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Home My WebLink About2019-03-06 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 6, 2019 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.Discussion and Status Update on the Electric Utility’s Overhead to Underground Conversion Discussion Program 2.Discussion of New Online Customer Portal Discussion 3.Staff Recommendation that the Utilities Advisory Commission Recommend that the City Action Council Adopt: (1) a Resolution Approving the Fiscal Year 2020 Wastewater Collection Financial Plan; and (2) a Resolution Increasing Wastewater Rates by 7% 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) 4.Discussion and Staff Update on Fiber and AMI Planning Discussion 5.Selection of Potential Topic(s) for Discussion at Future UAC Meeting Action NEXT SCHEDULED MEETING: April 3, 2019 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)). 12-Month Rolling Calendar Public Letter(s) to the UAC UTILITIES ADVISORY COMMISSION WEDNESDAY, March 6, 2019 – 7:00 P.M. COUNCIL CHAMBERS Palo Alto City Hall – 250 Hamilton Avenue Chairman: Michael Danaher  Vice Chair: Judith Schwartz  Commissioners: Arne Ballantine, Lisa Forssell, A. C. Johnston, Lauren Segal and Terry Trumbull  Council Liaison: Tom DuBois Presentation Utilities Advisory Commission Minutes Approved on: Page 1 of 11 UTILITIES ADVISORY COMMISSION MEETING MINUTES OF FEBRUARY 6, 2019 REGULAR MEETING CALL TO ORDER Chair Danaher called the meeting of the Utilities Advisory Commission (UAC) to order at 7:00 p.m. Present: Chair Danaher, Vice Chair Schwartz, Commissioners Forssell, Johnston, Segal, and Trumbull Absent: Commissioner Ballantine ORAL COMMUNICATIONS None. APPROVAL OF THE MINUTES Vice Chair Schwartz corrected her comments in the minutes as follows: (page 1) "She had talked to a Vice President of PepCo about undergrounding. She confirmed that pad-mounted transformers in newer underground areas are standard. Standards documents for transformers in underground districts in D.C. needed work. Vice Chair Schwartz has encouraged colleagues at DOE to document best practices and alternatives for undergrounding." (Page 5) "Vice Chair Schwartz remarked that having solar resources visible in the community can be more meaningful … ." "The Worcester Regional Transit Authority is using solar on a large building that will charge electric buses, which can have value for transit and other things." (Page 8) "Vice Chair Schwartz agreed that the UAC could form a fiber subcommittee again. She asked if informing the CAC about AMI or informing the UAC about fiber would be more efficient." "Vice Chair Schwartz suggested encouraging members of the CAC to apply for a seat on the UAC. Being informed and responsible for a range of issues could be worthwhile." Commissioner Trumbull moved to approve the minutes from the January 9, 2019 meeting as amended. Commissioner Segal seconded the motion. The motion carried 6-0 with Chair Danaher, Vice Chair Schwartz, and Commissioners Forssell, Johnston, Segal, and Trumbull voting yes, and Commissioner Ballantine absent. AGENDA REVIEW AND REVISIONS None. REPORTS FROM COMMISSIONER MEETINGS/EVENTS None. GENERAL MANAGER OF UTILITIES REPORT Dave Yuan, Strategic Business Manager, and Jonathan Abendschein, Assistant Director of Resource Management, delivered the General Manager’s Report. Hydrologic Conditions – Recent storms have resulted in reservoir conditions that are average or slightly above-average compared to historical levels. Cumulative precipitation in the Central Sierras for the 2018-19 water year is currently at 116% of average for this date, and 105% of average in the Northern Sierras. And DRAFT Utilities Advisory Commission Minutes Approved on: Page 2 of 11 statewide snowpack levels are currently 125% of average for this date. If the rest of the winter stays dry from here on the water year precipitation could still end up below average, but the year is off to a good start. Upgrade Downtown Project Nears Final Stages of Construction – The Upgrade Downtown project along University Avenue and neighboring streets of downtown is moving toward the final stages of construction. Construction on the final block of University Avenue between High Street and the ‘on and off’ ramps at Alma Street is expected to begin later this week or the first part of next week, depending upon weather conditions. City staff have developed a traffic control plan with the contractor to alleviate traffic congestion and ensure the safety of motorists, pedestrians and cyclists. Drivers are encouraged to detour to roads such as Lytton, Forest, or Hamilton to enter downtown. The major utility infrastructure work in downtown is expected to be complete by the end of March 2019. Project details, including maps, traffic control plan and construction schedule are available at upgradedowntownpa.com. Upcoming PG&E Gas Pipeline Work in Palo Alto – As part of its gas pipeline safety and maintenance program, PG&E will be replacing sections of its gas transmission pipeline running through Palo Alto. Construction will occur in several locations and is expected to begin around mid-February and continue through July. City staff are communicating project details with affected stakeholders, including residents, schools and businesses, and confirming that PG&E has proper traffic controls in place to ensure safe routes around the construction areas for bicyclists, pedestrians and motorists. Project details, including construction schedule and maps, are posted in a news item on our home webpage, and will be updated as more information becomes available. PG&E is also proposing to remove 11 trees that are close to the pipeline which the utility views as problematic. Most of these trees are located on private property. Urban Forestry staff continues to meet with PG&E to coordinate the process for outreach, permitting, notification, and tree replacements. New Stanford Hospital Marks Final Project of Business New Construction Program – Stanford Hospital recently completed a set of major efficiency upgrades installed under the utility’s Business New Construction program. Stanford installed high efficiency lighting and controls, variable speed drives on fans and water pumps, energy efficient glazing on windows and hot aisle containment for the data center. The hospital was built 21% more efficient than the baseline and will result in a continuing savings of over 4.2 million kWh/year, enough to power over 7000 homes. This one project is equivalent to approximately 70% of CPAU’s electric efficiency savings for FY 2017. This is the last project to go through the Business New Construction program, which officially stopped taking applications in 2017. New BAWSCA Video Highlights Accomplishments – I would like to make you aware of a new video titled “15 Years of BAWSCA: Representing Your Voice,” which highlights the value BAWSCA has provided to the 26 member agencies that purchase water from the SFPUC. BAWSCA, as a joint action agency, delivers critical operational support and advocacy on behalf of the Bay Area SFPUC wholesale customers that none of us could effectively deliver on our own. Some notable achievements featured include: its critical oversight role in the $4.8 billion Water Supply Improvement Projects; saving member agencies $40M over the past 15 years by ensuring the SFPUC allocates costs properly to wholesale customers, saving members $62M over 21 years by issuing bonds to prepay debt owed to the SFPUC for capital projects; negotiating the 25-year Water Supply Agreement; and saving 2.9 billion gallons of water through conservation programs, helping to make the Bay Area’s per capita water use some of the lowest in the state. I encourage you to view the video if you want to understand the important role BAWSCA plays on behalf of Palo Alto water customers. The video can be found on Vimeo, and we will forward you a link. I also want to note that BAWSCA’s General Manager, Nicole Sandkulla, is here this evening to speak to the WSA amendments on your agenda. In response to Commissioner Forssell's question regarding the portions of Stanford University served by the Water Utility, Abendschein advised that Stanford Research Park, Stanford Hospital, and the Stanford Shopping Center were located within the City of Palo Alto. Utilities Advisory Commission Minutes Approved on: Page 3 of 11 COMMISSIONER COMMENTS None. UNFINISHED BUSINESS None. NEW BUSINESS ITEM 1: ACTION: Utilities Advisory Commission Recommendation that the City Council Adopt a Resolution Approving the November 2018 Amended and Restated Water Supply Agreement Between the City and County of San Francisco and Wholesale Customers in Alameda County, San Mateo County, and Santa Clara County and Authorizing the City Manager to Execute the Amended and Restated Water Supply Agreement. Jonathan Abendschein, Assistant Director of Resource Management, introduced Nicole Sandkulla, General Manager of Bay Area Water Supply and Conservation Agency (BAWSCA), who was instrumental in achieving the negotiated amendments. Chair Danaher requested Ms. Sandkulla share information regarding BAWSCA. Nicole Sandkulla reported BAWSCA is a special district, which was enabled in 2002 through special legislation sponsored by the 26 wholesale water customers of the San Francisco Regional Water System (System). BAWSCA's 26 member agencies, also known as wholesale customers, serve 1.8 million residential customers and more than 40,000 businesses and community organizations across three counties. The wholesale customers rely on the System for some to all of their water supply. The wholesale customers are connected through a Water Supply Agreement (WSA), which is a unique structure in a wholesale/retail relationship for water. The contract resulted from a lawsuit filed by the City of Palo Alto against the City and County of San Francisco (San Francisco) in the 1970s. The contract exists to protect the financial and water supply interests of the wholesale customers. BAWSCA has a staff of eight and an office located in San Mateo. The Board of Directors is comprised of one representative from each member agency. BAWSCA focuses its efforts on the goal of a reliable supply of high-quality water at a fair price. The WSA was renegotiated most recently in 2009. BAWSCA administers the WSA on behalf of the wholesale customers and ensures each agency pays its fair share in proportion to its use. In administering the contract, BAWSCA discovered some provisions that needed amending. BAWSCA proposed some amendments, and San Francisco proposed some amendments. Negotiations have produced a solid set of amendments that do not stray from policy positions embedded in the contract. In answer to Commissioner Trumbull's inquiry regarding audits of BAWSCA by an agency similar to the Local Agency Formation Commission of Santa Clara County (LAFCO), Sandkulla advised that the San Mateo and Santa Clara LAFCOs reviewed BAWSCA in 2005 to ensure efforts were not duplicated and boundary issues had been resolved. The reviews found no issues. Abendschein indicated staff requests review of the contract so that the item can be placed on the City Council's March 4 Consent Calendar. Adoption needs to occur quickly. Lisa Bilir, Resource Planner, disclosed that in September the City authorized BAWSCA to negotiate with San Francisco to amend the WSA, and the negotiations led to the proposed amendments. Importantly, the amendments do not change the basic contract structure of the WSA or the City's fundamental rights. Amendment 1 concerns oversight of the San Francisco Public Utilities Commission (SFPUC) Capital Improvement Program (CIP). SFPUC has an ongoing CIP to maintain the integrity of the System. Wholesale customers are responsible for a portion of capital projects with an estimated cost of $2 billion over ten years. Amendment 1 establishes a formal process for SFPUC and BAWSCA to engage in development of a 10-year CIP and to comment on proposed changes to the water supply and delivery targets. Under the amendment, BAWSCA and wholesale customers will have the ability to oversee and scrutinize SFPUC's capital program, which is a major factor in rate setting. Amendment 2 concerns the Tier 1 Drought Plan, which is the formula Utilities Advisory Commission Minutes Approved on: Page 4 of 11 SFPUC uses to allocate water between retail and wholesale customers during drought. If the Tier 1 formula had been applied during the most recent drought, retail customers would have been allocated more water during the drought than during non-drought years. The Tier 1 formula was not applied during the recent drought because of state-mandated drought reductions. Amendment 2 will correct the Tier 1 Drought Plan to require retail customers conserve at least 5 percent of water during a drought. Amendment 2 benefits Palo Alto by ensuring a more equitable allocation of water during a drought. Amendment 3, an administrative amendment, extends the time for SFPUC to make water supply decisions from 2018 to 2028 so that SFPUC can gather information regarding future water supplies. System costs are allocated one-third to retail customers and two-thirds to wholesale customers based on usage of the customer groups. In addition, System costs for facilities known as the Hetch Hetchy Enterprise are allocated 55 percent to power customers and 45 percent to water customers. Because of the cost allocation, proper designation of assets as water, power, or joint is very important. In answer to Vice Chair Schwartz's query regarding use of the formula to calculate the proportional annual water usage when reviewing rate design, Abendschein reported the concept may be raised in future discussions of electric financial forecasts and rate studies and electric cost of service and rate adjustments. Vice Chair Schwartz felt the concept of proportional usage could be an equitable method for setting rates. Bilir continued the presentation, stating in fiscal year 2010-2011 the SFPUC unilaterally changed the classification of a small number of Hetch Hetchy Enterprise assets from power to joint, which would have added $50 million in obligations to the wholesale customers. BAWSCA disputed the changes and has been trying to resolve it. Amendment 4 resolves the dispute and the issue more broadly by documenting and fixing the asset classification for each asset in the Hetch Hetchy Enterprise. The amendment reflects SFPUC and BAWSCA's agreement for a specific cost allocation for seven capital projects that are very important to SFPUC and wholesale customers, even though the underlying asset may have a different classification than the project. Amendment 4 fixes the asset classifications of 500 assets, prevents any future unilateral changes, mitigates the financial risk for two high-risk and possibly very expensive projects, eliminates the need for an expensive new pipeline, and ensures power customers pay toward critically needed projects that maintain and enhance system reliability. Overall, Amendment 4 ensures wholesale customers pay only their fair share for upcoming capital work. In response to Commissioner Segal's inquiry about the unilateral change being a change in the use of the assets or a mistake, Sandkulla reported the use of the asset and the asset's function did not change. The assets were older and had been paid off. The SFPUC accounting department determined the assets were new because they had been paid off, and the classification could be changed because the assets were new. In addition, water runs through the asset; therefore, the classification could be changed from power to joint. The change was made administratively, and BAWSCA staff questioned it. Commissioner Segal understood the amendment would prevent a unilateral change of an asset classification, and the process to jointly change a classification could take five years. In answer to her question about BAWSCA's ability to change a classification to benefit wholesale customers, Sandkulla explained that BAWSCA agreed to reclassify projects rather than assets because the projects would benefit the wholesale customers. That consideration may be employed again used in the future. In reply to Commissioner Forssell's request for descriptions of the two high-risk and possibly very expensive projects, Sandkulla reported one project involved installing a valve at the end of the Mountain Tunnel to maintain greater control of flow. SFPUC wanted to designate the project as a water project, but BAWSCA wanted it to remain a joint project. The second project proposed interim repairs to the Moccasin Dam. BAWSCA accepted the classification of the project as water in order to have repairs performed quickly, but the dam remains a joint project. Bilir further reported the Wholesale Capital Fund is a fund for revenue collected from wholesale customers for a set of capital projects funded by revenues. The balance is currently reconciled every five years. Amendment 5 provides for annual reconciliation, which will match the SFPUC's budget requirement, Utilities Advisory Commission Minutes Approved on: Page 5 of 11 appropriation process, and project spending needs. Regardless of the frequency of reconciliation, wholesale customers continue to be responsible for actual revenue-funded capital expenditures. This amendment ensures SFPUC has the necessary resources for capital improvements that benefit Palo Alto without holding an excessive amount of wholesale customer funds. Amendment 6 will update the Water Supply Improvement Program completion date from December 31, 2015 to an estimated date of December 31, 2021. Amendment 7 more accurately describes the operational details of the Regional Groundwater Storage and Recovery Project (RGSRP), which benefits the region. Palo Alto is not a party to this project. On December 11, 2018, the SFPUC approved the Amended and Restated WSA pending approval by wholesale customers. BAWSCA recommends member agencies adopt the amendments by March 31, 2019. In answer to Commissioner Trumbull's inquiry regarding environmental analysis, Bilir advised that the City Attorney's Office has approved a statement indicating this is not considered a project. In response to Commissioner Johnston's question about the number of wholesale customers that have approved the amendments and about the possibility of wholesale customers raising questions, Sandkulla reported five member agencies have approved the amendments. The remaining agencies have scheduled the amendments for consideration and anticipate taking action prior to March 31. She did not expect any wholesale customers raising questions or concerns. Commissioner Johnston understood the amendments provide BAWSCA some ability to get insight into the CIP and asked if BAWSCA or wholesale customers could object to capital improvements. Sandkulla remarked that BAWSCA and wholesale customers could do very little to influence capital improvements. SFPUC does not report to anybody, but a public process has been effective in obtaining SFPUC cooperation. In reply to Commissioner Forssell's query regarding SFPUC's allocation increasing under the Tier 1 Drought Plan in small drought conditions, Sandkulla explained that the percentages in the table are not as effective as anticipated in 2001. Changes in water conservation and differences in demand make determining the right number for future use difficult. The easier approach is to retain the table, but at a minimum require SFPUC to cut back water use by 5 percent. If the table overcomes it, there would be more of a cutback. The amendment includes language for a future discussion of the issue. With respect to Commissioner Forssell's question about the 5-percent being a reduction of the previous year's use or a reduction of the total, Sandkulla advised that the cutback is based on water use just prior to the drought. The calculation is not perfect, and San Francisco ultimately accepted a minimum cutback. In response to Commissioner Forssell's request for information about the need for an expensive new pipeline, Sandkulla reported in January 2018 SFPUC included a project for a new water-only pipeline in its CIP. The new pipeline would parallel the existing Moccasin pipeline. The Moccasin pipeline is a power facility, but water and power use it. SFPUC proposed a new pipeline because Moccasin may not be a cost-effective power operation. If the new pipeline was eliminated from the CIP, SFPUC was not willing to invest in repairing the Moccasin pipeline; therefore, it probably would fail. BAWSCA supported a repair project because repairs to a pipeline cost considerably less than constructing a new pipeline. The pipeline will remain a joint asset, but water and power will share the repair cost. ACTION: Commissioner Trumbull moved to recommend the City Council adopt a resolution approving the November 2018 Amended and Restated Water Supply Agreement between the City and County of San Francisco and Wholesale Customers in Alameda County, San Mateo County, and Santa Clara County and authorize the City Manager to execute the Amended and Restated Water Supply Agreement. Commissioner Johnston seconded the motion. The motion carried 6-0 with Chair Danaher, Vice Chair Schwartz, and Commissioners Forssell, Johnston, Segal, and Trumbull voting yes, and Commissioner Ballantine absent. ITEM 2: DISCUSSION: Staff Presentation on Utilities Workforce Update: Succession Planning, Recruitments and Vacancies. Herb Borock noted slides 2 and 3 reflect 42.5 vacancies, but slide 5 reflects 43.5 vacancies. Slide 7 reflects two management positions that are not highlighted in the previous charts. Graphs of vacancies and Utilities Advisory Commission Minutes Approved on: Page 6 of 11 retirement eligibility by bargaining unit would be interesting. He suspected the number of management employees eligible for retirement is high. Dave Yuan, Strategic Business Manager, reported the 2018 Utilities Strategic Plan identifies workforce as one of four priorities. The objective for workforce is to ensure long-term staffing in order to continue to provide essential utility services. In response to Vice Chair Schwartz's inquiry regarding the Assistant City Manager/Utilities General Manager position, Yuan advised that the position will be reclassified as Utilities General Manager in the fiscal year (FY) 2019-2020 budget. Yuan further reported wastewater, gas, water, and electric operations has the highest number of vacancies at 26. The number of vacancies in electric operations may begin affecting daily operations and emergency response times. Staff is actively recruiting for 32 of the total 42.5 vacant positions. Eight positions are hard to fill because they require unique skills and the market is quite competitive. Tomm Marshall, Assistant Director of Utility Operations, indicated one of the key positions in electric operations is Lineperson/Cable Splicer. The position has not been fully staffed in the last ten years, and currently six positions are vacant. The position of Compliance Technician requires the same skills as a Lineperson, and two positions are vacant. The position of System Operator has also had ongoing vacancies for a number of years. Currently, two positions are vacant. The Assistant Director of Engineering position has been vacant for two years. The Assistant Director of Operations, Manager of Electric Operations, and Electric Supervisor positions will be vacant in the next two to three years due to retirement. Retirement is a concern industry wide. Recruiting and retaining staff is a particular problem in the Bay Area due to the high cost of living and commute time. Lineperson wages have escalated faster in other cities than in Palo Alto. At the end of a five-year training period, an apprentice Lineperson is not ready to work on his own. Another five years of training is needed before a Lineperson can lead a crew or work alone. Staff is able to recruit persons for entry-level positions but not mid-level positions. In addition, staff is having difficulty finding people with the skills needed for senior-level positions. Employees are working out of class, rotating through jobs, and being promoted in order to fill needed positions. Labor negotiations are underway with Service Employees International Union (SEIU) and will begin in June with Utilities Management and Professional Association of Palo Alto (UMPAPA). When an employee's retirement date is known, another employee will work with the retiring employee to learn his duties and responsibilities prior to his departure. Staff is utilizing contract services and recently retired persons to fill vacant positions. Long-term strategies to increase staffing include explore market-based compensation for critical and hard-to-fill positions; hire more resources for recruitment; evaluate retention pay options; develop and implement succession strategies such as professional development and training, recruitment, and market-based compensation; and assess department reorganization. In reply to Commissioner Johnston's queries regarding negotiation of salaries for union jobs, Marshall explained that increasing salaries or implementing market-based compensation has to be negotiated with unions. Yuan added that the City has the right to meet and confer with a union regarding compensation for at-risk positions, which means negotiations may occur outside regular contract negotiations. As the City negotiates pay increases, other cities are negotiating pay increases as well. In answer to Commissioner Forssell's question regarding the potential length of negotiations, Marshall related that negotiations typically take months, not years. Sandra Blanch, Assistant Director of Human Resources, added that the labor agreement reached in December required about six months of negotiations. The last three labor contracts have addressed Lineperson compensation, but the market rate changes rapidly. Staff is exploring the possibility of retention pay. In response to Chair Danaher's inquiries about training and education for Lineperson, Marshall explained that applicants are high school graduates and sometimes graduates of "colleges" that teach basic skills. An Utilities Advisory Commission Minutes Approved on: Page 7 of 11 apprentice linesman will alternate between training and working in the field over the five-year apprenticeship period. In answer to Commissioner Forssell's queries regarding a cost comparison of contract services and employees, Marshall reported an employee is less expensive in the current market. Contract services may cost as much as 25-50 percent more than an employee. Yuan added that CPAU recently awarded a contract for services on an as-needed basis at a cost of $1.5 million per year for three years. The contract will provide four to six people to work as needed. Jonathan Abendschein, Assistant Director of Resource Management, clarified the contract as also including equipment, overhead, etc. In reply to Vice Chair Schwartz's question about recruiting PG&E workers given the possibility of PG&E seeking bankruptcy protection, Marshall advised that staff has contacts at PG&E and attempts to recruit their employees. The challenge with recruiting employees from other cities or companies is the employee has to leave one union, the International Brotherhood of Electrical Workers (IBEW), for SEIU. Vice Chair Schwartz remarked that the City should consider offering unusual benefits, such as housing, that will attract workers. Recruitment needs to be more systemic. Yuan indicated staff has been attending job fairs. In response to Commissioner Segal's inquiry regarding reasons employees leave, Marshall stated employees typically leave for higher pay and a more affordable cost of living. Housing is critical because employees need to live close enough to Palo Alto to respond in an emergency situation. If employees need hours to travel to the City, the recovery period may be extended. Commissioner Segal suggested the City may need to consider housing at least during the week for regular employees or on-call employees. In answer to her question regarding implementation of long-term strategies, Marshall related that CPAU has a succession strategy. The challenges are the number of employees facing retirement and the few employees with experience between entry-level and retirement-age. Vice Chair Schwartz commented on staff not attending conferences where they could become acquainted with colleagues who could benefit CPAU. CPAU needs to recruit senior management who will attract additional employees. Staffing challenges cannot be resolved with entry-level people. Blanch related staff's efforts to recruit from other agencies. A couple of candidates from Long Beach and Hawaii began work for CPAU in 2018. In answer to Chair Danaher's query regarding the salary range for Lineman and equivalent positions, Yuan indicated the salary for Linesman and Compliance Technician at the journeyman level is $125,000-$130,000 per year. Chair Danaher remarked that staffing is one step away from an emergency situation, and the City Council should ensure financial restrictions are not an issue for hiring. Commissioner Forssell did not understand why a union would not agree to a pay increase. The situation may be similar to increasing construction costs in that CPAU may simply have to pay the prevailing wage for employees because utilities have to be safe and reliable. She concurred with making the Council aware of the challenges. Vice Chair Schwartz recalled the Council's direction to keep utility rates below PG&E's rates. That would be a silly goal if Utilities cannot operate due to the lack of staff. The UAC needs to support staff in challenging that goal. Chair Danaher disagreed with the need to challenge the goal because staffing costs could increase measurably without increasing the overall budget measurably. In response to his question regarding union representation, Marshall stated SEIU represents trade jobs and UMPAPA represents management employees. ACTION: None Utilities Advisory Commission Minutes Approved on: Page 8 of 11 ITEM 3: DISCUSSION: Upcoming Home Energy and Water Reports Program. Lacey Lutes, Utility Program Manager, reported the Home Energy Reports Program began in 2010, and the Home Water Reports Program was added in 2013. In 2015, the program accounted for 22.3 percent of electric savings and 64.9 percent of gas savings. In reply to Chair Danaher's question about overall gas usage, Lutes explained that the program accounted for 1.46 percent of residential gas savings. Jonathan Abendschein, Assistant Director of Resource Management, clarified that citywide residential gas usage decreased 1.46 percent because of this program. Vice Chair Schwartz believed 22 percent and 65 percent are misleading numbers because 65 percent of 1 percent is really different from 65 percent. Lutes continued her presentation, stating of all the programs CPAU is mandated to operate in order to provide energy savings for the City, this program accounted for a significant percentage of savings. Abendschein related that energy efficiency generates small savings year after year, but the savings add up to big savings over time. CPAU judges itself on overall savings. These numbers reflect the contribution of the program to CPAU's portfolio of savings. In answer to Chair Danaher's question of whether this program was CPAU's best efficiency promotion program, Abendschein responded yes. Lutes further reported the reports program was one of CPAU's most cost-effective programs for the total dollar amount spent versus the energy savings. The program ended in 2015, but staff intends to relaunch the program and has issued a Request for Proposals (RFP) for a single sign-on solution for customers. The new platform will include best practices and clear statements about the assumptions used for each household. In response to Vice Chair Schwartz's query regarding demographic data for a home office, Lutes advised that the program addresses electric vehicle (EV) ownership and solar power. She is negotiating a contract for a reporting program that can adjust comparisons for factors such as solar power, EVs, and electrification. Vice Chair Schwartz expressed concern that the household comparison may be outdated and suggested comparisons include some of the newer concepts. Perhaps the UAC could see a demonstration of the portal. Lutes clarified that the comparisons are not new but have solid results. The new program will have energy challenges, which have not been used in Palo Alto previously. Abendschein indicated staff will provide a portal demonstration in March. Staff has created flexibility in the contract to implement best practices, to generate comparison reports, and to implement additional concepts as they become accepted. Chair Danaher remarked that more data and comparisons will be available once advanced metering infrastructure (AMI) is implemented. In response to Commissioner Trumbull's query regarding staff obtaining results from the program, Lutes disclosed staff will work with the consultant to launch the program, and then the consultant will run the program. Under the prior program, most customer complaints were caused by a lack of understanding of the comparisons. In response to those complaints, staff has developed a separate cohort for solar customers. Vice Chair Schwartz commented that staff may not have received all customer comments because, based on her experience, the vendor removed customers who asked questions from the program. Abendschein related the ability of this program to serve as an outreach and marketing channel. It will be tied to other programs and features that allow people to take action. It can also be a channel for positive interaction between staff and customers. ACTION: None Utilities Advisory Commission Minutes Approved on: Page 9 of 11 ITEM 4: DISCUSSION: Staff Presentation on Preliminary Rate Changes for Electric, Gas, Wastewater Collection, and Water Utilities for FY 2020. Eric Keniston, Senior Resource Planner, noted the projections include refuse rates for information only. Staff will complete gas and water cost of service adjustment (COSA) updates in 2019, and wastewater COSA updates are planned for 2020. Staff projected a 5-percent overall residential rate increase for fiscal year 2019. The projection has changed based on ending reserves for FY 2018. For FY 2020, staff projects a 9-percent rate increase for electric, a 10-percent increase for gas, a 7-percent increase for wastewater, a 4-percent increase for water, and no increase for refuse. Jonathan Abendschein, Assistant Director of Resource Management, recalled staff talking with the Finance Committee about ways to contain costs in each budget cycle without sacrificing service. Staff has advanced the preliminary rate forecast so that division heads can understand the rate outlook for the next year and focus their efforts on efficiencies prior to submitting their proposed budgets. In addition, staff continues to review personnel actions in order to operate efficiently and handle vacancy issues and to regularly review performance metrics and expenditures. Keniston further reported the Supply Operations Reserve balance is currently below the minimum guideline. Staff can utilize the Hydroelectric Stabilization Reserve or the Special Projects Reserve to raise the balance above the minimum guideline. Staff projects 3-5 percent rate increases beyond FY 2020. All utilities are facing declining sales as usage moves into the historical long-term decline. The Distribution Operations Reserve balance is projected to remain around the minimum guideline and increase over time. In reply to Chair Danaher's query about increasing the Supply Operations Reserve balance by $20 million over the next few years, Keniston indicated that is staff's intent. In response to Commissioner Johnston's questions about the reason the projection jumped from 3 to 9 percent, Keniston explained the increases in electric commodity costs and capital project costs caused the projection to increase. When sales decrease, rate increases are spread over fewer and fewer units. Within the projection for gas rates, a 15-percent distribution rate increase equates to about a 10-percent overall bill impact. The projection increased based on plans to resume annual water main replacement projects, cross- bore contingency costs, and regional backbone transportation cost increases. In answer to Vice Chair Schwartz's inquiry about the effect of PG&E seeking bankruptcy protection or selling its gas operation, Abendschein indicated staff continues to explore the possibilities. Staff is less concerned about CPAU's direct exposure and more concerned about indirect exposure such as loss of privileges on the transmission pipeline or PG&E passing costs via the transmission access charge. The Northern California Power Agency (NCPA) is assisting staff with a response on that front. Keniston continued the presentation, stating Electric Utility revenues are below costs and projected costs; therefore, 10-percent rate increases will be needed for the next two or three years. With the rate increase, the Operations Reserve balance will fall within the minimum and maximum guidelines. The minimum guideline level is $6 million, so the Operations Reserve will provide only a small cushion. For wastewater, staff proposes a 7-percent rate increase. Staff anticipates an increased amount of capital work on the Palo Alto distribution system and the Water Quality Control Plant (WQCP). Wastewater collection does not have much debt service, but most of the WQCP capital expense will be related to debt service. Operations Reserves are small and will draw down quickly such that staff expects the balance will reach the minimum guideline balance by FY 2022. A 7-8 percent increase will cause a $2.50-$3.00 per month bill impact. Staff proposes a 4-percent overall water rate increase and plans to create a separate commodity rate component for pass- through. This is a good time for a separate component as the SFPUC does not appear to be planning rate increases until 2022 or 2023. In the water COSA, staff is evaluating a merger of all residential meter charges into one charge for all residential customers. Currently, SFPUC has a $4 billion project for seismic improvements to the Hetch Hetchy system. In future years, many capital improvements will be needed. The cost of water accounts for about 40 percent of the utility's costs. From 2014-2024, staff projects average Utilities Advisory Commission Minutes Approved on: Page 10 of 11 overall 4-percent cost increases. Capital investments account for slightly more than 50 percent of distribution-related costs. Over the last five years, distribution costs have been increasing slowly, but staff believes they will increase faster to 2024. If a project to install backup generators at pumping stations does not materialize, near-term costs could decrease. The cost of underground construction has increased precipitously since 2010. Palo Alto's median bill is approximately 12 percent higher than the average bill of comparable cities. Chair Danaher commented that a comparison of median monthly residential bills is not meaningful if lots and yards vary greatly in size. A comparison based on cost per cubic foot could be more meaningful. Commissioner Forssell interpreted the chart as a comparison of bills for usage of 4 ccf, 8 ccf, and 18 ccf. Keniston further reported water costs increased due to reservoir infrastructure in the Foothills. Cost containment strategies could include reducing the number of reservoirs in the Foothills or instituting an elevation surcharge. In response to Vice Chair Schwartz's query about reallocating some of those resources to fire prevention, Keniston advised staff does allocate a portion of costs to fire protection rates and can consider allocations to other funds. Keniston continued the presentation, stating over the last five years, rates have increased on average 6.5 percent per year. Rates for comparable cities have increased by 9 percent per year. For FY 2020, CPAU will probably have an 8-percent cost decrease due to one-time capital decreases. If other revenues such as interest income or capacity fees decrease, staff may have to increase rates more. Staff anticipates overall costs will decrease slightly over the next few years. When the SFPUC rate increases take effect, CPAU's costs will begin to rise. The Operations Reserve balance currently falls well within the minimum and maximum guidelines. In response to Chair Danaher's question regarding UAC action on rate proposals, Keniston explained the Proposition 218 notice requirement for water and wastewater rates. Staff will present the water and wastewater rate proposals to the UAC in March and the Finance Committee in April. Electric and gas rates will be presented in the next two to three months. Commissioner Johnston recommended staff communicate the cost drivers for rate increases to the Finance Committee. Vice Chair Schwartz suggested staff also illustrate the fixed costs versus variable costs based on usage. In reply to her question about the concentration of EVs in Palo Alto not affecting electric revenue, Keniston reported EVs do not use a lot of energy on a kilowatt per hour (kW h) basis. EVs do create demand issues, which could drive up costs because of the need to replace transformers. The increase in residential usage has been countered with a decrease in commercial usage of electricity. Chair Danaher agreed with Vice Chair Schwartz's point about illustrating costs. He commended staff for including the overall percentages, cost containments, and the chart showing the cost of undergrounding. CPAU should have a list of capital projects it can accelerate if staff anticipates a recession such that costs might decrease. ACTION: None ITEM 5: Discussion: Staff Update and Discussion of Fiber and AMI Planning. Dave Yuan, Strategic Business Manager, reported staff met with the Citizens Advisory Committee in January and provided an update regarding the Fiber to the Node (FTTN) RFP. Staff continues to meet with the City Attorney's Office to review the RFP. CPAU will host the NorCal Water AMI consortium meeting the following Wednesday. A Council update is tentatively scheduled for March 2019. Utilities Advisory Commission Minutes Approved on: Page 11 of 11 ACTION: None ITEM 6: ACTION: Selection of Potential Topic(s) for Discussion at Future UAC Meeting and Potential Designation of UAC Ad Hoc Subcommittee(s). Vice Chair Schwartz requested a discussion around citizens' misperceptions about their bills tracking usage. Catherine Elvert, Utilities Communications Manager, reported staff investigated a customer's complaint on Nextdoor about his high water bill. The high water bill occurred four or five months prior to the message appearing on Nextdoor. Staff encouraged the customer to contact customer service immediately when he noticed a spike in the water bill. The resident seemed to recall construction work in front of the house, and staff determined the work was not performed by City crews. Given the length of time that had passed, staff could not do much more to aid the resident. ACTION: None NEXT SCHEDULED MEETING: March 6, 2019 Meeting adjourned at 9:31 p.m. Respectfully Submitted Tabatha Boatwright City of Palo Alto Utilities Utilities Advisory Commission Minutes Approved on: April 9, 2019 Page 1 of 8 UTILITIES ADVISORY COMMISSION MEETING FINAL MINUTES OF MARCH 6, 2019 REGULAR MEETING CALL TO ORDER Vice Chair Schwartz called the meeting of the Utilities Advisory Commission (UAC) to order at 7:00 p.m. Present: Vice Chair Schwartz, Commissioners Forssell, Johnston, Segal, and Trumbull Absent: Chair Danaher, Commissioner Ballantine ORAL COMMUNICATIONS None. APPROVAL OF THE MINUTES Commissioner Trumbull moved to approve the minutes of the February 6, 2019 meeting as presented. Commissioner Forssell seconded the motion. The motion carried 5-0 with Vice Chair Schwartz and Commissioners Forssell, Johnston, Segal, and Trumbull voting yes, and Chair Danaher and Commissioner Ballantine absent. AGENDA REVIEW AND REVISIONS None. REPORTS FROM COMMISSIONER MEETINGS/EVENTS Vice Chair Schwartz reported she attended the Water Advanced Metering Infrastructure (AMI) Norcal meeting led by the City of Palo Alto Utilities (CPAU), where she learned that AMI technology for water is not as developed as for electricity. CPAU has an opportunity to do some interesting and novel things with AMI for water. The utilities participating in the meeting are willing to share information and to collaborate. Based on comments from other utilities, Staff's approach to AMI implementation should prevent future problems. their system wide meter audit should reduce future problems. The Electric Program Investment Charge (EPIC) Symposium showcased new clean energy technologies, many of which are in the idea stage. Projects in the concept phase should be distinguished from projects that have been implemented. In the State of the City address, the Mayor's approach to housing was analytical, which could reflect his participation as Council liaison in UAC meetings. A webcast from the Smart Energy Consumer Collaborative indicated basic approaches to energy literacy and community involvement work consistently. During the webcast, a gentleman presented interesting information regarding data analytics, and he could be a good resource for CPAU. GENERAL MANAGER OF UTILITIES REPORT Dean Batchelor, Utilities Director, delivered the General Manager’s Report. SunShares – The final tallies are in and Palo Alto was the top outreach partner of all cities participating in the 2018 Bay Area SunShares solar group-buy program both in terms of the number of solar contracts signed and the number of kilowatts of rooftop solar capacity that will be installed through the program. Palo Alto Utilities Advisory Commission Minutes Approved on: April 9, 2019 Page 2 of 8 residents signed 23 contracts for a total of 115 kilowatts of rooftop solar. Palo Alto was also the #1 city for purchases of electric vehicles through SunShares. Our residents purchased 40% - that’s about 5 out of 12 - of the total number of EVs sold through the program Bay Area-wide. Workforce Recruitment – Over the past six months, Utilities staff has been participating in job fairs and career panels in an effort to recruit new employees to our organization. These activities are in line with the Workforce Priority strategies adopted with the updated Utilities Strategic Plan. One specific event this past month included the California Campus Career Day at the Northwest Lineman College in which staff was able to meet graduates and alumni to talk about lineman opportunities with CPAU. Spring Landscape Workshops – Our spring landscape workshop series begins this Saturday, March 9 with a focus on rainwater harvesting to help residents conserve water in the landscape and reduce runoff. Please feel free to join us from 9:00 to noon at the Mitchell Park Community Center. Attendees will also learn how to take advantage of rebates for rain barrels, cisterns, green roofs and permeable paving. Register at cityofpaloalto.org/workshops. APPA Webinar on Thermal Microgrids – Next Wednesday, March 13, CPAU staff will participate in an American Public Power Association (APPA) webinar on thermal microgrids. The webinar, titled “Improving Economics, Sustainability, and Reliability in the Building Energy Sector with a Thermal Microgrid," shares results of our thermal microgrid study conducted this past summer. Please let us know if you would like to listen in and need any assistance with accessing the APPA webinar. AMI Workshop – On March 27, the City is partnering with the Bay Area Water Supply and Conservation Agency (BAWSCA) and Valley Water to host a workshop on AMI. The goals are to support member agency efforts to advance the implementation of AMI within their respective service areas, provide guidance on how to use AMI data to improve water use efficiency, and identify potential opportunities for regional coordination. The workshop will be held at the Mitchell Park Community Center from 9:30 to 3:00. Great Race for Saving Water & Earth Day Festival – Join us on Saturday, April 13 for the City’s 6th annual fun run and walk plus Earth Day festival. Participants can walk, run, bike or stroll in the 5 kilometer or 10K distances and let the kids dash to chase the “running toilet.” After the race, we host a free festival with electric vehicle ride and drive, live music, nature activities, community booths and family-friendly educational fun. The event is held at the Palo Alto Baylands Athletic Center from 9:00 to 1:00. There will be a special ribbon-cutting ceremony for the San Francisquito creek flood control project at the starting line right before the race. Find details and registration at cityofpaloalto.org/earthday. Now Hiring Paid Internship Positions – Do you know a college student interested in gaining work experience while in school? Please encourage them to apply for one of the City’s paid internship positions by March 24. There are openings for work in Utilities Communications, Zero Waste, Urban Forestry, Community Services, and more. Employment opportunities are available on the City’s website at cityofpaloalto.org. In reply to Vice Chair Schwartz's request for a definition of thermal microgrid, Jonathan Abendschein, Assistant Director of Resource Management, explained that a thermal microgrid is a district heating and cooling system. Stanford University's system utilizes waste heat from cooling loads for other uses such as water or space heating. COMMISSIONER COMMENTS None. UNFINISHED BUSINESS None. Utilities Advisory Commission Minutes Approved on: April 9, 2019 Page 3 of 8 NEW BUSINESS ITEM 1: DISCUSSION: Discussion and Status Update on the Electric Utility's Overhead to Ground Conversion Program. Debra Lloyd, Acting Assistant Director of Engineering, reported staff began undergrounding electric facilities in Palo Alto in 1965. District 8 was formed but has not been undergrounded. Districts 47 and 46 are being undergrounded and should be complete soon. Districts 42 and 43 will be undergrounded next. Staff has proposed six additional districts for undergrounding. Staff anticipates a 30-year planning horizon for undergrounding given the lack of staff resources. The City has 304 or 306 miles of primary distribution lines, of which approximately 190 miles or 62% are underground. Including secondary distribution lines and service drops reduces the amount of underground lines to approximately 50%. In reply to Commissioner Segal's inquiry regarding the gray areas on the map of underground districts, Lloyd advised that the gray areas have underground facilities but are not underground districts. Districts are formed to convert overhead facilities to underground facilities. Lloyd continued the presentation, stating slightly more than 52% of properties are served by underground facilities, leaving approximately 14,000 residential properties being served by overhead facilities. In the six proposed districts, a small number of properties will convert to underground service because many properties are served by overhead facilities located behind the properties. Undergrounding facilities located at the rear of properties may not be possible. In answer to Vice Chair Schwartz's query regarding customers paying for undergrounding, Dean Batchelor, Utilities Director, explained that 100% of customers in a district have to agree to undergrounding before undergrounding can occur. The customer typically pays $3,000-$6,000 for the connection and upgrading his electric panel. Lloyd related that if customers who are currently served by overhead facilities at the rear of the property can be served by underground facilities at the front of the property, the cost to the customer will be higher because the electric panel will have to be moved to the front of the property. In response to Commissioner Forssell's inquiry regarding AT&T contributing to the cost to underground facilities at the rear of the property, Batchelor reported AT&T has stated it will contribute to undergrounding its equipment and wires but not to undergrounding infrastructure. Currently, AT&T and Comcast contribute 50% of undergrounding project costs. Lloyd added that staff would open negotiations with AT&T if the Council directs staff to move more aggressively in residential areas. AT&T has agreed to the boundaries of the six proposed districts. In reply to Commissioner Johnston's question regarding properties shown in red on the map, Lloyd indicated only the properties shown in red will be served by underground facilities. In answer to Commissioner Johnston's question about the design life of overhead equipment, Batchelor advised that overhead wiring can last 10-20 years longer than underground wiring because heat in underground facilities degrades the insulation around wiring faster. In response to Commissioner Johnston's query regarding scheduling undergrounding projects, Batchelor related that staff schedules undergrounding projects at the end of the useful life of overhead facilities, unless an area has a higher than usual number of outages. In reply to Commissioner Johnston's question of whether staff wanted a review the undergrounding program, Lloyd responded no. Staff's intent in presenting the information is to update the UAC regarding the progress of undergrounding facilities. In response to Commissioner Johnston's query regarding constraints on progress, Lloyd reported the main constraints are AT&T and Comcast agreement to projects and the additional cost to customers if a project provides only a local benefit. In answer to Commissioner Forssell's question of whether hiring more engineering staff could reduce the 30- year horizon, Lloyd advised that assistance from a consultant for engineering design could increase the pace of projects, but larger and more urgent projects could continue to delay undergrounding projects. In reply to Utilities Advisory Commission Minutes Approved on: April 9, 2019 Page 4 of 8 Commissioner Forssell's query about a best-case timeline, Lloyd replied under ideal conditions staff could complete one underground district every 3-4 years with some overlap of projects. In answer to Commissioner Segal's inquiry about properties that connect to underground facilities having to pay a second time when facilities at the rear of the property are undergrounded, Lloyd advised that the customers will not have a direct expense for the undergrounding at the rear. In reply to Commissioner Segal's query regarding staff obtaining customer consent to underground, Batchelor indicated typically staff seeks customer consent as soon as a district is formed. Council Member DuBois stated that given the length of time since the Council reviewed the undergrounding program, it may be worthwhile for staff to return to Council for a policy discussion. In response to his question regarding the City's ability to force an underground district, Lloyd related that the City could pay 100% of the costs for undergrounding. Staff can ask the City Attorney's Office about other methods to obtain AT&T's and Comcast's participation in undergrounding projects. Vice Chair Schwartz requested a comparison of overhead and underground districts in terms of frequency of outages, length of service restoration times, and costs to support underground and overhead districts. She inquired whether AMI will increase the cost of undergrounding and repairs to underground facilities; about the consequences of implementing Fiber to the Premise (FTTP) after AT&T and Comcast have contributed to undergrounding; and about financing arrangements extended to customers for undergrounding costs. Jimmy Pachikara, Acting Engineering Manager, advised that underground facilities are more expensive to maintain and require more time to restore an outage compared to overhead facilities. Batchelor reported customers can pay undergrounding costs over 10 years. Staff will ask the City Attorney's Office about the consequences of implementing FTTP. Commissioner Forssell remarked that quantifying the safety and reliability of overhead versus underground facilities could be worthwhile. Perhaps staff could include a question about a neighborhood's desire for undergrounding in future surveys. ACTION: None ITEM 2: DISCUSSION: Discussion of New Online Customer Portal. Robert Hinden requested more details about the security features for the portal. Kevin Enderby, Principal Business Analyst, reported the My Utilities Account (MUA) was built in 2009 and allows customers to view their invoices and usage, pay their bills, and elect electronic billing. MUA has been modified to provide a move-out feature and to be more user-friendly. The SAP application has limited upgrade options that do not meet requirements. Approximately 19,000 accounts have registered for MUA. Approximately 5,400 one-time payments and 7,500 recurring payments are made through MUA each month. Approximately 4,500 accounts receive electronic bills only, and approximately 1,200 accounts receive both electronic and paper bills. A recent survey of customers found MUA provides good information, but it is busy and not intuitive. The text size is small, and the font is not standard across pages. Objectives for the new customer portal were to increase customer engagement through new functionality, features, and screens; increase customer satisfaction and productivity by providing a mobile experience and a single sign-on; reduce incoming phone calls; improve security features, including more password options, more stringent requirements for passwords, and additional protection for payment information; and to encourage energy efficiency and conservation through online tools. Two assessments of MUA have been performed, and the results of the assessments contributed to the design of the new portal. In response to Vice Chair Schwartz's query of whether staff intends to build a custom portal when many good portals are available commercially, Enderby replied no. Utilities Advisory Commission Minutes Approved on: April 9, 2019 Page 5 of 8 Enderby continued the presentation, stating 1,200 customers participated in a survey about MUA. The most common customer comments concerned a better presentation and a more intuitive interface. Utilities staff and staff from other municipalities provided input as well. Based on information obtained from the assessments, survey, and staff input, a Request for Proposals (RFP) for a customer portal vendor was issued in 2017. From the RFP responses, staff selected Smart Energy Water (SEW). The new portal will include a mobile experience, a modern look and feel, enhanced security features, and information and features requested by customers. In addition, a separate mobile app will be available for users. The portal dashboard will contain movable tiles for billing, outages, notifications, comparisons, account information, usage, and efficiency. Usage and cost data over the past 12 months for electric, water, and gas will be presented in bar graphs. In reply to Commissioner Forssell's inquiry about customizing the user interface for CPAU, Enderby explained that SEW provided a template for the interface, and staff added features within the parameters of the template. Enderby further reported the browser view of the portal on a mobile device will have the eight tiles on the left side of the screen with data for each tile on the right once the user clicks a tile. The mobile app will be available for review in a few months. Vice Chair Schwartz commented that SEW's mobile app is really nice. Enderby continued the presentation, indicating a soft launch of the new portal is planned for 100-200 residential and commercial customers. Emails will be sent to customers advising them of their participation in the soft launch. A survey of detailed questions will be sent to participants a few weeks after use, and feedback will contribute to adjustments to the portal. A full launch of the new portal is planned for the end of the summer. SEW wants to complete all revisions and enhancements to the portal prior to releasing a mobile app. MUA will be phased out after a full launch of the new portal. In answer to Commissioner Segal's question regarding multiple members of a household having access to the app, Enderby explained that each account is associated with a single email address, but guests can be given access to an account. Enderby further reported any enhancements not included in the 2019 launch of the portal will be included in 2020. Text alerts and email notifications will be added in the future. Outreach includes announcement and tutorial videos, print and digital ads, mailers, and social media. Vice Chair Schwartz announced SEW is hosting an event in Redwood City and encouraged staff to attend the event. Enderby reported staff has not received an invitation to the event; however, the event is shown on SEW's list of upcoming events. In answer to Council Member DuBois' query about CPAU appearing in financial institutions' electronic bill pay systems, Enderby indicated that could occur during the Customer Information System (CIS) upgrade or implementation. Staff attended an SEW event a few weeks ago and engaged with the City of Pleasanton regarding SEW and CPAU's roadmap. Vice Chair Schwartz assumed future AMI data could be incorporated into the portal. Commissioner Forssell volunteered to participate in the soft launch. Dave Yuan, Strategic Business Manager, indicated staff will send Commissioners invitations to participate in the soft launch. ACTION: None Utilities Advisory Commission Minutes Approved on: April 9, 2019 Page 6 of 8 ITEM 3: ACTION: Staff Recommendation that the Utilities Advisory Commission Recommend the City Council Adopt Resolutions (1) Approving the Fiscal Year 2020 Wastewater Collection Financial Plan and (2) Increasing Wastewater Rates by 7% 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). Eric Keniston, Senior Resource Planner, reported staff recommends a 7% rate increase in wastewater collection rates and projects 6-8% annual increases over the next four years. Consistent with the Utilities Strategic Plan, staff reviews multiyear strategies, personnel actions, performance metrics, and expenditures in an effort to contain costs and lower rate increases. The Wastewater Utility is comprised of a collection system and a treatment system. The collection system funnels wastewater to the Regional Water Quality Control Plant (RWQCP). The wastewater treatment plant treats effluent from Palo Alto, Stanford University, East Palo Alto, Los Altos Hills, Los Altos, and Mountain View. CPAU operates the collection system while Public Works operates the RWQCP. The Wastewater Utility's costs are split roughly 50% for wastewater collection and 50% for wastewater treatment. Treatment costs have grown about 8% per year since 2016 and are projected to grow approximately 6% annually in the future. Collection costs have grown about 4.5% per year since 2016 and are projected to grow approximately 1% annually in the future. Within treatment costs, operations costs have grown approximately 9% per year because of the maintenance needs of the aging RWQCP. Because of capital improvements to the RWQCP, treatment operations costs should increase only 4% per year, but debt service costs for the treatment plant will increase about 17% annually. In response to Vice Chair Schwartz's inquiry regarding retirement of the incinerator, Phil Bobel, Public Works Assistant Director, advised that incineration of sewage sludge is being phased out, and sludge will be trucked to other facilities for at least the next five years. Eliminating the incinerator will reduce CO2 emissions and reduce costs. Debt service costs will increase due to capital projects to replace RWQCP components other than the incinerator. Sewage sludge will always release CO2, but composting sludge will release CO2 more slowly and create a product usable in agriculture. Keniston further reported capital projects at the RWQCP will total approximately $100 million over the next several years. Collection system costs are split approximately 50% to operations costs and 50% to capital costs with debt service costs scheduled to be paid in full in 2023. Since 2016, capital costs have increased approximately 8% per year while operations costs have increased approximately 1.5% per year. In the future, operations costs should increase about 2.5%. Staff projects capital costs between 2019 and 2024 will be flat because staff anticipates only small capital projects over the next few years. The main drivers for increases in collection costs are overhead costs and underground construction costs. The median monthly residential bill is approximately 29% less than the average of other cities' bills. In reply to Commissioner Segal's question about the average wastewater bill for Los Altos Hills, Stanford University, and East Palo Alto, Bobel indicated the average bill for neighboring communities served by the RWQCP is similar to Palo Alto's average. The treatment plant serving cities in southern San Mateo County (e.g. Redwood City) has already started capital improvements; therefore, the rates are higher for those cities. The rates for cities further south are similar to Palo Alto's rates because the San Jose treatment plant has not started capital improvements. In answer to Commissioner Forssell's query regarding the inclusion of Hayward in the bill comparisons, Bobel explained that the treatment plant serving Hayward has not started capital improvements. Jonathan Abendschein, Assistant Director of Resource Management, added that staff utilizes the same comparison cities for all utilities. Hayward is a comparison city because it is similar in size to Palo Alto, is located in the East Bay, has a slightly lower median income, and often has slightly lower costs for its utilities. Keniston continued his presentation, stating Palo Alto's rates have increased approximately 4.5% annually while rates for comparison cities have increased approximately 6% annually. However, rate increases over the past five years have been greater than the Consumer Price Index (CPI) for the Bay Area. Fiscal year (FY) 2020 total costs will increase approximately 1% over FY 2019 total costs due to increases in treatment costs Utilities Advisory Commission Minutes Approved on: April 9, 2019 Page 7 of 8 and ongoing operations costs and a decrease in ongoing capital costs. Dean Batchelor, Utilities Director, added the lack of staff is causing the reduction in capital projects and, consequently, capital spending in FY 2020. Historical spending levels will probably return in 2-3 years. Abendschein indicated the 2020 Wastewater Collection Financial Plan reflects a slightly higher rate trajectory than provided in the presentation. After considering a realistic pace for capital improvement projects over the next few years, staff determined rate increases would more likely be 7% and 6% rather than 7% and 8%. Vice Chair Schwartz suggested staff draft an explanation of the rate increases in simple language and share it with the community via social media and news releases. Abendschein related that staff routinely develops talking points and will share them with the UAC. Catherine Elvert, Communications Manager, explained that staff develops a comprehensive and proactive communications strategy for sharing the drivers for costs and efforts to contain costs. In answer to Commissioner Johnston's request for updated projections of reserve balances based on the revised rates, Keniston reported the rate increases maintain the operations reserve fund within the minimum and maximum guidelines. Commissioner Johnston remarked that the purpose of raising rates is to cover costs, which can be depicted in a graph of reserve balances. Keniston added that the average of collection capital expenses would be lower than stated in the prior projections. Bobel advised that the RWQCP reserve fund is separate from the discussion. Because the RWQCP partners do not pay into the reserve fund, it has a negative balance at the current time. In response to Commissioner Segal's question regarding Palo Alto and Mountain View paying approximately the same amounts for the RWQCP, Bobel clarified that Mountain View has a larger residential population than Palo Alto; however, Palo Alto's population increases greatly during the workday. ACTION: Commissioner Trumbull moved to recommend the City Council adopt resolutions (1) approving the fiscal year 2020 Wastewater Collection Financial Plan and (2) increasing wastewater rates by 7% 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) with the revised projections proposed by staff. Commissioner Johnston seconded the motion. The motion carried 5-0 with Vice Chair Schwartz and Commissioners Forssell, Johnston, Segal, and Trumbull voting yes, and Chair Danaher and Commissioner Ballantine absent. ITEM 4: DISCUSSION: Discussion and Staff Update on Fiber and AMI Planning. Dave Yuan, Strategic Business Manager, reported staff proposes canceling the RFP for the Fiber to the Node (FTTN) business case and reissuing an RFP with a focus on AMI, engineering design, and a construction cost estimate. The RFP could be issued in May. Staff will provide the Council with an update in April. In reply to Vice Chair Schwartz's question about the applications of fiber, Yuan indicated it would be a part of the new RFP. ACTION: None ITEM 5: ACTION: Selection of Potential Topic(s) for Discussion at Future UAC Meeting. Vice Chair Schwartz suggested a future item regarding retrofits for housing stock and best practices for new construction with respect to climate change. Jonathan Abendschein, Assistant Director of Resource Management, advised that the State has published codes for new construction, and staff is reviewing reach codes for the City. Utility efficiency programs can benefit existing housing. Vice Chair Schwartz remarked that the item could be compatible with the Council's direction and could excite the community to improve its response to climate change. Utilities Advisory Commission Minutes Approved on: April 9, 2019 Page 8 of 8 In answer to Commissioner Forssell's inquiry regarding the April Green Acres update, Dean Batchelor, Utilities Director, indicated the item will likely be an action item. Vice Chair Schwartz requested a comparison of underground and overhead facilities with respect to outages and restoration of service for the discussion. ACTION: None NEXT SCHEDULED MEETING: April 3, 2019 Meeting adjourned at 9:08 p.m. Respectfully Submitted as corrected: - REPORTS FROM COMMISSIONER MEETINGS/EVENTS Tabatha Boatwright City of Palo Alto Utilities 1 MEMORANDUM TO: UTILITIES ADVISORY COMMISSION FROM: UTILTIES DEPARTMENT DATE: March 6, 2019 SUBJECT: Discussion and Status Update on the Electric Utility’s Overhead to Underground Conversion Program RECOMMENDATION The purpose of this report is to provide an update on the status of the Electric Utility’s Overhead to Underground Conversion Program to the Utilities Advisory Commission. BACKGROUND The City of Palo Alto began a program to underground overhead electric, telephone, and cable television facilities in 1965. Since inception of the undergrounding program, 44 Underground Utility Districts (“UUDs”) have been established, of which 42 have been completed and two are in the different stages of construction. As of today, approximately fifty-five percent (55%) of City’s electric distribution lines are underground, either through the underground conversion program or having been placed underground when originally installed. To establish the undergrounding program, the City amended the Municipal Code adding Chapter 12.16 titled Underground Utilities. In conjunction with Municipal Code, Utility Rule & Regulation 17 was created to cover the conversion of electric and communication facilities to underground. The undergrounding program is funded by a portion (2%) of electric revenues collected annually. It takes approximately two years of revenue to fund each project which depending on the size can cost $2.5 – $3.5 million. Each underground district will take approximately three and a half to four years to complete, from beginning the administrative process to establish a district to the completion of construction. It should be noted that underground electric system equipment has a design life of 30 to 40 years. While conduits and other substructure typically last well beyond this time frame, electric equipment and cable needs to be replaced about every 40 years to maintain high levels of electric service reliability. In order to maintain the appropriate replacement cycle, staff is also rebuilding, on average, one district every other year at an approximate cost of $750k to $1.0 million per rebuild. The most recent update to the UAC on the undergrounding program was on December 2, 2015. At that meeting Staff reported on Council’s rejection of staff’s recommendation that Council appoint an advisory body to solicit broad community input on potential changes to the City of Palo Alto Utilities electric overhead to underground conversion policy. That recommendation was endorsed by both the Finance Committee on December 18, 2012 (Staff Report 3247) and UAC on September 5, 2012. In light of this direction from Council, staff has been proceeding with the underground program by identifying areas that meet the tariffs that govern AT&T and ensure their participation in cost sharing for substructure installation. The poles within the City of Palo Alto are jointly owned with AT&T or in a few cases jointly owned with AT&T and PG&E. Comcast leases space on the poles from AT&T for attachment of their TV cables. Due to the joint ownership of the poles, Underground Districts require agreement on the project boundaries with the other joint owners. Once the agreement on the Underground District boundaries has been reached, the substructures are jointly installed to reduce the costs of the project. Coordinating the construction with AT&T and Comcast minimizes the impact on the neighborhoods. To facilitate the coordination between the parties in an Underground District, a master agreement has been signed by the City, AT&T, and Cable TV. This master agreement is amended each time an underground district is formed to include the new Underground District. DISCUSSION Currently, UUD 47 (area bounded by Middlefield Road/Forest Avenue/Cowper Street/Addison Avenue) is waiting for a handful of properties to finish converting their services to underground, before the overhead lines can be removed. UUD 46 (area at the intersection of Arastradero Road/West Charleston Road/El Camino Real) recently completed the installation of substructures (conduits and boxes) and is waiting for staff availability for installation of electric cables and equipment. Two additional districts (UUD 42 & 43) were previously agreed to with AT&T for future construction.1 Staff had a series of meetings with AT&T to discuss new Underground Utility Districts. AT&T has agreed that several areas/districts proposed by staff meet California Public Utilities Commission (CPUC) guidelines and they are eligible for AT&T cost sharing. AT&T recognizes its involvement and has conveyed acceptance of the proposed boundaries to the City via email for the six (6) new UUDs: 48, 49, 50, 51, 52 & 53. Exhibit “A” shows the boundaries of the six new UUDs - 48, 49, 50, 51, 52 & 53. Completion of these six UUDs will result in the removal of total number of 149 utility poles, 30 pole mounted transformers and require a total of approximately 15,760’ of trenching work, and, together with UUD 42 and 43, will result in approximately sixty (60%) of the City’s electric distribution lines undergrounded. Staff has estimated that it could take up to 31 years to complete the six new UUDs plus the previously agreed to UUDs (42 & 43). We have had a higher undergrounding conversion rate in the past, however, a consequence of undergrounding electric facilities is the need to replace the equipment as it reaches the end of its useful life (30-40 years). Failure to replace the equipment 1 Missing in the number progression is District 8, which was defined in the 1960’s but never established due to lack of community support to contribute to the cost will result in increased outages. In addition to the added work or replacing underground facilities, staff anticipates upcoming retirements of Engineering staff will impact completing projects. Staff expects that each UUD in the future will take an average of 3.5-4 years. Staff is optimistic that new staff in engineering will gain experience and knowledge and the conversion program can be brought back to historical levels of conversion in the future. Total projected cost for completing all eight UUDs is in the range of $20 to $24 million, present cost, anticipating that AT&T and Comcast will reimburse the City for their share of substructure costs. This projected cost is based on the current prevailing wages and market conditions. However, some of the unknown parameters that would influence the project cost, such as increase in material and labor, over the next 31 years are not factored into the projected cost. The majority of the completed or proposed undergrounding work is in commercial areas or main thoroughfares of the City. Some residential areas have been undergrounded, but this was prior to AT&T advising City staff that future underground districts proposed in residential areas will not qualify for AT&T substructure cost sharing. At a future meeting, staff will seek guidance from the UAC on how to proceed with the undergrounding conversion work in residential areas, including funding options. NEXT STEPS Funding for Underground Districts General Benefit Undergrounding is funded at approximately 2% of annual electric revenue. AT&T and Comcast reimburse the City for their share of substructure costs. Typically, the overall substructure cost is distributed to AT&T (30%), Comcast (20%), with the remaining 50% the City’s share for installing electric and fiber optic substructure. This will be the method used for the next eight UUDs agreed to with AT&T. Timeline The following table shows the tentative time schedule for completing the newly identified UUDs. However, completion of these Underground Districts depends on the resources available to Engineering and Operation staff during the design and construction phases. It is possible to accelerate undergrounding conversion program, if we allocate more resources and have dedicated engineering staff to work on overhead to underground conversion projects, though this will impact other priorities in Engineering. The Electric Operations Division also needs to fill existing vacant positions to support present and upcoming engineering projects. Funding and staffing needs required for the Overhead to Underground Conversion Program will be impacted by the future policy decisions or other initiatives undertaken by the Electric Engineering Division. The ability to complete these projects has already been impacted and delayed by approximately 5-7 years due to unanticipated projects such as the Caltrain Electrification, Grade Separation Project and small cell deployment, and issues related with current underground rebuild projects and aging infrastructure. Description Commencement & Completion Date 1. Underground Utility District No. 42 (Embarcadero Road between Emerson Street and Middlefield Road) July 2020-December 2023 2 Underground Utility District No. 43 (Area bounded by Emerson Street/Lincoln Avenue/Alma Street/Kellogg Avenue) July 2024-December 2027 3. Underground Utility District No. 48 (Embarcadero Road between Louis Road and St. Francis Drive) July 2028-December 2031 4. Underground Utility District No. 49 (East Charleston Road between Fabian Street and Middlefield Road) July 2032-December 2035 5. Underground Utility District No. 50 (East Meadow Drive between Middlefield Road and Louis Road) July 2036-December 2039 6. Underground Utility District No. 51 (East Meadow Drive between Alma Street and Middlefield Road) July 2040-December 2043 7. Underground Utility District No. 52 (San Antonio Road between Middlefield Road and McKay Drive) July 2044-December 2047 8. Underground Utility District No. 53 (East Charleston Road between Middlefield Road and Alma Street) July 2048-December 2051 RESOURCE IMPACT Funding for the Underground Districts is approved by the City Council during the annual budget process. These future projects are not approved for construction until the budget for these projects is approved each fiscal year. Each year staff re-evaluates the future year recommendations and proposes changes based on additional information acquired since the last budget cycle including telephone company participation covering project costs. POLICY IMPLICATIONS The proposed undergrounding projects supports Utilities Strategic Plan’s (USP) mission to provide safe, reliable, environmentally sustainable and cost effective services to residents. The undergrounding program also supports USP’s Priority 4 – related to proactive infrastructure replacement for reliability and resiliency. DocuSign Envelope ID: OF3B67E0-B2DE-47D4-9AB9-AE05BBB1BC2F ENVIRONMENTAL REVIEW The UAC's discussion of the City's underground project is not subject to California Environmental Quality Act review, as it does not meet the definition of a project under Public Resources Code section 21065. ATTACHMENTS 1. Attachment A: Exhibit "A" -Maps of Future Utility Underground Districts -48, 49, 50, 51, 52 &53 PREPARED BY: REVIEWED BY: APPROVED BY: Director of Utilities This Page Intentionally Left Blank ATTACHMENT A F- r # of Properties = 19 # of Poles = 28 # of Pole Mounted XFMR's = 9 Trench Length = 2,910 ft e e h se ice APPROVED ?? SR. ENGINEER/MANAGER ENGR. GJ DRWN EM CHKD. GJ OPS. SW UG District #48 Boundary Drawing City of Palo Alto California UTILITIES, ELECTRIC ENGINEERING REV. DATE APPR. DESCRIPTION MAPS/ CKTP SCALE W.O.R!/DRAWING # 04 NTS SHEET 1 OF 1 # of Properties = 11 # of Poles = 15 # of Pole Mounted XFMR's = 2 Trench Length = 1,810 ft o r s it e is s APPROVED ii SR. ENGINEER I MANAGER UG District #49 Boundary Drawing REV. DATE APPR. DESCRIPTION ENGR. GJ DRWN EM CHKO. GJ OPS. SW City of Palo Alto California UTILITIES, ELECTRIC ENGINEERING MAP 11 CKT# SCALE W.O.#I DRAWING It GS NTS SHEET 1 OF 1 11 EAST V/TV/ER 5 DRIVE. EAST MEADOW DRIVE 3600 LV LV 00 LV 3 [ / CC J co, LV MEADOW ' D 60KV Line Exists # of Properties = 12 # of Poles = 15 # of Pole Mounted XFMR's = 3 Trench Length = 2,450 ft erties m-, i h Se ices APPROVED ?? SR. ENGINEER/MANAGER ENGR. GJ DRWN EM UG District #50 Boundary Drawing City of Palo Alto California REV. DATE APPR. DESCRIPTION MAP # CKT# SCALE W.0#/DRAWING# CHKD. GJ OPS. SW UTILITIES, ELECTRIC ENGINEERING F5 NTS SHEET 1 OF 35 � 40 3,00 60KV Line Exists # of Properties = 8 # of Poles = 41 # of Pole Mounted XFMR's = 5 Trench Length = 3,480 ft erties i h e is APPROVED ?? SR. ENGINEER /MANAGER ENGR. GJ DRWN EM CHKD. GJ OPS. SW UG District #51 Boundary Drawing City of Palo Alto California UTILITIES, ELECTRIC ENGINEERING REV. DATE APPR. DESCRIPTION RAPE CKT# SCALE W.O.#/DRAWING# F5 F6 NTS F7 SHEET 1 OF U< co Y DRIVE -P jLD CT J ND 4`I47 4�159s 4171,U 4v183 41 5 6 4S 1 ,a 46,z 4TH 47� 4 4D1 495 4115 I ND 4217 4337 4c71 ART0N10 ROAD 2 r oN10 435 4\148 4160 4,12 ,,ND ND 4 -P 2 \ 0 ND W -p CT ND CD ND -P 0 ,4154 -P 415t 22 ND ND U 3 11 0 REV. DATE APPR. DESCRIPTION N2 ,D� l # of Properties = 12 # of Poles = 22 # of Pole Mounted XFMR's = 6 Trench Length = 2,000 ft e ies t icS APPROVED ?? SR. ENGINEER I MANAGER ENGR. GJ SEWN EM CARD. GJ OPS. SW UG District #52 Boundary Drawing _• 111/G City of Palo Alto ®�� California UTILITIES, ELECTRIC ENGINEERING MAPS CKT# SCALE W.O.#I DRAWING# G6 6 NTS SHEET 1 OF # of Properties = 31 # of Poles = 30 # of Pole Mounted XFMR's = 5 Trench Length = 3,110 ft APPROVED ii SR. ENGINEER I MANAGER UG District #53 Boundary Drawing REV. DATE APPR. DESCRIPTION ENGR. GJ DRWN EM CHKO. GJ OPS. SW City of Palo Alto California UTILITIES, ELECTRIC ENGINEERING MAP# CKT# SCALE W.O.#I DRAWING# G6 G7 NTS SHEET OF 1 Page 1 of 7 3 MEMORANDUM TO: UTILITIES ADVISORY COMMISSION FROM: UTILITIES DEPARTMENT DATE: March 6, 2019 SUBJECT: Staff Recommendation that the Utilities Advisory Commission Recommend that the City Council Adopt: (1) a Resolution Approving the Fiscal Year 2020 Wastewater Collection Financial Plan; and (2) a Resolution Increasing Wastewater Rates by 7% 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) RECOMMENDATION Staff requests that the Utilities Advisory Commission (UAC) recommend that the Council: 1. Adopt a resolution (Attachment A) approving: a. The Fiscal Year (FY) 2020 Wastewater Collection Financial Plan (Attachment B); and b. Authority to transfer up to $978,000 from the CIP Reserve to the Operations Reserve in FY 2020; 2. Adopt a resolution (Attachment C) increasing wastewater rates 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) (Attachment D). EXECUTIVE SUMMARY The FY 2020 Wastewater Collection Utility Financial Plan includes projections of the utility’s costs and revenues through FY 2024. The Financial Plan projects costs to rise on average by 3.5% over the forecast horizon due primarily to increasing treatment costs related to capital improvements and increasing operational costs at the Regional Water Quality Control Plant (RWQCP), as well as increasing collection system costs for operations and capital. In addition, current revenues are only 90% of cost. As a result, staff proposes a 7% wastewater collection rate increase in FY 2020 and projects rate increases of 8% annually through FY 2024 to raise rate revenues to cover current and projected costs. Page 2 of 7 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 Plan also contains a set of Reserves Management Practices describing the reserves for each utility and the management practices for those reserves. The City’s sewer system collects wastewater from Palo Alto residents and delivers it to the RWQCP for treatment. The City of Palo Alto runs the RWQCP, but it also treats wastewater for five other partner agencies (Stanford, East Palo Alto, Los Altos Hills, Lost Altos, and Mountain View). Much of the wastewater for those partner agencies is also transported across the City’s wastewater collection system. The Wastewater Collection Utility has two main costs: the costs of operating the collection system and the Palo Alto’s share of the cost of running the RWQCP.1 As discussed in previous years, both cost components have been increasing and are expected to continue to increase. The RWQCP is aging. Palo Alto has seen increases in operational costs in recent years, and debt service for the plant is expected to increase substantially in coming years as a major rehabilitation and replacement plan adopted in 2012 (the Long Range Facilities Plan) is implemented. Collection system costs are also increasing, though not as much as treatment costs. This is primarily driven by increases in capital costs: the cost of underground construction to replace aging sewer mains has nearly doubled since 2008. Other operational costs have also increased (e.g. salaries and benefits and overhead), but more slowly than treatment and collection infrastructure-related costs. This year’s forecasts take place in the context of rising construction costs and the need for major rehabilitation and replacement of infrastructure at the Regional Water Quality Control Plant. The UAC reviewed the preliminary financial forecasts at its February 6, 2019 meeting. DISCUSSION Staff completes an annual assessment of the financial position of the City’s wastewater collection utility 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. 1 The costs associated with the RWQCP are shared among Palo Alto and the partner agencies based on wastewater flows and the composition of the wastewater each agency sends to the treatment plant. Palo Alto’s share varies from year to year, but is roughly one third of the total cost. Page 3 of 7 The current rate proposals are also based on the methodology described in the 2011 Wastewater Collection Utility cost of Service and Rate Study completed by Utility Financial Solutions (Staff Report 1399). Staff intends to review and update this study in FY 2020. Proposed Actions for FY 2020 1. Increase wastewater rates by 7% for 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. Transfer up to $978,000 from the CIP Reserve to the Operations Reserve, as needed, to keep the Operations Reserve above minimum guideline levels. The FY 2020 Wastewater Collection Financial Plan (Attachment B) describes these proposed actions in more detail. The transfer will enable staff to maintain Operations Reserve levels while spreading the required rate increases for the wastewater collection utility over several years. Staff proposes to adjust wastewater rates as shown in Table 1 below, effective July 1, 2019. The adjustments will increase the system average rate by roughly 7%. These rate changes are included in the amended rate schedules provided as Attachment D. Residential and commercial minimum charges are based on an outflow estimate of 5 ccf per month, determined according to prior sampling. An estimate is used because residential water meters are not linked to wastewater accounts, and apartments usually do not have separate water meters. Commercial customers are charged based on average winter water usage so as to minimize the effects of irrigation. Restaurant customers use annual flow as they generally lack irrigation, but are charged higher rates due to higher grease and oil discharges necessitating more maintenance cost. Table 1: Current and Proposed Wastewater Collection Charges Current (7/1/2018) Proposed (7/1/2019) Change $/mo. % Monthly Service and Minimum Charges ($/month) S-1 (Residential) Service charge $38.66 $41.37 $2.71 7% S-2 (Commercial), S-6 (Restaurant) Minimum 38.66 41.37 2.71 7% Quantity Rates S-1 (Residential) N/A N/A N/A - - S-2 (Commercial) $/CCF 7.45 7.97 0.52 7% S-6 (Restaurant) $/CCF 11.52 12.33 0.81 7% S-7 (Industrial) $/CCF 3.42 3.66 0.24 7% (1) Monthly charges for S-1 are fixed monthly charges, and those for S-2 and S-6 are minimum monthly charges. (2) Currently there are no customers on the S-7 rate schedule; however, CPAU continues to maintain it in case there is a need for the rate schedule in the future. Page 4 of 7 FY 2019 Financial Plan’s Projected Rate Adjustments for the Next Five Fiscal Years Table 2 shows the projected rate adjustments included in the Wastewater Collection Utility Financial Plans and their impact on a residential wastewater bill. Table 2: Projected Rate Adjustments and Residential Bill Impact, FY 2020 to FY 2024 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 Wa stewater Utility 7% 8% 8% 8% 8% Estimated Bill Impact for Residential Customers ($/mo) $2.71 $3.31 $3.57 $3.86 $4.17 As noted above, the main drivers for the increase in the Wastewater Collection Utility’s costs (and therefore rates) over the next several years are the costs for wastewater treatment, which are projected to increase by about 6% per year as the City makes several upgrades to the Regional Water Quality Control Plant. The treatment plant’s major project, started in FY 2018, is making progress constructing the Sludge Dewatering and Truck Loadout Facility, which will allow (in 2019) the retirement of the Plant’s two sewage sludge incinerators that have been in operation since 1972. Future projects include secondary treatment upgrades as well as replacement of the headworks facility. Capital improvement costs for the wastewater collection system increased in FY 2019 as an annual main replacement cycle resumed, but are projected to drop somewhat in FY 2020 as some ongoing project costs are reduced. Construction costs for main replacement projects are projected to be around 30% higher than they were in FY 2016, the last year an annual main replacement project was budgeted. After FY 2020, Operating and CIP costs are projected to rise roughly 2%-3% annually. Figure 1 and 2 below illustrate the increase in the Wastewater Collection Utility’s costs. The figures use FY 2016 as a comparison year because FY 2017 and FY 2018 are atypical years, due to one-time cost savings related to delayed main replacement projects. Page 5 of 7 Figure 1: FY 2016 and FY 2024 costs Figure 2: Percentage of Total Cost Increase From FY 2016 to FY 2024 Attributed to Treatment, Capital, and Operations Costs Figure 1 and 2 show that nearly 70% of the increase from FY 2016 to FY 2024 is due to treatment cost increases. The remaining 30% is due to increases in operations and capital costs. Wastewater main replacement costs have risen substantially in recent years, and the water and gas utilities have also seen similar increases. Because bids for projects have continued to come in higher than historical prices, Staff re-evaluated the cost of future projects and revalued them Page 6 of 7 based on current bid indications. As a result, projected costs for main replacement projects have risen by $1 to $2 million from prior forecasts. Wastewater Bill Comparison with Surrounding Cities The annual sewer bill for a Palo Alto resident is $464 under current rates, 29% lower than the average neighboring community. Table 3 shows the monthly sewer bills for residential customers compared to what they would be in surrounding communities. Table 3: Residential Monthly Sewer Bill Comparison (based on rates as of February, 2019) Palo Alto Neighboring Communities Neighboring Community Average Menlo Park Redwood City Mountain View Los Altos Santa Clara Hayward 38.66 93.83 78.24 42.91 40.80 37.36 32.85 54.33 If Council adopts the proposed wastewater rate change, and assuming other agencies do not change their sewer rates, Palo Alto would be 24% lower than the average neighboring community. Staff has no information at this time as to whether or when the surrounding communities are planning wastewater rate changes. However, as most agencies are also requiring renovations to their respective treatment plants, staff assumes increases at other agencies will occur. Note that as partners in the RWQCP, Mountain View and Los Altos will be affected by the same treatment cost increases as Palo Alto. Changes from Prior Financial Forecasts Staff has projected the need for ongoing wastewater rate increases, starting in FY 2019, for several years. Table 4 compares current rate projections to those projected in the last two year’s Financial Plans. As shown, the FY 2020 rate projections are lower than was projected last year. The FY 2020 projections reflect current information available regarding the cost of capital improvements both in Palo Alto’s streets as well as at the Regional Water Quality Control Plant. Table 4: Projected Wastewater Rate Changes for FY 2020 to FY 2024 Projection FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 Current (FY 2020 Financial Plan) 7% 8% 8% 8% 8% Prior year (FY 2019 Financial Plan) 12% 10% 6% 4% 4% Two years ago (FY 2018 Financial Plan) 7% 7% 7% 7% 5% NEXT STEPS The Finance Committee will consider the recommended wastewater rate changes on April 2. Assuming the Finance Committee supports the proposed rate adjustments, staff will send notification of the potential rate increases to customers as required by Article XIIID of the State Constitution (added by Proposition 218). The City Council will consider the proposed Financial Plans and amended rate schedules with the FY 2020 budget, at which time the public hearing required by Article XIIID ofthe State Constitution will be held. RESOURCE IMPACT Staff projects normal year revenues for the Wastewater Collection Utility to increase by roughly 7% ($1.3 million) in FY 2020 as a result of the proposed rate increases. See the FY 2020 Wastewater Collection Utility Financial Plan (Attachment B) for a more comprehensive overview of projected cost and revenue changes for the next five years. POLICY IMPLICATIONS The proposed wastewater rate adjustments are consistent with Council-adopted Reserve Management Practices that are part of the Financial Plans. Staff developed the wastewater rate adjustments using a cost of service study and methodology that was completed in compliance with the cost of service requirements of Proposition 218. ENVIRONMENTAL REVIEW The UAC's review and recommendation to Council on the proposed FY 2019 Wastewater Collection Financial Plan and rate adjustments do not meet the definition of a project, pursuant to Section 21065 of the California Environmental Quality Act, thu·s no environmental review is required. ATTACHMENTS A. Resolution of the Council of the City of Palo Alto Approving the FY 2020 Wastewater Collection Utility Financial Plan and Proposed Transfers B. Proposed FY 2020 Wastewater Collection Utility Financial Plan C. Resolution of the Council of the City of Palo Alto Increasing Wastewater Rates and Adopting a Wastewater Collection Rate Increase and Amending Rate Schedules 5-1, 5-2, 5-6 and S-7 D. Amended Rate Schedules 5-1, 5-2, 5-6 and 5-7 PREPARED BY: ERIC KENISTON, Senior Resource Planner REVIEWED BY: ATHAN ABENDSCHEIN Assistant Director, Resource Management APPROVED BY: Director of Utilities Page 7 of 7 This Page Intentionally Left Blank Attachment A *NOT YET APPROVED * 6054066 Resolution No. Resolution of the Council of the City of Palo Alto Approving the FY 2020 Wastewater Utility Financial Plan R E C I T A L S A.Each year the City of Palo Alto (“City”) 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 a part of the Financial Plans. The Council of the City of Palo Alto does hereby RESOLVE as follows: Plan. SECTION 1. The Council hereby approves the FY 2020 Wastewater Utility Financial SECTION 2. The Council hereby approves the transfer of up to $978,000 in FY 2020 from the Capital Improvement Projects Reserve to the Operations Reserve, as described in the FY 2020 Wastewater Utility Financial Plan and approved via this resolution. SECTION 3. The Council finds that the adoption of this resolution does not meet the California Environmental Quality Act’s 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: Attachment A *NOT YET APPROVED * 6054066 ATTEST: City Clerk Mayor APPROVED AS TO FORM: APPROVED: Senior Deputy City Attorney City Manager Director of Utilities Director of Administrative Services This Page Intentionally Left Blank FY 2020 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN FY 2020 TO FY 2024 Attachment B WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 2 | Page FY 2020 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN FY 2020 TO FY 202 4 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 2018 Rate and Reserves Proposals ....................................................... 5 Section 3A: Rate Design ............................................................................................................... 5 Section 3B: Current and Proposed Rates ..................................................................................... 6 Section 3C: Bill Impact of Proposed Changes .............................................................................. 7 Section 3D: Proposed Reserve Transfers ..................................................................................... 7 Section 4: Utility Overview .................................................................................................... 8 Section 4A: Wastewater Utility History ....................................................................................... 8 Section 4B: Customer base .......................................................................................................... 9 Section 4C: Collection System ...................................................................................................... 9 Section 4D: Cost Structure and Revenue Sources ...................................................................... 10 Section 4E: Reserves Structure ................................................................................................... 10 Section 4F: Competitiveness ...................................................................................................... 11 Section 5: Utility Financial Projections ................................................................................. 12 Section 5A: FY 2014 to FY 2018 Cost and Revenue Trends ........................................................ 12 Section 5B: FY 2018 Results ....................................................................................................... 13 Section 5C: FY 2019 Projections ................................................................................................. 13 Section 5D: FY 2020 – FY 2024 Projections ................................................................................ 13 Section 5E: Risk Assessment and Reserves Adequacy ............................................................... 15 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 3 | Page Section 5F: Alternate Scenarios ................................................................................................. 16 Section 5G: Long-Term Outlook ................................................................................................. 16 Section 6: Details and Assumptions ..................................................................................... 16 Section 6A: Wastewater Treatment Costs ................................................................................. 16 Section 6B: Operations .............................................................................................................. 17 Section 6C: Capital Improvement Program (CIP) ....................................................................... 17 Section 6D: Debt Service ............................................................................................................ 19 Section 6E: Other Revenues ....................................................................................................... 21 Section 7: Communications Plan .......................................................................................... 21 Appendices ......................................................................................................................... 22 Appendix A: Wastewater Collection Financial Forecast Detail .................................................. 23 Appendix B: Wastewater Collection Utility Capital Improvement Program (CIP) Detail .......... 24 Appendix C: Wastewater Collection Utility Reserves Management Practices .......................... 25 Appendix D: Map (CPA Wastewater Collection System - Sewer Mains Replaced or Rehabilitated since 1990) .......................................................................................................... 28 Appendix E: Sample of Wastewater Collection Outreach Materials ......................................... 29 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 4 | Page SECTION 1 : DEFINITIONS AND ABBREVIATIONS CCF The standard unit of measurement for water delivered to water customers, equal to one hundred cubic feet, or roughly 748 gallons. When water usage is used to assess wastewater charges for commercial customers, it is measured in CCF. CIP Capital Improvement Program CPAU City of Palo Alto Utilities Department FOG Fats, oils, and grease. When flushed into the sewer system, these materials accumulate in parts of the sewer system and create blockages. O&M Operations and Maintenance RWQCP Regional Water Quality Control Plant, the wastewater treatment plant owned and operated by the City of Palo Alto that serves Palo Alto and several surrounding communities. UAC Utilities Advisory Commission SECTION 2 : EXECUTIVE SUMMARY AND RECOMMENDATIONS This document presents a Financial Plan for the City of Palo Alto’s Wastewater Collection Utility for the next five years. The 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 Overall costs in the Wastewater Collection Utility are expected to rise by an average of approximately 3.5% per year from fiscal year (FY) 2019 to FY 2024. Wastewater treatment costs are projected to rise by an average of approximately 6.1% annually and collection system CIP costs, which rose substantially in FY 2019 as sewer main replacement projects resumed an annual replacement cycle, are projected to remain relatively flat over the projection period. Wastewater collection system operations costs are currently projected to increase by 2% to 3% per year. Table 1 below shows the costs for the Wastewater Collection Utility. Table 1: Expenses for FY 2018 to FY 2024 Expenses ($000) FY 2018 (actual) FY 2019 (estimate) FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 Treatment Costs 9,559 10,981 11,733 12,400 13,974 14,365 14,744 Operations 4,779 5,660 5,829 6,120 6,253 6,239 6,246 Capital Projects 2,955 6,631 5,950 6,153 6,320 6,509 6,705 TOTAL 17,294 23,273 23,512 24,673 26,547 27,114 27,694 Across all the City’s utilities, CIP expenses are reflective of higher contract bid prices for underground construction. Going forward, to ensure that revenues cover rising costs and reserves remain healthy, the financial plan includes the proposed and projected rate changes shown in Table 2. The table also shows rate projections from last year’s Financial Plan. Last WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 5 | Page year’s plan projected higher initial increases in FY 2020 and 2021 due to projected lower reserve balances. Table 2: Proposed / Projected Wastewater Collection Rate Trajectory for FY 2020 to FY 2024 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 Current Plan 7% 8% 8% 8% 8% FY 2019 Plan 12% 10% 6% 4% 4% The Wastewater Collection Utility has a small balance in both its Rate Stabilization and CIP Reserves. The Rate Stabilization Reserve is used to phase in rate increases over multiple years to reduce rate impacts to customers. The FY 2019 Financial Plan included a transfer of these funds to the Operations Reserve in FY 2019, and the transfer was approved per resolution. A transfer from the CIP Reserve to the Operations Reserve may be required as well, and staff currently anticipates this will be necessary in FY 2020. That decision will depend on ending Operations Reserve balances, so Staff is seeking approval of the CIP to Operations Reserve transfer with Council’s approval of this Financial Plan, in the event the transfer becomes necessary. The Operations Reserve was above its target level in FY 2018, but is projected to decline through FY 2022 before increasing again in FY 2023 (see more detail in Figure 5). Table 3: Transfers To/(From) Reserves for FY 2018 to FY 2024 ($000) Reserve FY 2019 FY 2020 FY 2021 to FY 2024 CIP Reserve - (978) - Rate Stabilization (342) - Operations 342 978 - Unassigned - - - SECTION 2 B : SUMMARY OF PROPOSED ACTIONS Staff proposes completion of the following actions for the Wastewater Collection Utility in FY 2019: 1. Transfer $342,000 from the Rate Stabilization Reserve to the Operations Reserve in FY 2019, per Resolution 9766. Staff proposes the following actions for the Wastewater Collection Utility in FY 2020: 1. Increase rates by 7% to bring revenue collection closer to expenses. This is described in more detail in Section 3B: Current and Proposed Rates. 2. Transfer up to $978,000 from the CIP Reserve to the Operations Reserve in FY 2020. SECTION 3 : DETAIL OF FY 2018 RATE AND RESERVES PROPOSALS SECTION 3 A : RATE DESIGN The Wastewater Collection Utility’s rates are evaluated and implemented in compliance with the cost of service requirements and procedural rules set forth in the California Constitution WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 6 | Page (Proposition 218). Current rates were structured based on staff’s annual assessment of the wastewater utility’s financial position, and relied on the methodology from the January 2011 Wastewater Collection Utility Cost of Service & Rate Study completed by Utility Financial Solutions (Staff Report 1399). Since the study’s publication, staff has updated certain rate structure components from those identified in the study, while maintaining cost-based rates. For instance, commercial customers previously had an option to be billed based on annual water usage or winter-only water usage, and staff opted to make winter-only the standard. This change better reflects sewer-related outflows and removes possible irrigation effects. Staff plans to review and update this cost of service study in FY 2020. Before conducting any new cost of service study, staff reviews current rates and the scope of the study with the Utilities Advisory Commission (UAC) and Council to determine the City’s policy priorities. SECTION 3 B : CURRENT AND PROPOSED RATES The current rates were adopted July 1, 2018, when the City increased sewer rates by 11%. CPAU has three sewer rate schedules: one for residents (S-1), one for commercial customers (S-2), and a special schedule for restaurants (S-6), which discharge higher than average amounts of grease and oil and, therefore, have a greater impact on the sewer system. Residential customers are billed a monthly service charge, while commercial customers are billed based on their winter month water usage (previous January through March). This closely approximates non-irrigation water consumption, which represents actual sewer use. Restaurant customers are billed monthly based on water usage. CPAU also maintains a rate schedule for industrial dischargers (S-7), but there are currently no customers required to be on this rate schedule. CPAU proposes a 7% rate increase in FY 2020. This increase will go to fund increases to treatment costs resulting from Water Quality Control Plant improvements and upgrades, as well as ongoing collection systems capital projects and operations costs. Table 4, below, summarizes the current and proposed rates for all customer classes. Section 4F: Competitiveness discusses comparisons with neighboring communities. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 7 | Page Table 4: Current Sewer Rates Current (as of 7/1/2018) Proposed (effective 7/1/2019) Monthly Service and Minimum Charges ($/month) S-1 (Residential) Service charge $38.66 $41.37 S-2 (Commercial), S-6 (Restaurant) Minimum 38.66 41.37 Quantity Rates: based on winter water usage (average for January - March bill period) S-2 (Commercial) $/CCF 7.45 7.97 S-6 (Restaurant) $/CCF 11.52 12.33 S-7 (Industrial) $/CCF 3.42 3.66 SECTION 3 C: BILL IMPACT OF PROPOSED CHANGES Table 5 below shows the impact of the proposed July 1, 2019 rate changes: Table 5: Impact of Proposed Sewer Changes Current (as of 7/1/2018) Proposed (effective 7/1/2019) Change $/mo. % Residential $38.66 $38.66 $2.71 7% General Commercial (14 CCF) 104.30 111.58 7.28 7% Restaurant (56 CCF) 645.12 690.48 45.36 7% SECTION 3 C : PROPOSED RESERVE TRANSFERS In the FY 2017 Financial Plan, staff recommended a $1.95 million transfer from the Rate Stabilization Reserve in FY 2016. This left a small amount, $342,000, which was originally to be transferred in FY 2017 to bring the Rate Stabilization Reserve balance to zero. However, because new main replacement projects were deferred in FY 2017 and FY 2018, resulting in one-time cost savings, the Operation Reserve ended above the maximum guideline level, and the transfer was not needed. Staff will transfer the remaining $342,000 in FY 2019. In addition, staff is seeking Council approval to transfer $978,000 from the CIP Reserve to the Operation Reserve in FY 2020, in the event that is needed. These transfers are included in the financial projections in this Financial Plan, and will enable CPAU to maintain adequate Operations Reserve levels while moderating the pace of increase in Wastewater Collection rates. Appendix A: Wastewater Collection Financial Forecast Detail shows the impact of these transfers on reserves levels. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 8 | Page SECTION 4 : UTILITY OVERVIEW This section provides an overview of the utility and its operations. It is intended as general background information and to help readers better understand the forecasts in later sections. SECTION 4 A : WASTEWATER UTILITY HISTORY The Wastewater Utility commenced operation in 1899 to serve Palo Alto and Stanford. In its first three decades the system grew to 60 miles of sewers. Raw sewage was discharged into Mayfield Slough at the edge of the Bay. In the 1930s, at the behest of the State Department of Health, Palo Alto built the South Bay’s first wastewater treatment plant. At that time the sewer system served 20,500 Stanford and Palo Alto residents and a cannery. The plant was upgraded twice in the 1940s and 1950s to increase capacity.1 At the same time, the postwar population and industrial boom in the 1950s required rapid expansion of the sewer system. In the first half of the 1960s Palo Alto’s area doubled, as did wastewater flows, overwhelming the capacity of several of the utility’s “trunk lines,” which are the largest diameter main sewer lines carrying wastewater to the treatment plant. This prompted the City, in 1965, to perform the first of its sewer master plans to identify needed capacity improvements. At that point the Wastewater Utility’s system comprised more than 150 miles of sewer mains.2 In 1968 the City signed agreements with the Cities of Mountain View and Los Altos to build a new regional treatment plant, the RWQCP, which is still in operation today. Since 1940 the City had been providing treatment services to the East Palo Alto Sanitary District through an existing agreement, and was also serving Stanford University by transporting wastewater across the City’s sewer system to the treatment plant. Both of these organizations became partners in the RWQCP as well. At the same time the Town of Los Altos Hills became the sixth partner as it signed an agreement with the City to connect the Town’s sewer system to the City’s sewer system to carry wastewater to the new RWQCP. The current agreements for the RWQCP extend through 2035.3 In the 1980s the City directed increased attention to the condition of its sewer system, performing a series of studies of groundwater inflow and infiltration into the system. The studies found high rates of infiltration, estimating that as much as 40% of the water going to the RWQCP from Palo Alto’s system was groundwater and stormwater rather than wastewater.4 In some parts of Palo Alto the land surface had subsided due to groundwater pumping by the water utility, and though that practice had ceased many years earlier as the water utility switched to the Hetch Hetchy Regional Water System, parts of the city had already subsided two to five feet. This subsidence had damaged several parts of the sewer collection system, leading to reduced slopes for sewer mains that caused reductions in capacity. In 1 Long Range Facilities Plan for the Regional Water Quality Control Plant, August 2012, Carollo Engineers, pp 2-1 through 2-2 2 Wastewater Collection and Storm Drainage, 1965, Brown and Caldwell Consulting Engineers, pp 4, 6-7, 143 3 Long Range Facilities Plan for the Regional Water Quality Control Plant, August 2012, Carollo Engineers, pg 2-2 4 Wastewater Collection System Master Plan – Capacity Assessment, January 2004, MWH Americas, Inc., pg ES-2 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 9 | Page response to these studies the City commenced an accelerated sewer system rehabilitation program.5 At that point the sewer system comprised over 190 miles of mains.6 A Master Plan study in 1988 recommended a variety of capacity expansions, and in the 1990s the City completed about half of them. However, a 2004 Master Plan update found that the accelerated sewer rehabilitation plan started in the early 1990s had substantially reduced infiltration, easing the capacity problems that had led the to the recommended capacity increases in the 1988 study. Several of the outstanding projects were canceled and replaced with a different set of projects.7 At the same time the City updated its hydraulic model and developed greater capacity to do system planning in house. SECTION 4 B : C USTOMER BASE The City of Palo Alto’s Wastewater Collection Utility provides sewer service to the residents and businesses of Palo Alto. It is distinct from the Wastewater Treatment Utility, which provides treatment services for surrounding communities in addition to Palo Alto. Nearly 22,000 customers are connected to the sewer system, approximately 20,440 (93%) of which are residential and 1,560 (7%) of which are non-residential. Residential customers pay a flat fee for service. Non-residential customers are billed for sewer service based on their metered winter water usage. There is relatively little variability in revenues for this utility. S ECTION 4 C : COLLECTION SYSTEM The Wastewater Collection Utility delivers all the wastewater it collects to the Regional Water Quality Control Plant (RWQCP) operated by the City of Palo Alto under a partnership agreement with several surrounding communities. Palo Alto is responsible for 35% to 40% of the wastewater sent to the RWQCP. This Financial Plan does not describe the cost of running the RWQCP in detail as this cost is contained in the Wastewater Treatment Utility; however since these costs are a major driver of CPAU’s sewer rates, Section 6A: Wastewater Treatment Costs provides some discussion of future trends in treatment costs. Treatment costs make up nearly half of the Wastewater Collection Utility’s expenses as shown in Table 1 above. To collect wastewater from its customers and deliver it to the RWQCP, CPAU owns roughly 18,000 sewer laterals (which collect wastewater from customers’ plumbing systems) and 217 miles of sewer mains (which transport the waste to the treatment plant). These laterals and mains, along with the associated manholes and cleanouts, represent the vast majority of infrastructure used to collect wastewater in Palo Alto. CPAU conducts a sewer rehabilitation and replacement program to replace mains over time as they deteriorate or to increase capacity. For more discussion of this program, see Section 6C: Capital Improvement Program (CIP). CIP expense accounts for roughly a quarter of the utility’s expenditures. In addition to its CIP, CPAU performs various maintenance activities on the sewer system. These include inspecting and repairing sewer laterals, responding to sewer overflows, regularly 5 CMR 183:90, Infrastructure Review and Update, March 1, 1990 6 Master Plan of the Wastewater Collection System, December 1988, Camp Dresser & McKee, Inc., pg 1-2 7 Wastewater Collection System Master Plan – Capacity Assessment, January 2004, MWH Americas, Inc., pg ES-3 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 10 | Page cleaning sections of the system heavily impacted by fats, oils, and grease (FOG), and building and replacing sewer laterals for new or redeveloped buildings. The utility also shares the costs of other operational activities (such as customer service, billing, equipment maintenance, and street restoration) with the City’s other utilities. These maintenance and operations expenses, as well as associated administration, debt service, rent, and other costs, make up approximately another quarter of the utility’s expenses. SECTION 4 D : COST STRUCTURE AND REVENUE SOURCES In FY 2018, treatment costs represented slightly more than half of the Wastewater Collection Utility’s costs (53%), and Operations costs represented nearly a third (31%), while Capital spending accounted for the remainder (16%). Figure 1 shows these expenditures. The utility’s revenue in FY 2018, shown in Figure 2, came primarily from sewer charges (92%), with the remainder coming mainly from capacity and connection fees and other sources (8%). Figure 1: Cost Structure (FY 2018) Figure 2: Revenue Structure (FY 2018) SECTION 4 E : RESERVES STRUCTURE CPAU maintains six reserves for its Wastewater Collection Utility to manage various types of contingencies. Below is a summary of these reserves and Appendix C: Wastewater Collection Utility Reserves Management Practices provides 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. It also acts as a WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 11 | Page contingency reserve for the CIP. This type of reserve is used in other utility funds (Electric, Gas, and Water) as well. • Rate Stabilization Reserve: This reserve is intended to be empty unless one or more large rate increases are anticipated 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 Water) as well. • Operations Reserve: This is the primary contingency reserve for the Wastewater Collection Utility, and is used to manage yearly variances from budget for operational costs. This type of reserve is used in other utility funds (Electric, Gas, and Water) 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 6 shows the monthly sewer bills for residential customers compared to what they would be in surrounding communities. The annual sewer bill for a Palo Alto customer is $464 under current rates, 29% lower than the average neighboring community. Palo Alto has the fifth lowest bill of the group. Table 6: Residential Monthly Equivalent Sewer Bill Comparison ($) Palo Alto Neighboring Communities Neighboring Community Average Menlo Park Redwood City Santa Clara Mountain View Los Altos Hayward 38.66 93.83 78.24 42.91 40.80 37.36 32.85 54.33 Based on rates as of February 2019 Table 7 compares the sewer bills for two classes of commercial customers to what they would be under surrounding communities’ rate schedules. Note that other communities often have specific rates for industrial customers that discharge high intensity wastewater, such as food processors or chemical or electronics manufacturers, but Palo Alto does not currently have any customers that require these special rates. Palo Alto is less competitive with surrounding cities with regards to commercial sewer rates, but is not the most expensive jurisdiction in all cases. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 12 | Page Table 7: Commercial Monthly Sewer Bill Comparison ($) Palo Alto Neighboring Communities Neighboring Community Average Menlo Park Redwood City Mountain View Los Altos Santa Clara Hayward General Commercial 104.30 135.24 103.18 127.12 52.41 72.10 70.98 93.50 Restaurant 645.12 963.20 988.96 583.52 142.71 666.40 519.12 643.98 Based on rates as of February 2019 SECTION 5 : UTILITY FINANCIAL PROJECTIONS SECTION 5 A : FY 2014 TO FY 2018 COST AND REVENUE TRENDS Figure 3 shows the Wastewater Collection Utility’s actual expenses and revenues for the past five years and projections through FY 2024. Total treatment plant expenses have grown, on average, by around 4% per year. Wastewater collection capital investment fluctuated greatly during this time period: FY 2014 saw a reduction in investment mainly due to delayed main replacement projects, and FY 2015 and 2016 saw increased capital investment as those capital projects were completed. Collections operations costs decreased slightly during this timeframe. Since the revenue for this utility is very stable, revenue changes closely follow rate changes. The other large revenue item of note is the continued connection and capacity fees from new construction. These fees grew dramatically between FY 2010 and FY 2015 and then plateaued. Figure 3: Wastewater Collection Utility Expenses, Revenues and Rate Changes Actual Costs through FY 2018 and Projections through FY 2024 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 13 | Page SECTION 5 B : FY 2018 RESULTS Actual revenues for FY 2018 were lower than forecast revenues ($18.4 million actual vs. $18.7 million projected). Total FY 2018 expenses were $17.3 million compared to projections of $19.3 million in the FY 2019 Financial Plan. Table 8 summarizes the variances from forecast. Table 8: FY 2017, Actual Results vs. Financial Plan Forecast ($000) Net Cost/ (Benefit) Type of Change Wastewater treatment costs lower than forecast $(859) Cost decrease Sales revenues higher than forecast $(253) Revenue increase Interest, Connection, capacity fees and other revenues $629 Revenue decrease Operations, capital and other cost decreases $(1,143) Cost decrease Net Cost / (Benefit) of Variances $(1,626) SECTION 5 C : FY 2019 PROJECTIONS This year staff is estimating slightly lower overall costs for FY 2019. Based upon actual results for FY 2018, staff estimated operations costs to be lower by around $425 thousand, with treatment costs projected to be about $183 thousand higher. Revenue from sales is projected to increase by $262 thousand, but other income from connection fees and interest is projected to be lower by $176 thousand. Revised projections estimate a net withdrawal from reserves of $2.3 million vs. $2.7 million in last year’s forecast. Table 9 summarizes the variances from the prior forecast. Table 9: FY 2018, Updated Projections vs. Financial Plan Forecast ($000) Net Cost/ (Benefit) Type of Change Wastewater treatment cost increases $183 Cost increase Operations and other cost decreases $(423) Cost decrease Sales revenues higher than forecast $(262) Revenue increase Connection, capacity fees and other revenue $176 Revenue decrease Net Cost / (Benefit) of Variances $(326) SECTION 5 D : FY 2020 – FY 2024 PROJECTIONS As shown in Figure 3 above (and, in more detail, in Appendix A: Wastewater Collection Financial Forecast Detail), the Wastewater Collection Utility’s total costs are projected to increase by roughly 4% per year on average for FY 2019 through FY 2024. The majority of this increase is due to projected capital cost increases for treatment. The treatment plant is facing the need for major upgrades in coming years, due to aging equipment and changing environmental WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 14 | Page regulations. The costs of the plant are shared among member agencies, with members expected to see average cost increases of around 6% per year over the forecast horizon. As noted previously, collection system capital expenses were lower than usual in FY 2017 and FY 2018 as sewer main replacement projects were delayed to enable staff to complete previous year projects, but a regular annual main replacement cycle resumed in FY 2019. However, underground construction costs for all utilities have increased significantly. This means that the FY 2019 capital budget for a main replacement project is 30.7% higher than in FY 2016, which was the most recent “normal” year in the CIP program (a year when an annual sewer main replacement project was budgeted). In FY 2020, there is a planned reduction in funding for a smaller main replacement project, resulting in a lower projected CIP expense. After this, staff expects overall collection system capital costs to increase by 2% to 3% per year over the next five years. The red line in Figure 3 shows revenue levels and the figure shows that there have been several years where costs exceeded revenues. This trend is projected to continue every year from 2018 through 2022, and will result in a fairly rapid reduction of reserves. Staff projects annual rate increases of 7% to 8% are required to keep reserves from dropping below minimum reserve guidelines. Figure 4 below shows the relative drop in reserves through FY 2022, which begin to recover starting in FY 2023. Figure 4: Wastewater Collection Reserves Projections WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 15 | Page SECTION 5 E : RISK ASSESSMENT AND RESERVES ADEQUACY The Wastewater Collection Utility currently has one contingency reserve, the Operations Reserve. This Financial Plan as presented results in the Operations Reserve nearing the minimum guideline level, but reaching the Target level by the end of the forecast period. Alternative plans could result in reserves being higher, but these would result in larger rate increases. Similarly, lower rate increases would result in lower reserves for a longer period. Figure 5 below shows the proposed Staff plan. Figure 5: Operations Reserve Adequacy Staff performs an annual assessment of risks for the Wastewater Collection Utility. For this evaluation, staff estimates the revenue shortfall due to: 1. the maximum observed budget-to-actual variance in one year during the past five years; 2. an increase of 10% in system improvement CIP expenditures for the year; and 3. an increase of 10% in treatment costs. Table 10 summarizes the risk assessment calculation for the Wastewater Collection Utility through FY 2024. The Operations Reserve is projected to be adequate to manage these levels of risk over the entire forecast period. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 16 | Page Table 10: Wastewater Collection Risk Assessment FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 Total Revenue ($000) 20,626 22,268 24,050 25,973 28,051 Max. Historical Budget-to-Actual variance 4% 4% 4% 4% 4% Budget-to-Actual Risk ($000) 825 891 962 1,039 1,122 System Rehabilitation CIP Budget ($000) 5,505 5,690 5,840 6,012 6,190 CIP Contingency @10% ($000) 551 569 584 601 619 Treatment Budget ($000) 11,733 12,400 13,974 14,365 14,744 Treatment Cost Contingency @10% ($000) 1,173 1,240 1,397 1,436 1,474 Total risk assessment value ($000) 2,549 2,700 2,943 3,077 3,215 Projected Operations Reserve Level ($000) 5,190 4,485 3,607 4,276 6,427 SECTION 5 F : ALTERNATE SCENARIOS No alternate scenarios are proposed as part of this financial plan. SECTION 5 G : LONG-TERM OUTLOOK In the longer term (5 to 35 years) the primary factor that could lead to increased costs for the Wastewater Collection Utility are major upgrades at the RWQCP, a share of which will be allocated to the utility as part of treatment costs. These upgrades includes replacement or rehabilitation of the parts of the facility that pump raw sewage to the main treatment works (the headworks), separate out primary sludge (the primary settling tank), process sludge (the bio-solids facility), and treat wastewater (the fixed film reactors). Upgrades to the laboratories and operational buildings are planned as well. In addition, the 72-inch regional trunk sewer line flowing into the plant needs to be evaluated and rehabilitated. In the future, nutrient limiting regulations for RWQCP discharges are anticipated from the State due to changes in San Francisco Bay. A response to the proposed regulations was addressed in the Long Range Facilities Plan in 2012 and will be more fully addressed by a capital project (WQ- 14004) to upgrade the secondary treatment process, currently in design. The project is in response to aging equipment as well as the regulations, although replacing the aging equipment is needed whatever the outcome of the regulations. SECTION 6 : DETAILS AND ASSUMPTIONS SECTION 6 A : WASTEWATER TREATMENT COSTS Treatment expenses represent the Wastewater Collection Utility’s share of the costs of operating the RWQCP. Per the partnership agreements between Palo Alto and its partner agencies, these charges are assessed based on a formula that takes into account the total amount of wastewater delivered, the amount of organic material in it, its ammonia content, and the total suspended solids it is carrying. The Wastewater Collection Utility’s assessed share WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 17 | Page of the RWQCP’s revenue requirement fluctuates in the 35% to 40% range. Mountain View is the other large agency served by the RWQCP (38% of the revenue requirement estimated for FY 2019) with the smaller agencies (Stanford, Los Altos, East Palo Alto, and Los Altos Hills) making up the remainder of the flow to the treatment plant. Based on detailed project cost projections provided by RWQCP staff, treatment costs are likely to continue to increase by roughly 5% per year through at least 2030. Wastewater Treatment Fund costs are increasing due to rising salary and benefit costs as well as the attendant allocated charges for centralized city services needed to support wastewater treatment fund operations. Additional expenses include increased water and air permitting fees from the Regional Water Quality Control Board and the Bay Area Air Quality Management District. Commodity and utility rates to operate the facility are also increasing with the largest increases in FY 2019 for electrical, water, gas, and storm rates. Chemical expenses, needed to adjust water quality and meet permit requirements, are also increasing modestly per the latest chemical market conditions and procurement contract conditions. Capital projects, parts, and materials are increasing at about 3% per year to keep up with ongoing replacement of aging equipment. Larger increases to capital expenses are expected to begin in FY 2020 in the form of new debt service for major projects to implement the Plant’s capital program. The Plant’s major project in FY 2019 will be finishing construction of the Sludge Dewatering and Truck Loadout Facility, which will allow the retirement of the Plant’s two sewage sludge incinerators that have been in operation since 1972. SECTION 6 B : OPERATIONS Operations costs include the Customer Service, Distribution Operations, Engineering, and Allocated Charges categories in Appendix A: Wastewater Collection Financial Forecast Detail. Debt service, rent, and transfers are also included in this category. Customer Service costs are primarily related to the call center and collections on delinquent accounts. The Distribution Operations category includes preventative and corrective maintenance on sewer mains and laterals, investigation of sewer overflows, regular cleaning of heavily impacted sections of the sewer system, and services shared with other utilities (such as street restoration and equipment maintenance). Allocated Charges include the costs of accounting, purchasing, legal, and other administrative functions provided by the City’s General Fund staff, as well as shared communications services and Utilities Department administrative overhead and billing system maintenance costs. Operations costs are projected to increase by 2 to 3% per year, on average, over the forecast period. Underlying these projections are salary and benefit, consumer price index, and other cost projections used in the City’s long-range financial forecast. SECTION 6 C : CAPITAL IMPROVEMENT PROGRAM (CIP) The Wastewater Collection Utility’s CIP consists of the following programs: • The Sanitary Sewer Replacement/Rehabilitation (SSR) Program, under which the Wastewater Collection Utility replaces aging sewer mains. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 18 | Page • Customer Connections, which covers the cost when the Wastewater Collection Utility installs new laterals or upgrades existing laterals at a customer’s request in response to development or redevelopment. CPAU charges a fee to these customers to cover the cost of these projects. • Ongoing Projects, which covers the cost of replacing deteriorated manholes and sewer laterals, as well as the cost of capitalized tools and equipment. The Sanitary Sewer Replacement and Rehabilitation Program funds the replacement of deteriorating sewer mains to increase capacity or improve pipe condition in various parts of the sewer system. The sewer system consists of over 217 miles of mains, and CPAU uses a variety of tools to establish which sections are in need of replacement. The 2004 Master Plan study identified wastewater mains with capacity deficiency and they have been corrected in past CIP projects. For condition assessment, maintenance statistics (such as records of the location and number of sewer overflows on the system) and videotape of sewer mains from a past video inspection of sewer main project or during regular cleaning can reveal areas with deteriorating pipe. CPAU uses a structural rating system to grade the pipe defects. The video-inspection data and maintenance records are used to plan and prioritize sewer main replacement and rehabilitation. Utilities also coordinates with the Public Works street maintenance program to avoid cutting into newly repaved streets. A major goal of the replacement program is to minimize sewer overflow and reduce groundwater and rainwater infiltration. As mains deteriorate they begin to allow roots into the pipe joints to create blockages, permitting groundwater and rainwater to infiltrate the system. Some level of infiltration is expected on any sewer system, but if there is too much, the combined flow of wastewater and groundwater/rainwater can overwhelm the capacity of various parts of the sewer system. Reducing infiltration can reduce the need to expand the system to accommodate increased flow, as well as reducing unnecessary amounts of water to be treated at the treatment plant. To achieve this goal, deteriorating mains are either rehabilitated with a plastic lining or replaced with new HDPE pipe. Staff has been replacing/rehabilitating the mains as needed according to their condition. In addition, Wastewater Operations’ routine maintenance continues to stay on schedule to minimize sewer overflows. Over the last few years, main replacement costs have been increasing for utilities due to economic activity in the Bay Area causing construction cost inflation. It is likely that this trend will continue in the short term. This increase in cost was a partial reason for a one year delay in projects in FY 2018. Staff deferred its FY 2018 replacement project because all Field Inspectors were busy providing inspection services for one water and two previous wastewater construction projects. Several Engineers were also focused on designing, coordinating amongst all departments, and setting up the contract for the complicated Upgrade Downtown project. However, Utilities Engineering has been consistently replacing aging sewer mains since the early 90’s. The proactive replacement program keeps the collection system in good condition. Between 1990 and 2017, 67 miles or 31% of the collection system has been replaced or rehabilitated (the red- colored lines shown in the attached map in Appendix D: Map (CPA Wastewater Collection WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 19 | Page System - Sewer Mains Replaced or Rehabilitated since 1990). This is an average of approximately 13,530 feet (~2.6 miles), or 1.2% of the system, of sewer main being replaced or rehabilitated per year. Given sewer main expected lifetimes, this is a sustainable replacement rate. In many cases, annual projects get combined together to save administrative time/cost and to make the project more attractive for contractors to bid. The most recent Sanitary Sewer Replacement (SSR) projects SSR 24/25/26 and SSR 27 were substantially completed in April of 2017. Staff continues to re-evaluate and re-prioritize the scope of future projects based on the structural rating system and available budget. Part of the assessment is to evaluate whether a slightly reduced replacement rate would jeopardize the integrity of the system, since large portions of the mains that have not been replaced or rehabilitated are located in sub-divisions that were developed between 1950 and 1970. Customer Connections costs are projected to increase steadily by around 3% each year through the end of the forecast period. Actual expenses for these projects fluctuate annually depending on how many defective laterals and manholes are discovered during routine maintenance, as well as how much development and redevelopment is going on that prompts the replacement or upgrade of sewer laterals. It is worth noting that property owners pay a fee for sewer lateral replacement or expansion during redevelopment, so when the number of projects increases, so does fee revenue. Table 12 displays projected CIP spending for the 5-year financial forecast period. Table 11: Projected CIP Spending Aside from Customer Connections, the CIP plan for FY 2019 to FY 2023 is funded by sewer rates and capacity fees. Appendix B: Wastewater Collection Utility Capital Improvement Program (CIP) Detail shows the details of the plan. SECTION 6 D : DEBT SERVICE The Wastewater Collection Utility currently pays its share of one bond issuance, the 1999 Utility Revenue Bonds, Series A, which is due to be retired in 2024. This $17.7 million issuance refinanced various earlier Storm Drain, Wastewater Treatment, and Wastewater Collection Utility bond issuances. The Wastewater Collection Utility’s share of the issuance was roughly $1.9 million. This amount represented the second refinancing of the remaining principal of a 1990 bond issuance, which itself was a refinancing of a 1985 issuance that financed a variety of improvements to the sewer system. The cost of debt service for the Wastewater Collection Utility’s share of this bond issuance for the financial forecast period is roughly $128,000 per year as shown in Table 13 below. Project Category Current Budget* Spending, Curr. Yr Remain. Budget**Committed FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 Sewer Rehab/Augmentation 6,105 (376) 5,729 825 4,520 4,675 4,796 4,939 5,093 Ongoing Projects 1,129 (445) 683 380 985 1,015 1,043 1,073 1,104 Customer Connections 447 (132) 315 30 445 463 480 497 512 TOTAL 7,681 (954) 6,728 1,236 5,950 6,153 6,320 6,509 6,708 *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). WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 20 | Page Table 12: Wastewater Collection Utility Debt Service ($000) FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 1999 Utility Revenue Bonds, Series A 128 129 129 129 0 The 1999 Utility Revenue Bonds include two covenants stating that 1) the Wastewater Collection Utility will maintain a debt coverage ratio of 125% of debt service, and 2) that the City will maintain “Available Reserves”8 equal to five times the annual debt service. The current financial plan maintains compliance with both covenants throughout the forecast period. Table 14, below, shows compliance with the first covenant. Due to the small size of the annual debt service payment for these bonds, the Wastewater Collection Utility’s Operations Reserve alone more than satisfies the second covenant at more than 30 times annual debt service throughout the forecast period. Table 13: Debt Service Coverage Ratio ($000) FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 Revenues 19,240 20,616 22,258 24,040 25,963 28,041 Expenses (Excl. CIP and Debt Service) 14,458 15,384 16,330 18,018 18,262 18,888 Net Revenues 4,781 5,232 5,929 6,022 7,701 9,153 Debt Service 128 128 129 129 129 0 Coverage Ratio 3729% 4096% 4611% 4665% 5958% N/A The Wastewater Collection Utility’s reserves (but not its net revenues) are also considered security for the Storm Drain and Wastewater Treatment Utilities’ shares of the debt service on the 1999 bonds. Throughout the term of the bonds there remains a small risk that the Wastewater Collection Utility’s reserves could be called upon to make a debt service payment on behalf of one of those utilities if it cannot meet its debt service obligations. Staff does not foresee this occurring based on the current financial condition of those utilities. If the Wastewater Collection Utility’s reserves were used this way, any amounts advanced would have to be repaid by the borrowing utility. One other bond series is secured by the net revenues (but not the reserves) of the Wastewater Collection Utility. The 1995 Series A Utility Revenue Bonds issued for the Storm Drain utility were secured by the net revenues of the City’s “Enterprise,” which was defined as the City’s water, gas, wastewater, storm drain, and electric utilities, and are senior to the 1999 bonds referenced above. Debt service payments of roughly $680,000 per year are made on the 1995 Series A bonds by the City’s Storm Drain Utility, and staff does not currently foresee any risk of that utility being unable to make payment. 8 Available Reserves as defined in the 1999 Utility Revenue Bonds included reserves for the Water, Wastewater Treatment, Wastewater Collection, Refuse, Storm Drain, Electric, and Gas Utilities WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 21 | Page SECTION 6 E : OTHER REVENUES The utility has seen substantial increases in connection and capacity fee revenues in recent years. These fees are imposed to cover the cost of installing new service lines and the customer’s impact on the overall system capacity. These are assumed to continue, albeit slightly reduced from current levels. Income from interest and transfers in are projected to remain steady through the forecast horizon. SECTION 7 : COMMUNICATIONS PLAN The FY 2020 Wastewater Collection Utility communications strategy covers three primary areas: infrastructure upgrades, maintenance and operation activities that relate to safety, and the resulting impact to rate this year. Communication about wastewater rate adjustments will highlight the important infrastructure and operations upgrades that are occurring at the Regional Water Quality Control Plant (WQCP) and increased capital improvement projects (CIP) to improve wastewater collection utility services. This includes increased CIP work, both on wastewater collection mains and at the WQCP. To keep customers apprised of the status and accomplishments of CIP projects, a network of project web pages are maintained and updated as needed. Customers are informed of project information on the Utilities website at www.cityofpaloalto.org/utilityprojects and through utility bill inserts, ads in newspapers and local publications, social media, and email newsletters. An important communications topic for the wastewater utility is avoiding sewer back-ups due to FOG (fats, oil and grease) and trash being dumped down drains and toilets. Safety topics are emphasized year-round. Staff continues with the outreach goal of educating customers about the utility’s gas-sewer line cross-bore inspection program, including the importance of calling Utilities prior to clearing sewer lines in the event of a sewer back-up. Promotional activity about wastewater infrastructure upgrades, utility maintenance and safety operations includes use of bill inserts, ads in local print publications, website pages, email newsletters and social media. While print materials and website pages feature prominently, CPAU is increasing the outreach emphasis on more direct communication with customers, including through use of social media, email newsletters, digital ads and videos. Staff also attend community safety and emergency preparedness events and neighborhood meetings, and we continually seek out new opportunities to do so. One example of a new residential outreach opportunity is through providing information on the Cool Blocks curriculum. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 22 | Page APPENDICES Appendix A: Wastewater Collection Financial Forecast Detail Appendix B: Wastewater Collection Utility Capital Improvement Program (CIP) Detail Appendix C: Wastewater Collection Utility Reserves Management Practices Appendix D: Map (CPA Wastewater Collection System - Sewer Mains Replaced or Rehabilitated since 1990) Appendix E: Sample of Wastewater Collection Outreach Materials WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 23 | Page APPENDIX A : WASTEWATER COLLECTION FINANCIAL FORECAST DETAIL WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 24 | Page APPENDIX B : WASTEWATER COLLECTION 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 2020 FY 2021 FY 2022 FY 2023 FY 2024 SEWER SYSTEM REHABILITATION AND AUGMENTATION (SSR/A) PROGRAM WC-11000 SSR/A - Project 24 129,256 - - - 129,256 94,404 - - - - - WC-12001 SSR/A - Project 25 186,531 - - - 186,531 186,531 - - - - - WC-13001 SSR/A - Project 26 261,594 - - - 261,594 215,207 - - - - - WC-14001 SSR/A - Project 27 73,015 - - - 73,015 - - - - - - WC-15001 SSR/A - Project 28 202,443 4,842,600 - (343,267) 4,701,776 329,198 - - - - - WC-16001 SSR/A - Project 29 - 409,849 - (32,956) 376,893 - 4,098,490 - - - - WC-17001 SSR/A - Project 30 - - - - - - 421,684 4,209,845 - - - WC-19001 SSR/A - Project 31 - - - - - - - 465,185 4,348,150 - - WC-20000 SSR/A - Project 32 - - - - - - - - 448,249 4,477,495 - WC-20001 SSR/A - Project 33 - - - - - - - - - 461,696 4,616,960 WC-22001 SSR/A - Project 34 - - - - - - - - - - 475,547 Subtotal, Sewer Rehab./Augmentation 852,839 5,252,449 - (376,223) 5,729,065 825,340 4,520,174 4,675,030 4,796,399 4,939,191 5,092,507 ONGOING PROJECTS WC-13002 Fusion & Gen. Equip./Tools - 50,000 - - 50,000 - 50,000 50,000 50,000 50,000 50,000 WC-15002 WW System Improvements 1 253,000 - - 253,001 - 260,000 269,000 276,875 285,181 293,737 WC-99013 Sewer / Manhole Rehab.170,088 655,636 - (445,318) 380,406 380,406 675,305 695,564 716,431 737,924 760,062 Subtotal, Ongoing Projects 170,089 958,636 - (445,318) 683,407 380,406 985,305 1,014,564 1,043,306 1,073,105 1,103,799 CUSTOMER CONNECTIONS (FEE FUNDED) WC-80020 Sewer System Extensions 27,286 420,000 - (132,084) 315,202 30,175 445,000 463,000 480,000 497,000 511,910 Subtotal, Customer Connections 27,286 420,000 - (132,084) 315,202 30,175 445,000 463,000 480,000 497,000 511,910 GRAND TOTAL 1,050,214 6,631,085 - (953,625) 6,727,674 1,235,921 5,950,479 6,152,594 6,319,705 6,509,296 6,708,216 Funding Sources Connection/Capacity Fees 405,820 - 430,534 443,450 456,754 470,457 470,457 Funded by Rates and Other Revenue 6,211,085 - 5,505,479 5,689,594 5,839,705 6,012,296 6,196,306 CIP-RELATED RESERVES DETAIL 6/30/2018 (Actual) 6/30/2019 (Unaudited) Reappropriations 350,244 5,491,753 Commitments 699,970 1,235,921 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 25 | Page APPENDIX C : WASTEWATER COLLECTION UTILITY RESERVES MANAGEMENT PRACTICES The following reserves management practices shall be used when developing the Wastewater Collection 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, if the Financial Plan delivered in conjunction with the FY 2015 budget includes projections for FY 2015 to FY 2019, FY 2015 to FY 2019 would be 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 Wastewater Collection 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 Wastewater Collection 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 Wastewater Collection 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. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 26 | 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 Wastewater Collection Utility Financial Plan must result in the withdrawal of all funds from this Reserve by the end of the Financial Planning Period. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 27 | 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 Wastewater Collection 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 105 days of O&M and commodity expense Maximum Level 150 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 Wastewater Collection 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 Wastewater Collection 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 Wastewater Collection 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 Wastewater Collection 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 2020, 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. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 28 | Page APPENDIX D : MAP (CPA WASTEWATER COLLECTION SYSTEM - SEWER MAINS REPLACED OR REHABILITATED SINCE 1990) WASTEWATER COLLECTION UTILITY FINANCIAL PLAN March 2019 29 | Page APPENDIX E : SAMPLE OF WASTEWATER COLLECTION OUTREACH MATERIALS This Page Intentionally Left Blank Attachment C *NOT YET APPROVED * 6054068 Resolution No. _________ Resolution of the Council of the City of Palo Alto Increasing Wastewater Rates 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) 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 ____, 2019, 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 ________ 2019 public hearing was mailed to all City of Palo Alto Utilities wastewater customers by _______, 2019. 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 wastewater 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 S-1 (Residential Wastewater Collection and Disposal) is hereby amended to read as attached and incorporated. Utility Rate Schedule S-1, as amended, shall become effective July 1, 2019. SECTION 2. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule S-2 (Commercial Wastewater Collection and Disposal) is hereby amended to read as attached and incorporated. Utility Rate Schedule S-2, as amended, shall become effective July 1, 2019. SECTION 3. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule S-6 (Restaurant Wastewater Collection and Disposal) is hereby amended to read as attached and incorporated. Utility Rate Schedule S-6, as amended, shall become effective July 1, 2019. Attachment C * NOT YET APPROVED * 6054068 SECTION 4. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule S-7 (Commercial Wastewater Collection and Disposal – Industrial Discharger) is hereby amended to read as attached and incorporated. Utility Rate Schedule S-7, as amended, shall become effective July 1, 2019. SECTION 5. The Council finds that the revenue derived from the wastewater rates approved by this resolution do not exceed the funds required to provide wastewater service, and the revenue derived from the adoption of this resolution shall be used only for the purposes set forth in Article VII, Section 2, of the Charter of the City of Palo Alto. SECTION 6. 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 7. The Council finds that the adoption of this resolution changing wastewater collection rates to meet operating expenses, purchase supplies and materials, meet financial reserve needs and obtain funds for capital improvements necessary to maintain service is not subject to the California Environmental Quality Act (CEQA), pursuant to California Public Resources Code Sec. 21080(b)(8) and Title 14 of the California Code of Regulations Sec. 15273(a). After reviewing the staff report and all attachments presented to Council, the Council incorporates these documents herein and finds that sufficient evidence has been presented setting forth with specificity the basis for this claim of CEQA exemption. INTRODUCED AND PASSED: AYES: NOES: ABSENT: ABSTENTIONS: ATTEST: ___________________________ ___________________________ City Clerk Mayor APPROVED AS TO FORM: APPROVED: ___________________________ ___________________________ Senior Deputy City Attorney City Manager Attachment C * NOT YET APPROVED * 6054068 ___________________________ Director of Utilities ___________________________ Director of Administrative Services This Page Intentionally Left Blank RESIDENTIAL WASTEWATER COLLECTION AND DISPOSAL UTILITY RATE SCHEDULE S-1 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No S-1-1 Effective 7-1-20198 dated 7-1-20168 Sheet No S-1-1 A. APPLICABILITY: This schedule applies to each Occupied Domestic Dwelling unit. B.TERRITORY: This schedule applies everywhere the City of Palo Alto provides Wastewater Service. C. RATES: Per Month Each Occupied Domestic Dwelling unit ................................................................................ $38.6641.37 D.SPECIAL NOTES: 1. Any dwelling unit being individually served by a Water, Gas, or Electric Meter will be considered continuously occupied. 2.For two or more Occupied Domestic Dwelling units served by one Water Meter, the monthly Wastewater charge will be calculated by multiplying the current Wastewater rate by the number of dwelling units. 3.Each developed separate lot shall have a separate service lateral to a sanitary main or manhole. {End} Attachment D COMMERCIAL WASTEWATER COLLECTION AND DISPOSAL UTILITY RATE SCHEDULE S-2 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No S-2-1 Effective 7-1-20198 dated 7-1-20186 Sheet No S-2-1 A. APPLICABILITY: This schedule applies to all commercial establishments other than those served under Utility Rate Schedule S-1 (Residential Wastewater Collection and Disposal), Rate Schedule S-6 (Restaurant Wastewater Collection and Disposal) or Rate Schedule S-7 (Commercial Establishments Wastewater Disposal – Industrial Discharger). B.TERRITORY: This schedule applies everywhere the City of Palo Alto provides Wastewater Services. C. RATES: 1. Minimum Charge per connection per month .............................................................$38.6641.37 2.Quantity Rates, per 100 cubic feet (See Section D.1) .............................................$7.457.97 D.SPECIAL NOTES: 1. The monthly charge for the quantity rate set forth in Section C.2 of this rate schedule will be based upon the average Water usage for the months of January, February and March, and applied in the following July. If a Water Meter is identified as exclusively serving irrigation landscaping, such Meter will be exempted from Wastewater charge calculations. Customers without an applicable usage history will be charged at the minimum monthly charge until such time as such usage may reasonably be established by the City of Palo Alto Utilities Department. 2.The City of Palo Alto Utilities Department may require Wastewater Metering facilities, in which case Service will be governed by terms of a special agreement between the City and the Customer. {End} RESTAURANT WASTEWATER COLLECTION AND DISPOSAL UTILITY RATE SCHEDULE S-6 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No S-6-1 Effective 7-1-20198 dated 7-1-20186 Sheet No S-6-1 A. APPLICABILITY: This schedule applies to all restaurants. B.TERRITORY: This schedule applies everywhere the City of Palo Alto provides Wastewater Services. C. RATES: 1. Minimum charge per connection per month ......................................................... $38.6641.37 2.Quantity Rates, per 100 cubic feet of monthly metered Water usage ........................ $ 11.5212.33 D.SPECIAL NOTES: 1.The City of Palo Alto Utilities Department may require Wastewater Metering facilities, in which case Service will be governed by terms of a special agreement between the City and the Customer. {End} COMMERCIAL WASTEWATER COLLECTION AND DISPOSAL –INDUSTRIAL DISCHARGER UTILITY RATE SCHEDULE S-7 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No S-7-1 Effective 7-1-20198 dated 7-1-20168 Sheet No S-7-1 A. APPLICABILITY: This schedule applies to any establishment requiring sampling of industrial discharges in excess of 25,000 gallons per day, or special discharge monitoring, as defined in Rule and Regulation 23, Section D. B.TERRITORY: This schedule applies everywhere the City of Palo Alto provides Wastewater Services. C. RATES: 1. Collection System Operation, Maintenance, and Infiltration Inflow: $2.15 per 100 cubic feet of metered water use. 2.Advanced Waste Treatment Operations and Maintenance Charge: $1.27 51 per 100 cubic feet of metered water use 3. $ 247.56 per 1000 pounds (lbs) of COD (Chemical Oxygen Demand) 4. $ 596.62 per 1000 lbs of SS (Suspended Solids) 5. $ 3,983.85 per 1000 lbs of NH 3 (Ammonia) 6. $ 14,781.25 per 1000 lbs of toxics (chromium, copper, cyanide, lead, nickel, silver, and zinc) D.SPECIAL NOTES: 1.Water usage will be determined as defined in Rule and Regulation 23, Section D. If a Water Meter is identified as exclusively serving irrigation landscaping, such Meter will be exempted from Wastewater charge calculations. 2.The City of Palo Alto Utilities Department may require Wastewater Metering facilities, in which case Service will be governed by terms of a special agreement between the City of Palo Alto and the Customer. 3.Charges for large discharges will be determined on the basis of sampling as outlined in Utilities Rule and Regulation 23, Section D. However, for purposes of arriving at an accurate flow estimate, discharge Meters, if installed, can be utilized to measure outflow for billing purposes. Annual charges will be determined and allocated monthly for billing purposes. {End}