HomeMy WebLinkAboutRESO 9974
6055486
Reference Document: FY22 Water Utility Financial Plan
Resolution No.9974
Resolution of the Council of the City of Palo Alto Approving the FY 2022
Water Utility Financial Plan and Reserve Transfer
R E C I T A L S
A. Each year the City of Palo Alto (“City”) regularly assesses the financial position of its
utilities with the goal of ensuring adequate revenue to fund operations. This includes making
long-term projections of market conditions, the physical condition of the system, and other
factors that could affect utility costs, and setting rates adequate to recover these costs. The
City 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 approves the FY 2022 Water Utility Financial Plan.
SECTION 2. The Council hereby approves a transfer from the Operations Reserve to
the Capital Improvement Projects Reserve of up to $13,240,000 in FY 2022 as described in the
FY 2022 Water Utility Financial Plan. Annual capital program contributions beyond FY 2022 will
be approved by Resolution annually.
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Reference Document: FY22 Water Utility Financial Plan
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SECTION 3. The Council finds that the adoption of this resolution does not meet
the California Environmental Quality Act’s (CEQA) definition of a project under Public
Resources Code Section 21065 and CEQA Guidelines Section 15378(b)(5), because it is an
administrative governmental activity which will not cause a direct or indirect physical
change in the environment, and therefore, no environmental review is required.
INTRODUCED AND PASSED: June 21, 2021
AYES: BURT, DUBOIS, KOU, STONE
NOES: CORMACK, FILSETH, TANAKA
ABSENT:
ABSTENTIONS:
ATTEST:
________________________________ ________________________________
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
________________________________ ________________________________
Assistant City Attorney City Manager
________________________________
Director of Utilities
________________________________
Director of Administrative Services
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WATER UTILITY FINANCIAL PLAN
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FY 2022 WATER
UTILITY
FINANCIAL PLAN
FY 2022 TO FY 2026
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FY 2022 WATER UTILITY
FINANCIAL PLAN
FY 2022 TO FY 2026
TABLE OF CONTENTS
Section 1: Definitions and Abbreviations................................................................................ 4
Section 2: Executive Summary and Recommendations ........................................................... 4
Section 2A: Overview of Financial Position .................................................................................. 4
Section 2B: Summary of Proposed Actions .................................................................................. 7
Section 3: Detail of FY 2022 Rate and Reserves Proposals ....................................................... 8
Section 3A: Rate Design ............................................................................................................... 8
Section 3B: Current and Proposed Rates ..................................................................................... 8
Section 3C: Proposed Reserve Transfers .................................................................................... 11
Section 4: Utility Overview .................................................................................................. 12
Section 4A: Water Utility History ............................................................................................... 13
Section 4B: Customer Base ........................................................................................................ 14
Section 4C: Distribution System ................................................................................................. 14
Section 4D: Cost Structure and Revenue Sources ...................................................................... 14
Section 4E: Reserves Structure ................................................................................................... 15
Section 4F: Competitiveness ...................................................................................................... 15
Section 5: Utility Financial Projections ................................................................................. 16
Section 5A: Load Forecast .......................................................................................................... 16
Section 5B: FY 2016 to FY 2020 Cost and Revenue Trends ........................................................ 18
Section 5C: FY 2020 Results ....................................................................................................... 19
Section 5D: FY 2021 Projections ................................................................................................ 19
Section 5E: FY 2022 – FY 2026 Projections ................................................................................ 20
Section 5F: Risk Assessment and Reserves Adequacy ............................................................... 23
Section 5G: Alternate scenario .................................................................................................. 24
Section 5H: Long-Term Outlook ................................................................................................. 24
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Section 6: Details and Assumptions ..................................................................................... 25
Section 6A: Water Purchase Costs ............................................................................................. 25
Section 6B: Operations .............................................................................................................. 27
Section 6C: Capital Improvement Program (CIP) ....................................................................... 28
Section 6D: Debt Service ............................................................................................................ 33
Section 6E: Other Revenues ....................................................................................................... 34
Section 6F: Sales Revenues ........................................................................................................ 34
Section 7: Communications Plan .......................................................................................... 35
Appendices ......................................................................................................................... 35
Appendix A: Water Utility Financial Forecast Detail ................................................................. 37
Appendix B: Water Utility Capital Improvement Program (CIP) Detail ..................................... 39
Appendix C: Water Utility Reserves Management Practices ..................................................... 40
Appendix D: Description of Water Utility Operational Activities ............................................... 43
Appendix E: Sample of Water Utility Outreach Communications ............................................. 44
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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 FY 2022 through FY 2026.
This Financial Plan provides for revenues to cover the costs of operating the utility safely over
that period 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
Staff expects overall costs in the Water Utility to rise on average by about 4% per year from fiscal
year (FY) 2022 to 2026. Operations cost projections rise on average by about 3% annually through
the projection period. Water supply costs are based on current SFPUC projections and are the
largest individual component of the utility’s costs. The cost of the City’s SFPUC water supply is
increasing over the forecast period due to increasing debt service for a series of major capital
projects on the Hetch Hetchy Regional Water System. However, the SFPUC’s water supply rates
will remain relatively flat through FY 2022 as SFPUC returns to customers reserves it accumulated
in prior years, with rates rising steeply after FY 2022. See Section 6A: Water Purchase Costs for
more information. Capital costs were lower than budgeted in FY 2020. In FY 2021 and 2022 many
of the budgeted capital projects that were deferred from previous years are anticipated to be
completed and reserve funds are available for the majority of those costs. The water utility plans
for a main replacement construction project every other year. Actual capital costs vary from year
to year, however, this financial plan continues with a stable annual capital contribution from the
Operations Reserve to the Capital Improvement Program Reserve (CIP Reserve). This contribution
began in FY 2021 with the adoption of the FY 2021 Water Financial Plan and it promotes rate
stability and continuity in water expenditure levels. Section 6C: Capital Improvement Program
(CIP) provides more detail. Table 1 below shows the costs for the Water Utility from FY 2020
through FY 2026. The “CIP” row in Table 1 includes capital funding needed in FY 2020 and planned
contributions from rates to the CIP Reserve for FY 2021 through FY 2026 and does not include
the additional one-time transfers from the Operations Reserve to the CIP Reserve shown in Table
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4. This differs from planned CIP which is shown in line 12 of Table 4 and is reflected as an expense
in the CIP Reserve.
Table 1: Expenses for FY 2020 to FY 2026 (Thousand $’s)
Expenses
($000)
FY 2020
(act.)
FY 2021
(est.) FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
Water
Purchases
21,773 21,847 21,592 22,867 23,839 26,412 27,266
Operations 18,836 18,573 20,316 20,787 21,918 22,456 22,814
CIP 3,265 8,000 8,240 8,487 8,742 9,004 9,274
TOTAL 43,875 48,420 50,148 52,141 54,500 57,872 59,354
This proposed Financial Plan projects that the Water Utility will need the rate increases shown in
Table 2 in order for revenues to cover costs and reserves to remain within guideline levels. Water
supply costs are projected to increase beginning in FY 2023, water sales are projected to decline
somewhat, and little or no increase is expected in non-sales revenue (e.g., interest, connection
fees). Overall water sales increased approximately 3% during the months affected by the
pandemic. Because weather was also dry during the same time period, which also tends to
increase water sales, COVID-19-related sales impacts are not able to be determined with
specificity. Section 5E: FY 2022 – FY 2026 Projections contains additional detail.
Table 2 also shows rate projections from the last two Financial Plans for FY 2020 and FY 2021;
the proposed rate increases have not changed from the FY 2021 Financial Plan, however they are
lower than the proposed rate increases in the FY 2020 Plan.
Table 2: Proposed and Projected Water Revenue Changes for FY 2022 to FY 2026
Projection FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
Current 0% 5% 5% 5% 5%
FY 2021 Plan 0% 5% 5% 5% -
FY 2020 Plan 3% 6% 6% - -
Table 3 shows the proposed water rate increases broken out into the needed increases to
commodity revenues, to cover the costs of purchasing water from SFPUC and separately the
distribution revenue increases to pay for the upkeep of Palo Alto’s water distribution system.
Table 3: Proposed Commodity and Distribution Water Revenue Changes FY 2022 to FY 2026
Projection FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
Commodity Revenue (SFPUC Purchases) 0% 8% 6% 12%* 6%
Distribution Revenue 0% 3% 4% 0% 4%
Total Revenue 0% 5% 5% 5% 5%
*SFPUC’s projected water supply rate increase in FY 2025 is 13%, however, this Financial Plan
uses the Rate Stabilization Reserves and holds distribution revenue increases to 0% in FY 2025 to
forecast an overall impact to customers of no more than 5% annually.
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The Water Utility’s Rate Stabilization Reserve can be used to smooth rate increases over several
years. In June 2020, Council approved a transfer of $5 million from the Operations Reserve to the
Rate Stabilization Reserve, bringing the balance in the reserve to $9.07 million at FY 2020 year
end. The use of the Rate Stabilization Reserve, together with the cost and revenue projections in
this Financial Plan allow projected CPAU water rates to increase by 5% or less annually over the
next five years. This Financial Plan projects that the Rate Stabilization Reserve will be exhausted
by the end of FY 2026.
The Water Utility also has a Capital Improvement Program (CIP) Reserve that is used to manage
cash flow for capital projects and acts as a reserve for capital contingencies. In FY 2021, the water
utility began funding the CIP Reserve with an annual capital program contribution as well as one-
time transfers for one-time reservoir upgrade projects. The annual capital program contribution
began at a level of $8 million in FY 2021 and this plan proposes $8.24 million in FY 2022 based
upon an estimate of the amount of CIP work there is each year, spread out over the forecast
period. Having these funds in place will address uneven annual funding associated with ongoing
CIP projects, and will be a source for one-time or immediately needed projects. Figure 11 shows
the projected CIP Reserve balances and guideline levels for FY 2022 through FY 2026.
This plan updates the transfer proposals due to the project cost increases for reservoir
replacements. Specifically, the proposed transfers from the Operations Reserve to the CIP
Reserve, in addition to the $3 million transfer that occurred in FY 2020, are $5 million in FY 2022,
$3.5 million in FY 2023, and $3.5 million in FY 2026 (see line 8 in Table 4). Staff will request Council
approval for the transfers beyond FY 2022 in future Financial Plans once the year-end FY 2021
reserve balances are known. At year end FY 2020, an estimated nearly $6 million was considered
unassigned (above the maximum guideline level in the Operations Reserve); the intended use of
these funds is for the reservoir replacements.
Higher bid cost and delays in project schedules resulted in a deferment of main replacement
projects in FY 2017 through FY 2019, temporarily lowering costs. This resulted in the Operations
Reserve being filled to the maximum guideline level, with surplus reserves available to phase in
rate increases more slowly over the forecast period. The maximum guideline level for the
Operations Reserve equals 120 days of operations and maintenance and commodity expense.
Table 4 shows the starting and ending balances for the Operations & Unassigned Reserves
combined, Rate Stabilization Reserve, and CIP Reserve, minimum and maximum Operations
Reserve guideline levels and projected reserve transfers over the forecast period. See Section 3D:
Proposed Reserve Transfers for more details.
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Table 4: Operations & Unassigned, Rate Stabilization and CIP Reserves Starting and Ending
Balances, Revenues, Transfers To/(From) Reserves and Capital Program Contribution
To/(From) Reserves Projected for FY 2021 to FY 2026 ($000)
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
Starting Balance
(1) Operations/Unassigned 19,841 20,684 14,353 9,252 11,718 11,585
(2) Rate Stabilization 9,069 9,069 9,069 9,069 5,000 3,000
(3) CIP 5,726 10,310 10,608 11,615 7,274 11,122
Revenues
(4) Total Revenue 49,015 48,563 50,281 52,632 55,470 57,678
(5) Transfers In 249 254 259 264 269 275
Transfers
(6) Operations/Unassigned - (5,000) (3,500) 4,069 2,000 (500)
(7) Rate Stabilization - - - (4,069) (2,000) (3,000)
(8) CIP - 5,000 3,500 - - 3,500
Capital Program
Contribution
(9) Operations/Unassigned (8,000) (8,240) (8,487) (8,742) (9,004) (9,274)
(10) CIP 8,000 8,240 8,487 8,742 9,004 9,274
Expenses
(11) Total Expenses other than
CIP
(39,936) (41,414) (43,150) (44,634) (47,733) (48,935)
(12) Planned CIP (3,416) (12,942) (10,980) (13,083) (5,156) (21,295)
(13) Transfers Out (484) (494) (504) (1,124) (1,134) (1,145)
Ending Balance
(1)+(4)+(5)+(6)+(9)+(11)+(13) Operations/Unassigned
20,684
14,353
9,252
11,718
11,585
9,684
(2)+(7) Rate Stabilization 9,069 9,069 9,069 5,000 3,000 -
(3)+(8)+(10)+
(12)* CIP 10,310 10,608 11,615 7,274 11,122 2,602
Operations Reserve
Guideline Levels
(14) Minimum 6,644 6,889 7,176 7,522 8,033 8,232
(15) Maximum 13,289 13,778 14,352 15,044 16,066 16,464
* Planned CIP (item 12) is reflected as an expense in the CIP Reserve and does not include CIP
funded through reappropriations or commitments
SECTION 2B: SUMMARY OF PROPOSED ACTIONS
Staff proposes the following action for the Water Utility in FY 2022:
1. A transfer of up to $13.24 million from the Operations Reserve to the CIP Reserve in FY
2022. See Section 6C: Capital Improvement Program (CIP) for more details.
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SECTION 3: DETAIL OF FY 2022 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 Article XIII D of the California Constitution
(Proposition 218) and applicable statutory law. 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), RFC’s 2015 Memorandum: Proposed Water
Rates updating the 2012 Study and analyzing drought rates (Staff Report 5951), as well as RFC’s
2019 Memorandum updating the 2012 study (Staff Report 10295). Staff plans to update the 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.
SECTION 3B: CURRENT AND PROPOSED RATES
The current rates and surcharges became effective on July 1, 2019. 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, and also
the cost of maintaining the capability to deliver a peak flow for that customer based on 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, including most multi-family customers, pay a
uniform price for each CCF used. A separate rate per CCF exists for separately metered irrigation
service.
For July 1, 2021, staff is proposing no rate increase. Water rates are composed of two general
types of costs: commodity and distribution. Commodity costs are mainly volumetric in nature
and charged by the San Francisco Public Utilities Commission (SFPUC). In May 2020, the SFPUC
provided a rate notice letter that their W-25 wholesale rate for agencies with long-term contracts
would remain at $4.10/CCF in FY 2021 and also estimated it would remain at $4.10/CCF in FY
2022. The SFPUC will not determine its final wholesale customer rate for FY 2022 until May or
June, 2021. If SFPUC’s final rate for FY 2022 does increase, the City must notify customers 30 days
in advance of the pass-through rate increase. The May 2020 rate notice contemplates no rate
increase until FY 2024 when 15.2% rate increase would be needed as well as an additional 11.1%
increase in FY 2025. However, this assumes that the wholesale customer balancing account is
fully drained before any wholesale customer rate increases occur. SFPUC also issued a 10-year
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financial plan in February 2020 that illustrates a possible rate trajectory with generally smaller
annual rate increases that begin in FY 2023 instead of FY 2024, which assumes the use of the
balancing account to smooth the needed rate increases. This Financial Plan uses the SFPUC’s 10-
year financial plan rate trajectory.
Distribution rates cover all the costs to deliver water within the City, such as operations,
maintenance, metering, billing, and capital improvements. Prior to 2021, the distribution costs
would fluctuate depending on capital improvement spending. However, in June 2020 the Council
approved a steady amount of funding to the capital reserve beginning in FY 2021 and the amount
to be transferred to the CIP Reserve is approved annually by Council. With this change, the CIP
Reserve now reflects actual fluctuations in CIP expenditures (money spent on actual projects in
a given year). Previously, CIP expenditures were reflected in the Operations Reserve. Table 4 (row
12) shows planned CIP expenditures and the CIP Reserve balance is calculated by taking the
starting balance for the CIP Reserve (row 3), adding the one-time transfers (row 8) and capital
program contributions (row 10) and subtracting planned CIP expenditures (row 12). Section 5E:
FY 2022 – FY 2026 Projections contains a more detailed description of this change. In this way,
although CIP expenditures fluctuate from year to year, the capital program contribution to the
CIP reserve is projected to remain fairly constant over the next five years, increasing by 3% per
year on average. The exception to this is the one-time reservoir replacement costs that will be
funded through one-time transfers from the Operations Reserve. More detail regarding reserve
transfers is in Section 3C: Proposed Reserve Transfers. Operations costs are discussed in Section
6B: Operations, below.
Customers have a separate commodity rate for purchased water from SFPUC relative to the rest
of the distribution-related portion of the volumetric rates. This charge passes-through future
SFPUC rate increases to customers. All customers will pay this separate commodity cost for each
unit of water in addition to the volumetric rate that is applicable for their customer class. The
rates shown below are in addition to the pass-through commodity rate that is charged to
customers based on SFPUC supply charges. The pass-through commodity rate is currently $4.10
per CCF. SFPUC is not anticipated to increase its supply charges in FY 2022. This automatically
adjusting pass-through charge is effective July 1, 2019 through July 1, 2024 pursuant to
Resolution 9844 “Resolution of the Council of the City of Palo Alto Adopting a Water Rate
Increase and Amending Utility Rate Schedules W-1, W-2, W-3, W-4 and W-7, June 17, 2019.”
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Table 5 shows the current consumption charges, which, like the rates in Table 6 and Table 7, are
not proposed to change for FY 2022.
Table 5: Water Consumption Charges ($/CCF)
W-1 (Residential) Volumetric Rates ($/CCF)
Tier 1 Rates 2.56
Tier 2 Rates 5.97
W-2 (Construction) Volumetric Rates ($/CCF)
Uniform Rate 3.61
W-4 (Commercial) Volumetric Rates ($/CCF)
Uniform Rate 3.61
W-7 (Irrigation) Volumetric Rates ($/CCF)
Uniform Rate 5.50
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Table 6 shows the current monthly service charges for rate schedule W-1, W-4 and W-7.
Table 6: Current Monthly Service Charges for W-1, W-4 and W-7
Meter
Size
Monthly Service Charge ($/month based on
meter size)
Residential (W-1) Commercial (W-4)
and Irrigation (W-7)
5/8” 20.25 17.71
3/4” 20.25 23.67
1” 20.25 35.59
1 ½” 65.40 65.40
2” 101.17 101.17
3” 214.44 214.44
4” 381.37 381.37
6” 780.79 780.79
8” 1,436.57 1,436.57
10” 2,271.20 2,271.20
12” 2,986.60 2,986.60
Table 7 shows the current monthly service charges for rate schedule W-3
Table 7: Current Monthly Service Charges for Fire Services (W-3)
Meter
Size
Monthly Service Charge
($/month based on meter
size)
Current (7/1/19)
2” $4.17
4” $25.81
6” $74.96
8” $159.74
10” $287.27
12” $464.02
SECTION 3C: PROPOSED RESERVE TRANSFERS
In the FY 2021 Financial Plan, Council approved a $5 million transfer from the Operations Reserve
to the Rate Stabilization Reserve in FY 2020, which brought the balance in the Rate Stabilization
Reserve to $9.07 at year-end FY 2020. The Rate Stabilization Reserve will be used to offset the
costs of a series of large wholesale supply rate increases that are anticipated to begin annually in
FY 2023. The use of the Rate Stabilization Reserve in this way allows projected CPAU water rates
to increase by 5% or less annually over the next five years. Funds from the Rate Stabilization
Reserve will be drawn down annually beginning in FY 2024 to minimize the need for a rate
increase triggered by increasing costs. See Table 4 above, row 7, for a summary of the reserve
transfers into and out of the Rate Stabilization Reserve. SFPUC projects wholesale rate increases
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from $4.10 per CCF currently to $4.43 per CCF in FY 2023, $4.70 per CCF in FY 2024, and $5.33
per CCF in FY 2025 with annual increases continuing beyond FY 2025.
The Water Utility Reserves Management Practices state that 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 Financial Planning
Period. This Financial Plan recommends withdrawing the funds from the Rate Stabilization
Reserve for the purpose of rate stabilization in FY 2024 through FY 2026, the end of the Financial
Planning Period.
In the FY 2021 Financial Plan, Council approved an $8 million capital program contribution to the
CIP Reserve from the Operations Reserve in FY 2021. This amount is an estimate of the amount
of CIP work there is in a given year, spread out over the forecast period. This Financial Plan
recommends an $8.24 million capital program contribution to the CIP Reserve in FY 2022. Table
4 above shows the proposed capital program contributions in row 10. Having these funds in place
will address uneven annual funding associated with ongoing CIP projects, and will be a source for
one-time or immediately needed projects.
Additionally, in the FY 2021 Financial Plan, Council approved one-time transfers from the
Operations Reserve to the CIP Reserve to fund reservoir replacement costs for the remaining
Corte Madera reservoir replacement costs and the Dahl and Park reservoir replacement costs.
These one-time transfers totaled $8 million ($3 million in FY 2020, $1.5 million in FY 2021 and
$3.5 million in FY 2022). The $3 million transfer in FY 2020 was completed and brought the
balance in the CIP Reserve at year end FY 2020 to $5.726 million. Based upon the costs for the
Corte Madera work, staff estimates that the Park and Dahl reservoirs will each cost $3.5 million
more than anticipated last year. This Financial Plan recommends adding $3.5 million in one-time
transfers in FY 2023 and FY 2026, the years when construction is planned for the remaining two
tank replacements. Based on the projected CIP Reserve balance at year end FY 2021 being at the
maximum guideline level, staff recommends waiting until FY 2022 to transfer the $5 million in
one-time transfers (instead of $1.5 million in FY 2021 and $3.5 million in FY 2022) in order to re-
evaluate once the reserve balances are known at the end of FY 2021.
Projected one-time spending needs for reservoir replacement are shown in Appendix B on the
line labeled “WS-09000 Seismic Water System”. The one-time transfers to the CIP Reserve to pay
for the reservoir replacement costs allows the CIP Reserve to remaining within guideline levels
and sufficiently fund budgeted CIP as fluctuating annual amounts of capital investment occur
going forward. Table 4 shows the proposed capital program contributions in row 8. In addition,
the funds will help to stabilize rate fluctuations for customers that may otherwise result from
fluctuations in capital spending.
Section 4E: Reserves Structure and Appendix A: Water Utility Financial Forecast Detail shows
details of reserves levels.
SECTION 4: UTILITY OVERVIEW
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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.
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, 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 the distribution system needed major
upgrades 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 Regional
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. This has resulted and will continue to result in large increases in the annual debt service
costs assigned to wholesale customers like Palo Alto. After each WSIP project is completed,
wholesale customers must start paying the debt service costs within 3 to 4 years. The majority of
those costs, funded with bond financing, will be paid off over approximately 30 years. The SFPUC
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continues to evaluate its aging system for other needed infrastructure improvements; future
major improvements include dam safety and Mountain Tunnel repairs.
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 (primarily in Los Altos Hills). Approximately
20,100 customers are connected to the water system. Approximately 16,200 (81%) of these are
separately metered residential customers and approximately 3,900 (19%) of these are
commercial, master-metered residential, irrigation and fire service customers.
Judging from seasonal consumption patterns, between 35% and 50% of Palo Alto’s water is used
for irrigation, and that consumption is heavily weather dependent. It also varies significantly by
season. As a result of these two factors, there is significant variability in the amount of water that
is demanded from the system month to month and year to year.
SECTION 4C: DISTRIBUTION SYSTEM
To deliver water to its customers, CPAU owns and operates roughly 236 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 47% of the Water
Utility’s costs in FY 2020, Operational
costs represented 40%, and capital
investment was responsible for the
remaining 13%. Staff projects these
percentage distributions to remain similar
over the forecast period.
Figure 1: Cost Structure (FY 2020)
47%
40%
13%
Supply
Operations
Capital
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The Water Utility’s revenue is primarily
from sales of water and the remainder
from capacity and connection fees,
interest on reserves, and other sources.
Appendix A: Water Utility Financial
Forecast Detail shows more detail on the
utility’s cost and revenue structures.
Approximately 16% of the utility’s
revenues come from fixed service
charges, though most of its costs are
fixed.
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, as well as to manage cash flow for ongoing
capital projects. This reserve 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 8 shows the current water bills for single-family residential customers compared to what
they would be under surrounding communities’ rate schedules. CPAU is among the highest
monthly bills of the group, although bills for smaller water users are less than in some
Figure 2: Revenue Structure (FY 2020)
93%
7%
Sales of Water
Other Revenue
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surrounding communities. These comparison cities are the cities CPAU compares itself to in the
annual budget across all industries.
Table 8: Single-Family Residential Monthly Water Bill Comparison
Usage
(CCF/month)
Residential monthly bill comparison ($/month)*
As of January 2021
Palo
Alto
Menlo
Park
Mountain
View Hayward
Redwood
City
Santa
Clara
Los
Altos
4 $46.89 $52.42 $38.34 $39.20 $54.04 $44.62 $42.99
(Winter median) 7 $70.28 $77.50 $59.37 $60.62 $76.09 $63.91 $60.84
(Annual median) 9 $90.42 $94.23 $73.39 $74.90 $90.79 $76.77 $72.73
(Summer median) 14 $140.77 $136.31 $108.44 $112.51 $138.94 $108.92 $101.62
25 $251.54 $229.06 $227.65 $205.02 $267.39 $179.65 $169.20
* Based on the FY 2013 BAWSCA survey, the fraction of SFPUC as the source of potable water
supply was 100% for Palo Alto, 95% for Menlo Park, 100% for Redwood City, 87% for Mountain
View, 10% for Santa Clara and 100% for Hayward. Los Altos does not receive water supply from
SFPUC.
SECTION 5: UTILITY FINANCIAL PROJECTIONS
SECTION 5A: LOAD FORECAST
Figure 4 shows 40 years of water consumption history. Average water use has trended downward
over time even as Palo Alto’s population has grown. Significant water use reductions over the 40-
year history were in response to requests to reduce water use in the 1976-77 and 1988-92
drought periods. During these periods, customers invested in efficient equipment and modified
behavior to achieve water reduction goals. Reductions in usage achieved during these drought
periods endured even after those periods. More recently, water sales decreased substantially
during the 2007-2009 recession and drought and during the 2014-2017 drought. Usage has
started to return to pre-drought levels, though the level at which usage will finally plateau is
unknown.
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Figure 3: Historical Water Consumption
Figure 4 shows the financial plan forecast of water consumption through FY 2026, as denoted by
the dotted line.
Figure 4: Forecast Water Consumption
During the recent drought, the State mandated a 24% water use restriction for Palo Alto until
May 2016. Customers continue to conserve, but water usage has been increasing. In FY 2020
consumption was influenced by both dry weather and COVID-19 impacts to residents and
businesses. This forecast is based on consumption levels in FY 2018 through FY 2020 and assumes
a continuation of the long-term usage declines over time.
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SECTION 5B: FY 2016 TO FY 2020 COST AND REVENUE TRENDS
Figure 5 and the tables in Appendix A: Water Utility Financial Forecast Detail show how costs
have changed during the last five years as well as how staff projects they will change over the
next five years.
The annual expenses for the water utility rose substantially between 2016 and 2020. The
increases were related to both water purchase costs and operations costs. Water purchase costs
increased 24% from $17.6 million in FY 2016 to $21.8 million in FY 2020. Section 6A: Water
Purchase Costs contains a more in-depth discussion of water purchase costs. Operations costs
increased by about 21% from FY 2016 to FY 2020 while CIP costs have generally increased but
fluctuated down in certain years. For example, in FY 2017, a water main replacement project that
CPAU put out for bid resulted in very few contractors competing, and project bids that were
higher than budgeted. This led to delays due to the changing market conditions and rising CIP
costs. Section 6B: Operations contains more detail regarding operations costs and Section 6C:
Capital Improvement Program (CIP) provides more detail regarding CIP costs. Note that in Figure
5, Capital Investment in the projected years reflects one-time transfers as well as the annual
capital program contribution to the CIP Reserve.
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Figure 5: Water Utility Expenses, Revenues, and Rate Changes:
Actual Expenses through FY 2020 and Projections through FY 2026
SECTION 5C: FY 2020 RESULTS
Actual sales revenues for FY 2020 were higher than projected ($47.1 million vs. $45.5 million).
Operating costs and capital funding needs were lower during FY 2020, mainly due to deferrals of
capital spending, and lower than expected water purchase costs due to low non-revenue water.
Table 8 summarizes the variances from forecast.
Table 9: FY 2020, Actual Results vs. Financial Plan Forecast Net Cost/ (Benefit) ($000) Type of change
Higher sales revenues $(1,643) Higher revenues
Capital deferrals $(13,679) Cost savings
Water purchases lower than expected $(404) Cost savings
Operating Expensehigher than expected $226 Cost increase
Net Cost / (Benefit) of Variances $(15,501)
SECTION 5D: FY 2021 PROJECTIONS
Estimated sales revenues are expected to be higher than forecasted in the FY 2021 Financial Plan
by about $1.8 million while other revenue is expected to be lower than forecasted by $1.4 million.
Total revenue is expected to be $0.4 million higher than forecasted. The higher sales revenue is
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in part because the sales decreases forecasted in the FY 2021 Financial Plan, which were made in
light of the COVID-19 pandemic and related economic impacts, have not materialized.
Water purchase costs are expected to be higher than anticipated in the FY 2021 Financial Plan
due to updated sales forecasts. The FY 2021 Financial Plan estimated the CIP funding needed for
FY 2021 to be $5.8 million while the current estimated CIP funding needed for FY 2021 is $3.5
million, a difference of approximately $2.3 million. Operations & Maintenance expense decreases
are anticipated from lower than expected budgets. Table 10 summarizes the changes from the
FY 2021 forecast.
Table 10: FY 2021 Change in Projected Results, 2021 Forecast vs 2022 Forecast ($000) Net Cost/
(Benefit)
Type of
Change
Sales Revenue ($1,826) Revenue increase
Other Revenue (Including Interest Income) $1,394 Revenue decrease
Water Purchases $858 Cost increase
Capital Program Funding ($2,344) Cost decrease
Operations & Maintenance Costs ($869) Cost decrease
Net Cost / (Benefit) of Variances ($2,787)
SECTION 5E: FY 2022 – FY 2026 PROJECTIONS
Figure 5 above shows that on average the 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 by
about 6 percent on average over the forecast period FY 2022 – FY 2026. Operations and capital
costs are also expected to increase at the same rate of inflation used in the City’s preliminary
financial projections (3% to 5% 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.
This Financial Plan addresses revenue losses due to COVID-19 and the ongoing associated
economic effects. So far, the Water Utility has experienced sales and revenue losses in the
commercial customer class and sales and revenue increases from residential customers. From
March 2020 through December 2020, months impacted by the COVID-19 pandemic, commercial
water sales were approximately 12% lower than the same months in 2018 and 13% lower than
the same months in 2019. However, these reductions in water sales were offset by the increases
in residential water sales. The resulting total water sales were 3% higher during March through
December 2020 than during the same months in 2019 and 2018. Because weather was also dry
during the same time period, which also tends to increase water sales, COVID-19-related sales
impacts are not able to be determined with specificity. Staff will continue to monitor water sales
and will recommend adjustments in next year’s financial plan as needed. As shown in Figure 5,
above the Water Utility requires rate increases of between 0% and 5% per year through FY 2026
to provide sufficient revenues to fund annual expenses. This forecast assumes the use of the Rate
Stabilization Reserve annually beginning in FY 2024 to spread the series of large water supply rate
increases expected from the SFPUC over multiple years. In addition, the CIP Reserve is used to
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provide capital funding going forward as well as stabilize rates by stabilizing fluctuations from
year to year in capital spending.
Annually, beginning in FY 2021, a fixed funding amount began to be provided from the Operations
Reserve to the CIP Reserve to fund capital improvements. The proposed amount for FY 2022 is
$8.24 million as shown in Table 3, rows 9 and 10. This amount is an estimate of the amount of
CIP work there is in a given year, spread out over the forecast period. It was derived by calculating
the approximate average annual CIP budget for FY 2022 through FY 2026 less an allowance for
unspent funds and excluding the one-time reservoir replacement costs. The reservoir
replacement costs will be funded through the one-time transfers of $5 million in FY 2022, $3.5
million in FY 2023 and $3.5 million in FY 2026 from the Operations Reserve to the CIP Reserve.
Table 3 shows these transfers in row 8. This approach provides stability to the Operations Reserve
by providing for a steady funding stream for CIP work and by reflecting fluctuations due to CIP
such as project delays or accelerations in the CIP Reserve; ultimately, this stability should provide
more stable customer rates. The use of the CIP Reserve in this way isolates fluctuations due to
CIP delays or accelerations and allow those to be viewed together in the CIP Reserve. Conversely,
other trends or factors affecting the Operations Reserve will be easier to identify and
communicate in that reserve. Without the capital program contribution to the CIP Reserve, the
relative stability of total costs, and revenues shown in Figure 5 would fluctuate greatly from year
to year as shown below in Figure 6.
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Figure 6: Water Utility Expenses, Revenues, and Rate Changes:
Actual Expenses through FY 2020 and Projections through FY 2026
Note that the fluctuations in CIP show a mismatch in many forecasted years between revenues
and costs. Isolating fluctuations in capital investment in the CIP Reserve not only helps provide
adequate funding for needed capital improvements but also shows a more realistic view of the
relationship between costs and revenues as shown in Figure 5.
Figure 7 shows reserves trends based on these cost and revenue projections. The figure shows
credit to the Rate Stabilization Reserve in FY 2020 and the contributions from the Rate
Stabilization Reserve to the Operations Reserve in FY 2024 through FY 2026.
Staff expects the Operations Reserve, the main contingency reserve, to be within the target range
by the end of FY 2023 and for the remainder of the forecast period, and that this reserve will be
adequate to meet all identified risks, as discussed in Section 5F: Risk Assessment and Reserves
Adequacy. In addition, the Unassigned Reserve reflects reserve funds in the Operations Reserve
above the maximum guideline level. These funds will be needed for the reservoir replacement
projects. These excess reserves will be utilized by the end of FY 2023 and must be used before
Rate Stabilization Reserve funds are utilized.
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Figure 7: Water Utility Reserves
Actual Year End Reserve Levels for FY 2020 and Projections through FY 2026
SECTION 5F: RISK ASSESSMENT AND RESERVES ADEQUACY
The Water Utility’s main contingency reserve is the Operations Reserve, and this Financial Plan
proposes using funds and raising rates slowly such that reserves remain well within the guideline
levels throughout the forecast period, as shown in Figure 8. Staff will consider funds in the
Operations Reserve in excess of the maximum to be unassigned. The Operations Reserve is
projected to exceed both the minimum reserve level and the short term risk assessment level
throughout the forecast period.
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Figure 8: Operations Reserve Adequacy
Table 10 summarizes the risk assessment calculation for the Water Utility through FY 2026. The
risk assessment includes the revenue shortfall that could accrue due to lower than forecasted
sales revenue.
Table 11: Water Risk Assessment ($000)
FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
Total non-commodity revenue
$26,322
$26,782
$28,142
$28,728
$29,769
Max. revenue variance, previous ten years 13% 13% 13% 13% 13%
Risk of revenue loss $2,374 $2,416 $2,539 $2,592 $2,685
Total Risk Assessment value $2,374 $2,416 $2,539 $2,592 $2,685
SECTION 5G: ALTERNATE SCENARIO
There is no alternate scenario presented in this Financial Plan.
SECTION 5H: 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, completed in FY 2016 evaluated the current state of the distribution system and determined
the necessary rate of main replacement in the next 20 years. This study factored in seismically
vulnerable mains as well as deteriorating mains. In addition, CPAU’s water supplier, the SFPUC,
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has replaced and seismically strengthened its water transmission infrastructure, which will
benefit Palo Alto and all Hetch Hetchy Regional Water System 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 Valley
Water. These alternatives have been analyzed in the past, and were analyzed again most recently
in the 2017 Water Integrated Resource Plan1. Some of these alternatives may provide cost
savings or increased drought protection. For example, in November, 2019, the City of Palo Alto
entered into an agreement with Valley Water and the City of Mountain View that will provide (1)
funding for a salt removal facility at the Regional Water Quality Control Plant in Palo Alto to
improve the quality of non-potable recycled water used in Palo Alto and Mountain View, (2) a
transfer of treated wastewater from Palo Alto to Valley Water for use in the county south of
Mountain View, and (3) Palo Alto and Mountain View will have a future option to request new
potable or non-potable water supply from Valley Water if needed.
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 inundation, possibly resulting in
higher maintenance and replacement costs. 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 its 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. In January 2021, the SFPUC provided an informal estimate for FY 2022 wholesale water
rates to remain at $4.10 per CCF.
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 30, 2020, 98.8% of the WSIP regional projects
1 2017 Water Integrated Resource Plan: https://www.cityofpaloalto.org/civicax/filebank/documents/56088
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are complete.2 This has resulted and will continue to result in large increases in the annual debt
service costs assigned to wholesale customers like Palo Alto. After each WSIP project is
completed, wholesale customers must start paying the debt service costs within 3 to 4 years. The
currently estimated WSIP completion date is June 30, 2023, as adopted by the SFPUC in April of
2020. In large part because of these WSIP-related debt service costs, the SFPUC’s wholesale
water rate has already increased from $1.43 per CCF in FY 2009 to $4.10 per CCF in FY 2021, and
is forecast to increase to $5.59 per CCF by FY 2026 (these projections are subject to change based
on future SFPUC budget estimates). Figure 9 shows the SFPUC’s actual wholesale water rate
since FY 2009 and a projection through FY 2026 and beyond. Note that the wholesale water rate
decreased in FY 2014, but the apparent rate decrease is due to a debt the BAWSCA agencies
owed to SFPUC being directly paid by the BAWSCA agencies via bond financing. This cost is in
addition to the wholesale water rate and adds about $0.35 to $0.45 per CCF to the wholesale
rate.
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, and dam
safety work slated to occur during the next 10 years. 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 primarily 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.
Total deliveries from the Regional Water System were higher than the five year average in FY
2020. Although reservoir storage in the Regional Water System is at normal levels, precipitation
was well below average in water year 2020 and has continued to be low at the beginning of water
year 2021. If sales continue to trend higher than average, a rate increase is unlikely in FY 2022,
however, if precipitation continues at below average levels, the SFPUC may call for voluntary
water conservation measures.
2 First Quarter FY 2020 - 2021 WSIP Regional Quarterly
Report,https://www.sfwater.org/modules/showdocument.aspx?documentid=16461
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Figure 9: Historical and Projected SFPUC Wholesale Water Rate
During FY 2017 through FY 2020, the balancing account for SFPUC’s wholesale customers built
up an over-collection of revenue due to wholesale customer revenues exceeding costs. There are
several reasons contributing to this: SFPUC sold more wholesale water than its sales projection
used for rate setting, there were cost savings in the wholesale revenue requirement due to the
SFPUC’s debt refinancing, and BAWSCA’s annual review of the wholesale revenue requirement
resulted in credits applied to the balancing account. These balancing account funds will be
refunded approximately between FY 2021 and FY 2024, which allows some rate stabilization of
SFPUC’s wholesale rates. If it weren’t for this rate stabilization effect of the balancing account,
Palo Alto would pay higher rates in FY 2022 for water purchased from SFPUC.
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 potential 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 2016 to FY 2020, overall operations costs increased 5% per year on average (see Figure
10). Operations and Maintenance costs and Resource Management costs were the primary
reasons for the increase, driven primarily by increases in salaries and benefits. Transfers have
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varied from year to year, but staff expect transfers to remain relatively low and stable through
the forecast period.
The financial plan projections align as much as possible with the City’s budget assumptions;
instead of a ten-year General Fund Long Range Financial Forecast, the City presented a
preliminary forecast focusing on FY 2022 based on the current economic climate and continued
unknown impacts of the COVID-19 pandemic.3 This plan projects operations costs to increase by
2 to 3% per year, on average, over the forecast period. Underlying these projections are
preliminary assumptions for non-salary and benefit cost categories from Palo Alto’s Office of
Management and Budget. For salary and benefit assumptions, this financial plan uses estimated
budget annual percentage increases applied to the actual 2020 salaries and benefits which is 8%
in FY 2022 and an average of 3% per year in FY 2023 through FY 2026. These percentage estimates
may change as the budget is refined and finalized this fiscal year.
Figure 10: Historical and Projected Operational Costs
SECTION 6C: CAPITAL IMPROVEMENT PROGRAM (CIP)
The Water Utility’s CIP consists of the following types of projects:
3 Staff Report #11844
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• One-time projects, or large, non-recurring replacement of system assets (such as
reservoir rehabilitation).
• Water main replacement, which represents the ongoing replacement of aging water
mains and the services associated with those mains, as well as seismically vulnerable
mains located in areas where soil is prone to liquefaction.
• Ongoing projects, which represent the cost of replacing aging and under-recording
meters and degraded boxes and covers, minor replacements of various types of
distribution system equipment, and the cost of capitalized tools and equipment.
• Customer connections, which represents the cost when the Water Utility installs new
services or upgrades existing services at a customer’s request in response to
development or redevelopment. CPAU charges a fee to these customers to cover the cost
of these projects.
Table 11 shows the FY 2021 projected budget and the five year CIP spending plan, although these
figures are preliminary pending ongoing budget discussions.
Table 12: Budgeted Water Utility CIP Spending ($000)
This budget does not include allocated overhead, which is estimated to be $0.97 million in 2021
and escalating at 2-4% annually thereafter as shown in the table below. Allocated overhead is
shown below and added to the capital budget as a capital expenditure.
Table 13: Allocated Overhead
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
Allocated Overhead $967,539 $1,006,627 $1,033,504 $1,064,510 $1,096,445 $1,121,882
The water main replacement program funds the replacement of deteriorating water mains or
water mains in liquefaction zones. 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. In recent years, CPAU has already replaced
many miles of the most leak-prone and deteriorated pipes. CPAU is currently pursuing a pipe
replacement program of mains that are subject to recurring breaks based on maintenance history
and 13.5 miles of mains that were identified in the 2015 water system study. CPAU also
coordinates with the Public Works street maintenance program to avoid cutting into newly
repaved streets. The main replacement schedule in this financial plan will allow CPAU to replace
these mains on schedule.
Costs for the water main replacement program are increasing for a variety of reasons:
Project Category
Current
Budget*
Spending,
Curr. Yr
Remain.
Budget**Committed FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
One Time Projects 8,153 (50) 8,103 - 500 7,000 500 600 7,000
Water Main Replacement 3,659 (162) 3,497 - 8,925 425 8,925 425 9,350
Ongoing Projects 2,426 (718) 1,708 - 2,085 2,083 2,183 2,611 3,387
Customer Connections - (375) (375) - 877 905 932 961 989
TOTAL 14,238 (1,305) 12,933 - 12,388 10,413 12,540 4,596 20,726
*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).
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• Fire Code regulations now mandate fire sprinklers for new residential units. To
accommodate increased fire flows, new main replacement projects require larger
diameter pipe.
• CPAU has switched to high-density polyethylene (HDPE) for its mains. Installation costs
for this material are slightly higher, though lifecycle costs are lower, and the material
performs better. Joints in distribution mains are the most likely place for failure, and
sections of HDPE pipe can be fused together rather than connected with fittings. In the
long run, this will reduce losses and maintenance costs.
• To take full advantage of HDPE’s fusibility, CPAU is now replacing the services along with
the water mains with new HDPE services. In the past, the existing services were
reconnected, regardless of the material. This new practice costs more in the short run,
but will provide long term benefits.
• Lastly, costs have escalated after the recession. The regional and even national focus on
infrastructure improvement has created labor shortages in the construction market,
leading to higher bids than were seen in the past.
These factors have created some uncertainty in future water main replacement costs. As bids for
recent projects have consistently come in higher over the last few years, future main replacement
project budgets have been increased 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. In
1993, the long term water main replacement program focused on replacing the oldest and most
degraded parts of the system. Roughly 26% 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 FY 2016 to evaluate the current state of the distribution system and determine the
necessary rate of main replacement in the next 20 years. This study factored in seismically
vulnerable mains as well as deteriorating mains. Mains with recurring maintenance issues are
added to projects as they are identified. Preparing for the future, CPAU is in the process of
evaluating the utility’s asbestos cement pipe (ACP) mains. Over half the mains in the system are
ACP. The ACP pipe has performed very well, but CPAU wants to verify its life expectancy and plan
for its future replacement in 20 to 30 years.
This financial plan addresses these challenges in a way that will allow CPAU to meet its main
replacement needs. This financial plan includes approximately $8.5 million every other year for
main replacement construction. In prior years main replacement construction was planned at
approximately $5.7 million annually. Staff anticipates that larger main replacement construction
projects every other year will attract more contractors to bid on the larger projects.
Included in the one-time project budget are seismic water system upgrades and/or replacement
for the Park 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 the construction work and design for the replacement for Dahl and Park reservoirs will
cost approximately $7 million each in FY 2023 and FY 2026.
One project not included in this forecast is protecting the large water transmission line in the
foothills from seismic events. To date the concrete cylinder pipe has performed well and is not in
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need of immediate replacement. Once the storage issues are addressed, the focus will be to
address the transmission main replacement. 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 $3 million in FY
2021 and increase to approximately $4.3 million 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. 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 2022 to FY 2026 is funded by revenue from
utility rates and capacity fees. Appendix B: Water Utility Capital Improvement Program (CIP)
Detail shows the details of the plan.
Figure 11 below shows the projected CIP Reserve balances from FY 2022 through FY 2026. Figure
12 below shows the projected CIP expenditure fluctuating from year to year with the staggered
main replacement schedule, relative to the more steady capital program contributions to the CIP
Reserve. In FY 2022, the capital program contribution to the CIP Reserve is $8.24 million. The
capital program contribution increases with inflation at a projected level of 3%. Appendix A:
Water Utility Financial Forecast Detail shows the amount of the capital program contributions
under “Expenses” for FY 2021 through FY 2026.
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Figure 11: Projected CIP Reserve Balances FY 2021 to FY 2026
Figure 12: Projected CIP Expenditure,and Projected Capital Program Contribution, FY 2021 to
FY 2026
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SECTION 6D: DEBT SERVICE
The Water Utility’s annual debt service is roughly $3.2 million per year. This is associated with
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, and rehabilitation of existing wells and tanks) which will 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 offering 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:
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Table 14: Water Utility Debt Service ($000)
FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
2009 Water Revenue Bonds, Series A (net of
grants) 2,132 2,151 2,151 2,151 2,151
2011 Utility Revenue Bonds, Series A 657 658 658 658 658
Total 2,790 2,810 2,810 2,810 2,810
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.
SECTION 6E: OTHER REVENUES
The Water Utility receives most of its revenues from sales of water. The next largest source in FY
2020 was service connection fee revenue, which was higher than forecasted and represented
37% of revenue from sources other than water sales; interest income represented 28% of
revenue from sources other than water sales, capacity fees and grants each represented
approximately 13% 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 over the past 10 years
since FY 2010. Connection and capacity fee revenue is reflected in the Operations Reserve.
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 fluctuate from year to year. Over the past
two years, capacity fees have been lower than the average of the last five years while service
connection fees have been higher than the average of the past five years. In total, Staff is
forecasting revenue from these sources to increase at an average of 2% per year in subsequent
years.
Other revenue sources are projected to stay stable through the forecast period, though interest
income 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 5A: Load Forecast and
the projected rate changes shown in Figure 5. Except where stated otherwise, these load
forecasts are based on normal precipitation. Precipitation can vary substantially, and this can
affect revenues substantially. In dry years customers use more water, increasing revenues, and
in wet years they use less. It is difficult to predict customer usage recovery post-drought and
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during the ongoing pandemic. Staff will continue to monitor these patterns and adjust
projections accordingly in subsequent financial plans.
SECTION 7: COMMUNICATIONS PLAN
The Fiscal Year (FY) 2022 Water Utility communications strategy covers these primary areas:
efficiency services and utility bill savings; capital improvement, operations and maintenance for
infrastructure safety and reliability; sustainable water resources management; and cost
containment measures. The City of Palo Alto Utilities (CPAU) communication methods include
use of the utilities website, utility bill inserts, messaging on utility bills, email newsletters, print
and digital ads in local publications, social media, and community messaging platforms.
In FY 2022, CPAU is proposing no increase in water utility rates. FY 2021 year-end Operations
Reserves are projected to be above guideline levels and within guideline levels by year end FY
2022. CPAU will utilize the capital reserve to promote reserve health and provide sufficient funds
for critical capital investments. The focus of communications for water utility rates will continue
to be on cost drivers for future rate increases which are expected to resume in 2023; what CPAU
is doing to keep costs down; and the value of our customers’ investment through their rates.
Future projections for FY 2023-2026 indicate that a 5% annual increase will be necessary to
maintain adequate reserves within a healthy margin while paying for wholesale rate increases.
One of the main reasons for future water utility rate increases includes the continual need for
infrastructure upgrades along the local water distribution system to replace or maintain the
water pipes, mains, and service connections. This necessary maintenance helps prevent leaks,
which cost the utility and rate payers money, and prevents damage to infrastructure which could
exacerbate safety and reliability concerns in the long term. Market economics have continued to
drive up labor and material costs for construction projects. Additionally, CPAU must pay for
commodity water rate increases from the City’s water supplier, the San Francisco Public Utilities
Commission (SFPUC). Any increased supply costs are passed on to CPAU customers. As a not for
profit public utility, CPAU must recover its costs primarily through revenue generated by rates.
Staff maintain a dedicated webpage at cityofpaloalto.org/ratesoverview to provide an overview
on all utility rates, including information on costs, utilities supply resources, infrastructure
projects, and the value of what customers get for what they pay. While print materials and
website pages feature prominently, CPAU is increasing the outreach emphasis on more direct
communication with customers, including through use of social media, email newsletters, digital
ads and videos. Aside from the 2020-2021 COVID-19 shelter-in-place public health order, staff
typically attend community outreach events, safety and emergency preparedness fairs, and
neighborhood meetings to share information on our programs. One example of a new residential
outreach opportunity is through providing information on the Cool Blocks curriculum.
For the water utility, CPAU will continue its outreach on making water conservation a way of life,
regardless of drought or rain conditions, which is in line with the State of California’s current
outreach campaign. CPAU promotes available water use efficiency rebates, incentives and easy
water-saving behaviors. Messaging reinforces the importance of water use efficiency, and that
although rates may increase in the future, efficient usage can help customers avoid seeing a
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significant water cost increase on the utility bill. The City is also exploring opportunities to expand
water reuse, such as through recycled water, to further reduce demands on potable water
supplies.
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 A: WATER UTILITY FINANCIAL FORECAST DETAIL
1 FISCAL YEAR FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
2
3 WATER SUPPLY
4 Purchases (CCF)4,127,085 4,172,038 4,859,576 4,600,987 4,757,199 4,775,311 4,713,232 4,651,960 4,591,484 4,531,795 4,472,882
5 Sales (CCF)3,858,825 3,852,185 4,609,893 4,411,473 4,670,827 4,567,464 4,508,087 4,449,481 4,391,638 4,334,547 4,278,198
6
7 BILL AND RATE CHANGES
8 Variable Charge (Supply)9%7%-6%0%0%0%0%8%6%12%6%
9 Residential Variable Charge (Distribution)5%-2%-4%0%-2%3%0%3%6%3%5%
10 System Average Rate 7%2%1%-1%0%0%0%5%6%7%6%
11 Average Customer Bill (projected)1%0%0%5%5%5%5%
12
13 STARTING RESERVES
14 Reappropriations (Non-CIP)- - - - 258,000 70,000 70,000 70,000 70,000 70,000 70,000
15 Commitments (Non-CIP)347,000 177,273 177,273 284,034 442,000 796,000 796,000 796,000 796,000 796,000 796,000
16 Restricted for Debt Service 3,316,000 3,299,194 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000
17 Emergency Plant Replacement - - - - - - - - - - -
18 Reappropriations & Commitments 9,656,000 10,530,000 13,266,000 11,326,000 15,090,505 11,036,000 11,036,000 11,036,000 11,036,000 11,036,000 11,036,000
19 Capital Reserve 4,000,000 2,726,096 2,726,096 2,726,096 2,726,096 5,726,096 10,310,423 10,608,451 11,615,464 7,274,334 11,122,468
20 Rate Stabilization Reserve 6,567,000 1,877,437 4,069,437 4,069,437 4,069,437 9,069,437 9,069,437 9,069,437 9,069,437 5,000,000 3,000,000
21 Operations Reserve 11,663,836 14,606,828 12,734,948 13,741,000 12,438,456 13,351,122 13,288,922 13,778,100 9,251,924 11,717,950 11,585,196
22 Unassigned - - 7,056,052 7,182,707 8,213,544 6,489,877 7,395,474 574,713 - - -
23 TOTAL STARTING RESERVES 35,549,836 33,216,828 43,289,806 42,589,274 46,498,038 49,798,533 55,226,256 49,192,700 45,098,826 39,154,284 40,869,664
24
25 REVENUES
26 Net Sales 36,136,644 41,657,382 44,078,960 44,134,246 47,136,524 45,296,544 44,805,547 46,484,471 48,774,319 51,549,436 53,678,788
27 Other Revenues and Transfers In 3,258,936 5,829,851 4,116,200 5,218,976 3,927,307 3,967,324 4,011,255 4,055,483 4,121,960 4,189,677 4,273,851
28 TOTAL REVENUES 39,395,579 47,487,233 48,195,160 49,353,223 51,063,831 49,263,868 48,816,802 50,539,954 52,896,278 55,739,112 57,952,639
29
30 EXPENSES
31 Water Purchases 17,626,020 20,075,322 21,957,711 21,210,399 21,773,295 21,846,978 21,592,454 22,867,082 23,839,493 26,412,042 27,265,840
32 Operating Expenses 5.8%-54.7%
33 Administration
34 Allocated Charges 2,953,291 3,151,373 2,809,112 2,626,526 2,799,878 2,846,356 2,961,349 3,040,417 3,131,630 3,225,578 3,300,412
35 Rent 1,803,087 1,720,711 1,775,774 1,832,599 1,904,070 1,942,151 1,980,994 2,030,519 2,091,435 2,154,178 2,218,803
36 Debt Service 3,222,606 3,219,316 3,222,669 3,220,858 3,220,638 3,222,843 3,223,563 3,224,553 3,224,553 3,224,553 3,224,553
37 Transfers and Other Adjustments (377,200) (256,608) 393,607 438,322 474,953 484,452 494,141 504,024 1,124,104 1,134,386 1,144,874
38 Subtotal, Administration 7,601,785 7,834,792 8,201,161 8,118,304 8,399,539 8,495,802 8,660,047 8,799,513 9,571,721 9,738,695 9,888,642
39 Resource Management 592,744 868,038 922,558 963,976 1,159,106 1,174,522 1,245,228 1,280,531 1,318,946 1,358,515 1,381,066
40 Operations and Mtc 5,038,570 5,290,549 5,725,236 5,964,589 7,010,251 7,104,188 8,527,598 8,768,929 9,031,997 9,302,957 9,459,246
41 Engineering (Operating)282,472 355,852 354,597 383,877 401,902 408,051 427,719 439,417 452,600 466,178 475,781
42 Customer Service 2,076,559 1,616,008 1,625,332 1,620,421 1,865,571 1,887,771 2,017,272 2,075,874 2,138,150 2,202,295 2,232,687
43 Allowance for Unspent Budget - - - (427,929) - (496,841) (561,933) (577,703) (595,034) (612,885) (623,757)
44 Subtotal, Operating Expenses 15,592,128 15,965,239 16,828,885 16,623,240 18,836,369 18,573,494 20,315,932 20,786,560 21,918,380 22,455,754 22,813,665
45 Capital Program Contribution^9,082,021 4,110,131 8,169,097 11,791,292 3,265,168 8,000,000 8,240,000 8,487,200 8,741,816 9,004,070 9,274,193
46 TOTAL EXPENSES 42,300,170 40,150,692 46,955,693 49,624,930 43,874,831 48,420,472 50,148,386 52,140,842 54,499,689 57,871,866 59,353,698
47
48 ENDING RESERVES
49 Reappropriations (Non-CIP)- - - 258,000 70,000 70,000 70,000 70,000 70,000 70,000 70,000
50 Commitments (Non-CIP)177,273 177,273 284,034 442,000 796,000 796,000 796,000 796,000 796,000 796,000 796,000
51 Restricted for Debt Service 3,299,194 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000
52 Emergency Plant Replacement - - - - - - - - - - -
53 Reappropriations & Commitments 10,530,000 13,266,000 11,326,000 15,090,505 11,036,000 11,036,000 11,036,000 11,036,000 11,036,000 11,036,000 11,036,000
54 Capital Reserve 2,726,096 2,726,096 2,726,096 2,726,096 5,726,096 10,310,423 10,608,451 11,615,464 7,274,334 11,122,468 2,601,935
55 Rate Stabilization Reserve 1,877,437 4,069,000 4,069,437 4,069,437 9,069,437 9,069,437 9,069,437 9,069,437 5,000,000 3,000,000 -
56 Operations Reserve 14,606,828 12,734,948 13,741,000 12,438,456 13,351,122 13,288,922 13,778,100 9,251,924 11,717,950 11,585,196 9,684,137
57 Unassigned - 7,056,052 7,182,707 8,213,544 6,489,877 7,395,474 574,713 - - - -
58 TOTAL ENDING RESERVES 33,216,828 43,289,369 42,589,274 46,498,038 49,798,533 55,226,256 49,192,700 45,098,826 39,154,284 40,869,664 27,448,072
^ Capital Program Contribution represents levelized amount of CIP funding for the CIP Reserve beginning in FY 2021
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Appendix A (continued)
1 FISCAL YEAR FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
2
3 REVENUES
4 Net Sales 82%92%88%91%89%92%92%92%92%92%92%93%
5 Other Revenues and Transfers In 18%8%12%9%11%8%8%8%8%8%8%7%
6 TOTAL REVENUES 100%100%100%100%100%100%100%100%100%100%100%100%
7
8 EXPENSES
9 Water Purchases 39%42%50%47%43%50%45%43%44%44%46%46%
10 Operating Expenses
11 Administration
12 Allocated Charges 6%7%8%6%5%6%6%6%6%6%6%6%
13 Rent 6%4%4%4%4%4%4%4%4%4%4%4%
14 Debt Service 8%8%8%7%6%7%7%6%6%6%6%5%
15 Transfers and Other Adjustments 0%-1%-1%1%1%1%1%1%1%2%2%2%
16 Subtotal, Administration 20%18%20%17%16%19%18%17%17%18%17%17%
17 Resource Management 1%1%2%2%2%3%2%2%2%2%2%2%
18 Operations and Mtc 13%12%13%12%12%16%15%17%17%17%16%16%
19 Engineering (Operating)1%1%1%1%1%1%1%1%1%1%1%1%
20 Customer Service 5%5%4%3%3%4%4%4%4%4%4%4%
21 Allowance for Unspent Budget 0%0%0%0%-1%0%-1%-1%-1%-1%-1%-1%
22 Subtotal, Operating Expenses 39%37%40%36%33%43%38%41%40%40%39%38%
23 Capital Program Contribution 21%21%10%17%24%7%17%16%16%16%16%16%
24 TOTAL EXPENSES 100%100%100%100%100%100%100%100%100%100%100%100%
25
26 RISK ASSESSMENT DETAIL
27 Distribution Revenue Variance 1,684,153 1,826,395 1,877,534 1,877,534 1,638,217 2,443,814 2,396,824 2,374,493 2,415,969 2,538,630 2,591,503 2,685,422
28 10% CIP Program Contingency 858,037 908,202 411,013 816,910 1,179,129 326,517 - - - - - -
29 Total Risk Asssessment Value 2,542,190 2,734,598 2,288,548 2,694,444 2,817,346 2,770,331 2,396,824 2,374,493 2,415,969 2,538,630 2,591,503 2,685,422
30 Projected Operations Reserve 11,663,836 14,606,828 12,734,948 13,741,000 12,438,456 13,351,122 13,288,922 13,778,100 9,251,924 11,717,950 11,585,196 9,684,137
31 Operations Reserve, % of Risk Value 459%534%556%510%441%482%554%580%383%462%447%361%
32
33 OPERATIONS RESERVE
34 Min (60 days of non-capital expenses)5,230,611 5,145,323 6,320,551 6,375,879 6,219,228 6,675,561 6,644,461 6,889,050 7,175,941 7,521,842 8,033,062 8,232,247
35 Target (90 days of non-capital expenses)9,395,240 8,698,557 9,527,750 10,058,439 9,328,842 10,013,342 9,966,692 10,333,575 10,763,912 11,282,763 12,049,594 12,348,371
36 Max (120 days of non-capital expenses)13,559,870 12,251,790 12,734,948 13,741,000 12,438,456 13,351,122 13,288,922 13,778,100 14,351,882 15,043,684 16,066,125 16,464,495
37 Risk Assessment Value 2,542,190 2,734,598 2,288,548 2,694,444 2,817,346 2,770,331 2,396,824 2,374,493 2,415,969 2,538,630 2,591,503 2,685,422
38
39 DEBT SERVICE COVERAGE RATIO
40 Net Revenues (125% of Debt Service)878%931%1020%1104%1075%1161%1154%1200%1254%1319%1415%1453%
41 Available Reserves (5x Debt Service)*9.9 9.2 12.4 12.1 13.2 14.2 15.9 14.0 12.7 10.9 11.4 7.2
42
*For the purposes of debt covenants, the unrestricted reserves of other utilities may be counted toward the available reserves for meeting this measure. A ratio below 5x means that this utility is relying on
the reserves of other utilities to meet its debt covenants.
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APPENDIX B: WATER UTILITY CAPITAL IMPROVEMENT PROGRAM (CIP) DETAIL
Project #Project Name
Reappropriated / Carried Forward from Previous Years Current Year Funding Proposed Budget Amendments Spending, Current Year Remaining in CIP Reserve Fund Commitments FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
ONE TIME PROJECTS
WS-07000 Regulation Station Imp.681,394 - - (710) 680,684 - - - - - WS-07001 Water Recycling Facilities 391,020 - - - 391,020 - - - - - -
WS-08001 Water Reservoir Coating - - - - - - - - -
WS-09000 Seismic Water System 5,080,313 2,000,000 - (49,007) 7,031,306 - 500,000 7,000,000 500,000 600,000 7,000,000 Subtotal, One-time Projects 6,152,727 2,000,000 - (49,717) 8,103,010 - 500,000 7,000,000 500,000 600,000 7,000,000
WATER MAIN REPLACEMENT PROGRAMWS-12001 WMR- Project 26 - - 5 5 - - - - - -
WS-13001 WMR - Project 27 3,096,590 - - (111,236) 2,985,354 - - - - - WS-14001 WMR - Project 28 562,516 - - (51,178) 511,338 - 8,500,000 - - - -
WS-15002 WMR - Project 29 - - - - - - 425,000 425,000 8,500,000 - -
WS-16001 WMR - Project 30 - - - - - - - - 425,000 425,000 8,500,000 WS-19001 WMR - Project 31 - - - - - - - - - - 850,000
Subtotal, Water Main Replacement Prog.3,659,106 - - (162,409) 3,496,697 - 8,925,000 425,000 8,925,000 425,000 9,350,000
ONGOING PROJECTSWS-80014 Services/Hydrants - - - (42,059) (42,059) 400,000 400,000 400,000 412,000 424,000
WS-80015 Water Meters 1 701,450 - (45,274) 656,177 546,364 562,755 579,638 600,000 1,688,757
WS-02014 W-G-W Utility GIS Data 810,730 (810,730) - (42,994) (42,994) 483,958 498,477 513,431 528,800 544,000 WS-13002 Equipment/Tools - 50,000 - (34,792) 15,208 100,000 50,000 50,000 50,000 50,000
WS-11003 Dist. Sys. Improvements 292,356 269,469 - (294,110) 267,715 277,553 285,880 294,456 305,000 314,000 WS-11004 Supply Sys. Improvements - 749,469 - (12,121) 737,348 277,553 285,880 345,131 715,000 366,000
WS-19000 Mayfield Reservoir 363,253 - - (246,351) 116,902 -
- - - Subtotal, Ongoing Projects 1,466,340 959,658 - (717,701) 1,708,297 - 2,085,428 2,082,992 2,182,656 2,610,800 3,386,757
CUSTOMER CONNECTIONS (FEE FUNDED)
WS-80013 Water System Extensions 72,365 (72,365) - (374,993) (374,993) 877,250 904,595 931,955 960,500 989,000
Subtotal, Customer Connections 72,365 (72,365) - (374,993) (374,993) - 877,250 904,595 931,955 960,500 989,000
GRAND TOTAL 11,350,538 2,887,293 - (1,304,820)12,933,011 - 12,387,678 10,412,587 12,539,611 4,596,300 20,725,757
Funding Sources
Connection/Capacity Fees 1,860,946 - 1,815,524 1,845,990 1,895,819 1,939,875 - Other Utility Funds (Asset Mgmt, GIS Systems)313,242 - 322,640 332,320 342,286 352,533 350,000
Utility Rates 2,887,293 - 10,249,514 8,234,277 10,301,506 2,303,892 20,375,757
CIP-RELATED RESERVES DETAIL 6/30/2020Actual 6/30/21(Unaudited)
Reappropriations & Commitments 11,350,538 12,933,011
DocuSign Envelope ID: 15661066-80E2-4EDC-ACBE-2FA6B7CACCC4
WATER UTILITY FINANCIAL PLAN
March, 2021 40 | Page
APPENDIX C: WATER UTILITY RESERVES MANAGEMENT PRACTICES
The following reserves management practices shall be used when developing the Water Utility
Financial Plan:
Section 1. Definitions
a) “Financial Planning Period” – The Financial Planning Period is the range of future fiscal
years covered by the Financial Plan. For example, for the Water Utility Financial Plan
delivered in conjunction with the FY 2015 budget, FY 2015 to FY 2021 is the Financial
Planning Period.
b) “Fund Balance” – As used in these Reserves Management Practices, Fund Balance refers
to the Utility’s Unrestricted Net Assets.
c) “Net Assets” - The Government Accounting Standards Board defines a Utility’s Net Assets
as the difference between its assets and liabilities.
d) “Unrestricted Net Assets” - The portion of the Utility’s Net Assets not invested in capital
assets (net of related debt) or restricted for debt service or other restricted purposes.
Section 2. Reserves
The Water Utility’s Fund Balance is reserved for the following purposes:
a) For existing contracts, as described in Section 3 (Reserve for Commitments)
b) For operating and capital budgets re-appropriated from previous years, as described in
Section 4 (Reserve for Re-appropriations)
c) For cash flow management and contingencies related to the Water Utility’s Capital
Improvement Program (CIP), as described in Section 5 (CIP Reserve)
d) For rate stabilization, as described in Section 6 (Rate Stabilization Reserve)
e) For operating contingencies, as described in Section 7 (Operations Reserve)
f) Any funds not included in the other reserves will be considered Unassigned Reserves and
shall be returned to ratepayers or assigned a specific purpose as described in Section 8
(Unassigned Reserves).
Section 3. Reserve for Commitments
At the end of each fiscal year the Reserve for Commitments will be set to an amount equal to
the total remaining spending authority for all contracts in force for the Water Utility at that
time.
Section 4. Reserve for Re-appropriations
At the end of each fiscal year the Reserve for Re-appropriations will be set to an amount equal
to the amount of all remaining capital and non-capital budgets, if any, that will be re-
appropriated to the following fiscal year in accordance with Palo Alto Municipal Code Section
2.28.090.
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:
DocuSign Envelope ID: 15661066-80E2-4EDC-ACBE-2FA6B7CACCC4
WATER UTILITY FINANCIAL PLAN
March, 2021 41 | Page
a) The following guideline levels are set forth for the CIP Reserve. These guideline levels are
calculated for each fiscal year of the Financial Planning Period and approved by Council
resolution.
Minimum Level 20% of the maximum CIP Reserve guideline
level
Maximum Level Average annual (12 month)4 CIP budget, for
48 months of budgeted CIP expenses5
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: If, at the end of any fiscal year, the minimum guideline is not met, staff
shall present a plan to the City Council to replenish the reserve. The plan shall be delivered
by the end of the following fiscal year, and shall, at a minimum, result in the reserve
reaching its minimum level by the end of the next fiscal year. For example, if the CIP
Reserve is below its minimum level at the end of FY 2017, staff must present a plan by
June 30, 2018 to return the reserve to its minimum level by June 30, 2019. In addition,
staff may present, and the Council may adopt, an alternative plan that takes longer than
one year to replenish the reserve, or that does so in a shorter period of time.
d) Maximum Level: If there are funds in this reserve in excess of the maximum level staff
must propose in the next Financial Plan to transfer these funds to another reserve, return
the funds to ratepayers, or designate a specific use of the funds for CIP investments that
will be made by the end of the next Financial Planning Period. Staff may also seek City
Council to approve holding funds in this reserve in excess of the maximum level if they
are held for a specific future purpose related to the CIP.
Section 6. Rate Stabilization Reserve
Funds may be added to the Rate Stabilization Reserve by action of the City Council and
held to manage the trajectory of future year rate increases. Withdrawal of funds from the
Rate Stabilization Reserve requires Council action. If there are funds in the Rate
Stabilization Reserve at the end of any fiscal year, any subsequent Water Utility Financial
Plan must result in the withdrawal of all funds from this Reserve by the end of the next
Financial Planning Period. The Council may approve exceptions to this requirement, when
proposed by staff to provide greater rate stabilization to customers.
4 Each month is calculated based upon 1/12 of the annual budget.
5 For example, in the Financial Plan for FY 2021, the 48 month period to use to derive the annual
average is FY 2021 through FY 2024. In the FY 2022 Financial Plan, the 48 month period to use
to derive the annual average would be FY 2022 through FY 2025 etc.
DocuSign Envelope ID: 15661066-80E2-4EDC-ACBE-2FA6B7CACCC4
WATER UTILITY FINANCIAL PLAN
March, 2021 42 | Page
Section 7. Operations Reserve
The Operations Reserve is used to manage normal variations in costs and as a reserve for
contingencies. Any portion of the Water Utility’s Fund Balance not included in the reserves
described in Section 3-Section 6 above will be included in the Operations Reserve unless this
reserve has reached its maximum level as set forth in Section 7(d) below. Staff will manage
the Operations Reserve according to the following practices:
a) The following guideline levels are set forth for the Operations Reserve. These guideline
levels are calculated for each fiscal year of the Financial Planning Period based on the
levels of Operations and Maintenance (O&M) and commodity expense forecasted for that
year in the Financial Plan.
Minimum Level 60 days of O&M and commodity expense
Target Level 90 days of O&M and commodity expense
Maximum Level 120 days of O&M and commodity expense
b) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Operations
Reserve are lower than the minimum level set forth above, staff shall present a plan to
the City Council to replenish the reserve. The plan shall be delivered within six months of
the end of the fiscal year, and shall, at a minimum, result in the reserve reaching its
minimum level by the end of the following fiscal year. For example, if the Operations
Reserve is below its minimum level at the end of FY 2014, staff must present a plan by
December 31, 2014 to return the reserve to its minimum level by June 30, 2015. In
addition, staff may present, and the Council may adopt, an alternative plan that takes
longer than one year to replenish the reserve.
c) Target Level: If, at the end of any fiscal year, the Operations Reserve is higher or lower
than the target level, any Financial Plan created for the Water Utility shall be designed to
return the Operations Reserve to its target level within four years.
d) Maximum Level: If, at any time, the Operations Reserve reaches its maximum level, no
funds may be added to this reserve. Any further increase in the Water Utility’s Fund
Balance shall be automatically included in the Unassigned Reserve described in Section 8,
below.
Section 8. Unassigned Reserve
If the Operations Reserve reaches its maximum level, any further additions to the Water
Utility’s Fund Balance will be held in the Unassigned Reserve. If there are any funds in the
Unassigned Reserve at the end of any fiscal year, the next Financial Plan presented to the City
Council must include a plan to assign them to a specific purpose or return them to the Water
Utility ratepayers by the end of the first fiscal year of the next Financial Planning Period. For
example, if there were funds in the Unassigned Reserves at the end of FY 2015, and the next
Financial Planning Period is FY 2016 through FY 2021, the Financial Plan shall include a plan
to return or assign any funds in the Unassigned Reserve by the end of FY 2016. Staff may
present an alternative plan that retains these funds or returns them over a longer period of
time.
DocuSign Envelope ID: 15661066-80E2-4EDC-ACBE-2FA6B7CACCC4
WATER UTILITY FINANCIAL PLAN
March, 2021 43 | Page
APPENDIX D: DESCRIPTION OF WATER UTILITY OPERATIONAL ACTIVITIES
This appendix describes the activities associated with the various operational activities referred
to in Section 6B: Operations of this Financial Plan.
Administration: Accounting, purchasing, legal, and other administrative functions provided by
the City’s General Fund staff, as well as shared communications services, CPAU administrative
overhead, and billing system maintenance costs. This category also includes Water Utility debt
service and rent paid to the General Fund for the land associated with reservoirs and various
other facilities.
Customer Service: This category includes the Water Utility’s share of the call center, meter
reading, collections, and billing support functions. Billing support encompasses staff time
associated with bill investigations and quality control on certain aspects of the billing process. It
does not include maintenance of the billing system itself, which is included in Administration.
This category also includes CPAU’s key account representatives, who work with large commercial
customers who have more complex requirements for their water services.
Engineering (Operating): The Water Utility’s engineers focus primarily on the CIP, but a small
portion of their time is spent assisting with distribution system maintenance.
Operations and Maintenance: This category includes the costs of a variety of distribution system
maintenance activities, including:
• investigating reports of damaged mains or services and performing emergency repairs;
• testing and operating valves;
• monitoring water quality and reservoir levels;
• monitoring the status of the different pressure zones;
• flushing water at hydrants and other closed end points of the system;
• building and replacing water services for new or redeveloped buildings; and
• testing and replacing meters to ensure accurate sales metering.
This category also includes a variety of functions the utility shares with other City utilities,
including:
• the Field Services team (which does field research of various customer service issues);
• the Cathodic Protection team (which monitors and maintains the systems that prevent
corrosion in metal tanks and reservoirs); and
• the General Services team (which manages and maintains equipment, paves and restores
streets after gas, water, or sewer main replacements, and provides welding services)
Resource Management: This category includes water procurement, contract management,
water resource planning, interaction with BAWSCA, the SFPUC, and Valley Water, and tracking of
legislation and regulation related to the water industry.
DocuSign Envelope ID: 15661066-80E2-4EDC-ACBE-2FA6B7CACCC4
March, 2021 44 | Page
APPENDIX E: SAMPLE OF WATER UTILITY OUTREACH COMMUNICATIONS
DocuSign Envelope ID: 15661066-80E2-4EDC-ACBE-2FA6B7CACCC4
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