HomeMy WebLinkAboutStaff Report 3596
City of Palo Alto (ID # 3596)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 3/19/2013
City of Palo Alto Page 1
Summary Title: Water Utility Rate Adjustment and Financial Forecast
Title: Utilities Advisory Commission Recommendation that Council Adopt a
Resolution to Increase Water Fund Revenues by $2.4 Million per year
Effective July 1, 2013 and Amend Water Utility Rate Schedules W-1, W-2, W-
3, W-4 and W-7
From: City Manager
Lead Department: Utilities
Recommendation
Staff and the Utilities Advisory Commission (UAC) recommend that the Finance Committee
review the 5-year Financial Forecast for the Water Fund and recommend that Council adopt the
attached resolution to:
1. increase overall retail water rates and annual revenues for the Water Fund by 7.0
percent, or $2.4 million per year, effective July 1, 2013; and
2. Amend Utility Rate Schedules W-1, W-2, W-3, W-4, and W-7, as attached.
The recommended rate changes will trigger the notice and protest hearing procedures under
Proposition 218.
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 for the next five years. A 7% rate
increase is recommended effective July 1, 2013. The financial projections indicate a need for
rate increases of 7% per year for Fiscal Year (FY) 2015 through FY 2017 and 6% for FY 2018.
These preliminary rate adjustment projections will result in adequate financial reserves for the
5-year forecast horizon.
Staff evaluated an alternative of no rate increase for FY 2014, but since costs are projected to
increase substantially over the next five years due to the Hetch Hetchy system’s capital program,
no rate adjustment for FY 2014 would result in the need for a 16% rate increase for FY 2015.
City of Palo Alto Page 2
Rates were last adjusted on July 1, 2012 based on the conclusions of a cost of service study
completed In March 2012. The cost of service model from this study was updated with forecast
information for FY 2014 to develop the recommended rate adjustments. The impact on
residential customers depends on customer’s water usage. For the median usage level, the bill
impact of the rate increase is an increase of $5.19 per month.
At its March 6, 2013 meeting, the UAC reviewed the 5-year financial forecasts for the Water
Fund and recommended an overall increase of 7% to current Water Utility Rate s, effective July
1, 2013.
Background
The City of Palo Alto Utilities (CPAU) serves about 20,000 water customers. The average daily
consumption of water in FY 2012 was 10.4 million gallons per day (mgd) or 5.1 million ccf
(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), and debt service payments.
Changes in these factors can trigger an adjustment to the revenue requirement.
Last year’s 5-year financial forecast projected the need for a 15% water rate increase for FY
2014. The major reason for the reassessment of the FY 2014 rate adjustment is the reduction
in the Water Fund’s Capital Improvement Program (CIP) budget for FY 2013 and FY 2014.
Discussion
Financial Projections
Table 1 below shows financial projections for the Water Fund for FY 2013 to FY 2018. For FY
2012, both budgeted and realized (actuals) financials based on the City’s Comprehensive
Annual Financial Report (CAFR) are shown. For FY 2013, both budgeted and projected financial
expectations are shown. The projected column for FY 2013 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. Also included for
projected FY 2013 is the expected mid-year release of CIP re-appropriations.
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Table 1: Five-Year Financial Plan
FINANCIAL PROJECTIONS
$(000')s
Adopted Actual Adopted Projected
2012 2012 2013 2013 2014 2015 2016 2017 2018
1 % CHANGE IN RETAIL RATE 12.5%20.8%15%15%7%7%7%6%7%
2 PROJECTED SYSTEM AVERAGE RATE ($/CCF)5.86 6.30 7.24 7.24 7.68 8.21 8.79 9.31 9.97
3 PROJECTED COMMODITY COST ($/CCF)2.74 2.69 2.96 2.97 3.12 3.69 3.87 3.90 4.35
4 SALES UNITS (THOUSAND CCFs)5,256 5,063 4,946 4,880 4,808 4,644 4,683 4,731 4,779
5 PROJECTED CHANGE IN RETAIL SALES REVENUE 3,422 3,299 4,671 4,609 2,414 2,495 2,692 2,495 3,116
6 REVENUE
7 Utilities Retail Sales 30,652 30,494 35,963 35,121 36,801 38,038 41,043 43,966 47,500
8 Service Connection & Capacity Fees 700 1,445 709 709 718 728 750 771 793
9 Other Revenues plus Transfers In 873 1,213 1,167 1,167 1,157 1,146 1,133 1,119 1,105
10 Interest & Gain or Loss on Investment 971 520 749 749 543 472 420 393 239
11 Sub Total 33,196 33,673 38,587 37,745 39,218 40,383 43,346 46,249 49,638
12 CIP Bond Proceeds / Reserve 0 0 0 0 0 0 0 0 0
13 Total Sources of Funds 33,196 33,673 38,587 37,745 39,218 40,383 43,346 46,249 49,638
14 OPERATING EXPENSE
15 Water Supply Purhcases 15,774 14,955 15,940 15,794 16,353 18,655 19,763 20,096 22,619
16 Operations 10,956 11,629 13,055 13,055 13,305 13,709 14,056 14,495 14,948
17 Debt Service & Other Related 3,338 3,338 3,219 3,219 3,220 3,219 3,223 3,219 3,223
18 Rent 2,142 2,142 1,912 1,912 1,949 2,007 2,069 2,130 2,195
19 CIP 4,369 4,369 6,115 3,378 5,201 5,339 5,054 5,712 5,819
20 Sub Total 36,578 36,433 40,242 37,359 40,028 42,929 44,164 45,653 48,804
21 CIP (Bonded)0 0 0 0 0 0 0 0 0
22 Total Uses of Funds 36,578 36,433 40,242 37,359 40,028 42,929 44,164 45,653 48,804
23
24 Into/ (Out of) Reserves (3,382)(2,760)(1,655)387 (810)(2,546)(818)596 834
Fiscal Year
City of Palo Alto
Water Utility
Cost Drivers
Total FY 2012 expenses (Row 20 in Table 1) were $36.4 million, which is just slightly lower than
budgeted. Water supply purchase costs were $0.8 million lower than budge ted, due to lower
than expected demand, but this was offset by operations costs that were $674,000 higher than
budgeted. Total expenses are projected to increase by less than $1 million in FY 2013, which is
$2.8 million lower than the budgeted increase, mainly due to reduced CIP expense in FY 2013.
For FY 2014 and FY 2015, total expenses are projected to increase by around $2.7 million a
year, with an average increase of $1.9 million a year for the remaining three years of the 5 -year
forecast period. These projected increases are driven mainly by water supply purchase costs,
with total expenses for the utility reaching a total of $48.7 million by FY 2018.
The major cost drivers for the Water Fund over the 5 -year financial forecast period include
water demand, wholesale water costs, operations costs and CIP costs, which are described in
more detail below.
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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 0.8% revenu e loss. However, costs are largely fixed, and do not
necessarily decrease with decreases in water demand levels over the long term.
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 City aggressively pursued
water conservation and community outreach programs during these years. While water
consumption increased somewhat after the drought periods, the City’s water use levels have
generally declined since 2000 despite the growth in population and employment. Similar
trends were observed in other cities in the region. Significant long-term reduction in water
demand was achieved as a result of continuous improvements in building plumbing codes,
various City ordinances, and resulting investments in water efficient equipment. Figure 1 below
shows the City’s actual potable water consumption since 1965.
Figure 1
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Th
o
u
s
a
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C
F
/
y
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Fiscal Year
City of Palo Alto Water Consumption Since 1965
While local water demand projections affect future sales revenue forecasts, regional water
demands 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, two additional
demand scenarios were analyzed. All scenarios include an assum ed price elasticity of -0.2, in
which a 10% price increase results in a 2% demand reduction.
City of Palo Alto Page 5
The water usage forecast used for the financial forecast is the “Updated scenario”, which is
updated from last year’s demand scenario. In the Updated case, water consumption is
expected to decrease for the next two years, followed by slight annual increases to reach a
consumption level close to the projected FY 2013 usage level.
In the “Base” scenario, water demand in Palo Alto decreases by about 1% in FY 2014, t hen
decreases 1.5% to 1.9% per year from FY 2015 through FY 2018. The “Low” demand scenario
for FY 2014 and FY 2015 assumes a steeper decline of 6% in FY 2014 followed by decreases of
3% to 3.8% per year for FY 2015 through FY 2018. Figure 2 presents the historical water
consumption levels in the City from FY 2001 through FY 2012 and the demand scenarios
analyzed for FY 2013 through FY 2021.
Figure 2
Water Supply Costs
Major planned infrastructure upgrade projects are being undertaken by the SFPUC, fo r which
CPAU and SFPUC’s other water customers share the cost. Offsetting this somewhat are lower
costs related to a recent capital prepayment by SFPUC’s wholesale agencies to SFPUC. Figure 3
presents the SFPUC’s actual and projected wholesale water rates. Note that the latest
wholesale rate projections are lower than last year’s projections. This is due to the savings
from the capital prepayment as well as higher regional water sales projections by SFPUC.
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Overall, the water supply purchase costs are p rojected to increase from $16.4 million in FY 2014
to $22.6 million in FY 2018, or 8.4%/year on average. Water purchase costs account for 40.9%
of total expenses for FY 2014 and 46.4% of total expenses for FY 2018.
Figure 3
Over the long term, the water utility’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 also
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’s costs are largely fixed, with minimal avoided
operations costs, a reduction in demand in the current year will result in an under-collection of
their revenue requirement, which is then recovered in the subsequent year.
CPAU’s long-term water purchase costs could change if the City’s share of SFPUC’s total
deliveries changed and if the SFPUC’s cost recovery mechanism remains unchanged. The City’s
wholesale water supply costs beyond FY 2014 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 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.
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Capital Improvement Program (CIP)
CIP costs are expected to increase by an average of 2.8%/year for the five -year financial
horizon. Table 2 presents the expected CIP projects and costs for the financial for ecast horizon.
Table 2: Capital Improvement Program (FY 2014 – FY 2018)
2013-14 2014-15 2015-16 2016-17 2017-18
WBS Desc.Exp.Rev.Exp.Rev.Exp.Rev.Exp.Rev.Exp.Rev.
WS-02014 W-G-W Utility GIS Da $275,000 -$183,333 $275,000 -$183,333 $275,000 -$183,333 $275,000 -$183,333 $275,000 -$183,333
WS-11000 WMR-Project 25 (WS-1 $2,736,906 $0 $0 $0 $0 $0 $0 $0 $0 $0
WS-11003 Water Distribution S $218,000 $0 $225,000 $0 $232,000 $0 $239,000 $0 $247,000 $0
WS-11004 Water Supply Sys Imp $218,000 $0 $225,000 $0 $232,000 $0 $239,000 $0 $247,000 $0
WS-12001 WMR-Project 26 (WS-1 $505,000 $0 $2,975,000 $0 $0 $0 $0 $0 $0 $0
WS-13001 WMR-Project 27 (WS-1 $0 $514,000 $0 $2,895,000 $0 $0 $0 $0
WS-13002 Equipment Tools $0 $0 $53,000 $0 $0 $0 $56,180 $0 $0 $0
WS-13006 Water Meter Shop Ren $200,000 $0 $0 $0 $0 $0 $0 $0 $0 $0
WS-14001 WMR-Project 28 (WS-1 $0 $0 $0 $0 $324,000 $0 $3,445,000 $0 $0 $0
WS-15002 WMR-Project 29 (WS-1 $0 $0 $0 $0 $0 $0 $334,000 $0 $3,550,000 $0
WS-16001 WMR - Project 30 $0 $0 $0 $0 $0 $0 $0 $0 $344,020 $0
WS-80013 Water System Extensi $440,000 -$868,000 $450,000 -$878,000 $460,000 -$899,840 $473,000 -$921,000 $486,000 -$943,000
WS-80014 Water Service Hydran $229,000 $0 $236,000 $0 $243,080 $0 $250,400 $0 $263,000 $0
WS-80015 Water Meters $379,000 $0 $386,000 $0 $393,080 $0 $400,372 $0 $407,000 $0
Total $5,200,906 -$1,051,333 $5,339,000 -$1,061,333 $5,054,160 -$1,083,173 $5,711,952 -$1,104,333 $5,819,020 -$1,126,333
The ongoing water main replacement and system improvement projects cost $3 to $4 million
annually, with remaining funding of $1 to $2 million required for ongoing supply system
improvements, hydrant and meter servicing, as well as customer financed system extensions.
Other Costs
Other major costs include the debt service payments reflecting the annual payments on the
two outstanding water bonds of $650,000 (2002 Utility Revenue Bonds, Series A) and $2.6
million (2009 Water Revenue Bonds, Series A), both recently refinanced to lower rates. Other
operating expenditures such as operations, maintenance, and rent are projected to increase by
3% per year. Salary and benefit cost projections are from the City’s long-range financial
forecast.
Revenue Projections
Retail sales constitute the largest source of revenue for the Water Fund. In FY 2012, total retail
sales amounted to $30.9 million. This was $0.2 million (0.7%) higher than b udgeted. Other
revenues in FY 2012 include service connection and capacity fees, transfers in, and interest and
gain or loss on investments which totaled $2.8 million. Going forward, interest and gains on
investments in future years are calculated assuming a 2.2% return on investment. Projections
for retail sales revenue are based on the results of updated case water demand scenarios and
required rate adjustments consistent with the revenue requirements discussed below.
City of Palo Alto Page 8
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 maintenance expenses, water supply purchases,
debt service payments and CIP expenditures. With a 7% increase in FY 2014, there is a
projected revenue shortfall of $811,000. A further increase of 7% in FY 2015 will still incur a W-
RSR drawdown of $2.5 million, but the level will still be above both minimum guideline levels
and risk assessment levels. The projected rate increases after FY 2015 are projected to keep
reserves at or slightly above minimum through the forecast horizon. The Water Fund’s
projected costs, revenues, and revenue increases from FY 2012 through FY 2018 are depicted in
Figure 4 below.
Figure 4
Alternative Revenue Trajectory
Staff evaluated a scenario with no revenue increase for FY2014. Without a rate adjustment for
FY 2014, revenues would not cover the projected costs and a drawdown from the W-RSR of
$3.1 million would be required, but the W-RSR would still be $1.9 million above the long-term
minimum reserve guideline and $2.4 million over the short -term risk assessment level.
However, no rate adjustment for FY 2014 would result in the need for a 16% rate adjustment
for FY 2015. The recommended 7% revenue increase for FY 2014 avoids future rate shocks and
maintains the message to customers that water costs are increasing.
City of Palo Alto Page 9
Reserves and Risk Assessment
The Council-approved guidelines for the W-RSR require an annual assessment of short-term
uncertainties. 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 3 summarizes the risk assessment
calculation for the Water Fund.
Table 3: Water Rate Stabilization Reserves and Annual Reserve Adequacy Analysis
FY 2013 FY 2014 FY 2015
Budget revenue ($000) 35,983 36,801 38,038
Historical Budget-to-Actual variance 12.1% 12.1% 12.1%
Budget-to-Actual Risk ($000) 4,372 4,471 4,621
CIP Budget ($000) 6,115 5,201 5,339
CIP Contingency @10% of CIP Budget ($000) 612 520 534
Total short-term risk assessment value ($000) 4,983 4,991 5,155
Reserve Requirement as % of Sales Revenue 13.8% 13.6% 13.6%
Table 4 summarizes the minimum and maximum long-term guideline levels for the W-RSR for
FY 2013 through FY 2015 as well as the short-term risk assessment value from Table 3 above.
Table 4: Water RSR Guideline Levels and Short -Term Risk Assessment ($M)
For the five-year financial forecast period, the reserve level projections are shown in Figure 5
below.
Water Rate Stabilization Reserve FY 2013 FY 2014 FY 2015
Estimated End of Year Balance 10.2 9.4 6.9
Risk Assessment 5.0 5.0 5.2
Minimum Level Guideline (15% of sales revenues) 5.4 5.5 5.7
Maximum Level Guideline (30% of sales revenues) 10.7 11.1 11.4
City of Palo Alto Page 10
Figure 5
Cost of Service Analysis
The City hired Raftelis Financial Consultants, Inc. (RFC) in November 2012 to conduct a cost of
service analysis (COSA) utilizing the most recent data available for customer water usage (FY
2011) and associated costs for the Water Fund. The analysis included a review of utility
financial data, customer class load profiles and the specific costs associated with providing
utility services. The study was conducted based on industry-recognized procedures involving
the functional classification of utility assets and expenses, and allocation of costs to customer
classes based on the cost to provide the service. Specific customer cl ass attributes included
quantity of service and resource consumed; variability of use during the year; and peak
demands created on the system by each class.
The model provided by RFC was updated using projected sales and revenue figures for FY 2014.
Summary results are presented in the following sections. The proposed adjustment to water
rates is consistent with the COSA results.
Current Rate Schedules and Recommended COSA Alignments
The COSA model compared required revenue collection based on cost of service versus revenue
collection under current rate schedules. The results are presented in Table 5. The column
entitled “Revenue Difference” indicates the required rate adjustment by customer class with an
overall revenue increase of 7%. Also shown is the percentage of total revenue for COSA and
Current rates. Since rates were re-aligned just last year according to the COSA, the revenue
adjustments are very similar for each customer rate class (except for fire service, which is only
1% of the total revenues).
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Table 5: Required Revenue Collection based on COSA versus Current Rates
Customer Class Revenue Revenue
Difference
% of Total Revenues
COSA Current COSA Current
Residential – W1 $18,647,719 $17,251,033 8% 51% 50%
Master MFR/Commercial – W4 $13,848,691 $12,957,157 7% 38% 38%
Irrigation – W7 $ 3,899,542 $ 3,722,937 5% 11% 11%
Fire Service – W3 $ 429,163 $ 484,868 -11% 1% 1%
TOTAL $36,825,114 $34,415,995 7% 100% 100%
Current water rates consist of two components: a commodity rate (volu metric rate) and a
monthly fixed service charge (meter charge). The monthly service charge varies by meter size
and the volumetric rate for residential customers on the W-1 rate schedule is based on usage
tier. For master-metered multi-family residential (Master MFR) and non-residential customers
a single volumetric rate is used. The residential volumetric rates on the W-1 rate schedule are
also referred to as “inverted block rates” where usage in the first tier has a lower rate than
usage in the second tier. The Tier 1 usage block for W-1 residential customers is defined as 0.2
ccf per day, or 6 ccf per month for a 30-day billing period. Usage over 6 ccf per month falls into
Tier 2. Table 6 shows current and proposed water rates based on COSA results. Attachment B
shows the proposed changes to each rate schedule.
City of Palo Alto Page 12
Table 6: Current and Proposed Water Rates (W1, W3, W4 and W7 Rate Schedules)
General Monthly Meter Service Charge
Meter Size Effective July 1, 2012 July 1, 2013 Difference
5/8"$13.74 $14.67 7%
3/4"$18.28 $19.51 7%
1"$27.35 $29.18 7%
1 1/2"$50.03 $53.37 7%
2"$77.25 $82.39 7%
3"$163.44 $174.29 7%
4"$290.46 $309.72 7%
6"$594.39 $633.80 7%
8"$1,093.39 $1,165.86 7%
10"$1,728.48 $1,843.02 7%
12"N/A $2,423.45 N/A
Monthly Fire Meter Service Charge
Meter Size Effective July 1, 2012 July 1, 2013 Difference
2"$3.30 $3.03 -8%
4"$20.44 $18.78 -8%
6"$59.38 $54.55 -8%
8"$126.54 $116.24 -8%
10"$227.56 $209.03 -8%
12"N/A $337.65 N/A
Commodity Rate ($/ccf)
Effective July 1, 2012 July 1, 2013 Difference
Residential - W1
Tier 1 0 - 6 ccf $4.54 $4.99 10%
Tier 2 over 6 ccf $7.06 $7.58 7%
Master MFR/Commercial - W4 $5.75 $6.15 7%
Irrigation - W7 $7.19 $7.52 5%
Construction - W2 $5.75 $6.15 7%
Fixed Monthly Service Charges
The proposed monthly service charges are increased 7% from current rates except for fire
meter service on Rate Schedule W-3 (Fire Service Connections), which are proposed to
decrease by 8%. The reason for this apparent discrepancy is that, according to the COSA model,
as purchase cost has grown but other factors (costs, number of fire services) remain stable (or
grow less), then the relative percentage allocation of cost to fire service falls. Note that the
total revenue from W-3 is small (less than 1.2% of the total expected revenue for FY 2014) as
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shown in Table 5. Revenue collection through the fixed service charges will remain about 15%
of total revenue collections in FY 2014. This is well within the California Urban Water
Conservation Council guideline of less than 30% to support water conservation objectives.
Volumetric Charges
The commodity rate for Rate Schedule W-2 (Water Service from Fire Hydrants) is proposed to
continue to be the same as the commodity rate applicable for Rate Schedule W-4. Rate
Schedule W-2 applies to all water taken from fire hydrants for construction , maintenance, and
other uses in conformance with the provisions of a Hydrant Meter Permit. Annual revenues
from the W-2 rate amount to only about $120,000, or less than 0.4% of total revenues.
For residential customers on Rate Schedule W-1, the proposed volumetric rate for Tier 1 is
increased by 10% while the volumetric rate for Tier 2 is increased by 7%, in accordance with the
COSA model. The volumetric rates for irrigation customers (Rate Schedule W-7) are increased
by 4.6% to be aligned with the COSA results.
Customer Bill Impact of Proposed Rate Changes
Table 7 below shows the impact of the proposed rate increase on customer bills based on
consumption level for the residential and commercial classes.
Table 7: Impact of Proposed Rate Increase on Customer Bills
Customer
Usage
(CCF)
Current
Monthly
Bill ($)
Proposed
Monthly
Bill ($)
Amount of
Proposed
Increase ($)
Percent
Increase
Small Residential (5/8” Meter) 4 31.90 34.63 2.73 8.6%
Median Residential- Winter (5/8” Meter) 7 48.04 52.19 4.15 8.6%
Median Residential- Annual (5/8” Meter) 9 62.16 67.35 5.19 8.3%
Median Residential-Summer (5/8” Meter) 14 97.46 105.25 7.79 8.0%
Large Residential (5/8” Meter) 25 175.12 188.63 13.51 7.7%
Medium Commercial (3" Meter) 300 1,888.44 2,019.29 130.85 6.9%
Large Commercial or Industrial (6" Meter) 1200 7494.39 8,013.80 519.41 6.9%
Large Commercial or Industrial
(irrigation only W-7) (6” Meter) 3000 22,164.39 23,193.80 1,029.41 4.6%
Table 7 shows that the increase is greater in percentage terms for residential customers who
use less water due to the service charge increase and the reduction in the ratio of the
volumetric rates for Tier 1 and Tier 2. Tier 2 volumetric charges are currently 156% of Tier 1
charges. Proposed Tier 2 charges are 152% of Tier 1 charges.
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
presented its findings to the UAC in October 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
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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 supply; higher quality
of service; and higher rent payment for its use of real esta te in the service territory.
Table 8 below, which compares monthly water bills using municipal water rates as of February
1, 2013, indicates that the average residential customer in surrounding cities pays
approximately 37% less than the median Palo Alto residential customer. Nearby cities that
purchase water supplies from the SFPUC have raised their rates in response to price increases
and indications are that they will continue to do so. At this time, the certainty or magnitude of
the rate increases is not known.
Table 8: Monthly Residential Water Bill Comparison
Residential Monthly Water Bill ($/month)
As of February 1, 2013
Usage CCF/month Palo Alto
Menlo
Park
Redwood
City
Mountain
View
Los
Altos
Santa
Clara Hayward
4 31.90 34.97 33.72 17.59 26.25 12.68 22.20
(Winter median) 7 48.04 51.12 44.09 30.85 36.28 22.19 37.35
(Annual median) 9 62.16 61.87 51.53 39.69 42.97 28.53 47.45
(Summer median) 14 97.46 90.00 73.67 61.79 60.54 44.38 74.50
25 175.12 152.56 140.55 110.41 99.60 79.25 143.25
Notes:
1. Menlo Park rates based on California Water Service’s Bear Gulch District.
2. Los Altos rates based on California Water Service’s Los Altos District, whose source water is groundwater
and treated water from the Santa Clara Valley Water District.
3. Based on the FY 2011 BAWSCA survey, the fraction of SFPUC as source of potable water supply was 100%
for Palo Alto, 90% for Menlo Park, 100% for Redwood City, 86% for Mountain View, 12% for Santa Clara
and 100% for Hayward.
Commission Review and Recommendations
At its February 13 and March 6, 2013 meetings, the UAC reviewed the 5-year financial forecasts
for the Water Fund and staff’s rate proposals. At the February meeting staff provided a
preview of the financial forecasts and the UAC discussed staff’s initial proposal of no water rate
increase for FY 2014. The wholesale SFPUC water rates are increasing, but this increase is
partially offset by a decrease in the CIP budget for FY 2014, allowing for a zero rate increase for
one year. However, a zero increase in FY 2014 would be followed by larger increases starting in
FY 2015. Staff also presented an alternative rate proposal that smoothed out the rate increases
over the five-year financial forecast horizon. The UAC discussed the merits of smoothing out
the rate increases by starting with a smaller increase in FY 2014. The excerpted final notes from
the UAC’s February 13, 2013 meeting are provided as Attachment E.
At its March meeting, the UAC discussed staff’s revised proposal for a 7% overall increase for FY
2014. The UAC also provided guidance on communicating the rate increases and the cost
City of Palo Alto Page 15
drivers, and discussed rate design issues, rate comparisons with other agencies, and water
demand forecasts.
On March 6, 2013 the UAC voted 6-0, with one Commissioner absent, to recommend that the
Council approve an increase in the overall retail water rates and annual revenues for the Water
Fund by 7.0 percent, or $2.4 million per year, effective July 1, 2013, and approve the W-1, W-2,
W-3, W-4, and W-7 rates as recommended by staff. The excerpted draft notes from the UAC’s
March 6, 2013 meeting are provided as Attachment D.
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)(1-4) (modification of rates for the purpose of meeting operating expenses, purc hasing
supplies, equipment or materials, meeting financial reserve needs and requirements and
obtaining funds for capital projects necessary to maintain service within existing service areas.)
Attachments:
Attachment A: Reso for Water Rate Increase (PDF)
Attachment B: Utility Rate Schedules W-1, W-2, W-3, W-4 and W-7 effective July 1,
2013 (PDF)
Attachment C: Water Utility Financial Forecast (FY 2014-FY 2018) (PDF)
Attachment D: Excerpted Draft Minutes of March 6, 2013 UAC Meeting (PDF)
Attachment E: Excerpted Final Minutes of Feb 13, 2013 UAC Meeting (PDF)
*Not Yet Approved*
130312 dm 015005
ATTACHMENT A
Resolution No. _________
Resolution of the Council of the City of Palo Alto Adopting a Water Rate Increase
and Amending Utility Rate Schedules W-1,W-2, W-3, W-4 and W-7
R E C I T A L S
A. Pursuant to Chapter 12.20.010 of the Palo Alto Municipal Code, the Council of
the City of Palo Alto may by resolution adopt rules and regulations governing utility services,
fees and charges.
B. Pursuant to Article XIIID Sec. 6 of the California Constitution, on March 6, 2013,
the City of Palo Alto held a public hearing to consider all protests against the proposed water
rate amendments.
C. 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 amendments.
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 as attached
and incorporated. Utility Rate Schedule W-1, as amended, shall become effective July 1, 2013.
SECTION 2. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule W-2 (Water Service from Fire Hydrants) is hereby amended to read as attached
and incorporated. Utility Rate Schedule W-2, as amended, shall become effective July 1, 2013.
SECTION 3. 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 as attached and
incorporated. Utility Rate Schedule W-3, as amended, shall become effective July 1, 2013.
SECTION 4. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule W-4 (Residential Master-Metered and General Non-Residential Water Service) is
hereby amended to read as attached and incorporated. Utility Rate Schedule W-4, as amended,
shall become effective July 1, 2013.
SECTION 5. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule W-7 (Non-Residential Irrigation Water Service) is hereby amended to read as
attached and incorporated. Utility Rate Schedule W-7, as amended, shall become effective July
1, 2013.
*Not Yet Approved*
130312 dm 015005
SECTION 6. 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.
SECTION 7. The Council finds that the adoption of this resolution changing water
rates to meet operating expenses, purchase supplies and materials, meet financial reserve
needs and obtain funds for capital improvements necessary to maintain service is not subject to
the California Environmental Quality Act (CEQA), pursuant to California Public Resources Code
Sec. 21080(b)(8) and Title 14 of the California Code of Regulations Sec. 15273(a). After
reviewing the staff report presented to Council, the Council incorporates these documents
herein and finds that sufficient evidence has been presented setting forth with specificity the
basis for this claim of CEQA exemption.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
___________________________ ___________________________
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
___________________________ ____________________________
Sr. Deputy City Attorney City Manager
____________________________
Director of Utilities
_____________________________
Director of Administrative Services
GENERAL RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-1-1 Effective 7-1-20132
dated 10-1-20117-1-2012 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 Service Charge: Per Month
For 5/8-inch meter ..................................................................................................... $ 13.7414.67
For 3/4 inch meter ..................................................................................................... 18.2819.51
For 1 inch meter ........................................................................................................ 27.3529.18
For 1 1/2 inch meter .................................................................................................. 50.0353.37
For 2-inch meter ........................................................................................................ 77.2582.39
For 3-inch meter ........................................................................................................ 163.44174.29
For 4-inch meter ........................................................................................................ 290.46309.72
For 6-inch meter ........................................................................................................ 594.39633.80
For 8-inch meter ........................................................................................................1,093.391,165.86
For 10-inch meter ......................................................................................................1,728.481,843.02
For 12-inch meter ....................................................................................................... 2,423.45
Commodity Rate: (To be added to Service Charge and applicable to all pressure zones.)
Per Hundred Cubic Feet (ccf)
Per Month All Pressure Zones
Tier 1 usage ........................................................................................................................$4.9954
Tier 2 usage (All usage over 100% of Tier 1) ........................................................................ 7.5806
Temporary unmetered service to residential
subdivision developers, per connection ........................................................................ $6.00
GENERAL RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-1-2 Effective 7-1-20132
dated 10-1-20117-1-2012 Sheet No W-1-2
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 0.2 ccf per day
rounded to the nearest whole ccf, based on meter reading days of service. As an example,
for a 30 day bill, the Tier 1 level would be 0 through 6 ccf. For further discussion of bill
calculation and proration, refer to Rule and Regulation 11.
{End}
WATER SERVICE FROM FIRE HYDRANTS
UTILITY RATE SCHEDULE W-2
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-2-1 Effective 7-1-20123
dated 7-1-200912 Sheet No W-2-1
A. APPLICABILITY:
This schedule applies to all water taken from fire hydrants for construction, maintenance, and
other uses in conformance with provisions of a Hydrant Meter Permit.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides water services.
C. RATES:
1. Monthly Service Charge.
METER SIZE
5/8 inch ........................................................................................................................... 50.00
3 inch ........................................................................................................................... 125.00
2. Commodity Rate: (per hundred cubic feet) ................................................................ $5.756.15
D. SPECIAL NOTES:
1. Monthly charges shall include the applicable monthly service charge in addition to usage billed at
the commodity rate.
2. Any applicant using a hydrant without obtaining a Hydrant Meter Permit or any permittee using a
hydrant without a Hydrant Meter Permit shall pay a fee of $50.00 for each day of such use in
addition to all other costs and fees provided in this schedule. A hydrant permit may be denied or
revoked for failure to pay such fee.
3. A meter deposit of $750.00 may be charged any applicant for a Hydrant Meter Permit as a
prerequisite to the issuance of a permit and meter(s). A charge of $50.00 per day will be added for
delinquent return of hydrant meters. A fee will be charged for any meter returned with missing or
damaged parts.
4. Any person or company using a fire hydrant improperly or without a permit, or who draws water
from a hydrant without a meter installed and properly recording usage shall, in addition to all other
applicable charges be subject to criminal prosecution pursuant to the Palo Alto Municipal Code.
{End}
FIRE SERVICE CONNECTIONS
UTILITY RATE SCHEDULE W-3
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-3-1 Effective 7-1-20132
dated 10-1-20117-1-2012 Sheet No W-3-1
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:
2-inch connection .......................................................................................................$3.303.03
4-inch connection .......................................................................................................20.4418.78
6-inch connection ....................................................................................................... 59.3854.55
8-inch connection .......................................................................................................126.54116.24
10-inch connection .....................................................................................................227.56209.03
12-inch connection ..................................................................................................... 337.65
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 testing and repairing the fire extinguishing facilities. Using
hydrants and fire services for other purposes is illegal and will be subject to the
commodity charge as noted above, fines, and criminal prosecution pursuant to the Palo
Alto Municipal Code.
2. 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
Supersedes Sheet No W-3-2 Effective 7-1-20132
dated 10-1-20117-1-2012 Sheet No W-3-2
3. Utilities Rule and Regulation No. 21 provides additional information on Automatic Fire
Services.
4. Repairs and testing of fire extinguishing facilities are not considered unauthorized use of
water if records and documentation are supplied by the customer.
{End}
RESIDENTIAL MASTER-METERED AND
GENERAL NON-RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W-4
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-4-1 Effective 7-1-20123
dated 10-1-20117-1-2012 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 Service Charge Per Month
For 5/8-inch meter .................................................................................... $ 13.7414.67
For 3/4-inch meter .................................................................................... 18.2819.51
For 1-inch meter .................................................................................... 27.3529.18
For 1 ½-inch meter .................................................................................... 50.0353.37
For 2-inch meter .................................................................................... 77.2582.39
For 3-inch meter .................................................................................... 163.44174.29
For 4-inch meter .................................................................................... 290.46309.72
For 6-inch meter .................................................................................... 594.39633.80
For 8-inch meter ....................................................................................1,093.391,165.86
For 10-inch meter ....................................................................................1,728.481,843.02
For 12-inch meter .................................................................................... 2,423.45
Commodity Rates: (to be added to Service Charge)
Per Hundred Cubic Feet (ccf)
Per Month All Pressure Zones
Per ccf ............................................................................................................ $ 5.756.15
RESIDENTIAL MASTER-METERED AND
GENERAL NON-RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W-4
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-4-2 Effective 7-1-20123
dated 10-1-20117-1-2012 Sheet No W-4-2
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}
NON-RESIDENTIAL IRRIGATION WATER SERVICE
UTILITY RATE SCHEDULE W-7
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-7-1 Effective 7-1-20123
dated 10-1-20117-1-2012 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 Service Charge Per Month
For 5/8-inch meter .................................................................................... $ 13.7414.67
For 3/4-inch meter .................................................................................... 18.2819.51
For 1-inch meter .................................................................................... 27.3529.18
For 1 1/2 inch meter .................................................................................... 50.0353.37
For 2-inch meter .................................................................................... 77.2582.39
For 3-inch meter .................................................................................... 163.44174.29
For 4-inch meter .................................................................................... 290.46309.72
For 6-inch meter .................................................................................... 594.39633.80
For 8-inch meter ....................................................................................1,093.391.165.86
For 10-inch meter ....................................................................................1,728.481.843.02
For 12-inch meter .................................................................................... 2,423.45
Commodity Rates: (to be added to Service Charge)
Per Hundred Cubic Feet (ccf)
Per Month All Pressure Zones
Per ccf ............................................................................................................ $ 7.1952
NON-RESIDENTIAL IRRIGATION WATER SERVICE
UTILITY RATE SCHEDULE W-7
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-7-2 Effective 7-1-20123
dated 10-1-20117-1-2012 Sheet No W-7-2
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}
$('000)
Actual Adopted Projected
2012 2013 2013 2014 2015 2016 2017 2018
1 % CHANGE IN RETAIL RATE 20.8%15.0%15.0%7.0%7.0%7.0%6.0%7.0%
2 SYSTEM AVERAGE RATE ($/CCF)6.30 7.24 7.24 7.68 8.21 8.79 9.31 9.97
3 SALES UNITS (CCFs)5,063 4,946 4,946 4,808 4,644 4,683 4,731 4,779
4 WATER UTILITY REVENUE
5 SALES REVENUE:27,700 31,507 30,725 34,487 35,647 38,463 41,575 44,514
6 RATE ADJUSTMENT 3,299 4,671 4,609 2,414 2,495 2,692 2,495 3,116
7 PRORATION IMPACT (137)(195)(192)(101)(104)(112)(104)(130)
8 TOTAL ADJUSTED SALES 30,862 35,983 35,141 36,801 38,038 41,043 43,966 47,500
9 INTEREST 520 749 749 543 472 420 393 239
10 OTHER REVENUE 846 1,147 1,147 1,157 1,146 1,133 1,119 1,105
11 CONNECTION & CAPACITY FEES 1,445 709 709 718 728 750 771 793
12 FROM RESERVES:
13 RATE STABILIZATION 2,638 1,655 0 810 2,546 818 0 0
14 CIP BOND PROCEEDS 0 0 0 0 0 0 0 0
15 COMMITMENTS & REAPPROPRIATIONS 0 0 1,847 0 0 0 0 0
16 TOTAL FINANCIAL RESOURCES 36,311 40,242 39,592 40,028 42,929 44,164 46,249 49,638
17 OPERATING EXPENSES
18 RESOURCE MANAGEMENT & ADMIN 553 615 615 627 647 664 687 710
19 PURCHASES 14,955 15,940 15,794 16,353 18,655 19,763 20,096 22,619
20 CUSTOMER DESIGN & CONN. (CIP)420 430 430 440 450 460 473 486
21 SYSTEM IMPROVEMENT(CIP) - Nonbond 3,949 5,685 2,948 4,761 4,889 4,594 5,239 5,333
22 SYSTEM IMPROVEMENT(CIP) - Bond 0 0 0 0 0 0 0 0
23 ALLOCATED ADMIN & OVERHEAD 2,003 2,784 2,784 2,784 2,861 2,930 3,004 3,080
24 ENGINEERING SUPPORT & ADMIN 1,184 771 771 797 825 848 881 915
25 WATER OPERATIONS 4,034 5,332 5,332 5,458 5,638 5,788 5,990 6,198
26 CUSTOMER SERVICE & ADMIN 658 568 568 586 606 623 647 671
27 METER READING 254 385 385 401 416 427 445 463
28 BILLING AND COLLECTIONS 260 193 193 202 210 216 225 234
29 WATER DEMAND SIDE MANAGEMENT 375 702 702 710 731 750 772 795
30 DEBT SERVICE & RELATED 3,338 3,219 3,219 3,220 3,219 3,223 3,219 3,223
32 RENT 2,142 1,912 1,912 1,949 2,007 2,069 2,130 2,195
33 TRANSFERS OUT 2,308 1,705 1,705 1,739 1,774 1,809 1,846 1,882
34 TOTAL OPERATING EXPENSES 36,433 40,242 37,359 40,028 42,929 44,164 45,653 48,804
35 RESERVE ADDITIONS:
36 PLANT REPLACEMENT 0 0 0 0 0 0 0 0
37 RATE STABILIZATION 0 0 2,233 0 0 0 596 834
38 DEBT SERVICE RESERVE (122)0 0 0 0 0 0 0
39 TOTAL RESERVE ADDITIONS:(122)0 2,233 0 0 0 596 834
40 TOTAL REVENUE REQUIREMENT 36,311 40,242 39,592 40,028 42,929 44,164 46,249 49,638
41 RESERVES BALANCES
42 PLANT REPLACEMENT 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
43 RATE STABILIZATION 8,001 6,347 10,234 9,424 6,879 6,060 6,657 7,490
44 CIP DEBT SERVICE 3,225 3,225 3,225 3,225 3,225 3,225 3,225 3,225
45 TOTAL RESERVES BALANCES 12,226 10,571 14,459 13,649 11,104 10,285 10,882 11,715
46
47 COMMITMENTS & REAPPROPRIATIONS 14,096 14,096 12,249
48 RATE STABILIZATION RESERVES GUIDELINES
49
50 Short Term Risk Assessment Value 4,169 4,983 4,983 4,991 5,155 5,492 5,913 6,353
51 Long Term Rate Stabilization Guidelines
52 RSR Minimum 4,454 5,372 5,372 5,535 5,721 6,173 6,610 7,145
53 RSR Maximum 8,908 10,744 10,744 11,070 11,443 12,347 13,221 14,289
54
2012 2013 2014 2015 2016 2017 2018
City of Palo Alto
Water Utility
WATER
Fiscal Year
R
E
V
E
N
U
E
S
R
E
S
E
R
V
E
S
E
X
P
E
N
S
E
S
Excerpted Draft
Utilities Advisory Commission Meeting
Minutes of March 6, 2013
ITEM 5: ACTION: Staff Recommendation that the Utilities Advisory Commission Review the 5 -
Year Financial Forecast for the Water Fund and Recommend that Council Increase Water Fund
Revenues by $2.4 million per year Effective July 1, 2013 and Amend Water Utility Rate
Schedules W-1, W-2, W-3, W-4 and W-7
Resource Planner Eric Keniston stated that staff revised its proposal after the discussion by the
UAC in February. A steady rate increase trajectory of about 7% per year is now forecast. The
proposed rates to be effective July 1, 2013 were developed by updating the cost of service
model, which resulted in some small shifts between customer classes.
Commissioner Melton stated that he likes the smoother rate trajectory, which provides a
steady message.
Commissioner Waldfogel asked about last year when we looked at fixed vs. variable cost and
how the COSA proposed to collect fixed/ service charges. He recalled that the service cha rges
would be phased in. Keniston added that the service charges are now at full cost of service
level.
Commissioner Hall stated that communication of the rate increase needs to be clear and
careful. He indicated that the rate increase in the future will depend upon the actual water
usage so that there is a high degree of uncertainty on the cost of water. In addition, the
average increase for residential customers is closer to 8.5%, not 7% so this needs to be carefully
communicated. Commissioner Hall asked if there any changes in the application of cost of
service model. Keniston stated there was not.
Chair Cook asked why water usage is projected to go down. Keniston replied that the load
forecast is based on an econometric model trend and includes the planned implementation of
water efficiency measures.
Chair Cook noted that SFPUC costs are increasing dramatically and that this should be used as
the explanation for why our rates are going up.
Chair Cook asked why our water rates are so much higher than neighboring cities. Senior
Resource Planner Debbie Lloyd referred to the 2010 water benchmark study, namely
infrastructure replacement programs, lack of access to other sources of supply, higher quality
serve and high rents.
Commissioner Hall noted that Palo Alto does not bond finance its CIP projects unlike other
cities, which do that. He stated that Palo Alto’s “pay as you go” practice is a good story to tell
and it should be included in the communication to customers.
Commissioner Melton asked if the San Francisco Public Utilities Commission (SFPUC) chooses to
change the wholesale rate structure to collect more from fixed charges instead of volumetric
charges, the City would not save any money by reducing its water usage. He added that
SFPUC’s costs are almost all fixed costs so such a wholesale rate design may make sense.
Assistant Director Jane Ratchye stated that staff is aware of this issue and will address it further
in the analysis underway in the Water Integrated Resource Plan (WIRP) upd ate. She added that
this issue did not come up this year in the annual meeting with SFPUC and she expects that we
will hear about any such proposals long before they would be implemented to allow time to
participate in the review process.
ACTION:
Commissioner Eglash made a motion to recommend that the Council increase overall retail
water rates and annual revenues for the Water Fund effective July 1, 2013 and amend Utility
Rate Schedules W-1, W-2, W-3, W-4, and W-7, as proposed. Commissioner Melton seconded
the motion. The motion carried (6-0) with Commissioner Chang absent.
Eglash commended staff on the process for the review of the financial forecasts this year with
the discussion spread over two meetings before the proposal was finalized. Reg arding the CIP
spending, he would like to see a longer view since we don't want the future discussion to show
just a sudden increase from the current year spending.
Excerpted Final
Utilities Advisory Commission Meeting
Minutes of February 13, 2013
ITEM 2: PRESENTATION: Presentation on Financial Projections for the City’s Electric, Gas,
Water and Wastewater Collection Utilities
Assistant Director Jane Ratchye stated that the presentation on the financial forecasts is a
preview of next month's discussion. This month no information was provided in advance of the
presentation, but next month the full report will be provided with all information. In this
presentation, we will be showing options for the water and wastewater funds and would like to
get some feedback from the commission on these options.
Resource Planner Eric Keniston provided an overview of the 5-year financial forecasts for all
funds, stating it was possible to not have any rate increases for FY 2014. This is different from
last year’s financial projections, which had forecast the need for increases of 15% for water and
9% for wastewater. Electric and gas show no need for changes at this time. T here have been
some significant savings related to Capital Improvement Programs (CIP).
For the Electric Fund, no rate increases were shown to be needed, but supply costs
(renewables, transmission) were projected to increase, and distribution costs were pr ojected to
decrease due to decreased Capital Improvement Program (CIP) budgets in the next two years.
This was due to a backlog of projects as well as vacancies (under -filled positions, retirements,
fewer trainers for new employees). No rate increases are shown to be needed until FY 2016.
Commissioner Cook asked why there were vacancies in this economy, and whether it was a
structural issue. Director Fong stated that for skilled positions such as electric and gas
engineers there is a shortage.
Commissioner Eglash added that this is an industry wide problem for utilities.
Commissioner Hall observed that the large drop in CIP expenses is significant, and
Commissioner Cook asked whether this could cause a problem in the future with operations.
Director Fong stated that if a project came up that was required immediately, those would be
done.
Vice Chair Foster asked if there were zero dollars budgeted for undergrounding for FY 2014.
Keniston confirmed that this is true.
Regarding the Gas Fund, Keniston stated that since all customers now have market rate gas
commodity costs, the net revenue profile is relatively steady. In addition, other components
were brought into alignment with cost of service study as of the rates effective July 1, 2012. CIP
deferrals for two years will cause distribution costs to fall significantly so that the distribution
rate stabilization reserve (RSR) levels are projected to rise above the maximum guideline level
for several years. Options are to let the reserves be where they are, or to have rate decreases
(with increases later). The gas supply RSR is more of a cash flow reserve as market -based
commodity costs are passed through to customers. With a two month lag between billing and
revenue collection, funds should be in place to cover the potentially expensive float needed for
winter gas.
Commissioner Cook asked if the minimum and maximum guidelines are legal requirements.
Keniston replied that they are not legal requirements.
Commissioner Melton asked whether the high amount for the gas distribution RSR was all due
to CIP deferrals. Keniston confirmed that it was.
Commissioner Eglash asked if, given market prices for gas sales, whether RSR needs been re -
assessed. Assistant Director Ratchye stated staff will reasse ss the appropriate reserve levels
after completion of a rates policy. Director Fong added that the reserve is needed for cash
flow, so the reserve needs may not necessarily be reduced, but may be based on when we pay
for gas and when we receive the corresponding revenue from customers.
Keniston stated that the Water fund has seen large cost increases over the last few years. In FY
2014, it is possible to have no rate increase, although large increases would be needed starting
in FY 2015 if there were no rate increase for FY 2014. The reasons for lower expenses this year
include a return of capital funds in FY 2013 and a deferral of main replacement projects by one
year. Therefore, the Water RSR will be near to the maximum guideline level instead of the
minimum for FY 2013. Keniston stated that an alternative rate increase profile would be 7%
annual increases for the 5-year period.
Commissioner Hall asked if the SFPUC rates rising will be offset by the CIP decreases. Keniston
replied that this is the case for next year.
Commissioner Melton stated that if there is no rate increase next year, the following year
increase will be much higher and that in the past, the UAC generally counseled against that.
Commissioner Hall stated he preferred a level rate increase trajectory.
Regarding the wastewater fund, Keniston stated last year a 9% increase was projected for FY
2014, but with CIP main replacement deferrals of one year, revenues are expected to be above
expenses and the wastewater RSR is expected to be above the maximum guideline for FY 2014.
A double digit rate increase will possibly be needed in FY 2015. An alternative plan could have
a small increase in FY 2014, but reserves would be pushed above maximum guideline levels
with anything more than a small increase.
Commissioner Melton asked whether the cost growth was due to the treatment plant cost
going up. Keniston confirmed that this was the case.
Commissioner Melton stated that temporarily exceeding the maximum guideline level is not as
significant as dipping below the minimum guideline level. A one year peak over maximum is
not a big deal.
Commissioner Eglash stated he was uncomfortable with taking more money from ratepayers
simply to bank it for future cost increases. He would rat her leave the money with ratepayers,
especially when the reserve levels are above the maximum guideline level.
Commissioner Waldfogel stated the reserves should reflect deferred or accrued maintenance
cost. It sounds like there isn’t a plan to try and catch up with CIP projects.
Commissioner Eglash agreed, saying he was on a UAC committee reviewing the CIP in the past
and was impressed with the long-term plan to be current with infrastructure replacements. It is
a reason to be very proud of CPAU, but the notion when you can't spend at the rate you would
like to, or to treat CIP deferrals as a savings instead of a known cost or deferred expense for the
future creates some unease.
Director Fong added that CPAU has always practiced ‘pay as you go’ for CI P expenditures. The
consideration of budgeting for future CIP expenses is possibly in conflict the idea of not holding
more of ratepayer funds than actual expenses indicate.
Commissioner Eglash wondered if there is a matter of degree and of predictabilit y that makes
CIP different, but agreed that there is a conflict in objectives.
Commissioner Melton agreed that, if because of other limitations we have to defer CIP, it
seems appropriate to bank funds for the future when costs start coming along, includi ng that,
as a representative to the City’s Infrastructure Task Force, this is how the General Fund got into
trouble. If in the future Utilities has to do three years of work to get back on track, there should
be money in an infrastructure reserve fund to handle that.
Vice Chair Foster asked if there would be a situation of doing multiple projects at once in the
future, or if this would be a steady deferral out one year. Director Fong stated it was the latter.
Commissioner Waldfogel stated that ratepayers should expect to pay a portion of the life of
infrastructure, even if there are no expenses in one year, that it should not be a ‘jubilee’ of
sorts. Director Fong stated this would be an excellent discussion for the rates policy.
Assistant Director Ratchye asked whether the UAC had any direction for staff as to the
proposals to be provided in March.
Commissioner Eglash said that he is supportive of a flatter rate increase for water, rather than
zero in FY 2014, as this has always been expected. However, he would support zero for
wastewater as the reserves would go above the maximum guideline level.
Commissioner Melton said that he supports the steady, moderate rate increase alternative for
water as he would like to avoid double digit rate increases in water in the future. However, he
said he feels less strongly for wastewater since the dollars are not that large.
Commissioner Eglash encouraged staff to think about the input provided on the CIP funding as
he is very interested in not treating the CIP deferrals as savings, but look at opportunity to bank
the money for catching up with the CIP projects.
Commissioner Melton asked about how much of the fixed costs for the gas distribution and
water costs are collected with fixed charges and how much is collected with volumetric charges.
Ratchye stated that according to the cost of service study, some of the fixed costs are assigned
to be collected with fixed charges, but not all the fixed costs.
Commissioner Waldfogel asked if staff will be coming back with the fiber fund financial
information. Keniston said that there are no plans to do that at this time since rate increases
for the fiber fund are based on the Consumer Price Index.
Director Fong stated that the City Auditor completed an audit of CPAU's reserves and that their
advice was not to store money in reserves, but to only charge customers what is needed in a
particular year.
Vice Chair Foster indicated his support for steady rate increases for water, but said that he did
not have a strong opinion on wastewater.