HomeMy WebLinkAboutStaff Report 1398City of Palo Alto (ID # 1398)
Finance Committee Staff Report
Report Type:Meeting Date: 3/1/2011
March 01, 2011 Page 1 of 19
(ID # 1398)
Council Priority: {ResProject:ClearLine}
Title: Water Utility Rate Changes
Subject: Proposed Water Utility Rate Adjustments and Long Term F inancial
Projections
From:City Manager
Lead Department: Utilities
Recommendation
Staff requests that the Finance Committee recommend that the City Council adopt a resolution
to:
1.Increase overall retail water rates and annual revenues for the Water Fund by 12.5
percent or $3.4 million in Fiscal Year (FY) 2012; and
2.Amend Utility Water Rate Schedules W-1, W-3, W-4, and W-7, as attached.
The recommended rate increase will trigger the notice and protest hearing procedures under
Proposition 218.
Executive Summary
This report discusses the projected costs and revenue requirements for the Water Fund for FY
2012 through FY 2016, as well as recommended rate revisions for FY 2012.
Staff assessed major cost drivers and expected costs, the short-term risks, reviewed reserve
guidelines, and determined the revenue requirements for the Water Fund for the next five
years. Staff projects a revenue shortfall of $6.2 million in FY 2012 and requests a revenue
requirement increase of $3.4 million or an average rate increase of 12.5%, for FY 2012 followed
by additional rate increases of 17%, 16% and 8% for FY 2013 through FY 2015. Due to sufficient
reserve levels in the Water Rate Stabilization Reserves (WRSR), the remaining shortfall of $2.8
million in FY 2012 will be drawn out of the reserves. Staff requests the F inance Committee
recommend adoption of rate changes for FY 2012 only at this time. The average rate
adjustments projected for FY 2013 through FY 2016 are provided for information purposes and
are subject to change. The proposed rate adjustments achieve a gradual increase of the revenue
stream required to fund the expected operating expenses facing the Water Fund over the next
five years. The projected adjustments achieve the goals of ensuring that the balance of the
Water Rate Stabilization Reserve (W-RSR) is adequate and within the Council-approved reserve
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guideline levels for FY 2012 and for the long-term forecast horizon. In the interim years of FY
2013 and FY 2014, W-RSR is projected to go below the minimum guidelines but recover starting
in FY 2015 and end within the guidelines at the end of the forecast horizon.
In October 2010 and November 2010, staff brought to the Utilities Advisory Commission (UAC)
and the F inance Committee respectively, an assessment of existing rate structures with respect
to the relative cost to serve distinct customer classes within the City of Palo Alto (City), utilizing
cost of service analysis. Staff also discussed with the UAC and the F inance Committee certain
rate making objectives. Staff recommends, in concurrence with these discussions and direction
provided by the UAC and the F inance Committee, a re-allocation of revenue collection by rate
class. The revenue-neutral rate adjustments result in an average rate increase of 4.2% for the
residential class, an average rate decrease of 9.9% for the commercial rate class, an average
increase of 14.2% for the irrigation rate class, and an average increase of 93% for the private fire
hydrant rate class. At its February 2, 2011 meeting, the UAC indicated acceptance of staff
recommendation on the cost of service adjustments between various customer classes. The
UAC voted 5-2 on staff ’s proposal with amendments to the “within” class rate designs,
particularly regarding the allocation of costs between fixed and volumetric rate recovery
mechanisms and the manner in which the additional $3.4 million in cost increases are proposed
to be recovered.
If approved by Council, the proposed $3.4 million increase for FY 2012 results in a total revenue
increase of $2.5 million (17%) from the residential customers and $0.9 million (8%) from the
business customers.The impact of the proposed FY 2012 water rate adjustments is an
additional $10.07 on an average residential customer ’s current monthly water utility bill of
$72.01. The impact on an individual customer will vary depending on customer class and
individual customer water usage levels.
Background
The City’s Water Utility (Utility) serves about 20,000 customers over an area of approximately
26 square miles. The City’s average daily consumption of water in FY 2010 was 10.2 million
gallons per day (mgd) or 5.0 million ccf (hundred cubic feet) of water for the year. The Utility is
responsible for the operations and maintenance of the system and purchases all of its water
from the San Francisco Public Utilities Commission (SFPUC) through a contract that runs
through June 2034.
In order to maintain the financial viability of the Utility, staff conducts an annual review of
major cost drivers and expected costs facing the utility; evaluates risks and adequacy of
reserves; and determines the revenue requirements of the Water Fund for the next five years.
The revenue requirements and resulting rate adjustment targets depend on a number of
factors. They include sales projections,water supply costs, distribution system operating and
Capital Improvement Program (CIP)expenses, prudent funding of the Water Rate Stabilization
Reserve (W-RSR), the Emergency Plant Replacement (EPR) Reserve, and debt service payments.
Any change in these factors can trigger an adjustment to the revenue requirement. During the
budget process, staff forecasts customer load, revenues and utility expenses to quantify the
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annual revenue requirement. Changes to forecasted revenues or expenses are reflected in
adjustments to the budget during the mid-year budget adjustment process.
In FY 2010, staff hired Utility Financial Solutions, LLC (UFS), an external consulting firm to
conduct a cost of service analysis (COSA). COSAs are conducted to review utility rate structures
and the alignment of revenues by customer class with the cost of providing service to each
customer class. COSAs also fulfill Proposition 218 requirements for determining the proper
allocation of costs to customers. Based on the results of the COSA, and a review of existing
Water Utility rate structures, staff analyzed various alternative rate structures to ensure
equitable rates for all customer classes. Staff discussed with the UAC at its October 2010
meeting and the Finance Committee at its November 2010 meeting various alternatives to
water rate structures in order to meet certain rate making objectives, and general
recommendations from those meetings are incorporated in this report.
Discussion
Financial Projections
Table 1 below shows financial projections for the Water Fund for FY 2010 to FY 2016. For FY
2010, both budgeted and realized actuals based on City’s Audited Financial Report (CAFR) are
shown. For FY 2011, both budgeted and projected financial expectations are shown. The
projected column for FY 2011 reflects revised Retail Sales Revenue and Wholesale Water
Purchase Costs based on the actual water consumption levels realized in the first half of the
year, and revised projections for the second half.
Cost Drivers
Total expenses1 were $31.2 million in FY 2010. This is $2.9 million higher than budgeted due
mainly to debt financing expenses associated with the Water Bond issued that year. This
overage was mitigated somewhat by lower than expected purchase costs and operations
expense. In FY 2011, total expenses are expected to be slightly lower than budgeted, reaching
$32.0 million as a result of lower than expected water use in Palo Alto. Starting in FY 2012,
however, total expenses are projected to increase sharply, reaching $42.4 million in FY 2016,
driven in large part by increases in water supply purchase costs and CIP-related expenses.
1 Refers to Row 20 in Table 1: Total expenses excluding Bond Financed Capital Improvement Program (CIP).
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Table 1
Five-Year Financial Plan –Projected Costs (in $thousands)
$(000')s
Adopted Adopted
Budget Actual Budget Projected Projected Projected Projected Projected Projected
2010 2010 2011 2011 2012 2013 2014 2015 2016
1 % CHANGE IN RETAIL RATE 5.0%5.0%0.0%0.0%12.5%17.0%16.0%8.0%0.0%
2 PROJECTED SYSTEM AVERAGE RATE ($/CCF)5.21 5.23 5.21 5.21 5.86 6.85 7.95 8.59 8.59
3 PROJECTED COMMODITY COST ($/CCF)1.70 1.66 2.00 1.92 2.57 2.96 3.17 3.37 3.84
4 SALES UNITS (THOUSAND CCFs)5,543 4,955 5,504 5,143 5,256 5,195 5,170 5,143 5,120
5 PROJECTED CHANGE IN RETAIL SALES REVENUE 1,375 1,234 0 0 3,422 5,174 5,670 3,272 0
6 REVENUE
7 Utilities Retail Sales 28,948 25,851 28,808 26,926 30,795 35,539 41,013 44,174 44,113
8 Service Connection & Capacity Fees 682 694 692 692 767 776 785 795 750
9 Other Revenues plus Transfers In 131 648 766 766 158 159 161 162 162
10 Interest & Gain or Loss on Investment 1,265 1,375 1,050 1,050 595 665 627 976 1,449
11 Sub Total 31,026 28,568 31,316 29,434 32,314 37,140 42,586 46,107 46,475
12 CIP Bond Proceeds / Reserve 35,000 35,000 3,500 3,500 0 0 0 8,000 16,000
13 Total Sources of Funds 66,026 63,568 34,816 32,934 32,314 37,140 42,586 54,107 62,475
14 OPERATING EXPENSE
15 Water Supply Purhcases 10,354 9,061 12,043 10,834 14,790 16,840 17,949 18,986 21,541
16 Operations 10,094 8,428 10,721 10,721 10,603 10,709 10,816 10,924 11,034
17 Debt Service & Other Related 775 5,379 2,981 2,981 2,734 2,741 2,753 2,762 2,778
18 Rent 2,107 2,107 2,107 2,107 2,128 2,150 2,171 2,193 2,215
19 CIP (Non-Bonded)4,914 6,189 5,348 5,348 4,869 9,924 9,413 5,051 4,871
20 Sub Total 28,244 31,165 33,201 31,992 35,124 42,364 43,102 39,916 42,439
21 CIP (Bonded)22,500 22,500 3,500 3,500 8,000 16,000
22 Total Uses of Funds 50,744 53,665 36,701 35,492 35,124 42,364 43,102 47,916 58,439
23
24 Into/ (Out of) Reserves 15,282 9,903 (1,885)(2,558)(2,811)(5,224)(516)6,191 4,036
25
26 Ending Rate Stabilization Reserve 14,089 13,536 10,851 10,978 8,167 2,943 2,427 8,618 12,654
27 Portion held for Bond CIP 3,500 0
28 Ending Plant Replacement Reserve 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
29 Ending Debt Service Reserve 5,080 3,347 3,347 3,347 3,347 3,347 3,347 3,347 3,347
30
31 Short Term Assessment of Risks 3,765 3,765 3,766 4,168 4,169 5,190
32 Rate Stabilization Guidelines
33 Miniumum 4,330 3,887 4,300 4,017 4,619 5,342 6,166 6,625 6,596
34 Maximum 8,660 7,774 8,600 8,035 9,238 10,684 12,332 13,250 13,191
35
Fiscal Year
Date: Nov 30, 2010
City of Palo Alto
Water Utility Financial Projections
Water supply costs are projected to more than double from their current levels of $10.8 million
in FY 2011 to $21.5 million in FY 2016. This is due to planned infrastructure upgrade projects
that are being undertaken by the City’s primary water supplier, the SFPUC. The City Council
supports this infrastructure upgrade effort as it will repair and upgrade the regional water
supply system (CMR: 311:00). All of the SFPUC’s water customers share the cost of this project.
Chart 1 presents the SFPUC’s wholesale water prices for both the historical period from 1971 to
2011 and projections through 2021, as of January 2011. The latest wholesale price projections
are significantly higher than last year’s projections. This is primarily due to lower water use by
all SFPUC’s water customers and the fact that SFPUC’s water system costs are all fixed and not
dependent on water use levels. SFPUC is currently reviewing its wholesale water rate structures
and may propose a new rate setting approach for FY 2012. Depending on the outcome of the
rate setting mechanism adopted by SFPUC, Palo Alto’s water supply costs are projected to
increase from $10.8 million in FY 2011 to between $14.4 and $15.6 million in FY 2012. Staff
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assumed $14.8 million for the financial projections presented in this report based on an earlier
analysis.
Chart 1
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
1971
1976
1981
1986
1991
1996
2001
2006
2011
2016
2021
Commodity Cost ($/AF)
SFPUC's Wholesale Water Prices
Actual Rates
February 2010 Projection
February 2011 Projection
Another sizeable expenditure is for the new CIP projects planned for FY 2013 and FY 2014.
Recent investigations of Palo Alto’s water storage tanks have shown the need for additional
retrofits required for seismic protection as well as improvements needed for tank coatings.
These projects are projected to take three years, with costs anticipated to be $2.7 million in FY
2012, $4.0 million in FY 2013, and $4.4 million in FY 2014. Due to the new project costs
anticipated for FY 2012, an existing water main replacement project2 of $3.2 million will be
deferred from FY 2012 to FY 2013.
Bond-funded CIP projects in FY 2010 include the Water Reservoir and Well Rehabilitation
project, which is proceeding as planned. Staff is also considering another large capital project to
extend the recycled water distribution system that may impact the Water Fund within the five-
year forecast horizon. The capital expenditure for this project could total over $32 million and
significant expenditures could start in FY 2015. The sources of funds for the project have not
been identified at this time, but are likely to include a combination of state and federal grants
and a state low interest loan. Additional funds for the recycled water project could come from
2 Water Main Replacement Project # 25.
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project partners that have not yet been identified and bond proceeds for the balance of the
project costs.
For the other cost items, the Debt Service payments reflect ongoing payments on the two
outstanding water bonds of $775 thousand (2002 Utility Revenue Bonds, Series A) and $2.0
million (2009 Water Revenue Bonds, Series A). Debt Service charges for FY 2010 also include
$3.8 million for the water reservoir and well rehabilitation bond issuance.
Staff projects a long-term net cost increase of 1% per year in other operating expenditures such
as operations, maintenance and administration costs, allocated cost plan and Utilities
administration charges, rents, and other transfers.This conservative assumption reflects the
current expectations for the economic activity for the region. Depending on the final outcome
of labor negotiations and other budgetary decisions, final Operating Budget proposals will be
determined and presented to the Finance Committee at its May 2011 meeting.
Revenue Projections
Retail Sales constitute the largest source of revenue for the Water Fund. In FY 2010, total Retail
Sales amounted to $25.8 million. This was $3.1 million (10.7%) lower than budgeted. Water
demand projections are discussed in detail in the following section. Other revenues in FY 2010
include Service Connection and Capacity Fees of $694,000 and Transfers In of $648,000.
Interest and Gains on Investments totaled $1.4 million in FY 2010. Additionally, the City issued
Water Bonds of $35.0 million to finance the Emergency Reservoir and Well Rehabilitation
Project during FY 2010. Going forward, the Utility plans to acquire external funding3 for the
recycled water project related expenses shown for FY 2015 and FY 2016. Interest and Gains on
Investments in future years are calculated assuming a 3% return on investment.
Water Demand
Water demand has a significant impact on the financial position of the Water Fund. A 1% drop
in water demand results in a 0.95% loss in sales revenue or 0.87% loss in total revenue, and
since most costs facing the water utility are fixed, this results in a corresponding need to
increase water revenues and, therefore, rates.
Water demand in the City has been declining since its peak in the early 1970’s. During the last
forty years, the City and the region experienced two periods of drought, the first one during
1976-77, and the second one lasting a longer time span from 1987 through 1992. The City
aggressively pursued water conservation and community outreach programs during these
years. Coupled with drought rates, these measures resulted in an average of 38% reduction in
water consumption in the City during each occurrence. As can be seen in Chart 2, while some of
the consumption resumed after the drought was over, the City’s water use levels nevertheless
have declined since 2000 despite the growth in population and employment. While some of the
decrease was due to the availability of recycled water, significant long term reduction in water
3 Table 1 Row 12 and Row 21 –CIP Bond Proceeds and Expenses of $8.0 million in FY 2015 and $16.0 million in FY
2016
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demand was achieved as a result of continuous improvements in building plumbing codes,
various City ordinances, and resulting investments in water efficient equipment.
Recently, the region as well as the City has been experiencing another significant decline in the
demand for water. Water consumption levels observed in FY 2010 were the lowest since the
drought of 1992. The recent decline in water use is attributable to a combination of factors
including the regional weather conditions, the state of the economy and the effect of the City’s
continuing water conservation effort. The City’s water consumption in FY 2010 was 9% lower
than consumption in FY 2009 and 14% lower than consumption in FY 2008.
For financial forecasting purposes the question is how the City’s and the region’s water
consumption will continue into the future. In order to evaluate the impact of water demand on
the financial forecast for the Water Fund, three scenarios were developed.
Under the base case scenario, water demand increases by 3.6% in FY 2011, but due to slow
economic recovery and expected rate increases during the earlier part of the forecast horizon,
it is projected to decrease at an average rate of 0.7% per year for the following three years.
With the expected recovery taking effect during the latter part of the forecast horizon, demand
is expected to gradually increase at an average rate of 0.8% per year for the rest of the forecast
horizon. The base case also reflects the expected impact of planned water conservation
program implementation to meet goals in the 2005 Urban Water Management Plan. Under the
low scenario, water demand decreases an additional 5.4% in FY 2011, followed by a 1.0% per
year decline throughout the forecast horizon. In contrast, under the high scenario, water
demand increases by 8.9% in FY 2011, followed by a 1.5% per year increase for the rest of the
forecast horizon.
Chart 2 presents the historical water consumption levels in the City from FY 1960 through FY
2010 and the results of the demand scenarios analyzed. The financial projections presented in
this report are based on the base case scenario for water demand. The sensitivity of the
projections to the low and high demand scenarios is presented in the reserves and risk
assessment section.
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Chart 2
Palo Alto Water Consumption
-
1
2
3
4
5
6
7
8
9
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Millions
Fiscal Year
Annual Usage (CCF/year)
High
Base
Low
ForecastActual
Revenue Requirement
The revenue requirement of the Water Fund is the total amount of revenue that the Utility
must collect in order to meet its operations and maintenance (O&M) expenses, water supply
purchases, debt service payments and rate-financed CIP expenditures. Without a rate
adjustment, under the base scenario demand forecast, the Water Fund is projected to have a
revenue shortfall of $6.2 million and $13.1 million in FY 2012 and FY 2013 respectively. Due to
its healthy reserves in FY 2011, staff recommends smoothed rate increases of 12.5% for FY 2012
and 17% for FY 2013 rather than a smaller increase in FY 2012 and a very large (greater than
20%) increase in FY 2013.
As discussed earlier, the revenue requirement in the Water Fund is very sensitive to demand
projections. For example, even with the recommended rate adjustments, under the low
demand scenario, the Water Fund would need an additional $3.7 million in FY 2012, and $4.3
million in FY 2013, in order to maintain reserves at the same levels as in the base scenario.
Conversely under the high demand scenario, the revenue shortfall would be much lower,
estimated to be $1.4 million and $3.8 million in FY 2012 and FY 2013 respectively.
Reserves and Risk Assessment
The Water Fund’s Rate Stabilization Reserve (W-RSR) Guidelines are established by the City
Council. The Council reviews reserve adequacy periodically and adjusts the guidelines as
needed. The W-RSR Guidelines were lowered in June 2009 (CMR:281:09) from 50% and 20% to
30% and 15% of sales revenues for maximum and minimum reserve levels, respectively.
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Additionally, as required by the guidelines, staff performs an annual assessment of short-term
risks for the fund. This analysis involves estimating the revenue shortfall due to the maximum
observed budget-to-actual variance in one year during the past ten years, plus a variance of
10% of planned CIP expenditures for the budget year.
Table 2 summarizes the short-term risk assessment values for FY 2012 and FY 2013 and the
minimum and maximum guideline levels for the W-RSR. With the proposed 12.5% and 17%
rate increases for FY 2012 and FY 2013, respectively, the estimated end-of-year balance for the
W-RSR is $7.9 million in FY 2012 and $2.9 million in FY 2013. This is above both the short-term
risk assessment values as well as the minimum guidelines for FY 2012 but falls short of both the
risk assessment and minimum guideline levels for FY 2013. Staff is proposing approval of rate
adjustments for FY 2012 only at this time, and FY 2013 projections are provided for information
only. Staff will come back next year during the budget process for FY 2013 with the updated
financial projections and propose revised rate adjustments if necessary.
Due to the high volatility in water demand and the significant impact it can have on water utility
financials, staff performed an additional level of analysis this year using the low and high water
demand scenarios discussed earlier in this report. As shown in Table 2, the estimated end of
year balances under these scenarios would be significantly different. Staff will monitor and
report water sales levels throughout the fiscal year and may propose additional rate
adjustments during the mid-year budget adjustment process, if necessary.
Table 2: Water Rate Stabilization Reserve Guideline Levels and Short Term Risk Assessment
($M)
Cost of Service Analysis (COSA)
As mentioned earlier, staff hired UFS in October 2009 to conduct a COSA study for the Water
Utility. UFS has experience in completing over 300 COSA studies for municipal utilities around
the nation. The analysis involved an in-depth review of utility financial data, customer class
load profiles, and the specific costs associated with providing utility services. It was conducted
based on industry-recognized procedures involving functional classification of utility assets and
expenses, and allocation of costs to customer classes based on the cost to provide the service.
Specific customer class attributes included quantity of service and/or resource consumed;
variability of use during the year; and, peak demands created on the system by each class.
WATER RATE STABILIZATION RESERVE FY 2011 FY 2012 FY 2013
ESTIMATED END OF YEAR BALANCE -BASE 11.0 7.9 2.9
ESTIMATED END OF YEAR BALANCE -LOW 8.7 2.1 (7.4)
ESTIMATED END OF YEAR BALANCE -HIGH 12.3 11.0 8.5
RISK ASSESSMENT 4.2 4.2 5.2
MINIMUM LEVEL GUIDELINES 4.6 4.6 5.3
MAXIMUM LEVEL GUIDELINES 9.3 9.2 10.7
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The result of the study is a recommended adjustment to rate schedules to accurately align
future revenues collected from each customer class with the costs attributable to serving that
class. The original study used financial data prepared for FY 2011 Long Range Financial
Projections presented to the UAC in February 2010. The study also relied on billing data for all
of FY 2008 and part of FY 2009. The original study results were updated with FY 2010 customer
usage data as it became available in September 2010. Table 3 presents the summary of updated
COSA results for the Water Utility. Attachment G and H provide the Technical Memorandum for
the updated results and the original Cost of Service Study, respectively.
Table 3 –Summary of COSA Results
RATE
SCHEDULE
CUSTOMER CLASS PROJECTED
REVENUE
COST OF SERVICE COSA
ADJUSTMENT
W-1 RESIDENTIAL $14,304,899 $14,910,404 4%
W-4 COMMERCIAL 11,357,704 10,230,499 -10%
W-7 IRRIGATION 2,977,646 3,397,634 14%
W-3 PRIVATE FIRE HYDRANTS 25,388 49,039 93%(*)
W-3 PUBLIC FIRE HYDRANTS -78,253 N/A(**)
TOTAL $28,665,638 $28,665,830 0%
(*) The W3 Private Fire Hydrant COSA adjustment represents an adjustment to meter
charge based on meter size. For example, for a 4 inch meter, the current monthly
service charge of $4.20 must be increased to $7.20 to properly recover utility costs.
(**) The suggested adjustment for W3 Public Fire Hydrant service is an annual charge of
$78,253 for the Municipal Class. Currently the City is not charged for public fire hydrant
service.
Water Utility Customer Profile and Revenue Collection
As of June 2010, the City’s Water Utility had approximately 20,000 water service accounts.
Table 4 provides the distribution of accounts by customer segment and meter size. While
approximately 81% of customer accounts fall into the residential classification, this represents
49% of revenues. The remaining 51% of revenues are collected from commercial customers
through a combination of the W4, W7 and W3 rate schedules. Table 5 provides the distribution
of revenue by rate schedule and rate component. Currently, approximately 7% of revenues are
collected through the fixed monthly service charges and 93% through volumetric charges.
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Table 4 –Number of Accounts (FY 2010)
Me ter
Size RESIDENTIAL COMMERCIAL IRRIGATION
PRIVATE FIRE
PROTECTION
W1 W4 W7 W3
5/8 "13,692 1,058 53 -
3/4 "526 80 7 -
1 "1,862 592 75 -
1 1/2"171 370 62 -
2"66 622 112 -
3"- 79 13 -
4"- 51 5 236
6"- 24 1 217
8"- 10 1 133
10"- - - 8
TOTAL 16,317 2,886 329 594
Table 5 –Sales Revenue (FY 2010)
RESIDENTIAL COMMERCIAL IRRIGATION
PRIVATE FIRE
PROTECTION TOTAL
W1 W4 W7 W3
1,049,849$ 596,544$ 73,887$ 47,296$ 1,797,900$
11,544,391$ 10,338,903$ 2,160,287$ 11,340$ 24,073,244$
12,594,239$ 10,935,448$ 2,234,173$ 58,636$ 25,871,144$ Total Revenue
REVENUE SOURCE
Service Charge
Volumetric Charge
Chart 3 shows the monthly water use profile for each customer class4. The residential sector’s
water use varies significantly throughout the year and peaks the highest, whereas the
commercial sector exhibits a flatter water use profile. Irrigation customers’ peak-to-average
ratio is the highest among all customer classes. Peak-to-average ratio is defined as the peak
month usage divided by the average usage during the year, and is used in determining how
some of the system costs are allocated among customer classes. The ratio is used to allocate
costs associated with meeting usage requirements in excess of base usage. Such costs include
operating and capital costs for plant and system capacity installed beyond that required to
meet average use consumption.A review of historical peak-to-average ratio over time as
presented in Chart 45 shows that residential customers’ ratio has increased while the ratio for
commercial customers has been in decline. As residential customers’ contribution to the peak-
to-average ratio increases relative to commercial customers so does their share of the cost of
service.
4 Customer use profile is based on two year averages of billing data covering FY 2009 and FY 2010.
5 Peak-to-average ratio is based on two year averages of billing data covering FY 2002 –2010.
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Chart 3
Chart 4
Customer Class Peak to Average Water Use Ratio
1.20
1.40
1.60
1.80
2.00
2.20
2.40
2.60
2.80
2002 2003 2004 2005 2006 2007 2008 2009 2010
Fiscal Year
Ratio
Residential
Commercial
Irrigation
Current Rate Schedules and Recommended COSA Alignments
Current water rates consist of two components: a monthly customer charge (service charge)
and a commodity rate (volumetric rate). The monthly service charge per customer varies based
on meter size and the volumetric rate varies for residential customers based on usage tier. The
residential volumetric rates are also referred to as “inverted block rates” where the lower
usage tiers are charged at a rate that is lower than higher usage tiers. For non-residential
accounts a single volumetric rate is used. The Tier 1 usage block for residential accounts is
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defined as 0.233 ccf per day or, for a 30 day billing period, 7 ccf per month. Any usage over 7
ccf per month falls into Tier 2. Table 6A shows current water rates and COSA results by meter
size and customer segment for the W1, W4 and W7 rate schedules, and Table 6B shows the
same for the W3 rate schedule.
Table 6A -Current Water Rates and COSA Results
(W1, W4 and W7 Rate Schedules)
Meter
Size $/Month Customer Segment Monthly
CCF $/CCF Meter
Size $/Month Customer Segment Monthly
CCF $/CCF
3/4 "$ 5.00 0-7 3.949$ 3/4 "$ 14.75 Residential (W-1)All 4.340$
5/8 "$ 5.00 > 7 5.624$ 5/8 "$ 14.75 Commercial (W-4)All 4.120$
1 "$ 6.50 Commercial (W-4)All 4.946$ 1 "$ 19.97 Irrigation (W-7)All 5.570$
1 1/2"$ 12.27 Irrigation (W-7)All 4.946$ 1 1/2"$ 42.49
2"$ 19.37 2"$ 67.49
3"$ 77.65 3"$ 150.05
4"$ 130.60 4"$ 259.52
6"$ 260.43 6"$ 551.53
8"$ 383.67 8"$ 903.63
CURRENT RATES
Residential (W-1)
(W1, W4 & W7)
Service Charge Volumetric Charge
COST OF SERVICE RATES
(W1, W4 & W7)
Service Charge Volumetric Charge
Table 6B -Current Water Rates and COSA Results
W3 (Private Fire Hydrants) Rate Schedule
Unit Meter Size CURRENT COSA
$/month 4 "$ 4.20 $ 7.27
$/month 6 "$ 7.00 $ 16.13
$/month 8 "$ 10.75 $ 28.53
$/month 10 "$ 15.75 $ 44.48
Volumetric $/ccf All $ 10.00 N/A
CURRENT AND COSA RATES
(W3)
Service Charge
Note that the COSA results are based on FY 2011 financial projections, and do not include an
overall system-wide rate adjustment of 12.5% for FY 2012.
Rate Design
Staff presented three rate design objectives to the UAC at its meeting in September 2010 and
to the Finance Committee at its meeting in October 2010. The objectives presented were to
adjust rate schedules to:
·reflect updated COSA,
·provide effective price signals to promote water conservation, and
·avoid rate/bill shock and financial hardship.
March 01, 2011 Page 14 of 19
(ID # 1398)
Based on the feedback received from both the UAC and the Finance Committee, staff proposed
a set of changes to the current rate structure for both the Residential (W-1) and the
Commercial (W-4) Rate Schedules and presented these changes to the UAC at its February 2011
meeting. With the proposed changes residential rates will increase from two to three tiers, and
tiered rates (two tiers) will be introduced for commercial rates. Tiered rates meet the objective
of providing effective price signals to promote water conservation and are in line with the
California Constitution Article X, Section 2 that requires that water resources of California “be
put to beneficial use to the fullest extent of which they are capable, and that the waste and
unreasonable use or unreasonable method of use of water be prevented”. California’s Water
Code, Section 375 also explicitly allows water conservation measures to be adopted, including
water “rate structure designs.”
Although Palo Alto has sufficient water supplies from the SFPUC in normal water years, new
water supplies for the state are very expensive to develop. Many agencies, including the
SFPUC, are considering new projects to increase water supplies such as desalination, recycled
water, and new water storage reservoirs. These new water supply resources can cost from $5
per ccf to over $20 per ccf. Tiered rates that encourage water conservation create an incentive
to use water efficiently, comply with both AB 2882 and the California constitutional directive to
avoid unreasonable use and waste of water,and help avoid the need for these high cost
supplies.
Additionally, staff proposed to increase the monthly fixed service charge in line with the cost of
service for each rate schedule. Service charges represent the costs associated with serving
customers regardless of usage level or usage characteristics. Service costs include cost of meter
reading, meter installations, billing and collection, service connections, and a portion of the
operation and maintenance expenses of the distribution system and allocated administration
costs. When aligned with cost of service levels, revenue collection through fixed charges would
increase from 5% in FY 20116 to 15% in FY 2012. This is well within the California Urban Water
Conservation Council (CUWCC) guideline level of less than 30% for conservation based rates.
With increased fixed service charges, additional tiers for both residential and commercial rate
structures, and the alignment of average rates with the cost of service by rate class, the
proposed changes meet the objectives set forth during the UAC and Finance Committee
meetings.
For the W3 and W7 rate schedules, no structural change to the rates is proposed; and proposed
FY 2012 rates consist of adjustments for COSA together with the 12.5% revenue requirement
increase applicable to the W7 rate schedule.
The UAC recommended by a vote of five to two to recommend the Council to adopt proposed
rates at the February 2011 meeting with some modifications. The requested modifications were
that:
6 Based on customer sales data used for cost of service study.
March 01, 2011 Page 15 of 19
(ID # 1398)
·Residential tier 1 and tier 2 prices would be increased slightly from current prices, and
the additional revenue would be used to lower the fixed service charges;
·There would be no bill reduction for commercial customers as a result of proposed rate
revisions.
After incorporating these modifications, the increase in fixed service charge component of the
bill is reduced from the original 200% proposed to the UAC in February 2011 to 50%. The
difference is reflected in the increase in the volumetric charges for residential tier 1 and tier 2.
Staff anticipates that with the projected 17% increase planned in FY 2013, full implementation
of fixed charges at cost of service levels will be achieved over a two year period. With these
changes, revenue collection through fixed charges is estimated to be 8%.
Table 7 shows the current and proposed water rates incorporating UAC modifications for FY
2012 for the W1, W4 and W7 rate schedules.
Table 7 -Proposed Rate for FY 2012
Meter
Size Current Proposed
3/4 "$ 5.00 $ 7.50
Monthly
CCF $/CCF Monthly
CCF $/CCF
5/8 "$ 5.00 $ 7.50 Tier 1 0-7 3.949$ 0 - 6 4.100$
1 "$ 6.50 $ 9.75 Tier 2 > 7 5.624$ 7 - 29 6.248$
1 1/2"$ 12.27 $ 18.41 Tier 3 --> 29 7.642$
2"$ 19.37 $ 29.06 Tier 1 All 4.946$ 0 - 14 4.769$
3"$ 77.65 $ 116.48 Tier 2 --> 14 4.946$
4"$ 130.60 $ 195.90 Irrigation (W-7)All All 4.946$ All 6.266$
6"$ 260.43 $ 390.65
8"$ 383.67 $ 575.51
Proposed
Service Charge ($/month)Volumetric Charge ($/CCF)
Rate Schedule Usage
Tiers
Current
Residential (W-1)
Commercial (W-4)
Customer Bill Impact of Proposed Rate Changes
Table 8 below shows the impact of the proposed rate increase on customer bills based on
different consumption levels for the residential and commercial classes.
March 01, 2011 Page 16 of 19
(ID # 1398)
Table 8: Impact of Proposed Rate Increase on Customer Bills
Customer
Usage
(ccf)
Proposed
Monthly Bill
($)
Amount of
Proposed
Increase ($)
Percent
Increase
Small Residential (5/8” Meter)6 $ 32.10 $3.41 11.9%
Medium Residential (5/8” Meter)14 82.08 10.07 14.0%
Large Residential (5/8” Meter)35 221.66 31.54 16.6%
Medium Commercial (3" Meter)300 1,597.80 36.35 2.3%
Large Commercial or Industrial (6"
Meter)1200 6,323.37 127.74 2.1%
Large Commercial or Industrial (6"
Meter) (irrigation only) (W-7)3000 19,068.65 3,970.22 26.3%
Comparison of Palo Alto Water Rates and Surrounding Cities
For several years, Palo Alto's retail water rates have generally been higher than those in
surrounding areas. Staff initiated a Benchmark Study for the Water Utility in May 2010 and
presented its findings to the UAC in October 2010 and to the Finance Committee in November
2010. The objective of the study was to develop benchmarks and to provide insight as to the
main reasons for the higher water rates in Palo Alto. The findings of this study highlighted
some key areas such as more spending by Palo Alto for replacement of aging infrastructure;
lack of access to lower cost water supply; more expensive service terrain to serve; higher
quality of service; and higher rent payment for its use of real estate in the service territory.
Rent charges for the Water Utility’s use of real estate in the service territory are adjusted
annually to market value based on a survey conducted by the City.
Table 9 below, which compares monthly water bills using municipal water rates as of January 1,
2011 for Mountain View, Redwood City, Santa Clara and Menlo Park, indicates that the average
residential customer in surrounding cities pays approximately 24 % less than the average Palo
Alto residential customer. The residential bill comparison with the average benchmark city is
seven percentage points lower this year compared to the same period a year ago as other cities
facing similar cost increases have begun raising their water rates as well. There are indications
that nearby cities that purchase water supplies from the SFPUC will continue to raise rates in FY
20127. At this time, the certainty or magnitude of their rate increases is not known.
7 Based on the FY 2009 BAWSCA survey, the share of SFPUC as source of water supply was 89% for Menlo Park,
100% for Redwood City, 86% for Mountain View, and 12% for Santa Clara.
March 01, 2011 Page 17 of 19
(ID # 1398)
Table 9 –Monthly Residential Water Bill Comparison (rates in effect as of Jan. 1, 2011)
Water
Customer
Usage
(ccf)
Palo
Alto
Menlo
Park1
Redwood
City
Mountain
View
Santa
Clara
Average
Benchmark
(%)
Diff.
Small 6 $28.69 $38.95 $33.07 $20.78 $16.44 $27.31 -4.8%
Average 14 $72.01 $73.14 $60.37 $48.04 $38.36 $54.97 -23.7%
Large 35 $190.12 $165.38 $185.45 $153.21 $95.90 $149.98 -21.1%
Difference from CPAU 1.6%-16.2%-33.3%-46.7%-23.7%
1. Menlo Park rates based on California Water Service-Bear Gulch district –proposed for
1/1/11
Proposition 218 Water Rate Increase Procedure
Proposition 218 amended the California Constitution and set forth procedural requirements
that public agencies must follow in order to enact or increase a property-related fee. Since
Proposition 218 applies to the water rate increases described here, 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 a majority of customers submit written protests
against the proposed fees, the City may not impose the fee.
Possibility of Water Use Restrictions due to Water Shortage
In the event of a water shortage, the SFPUC will declare a water shortage emergency and
impose mandatory water use reductions. If this action is taken, then staff will return to the
UAC with an updated proposal for a rate adjustment and water rate schedules. Staff does not
expect a water shortage for FY 2012 at this time.
Alternatives
Staff evaluated alternative revenue-neutral rate changes based on COSA recommendations,
and the rate making objectives identified. One alternative is to implement more tiers for both
residential and commercial rate schedules. This alternative was rejected due to the increased
complexity with this alternative and the fact that it would achieve effectively the same results
as the proposed rate structures. Another alternative is to introduce different tier usage blocks
based on meter size. This alternative has the advantage of addressing the size differences
between customers especially for commercial customers. This alternative was rejected due to
its complexity as well as the additional implementation costs required for billing system
configurations.
Board/Commission Review and Recommendations
The UAC considered staff’s recommendation at its February 2, 2011 meeting. The
Commissioners discussed in detail the rate design changes proposed by staff, including the cost
of service adjustments between customer classes, the impact of increasing the fixed service
charge component in one year, and the level and effectiveness of the volumetric rates. The
March 01, 2011 Page 18 of 19
(ID # 1398)
Commissioners also discussed the proposed 12.5% revenue requirement increase for 2012 and
that, under the current five-year projections, the Water Rate Stabilization Reserve would be
below the minimum guidelines of FY 2013 and FY 2014.
The Commission voted by five to two in favor of recommending that the City Council approve
staff’s recommended Water Utility Rate Adjustments with the following amendments:
a)The rate adjustment proposal by staff be modified so that no commercial customer’s bill
would be decreased;
b)The volumetric rates for residential customers for usage in tiers 1 and 2 be increased
and the fixed charges be reduced; and
c)The Council is made aware that the UAC is aware that the five-year financial projections
show that the balance of the Water Rate Stabilization Reserve falls below the minimum
guideline level for two years.
Draft minutes from the UAC’s February 2, 2011 meeting are provided as Attachment I.
Resource Impact
Approval of this rate proposal will increase the Water Fund retail sales revenues by
approximately $3.4 million for FY 2012.
Policy Implications
This recommendation does not represent a change to current City policies.
Environmental Review
The restructuring of water rates to meet operating expenses and financial reserve needs is not
subject to the California Environmental Quality Act (CEQA), pursuant to California Public
Resources Code Sec. 21080(b)(8) and Title 14 of the California Code of Regulations Sec.
15273(a)(1) and (3).
ATTACHMENTS:
·A Water Fund Financial Projections (FY2012-FY2016)(PDF)
·Attachment A: Water Fund Financial Projections (FY2012-FY2016)(PDF)
·Attachment B: Utility Rate Schedule W-1 effective 7-1-2011 (DOC)
·B W-1 effective 7-1-2011 (DOC)
·Attachment C: Utility Rate Schedule W-3 effective 7-1-2011 (DOC)
·C W-3 effective 7-1-2011 (DOC)
·Attachment D: Utility Rate Schedule W-4 effective 7-1-2011 (DOC)
·D W-4 effective 7-1-2011 (DOC)
·Attachment E: Utility Rate Schedule W-7 effective 7-1-2011 (DOC)
·E W-7 effective 7-1-2011 (DOC)
·Attachment F: Draft Resolution for Water July 1 2011 (PDF)
March 01, 2011 Page 19 of 19
(ID # 1398)
·F Draft Resolution for Water July 1 2011 (PDF)
·Attachment G: Water Technical Memorandum (DOC)
·G Water Technical Memorandum (PDF)
·Attachment H: Water Cost of Service Report (PDF)
·H Water Cost of Service Report (PDF)
·Attachment I: Draft UAC Minutes of February 2, 2011 (DOCX)
·I Draft Excerpted Minutes of February 2, 2011 UAC Meeting (PDF)
Prepared By:Ipek Connolly, Sr. Resource Planner
Department Head:Valerie Fong, Director
City Manager Approval:James Keene, City Manager
Adopted Actual Adjusted Projected Projected Projected Projected Projected
2010 2010 2011 2012 2013 2014 2015 2016
1 % CHANGE IN RETAIL RATE 5.0% 5.0% 0.0% 12.5% 17.0% 16.0% 8.0% 0.0%
2 SYSTEM AVERAGE RATE ($/CCF)5.21 5.23 5.21 5.86 6.85 7.95 8.59 8.59
3 SALES UNITS (CCFs)5,543 4,955 5,143 5,256 5,195 5,170 5,143 5,120
4 WATER UTILITY REVENUE
5 SALES REVENUE:27,493 24,679 26,783 27,373 30,438 35,437 40,896 43,971
6 RATE ADJUSTMENT 1,375 1,234 0 3,422 5,174 5,670 3,272 0
7 PRORATION IMPACT (57) (51)0 (143) (216) (236) (136)0
8 TOTAL ADJUSTED SALES 28,810 25,862 26,783 30,652 35,397 40,871 44,031 43,971
9 UNMETERED SALES/OTHER 138 (10)142 142 142 142 142 142
10 INTEREST 1,265 1,375 1,050 595 665 627 976 1,449
11 OTHER REVENUE 131 648 766 158 159 161 8,162 16,162
12 CONNECTION FEES 682 694 692 767 776 785 795 750
13 FROM RESERVES:
14 RATE STABILIZATION 0 0 6,058 2,811 5,224 516 0 0
15 CIP BOND PROCEEDS 35,000 35,000 0 0 0 0 0 0
16 TOTAL FINANCIAL RESOURCES 66,026 63,568 35,492 35,124 42,364 43,102 54,107 62,475
17 OPERATING EXPENSES
18 PURCHASES 10,354 9,061 10,834 14,790 16,840 17,949 18,986 21,541
19 CUSTOMER DESIGN & CONN. (CIP)400 569 410 420 430 440 450 232
20 SYSTEM IMPROVEMENT(CIP) - Nonbond 4,514 5,620 4,938 4,449 9,494 8,973 4,601 4,639
21 SYSTEM IMPROVEMENT(CIP) - Bond 22,500 22,500 3,500 0 0 0 8,000 16,000
22 OPERATIONS, & MAINT, OTHER ADMIN.7,385 6,378 7,604 7,680 7,757 7,835 7,913 7,992
23 ALLOCATED CHARGES:
24 COST PLAN CHARGES & OTHER 1,106 410 1,076 1,087 1,097 1,108 1,119 1,131
25 UTILITIES ADMINISTRATION 1,346 1,171 1,600 1,616 1,632 1,648 1,664 1,681
26 TOTAL MAJOR ACTIVITIES 47,604 45,709 29,962 30,042 37,251 37,953 42,734 53,216
27 DEBT SERVICE & RELATED 775 5,379 2,981 2,734 2,741 2,753 2,762 2,778
28 TRANSFERS:
29 RENT 2,107 2,107 2,107 2,128 2,150 2,171 2,193 2,215
30 OTHER TRANSFER 258 282 442 221 223 225 227 229
31 SUB-TOTAL TRANSFER 2,365 2,389 2,549 2,349 2,372 2,396 2,420 2,444
32 TOTAL OPERATING EXPENSES 50,744 53,477 35,492 35,124 42,364 43,102 47,916 58,439
33 RESERVE ADDITIONS:
34 PLANT REPLACEMENT 0 0 0 0 0 0 0 0
35 RATE STABILIZATION 10,982 7,336 0 0 0 0 6,191 4,036
36 DEBT SERVICE RESERVE 4,300 2,567 0 0 0 0 0 0
37 TOTAL RESERVE ADDITIONS: 15,282 9,903 0 0 0 0 6,191 4,036
38 TOTAL REVENUE REQUIREMENT 66,026 63,380 35,492 35,124 42,364 43,102 54,107 62,475
39 RESERVES BALANCES
40 PLANT REPLACEMENT 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
41 RATE STABILIZATION 14,089 13,536 10,978 8,167 2,943 2,427 8,618 12,654
Portion set aside for Bond 3,500
42 CIP DEBT SERVICE 5,080 3,347 3,347 3,347 3,347 3,347 3,347 3,347
43 TOTAL RESERVES BALANCES 20,169 21,383 15,325 12,514 7,290 6,774 12,965 17,001
44
45 Short Term Risk Assessment Value 3,765 3,765 4,168 4,169 5,190 9,249 9,938 9,893
46
47 Long Term Rate Stabilization Guidelines
48 RSR Minimum 4,330 3,887 4,017 4,619 5,342 6,166 6,625 6,596
49 RSR Maximum 8,660 7,774 8,035 9,238 10,684 12,332 13,250 13,191
50
2010 2010 2011 2012 2013 2014 2015 2016
City of Palo Alto
Water Utility
WATER
Fiscal Year
E
X
P
E
N
S
E
S
R
E
V
E
N
U
E
S
R
E
S
E
R
V
E
S
GENERAL RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Effective 7-1-20092011
Supersedes Sheet No W-1-1 dated 11-1-20087-1-2009 Sheet No W-1-1
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 ...........................................................................................................$5.007.50
For 3/4 inch meter ...........................................................................................................5.00 7.50
For 1 inch meter ...........................................................................................................6.50 9.75
For 1 1/2 inch meter ...........................................................................................................12.27
18.41
For 2-inch meter ...........................................................................................................19.37
29.06
For 3-inch meter ...........................................................................................................
77.65116.48
For 4-inch meter ...........................................................................................................
130.60195.90
For 6-inch meter ...........................................................................................................
260.43390.65
For 8-inch meter ...........................................................................................................
383.67575.51
For 10-inch meter ...........................................................................................................
383.67575.51
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 .......................................................................................................................
$3.9494.100
GENERAL RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Effective 7-1-20092011
Supersedes Sheet No W-1-2 dated 11-1-20087-1-2009 Sheet No W-1-2
Tier 2 usage (All usage over 100% of Tier 1).......................................................................5.624
6.248
Tier 3 usage (All usage over Tier 2)......................................................................................7.642
Temporary unmetered service to residential
subdivision developers, per connection .......................................................................$6.00
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. Tier 2 water
usage shall be calculated and billed based on usage greater than Tier 1 and up to a level of
0.967 ccf per day, rounded to the nearest whole ccf, based on meter reading days of
service. Tier 3 encompasses all usage over Tier 2 levels. As an example, for a 30 day
bill, the Tier 1 level would be 0 through 67 ccf, and Tier 2 would be between 7 and 29
ccf. For further discussion of bill calculation and proration, refer to Rule and Regulation
11.
{End}
FIRE SERVICE CONNECTIONS
UTILITY RATE SCHEDULE W-3
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Effective 11-1-20087-1-2011
Supersedes Sheet No W-3-1 dated 7-1-199211-1-2008 Sheet No
A.APPLICABILITY:
This schedule applies to all public fire hydrants and private fire service connections.
B.TERRITORY:
This schedule applies everywhere the City of Palo Alto provides water services.
C.RATES:
1.Monthly Service Charges
Public Fire Hydrant....................................................................................................$5.00
Private Fire Service:
4-inch connection ......................................................................................................$4.207.27
6-inch connection ...................................................................................................... $ 7.0016.13
8-inch connection ......................................................................................................$ 10.7528.53
10-inch connection ....................................................................................................$ 15.7544.48
2.Commodity (To be added to Service Charge unless water is used for fire extinguishing or
testing purposes.)
Per Hundred Cubic Feet
All water usage ..........................................................................................................$10.00
D.SPECIAL NOTES:
1.Service under this schedule may be discontinued if water is used for any purpose other
than fire extinguishing or water used in testing and repairing the fire extinguishing
facilities. Such water used for other purposes is illegal and will be subject to the
commodity charge as noted above and fines.
2.No commodity charge will apply for water used for fire extinguishing purposes.
3.For a combination water and fire service, the general water service schedule shall apply.
FIRE SERVICE CONNECTIONS
UTILITY RATE SCHEDULE W-3
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Effective 11-1-20087-1-2011
Supersedes Sheet No W-3-2 dated 7-1-199211-1-2008 Sheet No
4.Utilities Rule and Regulation No. 21 provides additional information on Automatic Fire
Services.
5.Repairs and testing of fire extinguishing facilities are not considered unauthorized use of
water if records and documentation are supplied by the customer.
6.Unauthorized use of water which is unrelated to fire protection is subject to criminal
prosecution pursuant to the Palo Alto Municipal Code.
{End}
GENERAL NON-RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W-4
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Effective 7-1-20092011
Supersedes Sheet No W-4-1 dated 11-1-20087-1-2009 Sheet No W-4-1
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 ...............................................................................................$5.007.50
For 3/4-inch meter ...............................................................................................$5.007.50
For 1-inch meter ...............................................................................................$6.509.75
For 1 ½-inch meter ...............................................................................................
$12.2718.41
For 2-inch meter ...............................................................................................
$19.3729.06
For 3-inch meter ...............................................................................................
$77.65116.48
For 4-inch meter ...............................................................................................
$130.60195.90
For 6-inch meter ...............................................................................................
$260.43390.65
For 8-inch meter ...............................................................................................
$383.67575.51
For 10-inch meter ...............................................................................................
$383.67575.51
Commodity Rates: (to be added to Customer Charge)
Per Hundred Cubic Feet (ccf)
Per Month All Pressure Zones
GENERAL NON-RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W-4
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Effective 7-1-20092011
Supersedes Sheet No W-4-2 dated 11-1-20087-1-2009 Sheet No W-4-2
Tier 1 Per ccf .......................................................................................................................
$4.9464.769
Tier 2 (All usage over Tier 1)................................................................................................4.946
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 0.467 ccf per day
rounded to the nearest whole ccf, based on meter reading days of service. Tier 2
encompasses all usage over Tier 1 levels. As an example, for a 30 day bill, the Tier 1
level would be 0 through 14 ccf. For further discussion of bill calculation and proration,
refer to Rule and Regulation 11.
{End}
IRRIGATION WATER SERVICE
UTILITY RATE SCHEDULE W-7
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Effective 7-1-20092011
Supersedes Sheet No W-7-1 dated 11-1-20087-1-2009 Sheet No W-7-1
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 ...............................................................................................$5.007.50
For 3/4-inch meter ...............................................................................................$5.007.50
For 1-inch meter ...............................................................................................$6.509.75
For 1 1/2 inch meter ...............................................................................................
$12.2718.41
For 2-inch meter ...............................................................................................
$19.3729.06
For 3-inch meter ...............................................................................................
$77.65116.48
For 4-inch meter ...............................................................................................
$130.60195.90
For 6-inch meter ...............................................................................................
$260.43390.65
For 8-inch meter ...............................................................................................
$383.67575.51
For 10-inch meter ...............................................................................................
$383.67575.51
Commodity Rates: (to be added to Customer Charge)
Per Hundred Cubic Feet (ccf)
Per Month All Pressure Zones
IRRIGATION WATER SERVICE
UTILITY RATE SCHEDULE W-7
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Effective 7-1-20092011
Supersedes Sheet No W-7-2 dated 11-1-20087-1-2009 Sheet No W-7-2
Per Ccf .......................................................................................................................
$4.9466.226
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}
*Not Yet Approved*
110126 dm 6051532
Resolution No. _________
Resolution of the Council of the City of Palo Alto Amending Utility
Rate Schedules W-1, -3, 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 _, 2011, 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 sheets W-1-1 and W-1-2, attached hereto and incorporated herein. The
foregoing Utility Rate Schedule, as amended, shall become effective July 1, 2011.
SECTION 2. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code,
Utility Rate Schedule W-3 (Fire Service Connections) is hereby amended to read in
accordance with sheets W-3-1 and W-3-2, attached hereto and incorporated herein. The
foregoing Utility Rate Schedule, as amended, shall become effective July 1, 2011.
SECTION 3. 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 sheets W-4-1 and W-4-2, attached hereto and incorporated herein.
The foregoing Utility Rate Schedule, as amended, shall become effective July 1, 2011.
SECTION 4. 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 sheets W-7-1 and W-7-2, attached hereto and incorporated herein. The
foregoing Utility Rate Schedule, as amended, shall become effective July 1, 2011.
SECTION 5. 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.
//
//
//
*Not Yet Approved*
110126 dm 6051532
SECTION 6. The Council finds that a restructuring of 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:
___________________________ ___________________________
Senior Deputy City Attorney City Manager
___________________________
Director of Utilities
___________________________
Director of Administrative
Services
DATE: December 7, 2010
PREPARED FOR: City of Palo Alto Utilities – Water Department
PREPARED BY: Mark Beauchamp, CPA/Utility Financial Solutions
SUBJECT: Cost of Service with Updated Billing Units
Purpose
The purpose of this technical memorandum (TM) is to compare the results of the cost of service study with
updated billing statistics for 2010. The original study was based on fiscal years 2008 and 2009 usage
patterns for each customer class. This update used the original costs with updated usage patterns using 2009
and 2010. This memorandum compares the summary results of original study with the updated usage
patterns.
Water Cost of Service Results:
Table One – Comparison of Original Study Results with Updated Study
Customer Class Original Study
With 2010 Billing
Statistics Original Study
With 2010 Billing
Statistics
W-1 Residential 15,219,495$ 14,910,404$ 6% 4%
W-4 Commercial 10,210,142 10,230,499 -10% -10%
W-7 Irrigation 3,108,767 3,397,634 4% 14%
W-3 Private Fire Protection 49,174 49,039 94% 93%
Public Fire Protection - Hydrants 78,253 78,253
Total 28,665,830$ 28,665,830$
The update of the usage patterns had the most significant impact on the W-7 Irrigation class of service. This
class uses a majority of its usage during months when customers sprinkle lawns. The cost of service study
averages the usage over a two year period in order to smooth out annual variation in billing statistics; despite
this however, there can be significant changes in cost of service results during extremely dry years that
require substantial lawn sprinkling or years with substantial rainfall that limits the amount of lawn
sprinkling. The change resulted in a 10% change in cost of service results for the irrigation class, and a 2%
change in the results for the residential class. The change for commercial class and fire protection were
insignificant.
Page Two – Updated Water Study Results
The table below is the updated cost of service results for the monthly customer and usage charges:
Table Two – Comparison of cost based charges
Customer Class Meter Size
Using 2010
Billing
Statistics
Original
Study
Using 2010
Billing
Statistics
Original
Study
W-1 Residential 3/4 14.75$ 13.94$ 4.34$ 4.52$
W-1 1 19.97 18.54 4.34 4.52
W-1 1.5 42.49 39.27 4.34 4.52
W-1 2 67.49 61.77 4.34 4.52
W-4 Commercial 3/4 14.75 13.94 4.12 4.16
W-4 1 19.97 18.54 4.12 4.16
W-4 1.5 42.49 39.27 4.12 4.16
W-4 2 67.49 61.77 4.12 4.16
W-4 3 150.05 137.16 4.12 4.16
W-4 4 259.52 236.62 4.12 4.16
W-4 6 551.53 500.00 4.12 4.16
W-4 8 903.63 812.02 4.12 4.16
W-7 Irrigation 3/4 14.75 13.94 5.57 5.10
W-7 1 19.97 18.54 5.57 5.10
W-7 1.5 42.49 39.27 5.57 5.10
W-7 2 67.49 61.77 5.57 5.10
W-7 3 150.05 137.16 5.57 5.10
W-7 4 259.52 236.62 5.57 5.10
W-7 6 551.53 500.00 5.57 5.10
W-7 8 903.63 812.02 5.57 5.10
Monthly Meter Charges CCU Charges
CITY OF PALO ALTO UTILITIES
WATER COST OF SERVICE & RATE STUDY
Fiscal Year 2011
2/3/2011 1
CITY OF PALO ALTO – WATER COST OF SERVICE STUDY
TABLE OF CONTENTS
Page No.
Introduction 2
Utility Revenue Requirements 3
Cost of Service Summary 5
Cost of Service Components 12
Significant Assumptions 13
Accountants Compilation Report 14
2/3/2011 2
CITY OF PALO ALTO WATER UTILITY
REVENUE REQUIREMENT, COST OF SERVICE AND RATE DESIGN
INTRODUCTION
This report was prepared to provide the City of Palo Alto Utilities Department (CPAU) with a
water cost of service study and a comprehensive examination of its existing rate structures by an
outside party. Utility Financial Solutions was cont racted to review revenue requirements and the
cost of providing service to CPAU’s water customers. This purpose of the study includes:
1) Determine Water Utility’s revenue requirem ents for Fiscal Year (FY) 2011 based on
budget and financial projections provided by Palo Alto staff
2) Allocate utility’s revenues requirements to customer classes
3) Identify the cost to provide service to customer classes
5) Review the current Water Utility rate structure and propose alternative rate structures.
6) If possible, propose rate structures to encourage conservation and efficient use of
resources
The report is structured in the following manner:
.
• Introduction
• Utility Revenue Requirements for Fiscal Year 2011
• Cost of Service Summary
• Recommended Rate Adjustment
• Cost of Service Components
• Significant Assumptions Used in Analysis
• Recommendations
• Compilation Report
2/3/2011 3
CITY OF PALO ALTO WATER UTILITY
REVENUE REQUIREMENT, COST OF SERVICE AND RATE DESIGN
UTILITY REVENUE REQUIREMENTS
CPAU’s financial projections were used to evaluate the current and projected financial
statements. The table below is the accrual basis revenues and expenses for CPAU’s Water
Utility. (Cash basis is listed on page three of this report). CPAU’s projected rate adjustments are
incorporated into the financial projection with rate adjustments of 0.0% for FY 2011; 8% for FY
2012 and 9% for FY 2013 – FY 2015. The projected operating income for FY 2011 is $3.53
million and is projected to increase to $5.4 million in 2015.
Table One – Projected Financial Statements FY 2011 – FY 2015 (thousands)
FY 2011 FY 2012 FY 2013 FY 2014 FY 2015
RATE ADJUSTMENT 0.0% 8.0% 9.0% 9.0% 9.0%
REVENUES
SALES REVENUES 28,666$ 31,336$ 34,179$ 37,291$ 40,687$
DISCOUNTS / UNMETERED 138 138 138 138 138
OTHER / OP TRANS IN 337 341 344 348 351
CONNECTION FEES / CAPACITY FEES 767 776 785 795 804
TOTAL REVENUES 29,907$ 32,590$ 35,445$ 38,571$ 41,980$
EXPENSES
SUPPLY 12,808$ 15,018$ 17,984$ 20,342$ 22,028$
DISTRIBUTION 5,201 5,254 5,306 5,359 5,413
CUSTOMER SUPPORT SERVICES 1,612 1,628 1,645 1,661 1,678
ALLOCATED CHARGES 2,484 2,509 2,534 2,560 2,585
RENT AND TRANSFERS OUT 2,331 2,354 2,377 2,401 2,425
DEPRECIATION EXPENSE 1,943 2,077 2,214 2,354 2,479
TOTAL O&M EXPENSES 26,380$ 28,839$ 32,060$ 34,676$ 36,608$
OPERATING INCOME 3,528$ 3,750$ 3,386$ 3,895$ 5,372$
NON OPERATING INCOME AND EXPENSES
INTEREST INCOME 1,265$ 804$ 731$ 1,160$ 1,714$
INTEREST EXPENSE (1,201) (1,227) (1,262) (1,308) (1,356)
TOTAL OTHER OPR. INCOME AND EXPENSES 64$ (423)$ (532)$ (148)$ 358$
NET INCOME 3,592$ 3,327$ 2,854$ 3,747$ 5,730$
2/3/2011 4
CITY OF PALO ALTO WATER UTILITY
REVENUE REQUIREMENT, COST OF SERVICE AND RATE DESIGN
UTILITY REVENUE REQUIREMENTS
The table below is projected cash flows and cash reserves from FY 2011 through FY 2015. The
projected cash available for FY 2011 is $10.3 million (excluding cash committed to previous CIP
programs). Cash is projected to decline each year and approximate $8.0 million in FY 2015.
Table Two – Projected Cash Balance (thousands)
FY 2011 FY 2012 FY 2013 FY 2014 FY 2015
Add Net Income 3,592$ 3,327$ 2,854$ 3,747$ 5,730$
Add Back Depreciation Expense 1,943 2,077 2,214 2,354 2,479
Debt Service Principal 1,172 1,507 1,479 1,445 1,406
Cash Available from Operations 4,363$ 3,897$ 3,589$ 4,657$ 6,804$
Estimated Annual Capital Additions 5,348 5,479 5,612 5,003 5,106
Net Cash From Operations (985)$ (1,582)$ (2,023)$ (346)$ 1,697$
Beginning Cash Balance 14,437$ 13,452$ 11,870$ 9,847$ 9,501$
Ending Cash Balance 13,452 11,870 9,847 9,501 11,198
Bond Reserve Fund 3,155 3,155 3,155 3,155 3,155
Available Cash Reserves 10,297$ 8,715$ 6,692$ 6,346$ 8,043$
2/3/2011 5
CITY OF PALO ALTO WATER UTILITY
REVENUE REQUIREMENT, COST OF SERVICE AND RATE DESIGN
COST OF SERVICE
The purpose of a cost of service study is to allocate costs to customer classes based on quantity
of water consumed, variability of flow during th e year, peak demands created on the system for
each class and costs associated with metering, billing and accounting. The cost of service study
is based on recognized procedures for allocating several categories of costs to customer
classifications. Costs were allocated in proporti on to each classification's use of the facilities
and services.
The table below summarizes revenues projected from customers for FY 2011 and compares the
projected revenues with the cost of providing service to each class of customers.
Cost of Service = Cost of providing water service to customers
Projected Revenues = Projected revenues recovered from current rate design
Percent Difference = Variation between cost of service and current rate design
Positive = Percent increase to meet cost of service
Negative = Percent decrease to meet cost of service
Table Three – Cost of Service Summary
Class Cost of Service
Projected
Revenues
Percent
Difference
W-1 Residential 15,219,495$ 14,304,899$ 6%
W-4 Commercial 10,210,142 11,357,704 -10%
W-7 Irrigation 3,108,767 2,977,646 4%
W-3 Private Fire Protection 49,174 25,388 94%
Public Fire Protection - Hydrants 78,253 -
Total 28,665,830$ 28,665,638$ 0%
The cost of service study identified variations between the current rate design and cost of
service results a discussion of each class is listed below:
Residential Class - W-1 Rate Schedule
The cost of service results identified the need for a 6 percent overall rate adjustment for the
residential class. The variation between current charges and cost of service results are due to
reduced monthly meter charges, CPAU currently charges a $5.00/month meter charge, when
compared with cost of service charge of $13.94/month. (Please see table 9) CPAU may
consider placing greater increases in the monthly meter charge component and less of an
increase in the commodity component.
Irrigation Meters - W-7 Rate Schedule
Customers on the W-7 irrigation rate use a majority of water during the summer season and little
water the remainder of the year. The W-7 irrigation rate class contributes substantially to
CPAU’s peak system loadings and the cost of service results can vary significantly depending on
the weather patterns. The cost of service study identified a 4% increase in rates is needed to
meet cost of service requirements.
2/3/2011 6
CITY OF PALO ALTO WATER UTILITY
REVENUE REQUIREMENT, COST OF SERVICE AND RATE DESIGN
COST OF SERVICE
Commercial Class - W-4 Rate Schedule
The current rate charged to commercial customers is on average 10 percent greater than the
cost of providing the service. It is recommended the W-4 rate be adjusted to move the rate
closer to cost of service in future years.
Fire Hydrants – W-3 Rate Schedule
To meet cost of service requirements a 94% increase is needed for the W-3 rate (private fire
protection). Public fire protection (City Hydrants) is currently a service not allocated to the City
of Palo Alto. The total annual cost to operate and maintain public fire protection is $156,505. In
discussion with CPAU staff it was assumed 50% of the cost should be shared by all customer
classes to reflect the benefit that fire hydrants provide the entire water system. Flushing of the
hydrants helps to clean the water system and is a benefit to all users of the system. As a result,
only $78,253 (the remaining 50% of $156,505) was allocated directly to the public fire protection
– City Hydrants.
Table Four – Fire Hydrants Revenue Requirements
Cost of Service
Projected
Revenues
Percent
Difference
W-3 Private Fire Protection 49,174$ 25,388$ 94%
Public Fire Protection - City Hydrant 78,253 -
Fire Hydrants and Private Fire
Protection
*Public Fire Protection - City hydrants, $78,253 represents the full cost to be recovered.
**CPAU should consider increases to the monthly customer charges for private fire protection.
Table Five – W-3 - Comparison of Current Meter Charges and Cost of Service
Meter Size Current
Monthly Meter
Cost of
Service
W3 - Private Fire Service- 4 Inch 4.20$ 7.27$
W3 - Private Fire Service- 6 Inch 7.00 16.13
W3 - Private Fire Service- 8 Inch 10.75 28.53
W3 - Private Fire Service- 10 Inch 15.75 44.48
2/3/2011 7
CITY OF PALO ALTO WATER UTILITY
REVENUE REQUIREMENT, COST OF SERVICE AND RATE DESIGN
COST OF SERVICE
The allocation study was modeled after the “Base & Extra Capacity Method” for allocating costs
to customer classifications. The method is described in the 2007 and prior editions of the Water
Rates Manual, published by the American Water Works Association. The four basic categories of
cost responsibility are base, extra capacity, customer and fire protection costs. The following
discussions present a brief description of these costs and the manner in which they were
allocated.
Base Costs are costs that tend to vary with the quantity of water used, and include costs
associated with supplying, treating, pumping and distributing water to customers under average
load conditions, without the elements necessary to meet peak demands. Base costs are
allocated to customer classifications by their average daily usage.
Extra Capacity Costs are costs associated with meeting usage requirements in excess of the
base. They include operating and capital costs for plant and system capacity installed beyond
that required to meet average use consumption. The extra capacity costs are subdivided into two
categories; costs necessary to meet “maximum day extra demand” and costs to meet “maximum
hour extra demand”. The extra capacity costs are allocated to customer classifications based on
each class’s contribution to the systems maximum- day and-maximum hour usage.
Table Six - Classification Percentages between Base and Extra Capacity Costs:
Average Day Max Day Max Hour
CCF's 15,803 23,963 26,948
Average Day to Max Day Percent 66% 34%
Average Day to Max Hour Percent 59% 30% 11%
Costs related to investment in assets and a portion of the distribution costs are allocated 59
percent on usage (base costs); 30 percent on maximum day and 11 percent on maximum hour
(extra-capacity) The values were calculated using the peak to average ratios discussed below.
2/3/2011 8
CITY OF PALO ALTO WATER UTILITY
REVENUE REQUIREMENT, COST OF SERVICE AND RATE DESIGN
COST OF SERVICE
The table below identifies the ratios used to de termine the extra capacity costs and is based on
the calculated peaking factor. Classes with higher ratios typically increase usage during peak
system times and results in greater use of system capacity. Listed below are peak ratios for
each customer type for 2008 and 2009, the average of the two years was used in the analysis to
allocate costs for 2011. (A factor of 1.0 was used for fire protection)
Table Seven – Peak to Average Usage Ratio
Customer Class
CCF Usage
during
peak month
Average
Monthly
Usage per
year - CCF
Peak to
Average
Ratio
CCF Usage
during peak
month
Average
Monthly
Usage per
year - CCF
Peak to
Average
Ratio
CCF Usage
during peak
month
Average
Monthly
Usage per
year - CCF
Peak to
Average
Ratio
W1 - Residential 351,418 228,518 1.54 343,051 213,906 1.60 694,469 442,424 1.57
W2 - Contruction Water Use 1.00 1.00 - - 1.00
W3 - Private Fire Service 1.00 1.00 - - 1.00
W4 - Commercial 199,202 155,155 1.28 253,996 187,877 1.35 453,198 343,031 1.32
W7 - Irrigation 90,509 48,840 1.85 101,013 47,196 2.14 191,522 96,036 1.99
Total System 641,129 432,513 1.48 698,060 448,978 1.55 1,339,189 881,492 1.52
2008 Peak Factor 2009 Peak Factor Two Year Average
The peaking factor is based on the ratio between the usage during the peak month and average
usage during the year for each class. The residential peak ratio of 1.57 means the usage in the
peak month is 1.57 times greater than annual usage. The commercial class usage is relatively
constant during the year with a two year average peak to average ratio of 1.32. The least
efficient class is irrigation (W-7) with a two year average peak to average ratio of 1.99. The
peaking factors in Table Seven above were applied in the table below to calculate values for
base, maximum day and maximum hour.
Customer Class Annual Use
Average
Rate
Capacity
Factor
Total
Capacity
Extra
Capacity
Capacity
Factor
Total
Capacity
Extra
Capacity
W1 - Residential0.75 2,308,194 6,323.8 1.57 9,926 3,603 1.78 11,225 4,901
W1 - Residential1 447,514 1,226.1 1.57 1,925 698 1.78 2,176 950
W1 - Residential1.5 73,178 200.5 1.57 315 114 1.78 356 155
W1 - Residential2 41,011 112.4 1.57 176 64 1.78 199 87
W1 - Residential3 33 0.1 1.57 0 0 1.78 0 0
W3 - Private Fire Service-4 185 0.5 1.00 1 1.00 1
W3 - Private Fire Service-6 463 1.3 1.00 1 1.00 1
W3 - Private Fire Service-8 350 1.0 1.00 1 1.00 1
W3 - Private Fire Service-10 72 0.2 1.00 0 1.00 0
Public Fire Hydrants - - 1.00 - 1.00 -
W4 - Commercial-0.75 247,341 677.6 1.32 895 218 1.50 1,014 336
W4 - Commercial1 205,951 564.3 1.32 745 181 1.50 844 280
W4 - Commercial1.5 265,294 726.8 1.32 960 233 1.50 1,087 360
W4 - Commercial2 740,393 2,028.5 1.32 2,680 651 1.50 3,034 1,006
W4 - Commercial3 261,040 715.2 1.32 945 230 1.50 1,070 355
W4 - Commercial4 169,826 465.3 1.32 615 149 1.50 696 231
W4 - Commercial6 141,177 386.8 1.32 511 124 1.50 579 192
W4 - Commercial8 252,711 692.4 1.32 915 222 1.50 1,036 343
W7 - Irrigation0.75 10,683 29.3 1.99 58 29 2.16 63 34
W7 - Irrigation1 25,342 69.4 1.99 138 69 2.16 150 81
W7 - Irrigation1.5 72,049 197.4 1.99 394 196 2.16 426 229
W7 - Irrigation2 163,129 446.9 1.99 891 444 2.16 965 518
W7 - Irrigation3 100,716 275.9 1.99 550 274 2.16 596 320
W7 - Irrigation4 59,577 163.2 1.99 326 162 2.16 353 189
W7 - Irrigation6 111,558 305.6 1.99 610 304 2.16 660 355
W7 - Irrigation8 70,322 192.7 1.99 384 192 2.16 416 223
Total 5,768,111 15,803 23,963 8,160 26,948 11,145
Base Maximum Day Maximum Hour
2/3/2011 9
CITY OF PALO ALTO WATER UTILITY
REVENUE REQUIREMENT, COST OF SERVICE AND RATE DESIGN
COST OF SERVICE
Customer Costs (Meter Costs) are costs associated with serving customers regardless of usage
level or usage characteristics. Customer costs include the operation and maintenance expenses
related to meter installation, meter readings, billing and collecting. The customer costs are
allocated to each class based on the cost of installing meters and services and the cost of
providing customer service to different classes of customers. Customer costs considered fixed
and allocated to the customer charge component include the following items:
1. Cost of meter reading
2. Cost of meter installations
3. Cost of service connections
4. Forty percent of the operation and maintenance expenses of the distribution system
(Based on the ratio of Max Day to Average Day usage)
5. Billing & collection costs
6. Allocated amount of administration costs based on total expenses as a ratio of customer
cost expenses
7. Reduced by other revenue items based on total expenses as a ratio of customer cost
expenses
The tables below are meter cost ratios and the meter demand ratios used to determine customer
costs for each meter size.
Meter Cost Ratio (Initial Cost for CPAU to install a meter)
Meter Size -
Inches
Costs to
Install a
Meter in $
0.75 147$
1 147
1.5 326
2 423
3 962
4 1,573
6 2,829
8 3,252
2/3/2011 10
CITY OF PALO ALTO WATER UTILITY
REVENUE REQUIREMENT, COST OF SERVICE AND RATE DESIGN
COST OF SERVICE
Meter Demand Ratio (Potential demand for water based on size of meter)
Meter
Size in
Inches
Area of
Meter -
Square
Inches
Meter Ratio
using a base
of 0.75 inch
0.75 0.44 1.00
1.00 0.79 1.78
1.50 1.77 4.00
2.00 3.14 7.11
3.00 7.07 16.00
3.00 7.07 16.00
4.00 12.56 28.44
6.00 28.26 64.00
8.00 50.24 113.78
10.00 78.50 177.78
The meter ratio is a calculated value based on the potential volume that can pass through the
meter. This value determines the maximum potential demand a customer can create on the
water system. The formula is calculated as follows:
(Radius of meter squared) X value of Pi
where: Meter Size/2 = Radius of meter and Pi = 3.14
2/3/2011 11
CITY OF PALO ALTO WATER UTILITY
REVENUE REQUIREMENT, COST OF SERVICE AND RATE DESIGN
COST OF SERVICE
Fire Protection Costs are costs associated wi th installing facilities to meet expected peak
demands of fire protection services. Operating and capital costs for hydrants were allocated
directly to fire protection classifications. Certain parts of the water system are required to be
oversized to help ensure adequate capacity exists to fight fires. Water towers are specifically
oversized to meet the fire flow requirements of the community. The portion of towers allocated
directly to fire protection is 20.6% of water tower costs and is based on the calculation listed
below.
Table Eight – Fire Hydrants Water Requirements
GPM
Hour
Requirement
Total
Requirement
in MGD
Fire Flow Requirement 6,000 6.00 2.16
Reservoir Capacity 10.50
Percent of Total 20.6%
GPM – Gallons per minute requirement
2/3/2011 12
CITY OF PALO ALTO WATER UTILITY
REVENUE REQUIREMENT, COST OF SERVICE AND RATE DESIGN
COST OF SERVICE
COST OF S ERVICE C OMPONENTS
The table below identifies cost of service rates and identifies the monthly charge and
consumption charge for each meter size and each customer class.
Table Nine – Comparison of Current Charges with Cost of Service Charges
Customer Class Meter Size
Monthly
Meter
Charges
CCU
Charges
Average
COS Rate
Monthly
Meter
Charges
Current
Rate First
Block
Current
Rate
Second
Block
Average
Current Rate
W-1 Residential 3/4 13.94$ 4.52$ 5.61$ 5.00$ 3.949$ 5.624$ 5.11
W-1 1 18.54 4.52 5.50 6.50 3.949 5.624 5.35
W-1 1.5 39.27 4.52 5.68 12.27 3.949 5.624 5.64
W-1 2 61.77 4.52 5.77 19.37 3.949 5.624 5.78
W-4 Commercial 3/4 13.94 4.16 4.99 5.00 4.946 5.23
W-4 1 18.54 4.16 4.80 6.50 4.946 5.15
W-4 1.5 39.27 4.16 4.80 12.27 4.946 5.13
W-4 2 61.77 4.16 4.71 19.37 4.946 5.11
W-4 3 137.16 4.16 4.52 77.65 4.946 5.12
W-4 4 236.62 4.16 4.78 130.60 4.946 5.26
W-4 6 500.00 4.16 4.95 260.43 4.946 5.34
W-4 8 812.02 4.16 4.61 383.67 4.946 5.14
W-7 Irrigation 3/4 13.94 5.10 5.51 5.00 4.946 5.19
W-7 1 18.54 5.10 5.27 6.50 4.946 5.10
W-7 1.5 39.27 5.10 5.10 12.27 4.946 5.03
W-7 2 61.77 5.10 5.19 19.37 4.946 5.06
W-7 3 137.16 5.10 4.95 77.65 4.946 5.01
W-7 4 236.62 5.10 5.08 130.60 4.946 5.08
W-7 6 500.00 5.10 4.89 260.43 4.946 4.98
W-7 8 812.02 5.10 4.98 383.67 4.946 5.01
Current ChargesCost of Service Charges
2/3/2011 13
CITY OF PALO ALTO WATER UTILITY
REVENUE REQUIREMENT, COST OF SERVICE AND RATE DESIGN
SIGNIFICANT ASSUMPTIONS
This section outlines the procedur es used to develop the cost of service for CPAU’s Water Utility
and related significant assumptions.
REVENUE FORECAST
Sales revenues and rate adjustments were provided by CPAU. The table below projects
revenues from FY 2011 – FY 2015.
Table Ten – Projected Revenues (thousands)
FY 2011 FY 2012 FY 2013 FY 2014 FY 2015
RATE ADJUSTMENT 0.0% 8.0% 9.0% 9.0% 9.0%
REVENUES
SALES REVENUES 28,666$ 31,336$ 34,179$ 37,291$ 40,687$
F ORECASTED O PERATING E XPENSES FOR FY 2011
Forecasted expenses were provided by CPAU and are listed in the table below:
Table Eleven – Palo Alto Projected FY 2011 Expenses (thousands)
Category Amount
Supply 12,808$
Distribution 10,549
Support Services and Admin 1,612
Debt Service 2,373
Rent and Transfers Out 2,331
Rate Stabilization (985)
Other Revenues and Expense (23)
Totals 28,666$
CUSTOMER USAGE INFORMATION
Usage patterns for customer classes were based on monthly number of customers and
monthly volumetric usages listed on table seven.
Utility Financial Solutions
185 Sun Meadow Ct.
Holland, MI 49424
Phone: 616-393-9722
Fax: 616-393-9721
ACCOUNTANTS' COMP ILATION REPORT
City of Palo Alto Utilities Department
The accompanying forecasted statements of revenues and expenses of the City of Palo Alto Water
Department were provided by CPAU and compiled for the year ending June 30, 2011 through June
30, 2015. CPAU’s projection was restated in accordance with guidelines established by the American
Institute of Certified Public Accountants and reflected in this report.
The purpose of this report is to assist management in determining the cost to service each customer
class. This report should not be used for any other purpose.
A compilation is limited to presenting, in the form of a forecast; information represented by
management and does not include evaluation of support for any assumptions used in projecting
revenue requirements. We have not audited the forecast and, accordingly, do not express an opinion
or any other form of assurance on the statements or assumptions accompanying this report.
Differences between forecasted and actual results will occur since some assumptions may not
materialize and events and circumstances may occur that were not anticipated, some of these
variations may be material. Utility Financial Solutions has no responsibility to update this report after
the date of this report.
This report is intended fo r information and use by the City of Palo Alto, Utilities Department for the
purposes stated above. This report is not intended to be used by anyone except the specified
parties.
UTILITY FINANCIAL SOLUTIONS
Mark Beauchamp, CPA, CMA, MBA
Holland, MI
January 11, 2011
EXCERPTED DRAFT MINUTES OF UTILITIES ADVISORY COMMISSION
Meeting of February 2, 2011
ITEM 1: ACTION: Proposed Water Utility Rate Adjustments and Long -Term Financial Projections
Senior Resource Planner Ipek Connolly provided a presentation on the water utility’s five-year
financial projections and proposed rate adjustments for FY 2012. Connolly noted that over the five-
year planning period, the cost of water purchases is expected to increase from $10.8 million in FY
2011 to $21.5 million in FY 2016. Regarding the rate adjustments, staff proposed to make the
cost-of-service analysis (COSA) adjustments between customer classes and between fixed and
volumetric charges in one year, along with a 12.5% ($3.5Million) increase in overall sales revenue.
This translates to a 17.4% increase in residential sales revenue and an 8% increase in business
sales revenue since the COSA realignment between customer classes is a 4% increase in
residential rates and a 10% reduction in commercial rates, and a 14% increase in commercial
irrigation rates. The adjustment to the fixed charge component would increase the revenue
collected from fixed charges from 5% to 15% of total sales revenue. The staff proposal would also
add a tier to residential and commercial rates. The financial projections illustrated the impact of the
revised (higher) SFPUC supply rate increases, lower water demand projections, and additional
capital improvement projects. Connolly also presented a couple of alternative scenarios suggested
by UAC members. One alternative was to raise rates sooner to avoid more increase later and
avoid going below the minimum reserve guideline. Another alternative was to try and achieve
stable rate increases (i.e., the same percentage over the 5 year planning horizon).
Commissioner Eglash asked for an explanation of how revenue from commercial customers was
increasing when they were getting a 10% decrease. Director Fong and Connolly explained that the
10% decrease was for the cost of service realignment between customer classes. With the
proposed FY 2012 increase of 12.5% in overall revenue requirements and the COSA increase of
14% for irrigation accounts the net increase to the commercial customers overall was 8%.
Commissioner Melton stated that he thought it was a well thought out proposal but expressed his
concern about dropping below minimum reserve guidelines for two years. He acknowledged that it
would take a large increase in FY 2012 to stay above the minimum guidelines in future years, but
requested that it be made clear to the Council of that possible outcome.
Chair Waldfogel and Commissioner Berry discussed alternatives to reduce the impact of the CIP
increase. Chair Waldfogel suggested stretching the CIP over three years, and Commissioner Berry
asked if the two new projects could be financed instead of paid for out of current ratepayer
revenues. Director Fong replied that she would not recommend delaying the projects as they were
safety related, and bond financing was not the typical way of financing such projects, but that it is
something that could be considered.
Commissioner Keller asked if the demand reduction was mainly from the business sector and
economy driven. She also observed that the reserve calculations were very sensitive to demand
projections, so the Commission should not get too focused on the reserve projections for future
years. Connolly replied that the demand reductions were partly driven by the economy, but also by
the weather and conservation actions.
Commissioner Cook asked how the tiers were determined, and if the tiers were effective in
encouraging conservation. Connolly explained that tier points had been selected based on the
percentage of customers that would fall into them for winter and summer usage. For example, tier
one was set based on winter usage and was designed so that 50% of customers would not exceed
tier one based on their winter usage. Connolly also explained that price response is low but there is
some, and the response is higher for low income customers and irrigation use.
Chair Waldfogel indicated that the UAC received a letter from Canopy and read the questions in
the letter:
1. Do we know what impact these rate changes might have on the landscape and health
of trees in particular?
2. Was Planning Arborist Dave Dockter consulted on this matter?
3. Is demand for water usually elastic to price? Does this elasticity vary tier to tier?
4. If the rate change is accompanied by additional encouragements to conserve water in
the landscape (such as the removal of irrigated lawns), could instructions be given
regarding the need to provide alternate irrigation for trees that are currently irrigated
indirectly through the watering of lawns?
Commissioner Keller recognized that the COSA resulted in a 4% residential increase, but she
asked if the cost could be split differently so that low usage customers could still have the ability to
lower their bills. She was concerned that the drop in volumetric rates for residential tiers one and
two did not give a conservation signal and was a confusing message to customers. Director Fong
stated that staff’s proposal was to increase the fixed charge to the COSA recommendation
especially since there is strong sentiment among the Council to avoid ramifications to the Water
Fund when usage drops based on the experience of the Refuse Fund. However when fixed rates
increase, volumetric rates must decrease to maintain the same revenue.
Commissioner Eglash summarized the “big picture”; water rates are rising dramatically, water is a
finite resource, and the City needs a rate structure to encourage conservation and has an
obligation to send correct price signals. There are significant avoided costs from conserving water.
He indicated that we have a responsibility to bring in the third usage tier to incent efficient use. He
recognized there was some concern about trees but he did not think most trees relied solely on
irrigation because of the relatively high water table in Palo Alto. Although he didn’t think trees
would be impacted, he indicated that if they were we would need to find a solution to that problem.
He expressed a preference for keeping commercial rates flat rather than having some commercial
customers having bill reductions and suggested applying Commissioner Keller’s suggestion to
commercial rates in not having their volumetric charges reduced.
Commissioner Foster expressed his appreciation for staff’s report and asked for clarification on
COSA legal requirements. He asked if the City was under a legal obligation to follow COSA, if
there was any arbitrariness to COSA studies, and if there was any obligation to move to the COSA
fixed charge recommendation. Staff replied that yes, regulations (Proposition 218) required that
rates be based on cost of service and the COSA study used industry standard cost causation
models for assigning cost of service. The fixed cost was a rate design issue, but that the current
low fixed costs were not collecting the full cost of service from low usage customers.
Commissioner Foster recognized that the proposed rate increases are painful and he would rather
the COSA be phased in more gradually so as to avoid the rate increase differential between low
usage residential customers and commercial customers. He would like to see all customers share
some of the required increase. He also would like a more gradual move to the fixed cost increase
(he would prefer no fixed costs). He also advised that staff communicate clearly the projected rate
increase over the next few years.
Commissioner Melton asked why staff proposed to move to full COSA alignment by customer
classes in one year although both the UAC and the Finance Committee previously indicated a
preference to move to the class alignment over more than one year. Staff indicated that since the
Water Fund’s reserves are currently healthy and, therefore, it was possible to somewhat reduce
the requested revenue increase for FY 2012 and include the COSA alignment in one year.
Additionally, staff indicated its preliminary assessment that it would recommend no increase to gas
or electric rates, so the total bill impact from the one-year COSA alignment for water rates was
doable.
Chair Waldfogel noted that the commission has several choices, including: 1) approve staff’s
proposal now; 2) approve the proposal with tweaks now; 3) appoint a subcommittee to work with
staff to develop new proposals; or 4) ask staff to return with a new proposal based on the
commission’s input. Commissioner Eglash opposed delaying action and noted that the
Commission needs to grapple with the issues now.
ACTION:
Commissioner Melton moved to recommend staff’s proposal with the change that staff make the
adjustments necessary so that no customer would get a bill decrease. Commissioner Foster
seconded the motion.
Commissioner Eglash offered a friendly amendment regarding lower usage customers: that the
volumetric rates for tiers 1 and 2 not be reduced from current levels and the fixed charge be
lowered to account for the higher volumetric charges, the tier 3 residential rate would stay at the
level proposed by staff. Commissioner Melton accepted the amendment offered by Commissioner
Eglash, but stated he would not accept elimination of the residential 3rd tier.
Chair Waldfogel offered an amendment to have a 14% increase in the revenue requirement for FY
2012 to have stable rate increases planned over the 5 year projection. Commissioner Berry
seconded the motion, but then withdrew his second when he understood the net impact on
residential customers of the revenue requirement increase and the COSA adjustment. Chair
Waldfogel offered an amendment to remove the residential tier 3, but there was no second.
Commissioners Eglash and Keller proposed modifying the first amendment so that residential tiers
1 and 2 rates would increase slightly instead of remaining at current levels. Commissioner Melton
accepted the revised amendment and reiterated his earlier request that the Council be well
apprised of the fact that the five-year financial projections show the reserves going below the
minimum guidelines for two years.
The final restated amended motion was: to recommend Council approve amendments to the water
rates such that: a) overall retail water rates and annual revenues for the Water Fund increase by
12.5%, or $3.5 million, in Fiscal Year 2012; b) the rate adjustment proposal by staff be modified so
that no customer’s bill would be decreased. These modifications will require that the volumetric
rates for residential customers for usage in tiers 1 and 2 and for commercial customers be
increased and the fixed charges be reduced; and c) the Council be made aware that the UAC is
aware that the five-year financial projections show that the balance of the Water Rate Stabilization
Reserve falls below the minimum guideline level for two years.
The motion passed (5-2) with Chair Waldfogel and Commissioner Berry opposed. Chair Waldfogel
indicated that his opposition was due to the fact that the customers most affected by the proposal
are those with large landscaped areas. Commissioner Berry indicated that he couldn’t support the
motion since he couldn’t see that actual proposed rates that would result from the proposed
modifications.