HomeMy WebLinkAboutRESO 9601060322 sdl 6053681
Resolution No. 9601
Resolution of the Council of the City of Palo Alto Approving the
FY 2017 Water Utility Financial Plan
R E C I T A L S
A. Each year the regularly assesses the financial position of
its utilities with the goal of ensuring adequate revenue to fund operations. This includes
making longterm projections of market conditions, the physical condition of the system, and
other factors that could affect utility costs, and setting rates adequate to recover these costs. It
does this with the goal of providing safe, reliable, and sustainable utility services at competitive
rates. The City adopts Financial Plans to summarize these projections.
B. The City uses reserves to protect against contingencies and to manage other
aspects of its operations, and regularly assesses the adequacy of these reserves and the
management practices governing their operation. The status of utility reserves and their
management practices are included in Reserves Management Practices attached to and made
part of the Financial Plans.
The Council of the City of Palo Alto does hereby RESOLVE as follows:
SECTION 1. The Council hereby adopts the FY 2017 Water Utility Financial Plan.
SECTION 2. The Council hereby approves the transfer of $4.7 million in FY 2016 from
the Rate Stabilization Reserve to the Operations Reserve, as described in the FY 2017 Water
Utility Financial Plan approved via this resolution.
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060322 sdl 6053681
SECTION 3. The Council finds that the adoption of this resolution does not meet the
California Environmental Quality Act a project under Public Resources
Code Section 21065, and therefore, no environmental assessment is required.
INTRODUCED AND PASSED: June 13, 2016
AYES: BURT, DUBOIS, FILSETH, HOLMAN, KNISS, SCHARFF, SCHMID, WOLBACH
NOES:
ABSENT: BERMAN
ABSTENTIONS:
ATTEST:
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
Senior Deputy City Attorney City Manager
Director of Utilities
Director of Administrative Services
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FY 2017 WATER
UTILITY
FINANCIAL PLAN
FY 2017 TO FY 2026
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FY 2017 WATER UTILITY
FINANCIAL PLAN
FY 2017 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 .................................................................................. 5
Section 3: Detail of FY 2017 Rate and Reserves Proposals ....................................................... 5
Section 3A: Rate Design ............................................................................................................... 5
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 ................................................................................................. 9
Section 4B: Customer Base ........................................................................................................ 10
Section 4C: Distribution System ................................................................................................. 11
Section 4D: Cost Structure and Revenue Sources ...................................................................... 11
Section 4E: Reserves Structure................................................................................................... 12
Section 4F: Competitiveness ...................................................................................................... 12
Section 5: Utility Financial Projections ................................................................................. 13
Section 5A: Load Forecast .......................................................................................................... 13
Section 5B: FY 2011 to FY 2015 Cost and Revenue Trends ........................................................ 14
Section 5C: FY 2015 Results ....................................................................................................... 15
Section 5D: FY 2016 Projections ................................................................................................ 16
Section 5E: FY 2017FY 2026 Projections ................................................................................... 16
Section 5F: Risk Assessment and Reserves Adequacy ............................................................... 18
Section 5G: Alternate Scenarios................................................................................................. 19
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Section 5H: LongTerm Outlook ................................................................................................. 21
Section 6: Details and Assumptions ..................................................................................... 21
Section 6A: Water Purchase Costs............................................................................................. 21
Section 6B: Operations .............................................................................................................. 23
Section 6C: Capital Improvement Program (CIP)....................................................................... 24
Section 6D: Debt Service............................................................................................................ 27
Section 6E: Other Revenues ....................................................................................................... 28
Section 6F: Sales Revenues........................................................................................................ 28
Section 7: Communications Plan .......................................................................................... 28
Appendices ......................................................................................................................... 30
Appendix A: Water Utility Financial Forecast Detail ................................................................. 31
Appendix B: Water Utility Capital Improvement Program (CIP) Detail ..................................... 33
Appendix C: Water Utility Reserves Management Practices..................................................... 35
Appendix D: Description of Water Utility Operational Activities............................................... 38
Appendix E: Sample of Water Utility Outreach Communications ............................................. 39
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SECTION 1: DEFINITIONS AND ABBREVIATIONS
BAWSCA Bay Area Water Supply and Conservation Agency
CCF The standard unit of measurement for water delivered to water customers, equal to
one hundred cubic feet, or roughly 748 gallons.
CIP Capital Improvement Program
CPAU City of Palo Alto Utilities Department
O&M Operations and Maintenance
RFC Raftelis Financial Consultants, Inc.
SFPUC San Francisco Public Utilities Commission
SFWD San Francisco Water Department
UAC Utilities Advisory Commission
WSIP The SFPUC’s Water System Improvement Program to seismically strengthen the
transmission lines of the Hetch Hetchy regional water system.
SECTION 2: EXECUTIVE SUMMARY AND RECOMMENDATIONS
This document presents a Financial Plan for the City’s Water Utility for the next ten years. This
Financial Plan provides revenues to cover the costs of operating the utility safely over that time
while adequately investing for the future. It also addresses the financial risks facing the utility
over the short term and long term, and includes measures to mitigate and manage those risks.
SECTION 2A: OVERVIEW OF FINANCIAL POSITION
By FY 2026, costs for the Water Utility will increase 24% over FY 2016 levels, as shown in Table
1. Most of increase is related to the cost of water supplied by the San Francisco Public Utilities
Commission (SFPUC), which is projected to rise 34% in that time due to the issuance of long
term debt to finance major seismic improvements to the Hetch Hetchy transmission system.
The cost of replacing the water mains in the City’s water distribution system has also increased
substantially from the low costs seen during the recent recession, but is projected to remain
relatively level during the forecast horizon. Staff projects only inflationary increases to most
other costs over the forecast period.
Table 1: Expenses for FY 2015 to FY 2026 (Thousand $’s)
Expenses
($000)
FY
2015
(act.)
FY
2016
(est.)
FY
2017
FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
Water
Purchases
Operations
Capital
Projects
TOTAL
To cover these increases in costs, revenues (and therefore rates) need to increase over the next
several years to balance costs and revenues. The rate trajectory shown in Table 2 assumes that
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the drought continues through 2017 and that consumption does not return to its predrought
levels. Table 2 also compares current rate projections to those projected in last year’s Financial
Plan.
Table 2: Projected Water Rate Trajectory for FY 2017 to FY 2026
Projection FY
2017
FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
Current 6% 9% 9% 6% 2% 2% 2% 3% 5% 3%
Last year 8% 8% 8% 3% 1% 2% 3% N/A 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 2017. The Water Utility also has a Capital Improvement Program (CIP) Reserve that can be
used to offset onetime 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 2017. At that point the Emergency Water Supply and Storage Project and the
Water System Master Plan will have been completed, so capital costs will be known with more
certainty. Table 3 shows the projected reserve transfers over the forecast period.
Table 3: Transfers To/(From) Reserves for FY 2016 to FY 2026 ($000)
Reserve FY 2016 FY 2017 FY 2018 to FY 2026
Capital Improvement (4,000)
Rate Stabilization (4,700) (1,867)
Operations 4,700 5,867
SECTION 2B: SUMMARY OF PROPOSED ACTIONS
Staff proposes the following actions for the Water Utility in FY 2016:
1. Transfer $4.7 million from the Rate Stabilization Reserve to the Operations Reserve. See
Section 3D: Proposed Reserve Transfers for more details.
Staff proposes the following actions for the Water Utility in FY 2017:
1. Increase rates as shown in Section 3B: Current and Proposed Rates. These changes are
projected to increase the system average rate by roughly 6%.
2. Transfer $1.867 million from the Rate Stabilization Reserve to the Operations Reserve.
See Section 3D: Proposed Reserve Transfers for more details.
3. Transfer $4 million from the CIP Reserve to the Operations Reserve.
SECTION 3: DETAIL OF FY 2017 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). Current rates were structured based on staff’s assessment of the financial
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position of the Water Utility, and updated using the methodology from the March 2012 Palo
Alto Water Cost of Service & Rate Study by Raftelis Financial Consultants, Inc., as well as
Raftelis’ 2015 memoranda updating the 2012 Study and analyzing drought rates (Staff Report
2676). Staff plans to review and update this cost of service study in 2 to 3 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.
SECTION 3B: CURRENT AND PROPOSED RATES
The current rates and surcharges were effective on September 1, 2015. Rates were realigned
to the results of an updated cost of service study, performed by Raftelis Financial Consultants,
Inc. (RFC), which both developed the drought surcharges and reviewed the City’s water rate
methodology and structure in light of recent court decisions interpreting the state
constitution’s cost of service requirements. RFC examined and validated both the City’s
methodology and rate structure as fundamentally sound, 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: one for separately metered residential customers (W1), one for
commercial and mastermetered multifamily residential customers (W4), and specific
schedules for irrigationonly services (W7), services to fire sprinkler systems in buildings and
private hydrants (W3), and for 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 a base price per CCF, and all additional units
charged a higher price per CCF. Commercial customers pay a uniform price for each CCF used,
and a higher price for separately metered irrigation service.
Table 4 and Table 6 show the current and proposed monthly service charges for all rate
schedules. Staff evaluated grouping the smallest meter sizes (5/8”, 3/4” and 1” meters) into
one charge category, but confirmed that there is a significant variation in actual demand on the
water distribution system among customers using each of these water sizes. As such, staff is
not recommending a change to the monthly service charge schedule.
Table 5 shows the consumption charges. Table 7 shows the current and proposed drought
surcharge levels. The basis for calculating these charges is staff’s annual assessment of the
water utility’s financial position, as well as the cost of service methodology from the 2012 Palo
Alto Water Cost of Service & Rate Study and 2015 update, prepared by RFC.
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Table 4: Current and Proposed Monthly Service Charges
Meter
Size
Monthly Service Charge
($/month based on meter size) Change
Current (9/1/15) Proposed (7/1/16) $/mo %
5/8” $16.03 $16.77 $0.74 5%
3/4” $21.50 $22.60 $1.10 5%
1” $32.45 $34.26 $1.81 6%
1 ½” $59.83 $63.40 $3.57 6%
2” $92.67 $98.37 $5.70 6%
3” $196.70 $209.11 $12.41 6%
4” $350.00 $372.31 $22.31 6%
6” $716.82 $762.81 $45.99 6%
8” $1,319.07 $1,403.94 $84.87 6%
10” $2,085.57 $2,219.92 $134.35 6%
12” $2,742.56 $2,919.34 $495.89 6%
Table 5: Current and Proposed Water Consumption Charges
Current
(9/1/15)
Proposed
(7/1/16)
Change
$/CCF %
W1 (Residential) Volumetric Rates ($/CCF)
Tier 1 Rates 5.93 6.30 0.37 6%
Tier 2 Rates 8.38 8.82 0.44 5%
W2 (Construction) Volumetric Rates ($/CCF)
Uniform Rate 6.92 7.32 0.40 6%
W4 (Commercial) Volumetric Rates ($/CCF)
Uniform Rate 6.92 7.32 0.40 6%
W7 (Irrigation) Volumetric Rates ($/CCF)
Uniform Rate 8.29 8.72 0.43 5%
Table 6: Current and Proposed Monthly Fire Service Charges
Meter
Size
Monthly Service Charge
($/month based on meter size) Change
Current (9/1/15) Proposed (7/1/16) $/mo %
2” $3.43 $3.79 $0.36 10%
4” $21.22 $23.42 $2.20 10%
6” $61.63 $68.03 $6.40 10%
8” $131.34 $144.97 $13.63 10%
10” $236.20 $260.70 $24.50 10%
12” $381.52 $421.11 $39.59 10%
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Table 7: Current and Proposed Drought Surcharge Charges
Current
(9/1/15)
Proposed
(7/1/16)
Change
$/CCF %
10%/15% Reduction ($/CCF)
W1 Residential (Tier 1) 0.19 0.20 $0.01 5%
W1 Residential (Tier 2) 0.55 0.58 0.03 5%
W4(Nonresidential and Master
Metered MultiFamily) 0.24 0.26 0.02 8%
W7 (Irrigation) 0.51 0.53 0.02 4%
20% Reduction ($/CCF)
W1 Residential (Tier 1) 0.39 0.43 0.04 10%
W1 Residential (Tier 2) 1.14 1.21 0.07 6%
W4 (Nonresidential and Master
Metered MultiFamily) 0.49 0.53 0.04 8%
W7 (Irrigation) 1.18 1.25 0.07 6%
25% Reduction ($/CCF)
W1 Residential (Tier 1) 0.59 0.64 0.05 8%
W1 Residential (Tier 2) 1.76 1.85 0.09 5%
W4 (Nonresidential and Master
Metered MultiFamily) 0.72 0.77 0.05 7%
W7 (Irrigation) 1.93 2.02 0.09 5%
SECTION 3C: BILL IMPACT OF PROPOSED RATE CHANGES
Table 8 shows the impact of the proposed July 1, 2016 rate changes on the median residential
bill. The average increase is roughly 6%, but some customers may see slightly higher or lower
increases due to slight changes in the composition of the utility’s costs. Table 8 is presented
assuming continued activation of the drought surcharge at the 20% reduction level.
Table 8: Impact of Proposed Water Rate Changes on Residential Bills
Usage
(CCF/month)
Bill under
Current Rates
(9/15/15)
Bill under
Proposed
Rates (7/1/16)
Change
$/mo. %
4$ 41.31$ 43.69 $ 2.38 6%
(Winter median) 7 63.47 67.18 3.71 6%
(Annual median) 9 82.51 87.24 4.73 6%
(Summer median) 14 130.11 137.39 7.28 6%
25 234.83 247.72 12.89 5%
Table 9 shows the impact of the proposed July 1, 2016 rate changes on various representative
commercial customer bills. This comparison includes continuation of the drought surcharge at
the 20% reduction level.
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Table 9: Impact of Proposed Water Rate Changes on Commercial Bills
Usage
(CCF/month)
Bill under
Current Rates
(9/15/15)
Bill under
Proposed Rates
(7/1/16)
Change
$/mo. %
Commercial (W4) (5/8” meters)
(Annual median) 12 $ 104.95 110.97 6.02 6%
(Annual average) 64 490.27 519.17 28.90 6%
Irrigation (W7) (1 ½” meters)
(Winter median) 9 145 153 8 6%
(Summer median) 37 410 432 22 5%
(Winter average) 56 590 622 32 5%
(Summer average) 199 1,944 2,047 103 5%
SECTION 3D: PROPOSED RESERVE TRANSFERS
In the FY 2016 Financial Plan, several transfers between reserves were discussed for FY 2016.
CIP related funds were transferred out of the Reappropriations Replacement into the CIP
Reserve, and $5.5 million was proposed to be transferred from the Rate Stabilization Reserve
into the Operations Reserve.
Due to the long running drought in California, and as lower expenses in FY 2015 resulted in
higher ending reserve balances than initially projected, staff recommends reducing the $5.5
million transfer from the Rate Stabilization Reserve in FY 2016 to $4.7 million, and proposes
transferring $1.87 million in FY 2017. This transfer will exhaust the Rate Stabilization Reserve, as
planned for and discussed in Section 4E: Reserves Structure, and is included in the financial
projections in this Financial Plan. It will enable CPAU to maintain adequate Operations Reserve
levels while moderating the pace of increase in water rates.
A proposed $4 million transfer from the CIP Reserve to the Operations Reserve was also
discussed in the FY 2016 Financial Plan. This transfer will help fund the Operations Reserve, as
well as bring the CIP Reserve closer to its target reserve level. The impact of these transfers on
reserves levels can be seen in Section 4E: Reserves Structure and Appendix A: Water Utility
Financial Forecast Detail.
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 Section 5:
Utility Financial Projections and Section 6: Details and Assumptions.
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
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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. A 20year contract was
signed with San Francisco, 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 town, while existing sections of the system continued to age. In the
mid1980s, 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, an
analysis of cost effective system improvements was performed and the rate of main
replacement was increased from one mile per year to three. A plan to replace 75 miles of
deficient mains within 25 years was begun.
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, nearly completed,
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.
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.
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
customers are connected to the water system, approximately 16,500 (81%) of which are
separately metered residential customers and 3,800 (19%) of which are commercial, master
metered residential, irrigation and fire service customers.
Judging from seasonal consumption patterns, between 35% and 50% of Palo Alto’s water is
used for irrigation, and that consumption is heavily weather dependent. It also varies
significantly by season. As a result of these two factors, there is significant variability in the
amount of water that is demanded from the system month to month and year to year.
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Figure 1: Cost Structure (FY 2015)
Figure 2: Revenue Structure (FY 2015)
93%
7%
Sales of Water
Other Revenue
SECTION 4C: DISTRIBUTION SYSTEM
To deliver water to its customers, the utility owns roughly 233 miles of mains (which transport
the water from the SFPUC meters at the city’s borders to the customer’s service laterals and
meters), eight wells (to be used in emergencies), five water storage reservoirs (also for
emergency purposes) and several tanks used to moderate pressure and deal with peaks in flow
and demand (due to fire suppression, heavy usage times, etc.). These represent the vast
majority of the infrastructure used to distribute water in Palo Alto.
SECTION 4D: COST STRUCTURE AND REVENUE SOURCES
As shown in Figure 1, water purchase
costs accounted for roughly 39% of the
Water Utility’s costs in FY 2015.
Operational costs represented roughly
40%, and capital investment was
responsible for the remaining 21%.
Water purchase costs are projected to
rise to roughly 41% of costs by FY 2026.
The Water Utility receives 93% of its
revenue from sales of water and the
remainder from capacity and connection
fees, interest on reserves, and other
sources. As rates increase over the next
several years, the percentage of revenue
from sales of water is expected to
increase as well. Appendix A: Water
Utility Financial Forecast Detail shows
more detail on the utility’s cost and
revenue structures. Roughly 15% of the
utility’s revenues come from fixed
service charges, though most of its costs
are fixed. This is typical for California
water utilities, and conforms to the Best
Management Practices (BMPs) of the
California Urban Water Conservation Council (CUWCC), a statewide conservation council of
environmental groups, state agencies, and water utilities to which the City is a signatory. One
of CUWCC’s BMPs is that a utility’s revenue from fixed service charges constitutes at most 30%
of the utility’s total revenue from all charges1.
1 See http://www.cuwcc.org/Resources/MemorandumofUnderstanding/Exhibit1BMPDefinitionsSchedules
andRequirements/BMP1UtilityOperationsPrograms
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SECTION 4E: RESERVES STRUCTURE
CPAU maintains six reserves for its Water Utility to manage various types of contingencies.
These are summarized below, but 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 onetime 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 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 Wastewater
Collection) as well.
Operations Reserve: This is the primary contingency reserve for the Water Utility, and is
used to manage yearly variances from 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 10 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: Residential Monthly Water Bill Comparison
Usage
(CCF/month)
Residential monthly bill comparison ($/month)*
As of February 2016
Palo
Alto
Menlo
Park
Mountain
View Hayward
Redwood
City
Santa
Clara
4 41.31 44.11 31.46 28.68 43.69 16.64
(Winter median) 7 63.47 62.25 48.77 48.42 57.13 29.12
(Annual median) 9 82.51 74.36 60.31 61.58 66.77 37.44
(Summer median) 14 130.11 106.12 89.16 96.24 95.46 58.24
25 234.83 176.80 187.23 181.49 182.14 104.00
* All comparisons use the 5/8” meter size.
SECTION 5: UTILITY FINANCIAL PROJECTIONS
SECTION 5A: LOAD FORECAST
Figure 3 shows 40 years of water consumption history. Average water use has trended
downward over time even as Palo Alto’s population has grown. Significant water use reductions
over the 40year history were in response to requests to reduce water use in the 197677 and
198892 drought periods. During these periods, customers invested in efficient equipment and
modified behavior to achieve the water reduction goals. More recently, water sales decreased
substantially during the 20072009 recession and during the current drought. Water use is
down by similar amounts among both commercial and residential customers. Both summertime
and wintertime use have decreased for all customer classes.
Figure 3: Historical Water Consumption
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Figure 4 shows the forecast of water consumption through FY 2026, as denoted by the dotted
line.
Figure 4: Forecast Water Consumption
Palo Alto is currently experiencing drought conditions with State mandated 24% water use
restrictions in effect. The current forecast assumes current conditions continue through FY
2017, with the drought easing in spring of 2017. It also assumes consumption only returns to
50% of its predrought levels, which is consistent with patterns experienced in prior droughts.
SECTION 5B: FY 2011 TO FY 2015 COST AND REVENUE TRENDS
Figure 5 and the tables in Appendix A: Water Utility Financial Forecast Detail show how costs
have changed during the last five years as well as how they are projected to change over the
next decade.
The annual expenses for the water utility rose substantially between 2011 and 2015. The
increases were primarily related to water purchase costs, which increased 47% from $10.7
million in FY 2011 to $15.7 million in FY 2014. A more indepth discussion of water purchase
costs will be found in Section 6A: Water Purchase Costs. Operations cost increased by about 3%
annually, while CIP costs stayed relatively flat, except in FY 2013 when there was a hold on new
CIP spending to permit completion of a backlog of projects. This budgetary hold allowed for
backlogged water main replacement projects to be started, which consumed surplus capital
reserves.
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Figure 5: Water Utility Expenses, Revenues, and Rate Changes:
Actual Costs through FY 2015 and Projections through FY 2026
SECTION 5C: FY 2015 RESULTS
In early 2014, when proposing rate adjustments to be effective on July 1, 2014, staff forecast
the need for a 4% rate increase. However, higher sales in FY 2014, and projected increased
sales in FY 2015 increased reserves such that no rate change was needed for FY 2015. Forecast
revenues for FY 2015 were actually $41.2 million instead of the projected revenues of $36.4
million. The largest reason for this was a return of funds related to a return of CIP funds.
Connection and capacity fees were, and have continued to be, higher than forecast. Actual
expenses for FY 2015 were $40.1 million compared to the projected expenses of $38.7 million.
Table 11 summarizes the variances from forecast.
Actual Projected
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Table 11: FY 2015, Actual Results vs. 2014 Forecast
Net Cost/
(Benefit)
Type of
change
Return of capital project funds ($2,667,000) Revenue increase
Connection and capacity fees higher than forecast ($1,043,000) Revenue increase
Water supply costs lower than expected (700,000) Cost savings
Other revenues (interest income, etc.) were higher than
forecasted
($1,152,000) Revenue increase
Operations costs lower than expected (1,300,000) Cost savings
Capital project costs higher than projected 3,500,000 Cost increase
Net Cost / (Benefit) of Variances ($3,362,000)
SECTION 5D: FY 2016 PROJECTIONS
Several factors have contributed to changes between last year’s forecast and this year’s
projections. Most notably, the ongoing drought has reduced projected FY 2016 sales by around
12%. The activation of a drought rate surcharge in September 2015, however, means that FY
2016 revenues are projected to be only 4.6% lower than forecast. On the cost side, reduced
purchases and lower than forecast wholesale supply rates from the SFPUC are expected to
result in supply cost decreases of 13.7% for FY 2016. Notable are projected CIP cost increases of
$2.3 million, or 26%, mainly due to general cost increases and completing some projects. Table
12 summarizes the changes from last year’s forecast.
Table 12: FY 2016 Change in Projected Results, 2016 Forecast vs 2017 Forecast
Net Cost/
(Benefit)
Type of
change
Lower purchase costs ($2,809,000) Cost savings
Higher misc. revenues (interest income, fees) ($111,000) Revenue increase
Lower sales revenue $2,039,000 Revenue decrease
Capital project costs higher than projected $2,315,000 Cost increase
Higher Operations budgets $163,000 Cost increase
Net Cost / (Benefit) of Variances $1,507,000
SECTION 5E: FY 2017FY 2026 PROJECTIONS
As can be seen in Figure 5 above, costs for the Water Utility are not projected to change
significantly between FY 2016 and FY 2017. However, as discussed earlier, water supply costs
are the main reason for the cost increases. Water supply costs are projected to increase by 7%
in FY 2017 and grow steadily over the coming years. Operations costs include will increase by $1
million in FY 2017 for emergency generator leasing and maintenance, but will otherwise
roughly match inflation through the forecast period. Capital investment costs are also expected
to increase at the same rate of inflation used in the City’s longterm financial plans (2.5 to
3%/year), though 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.
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Revenues are below expenses and will require annual rate increases between 6% and 9%
through FY 2020 to keep up with these cost increases even with the use of the Rate
Stabilization Reserve to spread the increases over multiple years. Costs have already increased
substantially over the last few years, and revenues have not kept pace. Sales revenues were
adequate in FY 2014 due to lower than average CIP expenditures in that year, but starting in FY
2015 deficits are forecast. To help close this gap, revenues were increased by 12% in FY 2016.
Reserves trends based on these revenue projections are shown in Figure 6 below. The Rate
Stabilization Reserve is projected to have a zero balance by the end of FY 2017, and the CIP
Reserve is projected to decrease by $4 million by the end of FY 2017. Assuming these increases
in revenue, the Operations Reserve, the main contingency reserve, is expected to remain above
the minimum reserve level and will be adequate to meet all identified risks, as discussed in
Section 5F: Risk Assessment and Reserves Adequacy.
These projections assume that drought restrictions end in FY 2017, and that the request for
water usage reductions remains at 24%. If the drought worsens or continues longer than
projected, the level of the drought surcharge currently in place may need to be reviewed. The
forecast also assumes that water main replacement project costs do not increase by more than
inflation. This is a major uncertainty as staff awaits the results of the Water Master Plan study
to determine the advisable water main replacement strategy.
Figure 6: Water Utility Reserves
Actual Reserve Levels through FY 2015 and Projections through FY 2026
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SECTION 5F: RISK ASSESSMENT AND RESERVES ADEQUACY
The Water Utility currently has one contingency reserve, the Operations Reserve, and this
Financial Plan maintains reserves within the approved reserve maximum and minimum
guidelines throughout the forecast period, as shown in Figure 7. Reserve levels also exceed the
short term risk assessment for the utility. Note that while the Operations Reserve is above the
target level in FY 2017, it falls to below the target (but above the minimum) in FY 2018 through
FY 2020.
Figure 7: Operations Reserve Adequacy
Table 13 summarizes the risk assessment calculation for the Water Utility through FY 2021. The
same methodology is used for FY 2022 through FY 2026 as well. The risk assessment includes
the revenue shortfall that could accrue due to:
1. Lower than forecasted sales revenue; and
2. An increase of 10% of planned system improvement CIP expenditures for the budget
year.
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Table 13: Water Risk Assessment ($000)
FY 2017 FY 2018 FY 2019 FY 2020 FY 2021
Total noncommodity revenue $18,406 $20,744 $23,233 $24,976 $25,226
Max. revenue variance, previous ten years 13%13%13%13%13%
Risk of revenue loss $1,819 $2,050 $2,296 $2,468 $2,492
CIP Budget $10,216 $10,012 $10,252 $10,555 $10,867
CIP Contingency @10%$1,022 $1,001 $1,025 $1,056 $1,087
Total Risk Assessment value $2,840 $3,051 $3,321 $3,523 $3,579
SECTION 5G: ALTERNATE SCENARIOS
At the UAC’s February 2016 meeting, it was suggested that staff prepare two alternate
scenarios for rate increases. The first (“Target”) scenario keeps the Operations Reserve at or
near the Target level throughout the forecast period as shown in Figure 8 below. The second
(“Minimum”) has no rate change in FY 2017 and lets the Operations Reserve stay at minimum
for five years as shown in Figure 9 below. Both options as well as the proposed rate
adjustments are shown in Table 14.
Table 14: Projected Water Rate Trajectory for FY 2017 to FY 2026
FY
2017
FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
Proposed 6% 9% 9% 6% 2% 2% 2% 3% 5% 3%
Target 3% 20% 3% 2% 3% 3% 2% 4% 2% 4%
Minimum 0% 18% 7% 3% 3% 4% 3% 4% 3% 4%
The Target scenario requires a 3% rate increase (smaller than the proposed 6% increase) in FY
2017, but requires a very large rate increase (20%) in FY 2018 to make up for another year with
a significant deficit with revenues not covering costs. The level of the Operations Reserve in the
target scenario is shown in Figure 8 below.
The Minimum scenario also requires a significant rate increase (18%) in FY 2018 if no rate
change is implemented in FY 2017 with a large (7%) rate increase required for FY 2019. The
level of the Operations Reserve in the target scenario is shown in Figure 9 below.
Staff recommends a 6% water rate increase in FY 2017 to moderate the rate increases that are
projected in FY 2018 while keeping the Water Operations Reserve at healthy levels.
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Figure 8: Operations Reserve at Target Level
Figure 9: Operations Reserve at Minimum for FY 2018 through FY 2021
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SECTION 5H: LONGTERM 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, currently under review, will give CPAU a better picture of the longterm 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 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 6A: 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 system begins with a system of reservoirs and
tunnels in the high Sierra in Yosemite County and is transported by a gravityfed pipeline to the
Bay Area. Currently, the SFPUC is in the midst of a $4.8 billion bondfinanced capital
improvement program (the Water System Improvement Program, or WSIP) to seismically
retrofit the facilities that transport water to the Bay Area. 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
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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 $3.75 per CCF in FY 2016, and is forecasted to increase to over
$5.00 per CCF by FY 2025. Figure 10 shows the SFPUC’s actual wholesale water rate since FY
2009 and a projection through FY 2026. 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 add 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. Parts of SFPUC’s system not included in the WSIP also may
need rehabilitation. Some of these projects are already included in the SFPUC’s rate
projections, but the SFPUC is conducting condition assessments of other “upcountry” facilities,
located in the Sierras in the coming years. If the these assessments identify other facilities that
need replacement, it may result in additional rate increases beyond FY 2020 as new debt is
issued to finance the projects.
In January 2016, the SFPUC provided a range for FY 2017 wholesale water rates of between $4
and $5 per CCF. In February, the SFPUC updated its estimate for FY 2017 to $4.05/CCF, but
there is much uncertainty surrounding the length of the drought and water usage by the
BAWSCA agencies. Since the State has mandated water use reductions for most BAWSCA
agencies by 20% or more, SFPUC’s rates will invariably need to increase since its costs are
almost entirely fixed with no relation to the quantity of water that delivered by the system.
As shown in Figure 10, this year’s projection of SFPUC wholesale rates has increased from the
previous year’s projection. If the drought ends in FY 2017 and sales increase (or at least don’t
decline further), then rate projections may level out. However, if snow and rain do not
materialize, current calls for restricted usage may continue or even be increased.
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Figure 10: Historical and Projected SFPUC Wholesale Water Rate
SECTION 6B: OPERATIONS
CPAU’s Water Utility operations include the following activities:
Administration, a category that includes charges allocated to the Water Utility for
administrative services provided by the General Fund and for Utilities Department
administration, as well as debt service and other transfers. Additional detail on Water
Utility debt service is provided in Section 6D: Debt Service
Customer Service
Engineering work for maintenance activities (as opposed to capital activities)
Operations and Maintenance of the distribution system; and
Resource Management
Appendix D: Description of Water Utility Operational Activities includes detailed descriptions of
the work associated with each of these activities.
From FY 2011 to FY 2015 Operations costs (excluding debt service, rent, and transfers)
increased 3.5% per year on average (see Figure 11). The increases were driven by allocated
charges, which increased by 7% per year on average and increases in other Operations costs,
which increased by roughly 4% per year. Debt service costs increased by $2.4 million per year as
a result of a bond issued to finance the Emergency Water Supply and Storage Project. Transfers
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have varied from year to year, but are expected to remain relatively low and stable through the
forecast period.
In FY 2017 Operations costs are projected to increase by $1 million for a capital lease of
emergency generators for various wells and pump stations. This is a new ongoing cost. Aside
from that, only inflationary increases are projected for Operations costs. Underlying these
projections are assumptions for salary and benefit costs, consumer price index, and other cost
projections that match the City’s longrange financial forecast.
Figure 11: Historical and Projected Operational Costs
SECTION 6C: CAPITAL IMPROVEMENT PROGRAM (CIP)
The Water Utility’s CIP consists of the following types of projects:
Customer connections, which represents the cost when the Water Utility installs new
services or upgrades existing services at a customer’s request in response to
development or redevelopment. CPAU charges a fee to these customers to cover the
cost of these projects.
Ongoing projects, which represent the cost of replacing aging and underrecording
meters and degraded boxes and covers, minor replacements of various types of
distribution system equipment, and the cost of capitalized tools and equipment.
Actual Projected
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One time projects, or large, nonrecurring replacement of system assets (such as
reservoir rehabilitation)
Water main replacement, which represents the ongoing replacement of aging water
mains, and sometimes the services associated with those mains.
Table 15 shows the FY 2016 adopted budget, with actual spending and remaining budget as of
December 31, 2015. Also included is 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 15: Budgeted Water Utility CIP Spending ($000)
*Includes unspent funds from previous years carried forward or reappropriated into the current
fiscal year
**Equal to Reserve for Reappropriations + Reserve for Commitments.
The water main replacement program funds the replacement of deteriorating water mains. The
water system consists of over 236 miles of mains, approximately 2000 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. Mains are selected 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 highdensity polyethylene (HDPE) for its mains. Installation costs
for this material are slightly higher, though lifecycle costs are lower, and the material
performs better. Joints in distribution mains are the most likely place for failure, and
sections of HDPE pipe can be fused together rather than connected with fittings. In the
long run, this will reduce losses and maintenance costs.
To take full advantage of HDPE’s fusibility, CPAU is now replacing the services along
with the water mains with new HDPE services. In the past, the existing services were
reconnected, regardless of the material. This new practice costs more in the short run,
but will provide long term benefits.
Lastly, costs have escalated after the recession.
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These factors have created some uncertainty in future water main replacement costs. If the
cost of water main replacement continues at its current levels, water main replacement
budgets will need to be increased by $1M to $2M per year to keep up the current pace of main
replacement. 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%. This
makes it a good time to reevaluate the program. CPAU initiated a master planning process in
FY 2015 to evaluate the current state of the distribution system and determine the necessary
rate of main replacement in future years. Currently the utility replaces about 1.3% of the
system each year, which is an 80year replacement cycle. The master planning process may
reveal a need for a higher main replacement rate, or may reveal that pipes are currently in good
condition and a lower rate of replacement is sufficient. Results are being reviewed and follow
up questions prepared.
If this study determines that a lower rate of main replacement is acceptable, increases to water
main replacement project budgets may not be necessary. Likewise, if the permile costs of main
replacement come down, that would also reduce or eliminate the need to increase main
replacement budgets. A combination of reduced costs and a reduced rate of main replacement
could even allow CPAU to reduce those budgets. However, if permile main replacement costs
stay at their current levels and the study reveals the need to maintain the same rate of main
replacement (or a higher rate), CPAU’s CIP costs would rise.
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. The final
report with recommendations is expected to be available in 2016.
Ongoing Projects and Customer Connections are projected to cost approximately $1.9 million in
FY 2016 and increase by 3.5% 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
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 2016 to FY 2020 is funded by utility rates
and capacity fees. The details of the plan are shown in Appendix B: Water Utility Capital
Improvement Program (CIP) Detail.
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SECTION 6D: 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.
The cost of debt service for the Water Utility’s share of these bond issuances for the financial
forecast period is shown in Table 16:
Table 16: Water Utility Debt Service ($000)
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
2009 Water Revenue Bonds,
Series A (net of grants)
2,002 2,012 2,031 2,046 2,064 2,079 2,101 2,151
2011 Utility Revenue Bonds,
Series A 657 657 656 654 656 657 657 657
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.
The net revenues (but not the reserves) of the Water Utility are also pledged for one other
bond as shown in Table 17 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.
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Table 17: Other Issuances Secured by the Water Utility’s Revenues or Reserves
Bond Issuance Responsible
Utilities
Annual Debt
Service ($000)
Secured by Water Utility’s:
Net Revenues Reserves
1995 Series A Utility
Revenue Bonds Storm Drain $680 Yes No
SECTION 6E: OTHER REVENUES
The Water Utility receives most of its revenues from sales of water, but about 7% comes from
other sources. The largest revenue source in FY 2015 was a onetime return of previously
budgeted CIP dollars (36%). The next largest source is connection and capacity fees, which in FY
2015 represented 29% of revenue from sources other than water sales. The remainder
consisted of a variety of miscellaneous charges and transfers.
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
Sales revenue projections are based on the load forecast in Section 5A: Load Forecast and the
projected rate changes shown in Figure 5. Except where stated otherwise, these load forecasts
are based on normal precipitation. Precipitation can vary substantially, however, even in non
drought years, and this can affect revenues substantially. In dry years customers use more
water, increasing revenues, and in wet years they use less. These variations happen in the
winter, since summers have virtually no local precipitation regardless of whether it is a dry or
wet year. The variations are most likely related to winter irrigation demand.
SECTION 7: COMMUNICATIONS PLAN
In FY 2017, communications will continue to focus on water utility rate increases, including the
reasons why and how rates may change contingent upon continued drought conditions. The
City will also communicate 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 inserts, print ads, videos
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for web and television, social media posts 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 drought conditions and importance of
water use efficiency, tying in the message 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 include bill inserts, web updates, email blasts, 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 yearround. 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 reappropriated from previous years, as described in
Section 4 (Reserve for Reappropriations)
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 Reappropriations
At the end of each fiscal year the Reserve for Reappropriations will be set to an amount
equal to the amount of all remaining capital and noncapital 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 3Section 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 6B: Operations of this Financial Plan.
Administration: Accounting, purchasing, legal, and other administrative functions provided by
the City’s General Fund staff, as well as shared communications services, CPAU administrative
overhead, and billing system maintenance costs. This category also includes Water Utility debt
service and rent paid to the General Fund for the land associated with reservoirs and various
other facilities.
Customer Service: This category includes the Water Utility’s share of the call center, meter
reading, collections, and billing support functions. Billing support encompasses staff time
associated with bill investigations and quality control on certain aspects of the billing process. It
does not include maintenance of the billing system itself, which is included in Administration.
This category also includes CPAU’s key account representatives, who work with large
commercial customers who have more complex requirements for their water services.
Engineering (Operating):The Water Utility’s engineers focus primarily on the CIP, but a small
portion of their time is spent assisting with distribution system maintenance.
Operations and Maintenance: This category includes the costs of a variety of distribution
system maintenance activities, including:
investigating reports of damaged mains or services and performing emergency repairs;
testing and operating valves;
monitoring water quality and reservoir levels;
monitoring the status of the different pressure zones;
flushing water at hydrants and other closed end points of the system;
building and replacing water services for new or redeveloped buildings; and
testing and replacing meters to ensure accurate sales metering.
This category also includes a variety of functions the utility shares with other City utilities,
including:
the Field Services team (which does field research of various customer service issues);
the Cathodic Protection team (which monitors and maintains the systems that prevent
corrosion in metal tanks and reservoirs); and
the General Services team (which manages and maintains equipment, paves and
restores streets after gas, water, or sewer main replacements, and provides welding
services)
Resource Management:This category includes water procurement, contract management,
water resource planning, interaction with BAWSCA, the SFPUC, and the SCVWD, and tracking of
legislation and regulation related to the water industry.
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APPENDIX E: SAMPLE OF WATER UTILITY OUTREACH COMMUNICATIONS
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