HomeMy WebLinkAboutStaff Report 2401-2477Item No. 3. Page 1 of 13
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Utilities Advisory Commission
Staff Report
From: Dean Batchelor, Director Utilities
Lead Department: Utilities
Meeting Date: March 6, 2024
Staff Report: 2401-2477
TITLE
Staff Recommend the Utilities Advisory Commission Recommend that the City Council Adopt a
Resolution: 1) Approving the FY 2025 Wastewater Collection Utility Financial Plan 2) Amending
Rate Schedules S-1 (Residential Wastewater Collection and Disposal), S-2 (Commercial
Wastewater Collection and Disposal), S-6 (Restaurant Wastewater Collection and Disposal) and
S-7 (Commercial Wastewater Collection and Disposal – Industrial Discharger), and 3) Approving
up to a $3 million enterprise transfer loan from the Fiber Optics Fund to the Wastewater
Collection Utility’s Operations Reserve in FY 2024.
RECOMMENDATION
Staff request that the Utilities Advisory Commission (UAC) recommend that the City Council
adopt a resolution (Attachment A):
1. Approving the Fiscal Year (FY) 2025 Wastewater Collection Financial Plan (Attachment A,
Exhibit 1); and
2. Increasing Wastewater Collection Utility Rates Via the Amendment of Rate Schedules
S-1 (Residential Wastewater Collection and Disposal), S-2 (Commercial Wastewater
Collection and Disposal), S-6 (Restaurant Wastewater Collection and Disposal) and S-7
(Commercial Wastewater Collection and Disposal – Industrial Discharger) (Attachment
A, Exhibit 2); and
3. Approving up to a $3 million enterprise transfer loan from the Fiber Optics Fund to the
Wastewater Collection Utility’s Operations Reserve in FY 2024.
EXECUTIVE SUMMARY
The fiscal year (FY) 2025 Wastewater Collection Utility Financial Plan (Attachment A, Exhibit 1)
includes projections of the utility’s costs and revenues through FY 2029. The Financial Plan
anticipates costs will rise over the forecast horizon due to increasing treatment costs related to
capital improvements and operational costs at the Regional Water Quality Control Plant
(RWQCP), as well as increasing collection system operational and Capital Improvement Program
(CIP) costs.
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In 2023, the Council approved the first in a series of rate increases which incorporated expected
costs for the City to accelerate its rate of sewer main replacements from 1 mile to 2.5 miles per
year by FY 26 (implemented as a major sewer replacement project of 5 miles every other year).
The accelerated rate of main replacement was calculated to replace all aging sewer mains within
8 years beyond their 100-year life expectancy. Additionally, in FY 2023 the Wastewater Utility
accelerated by a year the most expensive sewer main replacement that the utility has ever
completed (Staff Report 2301-0808, May 8, 2023 approving contract for Sanitary Sewer
Replacement Project 31, WC-19001). Council approved transfers of all funds from the CIP Reserve
($3.178 million) and from the Rate Stabilization Reserve ($0.34 million) to the Operations Reserve
to utilize all available funds to accelerate construction in coordination with Caltrans’ repaving
plans for the affected section of El Camino. Staff projected that expenditures related to Sanitary
Sewer Replacement Project 31 would bring the Operations Reserve temporarily down to the
minimum guideline range.
However, in FY 2023, costs were higher than forecasted, primarily for CIP-related costs (e.g.,
construction cost, CIP allocated costs, salaries and benefits not assigned to a specific CIP project)
and transfers out to capital projects. Concurrently, revenue was lower than forecasted (primarily
capacity fee revenue) and as a result, the Operations Reserve ended the year with a negative
balance of $0.7 million. Additionally, in the current year, the Wastewater Utility increased rates
by 9% for non-residential customers, however revenues (other than restaurants) are projected
to decline by 4% from FY 2023. This may be due to wet weather and reductions in winter water
usage.
In an effort to increase the currently low reserve levels, staff recommends a 15% rate increase in
FY 2025, which is equivalent to $7.29 per month per residential customer. This proposal would
include proceeding with a reduced-size main replacement in FY 2026 of 1.25 miles instead of 5
miles due to the low reserve and revenue levels. This would allow the highest priority mains to
be replaced while allowing the reserves to replenish before the next major project. The 5-mile
sewer main replacement every other year would resume with construction scheduled in FY 2028.
With this schedule of main replacement, the last remaining sewer main would be 110 years old
at the time it is replaced instead of 108 years old.
Staff presented a 9% preliminary wastewater rate increase to the Utilities Advisory Commission1
(UAC) in January. Commissioners suggested staff consider a higher rate increase to reduce the
amount of capital deferral and to restore reserve balances. Commissioners noted Palo Alto’s
favorable sewer rates compared with neighboring agencies, the need to address low reserve
levels, and the need to not further defer capital. The attached Financial Plan includes an
alternative with a 9% rate increase each year that considers fully deferring sewer main
replacement until FY 2028. This alternative would provide sufficient funding for the last
remaining sewer main to be 111 years old at the time it is replaced while maintaining Palo Alto’s
rates below the rates of neighboring agencies.
1 Staff Report 2309-2080 https://www.cityofpaloalto.org/files/assets/public/v/2/agendas-minutes-
reports/agendas-minutes/utilities-advisory-commission/archived-agenda-and-minutes/agendas-and-minutes-
2024/01-jan-2024/01-03-2024-packet.pdf .
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Operating wastewater assets past their useful life increases the likelihood of substantial pipe
failures potentially resulting in additional repair and maintenance costs, sanitary sewer
overflows, sinkholes, or other catastrophic impacts. Both of the alternative rate increases and
their associated infrastructure delays presented here attempt to minimize ratepayer impacts
while also prudently managing the City’s infrastructure and maintaining an acceptable level of
risk.
BACKGROUND
Every year staff presents the UAC with Financial Plans for the Electric, Gas, Water, and
Wastewater Collection Utilities. The Financial Plans recommend rate adjustments if necessary to
maintain the financial health of these enterprises. These Financial Plans include a comprehensive
overview of the operations of each enterprise, both retrospective and prospective, and are
intended to be a reference for UAC, Finance Committee, and Council members as they review
the budget and staff’s rate recommendations. Each Financial Plan also contains a set of Reserves
Management Practices describing the reserves for each utility and the management practices for
those reserves.
The City’s sewer system collects wastewater from Palo Alto residents and delivers it to the
RWQCP for treatment. The City of Palo Alto runs the RWQCP, which also treats wastewater for
five other partner agencies (Stanford, East Palo Alto Sanitary District, Los Altos Hills, Los Altos,
and Mountain View). Some of the wastewater for certain partner agencies is also transported
across the City’s wastewater collection system.
The Wastewater Collection Utility has two main costs: the costs of operating the collection
system and Palo Alto’s share of the cost of running the RWQCP (treatment costs).2 Both cost
components have been increasing and are expected to continue to increase. Increases in
collection system capital costs are primarily driving the increased collection system costs. The
utility is in the process of increasing the rate of sewer main replacement projects from 1 mile to
2.5 miles per year (going from 2 miles to 5 miles per project constructed every other year) to
fulfill the goal of replacing pipes near their life expectancy. Staff’s experience suggests that pipe
can last around 100 years in Palo Alto’s underground condition. At the conclusion of the currently
ongoing main replacement, there will be 136 miles of original sewer mains to be replaced or
rehabilitated and most of these are vitrified clay pipe originally installed between 1950 and 1970.
Staffing and inspection capacity exists to replace 2.5 miles per year on average. Reducing the size
of the sewer main replacement in FY 2026 and beginning the first 5-mile main replacement
project in FY 2028, the ~60 year cycle of replacement will mean the last sewer main replaced is
110 years old at the time it is replaced. Additionally, staff expects construction cost inflation to
impact future main replacement costs and assumes this alone will increase CIP costs 5.4%
annually.
2 The costs associated with the RWQCP are shared among Palo Alto and the partner agencies based primarily on
wastewater flows and the composition of the wastewater each agency sends to the treatment plant. Palo Alto’s
share varies from year to year but is roughly one third of the total cost.
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The RWQCP (Treatment Plant) has been in operation since 1934. Aging equipment, new
regulatory requirements, and the movement to full sustainability will require rehabilitation,
replacement and new processes. Debt service for the plant is expected to increase substantially
in coming years as a major rehabilitation and replacement plan adopted in 2012 (Long Range
Facilities Plan3) is implemented. For example, the $193 million Secondary Treatment Upgrades
capital project is in construction, and the $51.7 million Headworks Facility is in engineering
contract negotiations. The RWQCP is also beginning an update to the Long Range Facilities Plan
and plans to begin this work in 2024 and complete the plan in 2026. The results of this work will
direct future CIP work at the Treatment Plant. Additionally, the plan will re-evaluate the cost of
service for annual operating shares and re-evaluate the fixed allocation capacity shares for each
partner.
ANALYSIS
Staff completes an annual assessment of the financial position of the City’s wastewater collection
utility to ensure adequate revenue to fund operations, in compliance with the cost of service
requirements set forth in the California Constitution (Proposition 218). This includes making long-
term projections of market conditions, the physical condition of the system, and other factors
that could affect utility costs, and setting rates adequate to recover these costs. The rates
proposed in this Financial Plan were developed based on the 2021 Cost of Service and Rate Study
completed by Raftelis Financial Consultants, Inc., the “City of Palo Alto 2021 Wastewater COS
Report.”4
The FY 2025 Wastewater Collection Financial Plan describes Council’s proposed actions in detail.
staff recommends increasing wastewater rates as shown in Table 1 below, effective July 1, 2024,
with a system average rate increase of 15%, as shown in the amended rate schedules included
as Attachment A, Exhibit 2. Additionally, staff added an alternative rate proposal with a 9% rate
increase, which was the preliminary rate proposal presented to the UAC in January. This
alternative is described in more detail in the FY 2025 Financial Plan (Attachment A, Exhibit 1) and
outlined in the amended rate schedules shown in Attachment A, Exhibit 3. Table 2 below shows
the residential bill impacts of the rate proposal compared to the alternative.
Residential customers pay a monthly fixed sewer service charge while commercial customers
(other than restaurants) are billed monthly based on average winter water usage for the months
of January, February and March, applied in the following July. This closely approximates non-
irrigation water consumption, which represents sewer use. Restaurant customers are charged
based on monthly water usage as they generally lack irrigation but are charged higher rates due
to higher grease and oil discharges necessitating additional treatment costs. Currently there are
3 Long Range Facilities Plan https://www.cityofpaloalto.org/files/assets/public/v/1/public-works/water-quality-
control-plant/lrfp-final-report-08-2012.pdf
4 A cost of service study is a study using industry-standard techniques to determine how the costs of running the
utility should be recovered from its customers. Charges to each customer are set in proportion to the cost of
serving that customer. https://www.cityofpaloalto.org/files/assets/public/v/1/agendas-minutes-
reports/reports/city-manager-reports-cmrs/attachments/08-09-2021-id-12378-att-f-2021-wastewater-cos-
report.pdf
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no customers on the S-7 (Industrial) rate schedule; however, CPAU continues to maintain the S-
7 rate schedule in case of future need.
Table 1: Current and Projected Wastewater Collection Charges With 15% System Average
Rate Increase in FY 2025
ChangeCurrent
(as of 7/1/2023)
Proposed
(effective 7/1/2024)$%
Monthly Service Charges ($/Month)
S-1 (Residential)Service Charge $ 48.64 $55.93 $ 7.29 15%
Water Quantity Rates ($/CCF)
S-2 (Commercial) Quantity Rates 9.08 10.44 1.36 15%
S-6 (Restaurant)Quantity Rates 13.55 15.58 2.03 15%
FY 2025 Financial Plan’s Rate Adjustments for the Next Five Fiscal Years
Table 2 shows the residential wastewater bill impact of the rate adjustment proposal compared
with the alternative included in the Wastewater Collection Utility Financial Plan.
Table 2: Projected Residential Bill Impact, Rate Increase Percentage, Estimated Monthly
Sewer Bill, and Net Difference in Monthly Bills FY 2025 to FY 2029
Alternatives FY 2025 FY 2026 FY 2027 FY 2028 FY 2029
7.29 5.03 5.48 5.31 5.02 Proposal: 15% in
FY 2025 15%9%9%8%7%
4.37 4.77 5.20 5.66 6.17
Estimated Bill Impact for
Residential Customers
($/mo.) and Rate
Increase Percentage (1)Alternative: 9% in
FY 2025 9%9%9%9%9%
Proposal: 15% in
FY 2025 55.93 60.96 66.44 71.75 76.77 Estimated Monthly
Sewer Bill ($)
Alternative: 9% in
FY 2025 53.01 57.78 62.98 68.64 74.81
Net Difference in
Monthly Bills ($)
15% vs. 9% in FY
2025 2.92 3.18 3.46 3.11 1.96
(1) estimated impact on residential wastewater monthly bill, which is currently $48.64.
The difference between the 15% and 9% scenarios is $2.92 per residential customer per month
in FY 2025 and ranges from $3.46 in FY 2027 to $1.96 per month per residential customer by the
end of the forecast period.
The proposal would decrease the duration the sewer main assets are operated past their
estimated useful life and allow for the highest priority main to be replaced in FY 2026. The longer
that wastewater assets are operated past their useful life, the greater the risk of substantial pipe
failures, potentially resulting in additional repair and maintenance costs, sanitary sewer
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overflows, sinkholes, or other catastrophic impacts. Table 3 shows the alternate rate scenarios
and estimated age of the last remaining sewer main replaced for each alternative.
Table 3: Alternate Scenarios for Wastewater Rate Changes
FY 2025 – FY 2026
Main Replacement a
Budget Length
(miles)
FY
2025
FY
2026
FY
2027
FY
2028
FY
2029
Age of Last
Remaining Sewer
Main Replaced
15%9%9%8%7%Proposal: 15%
in FY 2025 $3M ~ 1.25 $7.29 $5.03 $5.48 $5.31 $5.02 110 years
9%9%9%9%9%Alternative: 9%
in FY 2025 $0 0 $4.37 $4.77 $5.20 $5.66 $6.17 111 years
a) The estimated budget for a 5-mile sewer main replacement in FY 2025 – FY 2026 is $11.6 million.
As noted above, one of the main drivers for the increase in the Wastewater Collection Utility’s
costs (and therefore rates) over the next several years is the cost for wastewater treatment,
which is projected to increase by an average of 7.2% annually from FY 2024 to FY 2029 as the City
makes several upgrades to the aging RWQCP. Increases to capital expenses begin in FY 2024 with
the Joint Intercepting Sewer Rehabilitation construction, funded on a pay-as-you-go basis. The
Wastewater Utility begins to pay for debt service for major projects beginning with the Primary
Sedimentation Tank in FY 2025, Outfall Line Construction in FY 2027, Secondary Treatment
Upgrades in FY 2029 and Headworks in FY 2030.
Staff anticipates Wastewater Collection operations and CIP costs (excluding costs associated with
treatment) will increase by approximately 9.6% annually from FY 2024 to FY 2029. The
Wastewater Collection Utility undertakes a larger main replacement project every other year.
Undertaking a large main replacement project every other year will allow staff to continue
replacing wastewater mains that are in poor condition, while easing scheduling difficulties for
inspection coverage due to shared staffing across water, wastewater, gas, and large development
services projects. Over the last few years, main replacement costs have been increasing for
utilities due to economic activity in the Bay Area causing construction cost inflation. Utilities has
bid one sewer project since the pandemic began. There are no indications of a decrease in
construction costs in the near future.5
Figure 1 and 2 below illustrate the increase in the Wastewater Collection Utility’s costs. RWQCP
costs for the Wastewater Collection Utility are included in “Treatment,” while “Capital” and
“Operations” include only collection system costs. 31% of the increase from FY 2019 to FY 2029
5 As an additional reference, the California Construction Cost index from December 2022 to December 2023 was
9.4%. See: https://www.dgs.ca.gov/RESD/Resources/Page-Content/Real-Estate-Services-Division-Resources-List-
Folder/DGS-California-Construction-Cost-Index-CCCI
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is due to treatment cost increases, 25% is due to increases in operations costs, and collection
capital costs are responsible for 44% of the increase.
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Figure 1: FY 2019 and FY 2029 Costs ($ Millions)*
* In Figure 1, FY 2019 Capital represents an average of capital costs in FY 2019 and FY 2020 and the FY
2029 Capital represents the capital program contribution from the Operations Reserve to the CIP
Reserve.
Figure 2: Percentage of Cost Increase from FY 2019 to FY 2029 Attributed to Treatment, and
Operations Costs
To promote rate stability and provide continuity in collection system CIP expenditure levels, in
2021 the Council approved a steady annual capital program contribution from the Operations
Reserve to the CIP Reserve. The CIP Reserve would then absorb annual spending fluctuations,
0
2
4
6
8
10
12
14
16
Treatment Capital Operations
FY 2019 FY 2029
31%
44%
25%
Treatment Capital Operations
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reducing the impact on the Operations Reserve. However, all of the funding was transferred out
of the CIP Reserve in FY 2023 to pay for the ongoing Sanitary Sewer Replacement Project 31 on
El Camino (estimated to be completed in May 2024), and the year-end FY 2023 Operations
Reserve is low. In the short-term there is not sufficient funding to continue the annual Capital
Program Contribution to the CIP Reserve. Furthermore, the Wastewater Collection Utility
Reserves Management Practices state that if, at the end of any fiscal year, the minimum guideline
is not met in the CIP or Operations Reserve, staff shall present a plan to the City Council to
replenish the reserve.6
The attached Financial Plan recommends increasing rates necessary to cover rising costs and
restore reserves over the five year forecast. Figure 3 below shows the projected CIP Reserve
balances; the reserve would remain above the minimum guideline in FY 2030 and each
subsequent year.
Given the low reserves, and the projected levels of revenue and expenses, there is a risk that the
short-term need for cash will exceed available cash. For this reason, this Financial Plan
recommends Council approve a loan transfer up to $3 million from the Fiber Optics fund in FY
2024 to cover the potential shortfall of cash in the Wastewater Utility. The Wastewater utility
would repay the loan in FY 2026 at a rate equal to the City’s portfolio rate plus 0.25%
Figure 4 below shows year-end reserve balance levels for each reserve from FY 2024 projected
through FY 2029. Table 4 shows reserve starting and ending balances, revenues, transfers
expenses, capital program contribution and operations reserve guideline levels from FY 2024 to
FY 2029.
6 See Appendix C, Wastewater Collection Utility Reserves Management Practices Section 7(b) and 5(c).
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Figure 3: Projected Capital Reserve Balances, FY 2025 to FY 2029
Figure 4: Wastewater Collection Utility Year-End Reserve Levels, FY 2022 to FY 2029
$-
$2
$4
$6
$8
$10
$12
2025 2026 2027 2028 2029
$ (
M
i
l
l
i
o
n
s
)
Fiscal Year
CIP Reserve (Year-End)Reserve Min/Max
-$2
$0
$2
$4
$6
$8
$10
$12
$14
2022 2023 2024 2025 2026 2027 2028 2029
Actual Projected
$ (
M
i
l
l
i
o
n
s
)
Fiscal Year
Rate Stabilization
CIP
Reappropriations &
Commitments
CIP Reserve
Operations Reserve
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Table 4: Operations, Rate Stabilization and CIP Reserves Starting and Ending Balances,
Revenues, Transfers To/(From) Reserves, Expenses, Capital Program Contribution To/(From)
Reserves, and Operations Reserve Guideline Levels for FY 2024 to FY 2029 ($000)
* Planned CIP (item 12) is reflected as an expense in the CIP Reserve in FY 2027 – FY 2029 and
does not include CIP funded through Reappropriations or Commitments reserves.
Wastewater Bill Comparison with Surrounding Cities
The monthly equivalent sewer bill for a Palo Alto resident is $48.64 under current rates, 26%
lower than the average neighboring community. Table 5 shows the monthly sewer bills at current
rates for residential customers compared to what they would be in surrounding communities.
These communities are the same six cities that Palo Alto compares itself to in the annual budget
across Water, Wastewater, Gas, and Electric utilities.
Table 5: Residential Monthly Equivalent Sewer Bill Comparison ($) at Current Rates
Neighboring CommunitiesPalo
Alto
Neighboring
Community
Average
Menlo
Park
Redwood
City
Santa
Clara
Mountain
View Los Altos Hayward
48.64 65.38 108.83 89.28 48.28 53.10 51.47 41.29
If Council adopts a 15% rate increase in FY 2025, and assuming other agencies do not change
their sewer rates, Palo Alto’s residential rates would remain 14% lower than the current average
neighboring community in FY 2025. Given the similar ages of treatment and collection facilities
in the Bay Area, it is likely that surrounding jurisdictions will experience rate increases in the
coming years. If Council adopts the 9% wastewater rate increase alternative in FY 2025, and
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assuming other agencies do not change their sewer rates, Palo Alto’s residential rates would
remain 19% lower than the current average neighboring community. Staff has no information at
this time as to whether or when the surrounding communities are planning wastewater rate
changes. However, as most agencies are also requiring renovations to their respective treatment
plants, increases at other agencies are likely. Note that as partners in the RWQCP, Mountain View
and Los Altos will be affected by similar treatment cost increases as Palo Alto.
Table 6 shows the monthly sewer bills for Commercial and Restaurant customers. Palo Alto has
higher commercial sewer rates than several surrounding cities but is not the most expensive
jurisdiction. Palo Alto’s commercial bills are 9% higher than the neighboring community average
while Palo Alto’s restaurant bills are 7% below the neighboring community average. Table 8
assumes 14 units of water for the general commercial use and 38 units of water for restaurant
use.
Table 6 Non-Residential Monthly Equivalent Sewer Bill Comparison ($)
Neighboring CommunitiesPalo
Alto
Neighboring
Community
Average
Menlo
Park
Redwood
City
Santa
Clara
Mountain
View
Los
Altos Hayward
General
Commercial 127.12 116.17 147.28 117.74 82.18 166.18 89.54 94.08
Restaurant 514.90 553.44 842.08 765.70 520.60 517.18 243.02 432.06
Changes from Prior Financial Forecasts
Table 7 compares the projected overall rate changes in the current Financial Plan with the
projected rate changes in the FY 2024 Financial Plans.
Table 7: Proposed/Projected Wastewater Rate Changes for FY 2025 to FY 2029
Projection FY
2025
FY
2026
FY
2027
FY
2028
FY
2029
Staff Proposal in Current Plan (FY 2025) 15%
in FY 2025
15%9%9%8%7%
Alternative (FY 2025) 9% in FY 2025 9%9%9%9%9%
FY 2024 Financial Plan 9%9%8%5%N/A
Next Steps
Staff is bringing the preliminary rate projections to the Finance Committee on February 21st and
staff will describe the Finance Committee’s recommendations to the UAC during the March UAC
meeting. Assuming the UAC and the Finance Committee support the proposed rate adjustments,
staff will send notification of the potential rate increases to customers as required by Article XIIID
of the State Constitution (added by Proposition 218) expected in April 2024. The City Council will
consider the proposed Financial Plans and amended rate schedules with the FY 2025 budget,
expected in June, at which time the public hearing required by Article XIIID of the State
Constitution will be held. If Council approves the proposed rate increases, they will become
effective July 1, 2024. and
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FISCAL/RESOURCE IMPACT
Staff anticipates normal year revenues for the Wastewater Collection Utility will increase by
approximately $3.3 million in FY 2025 as a result of a 15% rate increase. Given the low operations
reserve, and the projected levels of revenue and expenses, the attached Financial Plan
recommends Council approve an enterprise loan transfer up to $3 million from the Fiber Optic
fund in FY 2024 to the Wastewater Collection Fund Operations Reserve. The Wastewater Utility
would repay any such loan in FY 2026 at a rate equal to the City’s portfolio rate plus 0.25% (the
portfolio rate is expected to be higher than the current rate of 2.47% and this financial plan
assumes a rate of 3%). See the FY 2025 Wastewater Collection Utility Financial Plan for a more
comprehensive overview of projected cost and revenue changes for the next five years. The FY
2025 Budget is being developed concurrent with these rates and depending on final rates,
adjustments to the budget may be necessary at a later time.
STAKEHOLDER ENGAGEMENT
At the January 2024 UAC meeting, staff proposed a 9% wastewater rate increase in FY 2025 and
Commissioners suggested a higher rate increase to avoid deferring the sewer infrastructure
investment, especially given the City’s favorable rates compared to neighboring agencies, and
expressed concern about the low reserve balances and the need to replenish reserves. Staff now
recommends a 15% system average rate increase in FY 2025 based upon the UAC’s feedback.
Staff discussed the proposals with the Finance Committee on February 21, 2024 and will describe
the Finance Committee’s feedback to the UAC during the March UAC meeting.
ENVIRONMENTAL REVIEW
The Utilities Advisory Commission’s review and recommendation to Council on the proposed FY
2025 Wastewater Collection Financial Plan and rate adjustments do not meet the definition of a
project, pursuant to Section 21065 of the California Environmental Quality Act, thus no
environmental review is required.
ATTACHMENTS
Attachment A: Wastewater FY25 Resolution
Attachment B: Wastewater FY25 Presentation
AUTHOR/TITLE:
Dean Batchelor, Director of Utilities
Staff: Lisa Bilir, Senior Resource Planner
Attachment A
* NOT YET APPROVED *
027022024
Resolution No.
Resolution of the Council of the City of Palo Alto Approving the
FY 2025 Wastewater Collection Utility Financial Plan, Including Reserve
Transfers, and Adjusting Wastewater Rates by Amending Rate
Schedules S-1 (Residential Wastewater Collection and Disposal), S-2
(Commercial Wastewater Collection and Disposal), S-6 (Restaurant
Wastewater Collection and Disposal) and S-7 (Commercial Wastewater
Collection and Disposal – Industrial Discharger)
R E C I T A L S
A. Each year the City of Palo Alto (“City”) assesses the financial position of its utilities
with the goal of ensuring adequate revenue to fund operations. This includes making long-term
projections of market conditions, the physical condition of the system, and other factors that
could affect utility costs, and setting rates adequate to recover these costs. 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 a
part of the Financial Plans.
C. Pursuant to Chapter 12.20.010 of the Palo Alto Municipal Code, the Council of
the City of Palo Alto may by resolution adopt rules and regulations governing utility services,
fees and charges.
D. On , 2024, the City Council held a full and fair public hearing regarding
the proposed rate increase and considered all protests against the proposals.
E. As required by Article XIII D, Section 6 of the California Constitution and
applicable law, notice of the , 2024 public hearing was mailed to all City of Palo Alto
Utilities wastewater customers by , 2024.
F. The City Clerk has tabulated the total number of written protests presented by
the close of the public hearing, and determined that it was less than fifty percent (50%) of the
total number of customers and property owners subject to the proposed wastewater rate
amendments, therefore a majority protest does not exist against the proposal.
The Council of the City of Palo Alto does hereby RESOLVE as follows:
SECTION 1. The Council hereby adopts the FY 2025 Wastewater Collection Utility
Financial Plan.
Attachment A
* NOT YET APPROVED *
027022024
SECTION 2. The Council hereby approves a transfer from the Fiber Optics Fund to the
Wastewater Collection Fund Operations Reserve of up to $3,000,000 in FY 2024 as described
in the FY 2025 Wastewater Collection Utility Financial Plan.
SECTION 3. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate
Schedule S-1 (Residential Wastewater Collection and Disposal) is hereby amended to read as
attached and incorporated. Utility Rate Schedule S-1, as amended, shall become effective July
1, 2024.
SECTION 4. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate
Schedule S-2 (Commercial Wastewater Collection and Disposal) is hereby amended to read as
attached and incorporated. Utility Rate Schedule S-2, as amended, shall become effective July
1, 2024.
SECTION 5. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate
Schedule S-6 (Restaurant Wastewater Collection and Disposal) is hereby amended to read as
attached and incorporated. Utility Rate Schedule S-6, as amended, shall become effective July
1, 2024.
SECTION 6. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate
Schedule S-7 (Commercial Wastewater Collection and Disposal – Industrial Discharger) is
hereby amended to read as attached and incorporated. Utility Rate Schedule S-7, as amended,
shall become effective July 1, 2024.
SECTION 7. The Council finds that the revenue derived from the wastewater rates
approved by this resolution do not exceed the funds required to provide wastewater service,
and the revenue derived from the adoption of this resolution shall be used only for the
purposes set forth in Article VII, Section 2, of the Charter of the City of Palo Alto.
SECTION 8. The Council finds that the fees and charges adopted by this resolution are
charges imposed for a specific government service or product provided directly to the payor
that are not provided to those not charged, and do not exceed the reasonable costs to the City
of providing the service or product.
//
//
//
//
Attachment A
* NOT YET APPROVED *
027022024
SECTION 9. The Council finds that the adoption of this resolution approving the FY 2025
Wastewater Collection Utility Financial Plan does not meet the California Environmental Quality
Act’s definition of a project under Public Resources Code Section 21065 and CEQA Guidelines
Section 15378(b)(5), because it is an administrative governmental activity which will not cause a
direct or indirect physical change in the environment, and therefore, no environmental review is
required. The Council finds that the adoption of this resolution changing Wastewater collection
rates to meet operating expenses, purchase supplies and materials, meet financial reserve needs
and obtain funds for capital improvements necessary to maintain service is not subject to the
California Environmental Quality Act (CEQA), pursuant to California Public Resources Code Sec.
21080(b)(8) and Title 14 of the California Code of Regulations Sec. 15273(a). After reviewing the
staff report and all attachments presented to Council, the Council incorporates these documents
herein and finds that sufficient evidence has been presented setting forth with specificity the
basis for this claim of CEQA exemption.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS
ATTEST:
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
Assistant City Attorney City Manager
Director of Utilities
Director of Administrative Services
Attachment A: Exhibit 1
FY 20 2 5 WASTEWATER
COLLECTION UTILITY
FINANCIAL PLAN
FY 202 5 TO FY 2029
Attachment A: Exhibit 1
FY 20 2 5 WASTEWATER COLLECTION
UTILITY FINANCIAL PLAN
FY 202 5 TO FY 202 9
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 Rate and Reserves Proposals ................................................................. 8
Section 3A: Rate Design ............................................................................................................... 8
Section 3B: Current and Proposed Rates ..................................................................................... 8
Section 3C: Bill Impact of Proposed Changes .............................................................................. 9
Section 3D: Proposed Reserve Transfers ..................................................................................... 9
Section 4: Utility Overview .................................................................................................. 10
Section 4A: Wastewater Utility History ..................................................................................... 10
Section 4B: Customer base ........................................................................................................ 11
Section 4C: Collection System .................................................................................................... 11
Section 4D: Cost Structure and Revenue Sources ...................................................................... 12
Section 4E: Reserves Structure ................................................................................................... 13
Section 4F: Competitiveness ...................................................................................................... 13
Section 5: Utility Financial Projections ................................................................................. 14
Section 5A: FY 2019 to FY 2023 Cost and Revenue Trends ........................................................ 14
Section 5B: FY 2023 Results ....................................................................................................... 15
Section 5C: FY 2024 Projections ................................................................................................. 16
Section 5D: FY 2025 to FY 2029 Projections .............................................................................. 16
Section 5E: Risk Assessment and Reserves Adequacy ............................................................... 17
Section 5F: Alternate Scenarios ................................................................................................. 19
Attachment A: Exhibit 1
Section 5G: Long-Term Outlook ................................................................................................. 22
Section 6: Details and Assumptions ..................................................................................... 22
Section 6A: Wastewater Treatment Costs ................................................................................. 22
Section 6B: Operations .............................................................................................................. 25
Section 6C: Capital Improvement Program (CIP) ....................................................................... 25
Section 6D: Debt Service ............................................................................................................ 29
Section 6E: Other Revenues ....................................................................................................... 30
Section 7: Communications Plan .......................................................................................... 31
Appendices ......................................................................................................................... 32
Appendix A: Wastewater Collection Financial Forecast Detail .................................................. 33
Appendix B: Wastewater Collection Utility Capital Improvement Program (CIP) Detail .......... 34
Appendix C: Wastewater Collection Utility Reserves Management Practices .......................... 35
Appendix D: Map (CPA Wastewater Collection System - Sewer Mains Replaced or
Rehabilitated since 1990) .......................................................................................................... 38
Appendix E: Sample of Wastewater Collection Outreach Materials ......................................... 39
Attachment A: Exhibit 1
SECTION 1 : DEFINITIONS AND ABBREVIATIONS
CCF The standard unit of measurement for water delivered to water customers, equal to
one hundred cubic feet, or roughly 748 gallons. When water usage is used to assess
wastewater charges for commercial customers, it is measured in CCF.
CIP Capital Improvement Program
CPAU City of Palo Alto Utilities Department
FOG Fats, oils, and grease. When flushed into the sewer system, these materials
accumulate in parts of the sewer system and create blockages.
O&M Operations and Maintenance
RWQCP Regional Water Quality Control Plant, the wastewater treatment plant owned and
operated by the City of Palo Alto that serves Palo Alto and several surrounding
communities.
UAC Utilities Advisory Commission
SECTION 2 : EXECUTIVE SUMMARY AND RECOMMENDATIONS
This document presents a Financial Plan for the City of Palo Alto’s Wastewater Collection Utility
for the next five years. The Financial Plan describes how revenues will cover the costs of operating
the utility safely over that time while adequately investing for the future. It also addresses the
financial risks facing the utility over the short and long term and includes measures to mitigate
and manage those risks.
SECTION 2 A : OVERVIEW OF FINANCIAL POSITION
Overview
The Wastewater Collection Utility’s costs include the collection system costs to collect sewage
within Palo Alto, maintain and replace sewer infrastructure, and provide customer service, billing
and administration as well as Palo Alto’s share of the costs to treat sewage at Palo Alto’s Regional
Water Quality Control Plant. This Financial Plan projects total Wastewater Collection Utility costs
(including Palo Alto’s share of wastewater treatment costs) to increase by an average of 9.6%
annually from fiscal year (FY) 2024 to FY 2029. The collection system’s operations and capital
costs, not including Palo Alto’s share of wastewater treatment costs, are expected to grow at an
average of 12.3% annually from FY 2024 to FY 2029, however, cost increases vary from year to
year. These average change percentages are calculated using two-year averages for capital
investment because the utility plans for one large main replacement every other year. Section
6B: Operations provides more detail about operations costs, and Section 6C: Capital
Improvement Program (CIP) provides more detail about capital costs.
In 2023, the Council approved the first in a series of rate increases which incorporated expected
costs for the City to accelerate its rate of sewer main replacements from 1 mile to 2.5 miles per
year by FY 2026. The sustainable rate of main replacement needed to replace all sewer mains in
Palo Alto within, or as close as possible to, their 100-year life expectancy is 2.5 miles per year.
Additionally, in FY 2023, the Wastewater Utility began the most expensive sewer main
replacement project that it has undertaken, and it was accelerated by a year (Staff Report 2301-
0808, May 8, 2023 approving contract for Sanitary Sewer Replacement Project 31, WC-19001).
Attachment A: Exhibit 1
This project was double the cost of the utility’s second largest main replacement project which
occurred in 2021. It was important to coordinate the work for SSR 31 with Caltrans to limit or
avoid digging into newly-paved street on El Camino. Council approved transfers of all funds from
the CIP Reserve ($3.178 million) and from the Rate Stabilization Reserve ($0.34 million) to the
Operations Reserve to utilize all available funds for this project. Staff projected that expenditures
related to SSR 31 would bring the Operations Reserve temporarily down to the minimum
guideline range.
However, in FY 2023, costs were higher than forecasted, primarily due to CIP-related costs and
transfers out to capital projects, and revenue was lower than forecasted (primarily capacity fee
revenue). As a result, the Operations Reserve ended the year with a negative balance of $0.7
million (discussed further in Section 5E: Risk Assessment and Reserves Adequacy). Additionally,
in the current year, non-residential revenues (other than restaurants) are projected to decline by
4% from FY 2023. This may be due to wet weather conditions and reductions in winter water
usage.
Staff recommends a 15% rate increase in FY 2025, or $7.29 per month per residential customer,
in order to bring revenue back in line with costs, and gradually recover the reserves to within
guideline ranges. As part of this recommendation, staff would defer the 5-mile main replacement
planned for FY 2026 and instead proceed with a reduced-size main replacement of 1.25 miles in
FY 2026 due to the low reserve and revenue levels. The 15% rate increase would allow up to $3
million in the capital budget for main replacement in FY 2025 - FY 2026. $3 million is
approximately 25% of the estimated budget for a 5-mile sewer main replacement. Assuming a
linear relationship between cost and pipe length replaced, this would support 1.25 miles of main
replacement. Based on this mileage, the estimated age of the last remaining sewer replaced
would be 110 years, instead of 108 years old.
The 5-mile sewer main replacement would resume every other year beginning with construction
in FY 2028. As an alternative, staff is presenting a 9% rate increase option that includes fully
deferring the 5-mile main replacement planned for FY 2026 due to the low reserves, low revenues
and inflationary cost increases (Section 5F: Alternate Scenarios provides more details).
The Regional Water Quality Control Plant (RWQCP) provides wastewater treatment to Palo Alto
and several surrounding communities. The RWQCP anticipates that wastewater treatment costs,
a share of which are allocated to Palo Alto and passed on to wastewater collection customers,
will increase by an average of 7.2% annually from FY 2024 to 2029. Debt service for treatment
costs are increasing – the largest increase is for the Secondary Treatment Upgrades debt service,
expected to begin in FY 2029 (See Section 6A: Wastewater Treatment Costs for more details).
Rehabilitation and replacement of plant equipment at the RWQCP that has been in use for over
40 years is necessary for the City to continue to provide wastewater treatment safely and in
compliance with regulatory requirements for the discharge of treated wastewater 24 hours a
day. Palo Alto is in the process of applying to Valley Water’s “Guiding Principle 5" grant program
that awards funds to communities like Palo Alto where property taxpayers pay State Water
Project property taxes but receive on average 85% of their water supply from sources other than
Valley Water managed supplies. Guiding Principle 5 awards grants to each community for certain
purposes including wastewater treatment environmental upgrades. Treatment costs shown in
Attachment A: Exhibit 1
Table 1 are offset by these grant funds from FY 2026 – FY 2029. More details are in Section 6A:
Wastewater Treatment Costs.
Table 1 shows actual expenses for FY 2023 and projected expenses for FY 2024 through FY 2029.
In Table 1, “Treatment” reflects Palo Alto’s share of Regional Water Quality Control Plant O&M
and CIP costs. “Operations” includes O&M costs for the collection system. “CIP” shown from FY
2023 to FY 2026 includes capital costs of the collection system. Excluded from this table is the
increase of $4.922 in CIP commitments and reappropriations reserves at year end FY 2023,
bringing total CIP Reappropriations and Commitment reserves to $9.534 million. Currently the
CIP Reserve is zero. However, beginning in FY 2027, the CIP expense line shown in Table 1 reflects
capital program contributions of $10.2 million per year, increasing with inflation assumed at 5.4%
annually, which will be transferred from the Operations Reserve to the CIP Reserve to fund capital
costs and to gradually bring the CIP Reserve back to within guideline range. Capital program
contributions amounts are also shown in line 9 in Table 3 below. FY 2028 includes a larger one-
time capital program contribution for the costs of the one-time pump station retrofit capital
work. Table 1 CIP amounts shown in FY 2024 through FY 2026 reflect planned CIP (also shown in
Table 3, line 12).
Table 1: Wastewater Collection Expenses for FY 2023 to FY 2029 ($000)*
Expense FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029
Actual Projected
Treatment 10,784 12,432 13,185 11,139 12,349 12,839 14,943
Operations 7,823 8,006 8,573 11,720 8,819 9,140 9,490
CIP 6,446 2,691 4,128 5,202 10,200 11,659 11,139
TOTAL 25,052 23,129 25,887 28,061 31,368 33,639 35,572
*Note: numbers are shown rounded to the nearest one thousand dollars.
Rate Proposal
Table 2 compares the projected overall rate changes in the current Financial Plan with the
projected rate change in the FY 2024 Financial Plan. The current plan includes previously
approved rate increases by the Council to accelerate the rate of main replacement, now needing
a larger rate increases to cover rising costs and restore reserves; it also reflects staff’s
recommended adjustments described above to perform a smaller main replacement in FY 2026
to allow reserves to replenish before resuming the original replacement schedule in FY 2028. The
Wastewater Collection Utility Reserves Management Practices state that if, at the end of any
fiscal year, the minimum guideline is not met in the CIP or Operations Reserve, staff shall present
a plan to the City Council to replenish the reserve.1 This Financial Plan includes a plan to replenish
the Operations Reserve to within the guideline range by the end of FY 2026 and gradually restore
the CIP Reserve to within the guideline range by FY 2031.
1 See Appendix C, Wastewater Collection Utility Reserves Management Practices Section 7(b)
and 5(c).
Attachment A: Exhibit 1
Table 2: Proposed/Projected Wastewater Collection Rate Trajectory for FY 2025 to FY 2029
Projection FY
2025
FY
2026
FY
2027
FY
2028
FY
2029
Current Plan (FY 2025) 15% in FY 2025 15% 9% 9% 8% 7%
FY 2024 Financial Plan 9% 9% 8% 5% N/A
Reserve Changes
Table 3 shows the starting and ending balance in the Operations, CIP and Rate Stabilization
Reserves and the projected reserve transfers and capital program contributions for FY 2024
through FY 2029.
Table 3: Operations, Rate Stabilization and CIP Reserves Changes, Revenue and Guideline
Levels for FY 2024 to FY 2029 ($000)
* Planned CIP (item 12) is reflected as an expense in the CIP Reserve in FY 2027 and on and does not include CIP
funded through Reappropriations or Commitments reserves.
SECTION 2 B : SUMMARY OF PROPOSED ACTIONS
Staff proposes the following actions for the Wastewater Collection Utility in FY 2025:
1. Approve the Fiscal Year 2025 Wastewater Collection Utility Financial Plan
2. Amend the following rate schedules to reflect an increase of 15% in FY 2025 for all
customer classes to bring revenue collection closer to expenses: Rate Schedules S-1
(Residential Wastewater Collection and Disposal), S-2 (Commercial Wastewater
Collection and Disposal), S-6 (Restaurant Wastewater Collection and Disposal) and S-7
(Commercial Wastewater Collection and Disposal – Industrial Discharger) See 3B for more
details.
Attachment A: Exhibit 1
3. Approve up to a $3 million enterprise transfer loan from the Fiber Optics Fund to the
Wastewater Collection Utility’s Operations Reserve in FY 2024.
SECTION 3 : DETAIL OF RATE AND RESERVES PROPOSALS
SECTION 3 A : RATE DESIGN
The Wastewater Collection Utility’s rates are evaluated and implemented in compliance with the
cost of service requirements and procedural rules set forth in Article XIII D of the California
Constitution (Proposition 218). Current rates are structured based on staff’s annual assessment
of the Wastewater Collection Utility’s financial position (Staff Report 2302-0939 2)) and relied on
the methodology from the City of Palo Alto 2021 Wastewater COS Report,3 prepared by Raftelis
Financial Consultants, Inc.
SECTION 3 B : CURRENT AND PROPOSED RATES
The current rates were effective July 1, 2023, when the City increased sewer rates by 9%.
CPAU has three sewer rate schedules applicable to current customers: one for residential
customers (S-1), one for non-residential customers (other than restaurants) (S-2), and one for
restaurants (S-6). Restaurants have a special rate schedule because they discharge higher
concentrations of grease, oil and organic components in their sewage and, therefore, discharge
sewage that is relatively expensive to treat. Residential customers are billed a monthly service
charge, while commercial customers other than restaurants are billed each month based on their
winter month water usage (previous January through March). This closely approximates non-
irrigation water consumption, which represents actual sewer use. This proxy for actual sewer use
is needed because sewer customers do not generally have meters installed on their sewer
connection whereas water connections are usually metered. CPAU also maintains a rate schedule
for industrial dischargers (S-7), but there are currently no customers on this rate schedule.
To align revenues with costs, CPAU proposes to increase overall rates by 15% in FY 2025, by an
additional 9% per year in FY 2026 and FY 2027, by 8% in FY 2028 and by 7% in FY 2029. Table 4
below summarizes the current and proposed rates for all customer classes. These rate increases
will cover the increasing treatment costs resulting from improvements and upgrades to the
RWQCP, as well as updated sewer main replacement cycles for collection systems capital projects,
and general operations costs.
Raftelis Financial Consultants, Inc. completed a cost of service (COS) study for the Wastewater
Collection Utility in 2021. Staff calculated the revenue increases needed for the Wastewater
2
https://cityofpaloalto.primegov.com/meeting/document/1684.pdf?name=Item%2028%20Staff
%20Report
3 https://www.cityofpaloalto.org/files/assets/public/v/1/agendas-minutes-reports/reports/city-
manager-reports-cmrs/attachments/08-09-2021-id-12378-att-f-2021-wastewater-cos-
report.pdf
Attachment A: Exhibit 1
Collection Utility based on projected revenue and expenses and applied the same increase
percentage to the rates across customer classes.
Table 4: Current and Proposed Sewer Rates
Current
(as of 7/1/2023)
Proposed
(effective 7/1/2024)
Change
$ %
Monthly Service Charges ($/Month)
S-1 (Residential) Service Charge $ 48.64 $55.93 $ 7.29 15%
Water Quantity Rates ($/CCF)
S-2 (Commercial) Quantity Rates 9.08 10.44 1.36 15%
S-6 (Restaurant) Quantity Rates 13.55 15.58 2.03 15%
The proposed rates for the S-7 (Industrial Discharger) rate schedule are:
1) Collection System Operation, Maintenance, and Infiltration Inflow: $5.18 per 100 cubic
feet of metered water use.
2) Advanced Waste Treatment Operations and Maintenance Charge: $2.07 per 100 cubic
feet of metered water use
3) $253.49 per 1000 pounds (lbs) of COD (Chemical Oxygen Demand)
4) $611.17 per 1000 lbs of SS (Suspended Solids)
5) $4,223.09 per 1000 lbs of NH3 (Ammonia)
6) $18,528.29 per 1000 lbs of toxics (chromium, copper, cyanide, lead, nickel, silver, and zinc)
SECTION 3 C: BILL IMPACT OF PROPOSED CHANGES
Table 5 below shows the bill impact of the proposed FY 2025 rate changes (effective 7/1/2024)
for typical customers:
Table 5: Bill Impact of Proposed Sewer Rate Changes
Current
(as of 7/1/2023)
Proposed
(effective 7/1/2024)
Change
$/mo. %
S-1 (Residential) $ 48.64 $ 55.93 $7.29 15%
S-2 (Commercial) - 14 CCF 127.12 146.16 19.04 15%
S-6 (Restaurant) - 56 CCF 758.80 872.48 113.68 15%
In FY 2025, residential customers will experience a 15% increase in bills. Commercial and
Restaurant customers bill impacts will vary due to each customer’s utilization of the system.
SECTION 3 C : PROPOSED RESERVE TRANSFERS
At the end of FY 2023 the Wastewater Collection Fund’s operations reserve was negative $0.7
million (see Figure 5: Operations Reserve Adequacy). The operations reserve not only reflects
changes in revenues and expenses, but also reflects changes in capital investments in assets and
liabilities. The negative operations reserve reflects certain accounting or “paper” entries for
pension and other post-employment benefits liabilities as well as unrealized losses on
Attachment A: Exhibit 1
investments (totaling $8.2 million at year end FY 2023). Excluding the impacts of these accounting
entries, the wastewater collection utility’s operations reserve would be positive (note: the utility
continues to pay the required annual contributions to CalPERS and set aside Section 115
irrevocable trust for pension liabilities). Nevertheless, the operations reserve balance is below
the guideline range and this financial plan outlines actions to bring the reserve back within the
guideline range throughout the forecast period.
The wastewater utility is currently completing sanitary sewer replacement (SSR) project 31
scheduled for completion by May 2024, and has a need for cash to pay the contractor for this
project. Given the low operations reserve, and the projected levels of revenue and expenses,
there is a risk that this short-term need for cash will exceed available cash. For this reason, this
Financial Plan recommends Council approve a transfer up to $3 million from the Fiber fund in FY
2024 to cover the potential cash shortfall in the Wastewater Utility. The Wastewater utility would
repay any such loan in FY 2026 at a rate equal to the City’s portfolio rate plus 0.25% (the portfolio
rate is expected to be higher than the current rate of 2.47% and this financial plan assumes a rate
of 3%). This will compensate the Fiber fund for the interest it would have earned plus an extra
0.25%). The need for this and future transfers will be re-evaluated once the year-end reserve
balances for FY 2024 are known.
SECTION 4 : UTILITY OVERVIEW
This section provides an overview of the utility and its operations. It is intended as general
background information and to help readers better understand the forecasts in later sections.
SECTION 4 A : WASTEWATER UTILITY HISTORY
The Wastewater Utility commenced operation in 1899 to serve Palo Alto and Stanford. In its first
three decades the system grew to 60 miles of sewers. Raw sewage was discharged into Mayfield
Slough at the edge of the Bay. In the 1930s, at the behest of the State Department of Health, Palo
Alto built the South Bay’s first wastewater treatment plant. At that time the sewer system served
20,500 Stanford and Palo Alto residents and a cannery. The plant was upgraded twice in the
1940s and 1950s to increase capacity.4 At the same time, the postwar population and industrial
boom in the 1950s required rapid expansion of the sewer system. In the first half of the 1960s
Palo Alto’s area doubled, as did wastewater flows, overwhelming the capacity of several of the
utility’s “trunk lines,” which are the largest diameter main sewer lines carrying wastewater to the
treatment plant. This prompted the City, in 1965, to perform the first of its sewer master plans
to identify needed capacity improvements. At that point the Wastewater Utility’s system
comprised more than 150 miles of sewer mains.5
In 1968 the City signed agreements with the Cities of Mountain View and Los Altos to build a new
regional treatment plant, the RWQCP, which is still in operation today. Since 1940 the City had
been providing treatment services to the East Palo Alto Sanitary District through an existing
agreement and was also serving Stanford University by transporting wastewater across the City’s
sewer system to the treatment plant. Both of these organizations became partners in the RWQCP
4 Long Range Facilities Plan for the Regional Water Quality Control Plant, August 2012, Carollo Engineers, pp 2-1
through 2-2
5 Wastewater Collection and Storm Drainage, 1965, Brown and Caldwell Consulting Engineers, pp 4, 6-7, 143
Attachment A: Exhibit 1
as well. At the same time the Town of Los Altos Hills became the sixth partner as it signed an
agreement with the City to connect the Town’s sewer system to the City’s sewer system to carry
wastewater to the new RWQCP. The current agreements for the RWQCP extend through 2035.6
In the 1980s the City performed a series of studies of groundwater inflow and infiltration into the
system. The studies found high rates of infiltration, estimating that as much as 40% of the water
going to the RWQCP from Palo Alto’s system was groundwater and stormwater rather than
wastewater.7 In some parts of Palo Alto the land surface had subsided due to groundwater
pumping by the water utility, and though that practice had ceased many years earlier as the water
utility switched to the Hetch Hetchy Regional Water System, parts of the city had already
subsided two to five feet. This subsidence had damaged several parts of the sewer collection
system, leading to reduced slopes for sewer mains that caused reductions in capacity. In response
to these studies the City commenced an accelerated sewer system rehabilitation program.8 At
that point the sewer system comprised over 190 miles of mains.9
A Master Plan study in 1988 recommended a variety of capacity expansions, and in the 1990s the
City completed about half of them. However, a 2004 Master Plan update found that the
accelerated sewer rehabilitation plan started in the early 1990s had substantially reduced
infiltration, easing the capacity problems that had led the to the recommended capacity
increases in the 1988 study. Several of the outstanding projects were canceled and replaced with
a different set of projects.10 At the same time the City updated its hydraulic model and developed
greater capacity to do system planning in-house.
SECTION 4 B : C USTOMER BASE
The City of Palo Alto’s Wastewater Collection Utility provides sewer service to the residents and
businesses of Palo Alto. It is distinct from the Wastewater Treatment Utility, which provides
treatment services for surrounding communities in addition to Palo Alto. In effect, the
Wastewater Collection Utility serves as a wholesale customer of the Wastewater Treatment
Utility, and the rates charged by the Wastewater Collection Utility to its retail customers recover
not only collection costs but also Palo Alto’s share of Wastewater Treatment Utility Costs. Nearly
27,580 customers are connected to the sewer collection system, approximately 26,050 (94%) of
which are residential and 1,530 (6%) of which are non-residential. Residential customers pay a
flat fee per dwelling unit for service. Commercial customers are billed for sewer service based on
their metered winter water usage while Restaurant customers are billed for sewer service based
on their metered monthly water usage.
SECTION 4 C : COLLECTION SYSTEM
The Wastewater Collection Utility delivers all the wastewater it collects to the Regional Water
Quality Control Plant (RWQCP) operated by the City of Palo Alto under a partnership agreement
with several surrounding communities. Palo Alto is responsible for 32% to 35% of the wastewater
6 Long Range Facilities Plan for the Regional Water Quality Control Plant, August 2012, Carollo Engineers, pg 2-2
7 Wastewater Collection System Master Plan – Capacity Assessment, January 2004, MWH Americas, Inc., pg ES-2
8 CMR 183:90, Infrastructure Review and Update, March 1, 1990
9 Master Plan of the Wastewater Collection System, December 1988, Camp Dresser & McKee, Inc., pg 1-2
10 Wastewater Collection System Master Plan – Capacity Assessment, January 2004, MWH Americas, Inc., pg ES-3
Attachment A: Exhibit 1
sent to the RWQCP. This Financial Plan does not describe the cost of running the RWQCP in detail
as this cost is contained in the Wastewater Treatment Utility; however since these costs are a
major driver of CPAU’s sewer rates, Section 6A: Wastewater Treatment Costs provides some
discussion of future trends in treatment costs. Treatment costs make up more than a third of the
Wastewater Collection Utility’s expenses as shown in Table 1 above.
To collect wastewater from its customers and deliver it to the RWQCP, CPAU owns roughly 18,000
sewer laterals (which collect wastewater from customers’ plumbing systems) and 217 miles of
sewer mains (which transport the waste to the treatment plant). These laterals and mains, along
with the associated manholes and cleanouts, represent the vast majority of infrastructure used
to collect wastewater in Palo Alto. CPAU conducts a sewer rehabilitation and replacement
program to replace mains over time as they deteriorate or to increase capacity. For more
discussion of this program, see Section 6C: Capital Improvement Program (CIP). CIP expense
accounts for less than a quarter of the utility’s expenditures.
In addition to CIP, CPAU performs various maintenance activities on the sewer system. These
include inspecting and repairing sewer laterals, responding to sewer overflows, regularly cleaning
sections of the system heavily impacted by fats, oils, and grease (FOG), and building and replacing
sewer laterals for new or redeveloped buildings. The utility also shares the costs of other
operational activities (such as customer service, billing, equipment maintenance, and street
restoration) with the City’s other utilities. These maintenance and operations expenses, as well
as associated administration, debt service, rent, and other costs, make up approximately another
quarter of the utility’s expenses.
SECTION 4 D : COST STRUCTURE AND REVENUE SOURCES
In FY 2023, approximately 43% of the Wastewater Collection Utility costs were for treatment
(capital and operations), while about 31% were for the collection system’s operations. The
remaining 26% were for collection system capital improvements. Figure 1 illustrates these
expenditures. The utility’s main source of revenue in FY 2023, shown in Figure 2, was sewer
charges (96%), with the rest from connection fees and other sources (4%).
Figure 1: Cost Structure (FY 2023) Figure 2: Revenue Structure (FY 2023)
43%
31%
26%
Treatment
Collec�on Opera�ons
Collec�on Capital
96%
4%
Sales Revenue Other Revenue
Attachment A: Exhibit 1
SECTION 4 E : RESERVES STRUCTURE
CPAU maintains six reserves for its Wastewater Collection Utility to manage various types of
contingencies. Below is a summary of these reserves and Appendix C: Wastewater Collection
Utility Reserves Management Practices provides more detailed definitions and guidelines for
reserve management:
• Reserve for Commitments: A reserve equal to the utility’s outstanding contract liabilities
for the current fiscal year. Most City funds, including the General Fund, have a
Commitments Reserve.
• Reserve for Reappropriations: A reserve for funds dedicated to projects reappropriated
by the City Council, nearly all of which are capital projects. Most City funds, including the
General Fund, have a Reappropriations Reserve.
• Capital Improvement Program (CIP) Reserve: The CIP reserve is used to accumulate funds
for future expenditure on CIP projects and a reserve level is typically maintained in order
to smooth major CIP expenditures every other year. It also acts as a contingency reserve
for unexpected capital costs. This type of reserve is used in other utility funds (Electric,
Gas, and Water) as well.
• Rate Stabilization Reserve: This reserve is intended to be empty unless one or more large
rate increases are anticipated in the forecast period. In that case, funds can be
accumulated to spread the impact of those future rate increases across multiple years.
This type of reserve is used in other utility funds (Electric, Gas, and Water) as well.
• Operations Reserve: This is the primary contingency reserve for the Wastewater
Collection Utility and is used to manage yearly variances from budget for operational
costs. This type of reserve is used in other utility funds (Electric, Gas, and Water) as well.
• Unassigned Reserve: This reserve is for any funds not assigned to the other reserves.
SECTION 4 F : COMPETITIVENESS
Table 6 shows the monthly sewer bills for residential customers compared to what they would be
in surrounding communities. The average monthly sewer bill for a Palo Alto single family
residential customer is $48.64 at current rates, which is lower than four of the six neighboring
communities. These communities are the same six that Palo Alto compares itself to in the annual
budget across Water, Wastewater, Gas, and Electric industries. In the following tables, “Menlo
Park” refers to the West Bay Sanitary District.
Table 6: Residential Monthly Equivalent Sewer Bill Comparison (FY 2024 Rates) ($)
Palo
Alto
Neighboring
Community
Average Neighboring Communities
Menlo Park
Redwood
City Santa Clara
Mountain
View Los Altos Hayward
48.64 65.38 108.83 89.28 48.28 53.10 51.47 41.29
Table 7 compares the sewer bills for two classes of non-residential customers to what they would
be under surrounding communities’ rate schedules. Note that other communities often have
specific rates for industrial customers that discharge high intensity wastewater, such as food
Attachment A: Exhibit 1
processors or chemical or electronics manufacturers, but Palo Alto does not currently have any
customers that require these special rates. The estimate of Palo Alto commercial and restaurant
monthly sewer bills are around the neighboring community average, assuming neighboring
communities do not increase sewer rates. The monthly bill comparison assumes 14 CCF of water
for general commercial customers and 56 CCF of water for restaurants.
Table 7: Commercial Monthly Sewer Bill Comparison (FY 2024 Rates) ($)
Customer
Types Palo Alto
Neighboring
Community
Average
Neighboring Communities
Menlo
Park
Redwood
City
Santa
Clara
Mountain
View Los Altos Hayward
General
Commercial 127.12 115.33 147.28 117.74 82.18 166.18 84.55 94.08
Restaurant 758.80 812.27 1,240.96 1,128.40 767.20 762.16 338.18 636.72
SECTION 5 : UTILITY FINANCIAL PROJECTIONS
SECTION 5 A : FY 2019 TO FY 202 3 COST AND REVENUE TRENDS
Figure 3 shows the Wastewater Collection Utility’s actual expenses and revenues for the past five
years and projections through FY 2029. Treatment plant expenses (including CIP and O&M)
assigned to Palo Alto’s Wastewater Collection Utility increased, on average, by 2.3% annually
from FY 2019 to FY 2023.
Since wastewater revenue is relatively stable, historically, revenue changes closely followed rate
changes. However, during the pandemic, non-residential wastewater revenue declined by about
9% in FY 2022 and then increased by 6% in FY 2023. In the current year, non-residential revenue
is projected to decline by 2% in the first six months despite the 9% rate increase. This is likely due
to low winter usage in January – March of 2023 during the historically wet winter. Revenue is
forecasted to recover gradually over the next three years. However, this revenue reduction
increases the upward pressure on rates in FY 2025 and in future years. Connection and capacity
fees grew dramatically between FY 2010 and FY 2015 and then plateaued and then declined
significantly in FY 2022. Capacity fees dropped to zero in FY 2023. This is likely due to more tenant
improvements permits rather than new service connection permits where the improvements are
inside the buildings and the utility infrastructure remains the same. These revenue reductions
contribute to the need to increase rates.
Attachment A: Exhibit 1
Figure 3: Wastewater Collection Utility Expenses, Revenues and Rate Changes
Actual Costs through FY 2023 and Projections through FY 2029
*CIP in the projected years include changes due to commitments/reappropriations and funds
transferred to the CIP Reserve
SECTION 5 B : FY 202 3 RESULTS
The FY 2024 Financial Plan proposed to increase the rate of sewer main replacement from 1 mile
per year to 2.5 miles per year beginning FY 2026, in order to replace the remaining 138 miles of
sewer mains before they exceed their expected life. However, in FY 2023 revenues were lower
than forecasted and costs were higher than forecasted; additionally, the utility proceeded a year
early with a large sewer main replacement project to coordinate with Caltrans. These two factors
led to low reserve levels at the end of FY 2023. The utility’s revenues and reserves need time to
recover and rates need to increase to support the 2.5 mile per year rate of main replacement.
Actual sewer service charge revenues for FY 2023 were similar to the forecasted level. However,
capacity fee and connection fee revenue was $0.23 million lower than forecasted in the FY 2024
Financial Plan ($0.2 million actual vs. $0.45 million forecasted). Additionally, uncollectable (bad
debt expense for utility bill amounts owed that are no longer collectible) were also higher than
forecasted possibly resulting from the economic impacts of COVID-19 policies. Total revenues
were $0.4 million lower than expected.
Treatment expenses were similar to the forecasted level ($10.8 million). Collection system
capital-related costs were approximately $2.7 million higher than expected ($16 million actual
compared with $13.3 million forecasted). The main factors contributing to this were CIP-related
allocated costs, CIP salaries and benefits and the forecasted CIP budget, which anticipated
underspending, however, the actual CIP sewer replacement bid exceeded the estimated budget.
See section 6C for details.
In FY 2022, unrealized gains/losses were separated out from the Operations Reserve into a
separate “Unrealized Gain/Loss on Investment” reserve. There was a subsequent adjustment to
11%7%0%
3%3%9%15%9%9%
8%7%
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
Actual Projected
Cos
t
/Rev
e
n
u
e
$ (Mi
l
l
i
o
n
s
)
Fiscal Year
Collec�on Capital & Debt *
Collec�on Opera�ons
Treatment Capital & Debt
Treatment Opera�ons
Revenue
Attachment A: Exhibit 1
the year-end FY 2022 operations reserve balance to also move unrealized gains/losses from prior
years to the separate reserve. This reduced the operations reserve by $0.135 million in FY 2023.
Additionally, operating expenses were higher than expected primarily due to a transfer out to
the capital projects fund. Table 8 below summarizes key reasons for the variances from forecast.
Table 8: FY 2023 Actuals vs. FY 2024 Financial Plan Forecast for FY 2023 ($000) Net Cost/
(Benefit)
Type of
Change
Lower connection and capacity fees, higher uncollectibles $ 391 Revenue decrease
Expenses higher than expected $ 535 Cost increase
Higher CIP-related charges including allocated charges and
CIP reappropriations/commitments
$ 2,641 Cost increase
Accounting adjustment to Operations Reserve $ 135 Cost increase
Net Cost / (Benefit) of Variances $ 3,703
SECTION 5 C : FY 2024 PROJECTIONS
Staff currently projects lower sales revenue compared to the FY 2024 Financial Plan ($21.9 million
vs $22.7 million) due to lower sales revenue among non-residential customers, other than
restaurants, as well as increased uncollectibles. Staff now anticipates other revenue from
connection and capacity fees and interest to be lower than originally expected, and expects
transfers in from the true-up of a shared GIS Capital Project shared between the Water, Gas, and
Wastewater Collection funds to be higher than forecasted. In total, the current projection of
other revenue is $0.6 million higher than the projection in the FY 24 Financial Plan. Treatment
cost projections increased by $0.14 million. The current estimate of collection system costs is
higher than forecasted in the FY 2024 Financial Plan by $0.36 million. This does not include CIP
spending budgeted in prior years in the CIP Reappropriations and Commitments Reserves; that
totals $9.5 million and primarily reflects the ongoing main replacement for Sewer Replacement
Project 31. Table 9 summarizes key variances from the prior forecast.
Table 9: FY 2024 Projections vs. FY 2024 Financial Plan Forecast ($000) Net Cost/
(Benefit)
Type of
Change
Sales revenues lower than forecast $ 833 Revenue decrease
Other revenue higher than forecast $ (3,615) Revenue increase
Treatment cost increases $ 140 Cost increase
Collection system operations and capital $ 359 Cost increase
Net Cost / (Benefit) of Variances $ (2,283)
SECTION 5 D : FY 2025 TO FY 2029 PROJECTIONS
As shown in Figure 3 above (and, in more detail, in Appendix A: Wastewater Collection Financial
Forecast Detail), the Wastewater Collection Utility’s total costs are projected to increase by
approximately 10.1% per year on average for FY 2025 through FY 2029.
Capital costs for treatment are also increasing because the treatment plant is planning major
upgrades in coming years, due to aging equipment and changing environmental regulations. The
costs of the plant are shared among member agencies, with members expected to see average
Attachment A: Exhibit 1
cost increases of around 6.5% per year over the forecast horizon. The biggest increase in
Treatment costs is the addition of debt service for the Secondary Treatment Upgrades in FY 2029,
which is a $193 million capital project funded through a low-interest State Revolving Fund loan,
which the Wastewater Utility has included into its cost projections. (see Section 6A: Wastewater
Treatment Costs
Figure 4 shows the actuals for FY 2023 and projected reserve levels through FY 2029. Figure 5
shows the movement of funds from the CIP Reserve, Operations Reserve and Rate Stabilization
Reserve to the CIP Reappropriations and Commitments Reserves in FY 2023. The chart assumes
that half of the CIP Reappropriations and Commitments are spent in FY 2024 and half are spent
in FY 2025. The proposed rate increases will gradually bring the Operations Reserve back to within
the guideline range by the end of FY 2026 and allow the CIP Reserve to also be replenished
gradually by FY 2031.
Figure 4: Wastewater Collection Utility Year-End Reserves Levels, FY 2023 to FY 2029
SECTION 5 E : RISK ASSESSMENT AND RESERVES ADEQUACY
The Operations Reserve, which is the Wastewater Collection Utility’s primary contingency
reserve, is expected to return to within the reserve guideline levels by the end of FY 2026 and
remain within the guideline range for the rest of the forecast period, as shown in Figure 5 below.
The proposed annual rate increases in this Financial Plan are intended to maintain a steady rate
trajectory and keep the Operations Reserve within the guideline range in the long term.
-$2
$0
$2
$4
$6
$8
$10
$12
$14
2022 2023 2024 2025 2026 2027 2028 2029
Actual Projected
$ (Mi
l
l
i
o
n
s
)
Fiscal Year
Rate Stabiliza�on
CIP
Reappropria�ons &
Commitments
CIP Reserve
Opera�ons Reserve
Attachment A: Exhibit 1
Figure 5: Operations Reserve Adequacy
Staff performs an annual assessment of risks for the Wastewater Collection Utility. Table 10
summarizes the risk assessment calculation for the Wastewater Collection Utility through FY
2029. The risk assessment includes the revenue shortfall that could accrue due to:
1. the maximum observed budget-to-actual variance in one year during the past five years;
and
2. an increase of 10% in treatment costs.
Staff is proposing to allow the Wastewater Operations Reserve to be below the guideline range
for three fiscal years (FY 2023 through FY 2025). This Financial Plan projects the Wastewater
Utility’s primary contingency reserve, the Operations Reserve, to be below guideline levels at the
end of FY 2023 through FY 2025 and then return to within the guideline range by the end of FY
2026 and increase to approximately target levels by the end of the forecast period. Per the
Reserves Management Practices (Appendix C) any rate plan that involves returning the
Operations Reserve to within guideline levels in more than one year requires Council approval.
Table 10 shows the Operations Reserve ending balances alongside the risk assessment values and
Figure 5 shows the Operations Reserve ending balances alongside the minimum, maximum, and
target guidelines. In case costs exceed available reserves during the FY 2023-2025 timeframe,
staff is requesting Council approval to transfer up to $3 million from the Fiber fund to the
Wastewater Utility. The Wastewater Utility could additionally explore other short-term financing
options if necessary. The Operations Reserve is projected to be adequate to manage these levels
of risk from FY 2026 through FY 2029.
-$2
$0
$2
$4
$6
$8
$10
$12
2022 2023 2024 2025 2026 2027 2028 2029
Actual Projected
$ (Mil
l
i
o
n
s
)
Fiscal Year
Reserve (Year-End)
Reserve Min/Max
Reserve Target
Risk Assessment
Attachment A: Exhibit 1
Table 10: Wastewater Collection Risk Assessment for FY 2024 to FY 2029
FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029
Total Revenue ($000) $22,049 $25,308 $27,902 $30,673 $33,398 $35,748
Max. Historical Budget-to-Actual variance 4% 4% 4% 4% 4% 4%
Budget-to-Actual Risk ($000) 882 1,012 1,116 1,227 1,336 1,430
Treatment Budget ($000) 12,432 13,185 11,139 12,349 12,839 14,943
Treatment Cost Contingency @10% ($000) 1,243 1,319 1,114 1,235 1,284 1,494
Total Risk Assessment Value ($000) 2,125 2,331 2,230 2,462 2,620 2,924
Projected Operations Reserve Level ($000) 2,875 3,371 4,342 4,837 5,568 6,743
SECTION 5 F : ALTERNATE SCENARIOS
This Financial Plan includes an alternate rate trajectory scenario as shown in Table 11 below. Staff
brought this item to the Finance Committee for discussion on February 20, 2024 (Staff Report
2312-2468). Staff will describe the Finance Committee’s feedback to the UAC during the March
UAC meeting.
Table 11 shows the rate projections of the alternative that would increase rates 9% in FY 2025
and fully defer the first 5-mile Sanitary Sewer Replacement (SSR) construction in FY 2026. This
alternative includes a 5-mile sewer main replacement every two years beginning in FY 2028.
Table 12 to 14 shows the monthly bill impacts of the recommended and alternative rate increase
scenario for residential, commercial and restaurant customers in FY 2025 to FY 2029.
Attachment A: Exhibit 1
Table 11: Wastewater Rate Changes and Residential Monthly Bill Impacts
FY 2025 – FY 2026
Main Replacement a FY
2025
FY
2026
FY
2027
FY
2028
FY
2029
Age of Last
Remaining Sewer
Main Replaced Budget Length
(miles)
REcommendati
on: 15% in FY
2025
$3M ~1.25
15% 9% 9% 8% 7%
110 years $7.29 $5.03 $5.48 $5.31 $5.02
Alternate: 9%
in FY 2025 $0 0 9% 9% 9% 9% 9% 111 years $4.37 $4.77 $5.20 $5.66 $6.17
a) The estimated budget for a 5-mile sewer main replacement in FY 2025 – FY 2026 is $11.6 million.
Table 12: Residential Monthly Bill Impact, S-1
(calculated from FY 2024 residential monthly bill of $48.64/mo)
Rate Scenarios FY 2025 FY 2026 FY 2027 FY 2028 FY 2029
15% in FY 2025 $7.29 $5.03 $5.48 $5.31 $5.02
9% in FY 2025 4.37 4.77 5.20 5.66 6.17
Table 13: Commercial Monthly Bill Impact, S-2, 14 CCF (calculated from FY 2024 commercial
monthly bill of $127.12/mo)
Rate Scenarios FY 2025 FY 2026 FY 2027 FY 2028 FY 2029
15% in FY 2025 $19.04 $13.02 $14.28 $13.86 $13.02
9% in FY 2025 11.34 12.46 13.58 14.70 16.10
Table 14: Restaurant Monthly Bill Impact, S-6, 56 CCF (calculated from FY 2024 restaurant
monthly bill of $758.80/mo)
Rate Scenarios FY 2025 FY 2026 FY 2027 FY 2028 FY 2029
15% in FY 2025 $113.68 $78.40 $85.12 $82.88 $77.84
9% in FY 2025 67.76 73.92 80.64 87.92 95.76
The following figures show the expenses, revenues and rate changes chart as well as operations
reserve and CIP Reserve Year-end Balances for the alternative of a 9% increase in FY 2025.
Attachment A: Exhibit 1
Figure 6: Wastewater Collection Utility Expenses, Revenues and Rate Changes – 9% increase
in FY 2025
*CIP in the projected years include changes due to commitments/reappropriations and funds
transferred to the CIP Reserve
Figure 7: Wastewater Collection Operations Reserve Year End Balances – 9% increase in FY
2025
11%7%0%
3%3%9%9%9%
9%9%
9%
$0
$5
$10
$15
$20
$25
$30
$35
$40
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
Actual Projected
Cos
t
/Rev
e
n
u
e
$ (Mi
l
l
i
o
n
s
)
Fiscal Year
Collec�on Capital & Debt *
Collec�on Opera�ons
Treatment Capital & Debt
Treatment Opera�ons
Revenue
-$2
$0
$2
$4
$6
$8
$10
$12
2022 2023 2024 2025 2026 2027 2028 2029
Actual Projected
$ (Mil
l
i
o
n
s
)
Fiscal Year
Reserve (Year-End)
Reserve Min/Max
Reserve Target
Risk Assessment
Attachment A: Exhibit 1
Figure 8: Wastewater Collection CIP Reserve Year End Balances – 9% increase in FY 2025
SECTION 5 G : LONG -TERM OUTLOOK
In the longer term (5 to 35 years), there are several factors that could potentially increase costs
for the Wastewater Collection Utility. Section 2A: Overview of Financial Position discusses the
acceleration of sewer main replacement projects, with alternative main replacement schedules
shown in Section 5F: Alternate Scenarios. Another factor is major upgrades at the RWQCP, for
which the Wastewater Utility will pay its share as part of treatment costs. More details are in
Section 6A: Wastewater Treatment Costs.
SECT ION 6 : DETAILS AND ASSUMPTIONS
SECTION 6 A : WASTEWATER TREATMENT COSTS
Treatment expenses represent the Wastewater Collection Utility’s share of the costs of operating
the RWQCP. According to the agreements between Palo Alto and its partner agencies, these
charges are calculated using a formula that considers the amount of wastewater, the organic
material and ammonia levels, and the total suspended solids it contains. The Wastewater
Collection Utility’s assessed share of the RWQCP’s revenue requirement is projected to be 32%
for FY 2025. Mountain View is the other large agency served by the RWQCP (42% of the revenue
requirement estimated for FY 2025) with the smaller agencies (Stanford, Los Altos, East Palo Alto,
and Los Altos Hills) making up the remaining share of the total treatment costs.
Based on detailed project cost estimates provided by RWQCP staff, overall treatment costs are
estimated to increase by an average of 7.2% per year from FY 2024 through FY 2029. Wastewater
Treatment Fund costs are increasing due to major plant rehabilitation and rising salary and
benefit costs as well as increased staffing needed to support capital programs. Additional
$-
$2
$4
$6
$8
$10
$12
2025 2026 2027 2028 2029
$ (Mil
l
i
o
n
s
)
Fiscal Year
CIP Reserve (Year-End)Reserve Min/Max
Attachment A: Exhibit 1
expense increases include sludge hauling services costs, maintenance materials costs and rent.
Commodity and utility rates to operate the facility are also anticipated to increase in FY 2025 for
electric, water, and natural gas rates.
The largest increase in the treatment costs is the repayment of the Secondary Treatment
Upgrades through a low-interest Clean Water State Revolving Fund Loan. Loan payments are
expected to begin in FY 2029. Slow reimbursement for the Secondary Treatment Upgrades capital
project during construction has created a cashflow issue for the RWQCP. This will increase
treatment costs in the short-term beyond the projected levels shown below as the Wastewater
Treatment fund will owe other City funds for the loss on shared return on investment on cash.
The RWQCP completed a Long-Range Facilities Plan in 2012 which has guided the CIP needs of
the Treatment Plant. Currently, the RWQCP is beginning an update to the Long-Range Facilities
Plan and plans to begin this work in 2024 and complete the plan in 2026. The results of this work
will direct future CIP work at the Treatment Plant. Additionally, the plan will re-evaluate the cost
of service for annual operating shares and re-evaluate the fixed allocation capacity shares for
each partner.
Palo Alto’s share of treatment operations and maintenance costs is expected to increase by an
average of 4.6% per year from FY 2024 through FY 2029. Capital projects and debt are increasing
at an average of 15% per year from FY 2024 through FY 2029. Increases to capital expenses begin
in FY 2024 with the Joint Intercepting Sewer Rehabilitation construction, funded on a pay-as-you-
go basis. The Wastewater Utility begins to pay for debt service for major projects beginning with
the Primary sedimentation Tank in FY 2025, Outfall Line Construction in FY 2027, Secondary
Treatment Upgrades in FY 2029 and Headworks in FY 2030. Figure 9 below shows the estimated
costs of treatment expenses for Palo Alto.
Attachment A: Exhibit 1
Figure 9: Palo Alto’s Share of Wastewater Treatment Expenses (Projection & Planned CIP)
Grant Funding
Santa Clara Valley Water District (Valley Water) is the groundwater manager for Santa Clara
County. Valley Water developed the “GP5 Program” grant program for communities and/or
organizations, like the City of Palo Alto, where property taxpayers pay State Water Project
property taxes but receive on average 85% of their water supply from sources other than Valley
Water managed supplies. GP5 refers to Guiding Principle 5, a principle of the Valley Water Board
that awards grants to each community at a dollar amount up to the State Water Project property
taxes paid by property owners in their respective service areas. The grants must fund
conservation programs, potable recycled water, non-potable recycled water (including salinity
reductions), options to purchase wastewater, purified water, wastewater treatment plant
environmental upgrades, Advanced Metering Infrastructure (AMI) updates, or dedicated
environmental-focused activities.
The RWQCP is currently in the process of applying for this grant funding for Palo Alto’s portion of
certain qualifying Wastewater Treatment capital projects. These are estimated to include:
• Joint Intercepting Sewer Rehabilitation
• Outfall Line Construction
• 12kV Loop Electrical Improvements and
• Headworks
The estimated funding available to Palo Alto through this grant program is $11.2 million through
FY 2033. This Financial Plan assumes those funds begin to be received as an offset to Palo Alto’s
treatment costs in FY 2026, which allows for a year of delays in the process of being awarded the
grant funding. In total, this Financial Plan assumes $7.4 million of the funds are received during
the 5-year planning period as shown in the following table.
Attachment A: Exhibit 1
Table 15: GP5 Grant Funding Assumed to Offset Palo Alto’s Treatment Costs
SECTION 6 B : OPERATIONS
Operations costs include the Customer Service, Distribution Operations, Engineering, and
Allocated Charges categories in Appendix A: Wastewater Collection Financial Forecast Detail.
Debt service, rent, and transfers are also included in this category. Customer Service costs are
primarily related to the call center and collections on delinquent accounts. The Distribution
Operations category includes preventative and corrective maintenance on sewer mains and
laterals, investigation of sewer overflows, regular cleaning of heavily impacted sections of the
sewer system, and services shared with other utilities (such as street restoration and equipment
maintenance). Allocated Charges include the costs of accounting, purchasing, legal, and other
administrative functions provided by the City’s General Fund staff, as well as shared
communications services and Utilities Department administrative overhead and billing system
maintenance costs. A portion of these costs are allocated to operations costs and a portion to
capital costs.
This Financial Plan anticipates operations costs will increase by approximately 3.5% annually from
FY 2024 to FY 2029 based on preliminary assumptions for non-salary and benefit cost categories
from Palo Alto’s Office of Management and Budget. This includes an assumption of a 7.5%
increase to salaries and benefits costs in FY 2024 and a 3-4% increase annually in subsequent
years.
SECTION 6 C : CAPITAL IMPROVEMENT PROGRAM (CIP)
The Wastewater Collection Utility’s CIP consists of the following programs:
• The Sanitary Sewer Replacement/Rehabilitation (SSR) Program, under which the
Wastewater Collection Utility replaces aging sewer mains.
• Customer Connections, which covers the cost when the Wastewater Collection Utility
installs new laterals or upgrades existing laterals at a customer’s request in response to
development or redevelopment. CPAU charges a fee to these customers to cover the cost
of these projects.
• Ongoing Projects, which covers the cost of replacing deteriorated manholes and sewer
laterals, addressing unplanned replacement needs, performing hydraulic analysis,
replacing antiquated software, as well as the cost of capitalized tools and equipment.
The Sanitary Sewer Replacement and Rehabilitation Program funds the replacement of
deteriorating sewer mains to increase capacity or improve pipe condition in various parts of the
sewer system. The sewer system consists of 216 miles of mains, and CPAU uses a variety of tools
to establish which sections need to be replaced. The 2004 Master Plan study identified
wastewater mains with capacity deficiency, and they have been corrected in past CIP projects. A
new master plan study is underway and will update the existing wastewater model, given the
many development projects which have introduced additional flow in the collection system since
2004. The master plan project was approved at the November 27, 2023 Council Meeting and the
FY 2025 FY 2026 FY 2027 FY 2028 FY 2029
GP5 Grants ($'000)- 1,815 1,494 1,494 2,667
Attachment A: Exhibit 1
consultant is currently under contract. The new study includes flow-monitoring data to reflect
current condition and re-assessment of the system capacity. For condition assessment,
maintenance statistics (such as records of the location and number of sewer overflows on the
system) and video recording of sewer mains during routine cleaning and inspection can reveal
areas with deteriorating pipe. CPAU uses a structural rating system to grade the pipe defects. The
video-inspection data and maintenance records are used to plan and prioritize sewer main
replacement and rehabilitation.
Utilities also coordinates with the Public Works street maintenance program to avoid cutting into
newly repaved streets. Major goals of the replacement program are to minimize sewer overflows
and reduce groundwater and rainwater infiltration. As clay pipe deteriorates, roots start
intruding into the cracks or pipe joints to create blockages, permitting groundwater or rainwater
to infiltrate the system, and potentially cause structural damage such as broken or collapsed pipe.
Some level of infiltration is expected on any sewer system, but if there is too much, the combined
flow of wastewater and groundwater/rainwater can overwhelm the capacity of various parts of
the sewer system. Reducing infiltration can reduce the need to expand the system to
accommodate increased flow, as well as reducing unnecessary amounts of water to be treated
at the treatment plant. To achieve this goal, deteriorating mains are either replaced with new
HDPE pipe or rehabilitated with a plastic lining when replacement is not feasible. Staff has been
replacing/rehabilitating the mains as needed according to their condition. In addition,
Wastewater Operations’ routine maintenance continues to stay on schedule to minimize sewer
overflows.
Utilities Engineering has been consistently replacing aging sewer mains since the early 1990s. The
proactive replacement program keeps the collection system in good condition. Between 1990
and 2022, 80 miles or 37% of the collection system has been replaced or rehabilitated (the darker
green-colored lines shown in the attached map in Appendix D: Map (CPA Wastewater Collection
System - Sewer Mains Replaced or Rehabilitated since 1990).
A routine replacement program is recommended to keep the system reliable. Each SSR project
in recent years has had approximately a $4 to $5 million budget to cover design and construction.
This project scope and frequency allowed staff to replace 1 mile per year of wastewater mains
that were in poor condition that potentially would collapse to create sewer overflow or street
sink hole and to reduce groundwater and rainwater infiltration through cracks or leaking joints.
As part of the FY 2024 financial plan, staff recommended an accelerated CIP program to increase
the replacement rate from 1 mile to 2.5 miles per year (from 2 miles to 5 miles per project
constructed every other year) to fulfil the goal of replacing pipes near their life expectancy. Staff’s
proposal attempted to minimize rate impacts while also prudently managing the City’s
infrastructure and maintaining an acceptable level of risk. The FY 2024 financial plan proposed to
begin the accelerated main replacement starting in FY 2026, however due to unforeseen
reductions in revenue and increases in operating expenses this financial plan proposes to begin
the accelerated CIP replacement rate in FY 2028. Additionally, in 2025, storm damage to a sewer
pipe at Arastradero Creek needs to be repaired for an estimated $0.3 million.
With the completion of SSR 31 there will be 136 miles of sewer main remaining to be replaced
before the end of its useful life.
Attachment A: Exhibit 1
This Financial Plan includes one alternative rate trajectory of 9% in FY 2025 described in detail in
Section 5F:Alternate Scenarios. Under the alternative, deferring the 5-mile project planned for
FY 2026 and adding one additional project to the end of the ~60 year replacement cycle will mean
the last main is approximately 110-111 years old before it is replaced. Staff recommends a higher
rate increase of 15% in FY 2025 to raise revenues to pay for a reduced-size main replacement of
1 mile (instead of 5 miles) with construction in FY 2026. With the inclusion of this project in FY
2026, the last remaining main would be approximately 110 years old when it is replaced.
The most recent SSR project, SSR 31 includes sewer main replacement on El Camino Real in
Caltrans Right of Way and Page Mill Road in Santa Clara County Right of Way. Construction began
the end of July 2023 with completion anticipated in May 2024. SSR 31’s schedule was accelerated
to complete sewer replacement prior to Caltrans’ street improvement project on El Camino Real,
to avoid digging into the newly-paved street. SSR 31’s accelerated schedule and work in El Camino
Real resulted in higher than anticipated construction costs. Over the last few years, main
replacement costs have been increasing for utilities due to economic activity in the Bay Area
causing construction cost inflation. Utilities has bid one sewer project since the pandemic began.
There are no indications of a dip in construction costs in the near future. Therefore, future CIP
spending assumes an inflation rate of about 5.4% annually, which will significantly increase CIP
costs over the forecast period.
The costs for Customer Connections and on-going projects are projected to remain steady
through the end of the forecast period. Actual expenses for these projects fluctuate annually
depending on how many defective laterals and manholes are discovered during routine
maintenance, as well as how much development and redevelopment is going on that prompts
the replacement or upgrade of sewer laterals. Property owners pay a fee for sewer lateral
replacement or expansion during redevelopment, so when the number of projects increases, so
does fee revenue.
Table 16 displays anticipated CIP spending for the 5-year financial forecast period, assuming the
accelerated replacement rate of CIP projects will start in FY 2028.
Table 16: Projected CIP Spending, FY 2024 to FY 2029 ($,000)
Aside from Customer Connections, the CIP plan for FY 2024 to FY 2029 is funded by sewer rates
and capacity fees. Appendix B: Wastewater Collection Utility Capital Improvement Program (CIP)
Detail shows the details of the plan.
Figure 10 below shows the projected CIP Reserve balances from FY 2025 through FY 2029. Figure
11 below shows the projected CIP expenditures fluctuating from year to year with the staggered
main replacement schedule. The utility will resume capital program contributions as soon as
Attachment A: Exhibit 1
possible and this is projected to be in FY 2027. This will gradually re-establish the CIP Reserve
within the guideline range by FY 2031. Until FY 2027 the CIP Reserve is expected to remain empty.
Appendix A: Wastewater Collection Financial Forecast Detail shows the amount of the rate-
funded CIP Reserve contributions under “Expenses” for FY 2024 through FY 2029.
Figure 10: Projected CIP Reserve Balances, FY 2025 to FY 2029 ($,000)
$-
$2
$4
$6
$8
$10
$12
2025 2026 2027 2028 2029
$ (Mil
l
i
o
n
s
)
Fiscal Year
CIP Reserve (Year-End)Reserve Min/Max
Attachment A: Exhibit 1
Figure 11: Projected CIP Expenditure, and Projected Capital Program Contribution, FY 2027 to
FY 2029 ($000)
SECTION 6 D : DEBT SERVICE
The Wastewater Collection Utility currently pays its share of one bond issuance, the 1999 Utility
Revenue Bonds, Series A, which is due to be retired in FY 2024. This $17.7 million issuance
refinanced various earlier Storm Drain, Wastewater Treatment, and Wastewater Collection
Utility bond issuances. The Wastewater Collection Utility’s share of the issuance was roughly $1.9
million. This amount represented the second refinancing of the remaining principal of a 1990
bond issuance, which itself was a refinancing of a 1985 issuance that financed a variety of
improvements to the sewer system. The cost of debt service for the Wastewater Collection
Utility’s share of this bond issuance for the financial forecast period is roughly $129,000 per year.
The 1999 Utility Revenue Bonds include two covenants stating that 1) the Wastewater Collection
Utility will maintain a debt coverage ratio of 125% of debt service, and 2) that the City will
maintain “Available Reserves”11 equal to five times the annual debt service. The current Financial
Plan maintains compliance with both covenants throughout the forecast period. Table 17, below,
shows compliance with the first covenant.
11 Available Reserves as defined in the 1999 Utility Revenue Bonds included reserves for the Water, Wastewater
Treatment, Wastewater Collection, Refuse, Storm Drain, Electric, and Gas Utilities
$0
$2
$4
$6
$8
$10
$12
$14
$16
2027 2028 2029
$ (Mil
l
i
o
n
s
)
Fiscal Year
CIP Reserve Contribu�on Total CIP Expenses
Attachment A: Exhibit 1
Table 17: Debt Service Coverage Ratio ($000)
FY 2024
Revenues 21,915
Expenses (excl. CIP
and Debt Service)
20,308
Net Revenues 1,606
Debt Service 129
Coverage Ratio 1243%
Table 18, below, shows the available reserves in relation to the debt service for the Wastewater
Collection utility in FY 2024.
Table 18: Debt Service Minimum Reserves ($000)
FY 2024
Wastewater Collection and Water Utilities a 20,313
Debt Service b 129
Reserves Ratio c 157x
a) CIP, Rate Stabilization, Operations and Unassigned Reserves
b) Wastewater Collection and Water Utility’s share of the debt service on
the 1999 Utility Revenue Bonds
c) Calculated using combined Wastewater Collection and Water Utility
reserves. The actual reserves ratio for the 1999 Utility Revenue Bonds is
calculated based on the combined Water, Wastewater Treatment,
Wastewater Collection, Refuse, Storm Drain, Electric, and Gas Utilities
reserves and total debt service and is higher than shown here.
The Wastewater Collection Utility’s reserves (but not its net revenues) are also considered
security for the Storm Drain and Wastewater Treatment Utilities’ shares of the debt service on
the 1999 bonds. Throughout the term of the bonds there remains a small risk that the
Wastewater Collection Utility’s reserves could be called upon to make a debt service payment on
behalf of one of those utilities if it cannot meet its debt service obligations. Staff does not foresee
this occurring based on the current financial condition of those utilities. If the Wastewater
Collection Utility’s reserves were used this way, any amounts advanced would have to be repaid
by the borrowing utility.
SECTION 6 E : OTHER REVENUES
Other revenues are from capacity and connection fees and income from interest and transfers
in. These revenues fluctuate from year to year. This plan forecasts other revenues using a three-
year average of actual capacity and connection fee revenue from FY 2021 – FY 2023 and assuming
no inflation throughout the forecast period.
Attachment A: Exhibit 1
SECTION 7 : COMMUNICATIONS PLAN
In FY 2025, the communications strategy for the wastewater collection utility will address the
following primary areas: cost drivers, cost containment measures, infrastructure upgrades,
increasing wastewater treatment costs, maintenance and operations related to safety, and how
these necessary activities impact the rates this year. Communication about wastewater rate
adjustments will highlight the important infrastructure upgrades that are occurring at the
Regional Water Quality Control Plant (RWQCP) as well as increased capital improvement projects
(CIP) to improve our wastewater collection utility services. These infrastructure upgrades are
necessary to replace aging wastewater collection mains and sanitary sewer treatment equipment
at the RWQCP. Financial reserves are also below minimum guidelines due to higher capital
improvement program costs, lower revenue than forecasted, and higher transfers out to capital
projects. Some projects will be deferred as the fund increases revenues to a sustainable level.
Staff update the utilities webpages with information on the progress of wastewater projects to
keep customers apprised of the status and accomplishments of capital improvement projects.
Customers can find project schedules, maps, overviews of the work being done, and project
manager contact information at the Utilities Projects webpage12. Promotional activities about
wastewater infrastructure upgrades and environmental service improvements, operations,
safety, CPAU and customer responsibilities for wastewater system maintenance, include the use
of bill inserts, ads in local print publications, email newsletters and social media.
An important communications topic for the wastewater utility is avoiding sewer back-ups due to
FOG (fats, oil and grease), trash and other hazardous materials being dumped down drains and
toilets. These items can clog sewer lines, cause sewer overflows, pollute San Francisco Bay, and
create a health and safety risk to humans. Safety topics are emphasized year-round. Staff
continue to educate customers about the utility’s gas-sewer line cross-bore inspection program,
including the importance of calling 811 before digging and contacting CPAU prior to clearing
sewer lines in the event of a sewer back-up.
While print materials and webpages feature prominently, CPAU is increasing the outreach
emphasis on more direct communication with customers, including through use of social media,
email newsletters, digital ads and videos. Staff attend community outreach events, safety and
emergency preparedness fairs, business and neighborhood meetings. CPAU continually seeks out
new opportunities to engage with the public to spread awareness about important safety topics
and inform the community about project improvements such as at the RWQCP.
12 https://www.cityofpaloalto.org/Departments/Utilities/Utilities-Services-Safety/Utilities-
Projects
Attachment A: Exhibit 1
APPENDICES
Appendix A: Wastewater Collection Financial Forecast Detail
Appendix B: Wastewater Collection Utility Capital Improvement Program (CIP) Detail
Appendix C: Wastewater Collection Utility Reserves Management Practices
Appendix E: Map (CPA Wastewater Collection System - Sewer Mains Replaced or Rehabilitated
since 1990)
Appendix E: Sample of Wastewater Collection Outreach Materials
Attachment A: Exhibit 1
APPENDIX A : WASTEWATER COLLECTION FINANCIAL FORECAST DETA IL
Attachment A: Exhibit 1
APPENDIX B : WASTEWATER COLLECTION UTILITY CAPITAL IMPROVEMENT PROGRAM (CIP) DETAIL
Attachment A: Exhibit 1
APPENDIX C : WASTEWATER COLLECTION UTILITY RESERVES
MANAGEMENT PRACTICES
The following reserves management practices shall be used when developing the Wastewater
Collection Utility Financial Plan:
Section 1. Definitions
a) “Financial Planning Period” – The Financial Planning Period is the range of future fiscal
years covered by the Financial Plan. For example, if the Financial Plan delivered in
conjunction with the FY 2015 budget includes projections for FY 2015 to FY 2019, FY 2015
to FY 2019 would be the Financial Planning Period.
b) “Fund Balance” – As used in these Reserves Management Practices, Fund Balance refers
to the Utility’s Unrestricted Net Assets.
c) “Net Assets” - The Government Accounting Standards Board defines a Utility’s Net Assets
as the difference between its assets and liabilities.
d) “Unrestricted Net Assets” - The portion of the Utility’s Net Assets not invested in capital
assets (net of related debt) or restricted for debt service or other restricted purposes.
Section 2. Reserves
The Wastewater Collection Utility’s Fund Balance is reserved for the following purposes:
a) For existing contracts, as described in Section 3 (Reserve for Commitments)
b) For operating and capital budgets re-appropriated from previous years, as described in
Section 4 (Reserve for Re-appropriations)
c) For cash flow management and contingencies related to the Wastewater Collection
Utility’s Capital Improvement Program (CIP), as described in Section 5 (CIP Reserve)
d) For rate stabilization, as described in Section 6 (Rate Stabilization Reserve)
e) For operating contingencies, as described in Section 7 (Operations Reserve)
f) Any funds not included in the other reserves will be considered Unassigned Reserves and
shall be returned to ratepayers or assigned a specific purpose as described in Section 8
(Unassigned Reserves).
Section 3. Reserve for Commitments
At the end of each fiscal year the Reserve for Commitments will be set to an amount equal
to the total remaining spending authority for all contracts in force for the Wastewater
Collection Utility at that time.
Section 4. Reserve for Re-appropriations
At the end of each fiscal year the Reserve for Re-appropriations will be set to an amount
equal to the amount of all remaining capital and non-capital budgets, if any, that will be re-
appropriated to the following fiscal year in accordance with Palo Alto Municipal Code
Section 2.28.090.
Attachment A: Exhibit 1
Section 5. CIP Reserve
The CIP Reserve is used to manage cash flow for capital projects and acts as a reserve for
capital contingencies. Staff will manage the CIP Reserve according to the following
practices:
a) The following guideline levels are set forth for the CIP Reserve. These guideline levels are
calculated for each fiscal year of the Financial Planning Period and approved by Council
Resolution.
Minimum Level 20% of the maximum CIP Reserve guideline level
Maximum Level Average annual (12 month)13 CIP budget, for 48
months of budgeted CIP expenses14
b) Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and
the Reserve for Commitments when funds are added or removed from to that reserve as
a result of a change in contractual commitments related to CIP projects. Any other
additions to or withdrawals from the CIP reserve require Council action.
c) Minimum Level:
i) If, at the end of any fiscal year, the minimum guideline is not met, staff shall present
a plan to the City Council to replenish the reserve. The plan shall be delivered by the
end of the following fiscal year, and shall, at a minimum, result in the reserve reaching
its minimum level by the end of the next fiscal year. For example, if the CIP Reserve is
below its minimum level at the end of FY 2017, staff must present a plan by June 30,
2018 to return the reserve to its minimum level by June 30, 2019. In addition, staff
may present, and the Council may adopt, an alternative plan that takes longer than
one year to replenish the reserve, or that does so in a shorter period of time.
d) Maximum Level: If there are funds in this reserve in excess of the maximum level staff
must propose in the next Financial Plan to transfer these funds to another reserve, return
the funds to ratepayers, or designate a specific use of the funds for CIP investments that
will be made by the end of the next Financial Planning Period. Staff may also seek City
Council to approve holding funds in this reserve in excess of the maximum level if they
are held for a specific future purpose related to the CIP.
Section 6. Rate Stabilization Reserve
Funds may be added to the Rate Stabilization Reserve by action of the City Council and held
to manage the trajectory of future year rate increases. Withdrawal of funds from the Rate
Stabilization Reserve requires Council action. If there are funds in the Rate Stabilization
Reserve at the end of any fiscal year, any subsequent Wastewater Collection Utility
Financial Plan must result in the withdrawal of all funds from this Reserve by the end of the
Financial Planning Period.
13 Each month is calculated based upon 1/12 of the annual budget.
14 For example, in the Financial Plan for FY 2022, the 48 month period to use to derive the
annual average is FY 2022 through FY 2025. In the FY 2023 Financial Plan, the 48 month period
to use to derive the annual average would be FY 2023 through FY 2026 etc.
Attachment A: Exhibit 1
Section 7. Operations Reserve
The Operations Reserve is used to manage normal variations in costs and as a reserve for
contingencies. Any portion of the Wastewater Collection Utility’s Fund Balance not included
in the reserves described in Section 3-Section 6 above will be included in the Operations
Reserve unless this reserve has reached its maximum level as set forth in Section 7(d)
below. Staff will manage the Operations Reserve according to the following practices:
a) The following guideline levels are set forth for the Operations Reserve. These guideline
levels are calculated for each fiscal year of the Financial Planning Period based on the
levels of Operations and Maintenance (O&M) and commodity expense forecasted for that
year in the Financial Plan.
Minimum Level 60 days of O&M and commodity expense
Target Level 105 days of O&M and commodity expense
Maximum Level 150 days of O&M and commodity expense
b) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Operations
Reserve are lower than the minimum level set forth above, staff shall present a plan to
the City Council to replenish the reserve. The plan shall be delivered within six months of
the end of the fiscal year, and shall, at a minimum, result in the reserve reaching its
minimum level by the end of the following fiscal year. For example, if the Operations
Reserve is below its minimum level at the end of FY 2014, staff must present a plan by
December 31, 2014 to return the reserve to its minimum level by June 30, 2015. In
addition, staff may present, and the Council may adopt, an alternative plan that takes
longer than one year to replenish the reserve.
c) Target Level: If, at the end of any fiscal year, the Operations Reserve is higher or lower
than the target level, any Financial Plan created for the Wastewater Collection Utility shall
be designed to return the Operations Reserve to its target level within four years.
d) Maximum Level: If, at any time, the Operations Reserve reaches its maximum level, no
funds may be added to this reserve. Any further increase in the Wastewater Collection
Utility’s Fund Balance shall be automatically included in the Unassigned Reserve
described in Section 8, below.
Section 8. Unassigned Reserve
If the Operations Reserve reaches its maximum level, any further additions to the
Wastewater Collection Utility’s Fund Balance will be held in the Unassigned Reserve. If there
are any funds in the Unassigned Reserve at the end of any fiscal year, the next Financial Plan
presented to the City Council must include a plan to assign them to a specific purpose or
return them to the Wastewater Collection Utility ratepayers by the end of the first fiscal year
of the next Financial Planning Period. For example, if there were funds in the Unassigned
Reserves at the end of FY 2015, and the next Financial Planning Period is FY 2016 through FY
2020, the Financial Plan shall include a plan to return or assign any funds in the Unassigned
Reserve by the end of FY 2016. Staff may present an alternative plan that retains these funds
or returns them over a longer period of time.
Attachment A: Exhibit 1
APPENDIX D: MAP (CPA WASTEWATER COLLECTION SYSTEM - SEWER
MAINS REPLACED OR REHABILITATED SINCE 1990)
Attachment A: Exhibit 1
APPENDIX E : SAMPLE OF WASTEWATER COLLECTION OUTREACH
MATERIALS
RESIDENTIAL WASTEWATER COLLECTION AND DISPOSAL
UTILITY RATE SCHEDULE S-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No S-1-1 Effective 7-1-20243
dated 7-1-20232 Sheet No S-1-1
A. APPLICABILITY:
This schedule applies to each Occupied Domestic Dwelling unit.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Wastewater Service.
C. RATES:
Per Month
Each Occupied Domestic Dwelling unit ................................................................................
$48.6455.93
D. SPECIAL NOTES:
1.Any dwelling unit being individually served by a Water, Gas, or Electric Meter will be
considered continuously occupied.
2.For two or more Occupied Domestic Dwelling units served by one Water Meter, the
monthly Wastewater charge will be calculated by multiplying the current Wastewater rate
by the number of dwelling units.
3.Each developed separate lot shall have a separate service lateral to a sanitary main or
manhole.
{End}
Attachment A, Exhibit 2
COMMERCIAL WASTEWATER COLLECTION AND DISPOSAL
UTILITY RATE SCHEDULE S-2
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No S-2-1 Effective 7-1-20243
dated 7-1-20232 Sheet No S-2-1
A. APPLICABILITY:
This schedule applies to all commercial establishments other than those served under Utility Rate
Schedule S-1 (Residential Wastewater Collection and Disposal), Rate Schedule S-6 (Restaurant
Wastewater Collection and Disposal) or Rate Schedule S-7 (Commercial Establishments
Wastewater Disposal – Industrial Discharger).
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Wastewater Service.
C. RATES:
Quantity Rate, per 100 cubic feet (See Section D.1) .......................................................... $9.0810.44
D. SPECIAL NOTES:
1. The monthly charge for the quantity rate set forth in Section C of this rate schedule will be
based upon the average Water usage for the months of January, February and March, and
applied in the following July. If a Water Meter is identified as exclusively serving
irrigation landscaping, such Meter will be exempted from Wastewater charge calculations.
Customers without an applicable usage history will be rebuttably presumed to have usage
of 4.8 ccf per month until such time as such usage may reasonably be established by the
City of Palo Alto Utilities Department.
2. The City of Palo Alto Utilities Department may require Wastewater Metering facilities, in
which case Service will be governed by terms of a special agreement between the City and
the Customer.
{End}
Attachment A, Exhibit 2
RESTAURANT WASTEWATER COLLECTION AND DISPOSAL
UTILITY RATE SCHEDULE S-6
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No S-6-1 Effective 7-1-20243
dated 7-1-20232 Sheet No S-6-1
A. APPLICABILITY:
This schedule applies to all restaurants.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Wastewater Service.
C. RATES:
Quantity Rates, per 100 cubic feet of monthly metered Water usage ...................................$
13.555.58
D. SPECIAL NOTES:
1. The City of Palo Alto Utilities Department may require Wastewater Metering facilities, in
which case Service will be governed by terms of a special agreement between the City and
the Customer.
{End}
Attachment A, Exhibit 2
COMMERCIAL WASTEWATER COLLECTION AND DISPOSAL
– INDUSTRIAL DISCHARGER
UTILITY RATE SCHEDULE S-7
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No S-7-1 Effective 7-1-20243
dated 7-1-20232 Sheet No S-7-1
A. APPLICABILITY:
This schedule applies to any establishment requiring sampling of industrial discharges in excess
of 25,000 gallons per day, or special discharge monitoring, as defined in Rule 23, Section C.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Wastewater Service.
C. RATES:
1. Collection System Operation, Maintenance, and Infiltration Inflow:
$ 4.515.18 per 100 cubic feet of metered water use.
2. Advanced Waste Treatment Operations and Maintenance Charge:
$ 2.071.80 per 100 cubic feet of metered water use
3. $253.4920.43 per 1000 pounds (lbs) of COD (Chemical Oxygen Demand)
4. $ 611.17531.46 per 1000 lbs of SS (Suspended Solids)
5. $ 4,223.093,672.26 per 1000 lbs of NHRR3RR (Ammonia)
6. $ 18,528.2916,111.56 per 1000 lbs of toxics (chromium, copper, cyanide, lead, nickel, silver,
and zinc)
D. SPECIAL NOTES:
1. Water usage will be determined as defined in Rule 23, Section C. If a Water Meter is
identified as exclusively serving irrigation landscaping, such Meter will be exempted from
Wastewater charge calculations.
2. The City of Palo Alto Utilities Department may require Wastewater Metering facilities, in
which case Service will be governed by terms of a special agreement between the City of
Palo Alto and the Customer.
3. Charges for large discharges will be determined on the basis of sampling as outlined in
Utilities Rule 23, Section C. However, for purposes of arriving at an accurate flow
estimate, discharge Meters, if installed, can be utilized to measure outflow for billing
purposes. Annual charges will be determined and allocated monthly for billing purposes.
{End}
Attachment A, Exhibit 2
RESIDENTIAL WASTEWATER COLLECTION AND DISPOSAL
UTILITY RATE SCHEDULE S-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No S-1-1 Effective 7-1-20243
dated 7-1-20232 Sheet No S-1-1
A. APPLICABILITY:
This schedule applies to each Occupied Domestic Dwelling unit.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Wastewater Service.
C. RATES:
Per Month
Each Occupied Domestic Dwelling unit ................................................................................
$48.6453.01
D. SPECIAL NOTES:
1.Any dwelling unit being individually served by a Water, Gas, or Electric Meter will be
considered continuously occupied.
2.For two or more Occupied Domestic Dwelling units served by one Water Meter, the
monthly Wastewater charge will be calculated by multiplying the current Wastewater rate
by the number of dwelling units.
3.Each developed separate lot shall have a separate service lateral to a sanitary main or
manhole.
{End}
Attachment A: Exhibit 3
COMMERCIAL WASTEWATER COLLECTION AND DISPOSAL
UTILITY RATE SCHEDULE S-2
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No S-2-1 Effective 7-1-20243
dated 7-1-20232 Sheet No S-2-1
A. APPLICABILITY:
This schedule applies to all commercial establishments other than those served under Utility Rate
Schedule S-1 (Residential Wastewater Collection and Disposal), Rate Schedule S-6 (Restaurant
Wastewater Collection and Disposal) or Rate Schedule S-7 (Commercial Establishments
Wastewater Disposal – Industrial Discharger).
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Wastewater Service.
C. RATES:
Quantity Rate, per 100 cubic feet (See Section D.1) .......................................................... $9.8908
D. SPECIAL NOTES:
1. The monthly charge for the quantity rate set forth in Section C of this rate schedule will be
based upon the average Water usage for the months of January, February and March, and
applied in the following July. If a Water Meter is identified as exclusively serving
irrigation landscaping, such Meter will be exempted from Wastewater charge calculations.
Customers without an applicable usage history will be rebuttably presumed to have usage
of 4.8 ccf per month until such time as such usage may reasonably be established by the
City of Palo Alto Utilities Department.
2. The City of Palo Alto Utilities Department may require Wastewater Metering facilities, in
which case Service will be governed by terms of a special agreement between the City and
the Customer.
{End}
Attachment A: Exhibit 3
RESTAURANT WASTEWATER COLLECTION AND DISPOSAL
UTILITY RATE SCHEDULE S-6
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No S-6-1 Effective 7-1-20243
dated 7-1-20232 Sheet No S-6-1
A. APPLICABILITY:
This schedule applies to all restaurants.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Wastewater Service.
C. RATES:
Quantity Rates, per 100 cubic feet of monthly metered Water usage ...................................$
14.763.55
D. SPECIAL NOTES:
1. The City of Palo Alto Utilities Department may require Wastewater Metering facilities, in
which case Service will be governed by terms of a special agreement between the City and
the Customer.
{End}
Attachment A: Exhibit 3
COMMERCIAL WASTEWATER COLLECTION AND DISPOSAL
– INDUSTRIAL DISCHARGER
UTILITY RATE SCHEDULE S-7
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No S-7-1 Effective 7-1-20243
dated 7-1-20232 Sheet No S-7-1
A. APPLICABILITY:
This schedule applies to any establishment requiring sampling of industrial discharges in excess
of 25,000 gallons per day, or special discharge monitoring, as defined in Rule 23, Section C.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Wastewater Service.
C. RATES:
1. Collection System Operation, Maintenance, and Infiltration Inflow:
$ 4.951 per 100 cubic feet of metered water use.
2. Advanced Waste Treatment Operations and Maintenance Charge:
$ 1.9680 per 100 cubic feet of metered water use
3. $240.2620.43 per 1000 pounds (lbs) of COD (Chemical Oxygen Demand)
4. $ 579.2931.46 per 1000 lbs of SS (Suspended Solids)
5. $ 4,002.763,672.26 per 1000 lbs of NHRR3RR (Ammonia)
6. $ 17,561.606,111.56 per 1000 lbs of toxics (chromium, copper, cyanide, lead, nickel, silver,
and zinc)
D. SPECIAL NOTES:
1. Water usage will be determined as defined in Rule 23, Section C. If a Water Meter is
identified as exclusively serving irrigation landscaping, such Meter will be exempted from
Wastewater charge calculations.
2. The City of Palo Alto Utilities Department may require Wastewater Metering facilities, in
which case Service will be governed by terms of a special agreement between the City of
Palo Alto and the Customer.
3. Charges for large discharges will be determined on the basis of sampling as outlined in
Utilities Rule 23, Section C. However, for purposes of arriving at an accurate flow
estimate, discharge Meters, if installed, can be utilized to measure outflow for billing
purposes. Annual charges will be determined and allocated monthly for billing purposes.
{End}
Attachment A: Exhibit 3
March 6, 2024 www.cityofpaloalto.org
WASTEWATER COLLECTION UTILITY FINANCIAL PROJECTIONS
2
Wastewater Proposal
•Staff Recommendation: 15% rate increase in FY 25, $7.29 per residential customer per month
•Reduced-size sewer replacement $1M in FY 25 and $2M in FY 26
•$2M Pump station retrofit in FY 28
•Alternative 9% rate increase in FY 25, $4.37 per residential customer per month
•Defer FY 25 and FY 26 of planned sewer replacement
•Defer pump station retrofit
•Both staff recommendation and alternative resume 2.5 miles per year of sewer main replacement
in FY 28
Rate Projections:
3
Summary of Proposal and Alternative Residential Bill Impacts
4
Wastewater Alternatives & Residential Bill Impacts
5
Wastewater Projections
•FY 2023 Year End Ops Reserve below minimum guideline and below zero, at -$0.7M, due to:
o $3M – higher CIP-related (including admin costs)
o $0.5M – revenue lower than forecasted
o $0.3M – higher transfers out to capital projects
•Sanitary Sewer Replacement 31 moved up a year from FY 2024 to FY 2023 due to coordination with
CalTrans; $9.3M in the reappropriations reserve for this project
•Current year revenue projected to be $0.7M below projection due to non-residential revenue
declines as a result of wet weather and reductions in winter water usage
•Recommend reduced size sewer main replacement (construction in FY 2026)
•Reductions temporary as the Wastewater Collection fund increases revenues to sustainable level by
the end of the forecast period
6
Wastewater Utility Basics
•Treatment Plant has five partners: Stanford, East Palo Alto, Los Altos
Hills, Los Altos, and Mountain View
•Wastewater drains from partner systems through the City of Palo
Alto Collection System, and into the City of Palo Alto Regional Water
Quality Control Plant (RWQCP) for treatment
•City of Palo Alto Utilities Department manages collection system,
Public Works manages the RWQCP
7
Wastewater Utility Cost Structure
Palo Alto’s share of the cost
to treat sewage at Palo Alto’s
Regional Water Quality
Control Plant
Cost to collect sewage within
Palo Alto, including: maintaining
and replacing sewer
infrastructure, customer service,
billing, administration, etc.
8
Long Term Cost Trends
Annualized
Increase
FY 19-25
Treatment:
4.6%/yr
Collection:
7.1%/yr
Annualized
Increase
FY 25-29
Treatment:
3.2%/yr
Collection:
15.1%/yr
Note: Collection
Capital reflects
Two-Year
Average
9
Treatment Cost Drivers
•Regional Water Quality Control Plant needs rehabilitation
•Long Range Facilities Plan completed in 2012, currently being
updated including partner cost-share re-evaluation
•Near Term Major Projects:
•Sedimentation Tank ($19.4M)
•Outfall Pipeline ($17.8M)
•Laboratory/Operations Center ($48.5M)
•Secondary Treatment Upgrades ($193M)
•Applying for grant funding from Valley Water (estimated
$11.2M available to Palo Alto from 2024 through 2033);
•Forecast assumes $7.4M available from FY 26 – FY 29
10
Wastewater Collection Costs
11
Wastewater Collection Cost Trends
Annualized
Increase
FY19-25
Annualized
Increase
FY25-29
Collection
Capital:
0.8%/yr
Operations:
6.0%/yr
Collection
Capital:
32.4%/yr
Operations:
2.6%/yr
Reflects Reduced-
Size Sewer
Replacement in FY
2025 and FY 2026
Note: Capital &
Debt Service
reflects two-year
average
12
OPERATIONS/CAPITAL COST DRIVERS
Operational Costs
•Salary and benefit costs for existing staff
•3-4% annual inflation for other operating costs
•Revenue reduction expected in current year $700K,
estimated recovery by FY 2027
•Lower connection, capacity fees and interest income
Capital Costs
•Underground construction cost increases
•Allocated cost increases
•Sanitary Sewer Replacements at the rate of 2.5 miles per
year after fund recovers
13
Wastewater Reserve Projections
14
Preliminary Wastewater Cost and Revenue Projections
* Includes changes due to
commitments/reappropriations
and funds transferred to the CIP
Reserve
15
Wastewater Operations Reserve Projections
16
Wastewater CIP Reserve Projections
17
ALTERNATIVE Preliminary Wastewater Projections
* Includes changes due to
commitments/reappropriations
and funds transferred to the CIP
Reserve
9% in FY25
18
ALTERNATIVE: Wastewater Operations Reserve Projection
9% in FY25
19
ALTERNATIVE: Wastewater CIP Reserve Projection
Reduced-Size Sewer Replacement: $1M in FY 2025 and $2M in FY 2026
9% in FY25
20
WASTEWATER MONTHLY RESIDENTIAL BILL ($) NOVEMBER 2023
Palo Alto is 26% below
comparison city average
21
WASTEWATER MONTHLY NON-RESIDENTIAL BILL ($)
NOVEMBER 2023
Commercial: Palo Alto is 9% higher than
comparison city average
Restaurant: Palo Alto is 7% below
comparison city average
22
RECOMMENDATION
Staff requests that the UAC recommend that the City Council Adopt a
resolution approving:
•The Fiscal Year 2025 Wastewater Collection Financial Plan
•Increasing Wastewater Collection Utility Rates Via the Amendment
of Rate Schedules S-1 (Residential Wastewater Collection and
Disposal), S-2 (Commercial Wastewater Collection and Disposal), S-6
(Restaurant Wastewater Collection and Disposal) and S-7
(Commercial Wastewater Collection and Disposal – Industrial
Discharger)
•Approving up to a $3 million enterprise transfer loan from the Fiber
Optics Fund to the Wastewater Collection Utility’s Operations
Reserve in FY 2024