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HomeMy WebLinkAboutStaff Report 188-09TO: FROM: ATTENTION: DATE: SUBJECT: BUDGET FY 2010 -FY 2011 HONORABLE CITY COUNCIL CITY MANAGER FINANCE COMMITTEE MARCH 31, 2009 DEPARTMENT: UTILITIES CMR: 188:09 Utilities Advisory Commission Recommendation that Finance Committee Recommend Council Adoption of a Resolution Adopting a Water Rate Increase and Amending Utilities Rate Schedules W-1, W-4, and W-7 RECOMMENDATION Staff and the Utilities Advisory Commission (UAC) recommend that the Finance Committee recommends that the City Council adopt the attached resolution to: (a) Approve a 5 percent increase to water retail rates effective July 1, 2009, which will increase annual revenues by $1.4 million; and, (b) Approve the changes to the Water Utility Rate Schedules (W-1, W-4 and W-7), as attached. BACKGROUND During the budget processes for Fiscal Year (FY) 2009, an 8 percent water revenue increase was approved by the City Council effective July 1, 2008. The Water Fund's revenue requirement consists of a number of components including: wholesale water cost, distribution system operations, Capital Improvement Program (CIP) projects, funding of the Water Rate Stabilization Reserve (W-RSR), the Emergency Plant Replacement (EPR) Reserve, 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 annual revenue requirement. DISCUSSION Revenues and Expenses Table 1 below shows the estimated revenues and expenses for the Water Fund for FY 2010 and FY 2011, the actual revenues and expenses for FY 2008, and the budgeted revenues and expenses for FY 2009. CMR: 188:09 Page 1 of 6 TABLE 1- Water Fund Sources and Uses of Funds ($000 Fiscal Year A Actual 2008 B Adjusted 2009 C Proposed 2010 D Planned 2011 E 2012 F 2013 G 2014 1 % CHANGE IN RETAIL RATE 10.0% 8.0% 5.0% 7.0% 8.0% 9.0% 9.0% 2 PROJECTED SYSTEM AVERAGE RATE ($/CCF) $ 4.60 $ 4.96 $ 5.21 $ 5.57 $ 6.02 $ 6.56 $ 7.15 3 PROJECTED COMMODITY COST ($/CCF) $ 1.35 $ 1.47 $ 1.70 $ 1.98 $ 2.30 $ 2.77 $ 3.12 4 SALES UNITS (THOUSAND CCFs) 5,660 5,381 5,543 5,549 5,554 5,560 5,565 5 PROJECTED CHANGE IN RETAIL SALES REVENUE 2,366 1,977 1,375 2,023 2,476 3,011 3,286 6 7 Utilities Retail Sales 25,855 26,511 28,713 30,737 33,225 36,248 39,559 8 Service Connection Charges & Capacity Fees 1,372 886 920 931 942 886 897 9 Other Revenues plus Transfers In 365 97 97 97 97 97 97 10 Interest Plus Gain or Loss on Investment 1,628 1,015 1,161 646 574 561 550 11 CIP Bond Proceeds / Reserve 0 35,000 22,500 3,500 0 0 0 12 Total Sources of Funds 29,221 63,510 53,390 35,911 34,838 37,792 41,102 13 14 Purchases 8,363 8,701 10,354 12,067 14,028 16,907 19,059 15 Supply Operating Budget 350 659 685 712 741 770 801 16 Distribution Operating Budget 6,661 8,765 9,116 9,480 9,860 10,254 10,664 17 Debt Service Payments (Principle & Interest) 777 776 3,203 3,203 3,203 3,203 3,203 18 Rent 1,788 1,919 1,977 2,036 2,097 2,160 2,225 19 Transfer to General Fund 2,589 2,667 0 0 0 0 0 20 Other Transfers Out 460 1,131 749 749 749 749 749 21 Capital Improvement Programs 11,139 14,205 27,102 7,627 4,271 4,294 4,425 22 Operating Encumbrances & Reconciliation 19 0 0 0 0 0 0 23 Total Uses of Funds 32,146 38,823 53,185 35,875 34,948 38,337 41,126 24 25 Into/ (Out of) Reserves (2,925) 24,686 206 36 (110) (545) (24) Based on five-year financial projections, staff projects total uses of funds of $53.2 million in FY 2010 for the Water Fund. This is driven predominantly by the CIP costs associated with the Emergency Water Supply and Storage Project. This project will mainly be funded by the issuance of $35 million in bonds, but this will increase debt service payments to $3.2 million per year from current levels of $0.8 million per year. Additionally, purchase costs are expected to increase to $10.4 million in FY 2010. Staff expects a continued increase in the water purchase costs due to San Francisco Public Utilities Commission's (SFPUC's) infrastructure upgrade costs in future years. Supply and Distribution Operating Costs are expected to total $9.8 million in FY 2010. Staff identified a total cost savings of $0.3 million in Supply and Distribution Operating costs mainly as a result of keeping salaries and benefits unchanged from FY 2009 levels, and targeting a five percent reduction in some controllable cost areas such as travel, meetings, office supplies and other general expenses. As staff is currently assessing these and other possible adjustments to the proposed FY 2010 operating budget, these adjustments have not been reflected in the figures presented in Table 1. They are reflected as part of the discussions in the section below on reserves. Depending on the final outcome of labor negotiations and other budgetary decisions, final Operating Budget proposals will be determined. CMR: 188:09 Page 2 of 6 Reserves and Risk Assessment Table 2 below summarizes the end -of -year balances for the W-RSR, the risk assessment level and the reserve guidelines. Staff is proposing a change to the existing RSR Guidelines which would result in a reduction to the Minimum and Maximum Reserve levels (CMR:180:09). The annual risk assessment of the water fund is determined by assessing the short-term risks to the water fund. A report of this assessment was reviewed by the UAC at its February 2009 meeting. The reserve guidelines were established to manage risks over the longer term. TABLE 2: Water Reserve Balance, Guideline Levels and Risk Assessment Level ($M) Water Rate Stabilization Reserve FY 2009 FY 2010 FY 2011 Estimated End of Year Balance 9.0 9.2 9.3 Risk Assessment Level 3.6 3.8 4.0 Reserve Minimum Level 5.3 4.3 4.6 Reserve Maximum Level 13.3 8.7 9.3 After the proposed five percent rate increase, the W-RSR balance is forecast to be $9.2 million at the end of FY 2010, which is above the maximum guideline levels. With the additional budget savings of $0.3 million identified in Operating budget, expected year end balance could be as high as $9.5 million. Due to continued future projected rate increases by SFPUC, staff recommends keeping a healthy reserve balance in the Water Fund in order to minimize the magnitude of future rate increases. Allocation of the Proposed Revenue Increase Due to the billing system migration project, staff is not proposing any structural changes to the current rate schedules for FY 2010. Staff is, however, proposing to implement the required rate increases in a manner that moves the existing rates towards one that further promotes water conservation. Towards that objective, all of the required rate increase is applied to the volumetric component of the existing rate structures, and where applicable, to the higher consumption tier. The impact of the overall rate increase is designed to be equal on average across customer classes. However, individual customers' bills may result in different percentage increases, depending on monthly usage patterns. Table 3 below shows the impact of the proposed rate increase on customer bills based on different consumption levels for the residential and non-residential classes. CMR: 188:09 Page 3 of 6 TABLE 3: Impact of Rate Increase on Customer Bills Customer Usage Per Month (CCF) Current Monthly Bill ($) Proposed Monthly Bill ($) Proposed Monthly Bill Increase ($) Proposed Monthly Bill Increase (%) Small Residential (5/8" Meter) 7 $ 32.64 $ 32.64 $- 0.0% Medium Residential (5/8" Meter) 14 68.79 72.01 3.22 4.7% Large Residential (5/8" Meter) 35 177.24 190.12 12.88 7.3% Medium Commercial (3" Meter) 300 1,486.75 1,561.45 74.70 5.0% Large Commercial or Industrial (6" Meter) 1200 5,896.83 6,195.63 298.80 5.1% Large Commercial or Industrial (6" Meter) (irrigation only) (W-7) 3000 14,351.43 15,098.43 747.00 5.2% 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 CIP to rehabilitate or replace aging water distribution infrastructure. Table 4 below, which compares monthly water bills using municipal water rates as of January 1, 2009 for Mountain View, Redwood City, Santa Clara and Menlo Park, indicates that the average residential customer in surrounding cities pays approximately 34 percent less than the average Palo Alto residential customer. There are indications that nearby cities that purchase water supplies from the SFPUC may be raising rates in FY 2010. 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, 2009) Water Usage (CCF) Palo Alto Mountain View Redwood City Santa Clara Menlo Park Average Benchmark (%) Diff. Small 7 $32.64 $21.91 $30.85 $16.14 $32.99 $25.47 -22.0% Average 14 $68.79 $43.54 $50.72 $32.27 $54.28 $45.20 -34.3% Large 35 $177.24 $138.93 $153.20 $80.68 $119.81 $123.15 -30.5% Difference from CPAU -36.7% -26.3% -53.1% -21.1% -34.3% 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 and customer charges described here, CMR: 188:09 Page 4 of 6 the City must provide written notice by mail to water customers 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, 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. Possibility of Water Use Restrictions due to Water Shortage There is a possibility that the SFPUC will declare a water shortage emergency and impose mandatory water use reductions. However, the SFPUC has not taken this action at the time this report was prepared and is not expected to before mid- to late -March. If this action is taken, staff will return to the UAC and Council with an updated proposal for a rate adjustment and water rate schedules. The proposed rate adjustments will depend on the required revenue increases in order to compensate for the revenue loss due to targeted water reductions required by SFPUC. ALTERNATIVES Staff evaluated the impact of a zero percent rate adjustment for FY 2010. Under this scenario, future rate adjustments would be significantly higher in order to collect the required revenues due to the expected cost increases outlined in this report. This alternative was rejected in favor of the proposed rate adjustment to provide a steadier series of rate adjustments, rather than large jumps in rates from year to year. COMMISSION REVIEW AND RECOMMENDATIONS On March 4, 2009, the UAC voted unanimously (5-0), to recommend that the City Council: (a) Approve a 5 percent increase to water retail rates effective July 1, 2009, which will increase annual revenues by $1.4 million; and, (b) Approve the changes to the Water Utility Rate Schedules, as attached. In its discussions, one commissioner noted that the rate increase could be reduced based on maintaining adequate reserves. Others felt that the rate increase was acceptable since future costs are increasing and a lower increase at this time could lead to higher future increases due to highly likely future water supply cost increases. The notes from the UAC meeting are provided as Attachment D. RESOURCE IMPACT Approval of this rate proposal will increase the Water Fund retail sales revenues by approximately $1.4 million for FY 2010. POLICY IMPLICATIONS This recommendation does not represent a change to current City policies. ENVIRONMENTAL REVIEW The City is raising Water Utility rates predominantly for funding requirements due to capital projects planned to maintain service within existing facilities and increased Debt Service payments expected as a result of $35 million bond issuance associated with the Emergency CMR: 188:09 Page 5 of 6 Water Supply and Storage Project. The City also requires increased funding for water supply purchasing costs due to planned San Francisco Public Utilities Commission's infrastructure upgrade costs. An increase in water 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 Section 21080(b)(8) and Title 14 of the California Code of Regulations Section 15273(a)(1) and (3). ATTACHMENTS A. Resolution B. Water Fund FY 2010 Rate Adjustment Financial Projections C. Water Rate Schedules: W-1, W-4 and W-7 D. Draft Notes from the March 4, 2009 UAC meeting PREPARED BY: DEPARTMENT APPROVAL: CITY MANAGER APPROVAL: IPEK CONNOLLY Utilities, Sr. Resource Planner JANE O. RATCHY Utilities Assistant Dir c or, Resource Management VALERIE O. F NG Director (\if Uti ' ies -) 17 JAM�K�ENE City ap//ger CMR: 188:09 Page 6 of 6 ATTACHMENT A NOT YET APPROVED Resolution No. Resolution of the Council of the City of Palo Alto Adopting a Water Rate Increase and Amending Utility Rate Schedules W-1, W-4, and W-7 WHEREAS, 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 and the fees and charges therefore; and WHEREAS, pursuant to Article XIIID Sec. 6 of the California Constitution, on June 9, 2008, the Council of the City of Palo Alto held a public hearing to consider all protests against the proposed water rate increases; and WHEREAS, the total number of written protests presented by the close of the public hearing was less than fifty percent (50%) of the total number of customers and property owners subject to the proposed water rate increases. NOW, THEREFORE, the Council of the City of Palo Alto does hereby RESOLVE as follows: SECTION 1. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule W-1 (General Residential Water Service) is hereby amended to read in accordance with sheet W-1-1, attached hereto and incorporated herein. The foregoing Utility Rate Schedule, as amended, shall become effective July 1, 2009. SECTION 2. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule W-4 (General Non Residential Water Service) is hereby amended to read in accordance with sheet W-4-1, attached hereto and incorporated herein. The foregoing Utility Rate Schedule, as amended, shall become effective July 1, 2009. SECTION 3. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule W-7 (Irrigation Water Service) is hereby amended to read in accordance with sheet W-7-1, attached hereto and incorporated herein. The foregoing Utility Rate Schedule, as amended, shall become effective July 1, 2009. SECTION 4. The Council finds that the revenue derived from the authorized adoption enumerated herein shall be used only for the purpose set forth in Article VII, Section 2, of the Charter of the City of Palo Alto. 1 090323 syn 6050700 NOT YET APPROVED SECTION 5. The Council finds that an increase in water 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). INTRODUCED AND PASSED: AYES: NOES: ABSENT: ABSTENTIONS: ATTEST: City Clerk Mayor APPROVED AS TO FORM: APPROVED: Deputy City Attorney City Manager Director of Utilities Director of Administrative Services 2 090323 syn 6050700 uf°, GAt0Ali0 LITIti'('I[G 11 12 13 14 15 16 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 Fiscal Year % CHANGE IN RETAIL RATE SYSTEM AVERAGE RATE ($/CCF) SALES UNITS (CCFs) WATER UTILITY REVENUE SALES REVENUE: RATE ADJUSTMENT PRORATION IMPACT TOTAL ADJUSTED SALES DISCOUNTS/UNCOLLECT. INTEREST OTHER REVENUE CONNECTION FEES FROM RESERVES: RATE STABILIZATION CIP BOND PROCEEDS TOTAL FINANCIAL RESOURCES OPERATING EXPENSES PURCHASES CUSTOMER DESIGN & CONN. (CIP) SYSTEM IMPROVEMENT(CIP) OPERATIONS, & MAINT, OTHER ADMIN. ALLOCATED CHARGES: COST PLAN CHARGES & OTHER UTILITIES ADMINISTRATION TOTAL MAJOR ACTIVITIES DEBT SERVICE TRANSFERS: GENERAL FUND TRANSFER RENT OTHER TRANSFER SUB -TOTAL TRANSFER RESERVE ADDITIONS: PLANT REPLACEMENT RATE STABILIZATION DEBT SERVICE RESERVE TOTAL RESERVE ADDITIONS: TOTAL REVENUE REQUIREMENT RESERVES BALANCES PLANT REPLACEMENT RATE STABILIZATION CIP DEBT SERVICE Short Term Risk Assessment Value Long Term Rate Stabilization Guidelines RSR Minimum RSR Maximum Actual Adjusted 2008 2009 10.0% 4.60 5,660 8:0% 4.96 5,381 23,657 24,711 2,366 1,977 (99) (82) 25,925 , 26,606 (69) (95) 1,628 1,015 365 97 1,372 886 3,166 4,069 0 35,000 32,387 8,363 8,701 360 343 10,779 13,862 5,444 7,037 549 1,024 1,019 1,362 26,513 32,330 2,589 1,788 479 4,856 2,667 1,919 1,131 5,717 32,387 67,578 1,595 1,000 13,111 9,042 780 30,130 4,942 5,303 12,355 13,258 Proposed 2010 5.0% 5.21 5,543 27,493 1,375 (57) 28,810 (98) 1,161 97 920 0 22,500 53,390 10,354 353 26,749 7,319 1,065 1,417 47,256 3,203 0 1,977 749 2,726 206 53,390 1,000 9,248 7,630 17,878 Planned 2011 7.0% 5.57 5,549 28,896 2,023 (84) 30,835 (98) 646 97 931 0 3,500 35,911 12,067 364 7,263 7,612 1,108 1,473 29,887 3,203 0 2,036 749 2,785 35,911 1,000 9,284 4,130 ATTACHMENT B 8.0% 6.02 5,554 30,950 2,476 (103) 33,323 (98) 574 97 942 34,948 14,028 374 3,897 7,916 1,152 1,532 28,899 3,203 0 2,097 749 2,846 34,948 1,000 9,174 4,130 10,028 9.0% 6.56 5,560 33,460 3,011 (125) 36,345 (98) 561 97 886 38,337 16,907 386 3,908 8,233 1,198 1,593 32,225 3,203 0 2,160 749 2,909 38,337 1,000 8,629 4,130 10,941 9.0% 7.15 5,565 36,507 3,286 (137) 39,656 (98) 550 97 897 19,059 398 4,027 8,562 34,949 0 2,225 749 2,974 41,126 1,000 8,605 4,130 11,938 ATTACHMENT C GENERAL RESIDENTIAL WATER SERVICE UTILITY RATE SCHEDULE W-1 A. APPLICABILITY: This schedule applies to all separately metered single family residential water services. B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides water services. C. RATES: Per Meter Monthly Customer Charge: Per Month For 5/8 -inch meter $5.00 For 3/4 inch meter 5.00 For 1 inch meter 6.50 For 1 1/2 inch meter 12.27 For 2 -inch meter 19.37 For 3 -inch meter 77.65 For 4 -inch meter 130.60 For 6 -inch meter 260.43 For 8 -inch meter 383.67 For 10 -inch meter 383.67 Commodity Rate: (To be added Customer Charge and applicable to all pressure zones.) Per Hundred Cubic Feet (ccf) Per Month All Pressure Zones Tier 1 usage $3.949 Tier 2 usage (All usage over 100% of Tier 1) 5.464624 Temporary unmetered service to residential subdivision developers, per connection $6.00 CITY OF PALO ALTO UTILITIES Issued by the City Council Effective 44-7-1-X82009 Sheet No W-1-1 Supersedes Sheet No W-1-1 dated -711-1-2008 CITY OF PALO ALTO UTILITIES GENERAL RESIDENTIAL WATER SERVICE UTILITY RATE SCHEDULE W-1 D. SPECIAL NOTES: 1. Calculation of Cost Components The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or taxes. On a customer's bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. 2. Calculation of Usage Tiers Tier 1 water usage shall be calculated and billed based upon a level of 0.233 ccf per day rounded to the nearest whole ccf, based on meter reading days of service. As an example, for a 30 day bill, the Tier 1 level would be 7 ccf. For further discussion of bill calculation and proration, refer to Rule and Regulation 11. [End) CITY OF PALO ALTO UTILITIES Issued by the City Council EV-" Effective 4-1-7 1 20082009 Sheet No W-1-2 Supersedes Sheet No W-1-2 dated 711-1-2008 CITY OF PALO ALTO UTILITIES GENERAL NON-RESIDENTIAL WATER SERVICE UTILITY RATE SCHEDULE W-4 A. APPLICABILITY: This schedule applies to non-residential water service in the City of Palo Alto and its distribution area. This schedule is also applicable to multi -family residential customers served through a master meter. B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides water services. C. RATES: Per Meter Monthly Customer Charge Per Month For 5/8 -inch meter $5.00 For 3/4 -inch meter $5.00 For 1 -inch meter $6.50 For 1 1/2 inch meter $12.27 For 2 -inch meter $19.37 For 3 -inch meter $77.65 For 4 -inch meter $130.60 For 6 -inch meter $260.43 For 8 -inch meter $383.67 For 10 -inch meter $383.67 Commodity Rates: (to be added to Customer Charge) Per Hundred Cubic Feet (Ccf) Per Month All Pressure Zones Per Ccf $179�16 CITY OF PALO ALTO UTILITIES Issued by the City Council Effective -147 1 20042009 Sheet No W-4-1 Supersedes Sheet No W-4-1 dated -711-1-2008 CITY OF PALO ALTO UTILITIES GENERAL NON-RESIDENTIAL WATER SERVICE UTILITY RATE SCHEDULE W-4 D. SPECIAL NOTES: 1. Calculation of Cost Components The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or taxes. On a customer's bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. [End] CITY OF PALO ALTO UTILITIES Issued by the City Council \\I1/� Effective 447 1 X82009 Sheet No W-4-2 Supersedes Sheet No W-4-2 dated -711-1-2008 CITY OF PALO ALTO UTILITIES IRRIGATION WATER SERVICE UTILITY RATE SCHEDULE W-7 A. APPLICABILITY: This schedule applies to non-residential water service supplying dedicated irrigation meters in the City of Palo Alto and its distribution area. B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides water services. C. RATES: Per Meter Monthly Customer Charge Per Month For 5/8 -inch meter $5.00 For 3/4 -inch meter $5.00 For 1 -inch meter $6.50 For 1 1/2 inch meter $12.27 For 2 -inch meter $19.37 For 3 -inch meter $77.65 For 4 -inch meter $130.60 For 6 -inch meter $260.43 For 8 -inch meter $383.67 For 10 -inch meter $383.67 Commodity Rates: (to be added to Customer Charge) Per Hundred Cubic Feet (Ccfccf) Per Month All Pressure Zones Per Ccf $4.69946 CITY OF PALO ALTO UTILITIES Issued by the City Council ,',/EV Effective -147-1-2-8052009 Sheet No W-7-1 Supersedes Sheet No W-7-1 dated -711-1-2008 CITY OF PALO ALTO UTILITIES IRRIGATION WATER SERVICE UTILITY RATE SCHEDULE W-7 D. SPECIAL NOTES: 1. Calculation of Cost Components The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or taxes. On a customer's bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. {End) CITY OF PALO ALTO UTILITIES Issued by the City Council Effective 4-1-7-1-282009 Sheet No W-7-2 Supersedes Sheet No W-7-2 dated -711-1-2008 CITY OF PALO ALTO UTILITIES ATTACHMENT D EXCERPTS from Draft Minutes of UAC Meeting of March 4th, 2009 ITEM 5: ACTION ITEM: Rates Proposals for Fiscal Year 2010 Senior Resource Planner Ipek Connolly reviewed where we are in the budget process. In February, the UAC reviewed the long-term financial projections and this month, it will review the proposed rate adjustments for FY 2010. The rate proposals will be considered by the Council Finance Committee on March 31. The budget will be considered by the UAC in May and by the Finance Committee on May 19. Council adoption of the budget is scheduled for June 8. Connolly listed the assumptions used to prepare the financial projections used to develop the rate projections. The assumptions that have changed since the UAC saw the financial projections in February include the proposed changes in the equity transfer method (Item #4 discussed tonight), and additional savings identified in supply and distribution operating budgets. Savings estimates for operating budgets total $354,000. In addition, although labor negotiations are not complete for FY 2010, if there were no cost increases for salaries and benefits for FY 2010 compared to FY 2009, then savings would total $1,326,000. These savings are not incorporated into the cost projections at this time, but can be considered. Chair Dawes asked Director Fong if she had looked closely at headcount. Fong responded that she has looked closely, but that there are many regulatory compliance and reporting requirements that require staff to complete. These include the Department of Transportation, the Federal Energy Regulatory Commission, the California Energy Commission, State and County Department of Health, Regional Water Quality Control Board, and the California Public Utilities Commission. In addition, she scrutinizes the justification to fill any vacancy and noted that there is a rigorous city- wide process that any vacancy must go through before filling. Commissioner Waldfogel felt that the director should look at all programs and cut the lowest value projects and programs. Connolly presented the impact on the average residential total bill for gas, water, electricity and wastewater if the proposed rate adjustments were adopted by Council. Although water, wastewater, and electric rates are proposed to be increased, the proposed gas rate decrease cancels almost all the other rate increases so that, on an annual basis, the average residential bill will increase only 7 cents per month. Chair Dawes asked if staff had done any benchmarking or examination of best practices for utilities. He asked if NCPA has started a study to help the member agencies institute best management practices. Fong said that this much coordination between agencies, including the evaluation of pooled resources where feasible and bulk buying of supplies with other agencies. Commissioner Waldfogel said that across the board, there is a need to acknowledge the state of the economy with salary cuts, layoffs, drop in the value of homes and investments. He advised that Utilities must ensure that all the fat is cut off and that we need to proceed to cut into the bone at this point. 5a. Water: Senior Resource Planner Ipek Connolly presented the Water Fund costs and revenue projections and staffs recommended water rate increase for FY 2010 of 5%. She noted that the recommended water rate increase would be applied for residential customers on the second tier of water use. The rate for the first tier is not proposed to change so that low water users would not have an increased bill. Commissioner Rosenbaum asked whether City was really planning to sell water bonds and begin debt service in FY 2010. Connolly said that this was the plan and noted that even if the bond financing doesn't occur on schedule; we know that water supply costs are increasing in the future. Commissioner Waldfogel noted that there is a 16% increase in commodity cost, but only a 5% increase in the water rate, which he felt was good. Chair Dawes noted that the Water Fund Rate Stabilization Reserve (RSR) would be above the maximum guideline level after a 5% rate increase in FY 2010. He suggested that a lesser increase may make sense, especially since we're not sure when the water bond would be sold. Commissioner Melton noted that the proposal involves an attempt to ensure that future rate increases can be kept below 10% due to continued cost increases expected. ACTION: Commissioner Melton moved the staff recommendation to recommend that Council: 1) approve a 5 percent increase to water retail rates effective July 1, 2009, which will increase annual revenues by $1.4 million; and 2) approve the changes to the Water Utility Rate Schedules (W-1, W- 4 and W-7), as proposed. Commissioner Rosenbaum seconded the motion. The UAC voted to approve the motion unanimously (5-0).