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TO: HONORABLE CITY COUNCIL
FROM: CITY MANAGER DEPARTMENT: UTILITIES
ATTENTION: FINANCE COMMITTEE
DATE: MARCH 18, 2008 CMR: 169:08
SUBJECT: UTILITIES ADVISORY COMMISSION RECOMMENDATION TO
ADOPT A RESOLUTION ADOPTING A WATER RATE
INCREASE AND AMENDING UTILITY RATE SCHEDULES W-1,
W-2, W-4, AND W-7
RECOMMENDATION
Staff and the Utilities Advisory Commission (UAC) recommend that the City Council adopt the
attached resolution to:
(a) Approve an 8 percent increase to retail water rates, for Fiscal Year (FY) 2008-09,
effective July 1, 2008, which will increase annual revenues by $2.0 million; and,
(b) Approve the changes to the Water Utility Rate Schedules (W-1, W-2, W-4, and W-7),
as attached.
BACKGROUND
During the two-year FY 2007-09 budget process, a 10 percent rate increase was proposed by the
Utilities Department and approved by the City Council for FY 2007-08. In addition, a 10 percent
rate increase was approved in-concept for FY 2008-09. On February 19, City Council approved
mid-year changes to the FY 2007-08 budget primarily to reflect the unanticipated increased
wholesale cost of water [CMR:151:08].
The Water Fund’s revenue requirement consists of a number of components including:
wholesale water cost, distribution system operations costs, Capital Improvement Program (CIP)
projects, funding of the Water Rate Stabilization Reserve (W-RSR) and the Emergency Plant
Replacement Reserve (EPRR), and debt service. Any change in one or more of these
components, or a change in retail sales levels, can trigger the need for a rate adjustment. During
the budget process, staff forecasts customer revenues and utility expenses in order to quantify the
CMR: 169:08 Page 2 of 6
annual revenue requirement. Changes to forecasted revenues or expenses are reflected in
adjustments during the midyear budget process.
DISCUSSION
Table 1 below shows the estimated FY 2008-09 revenues and expenses for the Water Fund as
well as the actual revenues and expenses for FY 2006-07 and the adjusted budget revenues and
expenses for FY 2007-08.
TABLE 1 – Water Fund Sources and Uses of Funds ($000)
At the end of FY 2006-07, $9.2 million was returned to the W-RSR for encumbered CIP projects
that were cancelled. These funds will be used for the City’s Emergency Water Supply and
Storage Project. The total cost of the project is estimated to be $42 million, and Utilities staff is
working with the Administrative Services Department to explore utility revenue bond financing
for approximately $35 million of the project cost.
At this time, the San Francisco Public Utilities Commission (SFPUC) has yet to adopt the
wholesale water cost for FY 2008-09 and it may substantially differ from projections. Water
sales levels have stabilized lately and revenue forecasts for FY 2008-09 and beyond reflect this
CMR: 169:08 Page 3 of 6
pattern. CIP expenses not funded by bond proceeds are projected to be in the $4 million per year
range for the next several years.
Reserves and Risk Assessment
Table 2 below summarizes the end of year balances for the W-RSR, the risk assessment level
and the Reserve Guidelines. Staff presented the annual risk assessment of the Water Fund to the
UAC at its February 2008 meeting. Note that the risk assessment level is determined by
assessing the short-term risks to the Water Fund. The Reserve Guidelines were established to
manage risks over the longer term.
TABLE 2: Water Reserve Balance, Guideline Levels and Risk Assessment Level ($M)
Water Rate Stabilization Reserve FY 2006-07
(actual)
FY 2007-08
(estimated)
FY 2008-09
(forecast)
End of Year Balance 16.3 9.9 6.9
Risk Assessment Level 3.3 3.5
Reserve Minimum Level 7.1 4.9 5.3
Reserve Maximum Level 14.2 12.4 13.3
After the proposed eight percent rate increase, the W-RSR balance is forecast to be $6.9 million
at the end of FY 2008-09, which is above the minimum guideline level as well as the risk
assessment level. Due to continued future expected rate increases by SFPUC, staff recommends
keeping a healthy reserve balance in the Water Fund.
Allocation of the Proposed Revenue Increase
In FY 2007-08, the fixed monthly customer charge was re-introduced to partially collect fixed
costs for all customer classes. The balance of the costs is recovered in volumetric rates. The
fixed component introduced an element of ‘rate shock’ to some customers, especially residential
customers with low water usage. While incremental adjustments to the fixed monthly customer
charge may be made over time, staff proposes that only the volumetric component of the rates be
increased in FY 2008-09. Staff proposes that the increased water costs be allocated in FY 2008-
09 to higher tier usage, both to avoid additional rate shock to residential customers with lower
water usage, as well as to promote resource conservation.
Table 3 below shows the impact of the proposed rate increase on customer bills based on
different consumption levels for the residential and non-residential classes.
CMR: 169:08 Page 4 of 6
TABLE 3: Impact of Rate Increase on Customer Bills
Customer
Usage
(CCF)
Proposed
Monthly
Bill ($)
Amount of
Proposed
Increase ($)
Percent
Increase
Small Residential (5/8” Meter) 7 $ 32.64 $ - 0%
Average Residential (5/8” Meter) 14 68.79 4.58 7.1%
Medium Residential (5/8” Meter) 20 99.78 8.50 9.3%
Large Residential (5/8” Meter) 35 177.24 18.31 11.5%
Medium Commercial (3" Meter) 300 1,486.75 106.80 7.7%
Large Commercial or Industrial (6" Meter) 1200 5,896.83 427.20 7.8%
Large Commercial or Industrial (6" Meter)
(irrigation only) (W-7) 3000 14,351.43 1,068.00 8.0%
Comparison of Palo Alto Water Rates and Surrounding Cities:
For several years, Palo Alto's retail water rates have generally been higher than surrounding
areas, due to the funding of an aggressive capital program to rehabilitate or replace aging water
distribution infrastructure. Table 4 below, which compares monthly water bills using municipal
water rates as of January 1, 2008 for Mountain View, Redwood City, Los Altos and Menlo Park,
indicates that the average residential customer in surrounding cities pays approximately 31
percent less than the average Palo Alto residential customer. There are indications that nearby
cities that purchase their water supplies from the SFPUC may be raising rates in FY 2008-09. At
this time, the certainty or magnitude of their rate increases is not known.
TABLE 4 – Monthly Residential Water Bill Comparison (rates in effect as of Jan. 1, 2008)
Water Usage
(CCF)
Palo
Alto
Mountain
View
Redwood
City
Los
Altos1
Menlo
Park1
Average
Benchmark
Delta
(%)
Small 7 $32.64 $20.85 $28.20 $26.45 $32.15 $26.91 17.5
%
Average 14 $64.21 $41.43 $42.80 $42.22 $51.18 $44.41 30.8
%
Large 35 $158.9
2 $132.27 $105.60 $89.55 $108.3
0 $108.93 31.5
%
Delta for Average use 35.5% 33.3% 34.2% 20.3% 39.8%
Proposition 218 Water Rate Increase Procedure:
Proposition 218 amended the California Constitution and set forth procedural requirements
public agencies must follow in order to enact or increase a property-related fee. Since
Proposition 218 applies to the water service rate increases described here, the City must provide
written notice by mail to water customers and property owners subject to the proposed fees,
followed by a public hearing held not less than 45 days after notice is mailed. The notice must
include the amount of the fee, the basis upon which the fee was calculated, the reason for the fee,
1 Served by the California Water Service Company
CMR: 169:08 Page 5 of 6
and the date, time and location of the public hearing. If written protests against the proposed
fees are not presented by a majority of customers, the City may impose the fee.
ALTERNATIVES
Staff evaluated the impact of alternative rate proposals to the proposed $2.0 million revenue
increase. Any smaller rate increase would require reducing some combination of the operating
budget, CIP, or the W-RSR. Reducing the CIP would hinder water main replacement projects,
where the infrastructure has exceeded its system design life. Reducing the water operating
budget will hinder the reliability and safety of the water system. Withdrawing more funds from
the W-RSR would drive the reserve balance below the minimum guideline level, and could
necessitate an emergency rate increase request to accommodate infrastructure failure, or an
unexpected increase in water supply costs.
UTILITIES ADVISORY COMMISSION REVIEW AND RECOMMENDATIONS
On March 5, 2008, the UAC voted unanimously (4-0 with one Commissioner absent), to
recommend that the City Council:
(a) Approve an 8 percent increase to retail water rates for Fiscal Year (FY) 2008-09,
effective July 1, 2008, which will increase annual revenues by $2.0 million; and,
(b) Approve the changes to the Water Utility Rate Schedules, as attached.
The UAC discussed the fact that Palo Alto’s water rates are higher than neighboring cities and
noted that this trend is worrisome. The UAC also asked staff to explain why the fixed charges
were not proposed to increase as this is what staff had indicated last year when proposing the
reinstatement of the fixed charge. Staff responded that the goal of encouraging water
conservation has increased in importance since last year and that a greater difference in the rates
for higher use tiers will serve to provide a stronger incentive to conserve.
RESOURCE IMPACT
Approval of this rate proposal will increase the Water Fund retail sales revenues in FY 2008-09
by approximately $2.0 million.
POLICY IMPLICATIONS
This recommendation is consistent with current City policies.
ENVIRONMENTAL REVIEW
An increase in rates to meet operating expenses and financial reserve needs 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)(1) and (3).
CMR: 169:08 Page 6 of 6
ATTACHMENTS
A. Resolution
B. Water Rate Schedules: W-1, W-2, W-4, and W-7
C. Draft Minutes of the UAC meeting of March 5, 2008
PREPARED BY: Eric Keniston, Utilities Rate Analyst
Ipek Connolly, Senior Resource Planner
REVIEWED BY: Jane Ratchye, Assistant Director of Utilities, Resource Management
DEPARTMENT HEAD: _________________________________
VALERIE O. FONG
Director of Utilities
CITY MANAGER APPROVAL: _________________________________
EMILY HARRISON
Assistant City Manager