HomeMy WebLinkAboutStaff Report 2509
City of Palo Alto (ID # 2509)
Finance Committee Staff Report
Report Type: Meeting Date: 3/6/2012
City of Palo Alto Page 1
Summary Title: Water Fund Long Term Financial Projections
Title: Water Fund Financial Projections (FY 2013 – FY 2017)
From: City Manager
Lead Department: Utilities
Recommendation
This report presents the projected costs and revenue requirements for the W ater Fund for
Fiscal Year (FY) 2013 through FY 2017. No action is required.
Executive Summary
Staff assessed major cost drivers and expected costs, the short-term assessment of risks, reserve
guidelines, and the revenue requirements for the Water Fund fo r the next five years. The
financial forecast shows that a rate adjustment of 20% is needed for FY 2013 followed by an
additional 24% in FY 2014 to bring fund revenues in line with expected cost increases facing the
utility during these two years. For th e remaining three years of the forecast horizon, staff
projects smaller rate adjustments.
The major reasons for the need for these substantial rate adjustments are the expected large
increase in the wholesale price for water from San Francisco coupled w ith lower water usage
forecasts. The retail rate adjustment projections for the Water Fund are highly sensitive to
water usage projections. For example, in a low usage scenario, the rate adjustments needed
for FY 2013 and FY 2014 are 25% and 36%, respect ively. Financing some of the projects in the
Water Fund’s Capital Improvement Program (CIP) could lower the rate increase requirement in
FY 2014, however, this option requires higher rate adjustments in the subsequent three years.
The preliminary projected rate adjustments presented in this report achieve the goals of
ensuring that the fund’s reserve balances are sufficient to cover projected costs and within the
Council-approved reserve guideline levels for the forecast horizon. In April, the Finance
Committee is scheduled to consider a rate adjustment proposal for FY 2013.
Background
The City of Palo Alto Utility (CPAU) serves about 20,000 water customers. The average daily
consumption of water in FY 2011 was 11.2 million gallons per day (mgd) or 5.4 million ccf
City of Palo Alto Page 2
(hundred cubic feet) of water for the year. CPAU is responsible for the operations and
maintenance of the system and purchases all of its potable water supplies 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 Water Fund, staff conducts an annual review of
major cost drivers and expected costs, 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 including sales revenue
projections, wholesale water purchase costs, distribution system operating and CIP expenses,
prudent funding of the Water Rate Stabilization Reserve (W-RSR), the Emergency Plant
Replacement (EPR) Reserve, and debt service payments. Changes in these factors can trigger
an adjustment to the revenue requirement.
Discussion
Financial Projections
Table 1 below shows financial projections for the Water Fund for FY 2012 to FY 2017. For FY
2011, both budgeted and realized actuals based on the City’s Comprehensive Annual Financial
Report (CAFR) are shown. For FY 2012, both budgeted and projected financial ex pectations are
shown. The projected column for FY 2012 reflects revised retail sales revenue and wholesale
water purchase costs based on the actual water consumption levels realized in the first half of
the fiscal year, and revised projections for the second half. Also included for projected FY 2012
is the expected mid-year release of CIP re-appropriations.
City of Palo Alto Page 3
Table 1
Five-Year Financial Plan
$(000')s
Adopted Actual Adopted Projected
2011 2011 2012 2012 2013 2014 2015 2016 2017
1 % CHANGE IN RETAIL RATE 0.0%0.0%12.5%20.8%20.0%24.0%6.0%0.0%8.0%
2 PROJECTED SYSTEM AVERAGE RATE ($/CCF)5.21 5.21 5.86 6.30 7.56 9.37 9.93 9.93 10.73
3 PROJECTED COMMODITY COST ($/CCF)2.00 1.96 2.74 2.69 3.44 3.77 4.57 4.81 5.29
4 SALES UNITS (THOUSAND CCFs)5,504 4,992 5,256 5,011 4,997 4,773 4,521 4,445 4,422
5 PROJECTED CHANGE IN RETAIL SALES REVENUE 0 0 3,422 3,266 6,292 8,655 2,541 0 3,513
6 REVENUE
7 Utilities Retail Sales 28,658 26,033 30,652 29,254 37,491 44,356 44,792 44,138 47,284
8 Service Connection & Capacity Fees 692 1,146 700 700 776 785 795 750 771
9 Other Revenues plus Transfers In 916 1,040 873 873 866 856 845 832 819
10 Interest & Gain or Loss on Investment 1,050 181 971 971 604 613 776 645 569
11 Sub Total 31,316 28,400 33,196 31,797 39,737 46,609 47,209 46,365 49,443
12 CIP Bond Proceeds / Reserve 3,500 3,500 0 0 0 0 0 0 0
13 Total Sources of Funds 34,816 31,900 33,196 31,797 39,737 46,609 47,209 46,365 49,443
14 OPERATING EXPENSE
15 Water Supply Purhcases 12,043 10,678 15,774 14,684 18,725 19,593 22,505 23,282 25,461
16 Operations 10,721 9,278 10,956 10,956 11,779 12,014 12,255 12,500 12,750
17 Debt Service & Other Related 2,981 3,885 3,338 3,338 3,219 3,220 3,219 3,223 3,219
18 Rent 2,107 2,107 2,142 2,142 2,185 2,228 2,273 2,318 2,365
19 CIP (Non-Bonded)5,348 5,348 4,369 4,369 6,000 9,813 6,794 5,189 5,151
20 Sub Total 33,201 31,297 36,578 35,489 41,907 46,869 47,046 46,512 48,946
21 CIP (Bonded)3,500 3,500 0 0 0 0 0 0 0
22 Total Uses of Funds 36,701 34,797 36,578 35,489 41,907 46,869 47,046 46,512 48,946
23
24 Into/ (Out of) Reserves (1,885)(2,897)(3,382)(3,691)(2,170)(260)163 (147)497
Fiscal Year
City of Palo Alto
Water Utility
FINANCIAL PROJECTIONS
(FY 2013 - FY 2017)
Cost Drivers
Total expenses1 in FY 2011 were $31.3 million. This is $1.9 million lower than budgeted, mainly
due to $1.4 million lower water supply purchases as a result of lower than expected demand for
water. Operations costs were $1.4 million lower than budgeted, but this was offset by the debt
service and other costs that were $904,000 higher than budgeted. In FY 2012, total expenses
are projected to increase by $4.2 million, which is lower than the budgeted increase, again due
to the lowered expectations for water demand for FY 2012. Total expenses are projected to
increase by an additional $6.4 million in FY 2013 and a further increase of $5.0 million in FY
2014. Driven mainly by water supply purchase costs and CIP-related needs, the rate of increase
in costs diminishes towards the latter part of the forecast horizon with total expenses for the
utility reaching a total of $48.9 million by FY 2017.
Water Demand
Clearly, water demand has a significant impact on the financial position of the Water Fund. A
1% drop in water demand results in a 0.9% revenue loss. However, costs are largely fixed, and
do not necessarily decrease with decreases in water demand levels over the long term.
1 Refers to Row 20 in Table 1: Total expenses excluding bond financed CIP projects.
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Water demand in the City has been declining since its peak in 1976. 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 from 1987 through 1992. The City aggressively pursued water
conservation and community outreach programs during these years. While some water
consumption resumed after the drought periods were over, the City’s water u se levels
nevertheless have declined since 2000 despite the growth in population and employment.
Similar trends were observed in other cities in the region. Although some of the decrease since
1997 was due to the availability of recycled water, significant long-term reduction in water
demand was achieved as a result of continuous improvements in building plumbing codes,
various City ordinances, and customer investments in water efficient equipment. Figure 1
below shows the City’s actual potable water consumption since 1965.
Figure 1
City of Palo Alto Water Consumption since 1965
0
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1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
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Water demand projections not only affect future sales revenue forecasts but also have a
significant impact on SFPUC’s wholesale water rates. In order to evaluate the impact of water
demand on the financial projections for the Water Fund, three demand scenarios were
developed. Under the base case scenario, water demand in Palo Alto remain s at current levels
for FY 2012 and FY 2013, and then decreases by about 1.7% per year through FY 2020. These
projections include an assumption for lower demand in response to the October 2011 rate
increase and projected rate increases2.
2 All scenarios include an assumed price elasticity of -.2 which suggests that a price increase of 10%
results in a demand reduction of 2%.
City of Palo Alto Page 5
Low- and high-demand scenarios were developed using historical data and assumptions
regarding the rate of increase or decrease per year3 for each scenario, plus a price response
similar to that used in the base case. Figure 2 presents the historical water consumption levels
from FY 2001 through FY 2011 and the demand scenarios analyzed for FY 2012 through FY
2020. For the base case, by FY 2020, water consumption is expected to decrease from current
usage levels by 15%.
Figure 2
3.0
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City of Palo Alto -Water Demand
Scenario Analysis
High
Base
Low
Actuals
The financial projections for the Water Fund discussed in this report are based on the base case
demand scenario. The low- and high-demand scenarios are presented for sensitivity analysis
purposes. Attachments B and C present summary results for financial analysis using the low -
and high-demand scenarios, respectively.
Water Supply Costs
Major planned infrastructure upgrade projects are being undertaken by the SFPUC, for whi ch
CPAU and SFPUC’s other water customers share the cost. As a result, water supply costs are
projected to increase by $4.0 million from $14.7 million in FY 2012 to $18.7 million in FY 2013.
By FY 2017, water supply costs reach $25.5 million , or a 73% increase in five years. Figure 3
presents the SFPUC’s actual and projected wholesale water rates. Note that the latest
wholesale rate projection for FY 2013 is about 8% higher than last year’s projection for FY 2013.
3 For the high scenario, an upward annual average trend factor of 1% per year is assumed. For the low
scenario, a downward annual average trend factor of 1% per year is assumed.
City of Palo Alto Page 6
This is primarily due to lower water use by all SFPUC’s wholesale water customers while
SFPUC’s costs are fixed, so that the costs must be recovered over fewer sales units.
Figure 3
SFPUC Wholesale Water Prices
$0
$1
$2
$3
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Actual Rates
April 2011 Projection
December 2011 Projection
Over the long term, the Water Fund’s costs, including water purchase costs, do not vary with
the amount of water used. This may seem counterintuitive given that SFPUC charges a
volumetric rate which would indicate that as demand decreases, purchase costs would
decrease proportionally. While this is true for the current year’s costs, any revenue shortfall or
excess that occurs in the current year is kept in a balancing account by SFPUC and recovered or
returned in the subsequent years as SFPUC must collect all of its costs of delivering water to its
customers.
If the City’s share of SFPUC’s total deliveries changes, then CPAU’s long-term water purchase
costs would change. The City’s wholesale water supply costs beyond FY 2013 were estimated
using SFPUC’s projected revenue requirements and assumptions about the City’s share of total
deliveries by SFPUC to its wholesale customers. Water supply purchase costs presented in
Table 1 (page 2) assume that the City will maintain its current share of SFPUC costs in the near
term and gradually decrease over the long term as growth in other agencies will outpace
growth in Palo Alto. It is also conceivable that other agencies that have access to lower cost
water supply alternatives will take a greater share of their supplies from these alternatives.
Some of this development has already taken place. In FY 2011, the City’s share of the SFPUC’s
wholesale water purchases was 7.6%. Based on the latest estimates from SFPUC, the City’s
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share is expected to be 8.4% in FY 2012. Figure 4 presents the wholesale water supply cost for
the alternative wholesale water cost scenarios analyzed by staff.
Figure 4
Water Supply Cost Projections
Scenario Analysis
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Low Cost
Base Case
High Cost
For FY 2013, supply costs are $3.0 million lower or $2.7 million higher than the $18.7 million
projected in the base case depending on the water demand scenario. For FY 2014 and beyond,
the differences in the results reflect the impact from assumptions about the City’s share of total
SFPUC wholesale supplies. Depending on the scenario, by FY 2017, supply costs are $6.2 million
lower or $7.5 million higher than the $25.5 million projected in the base case.
Capital Improvement Program (CIP)
Another sizeable funding requirement is for CPAU’s planned CIP projects. Altogether, projected
CIP expenditures total $6.0 million in FY 2013 and $9.8 million in FY 2014, then are expected to
decrease after FY 2015. Table 2 presents the expected CIP costs for the financial forecast
horizon.
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Table 2
ID Description FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Asset Man.Mobile Depl. 100,000
WS-13002 Fusion and Gen Equip Tools 50,000 53,000 56,180
WS-13003 GPS Equipment Upgrade 200,000
WS-09000 Seismic Water System 600,000 3,820,000
WS-07000 Turnouts Regulator S 600,000
WS-11003 Water Distribution S 212,000 218,000 225,000 232,000 238,960
WS-80015 Water Meters 222,000 229,000 236,000 243,080 250,372
WS-08001 Water Reservoir Coat 500,000 1,000,000 1,000,000
WS-80014 Water Service Hydran 222,000 229,000 236,000 243,080
WS-11004 Water Supply Sys Imp 212,000 218,000 225,000 232,000 238,960
WS-80013 Water System Extensi 430,000 440,000 450,000 460,000 473,000
WS-02014 W-G-W Utility GIS Da 100,000 100,000 100,000
WS-11000 WMR-Project 25 3,152,000
WS-12001 WMR-Project 26 3,245,000
WS-13001 WMR-Project 27 314,000 3,345,000
WS-14001 WMR-Project 28 324,000 3,445,000
WS-15002 WMR-Project 29 334,000 3,550,000
WS-16001 WMR - Project 30 344,020
WS-16002 WMR - Project 31
Total 6,000,000 9,813,000 6,794,000 5,189,160 5,151,492
FY 2013 - FY 2017 Capital Improvement Program Budget ($)
The ongoing water main replacement and system improvement projects cost about $5.0 million
annually. In addition, engineering studies of CPAU’s water storage tanks have shown the need
for additional retrofits required for seismic protection (WS-09000) as well as improvements
needed for tank coatings (WS-08001) and the turnout regulator station (WS-07000). These
three projects are expected to cost $16.0 million with $8.5 million of funding alr eady
encumbered and/or re-appropriated for work that has already begun. The expected funding
requirements for the remaining components of these three projects are $1.1 million in FY 2013,
$4.8 million in FY 2014, and $1.6 million in FY 2015.
Due to the nature and size of the three projects and the impact of these projects on utility
finances and rates, staff evaluated a bond financing scenario as an option to the “pay -as-you-
go” approach that is assumed under the base case. Under this scenario, a $6.5 million bond is
issued in FY 2014 to finance the CIP project expenditures for these projects in FY 2014 and FY
2015. The estimated additional annual debt service payment is $553,000. This results in a
lower revenue requirement for FY 2014 and FY 2015, but the system average rate in later years
is higher under this scenario compared to the base case. The financial projections and revenue
requirements for this scenario are presented in Attachment D.
Other Costs
Other major costs include the debt service payments reflecting the annual payments on the
two outstanding water bonds of $775,000 (2002 Utility Revenue Bonds, Series A) and $2.0
million (2009 Water Revenue Bonds, Series A). Staff projects a long-term net cost increase of
2% per year in other operating expenditures such as operations, maintenance and
City of Palo Alto Page 9
administration costs, allocated cost plan and Utilities administration charges, rents, and other
transfers. 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
in May 2012.
Revenue Projections
Retail sales constitute the largest source of revenue for the Water Fund. In FY 2011, total retail
sales amounted to $26.0 million. This was $2.6 million (9.2%) lower than budgeted due to
lower than expected water consumption. Other revenues in FY 2011 include service connection
and capacity fees, transfers in, and interest and gain or loss on investments which totaled $2.4
million resulting in a net negative budget variation of $291,000 , or 10.9% of budgeted revenue.
Projected interest and gains on investments are calculated assuming a 3% return on
investment. Projections for retail sales revenue are based on the base water demand sce narios
and required rate adjustments consistent with the revenue requirements discussed below.
Revenue Requirement
The revenue requirement of the Water Fund is the total amount of revenue that CPAU must
collect in order to meet its operations and maintena nce (O&M) expenses, water supply
purchases, debt service payments and CIP expenditures. Without a rate adjustment, under the
base demand scenario, the Water Fund is projected to have revenue shortfalls of $8.5 million
and $8.9 million in FY 2013 and FY 2014, respectively. Due to healthy reserves projected in FY
2012, staff preliminarily recommends a rate increase of 20% and a reserve drawdown of $2.2
million for FY 2013 and an additional 24% rate increase for FY 2014.
It should be re-emphasized that the revenue requirement in the Water Fund is highly sensitive
to demand projections. For example, under the low demand scenario, the Water Fund would
need rate increases of 25% and 36% for FY 2013 and FY 2014, respectively, in order to maintain
reserves at about the same levels as in the base scenario. Conversely under the high demand
scenario, rate increases of 10% and 11% would be required. In the scenario that includes bond
financing for CIP projects in FY 2014, assuming base case water demand levels and a 20% rate
adjustment in FY 2013, the expected rate increase for FY 2014 is 12%.
A summary of expected rate adjustments, projected system average and end-of-year balances
for the W-RSR for all the scenarios analyzed is presented in Table 3.
City of Palo Alto Page 10
Table 3
Summary of Alternative Scenarios
FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Base Case
Rate Adjustment % 20.0 24.0 6.0 0.0 8.0
System Average Rate $/ccf 7.56 9.37 9.93 9.93 10.73
W-RSR $M 7.1 6.8 7.0 6.8 7.3
Low Demand
Rate Adjustment % 25.0 36.0 6.5 1.0 8.5
System Average Rate $/ccf 7.87 10.70 11.40 11.51 12.49
W-RSR $M 6.8 6.8 6.7 6.6 7.0
High Demand
Rate Adjustment % 10.0 11.0 10.0 0.0 0.0
System Average Rate $/ccf 6.93 7.69 8.46 8.46 8.46
W-RSR $M 8.8 6.5 7.3 8.2 7.1
Bond Financing
Rate Adjustment % 20.0 12.0 14.0 5.0 6.4
System Average Rate $/ccf 7.56 8.46 9.65 10.13 10.78
W-RSR $M 7.1 6.2 6.9 7.1 7.3
Depending on the scenario, the system average rate may increase from the current $6.30 / ccf
to as high as $12.49/ccf (an increase of 98%) under the low demand scenario or as low as
$8.46/ccf (an increase of 34%) under the high demand scenario. Note that the impact of the
changes in the system average rate on individual customer bills will be different than the
change in the system average rate. Median monthly water consumption for a residential
customer in FY 2011 was 9 ccf, corresponding to a monthly bill of $53.62. Given the changes in
average consumption levels assumed in these scenarios, expected monthly bills by the end of
the forecast horizon would be 54% higher in the low demand scenario and 34% higher in the
high demand scenario. The bond financing scenario smoothes the rate increases in the short
run but does not offer significant relief to the system average rate in the long run. The details
of the financial projections under each of the scenarios are presented in Attachments B through
D.
Reserves and Risk Assessment
The Council-adopted Water Rate Stabilization Reserve (W-RSR) guidelines levels are equal to
30% and 15% of sales revenues for the maximum and minimum levels, respectively.
Additionally, as required by the guidelines, staff performs an annual assessment of short -term
risks for the fund. For this analysis, staff estimates the revenue shortfall due to the maximum
observed budget-to-actual variance in one year during the past ten years, plus a variance of
10% of planned CIP expenditures for the budget year.
Table 4 summarizes the short-term risk assessment values for FY 2013 and FY 2014 and the
minimum and maximum long-term guideline levels for the W-RSR. With rate increases of 20%
City of Palo Alto Page 11
and 24% for FY 2013 and FY 2014, the estimated end-of-year balances are above both the
short-term risk assessment values as well as the minimum guideline levels through FY 2014.
Table 4
Water Rate Stabilization Reserve Guideline Levels
and Short Term Risk Assessment ($M)
For the five-year financial forecast period, the reserve levels are shown in Figure 5 below.
Figure 5
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
$14.0
$16.0
$18.0
$20.0
2011 2012 2013 2014 2015 2016 2017
Water Fund Rate Stabilization Reserve Levels
($Million)
LT RSR Min & Max
ST Risk Assessment
FY Ending RSR
0.0%6.0%24.0%8.0%20.0%20.8 0.0%
Comparison of Water Rates in Palo Alto and Surrounding Cities
For several years, Palo Alto's retail water rates have generally been higher than those in
surrounding areas. Staff completed a benchmark study for the Water Fund in May 2010 and
Water Rate Stabilization Reserve FY 2012 FY 2013 FY 2014
Estimated End of Year Balance 9.2 7.1 6.8
Short-Term Risk Assessment 4.2 5.2 6.4
Long-Term Minimum Level Guidelines 4.4 5.7 6.7
Long-Term Maximum Level Guidelines 8.8 11.3 13.4
City of Palo Alto Page 12
presented its findings to the UAC in October 2010 and to th e 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 the study highlighted some
key areas including more spending by CPAU for replacement of aging infrastructure; lack of
access to lower cost water supplies; higher quality of service; and higher rent payment for its
use of real estate in the service territory.
Table 5 below, which compares monthly water bills using municipal water rates as of January 1,
2012 for Mountain View, Redwood City, Santa Clara and Menlo Park, indicates that the average
residential customer in surrounding cities pays approximately 22.1 % less than the median Palo
Alto residential customer. There are indications that nearby cities that purchase water supplies
from the SFPUC4 will continue to raise rates for FY 2013. At this time, the certainty or
magnitude of the rate increases is not known.
Table 5
Monthly Residential Water Bill Comparison (rates in effect as of Jan. 1, 2012)
Water
Customer2
Usage
(CCF)
Palo
Alto
Menlo
Park1
Redwood
City
Mountain
View
Santa
Clara
Average
Benchmark
(%)
Diff.
Small 6 $31.60 $42.47 $36.06 $24.96 $17.94 $30.36 -3.9%
Median 9 $53.62 $56.96 $46.02 $37.23 $26.91 $41.78 -22.1%
Large 29 $200.42 $158.90 $156.16 $135.15 $86.71 $134.23 -33.0%
Difference from CPAU 6.2% -14.2% -30.6% -49.8% -22.1%
1. Menlo Park rates based on California Water Service’s Bear Gulch district.
2. “Small” represents 50th percentile winter usage, “Median” represents 50th percentile
annual usage, and “Large” represents 85th percentile summer usage in FY 2011.
Commission Review and Recommendations
The UAC discussed the financial projections at its February 1, 2012 meeting. The
Commissioners discussed in detail the reasons for the cost increases noting that they are due to
factors outside the control of the City. The Commissioners encouraged staff to highlight this in
their communication of the rate increases to customers. Also noted was the fact that most
costs in the water fund were fixed, the rate increase projections were highly dependent on
water demand levels, but expected bill increases would be less for customers who chose to
lower their water consumption levels.
The draft minutes from the UAC’s February 1, 2012 meeting are provided as Attachment E.
Attachments:
Attachment A: Water Fund Financial Projections (FY 2013 - FY 2017) (PDF)
Attachment B: Low Demand Scenario Analysis (PDF)
4 Based on the FY 2009 BAWSCA survey, the share of SFPUC as the source of water supply was 89% for
Menlo Park, 100% for Redwood City, 86% for Mountain View, and 12% for Santa Clara.
City of Palo Alto Page 13
Attachment C: High Demand Scenario Analysis (PDF)
Attachment D: Bond Financing Scenario Analysis (PDF)
Attachment E: Excerpts from Draft UAC Minutes (PDF)
$('000)
Adopted Actual Adopted Projected
2011 2011 2012 2012 2013 2014 2015 2016 2017
1 % CHANGE IN RETAIL RATE 0.0% 0.0% 12.5% 20.8% 20.0% 24.0% 6.0% 0.0% 8.0%
2 SYSTEM AVERAGE RATE ($/CCF)5.21 5.21 5.86 6.30 7.56 9.37 9.93 9.93 10.73
3 SALES UNITS (CCFs)5,504 4,992 5,256 5,011 4,997 4,773 4,521 4,445 4,422
4 WATER UTILITY REVENUE
5 SALES REVENUE:28,666 26,027 27,373 26,124 31,461 36,061 42,357 44,138 43,917
6 RATE ADJUSTMENT 0 0 3,422 3,266 6,292 8,655 2,541 0 3,513
7 PRORATION IMPACT 0 0 (143) (136) (262) (361) (106)0 (146)
8 TOTAL ADJUSTED SALES 28,666 26,027 30,652 29,254 37,491 44,356 44,792 44,138 47,284
9 INTEREST 1,050 181 971 971 604 613 776 645 569
10 OTHER REVENUE 908 1,046 873 873 866 856 845 832 819
11 CONNECTION & CAPACITY FEES 692 1,146 700 700 776 785 795 750 771
12 FROM RESERVES:
13 RATE STABILIZATION 1,885 2,897 3,382 1,396 2,170 260 0 147 0
14 CIP BOND PROCEEDS 3,500 3,500 0 0 0 0 0 0
15 COMMITMENTS & REAPPROPRIATIONS 0 0 0 2,295 0 0 0 0 0
16 TOTAL FINANCIAL RESOURCES 36,701 34,797 36,578 35,489 41,907 46,869 47,209 46,512 49,443
17 OPERATING EXPENSES
18 RESOURCE MANAGEMENT & ADMIN 660 576 667 667 680 694 708 722 737
19 PURCHASES 12,043 10,678 15,774 14,684 18,725 19,593 22,505 23,282 25,461
20 CUSTOMER DESIGN & CONN. (CIP)410 410 420 420 430 440 450 460 473
21 SYSTEM IMPROVEMENT(CIP) - Nonbond 4,938 4,938 3,949 3,949 5,570 9,373 6,344 4,729 4,678
22 SYSTEM IMPROVEMENT(CIP) - Bond 3,500 3,500 0 0 0 0 0 0 0
23 ALLOCATED ADMIN & OVERHEAD 2,675 1,799 2,524 2,524 2,621 2,673 2,727 2,781 2,837
24 ENGINEERING SUPPORT & ADMIN 940 1,155 983 983 1,051 1,072 1,093 1,115 1,137
25 WATER OPERATIONS 4,335 3,993 4,862 4,862 5,419 5,527 5,638 5,750 5,865
26 CUSTOMER SERVICE & ADMIN 600 648 662 662 675 688 702 716 731
City of Palo Alto
Water Utility
Fiscal Year
R
E
V
E
N
U
E
S
E
X
P
E
N
FINANCIAL PROJECTIONS
(BASE CASE)
(FY 2013 - FY 2017)
27 METER READING 242 246 261 261 266 272 277 283 288
28 BILLING AND COLLECTIONS 248 229 256 256 261 267 272 277 283
29 WATER DEMAND SIDE MANAGEMENT 580 354 636 636 700 714 728 742 757
30 DEBT SERVICE & RELATED 2,981 3,885 3,338 3,338 3,219 3,220 3,219 3,223 3,219
32 RENT 2,107 2,107 2,142 2,142 2,185 2,228 2,273 2,318 2,365
33 TRANSFERS OUT 442 280 104 104 106 108 110 112 115
34 TOTAL OPERATING EXPENSES 36,701 34,797 36,578 35,489 41,907 46,869 47,046 46,512 48,946
35 RESERVE ADDITIONS:
36 PLANT REPLACEMENT 0 0 0 0 0 0 0 0 0
37 RATE STABILIZATION 0 0 0 0 0 0 163 0 497
38 DEBT SERVICE RESERVE 0 0 0 0 0 0 0 0 0
39 TOTAL RESERVE ADDITIONS:0 0 0 0 0 0 163 0 497
40 TOTAL REVENUE REQUIREMENT 36,701 34,797 36,578 35,489 41,907 46,869 47,209 46,512 49,443
41 RESERVES BALANCES
42 PLANT REPLACEMENT 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
43 RATE STABILIZATION 10,851 10,639 7,257 9,243 7,073 6,813 6,976 6,829 7,326
44 CIP DEBT SERVICE 3,347 3,347 3,347 3,347 3,347 3,347 3,347 3,347 3,347
45 TOTAL RESERVES BALANCES 15,198 14,986 11,604 13,590 11,420 11,160 11,323 11,177 11,674
46
47 COMMITMENTS & REAPPROPRIATIONS 13,873
48 RATE STABILIZATION RESERVES GUIDELINES
49
50 Short Term Risk Assessment Value 4,168 4,168 4,169 4,169 5,155 6,370 6,122 5,882 6,260
51 Long Term Rate Stabilization Guidelines
52 RSR Minimum 4,300 3,904 4,619 4,408 5,663 6,707 6,735 6,621 7,115
53 RSR Maximum 8,600 7,808 9,238 8,817 11,326 13,415 13,470 13,241 14,229
54
2011 2012 2013 2014 2015 2016 2017WATER
R
E
S
E
R
V
E
S
S
E
S
$(000')s
Adopted Actual Adopted Projected
2011 2011 2012 2012 2013 2014 2015 2016 2017
1 % CHANGE IN RETAIL RATE 0.0% 0.0% 12.5% 20.8% 25.0% 36.0% 6.5% 1.0% 8.5%
2 PROJECTED SYSTEM AVERAGE RATE ($/CCF)5.21 5.21 5.86 6.30 7.87 10.70 11.40 11.51 12.49
3 PROJECTED COMMODITY COST ($/CCF)2.00 1.96 2.74 2.81 3.08 4.25 5.18 5.48 6.05
4 SALES UNITS (THOUSAND CCFs)5,504 4,992 5,256 4,790 4,457 4,192 3,852 3,763 3,718
5 PROJECTED CHANGE IN RETAIL SALES REVENUE 0 0 3,422 3,121 7,016 11,878 2,680 429 3,639
6 REVENUE
7 Utilities Retail Sales 28,658 26,033 30,652 27,962 34,788 44,376 43,792 43,310 46,296
8 Service Connection & Capacity Fees 692 1,146 700 700 776 785 795 750 771
9 Other Revenues plus Transfers In 916 1,040 873 873 866 856 845 832 819
10 Interest & Gain or Loss on Investment 1,050 181 971 971 566 605 775 637 561
11 Sub Total 31,316 28,400 33,196 30,506 36,996 46,622 46,207 45,530 48,447
12 CIP Bond Proceeds / Reserve 3,500 3,500 0 0 0 0 0 0 0
13 Total Sources of Funds 34,816 31,900 33,196 30,506 36,996 46,622 46,207 45,530 48,447
14 OPERATING EXPENSE
15 Water Supply Purhcases 12,043 10,678 15,774 14,684 14,955 19,392 21,720 22,447 24,498
16 Operations 10,721 9,278 10,956 10,956 11,779 12,014 12,255 12,500 12,750
17 Debt Service & Other Related 2,981 3,885 3,338 3,338 3,219 3,220 3,219 3,223 3,219
18 Rent 2,107 2,107 2,142 2,142 2,185 2,228 2,273 2,318 2,365
19 CIP (Non-Bonded)5,348 5,348 4,369 4,369 6,000 9,813 6,794 5,189 5,151
20 Sub Total 33,201 31,297 36,578 35,489 38,138 46,668 46,260 45,677 47,983
21 CIP (Bonded)3,500 3,500 0 0 0 0 0 0 0
22 Total Uses of Funds 36,701 34,797 36,578 35,489 38,138 46,668 46,260 45,677 47,983
23
24 Into/ (Out of) Reserves (1,885) (2,897) (3,382) (4,983) (1,142) (46) (54) (147) 464
25
26 Ending Rate Stabilization Reserve 10,851 10,639 7,257 7,951 6,809 6,763 6,709 6,562 7,026
27 Ending Plant Replacement Reserve 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
28 Ending Debt Service Reserve 3,347 3,347 3,347 3,347 3,347 3,347 3,347 3,347 3,347
Fiscal Year
City of Palo Alto
Water Utility
FINANCIAL PROJECTIONS
SCENARIO: LOW DEMAND
(FY 2013 - FY 2017)
29 Ending Commitments and Reappropriations 13,873
30
31 Short Term Assessment of Risks 4,168 4,168 4,169 4,169 4,827 6,373 6,000 5,781 6,140
32 Rate Stabilization Guidelines
33 Miniumum 4,300 3,904 4,619 4,214 5,262 6,731 6,585 6,499 6,967
34 Maximum 8,600 7,808 9,238 8,428 10,524 13,461 13,171 12,998 13,934
35
$(000')s
Adopted Actual Adopted Projected
2011 2011 2012 2012 2013 2014 2015 2016 2017
1 % CHANGE IN RETAIL RATE 0.0% 0.0% 12.5% 20.8% 10.0% 11.0% 10.0% 0.0% 0.0%
2 PROJECTED SYSTEM AVERAGE RATE ($/CCF)5.21 5.21 5.86 6.30 6.93 7.69 8.46 8.46 8.46
3 PROJECTED COMMODITY COST ($/CCF)2.00 1.96 2.74 2.47 3.44 3.29 3.93 4.07 4.41
4 SALES UNITS (THOUSAND CCFs)5,504 4,992 5,256 5,459 5,640 5,582 5,514 5,458 5,512
5 PROJECTED CHANGE IN RETAIL SALES REVENUE 0 0 3,422 3,557 3,551 4,253 4,239 0 0
6 REVENUE
7 Utilities Retail Sales 28,658 26,033 30,652 31,867 38,910 42,734 46,449 46,150 46,612
8 Service Connection & Capacity Fees 692 1,146 700 700 776 785 795 750 771
9 Other Revenues plus Transfers In 916 1,040 873 873 866 856 845 832 819
10 Interest & Gain or Loss on Investment 1,050 181 971 971 683 664 768 654 611
11 Sub Total 31,316 28,400 33,196 34,410 41,234 45,039 48,858 48,387 48,812
12 CIP Bond Proceeds / Reserve 3,500 3,500 0 0 0 0 0 0 0
13 Total Sources of Funds 34,816 31,900 33,196 34,410 41,234 45,039 48,858 48,387 48,812
14 OPERATING EXPENSE
15 Water Supply Purhcases 12,043 10,678 15,774 14,684 21,133 19,995 23,587 24,207 26,472
16 Operations 10,721 9,278 10,956 10,956 11,779 12,014 12,255 12,500 12,750
17 Debt Service & Other Related 2,981 3,885 3,338 3,338 3,219 3,220 3,219 3,223 3,219
18 Rent 2,107 2,107 2,142 2,142 2,185 2,228 2,273 2,318 2,365
19 CIP (Non-Bonded)5,348 5,348 4,369 4,369 6,000 9,813 6,794 5,189 5,151
20 Sub Total 33,201 31,297 36,578 35,489 44,316 47,271 48,127 47,436 49,958
21 CIP (Bonded)3,500 3,500 0 0 0 0 0 0 0
22 Total Uses of Funds 36,701 34,797 36,578 35,489 44,316 47,271 48,127 47,436 49,958
23
24 Into/ (Out of) Reserves (1,885) (2,897) (3,382) (1,079) (3,081) (2,232) 730 950 (1,145)
25
26 Ending Rate Stabilization Reserve 10,851 10,639 7,257 11,856 8,774 6,542 7,273 8,223 7,078
27 Ending Plant Replacement Reserve 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
28 Ending Debt Service Reserve 3,347 3,347 3,347 3,347 3,347 3,347 3,347 3,347 3,347
Fiscal Year
City of Palo Alto
Water Utility
FINANCIAL PROJECTIONS
SCENARIO: HIGH DEMAND
(FY 2013 - FY 2017)
29 Ending Commitments and Reappropriations 13,873
30
31 Short Term Assessment of Risks 4,168 4,168 4,169 4,169 5,327 6,173 6,323 6,126 6,178
32 Rate Stabilization Guidelines
33 Miniumum 4,300 3,904 4,619 4,802 5,859 6,437 6,994 6,923 6,992
34 Maximum 8,600 7,808 9,238 9,604 11,717 12,873 13,988 13,845 13,984
35
$(000')s
Adopted Actual Adopted Projected
2011 2011 2012 2012 2013 2014 2015 2016 2017
1 % CHANGE IN RETAIL RATE 0.0% 0.0% 12.5% 20.8% 20.0% 12.0% 14.0% 5.0% 6.4%
2 PROJECTED SYSTEM AVERAGE RATE ($/CCF)5.21 5.21 5.86 6.30 7.56 8.46 9.65 10.13 10.78
3 PROJECTED COMMODITY COST ($/CCF)2.00 1.96 2.74 2.69 3.44 3.77 4.57 4.81 5.29
4 SALES UNITS (THOUSAND CCFs)5,504 4,992 5,256 5,011 4,997 4,773 4,635 4,483 4,416
5 PROJECTED CHANGE IN RETAIL SALES REVENUE 0 0 3,422 3,266 6,292 4,327 5,491 2,162 2,863
6 REVENUE
7 Utilities Retail Sales 28,658 26,033 30,652 29,254 37,491 40,208 44,485 45,316 47,471
8 Service Connection & Capacity Fees 692 1,146 700 700 776 785 795 750 771
9 Other Revenues plus Transfers In 916 1,040 873 873 866 856 845 832 819
10 Interest & Gain or Loss on Investment 1,050 181 971 971 604 613 830 658 595
11 Sub Total 31,316 28,400 33,196 31,797 39,737 42,462 46,955 47,557 49,656
12 CIP Bond Proceeds / Reserve 3,500 3,500 0 0 0 4,820 1,128 0 0
13 Total Sources of Funds 34,816 31,900 33,196 31,797 39,737 47,282 48,083 47,557 49,656
14 OPERATING EXPENSE
15 Water Supply Purhcases 12,043 10,678 15,774 14,684 18,725 19,593 23,065 23,480 25,423
16 Operations 10,721 9,278 10,956 10,956 11,779 12,014 12,255 12,500 12,750
17 Debt Service & Other Related 2,981 3,885 3,338 3,338 3,219 3,773 3,771 3,775 3,772
18 Rent 2,107 2,107 2,142 2,142 2,185 2,228 2,273 2,318 2,365
19 CIP (Non-Bonded)5,348 5,348 4,369 4,369 6,000 4,993 5,194 5,189 5,151
20 Sub Total 33,201 31,297 36,578 35,489 41,907 42,602 46,558 47,262 49,461
21 CIP (Bonded)3,500 3,500 0 0 0 4,820 1,600 0 0
22 Total Uses of Funds 36,701 34,797 36,578 35,489 41,907 47,422 48,158 47,262 49,461
23
24 Into/ (Out of) Reserves (1,885) (2,897) (3,382) (3,691) (2,170) (139) (75) 295 195
25
26 Ending Rate Stabilization Reserve 10,851 10,639 7,257 9,243 7,073 6,933 6,858 7,153 7,347
27 Ending Plant Replacement Reserve 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
28 Ending Debt Service Reserve 3,347 3,347 3,347 3,347 3,347 5,027 3,900 3,900 3,900
Fiscal Year
City of Palo Alto
Water Utility
FINANCIAL PROJECTIONS
SCENARIO: BOND FINANCING
(FY 2013 - FY 2017)
29 Ending Commitments and Reappropriations 13,873
30
31 Short Term Assessment of Risks 4,168 4,168 4,169 4,169 5,155 5,385 5,924 6,025 6,283
32 Rate Stabilization Guidelines
33 Miniumum 4,300 3,904 4,619 4,408 5,663 6,058 6,707 6,811 7,139
34 Maximum 8,600 7,808 9,238 8,817 11,326 12,117 13,414 13,622 14,277
35
Excerpts from Draft UAC Minutes –February 1, 2012
ITEM 2: DISCUSSION: Water Utility Financial Projections (FY 2013 –FY 2017)
Senior Resource Planner Ipek Connolly provided a summary of the written report. Connolly
advised that the cost increases for water purchases that were anticipated last year are
materializing. Of the $13.5 million in additional revenue requirement in FY 2017, $10.8 million is
due to the increase in water supply costs. The other $2.7 million is due to the general inflationary
cost increase of 2% per year that is built into the forecasts. She also stated that the price of water
from San Francisco is expected to increase even more than expected last year. Under the latest
rate projections from SFPUC, supply costs for FY 2013 are expected to increase by $4.0 million
from their current levels of $14.7 million.
Connolly said that in FY 2014 and FY 2015, CPAU's capital improvement project (CIP) costs are
higher than the normal annual CIP expenditures. The utility spends about $5.0 million annually for
its ongoing CIP projects, but there are plans to increase that amount to double that in FY 2014.
These are for the Seismic Improvements, Reservoir Coating, and Turnouts Regulator Station
projects. These are one-time projects related to safety and reliability improvement of the system,
which may be potential candidates for bond financing, rather than rate financing.Staff did evaluate
a bond-financing scenario starting in FY 2014 which is presented in the report and may come back
to the UAC next year with an updated evaluation based on updated financials at that time. Connolly
stated that water demand in the City has been on the decline, and since last year, water demand
projections have declined significantly, which has led to higher costs per unit (ccf) sold. The
demand forecast greatly influences the revenue increase required. In order to analyze the
sensitivity, staff evaluated three alternative demand forecast scenarios and presented the results in
the report. In summary, there is a need for an additional revenue increase of 20% in FY 2013
followed by an additional increase of 24% in FY 2014. If demand projections change during the
course of the fiscal year, the projected rate adjustments may vary by as much as no rate increase
for FY 2014 or 36% under the high demand and low demand scenarios, respectively.
Connolly noted that the financial forecast is provided for information only and staff will return to the
UAC with rate adjustment recommendations at the special meeting on March 27. After review by
Finance Committee in April, rate changes are expected to be adopted by Council in June to be
effective July 1, 2012.
Commissioner Eglash commented that the focus on rates obscures the fact that the bill changes
depends on usage changes. It is frustrating for customers to reduce usage, then see rates
increase. We need to communicate that reducing usage will reduce the impact of a rate increase.
We need to separate the price of the commodity from everything else and we need to talk about
the bill and not just the rate since the average usage has gone down as evidenced that the overall
city demand has declined. We need to get the message to customers that the issue is how much
the commodity price from SFPUC is influencing the rate increase while our other costs are being
managed closely.
Connolly agreed that this was an important part of the communication of the projected cost and
rate increases to the public and needs to be highlighted in the presentation. She pointed out that
this analysis was provided in the report that while rates increase by 98% by FY 2017 under the low
demand scenario, customer bills increase only by 54% due to lowered water use by the average
customer. Commissioner Eglash expressed concern about the public relations fallout of these
incredibly large increases in water rates, specifically that CPAU would be blamed for it when these
cost increases are largely externally driven by the price that we are paying for the commodity. A
chart showing higher rate increases as a result of lower consumption will lead people to say that
they use less and now we are telling them that as a result we now have to raise rates. For the
Finance Committee, the Council and the public, he suggested that perhaps the staff needs to show
separately what is going on due to the price of the commodity which we are just stuck with, and the
contribution of everything else. Assistant Director Ratchye agreed and suggested to show average
bills over time, along with how usage per customer is declining, and even though the rates are
going up over time, the average bill is not going up as much as the rate increases. Commissioner
Eglash agreed and added that because the price of the commodity is going up so dramatically, for
sure the bills will still go up for almost everyone in the City, but a hypothetical bill would be
separated into two components, the commodity and everything else, showing that the bill increases
separately for the commodity portion and for everything else; then it would be clear that only the
commodity cost is going up, and we don’t control the commodity cost.
Commissioner Melton said that he supported issuing bonds, but that a $6.5 million bond issuance
may not be of sufficient size -should be a minimum size of $15 million to cover the financing costs.
He pointed out that if there are other costs in other utilities that make sense to bond finance and we
combine and come up with a $15 million or over, then it might make sense to issue a bond.
Commissioner Melton also noted that in FY 2012, we did not fully implement the fixed charge
increase recommended by the cost of service analysis and asked if we will address that for FY
2013. The plan last year (FY 2012) was to implement the second phase of that this year (FY
2013). Director Fong said that the subject for this meeting is the financial projections overall and
that the issue of fixed charges versus volumetric charges will be revisited in late March when we
return with water rate proposals.
Commissioner Waldfogel said he was struck by the scenarios that differ by demand, sales volumes
were plus or minus 20% up or down depending on the scenario, but the difference in costs
between the scenarios was so small. He pointed out that this showed that essentially the
commodity is free and what we are paying for is the distribution. He urged to internalize that into
our rate structures. He acknowledged that we are moving in that direction but what we are seeing
here is that a change of 1000 ccf or so only changes our costs by 2%. He advised that if we have
to communicate anything, it has to be that the cost of the system is plumbing and not the
commodity.
Commissioner Keller said that predicting use is the big dilemma and asked whether there are any
tools that can be developed to improve that. She noted that the report stated that a price elasticity
of -.2 was used, but she wondered how firm that number is. Connolly stated that staff uses a
variety of tools including monitoring and forecasting of large customer consumption. This includes
review and discussions with large customers regarding their historical water usage and plans for
the future. Staff also uses statistical models that use time series data relating water use to weather,
economic conditions, and rates. But weather is a significant factor in determining water
consumption. Director Fong added that other agencies are in the same situation as Palo Alto.
Connolly added that we were ahead of other agencies last year and came in within 2% of expected
for the fiscal year. On the price elasticity issue, Connolly stated that this was a well studied area
with results varying depending on indoor vs. outdoor use or high income vs. low income
households etc. Staff used -0.2 as an assumption based on available literature in this area.
Connolly pointed out that it is difficult to estimate this relationship for Palo Alto Utilities customers
as they get their bills for multiple utilities all in one bill.
Commissioner Keller asked if larger customers could be issued separate water bills so that their
water usage would stand out. Director Fong said that they get combined bills, too, but may be
more focused on their usage levels. Commissioner Keller also suggested more effort on
communicating the rate increases. Most people don’t seem to be very aware of future water price
increases, and it seems this could be an opportunity to improve communication to encourage water
conservation.
Commissioner Eglash noted that the cost for the purchase of water does depend on water usage
so the price of the commodity is actually a large amount. Ratchye replied that the costs of the
supply are actually fixed, too, but since the wholesale price is volumetric, it seems like we would
save money by saving water. However, San Francisco’s costs are actually all fixed, and not
dependent upon the volume of water sold and these costs must be paid regardless despite usage
levels. To the extent that wholesale revenues do not cover San Francisco’s costs, the costs will be
paid in the following year. Connolly pointed out that staff evaluated commodity costs under
different scenarios and, in these analyses, what changes is not the absolute demand levels in Palo
Alto but the City’s share of total wholesale purchases from SFPUC. Commodity costs to Palo Alto
will only vary based on Palo Alto’s share of total water purchases from SFPUC; otherwise, even
the commodity costs are fixed. Based on the analysis, and depending on the assumption regarding
the share of City’s purchases from SFPUC, supply costs in FY 2017 can be $6.2 million lower or
$7.5 million higher than the $25.5 million projected in the base case
Vice Mayor Scharff said that since all costs are fundamentally fixed and we continue to charge a
volumetric rate, the only way for a customer to save money is to save more than your neighbor.
Commissioner Waldfogel stated that he supports bond financing to mitigate future rate increases
and recommended adding CIP projects from other utilities (e.g. gas, wastewater, electric) for a
bond of sufficient size to justify financing costs. Director Fong said that the City will be looking at a
bond, but it will likely be next year so as not to interfere with the potential bond issuance for the
City's General Fund as recommended by the Infrastructure Blue Ribbon Task Force.