HomeMy WebLinkAboutRESO 9768DocuSign Envelope ID: 70FF9F25-C7D8-468B-B060-1DBB91485043
Resolution No. 9768
Resolution of the Council of the City of Palo Alto Approving the
Fiscal Year 2019 Water Utility Financial Plan
RECITALS
A. Each year the City of Palo Alto {"City") regularly assesses the financial position of its
utilities with the goal of ensuring adequate revenue to fund operations. This includes making long-term
projections of market conditions, the physical condition of the system, and other factors that could
affect utility costs, and setting rates adequate to recover these costs. It does this with the goal of
providing safe, reliable, and sustainable utility services at competitive rates. The City adopts Financial
Plans to summarize these projections.
B. The City uses reserves to protect against contingencies and to manage other aspects of
its operations, and regularly assesses the adequacy of these reserves and the management practices
governing their operation. The status of utility reserves and their management practices are included in
Reserves Management Practices attached to and made part of the Financial Plans.
The Council of the City of Palo Alto hereby RESOLVES as follows:
SECTION 1. The Council hereby adopts the FY 2019 Water Utility Financial Plan.
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DocuSign Envelope ID: 70FF9F25-C7DB-4688-8060-108891485043
FY 2019 WATER
UTILITY
FINANCIAL PLAN
FY 2019 TO FY 2028 ·
DocuSign Envelope ID: 70FF9F25-C7D8-468B-B060-1DBB91485043
WATER UTILITY FINANCIAL PLAN
FY 2019 WATER UTILITY
FINANCIAL PLAN
FY 2019 TO FY 2028
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 .................................................................................. S
Section 3: Detail of FY 2019 Rate and Reserves Proposals ....................................................... 6
Section 3A: Rate Design ............................................................................................................... 6
Section 3B: Current and Proposed Rates ..................................................................................... 6
Section 3C: Bill Impact of Proposed Rate Changes ...................................................................... 8
Section 3D: Proposed Reserve Transfers ..................................................................................... 9
Section 4: Utility Overview .................................................................................................... 9
Section 4A: Water Utility History ............................................................................................... 10
Section 4B: Customer Base ........................................................................................................ 10
Section 4C: Distribution System ................................................................................................. 11
Section 4D: Cost Structure and Revenue Sources ...................................................................... 11
Section 4£: Reserves Structure ................................................................................................... 12
Section 4F: Competitiveness ........... : .......................................................................................... 12
Section 5: Utility Financial Projections ................................................................................. 13
Section SA: Load Forecast .......................................................................................................... 13
Section SB: FY 2012 to FY 2016 Cost and Revenue Trends ........................................................ 14
Section SC: FY 2017 Results ....................................................................................................... 1S
Section SD: FY 2018 Projections ................................................................................................ 16
Section SE: FY 2019 -FY 2028 Projections ................................................................................ 16
Section SF: Risk Assessment and Reserves Adequacy ............................................................... 18
Section SG: Alternate Scenarios ................................................................................................. 19
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Section SH: Long-Term Outlook ................................................................................................. 20
Section 6: Details and Assumptions ..................................................................................... 20
Section 6A: Water Purchase Costs ............................................................................................. 20
Section 68: Operations .............................................................................................................. 22
Section 6C: Capital Improvement Program (CIP} ....................................................................... 23
Section 6D: Debt Service ............................................................................................................ 26
Section 6£: Other Revenues ....................................................................................................... 27
Section 6F: Sales Revenues ........................................................................................................ 27
Section 7: Communications Plan .......................................................................................... 28
Appendices ......................................................................................................................... 29
Appendix A: Water Utility Financial Forecast Detail ................................................................. 30
Appendix B: Water Utility Capital Improvement Program {CIP} Detail ..................................... 32
Appendix C: Water Utility Reserves Management Practices ..................................................... 33
Appendix D: Description of Water Utility Operational Activities ............................................... 36
Appendix E: Sample of Water Utility Outreach Communications ............................................. 37
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WATER UTILITY FINANCIAL PLAN
SECTION 1: DEFINITIONS AND ABBREVIATIONS
Bay Area Water Supply and Conservation Agency BAWSCA
CCF The standard unit of measurement for water delivered to water customers, equal to
one hundred cubic feet, or roughly 748 gallons.
Capital Improvement Program
City of Palo Alto Utilities Department
Operations and Maintenance
Raftelis Financial Consultants, Inc.
San Francisco Public Utilities Commission
San Francisco Water Department
Utilities Advisory Commission
CIP
CPAU
O&M
RFC
SF PUC
SFWD
UAC
WSIP The SFPUC's Water System Improvement Program to seismically strengthen the
transmission lines of the Hetch Hetchy regional water system.
SECTION 2: EXECUTIVE SUMMARY AND RECOMMENDATIONS
This document presents a Financial Plan for the City's Water Utility for the next ten years. This
Financial Plan provides revenues to cover the costs of operating the utility safely over that time
while adequately investing for the future. It also addresses the financial risks facing the utility
over the short term and long term, and includes measures to mitigate and manage those risks.
SECTION 2A: OVERVIEW OF FINANCIAL POSITION
Based on staff's most recent analysis, staff expects overall costs in the Water Utility to rise by
about 3.3% per year from fiscal year (FY) 2018 to 2028. Excluding FY 2017 (which, unlike normal
years, did not include a water main replacement project), most costs are projected to rise by 2-
4% annually through the projection period. Water supply costs, the largest component of the
utility's costs, are projected to remain relatively flat through FY 2022, based on current SFPUC
projections, then rise steeply thereafter due to a series of major capital projects on the Hetch
Hetchy water system. See Section 6A: Water Purchase Costs for more information. Capital
projects, with several reservoir and tank rehabilitation projects scheduled for FY 2019 through
FY 2021, as well as increases to main replacement project costs to reflect rising construction
costs . More detail on CIP costs is discussed in Section 6C: Capital Improvement Program {CIP)
below. Table 1 below shows the costs for the Water Utility from FY 2017 through FY 2028.
Table 1: Expenses for FY 2017 to FY 2028 (Thousand $'s)
Expenses FY FY FY FY FY FY FY FY FY FY FY FY 2017 2018 ($000) (act.) (est.) 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Water 20,075 22,062 22,611 22,366 22,124 21,884 23,401 25,915 26,874 28,261 29,212 30,624 Purchases
Operations 15,965 18,627 19,087 19,559 20,032 20,472 20,916 21 ,306 21 ,684 22,095 22,371 22,766
Capital 4,110 8,267 13,695 13,210 16,765 10,709 11,023 11,344 11,675 12,024 12,373 12,737 Projects
TOTAL 40, 151 48,956 55,394 55,135 58,920 53,065 55,340 58,566 60,233 62,380 63,956 66,127
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This proposed financial plan projects that the Water Utility needs the rate increases shown in
Table 2 to ensure that revenues cover rising costs and reserves remain healthy. While costs are
increasing roughly 3.4% per year through FY 2024, staff projects a need for sales revenue
increases averaging roughly 4% per year over that period. This is due to the fact that revenue is
currently slightly below costs and also because little or no increase is expected in non-sales
revenue (e.g. interest, connection fees).
The table also shows rate projections from last year's Financial Plan. Last year's plan projected
earlier, generally higher rate increases. However, the delay of FY 2017 water main replacement
projects as well as post-drought sales revenues resulted in an increase in reserves, which
enabled the more gradual increases projected in the current plan. The current plan assumes
that the Rate Stabilization Reserve will be drawn down faster and the Operations Reserve run
closer to the minimum guideline level for the next several years, in accordance with the
Finance Committee's direction on April 17, 2018.
Table 2: Proposed and Projected Water Rate Changes for FY 2019 to FY 2028
Projection FY FY FY FY FY FY FY FY FY FY
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Current 3% 4% 4% 4% 5% 6% 5% 5% 4% 4%
Last year 6% 6% 6% 6% 6% 2% 2% 2% 1% N/A
2 years 9% 6% 2% 2% 2% 3% 5% 3% N/A N/A
The Water Utility has a Rate Stabilization Reserve that can be used to smooth rate increases
over several years. This Financial Plan projects that these reserves will be exhausted by the end
of FY 2021. The Water Utility also has a Capital Improvement Program (CIP) Reserve that can be
used to offset one-time unanticipated capital costs. This Financial Plan assumes that the CIP
Reserve will be used for unanticipated capital expenses or returned to the Operations Reserve
by the end of FY 2020. The Water Utility Operations Reserve was above the maximum guideline
level at the end of FY 2017, mainly due to larger than anticipated drought surcharge revenue.
However, these funds will be needed to fund the Water Utility in FY 2018 and FY 2019, bringing
the Operations Reserve within guidelines by FY 2020. Table 3 shows the projected reserve
transfers over the forecast period.
Table 3: Transfers To/(From) Reserves for FY 2018 to FY 2028 ($000)
Reserve FY 2018 FY 2019 FY 2020 to FY 2028
Capital Improvement - -(2,726)
Rate Stabilization - -(4,069)
Operations - -6,785
SECTION 2B: SUMMARY OF PROPOSED ACTIONS
Staff proposes the following actions for the Water Utility in FY 2019:
1. Increase rates to raise an additional 3% in revenue to fund increases to capital
expenditures and increased operations costs. Section 38: Current and Proposed Rates
describes this increase in more detail.
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SECTION 3: DETAIL OF FY 2019 RATE AND RESERVES PROPOSALS
SECTION 3A: RATE DESIGN
The Water Utility's rates are evaluated and implemented in compliance with the cost of service
requirements and procedural rules set forth in the California Constitution under Article 13 (per
Proposition 218). The City structured current rates based on staff's assessment of the financial
position of the Water Utility, and updated current rates using the methodology from the March
2012 Palo Alto Water Cost of Service & Rate Study by Raftelis Financial Consultants, Inc. (RFC)
(Staff Report 2676), as well as RFC's 2015 Memorandum: Proposed Water Rates updating the
2012 Study and analyzing drought rates (Staff Report 5951). Staff plans to review and update
this cost of service study in 1 to 2 years, unless any major changes occur to the utility's
operations or customer base that would necessitate an earlier study. Before conducting any
new cost of service study, staff will review current rates and the scope of the study with the
Utilities Advisory Commission (UAC) and Council to determine the City's policy priorities.
In 2015 Council adopted a drought surcharge to assist the water utility in recovering its costs
due to decreased revenue resulting from lower water consumption as customers conserved.
With the State declaring the drought over in FY 2017, the drought surcharge was discontinued
as of July 1, 2017.
SECTION 3B: CURRENT AND PROPOSED RATES
The current rates and surcharges were effective on July 1, 2017. Current rates reflect
adjustments in accordance with the results of an updated cost of service study performed by
RFC in 2015. The 2015 study developed the drought surcharges and evaluated the City's water
rate methodology and structure in light of court decisions interpreting provisions of the State
Constitution applicable to water rates. RFC validated the City's rate structure, recommending
only minor adjustments to ensure that peaking costs were equitably allocated to each customer
class and residential rate tier.
CPAU has five rate schedules: separately metered residential customers (W-1), commercial and
master-metered multi-family residential customers (W-4), irrigation-only services (W-7),
services to fire sprinkler systems in buildings and private hydrants (W-3), and service to fire
hydrant rental meters used for construction (W-2). All customers pay a monthly service charge
based on the size of their inlet meter. This charge represents meter reading, billing, and other
customer service costs, but also the cost of maintaining the capability to deliver a peak flow for
that customer corresponding to their meter size. All customers are also charged for each CCF
(one hundred cubic feet) of water used. Separately metered residential customers are charged
on a tiered basis, with the first 0.2 CCF per day (6 CCF for a 30 day billing period) charged at the
first tier price per CCF, and all additional units charged a higher tier price per CCF. Commercial
customers pay a uniform price for each CCF used, and a higher price for separately metered
irrigation service.
For July 1, 2018 staff is proposing an increase in rates of approximately three percent. Water
rates are composed of two general types of costs: commodity and distribution. Commodity
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costs are mainly volumetric in nature and charged by the San Francisco Public Utilities
Commission (SFPUC). In late December 2017, the SFPUC provided a preliminary estimate that
their FY 2019 W-25 wholesale rate for agencies with long-term contracts would remain at
$4.10/CCF in FY 2019. The SFPUC will not determine its final rate until May or June. However,
in order to have the City's water rates in place for July 1, staff must notify customers by the end
of April. Staff is using the SFPUC's December 2017 estimate in this forecast.
For FY 2018, early indications were that the SFPUC would raise their rates to $4.37 /CCF, and
this was what was used in CPAU staff's rate setting analysis. Since the SFPUC's actual rate
increase was lower, and FY 2019 indications forecast no change, staff will reduce the
commodity portion of CPAU's rates accordingly.
Distribution rates cover all the costs to deliver water within the City, such as operations,
maintenance, metering and billing, and capital improvement. Capital improvement costs have
been increasing by about 5% annually, are projected to continue rising in the future, and staff is
reflecting these changes in distribution costs. Operations costs are discussed in Section 68:
Operations, below. The decrease in commodity rates partially offsets the distribution increases,
thus the percentage change differs between volumetric rates and monthly service charges.
Table 4 shows the current and proposed consumption charges.
Table 4: Current and Proposed Water Consumption Charges
11
Current Proposed Change
(7/1/17) (7/1/18) $/CCF %
W-1 (Residential) Volumetric Rates ($/CCF)
Tier 1 Rates 6.66 6.64 (0.02) 0%
Tier 2 Rates 9.18 9.44 0.26 3%
W-2 (Construction) Volumetric Rates ($/CCF)
Uniform Rate 7.68 7.77 0.09 1%
W-4 (Commercial) Volumetric Rates ($/CCF)
Uniform Rate 7.68 7.77 0.09 1%
W-7 (Irrigation) Volumetric Rates ($/CCF)
Uniform Rate 9.08 9.33 0.25 3%
Table 5 shows the current and proposed monthly service charges for rate schedules W-1, W-4,
and W-7.
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Table 5: Current and Proposed Monthly Service Charges for W-1, W-4, and W-7
Monthly Service Charge Change
($/month based on meter size)
Meter Current (7/1/17) Proposed (7 /1/18) $ %
Size Residential (W-1) Residential (W-1)
Commercial (W-4) Commercial (W-4)
Irrigation (W-7) Irrigation (W-7)
5/8" $16.77 $18.43 $1.66 9.9%
3/4" $22.60 $24.83 $2.23 9.9%
1" $34.26 $37.64 $3.38 9.9%
1 Yi'' $63.40 $69.66 $6.26 9.9%
2" $98.37 $108.08 $9.71 9.9%
3" $209.11 $229.75 $20.64 9.9%
4" $372.31 $409.05 $36.74 9.9%
6" $762.81 $838.09 $75.28 9.9%
8" $1,403.94 $1,542.50 $138.56 9.9%
10" $2,219.92 $2,439.01 $219.09 9.9%
12" $2,919.34 $3,207.45 $288.11 9.9%
Table 6 shows the current and proposed monthly service charges for rate schedule W-3
Table 6: Current and Proposed Monthly Service Charges for Fire Services (W-3}
Monthly Service Charge Change
Meter ($/month based on meter size)
Size Current (7 /1/17) Proposed (7 /1/18) $ %
2" $3.79 $4.16 $0.37 9.9%
4" $23.42 $25.73 $2.31 9.9%
6" $68.03 $74.74 $6.71 9.9%
8" $144.97 $159.28 $14.31 9.9%
10" $260.70 $286.43 $25.73 9.9%
12" $421.11 $462.67 $41.56 9.9%
SECTION 3C: BILL IMPACT OF PROPOSED RATE CHANGES
Table 7 shows the impact of the proposed July 1, 2018 rate changes on the median residential
bill. The average increase is projected to be about three percent, but some customers may see
slightly higher or lower increases due to slight changes in the composition of the utility's costs.
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Table 7: Impact of Proposed Water Rate Changes on Residential Bills
Bill under Bill under Change
Usage Current Rates Proposed
(CCF/month) (7/1/17) Rates (7 /1/18) $/mo. %
4 $43.41 $44.99 $1.58 3.6%
(Winter median) 7 $65.91 $67.71 $1.80 2.7%
(Annual median) 9 $84.27 $86.59 $2.32 2.7%
(Summer median) 14 $130.17 $133.79 $3.62 2.8%
25 $231.15 $237.63 $6.48 2.8%
Table 8 shows the impact of the proposed July 1, 2018 rate changes on various representative
commercial customer bills.
Table 8: Impact of Proposed Water Rate Changes on Commercial Bills
I Bill under
Bill under Proposed Change
Usage Current Rates Rates
(CCF/month) (7/1/17) (7/1/18) $/mo. %
Commercial (W-4) (5/8" meters)
(Annual median) 12 $108.93 $111.67 $2.74 2.5%
(Annual average) 64 $508.29 $515.71 $7.42 1.5%
Irrigation (W-7) (1 Yi'' meters)
(Winter median) 9 $ 145.12 $ 153.63 $ 8.51 5.9%
(Summer median) 37 $ 399.36 $ 414.87 $ 15.51 3.9%
(Winter average) 56 $ 571.88 $ 592.14 $ 20.26 3.5%
(Summer average) 199 $ 1,870.32 $ 1,926.33 $ 56.01 3.0%
SECTION 30: PROPOSED RESERVE TRANSFERS
In the FY 2018 Financial Plan, staff proposed transferring $1.87 million from the Rate
Stabilization Reserve to the Operations Reserve in FY 2018. This transfer was not necessary as
increased sales during FY 2017 resulted in larger than expected revenues, largely from the
drought surcharge. The drought surcharge was discontinued at the start of FY 2018. Customer
sales recovery after the drought continues to be more robust than staff's initial projections.
Section 4E: Reserves Structure and Appendix A: Water Utility Financial Forecast Detail shows
details of reserves levels.
SECTION 4: UTILITY OVERVIEW
This section provides an overview of the utility and its operations. It provides general
background information and helps readers better understand the forecasts in Section 5: Utility
Financial Projections and Section 6: Details and Assumptions.
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SECTION 4A: WATER UTILITY HISTORY
The Water Utility was established on May 9, 1896, two years after the city was incorporated.
Voters of the 750 person community approved a $40,000 bond to buy local, private water
companies who operated one or more shallow wells to serve the nearby residents. The city
grew and the well system expanded until nine wells were in operation in 1932. Palo Alto began
receiving water from the San Francisco Water Department (SFWD) in 1937 to supplement these
sources.
A 1950 engineering report noted, "the capricious alternation of well waters and the San
Francisco Water Department water ... has made satisfactory service to the average customer
practically impossible". By 1950, only eight wells were still in operation. Despite this,
groundwater production increased in the 1950's leading to lower groundwater tables and water
quality concerns. In 1962, a survey of water softening costs to CPAU customers determined that
CPAU should purchase 100% of its water supply needs from the SFWD. CPAU signed a 20-year
contract with SFWD, and CPAU's wells were placed in standby condition. The SFWD later
became known as the SFPUC. Since 1962 (except for some very short periods) CPAU's entire
supply of potable water has come from the SFPUC.
As the city grew, so did the number of mains in the water system. The system of mains
expanded along with the city, while existing sections of the system continued to age. In the
mid-1980s, the number of breaks in cast iron mains installed during the 1940s and earlier
started to accelerate. In FY 1994, to combat deterioration of older sections of the system, CPAU
performed an analysis of cost effective system improvements and increased the rate of main
replacement from one mile per year to three. CPAU began a plan to replace 75 miles of
deficient mains within 25 years.
In 1999, a study of system reliability concluded that major upgrades were needed to the
distribution system to provide adequate water supply during a natural disaster. This ultimately
resulted in the $40 million Emergency Water Supply and Storage Project, completed in 2013,
which involved a new underground reservoir in El Camino Park, the siting and construction of
several emergency supply wells, and the upgrade of several existing wells and the Mayfield
pump station. Upon completion, the city began to focus reliability efforts on its system of water
storage reservoirs and transmission lines in the Foothills.
At the same time that CPAU was evaluating the reliability of its own system, the SFPUC, in
consultation with BAWSCA members, was evaluating the reliability of the Hetch Hetchy water
system, which crosses two major fault lines between the Sierras and the Bay Area. That
evaluation concluded that major upgrades to the system were required. This planning process
culminated in the SFPUC's $4.8 billion Water System Improvement Project (WSIP), which is
ongoing. The SFPUC continues to evaluate its aging system for other needed infrastructure
improvements.
SECTION 4B: CUSTOMER BASE
CPAU's Water Utility provides water service to the residents and businesses of Palo Alto, plus a
handful of residential customers not in Palo Alto (Los Altos Hills, primarily). Nearly 20,300
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SECTION 4E: RESERVES STRUCTURE
CPAU maintains six reserves for its Water Utility to manage various types of contingencies. The
descriptions below summarize these reserves; see Appendix C: Water Utility Reserves
Management Practices for more detailed definitions and guidelines for reserve management:
• Reserve for Commitments: A reserve equal to the utility's outstanding contract
liabilities for the current fiscal year. Most City funds, including the General Fund, have a
Commitments Reserve.
• Reserve for Reappropriations: A reserve for funds dedicated to projects reappropriated
by the City Council, nearly all of which are capital projects. Most City funds, including
the General Fund, have a Reappropriations Reserve.
• Capital Improvement Program {CIP) Reserve: The CIP reserve can be used to
accumulate funds for future expenditure on CIP projects and is anticipated to be empty
unless a major one-time CIP expenditure is expected in future years. This CIP can also
act as a contingency reserve for the CIP. This type of reserve is used in other utility funds
(Electric, Gas, and Wastewater Collection) as well.
• Rate Stabilization Reserve: This reserve is intended to be empty unless the city
anticipates one or more large rate increases in the forecast period. In that case, funds
can be accumulated to spread the impact of those future rate increases across multiple
years. This type of reserve is used in other utility funds (Electric, Gas, and Wastewater
Collection) as well.
• Operations Reserve: This is the primary contingency reserve for the Water Utility, and is
used to manage yearly variances from the budget for operational water supply costs.
This type of reserve is used in other utility funds (Electric, Gas, and Wastewater
Collection) as well.
• Unassigned Reserve: This reserve is for any funds not assigned to the other reserves
and is normally empty.
SECTION 4F: COMPETITIVENESS
Table 9 shows the current water bills for residential customers compared to what they would
be under surrounding communities' rate schedules. CPAU has the highest monthly bills of the
group, although bills for smaller water users are less than in some surrounding communities.
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Table 10: FY 2017, Actual Results vs. Financial Plan Forecast -Net Cost/ Type of
lBenefit) (000) I chanee
Higher sales revenues $(3,185) Revenue increase
Increased connection and capacity fees, other income (2,453) Revenue increase
Operations and maintenance, general admin costs lower (1,634) cost savings
than expected
Purchase costs higher than expected 833 cost increase
Net Cost I lBenefit) of Variances ·--$(6.439)
SECTION SD: FY 2018 PROJECTIONS
Sales levels for FY 2018 were increased based on recent usage trends, and estimated sales
revenues are also estimated to increase by about $4.2 million. Other revenues are also
expected to increase, partially due to the trend of higher connection and capacity fee income,
but also from higher interest income resulting from larger reserve balances. On the expense
side, the most notable change from the FY 2018 budget identified at this time are increases for
CIP expenditures. The effort to rehabilitate mains along University Avenue is anticipated to
have much higher costs than initially projected, and some additional projects were included
after last year's financial plan was created. Additional expense increases are anticipated from
higher water supply costs associated with higher water sales, as well as some increases to
operations and administrative costs. Table 11 summarizes the changes from last year's forecast.
Table 11: FY 2018 Change in Projected Results, 2018 Forecast vs 2019 Forecast
Net Cost/ Type of
--- -·-ffienefit) Cha nee
Higher sales revenues $(4,232) revenue increase
Higher misc. revenues (1,269) revenue increase
Increase in capital projects 4,185 cost increase
Higher operations and purchase budgets 1,233 cost increase
Net Cost I lBenefit) of Variances $(83)
SECTION SE: FY 2019 -FY 2028 PROJECTIONS
Figure S above shows that costs for the Water Utility are increasing through the rest of the
forecast period, though mainly after FY 2022 based on current estimates from the SFPUC.
Water supply costs are the largest component, and are generally projected to grow steadily by
about four percent over the forecast period. Operations and capital investment costs are also
expected to increase at the same rate of inflation used in the City's long-term financial plans
(2.S% to 3.0% per year). While future CIP costs have been revised upwards to reflect the higher
construction costs seen in recent projects, there is still uncertainty with regard to the utility's
future costs for main replacement. See Section 6: Details and Assumptions for more detail on
the costs that make up these projections, as well as the various assumptions underlying the
projections.
As shown in Figure S, above, staff currently projects revenues to be below expenses for FY 2018
and for the three subsequent years. Revenues exceeded expenses in FY 2017 due to delays in
water main replacement projects, leading to lower annual CIP spending in that year, as well as
drought surcharge revenue that made up for reduced distribution revenue as a result of
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Table 12: Water Risk Assessment ($000) ----·---~
FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
Total non-commodity revenue $20,284 $21,501 $22,748 $24,045 $24,525
Max. revenue variance, previous ten years 13% 13% 13% 13% 13%
Risk of revenue loss $2,004 $2,125 $2,248 $2,376 $2,423
CIP Budget $13,695 $13,210 $16,765 $10,709 $11,023
CIP Contingency@l0% $1,369 $1,321 $1,676 $1,071 $1,102
Total Risk Assessment value $3,374 $3,446 $3,924 $3,447 $3,526
SECTION SG: ALTERNATE SCENARIOS
Staff had originally proposed a 4% rate increase for FY 2019, which the Utilities Advisory
Commission approved at its March 7, 2018 meeting. At its April 3, 2018 meeting, the Finance
Committee had a concern that future rate increases of 6 to 7% were rather large, and
requested that staff return with some possible alternate proposals at the April 17, 2018
meeting. Four alternatives were brought back to the Finance Committee.
The first scenario was the original proposal presented at the March 7 UAC meeting (Item #21).
The second scenario is the one shown in this current version of the Financial Plan.
The third scenario added the financing of two large, one-time CIP projects (the Advanced
Metering Infrastructure and Reservoir rehabilitation/replacement projects) totaling $13 million.
These items would be financed internally from the Electric Special Projects Reserve for a term
of 20 years and create the following long-term cost and revenue profile.
The fourth scenario also included reducing the amount allocated for capital investments by $2
million per year. This would extend the current 20 year capital plan to 30 years, and lengthen
the rate of system main replacement to over 100 years. Staff recommended against this
particular plan.
A recap of the various proposals and how they were anticipated to affect rates is shown in the
table below:
Water Rate Proposal Alternatives
ff~ff~ff~ff~ff~ff~ff~ff~ff~ff~
Alternative 1 4% 7% 7% 6% 4% 4% 1%
Alternative 2 3% 4% 4% 4% 5% 6% 5%
Alternative 3 3% 3% 4% 4% 4% 5% 5%
Alternative 4 2% 3% 3% 3% 4% 5% 4%
1 https://www.cityofpaloalto.org/civicax/filebank/documents/63751
May 2018
3% 1% 2%
5% 4% 4%
5% 5% 5%
4% 5% 5%
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The Finance Committee chose Alternative 2, and that is the proposal shown in this amended
Financial Plan .
SECTION SH: LONG-TERM OUTLOOK
CPAU has put its Water Utility on strong footing by investing in its distribution system
infrastructure and emergency water facilities over the last 20 years. The Water System Master
Plan, recently completed and under review, will give CPAU a better picture of the long-term
outlook for its infrastructure and will result in a plan for an appropriate schedule for
infrastructure replacement and upgrades. In addition, CPAU's water supplier, the SFPUC, has
replaced and seismically strengthened its water transmission infrastructure, which will benefit
Palo Alto and all Hetch Hetchy customers over the long term.
The opportunities for CPAU's Water Utility to obtain additional supplies over the long term may
be in alternative water supplies such as recycled water, groundwater, and water from the Santa
Clara Valley Water District. These alternatives have been analyzed in the past, and will be
analyzed again in an upcoming update to the Water Integrated Resource Plan. Some of these
alternatives may provide cost savings or increased drought protection.
Climate change may begin to present challenges for the Water Utility over the next 20 to 40
years. Availability of water from SFPUC's Regional Water System may change with changing
seasonal precipitation patterns. Water consumption patterns may change. Consumption could
increase due to drier weather or decrease as customers become even more focused on water
conservation. Droughts may become more frequent. The risk of wildfire in the foothills could
increase, possibly threatening utility infrastructure or placing greater demands on it. Sea level
rise could result in greater exposure of utility infrastructure to saltwater intrusion or the need
to protect infrastructure from inundation, possibly resulting in higher maintenance and
replacement costs. It could also affect the groundwater aquifer that the utility relies on in
emergencies. Any of these could result in increases to the costs of operating the Water Utility.
As part of the Sustainability/Climate Action Plan, CPAU is currently working on a Climate
Change Adaptation Roadmap that will begin to assess some of these risks.
SECTION 6: DETAILS AND ASSUMPTIONS
SECTION GA: WATER PURCHASE COSTS
CPAU purchases all of the potable water supplies from the SFPUC, which owns and operates the
Hetch Hetchy Regional Water System. CPAU is one of several agencies that purchase water
from the SFPUC, all of whom are members of the Bay Area Water Supply and Conservation
Agency (BAWSCA). Palo Alto uses roughly 7% of the water delivered by the SFPUC to BAWSCA
member agencies.
The Hetch Hetchy Regional Water System begins with a system of reservoirs and tunnels in the
high Sierra in Yosemite County and water is transported by a gravity-fed pipeline to the Bay
Area. Currently, the SFPUC is in the midst of a $4.8 billion bond-financed capital improvement
program (the Water System Improvement Program, or WSIP) to seismically retrofit the facilities
that transport water to the Bay Area. As of September 2017, nearly 60% of the program (by
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dollar value) had been completed, while 40% was under construction.2 This has resulted in large
increases in the annual debt service costs assigned to wholesale customers like Palo Alto. The
wholesale customer debt service share of the WSIP is increasing from $53 million in FY 2010 to
over $200 million in FY 2020. As a result, the SFPUC's wholesale water rate has already
increased from $1.43 per CCF in FY 2009 to $4.10 per CCF in FY 2018, and is forecast to increase
to over nearly $6.00 per CCF by FY 2027 (these projections are subject to change based on
future SFPUC budget estimates). Figure 8 shows the SFPUC's actual wholesale water rate since
FY 2009 and a projection through FY 2027. Note that the wholesale water rate decreased in FY
2014, but the apparent rate decrease is due to a part of the debt being directly paid by the
BAWSCA agencies. This cost is paid in addition to the wholesale water rate and adds about
$0.35 to $0.45 per CCF to the wholesale rate.
The SFPUC's water rate projections show a less steeply increasing rate trajectory after all of the
debt for the WSIP has been issued. Still, debt service costs are projected to nearly double
between FY 2019 and FY 2028. Parts of SFPUC's system not included in the WSIP will also need
rehabilitation after the WSIP is completed, and some of these projects are already included in
the SFPUC's rate projections, such as additional Transmission, Supply & Storage and Treatment
system upgrade projects, slated to start after the WSIP ends. The SFPUC is also conducting
condition assessments of other "up-country" facilities, located in the Sierras, in the coming
years. Current estimates are that $1.8 billion will be needed between FY 2019 and FY 2028 for
these non-WSIP projects, but if these assessments identify other facilities that need
replacement, it may result in additional rate increases as new debt is issued to finance the
projects. For comparison, the WSIP was $4.8 billion.
In December 2017, the SFPUC provided an early estimate for FY 2019 wholesale water rates to
remain at $4.10 per CCF. Staff received a subsequent estimate which anticipates no change to
the SFPUC volumetric rate for several years. However, there is much uncertainty surrounding
continued water usage by the BAWSCA agencies. While drought restrictions ended in May
2016, customers' behavior changes are showing a steady increase during the dry winter of
2018.
As the drought ended in FY 2017 and sales have started increasing, if that trend continues in
upcoming years, rate projections may level out. However, if snow and rain do not materialize in
future years further calls for restricted usage may reoccur.
2 First Quarter FY 2017-18 WSIP Regional Quarterly Report, http://www.sfwater.org/index.aspx?page=307
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Table 13 shows the FY 2018 projected budget and the five year CIP spending plan, although
these figures are preliminary pending budget discussions starting in May. The 'committed'
column represents funds committed to contracts for which work has not yet been completed or
invoices paid.
Table 13: Budgeted Water Utility CIP Spending ($000)
Current Spending, Remain.
Project Category Budget* Curr. Yr Budget** Committed FY 2019 FY 2020
One Time Projects 6,123 (606) 5,516 3,578 2,200 2,200
Water Main Replacement 10,637 (1,387) 9,251 4,780 7,685 6,454
Ongoing Projects 3,086 (518) 2,568 749 2,025 1,982
Customer Connections 773 (373) 401 72 732 754
TOTAL 20,619 (2,884) 17,736 9,180 12,642 11,389
*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).
FY 2021
2,200
6,647
2,039
777
11,663
FY 2022 FY 2023
- -
6,847 7,055
2,099 2,161
800 824
9,746 10,040
The water main replacement program funds the replacement of deteriorating water mains. The
water system consists of over 236 miles of mains, approximately 2,000 fire hydrants, and over
20,000 metered service connections spanning 9 pressure zones over a 26 square mile service
area. CPAU utilizes an asset management database in conjunction with hydraulic modeling
software to prioritize capital improvements. CPAU selects mains for replacement by
researching the maintenance history of the system and identifying those that are undersized,
corroded, and subject to recurring breaks. CPAU uses a scoring system based on criticality in
order to prioritize which mains to replace first, and coordinates with the Public Works street
maintenance program to avoid cutting into newly repaved streets. CPAU replaces
approximately 3 miles of main per year, or 1.3% of the system.
Costs for the water main replacement program are increasing for a variety of reasons:
• Fire Code regulations now mandate fire sprinklers for new residential units. To
accommodate increased fire flows, new main replacement projects require larger
diameter pipe.
• CPAU has switched to high-density polyethylene (HOPE) for its mains. Installation costs
for this material are slightly higher, though lifecycle costs are lower, and the material
performs better. Joints in distribution mains are the most likely place for failure, and
sections of HOPE pipe can be fused together rather than connected with fittings. In the
long run, this will reduce losses and maintenance costs.
• To take full advantage of HOPE's fusibility, CPAU is now replacing the services along
with the water mains with new HOPE services. In the past, the existing services were
reconnected, regardless of the material. This new practice costs more in the short run,
but will provide long term benefits.
• Lastly, costs have escalated after the recession. The regional and even national focus
on infrastructure improvement has created labor shortages in the construction market,
leading to higher bids than were seen in the past.
These factors have created some uncertainty in future water main replacement costs. As bids
for new projects, such as upgrades to University Avenue, have consistently come in higher over
the last few years, future main replacement project budgets have been increased from prior
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year's estimates to reflect expected bid estimates. If the cost of water main replacement
continues to rise at its current levels, budgets may need to be revised further. However, CPAU
is nearing the end of a long term water main replacement program initiated in 1993 to replace
the oldest and most degraded parts of the system. Roughly 25% of the system has been
replaced, and the rate of water leaks has decreased 50%. CPAU initiated a master planning
process in FY 2015 that was completed in 2016 to evaluate the current state of the distribution
system and determine the necessary rate of main replacement in future years. Currently the
replacement rate of about 1.3% of the system each year is an 80-year replacement cycle.
In last year's financial forecast, staff projected a two year delay in new main replacement
projects. However, some of these delayed projects are now moving forward. The University
Avenue Business District project is progressing, and may require a budget increase of $3 million
in FY 2018 to continue. However, there still could be delays due to rising construction costs and
also the ongoing issue with keeping and maintaining qualified staff to design and work on
projects. The Water CIP estimates assume the resumption of annual main replacement
projects, starting in FY 2019. Staff assumes capital investment cost increases in 2024 and
beyond of approximately 3% annually.
Included in the one-time project budget is seismic water system upgrades and/or replacement
for the Corte Madera, Park, Boronda and Dahl reservoirs to improve earthquake resistance.
This work will improve protection from water loss at these reservoirs in a seismic event. If an
earthquake caused a significant water leak, this could lead to loss of water for firefighting, loss
of water storage for drinking, property damage from flooding or mudslides, and environmental
damages. Staff estimates this work will cost $2 million each year for three years beginning in FY
2019. In FY 2021, as part of the Electric fund CIP plan, there is an initiative to move meters to an
Advanced Metering Infrastructure, or AMI, to allow for more advanced monitoring, metering
and billing of the electric usage. This AMI network, however, can also be used to read water
and gas meters as well, and thus the plan to transition all Utility meters to the AMI platform.
Staff has included an additional $1.5 million in FY 2019 and FY 2020 for preparatory work and
meter testing, and $4.16 million for general meter replacement costs in FY2021.
One project not included in this forecast is the seismic strengthening of a large water
transmission line in the foothills. Staff has engaged a consultant to investigate alternatives for
this project. The consultant is analyzing an alternative that involves installing a valve and hose
system that could be used to bypass breaks in the line while they are repaired after an
earthquake. This is a relatively low cost alternative that would not substantially affect the
financial forecast. The study is not finalized yet, however, and if it is determined that the entire
pipeline needs to be replaced, it could cost between $15 million and $20 million, which would
likely require bond financing and would substantially affect the financial forecast.
Ongoing Projects and Customer Connections are projected to cost approximately $2.8 million in
FY 2019 and increase by an average of 2% per year through the end of the forecast period.
Actual expenses for these projects fluctuate annually depending on how many defective meters
are discovered and replaced during routine maintenance, as well as how much development
and redevelopment is going on that prompts the replacement or upgrade of water services. It is
worth noting that property owners pay a fee for water service replacement or expansion during
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redevelopment, so when the number of projects go up (meaning higher costs for this activity),
so does fee revenue.
Aside from customer connections, the CIP plan for FY 2019 to FY 2023 is funded by revenue
from utility rates and capacity fees. Appendix B: Water Utility Capital Improvement Program
(Cf P) Detail shows the details of the plan.
SECTION 60: DEBT SERVICE
The Water Utility's annual debt service is roughly $3.2 million per year. This is related to two
bond issuances, one requiring payments through 2026, the other through 2035. CPAU is in
compliance with all covenants on both bonds.
The first bond is the 2009 Water Revenue Bond, Series A, issued for $35 million to finance
construction of the Emergency Water Supply and Storage project (the El Camino Reservoir, new
wells, rehabilitation of existing wells and tanks, etc.) and to be retired by 2035. As part of the
'Build America' bond program, there is an interest payment subsidy from the Federal
Government of 35%. There is always the possibility that the federal government will choose to
stop payment on this subsidy. The automatic federal spending cuts under the Budget Control
Act (BCA) of 2011 have already reduced the subsidy by $50,000 per year, and if planned cuts
through 2021 proceed without amendment, staff estimates that the subsidy would be reduced
by over $200,000 per year by 2021. The Bipartisan Budget Act of 2013, which relieved some of
the discretionary spending cuts in the 2011 BCA, did not affect automatic cuts to the subsidy,
and actually extended the automatic cuts through 2023.
The second bond issuance is the 2011 Utility Revenue Refunding Bond, Series A, which is to be
retired in 2026. This $17.2 million issuance refinanced an earlier Water and Gas Utility bond
issuance, the 2002 Utility Revenue Bonds, Series A, which was issued to finance various capital
improvements for both systems. The Water Utility's share of the issuance was roughly $7.8
million.
Table 14 shows the cost of debt service for the Water Utility's share of these bond issuances for
the financial forecast period:
Table 14: Water Utility Debt Service ($000)
FY 2018 FY 2019 FY 2020 FY 2021 FY2022 FY2023 FY2024 FY 2025
2009 Water Revenue Bonds, 2,066 2,081 2,097 2,114 2,132 2,151 2,151 2,151
Series A (net of grants)
2011 Utility Revenue Bonds, 656 654 654 656 657 658 658 658
Series A
Both the 2009 and 2011 Bonds include the following covenants: 1) net revenues plus Available
Reserves shall at least equal 125% of the maximum annual debt service, and 2) Available
Reserves shall be at least 5 times the maximum annual debt service. Note that "Available
Reserves," as defined for both bonds, include the reserves for the Gas and Electric systems, not
just the Water system. This Financial Plan maintains compliance with these covenants
throughout the forecast period, as shown in Appendix A: Water Utility Financial Forecast Detail.
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The net revenues (but not the reserves) of the Water Utility are also pledged for one other
bond as shown in Table 15 below, even though the Water Utility is not responsible for the debt
service payments. The Water Utility's reserves or net revenues would only be called upon if the
responsible utilities are unable to make their debt service payments. Staff does not currently
foresee this occurring. Requirements of the California Constitution require that any amounts
advanced from one utility to pay debt service for another utility must be repaid by the
borrowing fund.
Table 15: Other Issuances Secured by the Water Utility's Revenues or Reserves
Bond Issuance Responsible Annual Debt Secured by Water Utility's:
Utilities Service ($000) Net Revenues Reserves
1995 Series A Utility Storm Drain $680 Yes No Revenue Bonds
SECTION GE: OTHER REVENUES
The Water Utility receives most of its revenues from sales of water. The next largest source is
connection and capacity fees, which in FY 2017 represented 58% of revenue from sources other
than water sales. The remainder consisted of a variety of miscellaneous charges, transfers and
interest income.
Revenues from connection and capacity fees have more than doubled since FY 2009.
Connection fees are charged to new developments that need new or replacement service
connections, while capacity fees are charged to development that put additional demands on
the water distribution system. Revenue from these sources decreased slightly during the
recession, but has increased substantially since then. Staff is forecasting lower revenue from
these sources in subsequent years, but has increased connection fees that are expected to
offset these reductions to some extent.
Other revenue sources are projected to stay stable through the forecast period, though interest
income always fluctuates depending on changes in interest rates. Some uncertainty also exists
related to the Federal government's commitment to continuing to pay the interest subsidy on
the Build America Bonds.
SECTION 6F: SALES REVENUES
Staff based the sales revenue projections on the load forecast in Section SA: load Forecast and
the projected rate changes shown in Figure 5. Except where stated otherwise, these load
forecasts are based on normal precipitation. Precipitation can vary substantially, and this can
affect revenues substantially. In dry years customers use more water, increasing revenues, and
in wet years they use less. One factor that is difficult to predict is customer usage recovery
post-drought. Usage will continue to rise until customers reach their level of desired
consumption. Where this new 'normal' level plateaus at, and the speed with which it reaches
level, is difficult to predict. Staff will continue to monitor these patterns and adjust projections
accordingly.
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SECTION 7: COMMUNICATIONS PLAN
In FY 2019, communications will continue to focus on water utility rate increases, including the
reasons why and how rates may change contingent upon varying precipitation levels.
Additionally, we will focus on how infrastructure costs and rising rates from our wholesale
water supplier, the San Francisco Public Utilities Commission, increases CPAU costs and must be
recovered through rate increases. Rates communications will include a substantial update to
information on a webpage dedicated to Utilities rates, "breaking news" on the Utility home
webpage, discussion in the Proposition 218 rate adjustment notice, bill insert and frequent
educational updates to internal and external stakeholders (customer service, marketing, City
Manager's Office, UAC, City Council, business and residential customers). Other
communications vehicles will include financial plans, presentations to UAC, Finance Committee,
City Council and any media coverage as a result of the rate increases. CPAU will continue its
outreach about continuing to make water conservation a way of life, regardless of drought or
rain conditions. Messaging will reinforce the importance of water use efficiency, and that
although rates are increasing, efficient usage should mean that a customer should not see a
significant increase in water utility costs on their bills.
Water conservation outreach will promote water use efficiency rebates, incentives and easy
water-saving behaviors through bill inserts, web updates, email newsletters, videos for the web
and television, presentations to customer groups and the use of social media. To keep
customers apprised of the status and accomplishments of CIP projects, a network of project
web pages are maintained. Traffic is driven to the website via ads in publications, newspaper
inserts, and through the comprehensive portfolio of outreach strategies as outlined above.
Safety topics are also emphasized year-round. For all utility outreach, while print materials and
website pages still feature prominently, CPAU is placing more emphasis on digital advertising
content, direct mail, community safety/emergency preparation events and presentations.
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APPENDICES
Appendix A: Water Utility Financial Forecast Detail
Appendix B: Water Utility Capital Improvement Program {CIP) Detail
Appendix C: Water Utility Reserves Management Practices
Appendix D: Description of Water Utility Operational Activities
Appendix E: Sample of Water Utility Outreach Communications
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APPENDIX C: WATER UTILITY RESERVES MANAGEMENT PRACTICES
The following reserves management practices shall be used when developing the Water Utility
Financial Plan:
Section 1. Definitions
a) "Financial Planning Period" -The Financial Planning Period is the range of future fiscal
years covered by the Financial Plan. For example, for the Water Utility Financial Plan
delivered in conjunction with the FY 2015 budget, FY 2015 to FY 2021 is the Financial
Planning Period.
b) "Fund Balance" -As used in these Reserves Management Practices, Fund Balance refers
to the Utility's Unrestricted Net Assets.
c) "Net Assets" -The Government Accounting Standards Board defines a Utility's Net
Assets as the difference between its assets and liabilities.
d) "Unrestricted Net Assets" -The portion of the Utility's Net Assets not invested in capital
assets (net of related debt) or restricted for debt service or other restricted purposes.
Section 2. Reserves
The Water Utility's Fund Balance is reserved for the following purposes:
a) For existing contracts, as described in Section 3 (Reserve for Commitments)
b) For operating and capital budgets re-appropriated from previous years, as described in
Section 4 (Reserve for Re-appropriations)
c) For cash flow management and contingencies related to the Water Utility's Capital
Improvement Program (CIP), as described in Section 5 (CIP Reserve)
d) For rate stabilization, as described in Section 6 (Rate Stabilization Reserve)
e) For operating contingencies, as described in Section 7 (Operations Reserve)
f) Any funds not included in the other reserves will be considered Unassigned Reserves
and shall be returned to ratepayers or assigned a specific purpose as described in
Section 8 (Unassigned Reserves).
Section 3. Reserve for Commitments
At the end of each fiscal year the Reserve for Commitments will be set to an amount equal
to the total remaining spending authority for all contracts in force for the Water Utility at
that time.
Section 4. Reserve for Re-appropriations
At the end of each fiscal year th.e 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.
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Section 5. CIP Reserve
The CIP Reserve is used to manage cash flow for capital projects and acts as a reserve for
capital contingencies. Staff will manage the CIP Reserve according to the following
practices:
a) The following guideline levels are set forth for the CIP Reserve. These guideline levels
are calculated for each fiscal year of the Financial Planning Period based on the levels of
CIP expense budgeted for that year.
Minimum Level 12 months of budgeted CIP expense
Maximum Level 24 months of budgeted CIP expense
b) Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and
the Reserve for Commitments when funds are added or removed from to that reserve
as a result of a change in contractual commitments related to CIP projects. Any other
additions to or withdrawals from the CIP reserve require Council action.
c) Minimum Level:
i) Funds held in the Reserve for Commitments may be counted as part of the CIP
Reserve for the purpose of determining compliance with the CIP Reserve minimum
guideline level.
ii) If, at the end of any fiscal year, the minimum guideline is not met, staff shall present
a plan to the City Council to replenish the reserve. The plan shall be delivered by the
end of the following fiscal year, and shall, at a minimum, result in the reserve
reaching its minimum level by the end of the next fiscal year. For example, if the CIP
Reserve is below its minimum level at the end of FY 2017, staff must present a plan
by June 30, 2018 to return the reserve to its minimum level by June 30, 2019. In
addition, staff may present, and the Council may adopt, an alternative plan that
takes longer than one year to replenish the reserve, or that does so in a shorter
period of time.
d) Maximum Level: If, at any time, the CIP Reserve reaches its maximum level, no funds
may be added to this reserve. If there are funds in this reserve in excess of the
maximum level staff must propose to transfer these funds to another reserve or return
them to ratepayers in the next Financial Plan. Staff may also seek City Council to
approve holding funds in this reserve in excess of the maximum level if they are held for
a specific future purpose related to the CIP.
Section 6. Rate Stabilization Reserve
Funds may be added to the Rate Stabilization Reserve by action of the .City Council and
held to manage the trajectory of future year rate increases. Withdrawal of funds from
the Rate Stabilization Reserve requires Council action. If there are funds in the Rate
Stabilization Reserve at the end of any fiscal year, any subsequent Water Utility
Financial Plan must result in the withdrawal of all funds from this Reserve by the end of
the next Financial Planning Period.
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Section 7. Operations Reserve
The Operations Reserve is used to manage normal variations in costs and as a reserve for
contingencies. Any portion of the Water Utility's Fund Balance not included in the reserves
described in Section 3-Section 6 above will be included in the Operations Reserve unless this
reserve has reached its maximum level as set forth in Section 7(d) below. Staff will manage
the Operations Reserve according to the following practices:
a) The following guideline levels are set forth for the Operations Reserve. These guideline
levels are calculated for each fiscal year of the Financial Planning Period based on the
levels of Operations and Maintenance (O&M) and commodity expense forecasted for
that year in the Financial Plan.
Minimum Level 60 days of O&M and commodity expense
Target Level 90 days of O&M and commodity expense
Maximum Level 120 days of O&M and commodity expense
b) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Operations
Reserve are lower than the minimum level set forth above, staff shall present a plan to
the City Council to replenish the reserve. The plan shall be delivered within six months
of the end of the fiscal year, and shall, at a minimum, result in the reserve reaching its
minimum level by the end of the following fiscal year. For example, if the Operations
Reserve is below its minimum level at the end of FY 2014, staff must present a plan by
December 31, 2014 to return the reserve to its minimum level by June 30, 2015. In
addition, staff may present, and the Council may adopt, an alternative plan that takes
longer than one year to replenish the reserve.
c) Target Level: If, at the end of any fiscal year, the Operations Reserve is higher or lower
than the target level, any Financial Plan created for the Water Utility shall be designed
to return the Operations Reserve to its target level within four years.
d) Maximum Level: If, at any time, the Operations Reserve reaches its maximum level, no
funds may be added to this reserve. Any further increase in the Water Utility's Fund
Balance shall be automatically included in the Unassigned Reserve described in Section
8, below.
Section 8. Unassigned Reserve
If the Operations Reserve reaches its maximum level, any further additions to the Water
Utility's Fund Balance will be held in the Unassigned Reserve. If there are any funds in the
Unassigned Reserve at the end of any fiscal year, the next Financial Plan presented to the
City Council must include a plan to assign them to a specific purpose or return them to the
Water Utility ratepayers by the end of the first fiscal year of the next Financial Planning
Period. For example, if there were funds in the Unassigned Reserves at the end of FY 2015,
and the next Financial Planning Period is FY 2016 through FY 2021, the Financial Plan shall
include a plan to return or assign any funds in the Unassigned Reserve by the end of
FY 2016. Staff may present an alternative plan that retains these funds or returns them over
a longer period of time.
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APPENDIX D: DESCRIPTION OF WATER UTILITY OPERATIONAL ACTIVITIES
This appendix describes the activities associated with the various operational activities referred
to in Section 68: Operations of this Financial Plan.
Administration: Accounting, purchasing, legal, and other administrative functions provided by
the City's General Fund staff, as well as shared communications services, CPAU administrative
overhead, and billing system maintenance costs. This category also includes Water Utility debt
service and rent paid to the General Fund for the land associated with reservoirs and various
other facilities.
Customer Service: This category includes the Water Utility's share of the call center, meter
reading, collections, and billing support functions. Billing support encompasses staff time
associated with bill investigations and quality control on certain aspects of the billing process. It
does not include maintenance of the billing system itself, which is included in Administration.
This category also includes CPAU's key account representatives, who work with large
commercial customers who have more complex requirements for their water services.
Engineering (Operating): The Water Utility's engineers focus primarily on the CIP, but a small
portion of their time is spent assisting with distribution system maintenance.
Operations and Maintenance: This category includes the costs of a variety of distribution
system maintenance activities, including:
• investigating reports of damaged mains or services and performing emergency repairs;
• testing and operating valves;
• monitoring water quality and reservoir levels;
• monitoring the status of the different pressure zones;
• flushing water at hydrants and other closed end points of the system;
• building and replacing water services for new or redeveloped buildings; and
• testing and replacing meters to ensure accurate sales metering.
This category also includes a variety of functions the utility shares with other City utilities,
including:
• the Field Services team (which does field research of various customer service issues);
• the Cathodic Protection team (which monitors and maintains the systems that prevent
corrosion in metal tanks and reservoirs); and
• the General Services team (which manages and maintains equipment, paves and
restores streets after gas, water, or sewer main replacements, and provides welding
services)
Resource Management: This category includes water procurement, contract management,
water resource planning, interaction with BAWSCA, the SFPUC, and the SCVWD, and tracking of
legislation and regulation related to the water industry.
February, 2017 36 I Page