HomeMy WebLinkAboutStaff Report 8385
City of Palo Alto (ID # 8385)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 9/19/2017
City of Palo Alto Page 1
Summary Title: Wastewater COSA Design Guidelines
Title: Utilities Advisory Commission Recommendation that the City Council
Approve Policy Objectives for the 2017 Wastewater Collection Utility Cost of
Service Analysis
From: City Manager
Lead Department: Utilities
Recommendation
Staff and the Utilities Advisory Commission (UAC) request that the Finance Committee
recommend that the City Council approve the Policy Objectives for the 2017 Wastewater
Collection Utility Cost of Service Analysis (Attachment A)
Executive Summary
Wastewater Collection rates were last adjusted when a 9% rate increase went into effect on
July 1, 2016.1 The last cost of service analysis (COSA) for this utility was completed in 2011.
Staff intends to complete a Wastewater Collection COSA in FY 2018 in advance of a projected
rate adjustment on July 1, 2018. The primary goal of the COSA will be to review the allocation
of costs to customer classes and the Wastewater Collection rate design to ensure customers are
charged according to the cost to serve them. This report discusses the existing rate design,
gives an overview of the issues to be addressed in the COSA, and presents the proposed COSA
policy objectives to guide staff and the consultant in completing the Wastewater Collection
COSA.
The UAC reviewed these guidelines at its meeting on August 2, 2017 meeting, and unanimously
recommended approval of the guidelines.
Background
A COSA is used to equitably and reasonably allocate a utility’s costs across the customer groups
served. A COSA includes a Rate Study, which sets the retail rates for specific customer classes.
COSAs support the development of fair and reasonable rates and serve as a complement to the
annual financial planning and budgeting processes. Through the financial planning and
1 Staff Report 6690 http://www.cityofpaloalto.org/civicax/filebank/documents/51813
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budgeting process the City determines its objectives for a utility (e.g. maintenance objectives,
customer service objectives, infrastructure replacement plans), estimates what it will cost to
achieve those objectives, implements cost control measures or process efficiency measures
where feasible, and proposes adjustments to its annual budget and utility rates. The COSA takes
this annual operating budget and determines how much of the cost should be allocated to each
customer class, establishing pricing structures to ensure the cost of serving each customer
matches the price they pay for the service. Note that this annual operating budget includes
both wastewater collection costs and Palo Alto wastewater customers’ share of the cost of
operating the Regional Water Quality Control Plant (RWQCP). The determination of Palo Alto’s
share of RWQCP wastewater treatment costs is made using a formula established under the
contracts among the agencies participating in funding of the RWQCP, and is simply an input to
the COSA process rather than a subject of the COSA.
The FY 2018 Wastewater Collection Utility Financial Plan2 projects the need for a 7% rate
increase on July 1, 2018. The current rates are based on a COSA performed by Utility Financial
Solutions (UFS) in 2011.3 COSAs are typically updated every three to seven years, or when there
are significant changes in the utility’s costs, customer base, or other factors. As California is
exiting a multi-year drought, and customer water usage is starting to stabilize at lower levels
than before the drought, it is a good time to evaluate whether customer sewer outflows have
changed as well. In addition, Wastewater Collection Utility expenses have changed in recent
years. Whether or not these changes have resulted in the need to adjust allocations of costs
between customers is unknown, but will be evaluated as a part of the COSA analysis.
Discussion
The following sections provide a review of the current rate structure, a discussion of rate design
issues affecting the utility, and the proposed set of policy objectives to guide the COSA.
Summary of Existing Rate Structure
CPAU has three sewer rate schedules: one for residents (S-1), one for commercial customers
(S-2), and a special schedule for restaurants (S-6), which discharge higher than average
amounts of grease and oil and, therefore, have a greater impact on the sewer system.
Residential customers (S-1) are billed a monthly service charge, while most commercial
customers (S-2) are billed based on their winter month water usage (January through March).
This closely approximates non-irrigation water consumption, which is a good proxy for actual
sewer use, since nearly all non-irrigation water is discharged to the sewer. Restaurant
customers (S-6) are billed based on monthly water usage.4 CPAU also maintains a rate schedule
for those industrial dischargers (S-7) whose discharge requires monitoring for specific
2 Staff Report 7855 http://www.cityofpaloalto.org/civicax/filebank/documents/56659
3 Staff Report 1399 http://www.cityofpaloalto.org/civicax/filebank/documents/26410
4 Note that unlike other commercial customers, restaurant water use is not based on winter water consumption.
This is because water use in restaurants is primarily process related (cooking, restrooms), meaning that month to
month variation typically represents variations in business water needs, which impacts the sewer, rather than
irrigation, which does not.
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pollutants, but there are currently no customers required to be on this rate schedule. Table 1,
below, summarizes the current rates for all customer classes.
Table 1: Current Wastewater Collection Rates
Current
(as of 7/1/2016)
Monthly Service and Minimum Charges ($/month)
S-1 (Residential) Service charge $34.83
S-2 (Commercial) and
S-6 (Restaurant)
Minimum $34.83
Quantity Rates: based on water usage
S-2 (Commercial) $/CCF 6.71
S-6 (Restaurant) $/CCF 10.38
S-7 (Industrial) $/CCF 3.08
COSA Policy Objectives
In the past, the UAC and Council have expressed concern about having limited ability to make
changes to proposed rate structures once a COSA is completed. Therefore, staff has committed
to having policy discussions with the UAC and Council prior to embarking on a COSA. For this
COSA, staff has a limited set of policy objectives (Attachment A) to guide the development of
the next Wastewater Collection COSA. The proposed objectives are:
Objective 1. Rates must be based on the cost to serve customers. This is the overriding
principle for the cost of service analysis (COSA); all other rate design
considerations are subsidiary to this basic premise.
Objective 2. Examine the feasibility of a separate flat rate for multi-family dwelling units.
Objective 3. Evaluate the impact of proposed rate designs on low income customers and
mitigate if feasible.
Objective 1: Rates must be based on the cost of service
The goal of a COSA is to identify the costs associated with serving each customer class and the
rates required to recover those costs. The California Constitution requires property-related fees
such as municipal wastewater collection rates to be based on the utility’s cost to serve its
customers, or else they are considered a tax subject to 2/3 voter approval. Thus, the COSA is an
important tool to design and support utility rates that are based on the cost of service. As a
result, this guideline must be the primary and overriding one for the COSA.
Objective 2: Consider potential updates to existing rate schedules
Staff recommends evaluating the possibility of differentiating rates by dwelling type (single
family homes vs multi-family dwellings, such as apartments) for the residential customer class.
Customers in apartments, townhomes, etc. have occasionally inquired as to whether a lower
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rate could be created for smaller dwellings, as they theoretically have less discharge to the
sewer than a larger home.
The COSA will also examine separate multi-family dwelling wastewater collection rates. While
some neighboring agencies offer this type of rate structure, it can present challenges since
most multi-family dwellings are master-metered, complicating assessment of individual water
use (and therefore sewer discharge). Recent surveys of the number of units served by master-
meters may allow for meaningful analysis to take place. Any potential for differentiating the
rate must be weighed against increased billing system complexity, as well as additional
monitoring and tracking considerations.
Objective 3: Evaluate the impacts of proposed rate designs on low income customers and
mitigate, if feasible
Tied with the review of residential customer rates, staff intends to evaluate the impact of any
recommended rate design changes on low-income consumers and may recommend mitigation
of those impacts if necessary. Low-income customers may have lower water usage than other
customers, on average, and are more likely to live in apartments, so rate structure changes that
take these characteristics into account may reduce the sewer rate impact on the City’s low-
income population.
Commission Review and Recommendation
The UAC reviewed this proposal at its August 2, 2017 meeting. Staff presented the basic
objectives of the COSA, and requested any comments or concerns that the UAC may have.
Commissioners had general questions regarding how current residential flat rates relate to
water consumption. Staff noted that residential rates are based on class averages and
estimations of ouflow based on water usage rather than individual customer use.
Commissioners also asked whether house size, number of fixtures, or occupancy impact
wastewater outflow, and how irrigation was factored into the analysis. Staff noted that these
factors indirectly affect water use and therefore would be considered in the COSA analysis, and
that irrigation is separated from indoor usage by analyzing customer class average winter
usage, when irrigation systems are typically turned off.
The UAC voted to recommend that the Council approve the proposed Wastewater Collection
COSA guidelines. The vote was unanimous (5-0, Commissioners Segal and Ballantine absent).
The draft excerpted minutes from the UAC’s August 2, 2017 meeting are provided as
Attachment B.
Next Steps
After receiving the Finance Committee’s recommendation, staff will take the COSA policy
objectives to the City Council for consideration. The COSA is expected to be completed by the
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spring of 2018 so that updated rates can be adopted as part of the FY 2019 budget process to
be effective on July 1, 2018.
Resource Impact
The work associated with this project will be absorbed using existing staff and contract budgets.
The new rates adopted as a result will be designed to generate adequate sales revenue to fund
the Wastewater Collection utility’s operations in FY 2019. As discussed in the FY 2018
Wastewater Collection Utility Financial Plan (Staff Report 7855), preliminary projections show
that the utility may need roughly 7% more sales revenue in FY 2019 than is generated by
current rates. Expenses are projected to exceed revenues, with reserves being used to
moderate customer impacts as rates are brought to parity over several years. Costs in general
are projected to increase due to inflation. For more detail on these projections see the adopted
FY 2018 Wastewater Collection Utility Financial Plan.
Policy Implications
The process of adopting these policy objectives provides the UAC and Council an opportunity to
provide policy guidance to staff before work begins on the COSA.
Environmental Review
Adoption of the Policy Objectives for the 2018 Wastewater Collection Cost of Service Analysis
does not meet the definition of a project, under Public Resources Code Section 21065 and
CEQA Guidelines Section 15378(b)(5), because it is an administrative governmental activity
which will not cause a direct or indirect physical change in the environment, thus no
environmental review is required.
Attachments:
Attachment A: Proposed Policy Objectives for the 2018 Wastewater Collection Cost of
Service Analysis
Attachment B: Draft Excerpted UAC Minutes of August 2, 2017
ATTACHMENT A
Policy Objectives for the Wastewater Collection Utility Cost of Service Analysis
Objective 1. Rates must be based on the cost to serve customers. This is the overriding
principle for the cost of service analysis (COSA); all other rate design
considerations are subsidiary to this basic premise.
Objective 2. Examine the feasibility of a separate flat rate for multi-family dwelling units.
Objective 3. Evaluate the impact of proposed rate designs on low income customers and
mitigate if feasible.
EXCERPTED DRAFT MINUTES OF THE AUGUST 2, 2017
UTILITIES ADVISORY COMMISSION MEETING
ITEM 3: ACTION: Staff Recommendation that the Utilities Advisory Commission Recommend that the City
Council Approve Policy Objectives for the 2017 Wastewater Collection Utility Cost of Service Analysis
Senior Resource Planner Eric Keniston presented three general objectives for the proposed Wastewater
Collection Cost of Service (COSA) study, and asked if the commissioners had any additions, comments or
concerns they wanted addressed in the study.
Commissioner Johnston supported the staff recommendation.
Commissioner Trumbull asked staff to clarify how sewer rates were charged.
Keniston noted that residential customers were charged a flat rate, based on class averages, while non-
residential customers were charged a rate based on water consumption. As not all residential units charged
for wastewater are billed directly for water, such as in apartments, tying sewer bills to water usage has not
been feasible in the past. This could be evaluated for the future.
Chair Danaher asked staff to confirm that one goal of the study was to determine if here could be different
class averages for different types of customers.
Keniston affirmed this.
Commissioner Schwartz asked if a larger house with more plumbing fixtures may have a different rate than
a smaller home, and whether the difference between rates would be large or small.
Keniston replied that low water usage months would be the proxy for outflow, and allocations would be
evaluated based on that.
Commissioner Schwartz stated she was a proponent of having allocations to smaller homes be smaller than
to larger homes.
Councilmember Filseth asked whether landscaping and irrigation were included in wastewater calculations.
Keniston mentioned that these were factored out when performing calculations.
Abendschein stated that census figures show that multi-family residences have fewer people on average,
and thus lower indoor consumption.
ACTION: Commissioner Danaher made a motion to recommend that the Utilities Advisory Commission
recommend that the Council approve the Policy Objectives for the 2017 Wastewater Collection Utility Cost
of Service Analysis. Commissioner Trumbull seconded the Motion. The motion carried unanimously (5 - 0)
with Vice Chair Ballantine and Commissioner Segal absent.
ATTACHMENT B