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HomeMy WebLinkAbout2021-02-03 Utilities Advisory Commission Agenda PacketMATERIALS RELATED TO AN ITEM ON THIS AGENDA SUBMITTED TO THE COMMISSION AFTER DISTRIBUTION OF THE AGENDA PACKET ARE AVAILABLE FOR PUBLIC INSPECTION IN THE UTILITIES DEPARTMENT AT PALO ALTO CITY HALL, 250 HAMILTON AVE. DURING NORMAL BUSINESS HOURS. AMERICANS 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 Supporting materials are available online at https://www.cityofpaloalto.org/gov/boards/uac/default.asp on Thursday, 5 days preceding the meeting. ****BY VIRTUAL TELECONFERENCE ONLY**** Join Zoom Webinar Here Meeting ID: 966 9129 7246 Phone: 1 (669) 900-6833 Pursuant to the provisions of California Governor’s Executive Order N-29-20, issued on March 17, 2020, to prevent the spread of COVID-19, this meeting will be held by virtual teleconference only, with no physical location. The meeting will be broadcast on Cable TV Channel 26, live on Midpen Media Center at https://midpenmedia.org. Members of the public who wish to participate by computer or phone can find the instructions at the end of this agenda. I. ROLL CALL II. AGENDA REVIEW AND REVISIONS III. 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. IV. APPROVAL OF THE MINUTES Approval of the Minutes of the Utilities Advisory Commission Meeting held on January 6, 2021 V. UNFINISHED BUSINESS - None VI. UTILITIES DIRECTOR REPORT VII. NEW BUSINESS 1. Staff Recommendation That the Utilities Advisory Commission Recommend the City Action Council Adopt a Resolution Approving the FY 2022 Wastewater Collection Utility Financial Plan Including Transfers to and From Wastewater Collection Utility Reserve Accounts and an Amendment to the Wastewater Collection Utility Reserves Management Practices; and Adopt a Resolution Adjusting 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) 2. Discussion and Status Update on the 2020 Sustainability and Climate Action Plan Discussion VIII. COMMISSIONER COMMENTS and REPORTS from MEETINGS/EVENTS UTILITIES ADVISORY COMMISSION – SPECIAL MEETING WEDNESDAY, February 3, 2021 – 4:00 P.M. ZOOM Webinar Chairman: Lisa Forssell  Vice Chair: Lauren Segal  Commissioners: Michael Danaher, Donald Jackson, A.C. Johnston, Greg Scharff, and Loren Smith  Council Liaison: Eric Filseth MATERIALS RELATED TO AN ITEM ON THIS AGENDA SUBMITTED TO THE COMMISSION AFTER DISTRIBUTION OF THE AGENDA PACKET ARE AVAILABLE FOR PUBLIC INSPECTION IN THE UTILITIES DEPARTMENT AT PALO ALTO CITY HALL, 250 HAMILTON AVE. DURING NORMAL BUSINESS HOURS. AMERICANS 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. IX. FUTURE TOPICS FOR UPCOMING MEETINGS: March 03, 2021 SUPPLEMENTAL INFORMATION - The materials below are provided for informational purposes, not for action or discussion during UAC Meetings (Govt. Code Section 54954.2(a)(3)). Informational Reports 12-Month Rolling Calendar Public Letter(s) to the UAC • Informational Update on Progress Toward a Second Transmission Line Corridor Connecting the City of Palo Alto Electric Distribution System to the Pacific Gas & Electric Transmission Grid • Informational Update on the Utilities Quarterly Report for Q4 FY 2020 MATERIALS RELATED TO AN ITEM ON THIS AGENDA SUBMITTED TO THE COMMISSION AFTER DISTRIBUTION OF THE AGENDA PACKET ARE AVAILABLE FOR PUBLIC INSPECTION IN THE UTILITIES DEPARTMENT AT PALO ALTO CITY HALL, 250 HAMILTON AVE. DURING NORMAL BUSINESS HOURS. AMERICANS 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. PUBLIC COMMENT INSTRUCTIONS Members of the Public may provide public comments to teleconference meetings via email, teleconference, or by phone. 1. Written public comments may be submitted by email to UACPublicMeetings@CityofPaloAlto.org. 2. Spoken public comments using a computer will be accepted through the teleconference meeting. To address the Commission, click on the link below for the appropriate meeting to access a Zoom- based meeting. Please read the following instructions carefully. A. You may download the Zoom client or connect to the meeting in-browser. If using your browser, make sure you are using a current, up-to-date browser: Chrome 30+, Firefox 27+, Microsoft Edge 12+, Safari 7+. Certain functionality may be disabled in older browsers including Internet Explorer. B. You will be asked to enter an email address and name. We request that you identify yourself by name as this will be visible online and will be used to notify you that it is your turn to speak. C. When you wish to speak on an agenda item, click on “raise hand.” The Attendant will activate and unmute speakers in turn. Speakers will be notified shortly before they are called to speak. D. When called, please limit your remarks to the time limit allotted. E. A timer will be shown on the computer to help keep track of your comments. 3. Spoken public comments using a smart phone use the telephone number listed below. When you wish to speak on an agenda item hit *9 on your phone so we know that you wish to speak. You will be asked to provide your first and last name before addressing the Council. You will be advised how long you have to speak. When called please limit your remarks to the agenda item and time limit allotted. Join Zoom Webinar Here Meeting ID: 966-9129-7246 Phone number: 1 669 900 6833 Utilities Advisory Commission Minutes Approved on: Page 1 of 5 UTILITIES ADVISORY COMMISSION MEETING MINUTES OF JANUARY 6, 2021 SPECIAL MEETING CALL TO ORDER Chair Forssell called the meeting of the Utilities Advisory Commission (UAC) to order at 4:00 p.m. Present: Chair Forssell, Vice Chair Segal, Commissioners Danaher, Jackson, Johnston, Scharff and Smith Absent: AGENDA REVIEW AND REVISIONS None. ORAL COMMUNICATIONS None. APPROVAL OF THE MINUTES Commissioner Johnston moved to approve the minutes of the December 2, 2020 meeting as presented. Commissioner Smith seconded the motion. The motion carried 6-1 with Chair Forssell, Vice Chair Segal, and Commissioners Jackson, Johnston, Scharff, and Smith voting yes, and Commissioner Danaher absent. UNFINISHED BUSINESS None. UTILITIES DIRECTOR REPORT Dean Batchelor, Utilities Director, delivered the Director's Report. Green vs CPA I have an update on the Green case, which is a class action lawsuit challenging the City’s gas and electric general fund transfers. As you know, for decades the City has annually transferred a portion of the earnings of its gas and electric utilities to its general fund, according to a voter- approved provision of the City’s charter. This type of transfer is commonly done by other municipal power and gas utilities in California. In 2015, a CPAU customer sued the City, claiming that the City violated the California Constitution (Proposition 26) by imposing gas and electric rates that exceeded the reasonable cost of providing those services, without voter approval. In particular, Green alleged that the City’s general fund transfers from the electric and gas utilities, as well as the rents that the utilities pay the general fund for use of City property, are not valid costs of providing service. The City denied wrongdoing and the case went to trial in 2019. In January 2020, the Superior Court judge ruled that the City’s electric rates were not taxes, but the gas rates were. In October 2020, the judge ruled on the remedy, ordering the City to pay $12.6 million in refunds to DRAFT Utilities Advisory Commission Minutes Approved on: Page 2 of 5 CPAU gas customers who took service between September 2015 and June 2019. Plaintiff’s attorney’s fees, expected to be in the millions of dollars, will likely be deducted from the class refund. Either side may appeal the trial court decision -- plaintiffs may do so to try to overturn the court’s decision on the electric rates, and the City may do so to try to overturn the court’s decision on the gas rates. The City has not yet decided whether to appeal. Whether or not either side appeals, there are a variety of issues to be determined regarding how to provide notice about the case to the class. The City’s attorneys are working on these issues with Green’s attorneys now. In the coming months, and assuming the case does not settle, current and former gas customers who are members of the class will receive an “opt-out notice” explaining the facts of the case, the result, and their right to opt-out of the class or to stay in the lawsuit. A hearing on these matters is set for February 2021. At that hearing, we expect the judge to determine the notice language, the timing of when it will be sent, and when refunds, if any, will be paid. If either side appeals, the City’s payment of refunds it owes, if any, will likely happen after all appeals are resolved, which could be several years from now. General fund transfers have been the frequent targets of class action attorneys, and the outcome of this case has implications for municipal utilities statewide. The City’s attorneys are actively engaged with the City Council on this litigation, and I will continue to keep you posted on any non-confidential material that I can share. NEW BUSINESS ITEM 1: DISCUSSION: Discussion of Gas Utility System Average Rates Impacts of Electrification. Lisa Bilir, Senior Resources Planner, shared that the item before the Commission was a back of the envelope analysis on average rate impacts of electrification and that final costs may differ significantly from the costs presented in the analysis. The scope of the analysis was limited to examining utility costs, not customer electrification costs, and the analysis focused on system average rate impacts. In the year 2016, Council adopted the Sustainability and Climate Action Plan (S/CAP) which included a goal to reduce the City’s Greenhouse Gas Emissions by 80 percent from 1990 levels by 2030. The S/CAP identified two primary sectors, natural gas use in buildings and mobility-related measures, that needed to reduce their Greenhouse Gas Emissions in order to reach the 80 percent by 2030 goal. This analysis assumes 60% Greenhouse Gas Emissions reductions in the building sector by 2030 which is a level that staff estimates will allow the building sector to make its contribution toward the overall goal. Some of the reasons for focusing on single-family residential customers are that one of the proposed key actions of the S/CAP update is to target electrification of all single-family residences; this sector represents about a third of the total natural gas use within the City and nearly two-thirds of the gas utility customers. Additionally, the Utilities Department determined that it is likely possible to run a viable gas system that serves only commercial and some multi-family customers. Staff analyzed three scenarios to illustrate the different possible ways achieve the 80 percent by 2030 goal. Scenario 1 shows rate impacts in FY 2030 and assumed that all single-family customers were electrified, disconnected from the gas system and that other customer classes had cut back their usage. Scenario 2 shows the FY 2030 rate impacts and assumed that single-family residential had cut back their usage by 90 percent but all still remained connected to the gas system. Scenario 3 shows rate impacts in FY 2025 part way toward Scenario 1 where a portion of single-family residential electrification and disconnection has occurred. The key reasons for Scenario 1’s system average rate reduction of 16% included the reduced size of the gas system and the associated costs to maintain, operate, and staff the smaller sized system. In Scenario 2, the system average rates were predicted to be 52 percent higher than the baseline scenario. That was because reductions were not realized in terms of reducing the size of the system and the cost to maintain, operate and staff the system was higher. Scenario 3 projected a transition period with higher costs for customers because of the cost of paying for disconnections which resulted in a system average rate increase of 17 percent. The analysis showed that widespread electrification without scaling down the gas system size could increase the system average rate for remaining customers. Even if the City was successful in reducing the system size by electrifying and disconnection, during the transition period there may be significant rate Utilities Advisory Commission Minutes Approved on: Page 3 of 5 impacts for remaining customers due to the costs of disconnection. The City may wish to continue to explore electrification incentives for renters, low-income residents, and small businesses during the transition. Commissioner Scharff commented that many residents in single-family homes also within Palo Alto live on a fixed income and for them, electrification could be a huge cost burden. He wanted to see a cost analysis done that predicted how much it would cost the City to pay for all residents to electrify. Telling residents that they are going to be disconnected will create political anger and we need to think about the political implications of this. In answer to his question on when the analysis would be presented to Council, Jonathan Abendschein, Assistant Director of Utilities, indicated that Staff was still working on key issues and concerns that were raised within the analysis. Once those key issues and concerns were addressed, all the data would be presented to Council. In reply to Commissioner Scharff’s inquiry about how much the Utility Fund transfer is, Abendschein shared that the transfer currently was approximately $6 million per year. Commissioner Scharff advised Staff to take into account that the $6 million may not be available anymore and how can the City make the idea of disconnecting from the Gas Utility more palatable to the community. He felt that electrifying and disconnecting the community would be very expensive and may cause political protest. Commissioner Danaher emphasized that there have been no estimates of how much it would cost a single- family home to electrify. The estimated cost is a key component in finding out how to make it cost effective for customers to electrify their homes. Abendschein expressed that the concern raised regarding how much it costs to electrify a single-family home is a core element of the upcoming analysis and that staff would be sharing those findings within the full context of the S/CAP updates. Commissioner Danaher suggested to factor in the cost for a resident to install double pane windows and other measures. Commissioner Johnston found the analysis eye-opening and that we have to get all the single-family residences off the system and be able to close parts of the system in order to make it cost effective. He agreed with all of the concerns that Commissioner Scharff and Commissioner Danaher had expressed. Disconnecting all single-family residents from the gas system would require significant incentives to cover the costs. Vice Chair Segal echoed all of the previous comments and added that all cities within the State of California will face the same challenges due to the state having its own Greenhouse Gas Emissions reduction goals. She wondered what is going on at the state level such as funding that we could take advantage of. She predicted it would be cheaper to buy all residents an electric car instead of electrifying homes after seeing the analysis and wanted to see that concept be reversed. Commissioner Jackson agreed with the other Commissioners. He emphasized that data on how much it would cost to electrify a single-family home is an important component as well as what incentives can the City provide to help with the financial burden. The City has to decide whether electrifying is a serious goal or not. Commissioner Smith said that there was still a lot more work that needed to be done and he echoed the concern about the cost to a single-family residence. He appreciated the assumptions that were assumed in the analysis. In answer to his question regarding what disconnection meant in the analysis, Bilir confirmed that disconnection meant that the mains would be sealed at the valves and each service line would be individually sealed. All risers and meters would be disconnected from a single-family residence. All the work was estimated to be done by a City of Palo Alto utility crew. In reply to Commissioner Smith’s request on why pipes need to be sealed, Dean Batchelor, Utilities Director, explained that pipes are sealed to prevent them from collapsing. Commissioner Smith suggested that the abandoned pipelines be used for fiber to the home and that could reduce the cost for both projects. Commissioner Scharff believed that the Council would benefit from hearing the Commission’s view on the subject after further analysis is done. Another key question he raised was how much Staff time should be spent on the subject if full electrification starts to look infeasible? Commissioner Scharff expressed concern about how residents would feel if they are faced with being required to electrify their homes and the difficulty of gathering data on the customer cost to electrify homes. Abendschein confirmed that Staff is close to Utilities Advisory Commission Minutes Approved on: Page 4 of 5 completing the residential cost component analysis including financing mechanisms for customers and that this will be presented to the UAC after completion. Batchelor added that an audit was underway that reviewed all of the utilities in terms of size of the mains, size of the meters, and other components. The audit will provide information on what size main and other information about each residential home has which will help determine electrification cost estimates. Vice Chair Segal agreed that more data collection and analysis needed to happen. Suggested quantifying cost per CO2 equivalent unit of reductions. She suggested asking residents what option is the least painful. In reply to Commissioner Jackson’s inquiry regarding Scenario 3 and if the rate increase was caused by disconnections, Bilir confirmed that was correct. Commissioner Jackson was in favor of the Commission reviewing future reports and providing feedback to Council. Chair Forssell concurred that there needed to be an analysis done on how much it would cost a homeowner to electrify. She felt it was important and valuable to have Staff continue to conduct related analyses. She predicted there could be a significant backlash if the City required electrification. Incentives such as providing fiber to the home while disconnecting from the Gas Utility as well as undergrounding were incentives she supported and she felt with such incentives in place, neighborhoods may volunteer to move forward with electrification. Councilmember Cormack appreciated the time horizons predicted in the analysis and felt that Staff’s approach to the problem was methodical. When the item comes to Council she wanted enough analysis done to understand a rough estimate for electrification for residents. The last time the S/CAP came before the Council there were dramatic choices in order to meet the goal; it is important to think about the time horizon. Council is releasing a package for boards and commissions including a handbook including establishing work plans. If the UAC feels that this would be one of the three top priorities for the year, this work plan could enable the UAC to inform Council of the UAC’s discussions and feedback on topics. ACTION: None ITEM 2: DISCUSSION: Discussion and Update on Lifecycle Emissions for Gasoline, Natural Gas and Electricity Consumed in Palo Alto. Lena Perkins, Senior Resource Planner, reported that the study was a request from the Commission on how lifecycle emissions are intertwined with S/CAP goals. Lifecycle meant the emissions from extraction, transport, refining, and use of a fuel. The impact on reported emissions varied between the different fuels. For every unit of gasoline used in the City, the total emissions were 34 percent higher than the emissions shown in the S/CAP. For Natural Gas, emissions per GWP 100 (Global Warming Potential over 100-years) was 49 percent higher than reflected in the S/CAP along with 5 percent higher for electricity and 34 percent higher for gasoline. Staff’s proposed next steps included considering total emissions when setting incentives for voluntary programs, consider calculating total emissions reductions by programs and projects, and consider collaborating with other organizations to help the community understand the full carbon impact of different actions. Vice Chair Segal appreciated the update and believed that it helped explain the impacts of electrifying or not electrifying to customers. In response to Chair Forssell’s inquiry regarding Staff’s recommendation to not use lifecycle emissions for the S/CAP, Perkins answered the recommendation was made because very few near-term choices would be impacted by including lifecycle emissions. Chair Forssell commented that lifecycle emissions made a huge difference when compared against the footprint minus offsets. Jonathan Abendschein, Assistant Director of Utilities, commented that Council had directed Staff to review the S/CAP without offsets. Staff continues to explore ways to include lifecycle emissions in incentive calculations and how data is presented for the S/CAP and Carbon Neutral Program. In answer to Chair Forssell’s question of what the International Council for Utilities Advisory Commission Minutes Approved on: Page 5 of 5 Local Environmental Initiatives (ICLEI) is, Perkins disclosed that ICLEI is the standard that communities use to do comparable Greenhouse Gas inventory and compare that inventory against other communities. Staff felt that the lifecycle emissions study could be communicated to the community without including it in the S/CAP because the S/CAP’s primary role was to provide the California Environmental Quality Act (CEQA) analysis and certification. She added that offsets were a better fit for places where consumers do not have choices. Chair Forssell appreciated seeing the data for both GWP 100 and GWP 20 and suggested to continue to compare the two in future reports. In reply to Commissioner Scharff’s query about natural gas emission being less than electricity, Perkins explained that these were emissions per unit of fuel delivered to the customer (well-to-pump, not well-to- wheel). Abendschein and Perkins also explained that the heat provided from an electric heat pump water heater is three times the higher compared to the heat provided by natural gas which resulted in lower emissions per unit of heat delivered by the electric heat pump. Perkins also noted that the City only purchases carbon-free electricity in long-term contracts, so that the carbon footprint of Palo Alto’s electricity supply is zero (other than transmission and distribution losses), whereas the carbon intensity shown and labeled in the report was for the 2020 California average electricity, not Palo Alto’s electricity supply. Gary Lindgren emphasized that half of the City’s electricity comes from natural gas because the City used electricity from the grid. Perkins agreed that the City does pull electricity from the grid but the net impact on the market and the carbon intensity of the market is such that the City produces enough electric resources that even examining load, supply, and emissions on an hourly basis that the net effect of the City electricity supply is that it greens up the supply of the average grid and displaces as much carbon as it causes to be emitted. Mr. Lindgren announced that he would be in contact with Staff regarding the topic. ACTION: None REPORTS FROM COMMISSIONER MEETINGS/EVENTS None. FUTURE TOPICS FOR UPCOMING MEETING: February 3, 2021. In reply to Commissioner Jackson’s inquiries regarding permitting for electrification and which departments play a role in approving electrification for dwelling units, Dean Batchelor, Director of Utilities, confirmed that a person from the Development Center would be presenting. Jonathan Abendschein, Assistant Director of Planning, added that the Development Center spokesperson will be able to answer any questions related to fire and utility Staff can help with utility questions. The discussion will be focused on solar and storage versus electrification and electric vehicles (EV). NEXT SCHEDULED MEETING: February 3, 2021. Commissioner Scharff moved to adjourn. Commissioner Danaher seconded the motion. The motion carried 7-0 with Chair Forssell, Vice Chair Segal, and Commissioners Danaher, Jackson, Johnston, Scharff, and Smith voting yes. Meeting adjourned at 5:42 p.m. Respectfully Submitted Tabatha Boatwright City of Palo Alto Utilities Utilities Advisory Commission Minutes Approved on: March 03, 2021 Page 1 of 8 UTILITIES ADVISORY COMMISSION MEETING MINUTES OF FEBRUARY 3, 2021 REGULAR MEETING CALL TO ORDER Chair Forssell called the meeting of the Utilities Advisory Commission (UAC) to order at 4:00 p.m. Present: Chair Forssell, Vice Chair Segal, Commissioners Danaher, Jackson, Johnston, Scharff and Smith Absent: AGENDA REVIEW AND REVISIONS None. ORAL COMMUNICATIONS None. APPROVAL OF THE MINUTES Commissioner Danaher moved to approve the minutes of the January 6, 2021 meeting with the revisions of the date. Commissioner Johnston seconded the motion. The motion carried 7-0 with Chair Forssell, Vice Chair Segal, and Commissioners Danaher, Jackson, Johnston, Scharff, and Smith voting yes. UNFINISHED BUSINESS None. UTILITIES DIRECTOR REPORT Dean Batchelor, Utilities Director, delivered the Director's Report. Utilities Sales and Delinquencies Water and electric utility sales continue to be at or above forecasts for FY 2021. Electricity consumption continues to be 5% to 10% below previous years, as forecasted, while water use continues to be at or above previous years, which is higher than forecasted. Gas consumption was low in summer and fall, below forecasts, but as winter started gas consumption rose significantly and consumption is now roughly the same as in previous winters. Bill delinquencies continue to rise. As of the end of December, delinquencies for all utilities totaled roughly $1.2 million. While delinquencies continue to rise gradually, they are still well within the amounts estimated in our financial forecasts. And many customers with delinquent accounts will eventually pay their delinquent balances off, based on prior experience. Status Update on the Water Year To-Date While it is still early in the water year, precipitation is currently at only about 40% of normal for the year in the Northern Sierras, the primary watershed for the hydroelectric generation we receive from the Central Valley Project, and 30% of normal in the Central Sierras, where the Calaveras hydroelectric project is located as well as the water sources for the SFPUC. A bad water year can result in as much as $8 million to $10 million Utilities Advisory Commission Minutes Approved on: March 03, 2021 Page 2 of 8 in additional costs for the electric utility. The electric utility has hydro stabilization reserves of $11.7 million currently, which is lower than the target level of $17 million, but well above the $3 million minimum. This is an issue we will be tracking through the spring and we may need to come back to the UAC and Council to discuss options for the electric utility if the water year does not improve. The City’s water supply, on the other hand, is in a better position. The SFPUC may consider voluntary restrictions on water use if the water year does not improve, but is not signaling a need for mandatory restrictions at this item. Clean Fuel Rewards Program: Under the statewide program all Palo Alto residents purchasing new electric vehicles are eligible for a Clean Fuel Rewards point-of-sale $1,500 rebate at participating dealerships. Since its launch in November 2020, the program has received ~15,000 rebate applications and roughly 5,000 rebates have been paid as of Dec 31, 2020. The number of applicants from Palo Alto is not known at this time. The total new EV sales in California is projected to be 250,000 in CY 2021, with Palo Alto anticipating about 1,500 additional EV registrations. CALeVIP: The California Energy Commission’s California Electric Vehicle Infrastructure Project (CALeVIP) launched in Santa Clara and San Mateo counties on Dec 16, 2020. This project provides rebates for Level 2 and Level 3 EV charger installation. CPAU has committed $1 million of Low Carbon Fuel Standard (LCFS) funds to receive $1 million in matching grant funding. In addition to rebate applications from the community the City’s public works department for five DC fast charger rebates for installation in public garages and has been provisionally approved for $350,000 in rebates. Home Efficiency Genie Virtual Audit: The Home Efficiency Genie is now offering virtual home energy and water efficiency assessments using a smart phone-based interactive platform for $49. This adapted version of the advisor visit allows the Genie technician to engage with residents in a live review of their home. After the assessment, the technician sends a report outlining the findings, discussion points and possible next steps. Residents are offered a safe delivery of energy and water saving devices like a smart power strip, LED light bulbs, high efficiency shower heads and faucet aerators. Since the launch of the virtual program in November, seven virtual assessments have been performed with positive feedback. Recent Offset Purchases: Following Council’s approval of the updated Carbon Neutral Gas Plan in December 2020, staff solicited proposals for carbon offsets from five brokers with whom the City has agreements in place. Staff received three proposals, and on January 7th, the City purchased 120,000 metric tons (MT) of carbon offsets from four projects at an average price of $5.81/MT CO2, well below the Council-approved maximum price of $19/MT. The offsets purchased and retired were from 53% coal mine methane capture, 43% forestry, and 4% livestock project types and adhered to all criteria outlined in the Carbon Neutral Gas Plan. These offset purchases make the city’s gas sales carbon neutral through December 2020. Rosamond Solar virtual ribbon cutting: Please join us at a virtual ribbon cutting ceremony for the Rosamond Central Solar Project on February 3 at 10 am. The Rosamond project will provide CPAU with 26 MW of solar electricity beginning in 2023. Rosamond is the sixth large-scale solar project to come online to supply Palo Alto with renewable energy. Solar energy will now supply 44-45%, close to half, of Palo Alto’s total electric needs each year. We will share the link to the ribbon cutting event with the UAC via email. Commissioner Danaher reported that he had no objections to postponing the discussion regarding home electrification permits. In reply to Commissioner Jackson’s inquires of if the 2nd transmission line will be above or below the ground and sea level rise impacts, Director Bachelor explained that the existing line is on towers and the new line will also be on towers. The towers are roughly 70 to 80 feet in the air which mitigates any sea level rise impacts. Utilities Advisory Commission Minutes Approved on: March 03, 2021 Page 3 of 8 NEW BUSINESS ITEM 1: ACTION: Staff Recommendation That the Utilities Advisory Commission Recommend the City Council Adopt a Resolution Approving the FY 2022 Wastewater Collection Utility Financial Plan Including Transfers to and From Wastewater Collection Utility Reserve Accounts and an Amendment to the Wastewater Collection Utility Reserves Management Practices; and Adopt a Resolution Adjusting 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). Dean Bachelor, Utilities Director, introduced Lisa Bilir who presented the item to the UAC. Lisa Bilir, Resource Planner, confirmed that the discussion is focused on the Wastewater Collection Utility Financial Plan. In 2020 City Council did not increase the wastewater rates and the current rates had been in place since July 1, 2019. Staff recommended a 3 percent overall revenue increase, an additional 3 percent increase in FY 2023, and a 5 percent increase annually starting in FY 2024 through FY 2026. Staff provided an alternate proposal of a zero percent increase but if adopted, the Wastewater Utility Fund would need to reduce spending or differ capital spending on the Collection System of approximately $200,000 per year during the 5 years. The key drivers for a 3 percent increase were due to a series of large increases in the treatment costs during the 5-year planning period as well as addressing the on-going needs of the Capital Improvement Projects (CIP) in the Collection System. To keep the increased percentage to 3 percent, staff had reduced the size and cost of each sewer replacement in the Collection System as well as differed two sewer replacements by one year. A Cost of Service Analysis was completed and the results of the study were incorporated into the rate proposals. Staff also proposed changes to the CIP Reserve to reflect the CIP spending on the Collection System as well as the revenue that is used in the CIP Reserve. With a zero percent increase and no further cost cuts, the Wastewater Operations Reserve yearend balance would drop close to the reserve minimum in the projected 10-year forecast. With a 3 percent increase, residential customers would see their bill increased by $1.95 per month, commercial customers would see an increase of $.12 per Centum Cubic-feet (CCF), and restaurant customers would see a reduced of $.26 per CCF. One highlighted of the Cost of Service Analysis was the importance of flow volume and flow volume is the volume of wastewater discharge from each customer class as well as from the City as a whole. Over the last 10 to 12-years, wastewater flows have declined across all customer classes, but the non-residential flow volumes have decreased more than residential flow volumes. That change reflected why there is a larger increase for residential customers than commercial customers. The City continued to have lower residential rates than surrounding Cities by 29 percent and the City will maintain that status through the projected 5-years. Commercial continued to be higher than surrounding Cities by 10 percent and restaurant bills were lower than surrounding Cities by 6 percent. Staff requested support from the UAC for the annual $4.35 million of funding to the CIP Reserve, a transfer of $2.2 million from the Operations Reserve to the CIP Reserve in FY 2022, and the associated changes to the reserve guidelines. In response to Commissioner Johnston’s questions regarding decreasing the size of several of the sewer projects and postponement of projects, Silvia Santos, WGW Engineering Manager, answered that it meant that the amount of sewer footage that is being replaced has been reduced. Bilir confirmed that several projects were postponed to a subsequent year. In reply to Commissioner Johnston’s inquiries regarding if residential meant single-family only and if it mattered if a multi-family building had a common water line, Bilir noted that single-family and multi-family are on the residential rate schedule. Jonathan Abendschein, Assistant Director of Utilities Resource Management, explained that multi-family buildings that contain central water using facilities may be charged a commercial rate for water but individual residents receive individual flat rate charges for their wastewater. In answer to Commissioner Johnston’s ask of how many years the new Cost of Service Study applies to, Bilir disclosed that there is not a set amount of time and staff will reevaluate the rate burden balance between the three classes if there are changes in the data. Commissioner Johnston announced that he is concerned that residential customers have a higher burden in terms of rate increases for wastewater. He supported the contribution of a leveled amount to the CIP Reserve on an annual basis. Utilities Advisory Commission Minutes Approved on: March 03, 2021 Page 4 of 8 In answer to Vice Chair Segal’s inquiry of if the Cost of Service Study was drafted traditionally in terms of evaluating flow versus strength versus customer service costs, Bilir confirmed that the new study was drafted in a way that is similar to the existing study. She agreed that as flow decreases, concentration increases and the assumption in the study is that the strength difference across the customer classes remained the same as in the previous study. Abendschein added that there is both capacity and strength related costs in transporting and treating wastewater. James Allen, Manager Water Quality Control Plant, clarified that 34 percent of the cost if for the flow and 66 percent is for strength. If the wastewater is more concentrated then there is a cost reduction and all partners see that reduction. In response to Vice Chair Segal’s query on why residential customers are carrying a bigger portion of the overall cost if the strength of the wastewater coming from restaurants is increasing because the flow is decreasing, Bilir noted that on the Collection System cost side, more of the cost went to flow. Also, residential customers make up 94 percent of the number of customers and because restaurants are a small customer class, very small changes in the flow make a big difference in the proposed rate. Vice Chair Segal disclosed that the changes in the reserves made sense, is in alignment with the other utilities, and she supported it. In reply to her question of if the budget included sea level rise impacts to treatment plant facilities, Allen disclosed that there is a $12 million project that once completed will carry more water from the plant and that will address sea level rise up to 3-feet. Also, as facilities are constructed, the elevation of those facilities is being raised to accommodate for sea- level rise. Karin North, Assistant Director of Public Works, specified that in parallel to the work being done at the plant, a Sea Level Rise Vulnerability Assessment is underway and staff is working with the Army Core of Engineers on levy improvement projects. Commissioner Scharff stated that the City of Menlo Park, Redwood City, and the City of Hayward skewed the comparison of monthly residential bills and gave a false impression for Palo Alto’s bill. He encouraged staff to revisit the residential monthly bill comparison. He did not support the notion of having residential customers paying more for the wastewater than commercial customers. In answer to his queries of what the driving costs are for wastewater and why flow is what determines the Cost of Service Study, Bilir mentioned that the Cities used in the comparison are the Cities that are used in all of the utility comparisons. In terms of cost, 50 percent of costs go-to the treatment of wastewater, 34 percent goes to flow and on the Collection side, 97 percent of costs go to flow. In response to Commissioner Scharff’s query about why is the Cost of Service Study using flow if it is a fixed cost, Santos explained that the issue is the conditions of the pipes and the cost reflects the replacement of pipes. Abendschein added that in the short term, costs do not change based on flow, but the fixed costs are based around the peak amount of flow that is associated with the system. Costs for the system are allocated based on how much each of the different customer classes use the capacity and does not reflect short term fluctuation. The goal of the Cost of Service Study is to make sure that the only allocations that take place are ones that as necessary based on data. In answer to Commissioner Scharff’s question of how does staff determine how much pipe is needed to be replaced, Santos noted that a condition assessment is conducted on the pipelines to prioritize replacements. The City has been replacing the pipeline on average 1 mile to 2 miles every other year. Batchelor added that the 3 percent increase helps pay for past replacement projects and treatment plant projects. Staff predicted that treatment costs will continue to rise. Commissioner Smith mentioned that the City of Los Altos was not a good City to compare to for both residential and commercial bills. In answer to his question regarding if the City of Los Altos’s wastewater infrastructure is newer, Bilir confirmed that staff will investigate further why the City of Los Altos has a lower bill than Palo Alto. Abendschein clarified that staff does not know what other City’s infrastructure maintenance plans are and maintenance plays a large role in rate increases and decreases. In response to Commissioner Smith’s queries regarding the CIP Reserve and if a study had been conducted to see if the City could transfer only $2.2 million annually instead of the proposed $4.35 million, Bilir clarified that the $4.35 million is the average for the entire Collection System CIP Budget. The $2.2 million is a catch-up transfer from the Operations Reserve to the CIP Reserve to be able to fund the upcoming sewer replacement project. Abendschein added that to maintain the 5 percent increase in the outer years while absorbing the increased treatment costs, the utility is drawing on the CIP Reserve slightly. The intention is not to fund the CIP less, Utilities Advisory Commission Minutes Approved on: March 03, 2021 Page 5 of 8 the transfer is a management strategy of dealing with higher treatment costs in later years. Allen noted that in terms of treatment cost drivers, Palo Alto’s share of the fixed asset is 38.16 percent and that is the total project cost. In reply to Councilmember Filseth’s prediction that 100 percent of the costs are fixed and any variable costs were associated with flow and strength, Abendschein agreed that broadly the cost of running the collection system is entirely fixed. Allen shared that electricity costs were associated with strength as well as flow. In answer to Councilmember Filseth’s summary that the practice is to allocate the fixed cost to who uses how much flow, Allen shared that there is a breakdown of strength and flow costs between the different pieces of equipment. Councilmember Filseth commented that the issues raised are common among utilities regarding large fixed costs and unfairly distributed rate percentage allocations. In answer to Councilmember Filseth’s ask of why the City of Menlo Park and Redwood City have higher bills than Palo Alto, Bilir shared that they have newer treatment plant facilities than Palo Alto. Allen confirmed that Palo Alto is more efficient with its CIP projects than other peninsula Cities. Commissioner Scharff emphasized that the City of Santa Clara is an extremely well-run utility for wastewater and Palo Alto should be proud that its utility is better than Santa Clara’s. He requested that staff breakdown the reasons why surrounding City’s have the average bill cost that they have. In reply to Chair Forssell’s query about how much has the wastewater flow decreased and why water usage is down, Bilir disclosed that wastewater flow decreased by 11 percent overall since the last Cost of Service Study was drafted 10-years ago. The assumption from the prior Cost of Service Study was compared to the new data and that comparison showed a decrease in water usage. Another change that the new Cost of Service Study reflected is that all industrial customers are now listed under commercial customers. In answer to Chair Forssell’s question of why did the strength assumptions almost double between the two studies, Bilir predicted that it was because there was a slight increase in the amount of infiltration assumption, but staff will investigate it further. In answer to Chair Forssell’s inquire of why there is a recommendation to eliminate the fixed monthly charge for commercial and restaurant customers, Abendschein clarified that the recommendation is to eliminate a minimum charge, not a fixed charge. It was not normal to have a fixed monthly charge in a Wastewater Utility, but staff will return with a follow-up answer. ACTION: Commissioner Danaher moved that the Utilities Advisory Commission (UAC) recommend the Council: 1. Adopt a resolution approving: a. The Fiscal Year (FY) 2022 Wastewater Collection Financial Plan; and b. Up to a $4.35 million transfer from the Operations Reserve to the Capital Improvement Projects Reserve in FY 2022; and c. Up to a $2.2 million transfer from the Operations Reserve to the Capital Improvements Projects Reserve in FY 2021; and d. Amendments to the Wastewater Collection Utility Reserves Management Practices in Appendix C to the FY 2022 Wastewater Collection Financial Plan and separately in Attachment D. Commissioner Scharff seconded the motion. The motion carried 7-0 with Chair Forssell, Vice Chair Segal, and Commissioners Danaher, Jackson, Johnston, Scharff, and Smith voting yes. ACTION: Commissioner Danaher moved that the Utilities Advisory Commission (UAC) recommend the Council: 2. Adopt a resolution approving: a. Adjustments to Wastewater Collection Utility Rates Via the Amendment of 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 Utilities Advisory Commission Minutes Approved on: March 03, 2021 Page 6 of 8 Collection and Disposal – Industrial Discharger). Commissioner Johnston seconded the motion. The motion carried 7-0 with Chair Forssell, Vice Chair Segal, and Commissioners Danaher, Jackson, Johnston, Scharff, and Smith voting yes. The UAC recessed at 5:47 p.m. and returned at 5:55 p.m. ITEM 2: DISCUSSION: Discussion and Status Update on the 2020 Sustainability and Climate Action Plan. Bret Andersen appreciated that the plan focused on the shift from gas to electric. The report indicated that the commercial sector does have the potential to reach the goal of reducing carbon emissions by 80 percent by the year 2023 (80 by ‘30). The report also indicated that the neighborhood level electrification pattern has many challenges and seemed like long-term planning instead of short-term planning. He wanted to see a focus on a short-term plan. He concluded that if the Utilities Department can remove any barriers and implement easy to adopt programs, there will be little to no resistance from the community to move to all- electric. Jonathan Abendschein, Assistant Director of Utilities Resource Management, disclosed that the goal of the presentation is to give a brief update on the Sustainability and Climate Action Plan (S/CAP). Several City departments have worked on the plan. Modeling has been moved to in-house and staff predicted that those and the analysis will be completed in the coming weeks. As the analysis comes to a close, key points have been raised which included that there are costs to taking no action on climate change, costs and logistics of taking action are significant, and while the costs appear to be large, they are manageable. No plan is complete without a way to protect low-income residents, small businesses, and all the other lower financial sectors. The analysis has indicated that the whole community has to commit to all technically feasible avenues to achieve the 80 by ’30 goal. That meant greatly reducing vehicle miles traveled for employees and residents within the City. Businesses and multi-family non-residential facilities must commit to as much electrification as possible, but staff recognized that it will be challenging. For that reason, residents will be incentivized to electrify their homes even more and staff recognized that residents will need financial support, programs to make the conversion as easy as possible, and possible side benefits if the they electrify. The philosophy that staff used to design the S/CAP goals and key actions included, but were not limited to, educating and raising awareness, activation of early adopters and ensuring positive experiences, and rewarding neighborhood- level action. If the community is not ready for mandated pricing within the next 2 to 4-years, staff predicted it will be hard to achieve the 80 by ’30 goal. Several foundational implementation activities were identified to move electrification forward. Those included launching high participation voluntary programs, having an extensive awareness campaign, having customer-friendly permitting, preserving and enhancing electric reliability and resiliency, and developing a plan for scaling up programs to achieve emission reduction goals. In reply to Commissioner Jackson’s request of what ‘cost in line with the annual energy cost’ meant, Abendschein confirmed that the short-term impact may be doubled energy costs. Commissioner Jackson shared that residents who are retired may be part of the vulnerable groups who need more assistance when electrifying their homes. He found the report very exciting and agreed that finding ways to help early adoption is a key point. Commissioner Danaher indicated that it is important to continue monitoring what is happening at the state level and in neighboring communities. He requested there be quarterly updates on how the City is coming along with the installation of charging networks within the City. Commissioner Johnston found the presentation very exciting and encouraging. He appreciated that staff is exploring financial incentives and making the transition customer friendly. He agreed that there needs to be reliability within the electric utility to create trust with electric customers. Vice Chair Segal agreed with the comments regarding working with the state and neighboring Cities and resiliency in the Electric Utility. She wanted to see more efforts to reach citizens be made by testing different Utilities Advisory Commission Minutes Approved on: March 03, 2021 Page 7 of 8 communication channels. She agreed that more extreme weather patterns are on the horizon and ensuring that the power will stay on is key to building trust for electrification in the community. She concluded that she is concerned about relying on contractors to do foundational services for customers. Abendschein agreed that many customers are not being reached and that there is a staffing issue. Dean Batchelor, Utilities Director, confirmed that staff is working with the state on making changes to the apprenticeship program and making the ratio one linemen per one apprentice linemen instead of three to one. Commissioner Scharff found the electric vehicle (EV) information encouraging and felt that the state will help facilitate the change from gas-powered vehicles to EVs. He was concerned about the push of 100 percent electrification of single-family homes. He wanted to see more discussion and data around vulnerable populations and how the community will be impacted by supporting them. He expressed that the goal of Palo Alto doing all this is to show that a model can be implemented to help reduce emissions, but he wanted Council and staff to think about how much this program will cost the City and if the tradeoffs are worth it. He concluded he is concerned that the City is not being straightforward and transparent about discontinuing the Gas Utility. Abendschein agreed, but he explained that releasing costs has to be done sensitively and research must be included to ensure a positive outlook towards electrification. He emphasized that there are easy steps that can be taken in order to not sticker shock the community. In terms of financing for electrifying buildings, staff is exploring ways to tie the costs to the building and not to individual owners. Staff continued to explore a financial mechanism that does not affect housing values, does not affect credit scores, and does not factor in an owner’s financial position. Commissioner Smith appreciated the efforts staff is putting towards educating the public and the neighborhood-level action plan. He suggested that staff think about the Cubberley community engagement model and how that can be applied to outreach for electrification. He wanted to see the community engagement process started now. In answer to his question regarding the UAC study session that is proposed for May of 2021, Christine Luong, Sustainability Manager, reported that staff will be bringing forward the findings of the Impact Analysis. Chair Forssell appreciated the report, the discussion, and the approach that staff is taking. She agreed that Palo Alto is small and reducing its emissions is small, but she felt that the City can be an example of what a community can do. She also agreed that state mandates will be the driving force behind folks converting their vehicles to EVs, but she added that the City can help with that effort by removing barriers for EV users. She appreciated that the report disclosed co-benefits of EVs. In response to her question of is there qualified talent to fill the staffing positions that are needed to implement the plan, Abendschein predicted that filling the linemen and engineering position will be challenging. Batchelor disclosed that most likely the City will have to hire a contracting firm to analyze the existing system as well as rebuild the system along with City crews. Abendschein added that internal discussions will take place regarding staffing for voluntary programs. Chair Forssell suggested that staff explore having an all-electric model home and have it open to the public. Abendschein concurred and added that regional collaboration could make that happen. In answer to Commissioner Scharff’s query regarding why the S/CAP goals still supported vehicle hybrids, Abendschein noted that some folks have strong vehicle preferences and the S/CAP reflects that sensitivity. Luong added that plug-in hybrids are also a bridging strategy for renters. In reply to Commissioner Scharff’s inquiry of if reducing traffic is different than reducing emissions, Abendschein clarified that reducing traffic is a cheaper way to reduce emissions than electrifying vehicles. Commissioner Scharff noted that for a long time the City has pushed to reduce vehicles on roadways and yet traffic continued to stay steady or even increased. He did not believe that large numbers of folks will change their driving habits. Abendschein agreed that the City needed to be realistic about how much can be achieved. Councilmember Filseth shared that the report was exactly what Council has asked for. He confirmed that there were still several areas that needed further work such as informing folks that they need to reduce their vehicle trips. Utilities Advisory Commission Minutes Approved on: March 03, 2021 Page 8 of 8 ACTION: None COMMISSIONER COMMENTS and REPORTS from MEETINGS/EVENTS Commissioner Johnston thanked the staff for the report regarding the 2nd transmission line and he looked forward to hearing more about it in the future. Commissioner Jackson reported that he had attended the conference Northern California Power Agency (NCPA) had put on. Vice Chair Segal confirmed she had also attended the NCPA conference. Chair Forssell concurred she also attended the virtual conference as well as the virtual ribbon cutting ceremony for Rosamond Solar. Commissioner Scharff disclosed that he will continue to inform the UAC on events that NCPA puts on. Dean Batchelor, Utilities Director, shared that it is important that the NCPA see the UAC Commissioners attending their events. FUTURE TOPICS FOR UPCOMING MEETINGS: March 03, 2021 Vice Chair Segal wanted to see an update on sea level rise planning. Chair Forssell appreciated the quarterly report that was included in the Packet. NEXT SCHEDULED MEETING: March 03, 2021 Commissioner Danaher moved to adjourn. Commissioner Jackson seconded the motion. The motion carried 7-0 with Chair Forssell, Vice Chair Segal, and Commissioners Danaher, Jackson, Johnston, Scharff, and Smith voting yes. Meeting adjourned at 7:19 p.m. Respectfully Submitted Tabatha Boatwright City of Palo Alto Utilities City of Palo Alto (ID # 11882) Utilities Advisory Commission Staff Report Report Type: New Business Meeting Date: 2/3/2021 City of Palo Alto Page 1 Summary Title: FY 2022 Wastewater Collection Financial Plan and Rates Title: Staff Recommendation That the Utilities Advisory Commission Recommend the City Council Adopt a Resolution Approving the FY 2022 Wastewater Collection Utility Financial Plan Includ ing Transfers to and From Wastewater Collection Utility Reserve Accounts and an Amendment to the Wastewater Collection Utility Reserves Management Practices; and Adopt a Resolution Adjusting Wastewater Rates by Amending Rate Schedules S -1 (Residential Wast ewater 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) From: City Manager Lead Department: Ut ilities 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) 2022 Wastewater Collection Financial Plan (Attachment B); and b.Up to a $4.35 million transfer from the Operations Reserve to the Capital Improvement Projects Reserve in FY 2022; and c.Up to a $2.2 million transfer from the Operations Reserve to the Capital Improvements Projects Reserve in FY 2021; and d.Amendments to the Wastewater Collection Utility Reserves Management Practices in Appendix C to the FY 2022 Wastewater Collection Financial Plan (Attachment B) and separately in Attachment D. 2.Adopt a resolution (Attachment C) approving: a.Adjustments to Wastewater Collection Utility Rates Via the Amendment of Rate Schedules S-1 (Residential Wastewater Collection and Disposal), S-2 (Commercial Wastewater Collection and Disposal), S-6 (Restaurant Wastewater Staff: Lisa Bilir and Eric Keniston City of Palo Alto Page 2 Collection and Disposal) and S-7 (Commercial Wastewater Collection and Disposal – Industrial Discharger) (Attachment E). EXECUTIVE SUMMARY The FY 2022 Wastewater Collection Utility Financial Plan includes projections of the utility’s costs and revenues through FY 2026. The Financial Plan projects costs to rise 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 and capital. A 3% overall revenue increase is needed in FY 2022 and FY 2023 and staff projects overall revenue increases of approximately 5% annually through FY 2026 to cover current and projected costs. Raftelis Financial Consultants, Inc. reviewed and updated the cost of service study and made recommendations that are incorporated into the attached Financial Plan to ensure costs are equitably allocated to each customer class (Attachment F). As a result of this study, customers in each customer class will experience different rate impacts than the overall rate increase as outlined in Table 1 below. BACKGROUND Every year staff presents the UAC with Financial Plans for the Electric, Gas, Water, and Wastewater Collection Utilities. The Financial Plans recommend rate adjustments required to maintain the financial health of these enterprises. These Financial Plans include a comprehensive overview of the operations of each enterprise, 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, which also treats wastewater for five other partner agencies (Stanford, East Palo Alto Sanitary District, Los Altos Hills, Lost Altos, and Mountain View). Some of the wastewater for certain 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 Palo Alto’s share of the cost of running the RWQCP.1 Both cost components have been increasing and are expected to continue to increase. The RWQCP has been in operation since 1934. Aging equipment, new regulatory requirements, and the movement to full sustainability will require rehabilitation, replacement and new processes. 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 (Long Range Facilities Plan) is implemented. Rehabilitation and replacement of plant 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. City of Palo Alto Page 3 equipment that has been in use for over 40 years is necessary to ensure the city can provide wastewater treatment safely and in compliance with regulatory requirements for the discharge of treated wastewater 24 hours a day. Collection system costs are also increasing, though not as much as treatment costs. This is primarily driven by increases in collection system 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 Financial Plan projects revenue losses due to COVID-19 primarily from the Restaurant and Commercial customer classes. Staff expects annual revenue loss related to COVID-19 to be highest during FY 2022 at $0.9 million and proje cts recovery through FY 2025. Total revenue loss included in the estimate is $2.6 million for all five utilities from FY 2021 through FY 2025. The projection also includes approximately $0.2 million due to COVID -19 related bill delinquencies. The UAC reviewed the preliminary financial forecasts at its December 2, 2020 meeting (UAC Report #11649). Since that time, staff adjusted the budget downward for each upcoming sanitary sewer main replacement project and deferred two of the projects by one year in order to lower the needed rate increases. 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. This year, Raftelis Financial Consultants, Inc. completed a Cost of Service and Rate Study titled “City of Palo Alto 2020 Wastewater COS Report” (Attachment F).2 This study recommends adjustments to ensure costs are equitably allocated to each customer class. The rates presented in Table 1 below and in the attached Financial Plan incorporate the results and recommendations of the study. Proposed Actions for FY 2022 1. Increase overall revenues by 3% and adopt cost of service adjustments to the rate schedules that combined would increase residential monthly service charges in Rate Schedule S-1 (Residential Wastewater Collection and Disposal) by approximately 4.7%, increase S-2 (Commercial Wastewater Collection and Disposal) volumetric rates by approximately 1.5% and eliminate minimum monthly charges, decrease S-6 (Restaurant Wastewater Collection and Disposal) volumetric rates by approximately 2.1% and 2 A cost of service study is a study using industry-standard techniques to determine how the costs of running the utility should be recovered from its customers. Charges to each customer are set in proportion to the cost of serving that customer. City of Palo Alto Page 4 eliminate minimum monthly charges and update the S-7 (Commercial Wastewater Collection and Disposal – Industrial Discharger); 2. Approve up to a $4.35 million transfer from the Operations Reserve to the CIP Reserve in FY 2022; 3. Transfer up to $2.2 million from the Operations Reserve to the CIP Reserve in FY 2021; and 4. Amend the Wastewater Collection Utility Reserves Management Practices (Attachment D). The FY 2022 Wastewater Collection Financial Plan (Attachment B) describes these proposed actions in detail. Staff proposes to adjust wastewater rates as shown in Table 1 below, effective July 1, 2021. The adjustments increase the system average rate by 3% and were made in accordance with the recommendations in the COS Study. These rate changes are included in the amended rate schedules provided as Attachment E. Residential customers pay a monthly service charge while commercial customers are charged based on average winter water usage to minimize the effects of irrigation. Restaurant customers are charged based on monthly water usage 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 (7/1/2019) Proposed (7/1/2021) Change $/mo. % Monthly Service Charges ($/month) S-1 (Residential) Service charge $41.37 $43.32 $1.95 4.7% Quantity Rates S-2 (Commercial) $/CCF 7.97 8.09 0.12 1.5% S-6 (Restaurant) $/CCF 12.33 12.07 (0.26) (2.1%) (1) Monthly charges for S-1 (Residential) are fixed monthly charges. (2) For S-2 (Commercial) customers, the quantity charges are based upon the average water usage for the months of January, February and March and applied in the following July. For Restaurant customers, the quantity charges are based on monthly metered water usage. (3) Currently there are no customers on the S-7 (Industrial) rate schedule; however, CPAU continues to maintain the S-7 rate schedule in case there is a need for the rate schedule in the future. The attached Financial Plan updates the S-7 Industrial rates to reflect the COS adjustments. As noted above, staff has updated the COS study according to the attached memo. It was updated to reflect actual winter (January – March) water usage patterns from associated water accounts. Also, over the past 10 years the 15 industrial customers that used to be served by the City of Palo Alto Page 5 Wastewater Collection Utility have either left the system, moved industrial operations out of Palo Alto, or are now considered commercial customers rather than industrial due to changes in operations. Those customers accounted for approximately 11% of the estimated wastewater flows. With the flow changes of those customers and other changes in the non-residential flows, residential customers have increased their relative percentage of wastewater flows while non-residential customers have decreased their relative contributions to wastewater flows. This is a primary reason for the increases in rates for residential customers relative to commercial customers. The restaurant customer class pays for 5% of the total revenue both at current and proposed rates (see Table 2 below). However, because the customer class is so small, the approximately $14,000 drop in revenue required leads to a 1.4% decrease in customer class revenue and a 2.1% decrease in restaurant rates. The analysis also recommended removing the minimum charge for commercial and restaurant customer classes, as the volumetric charge is an equitable way to capture the variability in sewer usage among non-residential customers. Commercial customers will be billed volumetrically based on average water usage for the months of January, February and March, applied through the year starting in the following July.3 New commercial customers without an applicable usage history will be conservatively presumed to have a usage of 4.8ccf per month, until a water usage history is established. Restaurant customers’ volumetric charge will be based each month on metered water us during the prior metered-read period. Meanwhile, over the past 10 years, Palo Alto’s wastewater has become more concentrated as water conservation has occurred system-wide. These changed usage patterns and strength changes together with updated costs reflect the current cost of Wastewater Collection service. Based upon the analysis, the relative changes to customer class groups are shown in Table 2 below: Table 2: Revenue Allocation by Customer Class in FY 2022 Customer Class Customer Class Revenue Difference Customer Class Percentage of Total Revenue at Current Rates Customer Class Percentage of Total Revenue at Cost of Service Average Rate Impact % (from Table 1) At Current Rates At Cost of Service Residential (S-1) $12,924,319 $13,531,403 4.7% 63% 64% 4.7% Commercial (S- 2) $6,482,022 $6,467,761 (0.2%) 32% 31% 1.5% Restaurant (S-6) $1,031,313 $1,017,018 (1.4%) 5% 5% (2.1%) Industrial (S-7) $0 $0 $0 0% 0% 0% TOTAL $20,437,654 $21,016,183 2.8% 100% 100% - 3 This is done since the rainy and cool winter months are the period when water use is well correlated to sewer use, and when fluctuations in water use due to landscape needs is minimized. City of Palo Alto Page 6 As a result of the COS update together with the overall revenue increase of 3%, residential customers (S-1) will see a 4.7% rate increase (on average), Commercial (S-2) a 1.5% rate increase, and Restaurant (S-6) a 2.1% rate decrease. Individual customer impacts will vary for non-residential customers depending on usage. Note that although there is a rate increase of 1.5% for commercial customers, overall revenue from this class decreases by 0.2%. This is due to the elimination of the minimum charge. FY 2022 Financial Plan’s Projected Rate Adjustments for the Next Five Fiscal Years Table 3 shows the projected rate adjustments included in the Wastewater Collection Utility Financial Plans and their impact on a residential wastewater bill. Table 3: Projected Rate Adjustments and Residential Bill Impact, FY 2022 to FY 2026 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Wastewater Collection Utility Overall Rate Adjustment 3%* 3% 5% 5% 5% Residential Rate Adjustment 4.7% 3% 5% 5% 5% Estimated Bill Impact for Residential Customers ($/mo) $1.95 $1.30 $2.24 $2.35 $2.47 * The overall revenue increase proposed in FY 2022 is 3%. However, due to the COS adjustments, the residential customers will receive a rate increase of approximately 4.7% in FY 2022. As noted above, one of the main drivers for the increase in the Wastewater Collection Utility’s costs (and therefore rates) over the next several years is the cost for wastewater treatment, which is projected to increase by about 7.9% per year as the City makes several upgrades to the RWQCP. A major project at the RWQCP, the Sludge Dewatering and Truck Loadout Facility, was completed in 2019 which allowed the retirement of the Plant’s two sewage sludge incinerators that were in operation since 1972. Future projects include secondary treatment upgrades as well as replacement of the headworks facility. Beyond FY 2026 some of the upward pressure on treatment costs are expected to be relieved as the projected growth in treatment costs decrease to approximately 3% on average annually between FY 2026 and FY 2031. Wastewater Collection operations and capital costs (excluding costs associated with treatment) are projected to remain flat on average; operations costs are expected to grow an average of 2% annually, and this plan reflects deferrals of sanitary sewer main replacements and decreasing the budget for each upcoming main replacement to lower the overall collection system CIP budget. 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. Staff has not observed any dip in construction costs although more information will be known once the Utilities Department issues more construction bids. Additionally, the California Construction Cost index shows 2.8% increase City of Palo Alto Page 7 from December 2019 – December 2020.4 Wastewater Collection utility undertakes a larger main replacement project every other year with the next project occurring in FY 2022. The budget for the upcoming sanitary sewer main replacement will be reduced and the FY 2024 and FY 2026 main replacement projects will be deferred by one year and their budgets reduced.. Undertaking a larger main replacement project every other year allows staff to continue replacing wastewater mains that are in poor condition while easing scheduling difficulties for inspection coverage due to shared staffing across water, wastewater, gas and large development services projects. 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. Note that Figure 1 reflects the capital funded by rate revenue in FY 2016, while the FY 2026 bar shows the capi tal program contribution to the CIP Reserve that will occur if Council approves the proposal in the attached Financial Plan. In the following figure, all RWQCP costs are included in “Treatment,” while “Capital” and “Operations” include only collection system costs. Figure 1: FY 2016 and FY 2026 costs ($ millions) 4 https://www.dgs.ca.gov/RESD/Resources/Page-Content/Real-Estate-Services-Division-Resources-List- Folder/DGS-California-Construction-Cost-Index-CCCI City of Palo Alto Page 8 Figure 2: Percentage of Total Cost Increase From FY 2016 to FY 2026 Attributed to Treatment, Capital, and Operations Costs Figure 1 and 2 show that 84% of the increase from FY 2016 to FY 2026 is due to treatment cost increases, 17% is due to increases in operations costs. Collection capital costs are not expected to increase on average over this time period due to the project deferrals projecte d to keep rate increases to a minimum. To promote rate stability and provide continuity in collection system CIP expenditure levels, this plan establishes a consistent annual level of capital program contribution to the CIP Reserve. The CIP Reserve will then absorb annual spending fluctuations, reducing or eliminating the impact on rates. Figure 3 below shows the projected CIP Reserve balances. Staff proposes modifications to the Wastewater Collection Utility Reserves Management Practices to synchronize them with the staggered main replacement schedule, as well as annual funding based on staff’s estimate of annual CIP work for the next 48 months. Specifically, the modifications would set a new maximum CIP Reserve guideline level equal to the average annual (12 month) CIP budget, for 48 months of budgeted CIP expense.5 Staff also proposes that the Wastewater Collection Utility Reserves Management Practices be amended to provide that if there are funds in this reserve in excess of the maximum level, staff must propose in the next Financial Plan to transfer these funds to another reserve, return the funds to ratepayers, or designate a specific use of the funds for CIP investments that will be made by the end of the next Financial Planning Period. Although this Financial Plan includes a forecast period of five years, or 60 months, an even number of years (48 months or 4 years) is used for the CIP Reserve maximum calculation, 5 Each month is calculated based upon 1/12 of the annual budget. City of Palo Alto Page 9 because of the staggered main replacement schedule including a larger main replacement project every other year.6 The new minimum CIP Reserve level is 20% of the maximum CIP Reserve guideline level. This maximum in FY 2022 is $3.6 million and the minimum in FY 2022 is $0.7 million. Table 4 below shows the planned capital spending in row 11 fluctuating from year to year with the staggered main replacement schedule, and shows the stable capital program contributions to the CIP Reserve in rows 8 and 9. Figure 4 shows reserve balance changes for each reserve from FY 2020 and projected through FY 2026. Figure 3: Projected Capital Reserve Balances FY 2022 to FY 2026 Figure 4: Wastewater Collection Utility Actual Reserve Levels for FY 2020 and Projected Reserve Levels through FY 2026 6 For example, in this Financial Plan for FY 2021, the 48 month period to use to derive the annual average is FY 2021 through FY 2024. In the FY 2022 Financial Plan, the 48 month period to use to derive the annual average would be FY 2022 through FY 2025 etc. City of Palo Alto Page 10 Table 4: Operations, Rate Stabilization and CIP Reserves Starting and Ending Balances, Revenues, Transfers To/(From) Reserves, Expenses, Capital Program Contribution To/(From) Reserves, and Operations Reserve Guideline Levels for FY 2021 to FY 2026 ($000) FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Starting Balance (1) Operations 5,661 6,188 5,907 5,913 5,642 5,750 (2) Rate Stabilization 342 342 342 342 295 295 (3) CIP 978 3,178 2,559 3,681 3,861 2,461 Revenues (4) Total Revenue 21,404 21,452 22,359 23,707 25,127 26,606 Transfers (5) Operations (2,200) - - 47 - 295 (6) Rate Stabilization - - - (47) - (295) (7) CIP 2,200 - - - - - Capital Program Contribution (8) Operations - (4,350) (4,459) (4,593) (4,730) (4,872) (9) CIP - 4,350 4,459 4,593 4,730 4,872 Expenses (10) Total Expenses other than CIP and Debt Service (18,550) (17,254) (17,764) (19,304) (20,289) (22,901) (11) Debt Service (128) (129) (129) (129) - - (12) Planned CIP (1,231) (4,969) (3,337) (4,413) (6,130) (4,251) Ending Balance (1)+(4)+(5)+(8) +(10)+(11)* Operations/Unassigned 6,188 5,907 5,913 5,642 5,750 4,878 (2)+(6) Rate Stabilization 342 342 342 295 295 - (3)+(7)+(9)+ (12)* CIP 3,178 2,559 3,681 3,861 2,461 3,082 Operations Reserve Guideline Levels (13) Minimum 2,868 2,756 3,126 3,224 3,105 3,867 (14) Maximum 7,170 6,889 7,815 8,060 7,763 9,667 * Note: The current year, FY 2021, differs from FY 2022 through FY 2026 in that Planned CIP (item 12) is reflected as an expense in the Operations Reserve; the proposal in this Financial Plan for FY 2022 – FY 2026 reflects Planned CIP (item 12) as an expense in the CIP Reserve and reflects the capital program contribution as an expense in the Operations Reserve. Capital Projects & Reserve Table 4 above shows the anticipated CIP planned for FY 2021 through FY 2026. B eginning in FY 2022, capital projects will be funded from CIP Reserves instead of from the Operations Reserve. Table 4 shows the capital program contribution from the Operations Reserve to the CIP reserve in rows 8 and 9. The capital program contribution would be made annually from the Operations Reserve to the CIP Reserve ($4.35 million in FY 2022, and $4.35 million in FY 2023 and future years plus annual inflationary increases) to adequately fund the CIP budget. $4.35 million is an estimate of the amount of CIP work there is in a given year, spread out over the forecast City of Palo Alto Page 11 period. It was derived by calculating the approximate average annual CIP budget for FY 2022 through FY 2025 less an allowance for unspent funds and with consideration of making sure the CIP Reserve and Operations Reserve remain within the guideline ranges throughout the forecast period and excluding $1.4 million in reappropriated dollars that are expected to be available in FY 2022. Having the annual capital contribution to the CIP Reserve i n place will address uneven annual funding associated with ongoing CIP projects, and will be a source for one-time or immediately needed projects. Wastewater Bill Comparison with Surrounding Cities The annual sewer bill for a Palo Alto resident is $496.44 under current rates, 29% lower than the average neighboring community. Table 5 shows the monthly sewer bills for residential customers compared to what they would be in surrounding communities. These communities are the same six that Palo Alto compares itself to in the annual budget across Water, Wastewater, Gas, and Electric industries. Table 5: Residential Monthly Equivalent Sewer Bill Comparison ($) Palo Alto Neighboring Communities Menlo Park Redwood City Santa Clara Mountain View Los Altos Hayward 41.37 102.00 85.44 44.53 42.90 39.63 35.81 If Council adopts the proposed wastewater rate change, and assuming other agencies do not change their sewer rates, Palo Alto’s residential rates would remain 26% lower than the average neighboring community. Furthermore, under the attached financial plan and cost of service study, Palo Alto’s residential monthly bills would rise to $51.68 per month in FY 2026 which is still under the current neighboring community average of $58.38 per month. Staff has no information at this time as to whether or when the surrounding communities are planning wastewater rate changes. However, as most agencies are also requiring renovations to their respective treatment plants, increases at other agencies are likely. Note that as partners in the RWQCP, Mountain View and Los Altos will be affected by the same treatment cost increases as Palo Alto. Table 6 shows the monthly sewer bills for Commercial and Restaurant customers. Palo Alto is less competitive with surrounding cities with regards to commercial sewer rates but is not the most expensive jurisdiction. Palo Alto’s commercial bills are 10% higher than the neighboring community average while Palo Alto’s restaurant bills are 6% below the neighboring community average. Table 6 assumes 14 units of water for general commercial and 56 units of water for restaurants. City of Palo Alto Page 12 Table 6: Non-Residential Monthly Equivalent Sewer Bill Comparison ($) Palo Alto Neighboring Communities Menlo Park Redwood City Santa Clara Mountain View Los Altos Hayward General Commercial 111.58 138.04 112.70 74.06 134.12 68.06 81.62 Restaurant 690.48 1,163.68 1,079.68 743.12 614.88 272.26 541.52 Changes from Prior Financial Forecasts Staff projects the need for ongoing annual wastewater rate increases f rom FY 2022 through FY 2026. Table 7 compares current rate projections to those projected in the last two year’s Financial Forecasts. The FY 2022 rate projections are lower than was projected last year for FY 2022 and FY 2023 and this is in part because of deferrals of sanitary sewer replacement projects to lower collection system costs. The FY 2022 projections reflect current information on capital improvement costs both in Palo Alto’s streets as well as at the RWQCP. Table 7: Projected Wastewater Rate Changes for FY 2022 to FY 2026 Projection FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Current (FY 2022 Financial Plan) 3%* 3% 5% 5% 5% FY 2021 Financial Forecast7 5% 5% 5% 5% - FY 2020 Financial Plan 6% 6% 6% - - * The overall revenue increase proposed in FY 2022 is 3%. However, due to the COS adjustments, the residential customers will receive a rate increase of approximately 4.7% in FY 2022. Changes to Reserve Guidelines Staff proposes modifications to the Wastewater Collection Utility Reserves Manageme nt practices to synchronize them with the staggered main replacement schedule, as well as the capital program contributions to the CIP Reserve. The new maximum and minimum CIP Reserve guideline levels as well as the funding plans are described above and in detail in the attached Financial Plan. Staff further proposes to modify the Wastewater Collection Reserves Management Practices to provide that if there are funds in the CIP Reserve in excess of the maximum level staff must propose in the next Financial Plan to transfer these funds to another reserve, return the funds to ratepayers, or designate a specific use of the funds for CIP investments that will be made by the end of the next Financial Period. Staff may also seek City Council to approve holding fu nds 7 Presented to the Finance Committee, April 21, 2020. City of Palo Alto Page 13 in this reserve in excess of the maximum level if they are held for a specific future purpose related to the CIP. NEXT STEPS The Finance Committee will consider the recommended wastewater rate changes in March. 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 2022 budget, at which time the public hearing required by Article XIIID of the State Constitution will be held. RESOURCE IMPACT Staff projects a 3% increase in the normal year revenues for the Wastewater Collection Utility in FY 2022 as a result of the proposed rate changes. See the FY 2022 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 compl iance with the cost of service requirements of Proposition 218. ENVIRONMENTAL REVIEW The UAC’s review and recommendation to Council on the proposed FY 2022 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, thus no environmental review is required. Attachments: • Attachment A: Resolution Approving FY 2022 Financial Plan and Reserve Mgmt Practices • Attachment B: FY 2022 Wastewater Collection Financial Plan • Attachment C: Resolution Approving FY 2022 Wastewater Rates • Attachment D: Amended Wastewater Collection Utility Reserves Mgmt Practices • Attachment E: Amended Rate Schedules S-1, S-2, S-6, and S-7 • Attachment F: Wastewater Collection COS Report • Attachment G: Presentation Attachment A 6055473 * NOT YET APPROVED * Resolution No.__________ Resolution of the Council of the City of Palo Alto Approving the FY 2022 Wastewater Collection Utility Financial Plan and Amending the Wastewater Collection Utility Reserves Management Practices 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: SECTION 1. The Council hereby adopts the FY 2022 Wastewater Collection Utility Financial Plan. SECTION 2. The Council hereby approves the following transfers as described in the FY 2022 Wastewater Collection Utility Financial Plan: a. Up to $2,200,000 in FY 2021 from the Operations Reserve to the Capital Improvements Projects Reserve; and b. Up to $4,350,000 in FY 2022 from the Operations Reserve to the Capital Improvements Projects Reserve. Annual capital program contributions beyond FY 2022 will be approved by Resolution annually. SECTION 3. The Council hereby approves the amendments to the Wastewater Collection Utility Reserves Management Practices as shown in Attachment D. // // Attachment A 6055473 // SECTION 4. 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: ATTEST: ________________________________ ________________________________ City Clerk Mayor APPROVED AS TO FORM: ________________________________ APPROVED: Assistant City Attorney ________________________________ City Manager ________________________________ Director of Utilities ________________________________ Director of Administrative Services Attachment B FY 2022 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN FY 2022 TO FY 2026 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 2 | Page FY 2022 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN FY 2022 TO FY 2026 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 .................................................................................. 8 Section 3: Detail of FY 2022 Rate and Reserves Proposals ....................................................... 9 Section 3A: Rate Design ............................................................................................................... 9 Section 3B: Current and Proposed Rates ..................................................................................... 9 Section 3C: Bill Impact of Proposed Changes ............................................................................ 10 Section 3D: Proposed Reserve Transfers ................................................................................... 11 Section 4: Utility Overview .................................................................................................. 11 Section 4A: Wastewater Utility History ..................................................................................... 12 Section 4B: Customer base ........................................................................................................ 13 Section 4C: Collection System .................................................................................................... 13 Section 4D: Cost Structure and Revenue Sources ...................................................................... 14 Section 4E: Reserves Structure ................................................................................................... 14 Section 4F: Competitiveness ...................................................................................................... 15 Section 5: Utility Financial Projections ................................................................................. 16 Section 5A: FY 2016 to FY 2026 Cost and Revenue Trends ........................................................ 16 Section 5B: FY 2020 Results ....................................................................................................... 17 Section 5C: FY 2021 Projections ................................................................................................. 18 Section 5D: FY 2022 to FY 2026 Projections .............................................................................. 18 Section 5E: Risk Assessment and Reserves Adequacy ............................................................... 21 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 3 | Page Section 5F: Alternate Scenarios ................................................................................................. 23 Section 5G: Long-Term Outlook ................................................................................................. 25 Section 6: Details and Assumptions ..................................................................................... 25 Section 6A: Wastewater Treatment Costs ................................................................................. 25 Section 6B: Operations .............................................................................................................. 26 Section 6C: Capital Improvement Program (CIP) ....................................................................... 27 Section 6D: Debt Service ............................................................................................................ 31 Section 6E: Other Revenues ....................................................................................................... 32 Section 7: Communications Plan .......................................................................................... 32 Appendices ......................................................................................................................... 33 Appendix A: Wastewater Collection Financial Forecast Detail .................................................. 34 Appendix B: Wastewater Collection Utility Capital Improvement Program (CIP) Detail .......... 36 Appendix C: Wastewater Collection Utility Reserves Management Practices .......................... 37 Appendix D: Map (CPA Wastewater Collection System - Sewer Mains Replaced or Rehabilitated since 1990) .......................................................................................................... 40 Appendix E: Sample of Wastewater Collection Outreach Materials ......................................... 41 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 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 This Financial Plan projects operations and maintenance, financing and capital program costs in the Wastewater Collection Utility (including Palo Alto’s share of wastewater treatment costs ) to rise by an average of approximately 4.3% per year from actual fiscal year (FY) 2020 to forecasted FY 2026. Staff projects wastewater collection system operations costs to grow at an average of 2.0% annually from actual FY 2020 to forecasted FY 2026. The Regional Water Quality Control Plant projects wastewater treatment costs, a share of which are allocated to Palo Alto and passed on to wastewater collection customers, to rise by an average of 7.9% annually during the same time period. Capital costs for collection declined in FY 2017 through FY 2019 as capital projects experienced delays. However, capital spending increased in FY 2020. Capital spending in FY 2021 is expected to be lower than budgeted, however, these funds will be needed in FY 2022 for sewer main replacement work. Beginning in FY 2022, a level funding amount will be transferred to the CIP Reserve each year to make more active use of the reserve. A one-time transfer from the operations reserve to the CIP Reserve in FY 2021 will allow high priority sewer mains to be replaced in FY 2022 using the funds from the CIP Reserve. This steady funding to the CIP Reserve will lead to a gradual increase in available CIP funds through the forecast period as well as stable funding for CIP projects throughout the collection system. Section 6C: Capital Improvement Program (CIP) provides more detail. Table 1 below shows the costs of the Wastewater Collection Utility. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 5 | Page As approved in the FY 2020 Wastewater Collection Financial Plan, the schedule for main replacement includes larger sewer main replacement projects every other year instead of smaller projects annually. This main replacement schedule will allow CPAU to continue to replace wastewater mains that are in poor condition, while addressing challenges in the current construction market and optimizing current staffing resources. Additionally, this plan defers the sewer main replacement project planned for FY 2024 and FY 2026 by one year and reduces the size of each planned sewer main replacement project to allow for more gradual rate increases while still prioritizing the highest priority sewer mains for replacement and rehabilitation. Table 1 shows actual costs in FY 2020 and estimated costs in FY 2021 through FY 2026. In Table 1, “Treatment” reflects Palo Alto’s share of Regional Water Quality Control Plant O&M and Capital costs. “CIP” includes all capital costs of the collection system (including debt service) for FY 2020, and FY 2021 and planned contributions from rates to the collection system CIP fund for subsequent years. “Operations” includes O&M costs for the collection system. Table 1: Wastewater Collection Expenses for FY 2020 to FY 2026 Expenses ($000) FY 2020 (actual) FY 2021 (estimated) FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Treatment 10,234 10,995 11,154 11,487 12,827 13,632 16,112 Operations 6,023 6,324 6,101 6,277 6,477 6,657 6,789 CIP 5,294 1,359 4,479 4,588 4,722 4,730 4,872 TOTAL 21,550 18,677 21,733 22,352 24,025 25,019 27,774 Table 2 shows the projected overall average rate changes in the current financial plan to ensure that revenues cover rising costs and the operations and CIP reserves remain within the guideline ranges. The table also shows the projected rate changes from the FY 2020 Financial Plan. The current Financial Plan projects lower increases in FY 2022 through FY 2025. In part this is because the transfers of the CIP Reserve balance of $978K and the Rate Stabilization Reserve balance of $342K to the Operations Reserve that the FY 2020 Financial Plan projected for FY 2020 and FY 2019, respectively, were not necessary. The current Financial Plan makes use of the funds from the CIP Reserve and Rate Stabilization Reserve in future years to lessen the needed rate increases. Additionally, treatment costs were lower than budgeted in FY 2020. Also, to lower the projected rate changes further while meeting the most high priority collection system CIP needs, staff lowered CIP budgets for the collection system by delaying future main replacements and reducing the size of the main replacement budgets going forward. . In FY 2022 residential customers will see a rate increase in part as a result of a rebalancing of costs between residential and non-residential customers and in part because of the overall revenue increase needed to cover rising costs. This Financial Plan estimates revenue losses and bill delinquencies due to COVID-19 and the ongoing associated economic effects. The total assumed combined revenue reductions are approximately $400K in FY 2021 and $960K in FY 2022 and then smaller reductions through FY 2025 with a linear assumption of recovery to pre-pandemic levels by FY 2026. See Section 5D: FY 2022 to FY 2026 Projections for more detailed discussion. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 6 | Page Rate and bill impacts for individual customer classes are different from the overall percentage increases shown in Table 2 because of the results of the cost of service study conducted this year. Section 3: Detail of FY 2022 Rate and Reserves Proposals presents more detail regarding rate and bill impacts. Table 2: Proposed / Projected Wastewater Collection Rate Trajectory for FY 2022 to FY 2026 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Current Plan (FY 2022 Plan) 3%* 3% 5% 5% 5% Last Plan (FY 2020 Plan) 6% 6% 6% 6% 4% * The overall revenue increase is projected to be 3% in FY 2022. However, due to the results of this year’s cost of service study, commercial and residential rates will increase while restaurant rates will decrease. The Operations Reserve was within guideline levels at year end FY 2020 and is projected to remain within guideline levels throughout the projection period (see more detail in Figure 5). The Wastewater Collection utility also has a Capital Improvement Program (CIP) Reserve that is used to manage cash flow for capital projects and acts as a reserve for capital contingencies. Staff proposes modifications to the Wastewater Collection Utility Reserves Management Practices to synchronize them with the staggered main replacement schedule as well as annual funding based on staff’s estimate of annual CIP work for the next 48 months. Specifically, the modifications would set a new maximum CIP Reserve guideline level equal to the average annual (12 month) CIP budget, for 48 months of budgeted CIP expense.1 Staff also proposes that the Wastewater Collection Utility Reserves Management Practices be amended to provide that if there are funds in this reserve in excess of the maximum level, staff must propose in the next Financial Plan to transfer these funds to another reserve, return the funds to ratepayers, or designate a specific use of the funds for CIP investments that will be made by the end of the next Financial Planning Period. The proposed amendment would also authorize Staff to seek City Council approval to hold funds in this reserve in excess of the maximum level if they are held for a specific future purpose related to the CIP. Appendix C, section 5, reflects the new maximum and minimum CIP Reserve guideline levels. Although this Financial Plan includes a forecast period of five years, or 60 months, an even number of years (48 months or 4 years) is used for this calculation, because of the staggered 1 Each month is calculated based upon 1/12 of the annual budget. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 7 | Page main replacement schedule including a larger main replacement project every other year.2 The new minimum CIP Reserve level is 20% of the maximum CIP Reserve guideline level. This maximum in FY 2022 is $3.6 million and the minimum in FY 2022 is $0.7 million. Previously, the minimum and maximum CIP Reserve guideline levels were 12 and 24 months of budgeted CIP expenditure, respectively. Figure 7 shows the projected CIP Reserve balances and guideline levels for FY 2022 through FY 2026. These modifications will make full use of the CIP Reserve to manage fluctuations in capital investments while stabilizing customer rates. Staff recommends transferring the Rate Stabilization Reserve balance to the Operations Reserve in FY 2024. The Rate Stabilization Reserve is used to phase in rate increases over multiple years. Staff also recommends transferring $2.2 million from the Operations Reserve to the CIP Reserve in FY 2021 to provide sufficient funding for Sanitary Sewer Replacement 30 while keeping the CIP Reserve from falling below the minimum in FY 2022 or in any future year during the forecast period. Table 3 below shows the projected reserve transfers and Appendix C: Wastewater Collection Utility Reserves Management Practices provides more information about reserve management practices. Table 3: Transfers To/(From) Reserves for FY 2021 to FY 2026 ($000) Reserve FY 2021 FY 2022 FY 2023 to FY 2026 Operations (2,200) - 342 CIP Reserve 2,200 - - Rate Stabilization - - (342) Unassigned - - - Table 4 shows the starting and ending balance in the Operations, CIP and Rate Stabilization Reserves for FY 2021 through FY 2026. Figure 4 shows the Wastewater Collection utility reserve balances at year end FY 2020 and projected through FY 2026. Table 4 also shows the projected reserve transfer and capital program contribution over the forecast period. 2 For example, in this Financial Plan for FY 2022, the 48 month period to use to derive the annual average is FY 2022 through FY 2025. In the FY 2023 Financial Plan, the 48 month period to use to derive the annual average would be FY 2023 through FY 2026 etc. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 8 | Page Table 4: Operations, Rate Stabilization and CIP Reserves Starting and Ending Balances, Revenues, Transfers To/(From) Reserves, Expenses, Capital Program Contribution To/(From) Reserves, and Operations Reserve Guideline Levels for FY 2021 to FY 2026 ($000) FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Starting Balance (1) Operations 5,661 6,188 5,907 5,913 5,642 5,750 (2) Rate Stabilization 342 342 342 342 295 295 (3) CIP 978 3,178 2,559 3,681 3,861 2,461 Revenues (4) Total Revenue 21,404 21,452 22,359 23,707 25,127 26,606 Transfers (5) Operations (2,200) - - 47 - 295 (6) Rate Stabilization - - - (47) - (295) (7) CIP 2,200 - - - - - Capital Program Contribution (8) Operations - (4,350) (4,459) (4,593) (4,730) (4,872) (9) CIP - 4,350 4,459 4,593 4,730 4,872 Expenses (10) Total Expenses other than CIP and Debt Service (18,550) (17,254) (17,764) (19,304) (20,289) (22,901) (11) Debt Service (128) (129) (129) (129) - - (12) Planned CIP (1,231) (4,969) (3,337) (4,413) (6,130) (4,251) Ending Balance (1)+(4)+(5)+(8) +(10)+(11)* Operations/Unassigned 6,188 5,907 5,913 5,642 5,750 4,878 (2)+(6) Rate Stabilization 342 342 342 295 295 - (3)+(7)+(9)+ (12)* CIP 3,178 2,559 3,681 3,861 2,461 3,082 Operations Reserve Guideline Levels (13) Minimum 2,868 2,756 3,126 3,224 3,105 3,867 (14) Maximum 7,170 6,889 7,815 8,060 7,763 9,667 * Note: The current year, FY 2021, differs from FY 2022 through FY 2026 in that Planned CIP (item 12) is reflected as an expense in the Operations Reserve; the proposal in this Financial Plan for FY 2022 – FY 2026 reflects Planned CIP (item 12) as an expense in the CIP Reserve and reflects the capital program contribution as an expense in the Operations Reserve. SECTION 2 B : SUMMARY OF PROPOSED ACTIONS Staff proposes the following actions for the Wastewater Collection Utility in FY 2021 and 2022: 1. Increase overall revenues by 3% with the following customer class changes to reflect the cost of service adjustments: increase residential rates by 4.7%, increase commercial quantity rates by approximately 1.5%, and decrease restaurant quantity rates approximately 2.1%. This is described in more detail in Section 3B: Current and Proposed Rates; and 2. Approve up to a $4.35 million transfer from the Operations Reserve to the CIP Reserve in FY 2022. See Section 6C: Capital Improvement Program (CIP) for more details; and WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 9 | Page 3. Approve up to a $2.2 million transfer from the Operations Reserve to the CIP Reserve in FY 2021. See Section 3D: Proposed Reserve Transfers for more details; and 4. Amend the Wastewater Collection Utility Reserves Management Practices reflected in Appendix C, Section 5 and described above in Section 2A: Overview of Financial Position. SECTION 3 : DETAIL OF FY 2022 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 Article XIII D of the California Constitution (Proposition 218). Current rates are structured based on staff’s annual assessment of the Wastewater Collection Utility’s financial position, and updated cost, flow (the wastewater discharge entering the wastewater treatment plant) and strength (the soluble and insoluble organic and inorganic matters that need to be removed or neutralized for the treatment process for the utility) information. The proposed rate structure for FY 2022 allocates costs amongst customer classes according to the results of a new cost study, the City of Palo Alto2021 Wastewater COS Report, prepared by Raftelis Financial Consultants, Inc. and attached to the February 3, 2021 Utilities Advisory Commission Staff Report. SECTION 3 B : CURRENT AND PROPOSED RATES The current rates were adopted July 1, 2019, when the City increased sewer rates by 7%. CPAU has three sewer rate schedules applicable to current customers: one for residential customers (S-1), one for non-residential customers (other than restaurants) (S-2), and one for restaurants (S-6). Restaurants have a special rate schedule because they discharge higher concentrations of grease, oil and organic components in their sewage and, therefore, discharge sewage that is relatively expensive to treat. Residential customers are billed a monthly service charge , while commercial customers other than restaurants are billed each month based on their winter month water usage (previous January through March). This closely approximates non- irrigation water consumption, which represents actual sewer use. CPAU also maintains a rate schedule for industrial dischargers (S-7), but there are currently no customers required to be on this rate schedule. The City did not increase wastewater rates in FY 2021 but with the increases in treatment costs that are anticipated over the next five years together with needed priority sewer main replacements, CPAU proposes to increase overall revenues in FY 2022 by 3%. For FY 2023, the needed increase would also be 3% and then for FY 2024 through FY 2026, revenue is projected to increase by approximately 5% per year in order to provide needed funding for projected increases to treatment costs resulting from Regional Water Quality Control Plant improvements and upgrades, as well as ongoing collection systems capital projects and operations costs. Table 5, below, summarizes the current and proposed rates for all customer classes. Section 4F: Competitiveness discusses comparisons with neighboring communities. The analysis recommended removing the minimum charge from the commercial and restaurant customer WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 10 | Page classes as the volumetric charge is an equitable way to capture the variability in sewer usage among non-residential customers. Over the past 10 years the 15 industrial customers that used to be served by the Wastewater Collection Utility have either left the system or modified their practices or business such that their wastewater is similar to the wastewater of other customers in the commercial class. Those customers accounted for approximately 11% of the estimated wastewater flows. With the reductions in usage for this group of customers as well as additional reductions in non-residential usage of the sewer system, residential customers have increased their relative percentage of wastewater flows while non-residential customers have decreased their relative contributions to wastewater flows. This is a primary reason for the increases in rates for residential customers relative to commercial and restaurant customers. Table 5 shows the rate increases for each customer group including the cost of service adjustments. 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. This Financial Plan updates the S-7 Industrial rates to reflect the cost of service adjustments. Table 5: Current and Proposed Sewer Rates Current (as of 7/1/2019) Proposed (effective 7/1/2021) Monthly Service Charges ($/month) $ Change % Change S-1 (Residential) Service charge $41.37 $43.32 $1.95 4.7% Quantity Rates: $ Change % Change S-2 (Commercial) $/CCF 7.97 8.09 0.12 1.5% S-6 (Restaurant) $/CCF 12.33 12.07 (0.26) (2.1%) For any future industrial customers, the City maintains the S-7 rate schedule that will charge the following updated charges for each individual customer: 1) Collection System Operation, Maintenance, and Infiltration Inflow: $4.02 per 100 cubic feet of metered water use. 2) Advanced Waste Treatment Operations and Maintenance Charge: $1.60 per 100 cubic feet of metered water use 3) $196.34 per 1000 pounds (lbs) of COD (Chemical Oxygen Demand) 4) $473.38 per 1000 lbs of SS (Suspended Solids) 5) $3,270.92 per 1000 lbs of NH3 (Ammonia) SECTION 3 C: BILL IMPACT OF PROPOSED CHANGES Table 6 below shows the impact of the proposed July 1, 2020 rate changes on typical customers: WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 11 | Page Table 6: Impact of Proposed Sewer Changes Current (as of 7/1/2019) Proposed (effective 7/1/2021) Change $/mo. % Residential $41.37 $43.32 $1.95 4.7% General Commercial (14 CCF) 111.58 113.26 1.68 1.5% Restaurant (56 CCF) 690.48 675.92 (14.56) (2.1%) Based upon the results of the cost of service adjustments, some customers will see higher or lower increases in their sewer charges. In FY 2022, residential customers will experience approximately a 4.7% increase in bills. Commercial customers will experience approximately a 1.5% increase in bills and the impacts will vary due to each customer’s utilization of the system. Restaurant customers will experience bill decreases for the most part and the impacts will vary due to each customer’s utilization of the system. 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 through FY 2019, resulting in one-time cost savings, the Operation Reserve ended within the guideline level, and the transfer was not needed. The Operations Reserve is projected to be within the guideline range in FY 2021 and FY 2022. However, as the utility experiences treatment cost increases throughout the forecast period, the Operations Reserve declines to a level closer to the minimum guideline level. Staff requests approval to transfer the remaining $342,000 in FY 2024. This transfer will enable CPAU to maintain adequate Operations and CIP Reserve levels while moderating the pace of increase in Wastewater Collection rates. Staff also requests approval to transfer $2.2 million from the Operations Reserve to the CIP Reserve in FY 2021. This is the amount needed in FY 2022 together with the FY 2022 capital contribution to the CIP Reserve to fund the reduced budget for main replacement project SSR 30 without the CIP Reserve dropping below the minimum during the forecast period. Appendix A: Wastewater Collection Financial Forecast Detail shows the impact of these transfers on reserves levels. 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. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 12 | Page 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.3 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.4 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 2035.5 In the 1980s the City performed 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.6 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 response to these studies the City commenced an accelerated sewer system rehabilitation program.7 At that point the sewer system comprised over 190 miles of mains.8 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 3 Long Range Facilities Plan for the Regional Water Quality Control Plant, August 2012, Carollo Engineers, pp 2-1 through 2-2 4 Wastewater Collection and Storm Drainage, 1965, Brown and Caldwell Consulting Engineers, pp 4, 6-7, 143 5 Long Range Facilities Plan for the Regional Water Quality Control Plant, August 2012, Carollo Engineers, pg 2-2 6 Wastewater Collection System Master Plan – Capacity Assessment, January 2004, MWH Americas, Inc., pg ES-2 7 CMR 183:90, Infrastructure Review and Update, March 1, 1990 8 Master Plan of the Wastewater Collection System, December 1988, Camp Dresser & McKee, Inc., pg 1-2 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 13 | Page increases in the 1988 study. Several of the outstanding projects were canceled and replaced with a different set of projects.9 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. In effect, the Wastewater Collection Utility serves as a wholesale customer of the Wastewater Treatment Utility, and the rates charged by the Wastewater Collection Utility to its retail customers recover not only collection costs but also Palo Alto’s share of Wastewater Treatment Utility Costs. Nearly 27,633 customers are connected to the sewer collection system, approximately 26,034 (94%) of which are residential and 1,599 (6%) of which are non-residential. Residential customers pay a flat fee per dwelling unit for service. Non-residential customers are billed for sewer service based on their metered winter water usage. SECTION 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 over 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 less than a quarter of the utility’s expenditures. In addition to CIP, CPAU performs various maintenance activities on the sewer system. These include inspecting and repairing sewer laterals, responding to sewer overflows, regularly 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 9 Wastewater Collection System Master Plan – Capacity Assessment, January 2004, MWH Americas, Inc., pg ES-3 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 14 | Page 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 2020, treatment costs (capital and operations) represented approximately half of the Wastewater Collection Utility’s costs (48%), and collection system operations costs represented a third (27%), while collection system CIP costs accounted for the remainder (25%). Figure 1 shows these expenditures. The utility’s revenue in FY 2020, shown in Figure 2, came primarily from sewer charges (93%), with the remainder coming mainly from capacity and connection fees and other sources (7%). Figure 1: Cost Structure (FY 2020) Figure 2: Revenue Structure (FY 2020) 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 is used to accumulate funds for future expenditure on CIP projects and a reserve level is anticipated to be maintained in order to smooth major CIP expenditures every other year. It also acts as a contingency reserve for unexpected capital costs. This type of reserve is used in other utility funds (Electric, Gas, and Water) as well. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 15 | Page • 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 7 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 single family residential customer is $496.44 under current rates, which is lower than four of the six neighboring communities. These communities are the same six that Palo Alto compares itself to in the annual budget across Water, Wastewater, Gas, and Electric industries. In the following tables, “Menlo Park” refers to the West Bay Sanitary District. Table 7: Residential Monthly Equivalent Sewer Bill Comparison (FY 2020 Rates) ($) Palo Alto Neighboring Communities Menlo Park Redwood City Santa Clara Mountain View Los Altos Hayward 41.37 102.00 85.44 44.53 42.90 39.63 35.81 Staff does not currently have information about projected rate increases in neighboring communities. However, under the current projection in this financial plan, average bills for residential customers in FY 2026 of $51.68 per month would remain under the current neighboring community average of $58.38. Table 8 c ompares the sewer bills for two classes of non-residential customers to what they would be under surrounding communities’ rate schedules. Note that other communities often have specific rates for industrial customers that discharge high intensity wastewater, such as food processors or chemical or electronics manufacturers, but Palo Alto does not currently have any customers that require these special rates. Palo Alto is less competitive with surrounding cities with regards to commercial sewer rates but is not the most expensive jurisdiction. This proposal brings the commercial monthly sewer bill somewhat closer to the neighboring community average, assuming neighboring communities do not increase sewer rates. The monthly bill comparison assumes 14 units of water for general commercial and 56 units of water for restaurants. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 16 | Page Table 8: Commercial Monthly Sewer Bill Comparison (FY 2020 Rates) ($) Palo Alto Neighboring Communities Menlo Park Redwood City Santa Clara Mountain View Los Altos Hayward General Commercial 111.58 138.04 112.70 74.06 134.12 68.06 81.62 Restaurant 690.48 1,163.68 1,079.68 743.12 614.88 272.26 541.52 SECTION 5 : UTILITY FINANCIAL PROJECTIONS SECTION 5 A : FY 2016 TO FY 2026 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 2026. Treatment plant expenses (including CIP and O&M) assigned to Palo Alto’s Wastewater Collection Utility grew, on average, by 3.9% per year from FY 2016 through FY 2020 and are projected to grow by 7.9% per year on average from FY 2021 to FY 2026. Wastewater collection CIP fluctuated greatly during this time period: reduced investment in FY 2017 to FY 2019 mainly due to delayed main replacement projects, and increased CIP costs in FY 2015 and 2016 as capital projects were completed. Collections operations costs decreased slightly during this timeframe. Wastewater collection CIP costs will continue to fluctuate from year to year as sanitary sewer replacements occur every other year rather than annually. However, to mitigate the annual fluctuations and contribute to rate stability for customers, this financial plan proposes a steady annual capital program contribution to the CIP Reserve. For more detail see Section 6C: Capital Improvement Program (CIP). 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. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 17 | Page Figure 3: Wastewater Collection Utility Expenses, Revenues and Rate Changes Actual Costs through FY 2020 and Projections through FY 2026 Note: The overall revenue increase proposed in FY 2022 is 3%. Due to the cost of service adjustments, the residential customers will receive a rate increase of approximately 4.7% in FY 2022, commercial customers will experience a rate increase of approximately 1.5% in FY 2022, while restaurant customers will receive rate decreases for the most part. SECTION 5 B : FY 2020 RESULTS Actual revenues for FY 2020 were lower than forecasted revenues in the FY 2020 Financial Plan ($21.8 million actuals vs. $21.9 million projected). This was primarily because sales revenues were nearly $0.3 million lower than forecasted while other revenue was approximately $0.2 million higher than forecasted. Treatment expenses were approximately $1.5 million lower than forecasted in the FY 2020 Financial Plan ($10.2 million vs. $11.7 million projected). Collection system capital and operating costs were approximately $0.5 million higher than expected ($11.3 million actual vs. $11.8 million projected). Table 9 summarizes key reasons for the variances from forecast. Table 9: FY 2020, Actual Results vs. FY 2020 Financial Plan Forecast ($000) Net Cost/ (Benefit) Type of Change Sales revenues lower than forecast $281 Revenue decrease Wastewater treatment costs lower than forecast $(1,499) Cost decrease Collection System Expenses (Capital and Operations) $463 Cost increase Net Cost / (Benefit) of Variances $(755) WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 18 | Page SECTION 5 C : FY 2021 PROJECTIONS Staff estimates lower sales revenue for FY 2021 compared to the estimate in the FY 2021 financial forecast 10 ($20.0 million current projection vs. $20.9 million projected in the FY 2021 financial forecast). Staff projects other revenue from connection and capacity fees and interest to decrease by approximately $194,000. Treatment cost projections decreased by $1.2 million, while collection system costs are estimated to be lower overall by $825,000. Table 10 summarizes key variances from the prior forecast. Table 10: FY 2021, Updated Projections vs. FY 2021 Financial Forecast ($000) Net Cost/ (Benefit) Type of Change Sales revenues lower than forecast $863 Revenue decrease Interest, connection, capacity fees and other revenues $194 Revenue decrease Treatment cost reductions $(1,228) Cost decrease Collection system cost decreases $(655) Cost decrease Net Cost / (Benefit) of Variances $(825) SECTION 5 D : FY 2022 TO FY 2026 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 approximately 3% per year on average for FY 2021 through FY 2026. Treatment costs make up the majority of the increase. Capital costs for treatment are increasing at the fastest rate because the treatment plant is facing the need for major upgrades in coming years, due to aging equipment and changing environmental regulations. Rehabilitation and replacement of plant equipment that has been in use for over 40 years is necessary to ensure the city can provide wastewater treatment operation safely and in compliance with regulatory requirements for the discharge of treated wastewater 24 hours a day. The costs of the plant are shared among member agencies, with members expected to see average cost increases of around 8% per year over the forecast horizon. Collection system capital expenses were lower than usual in FY 2017 to FY 2019 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 2020. However, underground construction costs for all utilities have increased significantly. Beginning in FY 2022, capital projects will be funded from the CIP Reserve instead of from the Operations Reserve. Having these funds in place will address uneven annual funding associated with ongoing CIP projects. 10 Presented to the Finance Committee, April 21, 2020. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 19 | Page The capital program contribution will be made annually from the Operations Reserve to the CIP Reserve ($4.35 million in FY 2022 and future years plus annual inflationary increases) to adequately fund the CIP budget. $4.35 million is an estimate of the amount of CIP work there is in a given year, spread out over the forecast period. It was derived by calculating the approximate average annual CIP budget for FY 2022 through FY 2025 less an allowance for unspent funds and not including approximately $1.4 million in FY 2022 that is expected to be funded through reappropriations from FY 2021. Having the capital program contribution in place will address uneven annual funding associated with ongoing CIP projects, and will be a source for one-time or immediately needed projects. Without this change, the relative stability of total costs, and revenues shown in Figure 3: Wastewater Collection Utility Expenses, Revenues and Rate Changes would fluctuate greatly from year to year as shown below in Figure 4: Wastewater Collection Utility Expenses, Revenues and Rate Changes. Figure 4: Wastewater Collection Utility Expenses, Revenues and Rate Changes Actual Costs through FY 2020 and Projections through FY 2026 Note: The overall revenue increase proposed in FY 2022 is 3%. Due to the cost of service adjustments, the residential customers will receive a rate increase of approximately 4.7% in FY 2022, commercial customers will experience a rate increase of approximately 1.5% in FY 2022, while restaurant customers will receive rate decreases for the most part. The fluctuations in CIP show a mismatch in many forecasted years between revenues and costs. Isolating fluctuations in capital investment in the CIP Reserve not only helps to ensure adequate funding for needed capital improvements but also shows a more realistic view of the relationship between costs and revenues as shown in Figure 3. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 20 | Page This Financial Plan estimates revenue losses and bill delinquencies due to COVID-19 and the ongoing associated economic effects. So far, the Wastewater Utility has experienced revenue losses from the wastewater sector of as much as 65% per month during April – June 2020. Restaurant revenue has increased somewhat to approximately 33% below pre-pandemic levels. However, because this revenue is approximately 5% of the overall revenue, the impact on revenues in FY 2020 was outweighed by variations in other revenue categories. For FY 2021, this plan assumes that the current trend continues at approximately 33% of usage and revenue below pre-pandemic levels. In FY 2022, revenue losses are also expected in the Commercial category as winter water use reductions are expected in that customer class. This plan assumes a 10% winter water use reduction across the commercial category in January – March 2021, which will mean approximately a 10% revenue reduction in the commercial category in FY 2022. Commercial revenue is approximately $6.5 million annually, and this revenue reduction is assumed to be $0.65 million in FY 2022. For both restaurant and commercial revenue losses due to COVID-19, this plan assumes a linear recovery pattern over the next four years with full recovery by FY 2026. This Financial Plan also takes into account the sewer bill delinquencies due to COVID-19. The current balance of delinquent bills greater than 60 days as of 12/17/2020 is $130K. This plan assumes that bill delinquencies plateau and reduce by half by the end of FY 2021. Similar to the revenue loss assumption, the plan assumes linear recovery pattern over the next four years with full recovery by FY 2026. These revenue losses and bill delinquencies total to approximately $400K in FY 2021 and $960K in FY 2022 and then smaller reductions through FY 2025 with a linear assumption of recovery to pre-pandemic levels by FY 2026. These are larger forecasted reductions than what staff forecasted in May 2020 of approximately $160K or 2% revenue loss in FY 2021, $320K or 4% revenue loss in FY 2022, $500K or 6% revenue loss in FY 2023 and then declining losses to full recovery by FY 2026. The Revenue line in Figure 3 shows that revenues exceeded costs in FY 2019, this replenished reserves. However, due to increasing treatment and collection costs, annual rate increases of 3% in FY 2022 and FY 2023 and 5% in subsequent years are required to keep reserves within the guideline ranges. Figure 5 shows the actuals for FY 2020 and projected reserve levels and Figure 6 shows the relative drop in Operations Reserve from FY 2026 through FY 2029 and the effects of rate increases to keep the reserve within the guideline levels. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 21 | Page Figure 5: Wastewater Collection Reserves Projections SECTION 5 E : RISK ASSESSMENT AND RESERVES ADEQUACY The Wastewater Collection Utility currently has one contingency reserve, the Operations Reserve. The Operations Reserve remains within the guideline levels throughout the forecast period. See Figure 6 below. The five-year forecast period is through FY 2026, however, it is in the subsequent years FY 2027 through FY 2029 that the Operations Reserve dips down close to the minimum guideline level despite the assumption of 5% rate increases annually from FY 2024 through FY 2031. As costs rise steeply with infrastructure replacement needs both at the RWQCP and in the collection system, revenue struggles to keep up during that time period which results in a decreasing Operating Reserve level. This is a key reason why rates need to increase in the short-term to maintain the gradual rate trajectory and keep the operating reserve within the guideline range in the longer-term. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 22 | Page Figure 6: Operations Reserve Adequacy Staff performs an annual assessment of risks for the Wastewater Collection Utility. Table 11 summarizes the risk assessment calculation for the Wastewater Collection Utility through FY 2026. The risk assessment includes the revenue shortfall that could accrue due to: 1. the maximum observed budget-to-actual variance in one year during the past five years; and 2. an increase of 10% in treatment costs. Table 11 summarizes the risk assessment calculation for the Wastewater Collection Utility through FY 2026. The Operations Reserve is projected to be adequate to manage these levels of risk over the entire forecast period. Table 11: Wastewater Collection Risk Assessment FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Total Revenue ($000) 20,028 20,898 22,202 23,577 25,009 Max. Historical Budget-to-Actual variance 4% 4% 4% 4% 4% Budget-to-Actual Risk ($000) 801 836 888 943 1,000 Treatment Budget ($000) 11,154 11,487 12,827 13,632 16,112 Treatment Cost Contingency @10% ($000) 1,115 1,149 1,283 1,363 1,611 Total Risk Assessment Value ($000) 1,916 1,985 2,171 2,306 2,612 Projected Operations Reserve Level ($000) 5,907 5,913 5,642 5,750 4,878 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 23 | Page SECTION 5 F : ALTERNATE SCENARIOS The alternate scenario proposed here is for 0% revenue increase in FY 2022. Table 12: Proposed and Alternate Wastewater Rate Trajectory for FY 2022 to FY 2026 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Current Plan (FY 2022 Plan) 3%* 3% 5% 5% 5% Alternate Scenario (FY 2022 Plan) 0%* 3% 5% 5% 5% * The overall revenue increase is projected to be 3% in FY 2022 in the current plan and 0% in FY 2022 in the alternate scenario. However, due to the results of this year’s cost of service study, commercial rates will decrease relative to residential rates. The reduced revenue in this scenario equates to approximately $600K per year in FY 2022 and additional cumulative amounts in each subsequent year. In order to balance expenses and revenues, the alternate scenario assumes the capital contribution to the CIP Reserve is also be reduced by approximately $600K per year to a total of $3.75 million annually. This allows the Operations Reserve to stay within the guideline levels throughout the forecast period. Figure 7: Operations Reserve Adequacy below shows the Operations Reserve year-end balances from FY 2020 through FY 2031. Further budget reductions would need to be made to the Collection CIP to accommodate the reduced funding levels while keeping the CIP Reserve within the guideline levels. A budget reduction of approximately $1 million during the five year forecast period would be needed to keep the CIP and Operations Reserves within the guideline range until year end FY 2026. An additional approximately $5.5 million in budget reductions over the 10 year forecast period would be needed to keep the CIP and Operations Reserves within the guideline range until year end FY 2031. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 24 | Page Figure 7: Operations Reserve Adequacy With the 0% overall revenue increase in the alternate scenario and incorporating the results of the cost of service analysis, the final customer rates would reflect an increase for residential customers in FY 2022 and a reduction for most non-residential customers. Table 13: Current and Proposed Sewer Rates shows the customer rates that result from this scenario. Table 13: Current and Proposed Sewer Rates Current (as of 7/1/2019) Proposed (effective 7/1/2021) Monthly Service Charges ($/month) $ Change % Change S-1 (Residential) Service charge $41.37 $42.09 $0.72 1.7% Quantity Rates: $ Change % Change S-2 (Commercial) $/CCF 7.97 7.83 (0.14) (1.8%) S-6 (Restaurant) $/CCF 12.33 11.82 (0.51) (4.1%) For any future industrial customers, the City maintains the S-7 rate schedule that will charge the following updated charges for each individual customer: 1) Collection System Operation, Maintenance, and Infiltration Inflow: $3.76 per 100 cubic feet of metered water use. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 25 | Page 2) Advanced Waste Treatment Operations and Maintenance Charge: $1.60 per 100 cubic feet of metered water use 3) $196.34 per 1000 pounds (lbs) of COD (Chemical Oxygen Demand) 4) $473.38 per 1000 lbs of SS (Suspended Solids) 5) $3,270.92 per 1000 lbs of NH3 (Ammonia) 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 include 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 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 of the RWQCP’s revenue requirement is projected to be 35% for FY 2022. Mountain View is the other large agency served by the RWQCP (42% of the revenue requirement estimated for FY 2022) 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 an average of 5.9% per year from FY 2022 through FY 2031. Wastewater Treatment Fund costs are increasing due to major plant rehabilitation and 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 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 26 | Page 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 anticipated to increase in FY 2022 for 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, materials and debt are increasing at an average of about 15.1% per year through 2031 to keep up with ongoing replacement of aging equipment. Larger increases to capital expenses are expected to begin in FY 2024 in the form of new debt service for major projects to implement the Plant’s capital program. Major upcoming capital projects include Primary Sedimentation Tank Rehabilitation, Outfall Line Construction, Secondary Treatment Upgrades, and Operation Center and Laboratory. Figure 8 below shows the estimated costs of treatment expenses for Palo Alto. Figure 8: Palo Alto’s Share of Wastewater Treatment Expenses (Projection & Planned CIP) 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 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 27 | Page 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. The financial plan projections align as much as possible with the City’s budget assumptions, however instead of a ten-year General Fund Long Range Financial Forecast, the City presented a preliminary forecast focusing on FY 2022 based on the current economic climate and continued unknown impacts of the COVID-19 pandemic.11 This plan projects operations costs to increase by 2 to 3% per year, on average, over the forecast period. Underlying these projections are preliminary assumptions for non-salary and benefit cost categories from Palo Alto’s Office of Management and Budget. For salary and benefit assumptions, this financial plan uses the most updated wastewater utility budget annual percentage increases applied to the actual 2020 salaries and benefits which averages approximately 4% per year. 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. • 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, addressing unplanned replacement needs, performing hydraulic analysis, replacing antiquated software, 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 need to be replaced. 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 video recording 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, 11 Staff Report #11844 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 28 | Page 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 replaced with new HDPE pipe or rehabilitated with a plastic lining when replacement is not feasible. 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. Utilities has not bid a sewer project since the pandemic began. However, there are no indications of a dip in construction costs. 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 2019, 75 miles or 35% of the collection system has been replaced or rehabilitated (the darker green-colored lines shown in the attached map in Appendix D: Map (CPA Wastewater Collection System - Sewer Mains Replaced or Rehabilitated since 1990). This is an average of approximately 13,654 feet (~2.6 miles), or 1.2% of the system, of sewer main being replaced or rehabilitated per year. This is a sustainable replacement rate to keep the system reliable. Staff undertakes an SSR project every other year however, the FY 2024 and FY 2026 projects are planned to be deferred in order to lower CIP budgets to relieve the upward pressure on customer rates due to the ongoing pandemic and associated economic impacts. Each SSR project has approximately a $4 to $5 million budget to cover design and construction. This project scope and frequency allows staff to continue replacing wastewater mains that are in poor condition and to reduce groundwater and rainwater infiltration through cracks or leaking joints. Staff continues to re-evaluate and re-prioritize the scope of future projects based on the structural rating system, Wastewater Operations’ feedback 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 newer sub-divisions that were developed between 1950 and 1970. The costs for Customer Connections and on-going Projects are projected to remain steady 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 14 displays projected CIP spending for the 5-year financial forecast period. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 29 | Page Table 14: Projected CIP Spending Aside from Customer Connections, the CIP plan for FY 2022 to FY 2026 is funded by sewer rates and capacity fees. Appendix B: Wastewater Collection Utility Capital Improvement Program (CIP) Detail shows the details of the plan. Figure 9 below shows the projected CIP Reserve balances from FY 2022 through FY 2026. Figure 10 below shows the projected CIP expenditures fluctuating from year to year with the staggered main replacement schedule relative to the more steady projected capital program contributions. In FY 2022, the capital program contribution to the CIP Reserve is $4.35 million. The capital program contribution would increase with inflation at a projected level of 3% annually. Appendix A: Wastewater Collection Financial Forecast Detail shows the amount of the rate-funded CIP Reserve contributions under “Uses of Funds” or considered expenses for FY 2022 through FY 2026. Project Category Current Budget* Spending, Curr. Yr Remain. Budget**Committed FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Sewer Rehab/Augmentation 2,550 (1,469) 1,081 - 4,130 300 1,950 3,850 1,650 Ongoing Projects 1,389 (328) 1,061 - 1,050 1,575 1,100 1,126 1,150 Customer Connections 346 (51) 295 - 450 450 450 450 450 TOTAL 4,285 (1,848) 2,437 - 5,630 2,325 3,500 5,426 3,250 *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 February 2021 30 | Page Figure 9: Projected CIP Reserve Balances FY 2022 to FY 2026 Figure 10: Projected CIP Expenditure, and Projected Capital Program Contribution, FY 2022 to FY 2026 ($000) WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 31 | Page 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 $129,000 per year as shown in Table 15 below. Table 15: Wastewater Collection Utility Debt Service ($000) FY 2022 FY 2023 FY 2024 1999 Utility Revenue Bonds, Series A 129 129 129 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”12 equal to five times the annual debt service. The current financial plan maintains compliance with both covenants throughout the forecast period. Table 16, 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 16: Debt Service Coverage Ratio ($000) FY 2022 FY 2023 FY 2024 Revenues 20,015 20,886 22,190 Expenses (Excl. CIP and Debt Service) 15,412 15,899 17,406 Net Revenues 4,604 4,987 4,784 Debt Service 129 129 129 Coverage Ratio 3581% 3864% 3701% 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. 12 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 February 2021 32 | Page SECTION 6 E : OTHER REVENUES Other revenues are from capacity and connection fees and income from interest and transfers in. These revenues fluctuate from year to year. This plan forecasts other revenues using the average of the past five years for FY 2022 increasing by inflation annually through the forecast period. SECTION 7 : COMMUNICATIONS PLAN In FY 2022, the communications strategy for the wastewater collection utility will address the following primary areas: infrastructure upgrades, increasing wastewater treatment costs, maintenance and operations related to safety, and how these necessary activities impact the rates 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 (RWQCP) as well as increased capital improvement projects (CIP) to improve our wastewater collection utility services. These infrastructure upgrades are necessary to replace aging wastewater collection mains and sanitary sewer treatment equipment at the RWQCP. This is important for functional as well as safety reasons. Staff update the utilities website with information on the progress of wastewater projects to keep customers apprised of the status and accomplishments of CIP projects. Customers can find project schedules, maps, overview of the work being done, and project manager contact information at www.cityofpaloalto.org/utilityprojects. Promotional activities about wastewater infrastructure upgrades, operations, safety, CPAU and customer responsibilities for wastewater system maintenance, include the use of bill inserts, ads in local print publications, email newsletters and social media. 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 CPAU prior to clearing sewer lines in the event of a sewer back-up. 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. Aside from the year 2020 COVID-19 shelter-in-place public health order, staff typically 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 February 2021 33 | 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 February 2021 34 | Page APPENDIX A : WASTEWATER COLLECTION FINANCIAL FORECAST DETAIL 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 1 2 % CHANGE IN RETAIL RATE 9.0% 9.0% 0.0% 11.0% 7.0% 0.0% 3.0% 3.0% 5.0% 5.0% 5.0% 3 PROJECTED CHANGE IN RETAIL SALES REVENUE 1,317 1,421 - 1,916 1,359 - 612 630 1,082 1,136 1,193 4 5 RETAIL SALES REVENUE 15,648 17,126 17,420 19,342 20,335 19,996 20,015 20,886 22,190 23,565 24,997 6 CONNECTION AND CAPACITY FEES 794 1,047 549 594 686 752 767 787 810 835 860 7 OTHER / TRANSFERS IN 321 355 328 545 394 398 406 416 429 442 455 8 INTEREST 475 (88) 19 446 406 258 263 270 278 286 295 9 TOTAL SOURCES OF FUNDS 17,238 18,441 18,316 20,928 21,820 21,404 21,452 22,359 23,707 25,127 26,606 10 11 PURCHASES/CHARGES OF UTILITIES (TREATMENT)8,770 8,391 9,559 9,843 10,234 10,995 11,154 11,487 12,827 13,632 16,112 12 ALLOCATED CHARGES (CIP&OPERATING)1,816 1,388 634 1,414 1,122 1,002 1,005 1,022 1,047 1,078 1,123 13 CUSTOMER SERVICE (22) 345 283 304 300 308 320 332 344 354 360 14 DISTRIBUTION OPERATIONS 2,635 2,759 2,720 2,855 3,461 3,948 3,690 3,820 3,960 4,079 4,146 15 ENGINEERING (OPERATING)347 292 345 329 339 348 361 374 388 399 406 16 DEBT SERVICE 129 128 128 128 128 128 129 129 129 - - 17 RENT 293 300 310 320 332 251 256 262 270 278 287 18 OTHER/ TRANSFERS OUT 233 323 359 364 467 467 467 467 467 467 467 19 CAPITAL PROGRAM CONTRIBUTION^4,985 1,332 2,955 2,932 5,165 1,231 4,350 4,459 4,593 4,730 4,872 20 TOTAL USES OF FUNDS 19,185 15,258 17,294 18,489 21,550 18,677 21,733 22,352 24,025 25,019 27,774 21 22 INTO / (OUT OF) RESERVES (1,946) 3,183 1,022 2,439 271 2,727 (281) 6 (318) 108 (1,168) 23 24 ENDING COMMITMENTS & REAPPROPRIATIONS 11,088 1,922 1,268 5,732 4,775 4,775 4,775 4,775 4,775 4,775 4,775 25 ENDING PLANT REPLACEMENT RESERVE - - - - - - - - - - - 26 ENDING CIP RESERVE 978 978 978 978 978 3,178 2,559 3,681 3,861 2,461 3,082 27 ENDING RATE STABILIZATION RESERVE 342 342 342 342 342 342 342 342 295 295 - 28 ENDING OPERATIONS RESERVE 3,211 6,393 7,415 5,390 5,661 6,188 5,907 5,913 5,642 5,750 4,878 29 UNASSIGNED RESERVES - - - - - - - - - - - 30 31 SHORT TERM RISK ASSESSMENT VALUE 1,444 1,524 1,652 1,758 1,837 1,900 1,916 1,985 2,171 2,306 2,612 32 33 OPERATIONS RESERVE GUIDELINES 34 MIN (60 DAYS TREATMENT/O&M EXP)2,238 2,319 2,469 2,667 2,624 2,868 2,756 3,126 3,224 3,105 3,867 35 TARGET (105 DAYS TREATMENT/O&M EXP)3,916 4,059 4,322 4,668 4,592 5,019 4,823 5,470 5,642 5,434 6,767 36 MAX (150 DAYS TREATMENT/O&M EXP)5,594 5,798 6,174 6,669 6,559 7,170 6,889 7,815 8,060 7,763 9,667 37 ^Capital Program Contribution represents level amount of CIP funding from the Operations Reserve to the CIP Reserve beginning in FY 2022 Fiscal Year Wastewater Collection Financial Detail ($'000) Actual Projected WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 35 | Page WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 36 | 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 2022 FY 2023 FY 2024 FY 2025 FY 2026 SEWER SYSTEM REHABILITATION AND AUGMENTATION (SSR/A) PROGRAM WC-11000 SSR/A - Project 24 - - - - - - - - - - WC-12001 SSR/A - Project 25 - - - - - - - - - - WC-13001 SSR/A - Project 26 - - - - - - - - - - WC-14001 SSR/A - Project 27 - - - - - - - - - - - WC-15001 SSR/A - Project 28 692,891 (492,891) - (117,224) 82,776 - - 300,000 300,000 300,000 - WC-16001 SSR/A - Project 29 3,740,820 (1,740,820) - (1,352,249) 647,751 - - - - - - WC-17001 SSR/A - Project 30 221,000 129,000 - - 350,000 - 4,130,000 - - - WC-19001 SSR/A - Project 31 - - - - - - - 1,650,000 3,550,000 - WC-20000 SSR/A - Project 32 - - - - - - - - 1,650,000 Subtotal, Sewer Rehab./Augmentation 4,654,711 (2,104,711) - (1,469,473) 1,080,527 - 4,130,000 300,000 1,950,000 3,850,000 1,650,000 ONGOING PROJECTS WC-13002 Fusion & Gen. Equip./Tools 27,894 185,000 - (32,191) 180,703 - 50,000 50,000 50,000 50,000 50,000 WC-15002 WW System Improvements 205,952 94,048 - (171,210) 128,791 - 200,000 200,000 200,000 200,000 200,000 WC-99013 Sewer / Manhole Rehab.- 876,000 - (124,491) 751,509 - 800,000 1,325,000 850,000 875,500 900,000 Subtotal, Ongoing Projects 233,846 1,155,048 - (327,891) 1,061,003 - 1,050,000 1,575,000 1,100,000 1,125,500 1,150,000 CUSTOMER CONNECTIONS (FEE FUNDED) WC-80020 Sewer System Extensions 16,846 329,154 - (50,845) 295,155 - 450,000 450,000 450,000 450,000 450,000 Subtotal, Customer Connections 16,846 329,154 - (50,845) 295,155 - 450,000 450,000 450,000 450,000 450,000 GRAND TOTAL 4,905,403 (620,509) - (1,848,209) 2,436,685 - 5,630,000 2,325,000 3,500,000 5,425,500 3,250,000 Funding Sources Connection/Capacity Fees 750,000 - 600,000 600,000 600,000 600,000 600,000 Funded by Rates and Other Revenue (1,370,509) - 5,180,000 1,875,000 3,050,000 4,975,500 2,800,000 CIP-RELATED RESERVES DETAIL 6/30/2020 Actual 6/30/21 (Unaudited) Reappropriations & Commitments 4,905,403 2,436,685 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 37 | 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 February 2021 38 | 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 and approved by Council Resolution. Minimum Level 20% of the maximum CIP Reserve guideline level Maximum Level Average annual (12 month)13 CIP budget, for 48 months of budgeted CIP expenses14 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) 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 there are funds in this reserve in excess of the maximum level staff must propose in the next Financial Plan to transfer these funds to another reserve, return the funds to ratepayers, or designate a specific use of the funds for CIP investments that will be made by the end of the next Financial Planning Period. 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. 13 Each month is calculated based upon 1/12 of the annual budget. 14 For example, in the Financial Plan for FY 2022, the 48 month period to use to derive the annual average is FY 2022 through FY 2025. In the FY 2023 Financial Plan, the 48 month period to use to derive the annual average would be FY 2023 through FY 2026 etc. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 39 | 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 February 2021 40 | Page APPENDIX D : MAP (CPA WASTEWATER COLLECTION SYSTEM - SEWER MAINS REPLACED OR REHABILITATED SINCE 1990) WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 41 | Page APPENDIX E: SAMPLE OF WASTEWATER COLLECTION OUTREACH MATERIALS Attachment C * NOT YET APPROVED * 6055474 Resolution No. _________ Resolution of the Council of the City of Palo Alto Adjusting 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 ____, 2021, 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 ________ 2021 public hearing was mailed to all City of Palo Alto Utilities wastewater customers by _______, 2021. 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, 2021. 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, 2021. 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, 2021. Attachment C * NOT YET APPROVED * 6055474 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, 2021. 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. // // // // // // // // // // // // // // // Attachment C * NOT YET APPROVED * 6055474 // 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: ___________________________ ___________________________ Assistant City Attorney City Manager ___________________________ Director of Utilities ___________________________ Director of Administrative Services Attachment D APPENDIX A : 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; the Financial Planning Period would be FY 2015 to FY 2019. 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. Attachment D 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 and approved by Council Resolutionbased on the levels of CIP expense budgeted for that year. Minimum Level 20% of the maximum CIP Reserve guideline level 12 months of budgeted CIP expense Maximum Level Average annual (12 month)1 CIP budget, for 48 months of budgeted CIP expenses 224 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)i) 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 there are funds in this reserve in excess of the maximum level staff must propose in the next Financial Plan to transfer these funds to another reserve, return the funds to ratepayers, or designate a specific use of the funds for CIP investments that will be made by the end of the next Financial Planning Period. 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 1 Each month is calculated based upon 1/12 of the annual budget. 2 For example, in the Financial Plan for FY 2022, the 48 month period to use to derive the annual average is FY 2022 through FY 2025. In the FY 2023 Financial Plan, the 48 month period to use to derive the annual average would be FY 2023 through FY 2026 etc. Attachment D 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. 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 Attachment D 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. 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 7-1-202119 dated 7-1-20198 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 ................................................................................ $41.3743.32 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 E 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 7-1-202119 dated 7-1-20198 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 ............................................................. $41.37 2. Quantity Rates, per 100 cubic feet (See Section D.1)............................................. $8.097.97 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 rebuttably presumed to have usage of 4.8 ____ ccf per month charged at the Residentialminimum monthly charge per occupied domestic dwelling unit (Utility Rate Schedule S-1) 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 7-1-202119 dated 7-1-20198 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 ......................................................... $41.37 2. Quantity Rates, per 100 cubic feet of monthly metered Water usage ....................... $ 12.0712.33 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 7-1-202119 dated 7-1-20198 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 CD. B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides Wastewater Services. C. RATES: 1. Collection System Operation, Maintenance, and Infiltration Inflow: $4.022.15 per 100 cubic feet of metered water use. 2. Advanced Waste Treatment Operations and Maintenance Charge: $1.6051 per 100 cubic feet of metered water use 3. $196.34247.56 per 1000 pounds (lbs) of COD (Chemical Oxygen Demand) 4. $473.38596.62 per 1000 lbs of SS (Suspended Solids) 5. $3,270.923,983.85 per 1000 lbs of NH3 (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 CD. 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 CD. 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} Attachment F 2021 Wastewater COS Report January 11, 2021 CITY OF PALO ALTO 445 S Figueroa Street, Suite 1925 Los Angeles, CA 90071 www.raftelis.com January 11, 2021 Mr. Eric Keniston City of Palo Alto 250 Hamilton Avenue Palo Alto, CA 94301 Subject: Wastewater Collection Utility Cost of Service and Rate Study Dear Mr. Keniston, Raftelis is pleased to provide this wastewater cost of service study report (Report) to the City of Palo Alto (City). This study involved a comprehensive review of the City’s wastewater rate structure and the calculation of cost of service-based wastewater rates. This report summarizes key findings and recommendations related to the rates necessary for the City to meet its obligations. We are confident that the calculated rates are fair and equitable for the City’s customers and compliant with Proposition 218 requirements. This report includes an executive summary, cost of service analysis based on city budget and cost projections, and rate derivation for the wastewater utility. It was a pleasure working with you and we wish to express our thanks for the support you, Ms. Lisa Bilir, Mr. Eric Wong and other City staff provided during the study. If you have any questions, please do not hesitate to call me at (626) 583-1894. Sincerely, Raftelis Sudhir Pardiwala, P.E. Michael Hicks Executive Vice President Associate Consultant Table of Contents 1. Background .............................................................................................. 1 1.1.1. Objectives of Study ........................................................................................................ 1 1.1.2. System Overview ........................................................................................................... 1 2. Cost of Service Methodology ........................................................................ 3 2.1.1. LOADING (Mass Balance) ........................................................................................... 3 2.1.2. Functionalization of Costs ............................................................................................. 5 2.1.3. Revenue Requirement ................................................................................................... 8 2.1.4. Unit Cost Derivation ..................................................................................................... 8 2.1.5. Allocation of Cost to Customer Classes .......................................................................... 9 3. Rate derivation ........................................................................................ 11 3.1.1. Residential Rates ......................................................................................................... 11 3.1.2. Non-Residential Rates ................................................................................................. 11 3.1.3. Proposed Rates Schedule ............................................................................................. 12 3.1.4. Customer Impacts ....................................................................................................... 12 List of Tables Table 2-1: Mass Balance Analysis ...............................................................................................................5 Table 2-2: O&M Expense Allocation – FY 2021-2022 .............................................................................7 Table 2-3: Revenue Requirement ................................................................................................................8 Table 2-4: Customer Class Data ..................................................................................................................8 Table 2-5: Unit Cost Derivations ................................................................................................................9 Table 2-6: Allocation of Costs to Customer Classes ................................................................................10 Table 3-1: Residential Rate Derivation .....................................................................................................11 Table 3-2: Non-Residential Rate Derivation for FY 2021-2022 .............................................................12 Table 3-3: S-1 Residential Customer Impacts ..........................................................................................12 Table 3-4: S-2 Commercial Customer Impacts ........................................................................................13 Table 3-5: S-6 Restaurant Customer Impacts ...........................................................................................13 This page intentionally left blank to facilitate two-sided printing. WASTEWATER COS REPORT 1 1. Background 1.1.1. OBJECTIVES OF STUDY The City of Palo Alto (City) engaged Raftelis to update the City’s cost of service (COS) methodology and wastewater rate structure to ensure continued compliance with Proposition 218. This report documents the assumptions, methodologies, analyses, and proposed rates developed in the study. The mission of the City is to provide safe, reliable, environmentally sustainable, and cost-effective services. To ensure that the City can fulfill its mission effectively this study has been prepared with the following major objectives: 1. Ensure revenue sufficiency to meet the operation and maintenance (O&M) and capital needs of the City’s wastewater utility. 2. Ensure that rates are fair, equitable, and reflect the costs of providing services. 3. Plan for rate and revenue stability to prevent rate spikes, preserve the overall financial health of the utility, and maintain adequate operating and capital reserves under varying demand conditions. Wastewater rates are designed to recover the City’s costs to collect and treat wastewater (sewage). Wastewater collection and treatment costs are increasing due to planned infrastructure upgrades at the Regional Water Quality Control Plant (RWQCP). The existing plant is past its design lifetime and requires upgrades to meet stricter environmental standards. In addition to this, the cost to replace sewer mains in the City’s wastewater collection system has also increased. 1.1.2. SYSTEM OVERVIEW The City’s sewer system collects wastewater from Palo Alto residents and delivers it to the RWQCP for treatment. The City operates the RWQCP; however, the costs of the RWQCP are shared with five other agencies that receive treatment services from the RWQCP (Stanford, East Palo Alto Sanitary District, Los Altos Hills, Los Altos, and Mountain View). The Wastewater Utility has two main costs: collection system costs and Palo Alto’s share of RWQCP costs. Both cost components have been increasing and are expected to continue to increase. The RWQCP has been in operation since 1934. Aging equipment, new regulatory requirements, and the transition towards full sustainability will require the rehabilitation or replacement of much existing RWQCP infrastructure. The City has seen increases in operational costs in recent years, and debt service for the plant is expected to increase substantially as a major rehabilitation and replacement plan adopted in 2012 (Long Range Facilities Plan) is implemented. Collection system costs are also increasing, though not as significantly as treatment costs. These increasing costs are primarily driven by increases in capital costs. The cost of underground projects to replace aging sewer mains has nearly doubled since 2008. Operational costs have also increased (e.g., salaries and benefits and overhead), but more slowly than treatment and collection infrastructure-related costs. 2 CITY OF PALO ALTO The City’s current wastewater retail customers are divided into three customer classes: S-1 Residential, S-2 Commercial, and S-6 Restaurant. S-1 Residential is the largest customer class, comprising most of the City’s retail customers. City staff provided overall revenue projections based on expense and reserve level projections. These projections recommend an increase to the overall revenue generated by wastewater rates for FY 2021 – 2022 of 3%. Additionally, in order to keep each customer’s wastewater rates in alignment with the cost of serving that customer and reflect changing system use, certain rates are recommended for small rate adjustments while keeping overall revenue levels of the enterprise stable. WASTEWATER COS REPORT 3 2. Cost of Service Methodology This section of the Report discusses the allocation of O&M expenses and capital costs to the appropriate functional categories, allocating each functional category into cost components consistent with industry standards, the determination of unit costs, and calculation of costs by customer class. To allocate the cost of service among the different customer classes, costs first need to be allocated to appropriate functional categories and each functional category must be allocated to cost causation components. The following sections describe our allocations for the City’s wastewater system. The total cost of wastewater service is analyzed by system function in order to equitably distribute costs of service to the various classes of customers. For this analysis, wastewater utility costs of service are developed consistent with the guidelines for allocating costs detailed in the Water Environment Federation (WEF) Manual of Practice No. 27, Financing and Charges for Wastewater Systems, 2018. The wastewater COS analysis consists of the following major steps, as outlined below: 1. Estimate residential and non-residential customer flow and strength through a mass balance around the treatment plant 2. Functionalize O&M and capital costs into functional categories such as collection, treatment, customer service and general 3. Allocate each functional category into cost causation components such as flow and strength 4. Develop customer class characteristics by cost causation component 5. Calculate the unit cost causation component rates by dividing the total cost in each cost causation component in Step 3 by the customer class characteristics in Step 4 6. Calculate the cost by customer class by multiplying the unit costs in Step 5 by the customer class characteristics in Step 4 2.1.1. LOADING (MASS BALANCE) Wastewater customers do not generally have meters installed on their sewer connection. This stands in contrast to water connections, which are usually metered. A wastewater COS analysis consequently requires the estimation of loadings (i.e., flow and strength) for each customer class. To determine the wastewater flows from different customer classes, Raftelis reviewed the water use records of the City from March 2019 to February 2020 and the volume of wastewater receive at the treatment plant during this period. To avoid any temporary impacts of the ongoing pandemic, Raftelis used the time period indicated above instead of the fiscal year data. In the City, there are four classes of customers: (i) Residential (S-1), (ii) Commercial (S-2), (iii) Restaurant (S-6) and Industrial Discharger (S-7). Currently there are no Industrial Discharger customers in the City. Therefore, all non- residential customers other than restaurants are classified as Commercial. 4 CITY OF PALO ALTO Loading is a combination of flow and strength. Flow is the volume of wastewater discharge, while strength is a three-component measurement (COD, TSS and NH31) of the concentration of soluble and the insoluble organic and inorganic matters that will be removed or neutralized in the treatment process. To estimate residential wastewater loading, a mass balance analysis is conducted by taking the total flow and strength of the wastewater entering the RWQCP from the City’s collection system and reducing that loading by (i) inflow and infiltration and (ii) the loading of the City’s non-residential customers. Inflow and infiltration (I&I) is water that enters the wastewater collection system via a mechanism other than intentional customer discharges via their sewer connection. Sources of I&I include rainwater, run-off, and groundwater intrusions. I&I varies among wastewater systems. Based upon the mass balance calculation using metered water use in the winter months (January, February, and March) to estimate sewer use for residential and commercial customers as well as annual water usage data to estimate sewer use for restaurant customers, Palo Alto’s I&I is estimated to represent about 29% of its total influent. The loadings for commercial customers are estimated based on metered water use in the winter months by the City’s commercial customers.2 The loadings for restaurant customers are estimated based on metered, year-round billed water use by the City’s restaurant customers.3 Table 2-1 shows the total annual units of flow and strength for each customer class based on the results of the mass balance analysis. The results were compared with industry averages to verify the calculation and assumptions used in the mass balance. Over the last several years, multiple droughts and strong conservation messages have reduced water use and wastewater flows but did not affect the amount of solids and biological materials in the discharge. Current residential wastewater flows, based on the mass balance, are 4.8 ccf (one hundred cubic feet) per month per EDU, or 46 gallons per capita per day. The 4.8 ccf number is calculated by taking 1,489,989 ccf of residential flow divided by 26,034 residential customers, divided by 12 months, and the 46 gallons per capita per day is calculated by taking 1,489,989 ccf of residential flow divided by population estimate of 66,649 and converted to gallons per day by multiplying by 748 gallons per ccf and 365 days per year. This amount of flow results in much higher concentrations as compared to the wastewater flow used in the City’s 2009 rate study. The increased concentration thus results in an increased strength of discharges into the sewage system. To ensure that the total strength loadings influent to the wastewater treatment plant match the total generated by all classes, the analysis began with the existing assumptions based on the City’s 2009 rate study for strength measurements and then increased each proportionally for each customer class in relation to reduced flows as shown below. 1 COD is Chemical Oxygen Demand, TSS is Total Suspended Solids, and NH3 is Ammonia. 2 Water consumption during winter months is used as a proxy for wastewater system use because during the wet winter months (January, February and March) water delivered to a customer is primarily for interior use of the business (and discharged to the sewer system) rather than used for landscape maintenance purposes. Because water use in March 2020 was extremely atypical as a result of the onset of the COVID-19 emergency, this analysis considered water use in January 2020, February 2020, and March 2019. 3 Restaurants have relatively low outdoor water use, but often have widely varying customer loads (and water use) during the year for seasonal and other reasons. Therefore, this analysis was based on twelve months of water usage from March 2019 through February 2020. This analysis also uses a return factor on restaurant annual water use of 95% due to the assumption that restaurants use a small amount of water for outdoor watering. WASTEWATER COS REPORT 5 Strength Assumption from 2009 Study Revised Strength Assumptions As stated above, the estimated residential wastewater flow is 4.8 ccf (one hundred cubic feet) per month per EDU, or 46 gallons per capita per day (gpcd). The results for estimated residential wastewater flow falls within what Raftelis considers likely to be a reasonable indication of indoor water use and wastewater discharge for the City. Table 2-1: Mass Balance Analysis March 2019 – February 2020 Flow COD TSS NH3 (ccf) (lbs/yr) (lbs/yr) (lbs/yr) City Influent 3,338,235 13,253,263 5,938,962 750,185 Less: I&I (29 %) 968,088 755,394 755,394 0 Net Influent 2,370,147 12,497,869 5,183,568 750,185 S-2: Commercial 800,056 3,243,257 1,096,734 244,518 S-6: Restaurant 80,102 1,432,575 507,851 13,261 Non-Residential Loading 880,158 4,675,832 1,604,586 257,779 Net Residential Loading 1,489,989 7,822,036 3,578,982 492,406 2.1.2. FUNCTIONALIZATION OF COSTS After determining the utility’s revenue requirements, the next step in a COS analysis is to functionalize its operating and capital costs. The functions of the utility are collection, treatment, customer service and general. Each of the costs of the utility can be classified into these functions. The City’s O&M budget, is categorized as follows: » Allocated Charges » Distribution System - Administration » Engineering » Operation and Maintenance » Administration » Customer Service » Rates / Field Services / Utility Billing Customer Class COD mg/l TSS, mg/l Ammonia, mg/l S-1 440 210 26 S-2 340 120 24 S-6 1,500 555 13 Customer Class COD mg/l TSS, mg/l Ammonia, mg/l S-1 841 385 53 S-2 649 220 49 S-6 2,865 1,016 27 6 CITY OF PALO ALTO » Transfers » Treatment The City’s capital costs are functionalized into collection and treatment depending on the type of project. For operating and capital costs, each function is then assigned an allocation to cost causation components, expressed as a percentage for each cost causation component. The cost causation components are: » Flow » COD » TSS » NH3 » Customer » General Here “customer” costs are costs that are incurred on a per-customer basis, while “general” components are costs that cannot be specifically allocated to one of the other cost causation components. Table 2-2 shows the O&M expenses for FY 2021-2022 including the function and allocation to each cost causation component. Raftelis allocated each of these costs based on their functions and based on discussion with City staff regarding the costs related to each of the cost causation components. The second half of Table 2-2 shows the dollar amounts for each cost causation component based on the allocation percentages shown in the first half of the table. The total collection system percent allocation, shown in the third line from the end, is the proportion of each cost causation component based on total O&M expenses. Capital costs are categorized as collection or treatment. Collection capital costs are allocated entirely to flow while treatment costs (capital and O&M) are allocated based on the current methodology that Palo Alto uses to charge its partner agencies. This methodology was developed by the City’s treatment plant staff to meet USEPA requirements. Actual projected treatment costs for the coming year are then allocated based on these percentages. All treatment costs are allocated to Flow at 34% and COD, TSS and NH3 at 22% each. WASTEWATER COS REPORT 7 Table 2-2: O&M Expense Allocation – FY 2021-2022 O&M Budget Function Flow COD TSS NH3 Customer General TOTAL Allocated Charges4 General 100.0% 100.0% Distribution System - Administration Collection 100.0% 100.0% Engineering Collection 100.0% 100.0% Operation and Maintenance Collection 100.0% 100.0% Administration General 100.0% 100.0% Customer Service Customer 100.0% 100.0% Rates / Field Services / Utility Billing Customer 100.0% 100.0% Transfers5 General 100.0% 100.0% Treatment Treatment 34.0% 22.0% 22.0% 22.0% 100.0% O&M Budget Function Flow COD TSS NH3 Customer General TOTAL Allocated Charges General $0 $0 $0 $0 $0 $1,005,426 $1,005,426 Distribution System - Administration Collection $448,262 $0 $0 $0 $0 $0 $448,262 Engineering Collection $361,475 $0 $0 $0 $0 $0 $361,475 Operation and Maintenance Collection $3,241,907 $0 $0 $0 $0 $0 $3,241,907 Administration General $0 $0 $0 $0 $0 $0 $0 Customer Service Customer $0 $0 $0 $0 $274,967 $0 $274,967 Rates / Field Services / Utility Billing Customer $0 $0 $0 $0 $45,474 $0 $45,474 Transfers General $0 $0 $0 $0 $0 $723,370 $723,370 TOTAL - COLLECTION SYSTEM $4,051,644 $0 $0 $0 $320,441 $1,728,797 $6,100,882 % O&M Allocation - Collection Only 66% 0% 0% 0% 5% 28% 100% Treatment Treatment $3,140,163 $2,031,870 $2,031,870 $2,031,870 $0 $0 $9,235,774 Grand Total $7,191,807 $2,031,870 $2,031,870 $2,031,870 $320,441 $1,728,797 $15,336,656 4 Includes allocated general and administrative salaries and benefits, utilities administration direct charges and General Fund administrative and overhead expenses to the Wastewater Collection Utility. 5 Includes rent, enterprise transfers and other transfers. 8 CITY OF PALO ALTO 2.1.3. REVENUE REQUIREMENT Revenue requirements for FY 2021-2022 are shown below. Table 2-3 shows the City’s total revenue to be recovered from rates in FY 2021-2022. This figure is calculated by subtracting revenue offsets (or miscellaneous, non-rate revenues) and adjustments from the revenue requirements, which includes O&M expenses, rate funded capital costs, and debt service payments. The City’s total revenue requirement is allocated into Operating and Capital costs, which will later be allocated into each cost causation component. Additional details are shown in subsequent sections. The O&M and capital expenses and revenue offsets data is based on the City’s financial plan for FY 2021-2022. Table 2-3: Revenue Requirement FY 2021-2022 Operating Capital Total Revenue Requirements O&M Expenses - Collection $6,100,882 $6,100,882 O&M Expenses - Treatment $9,235,774 $9,235,774 Debt Service $128,566 $128,566 Rate Funded Capital - Collection $4,350,000 $4,350,000 Rate Funded Capital - Treatment $1,917,840 $1,917,840 Subtotal Revenue Requirements $15,336,656 $6,396,406 $21,733,062 Less: Revenue Offset Interest Plus Unrealized Gain or Loss $263,125 $263,125 Other $370,730 $370,730 Connection Fees $306,499 $306,499 Capacity Fees $460,950 $460,950 Reimbursement from Other Funds $35,515 $35,515 Bad Debt $(12,288) $(12,288) Subtotal Revenue Offset $657,082 $767,449 $1,424,531 Adjustments Cash from Reserves ($707,651) ($707,651) Subtotal Adjustments $0 ($707,651) ($707,651) Revenue to be Recovered from Rates $14,691,795 $6,336,609 $21,016,183 2.1.4. UNIT COST DERIVATION Table 2-4 shows the flow, strength, and accounts data for each customer class as set forth in the mass balance in Table 2-1. This is based on customer data provided by the City for March 2019 through February 2020. Table 2-4: Customer Class Data Customer Class Flow (ccf) COD (lbs/yr) TSS (lbs/yr) NH3 (lbs/yr) Customer Count Residential 1,489,989 7,822,036 3,578,982 492,406 26,034 Non-Residential S-2: Commercial 800,056 3,243,257 1,096,734 244,518 1,437 S-6: Restaurant 80,102 1,432,575 507,851 13,261 162 TOTAL 2,370,147 12,497,869 5,183,568 750,185 27,633 Table 2-5 shows the unit cost derivation for all cost causation components. Operating expenses, which total approximately $15.3 million (from Table 2-3), are allocated based on the O&M expense allocation shown in Table WASTEWATER COS REPORT 9 2-2 and are broken into their respective categories for collection ($6.1 million) and treatment ($9.2 million). The total cost is multiplied by each cost causation component’s allocation percentage to determine the dollar amount. A similar process is used to calculate the capital expenses for each cost causation component. General costs are reallocated in proportion to the remaining costs. The final adjusted COS, after reallocating costs related to the fixed charge, is divided by each unit of service (ccf/year for flow, lbs/year for strength and number of bills for customer costs) to determine the unit cost for each cost causation component. The units of service are derived from Table 2-4. A similar process is carried out for the treatment section to derive the unit costs for each of their cost causation components. Table 2-5: Unit Cost Derivations Development Unit Cost Collection Flow COD TSS NH3 Customer General TOTAL Operating Cost $3,615,271 $0 $0 $0 $285,929 $1,542,601 $5,443,800 Capital Cost $4,418,769 $0 $0 $0 $0 $0 $4,418,769 Total COS $8,034,039 $0 $0 $0 $285,929 $1,542,601 $9,862,569 Allocation of General Costs $1,489,587 $0 $0 $0 $53,014 ($1,542,601 ) $0 Adjusted COS $9,523,626 $0 $0 $0 $338,943 $0 $9,862,569 Units of Service 2,370,147 12,497,869 5,183,568 750,185 331,596 (ccf/yr) (lbs/yr) (lbs/yr) (lbs/yr) (Bills) Unit Cost Collection $4.02 $0.00 $0.00 $0.00 $1.03 (ccf) (Bill/mo) Development Unit Cost Treatment Flow COD TSS NH3 Customer General TOTAL Operating Cost $3,140,163 $2,031,870 $2,031,870 $2,031,870 $0 $0 $9,235,774 Capital Cost $652,066 $421,925 $421,925 $421,925 $0 $0 $1,917,840 Total Cost of Service $3,792,229 $2,453,795 $2,453,795 $2,453,795 $0 $0 $11,153,614 Units of Service 2,370,147 12,497,869 5,183,568 750,185 331,596 (ccf/yr) (lbs/yr) (lbs/yr) (lbs/yr) (Bills) Unit Cost Treatment $1.60 $0.20 $0.47 $3.27 $0.00 (ccf) (lb) (lb) (lb) 2.1.5. ALLOCATION OF COST TO CUSTOMER CLASSES The next step in the COS analysis is to proportionately allocate costs to the different customer classes. The unit costs derived in Table 2-5 are multiplied by each customer class’s flow, strength, and accounts data shown in Table 2-4 to determine the cost allocation for each class. For example, to determine the Residential Flow costs, the Residential flow of 1,489,989 ccf is multiplied by the Collection and Treatment Flow unit cost of $4.02 per ccf and $1.60 per ccf, respectively, to get $8,370,990 (note there are slight differences due to rounding of more decimal places). 10 CITY OF PALO ALTO Table 2-6 shows the allocation of costs to each customer class and a comparison between the total proposed COS amount and the projected FY 2021-2022 revenue at current rates. Table 2-6: Allocation of Costs to Customer Classes Customer Class Flow COD TSS NH3 Customer Total Current Rates Revenue S-1 Residential $8,370,990 $1,535,756 $1,694,217 $1,610,622 $319,330 $13,530,914 $12,924,319 Non- Residential S-2: Commercial $4,494,839 $636,772 $519,172 $799,799 $17,626 $6,468,207 $6,482,022 S-6: Restaurant $450,026 $281,268 $240,407 $43,375 $1,996 $1,017,062 $1,031,313 Total - COS $13,315,855 $2,453,795 $2,453,795 $2,453,795 $338,943 $21,016,183 $20,437,654 3. Rate derivation This section describes the derivation of the FY 2021-2022 wastewater rates based on the COS analysis. All calculated rates are rounded up to the nearest penny. 3.1.1. RESIDENTIAL RATES S-1 Residential customers are relatively homogenous, and many agencies charge a fixed charge to residential customers for simplicity and ease of understanding. The proposed residential rates ($43.32 per residential dwelling unit) were calculated by dividing the revenue requirement for residential customers ($13,530,914) by the total number of residential dwelling units served by the wastewater utility (26,034), and dividing that by 12 to calculate the monthly cost of service rate. Residential customers are charged a fixed rate per residential dwelling unit. We propose to retain the current fixed rate structure for residential customers. Table 3-1 shows the calculation of the FY 2021-2022 Residential wastewater rate and a comparison to the current rate. Table 3-1: Residential Rate Derivation Wastewater Rates Calculation Revenue Required Dwelling Units COS Rates Current Rates Difference Monthly Service Charge S-1: Residential $13,530,914 26,034 $43.32 $41.37 4.7 % Residential monthly service charges must increase by 4.7% as updated usage and strength data reveal a gap needed to cover the cost to serve all customers from the prior study. Residential flow estimates have increased relative to commercial and restaurant flow since the prior study and this is the primary reason for the difference between current rates and the rates in accordance with the COS to the residential class. 3.1.2. NON-RESIDENTIAL RATES Commercial customers are not very homogenous in that their flow can vary significantly. We propose to retain the current water-use-based rate structure for these customers. Each S-2 Commercial customer is charged a monthly charge during each fiscal year that is based on their average winter water usage in ccf for the preceding months of January, February, and March. Winter water consumption is used because during the winter months less water is used by customers for landscape maintenance, so winter water use is more proportional to sewer use. S-6 Restaurant Customers are charged based on actual metered water usage in a billing period, since restaurants generally have minimal landscaping but have water usage that can vary dramatically from month to month based on customer volume. The S-2 Commercial and S-6 Restaurant customer class flow and strengths loadings are outlined in Table 2-1. Table 3-2 shows the calculation of the FY 2021-2022 commercial and restaurant wastewater rates and a comparison to the current rates. Table 3-2: Non-Residential Rate Derivation for FY 2021-2022 Wastewater Rates Calculation Revenue Required Water Use COS Rates Current Rates Difference Volume Charge ($/CCF) * S-2: Commercial $6,468,207 800,056 $8.09 $7.97 1.5% S-6: Restaurant $1,017,062 84,318 $12.07 $12.33 -2.1 % *Note: We recommend elimination of the minimum charge for S-2 and S-6 customers going forward. S-2 customers should be billed only a volume charge based upon the average water usage for the months of January, February and March and applied through the year starting in the following July (so their monthly rate is the same for each month of the twelve-month billing year). This is done because the “rainy and cool” winter months are the period when water use is best correlated to sewer use and when fluctuations in water use due to landscape needs is minimized. For S-6 customers, the volume charge is based each month on metered water use during the prior metered-read period. For new S-2 and S-6 customers, without an applicable usage history, the City will presume to have use of 4.8 ccf per month, the estimated residential wastewater flow per EDU, until such time as usage may reasonably be established by the City Utilities Department. 3.1.3. PROPOSED RATES SCHEDULE For FY 2021-2022, a 3% increase in overall revenues is proposed based on the City staff’s calculations of revenues based on expenses and reserve needs. As shown in Tables 3-1 and 3-2, residential and commercial rates will increase, and restaurant rates will decrease, as a result of the COS analysis which allocates costs consistent with industry methodology so that customers pay in proportion to service received. Rates for any future industrial customers will be calculated using the unit costs shown in Table 2-5 and loadings of that customer. 3.1.4. CUSTOMER IMPACTS Table 3-3 shows the customer monthly bill impacts for S-1 Residential Customers in FY 2021-2022 of the proposed COS adjustments. Table 3-3: S-1 Residential Customer Impacts Customer Class Current Bill Proposed Bill $ Difference S1: Residential $41.37 $43.32 $1.95 Table 3-4 shows the customer monthly bill impacts for S-2 Commercial customers with average winter consumption at varying ranges. Table 3-4: S-2 Commercial Customer Impacts Average Winter Usage per month Current Bill Proposed Bill $ Difference 10 CCF $79.70 $80.90 $1.20 20 CCF $159.40 $161.80 $2.40 40 CCF $318.80 $323.60 $4.80 60 CCF $478.20 $485.40 $7.20 Table 3-5 shows the customer monthly bill impacts for S-6 Restaurant customers with varying metered water usages. Table 3-5: S-6 Restaurant Customer Impacts Usage per month Current Bill Proposed Bill $ Difference 10 CCF $123.30 $120.70 ($2.60) 20 CCF $246.60 $241.40 ($5.20) 40 CCF $493.20 $482.80 ($10.40) 60 CCF $739.80 $724.20 ($15.60) FEBRUARY 3, 2021 www.cityofpaloalto.org WASTEWATER COLLECTION UTILITY FINANCIAL PROJECTIONS Staff: Lisa Bilir and Eric Keniston • CITY OF PALO ALTO UTILIT 2 WASTEWATER PROJECTIONS •FY 2022 proposal: •3% overall revenue increase •Annual capital program contribution to CIP Reserve to ensure reserve health, rate stability, and availability of capital investment funds •Alternate Proposal: 0% overall revenue increase; the fund would need to reduce spending of $200,000 annually on average to prevent reserves falling below the minimum guidelines during FY 22-26 •Wastewater Cost of Service customer class % rate changes differ from overall: •4.7% for residential, 1.5% for commercial, and -2.1% for restaurant •Future projections •3% in FY 2023 •5% annually FY 2024 –FY 2026 ~CITY OF ~PALO ALTO 3 WASTEWATER OPERATIONS RESERVE PROJECTIONS • . CITY OF PALO ALTO $12 $10 $8 -VI S $6 -$4 $2 $0 _________ , -/~---------~ -_________________ _,, -.. -.... -.. -··-··-·· -· · -· · -· · --. . ...-. . ---- 0 .-i N m ,:::f" LI') I.O " 00 O"I 0 .-i N N N N N N N N N N m m 0 0 0 0 0 0 0 0 0 0 0 0 N N N N N N N N N N N N Actual Projection Fiscal Year -Reserve (Year -End) -Reserve Maximum - -Reserve Target -Reserve Minimum -Risk Assessment 4 RESIDENTIAL AND NON-RESIDENTIAL RATE IMPACTS Current (7/1/2019) Proposed (7/1/2021) Change $/mo. % Monthly Service Charges ($/month) S-1 (Residential) Service charge $41.37 $43.32 $1.95 4.7% Quantity Rates S-2 (Commercial) $/CCF 7.97 8.09 0.12 1.5% S-6 (Restaurant) $/CCF 12.33 12.07 (0.26) (2.1%) (1) Monthly charges for S-1 (Residential) are fixed monthly charges. (2) For S-2 (Commercial) customers, the quantity charges are based upon the average water usage for the months of January, February and March and applied in the following July. For Restaurant customers, the quantity charges are based on monthly metered water usage. (3) Currently there are no customers on the S-7 (Industrial) rate schedule; however, CPAU continues to maintain the S-7 rate schedule in case there is a need for the rate schedule in the future.• . CITY OF PALO ALTO 5 RESIDENTIAL AND NON-RESIDENTIAL BILL IMPACTS Note: Non-residential bill impacts will vary due to each customer’s utilization of the system. • . CITY OF PALO ALTO Res iden t ial General Commercial (14 CCF) Rest auran t (56 CCF)i Current (as of 7/1/2019) $41.37 111.58 690.48 Proposed Change (effective 7/1/2021) $/mo. % $43.3.2 $1.95 4.7%, 11 3 .26 1.68 1.5%, 675.9.2 (14.56), (2.1%) 6 WASTEWATER UTILITY COST STRUCTURE Palo Alto’s share of the cost to treat sewage at Palo Alto’s Regional Water Quality Control PlantCost to collect sewage within Palo Alto, including: maintaining and replacing sewer infrastructure, customer service, billing, administration, etc. Treatment $11.2 million 51% Collections $10.6 million 49% • . CITY OF PALO ALTO rn Treatment ■ Debt Service □ Operations ■ Capital 7 WASTEWATER UTILITY BASICS •Five partners: Stanford, East Palo Alto, Los Altos Hills, Los Altos, and Mountain View •Wastewater drains from partner systems through the City of Palo Alto Collection System, and into the City of Palo Alto Regional Water Quality Control Plant (RWQCP) for treatment •City of Palo Alto Utilities Department manages collection system, Public Works manages the RWQCP ~---,,., ood Clly >la Valhty Nc,r1r, FairOa s Atherton ~nloP ■rk (!'!) r ast Polo Atto /4 ii'"" M~oJ 1 9 xO Stant ,t ,;t ;[ill , : ~..... Mou ntai n " trodtt0 • Los Attos Vte w l 09 Altos Hill s r t Ill ol • Q Loyola Rancho San AnronoO~ ::;pac:ePres~e p rm•n r11e Sunnyv1 Cuper tevens Creek @ County Park • CITY OF PALO ALTO 8 TREATMENT COST DRIVERS •Regional Water Quality Control Plant needs rehabilitation •Long Range Facilities Plan completed in 2012 •Rehab/replacement of: •Sedimentation tank ($19M) •Outfall pipeline ($11M) •Laboratory/Operations Center ($57M) •Secondary Treatment ($129M) •Headworks Facility ($48M) ~CITY OF ~PALO ALTO 9 OPERATIONS/CAPITAL COST DRIVERS •Salary and benefit costs for existing staff •2-3% annual inflation for other operating costs •One-time revenue loss due to COVID-19 $960K in FY 2022, returning to normal by FY 2026 •Underground construction cost increases •Sanitary Sewer Replacements •Reduction of cost by reducing project size •Deferral in FY 2024 and FY 2026 to reduce upward pressure on rates ~CITY OF ~PALO ALTO 10 WASTEWATER MEDIAN MONTHLY RESIDENTIAL BILL ($) Palo Alto is 29% below comparison city average Palo Alto Neighboring Communities Menlo Park Redwood City Santa Clara Mountain View Los Altos Hayward 41.37 102.00 85.44 44.53 42.90 39.63 35.81 • . CITY OF PALO ALTO 11 WASTEWATER MONTHLY NON-RESIDENTIAL BILL ($) Commercial: Palo Alto is 10% higher than comparison city average Restaurant: Palo Alto is 6% below comparison city average Palo Alto Neighboring Communities Menlo Park Redwood City Santa Clara Mountain View Los Altos Hayward General Commercial 111.58 138.04 112.70 74.06 134.12 68.06 81.62 Restaurant 690.48 1,163.68 1,079.68 743.12 614.88 272.26 541.52 • . CITY OF PALO ALTO 12 WASTEWATER COST AND REVENUE PROJECTIONS $35 $30 -+--------------------------------------1-1-"k~ vi' $25 C 0 • CITY OF PALO ALTO $5 2016 2017 2018 Actual 11.0% 2019 7.0% 2020 3.0% 5.0% 5.0% 0.0% 3.0% 2021 2022 2023 2024 2025 2026 Projected -Revenue □ Collection Capital □ Collection Operations ■ Collection Debt Service ■ Treatment Capital & Debt □ Treatment Operations 13 WASTEWATER CIP RESERVE PROJECTIONS 5,000 4,500 4,000 V) 3,500 "C 3,000 C n, V) 2,500 ::, 0 .c 2,000 I- ,v,. 1,500 1,000 500 • . CITY OF PALO ALTO -------------------------------------------------------------------------------------- ~ N N") ~ L/') ~ I"'--00 O') 0 ~ N N N N N N N N N N") N") 0 0 0 0 0 0 0 0 0 0 0 N N N N N N N N N N N Fiscal Vear ~Capital Reserve Ending Balance -Proposed Reserve Minimum/Maximum 14 RECOMMENDATION Staff requests that the UAC recommend that the Council: •Adopt a resolution approving: •The Fiscal Year 2022 Wastewater Collection Financial Plan •Up to a $4.35 million capital program contribution from the Operations to the Capital Improvement Projects Reserve in FY 2022 •Up to a $2.2 million transfer from the Operations to the Capital Improvements Projects Reserve in FY 2021 •Amendments to the Wastewater Collection Utility Reserves Management Practices •Adopt a resolution approving adjustments to Wastewater Collection Utility Rates Via the Amendment of Wastewater Collection and Disposal Rate Schedules •S-1 (Residential), S-2 (Commercial), S-6 (Restaurant) and S-7 (Industrial Discharger) ~CITY OF ~PALO ALTO City of Palo Alto (ID # 11867) Utilities Advisory Commission Staff Report Report Type: New Business Meeting Date: 2/3/2021 City of Palo Alto Page 1 Summary Title: Status of 2020 S/CAP Update Title: Discussion and Status Update on the 2020 Sustainability and Climate Action Plan From: City Manager Lead Department: Utilities Recommendation This is report is intended to support discussion and no action is requested. Executive Summary Palo Alto experienced several rare and challenging events in 2020, events that had impacts throughout California, the United States, and the world. Amidst these challenges, the Council and UAC made it clear to staff that the community continued to support action on climate change and asked for solutions to achieve the City’s adopted and ambitious goal to reduce emissions 80% from 1990 levels by 2030 (the “80x30” goal). Staff has taken this message to heart and has devoted extensive analytical and research effort to developing solutions, even while responding to other challenges. This report is to communicate the status of the 2020 update to the Sustainability and Climate Action Plan (S/CAP). Staff’s intention in this report is to clarify for the UAC and the public the current direction of the S/CAP work effort and the detailed and actionable results staff intends to deliver. Background In April 2016, City Council unanimously adopted the goal of 80 percent greenhouse gas (GHG) reduction by 2030 (the “80x30” goal), calculated utilizing the 1990 baseline1. This ambitious goal is 20 years ahead of the State of California’s 80 percent by 2050 target. In November 2016, Council unanimously adopted the draft Sustainability/Climate Action Plan (S/CAP) Framework2, as the road map for achieving Palo Alto’s sustainability goals3. In December 2017, Council accepted a 2018-2020 Sustainability Implementation Plan4, as a summary of the City’s 1 Staff Report 6754, https://www.cityofpaloalto.org/civicax/filebank/documents/60861 2 https://www.cityofpaloalto.org/civicax/filebank/documents/64814 3 Staff Report 7304, https://www.cityofpaloalto.org/civicax/filebank/documents/60858 4 https://www.cityofpaloalto.org/civicax/filebank/documents/63141 Staff: Jonathan Abendschein CITY OF PALO ALTO City of Palo Alto Page 2 sustainability work plan5. The intent was for staff to update the S/CAP every five years and develop more granular five-year work plans and short-term programs, rather than attempt to build a detailed 14-year work plan. In early 2020, the City launched an update to the S/CAP to help meet our sustainability goals, including our 80 x 30 goal6. Staff proposed goals and key actions in seven areas: Energy, Mobility, Electric Vehicles, Water, Climate Adaptation and Sea Level Rise, Natural Environment, and Zero Waste. In April 2020, staff presented a proposed process for the 2020 update to the S/CAP7 and in June 2020 Council reviewed the potential goals and key actions that were formulated with community input and directed staff to continue with the S/CAP Update8. Also in June 2020, Staff discussed the potential goals and key actions with the Utility Advisory Commission9, the Planning and Transportation Commission10, and the Parks and Recreation Commission11. Discussion Regular feedback from Council and the UAC have pointed to the need for reasonably detailed information on costs, logistical hurdles, financing, and implementation planning to enable the Council to make a policy decision on how to proceed in meeting the 80x30 goal. While developing updated Goals and Key Actions for Council review in June, staff found that the scope and funding for the S/CAP consultant contract were inadequate for all modeling efforts needed. Staff undertook some additional analysis in-house and tapped into existing consulting budgets for help with other analysis. This has delayed the project to some extent, but the more “hands - on” approach has led to greater engagement by staff and has helped staff develop greater familiarity with the potential challenges involved in the project and how to overcome them. Utilities Department staff has taken a primary role in developing the climate change elements of the S/CAP in partnership with the Office of Transportation, the Office of Sustainability, the Public Works Department, the Department of Planning and Community Environment, and others. As the analysis is progressing, a clear story is developing. First, it’s clear that rapid action is needed to hold global warming to 1.5°C (3.7°F), the average global temperature at which the world begins to experience significant impacts from climate change. The world has already experienced 1°C (2.5°F) of warming. To inform policy decisions, staff is working to identify how 5 Staff Report 8487, https://www.cityofpaloalto.org/civicax/filebank/documents/62406 6 Staff Report 10941, https://www.cityofpaloalto.org/civicax/filebank/blobdload.aspx?t=59474.17&BlobID=75032 7 Staff Report 11021, https://www.cityofpaloalto.org/civicax/filebank/blobdload.aspx?t=53475.02&Bl obID=76048 8 Staff Report 11404, https://www.cityofpaloalto.org/civicax/filebank/blobdload.aspx?t=59513.75&BlobID=77028 9 Staff Report 11403, http://cityofpaloalto.org/civicax/filebank/documents/77112 10 Staff Report 11417, https://www.cityofpaloalto.org/civicax/filebank/documents/77435 11 https://www.cityofpaloalto.org/civicax/filebank/documents/77463 City of Palo Alto Page 3 Palo Alto’s goals align with global carbon reduction needs to achieve these global warming goals. It is also clear that achieving the emissions reductions needed will be challenging both logistically and financially. Still, early analysis is revealing that the scale of expenditure is such that the community may be able to afford it if there is community will. More work is needed to produce cost estimates that are ready for public presentation, but the scale of spending, if financed over decades, appears likely to be similar to current annual community expenditures on energy. Staff intends to describe how such costs might be financed and distributed in a way that make them most acceptable to the community and will be looking to UAC for recommendations and to Council for direction on these issues. Staff is also finding it necessary to look at impacts to groups with less ability to reduce emissions due to logistical or financial limitations, such as renters, multi-family building owners, small businesses, and lower-income residents. Any plan needs to take these community members’ needs into consideration. In general, this has led staff to adopt the following high-level principles to guide its analysis and the development of the final work product: • Assume extensive education and outreach will be needed in the community to build awareness of the need for action, the urgency of action, and to communicate what individuals can do to make a difference. • Find ways to help early adopters take action. Programs must be comprehensive and easy to participate in. A good customer experience (including in permitting and utility upgrade processes) is critical to create positive stories that will encourage others to participate as well. • Neighborhood-level action should be promoted and rewarded due to the positive cost benefits, and because it is a way to demonstrate how to scale programs up. • Demonstrate care for small businesses, renters, and low-income residents, finding ways to make participation easier, minimizing impacts, and providing financial incentives were needed. • Seek ways to leverage outside funding to expand the City’s impact once momentum builds • Partner with major employers to reduce emissions in ways that align with corporate sustainability goals • Only when the community is ready should these efforts be fully scaled up using mandates, carbon pricing, or other systemic tools that may require voter approval. But the City should act with the intent of making the community ready as soon as possible, preferably in the 2022 to 2024 time period. • To give the community confidence, before going to scale, clear, documented strategies are needed for staffing to handle large numbers of building projects, the utility physical and financial adaptation needed, rate impacts and affordability, resiliency needs, and other indirect impacts. Staff is developing the following work products to enable Council policy decisions: • A policy framework to identify the different ways emissions reduc tions might proceed City of Palo Alto Page 4 under different implementation plans, how those scenarios relate to the emissions reductions needed to hold global warming to 1.5°C (3.7°F), and the costs associated with achieving the goals in different ways, including the costs of inaction or delayed action. • A detailed assessment by sector of the building and vehicle transformations needed to achieve the goals and the costs of those transformations. Also included are the potential policy tools that could be used to achieve these transformations and the limitations of the tools available to effect change in some sectors. • A preliminary assessment of the various financing tools available for making the costs of the S/CAP more manageable. • An assessment of the co-benefits of the various emissions reductions activities • Preliminary assessments of gas and electric utility impacts, rate impacts, and municipal staffing needs of full-scale implementation • A preliminary first-phase implementation plan, to include elements such as: o Voluntary customer programs to be launched o Communications and engagement plan o Electric system investment plan to preserve reliability o Business process review (e.g. for permitting and utility upgrades) o Preliminary resiliency assessment for an electrified community o Staffing and funding required to implement the above o Development of a strategic plan of scaling up sustainability programs, including the staffing and funding needed, potential ordinances and mandates, ways to raise funds, and a roadmap for voter approval of necessary plan elements. Timeline The current estimated timeline for release of the S/CAP update is as follows: • February/March 2021: Council S/CAP panel discussion. • March 2021: Sustainability Work Plan Council Action Item • April 2021: Earth Day Report with the results of the 2019 greenhouse gas inventory and Business as Usual Forecast • April 2021: Council study session on high-level results of technical analysis of the goals and key actions needed to meet the 80 x 30 goal • April / May 2021: Public engagement begins on topics discussed with Council • Spring 2021: Detailed results of technical analysis completed, including the costs and efficacy of goals and key actions proposed to achieve the 80 x 30 goal. Hearings at boards and commissions will take place along with public outreach events. • Spring 2021: Public engagement continues • Summer 2021: S/CAP presented to Council for acceptance • By December 2021: California Environmental Quality Act (CEQA) evaluation completed • By December 2021: S/CAP with CEQA Review presented to Council for approval Resource Impact The additional analysis required for the above S/CAP work plan is estimated to require approximately 2 - 3 FTE of staff time spread across multiple departments and $50,000 to City of Palo Alto Page 5 $75,000 in additional consulting expense. This is being absorbed from existing budgeted resources. However, implementation of the above plan will require additional resources. Policy Implications The 2020 S/CAP Update aligns with two of the top three Council Priorities for CY 2020: “Sustainability, in the context of climate change” and “Improving mobility for all.” The 2020 S/CAP Update implements the policy objectives of the 2016 S/CAP goal to achieve 80% reductions to emissions by 2030 and the Comprehensive Plan Implementation Plan Goals: • Land Use Element o Goal L-2: An enhanced sense of “community” with development designed to foster public life, meet citywide needs and embrace the principles of sustainability o Goal L-4: Inviting pedestrian scale centers that offer a variety of retail and commercial services and provide focal points and community gathering places for the city’s residential neighborhoods and employment districts. • Transportation Element o Goal T-1: Create a sustainable transportation system, complemented by a mix of land uses, that emphasizes walking, bicycling, use of public transportation, and other methods to reduce greenhouse gas emissions and the use of single occupancy motor vehicles. o Goal T-2: Decrease delay, congestion, and vehicle miles travelled with a priority on our worst intersections and our peak commute times, including school traffic o Goal T-3: Maintain an efficient roadway network for all users. o Goal T-5: Encourage attractive, convenient, efficient and innovative parking solutions for all users. o Goal T-6: Provide a safe environment for motorists, pedestrians, and bicyclists on Palo Alto streets. o Goal T-8: Influence the shape and implementation of regional transportation policies and technologies to reduce traffic congestion and greenhouse gas emissions. • Natural Environment o Goal N-2: A thriving urban forest that provides public health, ecological, economic, and aesthetic benefits for Palo Alto. o Goal N-4: Water resources and infrastructure that are managed to sustain plant and animal life, support urban activities, and protect public health and safety. o Goal N-7: A clean, efficient energy supply that makes use of cost -effective renewable resources. o Goal N-8: Actively support regional efforts to reduce our contribution to climate change while adapting to the effects of climate change on land uses and city services. • Safety Element o Goal S-3: An environment free of the damaging effects of human -caused threats and hazardous materials. City of Palo Alto Page 6 Stakeholder Engagement Staff developed, and is implementing, a 2020 S/CAP Update Engagement Plan whic h identified relevant stakeholders, proposed materials, and desired meeting milestones and outcomes. Key steps to date have been a March 31 – April 14, 2020 Community Engagement Virtual Workshop; Council Study Sessions on an April 13, 2020 and June 16, 2020; a Utilities Advisory Commission Study Session on May 20, 2020; June 2020 Study sessions with the Utilities Advisory Commission, Planning and Transportation Commission, and Parks and Recreation Commission; and a Fall 2020 S/CAP Update Webinar series to highlight various topics addressed in the S/CAP update12. Staff will continue to provide opportunities for on-line engagement to gain a better understanding of the community’s concerns and vision around the S/CAP Update, as well as provide opportunities for community members who can’t attend the meetings to weigh in. Environmental Review This status update is not a project for the purposes of the California Environmental Quality Act (CEQA). However, CEQA review of the S/CAP Update is proceeding and is projected to be completed by Fall 2021. Attachments: • Attachment A: Presentation 12https://www.cityofpaloalto.org/services/sustainability/sustainability_and_climate_action_plan/community_enga gement/default.asp February 3, 2021 www.cityofpaloalto.org Sustainability and Climate Action Plan (S/CAP) Update Utilities Advisory Commission Attachment A Staff: Jonathan Abendschein 2 S/CAP Status Update •Current schedule –Jan-May adoption –need to push back •Several points are becoming clear as work proceeds: •Climate change is urgent, and there are costs to inaction •Costs and logistics of taking action are significant. Staff to provide Council estimates to help determine what community can accept. •And yet, while the cost looks large, it could be manageable given community will –costs could be similar to the cost of the community’s annual spending on energy. •Transitional issues (resiliency, gas rates) and issues specific to business community, low-income, renters are critical What is Needed to Achieve S/CAP Goals •Electrify 100% of single-family residential buildings •Targeted emissions reductions to multi-family and small and medium business emissions in cost-effective areas. •Reduce major facility emissions by 40% •Heavily reduce vehicle travel through increased transit and bicycle use, telecommuting, and the use of small EVs like e-bikes •For households that continue to need to drive, encourage ownership of at least one EV, use it as frequently as possible •Aim for most or all new and used vehicle purchases to be EVs or plug-in hybrids, except for very infrequently used vehicles •Substantial growth in the use of electric vehicles by commuters 3 S/CAP –Principles for Going to Scale •Educate and raise awareness •Activate early adopters and ensure good customer experience to create positive stories •Reward neighborhood-level action (e.g. undergrounding for block-level electrification) •Demonstrate care for small businesses, renters, low-income •Seek ways to increase funding for greater impact prior a ballot measure (e.g. on-bill financing, outside funding) •Partner with major employers to maximize impact •When community is ready, fully scale up with ballot measure 4 Foundational Implementation Activities •Launch high touch, high participation voluntary programs •Extensive awareness campaign •Customer-friendly permitting for electrification •Preserve and enhance electric reliability and resiliency •Develop plan for scaling up programs to achieve emissions reductions goals •Timeline: •Start immediately in 2021 after Council adoption •Aim for clear progress on these items by 2022 •May need until 2024 to show adequate progress 5 Jonathan Abendschein Assistant Director Utilities Resource Management 650-329-2309 Jon.Abendschein@cityofpaloalto.org