribution revenue as a result of drought conservation. As main replacement resumes, the Water Utility requires rate increases WATER UTILITY FINANCIAL PLAN February 2018 17 | Page of between 4% and 7% per year through FY 2024 to bring revenues up to match annual expenses. This forecast assumes the use of the Rate Stabilization Reserve to spread the increases over multiple years. Figure 6 below shows reserves trends based on these revenue projections. Staff projects the Rate Stabilization Reserve to have a zero balance by the end of FY 2021, and the CIP Reserve to decrease by $2.7 million by the end of FY 2020. Assuming these increases in revenue, staff expects the Operations Reserve, the main contingency reserve, to remain above the minimum reserve level and that this reserve will be adequate to meet all identified risks, as discussed in Section 5F: Risk Assessment and Reserves Adequacy. In addition, the Unassigned reserve reflects reserve funds in the Operations reserve above the maximum guideline level. With the expected increase in costs between FY 2018 and FY 2019, these excess reserves will be utilized quickly and moderate the pace of increases going forward, but must be used before Rate Stabilization Reserve funds are utilized. These projections assume that drought restrictions are not re-imposed by the State. Figure 6: Water Utility Reserves Actual Reserve Levels for FY 2017 and Projections through FY 2028 WATER UTILITY FINANCIAL PLAN February 2018 18 | Page SECTION 5 F : RISK ASSESSMENT AND RESERVES ADEQUACY The Water Utility currently has one contingency reserve, the Operations Reserve, and this Financial Plan maintains reserves within the approved reserve maximum and minimum guidelines throughout the forecast period, as shown in Figure 7. Funds in excess of the maximum as of the end of FY 2018 will be recommended to be moved to the Unassigned Reserve. Operations Reserve exceed the short term risk assessment for the utility. Figure 7: Operations Reserve Adequacy Table 12 summarizes the risk assessment calculation for the Water Utility through FY 2023. Staff used the same methodology for FY 2024 through FY 2028 as well. The risk assessment includes the revenue shortfall that could accrue due to: 1. Lower than forecasted sales revenue; and 2. An increase of 10% of planned system improvement CIP expenditures for the budget year. WATER UTILITY FINANCIAL PLAN February 2018 19 | Page Table 12: Water Risk Assessment ($000) FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 Total non-commodity revenue $20,597 $22,039 $23,581 $24,760 $25,330 Max. revenue variance, previous ten years 13% 13% 13% 13% 13% Risk of revenue loss $2,035 $2,178 $2,330 $2,447 $2,503 CIP Budget $13,695 $13,210 $16,765 $10,709 $11,023 CIP Contingency @10% $1,369 $1,321 $1,676 $1,071 $1,102 Total Risk Assessment value $3,405 $3,499 $4,007 $3,517 $3,605 SECTION 5 G : ALTERNATE SCENARIOS No alternative scenarios were considered as part of this financial plan. SECTION 5 H : LONG-TERM OUTLOOK CPAU has put its Water Utility on strong footing by investing in its distribution system infrastructure and emergency water facilities over the last 20 years. The Water System Master Plan, recently completed and under review, will give CPAU a better picture of the long-term outlook for its infrastructure and will result in a plan for an appropriate schedule for infrastructure replacement and upgrades. In addition, CPAU’s water supplier, the SFPUC, has replaced and seismically strengthened its water transmission infrastructure, which will benefit Palo Alto and all Hetch Hetchy customers over the long term. The opportunities for CPAU’s Water Utility to obtain additional supplies over the long term may be in alternative water supplies such as recycled water, groundwater, and water from the Santa Clara Valley Water District. These alternatives have been analyzed in the past, and will be analyzed again in an upcoming update to the Water Integrated Resource Plan. Some of these alternatives may provide cost savings or increased drought protection. Climate change may begin to present challenges for the Water Utility over the next 20 to 40 years. Availability of water from SFPUC’s Regional Water System may change with changing seasonal precipitation patterns. Water consumption patterns may change. Consumption could increase due to drier weather or decrease as customers become even more focused on water conservation. Droughts may become more frequent. The risk of wildfire in the foothills could increase, possibly threatening utility infrastructure or placing greater demands on it. Sea level rise could result in greater exposure of utility infrastructure to saltwater intrusion or the need to protect infrastructure from inundation, possibly resulting in higher maintenance and replacement costs. It could also affect the groundwater aquifer that the utility relies on in emergencies. Any of these could result in increases to the costs of operating the Water Utility. As part of the Sustainability/Climate Action Plan, CPAU is currently working on a Climate Change Adaptation Roadmap that will begin to assess some of these risks. SECTION 6 : DETAILS AND ASSUMPTIONS WATER UTILITY FINANCIAL PLAN February 2018 20 | Page SECTION 6 A : WATER P URCHASE COSTS CPAU purchases all of the potable water supplies from the SFPUC, which owns and operates the Hetch Hetchy Regional Water System. CPAU is one of several agencies that purchase water from the SFPUC, all of whom are members of the Bay Area Water Supply and Conservation Agency (BAWSCA). Palo Alto uses roughly 7% of the water delivered by the SFPUC to BAWSCA member agencies. The Hetch Hetchy Regional Water System begins with a system of reservoirs and tunnels in the high Sierra in Yosemite County and water is transported by a gravity-fed pipeline to the Bay Area. Currently, the SFPUC is in the midst of a $4.8 billion bond-financed capital improvement program (the Water System Improvement Program, or WSIP) to seismically retrofit the facilities that transport water to the Bay Area. As of September 2017, nearly 60% of the program (by dollar value) had been completed, while 40% was under construction.1 This has resulted in large increases in the annual debt service costs assigned to wholesale customers like Palo Alto. The wholesale customer debt service share of the WSIP is increasing from $53 million in FY 2010 to over $200 million in FY 2020. As a result, the SFPUC’s wholesale water rate has already increased from $1.43 per CCF in FY 2009 to $4.10 per CCF in FY 2018, and is forecasted to increase to over nearly $6.00 per CCF by FY 2023 (these projections are subject to change based on future SFPUC budget estimates). Figure 8 shows the SFPUC’s actual wholesale water rate since FY 2009 and a projection through FY 2027. Note that the wholesale water rate decreased in FY 2014, but the apparent rate decrease is due to a part of the debt being directly paid by the BAWSCA agencies. This cost is paid in addition to the wholesale water rate and adds about $0.35 to $0.45 per CCF to the wholesale rate. The SFPUC’s water rate projections show a less steeply increasing rate trajectory after all of the debt for the WSIP has been issued. Still, debt service costs are projected to nearly double between FY 2019 and FY 2028. Parts of SFPUC’s system not included in the WSIP will also need rehabilitation after the WSIP is completed, and some of these projects are already included in the SFPUC’s rate projections, such as additional Transmission, Supply & Storage and Treatment system upgrade projects, slated to start after the WSIP ends. The SFPUC is also conducting condition assessments of other “up-country” facilities, located in the Sierras, in the coming years. Current estimates are that $1.8 billion will be needed between FY 2019 and FY 2028 for these non-WSIP projects, but if these assessments identify other facilities that need replacement, it may result in additional rate increases as new debt is issued to finance the projects. For comparison, the WSIP was $4.8 billion. In December 2017, the SFPUC provided an early estimate for FY 2019 wholesale water rates to remain at $4.10 per CCF. Staff has yet to receive a new estimate, but there is much uncertainty surrounding continued lower water usage by the BAWSCA agencies. While drought restrictions ended in May 2016, customers’ behavior changes are showing a steady increase during the dry winter of 2018. 1 First Quarter FY 2017-18 WSIP Regional Quarterly Report, http://www.sfwater.org/index.aspx?page=307 WATER UTILITY FINANCIAL PLAN February 2018 21 | Page As the drought ended in FY 2017 and sales have started increasing, if that trend continues in upcoming years, rate projections may level out. However, if snow and rain do not materialize in future years further calls for restricted usage may reoccur. Figure 8: Historical and Projected SFPUC Wholesale Water Rate SECTION 6 B : OPERATIONS CPAU’s Water Utility operations include the following activities: • Administration, a category that includes charges allocated to the Water Utility for administrative services provided by the General Fund and for Utilities Department administration, as well as debt service and other transfers. Additional detail on Water Utility debt service is provided in Section 6D: Debt Service • Customer Service • Engineering work for maintenance activities (as opposed to capital activities) • Operations and Maintenance of the distribution system; and • Resource Management Appendix D: Description of Water Utility Operational Activities includes detailed descriptions of the work associated with each of these activities. From FY 2013 to FY 2017 Operations costs (excluding debt service, rent, and transfers) increased 3.5% per year on average (see Figure 9). Operations costs were the main driver. Debt service costs increased by $2.4 million per year as a result of a bond issued to finance the WATER UTILITY FINANCIAL PLAN February 2018 22 | Page Emergency Water Supply and Storage Project. Transfers have varied from year to year, but are expected to remain relatively low and stable through the forecast period. Staff project inflationary increases for Operations costs with underlying assumptions for salary and benefit costs, consumer price index, and other cost projections that match the City’s long-range financial forecast. Figure 9: Historical and Projected Operational Costs SECTION 6 C : CAPITAL IMPROVEMENT PROGRAM (CIP) The Water Utility’s CIP consists of the following types of projects: • One time projects, or large, non-recurring replacement of system assets (such as reservoir rehabilitation). • Water main replacement, which represents the ongoing replacement of aging water mains, and sometimes the services associated with those mains. • Ongoing projects, which represent the cost of replacing aging and under-recording meters and degraded boxes and covers, minor replacements of various types of distribution system equipment, and the cost of capitalized tools and equipment. • Customer connections, which represents the cost when the Water Utility installs new services or upgrades existing services at a customer’s request in response to Actual Projected WATER UTILITY FINANCIAL PLAN February 2018 23 | Page development or redevelopment. CPAU charges a fee to these customers to cover the cost of these projects. Table 13 shows the FY 2018 projected budget and the five year CIP spending plan, although these figures are preliminary pending budget discussions starting in May. The ‘committed’ column represents funds committed to contracts for which work has not yet been completed or invoices paid. Table 13: Budgeted Water Utility CIP Spending ($000) The water main replacement program funds the replacement of deteriorating water mains. The water system consists of over 236 miles of mains, approximately 2,000 fire hydrants, and over 20,000 metered service connections spanning 9 pressure zones over a 26 square mile service area. CPAU utilizes an asset management database in conjunction with hydraulic modeling software to prioritize capital improvements. CPAU selects mains for replacement by researching the maintenance history of the system and identifying those that are undersized, corroded, and subject to recurring breaks. CPAU uses a scoring system based on criticality in order to prioritize which mains to replace first, and coordinates with the Public Works street maintenance program to avoid cutting into newly repaved streets. CPAU replaces approximately 3 miles of main per year, or 1.3% of the system. Costs for the water main replacement program are increasing for a variety of reasons: • Fire Code regulations now mandate fire sprinklers for new residential units. To accommodate increased fire flows, new main replacement projects require larger diameter pipe. • CPAU has switched to high-density polyethylene (HDPE) for its mains. Installation costs for this material are slightly higher, though lifecycle costs are lower, and the material performs better. Joints in distribution mains are the most likely place for failure, and sections of HDPE pipe can be fused together rather than connected with fittings. In the long run, this will reduce losses and maintenance costs. • To take full advantage of HDPE’s fusibility, CPAU is now replacing the services along with the water mains with new HDPE services. In the past, the existing services were reconnected, regardless of the material. This new practice costs more in the short run, but will provide long term benefits. • Lastly, costs have escalated after the recession. The regional and even national focus on infrastructure improvement has created labor shortages in the construction market, leading to higher bids than were seen in the past. Project Category Current Budget* Spending, Curr. Yr Remain. Budget**Committed FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 One Time Projects 6,123 (606) 5,516 3,578 2,200 2,200 2,200 - - Water Main Replacement 10,637 (1,387) 9,251 4,780 7,685 6,454 6,647 6,847 7,055 Ongoing Projects 3,086 (518) 2,568 749 2,025 1,982 2,039 2,099 2,161 Customer Connections 773 (373) 401 72 732 754 777 800 824 TOTAL 20,619 (2,884) 17,736 9,180 12,642 11,389 11,663 9,746 10,040 *Includes unspent funds from previous years carried forward or reappropriated into the current fiscal year **Equal to CIP Reserves (Reserve for Reappropriations + Reserve for Commitments). WATER UTILITY FINANCIAL PLAN February 2018 24 | Page These factors have created some uncertainty in future water main replacement costs. As bids for new projects, such as upgrades to University Avenue, have consistently come in higher over the last few years, future main replacement project budgets have been increased from prior year’s estimates to reflect expected bid estimates. If the cost of water main replacement continues to rise at its current levels, budgets may need to be revised further. However, CPAU is nearing the end of a long term water main replacement program initiated in 1993 to replace the oldest and most degraded parts of the system. Roughly 25% of the system has been replaced, and the rate of water leaks has decreased 50%. CPAU initiated a master planning process in FY 2015 that was completed in 2016 to evaluate the current state of the distribution system and determine the necessary rate of main replacement in future years. Currently the replacement rate of about 1.3% of the system each year is an 80-year replacement cycle. In last year’s financial forecast, staff projected a two year delay in new main replacement projects. However, some of these delayed projects are now moving forward. The University Avenue Business District project is progressing, and may require a budget increase of $3 million in FY 2018 to continue. However, there still could be delays due to rising construction costs and also the ongoing issue with keeping and maintaining qualified staff to design and work on projects. The Water CIP estimates assume the resumption of annual main replacement projects, starting in FY 2019. Staff assumes capital investment cost increases in 2024 and beyond of approximately 3% annually. Included in the one-time project budget is seismic water system upgrades and/or replacement for the Corte Madera, Park, Boronda and Dahl reservoirs to improve earthquake resistance. This work will improve protection from water loss at these reservoirs in a seismic event. If an earthquake caused a significant water leak, this could lead to loss of water for firefighting, loss of water storage for drinking, property damage from flooding or mudslides, and environmental damages. Staff estimates this work will cost $2 million each year for three years beginning in FY 2019. In FY 2021, as part of the Electric fund CIP plan, there is an initiative to move meters to an Advanced Metering Infrastructure, or AMI, to allow for more advanced monitoring, metering and billing of the electric usage. This AMI network, however, can also be used to read water and gas meters as well, and thus the plan to transition all Utility meters to the AMI platform. Staff has included an additional $1.5 million in FY 2019 and FY 2020 for preparatory work and meter testing, and $4.16 million for general meter replacement costs in FY2021. One project not included in this forecast is the seismic strengthening of a large water transmission line in the foothills. Staff has engaged a consultant to investigate alternatives for this project. The consultant is analyzing an alternative that involves installing a valve and hose system that could be used to bypass breaks in the line while they are repaired after an earthquake. This is a relatively low cost alternative that would not substantially affect the financial forecast. The study is not finalized yet, however, and if it is determined that the entire pipeline needs to be replaced, it could cost between $15 million and $20 million, which would likely require bond financing and would substantially affect the financial forecast. Ongoing Projects and Customer Connections are projected to cost approximately $2.8 million in FY 2019 and increase by an average of 2% per year through the end of the forecast period. Actual expenses for these projects fluctuate annually depending on how many defective meters are discovered and replaced during routine maintenance, as well as how much development WATER UTILITY FINANCIAL PLAN February 2018 25 | Page and redevelopment is going on that prompts the replacement or upgrade of water services. It is worth noting that property owners pay a fee for water service replacement or expansion during redevelopment, so when the number of projects go up (meaning higher costs for this activity), so does fee revenue. Aside from customer connections, the CIP plan for FY 2019 to FY 2023 is funded by revenue from utility rates and capacity fees. Appendix B: Water Utility Capital Improvement Program (CIP) Detail shows the details of the plan. SECTION 6 D : DEBT SERVICE The Water Utility’s annual debt service is roughly $3.2 million per year. This is related to two bond issuances, one requiring payments through 2026, the other through 2035. CPAU is in compliance with all covenants on both bonds. The first bond is the 2009 Water Revenue Bond, Series A, issued for $35 million to finance construction of the Emergency Water Supply and Storage project (the El Camino Reservoir, new wells, rehabilitation of existing wells and tanks, etc.) and to be retired by 2035. As part of the ‘Build America’ bond program, there is an interest payment subsidy from the Federal Government of 35%. There is always the possibility that the federal government will choose to stop payment on this subsidy. The automatic federal spending cuts under the Budget Control Act (BCA) of 2011 have already reduced the subsidy by $50,000 per year, and if planned cuts through 2021 proceed without amendment, staff estimates that the subsidy would be reduced by over $200,000 per year by 2021. The Bipartisan Budget Act of 2013, which relieved some of the discretionary spending cuts in the 2011 BCA, did not affect automatic cuts to the subsidy, and actually extended the automatic cuts through 2023. The second bond issuance is the 2011 Utility Revenue Refunding Bond, Series A, which is to be retired in 2026. This $17.2 million issuance refinanced an earlier Water and Gas Utility bond issuance, the 2002 Utility Revenue Bonds, Series A, which was issued to finance various capital improvements for both systems. The Water Utility’s share of the issuance was roughly $7.8 million. Table 14 shows the cost of debt service for the Water Utility’s share of these bond issuances for the financial forecast period: Table 14: Water Utility Debt Service ($000) FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 2009 Water Revenue Bonds, Series A (net of grants) 2,066 2,081 2,097 2,114 2,132 2,151 2,151 2,151 2011 Utility Revenue Bonds, Series A 656 654 654 656 657 658 658 658 Both the 2009 and 2011 Bonds include the following covenants: 1) net revenues plus Available Reserves shall at least equal 125% of the maximum annual debt service, and 2) Available Reserves shall be at least 5 times the maximum annual debt service. Note that “Available Reserves,” as defined for both bonds, include the reserves for the Gas and Electric systems, not WATER UTILITY FINANCIAL PLAN February 2018 26 | Page just the Water system. This Financial Plan maintains compliance with these covenants throughout the forecast period, as shown in Appendix A: Water Utility Financial Forecast Detail. The net revenues (but not the reserves) of the Water Utility are also pledged for one other bond as shown in Table 15 below, even though the Water Utility is not responsible for the debt service payments. The Water Utility’s reserves or net revenues would only be called upon if the responsible utilities are unable to make their debt service payments. Staff does not currently foresee this occurring. Requirements of the California Constitution require that any amounts advanced from one utility to pay debt service for another utility must be repaid by the borrowing fund. Table 15: Other Issuances Secured by the Water Utility’s Revenues or Reserves Bond Issuance Responsible Utilities Annual Debt Service ($000) Secured by Water Utility’s: Net Revenues Reserves 1995 Series A Utility Revenue Bonds Storm Drain $680 Yes No SECTION 6 E : OTHER REVENUES The Water Utility receives most of its revenues from sales of water. The next largest source is connection and capacity fees, which in FY 2017 represented 58% of revenue from sources other than water sales. The remainder consisted of a variety of miscellaneous charges, transfers and interest income. Revenues from connection and capacity fees have more than doubled since FY 2009. Connection fees are charged to new developments that need new or replacement service connections, while capacity fees are charged to development that put additional demands on the water distribution system. Revenue from these sources decreased slightly during the recession, but has increased substantially since then. Staff is forecasting lower revenue from these sources in subsequent years, but has increased connection fees that are expected to offset these reductions to some extent. Other revenue sources are projected to stay stable through the forecast period, though interest income always fluctuates depending on changes in interest rates. Some uncertainty also exists related to the Federal government’s commitment to continuing to pay the interest subsidy on the Build America Bonds. SECTION 6 F : SALES REVENUES Staff based the sales revenue projections on the load forecast in Section 5A: Load Forecast and the projected rate changes shown in Figure 5. Except where stated otherwise, these load forecasts are based on normal precipitation. Precipitation can vary substantially, and this can affect revenues substantially. In dry years customers use more water, increasing revenues, and in wet years they use less. One factor that is difficult to predict is customer usage recovery post-drought. Usage will continue to rise until customers reach their level of desired consumption. Where this new ‘normal’ level plateaus at, and the speed with which it reaches WATER UTILITY FINANCIAL PLAN February 2018 27 | Page level, is difficult to predict. Staff will continue to monitor these patterns and adjust projections accordingly. SECTION 7 : COMMUNICATIONS PLAN In FY 2019, communications will continue to focus on water utility rate increases, including the reasons why and how rates may change contingent upon varying precipitation levels. Additionally, we will focus on how infrastructure costs and rising rates from our wholesale water supplier, the San Francisco Public Utilities Commission, increases CPAU costs and must be recovered through rate increases. Rates communications will include a substantial update to information on a webpage dedicated to Utilities rates, “breaking news” on the Utility home webpage, discussion in the Proposition 218 rate adjustment notice, bill insert and frequent educational updates to internal and external stakeholders (customer service, marketing, City Manager’s Office, UAC, City Council, business and residential customers). Other communications vehicles will include financial plans, presentations to UAC, Finance Committee, City Council and any media coverage as a result of the rate increases. CPAU will continue its outreach about continuing to make water conservation a way of life, regardless of drought or rain conditions. Messaging will reinforce the importance of water use efficiency, and that although rates are increasing, efficient usage should mean that a customer should not see a significant increase in water utility costs on their bills. Water conservation outreach will promote water use efficiency rebates, incentives and easy water-saving behaviors through bill inserts, web updates, email newsletters, videos for the web and television, presentations to customer groups and the use of social media. To keep customers apprised of the status and accomplishments of CIP projects, a network of project web pages are maintained. Traffic is driven to the website via ads in publications, newspaper inserts, and through the comprehensive portfolio of outreach strategies as outlined above. Safety topics are also emphasized year-round. For all utility outreach, while print materials and website pages still feature prominently, CPAU is placing more emphasis on digital advertising content, direct mail, community safety/emergency preparation events and presentations. WATER UTILITY FINANCIAL PLAN February 2018 28 | Page APPENDICES Appendix A: Water Utility Financial Forecast Detail Appendix B: Water Utility Capital Improvement Program (CIP) Detail Appendix C: Water Utility Reserves Management Practices Appendix D: Description of Water Utility Operational Activities Appendix E: Sample of Water Utility Outreach Communications APPENDIX A : WATER UTILITY FINANCIAL FORECAST DETAIL 1 FISCAL YEAR FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 2 3 WATER SUPPLY 4 Purchases 5,532,947 5,507,153 4,671,433 4,127,085 4,172,038 4,852,150 4,986,189 4,926,355 4,867,238 4,808,832 4,751,126 4,694,112 4,637,783 4,582,129 4,527,144 4,472,818 5 Sales 5,097,392 5,047,148 4,433,016 3,858,825 3,852,185 4,580,430 4,706,962 4,650,479 4,594,673 4,539,537 4,485,063 4,431,242 4,378,067 4,325,530 4,273,624 4,222,340 6 7 BILL AND RATE CHANGES 8 Variable Charge (Supply)11%-16%25%22%9%7%-6%5%5%6%5%7%2%4%2%2% 9 Variable Charge (Distribution)17%30%-16%10%5%-1%13%8%9%6%3%2%1%3%1%2% 10 Service Charge (Distribution)75%9%0%-10%3%0%12%7%7%5%2%1%1%2%2%4% 11 Change in System Average Rate 22%8%0%11%7%2%4%7%7%6%4%4%1%3%1%2% 12 Change in Average Residential Bill 21%7%-1%17%4%-2%3%5%5%5%3%3%1%2%2%3% 13 14 STARTING RESERVES 15 Reappropriations (Non-CIP)- - - - - - - - - - - - - - - - 16 Commitments (Non-CIP)714,000 2,000 347,000 347,000 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273 17 Restricted for Debt Service 3,225,000 3,225,000 3,331,000 3,316,000 3,299,194 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 18 Emergency Plant Replacement 1,000,000 1,000,000 1,000,000 - - - - - - - - - - - - - 19 Capital Reserve - - - 4,000,000 2,726,096 2,726,096 2,726,096 2,726,096 - - - - - - - - 20 Rate Stabilization Reserve 7,996,000 17,272,000 20,133,000 6,567,000 1,877,437 4,069,000 4,069,000 4,069,000 4,069,000 - - - - - - - 21 Operations Reserve - - - 11,663,836 14,606,828 12,734,948 13,741,000 12,896,930 11,728,634 9,937,852 11,244,928 12,473,900 13,253,905 13,498,028 13,525,556 13,122,780 22 Unassigned - - - - - 7,056,052 4,986,007 - - - - - - - - - 23 TOTAL STARTING RESERVES 12,935,000 21,499,000 24,811,000 25,893,836 22,686,828 30,023,369 28,959,376 23,129,299 19,234,907 13,375,125 14,682,201 15,911,173 16,691,178 16,935,301 16,962,829 16,560,053 24 25 REVENUES 26 Net Sales 36,647,924 39,029,262 33,654,549 36,136,644 41,657,382 43,189,169 45,946,518 48,550,827 51,381,619 53,992,359 55,490,378 56,986,955 57,211,828 58,435,519 58,630,830 59,331,362 27 Other Revenues and Transfers In 6,811,461 4,053,920 7,504,848 3,258,936 5,829,851 4,702,923 3,671,998 3,735,314 3,800,902 3,870,756 3,942,093 4,034,793 4,129,947 4,227,619 4,327,878 4,430,793 28 TOTAL REVENUES 43,459,385 43,083,182 41,159,397 39,395,579 47,487,233 47,892,092 49,618,516 52,286,141 55,182,521 57,863,115 59,432,471 61,021,747 61,341,775 62,663,138 62,958,709 63,762,155 29 30 EXPENSES 31 Water Purchases 16,605,351 15,705,288 15,669,935 17,626,020 20,075,322 22,061,917 22,611,475 23,355,859 24,190,148 25,318,382 26,207,075 27,533,642 27,680,356 28,458,072 28,558,184 28,658,677 32 Operating Expenses 679.9%2.9%5.8%-54.7%158.5% 33 Administration 34 Allocated Charges 2,422,880 2,366,077 2,342,985 2,953,291 3,151,373 2,438,768 2,490,375 2,540,960 2,597,475 2,657,609 2,719,082 2,773,765 2,829,463 2,911,318 2,966,458 3,034,716 35 Rent 1,911,963 2,192,454 2,249,457 1,803,087 1,720,711 2,931,563 3,092,799 3,120,634 3,148,720 3,177,058 3,208,829 3,240,917 3,273,326 3,306,059 3,339,120 3,372,511 36 Debt Service 3,219,165 3,220,208 3,218,869 3,222,606 3,219,316 3,222,669 3,220,858 3,220,638 3,222,843 3,223,563 3,224,553 3,224,553 3,224,553 3,224,553 3,224,553 3,224,553 37 Transfers and Other Adjustments 2,241,793 335,808 63,612 (377,200) (256,608) 391,302 399,129 407,111 415,253 423,558 432,030 432,030 432,030 432,030 432,030 432,030 38 Subtotal, Administration 9,795,801 8,114,546 7,874,923 7,601,785 7,834,792 8,984,302 9,203,160 9,289,342 9,384,290 9,481,788 9,584,493 9,671,264 9,759,372 9,873,960 9,962,160 10,063,809 39 Resource Management 557,910 570,040 488,331 592,744 868,038 1,089,530 1,121,904 1,163,283 1,204,080 1,241,610 1,278,957 1,312,198 1,344,159 1,378,016 1,399,695 1,432,650 40 Operations and Mtc 4,944,064 4,986,274 5,283,426 5,038,570 5,290,549 6,426,788 6,623,269 6,878,570 7,128,663 7,356,594 7,583,011 7,784,574 7,977,523 8,175,463 8,301,450 8,497,350 41 Engineering (Operating)338,659 381,502 358,128 282,472 355,852 397,451 409,827 426,073 441,926 456,290 470,543 483,234 495,348 507,516 515,230 527,406 42 Customer Service 1,584,759 1,677,926 1,821,447 2,076,559 1,616,008 2,193,588 2,262,089 2,352,159 2,439,994 2,519,510 2,598,397 2,668,637 2,735,657 2,802,749 2,845,252 2,912,511 43 Allowance for Unspent Budget - - - - - (464,458) (477,834) (494,626) (511,325) (526,854) (542,343) (556,130) (569,447) (583,993) (593,360) (607,300) 44 Subtotal, Operating Expenses 17,221,192 15,730,288 15,826,254 15,592,128 15,965,239 18,627,201 19,142,414 19,614,801 20,087,627 20,528,938 20,973,059 21,363,777 21,742,612 22,153,711 22,430,426 22,826,428 45 Capital Program Contribution 1,068,841 8,335,605 8,580,372 9,082,021 4,110,131 8,266,967 13,694,704 13,209,873 16,764,528 10,708,718 11,023,365 11,344,323 11,674,684 12,023,827 12,372,875 12,736,548 46 TOTAL EXPENSES 34,895,385 39,771,182 40,076,561 42,300,170 40,150,692 48,956,085 55,448,593 56,180,534 61,042,304 56,556,039 58,203,499 60,241,742 61,097,652 62,635,610 63,361,485 64,221,653 47 9.04 48 ENDING RESERVES 49 Reappropriations (Non-CIP)- - - - - - - - - - - - - - - - 50 Commitments (Non-CIP)2,000 347,000 347,000 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273 51 Restricted for Debt Service 3,225,000 3,331,000 3,316,000 3,299,194 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 52 Emergency Plant Replacement 1,000,000 1,000,000 - - - - - - - - - - - - - - 53 Capital Reserve - - 4,000,000 2,726,096 2,726,096 2,726,096 2,726,096 - - - - - - - - - 54 Rate Stabilization Reserve 17,272,000 20,133,000 6,567,000 1,877,437 4,069,000 4,069,000 4,069,000 4,069,000 - - - - - - - - 55 Operations Reserve - - 11,663,836 14,606,828 12,734,948 13,741,000 12,896,930 11,728,634 9,937,852 11,244,928 12,473,900 13,253,905 13,498,028 13,525,556 13,122,780 12,663,281 56 Unassigned - - - - 7,056,052 4,986,007 - - - - - - - - - - 57 TOTAL ENDING RESERVES 21,499,000 24,811,000 25,893,836 22,686,828 30,023,369 28,959,376 23,129,299 19,234,907 13,375,125 14,682,201 15,911,173 16,691,178 16,935,301 16,962,829 16,560,053 16,100,554 58 59 OPERATIONS RESERVE 60 Min (60 days of non-capital expenses)- - 5,230,611 5,145,323 6,320,551 7,015,601 7,197,171 7,403,859 7,625,531 7,890,478 8,116,649 8,398,943 8,485,334 8,680,756 8,742,700 8,824,316 61 Target (90 days of non-capital expenses)- - 9,395,240 8,698,557 9,527,750 10,378,300 10,847,792 11,159,004 11,493,609 11,893,618 12,235,541 12,668,887 12,808,565 13,116,527 13,219,432 13,354,222 62 Max (120 days of non-capital expenses)- - 13,559,870 12,251,790 12,734,948 13,741,000 14,498,412 14,914,150 15,361,686 15,896,759 16,354,432 16,938,832 17,131,796 17,552,298 17,696,164 17,884,127 63 Risk Assessment Value 2,481,768 2,677,436 2,229,786 2,645,469 3,404,677 3,498,658 4,006,561 3,517,485 3,605,222 3,662,346 3,720,662 3,806,640 3,893,630 4,036,251 64 65 DEBT SERVICE COVERAGE RATIO 66 Net Revenues (125% of Debt Service)951%876%878%931%1020%1163%1196%1234%1274%1322%1363%1416%1433%1470%1481%1497% 67 Available Reserves (5x Debt Service)*5.7 6.6 6.9 6.0 8.3 7.9 6.1 4.9 3.1 3.5 3.9 4.1 4.2 4.2 4.1 3.9 Appendix A (continued) 1 FISCAL YEAR FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 2 3 REVENUES 4 Net Sales 84%91%82%92%88%90%93%93%93%93%93%93%93%93%93%93% 5 Other Revenues and Transfers In 16%9%18%8%12%10%7%7%7%7%7%7%7%7%7%7% 6 TOTAL REVENUES 100%100%100%100%100%100%100%100%100%100%100%100%100%100%100%100% 7 8 EXPENSES 9 Water Purchases 48%39%39%42%50%45%41%42%40%45%45%46%45%45%45%45% 10 Operating Expenses 11 Administration 12 Allocated Charges 7%6%6%7%8%5%4%5%4%5%5%5%5%5%5%5% 13 Rent 5%6%6%4%4%6%6%6%5%6%6%5%5%5%5%5% 14 Debt Service 9%8%8%8%8%7%6%6%5%6%6%5%5%5%5%5% 15 Transfers and Other Adjustments 6%1%0%-1%-1%1%1%1%1%1%1%1%1%1%1%1% 16 Subtotal, Administration 28%20%20%18%20%18%17%17%15%17%16%16%16%16%16%16% 17 Resource Management 2%1%1%1%2%2%2%2%2%2%2%2%2%2%2%2% 18 Operations and Mtc 14%13%13%12%13%13%12%12%12%13%13%13%13%13%13%13% 19 Engineering (Operating)1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%1% 20 Customer Service 5%4%5%5%4%4%4%4%4%4%4%4%4%4%4%5% 21 Allowance for Unspent Budget 0%0%0%0%0%-1%-1%-1%-1%-1%-1%-1%-1%-1%-1%-1% 22 Subtotal, Operating Expenses 49%40%39%37%40%38%35%35%33%36%36%35%36%35%35%36% 23 Capital Program Contribution 3%21%21%21%10%17%25%24%27%19%19%19%19%19%20%20% 24 TOTAL EXPENSES 100%100%100%100%100%100%100%100%100%100%100%100%100%100%100%100% 25 26 RISK ASSESSMENT DETAIL 27 Distribution Revenue Variance 1,623,731 1,769,234 1,818,772 1,818,772 2,035,206 2,177,671 2,330,108 2,446,613 2,502,885 2,527,914 2,553,193 2,604,257 2,656,342 2,762,596 28 10% CIP Program Contingency 858,037 908,202 411,013 826,697 1,369,470 1,320,987 1,676,453 1,070,872 1,102,337 1,134,432 1,167,468 1,202,383 1,237,287 1,273,655 29 Total Risk Asssessment Value 2,481,768 2,677,436 2,229,786 2,645,469 3,404,677 3,498,658 4,006,561 3,517,485 3,605,222 3,662,346 3,720,662 3,806,640 3,893,630 4,036,251 30 Projected Operations Reserve 11,663,836 14,606,828 12,734,948 13,741,000 12,896,930 11,728,634 9,937,852 11,244,928 12,473,900 13,253,905 13,498,028 13,525,556 13,122,780 12,663,281 31 Operations Reserve, % of Risk Value 470%546%571%519%379%335%248%320%346%362%363%355%337%314% 32 33 OPERATIONS RESERVE 34 Min (60 days of non-capital expenses)- - 5,230,611 5,145,323 6,320,551 7,015,601 7,197,171 7,403,859 7,625,531 7,890,478 8,116,649 8,398,943 8,485,334 8,680,756 8,742,700 8,824,316 35 Target (90 days of non-capital expenses)- - 9,395,240 8,698,557 9,527,750 10,378,300 10,847,792 11,159,004 11,493,609 11,893,618 12,235,541 12,668,887 12,808,565 13,116,527 13,219,432 13,354,222 36 Max (120 days of non-capital expenses)- - 13,559,870 12,251,790 12,734,948 13,741,000 14,498,412 14,914,150 15,361,686 15,896,759 16,354,432 16,938,832 17,131,796 17,552,298 17,696,164 17,884,127 37 Risk Assessment Value 2,481,768 2,677,436 2,229,786 2,645,469 3,404,677 3,498,658 4,006,561 3,517,485 3,605,222 3,662,346 3,720,662 3,806,640 3,893,630 4,036,251 38 39 DEBT SERVICE COVERAGE RATIO 40 Net Revenues (125% of Debt Service)951%876%878%931%1020%1163%1196%1234%1274%1322%1363%1416%1433%1470%1481%1497% 41 Available Reserves (5x Debt Service)*5.7 6.6 6.9 6.0 8.3 7.9 6.1 4.9 3.1 3.5 3.9 4.1 4.2 4.2 4.1 3.9 42 *For the purposes of debt covenants, the unrestricted reserves of other utilities may be counted toward the available reserves for meeting this measure. A ratio below 5x means that this utility is relying on the reserves of other utilities to meet its debt covenants. WATER UTILITY FINANCIAL PLAN February, 2017 31 | Page APPENDIX B : WATER UTILITY CAPITAL IMPROVEMENT PROGRAM (CIP) DETAIL Project #Project Name Reappropriated / Carried Forward from Previous Years Current Year Funding Proposed Budget Amendments Spending, Current Year Remaining in CIP Reserve Fund Commitments FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 ONE TIME PROJECTS WS-07000 Regulation Station Imp.776,358 196,054 - - 972,412 624,149 - - - - - WS-07001 Water Recycling Facilities - 395,649 - - 395,649 - - - - - - WS-08001 Water Reservoir Coating 1,130,852 - - (152,532) 978,320 621,825 - - - - - WS-09000 Seismic Water System 2,495,234 1,128,594 - (453,807) 3,170,021 2,332,347 2,000,000 2,000,000 2,000,000 - - WS-15004 Water System Master Plan 16 - - - 16 16 - - - - - WS-19000 Mayfield Reservoir - - - - - - 200,000 200,000 200,000 - - Subtotal, One-time Projects 4,402,460 1,720,297 - (606,339) 5,516,418 3,578,337 2,200,000 2,200,000 2,200,000 - - WATER MAIN REPLACEMENT PROGRAM WS-11000 WMR-Project 25 381,939 - - - 381,939 - - - - - - WS-12001 WMR- Project 26 5,410,048 1,143,000 3,027,320 (1,386,803) 8,193,565 4,780,180 600,000 - - - - WS-13001 WMR - Project 27 80,000 595,000 - - 675,000 - 6,500,000 - - - - WS-14001 WMR - Project 28 - - - - - - 585,107 5,851,070 - - - WS-15002 WMR - Project 29 - - - - - - - 602,660 6,026,602 - - WS-16001 WMR - Project 30 - - - - - - - - 620,740 6,207,400 - WS-19001 WMR - Project 31 - - - - - - - - - 639,362 6,396,320 WS-20000 WMR - Project 32 - - - - - - 658,820 Subtotal, Water Main Replacement Prog.5,871,987 1,738,000 3,027,320 (1,386,803) 9,250,504 4,780,180 7,685,107 6,453,730 6,647,342 6,846,762 7,055,140 ONGOING PROJECTS WS-80014 Services/Hydrants 11,158 412,000 - (231,440) 191,718 30,534 424,360 437,091 450,204 463,710 477,621 WS-80015 Water Meters - 565,000 - (87,733) 477,267 - 500,000 515,000 530,450 546,364 562,755 WS-02014 W-G-W Utility GIS Data 148,826 402,628 - (43,526) 507,928 405,300 442,890 456,177 469,862 483,958 498,477 WS-13002 Equipment/Tools - 50,000 - - 50,000 - 50,000 50,000 50,000 50,000 50,000 WS-11003 Dist. Sys. Improvements 863,136 247,000 - (128,810) 981,326 126,122 354,000 261,620 269,469 277,553 285,880 WS-11004 Supply Sys. Improvements 139,213 247,000 - (26,493) 359,720 187,227 254,000 261,620 269,469 277,553 285,880 Subtotal, Ongoing Projects 1,162,333 1,923,628 - (518,002) 2,567,959 749,183 2,025,250 1,981,508 2,039,454 2,099,138 2,160,613 CUSTOMER CONNECTIONS (FEE FUNDED) WS-80013 Water System Extensions 62,665 710,700 - (372,686) 400,679 71,918 732,021 753,981 776,601 799,899 823,896 Subtotal, Customer Connections 62,665 710,700 - (372,686) 400,679 71,918 732,021 753,981 776,601 799,899 823,896 GRAND TOTAL 11,499,445 6,092,625 3,027,320 (2,883,830)17,735,560 9,179,618 12,642,378 11,389,219 11,663,397 9,745,799 10,039,649 Funding Sources Connection/Capacity Fees 902,280 - 929,348 957,228 985,946 1,015,524 1,045,990 Other Utility Funds (Asset Mgmt, GIS Systems)268,418 - 295,260 304,118 313,242 322,640 332,320 Water Service Hydrant Replacement 1,224,608 1,261,346 1,299,188 1,338,164 1,378,310 Utility Rates 4,921,927 3,027,320 10,193,162 8,866,527 9,065,021 7,069,471 7,283,029 CIP-RELATED RESERVES DETAIL 6/30/2017 (Actual) 6/30/2018 (Unaudited) Reappropriations (excl. Bond Funded)1,292,081 8,555,942 Commitments (excl. Bond Funded)10,207,364 9,179,618 WATER UTILITY FINANCIAL PLAN February, 2017 32 | Page APPENDIX C : WATER UTILITY RESERVES MANAGEMENT PRACTICES The following reserves management practices shall be used when developing the Water Utility Financial Plan: Section 1. Definitions a) “Financial Planning Period” – The Financial Planning Period is the range of future fiscal years covered by the Financial Plan. For example, for the Water Utility Financial Plan delivered in conjunction with the FY 2015 budget, FY 2015 to FY 2021 is the Financial Planning Period. b) “Fund Balance” – As used in these Reserves Management Practices, Fund Balance refers to the Utility’s Unrestricted Net Assets. c) “Net Assets” - The Government Accounting Standards Board defines a Utility’s Net Assets as the difference between its assets and liabilities. d) “Unrestricted Net Assets” - The portion of the Utility’s Net Assets not invested in capital assets (net of related debt) or restricted for debt service or other restricted purposes. Section 2. Reserves The Water Utility’s Fund Balance is reserved for the following purposes: a) For existing contracts, as described in Section 3 (Reserve for Commitments) b) For operating and capital budgets re-appropriated from previous years, as described in Section 4 (Reserve for Re-appropriations) c) For cash flow management and contingencies related to the Water Utility’s Capital Improvement Program (CIP), as described in Section 5 (CIP Reserve) d) For rate stabilization, as described in Section 6 (Rate Stabilization Reserve) e) For operating contingencies, as described in Section 7 (Operations Reserve) f) Any funds not included in the other reserves will be considered Unassigned Reserves and shall be returned to ratepayers or assigned a specific purpose as described in Section 8 (Unassigned Reserves). Section 3. Reserve for Commitments At the end of each fiscal year the Reserve for Commitments will be set to an amount equal to the total remaining spending authority for all contracts in force for the Water Utility at that time. Section 4. Reserve for Re-appropriations At the end of each fiscal year the Reserve for Re-appropriations will be set to an amount equal to the amount of all remaining capital and non-capital budgets, if any, that will be re- appropriated to the following fiscal year in accordance with Palo Alto Municipal Code Section 2.28.090. WATER UTILITY FINANCIAL PLAN February, 2017 33 | Page Section 5. CIP Reserve The CIP Reserve is used to manage cash flow for capital projects and acts as a reserve for capital contingencies. Staff will manage the CIP Reserve according to the following practices: a) The following guideline levels are set forth for the CIP Reserve. These guideline levels are calculated for each fiscal year of the Financial Planning Period based on the levels of CIP expense budgeted for that year. Minimum Level 12 months of budgeted CIP expense Maximum Level 24 months of budgeted CIP expense b) Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and the Reserve for Commitments when funds are added or removed from to that reserve as a result of a change in contractual commitments related to CIP projects. Any other additions to or withdrawals from the CIP reserve require Council action. c) Minimum Level: i) Funds held in the Reserve for Commitments may be counted as part of the CIP Reserve for the purpose of determining compliance with the CIP Reserve minimum guideline level. ii) If, at the end of any fiscal year, the minimum guideline is not met, staff shall present a plan to the City Council to replenish the reserve. The plan shall be delivered by the end of the following fiscal year, and shall, at a minimum, result in the reserve reaching its minimum level by the end of the next fiscal year. For example, if the CIP Reserve is below its minimum level at the end of FY 2017, staff must present a plan by June 30, 2018 to return the reserve to its minimum level by June 30, 2019. In addition, staff may present, and the Council may adopt, an alternative plan that takes longer than one year to replenish the reserve, or that does so in a shorter period of time. d) Maximum Level: If, at any time, the CIP Reserve reaches its maximum level, no funds may be added to this reserve. If there are funds in this reserve in excess of the maximum level staff must propose to transfer these funds to another reserve or return them to ratepayers in the next Financial Plan. Staff may also seek City Council to approve holding funds in this reserve in excess of the maximum level if they are held for a specific future purpose related to the CIP. Section 6. Rate Stabilization Reserve Funds may be added to the Rate Stabilization Reserve by action of the City Council and held to manage the trajectory of future year rate increases. Withdrawal of funds from the Rate Stabilization Reserve requires Council action. If there are funds in the Rate Stabilization Reserve at the end of any fiscal year, any subsequent Water Utility Financial Plan must result in the withdrawal of all funds from this Reserve by the end of the next Financial Planning Period. WATER UTILITY FINANCIAL PLAN February, 2017 34 | Page Section 7. Operations Reserve The Operations Reserve is used to manage normal variations in costs and as a reserve for contingencies. Any portion of the Water Utility’s Fund Balance not included in the reserves described in Section 3-Section 6 above will be included in the Operations Reserve unless this reserve has reached its maximum level as set forth in Section 7(d) below. Staff will manage the Operations Reserve according to the following practices: a) The following guideline levels are set forth for the Operations Reserve. These guideline levels are calculated for each fiscal year of the Financial Planning Period based on the levels of Operations and Maintenance (O&M) and commodity expense forecasted for that year in the Financial Plan. Minimum Level 60 days of O&M and commodity expense Target Level 90 days of O&M and commodity expense Maximum Level 120 days of O&M and commodity expense b) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Operations Reserve are lower than the minimum level set forth above, staff shall present a plan to the City Council to replenish the reserve. The plan shall be delivered within six months of the end of the fiscal year, and shall, at a minimum, result in the reserve reaching its minimum level by the end of the following fiscal year. For example, if the Operations Reserve is below its minimum level at the end of FY 2014, staff must present a plan by December 31, 2014 to return the reserve to its minimum level by June 30, 2015. In addition, staff may present, and the Council may adopt, an alternative plan that takes longer than one year to replenish the reserve. c) Target Level: If, at the end of any fiscal year, the Operations Reserve is higher or lower than the target level, any Financial Plan created for the Water Utility shall be designed to return the Operations Reserve to its target level within four years. d) Maximum Level: If, at any time, the Operations Reserve reaches its maximum level, no funds may be added to this reserve. Any further increase in the Water Utility’s Fund Balance shall be automatically included in the Unassigned Reserve described in Section 8, below. Section 8. Unassigned Reserve If the Operations Reserve reaches its maximum level, any further additions to the Water Utility’s Fund Balance will be held in the Unassigned Reserve. If there are any funds in the Unassigned Reserve at the end of any fiscal year, the next Financial Plan presented to the City Council must include a plan to assign them to a specific purpose or return them to the Water Utility ratepayers by the end of the first fiscal year of the next Financial Planning Period. For example, if there were funds in the Unassigned Reserves at the end of FY 2015, and the next Financial Planning Period is FY 2016 through FY 2021, the Financial Plan shall include a plan to return or assign any funds in the Unassigned Reserve by the end of FY 2016. Staff may present an alternative plan that retains these funds or returns them over a longer period of time. WATER UTILITY FINANCIAL PLAN February, 2017 35 | Page APPENDIX D : DESCRIPTION OF WATER UTILITY OPERATIONAL ACTIVITIES This appendix describes the activities associated with the various operational activities referred to in Section 6B: Operations of this Financial Plan. Administration: Accounting, purchasing, legal, and other administrative functions provided by the City’s General Fund staff, as well as shared communications services, CPAU administrative overhead, and billing system maintenance costs. This category also includes Water Utility debt service and rent paid to the General Fund for the land associated with reservoirs and various other facilities. Customer Service: This category includes the Water Utility’s share of the call center, meter reading, collections, and billing support functions. Billing support encompasses staff time associated with bill investigations and quality control on certain aspects of the billing process. It does not include maintenance of the billing system itself, which is included in Administration. This category also includes CPAU’s key account representatives, who work with large commercial customers who have more complex requirements for their water services. Engineering (Operating): The Water Utility’s engineers focus primarily on the CIP, but a small portion of their time is spent assisting with distribution system maintenance. Operations and Maintenance: This category includes the costs of a variety of distribution system maintenance activities, including: • investigating reports of damaged mains or services and performing emergency repairs; • testing and operating valves; • monitoring water quality and reservoir levels; • monitoring the status of the different pressure zones; • flushing water at hydrants and other closed end points of the system; • building and replacing water services for new or redeveloped buildings; and • testing and replacing meters to ensure accurate sales metering. This category also includes a variety of functions the utility shares with other City utilities, including: • the Field Services team (which does field research of various customer service issues); • the Cathodic Protection team (which monitors and maintains the systems that prevent corrosion in metal tanks and reservoirs); and • the General Services team (which manages and maintains equipment, paves and restores streets after gas, water, or sewer main replacements, and provides welding services) Resource Management: This category includes water procurement, contract management, water resource planning, interaction with BAWSCA, the SFPUC, and the SCVWD, and tracking of legislation and regulation related to the water industry. February, 2017 36 | Page APPENDIX E : SAMPLE OF WATER UTILITY OUTREACH COMMUNICATIONS Attachment C * NOT YET APPROVED * 6053683 Resolution No. _________ Resolution of the Council of the City of Palo Alto Increasing Water Rates by 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) R E C I T A L S A. 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. B. On ____, 2018, the City Council held a full and fair public hearing regarding the proposed rate increase and considered all protests against the proposals. C. As required by Article XIII D, Section 6 of the California Constitution and applicable law, notice of the ________ 2018 public hearing was mailed to all City of Palo Alto Utilities water customers by _______, 2018. D. The City Clerk has tabulated the total number of written protests presented by the close of the public hearing, and determined that it was less than fifty percent (50%) of the total number of customers and property owners subject to the proposed water rate amendments, therefore a majority protest does not exist against the proposal. 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 July 1, 2018. 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 July 1, 2018. 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 July 1, 2018. 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 July 1, 2018. Attachment C * NOT YET APPROVED * 6053683 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 July 1, 2018. SECTION 6. The City Council finds as follows: a. Revenues derived from the water rates approved by this resolution do not exceed the funds required to provide water service. b. Revenues derived from the water rates approved by this resolution shall not be used for any purpose other than providing water service, and the purposes set forth in Article VII, Section 2, of the Charter of the City of Palo Alto. c. The amount of the water rates imposed upon any parcel or person as an incident of property ownership shall not exceed the proportional cost of the water service attributable to the parcel. 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. SECTION 8. 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. Attachment C * NOT YET APPROVED * 6053683 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 7-1-20187 dated 7-1-20176 Sheet No W-1-1 A. APPLICABILITY: This schedule applies to all separately metered single -family residential dwellings receiving Wwater Sservices from the City of Palo Alto Utilities. B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides Wwater Sservices. C. RATES: Per Meter Monthly Service Charge: Per Month For 5/8-inch meter ..................................................................................................... $ 16.7718.71 For 3/4 inch meter ..................................................................................................... 22.6025.21 For 1 inch meter ........................................................................................................ 34.2638.22 For 1 1/2 inch meter .................................................................................................. 63.4070.73 For 2-inch meter ........................................................................................................ 98.37109.75 For 3-inch meter ........................................................................................................ 209.11233.29 For 4-inch meter ........................................................................................................ 372.31415.36 For 6-inch meter ........................................................................................................ 762.81851.02 For 8-inch meter ........................................................................................................1,403.94566.29 For 10-inch meter ......................................................................................................2,219.92476.63 For 12-inch meter .......................................................................................................32,919.34256.93 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 ........................................................................................................................ $6.66 Tier 2 usage (All usage over 100% of Tier 1) ........................................................................ 9.4818 ATTACHMENT D 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 7-1-20187 dated 7-1-20176 Sheet No W-1-2 Drought Surcharges (deactivated): A drought surcharge will be added to the Customer’s applicable cCommodity Rrate for Tier 1 and Tier 2 Wwater usage when the City Council has determined that a Wwater reduction level is in effect for the City as described in Section D.3. The drought surcharges in the table below are measured in dollars per hundred cubic feet (ccf). Water Usage Reduction level Level 1 (10/15%) Level 2 (20%) Level 3 (25%) Tier 1 0.20 0.43 0.64 Tier 2 0.58 1.21 1.85 Temporary Service – Developers 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 Ccustomer’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 Wwater usage shall be calculated and billed based upon a level of 0.2 ccf per day rounded to the nearest whole ccf, based on Mmeter reading days of Sservice. 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 7-1-20187 dated 7-1-20176 Sheet No W-1-3 3. Drought Surcharge During period of Wwater shortage or restrictions on local Wwater use, the City Council may, by resolution, declare the need for citywide Wwater conservation at the 10/15%, 20% or 25% level. While such a resolution is in effect, a drought surcharge will apply. The purpose of the dDrought sSurcharge 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 7-1-20187 dated 7-1-20167 Sheet No W-2-1 A. APPLICABILITY: This schedule applies to all Wwater 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 Wwater Sservices. C. RATES: 1. Monthly Service Charge. METER SIZE 5/8 inch ........................................................................................................................... 50.00 3 inch ........................................................................................................................... 125.00 2. Commodity Rate: (per hundred cubic feet) ................................................................ $7.687.80 3. Drought Surcharges (deactivated): A drought surcharge will be added to the Customer’s applicable CCommodity Rrate when the City Council has determined that a Wwater reduction level is in effect for the City as described in Section D.5. The drought surcharges in the table below are measured in dollars per hundred cubic feet (ccf). Water Usage Reduction level Level 1 (10/15%) Level 2 (20%) Level 3 (25%) Surcharge 0.26 0.53 0.77 D. SPECIAL NOTES: 1. Monthly charges shall include the applicable monthly Sservice Ccharge in addition to usage billed at the commodity rate. 2. Any person or company applicant using a hydrant without first obtaining a valid Hydrant Meter Permit or any permittee using a hydrant without a Hydrant Meter Permit shall pay a fee of $50.00 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 7-1-20187 dated 7-1-20167 Sheet No W-2-2 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 revoked for failure to pay such fee. 3. A Mmeter deposit of $750.00 may be charged any applicant for a Hydrant Meter Permit as a prerequisite to the issuance of a permit and Mmeter(s). A charge of $50.00 per day will be added for delinquent return of hydrant Mmeters. A fee will be charged for any Mmeter returned with missing or damaged parts. 4. Any person or company using a fire hydrant improperly or without a permit, or who draws Wwater from a hydrant without a Mmeter 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 period of Wwater shortage or restrictions on local Wwater use, the City Council may, by resolution, declare the need for citywide Wwater conservation at the 10/15%, 20% or 25% level. While such a resolution is in effect, a drought surcharge will apply. The purpose of the dDrought sSurcharge 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 7-1-20186 dated 97-1-20165 Sheet No W-3-1 A. APPLICABILITY: This schedule applies to all public fire hydrants and private fire Sservice connections. B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides Wwater Sservices. C. RATES: 1. Monthly Service Charges Public Fire Hydrant .................................................................................................... $5.00 Private Fire Service: 2-inch connection .......................................................................................................$3.794.23 4-inch connection .......................................................................................................23.4226.13 6-inch connection ....................................................................................................... 68.0375.90 8-inch connection .......................................................................................................144.97161.73 10-inch connection .....................................................................................................260.70290.85 12-inch connection .....................................................................................................421.11469.81 2. Commodity (To be added to Service Charge unless Wwater 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 Wwater is used for any purpose other than fire extinguishing or testing and repairing the fire extinguishing facilities. Using hydrants and fire Sservices 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 Wwater and fire Sservice, the general Wwater Sservice 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 7-1-20186 dated 97-1-20165 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 Wwater if records and documentation are supplied by the Ccustomer. {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 7-1-20178 dated 7-1-20176 Sheet No W-4-1 A. APPLICABILITY: This schedule applies to Water Services to non-residential buildings, and multi-family residential dwellings served through a Master-Meter. 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 Wwater Sservices. C. RATES: Per Meter Monthly Service Charge Per Month For 5/8-inch meter .................................................................................... $ 16.7718.71 For 3/4-inch meter .................................................................................... 22.6025.21 For 1-inch meter .................................................................................... 34.2638.22 For 1 ½-inch meter .................................................................................... 63.4070.73 For 2-inch meter .................................................................................... 98.37109.75 For 3-inch meter .................................................................................... 209.11233.29 For 4-inch meter .................................................................................... 372.31415.36 For 6-inch meter .................................................................................... 762.81851.02 For 8-inch meter ....................................................................................1,403.94566.29 For 10-inch meter ....................................................................................2,219.92476.63 For 12-inch meter ....................................................................................32,919.34256.93 Commodity Rates: (to be added to Service Charge) Per Hundred Cubic Feet (ccf) Per Month All Pressure Zones Per ccf ............................................................................................................ $ 7.687.80 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 7-1-20178 dated 7-1-20176 Sheet No W-4-2 Drought Surcharges (deactivated): A drought surcharge will be added to the Customer’s applicable Ccommodity Rrate when the City Council has determined that a Wwater reduction level is in effect for the City as described in Section D.2. The drought surcharges in the table below are measured in dollars per hundred cubic feet (ccf). Water Usage Reduction level Level 1 (10/15%) Level 2 (20%) Level 3 (25%) Surcharge 0.26 0.53 0.77 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 Ccustomer’s bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. 2. Drought Surcharge During period of Wwater shortage or restrictions on local Wwater use, the City Council may, by resolution, declare the need for citywide Wwater conservation at the 10/15%, 20% or 25% level. While such a resolution is in effect, a drought surcharge will apply. The purpose of the Ddrought sSurcharge 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 7-1-20187 dated 7-1-20176 Sheet No W-7-1 A. APPLICABILITY: This schedule applies to non-residential Wwater Wservice supplying dedicated irrigation Mmeters in the City of Palo Alto and its distribution area. B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides Wwater Sservices. C. RATES: Per Meter Monthly Service Charge Per Month For 5/8-inch meter .................................................................................... $ 16.7718.71 For 3/4-inch meter .................................................................................... 22.6025.21 For 1-inch meter .................................................................................... 34.2638.22 For 1 1/2 inch meter .................................................................................... 63.4070.73 For 2-inch meter .................................................................................... 98.37109.75 For 3-inch meter .................................................................................... 209.11233.29 For 4-inch meter .................................................................................... 372.31415.36 For 6-inch meter .................................................................................... 762.81851.02 For 8-inch meter ....................................................................................1,403.94566.29 For 10-inch meter ....................................................................................2,219.92476.63 For 12-inch meter ....................................................................................32,919.34256.93 Commodity Rates: (to be added to Service Charge) Per Hundred Cubic Feet (ccf) Per Month All Pressure Zones Per ccf ............................................................................................................ $ 9.089.37 Drought Surcharges (deactivated): A drought surcharge will be added to the Customer’s applicable cCommodity Rrate when the City Council has determined that a Wwater reduction level is in effect for the City as described in Section D.2. The drought surcharges in the table below are measured in dollars per hundred cubic feet (ccf). 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 7-1-20187 dated 7-1-20176 Sheet No W-7-2 Water Usage Reduction level Level 1 (10/15%) Level 2 (20%) Level 3 (25%) Surcharge 0.53 1.25 2.02 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 Ccustomer’s bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. 2. Drought Surcharge During period of Wwater shortage or restrictions on local Wwater use, the City Council may, by resolution, declare the need for citywide Wwater conservation at the 10/15%, 20% or 25% level. While such a resolution is in effect, a drought surcharge will apply. The purpose of the Ddrought Ssurcharge is to recover revenues lost as a result of reduced consumption. {End}