HomeMy WebLinkAboutStaff Report 6689
City of Palo Alto (ID # 6689)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 4/19/2016
City of Palo Alto Page 1
Summary Title: FY 2017 Water Financial Plan and Rate Proposals
Title: Utilities Advisory Committee Recommendation that the City Council
Adopt: (1) a Resolution Approving the Fiscal Year 2017 Water Utility Financial
Plan; and (2) a Resolution Increasing Water Rates by 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)
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) approving the fiscal year (FY) 2017 Water Utility
Financial Plan (Attachment B); and
2. Adopt a resolution (Attachment C) increasing water rates by 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 2017 Water Utility Financial Plan includes projections of the utility’s costs and revenues
for FY 2017 through FY 2026. Costs are projected to rise substantially for the next several years
due primarily to increasing water supply costs. As a result, staff recommends a 6% water rate
increase effective on July 1, 2016 and projects the need for 9% rate increases in FY 2018 and
FY 2019. The 6% increase is needed to recover costs due to an expected 7% increase for the
cost of water from the San Francisco Public Utilities Commission (SFPUC) as well as increased
local operations costs.
City of Palo Alto Page 2
Costs are increasing by 24% from FY 2016 to FY 2026 and these increases are mostly due to
water supply costs. Current projections are that water supply costs will increase by 7% in FY
2017, but with the recent continuing drought, the trajectory of future water supply cost
increases is uncertain. To keep the Operations Reserve healthy while minimizing the impact to
customers, staff proposes spreading the rate increases required to match projected costs over
several years. This is possible with transfers to the Operations Reserve: $4 million from the CIP
Reserve in FY 2017 and $4.7 million and $1.87 million from the Rate Stabilization Reserve in FY
2016 and FY 2017, respectively. These actions will reduce the Rate Stabilization Reserve to zero
by the end of FY 2017.
The UAC reviewed the Water Financial Plan and Rate Proposals at its meeting on March 2,
2016, and unanimously recommended approval of the proposed rates and financial plan.
Background
Every year staff presents the 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, Finance Committee
and Council members as they review the budget and 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.
The Finance Committee reviewed preliminary financial forecasts and rate projections for all
Utilities funds at its March 1, 2016 meeting. Staff has made revisions to those preliminary
projections (but not for the Water Utility).
Discussion
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 described in the 2012
Palo Alto Water Cost of Service & Rate Study, the 2015 Study update and Drought Rate
memorandum completed by Raftelis Financial Consultants.
Proposed Actions for FY 2016
This year’s Water Utility Financial Plan includes the following proposed actions for FY 2016:
1. Reduce the $5.5 million transfer from the Rate Stabilization Reserve to the Operations
Reserve proposed in the FY 2016 Water Financial Plan to $4.7 million.
City of Palo Alto Page 3
Proposed Actions for FY 2017
This year’s Water Utility Financial Plan also includes the following proposed actions for FY 2017:
1. Transfer $1.87 million from the Rate Stabilization Reserve to the Operations Reserve.
2. Transfer $4 million from the CIP Reserve to the Operations Reserve
These transfers 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 2017 Water Financial Plan (Attachment B).
In addition, staff proposes to adjust water rates to the levels shown in Tables 1 through 4,
below, effective July 1, 2016. These changes are projected to increase the system average
water rate by roughly 6%. These rate changes are included in the proposed amended rate
schedules in Attachment D.
Table 1: Water Consumption Charges in $/CCF (Current and Proposed)
Current
(9/1/15)
Proposed
(7/1/16)
Change
$/CCF %
W-1 (Residential) Volumetric Rates ($/CCF)
Tier 1 Rates 5.93 6.30 0.37 6%
Tier 2 Rates 8.38 8.82 0.44 5%
W-2 (Construction) Volumetric Rates ($/CCF)
Uniform Rate 6.92 7.32 0.40 6%
W-4 (Commercial) Volumetric Rates ($/CCF)
Uniform Rate 6.92 7.32 0.40 6%
W-7 (Irrigation) Volumetric Rates ($/CCF)
Uniform Rate 8.29 8.72 0.43 5%
City of Palo Alto Page 4
Table 2: Current and Proposed Monthly Service Charge
Meter
Size
Monthly Service Charge
($/month based on meter size) Change
Current
(9/1/15)
Proposed
(7/1/16) $/mo %
5/8” $16.03 $16.77 $0.74 5%
3/4” $21.50 $22.60 $1.10 5%
1” $32.45 $34.26 $1.81 6%
1 ½” $59.83 $63.40 $3.57 6%
2” $92.67 $98.37 $5.70 6%
3” $196.70 $209.11 $12.41 6%
4” $350.00 $372.31 $22.31 6%
6” $716.82 $762.81 $45.99 6%
8” $1,319.07 $1,403.94 $84.87 6%
10” $2,085.57 $2,219.92 $134.35 6%
12” $2,742.56 $2,919.34 $495.89 6%
Table 3: Current and Proposed Monthly Fire Service Charges
Meter
Size
Monthly Service Charge
($/month based on meter size) Change
Current
(9/1/15)
Proposed
(7/1/16) $/mo %
2” $3.43 $3.79 $0.36 10%
4” $21.22 $23.42 $2.20 10%
6” $61.63 $68.03 $6.40 10%
8” $131.34 $144.97 $13.63 10%
10” $236.20 $260.70 $24.50 10%
12” $381.52 $421.11 $39.59 10%
City of Palo Alto Page 5
Table 4: Drought Surcharges in $/CCF (Current and Proposed)
Current
(9/1/15)
Proposed
(7/1/16)
Change
$/CCF %
10%/15% Reduction
W-1 Residential (Tier 1) 0.19 0.20 $0.01 5%
W-1 Residential (Tier 2) 0.55 0.58 0.03 5%
W-4 (Non-residential and
Master Metered Multi-Family) 0.24 0.26 0.02 8%
W-7 (Irrigation) 0.51 0.53 0.02 4%
20% Reduction
W-1 Residential (Tier 1) 0.39 0.43 0.04 10%
W-1 Residential (Tier 2) 1.14 1.21 0.07 6%
W-4 (Non-residential and
Master Metered Multi-Family) 0.49 0.53 0.04 8%
W-7 (Irrigation) 1.18 1.25 0.07 6%
25% Reduction
W-1 Residential (Tier 1) 0.59 0.64 0.05 8%
W-1 Residential (Tier 2) 1.76 1.85 0.09 5%
W-4 (Non-residential and
Master Metered Multi-Family) 0.72 0.77 0.05 7%
W-7 (Irrigation) 1.93 2.02 0.09 5%
Bill Impact of Proposed Rate Changes
Table 5 shows the impact of the proposed July 1, 2016 rate changes on residential bills. The
average increase is roughly 6%, but some customers may see variations 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. The bill comparison also includes continued activation of the
drought surcharge at the 20% reduction level.
Table 5: Impact of Proposed Rate Changes on Residential Bills
Usage
(CCF/month)
Bill under
Existing Rates
(9/1/15)
Bill under
Proposed Rates
(7/1/16)
Change
$/mo. %
4 41.31 43.69 2.38 6%
(Winter median) 7 63.47 67.18 3.71 6%
(Annual median) 9 82.51 87.24 4.73 6%
(Summer median) 14 130.11 137.39 7.28 6%
25 234.83 247.72 12.89 5%
City of Palo Alto Page 6
Table 6 shows the impact of the proposed July 1, 2016 rate changes on various representative
commercial customer bills. As with residents, this comparison includes the 20% drought
surcharge level.
Table 6: Impact of Proposed Rate Changes on Commercial Bills
Usage
(CCF/month)
Bill under
Current Rates
(9/1/15)
Bill under
Proposed Rates
(7/1/16)
Change
$/mo. %
Commercial (W-4) (5/8” meters)
(Annual median) 12 104.95 110.97 6.02 6%
(Annual average) 64 490.27 519.17 28.90 6%
Irrigation (W-7) (1 ½” meters)
(Winter median) 9 145 153 8 6%
(Summer median) 37 410 432 22 5%
(Winter average) 56 590 622 32 5%
(Summer average) 199 1,944 2047 103 5%
FY 2017 Financial Plan’s Projected Rate Adjustments for the Next Five Fiscal Years
Table 7 shows the projected rate adjustments over the next five years and their impact on the
annual median residential water bill.
Table 7: Projected Rate Adjustments, FY 2016 to FY 2020
FY 2017 FY 2018 FY 2019 FY 2020 FY 2021
Water Utility 6% 9% 9% 6% 2%
Estimated Bill Impact ($/mo)* $4.73 $7.85 $8.56 $6.22 $2.20
* estimated impact on median residential water bill, which is currently $82.51.
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 7% in FY 2017,
but due to the ongoing drought, future increases are uncertain. What is certain is that the
SFPUC’s costs to operate the Regional Water System are primarily fixed costs, so the water rate
is highly dependent on usage by users of the Regional Water System.
The Water Utility may also see a $1 million increase in operating costs for a capital lease for
emergency generators for wells and pump stations. Aside from that, operating and CIP costs
are projected to rise roughly 2% to 4% annually over that time. The FY 2017 Water Utility
Financial Plan assumes the current drought ends in 2017, but based on CPAU’s experience,
consumption is not anticipated to return to pre-drought levels.
Last year, staff discussed uncertainty in the forecasts of capital costs for the water utility in
coming years. Water main replacement costs have risen substantially in recent years, and it is
possible higher CIP expenditures will be required in the future. Staff is in the process of
reviewing a recently completed master plan for the water distribution system, and expects
City of Palo Alto Page 7
better information about future main replacement costs when that plan is completed. The
review is expected to be completed during 2016.
Water Bill Comparison with Surrounding Cities
Table 8 compares water bills under current rates as of February 1, 2016 for residential
customers to those in surrounding communities. CPAU has the highest monthly bills of the
group, although bills for smaller water users are less than in some surrounding communities. It
is unclear at this time what water rate changes may be implemented in these communities in
2016.
Table 8: Residential Monthly Water Bill Comparison
Usage
(CCF/month)
Residential monthly bill comparison ($/month)*
As of February 2016
Palo
Alto
Menlo
Park
Mountain
View Hayward
Redwood
City
Santa
Clara
4 41.31 44.11 31.46 28.68 43.69 16.64
(Winter median) 7 63.47 62.25 48.77 48.42 57.13 29.12
(Annual median) 9 82.51 74.36 60.31 61.58 66.77 37.44
(Summer median) 14 130.11 106.12 89.16 96.24 95.46 58.24
25 234.83 176.80 187.23 181.49 182.14 104.00
Based on the FY 2013 BAWSCA survey, the fraction of SFPUC as the source of potable water supply was
100% for Palo Alto, 95% for Menlo Park, 100% for Redwood City, 87% for Mountain View, 10% for Santa
Clara and 100% for Hayward.
Changes from Preliminary Financial Forecast
After presenting the preliminary financial forecast to the UAC on February 3, 2016, SFPUC
updated its wholesale water rate increase estimate. The wholesale rate is now forecast to
increase from $3.75/per hundred cubic feet (CCF) to $4.05/CCF for FY 2017 instead of the
previously projected $4.50/CCF. This updated projection was provided to the Finance
Committee on March 1 when it reviewed the preliminary financial projections. The change in
the wholesale cost of water allowed for a 6% retail rate increase for FY 2017, rather than the
9% increase in the preliminary financial forecast presented to the UAC. However, SFPUC’s
wholesale water rates for FY 2017 will not be finalized until June 2016.
Changes from Last Year’s Financial Forecast
Staff has projected future water rate increases for several years. Table 9 compares current rate
projections to those projected in the last two year’s Financial Plans. As shown, the FY 2017 rate
projections are somewhat lower than projected last year. In the FY 2015 Financial Plan, the
drought was not known to be as long or severe as it has been so the rate increase projections
are generally lower than current projections.
City of Palo Alto Page 8
Table 9: Projected Water Rate Trajectory for FY 2017 to FY 2026
Projection FY
2017
FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
Current
(FY 2017 Financial Plan) 6% 9% 9% 6% 2% 2% 2% 3% 5% 3%
Last year
(FY 2016 Financial Plan) 8% 8% 8% 3% 1% 2% 3% N/A N/A N/A
Two years ago
(FY 2015 Financial Plan) 6% 6% 6% 5% 1% N/A N/A N/A N/A N/A
Commission Review and Recommendation
The UAC reviewed this proposal at its March 2, 2016 meeting. Staff noted that the rate
projection had changed since the February 3, 2016 meeting as a result of updated wholesale
water rate projections from the SFPUC. The UAC discussed the factors that require a rate
increase noting that expenses rose 15% from FY 2015 to FY, but revenues actually dropped by
4% despite a 12% water rate increase (plus the imposition of drought surcharges), a
phenomenon that occurred since customers used much less water in response to the State’s
call for dramatic water use reductions due to the severe drought.
After discussion the UAC voted to recommend that the Council adopt resolutions approving the
FY 2017 Water Financial Plan and increasing water rates by amending Rate Schedules W-1, W-2,
W-3, W-4 and W-7. The vote was unanimous (5-0) with Chair Foster, Commissioners Ballantine,
Danaher, Eglash, and Schwartz voting yes and Vice Chair Cook and Commissioner Hall absent.
The draft excerpted minutes from the UAC’s March 2, 2016 meeting are provided as
Attachment E.
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 State Constitution (added
by Proposition 218). The Financial Plans and amended rate schedules will then go to the City
Council with the FY 2017 budget for adoption, at which time the public hearing required by
Article XIIID of the State Constitution 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 6% ($1.9
million) as a result of these rate increases. See the FY 2017 Water Financial Plan (Attachment B)
for a more comprehensive overview of projected cost and revenue changes for the next ten
years.
City of Palo Alto Page 9
Policy Implications
The proposed water rate adjustments are consistent with the Council-adopted Reserve
Management Practices that are part of the Financial Plans, and were developed using a cost of
service study and methodology consistent with the cost of service requirements of Proposition
218.
Environmental Review
The Finance Committee’s review and recommendation to Council on the FY 2017 Water
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.
Attachments:
Attachment A: Resolution Approving the FY 2017 Water Financial Plan (PDF) (PDF)
Attachment B: Proposed FY 2017 Water Financial Plan (PDF)
Attachment C: Resolution of the Council of the City of Palo Alto Increasing Water Rates
and Amending Rate Schedules W-1, W-2, W-3, W-4 and W-7 (PDF)
Attachment D: Proposed Amendments to Rate Schedules W-1, W-2, W-3, W-4, and W-
7, effective 7-1-2016 (PDF)
Attachment E: Excerpted UAC Draft Minutes of March 2, 2016 (PDF)
Attachment A
* NOT YET APPROVED *
Resolution No. _________
Resolution of the Council of the City of Palo Alto Approving the
FY 2017 Water Utility Financial Plan
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.
The Council of the City of Palo Alto does hereby RESOLVE as follows:
SECTION 1. The Council hereby adopts the FY 2017 Water Utility Financial Plan.
SECTION 2. The Council hereby approves the transfer of $4.7 million in FY 2016 from
the Rate Stabilization Reserve to the Operations Reserve, as described in the FY 2017 Water
Utility Financial Plan approved via this resolution.
/ /
/ /
/ /
/ /
/ /
//
060322 sdl 6053681
Attachment A
* NOT YET APPROVED *
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
060322 sdl 6053681
FY 2017 WATER
UTILITY
FINANCIAL PLAN
FY 2017 TO FY 2026
ATTACHMENT B
WATER UTILITY FINANCIAL PLAN
February 2016 2 | Page
FY 2017 WATER UTILITY
FINANCIAL PLAN
FY 2017 TO FY 2026
TABLE OF CONTENTS
Section 1: Definitions and Abbreviations................................................................................ 4
Section 2: Executive Summary and Recommendations ........................................................... 4
Section 2A: Overview of Financial Position .................................................................................. 4
Section 2B: Summary of Proposed Actions .................................................................................. 5
Section 3: Detail of FY 2017 Rate and Reserves Proposals ....................................................... 5
Section 3A: Rate Design ............................................................................................................... 5
Section 3B: Current and Proposed Rates ..................................................................................... 6
Section 3C: Bill Impact of Proposed Rate Changes ...................................................................... 8
Section 3D: Proposed Reserve Transfers ..................................................................................... 9
Section 4: Utility Overview .................................................................................................... 9
Section 4A: Water Utility History ................................................................................................. 9
Section 4B: Customer Base ........................................................................................................ 10
Section 4C: Distribution System ................................................................................................. 11
Section 4D: Cost Structure and Revenue Sources ...................................................................... 11
Section 4E: Reserves Structure ................................................................................................... 12
Section 4F: Competitiveness ...................................................................................................... 12
Section 5: Utility Financial Projections ................................................................................. 13
Section 5A: Load Forecast .......................................................................................................... 13
Section 5B: FY 2011 to FY 2015 Cost and Revenue Trends ........................................................ 14
Section 5C: FY 2015 Results ....................................................................................................... 15
Section 5D: FY 2016 Projections ................................................................................................ 16
Section 5E: FY 2017-FY 2026 Projections ................................................................................... 16
Section 5F: Risk Assessment and Reserves Adequacy ............................................................... 18
Section 5G: Alternate Scenarios................................................................................................. 19
WATER UTILITY FINANCIAL PLAN
February 2016 3 | Page
Section 5H: Long-Term Outlook ................................................................................................. 21
Section 6: Details and Assumptions ..................................................................................... 21
Section 6A: Water Purchase Costs ............................................................................................. 21
Section 6B: Operations .............................................................................................................. 23
Section 6C: Capital Improvement Program (CIP) ....................................................................... 24
Section 6D: Debt Service ............................................................................................................ 27
Section 6E: Other Revenues ....................................................................................................... 28
Section 6F: Sales Revenues ........................................................................................................ 28
Section 7: Communications Plan .......................................................................................... 28
Appendices ......................................................................................................................... 30
Appendix A: Water Utility Financial Forecast Detail ................................................................. 31
Appendix B: Water Utility Capital Improvement Program (CIP) Detail ..................................... 33
Appendix C: Water Utility Reserves Management Practices ..................................................... 35
Appendix D: Description of Water Utility Operational Activities ............................................... 38
Appendix E: Sample of Water Utility Outreach Communications ............................................. 39
WATER UTILITY FINANCIAL PLAN
February 2016 4 | Page
SECTION 1: DEFINITIONS AND ABBREVIATIONS
BAWSCA Bay Area Water Supply and Conservation Agency
CCF The standard unit of measurement for water delivered to water customers, equal to
one hundred cubic feet, or roughly 748 gallons.
CIP Capital Improvement Program
CPAU City of Palo Alto Utilities Department
O&M Operations and Maintenance
RFC Raftelis Financial Consultants, Inc.
SFPUC San Francisco Public Utilities Commission
SFWD San Francisco Water Department
UAC Utilities Advisory Commission
WSIP The SFPUC’s Water System Improvement Program to seismically strengthen the
transmission lines of the Hetch Hetchy regional water system.
SECTION 2: EXECUTIVE SUMMARY AND RECOMMENDATIONS
This document presents a Financial Plan for the City’s Water Utility for the next ten 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 2A: OVERVIEW OF FINANCIAL POSITION
By FY 2026, costs for the Water Utility will increase 24% over FY 2016 levels, as shown in Table
1. Most of increase is related to the cost of water supplied by the San Francisco Public Utilities
Commission (SFPUC), which is projected to rise 34% 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, but is projected to remain
relatively level during the forecast horizon. Staff projects only inflationary increases to most
other costs over the forecast period.
Table 1: Expenses for FY 2015 to FY 2026 (Thousand $’s)
Expenses
($000)
FY
2015
(act.)
FY
2016
(est.)
FY
2017
FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
Water
Purchases 15,670 17,645 18,899 19,976 21,177 21,259 21,475 21,697 21,915 22,302 23,652 23,426
Operations 15,826 17,442 17,065 17,509 17,960 18,429 18,863 19,276 19,703 20,135 20,578 21,033
Capital
Projects 8,580 11,039 10,216 10,012 10,252 10,555 10,867 11,189 11,519 11,860 12,211 12,572
TOTAL 40,077 46,127 46,180 47,498 49,390 50,243 51,205 52,161 53,137 54,297 56,441 57,031
To cover these increases in costs, revenues (and therefore rates) need to increase over the next
several years to balance costs and revenues. The rate trajectory shown in Table 2 assumes that
WATER UTILITY FINANCIAL PLAN
February 2016 5 | Page
the drought continues through 2017 and that consumption does not return to its pre-drought
levels. Table 2 also compares current rate projections to those projected in last year’s Financial
Plan.
Table 2: Projected Water Rate Trajectory for FY 2017 to FY 2026
Projection FY
2017
FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
Current 6% 9% 9% 6% 2% 2% 2% 3% 5% 3%
Last year 8% 8% 8% 3% 1% 2% 3% N/A N/A N/A
The Water Utility has a Rate Stabilization Reserve that can be used to smooth rate increases
over several years. This Financial Plan projects that these reserves will be exhausted by the end
of FY 2017. The Water 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 2026 ($000)
Reserve FY 2016 FY 2017 FY 2018 to FY 2026
Capital Improvement - (4,000) -
Rate Stabilization (4,700) (1,867) -
Operations 4,700 5,867 -
SECTION 2B: SUMMARY OF PROPOSED ACTIONS
Staff proposes the following actions for the Water Utility in FY 2016:
1. Transfer $4.7 million from the Rate Stabilization Reserve to the Operations Reserve. See
Section 3D: Proposed Reserve Transfers for more details.
Staff proposes the following actions for the Water Utility in FY 2017:
1. Increase rates as shown in Section 3B: Current and Proposed Rates. These changes are
projected to increase the system average rate by roughly 6%.
2. Transfer $1.867 million from the Rate Stabilization Reserve to the Operations Reserve.
See Section 3D: Proposed Reserve Transfers for more details.
3. Transfer $4 million from the CIP Reserve to the Operations Reserve.
SECTION 3: DETAIL OF FY 2017 RATE AND RESERVES PROPOSALS
SECTION 3A: 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 staff’s assessment of the financial
WATER UTILITY FINANCIAL PLAN
February 2016 6 | Page
position of the Water Utility, and updated using the methodology from the March 2012 Palo
Alto Water Cost of Service & Rate Study by Raftelis Financial Consultants, Inc., as well as
Raftelis’ 2015 memoranda updating the 2012 Study and analyzing drought rates (Staff Report
2676). 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.
SECTION 3B: CURRENT AND PROPOSED RATES
The current rates and surcharges were effective on September 1, 2015. Rates were re-aligned
to the results of an updated cost of service study, performed by Raftelis Financial Consultants,
Inc. (RFC), which both developed the drought surcharges and reviewed the City’s water rate
methodology and structure in light of recent court decisions interpreting the state
constitution’s cost of service requirements. RFC examined and validated both the City’s
methodology and rate structure as fundamentally sound, recommending only minor
adjustments to ensure that peaking costs were equitably allocated to each customer class and
residential rate tier.
CPAU has five rate schedules: one for separately metered residential customers (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 and Table 6 show the current and proposed monthly service charges for all rate
schedules. Staff evaluated grouping the smallest meter sizes (5/8”, 3/4” and 1” meters) into
one charge category, but confirmed that there is a significant variation in actual demand on the
water distribution system among customers using each of these water sizes. As such, staff is
not recommending a change to the monthly service charge schedule.
Table 5 shows the consumption charges. Table 7 shows the current and proposed drought
surcharge levels. 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 and 2015 update, prepared by RFC.
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Table 4: Current and Proposed Monthly Service Charges
Meter
Size
Monthly Service Charge
($/month based on meter size) Change
Current (9/1/15) Proposed (7/1/16) $/mo %
5/8” $16.03 $16.77 $0.74 5%
3/4” $21.50 $22.60 $1.10 5%
1” $32.45 $34.26 $1.81 6%
1 ½” $59.83 $63.40 $3.57 6%
2” $92.67 $98.37 $5.70 6%
3” $196.70 $209.11 $12.41 6%
4” $350.00 $372.31 $22.31 6%
6” $716.82 $762.81 $45.99 6%
8” $1,319.07 $1,403.94 $84.87 6%
10” $2,085.57 $2,219.92 $134.35 6%
12” $2,742.56 $2,919.34 $495.89 6%
Table 5: Current and Proposed Water Consumption Charges
Current
(9/1/15)
Proposed
(7/1/16)
Change
$/CCF %
W-1 (Residential) Volumetric Rates ($/CCF)
Tier 1 Rates 5.93 6.30 0.37 6%
Tier 2 Rates 8.38 8.82 0.44 5%
W-2 (Construction) Volumetric Rates ($/CCF)
Uniform Rate 6.92 7.32 0.40 6%
W-4 (Commercial) Volumetric Rates ($/CCF)
Uniform Rate 6.92 7.32 0.40 6%
W-7 (Irrigation) Volumetric Rates ($/CCF)
Uniform Rate 8.29 8.72 0.43 5%
Table 6: Current and Proposed Monthly Fire Service Charges
Meter
Size
Monthly Service Charge
($/month based on meter size) Change
Current (9/1/15) Proposed (7/1/16) $/mo %
2” $3.43 $3.79 $0.36 10%
4” $21.22 $23.42 $2.20 10%
6” $61.63 $68.03 $6.40 10%
8” $131.34 $144.97 $13.63 10%
10” $236.20 $260.70 $24.50 10%
12” $381.52 $421.11 $39.59 10%
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Table 7: Current and Proposed Drought Surcharge Charges
Current
(9/1/15)
Proposed
(7/1/16)
Change
$/CCF %
10%/15% Reduction ($/CCF)
W-1 Residential (Tier 1) 0.19 0.20 $0.01 5%
W-1 Residential (Tier 2) 0.55 0.58 0.03 5%
W-4 (Non-residential and Master
Metered Multi-Family) 0.24 0.26 0.02 8%
W-7 (Irrigation) 0.51 0.53 0.02 4%
20% Reduction ($/CCF)
W-1 Residential (Tier 1) 0.39 0.43 0.04 10%
W-1 Residential (Tier 2) 1.14 1.21 0.07 6%
W-4 (Non-residential and Master
Metered Multi-Family) 0.49 0.53 0.04 8%
W-7 (Irrigation) 1.18 1.25 0.07 6%
25% Reduction ($/CCF)
W-1 Residential (Tier 1) 0.59 0.64 0.05 8%
W-1 Residential (Tier 2) 1.76 1.85 0.09 5%
W-4 (Non-residential and Master
Metered Multi-Family) 0.72 0.77 0.05 7%
W-7 (Irrigation) 1.93 2.02 0.09 5%
SECTION 3C: BILL IMPACT OF PROPOSED RATE CHANGES
Table 8 shows the impact of the proposed July 1, 2016 rate changes on the median residential
bill. The average increase is roughly 6%, but some customers may see slightly higher or lower
increases due to slight changes in the composition of the utility’s costs. Table 8 is presented
assuming continued activation of the drought surcharge at the 20% reduction level.
Table 8: Impact of Proposed Water Rate Changes on Residential Bills
Usage
(CCF/month)
Bill under
Current Rates
(9/15/15)
Bill under
Proposed
Rates (7/1/16)
Change
$/mo. %
4 $ 41.31 $ 43.69 $ 2.38 6%
(Winter median) 7 63.47 67.18 3.71 6%
(Annual median) 9 82.51 87.24 4.73 6%
(Summer median) 14 130.11 137.39 7.28 6%
25 234.83 247.72 12.89 5%
Table 9 shows the impact of the proposed July 1, 2016 rate changes on various representative
commercial customer bills. This comparison includes continuation of the drought surcharge at
the 20% reduction level.
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February 2016 9 | Page
Table 9: Impact of Proposed Water Rate Changes on Commercial Bills
Usage
(CCF/month)
Bill under
Current Rates
(9/15/15)
Bill under
Proposed Rates
(7/1/16)
Change
$/mo. %
Commercial (W-4) (5/8” meters)
(Annual median) 12 $ 104.95 110.97 6.02 6%
(Annual average) 64 490.27 519.17 28.90 6%
Irrigation (W-7) (1 ½” meters)
(Winter median) 9 145 153 8 6%
(Summer median) 37 410 432 22 5%
(Winter average) 56 590 622 32 5%
(Summer average) 199 1,944 2,047 103 5%
SECTION 3D: PROPOSED RESERVE TRANSFERS
In the FY 2016 Financial Plan, several transfers between reserves were discussed for FY 2016.
CIP related funds were transferred out of the Reappropriations Replacement into the CIP
Reserve, and $5.5 million was proposed to be transferred from the Rate Stabilization Reserve
into the Operations Reserve.
Due to the long running drought in California, and as lower expenses in FY 2015 resulted in
higher ending reserve balances than initially projected, staff recommends reducing the $5.5
million transfer from the Rate Stabilization Reserve in FY 2016 to $4.7 million, and proposes
transferring $1.87 million in FY 2017. This transfer will exhaust the Rate Stabilization Reserve, as
planned for and discussed in Section 4E: Reserves Structure, and 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.
A proposed $4 million transfer from the CIP Reserve to the Operations Reserve was also
discussed in the FY 2016 Financial Plan. This transfer will help fund the Operations Reserve, as
well as bring the CIP Reserve closer to its target reserve level. The impact of these transfers on
reserves levels can be seen in Section 4E: Reserves Structure and Appendix A: Water Utility
Financial Forecast Detail.
SECTION 4: UTILITY OVERVIEW
This section provides an overview of the utility and its operations. It is intended as general
background information and to help readers better understand the forecasts in Section 5:
Utility Financial Projections and Section 6: Details and Assumptions.
SECTION 4A: 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
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February 2016 10 | Page
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
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, nearly completed,
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 $4.8 billion Water System Improvement Project (WSIP), which is
ongoing.
SECTION 4B: 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.
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.
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Figure 1: Cost Structure (FY 2015)
39%
40%
21%
Water Purchases
Operations
Capital
Figure 2: Revenue Structure (FY 2015)
93%
7%
Sales of Water
Other Revenue
SECTION 4C: 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.
SECTION 4D: COST STRUCTURE AND REVENUE SOURCES
As shown in Figure 1, water purchase
costs accounted for roughly 39% of the
Water Utility’s costs in FY 2015.
Operational costs represented roughly
40%, and capital investment was
responsible for the remaining 21%.
Water purchase costs are projected to
rise to roughly 41% of costs by FY 2026.
The Water Utility receives 93% 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 constitutes at most 30%
of the utility’s total revenue from all charges1.
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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SECTION 4E: 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:
• 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.
• 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 CIP can also
act as a contingency reserve for the CIP. 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 4F: COMPETITIVENESS
Table 10 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.
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Table 10: Residential Monthly Water Bill Comparison
Usage
(CCF/month)
Residential monthly bill comparison ($/month)*
As of February 2016
Palo
Alto
Menlo
Park
Mountain
View Hayward
Redwood
City
Santa
Clara
4 41.31 44.11 31.46 28.68 43.69 16.64
(Winter median) 7 63.47 62.25 48.77 48.42 57.13 29.12
(Annual median) 9 82.51 74.36 60.31 61.58 66.77 37.44
(Summer median) 14 130.11 106.12 89.16 96.24 95.46 58.24
25 234.83 176.80 187.23 181.49 182.14 104.00
* All comparisons use the 5/8” meter size.
SECTION 5: UTILITY FINANCIAL PROJECTIONS
SECTION 5A: LOAD FORECAST
Figure 3 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 during the 2007-2009 recession and during the current drought. Water use is
down by similar amounts among both commercial and residential customers. Both summertime
and wintertime use have decreased for all customer classes.
Figure 3: Historical Water Consumption
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Figure 4 shows the forecast of water consumption through FY 2026, as denoted by the dotted
line.
Figure 4: Forecast Water Consumption
Palo Alto is currently experiencing drought conditions with State mandated 24% water use
restrictions in effect. The current forecast assumes current conditions continue through FY
2017, with the drought easing in spring of 2017. It also assumes consumption only returns to
50% of its pre-drought levels, which is consistent with patterns experienced in prior droughts.
SECTION 5B: FY 2011 TO FY 2015 COST AND REVENUE TRENDS
Figure 5 and the tables in Appendix A: Water Utility Financial Forecast Detail show how costs
have changed during the last five years as well as how they are projected to change over the
next decade.
The annual expenses for the water utility rose substantially between 2011 and 2015. The
increases were primarily related to water purchase costs, which increased 47% from $10.7
million in FY 2011 to $15.7 million in FY 2014. A more in-depth discussion of water purchase
costs will be found in Section 6A: Water Purchase Costs. Operations cost increased by about 3%
annually, while CIP costs stayed relatively flat, except in FY 2013 when there was a hold on new
CIP spending to permit completion of a backlog of projects. This budgetary hold allowed for
backlogged water main replacement projects to be started, which consumed surplus capital
reserves.
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Figure 5: Water Utility Expenses, Revenues, and Rate Changes:
Actual Costs through FY 2015 and Projections through FY 2026
SECTION 5C: FY 2015 RESULTS
In early 2014, when proposing rate adjustments to be effective on July 1, 2014, staff forecast
the need for a 4% rate increase. However, higher sales in FY 2014, and projected increased
sales in FY 2015 increased reserves such that no rate change was needed for FY 2015. Forecast
revenues for FY 2015 were actually $41.2 million instead of the projected revenues of $36.4
million. The largest reason for this was a return of funds related to a return of CIP funds.
Connection and capacity fees were, and have continued to be, higher than forecast. Actual
expenses for FY 2015 were $40.1 million compared to the projected expenses of $38.7 million.
Table 11 summarizes the variances from forecast.
Actual Projected
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Table 11: FY 2015, Actual Results vs. 2014 Forecast
Net Cost/
(Benefit)
Type of
change
Return of capital project funds ($2,667,000) Revenue increase
Connection and capacity fees higher than forecast ($1,043,000) Revenue increase
Water supply costs lower than expected (700,000) Cost savings
Other revenues (interest income, etc.) were higher than
forecasted
($1,152,000) Revenue increase
Operations costs lower than expected (1,300,000) Cost savings
Capital project costs higher than projected 3,500,000 Cost increase
Net Cost / (Benefit) of Variances ($3,362,000)
SECTION 5D: FY 2016 PROJECTIONS
Several factors have contributed to changes between last year’s forecast and this year’s
projections. Most notably, the ongoing drought has reduced projected FY 2016 sales by around
12%. The activation of a drought rate surcharge in September 2015, however, means that FY
2016 revenues are projected to be only 4.6% lower than forecast. On the cost side, reduced
purchases and lower than forecast wholesale supply rates from the SFPUC are expected to
result in supply cost decreases of 13.7% for FY 2016. Notable are projected CIP cost increases of
$2.3 million, or 26%, mainly due to general cost increases and completing some projects. Table
12 summarizes the changes from last year’s forecast.
Table 12: FY 2016 Change in Projected Results, 2016 Forecast vs 2017 Forecast
Net Cost/
(Benefit)
Type of
change
Lower purchase costs ($2,809,000) Cost savings
Higher misc. revenues (interest income, fees) ($111,000) Revenue increase
Lower sales revenue $2,039,000 Revenue decrease
Capital project costs higher than projected $2,315,000 Cost increase
Higher Operations budgets $163,000 Cost increase
Net Cost / (Benefit) of Variances $1,507,000
SECTION 5E: FY 2017-FY 2026 PROJECTIONS
As can be seen in Figure 5 above, costs for the Water Utility are not projected to change
significantly between FY 2016 and FY 2017. However, as discussed earlier, water supply costs
are the main reason for the cost increases. Water supply costs are projected to increase by 7%
in FY 2017 and grow steadily over the coming years. Operations costs include will increase by $1
million in FY 2017 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 the same rate of inflation used in the City’s long-term financial plans (2.5 to
3%/year), though there is still uncertainty with regard to the utility’s future costs for main
replacement. See Section 6: Details and Assumptions for more detail on the costs that make up
these projections, as well as the various assumptions underlying the projections.
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Revenues are below expenses and will require annual rate increases between 6% and 9%
through FY 2020 to keep up with these cost increases even with the use of the Rate
Stabilization Reserve 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 deficits are forecast. To help close this gap, revenues were increased by 12% in FY 2016.
Reserves trends based on these revenue projections are shown in Figure 6 below. The Rate
Stabilization Reserve is projected to have a zero balance by the end of FY 2017, and the CIP
Reserve is projected to decrease by $4 million by the end of FY 2017. Assuming these increases
in revenue, the Operations Reserve, the main contingency reserve, is expected to remain above
the minimum reserve level and will be adequate to meet all identified risks, as discussed in
Section 5F: Risk Assessment and Reserves Adequacy.
These projections assume that drought restrictions end in FY 2017, and that the request for
water usage reductions remains at 24%. If the drought worsens or continues longer than
projected, the level of the drought surcharge currently in place may need to be reviewed. The
forecast also assumes that water main replacement project costs do not increase by more than
inflation. This is a major uncertainty as staff awaits the results of the Water Master Plan study
to determine the advisable water main replacement strategy.
Figure 6: Water Utility Reserves
Actual Reserve Levels through FY 2015 and Projections through FY 2026
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February 2016 18 | Page
SECTION 5F: 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 7. Reserve levels also exceed the
short term risk assessment for the utility. Note that while the Operations Reserve is above the
target level in FY 2017, it falls to below the target (but above the minimum) in FY 2018 through
FY 2020.
Figure 7: Operations Reserve Adequacy
Table 13 summarizes the risk assessment calculation for the Water Utility through FY 2021. The
same methodology is used for FY 2022 through FY 2026 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.
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Table 13: Water Risk Assessment ($000)
FY 2017 FY 2018 FY 2019 FY 2020 FY 2021
Total non-commodity revenue $18,406 $20,744 $23,233 $24,976 $25,226
Max. revenue variance, previous ten years 13% 13% 13% 13% 13%
Risk of revenue loss $1,819 $2,050 $2,296 $2,468 $2,492
CIP Budget $10,216 $10,012 $10,252 $10,555 $10,867
CIP Contingency @10% $1,022 $1,001 $1,025 $1,056 $1,087
Total Risk Assessment value $2,840 $3,051 $3,321 $3,523 $3,579
SECTION 5G: ALTERNATE SCENARIOS
At the UAC’s February 2016 meeting, it was suggested that staff prepare two alternate
scenarios for rate increases. The first (“Target”) scenario keeps the Operations Reserve at or
near the Target level throughout the forecast period as shown in Figure 8 below. The second
(“Minimum”) has no rate change in FY 2017 and lets the Operations Reserve stay at minimum
for five years as shown in Figure 9 below. Both options as well as the proposed rate
adjustments are shown in Table 14.
Table 14: Projected Water Rate Trajectory for FY 2017 to FY 2026
FY
2017
FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
Proposed 6% 9% 9% 6% 2% 2% 2% 3% 5% 3%
Target 3% 20% 3% 2% 3% 3% 2% 4% 2% 4%
Minimum 0% 18% 7% 3% 3% 4% 3% 4% 3% 4%
The Target scenario requires a 3% rate increase (smaller than the proposed 6% increase) in FY
2017, but requires a very large rate increase (20%) in FY 2018 to make up for another year with
a significant deficit with revenues not covering costs. The level of the Operations Reserve in the
target scenario is shown in Figure 8 below.
The Minimum scenario also requires a significant rate increase (18%) in FY 2018 if no rate
change is implemented in FY 2017 with a large (7%) rate increase required for FY 2019. The
level of the Operations Reserve in the target scenario is shown in Figure 9 below.
Staff recommends a 6% water rate increase in FY 2017 to moderate the rate increases that are
projected in FY 2018 while keeping the Water Operations Reserve at healthy levels.
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Figure 8: Operations Reserve at Target Level
Figure 9: Operations Reserve at Minimum for FY 2018 through FY 2021
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SECTION 5H: 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. The Water System Master
Plan, currently under review, 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 infrastructure
replacement and upgrades. In addition, CPAU’s water supplier, the SFPUC, has replaced and
seismically strengthened its water transmission infrastructure, which will benefit 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. Availability of water from SFPUC’s Regional Water System may change with changing
seasonal precipitation patterns. 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 6: DETAILS AND ASSUMPTIONS
SECTION 6A: WATER PURCHASE COSTS
CPAU purchases all of the potable water supplies from the SFPUC, which owns and operates the
Hetch Hetchy Regional Water 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 Alto uses roughly 7% of the water delivered by the SFPUC to BAWSCA
member agencies.
The Hetch Hetchy Regional Water System 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 $4.8 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 has resulted 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
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February 2016 22 | Page
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 $3.75 per CCF in FY 2016, and is forecasted to increase to over
$5.00 per CCF by FY 2025. Figure 10 shows the SFPUC’s actual wholesale water rate since FY
2009 and a projection through FY 2026. Note that the wholesale water rate decreased in FY
2014, but the apparent rate decrease is due to a part of the debt being directly paid by the
BAWSCA agencies. This cost is paid in addition to the wholesale water rate and add about
$0.35 to $0.45 per CCF to the wholesale rate.
The SFPUC’s water rate projections show a less steeply increasing rate trajectory after all of the
debt for the WSIP has been issued. 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 conducting condition assessments of other “up-country” 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.
In January 2016, the SFPUC provided a range for FY 2017 wholesale water rates of between $4
and $5 per CCF. In February, the SFPUC updated its estimate for FY 2017 to $4.05/CCF, but
there is much uncertainty surrounding the length of the drought and water usage by the
BAWSCA agencies. Since the State has mandated water use reductions for most BAWSCA
agencies by 20% or more, SFPUC’s rates will invariably need to increase since its costs are
almost entirely fixed with no relation to the quantity of water that delivered by the system.
As shown in Figure 10, this year’s projection of SFPUC wholesale rates has increased from the
previous year’s projection. If the drought ends in FY 2017 and sales increase (or at least don’t
decline further), then rate projections may level out. However, if snow and rain do not
materialize, current calls for restricted usage may continue or even be increased.
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February 2016 23 | Page
Figure 10: Historical and Projected SFPUC Wholesale Water Rate
SECTION 6B: 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
administration, as well as debt service and other transfers. Additional detail on Water
Utility debt service is provided in Section 6D: 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 D: Description of Water Utility Operational Activities includes detailed descriptions of
the work associated with each of these activities.
From FY 2011 to FY 2015 Operations costs (excluding debt service, rent, and transfers)
increased 3.5% per year on average (see Figure 11). The increases were driven by allocated
charges, which increased by 7% 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
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February 2016 24 | Page
have varied from year to year, but are expected to remain relatively low and stable through the
forecast period.
In FY 2017 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
SECTION 6C: 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.
Actual
Projected
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February 2016 25 | Page
• 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 15 shows the FY 2016 adopted budget, with actual spending and remaining budget as of
December 31, 2015. 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 15: 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:
• 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, costs have escalated after the recession.
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February 2016 26 | Page
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 sufficient. Results are being reviewed and follow
up questions prepared.
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.
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 2016.
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 2016 to FY 2020 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.
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February 2016 27 | Page
SECTION 6D: 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. CPAU is in
compliance with all covenants on both bonds.
The first bond is the 2009 Water Revenue Bond, Series A, issued for $35 million to finance
construction of the Emergency Water Supply and Storage project (the El Camino Reservoir, new
wells, rehabilitation of existing wells and tanks, etc.) 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 shown in Table 16:
Table 16: Water Utility Debt Service ($000)
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
2009 Water Revenue Bonds,
Series A (net of grants) 2,002 2,012 2,031 2,046 2,064 2,079 2,101 2,151
2011 Utility Revenue Bonds,
Series A 657 657 656 654 656 657 657 657
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. This 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 17 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.
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February 2016 28 | Page
Table 17: 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
SECTION 6E: OTHER REVENUES
The Water Utility receives most of its revenues from sales of water, but about 7% comes from
other sources. The largest revenue source in FY 2015 was a one-time return of previously
budgeted CIP dollars (36%). The next largest source is connection and capacity fees, which in FY
2015 represented 29% of revenue from sources other than water sales. The remainder
consisted 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 increased connection fees that 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.
SECTION 6F: SALES REVENUES
Sales revenue projections are based on the load forecast in Section 5A: Load Forecast and the
projected rate changes shown in Figure 5. 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 7: COMMUNICATIONS PLAN
In FY 2017, communications will continue to focus on water utility rate increases, including the
reasons why and how rates may change contingent upon continued drought conditions. The
City will also communicate how infrastructure costs and rising rates from our wholesale water
supplier, the San Francisco Public Utilities Commission, increases CPAU costs and must be
recovered through rate increases. 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
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February 2016 29 | Page
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.
WATER UTILITY FINANCIAL PLAN
February 2016 30 | Page
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: Description of Water Utility Operational Activities
Appendix E: Sample of Water Utility Outreach Communications
APPENDIX A: WATER UTILITY FINANCIAL FORECAST DETAIL
1 FISCAL YEAR 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 FY 2024 FY 2025 FY 2026
2
3 WATER SUPPLY
4 Purchases 5,416,220 5,538,305 5,532,947 5,507,153 4,671,433 4,127,085 4,172,372 4,353,850 4,556,414 4,486,307 4,448,095 4,410,865 4,372,643 4,328,601 4,285,924 4,231,873
5 Sales 4,992,473 5,062,873 5,097,392 5,047,148 4,433,016 3,858,825 3,859,444 4,027,311 4,214,683 4,149,834 4,114,488 4,080,051 4,044,695 4,003,956 3,964,480 3,914,482
6 (530,686) -12.1%
7 BILL AND RATE CHANGES
8 Variable Charge (Supply)15%38%11%-16%25%22%7%2%2%2%2%2%2%3%3%3%
9 Variable Charge (Distribution)-7%-12%17%30%-16%10%5%15%14%9%2%2%2%3%3%6%
10 Change in System Average Rate 0%12%22%8%0%11%6%9%9%6%2%2%2%3%3%5%
11
12 STARTING RESERVES
13 Reappropriations (Non-CIP)54,000 20,000 - - - - - - - - - - - - - -
14 Commitments (Non-CIP)40,000 765,000 714,000 2,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000
15 Restricted for Debt Service 3,348,000 3,348,000 3,225,000 3,225,000 3,331,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000
16 Emergency Plant Replacement 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 - - - - - - - - - - -
17 Capital Reserve - - - - - 4,000,000 13,256,000 9,256,000 9,256,000 9,256,000 9,256,000 9,256,000 9,256,000 9,256,000 9,256,000 9,256,000
18 Rate Stabilization Reserve 17,037,000 10,639,000 7,996,000 17,272,000 20,133,000 6,567,000 1,867,000 - - - - - - - - -
19 Operations Reserve - - - - - 11,663,836 9,807,734 11,017,309 7,655,292 7,759,702 9,208,904 10,185,947 10,710,850 10,890,498 10,976,735 10,969,473
20 Unassigned - - - - - - - - - - - - - - - -
21 TOTAL STARTING RESERVES 21,479,000 15,772,000 12,935,000 21,499,000 24,811,000 25,893,836 28,593,734 23,936,309 20,574,292 20,678,702 22,127,904 23,104,947 23,629,850 23,809,498 23,895,735 23,888,473
22
23 REVENUES
24 Net Sales 26,133,998 30,673,882 36,647,924 39,029,262 33,654,549 36,263,267 38,159,141 40,715,075 46,016,043 48,155,815 48,584,946 49,023,735 49,587,825 50,566,700 51,576,926 53,401,555
25 Other Revenues and Transfers In 2,812,063 5,892,133 6,811,461 4,053,920 7,504,848 3,307,155 3,363,253 3,420,419 3,478,285 3,536,762 3,597,449 3,662,424 3,728,765 3,816,351 3,906,270 3,998,583
26 TOTAL REVENUES 28,946,061 36,566,015 43,459,385 43,083,182 41,159,397 39,570,422 41,522,394 44,135,494 49,494,328 51,692,577 52,182,395 52,686,158 53,316,590 54,383,051 55,483,196 57,400,138
27
28 EXPENSES 26.4%
29 Water Purchases 10,677,914 14,889,399 16,605,351 15,705,288 15,669,935 17,644,669 18,899,310 19,976,217 21,177,479 21,259,327 21,475,294 21,696,607 21,914,567 22,302,108 22,701,664 23,050,946
30 Operating Expenses
31 Administration
32 Allocated Charges 1,798,630 2,003,116 2,422,880 2,366,077 2,342,985 2,343,499 2,402,461 2,462,917 2,524,882 2,588,411 2,653,298 2,719,668 2,787,709 2,857,466 2,928,969 3,002,261
33 Rent 2,122,405 2,156,887 1,911,963 2,192,454 2,249,457 2,677,106 2,757,419 2,840,142 2,925,346 3,013,106 3,103,500 3,196,605 3,292,503 3,391,278 3,493,016 3,597,807
34 Debt Service 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 3,224,553 3,224,553 3,224,553
35 Transfers and Other Adjustments 200,286 301,963 2,241,793 335,808 63,612 376,108 383,630 391,302 399,129 407,111 415,253 423,558 432,030 432,030 432,030 432,030
36 Subtotal, Administration 7,463,102 7,847,952 9,795,801 8,114,546 7,874,923 8,619,319 8,762,826 8,917,030 9,070,214 9,229,266 9,394,893 9,563,393 9,736,794 9,905,326 10,078,567 10,256,650
37 Resource Management 575,834 552,972 557,910 570,040 488,331 601,238 621,475 642,529 664,121 686,511 706,216 724,410 743,231 762,742 782,766 803,316
38 Operations and Mtc 4,885,428 4,900,606 4,944,064 4,986,274 5,283,426 5,345,288 5,529,766 5,721,935 5,919,070 6,123,705 6,301,710 6,464,531 6,633,106 6,808,061 6,987,630 7,171,936
39 Engineering (Operating)247,488 301,278 338,659 381,502 358,128 447,404 463,096 479,457 496,243 513,680 528,735 542,422 556,602 571,328 586,444 601,959
40 Customer Service 1,476,175 1,544,608 1,584,759 1,677,926 1,821,447 2,027,659 2,098,960 2,173,305 2,249,589 2,328,837 2,397,182 2,459,257 2,523,568 2,590,368 2,658,935 2,729,318
41 Allowance for Unspent Budget - - - - - 401,476 (411,505) (424,995) (438,832) (453,167) (465,976) (477,939) (490,301) (503,100) (516,234) (529,711)
42 Subtotal, Operating Expenses 14,648,027 15,147,415 17,221,192 15,730,288 15,826,254 17,442,384 17,064,620 17,509,261 17,960,405 18,428,832 18,862,761 19,276,075 19,702,999 20,134,724 20,578,108 21,033,467
43 Capital Program Contribution 9,327,120 9,366,201 1,068,841 8,335,605 8,580,372 11,039,470 10,215,889 10,012,033 10,252,034 10,555,216 10,867,297 11,188,574 11,519,375 11,859,984 12,210,686 12,571,782
44 TOTAL EXPENSES 34,653,061 39,403,015 34,895,385 39,771,182 40,076,561 46,126,524 46,179,819 47,497,511 49,389,918 50,243,375 51,205,352 52,161,256 53,136,941 54,296,815 55,490,458 56,656,195
45
46 ENDING RESERVES
47 Reappropriations (Non-CIP)20,000 - - - - - - - - - - - - - - -
48 Commitments (Non-CIP)765,000 714,000 2,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000
49 Restricted for Debt Service 3,348,000 3,225,000 3,225,000 3,331,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000
50 Emergency Plant Replacement 1,000,000 1,000,000 1,000,000 1,000,000 - - - - - - - - - - - -
51 Capital Reserve - - - - 4,000,000 13,256,000 9,256,000 9,256,000 9,256,000 9,256,000 9,256,000 9,256,000 9,256,000 9,256,000 9,256,000 9,256,000
52 Rate Stabilization Reserve 10,639,000 7,996,000 17,272,000 20,133,000 6,567,000 1,867,000 - - - - - - - - - -
53 Operations Reserve - - - - 11,663,836 9,807,734 11,017,309 7,655,292 7,759,702 9,208,904 10,185,947 10,710,850 10,890,498 10,976,735 10,969,473 11,713,415
54 Unassigned - - - - - - - - - - - - - - - -
55 TOTAL ENDING RESERVES 15,772,000 12,935,000 21,499,000 24,811,000 25,893,836 28,593,734 23,936,309 20,574,292 20,678,702 22,127,904 23,104,947 23,629,850 23,809,498 23,895,735 23,888,473 24,632,415
56
57 OPERATIONS RESERVE
58 Min (60 days of non-capital expenses)- - - - 5,230,611 6,082,017 6,232,446 6,488,975 6,767,143 6,864,270 6,977,906 7,089,168 7,202,255 7,336,928 7,475,494 7,607,764
59 Target (90 days of non-capital expenses)- - - - 9,395,240 9,166,903 9,395,593 9,783,548 10,204,079 10,353,171 10,527,111 10,697,594 10,870,947 11,085,459 11,306,122 11,517,661
60 Max (120 days of non-capital expenses)- - - - 13,559,870 12,251,790 12,558,739 13,078,120 13,641,014 13,842,072 14,076,317 14,306,020 14,539,639 14,833,990 15,136,750 15,427,559
61 Risk Assessment Value 2,481,768 2,873,181 2,840,361 3,050,960 3,320,931 3,523,428 3,579,316 3,636,369 3,704,694 3,794,916 3,892,600 4,062,286
Appendix A (continued)
1 FISCAL YEAR 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 FY 2024 FY 2025 FY 2026
2
3 REVENUES
4 Net Sales 90%84%84%91%82%92%92%92%93%93%93%93%93%93%93%93%
5 Other Revenues and Transfers In 10%16%16%9%18%8%8%8%7%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%100%
7
8 EXPENSES
9 Water Purchases 31%38%48%39%39%38%41%42%43%42%42%42%41%41%41%41%
10 Operating Expenses
11 Administration
12 Allocated Charges 5%5%7%6%6%5%5%5%5%5%5%5%5%5%5%5%
13 Rent 6%5%5%6%6%6%6%6%6%6%6%6%6%6%6%6%
14 Debt Service 10%9%9%8%8%7%7%7%7%6%6%6%6%6%6%6%
15 Transfers and Other Adjustments 1%1%6%1%0%1%1%1%1%1%1%1%1%1%1%1%
16 Subtotal, Administration 22%20%28%20%20%19%19%19%18%18%18%18%18%18%18%18%
17 Resource Management 2%1%2%1%1%1%1%1%1%1%1%1%1%1%1%1%
18 Operations and Mtc 14%12%14%13%13%12%12%12%12%12%12%12%12%13%13%13%
19 Engineering (Operating)1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%
20 Customer Service 4%4%5%4%5%4%5%5%5%5%5%5%5%5%5%5%
21 Allowance for Unspent Budget 0%0%0%0%0%1%-1%-1%-1%-1%-1%-1%-1%-1%-1%-1%
22 Subtotal, Operating Expenses 42%38%49%40%39%38%37%37%36%37%37%37%37%37%37%37%
23 Capital Program Contribution 27%24%3%21%21%24%22%21%21%21%21%21%22%22%22%22%
24 TOTAL EXPENSES 100%100%100%100%100%100%100%100%100%100%100%100%100%100%100%100%
25
26 RISK ASSESSMENT DETAIL
27 Distribution Revenue Variance 1,623,731 1,769,234 1,818,772 2,049,757 2,295,727 2,467,907 2,492,586 2,517,512 2,552,757 2,608,918 2,671,532 2,805,108
28 10% CIP Program Contingency 858,037 1,103,947 1,021,589 1,001,203 1,025,203 1,055,522 1,086,730 1,118,857 1,151,938 1,185,998 1,221,069 1,257,178
29 Total Risk Asssessment Value 2,481,768 2,873,181 2,840,361 3,050,960 3,320,931 3,523,428 3,579,316 3,636,369 3,704,694 3,794,916 3,892,600 4,062,286
30 Projected Operations Reserve 11,663,836 9,807,734 11,017,309 7,655,292 7,759,702 9,208,904 10,185,947 10,710,850 10,890,498 10,976,735 10,969,473 11,713,415
31 Operations Reserve, % of Risk Value 470%341%388%251%234%261%285%295%294%289%282%288%
32
33 OPERATIONS RESERVE
34 Min (60 days of non-capital expenses)- - - - 5,230,611 6,082,017 6,232,446 6,488,975 6,767,143 6,864,270 6,977,906 7,089,168 7,202,255 7,336,928 7,475,494 7,607,764
35 Target (90 days of non-capital expenses)- - - - 9,395,240 9,166,903 9,395,593 9,783,548 10,204,079 10,353,171 10,527,111 10,697,594 10,870,947 11,085,459 11,306,122 11,517,661
36 Max (120 days of non-capital expenses)- - - - 13,559,870 12,251,790 12,558,739 13,078,120 13,641,014 13,842,072 14,076,317 14,306,020 14,539,639 14,833,990 15,136,750 15,427,559
37 Risk Assessment Value 2,481,768 2,873,181 2,840,361 3,050,960 3,320,931 3,523,428 3,579,316 3,636,369 3,704,694 3,794,916 3,892,600 4,062,286
38
39 DEBT SERVICE COVERAGE RATIO
40 Net Revenues (125% of Debt Service)658%787%951%876%878%989%1017%1063%1115%1132%1152%1171%1191%1216%1242%1267%
41 Available Reserves (5x Debt Service)*3.5 2.7 5.7 6.6 6.9 7.7 6.3 5.2 5.3 5.7 6.0 6.2 6.2 6.3 6.3 6.5
WATER UTILITY FINANCIAL PLAN
June 16, 2014 33 | Page
APPENDIX B: WATER UTILITY CAPITAL IMPROVEMENT PROGRAM (CIP) DETAIL
WATER UTILITY FINANCIAL PLAN
June 16, 2014 34 | Page
Appendix B: Water Utility Capital Improvement Program (CIP) Detail (Continued)
WATER UTILITY FINANCIAL PLAN
June 16, 2014 35 | Page
APPENDIX C: 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 cash 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.
WATER UTILITY FINANCIAL PLAN
June 16, 2014 36 | Page
Section 5. CIP Reserve
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 or removed from to that reserve
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.
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.
WATER UTILITY FINANCIAL PLAN
June 16, 2014 37 | Page
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
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
June 16, 2014 38 | Page
APPENDIX D: DESCRIPTION OF WATER UTILITY OPERATIONAL ACTIVITIES
This appendix describes the activities associated with the various operational activities referred
to in Section 6B: 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.
June 16, 2014 39 | Page
APPENDIX E: SAMPLE OF WATER UTILITY OUTREACH COMMUNICATIONS
Attachment C
* NOT YET APPROVED *
Resolution No. _________
Resolution of the Council of the City of Palo Alto Increasing Water
Rates by 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. On ____, 2016, the City Council held a full and fair public hearing regarding the
proposed rate increase and considered all protests against the proposals.
C. As required by Article XIII D, Section 6 of the California Constitution and
applicable law, notice of the ________ 2016 public hearing was mailed to all City of Palo Alto
Utilities water customers by _______, 2016.
D. The City Clerk has tabulated the total number of written protests presented by
the close of the public hearing, and determined that it was less than fifty percent (50%) of the
total number of customers and property owners subject to the proposed water rate
amendments, therefore a majority protest does not exist against the proposal.
The Council of the City of Palo Alto does hereby RESOLVE as follows:
SECTION 1. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule W-1 (General Residential Water Service) is hereby amended to read as attached
and incorporated. Utility Rate Schedule W-1, as amended, shall become effective July 1, 2016.
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, 2016.
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, 2016.
160322 sdl 6053683
Attachment C
* NOT YET APPROVED *
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, 2016.
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, 2016.
SECTION 6. The City Council finds as follows:
a. Revenues derived from the water rates approved by this resolution do not exceed
the funds required to provide water service.
b. Revenues derived from the water rates approved by this resolution shall not be used
for any purpose other than providing water service, and the purposes set forth in
Article VII, Section 2, of the Charter of the City of Palo Alto.
c. The amount of the water rates imposed upon any parcel or person as an incident of
property ownership shall not exceed the proportional cost of the water service
attributable to the parcel.
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. Each of the rate schedules adopted by this resolution includes a structure of
drought surcharges that correspond to different levels of water use reduction in the City. In
order to charge the lowest drought surcharge possible, each rate schedule includes not only the
surcharge required to meet the 25% reduction level, but also surcharges reflecting two lower
levels of water use reduction. At any time, no more than one of these three surcharges will be
applicable. On August 17, 2015, Council adopted Resolution 9542 which established that the
Level 2 (20%) drought surcharges set forth on the City's schedule of water rates will be
collected on all City of Palo Alto Utilities water customer bills as of September 1, 2015 and
declared that the surcharge shall remain in effect until rescinded or modified by the City
Council.
SECTION 9. 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
160322 sdl 6053683
Attachment C
* NOT YET APPROVED *
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
160322 sdl 6053683
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 97-1-20156
dated 79-1-2015 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 ..................................................................................................... $ 16.7703
For 3/4 inch meter ..................................................................................................... 2122.6050
For 1 inch meter ........................................................................................................ 3234.2645
For 1 1/2 inch meter .................................................................................................. 5963.4083
For 2-inch meter ........................................................................................................ 9298.3767
For 3-inch meter ........................................................................................................ 196209.1170
For 4-inch meter ........................................................................................................ 350372.3100
For 6-inch meter ........................................................................................................ 716762.8182
For 8-inch meter ........................................................................................................1,3191,403.9407
For 10-inch meter ......................................................................................................2,0852,219.9257
For 12-inch meter .......................................................................................................2,7422,919.3456
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 ........................................................................................................................$56.3093
Tier 2 usage (All usage over 100% of Tier 1) ........................................................................ 8.8238
ATTACHMENT D
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 97-1-20156
dated 79-1-2015 Sheet No W-1-2
Drought Surcharges:
A drought surcharge will be added to the Customer’s applicable Commodity Rate for Tier 1 and Tier
2 water usage when the City Council has determined that a water reduction level is in effect for the
City as described in Section D.3. The drought surcharges in the table below are measured in dollars
per hundred cubic feet (ccf).
Water Usage
Reduction level Level 1 (10/15%) Level 2 (20%) Level 3 (25%)
Tier 1 0.2019 0.4339 0.6459
Tier 2 0.5855 1.2114 1.8576
Temporary unmetered service to residential
subdivision developers, per connection ........................................................................ $6.00
D. SPECIAL NOTES:
1. Calculation of Cost Components
The actual bill amount is calculated based on the applicable rates in Section C above and
adjusted for any applicable discounts, surcharges and/or taxes. On a customer’s bill
statement, the bill amount may be broken down into appropriate components as
calculated under Section C.
2. Calculation of Usage Tiers
Tier 1 water usage shall be calculated and billed based upon a level of 0.2 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.
GENERAL RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-1-3 Effective 97-1-20156
dated 79-1-2015 Sheet No W-1-3
3. Drought Surcharge
During period of water shortage or restrictions on local water use, the City Council may,
by resolution, declare the need for citywide water conservation at the 10/15%, 20% or
25% level. While such a resolution is in effect, a drought surcharge will apply. The
purpose of the Drought Surcharge is to recover revenues lost as a result of reduced
consumption.
{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 97-1-20156
dated 79-1-2015 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) ................................................................ $67.3292
3. Drought Surcharges:
A drought surcharge will be added to the Customer’s applicable Commodity Rate when the
City Council has determined that a water reduction level is in effect for the City as described in
Section D.5. The drought surcharges in the table below are measured in dollars per hundred
cubic feet (ccf).
Water Usage
Reduction level Level 1 (10/15%) Level 2 (20%) Level 3 (25%)
Surcharge 0.2624 0.5349 0.7772
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
WATER SERVICE FROM FIRE HYDRANTS
UTILITY RATE SCHEDULE W-2
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-2-2 Effective 97-1-20156
dated 79-1-2015 Sheet No W-2-2
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.
5. During period of water shortage or restrictions on local water use, the City Council may, by
resolution, declare the need for citywide water conservation at the 10/15%, 20% or 25% level.
While such a resolution is in effect, a drought surcharge will apply. The purpose of the Drought
Surcharge is to recover revenues lost as a result of reduced consumption.
{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 97-1-20156
dated 79-1-2015 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) ................................................................ $67.3292
3. Drought Surcharges:
A drought surcharge will be added to the Customer’s applicable Commodity Rate when the
City Council has determined that a water reduction level is in effect for the City as described in
Section D.5. The drought surcharges in the table below are measured in dollars per hundred
cubic feet (ccf).
Water Usage
Reduction level Level 1 (10/15%) Level 2 (20%) Level 3 (25%)
Surcharge 0.2624 0.5349 0.7772
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
WATER SERVICE FROM FIRE HYDRANTS
UTILITY RATE SCHEDULE W-2
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-2-2 Effective 97-1-20156
dated 79-1-2015 Sheet No W-2-2
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.
5. During period of water shortage or restrictions on local water use, the City Council may, by
resolution, declare the need for citywide water conservation at the 10/15%, 20% or 25% level.
While such a resolution is in effect, a drought surcharge will apply. The purpose of the Drought
Surcharge is to recover revenues lost as a result of reduced consumption.
{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 97-1-20156
dated 79-1-2015 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 .......................................................................................................$3.7943
4-inch connection .......................................................................................................2123.4222
6-inch connection ....................................................................................................... 6168.0363
8-inch connection .......................................................................................................131144.9734
10-inch connection .....................................................................................................236260.7020
12-inch connection .....................................................................................................381421.1152
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 97-1-20156
dated 79-1-2015 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 97-1-20156
dated 79-1-2015 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 .................................................................................... $ 16.7703
For 3/4-inch meter .................................................................................... 2122.6050
For 1-inch meter .................................................................................... 3234.2645
For 1 ½-inch meter .................................................................................... 5963.4083
For 2-inch meter .................................................................................... 9298.3767
For 3-inch meter .................................................................................... 196209.1170
For 4-inch meter .................................................................................... 350372.3100
For 6-inch meter .................................................................................... 716762.8182
For 8-inch meter ....................................................................................1,319403.9407
For 10-inch meter ....................................................................................2,085219.9257
For 12-inch meter ....................................................................................2,742919.3456
Commodity Rates: (to be added to Service Charge)
Per Hundred Cubic Feet (ccf)
Per Month All Pressure Zones
Per ccf ............................................................................................................ $ 67.3292
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 97-1-20156
dated 79-1-2015 Sheet No W-4-2
Drought Surcharges:
A drought surcharge will be added to the Customer’s applicable Commodity Rate when the City
Council has determined that a water reduction level is in effect for the City as described in Section
D.2. The drought surcharges in the table below are measured in dollars per hundred cubic feet
(ccf).
Water Usage
Reduction level Level 1 (10/15%) Level 2 (20%) Level 3 (25%)
Surcharge 0.2624 0.4953 0.7772
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. Drought Surcharge
During period of water shortage or restrictions on local water use, the City Council may,
by resolution, declare the need for citywide water conservation at the 10/15%, 20% or
25% level. While such a resolution is in effect, a drought surcharge will apply. The
purpose of the Drought Surcharge is to recover revenues lost as a result of reduced
consumption.
{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 97-1-20156
dated 79-1-2015 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 .................................................................................... $ 16.7703
For 3/4-inch meter .................................................................................... 2122.6050
For 1-inch meter .................................................................................... 3234.2645
For 1 1/2 inch meter .................................................................................... 5963.4083
For 2-inch meter .................................................................................... 9298.3767
For 3-inch meter .................................................................................... 196209.1170
For 4-inch meter .................................................................................... 350372.3100
For 6-inch meter .................................................................................... 716762.8182
For 8-inch meter ....................................................................................1,319403.9407
For 10-inch meter ....................................................................................2,085219.9257
For 12-inch meter ....................................................................................2,742919.3456
Commodity Rates: (to be added to Service Charge)
Per Hundred Cubic Feet (ccf)
Per Month All Pressure Zones
Per ccf ............................................................................................................ $ 8.7229
Drought Surcharges:
A drought surcharge will be added to the Customer’s applicable Commodity Rate when the City
Council has determined that a water reduction level is in effect for the City as described in Section
D.2. The drought surcharges in the table below are measured in dollars per hundred cubic feet (ccf).
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 97-1-20156
dated 79-1-2015 Sheet No W-7-2
Water Usage
Reduction level Level 1 (10/15%) Level 2 (20%) Level 3 (25%)
Surcharge 0.5351 1.2518 12.0293
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. Drought Surcharge
During period of water shortage or restrictions on local water use, the City Council may,
by resolution, declare the need for citywide water conservation at the 10/15%, 20% or
25% level. While such a resolution is in effect, a drought surcharge will apply. The
purpose of the Drought Surcharge is to recover revenues lost as a result of reduced
consumption.
{End}
EXCERPTED DRAFT MINUTES OF THE MARCH 2, 2016
UTILITIES ADVISORY COMMISSION MEETING
ITEM 3. ACTION: Staff Recommendation that the Utilities Advisory Commission Recommend
that the City Council Adopt: (1) a Resolution Approving the Fiscal Year 2017 Water Utility
Financial Plan; and (2) a Resolution Increasing Water Rates by 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)
Interim Rates Manager Eric Keniston summarized the written report and noted that the
wholesale cost of water from the San Francisco Public Utilities Commission (SFPUC) for FY 2017
was reduced since the February meeting when the UAC reviewed the preliminary financial
forecast. That means that the rate increase proposed for FY 2017 is 6%, rather than the 9%
projected in the preliminary forecast.
Keniston noted that, as in wastewater collection, expenses have been lower than revenues for
several years and that there was a hiatus in new CIP funding in FY 2013, which lowered overall
costs that year. The biggest driver for increasing water costs is the cost of SFPUC water due
both to higher SFPUC costs and the impact of the drought. Reserves have been reduced over
the last several years, but the Rate Stabilization Reserve will be exhausted by the end of Fy
2016. Staff’s rate proposal is to continue the drought surcharge that Council imposed as of
September 1, 2015. The plan to separate out the cost of water supply is not being proposed this
year, but will be revisited next year.
Keniston noted that the proposed 6% rate change for FY 2017 is less than the 8% rate
adjustment that was projected in last year’s financial plan, but a rate adjustment of 9% is
projected for FY 2018, which is higher than the 8% FY 2018 rate increase projected in last year’s
financial plan. However, he cautioned that the rate projections are very dependent on the
drought situation. The plan results in the Water Operations Reserve being above the minimum
reserve level over the entire forecast period. The bill impact for the proposed rate increase will
be almost the same for all customer classes and will add about $4.73 per month for the median
residential customer.
Keniston said that staff evaluated an alternate scenario with the Operations Reserve held at the
minimum level. This would allow for no rate increase in FY 2017, but that would require an
18% rate increase in FY 2018, which staff does not recommend. A scenario with the Operations
ATTACHMENT E
Reserve held at the target level would require a 3% rate increase in FY 2017 followed by a 20%
rate increase in FY 2018, which staff does not recommend.
Public comment
Herb Borock said that under Proposition 218, residents can object to rate increases and,
therefore, Council should be the one making a decision as to whether the rate proposal is the
one that is noticed to property owners. Now this notice is sent out after Finance Committee
weighs in, rather than before returning to Council. This comment goes to when the process
should start. Now Council does not see the proposal until it’s the final decision. An extra step
of going to Council should be figured into the process and timing.
Commissioner Danaher referred to Appendix A of the FY 2017 Water Financial Plan and asked
why line 25 (Other Revenues and Transfers in) was so variable over time. Keniston said that
these transfers come from a large variety of sources and can range from reimbursement from
other funds for projects or grant funds and that there can be large swings year to year for that
line item. Pointing to line 29 (Water Purchases), Commissioner Danaher asked if this is for the
water purchased from the SFPUC and asked if these costs were rising as the wholesale cost of
water increased. Keniston confirmed that understanding. Commissioner Danaher noted that
line 43 (Capital Program Contribution) rose in FY 2016 and asked if this was planned. Keniston
confirmed that understanding. Commissioner noted that even after the proposed 6% rate
increase, revenues would still be over $5 million less than expenses in FY 2017. Keniston
confirmed that conclusion. Commissioner Danaher asked if staff is comfortable with a 6%
increase in FY 2017. Keniston said that staff is comfortable with the proposal at this point.
Commissioner Schwartz said that since this situation has been years in the making, it would be
best to show more historical years on the charts. Also, is there a chance to time the rate
increases so that they don’t all come into place at the same time. She said that implementing a
water rate increase in the summer when people use more water is more painful and
implementing a gas rate increase in the winter when people use more gas is more painful and
that, if there is some flexibility, timing the increases could be beneficial. Interim Director
Shikada explained that the budgetary timing is important since the budgets are built on the idea
of a full budget year of revenues as well as expenses. He said that the impact on the customers
as well as the funds need to be considered, since if a rate increase is delayed, a larger increase
may be required in the future. Commissioner Schwartz said that we need to be responsible and
cover our expenses, but timing could be considered. How does our water rates compare to
other neighbors. Keniston referred to the bill comparisons in the Financial Plan (page 13) which
shows that Palo Alto’s current rates are higher than in the neighboring communities.
Commissioner Schwartz said that, given the experience of Flint Michigan, we want to make sure
to spend the money to continue to have the top quality water. We don’t want to reduce
expenses dramatically in this area. At the State of the City address by Mayor Burt,
Commissioner Schwartz talked to someone who perceived that there have been large rate
increases over the last several years, but when told that the increases were not large and
sometimes zero, we are making sure costs are covered—this is something people can
understand since it’s something we have to responsibly do.
Commissioner Eglash asked why we have the highest monthly water bill. Keniston referred to a
benchmark study done a couple of years ago, which showed that CPAU does more
infrastructure improvements and system maintenance than other agencies. A recent large
expense was the emergency water supply and storage project to rehabilitate wells, drill new
wells and construct a new water storage reservoir increased costs as well. These proactive
measures make a reliable system, but cause our rates to be higher.
Commissioner Eglash said that expenses rose 15% from FY 2015 to FY 2016 and rates did rise
12%, but revenues actually dropped by 4% since customers used much less water in response
to the State’s call for water use reductions in the drought. So, clearly, a significant gap is
developing and this supports the recommendation for the 6% rate increase, which would avoid
the problem we have with wastewater collection where we let a too large deficit develop
requiring large continued rate increases. In the case of the water utility, this is exacerbated by
the loss in revenue associated with reduced usage.
Commissioner Ballantine asked if the City has any lead pipe in its distribution system. Keniston
said that the City has no lead pipes in its system.
Commissioner Ballantine asked why the bill impact shown in Table 8 of the Financial Plan (page
8) shows a smaller impact for the largest water users, but he did the math and found that the
difference is not actually very in percentage terms. The 6% bill impacts shown actually range
from 5.6% to 5.8% and the 5% impact for the largest users is actually 5.49%. Keniston
confirmed that the chart rounds off the bill impact to the nearest whole number percentage
value. Commissioner Ballantine asked if the difference from low users to high users is due to
the fact that all customers must pay a fixed monthly service charge. Keniston confirmed that
this is the case.
ACTION:
Chair Foster made a motion that the UAC recommend that the Council adopt resolutions
approving the FY 2017 Water Financial Plan and increasing water rates by 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 Danaher
seconded the motion. The motion carried unanimously (5-0) with Chair Foster, Commissioners
Ballantine, Danaher, Eglash, and Schwartz voting yes and Vice Chair Cook and Commissioner
Hall absent. The motion carried unanimously (5-0) with Chair Foster, Commissioners Ballantine,
Danaher, Eglash, and Schwartz voting yes and Vice Chair Cook and Commissioner Hall absent.