HomeMy WebLinkAboutStaff Report 5591
City of Palo Alto (ID # 5591)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 4/7/2015
City of Palo Alto Page 1
Summary Title: Water Financial Plan and Rate Proposals
Title: Utilities Advisory Committee Recommendation that the City Council
Adopt: (1) a Resolution Approving the Fiscal Year 2016 Water Utility Financial
Plan and Amending the Water Utility Reserve Management Practices; and (2)
a Resolution Amending Rate Schedules W-1 (General Residential Water
Service), W-2 (Water Service from Fire Hydrants), W-3 (Fire Service
Connections), W-4 (Residential Master-Metered and General Non-Residential
Water Service), and W-7 (Non-Residential Irrigation Water Service) to
Increase Average Water Rates by 12%
From: City Manager
Lead Department: Utilities
Recommendation
Staff and the Utilities Advisory Commission (UAC) request that the Finance Committee
recommend that the Council:
1. Adopt a resolution (Attachment A) amending the Water Utility Reserve Management
Practices (Attachment B) and approving the fiscal year (FY) 2016 Water Utility Financial
Plan (Attachment C); and
2. Adopt a resolution (Attachment D) Amending Rate Schedules W-1 (General Residential
Water Service), W-2 (Water Service from Fire Hydrants), W-3 (Fire Service Connections),
W-4 (Residential Master-Metered and General Non-Residential Water Service), and W-7
(Non-Residential Irrigation Water Service).
Executive Summary
The FY 2016 Water Utility Financial Plan includes projections of the utility’s costs and revenues
for FY 2016 through FY 2023. Costs are projected to rise substantially for the next several years
due primarily to increasing water supply costs. As a result, staff projects the need for a 12%
rate increase on July 1, 2015 and 8% rate increases afterward each year through FY 2019.
Costs are increasing by 14% from FY 2015 to FY 2016, and are also projected to increase by
another 15% by FY 2020. These cost increases are mostly due to water supply costs, which are
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increasing by 31% in FY 2016, 9% in FY 2019, and 9% in FY 2020. Staff proposes spreading the
rate increases required to match these costs over several years. This is possible with two
recommended reserves transfers to the Operations Reserve—$2 million from the CIP Reserve
in FY 2015, and $5.5 million from the Rate Stabilization Reserve in FY 2016. This will reduce the
Rate Stabilization Reserve to nearly zero by the end of FY 2016.
Staff also recommends a change to the Water Utility Reserves Management Practices for the
CIP Reserve to accommodate a change in City budgeting practices for CIP projects.
The UAC reviewed the Water Financial Plan and Rate Projections at its meeting on March 4,
2015 and recommended approval of staff’s recommendation.
Background
Every year staff presents the Finance Committee with Financial Plans for its Electric, Gas, Water,
and Wastewater Collection Utilities and recommends any rate adjustments required to
maintain their financial health. These Financial Plans include a comprehensive overview of the
utility’s operations, both retrospective and prospective, and are intended to be a reference for
UAC and Council members as they review the budget and staff’s rate recommendations.
Each Financial Plan also contains a set of Reserves Management Practices describing the
reserves for each utility and the management practices for those reserves. Staff may propose
amendments to these reserves as part of the Financial Plans.
The Utilities Advisory Commission (UAC) reviewed this proposal at its March 4, 2015 meeting.
Both the UAC and Finance Committee reviewed preliminary financial forecasts and rate
projections for all utilities at their February 4 and March 3, 2015 meetings, respectively.
Discussion
Proposed Actions for FY 2015
When Council adopted the FY 2015 Water Utility Financial Plan, it approved several transfers
between reserves. Funds were transferred out of the Emergency Plant Replacement and Rate
Stabilization Reserve into the newly-created CIP and Operations Reserves. These transfers were
mainly related to setting up the new reserves structure approved as part of that Financial Plan.
Now, staff recommends an additional transfer for FY 2015. The final design for the seismic
strengthening and recoating of some of the reservoirs identified some additional work that may
need to be done at a cost of roughly $2 million. As a result, staff proposes a transfer of $2
million from the CIP Reserve to the Operations Reserve, so that it will have $4 million remaining
at the end of FY 2015.
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Proposed Actions for FY 2016
This year’s Water Utility Financial Plan includes the following proposed actions for FY 2016:
1. Amend the CIP Reserve to accommodate a change in the City’s capital budgeting
practices. These amendments are summarized below, but for a more in-depth
description of the reasons for these amendments, see Section 4C of the Financial Plan:
a. Modify the purpose of the CIP Reserve to enable it to act as a cash flow and
contingency reserve for capital investment projects by amending the Reserves
Management Practices.
b. Transfer funds projected to be released from the Reappropriations Reserve at
the beginning of FY 2016 due to a change in City capital budgeting practices to
the CIP Reserve.
c. Exceed the proposed maximum CIP Reserve guidelines through the end of FY
2017.
2. Transfer $5.5 million from the Rate Stabilization Reserve to the Operations Reserve. This
transfer will enable staff to maintain Operations Reserve levels while spreading the
required rate increases for the water utility over several years.
These proposed actions are described in more detail in the FY 2016 Water Financial Plan
(Attachment B).
In addition, staff proposes to adjust water rates to the levels shown in Tables 1-3, below,
effective July 1, 2015. These changes are projected to increase the system average rate by
roughly 12%. These rate changes are included in the proposed amended rate schedules in
Attachment E.
Staff’s annual assessment of the financial position of the City’s water utility is completed to
ensure adequate revenue to fund operations, in compliance with the cost of service
requirements set forth in the California Constitution (Proposition 218). This includes making
long-term projections of market conditions, the physical condition of the system, and other
factors that could affect utility costs, and setting rates adequate to recover these costs. The
current rate proposals are also based on the cost of service methodology from the 2012 Palo
Alto Water Cost of Service & Rate Study by Raftelis Financial Consultants.
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Table 1: Water Consumption Charges (Current and Proposed)
Current Rates
(7/1/13)
Proposed Rates
(7/1/15)
Change
$/CCF %
W-1 (Residential) Volumetric Rates ($/CCF)
Tier 1 Rates 4.99 5.70 $0.71 14%
Tier 2 Rates 7.58 8.38 $0.80 11%
W-2 (Construction) Volumetric Rates ($/CCF)
Uniform Rate 6.15 6.97 $0.82 13%
W-4 (Commercial) Volumetric Rates ($/CCF)
Uniform Rate 6.15 6.97 $0.82 13%
W-7 (Irrigation) Volumetric Rates ($/CCF)
Uniform Rate 7.52 8.46 $0.94 13%
Table 2: Current and Proposed Monthly Water Service Charge
Meter
Size
Monthly Service Charge
($/month based on meter size) Change
Current (7/1/13) Proposed (7/1/15) $/mo %
5/8” 14.67 $16.01 $1.34 9%
3/4” 19.51 $21.48 $1.97 10%
1” 29.18 $32.42 $3.24 11%
1 ½” 53.37 $59.77 $6.40 12%
2” 82.39 $92.60 $10.21 12%
3” 174.29 $196.54 $22.25 13%
4” 309.72 $349.71 $39.99 13%
6” 633.80 $716.24 $82.44 13%
8” 1,165.86 $1,318.01 $152.15 13%
10” 1,843.02 $2,083.89 $240.87 13%
12” 2,423.45 $2,740.37 $316.92 13%
Table 3: Current and Proposed Monthly Fire Service Charges
Meter
Size
Monthly Fire Service Charge
($/month based on meter size) Change
Current (7/1/13) Proposed (7/1/15) $/mo %
2” $3.03 $3.43 $0.40 13%
4” $18.78 $21.21 $2.43 13%
6” $54.55 $61.60 $7.05 13%
8” $116.24 $131.28 $15.04 13%
10” $209.03 $236.09 $27.06 13%
12” $337.65 $381.35 $43.70 13%
Bill Impact of Proposed Rate Changes
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Table 4 shows the impact of the proposed July 1, 2015 rate changes on the median residential
bill. This comparison assumes that customers do not decrease consumption. Historically,
however, customers have looked for ways to conserve after their bills have increased, so not all
customers will experience the same bill increase. The average increase is roughly 12%, but
some customers with very low bills may see slightly higher increases due to slight changes in
the composition of the utility’s costs, and how that affects the first tier and fixed charges under
the cost of service methodology.
Table 4: Impact of Proposed Water Rate Changes on Residential Bills
Usage
(CCF/month)
Bill under
Existing Rates
Bill under
Proposed Rates
Change
$/mo. %
4 34.63 38.81 4.18 12%
(Winter median) 7 52.19 58.59 6.40 12%
(Annual median) 9 67.35 75.35 8.00 12%
(Summer median) 14 105.25 117.24 11.99 11%
25 188.63 209.40 20.77 11%
Table 5 shows the impact of the proposed July 1, 2015 rate changes on various representative
commercial customer bills. As with residents, this comparison assumes that customers do not
decrease consumption.
Table 5: Impact of Proposed Water Rate Changes on Commercial Bills
Usage
(CCF/month)
Bill under
Current
Rates
Bill under
Proposed
Rates
Change
$/mo. %
Commercial (W-4) (5/8” meters)
(Annual median) 12 88.47 99.65 11.18 13%
(Annual average) 64 408.27 462.09 53.82 13%
Irrigation (W-7) (1 ½” meters)
(Winter median) 9 121 136 15 13%
(Summer median) 37 332 373 41 12%
(Winter average) 56 474 534 59 12%
(Summer average) 199 1,550 1743 193 12%
Financial Plan’s Projected Rate Adjustments for the Next Five Fiscal Years
Table 6 shows the projected rate adjustments over the next five years and their impact on the
median residential water bill. As discussed above, for FY 2016 staff is proposing to pass a large
increase in the SFPUC wholesale rate through to customers, and also slightly increase water
distribution rates. Staff projects the need for 8% rate increases through FY 2019, with increases
at the rate of inflation afterward.
City of Palo Alto Page 6
Table 6: Proposed/Projected Water Rate Adjustments, FY 2016 to FY 2020
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
Water Utility 12% 8% 8% 8% 3%
Estimated Bill Impact ($/mo)* $8.15 $6.37 $6.79 $7.24 $2.88
* estimated impact on median residential water bill, which is currently $67.35.
Table 7 shows the proposed and projected rate adjustments in the context of the other
proposed and projected utility rates.
Table 7: Rate Adjustments, All Utilities, FY 2016 Proposed, FY 2017 to FY 2020 Projected
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
Electric 0% 6% 6% 1% 1%
Gas1 0% 7% 4% 4% 4%
Wastewater 9% 9% 9% 9% 6%
Water 12% 8% 8% 8% 3%
Refuse2 9% 9% 8% 2% to 3% 2% to 3%
Storm Drain3 2.7% 2% to 3% 2% to 3% 2% to 3% 2% to 3%
Total Bill
Change4
(%) 6% 8% 7% 5% 3%
($/mo) $14.73 $18.91 $18.53 $14.39 $9.55
(1) Gas rate changes are shown with commodity rates held constant. Actual gas commodity rates will vary monthly
with wholesale market fluctuations
(2) No forecast available past FY 2018, inflationary increases assumed.
(3) Storm Drain Rates increase annually by CPI; existing rates sunset in June 2017 unless reauthorized by a majority
vote of property owners.
(4) Change in estimated median residential bill, $230.76 as of June 30, 2014
The main driver for the increase in the water utility’s costs (and therefore rates) over the next
several years is the cost of water. Wholesale water costs are projected to rise 30% in FY 2016
and 9% per year in FY 2019 and FY 2020 as the SFPUC issues debt to finance the SFPUC’s Water
System Improvement Program (WSIP) (no substantial changes are projected in FY 2017 and FY
2018). The City will also see a $1 million increase in operating costs for a capital lease for
emergency generators for wells and pump stations. Aside from that, the City’s operating and
CIP costs are projected to rise roughly 2% to 4% annually over that time. The Water Utility
Financial Plan assumes the current drought ends in early 2016, but includes projections for
alternate scenarios under which the drought extends for an additional one or two years.
Last year, staff discussed uncertainty in the forecasts of capital costs for the water utility in
coming years. Water main replacement costs have risen substantially in recent years, and it is
possible higher CIP expenditures will be required in the future. The Financial Plan includes rate
projections for an alternate scenario in which higher CIP spending is required. Staff is in the
process of completing a master plan for the water distribution system, and expects better
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information about future main replacement costs when that plan is completed. It is currently
expected to be completed in May 2015.
Commission Review and Recommendation
The UAC reviewed this proposal at its March 4, 2015 meeting. Staff noted at that meeting that
the March 4, 2015 proposal incorporated comments made by the UAC at its February 4, 2015
meeting regarding customer consumption levels after the drought ends. Staff also noted that
the rate projection had changed since the February 4, 2015 meeting as a result of updated
wholesale water rate projections from the SFPUC. The UAC approved the proposal unanimously
with minimal discussion. One Commissioner acknowledged the fact that staff had incorporated
UAC comments, and another asked about rate design and the balance of fixed versus
volumetric charges. Staff noted that the best time to discuss the appropriate level for fixed
charges was at the next cost of service study.
The draft minutes from the UAC’s March 4, 2015 meeting are provided as Attachment F.
Timeline
Assuming the Finance Committee supports staff’s recommendation, notification of the rate
increases will be sent to customers as required by Article XIIID of the California Constitution
(added by Proposition 218). The Financial Plans and rate schedules will then go to the City
Council with the FY 2016 budget for adoption, at which time a public hearing will be held. All
residents and other interested persons may submit written or oral testimony at the hearing,
and may also submit written protests to any or all of the proposed rate increases. Council may
adopt the proposed rates unless written protests are filed by a majority of the affected
customers.
Resource Impact
Normal year sales revenues for the Water Utility are projected to increase by roughly 12% ($3.7
million) as a result of these rate increases. The entire revenue increase will be offset by a $4.4
million increase in wholesale water supply costs. See the attached Financial Plans for a more
comprehensive overview of projected cost and revenue changes for the next five years.
Policy Implications
The attached Financial Plan includes amended Reserve Management Practices that will modify
Council policy with respect to the structure of the financial reserves Water Utility. These
Reserve Management Practices replace the current Reserve Management Practices, which
were last updated by Council in June 2014 (Resolution 9423).
Environmental Review
The Finance Committee’s review and recommendation to Council on these Financial Plans and
rate adjustments does not meet the California Environmental Quality Act’s definition of a
project, pursuant to Public Resources Code Section 21065, thus no environmental review is
required.
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Attachments:
Attachment A: Resolution Approving Water Financial Plan and Amending the Water
Utility Reserves Management Practices (PDF)
Attachment B: Proposed Amendments to Water Utility Reserves Management Practices
(PDF)
Attachment C: FY 2016 Water Utility Financial Plan (PDF)
Attachment D: Resolution of the Council of the City of Palo Alto Adopting a Water Rate
Increase and Amending Rate Schedules W-1, W-2, W-3, W-4, and W-7 (PDF)
Attachment E: Proposed Amendments to Rate Schedules W-1, W-2, W-3, W-4, and W-7
(PDF)
Attachment F: Excerpted Draft UAC Minutes of the March 4, 2015 (PDF)
Attachment A
* NOT YET APPROVED *
150220 mf 6053256 1
Resolution No. ____
Resolution of the Council of the City of Palo Alto Approving the
FY 2016 Water Utility Financial Plan and Amending the Water Utility
Reserves Management Practices
R E C I T A L S
A. Each year the City of Palo Alto (“City”) regularly assesses the financial position of
its utilities with the goal of ensuring adequate revenue to fund operations. This includes
making long-term projections of market conditions, the physical condition of the system, and
other factors that could affect utility costs, and setting rates adequate to recover these costs. It
does this with the goal of providing safe, reliable, and sustainable utility services at competitive
rates. The City adopts Financial Plans to summarize these projections.
B. The City uses reserves to protect against contingencies and to manage other
aspects of its operations, and regularly assesses the adequacy of these reserves and the
management practices governing their operation. The status of utility reserves and their
management practices are included in Reserves Management Practices attached to and made
part of the Financial Plans.
C. The City intends to make changes to its Water Utility Reserves Management
Practices to amend the purpose and management practices of the Water Utility’s Capital
Improvement Program (CIP) Reserve.
The Council of the City of Palo Alto RESOLVES, as follows:
SECTION 1. The Council hereby approves FY 2016 Water Utility Financial Plan,
including the amended Water Utility Reserves Management Practices. These Reserves
Management Practices replace the Reserves Management Practices previously approved for
the Water Utility as part of the FY 2015 Water Utility Financial Plan (Resolution 9423).
SECTION 2. The Council hereby approves the transfer of $2 million in FY 2015 from
the CIP Reserve to the Operations Reserve, the transfer of all funds released from the
Reappropriations Reserve at the end of FY 2015 to the CIP Reserve, the transfer of $5.5 million
from the Rate Stabilization Reserve to the Operations Reserve, and the exceedance of the
maximum CIP Reserve guidelines through the end of FY 2017, as described in the FY 2016
Water Utility Financial Plan approved via this resolution.
//
//
//
Attachment A
* NOT YET APPROVED *
150220 mf 6053256 2
SECTION 3. The Council finds that the adoption of this resolution does not meet the
California Environmental Quality Act’s (CEQA) definition of a project under Public Resources
Code Section 21065, and therefore, no environmental assessment is required.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
___________________________ ___________________________
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
___________________________ ___________________________
Senior Deputy City Attorney City Manager
___________________________
Director of Utilities
___________________________
Director of Administrative Services
DRAFT Proposed Amendments to Water Utility Reserves Management Practices
APPENDIX AC: WATER UTILITY RESERVES MANAGEMENT PRACTICES
The following reserves management practices shall be used when developing the Water Utility
Financial Plan:
Section 1. Definitions
a)“Financial Planning Period” – The Financial Planning Period is the range of future fiscal
years covered by the Financial Plan. For example, for the Water Utility Financial Plan
delivered in conjunction with the FY 2015 budget, FY 2015 to FY 2021 is the Financial
Planning Period.
b)“Fund Balance” – As used in these Reserves Management Practices, Fund Balance refers
to the Utility’s Unrestricted Net Assets.
c)“Net Assets” - The Government Accounting Standards Board defines a Utility’s Net
Assets as the difference between its assets and liabilities.
d)“Unrestricted Net Assets” - The portion of the Utility’s Net Assets not invested in capital
assets (net of related debt) or restricted for debt service or other restricted purposes.
Section 2. Reserves
The Water Utility’s Fund Balance is reserved for the following purposes:
a)For existing contracts, as described in Section 3 (Reserve for Commitments)
b)For operating and capital budgets re-appropriated from previous years, as described in
Section 4 (Reserve for Re-appropriations)
c)For future year expenditure on the Water Utility’scash flow management and
contingencies related to the Water Utility’s Capital Improvement Program (CIP), as
described in Section 5 (CIP Reserve)
d)For rate stabilization, as described in Section 6 (Rate Stabilization Reserve)
e)For operating contingencies, as described in Section 7 (Operations Reserve)
f)Any funds not included in the other reserves will be considered Unassigned Reserves
and shall be returned to ratepayers or assigned a specific purpose as described in
Section 8 (Unassigned Reserves).
Section 3. Reserve for Commitments
At the end of each fiscal year the Reserve for Commitments will be set to an amount equal
to the total remaining spending authority for all contracts in force for the Water Utility at
that time.
Section 4. Reserve for Re-appropriations
At the end of each fiscal year the Reserve for Re-appropriations will be set to an amount
equal to the amount of all remaining capital and non-capital budgets, if any, that will be re-
appropriated to the following fiscal year in accordance with Palo Alto Municipal Code
Section 2.28.090.
ATTACHMENT B
DRAFT Proposed Amendments to Water Utility Reserves Management Practices
Section 5. CIP Reserve
Funds may be added to or withdrawn from the CIP Reserve by action of the City Council and
held for future year expenditure on the Water Utility’s CIP Program. If there are funds in the
CIP Reserve at the end of any fiscal year, any subsequent Water Utility Financial Plan must
result in the withdrawal of all funds from this Reserve by the end of the next Financial
Planning Period.
The CIP Reserve is used to manage cash flow for capital projects and acts as a reserve for
capital contingencies. Staff will manage the CIP Reserve according to the following
practices:
a) The following guideline levels are set forth for the CIP Reserve. These guideline levels
are calculated for each fiscal year of the Financial Planning Period based on the levels of
CIP expense budgeted for that year.
Minimum Level 12 months of budgeted CIP expense
Maximum Level 24 months of budgeted CIP expense
b) Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and
the Reserve for Commitments when funds are added to or removed from the Reserve
for Commitments as a result of a change in contractual commitments related to CIP
projects. Any other additions to or withdrawals from the CIP reserve require Council
action.
c) Minimum Level:
i) Funds held in the Reserve for Commitments may be counted as part of the CIP
Reserve for the purpose of determining compliance with the CIP Reserve minimum
guideline level.
ii) If, at the end of any fiscal year, the minimum guideline is not met, staff shall present
a plan to the City Council to replenish the reserve. The plan shall be delivered by the
end of the following fiscal year, and shall, at a minimum, result in the reserve
reaching its minimum level by the end of the next fiscal year. For example, if the CIP
Reserve is below its minimum level at the end of FY 2017, staff must present a plan
by June 30, 2018 to return the reserve to its minimum level by June 30, 2019. In
addition, staff may present, and the Council may adopt, an alternative plan that
takes longer than one year to replenish the reserve, or that does so in a shorter
period of time.
d) Maximum Level: If, at any time, the CIP Reserve reaches its maximum level, no funds
may be added to this reserve. If there are funds in this reserve in excess of the
maximum level staff must propose to transfer these funds to another reserve or return
them to ratepayers in the next Financial Plan. Staff may also seek City Council to
approve holding funds in this reserve in excess of the maximum level if they are held for
a specific future purpose related to the CIP.
DRAFT Proposed Amendments to Water Utility Reserves Management Practices
Section 6. Rate Stabilization Reserve
Funds may be added to the Rate Stabilization Reserve by action of the City Council and
held to manage the trajectory of future year rate increases. Withdrawal of funds from
the Rate Stabilization Reserve requires Council action. If there are funds in the Rate
Stabilization Reserve at the end of any fiscal year, any subsequent Water Utility
Financial Plan must result in the withdrawal of all funds from this Reserve by the end of
the next Financial Planning Period.
Section 7. Operations Reserve
The Operations Reserve is used to manage normal variations in costs and as a reserve for
contingencies. Any portion of the Water Utility’s Fund Balance not included in the reserves
described in Section 3-Section 6 above will be included in the Operations Reserve unless this
reserve has reached its maximum level as set forth in Section 7(d) below. Staff will manage
the Operations Reserve according to the following practices:
a) The following guideline levels are set forth for the Operations Reserve. These guideline
levels are calculated for each fiscal year of the Financial Planning Period based on the
levels of Operations and Maintenance (O&M) and commodity expense forecasted for
that year in the Financial Plan.
Minimum Level 60 days of O&M and commodity expense
Target Level 90 days of O&M and commodity expense
Maximum Level 120 days of O&M and commodity expense
b) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Operations
Reserve are lower than the minimum level set forth above, staff shall present a plan to
the City Council to replenish the reserve. The plan shall be delivered within six months
of the end of the fiscal year, and shall, at a minimum, result in the reserve reaching its
minimum level by the end of the following fiscal year. For example, if the Operations
Reserve is below its minimum level at the end of FY 2014, staff must present a plan by
December 31, 2014 to return the reserve to its minimum level by June 30, 2015. In
addition, staff may present, and the Council may adopt, an alternative plan that takes
longer than one year to replenish the reserve.
c) Target Level: If, at the end of any fiscal year, the Operations Reserve is higher or lower
than the target level, any Financial Plan created for the Water Utility shall be designed
to return the Operations Reserve to its target level within four years.
d) Maximum Level: If, at any time, the Operations Reserve reaches its maximum level, no
funds may be added to this reserve. Any further increase in the Water Utility’s Fund
Balance shall be automatically included in the Unassigned Reserve described in Section
8, below.
Section 8. Unassigned Reserve
If the Operations Reserve reaches its maximum level, any further additions to the Water
Utility’s Fund Balance will be held in the Unassigned Reserve. If there are any funds in the
Unassigned Reserve at the end of any fiscal year, the next Financial Plan presented to the
DRAFT Proposed Amendments to Water Utility Reserves Management Practices
City Council must include a plan to assign them to a specific purpose or return them to the
Water Utility ratepayers by the end of the first fiscal year of the next Financial Planning
Period. For example, if there were funds in the Unassigned Reserves at the end of FY 2015,
and the next Financial Planning Period is FY 2016 through FY 2021, the Financial Plan shall
include a plan to return or assign any funds in the Unassigned Reserve by the end of
FY 2016. Staff may present an alternative plan that retains these funds or returns them over
a longer period of time.
WATER UTILITY
FINANCIAL PLAN
FY 2016 TO FY 2023
CONTENTS
Section 1: Definitions and Abbreviations ............................................................................................................... 2
Section 2: Introduction .......................................................................................................................................... 2
Section 3: Executive Summary and Recommendations .......................................................................................... 2
Section 3A: Overview of Financial Position ................................................................................................................ 2
Section 3B: Summary of Proposed Actions ................................................................................................................ 3
Section 4: Detail of FY 2016 Rate and Reserves Proposals ...................................................................................... 4
Section 4A: Current and Proposed Rates ................................................................................................................... 4
Section 4B: Bill Impact of Proposed Rate Changes .................................................................................................... 5
Section 4C: Reserves Management Practices, Proposed Change .............................................................................. 6
Section 4D: Proposed Reserve Transfers .................................................................................................................... 8
Section 5: Utility Overview .................................................................................................................................... 8
Section 5A: Water Utility History ............................................................................................................................... 8
Section 5B: Customer Base ........................................................................................................................................ 9
Section 5C: Distribution System ................................................................................................................................. 9
Section 5D: Cost Structure and Revenue Sources..................................................................................................... 10
Section 5E: Reserves Structure ................................................................................................................................. 10
Section 5F: Competitiveness .................................................................................................................................... 11
Section 6: Utility Financial Projections ................................................................................................................. 12
Section 6A: Load Forecast ........................................................................................................................................ 12
Section 6B: FY 2009 to FY 2014 Cost and Revenue Trends ....................................................................................... 14
Section 6C: FY 2014 Results ..................................................................................................................................... 15
Section 6D: FY 2015 Projections ............................................................................................................................... 16
Section 6E: FY 2016 – FY 2023 Projections ............................................................................................................... 16
Section 6F: Risk Assessment and Reserves Adequacy .............................................................................................. 18
Section 6G: Alternate Scenarios ............................................................................................................................... 19
Section 6H: Long-Term Outlook ............................................................................................................................... 20
Section 7: Details and Assumptions ..................................................................................................................... 21
Section 7A: Water Purchase Costs ........................................................................................................................... 21
Section 7B: Operations............................................................................................................................................. 22
Section 7C: Capital Improvement Program (CIP) ..................................................................................................... 24
Section 7D: Debt Service .......................................................................................................................................... 26
Section 7E: Other Revenues ..................................................................................................................................... 26
Section 7F: Sales Revenues ...................................................................................................................................... 27
Section 8: Communications Plan .......................................................................................................................... 27
Appendices .......................................................................................................................................................... 28
Appendix A: Water Utility Financial Forecast Detail ................................................................................................ 29
Appendix B: Water Utility Capital Improvement Program (CIP) Detail .................................................................... 33
Appendix C: Water Utility Reserves Management Practices ................................................................................... 35
Appendix D: Rate Design.......................................................................................................................................... 36
Appendix E: Water Utility Debt Service Details ........................................................................................................ 37
Appendix G: Description of Water Utility Operational Activities ............................................................................. 39
Appendix H: Sample of Water Utility Outreach Communications ........................................................................... 40
ATTACHMENT C
WATER UTILITY FINANCIAL PLAN
J u n e 1 6 , 2 0 1 4 2 | P a g e
SECTION 1: DEFINITIONS AND ABBREVIATIONS
BAWSCA: Bay Area Water Supply and Conservation Agency
CCF: one hundred cubic feet, the standard unit of measurement for water delivered to water
customers. Equal to roughly 748 gallons.
CIP: Capital Improvement Program
CPAU: City of Palo Alto Utilities Department
O&M: Operations and Maintenance
SFPUC: San Francisco Public Utilities Commission
SFWD: San Francisco Water Department
WSIP: the SFPUC’s Water System Improvement Program to seismically strengthen the
transmission lines of the Hetch Hetchy regional water system.
SECTION 2: INTRODUCTION
This document presents a Financial Plan for the City’s Water Utility for the next eight years. This
Financial Plan provides revenues to cover the costs of operating the utility safely over that time
while adequately investing for the future. It also addresses the financial risks facing the utility
over the short term and long term, and includes measures to mitigate and manage those risks.
SECTION 3: EXECUTIVE SUMMARY AND RECOMMENDATIONS
SECTION 3A: OVERVIEW OF FINANCIAL POSITION
By FY 2020, costs for the Water Utility will increase 30% over FY 2015 levels, as shown in Table
1. Most of increase from FY 2015 to FY 2020 is related to the cost of water supplied by the San
Francisco Public Utilities Commission (SFPUC), which is rising 50% in that time due to the
issuance of long term debt to finance major seismic improvements to the Hetch Hetchy
transmission system. The cost of replacing the water mains in the City’s water distribution
system has also increased substantially from the low costs seen during the recent recession.
Staff projects only inflationary increases to most other costs over the forecast period.
Table 1: Expenses for FY 2014 to FY 2023
Expenses
($000)
FY 2014
(actual)
FY 2015
(est.)
FY
2016
FY
2017
FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
Water
Purchases 15,705 16,013 20,451 20,498 20,225 22,764 24,080 22,922 23,013 24,123
Operations 15,730 16,386 17,279 17,727 18,199 18,677 19,174 19,630 20,062 20,508
Capital Projects 8,336 8,554 8,724 9,089 9,099 9,388 9,666 9,951 10,245 10,548
TOTAL 39,771 41,478 46,193 46,903 49,430 52,136 53,801 53,170 53,977 55,249
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To cover these increases in costs, revenues (and therefore rates) need to increase over the next
several years to balance costs and revenues, as shown in Table 2. This rate trajectory assumes
that the drought continues through 2015 and that consumption does not return to its pre-
drought levels. Because of reductions in consumption, customers who conserve will see lower
bill increases than what is shown in Table 2. Projected average residential bill increases are
shown in Appendix A (Water Utility Financial Forecast Detail).
Table 2: Projected Water Rate Trajectory for FY 2016 to FY 2023
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
12% 8% 8% 8% 3% 1% 2% 3%
The Water Utility has Rate Stabilization Reserves that can be used to spread these increases
over several years. This Financial Plan projects that these reserves will be exhausted by the end
of FY 2020. The utility also has a Capital Improvement Program (CIP) Reserve that can be used
to offset one-time unanticipated capital costs. This Financial Plan assumes that the CIP Reserve
will be used for unanticipated capital expenses or returned to the Operations Reserve by the
end of FY 2017. At that point the Emergency Water Supply and Storage Project and the Water
System Master Plan will have been completed, so capital costs will be known with more
certainty. Table 3 shows the projected reserve transfers over the forecast period.
Table 3: Transfers To/(From) Reserves for FY 2016 to FY 2023 ($000)
Reserve FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
Capital
Improvement - (4,000) - - - - - -
Rate
Stabilization (5,500) 0 (567) - (500) - - -
Operations 5,500 4,000 567 - 500 - - -
SECTION 3B: SUMMARY OF PROPOSED ACTIONS
Staff proposes the following actions for the Water Utility in FY 2015:
1. Transfer $2 million from the CIP Reserve to the Operations Reserve in FY 2015 due to
higher than projected expenses for the seismic strengthening of reservoirs and turnouts.
See Section 4D (Proposed Reserve Transfers) for more details.
Staff proposes the following actions for the Water Utility in FY 2016:
1. Increase rates as shown in Section 4A (Current and Proposed Rates). These changes are
projected to increase the system average rate by roughly 12%.
2. Take the following measures with respect to the CIP Reserve (see Section 4C (Reserves
Management Practices, Proposed Change) for more details):
a. Amend the Reserves Management Practices to modify the purpose of the CIP
Reserve to enable it to act as a cash flow and contingency reserve for capital
investment projects.
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b. Transfer all funds released from the Reappropriations Reserve at the beginning
of FY 2016 to the CIP Reserve.
c. Request Council approval to exceed the proposed maximum CIP Reserve
guidelines through the end of FY 2017.
3. Transfer $5.5 million from the Rate Stabilization Reserve to the Operations Reserve. See
Section 4D (Proposed Reserve Transfers) for more details.
SECTION 4: DETAIL OF FY 2016 RATE AND RESERVES PROPOSALS
SECTION 4A: CURRENT AND PROPOSED RATES
The current rates were adopted July 1, 2013, when CPAU increased water rates by 7%. CPAU
has five rate schedules: one for separately metered residents (W-1), one for commercial and
master-metered multi-family residential customers (W-4), and specific schedules for irrigation-
only services (W-7), services to fire sprinkler systems in buildings and private hydrants (W-3),
and for service to fire hydrant rental meters used for construction (W-2). All customers pay a
monthly service charge, based on the size of their inlet meter. This charge represents meter
reading, billing, and other customer service costs, but also the cost of maintaining the capability
to deliver a peak flow for that customer corresponding to their meter size. All customers are
also charged for each CCF (one hundred cubic feet) of water used. Separately metered
residential customers are charged on a tiered basis, with the first 0.2 CCF per day (6 CCF for a
30 day billing period) charged a base price per CCF, and all additional units charged a higher
price per CCF. Commercial customers pay a uniform price for each CCF used, and a higher price
for separately metered irrigation service.
Table 4 shows the current and proposed monthly service charges for all rate schedules. Table 5
shows the consumption charges. The basis for calculating these charges is staff’s annual
assessment of the water utility’s financial position, as well as the cost of service methodology
from the 2012 Palo Alto Water Cost of Service & Rate Study by Raftelis Financial Consultants.
Table 4: Current and Proposed Monthly Service Charge
Meter
Size
Monthly Service Charge
($/month based on meter size) Change
Current (7/1/13) Proposed (7/1/15) $/mo %
5/8” 14.67 $16.01 $1.34 9%
3/4” 19.51 $21.48 $1.97 10%
1” 29.18 $32.42 $3.24 11%
1 ½” 53.37 $59.77 $6.40 12%
2” 82.39 $92.60 $10.21 12%
3” 174.29 $196.54 $22.25 13%
4” 309.72 $349.71 $39.99 13%
6” 633.80 $716.24 $82.44 13%
8” 1,165.86 $1,318.01 $152.15 13%
10” 1,843.02 $2,083.89 $240.87 13%
12” 2,423.45 $2,740.37 $316.92 13%
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SECTION 4B: BILL IMPACT OF PROPOSED RATE CHANGES
Table 7 shows the impact of the proposed July 1, 2015 rate changes on the median residential
bill. This comparison assumes that customers do not decrease consumption. Historically,
however, customers have looked for ways to conserve after their bills have increased, so not all
customers will experience the same bill increase. The average increase is roughly 12%, but
some customers with very low bills may see slightly higher increases due to slight changes in
the composition of the utility’s costs and how that affects the first tier and fixed charges under
the cost of service methodology.
Table 6: Water Consumption Charges (Current and Proposed)
Current Rates
(7/1/13)
Proposed Rates
(7/1/15)
Change
$/CCF %
W-1 (Residential) Volumetric Rates ($/CCF)
Tier 1 Rates 4.99 5.70 $0.71 14%
Tier 2 Rates 7.58 8.38 $0.80 11%
W-2 (Construction) Volumetric Rates ($/CCF)
Uniform Rate 6.15 6.97 $0.82 13%
W-4 (Commercial) Volumetric Rates ($/CCF)
Uniform Rate 6.15 6.97 $0.82 13%
W-7 (Irrigation) Volumetric Rates ($/CCF)
Uniform Rate 7.52 8.46 $0.94 13%
Table 5: Current and Proposed Monthly Fire Service Charges
Meter
Size
Monthly Fire Service Charge
($/month based on meter size) Change
Current (7/1/13) Proposed (7/1/15) $/mo %
2” $3.03 $3.43 $0.40 13%
4” $18.78 $21.21 $2.43 13%
6” $54.55 $61.60 $7.05 13%
8” $116.24 $131.28 $15.04 13%
10” $209.03 $236.09 $27.06 13%
12” $337.65 $381.35 $43.70 13%
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Table 7: Impact of Proposed Water Rate Changes on Residential Bills
Usage
(CCF/month)
Bill under
Existing Rates
Bill under
Proposed
Rates (7/1/15)
Change
$/mo. %
4 34.63 38.81 4.18 12%
(Winter median) 7 52.19 58.59 6.40 12%
(Annual median) 9 67.35 75.35 8.00 12%
(Summer median) 14 105.25 117.24 11.99 11%
25 188.63 209.40 20.77 11%
Table 8 shows the impact of the proposed July 1, 2015 rate changes on various representative
commercial customer bills. As with residents, this comparison assumes that customers do not
decrease consumption.
Table 8: Impact of Proposed Water Rate Changes on Commercial Bills
Usage
(CCF/month)
Bill under
Current
Rates
Bill under
Proposed
Rates (7/1/15)
Change
$/mo. %
Commercial (W-4) (5/8” meters)
(Annual median) 12 88.47 99.65 11.18 13%
(Annual average) 64 408.27 462.09 53.82 13%
Irrigation (W-7) (1 ½” meters)
(Winter median) 9 121 136 15 13%
(Summer median) 37 332 373 41 12%
(Winter average) 56 474 534 59 12%
(Summer average) 199 1,550 1743 193 12%
SECTION 4C: RESERVES MANAGEMENT PRACTICES, PROPOSED CHANGE
Staff is proposing one change to the Water Utility Reserves Management Practices (Appendix C)
in this Financial Plan. Staff recommends changing the CIP Reserve definition and management
practices so that it becomes a cash flow and contingency reserve for CIP projects. Currently
these purposes are served by a combination of the Operations and Reappropriations Reserves,
while the CIP Reserve acts as a sinking fund to accumulate funds for large one-time future CIP
expenditures (which are rare). The City is changing its budgeting practices starting with FY 2016,
and will no longer reappropriate CIP budgets each year. Instead, CIP budgets for long-term or
ongoing projects will be renewed each year through the annual budget process. This means
that the funds in the Reappropriations Reserve ($10.4 million as of June 30, 2014) will be
released after June 30, 2015. These funds acted as a cash flow reserve for CIP projects, and
some or all of it should be retained for that purpose. Staff proposes to retain these funds in the
CIP reserve, and the proposed changes to the Reserves Management Practices will enable CPAU
to do that.
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Staff proposes to initially set a minimum and maximum guideline for the CIP reserve that will
enable it to hold similar amounts to what has typically been held in the Reappropriations
Reserve. Staff then intends to review capital reserve management practices at other agencies
and revisit these guideline levels. Initially, staff proposes a minimum guideline level of 12
months of CIP expenditures. CIP-related funds in the Commitments Reserve would be allowed
to count toward that guideline. The CIP-related funds in the Commitments Reserve are equal to
the total remaining balance of all CIP contracts currently in progress, and these funds should be
taken into account when determining whether CIP cash flow and contingency reserves are
adequate. The initial maximum guideline level would be 24 months of CIP expenditures, but the
maximum guideline could be exceeded with Council approval.
Figure 1 shows the Reappropriations Reserve level as of June 30, 2014, as well as the CIP
portion of the Reserve for Commitments. The proposed minimum and maximum guidelines
over the forecast period are also shown. The total funds held for CIP cash flow and
contingencies exceed the maximum guidelines in the short term because of the $4 million
already in the CIP reserve. Staff recommends holding that $4 million in the CIP Reserve until the
end of FY 2017 for unanticipated CIP expenditures associated with seismic upgrades to various
reservoirs. At that point, any funds remaining of that $4 million would be returned to the
Operations Reserve.
Figure 1: Capital Reserve
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SECTION 4D: PROPOSED RESERVE TRANSFERS
In the FY 2015 Financial Plan several transfers between reserves were approved. Funds were
transferred out of the Emergency Plant Replacement and Rate Stabilization Reserve into the
newly-created CIP and Operations Reserves. These transfers were mainly related to setting up
the new approved reserves structure. Now, in addition to these previously approved transfers,
staff recommends an additional transfer for FY 2015. The final design for the seismic
strengthening and recoating of some of the reservoirs identified some additional work that may
need to be done at a cost of roughly $2 million. As a result, staff proposes a transfer of $2
million from the CIP Reserve, leaving it with $4 million remaining at the end of FY 2015.
For FY 2016, staff proposes a $5.5 million transfer from the Rate Stabilization Reserve. This
transfer is included in the financial projections in this Financial Plan. It will enable CPAU to
maintain adequate Operations Reserve levels while moderating the pace of increase in water
rates. In addition, staff is proposing transfers from the Reappropriations Reserve to the CIP
Reserve as described in the previous section. The impact of these transfers on reserves levels
can be seen in Figure 7 and Appendix A (Water Utility Financial Forecast Detail).
SECTION 5: UTILITY OVERVIEW
This section provides an overview of the utility and its operations. It is intended as general
background information to help readers better understand the forecasts in Sections 6 and 7.
SECTION 5A: WATER UTILITY HISTORY
The Water Utility was established on May 9, 1896, two years after the city was incorporated.
Voters of the 750 person community approved a $40,000 bond to buy local, private water
companies who operated one or more shallow wells to serve the nearby residents. The city
grew and the well system expanded until nine wells were in operation in 1932. Palo Alto began
receiving water from the San Francisco Water Department (SFWD) in 1937 to supplement these
sources.
A 1950 engineering report noted, “the capricious alternation of well waters and the San
Francisco Water Department water… has made satisfactory service to the average customer
practically impossible”. By 1950, only eight wells were still in operation. Despite this,
groundwater production increased in the 1950’s leading to lower groundwater tables and water
quality concerns. In 1962, a survey of water softening costs to CPAU customers determined that
CPAU should purchase 100% of its water supply needs from the SFWD. A 20-year contract was
signed with San Francisco, and CPAU’s wells were placed in standby condition. The SFWD later
became known as the SFPUC. Since 1962 (except for some very short periods) CPAU’s entire
supply of potable water has come from the SFPUC.
As the city grew, so did the number of mains in the water system. The system of mains
expanded along with the town, while existing sections of the system continued to age. In the
mid-1980s, the number of breaks in cast iron mains installed during the 1940s and earlier
started to accelerate. In FY 1994, to combat deterioration of older sections of the system, an
analysis of cost effective system improvements was performed and the rate of main
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replacement was increased from one mile per year to three. A plan to replace 75 miles of
deficient mains within 25 years was begun.
In 1999, a study of system reliability concluded that major upgrades were needed to the
distribution system to provide adequate water supply during a natural disaster. This ultimately
resulted in the $40 million Emergency Water Supply and Storage Project, still underway, which
involved a new underground reservoir in El Camino Park, the siting and construction of several
emergency supply wells, and the upgrade of several existing wells and the Mayfield pump
station.
At the same time that CPAU was evaluating the reliability of its own system, the SFPUC, in
consultation with BAWSCA members, was evaluating the reliability of the Hetch Hetchy water
system, which crosses two major fault lines between the Sierras and the Bay Area. That
evaluation concluded that major upgrades to the system were required. This planning process
culminated in the SFPUC’s $4.6 billion Water System Improvement Project (WSIP), which is
ongoing.
SECTION 5B: CUSTOMER BASE
CPAU’s Water Utility provides water service to the residents and businesses of Palo Alto, plus a
handful of residential customers not in Palo Alto (Los Altos Hills, primarily). Nearly 20,300
customers are connected to the water system, approximately 16,500 (81%) of which are
separately metered residential customers and 3,800 (19%) of which are commercial, master-
metered residential, irrigation and fire service customers.
Customers use water for drinking, cooking, bathing, cleaning, irrigation, and other commercial
use. Judging from seasonal consumption patterns, between 35% and 50% of Palo Alto’s water is
used for irrigation, and that consumption is heavily weather dependent. It also varies
significantly by season. As a result of these two factors, there is significant variability in the
amount of water that is demanded from the system month to month and year to year.
SECTION 5C: DISTRIBUTION SYSTEM
To deliver water to its customers, the utility owns roughly 233 miles of mains (which transport
the water from the SFPUC meters at the city’s borders to the customer’s service laterals and
meters), eight wells (to be used in emergencies), five water storage reservoirs (also for
emergency purposes) and several tanks used to moderate pressure and deal with peaks in flow
and demand (due to fire suppression, heavy usage times, etc.). These represent the vast
majority of the infrastructure used to distribute water in Palo Alto.
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Figure 2: Cost Structure (FY 2014)
Figure 3: Revenue Structure (FY 2014)
SECTION 5D: COST STRUCTURE AND REVENUE SOURCES
As shown in Figure 2, water purchase
costs accounted for roughly 40% of the
Water Utility’s costs in FY 2014.
Operational costs also represented
roughly 40%, and capital investment was
responsible for the remaining 21%.
Water purchase costs are projected to
rise to roughly 46% of costs by FY 2020.
The Water Utility receives 91% of its
revenue from sales of water and the
remainder from capacity and connection
fees, interest on reserves, and other
sources. As rates increase over the next
several years, the percentage of revenue
from sales of water is expected to
increase as well. Appendix A (Water
Utility Financial Forecast Detail) shows
more detail on the utility’s cost and
revenue structures. Roughly 15% of the
utility’s revenues come from fixed service charges, though most of its costs are fixed. This is
typical for California water utilities, and conforms to the Best Management Practices (BMPs) of
the California Urban Water Conservation Council (CUWCC), a statewide conservation council of
environmental groups, state agencies, and water utilities to which the City is a signatory. One
of CUWCC’s BMPs is that a utility’s revenue from fixed service charges constitute at most 30%
of the utility’s total revenue from all charges1.
SECTION 5E: RESERVES STRUCTURE
CPAU maintains six reserves for its Water Utility to manage various types of contingencies.
These are summarized below, but see Appendix C (Water Utility Reserves Management
Practices) for more detailed definitions and guidelines for reserve management:
1 See http://www.cuwcc.org/Resources/Memorandum-of-Understanding/Exhibit-1-BMP-
Definitions-Schedules-and-Requirements/BMP-1-Utility-Operations-Programs
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Reserve for Commitments: A reserve equal to the utility’s outstanding contract
liabilities for the current fiscal year. Most City funds, including the General Fund, have a
Commitments Reserve.
Reserve for Reappropriations: A reserve for funds dedicated to projects reappropriated
by the City Council, nearly all of which are capital projects. Most City funds, including
the General Fund, have a Reappropriations Reserve. This is currently an important
reserve for all utility funds, but changes in budgeting practices will change that in future
years, as described in Section 4C (Reserves Management Practices, Proposed Change).
Capital Improvement Program (CIP) Reserve: The CIP reserve can be used to
accumulate funds for future expenditure on CIP projects and is anticipated to be empty
unless a major one-time CIP expenditure is expected in future years. This Financial Plan
proposes adding an additional purpose, making it a contingency reserve for the CIP. This
would change the way the reserve is managed, as described in Section 4C (Reserves
Management Practices, Proposed Change). This type of reserve is used in other utility
funds (Electric, Gas, and Wastewater Collection) as well.
Rate Stabilization Reserve: This reserve is intended to be empty unless one or more
large rate increases are anticipated in the forecast period. In that case, funds can be
accumulated to spread the impact of those future rate increases across multiple years.
This type of reserve is used in other utility funds (Electric, Gas, and Wastewater
Collection) as well.
Operations Reserve: This is the primary contingency reserve for the Water Utility, and is
used to manage yearly variances from budget for operational water supply costs. This
type of reserve is used in other utility funds (Electric, Gas, and Wastewater Collection)
as well.
Unassigned Reserve: This reserve is for any funds not assigned to the other reserves
and is normally empty.
SECTION 5F: COMPETITIVENESS
Table 8 shows the current water bills for residential customers compared to what they would
be under surrounding communities’ rate schedules. CPAU has the highest monthly bills of the
group, although bills for smaller water users are less than in some surrounding communities.
Table 9: Residential Monthly Water Bill Comparison
Residential monthly bill comparison ($/month) *
As of February 1, 2015
Usage
(CCF/month)
Palo
Alto
Menlo
Park
Mountain
View Hayward
Redwood
City
Santa
Clara
4 34.63 35.38 27.56 24.65 40.10 15.20
(Winter median) 7 52.19 51.10 42.74 41.49 52.43 26.60
(Annual median) 9 67.35 61.58 52.86 52.71 61.27 34.20
(Summer median) 14 105.25 89.01 78.16 82.65 87.59 53.20
25 188.63 150.02 164.22 158.14 167.12 95.00
* All comparisons using 5/8” meter size
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Table 9 shows the annual average monthly water bill for commercial customers for various
water usage levels. Redwood City is notable in that their irrigation rates are set on a budget
basis, and as such each parcel has a unique baseline value. For purposes of this comparison, the
budget was assumed to be equal to the usage amount.
SECTION 6: UTILITY FINANCIAL PROJECTIONS
SECTION 6A: LOAD FORECAST
Figure 4 shows 40 years of water consumption history. Average water use has trended
downward over time even as Palo Alto’s population has grown. Significant water use reductions
over the 40-year history were in response to requests to reduce water use in the 1976-77 and
1988-92 drought periods. During these periods, customers invested in efficient equipment and
modified behavior to achieve the water reduction goals. More recently, water sales decreased
substantially after the 2007-2009 recession and have not increased since, despite the fact that
economic activity in Palo Alto and the Bay Area has revived. The factors driving this are not
clear, but may include an increased awareness of the need for water conservation since
precipitation has been low for five of the seven years since 2007. Water use is down by similar
amounts among both commercial and residential customers. Both summertime use, which
includes irrigation, and wintertime use, which includes far less irrigation, have decreased for all
customer classes.
Table 10: Commercial Monthly Water Bill Comparison
Commercial/Multi-Family and Irrigation bill comparison ($/month)
As of February 1, 2015
Usage
(CCF/month)
Palo
Alto
Menlo
Park
Mountain
View Hayward
Redwood
City
Santa
Clara
Commercial (W-4) (5/8” meters)
(Annual median) 12 88.47 83.34 71.82 72.00 81.82 45.60
(Annual average) 64 408.27 359.77 334.94 371.00 484.96 243.20
Irrigation (W-7) (1 ½” meters)
(Winter median) 9 121 146 90 65 186 34
(Summer median) 37 332 294 232 226 391 141
(Winter average) 56 474 395 328 335 540 213
(Summer average) 199 1,550 1,156 1,051 1,158 1,666 756
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Figure 5 shows the forecast of water consumption through FY 2023. The forecast assumes that
current trends continue and sales through the forecast period decline slightly. This represents a
significant change from the prior year forecasts. Since the 2007-2009 recession, staff has
forecasted that water sales would grow as economic activity picked up, but that has not
occurred.
Palo Alto is currently experiencing drought conditions with 10% voluntary water use restrictions
in effect. The current forecast assumes current conditions continue through 2015, with the
drought ending in spring of 2016. It also assumes consumption only returns to 50% of its pre-
drought levels, which is consistent with patterns seen in prior droughts. It is highly unlikely the
state will exit the drought in 2015 given precipitation to date, but for informational purposes
Figure 5 shows the load forecast if the drought ends in 2015 and consumption returns to
normal.
Figure 4: Historical Water Consumption
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Figure 5: Forecasted Water Consumption
SECTION 6B: FY 2009 TO FY 2014 COST AND REVENUE TRENDS
The annual expenses for the water utility rose substantially between 2009 and 2014, though
the increase is difficult to discern from Figure 6 and the tables in Appendix A (Water Utility
Financial Forecast Detail) due a variety of major budget adjustments and transfers that took
place during that time. These adjustments and transfers were mainly related to the Emergency
Water Supply and Storage Project, a debt-financed project costing over $40 million. The project
involved seismically strengthening reservoirs, rehabilitating the five existing wells, drilling three
new wells, building a new reservoir at El Camino Park, and upgrading pumping stations.
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Excluding adjustments and transfers, the normal annual expenses for FY 2009 would have been
roughly $29 million. That includes $8.4 million for water purchases, $15 million for operational
expenses and debt service, and $5.5 million for capital investment. In FY 2014 normal year
annual expenses were $39 million. This was a 35% increase, or 6% per year on average from
FY 2009 to FY 2014. The increases were primarily related to water purchases and capital
investment. Water purchase costs increased from $8.4 million in FY 2009 to $15.7 million in FY
2014, an 87% increase. Average annual capital investment increased from $5.5 million to $7.5
million, primarily due to an increase in water main replacement costs. The reasons for both
increases are discussed in more detail in Sections 7C (Capital Improvement Program) and 7A
(Water Purchase Costs).
SECTION 6C: FY 2014 RESULTS
In spring of 2013, when proposing rate adjustments to be effective on July 1, 2013, staff
forecasted an $810,000 deficit for FY 2014. Results were better than forecasted, a $3.3 million
surplus. Sales revenues were higher than forecasted due to dry weather (Palo Altans were not
asked to reduce consumption until February 2014, late in the fiscal year). In addition, the SFPUC
wholesale water rate was 9% lower than forecasted, which resulted in savings despite the
higher water consumption. Revenues from connection and capacity fees were high, and there
were savings in operational budgets. These savings were partially offset by increased capital
Figure 6: Water Utility Expenses, Revenues, and Rate Changes:
Actual Costs through FY 2014 and Projections through FY 2023
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investment costs associated with water main replacement. Table 11 summarizes the variances
from forecast.
Table 11: FY 2014, Actual Results vs. 2013 Forecast
Net Cost/
(Benefit)
Type of
change
Savings in Operations budgets ($1,576,000) Cost savings
Sales volumes were 5% higher than forecasted ($2,227,000) Revenue increase
SFPUC rate was 9% lower than projected (partially
offset by purchase volumes that were 5% higher)
($648,000) Cost savings
Other revenues (interest income, capacity fees)
were higher than forecasted
($1,590,000) Revenue increase
Transfers out were lower than forecasted ($1,219,000) Cost savings
Capital project costs higher than projected $3,135,000 Cost increase
Net Cost / (Benefit) of Variances ($4,125,000)
SECTION 6D: FY 2015 PROJECTIONS
In spring of 2014, when preparing the financial forecast, staff forecasted a $3.1 million deficit
for FY 2015. Staff’s current forecast is for a deficit of about $3.7 million. In 2014, staff projected
lower revenues for FY 2015 due to the drought, but revenues are now projected to be even
lower. In addition, the SFPUC wholesale water rate was 5% lower than forecasted, which
resulted in additional savings. And although staff projected higher revenues from connection
and capacity fees, these have been even higher than staff’s projections. Lastly, there were
savings in operational budgets. These savings will be offset by increased capital investment
costs associated with seismic strengthening and re-coating of the reservoirs. Table 12
summarizes the changes from last year’s forecast.
Table 12: FY 2015 Change in Projected Results, 2014 Forecast vs 2015 Forecast
Net Cost/
(Benefit)
Type of
change
Savings in Operations budgets ($925,000) Cost savings
SFPUC rate 5% lower than projected ($1,170,000) Cost savings
Higher misc. revenues (interest income, fees) ($450,000) Revenue increase
lower sales revenue $260,000 Revenue decrease
Capital project costs higher than projected $2,406,000 Cost increase
Other changes in costs/revenue $485,000 Various
Net Cost / (Benefit) of Variances $606,000
SECTION 6E: FY 2016 – FY 2023 PROJECTIONS
As can be seen in Figure 6 above, costs for the Water Utility are projected to increase by $5.5
million (14%) in FY 2016, then another $2-3 million (6%) in both FY 2019 and FY 2020, but at
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only 1-3% per year in subsequent years. As discussed earlier, water supply costs are the main
reason for the cost increases. Water supply costs are projected to increase by 30% in FY 2016
and 9% per year on average in FY 2019 and FY 2020. Operations costs will increase by $1 million
in FY 2016 for emergency generator leasing and maintenance, but will otherwise roughly match
inflation through the forecast period. Capital investment costs are also expected to increase at
only an inflationary rate, though there is still uncertainty with regard to the utility’s future costs
for main replacement. See Section 7 (Details and Assumptions) for more detail on the costs that
make up these projections, as well as the various assumptions underlying the projections.
Revenues will have to increase at more than 8% per year on average through FY 2019 to keep
up with these cost increases, even with the use of rate stabilization reserves to spread the
increases over multiple years. Costs have already increased substantially over the last few
years, and revenues have not kept pace. Sales revenues were adequate in FY 2014 due to lower
than average CIP expenditures in that year, but starting in FY 2015 the utility will begin to see
deficits. To close this gap, revenues need to increase by 12% in FY 2016, then 8% per year
through FY 2019, then increase at a slower pace after that. To moderate the pace of increase in
the water rates, the utility’s Rate Stabilization Reserve will be drawn down over that period,
with most of it being used in FY 2016.
Customers who reduce consumption over the forecast period will see their bills increase at a
slower rate, and as more customers are added to the utility’s customer base, those customers
will share in paying for the utility’s fixed costs. The combination of these factors means that the
average residential bill is projected to increase at a slightly slower pace than the rates, or about
7% to 9% per year, assuming some growth in the customer base and decreases in the average
amount of water each customer uses. Of course, results will differ for each individual customer
depending on their water use patterns and whether they conserve.
Reserves trends based on these revenue projections are shown in Figure 7, below. The Rate
Stabilization Reserve is projected to be empty by the end of FY 2020, and the CIP Reserve is
projected to decrease by $4 million by the end of FY 2017. Assuming these increases in
revenue, the utility’s reserves will remain adequate through the forecast period. The
Operations Reserve, the utility’s main contingency reserve, will remain comfortably above
minimum levels and will be adequate to meet all identified risks, as discussed in Section 6F (Risk
Assessment and Reserves Adequacy).
These projections assume that drought restrictions end in early 2016, and that the request for
water usage reductions remain at 10%. If the drought worsens or continues longer than
projected, a drought surcharge may need to be developed and put in place. The forecast also
assumes that water main replacement project costs do not increase faster than inflation. This is
a major uncertainty, so staff has included a forecast in Section 6G (Alternate Scenario) involving
an alternate scenario with higher main replacement costs.
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SECTION 6F: RISK ASSESSMENT AND RESERVES ADEQUACY
The Water Utility currently has one contingency reserve, the Operations Reserve, and this
Financial Plan maintains reserves within the approved reserve maximum and minimum
guidelines throughout the forecast period, as shown in Figure 8. Reserve levels also exceed the
short term risk assessment for the utility.
Table 13 summarizes the risk assessment calculation for the Water Utility through FY 2020. The
same methodology is used for FY 2021 through FY 2023 as well. The risk assessment includes
the revenue shortfall that could accrue due to:
1. Lower than forecasted sales revenue; and
2. An increase of 10% of planned system improvement CIP expenditures for the budget year.
Figure 7: Water Utility Reserves:
Actual Reserve Levels through FY 2014 and Projections through FY 2023
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Table 13: Water Risk Assessment ($000)
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
Total non-commodity revenue $16,789 $20,131 $22,547 $22,998 $22,829
Max. revenue variance, previous ten years 13% 13% 13% 13% 13%
Risk of revenue loss $1,659 $1,989 $2,228 $2,272 $2,256
CIP Budget $8,724 $9,089 $9,099 $9,388 $9,666
CIP Contingency @10% $872 $909 $910 $939 $967
Total Risk Assessment value $2,531 $2,898 $3,138 $3,211 $3,222
This Financial Plan includes a proposal to make the CIP Reserve a contingency reserve as well.
See Section 4C (Reserves Management Practices, Proposed Change) for more details.
SECTION 6G: ALTERNATE SCENARIO
Staff created an additional scenario in which water main replacement budgets are 50% higher
than the base forecast. As described in Section 7C (Capital Improvement Program), prices for
the most recent water main replacement projects have been nearly 50% higher than previous
projects. The current forecast assumes that these prices have been temporary spikes due to the
Figure 8: Operations Reserve Adequacy
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economy picking up, but that may not be the case. The “High CIP” scenario assumes that CPAU
continues its current pace of water main replacement and prices remain at these higher levels.
Figure 9 shows the rate increases under the high CIP scenario as compared to the base case
(inflationary increases in CIP budgets). The high CIP scenario has a greater impact on rates than
an extended drought because it involves higher ongoing costs rather than a short-term revenue
loss. If this scenario becomes reality, it may be possible to phase in the increase in CIP budgets
over several years to defer the rate impact into later years. CPAU is developing a Water System
Master Plan, which is expected to be completed in early 2015. It will give CPAU the information
it needs to determine the feasibility of these types of strategies. See Section 7C (Capital
Improvement Program) for more discussion of CIP costs.
SECTION 6H: LONG-TERM OUTLOOK
CPAU has put its Water Utility on strong footing by investing in its distribution system
infrastructure and emergency water facilities over the last 20 years, so the next 20 to 40 years
after FY 2020 may involve only inflationary cost increases for the utility. The Water System
Master Plan, expected to be completed in May 2015, will give CPAU a better picture of the
long-term outlook for its infrastructure and will result in a plan for an appropriate schedule for
Figure 9: Rate Increases for High CIP Scenario
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infrastructure replacement and upgrades. In addition, CPAU’s water supplier, the SFPUC, has
replaced and seismically strengthened its water transmission infrastructure, which will be a
benefit to Palo Alto and all Hetch Hetchy customers over the long term.
The opportunities for CPAU’s Water Utility over the long term may be in alternative water
supplies such as recycled water, groundwater, and water from the Santa Clara Valley Water
District. These alternatives have been analyzed in the past, and will be analyzed again in an
upcoming update to the Water Integrated Resource Plan. Some of these alternatives may
provide cost savings or increased drought protection.
Climate change may begin to present challenges for the Water Utility over the next 20 to 40
years. Water consumption patterns may change. Consumption could increase due to drier
weather or decrease as customers become even more focused on water conservation.
Droughts may become more frequent. The risk of wildfire in the foothills could increase,
possibly threatening utility infrastructure or placing greater demands on it. Sea level rise could
result in greater exposure of utility infrastructure to saltwater intrusion or the need to protect
infrastructure from inundation, possibly resulting in higher maintenance and replacement
costs. It could also affect the groundwater aquifer that the utility relies on in emergencies. Any
of these could result in increases to the costs of operating the Water Utility. As part of the
Sustainability/Climate Action Plan, CPAU is currently working on a Climate Change Adaptation
Roadmap that will begin to assess some of these risks.
SECTION 7: DETAILS AND ASSUMPTIONS
SECTION 7A: WATER PURCHASE COSTS
CPAU purchases all of the potable water for its Water Utility from the SFPUC, which owns and
operates the Hetch Hetchy system. CPAU is one of several agencies that purchase water from
the SFPUC, all of whom are members of the Bay Area Water Supply and Conservation Agency
(BAWSCA). Palo Altans use roughly 7% of the water delivered by the SFPUC to BAWSCA
member agencies.
The Hetch Hetchy system begins with a system of reservoirs and tunnels in the high Sierra in
Yosemite County and is transported by a gravity-fed pipeline to the Bay Area. Currently, the
SFPUC is in the midst of a $4.6 billion bond-financed capital improvement program (the Water
System Improvement Program, or WSIP) to seismically retrofit the facilities that transport water
to the Bay Area. This is resulting in large increases in the annual debt service costs assigned to
wholesale customers like Palo Alto. The wholesale customer debt service share of the WSIP is
increasing from $53 million in FY 2010 to over $200 million in FY 2020. As a result, the SFPUC’s
wholesale water rate has already increased from $1.43 per CCF in FY 2009 to $2.93 per CCF in
FY 2015, and is forecasted to increase to $4.50 per CCF by FY 2020. Figure 10 shows the
SFPUC’s actual wholesale water rate since FY 2009 and a projection through FY 2023.
The SFPUC’s water rate projections show rates flattening out in FY 2020 after all of the debt for
the WSIP has been issued. Some other parts of SFPUC’s system not included in the WSIP also
may need rehabilitation. Some of these projects are already included in the SFPUC’s rate
projections, but the SFPUC is planning to do condition assessments of other “up-country”
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facilities, located in the Sierras in the coming years. If the these assessments identify other
facilities that need replacement, it may result in additional rate increases beyond FY 2020 as
new debt is issued to finance the projects.
As shown in Figure 10, this year’s projection of SFPUC wholesale rates has increased from the
previous year’s projection. The current projection assumes that drought restrictions continue
through 2015, ending in the spring of 2016. The SFPUC needed to increase its rates more than
anticipated due to lower consumption during 2014 and 2015 due to the drought, but wholesale
rates are not projected to decrease much (if at all) after the drought ends. Instead, underlying
costs will have increased enough by then that even if consumption increases after the drought,
the rates are not likely to decrease much. The current wholesale water rate projection assumes
higher rates in the long term than were assumed in last year’s projections. Consumption is
unlikely to return to pre-drought levels even after the drought ends, and the SFPUC will likely
adopt higher rates to recover its costs, which are mostly fixed.
Figure 10: Historical and Projected SFPUC Wholesale Water Rate
SECTION 7B: OPERATIONS
CPAU’s Water Utility operations include the following activities:
Administration, a category that includes charges allocated to the Water Utility for
administrative services provided by the General Fund and for Utilities Department
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administration, as well as debt service and other transfers. Additional detail on Water
Utility debt service is provided in Section 7D (Debt Service)
Customer Service
Engineering work for maintenance activities (as opposed to capital activities)
Operations and Maintenance of the distribution system; and
Resource Management
Appendix F (Description of Water Utility Operational Activities) includes detailed descriptions of
the work associated with each of these activities.
From FY 2009 to FY 2014 Operations costs (excluding debt service, rent, and transfers)
increased 5% per year on average (see Figure 11). The increases were driven by allocated
charges, which increased by 8% per year on average and increases in other Operations costs,
which increased by roughly 4% per year. Debt service costs increased by $2.4 million per year as
a result of a bond issued to finance the Emergency Water Supply and Storage Project. Transfers
have varied from year to year, but are expected to remain relatively low and stable through the
forecast period.
In FY 2016 Operations costs are projected to increase by $1 million for a capital lease of
emergency generators for various wells and pump stations. This is a new ongoing cost. Aside
from that, only inflationary increases are projected for Operations costs. Underlying these
projections are assumptions for salary and benefit costs, consumer price index, and other cost
projections that match the City’s long-range financial forecast.
Figure 11: Historical and Projected Operational Costs
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SECTION 7C: CAPITAL IMPROVEMENT PROGRAM (CIP)
The Water Utility’s CIP consists of the following types of projects:
Customer connections, which represents the cost when the Water Utility installs new
services or upgrades existing services at a customer’s request in response to
development or redevelopment. CPAU charges a fee to these customers to cover the
cost of these projects.
Ongoing projects, which represent the cost of replacing aging and under-recording
meters and degraded boxes and covers, minor replacements of various types of
distribution system equipment, and the cost of capitalized tools and equipment.
One time projects, or large, non-recurring replacement of system assets (such as
reservoir rehabilitation)
Water main replacement, which represents the ongoing replacement of aging water
mains, and sometimes the services associated with those mains.
Table 14 shows the FY 2015 adopted budget, with actual spending and remaining budget as of
December 31, 2014. Also included is the five year CIP spending plan, although these figures are
preliminary pending budget discussions starting in May. The ‘committed’ column represents
funds committed to contracts for which work has not yet been completed or invoices paid.
Table 14: Budgeted Water Utility CIP Spending ($000)
*Includes unspent funds from previous years carried forward or reappropriated into the current fiscal
year
**Equal to Reserve for Reappropriations + Reserve for Commitments.
The water main replacement program funds the replacement of deteriorating water mains. The
water system consists of over 236 miles of mains, approximately 2000 fire hydrants, and over
20,000 metered service connections spanning 9 pressure zones over a 26 square mile service
area. CPAU utilizes an asset management database in conjunction with hydraulic modeling
software to prioritize capital improvements. Mains are selected by researching the
maintenance history of the system and identifying those that are undersized, corroded, and
subject to recurring breaks. CPAU uses a scoring system based on criticality in order to
prioritize which mains to replace first, and coordinates with the Public Works street
maintenance program to avoid cutting into newly repaved streets. CPAU replaces
approximately 3 miles of main per year, or 1.3% of the system.
Costs for the water main replacement program are increasing for a variety of reasons:
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Fire Code regulations now mandate fire sprinklers for new residential units. To
accommodate increased fire flows, new main replacement projects require larger
diameter pipe.
CPAU has switched to high-density polyethylene (HDPE) for its mains. Installation costs
for this material are slightly higher, though lifecycle costs are lower, and the material
performs better. Joints in distribution mains are the most likely place for failure, and
sections of HDPE pipe can be fused together rather than connected with fittings. In the
long run, this will reduce losses and maintenance costs.
To take full advantage of HDPE’s fusibility, CPAU is now replacing the services along
with the water mains with new HDPE services. In the past, the existing services were
reconnected, regardless of the material. This new practice costs more in the short run,
but will provide long term benefits.
Lastly, as the economy begins to recover, costs have begun to escalate.
These factors have created some uncertainty in future water main replacement costs. If the
cost of water main replacement continues at its current levels, water main replacement
budgets will need to be increased by $1M to $2M per year to keep up the current pace of main
replacement. However, CPAU is nearing the end of a long term water main replacement
program initiated in 1993 to replace the oldest and most degraded parts of the system. Roughly
25% of the system has been replaced, and the rate of water leaks has decreased 50%. This
makes it a good time to re-evaluate the program. CPAU initiated a master planning process in
FY 2015 to evaluate the current state of the distribution system and determine the necessary
rate of main replacement in future years. Currently the utility replaces about 1.3% of the
system each year, which is an 80-year replacement cycle. The master planning process may
reveal a need for a higher main replacement rate, or may reveal that pipes are currently in good
condition and a lower rate of replacement is required. Results are expected in May 2015.
If this study determines that a lower rate of main replacement is acceptable, increases to water
main replacement project budgets may not be necessary. Likewise, if the per-mile costs of main
replacement come down, that would also reduce or eliminate the need to increase main
replacement budgets. A combination of reduced costs and a reduced rate of main replacement
could even allow CPAU to reduce those budgets. However, if per-mile main replacement costs
stay at their current levels and the study reveals the need to maintain the same rate of main
replacement (or a higher rate), CPAU’s CIP costs would rise. The implications for ratepayers of
that scenario are analyzed in Section 6G (Alternate Scenario).
One project not included in this forecast is the seismic strengthening of a large water
transmission line in the foothills. Staff has engaged a consultant to investigate alternatives for
this project. The consultant is analyzing an alternative that involves installing a valve and hose
system that could be used to bypass breaks in the line while they are repaired after an
earthquake. This is a relatively low cost alternative that would not substantially affect the
financial forecast. The study is not finalized yet, however, and if it is determined that the entire
pipeline needs to be replaced, it could cost between $15 million and $20 million, which would
likely require bond financing and would substantially affect the financial forecast. The final
report with recommendations is expected to be available in May 2015.
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Ongoing Projects and Customer Connections are projected to cost approximately $1.9 million in
FY 2016 and increase by 3.5% per year through the end of the forecast period. Actual expenses
for these projects fluctuate annually depending on how many defective meters are discovered
and replaced during routine maintenance, as well as how much development and
redevelopment is going on that prompts the replacement or upgrade of water services. It is
worth noting that property owners pay a fee for water service replacement or expansion during
redevelopment, so when the number of projects go up (meaning higher costs for this activity),
so does fee revenue.
Aside from customer connections, the CIP plan for FY 2015 to FY 2019 is funded by utility rates
and capacity fees. The details of the plan are shown in Appendix B (Water Utility Capital
Improvement Program (CIP) Detail).
SECTION 7D: DEBT SERVICE
The Water Utility’s annual debt service is roughly $3.2 million per year. This is related to two
bond issuances, one requiring payments through 2026, the other through 2035. The first
issuance, the 2011 Utility Revenue Refunding Bond, Series A, was a joint issuance between the
Water and Gas Utilities refinancing the 2002 Utility Revenue Bonds, Series A, which was issued
to finance various capital improvements for both systems. The second, larger issuance is the
2009 Water Revenue Bond, Series A (Direct Payment Build America bond) used to finance
construction of the Emergency Water Supply and Storage project (the El Camino Reservoir, new
wells, rehabilitation of existing wells and tanks, etc.) CPAU is in compliance with all covenants
on both bonds. Additional detail is provided in Appendix E (Water Utility Debt Service Details).
SECTION 7E: OTHER REVENUES
The Water Utility receives most of its revenues from sales of water, but about 9% comes from
other sources. The largest revenue source is connection and capacity fees, which in FY 2014
represented 52% of revenue from sources other than water sales. The next largest revenue
source in that category was interest on reserves (26%), followed by the interest subsidy from
the Federal government related to the utility’s 2009 Build America Bond issuance (14%), with
the remainder consisting of a variety of miscellaneous charges and transfers.
Revenues from connection and capacity fees have more than doubled since FY 2009.
Connection fees are charged to new developments that need new or replacement service
connections, while capacity fees are charged to development that put additional demands on
the water distribution system. Revenue from these sources decreased slightly during the
recession, but has increased substantially since then. Staff is forecasting lower revenue from
these sources in subsequent years, but has also proposed increases in connection fees that, if
adopted in early 2015, are expected to offset these reductions to some extent.
Other revenue sources are projected to stay stable through the forecast period, though interest
income always fluctuates depending on changes in interest rates. Some uncertainty also exists
related to the Federal government’s commitment to continuing to pay the interest subsidy on
the Build America Bonds. See Appendix E (Water Utility Debt Service Details) for more
information.
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SECTION 7F: SALES REVENUES
Sales revenue projections are based on the load forecast in Section 6A (Load Forecast) and the
projected rate changes shown in Figure 6. Except where stated otherwise, these load forecasts
are based on normal precipitation. Precipitation can vary substantially, however, even in non-
drought years, and this can affect revenues substantially. In dry years customers use more
water, increasing revenues, and in wet years they use less. These variations happen in the
winter, since summers have virtually no local precipitation regardless of whether it is a dry or
wet year. The variations are most likely related to winter irrigation demand.
SECTION 8: COMMUNICATIONS PLAN
In FY 2016, communications will focus on water utility rate increases, including the reasons why
and how rates may change contingent upon continued drought conditions. Rates
communications will include a substantial update to information on a webpage dedicated to
Utilities rates, “breaking news” on the Utility home webpage, discussion in the Proposition 218
rate adjustment notice, bill inserts, print ads, videos for web and television, social media posts
and frequent educational updates to internal and external stakeholders (customer service,
marketing, City Manager’s Office, UAC, City Council, business and residential customers). Other
communications vehicles will include financial plans, presentations to UAC, Finance Committee,
City Council and any media coverage as a result of the rate increases. CPAU will continue its
outreach about drought conditions and importance of water use efficiency, tying in the
message that although rates are increasing, efficient usage should mean that a customer should
not see a significant increase in water utility costs on their bills.
Water conservation outreach will include bill inserts, web updates, email blasts, videos for the
web and television, presentations to customer groups and the use of social media. To keep
customers apprised of the status and accomplishments of CIP projects, a network of project
web pages are maintained. Traffic is driven to the website via ads in publications, newspaper
inserts, and through the comprehensive portfolio of outreach strategies as outlined above.
Safety topics are also emphasized year-round. For all utility outreach, while print materials and
website pages still feature prominently, CPAU is placing more emphasis on digital advertising
content, direct mail, community safety/emergency preparation events and presentations.
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APPENDICES
Appendix A: Water Utility Financial Forecast Detail
Appendix B: Water Utility Capital Improvement Program (CIP) Detail
Appendix C: Water Utility Reserves Management Practices
Appendix D: Rate Design
Appendix E: Water Utility Debt Service Details
Appendix F: Description of Water Utility Operational Activities
Appendix G: Sample of Water Utility Outreach Communications
APPENDIX A: WATER UTILITY FINANCIAL FORECAST DETAIL
1 FISCAL YEAR FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
2
3 WATER SUPPLY
4 Purchases 5,669,518 5,362,359 5,416,220 5,538,305 5,532,947 5,507,153 4,725,136 4,773,600 4,887,917 4,810,714 4,735,760 4,701,084 4,680,394 4,651,320 4,616,646
5 Sales 5,395,080 4,954,950 4,992,473 5,062,873 5,097,392 5,047,148 4,344,946 4,389,511 4,494,630 4,423,638 4,354,716 4,322,829 4,303,804 4,277,070 4,245,185
6
7 BILL AND RATE CHANGES
8 Variable Charge (Supply)15%38%11%-16%20%31%-2%0%16%7%-5%1%6%
9 Variable Charge (Distribution)-7%-12%17%30%-12%0%23%14%4%0%6%3%1%
10 Service Charge (Distribution)-3%72%75%9%0%0%0%12%2%0%4%2%0%
11 Change in System Average Rate 0%12%22%8%0%12%8%8%8%3%1%2%3%
12 Change in Average Residential Bill -1%12%21%7%-1%9%7%6%6%2%1%1%2%
13
14 STARTING RESERVES
15 Reappropriations (Non-CIP)- - 54,000 20,000 - - - - - - - - - - -
16 Commitments (Non-CIP)267,323 98,000 40,000 765,000 714,000 2,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000
17 Restricted for Debt Service 780,000 780,000 3,348,000 3,348,000 3,225,000 3,225,000 3,331,000 3,331,000 3,331,000 3,331,000 3,331,000 3,331,000 3,331,000 3,331,000 3,331,000
18 Emergency Plant Replacement 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 - - - - - - - -
19 Capital Reserve - - - - - - - 4,000,000 14,847,000 10,847,000 10,847,000 10,847,000 10,847,000 10,847,000 10,847,000
20 Rate Stabilization Reserve 14,089,000 5,400,000 17,037,000 10,639,000 7,996,000 17,272,000 20,133,000 6,567,000 1,067,000 1,067,000 500,000 500,000 - - -
21 Operations Reserve - - - - - - - 6,825,996 7,388,745 9,587,610 10,996,799 11,491,182 11,522,648 11,904,886 12,374,300
22 Unassigned - - - - - - - - - - - - - - -
23 TOTAL STARTING RESERVES 16,136,323 7,278,000 21,479,000 15,772,000 12,935,000 21,499,000 24,811,000 21,070,996 26,980,745 25,179,610 26,021,799 26,516,182 26,047,648 26,429,886 26,899,300
24
25 REVENUES
26 Net Sales 26,640,717 25,839,375 26,133,998 30,673,882 36,647,924 39,008,671 34,066,218 38,321,464 42,263,580 45,061,690 47,965,975 49,037,955 49,414,313 50,256,219 51,432,726
27 Other Revenues and Transfers In 2,833,016 12,104,925 2,812,063 5,892,133 6,811,461 4,074,511 3,146,219 3,195,685 3,249,006 3,303,323 3,358,265 3,413,741 3,471,338 3,533,115 3,598,411
28 TOTAL REVENUES 29,473,733 37,944,300 28,946,061 36,566,015 43,459,385 43,083,182 37,212,437 41,517,150 45,512,586 48,365,013 51,324,240 52,451,696 52,885,651 53,789,333 55,031,137
29
30 EXPENSES
31 Water Purchases 8,443,057 9,061,245 10,677,914 14,889,399 16,605,351 15,705,288 16,012,748 20,450,988 20,497,789 20,224,895 22,764,353 24,080,279 22,921,818 23,012,781 24,123,189
32 Operating Expenses
33 Administration
34 Allocated Charges 1,629,800 1,580,604 1,798,630 2,003,116 2,422,880 2,374,411 2,082,585 2,134,799 2,188,511 2,243,583 2,300,029 2,357,900 2,417,009 2,477,469 2,539,450
35 Rent 1,919,052 2,107,405 2,122,405 2,156,887 1,911,963 2,192,454 2,249,457 2,316,941 2,386,449 2,458,042 2,531,784 2,607,737 2,685,969 2,766,548 2,849,545
36 Debt Service 776,059 1,950,625 3,341,781 3,385,986 3,219,165 3,220,208 3,218,869 3,222,606 3,219,316 3,222,669 3,220,858 3,220,638 3,222,843 3,223,563 3,224,553
37 Transfers and Other Adjustments 4,569,523 (2,551,533) 200,286 301,963 2,241,793 327,474 368,733 376,108 383,630 391,302 399,129 407,111 415,253 423,558 432,030
38 Subtotal, Administration 8,894,435 3,087,100 7,463,102 7,847,952 9,795,801 8,114,546 7,919,644 8,050,454 8,177,906 8,315,596 8,451,799 8,593,386 8,741,074 8,891,138 9,045,577
39 Resource Management 394,281 485,727 575,834 552,972 557,910 570,040 685,688 705,481 729,227 753,931 779,267 805,539 828,660 850,008 872,092
40 Operations and Mtc 4,039,649 4,257,240 4,885,428 4,900,606 4,944,064 4,986,274 6,184,549 6,365,432 6,585,118 6,813,962 7,048,720 7,292,410 7,504,387 7,698,282 7,899,029
41 Engineering (Operating)333,017 262,889 247,488 301,278 338,659 381,502 422,650 435,118 450,380 466,290 482,616 499,574 514,216 527,527 541,317
42 Customer Service 1,435,667 1,371,943 1,476,175 1,544,608 1,584,759 1,677,926 2,097,861 2,159,829 2,235,777 2,314,969 2,396,225 2,480,639 2,553,438 2,619,560 2,688,063
43 Allowance for Unspent Budget - - - - - - (924,743) (436,860) (451,237) (466,183) (481,514) (497,403) (511,532) (524,679) (538,269)
44 Subtotal, Operating Expenses 15,097,049 9,464,900 14,648,027 15,147,415 17,221,192 15,730,288 16,385,649 17,279,453 17,727,171 18,198,565 18,677,112 19,174,145 19,630,244 20,061,837 20,507,809
45 Capital Program Contribution 14,791,950 5,217,154 9,327,120 9,366,201 1,068,841 8,335,605 8,554,044 8,723,959 9,088,761 9,099,364 9,388,392 9,665,805 9,951,351 10,245,303 10,547,961
46 TOTAL EXPENSES 38,332,056 23,743,300 34,653,061 39,403,015 34,895,385 39,771,182 40,952,441 46,454,401 47,313,721 47,522,825 50,829,857 52,920,229 52,503,413 53,319,920 55,178,960
47
48 ENDING RESERVES
49 Reappropriations (Non-CIP)- 54,000 20,000 - - - - - - - - - - - -
50 Commitments (Non-CIP)98,000 40,000 765,000 714,000 2,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000
51 Restricted for Debt Service 780,000 3,348,000 3,348,000 3,225,000 3,225,000 3,331,000 3,331,000 3,331,000 3,331,000 3,331,000 3,331,000 3,331,000 3,331,000 3,331,000 3,331,000
52 Emergency Plant Replacement 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 - - - - - - - - -
53 Capital Reserve - - - - - - 4,000,000 14,847,000 10,847,000 10,847,000 10,847,000 10,847,000 10,847,000 10,847,000 10,847,000
54 Rate Stabilization Reserve 5,400,000 17,037,000 10,639,000 7,996,000 17,272,000 20,133,000 6,567,000 1,067,000 1,067,000 500,000 500,000 - - - -
55 Operations Reserve - - - - - - 6,825,996 7,388,745 9,587,610 10,996,799 11,491,182 11,522,648 11,904,886 12,374,300 12,226,477
56 Unassigned - - - - - - - - - - - - - - -
57 TOTAL ENDING RESERVES 7,278,000 21,479,000 15,772,000 12,935,000 21,499,000 24,811,000 21,070,996 26,980,745 25,179,610 26,021,799 26,516,182 26,047,648 26,429,886 26,899,300 26,751,477
58
1 FISCAL YEAR FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
2
3 REVENUES
4 Net Sales 90%68%90%84%84%91%92%92%93%93%93%93%93%93%93%
5 Other Revenues and Transfers In 10%32%10%16%16%9%8%8%7%7%7%7%7%7%7%
6 TOTAL REVENUES 100%100%100%100%100%100%100%100%100%100%100%100%100%100%100%
7
8 EXPENSES
9 Water Purchases 22%38%31%38%48%39%39%44%43%43%45%46%44%43%44%
10 Operating Expenses
11 Administration
12 Allocated Charges 4%7%5%5%7%6%5%5%5%5%5%4%5%5%5%
13 Rent 5%9%6%5%5%6%5%5%5%5%5%5%5%5%5%
14 Debt Service 2%8%10%9%9%8%8%7%7%7%6%6%6%6%6%
15 Transfers and Other Adjustments 12%-11%1%1%6%1%1%1%1%1%1%1%1%1%1%
16 Subtotal, Administration 23%13%22%20%28%20%19%17%17%17%17%16%17%17%16%
17 Resource Management 1%2%2%1%2%1%2%2%2%2%2%2%2%2%2%
18 Operations and Mtc 11%18%14%12%14%13%15%14%14%14%14%14%14%14%14%
19 Engineering (Operating)1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%
20 Customer Service 4%6%4%4%5%4%5%5%5%5%5%5%5%5%5%
21 Allowance for Unspent Budget 0%0%0%0%0%0%-2%-1%-1%-1%-1%-1%-1%-1%-1%
22 Subtotal, Operating Expenses 39%40%42%38%49%40%40%37%37%38%37%36%37%38%37%
23 Capital Program Contribution 39%22%27%24%3%21%21%19%19%19%18%18%19%19%19%
24 TOTAL EXPENSES 100%100%100%100%100%100%100%100%100%100%100%100%100%100%100%
25
26 RISK ASSESSMENT DETAIL
27 Distribution Revenue Variance 1,691,676 1,658,926 1,989,201 2,227,905 2,272,463 2,255,824 2,374,042 2,433,393 2,445,560
28 10% CIP Program Contingency 855,404 872,396 908,876 909,936 938,839 966,581 995,135 1,024,530 1,054,796
29 Total Risk Asssessment Value 2,547,081 2,531,322 2,898,077 3,137,842 3,211,303 3,222,404 3,369,177 3,457,923 3,500,356
30 Projected Operations Reserve 6,825,996 7,388,745 9,587,610 10,996,799 11,491,182 11,522,648 11,904,886 12,374,300 12,226,477
31 Operations Reserve, % of Risk Value 268%292%331%350%358%358%353%358%349%
32
33 OPERATIONS RESERVE
34 Min (60 days of non-capital expenses)- - - - - - 5,633,883 6,516,546 6,604,123 6,643,164 7,145,814 7,450,505 7,341,852 7,434,691 7,697,613
35 Target (90 days of non-capital expenses)- - - - - - 9,681,864 9,805,203 9,939,273 10,000,649 10,757,546 11,217,620 11,057,753 11,200,219 11,597,933
36 Max (120 days of non-capital expenses)- - - - - - 13,729,844 13,093,861 13,274,424 13,358,135 14,369,279 14,984,734 14,773,654 14,965,747 15,498,253
37 Risk Assessment Value 2,547,081 2,531,322 2,898,077 3,137,842 3,211,303 3,222,404 3,369,177 3,457,923 3,500,356
38
39 DEBT SERVICE COVERAGE RATIO
40 Net Revenues (125% of Debt Service)2933%850%658%787%951%876%907%1071%1087%1092%1187%1243%1220%1236%1284%
41 Available Reserves (5x Debt Service)*8.2 9.2 3.5 2.7 5.7 6.6 5.4 7.2 6.7 6.9 7.1 6.9 7.1 7.2 7.2
42 *For the purposes of debt covenants, the unrestricted reserves of other utilities may be counted toward the available reserves for meeting this measure. A ratio below 5x means that this utility is relying on the reserves of other utilities to meet its debt covenants.
WATER UTILITY FINANCIAL PLAN
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APPENDIX B: WATER UTILITY CAPITAL IMPROVEMENT PROGRAM (CIP) DETAIL
Project #Project Name
Reappropriated /
Carried Forward from
Previous Years
Current Year
Funding
Budget
Amendments
Spending,
Current Year
Remaining in
CIP Reserve
Fund Commitments FY 2016 FY 2017 FY 2018 FY 2019 FY 2019
ONE TIME PROJECTS
WS-07000 Regulation Station Imp.370,824 - - (15,406) 355,418 895,806 - - - -
WS-07001 Water Recycling Facilities 388,421 - - (37,603) 350,818 106,224 - - - -
WS-08001 Water Reservoir Coating 2,177,560 750,000 - (15,406) 2,912,154 4,376,620 - - - -
WS-09000 Seismic Water System 4,284,420 2,230,000 - (40,620) 6,473,800 6,107,517 - - - -
WS-11001 Vacuum Excavation Equip.- - - - - - - - - -
WS-13003 GPS Equipment Upgrade 200,000 - - - 200,000 - - - - -
WS-13004 Asset Mgmt. Mobile Sys.98,471 - - (3,467) 95,004 - - - - -
WS-13006 Meter Shop Renovations 46,907 - - (10,001) 36,906 - - - - -
WS-15004 Water System Master Plan - - 500,000 - 500,000 255,858
WS-08002 Emergency Water Supply 1,106,738 - - (296,577) 810,161 853,189 - - - -
Subtotal, One-time Projects 8,673,341 2,980,000 500,000 (419,080) 11,734,261 12,595,214 - - - - -
WATER MAIN REPLACEMENT PROGRAM
WS-08017 WMR - Project 22 - - - - - - - - - - -
WS-09001 WMR - Project 23 112,021 - - - 112,021 - - - - - -
WS-10001 WMR-Project 24 208,305 - - - 208,305 - - - - - -
WS-11000 WMR-Project 25 5,238,360 - (55,186) 5,183,174 4,414,466 - - - - -
WS-12001 WMR- Project 26 461,065 - - (1,176) 459,889 - 5,515,195 - - - -
WS-13001 WMR - Project 27 - - - - - - 568,065 5,680,651 - - -
WS-13001 WMR - Project 28 - - - - - - - 585,107 5,851,070 - -
WS-15002 WMR - Project 29 - - - - - - - - 602,600 6,026,602 -
WS-16001 WMR - Project 30 - - - - - - - - - 620,740 6,207,400
WS-16001 WMR - Project 31 - - - - - - - - - - 608,512
Subtotal, Water Main Replacement Prog.6,019,751 - - (56,362) 5,963,389 4,414,466 6,083,260 6,265,758 6,453,670 6,647,342 6,815,912
WATER UTILITY FINANCIAL PLAN
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Appendix B: Water Utility Capital Improvement Program (CIP) Detail (Continued)
Project #Project Name
Reappropriated /
Carried Forward from
Previous Years
Current Year
Funding
Budget
Amendments
Spending,
Current Year
Remaining in
CIP Reserve
Fund Commitments FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
ONGOING PROJECTS
WS-80014 Services/Hydrants 176,771 236,000 - (82,315) 330,456 - 243,080 250,400 263,000 270,000 278,100
WS-80015 Water Meters 256,009 386,000 - (94,025) 547,984 175,669 393,080 400,372 407,000 415,000 427,450
WS-02014 W-G-W Utility GIS Data 130,984 303,000 - (98,684) 335,300 156,505 332,750 366,025 402,628 442,890 456,177
WS-13002 Equipment/Tools 28,132 50,000 - (6,674) 71,458 - 50,000 50,000 50,000 50,000 50,000
WS-11003 Dist. Sys. Improvements 201,515 225,000 - (675,186) (248,671) 35,556 232,000 239,000 247,000 254,000 261,620
WS-11004 Supply Sys. Improvements 157,622 225,000 - (123,401) 259,221 39,773 232,000 239,000 247,000 254,000 261,620
Subtotal, Ongoing Projects 951,033 1,425,000 - (1,080,285) 1,295,748 407,503 1,482,910 1,544,797 1,616,628 1,685,890 1,734,967
CUSTOMER CONNECTIONS (FEE FUNDED)
WS-80013 Water System Extensions 2,553 450,000 - (265,623) 186,930 4,572 460,000 473,000 486,000 500,000 515,000
Subtotal, Customer Connections 2,553 450,000 - (265,623) 186,930 4,572 460,000 473,000 486,000 500,000 515,000
GRAND TOTAL 15,646,678 4,855,000 500,000 (1,821,350)19,180,328 17,421,755 8,026,170 8,283,555 8,556,298 8,833,232 9,065,879
Funding Sources
Connection/Capacity Fees 450,000 - 460,000 473,000 486,000 500,000
Other Utility Funds (Asset Mgmt, GIS Systems)202,000 - 222,000 244,000 268,000 295,000
Utility Rates 4,855,000 500,000 8,026,170 8,283,555 8,556,298 8,833,232 9,065,879
CIP-RELATED RESERVES DETAIL
6/30/2014
(Actual)12/31/20114
Reappropriations (excl. Bond Funded)10,846,585 1,758,573
Commitments (excl. Bond Funded)4,800,093 17,421,755
WATER UTILITY FINANCIAL PLAN
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APPENDIX C: WATER UTILITY RESERVES MANAGEMENT PRACTICES
(Amendments to this section are proposed. See the proposed adopting resolution for this
Financial Plan. This section will be added to the Financial Plan following adoption of any
amendments to this section.)
WATER UTILITY FINANCIAL PLAN
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APPENDIX D: RATE DESIGN
The Water Utility’s rates are evaluated and implemented in compliance with the cost of service
requirements and procedural rules set forth in the California Constitution under Article 13 (per
Proposition 218). Current rates were structured based on the methodology from the March
2012 Palo Alto Water Cost of Service & Rate Study by Raftelis Financial Consultants, Inc 2. Staff
plans to review and update this cost of service study in 2 to 3 years, unless any major changes
occur to the utility’s operations or customer base that would necessitate an earlier study.
Before conducting any new cost of service study, staff will review current rates and the scope of
the study with the Utilities Advisory Commission (UAC) and Council to determine the City’s
policy priorities.
2 Staff Report ID#2676, Finance Committee, April 18, 2012
WATER UTILITY FINANCIAL PLAN
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APPENDIX E: WATER UTILITY DEBT SERVICE DETAILS
The Water Utility currently makes payment on its share of two bond issuances. The first is the
2009 Water Revenue Bond, Series A, issued for $35 million, and to be retired by 2035. As part
of the ‘Build America’ bond program, there is an interest payment subsidy from the Federal
Government of 35%. There is always the possibility that the federal government will choose to
stop payment on this subsidy. The automatic federal spending cuts under the Budget Control
Act (BCA) of 2011 have already reduced the subsidy by $50,000 per year, and if planned cuts
through 2021 proceed without amendment, staff estimates that the subsidy would be reduced
by over $200,000 per year by 2021. The Bipartisan Budget Act of 2013, which relieved some of
the discretionary spending cuts in the 2011 BCA, did not affect automatic cuts to the subsidy,
and actually extended the automatic cuts through 2023.
The second bond issuance is the 2011 Utility Revenue Refunding Bond, Series A, which is to be
retired in 2026. This $17.2 million issuance refinanced an earlier Water and Gas Utility bond
issuance, the 2002 Utility Revenue Bonds, Series A, which was issued to finance various capital
improvements for both systems. The Water Utility’s share of the issuance was roughly $7.8
million.
The cost of debt service for the Water Utility’s share of these bond issuances for the financial
forecast period is as follows:
Table 15: Water Utility Debt Service ($000)
FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022
2009 Water
Revenue Bonds,
Series A (net of
grants)
1,986 2,002 2,012 2,031 2,046 2,064 2,079 2,101
2011 Utility
Revenue Bonds,
Series A
656 657 657 656 654 656 657 657
Both the 2009 and 2011 Bonds include the following covenants: 1) net revenues plus Available
Reserves shall at least equal 125% of the maximum annual debt service, and 2) Available
Reserves shall be at least 5 times the maximum annual debt service. Note that “Available
Reserves,” as defined for both bonds, include the reserves for the Gas and Electric systems, not
just the Water system.
The current Financial Plan maintains compliance with these covenants throughout the forecast
period, as shown in Appendix A (Water Utility Financial Forecast Detail).
The net revenues (but not the reserves) of the Water Utility are also pledged for one other
bond as shown in Table 16 below, even though the Water Utility is not responsible for the debt
service payments. The Water Utility’s reserves or net revenues would only be called upon if the
responsible utilities are unable to make their debt service payments. Staff does not currently
foresee this occurring. Requirements of the California Constitution require that any amounts
advanced from one utility to pay debt service for another utility must be repaid by the
borrowing fund.
WATER UTILITY FINANCIAL PLAN
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Table 16: Other Issuances Secured by the Water Utility’s Revenues or Reserves
Bond Issuance Responsible Utilities Annual Debt
Service ($000)
Secured by Water Utility’s:
Net Revenues Reserves
1995 Series A Utility
Revenue Bonds Storm Drain $680 Yes No
WATER UTILITY FINANCIAL PLAN
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APPENDIX F: DESCRIPTION OF WATER UTILITY OPERATIONAL ACTIVITIES
This appendix describes the activities associated with the various operational activities referred
to in Section 7B (Operations) of this Financial Plan.
Administration: Accounting, purchasing, legal, and other administrative functions provided by
the City’s General Fund staff, as well as shared communications services, CPAU administrative
overhead, and billing system maintenance costs. This category also includes Water Utility debt
service and rent paid to the General Fund for the land associated with reservoirs and various
other facilities.
Customer Service: This category includes the Water Utility’s share of the call center, meter
reading, collections, and billing support functions. Billing support encompasses staff time
associated with bill investigations and quality control on certain aspects of the billing process. It
does not include maintenance of the billing system itself, which is included in Administration.
This category also includes CPAU’s key account representatives, who work with large
commercial customers who have more complex requirements for their water services.
Engineering (Operating): The Water Utility’s engineers focus primarily on the CIP, but a small
portion of their time is spent assisting with distribution system maintenance.
Operations and Maintenance: This category includes the costs of a variety of distribution
system maintenance activities, including:
investigating reports of damaged mains or services and performing emergency repairs;
testing and operating valves;
monitoring water quality and reservoir levels;
monitoring the status of the different pressure zones;
flushing water at hydrants and other closed end points of the system;
building and replacing water services for new or redeveloped buildings; and
testing and replacing meters to ensure accurate sales metering.
This category also includes a variety of functions the utility shares with other City utilities,
including:
the Field Services team (which does field research of various customer service issues);
the Cathodic Protection team (which monitors and maintains the systems that prevent
corrosion in metal tanks and reservoirs); and
the General Services team (which manages and maintains equipment, paves and
restores streets after gas, water, or sewer main replacements, and provides welding
services)
Resource Management: This category includes water procurement, contract management,
water resource planning, interaction with BAWSCA, the SFPUC, and the SCVWD, and tracking of
legislation and regulation related to the water industry.
APPENDIX G: SAMPLE OF WATER UTILITY OUTREACH COMMUNICATIONS
Attachment D
* NOT YET APPROVED *
150220 mf 6053253 1
Resolution No. _____
Resolution of the Council of the City of Palo Alto Adopting a Water Rate Increase
and Amending Rate Schedules W-1 (General Residential Water Service), W-2
(Water Service from Fire Hydrants), W-3 (Fire Service Connections), W-4
(Residential Master-Metered and General Non-Residential Water Service), and
W-7 (Non-Residential Irrigation Water Service)
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 ________, 2015,
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.
The Council of the City of Palo Alto RESOLVES, 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, 2015.
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, 2015.
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, 2015.
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, 2015.
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, 2015.
Attachment D
* NOT YET APPROVED *
150220 mf 6053253 2
SECTION 6. The Council finds that the revenue derived from the adoption of this
resolution 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 fees and charges adopted by this resolution are
charges imposed for a specific government service or product provided directly to the payor
that are not provided to those not charged, and do not exceed the reasonable costs to the City
of providing the service or product.
SECTION 8. 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 and all attachments 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:
___________________________ ___________________________
Senior 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 7-1-2013
dated 7-1-2012 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 ..................................................................................................... $ 14.6716.01
For 3/4 inch meter ..................................................................................................... 19.5121.48
For 1 inch meter ........................................................................................................ 29.1832.42
For 1 1/2 inch meter .................................................................................................. 53.3759.77
For 2-inch meter ........................................................................................................ 82.3992.60
For 3-inch meter ........................................................................................................ 174.29196.54
For 4-inch meter ........................................................................................................ 309.72349.71
For 6-inch meter ........................................................................................................ 633.80716.24
For 8-inch meter ........................................................................................................1,165.861,318.01
For 10-inch meter ......................................................................................................1,843.022,083.89
For 12-inch meter .......................................................................................................2,423.452,740.37
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 ........................................................................................................................$4.995.70
Tier 2 usage (All usage over 100% of Tier 1) ........................................................................7.588.38
Temporary unmetered service to residential
subdivision developers, per connection ........................................................................ $6.00
ATTACHMENT E
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 7-1-2013
dated 7-1-2012 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 7-1-2013
dated 7-1-2012 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) ................................................................ $6.156.97
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 7-1-2013
dated 7-1-2012 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 .......................................................................................................$3.033.43
4-inch connection .......................................................................................................18.7821.21
6-inch connection ....................................................................................................... 54.5561.61
8-inch connection .......................................................................................................116.24131.29
10-inch connection .....................................................................................................209.03236.10
12-inch connection .....................................................................................................337.65381.36
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........................................................................................................... $10.00
D. SPECIAL NOTES:
1. Service under this schedule may be discontinued if water is used for any purpose other
than fire extinguishing or testing and repairing the fire extinguishing facilities. Using
hydrants and fire services for other purposes is illegal and will be subject to the
commodity charge as noted above, fines, and criminal prosecution pursuant to the Palo
Alto Municipal Code.
2. For a combination water and fire service, the general water service schedule shall apply.
FIRE SERVICE CONNECTIONS
UTILITY RATE SCHEDULE W-3
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-3-2 Effective 7-1-2013
dated 7-1-2012 Sheet No W-3-2
3. Utilities Rule and Regulation No. 21 provides additional information on Automatic Fire
Services.
4. Repairs and testing of fire extinguishing facilities are not considered unauthorized use of
water if records and documentation are supplied by the customer.
{End}
RESIDENTIAL MASTER-METERED AND
GENERAL NON-RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W-4
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-4-1 Effective 7-1-2013
dated 7-1-2012 Sheet No W-4-1
A. APPLICABILITY:
This schedule applies to non-residential water service in the City of Palo Alto and its distribution
area. This schedule is also applicable to multi-family residential customers served through a master
meter.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides water services.
C. RATES:
Per Meter
Monthly Service Charge Per Month
For 5/8-inch meter ....................................................................................$ 16.01$ 14.67
For 3/4-inch meter .................................................................................... 21.4819.51
For 1-inch meter .................................................................................... 32.42 29.18
For 1 ½-inch meter .................................................................................... 59.77 53.37
For 2-inch meter .................................................................................... 92.60 82.39
For 3-inch meter .................................................................................... 196.54174.29
For 4-inch meter .................................................................................... 349.71309.72
For 6-inch meter .................................................................................... 716.24633.80
For 8-inch meter ....................................................................................1,318.011,165.86
For 10-inch meter ....................................................................................2,083.891,843.02
For 12-inch meter ....................................................................................2,740.372,423.45
Commodity Rates: (to be added to Service Charge)
Per Hundred Cubic Feet (ccf)
Per Month All Pressure Zones
Per ccf ............................................................................................................ $ 6.156.97
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 7-1-2013
dated 7-1-2012 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 7-1-2013
dated 7-1-2012 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 .................................................................................... $ 16.0114.67
For 3/4-inch meter .................................................................................... 21.48 19.51
For 1-inch meter .................................................................................... 32.4229.18
For 1 1/2 inch meter .................................................................................... 59.77 53.37
For 2-inch meter .................................................................................... 92.60 82.39
For 3-inch meter .................................................................................... 196.54174.29
For 4-inch meter .................................................................................... 349.71309.72
For 6-inch meter .................................................................................... 716.24633.80
For 8-inch meter ....................................................................................1,318.011.165.86
For 10-inch meter ....................................................................................2,083.891.843.02
For 12-inch meter ....................................................................................2,740.372,423.45
Commodity Rates: (to be added to Service Charge)
Per Hundred Cubic Feet (ccf)
Per Month All Pressure Zones
Per ccf ............................................................................................................ $ 7.528.46
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 7-1-2013
dated 7-1-2012 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}
EXCERPTED DRAFT MINUTES OF THE MARCH 4, 2015
UTILITIES ADVISORY COMMISSION MEETING
ITEM 6: ACTION: Staff Recommendation that the Utilities Advisory Commission Recommend
that the City Council Adopt: (1) a Resolution Approving the Fiscal Year 2016 Water Utility
Financial Plan and Amending the Water Utility Reserve Management Practices; and (2) a
Resolution Amending Rate Schedules W-1 (General Residential Water Service), W-2 (Water
Service from Fire Hydrants), W-3 (Fire Service Connections), W-4 (Residential Master-Metered
and General Non-Residential Water Service), and W-7 (Non-Residential Irrigation Water
Service)
Senior Resource Planner Jon Abendschein provided an update to the preliminary rate
projections that were provided to the UAC at its February meeting. Abendschein stated that
the San Francisco Public Utilities Commission (SFPUC) had previously projected that wholesale
water rates would rise by 15%, but after the UAC's February meeting, the SFPUC advised the
City that its wholesale water rate for FY 2016 is instead projected to increase by 30.7%, which
would increase the City’s wholesale water costs by 14%. He stated that staff had changed its
rate proposal for FY 2016 to a 12% increase instead of 7%, and would use rate stabilization
reserves to spread any remaining cost increase across future years. Staff is working on a public
communications strategy. The result of the change in SFPUC’s wholesale water rates is that the
entire 12% proposed retail rate increase is due to the increased wholesale water cost.
Abendschein showed that the SFPUC's debt service is rising due to the Water System
Improvement Program (WSIP), the program to upgrade and repair the regional water system.
The project had started in 2007 and was projected to end in 2019. Each year the SFPUC issues
new debt to fund the next phase of the project. That meant that each year the annual debt
service costs assigned to wholesale customers like Palo Alto increases, with a corresponding
increase in wholesale water rates. The increases in debt service payments remain in effect until
the debt service is paid off in several decades.
Abendschein said staff incorporated feedback the UAC provided at its February meeting about
post-drought consumption and whether it would return to pre-drought levels. In previous
droughts consumption did not returned to pre-drought levels. Staff took that into account and
changed the water consumption forecast for FY 2016 through FY 2023. This assumption
primarily affected projected future rate increases rather than the proposed FY 2016 rate
increase, and affected them by a percentage point or two. He also noted that the projections
were rate changes, not bill changes, and customers who conserved would see lower bill
increases.
ATTACHMENT F
Commissioner Eglash commended staff on incorporating the comments from the UAC in
February and on responding to the unexpected change in the wholesale price of water.
Commissioner Chang asked if the balance between fixed charges versus volumetric charges was
appropriate, given the drought. She asked whether more revenue should be collected from
volumetric charges if the goal was to encourage conservation.
Abendschein noted that the last cost of service analysis (COSA) resulted in an allocation of fixed
charges of about 15% of the total revenue, which was an increase from the level of fixed
revenues collected prior to that COSA. It was in line with the California Urban Water
Conservation Council’s best management practices. The time to recommend revisions to the
level of fixed charges is at the next COSA.
ACTION:
Chair Foster made a motion to recommend that the City Council adopt: (1) a Resolution
Approving the Fiscal Year 2016 Water Utility Financial Plan and Amending the Water Utility
Reserve Management Practices; and (2) a Resolution Amending Rate Schedules W-1 (General
Residential Water Service), W-2 (Water Service from Fire Hydrants), W-3 (Fire Service
Connections), W-4 (Residential Master-Metered and General Non-Residential Water Service),
and W-7 (Non-Residential Irrigation Water Service). Commissioner Eglash seconded the
motion. The motion carried unanimously (5-0 with Chair Foster, Commissioners Chang, Eglash,
Hall, Melton and Vice Chair Waldfogel voting yes, and Commissioners Cook and Hall absent).